Equifax Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2010; unaudited. Financial comparisons are against the third quarter or first nine months of 2009, as applicable. Amounts are in U.S. dollars.
Business context and reporting period
Equifax provides consumer and commercial information, analytics, identity and fraud solutions, employment and income verification, and human-resources services. It reports five segments: U.S. Consumer Information Solutions (USCIS), International, TALX, North America Personal Solutions, and North America Commercial Solutions.
Financial performance and liquidity
- Third quarter: Revenue was $473.8 million, up 11%; operating income was $110.2 million, up 10%, with a 23.3% operating margin versus 23.5%. Income from continuing operations attributable to Equifax was $61.3 million; diluted continuing-operations EPS was $0.49. Net income attributable to Equifax was $76.5 million and diluted EPS was $0.61, including $15.2 million of discontinued-operations income.
- First nine months: Revenue was $1,377.5 million, up 8%; operating income was $320.3 million, up 7%, with a 23.3% margin, unchanged. Income from continuing operations attributable to Equifax was $173.0 million; diluted continuing-operations EPS was $1.36. Net income attributable to Equifax was $204.5 million and diluted EPS was $1.61, including $31.5 million from discontinued operations.
- Cash flow, nine months: Operating cash flow was $207.4 million, down from $268.8 million. Investing activities provided $85.5 million, including $181.7 million in divestiture proceeds; capital expenditures were $82.4 million. Financing activities used $278.7 million. Cash ended at $115.6 million, compared with $103.1 million at December 31, 2009.
- Balance sheet and debt: Current assets were $437.1 million and current liabilities $305.3 million at September 30. The filing reports total consolidated debt of $1,007.4 million, down from $1,069.1 million at September 30, 2009; there were no commercial-paper or revolving-facility borrowings. The $850 million senior credit facility had $848.3 million available. The leverage ratio was 1.71 against a maximum of 3.5; Equifax said it was in compliance with debt covenants.
- Shareholder returns: Equifax repurchased 3.7 million shares for $116.4 million during the first nine months and paid $0.12 per share in dividends. $155.5 million remained authorized for repurchases at quarter-end.
Material changes versus the prior comparable period
- Continuing-operations revenue grew across all five segments in the third quarter and nine-month period. TALX revenue rose 19% for the quarter, led by The Work Number; USCIS rose 12% for the quarter, while its nine-month growth was 2%. International revenue rose 7% and 11%, respectively.
- Reported net income and EPS benefited materially from the sales of APPRO and Direct Marketing Services (DMS): after-tax gains were $12.3 million and $14.9 million, respectively. Together, the sales generated approximately $181.7 million of cash proceeds during the first nine months. Their historical results were reclassified as discontinued operations.
- Operating cash flow fell $61.4 million year over year, primarily reflecting $35.0 million of additional pension contributions, deferred-tax changes, and other working-capital movements. Capital expenditures increased $31.2 million, partly because Equifax bought its Atlanta headquarters for $29.1 million.
- Debt was lower than a year earlier, and short-term debt and current maturities were $21.0 million at September 30, versus $183.2 million at December 31, 2009. Equifax also repurchased substantially more stock than in the prior-year period.
Outlook, management commentary, risks and unusual items
- Management described consumer and small-business lending as soft and expected lending growth in mature markets to lag the broader economic recovery. It said revenue and cash flow were not expected to improve meaningfully until 2011. This is commentary, not specific earnings guidance; no numerical forecast was provided.
- Management cited improving U.S. financial-institution demand, strategic product innovation, cross-selling, acquisitions, international expansion, and expense-management initiatives as growth drivers. The company expected funds from operations to meet foreseeable cash needs and intended to renew its $850 million senior facility before its July 2011 expiration, while anticipating higher renewal fees and borrowing spreads.
- Equifax sold APPRO in April and DMS in July 2010. On October 1, after quarter-end, it acquired authentication-solutions provider Anakam for $64 million.
- Annual goodwill and indefinite-lived intangible impairment tests found no impairment. The filing cautions that assumptions are sensitive to changes in growth, margins, discount rates, and economic conditions; Latin America and Talent Management Services are identified as areas to monitor.
- Risks include the uncertain effects of the Dodd-Frank Act and resulting regulations, which could require business changes, increase costs, or affect revenue. A Canadian tax reassessment covering 1995–2000 seeks $8.3 million to $18.5 million, plus interest and penalties; Equifax intends to contest it. The filing also describes ongoing litigation, including California bankruptcy-reporting claims whose damages settlement had not received final approval.
- The filing states that other possible legal outcomes were not expected to materially affect results, but acknowledges uncertainty. Outsourcing contracts include potential termination penalties; Equifax also has an option-related exposure under its CSC agreement, with an internally estimated purchase-price range of $600 million to $675 million based on December 2009 assumptions.
Important facts for investors to verify
- How much of earnings growth is recurring: compare continuing-operations results with gains and results from the divested businesses.
- Whether operating cash flow recovers, given lower year-to-date cash generation and increased pension funding and capital spending.
- Progress, pricing, and terms of the planned 2011 senior credit facility renewal and the company’s ability to maintain covenant compliance.
- Whether lending, mortgage activity, government hiring, and segment growth assumptions support management’s 2011 outlook and goodwill valuations.
- Developments in the Canadian tax reassessment, California bankruptcy litigation, Dodd-Frank implementation, and the post-quarter Anakam acquisition.