Transunion quarterly report, Q1 FY2013

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TransUnion Q1 2013 Form 10-Q Summary

Business context and reporting period

Quarter ended March 31, 2013. This combined quarterly report covers TransUnion Holding Company, Inc. and its wholly owned subsidiary, TransUnion Corp, which are operated as one business. TransUnion provides credit information, analytics, decisioning and consumer credit-monitoring services through U.S. Information Services (USIS), International and Interactive segments.

TransUnion Holding acquired TransUnion Corp on April 30, 2012. Comparisons with Q1 2012 use combined results, but the acquisition’s purchase-accounting adjustments—especially higher depreciation and amortization—mean periods are not fully comparable.

Financial results and liquidity

  • Revenue: $290.5 million, up $9.9 million (3.5%) from combined Q1 2012. Excluding foreign exchange and acquired revenue, growth was 4.2%.
  • Operating income and margin: $44.2 million versus $65.6 million; margin fell to 15.2% from 23.4%. Higher purchase-accounting amortization, strategic investment and labor costs weighed on results.
  • Net income: TransUnion Corp reported $11.5 million, with $10.2 million attributable to TransUnion Corp, compared with $12.1 million and $10.2 million, respectively, in Q1 2012. TransUnion Holding reported a $5.0 million consolidated net loss, including $49.8 million of interest expense; its loss attributable to Holding was $6.3 million. The different entity-level results reflect Holding’s additional debt and expenses.
  • Adjusted EBITDA: $93.3 million, up 3.3% from the company’s combined Q1 2012 figure of $90.3 million. This is a non-GAAP measure; management cautions it is not a substitute for GAAP results or cash flow.
  • Cash flow: Operating cash flow was $13.5 million, down from $21.6 million. Capital expenditures were $16.4 million, making operating cash flow less capital expenditures negative $2.9 million, compared with positive $4.3 million in Q1 2012. Cash and cash equivalents declined to $117.4 million from $154.3 million.
  • Liquidity: TransUnion Corp had no revolver borrowings and reported access to the full $210 million revolving facility. Its current assets were $374.7 million and current liabilities $184.7 million. Management said cash, operating cash generation and revolver availability should meet foreseeable liquidity needs.
  • Debt: TransUnion Holding reported total debt of $2.674 billion, including $1.004 billion of Holding-level notes; TransUnion Corp reported $1.676 billion. These entity totals overlap through the corporate structure and should not be added together. The term loan balance was $921 million. The $210 million revolver was undrawn.

Material changes and segment performance

  • USIS: Revenue increased 1.7% to $183.7 million. Online Data Services grew 4.6% and Decision Services 6.9%; Credit Marketing Services declined 11.7%. Segment operating income fell to $43.1 million from $55.6 million.
  • International: Revenue decreased 1.6% to $55.7 million as currency weakness offset local-currency volume growth. Excluding foreign exchange, revenue increased 5.1%, including contributions from acquisitions. Segment operating income fell to $2.4 million from $14.8 million.
  • Interactive: Revenue rose 18.0% to $51.1 million, driven by subscriber and indirect-channel volume growth and higher direct-channel revenue per subscriber. Operating income increased to $15.4 million from $9.9 million.
  • Consolidated depreciation and amortization increased $23.4 million to $45.3 million, primarily from fair-value step-ups in the 2012 acquisition. Holding’s interest expense rose to $49.8 million from $32.2 million on a combined prior-year basis, mainly due to Holding-issued notes.

Outlook, management commentary, risks and unusual items

  • Management cited improving economic conditions, consumer lending, mortgage refinancing and auto lending as supportive of demand, while consumer uncertainty, unemployment and a stronger U.S. dollar remained headwinds. It expects demand for targeted data and analytics to support growth across segments.
  • Management expects 2013 capital expenditures to be comparable to 2012 as a percentage of revenue. No specific revenue, earnings or margin guidance was provided.
  • A March 2013 amendment to the senior secured credit facility reduced the term-loan margin from 4.00% to 3.00%, lowered its interest-rate floor, extended maturity to February 2019, delayed excess-cash payments until 2014 and relaxed certain covenants. The company reported compliance with applicable debt covenants.
  • The company acquired an 80% interest in Brazil-based ZipCode on March 1, 2013; the acquisition’s operating results were described as immaterial. It also spent $30.3 million on acquisitions and purchases of noncontrolling interests during the quarter.
  • A foreign-currency translation loss of $17.4 million contributed to a $22.2 million comprehensive loss. A $5.6 million liability was recorded for interest-rate swaps covering $500 million notional; hedge cash flows were expected to begin in June 2013.
  • Tax results included effects of the retroactive reinstatement of the Subpart F look-through rule, including a $4.6 million deferred tax benefit and a $5.5 million deferred tax expense. Tax authorities regularly audit the company; $4.9 million of unrecognized tax benefits remained.
  • Legal matters include an appeal concerning final approval of a bankruptcy tradeline settlement, which was remanded for further proceedings; state attorney general investigations into industry practices; and an Investec arbitration. Management said it did not expect the bankruptcy matter to materially affect financial condition, but litigation outcomes remain uncertain.
  • Risks identified include economic and credit-market conditions, data security and service continuity, access to data sources, regulation, litigation, acquisitions and integration, international operations and currency fluctuations, competition, indebtedness, covenant compliance and liquidity.

Important facts for investors to verify

  • Confirm the distinction between TransUnion Holding and TransUnion Corp results, especially Holding’s loss and higher interest expense, and avoid adding overlapping debt balances.
  • Assess whether revenue growth and Interactive strength can offset continued operating-margin pressure, including purchase-accounting amortization and segment cost increases.
  • Review cash conversion, acquisition-related spending, capital expenditure needs and the decline in cash against debt service and future excess-cash principal payments.
  • Check the terms and covenant calculations for the amended term loan, the Holding PIK-toggle notes, and the company’s continuing compliance and refinancing capacity.
  • Monitor currency exposure, the interest-rate swaps, tax audits and unresolved legal matters, including the settlement appeal and investigations.