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TRANSUNION HOLDING COMPANY, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) References in this discussion and analysis to "TransUnion," "TransUnion Holding," the "Company," "we," "our," "us" and "its" are to TransUnion Holding Company, Inc. and its consolidated subsidiaries, collectively. The following discussion and analysis of TransUnion's financial condition and results of operations is provided as a supplement to, and should be read in conjunction with, TransUnion Holding Company, Inc's audited consolidated financial statements, the accompanying notes, "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2013, as well as the unaudited consolidated financial statements and the related notes presented in Part I, Item 1 of this Quarterly Report on Form 10-Q. Overview We are a leading global provider of information and risk management solutions. We provide these solutions to businesses across multiple industries and to individual consumers. Our technology and services enable businesses to make more timely and informed credit granting, risk management, underwriting, fraud protection and customer acquisition decisions by delivering high quality data, integrated with analytics and decision-making capabilities. Our interactive website provides consumers with real-time access to their personal credit information and analytical tools that help them understand and proactively manage their personal finances. Over a million unique consumers visit our website each month. We have operations in the United States, Africa, Canada, Latin America, Asia Pacific and India and provide services in 33 countries. Since our founding in 1968, we have built a diversified and stable customer base of approximately 45,000 businesses in multiple industries, including financial services, insurance, healthcare, automotive, retail and communications. We generate revenues primarily from the sale of credit reports, credit marketing services, portfolio reviews and other credit-related services to qualified businesses both in the U.S. and internationally through direct and indirect channels. We maintain long-standing relationships with many of our largest customers, including relationships of over ten years with each of our top ten global financial services customers. We attribute the length of our customer relationships to the critical nature of the services we provide, our consistency and reliability, and our innovative and collaborative approach to developing integrated solutions that meet our customers' continually changing needs. We also generate revenues by providing subscription-based interactive services to consumers that help them understand and manage their personal finances and that protect them from identity theft. Recent Developments On April 9, 2014, the Company refinanced and amended its senior secured credit facility. The refinancing resulted in an increase of the outstanding term loan from $1,120.5 million to $1,900.0 million. The excess proceeds were used to redeem the outstanding 11.375% notes including a prepayment premium and to pay an original issue discount and transaction fees. We refer to these transactions collectively as the 2014 Refinancing Transaction. The redemption of the 11.375% notes resulted in a net gain of $45.4 million recorded in other income and expense in the consolidated statements of income consisting of the unamortized 2012 Change in Control Transaction fair value increase in the notes of $89.4 million less an early redemption premium and other costs totaling $44.0 million. The refinancing of the senior secured credit facility resulted in $12.7 million of refinancing fees and other net costs expensed and recorded in other income and expense in the consolidated statements of income. We also incurred $5.0 million of new deferred financing fees that were recorded to other current assets and other assets in the consolidated balance sheets. See Part I, Item 1, Note 9, "Debt," and the Liquidity and Capital Resources discussion below for additional information. Segments We manage our business and report our financial results in three operating segments: U.S. Information Services ("USIS"), International and Interactive. • USIS provides credit reports, credit scores, identity authentication and verification services, analytical services, decisioning technology and other services to businesses in the United States through both direct and indirect channels. USIS also provides healthcare insurance-related information to medical care providers, facilities and insurers. In addition, USIS fulfills mandated consumer services such as dispute investigations and free annual credit reports as required by the FCRA and other credit-related legislation. In this segment, we intend to continue to focus on expansion into underpenetrated and growth industries, such as insurance, healthcare, and alternative data, and the introduction of innovative and differentiated solutions in the financial services and other industries. • International provides services similar to our USIS and Interactive segments in many countries outside the United States. We believe our International segment represents a significant opportunity for growth as several of the countries in which we operate, such as India, Mexico and Brazil, continue to develop their economies and credit markets. We also seek to enter into and develop our business in new geographies. 18-------------------------------------------------------------------------------- Table of Contents • Interactive provides primarily subscription-based services to consumers, including credit reports, credit scores and credit and identity monitoring, through both direct and indirect channels. As consumers become increasingly aware of their credit profiles and show heightened concerns over identity theft, we expect the Interactive segment to grow and represent an increasing portion of our overall revenue. In addition, Corporate provides shared services for the Company and conducts enterprise functions. Certain costs incurred in Corporate that are not directly attributable to one or more of the operating segments remain in Corporate. These costs are typically for enterprise-level functions and are primarily administrative in nature. Factors Affecting Our Results of Operations Macroeconomic and Industry Trends Our revenues are significantly influenced by general macroeconomic conditions, including the availability of affordable credit and capital, interest rates, inflation, employment levels, consumer confidence and housing demand. For the last few years, economic conditions have remained relatively stable, however confidence about economic conditions continues to be a concern that has limited consumer spending. Mortgage rates in the United States have increased since the first quarter of 2013, resulting in fewer mortgage refinancings year-over-year and restrained growth in our USIS segment. In addition, the continued strengthening of the U.S. dollar has diminished the operating results of our International segment. Our revenues are also significantly influenced by industry trends, including the demand for information services in the financial services, insurance, healthcare and other industries we serve. Companies increasingly rely on data and analytics to make more informed decisions, operate their businesses more effectively and manage risk. Similarly, consumers seek information to help them understand and proactively manage their personal finances and to better protect themselves against identity theft. We expect that increased demand for targeted data and sophisticated analytical tools will drive revenue growth in all of our segments. Recent Acquisitions and Partnerships We selectively evaluate acquisitions and partnerships as a means to expand our business, increase our international footprint and enter into new markets. • During the first quarter of 2014, we increased our equity interest in Credit Information Bureau (India) Limited ("CIBIL"), from 27.5% to 47.5% and entered into agreements to acquire an additional 7.5% equity interest. On May 21, 2014, we acquired the additional 7.5% equity interest, obtained control and began to consolidate the results of operations of CIBIL as part of our International segment in our consolidated statements of income. • Effective January 1, 2014, we acquired the remaining 30% equity interest in our Guatemala subsidiary, Trans Union Guatemala, S.A. (TransUnion Guatemala) from the minority shareholders. As a result of this acquisition, the Company no longer records net income attributable to noncontrolling interests for this subsidiary. • On December 16, 2013, we acquired a 100% ownership interest in certain assets of TLO, LLC ("TLO"). TLO provides data solutions for due diligence, threat assessment, identity authentication, fraud prevention, and debt recovery. The results of operations of TLO have been included as part of our USIS segment in our consolidated statements of income since the date of the acquisition. • On September 4, 2013, we acquired a 100% equity interest in e-Scan Data Systems, Inc. ("eScan"). eScan provides services to hospitals and healthcare providers to efficiently capture uncompensated care costs in their revenue management cycle programs. The results of operations of eScan have been included as part of our USIS segment in our consolidated statements of income since the date of the acquisition. • On March 1, 2013, we acquired an 80% equity interest in Data Solutions Serviços de Informática Ltda. ("ZipCode"). ZipCode provides data enrichment and registry information to companies in Brazil's information management, financial services, marketing and telecommunications segments. The results of operations of ZipCode have been included as part of our International segment in our consolidated statements of income since the date of the acquisition. 19-------------------------------------------------------------------------------- Table of Contents Key Components of Our Results of Operations Revenue We derive our USIS segment revenue from three operating platforms: Online Data Services, Credit Marketing Services and Decision Services. Revenue in Online Data Services is driven primarily by the volume of credit reports that our customers purchase. Revenue in Credit Marketing Services is driven primarily by demand for customer acquisition and portfolio review services. Revenue in Decision Services is driven primarily by demand for services that provide our customers with online, real-time, automated decisions at the point of consumer interaction. We report our International segment revenue in two categories: developed markets and emerging markets. Our developed markets are Canada, Hong Kong and Puerto Rico. Our emerging markets include Africa, Latin America, Asia Pacific and India. We derive our Interactive segment revenue from both direct and indirect channels. Our Interactive revenue is primarily subscription based. Cost of Services Costs of services include data acquisition and royalty fees, costs related to our databases and software applications, consumer and call center support costs, hardware and software maintenance costs, telecommunication expenses and occupancy costs associated with the facilities where these functions are performed. Selling, General and Administrative Selling, general and administrative expenses include personnel-related costs for sales, administrative and management employees, costs for professional and consulting services, advertising and the occupancy and facilities expenses of these functions. Non-Operating Income and Expense Non-operating income and expense includes interest expense, interest income, earnings from equity-method investments, dividends from cost-method investments and other non-operating income and expenses. 20-------------------------------------------------------------------------------- Table of Contents Results of Operations Key Performance Measures Management, including our chief operating decision maker, evaluates the financial performance of our businesses based on a variety of key indicators. These indicators include the non-GAAP measures Adjusted Operating Income and Adjusted EBITDA, and the GAAP measures of revenue, cash provided by operating activities and capital expenditures. For the three and six months ended June 30, 2014 and 2013, these indicators were as follows: Three Months Ended June 30, Six Months Ended June 30, $ % $ % (in millions) 2014 2013 Change Change 2014 2013 Change Change Revenue $ 327.5 $ 300.8 $ 26.7 8.9 % $ 630.9 $ 591.3 $ 39.6 6.7 % Reconciliation of operating income to Adjusted Operating Income: Operating income $ 32.4 $ 39.5 $ (7.1 ) (18.0 )% $ 67.2 $ 83.6 $ (16.4 ) (19.6 )% Adjustments(1) 10.2 5.2 5.0 96.2 % 10.2 4.1 6.1 148.8 % Adjusted Operating Income(2) $ 42.6 $ 44.7 $ (2.1 ) (4.7 )% $ 77.4 $ 87.7 $ (10.3 ) (11.7 )%Reconciliation of net income (loss) attributable to the Company to Adjusted EBITDA: Net income (loss) attributable to the Company $ 17.9 $ (7.8 ) $ 25.7 329.5 % $ 3.2 $ (14.2 ) $ 17.4 122.5 % Net interest expense 49.3 49.0 0.3 0.6 % 99.6 98.5 1.1 1.1 % Income tax (benefit) provision 14.3 (1.9 ) 16.2 nm 14.2 (2.7 ) 16.9 nm Depreciation and amortization 55.3 45.2 10.1 22.3 % 106.8 90.5 16.3 18.0 % Stock-based compensation 2.2 1.7 0.5 29.4 % 4.2 3.5 0.7 20.0 % Other (income) and expense(3) (47.5 ) 3.0 (50.5 ) nm (45.8 ) 6.9 (52.7 ) nm Adjustments(1) 10.2 5.2 5.0 96.2 % 10.2 4.1 6.1 148.8 % Adjusted EBITDA(2) $ 101.7 $ 94.4 $ 7.3 7.7 % $ 192.4 $ 186.6 $ 5.8 3.1 % Other metrics: Cash provided by operating activities $ 51.7 $ 33.8 $ 17.9 53.0 % $ 45.6 $ 47.3 $ (1.7 ) (3.6 )% Capital expenditures $ 35.5 $ 13.8 $ 21.7 157.2 % $ 74.3 $ 30.2 $ 44.1 146.0 % nm: not meaningful (1) For the three and six months ended June 30, 2014, adjustments consisted of $10.2 million of accelerated fees for a data matching service contract that we have terminated and in-sourced in our USIS segment as part of the upgrade to our technology platform. For the three months ended June 30, 2013, adjustments consisted of a $2.3 million loss on the disposal of a small operating company recorded in our International segment, and a $2.9 million adjustment for tax expense related to prior years that was recorded in each segment and in Corporate as follows: USIS $2.6 million; and Corporate $0.3 million. For the six months ended June 30, 2013, adjustments also included a $1.1 million gain on the disposal of a product line recorded in our USIS segment. (2) Adjusted Operating Income and Adjusted EBITDA are non-GAAP measures. We present Adjusted Operating Income and Adjusted EBITDA as supplemental measures of our operating performance because they eliminate the impact of certain items that we do not consider indicative of our ongoing operating performance. In addition to its use as a measure of our operating performance, our board of directors and executive management team use Adjusted EBITDA as a compensation measure. Adjusted Operating Income does not reflect certain other income and expense. Adjusted EBITDA does not reflect our capital expenditures, interest, income tax, depreciation, amortization, stock-based compensation and certain other income and expense. Other companies in our industry may calculate Adjusted Operating Income and Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures. Because of these limitations, Adjusted Operating Income and Adjusted EBITDA should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP. Adjusted Operating Income and Adjusted EBITDA are not measures of financial condition or 21-------------------------------------------------------------------------------- Table of Contents profitability under GAAP and should not be considered alternatives to cash flow from operating activities, as measures of liquidity or as alternatives to operating income or net income as indicators of operating performance. We believe that the most directly comparable GAAP measure to Adjusted Operating Income is operating income and the most directly comparable GAAP measure to Adjusted EBITDA is net income attributable to the Company. The reconciliations of Adjusted Operating Income and Adjusted EBITDA to their nearest GAAP measures are included in the table above. (3) Other income and expense above includes all amounts included in our consolidated statement of income in other income and expense, net, except for dividends received from cost method investments. For the three months ended June 30, 2014, other income and expense included a net gain of $45.4 million resulting from the early redemption of the 11.375% notes, $12.7 million of refinancing fees and other costs expensed as a result of refinancing our senior secured credit facility, a gain of $21.7 million resulting from remeasuring our previously held equity interest in CIBIL to fair value under the accounting guidance for acquisitions achieved in stages (ASC 805-10-25-10), an impairment charge of $4.5 million related to a cost-method investment that has sold its assets and is in the process of liquidating, $0.7 million of acquisition-related expenses and a net $1.7 million of other expense. For the three months ended June 30, 2013, other income and expense included $4.0 million of acquisition-related expenses and a net $0.9 million of other income. For the six months ended June 30, 2014, other income and expense included the net gain of $45.4 million resulting from the early redemption of the 11.375% notes, $12.7 million of refinancing fees and other costs expensed as a result of refinancing our senior secured credit facility, the gain of $21.7 million on our previously held equity interest in CIBIL, an impairment charge of $4.5 million related to a cost-method investment that has sold its assets and is in the process of liquidating, $1.3 million of acquisition-related expenses, and a net $2.8 million of other expenses. For the six months ended June 30, 2013, other income and expense included $5.6 million of acquisition-related expenses and a net $1.3 million of other expenses. See Part I, Item 1, Note 9, "Debt" for additional information about the early redemption of the 11.375% notes and refinancing of the senior secured credit facility. See Part I, Item 1, Note 6, "Investments in Affiliated Companies," for additional information on the gain on our equity interest in CIBIL. See the "non-operating income and expense" discussion below for additional information on both the 2014 Refinancing Transaction and the gain on our equity interest in CIBIL. Revenue Total revenue increased $26.7 million and $39.6 million for the three and six months ended June 30, 2014, respectively, compared with the same periods in 2013, due to revenue from our recent acquisitions of TLO, eScan, CIBIL and ZipCode in our USIS and International segments and strong organic growth in our International and Interactive segments, partially offset by the impact of weakening foreign currencies on the 2014 revenue of our International segment. Acquisitions accounted for an increase in revenue of 6.5% and 5.9% in each respective period. The impact of weakening foreign currencies accounted for a decrease in revenue of 1.6% and 1.8% in each respective period. Excluding revenue from the recent acquisitions and the impact of weakening foreign currencies, consolidated revenues grew 4.0% and 2.6% in each respective period. Revenue by segment for the three- and six-month periods was as follows: Three Months Ended June 30, Six Months Ended June 30, (in millions) 2014 2013 $ Change % Change 2014 2013 $ Change % Change U.S. Information Services: Online Data Services $ 140.1 $ 132.0 $ 8.1 6.1 % $ 271.1 $ 259.1 $ 12.0 4.6 % Credit Marketing Services 32.4 30.9 1.5 4.9 % 63.3 62.7 0.6 1.0 % Decision Services 34.3 25.0 9.3 37.2 % 66.5 49.8 16.7 33.5 % Total U.S. Information Services 206.8 187.9 18.9 10.1 % 400.9 371.6 29.3 7.9 % International: Developed markets 24.3 24.5 (0.2 ) (0.8 )% 46.1 46.5 (0.4 ) (0.9 )% Emerging markets 38.8 36.8 2.0 5.4 % 71.3 70.5 0.8 1.1 % Total International 63.2 61.3 1.9 3.1 % 117.4 117.0 0.4 0.3 % Interactive 57.5 51.6 5.9 11.4 % 112.6 102.7 9.9 9.6 % Total revenue $ 327.5 $ 300.8 $ 26.7 8.9 % $ 630.9 $ 591.3 $ 39.6 6.7 % 22 -------------------------------------------------------------------------------- Table of Contents U.S. Information Services Segment USIS revenue increased $18.9 million and $29.3 million for the three and six months ended June 30, 2014, respectively, compared with the same periods in 2013, with increases in revenue in all platforms. Online Data Services Online Data Services revenue increased $8.1 million and $12.0 million in the three- and six-month periods, respectively, compared with the same periods in 2013, due to revenue from the acquisition of TLO and a 1.3% and 0.7% increase in online credit report unit volume in each respective period. Increases in credit report unit volume in the financial services, insurance, and other markets were mostly offset by a decrease in volume in the resellers market due to higher mortgage interest rates and the resulting decline in refinancings in 2014 compared with 2013, resulting in a slight decrease in the average pricing for online credit reports in each period. Credit Marketing Services Credit Marketing Services revenue increased $1.5 million and $0.6 million in the three- and six-month periods, respectively, compared with the same periods in 2013, due to an increase in custom data sets and archive information in the insurance market. Decision Services Decision Services revenue increased $9.3 million and $16.7 million in the three- and six-month periods, respectively, compared with the same periods in 2013, due to revenue from our acquisition of eScan and other increases in the healthcare market. International Segment International revenue increased $1.9 million, or 3.1%, and $0.4 million, or 0.3%, for the three and six months ended June 30, 2014, respectively, compared with the same periods in 2013. Higher local currency revenue from increased volumes in most regions and the inclusion of CIBIL and ZipCode revenue in our consolidated results from the date of acquisition was partially offset by a 7.8% and 9.2% decrease in revenue in each respective period from the impact of weakening foreign currencies. Incremental revenue from our acquisition of CIBIL and ZipCode accounted for a 5.1% and 3.3% increase in International revenue in the three- and six-month periods. Excluding the impact of foreign currencies and acquisitions, International revenue increased 5.9% and 6.2% in each respective period. Developed Markets Developed markets revenue decreased $0.2 million, or 0.8%, and $0.4 million, or 0.9%, in the three- and six-month periods, respectively, compared with the same periods in 2013, due primarily to a 2.9% and 3.4% decrease in revenue in each respective period from the impact of a weakening Canadian dollar, partially offset by an increase in volume in Canada and Hong Kong in each period. Excluding the impact of foreign currencies, developed markets revenue increased 2.0% and 2.6% in each respective period. Emerging Markets Emerging markets revenue increased $2.0 million, or 5.4%, and $0.8 million, or 1.1%, in the three- and six-month periods, respectively, compared with the same periods in 2013. An increase in volumes in all regions and the inclusion of CIBIL and ZipCode revenue in our consolidated results from the date of acquisition was partially offset by a 11.1% and 12.9% decrease in revenue in each respective period from the impact of weakening foreign currencies, primarily the South African rand. Incremental revenue from our acquisition of CIBIL and ZipCode accounted for a 8.4% and 5.5% increase in emerging markets revenue in the three- and six-month periods. Excluding the impact of foreign currencies and acquisitions, emerging markets revenue increased 8.2% and 8.5% in each respective period. Interactive Segment Interactive revenue increased $5.9 million compared with the prior year. This increase was due primarily to an increase in the average number of subscribers and volume in our indirect channel, partially offset by a decrease in the number of subscribers in our direct channel. 23-------------------------------------------------------------------------------- Table of Contents Operating Expenses Total operating expenses increased $33.8 million and $56.0 million for the three and six months ended June 30, 2014, respectively, compared with the same periods in 2013. The increases were due primarily to: • operating and integration costs associated with our TLO, eScan, CIBIL and ZipCode acquisitions; • an acceleration of $10.2 million of fees for a data matching service contract that we have terminated and in-sourced as part of the upgrade to our technology platform; • an increase in depreciation and amortization; • a severance charge related to the consolidation and subsequent closure of our California-based contact center; and • an increase in labor costs due to adjusting the fair value of our stock-based compensation liability awards in our International segment, partially offset by: • the impact of weakening foreign currencies on the expenses of our International segment; and • a decrease in litigation expense. Operating expenses in the three- and six-month periods were as follows: Three Months Ended June 30, Six Months Ended June 30, (in millions) 2014 2013 $ Change % Change 2014 2013 $ Change % Change Cost of services $ 132.4 $ 121.3 $ 11.1 9.2 % $ 253.3 $ 239.0 $ 14.3 6.0 % Selling, general and administrative 107.4 94.8 12.6 13.3 % 203.6 178.2 25.4 14.3 % Depreciation and amortization 55.3 45.2 10.1 22.3 % 106.8 90.5 16.3 18.0 % Total operating expenses $ 295.1 $ 261.3 $ 33.8 12.9 % $ 563.7 $ 507.7 $ 56.0 11.0 % Cost of Services Cost of services increased $11.1 million and $14.3 million in the three- and six-month periods, respectively, compared with the same periods in 2013. The increase in both periods was due primarily to: • operating and integration costs of our TLO, eScan, CIBIL and ZipCode acquisitions in our USIS and International segments; • an acceleration of $10.2 million of fees for a data matching service contract that we have terminated and in-sourced in our USIS segment; and • a severance charge related to the consolidation and subsequent closure of our California-based contact center in our USIS segment, partially offset by: • the impact of weakening foreign currencies on the expenses of our International segment. Selling, General and Administrative Selling, general and administrative expenses increased $12.6 million and $25.4 million in the three- and six-month periods, respectively, compared with the same periods in 2013. The increase in both periods was due primarily to: • operating and integration costs from our TLO, eScan, CIBIL and ZipCode acquisitions in our USIS and International segments; • a severance charge related to the consolidation and subsequent closure of our California-based contact center and increased headcount in Corporate; and • an increase in labor costs due to adjusting the fair value of our stock-based compensation liability awards in our International segment, partially offset by: • the impact of weakening foreign currencies on our International segment; and 24 -------------------------------------------------------------------------------- Table of Contents • a decrease in litigation expense in our USIS segment. Depreciation and Amortization Depreciation and amortization increased $10.1 million and $16.3 million in the three- and six-month periods, respectively, compared with the same periods in 2013, due primarily to the recent business acquisitions and additional capital expenditures made in the second half of 2013 and first half of 2014, primarily in our USIS segment. Operating Income and Operating Margins Three Months Ended June 30, Six Months Ended June 30, (in millions) 2014 2013 $ Change % Change 2014 2013 $ Change % Change Operating Income(1) U.S. Information Services $ 26.5 $ 37.3 $ (10.8 ) (29.0 )% $ 58.7 $ 80.3 $ (21.6 ) (26.9 )% International 4.7 4.1 0.6 14.6 % 7.0 6.5 0.5 7.7 % Interactive 20.3 15.9 4.4 27.7 % 39.4 31.3 8.1 25.9 % Corporate (19.1 ) (17.8 ) (1.3 ) 7.3 % (37.9 ) (34.5 ) (3.4 ) 9.9 % Total operating income $ 32.4 $ 39.5 $ (7.1 ) (18.0 )% $ 67.2 $ 83.6 $ (16.4 ) (19.6 )% Operating Margin U.S. Information Services 12.8 % 19.9 % (7.0 )% 14.6 % 21.6 % (7.0 )% International 7.4 % 6.7 % 0.7 % 6.0 % 5.6 % 0.4 % Interactive 35.3 % 30.8 % 4.5 % 35.0 % 30.5 % 4.5 % Total operating margin 9.9 % 13.1 % (3.2 )% 10.7 % 14.1 % (3.5 )% Adjusted Operating Income(2) U.S. Information Services $ 36.7 $ 39.9 $ (3.2 ) (8.0 )% $ 68.9 $ 81.9 $ (13.0 ) (15.9 )% International 4.7 6.4 (1.7 ) (26.6 )% 7.0 8.8 (1.8 ) (20.5 )% Interactive 20.3 15.9 4.4 27.7 % 39.4 31.3 8.1 25.9 % Corporate (19.1 ) (17.5 ) (1.6 ) (9.1 )% (37.9 ) (34.3 ) (3.6 ) (10.5 )% Total Adjusted Operating Income $ 42.6 $ 44.7 $ (2.1 ) (4.7 )% $ 77.4 $ 87.7 $ (10.3 ) (11.7 )% Adjusted Operating Margin U.S. Information Services 17.7 % 21.2 % (3.5 )% 17.2 % 22.0 % (4.8 )% International 7.4 % 10.4 % (3.0 )% 6.0 % 7.5 % (1.5 )% Interactive 35.3 % 30.8 % 4.5 % 35.0 % 30.5 % 4.5 % Total adjusted operating margin 13.0 % 14.9 % (1.9 )% 12.3 % 14.8 % (2.5 )% (1) For the three and six months ended June 30, 2014, operating income included $10.2 million of accelerated fees for a data matching service contract that we have terminated and in-sourced that was recorded in our USIS segment. For the three months ended June 30, 2013, operating income included a $2.3 million loss on the disposal of a small operating company recorded in our International segment and a $2.9 million adjustment for tax expense related to prior years that was recorded in each segment and in Corporate as follows: USIS $2.6 million; and Corporate $0.3 million. For the six months ended June 30, 2013, operating income also included a $1.1 million gain on the disposal of a product line recorded in our USIS segment. (2) See footnote 2 to the "Key Performance Measures" table for a discussion about Adjusted Operating Income, why we use it, its limitations, and the reconciliation to its most directly comparable GAAP measure, operating income. 25-------------------------------------------------------------------------------- Table of Contents Total operating income decreased $7.1 million and $16.4 million for the three and six months ended June 30, 2014, respectively, compared with the same periods in 2013. The decreases were due primarily to: • operating and integration costs from our TLO, eScan, CIBIL and ZipCode acquisitions in our USIS and International segments; • an acceleration of $10.2 million of fees for a data matching service contract that we have terminated and in-sourced in our USIS segment; • the increase in depreciation and amortization primarily in our USIS segment; • a severance charge related to the consolidation and subsequent closure of our California-based contact center in our USIS segment and Corporate; • an increase in labor costs due to adjusting the fair value of our stock-based compensation liability awards in our International segment; and • the impact of weakening foreign currencies on the 2014 results of our International segment; and partially offset by: • the increase in revenue in all segments, including revenue from the recent acquisitions. Margins for the USIS segment decreased due primarily to the integration expenses of our eScan and TLO acquisitions including depreciation and amortization as well as the accelerated fees for canceling the data matching service and the severance charge, partially offset by the increase in revenue. Margins for the International segment were relatively flat as the increase in revenue was offset by the increase in operating and integration costs of the recent acquisitions and stock-based compensation. Margins for the Interactive segment increased due to the increase in revenue. Non-Operating Income and Expense Three Months Ended June 30, Six Months Ended June 30, (in millions) 2014 2013 $ Change % Change 2014 2013 $ Change % Change Interest expense $ (50.0 ) $ (49.2 ) $ (0.8 ) (1.6 )% $ (100.8 ) $ (99.0 ) $ (1.8 ) (1.8 )% Interest income 0.7 0.2 0.5 250.0 % 1.2 0.5 0.7 140.0 % Earnings from equity method investments 3.1 4.2 (1.1 ) (26.2 )% 6.7 7.3 (0.6 ) (8.2 )% Other income and expense, net: Acquisition fees (0.7 ) (4.0 ) 3.3 82.5 % (1.3 ) (5.6 ) 4.3 76.8 % Loan fees (13.6 ) (0.5 ) (13.1 ) nm (14.2 ) (3.2 ) (11.0 ) nm Dividends from cost method investments 0.5 0.5 - - % 0.5 0.5 - - % Other income, net 61.8 1.3 60.5 nm 61.3 1.9 59.4 nm Total other income and expense, net 48.0 (2.7 ) 50.7 nm 46.3 (6.4 ) 52.7 nm Non-operating income and expense $ 1.8 $ (47.5 ) $ 49.3 103.8 % $ (46.6 ) $ (97.6 ) $ 51.0 52.3 % nm: not meaningful Interest expense increased $0.8 million and $1.8 million in the three- and six-month periods, respectively, compared with the same periods in 2013. Additional interest expense resulting from the increase in the average principal balance of the senior secured credit facility in 2014 compared with 2013 was offset by lower interest expense resulting from the early redemption of the 11.375% notes. See Part I, Item 1, Note 9, "Debt,"for additional information on our interest expense. Acquisition fees represent costs we have incurred for acquisition-related efforts. For the three and six months ended June 30, 2014, loan fees included $12.7 million of refinancing fees and other net costs expensed as a result of refinancing our senior secured credit facility. 26-------------------------------------------------------------------------------- Table of Contents For the three and six months ended June 30, 2014, other income, net, included a net gain of $45.4 million resulting from the early redemption of the 11.375% notes consisting of the unamortized 2012 Change in Control Transaction fair value increase in the notes of $89.4 million less an early redemption premium and other costs totaling $44.0 million. Other income, net for the three- and six month periods also included a gain of $21.7 million resulting from remeasuring our previously held equity interest in CIBIL under the accounting guidance for acquisitions achieved in stages (ASC 805-10-25-10), an impairment charge of $4.5 million related to a cost-method investment that has sold its assets and is in the process of liquidating, and a loss of $0.7 million on the swap that no longer qualifies for hedge accounting. See Part I, Item 1, Note 9, "Debt" for additional information about the early redemption of the 11.375% notes and the senior secured credit facility refinancing. See Part I, Item 1, Note 6, "Investments in Affiliated Companies," for additional information on the gain on our equity interest in CIBIL. Provision for Income Taxes Over the last three years, a tax law known as the "look-through rule" exception has been allowed to expire and has been retroactively reinstated, which has impacted TransUnion's effective tax rate. Subpart F requires U.S. corporate shareholders to recognize current U.S. taxable income from passive income, such as dividends earned, at certain foreign subsidiaries regardless of whether that income is remitted to the U.S. The look-through rule provides an exception to this recognition for subsidiary passive income attributable to an active business. When the look-through rule is not in effect, we are required under ASC 740-30 to accrue a tax liability for certain foreign earnings as if those earnings were distributed. During 2013, the look-through rule exception was retroactively reinstated and then, effective January 1, 2014, it was again allowed to expire. For the three months ended June 30, 2014, the effective tax rate of 41.8% was higher than the 35% U.S. federal statutory rate due primarily to the expiration of the look-through rule and changes in state income tax rates. For the three months ended June 30, 2013, we reported a loss before income taxes and an effective tax benefit rate of 23.8%. This rate was lower than the 35% U.S. federal statutory rate due primarily to the impact of lower foreign tax rates on interim period tax expense. For the six months ended June 30, 2014, the effective tax rate of 68.9% was higher than the 35% U.S. federal statutory rate due primarily to the expiration of the look-through rule and the application of ASC 740-30 to our unremitted foreign earnings, along with increased tax on foreign dividends and an increase in the state income tax rate. For the six months ended June 30, 2013, we reported a loss before income taxes and an effective tax benefit rate of 19.3%. This rate was lower than the 35% U.S. federal statutory rate due primarily to the net impact on deferred tax of the look-through rule reinstatement, an increase to the state income tax rate and the effect of lower foreign tax rates on interim period tax expense. Significant Changes in Assets and Liabilities There were no significant changes in assets or liabilities between December 31, 2013, and June 30, 2014. Liquidity and Capital Resources Overview Our principal sources of liquidity are cash flows provided by operating activities, cash and cash equivalents on hand, and our senior secured revolving credit facility. Our principal uses of liquidity are working capital, capital expenditures, debt service and other general corporate purposes. We believe our cash on hand, cash generated from operations, and funds available under the senior secured revolving credit facility will be sufficient to finance our liquidity requirements for the foreseeable future. We may, however, elect to raise funds through debt or equity financing in the future to fund significant investments or acquisitions that are consistent with our growth strategy. Cash and cash equivalents totaled $93.2 million and $111.2 million at June 30, 2014, and December 31, 2013, respectively, of which $56.5 million and $80.6 million was held outside the United States. As of June 30, 2014, we had no outstanding borrowings against the senior secured revolving credit facility and could have borrowed up to the full $190.0 million available. Beginning in 2015, we will be required to make additional principal payments based on the previous year's excess cash flows. See Part I, Item 1, Note 9 "Debt," for additional information about our debt. 27-------------------------------------------------------------------------------- Table of Contents Sources and Uses of Cash Six Months Ended June 30, (in millions) 2014 2013 $ Change Cash provided by operating activities $ 45.6 $ 47.3 $ (1.7 ) Cash used in investing activities (121.0 ) (54.4 ) (66.6 ) Cash provided by (used in) financing activities 57.8 (12.2 ) 70.0 Effect of exchange rate changes on cash and cash equivalents (0.4 ) (4.8 ) 4.4 Net change in cash and cash equivalents $ (18.0 ) $ (24.1 ) $ 6.1 Operating Activities Cash flows from operations was relatively unchanged from the prior year. Investing Activities The increase in cash used in investing activities was due primarily to an increase in cash paid for capital expenditures and the acquisition of CIBIL. Financing Activities The increase in cash provided by financing activities was due primarily to an increase in net borrowings partially offset by the 2014 Refinancing Transaction prepayment premium and fees. Capital Expenditures Capital expenditures are made to grow our business by developing new and enhanced capabilities, to increase the effectiveness and efficiency of the organization, and to reduce risk. Expenditures are made primarily for product development, disaster recovery and redundancy, security enhancements, regulatory compliance, and the replacement and upgrade of existing equipment at the end of its useful life. During the third quarter of 2013 we began a strategic initiative to upgrade our technology platform to enable growth, provide additional redundancy, promote innovation and to provide a competitive advantage. We also are in the process of making improvements to our corporate headquarters facility. Cash paid for capital expenditures increased $44.1 million, from $30.2 million for the six months ended June 30, 2013, to $74.3 million for the six months ended June 30, 2014 due to the ongoing upgrades to our technology platform and corporate headquarters facility. We expect total capital expenditures for the remainder of 2014 to be higher than 2013 as a percent of revenue due to strategic initiatives, including further upgrades of our technology platform and improvements to our corporate headquarters. Debt Senior Secured Credit Facility On April 9, 2014, we refinanced and amended our senior secured credit facility. The refinancing resulted in an increase of the outstanding term loan from $1,120.5 million to $1,900.0 million. The amendment, among other things, reduced the interest rate floor and margins, reduced the amount available under the revolving line of credit from $210.0 million to $190.0 million, extended the maturity dates, and changed certain covenant requirements. The additional borrowings were used in part to repay all amounts outstanding under the existing revolving line of credit and pay fees and expenses associated with the refinancing transaction. On May 9, 2014, the remaining borrowings were used to redeem the entire $645.0 million outstanding balance of the 11.375% notes issued by TransUnion Financing Corp and Trans Union LLC including unpaid accrued interest and a prepayment premium. We refer to these transactions collectively as the "2014 Refinancing Transaction." The 2014 Refinancing Transaction resulted in a net gain of $32.7 million that was recorded in the consolidated statement of income and $5.0 million of additional deferred financing fees that were recorded in the consolidated balance sheet in the second quarter of 2014. The 2014 Refinancing Transaction is also expected to result in a reduction in cash paid for interest of approximately $45 million annually at current interest rates beginning in May, 2014. 11.375% notes In connection with the 2010 Change in Control Transaction, on June 15, 2010, we issued $645.0 million principal amount of 11.375% senior unsecured notes ("11.375% notes") due June 15, 2018. As a result of the 2012 Change in Control Transaction, a purchase accounting fair value adjustment increase of $124.2 million was allocated to the senior notes. These notes were repaid 28-------------------------------------------------------------------------------- Table of Contents in full on May 9, 2014, from the incremental proceeds borrowed on our senior secured credit facility. Effect of Certain Debt Covenants Our senior secured credit facility includes a senior secured net leverage ratio covenant which must be tested as a condition to incur additional indebtedness. The ratio must also be tested at the end of any fiscal quarter for which we have a line of credit borrowing outstanding in excess of 30% of the revolving credit commitment. As of June 30, 2014, this covenant, if it applied, would have required us to maintain a senior secured net leverage ratio on a pro forma basis equal to, or less than, 6.00-to-1. The senior secured net leverage ratio is the ratio of TransUnion Corp's consolidated senior secured net debt to TransUnion Corp's consolidated EBITDA for the trailing twelve months as defined in the credit agreement governing our senior secured credit facility ("Covenant EBITDA"). Covenant EBITDA for the trailing twelve-month period ended June 30, 2014, totaled $438.8 million. Covenant EBITDA was higher than Adjusted EBITDA by $55.1 million for the trailing twelve-month period ended June 30, 2014, due to adjustments for noncontrolling interests, equity investments and other adjustments as defined in the credit agreement governing our senior secured credit facility. On June 30, 2014, the Company had no borrowings outstanding against the revolving line of credit and was therefore not subject to the net leverage ratio covenant. However, the senior secured net leverage ratio as of June 30, 2014, was 4.13 to 1. Under the covenants of the instruments governing our senior debt, TransUnion Corp is restricted from making certain distribution payments to TransUnion Holding Company, Inc. As of June 30, 2014, and December 31, 2013, TransUnion Corp's capacity to make these payments was restricted to approximately $145 million and $140 million, respectively. As result of the 2014 Refinancing Transaction, TransUnion Corp can make dividend payments to TransUnion Holding Company, Inc. for the purpose of making interest payments, without restrictions. On April 30, 2012, we entered into swap agreements that effectively fixed the interest payments on a portion of the existing term loan at 2.033%, plus the applicable margin, beginning March 28, 2013. Under the swap agreements, which we have designated as cash flow hedges, we pay a fixed rate of interest of 2.033% and receive a variable rate of interest equal to the greater of 1.50% or the three month LIBOR. The net amount paid or received is recorded as an adjustment to interest expense. As a result of the April 9, 2014, credit facility amendment, the hedges were no longer expected to be highly effective and no longer qualify for hedge accounting. The total fair value of the swap instruments as of April 9, 2014, of $1.6 million was recorded in other liabilities. The corresponding net of tax loss of $1.0 million was recorded in accumulated other comprehensive income and will be amortized to interest expense on a straight-line basis through December 29, 2017, the remaining life of the swaps. Changes in the fair value of the swaps after April 9, 2014, are being recorded in other income and expense. We recorded a loss of $0.7 million for the change in the fair value of the swaps from April 9, 2014, through June 30, 2014. Recent Accounting Pronouncements See Note 1, "Significant Accounting And Reporting Policies," for information about recent accounting pronouncements and the potential impact on our consolidated financial statements. Application of Critical Accounting Estimates We prepare our consolidated financial statements in conformity with U.S. GAAP. These accounting principles require us to make certain judgments and estimates in reporting our operating results and our assets and liabilities. Although we believe that our estimates and judgments are reasonable, they are based on information available at the time, and actual results may differ significantly from these estimates under different conditions. See the "Application of Critical Accounting Estimates" section in Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1, "Significant Accounting and Reporting Policies" to our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 27, 2014, for a description of the significant accounting estimates used in the preparation of our consolidated financial statements. Cautionary Statement Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Any statements made in this quarterly report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plans and strategies. These statements often include words such as "anticipate," "expect," "suggest," "plan," "believe," "intend," "estimate," "target," "project," "should," "could," "would," "may," "will," "forecast" and other similar expressions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that factors affecting our actual financial results or results of operations could cause actual results to differ materially from those expressed 29-------------------------------------------------------------------------------- Table of Contents in the forward-looking statements. Factors that could materially affect our financial results or such forward-looking statements include: • macroeconomic and industry trends and adverse developments in the debt, consumer credit and financial services markets; • our ability to maintain the security and integrity of our data; • our ability to deliver services timely without interruption; • our ability to maintain our access to data sources; • government regulation and changes in the regulatory environment; • litigation or regulatory proceedings; • our ability to effectively develop and maintain strategic alliances and joint ventures; • our ability to make acquisitions and integrate the operations of other businesses; • our ability to timely develop new services; • our ability to manage and expand our operations and keep up with rapidly changing technologies; • our ability to manage expansion of our business into international markets; • economic and political stability in international markets where we operate; • our ability to effectively manage our costs; • our ability to provide competitive services and prices; • our ability to make timely payments of principal and interest on our indebtedness; • our ability to satisfy covenants in the agreements governing our indebtedness; • our ability to maintain our liquidity; • fluctuations in exchange rates; • changes in federal, state, local or foreign tax law; • our ability to protect our intellectual property; • our ability to retain or renew existing agreements with long-term customers; • our ability to access the capital markets; • further consolidation in our end customer markets; • reliance on key management personnel; and • other factors described and referred to in our Annual Report on Form 10-K for the year ended December 31, 2013, under Part I, Item 1A, "Risk Factors," and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Many of these factors are beyond our control. The forward-looking statements contained in this quarterly report speak only as of the date of this quarterly report. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements, to reflect events or circumstances after the date of this quarterly report or to reflect the occurrence of unanticipated events. 30-------------------------------------------------------------------------------- Table of Contents |