Verisk Analytics, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a standalone quarterly report; the filing also provides unaudited fourth-quarter results. Dollar amounts below are in millions unless stated otherwise.
Business context
Verisk provides proprietary data, analytics and decision-support solutions, primarily to insurance customers, across risk assessment and decision analytics. Most revenue comes from subscriptions and long-term agreements, many paid in advance. The company reported that approximately 69% of 2011 revenue came from subscriptions or long-term agreements. It acquired Health Risk Partners and Bloodhound Technologies in 2011, expanding its healthcare analytics and claims-editing offerings.
Financial performance
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Revenue | $1,331.8 | $1,138.3 | +17.0% |
| Operating income | $513.4 | $440.9 | +16.4% |
| Net income | $282.8 | $242.6 | +16.6% |
| Diluted EPS | $1.63 | $1.30 | +25.4% |
| EBITDA, company-defined non-GAAP | $592.0 | $509.0 | +16.3% |
| EBITDA margin | 44.4% | 44.7% | Down 0.3 percentage points |
| Operating cash flow | $375.7 | $336.0 | +11.8% |
Annual operating margin was approximately 38.5% versus 38.7% in 2010; net margin was approximately 21.2% versus 21.3%. Interest expense rose 55.3% to $53.8 million, mainly following issuance of $700 million of senior notes. The effective tax rate declined to 38.6% from 40.4%.
Fourth quarter, unaudited: Revenue was $351.6 million versus $293.2 million in Q4 2010; operating income was $138.9 million versus $113.7 million; net income was $80.3 million versus $65.9 million; diluted EPS was $0.47 versus $0.37.
Segments: Risk Assessment revenue increased 3.9% to $563.4 million, with EBITDA margin improving to 50.8% from 49.5%. Decision Analytics revenue increased 28.9% to $768.5 million, including $106.9 million attributable to recent acquisitions; its EBITDA margin declined to 39.8% from 40.4%. Excluding recent acquisitions, Decision Analytics growth was supported by insurance loss-quantification and catastrophe-modeling demand and healthcare services, while mortgage and financial services revenue weakened.
Cash, debt and capital allocation
- Year-end cash and cash equivalents were $191.6 million, and available-for-sale securities were $5.1 million; together these totaled $196.7 million.
- Total debt, including capital leases, was $1.106 billion, compared with $839.5 million a year earlier. The company had no borrowings outstanding under its $725 million committed revolving credit facility at year-end and reported compliance with debt covenants.
- Operating cash flow was $375.7 million; investing cash outflow was $204.1 million, including $121.7 million for acquisitions and $59.8 million for fixed-asset purchases. Financing cash outflow was $34.8 million, including $381.8 million of share repurchases, largely offset by debt issuance and other financing proceeds.
- Capital expenditures were 5.1% of revenue in 2011. Management estimated 2012 capital expenditures of approximately $75 million, primarily for technology infrastructure and solution development.
- The board authorized an additional $300 million of repurchases in January 2012, bringing the program’s total authorization to $900 million. The company did not intend to pay cash dividends.
Material changes, outlook and risks
- Revenue growth reflected both acquisitions and organic expansion. Recent acquisitions added $106.9 million of 2011 revenue; therefore, reported growth is not wholly organic.
- Management cited recurring revenue and positive cash flow as key measures, and described growth priorities including selling more solutions to existing customers, developing proprietary data and analytics, expanding into adjacent markets, and pursuing selective acquisitions. No specific revenue or earnings guidance was provided.
- Management expected at least approximately $28.9 million of pension contributions in 2012, and was considering voluntary pension prefunding of $70 million to $90 million. A hard freeze of pension compensation and service credits was scheduled for February 29, 2012.
- Customer and market concentration are significant: approximately 52% of 2011 revenue came from U.S. P&C primary insurers; mortgage-related solutions contributed approximately 10%, and two customers represented the majority of mortgage revenue. Mortgage origination volumes had declined versus 2010.
- Key stated risks include loss or restricted use of contributed or third-party data; privacy, security and regulatory changes; dependence on insurance and mortgage markets; customer consolidation; competition; acquisition integration and financing; and litigation.
- A Florida class action naming Xactware was reported after year-end; it sought declaratory relief and no monetary relief against Xactware, and the company said it could not estimate the outcome or liability. Other described matters included resolved claims and litigation; management stated that the possible loss in an early-stage ongoing matter could not be reasonably estimated.
- 2011 included a $3.4 million benefit from reducing acquisition contingent consideration after earnout targets for D2 and Strategic Analytics were assessed as unlikely to be met. Goodwill and net intangible assets totaled $936.4 million, about 60.8% of assets; no 2011 goodwill impairment was recorded.
Most important facts for investors to verify
- How much of Decision Analytics’ growth is sustainable organic growth versus acquisition contribution, and how acquired businesses are integrating.
- Whether recurring subscription revenue, segment margins and operating cash flow remain resilient, especially amid continued mortgage-market weakness.
- Debt maturities, interest costs, covenant headroom and the cash impact of repurchases, planned capital spending and pension funding.
- Exposure to a small number of mortgage customers and the company’s ability to retain access to customer-contributed and third-party data.
- Developments in the Xactware/Citizens matter and other litigation, along with privacy, data-security and regulatory risks.
- The assumptions supporting goodwill and intangible-asset valuations, and the limitations of company-defined EBITDA as a substitute for GAAP cash flow or earnings measures.