Verisk Analytics, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Verisk provides data, analytics, and decision-support solutions, principally to insurance and other risk-bearing industries. Its reportable segments are Decision Analytics and Risk Assessment.
Financial performance
- Revenue: $502.6 million, up 2.0% year over year. Excluding recent acquisitions, revenue increased 0.9%.
- Segment revenue: Decision Analytics revenue was $313.2 million, up 0.1%; Risk Assessment revenue was $189.4 million, up 5.4%. Decision Analytics’ energy and specialized markets revenue fell 5.9%, while its insurance revenue rose 4.1%.
- Profit: Operating income was $187.7 million, down 2.6%. Continuing-operations income was $108.8 million versus $109.7 million. Net income was $108.8 million versus $92.6 million, reflecting the prior-year discontinued-operation loss. Diluted EPS was $0.64 versus $0.54; continuing-operations diluted EPS was $0.64 in both periods.
- Margins and EBITDA: Operating margin was approximately 37.3%, compared with 39.1%. EBITDA, a company-defined non-GAAP measure, was $245.7 million, down 6.6%; the 2016 comparison included $14.7 million of EBITDA from the healthcare business subsequently sold. Reported EBITDA margin, including discontinued operations, was 48.9% versus 46.8%.
- Cash flow: Operating cash flow was $317.9 million, up 4.6%; investing cash outflow was $107.4 million, including acquisitions and related escrow funding; financing cash outflow was $192.3 million. Cash and cash equivalents ended the quarter at $155.0 million.
- Debt and liquidity: Total debt was $2,287.6 million, including capital leases and debt issuance costs; senior-note principal was $2.3 billion. The company repaid $100 million on its revolving facility and had no facility borrowings at quarter-end. It reported $1.5 billion of facility capacity, approximately $1.497 billion available net of letters of credit, and compliance with debt covenants. Cash plus available-for-sale securities was $158.6 million.
- Other metrics: Deferred revenue was $501.6 million, up from $330.8 million at year-end, consistent with advance customer payments. Capital expenditures were $31.1 million. The company repurchased $99.3 million of common stock during the quarter.
Changes versus the prior-year quarter
- Revenue growth was modest and uneven: Risk Assessment grew, while Decision Analytics was nearly flat. Excluding acquisitions, Decision Analytics declined 0.9%, principally due to energy-market and currency headwinds; Risk Assessment grew 4.2% excluding acquisitions.
- Operating expenses rose 4.9%, faster than revenue: cost of revenues increased 5.6% and selling, general and administrative expenses increased 6.8%. Operating income consequently declined.
- Interest expense fell 11.3%, primarily following repayments of revolving-credit borrowings funded with proceeds from the 2016 healthcare-business sale and operating cash.
- Q1 2016 included the sold healthcare business as a discontinued operation, with a $17.1 million after-tax loss, including an $18.2 million tax charge. That discontinued-operation loss did not recur in Q1 2017.
Outlook, commentary, risks, and unusual items
- Management expected 2017 capital expenditures of approximately $160 million, mainly for technology infrastructure and solution development. It stated that operating cash flow and the revolving facility should provide sufficient funding for working capital, capital expenditures, and growth plans. The filing provides no numerical revenue or earnings guidance.
- Management described subscription and long-term-contract revenue as predominantly recurring and generally paid in advance. It noted that first-quarter cash flow tends to benefit from subscription-payment timing and that investment in new solutions may offset margin expansion.
- Four businesses were acquired during the quarter for a combined net cash purchase price of $76.3 million. Purchase-price allocations were preliminary; goodwill of $52.0 million was recorded and was not tax deductible. Acquisition transaction costs were $1.3 million.
- The company held an $84.7 million subordinated note receivable from the buyer of its former healthcare business; Q1 investment income included $2.8 million of interest from the note. Its estimated fair value was $77.0 million. The filing also reports an $8.4 million equity investment linked to the sale.
- Contingencies include patent litigation involving Xactware and Verisk, and other legal matters for which the company said it could not estimate a possible loss. The Intellicorp matter reached a proposed settlement in April 2017, with a non-material cash payment and non-monetary relief; preliminary approval was granted after quarter-end. The Tenth Circuit affirmed dismissal of the ACORD matter in April 2017, subject to further review deadlines.
- The effective tax rate rose to 32.47% from 31.69%, primarily due to reduced U.K. tax benefits, partly offset by the effect of adopting share-based-payment accounting guidance. The company was evaluating the impact of the new revenue-recognition standard, effective for it beginning fiscal 2018.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no off-balance-sheet arrangements and no material change in risk factors from its 2016 Form 10-K.
Important facts for investors to verify
- Whether Decision Analytics’ energy and specialized markets weakness persists, and whether Risk Assessment growth continues.
- How operating costs, acquisition contributions, and investment spending affect operating income and EBITDA; review the company’s non-GAAP EBITDA definition and reconciliation.
- The collectability and eventual repayment terms of the healthcare-sale note, including its estimated fair value and accrued interest.
- Final purchase-price allocations and integration results for the four Q1 acquisitions.
- Developments and potential exposure in the patent and other legal proceedings, and the final status and terms of the Intellicorp settlement.
- Debt-covenant headroom, planned capital expenditures, and the pace of share repurchases relative to cash generation.