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EFX > SEC Filings for EFX > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for EQUIFAX INC

Form 10-K for EQUIFAX INC


28-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As used herein, the terms Equifax, the Company, we, our and us refer to Equifax Inc., a Georgia corporation, and its consolidated subsidiaries as a combined entity, except where it is clear that the terms mean only Equifax Inc.

All references to earnings per share data in Management's Discussion and Analysis, or MD&A, are to diluted earnings per share, or EPS, unless otherwise noted. Diluted EPS is calculated to reflect the potential dilution that would occur if stock options or other contracts to issue common stock were exercised and resulted in additional common shares outstanding.

BUSINESS OVERVIEW

We are a leading global provider of information solutions and human resources business process outsourcing services for businesses, governments, and consumers. We leverage some of the largest sources of consumer and commercial data, along with advanced analytics and proprietary decisioning technology, to create customized insights which enable our business clients to grow faster, more efficiently and more profitably, and to inform and empower consumers.

Clients rely on us for consumer and business credit intelligence, credit portfolio management, fraud detection, decisioning technology, marketing tools, and human resources and payroll services. We also offer a portfolio of products that enable individual consumers to manage their financial affairs and protect their identity. Our revenue stream is diversified among individual consumers and among businesses across a wide range of industries and international geographies.

Segment and Geographic Information

Segments. The U.S. Consumer Information Solutions, or USCIS, segment, the largest of our five segments, consists of three product and service lines:
Online Consumer Information Solutions, or OCIS; Mortgage Solutions; and Consumer Financial Marketing Services. OCIS and Mortgage Solutions revenue is principally transaction-based and is derived from our sales of products such as consumer credit reporting and scoring, identity management and authentication, fraud detection and modeling services. USCIS also markets certain of our decisioning products which facilitate and automate a variety of consumer credit-oriented decisions. Consumer Financial Marketing Services revenue is principally project- and subscription-based and is derived from our sales of batch credit, consumer wealth or demographic information such as those that assist clients in acquiring new customers, cross-selling to existing customers and managing portfolio risk.

The International segment consists of Latin America, Europe and Canada Consumer. Canada Consumer's products and services are similar to our USCIS offerings, while Europe and Latin America are made up of varying mixes of product lines that are in our USCIS, North America Commercial Solutions and North America Personal Solutions reportable segments.

The Workforce Solutions segment consists of the Verification Services and Employer Services business units. Verification Services revenue is transaction based and is derived primarily from employment, income and social security number verifications. Employer Services revenues are derived from our provision of certain human resources business process outsourcing services that include both transaction- and subscription-based product offerings. These services assist our clients with the administration of unemployment claims and employer-based tax credits and the handling of certain payroll-related transaction processing.

North America Personal Solutions revenue is both transaction- and subscription-based and is derived from the sale of credit monitoring and identity theft protection products, which we deliver electronically to consumers primarily via the internet and to a lesser extent through mail.

North America Commercial Solutions revenue is principally transaction based, with the remainder project based, and is derived from the sale of business information, credit scores and portfolio analytics that enable clients to utilize our reports to make financial, marketing and purchasing decisions related to businesses.

Geographic Information. We currently operate in the following countries:
Argentina, Brazil, Canada, Chile, Costa Rica, Ecuador, El Salvador, Honduras, Mexico, Paraguay, Peru, Portugal, the Republic of Ireland, Spain, the U.K., Uruguay, and the U.S. Our operations in the Republic of Ireland focus on data handling and customer support activities. We have an investment in the second largest consumer and commercial credit information company in Brazil and offer consumer credit services in India and Russia through joint ventures. Of the countries we operate in, 77% of our revenue was generated in the U.S. during the twelve months ended December 31, 2013.

Key Performance Indicators. Management focuses on a variety of key indicators to monitor operating and financial performance. These performance indicators include measurements of operating revenue, change in operating revenue, operating income, operating margin, net income, diluted earnings per share, cash provided by operating activities and capital expenditures. Key performance indicators for the twelve months ended December 31, 2013, 2012 and 2011, include the following:

                                                      Key Performance Indicators
                                                         Twelve Months Ended
                                                             December 31,
                                             2013                 2012                 2011
                                             (Dollars in millions, except per share data)
Operating revenue                      $      2,303.9       $      2,073.0       $      1,893.2
Operating revenue change                           11 %                 10 %                  5 %
Operating income                       $        611.2       $        480.0       $        468.6
Operating margin                                 26.5 %               23.2 %               24.8 %
Net income attributable to Equifax     $        351.8       $        272.1       $        232.9
Diluted earnings per share from
continuing operations                  $         2.69       $         2.18       $         1.86
Cash provided by operating
activities                             $        566.3       $        496.3       $        408.7
Capital expenditures                   $         83.3       $         66.0       $         75.0

Business Environment and Company Outlook

Demand for our services tends to be correlated to general levels of economic activity, to consumer credit activity, to a lesser extent small commercial credit and marketing activity, and to our own initiatives to expand our products and markets served. In 2013, in the United States, we experienced modest growth in overall economic activity and in general consumer credit, a moderate year-over-year decline in consumer mortgage activity, and continuing benefits from our internal product and market initiatives. As expected, after growing in the first half of 2013, total company mortgage related revenues declined significantly in the second half of 2013, a trend we expect will continue into the first half of 2014. As a result, our Mortgage Solutions business unit's rate of year-over-year revenue growth slowed in 2013 and the mortgage-related components of revenue included in USCIS' Online Consumer Information Solutions and Workforce Solutions' Verification Services each declined in absolute terms compared to 2012. While we continue to expect modest growth in overall economic activity and general consumer credit to continue in 2014, mortgage market origination activity is expected to continue declining due to elevated interest rates. Internationally, the environment continues to be challenging as various countries address their particular political, fiscal and economic issues. In addition, recent weakening in foreign exchange rates of certain of the countries in which we participate will reduce growth in revenue and profit when reported in U.S. dollars. Offsetting these challenges, we continue to expect that our ongoing investments in new product innovation, business execution, enterprise growth initiatives, technology infrastructure, and continuous process improvement will enable us, in a modestly growing economy, to deliver long-term average organic revenue growth ranging between 6% and 8% with additional growth of 1% to 2% derived from strategic acquisitions consistent with our long term business strategy. We also expect to grow earnings per share at a somewhat faster rate than revenue over time as a result of both operating and financial leverage. In 2014, we expect to offset the negative growth in mortgage-related revenues with strong revenue growth in our core, non-mortgage market initiatives.

RESULTS OF OPERATIONS -

TWELVE MONTHS ENDED DECEMBER 31, 2013, 2012 AND 2011

Consolidated Financial Results

Operating Revenue

                                Twelve Months Ended December 31,                            Change
                                                                          2013 vs. 2012           2012 vs. 2011
Operating Revenue               2013            2012         2011           $          %               $            %
                                                               (Dollars in millions)

U.S. Consumer Information
Solutions                   $    1,013.4    $      869.3   $   765.0   $     144.1       17 %   $         104.3       14 %
International                      513.5           486.2       492.9          27.3        6 %             (6.7)       -1 %
Workforce Solutions                474.1           442.1       382.1          32.0        7 %              60.0       16 %
North America Personal
Solutions                          207.4           185.5       163.9          21.9       12 %              21.6       13 %
North America Commercial
Solutions                           95.5            89.9        89.3           5.6        6 %               0.6        1 %
Consolidated operating
revenue                     $    2,303.9    $    2,073.0   $ 1,893.2   $     230.9       11 %   $         179.8        9 %

Revenue for 2013 increased by 11% compared to 2012. The growth was driven by the acquisition of CSC Credit Services in the fourth quarter of 2012 ("CSC Credit Services Acquisition") and the impact of strategic growth initiatives across our businesses. The first half of 2013 also benefitted from the impact of increased mortgage refinancing activity in the U.S., which, as expected, began to decline in the second half of 2013 as compared to the prior year. This expected decline reduced reported growth rates in our USCIS and Workforce Solutions business units for the second half of 2013 as compared to the first half of 2013. For the full year, the net decline in mortgage market activity reduced our revenue growth rate by approximately 1.7%. The effect of foreign exchange rates reduced revenue by $20.4 million in the 2013 compared to 2012.

Revenue for 2012 increased by 9% compared to 2011. The deconsolidation of our Brazilian business, which resulted from the merger of our business into a larger entity during the second quarter of 2011, negatively impacted revenue growth by $35.4 million in 2012, compared to the prior year, while all other revenue increased by 12% compared to 2011. The growth in 2012 was driven by strong execution of key strategic initiatives and the impact of increased mortgage refinancing activity in the U.S. The effect of foreign exchange rates, in locations other than Brazil, reduced revenue by $12.5 million in 2012 compared to the prior year.

Operating Expenses

                               Twelve Months Ended December 31,                          Change
                                                                         2013 vs. 2012            2012 vs. 2011
Operating Expenses             2013            2012         2011          $           %             $          %
                                                            (Dollars in millions)

Consolidated cost of
services                   $      787.3    $      759.5   $   703.9   $     27.8         4 %   $      55.6        8 %
Consolidated selling,
general and
administrative expenses           715.8           673.5       560.1         42.3         6 %         113.4       20 %
Consolidated
depreciation and
amortization expense              189.6           160.0       160.6         29.6        19 %         (0.6)        0 %
Consolidated operating
expenses                   $    1,692.7    $    1,593.0   $ 1,424.6   $     99.7         6 %   $     168.4       12 %

Cost of Services. Cost of services increased $27.8 million in 2013 compared to the prior year. The increase in cost of services, when compared to 2012, was due primarily to increased salary and benefit costs of $27.8 million as well as smaller increases across other categories. The CSC Credit Services Acquisition did not have a material impact on cost of services as this business had already been processed on our systems under our previous affiliate arrangement. The effect of changes in foreign exchange rates reduced cost of services by $4.9 million.

Cost of services increased $55.6 million in 2012 compared to the prior year. The increase was due primarily to the impact of increased salary expense, direct production expenses and contract service expenses of $63.2 million as well as smaller increases in other expenses to support revenue growth. The increase in expense in 2012 was partially offset by decreases related to the deconsolidation of our Brazilian business. The impact of changes in foreign currency exchange rates decreased our cost of services by $3.4 million.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $42.3 million in 2013 as compared to 2012. The increase was due primarily to increased salary, severance, advertising, litigation and regulatory compliance expenses of $56.4 million as well as smaller increases in expense in various categories as we continue to support our business growth. 2013 expenses were also impacted by the CSC Credit Services Acquisition which contributed approximately $19 million of incremental selling, general and administrative expenses some of which are transitional expenses as we integrate the business. These expenses were partially offset by the $38.7 million non-cash pension settlement charge that occurred in the fourth quarter of 2012 and declines in incentive costs. The impact of changes in foreign currency exchange rates decreased our selling, general and administrative expenses by $4.4 million.

The increase in selling, general and administrative expenses in 2012, as compared to 2011, included a $38.7 million non-cash pension settlement charge that occurred in the fourth quarter of 2012. The remaining increase was primarily due to increased salary, incentive, and professional and contractor services expenses of $66.4 million as well as higher marketing and other expenses partially offset by decreases in expenses related to the deconsolidation of our Brazilian business. The impact of changes in foreign currency exchange rates decreased our selling, general and administrative expenses by $2.7 million.

Depreciation and Amortization. The increase in depreciation and amortization expense in 2013, as compared to 2012, was driven by $49.1 million of incremental expense resulting from the CSC Credit Services Acquisition primarily related to amortization of purchased intangibles. The CSC Credit Services Acquisition amortization is partially offset by certain purchased intangible assets related to the TALX acquisition in 2007 that became fully amortized during the second quarter of 2013 as well as other miscellaneous purchased intangible assets that fully depreciated during 2013.

The slight decrease in depreciation and amortization expense in 2012, as compared to 2011, is primarily due to the decline in amortization of certain purchased intangibles acquired as part of the TALX acquisition in 2007, which fully amortized during the second quarter of 2011, and the amortization and depreciation decrease resulting from the deconsolidation of our Brazilian business. This decrease was partially offset by our two 2011 acquisitions within Workforce Solutions.

Operating Income and Operating Margin

                                            Twelve Months Ended December 31,                           Change
                                                                                        2013 vs. 2012          2012 vs. 2011
Operating Income and Operating Margin      2013            2012           2011             $         %            $        %
                                                                        (Dollars in millions)

Consolidated operating revenue          $   2,303.9     $  2,073.0     $  1,893.2     $     230.9    11 %     $   179.8      9 %
Consolidated operating expenses            (1,692.7 )     (1,593.0 )     (1,424.6 )        (99.7)     6 %       (168.4)     12 %
Consolidated operating income           $     611.2     $    480.0     $    468.6     $     131.2    27 %     $    11.4      2 %
Consolidated operating margin                  26.5 %         23.2 %         24.8 %                 3.3 pts               -1.6 pts

In 2013, operating income increased faster than revenue due to margin improvements in our Workforce Solutions, North America Personal Solutions and North America Commercial Solutions businesses, reflecting rapid revenue growth and the ability to leverage our existing cost base. Operating income in 2012 was also negatively impacted by the $38.7 million pension settlement recorded during the fourth quarter of 2012.

In 2012, operating expenses increased at a slightly faster rate than revenue, and operating income increased at a lower rate than revenue, due to a $38.7 million pension settlement recorded during the fourth quarter of 2012, partially offset by improvements in margins in four of our business segments. The overall operating margin decreased in 2012 compared to the prior year period due primarily to the pension settlement in 2012 which negatively impacted margin by 180 basis points, and by increases in corporate expenses other than the pension settlement, which increased faster than revenues. These negative impacts on operating margin were partially offset by improvements in margins in our USCIS, International, Workforce Solutions and Personal Solutions businesses, driven by revenue growth.

Other Expense, Net

                             Twelve Months Ended December 31,                             Change
                                                                          2013 vs. 2012           2012 vs. 2011
Other Expense, Net          2013             2012          2011            $          %             $          %
                                                           (Dollars in millions)

Consolidated interest
expense                  $      70.2       $    55.4     $    55.1     $     14.8       27 %   $       0.3        1 %
Consolidated other
expense (income), net           10.6            (6.7 )         7.6           17.3       nm          (14.3)       nm
Consolidated other
expense, net             $      80.8       $    48.7     $    62.7     $     32.1       66 %   $    (14.0)      -22 %
Average cost of debt             4.6 %           5.3 %         5.5 %
Total consolidated
debt, net, at year end   $   1,442.0       $ 1,730.7     $ 1,013.2     $  (288.7)      -17 %   $     717.5       71 %

Interest expense increased in 2013, when compared to 2012, due primarily to the issuance of $500 million of 3.30% ten-year senior notes in December 2012 to fund the CSC Credit Services Acquisition. Our consolidated debt balance decreased, as compared to the prior year, as a result of paying down $265.0 million of commercial paper during 2013 that was used to partially fund the CSC Credit Services Acquisition. The decrease in the average cost of debt for 2013 is due to the issuance of the $500 million senior notes at a low interest rate and additional low rate commercial paper outstanding on average, which caused the average cost of debt to decrease as compared to the prior year.

Interest expense increased slightly in 2012, when compared to the same period in 2011, due to the issuance of $500 million of 3.30% ten-year senior notes in December 2012. Our consolidated debt balance increased at December 31, 2012, as a result of the issuance of $500 million of 3.30% senior notes and additional borrowings in the form of commercial paper to partially fund the acquisition of CSC Credit Services. The decrease in the average cost of debt for 2012 is due to the issuance of the $500 million Senior Notes at a low interest rate and additional low rate commercial paper outstanding on average year to date, which caused the average cost of debt to decrease as compared to the prior year period.

The increase in other expense (income), net, in 2013 is due to the impairment of our cost method investment representing a 15% equity interest in Boa Vista Servicos S.A. ("BVS") recorded in 2013. During the fourth quarter of 2013, the management of BVS revised its near-term outlook and its operating plans to reflect reduced near-term market expectations for credit information services in Brazil and increased investment needed to achieve its strategic objectives. As a result of these changes, and the associated near-term changes in cash flow expected from the business, we recorded a 40 million Brazilian Reais ($17.0 million) impairment of our original investment of 130 million Brazilian Reais. If the economic growth in Brazil remains at lower than trend levels for an extended period or if BVS is unsuccessful in effectively implementing its strategy, further write-downs could be recognized in future periods.

Other expense (income), net in 2013 also includes $6.5 million in foreign exchange losses related to dividends declared by our subsidiary in Argentina and losses incurred in repatriating these funds. These expenses were partially offset by an increase in our equity in the earnings of our Russian joint venture.

Other expense (income), net, from continuing operations for 2012, decreased $14.3 million, as compared to the prior year periods. The decrease is primarily due to the merger of our Brazilian business during the second quarter of 2011. On May 31, 2011, we completed the merger of our Brazilian business with BVS, which was accounted for as a sale and deconsolidated, in exchange for a 15% equity interest in BVS (the "Brazilian Transaction"). We recorded a $10.3 million pre-tax loss on the Brazilian Transaction in other expense (income), net. Other expense, net, was also reduced in 2012 by higher income from our minority investment in Russia and interest earned on higher cash balances during 2012.

Income Taxes

                                               Twelve Months Ended December 31,                          Change
                                                                                          2013 vs. 2012           2012 vs. 2011
Provision for Income Taxes                   2013             2012          2011           $           %            $          %
                                                                           (Dollars in millions)

Consolidated provision for income taxes   $    188.9       $    156.0      $ 167.1     $     32.9       21 %   $    (11.1)      -7 %
Effective income tax rate                       35.6 %           36.2 %       41.2 %

Our effective tax rate was 35.6% for 2013, down from 36.2% for the same period in 2012. The 2013 rate benefitted by 3.7% as compared to the 2012 rate due to the unfavorable impact in 2012 of certain one-time effects caused by certain international tax planning implemented during 2012. This was offset by a one-time 2.8% benefit in 2012 associated with a tax method change approved by tax authorities in 2012. The 2013 effective rate increased by 0.6% as compared to 2012 due to increases in state income tax rates, which become effective in 2013. We expect our effective tax rate in 2014 to be in the range of 36% to 37%.

Our effective rate was 36.2% for 2012, down from 41.2% for the same period in 2011. The 2011 rate was higher primarily due to the impact of the Brazilian Transaction which increased our effective rate by 5.2%. In addition, the 2012 rate increased by 4.7% compared to the prior year due the one-time effects of certain international tax planning implemented during the year. This was offset by a 3.5% one-time benefit associated with a tax method change approved by tax authorities in 2012. In addition, the 2012 rate benefitted from certain federal, state and international benefits that we do not expect to recur in future years.

Net Income

                                          Twelve Months Ended December 31,                        Change
                                                                                   2013 vs. 2012          2012 vs. 2011
Net Income                                2013            2012         2011           $         %           $         %
                                                            (In millions, except per share amounts)

Consolidated operating income         $      611.2    $      480.0   $   468.6   $     131.2     27 %   $    11.4       2 %
Consolidated other expense, net             (80.8)          (48.7)      (62.7)        (32.1)     66 %        14.0     -22 %
Consolidated provision for income
taxes                                      (188.9)         (156.0)     (167.1)        (32.9)     21 %        11.1      -7 %
Consolidated net income from
continuing operations                        341.5           275.3       238.8          66.2     24 %        36.5      15 %
Discontinued operations, net of tax           18.4             5.5         2.9          12.9    230 %         2.6      92 %
Net income attributable to
noncontrolling interests                     (8.1)           (8.7)       (8.8)           0.6     -7 %         0.1      -2 %
Net income attributable to Equifax    $      351.8    $      272.1   $   232.9   $      79.7     29 %   $    39.2      17 %
Diluted earnings per common share
Net income from continuing
operations attributable to Equifax    $       2.69    $       2.18   $    1.86   $      0.51     23 %   $    0.32      17 %
Discontinued operations
attributable to Equifax                       0.15            0.04        0.02   $      0.11    231 %   $    0.02     100 %
Net income attributable to Equifax    $       2.84    $       2.22   $    1.88   $      0.62     28 %   $    0.34      18 %
Weighted-average shares used in
computing
diluted earnings per share                   123.7           122.5       123.7

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