Verisk Analytics, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Verisk provides proprietary data, analytics and decision-support solutions, primarily for risk-bearing businesses. Its reportable segments are Decision Analytics and Risk Assessment. The healthcare business, Verisk Health, is presented as discontinued operations.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue from continuing operations | $492.7 million | $384.3 million | +28.2% |
| Operating income | $192.6 million | $174.0 million | +10.7% |
| Income from continuing operations | $109.7 million | $96.4 million | +13.9% |
| Net income | $92.6 million | $98.7 million | -6.1% |
| Diluted EPS | $0.54 | $0.61 | -11.5% |
| Operating cash flow | $303.9 million | $271.0 million | +12.1% |
| Capital expenditures | $30.8 million | $24.8 million | Higher year over year |
- Revenue growth included $89.3 million from Wood Mackenzie, Infield and PCI. Excluding those acquisitions, consolidated revenue increased 5.0%.
- Decision Analytics revenue rose 46.7% to $312.9 million, including acquisitions; excluding them, it grew 4.8%. Risk Assessment revenue increased 5.2% to $179.8 million.
- EBITDA, a non-GAAP measure, was $263.1 million, up 21.6%. Reported consolidated EBITDA margin, including discontinued operations, was 46.8%, versus 47.1%; Verisk Health reduced Q1 2016 margin by 3.6 percentage points. Risk Assessment margin increased to 60.8% from 59.1%; Decision Analytics margin was 40.2% versus 40.0%, including discontinued operations.
- Net income included a $17.1 million after-tax loss from discontinued operations, compared with $2.3 million income a year earlier. The 2016 discontinued-operation tax provision included an $18.2 million charge, primarily from recognizing a deferred tax liability related to Verisk Health’s estimated stock-basis difference.
- Cash and cash equivalents were $131.8 million at March 31, 2016; cash plus available-for-sale securities totaled $135.3 million. Operating cash flow excluding Verisk Health was $281.8 million, up 20.2%.
- Total debt on the balance sheet was $2.981 billion, including short-term debt and current maturities. The company reported $2.3 billion aggregate principal of senior notes and $705 million of revolver borrowings. It disclosed $1.0427 billion available under its $1.75 billion revolving facility and compliance with debt covenants. In April, it repaid $25 million of revolver borrowings.
- Financing cash outflow was $277.8 million, including $165 million of net short-term debt repayments and $116.4 million of share repurchases. The company repurchased 1.66 million shares at an average $69.97; $353.0 million remained authorized.
Material changes and management commentary
- Acquisition-related revenue drove much of the reported growth, alongside higher acquisition-related operating costs, depreciation and amortization, and interest expense. Interest expense increased 75.4% to $32.0 million, primarily due to debt incurred for Wood Mackenzie.
- Excluding recent acquisitions, Decision Analytics insurance revenue grew, while financial-services revenue declined 19.0%, partly because a media-effectiveness project had contributed revenue in Q1 2015. Energy and specialized markets revenue excluding acquisitions decreased 3.6%, reflecting lower weather-risk solutions.
- Risk Assessment growth reflected pricing, enhanced solution content and expanded sales to existing customers. Management cited operating leverage and cost efficiencies in the segment.
- Management said subscription and long-term agreement receipts, generally collected in advance, support recurring revenue and cash generation. It expects approximately $175 million of 2016 capital expenditures, primarily for technology infrastructure and solution development.
Outlook, unusual items and risks
- After quarter-end, Verisk signed an agreement to sell Verisk Health to Veritas Capital for $820 million, subject to customary adjustments, regulatory approvals and closing conditions. Consideration consists of $720 million cash, a $100 million subordinated note with an eight-year maturity and 9% interest paid in kind, plus other contingent consideration. Closing was expected by June 30, 2016; the filing does not establish the eventual closing or final proceeds.
- The company also acquired Risk Intelligence Ireland in April 2016 for $6.8 million net cash consideration.
- Management stated that Q1 results are not necessarily indicative of full-year results. The filing provides capital expenditure expectations but no specific revenue or earnings guidance.
- Several legal matters, including putative class actions and patent litigation, remained unresolved; the company said it could not estimate potential losses. The filing also notes that controls testing excluded Wood Mackenzie, Infield and PCI, which represented 18.1% of Q1 revenue; management concluded disclosure controls were effective.
- Foreign-currency translation reduced other comprehensive income by $75.3 million in the quarter. The filing reported no material change in market risks, risk factors or contractual obligations from the prior annual report.
Investor verification checklist
- Confirm the Verisk Health sale’s closing, final adjusted consideration, contingent terms and treatment of the subordinated note.
- Assess organic growth and margins separately from Wood Mackenzie, Infield and PCI, including the durability of insurance growth and weakness in financial services and weather risk.
- Review the discontinued-operation tax charge and any resulting tax effects or sale-related adjustments.
- Monitor debt, revolver availability, covenant headroom, interest costs and capital allocation, including repurchases and planned capital expenditures.
- Track developments and potential exposure in the disclosed litigation, and the integration of acquired businesses into internal controls.