Equifax Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; unaudited. Comparisons are with the corresponding 2012 periods. Equifax provides consumer and commercial information services, employment and income verification, and related solutions through five reportable segments.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $572.0 million | $520.0 million | $1,725.4 million | $1,539.2 million |
| Operating income | $150.0 million | $130.5 million | $457.1 million | $387.8 million |
| Operating margin | 26.2% | 25.1% | 26.5% | 25.2% |
| Continuing income attributable to Equifax | $84.1 million | $76.9 million | $256.7 million | $222.1 million |
| Net income attributable to Equifax | $83.5 million | $77.9 million | $275.1 million | $225.8 million |
| Diluted EPS | $0.67 | $0.64 | $2.23 | $1.84 |
| Cash provided by operating activities | $167.6 million | $151.0 million | $374.4 million | $348.3 million |
| Capital expenditures | $25.3 million | $14.8 million | $61.5 million | $49.3 million |
At September 30, 2013, cash and cash equivalents were $131.9 million, total debt was $1,438.8 million, and $748.6 million was available under the $750 million revolving credit facility. No commercial paper or revolving-facility borrowings were outstanding. The reported leverage ratio was 1.74 against a maximum covenant of 3.5; Equifax reported compliance with its debt covenants. The quarterly dividend was $0.22 per share.
Changes and business drivers
- Q3 revenue grew 10%, operating income 15%, and diluted EPS 5% year over year. For the first nine months, revenue increased 12%, operating income 18%, and diluted EPS 21%.
- Growth reflected the CSC Credit Services acquisition, strategic initiatives, and—particularly in the first half—strong U.S. mortgage refinancing activity. Foreign exchange reduced revenue by $6.6 million in Q3 and $13.0 million year to date.
- U.S. Consumer Information Solutions revenue rose 15% in Q3; acquisition-related amortization and integration costs contributed to a lower segment margin of 37.9%, down from 40.1%.
- Workforce Solutions revenue grew 3% in Q3, while operating margin expanded to 29.9% from 25.4%, reflecting cost initiatives and fixed-cost leverage. Mortgage-related verification revenue declined 12% in the quarter, offset by 12% growth in non-mortgage verification.
- International revenue grew 6% as reported and 11% in local currency in Q3; currency movements were a significant drag. North America Personal Solutions revenue increased 14%, and North America Commercial Solutions increased 9%.
- Interest expense rose 29% in Q3, primarily due to the $500 million of 3.30% senior notes issued in December 2012. Total debt was higher than a year earlier, principally reflecting acquisition financing.
Cash, capital allocation, and unusual items
Nine-month operating cash flow increased $26.1 million year over year. Investing activities used $47.9 million, including $61.5 million of capital expenditures and $27.5 million for acquisitions, partly offset by $47.5 million of divestiture proceeds. Financing activities used $333.9 million, including $266.5 million of net short-term debt repayments and $79.9 million of dividends to Equifax shareholders. Equifax repurchased $11.9 million of shares and had $215.1 million remaining under its repurchase authorization.
Two non-strategic businesses were sold for $47.5 million. The nine-month results include an $18.4 million after-tax discontinued-operations gain, primarily from an $18.1 million tax benefit; this materially contributed to reported net-income growth. In Q3, Equifax recorded purchase-accounting corrections related to the CSC acquisition: $73.3 million of reacquired rights, an $85.5 million goodwill increase, and a $158.8 million reduction in indefinite-lived intangible assets, plus $9.7 million of amortization expense, including $6.5 million relating to the first half. Annual goodwill and indefinite-lived intangible impairment tests found no impairment.
Outlook, risks, and contingencies
Management expected modest U.S. economic and consumer-credit growth through 2013, but anticipated mortgage origination activity would continue declining as interest rates rose, with the trend expected to continue into 2014. Management expected 2013 total revenue growth, including CSC Credit Services, around the midpoint of its original 10%–12% guidance. Its longer-term expectation was 6%–8% average organic revenue growth, plus 1%–2% from strategic acquisitions, and EPS growth somewhat faster than revenue.
Management said operating cash generation and available credit should fund foreseeable needs, including working capital, investment, interest, potential pension contributions, and dividends. Risks include economic and consumer-credit conditions, lower mortgage volumes, international political and economic challenges, foreign-exchange movements, acquisition integration, and sensitivity of goodwill valuations to forecast and discount-rate assumptions. Equifax also disclosed ongoing multistate and separate state attorney-general investigations into consumer reporting practices, and continuing California bankruptcy-related litigation; it could not predict investigation outcomes but did not expect them to materially affect the financial statements. Other legal matters were not expected to be individually material. The filing reported no material change in risk factors or market-risk exposure.
Important facts for investors to verify
- How much future revenue and margin depends on CSC Credit Services, and how acquisition amortization, integration expenses, and the disclosed purchase-accounting correction affect comparability.
- Whether mortgage-market contraction develops as management expected, and its effects on USCIS and mortgage-related verification revenue.
- Whether the $18.4 million divestiture gain and related tax benefit are separated from recurring earnings in evaluating year-to-date growth.
- Progress and potential financial consequences of the attorney-general investigations and California litigation.
- Debt repayment, liquidity, and continued covenant compliance, alongside planned capital spending, dividends, and share repurchases.
- Goodwill valuation assumptions and sensitivity: the filing reported fair value above carrying value for tested units, but stated that changes in forecasts or discount rates could affect impairment conclusions.