Equifax Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Equifax provides credit and other information services, workforce verification and HR services, and consumer products. Amounts are in U.S. dollars.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $834.2m | $834.8m | $2,576.8m | $2,523.8m |
| Operating income | $64.1m | $154.7m | $401.9m | $639.1m |
| Operating margin | 7.7% | 18.5% | 15.6% | 25.3% |
| Net income attributable to Equifax | $38.4m | $96.3m | $274.2m | $415.0m |
| Diluted EPS | $0.32 | $0.79 | $2.26 | $3.41 |
| Cash from operating activities | — | — | $507.4m | $608.7m |
| Capital expenditures (cash outflow) | — | — | $208.1m | $157.5m |
Q3 operating expenses rose 13% to $770.1m, led by higher service costs. The reported Q3 income-tax line was a $0.9m benefit, compared with a $35.5m benefit in Q3 2017; the effective tax rates were a 2.3% benefit and 26.1% expense, respectively. The lower 2018 tax rate reflected the U.S. tax-law changes and discrete tax benefits.
At September 30, 2018, cash was $253.4m, total debt was $2,653.1m, and long-term debt, net, was $2,629.4m. Current assets were $887.5m and current liabilities were $744.2m. The company had $1.08bn available under its revolver and $215m under its receivables facility, with no revolver or commercial-paper borrowings. It reported compliance with debt covenants.
Material changes and operating drivers
- Q3 revenue was essentially flat year over year; nine-month revenue grew 2%. Growth in Workforce Solutions was offset in Q3 by declines in International and Global Consumer Solutions.
- Q3 operating income fell 59%, and nine-month operating income fell 37%, primarily reflecting higher technology and data-security spending following the 2017 cybersecurity incident, alongside other cost increases.
- Workforce Solutions revenue rose 9% in Q3 and 7% year to date, driven principally by Verification Services. Global Consumer Solutions revenue declined 12% in Q3 and 6% year to date, partly because U.S. paid-product advertising had been suspended after the incident and U.K. business was affected by GDPR.
- International revenue declined 2% in Q3 but rose 6% year to date; currency movements weighed on reported results. USIS revenue was flat in Q3 and down 1% year to date.
- Operating cash flow declined $101.3m year to date. Capital expenditures increased, reflecting investment in technology, infrastructure and security. Acquisitions used $115.8m of cash.
- Equifax issued $1.0bn of senior and floating-rate notes in May 2018, using proceeds to repay commercial paper, revolver and term-loan borrowings. It entered a new $1.1bn, five-year revolver in September. Debt was approximately 89% fixed-rate and 11% effectively variable-rate.
Outlook, risks and unusual items
- Management expected continued significant cybersecurity-related professional-services, technology, security, insurance, finance, compliance and regulatory costs, including capital investment. The ultimate scale of these increases was not specified.
- Management described a mixed economic outlook: expected U.S. mortgage-market declines, continued weakness in Argentina, and varying conditions across other markets. No consolidated revenue or EPS guidance was provided in the supplied filing text.
- U.S. consumer-product advertising resumed in Q4 2018; management expected related benefits to begin in 2019.
- The 2017 breach involved personal information of approximately 145.5m U.S. consumers identified initially, with another 2.4m identified in March 2018; personal information of Canadian and U.K. consumers was also affected. Equifax said it found no evidence that its core consumer, employment/income or commercial reporting databases were accessed.
- Hundreds of class actions, more than 1,000 individual consumer actions and numerous government investigations remained ongoing. Equifax said potential losses could be material but could not estimate a loss or range. The CFPB and FTC had indicated their staffs were considering recommending legal action; other agencies were also investigating.
- Equifax recorded $45m of insurance recoveries in the first nine months of 2018 and had recorded and received $95m cumulatively through September 30. It reported $125m of cybersecurity coverage above a $7.5m deductible. The U.K. privacy regulator imposed a monetary penalty described as not material.
- In October 2018, after quarter-end, Equifax reached an agreement in principle to settle public-records litigation; the Q3 filing says the accrued estimate was not material. It also reported an Australian consumer-law settlement, subject to court approval, requiring a penalty, refunds to certain consumers and specified conduct restrictions.
- The company reported no goodwill impairment in its September annual test. Asia Pacific goodwill fair value exceeded carrying value by 9%, leaving that unit comparatively sensitive to changes in assumptions.
Investor verification priorities
- Track breach-related legal, regulatory and remediation costs, insurance recoveries, and any eventual estimate of potential losses.
- Assess whether higher security and technology spending continues to pressure operating margins and cash generation.
- Verify recovery in Global Consumer Solutions after advertising resumed, and monitor performance in Workforce Solutions and mortgage-related businesses.
- Review debt, interest expense, revolver availability and covenant compliance as the company funds investment and ongoing incident-related costs.
- Confirm final terms and approval of the public-records and Australian settlements, and developments in the breach investigations and litigation.