Verisk Analytics, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; compared with the three months ended March 31, 2010. Balance-sheet comparisons are to December 31, 2010. Unless stated otherwise, amounts below are in U.S. dollars.
Business context and results
Verisk supplies proprietary data, analytics and decision-support solutions, principally for property and casualty insurance, and operates through Risk Assessment and Decision Analytics. Results are unaudited.
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $312.9 million | $276.2 million | +13.3% |
| Operating income | $119.3 million | $106.4 million | +12.1% |
| Net income | $65.9 million | $55.4 million | +19.0% |
| Diluted EPS | $0.37 | $0.29 | +27.6% |
| EBITDA (non-GAAP) | $139.1 million | $123.6 million | +12.5% |
| EBITDA margin (non-GAAP) | 44.4% | 44.8% | Down 0.4 percentage points |
| Operating cash flow | $145.6 million | $137.2 million | +6.1% |
Consolidated operating margin was approximately 38.1%, versus 38.5% in the prior-year quarter. Cost of revenue increased 8.3%; selling, general and administrative expense increased 31.3%. Interest expense rose 13.6% to $9.6 million. The effective tax rate was 40.1%, compared with 43.5% (41.1% excluding the prior-year Medicare-related charge).
Segments and drivers of change
- Risk Assessment: Revenue increased 4.4% to $140.5 million; segment EBITDA rose 13.2% to $74.2 million, and EBITDA margin improved to 52.8% from 48.7%. Management cited pricing and deeper penetration of existing customers, alongside cost efficiencies.
- Decision Analytics: Revenue increased 21.7% to $172.3 million; segment EBITDA rose 11.6% to $64.9 million, while EBITDA margin declined to 37.7% from 41.1%. Recent acquisitions added $18.6 million to revenue and weighed on margin; growth excluding acquisitions was $12.1 million. Loss quantification also benefited from new contracts and higher activity associated with severe weather and other damage.
- Overall revenue growth included $18.6 million from the 2010 acquisitions of 3E, Crowe Paradis and Strategic Analytics. Excluding those acquisitions, revenue increased $18.1 million. Lower share counts following repurchases contributed to the larger percentage growth in EPS than in net income.
Cash flow, liquidity and debt
- Cash and cash equivalents were $101.2 million at March 31, up from $55.0 million at year-end; available-for-sale securities were $5.6 million. Operating cash flow was $145.6 million, investing cash outflow $13.5 million and financing cash outflow $86.2 million.
- Fixed-asset purchases were $13.6 million; segment disclosures report capital expenditures, including non-cash purchases and capital leases, of $18.7 million, versus $8.9 million a year earlier. Financing cash outflow included $73.6 million of share repurchases and $15.9 million of net debt repayment.
- Total reported debt, including capital leases and other obligations, was $830.5 million at March 31, versus $839.5 million at December 31. Current liabilities exceeded current assets ($492.5 million versus $311.7 million), reflecting in part $247.1 million of fees received in advance; management describes its working-capital deficit as typical for its prepaid subscription model.
- The company reported $295 million outstanding on its $600 million revolving facility at March 31 and classified it as noncurrent because it was refinanced long term after quarter-end. Verisk stated it complied with debt covenants at March 31.
- On April 6, 2011, Verisk issued $450 million of 5.80% senior notes due 2021, receiving net proceeds of $446.0 million. It used part of the proceeds to refinance the $295 million revolver balance and, later, to fund the Bloodhound acquisition.
Outlook, subsequent events and risks
- No numerical earnings or revenue guidance is provided. Management says it expects cash from operations and available revolving-credit capacity to be sufficient for working capital, capital expenditures, acquisition-related payments and growth plans. It notes first-quarter operating cash flow is generally higher because subscription customers pay in advance.
- On April 27, 2011, Verisk acquired Bloodhound Technologies for a net cash purchase price of $82 million, plus $6.6 million placed in indemnity escrows. The initial purchase accounting was incomplete; the filing says further acquisition details would be provided in the subsequent quarterly report.
- The board authorized an additional $150 million of repurchases in March, bringing total program authorization to $450 million. Verisk repurchased 2.24 million shares at a weighted-average $32.71 during the quarter; $164.1 million remained available at March 31.
- Management says it cannot reasonably estimate potential losses for certain ongoing matters, including the Hanover indemnity dispute, a Louisiana Xactware-related action and an appeal in the iiX Driver Privacy Protection Act case. It states that an adverse judgment or settlement could materially affect results, financial position or cash flows. The Interthinx employment case was settled and received final court approval in February 2011.
- The filing reports no material change in previously disclosed risk factors or market risks, no off-balance-sheet arrangements, and effective disclosure controls as of March 31. It cautions that quarterly results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- How much of Decision Analytics growth and margin performance is organic versus acquisition-related, particularly after integrating Bloodhound.
- Whether the April notes and refinancing materially change ongoing interest costs, leverage, covenant headroom and acquisition capacity.
- Cash conversion and working-capital trends, including the durability of advance subscription receipts and the increase in capital spending.
- Repurchase pace and funding, and the effect of buybacks and Class B share conversions on share count and per-share results.
- Developments in the disclosed legal matters and the eventual purchase-price allocation and goodwill/intangible values for Bloodhound.