Verisk Analytics, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Verisk provides data analytics and decision-support solutions across Insurance, Energy and Specialized Markets, and Financial Services. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $702.7 | $652.7 | $2,071.2 | $1,930.3 |
| Operating income | $275.4 | $69.5 | $787.5 | $490.3 |
| Net income | $185.8 | $32.9 | $536.5 | $317.7 |
| Diluted EPS | $1.12 | $0.20 | $3.24 | $1.91 |
| Operating cash flow | $207.1 | $213.6 | $819.2 | $779.9 |
| Capital expenditures | $64.8 | $60.7 | $174.4 | $152.8 |
Revenue grew 7.6% in Q3 and 7.3% year to date. Excluding recent acquisitions and dispositions, management reported growth of 4.1% for Q3 and 3.1% for the first nine months. Net income margin was 26.4% in Q3 and 25.9% year to date; reported EBITDA margin, a non-GAAP measure, was 52.1% and 50.7%, respectively. The large year-over-year profit and margin increases chiefly reflect the $125 million litigation reserve recorded in 2019, as well as cost reductions and other items—not solely underlying growth.
For the first nine months, operating cash flow less capital expenditures was approximately $644.8 million. Cash and cash equivalents were $221.8 million at September 30, 2020, versus $184.6 million at year-end 2019. Current liabilities exceeded current assets by $623.2 million; the filing describes a historically negative working-capital position arising largely from advance customer payments and deferred revenue.
Revenue mix and material changes
- Insurance: Q3 revenue was $498.6 million, up 6.3%; nine-month revenue was $1,474.4 million, up 5.8%. Underwriting and rating growth was partly offset by claims weakness, including COVID-19-sensitive transactional activity and the effect of an injunction affecting roof-measurement solutions.
- Energy and Specialized Markets: Q3 revenue was $163.8 million, up 16.7%; nine-month revenue was $478.2 million, up 17.8%. Much of the reported growth reflected acquisitions; excluding acquisitions and dispositions, revenue was nearly flat in Q3 and down 0.6% year to date.
- Financial Services: Q3 revenue was $40.3 million, down 7.1%; nine-month revenue was $118.6 million, down 9.2%. Excluding acquisitions and dispositions, revenue increased 1.7% in Q3 and 0.2% year to date.
- Q3 SG&A fell to $96.4 million from $255.0 million, principally because the prior-year quarter included the $125 million EagleView patent-litigation reserve and higher acquisition earn-out costs. Nine-month SG&A declined 36.3%, also reflecting these items.
- Nine-month other operating income included gains of $15.9 million from the sale of the compliance background-screening business and $3.5 million from the data warehouse business. The 2019 comparison included a $6.2 million loss on the retail analytics sale.
Debt, liquidity, and capital allocation
Total balance-sheet debt, including finance lease liabilities and related accounting adjustments, was $3,159.3 million at September 30, 2020, compared with $3,151.0 million at December 31, 2019. The company issued $500 million of 3.625% senior notes due 2050 in May, using net proceeds for general corporate purposes, including repayment of revolving-facility borrowings. A $449.7 million senior note was classified as current and is due in May 2021.
There were no borrowings outstanding under the $1 billion revolving credit facility at September 30, and available capacity, net of letters of credit, was $994.8 million. Verisk reported compliance with debt covenants. During the first nine months, it repurchased $298.8 million of shares and paid $131.8 million in dividends; the quarterly dividend was $0.27 per share, up from $0.25 a year earlier.
Outlook, commentary, risks, and contingencies
- Guidance: The filing provides no specific full-year revenue, earnings, or cash-flow guidance. Management said it did not then anticipate a lasting material effect from COVID-19 on its long-term growth profile, while noting the pandemic remained uncertain.
- COVID-19: Management reported minimal customer-facing interruptions, no significant customer losses or deterioration in collections, liquidity, or subscription renewals, and compliance with covenants. It said approximately 85% of revenue had no identified material COVID-19 impact and grew about 6% in Q3. Certain transactional solutions—particularly travel and auto insurance-related activity, commercial-building engineering work, energy consulting, and financial-services marketing analytics—were affected; revenue attributable to those identified solutions declined approximately 10% in Q3.
- EagleView litigation: A 2019 jury awarded $125 million for patent infringement and the court entered an injunction covering specified products. The court denied Verisk’s post-trial motions in September 2020; Verisk appealed in October. EagleView’s request for enhanced damages remained pending. Any amount above the recorded $125 million reserve could create additional expense; ultimate resolution was uncertain.
- Other legal matter: A September 2020 ERISA class action alleges excessive 401(k) plan fees and fiduciary breaches. Damages were not specified, and the company could not reasonably estimate potential liability.
- Other notable items: The Franco Signor acquisition closed in September for a net cash purchase price of $159.9 million; purchase accounting remained preliminary. The aerial-imagery business was exchanged for a 35% interest in Vexcel, valued at $129.7 million at quarter-end. No goodwill impairment was identified in the June 2020 annual test. The effective tax rate was 22.6% for Q3 and 21.3% year to date.
Important facts for investors to verify
- Track organic growth by segment, especially the underlying trend in Energy and Specialized Markets and the recovery of COVID-affected transactional and claims-related revenue.
- Review the EagleView appeal and enhanced-damages decision, and assess exposure beyond the existing $125 million reserve.
- Monitor the ERISA litigation as the case develops; the filing provides no loss estimate.
- Assess leverage, the May 2021 debt maturity, liquidity, and the company’s ongoing repurchases, dividends, and acquisition spending.
- Separate recurring operating performance from the prior-year litigation reserve, current-period disposition gains, acquisition effects, and COVID-related expense reductions when comparing margins and earnings.