TransUnion — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; comparative periods are the corresponding periods of 2015. Unaudited consolidated financial statements. TransUnion provides credit, risk, information, analytics and consumer identity-protection services through USIS, International and Consumer Interactive.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $437.6 million | $389.1 million | $1,269.0 million | $1,120.7 million |
| Operating income | $95.8 million | $60.3 million | $211.3 million | $148.2 million |
| Operating margin | 21.9% | 15.5% | 16.6% | 13.2% |
| Net income (loss) attributable to TransUnion | $41.2 million | $(4.0) million | $71.0 million | $(13.3) million |
| Diluted EPS | $0.22 | $(0.02) | $0.39 | $(0.08) |
| Adjusted EBITDA | $166.6 million | $140.1 million | $467.5 million | $389.8 million |
| Operating cash flow | $126.6 million | $89.7 million | $276.1 million | $206.2 million |
| Capital expenditures | $30.6 million | $28.0 million | $85.5 million | $96.3 million |
Q3 revenue grew 12.5% and operating income rose 58.9%; nine-month revenue grew 13.2% and operating income rose 42.5%. Growth reflected organic gains across segments and acquisition revenue, partly offset by foreign-exchange headwinds. Acquisitions contributed 2.3% to Q3 and 1.8% to nine-month revenue growth; currency reduced growth by 0.4% and 1.5%, respectively.
- Segment performance: Q3 USIS revenue rose 14.2%, International 19.7% and Consumer Interactive 1.9%. Q3 segment operating margins were 23.4% for USIS, 17.5% for International and 42.1% for Consumer Interactive.
- Cash and investment: Cash was $137.9 million at September 30, 2016, versus $133.2 million at year-end 2015. Nine-month investing cash outflow was $441.8 million, mainly reflecting acquisitions; financing cash inflow was $168.3 million. Operating cash flow less capital expenditures was $190.6 million for the nine months.
- Debt and liquidity: Total debt was $2,387.7 million, including $49.5 million current debt; long-term debt was $2,338.2 million. Cash less total debt implies approximate net debt of $2,249.8 million. The revolving facility had $210.0 million available and no balance drawn. The company reported compliance with debt covenants.
Material changes and unusual items
- Net income turned positive versus the prior-year loss. Lower interest expense and the absence of 2015 debt-refinancing charges materially benefited comparisons: nine-month interest expense declined $51.3 million, while 2015 included $37.6 million of refinancing-related loss/expense in the cash-flow reconciliation.
- In 2016, TransUnion borrowed an additional $150.0 million under Term Loan B and $55.0 million under Term Loan A, primarily in connection with CIFIN. The 2016 investing outflow included $345.5 million for acquisitions and purchases of noncontrolling interests.
- Acquisitions and ownership increases included CIFIN, RTech, Auditz and additional interests in CIBIL, among others. Acquired businesses were described as not material individually to consolidated results.
- The 2016 effective tax rate was 41.3% for Q3 and 43.1% for nine months. Two offsetting tax adjustments included a $14.3 million reduction in deferred tax expense related to foreign earnings and a $12.8 million increase in expense from changed state tax assumptions.
- Secondary offerings by existing stockholders had no proceeds for TransUnion; the company recorded related costs of $0.7 million in Q3 and $2.5 million for the nine months.
Outlook, commentary and risks
- Management cited improving U.S. lending and economic conditions, stronger demand for consumer credit and identity-protection products, and continued customer demand for real-time analytics. A stronger U.S. dollar continued to weigh on reported International results.
- Management said cash, operating cash generation and the available revolver should fund planned capital expenditures, debt service and operating needs for the foreseeable future. It expected 2016 capital expenditures to be lower as a percentage of revenue than in 2015, following completion of major facility improvements and substantial completion of the technology transformation. No numerical revenue or earnings guidance is provided in the supplied filing text.
- Key exposures include consumer-data security and service continuity, access to data sources, regulatory change and litigation, customer retention, technology execution, acquisition integration, foreign exchange, variable-rate debt, liquidity and covenant compliance.
- Legal matters include consumer class actions concerning the OFAC alert service, including a certified California class of approximately 18,000; a Mississippi Attorney General settlement involving payment and consumer-practice commitments; and an ongoing CFPB investigation. The company said it could not predict the CFPB outcome and believed a resolution could involve monetary relief and changes to marketing and sales practices.
- Interest-rate caps cover a portion of variable-rate debt, with a 0.75% LIBOR threshold beginning June 2016. The filing anticipated reclassifying approximately $7.1 million from other comprehensive income to interest expense over the following 12 months.
Important facts for investors to verify
- Whether organic growth and improved segment margins persist, particularly in USIS and International, and how much future growth depends on acquisitions.
- Acquisition integration, purchase-accounting estimates, contingent consideration and the returns on CIFIN and other investments.
- Debt levels, floating-rate exposure, hedge costs, covenant headroom and the capacity to fund further acquisitions while maintaining liquidity.
- Developments and potential financial or operating consequences from the CFPB investigation and consumer litigation.
- Foreign-exchange effects, consumer-channel trends, technology transformation costs and the expected level of capital spending.