Verisk Analytics, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless noted. Verisk supplies proprietary data and analytics for risk-bearing businesses, principally in property and casualty insurance, with operations in Risk Assessment and Decision Analytics. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
- Revenue: $346.5, up 10.7%. Risk Assessment revenue was $145.0, up 3.1%; Decision Analytics revenue was $201.5, up 16.9%.
- Profit: Operating income was $139.0, up 16.5%; net income was $74.6, up 13.2%. Diluted EPS was $0.44, compared with $0.37.
- Margins: Consolidated EBITDA, a non-GAAP measure, was $159.2, up 14.5%; EBITDA margin was 45.9%, versus 44.4%. Decision Analytics margin was 39.3%, versus 37.7%; Risk Assessment margin was 55.1%, versus 52.8%.
- Cash flow: Operating cash flow was $189.6, compared with $145.6. Investing cash outflow was $367.1, largely reflecting the MediConnect acquisition. Financing provided $100.7, including $125.0 of net short-term borrowing and $36.8 of share repurchases. Cash declined by $76.7 to $114.9.
- Liquidity and debt: Cash plus available-for-sale securities totaled $119.9 at March 31, down from $196.7 at year-end. Total debt, including current debt, was $1,229.8, versus $1,105.9 at December 31. The company had $125.0 drawn on its $725.0 revolving facility and reported compliance with debt covenants. Working capital was negative, which management describes as a customary feature of its prepaid subscription model.
- Other metrics: Interest expense rose 70.4% to $16.4, primarily due to senior notes issued in 2011. The effective tax rate decreased to 39.4% from 40.1%. Capital expenditures, including noncash fixed-asset purchases and capital leases, were $15.9, or 4.6% of revenue.
Changes and business drivers
- Excluding recent acquisitions, revenue increased 7.7%. The 2011 acquisitions of Health Risk Partners and Bloodhound contributed $9.7 of Q1 2012 revenue; MediConnect, acquired March 30, contributed no Q1 revenue.
- Decision Analytics growth reflected insurance, healthcare, and specialized-market demand. Healthcare revenue nearly doubled to $30.4, including the contribution from recent acquisitions. Mortgage and financial services remained challenged: excluding a $2.9 category reclassification, revenue decreased $1.3.
- Risk Assessment growth was supported by pricing, enhancements to insurance programs, and expanded solutions to existing customers. Its margin improvement also benefited from lower pension costs.
- Expenses rose more slowly than revenue, and management attributed consolidated margin expansion to operating leverage and cost efficiencies. Recent acquisitions reduced the margin expansion by 0.5 percentage points.
Acquisition, outlook, and risks
- Verisk acquired MediConnect on March 30 for approximately $330.8 net cash and funded $17.0 in acquisition escrows. The preliminary allocation included $223.4 of goodwill and $157.9 of intangible assets; purchase accounting remained subject to revision.
- On February 29, Verisk froze future compensation and service credits in its pension plan and SERP. The freeze produced a $10.5 reduction in the unfunded pension liability. In April, the company drew another $75.0 on its revolver, primarily to make a $72.0 voluntary pension prefunding; management said it did not expect further 2012 pension contributions. It expected postretirement-plan contributions of $3.5 per quarter for the remaining quarters of 2012.
- The filing provides no specific revenue, earnings, or margin guidance. Management said it expected sufficient cash and available credit to meet working-capital and capital-expenditure needs and support growth. It noted expected 2012 capital spending was consistent with previously disclosed plans, primarily for technology infrastructure and solution development.
- Two legal matters were described: a Florida class action concerning Xactware’s 360Value property-replacement estimates, and a putative nationwide class action involving Intellicorp employment-screening reports. The company said it could not estimate the outcome or potential liability of either matter.
- Other considerations include acquisition integration and preliminary purchase accounting, substantial debt and covenant requirements, pension and postretirement obligations, and exposure to ordinary-course litigation. Management reported no material change in risk factors or market risks, no material change in internal control over financial reporting, and effective disclosure controls.
Important facts for investors to verify
- Whether MediConnect’s final purchase-price allocation, integration, and contribution to growth and margins differ materially from preliminary estimates.
- How much reported Decision Analytics and healthcare growth reflects acquisitions versus organic performance, including the effect of the revenue-category reclassification.
- Debt levels, interest costs, revolving-credit availability, covenant headroom, and the effect of the April borrowing and pension prefunding.
- Cash-flow sustainability, including the timing of advance subscription receipts, acquisition spending, share repurchases, and pension and postretirement funding.
- Developments in the two legal matters and whether any subsequent information changes the company’s assessment of potential exposure.