TransUnion Holding Company, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Figures are in U.S. dollars; amounts are in millions unless otherwise indicated. The filing covers TransUnion Holding Company, Inc. and its consolidated subsidiaries.
Business context and performance
TransUnion provides credit information, analytics, identity and risk-management services to businesses and consumers. It reports USIS, International and Interactive segments. Management cited acquisitions and organic growth as revenue drivers, partly offset by a stronger U.S. dollar’s adverse effect on International results.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $338.2 | $299.5 | $969.1 | $890.8 |
| Operating income | $40.8 | $49.3 | $107.9 | $132.9 |
| Operating margin | 12.1% | 16.5% | 11.1% | 14.9% |
| Net income (loss) attributable to TransUnion Holding | $(2.6) | $(3.4) | $0.6 | $(17.5) |
| Cash provided by operating activities | $64.5 | $63.8 | $110.1 | $111.1 |
| Capital expenditures | $43.4 | $23.9 | $117.7 | $54.1 |
Revenue increased 12.9% in Q3 and 8.8% year to date. Management attributed growth to acquisitions and organic growth; excluding acquisitions and foreign-exchange effects, revenue grew 6.0% in Q3 and 3.6% year to date. Q3 segment revenue was USIS $211.7, International $68.1 and Interactive $58.4. Interactive operating income improved, while USIS and International operating income declined.
Adjusted EBITDA, a non-GAAP measure, was $112.7 in Q3, up 13.3%, and $305.0 for nine months, up 6.6%. The filing cautions that this measure is not a substitute for GAAP results or operating cash flow. Nine-month operating cash flow less capital expenditures was $(7.6), calculated from reported figures.
Balance sheet, debt and liquidity
At September 30, 2014, cash and cash equivalents were $103.1, total assets $4,579.4 and total debt $2,897.2, including $27.7 of short-term debt and current maturities. Long-term debt was $2,869.5. The $190.0 revolving facility had no borrowings; the company reported $3.99-to-1 senior secured net leverage and stated it was in compliance with debt covenants. The leverage covenant was not then applicable because there were no revolver borrowings.
In April and May 2014, the company refinanced its secured credit facility and used proceeds in part to repay the $645.0 principal amount of 11.375% notes. The company reported lower rates and extended maturities, and estimated approximately $20 annually in lower interest expense at then-current rates, net of reduced amortization of the notes’ fair-value premium. Remaining debt includes $600.0 of 9.625% notes and approximately $398.6 of 8.125% notes, both due in 2018; the maturity schedule shows $1,019.0 due in 2018.
Material changes and unusual items
- Operating income fell 17.2% in Q3 and 18.8% year to date despite higher revenue. Higher depreciation and amortization, acquisition integration and operating costs, severance, corporate costs and currency effects weighed on results.
- Q3 depreciation and amortization included a $9.7 increase from revising the remaining useful lives of certain technology and facility assets. The company expects an additional $6–$8 of depreciation and amortization per quarter through Q2 2016.
- Nine-month results included a $45.8 gain on early redemption of the 11.375% notes and a $21.7 gain from remeasuring the previously held CIBIL stake when TransUnion obtained control. Other items included $12.7 of refinancing fees and costs, a $4.1 net investment impairment loss, and $10.2 of accelerated fees for a terminated data-matching contract. These items affect comparison of reported earnings with ongoing performance.
- TransUnion began consolidating CIBIL in May 2014 after increasing its ownership to 55%. Other recent acquisitions referenced by management include TLO, eScan and ZipCode.
- Foreign-currency translation contributed to a $29.5 Q3 and $36.8 nine-month other comprehensive loss, primarily reflecting currency translation adjustments.
Outlook, risks and contingencies
The filing provides no formal revenue or earnings guidance. Management expected 2014 capital expenditures to remain higher than 2013 as a percentage of revenue because of technology-platform and headquarters projects. It described growth opportunities in analytics, Interactive subscriptions and international markets, while noting that mortgage refinancing weakness had restrained parts of USIS and currency weakness had reduced International results.
Key risks identified include macroeconomic and credit-market conditions; data security, service continuity and access to data; regulation and litigation; acquisition integration and technology execution; foreign-exchange movements; debt service, covenants and liquidity; and tax-law changes. The company stated it believed cash, operating cash flow and available revolver capacity would meet foreseeable liquidity needs. It also disclosed ongoing legal proceedings, including consumer-protection, credit-reporting and privacy claims; outcomes can be uncertain and could materially affect a particular period. A previously disclosed Virginia public-records settlement received final approval and was funded in August 2014.
Management concluded disclosure controls were effective at a reasonable-assurance level and reported no materially affecting change in internal controls during the quarter.
Important facts for investors to verify
- How much revenue growth is recurring and organic versus attributable to acquired businesses, and how foreign exchange continues to affect International.
- Whether operating margins recover as acquisition, integration, severance and technology-investment costs evolve; assess the expected continuing depreciation increase.
- Actual capital spending, free cash generation and progress on the technology and headquarters projects.
- Debt repayment capacity, the 2018 maturity concentration, covenant headroom and whether expected refinancing-related interest savings materialize.
- The sustainability of reported earnings after excluding significant refinancing and acquisition-related gains and expenses, and the effect of tax-law changes.
- Developments in litigation and data-security, regulatory and service-continuity risks.