Equifax Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. Equifax provides credit and other information solutions, workforce and employment services, and consumer products across four reportable segments.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenue | $651.8 million | $584.5 million | +12% |
| Operating income | $154.2 million | $151.9 million | +2% |
| Operating margin | 23.7% | 26.0% | -2.3 percentage points |
| Net income attributable to Equifax | $88.3 million | $83.9 million | +5% |
| Diluted EPS | $0.73 | $0.67 | +9% |
| Cash from operating activities | $102.9 million | $71.8 million | +$31.1 million |
| Capital expenditures | $21.6 million | $18.5 million | +$3.1 million |
Revenue growth reflected gains across most businesses, including direct-to-consumer reseller volume, mortgage activity, and auto, government, and pre-employment services. Foreign exchange reduced reported revenue by $17.0 million. Operating expenses rose 15%, including a $20.7 million restructuring charge; higher selling, general and administrative costs also included increased incentives, compensation, litigation and regulatory compliance expense, and professional fees.
Segment revenue and operating income were: U.S. Information Solutions, $298.7 million and $126.6 million; International, $138.8 million and $28.0 million; Workforce Solutions, $148.7 million and $60.0 million; and Personal Solutions, $65.6 million and $18.0 million. Workforce revenue grew 24% and USIS 14%; International revenue declined 1% as reported, despite 10% local-currency growth. General corporate expense increased to $78.4 million from $30.7 million.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $95.0 million, down from $128.3 million at year-end 2014; total assets were $4.595 billion.
- Total debt was $1.525 billion, including $375.0 million of commercial paper; long-term debt, net, was $1.146 billion. Debt net of cash was approximately $1.430 billion.
- The $750 million revolving credit facility had no borrowings and $373.5 million available. The facility expires in December 2017. The leverage ratio was 1.72 against a maximum covenant of 3.5; Equifax reported compliance with its debt covenants.
- Operating cash flow improved year over year, which management attributed to working-capital improvement. Investing used $26.1 million, versus $354.7 million in Q1 2014, when acquisitions were substantially larger. Financing used $103.6 million, including $89.9 million of treasury-stock purchases and $34.7 million of shareholder dividends.
Material changes and unusual items
- Equifax recorded a $20.7 million pretax restructuring charge ($13.2 million after tax), primarily for approximately 300 position reductions, real-estate exit costs, and integration costs. Payments were expected to be substantially completed in 2015.
- Q1 2015 included a 75% equity investment in a U.K. debt collections and recovery management venture. Q1 2014 included the TDX and Forseva acquisitions.
- Equifax repurchased approximately 1.0 million shares on the open market for $89.9 million, at an average $91.30 per share; $223.7 million remained available under the authorization. The quarterly dividend increased from $0.25 to $0.29 per share.
- Management consolidated U.K. Personal Solutions into the Personal Solutions segment and recast prior-period segment information. A related goodwill impairment test resulted in no impairment.
Outlook, commentary and risks
Management expected modest U.S. economic and consumer-credit growth in 2015, with modest mortgage-origination growth and most of it in the first half. It described international conditions as challenging and warned that weaker foreign currencies would reduce reported revenue and profit. Longer term, Equifax stated an objective of 6%–8% average organic revenue growth, plus 1%–2% from strategic acquisitions, and expected EPS to grow somewhat faster than revenue. These are management’s stated expectations, not a specific quarterly earnings forecast.
Key exposures include foreign-exchange movements, economic and consumer-credit activity, seasonal revenue patterns, and execution of technology and growth initiatives. Equifax noted that online consumer information revenue is typically lowest in Q1, while Workforce Solutions’ Employer Services revenue is generally higher in Q1.
Legal and regulatory matters include a multi-state attorneys general investigation involving 32 states, separate New York and Mississippi investigations, and a CFPB investigation into consumer-reporting and related products. Equifax entered a March 2015 settlement with the New York Attorney General requiring a National Consumer Assistance Plan to be implemented over 6–39 months; outcomes of the remaining investigations were uncertain. The filing also describes ongoing California bankruptcy litigation. Management said recorded legal-contingency accruals were not material, but noted that some matters could result in adverse judgments, penalties, injunctions, or other relief.
Important facts for investors to verify
- Whether reported growth persists after accounting for foreign exchange and the strong mortgage, reseller, and employment-related demand cited for the quarter.
- Whether the restructuring and higher corporate, litigation, and compliance costs are temporary or continue to affect margins.
- Progress, costs, and potential consequences of the multistate attorneys general and CFPB investigations, as well as the New York settlement implementation.
- Commercial-paper funding, available revolver capacity, covenant headroom, and debt maturities; $375 million of commercial paper was outstanding at quarter-end.
- Cash generation and capital allocation, including the pace of share repurchases and the increased dividend.