Verisk Analytics, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; financial statements are unaudited. Unless noted, amounts below are in millions of dollars.
Business context
Verisk provides proprietary data, analytics, and decision-support solutions to risk-bearing businesses. Its two segments are Risk Assessment, focused principally on U.S. property and casualty insurance, and Decision Analytics, covering loss prediction, fraud detection, and loss quantification. The filing describes revenue as a mix of subscriptions, long-term agreements, and transactional services; 31% of revenue in each first-half period was transactional.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $327.3 | $281.7 | $640.1 | $557.8 |
| Operating income | $123.8 | $107.1 | $243.1 | $213.5 |
| Net income | $65.6 | $58.4 | $131.5 | $113.8 |
| Diluted EPS | $0.38 | $0.31 | $0.75 | $0.60 |
| EBITDA, company-defined non-GAAP | $143.6 | $124.0 | $282.6 | $247.7 |
| EBITDA margin | 43.9% | 44.0% | 44.1% | 44.4% |
Revenue increased 16.2% in Q2 and 14.8% in the first half. Net income rose 12.3% and 15.5%, respectively. The reported effective tax rates were 39.9% for Q2 and 40.0% for the first half, versus 40.9% and 42.2% a year earlier.
Segment performance: Q2 Risk Assessment revenue was $140.5 million, up 4.6%, and Decision Analytics revenue was $186.8 million, up 26.7%. First-half revenue was $281.1 million for Risk Assessment, up 4.5%, and $359.1 million for Decision Analytics, up 24.3%. First-half segment EBITDA margins were 50.6% and 39.1%, respectively; the prior-year Decision Analytics margin was 40.1%.
Cash flow, liquidity, and debt
- First-half operating cash flow was $187.1 million, compared with $173.0 million. Investing cash outflow was $172.6 million, versus $22.9 million, reflecting acquisitions, escrow funding, and higher fixed-asset purchases. Financing cash outflow was $18.1 million, versus $114.6 million.
- Cash and cash equivalents were $52.0 million at June 30, 2011; available-for-sale securities were $5.4 million. Combined, these totaled $57.3 million, compared with $60.6 million at year-end 2010.
- Total debt on the balance sheet was $1,025.2 million, including capital lease and other obligations, versus $839.5 million at December 31, 2010. Current debt was $170.7 million and long-term debt was $854.5 million. Management separately reported debt excluding capital lease and other obligations of approximately $1,014 million.
- In April, Verisk issued $450 million of 5.80% senior notes due 2021, receiving net proceeds of about $446 million. The revolving credit facility had a $600 million commitment, with $90 million outstanding under it at June 30. The company reported compliance with its debt covenants.
- Current assets of $295.5 million were below current liabilities of $511.6 million. Management said advance customer payments and the related deferred-revenue liability are characteristic of its subscription model and do not require a corresponding direct cash outflow.
Material changes and unusual items
- Bloodhound Technologies and Health Risk Partners were acquired in Q2 for net cash purchase prices of approximately $75.3 million and $46.4 million, respectively. First-half acquisitions contributed $39.5 million of revenue; Q2 acquisitions contributed $20.9 million. The purchase-price allocations were preliminary.
- A $3.4 million benefit from reversing contingent consideration for the D2 and Strategic Analytics acquisitions increased reported operating results. Based on current estimates, the sellers will not receive the related contingent payments.
- Verisk repurchased $214.0 million of Class A shares during the first half, including 6.5 million shares at a weighted average price of $33.40. Remaining authorization at June 30 was $20.4 million. On July 8, the board added $150 million, raising total authorization to $600 million.
- Class B-1 shares automatically converted to Class A shares on April 6, 2011; Class B-2 shares were scheduled to convert on October 6, 2011.
- Goodwill was $712.6 million, including $79.9 million added from current-year acquisitions. The annual June 30 impairment test found no impairment, although the filing notes only a moderate fair-value cushion for certain recently acquired reporting units.
Outlook, commentary, and risks
The filing gives no numerical earnings or revenue guidance. Management said recurring revenue and positive cash flow are central performance indicators and stated that operating cash flow and revolver availability should be sufficient for working capital, capital expenditures, acquisition-related payments, and growth plans. It noted that recent acquisitions restrained margin expansion, while the $3.4 million contingent-consideration reversal benefited reported EBITDA margin. Management also attributed Decision Analytics growth partly to acquisition contributions and higher loss-quantification demand associated with severe weather and other damage events.
- Mortgage exposure: Mortgage and mortgage-related solutions accounted for approximately 13% of 2010 revenue. The filing warns that lower mortgage origination volumes, changes affecting Fannie Mae or Freddie Mac, or mortgage insurers’ inability to write new policies could reduce revenue. Two customers represented the majority of 2010 mortgage revenue.
- Legal matters: The company disclosed several proceedings, including a Hanover indemnity dispute, a pending Louisiana class action involving Xactware, and an appeal in the iiX privacy case. Management said it could not determine the ultimate resolution or reasonably estimate possible losses for certain matters.
- Other risk: Acquisition accounting allocations remained subject to revision, and the filing cautions that actual results may differ from estimates. No material change to previously disclosed market risks was reported.
Most important facts for investors to verify
- How much of Decision Analytics’ growth is organic versus acquisition-driven, and whether acquired businesses meet expected integration and performance targets.
- Whether revenue growth converts to sustainable cash flow and margin improvement, given lower reported EBITDA margins and increased acquisition, compensation, and interest costs.
- Debt levels, refinancing needs, interest expense, and continued compliance with leverage and interest-coverage covenants.
- Mortgage-market exposure, customer concentration, and the potential effect of lower originations or changes to mortgage insurers and government-sponsored entities.
- Final purchase-price allocations, goodwill valuation headroom, and the resolution or eventual financial exposure of the disclosed legal proceedings.