Equifax 2009 Annual Report Download - page 33

Growth Assumptions structures. The cost of equity was computed using the Capital
The assumptions for our future cash flows begin with our historical Asset Pricing Model which considers the risk-free interest rate, beta,
operating performance, the details of which are described in our equity risk premium and specific company risk premium related to a
Management’s Discussion & Analysis of operating performance. particular reporting unit. The cost of debt was computed using a
Additionally, we consider the impact that known economic, industry benchmark rate and the Company’s tax rate. For the 2009 annual
and market trends will have on our future forecasts, as well as the goodwill impairment evaluation, the discount rates used to develop
impact that we expect from planned business initiatives including the estimated fair value of the reporting units ranged from 10% to
new product initiatives, client service and retention standards, and 17%. Because of assigned market premiums, discount rates are
cost management programs. At the end of the forecast period, the lowest for reporting units, such as Consumer Information Solutions,
long-term growth rate we used to determine the terminal value of whose cash flows are expected to be less volatile due to the matur-
each reporting unit was generally 3% to 5% based on manage- ity of the market they serve, their position in that market and other
ment’s assessment of the minimum expected terminal growth rate macroeconomic factors. Where there is the greatest volatility of cash
of each reporting unit, as well as broader economic considerations flows due to competition, or participation in less stable geographic
such as Gross Domestic Product, or GDP, inflation and the maturity markets than the United States, such as our Latin America reporting
of the markets we serve. 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.
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 2009 impairment testing at Estimated Fair Value and Sensitivities
September 30, 2009, we projected 2010 revenue and cash flow to The estimated fair value of each reporting unit is derived from the
be lower than 2009 levels for our Direct Marketing Services report- valuation techniques described above, incorporating the related pro-
ing unit, which continues to be impacted by reduced mailing jections and assumptions. An indication of possible impairment
volumes. We anticipate only modest revenue growth in 2010 for our occurs when the estimated fair value of the reporting unit is below
other reporting units based on planned business initiatives and pre- the carrying value of its equity. The estimated fair value for all report-
vailing trends exhibited by these units, such as continued demand ing units exceeded the carrying value of these units as of Septem-
for employment verification services and unemployment claims man- ber 30, 2009. As a result, no goodwill impairment was recorded.
agement in The Work Number and Tax Management Services
reporting units. The anticipated revenue growth, however, is partially The estimated fair value of the reporting unit is highly sensitive to
offset by assumed increases in expenses for a majority of our changes in these projections and assumptions; therefore, in some
reporting units which reflect the additional level of investment instances changes in these assumptions could impact whether the
needed in order to achieve the planned revenue growth. The 2009 fair value of a reporting unit is greater than its carrying value. For
long-term forecast used to conduct the impairment testing was sig- example, an increase in the discount rate and decline in the cumu-
nificantly lower in the aggregate than the long-term forecast that lative cash flow projections of a reporting unit could cause the fair
was developed in 2008. The 2009 long-term forecast does not value of the reporting unit to be below its carrying value. We per-
anticipate meaningful recovery of the global economy until later in form sensitivity analyses around these assumptions in order to
2010. Although we do not expect consolidated revenue or cash assess the reasonableness of the assumptions and the resulting
flow to improve meaningfully until later in 2010, we continue to take estimated fair values. Ultimately, future potential changes in these
cost containment actions to help maintain operating margins for our assumptions may impact the estimated fair value of a reporting unit
reporting units. and cause the fair value of the reporting unit to be below its carry-
ing value. The excess of fair value over carrying value for the Com-
Discount Rate Assumptions pany’s reporting units as of September 30, 2009, ranged from
We utilize a weighted average cost of capital, or WACC, in our approximately 15% to 300%.
impairment analysis that makes assumptions about the capital
structure that we believe a market participant would make and We have experienced declines in fair value excess for the majority of
include a risk premium based on an assessment of risks related to our reporting units since the date of our last impairment analysis
the projected cash flows of each reporting unit. We believe this (December 31, 2008) due to declines in actual and projected finan-
approach yields a discount rate that is consistent with an implied cial performance resulting from significant adverse economic condi-
rate of return that an independent investor or market participant tions. While no impairment was noted in our impairment tests as of
would require for an investment in a company having similar risks September 30, 2009, our reporting units with the smallest fair value
and business characteristics to the reporting unit being assessed. excess may be particularly sensitive to further deterioration in eco-
To calculate the WACC, the cost of equity and cost of debt are nomic conditions and could become impaired in future periods if
multiplied by the assumed capital structure of the reporting unit as anticipated levels of forecasted earnings are not achieved.
compared to industry trends and relevant benchmark company
EQUIFAX 2009 ANNUAL REPORT 31
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