Item 2. Management’s Discussion and Analysis
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.
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BUSINESS OVERVIEW
Equifax Inc. is a global data, analytics and technology company. We provide information solutions and human resources business process outsourcing services for businesses, governments and consumers. We have a large and diversified group of clients, including financial institutions, corporations, governments and individuals. Our services are based on comprehensive databases of consumer and business information derived from numerous sources including credit, financial assets, telecommunications and utility payments, employment, income, demographic and marketing data. We use advanced statistical techniques, machine learning and proprietary software tools to analyze available data to create customized insights, decision-making solutions and processing services for our clients. We also provide information, technology and services to support debt collections and recovery management. Additionally, we are a leading provider of payroll-related and human resource management business process outsourcing services in the United States of America, or U.S. For consumers, we provide products and services to help people understand, manage and protect their personal information and make more informed financial decisions.
We currently operate in four global regions: North America (U.S. and Canada), Asia Pacific (Australia, New Zealand and India), Europe (the United Kingdom, or U.K., Spain and Portugal) and Latin America (Argentina, Chile, Costa Rica, Ecuador, El Salvador, Honduras, Mexico, Paraguay, Peru and Uruguay). We maintain support operations in the Republic of Ireland, Chile, Costa Rica and India. We also offer Equifax branded credit services in Russia through a joint venture, have investments in consumer and/or commercial credit information companies through joint ventures in Cambodia, Malaysia and Singapore and have an investment in a consumer and commercial credit information company in Brazil.
Recent Events and Company Outlook
As further described in our 2020 Form 10-K, we operate in the United States, which represented 78% of our revenue in 2020, and internationally in 24 countries. Our products and services span a wide variety of vertical markets including financial services, mortgage, federal, state and local governments, automotive, telecommunications and many others.
On March 11, 2020, the World Health Organization designated the novel coronavirus disease (“COVID-19”) as a global pandemic. The impact of COVID-19 and related actions to attempt to control its spread began to impact our consolidated operating results in the first quarter of 2020. During 2020, the impact on the operating results in each country in which we operate differed based on the conditions and the vertical markets we serve in that country with the impact of the pandemic experienced most severely by our International business. In the first quarter of 2021, as efforts to minimize the spread of COVID-19 have been more successful and access to vaccinations has increased, our consolidated revenue grew when compared to 2020, reflecting strong U.S. mortgage market demand, recovering country economies, Equifax-led initiative growth and, to a lesser extent, revenue from acquired companies. A more thorough discussion of our business unit results are included under the heading “Segment Results” in the Management’s Discussion and Analysis of Financial Condition and Results of Operation section of this Form 10-Q. We are unable to determine the severity or duration of the impact of the COVID-19 pandemic on the individual markets in the countries we serve or how this impact will change with time. Although consolidated revenue has grown during the first quarter of 2021 when compared to 2020, due to the uncertain effects on the global economy caused by the impact of COVID-19, the impact on our future results of operations related to the COVID-19 pandemic are unclear.
We expect that the global COVID-19 pandemic will continue to impact our business and results of operations. While the COVID-19 pandemic affects the countries in which we operate, our critical priorities remain as follows:
(i) the health and safety of our employees and their families;
(ii) providing support to consumers;
(iii) helping our customers execute their changing business plans by providing innovative solutions combining our unique data assets and leading analytical and technology capabilities; and
(iv) executing on our cloud technology, data and security transformation per our previously stated plans.
In jurisdictions where local restrictions were implemented to prevent the further spread of the virus allow, our employees can work from their assigned offices, with limits placed on the number of employees on site at one time. For employees working at our offices and facilities, we have instituted social distancing protocols, increased the level of cleaning and sanitizing in those facilities and undertaken other actions to make these sites safer. We have also substantially reduced employee travel to only essential business needs. As part of our business continuity plans, we are generally following the requirements and protocols published by the U.S. Centers for Disease Control and the World Health Organization, and state and local governments. If public health authorities dictate further measures to limit further spread of the virus, we may need to
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reinstate our business continuity plans in certain countries or regions in which we operate. As of the date of this filing, we do not believe our work from home and return to office protocol have materially adversely impacted our internal controls, financial reporting systems or our operations.
Our data and analytics, product and sales teams are focused on how to refine existing products and services, as well as generate new products and services, to meet the changing needs of our customers in this environment. Our technology teams continue to execute on our cloud technology, data and security transformation, including the continued migration of our technology to cloud native environments. To date, the change to our working environment has not caused material disruptions in the execution of these plans.
As a response to the ongoing COVID-19 pandemic, we have implemented plans to manage our costs. We have significantly limited the addition of new employees and third party contracted services, eliminated all travel except where necessary to meet customer or regulatory needs, and acted to limit discretionary spending. The pace of recovery of the global economy from the COVID-19 induced recession remains uncertain and may affect certain markets or regions we serve differently. Any future asset impairment charges, increase in allowance for doubtful accounts, or restructuring charges could be more likely and will be dependent on the severity and duration of this crisis.
In light of the evolving health, social, economic and business environment, governmental regulations or mandates, and business disruptions that could occur, the potential impact that COVID-19 could have on our financial condition and operating results remains highly uncertain.
For more information, see “Item 1A. Risk Factors— Our business has been and will continue to be negatively impacted by the recent COVID-19 outbreak, ” in our 2020 Form 10-K.
2017 Cybersecurity Incident
In 2017, we experienced a cybersecurity incident following a criminal attack on our systems that involved the theft of certain personally identifiable information of U.S., Canadian and U.K. consumers. Criminals exploited a software vulnerability in a U.S. website application to gain unauthorized access to our network. In March 2017, the U.S. Department of Homeland Security distributed a notice concerning the software vulnerability. We undertook efforts to identify and remediate vulnerable systems; however, the vulnerability in the website application that was exploited was not identified by our security processes. We discovered unusual network activity in late-July 2017 and upon discovery promptly investigated the activity. Once the activity was identified as potential unauthorized access, we acted to stop the intrusion and engaged a leading, independent cybersecurity firm to conduct a forensic investigation to determine the scope of the unauthorized access, including the specific information impacted. Based on our forensic investigation, the unauthorized access occurred from mid-May 2017 through July 2017. No evidence was found that the Company’s core consumer, employment and income, or commercial reporting databases were accessed. On February 10, 2020, the U.S. Department of Justice announced that four members of the Chinese People’s Liberation Army were indicted on criminal charges for their involvement in the 2017 cybersecurity incident.
As a result of the 2017 cybersecurity incident, we were subject to a significant number of proceedings and investigations as described in Part II, “Item 1. Legal Proceedings” in this Form 10-Q. We did not record any settlement expenses related to the resolution of these proceedings and investigations for the three months ended March 31, 2021 and 2020. To date, we have recorded legal settlement expenses, net of insurance recoveries, of $800.9 million in selling, general, and administrative expenses in our Consolidated Statements of Income (Loss). As of March 31, 2021, $345.0 million is outstanding on the Consolidated Balance Sheet within other current liabilities related to the U.S. Consumer MDL Litigation. The amounts accrued represent our best estimate of the liability related to these matters. The Company will continue to evaluate information as it becomes known and adjust accruals for new information and further developments in accordance with ASC 450-20-25.
Future Costs
We are currently executing substantial initiatives in security and consumer support, and a company-wide transformation of our technology platforms to cloud based technologies, which we refer to as our technology transformation, and incurred substantially increased expenses and capital expenditures in 2018, 2019 and 2020 related to these initiatives. We expect to continue to continue to incur additional expenses and capital expenditures in the remainder of 2021 related to these initiatives, although at reduced levels compared to those incurred in 2020.
We will recognize the expenses and capital expenditures referenced herein as they are incurred.
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Segment and Geographic Information
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 revenue is 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 other complementary employment-based transaction services.
The USIS segment consists of three service lines: Online Information Solutions, Mortgage Solutions, and Financial Marketing Services. Online Information Solutions and Mortgage Solutions revenue is principally transaction-based and is derived from our sales of products such as consumer and commercial credit reporting and scoring, identity management, fraud detection and modeling services. USIS also markets certain decisioning software services that facilitate and automate a variety of consumer and commercial credit-oriented decisions. 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 Asia Pacific, Europe, Latin America and Canada. Canada’s services are similar to our USIS offerings. Asia Pacific, Europe and Latin America are made up of varying mixes of service lines that are generally consistent with those in our USIS reportable segment. We also provide information and technology services to support lenders and other creditors in the collections and recovery management process.
Global Consumer Solutions revenue is both transaction and subscription based and is derived from the sale of credit monitoring and identity theft protection products, which we deliver electronically to consumers primarily via the internet in the U.S., Canada, and the U.K. We also sell consumer and credit information to resellers who combine our information with other information to provide direct-to-consumer monitoring, reports and scores.
Geographic Information. We currently have operations in the following countries: Argentina, Australia, Canada, Chile, Costa Rica, Ecuador, El Salvador, Honduras, India, Mexico, New Zealand, Paraguay, Peru, Portugal, the Republic of Ireland, Spain, the U.K., Uruguay and the U.S. We also offer Equifax branded credit services in Russia through a joint venture, have investments in consumer and/or commercial credit information companies through joint ventures in Cambodia, Malaysia and Singapore and have an investment in a consumer and commercial credit information company in Brazil. Approximately 79% and 76% of our revenue was generated in the U.S. during the three months ended March 31, 2021 and 2020, respectively.
Key Performance Indicators. Management focuses on a variety of key indicators to monitor operating and financial performance. These performance indicators include measurements of operating revenue, change in operating revenue, operating income, operating margin, net income, diluted earnings per share, cash provided by operating activities and capital expenditures. The key performance indicators for the three months ended March 31, 2021 and 2020 were as follows:
Key Performance Indicators
Three Months Ended March 31,
2021 2020
(In millions, except per share data)
Operating revenue $ 1,213.0 $ 957.9
Operating revenue change 27 % 13 %
Operating income $ 306.6 $ 135.9
Operating margin 25.3 % 14.2 %
Net income attributable to Equifax $ 201.6 $ 116.9
Diluted earnings per share $ 1.64 $ 0.95
Cash provided by operating activities $ 143.4 $ 30.8
Capital expenditures* $ (107.4) $ (89.4)
*Amounts include accruals for capital expenditures.
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Operational and Financial Highlights
• We repurchased 0.2 million shares of our common stock on the open market for $34.1 million during the first three months of 2021. At March 31, 2021, $556.0 million was available for future purchases of common stock under our share repurchase authorization.
• We paid out $47.5 million or $0.39 per share in dividends to our shareholders during the first three months of 2021.
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RESULTS OF OPERATIONS—THREE MONTHS ENDED MARCH 31, 2021 AND 2020
Consolidated Financial Results
Operating Revenue
Three Months Ended March 31, Change
Consolidated Operating Revenue 2021 2020 $ %
(In millions)
Workforce Solutions $ 480.9 $ 301.6 $ 179.3 59 %
U.S. Information Solutions 409.4 343.2 66.2 19 %
International 241.3 216.0 25.3 12 %
Global Consumer Solutions 81.4 97.1 (15.7) (16) %
Consolidated operating revenue $ 1,213.0 $ 957.9 $ 255.1 27 %
Revenue increased by $255.1 million, or 27%, for the first quarter of 2021 compared to the same period in 2020. Total revenue was positively impacted by foreign exchange rates, which increased revenue by $19.3 million, or 2%, in the first quarter of 2021, compared to the same period in 2020.
Revenue in the first quarter of 2021 increased primarily due to growth in our Workforce Solutions and USIS businesses, due to strong U.S. mortgage related revenue and a return to growth in non-mortgage related revenue. Our International business also returned to growth in the quarter. These increases were partially offset by declines in GCS.
Operating Expenses
Three Months Ended March 31, Change
Consolidated Operating Expenses 2021 2020 $ %
(In millions)
Consolidated cost of services $ 483.3 $ 414.1 $ 69.2 17 %
Consolidated selling, general and administrative expenses 308.8 316.0 (7.2) (2) %
Consolidated depreciation and amortization expense 114.3 91.9 22.4 24 %
Consolidated operating expenses $ 906.4 $ 822.0 $ 84.4 10 %
Cost of services increased $69.2 million for the first quarter of 2021, compared to the same period in 2020. The increase was primarily due to higher royalty and production costs, which includes third party cloud usage fees. The impact of changes in foreign exchange rates on costs of services led to an increase of $10.6 million in the first quarter of 2021, compared to the same period in 2020.
Selling, general and administrative expenses decreased $7.2 million for the first quarter of 2021, compared to the same period in 2020. The decrease was due to lower incremental technology and data security costs as well as lower business travel costs, partially offset by higher people costs. The impact of changes in foreign currency exchange rates increased selling, general and administrative expenses by $3.9 million for the first quarter of 2021, compared to the same period in 2020.
Depreciation and amortization expense increased $22.4 million for the first quarter of 2021, compared to the same period in 2020. The increases are due to the higher amortization of capitalized internal-use software and system costs from technology transformation capital spending incurred in prior years, as well as higher amortization of acquisition costs.
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Operating Income and Operating Margin
Three Months Ended March 31, Change
Consolidated Operating Income 2021 2020 $ %
(In millions)
Consolidated operating revenue $ 1,213.0 $ 957.9 $ 255.1 27 %
Consolidated operating expenses 906.4 822.0 84.4 10 %
Consolidated operating income $ 306.6 $ 135.9 $ 170.7 126 %
Consolidated operating margin 25.3 % 14.2 % 11.1 pts
Total company operating margin increased by 11.1 percentage points for the first quarter of 2021, compared to the same period in 2020. The margin increase is due to increased revenue and a decrease in incremental technology and data security costs, partially offset by increased royalty and production costs, as well as depreciation expense.
Interest Expense and Other (Expense) Income, net
Three Months Ended March 31, Change
Consolidated Interest Expense and Other Income, net 2021 2020 $ %
(In millions)
Consolidated interest expense $ (37.2) $ (30.7) $ (6.5) 21 %
Consolidated other (expense) income, net (0.9) 51.1 (52.0) nm
Average cost of debt 3.4 % 3.6 %
Total consolidated debt, net, at quarter end $ 4,379.7 $ 3,508.2 $ 871.5 25 %
nm - not meaningful
Interest expense increased by $6.5 million for the first quarter of 2021, compared to the same period in 2020. The increase is due to the issuance of $1.0 billion senior notes in April 2020.
Other (expense) income, net, decreased by $52.0 million for the first quarter of 2021, compared to the same period in 2020. The decrease is due to a $32.9 million gain recorded in the first quarter of 2020 related to a fair value adjustment resulting from the acquisition of the remaining minority interest of our India joint venture, and in the first quarter of 2021 a loss of $11.9 million due to an unrealized fair value adjustment of our investment in Brazil, as well as foreign currency impacts of certain intercompany loans.
Income Taxes
Three Months Ended March 31, Change
Consolidated Provision for Income Taxes 2021 2020 $ %
(In millions)
Consolidated provision for income taxes $ (65.6) $ (37.5) $ (28.1) 75 %
Effective income tax rate 24.4 % 24.0 %
Our effective income tax rate was 24.4% for the three months ended March 31, 2021, compared to 24.0% f or the three months ended March 31, 2020. Our effective tax rate was slightly higher during the first quarter of 2021 as compared to 2020 due to a slightly greater foreign income tax rate differential and lower forecasted research and development credits in 2021.
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Net Income
Three Months Ended March 31, Change
Consolidated Net Income 2021 2020 $ %
(In millions, except per share amounts)
Consolidated operating income $ 306.6 $ 135.9 $ 170.7 126 %
Consolidated other (expense) income, net (38.1) 20.4 (58.5) (287) %
Consolidated provision for income taxes (65.6) (37.5) (28.1) 75 %
Consolidated net income 202.9 118.8 84.1 71 %
Net income attributable to noncontrolling interests (1.3) (1.9) 0.6 30 %
Net income attributable to Equifax $ 201.6 $ 116.9 $ 84.7 72 %
Diluted earnings per common share:
Net income attributable to Equifax $ 1.64 $ 0.95 $ 0.69 72 %
Weighted-average shares used in computing diluted earnings per share 123.2 122.6
Consolidated net income increased by $84.1 million for the first quarter of 2021, compared to the same period in 2020. The increase for the first quarter of 2021 is due to increased operating income resulting from the increase in revenue, partially offset by the reduction in other (expense) income, net, as well as higher tax expense.
Segment Financial Results
Workforce Solutions
Three Months Ended March 31, Change
Workforce Solutions 2021 2020 $ %
(In millions)
Operating revenue:
Verification Services $ 385.2 $ 220.2 $ 165.0 75 %
Employer Services 95.7 81.4 14.3 17 %
Total operating revenue $ 480.9 $ 301.6 $ 179.3 59 %
% of consolidated revenue 40 % 31 %
Total operating income $ 264.8 $ 133.5 $ 131.3 98 %
Operating margin 55.1 % 44.3 % 10.8 pts
Workforce Solutions revenue increased by 59% for the first quarter of 2021, compared to the same period in 2020. The increase was due to strong growth in Verification Services driven by growth in mortgage. There was also growth in Employer Services due to increases in unemployment claims management during the first quarter of 2021 as compared to the prior year period.
Verification Services
Revenue increased by 75% for the first quarter of 2021, compared to the same period in 2020, due to strong growth in the mortgage vertical and, to a lesser extent, talent solutions vertical both supported by continued addition of new records to The Work Number database.
Employer Services
Revenue increased by 17% for the first quarter of 2021, compared to the same period in 2020, due to increases in our unemployment claims management services, as U.S. unemployment claims increased due to the economic impact of COVID-19 on the U.S. economy.
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Workforce Solutions Operating Margin
Operating margin increased to 55.1% for the first quarter of 2021 from 44.3% for the first quarter of 2020. The increased margin was due to an increase in revenue, partially offset by increases in royalty and production costs.
USIS
Three Months Ended March 31, Change
U.S. Information Solutions 2021 2020 $ %
(In millions)
Operating revenue:
Online Information Solutions $ 302.0 $ 252.8 $ 49.2 19 %
Mortgage Solutions 54.1 42.8 11.3 27 %
Financial Marketing Services 53.3 47.6 5.7 12 %
Total operating revenue $ 409.4 $ 343.2 $ 66.2 19 %
% of consolidated revenue 34 % 36 %
Total operating income $ 139.7 $ 107.6 $ 32.1 30 %
Operating margin 34.1 % 31.4 % 2.7 pts
USIS revenue increased by 19% for the first quarter 2021, compared to the same period in 2020, due to improvements in our core credit decisioning services and mortgage solutions volumes related to the continued strength of the U.S. mortgage market in 2021.
Online Information Solutions
Revenue increased by 19% for the first quarter of 2021, compared to the same period in 2020. The increase was due to improved core credit decisioning services volumes related to improvements in the mortgage market as well as revenue related to the Kount acquisition. Also, we are beginning to see growth year over year related to non-mortgage online revenue, which started to decline in the second quarter of 2020 due to the economic impact of COVID-19.
Mortgage Solutions
Revenue increased by 27% for the first quarter of 2021, compared to the same period in 2020, due to increased mortgage market transaction volumes.
Financial Marketing Services
Revenue increased by 12% for the first quarter of 2021, compared to the same period in 2020, as customers have increased marketing activities as the U.S. economy continues its recovery from the economic impact of COVID-19, which began in the second half of March 2020.
USIS Operating Margin
USIS operating margin increased to 34.1% in the first quarter of 2021 from 31.4% in the first quarter of 2020. The margin increase during the first quarter of 2021 was due to an increase of revenue and a decrease in incremental technology and data security costs, partially offset by an increase in royalty, depreciation and production costs.
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International
Three Months Ended March 31, Change
International 2021 2020 $ %
(In millions)
Operating revenue:
Asia Pacific $ 86.9 $ 69.7 $ 17.2 25 %
Europe 68.7 66.4 2.3 3 %
Latin America 41.6 43.2 (1.6) (4) %
Canada 44.1 36.7 7.4 20 %
Total operating revenue $ 241.3 $ 216.0 $ 25.3 12 %
% of consolidated revenue 20 % 23 %
Total operating income $ 27.8 $ 15.3 $ 12.5 82 %
Operating margin 11.5 % 7.1 % 4.4 pts
International revenue increased by 12% for the first quarter of 2021, compared to the same period in 2020. On a local currency basis, revenue increased by 3% for the first quarter of 2021, driven by increases in Asia Pacific, Canada and Latin America, partially offset by declines in Europe. Local currency fluctuations against the U.S. dollar positively impacted revenue by $18.5 million, or 9%, for the first quarter of 2021.
Asia Pacific
On a local currency basis, revenue increased by 7% for the first quarter of 2021, compared to the same period in 2020. The increase in revenue for the first quarter of 2021 was driven by growth in our commercial business in Australia. Local currency fluctuations against the U.S. dollar positively impacted revenue by $12.6 million, or 18%, for the first quarter of 2021. Reported revenue increased by 25% for the first quarter of 2021, compared to the same period in 2020.
Europe
On a local currency basis, revenue decreased by 5% for the first quarter of 2021, compared to the same period in 2020. The decrease was mainly in the consumer vertical driven by the lower economic activity in the U.K. and Spain. Our debt management vertical was also negatively affected as government agencies temporarily halted placing debt amidst the COVID-19 pandemic. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $5.3 million, or 8%, for the first quarter 2021. Reported revenue increased by 3% for the first quarter of 2021, compared to the same period in 2020.
Latin America
On a local currency basis, revenue increased by 1% for the first quarter of 2021, compared to the same period in 2020. The increase was driven by price increases in Argentina, partially offset by continued negative impacts of COVID-19 across the entire region. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $2.0 million, or 5%, for the first quarter of 2021, primarily from Argentina and partially offset by Chile. Reported revenue decreased by 4% for the first quarter of 2021, compared to the same period in 2020.
Canada
On a local currency basis, revenue increased by 13% for the first quarter of 2021, compared to the same period in 2020. The increase for the first quarter of 2021 is primarily due to growth in the consumer, commercial and analytics verticals, as Canada continues to recover from the negative impacts of COVID-19. Local currency fluctuations against the U.S. dollar positively impacted revenue by $2.7 million, or 7%, for the first quarter of 2021. Reported revenue increased by 20% for the first quarter of 2021, compared to the same period in 2020.
International Operating Margin
Operating margin increased to 11.5% for the first quarter of 2021 from 7.1% in the first quarter of 2020. The increased margin for the first quarter of 2021 is due to the increased revenue mentioned above, lower level of technology and data security costs and discretionary expense control across all geographies, partially offset by increased people costs, depreciation expense and production costs.
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Global Consumer Solutions
Three Months Ended March 31, Change
Global Consumer Solutions 2021 2020 $ %
(In millions)
Total operating revenue $ 81.4 $ 97.1 $ (15.7) (16) %
% of consolidated revenue 6 % 10 %
Total operating income $ 14.0 $ 13.1 $ 0.9 7 %
Operating margin 17.2 % 13.5 % 3.7 pts
Revenue decreased by 16% for the first quarter of 2021, compared to the same period in 2020. On a local currency basis, revenue decreased by 17% for the first quarter of 2021. The reduction in revenue was driven by decreases in partner revenue, partially offset by growth in the direct to consumer business due to strong consumer subscription performance in North America. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $0.8 million, or 1%, for the first quarter results for 2021.
Global Consumer Solutions Operating Margin
Operating margin increased to 17.2% for the first quarter of 2021 from 13.5% in the first quarter of 2020. The increased margin in the first quarter of 2021 was due to a reduction in partner royalty costs and decrease in technology development costs, partially offset by increased depreciation expense and production costs.
General Corporate Expense
Three Months Ended March 31, Change
General Corporate Expense 2021 2020 $ %
(In millions)
General corporate expense $ 139.7 $ 133.6 $ 6.1 5 %
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, technology, security, data and analytics, administrative, legal, restructuring, and the portion of management incentive compensation determined by total company-wide performance.
General corporate expense increased by $6.1 million for the first quarter of 2021, compared to the same period in 2020. The increase in the first quarter is due to an increase in people costs and depreciation expense, partially offset by a decrease in incremental technology and data security costs.
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, remain in a strong financial position, and manage our capital structure to meet short and long-term objectives including reinvestment in existing businesses and strategic acquisitions.
Sources and Uses of Cash
Funds generated by operating activities, our Revolver and related commercial paper program, more fully described below, are our most significant sources of liquidity. At March 31, 2021, we had $0.8 billion in cash balances, as well as $1.1 billion available to borrow under our Revolver.
The Company has and expects to make payments to resolve certain legal proceedings and investigations related to the 2017 cybersecurity incident, described more fully in Part II, “Item 1. Legal Proceedings” in this Form 10-Q. Through March 31, 2021, the Company has made payments of $443.3 million for legal settlements related to the 2017 cybersecurity incident. The remaining $345.0 million to be paid to the Consumer Restitution Fund will be made after a final adjudication affirming the U.S. Consumer MDL Litigation settlement or dismissal of the pending appeals. Although we expect this payment and the remaining settlement payments to be made later in 2021, we can give no assurance that these payments will occur in 2021 due to pending approvals or appeals. As a result of the possible payments that could be made in 2021 related to the losses associated with certain legal proceedings and government investigations related to the 2017 cybersecurity incident and other requirements,
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funds generated by operating activities may not be sufficient to fund working capital and other cash requirements, including for acquisitions and share repurchases, throughout 2021. Our plan is to finance the payments with existing cash balances and borrowing capacity, as necessary.
Fund Transfer Limitations. The ability of certain of our subsidiaries and associated companies to transfer funds to the U.S. may be 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. As of March 31, 2021, we held $250.8 million of cash in our foreign subsidiaries.
Information about our cash flows, by category, is presented in the Consolidated Statements of Cash Flows. The following table summarizes our cash flows for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31, Change
Net cash provided by (used in): 2021 2020 2021 vs. 2020
(In millions)
Operating activities $ 143.4 $ 30.8 $ 112.6
Investing activities $ (973.5) $ (136.1) $ (837.4)
Financing activities $ (88.6) $ 92.7 $ (181.3)
Operating Activities
Cash provided by operating activities in the three months ended March 31, 2021 increased by $112.6 million compared the prior year period due to increased net income.
Investing Activities
Capital Expenditures
Three Months Ended March 31, Change
Net cash used in: 2021 2020 2021 vs. 2020
(In millions)
Capital expenditures* $ (113.0) $ (88.0) $ (25.0)
*Amounts above are total cash outflows for capital expenditures.
Our capital expenditures are used for developing, enhancing and deploying new and existing software in support of our expanding product set, replacing or adding equipment, updating systems for regulatory compliance, the licensing of standard software applications, investing in system reliability, security and disaster recovery enhancements, and updating or expanding our office facilities.
Capital expenditures paid in the first three months of 2021 increased by $25.0 million from the same period in 2020. We are continuing to invest in enhanced technology systems and infrastructure as part of our technology transformation.
Acquisitions, Divestitures and Investments
Three Months Ended March 31, Change
Net cash used in: 2021 2020 2021 vs. 2020
(In millions)
Acquisitions, net of cash acquired $ (862.0) $ (48.1) $ (813.9)
Cash received from divestiture $ 1.5 $ — $ 1.5
During the first three months of 2021 we acquired Kount within our USIS segment, HIRETech and i2Verify within our Workforce Solutions segment and a small tuck-in acquisition within our International segment. In addition, we also sold a small business within our International segment. During the first three months of 2020, we acquired the remaining interest in our India joint venture within the International segment.
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Financing Activities
Borrowings and Credit Facility Availability
Three Months Ended March 31, Change
Net cash provided by (used in): 2021 2020 2021 vs. 2020
(In millions)
Net short-term borrowings $ (0.7) $ 0.2 $ (0.9)
Borrowings on long-term debt $ — $ 125.0 $ (125.0)
Credit Facility Availability
In September 2018, the Company entered into a $1.1 billion five-year unsecured revolving credit facility with a group of financial institutions, which will mature in September 2023 (the “Revolver”). The Revolver replaced the Company’s previous $900.0 million unsecured revolving credit facility that was scheduled to mature in November 2020. Borrowings under the Revolver may be used for general corporate purposes, including working capital, capital expenditures, acquisitions and share repurchase programs. The Revolver has an accordion feature that allows us to request an increase in the total commitment to $1.6 billion. The Revolver includes an option to request a maximum of two one-year extensions of the maturity date, any time after the first anniversary of the Revolver closing. We believe we are currently in compliance with all representations and warranties necessary as a condition for borrowing under the Revolver, but we cannot assure that we will be able to comply with all such conditions for borrowing in the future. Availability of the Revolver is reduced by the outstanding principal balance of our commercial paper notes and by any letters of credit issued under the facility. On April 10, 2020, we amended our existing revolving credit facility to increase the maximum leverage ratio to provide additional financial flexibility as described further below.
Our $1.1 billion commercial paper (“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 Revolver and the total amount of CP which may be issued is reduced by the amount of any outstanding borrowings under our Revolver.
As of March 31, 2021, there were $0.7 million of letters of credit issued under the Revolver, no principal drawn amounts under the Revolver, and no commercial paper borrowings. Availability under the Revolver was $1.1 billion at March 31, 2021.
At March 31, 2021, 93% of our debt was fixed-rate debt and 7% was effectively variable debt. Our variable-rate debt consists of our floating rate notes due in 2021. The interest rates reset periodically, depending on the terms of the respective financing agreements. At March 31, 2021, the interest rate on our variable-rate debt was 1.06%.
Borrowing and Repayment Activity
We primarily borrow under our CP program and Revolver as needed and as availability allows.
Net short-term borrowings primarily represent borrowings or repayments of outstanding amounts under our CP program.
Borrowings on long-term debt represent the net proceeds received from draw downs on the Receivables Facility in the first three months of 2020.
Debt Covenants. A downgrade in our credit ratings would increase the cost of borrowings under our CP program and Revolver, 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 mortgages, liens, and sale/leaseback transactions.
In April 2020, we amended our existing revolving credit facility to increase the maximum leverage ratio to provide additional financial flexibility. The amendment increases the maximum leverage ratio, defined as consolidated funded debt divided by consolidated EBITDA for the preceding four quarters, to (i) 4.5 to 1.0 for fiscal quarters ending on June 30, 2020 through and including September 30, 2021 and (ii) 4.0 to 1.0 for the fiscal quarter ending on December 31, 2021. The maximum leverage ratio will return to 3.5 to 1.0 beginning with the fiscal quarter ending March 31, 2022 and thereafter.
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Beginning January 1, 2021, we may also elect to increase the maximum leverage ratio by 0.5 to 1.0 (not to exceed 4.5 to 1.0) in connection with certain material acquisitions if we satisfy certain requirements. The amendment also (i) permits cash in excess of $200 million to be netted against debt in the calculation of the leverage ratio through September 30, 2021, subject to certain restrictions and (ii) extends the add-back of certain expenses related to the 2017 cybersecurity incident to the definition of Consolidated EBITDA through December 31, 2021.
As of March 31, 2021, 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 the outstanding debt; however, our 2.3% senior notes due 2021, 3.6% senior notes due 2021, floating rate notes due 2021, 3.3% senior notes due 2022, 3.95% senior notes due 2023, 2.6% senior notes due 2024, 2.6% senior notes due 2025, 3.25% senior notes due 2026, 3.1% senior notes due 2030 and 7.0% senior notes due 2037 (together, the “Senior Notes”) contain change in control provisions. If the Company experiences a change of control or publicly announces the Company’s intention to effect a change of control and the rating on the Senior Notes is lowered by Standard & Poor’s (“S&P”) and Moody’s Investors Service (“Moody’s”) below an investment grade rating within 60 days of such change of control or notice thereof, then the Company 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. As of March 31, 2021, our S&P credit rating was BBB with a stable outlook and our Moody’s credit rating was Baa2 with a stable outlook. These ratings are subject to change as events and circumstances change.
For additional information about our debt, including the terms of our financing arrangements, basis for floating interest rates and debt covenants, see Note 5 of the Notes to Consolidated Financial Statements in our 2020 Form 10-K.
Equity Transactions
Three Months Ended March 31, Change
Net cash provided by (used in): 2021 2020 2021 vs. 2020
(In millions)
Treasury stock repurchases $ (34.1) $ — $ (34.1)
Dividends paid to Equifax shareholders $ (47.5) $ (47.3) $ (0.2)
Dividends paid to noncontrolling interests $ (0.7) $ (0.3) $ (0.4)
Proceeds from exercise of stock options and employee stock purchase plan $ 6.6 $ 16.7 $ (10.1)
Sources and uses of cash related to equity during the three months ended March 31, 2021 and 2020 were as follows:
- During the first three months of 2021, we repurchased 0.2 million shares of our common stock on the open market for $34.1 million. During the first three months of 2020, we did not repurchase any shares of our stock.
- We maintained our quarterly dividend of $0.39 per share in the first quarter of 2021. We paid cash dividends to Equifax shareholders of $47.5 million and $47.3 million, or $0.39 per share, during the three months ended March 31, 2021 and 2020, respectively.
- We received cash of $6.6 million and $16.7 million during the first three months of 2021 and 2020, respectively, from the exercise of stock options and the employee stock purchase plan.
At March 31, 2021, the Company had $556.0 million remaining for stock repurchases under the existing authorization from the board of directors.
Contractual Obligations, Commercial Commitments and Other Contingencies
Our contractual obligations have not changed materially from those reported in our 2020 Form 10-K. For additional information about certain obligations and contingencies, see Note 6 of the Notes to Consolidated Financial Statements in this Form 10-Q.
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Off-Balance Sheet Arrangements
There have been no material changes with respect to our off-balance sheet arrangements from those presented in our 2020 Form 10-K.
Benefit Plans
At December 31, 2020, 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, our CP program and our Revolver.
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 9 of the Notes to Consolidated Financial Statements in our 2020 Form 10-K.
Seasonality
Traditionally we experience seasonality in certain of our revenue streams. Revenue generated by the online consumer information services component of our USIS operating segment is 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, 1094, and 1095 preparation services which occur in the first quarter each year. Revenue generated from our financial wealth asset products and data management services in our Financial Marketing Services business are generally higher in the fourth quarter each year. Mortgage related revenue is generally higher in the second and third quarters of the year due to the increase in consumer home purchasing during the summer in the U.S. Due to the COVID-19 pandemic, as described above within “Recent Events and Company Outlook,” we are unsure of how future results will compare to historic seasonality trends.
Foreign Currency
Argentina has experienced multiple periods of increasing inflation rates, devaluation of the peso, and increasing borrowing rates. As such, Argentina has been deemed a highly inflationary economy by accounting policymakers. Beginning in the third quarter of 2018, we have accounted for Argentina as highly inflationary which resulted in the recognition of a $1.1 million foreign currency gain that was recorded in other income, net in our Consolidated Statements of Income during the three months ended March 31, 2021.
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 2020 Form 10-K.
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APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company’s Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles, or GAAP. This 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 2020 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.
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 2020 Form 10-K. There were no material changes to our market risk exposure during the three months ended March 31, 2021.