Equifax Inc: Form 10-Q for the period ended Mar 31, 2019

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

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

BUSINESS OVERVIEW

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 India and Russia through joint ventures, have investments in consumer and/or commercial credit information companies through joint ventures in Cambodia, Malaysia, Singapore and the United Arab Emirates, have an investment in a consumer and commercial credit information company in Brazil, and have an investment in an identity authentication company in Canada.

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 potentially impacted. Based on our forensic investigation, the unauthorized access occurred from mid-May through July 2017. No evidence was found that the Company’s core consumer, employment and income, or commercial reporting databases were accessed. We continue to cooperate with law enforcement in connection with the criminal investigation into the actors responsible for the 2017 cybersecurity incident.

Product Liability. As a result of the 2017 cybersecurity incident, we offered TrustedID® Premier, a credit file monitoring and identity theft protection product, for free to all eligible U.S. consumers who signed up through January 31, 2018. We also provided free credit reports and scores, credit monitoring and identity theft protection for twenty four months to impacted consumers in Canada and the U.K. We have recorded the expenses necessary to provide this service to those who signed up. In the fourth quarter of 2018, the Company extended the free credit monitoring services for an additional twelve months for eligible U.S. consumers impacted by the 2017 cybersecurity incident by providing them the opportunity to enroll in Experian® IDNotify™ at no cost. As of March 31, 2019 and December 31, 2018, our product liability balance was $11.2 million and $12.7 million, respectively.

Litigation, Claims and Government Investigations. As a result of the 2017 cybersecurity incident, we are subject to a significant number of proceedings and investigations as described in Part II, “Item 1. Legal Proceedings” in this Form 10-Q. We believe it is probable that we will incur losses associated with certain of these proceedings and investigations and have recorded an accrual of $690.0 million in selling, general, and administrative expenses and other current liabilities in our Consolidated Statements of (Loss) Income and Balance Sheets, respectively, exclusive of our legal and professional services expenses. The amount accrued represents 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. While it is reasonably possible that losses exceeding the amount accrued may be incurred, it is not possible at this time to estimate the additional possible loss in excess of the amount already accrued that might result from adverse judgments, settlements, penalties or other resolution of the proceedings and investigations described in Part II, “Item 1. Legal Proceedings” in this Form 10-Q based on a number of factors, such as the various stages of these proceedings and investigations, that alleged damages have not been specified or are uncertain, the uncertainty and complexity of achieving a multi-party resolution, the uncertainty as to the certification of a class or classes and the size of any certified class, as applicable, and the lack of resolution on significant factual and legal issues. The ultimate amount paid on these actions, claims and investigations in excess of the amount already accrued could be material to the Company’s consolidated financial condition, results of operations, or cash flows in future periods.

Future Costs. We are currently executing substantial initiatives in security and consumer support, and a company-wide transformation of our technology infrastructure, which we refer to as our technology transformation, and incurred substantial increased expenses and capital expenditures in the three months ended March 31, 2019 related to these initiatives. We expect to continue to incur significant expenses and capital expenditures in the remainder of 2019 and through 2020 related to these initiatives, although at levels slightly below those incurred in 2018.

We incurred significant legal and professional services expenses related to the lawsuits, claims and government investigations to which we are a party in the three months ended March 31, 2019, and expect to continue to incur these expenses until these items are resolved. We will recognize the expenses referenced herein as they are incurred. In the three months ended March 31, 2019, we incurred elevated costs for insurance, finance and compliance activities, and expect to incur costs at these levels for the remainder of 2019.

Insurance Coverage. At the time of the 2017 cybersecurity incident, we had $125.0 million of cybersecurity insurance coverage, above a $7.5 million deductible, to limit our exposure to losses such as those related to this incident. Since the announcement of the 2017 cybersecurity incident, we have received the maximum reimbursement under the insurance policy of $125.0 million.

Segment and Geographic Information

Segments. The USIS segment, the largest of our four segments, 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, which 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, while Asia Pacific, Europe and Latin America are made up of varying mixes of service lines that are generally in our USIS segment. We also provide information and technology services to support lenders and other creditors in the collections and recovery management process.

The Workforce Solutions segment consists of the Verification Services and Employer Services business lines. Verification Services revenue is transaction-based and is derived primarily from employment and income verification. Employer Services revenues are derived from our provision of certain human resources business process outsourcing services that include both transaction and subscription based product offerings. These services include unemployment claims management, employment-based tax credit services and other complementary employment-based transaction services.

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. Due to the 2017 cybersecurity incident we ceased advertising our consumer business in the U.S. in September 2017. We resumed advertising our U.S. paid products in the fourth quarter of 2018.

As part of our response to the 2017 cybersecurity incident, we made our TrustedID® Premier service, an identity theft protection and credit file monitoring product, available for free to all U.S. consumers for twelve months for those who signed up by January 31, 2018. In late 2018, the Company extended the free credit file monitoring services for impacted consumers in the U.S. using the free TrustedID Premier® service by providing them the opportunity to enroll in Experian® IDNotify™ at no cost for an additional twelve months. Similarly, for impacted consumers in Canada and the U.K., we provided free credit reports and scores, credit monitoring and identity theft protection for twenty four months. As part of our commitment to providing long-term resources and protections for consumers, in January 2018, the Company introduced Lock & Alert™, a mobile application enabled service that allows U.S. consumers to quickly lock and unlock their Equifax credit report for free, for life.

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 India and Russia through joint ventures, have investments in consumer and/or commercial credit information companies through joint ventures in Cambodia, Malaysia, Singapore, and the United Arab Emirates, have an investment in a consumer and commercial credit information company in Brazil, and have an investment in an identity authentication company in Canada. Approximately 72% and 70% of our revenue was generated in the U.S. during the three months ended March 31, 2019 and 2018, 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, 2019 and 2018 were as follows:

(In millions, except per share data)

*Amounts above include accruals for capital expenditures.

Operational and Financial Highlights

• We did not repurchase shares of our common stock during the first three months of 2019. At March 31, 2019, $590.1 million was available for future purchases of common stock under our share repurchase authorization.
• We paid out $47.1 million or $0.39 per share in dividends to our shareholders during the first three months of 2019.

Business Environment and Company Outlook

Demand for our services tends to be correlated to general levels of economic activity and to consumer credit activity, small commercial credit and marketing activity. Demand is also enhanced by our initiatives to expand our products, capabilities, and markets served. In the United States, we expect 2019 economic activity, as measured by GDP, to be down from the levels seen in the second half of 2018. We expect modest growth in consumer credit, excluding mortgage, over the course of 2019. U.S. Mortgage market originations are expected to be weaker in the first half of 2019 and down for the full year of 2019 versus 2018. We anticipate 2019 economic activity, as measured by GDP, in Canada to be slightly below the levels seen in the second half of 2018. In Australia, as measured by GDP, we anticipate 2019 economic activity to be at similar levels as seen in the second half of 2018, with slight improvement in the second half of 2019. Consumer and commercial credit markets in Australia weakened substantially in the second half of 2018, and have remained weak through the first quarter of

2019. We expect this weakness to continue throughout 2019. In the European markets we serve, the U.K., Spain and Portugal, we are expecting 2019 economic activity, as measured by GDP, to be at or slightly below the levels in 2018. In Latin America, our two largest markets are in Chile and Argentina. In Chile, we are expecting economic activity in 2019 to be down slightly compared to 2018. In Argentina, the market weakened significantly in 2018. We are expecting continued weakness in 2019 but at lower levels than in 2018.

The 2017 cybersecurity incident is expected to continue to impact revenue growth, principally in our USIS and Global Consumer Solutions businesses. We have incurred, in the first quarter of 2019, and will continue to incur, throughout 2019, legal, consulting and other costs related to the analysis and response to the 2017 cybersecurity incident. Additionally, we will continue to incur increased costs and capital expenditures related to our technology transformation, which includes costs for enhanced data security. In 2019 and beyond, we will continue to have increases in the ongoing run-rate of technology and security spending. We also expect to continue to incur increased expenses for insurance, finance, compliance activities, and to meet increased legal and regulatory requirements. The ultimate amount of these increases is expected to be significant.

As a result of the 2017 cybersecurity incident, we are subject to a significant number of proceedings and investigations as described in Part II, “Item 1. Legal Proceedings” in this Form 10-Q. We believe it is probable that we will incur losses associated with certain of these proceedings and investigations and have recorded an accrual of $690.0 million in selling, general, and administrative expenses and other current liabilities in our Consolidated Statements of (Loss) Income and Balance Sheets, respectively, exclusive of our legal and professional services expenses. The amount accrued represents 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. While it is reasonably possible that losses exceeding the amount accrued may be incurred, it is not possible at this time to estimate the additional possible loss in excess of the amount already accrued that might result from adverse judgments, settlements, penalties or other resolution of the proceedings and investigations described in Part II, “Item 1. Legal Proceedings” in this Form 10-Q based on a number of factors, such as the various stages of these proceedings and investigations, that alleged damages have not been specified or are uncertain, the uncertainty and complexity of achieving a multi-party resolution, the uncertainty as to the certification of a class or classes and the size of any certified class, as applicable, and the lack of resolution on significant factual and legal issues. As such, as of any given date, we could have exposure to losses as to which no liability has been accrued or as to which the accrued liability is inadequate. The ultimate amount paid on these actions, claims and investigations in excess of the amount already accrued could be material to the Company’s consolidated financial condition, results of operations, or cash flows in future periods.

RESULTS OF OPERATIONS—THREE MONTHS ENDED MARCH 31, 2019 AND 2018

Consolidated Financial Results

Operating Revenue

(In millions)

Revenue decreased by $19.6 million, or 2%, in the first quarter of 2019 compared to the same period in 2018. Total revenue for the first quarter of 2019 was negatively impacted by foreign exchange rates, which decreased revenue, on a local currency basis, by $26.2 million, or 3%, when compared to the first quarter of 2018.

Revenue in the first quarter decreased due to declines in our USIS, International, and Global Consumer Solutions segments. USIS declines are due to our mortgage related revenues. Global Consumer Solutions revenue declines are primarily due to declines in consumer subscription revenue based on our decision to suspend advertising to U.S. consumers after the 2017 cybersecurity incident until the fourth quarter of 2018. International had local currency growth across most regions but was negatively impacted by foreign exchange rates and market weakness in Asia Pacific. Workforce Solutions saw strong growth driven by Verification Services.

Operating Expenses

(In millions)

Cost of services increased $44.7 million in the first quarter of 2019 compared to the same period in 2018. We incurred increased technology and data security costs in the first quarter of 2019 as compared to 2018. The remaining increase is due to increased royalty and technology costs. The impact of changes in foreign exchange rates on costs of services was a decrease of $11.8 million in the first quarter of 2019.

Selling, general and administrative expenses increased $698.4 million in the first quarter of 2019 compared to the same period in 2018. The increase is primarily due to the accrual for losses associated with certain legal proceedings and investigations related to the 2017 cybersecurity incident of $690.0 million and a restructuring charge of $11.5 million. The remaining increase was driven by increases in people and advertising costs. The impact of changes in foreign currency exchange rates decreased selling, general and administrative expenses by $8.5 million in the first quarter of 2019.

Depreciation and amortization expense for the first quarter of 2019 remained flat compared to the same period in 2018. This change is due to increases in the amortization of capitalized internal-use software and system costs and depreciation of production equipment which was offset by a decrease in amortization of purchased intangibles.

Operating Income and Operating Margin

(In millions)

Total company operating margin decreased 89.7% in the first quarter of 2019 compared to the same period in 2018, primarily due to the accrual for losses associated with certain legal proceedings and investigations related to the 2017 cybersecurity incident, the aforementioned incremental technology and data security costs, and the restructuring charge.

Interest Expense and Other Income, net

(In millions)

Interest expense increased $2.8 million for the first quarter of 2019 when compared to the same period in 2018. The increase is due to the increase in our overall average cost of debt resulting from the issuance of the Senior Notes in May 2018.

Other income, net, decreased as compared to the prior year period due to losses on foreign currency including the foreign exchange impact of remeasuring the peso denominated monetary assets and liabilities as a result of the Argentine economy being deemed highly inflationary by accounting policymakers. These losses were partially offset by higher earnings on certain equity method investments.

Income Taxes

(In millions)

Our effective income tax rate is 13.7% for the first quarter of 2019 compared to 23.9% for the first quarter of 2018. Our effective tax rate was lower during the first quarter of 2019 as compared to 2018 due to permanent tax differences resulting from the accrual for losses associated with certain legal proceedings and investigations related to the 2017 cybersecurity incident. We computed income taxes for the first quarter of 2019 using the discrete method, applying the actual year-to-date effective tax rate to our pre-tax loss. We believe that this method yields a more reliable income tax calculation for the period due to the uncertainty associated with the estimate of our annual domestic pre-tax book income due to the ongoing litigation, claims, and government investigations related to the 2017 cybersecurity incident.

Net Income

(In millions, except per share amounts)

Consolidated net (loss) income decreased by $648.2 million in the first quarter of 2019 compared to the same period in 2018 due to decreased operating income primarily due to the accrual for losses associated with certain legal proceedings and investigations related to the 2017 cybersecurity incident, the aforementioned technology and data security costs, and the restructuring charge, partially offset by the tax benefits related to these expenses.

Segment Financial Results

USIS

(In millions)

USIS revenue decreased 3% in the first quarter of 2019 compared to the first quarter of 2018. The decrease is primarily due to declines in the U.S. mortgage market transaction volumes, impacting both our Mortgage Solutions and Online Information Solutions revenue. The decrease in the first quarter was partially offset by an increase in project related revenue.

Online Information Solutions

Revenue decreased 1% in the first quarter of 2019 compared to the first quarter of 2018. The decrease in the first quarter is due to declines in our core credit decisioning services volumes primarily due to the decline in the mortgage market activity in 2019 compared to 2018. This decrease was partially offset by revenue from our DataX acquisition completed in July 2018.

Mortgage Solutions

Revenue decreased by 23% for the first quarter of 2019 compared to the first quarter of 2018. The decrease is due to the decline in the mortgage market as well as channel shift between our Mortgage Solutions and Online Information Solutions businesses.

Financial Marketing Services

Revenue increased 6% for the first quarter of 2019 compared to the first quarter of 2018. The increase is due to an increase in project related revenue.

USIS Operating Margin

USIS operating margin decreased from 36.1% in the first quarter of 2018 to 32.2% in the first quarter of 2019. The margin reduction was due to the increase in technology and data security costs and decreased revenue.

International

(In millions)

nm - not meaningful.

International revenue decreased 8% in the first quarter of 2019 compared to the first quarter of 2018. Local currency revenue growth for the first quarter of 2019 was 2% driven by growth across the Europe, Latin America, and Canada regions. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $25.5 million, or 10%.

Asia Pacific

On a local currency basis, revenue decreased 3% in the first quarter of 2019 compared to the first quarter of 2018. The decrease is driven by weak consumer and commercial lending markets in Australia. In Australia, we had declines in consumer lending and direct-to-consumer related revenue. Local currency fluctuations negatively impacted revenue by $7.2 million, or 8%, for the first quarter of 2019. Reported revenue decreased 11% in the first quarter of 2019.

Europe

On a local currency basis, revenue increased 4% in the first quarter of 2019 compared to the first quarter of 2018. The increase is primarily due to growth in U.K. and Spain credit operations revenue. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $4.9 million, or 7%, for the first quarter of 2019. Reported revenue decreased 3% in the first quarter of 2019.

Latin America

On a local currency basis, revenue increased 5% in the first quarter of 2019 compared to the first quarter of 2018. The increase is driven by core revenue growth in several countries led by Chile. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $11.5 million, or 21%, in the first quarter of 2019 primarily from Argentina. Reported revenue decreased by 16% in the first quarter of 2019.

Canada

On a local currency basis, revenue increased 8% in the first quarter of 2019 compared to the first quarter of 2018. The increase is due to broad based revenue growth including growth from a December 2018 acquisition. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $1.9 million, or 6%, in the first quarter of 2019. Reported revenue increased by 2% in the first quarter of 2019.

International Operating Margin

Operating margin decreased from 15.0% in the first quarter of 2018 to 5.0% in the first quarter of 2019. The reduced margins are due to an increase in technology and data security, people, and production costs.

Workforce Solutions

(In millions)

Workforce Solutions revenue increased by 8% in the first quarter of 2019 compared to the first quarter of 2018. The increase for the first quarter was due to strong growth in Verification Services. The increase was partially offset by decreased revenue in our tax management services and our Affordable Care Act compliance services.

Verification Services

Revenue increased 16% in the first quarter of 2019 compared to the first quarter of 2018 due to strong growth in healthcare, talent solutions, financial, government and mortgage verticals, and continued addition of new records to The Work Number database.

Employer Services

Revenue decreased 4% in the first quarter of 2019 compared to the first quarter of 2018. The decrease is due to declines in our tax management services and Affordable Care Act compliance services.

Workforce Solutions Operating Margin

Operating margin decreased from 42.7% for the first quarter of 2018 to 42.1% for the first quarter of 2019. The reduced margins were due to increased costs in technology and data security, royalties and people.

Global Consumer Solutions

(In millions)

35

Revenue decreased 9% for the first quarter of 2019 compared to the first quarter of 2018. Local currency revenue decreased 8% in the first quarter of 2019. The decrease is primarily due to a decrease in our consumer direct revenue in the U.S. and U.K. In the U.S., we ceased advertising our consumer paid products in the U.S. in September 2017 following the cybersecurity incident. We resumed advertising our U.S. consumer paid products in the fourth quarter of 2018 and expect to see the related benefit to new consumer revenue in the second half of 2019. In the U.K., direct-to-consumer revenue was negatively impacted by the Global Data Protection Regulations that were implemented in May 2018. Local currency fluctuations negatively impacted revenue by $0.6 million, or 1%, for the first quarter of 2019.

Global Consumer Solutions Operating Margin

Operating margin decreased from 29.2% in the first quarter of 2018 to 12.1% in the first quarter of 2019. The reduced margins are due to lower revenue and an increase in advertising and technology and data security costs, partially offset by decreased people costs.

General Corporate Expense

(In millions)

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, administrative, legal, restructuring, and the portion of management incentive compensation determined by total company-wide performance.

General corporate expense increased $709.1 million in the first quarter of 2019 compared to the prior year period. The increase is primarily due to an accrual for losses associated with certain legal proceedings and investigations related to the 2017 cybersecurity incident of $690.0 million. The remaining increase is primarily due to a restructuring charge of $11.5 million and people 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 commercial paper program, our Revolver and our Receivables Facility, more fully described below, are our most significant sources of liquidity. We expect that funds generated by operating activities will be sufficient to finance our anticipated working capital and other cash requirements (such as ongoing capital expenditures associated with near-term actions to enhance technology systems and data security, legal fees and other professional services costs associated with the 2017 cybersecurity incident, interest payments, debt payments, potential pension funding contributions, and dividend payments) for the foreseeable future. In the first quarter of 2019, we recorded an accrual for losses associated with certain legal proceedings and investigations related to the 2017 cybersecurity incident of $690.0 million. While it is reasonably possible that losses exceeding the amount accrued may be incurred, it is not possible at this time to estimate the additional possible loss in excess of the amount already accrued that might result from adverse judgments, settlements, penalties or other resolution of the proceedings and investigations resulting from the 2017 cybersecurity incident. Such potential payments, if great enough, could have an adverse effect on our liquidity. In this case, funds generated from operating activities and our credit facilities may not be sufficient to pay such damages, costs, penalties, and fines. See Part I, “Item 1A. Risk Factors—The government investigations and litigation resulting from the 2017 cybersecurity incident will continue to adversely impact our business and results of operations” in our 2018 Form 10-K and Part II, Item 1. Legal Proceedings in this Form 10-Q. At March 31, 2019, $1.0 billion and $195.9 million were available to borrow under our Revolver and Receivables Facility, respectively, and we had cash and cash equivalents of $133.2 million included in our Consolidated Balance Sheets. In the event that additional financing is needed, we would exercise the accordion feature on our Revolver and/or 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 March 31, 2019, we held $119.0 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, 2019 and 2018:

(In millions)

Operating Activities

Cash provided by operating activities in the three months ended March 31, 2019 decreased by $88.6 million from the prior year. The decrease is due to the increased incremental data and security costs as a result of our technology transformation and the related change in deferred income taxes, partially offset by changes in our working capital position.

Investing Activities

Capital Expenditures

(In millions)

*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 2019 increased by $58.6 million from the same period in 2018 as we are continuing to invest in enhanced technology systems, infrastructure and data security after the 2017 cybersecurity incident.

Acquisitions, Divestitures and Investments

(In millions)

During the first three months of 2019 and 2018, we did not have material acquisition, divestiture, or investment activity.

Financing Activities

Borrowings and Credit Facility Availability

(In millions)

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 to 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.

Our $900.0 million 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, 2019, there were $0.8 million of letters of credit issued under the Revolver, no principal drawn amounts under the Revolver, and $65.0 million of commercial paper borrowings. Availability under the Revolver was $1.0 billion at March 31, 2019.

At March 31, 2019, 86% of our debt was fixed-rate debt and 14% was effectively variable debt. Our variable-rate debt consists of the Floating Rate Senior Notes, our commercial paper, and our Receivables Facility. The interest rates reset periodically, depending on the terms of the respective financing agreements. At March 31, 2019, the interest rates on our variable-rate debt ranged from 2.77% to 3.56%.

Borrowing and Repayment Activity

Net short-term borrowings (repayments) primarily represent repayments or borrowings of outstanding amounts under our CP program. We primarily borrow under our CP program, on our Revolver, or Receivables Facility as needed and availability allows.

The changes in net short-term borrowings (repayments) in the first three months of 2019 and 2018 primarily reflects the net activity of CP notes.

Payments on long-term debt reflect $25.0 million payments made on our Receivable Facility in the first three months of 2019.

Borrowings on long-term debt represent the net proceeds received from draw downs on our Receivables Facility in the first three months of 2019.

There were $25.0 million of borrowings under the Receivables Facility at March 31, 2019. The Receivables Facility was supported by $220.9 million of accounts receivable as collateral at March 31, 2019 which, as a retained interest, is included in accounts receivable, net in our Consolidated Balance Sheets.

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 addition, the Revolver requires us to maintain a maximum leverage ratio of not more than 3.5 to 1.0. As of March 31, 2019, we were in compliance with all of our debt covenants.

The Company does not have any credit rating triggers that would accelerate the maturity of a material amount of our 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, 3.25% senior notes due 2026, and 7.0% senior notes due 2037 (together, the “Senior Notes”) contain change in control provisions. If the Company experiences a change in control or publicly announces the Company’s intention to effect a change in control and the rating on the Senior Notes is lowered by each of Standard & Poor’s, or S&P, and Moody’s Investors Service, or Moody’s, below an investment grade rating within 60 days of such change in control or notice thereof, we will be required to offer to repurchase the Senior Notes at a price equal to 101% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest. As of March 31, 2019, our S&P credit rating was BBB with a negative outlook and our Moody’s credit rating was Baa1 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 2018 Form 10-K.

Equity Transactions

(In millions)

Sources and uses of cash related to equity during the three months ended March 31, 2019 and 2018 were as follows:

• During the first three months of 2019 and 2018, we did not repurchase any shares of our stock.
• We maintained our quarterly dividend of $0.39 per share in the first quarter of 2019. We paid cash dividends to Equifax shareholders of $47.1 million and $46.9 million, or $0.39 per share, during the three months ended March 31, 2019 and 2018, respectively.
• We received cash of $1.9 million and $2.2 million during the first three months of 2019 and 2018, respectively, from the exercise of stock options.

At March 31, 2019, the Company had $590.1 million remaining for stock repurchases under the existing Board authorization.

Contractual Obligations, Commercial Commitments and Other Contingencies

Our contractual obligations have not changed materially from those reported in our 2018 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 2018 Form 10-K.

Benefit Plans

At December 31, 2018, 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 Revolver and our Receivables Facility.

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 2018 Form 10-K.

Seasonality

We experience seasonality in certain of our revenue streams. Revenue generated by the online consumer information services component of our USIS operating segment are typically the lowest during the first quarter, when consumer lending activity is at a seasonal low. Revenue generated from the Employer Services business unit within the Workforce Solutions operating segment is generally higher in the first quarter due primarily to the provision of Form W-2, 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.

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 accounted for Argentina as highly inflationary which resulted in the recognition of a $0.3 million foreign currency loss that was recorded in other income, net in our Consolidated Statements of (Loss) Income during the three months ended March 31, 2019.

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 2018 Form 10-K.

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 2018 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.

For information regarding our exposure to certain market risks, see “Quantitative and Qualitative Disclosures about Market Risk,” in Part II, Item 7A of our 2018 Form 10-K. There were no material changes to our market risk exposure during the three months ended March 31, 2019.

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