Equifax Inc. — 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a standalone fourth-quarter report; selected Q4 figures are included below. Unless stated otherwise, financial amounts are in U.S. dollars.
Business context
Equifax provides consumer and commercial credit information, analytics and decisioning services, consumer credit and identity products, employment and income verification, and human-resources outsourcing. It reports five segments: U.S. Consumer Information Solutions (USCIS), International, TALX Workforce Solutions, North America Personal Solutions and North America Commercial Solutions. The largest customer represented 3% of revenue; 74% of 2011 revenue came from the U.S.
Financial performance
| Metric | 2011 | 2010 |
|---|---|---|
| Operating revenue | $1,959.8 million | $1,859.5 million |
| Operating income | $471.0 million | $430.0 million |
| Operating margin | 24.0% | 23.1% |
| Income from continuing operations | $240.2 million | $243.3 million |
| Net income attributable to Equifax | $232.9 million | $266.7 million |
| Diluted EPS from continuing operations | $1.87 | $1.86 |
| Total diluted EPS | $1.88 | $2.11 |
| Cash provided by operating activities | $408.7 million | $352.6 million |
| Capital expenditures | $75.0 million | $99.8 million |
Revenue increased 5% and operating income increased 10%. Operating margin expanded 0.9 percentage points. Net income attributable to Equifax fell 13%, principally reflecting the Brazilian transaction loss and the absence of 2010 gains on sales of discontinued businesses. The effective tax rate rose to 41.2% from 35.1%, largely due to the Brazil transaction.
Year-end cash was $127.7 million. Total debt, net of discounts and fair-value adjustments, was $1,013.2 million, versus $999.6 million a year earlier; total equity was $1,722.1 million. The company reported $468.6 million available under its $500 million revolving credit facility and was in compliance with debt covenants. Its leverage ratio was 1.61 against a maximum of 3.5.
Investing activities used $204.1 million, including $127.4 million for acquisitions and $75.0 million of capital expenditures. Financing activities used $195.9 million, including $142.3 million for share repurchases and $78.1 million of shareholder dividends.
Fourth-quarter snapshot
For the three months ended December 31, 2011, revenue was $509.7 million, operating income was $125.7 million, income from continuing operations was $74.5 million, and diluted EPS from continuing operations was $0.60. The comparable 2010 figures were $482.0 million, $109.7 million, $64.0 million and $0.50, respectively.
Material changes and segment trends
- Brazilian operations were merged into Boa Vista Serviços on May 31, 2011, in exchange for a 15% equity interest; Equifax deconsolidated the business. The transaction reduced reported 2011 revenue by $48.7 million and generated a $10.3 million pretax loss plus $17.5 million of tax expense.
- Excluding Brazil, International revenue grew 15%; reported International revenue rose 2%. International operating margin increased to 26.8% from 24.7%.
- USCIS revenue increased 7% to $792.6 million, with growth across its product lines. Core credit decision transaction volumes rose 11%, partly offset by lower average transaction pricing.
- TALX revenue increased 2% to $404.3 million, but operating income declined 2% and margin fell 0.9 percentage points, reflecting weakness in certain verification and government-related services and acquisition amortization.
- North America Personal Solutions revenue increased 15% to $180.7 million, supported by direct-to-consumer subscriptions. North America Commercial Solutions revenue increased 11% to $89.3 million.
- DataVision Resources was acquired for $50.0 million; Equifax also completed smaller acquisitions. The company repurchased 4.2 million shares for $142.3 million.
Outlook, risks and contingencies
Management said it did not expect measurable improvement in the overall business environment in 2012. Its long-term outlook was 6%–8% average annual organic revenue growth, plus 1%–2% from strategic acquisitions, with EPS expected to grow somewhat faster than revenue. Management expected a 2012 effective tax rate of 36%–38%. These are outlook statements, not guaranteed results.
- Demand depends partly on consumer and small-business lending, mortgage activity and employment. Management described lending as growing moderately but noted lender caution and mortgage activity below long-term average levels.
- Data privacy, security and consumer-protection rules are significant risks. The CFPB proposed including Equifax in its nonbank supervision program; the final rule was pending at the filing date. Compliance could increase costs or constrain operations.
- Other key risks include loss or reduced exclusivity of external data, competition and pricing pressure, cyber incidents, foreign-exchange exposure, economic and political risks abroad, and pension funding and market sensitivity.
- The SBFE data-management and marketing contract was scheduled to expire at the end of 2012 unless renewed. Loss of access or exclusivity could affect North America Commercial Solutions.
- CSC could require Equifax to purchase its credit-reporting business by exercising an option expiring in August 2013. Equifax estimated a potential price of approximately $650 million–$750 million at year-end 2011; the actual price could differ materially and would require financing.
- Equifax retained certain contingent liabilities in the Brazil transaction and committed to make up to $55 million available for borrowing by BVS through May 31, 2015; no borrowings were outstanding at year-end.
- The filing describes ongoing legal proceedings, including appeals related to a California bankruptcy-credit-reporting class settlement. Management did not expect other litigation matters to be individually material. A Canada Revenue Agency claim was settled in 2011 for $1.1 million, with a net refund of deposit and accrued interest of $9.9 million.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. No goodwill impairment was recorded in 2011.
Important facts for investors to verify
- Whether revenue and margin momentum continue after excluding the Brazil deconsolidation, and whether the long-term growth outlook remains achievable.
- How the higher 2011 tax rate and Brazil-related charges affect normalized earnings and cash taxes.
- Renewal and terms of the SBFE agreement, and any implications for access to or exclusivity over small-business data.
- Whether CSC exercises its option and the potential funding, leverage and dilution implications of a purchase.
- Progress of CFPB supervision and other privacy, data-security and consumer-protection requirements, including associated costs.
- Developments in litigation, retained Brazil contingent liabilities, and pension funding needs.