Equifax Inc. — Q3 2014 Form 10-Q
Business context and reporting period. Quarterly report for the three and nine months ended September 30, 2014. Equifax provides consumer and commercial information, analytics, verification and related services. Effective July 1, 2014, it reorganized reporting segments into U.S. Information Solutions (USIS), International, Workforce Solutions and North America Personal Solutions; prior periods were recast.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $613.4 million | $572.0 million | $1,811.8 million | $1,725.4 million |
| Operating income | $153.7 million | $150.0 million | $473.0 million | $457.1 million |
| Operating margin | 25.1% | 26.2% | 26.1% | 26.5% |
| Net income attributable to Equifax | $92.7 million | $83.5 million | $269.4 million | $275.1 million |
| Diluted EPS | $0.75 | $0.67 | $2.17 | $2.23 |
| Cash provided by operating activities | $195.6 million | $174.3 million | $413.4 million | $377.1 million |
- Q3 revenue rose 7% reported (8% excluding foreign-exchange effects); nine-month revenue rose 5% reported (6% excluding FX). Acquisitions contributed 4% of local-currency growth in both periods.
- Q3 continuing-operations income attributable to Equifax was $92.7 million, up from $84.1 million; nine-month continuing-operations income was $269.4 million, up from $256.7 million. Nine-month total net income and EPS declined versus 2013 because the prior-year period included $18.4 million of discontinued-operation gains.
- Operating margin contracted, principally reflecting a $7.9 million software-license dispute settlement in Q3, higher acquisition-related costs and amortization. Q3 SG&A increased 14% year over year.
- Q3 segment revenue and operating income: USIS $278.6 million and $104.3 million; International $158.4 million and $37.1 million; Workforce Solutions $122.5 million and $39.8 million; North America Personal Solutions $53.9 million and $17.0 million. International revenue growth was acquisition-led, while its operating income fell 9% and margin fell 6.7 percentage points.
- Nine-month investing cash outflow was $399.5 million, including $333.7 million for acquisitions; financing cash outflow was $126.7 million. Cash declined to $115.0 million from $235.9 million at year-end 2013.
Debt, liquidity and capital allocation
- Total debt was approximately $1.555 billion at September 30, 2014, versus $1.438 billion at December 31, 2013. Cash was $115.0 million; the filing reports no separate net-debt figure.
- Commercial paper outstanding was $132.1 million. The $750 million revolving facility had no borrowings and $616.4 million available. The company reported a 1.81 leverage ratio against a maximum covenant of 3.5 and compliance with all debt covenants.
- $275 million of 4.45% notes was due December 2014; management planned to repay it with short-term commercial-paper borrowings. Management said operating cash generation and available facilities should fund anticipated requirements.
- Equifax repurchased 2.5 million shares for $186.6 million in the first nine months and paid $91.3 million in shareholder dividends. The board authorized an additional $400 million repurchase; $428.5 million remained available at quarter-end.
Outlook, commentary and risks
- For the remainder of 2014, management expected modest growth in overall economic activity and consumer credit, and slight growth in mortgage originations versus 2013. It noted mortgage-related revenue declined in Q3, though at a slower rate than in Q2.
- Longer term, management targeted average organic revenue growth of 6%–8%, plus 1%–2% from strategic acquisitions, and expected EPS to grow somewhat faster than revenue. These are forward-looking expectations, not guarantees.
- Management cited challenging international conditions, currency weakness (which reduced revenue by $5.6 million in Q3 and $21.7 million year to date), Argentine peso depreciation and inflation, and continued mortgage-market weakness.
- TDX was acquired for $322.8 million in January 2014; Forseva was also acquired during the first quarter. Annual goodwill impairment testing found no impairment, but management cautioned that valuation depends on forecasts and discount-rate assumptions.
- Legal matters include a multistate attorneys general investigation, a CFPB investigation, and ongoing California bankruptcy litigation. The company could not predict the outcomes; recorded legal accruals were not material. No material changes to previously disclosed risk factors were reported.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Adoption effects of the new revenue-recognition standard were still under evaluation.
Most important facts for investors to verify
- Whether underlying revenue growth persists after separating acquisition contributions, FX impacts and mortgage-related declines.
- Whether margins recover as acquisition costs and the Q3 legal settlement effects compare against future periods.
- Funding and refinancing of the December 2014 notes, commercial-paper exposure and continued covenant headroom.
- Cash generation after acquisition spending, repurchases and dividends, and whether planned buybacks remain consistent with liquidity priorities.
- Developments in the CFPB, state attorneys general and California litigation matters, and any resulting financial or operational effects.