Equifax Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Equifax provides credit and other information, analytics, verification, and workforce services to businesses, governments, and consumers.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $880.0 million | $876.9 million | $1,726.1 million | $1,742.6 million |
| Operating income (loss) | $113.8 million | $193.6 million | $(504.0) million | $337.8 million |
| Operating margin | 12.9% | 22.1% | (29.2)% | 19.4% |
| Net income (loss) attributable to Equifax | $66.8 million | $144.8 million | $(489.1) million | $235.8 million |
| Diluted EPS | $0.55 | $1.19 | $(4.02) | $1.94 |
- Six-month operating results included $701.3 million of expense accruals for probable losses related to the 2017 cybersecurity incident. Q2 included $11.3 million of these accruals. The company also cited higher technology and security spending, restructuring, acquisition costs, and the absence of 2018 insurance recoveries.
- Q2 revenue was nearly flat. Workforce Solutions grew 11% and U.S. Information Solutions grew 2%, offset by declines in International (9%) and Global Consumer Solutions (7%). For the first six months, revenue declined 1%; International fell 8%, while Workforce Solutions grew 10%.
- Six-month cash from operating activities was $248.0 million, versus $354.8 million a year earlier. Investing used $468.3 million, including $208.5 million of capital expenditures and $234.8 million for acquisitions. Cash declined by $87.8 million to $135.8 million.
- At June 30, total debt was $2.882 billion; long-term debt, net, was $2.833 billion. The company reported $1.1 billion available under its revolving credit facility and $25 million available under its receivables facility. It was in compliance with debt covenants.
- Cash dividends were $0.39 per share in Q2 and $0.78 per share for the first half. No shares were repurchased during the first six months.
Material changes and outlook
- After quarter-end, Equifax entered into agreements addressing consumer litigation and government investigations related to the 2017 breach. Subject to court approvals, the agreements provide for $380.5 million for a consumer restitution fund, up to an additional $125 million for certain consumer claims, $180.5 million for the multistate group, $100 million to the CFPB, and $10 million to NYDFS. Additional credit-monitoring costs could apply if enrollment exceeds seven million.
- The company expected to pay the government amounts and contribute approximately $25 million to the fund in Q3 2019; the remaining fund contribution was expected after final approval, potentially in Q4. It planned to use existing borrowing capacity. The accrued liability for cybersecurity-related matters was $701.3 million, but Equifax said further losses could exceed the accrual and could be material; it could not estimate the additional amount.
- Management expected significant technology-transformation, security, consumer-support, legal, insurance, finance, and compliance costs to continue through 2019 and 2020. Technology and security spending was expected to remain elevated, with 2019–2020 initiative costs slightly below 2018 levels. No quantified full-year revenue or earnings guidance is provided in the supplied filing text.
- Management cited weak Australian credit markets, expected softness in Argentina, weaker first-half U.S. mortgage originations, and expected continuing effects of the breach on U.S. Information Solutions and Global Consumer Solutions. It expected some benefit from resumed U.S. consumer-product advertising in the second half of 2019.
- The company disclosed ongoing cybersecurity-related proceedings, including unresolved financial-institution, securities, derivative, state, Canadian, and individual consumer matters, as well as continuing investigations. Settlement approvals and outcomes remain contingencies. The filing also reported a negative outlook on both S&P and Moody’s credit ratings.
Investor verification priorities
- Confirm court approval, payment timing, total realized cost, and any additional exposure under the cybersecurity settlements; compare these with the $701.3 million accrual.
- Track operating performance excluding breach-related accruals and other unusual costs, particularly margins, technology/security expense, and cash generation.
- Assess liquidity after settlement payments, planned capital expenditures, and acquisitions, including borrowing and covenant capacity.
- Monitor International and Global Consumer Solutions trends, U.S. mortgage activity, and the extent to which Workforce Solutions growth continues.
- Review remaining litigation and investigations, and verify subsequent developments not covered by this quarter-end filing.