TransUnion 10-Q Summary: Quarter Ended June 30, 2013
Business context and reporting period
TransUnion Holding Company, Inc. and its wholly owned subsidiary, TransUnion Corp., filed a combined unaudited report for the second quarter and six months ended June 30, 2013. The companies operate as one business. TransUnion provides credit information, analytics and related services to businesses and consumers through U.S. Information Services (USIS), International and Interactive segments.
Year-over-year comparisons below use management’s combined 2012 periods, which include predecessor results before the April 30, 2012 acquisition. The acquisition created a new accounting basis; reported periods are not fully comparable, notably because of purchase-accounting amortization and significant 2012 transaction-related compensation costs.
Financial performance and liquidity
| Metric | Q2 2013 | Six months 2013 | Comparable 2012 change |
|---|---|---|---|
| Revenue | $300.8 million | $591.3 million | +6.2% and +4.9% |
| Operating income | $39.5 million | $83.6 million | Q2 was up from a $29.3 million loss; six-month increase was $47.3 million |
| Net loss attributable to TransUnion Holding | $7.8 million | $14.2 million | Improved from losses of $68.6 million and $66.9 million |
| Adjusted EBITDA, non-GAAP | $94.4 million | $186.6 million | Down 5.6% and 1.9% |
| Cash provided by operating activities | Not separately stated on the comparable basis in the filing | $47.3 million | Compared with $32.2 million used in the 2012 combined period |
Q2 operating margin was 13.1%, versus negative 10.3% in the 2012 combined comparison; six-month operating margin was 14.1%, versus 6.4%. Adjusted operating income, however, fell 27.2% in Q2 and 30.9% for the six months, to $44.7 million and $87.7 million, respectively. Adjusted EBITDA margin was approximately 31.4% for Q2 and 31.6% for the six months, compared with approximately 35.3% and 33.7% in the comparable 2012 periods.
At June 30, Holding reported cash of $130.2 million, total debt of $2.667 billion and current liabilities of $198.3 million. Its operating cash flow was $47.3 million for the first half; capital expenditures were $30.2 million. TransUnion Corp reported $1.669 billion of debt and $94.2 million of operating cash flow for the first half. The $210 million revolving credit facility was undrawn. Holding’s debt includes $600 million of 9.625% notes and approximately $398 million of 8.125% notes; debt also includes $918.6 million of secured term loans. Q2 and first-half interest expense for Holding was $49.2 million and $99.0 million.
Material changes and segment trends
- Revenue increased in all three segments. Interactive grew 13.9% in Q2 and 16.0% for the six months; USIS grew 4.1% and 2.9%; International grew 6.6% and 2.5%.
- Management attributed growth to improving economic conditions, increased credit-related demand and the CRB and ZipCode acquisitions. Excluding foreign exchange and those acquisitions, consolidated revenue growth was 6.7% in Q2 and 5.5% for the six months.
- International results were reduced by currency weakness: foreign exchange lowered segment revenue by 6.4% in both periods. The U.S. dollar’s continued strength also weighed on reported results.
- Operating expenses were lower than in the 2012 comparison, largely because 2012 included $90.7 million of accelerated stock-based compensation and related transaction expense. This benefit was partly offset by higher purchase-accounting depreciation and amortization, strategic investment, labor, Interactive advertising and acquisition-related costs.
- Adjusted results weakened despite revenue growth. Management cited investment and labor costs, foreign exchange, higher advertising and acquisition integration costs among the pressures; adjusted measures exclude specified items and are not GAAP measures.
Outlook, risks and unusual items
Management said improving U.S. lending and housing conditions supported results, but consumer uncertainty, unemployment and rising mortgage rates constrained growth. It expects demand for data and analytics to support growth across segments and views International markets as a growth opportunity. The filing provides no numerical revenue or earnings guidance. It expects 2013 capital expenditures to be higher than in 2012 as a percentage of revenue and believes available cash, operating cash generation and revolver capacity should meet liquidity needs for the foreseeable future. Additional term-loan principal payments based on prior-year excess cash flow begin in 2014.
In March 2013, TransUnion acquired an 80% interest in Brazil-based ZipCode. The term-loan amendment effective March 1 lowered the loan margin, extended maturity to February 2019 and relaxed certain covenants. The company reported compliance with debt covenants; its June 30 secured net leverage ratio was 1.85-to-1, and the revolving-line covenant applied only when borrowings are outstanding. A $487.5 million interest-rate swap position had a $1.0 million liability at quarter-end.
Material risks include macroeconomic and consumer-credit conditions, foreign-exchange movements, data security and service continuity, access to data sources, regulation, litigation, acquisition integration, customer retention, technology, liquidity and debt-service obligations. TransUnion was responding to multi-state and separate state attorneys general investigations into consumer reporting practices and said it believed it had not violated the law. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the strong GAAP operating-income comparison with the declines in adjusted operating income and Adjusted EBITDA, including the 2012 transaction-related charges excluded from adjusted measures.
- Review debt terms, interest burden, covenant restrictions and the effect of scheduled excess-cash-flow principal payments beginning in 2014.
- Track whether Interactive growth and U.S. credit-volume trends continue, and whether rising mortgage rates affect report volumes and marketing demand.
- Assess International performance excluding foreign exchange and acquisitions, and monitor exposure to currency movements and South Africa concentration.
- Follow the attorneys general investigations and other consumer-reporting litigation, as outcomes and potential liabilities are uncertain.