TransUnion Q3 2012 Form 10-Q Summary
Business context and reporting period
TransUnion Holding Company, Inc. and its wholly owned subsidiary TransUnion Corp. filed a combined, unaudited quarterly report for the three months ended September 30, 2012. TransUnion Holding acquired TransUnion Corp. on April 30, 2012. Comparisons with 2011 are presented against TransUnion Corp. as predecessor; purchase accounting and transaction-related expenses make 2012 periods not fully comparable. The company provides credit information, analytics, decision services and consumer credit-monitoring products through U.S. Information Services (USIS), International and Interactive segments.
Financial highlights
| Metric | Q3 2012 | Q3 2011 | Change |
|---|---|---|---|
| Revenue | $291.7 million | $267.6 million | +9.0% |
| Operating income | $61.3 million | $72.8 million | -15.8% |
| Operating margin | 21.0% | 27.2% | -6.2 percentage points |
| Net income attributable to TransUnion Holding | $11.3 million | $27.1 million | -58.3% |
| Adjusted EBITDA | $106.0 million | $95.7 million | +10.8% |
| Operating cash flow, TransUnion Corp. continuing operations | $65.8 million | $80.0 million | -17.8% |
Adjusted EBITDA is a non-GAAP measure; management cautions it is not a substitute for GAAP results or operating cash flow. Q3 segment revenue was USIS $186.1 million (+8.6%), International $59.8 million (+1.5%) and Interactive $45.8 million (+22.8%). Interactive operating income rose to $20.4 million from $16.0 million; USIS operating income fell to $47.5 million from $52.4 million, and International fell to $9.9 million from $19.1 million.
For the combined nine-month comparison, revenue was $855.6 million, up 11.0%; operating income was $97.6 million versus $188.4 million; and net loss attributable to the company was $55.5 million versus net income of $24.5 million. The comparison includes $90.6 million of accelerated stock-based compensation and related expenses associated with the change in control. Adjusted EBITDA increased 11.3% to $296.3 million. Combined operating cash flow was $129.5 million, down from $137.6 million; capital expenditures were $46.6 million versus $56.4 million.
Balance sheet, debt and liquidity
At September 30, 2012, TransUnion Holding reported cash and cash equivalents of $127.2 million, total assets of $4.27 billion and total liabilities of $3.15 billion. Total debt was $2.30 billion, including $600 million of Holding’s senior unsecured PIK-toggle notes; TransUnion Corp. reported $1.70 billion of debt. TransUnion Corp. had no borrowings under its $210 million revolving credit facility, leaving the full commitment available. Management said cash, operating cash flow and revolver availability should cover foreseeable operating, capital and debt-service needs. The company reported compliance with debt covenants; its senior secured net leverage ratio was 1.96x at September 30.
Changes, outlook, risks and unusual items
- Revenue growth reflected improving credit-market conditions, higher volumes across segments, and acquisitions; weakening foreign currencies partly offset International growth. Management cited improved consumer lending, mortgage refinancing and auto-loan activity, while noting continued unemployment and housing-market uncertainty.
- Operating costs increased, notably depreciation and amortization from acquisition accounting fair-value adjustments. Q3 depreciation and amortization rose $21.7 million year over year to $43.1 million. Nine-month results also included the accelerated compensation expense. Acquisition-related costs included $36.5 million for the change-in-control transaction and $3.0 million of abandoned IPO expenses.
- The April acquisition was funded in part with $600 million of 9.625% cash / 10.375% PIK-toggle notes due 2018. The acquisition purchase-price allocation remained preliminary, pending final valuation of certain intangible assets.
- After quarter-end, on November 1, Holding issued a further $400 million of PIK-toggle notes at 8.125% cash / 8.875% PIK interest, due 2018. Proceeds funded a $373.8 million shareholder dividend and issuance-related costs; TransUnion LLC also prepaid $10 million of its term loan. The filing gives no formal earnings or revenue guidance.
- Management identified risks from macroeconomic conditions, data security and service interruptions, access to external data, privacy and consumer-protection regulation, litigation, foreign exchange, acquisitions and integration, competition, and substantial debt. The CFPB had begun periodic examinations. The CEO had announced plans to step down once a successor was in place.
- Legal matters include privacy-related claims and a bankruptcy tradeline settlement whose approval was under appeal; the company said it believed reserves were appropriate but acknowledged additional losses could occur. Management reported disclosure controls were effective at the reasonable-assurance level and no material change in internal controls during the quarter.
Important facts for investors to verify
- How much of revenue and adjusted EBITDA growth reflects organic demand versus acquisitions, and whether segment profitability recovers as acquisition-related amortization and costs continue.
- The final purchase-price allocation and its impact on ongoing depreciation, amortization and reported earnings.
- Debt-service capacity and covenant restrictions following the post-quarter $400 million note issuance and $373.8 million dividend, including the availability of subsidiary cash to service Holding-level debt.
- Currency exposure and emerging-market concentration; the filing notes South Africa represented about 58% of emerging-market revenue in the periods discussed.
- Developments in CFPB examinations, privacy and other litigation, data-security controls, and the CEO succession process.