TransUnion — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. TransUnion provides credit information, analytics, decisioning and consumer financial-protection services through U.S. Information Services (USIS), International and Consumer Interactive.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $498.0 million | $437.6 million | $1,427.7 million | $1,269.0 million |
| Operating income | $126.6 million | $95.8 million | $343.2 million | $211.3 million |
| Net income attributable to TransUnion | $68.8 million | $41.2 million | $196.0 million | $71.0 million |
| Diluted EPS | $0.36 | $0.22 | $1.03 | $0.39 |
| Adjusted EBITDA (non-GAAP) | $194.1 million | $166.6 million | $551.9 million | $467.5 million |
Revenue increased 13.8% in Q3 and 12.5% for the nine-month period. Consolidated operating margin was 25.4% in Q3 versus 21.9%, and 24.0% for nine months versus 16.6%. Growth reflected organic increases across segments, acquisitions and favorable foreign exchange; nine-month profit also benefited from lower depreciation and amortization and tax benefits. Effective tax rates were 31.0% for Q3 and 25.2% year to date, compared with 41.3% and 43.1%, respectively, in 2016. Excess tax benefits from stock-option exercises reduced tax expense by $5.0 million in Q3 and $28.1 million for nine months.
Segments and material changes
- USIS: Revenue rose 14.2% in Q3 and 14.8% year to date. Q3 growth included Online Data Services (+12.2%), Marketing Services (+17.5%) and Decision Services (+18.2%). Management cited higher volumes, demand for new services and acquisitions. USIS margins improved, including from lower depreciation and technology-related savings.
- International: Revenue increased 15.3% in Q3 and 16.6% year to date, helped by higher local-currency volumes and stronger foreign currencies. Nine-month results also included CIFIN acquisition revenue.
- Consumer Interactive: Revenue increased 9.9% in Q3 but 2.4% for nine months; management attributed growth primarily to the indirect channel. Segment margin improved in both periods.
- Cost of services increased 19.7% in Q3, faster than revenue, reflecting labor, product, currency and acquisition costs, partly offset by productivity savings. SG&A rose 3.7% in Q3 and 5.4% year to date. Depreciation and amortization fell 15.9% year to date, partly because certain USIS software and equipment assets became fully depreciated in 2016.
Cash flow, liquidity and debt
For the first nine months, operating cash flow was $348.9 million versus $276.1 million. Capital expenditures were $91.0 million versus $85.5 million; operating cash flow less capital expenditures was $257.9 million, compared with $190.6 million. Investing activities used $149.2 million, versus $441.8 million, largely reflecting lower acquisition spending. Financing activities used $129.1 million, including $133.5 million of treasury-stock purchases.
At September 30, cash and cash equivalents were $253.3 million, up from $182.2 million at year-end 2016. Total debt was $2,386.5 million, including $34.4 million current and $2,352.1 million long-term. The company had no revolver borrowings and $300 million available under its revolving facility. Management said cash, operating cash generation and available credit should cover planned capital spending, debt service, acquisitions and operating needs for the foreseeable future.
August credit-facility amendments reduced certain borrowing margins, extended Term Loan A and revolver maturities to August 2022, increased the revolver commitment to $300 million and reduced scheduled Term Loan A repayments. Refinancing costs of $5.6 million were expensed in Q3; the January refinancing generated another $5.0 million in costs. TransUnion reported compliance with debt covenants at quarter-end. Variable-rate debt remains partly hedged by interest-rate caps.
Outlook, risks and unusual items
- No specific financial guidance or quantified forward outlook is provided. Management described U.S. lending conditions, labor-market and consumer-confidence trends, mortgage demand and demand for consumer credit and identity products as favorable; stronger foreign currencies also supported International results.
- Management identified risks including economic and credit-market changes, competition and customer retention, data security and service continuity, access to data sources, regulation, litigation, technology execution, acquisitions, foreign exchange and debt obligations.
- In the Ramirez case, a jury awarded approximately $8.1 million in statutory damages and $52.0 million in punitive damages. The company recorded an accrual for its estimate of probable statutory losses, net of expected insurance, but did not accrue punitive damages; it said the reasonably possible punitive loss ranged from zero to less than the statutory award. Post-trial motions and an expected appeal remained pending.
- TransUnion reported new class-action claims concerning public-record collection and reporting. It stated that it intended to defend them; the filing cautions that litigation and regulatory outcomes may be uncertain and actual costs may exceed reserves. Some settlements discussed were not expected to materially affect financial condition or results.
- The board authorized up to $300 million of share repurchases over three years. The company had purchased approximately $133.4 million under the program before Q3 and reported $166.6 million remaining; no program purchases were made during Q3. Separate purchases from underwriters earlier in 2017 totaled $133.5 million.
- The company planned to adopt the new revenue-recognition standard on January 1, 2018, using the modified retrospective approach. It had not identified a material effect on revenue recognition, but its evaluation was ongoing.
Important facts for investors to verify
- How much of reported earnings growth reflects ongoing operating performance versus lower depreciation and amortization and unusually favorable tax benefits.
- Whether USIS and Consumer Interactive growth and margins can be sustained, and how acquisition contributions and foreign-exchange effects evolve.
- The ultimate outcome, insurance recovery and financial exposure from Ramirez and the public-record litigation matters.
- Debt levels, variable-rate exposure, covenant headroom and the effect of refinancing terms and future interest rates.
- Execution and financial-statement effects of the 2018 revenue-standard adoption, and progress against the remaining share-repurchase authorization.