EQUIFAX INC 10-Q

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. 22 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 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 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 U.S., 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. In March 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. Details of the impact of COVID-19 to our 2020 results can be found under the heading “Segment Financial Results” in the Management’s Discussion and Analysis of Financial Condition and Results of Operation section of the 2020 Form 10-K. In the second quarter and first six months 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 the continuing strong U.S. mortgage market demand, recovering country economies, Equifax-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 Financial 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 second quarter and first six months 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. 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. In jurisdictions where local restrictions have been lifted, as is the case at our major U.S. locations, our employees are returning to work to their assigned offices in conjunction with jurisdictional guidance. In jurisdictions where the local restrictions that were implemented to prevent the further spread of the virus allow, our employees can work from their assigned offices or from home, with limits placed on the number of employees on site at one 23 time. Generally across our facilities, we have increased the level of cleaning and sanitizing and undertaken other actions to make these sites safer, including social distancing protocols. We have also substantially reduced employee travel. If public health authorities dictate further measures to limit further spread of the virus, we may need to 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 protocols 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 implemented plans to manage our costs. We limited the addition of new employees and third party contracted services, limited most 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 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 or six months ended June 30, 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 June 30, 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 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. 24 We will recognize the expenses and capital expenditures referenced herein as they are incurred. 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. GCS 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 80% of our revenue was generated in the U.S. during the three months ended June 30, 2021 and 2020, respectively. Approximately 79% and 78% of our revenue was generated in the U.S. during the six months ended June 30, 2021 and 2020, respectively. 25 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 and six months ended June 30, 2021 and 2020 were as follows: Key Performance Indicators Three Months Ended June 30, Six months ended June 30, 2021 2020 2021 2020 (In millions, except per share data) (In millions, except per share data) Operating revenue $ 1,234.8 $ 982.8 $ 2,447.8 $ 1,940.8 Operating revenue change 26 % 12 % 26 % 12 % Operating income $ 306.0 $ 166.8 $ 612.6 $ 302.7 Operating margin 24.8 % 17.0 % 25.0 % 15.6 % Net income attributable to Equifax $ 215.1 $ 100.2 $ 416.7 $ 217.1 Diluted earnings per share $ 1.74 $ 0.82 $ 3.38 $ 1.77 Cash provided by operating activities $ 407.7 $ 251.2 $ 551.1 $ 282.0 Capital expenditures* $ (117.4) $ (107.9) $ (224.9) $ (197.3) *Amounts include accruals for capital expenditures. Operational and Financial Highlights • We repurchased 0.4 million shares of our common stock on the open market for $69.9 million during the first six months of 2021. At June 30, 2021, $520.2 million was available for future purchases of common stock under our share repurchase authorization. • We paid out $95.0 million or $0.78 per share in dividends to our shareholders during the first six months of 2021. 26 RESULTS OF OPERATIONS—THREE MONTHS ENDED JUNE 30, 2021 AND 2020 Consolidated Financial Results Operating Revenue Three Months Ended June 30, Change Six Months Ended June 30, Change Consolidated Operating Revenue 2021 2020 $ % 2021 2020 $ % (In millions) (In millions) Workforce Solutions $ 495.7 $ 352.9 $ 142.8 40 % $ 976.5 $ 654.6 $ 321.9 49 % U.S. Information Solutions 405.8 365.6 40.2 11 % 815.2 708.8 106.4 15 % International 250.9 180.5 70.4 39 % 492.3 396.5 95.8 24 % Global Consumer Solutions 82.4 83.8 (1.4) (2) % 163.8 180.9 (17.1) (9) % Consolidated operating revenue $ 1,234.8 $ 982.8 $ 252.0 26 % $ 2,447.8 $ 1,940.8 $ 507.0 26 % Revenue increased by $252.0 million, or 26%, and by $507.0 million, or 26%, for the second quarter and first six months of 2021, respectively, compared to the same periods in 2020. Total revenue was positively impacted by foreign exchange rates, which increased revenue by $26.2 million and $45.4 million, or 3% and 2%, for the second quarter and first six months of 2021, respectively, compared to the same periods in 2020. Revenue in the second quarter and first six months of 2021 increased primarily due to growth in Workforce Solutions, USIS and International businesses, partially offset by a decline in GCS. Operating Expenses Three Months Ended June 30, Change Six Months Ended June 30, Change Consolidated Operating Expenses 2021 2020 $ % 2021 2020 $ % (In millions) (In millions) Consolidated cost of services $ 483.0 $ 409.3 $ 73.7 18 % $ 966.2 $ 823.4 $ 142.8 17 % Consolidated selling, general and administrative expenses 328.4 309.9 18.5 6 % 637.3 626.0 11.3 2 % Consolidated depreciation and amortization expense 117.4 96.8 20.6 21 % 231.7 188.7 43.0 23 % Consolidated operating expenses $ 928.8 $ 816.0 $ 112.8 14 % $ 1,835.2 $ 1,638.1 $ 197.1 12 % Cost of services increased $73.7 million and $142.8 million in the second quarter and first six months of 2021, respectively, compared to the same periods in 2020. The increases for both periods were primarily due to higher royalty costs, production costs, which include third party cloud usage fees, and people costs, partially offset by lower incremental technology and data security costs. The impact of changes in foreign exchange rates on costs of services led to an increase of $13.7 million and $24.3 million in the second quarter and first six months of 2021, respectively, compared to the same periods in 2020. Selling, general and administrative expenses increased $18.5 million and $11.3 million for the second quarter and first six months of 2021, respectively, compared to the same periods in 2020. The increases for both periods were due to increases in people and advertising costs, partially offset by lower incremental technology and data security costs, as well as lower business travel costs for the first six months of 2021. The impact of changes in foreign currency exchange rates increased selling, general and administrative expenses by $5.8 million and $9.7 million in the second quarter and first six months of 2021, respectively, compared to the same periods in 2020. Depreciation and amortization expense increased $20.6 million and $43.0 million in the second quarter and first six months of 2021, respectively, compared to the same periods 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. 27 Operating Income and Operating Margin Three Months Ended June 30, Change Six Months Ended June 30, Change Consolidated Operating Income 2021 2020 $ % 2021 2020 $ % (In millions) (In millions) Consolidated operating revenue $ 1,234.8 $ 982.8 $ 252.0 26 % $ 2,447.8 $ 1,940.8 $ 507.0 26 % Consolidated operating expenses 928.8 816.0 112.8 14 % 1,835.2 1,638.1 197.1 12 % Consolidated operating income $ 306.0 $ 166.8 $ 139.2 83 % $ 612.6 $ 302.7 $ 309.9 102 % Consolidated operating margin 24.8 % 17.0 % 7.8 pts 25.0 % 15.6 % 9.4 pts Total company operating margin increased by 7.8 percentage points and 9.4 percentage points in the second quarter and first six months of 2021, respectively, compared to the same periods in 2020. The margin increase is due to increased revenue and decreased incremental technology and data security costs, partially offset by increased royalty and production costs, people costs, and depreciation expense. Interest Expense and Other Income (Expense), net Three Months Ended June 30, Change Six Months Ended June 30, Change Consolidated Interest Expense and Other Income (Expense), net 2021 2020 $ % 2021 2020 $ % (In millions) (In millions) Consolidated interest expense $ (34.9) $ (36.6) $ 1.7 (5) % $ (72.1) $ (67.3) $ (4.8) 7 % Consolidated other income (expense), net 6.0 (1.8) 7.8 nm 5.1 49.3 (44.2) nm Average cost of debt 3.4 % 3.5 % 3.4 % 3.5 % Total consolidated debt, net, at quarter end $ 3,881.6 $ 4,375.8 $ (494.2) (11) % $ 3,881.6 $ 4,375.8 $ (494.2) (11) % nm - not meaningful Interest expense decreased by $1.7 million and increased by $4.8 million in the second quarter and first six months of 2021, respectively, compared to the same periods in 2020. The decrease for the second quarter of 2021 is due to the retirement of the 2.3% senior notes during the period. The increase for the first six months of 2021 is due to the issuance of $1.0 billion senior notes in April 2020, partially offset by the retirement of the 2.3% senior notes. Other income (expense), net, increased by $7.8 million and decreased by $44.2 million in the second quarter and first six months of 2021, respectively, compared to the same periods in 2020. The increase for the second quarter is due to the change in foreign currency impacts of certain intercompany loans year over year, partially offset by the unrealized loss in 2021 related to the fair value adjustment of our investment in Brazil. The decrease for the first six months of 2021 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. The first six months of 2021 was also impacted by the unrealized loss resulting from the fair value adjustment of our investment in Brazil in 2021, partially offset by the change in foreign currency impacts of certain intercompany loans year over year. Income Taxes Three Months Ended June 30, Change Six Months Ended June 30, Change Consolidated Provision for Income Taxes 2021 2020 $ % 2021 2020 $ % (In millions) (In millions) Consolidated provision for income taxes $ (61.2) $ (28.0) $ (33.2) 119 % $ (126.8) $ (65.5) $ (61.3) 94 % Effective income tax rate 22.1 % 21.8 % 23.2 % 23.0 % Our effective income tax rate was 22.1% for the three months ended June 30, 2021, compared to 21.8% for the three months ended June 30, 2020. Our effective income tax rate was 23.2% for the six months ended June 30, 2021, compared to 23.0% for the six months ended June 30, 2020. Our effective tax rate was slightly higher for the second quarter and first six months of 2021 as compared to 2020 due to a greater foreign income tax rate differential. 28 Net Income Three Months Ended June 30, Change Six Months Ended June 30, Change Consolidated Net Income 2021 2020 $ % 2021 2020 $ % (In millions, except per share amounts) (In millions, except per share amounts) Consolidated operating income $ 306.0 $ 166.8 $ 139.2 83 % $ 612.6 $ 302.7 $ 309.9 102 % Consolidated interest expense and other income (expense), net (28.9) (38.4) 9.5 (25) % (67.0) (18.0) (49.0) 272 % Consolidated provision for income taxes (61.2) (28.0) (33.2) 119 % (126.8) (65.5) (61.3) 94 % Consolidated net income 215.9 100.4 115.5 115 % 418.8 219.2 199.6 91 % Net income attributable to noncontrolling interests (0.8) (0.2) (0.6) (271) % (2.1) (2.1) — — % Net income attributable to Equifax $ 215.1 $ 100.2 $ 114.9 115 % $ 416.7 $ 217.1 $ 199.6 92 % Diluted earnings per common share: Net income attributable to Equifax $ 1.74 $ 0.82 $ 0.92 113 % $ 3.38 $ 1.77 $ 1.61 91 % Weighted-average shares used in computing diluted earnings per share 123.5 122.7 123.4 122.7 Consolidated net income increased by $115.5 million and $199.6 million for the second quarter and the first six months of 2021, respectively, compared to the same periods in 2020. The increase for both periods is due to increased operating income resulting from the increase in revenue from three of our operating segments, partially offset by higher tax expense, as well as the reduction in other income (expense) for the first six months of 2021. Segment Financial Results Workforce Solutions Three Months Ended June 30, Change Six Months Ended June 30, Change Workforce Solutions 2021 2020 $ % 2021 2020 $ % (In millions) (In millions) Operating revenue: Verification Services $ 394.5 $ 251.9 $ 142.6 57 % $ 779.6 $ 472.1 $ 307.5 65 % Employer Services 101.2 101.0 0.2 — % 196.9 182.5 14.4 8 % Total operating revenue $ 495.7 $ 352.9 $ 142.8 40 % $ 976.5 $ 654.6 $ 321.9 49 % % of consolidated revenue 40 % 36 % 40 % 34 % Total operating income $ 265.2 $ 174.2 $ 91.0 52 % $ 529.9 $ 307.7 $ 222.2 72 % Operating margin 53.5 % 49.4 % 4.1 pts 54.3 % 47.0 % 7.3 pts Workforce Solutions revenue increased by 40% and 49% in the second quarter and the first six months of 2021, respectively, compared to the same periods in 2020. The increases were due to strong growth in Verification Services driven by growth in both mortgage and non-mortgage verticals. Employer Services revenue increased for the first six months of 2021 as growth across our onboarding and tax services businesses, as well as acquisition related growth were partially offset by a decline in our unemployment claims business. Employer Services revenue was flat in the second quarter of 2021 as a decline in our unemployment claims business as compared to the prior year period was offset by growth across our onboarding and tax services businesses, as well as acquisition related growth. Verification Services Revenue increased by 57% and 65% in the second quarter and the first six months of 2021, respectively, compared to the same periods in 2020. The increase for both periods is due to strong growth in the mortgage vertical and, to a lesser extent, the talent solutions vertical despite the reduction in mortgage inquiries beginning during the second quarter of 2021. Revenue growth for both mortgage and non-mortgage verticals are supported by continued addition of new records to The Work Number database. 29 Employer Services Revenue was flat for the second quarter of 2021 and increased by 8% in the first six months of 2021, compared to the same periods in 2020. Revenue in the second quarter of 2021 was flat, as acquisition revenue and the increase in employee services was offset by a decrease in unemployment claims revenue as the number of claims greatly increased in 2020 due to the economic impact of COVID-19 on the U.S. economy. The increase in the first six months of 2021 is due to acquisition revenue and growth in employee services, partially offset by the decrease in unemployment claims management revenue due to the reduction in unemployment claims compared to the prior year period. Workforce Solutions Operating Margin Operating margin increased to 53.5% for the second quarter of 2021 from 49.4% for the second quarter of 2020 and to 54.3% for the first six months of 2021 from 47.0% for the first six months of 2020. The increased margins were due to the increase in revenue, partially offset by increases in royalty costs, production costs and depreciation expense. USIS Three Months Ended June 30, Change Six Months Ended June 30, Change U.S. Information Solutions 2021 2020 $ % 2021 2020 $ % (In millions) (In millions) Operating revenue: Online Information Solutions $ 298.0 $ 262.9 $ 35.1 13 % $ 600.0 $ 515.7 $ 84.3 16 % Mortgage Solutions 49.3 51.2 (1.9) (4) % 103.4 94.0 9.4 10 % Financial Marketing Services 58.5 51.5 7.0 14 % 111.8 99.1 12.7 13 % Total operating revenue $ 405.8 $ 365.6 $ 40.2 11 % $ 815.2 $ 708.8 $ 106.4 15 % % of consolidated revenue 33 % 37 % 33 % 37 % Total operating income $ 126.1 $ 113.1 $ 13.0 11 % $ 265.8 $ 220.7 $ 45.1 20 % Operating margin 31.1 % 30.9 % 0.2 pts 32.6 % 31.1 % 1.5 pts USIS revenue increased by 11% and 15% in the second quarter and the first six months of 2021, respectively, compared to the same periods in 2020. The increase in the second quarter of 2021 is due to improvements in our core credit decisioning services, acquisition revenue and financial marketing services, partially offset by a slight decrease in mortgage solutions due to declining mortgage inquiry volumes. The increase for the first six months of 2021 is due to improvements in our core credit decisioning services, acquisition revenue, financial marketing services, as well as mortgage solutions related to the overall strength of the U.S. mortgage market as compared to the prior year. Online Information Solutions Revenue increased by 13% and 16% in the second quarter and the first six months of 2021, respectively, compared to the same periods in 2020. The increases were due to improved core credit decisioning services volumes as well as revenue related to the Kount acquisition. Mortgage Solutions Revenue decreased by 4% in the second quarter of 2021 and increased by 10% in the first six months of 2021, compared to the same periods in 2020. Mortgage origination transaction volumes are up for the first six months of 2021 but have started to decline in the second quarter, as compared to the prior year. Financial Marketing Services Revenue increased by 14% and 13% in the second quarter and the first six months of 2021, respectively, compared to the same periods in 2020. The increase in both periods is due to increased marketing activities by customers as the U.S. economy continues its recovery from the economic impact of COVID-19. 30 USIS Operating Margin USIS operating margin increased to 31.1% for the second quarter of 2021 from 30.9% for the second quarter of 2020 and to 32.6% for the first six months of 2021 from 31.1% for the first six months of 2020. The slight margin increases for the second quarter and, to a greater extent, the first six months of 2021, were due to the increase in revenue and decrease in incremental technology and data security costs, partially offset by the increase in royalty, depreciation and production costs. International Three Months Ended June 30, Change Six Months Ended June 30, Change International 2021 2020 $ % 2021 2020 $ % (In millions) (In millions) Operating revenue: Asia Pacific $ 91.4 $ 65.2 $ 26.2 40 % $ 178.3 $ 134.9 $ 43.4 32 % Europe 68.4 48.0 20.4 42 % 137.1 114.4 22.7 20 % Latin America 44.0 34.2 9.8 29 % 85.7 77.4 8.3 11 % Canada 47.1 33.1 14.0 42 % 91.2 69.8 21.4 31 % Total operating revenue $ 250.9 $ 180.5 $ 70.4 39 % $ 492.3 $ 396.5 $ 95.8 24 % % of consolidated revenue 20 % 18 % 20 % 20 % Total operating income $ 29.3 $ (6.2) $ 35.5 573 % $ 57.2 $ 9.1 $ 48.1 529 % Operating margin 11.7 % (3.4) % 15.1 pts 11.6 % 2.3 % 9.3 pts International revenue increased by 39% and 24% in the second quarter and the first six months of 2021, respectively, compared to the same periods in 2020. On a local currency basis, revenue increased by 25% and 13% in the second quarter and the first six months of 2021, respectively, driven by increases in all geographies as local economies continue to recover from negative impacts of COVID-19. Local currency fluctuations against the U.S. dollar positively impacted revenue by $24.9 million, or 14%, for the second quarter of 2021 and by $43.4 million, or 11%, for the first six months of 2021. Asia Pacific On a local currency basis, revenue increased by 21% and 13% in the second quarter and the first six months of 2021, respectively, compared to the same periods in 2020. The increases in both periods were driven by growth in our commercial and identity and fraud businesses in Australia, as well as growth in our Australian consumer business mainly for the second quarter of 2021. Additionally, the increase in revenue for the second quarter is also attributable to growth in India due to higher consumer volumes related to economic recovery from the impacts of COVID-19. Local currency fluctuations against the U.S. dollar positively impacted revenue by $12.8 million, or 19%, and $25.3 million, or 19% for the second quarter and the first six months of 2021, respectively. Reported revenue increased by 40% and 32% in the second quarter and the first six months of 2021, respectively, compared to the same periods in 2020. Europe On a local currency basis, revenue increased by 27% and 9% in the second quarter and the first six months of 2021, respectively, compared to the same periods in 2020. The increases in both periods were driven by growth in the consumer and commercial verticals for the U.K. and Spain due to improving economic conditions in the second quarter of 2021, as well as growth in the debt management vertical driven by higher volumes within the private sector. Local currency fluctuations against the U.S. dollar positively impacted revenue by $7.2 million, or 15%, and $12.5 million, or 11% for the second quarter and the first six months of 2021, respectively. Reported revenue increased by 42% and 20% in the second quarter and the first six months of 2021, respectively, compared to the same periods in 2020. 31 Latin America On a local currency basis, revenue increased by 30% and 14% in the second quarter and the first six months of 2021, respectively, compared to the same periods in 2020. The increases in both periods were driven by price increases in Argentina and growth in the consumer vertical primarily for Argentina, Ecuador and Peru during the second quarter due to economic recovery from the impacts of COVID-19 across the region. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $0.5 million, or 1%, and $2.5 million, or 3% for the second quarter and the first six months of 2021, respectively. The negative foreign currency impacts in both periods were driven by negative impacts from Argentina, partially offset by positive impacts from Chile. Reported revenue increased by 29% and 11% in the second quarter and the first six months of 2021, respectively, compared to the same periods in 2020. Canada On a local currency basis, revenue increased by 26% and 19% in the second quarter and the first six months of 2021, respectively, compared to the same periods in 2020. The increases in both periods were driven by growth in the consumer, commercial, identity and fraud, and analytics businesses, mainly within the mortgage and fintech 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 $5.4 million, or 16%, and $8.0 million, or 12% for the second quarter and the first six months of 2021, respectively. Reported revenue increased by 42% and 31% in the second quarter and the first six months of 2021, respectively, compared to the same periods in 2020. International Operating Margin Operating margin increased to 11.7% for the second quarter of 2021 from a 3.4% loss for the second quarter of 2020 and to 11.6% for the first six months of 2021 from 2.3% for the first six months of 2020. The increased margin for both periods is due to the increased revenue mentioned above, lower technology and data security costs and discretionary expense control, partially offset by increased people costs, royalty and production costs and depreciation expense. GCS Three Months Ended June 30, Change Six Months Ended June 30, Change Global Consumer Solutions 2021 2020 $ % 2021 2020 $ % (In millions) (In millions) Total operating revenue $ 82.4 $ 83.8 $ (1.4) (2) % $ 163.8 $ 180.9 $ (17.1) (9) % % of consolidated revenue 7 % 9 % 7 % 9 % Total operating income $ 11.9 $ 7.8 $ 4.1 53 % $ 25.9 $ 20.9 $ 5.0 24 % Operating margin 14.5 % 9.3 % 5.2 pts 15.8 % 11.5 % 4.3 pts Revenue decreased by 2% and 9% in the second quarter and the first six months of 2021, respectively, compared to the same periods in 2020. On a local currency basis, revenue decreased by 3% and 11% for the second quarter and the first six months of 2021, respectively. The reduction in revenue for both periods 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 positively impacted revenue by $1.3 million, or 1%, and $2.0 million, or 2% for the second quarter and the first six months of 2021, respectively. GCS Operating Margin Operating margin increased to 14.5% for the second quarter of 2021 from 9.3% for the second quarter of 2020 and to 15.8% for the first six months of 2021 from 11.5% for the first six months of 2020. The increased margins for both periods were due to a reduction in partner royalty costs and decrease in technology development costs, partially offset by increased depreciation expense and advertising costs. 32 General Corporate Expense Three Months Ended June 30, Change Six Months Ended June 30, Change General Corporate Expense 2021 2020 $ % 2021 2020 $ % (In millions) (In millions) General corporate expense $ 126.5 $ 122.1 $ 4.4 4 % $ 266.2 $ 255.7 $ 10.5 4 % 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 $4.4 million and $10.5 million for the second quarter and the first six months of 2021, respectively, compared to the same periods in 2020. The increase in both periods was 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 June 30, 2021, we had $0.5 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 June 30, 2021, the Company has made payments of $443.6 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, 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. In the event that additional financing is needed, we would finance using the public and private corporate bond markets and/or syndicated loan markets, if available. 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 June 30, 2021, we held $290.4 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 six months ended June 30, 2021 and 2020: Six Months Ended June 30, Change Net cash provided by (used in): 2021 2020 2021 vs. 2020 (In millions) Operating activities $ 551.1 $ 282.0 $ 269.1 Investing activities $ (1,095.6) $ (250.9) $ (844.7) Financing activities $ (680.3) $ 916.3 $ (1,596.6) 33 Operating Activities Cash provided by operating activities in the six months ended June 30, 2021 increased by $269.1 million compared the prior year period due to increased net income. Investing Activities Capital Expenditures Six Months Ended June 30, Change Net cash used in: 2021 2020 2021 vs. 2020 (In millions) Capital expenditures* $ (235.5) $ (192.8) $ (42.7) *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 six months of 2021 increased by $42.7 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 Six Months Ended June 30, Change Net cash used in: 2021 2020 2021 vs. 2020 (In millions) Acquisitions, net of cash acquired $ (861.6) $ (48.1) $ (813.5) Cash received from divestiture $ 1.5 $ — $ 1.5 Investment in unconsolidated affiliates, net $ — $ (10.0) $ 10.0 During the first six 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 six months of 2020, we acquired the remaining interest in our India joint venture within the International segment. 34 Financing Activities Borrowings and Credit Facility Availability Six Months Ended June 30, Change Net cash provided by (used in): 2021 2020 2021 vs. 2020 (In millions) Net short-term (repayments) borrowings $ (0.6) $ 0.8 $ (1.4) Payments on long-term debt $ (500.1) $ (125.0) $ (375.1) Borrowings on long-term debt $ — $ 1,123.3 $ (1,123.3) Credit Facility Availability In September 2018, the Company entered into the Revolver, which is a $1.1 billion five-year unsecured revolving credit facility with a group of financial institutions, that will mature in September 2023. 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. In April 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 June 30, 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 June 30, 2021. At June 30, 2021, 92% of our debt was fixed-rate debt and 8% 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 June 30, 2021, the interest rate on our variable-rate debt was 1.03%. 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. Payments on long-term debt reflect $500 million payments related to senior notes in the first six months of 2021 and $125 million payments made related to the now-terminated Receivables Facility in the first six months of 2020. Borrowings on long-term debt represent the net proceeds received from issuance of the 2025 and 2030 senior notes, as well as the net proceeds received from draw downs on the now-terminated Receivables Facility during the first six 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. 35 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. 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 June 30, 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 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 (collectively, 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 June 30, 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 Six Months Ended June 30, Change Net cash provided by (used in): 2021 2020 2021 vs. 2020 (In millions) Treasury stock repurchases $ (69.9) $ — $ (69.9) Dividends paid to Equifax shareholders $ (95.0) $ (94.6) $ (0.4) Dividends paid to noncontrolling interests $ (5.8) $ (1.6) $ (4.2) Proceeds from exercise of stock options and employee stock purchase plan $ 25.1 $ 22.9 $ 2.2 Payment of taxes related to settlement of equity awards $ (30.4) $ — $ (30.4) Purchase of redeemable noncontrolling interests $ (3.6) $ — $ (3.6) Sources and uses of cash related to equity during the six months ended June 30, 2021 and 2020 were as follows: - During the first six months of 2021, we repurchased 0.4 shares of our common stock on the open market for $69.9 million. During the first six months of 2020, we did not repurchase any shares of our stock. - We maintained our quarterly dividend of $0.39 per share in the second quarter of 2021. We paid cash dividends to Equifax shareholders of $95.0 million and $94.6 million, or $0.78 per share, during the six months ended June 30, 2021 and 2020, respectively. - We received cash of $25.1 million and $22.9 million during the first six months of 2021 and 2020, respectively, from the exercise of stock options and the employee stock purchase plan. At June 30, 2021, the Company had $520.2 million remaining for stock repurchases under the existing authorization from the board of directors. 36 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. 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 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 U.S. 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 experienced multiple periods of increasing inflation rates, devaluation of the peso, and increasing borrowing rates. As such, Argentina was 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 $0.1 million foreign currency loss that was recorded in other income (expense), net in our Consolidated Statements of Income during the three and six months ended June 30, 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. 37 APPLICATION OF CRITICAL ACCOUNTING POLICIES The Company’s Consolidated Financial Statements are prepared in conformity with U.S. 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 and six months ended June 30, 2021.