Verisk Analytics, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; unaudited. Unless otherwise stated, dollar amounts below are in millions. Verisk supplies proprietary data and analytics for insurance, healthcare, mortgage and financial services, and other risk-bearing markets. Its reportable segments are Decision Analytics and Risk Assessment.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $398.9 | $340.1 | $1,118.6 | $980.2 |
| Operating income | $155.3 | $131.4 | $432.6 | $374.5 |
| Net income | $82.9 | $71.0 | $230.8 | $202.4 |
| Diluted EPS | $0.48 | $0.41 | $1.34 | $1.16 |
| EBITDA | $182.9 | $151.0 | $506.3 | $434.1 |
| EBITDA margin | 45.9% | 44.4% | 45.3% | 44.3% |
Revenue increased 17.3% in Q3 and 14.1% for the nine-month period. Excluding recent acquisitions, growth was 8.5% and 7.5%, respectively. Nine-month operating margin was approximately 38.7%, compared with 38.2% a year earlier. The nine-month effective tax rate was 39.4%, versus 39.7%.
Segments and material comparisons
- Decision Analytics: Nine-month revenue grew 22.6% to $685.6 million; excluding acquisitions, growth was 11.1%. Healthcare revenue rose 130.2%, including $59.5 million from recent acquisitions; organic healthcare growth was 41.0%. Mortgage and financial services revenue, excluding acquisition and category-reclassification effects, declined 8.7%, reflecting weaker forensic-services volumes.
- Risk Assessment: Nine-month revenue grew 2.8% to $433.0 million. Segment EBITDA margin increased to 54.3% from 50.7%, attributed to operating leverage and cost efficiencies. Property-specific rating and underwriting revenue declined 6.0%.
- Recent acquisitions contributed $64.7 million to nine-month revenue and $29.8 million to Q3 revenue. Acquisition-related intangible amortization and expenses increased, while the 2011 period included a $3.4 million benefit from reducing contingent acquisition liabilities.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $321.0 million, compared with $323.8 million. Investing cash outflow was $838.7 million, including $743.1 million for acquisitions and $55.7 million for fixed-asset purchases. Financing provided $424.0 million. Cash declined $93.8 million from year-end to $97.8 million.
- Management attributed the near-flat operating cash flow partly to a $72.0 million voluntary pension prefunding and higher interest payments, partly offset by increased customer receipts. Subscription payments are generally received in advance.
- At September 30, cash and available-for-sale securities totaled $102.7 million. Total debt was $1,567.5 million, compared with $1,105.9 million at December 31, 2011; cash less total debt implies net debt of about $1,469.7 million. Current assets of $361.3 million were below current liabilities of $668.3 million, in part reflecting $219.8 million of fees received in advance.
- The company issued $350 million of 4.125% senior notes due 2022, receiving net proceeds of about $344.9 million, used to repay acquisition-related revolver borrowings. The revolving facility was expanded from $725 million to $850 million and extended to October 2017; $735 million remained available at quarter-end. The company reported compliance with debt covenants.
- Verisk repurchased $128.1 million of stock during the first nine months and had $179.0 million remaining under its authorization. Long-term debt fair value was estimated at $1,584.2 million; this is an estimate, not its balance-sheet carrying value.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said it expects cash from operations and available credit to meet working-capital and capital-expenditure needs and support growth plans; interim results are not necessarily indicative of full-year results.
- Argus, MediConnect and Aspect Loss Prevention were acquired in 2012. Preliminary purchase-price allocations included $505.4 million of goodwill from current-year acquisitions and remained subject to revision. Total goodwill was $1,220.4 million; the annual June 2012 impairment test found no impairment.
- Argus financing increased leverage. The company disclosed that, at the acquisition date, debt was approximately $1.6 billion and pro forma leverage rose from 1.90x to 2.34x. It warned that higher leverage could constrain financing and strategic flexibility, and that expected acquisition benefits may not be realized.
- The pension plans were hard-frozen in February 2012. The company made $78.8 million of pension contributions for the year through September and did not expect further 2012 qualified-pension contributions. It contributed $13.5 million to the postretirement-benefit VEBA during the nine months and expected the final-quarter contribution to be consistent with the quarter’s contribution.
- Two disclosed legal matters—the Citizens/Xactware property-replacement-value case and a putative Fair Credit Reporting Act class action against Intellicorp—were unresolved; the company said it could not estimate potential liability. It also cautioned that future judgments or settlements could materially affect results, financial position or cash flows.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported during the quarter. The filing states there were no off-balance-sheet arrangements.
Important facts for investors to verify
- How much of future growth and profitability is organic, especially in healthcare, versus attributable to acquisitions and their integration costs.
- Debt maturities and refinancing needs, covenant headroom, and the effect of Argus and other acquisitions on leverage and interest expense.
- Whether subscription and advance-payment cash flows remain strong enough to support acquisition spending, capital expenditures and share repurchases.
- The final acquisition purchase-price allocations, goodwill and intangible amortization, and realization of expected acquisition benefits.
- Developments in the Citizens and Intellicorp litigation, for which the filing provides no clear estimate of potential loss.