Consumers, but Not Executives, May Pay for Equifax Failing By Gretchen Morgenson

Consumers, but Not Executives, May Pay for Equifax Failing By Gretchen Morgenson

September 13, 2017

Presentation Flow

Article Summary

Equifax History

Executive Compensation

Ethical Issues

Agency Theory

Largest Data Breach

Equifax – one of the nation’s top three credit reporting agencies

Impacting millions of consumers

Impacting millions of investors

Impacting the stock value

Equifax Performance Measures

Corporate Adjusted Earnings per share from continuing operations

Not calculated using GAAP)

Excludes Cost:

Cost related to acquisitions

Cost related to Impaired investments

Legal settlements

As per Equifax regulatory filings, this “provides meaningful supplemental information regarding our financial results”

Top Executives

Richard F. Smith John Gamble John J. Kelley, III
Chief Executive & Chairman of the Board Chief Financial Officer Chief Legal Officer
2016 – $15 Million 2016 – $3.1 Million 2016 – $2.8 Million
Distinguished work in meeting management objectives in 2016 “employed advanced analytics and technology to help drive client growth, security, efficiency and profitability” Distinguished work in meeting management objectives in 2016 “to advance and execute global enterprise risk management processes, including directing increased investment in data security” Distinguished work in meeting management objectives in 2016 “to refine and build out the company’s global security organization”

About Equifax

The oldest and largest credit bureau in existence.

Founded in 1898 by two brothers, Cator and Guy Woolford

Cator created a list of names and noted evidence of creditworthiness for his grocery business

He sold that list of names to offset his own business cost

Cator’s success led to establishing Equifax.

The Retail Credit Company

The Retail Credit Company expanded rapidly

Services expanded from grocers to the insurance industry in the early 1900’s

Company has nearly 300 branches in 1960’s

It collected all kinds of consumer data, even rumors about marital lives and childhoods

Scrutinized for selling this data to anyone who would buy it

Even rewarded for negative consumer information

U.S. Congress

US Congress met in 1971

Enacted the Fair Credit Reporting Act

New law was the first to govern the information

Regulated what was allowed to be collected and sold

Equifax was prohibited from misrepresenting itself

Employees were no longer given bonuses on the negative information

Equifax Today

Maintains over 401 million consumer credit records worldwide

Services include direct consumer credit monitoring

Operates in 14 countries

Public company on NYSE

Provides business credit evaluations

Offers a business credit scoring model

Equifax Small Business Enterprise

Equifax reports are commonly used by:

Retailers

Insurance firms

Health care providers

Utilities

Government agencies

Financial institutions

Equifax Today

Executive Compensation

Over the last three years, Equifax has determined top executive’s incentive compensation under the performance measure of corporate adjusted earnings per share.

Corporate adjusted earnings per share is a performance measure that calculates earnings by excluding certain costs, such as related acquisitions, that flow through a company’s profit-and-loss statement.

Acquisition expenses consist of the bulk of the cost that are excluded from its profits, however Equifax also excludes costs of impaired investments and legal settlements

Reconciliations

Reconciliations

Legal Exclusion

Equifax claims that exclusion of legal charges from financial performance “provides meaningful supplemental information regarding our financial results”

Equifax has not announced that it will stop excluding legal settlement costs from executive compensation calculations

Roughly one-fifth of companies in the S&P 500 excluded legal settlements and fees in their non-GAAP earnings measures in 2016

The legal consequences that will come about from the security breach will surely have an impact on the financial standing of Equifax.

Ethical Issues

Excluding costs toward adjusted EPS calculation to attract more investors?

U.S. GAAP numbers for stockholders

U.S. Non-GAAP numbers adjusted for top executives

Did Equifax executives dump stock?

Equifax was lobbying the Fair Credit Reporting Act, a bill to protect credit reporting agencies from class action suits

John Gamble, CFO, sold shares worth $946,374

Joseph Loughran, U.S. Information Solutions President, sold shares worth $584,099

Rodolfo Ploder, Workforce Solutions President, sold shares worth $240,458

Ethical Issues

Where is the SEC in this?

GAAP vs. Non-GAAP measures

Insider Trading

Who will be making payouts for failure of data security?

Executives

Consumers

Agency Theory

Unaligned goals between shareholders and management

Incentive pay measured by corporate adjusted earnings per share (non-GAAP)

Executives bear no consequences regarding litigation costs

Accounting experts suggest exclusion of litigation costs only for noncontrollable events

Continuing Investigation

September 11 – Congress holds hearing

September 15 – Two executives retires

Susan Mauldin, Chief Information Officer

David Webb, Chief Security Officer

September 26 – Richard Smith, CEO, retires

October 3 – Mr. Smith testifies and admits to mistakes before the House Digital Commerce and Consumer Protection subcommittee

The End

References

“Revenue, EPS, & Dividend – Equifax, Inc. (EFX).” NASDAQ.com, www.nasdaq.com/symbol/efx/revenue-eps

“Equifax Releases Second Quarter Results.” Equifax, investor.equifax.com/news-and-events/news/2017/07-26-2017-211830821. https://investor.equifax.com/news-and-events/news/2017/07-26-2017-211830821

Consolidated Financial Statements https://investor.equifax.com/~/media/Files/E/Equifax-IR/reports-and-presentations/financial-information/non-gaap-financial-measures/consolidated-financial-statements/q2-2017_consolidated-financial-statements.pdf

Gurdus, Elizabeth. “Cramer: 3 Equifax Executives Should Be Investigated for Insider Trading.”CNBC, CNBC, 5 Oct. 2017, www.cnbc.com/2017/10/04/cramer-3-equifax-executives-must-be-investigated-for-insider-trading.html

Equifax 2017, https://investor.equifax.com/~/media/Files/E/Equifax-IR/reports-and-presentations/financial-information/non-gaap-financial-measures/non-gaap-measures/q2-2017_non-gaap-measures.pdf

Equifax 2016, https://investor.equifax.com/~/media/Files/E/Equifax-IR/reports-and-presentations/financial-information/non-gaap-financial-measures/non-gaap-measures/q4-2016_non-gaap-measures.PDF

Morgenson, Gretchen. “Consumers, but Not Executives, May Pay for Equifax Failings.” The New York Times, https://www.nytimes.com/2017/09/13/business/equifax-executive-pay.html

Reconciliations of Non-GAAP Financial Measures to the Comparable

GAAP

Financial Measures (Unaudited) (Dollars in millions, except per share

amounts)

Twelve Months Ended

December 31,

(in millions, except per share amounts)20162015$ Change% Change

Net income attributable to Equifax488.80$ 429.10$ 59.70$ 14.4%

Acquisition-related amortization expense of certain acquired intangibles (1)176.50 122.30 54.20 44.0%

Veda acquisition related amounts other than acquisition-related amortization40.20 (0.50) 40.70 nm

Accrual for certain legal claims (3)6.50 7.50 (1.00) nm

Realignment of internal resources and other costs (4)5.70 23.40 (17.70) nm

Tax impact of adjustments (5)(48.70) (31.80) (16.90) nm

Income from the settlement of escrow amounts (6)- (12.30) 12.30 nm

Impairment of BVS investment (7)- 14.80 (14.80) nm

State income tax benefit (8)- (8.60) 8.60 nm

Net income attributable to Equifax, adjusted for items listed above669.00$ 543.90$ 125.10$ 23%

Diluted EPS attributable to Equifax, adjusted for items listed above5.52$ 4.50$ 1.02$

Weighted-average shares used in computing diluted EPS121.1120.9

Reconciliations of Non-GAAP Financial Measures to the Comparable

GAAP

Financial Measures (Unaudited) (Dollars in millions, except per share

amounts)

Three Months Ended

June 30,

(in millions, except per share amounts)20172016$ Change% Change

Net income attributable to Equifax165.40$ 130.90$ 34.50$ 26.0%

Acquisition-related amortization expense of certain acquired intangibles (1)41.80 47.10 (5.30) -11.0%

Veda acquisition related amounts other than acquisition-related amortization- – – -100%

Accrual for certain legal claims (3)- (6.50) (6.50) nm

Income tax effects of stock awards that are recognized upon vesting(4.80) – (4.80) nm

Tax impact of adjustments (5)(7.60) (11.80) 4.20 nm

Income from the settlement of escrow amounts (6)- – – nm

Impairment of BVS investment (7)- – – nm

State income tax benefit (8)- – – nm

Net income attributable to Equifax, adjusted for items listed above194.80$ 172.70$ 22.10$ 13%

Diluted EPS attributable to Equifax, adjusted for items listed above1.60$ 1.43$ 0.17$ 12%

Weighted-average shares used in computing diluted EPS121.9121.1


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