Verisk Analytics, Inc. — FY2015 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015; it is not a standalone fourth-quarter filing. Verisk provides data and analytics to insurance, financial services, healthcare, energy, and other customers through its Risk Assessment and Decision Analytics segments. Subscription and long-term contracts are generally prepaid and accounted for about 75% of 2015 revenue. The 2015 results include Wood Mackenzie, acquired May 19, as well as Infield and PCI, acquired in November.
Key financial metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $2,068.0 million | $1,746.7 million | +18.4% |
| Operating income | $736.6 million | $660.4 million | +11.5% |
| Net income | $507.6 million | $400.0 million | +26.9% |
| Diluted EPS | $3.01 | $2.37 | +27.0% |
| Cash from operating activities | $623.7 million | $489.5 million | +27.4% |
| Capital expenditures | $166.1 million | $146.8 million | +13.2% |
| Cash and cash equivalents | $138.3 million | $39.4 million | At year-end |
| Total debt | $3,168.0 million | $1,436.9 million | At year-end |
Operating margin was approximately 35.6% and net margin approximately 24.5%. Management-reported EBITDA was $1,054.2 million, or 51.0% of revenue, versus $858.6 million and 48.8% in 2014; EBITDA is a non-GAAP measure and the 2015 result included significant unusual gains noted below. Current assets were $604.6 million against current liabilities of $1,479.3 million; the filing attributes its customary working-capital deficit in part to prepaid customer contracts and deferred revenue. Cash plus available-for-sale securities totaled $141.9 million.
Material changes versus the prior comparable period
- Revenue increased $321.3 million; recent acquisitions contributed $219.6 million. Excluding those acquisitions, revenue grew 5.8%.
- Decision Analytics revenue rose 25.9% to $1,379.8 million, mainly reflecting acquisitions; excluding recent acquisitions, it grew 5.9%. Risk Assessment revenue increased 5.8% to $688.2 million.
- Within Decision Analytics, energy and specialized markets revenue increased 263.6% to $308.8 million, substantially due to acquisitions. Healthcare revenue declined 2.6% as reported; management said growth would have been 6.2% absent changed contract terms.
- Interest expense increased to $121.3 million from $70.0 million, primarily because of acquisition financing. The effective tax rate fell to 29.3% from 37.2%, reflecting Wood Mackenzie-related tax benefits and a U.K. tax-rate reduction.
- Operating cash flow rose, while investing cash outflow increased to $3,006.3 million, principally for the $2,889.6 million net cash purchase price of Wood Mackenzie.
Outlook, commentary, risks and unusual items
- Management estimated 2016 capital expenditures of approximately $175 million, principally for technology infrastructure and development of solutions. No formal revenue or earnings guidance is provided in the filing.
- Verisk reported a $85.2 million gain on foreign-currency hedging related to the Wood Mackenzie acquisition and a $15.6 million gain from the exercise and payout of EagleView warrants. Acquisition transaction costs and financing fees also affected results. Management said these items, net of acquisition transaction costs, increased 2015 EBITDA margin by 3.6 percentage points.
- Wood Mackenzie was financed with debt and an equity offering. Year-end debt was approximately $3.17 billion and debt-to-EBITDA leverage was 2.89x, up from 1.57x at March 31, 2015. The company reported compliance with debt covenants. $870 million was outstanding under the revolving facility at year-end; $165 million was repaid in January and February 2016, with plans to repay part and refinance the remainder during 2016.
- Management identified energy-sector weakness and low commodity prices as potential constraints on Wood Mackenzie customer spending; foreign exchange, especially sterling-dollar movements, also adds exposure. Other material risks include reliance on external data and U.S. P&C insurance customers, privacy and cybersecurity regulation, acquisition integration, competition, and legal proceedings.
- The company was exploring strategic alternatives for its Healthcare business, announced in October 2015; it cautioned that this may not result in a transaction.
- Several lawsuits, including putative class actions involving Fair Credit Reporting Act claims, alleged patent infringement, and insurance-related claims, remained unresolved. The company said it could not estimate potential losses for these matters. The Snyder case was dismissed in January 2016, with plaintiffs seeking reconsideration.
- Management and the auditor reported effective internal control over financial reporting, but the acquired Wood Mackenzie, Infield, and PCI businesses—representing 10.2% of 2015 revenue and 4.9% of year-end assets—were excluded from the internal-control assessment pending integration.
Investor verification points
- Separate organic growth from acquisition-driven growth and assess whether the acquired businesses meet expected performance and integration objectives.
- Reconcile the reported EBITDA margin with the $85.2 million hedge gain, $15.6 million warrant gain, acquisition costs, and the company’s non-GAAP definition.
- Review debt maturities, revolving-credit refinancing, covenant headroom, and leverage following the Wood Mackenzie acquisition.
- Check the outcome of the Healthcare strategic-alternatives review and the status and potential exposure of disclosed litigation.
- Assess the sensitivity of energy and specialized-markets revenue to commodity conditions, and the company’s ability to retain data sources and meet privacy and security requirements.