Business context and reporting period
Verisk Analytics, Inc. provides data, analytics and decision-support solutions, primarily to property-and-casualty insurers, through its Decision Analytics and Risk Assessment segments. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017; comparisons are with the same periods in 2016. Results are continuing operations unless otherwise noted. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Revenue | $523.2 | $498.3 | $1,025.8 | $991.0 |
| Operating income | $195.0 | $191.2 | $382.7 | $383.8 |
| Continuing-operations income | $121.0 | $106.8 | $229.8 | $216.5 |
| Diluted continuing-operations EPS | $0.72 | $0.62 | $1.36 | $1.26 |
| Operating cash flow | Not presented separately | Not presented separately | $429.8 | $385.1 |
| Capital expenditures | Not presented separately | Not presented separately | $72.5 | $62.2 |
- Q2 revenue increased 5.0%; H1 revenue increased 3.5%. Excluding recent acquisitions, management reported growth of 2.6% for Q2 and 1.8% for H1.
- Operating margin was approximately 37.3% in Q2 2017 versus 38.4% in Q2 2016, and 37.3% in H1 2017 versus 38.7% in H1 2016. Net income from continuing operations increased 13.3% in Q2 and 6.2% in H1.
- Reported net income was $121.0 million in Q2 and $229.8 million in H1 2017, versus $261.8 million and $354.4 million in the prior periods. The 2016 comparisons include $155.0 million and $137.9 million, respectively, of after-tax income from discontinued operations, including the healthcare business sale gain; reported net-income declines therefore do not reflect continuing-operations performance.
- Segment revenue growth was stronger in Risk Assessment: 6.4% in Q2 and 5.9% in H1. Decision Analytics revenue grew 4.2% and 2.2%, respectively. Decision Analytics insurance grew, while energy and specialized markets and financial services declined, with currency pressure and prior contract completions cited as factors.
- Company EBITDA, a non-GAAP measure, was $254.1 million in Q2 and $499.8 million in H1 2017. Prior-period figures of $500.0 million and $763.0 million include the healthcare disposal gain and discontinued business; excluding discontinued-operation EBITDA, prior-period EBITDA was approximately $245.2 million and $493.6 million. Continuing-business EBITDA margins were therefore approximately 48.6% and 48.7% in 2017 versus 49.2% and 49.8% in 2016.
- At June 30, cash and cash equivalents were $140.7 million; available-for-sale securities were $3.6 million. Total debt on the balance sheet was $2,403.4 million, including $120.0 million drawn on the revolving facility. The company had $1,376.5 million available under the $1.5 billion facility, net of letters of credit, and reported covenant compliance.
- H1 cash from operations was $429.8 million; investing used $194.7 million, including $122.3 million for acquisitions and $72.5 million for capital expenditures. Financing used $232.8 million, principally reflecting $266.1 million of share repurchases. Cash increased $5.6 million to $140.7 million.
- Total assets were $4,898.7 million and stockholders’ equity was $1,465.9 million at June 30, 2017. Current liabilities included $449.0 million of deferred revenue, which management says reflects advance customer payments and contributes to its structurally negative working capital.
Material changes, outlook and risks
- H1 revenue growth was led by Risk Assessment and Decision Analytics insurance. Excluding acquisitions, Decision Analytics revenue grew only 0.4% in H1; energy and specialized markets were affected by currency headwinds and lower environmental health and safety revenue, while financial services faced contract completions.
- Verisk completed multiple 2017 acquisitions, including Healix, Fintellix, MAKE and aerial-imagery businesses. The preliminary purchase-price allocation recorded $77.4 million of goodwill. Management cited $2.7 million of acquisition transaction costs for H1.
- On July 11, 2017, the company signed an agreement to acquire G2 Web Services for $112.0 million, subject to customary closing conditions and shareholder approvals; it expected closing by August 2017. Funding was expected from the credit facility and cash on hand.
- Management expected 2017 capital expenditures of approximately $185 million, mainly for technology infrastructure and solution development. The filing provides no revenue or earnings guidance. Management stated that operating cash flow and available revolver capacity should be sufficient for working capital, capital spending and growth plans.
- The company repurchased $266.1 million of shares in H1; $376.4 million remained authorized. The repurchase program has no expiration date and may be changed or suspended.
- Goodwill was $2,733.8 million, or 55.8% of total assets. The annual impairment test found no impairment, but the energy reporting unit’s fair value exceeded carrying value by less than 10%; its goodwill carrying value was $1,841.8 million. Management linked limited headroom to GBP/USD movements and energy-market conditions.
- Other items to monitor include the ongoing patent litigation involving Xactware, the pending final approval of a non-material Intellicorp class-action settlement, and a possible petition for Supreme Court review in the ACORD-related litigation. The filing says outcomes or potential losses cannot currently be estimated for certain matters.
- The company was evaluating adoption of the new revenue-recognition standard, effective for it in 2018. Identified areas include capitalization and amortization of contract commissions and the timing of certain licensing revenue; the financial impact was not yet clear.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether organic growth improves, particularly in Decision Analytics energy and specialized markets and financial services, and whether acquisition contributions translate into sustainable growth.
- Whether cost growth moderates: Q2 cost of revenues increased 8.5% against 5.0% revenue growth, and H1 increased 7.1% against 3.5% revenue growth.
- The energy reporting unit’s valuation assumptions and impairment headroom, given the less-than-10% excess of fair value over carrying value.
- The final purchase accounting, integration results and funding for 2017 acquisitions, including the proposed G2 transaction.
- Debt, liquidity, buyback pace and capital spending relative to cash generation, alongside the continuing distinction between recurring operating results and prior-year healthcare disposal gains.
- The eventual accounting and reported financial effects of the revenue-recognition standard, and the resolution of material legal proceedings.