Verisk Analytics, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; unaudited. Verisk provides data and analytics for risk-bearing businesses, principally in property and casualty insurance, with Decision Analytics and Risk Assessment reportable segments. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
- Second quarter: Revenue was $373.2, up 14.0% year over year; operating income was $138.4, up 11.8%; net income was $73.3, up 11.8%; diluted EPS was $0.43 versus $0.38.
- First six months: Revenue was $719.7, up 12.4%; operating income was $277.4, up 14.1%; net income was $147.9, up 12.5%; diluted EPS was $0.86 versus $0.75.
- EBITDA and margins: Six-month EBITDA, a company-defined non-GAAP measure, was $323.4, up 14.2%; EBITDA margin was 44.9% versus 44.2%. Q2 EBITDA was $163.8, up 14.0%, with a 43.9% margin, unchanged year over year. Verisk changed its EBITDA definition in Q2; it no longer excludes investment income and realized gains or losses on securities, and prior periods were recast.
- Cash flow: Six-month operating cash flow was $187.4, essentially unchanged from $187.1. Investing cash use was $387.0, including $331.3 for acquisitions and $36.5 for fixed assets. Financing provided $105.3. Cash declined $94.4 to $97.2. Operating cash flow was affected by a $72.0 voluntary pension prefunding.
- Liquidity and debt: Cash and available-for-sale securities totaled $102.0 at June 30. Current assets were $397.5 and current liabilities $612.3; management attributes the typical working-capital deficit in part to advance-paid subscriptions recorded as deferred revenue. Total debt, including capital leases and other obligations, was $1,256.2, versus $1,105.9 at year-end. The revolving facility had $150.0 drawn and $575.0 available; the company reported compliance with its debt covenants.
- Margins and taxes: Six-month effective tax rate was 39.4%, down from 40.0%. The filing reports six-month EBITDA margins of 38.8% for Decision Analytics (39.1% prior year) and 54.1% for Risk Assessment (50.8% prior year).
Material changes versus prior comparable periods
- Decision Analytics revenue rose 19.9% in the first half; Risk Assessment revenue rose 2.9%. Healthcare revenue increased sharply, with recent acquisitions contributing $34.8 of six-month revenue growth and $25.1 in Q2. Excluding recent acquisitions, total revenue increased 7.0% for the first half and 6.4% for Q2.
- Management cited growth in insurance loss quantification, catastrophe modeling, fraud solutions, and healthcare services. Mortgage and financial services remained pressured by lower forensic-solution volumes; excluding a category reclassification, this business declined.
- Interest expense increased 37.8% to $33.8 for the first half, primarily reflecting debt issued in 2011. Amortization of intangible assets rose 19.9%, partly due to acquisitions.
- On March 30, Verisk acquired MediConnect for approximately $331.3 net cash consideration and funded $17.0 of indemnity escrows. The acquisition added substantial goodwill and intangible assets; purchase accounting remained preliminary. Goodwill increased to $934.8, and the annual June 2012 impairment test found no impairment.
- Verisk repurchased 2.35 million shares for $107.0 during the first half; $199.7 remained authorized for repurchases at June 30. Stockholders’ equity improved from a $98.5 deficit at year-end to $46.7.
Outlook, management commentary, risks, and unusual items
- The filing provides no specific revenue, earnings, or margin guidance. Management said it expects sufficient cash and borrowing capacity for working capital, capital expenditures, and growth plans; interim results are not necessarily indicative of full-year results.
- Management emphasizes recurring revenue, customer prepayments, revenue growth, and EBITDA margin. Subscription payments are generally received in advance; 31% of revenue in each six-month period came from transactional solutions.
- The pension and supplemental pension plans were hard-frozen effective February 29, 2012. The company made a $72.0 voluntary pension prefunding and said it did not expect further qualified-plan contributions in 2012. It also contributed $8.5 to a newly established VEBA in the first half and expected remaining 2012 postretirement contributions to be consistent with the quarter.
- After quarter-end, Verisk acquired Aspect Loss Prevention on July 2 for approximately $6.9 net cash consideration and funded $0.8 of indemnity escrows. Initial purchase accounting was incomplete. It also repaid $10.0 on its revolving facility on July 2.
- Two disclosed lawsuits involve Xactware’s 360Value property-replacement estimates and Intellicorp’s employment-related consumer reports. The company said it could not estimate potential liability or ultimate resolution; outcomes could materially affect results, financial position, or cash flows.
- Other notable items include a $3.4 acquisition-liability benefit in the 2011 comparative period that did not recur, and a pension curtailment that reduced the unfunded pension liability. Management reported effective disclosure controls and no material change in risk factors or market-risk disclosures.
Important facts for investors to verify
- How much of ongoing growth—particularly healthcare growth—comes from acquired businesses versus organic performance, and how MediConnect integrates and performs.
- Whether the 44.9% first-half EBITDA margin is sustainable, considering acquisition-related dilution, the changed non-GAAP definition, and the 2011 comparative-period acquisition-liability benefit.
- Debt levels, upcoming maturities, borrowing-facility availability, covenant headroom, and the effect of share repurchases and future acquisitions on liquidity.
- The final MediConnect purchase-price allocation and the eventual allocation and performance of Aspect Loss Prevention.
- Developments in the Citizens/Xactware and Intellicorp litigation, for which the filing provides no estimable loss range.
- Cash-flow sustainability after the pension prefunding and continued pension and postretirement funding requirements.