Verisk Analytics, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Unless otherwise indicated, financial amounts below are in millions of dollars. Verisk provides data, analytics and decision-support solutions, primarily to insurance and risk-bearing businesses, through its Risk Assessment and Decision Analytics segments.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $498.1 | $470.4 | $1,489.1 | $1,283.3 |
| Operating income | $198.4 | $197.1 | $582.1 | $517.1 |
| Continuing-operations income | $127.6 | $124.2 | $344.0 | $379.5 |
| Net income | $127.6 | $131.8 | $482.0 | $393.8 |
| Diluted EPS | $0.74 | $0.77 | $2.81 | $2.36 |
| Operating cash flow | Not separately stated | Not separately stated | $463.7 | $520.0 |
- Q3 revenue grew 5.9%; operating income increased 0.6%. Continuing-operations income rose 2.7%, while net income fell 3.2% as the prior-year quarter included discontinued-operations income.
- Nine-month revenue grew 16.0%, but management said growth was 5.0% excluding recent acquisitions. Continuing-operations income declined 9.3%; reported net income increased 22.4%, principally reflecting the healthcare-business sale.
- Q3 diluted EPS from continuing operations was $0.74, up from $0.73; nine-month continuing-operations diluted EPS was $2.01, down from $2.27. Reported nine-month diluted EPS includes $0.80 from discontinued operations.
- Q3 operating margin was approximately 39.8% versus 41.9%; nine-month operating margin was approximately 39.1% versus 40.3%. Higher acquired-intangible amortization contributed to expense growth.
- Reported EBITDA was $252.7 in Q3 versus $278.8, and $1,015.8 for nine months versus $791.3. Nine-month 2016 EBITDA includes the healthcare-sale gain; these figures are non-GAAP and are not directly comparable without considering discontinued operations and unusual items.
Segments and material changes
- Decision Analytics: Revenue increased 6.2% in Q3 and 23.2% for nine months. Excluding acquisitions, growth was 4.5% and 4.9%, respectively. Insurance and financial services supported growth; energy and specialized markets faced continuing end-market and currency pressure.
- Risk Assessment: Revenue increased 5.3% in both periods, or 5.0% and 5.1% excluding the RII acquisition. Management cited pricing, enhanced offerings and expanded sales to existing customers.
- Verisk sold Verisk Health on June 1, 2016, classifying it as a discontinued operation. Consideration included $719.4 cash, a subordinated note with $100.0 face value, and contingent consideration. The company recorded a $269.4 pre-tax sale gain; the note receivable was carried at $83.6 at quarter-end.
- 2016 acquisitions included Greentech Media, Quest Offshore and Risk Intelligence Ireland, with stated net cash purchase prices of approximately $36.2, $8.0 and $6.2, respectively. Purchase-price allocations remained preliminary.
Cash, debt and liquidity
- Cash and cash equivalents were $164.8 at September 30, 2016, compared with $138.3 at December 31, 2015. Cash plus available-for-sale securities was $168.2.
- Nine-month operating cash flow was $463.7, down 10.8%; excluding discontinued operations, management reported a 5.4% decline to $442.2. Investing activities provided $579.3, primarily due to healthcare-sale proceeds. Financing used $1,007.1, principally for repayment of credit-facility borrowings and share repurchases.
- Total debt carrying value was $2,286.3, including $2,279.4 long-term debt and $6.9 of capital leases. Senior-note principal totaled $2.3 billion. The revolving credit facility had $1.5 billion capacity and no borrowings outstanding; the company reported covenant compliance.
- Capital expenditures were $98.6 for nine months. Management expected approximately $155.0 for full-year 2016, mainly for technology infrastructure and solution development. The company repurchased $189.8 of stock during the first nine months; $279.5 remained authorized.
Outlook, risks and other items
- The filing provides expected 2016 capital expenditures but no revenue, earnings or margin guidance. Management cited recurring revenues, advance subscription payments and operating cash generation as supports for liquidity and growth plans.
- Management noted energy-market and currency headwinds, and that investment in new solutions may offset margin expansion. Nine-month foreign-currency translation losses were $278.6, reducing comprehensive income.
- The company identified potential adverse effects from Brexit on economic conditions, regulation and its European operations. It also disclosed several ongoing class-action, patent, employment and other legal matters; outcomes and potential losses could not be estimated.
- Management reported disclosure controls were effective as of September 30, 2016. It reported no off-balance-sheet arrangements and no material changes to contractual obligations outside the ordinary course.
Important facts for investors to verify
- How much of revenue growth and future profitability depends on acquisitions, particularly Wood Mackenzie, versus underlying organic growth.
- The effect of continuing energy-market and currency pressures on Decision Analytics, and the earnings contribution and collectability of the healthcare-sale note and contingent consideration.
- Whether cash generation can sustain planned capital expenditures, debt service and share repurchases, and how the company’s debt covenants and credit-facility capacity evolve.
- The potential financial exposure from disclosed litigation and Brexit-related developments; the filing does not provide clear loss estimates for the legal matters.
- How reported earnings and EBITDA compare with continuing-operations performance after excluding the healthcare-sale gain and other prior-period unusual items.