Verisk Analytics, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context
Verisk provides proprietary data and analytics to risk-bearing businesses, with two reportable segments: Decision Analytics and Risk Assessment. Its mortgage services business, Interthinx, was sold in March 2014 and is presented as discontinued operations.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $448.7 | $411.9 | $1,281.9 | $1,179.0 |
| Operating income | $175.5 | $166.8 | $483.4 | $459.2 |
| Income from continuing operations | $99.0 | $94.9 | $271.6 | $255.9 |
| Net income | $99.0 | $96.4 | $302.7 | $261.2 |
| Diluted EPS | $0.58 | $0.56 | $1.78 | $1.51 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $378.6 | $386.5 |
- Q3 revenue grew 8.9%; Decision Analytics increased 11.8% and Risk Assessment 4.1%. For the first nine months, segment revenue grew 11.0% and 5.2%, respectively.
- Q3 operating income increased 5.2%, slower than revenue growth. Cost of revenues rose 15.7%, driven mainly by personnel and data/data-processing expenses; fixed-asset depreciation and amortization rose 31.1%.
- Reported nine-month net income rose 15.9%, while continuing-operations income increased 6.1%. The difference principally reflects $31.1 million of after-tax income from discontinued operations, including the gain on the Interthinx sale.
- Management-reported EBITDA was $211.3 million for Q3 and $644.0 million for nine months. The nine-month EBITDA margin was 49.8%, including the discontinued operation and sale gain; management said the gain added 3.9 percentage points. EBITDA is a non-GAAP measure.
- Effective tax rates were 37.2% for Q3 and 37.0% for the nine-month period, compared with 36.0% and 36.2%. Management attributed the higher 2014 rates primarily to prior-period tax-planning benefits, audit settlements, and resolution of uncertain tax positions.
Cash, debt, and liquidity
- Cash and cash equivalents were $432.5 million at September 30, 2014, versus $165.8 million at year-end 2013. Cash plus available-for-sale securities totaled $436.2 million.
- Total debt was $1,276.7 million, including capital leases; debt excluding leases was $1,265.7 million. Of total debt, $140.5 million was classified as current. Verisk had no borrowings under its revolving credit facility at quarter-end and reported $972.9 million of available borrowing capacity, net of letters of credit.
- Operating cash flow was $378.6 million. Investing activities provided $39.5 million, including $151.2 million of proceeds from the Interthinx sale, partly offset by $103.0 million of fixed-asset purchases. Financing activities used $151.6 million, primarily for $183.1 million of share repurchases.
- Fees received in advance were $254.2 million. Management says subscription prepayments support cash generation and expects available cash, operating cash flow, and credit capacity to meet working-capital and capital needs. The filing does not provide a conventional liquidity ratio.
Material developments, outlook, and risks
- Verisk agreed to acquire EagleView Technology Corporation for $650 million, funded with operating cash and credit-facility borrowings. The FTC issued a Second Request for information; the purchase agreement was extended to December 31, 2014. The transaction remained pending at quarter-end.
- On October 21, 2014, after quarter-end, the revolving credit facility was amended: capacity increased from $975 million to $990 million and maturity extended to October 2019. Verisk reported compliance with debt covenants at September 30.
- Management estimated 2014 capital expenditures of approximately $147 million, principally for technology infrastructure and solution development. It noted that investment in new solutions may offset margin expansion; no specific earnings guidance was provided.
- Interthinx’s sale generated a $65.4 million pretax gain and $31.1 million after-tax discontinued-operations income. A separate $6 million settlement of three employment matters was agreed in October, mostly expected to be covered by insurance and subject to court approval.
- In the Mariah Re litigation, claims against Verisk subsidiaries were dismissed with prejudice on September 30; the plaintiff had until October 31 to appeal. A pension-plan lawsuit was dismissed and plaintiffs appealed. A separate putative class action alleges a broad insurance-industry conspiracy; Verisk said it could not estimate the outcome or potential liability. The filing also describes a shareholder suit related to a prior subsidiary buyout, for which liability could not be estimated.
- Management stated that there had been no material change in its previously disclosed risk factors or market-risk exposures. Disclosure controls were assessed as effective at the reasonable-assurance level.
Most important facts for investors to verify
- Whether and when the EagleView acquisition closed, its final purchase price and financing mix, and any resulting debt or integration costs.
- Underlying continuing-business growth and margins, excluding the Interthinx sale gain and discontinued operations; reconcile company-reported EBITDA to GAAP results.
- Cash conversion and investment needs, including the stated 2014 capital-expenditure estimate and the effect of working-capital changes.
- Debt maturities, covenant headroom, and the impact of the amended credit facility and any acquisition-related borrowings.
- Final court approval and insurance coverage for the employment settlement, plus developments in the appealed and unresolved legal proceedings.