filings.toolsItem 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As used herein, the terms Equifax, the Company, we, our and us refer to Equifax Inc., a Georgia corporation, and its consolidated subsidiaries as a combined entity, except where it is clear that the terms mean only Equifax Inc.
All references to earnings per share data in Management’s Discussion and Analysis, or MD&A, are to diluted earnings per share, or EPS, unless otherwise noted. Diluted EPS is calculated to reflect the potential dilution that would occur if stock options or other contracts to issue common stock were exercised and resulted in additional common shares outstanding.
BUSINESS OVERVIEW
Equifax Inc. is a global data, analytics and technology company. We provide information solutions and human resources business process outsourcing services for businesses, governments and consumers. We have a large and diversified group of clients, including financial institutions, corporations, governments and individuals. Our services are based on comprehensive databases of consumer and business information derived from numerous sources including credit, financial assets, telecommunications and utility payments, employment, income, demographic and marketing data. We use advanced statistical techniques, machine learning and proprietary software tools to analyze available data to create customized insights, decision-making solutions and processing services for our clients. We also provide information, technology and services to support debt collections and recovery management. Additionally, we are a leading provider of payroll-related and human resource management business process outsourcing services in the United States of America, or U.S. For consumers, we provide products and services to help people understand, manage and protect their personal information and make more informed financial decisions.
We currently operate in four global regions: North America (U.S. and Canada), Asia Pacific (Australia, New Zealand and India), Europe (the United Kingdom, or U.K., Spain and Portugal) and Latin America (Argentina, Chile, Costa Rica, Ecuador, El Salvador, Honduras, Mexico, Paraguay, Peru and Uruguay). We maintain support operations in the Republic of Ireland, Chile, Costa Rica and India. We also offer Equifax branded credit services in Russia and India 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, and have an investment in a consumer and commercial credit information company in Brazil.
2017 Cybersecurity Incident
In 2017, we experienced a cybersecurity incident following a criminal attack on our systems that involved the theft of certain personally identifiable information of U.S., Canadian and U.K. consumers. Criminals exploited a software vulnerability in a U.S. website application to gain unauthorized access to our network. In March 2017, the U.S. Department of Homeland Security distributed a notice concerning the software vulnerability. We undertook efforts to identify and remediate vulnerable systems; however, the vulnerability in the website application that was exploited was not identified by our security processes. We discovered unusual network activity in late-July 2017 and upon discovery promptly investigated the activity. Once the activity was identified as potential unauthorized access, we acted to stop the intrusion and engaged a leading, independent cybersecurity firm to conduct a forensic investigation to determine the scope of the unauthorized access, including the specific information impacted. Based on our forensic investigation, the unauthorized access occurred from mid-May 2017 through July 2017. No evidence was found that the Company’s core consumer, employment and income, or commercial reporting databases were accessed. We continue to cooperate with law enforcement in connection with the criminal investigation into the actors responsible for the 2017 cybersecurity incident.
As a result of the 2017 cybersecurity incident, we are party to numerous lawsuits and governmental investigations. See “Item 1A. Risk Factors” and “Item 3. Legal Proceedings” in this Form 10-K for more information regarding these lawsuits and investigations.
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. Through December 31, 2017, we recorded $50.7 million of product costs in selling, general and administrative expenses in the accompanying Consolidated Statements of Income. In 2018, the Company extended the free credit monitoring services for an additional twelve months for eligible consumers impacted by the 2017 cybersecurity incident by providing them the opportunity to enroll in Experian® IDNotify™ at no cost. We recorded $20.4 million related to these services in selling,
general, and administrative expenses in the accompanying Consolidated Statements of Income for the twelve months ended December 31, 2018.
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 I, “Item 3. Legal Proceedings” in this Form 10-K. While we believe it is reasonably possible that we will incur losses associated with such proceedings and investigations, it is not possible at this time to estimate the amount of loss or range of possible loss that might result from adverse judgments, settlements, penalties or other resolution of the proceedings and investigations described in “Item 3. Legal Proceedings” based on 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 Company will continue to evaluate information as it becomes known and will record an estimate for losses at the time or times when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable. The Company believes that the ultimate amount paid on these actions, claims and investigations 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 2018 related to these initiatives. We expect to again incur significant expenses and capital expenditures in 2019 and 2020 related to these initiatives, although at levels slightly below those incurred in 2018.
We incurred significant legal and professional services expenses related to the lawsuits, claims and government investigations to which we are a party in 2018, and expect to continue to incur these expenses until these items are resolved. We will recognize the expenses and capital expenditures referenced herein as they are incurred. In 2018, we incurred elevated costs for insurance, finance and compliance activities, and expect to incur costs at these levels again in 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. During the twelve months ended December 31, 2018 and 2017, the Company recorded insurance recoveries of $75.0 million and $50.0 million, respectively, and received payments of $110.0 million and $15.0 million, respectively, for reimbursable costs incurred to date. Since the announcement of the 2017 cybersecurity incident in September 2017, 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. Asia Pacific, Europe and Latin America are made up of varying mixes of service lines that are generally in our USIS reportable segment. We also provide information and technology services to support lenders and other creditors in the collections and recovery management process.
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, we have investments in consumer and/or commercial credit information companies through joint ventures in Cambodia, Malaysia, Singapore and the United Arab Emirates, and have an investment in a consumer and commercial credit information company in Brazil. Approximately 71% our revenue was generated in the U.S. during both of the twelve months ended December 31, 2018 and 2017.
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. Key performance indicators for the twelve months ended December 31, 2018, 2017 and 2016, include the following:
| Key Performance Indicators Twelve Months Ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| (In millions, except per share data) | |||||||||||
| Operating revenue | $ | 3,412.1 | $ | 3,362.2 | $ | 3,144.9 | |||||
| Operating revenue change | 1 | % | 7 | % | 18 | % | |||||
| Operating income | $ | 448.0 | $ | 831.7 | $ | 825.1 | |||||
| Operating margin | 13.1 | % | 24.7 | % | 26.2 | % | |||||
| Net income attributable to Equifax | $ | 299.8 | $ | 587.3 | $ | 488.8 | |||||
| Diluted earnings per share | $ | 2.47 | $ | 4.83 | $ | 4.04 | |||||
| Cash provided by operating activities | $ | 672.2 | $ | 816.0 | $ | 823.0 | |||||
| Capital expenditures* | $ | (368.1 | ) | $ | (214.0 | ) | $ | (191.5 | ) |
*Amounts above include accruals for capital expenditures.
Business Environment and Company Outlook
Demand for our services tends to be correlated to general levels of economic activity and to consumer credit activity, small commercial credit and marketing activity. Demand is also enhanced by our initiatives to expand our products, capabilities, and markets served. In the United States, we expect 2019 economic activity, as measured by GDP, to be down from the levels seen in the second half of 2018. We expect modest growth in consumer credit, excluding mortgage, over the course of 2019. U.S. Mortgage market originations are expected to be much weaker in the first half of 2019 and down for the full year of 2019 versus 2018. We anticipate 2019 economic activity, as measured by GDP, in Canada to be slightly below the levels seen in the second half of 2018. In Australia, as measured by GDP, we anticipate 2019 economic activity to be below the levels seen in the second half of 2018 due to overall weakness in consumer credit markets. 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 Argentina and Chile. In Argentina, the market weakened significantly in 2018. We are expecting continued weakness in 2019 but at lower levels than in 2018. In Chile, we are expecting economic activity in 2019 to be down slightly compared to 2018.
The 2017 cybersecurity incident is expected to continue to negatively impact revenue, principally in our USIS and Global Consumer Solutions businesses. We have incurred, in 2018, and will continue to incur, in 2019, legal, consulting and other costs related to the analysis and response to the 2017 cybersecurity incident. Additionally, in 2018 and beyond, we have incurred and will continue to incur increased costs and capital expenditures related to our technology transformation, which includes costs for enhanced data security. In 2018 and beyond, we had and 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 “Item 3. Legal Proceedings” in this Form 10-K. While we believe it is reasonably possible that we will incur losses associated with these proceedings and investigations, it is not possible to estimate the amount of loss or range of possible loss that might result from adverse judgments, settlements, penalties or other resolution of the proceedings and investigations based on 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 Company will continue to evaluate information as it becomes known and will record an estimate for losses at the time or times when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable. The Company believes that the ultimate amount paid on these actions, claims and investigations could be material to the Company’s consolidated financial condition, results of operations, or cash flows in future periods and may reduce available resources to invest in technology and innovation.
RESULTS OF OPERATIONS —
TWELVE MONTHS ENDED DECEMBER 31, 2018, 2017 AND 2016
Consolidated Financial Results
Operating Revenue
| Twelve Months Ended December 31, | Change | |||||||||||||||||||||||||
| 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||||||||||||
| Operating Revenue | 2018 | 2017 | 2016 | $ | % | $ | % | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| U.S. Information Solutions | $ | 1,247.3 | $ | 1,262.7 | $ | 1,236.5 | $ | (15.4 | ) | (1 | )% | $ | 26.2 | 2 | % | |||||||||||
| International | 966.2 | 932.3 | 803.6 | 33.9 | 4 | % | 128.7 | 16 | % | |||||||||||||||||
| Workforce Solutions | 826.8 | 764.2 | 702.2 | 62.6 | 8 | % | 62.0 | 9 | % | |||||||||||||||||
| Global Consumer Solutions | 371.8 | 403.0 | 402.6 | (31.2 | ) | (8 | )% | 0.4 | — | % | ||||||||||||||||
| Consolidated operating revenue | $ | 3,412.1 | $ | 3,362.2 | $ | 3,144.9 | $ | 49.9 | 1 | % | $ | 217.3 | 7 | % |
Revenue for 2018 increased by 1% compared to 2017. The growth was driven by our Workforce Solutions and International segments which was partially offset by declines in USIS and Global Consumer Solutions which were negatively impacted by the 2017 cybersecurity incident. Workforce Solutions saw strong growth driven by Verification Services. International had local currency growth across all regions. The effect of foreign exchange rates reduced revenue by $28.3 million, or 1%, in 2018 compared to 2017.
Revenue for 2017 increased by 7% compared to 2016. The growth was driven by our International and Workforce Solutions segments. International had strong growth across all regions, which reflects broad based organic growth and the Veda acquisition. Workforce Solutions saw strong growth driven by Verification Services. USIS had an increase in revenue compared to 2016, reflecting growth in core credit decisioning, financial marketing services, mortgage and identity and fraud solutions. Revenue in our USIS, Global Consumer Solutions and Workforce Solutions segments were negatively impacted by the 2017 cybersecurity incident. The effect of foreign exchange rates reduced revenue by $6.0 million in 2017 compared to 2016.
Operating Expenses
| Twelve Months Ended December 31, | Change | |||||||||||||||||||||||||
| 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||||||||||||
| Operating Expenses | 2018 | 2017 | 2016 | $ | % | $ | % | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Consolidated cost of services | $ | 1,440.4 | $ | 1,210.7 | $ | 1,113.4 | $ | 229.7 | 19 | % | $ | 97.3 | 9 | % | ||||||||||||
| Consolidated selling, general and administrative expenses | 1,213.3 | 1,032.0 | 941.0 | 181.3 | 18 | % | 91.0 | 10 | % | |||||||||||||||||
| Consolidated depreciation and amortization expense | 310.4 | 287.8 | 265.4 | 22.6 | 8 | % | 22.4 | 8 | % | |||||||||||||||||
| Consolidated operating expenses | $ | 2,964.1 | $ | 2,530.5 | $ | 2,319.8 | $ | 433.6 | 17 | % | $ | 210.7 | 9 | % |
Cost of Services. Cost of services increased $229.7 million in 2018 compared to 2017. We incurred increased incremental technology and data security costs of $146.5 million in 2018. These increased technology and security costs predominantly reflect the investments we are making in our technology transformation, which include costs for enhanced data security. We expect these incremental costs as well as increased ongoing technology and security costs to continue in 2019 and 2020. The remaining increase is due to increased people and royalty costs. The effect of changes in foreign exchange rates reduced cost of services by $6.4 million.
Cost of services increased $97.3 million in 2017 compared to 2016. The increase in cost of services, when compared to 2016, was due to the increase in production costs driven by higher revenues, as well as increases of $14.2 million in professional services related to the 2017 cybersecurity incident and in people costs. The effect of changes in foreign exchange rates reduced cost of services by $2.1 million.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $181.3 million in 2018 as compared to 2017.
We incurred increased incremental technology and data security costs of $160.7 million in 2018. As was the case in cost of services, these increased technology and security costs predominately reflect the investments we are making in our technology transformation, which include costs for enhanced data security. We expect these incremental costs as well as increased ongoing technology and security costs to continue in 2019 and 2020.
Related to the 2017 cybersecurity incident, we incurred net costs of $19.0 million in 2018. We incurred legal and investigative fees of $73.6 million, and decreased costs to fulfill and support the free credit monitoring service provided to eligible consumers of $20.4 million. Additionally, we benefited from the recognition of insurance proceeds of $75.0 million to offset these costs in 2018, versus the $50.0 million of insurance proceeds recorded in 2017.
The remaining changes were driven by increases due to the restructuring charge of $46.1 million, people, the public records litigation settlement of $18.5 million, and insurance costs which were partially offset by decreased advertising costs.
The impact of changes in foreign currency exchange rates decreased our selling, general and administrative expenses by $10.2 million.
Selling, general and administrative expenses increased $91.0 million in 2017 as compared to 2016. The increase was due to $99.8 million of costs related to the 2017 cybersecurity incident, higher occupancy and people costs, partially offset by a decline in Veda integration and transaction costs. The impact of changes in foreign currency exchange rates decreased our selling, general and administrative expenses by $2.2 million.
Depreciation and Amortization. Depreciation and amortization expense for 2018 increased by $22.6 million. The increase is due to amortization of capitalized internal-use software and system costs and depreciation of production equipment, partially offset by a decrease in amortization of purchased intangibles.
Depreciation and amortization expense for 2017 increased by $22.4 million primarily due to increased depreciation due to increased capital expenditures.
Operating Income and Operating Margin
| Twelve Months Ended December 31, | Change | |||||||||||||||||||||||||
| Operating Income and Operating Margin | 2018 vs. 2017 | 2017 vs. 2016 | ||||||||||||||||||||||||
| 2018 | 2017 | 2016 | $ | % | $ | % | ||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Consolidated operating revenue | $ | 3,412.1 | $ | 3,362.2 | $ | 3,144.9 | $ | 49.9 | 1 | % | $ | 217.3 | 7 | % | ||||||||||||
| Consolidated operating expenses | 2,964.1 | 2,530.5 | 2,319.8 | 433.6 | 17 | % | 210.7 | 9 | % | |||||||||||||||||
| Consolidated operating income | $ | 448.0 | $ | 831.7 | $ | 825.1 | $ | (383.7 | ) | (46 | )% | $ | 6.6 | 1 | % | |||||||||||
| Consolidated operating margin | 13.1 | % | 24.7 | % | 26.2 | % | (11.6 | )pts | (1.5 | )pts |
Total company margin decreased in 2018 versus 2017, primarily due to the aforementioned technology and data security spending by the Company after the 2017 cybersecurity incident of $326.2 million reflected in costs of services and selling, general, and administrative expenses in our Consolidated Statements of Income.
Total company margin decreased in 2017 versus 2016, primarily due to the costs related to the 2017 cybersecurity incident, partially offset by increased margins in International and Workforce Solutions business segments and lower integration costs related to the acquisition of Veda.
Interest Expense and Other Income (Expense), net
| Twelve Months Ended December 31, | Change | |||||||||||||||||||||||||
| 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||||||||||||
| Consolidated Interest and Other Income (Expense), net | 2018 | 2017 | 2016 | $ | % | $ | % | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Consolidated interest expense | $ | (103.5 | ) | $ | (92.8 | ) | $ | (92.1 | ) | $ | (10.7 | ) | 12 | % | $ | (0.7 | ) | 1 | % | |||||||
| Consolidated other income, net | 11.8 | 7.7 | (4.8 | ) | 4.1 | 53 | % | 12.5 | (260 | )% | ||||||||||||||||
| Average cost of debt | 3.8 | % | 3.4 | % | 3.5 | % | ||||||||||||||||||||
| Total consolidated debt, net, at year end | $ | 2,635.5 | $ | 2,704.3 | $ | 2,672.2 | $ | (68.8 | ) | (3 | )% | $ | 32.1 | 1 | % |
Interest expense increased in 2018, when compared to 2017, due to an increase in our overall average cost of debt resulting from the issuance of the Senior Notes in May 2018.
Interest expense increased in 2017, when compared to 2016, due to an increase in our average consolidated debt outstanding in 2017, reflecting debt incurred in the first quarter of 2016 to finance the acquisition of Veda. Our average cost of debt decreased in 2017 compared to 2016, due to the higher balance of low rate commercial paper outstanding and lower long-term rates due to the repayment on July 3, 2017 of $272.5 million in principal amount of our 6.3% senior notes.
The increase in other income (expense), net, in 2018 is primarily due to higher earnings on certain equity method investments, an increase in interest income, and the release of a liability from a past acquisition. These increases were partially offset by increased pension expense and the foreign exchange impact of remeasuring the peso denominated monetary assets and liabilities as a result of Argentina becoming a highly inflationary economy for accounting purposes in 2018.
The increase in other income (expense), net, in 2017 is primarily due to a 2016 loss on the economic hedges, offset by a foreign currency gain on intercompany debt related to the Veda transaction which did not recur in 2017. There were also higher earnings on certain equity method investments in 2017.
Income Taxes
| Twelve Months Ended December 31, | Change | |||||||||||||||||||||||||
| 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||||||||||||
| Provision for Income Taxes | 2018 | 2017 | 2016 | $ | % | $ | % | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Consolidated provision for income taxes | $ | (50.0 | ) | $ | (148.6 | ) | $ | (233.1 | ) | $ | 98.6 | (66 | )% | $ | 84.5 | (36 | )% | |||||||||
| Effective income tax rate | 14.0 | % | 19.9 | % | 32.0 | % |
Our effective tax rate was 14.0% for 2018, down from 19.9% for the same period in 2017. The decrease in our effective income tax rate is due to the decrease in the statutory U.S. tax rate as a result of the Tax Act enacted in the fourth quarter of 2017 and the increase in the benefit received from the reversal of uncertain tax positions. These changes were offset by an increase in the impact of equity compensation, an increase in the foreign rate differential impact, and the deferred tax benefit recorded in the fourth quarter of 2017 to reflect the impact of the Tax Act.
Our effective tax rate was 19.9% for 2017, down from 32.0% for the same period in 2016. The decrease in our effective income tax rate for 2017 is primarily attributable to recording the preliminary impact of the Tax Act enacted in the fourth quarter of 2017, and the adoption of the new stock-based compensation guidance we prospectively adopted in the first quarter of 2017. We recognized a $48.3 million and $26.7 million tax benefit related to the estimated impact of tax legislation enacted in 2017 and the accounting change for stock-based compensation guidance for the full year 2017, respectively.
Net Income
| Twelve Months Ended December 31, | Change | |||||||||||||||||||||||||
| 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||||||||||||
| Net Income | 2018 | 2017 | 2016 | $ | % | $ | % | |||||||||||||||||||
| (In millions, except per share amounts) | ||||||||||||||||||||||||||
| Consolidated operating income | $ | 448.0 | $ | 831.7 | $ | 825.1 | $ | (383.7 | ) | (46 | )% | $ | 6.6 | 1 | % | |||||||||||
| Consolidated other expense, net | (91.7 | ) | (85.1 | ) | (96.9 | ) | (6.6 | ) | 8 | % | 11.8 | (12 | )% | |||||||||||||
| Consolidated provision for income taxes | (50.0 | ) | (148.6 | ) | (233.1 | ) | 98.6 | (66 | )% | 84.5 | (36 | )% | ||||||||||||||
| Consolidated net income | 306.3 | 598.0 | 495.1 | (291.7 | ) | (49 | )% | 102.9 | 21 | % | ||||||||||||||||
| Net income attributable to noncontrolling interests | (6.5 | ) | (10.7 | ) | (6.3 | ) | 4.2 | (39 | )% | (4.4 | ) | 70 | % | |||||||||||||
| Net income attributable to Equifax | $ | 299.8 | $ | 587.3 | $ | 488.8 | $ | (287.5 | ) | (49 | )% | $ | 98.5 | 20 | % | |||||||||||
| Diluted earnings per share: | ||||||||||||||||||||||||||
| Net income attributable to Equifax | $ | 2.47 | $ | 4.83 | $ | 4.04 | $ | (2.36 | ) | (49 | )% | $ | 0.79 | 20 | % | |||||||||||
| Weighted-average shares used in computing diluted earnings per share | 121.4 | 121.5 | 121.1 |
Consolidated net income decreased by $291.7 million, or 49%, in 2018 compared to 2017 due to decreased operating income primarily driven by the $326.2 million of aforementioned incremental technology and data security costs. The increased costs were partially offset by decreased income tax expense due to lower pre-tax income and the decrease in the statutory U.S. tax rate as a result of the Tax Act enacted in the fourth quarter of 2017.
Consolidated net income increased by $102.9 million, or 21%, in 2017 compared to 2016 due to increased operating income, principally in our International, Workforce Solutions, and USIS businesses, partially offset by the 2017 cybersecurity costs of $114.0 million and lower operating income in the Global Consumer Solutions business. There were also several income tax benefits, consisting principally of the fourth quarter tax benefit related to the Tax Act and the prospective adoption of the new stock-based compensation guidance in the first quarter of 2017. Additionally, there was an increase in other income, primarily due to a 2016 loss on economic hedges, offset by a foreign currency gain on intercompany debt related to the Veda transaction which did not recur in 2017.
Segment Financial Results
U.S. Information Solutions
| Twelve Months Ended December 31, | Change | |||||||||||||||||||||||||
| U.S. Information Solutions | 2018 vs. 2017 | 2017 vs. 2016 | ||||||||||||||||||||||||
| 2018 | 2017 | 2016 | $ | % | $ | % | ||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Operating revenue: | ||||||||||||||||||||||||||
| Online Information Solutions | $ | 877.5 | $ | 889.6 | $ | 879.3 | $ | (12.1 | ) | (1 | )% | $ | 10.3 | 1 | % | |||||||||||
| Mortgage Solutions | 153.6 | 148.9 | 142.2 | 4.7 | 3 | % | 6.7 | 5 | % | |||||||||||||||||
| Financial Marketing Services | 216.2 | 224.2 | 215.0 | (8.0 | ) | (4 | )% | 9.2 | 4 | % | ||||||||||||||||
| Total operating revenue | $ | 1,247.3 | $ | 1,262.7 | $ | 1,236.5 | $ | (15.4 | ) | (1 | )% | $ | 26.2 | 2 | % | |||||||||||
| % of consolidated revenue | 37 | % | 37 | % | 39 | % | ||||||||||||||||||||
| Total operating income | $ | 441.7 | $ | 539.1 | $ | 537.0 | $ | (97.4 | ) | (18 | )% | $ | 2.1 | — | % | |||||||||||
| Operating margin | 35.4 | % | 42.7 | % | 43.4 | % | (7.3 | )pts | (0.7 | )pts |
U.S. Information Solutions revenue decreased 1% in 2018 compared to 2017 due to declines in our core credit decisioning services and lower project related revenue as well as the negative impact from the 2017 cybersecurity incident. These declines were partially offset by revenue from a 2018 acquisition, growth in core mortgage, and revenue from mortgage channel partners.
U.S. Information Solutions revenue increased 2% in 2017 compared to 2016 due to growth in the mortgage and financial verticals, partially offset by a decline in our auto vertical and the impact of the 2017 cybersecurity incident.
Online Information Solutions. Revenue for 2018 decreased 1% compared to 2017, due to declines in our core credit decisioning services and identity and fraud solutions revenue. These declines were partially offset by growth from a 2018 acquisition and revenue from mortgage, auto, and direct to consumer channel partners.
Revenue for 2017 increased 1% compared to 2016, due to growth in core credit decisioning and identity and fraud solutions.
Mortgage Solutions. Revenue increased 3% in 2018 compared to 2017, primarily due to a new product offering. This growth was partially offset by declines in the mortgage market and our other mortgage product offerings.
Revenue increased 5% in 2017 compared to 2016, driven by growth in core mortgage, as well as growth from other mortgage product offerings.
Financial Marketing Services. Revenue decreased 4% in 2018 compared to 2017 due to a reduction in projects delivered.
Revenue increased 4% in 2017 compared to 2016 due to growth in credit marketing services and project related revenue.
U.S. Information Solutions Operating Margin. USIS operating margin decreased to 35.4% in 2018 compared to 42.7% in 2017, primarily due to the decrease in revenue and increases in incremental technology and data security costs, royalties, and the public records litigation settlement of $18.5 million. USIS operating margin decreased to 42.7% in 2017 compared to 2016 of 43.4%, primarily due to increased people costs, partially offset by product mix.
International
| Twelve Months Ended December 31, | Change | |||||||||||||||||||||||||
| 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||||||||||||
| International | 2018 | 2017 | 2016 | $ | % | $ | % | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Operating revenue: | ||||||||||||||||||||||||||
| Asia Pacific | $ | 325.6 | $ | 308.9 | $ | 244.2 | $ | 16.7 | 5 | % | $ | 64.7 | 26 | % | ||||||||||||
| Europe | 287.3 | 273.8 | 253.6 | 13.5 | 5 | % | 20.2 | 8 | % | |||||||||||||||||
| Latin America | 206.6 | 213.6 | 183.9 | (7.0 | ) | (3 | )% | 29.7 | 16 | % | ||||||||||||||||
| Canada | 146.7 | 136.0 | 121.9 | 10.7 | 8 | % | 14.1 | 12 | % | |||||||||||||||||
| Total operating revenue | $ | 966.2 | $ | 932.3 | $ | 803.6 | $ | 33.9 | 4 | % | $ | 128.7 | 16 | % | ||||||||||||
| % of consolidated revenue | 28 | % | 28 | % | 26 | % | ||||||||||||||||||||
| Total operating income | $ | 108.6 | $ | 169.4 | $ | 111.4 | $ | (60.8 | ) | (36 | )% | $ | 58.0 | 52 | % | |||||||||||
| Operating margin | 11.2 | % | 18.2 | % | 13.9 | % | (7.0 | )pts | 4.3 | pts |
International revenue increased by 4% in 2018 as compared to 2017. Local currency revenue growth for 2018 was 7%, driven by growth across all regions. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $29.5 million, or 3%.
International revenue increased by 16% in 2017 as compared to 2016. Local currency organic revenue growth for 2017, excluding Veda, was 11%, driven by growth across all regions. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $4.3 million, or 1%.
Asia Pacific. Local currency growth was 8% in 2018 primarily due to the Mercury acquisition and growth in our commercial business. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $8.8 million, or 3%, in 2018. Reported revenue increased 5% in 2018.
Local currency growth was 24% in 2017 primarily due to the Veda acquisition. Local currency fluctuations against the U.S. dollar positively impacted revenue by $6.1 million, or 3%, in 2017. Reported revenue increased 26% in 2017.
Europe. Local currency revenue growth was 1% in 2018 primarily due to growth in U.K. and Spain credit operations revenue and was partially offset by a decline in our debt management services. Local currency fluctuations against the U.S. dollar positively impacted revenue by $10.0 million, or 4%, for 2018. Reported revenue increased 5% in 2018.
Local currency revenue growth was 12% in 2017 primarily due to growth in U.K. debt management services and other growth in the U.K. and Spain. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $9.1 million, or 4%, for 2017. Reported revenue increased 8% in 2017.
Latin America. Local currency revenue increased 11% in 2018 driven by core growth primarily in Argentina, Chile and Ecuador. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $30.8 million, or 14%, in 2018, most notably due to depreciation in the foreign exchange rate of the Argentine peso. Reported revenue decreased 3% in 2018.
Local currency revenue increased 18% in 2017 driven by growth primarily in Argentina and Chile. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $3.9 million, or 2%, in 2017, most notably due to depreciation in the foreign exchange rate of the Argentine peso, partially offset by appreciation of the Chilean peso. Reported revenue increased 16% in 2016.
Canada. Local currency revenue increased 8% in 2018 compared to 2017, primarily due to broad based revenue growth. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $0.1 million in 2018. Reported revenue increased 8% in 2018.
Local currency revenue increased 9% in 2017 compared to 2016, primarily due to organic growth. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $2.7 million, or 2%, in 2017. Reported revenue increased 12% in 2017.
International Operating Margin. Operating margin decreased to 11.2% in 2018 as compared to 18.2% in 2017. The reduced margin is due to an increase in incremental technology and data security, people, and production costs as well as depreciation and amortization. These increased costs were positively impacted by foreign currency fluctuations during the year. Operating margin increased to 18.2% in 2017 as compared to 13.9% in 2016. The increase primarily resulted from a decrease in integration costs related to the Veda acquisition, lower growth in people costs, a gain on the sale of an asset, and a slight decrease in purchased intangibles amortization.
Workforce Solutions
| Twelve Months Ended December 31, | Change | |||||||||||||||||||||||||
| 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||||||||||||
| Workforce Solutions | 2018 | 2017 | 2016 | $ | % | $ | % | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Operating Revenue: | ||||||||||||||||||||||||||
| Verification Services | $ | 567.0 | $ | 501.5 | $ | 437.3 | $ | 65.5 | 13 | % | $ | 64.2 | 15 | % | ||||||||||||
| Employer Services | 259.8 | 262.7 | 264.9 | (2.9 | ) | (1 | )% | (2.2 | ) | (1 | )% | |||||||||||||||
| Total operating revenue | $ | 826.8 | $ | 764.2 | $ | 702.2 | $ | 62.6 | 8 | % | $ | 62.0 | 9 | % | ||||||||||||
| % of consolidated revenue | 24 | % | 23 | % | 22 | % | ||||||||||||||||||||
| Total operating income | $ | 332.7 | $ | 331.9 | $ | 295.5 | $ | 0.8 | — | % | $ | 36.4 | 12 | % | ||||||||||||
| Operating margin | 40.2 | % | 43.4 | % | 42.1 | % | (3.2 | )pts | 1.3 | pts |
Workforce Solutions revenue increased by 8% in 2018 compared to 2017 due to strong growth in Verification Services, partially offset by decreased revenue in unemployment claims.
Workforce Solutions revenue increased by 9% in 2017 compared to 2016 due to strong growth in the government, mortgage, financial and pre-employment screening verticals, partially offset by the impact of the 2017 cybersecurity incident.
Verification Services. Revenue increased 13% in 2018 compared to 2017, due to strong growth in government, mortgage, talent solutions, and healthcare verticals, and continued addition of new records to The Work Number database.
Revenue increased 15% in 2017 compared to 2016, due to strong growth in government, mortgage, financial, pre-employment screening and telecommunications verticals, and continued addition of new records to The Work Number database.
Employer Services. Revenue decreased 1% in 2018 compared to 2017 due to declines in our unemployment claims services, workforce analytics and our other employer services. These declines were partially offset by growth from our 2018 acquisitions.
Revenue decreased 1% in 2017 compared to 2016 due to a decline in our employment based tax credit services and workforce analytics offset by an increase in our on-boarding and unemployment claims services.
Workforce Solutions Operating Margin. Operating margin decreased 320 basis points to 40.2% in 2018 compared to 43.4% in 2017 due to increases in people, incremental technology and data security, and royalty costs. These increases were partially offset by the additional margin generated from increased revenue. Operating margin increased 130 basis points to 43.4% in 2017 compared to 42.1% in 2016 due to revenue growth and product mix, offset by increased people costs.
Global Consumer Solutions
| Twelve Months Ended December 31, | Change | |||||||||||||||||||||||||
| Global Consumer Solutions | 2018 vs. 2017 | 2017 vs. 2016 | ||||||||||||||||||||||||
| 2018 | 2017 | 2016 | $ | % | $ | % | ||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Total operating revenue | $ | 371.8 | $ | 403.0 | $ | 402.6 | $ | (31.2 | ) | (8 | )% | $ | 0.4 | — | % | |||||||||||
| % of consolidated revenue | 11 | % | 12 | % | 13 | % | ||||||||||||||||||||
| Total operating income | $ | 68.6 | $ | 106.2 | $ | 112.4 | $ | (37.6 | ) | (35 | )% | $ | (6.2 | ) | (6 | )% | ||||||||||
| Operating margin | 18.4 | % | 26.4 | % | 27.9 | % | (8.0 | )pts | (1.5 | )pts |
Revenue decreased 8% for 2018 in reported and local currency revenue, as compared to 2017. The decrease in revenue is due to a decrease in our consumer direct revenue in the U.S. and U.K. as we ceased advertising our consumer paid products in the U.S. in September 2017 following the 2017 cybersecurity incident and were impacted by the Global Data Protection Regulations in the U.K. These decreases were partially offset by an increase in our partner revenue, which includes revenue from the ID Watchdog acquisition. We resumed advertising our U.S. consumer paid products in the fourth quarter of 2018 and expect to see the related benefit starting in 2019. Local currency fluctuations against the U.S. dollar positively impacted revenue by $1.2 million for 2018.
Operating margin decreased in 2018 to 18.4% compared to 26.4% in 2017, due to the decreased revenue and an increase in incremental technology and data security costs which were partially offset by decreased advertising costs.
Revenue was flat for 2017 compared to 2016. Local currency revenue grew 1% in 2017, due to an increase in our partner revenue, which includes revenue from the ID Watchdog acquisition. The increase in revenue was offset by a decrease in our global consumer direct revenue, primarily in the U.S., as we ceased advertising our consumer business in the U.S. in September 2017 following the 2017 cybersecurity incident. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $1.8 million for 2017.
Operating margin decreased in 2017 to 26.4% as compared to 27.9% in the prior year, due to higher technology costs, product mix, and higher depreciation and acquisition costs, partially offset by lower advertising expenses.
General Corporate Expense
| Twelve Months Ended December 31, | Change | |||||||||||||||||||||||||
| 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||||||||||||
| General Corporate Expense | 2018 | 2017 | 2016 | $ | % | $ | % | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| General corporate expense | $ | 503.6 | $ | 314.8 | $ | 231.3 | $ | 188.8 | 60 | % | $ | 83.5 | 36 | % |
Our general corporate expenses are unallocated costs that are incurred at the corporate level and include those expenses impacted by corporate direction, including shared services, technology, administrative, legal, restructuring, and the portion of management incentive compensation determined by total company-wide performance.
General corporate expense increased $188.8 million in 2018. We incurred increased incremental technology and data security costs following the announcement of the 2017 cybersecurity incident of $186.7 million in 2018. This was partially offset by a decrease in legal and investigative fees and the costs to fulfill and support the free credit monitoring service provided to eligible consumers of $75.2 million in 2018. Further, we benefited from an increase in the recognition of insurance proceeds of $75.0 million to offset these costs in 2018, versus the $50.0 million of insurance proceeds recorded in 2017. Additionally, we recorded $46.1 million of restructuring charges in 2018 which primarily relate to a reduction of headcount. The remaining increase is due to people and insurance costs.
General corporate expense increased $83.5 million in 2017 primarily due to $109.4 million of costs related to the 2017 cybersecurity incident.
LIQUIDITY AND FINANCIAL CONDITION
Management assesses liquidity in terms of our ability to generate cash to fund operating, investing and financing activities. We continue to generate substantial cash from operating activities, remain in a strong financial position, and manage our capital structure to meet short- and long-term objectives including reinvestment in existing businesses and strategic acquisitions.
Sources and Uses of Cash
Funds generated by operating activities, our commercial paper program, our Revolver and our Receivables Facility, more fully described below, are our most significant sources of liquidity. We expect that funds generated by operating activities will be sufficient to finance our anticipated working capital and other cash requirements (such as ongoing capital expenditures associated with near-term actions to enhance technology systems and data security, legal fees and other professional service costs associated with the 2017 cybersecurity incident, interest payments, debt payments, potential pension funding contributions and dividend payments) for the foreseeable future. However, currently it is not possible to estimate the amount of loss or range of possible loss 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 “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” and “Item 3. Legal Proceedings” in the Form 10-K. At December 31, 2018, $1.08 billion was available to borrow under our Revolver. As of December 31, 2018, $209.8 million was available to borrow under our Receivables Facility. In the event that additional financing is needed, we would finance using the public and private corporate bond markets and/or syndicated loan markets, if available.
Fund Transfer Limitations. The ability of certain of our subsidiaries and associated companies to transfer funds to the U.S may be limited, in some cases, by certain restrictions imposed by foreign governments. These restrictions do not, individually or in the aggregate, materially limit our ability to service our indebtedness, meet our current obligations or pay dividends. As of December 31, 2018, we held $124.7 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 twelve months ended December 31, 2018, 2017 and 2016:
| Twelve Months Ended December 31, | Change | |||||||||||||||||||
| Net cash provided by (used in): | 2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||
| (In millions) | ||||||||||||||||||||
| Operating activities | $ | 672.2 | $ | 816.0 | $ | 823.0 | $ | (143.8 | ) | $ | (7.0 | ) | ||||||||
| Investing activities | $ | (461.5 | ) | $ | (349.5 | ) | $ | (1,975.9 | ) | $ | (112.0 | ) | $ | 1,626.4 | ||||||
| Financing activities | $ | (311.0 | ) | $ | (263.7 | ) | $ | 1,160.3 | $ | (47.3 | ) | $ | (1,424.0 | ) |
Operating Activities
Cash provided by operating activities for 2018 decreased by $143.8 million compared to 2017, due to the decrease in net income, adjusted for depreciation and amortization. This decrease was partially offset by an improvement in our working capital and the change in deferred income taxes.
Cash provided by operating activities for 2017 decreased by $7.0 million compared to 2016, due to an increase in working capital mostly driven by an increase in other assets, current and long-term and slower growth in current and long-term liabilities, excluding debt. Additionally we incurred significant costs related to the 2017 cybersecurity incident. These decreases were partially offset by growth in net income, slower growth in accounts receivable, net and an increase in depreciation and amortization.
Investing Activities
| Twelve Months Ended December 31, | Change | |||||||||||||||||||
| Net cash used in: | 2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||
| (In millions) | ||||||||||||||||||||
| Capital expenditures* | $ | (321.9 | ) | $ | (218.2 | ) | $ | (173.5 | ) | $ | (103.7 | ) | $ | (44.7 | ) |
*Amounts above are total cash outflows for capital expenditures.
Our capital expenditures are used for developing, enhancing and deploying new and existing software in support of our expanding product set, replacing or adding equipment, updating systems for regulatory compliance, licensing of standard software applications, investing in system reliability, security and disaster recovery enhancements, and updating or expanding our office facilities.
Capital expenditures in 2018 and 2017 increased from 2017 and 2016, respectively, as we are continuing to invest in enhanced technology systems, infrastructure and data security after the 2017 cybersecurity incident.
Acquisitions, Divestitures and Investments
| Twelve Months Ended December 31, | Change | |||||||||||||||||||
| Net cash provided by (used in): | 2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||
| (In millions) | ||||||||||||||||||||
| Acquisitions, net of cash acquired | $ | (138.3 | ) | $ | (139.9 | ) | $ | (1,791.6 | ) | $ | 1.6 | $ | 1,651.7 | |||||||
| Cash received from sale of asset | $ | 5.6 | $ | 8.6 | $ | — | $ | (3.0 | ) | $ | 8.6 | |||||||||
| Investment in unconsolidated affiliates, net | $ | (6.9 | ) | $ | — | $ | — | $ | (6.9 | ) | $ | — |
2018 Acquisitions and Investments. During 2018, we completed acquisitions in our Workforce Solutions and International segments as well as DataX Ltd. in the third quarter of 2018 in our USIS segment.
2017 Acquisitions and Investments. During the fourth quarter of 2017, we acquired 100% of the outstanding stock of Mercury Group of Companies Pty Ltd (“Mercury”), an Australian-owned workforce management company. During the third quarter of 2017, we completed the acquisition of 100% of the outstanding stock of ID Watchdog, Inc.
2016 Acquisitions and Investments. During the first quarter of 2016, the Company completed the acquisition of 100% of the ordinary voting shares of Veda for cash consideration of approximately $1.7 billion. During the first quarter of 2016, we settled all of the foreign currency options related to the Veda acquisition on the respective settlement dates for a net cash payment of $10.8 million. During the third quarter of 2016, the Company completed the acquisition of Barnett and Computersoft.
For additional information about our acquisitions, see Note 3 of the Notes to Consolidated Financial Statements in this report.
Financing Activities
| Twelve Months Ended December 31, | Change | |||||||||||||||||||
| Net cash provided by (used in): | 2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||
| (In millions) | ||||||||||||||||||||
| Net short-term (repayments) borrowings | $ | (959.2 | ) | $ | 252.4 | $ | 73.0 | $ | (1,211.6 | ) | $ | 179.4 | ||||||||
| Proceeds from issuance of long-term debt | $ | 994.5 | $ | 100.0 | $ | 1,574.7 | $ | 894.5 | $ | (1,474.7 | ) | |||||||||
| Payments on long-term debt | $ | (100.0 | ) | $ | (322.5 | ) | $ | (350.0 | ) | $ | 222.5 | $ | 27.5 |
Credit Facility Availability. In September 2018, the Company entered into a $1.10 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 $1.60 billion. The Revolver includes an option to request a maximum of two one-year extensions of the maturity date, any time after the first anniversary of the Revolver closing. We believe we are currently in compliance with all representations and warranties necessary as a condition for borrowing under the Revolver, but we cannot assure that we will be able to comply with all such conditions to borrowing in the future. Availability of the Revolver is reduced by the outstanding principal balance of our commercial paper notes and by any letters of credit issued under the facility.
Our $900.0 million Commercial Paper (“CP”) program has been established to allow for borrowing through the private placement of CP with maturities ranging from overnight to 397 days. We may use the proceeds of CP for general corporate purposes. The CP program is supported by our Revolver and the total amount of CP which may be issued is reduced by the amount of any outstanding borrowings under our Revolver.
At December 31, 2018, the Company had no borrowings outstanding of CP, $15.50 million of letters of credit outstanding and no borrowings outstanding under the Revolver. At December 31, 2018, a total of $1.08 billion was available under the Revolver.
At December 31, 2018, approximately 89% of our debt was fixed rate and 11% was variable rate. Our variable-rate debt consists of the Floating Rate Notes. The interest rate resets periodically, based on the terms of the respective financing arrangement. At December 31, 2018, the interest rate on our variable-rate debt was 3.5%.
Borrowing and Repayment Activity. Net short-term (repayments) borrowings primarily represent repayments or borrowings of outstanding amounts under our CP program. We primarily borrow under our CP program as needed and as availability allows.
The increase in net short-term (repayments) borrowings primarily relates to the net activity of CP notes in 2017.
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. 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 CP program.
On May 12, 2016, we issued $500.0 million principal amount of 2.3%, five-year senior notes and $275.0 million principal amount of 3.25%, ten-year senior notes in an underwritten public offering. Interest is payable semi-annually in arrears on June 1 and December 1 of each year. The net proceeds of the sale of the notes were used to repay borrowings under our previous 364-Day Revolver and a portion of the borrowings under our commercial paper program incurred to finance the acquisition of Veda.
Payments on long-term debt in 2017 reflect $272.5 million of payments related to senior notes, as well as $50.0 million of payments on the Term Loan. Borrowings on long-term debt reflect an $800.0 million draw down in the first quarter of 2016 on our Term Loan Facility and the issuance of $500.0 million of senior notes due 2021 and $275.0 million of senior notes due 2026 during the second quarter of 2016, as discussed above.
In the fourth quarter of 2017, Equifax entered into a $225 million, 2-year receivables funding facility (the Receivables Facility), which had an original maturity in 2019. In November 2018, we amended the Receivables Facility to extend the maturity to November 2020. Under the Receivables Facility, Equifax sells 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 accounts receivable to investors. The investors have no recourse to the Company’s other assets except for customary warranty and indemnity claims. Creditors of Equifax do not have recourse to the assets of Equifax Receivables Funding LLC.
Debt Covenants. A downgrade in 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. The outstanding indentures and comparable instruments 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. None of these covenants are considered restrictive to our operations and, as of December 31, 2018, the Company was 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 the outstanding debt; however, the 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 of control or publicly announces the Company’s intention to effect a change of control and the rating on the senior notes is lowered by Standard & Poor’s, or S&P, and Moody’s Investors Service, or Moody’s, below an investment grade rating within 60 days of such change of control or notice thereof, then the Company will be required to offer to repurchase the senior notes at a price equal to 101% of the aggregate principal amount of the senior notes plus accrued and unpaid interest.
Credit Ratings. Credit ratings reflect an independent agency’s judgment on the likelihood that a borrower will repay a debt obligation at maturity. The ratings reflect many considerations, such as the nature of the borrower’s industry and its competitive position, the size of the company, its liquidity and access to capital and the sensitivity of a company’s cash flows to changes in the economy. The two largest rating agencies, S&P and Moody’s, use alphanumeric codes to designate their ratings. The highest quality rating for long-term credit obligations is AAA and Aaa for S&P and Moody’s, respectively. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency.
Long-term ratings of BBB- and Baa3 or better by S&P and Moody’s, respectively, reflect ratings on debt obligations that fall within a band of credit quality considered to be “investment grade.” At December 31, 2018, the long-term ratings for our obligations were BBB+ with a negative outlook for S&P and Baa1 with a stable outlook for Moody’s. A downgrade in our credit rating 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. If our credit ratings were to decline to lower levels, we could experience increases in the interest cost for any new debt. In addition, the market’s demand for, and thus our ability to readily issue, new debt could become further affected by the economic and credit market environment. 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 variable interest rates and debt covenants, see Note 5 of the Notes to Consolidated Financial Statements in this report.
Equity Transactions
| Twelve Months Ended December 31, | Change | |||||||||||||||||||
| Net cash provided by (used in): | 2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||
| (In millions) | ||||||||||||||||||||
| Treasury stock purchases | $ | — | $ | (77.1 | ) | $ | — | $ | 77.1 | $ | (77.1 | ) | ||||||||
| Dividends paid to Equifax shareholders | $ | (187.9 | ) | $ | (187.4 | ) | $ | (157.6 | ) | $ | (0.5 | ) | $ | (29.8 | ) | |||||
| Dividends paid to noncontrolling interests | $ | (10.3 | ) | $ | (8.4 | ) | $ | (5.8 | ) | $ | (1.9 | ) | $ | (2.6 | ) | |||||
| Proceeds from exercise of stock options | $ | 11.8 | $ | 19.2 | $ | 31.5 | $ | (7.4 | ) | $ | (12.3 | ) | ||||||||
| Purchase of redeemable noncontrolling interests | $ | (30.9 | ) | $ | (2.6 | ) | $ | (3.6 | ) | $ | (28.3 | ) | $ | 1.0 |
Sources and uses of cash related to equity during the twelve months ended December 31, 2018, 2017 and 2016 were as follows:
| • | We did not repurchase any shares in 2018 and 2016. Under share repurchase programs authorized by our Board of Directors, we repurchased 0.5 million common shares during the twelve months ended December 31, 2017, for $77.1 million, at an average price per common share of $143.88. As of December 31, 2018, under the existing board authorization, the Company is approved for additional stock repurchases valued at $590.1 million. |
| • | During the twelve months ended December 31, 2018, 2017 and 2016, we paid cash dividends to Equifax shareholders of $187.9 million, $187.4 million and $157.6 million, respectively, at $1.56 per share for 2018 and 2017, and $1.32 per share for 2016. |
We anticipate continuing the payment of quarterly cash dividends. The actual amount of such dividends is subject to declaration by our Board of Directors and will depend upon future earnings, results of operations, capital requirements, our financial
condition and other relevant factors. There can be no assurance that the Company will continue to pay quarterly cash dividends at current levels or at all.
Contractual Obligations and Commercial Commitments
The following table summarizes our significant contractual obligations and commitments as of December 31, 2018. The table excludes commitments that are contingent based on events or factors uncertain at this time. Some of the excluded commitments are discussed below the footnotes to the table.
| Payments due by | |||||||||||||||||||
| Total | Less than 1 year | 1 to 3 years | 3 to 5 years | Thereafter | |||||||||||||||
| (In millions) | |||||||||||||||||||
| Debt (including capitalized lease obligation) (1) | $ | 2,654.9 | $ | 4.9 | $ | 1,100.0 | $ | 900.0 | $ | 650.0 | |||||||||
| Operating leases (2) | 192.2 | 32.5 | 55.1 | 42.5 | 62.1 | ||||||||||||||
| Data processing, outsourcing agreements and other purchase obligations (3) | 163.6 | 105.2 | 30.8 | 13.6 | 14.0 | ||||||||||||||
| Other long-term liabilities (4) (5) | 136.9 | 9.7 | 18.5 | 19.4 | 89.3 | ||||||||||||||
| Interest payments (6) | 691.5 | 100.1 | 185.5 | 109.1 | 296.8 | ||||||||||||||
| $ | 3,839.1 | $ | 252.4 | $ | 1,389.9 | $ | 1,084.6 | $ | 1,112.2 |
| (1) | The amounts are gross of unamortized discounts totaling $19.4 million at December 31, 2018. Total debt on our Consolidated Balance Sheets is net of the unamortized discounts and fair value adjustments. There were no fair value adjustments to our debt at December 31, 2018. |
| (2) | Our operating lease obligations principally involve office space and equipment, which include the ground lease associated with our headquarters building that expires in 2048. |
| (3) | These agreements primarily represent our minimum contractual obligations for services that we outsource associated with our computer data processing operations and related functions, and certain administrative functions. These agreements expire between 2019 and 2026. |
| (4) | These long-term liabilities primarily relate to obligations associated with certain pension, postretirement and other compensation-related plans, some of which are discounted in accordance with U.S. generally accepted accounting principles, or GAAP. We made certain assumptions about the timing of such future payments. In the table above, we have not included amounts related to future pension plan obligations, as such required funding amounts beyond 2019 have not been deemed necessary due to our current expectations regarding future plan asset performance. |
| (5) | This table excludes $24.9 million of unrecognized tax benefits, including interest and penalties, as we cannot make a reasonably reliable estimate of the period of cash settlement with the respective taxing authorities. |
| (6) | For future interest payments on variable-rate debt, which bears a rate equal to three-month LIBOR on the interest determination date plus 0.87% per annum, we used the variable rate in effect at December 31, 2018 to calculate these payments. Our outstanding variable rate debt at December 31, 2018, consisted of the Floating Rate Notes. The variable rate at December 31, 2018 was 3.5%. Future interest payments may be different depending on future borrowing activity and interest rates. |
Off-Balance Sheet Transactions
We do not engage in off-balance sheet financing activities.
Pursuant to the terms of certain industrial revenue bonds, we have transferred title to certain of our fixed assets with total costs of $156.4 million as of December 31, 2018 and 2017 to a local governmental authority in the U.S. to receive a property tax abatement related to economic development. The title to these assets will revert back to us upon retirement or cancellation of the applicable bonds. These fixed assets are still recognized on the Company’s Consolidated Balance Sheets as all risks and rewards related to the assets remain with the Company.
Letters of Credit and Guarantees
We will from time to time issue standby letters of credit, performance or surety bonds or other guarantees in the normal course of business. The aggregate notional amount of all performance and surety bonds and standby letters of credit was not material at December 31, 2018, and generally have a remaining maturity of one year or less. Guarantees are issued from time to time to support the needs of our operating units. The maximum potential future payments we could be required to make under the guarantees is not material at December 31, 2018.
Benefit Plans
We sponsor a qualified defined benefit retirement plan (the U.S. Retirement Income Plan, or USRIP) that covers approximately 12% of current U.S. salaried employees who were hired on or before June 30, 2007, the last date on which an individual could be hired and enter the plan before the USRIP was closed to new participation at December 31, 2008. This plan also covers retirees as well as certain terminated but vested individuals not yet in retirement status. We also sponsor a retirement plan with both defined benefit and defined contribution components that cover most salaried and hourly employees in Canada (the Canadian Retirement Income Plan, or CRIP); the defined benefit component was also closed to new hires on October 1, 2011.
During the twelve months ended December 31, 2018, we made voluntary contributions of $30.0 million to the USRIP and made contributions of $0.4 million to the CRIP. During the twelve months ended December 31, 2017, we did not make any contributions to the USRIP and made contributions of $1.5 million to the CRIP. At December 31, 2018, the USRIP met or exceeded ERISA’s minimum funding requirements. In the future, we will make minimum funding contributions as required and may make discretionary contributions, depending on certain circumstances, including market conditions and 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, and our credit facilities.
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 the 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 this report.
Effects of Inflation and Changes in Foreign Currency Exchange Rates
Equifax’s operating results are not materially affected by inflation, although inflation may result in increases in the Company’s expenses, which may not be readily recoverable in the price of services offered. To the extent inflation results in rising interest rates and has other adverse effects upon the securities markets and upon the value of financial instruments, it may adversely affect the Company’s financial position and profitability.
A portion of the Company’s business is conducted in currencies other than the U.S. dollar and changes in foreign exchange rates relative to the U.S. dollar can therefore affect the value of non-U.S. dollar net assets, revenues and expenses. Potential exposures as a result of these fluctuations in currencies are closely monitored. We generally do not mitigate the risks associated with fluctuating exchange rates, although we may from time to time through forward contracts or other derivative instruments hedge a portion of our translational foreign currency exposure or exchange rate risks associated with material transactions which are denominated in a foreign currency.
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 report.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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. The following accounting policies involve critical accounting estimates because they are particularly dependent on estimates and assumptions made by management about matters that are uncertain at the time the accounting estimates are made. In addition, while we have used our best estimates based on facts and circumstances available to us at the time, different estimates reasonably could have been used in the current period, or changes in the accounting estimates that we used are reasonably likely to occur from period to period, either of which may have a material impact on the presentation of our Consolidated Balance Sheets, Statements of Income, and Statements of Comprehensive Income (Loss). We also have other significant accounting policies which involve the use of estimates, judgments and assumptions that are relevant to understanding our results. For additional information about these policies, see Note 1 of the Notes to Consolidated Financial Statements in this report. 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.
Revenue Recognition
In accordance with ASC 606, “Revenue from Contracts with Customers,” we recognize revenue when a performance obligation has been satisfied by transferring a promised good or service to a customer and the customer obtains control of the good or service. In order to recognize revenue, we note that the two parties must have an agreement that creates enforceable rights, the performance obligations must be distinct and the transaction price can be determined. Our revenue is derived from the provision of information services to our customers on a transactional basis, in which distinct services are delivered over time as the customer simultaneously receives and consumes the benefits of the services delivered. To measure our performance over time, the output method is utilized to measure the value to the customer based on the transfer to date of the services promised, with no rights of return once consumed. In these cases, revenue on transactional contracts with a defined price but an undefined quantity is recognized utilizing the right to invoice expedient resulting in revenue being recognized when the service is provided and billed. Additionally, multi-year contracts with an defined price but an undefined quantity that utilize tier pricing would be defined as a series of distinct performance obligations satisfied over time utilizing the same method of measurement, the output method, with no rights of return once consumed. This measurement method is applied on a monthly basis resulting in revenue being recognized when the service is provided and billed.
Additionally, we recognize revenue from subscription-based contracts under which a customer pays a preset fee for a predetermined or unlimited number of transactions or services provided during the subscription period, generally one year. Revenue from subscription-based contracts having a preset number of transactions is recognized as the services are provided, using an effective transaction rate as the actual transactions are delivered. Any remaining revenue related to unfulfilled units is not recognized until the end of the related contract’s subscription period. Revenue from subscription-based contracts having an unlimited volume is recognized ratably during the contract term. Multi-year subscription contracts are analyzed to determine the full contract transaction price over the term of the contract and the subsequent price is ratably recognized over the full term of the contract.
Revenue is recorded net of sales taxes.
If at the outset of an arrangement, we determine that collectibility is not reasonably assured, revenue is deferred until the earlier of when collectibility becomes probable or the receipt of payment from the customer. If there is uncertainty as to the customer’s acceptance of the performance obligation, revenue is not recognized until the earlier of receipt of customer acceptance or expiration of the acceptance period.
We sell certain offerings that contain multiple performance obligations. These obligations may include consumer or commercial information, file updates for certain solutions, services provided by our decisioning technologies personnel, training services, statistical models and other services. In order to account for each of these obligations separately, the delivered promises within our contracts must meet the criterion to be considered distinct performance obligations to our customer. If we determine that the arrangement does not contain separate distinct obligations, the performance obligations are bundled together until a distinct obligation is achieved. This may lead to the arrangement consideration being recognized as the final contract obligation is delivered to our customer or ratably over the term of the contract.
Some of our arrangements with multiple performance obligations involve the delivery of services generated by a combination of services provided by one or more of our operating segments. No individual information service impacts the
value or usage of other information services included in an arrangement and each service can be sold alone or, in most cases, purchased from another vendor without affecting the quality of use or value to the customer of the other information services included in the arrangement. Some of our products require the installation of interfaces or platforms by our technology personnel that allow our customers to interact with our proprietary information databases. These installation services do not meet the requirement for being distinct, thus any related installation fees are deferred when billed and are recognized over the expected period that the customer will benefit from the related services. Revenue from the delivery of one-time files and models is recognized as the service is provided and accepted, assuming all other revenue recognition criteria are met. The direct costs of installation of a customer are capitalized and amortized over the useful life of the identifiable asset.
We record revenue on a net basis for those sales in which we have in substance acted as an agent or broker in the transaction and therefore do not have control.
In certain instances within our debt collections and recovery management services in our International operating segment and within our Workforce Solutions operating segment, variable consideration is constrained due to the fact that the revenue is contingent on a particular outcome. Within our debt collections and recovery management businesses, revenue is calculated as a percentage of debt collected on behalf of the customer and, as such, is primarily recognized when the debt is collected assuming all other revenue recognition criteria are met. Within our Workforce Solutions operating segment, the fees for certain of our tax credits and incentives revenue are based on a percentage of the credit delivered to our clients. Revenue for these arrangements is recognized based on the achievement of milestones, upon calculation of the credit, approval from a regulatory agency or when the credit is utilized by our client, depending on the provisions of the client contract.
Judgments and Uncertainties – Each performance obligation within a contract must be considered separately to ensure that appropriate accounting is performed for these distinct goods or services. These considerations include assessing the price at which the element is sold compared to its standalone selling price; concluding when the element will be delivered; evaluating collectability; and determining whether any contingencies exist in the related customer contract that impact the prices paid to us for the services.
Contract Balances – The contract balances are generated when revenue recognized varies from billing in a given period. A contract asset is created when an entity transfers a good or service to a customer and recognizes more revenue than what has been billed. As of December 31, 2018, the contract asset balance was $7.3 million. A contract liability is created when an entity transfers a good or service to a customer and recognizes less than what has been billed. Deferred revenue is recognized when we have an obligation to transfer goods or services to a customer and have already received consideration from the customer. We generally expect to recognize our deferred revenue as revenue within twelve months of being recorded based on the terms of the contracts.
Goodwill and Indefinite-Lived Intangible Assets
We review goodwill and indefinite lived intangible assets for impairment annually (as of September 30) and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. These events or circumstances could include a significant change in the business climate, legal factors, operating performance or trends, competition, or sale or disposition of a significant portion of a reporting unit. We have seven reporting units comprised of USIS, Asia Pacific, Europe, Latin America, Canada, Global Consumer Solutions (“GCS”), and Workforce Solutions. Effective September 30, 2018, the Verification Services and Employer Services reporting units were aggregated into a single reporting unit to better reflect the shared value and integration of the two businesses. Prior to aggregation, we assessed the recoverability of goodwill for Verification Services and Employer Services separately and determined that there was no impairment for the reporting units.
The goodwill balance at December 31, 2018, for our seven reporting units was as follows:
| December 31, | |||
| 2018 | |||
| (In millions) | |||
| U.S. Information Solutions | 1,128.9 | ||
| Asia Pacific | 1,416.8 | ||
| Europe | 155.0 | ||
| Latin America | 227.9 | ||
| Canada | 45.0 | ||
| Global Consumer Solutions | 185.9 | ||
| Workforce Solutions | 970.2 | ||
| Total goodwill | $ | 4,129.7 |
We performed a qualitative assessment to determine whether further impairment testing was necessary for our USIS, Europe, Latin America, Canada, GCS, and Workforce Solutions reporting units. In this qualitative assessment, we considered the following items for each of the reporting units: macroeconomic conditions, industry and market conditions, overall financial performance and other entity specific events. In addition, for each of these reporting units, the most recent fair value determination resulted in an amount that significantly exceeded the carrying amount of the reporting units. Based on these assessments, we determined the likelihood that a current fair value determination would be less than the current carrying amount of the reporting unit is not more likely than not. As a result of our conclusions, no further testing was required for these reporting units.
Valuation Techniques
We performed a quantitative assessment for our Asia Pacific reporting unit to determine whether impairment exists as the Veda transaction, which comprises the majority of our Asia Pacific reporting unit, was only completed approximately two years ago and due to the size of the cushion for the reporting unit in relation to our other reporting units. In determining the fair value of the reporting unit, we used a combination of the income and market approaches to estimate the reporting unit’s business enterprise value.
Under the income approach, we calculate the fair value of a reporting unit based on estimated future discounted cash flows which require assumptions about short and long-term revenue growth rates, operating margins for each reporting unit, discount rates, foreign currency exchange rates and estimates of capital charges. The assumptions we use are based on what we believe a hypothetical marketplace participant would use in estimating fair value. Under the market approach, we estimate the fair value based on market multiples of revenue or earnings before income taxes, depreciation and amortization, for benchmark companies or guideline transactions. We believe the guideline transaction used for our Asia Pacific reporting unit serves as an appropriate input for calculating a fair value for the reporting unit as the transaction multiples are similar to other guideline transactions that have been recently completed in our industry. Competition for our Asia Pacific reporting unit generally includes global consumer credit reporting companies, such as Experian, which offer a product suite similar to the reporting unit’s credit reporting solutions.
The values separately derived from each of the income and market approach valuation techniques were used to develop an overall estimate of a reporting unit’s fair value. We use a consistent approach across all reporting units when considering the weight of the income and market approaches for calculating the fair value of each of our reporting units. This approach relies more heavily on the calculated fair value derived from the income approach, with 70% of the value coming from the income approach. We believe this approach is consistent with that of a market participant in valuing prospective purchase business combinations. The selection and weighting of the various fair value techniques may result in a higher or lower fair value. Judgment is applied in determining the weightings that are most representative of fair value.
We have not made any material changes to the valuation methodology we use to assess goodwill impairment since the date of the last annual impairment test.
Growth Assumptions
The assumptions for our future cash flows begin with our historical operating performance, the details of which are described in our Management’s Discussion & Analysis of operating performance. Additionally, we consider the impact that
known economic, industry and market trends will have on our future forecasts, as well as the impact that we expect from planned business initiatives including new product initiatives, client service and retention standards, and cost management programs. At the end of the forecast period, the long-term growth rate we used to determine the terminal value of our Asia Pacific reporting unit was 4.85% based on management’s assessment of the minimum expected terminal growth rate of the reporting unit, as well as broader economic considerations such as GDP, inflation and the maturity of the markets we serve.
We projected revenue growth in 2019 for our Asia Pacific reporting unit in completing our 2018 impairment testing based on planned business initiatives and prevailing trends exhibited by this unit and not based on the assumption of meaningful acceleration in economic growth. The anticipated revenue growth in this reporting unit, however, is partially offset by assumed increases in expenses for the reporting unit which reflects the additional level of investment needed in order to achieve the planned revenue growth. The reporting unit will also incur increased costs related to our technology transformation.
Discount Rate Assumptions
We utilize a weighted average cost of capital, or WACC, in our impairment analysis that makes assumptions about the capital structure that we believe a market participant would make and include a risk premium based on an assessment of risks related to the projected cash flows for the reporting unit. We believe this approach yields a discount rate that is consistent with an implied rate of return that a market participant would require for an investment in a company having similar risks and business characteristics to the reporting unit being assessed. To calculate the WACC, the cost of equity and cost of debt are multiplied by the assumed capital structure of the reporting unit as compared to industry trends and relevant benchmark company structures. The cost of equity was computed using the Capital Asset Pricing Model which considers the risk-free interest rate, beta, equity risk premium and specific company risk premium related to a particular reporting unit. The cost of debt was computed using a benchmark rate and the Company’s tax rate. For the 2018 annual goodwill impairment evaluation, the discount rate used to develop the estimated fair value of the Asia Pacific reporting unit was 9.3%.
Estimated Fair Value and Sensitivities
The estimated fair value of the reporting units is derived from the valuation techniques described above, incorporating the related projections and assumptions. An indication of possible impairment occurs when the estimated fair value of the reporting unit is below the carrying value of its equity. The estimated fair value for our Asia Pacific reporting unit exceeded the related carrying value as of September 30, 2018. As a result, no goodwill impairment was recorded.
The estimated fair value of the reporting unit is highly sensitive to changes in these projections and assumptions; therefore, in some instances changes in these assumptions could impact whether the fair value of a reporting unit is greater than its carrying value. For example, an increase in the discount rate and decline in the projected cumulative cash flow of a reporting unit could cause the fair value of certain reporting units to be below its carrying value. We perform sensitivity analyses around these assumptions in order to assess the reasonableness of the assumptions and the resulting estimated fair values. Ultimately, future potential changes in these assumptions may impact the estimated fair value of a reporting unit and cause the fair value of the reporting unit to be below its carrying value. Our Asia Pacific reporting unit primarily represents our recently completed acquisition of Veda. Due to the recency of this acquisition and its overall significance to the reporting unit, Asia Pacific is more sensitive to changes in the assumptions noted above that could result in a fair value that is less than its carrying value. The excess of fair value over carrying value for the Asia Pacific reporting unit as of September 30, 2018 was 9%.
Loss Contingencies
We are subject to various proceedings, lawsuits and claims arising in the normal course of our business. We determine whether to disclose and/or accrue for loss contingencies based on our assessment of whether the potential loss is estimable, probable, reasonably possible or remote.
In the third quarter of 2017, we announced a cybersecurity incident potentially impacting U.S., Canadian and U.K. consumers. As a result of the 2017 cybersecurity incident, we are subject to a significant number of proceedings and investigations as described in “Item 3. Legal Proceedings” in the Form 10-K. While we believe it is reasonably possible that we will incur losses associated with such proceedings and investigations, it is not possible at this time to estimate the amount of loss or range of possible loss that might result from adverse judgments, settlements, penalties or other resolution of the proceedings and investigations based on 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 Company will continue to evaluate information as it becomes known and will record an estimate for losses at the time or times when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable. The Company believes that the ultimate amount paid on
these actions, claims and investigations could be material to the Company’s consolidated financial condition, results of operations, or cash flows in future periods.
Judgments and uncertainties — We periodically review claims and legal proceedings and assess whether we have potential financial exposure based on consultation with internal and outside legal counsel and other advisors. If the likelihood of an adverse outcome from any claim or legal proceeding is probable and the amount can be reasonably estimated, we record a liability on our Consolidated Balance Sheets for the estimated amount. If the likelihood of an adverse outcome is reasonably possible, but not probable, we provide disclosures related to the potential loss contingency. Our assumptions related to loss contingencies are inherently subjective.
Effect if actual results differ from assumptions — With the exception of the 2017 cybersecurity incident, we do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to determine loss contingencies. However, if facts and circumstances change in the future that change our belief regarding assumptions used to determine our estimates, we may be exposed to a loss that could be material.
Income Taxes
We record deferred income taxes using enacted tax laws and rates for the years in which the taxes are expected to be paid. We assess the likelihood that our deferred tax assets will be recovered from future taxable income or other tax planning strategies. To the extent that we believe that recovery is not likely, we must establish a valuation allowance to reduce the deferred tax assets to the amount we estimate will be recoverable.
Our income tax provisions are based on assumptions and calculations which will be subject to examination by various tax authorities. We record tax benefits for positions in which we believe are more likely than not of being sustained under such examinations. We assess the potential outcome of such examinations to determine the adequacy of our income tax accruals.
Judgments and uncertainties — We consider accounting for income taxes critical because management is required to make significant judgments in determining our provision for income taxes, our deferred tax assets and liabilities, and our future taxable income for purposes of assessing our ability to realize any future benefit from our deferred tax assets. These judgments and estimates are affected by our expectations of future taxable income, mix of earnings among different taxing jurisdictions, and timing of the reversal of deferred tax assets and liabilities.
We also use our judgment to determine whether it is more likely than not that we will sustain positions that we have taken on tax returns and, if so, the amount of benefit to initially recognize within our financial statements. We review our uncertain tax positions and adjust our unrecognized tax benefits in light of changes in facts and circumstances, such as changes in tax law, interactions with taxing authorities and developments in case law. These adjustments to our unrecognized tax benefits may affect our income tax expense. Settlement of uncertain tax positions may require use of our cash. At December 31, 2018, $24.9 million was recorded for uncertain tax benefits, including interest and penalties, of which it is reasonably possible that up to $4.1 million of our unrecognized tax benefit may change within the next twelve months.
Effect if actual results differ from assumptions — Although management believes that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to increases or decreases in income tax expense that could be material.
Pension and Other Postretirement Plans
We consider accounting for our U.S. and Canadian pension and other postretirement plans critical because management is required to make significant subjective judgments about a number of actuarial assumptions, which include discount rates, expected return on plan assets, interest cost and mortality and retirement rates. Actuarial valuations are used in determining our benefit obligation and net periodic benefit cost.
During 2018, we adopted the new MP-2018 mortality improvement projection scale in determining the liability for the U.S. pension plan. This updated scale, along with the change in the discount rate, contributed to a decrease in the projected benefit obligation as of December 31, 2018.
During 2017, we adopted the new MP-2017 mortality improvement projection scale in determining the liability for the U.S. pension plan. This updated scale partially offset the decrease in the discount rate in 2017, the net of which resulted in the increase in the projected benefit obligation as of December 31, 2017.
During 2016, we adopted the new MP-2016 mortality improvement projection scale in determining the liability for the U.S. pension plan. This updated scale partially offset the decrease in the discount rate in 2016, the net of which resulted in the increase in the projected benefit obligation as of December 31, 2016.
Judgments and uncertainties — We believe that the most significant assumptions related to our net periodic benefit cost are (1) the discount rate and (2) the expected return on plan assets, in each case as it relates to our U.S. pension plan. Our Canadian plan is not significant, and the impact of changes in assumptions for that plan is not material.
We determine our discount rates primarily based on high-quality, fixed-income investments and yield-to-maturity analysis specific to our estimated future benefit payments available as of the measurement date. Discount rates are updated annually on the measurement date to reflect current market conditions. We use a third-party yield curve to develop our discount rates. The yield curve provides discount rates related to a dedicated high-quality bond portfolio whose cash flows extend beyond the current period, from which we choose a rate matched to the expected benefit payments required for each plan.
The expected rate of return on plan assets is based on both our historical returns and forecasted future investment returns by asset class, as provided by our external investment advisor. In 2018, our U.S. pension plan investment loss of 3.2% was below the expected return of 7.25%. The expected return for the USRIP for 2019 is 6.70% following asset allocation changes that resulted in higher allocation to fixed income securities. The CRIP investment loss was 1.3% in 2018 versus the expected return of 6.0%. The expected return for the CRIP for 2019 is 6.0%. Our weighted-average expected rate of return for both plans for 2018 is 7.14% which is consistent with the 2017 expected rate.
Annual differences, if any, between the expected and actual returns on plan assets are included in unrecognized net actuarial gain or loss, a component of other comprehensive income. In calculating the annual amortization of the unrecognized net actuarial gain or loss, we use a market-related value of assets that smooths actual investment gains and losses on plan assets over a period up to five years. The resulting unrecognized net actuarial gain or loss amount is recognized in net periodic pension expense over the average remaining life expectancy of the participant group since almost all participants are inactive. The market-related value of our assets was $563.3 million at December 31, 2018. We do not expect our 2019 net periodic benefit cost, which includes the effect of the market-related value of assets, to be materially different than our 2018 cost. See Note 9 of the Notes to the Consolidated Financial Statements for details on changes in the pension benefit obligation and the fair value of plan assets.
Effect if actual results differ from assumptions — We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions that are used in our actuarial valuations. Adjusting our weighted-average expected long-term rate of return (7.14% at December 31, 2018) by 50 basis points would change our estimated pension expense in 2018 by approximately $2.8 million. Adjusting our weighted-average discount rate (4.39% at December 31, 2018) by 50 basis points would change our estimated pension expense in 2018 by approximately $1.1 million. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to changes in pension expense, pension liability or unrecognized prior service cost and actuarial gains (losses) that could be material.
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