Verisk Analytics, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; filed November 5, 2013. Financial figures below are in U.S. dollars; amounts are shown in millions unless noted. Verisk provides proprietary data and analytics for risk-bearing businesses, primarily in insurance, financial services and healthcare. Its reportable segments are Decision Analytics and Risk Assessment.
Financial results and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $438.6 | $398.9 | $1,263.2 | $1,118.6 |
| Operating income | $169.6 | $155.3 | $468.5 | $432.6 |
| Net income | $96.4 | $82.9 | $261.2 | $230.8 |
| Diluted EPS | $0.56 | $0.48 | $1.51 | $1.34 |
| EBITDA, non-GAAP | $202.9 | $182.9 | $568.3 | $506.3 |
| EBITDA margin, non-GAAP | 46.3% | 45.9% | 45.0% | 45.3% |
- Growth and margins: Q3 revenue grew 10.0%, operating income 9.2%, and net income 16.3%. For the first nine months, revenue grew 12.9%, operating income 8.3%, and net income 13.1%. Nine-month GAAP operating margin was approximately 37.1%, versus 38.7% a year earlier.
- Cash flow: Nine-month operating cash flow was $386.5 million, up from $321.0 million. Cash purchases of fixed assets were $107.9 million, implying operating cash flow less those purchases of approximately $278.5 million. Capital expenditures including noncash purchases and capital leases were $114.9 million.
- Liquidity: At September 30, cash and cash equivalents were $180.2 million and available-for-sale securities $4.5 million. Current assets were $461.3 million and current liabilities $456.6 million; fees received in advance, a significant current liability, generally relate to prepaid services.
- Debt: Reported total debt, including capital leases, was $1,310.6 million, compared with $1,461.4 million at December 31, 2012. The company had no revolver borrowings at quarter-end and reported $850 million of available capacity before the October amendment. It repaid $145 million of maturing private-placement debt during the nine months.
Material changes versus comparable periods
- For the first nine months, 2012 acquisitions contributed $68.0 million of 2013 revenue growth; excluding recent acquisitions, revenue rose 6.9%. In Q3, Argus contributed $15.6 million; excluding it, revenue increased 6.1%.
- Decision Analytics revenue grew 16.9% for the nine months, including acquisitions; excluding them, growth was 7.0%. Healthcare and insurance contributed to underlying growth, while financial-services revenue excluding Argus declined 14.8%, reflecting lower mortgage-forensics volumes.
- Risk Assessment revenue increased 6.7% for the nine months. Its EBITDA margin rose to 55.8% from 54.3%; Decision Analytics margin declined to 38.7% from 39.6%, which management attributed primarily to investment in new solution development.
- Nine-month interest expense rose 12.7%, primarily reflecting the $350 million of senior notes issued in September 2012. Fixed-asset depreciation and amortization increased 32.8%, primarily from technology and capacity investments and acquisitions.
- The effective tax rate fell to 36.3% for the nine months from 39.4%, primarily due to tax-planning strategies and favorable settlements and resolutions of uncertain tax positions.
Outlook, commentary, risks and unusual items
- Management expected approximately $160 million of capital expenditures for full-year 2013, principally for technology infrastructure and solution development. The filing gives no specific revenue or earnings guidance.
- Management said recurring revenue and positive cash flow are key indicators, and believes operating cash generation and credit availability will meet working-capital and capital needs. Subscription and long-term-contract customers commonly pay in advance; management notes that this supports cash generation.
- In October 2013, the revolving credit facility was amended to increase capacity from $850 million to $975 million and extend maturity from October 2017 to October 2018. Verisk reported compliance with debt covenants at September 30.
- The company repurchased 2.71 million shares for $162.1 million during the first nine months, at a weighted average price of $59.86; $282.1 million remained authorized at September 30.
- Three Intellicorp/iiX Fair Credit Reporting Act class actions were settled for $18.6 million, payable by insurance, subject to final approval. Several Interthinx wage-and-hour matters, a catastrophe-services dispute and a former MediConnect shareholder lawsuit remained unresolved; the company said it could not estimate potential liability for these matters.
- The annual goodwill impairment test as of June 30 found no impairment. Management reported no material change in risk factors, market risks, critical accounting policies, or internal control over financial reporting; disclosure controls were deemed effective.
Important facts for investors to verify
- How much future growth comes from underlying operations versus acquired businesses, particularly in Decision Analytics.
- Whether weakness in mortgage-forensics volumes persists and how it affects financial-services growth.
- Returns and expense effects from elevated investment in software, infrastructure and new solutions, including the 2013 capital-spending plan.
- Debt repayment needs, covenant headroom, and the terms and availability of the amended revolving facility.
- Final approval and insurance coverage for the $18.6 million settlement, and developments or potential exposure in the other pending legal matters.
- The sustainability of the lower effective tax rate, given the filing attributes the reduction partly to favorable settlements and tax-planning actions.