Verisk Analytics, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. The filing presents the healthcare business as discontinued operations for all periods shown.
Business context
Verisk provides proprietary data, analytics and decision-support solutions, principally for property and casualty insurance. Its reportable segments are Decision Analytics and Risk Assessment. Decision Analytics includes insurance, financial services, and energy and specialized markets; Risk Assessment serves the U.S. P&C insurance industry.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue from continuing operations | $498.3 | $428.6 | $991.0 | $812.9 |
| Operating income | $191.1 | $146.0 | $383.7 | $320.0 |
| Income from continuing operations | $106.7 | $158.9 | $216.5 | $255.3 |
| Net income, including discontinued operations | $261.7 | $163.3 | $354.4 | $262.0 |
| Diluted EPS, continuing operations | $0.62 | $0.95 | $1.26 | $1.55 |
| Diluted EPS, total | $1.53 | $0.97 | $2.07 | $1.59 |
| Operating cash flow | — | — | $378.5 | $355.5 |
- Revenue increased 16.3% in Q2 and 21.9% for the first half. Excluding the specified acquisitions, management reported growth of 5.4% in Q2 and 5.2% for the first half.
- Q2 operating income rose 30.8%; first-half operating income rose 19.9%. Q2 operating margin was approximately 38.3%, compared with 34.1% a year earlier; first-half margin was approximately 38.7%, versus 39.4%.
- Continuing-operations income declined 32.8% in Q2 and 15.2% for the first half. Prior-year results included an $85.2 million gain on a currency hedge associated with the Wood Mackenzie acquisition; 2016 also had higher effective tax rates, as 2015 benefited from acquisition-related tax items.
- Total net income includes the healthcare sale and other discontinued-operation results. The sale produced a $269.4 million pretax gain; discontinued operations contributed $155.0 million of net income in Q2 and $137.9 million for the first half of 2016. Total net income and total EBITDA margins therefore are not representative of continuing operations.
- First-half operating cash flow was $378.5 million, up from $355.5 million. Excluding discontinued operations, management reported $357.0 million versus $301.5 million. Capital expenditures were $62.2 million.
- Cash and cash equivalents were $196.4 million at June 30, 2016; with available-for-sale securities, liquidity totaled $199.8 million. Total debt carrying value was $2.275 billion, including $2.3 billion of senior-note principal; revolving-credit borrowings were zero, with $1.4975 billion available. The company reported covenant compliance.
- Deferred revenue was $431.2 million, reflecting the company’s advance-billed subscription model. Management stated that cash, operating cash generation and credit availability should meet working-capital and capital needs.
Material changes and management commentary
- Verisk sold Verisk Health on June 1 for $719.4 million cash after a working-capital adjustment, a subordinated note with $100 million face value, and contingent consideration. The note carries 9% stated interest, increasing to 11% under specified conditions; its June 30 recorded receivable was $83.1 million. Verisk also received a 10% equity interest in the buyer’s issuer.
- Decision Analytics revenue rose 34.0% for the first half, primarily reflecting Wood Mackenzie, Infield and PCI. Excluding those acquisitions, the segment grew 5.2%; energy and specialized markets revenue excluding them declined 6.7%, with weakness in weather-risk and environmental health and safety services.
- Risk Assessment revenue increased 5.3% for the first half, or 5.2% excluding RII. Management cited pricing and expanded solutions; segment EBITDA margin was 59.3%, compared with 59.1%.
- Management expects 2016 capital expenditures of approximately $155 million, mainly for technology infrastructure and solution development. The filing gives no revenue or earnings guidance.
- On July 26, after quarter-end, Verisk acquired Greentech Media for a net cash purchase price of $37 million, subject to closing adjustments. Purchase accounting was incomplete at filing.
Risks, contingencies and unusual items
- The company disclosed several legal matters, including putative Fair Credit Reporting Act class actions, patent litigation, an employment-related class action, and appeals in an antitrust/racketeering case. It stated that it could not estimate the ultimate resolution or reasonably estimate possible losses for these matters.
- Foreign-currency translation produced a $216.5 million first-half other comprehensive loss, and goodwill declined by $136.4 million from currency translation. The annual goodwill impairment test found no impairment.
- Verisk reported no material change in risk factors or market-risk disclosures from its 2015 Form 10-K, no off-balance-sheet arrangements, and no material change in contractual obligations outside the ordinary course.
Key facts for investors to verify
- How much of continuing revenue growth reflects underlying organic demand versus acquisitions, and whether weakness in certain energy and specialized markets businesses persists.
- The collectability, valuation and repayment terms of the healthcare-sale note and contingent consideration, including the value and terms of the equity interest received.
- Continuing-operations earnings and margins after separating discontinued operations, acquisition effects, the prior-year hedge gain and tax-rate differences.
- Debt maturity, covenant headroom, interest costs and planned use of cash for capital expenditures, acquisitions and share repurchases.
- Developments and potential financial exposure in the disclosed litigation, for which the filing does not provide a clear loss estimate.