TransUnion — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. TransUnion provides credit, risk, analytics, identity and consumer financial-information services across the U.S. and more than 30 countries. Figures are in U.S. dollars; financial statements are unaudited.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $425.7 million | $378.5 million | $831.4 million | $731.6 million |
| Operating income | $63.5 million | $51.4 million | $115.4 million | $87.9 million |
| Net income (loss) attributable to TransUnion | $17.3 million | $(2.6) million | $29.9 million | $(9.2) million |
| Diluted EPS | $0.09 | $(0.02) | $0.16 | $(0.06) |
| Adjusted EBITDA (non-GAAP) | $159.5 million | $134.8 million | $300.9 million | $249.6 million |
| Cash from operations | $107.8 million | $100.0 million | $149.5 million | $116.5 million |
| Capital expenditures | $24.0 million | $38.2 million | $54.9 million | $68.3 million |
- Q2 revenue rose 12.5%; six-month revenue rose 13.6%. Management attributed growth to organic gains across segments and platforms and acquisitions, partly offset by foreign-exchange headwinds. Acquisitions added 1.9% and 1.5% to revenue in the respective periods; currency reduced it by 1.6% and 2.2%.
- Q2 operating margin was 14.9%, versus 13.5%; six-month margin was 13.9%, versus 12.0%. USIS margins declined 0.4 percentage points in both comparisons; Consumer Interactive margins improved 4.9 and 5.6 points, respectively. International margins improved substantially from a lower prior-year base.
- Revenue growth by segment in Q2: USIS 10.2%, International 14.9%, and Consumer Interactive 15.5%. Consumer Interactive growth reflected indirect-channel gains and more direct subscribers; USIS Decision Services grew with healthcare and insurance demand.
- Cash and equivalents were $141.3 million at June 30, compared with $133.2 million at year-end 2015. Total debt was $2.401 billion, including $50.8 million current debt and $2.350 billion long-term debt. The company had no revolver borrowings and $210 million available.
Changes, financing and unusual items
- In 2016 TransUnion acquired a 71% interest in Colombian bureau CIFIN in February, increased its stake to 94.67% in May, and made a further investment. It also acquired Auditz, increased its ownership of India’s CIBIL to 77.1%, and acquired the remaining 12.5% of DHI. Six-month acquisition and noncontrolling-interest purchases used $270.6 million of cash.
- Debt increased from $2.205 billion at December 31, 2015. The company borrowed $150 million under Term Loan B to repay a revolver draw used partly for CIFIN, and $55 million under Term Loan A for a further CIFIN investment and general purposes. Reported debt includes original-issue discounts and financing fees.
- Interest expense fell to $21.3 million in Q2 and $41.7 million for six months, from $44.9 million and $89.6 million, respectively, primarily following repayment of high-coupon senior notes in July 2015. Other income and expense included $7.9 million of Q2 acquisition fees and $13.5 million for six months.
- Interest-rate caps covering an initial $1.526 billion of loan exposure cap LIBOR at 0.75% from June 30, 2016, with scheduled notional reductions through June 2020. Their fair-value changes caused net-of-tax losses in other comprehensive income of $7.1 million for Q2 and $21.9 million for six months.
- Secondary offerings of approximately 17.9 million and 18.0 million shares were completed by existing stockholders in March and June. TransUnion received no proceeds; it recorded related costs of $0.9 million in Q2 and $1.9 million for six months.
Outlook, liquidity and risks
- Management said cash on hand, operating cash generation and the revolver should fund planned capital expenditures, debt service and operating needs for the foreseeable future. It expected 2016 capital expenditures to be lower than 2015 as a percentage of revenue, following completion of major headquarters improvements and substantial completion of the technology-platform transformation. No specific revenue or earnings guidance was provided.
- Management cited improving U.S. lending, housing, auto, labor and consumer-confidence trends, alongside continued demand for consumer credit and identity-protection products. It also noted constrained consumer spending and a stronger U.S. dollar reducing reported International results.
- Debt covenants require a senior secured net leverage ratio of no more than 6.5-to-1 at quarter-end; TransUnion reported compliance at June 30. Variable-rate debt, foreign-exchange exposure, integration of acquisitions and completion of technology initiatives remain relevant risks.
- Legal and regulatory matters include FCRA class actions concerning OFAC alerts and consumer disclosures, a Mississippi Attorney General action, and a CFPB investigation into consumer-report and credit-monitoring product practices. Outcomes and potential losses are uncertain; the filing states that some exposures cannot be reasonably estimated. The bankruptcy tradeline settlement remains subject to further proceedings and mediation.
- Other key risks identified include data security and accuracy, access to data sources, service interruptions, regulation, litigation, customer retention, competition, technology change and the ability to meet debt obligations.
Important facts for investors to verify
- Whether organic growth and segment momentum persist after separating acquisition contributions and foreign-currency effects.
- How CIFIN and other acquisitions perform, and whether integration costs, purchase accounting or additional investment materially affect results.
- Debt levels, leverage-covenant headroom, floating-rate exposure and future cash available after capital spending and debt service.
- Whether technology-transformation spending declines as expected and USIS margins recover.
- Developments, settlement terms and potential financial effects of the FCRA, state AG and CFPB matters; the filing does not provide a clear estimate of possible losses for certain proceedings.
- The effective tax rate: 45.3% in Q2 and 45.2% for the six-month period, above the 35% U.S. statutory rate, primarily due to foreign earnings and foreign-subsidiary valuation allowances.