Verisk Analytics, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Verisk provides proprietary risk data, analytics, and decision-support solutions through its Risk Assessment and Decision Analytics segments. Results include Wood Mackenzie from its May 19 acquisition date; mortgage-services results are discontinued operations.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $497.7m | $423.6m | $957.0m | $833.2m |
| Operating income | $153.7m | $159.1m | $332.0m | $307.9m |
| Continuing-operations income | $163.3m | $88.1m | $262.0m | $172.5m |
| Net income | $163.3m | $88.1m | $262.0m | $203.7m |
| Diluted EPS | $0.97 | $0.52 | $1.59 | $1.20 |
| Operating cash flow | Not separately stated | Not separately stated | $355.5m | $286.8m |
- Q2 revenue increased 17.5%; excluding recent acquisitions, management reported growth of 7.6%. Six-month revenue rose 14.9%, or 9.5% excluding Maplecroft and Wood Mackenzie.
- Q2 reported EBITDA was $296.1m, a 59.5% margin versus 45.9% a year earlier. The $85.2m foreign-currency hedge gain, net of acquisition transaction costs, lifted the margin by 11.8 percentage points. Six-month EBITDA was $512.5m, a 53.5% margin versus 51.2%; the comparable net impact of the derivative gain and transaction costs was 6.1 percentage points. EBITDA is a non-GAAP measure.
- Q2 operating income declined 3.4% despite higher revenue, as expenses rose 30.0%, including higher selling, general and administrative costs and amortization. Six-month operating income increased 7.8%.
- Q2 effective tax rate was 18.8% versus 37.9%; the six-month rate was 27.3% versus 36.9%. The company attributed the lower rates primarily to Wood Mackenzie-related tax benefits. Six-month 2014 net income also included $31.1m from discontinued operations, so continuing-operations income is the closer comparison.
- Six-month cash flow from operations was $355.5m; capital expenditures were $60.1m, implying approximately $295.4m of operating cash flow less capital expenditures. Cash and cash equivalents were $145.5m and available-for-sale securities were $3.7m at June 30.
Balance sheet, acquisition and financing
- Verisk acquired Wood Mackenzie for a net cash purchase price of approximately $2.89bn, funded with debt, equity, revolving-credit borrowings, and cash. The acquisition expands the company internationally and into energy, chemicals, metals, and mining.
- Total debt, including capital leases, was $3.32bn at June 30, up from $1.44bn at year-end. Debt to EBITDA leverage was 3.10x, compared with 1.57x before the acquisition. The company said it was in compliance with debt covenants.
- Financing included $1.25bn principal of new senior notes due 2025 and 2045 and a $1.75bn revolving credit facility, with $1.02bn drawn at quarter-end. The facility requires minimum interest coverage of 3.0x and a funded-debt leverage ratio limit of 3.75x, stepping down to 3.5x after the specified post-acquisition period.
- Current liabilities exceeded current assets, in part reflecting $436.0m of fees received in advance. Management noted that prepaid subscriptions and long-term contracts support cash generation and stated it expected available cash and credit capacity to meet working-capital and capital needs.
Changes, outlook and risks
- Decision Analytics six-month revenue grew 20.7%, including acquired businesses; excluding recent acquisitions it grew 12.0%. Risk Assessment revenue increased 5.7%. Financial services, healthcare, insurance, and acquired energy-related operations contributed to Decision Analytics growth.
- Management estimated 2015 capital expenditures of approximately $170m, primarily for technology infrastructure and solution development. The filing provides no specific revenue or earnings guidance.
- Wood Mackenzie purchase-price allocations remained preliminary and could change during the measurement period of up to one year. Goodwill from the acquisition is not tax-deductible; annual goodwill impairment testing found no impairment as of June 30.
- Acquisition-related items included the $85.2m hedge gain, $26.6m of transaction costs in selling, general and administrative expense, and $13.3m of acquisition-related interest expense for the six-month period. Debt prepayments also generated $4.8m of make-whole costs, and terminated bridge-financing fees of $9.1m were expensed.
- Management identified higher leverage, integration and retention challenges, possible energy-industry weakness, international operating risks, and increased currency exposure as risks. A hypothetical 10% exchange-rate movement was not expected to materially affect earnings, according to the filing.
- Several legal matters remained unresolved, with potential losses not reasonably estimable. Appeals dismissing the Mariah Re and ISO pension matters were affirmed; other described matters included employment, shareholder, and alleged antitrust claims. Management reported effective disclosure controls, but excluded Wood Mackenzie from its assessment while integration proceeds.
Important facts for investors to verify
- How much of reported growth and EBITDA reflects Wood Mackenzie, Maplecroft, the hedge gain, acquisition costs, and tax benefits rather than ongoing operations.
- Wood Mackenzie’s post-acquisition performance, integration progress, customer and employee retention, and final purchase-price allocation.
- Debt reduction plans, leverage and covenant headroom, interest costs, and the company’s capacity to fund capital expenditures and other priorities.
- Whether management’s $170m capital-expenditure estimate and the reported cash-generation pattern are maintained; results are not necessarily indicative of full-year performance.
- Developments in outstanding litigation and the completion of Wood Mackenzie’s integration into internal financial controls.