Verisk Analytics, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Verisk provides data and analytics for risk-bearing businesses, primarily through its Risk Assessment and Decision Analytics segments. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and position
- Q3 revenue: $550.4 million, up 22.7% year over year. Excluding recent acquisitions, growth was 3.2%. Decision Analytics revenue rose 31.8% (1.4% excluding acquisitions); Risk Assessment grew 6.4%.
- Nine-month revenue: $1,507.4 million, up 17.6%; growth was 7.3% excluding Maplecroft and Wood Mackenzie. Decision Analytics grew 24.7% (8.1% excluding acquisitions), while Risk Assessment grew 5.9%.
- Profit: Q3 operating income was $208.9 million, up 19.0%, and net income was $131.8 million, up 33.1%. Diluted EPS was $0.77 versus $0.58. For nine months, operating income was $540.9 million, up 11.9%; continuing-operations income was $393.8 million, up 45.0%, and diluted continuing-operations EPS was $2.36 versus $1.60. Prior-year nine-month net income included $31.1 million from discontinued operations.
- Margins and EBITDA: Q3 EBITDA was $278.8 million, up 31.9%, with a 50.7% margin versus 47.1%. Nine-month EBITDA was $791.3 million, up 22.9%; the reported margin was 52.5% versus 49.8%, with the comparison affected by discontinued operations in 2014. EBITDA is a non-GAAP measure.
- Cash flow: Nine-month operating cash flow was $520.0 million versus $378.6 million. Capital expenditures were $105.8 million; operating cash flow less capital expenditures was approximately $414.3 million (calculated). Investing used $2,895.2 million, principally for the Wood Mackenzie acquisition; financing provided $2,503.2 million. Cash and cash equivalents ended at $168.8 million.
- Liquidity and debt: Cash plus available-for-sale securities totaled $172.5 million. Total debt, including capital leases, was $3,198.4 million, versus $1,436.9 million at year-end 2014; debt excluding capital leases was $3,190.6 million. The $1.75 billion revolving facility had $900 million drawn at quarter-end. The company reported compliance with debt covenants and repaid $70 million of revolver borrowings on October 19, 2015.
- Other balance-sheet changes: Total assets increased to $5,619.1 million from $2,345.3 million, primarily reflecting the acquisition. Goodwill was $3,119.5 million and net intangible assets were $1,415.6 million at September 30.
Material changes versus the prior comparable period
- On May 19, 2015, Verisk acquired Wood Mackenzie for a net cash purchase price of approximately $2.89 billion, expanding into international energy, chemicals, metals and mining data and analytics. The acquisition contributed materially to reported growth; Q3 Decision Analytics revenue excluding recent acquisitions rose only 1.4%.
- The acquisition was financed with new debt and a $720.8 million net equity offering, among other sources. Debt increased substantially, and interest expense rose 88.6% in Q3 and 69.7% for the nine-month period.
- Decision Analytics healthcare revenue fell 13.0% in Q3, which management attributed mainly to changes in customer contract language. Management said that applying the revised language to the prior-year comparison would imply a 2.0% decline. Nine-month healthcare growth was 1.5%, or 9.9% on management’s stated comparable contract basis.
- Risk Assessment continued steady growth, with nine-month revenue up 5.9%; management cited pricing, enhanced content and expanded solutions.
Outlook, management commentary, risks and unusual items
- Management gave no specific full-year revenue or earnings guidance in the supplied filing text. It expected approximately $170 million of capital expenditures for 2015, mainly for technology infrastructure and solution development, and said cash generation and credit availability should support working capital, capital spending and growth plans.
- Management described recurring revenue and positive cash flow as key indicators. Subscriptions and long-term agreements are generally prepaid; about 25.4% of nine-month revenue came from transactional solutions.
- Non-recurring items affected results: a $85.2 million gain on a foreign-currency hedge related to the acquisition and a $15.6 million gain from exercise and payout of EagleView warrants. Acquisition-related transaction costs included $26.6 million in SG&A and $13.3 million in interest expense for the nine months. The hedge and warrant gains boosted reported EBITDA and margins.
- Wood Mackenzie purchase-price allocations remained preliminary and subject to adjustment for up to one year after acquisition. Verisk recorded acquisition-related allocation revisions in Q3, including a $126.2 million increase to goodwill.
- In October 2015, Verisk announced it would explore strategic alternatives for its Healthcare business; there was no assurance a transaction would result.
- Key risks include higher leverage and reduced financing flexibility, execution and integration risks from Wood Mackenzie, energy-sector demand weakness, and increased international and foreign-currency exposure. The filing said a hypothetical 10% exchange-rate change would not have materially affected earnings during the period.
- Several legal matters were disclosed, including putative class actions alleging Fair Credit Reporting Act violations and patent infringement claims. The company said it could not estimate potential liabilities for these matters. Certain other lawsuits had been dismissed, with appeals concluded or summary judgment granted as described in the filing.
- Disclosure controls were assessed as effective, but Wood Mackenzie was excluded from the internal-control assessment while integration was underway; the acquired business represented 7.7% of assets and 8.3% of nine-month revenue.
Important facts for investors to verify
- How much reported growth and margin expansion reflects Wood Mackenzie and other acquisitions versus organic performance, especially in Decision Analytics.
- Whether the healthcare contract-language changes continue to affect revenue, and the outcome of the strategic-alternatives review.
- Debt repayment, leverage and covenant headroom following the acquisition; confirm the post-quarter $70 million revolver repayment in subsequent filings.
- Final purchase-price allocation, acquired-intangible amortization and integration costs for Wood Mackenzie.
- Whether one-time hedge and warrant gains obscure underlying earnings trends, and the status or potential exposure of the disclosed legal proceedings.