ADP Automatic Data Processing Inc

Equifax Inc. (EFX) posted fourth-quarter 2012 adjusted earnings per share (EPS) of 78 cents, beating the Zacks Consensus Estimate by 3 cents. Results were up 14.0% from the year-ago quarter. Adjusted EPS excludes the impact of CSC Credit Services acquisition fees, the pension settlement, certain income tax items and acquisition-related amortization expense, net of tax.

Revenues

Revenues grew 9.5% year over year to $558.1 million. The revenue figure was at the higher end of the company’s expected growth range and above the Zacks Consensus Estimate of $556.0 million. The upside could be attributed to top-line growth across the board.

Segment wise, total U.S. Consumer Information Solutions (USCIS) revenues were $235.7 million, up 9.0% from the year-ago quarter. Among sub-segments, strong growth was noticed in Mortgage Solutions Services (up 28.0%), followed by Online Consumer Information Solutions (up 8.0%). The company witnessed a deceleration in its Consumer Financial Marketing Services segment (down 1.0%).

International (including Europe, Canada and Latin America) revenues grew 7.0% year over year to $124.7 million, mostly due to 10.0% growth recognized in Canada Consumer segment, 8.0% in Latin America and 4.0% in Europe.

Revenues from the Workforce Solutions segment increased 11.0% year over year to $117.2 million. The upside resulted from a 27.0% year-over-year increase in Verification Services revenues, partially offset by a 6.0% decline in Employer Services revenues.

North American Personal Solutions contributed $52.9 million, reflecting 16.0% year-over-year improvement. North American Commercial Solutions generated $27.6 million, up 4.0% from the year-ago quarter.

Operating Results

Gross margin in the fourth quarter was 61.3%, down 110 basis points from the year-ago quarter. Operating margin was 17.1% as against 24.7% a year ago. The margin performance was better in International and flat in USCIS and North America Commercial Solutions, offset by weak performances of North America Personal Solutions and Workforce Solutions segments.

The company reported higher operating expenses with selling, general and administrative expenditure increasing 36.5% year over year. Depreciation and amortization expenses decreased 1.5% to $40.6 million.

On a GAAP basis, net income from continuing operations was $46.3 million or 38 cents per share versus $72.9 million or 60 cents per share in the comparable quarter last year. Excluding the impact of CSC Credit Services acquisition fees, the pension settlement, certain income tax items and acquisition-related amortization expense, net of tax, adjusted net income was $94.9 million or 78 cents per share, up 14.3% from $83.0 million or 68 cents in the year-ago quarter.

Balance Sheet & Cash Flow

Equifax exited the quarter with $146.8 million in cash and cash equivalents, down from $267.2 million in the previous quarter. Accounts receivables were $317.0 million. Total long-term debt was $1.45 billion, up from $968.3 million in the prior quarter. Cash provided by operating activities was $144.2 million compared with $151.7 million in the prior quarter.

Equifax’ board approved a 22.0% increase in quarterly cash dividend payout rate. The company will now pay dividend per share of 22 cents (previously 18 cents) on Mar 15, 2013 to shareholders of record as of Feb 22.

Guidance

For the first quarter of 2013, Equifax expects revenues to be up 10.0% to 12.0% from the year-ago quarter, based on contributions from domestic and international businesses and ongoing foreign exchange rates. Excluding the impact of acquisition-related amortization expense, Equifax expects adjusted EPS to range between 84 cents and 87 cents, reflecting a year-over-year increase of 20.0%–24.0%. The Zacks Consensus Estimate for the first quarter is 88 cents, which is higher than the company’s guidance.

For fiscal 2013, revenues are expected to grow in the range of 10.0% to 12.0% and adjusted EPS is expected between $3.56 and $3.64. The Zacks Consensus Estimate for fiscal 2013 is $3.61, which is toward the higher end of the company’s guidance.

The company also mentioned that with the acquisition of Computer Sciences Corp.’s (CSC) credit solutions business, it will be able to boost operating leverage as well as profitability.

Our Take

Equifax exited the fourth quarter with flying colors, surpassing the Zacks Consensus Estimate on both the top and bottom lines. We are optimistic about Equifax’ revenue growth prospects but margin deceleration keeps us concerned.

Management’s efforts regarding strategic initiatives for product innovation, broadening data assets through acquisitions and continuous share gains in North America were encouraging.

Given the company’s strong correlation to consumer and financial markets, as well as its U.S. and European exposure, we see a gradual improvement in results. Moreover, improving mortgage environment is a big positive for the stock. But stiff competition from Automatic Data Processing Inc. (ADP) and Moody’s Corp. (MCO) is a concern.

Currently, Equifax has a Zacks Rank #2 (Buy).

 
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