TransUnion — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. TransUnion provides data, analytics, credit and identity solutions to businesses and consumers through U.S. Information Services (USIS), International and Consumer Interactive. Unless noted, amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $563.1m | $474.8m | $1,100.5m | $929.7m |
| Operating income | $134.4m | $115.5m | $259.6m | $216.6m |
| Net income attributable to TransUnion | $55.0m | $64.9m | $128.1m | $127.3m |
| Diluted EPS | $0.29 | $0.34 | $0.67 | $0.67 |
| Adjusted EBITDA | $220.6m | $186.1m | $423.3m | $357.7m |
- Revenue grew 18.6% in Q2 and 18.4% for the first half. Management attributed growth to organic expansion, new products and acquisitions; acquisitions contributed 5.5% of Q2 and 4.4% of first-half revenue growth. Currency had negligible Q2 impact and added 0.4% to first-half growth.
- Q2 operating margin was 23.9%, versus 24.3% a year earlier; first-half margin was 23.6%, versus 23.3%. USIS margin declined to 26.7% from 28.1% in Q2, while International improved to 14.9% from 14.4%; Consumer Interactive was 46.3%, compared with 47.2%.
- Q2 operating income rose 16.3%, but net income attributable to TransUnion fell 15.2%. Higher acquisition and financing-related charges contributed to the earnings decline. Adjusted EBITDA increased 18.5% in Q2; it is a non-GAAP measure and includes adjustments detailed in the filing.
- For the six months, cash from continuing operating activities was $230.5m, up from $172.2m; capital expenditures were $70.4m, versus $58.0m. Q2 operating cash flow was $129.5m, versus $106.9m.
- At June 30, cash was $192.3m; total debt was $4,210.5m, including $139.2m current debt and $4,071.3m long-term debt. The revolving facility had $75.0m outstanding and $225.0m available. The company reported compliance with debt covenants.
Material changes and significant items
- TransUnion acquired U.K.-based Callcredit on June 19 for $1,408.2m cash, funded primarily with new borrowing. Its preliminary purchase-price allocation included $829.4m goodwill and $554.6m identifiable intangibles; the allocation remained subject to valuation. Certain noncore Callcredit businesses were classified as discontinued operations and were expected to be sold within a year.
- Other Q2 acquisitions included iovation and Healthcare Payment Specialists; their results were not material to the quarter. The company also increased its noncontrolling investment in SavvyMoney.
- Debt increased substantially to finance acquisitions. Q2 other expense was $39.7m, compared with $4.2m in Q2 2017; it included $25.4m acquisition fees, $12.2m loan fees and a $3.0m currency remeasurement loss. Interest expense increased to $25.9m from $22.6m. Management said interest expense would be higher going forward because of acquisition-related debt.
- Six-month investing cash outflow was $1,881.7m, primarily reflecting acquisitions; financing inflow was $1,731.9m, principally from additional borrowings. Cash increased by $76.5m over the first half.
- Foreign currency translation reduced Q2 comprehensive income by $80.2m, net of tax, and contributed to a $77.1m total other comprehensive loss.
Outlook, risks and contingencies
- No numerical revenue, earnings or cash-flow guidance is provided in the filing. Management described U.S. lending conditions, labor-market trends, consumer confidence, marketing demand and consumer credit/identity-protection demand as supportive; it cited ongoing headwinds in Africa and rising interest rates affecting mortgage refinancing.
- Management said cash on hand, operating cash generation and available credit were expected to meet planned operating needs, capital expenditures, debt service and acquisitions for the foreseeable future. Actual results remain subject to forward-looking risks.
- Key disclosed risks include economic and credit-market changes; customer retention; data security, access and service continuity; regulation and litigation; acquisition integration and realization of synergies; foreign exchange; and the ability to service debt, meet covenants and maintain liquidity. Debt is largely variable-rate; the weighted-average rate on variable-rate debt was 4.02% at June 30, up from 3.47% at year-end 2017. Interest-rate caps covered a $1,467.7m notional amount through June 2020.
- The Miller and Larson matters were subject to a proposed settlement involving corrective disclosures and three years of single-bureau credit monitoring; the court granted preliminary approval in July 2018, with final approval scheduled for November 28, 2018. The filing cautions that litigation and regulatory outcomes may exceed recorded reserves.
- The company adopted ASC 606 in 2018 using the modified retrospective method; management reported no material impact. The filing notes that the Callcredit acquisition pro forma disclosures were not yet complete and were expected in the next quarter.
Important facts for investors to verify
- How Callcredit and the other acquisitions perform, integrate, and contribute to organic growth and margins; also monitor final purchase-price allocations and planned disposals of noncore Callcredit operations.
- Debt, interest costs, variable-rate exposure, covenant headroom and liquidity following the acquisition financing; the filing does not state the company’s actual leverage ratio.
- Whether revenue growth and cash generation persist as acquisition-related costs, capital spending and interest expense rise.
- Developments in the Miller and Larson settlement and other legal, regulatory and tax matters, including unresolved Tax Cuts and Jobs Act estimates.