Equifax 2012 Annual Report Download - page 32

30 Equifax 2012 Annual Report
these financial considerations, qualitative factors such as variations in
growth opportunities and overall risk among the benchmark
companies were considered in the ultimate selection of the multiple.
The values separately derived from each of the income and market
approach valuation techniques were used to develop an overall
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 and 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
GDP, inflation and the maturity of the markets we serve.
We projected revenue growth in 2013 for our reporting units in
completing our 2012 impairment testing based on planned business
initiatives and prevailing trends exhibited by these units, such as
demand for employment verification services and government hiring
activity at the U.S. Transportation and Security Administration in
Verification Services and Talent Management Services reporting units
and not based on the assumption of meaningful economic recovery.
Growth in the Talent Management Services reporting unit is also
based on growth in the commercial sector of that business. The
anticipated revenue growth in all of the reporting units, however, 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 2012 long-term
forecast is not dependent upon meaningful recovery of the global
economy in the near term and we continue 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 a market participant would require for an investment in
a company having similar risks and business 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 2012 annual goodwill impairment evaluation, the discount
rates used to develop the estimated fair value of the reporting units
evaluated ranged from 9% to 12%. 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 competition, 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 2012 impairment testing is derived
from the valuation techniques described above, incorporating the
related projections and assumptions. An indication of possible impair-
ment 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, 2012. 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 projected
cumulative cash flow of a reporting unit could cause the fair value of
certain reporting units to be below its 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
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued