Verisk Analytics, Inc. - 10-Q Summary (Period Ended Sept 30, 2010)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2010, and the nine-month period ended on that date. Verisk Analytics, Inc. is a leading provider of data and analytics solutions for risk-bearing businesses, primarily in the U.S. property and casualty (P&C) insurance, mortgage, and healthcare sectors. The company operates through two segments: Risk Assessment (statistical and actuarial data) and Decision Analytics (fraud detection, loss prediction, and quantification). The reporting period includes the impact of recent acquisitions (Strategic Analytics, Enabl-u, and TierMed) and a follow-on public offering completed in October 2010.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 2010 | Nine Months Ended Sept 30, 2010 |
|---|---|---|
| Revenues | $287.4 million | $845.2 million |
| Operating Income | $113.7 million | $327.2 million |
| Net Income | $62.9 million | $176.7 million |
| Diluted EPS | $0.34 | $0.94 |
| EBITDA | $129.4 million | $377.1 million |
| EBITDA Margin | 45.0% | 44.6% |
| Cash and Equivalents | $107.3 million | (Balance Sheet) |
| Total Debt (Current + Long-term) | $530.2 million | (Balance Sheet) |
| Operating Cash Flow (9mo) | N/A | $241.8 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 11.2% year-over-year (Q3) and 10.9% for the nine-month period. The Decision Analytics segment drove significant growth (17.8% Q3, 19.2% 9mo), while Risk Assessment grew more modestly (4.8% Q3, 3.1% 9mo).
- Profitability: Net income rose 49.0% in Q3 and 32.8% for the nine months. Operating income increased 34.1% in Q3 and 25.9% for the nine months.
- Expense Management: Cost of revenues remained relatively flat in Q3 (-0.3%) but increased 2.7% for the nine months. Selling, General, and Administrative (SG&A) expenses increased 6.4% in Q3 and 9.4% for the nine months, driven by salaries and acquisition-related costs.
- Amortization: Amortization of intangible assets decreased 23.1% in Q3 and 18.0% for the nine months due to the full amortization of assets from prior acquisitions.
- Debt Reduction: Total debt decreased from $594.2 million at year-end 2009 to $530.2 million at Sept 30, 2010, primarily due to repayments of the syndicated revolving credit facility.
Guidance, Outlook, and Risks
- Management Commentary: Management attributes revenue growth to increased sales to existing customers, new customer acquisition, and strategic acquisitions. The company highlights strong recurring revenue models (subscriptions) and improved EBITDA margins driven by reduced ESOP allocation expenses (accelerated in late 2009) and lower pension costs.
- Capital Allocation: The company continues to repurchase shares. A $150 million repurchase program was authorized in April 2010, with an additional $150 million authorized in October 2010. Significant share repurchases occurred in Q3 and October 2010.
- Acquisitions: Recent acquisitions (Strategic Analytics, Enabl-u, TierMed) contributed to revenue growth. The company finalized purchase accounting for TierMed and Enabl-u in Q3, resulting in a $0.5 million gain from the reversal of contingent consideration.
- Risks and Contingencies:
- Legal Proceedings: The company is involved in various litigation matters, including class actions regarding its Claims Outcome Advisor and Xactware products (e.g., Hensley v. Computer Sciences Corp, Schafer v. State Farm). While settlements have been reached in some cases, others remain pending with uncertain outcomes.
- Regulatory Changes: Legislative changes regarding Medicare subsidies resulted in a non-cash tax charge of $2.4 million in the first quarter of 2010.
- Concentration: A significant portion of revenue comes from the U.S. P&C insurance industry; no single country outside the U.S. accounts for more than 1% of revenue.
Key Facts for Investor Verification
- EBITDA Margin Expansion: Verify the sustainability of the EBITDA margin increase (to 44.6% for 9mo) given the one-time benefit from the elimination of ESOP allocation expenses in 2010.
- Acquisition Integration: Assess the contribution of recent acquisitions (Strategic Analytics, Enabl-u, TierMed) to future organic growth versus one-time revenue bumps.
- Debt Covenants: Confirm continued compliance with debt covenants, specifically the fixed charge coverage ratio (min 275%) and leverage ratio (max 300%) under master shelf agreements.
- Share Repurchase Impact: Monitor the impact of aggressive share repurchases on cash reserves and future liquidity, especially given the $160 million borrowing in October 2010 to fund repurchases.
- Legal Exposure: Track the status of pending litigation (e.g., Mornay v. Travelers, iiX DPPA cases) for potential material adverse effects on financial results.