filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Equifax Inc. MD&A is provided as a supplement to and should be read in conjunction with our consolidated financial statements and the accompanying Notes to Financial Statements in Item 1 of this Form 10-Q. This section discusses the results of our operations for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021. All percentages have been calculated using unrounded amounts for each of the periods presented.
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 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 for businesses, governments and consumers, and we provide human resources business process automation and outsourcing services for employers. We have a large and diversified group of clients, including financial institutions, corporations, government agencies 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, educational history, criminal history, healthcare professional licensure and sanctions, 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 and process automation solutions and processing services for our clients. We are a leading provider of information and solutions used in payroll-related and human resource management business process services in the U.S. For consumers, we provide products and services to help people understand, manage and protect their personal information and make more informed financial decisions. Additionally, we also provide information, technology and services to support debt collections and recovery management.
We currently operate in four global regions: North America (U.S. and Canada), Asia Pacific (Australia, New Zealand and India), Europe (the U.K., Spain and Portugal) and Latin America (Argentina, Chile, Costa Rica, Dominican Republic, 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 have investments in consumer and/or commercial credit information companies through joint ventures in Cambodia, Malaysia and Singapore and have an investment in a consumer and commercial credit information company in Brazil. We have a joint venture in Russia that offers consumer credit services; however, we determined as of March 31, 2022 to exit our ownership position, wrote the value of the investment to zero and expect no future economic benefit from the joint venture's operations going forward.
Recent Events and Company Outlook
As further described in our 2021 Form 10-K, we operate in the U.S., which represented 78% of our revenue in 2021, and internationally in more than 20 countries. Our products and services span a wide variety of vertical markets including financial services, mortgage, federal, state and local governments, automotive, telecommunications and many others.
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 and employee hiring and onboarding activity. The impact of the COVID-19 pandemic and related actions to attempt to control its spread began to impact our consolidated operating results in the first quarter of 2020. During 2020, overall revenue grew, reflecting strong U.S. mortgage market demand in 2020 compared to 2019 and growth across our Workforce Solutions business. In 2021 and 2022 to-date, as efforts to minimize the spread of COVID-19 were more successful and access to vaccinations increased, our consolidated revenue grew when compared to prior year, reflecting recovering country economies, growth from Equifax initiatives and, to a lesser extent, revenue from acquired companies. The continued impact of the COVID-19 pandemic remains uncertain and may affect certain markets or regions we serve differently. To date, changes to our working environment as a result of COVID-19 have not caused material disruptions in the execution of our strategic plans and have not impacted our internal controls, financial reporting systems or operations.
In light of the evolving health, social, economic and business environment, governmental regulations or mandates, and business disruptions that could occur, the potential impact that COVID-19 could have on our financial condition and operating results remains unclear. For more information, see “Item 1A. Risk Factors—Our business has been and may continue to be negatively impacted by the COVID-19 pandemic,” in our 2021 Form 10-K.
For 2022, our planning assumes economies in which we operate continue to show growth relative to 2021. In the U.S., 2022 economic activity, as measured by GDP, is expected to grow but not at the same rate of growth experienced in 2021. We expect modest growth in consumer credit, excluding mortgage, over the course of 2022. Our outlook assumes the U.S. mortgage market, as measured by credit inquiries, will decline by greater than 46 percent on average for the remaining six months of 2022 versus the same period in 2021. The U.S. mortgage market, particularly the mortgage refinance portion of the U.S. mortgage market, can be further impacted by U.S. interest rates and therefore mortgage rates. In the international markets in which we operate, we expect 2022 economic activity, as measured by GDP, to grow but less than the rates of growth experienced in 2021.
Segment and Geographic Information
Segments. The Workforce Solutions segment consists of the Verification Services and Employer Services business lines. Verification Services revenue is transaction-based and is derived primarily from employment and income verification. Employer Services revenue is derived from our provision of certain human resources business process outsourcing services that include both transaction and subscription based product offerings. These services include unemployment claims management, employment-based tax credit services and other complementary employment-based transaction services.
The USIS segment consists of three service lines: Online Information Solutions, Mortgage Solutions, and Financial Marketing Services. Online Information Solutions and Mortgage Solutions revenue is principally transaction-based and is derived from our sales of products such as consumer and commercial credit reporting and scoring, identity management, fraud detection, modeling services and consumer credit monitoring services. USIS also markets certain decisioning software services which facilitate and automate a variety of consumer and commercial credit-oriented decisions. Online Information Solutions also includes our U.S. consumer credit monitoring solutions business. 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, Canada and Latin America. Canada’s services are similar to our USIS offerings. Asia Pacific, Europe and Latin America are made up of varying mixes of service lines that are generally consistent with those in our USIS reportable segment. We also provide information and technology services to support lenders and other creditors in the collections and recovery management process.
Geographic Information. We currently have operations in the following countries: Argentina, Australia, Canada, Chile, Costa Rica, Dominican Republic, 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 have investments in consumer and/or commercial credit information companies through joint ventures in Cambodia, Malaysia, Singapore and Russia and have an investment in a consumer and commercial credit information company in Brazil. We determined as of March 31, 2022 to exit our ownership position in Russia, wrote the value of the investment to zero and expect no future economic benefit from the joint venture's operations going forward. Approximately 78% of our revenue was generated in the U.S. during the three months ended June 30, 2022 and 2021, respectively. Approximately 79% and 78% of our revenue was generated in the U.S. during the six months ended June 30, 2022 and 2021, respectively.
Seasonality. We experience seasonality in certain of our revenue streams. Revenue generated by the online consumer information services component of our USIS operating segment is typically the lowest during the first quarter, when consumer
lending activity is at a seasonal low. Revenue generated from the Employer Services business unit within the Workforce Solutions operating segment is generally higher in the first quarter due primarily to the provision of Form W-2 and 1095-C services that occur in the first quarter each year. Revenue generated from our financial wealth asset products and data management services in our Financial Marketing Services business is generally higher in the fourth quarter each year due to the significant portion of our annual renewals and deliveries which occur then. Mortgage related revenue is generally higher in the second and third quarters of the year due to the increase in consumer home purchasing during the summer in the U.S. Any change in the U.S. mortgage market has a corresponding impact on revenue and operating profit for our business within the Workforce Solutions and USIS operating segments.
Key Performance Indicators. Management focuses on a variety of key indicators to monitor operating and financial performance. These performance indicators include measurements of operating revenue, change in operating revenue, operating income, operating margin, net income, diluted earnings per share, cash provided by operating activities and capital expenditures. The key performance indicators for the three and six months ended June 30, 2022 and 2021 were as follows:
| Key Performance Indicators | ||||||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| (In millions, except per share data) | ||||||||||||||||||||||||||
| Operating revenue | $ | 1,316.7 | $ | 1,234.8 | $ | 2,680.0 | $ | 2,447.8 | ||||||||||||||||||
| Operating revenue change | 7 | % | 26 | % | 9 | % | 26 | % | ||||||||||||||||||
| Operating income | $ | 304.6 | $ | 306.0 | $ | 637.1 | $ | 612.6 | ||||||||||||||||||
| Operating margin | 23.1 | % | 24.8 | % | 23.8 | % | 25.0 | % | ||||||||||||||||||
| Net income attributable to Equifax | $ | 200.6 | $ | 215.1 | $ | 422.4 | $ | 416.7 | ||||||||||||||||||
| Diluted earnings per share | $ | 1.63 | $ | 1.74 | $ | 3.42 | $ | 3.38 | ||||||||||||||||||
| Cash provided by operating activities | $ | 275.3 | $ | 407.7 | $ | 76.8 | $ | 551.1 | ||||||||||||||||||
| Capital expenditures* | $ | (152.5) | $ | (117.4) | $ | 293.3 | $ | (224.9) |
*Amounts include accruals for capital expenditures.
Operational and Financial Highlights
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We did not repurchase any shares from public market transactions in 2022. We repurchased 0.4 million shares of our common stock on the open market for $69.9 million during the first six months of 2021. At June 30, 2022, $520.2 million was available for future purchases of common stock under our share repurchase authorization.
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We paid out $95.7 million or $0.78 per share in dividends to our shareholders during the first six months of 2022.
RESULTS OF OPERATIONS—THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
Consolidated Financial Results
Operating Revenue
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated Operating Revenue | 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||||
| (In millions) | (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Workforce Solutions | $ | 609.2 | $ | 502.0 | $ | 107.2 | 21 | % | $ | 1,258.1 | $ | 989.2 | $ | 268.9 | 27 | % | ||||||||||||||||||||||||||||||||||
| U.S. Information Solutions | 421.4 | 455.7 | (34.3) | (8) | % | 854.4 | 915.1 | (60.7) | (7) | % | ||||||||||||||||||||||||||||||||||||||||
| International | 286.1 | 277.1 | 9.0 | 3 | % | 567.5 | 543.5 | 24.0 | 4 | % | ||||||||||||||||||||||||||||||||||||||||
| Consolidated operating revenue | $ | 1,316.7 | $ | 1,234.8 | $ | 81.9 | 7 | % | $ | 2,680.0 | $ | 2,447.8 | $ | 232.2 | 9 | % |
Revenue increased by $81.9 million, or 7%, and by $232.2 million, or 9%, for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021. Total revenue was negatively impacted by foreign exchange rates, which decreased revenue by $23.0 million, or 2%, and $35.6 million, or 1%, for the second quarter and first six months of 2022, compared to the same periods in 2021.
Revenue in the second quarter and first six months of 2022 increased primarily due to growth in Workforce Solutions and International, partially offset by a decline in the USIS business.
Operating Expenses
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated Operating Expenses | 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||||
| (In millions) | (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated cost of services | $ | 542.1 | $ | 483.0 | $ | 59.1 | 12 | % | $ | 1,095.5 | $ | 966.2 | $ | 129.3 | 13 | % | ||||||||||||||||||||||||||||||||||
| Consolidated selling, general and administrative expenses | 330.2 | 328.4 | 1.8 | 1 | % | 670.5 | 637.3 | 33.2 | 5 | % | ||||||||||||||||||||||||||||||||||||||||
| Consolidated depreciation and amortization expense | 139.8 | 117.4 | 22.4 | 19 | % | 276.9 | 231.7 | 45.2 | 20 | % | ||||||||||||||||||||||||||||||||||||||||
| Consolidated operating expenses | $ | 1,012.1 | $ | 928.8 | $ | 83.3 | 9 | % | $ | 2,042.9 | $ | 1,835.2 | $ | 207.7 | 11 | % |
Cost of services increased $59.1 million and $129.3 million in the second quarter and first six months of 2022, respectively, compared to the same periods in 2021. The increases for both periods were primarily due to higher royalty costs, people costs and production costs, which include third party cloud usage fees. The impact of changes in foreign exchange rates on costs of services led to a decrease of $12.4 million and $19.0 million in the second quarter and first six months of 2022, respectively, compared to the same periods in 2021.
Selling, general and administrative expenses increased $1.8 million and $33.2 million for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021. The increase in the second quarter was due to increases in sales and marketing related costs, offset by a decrease in people costs related to incentive plans. The increase in the first six months of 2022 was driven by an increase in sales and marketing related costs. The impact of changes in foreign currency exchange rates led to a decrease in selling, general and administrative expenses of $6.4 million and $10.0 million for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021.
Depreciation and amortization expense increased $22.4 million and $45.2 million for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021. The increase was due to the higher amortization of purchased intangible assets related to recent acquisitions and increased amortization of capitalized internal-use software and system costs from technology transformation capital spending incurred previously. The impact of changes in foreign currency exchange rates led to a decrease in depreciation and amortization expense of $3.0 million and $4.8 million, for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021.
Operating Income and Operating Margin
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated Operating Income | 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||||
| (In millions) | (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated operating revenue | $ | 1,316.7 | $ | 1,234.8 | $ | 81.9 | 7 | % | $ | 2,680.0 | $ | 2,447.8 | $ | 232.2 | 9 | % | ||||||||||||||||||||||||||||||||||
| Consolidated operating expenses | 1,012.1 | 928.8 | 83.3 | 9 | % | 2,042.9 | 1,835.2 | 207.7 | 11 | % | ||||||||||||||||||||||||||||||||||||||||
| Consolidated operating income | $ | 304.6 | $ | 306.0 | $ | (1.4) | — | % | $ | 637.1 | $ | 612.6 | $ | 24.5 | 4 | % | ||||||||||||||||||||||||||||||||||
| Consolidated operating margin | 23.1 | % | 24.8 | % | (1.7) | pts | 23.8 | % | 25.0 | % | (1.2) | pts |
Total company operating margin decreased by 1.7 percentage points and 1.2 percentage points in the second quarter and first six months of 2022, respectively, compared to the same periods in 2021. The margin decrease was due to the aforementioned increased operating expense and amortization expense that outpaced revenue growth during the period.
Interest Expense and Other Income, net
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated Interest Expense and Other Income, net | 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||||
| (In millions) | (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated interest expense | $ | (41.6) | $ | (34.9) | $ | (6.7) | 19 | % | $ | (81.4) | $ | (72.1) | $ | (9.3) | 13 | % | ||||||||||||||||||||||||||||||||||
| Consolidated other income, net | 1.8 | 6.0 | (4.2) | nm | 12.9 | 5.1 | 7.8 | nm | ||||||||||||||||||||||||||||||||||||||||||
| Average cost of debt | 2.9 | % | 3.4 | % | 2.9 | % | 3.4 | % | ||||||||||||||||||||||||||||||||||||||||||
| Total consolidated debt, net, at quarter end | $ | 5,685.2 | $ | 3,881.6 | $ | 1,803.6 | 46 | % | $ | 5,685.2 | $ | 3,881.6 | $ | 1,803.6 | 46 | % |
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Interest expense increased by $6.7 million and $9.3 million in the second quarter and first six months of 2022, respectively, compared to the same periods in 2021. The increase for the second quarter and first six months of 2022 was due to higher debt balances in 2022 when compared to the same periods of 2021 due to the purchase of Insights in the fourth quarter of 2021.
Other income, net, decreased by $4.2 million in the second quarter of 2022, as compared to the same period in 2021. Other income, net, increased by $7.8 million in the first six months of 2022, compared to the same period in 2021. The decrease for the second quarter of 2022 was due to the fair value adjustment of our investment in Brazil, offset by gains associated with the sale of two equity investments. The increase for the first six months of 2022 was due to gains associated with the sale of two equity method investments and the fair value adjustment of our investment in Brazil, partially offset by the other-than-temporary impairment recognized in the first quarter of 2022 related to our equity investment in Russia.
Income Taxes
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated Provision for Income Taxes | 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||||
| (In millions) | (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated provision for income taxes | $ | (63.4) | $ | (61.2) | $ | (2.2) | 4 | % | $ | (144.4) | $ | (126.8) | $ | (17.6) | 14 | % | ||||||||||||||||||||||||||||||||||
| Effective income tax rate | 23.9 | % | 22.1 | % | 25.4 | % | 23.2 | % |
Our effective income tax rate was 23.9% for the three months ended June 30, 2022, compared to 22.1% for the three months ended June 30, 2021. Our effective income tax rate was 25.4% for the six months ended June 30, 2022, compared to 23.2% for the six months ended June 30, 2021. Our effective tax rate was higher for the second quarter and first six months of 2022 as compared to 2021 due to a greater foreign income tax rate differential. The increase in the foreign rate differential was primarily driven by the adjustment to fully impair our investment in Russia.
Net Income
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated Net Income | 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||||
| (In millions, except per share amounts) | (In millions, except per share amounts) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated operating income | $ | 304.6 | $ | 306.0 | $ | (1.4) | — | % | $ | 637.1 | $ | 612.6 | $ | 24.5 | 4 | % | ||||||||||||||||||||||||||||||||||
| Consolidated interest expense and other income (expense), net | (39.8) | (28.9) | (10.9) | 38 | % | (68.5) | (67.0) | (1.5) | 2 | % | ||||||||||||||||||||||||||||||||||||||||
| Consolidated provision for income taxes | (63.4) | (61.2) | (2.2) | 4 | % | (144.4) | (126.8) | (17.6) | 14 | % | ||||||||||||||||||||||||||||||||||||||||
| Consolidated net income | 201.4 | 215.9 | (14.5) | (7) | % | 424.2 | 418.8 | 5.4 | 1 | % | ||||||||||||||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interests | (0.8) | (0.8) | — | — | % | (1.8) | (2.1) | 0.3 | 16 | % | ||||||||||||||||||||||||||||||||||||||||
| Net income attributable to Equifax | $ | 200.6 | $ | 215.1 | $ | (14.5) | (7) | % | $ | 422.4 | $ | 416.7 | $ | 5.7 | 1 | % | ||||||||||||||||||||||||||||||||||
| Diluted earnings per common share: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to Equifax | $ | 1.63 | $ | 1.74 | $ | (0.11) | (6) | % | $ | 3.42 | $ | 3.38 | $ | 0.04 | 1 | % | ||||||||||||||||||||||||||||||||||
| Weighted-average shares used in computing diluted earnings per share | 123.3 | 123.5 | 123.4 | 123.4 |
Consolidated net income decreased by $14.5 million and increased by $5.4 million for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021. The decrease for the second quarter of 2022 is due to increased interest, other and income tax expenses in 2022 as operating income levels remained similar across both periods. The increase for the first six months of 2022 is due to increased operating income resulting from increased revenue, partially offset by higher tax expense for the first six months of 2022.
Segment Financial Results
Workforce Solutions
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| Workforce Solutions | 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||||
| (In millions) | (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Operating revenue: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Verification Services | $ | 504.5 | $ | 394.5 | $ | 110.0 | 28 | % | $ | 1,017.8 | $ | 779.6 | $ | 238.2 | 31 | % | ||||||||||||||||||||||||||||||||||
| Employer Services | 104.7 | 107.5 | (2.8) | (3) | % | 240.3 | 209.6 | 30.7 | 15 | % | ||||||||||||||||||||||||||||||||||||||||
| Total operating revenue | $ | 609.2 | $ | 502.0 | $ | 107.2 | 21 | % | $ | 1,258.1 | $ | 989.2 | $ | 268.9 | 27 | % | ||||||||||||||||||||||||||||||||||
| % of consolidated revenue | 46 | % | 41 | % | 47 | % | 40 | % | ||||||||||||||||||||||||||||||||||||||||||
| Total operating income | $ | 281.2 | $ | 265.8 | $ | 15.4 | 6 | % | $ | 589.7 | $ | 531.5 | $ | 58.2 | 11 | % | ||||||||||||||||||||||||||||||||||
| Operating margin | 46.2 | % | 53.0 | % | (6.8) | pts | 46.9 | % | 53.7 | % | (6.8) | pts |
Workforce Solutions revenue increased by 21% and 27% in the second quarter and first six months of 2022, respectively, compared to the same periods in 2021. The increases for both periods were due to strong growth in Verification Services driven by growth in non-mortgage verticals and acquisition revenue in both Verification and Employer Services.
Verification Services
Revenue increased by 28% and 31% for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021. The increase in revenue for both periods was due to strong growth in talent solutions, government, other non-mortgage verticals, and acquisition revenue principally from Insights, offset by a decline in the mortgage vertical due to significantly slower U.S. mortgage origination activity in 2022 due to higher interest rates. Verification Services benefited across all verticals from the continued growth of employment and income records in The Work Number database.
Employer Services
Revenue decreased by 3% and increased by 15% in the second quarter and first six months of 2022, respectively, compared to the same periods in 2021. The decrease for the second quarter of 2022 is due to a decrease in unemployment claims management revenue as the number of claims has returned to pre-COVID-19 levels in 2022 after having been significantly higher in 2021 due to the economic impact of COVID-19 on the U.S. economy. The increase for the first six months of 2022 was due to acquisition revenue and growth in employee services, partially offset by a decrease in unemployment claims revenue.
Workforce Solutions Operating Margin
Operating margin decreased to 46.2% for the second quarter of 2022 from 53.0% for the second quarter of 2021, and to 46.9% for the first six months of 2022 from 53.7% for the first six months of 2021. The decreased margin for both periods is due to increased purchased intangible asset amortization costs, royalty costs, people costs and production costs which all grew faster than the increase in revenue.
USIS
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Information Solutions | 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||||
| (In millions) | (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Operating revenue: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Online Information Solutions | $ | 329.2 | $ | 347.8 | $ | (18.6) | (5) | % | $ | 673.0 | $ | 699.9 | $ | (26.9) | (4) | % | ||||||||||||||||||||||||||||||||||
| Mortgage Solutions | 36.8 | 49.3 | (12.5) | (25) | % | 80.3 | 103.4 | (23.1) | (22) | % | ||||||||||||||||||||||||||||||||||||||||
| Financial Marketing Services | 55.4 | 58.6 | (3.2) | (5) | % | 101.1 | 111.8 | (10.7) | (10) | % | ||||||||||||||||||||||||||||||||||||||||
| Total operating revenue | $ | 421.4 | $ | 455.7 | $ | (34.3) | (8) | % | $ | 854.4 | $ | 915.1 | $ | (60.7) | (7) | % | ||||||||||||||||||||||||||||||||||
| % of consolidated revenue | 32 | % | 37 | % | 32 | % | 37 | % | ||||||||||||||||||||||||||||||||||||||||||
| Total operating income | $ | 112.0 | $ | 136.7 | $ | (24.7) | (18) | % | $ | 233.5 | $ | 291.6 | $ | (58.1) | (20) | % | ||||||||||||||||||||||||||||||||||
| Operating margin | 26.6 | % | 30.0 | % | (3.4) | pts | 27.3 | % | 31.9 | % | (4.6) | pts |
USIS revenue decreased by 8% and 7% for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021. The decreases in both periods were due to the negative impact of declining mortgage inquiry volumes on both online services and mortgage solutions, partially offset by acquisition-related revenue and growth in non-mortgage online services. The decline in mortgage related online revenue and mortgage solutions revenue is due to declining mortgage inquiry volumes caused by higher interest rates during both periods of 2022 compared to the overall strength of the U.S. mortgage market in the prior year.
Online Information Solutions
Revenue decreased by 5% and 4% for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021. The decreases for both periods were due to declining mortgage origination volumes compared to the prior year, partially offset by revenue from acquisitions and continued growth of non-mortgage online services.
Mortgage Solutions
Revenue decreased by 25% and 22% in the second quarter and first six months of 2022, respectively, compared to the same periods in 2021. Total mortgage market credit inquiries reported by USIS declined by 33% and 29% in the second quarter and first six months of 2022, respectively, as compared to the prior year.
Financial Marketing Services
Revenue decreased by 5% and 10% for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021. The decreases for the second quarter and first six months of 2022 were driven by lower fraud, risk management and other data services revenue, partially offset by growth in marketing and wealth data sales.
USIS Operating Margin
USIS operating margin decreased to 26.6% for the second quarter of 2022 from 30.0% for the second quarter of 2021 and to 27.3% for the first six months of 2022 from 31.9% for the first six months of 2021. The margin decrease for both periods is due to the decrease in revenue and increase in depreciation expense related to increased capitalized software development spending and cloud production costs, partially offset by a decrease in royalty costs driven by the overall mortgage market decline.
International
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| International | 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||||
| (In millions) | (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Operating revenue: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Asia Pacific | $ | 90.1 | $ | 91.6 | $ | (1.5) | (2) | % | $ | 176.6 | $ | 178.6 | $ | (2.0) | (1) | % | ||||||||||||||||||||||||||||||||||
| Europe | 79.8 | 76.7 | 3.1 | 4 | % | 165.6 | 153.7 | 11.9 | 8 | % | ||||||||||||||||||||||||||||||||||||||||
| Canada | 64.0 | 64.7 | (0.7) | (1) | % | 125.7 | 125.4 | 0.3 | — | % | ||||||||||||||||||||||||||||||||||||||||
| Latin America | 52.2 | 44.1 | 8.1 | 18 | % | 99.6 | 85.8 | 13.8 | 16 | % | ||||||||||||||||||||||||||||||||||||||||
| Total operating revenue | $ | 286.1 | $ | 277.1 | $ | 9.0 | 3 | % | $ | 567.5 | $ | 543.5 | $ | 24.0 | 4 | % | ||||||||||||||||||||||||||||||||||
| % of consolidated revenue | 22 | % | 22 | % | 21 | % | 23 | % | ||||||||||||||||||||||||||||||||||||||||||
| Total operating income | $ | 32.4 | $ | 33.4 | $ | (1.0) | (3) | % | $ | 69.4 | $ | 63.2 | $ | 6.2 | 10 | % | ||||||||||||||||||||||||||||||||||
| Operating margin | 11.3 | % | 12.1 | % | (0.8) | pts | 12.2 | % | 11.6 | % | 0.6 | pts |
International revenue increased by 3% and 4% in the second quarter and the first six months of 2022, respectively, compared to the same periods in 2021. On a local currency basis, revenue increased by 11% in the second quarter and first six months of 2022, respectively, driven by growth in all geographies. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $23.0 million, or 8%, for the second quarter of 2022, and by $35.6 million, or 7%, for the first six months of 2022.
Asia Pacific
On a local currency basis, revenue increased by 6% for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021. The increases in both periods were driven by our commercial, consumer, identity and fraud, and background check verifications businesses in Australia, in addition to growth in India due to higher consumer volumes. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $7.2 million, or 8%, and $12.7 million, or 7%, for the second quarter and first six months of 2022, respectively. Reported revenue decreased by 2% and 1% for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021.
Europe
On a local currency basis, revenue increased by 16% for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021. The increases in both periods were driven by growth in the debt services business with higher volumes in the public sector, partially offset by a decline in the consumer direct business. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $9.2 million, or 12%, and $12.4 million, or 8%, for the second quarter and first six months of 2022, respectively. Reported revenue increased by 4% and 8% for the second quarter and first six months of 2022, compared to the same periods in 2021.
Canada
On a local currency basis, revenue increased by 2% for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021. The increases in both periods were driven by higher batch credit volumes, partially offset by declines in consumer services, mortgage related products, and online businesses due to interest rate increases. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $2.0 million, or 3%, and $2.1 million or 2%, for the second quarter and first six months of 2022, respectively. Reported revenue decreased by 1% and remained flat for the second quarter and first six months of 2022, compared to the same periods in 2021.
Latin America
On a local currency basis, revenue increased by 28% and 26% for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021. The increases in both periods reflect local currency growth across most countries driven by price increases mainly in Argentina and Chile, as well as growth due to acquisition revenue. Local currency fluctuations against the U.S. dollar negatively impacted revenue by $4.5 million, or 10%, and $8.4 million, or 10%, for the second quarter and first six months of 2022, respectively, primarily within Argentina and Chile. Reported revenue increased by 18% and 16% for the second quarter and first six months of 2022, compared to the same periods in 2021.
International Operating Margin
Operating margin decreased to 11.3% for the second quarter of 2022 from 12.1% for the second quarter of 2021 and increased to 12.2% for the first six months of 2022 from 11.6% for the first six months of 2021. The decreased margin for the second quarter of 2022 is due to higher cloud production costs and depreciation expense related to technology transformation project spending, partially offset by higher revenue. The increased margin for the first six months of 2022 is due to higher revenue and lower purchased intangible asset amortization costs in Australia, partially offset by higher cloud production costs and depreciation expense related to technology transformation project spending.
General Corporate Expense
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| General Corporate Expense | 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||||
| (In millions) | (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||||
| General corporate expense | $ | 121.0 | $ | 129.9 | $ | (8.9) | (7) | % | $ | 255.5 | $ | 273.7 | $ | (18.2) | (7) | % |
Our general corporate expenses are unallocated costs that are incurred at the corporate level and include those expenses impacted by corporate direction, including shared services, technology, security, data and analytics, administrative, legal, restructuring, and the portion of management incentive compensation determined by total company-wide performance.
General corporate expense decreased by $8.9 million and $18.2 million for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021. The decrease was due to reduced people costs, primarily incentive plans.
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 completing strategic acquisitions.
Funds generated by operating activities, our Revolver and related CP program, more fully described below, are our most significant sources of liquidity. At June 30, 2022, we had $223.6 million in cash balances, as well as $788.6 million available to borrow under our Revolver.
Sources and Uses of Cash
We believe that our existing cash balance, liquidity available from our CP and Revolver, cash generated from ongoing operations and continued access to public or private debt markets will be sufficient to satisfy cash requirements over the next 12 months and beyond. While there was no significant change in our cash requirements as of June 30, 2022 compared to December 31, 2021, we have utilized existing CP capacity, together with cash from operating activities, to meet our current obligations. This includes the $345.0 million consumer class action settlement payment that was made in January 2022 related to the U.S. Consumer MDL Litigation settlement that became effective on January 11, 2022. In addition, we plan to pay off the $500.0 million Senior Notes due December 2022 with a combination of operating cash flow, available capacity under our Revolver and related CP program, or borrowings in the public or private debt markets.
Fund Transfer Limitations. The ability of certain of our subsidiaries and associated companies to transfer funds to the U.S. may be limited, in some cases, by certain restrictions imposed by foreign governments. These restrictions do not, individually or in the aggregate, materially limit our ability to service our indebtedness, meet our current obligations or pay dividends. As of June 30, 2022, we held $194.4 million of cash in our foreign subsidiaries.
Information about our cash flows, by category, is presented in the Consolidated Statements of Cash Flows. The following table summarizes our cash flows for the six months ended June 30, 2022 and 2021:
| Six Months Ended June 30, | Change | |||||||||||||||||||
| Net cash provided by (used in): | 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||||
| (In millions) | ||||||||||||||||||||
| Operating activities | $ | 76.8 | $ | 551.1 | $ | (474.3) | ||||||||||||||
| Investing activities | $ | (328.7) | $ | (1,095.6) | $ | 766.9 | ||||||||||||||
| Financing activities | $ | 265.0 | $ | (680.3) | $ | 945.3 |
Operating Activities
Cash provided by operating activities in the six months ended June 30, 2022 decreased by $474.3 million compared to the prior year period due to the $345.0 million consumer class action settlement payment that was made in January 2022 related to the U.S. Consumer MDL Litigation settlement that became effective on January 11, 2022 and an increase in working capital during the year.
Investing Activities
Capital Expenditures
| Six Months Ended June 30, | Change | |||||||||||||||||||
| Net cash used in: | 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||||
| (In millions) | ||||||||||||||||||||
| Capital expenditures* | $ | (315.4) | $ | (235.5) | $ | (79.9) |
*Amounts above are total cash outflows for capital expenditures.
Our capital expenditures are used for developing, enhancing and deploying new and existing software in support of our expanding product set, replacing or adding equipment, updating systems for regulatory compliance, the licensing of certain software applications, investing in system reliability, security and disaster recovery enhancements, and updating or expanding our office facilities.
Capital expenditures paid in the first six months of 2022 increased by $79.9 million from the same period in 2021. We are continuing to invest in enhanced technology systems and infrastructure as part of our technology transformation.
Acquisitions, Divestitures and Investments
| Six Months Ended June 30, | Change | |||||||||||||||||||
| Net cash used in: | 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||||
| (In millions) | ||||||||||||||||||||
| Acquisitions, net of cash acquired | $ | (111.4) | $ | (861.6) | $ | 750.2 | ||||||||||||||
| Cash received from divestiture | $ | 98.1 | $ | 1.5 | $ | 96.6 | ||||||||||||||
During the first six months of 2022, we acquired Efficient Hire within our Workforce Solutions segment and Data Crédito within our International segment. During the first six months of 2022, we reported $98.1 million of cash inflows from investing activities associated with cash received from the sale of two investments and the pending sale of another investment. During the first six months of 2021, we acquired Kount within our USIS segment, HIREtech and i2Verify within our Workforce Solutions segment and a small tuck-in acquisition within our International segment. In addition, in 2021, we sold a small business within our International segment.
Financing Activities
Borrowings and Credit Facility Availability
| Six Months Ended June 30, | Change | |||||||||||||||||||
| Net cash provided by (used in): | 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||||
| (In millions) | ||||||||||||||||||||
| Net short-term borrowings | $ | 386.7 | $ | (0.6) | $ | 387.3 | ||||||||||||||
| Payments on long-term debt | $ | — | $ | (500.1) | $ | 500.1 | ||||||||||||||
Credit Facilities Availability
In August 2021, we refinanced our existing unsecured revolving credit facility of $1.1 billion set to expire in September 2023, and entered into a new $1.5 billion five-year unsecured Revolver and a new $700.0 million delayed draw Term Loan, collectively known as the “Senior Credit Facilities,” both which mature in August 2026. Borrowings under the Senior Credit Facilities may be used for working capital, for capital expenditures, to refinance existing debt, to finance acquisitions and for other general corporate purposes. The Revolver includes an option to request a maximum of three one-year extensions of the maturity date, any time after the first anniversary of the closing date of the Revolver. 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 Revolver.
In the third quarter of 2021, we increased the size of our CP program from $1.1 billion to $1.5 billion, consistent with the increase in our Revolver. Our $1.5 billion CP program has been established to allow for borrowing through the private placement of CP with maturities ranging from overnight to 397 days. We may use the proceeds of CP for general corporate purposes. The CP program is supported by our Revolver and the total amount of CP which may be issued is reduced by the amount of any outstanding borrowings under our Revolver.
As of June 30, 2022, there were $0.4 million of letters of credit outstanding, no outstanding borrowings under the Revolver, $700.0 million outstanding under the Term Loan and $711.0 million of outstanding CP notes. Availability under the Revolver was $788.6 million at June 30, 2022.
At June 30, 2022, 75% of our debt was fixed-rate debt and 25% was effectively variable debt. Our variable-rate debt consists of our outstanding term loan and CP. The interest rates reset periodically, depending on the terms of the respective financing agreements. At June 30, 2022, the interest rate on our variable-rate debt ranged from 1.25% to 2.94%.
Borrowing and Repayment Activity
We primarily borrow under our CP program and Revolver as needed and as availability allows. Net short-term borrowings primarily represent net borrowings or repayments of outstanding amounts under our CP program. There were no borrowings or payments on long-term debt for the first six months of 2022 or 2021.
Debt Covenants. A downgrade in our credit ratings would increase the cost of borrowings under our CP program, Revolver and Term Loan, and could limit or, in the case of a significant downgrade, preclude our ability to issue CP. Our outstanding indentures and comparable instruments also contain customary covenants including, for example, limits on mortgages, liens, sale/leaseback transactions, mergers and sales of assets.
In August 2021, we entered into our new Senior Credit Facilities as noted above in anticipation of the Appriss Insights acquisition, which provides additional financial flexibility. The Senior Credit Facilities include a maximum leverage ratio, defined as consolidated funded debt divided by consolidated EBITDA for the preceding four quarters, of (i) 3.75 to 1.0 initially, (ii) 4.25 to 1.0 for the first fiscal quarter ending after the consummation of the Company’s acquisition of Appriss Insights on October 1, 2021, until the fourth fiscal quarter ending September 30, 2022, (iii) 4.0 to 1.0 for the fifth fiscal quarter ending December 31, 2022 until the sixth fiscal quarter ending March 31, 2023 and (iv) 3.75 to 1.0 for the seventh fiscal quarter ending June 30, 2023 and through the remaining term of the Revolver. We may also elect to increase the maximum leverage ratio by 0.5 to 1.0 (subject to a maximum leverage ratio of 4.75 to 1.0) in connection with certain material acquisitions if we satisfy certain requirements. The Senior Credit Facilities also permit cash in excess of $175 million to be netted against debt in the calculation of the leverage ratio, subject to certain restrictions.
As of June 30, 2022, we were in compliance with all of our debt covenants.
We do not have any credit rating triggers that would accelerate the maturity of a material amount of the outstanding debt; however, our 3.3% senior notes due 2022, 3.95% senior notes due 2023, 2.6% senior notes due 2024, 2.6% senior notes due 2025, 3.25% senior notes due 2026, 3.1% senior notes due 2030, 2.35% senior notes due 2031 and 7.0% senior notes due 2037 (collectively, the “Senior Notes”) contain change in control provisions. If the Company experiences a change of control or publicly announces the Company’s intention to effect a change of control and the rating on the Senior Notes is lowered by Standard & Poor’s (“S&P”) and Moody’s Investors Service (“Moody’s”) below an investment grade rating within 60 days of such change of control or notice thereof, then the Company will be required to offer to repurchase the Senior Notes at a price equal to 101% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest. As of June 30, 2022, our S&P credit rating was BBB with a stable outlook and our Moody’s credit rating was Baa2 with a stable outlook. These ratings are subject to change as events and circumstances change.
For additional information about our debt, including the terms of our financing arrangements, basis for variable interest rates and debt covenants, see Note 5 of the Notes to Consolidated Financial Statements in our 2021 Form 10-K.
Equity Transactions
| Six Months Ended June 30, | Change | |||||||||||||||||||
| Net cash provided by (used in): | 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||||
| (In millions) | ||||||||||||||||||||
| Treasury stock repurchases | $ | — | $ | (69.9) | $ | 69.9 | ||||||||||||||
| Dividends paid to Equifax shareholders | $ | (95.7) | $ | (95.0) | $ | (0.7) | ||||||||||||||
| Dividends paid to noncontrolling interests | $ | (2.4) | $ | (5.8) | $ | 3.4 | ||||||||||||||
| Proceeds from exercise of stock options and employee stock purchase plan | $ | 8.7 | $ | 25.1 | $ | (16.4) | ||||||||||||||
| Payment of taxes related to settlement of equity awards | $ | (32.3) | $ | (30.4) | $ | (1.9) | ||||||||||||||
| Purchase of noncontrolling interests | $ | — | $ | (3.6) | $ | 3.6 |
Sources and uses of cash related to equity during the six months ended June 30, 2022 and 2021 were as follows:
- During the first six months of 2022, we did not repurchase any shares of our common stock on the open market. During the first six months of 2021, we repurchased $0.4 million shares of our common stock for $69.9 million.
- We maintained our quarterly dividend of $0.39 per share in the second quarter of 2022. We paid cash dividends to Equifax shareholders of $95.7 million and $95.0 million, or $0.78 per share, during the six months ended June 30, 2022 and 2021, respectively.
- We received cash of $8.7 million and $25.1 million during the first six months of 2022 and 2021, respectively, from the exercise of stock options and the employee stock purchase plan.
At June 30, 2022, the Company had $520.2 million remaining for stock repurchases under the existing authorization from the board of directors.
Contractual Obligations, Commercial Commitments and Other Contingencies
Our contractual obligations and commercial commitments have not changed materially from those reported in our 2021 Form 10-K. For additional information about certain obligations and contingencies, see Note 6 of the Notes to Consolidated Financial Statements in this Form 10-Q.
Off-Balance Sheet Arrangements
There have been no material changes with respect to our off-balance sheet arrangements from those presented in our 2021 Form 10-K.
Benefit Plans
At December 31, 2021, our U.S. Retirement Income Plan met or exceeded ERISA’s minimum funding requirements. In the future, we expect to make minimum funding contributions as required and may make discretionary contributions, depending on certain circumstances, including market conditions and our liquidity needs. We believe additional funding contributions, if any, would not prevent us from continuing to meet our liquidity needs, which are primarily funded from cash flows generated by operating activities, available cash and cash equivalents, our CP program and our Revolver.
For our non-U.S., tax-qualified retirement plans, we fund an amount sufficient to meet minimum funding requirements but no more than allowed as a tax deduction pursuant to applicable tax regulations. For our non-qualified supplementary retirement plans, we fund the benefits as they are paid to retired participants, but accrue the associated expense and liabilities in accordance with U.S. GAAP.
For additional information about our benefit plans, see Note 9 of the Notes to Consolidated Financial Statements in our 2021 Form 10-K.
Foreign Currency
Argentina experienced multiple periods of increasing inflation rates, devaluation of the peso, and increasing borrowing rates. As such, Argentina was deemed a highly inflationary economy by accounting policymakers. Beginning in the third quarter of 2018, we have accounted for Argentina as a highly inflationary economy which resulted in the recognition of a $0.1 million foreign currency gain and a $0.1 million foreign currency loss that was recorded in other income, net in our Consolidated Statements of Income during the three months and six months ended June 30, 2022 and June 30, 2021, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
For information about new accounting pronouncements and the potential impact on our Consolidated Financial Statements, see Note 1 of the Notes to Consolidated Financial Statements in this Form 10-Q and Note 1 of the Notes to Consolidated Financial Statements in our 2021 Form 10-K.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company’s Consolidated Financial Statements are prepared in conformity with U.S. GAAP. This requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in our Consolidated Financial Statements and the Notes to Consolidated Financial Statements. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates and assumptions about the effects of matters that are inherently uncertain. The “Application of Critical Accounting Policies and Estimates” section in the MD&A, and Note 1 of the Notes to Consolidated Financial Statements, in our 2021 Form 10-K describe the significant accounting estimates and policies used in the preparation of our Consolidated Financial Statements. Although we believe that our estimates, assumptions and judgments are reasonable, they are based upon information available at the time. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.
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