Verisk Analytics, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise stated. Verisk provides data analytics and decision-support solutions, principally to insurance customers, through its Insurance, Energy and Specialized Markets, and Financial Services segments.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $625.0 million | $581.2 million | +7.5%; +5.9% excluding recent acquisitions |
| Operating income | $202.4 million | $194.5 million | +4.1% |
| Net income | $134.4 million | $133.0 million | +1.0% |
| Diluted EPS | $0.81 | $0.79 | +2.5% |
| Net income margin | 21.5% | 22.9% | Down 1.4 percentage points |
| EBITDA (non-GAAP) | $281.8 million | $268.8 million | +4.8% |
| EBITDA margin (non-GAAP) | 45.1% | 46.3% | Down 1.2 percentage points |
| Operating cash flow | $366.1 million | $327.0 million | +12.0% |
Revenue by segment was Insurance $451.2 million (+9.3%; +7.0% excluding acquisitions), Energy and Specialized Markets $130.8 million (+4.2%), and Financial Services $43.0 million (-0.1%). Segment EBITDA was $232.3 million for Insurance, $36.2 million for Energy and Specialized Markets, and $13.3 million for Financial Services.
Operating expenses increased 9.3%, faster than revenue. Selling, general and administrative expense rose 21.3%, including acquisition-related earn-out costs; excluding recent acquisitions and earn-out costs, it increased 7.5%. The effective tax rate rose to 21.0% from 18.0%, primarily because of lower tax benefits from equity compensation. These factors contributed to net income and margin growing more slowly than revenue.
Cash flow, debt and liquidity
- Cash and cash equivalents were $179.5 million at March 31, 2019, versus $139.5 million at year-end; cash plus available-for-sale securities was $183.2 million.
- Operating cash flow was $366.1 million. The company says first-quarter cash flow typically benefits from advance subscription billings; deferred revenues increased $217.7 million in the cash-flow statement.
- Investing cash outflow was $120.3 million, including $69.1 million for acquisitions and $45.2 million of capital expenditures. Financing cash outflow was $206.4 million, including debt repayments, $75.0 million of share repurchases, and $40.9 million of dividends.
- Total debt on the balance sheet, including finance lease liabilities and net of applicable discounts and issuance costs, was $2,623.8 million, compared with $2,723.3 million at December 31, 2018. The company reported $170.0 million drawn on its revolving facility and $1,324.6 million of available capacity, net of letters of credit. It was in compliance with debt covenants.
- In March, Verisk issued $400 million of 4.125% senior notes due 2029; net proceeds were $394.0 million. It used cash and revolving-credit borrowings to repay $250 million of 4.875% notes due January 2019. In April, it repaid a further $70 million under the revolver.
Material developments, outlook and risks
- On March 29, 2019, Verisk acquired a Content as a Service business focused on environmental health and safety regulatory content for a net cash purchase price of $69.1 million. The preliminary allocation included $34.4 million of intangible assets and $32.8 million of goodwill; purchase accounting remained subject to revision.
- Verisk adopted ASC 842 lease accounting on January 1, 2019. At March 31, it reported $239.6 million of operating lease right-of-use assets and $267.5 million of operating lease liabilities. This adoption affects balance-sheet comparisons with 2018.
- Management emphasized recurring subscription revenue and cash generation, and stated it expects sufficient cash and credit availability to fund working capital, capital spending and growth plans. The filing provides no quantitative revenue, earnings or margin guidance. Management cautioned that first-quarter results are not necessarily indicative of full-year results.
- Management attributed segment and consolidated margin pressure principally to recent acquisitions and acquisition-related earn-out costs. It also noted planned investment in new solutions and businesses may offset margin expansion.
- Verisk disclosed patent litigation involving Xactware products, with trial ordered to begin June 10, 2019, and a separate putative class action alleging under-insurance related to the 2017 Northern California wildfires. The company said it could not reasonably estimate the ultimate resolution or liability for either matter.
- The company reported no material change in risk factors or market-risk disclosures, no off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2019.
Important facts for investors to verify
- Whether organic revenue growth and the stronger Insurance segment results persist, and whether Financial Services returns to growth.
- Whether expense growth, earn-out costs and acquisition integration continue to weigh on margins and earnings conversion.
- Cash-flow quality and seasonality, especially the contribution from advance billings and deferred revenue.
- Debt levels, refinancing and covenant headroom, alongside continued repurchases and dividends.
- Final purchase-price allocation and performance of the acquired CaaS business; lease-accounting effects on period comparisons.
- Developments and potential financial exposure in the patent and wildfire-related litigation; the filing does not provide a clear loss estimate.