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Equifax wipes away breach charges to claim an earnings beat

Former Equifax CEO Richard Smith, right, and Interim CEO Paulino Barros testify Wednesday on Capitol Hill.

Equifax Inc. estimates that it has already lost nearly $90 million from the massive data breach that it announced two months ago, but is giving investors and analysts the ability to ignore it.

In its first quarterly earnings report since revealing that data on more than 145 million Americans was put in jeopardy when intruders managed to infiltrate the data-warehousing company’s network, Equifax EFX, +1.63% admitted that profit declined 28% from a year ago. However, after wiping away the $87.5 million in costs of the data breach for its adjusted earnings metric, Equifax was able to claim a 6% gain in profit and beat average analyst estimates.

Don’t miss: How the biggest companies use made-up earnings numbers

Equifax’s adjusted earnings are nothing new for it or thousands of other companies. MarketWatch has shown repeatedly how companies use adjusted earnings to make their results appear better than they actually are. While the Securities and Exchange Commission has cracked down on how companies use the figures, so far it has had little success in changing the culture of earnings reports.

In third-quarter earnings released Thursday afternoon, Equifax said that it paid $27.3 million in costs from the breach by the end of its quarter on Sept. 30: $17.1 million in “professional fees,” such as legal fees and payments to vendors who were investigating the breach, and $10.2 million in “consumer support,” which would refer to efforts like the dedicated call center Equifax established (which was not particularly helpful immediately after the news broke).

On top of that, Equifax said that it realized $4.7 million in costs for offering its own credit-monitoring and identity theft-protection services for free to consumers in response to the breach, but estimates that there will be much more. While Equifax is not paying another company to provide these services, which consumers can claim though Jan. 31, 2018, it still estimates that the services provided will cost $56 million to $110 million.

Charges equal to the low end of that estimate were accounted for in Equifax’s standard earnings number, which lives up to the U.S.’s Generally Accepted Accounting Principles, or GAAP, resulting in the $87.5 million total. However, the company stripped the charges from a non-GAAP earnings figure that it provided, which allows Equifax to claim that profits are growing even as it takes a hit from the data breach.

The SEC requires that companies list GAAP earnings more prominently, but allows companies to provide non-GAAP figures while promising to keep a close eye on them. Executives typically claim that non-GAAP numbers are a truer picture of their underlying business because they strip out one-time items such as litigation or merger-related charges or the write-down of assets that have lost value.

It is highly unlikely that this will be the last of Equifax’s charges for the breach, however, which the company freely admitted in a filing with the SEC.

“We expect to incur significant legal and other professional services expenses associated with the cybersecurity incident in future periods,” Equifax said in its filing, specifically mentioning increased IT and security spending, as well as higher costs for a variety of services, like insurance. “We will recognize these expenses as services are received.”

In the SEC filing, Equifax noted that it faces more than 240 class-action lawsuits related to the breach, and is cooperating with investigations by all 50 states’ attorneys general and an alphabet soup of governmental agencies (SEC, FINRA, CFPB, FTC and FCA among them). In addition, the company has received subpoenas from the SEC and a U.S. Attorney’s Office in Georgia regarding stock sales by executives after the breach was discovered but before it was disclosed.

To help with the costs of all that, Equifax said in the filing that it has insurance specifically for cybersecurity-related instances, with a $7.5 million deductible. However, it admitted that it doesn’t know how much, or even if, that insurance policy will pay.

“We have not yet concluded that the costs are reimbursable and probable of recovery under our insurance coverage,” the filing stated.

The adjusted-earnings beat may have helped Equifax in late trading Thursday, as the company’s stock dropped more than 3% after earnings were first released, but then recovered to a decline of less than 1% later in the after-hours period. Company executives planned a conference call for Friday morning to discuss the results, when it would not be surprising if they focus more on the adjusted earnings than the profit that has breach costs stripped out. After all, Equifax determines its executives’ bonuses based on non-GAAP financial performance, according to its most recent proxy statement.

Reporter Francine McKenna contributed to this report.


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