Verisk Analytics, Inc. — FY 2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2016; it is not a standalone fourth-quarter filing. Verisk provides data and analytics to insurance, energy and specialized markets, and financial services customers. Most revenue comes from recurring subscriptions and long-term agreements. Results are presented in millions of dollars unless noted.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 | Change / context |
|---|---|---|---|
| Revenue from continuing operations | $1,995.2 | $1,760.7 | +13.3%; +4.9% excluding specified recent acquisitions |
| Operating income | $767.6 | $703.4 | +9.1%; operating margin about 38.5%, versus 40.0% |
| Income from continuing operations | $451.5 | $487.5 | -7.4%; diluted EPS $2.64 versus $2.89 |
| Net income, including discontinued operations | $591.2 | $507.6 | +16.5%; diluted EPS $3.45 versus $3.01 |
| Cash from operating activities | $546.1 | $623.7 | Down $77.6 |
| Capital expenditures | $156.5 | $166.1 | About 7.4% of revenue in 2016 |
| Cash and available-for-sale securities | $138.5 | $141.9 | Cash alone was $135.1 |
| Total debt | $2,387.0 | $3,145.7 | Debt less cash and securities was approximately $2,248.5 |
Current assets were $500.9 and current liabilities $621.6; management says a working-capital deficit is typical because subscriptions are often prepaid. The company reported compliance with debt covenants. The $1.5 billion revolving facility had $100 million drawn at year-end; $70 million was repaid in January and February 2017.
Segments and fourth quarter
- Decision Analytics revenue was $1,270.9, up 18.5% as reported; excluding specified acquisitions, it grew 4.8%. Energy and specialized markets grew 43.4% reported, but declined 5.5% excluding acquisitions, amid energy-market and currency headwinds.
- Risk Assessment revenue was $724.3, up 5.2% reported and 5.0% excluding acquisitions.
- Fourth-quarter revenue was $506.1 versus $477.4 in 2015. Operating income was $185.5 versus $186.2; net income was $109.3 versus $113.8.
Material changes, unusual items and outlook
- Verisk sold its healthcare business on June 1, 2016, for $714.6 million cash, plus a subordinated note and contingent consideration. The sale generated a $265.9 million pre-tax gain; discontinued operations contributed $139.7 million to 2016 net income. The note had a stated 9% interest rate, rising to 11% under specified conditions; its year-end carrying receivable was $84.1 million.
- Debt declined following $770 million of net credit-facility repayments, largely funded by the healthcare divestiture proceeds. The 2016 effective tax rate on continuing operations was 30.9%, compared with 28.7% in 2015; management attributed the increase primarily to nonrecurring Wood Mackenzie-related tax benefits in 2015.
- 2015 comparisons include an $85.2 million one-time foreign-currency hedge gain related to the Wood Mackenzie acquisition. 2016 net income also included the healthcare-sale gain, so reported net-income growth does not reflect continuing operations alone.
- Verisk completed several smaller acquisitions in 2016, including Greentech Media and Analyze Re. Subsequent to year-end, it acquired Healix for $53.8 million cash in February 2017.
- Management estimated 2017 capital expenditures of approximately $160 million, principally for technology infrastructure and solution development. No specific company revenue or earnings guidance is provided. Management described continued investment in products and growth, while noting volatile energy markets, currency pressure and changing customer demand.
Risks and contingencies
- Approximately 48.9% of 2016 revenue came from U.S. P&C primary insurers. Industry conditions, customer consolidation, reduced acceptance of Verisk’s solutions, or changes in premium-linked fees could affect results.
- The business depends on customer, government and other third-party data. Loss of access, privacy or cybersecurity incidents, and tighter data regulation could impair products, increase costs or damage customer relationships.
- Acquisition integration, goodwill and intangible-asset valuation, and leverage remain important risks. Goodwill and net intangible assets totaled $3,588.9 million, or 77.5% of assets; the 2016 annual goodwill impairment test identified no impairment.
- Foreign-exchange exposure, the U.K.’s exit from the EU, and weakness or volatility in energy markets could affect revenue and costs. Foreign revenue represented 22.6% of consolidated revenue in 2016.
- Patent, antitrust, insurance-related and other litigation remained unresolved. Management said it could not estimate possible losses for certain ongoing matters; it reported non-material settlements in two other cases.
Most important facts for investors to verify
- Separate recurring operating performance from acquisition contributions and the healthcare-sale gain; continuing-operations income fell despite higher reported revenue.
- Review cash conversion and the drivers of lower operating cash flow, including tax paid on the divestiture gain and the one-time $18.8 million KSOP cash contribution.
- Assess debt maturities, covenant headroom and future capital allocation. The company repurchased $326.8 million of shares in 2016, had $636.0 million of authorization remaining, and did not intend to pay dividends.
- Track organic growth and margins in Energy and specialized markets, including the effect of commodity conditions and currency movements.
- Monitor the status and potential financial or operational effects of the disclosed litigation, data-protection risks, and integration of acquisitions.