Verisk Analytics, Inc. — Q1 2018 Form 10-Q
Business context and period. Verisk provides data analytics and decision-support solutions, principally to insurance, energy and specialized markets, and financial-services customers. This unaudited report covers the three months ended March 31, 2018, compared with Q1 2017. Beginning in Q1 2018, the company reported three segments—Insurance, Energy and Specialized Markets, and Financial Services—and recast the prior-period segment information.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $581.2 million | $502.6 million | +15.6%; +8.3% excluding recent acquisitions |
| Operating income | $194.5 million | $187.7 million | +3.6% |
| Net income | $133.0 million | $108.8 million | +22.2% |
| Diluted EPS | $0.79 | $0.64 | +23.4% |
| Net income margin | 22.9% | 21.7% | +1.2 percentage points |
| EBITDA | $268.8 million | $245.7 million | +9.4% |
| EBITDA margin | 46.3% | 48.9% | -2.6 percentage points |
| Operating cash flow | $327.0 million | $317.9 million | +2.9% |
Reported revenue included $36.8 million from recent acquisitions. Revenue growth excluding those acquisitions was 8.8% in Insurance, 8.4% in Energy and Specialized Markets, and 2.1% in Financial Services. The lower consolidated EBITDA margin primarily reflected acquisitions and associated costs; segment margin declines also reflected acquisitions, internal investment, and a contingent-payment accrual.
Segment results: Insurance revenue was $412.6 million (+12.5%) and EBITDA $224.0 million (+9.9%); Energy and Specialized Markets revenue was $125.5 million (+18.1%) and EBITDA $33.6 million (+6.0%); Financial Services revenue was $43.1 million (+46.2%) and EBITDA $11.2 million (+9.8%). Financial Services’ reported revenue growth was largely acquisition-driven; excluding acquisitions, growth was 2.1%. Its EBITDA margin fell to 26.0% from 34.6%, including an $3.5 million Fintellix contingent-payment accrual.
Interest expense rose 15.4% to $32.8 million, attributed to higher average credit-facility borrowings associated with prior acquisitions. The effective tax rate declined to 18.0% from 32.5%, primarily due to U.S. tax reform and greater equity-compensation tax benefits. The resulting tax reduction contributed to net income growth outpacing operating-income growth.
Cash, liquidity, debt and capital allocation
- Cash and cash equivalents were $149.8 million; available-for-sale securities were $3.8 million. Together, these totaled $153.6 million, versus $146.1 million at year-end 2017.
- Total debt on the balance sheet was $2.782 billion, down from $3.009 billion at December 31, 2017. The company had $480 million outstanding under its $1.5 billion revolving facility and reported $1.015 billion available for borrowing, net of letters of credit.
- The company reported compliance with debt covenants. It repaid $235 million net on the revolving facility during the quarter and a further $20 million on April 23, 2018. Senior notes had $2.3 billion aggregate principal outstanding.
- Current liabilities exceeded current assets by approximately $849.5 million, largely reflecting deferred revenue from customer prepayments. Management said the subscription and long-term-contract model generally brings in cash before revenue is recognized and supports working capital needs.
- Investing cash outflow was $68.5 million, including $43.2 million of capital expenditures and acquisition-related payments. Financing cash outflow was $254.2 million, including net debt repayments and $36.2 million of share repurchases. The company also reported $39.8 million of treasury-stock acquisitions in the equity statement, including amounts not necessarily paid in cash by quarter-end.
Changes, outlook and other notable disclosures
- Management expected 2018 capital expenditures of approximately $230 million, principally for technology infrastructure and development or enhancement of solutions. This is the filing’s stated outlook; no broader revenue or earnings guidance is provided in the supplied text.
- Two acquisitions closed in Q1: Business Insight, a U.K. and Ireland insurer analytics provider, for net cash consideration of $17.1 million; and Marketview, a New Zealand consumer-spending analytics provider, for $4.0 million. Their preliminary purchase-price allocations remained subject to revision. The company said these acquisitions were not material individually or together.
- Topic 606 revenue recognition was adopted January 1, 2018 using the modified retrospective method. Adoption increased opening retained earnings by $35.2 million and increased Q1 net income by $1.1 million compared with the prior accounting basis. Prior-period results were not restated.
- Remaining performance obligations were $589.8 million at March 31; the company expected 99% to be satisfied within one year and 1% thereafter, subject to possible contract modifications.
- Goodwill was $3.454 billion, or 55.3% of total assets. The 2017 energy reporting-unit fair value exceeded carrying value by less than 10%; management reported no Q1 triggering event affecting the prior impairment test.
- The company disclosed ongoing patent litigation concerning Xactware products. It said the matter’s ultimate resolution and potential loss could not be reasonably estimated; plaintiffs seek damages and injunctive relief. Some patent claims had previously been dismissed.
- Management stated that disclosure controls were effective at the reasonable-assurance level and that there were no material changes in internal control over financial reporting or material changes to reported risk factors.
Important facts for investors to verify
- How much of continuing revenue growth and future profitability is organic, particularly in Financial Services, versus attributable to acquisitions.
- Whether acquisition-related expense, amortization, and contingent-payment costs continue to weigh on EBITDA margins, and how the Fintellix accrual is ultimately resolved.
- Progress against the approximately $230 million 2018 capital-expenditure expectation and the cash-flow effects of customer billing and deferred revenue.
- Debt reduction, revolving-credit availability, covenant headroom, and the upcoming January 2019 maturity of the 4.875% senior notes.
- Developments in the patent litigation and any change in the energy reporting unit’s goodwill impairment risk.
- The effects of Topic 606 and tax reform on comparability of reported results and the effective tax rate.