Equifax Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. Equifax provides credit and other information, analytics, employment and income verification, human-resources services, and consumer credit monitoring across four segments: U.S. Information Solutions (USIS), International, Workforce Solutions, and Global Consumer Solutions.
Financial performance
Amounts are in millions of U.S. dollars except per-share data.
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $3,144.9 | $2,663.6 | +18% |
| Operating income | $817.9 | $693.9 | +18% |
| Operating margin | 26.0% | 26.1% | Down 0.1 point |
| Net income attributable to Equifax | $488.8 | $429.1 | +14% |
| Diluted EPS | $4.04 | $3.55 | +14% |
| Cash from operating activities | $795.8 | $742.1 | +$53.7 |
| Cash capital expenditures | $173.5 | $146.2 | +$27.3 |
- Fourth quarter 2016 revenue was $801.1, operating income $203.9, net income attributable to Equifax $123.0, and diluted EPS $1.01.
- Revenue growth reflected organic gains and the Veda acquisition; foreign exchange reduced FY 2016 revenue by $75.2, or about 3%.
- Segment revenue and operating margin: USIS $1,236.5 and 43.4%; International $803.6 and 13.9%; Workforce Solutions $702.2 and 42.1%; Global Consumer Solutions $402.6 and 27.9%. International revenue rose 41%, primarily from Veda; excluding Veda, local-currency organic growth was 12%.
- Interest expense increased to $92.1 from $63.8, mainly because of acquisition-related borrowing. The effective tax rate was 32.0%, versus 31.7%.
Liquidity, debt, and capital
- At year-end, cash and cash equivalents were $129.3. Total debt, net of discounts, was $2,672.2, up from $1,187.7; gross scheduled debt was $2,685.4. Short-term debt and current maturities totaled $585.4.
- Commercial paper outstanding was $310.3; no revolving-credit borrowings were outstanding, and $589.2 was available under the $900 million revolver. The company reported compliance with debt covenants and investment-grade ratings of BBB+ and Baa1.
- Operating cash flow increased, while investing cash outflow rose to $1,975.9, primarily reflecting the Veda acquisition. Cash dividends paid were $157.6; no shares were repurchased in 2016. The remaining board authorization for repurchases was $667.2.
Material changes, outlook, and risks
- Equifax acquired Veda, a leading Australian and New Zealand credit-information provider, in February 2016 for approximately $1.7 billion in cash plus $189.5 million of assumed debt. It also acquired Barnett & Associates and Computersoft. The Veda transaction drove substantial increases in goodwill, purchased intangibles, debt, and amortization.
- Veda-related costs totaled $40.2 in 2016: $30.1 of transaction and integration costs in operating income, $9.2 of foreign-exchange-related expense, and $0.7 of interest expense. International margin fell from 20.0% to 13.9%, primarily due to Veda-related amortization and integration costs, as well as Latin American margin pressure.
- For 2017, management expected modest but improving U.S. economic and consumer-credit growth, but mortgage originations were expected to decline by a double-digit percentage. Management’s long-term targets were 6%–8% average annual organic revenue growth, plus 1%–2% from strategic acquisitions, and EPS growth somewhat faster than revenue. Weaker foreign exchange rates were expected to weigh on reported growth.
- Key risks include reliance on external data providers; cyberattack, system-disruption, privacy and data-protection exposure; evolving regulation, including the EU GDPR effective in May 2018; competition and pricing pressure; currency movements; and acquisition integration and leverage. The filing reported no known material data breach.
- In January 2017, Equifax agreed to a CFPB settlement requiring $3.8 in consumer restitution, $2.5 in civil penalties, and changes to certain marketing practices. A separate CFPB Workforce Solutions investigation concluded without planned enforcement. The California bankruptcy litigation remained pending, with an agreement in principle to settle monetary claims.
- Management and the auditor concluded internal control over financial reporting was effective; however, the assessment and audit did not include Veda’s controls. Veda represented $2,117.1 of year-end assets and $236.1 of 2016 revenue.
Investor verification priorities
- Assess the sustainability of organic growth and margins apart from Veda, foreign exchange, acquisition amortization, and integration costs.
- Review Veda’s contribution and integration progress, purchase accounting, goodwill concentration, and the resulting debt and interest burden.
- Verify cash conversion, working-capital trends, capital investment needs, near-term debt maturities, and revolver availability.
- Track the CFPB settlement implementation, California litigation resolution, U.K. regulatory authorization, and GDPR readiness.
- Evaluate cyber, data-source, foreign-exchange, and mortgage-market risks against management’s 2017 assumptions and long-term targets.