Verisk Analytics, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts are in U.S. dollars; financial statements are unaudited. Verisk provides data analytics and decision-support solutions, principally to insurance, energy and specialized markets, and financial services customers.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First six months 2018 | First six months 2017 |
|---|---|---|---|---|
| Revenue | $601.3 million | $523.2 million | $1,182.5 million | $1,025.8 million |
| Operating income | $212.3 million | $195.0 million | $406.8 million | $382.7 million |
| Net income | $153.5 million | $121.0 million | $286.5 million | $229.8 million |
| Diluted EPS | $0.91 | $0.72 | $1.70 | $1.36 |
| EBITDA, non-GAAP | $290.5 million | $254.1 million | $559.3 million | $499.8 million |
| EBITDA margin, non-GAAP | 48.3% | 48.6% | 47.3% | 48.7% |
| Net income margin | 25.5% | 23.1% | 24.2% | 22.4% |
| Effective tax rate | 17.0% | 28.8% | 17.5% | 30.6% |
Revenue increased 14.9% in Q2 and 15.3% for the six-month period. Excluding acquisitions, management reported growth of 8.3% for both periods. Net income and diluted EPS rose faster than revenue, helped by lower effective tax rates; operating expenses, including depreciation and amortization, grew faster than revenue over the six months. Interest expense increased 12.1% in Q2 and 13.7% for the six months.
Segments and material changes
- Insurance: Six-month revenue was $842.1 million, up 12.4% (8.6% excluding acquisitions); EBITDA was $460.3 million, up 11.1%. EBITDA margin declined to 54.7% from 55.3%, primarily due to acquisitions.
- Energy and Specialized Markets: Revenue was $255.4 million, up 17.9% (8.6% excluding acquisitions); EBITDA was $74.8 million, up 13.7%. Margin declined to 29.3% from 30.4%, with internal investment and contingent acquisition consideration cited.
- Financial Services: Revenue was $85.0 million, up 41.9%, but up 3.2% excluding acquisitions; EBITDA was $24.2 million, up 22.6%. Margin declined to 28.5% from 32.9%, mainly due to a $3.5 million Fintellix contingent payment.
- Effective in Q1 2018, Verisk changed its reportable segments from Decision Analytics and Risk Assessment to Insurance, Energy and Specialized Markets, and Financial Services; prior-period segment figures were recast.
- Verisk adopted Topic 606 revenue accounting using the modified retrospective method on January 1, 2018. The adoption increased six-month net income by $2.5 million; comparative 2017 results were not restated. The filing reports no material Q2 revenue impact from adoption.
Cash flow, debt and liquidity
- Six-month operating cash flow was $534.2 million, versus $429.8 million a year earlier. Investing cash outflow was $170.0 million, including $99.3 million of capital expenditures and $67.7 million of acquisition and escrow payments. Financing cash outflow was $377.1 million, including $235.0 million of net credit-facility repayments and $179.4 million of share repurchases.
- Cash and cash equivalents were $132.0 million at June 30, down from $142.3 million at year-end; cash plus available-for-sale securities totaled $135.8 million. Operating cash flow less capital expenditures was $434.9 million, calculated from the reported amounts.
- Total debt was $2,781.1 million, compared with $3,008.8 million at December 31, 2017. This included $480.0 million outstanding on the revolving facility and $249.7 million of senior notes due January 2019 classified as current. Verisk reported $1,013.7 million of available revolving capacity, net of letters of credit, and compliance with debt covenants.
- Current liabilities exceeded current assets, largely reflecting deferred revenue from prepaid subscriptions. Management said this working-capital deficit is typical of its prepaid subscription model and expects available cash and credit capacity to meet working capital and capital expenditure needs.
- Capital expenditures were $99.3 million for the six months; management expected approximately $230 million for full-year 2018.
Outlook, risks and unusual items
- The filing provides a capital expenditure expectation, but no specific revenue, earnings, or margin guidance. Management noted that interim results are not necessarily indicative of full-year results.
- Management attributed underlying growth to customer demand and, in Energy and Specialized Markets, improving end markets, favorable currency movements, and environmental health and safety services. Financial Services growth excluding acquisitions was more modest.
- Foreign currency translation reduced other comprehensive income by $62.9 million for the first six months and by $165.6 million in Q2 alone; Q2 comprehensive income was a loss of $11.4 million despite positive net income.
- Verisk acquired Validus, Business Insight, and Marketview in 2018 for a combined net cash purchase price of $67.2 million. Preliminary purchase allocations included $41.1 million of goodwill, which the filing says is not tax-deductible.
- A patent-infringement case involving Verisk’s Xactware products remains unresolved. Discovery was closed, summary judgment motions were due August 31, 2018, and the company said it could not reasonably estimate the outcome or potential liability; an adverse result could materially affect results, financial position, or cash flows.
- The company completed its annual June 30 goodwill impairment test and reported no impairment. Adoption of the new lease standard was expected to have a material balance-sheet impact; adoption was not planned early. Management reported no material change in risk factors or market-risk disclosures and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether organic revenue growth and segment margins continue, particularly in Financial Services, where acquisition-excluded growth was 3.2% for the six months.
- How acquisition-related amortization, contingent payments, and integration costs affect future margins and earnings.
- The 2019 senior-note maturity, revolving-facility usage, interest expense, and covenant headroom.
- Actual full-year capital expenditures versus the approximately $230 million expectation, and the sustainability of operating cash flow after investment and shareholder returns.
- Developments in the Xactware patent litigation and any subsequent change in the company’s assessment of potential exposure.
- The eventual balance-sheet effect of lease-standard adoption and any revisions to the preliminary accounting for recent acquisitions.