Verisk Analytics, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone Q4 report; Q4 results are noted separately below. Amounts are in U.S. dollars, millions, unless stated otherwise.
Business context and financial results
Verisk provides data analytics and decision-support solutions across Insurance, Energy and Specialized Markets, and Financial Services. Most revenue comes from subscriptions, typically prepaid. In 2018, approximately 80% of revenue came from annual subscriptions or long-term agreements.
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $2,395.1 | $2,145.2 | +11.6% |
| Operating income | $834.1 | $801.2 | +4.1% |
| Net income | $598.7 | $555.1 | +7.9% |
| Diluted EPS | $3.56 | $3.29 | +8.2% |
| Operating margin | 34.9% | 37.4% | Down 2.5 percentage points |
| Net income margin | 25.0% | 25.9% | Down 0.9 percentage points |
| EBITDA (non-GAAP) | $1,145.5 | $1,047.8 | +9.3% |
| EBITDA margin (non-GAAP) | 47.8% | 48.8% | Down 1.0 percentage point |
Reported revenue growth included $110.9 million from recent acquisitions; growth excluding those acquisitions was 6.5%. The lower EBITDA margin reflected, in part, recent acquisitions with somewhat lower margins. Operating expenses rose faster than revenue, including higher personnel costs, depreciation and amortization.
Segments and material changes
- Insurance: Revenue of $1,705.9 million, up 10.0% (7.2% excluding recent acquisitions); EBITDA was $932.2 million and margin was 54.6%, versus 55.2%. Underwriting and rating and claims both grew; claims benefited from repair-estimating, analytics, and aerial-imagery solutions.
- Energy and Specialized Markets: Revenue of $513.3 million, up 15.4% (6.9% excluding PowerAdvocate); EBITDA was $154.4 million and margin was 30.1%, versus 30.0%. Management cited improved energy end markets and growth in environmental health and safety services.
- Financial Services: Revenue of $175.9 million, up 17.3% as reported, but down 2.0% excluding Marketview. EBITDA was $58.9 million; margin declined to 33.5% from 39.0%, partly due to a $3.5 million Fintellix contingent acquisition payment and the acquired business mix.
Beginning in 2018, Verisk changed its reportable segments from Decision Analytics and Risk Assessment to the three vertical-market segments above; prior periods were recast. The company adopted Topic 606 revenue recognition in 2018, recording a $35.2 million adjustment to opening retained earnings. Management reported the adoption increased 2018 net income by $4.5 million compared with the prior accounting method.
Cash flow, debt, and liquidity
- Cash from operating activities was $934.4 million, up from $743.5 million. Investing activities used $265.4 million and financing activities used $669.8 million.
- Capital expenditures were $231.0 million, or 9.6% of revenue. Acquisitions used $153.1 million, partly offset by $121.4 million received on repayment of the healthcare-sale promissory note.
- Cash and cash equivalents were $139.5 million at year-end, versus $142.3 million. The company reported cash plus available-for-sale securities of $142.8 million.
- Total debt as reported on the balance sheet was $2,723.3 million, down from $3,008.8 million. The $1.5 billion revolving credit facility had $415.0 million outstanding and $1,078.9 million available, net of letters of credit. The company was in compliance with debt covenants.
- Interest expense was $129.7 million, compared with $119.4 million. Management attributed the increase primarily to higher average revolving-credit borrowings associated with repurchases and acquisition financing.
- Verisk repurchased $438.6 million of shares in 2018. The board declared a $0.25-per-share dividend in February 2019, payable in March.
Q4 results, outlook, risks, and unusual items
For the quarter ended December 31, 2018, revenue was $613.9 million, operating income was $216.2 million, net income was $146.2 million, and diluted EPS was $0.87. In Q4 2017, the respective figures were $570.3 million, $210.1 million, $204.6 million, and $1.22. Thus, Q4 revenue and operating income increased, while net income and EPS declined; the filing does not provide a standalone Q4 explanation sufficient to attribute the entire decline.
The filing provides no specific numerical 2019 revenue or earnings guidance. Management described strategic priorities including increasing solution penetration, developing proprietary data and analytics, expanding into adjacent and international markets, and pursuing complementary acquisitions. It cited demand opportunities in insurance risk and fraud analytics, regulatory tools, and energy-transition information, while noting that results depend on market conditions.
- Key risks: Access to third-party and customer data; cybersecurity, privacy, and regulatory changes; reliance on U.S. property-and-casualty insurers (approximately 47% of 2018 revenue); competition and customer consolidation; acquisition integration and leverage; energy-sector cyclicality; foreign exchange and Brexit uncertainty; and service disruption or data-center failure.
- Legal contingencies: Patent litigation brought by EagleView and a putative class action alleging under-insurance related to Verisk’s 360Value product remained unresolved. The company said it could not reasonably estimate the possible loss in either matter. The court denied certain company summary-judgment motions in the patent case.
- Unusual items: A $12.3 million gain resulted from early repayment of the healthcare-sale promissory note. The effective tax rate fell to 16.8% from 19.7%, primarily reflecting U.S. tax reform and equity-compensation tax benefits. Foreign-currency translation and pension adjustments reduced comprehensive income; comprehensive income was $419.8 million versus $793.6 million.
- Audit and controls: The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management excluded specified 2018 acquisitions from its controls assessment; they represented 0.4% of total assets, excluding integrated goodwill and intangibles, and 0.5% of revenue.
Most important facts for investors to verify
- Whether organic growth continues, particularly in Financial Services, where revenue declined 2.0% excluding the acquisition contribution.
- Whether margins stabilize as acquisition-related costs, amortization, and investment spending evolve.
- Debt repayment, interest expense, covenant headroom, and the effect of continued share repurchases on leverage and per-share results.
- The outcomes and potential financial impact of the patent and 360Value lawsuits, which are not estimable from the filing.
- Whether data access, privacy compliance, cyber controls, and integration of recent acquisitions remain adequate; also review the effect of the 2019 lease-accounting adoption, for which Verisk estimated material balance-sheet additions.