Equifax Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2011; comparisons are with the third quarter and first nine months of 2010. Equifax provides consumer and commercial information services, identity and fraud solutions, employment verification, and related services through five reportable segments.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $490.4 million | $473.8 million | $1,450.1 million | $1,377.5 million |
| Operating income | $121.6 million | $110.2 million | $345.3 million | $320.3 million |
| Operating margin | 24.8% | 23.3% | 23.8% | 23.3% |
| Income from continuing operations attributable to Equifax | $66.7 million | $61.3 million | $158.5 million | $173.0 million |
| Diluted continuing-operations EPS | $0.54 | $0.49 | $1.28 | $1.36 |
| Net income attributable to Equifax | $66.7 million | $76.5 million | $158.5 million | $204.5 million |
- Revenue and margins: Revenue grew 4% in Q3 and 5% year to date. Management reported 8% growth excluding Brazil in both periods. Operating income rose 10% in Q3 and 8% year to date; reported margin gains were partly influenced by Brazil’s deconsolidation.
- Profit and unusual comparisons: Q3 net income attributable to Equifax fell 13%, despite higher continuing-operations income, because Q3 2010 included $15.2 million of discontinued-operations income, primarily a gain on the Direct Marketing Services sale. Year-to-date income from continuing operations fell 8%; the Brazilian transaction and higher effective taxes contributed. 2010 year-to-date results also included gains from the APPRO and DMS sales.
- Cash flow: For the first nine months, operating cash flow was $259.0 million versus $207.4 million. Capital expenditures were $59.2 million versus $82.4 million. Investing used $173.1 million, including $112.2 million for acquisitions; financing used $98.9 million. Cash declined $17.4 million to $102.0 million.
- Balance sheet and liquidity: At September 30, cash was $102.0 million, current assets $430.2 million, and current liabilities $344.2 million. Debt was approximately $1.04 billion, including $50.1 million of commercial paper; $967.8 million was reported as long-term debt, net. The $500 million revolving facility had no borrowings and $448.5 million available. The leverage ratio was 1.69 against a 3.5 maximum covenant, and Equifax reported compliance with its covenants.
- Capital returns: Equifax paid $58.7 million in shareholder dividends and repurchased $75.2 million of stock during the first nine months. The quarterly dividend had increased to $0.16 per share; $179.3 million remained authorized for repurchases at quarter-end.
Material changes and segment trends
- Q3 revenue increased in U.S. Consumer Information Solutions (4%), TALX (4%), North America Personal Solutions (14%), and North America Commercial Solutions (18%); International revenue declined 3%, largely reflecting Brazil’s removal from consolidation. Year-to-date revenue increased across all segments, with International up 6%.
- Personal Solutions and Commercial Solutions showed strong growth and margin improvement. International revenue outside Brazil grew, while reported International margins benefited from the exit of a business whose margins had weakened. TALX year-to-date operating income declined 2%, with pressure in government-related verification and talent services.
- On May 31, 2011, Equifax merged its Brazilian business into Boa Vista Serviços S.A. (BVS), received a 15% equity interest, and deconsolidated the business. The transaction reduced reported revenue by $20.9 million in Q3 and $28.9 million year to date. Equifax recorded a $10.3 million pretax loss and $17.5 million tax expense; management cited a $27.8 million combined effect on year-to-date earnings. The BVS investment was valued at $70.6 million at September 30.
Outlook, risks, and contingencies
- Management said lending activity had stabilized but remained weak and expected credit-economy conditions not to contribute measurably to organic growth for the rest of 2011. It expected growth instead from newer products and penetration of new customer segments. No numerical earnings or revenue guidance was provided.
- Management described the operating environment as challenging for traditional products, while citing opportunities in analytics, decisioning, technology, and newer offerings. It continued expense-control initiatives and investment in product development and sales capacity.
- Equifax may provide BVS up to $55 million in funding through May 31, 2015; any borrowing would be due then, with specified conversion options. Equifax also retained certain contingent liabilities related to the transaction.
- Legal proceedings include the California bankruptcy-reporting class litigation. The court approved a settlement in July 2011; several objectors appealed. Equifax said other legal matters were not expected to be material individually or in aggregate, while noting outcomes are uncertain.
- The CSC agreement includes options relating to CSC’s credit-reporting business; Equifax’s estimate of a potential exercise price, based on its analysis at December 31, 2010, was $625 million to $700 million, but the actual amount could be materially higher or lower. Management also disclosed potential termination penalties under certain outsourcing agreements.
- Annual goodwill testing found no impairment. However, management identified Talent Management Services as having the smallest absolute excess of estimated fair value over carrying value among the units tested and warned that weaker-than-forecast hiring or other adverse changes could result in future impairment.
- Forward-looking statements are subject to economic, market, regulatory, currency, competitive, and other risks. The filing reported no material change in risk factors from the 2010 Form 10-K.
Important facts for investors to verify
- How much of ongoing growth is organic and sustainable, particularly given Brazil’s deconsolidation and favorable foreign-exchange effects.
- The Brazilian transaction’s final tax, retained-liability, and potential BVS funding implications.
- Whether weak lending and mortgage activity, government hiring trends, or customer demand affect USCIS, TALX, and goodwill assumptions.
- Debt maturities, commercial-paper access, covenant headroom, and the effect of any credit-rating downgrade on borrowing costs or market access.
- The status and potential financial exposure of the California litigation appeals, CSC options, and outsourcing-contract termination provisions.