Equifax Inc. — 2010 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2010. The filing is an annual report, not a standalone Q4 filing; selected fourth-quarter results are noted below. Unless stated otherwise, amounts are in U.S. dollars.
Business context
Equifax provides consumer and business credit information, analytics, identity and fraud solutions, consumer credit-monitoring products, and employment verification and human-resources outsourcing services. It reports five segments: U.S. Consumer Information Solutions, International, TALX, North America Personal Solutions, and North America Commercial Solutions. The U.S. generated 73% of 2010 revenue; the largest customer contributed 3% of total revenue.
Financial results and liquidity
| Metric | FY 2010 | FY 2009 | Change |
|---|---|---|---|
| Operating revenue | $1,859.5 million | $1,716.0 million | +8% |
| Operating income | $430.0 million | $381.8 million | +13% |
| Operating margin | 23.1% | 22.2% | +0.9 percentage points |
| Income from continuing operations attributable to Equifax | $235.2 million | $217.8 million | +8% |
| Net income attributable to Equifax | $266.7 million | $233.9 million | +14% |
| Diluted EPS, continuing operations | $1.86 | $1.70 | +9% |
| Diluted EPS, including discontinued operations | $2.11 | $1.83 | +15% |
| Cash from operating activities | $352.6 million | $418.4 million | -16% |
| Capital expenditures | $99.8 million | $70.7 million | +$29.1 million |
Revenue and operating income improved, while operating cash flow declined. The cash-flow decrease reflected higher pension contributions, taxes paid on divestitures, and working-capital changes. FY 2010 net income included $31.5 million of after-tax discontinued-operations income, including after-tax gains of $12.3 million on the APPRO sale and $14.9 million on the DMS sale.
At year-end, cash and cash equivalents were $119.4 million. Balance-sheet debt, net of discounts and including fair-value adjustments, was $999.6 million, down from $1,174.1 million in 2009. The debt table reports $990.2 million of total debt before those adjustments. The company had $848.3 million available under its $850 million senior credit facility at year-end, no outstanding commercial paper or facility borrowings, and a leverage ratio of 1.71x against a 3.5x covenant limit. The current ratio was approximately 1.34x ($429.2 million current assets divided by $319.5 million current liabilities).
Fourth quarter: Revenue was $482.0 million versus $435.4 million in Q4 2009; operating income was $109.7 million versus $82.9 million. Net income attributable to Equifax was $62.2 million versus $60.2 million, and diluted EPS was $0.50 versus $0.47. Q4 2010 had no discontinued-operations income, compared with $5.3 million in Q4 2009.
Material changes and segment trends
- Revenue grew in all five segments. TALX rose 14% to $395.6 million, led by 32% growth in The Work Number; North America Commercial Solutions rose 15% to $80.5 million.
- International revenue rose 10% to $482.8 million, with growth in Latin America and favorable foreign-exchange effects; International operating margin fell 2.4 points to 24.7%, reflecting mix and investment in expenses.
- U.S. Consumer Information Solutions revenue rose 4% to $743.0 million. Mortgage Solutions and Consumer Financial Marketing Services grew, while online consumer credit revenue declined 3%, including a 5% decrease in online credit-decision transaction volume.
- North America Personal Solutions revenue increased 6% to $157.6 million, with subscription-service growth and improved operating margin. The segment’s margin rose 5.3 points to 28.3%.
- Equifax sold its APPRO loan-origination software business for approximately $72 million and DMS for approximately $117 million. It acquired Anakam for $64.3 million and completed smaller international acquisitions.
- The company repurchased 5.2 million shares for $167.5 million and paid $35.2 million in shareholder dividends. Annual declared dividends increased to $0.28 per share from $0.16.
Outlook, risks and unusual items
- Management expected modest improvement in the credit economy in 2011, with no measurable contribution to organic growth; it expected organic growth from newer products and 2010 business momentum. The filing does not provide a specific consolidated revenue or EPS forecast.
- Management projected a 2011 effective tax rate of 36%–38% and capital expenditures of $75–$95 million.
- After year-end, Equifax extended its revolving credit facility maturity to February 2015 and reduced facility and commercial-paper capacity from $850 million to $500 million. Pricing and unused-facility fees increased; an accordion feature permits a request to raise facility capacity to $750 million.
- CSC holds an option, exercisable through 2013, to sell its credit-reporting business to Equifax. Equifax estimated a year-end 2010 exercise price of $625–$700 million, payable in cash, but the actual price could differ materially and financing would be required.
- Key risks include weak consumer and small-business lending, loss of access to external data, intense competition and pricing pressure, cybersecurity or system outages, evolving privacy and financial regulation (including Dodd-Frank implementation), international and foreign-exchange exposure, and reliance on outsourced providers.
- The CRA’s Canadian tax reassessments concern 1995–2000 tax years and assert claims of C$8.5–C$19.0 million plus interest and penalties; Equifax disputes the claims. The filing also describes ongoing litigation, including unresolved damages claims in the California bankruptcy-reporting cases, but says it does not expect other matters to have a material impact based on its assessment.
- There was no goodwill impairment in 2010. Management identified Latin America and Talent Management Services as more sensitive to forecast assumptions and noted that adverse developments could lead to future impairment.
Important facts for investors to verify
- Separate recurring operating earnings from discontinued-operations gains when assessing FY 2010 net income and EPS.
- Track whether operating cash flow recovers from its 16% decline and how pension funding and working capital affect cash generation.
- Review the amended credit facility’s higher pricing and reduced capacity, along with debt maturities and covenant headroom.
- Assess whether TALX and newer product growth can offset continued softness in core consumer credit-decision volumes and whether International margins stabilize.
- Monitor the CSC option through 2013, the Canadian tax reassessment, the California litigation, and regulatory and data-security developments.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at December 31, 2010.