TransUnion 10-Q Summary — Quarter Ended September 30, 2018
Business context and reporting period
TransUnion provides data, analytics and decisioning services to businesses and consumers. This filing covers the third quarter and first nine months of 2018; comparisons are with the corresponding 2017 periods unless stated otherwise. Results include Callcredit from its June 19, 2018 acquisition date.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $603.6 million | $498.0 million | $1,704.1 million | $1,427.7 million |
| Operating income | $122.1 million | $126.6 million | $381.7 million | $343.2 million |
| Net income attributable to TransUnion | $46.3 million | $68.8 million | $174.4 million | $196.0 million |
| Diluted EPS | $0.24 | $0.36 | $0.91 | $1.03 |
| Adjusted EBITDA (non-GAAP) | $244.9 million | $194.1 million | $668.1 million | $551.9 million |
| Cash provided by operating activities of continuing operations | Not stated for quarter | Not stated for quarter | $410.3 million | $346.7 million |
- Q3 revenue rose 21.2%; nine-month revenue rose 19.4%. Adjusted Revenue, which includes an acquisition-related purchase-accounting adjustment, grew 24.8% in Q3 and 20.6% year to date.
- Q3 operating margin was 20.2%, down from 25.4%; nine-month margin was 22.4%, down from 24.0%. Higher acquisition-related amortization, integration and labor costs weighed on margins.
- Q3 operating income declined 3.6%, and net income attributable to TransUnion declined 32.7%. Higher interest expense and Q3 tax expense also reduced earnings. Nine-month operating income increased 11.2%, while attributable net income declined 11.0%.
- Nine-month capital expenditures were $118.3 million, versus $91.0 million. Operating cash flow less capital expenditures was $292.0 million, compared with $255.7 million in 2017.
- At September 30, cash was $226.6 million; total debt was $4.12 billion, versus $2.46 billion at December 31, 2017. The company had no revolving-credit borrowings and $300 million available. It reported compliance with debt covenants.
- Weighted-average interest on variable-rate debt was 4.17%, up from 3.47% at year-end 2017. Interest-rate caps cover a portion of exposure through June 2020.
Material changes and management commentary
- Callcredit was acquired for $1.408 billion in cash, primarily debt-funded. It contributed $35.9 million of revenue and an $18.9 million operating loss from acquisition through September 30. The purchase-price allocation remains preliminary.
- TransUnion also acquired iovation and Healthcare Payment Specialists and increased its investment in SavvyMoney. The company cited international expansion, product development and expected operating synergies as strategic aims.
- Revenue increased across all segments. Q3 USIS revenue grew 20.1%, International 35.6% and Consumer Interactive 11.3%. International operating margin fell to 3.0% from 21.0%, principally reflecting acquired-business amortization and integration costs; USIS margin also declined, while Consumer Interactive margin improved.
- Management described U.S. consumer lending conditions as healthy, with strong labor-market and consumer-confidence conditions. It noted pressure from higher interest rates on mortgage refinancing, a softer housing market, continued headwinds in Africa and adverse currency movements.
- Management said cash, operating cash flow and available credit should be sufficient for foreseeable operating, capital and debt-service needs. No specific revenue, earnings or cash-flow guidance was provided.
Risks, contingencies and unusual items
- Q3 effective tax rate was 36.0%, including a $5.6 million impact from revisions to provisional estimates related to the 2017 Tax Act. Management expected to finalize those estimates in Q4 2018. The nine-month effective tax rate was 28.2%.
- Acquisition financing increased debt and interest expense; management expected interest expense to remain higher. Variable rates and foreign-currency movements add exposure.
- Businesses deemed non-core within Callcredit were classified as discontinued operations; TransUnion expected to sell them within a year. Q3 and nine-month discontinued-operations losses were $1.4 million, net of tax.
- Final settlement approval was granted for public-record matters other than the Walsh matter. The company expected the remaining matter to resolve without material impact, but noted that litigation outcomes can be uncertain.
- Other cited risks include data security and access, regulatory change, litigation, customer retention, competition, acquisition integration, debt covenants and the ability to maintain liquidity.
Important facts for investors to verify
- Whether Callcredit integration delivers expected synergies and whether its operating losses and acquired-intangible amortization decline.
- Debt repayment, interest-rate exposure, leverage and covenant headroom following the acquisition borrowing.
- Underlying organic growth by segment, particularly excluding acquisitions, purchase-accounting effects and foreign exchange.
- Final Callcredit purchase-price allocation, sale and results of the discontinued businesses, and Q4 completion of tax estimates.
- Whether margins recover as acquisition-related costs normalize, and the sustainability of cash generation and dividends.