Verisk Analytics, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; unaudited. Verisk provides proprietary data and analytics to help customers assess risk, detect fraud, and quantify losses. Its reportable segments are Decision Analytics and Risk Assessment.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $421.3 million, up 12.9% | $824.6 million, up 14.6% |
| Operating income | $151.5 million, up 9.5% | $298.9 million, up 7.8% |
| Net income | $84.2 million, up 14.8% | $164.7 million, up 11.3% |
| Diluted EPS | $0.49, versus $0.43 | $0.95, versus $0.86 |
| EBITDA and margin | $185.6 million; 44.1%, versus 43.9% | $365.3 million; 44.3%, versus 44.9% |
Amounts are in U.S. dollars. EBITDA is a non-GAAP measure defined by the company; it should not be viewed as a substitute for GAAP results or cash flow.
- Segment revenue, six months: Decision Analytics was $517.8 million, up 20.3%; Risk Assessment was $306.9 million, up 6.1%. Decision Analytics EBITDA margin fell to 37.3% from 38.8%; Risk Assessment improved to 56.2% from 54.1%.
- Cash flow, six months: Operating cash flow was $246.7 million, versus $187.4 million. Investing used $63.0 million, compared with $387.0 million, largely reflecting the prior-year MediConnect acquisition. Financing used $100.2 million, primarily for share repurchases.
- Liquidity: At June 30, cash and cash equivalents were $172.6 million and available-for-sale securities were $4.3 million. The company reported $176.8 million combined cash and securities and had the full $850 million revolving facility undrawn.
- Debt: Total debt, including capital leases, was $1.405 billion, down from $1.461 billion at year-end. Debt excluding capital leases was $1.400 billion. The company reported compliance with debt covenants.
- Balance sheet: Total assets were $2.439 billion and stockholders’ equity $365.5 million. Current liabilities of $585.1 million exceeded current assets of $493.6 million; management said advance customer payments and deferred revenue are characteristic of its subscription model.
Material changes and drivers
- Q2 revenue growth included $19.0 million from recent acquisitions; excluding those acquisitions, revenue increased 7.8%. For the first half, acquisitions contributed $52.4 million, and revenue excluding recent acquisitions grew 7.3%.
- First-half Decision Analytics growth was led by healthcare and insurance. Financial-services revenue excluding Argus declined 13.9%, reflecting lower mortgage-services volumes. Risk Assessment growth was attributed mainly to insurance programs and expanded solutions.
- First-half cost of revenue rose 20.9%, faster than revenue, while depreciation and amortization increased substantially, partly due to acquisitions and investment in technology. Interest expense increased 17.9%, mainly due to senior notes issued in September 2012.
- The effective tax rate fell to 36.4% for the first half from 39.4%, primarily due to tax-planning strategies and the R&D tax credit, including recognition in Q1 of the retroactively extended 2012 credit.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expected 2013 capital expenditures of approximately $115 million, primarily for technology infrastructure and solution development.
- Management cited investment in new solutions and recent acquisitions as factors weighing on first-half EBITDA margin. It noted that results for the six-month period are not necessarily indicative of full-year results.
- The company repurchased 2.33 million shares in the first half for $137.6 million, at a weighted average $59.17 per share. The board added $300 million to the authorization in June; $306.6 million remained available at June 30.
- Several putative class actions involving consumer-reporting practices and employee wage claims, and a contract-related action involving subsidiaries, were disclosed. The company said it could not estimate their ultimate resolution or potential liability; adverse outcomes could materially affect results, financial position, or cash flows.
- Goodwill impairment testing at June 30 resulted in no impairment. Management reported effective disclosure controls and no material change in risk factors or market-risk disclosures from the 2012 Form 10-K.
Most important facts for investors to verify
- How much future growth is organic, particularly in healthcare and insurance, versus attributable to acquisitions; monitor the continuing weakness in mortgage-related financial services.
- Whether revenue growth can outpace cost growth and restore or expand margins as acquisition-related amortization and solution-development investment continue.
- Debt maturities, refinancing and covenant headroom, alongside planned capital expenditures and ongoing share repurchases.
- Developments and any potential financial exposure in the disclosed litigation; the filing does not provide a clear estimate of possible losses.
- The sustainability of cash conversion, including advance customer fees, and the extent to which the lower effective tax rate and R&D credit benefit recur.