TransUnion — Q2 2019 Form 10-Q
Business context and period: TransUnion provides consumer credit data, analytics, identity and decisioning solutions to businesses and consumers. This report covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods unless noted. The company reports U.S. Markets, International and Consumer Interactive segments.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $661.9M | $563.1M | $1,281.2M | $1,100.5M |
| Operating income | $159.7M | $134.4M | $281.8M | $259.6M |
| Net income attributable to TransUnion | $101.5M | $55.0M | $172.4M | $128.1M |
| Diluted EPS attributable to TransUnion | $0.53 | $0.29 | $0.90 | $0.67 |
| Adjusted EBITDA (non-GAAP) | $263.7M | $220.6M | $502.6M | $423.3M |
| Adjusted EBITDA margin (non-GAAP) | 39.7% | 39.2% | 39.1% | 38.5% |
Q2 revenue rose 17.5%; management attributed the increase to organic growth, acquisitions and new products, partly offset by foreign-exchange headwinds. Acquisitions contributed 8.9% to Q2 revenue growth, while currency movements reduced it by 1.2%. Operating expenses increased 17.1%, including higher service costs, SG&A and depreciation and amortization. Q2 operating margin was approximately 24.1%, versus 23.9% a year earlier.
Revenue by segment in Q2 was $405.9M for U.S. Markets (+13.3%), $151.1M for International (+42.1%) and $123.6M for Consumer Interactive (+5.1%). International growth reflected Callcredit, acquired in June 2018, as well as growth in other regions; currency weakness was a partial offset. Consumer Interactive growth was partly offset by lower incremental credit-monitoring revenue following a competitor breach.
Six-month cash from continuing operating activities was $308.3M, up from $230.5M. Capital expenditures were $88.0M versus $70.4M, leaving operating cash flow less capital expenditures of approximately $220.3M. Cash and cash equivalents were $194.7M at June 30, 2019, versus $187.4M at year-end 2018.
Total debt was $3,917.9M, down from $4,048.1M at year-end; the company prepaid $100.0M of Term Loan B-3 debt during Q2. Long-term debt was $3,831.5M. The $300M revolving facility had no borrowings and $299.9M available, net of letters of credit. The company reported compliance with debt covenants. Cash plus available revolver capacity was approximately $494.6M.
Changes, outlook and notable items
- Q2 net income benefited from a $31.2M gain on a cost-method investment, partly offset by $8.6M of investment impairments recorded in the first half. Other income and expense was $26.7M in Q2, compared with a $39.7M expense in Q2 2018. The gain and other nonrecurring items affect comparability.
- Interest expense increased to $45.2M in Q2 from $25.9M, and to $90.2M for the first half from $48.5M, primarily reflecting higher debt following 2018 acquisitions and higher average rates. The company uses interest-rate caps and swaps to hedge some variable-rate exposure.
- Management described U.S. consumer lending conditions as healthy, with improving mortgage-market indicators and strong demand for consumer solutions. It also cited uncertainty around trade policy and global growth, Brexit concerns and weaker currencies, particularly in Latin America and Africa. No numerical full-year revenue or earnings guidance is provided in the supplied filing text.
- On July 12, 2019, after quarter-end, a Hong Kong subsidiary in which TransUnion owns 56.25% was found to have been targeted by fraud involving employee impersonation and fraudulent wire requests. Transfers totaled $17.8M. The company expected a one-time pre-tax charge of up to $17.8M in Q3; investigation was ongoing. It stated there was no evidence of unauthorized access to consumer data and did not expect a broader material business impact.
- The fraud incident revealed a material weakness in controls over safeguarding cash at the Hong Kong subsidiary. Management concluded disclosure controls were not effective at quarter-end and began remediation, including tighter wire approvals, email and online-banking controls, and more centralized cash oversight; remediation was expected during the remainder of 2019.
- Callcredit-related noncore businesses were classified as discontinued operations and had all been disposed of by June 30. Discontinued operations resulted in a $3.0M after-tax loss in Q2 and $4.6M for the first half.
- Adoption of lease accounting guidance in 2019 added right-of-use assets and lease liabilities; this affects balance-sheet comparability with year-end 2018. Operating lease liabilities totaled $82.6M at June 30, excluding finance leases.
Important facts for investors to verify
- How much of reported growth is organic, and how results compare after accounting for Callcredit and other acquisition effects and foreign exchange.
- The recurrence and cash implications of the $31.2M investment gain, other investment impairments, and stock-based compensation tax benefits that lowered the first-half effective tax rate to 18.0%.
- Progress and effectiveness of remediation for the material weakness, and whether the Hong Kong fraud ultimately results in losses beyond the expected charge of up to $17.8M.
- Debt-service capacity and sensitivity to variable interest rates; total debt was about $3.92B and Q2 interest expense rose materially year over year.
- Whether management’s favorable economic commentary persists amid trade, global-growth, Brexit and currency risks; the filing provides no numerical full-year guidance.