Equifax Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 21, 2019. This is an annual report, not a standalone Q4 filing. The company provides quarterly results, including Q4, below. Equifax is a global data, analytics and technology company with four segments: U.S. Information Solutions (USIS), International, Workforce Solutions and Global Consumer Solutions.
Financial results
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $3,412.1 million | $3,362.2 million | +1% |
| Operating income | $448.0 million | $831.7 million | -46% |
| Operating margin | 13.1% | 24.7% | -11.6 percentage points |
| Net income attributable to Equifax | $299.8 million | $587.3 million | -49% |
| Diluted EPS | $2.47 | $4.83 | -49% |
| Cash from operating activities | $672.2 million | $816.0 million | -$143.8 million |
| Capital expenditures | $321.9 million cash outflow | $218.2 million cash outflow | +$103.7 million outflow |
Q4 2018: Revenue was $835.3 million versus $838.5 million in Q4 2017. Operating income was $46.1 million versus $192.6 million; net income attributable to Equifax was $25.6 million versus $172.3 million; diluted EPS was $0.21 versus $1.42. Q4 2018 included a $46.1 million restructuring charge.
Segment revenue and operating income, FY 2018: USIS revenue was $1,247.3 million (-1% year over year) and operating income $441.7 million; International revenue was $966.2 million (+4%) and operating income $108.6 million; Workforce Solutions revenue was $826.8 million (+8%) and operating income $332.7 million; Global Consumer Solutions revenue was $371.8 million (-8%) and operating income $68.6 million. International operating income fell 36%; GCS operating income fell 35%.
Balance sheet and liquidity: Cash and cash equivalents were $223.6 million at year-end, total debt net was $2,635.5 million, and total equity was $3,155.7 million. The company reported $1.08 billion available under its revolving credit facility and $209.8 million available under its receivables facility; neither facility had borrowings at year-end. Approximately 89% of debt was fixed-rate. FY 2018 dividends paid to shareholders were $187.9 million ($1.56 per share).
Material changes versus the prior comparable period
- Revenue growth was modest: Workforce Solutions and International grew, while USIS and GCS declined. The 2017 cybersecurity incident continued to weigh on USIS and GCS.
- Operating expenses rose 17% to $2,964.1 million, substantially faster than revenue. Incremental technology and data-security costs were $307.2 million across cost of services and SG&A; total net pretax expenses related to the incident were $326.2 million after $75.0 million of insurance recoveries.
- Operating margin contracted to 13.1% from 24.7%, and cash from operations declined. Capital expenditures increased as the company invested in technology infrastructure and security.
- Debt composition changed following the May 2018 issuance of $1.0 billion in senior and floating-rate notes, used to repay commercial paper, revolver and term-loan borrowings. Year-end net debt was down $68.8 million from 2017.
- The effective tax rate fell to 14.0% from 19.9%, largely reflecting the lower U.S. federal tax rate under the Tax Cuts and Jobs Act and other tax items. The 2017 comparison included a $48.3 million tax benefit related to that Act.
Outlook, risks and unusual items
- Management expected 2019 U.S. mortgage originations to be materially weaker in the first half and lower for the full year than in 2018. It anticipated modest growth in U.S. consumer credit excluding mortgages, while describing economic conditions in Canada, Australia, Europe and parts of Latin America as subdued or weakening.
- Management expected significant security, technology-transformation and capital spending in 2019 and 2020, at levels slightly below 2018, with elevated legal, insurance, finance and compliance costs continuing. No numeric earnings or revenue guidance is provided in the supplied filing text.
- The 2017 breach affected approximately 145.5 million U.S., 19,000 Canadian and 860,000 U.K. consumers; approximately 2.4 million U.S. consumers also had names and partial driver’s-license information stolen. The company reported that its core consumer, employment/income and commercial reporting databases were not accessed.
- Numerous consumer and financial-institution lawsuits and government investigations remained unresolved. Equifax said the potential loss range could not be estimated and that ultimate payments could be material to future financial condition, results or cash flows. Its $125 million cybersecurity insurance limit had been fully reimbursed; further incident losses were not covered by that policy.
- Other notable items included the $46.1 million Q4 restructuring charge, an $18.5 million accrual for a proposed settlement of public-records litigation, and an Australian consumer-law settlement subject to final court review. The company also entered a consent order with certain state banking regulators concerning information security.
- Key execution and business risks include further cyber incidents, cloud migration and service disruption, customer or data-supplier losses, regulation and privacy-law changes, foreign-exchange exposure, competition, and the possibility that litigation or regulatory remedies constrain data use or increase costs.
- Management and the auditor reported effective internal control over financial reporting at year-end; the auditor issued an unqualified opinion on the consolidated financial statements.
Important facts for investors to verify
- Progress and total future costs of the security remediation and cloud-focused technology transformation, including whether projected savings and benefits are realized.
- Developments, settlement amounts and possible regulatory restrictions arising from breach-related litigation and investigations; the filing does not provide a clear estimate of total exposure.
- Whether USIS and GCS revenue recover following resumed U.S. consumer advertising in Q4 2018, and how weak mortgage markets affect results.
- Cash generation, capital spending, debt maturities and covenant headroom if incident-related payments or costs rise; year-end ratings included S&P BBB+ with a negative outlook and Moody’s Baa1 stable.
- International currency effects and economic conditions, particularly the Argentine peso and the company’s exposure to foreign-currency translation.