Business context and reporting period
Equifax Inc. is a global provider of consumer and commercial information, analytics, verification, and related services. This unaudited Form 10-Q covers the three months ended March 31, 2014; comparisons are with the first quarter of 2013 unless noted. Amounts are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Operating revenue | $584.5 million | $566.5 million; up 3% reported and 5% excluding adverse FX |
| Operating income / margin | $151.9 million / 26.0% | $149.0 million / 26.3% |
| Income from continuing operations attributable to Equifax | $83.9 million | $82.1 million |
| Net income attributable to Equifax | $83.9 million | $101.1 million, including $19.0 million from discontinued operations |
| Diluted EPS | $0.67 | $0.82, including $0.15 from discontinued operations |
| Cash from operations | $65.0 million | $66.3 million |
| Capital expenditures | $18.5 million | $18.7 million |
| Cash and cash equivalents | $101.4 million at March 31 | $235.9 million at December 31, 2013 |
| Total debt | $1.632 billion | $1.438 billion at December 31, 2013 |
Operating expenses rose 4% to $432.6 million, faster than revenue, and operating margin declined 0.3 percentage points. The effective tax rate was 34.9%, versus 36.0%, primarily due to increased discrete state-tax benefits. Interest expense was $17.3 million; other expense was $2.1 million, including increased foreign-exchange losses related to Argentina.
Investing activities used $347.9 million, principally reflecting $333.7 million of acquisition spending net of cash acquired. Financing provided $154.9 million, including $193.4 million of net short-term borrowings. The company reported $555.8 million available under its revolving credit facility, no borrowings under that facility, and $192.8 million of commercial paper outstanding. Its leverage ratio was 1.96 against a maximum covenant of 3.5; Equifax reported compliance with debt covenants.
Material changes and segment results
- Equifax acquired U.K.-based TDX Group for $322.8 million in January 2014, expanding collections and recovery capabilities. It also acquired Forseva; the filing does not provide its purchase price. Acquisitions contributed to revenue growth and added amortization expense.
- International revenue increased 16% to $143.9 million, but operating income fell 15% to $29.4 million and margin declined to 20.4%, reflecting acquisition amortization, TDX seasonality, and inflation pressures in Argentina. Reported revenue growth was reduced by currency movements.
- U.S. Consumer Information Solutions revenue was essentially flat at $243.9 million; operating income increased to $94.8 million. Mortgage Solutions revenue fell 18%, while core online consumer information revenue grew 2%.
- Workforce Solutions revenue declined 3% to $119.7 million as mortgage-related verification fell, partly offset by growth in non-mortgage verification. Operating income rose 3% to $38.7 million.
- North America Personal Solutions revenue rose 6% to $54.1 million, including the benefit of the 2013 TrustedID acquisition. North America Commercial Solutions revenue was flat at $22.9 million; operating income declined 9% to $4.4 million.
- Reported net income and EPS declined year over year mainly because Q1 2013 included discontinued-operation earnings and a disposal gain. Continuing-operations income attributable to Equifax increased 2%.
Outlook, risks, contingencies, and unusual items
Management expected modest U.S. economic and consumer-credit growth to continue in 2014, while mortgage origination activity was expected to decline versus 2013; management expected mortgage-related revenue declines to continue into Q2. International conditions remained challenging, with weak growth in developed markets, country-specific risks in some developing markets, and adverse currency effects. Long-term targets were 6%–8% average organic revenue growth plus 1%–2% growth from strategic acquisitions, with EPS expected to grow somewhat faster than revenue. These are forward-looking expectations, not guarantees.
Management cited mortgage-market weakness, foreign-exchange exposure, economic and political conditions, and seasonality among relevant operating considerations. Equifax disclosed a CFPB Civil Investigative Demand concerning marketing and provision of consumer reports, scores, and monitoring products, and investigations by attorneys general in 32 states as well as separate New York and Mississippi investigations. The company was cooperating and said outcomes could not be predicted. A California credit-reporting class action remained in proceedings following an appellate remand. Management stated that recorded legal accruals were not material; other litigation could result in adverse judgments, penalties, injunctions, or fines.
TDX purchase-price allocations included $230.7 million of goodwill and remained subject to resolution of certain acquisition-date contingencies, principally working capital and tax matters. The company also reported that the possible change in gross unrecognized tax benefits over the next 12 months ranged from $0 to $4.7 million. The 2013 restructuring program involved approximately 160 positions; $4.5 million of payments were made in Q1 2014, with payments expected to be substantially complete by year-end. Management said disclosure controls were effective and there were no material changes to risk factors or market-risk exposure from the prior annual filing.
Most important facts for investors to verify
- Whether mortgage-related demand continues to weaken, particularly in USCIS and Workforce Solutions, and the resulting effect on revenue and margins.
- TDX and Forseva integration, acquisition contribution to growth, purchase-price allocation adjustments, and acquisition-related amortization.
- International performance and the effects of currency movements and country-specific pressures, especially in Argentina.
- Debt refinancing and liquidity: the $275 million 4.45% notes due December 2014, commercial-paper funding, and continued covenant compliance.
- Developments and potential financial consequences of the CFPB, state attorneys general, and California litigation matters.
- Cash generation and working-capital trends following the acquisition-related cash outflow and the decline in quarter-end cash.