Verisk Analytics, Inc. — Q1 2014 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2014, compared with Q1 2013. Verisk provides proprietary data and analytics for risk-bearing businesses through Decision Analytics and Risk Assessment. The mortgage services business, Interthinx, is presented as a discontinued operation in both periods.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Continuing revenues | $409.6 million | $376.7 million | +8.7% |
| Operating income | $148.8 million | $145.5 million | +2.3% |
| Income from continuing operations | $84.4 million | $79.4 million | +6.3% |
| Net income, including discontinued operations | $115.6 million | $80.5 million | +43.5% |
| Diluted EPS, including discontinued operations | $0.68 | $0.47 | +44.7% |
| Cash provided by operating activities | $232.8 million | $191.3 million | +21.7% |
- Revenue growth was led by Decision Analytics, up 10.4% to $247.3 million; Risk Assessment rose 6.4% to $162.3 million. Decision Analytics financial services revenue grew 21.6%, insurance 11.8%, and healthcare 8.2%.
- Expenses grew faster than sales: cost of revenues increased 18.1% to $169.7 million, including $11.7 million of higher data and data-processing costs. Operating margin was approximately 36.3%, versus 38.6% a year earlier.
- Interest expense fell 13.2% to $17.4 million, primarily because certain shelf notes matured and were repaid in 2013. The effective tax rate declined to 35.7% from 36.6%, primarily reflecting favorable state legislative changes.
- Reported net income includes $31.1 million of after-tax income from discontinued operations. Verisk sold Interthinx on March 11 for $155 million in cash and recorded a $65.4 million pretax gain on the sale. Thus, net income and reported EBITDA growth are not representative of continuing operations alone. EBITDA, a non-GAAP measure, was $238.4 million, up 32.7%, and includes discontinued operations and the sale gain.
- Operating cash flow benefited from customer collections and advance subscription payments; fees received in advance rose to $343.8 million from $226.6 million at year-end. Cash and cash equivalents were $427.4 million at March 31, compared with $165.8 million at December 31; cash plus available-for-sale securities totaled $431.3 million.
- Total debt, including capital leases, was $1.275 billion. The company had no borrowings under its $975 million revolving credit facility and reported $972.9 million of available capacity, net of letters of credit. It was in compliance with debt covenants.
- Investing cash flow was positive $109.9 million, principally reflecting the $155 million Interthinx proceeds; capital expenditures were $36.1 million. Financing cash flow was negative $81.6 million, primarily due to $88.2 million of share repurchases. The company expected 2014 capital expenditures of approximately $147 million.
Material changes, outlook, and risks
- Verisk agreed to acquire Eagleview Technology Corporation for a net cash purchase price of $650 million, expected to be funded with operating cash and credit-facility borrowings. Following an FTC Second Request for information, the company expected the transaction to close in Q3 2014, subject to regulatory, shareholder, and other customary conditions.
- Management describes advance-paid subscriptions and long-term contracts as a source of recurring revenue and cash flow, and cites revenue growth and EBITDA margin as performance measures. It expects to invest in technology and new solutions; those investments may offset margin expansion. No broader earnings or revenue guidance is provided in the filing.
- The filing identifies several unresolved legal matters, including employment-related claims concerning former subsidiary Interthinx, the Mariah Re dispute, a MediConnect shareholder suit, an ERISA pension-plan class action, and a vehicle-history-related injury suit. The company says it cannot currently estimate possible losses for these matters. A separate FCRA class-action settlement for $18.6 million was described as insurance-funded and subject to final approval.
- Management reported no material change in risk factors or market-risk disclosures, no material changes in contractual obligations, and no off-balance-sheet arrangements. Disclosure controls were assessed as effective as of March 31, 2014.
Key investor verification points
- Confirm the timing, final purchase price, regulatory outcome, and financing of the Eagleview acquisition, including the resulting debt and covenant headroom.
- Assess continuing-operations earnings and margins separately from the Interthinx sale gain and discontinued-operation results.
- Track whether revenue growth can outpace rising cost of revenues, especially data-processing, personnel, and technology costs.
- Review the cash-flow contribution from advance customer payments and the planned increase in capital expenditures.
- Monitor resolution and potential exposure from the outstanding litigation, particularly the Interthinx-related claims for which Verisk retained responsibility after the sale.