Equifax Inc. — 2012 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012; filed February 22, 2013. Amounts are in U.S. dollars unless noted.
Business context
Equifax provides consumer and commercial credit information, analytics, identity and fraud services, workforce verification and human-resources outsourcing, and consumer credit-monitoring products. It reports five segments: U.S. Consumer Information Solutions (USCIS), International, Workforce Solutions, North America Personal Solutions, and North America Commercial Solutions. USCIS generated 42% of 2012 revenue. The largest client represented 2% of revenue; 24% of revenue came from international clients.
Financial performance and liquidity
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Operating revenue | $2,160.5 million | $1,959.8 million | +10% |
| Operating income | $489.0 million | $471.0 million | +4% |
| Operating margin | 22.6% | 24.0% | -1.4 percentage points |
| Income from continuing operations | $280.8 million | $240.2 million | +17% |
| Net income attributable to Equifax | $272.1 million | $232.9 million | +17% |
| Diluted EPS from continuing operations | $2.22 | $1.87 | +19% |
| Cash from operating activities | $496.3 million | $408.7 million | +$87.6 million |
| Capital expenditures | $66.0 million | $75.0 million | -$9.0 million |
Operating cash flow less capital expenditures was approximately $430 million. Investing activities used $1,083.6 million, principally reflecting the $1.0 billion CSC Credit Services acquisition. Cash and cash equivalents were $146.8 million at year-end, versus $127.7 million a year earlier.
Year-end debt carrying value was $1,730.7 million, compared with $1,013.2 million in 2011. The company had $265 million of commercial paper outstanding, no borrowings under its $750 million revolving facility, and $483.6 million of facility availability. Its stated leverage ratio was 2.08 against a 3.5 maximum covenant; Equifax reported compliance with debt covenants. The facility was extended to December 2017. Dividends declared were $0.72 per share, up from $0.64.
Results by segment were mixed: USCIS revenue rose 16% to $916.8 million and operating income rose 19%; Workforce Solutions revenue increased 15% to $463.1 million; Personal Solutions revenue increased 13% to $204.5 million. International revenue fell 1% to $486.2 million, partly due to Brazil’s prior deconsolidation and foreign exchange; revenue in other international geographies grew. North America Commercial Solutions revenue increased 1% to $89.9 million, while operating income declined 16%.
Material changes and unusual items
- Equifax acquired CSC Credit Services on December 28, 2012, for approximately $1.0 billion. Its 2012 contribution was immaterial; the purchase substantially increased goodwill, identifiable intangibles, assets, and debt.
- A fourth-quarter pension settlement and plan amendment generated a $38.7 million charge. The company paid $62.6 million from plan assets to former employees who elected lump sums.
- The pension charge contributed to fourth-quarter operating income falling to $95.2 million from $125.7 million in Q4 2011; quarterly net income attributable to Equifax was $46.3 million versus $74.4 million, and diluted EPS was $0.38 versus $0.61. Q4 revenue increased to $558.1 million from $509.7 million.
- The 2012 effective tax rate was 36.2%, down from 41.2% in 2011. The 2012 rate included a $15.3 million tax benefit from an approved tax-method change and $20.5 million of expense from international tax restructuring; management noted certain benefits were not expected to recur.
- In the first quarter of 2013, after year-end, Equifax divested Settlement Services and Talent Management Services for approximately $48 million combined. Together these businesses generated $87.5 million of 2012 revenue; their historical results were expected to be classified as discontinued operations from Q1 2013.
Outlook, risks, and contingencies
Management expected 2013 continuing-operations revenue growth of 10%–12%, with CSC acquisition growth more than offsetting expected lower U.S. mortgage volumes. It anticipated strong U.S. mortgage refinancing in the first half of 2013 followed by a decline in the second half, and modest economic growth in most markets. Its longer-term targets were 6%–8% average annual organic revenue growth plus 1%–2% from strategic acquisitions, with EPS growth somewhat faster than revenue. The expected 2013 effective tax rate was 35%–37%.
- Key risks include weaker consumer lending or mortgage activity, competition and pricing pressure, loss of access to external data sources, cyber or data-security incidents, regulatory changes and compliance costs, foreign exchange and economic exposure, and acquisition integration or goodwill impairment.
- Equifax became subject to CFPB supervision as a larger participant; its first examination, focused on compliance management, was completed in Q4 2012. The filing warns that regulatory enforcement or new rules could materially affect operations and costs.
- Potential Latin American changes included Ecuador’s move toward a state-run credit registry and proposed or pending data and credit-reporting legislation in several countries. Equifax said significant restrictions in Argentina, Chile, or several smaller markets could materially affect International results.
- Legal proceedings included appeals in consolidated California bankruptcy-reporting litigation, with oral argument scheduled for March 2013. The company stated that other pending matters were not expected to be individually material, while acknowledging some adverse outcomes were likely.
- Goodwill was $2.29 billion. No impairment was recorded in 2012, but management identified Talent Management Services as the reporting unit with the lowest absolute fair-value cushion and noted sensitivity to hiring trends and valuation assumptions.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management and the auditor excluded the newly acquired CSC operations from the 2012 internal-control assessment.
Important facts for investors to verify
- Whether CSC Credit Services delivers the expected revenue, cost synergies, and returns, and how its purchase accounting and financing affect future earnings and leverage.
- Whether mortgage and verification activity weaken as management anticipated, and whether non-mortgage growth can offset the resulting pressure.
- The sustainability of margin and EPS growth after excluding the one-time pension charge and tax items.
- Progress on CFPB compliance, data security, and evolving privacy and credit-reporting rules, particularly in Latin America.
- Current debt, covenant headroom, cash-flow capacity, and any subsequent pension funding or legal developments.