NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2019
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Nature of Operations.
We collect, organize and manage various types of financial, demographic, employment and marketing information. Our products and services enable businesses to make credit and service decisions, manage their portfolio risk, automate or outsource certain payroll-related, tax and human resources business processes, and develop marketing strategies concerning consumers and commercial enterprises. We serve customers across a wide range of industries, including the financial services, mortgage, retail, telecommunications, utilities, automotive, brokerage, healthcare and insurance industries, as well as government agencies. We also enable consumers to manage and protect their financial health through a portfolio of products offered directly to consumers. As of
June 30, 2019
, we operated in the following countries: Argentina, Australia, Canada, Chile, Costa Rica, Ecuador, El Salvador, Honduras, India, Ireland, Mexico, New Zealand, Paraguay, Peru, Portugal, Spain, the United Kingdom, or U.K., Uruguay and the United States of America, or 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.
We develop, maintain and enhance secured proprietary information databases through the compilation of consumer specific data, including credit, income, employment, asset, liquidity, net worth and spending activity, and business data, including credit and business demographics, that we obtain from a variety of sources, such as credit granting institutions, and income and tax information primarily from large to mid-sized companies in the U.S. We process this information utilizing our proprietary information management systems. We also provide information, technology and services to support debt collections and recovery management.
Basis of Presentation.
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, the instructions to Form 10-Q and applicable sections of SEC Regulation S-X. To understand our complete financial position and results, as defined by GAAP, this Form 10-Q should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in our annual report on Form 10-K for the year ended
December 31, 2018
(“
2018
Form 10-K”).
Our unaudited Consolidated Financial Statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the periods presented and are of a normal recurring nature.
Earnings Per Share.
Our basic earnings per share, or EPS, is calculated as net income attributable to Equifax divided by the weighted-average number of common shares outstanding during the period. Diluted EPS is calculated to reflect the potential dilution that would occur if stock options or other contracts to issue common stock were exercised and resulted in additional common shares outstanding. The net income (loss) amounts used in both our basic and diluted EPS calculations are the same. A reconciliation of the weighted-average outstanding shares used in the two calculations is as follows:
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|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
(In millions)
|
Weighted-average shares outstanding (basic)
|
|
120.8
|
|
|
120.3
|
|
|
120.8
|
|
|
120.3
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock units
|
|
1.2
|
|
|
1.1
|
|
|
1.0
|
|
|
1.1
|
|
Weighted-average shares outstanding (diluted)
|
|
122.0
|
|
|
121.4
|
|
|
121.8
|
|
|
121.4
|
|
For the three months ended
June 30, 2019
and
2018
, stock options that were anti-dilutive were
1.2 million
and
0.7 million
, respectively. For the
six
months ended
June 30, 2019
and
2018
, stock options that were anti-dilutive were
1.3 million
and
0.6 million
, respectively.
Financial Instruments.
Our financial instruments consist of cash and cash equivalents, accounts and notes receivable, accounts payable and short- and long-term debt. The carrying amounts of these items, other than long-term debt, approximate their fair market values due to the short-term nature of these instruments. The fair value of our fixed-rate debt is determined using Level 2 inputs such as quoted market prices for similar publicly traded instruments, and for non-publicly traded instruments through valuation techniques involving observable inputs based on the specific characteristics of the debt instrument. As of
June 30, 2019
and
December 31, 2018
, the fair value of our long-term debt, including the current portion, was
$3.0 billion
and
$2.6 billion
, respectively, compared to its carrying value of
$2.8 billion
and
$2.6 billion
, respectively.
Fair Value Measurements.
Fair value is determined based on the assumptions marketplace participants use in pricing the asset or liability. We use a three level fair value hierarchy to prioritize the inputs used in valuation techniques between observable inputs that reflect quoted prices in active markets, inputs other than quoted prices with observable market data and unobservable data (e.g., a company’s own data).
The following table presents items measured at fair value on a recurring basis:
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Fair Value Measurements at Reporting Date Using:
|
Description
|
|
Fair Value of Assets
(Liabilities) at
June 30, 2019
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
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|
(In millions)
|
Deferred Compensation Plan Assets
(1)
|
|
$
|
36.1
|
|
|
$
|
36.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred Compensation Plan Liability
(1)
|
|
(36.1
|
)
|
|
—
|
|
|
(36.1
|
)
|
|
—
|
|
Total
|
|
$
|
—
|
|
|
$
|
36.1
|
|
|
$
|
(36.1
|
)
|
|
$
|
—
|
|
(1) We maintain deferred compensation plans that allow for certain management employees to defer the receipt of compensation (such as salary, incentive compensation and commissions) until a later date based on the terms of the plan. The liability representing benefits accrued for plan participants is valued at the quoted market prices of the participants’ investment elections. The asset consists of mutual funds reflective of the participants’ investment selections and is valued at daily quoted market prices.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis.
We completed various acquisitions during the
six
months ended
June 30, 2019
and the year ended
December 31, 2018
. The values of net assets acquired and the resulting goodwill were recorded at fair value using Level 3 inputs. The majority of the related current assets acquired and liabilities assumed were recorded at their carrying values as of the date of acquisition, as their carrying values approximated their fair values due to their short-term nature. The fair values of goodwill and definite-lived intangible assets acquired in these acquisitions were internally or externally estimated primarily based on the income approach. The income approach estimates fair value based on the present value of the cash flows that the assets are expected to generate in the future. We developed internal estimates for the expected cash flows and discount rates used in the present value calculations.
Other Current Assets.
Other current assets on our Consolidated Balance Sheets represent amounts receivable from tax authorities. Other current assets also include amounts in specifically designated accounts that hold the funds that are due to customers from our debt collection and recovery management services. As of
June 30, 2019
, these assets were approximately
$17.8 million
, with a corresponding balance in other current liabilities. These amounts are restricted as to their current use, and will be released according to the specific customer agreements.
Other Assets.
Other assets on our Consolidated Balance Sheets primarily represent the long-term portion of the Company’s operating lease right-of-use assets, our investment in unconsolidated affiliates, employee benefit trust assets, assets related to life insurance policies covering certain officers of the Company, and the long-term portion of the Company’s right to consideration in exchange for goods or services that the entity has transferred to a customer (contract assets).
Other Current Liabilities.
Other current liabilities on our Consolidated Balance Sheets consist of the current portion of operating lease liabilities and various accrued liabilities such as costs related to the 2017 cybersecurity incident as described more fully in Note 6, interest expense, accrued payroll and other taxes, and accrued legal expenses. Other current liabilities also include corresponding amounts of other current assets related to amounts in specifically designated accounts that hold the funds that are due to customers from our debt collection and recovery management services. As of
June 30, 2019
, these funds were approximately
$17.8 million
. These amounts are restricted as to their current use and will be released according to the specific customer agreements.
Change in Accounting Principle.
In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842).” This standard requires lessees to record most leases on their balance sheets and expenses on their income statements in a manner similar to current lease accounting. The guidance also eliminates current real estate-specific provisions for all entities. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. All entities will classify leases to determine how to recognize lease-related revenue and expense. The guidance is effective for fiscal years and interim reporting periods beginning after December 15, 2018.
In July 2018, the FASB approved an additional optional transition method by allowing entities to initially apply the new lease standard at the adoption date. As of January 1, 2019, we adopted the standard using this optional transition method. The adoption of the standard did not have a material impact on our consolidated financial statements with the most significant impact being the recognition of right-of-use assets and lease liabilities for operating leases in other assets, net and other current and long-term liabilities, respectively, in our Consolidated Balance Sheets. We have applied the available package of practical expedients, as well as the election not to apply recognition and measurement requirements to short-term leases. We have implemented internal controls to enable preparation of financial information on adoption. See Note 3 for further details.
Recent Accounting Pronouncements.
Goodwill.
In January 2017, the FASB issued ASU 2017-04 “Simplifying the Test for Goodwill Impairment (Topic 350).” This standard eliminates Step 2 from the current goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted. This guidance must be applied on a prospective basis. We do not expect the adoption of this guidance to have a material impact on our financial position, results of operations or cash flows.
Credit Losses
. In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019. We do not expect the adoption of the standard to have a material impact on our consolidated financial statements.
Fair Value Measurements
. In August 2018, the FASB issued ASU No. 2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement” which eliminates, adds, and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. ASU 2018-13 is effective for all entities for fiscal years beginning after December 15, 2019, and interim periods therein, but entities are permitted to early adopt either the entire standard or only the provisions that eliminate or modify the requirements. The adoption of this standard will have an impact on our disclosures and will not materially impact our consolidated financial statements.
Retirement Benefits
. In August 2018, the FASB issued ASU No. 2018-14 “Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans” which requires minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020 and early adoption is permitted. The adoption of this standard will have an impact on our disclosures and will not materially impact our consolidated financial statements.
Cloud Computing Arrangements
. In August 2018, the FASB issued ASU No. 2018-15 “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.” ASU 2018-15 requires that issuers follow the internal-use software guidance in Accounting Standards Codification (ASC) 350-40 to determine which costs to capitalize as assets or expense as incurred. The ASC 350-40 guidance requires that certain costs incurred during the application development stage be capitalized and other costs incurred during the preliminary project and post-implementation stages be expensed as they are incurred. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, and interim periods therein. We are evaluating the impact of the adoption of the standard on our consolidated financial statements.
2. REVENUE
Revenue Recognition.
Based on the information that management reviews internally for evaluating operating segment performance and nature, amount, timing, and uncertainty of revenue and cash flows affected by economic factors, we disaggregate revenue as follows:
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|
|
|
|
|
|
Three Months Ended June 30,
|
|
Change
|
|
Six Months Ended June 30,
|
|
Change
|
Consolidated Operating Revenue
|
|
2019
|
|
2018
|
|
$
|
|
%
|
|
2019
|
|
2018
|
|
$
|
|
%
|
|
|
(In millions)
|
Online Information Solutions
|
|
$
|
246.1
|
|
|
$
|
224.1
|
|
|
$
|
22.0
|
|
|
10
|
%
|
|
$
|
463.8
|
|
|
$
|
443.8
|
|
|
$
|
20.0
|
|
|
5
|
%
|
Mortgage Solutions
|
|
35.6
|
|
|
45.5
|
|
|
$
|
(9.9
|
)
|
|
(22
|
)%
|
|
67.8
|
|
|
87.2
|
|
|
$
|
(19.4
|
)
|
|
(22
|
)%
|
Financial Marketing Services
|
|
51.0
|
|
|
55.0
|
|
|
$
|
(4.0
|
)
|
|
(7
|
)%
|
|
99.4
|
|
|
100.5
|
|
|
$
|
(1.1
|
)
|
|
(1
|
)%
|
Total U.S. Information Solutions
|
|
332.7
|
|
|
324.6
|
|
|
$
|
8.1
|
|
|
2
|
%
|
|
631.0
|
|
|
631.5
|
|
|
$
|
(0.5
|
)
|
|
—
|
%
|
Asia Pacific
|
|
75.9
|
|
|
86.1
|
|
|
$
|
(10.2
|
)
|
|
(12
|
)%
|
|
149.0
|
|
|
168.5
|
|
|
$
|
(19.5
|
)
|
|
(12
|
)%
|
Europe
|
|
66.0
|
|
|
72.3
|
|
|
$
|
(6.3
|
)
|
|
(9
|
)%
|
|
134.5
|
|
|
143.0
|
|
|
$
|
(8.5
|
)
|
|
(6
|
)%
|
Latin America
|
|
47.6
|
|
|
54.2
|
|
|
$
|
(6.6
|
)
|
|
(12
|
)%
|
|
94.8
|
|
|
110.1
|
|
|
$
|
(15.3
|
)
|
|
(14
|
)%
|
Canada
|
|
39.5
|
|
|
37.7
|
|
|
$
|
1.8
|
|
|
5
|
%
|
|
75.8
|
|
|
73.2
|
|
|
$
|
2.6
|
|
|
4
|
%
|
Total International
|
|
229.0
|
|
|
250.3
|
|
|
$
|
(21.3
|
)
|
|
(9
|
)%
|
|
454.1
|
|
|
494.8
|
|
|
$
|
(40.7
|
)
|
|
(8
|
)%
|
Verification Services
|
|
172.3
|
|
|
149.3
|
|
|
$
|
23.0
|
|
|
15
|
%
|
|
321.2
|
|
|
277.7
|
|
|
$
|
43.5
|
|
|
16
|
%
|
Employer Services
|
|
57.8
|
|
|
58.3
|
|
|
$
|
(0.5
|
)
|
|
(1
|
)%
|
|
137.4
|
|
|
141.0
|
|
|
$
|
(3.6
|
)
|
|
(3
|
)%
|
Total Workforce Solutions
|
|
230.1
|
|
|
207.6
|
|
|
$
|
22.5
|
|
|
11
|
%
|
|
458.6
|
|
|
418.7
|
|
|
$
|
39.9
|
|
|
10
|
%
|
Global Consumer Solutions
|
|
88.2
|
|
|
94.4
|
|
|
$
|
(6.2
|
)
|
|
(7
|
)%
|
|
182.4
|
|
|
197.6
|
|
|
$
|
(15.2
|
)
|
|
(8
|
)%
|
Total operating revenue
|
|
$
|
880.0
|
|
|
$
|
876.9
|
|
|
$
|
3.1
|
|
|
—
|
%
|
|
$
|
1,726.1
|
|
|
$
|
1,742.6
|
|
|
$
|
(16.5
|
)
|
|
(1
|
)%
|
Remaining Performance Obligation –
We have elected to disclose only the remaining performance obligations for those contracts with an expected duration of greater than one year and do not disclose the value of remaining performance obligations for contracts in which we recognize revenue at the amount to which we have the right to invoice. We expect to recognize as revenue the following amounts related to our remaining performance obligations as of
June 30, 2019
inclusive of foreign exchange impact:
|
|
|
|
|
|
Performance Obligation
|
|
Amount
|
|
|
(In millions)
|
Less than 1 year
|
|
$
|
35.5
|
|
1 to 3 years
|
|
50.1
|
|
3 to 5 years
|
|
23.5
|
|
Thereafter
|
|
52.1
|
|
Total remaining performance obligation
|
|
$
|
161.2
|
|
3. LEASES
On January 1, 2019, we adopted ASU 2016-02 using the optional transition method resulting in a cumulative-effect adjustment to our Consolidated Balance Sheets. Comparative financial statements of prior periods have not been adjusted to apply the new method retrospectively. The new method of accounting was applied only to leases that have ongoing minimum lease commitments after January 1, 2019, excluding short-term leases.
The effect of the adoption on key financial statement line items for the
six
months ended
June 30, 2019
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
Change
|
Balance Sheet
|
|
Prior to ASU 2016-02 adoption
|
|
As reported under ASU 2016-02
|
|
$
|
|
%
|
|
|
(In millions)
|
|
|
Prepaid expenses
|
|
$
|
99.6
|
|
|
$
|
97.9
|
|
|
$
|
(1.7
|
)
|
|
(2
|
)%
|
Other assets, net
|
|
$
|
191.9
|
|
|
$
|
305.7
|
|
|
$
|
113.8
|
|
|
59
|
%
|
Total assets
|
|
$
|
7,361.4
|
|
|
$
|
7,473.5
|
|
|
$
|
112.1
|
|
|
2
|
%
|
Other current liabilities
|
|
$
|
878.7
|
|
|
$
|
899.6
|
|
|
$
|
20.9
|
|
|
2
|
%
|
Other long-term liabilities
|
|
$
|
78.9
|
|
|
$
|
170.1
|
|
|
$
|
91.2
|
|
|
116
|
%
|
Total liabilities
|
|
$
|
4,773.5
|
|
|
$
|
4,885.6
|
|
|
$
|
112.1
|
|
|
2
|
%
|
Leases.
We determine if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets and liabilities are included in other assets, net and other current and long-term liabilities, respectively, in our Consolidated Balance Sheets.
Operating lease ROU assets and lease liabilities are recognized based on the present value of the future fixed lease payments over the lease term at the commencement date. As most of our leases do not provide an implicit rate, we use our quarterly incremental borrowing rate based on the information available that corresponds to each lease commencement date and lease term when determining the present value of future payments.
Our operating leases principally involve office space. These operating leases may contain variable non-lease components consisting of common area maintenance, operating expenses, insurance, and similar costs of the office space that we occupy. We have adopted the practical expedient to not separate these non-lease components from the lease components and instead account for them as a single lease component for all of our leases. The operating lease ROU assets include future fixed lease payments made as well as any initial direct costs incurred and exclude lease incentives. Variable lease payments are not included within the operating lease ROU assets or lease liabilities and are expensed in the period in which they are incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
Lease expense for operating leases was
$10.6 million
for the three months ended
June 30, 2019
and
2018
, respectively. Lease expense for operating leases was
$19.5 million
and
$20.2 million
for the
six
months ended
June 30, 2019
and
2018
, respectively. Our leases have remaining lease terms of
one year
to
fifteen years
, some of which may include options to extend the lease term up to
five years
, and some of which may include options to terminate leases within
one year
. We have elected to not record operating lease ROU assets and liabilities for short-term leases that have a term of twelve months or less. Our lease expense includes our short-term lease cost which is not material to our Consolidated Financial Statements.
Other information related to our operating leases was as follows:
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
Amount
|
(in millions, except lease term and discount rate)
|
|
|
Supplemental Cash Flows Information
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows used by operating leases
|
|
$
|
14.7
|
|
Right-of-use assets obtained in exchange for lease obligations (non-cash):
|
|
|
Operating leases
|
|
$
|
2.6
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
6.3 years
|
|
Weighted Average Discount Rate
|
|
4.3
|
%
|
Estimated future minimum payment obligations for non-cancelable operating leases are as follows as of
June 30, 2019
:
|
|
|
|
|
|
Years ending December 31,
|
|
Amount
|
|
|
(In millions)
|
2019
|
|
$
|
15.7
|
|
2020
|
|
29.1
|
|
2021
|
|
24.2
|
|
2022
|
|
21.4
|
|
2023
|
|
18.7
|
|
Thereafter
|
|
37.6
|
|
|
|
$
|
146.7
|
|
|
|
|
We do not have any sublease agreements and, as a result, expected sublease income is not reflected as a reduction in the total minimum rental obligations under operating leases in the table above.
4. GOODWILL AND INTANGIBLE ASSETS
Goodwill.
Goodwill represents the cost in excess of the fair value of the net assets acquired in a business combination. Goodwill is tested for impairment at the reporting unit level on an annual basis and on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. We perform our annual goodwill impairment tests as of September 30.
During the first
six
months of
2019
, we completed the acquisition of PayNet in our USIS and International operating segments and completed additional acquisitions in our Workforce Solutions segment.
Changes in the amount of goodwill for the
six
months ended
June 30, 2019
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Information
Solutions
|
|
International
|
|
Workforce
Solutions
|
|
Global Consumer Solutions
|
|
Total
|
|
|
(In millions)
|
Balance, December 31, 2018
|
|
$
|
1,128.9
|
|
|
$
|
1,844.7
|
|
|
$
|
970.2
|
|
|
$
|
185.9
|
|
|
$
|
4,129.7
|
|
Acquisitions
|
|
153.7
|
|
|
2.1
|
|
|
14.3
|
|
|
—
|
|
|
170.1
|
|
Adjustments to initial purchase price allocation
|
|
—
|
|
|
(0.2
|
)
|
|
0.1
|
|
|
—
|
|
|
(0.1
|
)
|
Foreign currency translation
|
|
—
|
|
|
(17.6
|
)
|
|
—
|
|
|
0.4
|
|
|
(17.2
|
)
|
Balance, June 30, 2019
|
|
$
|
1,282.6
|
|
|
$
|
1,829.0
|
|
|
$
|
984.6
|
|
|
$
|
186.3
|
|
|
$
|
4,282.5
|
|
Indefinite-Lived Intangible Assets.
Indefinite-lived intangible assets consist of indefinite-lived reacquired rights representing the value of rights which we had granted to various affiliate credit reporting agencies that were reacquired in the U.S. and Canada. At the time we acquired these agreements, they were considered perpetual in nature under the accounting guidance in place at that time and, therefore, the useful lives are considered indefinite. Indefinite-lived intangible assets are not amortized. We are required to test indefinite-lived intangible assets for impairment annually and whenever events or circumstances indicate that there may be an impairment of the asset value. We perform our annual indefinite-lived intangible asset impairment test as of September 30. The estimated fair value of our indefinite-lived intangible assets exceeded the carrying value as of September 30, 2018. As a result,
no
impairment was recorded. Our indefinite-lived intangible asset carrying amounts did
no
t change materially during the
six
months ended
June 30, 2019
.
Purchased Intangible Assets.
Purchased intangible assets represent the estimated acquisition date fair value of acquired intangible assets used in our business. Purchased data files represent the estimated acquisition date fair value of consumer credit files acquired primarily through the purchase of independent credit reporting agencies in the U.S., Canada and Australia. We expense the cost of modifying and updating credit files in the period such costs are incurred. We amortize all of our purchased intangible assets on a straight-line basis. For additional information about the useful lives related to our purchased intangible assets, see Note 1 of the Notes to Consolidated Financial Statements in our
2018
Form 10-K.
Purchased intangible assets at
June 30, 2019
and
December 31, 2018
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Definite-lived intangible assets:
|
|
(In millions)
|
Purchased data files
|
|
$
|
903.1
|
|
|
$
|
(324.2
|
)
|
|
$
|
578.9
|
|
|
$
|
911.4
|
|
|
$
|
(298.7
|
)
|
|
$
|
612.7
|
|
Acquired software and technology
|
|
111.4
|
|
|
(75.7
|
)
|
|
35.7
|
|
|
130.3
|
|
|
(84.1
|
)
|
|
46.2
|
|
Customer relationships
|
|
685.0
|
|
|
(300.0
|
)
|
|
385.0
|
|
|
693.1
|
|
|
(295.2
|
)
|
|
397.9
|
|
Reacquired rights
|
|
—
|
|
|
—
|
|
|
—
|
|
|
73.3
|
|
|
(73.3
|
)
|
|
—
|
|
Proprietary database
|
|
108.9
|
|
|
(16.8
|
)
|
|
92.1
|
|
|
46.3
|
|
|
(12.5
|
)
|
|
33.8
|
|
Non-compete agreements
|
|
7.5
|
|
|
(3.0
|
)
|
|
4.5
|
|
|
3.8
|
|
|
(2.2
|
)
|
|
1.6
|
|
Trade names and other intangible assets
|
|
20.4
|
|
|
(12.5
|
)
|
|
7.9
|
|
|
18.7
|
|
|
(11.7
|
)
|
|
7.0
|
|
Total definite-lived intangible assets
|
|
$
|
1,836.3
|
|
|
$
|
(732.2
|
)
|
|
$
|
1,104.1
|
|
|
$
|
1,876.9
|
|
|
$
|
(777.7
|
)
|
|
$
|
1,099.2
|
|
Amortization expense related to purchased intangible assets was
$35.7 million
and
$39.2 million
during the three months ended
June 30, 2019
and
2018
, respectively. Amortization expense related to purchased intangible assets was
$69.8 million
and
$81.4 million
during the
six
months ended
June 30, 2019
and
2018
, respectively.
Estimated future amortization expense related to definite-lived purchased intangible assets at
June 30, 2019
is as follows:
|
|
|
|
|
|
Years ending December 31,
|
|
Amount
|
|
|
(In millions)
|
2019
|
|
$
|
70.9
|
|
2020
|
|
135.9
|
|
2021
|
|
118.4
|
|
2022
|
|
112.7
|
|
2023
|
|
111.5
|
|
Thereafter
|
|
554.7
|
|
|
|
$
|
1,104.1
|
|
5. DEBT
Debt outstanding at
June 30, 2019
and
December 31, 2018
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
|
(In millions)
|
Commercial paper
|
|
$
|
27.5
|
|
|
$
|
—
|
|
Receivables Funding Facility
|
|
200.0
|
|
|
—
|
|
Notes, 2.30%, due June 2021
|
|
500.0
|
|
|
500.0
|
|
Notes, 3.60%, due Aug 2021
|
|
300.0
|
|
|
300.0
|
|
Notes, Floating Rate, due Aug 2021
|
|
300.0
|
|
|
300.0
|
|
Notes, 3.30%, due Dec 2022
|
|
500.0
|
|
|
500.0
|
|
Notes, 3.95%, due May 2023
|
|
400.0
|
|
|
400.0
|
|
Notes, 3.25%, due June 2026
|
|
275.0
|
|
|
275.0
|
|
Debentures, 6.90%, due July 2028
|
|
125.0
|
|
|
125.0
|
|
Notes, 7.00%, due July 2037
|
|
250.0
|
|
|
250.0
|
|
Other
|
|
4.8
|
|
|
4.9
|
|
Total debt
|
|
2,882.3
|
|
|
2,654.9
|
|
Less short-term debt and current maturities
|
|
(32.3
|
)
|
|
(4.9
|
)
|
Less unamortized discounts and debt issuance costs
|
|
(16.7
|
)
|
|
(19.4
|
)
|
Total long-term debt, net
|
|
$
|
2,833.3
|
|
|
$
|
2,630.6
|
|
3.6%, 3.95%, and Floating Rate Senior Notes.
In May 2018, we issued
$300.0
million aggregate principal amount of
3.6%
Senior Notes due 2021 (the “2021 Notes”),
$400.0 million
aggregate principal amount of
3.95%
Senior Notes due 2023 (the “2023 Notes”), and
$300.0 million
aggregate principal amount Floating Rate Notes due 2021 (the “Floating Rate Notes”) in an underwritten public offering. Interest on the 2021 Notes will accrue from their date of issuance at a rate of
3.6%
per year and will be payable in cash semi-annually in arrears on February 15 and August 15 of each year, and began on February 15, 2019. Interest on the 2023 Notes will accrue from their date of issuance at a rate of
3.95%
per year and will be payable in cash semi-annually in arrears on June 15 and December 15 of each year, and began on December 15, 2018. Interest on the Floating Rate Notes for a particular interest period will be a rate equal to three-month LIBOR on the interest determination date plus
0.87%
per annum and will be payable in cash quarterly in arrears on February 15, May 15, August 15, and November 15 of each year, and began on August 15, 2018. The net proceeds of the sale of the notes were used to repay borrowings under our Revolver, our prior
$800.0 million
three
-year delayed draw term loan facility (“Term Loan”) and our commercial paper (“CP”) program. We must comply with various non-financial covenants, including certain limitations on mortgages, liens and sale-leaseback transactions, as well as mergers and sales of substantially all of our assets. The Senior Notes are unsecured and rank equally with all of our unsecured and unsubordinated indebtedness.
Senior Credit Facility.
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. 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. As of
June 30, 2019
, there were
$0.8 million
of letters of credit outstanding,
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
.
Commercial Paper Program.
In the second quarter of 2019, we increased our commercial paper program to
$1.1 billion
. Our commercial paper program has been established through the private placement of commercial paper notes from time-to-time, in which borrowings bear interest at either a floating rate (based on LIBOR or other benchmarks), or a fixed rate, plus the applicable margin. Maturities of commercial paper can range from overnight to
397
days. Because the CP is backstopped by our Revolver, the amount of CP which may be issued under the program is reduced by the outstanding face
amount of any letters of credit issued and by the outstanding borrowings under our Revolver. At
June 30, 2019
, there were
$27.5 million
outstanding commercial paper notes.
Receivables Funding Facility.
In 2017, Equifax entered into a
$225.0 million
,
two
-year receivables funding facility (the “Receivables Facility”), which had an original maturity in November 2019. In November 2018, we amended the Receivables Facility to extend the maturity to November 2020. Under the Receivables Facility, Equifax and certain of its U.S. subsidiaries sell the eligible third-party receivables of its U.S. based business, to Equifax Receivables Funding LLC, a consolidated, wholly-owned, bankruptcy-remote subsidiary that may subsequently transfer, without recourse, an undivided interest in these accounts receivable to investors. The investors have no recourse to the Company’s other assets except for customary repurchase, warranty and indemnity claims. Creditors of Equifax do not have recourse to the assets of Equifax Receivables Funding LLC. The Receivables Facility contains standard representations, warranties and covenants made by Equifax and its U.S. subsidiaries in connection with the sale of the receivables, and any repurchase, warranty or indemnity obligations of the U.S. subsidiaries in connection with the sale of the receivables (but no obligations of Equifax Receivables Funding LLC) are guaranteed by Equifax.
There were
$200.0 million
in outstanding 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.
For additional information about our debt agreements, see Note 5 of the Notes to Consolidated Financial Statements in our
2018
Form 10-K.
6. COMMITMENTS AND CONTINGENCIES
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.
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.
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
.
Litigation, Claims and Government Investigations.
As a result of the 2017 cybersecurity incident, we are subject to a significant number of proceedings and investigations.
Since the 2017 cybersecurity incident, hundreds of class actions and other lawsuits have been filed against us typically alleging harm from the 2017 cybersecurity incident and seeking various remedies, including monetary and injunctive relief.
On July 19, 2019 and July 22, 2019, as further described below, we entered into multiple agreements that resolve the U.S. Consumer MDL Litigation (as defined below) 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 MDL Court (as defined below), 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 Consumer Restitution Fund will be used to (1) compensate affected consumers for certain unreimbursed costs or expenditures incurred by affected consumers that are fairly traceable to the 2017 cybersecurity incident, (2) provide affected consumers with an opportunity to enroll in at least four years of credit monitoring services provided by a third party unaffiliated with the Company or alternative compensation for affected consumers who already have other credit monitoring services, (3) provide affected consumers with additional benefits such as identity restoration services and (4) pay reasonable attorneys’ fees and reasonable costs and expenses for the plaintiffs’ counsel in the U.S. Consumer MDL Litigation (not to exceed $80.5 million) and administrative and notice costs.
The Company has agreed to contribute up to an additional $125 million to the Consumer Restitution Fund to cover unreimbursed costs and expenditures described in (1) above 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 the third party credit monitoring services described above in (2) 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 has accrued its best estimate for estimated probable losses it expects to incur with respect to the Consumer Settlement. The Company also agreed to implement certain business practice commitments related to information security to safeguard the personal information of consumers, including conducting third party assessments of its information security program.
The agreement regarding the U.S. Consumer MDL Litigation is subject to approval by the U.S. District Court for the Northern District of Georgia. The settlement with the MSAG Group consists of substantially similar agreements with each of the participating jurisdictions, and each agreement is subject to court approval in the relevant jurisdiction. There can be no assurance that the courts in each relevant jurisdiction will approve the agreements which make up the Consumer Settlement. The Company’s participation in the Consumer Settlement does not constitute an admission by the Company of any fault or liability, and the Company does not admit fault or liability.
We face numerous other lawsuits and government investigations related to the 2017 cybersecurity incident that have not yet been resolved. These ongoing lawsuits and governmental investigations may result in additional judgments, fines, settlements or other relief. We dispute the allegations in the remaining lawsuits and intend to defend against such claims.
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
below
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.
Set forth below are descriptions of the main categories of lawsuits and investigations related to the 2017 cybersecurity incident.
Multidistrict Litigation.
Hundreds of class actions were filed against us in federal and state courts relating to the 2017 cybersecurity incident. The plaintiffs in these cases, who purport to represent various classes of U.S. consumers and small businesses, generally claim to have been harmed by alleged actions and/or omissions by Equifax in connection with the 2017 cybersecurity incident and assert a variety of common law and statutory claims seeking monetary damages, injunctive relief and other related relief.
In addition, certain class actions have been filed by financial institutions that allege their businesses have been placed at risk due to the 2017 cybersecurity incident and generally assert common law claims, such as claims for negligence, as well as, in some cases, statutory claims. The financial institution class actions seek compensatory damages, injunctive relief and other related relief.
Furthermore, a lawsuit has been filed against us by the City of Chicago with respect to the 2017 cybersecurity incident alleging violations of state laws and local ordinances governing protection of personal data, consumer fraud, breach notice requirements and business practices and seeking declaratory and injunctive relief and the imposition of fines the aggregate amount of which the complaint does not specifically quantify. Three Indian Tribes filed suits in federal court asserting putative class actions relating to the 2017 cybersecurity incident brought on behalf of themselves and other similarly situated federally recognized Indian Tribes and Nations. Additionally, the Commonwealth of Puerto Rico filed an action on its own behalf and on behalf of the people of Puerto Rico arising out of the 2017 cybersecurity incident.
Beginning on December 6, 2017 and pursuant to multiple subsequent orders, the U.S. Judicial Panel on Multidistrict Litigation ordered the consolidation and transfer for pre-trial proceedings with respect to the U.S. cases pending in federal court discussed above, including the City of Chicago action, the Indian Tribal suits, and the Puerto Rico action, to the Northern District of Georgia as the single U.S. District Court for centralized pre-trial proceedings (the “MDL Court”). Based on these orders, consolidated proceedings with respect to U.S. consumer, small business and financial institution federal class actions and other lawsuits related to the 2017 cybersecurity incident have been conducted in the MDL Court. The MDL Court has established separate tracks for the consumer and financial institution class action cases and appointed lead counsel on behalf of plaintiffs in both tracks. We refer to the consumer class action cases, captioned
In re: Equifax, Inc. Customer Data Security Breach Litigation, MDL No. 2800 (Consumer Cases)
, as the “U.S. Consumer MDL Litigation.” Certain plaintiffs with cases pending in the MDL consolidated proceedings, including the Indian Tribe plaintiffs, Puerto Rico and the City of Chicago, have sought the establishment of additional tracks and other related relief. The MDL Court denied the request for a separate track by an individual plaintiff, but has not yet ruled on the remaining requests.
The Company moved to dismiss the consolidated class action complaints filed by the U.S. consumer, small business and financial institution plaintiffs in their entirety. On January 28, 2019, the MDL Court dismissed the small businesses’ consolidated class action complaint in its entirety. The MDL Court dismissed certain claims brought by the consumer and financial institution plaintiffs, while allowing other claims by those plaintiffs to proceed. Pursuant to case management orders issued by the MDL Court, consolidated pre-trial proceedings, including discovery between the parties, have been proceeding on the remaining claims of the U.S. consumer and financial institution plaintiffs.
As described above, in the third quarter of 2019, the Company entered into a settlement agreement that, upon approval by the MDL Court, will resolve and dismiss the claims asserted in the U.S. Consumer MDL Litigation. This settlement does not resolve the financial institution class action before the MDL Court or the actions by the City of Chicago or the Indian Tribes. The action by Puerto Rico will be dismissed with prejudice after the U.S. Consumer MDL Litigation settlement is approved.
Georgia State Court Consumer Class Actions.
Four putative class actions arising from the 2017 cybersecurity incident were filed against us in Fulton County Superior Court and Fulton County State Court in Georgia based on similar allegations and theories as alleged in the U.S. consumer class actions pending in the MDL Court and seek monetary damages, injunctive relief and other related relief on behalf of Georgia citizens. These cases have been transferred to a single judge in the Fulton County Business Court and three of the cases were consolidated into a single action. On July 27, 2018, the Fulton County
Business Court granted the Company’s motion to stay the remaining single case, and on August 17, 2018, the Fulton County Business Court granted the Company’s motion to stay the consolidated case.
Canadian Class Actions.
Eight Canadian class actions, six of which are on behalf of a national class of approximately 19,000 Canadian consumers, have been filed against us in Ontario, Saskatchewan, Quebec, British Columbia and Alberta. Each of the proposed Canadian class actions asserts a number of common law and statutory claims seeking monetary damages and other related relief in connection with the 2017 cybersecurity incident. The plaintiffs in each case seek class certification/authorization on behalf of Canadian consumers whose personal information was allegedly impacted by the 2017 cybersecurity incident. In some cases, plaintiffs also seek class certification on behalf of Canadian consumers who had contracts for subscription products with Equifax around the time of the incident. All purported class actions are at preliminary stages, and we are opposing class certification or authorization in cases where such motions are pending. In addition, one of the cases in Ontario as well as the Saskatchewan case have been stayed. The Court’s order staying the Saskatchewan case is on appeal.
TransUnion Litigation.
On November 27, 2017, Trans Union LLC and TransUnion Interactive, Inc. (collectively, “TransUnion”) filed a lawsuit in the U.S. District Court for the Northern District of Illinois against Equifax Information Services LLC, Equifax Inc., and Equifax Consumer Services LLC f/k/a Equifax Consumer Services, Inc. In its lawsuit, TransUnion asserts claims for declaratory relief, breach of contract, and anticipatory repudiation of contract based on our Reciprocal Data Supply Agreement (the “Agreement”), which sets forth the pricing terms for credit monitoring supplied by the parties to each other. TransUnion seeks a declaration regarding its contractual rights under the Agreement and monetary damages. On January 26, 2018, we moved to dismiss TransUnion’s claims. On June 19, 2018, the court granted in part and denied in part our motion to dismiss, dismissing Equifax Inc. from the case. On July 24, 2019, the parties executed a settlement agreement to settle the matter. The Company has accrued for estimated probable losses it expects to incur with respect to this matter.
Securities Class Action Litigation.
A consolidated putative class action lawsuit alleging violations of certain federal securities laws in connection with statements and alleged omissions regarding our cybersecurity systems and controls is pending against us and our former Chairman and Chief Executive Officer in the U.S. District Court for the Northern District of Georgia. The consolidated complaint seeks certification of a class of all persons who purchased or otherwise acquired Equifax securities from February 25, 2016 through September 15, 2017 and unspecified monetary damages, costs and attorneys’ fees. The Company moved to dismiss the consolidated class action complaint in its entirety. On January 28, 2019, the court dismissed claims against certain individual defendants and claims challenging certain statements, but allowed other claims against Equifax and our former Chairman and Chief Executive Officer to proceed. Pursuant to scheduling and case management orders issued by the court, pre-trial proceedings, including discovery between the parties, are moving forward on the remaining claims.
Shareholder Derivative Litigation.
A consolidated putative shareholder derivative action naming certain of our current and former executives, officers and directors as defendants and naming us as a nominal defendant is pending in the U.S. District Court for the Northern District of Georgia. Among other things, the consolidated complaint alleges claims for breaches of fiduciary duties, unjust enrichment, corporate waste and insider selling by certain defendants, as well as certain claims under the federal securities laws. The complaint seeks unspecified damages on behalf of the Company, plus certain equitable relief. We have appointed a committee of independent directors empowered to evaluate and respond in our best interests to the claims and related litigation demands.
Government Lawsuits
.
In addition to the City of Chicago’s and Commonwealth of Puerto Rico’s lawsuits in the MDL Court, the City of San Francisco filed a lawsuit against us in Superior Court in the County of San Francisco on behalf of the People of the State of California alleging violations of California’s unfair competition law due to purported violations of statutory protections of personal data and statutory data breach requirements and seeking statutory penalties, injunctive relief, and restitution for California consumers, among other relief. The court has stayed the City of San Francisco action until August 1, 2019.
Civil enforcement actions have been filed against us by the Attorneys General of Indiana, Massachusetts and West Virginia alleging violations of commonwealth/state consumer protection laws. The Indiana action, which was filed on May 6, 2019, is pending in the Superior Court of Marion County and seeks injunctive relief, civil penalties, restitution, costs and other relief. The Massachusetts action is pending in Suffolk Superior Court and seeks permanent injunctive relief, civil penalties, restitution, disgorgement of profits, costs and attorneys’ fees. The Suffolk Superior Court denied the Company’s motions to stay and dismiss the case, and the case is in discovery. On July 19, 2019, the Company entered into an agreement with the Attorney General of West Virginia to resolve the West Virginia lawsuit as part of the settlement with the MSAG Group. The lawsuit filed by the Attorney General of Puerto Rico was transferred to the MDL proceeding, as described above. On July 19, 2019, the
Company entered into an agreement with the Attorney General of Puerto Rico to resolve the lawsuit as part of the settlement with the MSAG Group.
Individual Consumer Litigation
.
Over 1,000 individual consumer actions, including multi-plaintiff actions, have been filed against us in state (general jurisdiction and small claims) and federal courts across the U.S. related to the 2017 cybersecurity incident. These claims have included more than 2,500 individual plaintiffs. In addition, approximately 50 individual arbitration claims have been filed. The plaintiffs/claimants in these cases have generally claimed to have been harmed by alleged actions and/or omissions by Equifax in connection with the 2017 cybersecurity incident and assert a variety of common law and statutory claims seeking primarily monetary damages. Where possible, actions filed in federal court have been removed to federal court and noticed for transfer to the MDL Court. Many of these matters have been finally resolved, and others are in various stages.
Government Investigations.
We continue to cooperate with federal, state, city and foreign governmental agencies and officials investigating or otherwise seeking information, testimony and/or documents, including through Civil Investigative Demands and subpoenas, regarding the 2017 cybersecurity incident and related matters, including the U.S. Securities and Exchange Commission (“SEC”), the U.S. Department of Justice, other U.S. state regulators, certain Congressional committees and the U.K.’s Financial Conduct Authority (“FCA”). In addition, the Puerto Rico Department of Consumer Affairs has issued Notices of Infraction related to the Company’s alleged failure to give timely notice of the 2017 cybersecurity incident under Puerto Rico law to the Department and Puerto Rico consumers.
The SEC issued a subpoena on May 14, 2018 regarding disclosure issues relating to the 2017 cybersecurity incident. We continue to cooperate with the SEC in its investigation. In addition, we continue to cooperate with the SEC and the U.S. Attorney’s Office for the Northern District of Georgia regarding investigations into the trading activities by certain of our current and former employees in relation to the 2017 cybersecurity incident.
The New York State Attorney General Investor Protection Bureau (“IPB”) issued a subpoena on September 20, 2017 relating to an investigation of whether there has been a violation of the Martin Act. We have continued to cooperate with the IPB in its investigation.
The FCA served an Enforcement Notice and Information Requests. We have provided responses to these requests and continue to cooperate with the FCA.
Although we are actively cooperating with the above investigations and inquiries, an adverse outcome to any such investigations and inquiries could subject us to fines or other obligations, which may have an adverse effect on how we operate our business or our results of operations.
In addition to the ongoing investigations described above, a number of governmental investigations have concluded, including the following described below.
As described above, on July 19, 2019, the Company resolved the consolidated multi-state investigation involving the Attorneys General of 48 states, the District of Columbia and Puerto Rico. As noted above, the Attorneys General of Indiana and Massachusetts did not participate in the multi-state process and each have filed suit. The Attorney General of Texas conducted a separate investigation, and resolved its investigation as part of the MSAG Group settlement. The settlement with the MSAG Group consists of substantially similar agreements with each of the participating jurisdictions, and each agreement is subject to court approval in the relevant jurisdiction.
As described above, the Company entered into agreements with the CFPB, FTC and NYDFS to resolve their investigations. The agreements with the CFPB and the FTC were approved by the U.S. District Court for the Northern District of Georgia.
The Financial Industry Regulatory Authority, Inc. conducted an investigation that has now been concluded.
The Office of the Privacy Commissioner of Canada (“OPC”) concluded its investigation into the 2017 cybersecurity incident, and published its report of findings on April 9, 2019. Equifax cooperated with the OPC’s investigation and entered into a compliance agreement with the OPC regarding certain non-monetary terms which was published on April 9, 2019.
Public Records Litigation
Equifax has been named as a defendant in 19 putative class action lawsuits pending in federal courts across the country relating to its reporting of civil judgments and tax liens on consumers’ credit files. In October 2018, Equifax and the plaintiffs’ attorneys who filed the lawsuits reached an agreement in principle to settle the public records-related claims at issue on behalf of a nationwide class of consumers
and we accrued an estimate of
$18.5 million
for our liability for these matters in the third quarter of 2018. The amount accrued represents our best estimate of the liability related to this matter
. The parties have filed notices of settlement in the pending lawsuits, and on April 17, 2019, the plaintiffs filed a motion for preliminary approval of the nationwide class action settlement in the case titled
Mark William Thomas, et al. v. Equifax Information Services LLC
. On May 14, 2019, the court preliminarily approved the settlement and scheduled a final approval hearing for September 13, 2019. If the settlement is not finally approved by the court, Equifax believes it has valid defenses to each of these actions and will continue to defend against them.
Data Processing, Outsourcing Services and Other Agreements
We have separate agreements with Google, IBM, Tata Consultancy Services and others to outsource portions of our network infrastructure, computer data processing operations, applications development, business continuity and recovery services, help desk service and desktop support functions, operation of our voice and data networks, maintenance and related functions and to provide certain other administrative and operational services. Annual payment obligations in regard to these agreements vary due to factors such as the volume of data processed; changes in our servicing needs as a result of new product offerings, acquisitions or divestitures; the introduction of significant new technologies; foreign currency; or the general rate of inflation. In certain circumstances (e.g., a change in control or for our convenience), we may terminate these data processing and outsourcing agreements, and, in doing so, certain of these agreements require us to pay significant termination fees.
Guarantees and General Indemnifications
We may issue standby letters of credit and performance and surety bonds in the normal course of business. The aggregate notional amounts of all performance and surety bonds and standby letters of credit was
no
t material at
June 30, 2019
, and generally have a remaining maturity of
one year
or less. We may issue other guarantees in the ordinary course of business. The maximum potential future payments we could be required to make under the guarantees in the ordinary course of business is
no
t material at
June 30, 2019
. We have agreed to guarantee the liabilities and performance obligations (some of which have limitations) of a certain debt collections and recovery management variable interest entity under its commercial agreements.
We have agreed to standard indemnification clauses in many of our lease agreements for office space, covering such things as tort, environmental and other liabilities that arise out of or relate to our use or occupancy of the leased premises. Certain of our credit agreements include provisions which require us to make payments to preserve an expected economic return to the lenders if that economic return is diminished due to certain changes in law or regulations. In conjunction with certain transactions, such as sales or purchases of operating assets or services in the ordinary course of business, or the disposition of certain assets or businesses, we sometimes provide routine indemnifications, the terms of which range in duration and sometimes are not limited. Additionally, the Company has entered into indemnification agreements with its directors and executive officers to indemnify such individuals to the fullest extent permitted by applicable law against liabilities that arise by reason of their status as directors or officers. The Company maintains directors and officers liability insurance coverage to reduce its exposure to such obligations.
We cannot reasonably estimate our potential future payments under the guarantees and indemnities and related provisions described above because we cannot predict when and under what circumstances these provisions may be triggered. We had
no
accruals related to guarantees and indemnities on our Consolidated Balance Sheets at
June 30, 2019
or
December 31, 2018
.
Contingencies
In addition to the matters set forth above, we are involved in legal and regulatory matters, government investigations, claims and litigation arising in the ordinary course of business. We periodically assess our exposure related to these matters based on the information which is available. We have recorded accruals in our Consolidated Financial Statements for those matters in which it is probable that we have incurred a loss and the amount of the loss, or range of loss, can be reasonably estimated.
For additional information about these and other commitments and contingencies, see Note 6 of the Notes to Consolidated Financial Statements in our
2018
Form 10-K.
7. INCOME TAXES
We are subject to U.S. federal, state and international income taxes. We are generally no longer subject to federal, state, or international income tax examinations by tax authorities for years before 2015 with few exceptions. Due to the potential for resolution of state and foreign examinations, and the expiration of various statutes of limitations, it is reasonably possible that our gross unrecognized tax benefit balance may change within the next
twelve months
by a range of
$0
to
$4.4 million
.
Effective Tax Rate
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.
8. ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in accumulated other comprehensive loss by component, after tax, for the
six
months ended
June 30, 2019
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency
|
|
Pension and other
postretirement
benefit plans
|
|
Cash flow
hedging
transactions
|
|
Total
|
|
|
(In millions)
|
Balance, December 31, 2018
|
|
$
|
(328.0
|
)
|
|
$
|
(297.1
|
)
|
|
$
|
(1.2
|
)
|
|
$
|
(626.3
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(19.8
|
)
|
|
—
|
|
|
0.1
|
|
|
(19.7
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
6.0
|
|
|
—
|
|
|
6.0
|
|
Net current-period other comprehensive income
|
|
(19.8
|
)
|
|
6.0
|
|
|
0.1
|
|
|
(13.7
|
)
|
Balance, June 30, 2019
|
|
$
|
(347.8
|
)
|
|
$
|
(291.1
|
)
|
|
$
|
(1.1
|
)
|
|
$
|
(640.0
|
)
|
Reclassifications out of accumulated other comprehensive loss for the
six
months ended
June 30, 2019
, are as follows:
|
|
|
|
|
|
|
|
Details about accumulated other
comprehensive income (loss) components
|
|
Amount reclassified
from accumulated other
comprehensive income (loss)
|
|
Affected line item in
the statement where
net income is presented
|
|
|
(In millions)
|
|
|
Amortization of pension and other postretirement plan items:
|
|
|
|
|
|
Prior service cost
|
|
$
|
(0.4
|
)
|
|
(1)
|
Recognized actuarial loss
|
|
8.0
|
|
|
(1)
|
|
|
7.6
|
|
|
Total before tax
|
|
|
(1.6
|
)
|
|
Tax benefit
|
|
|
$
|
6.0
|
|
|
Net of tax
|
(1)
These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension cost (See Note 9 Benefit Plans for additional details).
Changes in accumulated other comprehensive income (loss) related to noncontrolling interests were not material as of
June 30, 2019
.
9. BENEFIT PLANS
We sponsor defined benefit pension plans and defined contribution plans. For additional information about our benefit plans, see Note 9 of the Notes to Consolidated Financial Statements in our
2018
Form 10-K.
The following table provides the components of net periodic benefit cost. The service cost component is included in selling, general and administrative expenses and the other components of net periodic benefit cost are included in other income, net in the Consolidated Statements of Income (Loss) for the
three and six
months ended
June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
Three Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
(In millions)
|
Service cost
|
|
$
|
0.7
|
|
|
$
|
0.9
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
Interest cost
|
|
7.1
|
|
|
6.7
|
|
|
0.2
|
|
|
0.2
|
|
Expected return on plan assets
|
|
(9.0
|
)
|
|
(9.6
|
)
|
|
(0.2
|
)
|
|
(0.3
|
)
|
Amortization of prior service cost
|
|
0.1
|
|
|
0.1
|
|
|
(0.3
|
)
|
|
(0.3
|
)
|
Recognized actuarial loss
|
|
3.7
|
|
|
5.0
|
|
|
0.3
|
|
|
0.4
|
|
Total net periodic benefit cost
|
|
$
|
2.6
|
|
|
$
|
3.1
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
(In millions)
|
Service cost
|
|
$
|
1.4
|
|
|
$
|
1.8
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
Interest cost
|
|
14.2
|
|
|
13.4
|
|
|
0.4
|
|
|
0.4
|
|
Expected return on plan assets
|
|
(18.0
|
)
|
|
(19.2
|
)
|
|
(0.4
|
)
|
|
(0.6
|
)
|
Amortization of prior service cost
|
|
0.2
|
|
|
0.2
|
|
|
(0.6
|
)
|
|
(0.6
|
)
|
Recognized actuarial loss
|
|
7.4
|
|
|
10.0
|
|
|
0.6
|
|
|
0.8
|
|
Total net periodic benefit cost
|
|
$
|
5.2
|
|
|
$
|
6.2
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
10. RESTRUCTURING CHARGES
In the first quarter of 2019 and the fourth quarter of 2018, we recorded
$11.5 million
(
$8.8 million
, net of tax) and
$46.1 million
(
$35.0 million
, net of tax) of restructuring charges, respectively, all of which were recorded in selling, general and administrative expenses on our Consolidated Statements of (Loss) Income. These charges were recorded to general corporate expense and resulted from our continuing efforts to realign our internal resources to support the Company’s strategic objectives. The 2019 and 2018 restructuring charges primarily relate to a reduction in headcount. We paid
$4.1 million
and
$6.3 million
of the 2019 and 2018 restructuring charges, respectively, in the second quarter of 2019. We paid
$5.0 million
and
$16.4 million
of the 2019 and 2018 restructuring charges, respectively, in the first six months of 2019. The remaining payments for both charges will be completed in 2019.
11. SEGMENT INFORMATION
Reportable Segments.
We manage our business and report our financial results through the following
four
reportable segments, which are the same as our operating segments:
- U.S. Information Solutions (“USIS”)
- International
- Workforce Solutions
- Global Consumer Solutions
The accounting policies of the reportable segments are the same as those described in our summary of significant accounting policies in Note 1 of the Notes to Consolidated Financial Statements in our
2018
Form 10-K. We evaluate the performance of these reportable segments based on their operating revenues, operating income and operating margins, excluding unusual or infrequent items, if any. The measurement criteria for segment profit or loss and segment assets are substantially the same for each reportable segment. Inter-segment sales and transfers are not material for all periods presented. All transactions between segments are accounted for at fair market value or cost depending on the nature of the transaction, and no timing differences occur between segments.
A summary of segment products and services is as follows:
U.S. Information Solutions.
This segment includes consumer and commercial information services (such as credit information and credit scoring, credit modeling services and portfolio analytics (decisioning tools), which are derived from our databases of business credit and financial information, locate services, fraud detection and prevention services, identity verification services and other consulting services); mortgage loan origination information; financial marketing services; and identity management.
International.
This segment includes information services products, which includes consumer and commercial services (such as credit and financial information, credit scoring and credit modeling services), credit and other marketing products and services. In Asia Pacific, Europe, Latin America and Canada, we also provide information, technology and services to support debt collections and recovery management.
Workforce Solutions.
This segment includes employment, income and social security number verification services as well as complementary payroll-based transaction services and employment tax management services.
Global Consumer Solutions.
This segment includes credit information, credit monitoring and identity theft protection products sold directly and indirectly to consumers via the internet and in various hard-copy formats 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.
Operating revenue and operating income by operating segment during the
three and six
months ended
June 30, 2019
and
2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions)
|
|
June 30,
|
|
June 30,
|
Operating revenue:
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
U.S. Information Solutions
|
|
$
|
332.7
|
|
|
$
|
324.6
|
|
|
$
|
631.0
|
|
|
$
|
631.5
|
|
International
|
|
229.0
|
|
|
250.3
|
|
|
454.1
|
|
|
494.8
|
|
Workforce Solutions
|
|
230.1
|
|
|
207.6
|
|
|
458.6
|
|
|
418.7
|
|
Global Consumer Solutions
|
|
88.2
|
|
|
94.4
|
|
|
182.4
|
|
|
197.6
|
|
Total operating revenue
|
|
$
|
880.0
|
|
|
$
|
876.9
|
|
|
$
|
1,726.1
|
|
|
$
|
1,742.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions)
|
|
June 30,
|
|
June 30,
|
Operating income:
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
U.S. Information Solutions
|
|
$
|
117.9
|
|
|
$
|
126.3
|
|
|
$
|
214.0
|
|
|
$
|
237.2
|
|
International
|
|
22.7
|
|
|
37.0
|
|
|
33.9
|
|
|
73.7
|
|
Workforce Solutions
|
|
95.6
|
|
|
83.9
|
|
|
191.8
|
|
|
173.9
|
|
Global Consumer Solutions
|
|
12.8
|
|
|
19.0
|
|
|
24.3
|
|
|
49.1
|
|
General Corporate Expense
|
|
(135.2
|
)
|
|
(72.6
|
)
|
|
(968.0
|
)
|
|
(196.1
|
)
|
Total operating (loss) income
|
|
$
|
113.8
|
|
|
$
|
193.6
|
|
|
$
|
(504.0
|
)
|
|
$
|
337.8
|
|
Total assets by operating segment at
June 30, 2019
and
December 31, 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(In millions)
|
|
2019
|
|
2018
|
Total assets:
|
|
|
|
|
U.S. Information Solutions
|
|
$
|
2,285.7
|
|
|
$
|
1,654.8
|
|
International
|
|
2,967.8
|
|
|
2,959.1
|
|
Workforce Solutions
|
|
1,230.5
|
|
|
1,249.5
|
|
Global Consumer Solutions
|
|
269.5
|
|
|
255.0
|
|
General Corporate
|
|
720.0
|
|
|
1,034.8
|
|
Total assets
|
|
$
|
7,473.5
|
|
|
$
|
7,153.2
|
|