Equifax Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unless noted, financial amounts are in U.S. dollars. Equifax provides consumer and commercial information services, workforce verification and related business-process services, and consumer credit and identity-protection products.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $678.1m | $613.9m | $1,329.9m | $1,198.4m |
| Operating income | $188.5m | $167.4m | $342.7m | $319.3m |
| Operating margin | 27.8% | 27.3% | 25.8% | 26.6% |
| Net income attributable to Equifax | $111.0m | $92.8m | $199.3m | $176.7m |
| Diluted EPS | $0.92 | $0.75 | $1.64 | $1.42 |
| Cash from operating activities | $186.7m | $152.8m | $289.6m | $224.6m |
| Capital expenditures | $33.6m | $19.2m | $55.2m | $37.7m |
- Q2 revenue grew 10%; first-half revenue grew 11%. Foreign exchange reduced reported revenue by $19.0m in Q2 and $36.0m in the first half.
- Q2 operating margin improved 0.5 percentage points; first-half margin fell 0.8 points, reflecting the first-quarter restructuring charge and higher people costs, partly offset by improved USIS and Workforce Solutions margins.
- At June 30, cash was $84.2m and total debt was $1,482.6m, including $333.3m of commercial paper. The company had $415.3m available under its revolving credit facility; leverage ratio was 1.64 against a maximum covenant ratio of 3.5.
- First-half cash used in investing was $59.7m, versus $374.4m in 2014, largely because prior-year acquisition spending was substantially higher. Financing used $268.1m, including $182.2m of share repurchases and $69.0m of shareholder dividends.
Business and segment changes
- USIS revenue increased 12% in Q2 and 13% in the first half; segment operating margin rose to 42.1% for Q2. Growth reflected direct-to-consumer reseller volume, mortgage activity, and financial-services and auto demand.
- Workforce Solutions revenue grew 23% in both periods, with strong verification demand; Q2 operating margin rose to 38.3%.
- International reported revenue declined 1% in both periods as currency effects offset local-currency growth; Q2 operating margin declined to 19.9%.
- Personal Solutions revenue grew 7% in Q2, but operating margin declined to 27.6% amid higher technology and marketing costs.
- Equifax consolidated U.K. Personal Solutions with its North American business in January 2015 and recast segment reporting accordingly.
Outlook, unusual items and risks
- Management expected modest U.S. economic and consumer-credit growth in 2015 and mortgage originations to increase slightly over 10% for the full year, with growth expected to be much more modest in the second half. It cautioned that international conditions and weaker currencies would weigh on reported revenue and profit.
- Long-term expectations were 6%–8% average organic revenue growth, plus 1%–2% from strategic acquisitions, and EPS growth somewhat faster than revenue. These are long-term expectations, not specific full-year 2015 earnings guidance.
- A $14.8m second-quarter impairment was recorded on Equifax’s 15% investment in Brazilian credit-information company Boa Vista Servicos, following weaker market conditions and revised projections. The investment’s estimated fair value was 44m Brazilian reais ($14.1m).
- A $20.7m first-quarter restructuring charge, primarily for approximately 300 position reductions, real-estate exits and integration costs, was recorded in SG&A. Payments were expected to be substantially completed in 2015.
- The effective tax rate declined to 29.0% in Q2 and 31.7% for the first half, partly due to an $8.6m discrete benefit from a state tax-law change and a more favorable foreign tax-rate differential.
- Settlements with New York and 31 other states require implementation of a National Consumer Assistance Plan over 6–39 months. Mississippi’s investigation and a CFPB investigation remained unresolved; outcomes could not be predicted. The company reported no material aggregate accrual for legal and regulatory contingencies.
- Management described liquidity as strong and expected operating cash flows to fund anticipated requirements. It reported compliance with debt covenants and effective disclosure controls; no material change in internal control was reported.
Important facts for investors to verify
- Whether strong USIS and Workforce Solutions growth continues and offsets international currency pressure and weaker segment results.
- How much of earnings growth reflects sustainable operations versus the lower tax rate, and how corporate, compliance and litigation expenses develop.
- Whether the Brazilian investment’s estimated value and the assumptions behind the $14.8m impairment remain supportable.
- The costs and operational effects of restructuring and the state consumer-assistance settlements, and the outcomes of the Mississippi and CFPB investigations.
- Cash needs and capital allocation alongside commercial-paper borrowings, share repurchases, dividends and increased technology investment.