TransUnion Holding Company, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Financial figures are in millions of dollars unless noted. The interim statements are unaudited.
Business context and results
TransUnion provides credit information, analytics, identity and risk-management services to businesses and consumers. It reported three segments: U.S. Information Services (USIS), International and Interactive. During the quarter, it obtained control of India’s CIBIL and began consolidating it in International.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $327.5 | $300.8 | $630.9 | $591.3 |
| Operating income | $32.4 | $39.5 | $67.2 | $83.6 |
| Operating margin | 9.9% | 13.1% | 10.7% | 14.1% |
| Net income (loss) attributable to TransUnion Holding | $17.9 | $(7.8) | $3.2 | $(14.2) |
| Adjusted EBITDA (non-GAAP) | $101.7 | $94.4 | $192.4 | $186.6 |
Q2 revenue increased 8.9%; six-month revenue rose 6.7%. Excluding acquisitions and foreign-exchange effects, revenue grew 4.0% in Q2 and 2.6% for the half year. In Q2, revenue increased across all segments; Interactive grew 11.4%, USIS 10.1% and International 3.1%. Segment operating income increased in Interactive and International but declined in USIS.
Cash flow, debt and liquidity
- Six-month operating cash flow was $45.6, versus $47.3 a year earlier. Investing used $121.0, including $74.3 of capital expenditures and acquisition-related spending; financing provided $57.8. Cash declined $18.0 to $93.2.
- Total debt was $2,903.5 at June 30, including $2,874.5 of long-term debt. Cash was $93.2; the $190.0 revolving facility was undrawn and available. The company reported a 4.13-to-1 senior secured net leverage ratio and compliance with debt covenants.
- In April and May, the company refinanced its credit facility, increased the term loan and repaid the $645.0 principal balance of 11.375% notes. Management estimated the transaction would reduce annual cash interest by approximately $45 at then-current rates, beginning in May 2014.
- Six-month capital expenditures increased to $74.3 from $30.2, primarily for technology-platform upgrades and headquarters improvements.
Material changes, outlook and unusual items
- Operating income fell 18.0% in Q2 and 19.6% for the first half, despite revenue growth. Management cited acquisition integration costs, higher depreciation and amortization, a $10.2 accelerated fee for terminating and bringing in-house a data-matching contract, contact-center severance, and higher labor costs. Adjusted operating income also declined: $42.6 in Q2 versus $44.7, and $77.4 for six months versus $87.7.
- Q2 and six-month results included a $45.4 gain on early redemption of the 11.375% notes, a $21.7 gain from remeasuring the previously held CIBIL interest, $12.7 in refinancing fees and costs, and a $4.5 impairment of a cost-method investment. These items materially affected reported non-operating results; Q2 pretax income was $34.2.
- The effective tax rate was 41.8% for Q2 and 68.9% for six months, primarily reflecting expiration of the U.S. look-through tax-rule exception and state tax changes. The company said the six-month operating results are not necessarily indicative of full-year results.
- Management expected remaining-2014 capital expenditures to be higher than in 2013 as a percentage of revenue. It said cash, operating cash generation and available revolver capacity should fund foreseeable liquidity needs. No specific revenue or earnings guidance was provided.
- Management cited higher U.S. mortgage rates and fewer refinancing volumes, currency weakness affecting International results, and continuing macroeconomic sensitivity. Forward-looking risks include data security and service continuity, access to data, regulation and litigation, acquisition integration, foreign exchange, competition and debt service.
Contingencies and other matters
The filing describes ongoing consumer-credit, privacy and related litigation. On July 24, 2014, a court certified a class of approximately 8,000 individuals in the OFAC Alert Service case for statutory damages if a willful FCRA violation is ultimately found; the company noted a disputed legal issue and intends to defend the matter. A Guatemalan court granted an amparo on July 10, 2014, concerning any consumer-database information for which adequate consent was not obtained; TransUnion appealed and stated it believes it complies with local law. The filing says some litigation exposures cannot be reasonably estimated, though the company did not expect currently known cases to materially affect financial condition. Management concluded disclosure controls were effective.
Key facts for investors to verify
- Underlying operating performance and margins excluding the refinancing and CIBIL remeasurement gains and other unusual charges.
- Whether acquisition integration, the data-matching contract transition and technology investment deliver expected growth and efficiency.
- Debt-service capacity, refinancing-related interest savings, covenant headroom and the effect of future excess-cash-flow repayments.
- Capital expenditure levels and operating cash conversion, given the substantial increase in investment spending.
- Foreign-exchange, tax-law and litigation developments, particularly the OFAC class action and Guatemala amparo appeal.