Business context and reporting period
Verisk Analytics, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company provides proprietary risk data, analytics, and decision-support solutions through its Decision Analytics and Risk Assessment segments. Mortgage-services subsidiary Interthinx was sold on March 11, 2014; its results are presented as discontinued operations.
Key financial metrics
Amounts are in millions of U.S. dollars except per-share data. Comparisons are with the corresponding 2013 period.
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $423.6; up 8.5% from $390.4 | $833.2; up 8.6% from $767.1 |
| Operating income | $159.1; up 8.3% from $146.9 | $307.9; up 5.3% from $292.4 |
| Income from continuing operations | $88.1; up 8.0% from $81.6 | $172.5; up 7.1% from $161.0 |
| Net income | $88.1; up 4.6% from $84.2 | $203.7; up 23.6% from $164.7 |
| Diluted EPS | $0.52 versus $0.49 | $1.20 versus $0.95 |
| EBITDA | $194.2; up 4.6% from $185.6 | $432.6; up 18.4% from $365.3 |
Quarterly operating margin was approximately 37.6%, broadly flat year over year. Management reported a 45.9% consolidated EBITDA margin for Q2 versus 44.1% in Q2 2013. For the first half, management reported a 51.2% EBITDA margin, including a 5.9 percentage-point benefit from discontinued operations and the Interthinx sale; the prior-year margin was 44.3% and was reduced by discontinued operations. EBITDA is a non-GAAP measure.
Six-month operating cash flow was $286.8, up 16.3% from $246.7. Capital spending was $75.8, and the company repurchased $122.1 of shares. The $155.0 Interthinx sale proceeds contributed to investing cash flow of $70.5, versus $62.998 used in the prior-year period. Cash and cash equivalents were $419.4 at June 30, up from $165.8 at year-end; cash plus available-for-sale securities totaled $423.3.
Total debt, including capital leases, was $1,275.4; debt excluding leases was $1,265.5. The company had no borrowings under its $975.0 revolving credit facility and reported $972.9 of available capacity, net of letters of credit. Current debt and capital lease obligations were $139.8, including shelf notes due in 2015. Fees received in advance were $309.2, reflecting customer prepayments; total current assets were $704.6 and current liabilities were $608.7. Stockholders’ equity was $676.3.
Material changes versus the prior comparable period
- Decision Analytics revenue grew 10.8% in Q2 and 10.6% for the first half; Risk Assessment grew 5.0% and 5.7%, respectively. First-half Decision Analytics growth was led by insurance, financial services, and healthcare; specialized markets revenue was nearly flat.
- First-half cost of revenues rose 15.6%, faster than revenue, reflecting higher salaries and benefits, data and data-processing costs, rent, and technology spending. SG&A was nearly unchanged. Fixed-asset depreciation and amortization rose 35.1%, while intangible amortization fell 16.7%.
- Interest expense declined 12.3% for the first half, primarily because private-placement notes matured and were repaid in 2013. The effective tax rate increased to 36.9% from 36.2%, largely because of greater tax-planning benefits in the prior period.
- First-half net income included $31.1 of after-tax discontinued-operation income, including the Interthinx sale gain. The gain on sale was $65.4 before tax; Q2 2014 had no discontinued-operation income.
Outlook, management commentary, risks, and unusual items
- Management expected 2014 capital expenditures of approximately $147.0, mainly for technology infrastructure and developing or enhancing solutions. It did not provide specific earnings or revenue guidance in the supplied filing text.
- The planned $650.0 acquisition of Eagleview Technology Corporation, parent of Pictometry and Eagle View, was expected to close at the end of Q3 2014, subject to approvals and customary conditions. The FTC had issued a Second Request for information. Management expected to fund the purchase with operating cash and revolver borrowings.
- Management cited recurring revenues, advance customer payments, operating cash flow, and revolver capacity as sources of liquidity. It noted that investment in new solutions may offset operating leverage and margin expansion. Capital expenditures were 9.0% of first-half revenue versus 7.7% a year earlier.
- The company repurchased 1.91 million shares in the first half at a weighted average $62.38 per share. The board added $300.0 to its authorization in June; $346.2 remained available at quarter-end.
- Goodwill impairment testing at June 30 found no impairment. Management said there were no material changes to previously disclosed risk factors or market risks, and reported effective disclosure controls and no material change in internal control over financial reporting.
- Several legal matters remained unresolved, including employment-related claims concerning former subsidiary Interthinx, the Mariah Re litigation, a MediConnect shareholder suit, and an ERISA pension action. The company said it could not estimate potential losses for these matters. Separate FCRA class actions were settled for $18.6, to be paid by insurance, without material adverse effect; another matter was also settled without material adverse effect.
Important facts for investors to verify
- Confirm the Eagleview transaction’s closing status, final purchase-price adjustments, financing mix, and expected effect on debt and results.
- Assess whether revenue growth can continue while cost of revenues and capital spending are rising faster than revenue.
- Separate recurring operating performance from the Interthinx disposal gain when evaluating first-half net income, EBITDA, and margins.
- Review debt maturities, covenant headroom, and liquidity after the planned acquisition; the filing reports covenant compliance at June 30.
- Track the unresolved legal claims and potential exposure, which the company said could not then be reasonably estimated.
- Reconcile the MD&A’s stated Q2 2013 EBITDA margin of 44.1% with the reported EBITDA and revenue figures, which do not appear to yield that percentage.