Transunion annual report, FY2016

Full document

TransUnion 2016 Form 10-K Summary

Business context and reporting period

TransUnion is a global risk and information services provider, serving businesses and consumers with credit information, analytics, decisioning, identity and consumer-finance products. It operates through USIS, International and Consumer Interactive, with Corporate providing shared services. This annual report covers the fiscal year ended December 31, 2016; quarterly figures below include the three months ended December 31, 2016. Amounts are in U.S. dollars.

Financial performance and liquidity

  • Revenue: Full-year revenue was $1,704.9 million, up 13.1% from $1,506.8 million in 2015. Fourth-quarter revenue was $435.9 million versus $386.1 million.
  • Profitability: Operating income rose to $300.5 million from $197.1 million; operating margin increased to 17.6% from 13.1%. Net income attributable to TransUnion was $120.6 million, or $0.65 diluted EPS, compared with $5.9 million, or $0.04, in 2015. Full-year Adjusted EBITDA, a non-GAAP measure, increased 20.9% to $636.8 million from $526.7 million.
  • Cash flow and investment: Cash from operating activities was $389.9 million, up from $309.1 million. Capital expenditures were $124.0 million, down from $132.2 million. Cash used in investing activities increased to $495.8 million, primarily reflecting acquisitions.
  • Debt and liquidity: Total debt was $2,375.6 million at year-end, compared with $2,204.6 million a year earlier; all outstanding debt was variable-rate, with a 3.40% weighted-average interest rate. Cash and cash equivalents were $182.2 million. The $210 million revolving facility was undrawn. The company reported compliance with its debt covenants.
  • Segments: Gross segment revenue was $1,045.1 million for USIS, $313.9 million for International and $407.1 million for Consumer Interactive. Segment operating income was $203.5 million, $49.8 million and $168.9 million, respectively; segment margins were 19.5%, 15.9% and 41.5%. Segment revenue is before intersegment eliminations.

Material changes versus the prior comparable period

  • Revenue grew across all segments. USIS increased 13.0%, International 16.4% and Consumer Interactive 10.1%. Acquisitions contributed an estimated 2.0% to consolidated revenue growth; weaker foreign currencies reduced growth by 1.1%.
  • Net income attributable to the company increased substantially from 2015. Lower interest expense, higher revenue and lower depreciation and amortization supported the improvement; higher operating costs and a $19.4 million CFPB-related charge partly offset it.
  • Operating cash flow improved by $80.8 million. Acquisition-related investing outflows increased, while capital expenditures declined as the U.S. technology infrastructure transformation was effectively completed.
  • During 2016, TransUnion acquired CIFIN in Colombia and healthcare businesses RTech and Auditz, among other transactions, and increased its ownership of CIBIL in India to 82.1%. Segment reporting was also revised to move certain U.S. consumer-facing activities from USIS to Consumer Interactive; prior periods were recast, with no effect on consolidated results.

Outlook, commentary, risks and unusual items

  • Management cited improving U.S. lending and consumer conditions, continued demand for consumer credit and identity products, and growth opportunities in analytics, healthcare and emerging markets. The filing does not provide specific forward revenue or earnings guidance.
  • Management said available cash, operating cash flow and revolver capacity should fund planned capital expenditures, debt service and operating needs for the foreseeable future. The company does not expect to pay cash dividends in the foreseeable future.
  • In December 2016, TransUnion agreed to a CFPB consent order concerning consumer-product advertising, marketing and sales. It recorded a $19.4 million charge, including $13.9 million for consumer redress, a $3.0 million penalty and estimated $2.5 million of related costs. Required practice changes and a compliance plan are part of the settlement.
  • Several FCRA-related class actions remained pending, including OFAC-alert and consumer-disclosure matters. The company said outcomes are uncertain and some exposures cannot be reasonably estimated; it intends to defend the cases. It had accrued $35.9 million for anticipated legal and regulatory claims at year-end.
  • Key risks include data security or service interruptions, access to external data, privacy and consumer-protection regulation, customer retention and competition, economic sensitivity in U.S. financial services, foreign-exchange movements, acquisition integration and substantial variable-rate debt. A 10% change in the U.S. dollar against the relevant currency basket would have changed 2016 revenue by an estimated $32.8 million and operating income by $5.5 million.
  • After year-end, the company amended its Term Loan B to extend maturity by two years, reduce the applicable margin by 0.25% and lower the LIBOR floor from 0.75% to zero. The board also authorized up to $300 million of share repurchases over three years; repurchases are discretionary.

Important facts for investors to verify

  • Review the debt agreement, maturity profile, covenant headroom and exposure to variable interest rates, including the effects of the 2017 Term Loan B amendment.
  • Track CFPB settlement implementation and the status, potential exposure and insurance coverage of the pending FCRA class actions.
  • Assess whether organic growth and margins persist after separating acquisition contributions, foreign-exchange effects and non-GAAP adjustments.
  • Monitor Consumer Interactive’s indirect-channel partner exposure and the impact of the partner acquired by a competitor.
  • Note that the auditor issued unqualified opinions on the financial statements and internal controls; CIFIN’s internal controls were excluded from the 2016 assessment and audit.