Business context and reporting period
Verisk Analytics, Inc. filed this Form 10-K for the fiscal year ended December 31, 2017. It provides data analytics and decision-support solutions, primarily to insurance, energy and specialized markets, and financial-services customers. Its two segments are Decision Analytics and Risk Assessment. More than 80% of 2017 revenue came from subscriptions and long-term agreements, generally paid in advance.
Financial results and key metrics
| Metric | FY 2017 | FY 2016 | Change or context |
|---|---|---|---|
| Revenue | $2,145.2 million | $1,995.2 million | Up 7.5%; up 4.5% excluding revenue from recent acquisitions |
| Operating income | $801.2 million | $767.6 million | Up 4.4%; operating margin approximately 37.3% versus 38.5% |
| Continuing-operations net income | $555.1 million | $451.5 million | Up 22.9%; diluted EPS was $3.29 versus $2.64 |
| Total net income | $555.1 million | $591.2 million | Down 6.1%; 2016 included $139.7 million income from discontinued operations, including the healthcare-business sale |
| Net cash from operating activities | $743.5 million | $577.5 million | Up $166.0 million |
| Capital expenditures | $183.5 million | $156.5 million | 2017 was 8.6% of revenue |
| Cash and cash equivalents | $142.3 million | $135.1 million | Available-for-sale securities added $3.8 million at year-end 2017 |
| Total debt | $3,008.8 million | $2,387.0 million | Includes capital leases; year-end revolving-credit borrowings were $715.0 million |
Decision Analytics revenue rose 8.2% to $1,374.9 million; Risk Assessment revenue rose 6.4% to $770.3 million. Risk Assessment EBITDA margin increased to 59.5% from 57.4%. Reported consolidated EBITDA was $1,047.8 million in 2017 and $1,251.3 million in 2016; the latter included $266.0 million from discontinued operations. Excluding that contribution, 2016 EBITDA was $985.3 million. EBITDA is a non-GAAP measure.
Current assets were $597.6 million and current liabilities $1,337.6 million at year-end. Management says the working-capital deficit is typical because subscription customers generally prepay; deferred revenue was $384.7 million. The company reported compliance with debt covenants. Its revolving facility was extended to May 2022; $110 million of year-end facility borrowings was repaid in January 2018.
Material changes versus the prior comparable period
- Revenue growth reflected both acquisitions and underlying growth: excluding recent acquisitions, Decision Analytics revenue increased 4.3% and Risk Assessment 4.7%.
- Decision Analytics insurance revenue grew 12.1%; energy and specialized markets grew 0.4% including acquisitions but declined 2.2% excluding them. Financial-services revenue grew 13.4% including acquisitions but declined 2.8% excluding them.
- Net income from continuing operations increased substantially, while total net income declined because 2016 included the healthcare-business divestiture gain and discontinued-operation results.
- Operating cash flow improved, partly because 2016 included a $99.9 million tax payment related to the healthcare sale and an $18.8 million ESOP cash contribution, neither recurring in 2017.
- Acquisitions, including escrow funding, used $914.9 million of cash in 2017. The company acquired businesses in insurance, financial services, energy and aerial imagery; recent acquisitions contributed $61.3 million of 2017 revenue.
For the fourth quarter, revenue was $570.3 million versus $506.1 million a year earlier; operating income was $210.1 million versus $185.5 million, and net income was $204.6 million versus $109.3 million. Fourth-quarter 2017 diluted EPS was $1.22 versus $0.64.
Outlook, commentary, risks and unusual items
- No formal revenue or earnings guidance is provided. Management estimated 2018 capital expenditures of approximately $230 million, mainly for technology infrastructure and solution development. Management described energy-market prospects as more optimistic for 2018 and cited expected moderate growth in upstream capital investment.
- The 2017 effective tax rate was 19.7%, down from 30.9%. U.S. tax reform produced an estimated $89.1 million benefit from remeasurement of deferred taxes and an estimated $8.0 million reduction in current tax payable from bonus depreciation. The company said it did not expect material tax-provision effects from the other new provisions.
- Insurance-industry exposure is significant: approximately 48.9% of 2017 revenue came from solutions provided to U.S. P&C primary insurers. Catastrophe losses from Hurricanes Harvey, Irma and Maria affected insurer results in 2017.
- Key stated risks include loss or restriction of access to third-party and customer data; cybersecurity, privacy and regulatory changes; dependence on the P&C insurance sector; competition and customer consolidation; acquisition integration and leverage; international and currency exposure; and litigation.
- Goodwill was $3,368.7 million, or 56.0% of total assets. No impairment was recorded, but the energy reporting unit’s fair value exceeded carrying value by less than 10% at the June 2017 test, reflecting currency and energy-market conditions.
- Ongoing patent litigation involving Xactware could not be reasonably estimated. A putative class-action FCRA matter was settled with a non-material cash payment and non-monetary relief; the settlement received final approval in October 2017. The Snyder antitrust case was dismissed, with appeals ultimately denied. Management stated it could not estimate possible losses for ongoing matters.
- The auditor issued an unqualified opinion on the financial statements and internal controls. Management and the auditor excluded the 2017 acquired businesses from the internal-control assessment; these represented 1.9% of revenue and 2.0% of assets, excluding goodwill and intangibles.
Investor facts to verify
- Underlying organic growth by segment and whether weakness excluding acquisitions in energy and financial services persists.
- Integration, returns and purchase-accounting outcomes for 2017 acquisitions, including the $914.9 million acquisition cash outlay.
- Debt reduction, refinancing needs and covenant headroom, particularly given $715 million of revolving borrowings at year-end.
- Execution against the approximately $230 million 2018 capital-expenditure estimate and resulting cash generation.
- Future impairment sensitivity for energy goodwill, and any developments in the unresolved patent litigation or data-security and privacy risks.
- The effects of tax reform and the adoption of new accounting standards; management expected the 2018 revenue-recognition adoption impact to be immaterial, while the lease standard’s balance-sheet impact was expected to be material.