Verisk Analytics, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. Verisk provides data, analytics, and decision-support solutions, primarily to insurance, energy, and financial-services customers. This unaudited filing covers the quarter and nine months ended September 30, 2017; comparisons are with the same 2016 periods. Results are presented under U.S. GAAP. The 2016 comparison includes the healthcare business as a discontinued operation, including a substantial sale gain.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $549.1m | $498.1m | $1,574.9m | $1,489.1m |
| Operating income | $208.4m | $198.4m | $591.2m | $582.2m |
| Income from continuing operations | $120.7m | $127.6m | $350.5m | $344.0m |
| Net income | $120.7m | $127.6m | $350.5m | $481.9m |
| Diluted EPS from continuing operations | $0.72 | $0.74 | $2.08 | $2.01 |
| EBITDA, management-defined non-GAAP | $272.3m | $252.7m | $772.1m | $1,015.7m |
- Q3 revenue rose 10.2%; excluding recent acquisitions, it increased 6.5%. Q3 EBITDA increased 7.7%, while EBITDA margin was 49.6% versus 50.7%.
- For the first nine months, revenue grew 5.8%, or 3.4% excluding recent acquisitions. Continuing-operations income rose 1.9%; diluted continuing-operations EPS increased 3.5%. Reported net income fell 27.3%, largely reflecting the prior-year healthcare divestiture gain; the filing says that gain also materially elevated 2016 EBITDA and margins.
- Q3 effective tax rate was 33.2% versus 26.0%; nine-month rate was 31.5% versus 30.3%. Management cited reduced U.K. tax benefits and foreign-income mix, partly offset by a tax benefit from adopting share-based-payment accounting guidance.
- Segment revenue: Q3 Decision Analytics $355.9m (+12.2%; +7.5% excluding acquisitions) and Risk Assessment $193.2m (+6.9%; +4.9% excluding acquisitions). Nine-month revenue was $999.7m and $575.2m, respectively. Decision Analytics’ underlying nine-month growth was led by insurance; energy and specialized markets faced currency headwinds, and financial services was affected by contract completions.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $592.1m, up from $484.4m. Investing used $823.9m, including $705.2m of acquisition net cash consideration and $113.8m of capital expenditures. Financing provided $234.3m, including net revolver borrowing, partly offset by $276.2m of share repurchases.
- Cash and cash equivalents were $142.0m at September 30, 2017; cash plus available-for-sale securities was $145.7m. Current assets were $544.7m and current liabilities $1,203.1m; management says prepaid subscriptions and deferred revenue make a working-capital deficit customary for the business.
- Total debt was $2,881.7m, including $595.0m drawn on the revolving facility. The company reported $901.4m of facility availability net of outstanding letters of credit and compliance with debt covenants. The facility maturity was extended to May 15, 2022.
- Management expected 2017 capital expenditures of approximately $185m. The company repurchased $269.8m of shares during the nine months and had $366.2m remaining under its authorization at quarter-end.
Developments, outlook, and risks
- The company made multiple acquisitions in 2017, including G2, Sequel, and LCI; total net cash purchase price for acquisitions shown in the filing was $705.2m. Acquisition-related goodwill and intangible assets increased substantially; purchase-price allocations remained preliminary and could be revised.
- Management was preparing to adopt Topic 606 in 2018 using the modified retrospective method. It expected most revenue to continue being recognized over time, but was assessing licensing arrangements. Most sales commissions were expected to be capitalized and amortized, potentially over as long as five years; the full financial-statement effect was still under evaluation.
- Goodwill was $3,188.8m, or 56.7% of total assets. The June 2017 impairment test found no impairment, but the energy reporting unit’s fair value was less than 10% above carrying value. Management cited GBP/USD movements and energy-market conditions; no subsequent triggering event was identified before filing.
- Legal matters included unresolved patent claims involving Xactware products; the filing said the ultimate resolution and liability could not reasonably be estimated. The Intellicorp FCRA class action had a proposed settlement with a non-material cash payment and non-monetary relief, pending final approval as described in the filing. The Snyder litigation dismissal was affirmed and the Supreme Court denied review on October 30, 2017.
- The filing reported no material change in risk factors, market-risk disclosures, contractual obligations, or internal controls; disclosure controls were deemed effective. Management cautioned that interim results are not necessarily indicative of full-year results. No specific revenue or earnings guidance was provided.
Important facts for investors to verify
- Underlying revenue growth and margins excluding acquisitions, and the acquired businesses’ integration and contribution.
- Debt repayment capacity, borrowing costs, covenant headroom, and cash available after acquisitions, capital spending, and repurchases.
- Whether the energy reporting unit’s narrow goodwill valuation cushion changes in response to currency or market conditions.
- The final Topic 606 transition impact, especially commission capitalization and licensing-revenue timing.
- Final acquisition purchase-price allocations, unresolved litigation outcomes, and the performance and collectability of the $94.8m healthcare-sale promissory note receivable.
- Comparability of reported year-over-year net income and EBITDA, given the healthcare divestiture gain included in the 2016 period.