Equifax Inc: Form 10-Q for the period ended Jun 30, 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 June 30, 2019 and December 31, 2018, our product liability balance was $5.6 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.

In July 2019, as further described in Part II, “Item 1. Legal Proceedings” in this Form 10-Q, we entered into multiple agreements that resolve the U.S. Consumer MDL Litigation (as defined in “Item 1. Legal Proceedings”) and the investigations of the Federal Trade Commission (“FTC”), the Consumer Financial Protection Bureau (“CFPB”), the Attorneys General of 48 states, the District of Columbia and Puerto Rico (the “MSAG Group”) and the New York Department of Financial Services (“NYDFS”) (collectively, the “Consumer Settlement”). Under the terms of the Consumer Settlement, if finally approved by the court, the Company will contribute $380.5 million to a non-reversionary settlement fund (the “Consumer Restitution Fund”) to provide restitution for U.S. consumers identified by the Company whose personal information was compromised as a result of the 2017 cybersecurity incident. The Company has agreed to contribute up to an additional $125 million to the Consumer Restitution Fund to cover certain unreimbursed costs and expenditures of affected consumers in the event the $380.5 million in the Consumer Restitution Fund is exhausted. In addition, if the number of affected consumers who enroll in third party credit monitoring services exceeds seven million, the Company may be required, under certain circumstances, to contribute additional money into the Consumer Restitution Fund to cover the incremental cost of providing credit monitoring services to the additional affected consumers.

The Company also agreed to pay an additional $180.5 million to the MSAG Group and the following monetary penalties: (1) $100 million to the CFPB and (2) $10 million to the NYDFS. The Company expects to pay the MSAG Group, the CFPB and the NYDFS in the third quarter of 2019. The Company expects to contribute approximately $25 million to the Consumer Restitution Fund in the third quarter of 2019. The contribution of the remainder of the $380.5 million to the Consumer Restitution Fund will be made after final court approval of the Consumer Settlement, which could occur as early as the fourth quarter of 2019. Our current plans are to finance the payments with existing borrowing capacity, including under our $1.1 billion five-year unsecured revolving credit facility and our $225 million receivables funding facility.

We believe it is probable that we will incur losses associated with certain of the proceedings and investigations related to the 2017 cybersecurity incident. We recorded accruals of $11.3 million and $701.3 million, respectively, in selling, general, and administrative expenses and other current liabilities in our Consolidated Statements of Income (Loss) and Balance Sheets, respectively, for the three and six months ending June 30, 2019, 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 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 and six months ended June 30, 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 related to the 2017 cybersecurity incident in the three and six months ended June 30, 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 and six months ended June 30, 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 73% and 70% of our revenue was generated in the U.S. during the three months ended June 30, 2019 and 2018, respectively. Approximately 72% and 70% of our revenue was generated in the U.S. during the six months ended June 30, 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 and six months ended June 30, 2019 and 2018 were as follows:

(In millions, except per share data)

(In millions, except per share data)

*Amounts include accruals for capital expenditures.

Operational and Financial Highlights

• We did not repurchase shares of our common stock during the first six months of 2019. At June 30, 2019, $590.1 million was available for future purchases of common stock under our share repurchase authorization.
• We paid out $94.2 million or $0.78 per share in dividends to our shareholders during the first six 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 were weaker in the first half of 2019 versus 2018, are expected to improve in the second half of 2019 and are expected to be down marginally for the full year of 2019 versus 2018. We anticipate 2019 economic activity, as measured by GDP, in Canada to be at the levels seen in the second half of 2018 with the second half of 2019 up slightly from the first half of 2019. 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 half 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 compared to 2018. In Argentina, the market weakened significantly in 2018. We are expecting continued weakness throughout 2019.

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 six months 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 the remainder of 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 the proceedings and investigations related to the 2017 cybersecurity incident. We recorded accruals of $11.3 million and $701.3 million, respectively, in selling, general, and administrative expenses and other current liabilities in our Consolidated Statements of Income (Loss) and Balance Sheets, respectively, for the three and six months ending June 30, 2019, 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 AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

Consolidated Financial Results

Operating Revenue

(In millions)

(In millions)

Revenue increased by $3.1 million and decreased by $16.5 million, or 1%, in the second quarter and first six months of 2019, respectively, compared to the same periods in 2018. Total revenue was negatively impacted by foreign exchange rates, which decreased revenue, on a local currency basis, by $22.7 million and $48.8 million, or 3%, for the second quarter and first six months of 2019, respectively, compared to the same periods in 2018.

Revenue in the second quarter increased slightly due to growth in our USIS and Workforce Solutions segments, offset by declines in our International and Global Consumer Solutions segments.

Revenue in the first six months declined due to decreases in our International and Global Consumer Solutions segments, partially offset by growth in our Workforce Solutions segment.

Operating Expenses

(In millions)

(In millions)

Cost of services increased $28.3 million and $72.9 million in the second quarter and first six months of 2019, respectively, compared to the same periods in 2018. We incurred increased technology and data security costs in the second quarter and first six months of 2019 as compared to 2018. The remaining increase is due to increased royalty, technology, and people costs. The impact of changes in foreign exchange rates on costs of services was a decrease of $10.0 million and $21.8 million in the second quarter and first six months of 2019, respectively.

Selling, general and administrative expenses increased $49.3 million and $747.6 million in the second quarter and first six months of 2019, respectively, compared to the same periods in 2018. The increases are primarily due to accruals for losses associated with certain legal proceedings and investigations related to the 2017 cybersecurity incident of $11.3 million and $701.3 million in the second quarter and first six months of 2019, respectively, a restructuring charge of $11.5 million in the first quarter of 2019, and transaction costs related to the PayNet acquisition of $6.3 million in the second quarter of 2019. The remaining increase was driven by an increase in advertising costs in both periods of 2019 and insurance recoveries of $35.0 million and $45.0 million in the second quarter and first six months of 2018, respectively. The impact of changes in foreign currency exchange rates decreased selling, general and administrative expenses by $7.3 million and $15.8 million in the second quarter and first six months of 2019, respectively.

Depreciation and amortization expense increased $5.3 million and $4.8 million for the second quarter and first six months of 2019, respectively, compared to the same periods in 2018. The increases are due to the amortization of capitalized internal-use software and system costs and depreciation of production equipment which were partially offset by a decrease in amortization of purchased intangibles.

Operating Income and Operating Margin

(In millions)

(In millions)

Total company operating margin decreased by 9.2% and 48.6% in the second quarter and first six months of 2019 compared to the same periods 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, the restructuring charge, and the timing of insurance recoveries in 2018. The remaining decrease is due to increases in royalty, technology, and advertising costs.

Interest Expense and Other Income, net

(In millions)

(In millions)

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Interest expense increased $1.2 million and $4.0 million for the second quarter and first six months of 2019, respectively, compared to the same periods in 2018. The increases are due to the increase in debt in both periods from the draw down on our Receivables Facility. The increase in the first six months is also due to a slight increase in our overall average cost of debt resulting from the issuance of the Senior Notes in May 2018.

Other income, net, slightly increased and slightly decreased in the second quarter and first six months of 2019, respectively, compared to the same periods in 2018. The second quarter increase is due to higher earnings on certain equity method investments. The decrease in the first six months is 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 and a decrease in interest income, partially offset by higher earnings on certain equity method investments.

Income Taxes

(In millions)

(In millions)

Our effective income tax rate is 23.3% for the three months ended June 30, 2019 compared to 13.7% for the three months ended June 30, 2018. Our effective income tax rate is 12.2% for the six months ended June 30, 2019 compared to 18.0% for the six months ended June 30, 2018. Our second quarter 2018 tax rate was favorably impacted by a settlement with tax authorities of uncertain tax positions related to the 2016 and 2017 tax years. Our effective tax rate is lower for the six months ending June 30, 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 second quarter and year-to-date income taxes for 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)

(In millions, except per share amounts)

Consolidated net (loss) income decreased by $77.8 million and $726.1 million in the second quarter and first six months of 2019, respectively, compared to the same periods 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 and the aforementioned technology and data security costs, net of the related tax benefits of these expenses.

Segment Financial Results

USIS

(In millions)

(In millions)

USIS revenue increased by 2% and remained flat in the second quarter and first six months of 2019, respectively, compared to the same periods in 2018. The changes are due to increases in revenue from acquisitions and core credit decisioning services. The second quarter increases were partially offset by declines in Mortgage Solutions due to channel shift and a decrease in project related revenue. The increases in core credit decisioning in the first six months were offset by declines in the U.S. mortgage market transaction volumes, impacting both our Mortgage Solutions and Online Information Solutions revenue.

Online Information Solutions

Revenue increased by 10% and 5% in the second quarter and first six months of 2019, respectively, compared to the same periods in 2018. The increase in the first quarter is due to revenue from acquisitions, an increase in core credit decisioning services volumes, and revenue from our identity and fraud solutions.

Mortgage Solutions

Revenue decreased by 22% for both the second quarter and first six months of 2019 compared to the same periods in 2018. The decrease in both periods is due to channel shift between our Mortgage Solutions and Online Information Solutions businesses. The decrease in the first six months is also due to the decline in the mortgage market.

Financial Marketing Services

Revenue decreased by 7% and 1% for the second quarter and first six months of 2019, respectively, compared to the same period in 2018. The decreases are due to a decrease in project related revenue.

USIS Operating Margin

USIS operating margin decreased from 38.9% in the second quarter of 2018 to 35.4% in the second quarter of 2019, and decreased from 37.6% in the first six months of 2018 to 33.9% in the first six months of 2019. The margin reduction was due to the increase in technology and data security and royalty costs, partially offset by decreased people costs.

International

(In millions)

(In millions)

International revenue decreased by 9% and 8% in the second quarter and first six months of 2019, respectively, compared to the same periods in 2018. Local currency revenue growth for the second quarter and first six months of 2019 was flat and 1%, respectively, driven by growth across the Latin America and Canada regions, offset by declines in the Asia Pacific region in both periods and the Europe region in the second quarter. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $22.1 million, or 9%, and $47.7 million, or 10%, during the second quarter and first six months of 2019, respectively.

Asia Pacific

On a local currency basis, revenue decreased by 5% and 4% in the second quarter and first six months of 2019, respectively, compared to the same periods in 2018. The decrease is driven by weak consumer and commercial lending markets in Australia resulting in declines in consumer lending and direct-to-consumer related revenue. Local currency fluctuations negatively impacted revenue by $6.0 million, or 7%, and $13.3 million, or 8%, for the second quarter and first six months of 2019, respectively. Reported revenue decreased by 12% in both the second quarter and first six months of 2019, respectively.

Europe

On a local currency basis, revenue decreased by 3% and was flat in the second quarter and first six months of 2019, respectively, compared to the same periods in 2018. The changes in both periods are primarily due to declines in our debt services revenue. For the first six months, credit operations revenue growth offset the declines in debt services revenue. In the second quarter of 2019, credit operations revenue declined, as declines in the U.K. more than offset growth in Spain. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $4.0 million, or 6%, and $9.0 million, or 6%, for the second quarter and first six months of 2019, respectively. Reported revenue decreased by 9% and 6% in the second quarter and first six months of 2019, respectively.

Latin America

On a local currency basis, revenue increased by 8% and 6% in the second quarter and first six months of 2019, respectively, compared to the same periods in 2018. The increase is driven by growth in Argentina and Chile. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $10.6 million, or 20%, and $22.1 million, or 20%, in the second quarter and first six months of 2019, respectively, primarily from Argentina and Chile. Reported revenue decreased by 12% and 14% in the second quarter and first six months of 2019, respectively.

Canada

On a local currency basis, revenue increased by 9% and 8% in the second quarter and first six months of 2019, respectively, compared to the same periods in 2018. The increase is due to broad based revenue growth including growth from acquisitions. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $1.5 million, or 4%, and $3.3 million, or 5%, in the second quarter and first six months of 2019, respectively. Reported revenue increased by 5% and 4% in the second quarter and first six months of 2019, respectively.

International Operating Margin

Operating margin decreased from 14.8% in the second quarter of 2018 to 9.9% in the second quarter of 2019 and from 14.9% in the first six months of 2018 to 7.5% in the first six months of 2019. The reduced margins are due to an increase in technology and data security, production, and people costs.

Workforce Solutions

(In millions)

(In millions)

Workforce Solutions revenue increased by 11% and 10% in the second quarter and first six months of 2019, respectively, compared to the same periods in 2018. The increases for the second quarter and first six months were due to strong growth in Verification Services and were partially offset by decreased revenue in our tax management services and our Affordable Care Act compliance services.

Verification Services

Revenue increased by 15% and 16% in the second quarter and first six months of 2019, respectively, compared to the same periods in 2018 due to strong growth in mortgage, government, talent solutions, financial, and healthcare verticals, and continued addition of new records to The Work Number database.

Employer Services

Revenue decreased by 1% and 3% in the second quarter and first six months of 2019, respectively, compared to the same periods in 2018. The decrease is due to declines in our tax management services and Affordable Care Act compliance services. These decreases were partially offset by revenue from acquisitions.

Workforce Solutions Operating Margin

Operating margin increased from 40.4% for the second quarter of 2018 to 41.6% for the second quarter of 2019 and from 41.5% for the first six months in 2018 to 41.8% for the first six months of 2019. The increased margins were due to the increase in revenue.

Global Consumer Solutions

(In millions)

(In millions)

Revenue decreased by 7% and 8% for the second quarter and first six months of 2019, respectively, compared to the same periods in 2018. Local currency revenue decreased 6% and 7% in the second quarter and first six months of 2019, respectively. The decreases in both periods are primarily due to decreases in our consumer direct revenue in the U.S and the U.K. In the second quarter of 2019, partner revenue was down primarily due to timing of project related U.S. partner revenue. 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%, and $1.2 million, or 1%, for the second quarter and first six months of 2019, respectively.

Global Consumer Solutions Operating Margin

Operating margin decreased from 20.1% in the second quarter of 2018 to 14.5% in the second quarter of 2019 and from 24.8% in the first six months of 2018 to 13.3% in the first six months of 2019. The reduced margin in the second quarter is due to lower revenue and an increase in advertising costs, partially offset by decreased people costs. The reduced margin in the first six months is 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)

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

General corporate expense increased $62.6 million and $771.9 million in the second quarter and first six months of 2019, respectively, compared to the prior year period. The increase is primarily due to accruals for losses associated with certain legal proceedings and investigations related to the 2017 cybersecurity incident of $11.3 million and $701.3 million in the second quarter and first six months of 2019, respectively. The remaining increase is primarily due to technology and data security costs, a restructuring charge of $11.5 million in the first quarter of 2019 and people costs. Additionally, the 2018 periods received the benefit of insurance recoveries of $35.0 million and $45.0 million in the second quarter and first six months, respectively.

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 and our Receivables Facility, more fully described below, are our most significant sources of liquidity. As noted above, the Company 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. The Company also agreed to pay an additional $180.5 million to the MSAG Group and the following monetary penalties: (1) $100 million to the CFPB and (2) $10 million to the NYDFS. The Company expects to pay the MSAG Group, the CFPB and the NYDFS in the third quarter of 2019. The Company expects to contribute approximately $25 million to the Consumer Restitution Fund in the third quarter of 2019. The contribution of the remainder of the $380.5 million to the Consumer Restitution Fund will be made after final court approval of the Consumer Settlement, which could occur as early as the fourth quarter of 2019. Our current plans are to finance the payments with existing borrowing capacity, including under our $1.1 billion five-year unsecured revolving credit facility and our $225 million receivables funding facility. Thus, funds generated by operating activities are not expected to be sufficient to fund working capital and other cash requirements throughout 2019 and 2020. The Company has sufficient committed financing in our Revolver and Receivables Facility to cover the expected shortfall. If necessary, we could exercise the accordion feature on our Revolver and/or finance using the public and private corporate bond markets and/or syndicated loan markets.

In the second quarter and first six months of 2019, we recorded accruals for losses associated with certain legal proceedings and investigations related to the 2017 cybersecurity incident of $11.3 million and $701.3 million, respectively. 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 June 30, 2019, $1.1 billion and $25.0 million were available to borrow under our Revolver and Receivables Facility, respectively, and we had cash and cash equivalents of $135.8 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 June 30, 2019, we held $124.5 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, 2019 and 2018:

(In millions)

41

Operating Activities

Cash provided by operating activities in the six months ended June 30, 2019 decreased by $106.8 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, as well as $80.0 million in insurance proceeds received in 2018, 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 six months of 2019 increased by $89.8 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 and due to the timing of payments for capital expenditure-related payables.

Acquisitions, Divestitures and Investments

(In millions)

During the first six months of 2019, we completed the acquisition of PayNet in our USIS and International operating segments and completed an additional acquisition in our Workforce Solutions segment. During the first six months of 2018, we completed acquisitions in our Workforce Solutions and International segments.

Financing Activities

Borrowings and Credit Facility Availability

(In millions)

42

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.

In the second quarter of 2019, we increased our commercial paper program to $1.1 billion. Our 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, 2019, there were $0.8 million of letters of credit issued under the Revolver, no principal drawn amounts under the Revolver, and $27.5 million of commercial paper borrowings. Availability under the Revolver was $1.1 billion at June 30, 2019.

At June 30, 2019, 82% of our debt was fixed-rate debt and 18% 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 June 30, 2019, the interest rates on our variable-rate debt ranged from 2.72% to 3.48%.

Borrowing and Repayment Activity

We primarily borrow under our CP program, on our Revolver, or our Receivables Facility as needed and availability allows.

Net short-term borrowings (repayments) primarily represent borrowings or repayments of outstanding amounts under our CP program in the first six months of 2019. The decrease in net short-term borrowing (repayments) in the first six months of 2018 primarily reflect the repayment of outstanding borrowings on our CP program and Term Loan with the proceeds from the issuance of the 2021, Floating Rate, and 2023 senior notes.

Payments on long-term debt reflect $50.0 million payments made on our Receivable Facility in the first six months of 2019 and payments on our Revolver in the first six months of 2018.

Borrowings on long-term debt represent the net proceeds received from draw downs on our Receivables Facility in the first six months of 2019 and the issuance of the 2021, Floating Rate, and 2023 senior notes in the first six months of 2018.

There were $200.0 million of borrowings under the Receivables Facility at June 30, 2019. The Receivables Facility was supported by $225.0 million of accounts receivable as collateral at June 30, 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 permitted under the terms of the Revolver, we made the election to increase the covenant to 4.0 to 1.0, effective for four consecutive quarters, beginning in the second quarter of 2019 and continuing through the first quarter of 2020. As of June 30, 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 June 30, 2019, our S&P credit rating was BBB with a negative outlook and our Moody’s credit rating was Baa1 with a negative 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 six months ended June 30, 2019 and 2018 were as follows:

• During the first six 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 second quarter of 2019. We paid cash dividends to Equifax shareholders of $94.2 million and $93.9 million, or $0.78 per share, during the six months ended June 30, 2019 and 2018, respectively.
• We received cash of $6.1 million and $5.7 million during the first six months of 2019 and 2018, respectively, from the exercise of stock options.

At June 30, 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 CP program, 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 have accounted for Argentina as highly inflationary which resulted in the recognition of an immaterial and $0.3 million foreign currency loss that was recorded in other income, net in our Consolidated Statements of Income (Loss) during the three and six months ended June 30, 2019, respectively.

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 and six months ended June 30, 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.