Verisk Analytics, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; filed October 30, 2018. Verisk provides data analytics and decision-support services, principally to insurance, energy and specialized markets, and financial services customers. Most subscription services are paid in advance and recognized over the contract term.
Financial performance
| Metric | Q3 2018 | Q3 2017 | First nine months 2018 | First nine months 2017 |
|---|---|---|---|---|
| Revenue | $598.7 million | $549.1 million | $1,781.2 million | $1,574.9 million |
| Operating income | $211.1 million | $208.4 million | $617.9 million | $591.2 million |
| Net income | $166.0 million | $120.7 million | $452.5 million | $350.5 million |
| Diluted EPS | $0.99 | $0.72 | $2.68 | $2.08 |
| EBITDA (non-GAAP) | $297.9 million | $272.3 million | $857.3 million | $772.1 million |
| EBITDA margin (non-GAAP) | 49.8% | 49.6% | 48.1% | 49.0% |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $761.0 million | $592.1 million |
Q3 revenue increased 9.0% year over year; excluding recent acquisitions, it grew 4.7%. Nine-month revenue rose 13.1%, or 7.0% excluding acquisitions. Nine-month segment revenue growth was 10.9% in Insurance, 16.8% in Energy and Specialized Markets, and 26.3% in Financial Services; excluding acquisitions, growth was 7.5%, 7.9%, and a 1.6% decline, respectively. Insurance generated about 71% of nine-month revenue.
Q3 net income rose 37.5%, while operating income increased only 1.3%. The effective tax rate declined to 13.9% from 33.2% in Q3 and to 16.2% from 31.5% for the nine-month period, primarily reflecting U.S. tax reform and greater equity-compensation tax benefits. Results also included a $12.3 million gain from early repayment of a subordinated note. Nine-month interest expense increased 11.2% to $97.1 million, and intangible amortization rose 33.7% to $98.5 million.
Cash flow, balance sheet and capital allocation
- Nine-month operating cash flow was $761.0 million, up 28.5%. Investing cash outflow was $103.8 million, compared with $823.9 million in 2017; financing cash outflow was $648.5 million, versus $234.3 million of inflow. Capital expenditures were $154.5 million, up from $113.8 million, primarily for aerial-imagery equipment and software development. The company received $121.4 million from repayment of the subordinated note.
- At September 30, cash and cash equivalents were $147.6 million; cash plus available-for-sale securities totaled $151.6 million. Total debt was $2,587.2 million, down from $3,008.8 million at year-end 2017. The balance sheet reported $542.3 million of current debt, including $249.8 million of 4.875% notes due January 2019.
- The $1.5 billion revolving credit facility had $285.0 million drawn and $1,208.3 million available net of letters of credit. Verisk reported compliance with debt covenants. It subsequently borrowed $35.0 million and repaid $25.0 million under the facility.
- Current assets of $593.7 million were below current liabilities of $1,219.2 million, largely reflecting deferred revenue from prepaid customer subscriptions. Management said operating cash generation and facility availability should meet working-capital, capital-expenditure, and growth needs.
- Verisk repurchased $282.2 million of shares during the first nine months and had $584.0 million of authorization remaining at quarter-end. A further $50.0 million accelerated repurchase agreement was entered into in September and became effective after quarter-end.
Material changes, outlook and risks
- Effective in Q1 2018, management reorganized reporting into Insurance, Energy and Specialized Markets, and Financial Services; prior-period segment results were recast. Topic 606 was adopted using the modified retrospective method. It increased nine-month 2018 net income by $3.7 million versus the former accounting, while 2017 comparatives remain under the prior standard.
- Nine-month EBITDA margin slipped to 48.1% from 49.0%, which management attributed primarily to acquisitions and $4.2 million of acquisition contingent consideration. Financial Services’ nine-month EBITDA margin fell to 31.8% from 36.8%, including a $3.5 million Fintellix contingent payment.
- Management emphasized recurring revenue and cash generation, but the filing provides no specific forward revenue, earnings, or margin guidance. Results for the first nine months are not necessarily indicative of full-year results. Management cited end-market improvement in energy and growth in environmental health and safety services.
- Verisk expects the new lease-accounting standard, to be adopted January 1, 2019, to have a material balance-sheet impact based on its review of future contractual obligations. Other listed accounting updates were not expected to have a material impact or were still under evaluation.
- The company faces patent litigation involving Xactware/Verisk products and Eagle View/Pictometry. Discovery was closed and a summary-judgment motion was submitted; the company said the outcome and any potential liability could not be reasonably estimated. It intends to defend the case. No material change in previously disclosed risk factors was reported.
- The annual goodwill impairment test found no impairment, and the company reported no off-balance-sheet arrangements or material changes to contractual obligations outside the ordinary course.
Important facts for investors to verify
- How much reported growth is sustainable organic growth versus acquisition contribution, particularly in Financial Services.
- Whether operating-cost growth, amortization, and acquisition-related expenses continue to pressure operating income and EBITDA margins.
- The effect of the 2019 lease-standard adoption and the refinancing or repayment plan for the $249.8 million notes due January 2019.
- Whether cash generation remains sufficient to fund elevated capital expenditure, acquisitions, debt service, and share repurchases.
- Developments in the patent litigation and any resulting financial exposure; the filing provides no clear estimate of potential loss.
- The durability of the lower effective tax rate and the contribution of the one-time $12.3 million note-repayment gain to reported earnings.