UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2013

 

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                                      to                                      .

 

Commission File Number: 001-06605

 

 

 

EQUIFAX INC.

(Exact name of registrant as specified in its charter)

 

Georgia   58-0401110
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
1550 Peachtree Street, N.W., Atlanta, Georgia   30309
 (Address of principal executive offices)    (Zip Code)

 

404-885-8000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has   been subject to such filing requirements for the past 90 days. Yes    x     No    ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    x     No    ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x Accelerated filer  ¨

Non-accelerated filer   ¨

(Do not check if a smaller

reporting company)

Smaller reporting company  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    ¨     No    x

 

On July 12, 2013, there were 121,283,658 shares of the registrant’s common stock outstanding.

 

 
 

 

EQUIFAX INC.

 

QUARTERLY REPORT ON FORM 10-Q

 

QUARTER ENDED June 30, 2013

 

INDEX

 

        Page
PART I.   Financial Information   4
Item 1.   Financial Statements (Unaudited)   4
    Consolidated Statements of Income—Three and Six Months Ended June 30, 2013 and 2012   4
    Consolidated Statements of Comprehensive Income—Three and Six Months Ended June 30, 2013 and 2012   6
    Consolidated Balance Sheets—June 30, 2013 and December 31, 2012   7
    Consolidated Statements of Cash Flows—Six Months Ended June 30, 2013 and 2012   8
    Consolidated Statements of Equity and Other Comprehensive Income—Six Months Ended June 30, 2013 and 2012   9
    Notes to Consolidated Financial Statements   10
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations   22
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   36
Item 4.   Controls and Procedures   36
PART II.   Other Information   37
Item 1.   Legal Proceedings   37
Item 1A.   Risk Factors   37
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   38
Item 6.   Exhibits   39
Signatures       40
Index to Exhibits       41

 

2
 

 

FORWARD-LOOKING STATEMENTS

 

This report contains information that may constitute “forward-looking statements.” Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will,” “may” and similar expressions identify forward-looking statements, which generally are not historical in nature. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future, including statements relating to future operating results, are forward-looking statements. Management believes that these forward-looking statements are reasonable as and when made. However, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our Company’s historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Part II, “Item 1A. Risk Factors,” and elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2012, and those described from time to time in our future reports filed with the Securities and Exchange Commission. As a result of such risks and uncertainties, we urge you not to place undue reliance on any such forward-looking statements. Forward-looking statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

3
 

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)

 

EQUIFAX INC.

 

CONSOLIDATED STATEMENTS OF INCOME

 

   Three Months Ended 
   June 30, 
   2013   2012 
(In millions, except per share amounts)  (Unaudited) 
Operating revenue  $586.9   $513.3 
Operating expenses:          
Cost of services (exclusive of depreciation and amortization below)   198.2    187.2 
Selling, general and administrative expenses   186.5    156.8 
Depreciation and amortization   44.1    40.3 
Total operating expenses   428.8    384.3 
Operating income   158.1    129.0 
Interest expense   (17.6)   (13.7)
Other income, net   3.5    2.2 
Consolidated income from continuing operations before income taxes   144.0    117.5 
Provision for income taxes   (51.7)   (41.0)
Consolidated income from continuing operations   92.3    76.5 
Discontinued operations, net of tax   -    2.3 
Consolidated net income   92.3    78.8 
Less:  Net income attributable to noncontrolling interests   (1.8)   (2.4)
Net income attributable to Equifax  $90.5   $76.4 
Amounts attributable to Equifax:          
Net income from continuing operations attributable to Equifax  $90.5   $74.1 
Discontinued operations, net of tax   -    2.3 
Net income attributable to Equifax  $90.5   $76.4 
Basic earnings per common share:          
Net income from continuing operations attributable to Equifax  $0.75   $0.61 
Discontinued operations attributable to Equifax   -    0.02 
Net income attributable to Equifax  $0.75   $0.63 
Weighted-average shares used in computing basic earnings per share   121.0    120.3 
Diluted earnings per common share:          
Net income from continuing operations attributable to Equifax  $0.73   $0.60 
Discontinued operations attributable to Equifax   -    0.02 
Net income attributable to Equifax  $0.73   $0.62 
Weighted-average shares used in computing diluted earnings per share   123.6    122.8 
Dividends per common share  $0.22   $0.18 

 

See Notes to Consolidated Financial Statements.

 

4
 

 

EQUIFAX INC.

 

CONSOLIDATED STATEMENTS OF INCOME

 

   Six Months Ended 
   June 30, 
   2013   2012 
(In millions, except per share amounts)  (Unaudited) 
Operating revenue  $1,153.4   $1,019.2 
Operating expenses:          
Cost of services (exclusive of depreciation and amortization below)   393.3    374.6 
Selling, general and administrative expenses   361.0    306.6 
Depreciation and amortization   92.0    80.7 
Total operating expenses   846.3    761.9 
Operating income   307.1    257.3 
Interest expense   (35.3)   (27.5)
Other income, net   3.6    3.5 
Consolidated income from continuing operations before income taxes   275.4    233.3 
Provision for income taxes   (98.9)   (83.5)
Consolidated income from continuing operations   176.5    149.8 
Discontinued operations, net of tax   19.0    2.7 
Consolidated net income   195.5    152.5 
Less:  Net income attributable to noncontrolling interests   (3.9)   (4.6)
Net income attributable to Equifax  $191.6   $147.9 
Amounts attributable to Equifax:          
Net income from continuing operations attributable to Equifax  $172.6   $145.2 
Discontinued operations, net of tax   19.0    2.7 
Net income attributable to Equifax  $191.6   $147.9 
Basic earnings per common share:          
Net income from continuing operations attributable to Equifax  $1.43   $1.21 
Discontinued operations attributable to Equifax   0.16    0.02 
Net income attributable to Equifax  $1.59   $1.23 
Weighted-average shares used in computing basic earnings per share   120.7    120.1 
Diluted earnings per common share:          
Net income from continuing operations attributable to Equifax  $1.40   $1.18 
Discontinued operations attributable to Equifax   0.15    0.02 
Net income attributable to Equifax  $1.55   $1.21 
Weighted-average shares used in computing diluted earnings per share   123.4    122.6 
Dividends per common share  $0.44   $0.36 

 

See Notes to Consolidated Financial Statements.

 

5
 

 

EQUIFAX INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(Unaudited)

 

   Three Months Ended June 30, 
   2013   2012 
   Equifax   Noncontrolling       Equifax   Noncontrolling     
   Shareholders   Interests   Total   Shareholders   Interests   Total 
   (In millions) 
Net income  $90.5   $1.8   $92.3   $76.4   $2.4   $78.8 
Other comprehensive income:                              
Foreign currency translation adjustment, net   (13.5)   2.5    (11.0)   (20.3)   (0.5)   (20.8)
Change in unrecognized prior service cost and actuarial losses related to our pension and other postretirement benefit plans, net   2.3    -    2.3    2.8    -    2.8 
Change in cumulative loss from cash flow hedging transactions, net   -    -    -    0.1    -    0.1 
Comprehensive income  $79.3   $4.3   $83.6   $59.0   $1.9   $60.9 

 

   Six Months Ended June 30, 
   2013   2012 
   Equifax   Noncontrolling       Equifax   Noncontrolling     
   Shareholders   Interests   Total   Shareholders   Interests   Total 
   (In millions) 
Net income  $191.6   $3.9   $195.5   $147.9   $4.6   $152.5 
Other comprehensive income:                              
Foreign currency translation adjustment   (23.1)   2.0    (21.1)   (5.4)   (0.3)   (5.7)
Change in unrecognized prior service cost and actuarial losses related to our pension and other postretirement benefit plans   5.3    -    5.3    6.2    -    6.2 
Change in cumulative loss from cash flow hedging transactions   -    -    -    0.1    -    0.1 
Comprehensive income  $173.8   $5.9   $179.7   $148.8   $4.3   $153.1 

 

 

See Notes to Consolidated Financial Statements.

 

6
 

 

EQUIFAX INC.

 

CONSOLIDATED BALANCE SHEETS

 

   June 30,   December 31, 
   2013   2012 
         
(In millions, except par values)  (Unaudited)     
ASSETS          
Current assets:          
Cash and cash equivalents  $104.9   $146.8 
Trade accounts receivable, net of allowance for doubtful accounts of $6.7 and $6.3 at June 30, 2013 and December 31, 2012, respectively   318.5    317.0 
Prepaid expenses   33.9    26.2 
Other current assets   55.3    39.7 
Total current assets   512.6    529.7 
Property and equipment:          
Capitalized internal-use software and system costs   380.1    369.9 
Data processing equipment and furniture   193.9    198.4 
Land, buildings and improvements   179.8    177.0 
Total property and equipment   753.8    745.3 
Less accumulated depreciation and amortization   (474.5)   (461.6)
Total property and equipment, net   279.3    283.7 
Goodwill   2,248.3    2,290.4 
Indefinite-lived intangible assets   254.3    254.5 
Purchased intangible assets, net   918.4    987.7 
Other assets, net   160.7    165.1 
Total assets  $4,373.6   $4,511.1 
LIABILITIES AND EQUITY          
Current liabilities:          
Short-term debt and current maturities of long-term debt  $76.5   $283.3 
Accounts payable   17.8    25.1 
Accrued expenses   83.8    84.9 
Accrued salaries and bonuses   61.9    104.7 
Deferred revenue   57.1    57.9 
Other current liabilities   78.7    90.6 
Total current liabilities   375.8    646.5 
Long-term debt   1,429.1    1,447.4 
Deferred income tax liabilities, net   220.9    227.7 
Long-term pension and other postretirement benefit liabilities   174.5    176.3 
Other long-term liabilities   53.3    54.0 
Total liabilities   2,253.6    2,551.9 
Commitments and Contingencies (see Note 5)          
Equifax shareholders' equity:          
Preferred stock, $0.01 par value: Authorized shares - 10.0; Issued shares - none   -    - 
Common stock, $1.25 par value: Authorized shares - 300.0; Issued shares - 189.3 at June 30, 2013 and December 31, 2012; Outstanding shares - 121.3 and 120.4 at June 30, 2013 and December 31, 2012, respectively   236.6    236.6 
Paid-in capital   1,156.4    1,139.6 
Retained earnings   3,202.8    3,064.6 
Accumulated other comprehensive loss   (379.8)   (362.0)
Treasury stock, at cost, 67.4 shares and 68.3 shares at June 30, 2013 and December 31, 2012, respectively   (2,113.8)   (2,139.7)
Stock held by employee benefits trusts, at cost, 0.6 shares at  both June 30, 2013 and December 31, 2012   (5.9)   (5.9)
Total Equifax shareholders' equity   2,096.3    1,933.2 
Noncontrolling interests   23.7    26.0 
Total equity   2,120.0    1,959.2 
Total liabilities and equity  $4,373.6   $4,511.1 

 

See Notes to Consolidated Financial Statements.

 

7
 

 

EQUIFAX INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Six Months Ended 
   June 30, 
   2013   2012 
(In millions)  (Unaudited) 
Operating activities:          
Consolidated net income  $195.5   $152.5 
Adjustments to reconcile consolidated net income to net cash provided by operating activities:          
Gain on divestiture   (19.0)   - 
Depreciation and amortization   92.3    82.4 
Stock-based compensation expense   16.7    15.0 
Excess tax benefits from stock-based compensation plans   (7.6)   (3.6)
Deferred income taxes   (7.5)   (0.8)
Changes in assets and liabilities, excluding effects of acquisitions:          
Accounts receivable, net   (14.5)   (9.8)
Prepaid expenses and other current assets   (3.9)   (9.9)
Other assets   4.6    0.9 
Current liabilities, excluding debt   (57.2)   (28.5)
Other long-term liabilities, excluding debt   7.4    (0.9)
Cash provided by operating activities   206.8    197.3 
Investing activities:          
Capital expenditures   (36.2)   (34.5)
Cash received from divestitures   47.5    2.5 
Investment in unconsolidated affiliates, net   (6.4)   (3.6)
Cash provided by (used in) investing activities   4.9    (35.6)
Financing activities:          
Net short-term repayments   (206.6)   (31.6)
Payments on long-term debt   (15.0)   (15.1)
Treasury stock purchases   -    (51.1)
Dividends paid to Equifax shareholders   (53.2)   (43.1)
Dividends paid to noncontrolling interests   (3.9)   (1.4)
Proceeds from exercise of stock options   24.3    33.3 
Excess tax benefits from stock-based compensation plans   7.6    3.6 
Other   (0.6)   (0.4)
Cash used in financing activities   (247.4)   (105.8)
Effect of foreign currency exchange rates on cash and cash equivalents   (6.2)   (0.5)
Increase (decrease) in cash and cash equivalents   (41.9)   55.4 
Cash and cash equivalents, beginning of period   146.8    127.7 
Cash and cash equivalents, end of period  $104.9   $183.1 

 

See Notes to Consolidated Financial Statements.

 

8
 

 

EQUIFAX INC.

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AND OTHER COMPREHENSIVE INCOME

 

For the Six Months Ended June 30, 2013

 

(Unaudited)

 

   Equifax Shareholders         
                           Stock         
                   Accumulated       Held By         
   Common Stock           Other       Employee         
   Shares       Paid-In   Retained   Comprehensive   Treasury   Benefits   Noncontrolling   Total 
   Outstanding   Amount   Capital   Earnings   Loss   Stock   Trusts   Interests   Equity 
   (In millions, except per share amounts) 
Balance, December 31, 2012   120.4   $236.6   $1,139.6   $3,064.6   $(362.0)  $(2,139.7)  $(5.9)  $26.0   $1,959.2 
Net income   -    -    -    191.6    -    -    -    3.9    195.5 
Other comprehensive income   -    -    -    -    (17.8)   -    -    (2.0)   (19.8)
Shares issued under stock and benefit plans,                                             
  net of minimum tax withholdings   0.9    -    (7.9)   -    -    25.9    -    -    18.0 
Cash dividends ($0.22 per share)   -    -    -    (53.4)   -    -    -         (53.4)
Dividends paid to employee benefits trusts   -    -    0.2    -    -    -    -    -    0.2 
Stock-based compensation expense   -    -    16.7    -    -    -    -    -    16.7 
Tax effects of stock-based compensation plans   -    -    7.8    -    -    -    -    -    7.8 
Dividends paid to noncontrolling interests   -    -    -    -    -    -    -    (3.9)   (3.9)
Other   -    -    -    -    -    -    -    (0.3)   (0.3)
Balance, June 30, 2013   121.3   $236.6   $1,156.4   $3,202.8   $(379.8)  $(2,113.8)  $(5.9)  $23.7   $2,120.0 

 

*At June 30, 2013, $227.1 million was authorized for future purchases of common stock under our share repurchase authorization.

 

Accumulated Other Comprehensive Loss consists of the following components:

 

   June 30,   December 31, 
   2013   2012 
   (In millions) 
Foreign currency translation  $(106.7)  $(83.6)
Unrecognized actuarial losses and prior service cost related to our pension and other postretirement benefit plans, net of accumulated tax of $155.2 and $159.3 at June 30, 2013 and December 31, 2012, respectively   (271.1)   (276.4)
Cash flow hedging transactions, net of accumulated tax of $1.3 at June 30, 2013 and December 31, 2012   (2.0)   (2.0)
Accumulated other comprehensive loss  $(379.8)  $(362.0)

 

See Notes to Consolidated Financial Statements.

 

9
 

 

EQUIFAX INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

June 30, 2013

 

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.

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations.   We collect, organize and manage various types of financial, demographic, employment and marketing information. Our products and services enable businesses to make credit and service decisions, manage their portfolio risk, automate or outsource certain human resources, employment tax and payroll-related business processes, and develop marketing strategies concerning consumers and commercial enterprises. We serve customers across a wide range of industries, including the financial services, mortgage, retail, telecommunications, utilities, automotive, brokerage, healthcare and insurance industries, as well as government agencies. We also enable consumers to manage and protect their financial health through a portfolio of products offered directly to consumers. As of June 30, 2013, we operated in the following countries: Argentina, Canada, Chile, Costa Rica, Ecuador, El Salvador, Honduras, Paraguay, Peru, Portugal, Spain, the United Kingdom, or U.K., Uruguay, and the United States of America, or U.S. We also maintain support operations in the Republic of Ireland. We have an investment in a consumer and commercial credit information company in Brazil and offer credit services in Russia and India through joint ventures.

 

We develop, maintain and enhance secured proprietary information databases through the compilation of actual consumer data, including credit, employment, asset, liquidity, net worth and spending activity, and business data, including credit and business demographics, that we obtain from a variety of sources, such as credit granting institutions, public record information (including bankruptcies, liens and judgments), income and tax information primarily from large to mid-sized companies in the U.S., and marketing information.  We process this information utilizing our proprietary information management systems.

 

Basis of Presentation.   The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, the instructions to Form 10-Q and applicable sections of Regulation S-X. To understand our complete financial position and results, as defined by GAAP, this Form 10-Q should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in our annual report on Form 10-K for the year ended December 31, 2012 (“2012 Form 10-K”).

 

Our unaudited Consolidated Financial Statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the periods presented and are of a normal recurring nature. Certain prior year amounts have been reclassified to conform to current period presentation.

 

Earnings Per Share.   Our basic earnings per share, or EPS, is calculated as net income attributable to Equifax divided by the weighted-average number of common shares outstanding during the period. 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. The net income amounts used in both our basic and diluted EPS calculations are the same. A reconciliation of the weighted-average outstanding shares used in the two calculations is as follows:

 

10
 

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2013   2012   2013   2012 
   (In millions)         
Weighted-average shares outstanding (basic)   121.0    120.3    120.7    120.1 
Effect of dilutive securities:                    
Stock options and restricted stock units   2.6    2.5    2.7    2.5 
Weighted-average shares outstanding (diluted)   123.6    122.8    123.4    122.6 

 

For the three and six months ended June 30, 2013, 0.1 million stock options were anti-dilutive and therefore excluded from this calculation.  For the three and six months ended June 30, 2012, the stock options that were anti-dilutive were not material. 

 

Financial Instruments.   Our financial instruments consist primarily of cash and cash equivalents, accounts and notes receivable, accounts payable and short- and long-term debt. The carrying amounts of these items, other than long-term debt, approximate their fair market values due to the short-term nature of these instruments. The fair value of our fixed-rate debt is determined using Level 2 inputs such as quoted market prices for publicly traded instruments, and for non-publicly traded instruments through valuation techniques depending on the specific characteristics of the debt instrument. As of June 30, 2013 and December 31, 2012, the fair value of our long-term debt, based on observable inputs was $1.5 billion and $1.6 billion, respectively compared to its carrying value of $1.4 billion and $1.5 billion, respectively.

 

Derivatives and Hedging Activities.   We use derivative financial instruments as a risk management tool to hedge the Company’s exposure to changes in interest rates, not for speculative purposes. We have used interest rate swaps and interest rate lock agreements to manage interest rate risk associated with our fixed and floating-rate borrowings. Forward contracts on various foreign currencies have been used to manage the foreign currency exchange rate risk of certain firm commitments denominated in foreign currencies. We recognize all derivatives on the balance sheet at fair value. Derivative valuations reflect the value of the instrument including material amounts associated with counterparty risk.

 

Fair Value Hedges.   In conjunction with our November 2009 sale of five-year Senior Notes, we entered into five-year interest rate swaps, designated as fair value hedges, which convert the debt’s fixed interest rate to a variable rate. These swaps involve the receipt of fixed rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount. Changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed-rate Senior Notes they hedge due to changes in the designated benchmark interest rate and are recorded in interest expense. The fair value of these interest rate swaps was an asset of $8.9 million and $12.2 million at June 30, 2013 and December 31, 2012, respectively, and was recorded in other long-term assets on our Consolidated Balance Sheets.

 

Fair Value Measurements.   Fair value is determined based on the assumptions marketplace participants use in pricing the asset or liability. We use a three level fair value hierarchy to prioritize the inputs used in valuation techniques between observable inputs that reflect quoted prices in active markets, inputs other than quoted prices with observable market data and unobservable data (e.g., a company’s own data).

 

11
 

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

The following table presents items measured at fair value on a recurring basis:

 

       Fair Value Measurements at Reporting Date Using: 
Description  Fair Value of Assets
(Liabilities) at
June 30, 2013
   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
   (In millions) 
Fair Value Interest Rate Swaps(1)  $8.9   $-   $8.9   $- 
Notes, due 2014(1)   (283.9)   -    (283.9)   - 
Deferred Compensation Plan(2)   (19.9)   -    (19.9)   - 
Total  $(294.9)  $-   $(294.9)  $- 

 

(1)         The fair value of our interest rate swaps, which are designated as fair value hedges, and our notes, due in 2014, are based on the present value of expected future cash flows using zero coupon rates and are classified within Level 2 of the fair value hierarchy.

 

(2)         We maintain deferred compensation plans that allow for certain management employees to defer the receipt of compensation (such as salary, incentive compensation and commissions) until a later date based on the terms of the plan. The liability representing benefits accrued for plan participants is valued at the quoted market prices of the participants’ investment elections.

 

Variable Interest Entities.  We hold interests in certain entities, including credit data and information solutions ventures, that are considered variable interest entities, or VIEs.  These variable interests relate to ownership interests that require financial support for these entities.  Our investments related to these VIEs totaled $17.4 million at June 30, 2013, representing our maximum exposure to loss.  We are not the primary beneficiary and are not required to consolidate any of these VIEs.

 

Other Assets.  Other assets on our Consolidated Balance Sheets primarily represents our investment in unconsolidated affiliates, interest rate swaps, assets related to life insurance policies covering certain officers of the Company, employee benefit trust assets and data purchases, net of related amortization. Our investment in Boa Vista Servicos (“BVS”), which represents a 15% equity interest in BVS, was valued at 130 million Brazilian Reais ($58.7 million and $63.6 million at June 30, 2013 and December 31, 2012, respectively) and is accounted for using the cost method. The estimated fair value of the investment approximates carrying value at June 30, 2013.

 

Recent Accounting Pronouncements.    Testing Indefinite-Lived Intangible Assets for Impairment. In July 2012, the FASB issued Accounting Standards Update No. 2012-02, “Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment,” which allows a company the option to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test.  Under that option, a company would no longer be required to calculate the fair value of an indefinite-lived intangible asset unless the company determines, based on that qualitative assessment, that it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount.  This guidance is effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption was permitted. We will implement the new standard in our 2013 annual impairment testing.  This guidance is not expected to have a material effect on our financial condition or results of operations.

 

Other Comprehensive Income. In February 2013, the FASB issued Accounting Standards Update No. 2013-02, “Reporting of Amounts Reclassified Out of Other Comprehensive Income,” which requires public companies to present information about reclassification adjustments from accumulated other comprehensive income in their annual and interim financial statements in a single note or on the face of the financial statements. This standard is effective prospectively for annual and interim reporting periods beginning after December 15, 2012. We adopted this standard in the first quarter of 2013 and it did not have an effect on our financial condition or results of operations.

 

For additional information about recent accounting pronouncements adopted or pending adoption, see Note 1 of the Notes to Consolidated Financial Statements in our 2012 Form 10-K.

 

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2. DISCONTINUED OPERATIONS

 

During the first quarter of 2013, we divested of two non-strategic business lines, Equifax Settlement Services, which was part of our Mortgage business within the USCIS operating segment, and Talent Management Services, which was part of our Employer Services business within our Workforce Solutions operating segment, for a total of $47.5 million. $3.5 million of the proceeds of the sale of Talent Management Services was placed in escrow and is due 18 months after the transaction date. The historical results of these operations are classified as discontinued operations in the Consolidated Statements of Income. Revenue for these business lines for the three and six months ended June 30, 2013, was $0 and $9.3 million, respectively, and $22.6 million and $39.4 million for the three and six months ended June 30, 2012, respectively. Pretax income was $0 and $1.5 million for the three and six months ended June 30, 2013, respectively, and $3.7 million and $4.5 million for the three and six months ended June 30, 2012, respectively. We recorded a gain on the disposals in the first quarter of 2013 of $18.4 million, including an income tax benefit of $18.1 million, of which $14.3 million was current tax benefits. The tax benefit is primarily a result of our tax basis in Talent Management Services. The gain was classified as discontinued operations in the Consolidated Statements of Income.

 

3. GOODWILL AND INTANGIBLE ASSETS

 

Goodwill.   Goodwill represents the cost in excess of the fair value of the net assets acquired in a business combination. Goodwill is tested for impairment at the reporting unit level on an annual basis and on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. We perform our annual goodwill impairment tests as of September 30.

 

Changes in the amount of goodwill for the six months ended June 30, 2013, are as follows:

 

   U.S. Consumer           North America   North America     
   Information       Workforce   Personal   Commercial     
   Solutions   International   Solutions   Solutions   Solutions   Total 
   (In millions) 
Balance, December 31, 2012  $947.7   $369.3   $934.0   $1.8   $37.6   $2,290.4 
Adjustments to initial purchase price allocation   (0.4)   -    -    -    -    (0.4)
Foreign currency translation   -    (11.1)   -    -    (0.3)   (11.4)
Tax benefits of stock options exercised   -    -    (0.1)   -    -    (0.1)
Businesses sold   (2.7)   (1.4)   (26.1)   -    -    (30.2)
Balance, June 30, 2013  $944.6   $356.8   $907.8   $1.8   $37.3   $2,248.3 

 

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3. GOODWILL AND INTANGIBLE ASSETS (Continued)

 

Indefinite-Lived Intangible Assets.   Indefinite-lived intangible assets consist of contractual/territorial rights representing the estimated acquisition date fair value of rights to operate in certain territories acquired through the purchase of independent credit reporting agencies in the U.S. and Canada. Our contractual/territorial rights are perpetual in nature and, therefore, the useful lives are considered indefinite. Indefinite-lived intangible assets are not amortized. We are required to test indefinite-lived intangible assets for impairment annually and whenever events or circumstances indicate that there may be an impairment of the asset value. We perform our annual indefinite-lived intangible asset impairment test as of September 30.  Our contractual/territorial rights carrying amounts did not change materially during the six months ended June 30, 2013.

 

Purchased Intangible Assets.   Purchased intangible assets represent the estimated acquisition date fair value of acquired intangible assets used in our business. Purchased data files represent the estimated acquisition date fair value of consumer credit files acquired primarily through the purchase of independent credit reporting agencies in the U.S. and Canada. We expense the cost of modifying and updating credit files in the period such costs are incurred. We amortize purchased data files, which primarily consist of acquired consumer credit files, on a straight-line basis. Primarily all of our other purchased intangible assets are also amortized on a straight-line basis. For additional information about the useful lives related to our purchased intangible assets, see Note 1 of the Notes to Consolidated Financial Statements in our 2012 Form 10-K.

 

Purchased intangible assets at June 30, 2013 and December 31, 2012 consisted of the following:

 

   June 30, 2013   December 31, 2012 
       Accumulated           Accumulated     
   Gross   Amortization   Net   Gross   Amortization   Net 
Definite-lived intangible assets:  (In millions) 
Purchased data files  $752.9   $(212.7)  $540.2   $795.6   $(229.2)  $566.4 
Acquired software and technology   34.2    (16.5)   17.7    34.4    (13.5)   20.9 
Customer relationships   498.1    (168.8)   329.3    522.1    (164.5)   357.6 
Proprietary database   125.0    (122.6)   2.4    125.0    (115.9)   9.1 
Non-compete agreements   19.2    (7.5)   11.7    19.4    (5.5)   13.9 
Trade names and other intangible assets   39.6    (22.5)   17.1    41.5    (21.7)   19.8 
Total definite-lived intangible assets  $1,469.0   $(550.6)  $918.4   $1,538.0   $(550.3)  $987.7 

 

Amortization expense from continuing operations related to purchased intangible assets was $26.3 million and $21.5 million during the three months ended June 30, 2013 and 2012, respectively. Amortization expense from continuing operations related to purchased intangible assets was $56.6 million and $43.3 million during the six months ended June 30, 2013 and 2012, respectively.

 

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4. DEBT

 

Debt outstanding at June 30, 2013 and December 31, 2012 was as follows:

 

   June 30,   December 31, 
   2013   2012 
   (In millions) 
Commercial paper  $60.0   $265.0 
Notes, 7.34%, due in installments through May 2014   15.0    30.0 
Notes, 4.45%, due December 2014   275.0    275.0 
Notes, 6.30%, due July 2017   272.5    272.5 
Notes, 3.30%, due Dec 2022   500.0    500.0 
Debentures, 6.90%, due July 2028   125.0    125.0 
Notes, 7.00%, due July 2037   250.0    250.0 
Capitalized lease obligation   -    2.2 
Other   1.2    0.7 
Total debt   1,498.7    1,720.4 
Less short-term debt and current maturities   (76.5)   (283.3)
Less unamortized discounts   (2.2)   (2.3)
Plus fair value adjustments   9.1    12.6 
Total long-term debt, net  $1,429.1   $1,447.4 

 

Senior Credit Facility.   We are party to a $750.0 million unsecured revolving credit facility, which we refer to as the Senior Credit Facility, with a group of financial institutions.  The Senior Credit Facility also has an accordion feature that allows us to request an increase in the total commitment to $1.0 billion.  Borrowings may be used for general corporate purposes, including working capital, capital expenditures, acquisitions and share repurchase programs. The Senior Credit Facility is scheduled to expire in December 2017. Availability of the Senior Credit Facility for borrowings is reduced by the outstanding face amount of any letters of credit issued under the facility and, pursuant to our existing Board of Directors authorization, by the outstanding principal amount of our commercial paper notes. As of June 30, 2013, there were no outstanding borrowings under this facility and $688.6 million was available for borrowing.

 

Commercial Paper Program.   Our $750.0 million commercial paper program has been established through the private placement of commercial paper notes from time-to-time. Maturities of commercial paper can range from overnight to 397 days. The commercial paper program is supported by our Senior Credit Facility and, pursuant to our existing Board of Directors authorization, the total amount of commercial paper which may be issued is reduced by the amount of any outstanding borrowings under our Senior Credit Facility. At June 30, 2013, there was $60.0 million in commercial paper notes outstanding.

 

For additional information about our debt agreements, see Note 6 of the Notes to Consolidated Financial Statements in our 2012 Form 10-K.

 

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5. COMMITMENTS AND CONTINGENCIES

 

Data Processing, Outsourcing Services and Other Agreements.  We have separate agreements with IBM, TCS and others to outsource portions of our computer data processing operations, applications development, maintenance and related functions and to provide certain other administrative and operational services. The agreements expire between 2013 and 2018. The estimated aggregate minimum contractual obligation remaining under these agreements is approximately $70 million as of December 31, 2012, with no future year’s minimum contractual obligation expected to exceed approximately $40 million. Annual payment obligations in regard to these agreements vary due to factors such as the volume of data processed; changes in our servicing needs as a result of new product offerings, acquisitions or divestitures; the introduction of significant new technologies; foreign currency; or the general rate of inflation. In certain circumstances (e.g., a change in control or for our convenience), we may terminate these data processing and outsourcing agreements, and, in doing so, certain of these agreements require us to pay a significant penalty.

  

Guarantees and General Indemnifications.   We may issue standby letters of credit, performance bonds or other guarantees in the normal course of business. The aggregate notional amount of all performance bonds and standby letters of credit was not material at June 30, 2013, and all have a remaining maturity of one year or less. The maximum potential future payments we could be required to make under the guarantees is not material at June 30, 2013.

 

We have agreed to standard indemnification clauses in many of our lease agreements for office space, covering such things as tort, environmental and other liabilities that arise out of or relate to our use or occupancy of the leased premises. Certain of our credit agreements include provisions which require us to make payments to preserve an expected economic return to the lenders if that economic return is diminished due to certain changes in law or regulations. In conjunction with certain transactions, such as sales or purchases of operating assets or services in the ordinary course of business, or the disposition of certain assets or businesses, we sometimes provide routine indemnifications, the terms of which range in duration and sometimes are not limited. Additionally, the Company has entered into indemnification agreements with its directors and executive officers to indemnify such individuals to the fullest extent permitted by applicable law against liabilities that arise by reason of their status as directors or officers. The Company maintains directors and officers liability insurance coverage to reduce its exposure to such obligations.

 

We cannot reasonably estimate our potential future payments under the indemnities and related provisions described above because we cannot predict when and under what circumstances these provisions may be triggered. We had no accruals related to indemnifications on our Consolidated Balance Sheets at June 30, 2013 or December 31, 2012.

 

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5. COMMITMENTS AND CONTINGENCIES (Continued)

 

Contingencies.   We are involved in legal proceedings, claims and litigation arising in the ordinary course of business. We periodically assess our exposure related to these matters based on the information which is available. We have recorded accruals in our Consolidated Financial Statements for those matters in which it is probable that we have incurred a loss and the amount of the loss, or range of loss, can be reasonably estimated.

 

For other legal proceedings, claims and litigation, we have recorded loss contingencies that are immaterial, or we cannot reasonably estimate the potential loss because of uncertainties about the outcome of the matter and the amount of the loss or range of loss. Although the final outcome of these other matters cannot be predicted with certainty, any possible adverse outcome arising from these matters is not expected to have a material impact on our Consolidated Financial Statements, either individually or in the aggregate. However, our evaluation of the likely impact of these matters may change in the future.

 

For additional information about these and other commitments and contingencies, see Note 7 of the Notes to Consolidated Financial Statements in our 2012 Form 10-K.  

 

6. INCOME TAXES

 

We are subject to U.S. federal, state and international income taxes. We are generally no longer subject to federal, state, or international income tax examinations by tax authorities for years ending prior to December 31, 2007, with few exceptions. Due to the potential for resolution of state and foreign examinations, and the expiration of various statutes of limitations, it is reasonably possible that our gross unrecognized tax benefit balance may change within the next twelve months by a range of $0 to $7.6 million.

 

Effective Tax Rate.      Our effective income tax rate was 35.9% for the three months ended June 30, 2013, up from 34.9% for the same period in 2012 due primarily to increased state income taxes and other permanent items.   The effective income tax rate was relatively flat for the six months ended June 30, 2013 as compared to the prior year period.

 

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7. ACCUMULATED OTHER COMPREHENSIVE INCOME

 

Changes in accumulated other comprehensive income by component, after tax, for the six months ended June 30, 2013, are as follows:

 

       Pension and other   Cash flow     
   Foreign   postretirement   hedging     
   currency   benefit plans   transactions   Total 
   (In millions) 
Balance, December 31, 2012  $(83.6)  $(276.4)  $(2.0)  $(362.0)
Other comprehensive income before reclassifications   (23.1)   (2.7)   -    (25.8)
Amounts reclassified from accumulated other comprehensive income   -    8.0    -    8.0 
Net current-period other comprehensive income   (23.1)   5.3    -    (17.8)
Balance, June 30, 2013  $(106.7)  $(271.1)  $(2.0)  $(379.8)

 

Reclassifications out of accumulated other comprehensive income for the six months ended June 30, 2013, are as follows:

 

   Amount reclassified   Affected line item in
Details about accumulated other  from accumulated other   the statement where
comprehensive income components  comprehensive income (1)   net income is presented
   (in millions)    
Amortization of pension and other postretirement plan items:        
Prior service cost  $(0.4)  (2)
Recognized actuarial loss   (12.4)  (2)
    (12.8)  Total before tax
    4.8   Tax benefit
   $(8.0)  Net of tax

 

(1)         Amounts in parentheses indicate expense recognized in the Consolidated Statements of Income.

 

(2)         These accumulated other comprehensive income components are included in the computation of net periodic pension cost (See Note 8 Benefit Plans for additional details).

 

Changes in accumulated other comprehensive income related to noncontrolling interests were not material as of June 30, 2013.

 

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8. BENEFIT PLANS

 

We sponsor defined benefit pension plans and defined contribution plans. For additional information about our benefit plans, see Note 11 of the Notes to Consolidated Financial Statements in our 2012 Form 10-K.

 

The following table provides the components of net periodic benefit cost, included in selling, general and administrative expenses in the Consolidated Statements of Income, for the three and six months ended June 30, 2013 and 2012:

 

   Pension Benefits   Other Benefits 
   Three Months Ended June 30, 
   2013   2012   2013   2012 
   (In millions) 
Service cost    $1.3   $1.6   $0.2   $0.1 
Interest cost   7.2    8.3    0.4    0.3 
Expected return on plan assets     (9.8)   (11.6)   (0.4)   (0.4)
Amortization of prior service cost   0.3    0.2    (0.1)   (0.1)
Recognized actuarial loss     4.4    4.0    3.3    0.3 
Total net periodic benefit cost  $3.4   $2.5   $3.4   $0.2 

 

   Pension Benefits   Other Benefits 
   Six Months Ended June 30, 
   2013   2012   2013   2012 
   (In millions) 
Service cost    $2.6   $3.2   $0.3   $0.2 
Interest cost   14.4    16.6    0.7    0.6 
Expected return on plan assets     (19.6)   (23.2)   (0.8)   (0.8)
Amortization of prior service cost   0.6    0.4    (0.2)   (0.2)
Recognized actuarial loss     8.8    8.0    3.6    0.6 
Total net periodic benefit cost  $6.8   $5.0   $3.6   $0.4 

 

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9. SEGMENT INFORMATION

 

Reportable Segments.   We manage our business and report our financial results through the following five reportable segments, which are the same as our operating segments:

 

-U.S. Consumer Information Solutions

 

-International

 

-Workforce Solutions

 

-North America Personal Solutions

 

-North America Commercial Solutions

 

The accounting policies of the reportable segments are the same as those described in our summary of significant accounting policies in Note 1 of the Notes to Consolidated Financial Statements in our 2012 Form 10-K. We evaluate the performance of these reportable segments based on their operating revenues, operating income and operating margins, excluding unusual or infrequent items, if any. Inter-segment sales and transfers are not material for all periods presented. The measurement criteria for segment profit or loss and segment assets are substantially the same for each reportable segment. All transactions between segments are accounted for at cost, and no timing differences occur between segments.

 

A summary of segment products and services is as follows:

 

U.S. Consumer Information Solutions.   This segment includes consumer information services (such as credit information and credit scoring, credit modeling services, locate services, fraud detection and prevention services, identity verification services and other consulting services); mortgage loan origination information; consumer financial marketing services; and identity management.

 

International.   This segment includes information services products, which includes consumer and commercial services (such as credit and financial information, credit scoring and credit modeling services), credit and other marketing products and services, and products and services sold directly to consumers similar to those sold by North America Personal Solutions.

 

Workforce Solutions.   This segment includes employment, income and social security number verification services as well as complementary payroll-based transaction services and employment tax management services.

 

North America Personal Solutions.   This segment includes credit information, credit monitoring and identity theft protection products sold directly to consumers via the internet.

 

North America Commercial Solutions.   This segment includes commercial products and services such as business credit and demographic information, credit scores and portfolio analytics (decisioning tools), which are derived from our databases of business credit and financial information.

 

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9. SEGMENT INFORMATION (Continued)

 

Operating revenue and operating income by operating segment during the three and six months ended June 30, 2013 and 2012 are as follows:

 

   Three Months Ended   Six Months Ended 
(In millions)  June 30,   June 30, 
Operating revenue:  2013   2012   2013   2012 
U.S. Consumer Information Solutions   $259.7   $217.6   $504.8   $427.9 
International   129.8    119.5    253.5    240.5 
Workforce Solutions    123.2    109.7    246.9    218.6 
North America Personal Solutions   51.5    46.2    102.6    91.1 
North America Commercial Solutions    22.7    20.3    45.6    41.1 
Total operating revenue  $586.9   $513.3   $1,153.4   $1,019.2 

 

   Three Months Ended   Six Months Ended 
(In millions)  June 30,   June 30, 
Operating income:  2013   2012   2013   2012 
U.S. Consumer Information Solutions  $104.3   $87.4   $196.2   $168.8 
International   37.2    35.0    71.9    73.5 
Workforce Solutions   38.3    26.6    75.7    52.8 
North America Personal Solutions   14.2    12.4    28.7    23.7 
North America Commercial Solutions   3.8    2.8    8.7    6.3 
General Corporate Expense   (39.7)   (35.2)   (74.1)   (67.8)
Total operating income  $158.1   $129.0   $307.1   $257.3 

 

 

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ITEM 2.  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, employment and income verifications and human resources business process outsourcing services. We leverage some of the largest sources of consumer and commercial data, along with advanced analytics and proprietary technology, to create customized insights which enable our business customers to grow faster, more efficiently and more profitably, and to inform and empower consumers.

 

Businesses rely on us for consumer and business credit intelligence, credit portfolio management, fraud detection, decisioning technology, marketing tools, and human resources-related 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 businesses across a wide range of industries and international geographies and individual consumers.

 

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, fraud detection and modeling services. USCIS also markets certain decisioning software services 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 and consumer wealth 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 Canada Consumer, Europe and Latin America. 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 lines. Verification Services revenue is transaction-based and is derived primarily from employment and income verification. 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 include unemployment claims management, employment-based tax credit services, and complementary payroll-based transaction services.

 

North America Personal Solutions revenue is primarily subscription-based supplemented by some transaction-based services, and is derived from the sale of credit monitoring, debt management and identity theft protection products, which we deliver to consumers electronically via the internet.

 

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 customers to utilize our reports to make financing, marketing and purchasing decisions related to businesses.

 

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   Geographic Information.   We currently operate in the following countries: Argentina, Canada, Chile, Costa Rica, Ecuador, El Salvador, Honduras, 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 a consumer and commercial credit information company in Brazil and offer consumer credit services in India and Russia through joint ventures.

 

Key Performance Indicators.    Management focuses on a variety of key indicators to monitor operating and financial performance. These performance indicators include operating revenue, change in operating revenue, operating income, operating margin, net income attributable to Equifax, diluted earnings per share, cash provided by operating activities and capital expenditures. The key performance indicators for the three and six months ended June 30, 2013 and 2012 were as follows:

 

   Key Performance Indicators 
   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2013   2012   2013   2012 
   (Dollars in millions, except per share data) 
Operating revenue   $586.9   $513.3   $1,153.4   $1,019.2 
Operating revenue change   14%   9%   13%   10%
Operating income   $158.1   $129.0   $307.1   $257.3 
Operating margin   26.9%   25.1%   26.6%   25.2%
Net income from continuing operations attributable to Equifax  $90.5   $74.1   $172.6   $145.2 
Net income attributable to Equifax  $90.5   $76.4   $191.6   $147.9 
Diluted earnings per share from continuing operations attributable to Equifax   $0.73   $0.60   $1.40   $1.18 
Diluted earnings per share attributable to Equifax  $0.73   $0.62   $1.55   $1.21 
Cash provided by operating activities   $140.5   $149.0   $206.8   $197.3 
Capital expenditures  $17.5   $14.3   $36.2   $34.5 

 

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. During the first half of 2013, in the United States, we experienced modest growth in overall economic activity and in general consumer credit, strong year-over-year growth in consumer mortgage activity, and continuing benefits from our internal product and market initiatives. While we expect modest growth in overall economic activity and general consumer credit to continue through the current year, beginning late in the second quarter, mortgage market activity began to decline due to increased interest rates, and we expect mortgage market volumes to decline year-over-year in the second half, consistent with our outlook as we entered the year. Internationally, the environment continues to be challenging as various countries address their particular political, fiscal and economic issues. Offsetting these challenges, we continue to expect that our ongoing investments in new product innovation, business execution, enterprise growth initiatives, technology infrastructure, strategic acquisitions, 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. We also expect to grow earnings per share at a somewhat faster rate than revenue as a result of both operating and financial leverage. We continue to expect total revenue growth, including the impact of our acquisition of CSC Credit Services, in 2013 to be between 10% and 12%.

 

23
 

 

RESULTS OF OPERATIONS—THREE AND SIX MONTHS JUNE 30, 2013 AND 2012

 

Consolidated Financial Results

 

Operating Revenue

 

   Three Months Ended June 30,           Six Months Ended June 30,         
           Change           Change 
Consolidated Operating Revenue  2013   2012   $   %   2013   2012   $   % 
   (Dollars in millions)   (Dollars in millions) 
                                 
U.S. Consumer Information Solutions  $259.7   $217.6   $42.1    19%  $504.8   $427.9   $76.9    18%
International   129.8    119.5    10.3    9%   253.5    240.5    13.0    5%
Workforce Solutions   123.2    109.7    13.5    12%   246.9    218.6    28.3    13%
North America Personal Solutions   51.5    46.2    5.3    12%   102.6    91.1    11.5    13%
North America Commercial Solutions   22.7    20.3    2.4    12%   45.6    41.1    4.5    11%
Consolidated operating revenue  $586.9   $513.3   $73.6    14%  $1,153.4   $1,019.2   $134.2    13%

 

Revenue increased by 14% and 13% in the second quarter and first six months of 2013, respectively, compared to the same periods in 2012. The growth was driven by the acquisition of CSC Credit Services in the fourth quarter of 2012 (“CSC Credit Services Acquisition”), the impact of strategic growth initiatives across our businesses, and the impact of increased mortgage refinancing activity in the U.S., which we expect to decline in the second half of 2013 as compared to the prior year.  This expected decline will reduce reported growth rates in our USCIS and Workforce Solutions business units. The effect of foreign exchange rates reduced revenue by $4.0 million in the second quarter and $6.4 million during the first six months of 2013 compared to the year-ago period.

 

Operating Expenses

 

   Three Months Ended June 30,           Six Months Ended June 30,         
           Change           Change 
Consolidated Operating Expenses  2013   2012   $   %   2013   2012   $   % 
   (Dollars in millions)   (Dollars in millions) 
                                 
Consolidated cost of services  $198.2   $187.2   $11.0    6%  $393.3   $374.6   $18.7    5%
Consolidated selling, general and administrative expenses   186.5    156.8    29.7    19%   361.0    306.6    54.4    18%
Consolidated depreciation and amortization expense   44.1    40.3    3.8    10%   92.0    80.7    11.3    14%
Consolidated operating expenses  $428.8   $384.3   $44.5    12%  $846.3   $761.9   $84.4    11%

 

The increase in cost of services, when compared to the second quarter and first six months of 2012, was due primarily to increased salary and benefit costs of $7.0 million and $11.0 million in the second quarter and first six months of 2013 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 $0.9 million and $1.3 million in the three and six months ended June 30, 2013, respectively.

 

Selling, general and administrative expense increased $29.7 million in the second quarter and $54.4 million in the first six months of 2013 compared to the year ago periods.  The increase in the second quarter and first six months of 2013 was due primarily to increased salary, employee benefit, advertising, litigation, and regulatory compliance expenses of $17.7 million and $31.2 million, respectively. Both periods were also impacted by the CSC Credit Services Acquisition which contributed approximately an incremental $6 million and $14 million of selling, general and administrative expense in the second quarter and first six months of 2013, respectively, some of which are transitional expenses as we integrate the business. The impact of changes in foreign currency exchange rates decreased our selling, general and administrative expenses by $0.9 million and $1.2 million in the three and six months ended June 30, 2013, respectively.

 

24
 

 

Depreciation and amortization expense for the second quarter and first six months of 2013 increased $3.8 million and $11.3 million, respectively, as compared to the same periods in 2012, driven by $9.0 in the second quarter and $18.0 million in the first six months of 2013 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.

 

Operating Income and Operating Margin

 

   Three Months Ended June 30,           Six Months Ended June 30,         
           Change           Change 
Consolidated Operating Income  2013   2012   $   %   2013   2012   $   % 
   (Dollars in millions)   (Dollars in millions) 
                                 
Consolidated operating revenue  $586.9   $513.3   $73.6    14%  $1,153.4   $1,019.2   $134.2    13%
Consolidated operating expenses   (428.8)   (384.3)   (44.5)   12%   (846.3)   (761.9)   (84.4)   11%
Consolidated operating income  $158.1   $129.0   $29.1    23%  $307.1   $257.3   $49.8    19%
Consolidated operating margin   26.9%   25.1%        1.8%pts   26.6%   25.2%        1.4%pts

 

In the second quarter of 2013, operating income from continuing operations 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. 

 

Other Expense, Net

 

   Three Months Ended June 30,           Six Months Ended June 30,         
           Change           Change 
Consolidated Other Expense, Net  2013   2012   $   %   2013   2012   $   % 
   (Dollars in millions)   (Dollars in millions) 
                                 
Consolidated interest expense  $17.6   $13.7   $3.9    28%  $35.3   $27.5   $7.8    28%
Consolidated other income   (3.5)   (2.2)   (1.3)   59%   (3.6)   (3.5)   (0.1)   3%
Consolidated other expense, net  $14.1   $11.5   $2.6    22%  $31.7   $24.0   $7.7    32%
Average cost of debt   4.5%   5.6%             4.4%   5.6%          
Total consolidated debt, net, at quarter end  $1,505.6   $968.8   $536.8    55%  $1,505.6   $968.8   $536.8    55%

 

 

Interest expense increased for the second quarter and the first six months of 2013, when compared to the same periods in 2012, due primarily to the issuance of $500 million of 3.30% ten-year senior notes in December 2012.  Our consolidated debt balance increased as of June 30, 2013, as a result of the issuance of the 3.30% senior notes and additional borrowings in the form of commercial paper to fund the CSC Credit Services Acquisition.  The decrease in the average cost of debt for the second quarter and first six months of 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 period.

 

Other income for the three and six month periods ending June 30, 2013, did not change materially as compared to the prior year periods.

 

25
 

 

Income Taxes

 

   Three Months Ended June 30,           Six Months Ended June 30,         
           Change           Change 
Consolidated Provision for Income Taxes  2013   2012   $   %   2013   2012   $   % 
   (Dollars in millions)   (Dollars in millions) 
                                 
Consolidated provision for income taxes  $51.7   $41.0   $10.7    26%  $98.9   $83.5   $15.4    19%
Effective income tax rate   35.9%   34.9%             35.9%   35.8%          

 

Our effective income tax rate was 35.9% for the three months ended June 30, 2013, up from 34.9% for the same period in 2012 due primarily to increased state income taxes and other permanent items.   The effective income tax rate was relatively flat for the six months ended June 30, 2013 as compared to the prior year period.

 

Net Income

 

   Three Months Ended June 30,           Six Months Ended June 30,         
           Change           Change 
Consolidated Net Income  2013   2012   $   %   2013   2012   $   % 
   (In millions, except per share amounts)   (In millions, except per share amounts) 
                                 
Consolidated operating income  $158.1   $129.0   $29.1    23%  $307.1   $257.3   $49.8    19%
Consolidated other expense, net   (14.1)   (11.5)   (2.6)   22%   (31.7)   (24.0)   (7.7)   32%
Consolidated provision for income taxes   (51.7)   (41.0)   (10.7)   26%   (98.9)   (83.5)   (15.4)   19%
Consolidated net income from continuing operations   92.3    76.5    15.8    21%   176.5    149.8    26.7    18%
Discontinued operations, net of tax   -    2.3    (2.3)   -100%   19.0   2.7    16.3    nm 
Net income attributable to noncontrolling interests   (1.8)   (2.4)   0.6    -25%   (3.9)   (4.6)   0.7    -16%
Net income attributable to Equifax  $90.5   $76.4   $14.1    19%  $191.6   $147.9   $43.7    30%
Diluted earnings per common share:                                        
Net income from continuing operations attributable to Equifax  $0.73   $0.60   $0.13    22%  $1.40   $1.18   $0.22    18%
Discontinued operations attributable to Equifax   -    0.02    (0.02)   -100%   0.15    0.02    0.13    nm 
Net income attributable to Equifax  $0.73   $0.62   $0.11    18%  $1.55   $1.21   $0.34    29%
Weighted-average shares used in computing diluted earnings per share   123.6    122.8              123.4    122.6           

 

Consolidated income from continuing operations increased by $15.8 million and $26.7 million, or 21% and 18%, in the three and six month periods ending June 30, 2013, respectively, due to increased operating income in four of our five operating segments, net of associated income taxes and higher interest expense as a result of our CSC Credit Services Acquisition. Net income attributable to Equifax for the first six months of 2013, as compared to the prior year, also benefitted from increased income from discontinued operations, driven by an $18.4 million gain, after tax, on the sale of our Talent Management Services and Equifax Settlement Services business lines. This gain results primarily from an income tax benefit of $18.1 million, including $14.3 million of current tax benefits. Net income attributable to Equifax for the three months ended June 30, 2013, was negatively impacted compared to the prior year period by the absence of earnings from the discontinued operations which benefited the prior year period.

 

26
 

 

Segment Financial Results

 

USCIS

 

   Three Months Ended June 30,           Six Months Ended June 30,         
           Change           Change 
U.S. Consumer Information Solutions  2013   2012   $   %   2013   2012   $   % 
   (Dollars in millions)   (Dollars in millions) 
Operating revenue:                                        
Online Consumer Information Solutions (OCIS)  $184.8   $157.9   $26.9    17%  $360.4   $311.8   $48.6    16%
Mortgage Solutions   32.5    23.6    8.9    38%   62.1    45.9    16.2    35%
Consumer Financial Marketing Services   42.4    36.1    6.3    17%   82.3    70.2    12.1    17%
Total operating revenue  $259.7   $217.6   $42.1    19%  $504.8   $427.9   $76.9    18%
% of consolidated revenue   44%   43%             44%   42%          
Total operating income  $104.3   $87.4   $16.9    19%  $196.2   $168.8   $27.4    16%
Operating margin   40.2%   40.2%        0.0% pts   38.9%   39.4%        -0.5% pts

 

U.S. Consumer Information Solutions revenue increased 19% and 18% in the second quarter and first six months of 2013 as compared to the prior year period. The CSC Credit Services Acquisition contributed 14% of the revenue growth in both the second quarter and first six months of 2013. The remaining growth was due primarily to a continued higher level of mortgage activity and other strategic growth initiatives.

 

OCIS

 

Revenue for the second quarter and first six months of 2013 increased 17% and 16% when compared to the prior year periods.  This increase was driven primarily by the incremental revenue from the CSC Credit Services Acquisition as compared to the prior year. Excluding the CSC Credit Services Acquisition, revenue increased 4% in the second quarter and 2% in the first six months of 2013 as compared to a year ago. A 2% decline in the second quarter and 6% decline in the first six months of 2013 in credit report transaction volume due to changes in usage in the telecommunications sector and declines in volume from select high volume but lower priced accounts in the financial services market was more than offset by higher average unit revenue due to more favorable mix and specific pricing initiatives.

 

Mortgage Solutions

 

Revenue increased 38% and 35% for the three and six month periods ended June 30, 2013, when compared to the prior year period due to the incremental revenue resulting from the CSC Credit Services Acquisition which contributed 21% of the growth in both periods as well as continued favorable market conditions and increased new product sales and market share from existing customers.

 

Consumer Financial Marketing Services

 

Revenue increased $6.3 million, or 17%, for the second quarter and $12.1 million, or 17%, for the first six months of 2013, as compared to 2012. Revenue related to the CSC Credit Services Acquisition contributed approximately 12% of the revenue growth in both periods, with the remainder coming from account acquisition and analytical services delivered to members of our key client program.

 

USCIS Operating Margin

 

USCIS operating margin was relatively flat in the second quarter and the first six months of 2013 as compared to 2012 as revenue growth was offset by increased depreciation and amortization expense, certain transitional expenses related to the CSC Credit Services Acquisition, and increased investments in growth initiatives. The increased depreciation and amortization expense was primarily a result of the additional $9.0 million and $18.0 million in the second quarter and first six months of 2013, respectively, of acquisition-related amortization expense related to the CSC Credit Services Acquisition.

 

27
 

 

International

 

   Three Months Ended June 30,           Six Months Ended June 30,         
           Change           Change 
International  2013   2012   $   %   2013   2012   $   % 
   (Dollars in millions)   (Dollars in millions) 
Operating revenue:                                        
Latin America  $48.6   $46.3   $2.3    5%  $95.1   $92.8   $2.3    3%
Europe   47.1    41.3    5.8    14%   91.7    84.4    7.3    9%
Canada Consumer   34.1    31.9    2.2    7%   66.7    63.3    3.4    5%
Total operating revenue  $129.8   $119.5   $10.3    9%  $253.5   $240.5   $13.0    5%
% of consolidated revenue   22%   23%             22%   24%          
Total operating income  $37.2   $35.0   $2.2    7%  $71.9   $73.5   $(1.6)   -2%
Operating margin   28.7%   29.2%        -0.5pts   28.4%   30.5%        -2.1% pts

 

International revenue increased by 9% and 5% in the second quarter and first six months of 2013, respectively, as compared to the same periods in 2012. Local currency revenue increased 12% in the second quarter and 8% in the six month period due to growth across the geographies. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $3.9 million, or 3%, in the second quarter and $6.2 million, or 3%, in the first six months of 2013.

 

Latin America

 

Revenue increased in the second quarter and first six months of 2013 as compared to the prior year periods. In local currency, revenue growth was 11% in the second quarter and 7% in the first six months of 2013 driven by growth in Argentina, Ecuador and Uruguay. The growth in the six months ending June 30, 2013 was partially offset by a decline in Chile due to regulatory changes in the allowable uses of credit information, whose impact on year over year comparisons was largely anniversaried by the second quarter. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $2.5 million, or 6%, in the second quarter of 2013 and $4.3 million, or 4%, in the first six months of 2013.

 

Europe

 

Revenue increased 14% and 9% in the three and six month periods ended June 30, 2013, respectively, compared to the same periods in 2012. In local currency, revenue growth was 16% in the second quarter 2013 and 10% in the first six months of 2013 driven by increased revenue in the U.K. across most product segments and, in the second quarter of 2013, by good revenue growth in Spain despite continued challenging economic conditions. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $0.8 million, or 2%, in the second quarter and $1.1 million, or 1%, in the first six months of 2013.

 

Canada Consumer

 

Local currency revenue increased 9% and 7% in the three and six month periods ended June 30, 2013, respectively, compared to the prior year periods in 2012 primarily due to new customers within marketing and technology services along with growth in analytical services.   Local currency fluctuations against the U.S. dollar negatively impacted revenue by $0.5 million, or 2%, in the second quarter of 2013 and $0.8 million, or 2%, in the first six months of 2013. These currency fluctuations resulted in 7% and 5% reported revenue growth in the second quarter and first six months of 2013, respectively.

 

International Operating Margin

 

Operating margin decreased in the second quarter and first six months of 2013 as compared to 2012 primarily due to increased investments in new business and strategic initiatives across most geographies in order to support future revenue growth.

 

28
 

 

Workforce Solutions

 

   Three Months Ended June 30,           Six Months Ended June 30,     
           Change           Change 
Workforce Solutions  2013   2012   $   %   2013   2012   $   % 
   (Dollars in millions)   (Dollars in millions) 
Operating revenue:                                        
Verfication Services  $76.7   $63.3   $13.4    21%  $145.5   $120.1   $25.4    21%
Employer Services   46.5    46.4    0.1    0%   101.4    98.5    2.9    3%
Total operating revenue  $123.2   $109.7   $13.5    12%  $246.9   $218.6   $28.3    13%
% of consolidated revenue   21%   21%             21%   21%          
Total operating income  $38.3   $26.6   $11.7    44%  $75.7   $52.8   $22.9    43%
Operating margin   31.1%   24.2%        6.9% pts   30.7%   24.2%        6.5% pts

 

Verification Services

 

Revenue increased 21% in the second quarter and first six months of 2013 compared to the prior year periods, due to 25% and 24% growth in mortgage-related verification revenue due to the strong level of mortgage refinancing activity during the second quarter and first six months of 2013, respectively, and 18% growth in both periods in non-mortgage verification revenue as a result of increased revenue related most notably to government, pre-employment and consumer finance customer segments.

 

Employer Services

 

Revenue was flat in the second quarter and increased 3% in the first six months of 2013, as compared to the same periods in 2012. Revenue growth due to the renewal of the federal Work Opportunity Tax Credit program at the end of 2012 and growth in our transaction-based complementary services business was partially offset in the six month period and fully offset in the second quarter of 2013 by lower overall claims activity in our unemployment cost management business and the expiration of the HIRE Act tax credit.

 

Workforce Solutions Operating Margin

 

Operating margin for the second quarter and first six months of 2013 increased significantly compared to the prior year periods. Margin expansion was primarily driven by strong revenue growth in products with a high degree of fixed costs. The second quarter of 2013 also benefited from lower acquisition-related amortization.

 

North America Personal Solutions

 

   Three Months Ended June 30,       Six Months Ended June 30,     
           Change           Change 
North America Personal Solutions  2013   2012   $   %   2013   2012   $   % 
   (Dollars in millions)   (Dollars in millions) 
                                 
Total operating revenue  $51.5   $46.2   $5.3    12%  $102.6   $91.1   $11.5    13%
% of consolidated revenue   9%   9%             9%   9%          
Total operating income  $14.2   $12.4   $1.8    15%  $28.7   $23.7   $5.0    21%
Operating margin   27.6%   26.8%        0.8% pts   28.0%   26.0%        2.0% pts

 

Revenue increased 12% and 13% for the three and six month periods ended June 30, 2013 as compared to the same periods in the prior year primarily due to increased direct to consumer, Equifax-branded U.S.-based subscription service revenue which was up 11% in both the second quarter and first six months of 2013, respectively. The increase was driven by new product sales and higher average revenue per subscriber, reflecting additional features in the Equifax product offering, as well as growth in subscribers.  Strong growth of services in the Canadian market also contributed to growth in the Personal Solutions business. Operating margin increased in both periods as compared to the prior year due to lower monitoring and credit file expenses resulting from the CSC Credit Services Acquisition, partially offset by increased investment in sales and marketing expenses.

 

29
 

 

North America Commercial Solutions

 

   Three Months Ended June 30,       Six Months Ended June 30,     
           Change           Change 
North America Commercial Solutions  2013   2012   $   %   2013   2012   $   % 
   (Dollars in millions)   (Dollars in millions) 
                                 
Total operating revenue  $22.7   $20.3   $2.4    12%  $45.6   $41.1   $4.5    11%
% of consolidated revenue   4%   4%             4%   4%          
Total operating income  $3.8   $2.8   $1.0    34%  $8.7   $6.3   $2.4    37%
Operating margin   16.8%   14.0%        2.8% pts   19.1%   15.4%        3.7% pts

 

Revenue increased 12% and 11%, in both U.S. dollars and local currency, for the three and six months ended June 30, 2013 as compared to the same periods in the prior year. Transaction-based revenue serving credit risk needs of our customers, which represents approximately 60% of our revenue, grew 20% in the second quarter of 2013 and 12% in the first six months as compared to the prior year periods. Project-oriented revenue was relatively flat in the second quarter of 2013 and increased 11% in the first six months of 2013 due to one-time project revenue as well as new product offerings. The impact of changes in foreign exchange rates on the Canadian portion of our business was not material. Operating margin increased in the second quarter and first six months of 2013 compared to the prior year due to revenue growth in a business with significant fixed costs.

 

General Corporate Expense

 

   Three Months Ended June 30,       Six Months Ended June 30,     
           Change           Change 
General Corporate Expense  2013   2012   $   %   2013   2012   $   % 
   (Dollars in millions)   (Dollars in millions) 
         
General corporate expense  $39.7   $35.2   $4.5    13%  $74.1   $67.8   $6.3    9%

 

Our general corporate expenses are unallocated costs that are incurred at the corporate level and include those expenses impacted by corporate direction, including shared services, administrative, legal, restructuring, and the portion of management incentive compensation determined by total company-wide performance. General corporate expenses increased for the second quarter and first six months of 2013 compared to the same periods in 2012, primarily due to increased salary and employee benefit costs as well as investments in company infrastructure and growth.

 

LIQUIDITY AND FINANCIAL CONDITION

 

Management assesses liquidity in terms of our ability to generate cash to fund operating, investing and financing activities. We continue to generate substantial cash from operating activities and remain in a strong financial position, with resources available for reinvestment in existing businesses, strategic acquisitions and managing our capital structure to meet short- and long-term objectives.

 

Sources and Uses of Cash

 

Funds generated by operating activities and our credit facilities continue to be our most significant sources of liquidity. We expect that funds generated from results of operations will be sufficient to finance our anticipated working capital and other cash requirements (such as capital expenditures, interest payments, potential pension funding contributions and dividend payments) for the foreseeable future. If borrowings were needed, we would expect to borrow in the commercial paper or corporate bond markets; or in the event that credit market conditions were to deteriorate, we would rely more heavily on borrowings from the Senior Credit Facility as described below. At June 30, 2013, $688.6 million was available to borrow under our Senior Credit Facility. Our Senior Credit Facility does not include a provision under which lenders could refuse to allow us to borrow under this facility in the event of a material adverse change in our financial condition, as long as we are in compliance with the covenants contained in the credit agreement.

 

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The following table summarizes our cash flows for the six months ended June 30, 2013 and 2012:

 

   Six Months Ended June 30,   Change 
Net cash provided by (used in):  2013   2012   2013 vs. 2012 
   (Dollars in millions) 
             
Operating activities  $206.8   $197.3   $9.5 
Investing activities  $4.9   $(35.6)  $40.5 
Financing activities  $(247.4)  $(105.8)  $(141.6)

 

Operating Activities

 

Cash provided by operating activities in the six months ended June 30, 2013 increased by $9.5 million over the prior year.  Cash provided from net income, excluding the impact of the 2013 divestitures and adjusting for an increase in amortization expense resulting from the CSC Credit Services Acquisition, increased $33.9 million.  The remaining increase in cash from operations was driven primarily by changes in net working capital and other balance sheet changes.

 

Fund Transfer Limitations.   The ability of certain of our subsidiaries and associated companies to transfer funds to us is limited, in some cases, by certain restrictions imposed by foreign governments. These restrictions do not, individually or in the aggregate, materially limit our ability to service our indebtedness, meet our current obligations or pay dividends.  We currently hold $92.1 million of cash in our foreign subsidiaries.

 

Investing Activities

 

Capital Expenditures

 

   Six Months Ended June 30,   Change 
Net cash provided by (used in):  2013   2012   2013 vs. 2012 
   (In millions) 
     
Capital expenditures  $(36.2)  $(34.5)  $(1.7)

 

Our capital expenditures are used for developing, enhancing and deploying new and existing software in support of our expanding product set, replacing or adding facilities and equipment, updating systems for regulatory compliance, the licensing of software applications and investing in system reliability, security and disaster recovery enhancements. Capital expenditures in 2013 were not materially different from 2012 as we are continuing to invest in new products and technology infrastructure.

 

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Acquisitions, Divestitures and Investments

 

   Six Months Ended June 30,   Change 
Net cash provided by (used in):  2013   2012   2013 vs. 2012 
   (In millions) 
             
Cash received from divestiture  $47.5   $2.5   $45.0 
Investment in unconsolidated affiliates, net  $(6.4)  $(3.6)  $(2.8)

 

During the first six months of 2013, we divested of two non-strategic business lines, Equifax Settlement Services which was part of our Mortgage business within the USCIS operating segment and Talent Management Services which was part of our Employer Services business within our Workforce Solutions operating segment, for a total of $47.5 million. $3.5 million of the proceeds of the sale of Talent Management Services was placed into an escrow account and will be released to us 18 months after the transaction date. We also divested of two other small non-strategic operations.

 

During the first six months of 2013, we invested $5.4 million in our joint venture in Russia to increase our percentage ownership interest as well as $1.0 million in another international entity as compared to the first half of 2012 in which we invested $3.6 million in our joint venture in Russia.

 

Financing Activities

 

Borrowings and Credit Facility Availability

 

   Six Months Ended June 30,   Change 
Net cash provided by (used in):  2013   2012   2013 vs. 2012 
   (In millions) 
             
Net short-term repayments  $(206.6)  $(31.6)  $(175.0)
Payments on long-term debt  $(15.0)  $(15.1)  $0.1 

 

Credit Facility Availability

 

Our principal unsecured revolving credit facility with a group of banks, which we refer to as the Senior Credit Facility, permits us to borrow up to $750.0 million through December 2017. The Senior Credit Facility may be used for general corporate purposes. Availability of the Senior Credit Facility for borrowings is reduced by the outstanding face amount of any letters of credit issued under the facility and, pursuant to our existing Board of Directors authorization, by the outstanding principal amount of our commercial paper notes, or CP.

 

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Our $750.0 million CP program has been established to allow for borrowing through the private placement of CP with maturities ranging from overnight to 397 days. We may use the proceeds of CP for general corporate purposes. The CP program is supported by our Senior Credit Facility and, pursuant to our existing Board of Directors authorization, the total amount of CP which may be issued is reduced by the amount of any outstanding borrowings under our Senior Credit Facility.

 

At June 30, 2013, there was $60.0 million of borrowings outstanding under our CP program. At June 30, 2013, a total of $688.6 million was available under our Senior Credit Facility.

 

At June 30, 2013, 77% of our debt was fixed-rate debt and 23% was effectively variable-rate debt. Our variable-rate debt, consisting of our commercial paper borrowings and five-year senior notes due 2014 (against which we have executed interest rate swaps to convert interest expense from fixed rates to floating rates), generally bears interest based on a specified margin plus a base rate (LIBOR). The interest rates reset periodically, depending on the terms of the respective financing arrangements. At June 30, 2013, the interest rate on our variable-rate debt ranged from 0.33% to 2.08%.

 

Borrowing and Repayment Activity

 

Net short-term repayments primarily represent activity under our CP program. We primarily borrow under our CP program, as need and availability allow.

 

The increase in net short-term repayments primarily reflects the net repayment of a significant portion of the CP notes outstanding as a result of the CSC Credit Services Acquisition at the end of 2012 during the first six months of 2013.

 

The payments on long-term debt primarily reflect $15 million payments made in the second quarter of both 2013 and 2012 on our 7.34% Notes.

 

Debt Covenants.   A downgrade in our credit ratings would increase the cost of borrowings under our CP program and credit facilities, and could limit or, in the case of a significant downgrade, preclude our ability to issue CP. Our outstanding indentures and comparable instruments also contain customary covenants including, for example, limits on the incurrence of secured debt and sale/leaseback transactions. In addition, our Senior Credit Facility requires us to maintain a maximum leverage ratio of not more than 3.5. Our leverage ratio was 1.81 at June 30, 2013. None of these covenants are considered restrictive to our operations and, as of June 30, 2013, we were in compliance with all of our debt covenants.

 

We do not have any credit rating triggers that would accelerate the maturity of a material amount of our outstanding debt; however, our 4.45% Senior Notes due 2014, 6.3% Senior Notes due 2017, 3.3% Senior Notes due 2022 and 7.0% Senior Notes due 2037 (together, the “Senior Notes”) contain change of control provisions. If we experience a change of control or publicly announce our intention to effect a change of control and the rating on the Senior Notes is lowered by each of Standard & Poor’s, or S&P, and Moody’s Investors Service, or Moody’s, below an investment grade rating within 60 days of such change of control or notice thereof, we will be required to offer to repurchase the Senior Notes at a price equal to 101% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest.

 

For additional information about our debt, including the terms of our financing arrangements, basis for variable interest rates and debt covenants, see Note 6 of the Notes to Consolidated Financial Statements in our 2012 Form 10-K.

 

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Equity Transactions

 

   Six Months Ended June 30,   Change 
Net cash provided by (used in):  2013   2012   2013 vs. 2012 
   (In millions) 
             
Treasury stock repurchases  $-   $(51.1)  $51.1 
Dividends paid to Equifax shareholders  $(53.2)  $(43.1)  $(10.1)
Dividends paid to noncontrolling interests  $(3.9)  $(1.4)  $(2.5)
Proceeds from exercise of stock options  $24.3   $33.3   $(9.0)
Excess tax benefits from stock-based compensation plans  $7.6   $3.6   $4.0 

 

Sources and uses of cash related to equity during the six months ended June 30, 2013 and 2012 were as follows:

 

-We increased our quarterly dividend from $0.18 per share to $0.22 per share as announced in the fourth quarter of 2012.  We paid cash dividends to Equifax shareholders of $53.2 million and $43.1 million during the six months ended June 30, 2013 and 2012, respectively.

 

-We received cash of $24.3 million and $33.3 million during the first six months of 2013 and 2012, respectively, from the exercise of stock options.

 

At June 30, 2013, the Company had $227.1 million remaining for stock repurchases under the existing Board authorization. 

 

Contractual Obligations, Commercial Commitments and Other Contingencies

 

Our contractual obligations have not changed materially from those reported in our 2012 Form 10-K.  For additional information about certain obligations and contingencies see Note 5 of the Notes to Consolidated Financial Statements in this Form 10-Q.

 

Off-Balance Sheet Arrangements

 

There have been no material changes with respect to our off-balance sheet arrangements from those presented in our 2012 Form 10-K.

 

Related Party Transactions

 

We engage in various transactions and arrangements with related parties. We believe the terms of the transactions and arrangements do not differ from those that would have been negotiated with an independent party.

 

Benefit Plans

 

At December 31, 2012, our U.S. Retirement Income Plan, or USRIP, met or exceeded ERISA’s minimum funding requirements. In the future, we expect to make minimum funding contributions as required and may make discretionary contributions, depending on certain circumstances, including market conditions and our liquidity needs. We believe additional funding contributions, if any, would not prevent us from continuing to meet our liquidity needs, which are primarily funded from cash flows generated by operating activities, available cash and cash equivalents, and our committed credit facilities.

 

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For our non-U.S., tax-qualified retirement plans, we fund an amount sufficient to meet minimum funding requirements but no more than allowed as a tax deduction pursuant to applicable tax regulations. For our non-qualified supplementary retirement plans, we fund the benefits as they are paid to retired participants, but accrue the associated expense and liabilities in accordance with GAAP.  

 

For additional information about our benefit plans, see Note 11 of the Notes to Consolidated Financial Statements in our 2012 Form 10-K.

 

Seasonality

 

We experience seasonality in certain of our revenue streams. Revenue generated by the online consumer information services component of our USCIS operating segment are typically the lowest during the first quarter, when consumer lending activity is at a seasonal low. Revenue generated from the Employer Services business unit within the Workforce Solutions operating segment is generally higher in the first quarter due primarily to the provision of Form W-2 preparation services which occur in the first quarter each year.  Revenue generated from our financial wealth asset products in Consumer Financial Marketing Services and from data management services in our North America Commercial business are generally higher in the fourth quarter each year due to the significant portion of our annual renewals which occur in the fourth quarter of each year.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

For information about new accounting pronouncements and the potential impact on our Consolidated Financial Statements, see Note 1 of the Notes to Consolidated Financial Statements in this Form 10-Q and Note 1 of the Notes to Consolidated Financial Statements in our 2012 Form 10-K.

 

APPLICATION OF CRITICAL ACCOUNTING POLICIES

 

The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in our Consolidated Financial Statements and the Notes to Consolidated Financial Statements. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates and assumptions about the effects of matters that are inherently uncertain. The “Application of Critical Accounting Policies and Estimates” section in the MD&A, and Note 1 of the Notes to Consolidated Financial Statements, in our 2012 Form 10-K describe the significant accounting estimates and policies used in the preparation of our Consolidated Financial Statements. Although we believe that our estimates, assumptions and judgments are reasonable, they are based upon information available at the time. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.

 

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

For information regarding our exposure to certain market risks, see “Quantitative and Qualitative Disclosures about Market Risk,” in Part II, Item 7A of our 2012 Form 10-K. There were no material changes to our market risk exposure during the six months ended June 30, 2013.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

As of the end of the period covered by this report, an evaluation was carried out by the Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.  OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

Equifax, certain of its subsidiaries, and other persons have been named as parties in various legal actions and administrative proceedings arising in connection with the operation of Equifax’s businesses. In most cases, plaintiffs seek unspecified damages and other relief. These actions include the following:

 

California Bankruptcy Litigation. In consolidated actions filed in the U.S. District Court for the Central District of California, captioned Terri N. White, et al. v. Equifax Information Services LLC, Jose Hernandez v. Equifax Information Services LLC, Kathryn L. Pike v. Equifax Information Services LLC, and Jose L. Acosta, Jr., et al. v. Trans Union LLC, et al. , plaintiffs asserted that Equifax violated federal and state law (the FCRA, the California Credit Reporting Act and the California Unfair Competition Law) by failing to follow reasonable procedures to determine whether credit accounts are discharged in bankruptcy, including the method for updating the status of an account following a bankruptcy discharge. On August 20, 2008, the District Court approved a Settlement Agreement and Release providing for certain changes in the procedures used by defendants to record discharges in bankruptcy on consumer credit files. That settlement resolved claims for injunctive relief, but not plaintiffs’ claims for damages. On May 7, 2009, the District Court issued an order preliminarily approving an agreement to settle remaining class claims. The District Court subsequently deferred final approval of the settlement and required the settling parties to send a supplemental notice to those class members who filed a claim and objected to the settlement or opted out, with the cost for the re-notice to be deducted from the plaintiffs’ counsel fee award.   Mailing of the supplemental notice was completed on February 15, 2011.  The deadline for this group of settling plaintiffs to provide additional documentation to support their damage claims or to opt-out of the settlement was March 31, 2011.  On July 15, 2011, following another approval hearing, the District Court approved the settlement. Several objecting plaintiffs subsequently filed notices of appeal to the U.S. Court of Appeals for the Ninth Circuit, which, on April 22, 2013, issued an order remanding the case to the District Court for further proceedings.

 

Other.   Equifax has been named as a defendant in various other legal actions, including administrative claims, class actions and other litigation arising in connection with our business. Some of the legal actions include claims for substantial compensatory or punitive damages or claims for indeterminate amounts of damages. We believe we have strong defenses to, and where appropriate, will vigorously contest, many of these matters. Given the number of these matters, some are likely to result in adverse judgments, penalties, injunctions, fines or other relief. However, we do not believe that these litigation matters will be individually material to our financial condition or results of operations. We may explore potential settlements before a case is taken through trial because of the uncertainty and risks inherent in the litigation process.

 

For information regarding our accounting for legal contingencies, see Note 5 of the Notes to Consolidated Financial Statements in this Form 10-Q.

 

ITEM 1A.  RISK FACTORS

 

There have been no material changes with respect to the risk factors disclosed in our 2012 Form 10-K.

 

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ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following table contains information with respect to purchases made by or on behalf of Equifax or any “affiliated purchaser” (as defined in Rule 10b-18(a) (3) under the Securities Exchange Act of 1934), of our common stock during our second quarter ended June 30, 2013:

 

               Maximum Number 
               (or Approximate 
           Total Number   Dollar Value) 
   Total   Average   of Shares Purchased   of Shares that May 
   Number   Price   as Part of   Yet Be Purchased 
   of Shares   Paid   Publicly-Announced   Under the Plans or 
Period  Purchased (1)   Per Share (2)   Plans or Programs   Programs (3) 
                 
April 1 - April 30, 2013   91,693   $-    -   $227,063,511 
May 1 - May 31, 2013   3,163   $-    -   $227,063,511 
June 1 - June 30, 2013   -   $-    -   $227,063,511 
Total   94,856   $-    -   $227,063,511 

 

(1)The total number of shares purchased for the quarter includes shares surrendered, or deemed surrendered, in satisfaction of the exercise price and/or to satisfy tax withholding obligations in connection with the exercise of employee stock options, totaling 91,693 shares for the month of April 2013, 3,163 shares for the month of May 2013, and no shares for the month of June 2013.

 

(2)Average price paid per share for shares purchased as part of our share repurchase program (includes brokerage commissions).

 

(3)At June 30, 2013, the amount authorized for future share repurchases under the share repurchase program was $227.1 million. The program does not have a stated expiration date.

 

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Dividend and Share Repurchase Restrictions

 

Our Senior Credit Facility restricts our ability to pay cash dividends on our capital stock or repurchase capital stock if a default or event of default exists or would result, according to the terms of the credit agreement.

 

ITEM 6.  EXHIBITS

 

Exhibit No.   Description
31.1   Rule 13a-14(a) Certification of Chief Executive Officer
31.2   Rule 13a-14(a) Certification of Chief Financial Officer
32.1   Section 1350 Certification of Chief Executive Officer
32.2   Section 1350 Certification of Chief Financial Officer
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
101.DEF   XBRL Taxonomy Extension Definition Linkbase 
101.LAB   XBRL Taxonomy Extension Label Linkbase
101.PRE   XBRL Taxonomy Extension Presentation Linkbase

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Equifax Inc.
  (Registrant)
   
Date: July 25, 2013 By: /s/ Richard F. Smith
    Richard F. Smith
    Chairman and Chief Executive Officer
    (Principal Executive Officer)
     
Date: July 25, 2013   /s/ Lee Adrean
    Lee Adrean
    Corporate Vice President and
    Chief Financial Officer
    (Principal Financial Officer)
     
Date: July 25, 2013   /s/ Nuala M. King
    Nuala M. King
    Senior Vice President and Corporate Controller
    (Principal Accounting Officer)

 

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INDEX TO EXHIBITS

 

Exhibit No.   Description
31.1   Rule 13a-14(a) Certification of Chief Executive Officer
31.2   Rule 13a-14(a) Certification of Chief Financial Officer
32.1   Section 1350 Certification of Chief Executive Officer
32.2   Section 1350 Certification of Chief Financial Officer
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
101.DEF   XBRL Taxonomy Extension Definition Linkbase 
101.LAB   XBRL Taxonomy Extension Label Linkbase
101.PRE   XBRL Taxonomy Extension Presentation Linkbase

 

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