Equifax Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Equifax provides credit and other information solutions, employment and income verification, workforce services, and consumer products. Figures are in U.S. dollars; financial statements are unaudited.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $586.9 million | $513.3 million | $1,153.4 million | $1,019.2 million |
| Operating income | $158.1 million | $129.0 million | $307.1 million | $257.3 million |
| Operating margin | 26.9% | 25.1% | 26.6% | 25.2% |
| Continuing-operations net income attributable to Equifax | $90.5 million | $74.1 million | $172.6 million | $145.2 million |
| Diluted EPS | $0.73 | $0.60 from continuing operations | $1.55, including discontinued operations | $1.21 |
| Cash from operating activities | Not separately provided | Not separately provided | $206.8 million | $197.3 million |
| Capital expenditures | Not separately provided | Not separately provided | $36.2 million | $34.5 million |
Q2 revenue rose 14%, operating income 23%, continuing-operations net income attributable to Equifax 22%, and diluted continuing-operations EPS 22% year over year. First-half revenue increased 13%; operating income rose 19%. First-half reported EPS included $0.15 from discontinued operations, principally the divestiture gain.
Q2 operating margin expanded 1.8 percentage points. Cost of services rose 6% in Q2, while SG&A rose 19%; management cited higher compensation, advertising, litigation and regulatory-compliance costs, plus CSC integration expenses. First-half operating cash flow increased $9.5 million year over year.
Segments and material changes
- U.S. Consumer Information Solutions: Revenue increased 19% in Q2 and 18% for the first half. CSC Credit Services contributed 14% of growth in both periods; mortgage activity and growth initiatives also contributed. Segment margin was 40.2% in Q2, unchanged year over year.
- International: Revenue increased 9% in Q2 and 5% for the first half; foreign exchange reduced reported growth. Operating margin declined to 28.7% in Q2 from 29.2%, and to 28.4% for the first half from 30.5%, mainly reflecting investment in growth initiatives.
- Workforce Solutions: Revenue increased 12% in Q2 and 13% for the first half. Operating margin expanded to 31.1% in Q2 from 24.2%, principally from strong verification revenue and fixed-cost leverage.
- North America Personal Solutions: Revenue rose 12% in Q2; margin increased to 27.6% from 26.8%.
- North America Commercial Solutions: Revenue rose 12% in Q2; margin increased to 16.8% from 14.0%.
Growth reflected the late-2012 CSC Credit Services acquisition, business initiatives, and strong U.S. mortgage refinancing activity. Equifax said U.S. credit-report transaction volumes declined in some channels, partly offset by improved unit revenue. Foreign exchange reduced consolidated revenue by $4.0 million in Q2 and $6.4 million for the first half.
Liquidity, debt and capital
- At June 30, cash and cash equivalents were $104.9 million, down from $146.8 million at year-end 2012; current assets were $512.6 million and current liabilities $375.8 million.
- Balance-sheet debt, including current maturities, was $1,505.6 million, versus $1,730.7 million at year-end 2012. Commercial paper outstanding was $60.0 million. The $750 million revolving facility had no borrowings and $688.6 million available.
- The company reported a 1.81 leverage ratio against a maximum covenant limit of 3.5 and said it was in compliance with debt covenants. At quarter-end, 77% of debt was fixed-rate and 23% effectively variable-rate.
- First-half financing cash use was $247.4 million, including $206.6 million of net short-term debt repayments and $53.2 million of dividends paid to Equifax shareholders. The quarterly dividend was $0.22 per share, up from $0.18 a year earlier.
- First-half investing cash flow was positive $4.9 million, including $47.5 million of divestiture proceeds and $36.2 million of capital expenditures. Cash declined by $41.9 million during the period.
Outlook, risks and unusual items
- Management maintained its 2013 total revenue growth expectation of 10%–12%, including CSC Credit Services. It expected long-term average organic growth of 6%–8%, with an additional 1%–2% from strategic acquisitions, and said EPS was expected to grow somewhat faster than revenue.
- Management expected modest U.S. economic and consumer-credit growth to continue, but anticipated lower mortgage-market volumes year over year in the second half as higher interest rates reduced activity. This was expected to weigh on reported growth in U.S. Consumer Information Solutions and Workforce Solutions.
- International conditions remained challenging amid political, fiscal and economic issues. Foreign currency movements were a reported headwind in the first half.
- In Q1, Equifax sold Equifax Settlement Services and Talent Management Services for $47.5 million; $3.5 million was held in escrow. The first-half results included $19.0 million of discontinued-operations income, principally related to the sales and associated tax effects. The businesses contributed no Q2 revenue.
- Equifax disclosed ordinary-course litigation and contingencies. In the California bankruptcy litigation, the Ninth Circuit remanded the case to the district court for further proceedings in April 2013. Management said other pending matters were not expected to have a material financial impact, while acknowledging outcomes cannot be predicted with certainty.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to risk factors or market-risk exposure.
Important facts for investors to verify
- How much of reported revenue growth and future earnings depends on CSC Credit Services, and how integration costs and acquired-intangible amortization evolve.
- Whether mortgage-volume declines in the second half match management’s expectations and how they affect USCIS and Workforce Solutions growth.
- Whether margin gains persist, especially given higher SG&A, regulatory-compliance and litigation costs and International investment spending.
- Cash conversion and debt reduction, including the use of the revolving facility, upcoming maturities, and dividend and repurchase capacity.
- The composition and sustainability of first-half EPS growth, separating continuing operations from divestiture-related discontinued income and tax benefits.
- Developments in the California bankruptcy litigation and other legal or regulatory matters.