Equifax Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Unaudited consolidated results; amounts are in millions except per-share data. Equifax provides credit and other information solutions, workforce services, and consumer and commercial products across five reportable segments.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $535.8 | $487.1 | $1,058.5 | $959.7 |
| Operating income | $132.7 | $114.6 | $261.7 | $223.7 |
| Operating margin | 24.8% | 23.5% | 24.7% | 23.3% |
| Net income attributable to Equifax | $76.4 | $34.5 | $147.9 | $91.8 |
| Diluted EPS | $0.62 | $0.28 | $1.21 | $0.74 |
| Cash provided by operating activities | $152.1 | $123.9 | $200.4 | $147.0 |
Revenue rose 10% in both periods; operating income increased 16% in Q2 and 17% in the first half. Net income attributable to Equifax rose 122% and 61%, respectively. Q2 interest expense was $13.7; first-half interest expense was $27.5. Capital expenditures were $14.3 in Q2 and $34.5 year to date, versus $17.7 and $43.9 in the comparable periods.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $183.1, versus $127.7 at year-end 2011; current assets were $517.0 and current liabilities $293.8.
- Total debt was $955.9, including $17.0 of short-term debt and current maturities; long-term debt, net, was $951.8. The company reported total debt net of related adjustments of $968.8 in its MD&A. Debt declined from $999.2 at December 31, 2011.
- The $500 million revolving credit facility had no borrowings and $498.6 available. Commercial paper outstanding was zero. The facility expires in February 2015. The leverage ratio was 1.45 against a maximum of 3.5; Equifax reported compliance with covenants.
- First-half cash flows included $35.6 used in investing and $108.9 used in financing. Financing included $51.1 of share repurchases and $43.1 of dividends to Equifax shareholders. The company held $108.1 of cash in foreign subsidiaries.
Material changes and segment trends
- U.S. Consumer Information Solutions revenue increased 19% in Q2 and the first half, driven by credit transaction growth and elevated mortgage refinancing. Mortgage Solutions revenue rose 51% in Q2.
- Workforce Solutions revenue grew 20% in Q2 and 17% year to date, mainly from mortgage-related verification and the 2011 DataVision acquisition.
- North America Personal Solutions revenue rose 12% in both periods. International revenue fell 9% in Q2 and 7% year to date, largely reflecting Brazil’s deconsolidation and currency headwinds; excluding Brazil, other geographies grew.
- North America Commercial Solutions revenue declined 2% in Q2 and 1% year to date; operating income fell 35% and 33%, respectively, as project-oriented demand weakened and expenses increased.
- The 2011 Brazilian transaction materially affects comparisons: Equifax exchanged its Brazilian business for a 15% stake in Boa Vista Serviços and recognized a $10.3 pre-tax loss and $17.5 tax expense in 2011. The prior-year tax and transaction charges contributed to this period’s much higher reported earnings and lower effective tax rates: 35.0% versus 59.4% in Q2, and 35.9% versus 48.4% for the first half.
Outlook, risks and contingencies
Management expected modest economic growth for the remainder of 2012 and continued to target long-term average organic revenue growth of 6%–8%, plus 1%–2% from strategic acquisitions, with EPS growth somewhat faster than revenue. Management cautioned that mortgage refinancing strength could fade later in 2012 as eligible borrowers diminish; home-purchase mortgage activity remained weak. Continued investments in products, technology, analytics, acquisitions and expense improvement were priorities.
- Regulatory uncertainty is significant. The CFPB’s July 2012 final rule brought Equifax’s credit reporting agency within its nonbank supervision program; examinations were expected to begin after September 30, 2012. Privacy, data-use and other regulatory changes could raise costs or affect revenue.
- Equifax disclosed ordinary-course litigation, including appeals related to a California bankruptcy-reporting class settlement, but said other matters were not expected to have a material financial impact. Outcomes remain uncertain.
- CSC has an option, exercisable before August 1, 2013 under specified conditions, relating to its credit reporting business. Equifax estimated a possible purchase price of $650–$750 million based on its December 31, 2011 analysis; actual value could differ materially.
- Equifax could provide BVS up to $55 million in funding through May 31, 2013; none was outstanding at June 30, 2012. Outsourcing agreements carried estimated remaining minimum obligations of about $70 million as of December 31, 2011.
- Management stated disclosure controls were effective and there had been no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether refinancing-driven growth in U.S. Consumer Information Solutions and Workforce Solutions persists, and how results respond if mortgage activity declines.
- Underlying revenue and earnings growth excluding the Brazilian deconsolidation and prior-year transaction-related charges, as well as currency effects.
- Performance recovery—or further deterioration—in North America Commercial Solutions and the impact of rising corporate expenses.
- Potential effects of CFPB supervision and other regulatory changes, and developments in litigation and the CSC option.
- Debt and liquidity trends, pension funding needs, and the pace of share repurchases and dividends.