Verisk Analytics, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; filed November 1, 2011. Unless noted, financial amounts below are in millions. The company provides data and analytics for risk-bearing businesses through Risk Assessment and Decision Analytics.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $340.1 | $287.4 | $980.2 | $845.2 |
| Operating income | $131.4 | $113.7 | $374.5 | $327.2 |
| Net income | $71.0 | $62.9 | $202.4 | $176.7 |
| Diluted EPS | $0.41 | $0.34 | $1.16 | $0.94 |
| EBITDA | $151.0 | $129.9 | $433.6 | $377.6 |
| EBITDA margin | 44.4% | 45.2% | 44.2% | 44.7% |
Cash flow, nine months: Operating cash flow was $323.8 million, versus $241.8 million; investing cash outflow was $186.4 million, versus $29.5 million; financing cash outflow was $139.5 million, versus $176.6 million. Fixed-asset purchases were $41.9 million. Cash and cash equivalents were $52.8 million at September 30, compared with $55.0 million at year-end 2010; available-for-sale securities were $4.8 million.
Balance sheet and debt: Total assets were $1,379.9 million and total liabilities $1,538.8 million, leaving a stockholders’ deficit of $158.9 million. Current assets were $271.8 million and current liabilities $506.0 million; management says advance customer payments and subscription economics generally produce a working-capital deficit. Total debt, including capital leases and other obligations, was $1,019.3 million, compared with $839.5 million at year-end 2010. The filing reports $1,009.0 million of debt excluding capital leases and other obligations.
Material changes and drivers
- Nine-month revenue rose 16.0%; Q3 revenue rose 18.4%. Decision Analytics drove most of the increase: nine-month revenue increased 27.1%, while Risk Assessment increased 3.9%.
- Recent acquisitions contributed $70.6 million of nine-month revenue growth and $31.1 million in Q3. Excluding those acquisitions, nine-month revenue increased $64.4 million.
- Decision Analytics growth included increased loss-quantification activity associated partly with severe weather and other U.S. damage claims, as well as new projects and greater customer penetration. Risk Assessment growth was attributed primarily to price increases, solution enhancements, and customer penetration.
- Nine-month operating income increased 14.5% and net income increased 14.6%. Diluted EPS rose 23.4%, alongside lower weighted-average diluted shares, reflecting share repurchases.
- EBITDA margin declined year over year, which management attributed in part to acquisitions; nine-month margin was also positively affected by a $3.4 million acquisition-liability reversal. Decision Analytics margin was 39.5% for the nine months, versus 40.8%; Risk Assessment margin improved to 50.6% from 48.9%.
- Interest expense rose 53.9% for the nine months to $39.1 million, primarily following issuance of $450 million of 5.80% senior notes due in 2021.
Liquidity, outlook, risks, and unusual items
- Management stated it believed operating cash flow and available revolving-credit capacity would be sufficient for working capital, capital expenditures, acquisition payments, and growth plans. No numerical earnings or revenue guidance is provided; management cautions that interim results are not necessarily indicative of full-year results.
- On October 25, 2011, after quarter-end, the revolving credit facility was increased from $600 million to $700 million, its maturity extended from September 2014 to October 2016, and borrowing rates reduced to LIBOR plus 1.25%–1.875%. The company reported covenant compliance at September 30 under its then-existing facilities.
- The company repurchased $340.1 million of Class A shares during the first nine months and had $47.4 million of authorization remaining at September 30. It repurchased 3.7 million shares in Q3 at an average $33.51 per share.
- Acquisitions of Bloodhound and Health Risk Partners closed in 2011 for net cash purchase prices of approximately $75.3 million and $46.4 million, respectively. Purchase-price allocations remained preliminary. Goodwill was $712.6 million; the June 2011 annual impairment test found no impairment, and the company reported no subsequent indicators.
- Operating cash flow benefited from customer receipts and deferral of a $22.8 million estimated federal tax payment to October 31 under Hurricane Irene tax relief. This timing benefit is not necessarily recurring.
- The company reversed $3.4 million of contingent consideration after reassessing the likelihood that D2 Hawkeye and Strategic Analytics would meet earn-out targets; management expected no contingent payments to those sellers based on current estimates.
- Mortgage-market weakness is a disclosed risk: mortgage-related revenue depends partly on transaction volumes, and two customers represented the majority of 2010 mortgage revenue. Lower originations, changes to Fannie Mae or Freddie Mac, or reduced mortgage-insurer activity could pressure revenue and profitability.
- Legal matters include the unresolved Mornay Xactware-related litigation and the appeal in the iiX Driver Privacy Protection Act case; the company said it could not estimate potential liability. The Hanover dispute was settled in August 2011 without material adverse consequences.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter. The company reported no off-balance-sheet arrangements and no material change in market-risk disclosures.
Important facts for investors to verify
- How much of Decision Analytics’ growth and margin performance is attributable to acquired businesses versus organic growth, and how acquisition integration affects future margins.
- Whether weather-related claims volumes and mortgage transaction activity persist, and how concentrated mortgage-customer exposure evolves.
- Cash-flow quality, including the effect of advance billings and the deferred $22.8 million tax payment, compared with recurring operating cash generation.
- Debt service, leverage, covenant headroom, and the terms and availability of the amended $700 million revolving facility.
- Final purchase-price allocations for recent acquisitions, goodwill and intangible-asset valuation, and any developments in unresolved legal proceedings.
- Share repurchase pace and financing, given the $340.1 million spent during the nine-month period and the increase in debt.