Equifax Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Equifax provides information, analytics, credit and identity services, and workforce solutions. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $846.1 million | $865.7 million |
| Operating income (loss) | $(617.9) million | $144.2 million |
| Operating margin | (73.0)% | 16.7% |
| Net income (loss) attributable to Equifax | $(555.9) million | $90.9 million |
| Diluted EPS | $(4.57) | $0.75 |
| Cash from operating activities | $31.0 million | $119.6 million |
| Capital expenditures, cash basis | $114.8 million | $56.2 million |
Revenue declined 2% year over year; foreign exchange reduced reported revenue by $26.2 million. A $690.0 million accrual for probable losses related to the 2017 cybersecurity incident was the principal cause of the reported operating and net losses. SG&A also included $11.5 million of restructuring charges. The reported operating margin is therefore heavily affected by these unusual legal and restructuring items.
Cash and cash equivalents were $133.2 million at March 31, 2019, down from $223.6 million at year-end 2018. Total debt was $2.745 billion, including $69.7 million of short-term debt and current maturities; long-term debt, net, was $2.657 billion. The company reported $1.0 billion available under its revolving facility and $195.9 million available under its receivables facility, and said it was in compliance with debt covenants. Current liabilities were $1.523 billion, including the cybersecurity-related accrual within other current liabilities.
Business trends and changes
- Workforce Solutions: Revenue rose 8% to $228.5 million, led by Verification Services growth of 16%; operating income increased 7% to $96.2 million.
- U.S. Information Solutions: Revenue fell 3% to $298.3 million, mainly reflecting weaker mortgage activity; operating income fell 13% to $96.0 million.
- International: Revenue fell 8% to $225.1 million as currency translation and weak Asia Pacific markets offset 2% local-currency growth. Operating income declined to $11.2 million from $36.7 million.
- Global Consumer Solutions: Revenue fell 9% to $94.2 million and operating income fell to $11.4 million from $30.1 million. U.S. paid-product advertising resumed in Q4 2018 after being suspended following the breach.
Cost of services increased 13%, including higher technology and data-security costs. Operating cash flow declined by $88.6 million year over year, which the company attributed to higher technology and security costs and deferred-tax effects, partly offset by working capital. Capital expenditures more than doubled as Equifax invested in technology infrastructure and security.
Outlook, risks and unusual items
- Management expected U.S. economic activity to moderate from the second half of 2018, modest growth in consumer credit excluding mortgages, and weaker mortgage originations for full-year 2019. It also described weak Australian credit markets and continued economic or currency pressures in some international markets.
- Management expected significant security, consumer-support, technology-transformation, legal, insurance, finance and compliance costs through 2019 and into 2020. Technology-transformation expenses and capital expenditures were expected to remain significant, though slightly below 2018 levels; increased ongoing technology and security spending was also anticipated.
- The company said the 2017 incident continued to affect revenue growth, particularly in U.S. Information Solutions and Global Consumer Solutions. It expected benefits from resumed U.S. consumer-product advertising in the second half of 2019.
- Equifax had accrued $690.0 million for probable losses tied to certain breach-related litigation and investigations, excluding legal and professional-services expenses. It warned that additional losses could exceed the accrual and that the amount could not then be estimated. In Q2 2019, after the reporting date, Equifax reported confidential settlement terms intended to resolve U.S. consumer MDL claims, subject to court approval, and progress toward a potential broader resolution; the filing does not provide the settlement amount.
- Other breach-related matters included government investigations, consumer and financial-institution litigation, and potential regulatory penalties. The company had received the maximum $125.0 million reimbursement under its cybersecurity insurance policy.
- Q1 restructuring charges were $11.5 million. The company adopted lease accounting guidance on January 1, 2019; it recognized operating lease right-of-use assets and liabilities, with no material overall impact reported.
No specific numerical full-year revenue or earnings guidance is provided in the supplied filing text.
Key investor verification points
- Confirm the final terms, court approval, total cost and payment timing of the Q2 consumer settlement and any broader government resolution; compare these with the $690.0 million accrual and assess potential additional exposure.
- Track the scale and timing of breach-related legal, regulatory, security and technology-transformation spending, including its effects on cash flow and capital expenditures.
- Assess whether revenue and margins recover in mortgage-related services and Global Consumer Solutions, and whether Workforce Solutions growth continues.
- Monitor international performance, foreign-exchange effects, debt levels, facility availability and covenant compliance.