Equifax Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; unaudited. Equifax provides credit and other data, analytics, verification, workforce, and consumer services.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $875.7 million | $834.2 million | $2,601.8 million | $2,576.8 million |
| Operating income (loss) | $121.6 million | $64.1 million | $(382.5) million | $401.9 million |
| Operating margin | 13.9% | 7.7% | (14.7)% | 15.6% |
| Net income (loss) attributable to Equifax | $81.1 million | $38.4 million | $(408.0) million | $274.2 million |
| Diluted EPS | $0.66 | $0.32 | $(3.35) | $2.26 |
| Cash provided by operating activities | Not presented as a quarterly cash-flow figure in the filing text | $83.1 million | $507.4 million |
- Revenue and segments: Q3 revenue rose 5%; nine-month revenue rose 1%. Workforce Solutions grew 19% in Q3 and 13% year to date, led by Verification Services. USIS revenue increased 2% and 1%, respectively. International revenue fell 2% and 6%, while Global Consumer Solutions was flat in Q3 and down 5% year to date.
- Cash and investment: Cash was $167.5 million at September 30, down from $223.6 million at year-end. Nine-month capital expenditures were $305.7 million and acquisitions used $234.8 million. Investing activities used $565.5 million.
- Debt and liquidity: Total debt was $3.222 billion, including $368 million of commercial paper and $200 million drawn under the receivables facility; long-term debt, net, was $2.835 billion. Revolver availability was $731.3 million and receivables-facility availability was $25 million. The company reported compliance with debt covenants; the leverage covenant was temporarily raised to 4.0-to-1.0 through Q1 2020.
- Margins and expenses: Q3 operating income improved as revenue increased and certain incident-related and technology-security costs declined. Nine-month SG&A increased to $1.601 billion, principally reflecting a $701.3 million accrual for cybersecurity-related proceedings and investigations.
- Other: The quarterly dividend was $0.39 per share. No open-market share repurchases were made in the first nine months; $590.1 million remained under the authorization.
Material changes and management outlook
- The sharp year-to-date loss and margin deterioration primarily reflect the cybersecurity-related legal and settlement accrual, alongside technology and data-security costs. The filing also cites commercial-customer settlements, restructuring charges, and the prior-year benefit from $45 million of insurance recoveries.
- In July 2019, Equifax reached agreements resolving the U.S. consumer multidistrict litigation, subject to court approval, and certain federal and state investigations. The company agreed to fund $380.5 million for consumer restitution and related costs, with up to $125 million of additional consumer-cost contributions under specified conditions. It also agreed to monetary penalties and security-related business commitments. Equifax had made an initial $25.2 million fund contribution; the remaining contribution was expected after final court approval, potentially as early as Q1 2020.
- Equifax accrued $701.3 million for probable losses during the first nine months, excluding legal and professional fees. Management said additional losses are reasonably possible but cannot currently be estimated and could be material. The consumer settlement remained subject to final approval by the MDL court.
- Management expected significant security, consumer-support, technology-transformation, legal, insurance, finance, and compliance costs to continue through the remainder of 2019 and, for technology and security initiatives, through 2020. Spending was expected to be slightly below 2018 levels for those initiatives. No specific numerical revenue or earnings guidance is provided in the filing text.
- Management cited mixed economic and credit-market conditions, foreign-exchange headwinds, weaker Australian markets, and uncertainty in Argentina and the U.K. (including Brexit). The 2017 incident was expected to continue affecting revenue growth, particularly in USIS and Global Consumer Solutions.
- The SEC Enforcement Division ended its inquiry into disclosure issues in August 2019 and did not recommend enforcement action. Other investigations and litigation remained ongoing. The annual goodwill impairment review found no impairment, though Asia Pacific goodwill was more sensitive to assumptions; estimated fair value exceeded carrying value by 14%.
Important facts for investors to verify
- Final court approval and funding requirements for the consumer settlement, including possible additional contributions tied to consumer claims and monitoring enrollment.
- Whether unresolved lawsuits, government investigations, and other claims require losses beyond the $701.3 million accrued, and the resulting cash-payment timing.
- Liquidity after settlement payments: operating cash generation was substantially lower year over year, while capital spending and acquisition outflows remained significant.
- Debt levels, commercial-paper refinancing needs, covenant compliance, and credit ratings, which were BBB and Baa1 with negative outlooks at September 30, 2019.
- Execution and ongoing costs of the technology transformation and security program, and whether the incident continues to constrain consumer-business growth.