Equifax Inc. — Q3 2012 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. Equifax provides consumer and commercial credit information, workforce verification and related services through five reportable segments.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $543.9 million | $490.4 million | $1,602.4 million | $1,450.1 million |
| Operating income | $132.1 million | $121.6 million | $393.8 million | $345.3 million |
| Operating margin | 24.3% | 24.8% | 24.6% | 23.8% |
| Net income attributable to Equifax | $77.9 million | $66.7 million | $225.8 million | $158.5 million |
| Diluted EPS | $0.64 | $0.54 | $1.84 | $1.28 |
| Cash from operating activities | $151.7 million | $112.0 million | $352.1 million | $259.0 million |
- Q3 revenue rose 11% and Equifax-attributable net income rose 17%. Nine-month revenue rose 11%; net income rose 43% and diluted EPS rose 45%.
- For the nine months, investing activities used $57.8 million, including $49.3 million of capital expenditures; financing activities used $153.6 million. Cash increased $139.5 million to $267.2 million.
- At September 30, balance-sheet debt was $968.3 million, compared with $1,013.2 million at December 31, 2011. No commercial paper or revolving-credit borrowings were outstanding; $498.6 million was available under the $500 million credit facility. The leverage ratio was 1.42 versus a 3.5 covenant limit.
- Quarterly operating margin declined 0.5 percentage points year over year; nine-month margin increased 0.8 points.
Material changes and segment performance
- U.S. Consumer Information Solutions (USCIS) revenue grew 15% in Q3 and 18% year to date, led by mortgage refinancing and credit transaction volumes. Mortgage Solutions revenue rose 35% in Q3. Management cautioned that USCIS growth would likely moderate as strong prior-year comparisons begin.
- Workforce Solutions revenue increased 14% in Q3 and 16% year to date, primarily from verification services and mortgage-related activity. Employer Services revenue declined 5% in Q3.
- International revenue increased 2% in Q3 but fell 4% year to date, largely reflecting the prior-year deconsolidation of the Brazilian business and foreign-exchange effects. Excluding Brazil, management reported year-to-date growth in other geographies.
- North America Personal Solutions revenue grew 13% in Q3. North America Commercial Solutions revenue declined 2%, with weaker project-oriented marketing revenue and lower segment operating income.
- General corporate expense rose $5.5 million in Q3 and $23.3 million year to date, principally due to incentive compensation and corporate infrastructure investment. Q3 also included a $3.7 million International restructuring charge.
Outlook, risks and contingencies
- Management expected modest economic growth in most served markets for the remainder of 2012 and strong U.S. mortgage refinancing activity to continue. Its longer-term target was 6%–8% average annual organic revenue growth, plus 1%–2% from strategic acquisitions, with EPS expected to grow somewhat faster than revenue. These are expectations, not a specific quarterly earnings forecast.
- Management cited cautious lending, weak home-sale-related mortgage activity, challenging international economic conditions, and uncertainty in small-business marketing demand. It noted that refinancing-driven growth in USCIS and verification could slow against stronger comparisons.
- Cybersecurity and privacy risks are material given the sensitive information Equifax handles. The filing also identifies evolving regulation, including CFPB supervision of credit reporting firms, as a potential source of compliance costs and business constraints.
- Goodwill and indefinite-lived intangible impairment tests recorded no impairment. However, management warned that adverse changes in assumptions could affect valuations; Talent Management Services had the smallest disclosed fair-value cushion, and results depend in part on government and commercial hiring.
- Legal proceedings include pending appeals in the California bankruptcy litigation; management did not expect other disclosed proceedings to materially affect results, while noting outcomes are uncertain. Equifax also disclosed a CSC option to sell its credit reporting business, estimated at $750 million–$1 billion if exercised at September 30, 2012, with the option exercisable before August 1, 2013. Equifax had separately committed to make up to $55 million available to BVS; no amount was outstanding.
- Unusual year-over-year comparability: the 2011 Brazilian transaction included a $10.3 million pretax loss and related tax effects, and its deconsolidation reduced 2012 comparative revenue. The transaction materially affected nine-month earnings and tax-rate comparisons.
Important facts for investors to verify
- How much of recent USCIS and Workforce Solutions growth depends on mortgage refinancing, and how results develop as comparisons strengthen.
- Whether International growth excluding Brazil can continue, given currency movements, regional economic conditions and regulatory changes.
- The drivers of rising corporate and operating costs, and whether margin performance is sustainable after the Q3 restructuring charge.
- Debt maturity, interest-rate exposure, and the potential cash and strategic implications of the CSC option or BVS funding commitment.
- Developments in CFPB examinations, data-security controls, and legal proceedings that could affect compliance costs, reputation or results.