Verisk Analytics, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. Although the request identifies “2012 Q4,” this filing is an annual report; it also provides unaudited fourth-quarter results. Unless noted otherwise, figures below are in U.S. dollars.
Business context and reporting period
Verisk provides proprietary risk data, analytics and decision-support solutions, primarily to property and casualty insurers, and also to customers in healthcare, financial services and specialized markets. It reports two segments: Risk Assessment and Decision Analytics. Subscriptions and long-term agreements are generally prepaid; these represented 67.2% of FY2012 revenue.
Financial performance and liquidity
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Revenue | $1,534.3 million | $1,331.8 million | +15.2% |
| Operating income | $591.6 million | $513.4 million | +15.2% |
| Net income | $329.1 million | $282.8 million | +16.4% |
| Diluted EPS | $1.92 | $1.63 | +17.8% |
| EBITDA, company-defined non-GAAP | $695.9 million | $592.9 million | +17.4% |
| EBITDA margin | 45.4% | 44.5% | +0.9 percentage points |
| Operating cash flow | $468.2 million | $375.7 million | +24.6% |
| Capital expenditures | $79.8 million | $68.4 million | +16.6% |
Decision Analytics revenue rose 24.2% to $954.8 million; Risk Assessment revenue rose 2.9% to $579.5 million. Reported growth included $105.1 million from recent acquisitions; excluding those acquisitions, consolidated revenue increased 7.3%. Healthcare was the fastest-growing Decision Analytics category, up 115.0%, including acquired revenue; excluding the specified recent acquisitions, it grew 36.2%.
At year-end, cash and cash equivalents were $89.8 million and available-for-sale securities were $4.9 million. Total debt was $1,461.4 million, up from $1,105.9 million; management reported leverage of 2.11x. The company had $840 million available under its committed revolving facility and was in compliance with its debt covenants. Current liabilities exceeded current assets, but the company says prepaid customer fees and its subscription model contribute to its historically managed working-capital deficit. It reported no off-balance-sheet arrangements.
Net cash used in investing was $883.6 million, principally reflecting acquisition spending; financing cash flow was positive $313.6 million. The company repurchased $162.6 million of stock in 2012 and had $144.2 million remaining under its $900 million repurchase authorization. It does not intend to pay cash dividends.
Material changes versus comparable periods
- Revenue growth accelerated in Decision Analytics, with acquisitions materially contributing. Argus, MediConnect, Aspect Loss Prevention and IRMS were among 2012 acquisitions; Argus and MediConnect were the largest of those noted.
- Interest expense increased 34.7% to $72.5 million, reflecting additional debt issuance. Debt rose following acquisition financing, including $380 million borrowed for Argus; leverage increased from 1.90x before that acquisition to 2.11x at year-end.
- Cash declined from $191.6 million to $89.8 million, while operating cash flow increased. Management cited acquisition payments, pension prefunding and other cash uses among the period’s drivers.
- Intangible amortization increased 54.0% to $53.6 million, mainly due to acquisitions. Goodwill and net intangible assets totaled $1,768.4 million, 74.9% of total assets; the 2012 goodwill impairment test found no impairment.
- Risk Assessment EBITDA margin improved to 54.6% from 51.0%; Decision Analytics EBITDA margin was 39.8% in both years. Consolidated margin improved to 45.4% from 44.5%.
- Fourth-quarter revenue was $415.7 million versus $351.6 million, and net income was $98.3 million versus $80.3 million in Q4 2011.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no formal company revenue or earnings guidance. Management expected U.S. P&C premium growth at or above recent rates through 2013, assuming modest economic growth. It cited Mortgage Bankers Association estimates indicating mortgage origination activity would decline in 2013. Estimated 2013 capital expenditures were approximately $115 million.
- Market and business risks: Approximately 48.3% of 2012 revenue came from solutions for U.S. P&C primary insurers. Mortgage-related revenue was approximately 8.5%; two customers represented the majority of that revenue. Mortgage-market volumes, customer concentration and insurance-industry conditions could affect results.
- Other principal risks: Dependence on external data sources; privacy, data-protection and regulatory changes; cybersecurity or service interruptions; competition; acquisition integration and impairment risk; and the effect of increased leverage.
- Legal contingencies: The filing describes putative Fair Credit Reporting Act class actions involving Intellicorp and iiX. Verisk said it could not estimate the matters’ ultimate resolution or potential liability. In a separate Citizens/Xactware case, the plaintiff dismissed claims against Xactware in November 2012.
- Other notable items: The pension plans were hard-frozen in 2012, and the company made substantial pension and postretirement-plan contributions. The effective tax rate declined to 36.6% from 38.6%, partly due to tax-planning benefits, some non-recurring. Deloitte issued unqualified opinions on the financial statements and internal controls; management excluded Argus from its internal-control assessment because of acquisition timing.
Important facts for investors to verify
- How much of future growth is organic, and whether acquired businesses meet expected revenue and profitability contributions.
- Debt maturities, refinancing needs, covenant headroom and leverage following acquisitions and planned investment.
- Whether the projected 2013 P&C premium trends and mortgage-volume expectations materialized, given Verisk’s market exposures and mortgage customer concentration.
- Developments, class-certification status and potential exposure in the FCRA litigation; the filing does not provide a clear loss estimate.
- Acquisition purchase-price allocations and the recoverability of goodwill and acquired intangible assets.
- The ongoing effects of pension-plan changes, tax-planning benefits and acquisition-related amortization on recurring earnings and cash flow.