Equifax 2010 Annual Report Download - page 32

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 methodol-
ogy 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 each
reporting unit was generally 3% to 5% based on management’s
assessment of the minimum expected terminal growth rate of each
reporting unit, as well as broader economic considerations such as
Gross Domestic Product, or GDP, inflation and the maturity of the
markets we serve.
As a result of the economic downturn experienced in 2008 and 2009,
and the resultant decline in revenue experienced in certain of our
business units, in completing our 2010 impairment testing at
September 30, 2010, we projected only modest revenue growth in
2011 for our reporting units based on planned business initiatives and
prevailing trends exhibited by these units. The anticipated revenue
growth is partially offset by assumed increases in expenses for a
majority of our reporting units which reflect the additional level of
investment needed in order to achieve the planned revenue growth.
Our 2010 long-term forecast anticipated slow but steady recovery of
the global economy in 2011 which combined with our own strategic
initiatives is expected to result in moderate revenue and cash flow
growth. We also plan on continuing to take cost containment actions
to help maintain operating margins for our reporting units.
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 of each reporting unit. We believe this
approach yields a discount rate that is consistent with an implied rate
of return that an independent investor or market participant would
require for an investment in a company having similar risks and busi-
ness 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 2010 annual goodwill impairment evalua-
tion, the discount rates used to develop the estimated fair value of
the reporting units ranged from 10% to 16%. Because of assigned
market premiums, discount rates are lowest for reporting units,
whose cash flows are expected to be less volatile due to such factors
as the maturity of the market they serve, their position in that market
or other macroeconomic factors. Where there is the greatest volatility
of cash flows due to the degree of maturity or predictability of a busi-
ness, competition, or participation in less stable geographic markets,
such as our Latin America reporting unit, the discount rate selected is
in the higher portion of the range as there is more inherent risk in the
expected cash flows of that reporting unit.
Estimated Fair Value and Sensitivities
The estimated fair value of the reporting units whose fair value was
calculated for purposes of the 2010 impairment testing 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 all reporting units exceeded the carrying value of these
units as of September 30, 2010. 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 cumula-
tive cash flow projections of a reporting unit could cause the fair value
of certain reporting units to be below their 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. The excess
of fair value over carrying value for the Company’s reporting units that
were valued as of September 30, 2010, ranged from approximately
15% to 76%.
The Work Number revenues have been strong historically, having
grown at a double digit compound annual growth rate since our
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
EQUIFAX 2010 ANNUAL REPORT
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