UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2012
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-34480
VERISK ANALYTICS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 26-2994223 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
545 Washington Boulevard Jersey City, NJ |
07310-1686 | |
(Address of principal executive offices) | (Zip Code) |
(201) 469-2000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of October 26, 2012, there was the following number of shares outstanding of each of the issuers classes of common stock:
Class | Shares Outstanding | |
Class A common stock $.001 par value |
166,798,524 |
Index to Form 10-Q
Table of Contents
Page Number | ||||
PART I FINANCIAL INFORMATION | ||||
3 | ||||
3 | ||||
4 | ||||
5 | ||||
Condensed Consolidated Statements of Changes in Stockholders Equity (Deficit) |
6 | |||
7 | ||||
8 | ||||
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
26 | |||
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
34 | |||
34 | ||||
36 | ||||
36 | ||||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
36 | |||
36 | ||||
36 | ||||
36 | ||||
36 | ||||
37 | ||||
VERISK ANALYTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2012 and December 31, 2011
2012 (unaudited) |
2011 | |||||||
(In thousands, except for share and per share data) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ | 97,770 | $ | 191,603 | ||||
Available-for-sale securities |
4,895 | 5,066 | ||||||
Accounts receivable, net of allowance for doubtful accounts as of September 30, 2012 and December 31, 2011 of $4,203 and $4,158, respectively |
175,520 | 153,339 | ||||||
Prepaid expenses |
25,387 | 21,905 | ||||||
Deferred income taxes, net |
15,614 | 3,818 | ||||||
Federal and foreign income taxes receivable |
8,538 | 25,242 | ||||||
State and local income taxes receivable |
| 11,433 | ||||||
Other current assets |
33,613 | 41,248 | ||||||
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Total current assets |
361,337 | 453,654 | ||||||
Noncurrent assets: |
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Fixed assets, net |
144,799 | 119,411 | ||||||
Intangible assets, net |
530,023 | 226,424 | ||||||
Goodwill |
1,220,384 | 709,944 | ||||||
Deferred income taxes, net |
| 10,480 | ||||||
Other assets |
46,890 | 21,193 | ||||||
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Total assets |
$ | 2,303,433 | $ | 1,541,106 | ||||
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LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
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Current liabilities: |
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Accounts payable and accrued liabilities |
$ | 176,464 | $ | 162,992 | ||||
Acquisition related liabilities |
| 250 | ||||||
Short-term debt and current portion of long-term debt |
265,794 | 5,554 | ||||||
Pension and postretirement benefits, current |
2,912 | 4,012 | ||||||
Fees received in advance |
219,800 | 176,842 | ||||||
State and local income taxes payable |
3,287 | | ||||||
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Total current liabilities |
668,257 | 349,650 | ||||||
Noncurrent liabilities: |
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Long-term debt |
1,301,683 | 1,100,332 | ||||||
Pension benefits |
22,522 | 109,161 | ||||||
Postretirement benefits |
5,369 | 18,587 | ||||||
Deferred income taxes, net |
80,755 | | ||||||
Other liabilities |
82,799 | 61,866 | ||||||
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Total liabilities |
2,161,385 | 1,639,596 | ||||||
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Commitments and contingencies |
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Stockholders equity (deficit): |
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Common stock, $.001 par value; 1,200,000,000 shares authorized; 544,003,038 shares issued and 166,259,163 and 164,285,227 outstanding as of September 30, 2012 and December 31, 2011, respectively |
137 | 137 | ||||||
Unearned KSOP contributions |
(544 | ) | (691 | ) | ||||
Additional paid-in capital |
991,739 | 874,808 | ||||||
Treasury stock, at cost, 377,743,875 and 379,717,811 shares as of September 30, 2012 and December 31, 2011, respectively |
(1,579,859 | ) | (1,471,042 | ) | ||||
Retained earnings |
807,428 | 576,585 | ||||||
Accumulated other comprehensive losses |
(76,853 | ) | (78,287 | ) | ||||
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Total stockholders equity (deficit) |
142,048 | (98,490 | ) | |||||
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Total liabilities and stockholders equity (deficit) |
$ | 2,303,433 | $ | 1,541,106 | ||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
VERISK ANALYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For The Three and Nine Months Ended September 30, 2012 and 2011
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(In thousands, except for share and per share data) | ||||||||||||||||
Revenues (including amounts from related parties of $0 and $4,699 for the three months ended September 30, 2012 and 2011 and $0 and $13,882 for the nine months ended September 30, 2012 and 2011, respectively) (1) |
$ | 398,863 | $ | 340,098 | $ | 1,118,590 | $ | 980,247 | ||||||||
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Expenses: |
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Cost of revenues (exclusive of items shown separately below) |
156,749 | 137,619 | 437,153 | 393,360 | ||||||||||||
Selling, general and administrative |
58,707 | 51,475 | 175,159 | 156,640 | ||||||||||||
Depreciation and amortization of fixed assets |
12,714 | 10,798 | 37,448 | 32,958 | ||||||||||||
Amortization of intangible assets |
15,442 | 8,797 | 36,216 | 26,129 | ||||||||||||
Acquisition related liabilities adjustment |
| | | (3,364 | ) | |||||||||||
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Total expenses |
243,612 | 208,689 | 685,976 | 605,723 | ||||||||||||
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Operating income |
155,251 | 131,409 | 432,614 | 374,524 | ||||||||||||
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Other income (expense): |
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Investment income |
136 | 99 | 397 | 99 | ||||||||||||
Realized (loss) gain on securities, net |
(638 | ) | (86 | ) | (338 | ) | 401 | |||||||||
Interest expense |
(18,133 | ) | (14,593 | ) | (51,895 | ) | (39,093 | ) | ||||||||
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Total other expense, net |
(18,635 | ) | (14,580 | ) | (51,836 | ) | (38,593 | ) | ||||||||
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Income before income taxes |
136,616 | 116,829 | 380,778 | 335,931 | ||||||||||||
Provision for income taxes |
(53,705 | ) | (45,842 | ) | (149,935 | ) | (133,491 | ) | ||||||||
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Net income |
$ | 82,911 | $ | 70,987 | $ | 230,843 | $ | 202,440 | ||||||||
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Basic net income per share |
$ | 0.50 | $ | 0.43 | $ | 1.39 | $ | 1.21 | ||||||||
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Diluted net income per share |
$ | 0.48 | $ | 0.41 | $ | 1.34 | $ | 1.16 | ||||||||
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Weighted average shares outstanding: |
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Basic |
165,978,080 | 164,195,325 | 165,587,027 | 166,728,786 | ||||||||||||
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Diluted |
171,660,543 | 171,169,658 | 171,637,571 | 174,255,965 | ||||||||||||
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(1) | See Note 13. Related Parties for further information. |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
VERISK ANALYTCS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For The Three and Nine Months Ended September 30, 2012 and 2011
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(In thousands) | ||||||||||||||||
Net income |
$ | 82,911 | $ | 70,987 | $ | 230,843 | $ | 202,440 | ||||||||
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Other comprehensive income (loss), net of tax: |
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Unrealized holding gain (loss) on investments |
96 | (290 | ) | (217 | ) | (542 | ) | |||||||||
Unrealized foreign currency gain (loss) |
4 | (555 | ) | (130 | ) | 18 | ||||||||||
Pension and postretirement unfunded liability adjustment |
401 | 697 | 1,781 | 2,671 | ||||||||||||
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Total other comprehensive income (loss) |
501 | (148 | ) | 1,434 | 2,147 | |||||||||||
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Comprehensive income |
$ | 83,412 | $ | 70,839 | $ | 232,277 | $ | 204,587 | ||||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
VERISK ANALYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT) (UNAUDITED)
For The Year Ended December 31, 2011 and The Nine Months Ended September 30, 2012
Accumulated | ||||||||||||||||||||||||||||||||||||||||
Unearned | Additional | Other | Total | |||||||||||||||||||||||||||||||||||||
Common Stock Issued | KSOP | Paid-in | Treasury | Retained | Comprehensive | Stockholders | ||||||||||||||||||||||||||||||||||
Class A | Class B (Series 1) | Class B (Series 2) | Par Value | Contributions | Capital | Stock | Earnings | Losses | Equity (Deficit) | |||||||||||||||||||||||||||||||
(In thousands, except for share data) | ||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2010 |
150,179,126 | 198,327,962 | 193,665,008 | $ | 135 | $ | (988 | ) | $ | 754,708 | $ | (1,106,321 | ) | $ | 293,827 | $ | (55,803 | ) | $ | (114,442 | ) | |||||||||||||||||||
Net income |
| | | | | | | 282,758 | | 282,758 | ||||||||||||||||||||||||||||||
Other comprehensive loss |
| | | | | | | | (22,484 | ) | (22,484 | ) | ||||||||||||||||||||||||||||
Conversion of Class B (Series 1) common stock |
198,327,962 | (198,327,962 | ) | | | | | | | | | |||||||||||||||||||||||||||||
Conversion of Class B (Series 2) common stock |
193,665,008 | | (193,665,008 | ) | | | | | | | | |||||||||||||||||||||||||||||
Treasury stock acquiredClass A (11,326,624 shares) |
| | | | | | (380,710 | ) | | | (380,710 | ) | ||||||||||||||||||||||||||||
KSOP shares earned |
| | | | 297 | 12,318 | | | | 12,615 | ||||||||||||||||||||||||||||||
Stock options exercised, including tax benefit of $57,684 (3,716,165 shares reissued from treasury stock) |
1,830,942 | | | 2 | | 85,051 | 15,978 | | | 101,031 | ||||||||||||||||||||||||||||||
Stock based compensation |
| | | | | 22,656 | | | | 22,656 | ||||||||||||||||||||||||||||||
Other stock issuances |
| | | | | 75 | 11 | | | 86 | ||||||||||||||||||||||||||||||
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Balance, December 31, 2011 |
544,003,038 | | | 137 | (691 | ) | 874,808 | (1,471,042 | ) | 576,585 | (78,287 | ) | (98,490 | ) | ||||||||||||||||||||||||||
Net income |
| | | | | | | 230,843 | | 230,843 | ||||||||||||||||||||||||||||||
Other comprehensive income |
| | | | | | | | 1,434 | 1,434 | ||||||||||||||||||||||||||||||
Treasury stock acquiredClass A (2,776,655 shares) |
| | | | | | (127,826 | ) | | | (127,826 | ) | ||||||||||||||||||||||||||||
KSOP shares earned |
| | | | 147 | 9,334 | | | | 9,481 | ||||||||||||||||||||||||||||||
Stock options exercised, including tax benefit of $63,461 (4,750,591 shares reissued from treasury stock) |
| | | | | 88,081 | 18,989 | | | 107,070 | ||||||||||||||||||||||||||||||
Stock based compensation |
| | | | | 19,303 | | | | 19,303 | ||||||||||||||||||||||||||||||
Other stock issuances |
| | | | | 213 | 20 | | | 233 | ||||||||||||||||||||||||||||||
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Balance, September 30, 2012 |
544,003,038 | | | $ | 137 | $ | (544 | ) | $ | 991,739 | $ | (1,579,859 | ) | $ | 807,428 | $ | (76,853 | ) | $ | 142,048 | ||||||||||||||||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
6
VERISK ANALYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For The Nine Months Ended September 30, 2012 and 2011
2012 | 2011 | |||||||
(In thousands) | ||||||||
Cash flows from operating activities: |
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Net income |
$ | 230,843 | $ | 202,440 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization of fixed assets |
37,448 | 32,958 | ||||||
Amortization of intangible assets |
36,216 | 26,129 | ||||||
Amortization of debt issuance costs and original issue discount |
1,649 | 1,206 | ||||||
Allowance for doubtful accounts |
576 | 852 | ||||||
KSOP compensation expense |
9,481 | 9,630 | ||||||
Stock based compensation |
19,303 | 17,288 | ||||||
Noncash charges associated with performance-based appreciation awards |
| 627 | ||||||
Acquisition related liabilities adjustment |
| (3,364 | ) | |||||
Realized loss (gain) on securities, net |
338 | (401 | ) | |||||
Deferred income taxes |
(526 | ) | (2,083 | ) | ||||
Loss on disposal of assets |
88 | 635 | ||||||
Excess tax benefits from exercised stock options |
(55,056 | ) | (5,470 | ) | ||||
Other operating |
215 | 133 | ||||||
Changes in assets and liabilities, net of effects from acquisitions: |
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Accounts receivable |
(3,026 | ) | (24,445 | ) | ||||
Prepaid expenses and other assets |
7,126 | (3,229 | ) | |||||
Federal and foreign income taxes |
84,621 | 48,925 | ||||||
State and local income taxes |
14,887 | 5,382 | ||||||
Accounts payable and accrued liabilities |
3,168 | 12,509 | ||||||
Fees received in advance |
39,588 | 24,841 | ||||||
Pension and postretirement benefits |
(97,809 | ) | (15,216 | ) | ||||
Other liabilities |
(8,133 | ) | (5,593 | ) | ||||
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Net cash provided by operating activities |
320,997 | 323,754 | ||||||
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Cash flows from investing activities: |
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Acquisitions, net of cash acquired for 2012 and 2011 of $36,113 and $590, respectively |
(743,091 | ) | (121,721 | ) | ||||
Purchase of non-controlling equity investment in non-public companies |
(2,000 | ) | | |||||
Earnout payments |
(250 | ) | (3,500 | ) | ||||
Escrow funding associated with acquisitions |
(37,800 | ) | (19,560 | ) | ||||
Purchases of fixed assets |
(55,724 | ) | (41,925 | ) | ||||
Purchases of available-for-sale securities |
(1,317 | ) | (1,422 | ) | ||||
Proceeds from sales and maturities of available-for-sale securities |
1,478 | 1,722 | ||||||
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Net cash used in investing activities |
(838,704 | ) | (186,406 | ) | ||||
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Cash flows from financing activities: |
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Proceeds from issuance of long-term debt, net of original issue discount |
347,224 | 448,956 | ||||||
Repayment of current portion of long-term debt |
| (125,000 | ) | |||||
Repayment of short-term debt refinanced on a long-term basis |
(347,224 | ) | (295,000 | ) | ||||
Proceeds from issuance of short-term debt with original maturities greater than three months |
| 120,000 | ||||||
Proceeds from short-term debt, net |
462,224 | 22,311 | ||||||
Payment of debt issuance costs |
(3,623 | ) | (4,542 | ) | ||||
Repurchase of Class A common stock |
(128,073 | ) | (340,122 | ) | ||||
Proceeds from stock options exercised |
43,571 | 28,433 | ||||||
Excess tax benefits from exercised stock options |
55,056 | 5,470 | ||||||
Other financing, net |
(5,151 | ) | | |||||
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Net cash provided by (used in) financing activities |
424,004 | (139,494 | ) | |||||
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Effect of exchange rate changes |
(130 | ) | 18 | |||||
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Decrease in cash and cash equivalents |
(93,833 | ) | (2,128 | ) | ||||
Cash and cash equivalents, beginning of period |
191,603 | 54,974 | ||||||
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Cash and cash equivalents, end of period |
$ | 97,770 | $ | 52,846 | ||||
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Supplemental disclosures: |
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Taxes paid |
$ | 51,017 | $ | 82,526 | ||||
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Interest paid |
$ | 41,431 | $ | 25,876 | ||||
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Noncash investing and financing activities: |
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Repurchase of Class A common stock included in accounts payable and accrued liabilities |
$ | 953 | $ | 2,244 | ||||
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Deferred tax (liability) asset established on date of acquisition |
$ | (78,832 | ) | $ | 1,280 | |||
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Capital lease obligations |
$ | 3,544 | $ | 7,683 | ||||
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Capital expenditures included in accounts payable and accrued liabilities |
$ | 998 | $ | 778 | ||||
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Increase in goodwill due to acquisition related escrow distributions |
$ | 4,128 | $ | | ||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
7
VERISK ANALYTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except for share and per share data, unless otherwise stated)
1. Organization:
Verisk Analytics, Inc. and its consolidated subsidiaries (Verisk or the Company) enable risk-bearing businesses to better understand and manage their risks. The Company provides its customers proprietary data that, combined with analytic methods, create embedded decision support solutions. The Company is one of the largest aggregators and providers of data pertaining to property and casualty (P&C) insurance risks in the United States of America (U.S.). The Company offers solutions for detecting fraud in the U.S. P&C insurance, mortgage, financial services, and healthcare industries and sophisticated methods to predict and quantify loss in diverse contexts ranging from natural catastrophes to supply chain to health insurance. The Company provides solutions, including data, statistical models or tailored analytics, all designed to allow clients to make more logical decisions.
Verisk was established to serve as the parent holding company of Insurance Services Office, Inc. (ISO). ISO was formed in 1971 as an advisory and rating organization for the P&C insurance industry to provide statistical and actuarial services, to develop insurance programs and to assist insurance companies in meeting state regulatory requirements. Over the past decade, the Company has broadened its data assets, entered new markets, placed a greater emphasis on analytics, and pursued strategic acquisitions. Verisks Class A common stock trades under the ticker symbol VRSK on the NASDAQ Global Select Market.
2. Basis of Presentation and Summary of Significant Accounting Policies:
The accompanying unaudited condensed consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the U.S. (U.S. GAAP). The preparation of financial statements in conformity with these accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include acquisition purchase price allocations, the fair value of goodwill, the realization of deferred tax assets, acquisition related liabilities, fair value of stock based compensation, liabilities for pension and postretirement benefits, and the estimate for the allowance for doubtful accounts. Actual results may ultimately differ from those estimates. Certain reclassifications have been made related to the segment reporting within Decision Analytics revenue categories in the notes to the condensed consolidated financial statements to conform to the respective 2012 presentation.
The condensed consolidated financial statements as of September 30, 2012 and for the three and nine months ended September 30, 2012 and 2011, in the opinion of management, include all adjustments, consisting of normal recurring accruals, to present fairly the Companys financial position, results of operations and cash flows. The operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements and related notes for the three and nine months ended September 30, 2012 have been prepared on the same basis as and should be read in conjunction with the annual report on Form 10-K for the year ended December 31, 2011. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules of the Securities and Exchange Commission (SEC). The Company believes the disclosures made are adequate to keep the information presented from being misleading.
Recent Accounting Pronouncements
In July 2012, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2012-02, Intangibles-Goodwill and Other (ASU No. 2012-02). Under ASU No. 2012-02, an entity has an option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. ASU No. 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company has elected not to early adopt. ASU 2012-02 is not expected to have a material impact on the Companys consolidated financial statements as the Company has incorporated and will continue to incorporate consideration of qualitative factors in the indefinite-lived intangible asset impairment testing.
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (ASU No. 2011-05). Under ASU No. 2011-05, an entity has an option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. ASU No. 2011-05 was adopted by the Company on January 1, 2012 and did not have a material impact on the Companys condensed consolidated financial statements.
3. Investments:
The following is a summary of available-for-sale securities:
Gross | Gross | |||||||||||||||
Adjusted | Unrealized | Unrealized | ||||||||||||||
Cost | Gain | Loss | Fair Value | |||||||||||||
September 30, 2012 |
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Registered investment companies |
$ | 4,812 | $ | 83 | $ | | $ | 4,895 | ||||||||
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Total available-for-sale securities |
$ | 4,812 | $ | 83 | $ | | $ | 4,895 | ||||||||
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December 31, 2011 |
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Registered investment companies |
$ | 4,618 | $ | 439 | $ | | $ | 5,057 | ||||||||
Equity securities |
14 | | (5 | ) | 9 | |||||||||||
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Total available-for-sale securities |
$ | 4,632 | $ | 439 | $ | (5 | ) | $ | 5,066 | |||||||
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In addition to the available-for-sale securities above, the Company has equity investments in non-public companies in which the Company acquired non-controlling interests and for which no readily determinable market value exists. These securities were accounted for under the cost method in accordance with Accounting Standards Codification (ASC) 323-10-25, The Equity Method of Accounting for Investments in Common Stock. At September 30, 2012 and December 31, 2011, the carrying value of such securities was $4,764 and $3,443, respectively, and has been included in Other assets in the accompanying condensed consolidated balance sheets.
8
4. Fair Value Measurements:
Certain assets and liabilities of the Company are reported at fair value in the accompanying condensed consolidated balance sheets. Such assets and liabilities include amounts for both financial and non-financial instruments. To increase consistency and comparability of assets and liabilities recorded at fair value, ASC 820-10, Fair Value Measurements (ASC 820-10) establishes a three-level fair value hierarchy to prioritize the inputs to valuation techniques used to measure fair value. ASC 820-10 requires disclosures detailing the extent to which companies measure assets and liabilities at fair value, the methods and assumptions used to measure fair value and the effect of fair value measurements on earnings. In accordance with ASC 820-10, the Company applied the following fair value hierarchy:
Level 1 - |
Assets or liabilities for which the identical item is traded on an active exchange, such as publicly-traded instruments. | |
Level 2 - |
Assets and liabilities valued based on observable market data for similar instruments. | |
Level 3 - |
Assets or liabilities for which significant valuation assumptions are not readily observable in the market; instruments valued based on the best available data, some of which is internally-developed, and considers risk premiums that market participant would require. |
The following table provides information for such assets and liabilities as of September 30, 2012 and December 31, 2011. The fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and short-term debt approximate their carrying amounts because of the short-term maturity of these instruments. The short-term debt would be a Level 2 liability if it was measured at fair value on the condensed consolidated balance sheets. The fair value of the Companys long-term debt was estimated at $1,584,181 and $1,181,788 as of September 30, 2012 and December 31, 2011, respectively, and would be a Level 2 liability if the long-term debt was measured at fair value on the condensed consolidated balance sheets. The long-term debt is based on quoted market prices if available, and if not, an estimate of interest rates available to the Company for debt with similar features, the Companys current credit rating and spreads applicable to the Company. These assets and liabilities are not presented in the following table.
Quoted Prices | ||||||||||||
in Active Markets | Significant Other | |||||||||||
for Identical | Observable | |||||||||||
Total | Assets (Level 1) | Inputs (Level 2) | ||||||||||
September 30, 2012 |
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Cash equivalentsmoney-market funds |
$ | 1,210 | $ | | $ | 1,210 | ||||||
Registered investment companies (1) |
$ | 4,895 | $ | 4,895 | $ | | ||||||
December 31, 2011 |
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Cash equivalentsmoney-market funds |
$ | 2,449 | $ | | $ | 2,449 | ||||||
Registered investment companies (1) |
$ | 5,057 | $ | 5,057 | $ | | ||||||
Equity securities (1) |
$ | 9 | $ | 9 | $ | |
(1) | Registered investment companies and equity securities are classified as available-for-sale securities and are valued using quoted prices in active markets multiplied by the number of shares owned. |
5. Acquisitions:
2012 Acquisitions
On August 31, 2012, the Company acquired Argus Information & Advisory Services, LLC (Argus), a provider of information, competitive benchmarking, scoring solutions, analytics, and customized services to financial institutions and regulators in North America, Latin America, and Europe, for a net cash purchase price of approximately $404,995 and funded $20,000 of indemnity escrows. Within the Companys Decision Analytics segment, this acquisition enhances the Companys position as a provider of data, analytics, and decision-support solutions to financial institutions globally.
On July 2, 2012, the Company acquired the net assets of Aspect Loss Prevention, LLC (ALP), a provider of loss prevention and analytic solutions to the retail, entertainment, and food industries, for a net cash purchase price of approximately $6,917 and funded $800 of indemnity escrows. Within the Companys Decision Analytics segment, ALP further advances the Companys position as a provider of data, analytics, and decision-support solutions.
On March 30, 2012, the Company acquired 100% of the stock of MediConnect Global, Inc. (MediConnect), a service provider of medical record retrieval, digitization, coding, extraction, and analysis, for a net cash purchase price of approximately $331,405 and funded $17,000 of indemnity escrows. Within the Companys Decision Analytics segment, MediConnect further supports the Companys objective as the leading provider of data, analytics, and decision-support solutions to the healthcare and property casualty industry.
9
The preliminary purchase price allocations of the acquisitions resulted in the following:
MediConnect | ALP | Argus | Total | |||||||||||||
Accounts receivable |
$ | 7,077 | $ | 489 | $ | 12,165 | $ | 19,731 | ||||||||
Current assets |
14,918 | | 568 | 15,486 | ||||||||||||
Fixed assets |
1,075 | 28 | 4,994 | 6,097 | ||||||||||||
Intangible assets |
157,905 | 5,736 | 176,174 | 339,815 | ||||||||||||
Goodwill |
223,982 | 2,228 | 279,228 | 505,438 | ||||||||||||
Other assets |
17,087 | 801 | 20,000 | 37,888 | ||||||||||||
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Total assets acquired |
422,044 | 9,282 | 493,129 | 924,455 | ||||||||||||
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Current liabilities |
3,005 | 756 | 9,660 | 13,421 | ||||||||||||
Other liabilities |
70,634 | 809 | 58,474 | 129,917 | ||||||||||||
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Total liabilities assumed |
73,639 | 1,565 | 68,134 | 143,338 | ||||||||||||
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Net assets acquired |
$ | 348,405 | $ | 7,717 | $ | 424,995 | $ | 781,117 | ||||||||
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The amounts assigned to intangible assets by type for the current year acquisitions are summarized in the table below:
Weighted Average Useful Life |
MediConnect | ALP | Argus | Total | ||||||||||||||||
Technology-based |
10 years | $ | 43,110 | $ | 1,225 | $ | 27,715 | $ | 72,050 | |||||||||||
Marketing-related |
6 years | 14,782 | 253 | 11,671 | 26,706 | |||||||||||||||
Customer-related |
15 years | 100,013 | 4,258 | 136,788 | 241,059 | |||||||||||||||
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Total intangible assets |
13 years | $ | 157,905 | $ | 5,736 | $ | 176,174 | $ | 339,815 | |||||||||||
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The allocations of the purchase prices (noted within the tables above) are all subject to revisions as additional information is obtained about the facts and circumstances that existed as of the acquisition date. The revisions may have an impact on the consolidated financial statements. The allocations of the purchase prices will be finalized once all information is obtained, but not to exceed one year from the acquisition dates.
The goodwill associated with the stock purchase of MediConnect is not deductible for tax purposes; whereas the goodwill associated with the asset purchase of ALP is deductible for tax purposes. The goodwill associated with the acquisition of Argus is partially deductible for income tax purposes as approximately 47% of the net cash purchase price represented an asset purchase. For the three and nine months ended September 30, 2012, the Company incurred transaction costs related to these acquisition of $681 and $1,508, respectively, included within Selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.
Supplemental information on an unaudited pro forma basis is presented below as if the acquisitions of MediConnect and Argus occurred at the beginning of the year 2011. The pro forma information for the nine months ended September 30, 2012 and 2011 presented below is based on estimates and assumptions, which the Company believes are reasonable and not necessarily indicative of the consolidated financial position or results of operations in future periods or the results that actually would have been realized had these acquisitions been completed at the beginning of 2011. The unaudited pro forma information includes intangible asset amortization charges and incremental borrowing costs as a result of the acquisitions, net of related tax, estimated using the Companys effective tax rate for continuing operations for the periods.
For the Nine Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
(unaudited) | ||||||||
Pro forma revenues |
$ | 1,173,420 | $ | 1,052,193 | ||||
Pro forma net income |
$ | 222,840 | $ | 183,666 | ||||
Pro forma basic income per share |
$ | 1.35 | $ | 1.10 | ||||
Pro forma diluted income per share |
$ | 1.30 | $ | 1.05 |
2011 Acquisitions
On June 17, 2011, the Company acquired the net assets of Health Risk Partners, LLC (HRP), a provider of solutions to optimize revenue, ensure compliance and improve quality of care for Medicare Advantage and Medicaid health plans, for a net cash purchase price of approximately $46,400 and funded $3,000 of indemnity escrows and $10,000 of contingency escrows. Within the Companys Decision Analytics segment, this acquisition further advances the Companys position as a major provider of data, analytics, and decision-support solutions to the healthcare market.
On April 27, 2011, the Company acquired 100% of the stock of Bloodhound Technologies, Inc. (Bloodhound), a provider of real-time pre-adjudication medical claims editing, for a net cash purchase price of approximately $75,321 and funded $6,560 of indemnity escrows. Within the Companys Decision Analytics segment, Bloodhound addresses the need of healthcare payers to control fraud and waste in a real-time claims-processing environment, and these capabilities align with the Companys existing fraud identification tools in the healthcare market.
The goodwill associated with Bloodhound is not deductible for tax purposes; whereas the goodwill associated with HRP is deductible for tax purposes as this was an asset purchase rather than a stock purchase. For the three and nine months ended September 30, 2012, the Company incurred no transaction costs related to these acquisitions. In accordance with ASC 805, the allocation of the purchase prices for HRP and Bloodhound was revised during the measurement period. Refer to Note 6. Goodwill and Intangible Assets for further discussion.
10
Acquisition Escrows
Pursuant to the related acquisition agreements, the Company has funded various escrow accounts to satisfy pre-acquisition indemnity and tax claims arising subsequent to the acquisition dates, as well as a portion of the contingent payments. At September 30, 2012 and December 31, 2011, the current portion of the escrows amounted to $31,072 and $36,967, and the noncurrent portion of the escrow amounted to $25,800 and $4,508, respectively. The current and noncurrent portions of the escrows have been included in Other current assets and Other assets in the accompanying condensed consolidated balance sheets, respectively.
6. Goodwill and Intangible Assets:
The following is a summary of the change in goodwill from December 31, 2011 through September 30, 2012, both in total and as allocated to the Companys operating segments:
Risk Assessment |
Decision Analytics |
Total | ||||||||||
Goodwill at December 31, 2011 (1) |
$ | 27,908 | $ | 682,036 | $ | 709,944 | ||||||
Current year acquisitions |
| 467,638 | 467,638 | |||||||||
Acquisition related escrow funding |
| 37,800 | 37,800 | |||||||||
Purchase accounting reclassifications |
| 874 | 874 | |||||||||
Finalization of acquisition related escrows |
| 4,128 | 4,128 | |||||||||
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Goodwill at September 30, 2012 (1) |
$ | 27,908 | $ | 1,192,476 | $ | 1,220,384 | ||||||
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(1) | These balances are net of accumulated impairment charges of $3,244 that occurred prior to January 1, 2009. |
The Company finalized the purchase accounting for the acquisitions of HRP and Bloodhound during the quarter ended June 30, 2012. The Companys purchase accounting reclassifications primarily related to the finalization of HRP and Bloodhound resulted in an increase in goodwill of $836, and an increase in liabilities of $1,233, an increase in other assets of $882 and a decrease in fixed assets of $226. The impact of these adjustments on the consolidated statements of operations for the nine months ended September 30, 2012 and 2011 was immaterial.
Goodwill and intangible assets with indefinite lives are subject to impairment testing annually as of June 30, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. Goodwill impairment testing compares the carrying value of each reporting unit to its fair value. If the fair value of the reporting unit exceeds the carrying value of the net assets, including goodwill assigned to that reporting unit, goodwill is not impaired. If the carrying value of the reporting units net assets including goodwill exceeds the fair value of the reporting unit, then the Company will determine the implied fair value of the reporting units goodwill. If the carrying value of a reporting units goodwill exceeds its implied fair value, then an impairment loss is recorded for the difference between the carrying amount and the implied fair value of goodwill. The Company completed the required annual impairment test as of June 30, 2012, which resulted in no impairment of goodwill.
The Companys intangible assets and related accumulated amortization consisted of the following:
Weighted Average Useful Life |
Cost | Accumulated Amortization |
Net | |||||||||||||
September 30, 2012 |
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Technology-based |
8 years | $ | 307,704 | $ | (171,510 | ) | $ | 136,194 | ||||||||
Marketing-related |
6 years | 75,476 | (38,125 | ) | 37,351 | |||||||||||
Contract-based |
6 years | 6,555 | (6,555 | ) | | |||||||||||
Customer-related |
14 years | 414,283 | (57,805 | ) | 356,478 | |||||||||||
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Total intangible assets |
$ | 804,018 | $ | (273,995 | ) | $ | 530,023 | |||||||||
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December 31, 2011 |
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Technology-based |
7 years | $ | 235,654 | $ | (155,333 | ) | $ | 80,321 | ||||||||
Marketing-related |
5 years | 48,770 | (33,190 | ) | 15,580 | |||||||||||
Contract-based |
6 years | 6,555 | (6,482 | ) | 73 | |||||||||||
Customer-related |
13 years | 173,224 | (42,774 | ) | 130,450 | |||||||||||
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Total intangible assets |
$ | 464,203 | $ | (237,779 | ) | $ | 226,424 | |||||||||
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Consolidated amortization expense related to intangible assets for the three months ended September 30, 2012 and 2011, was $15,442 and $8,797, respectively. Consolidated amortization expense related to intangible assets for the nine months ended September 30, 2012 and 2011, was $36,216 and $26,129, respectively. Estimated amortization expense in future periods through 2017 and thereafter for intangible assets subject to amortization is as follows:
Year |
Amount | |||
2012 |
$ | 16,777 | ||
2013 |
62,889 | |||
2014 |
54,858 | |||
2015 |
50,475 | |||
2016 |
48,914 | |||
2017 and Thereafter |
296,110 | |||
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$ | 530,023 | |||
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11
7. Income Taxes:
The Companys effective tax rate for the three and nine months ended September 30, 2012 was 39.31% and 39.38%, respectively, compared to the effective tax rate for the three and nine months ended September 30, 2011 of 39.24% and 39.74%, respectively. The effective tax rate for the nine months ended September 30, 2012 is lower than the September 30, 2011 effective tax rate primarily due to the continued execution of tax planning strategies. The difference between statutory tax rates and the Companys effective tax rate is primarily attributable to state taxes and non-deductible share appreciation from the ISO 401(k) Savings and Employee Stock Ownership Plan (KSOP).
8. Debt:
The following table presents short-term and long-term debt by issuance:
Issuance | Maturity | September 30, | December 31, | |||||||||||||
Date | Date | 2012 | 2011 | |||||||||||||
Short-term debt and current portion of long-term debt: |
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Syndicated revolving credit facility |
Various | Various | $ | 115,000 | $ | | ||||||||||
Prudential senior notes: |
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6.28% Series I senior notes |
4/29/2008 | 4/29/2013 | 15,000 | | ||||||||||||
6.13% Series G senior notes |
8/8/2006 | 8/8/2013 | 75,000 | | ||||||||||||
Aviva Investors senior notes: |
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6.46% Series A senior notes |
4/27/2009 | 4/27/2013 | 30,000 | | ||||||||||||
Principal senior notes: |
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6.16% Series B senior notes |
8/8/2006 | 8/8/2013 | 25,000 | | ||||||||||||
Capital lease obligations and other |
Various | Various | 5,794 | 5,554 | ||||||||||||
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Short-term debt and current portion of long-term debt |
265,794 | 5,554 | ||||||||||||||
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Long-term debt: |
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Verisk senior notes: |
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5.800% senior notes, less unamortized discount of $888 and $967 as of September 30, 2012 and December 31, 2011, respectively |
4/6/2011 | 5/1/2021 | 449,112 | 449,033 | ||||||||||||
4.875% senior notes, less unamortized discount of $2,122 and $2,376 as of September 30, 2012 and December 31, 2011, respectively |
12/8/2011 | 1/15/2019 | 247,878 | 247,624 | ||||||||||||
4.125% senior notes, less unamortized discount of $2,762 and $0 as of September 30, 2012 and December 31, 2011, respectively |
9/12/2012 | 9/12/2022 | 347,238 | | ||||||||||||
Prudential senior notes: |
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6.13% Series G senior notes |
8/8/2006 | 8/8/2013 | | 75,000 | ||||||||||||
5.84% Series H senior notes |
10/26/2007 | 10/26/2013 | 17,500 | 17,500 | ||||||||||||
5.84% Series H senior notes |
10/26/2007 | 10/26/2015 | 17,500 | 17,500 | ||||||||||||
6.28% Series I senior notes |
4/29/2008 | 4/29/2013 | | 15,000 | ||||||||||||
6.28% Series I senior notes |
4/29/2008 | 4/29/2015 | 85,000 | 85,000 | ||||||||||||
6.85% Series J senior notes |
6/15/2009 | 6/15/2016 | 50,000 | 50,000 | ||||||||||||
Principal senior notes: |
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6.16% Series B senior notes |
8/8/2006 | 8/8/2013 | | 25,000 | ||||||||||||
New York Life senior notes: |
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5.87% Series A senior notes |
10/26/2007 | 10/26/2013 | 17,500 | 17,500 | ||||||||||||
5.87% Series A senior notes |
10/26/2007 | 10/26/2015 | 17,500 | 17,500 | ||||||||||||
6.35% Series B senior notes |
4/29/2008 | 4/29/2015 | 50,000 | 50,000 | ||||||||||||
Aviva Investors senior notes: |
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6.46% Series A senior notes |
4/27/2009 | 4/27/2013 | | 30,000 | ||||||||||||
Capital lease obligations and other |
Various | Various | 2,455 | 3,675 | ||||||||||||
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Long-term debt |
1,301,683 | 1,100,332 | ||||||||||||||
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Total debt |
$ | 1,567,477 | $ | 1,105,886 | ||||||||||||
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On September 12, 2012, the Company completed an issuance of senior notes in the aggregate principal amount of $350,000. These senior notes are due on September 12, 2022 and accrue interest at a rate of 4.125%. The Company received net proceeds of $344,950 after deducting original issue discount, underwriting discount, and commissions of $5,050. The senior notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured and unsubordinated basis by ISO and certain subsidiaries that guarantee our syndicated revolving credit facility or any amendment, refinancing or replacement thereof (See Note 15. Condensed Consolidated Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries for further information). Interest will be payable semi-annually on March 12 and September 12 of each year, beginning on March 12, 2013. Interest accrues from September 12, 2012. The debt issuance costs will be amortized from the date of issuance to the maturity date. The senior notes rank equally with all of the Companys existing and future senior unsecured and unsubordinated indebtedness. However, the senior notes are structurally subordinated to the indebtedness of any of the subsidiaries that do not guarantee the notes and are effectively subordinated to any future secured indebtedness to the extent of the value of the assets securing such indebtedness. The guarantees of the senior notes rank equally and ratably in right of payment with all other existing and future unsecured and unsubordinated indebtedness of the guarantors, and senior in right of payment to all future subordinated indebtedness of the guarantors. Because the guarantees of the notes are not secured, such guarantees will be effectively subordinated to any existing and future secured indebtedness of the applicable guarantor to the extent of the value of the collateral securing that indebtedness. The indenture governing the senior notes contains certain covenants that restrict the ability of the Company and its subsidiaries to, among other things, create certain liens, enter into sale/leaseback transactions and consolidate with, sell, lease, convey or otherwise transfer all or substantially all of its assets, or merge with or into, any other person or entity, in each case, subject to exceptions and qualifications described in the indenture. In addition, the indenture provides that upon a change of control event, the holders of the notes have the right to require the Company to repurchase all or any part of such holders notes at a purchase price in cash equal to 101% of the principal amount of the notes plus accrued and unpaid interest, if any, to the date of repurchase.
12
On September 28, 2012, the Company amended its committed senior unsecured Syndicated Revolving Credit Facility (the Credit Facility) with Bank of America N.A., JPMorgan Chase Bank N.A., and a syndicate of banks to increase the borrowing capacity under the Credit Facility from $725,000 to $850,000, extend the maturity date from October 24, 2016 to October 24, 2017 and increase the maximum Consolidated Funded Debt Leverage Ratio from 3.25-to-1.0 to 3.50-to-1.0. As of September 30, 2012, the Company has an available borrowing capacity of $735,000 under the Credit Facility. Borrowings may be used for general corporate purposes, including working capital and capital expenditures, acquisitions and share repurchase programs. As of September 30, 2012 and December 31, 2011, the Company had $115,000 and $0, respectively, outstanding under the Credit Facility.
9. Stockholders Equity (Deficit):
The Company has 1,200,000,000 shares of authorized Class A common shares. The Class A common shares have rights to any dividend declared by the board of directors, subject to any preferential or other rights of any outstanding preferred stock, and voting rights to elect all eleven members of the board of directors.
Share Repurchase Program
The Company has authorized repurchases of up to $900,000 of its common stock through its share repurchase program (the Repurchase Program) and as of September 30, 2012, the Company had $178,951 available to repurchase shares. The Company has no obligation to repurchase stock under this program and intends to use this authorization as a means of offsetting dilution from the issuance of shares under the KSOP, the Verisk 2009 Equity Incentive Plan (the Incentive Plan) and the ISO 1996 Incentive Plan (the Option Plan), while providing flexibility to repurchase additional shares if warranted. This authorization has no expiration date and may be increased, reduced, suspended, or terminated at any time. Repurchased shares will be recorded as treasury stock and will be available for future issuance as part of the Repurchase Program.
During the nine months ended September 30, 2012, the Company repurchased 2,776,655 shares of Class A common stock as part of this program at a weighted average price of $46.04 per share. The Company utilized cash from operations and the proceeds from its senior notes and syndicated revolving credit facility to fund these repurchases. As treasury stock purchases are recorded based on trade date, the Company has included $953 in Accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheets for those purchases that have not settled as of September 30, 2012.
Earnings Per Share (EPS)
Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding, using the treasury stock method, if the dilutive potential common shares, including stock options and nonvested restricted stock, had been issued.
The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the three and nine months ended September 30, 2012 and 2011:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Numerator used in basic and diluted EPS: |
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Net income |
$ | 82,911 | $ | 70,987 | $ | 230,843 | $ | 202,440 | ||||||||
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Denominator: |
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Weighted average number of common shares used in basic EPS |
165,978,080 | 164,195,325 | 165,587,027 | 166,728,786 | ||||||||||||
Effect of dilutive shares: |
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Potential Class A common shares issuable from stock options and stock awards |
5,682,463 | 6,974,333 | 6,050,544 | 7,527,179 | ||||||||||||
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Weighted average number of common shares and dilutive potential common shares used in diluted EPS |
171,660,543 | 171,169,658 | 171,637,571 | 174,255,965 | ||||||||||||
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Basic net income per share |
$ | 0.50 | $ | 0.43 | $ | 1.39 | $ | 1.21 | ||||||||
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|
|
|
|
|
|
|
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Diluted net income per share |
$ | 0.48 | $ | 0.41 | $ | 1.34 | $ | 1.16 | ||||||||
|
|
|
|
|
|
|
|
The potential shares of common stock that were excluded from diluted EPS were 932,045 and 1,555,507 for the nine months ended September 30, 2012 and 2011, respectively, because the effect of including these potential shares was anti-dilutive.
Accumulated Other Comprehensive Losses
The following is a summary of accumulated other comprehensive losses:
September 30, | December 31, | |||||||
2012 | 2011 | |||||||
Unrealized gains on investments, net of tax |
$ | 52 | $ | 269 | ||||
Unrealized foreign currency losses |
(1,105 | ) | (975 | ) | ||||
Pension and postretirement unfunded liability adjustment, net of tax |
(75,800 | ) | (77,581 | ) | ||||
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|
|
|
|||||
Accumulated other comprehensive losses |
$ | (76,853 | ) | $ | (78,287 | ) | ||
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|
|
13
10. Equity Compensation Plans:
All of the Companys granted equity awards, including outstanding stock options and restricted stock, are covered under the Incentive Plan or the Option Plan. Awards under the Incentive Plan may include one or more of the following types: (i) stock options (both nonqualified and incentive stock options), (ii) stock appreciation rights, (iii) restricted stock, (iv) restricted stock units, (v) performance awards, (vi) other share based awards, and (vii) cash. Employees, directors and consultants are eligible for awards under the Incentive Plan. On July 1, 2011, the Company began issuing Class A common stock under these plans from the Companys treasury shares. Cash received from stock option exercises for the nine months ended September 30, 2012 and 2011 was $43,571 and $28,433, respectively. During the three months ended September 30, 2012, the Company granted 4,777 shares of Class A common stock, 36,697 nonqualified stock options that were immediately vested and 96,750 nonqualified stock options with a one year service vesting period, to the directors of the Company. These options have an exercise price equal to the closing price of the Companys Class A common stock on the grant date and a ten year contractual term. As of September 30, 2012, there were 5,770,689 shares of Class A common stock reserved and available for future issuance under the plans.
During the nine months ended September 30, 2012, the Company granted 810,568 nonqualified stock options and 236,280 shares of restricted stock to key employees. The nonqualified stock options have an exercise price equal to the closing price of the Companys Class A common stock on the grant date, with a ten-year contractual term and a service vesting period of four years. The restricted stock is valued at the closing price of the Companys Class A common stock on the grant date and has a service vesting period of four years. The Company recognizes the expense of the restricted stock ratably over the periods in which the restrictions lapse. The restricted stock is not assignable or transferrable until it becomes vested.
The fair value of the stock options granted during the nine months ended September 30, 2012 and 2011 was estimated using a Black-Scholes valuation model that uses the weighted average assumptions noted in the following table:
2012 | 2011 | |||||||
Option pricing model |
Black-Scholes | Black-Scholes | ||||||
Expected volatility |
32.25 | % | 30.44 | % | ||||
Risk-free interest rate |
0.90 | % | 2.21 | % | ||||
Expected term in years |
4.6 | 5.1 | ||||||
Dividend yield |
0.00 | % | 0.00 | % | ||||
Weighted average grant date fair value per stock option |
$ | 13.59 | $ | 10.42 |
The expected term for a majority of the stock options granted was estimated based on studies of historical experience and projected exercise behavior. However, for certain stock options granted, for which no historical exercise pattern exists, the expected term was estimated using the simplified method. The risk-free interest rate is based on the yield of U.S. Treasury zero coupon securities with a maturity equal to the expected term of the equity award. The volatility factor was based on the average volatility of the Companys peers, calculated using historical daily closing prices over the most recent period that is commensurate with the expected term of the stock option award. The expected dividend yield was based on the Companys expected annual dividend rate on the date of grant.
A summary of options outstanding under the Incentive Plan and the Option Plan as of December 31, 2011 and September 30, 2012 and changes during the interim period is presented below:
Number of Options |
Weighted Average Exercise Price |
Aggregate Intrinsic Value |
||||||||||
Outstanding at December 31, 2011 |
18,896,405 | $ | 16.55 | $ | 445,510 | |||||||
|
|
|||||||||||
Granted |
944,015 | $ | 47.33 | |||||||||
Exercised |
(4,707,394 | ) | $ | 7.33 | $ | 178,912 | ||||||
|
|
|||||||||||
Cancelled or expired |
(309,840 | ) | $ | 14.81 | ||||||||
|
|
|||||||||||
Outstanding at September 30, 2012 |
14,823,186 | $ | 20.87 | $ | 396,444 | |||||||
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|
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Options exercisable at September 30, 2012 |
9,603,360 | $ | 16.58 | $ | 297,975 | |||||||
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|
|||||||||
Options exercisable at December 31, 2011 |
12,153,311 | $ | 12.35 | $ | 337,647 | |||||||
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|
Intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the quoted price of Verisks common stock as of the reporting date. The aggregate intrinsic value of stock options outstanding and exercisable at September 30, 2012 was $396,444 and $297,975, respectively. In accordance with ASC 718, Stock Compensation, excess tax benefit from exercised stock options is recorded as an increase to additional paid-in capital and a corresponding reduction in income taxes payable. This tax benefit is calculated as the excess of the intrinsic value of options exercised in excess of compensation recognized for financial reporting purposes. The amount of the tax benefit that has been realized, as a result of those excess tax benefits, is presented as a financing cash inflow within the accompanying condensed consolidated statements of cash flows. For the nine months ended September 30, 2012 and 2011, the Company recorded excess tax benefit from stock options exercised of $63,461 and $35,643, respectively. The Company realized $55,056 and $5,470 of tax benefit within the Companys quarterly tax payments through September 30, 2012 and 2011, respectively.
The Company estimates expected forfeitures of equity awards at the date of grant and recognizes compensation expense only for those awards that the Company expects to vest. The forfeiture assumption is ultimately adjusted to the actual forfeiture rate. Changes in the forfeiture assumptions may impact the total amount of expense ultimately recognized over the requisite service period and may impact the timing of expense recognized over the requisite service period.
14
A summary of the status of the restricted stock awarded under the Incentive Plan as of December 31, 2011 and September 30, 2012 and changes during the interim period is presented below:
Number of Shares |
Weighted Average Grant Date Fair Value |
|||||||
Outstanding at December 31, 2011 |
145,634 | $ | 33.32 | |||||
Granted |
236,280 | $ | 47.04 | |||||
Vested |
(37,632 | ) | $ | 33.44 | ||||
Forfeited |
(6,518 | ) | $ | 40.62 | ||||
|
|
|||||||
Outstanding at September 30, 2012 |
337,764 | $ | 42.74 | |||||
|
|
As of September 30, 2012, there was $43,274 of total unrecognized compensation costs, exclusive of the impact of vesting upon retirement eligibility, related to nonvested share-based compensation arrangements granted under the Incentive Plan and the Option Plan. That cost is expected to be recognized over a weighted average period of 2.57 years. As of September 30, 2012, there were 5,219,826 and 337,764 nonvested stock options and restricted stock, respectively, of which 4,611,326 and 287,434 are expected to vest. The total grant date fair value of options vested during the nine months ended September 30, 2012 and 2011 was $15,559 and $15,385, respectively. The total grant date fair value of restricted stock vested during the nine months ended September 30, 2012 and 2011 was $2,227 and $604, respectively.
On May 16, 2012, the Companys stockholders approved the implementation of an employee stock purchase plan (ESPP). The ESPP commenced on October 1, 2012 and offers eligible employees the opportunity to authorize payroll deductions of up to 20.00% of their regular base salary and up to 50.00% of their short-term incentive compensation, both of which in total may not exceed $25 in any calendar year, to purchase shares of the Companys Class A common stock at a 5.00% discount of its fair market value at the time of purchase. In accordance with ASC 718, the ESPP is noncompensatory as the purchase discount is 5.00% or less from the fair market value, substantially all employees that meet limited employment qualifications may participate, and it incorporates no option features.
11. Pension and Postretirement Benefits:
The Company maintained a qualified benefit pension plan for substantially all of its employees hired prior to March 1, 2005 through membership in the Pension Plan for Insurance Organizations (the Pension Plan), a multiple-employer trust. Future benefits provided to participants within the Pension Plan are determined using a cash balance formula. Under the cash balance formula, each participant has an account, which is credited annually based on salary rates determined by years of service, as well as the interest earned on their previous year-end cash balance. The Profit Sharing Plan, a defined contribution plan, replaced the Pension Plan for all eligible employees hired on or after March 1, 2005. The Company also has a nonqualified supplemental cash balance plan (SERP) for certain employees. The SERP is funded from the general assets of the Company.
On February 29, 2012, the Company instituted a hard freeze, which eliminated all future compensation and services credits, to participants in the Pension Plan and SERP. Accordingly, the Company remeasured the assets and liabilities of both plans and recognized a curtailment, resulting in a net reduction in the unfunded pension liability of $10,466 as of March 31, 2012. There is no longer a service cost component in the net periodic benefit cost as all participants are considered inactive in both plans. The Company generally amortized the actuarial gains and losses for the plans over the average future service period of the active participants. However, beginning February 29, 2012, the Company is amortizing the actuarial losses over the remaining life of the inactive plan participants since all are now considered inactive. The February 29, 2012 remeasurement utilized a weighted average discount rate of 4.73%, compared to the rate of 4.98% used for the year ended December 31, 2011.
The Company also provides certain healthcare and life insurance benefits for both active and retired employees. The Postretirement Health and Life Insurance Plan (the Postretirement Plan) is contributory, requiring participants to pay a stated percentage of the premium for coverage. As of October 1, 2001, the Postretirement Plan was amended to freeze benefits for current retirees and certain other employees at the January 1, 2002 level. Also, as of October 1, 2001, the Postretirement Plan had a curtailment, which eliminated retiree life insurance for all active employees and healthcare benefits for almost all future retirees, effective January 1, 2002.
The components of net periodic benefit (credit) cost and the amounts recognized in other comprehensive income for the three and nine months ended September 30, 2012 and 2011 are summarized below:
Pension Plan and SERP | Postretirement Plan | |||||||||||||||
For the Three Months Ended September 30, | ||||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Service cost |
$ | | $ | 1,590 | $ | | $ | | ||||||||
Interest cost |
4,903 | 5,442 | 175 | 251 | ||||||||||||
Expected return on plan assets |
(7,277 | ) | (6,449 | ) | (120 | ) | | |||||||||
Amortization of prior service credit |
| (200 | ) | (38 | ) | (37 | ) | |||||||||
Amortization of net actuarial loss |
632 | 1,384 | 138 | 163 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic benefit (credit) cost |
$ | (1,742 | ) | $ | 1,767 | $ | 155 | $ | 377 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Employer contributions |
$ | 104 | $ | 6,489 | $ | 5,913 | $ | 1,125 | ||||||||
|
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|
|
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|
|
|||||||||
For the Nine Months Ended September 30, | ||||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Service cost |
$ | 282 | $ | 4,771 | $ | | $ | | ||||||||
Interest cost |
14,940 | 16,280 | 525 | 753 | ||||||||||||
Expected return on plan assets |
(21,624 | ) | (19,348 | ) | (240 | ) | | |||||||||
Curtailment gain |
(779 | ) | | | | |||||||||||
Amortization of prior service credit |
(133 | ) | (601 | ) | (113 | ) | (109 | ) | ||||||||
Amortization of net actuarial loss |
2,983 | 4,199 | 413 | 489 | ||||||||||||
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|
|||||||||
Net periodic benefit (credit) cost |
$ | (4,331 | ) | $ | 5,301 | $ | 585 | $ | 1,133 | |||||||
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|
|||||||||
Employer contributions |
$ | 79,459 | $ | 19,144 | $ | 15,565 | $ | 2,507 | ||||||||
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15
In March 2012, the Company established a voluntary employees beneficiary association plan (the VEBA Plan) under Section 501(c)(9) of the Internal Revenue Code to fund the Postretirement Plan. The Company contributed $5,000 and $13,500 to the VEBA Plan for the three and nine months ended September 30, 2012, respectively. The contribution to the Postretirement Plan for the remaining quarter for the year ending December 31, 2012 is expected to be consistent with this quarter. In addition, in April 2012, the Company completed a voluntary prefunding to the Pension Plan of $72,000, which resulted in a total contribution of $78,837 for the year, of which $28,206 was the minimum contribution requirement for 2012. Since the Company has fulfilled the minimum contribution requirement for the year ending December 31, 2012, the Company does not expect to make any further contribution to the Pension Plan.
12. Segment Reporting:
ASC 280-10, Disclosures About Segments of an Enterprise and Related Information (ASC 280-10), establishes standards for reporting information about operating segments. ASC 280-10 requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker (CODM) in deciding how to allocate resources and in assessing performance. The Companys Chief Executive Officer and Chairman of the Board is identified as the CODM as defined by ASC 280-10. To align with the internal management of the Companys business operations based on service offerings, the Company is organized into the following two operating segments, which are also the Companys reportable segments:
Decision Analytics: The Company develops solutions that its customers use to analyze the three key processes in managing risk: prediction of loss, detection and prevention of fraud and quantification of loss. The Companys combination of algorithms and analytic methods incorporates its proprietary data to generate solutions in each of these three categories. In most cases, the Companys customers integrate the solutions into their models, formulas or underwriting criteria in order to predict potential loss events, ranging from hurricanes and earthquakes to unanticipated healthcare claims. The Company develops catastrophe and extreme event models and offers solutions covering natural and man-made risks, including acts of terrorism. The Company also develops solutions that allow customers to quantify costs after loss events occur. Fraud solutions include data on claim histories, analysis of mortgage applications to identify misinformation, analysis of claims to find emerging patterns of fraud, and identification of suspicious claims in the insurance, mortgage and healthcare sectors. Effective December 31, 2011, the Company provided additional disclosure about its revenue within Decision Analytics segment based on the industry vertical groupings of insurance, mortgage and financial services, healthcare, and specialized markets. Previously, the Company disclosed revenues based on the classification of its solutions as fraud identification and detection solutions, loss prediction solutions and loss quantification solutions.
Risk Assessment: The Company is the leading provider of statistical, actuarial and underwriting data for the U.S. P&C insurance industry. The Companys databases include cleansed and standardized records describing premiums and losses in insurance transactions, casualty and property risk attributes for commercial buildings and their occupants and fire suppression capabilities of municipalities. The Company uses this data to create policy language and proprietary risk classifications that are industry standards and to generate prospective loss cost estimates used to price insurance policies.
The two aforementioned operating segments represent the segments for which separate discrete financial information is available and upon which operating results are regularly evaluated by the CODM in order to assess performance and allocate resources. The Company uses EBITDA as the profitability measure for making decisions regarding ongoing operations. EBITDA is net income before interest expense, provision for income taxes, depreciation and amortization of fixed and intangible assets. In the second quarter of 2012, the Company changed its definition of EBITDA such that it only reflects the definition noted and no longer excludes investment income (loss) and realized gain (loss) on securities, net, for all periods presented. EBITDA is the measure of operating results used to assess corporate performance and optimal utilization of debt and acquisitions. Operating expenses consist of direct and indirect costs principally related to personnel, facilities, software license fees, consulting, travel, and third-party information services. Indirect costs are generally allocated to the segments using fixed rates established by management based upon estimated expense contribution levels and other assumptions that management considers reasonable. The Company does not allocate interest expense and provision for income taxes, since these items are not considered in evaluating the segments overall operating performance. The CODM does not evaluate the financial performance of each segment based on assets. On a geographic basis, no individual country outside of the U.S. accounted for 1.00% or more of the Companys consolidated revenue for either the three and nine months ended September 30, 2012 or 2011. No individual country outside of the U.S. accounted for 1.00% or more of total consolidated long-term assets as of September 30, 2012 or December 31, 2011.
16
The following table provides the Companys revenue and operating income by reportable segment for the three and nine months ended September 30, 2012 and 2011, as well as reconciliations to income before income taxes for all periods presented in the accompanying condensed consolidated statements of operations:
For the Three Months Ended | For the Three Months Ended | |||||||||||||||||||||||
September 30, 2012 | September 30, 2011 | |||||||||||||||||||||||
Decision | Risk | Decision | Risk | |||||||||||||||||||||
Analytics | Assessment | Total | Analytics | Assessment | Total | |||||||||||||||||||
Revenues |
$ | 254,996 | $ | 143,867 | $ | 398,863 | $ | 200,121 | $ | 139,977 | $ | 340,098 | ||||||||||||
Expenses: |
||||||||||||||||||||||||
Cost of revenues (exclusive of items shown separately below) |
111,709 | 45,040 | 156,749 | 88,410 | 49,209 | 137,619 | ||||||||||||||||||
Selling, general and administrative |
38,971 | 19,736 | 58,707 | 31,410 | 20,065 | 51,475 | ||||||||||||||||||
Acquisition related liabilities adjustment |
| | | | | | ||||||||||||||||||
Investment income and realized loss (gain) on securities, net |
| 502 | 502 | | (13 | ) | (13 | ) | ||||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||||
EBITDA |
104,316 | 78,589 | 182,905 | 80,301 | 70,716 | 151,017 | ||||||||||||||||||
Depreciation and amortization of fixed assets |
9,436 | 3,278 | 12,714 | 7,444 | 3,354 | 10,798 | ||||||||||||||||||
Amortization of intangible assets |
15,442 | | 15,442 | 8,760 | 37 | 8,797 | ||||||||||||||||||
Investment income and realized (loss) gain on securities, net |
| (502 | ) | (502 | ) | | 13 | 13 | ||||||||||||||||
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|
|
|
|
|
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|
|||||||||||||
Operating income |
$ | 79,438 | $ | 75,813 | 155,251 | $ | 64,097 | $ | 67,312 | 131,409 | ||||||||||||||
|
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|
|
|
|
|
|
|||||||||||||||||
Investment income and realized (loss) gain on securities, net |
(502 | ) | 13 | |||||||||||||||||||||
Interest expense |
(18,133 | ) | (14,593 | ) | ||||||||||||||||||||
|
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|
|
|||||||||||||||||||||
Income before income taxes |
$ | 136,616 | $ | 116,829 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Capital expenditures, including noncash purchases of fixed assets and capital lease obligations |
$ | 15,715 | $ | 3,112 | $ | 18,827 | $ | 11,778 | $ | 2,117 | $ | 13,895 | ||||||||||||
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|||||||||||||
For the Nine Months Ended | For the Nine Months Ended | |||||||||||||||||||||||
September 30, 2012 | September 30, 2011 | |||||||||||||||||||||||
Decision | Risk | Decision | Risk | |||||||||||||||||||||
Analytics | Assessment | Total | Analytics | Assessment | Total | |||||||||||||||||||
Revenues |
$ | 685,565 | $ | 433,025 | $ | 1,118,590 | $ | 559,197 | $ | 421,050 | $ | 980,247 | ||||||||||||
Expenses: |
||||||||||||||||||||||||
Cost of revenues (exclusive of items shown separately below) |
301,376 | 135,777 | 437,153 | 247,841 | 145,519 | 393,360 | ||||||||||||||||||
Selling, general and administrative |
112,910 | 62,249 | 175,159 | 94,103 | 62,537 | 156,640 | ||||||||||||||||||
Acquisition related liabilities adjustment |
| | | (3,364 | ) | | (3,364 | ) | ||||||||||||||||
Investment income and realized loss (gain) on securities, net |
| (59 | ) | (59 | ) | | (500 | ) | (500 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
EBITDA |
271,279 | 235,058 | 506,337 | 220,617 | 213,494 | 434,111 | ||||||||||||||||||
Depreciation and amortization of fixed assets |
26,942 | 10,506 | 37,448 | 21,756 | 11,202 | 32,958 | ||||||||||||||||||
Amortization of intangible assets |
36,216 | | 36,216 | 26,020 | 109 | 26,129 | ||||||||||||||||||
Investment income and realized (loss) gain on securities, net |
| 59 | 59 | | 500 | 500 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income |
$ | 208,121 | $ | 224,493 | 432,614 | $ | 172,841 | $ | 201,683 | 374,524 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Investment income and realized (loss) gain on securities, net |
59 | 500 | ||||||||||||||||||||||
Interest expense |
(51,895 | ) | (39,093 | ) | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Income before income taxes |
$ | 380,778 | $ | 335,931 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Capital expenditures, including noncash purchases of fixed assets and capital lease obligations |
$ | 45,372 | $ | 11,457 | $ | 56,829 | $ | 39,342 | $ | 8,906 | $ | 48,248 | ||||||||||||
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17
Operating segment revenue by type of service is provided below:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Decision Analytics: |
||||||||||||||||
Insurance |
$ | 126,301 | $ | 116,281 | $ | 364,847 | $ | 333,915 | ||||||||
Mortgage and financial services |
37,960 | 34,272 | 107,534 | 102,611 | ||||||||||||
Healthcare |
69,324 | 30,277 | 150,153 | 65,216 | ||||||||||||
Specialized markets |
21,411 | 19,291 | 63,031 | 57,455 | ||||||||||||
|
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|
|
|
|
|
|
|||||||||
Total Decision Analytics |
254,996 | 200,121 | 685,565 | 559,197 | ||||||||||||
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|
|
|
|
|
|||||||||
Risk Assessment: |
||||||||||||||||
Industry-standard insurance programs |
98,270 | 92,894 | 295,414 | 278,140 | ||||||||||||
Property-specific rating and underwriting information |
31,415 | 33,107 | 96,431 | 102,621 | ||||||||||||
Statistical agency and data services |
8,056 | 7,888 | 23,910 | 23,263 | ||||||||||||
Actuarial services |
6,126 | 6,088 | 17,270 | 17,026 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Total Risk Assessment |
143,867 | 139,977 | 433,025 | 421,050 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
$ | 398,863 | $ | 340,098 | $ | 1,118,590 | $ | 980,247 | ||||||||
|
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|
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|
|
13. Related Parties:
The Company considers its stockholders that own more than 5.00% of the outstanding stock within a respective class to be related parties as defined within ASC 850, Related Party Disclosures. In 2011, all of the Companys outstanding Class B (Series 1) and Class B (Series 2) shares converted to Class A. As a result of the conversion, the Company had no related parties owning more than 5.00% of a class of stock as of September 30, 2012.
At September 30, 2011, there were three Class A and five Class B stockholders, each owning more than 5.00% of the respective outstanding class. The Company had revenues from related parties for the three months ended September 30, 2012 and 2011 of $0 and $4,699, respectively, and revenues of $0 and $13,882 for the nine months ended September 30, 2012 and 2011, respectively.
14. Commitments and Contingencies:
The Company is a party to legal proceedings with respect to a variety of matters in the ordinary course of business, including the matters described below. With respect to ongoing matters, the Company is unable, at the present time, to determine the ultimate resolution of or provide a reasonable estimate of the range of possible loss attributable to these matters or the impact it may have on the Companys results of operations, financial position or cash flows. This is primarily because the matters are in early stages and discovery has either not commenced or been completed. Although the Company believes it has strong defenses and intends to vigorously defend these matters, the Company could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations, financial position or cash flows.
Citizens Insurance Litigation
On February 28, 2012, the Company was served with a complaint filed in the Florida State Circuit Court for Pasco County naming Citizens Property Insurance Corporation (Citizens) and the Companys Xactware subsidiary. The complaint alleged a class action seeking declaratory and injunctive relief against defendants and was brought on behalf of all individuals who have purchased a new or renewed a property casualty insurance policy from Citizens where Citizens used Xactwares 360Value product to determine replacement value of the property. On March 12, 2012, plaintiffs served their First Amended Complaint on Xactware additionally alleging that: (1) Citizens and Xactware knowingly made false statements to the plaintiff class concerning their properties replacement cost values; (2) fraud against Xactware based on its alleged misrepresentation of the replacement value of plaintiffs properties; (3) conspiracy against Citizens and Xactware based on their alleged artificial inflation of the value of plaintiffs properties; and (4) products liability against Xactware, claiming Xactware defectively designed 360Value as used in the Florida insurance market. The First Amended Complaint sought declaratory and injunctive relief, as well as unspecified monetary damages alleged to be in excess of $1,000 for the class. On May 31, 2012 plaintiff served his Second Amended Complaint which no longer alleges a class action, but continues to allege: (1) that Citizens and Xactware artificially inflated the replacement cost value of plaintiffs property using 360Value; (2) fraud by Xactware; (3) a conspiracy between Citizens and Xactware; and (4) products liability against Xactware. The Second Amended Complaint similarly seeks declaratory and injunctive relief as well as damages representing the difference between the premium plaintiff paid to Citizens using 360Value and what the premium should have been if Citizens used an accurate replacement cost value for plaintiffs property. Defendants motion to transfer was granted and the case was transferred to Leon County Circuit on September 17, 2012.
At this time it is not possible to determine the ultimate resolution of, or estimate the liability related to, this matter.
Intellicorp Records, Inc. Litigation
On April 20, 2012, the Company was served with a complaint filed in Alameda County Superior Court in California naming the Companys subsidiary Intellicorp Records, Inc. titled Jane Roe v. Intellicorp Records, Inc. et al. The complaint alleged a nationwide putative class action on behalf of all persons who have been the subject of a consumer report furnished to a third party by Intellicorp for employment purposes and whose report contained any negative public record of criminal arrest, charge or conviction during the 5 years preceding the filing of the action until final resolution. The complaint alleged violations of the Fair Credit Reporting Act and claimed that Intellicorp failed to implement policies and procedures designed to ensure that criminal record information provided to employers is complete and up to date, and failed to notify class members contemporaneously of the fact that criminal record information was being provided to their employers and prospective employers. Intellicorp removed the case to the United States District Court of the Northern District of California. The District Court later granted Intellicorps motion to transfer the case, which is now pending in the United States District Court for the Northern District of Ohio. On October 24, 2012 plaintiffs served their First Amended Complaint (the Complaint) alleging a nationwide putative class action on behalf of all persons who have been the subject of a consumer report furnished to a third party by Intellicorp for employment purposes and whose report contained any negative public record of criminal arrest, charge or conviction without also disclosing the final disposition of the charges during the 5 years preceding the filing of the action through the date class certification is granted. The Complaint continues to allege the previously alleged violations of the Fair Credit Reporting Act and seeks statutory damages for the class in an amount not less than one hundred dollars and not more than one thousand dollars per violation, punitive damages, costs and attorneys fees as well as unspecified monetary damages for the named plaintiff.
At this time, it is not possible to determine the ultimate resolution of, or estimate the liability related to, this matter.
18
15. Condensed Consolidated Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries
In 2012 and 2011, Verisk Analytics, Inc. (the Parent Company) registered senior notes with full and unconditional and joint and several guarantees by certain of its 100 percent wholly-owned subsidiaries and issued certain other debt securities with full and unconditional and joint and several guarantees by certain of its subsidiaries. Accordingly, presented below is the condensed consolidating financial information for (i) the Parent Company, (ii) the guarantor subsidiaries of the Parent Company on a combined basis and (iii) all other non-guarantor subsidiaries of the Parent Company on a combined basis, as of September 30, 2012 and December 31, 2011 and for the three and nine months ended September 30, 2012 and 2011. The condensed consolidating financial information has been presented using the equity method of accounting, to show the nature of assets held, results of operations and cash flows of the Parent Company, the guarantor subsidiaries and the non-guarantor subsidiaries assuming all guarantor subsidiaries provide both full and unconditional, and joint and several guarantees to the Parent Company at the beginning of the periods presented. Effective as of December 31, 2011, ISO Staff Services, Inc. (ISOSS), a guarantor of the senior notes, merged with and into ISO, also a guarantor of the senior notes, pursuant to which ISO was the surviving corporation. By virtue of the merger, ISO expressly assumed all of the obligations of ISOSS, including the guarantee by ISOSS of the senior notes.
CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
As of September 30, 2012
Verisk Analytics, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminating Entries |
Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 378 | $ | 41,459 | $ | 55,933 | $ | | $ | 97,770 | ||||||||||
Available-for-sale securities |
| 4,895 | | | 4,895 | |||||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $4,203 |
| 125,456 | 50,064 | | 175,520 | |||||||||||||||
Prepaid expenses |
| 22,839 | 2,548 | | 25,387 | |||||||||||||||
Deferred income taxes, net |
| 2,558 | 13,056 | | 15,614 | |||||||||||||||
Federal and foreign income taxes receivable |
10,349 | 7,150 | | (8,961 | ) | 8,538 | ||||||||||||||
State and local income taxes receivable |
806 | | 190 | (996 | ) | | ||||||||||||||
Intercompany receivables |
375,417 | 194,718 | 216,560 | (786,695 | ) | | ||||||||||||||
Other current assets |
12,005 | 12,887 | 8,721 | | 33,613 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
398,955 | 411,962 | 347,072 | (796,652 | ) | 361,337 | ||||||||||||||
Noncurrent assets: |
||||||||||||||||||||
Fixed assets, net |
| 117,436 | 27,363 | | 144,799 | |||||||||||||||
Intangible assets, net |
| 67,140 | 462,883 | | 530,023 | |||||||||||||||
Goodwill |
| 486,250 | 734,134 | | 1,220,384 | |||||||||||||||
Deferred income taxes, net |
| 49,557 | | (49,557 | ) | | ||||||||||||||
Investment in subsidiaries |
852,866 | 900,914 | | (1,753,780 | ) | | ||||||||||||||
Other assets |
14,171 | 30,661 | 2,058 | | 46,890 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 1,265,992 | $ | 2,063,920 | $ | 1,573,510 | $ | (2,599,989 | ) | $ | 2,303,433 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable and accrued liabilities |
$ | 15,434 | $ | 103,094 | $ | 57,936 | $ | | $ | 176,464 | ||||||||||
Short-term debt and current portion of long-term debt |
| 265,398 | 396 | | 265,794 | |||||||||||||||
Pension and postretirement benefits, current |
| 2,912 | | | 2,912 | |||||||||||||||
Fees received in advance |
| 185,267 | 34,533 | | 219,800 | |||||||||||||||
Intercompany payables |
64,282 | 531,164 | 191,249 | (786,695 | ) | | ||||||||||||||
Federal and foreign income taxes payable |
| | 8,961 | (8,961 | ) | | ||||||||||||||
State and local income taxes payable |
| 4,283 | | (996 | ) | 3,287 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
79,716 | 1,092,118 | 293,075 | (796,652 | ) | 668,257 | ||||||||||||||
Noncurrent liabilities: |
||||||||||||||||||||
Long-term debt |
1,044,228 | 257,388 | 67 | | 1,301,683 | |||||||||||||||
Pension and postretirement benefits |
| 27,891 | | | 27,891 | |||||||||||||||
Deferred income taxes, net |
| | 130,312 | (49,557 | ) | 80,755 | ||||||||||||||
Other liabilities |
| 51,406 | 31,393 | | 82,799 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
1,123,944 | 1,428,803 | 454,847 | (846,209 | ) | 2,161,385 | ||||||||||||||
Total stockholders equity |
142,048 | 635,117 | 1,118,663 | (1,753,780 | ) | 142,048 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities and stockholders equity |
$ | 1,265,992 | $ | 2,063,920 | $ | 1,573,510 | $ | (2,599,989 | ) | $ | 2,303,433 | |||||||||
|
|
|
|
|
|
|
|
|
|
19
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2011
Verisk Analytics, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminating Entries |
Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 76,238 | $ | 76,813 | $ | 38,552 | $ | | $ | 191,603 | ||||||||||
Available-for-sale securities |
| 5,066 | | | 5,066 | |||||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $4,158 |
| 128,214 | 25,125 | | 153,339 | |||||||||||||||
Prepaid expenses |
| 20,090 | 1,815 | | 21,905 | |||||||||||||||
Deferred income taxes, net |
| 2,557 | 1,261 | | 3,818 | |||||||||||||||
Federal and foreign income taxes receivable |
7,905 | 23,024 | | (5,687 | ) | 25,242 | ||||||||||||||
State and local income taxes receivable |
618 | 10,392 | 423 | | 11,433 | |||||||||||||||
Intercompany receivables |
250,177 | 482,172 | 147,996 | (880,345 | ) | | ||||||||||||||
Other current assets |
| 26,094 | 15,154 | | 41,248 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
334,938 | 774,422 | 230,326 | (886,032 | ) | 453,654 | ||||||||||||||
Noncurrent assets: |
||||||||||||||||||||
Fixed assets, net |
| 102,202 | 17,209 | | 119,411 | |||||||||||||||
Intangible assets, net |
| 81,828 | 144,596 | | 226,424 | |||||||||||||||
Goodwill |
| 481,736 | 228,208 | | 709,944 | |||||||||||||||
Deferred income taxes, net |
| 50,267 | | (39,787 | ) | 10,480 | ||||||||||||||
Investment in subsidiaries |
601,380 | 104,430 | | (705,810 | ) | | ||||||||||||||
Other assets |
6,218 | 13,059 | 1,916 | | 21,193 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 942,536 | $ | 1,607,944 | $ | 622,255 | $ | (1,631,629 | ) | $ | 1,541,106 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable and accrued liabilities |
$ | 6,328 | $ | 117,759 | $ | 38,905 | $ | | $ | 162,992 | ||||||||||
Acquisition related liabilities |
| | 250 | | 250 | |||||||||||||||
Short-term debt and current portion of long-term debt |
| 5,161 | 393 | | 5,554 | |||||||||||||||
Pension and postretirement benefits, current |
| 4,012 | | | 4,012 | |||||||||||||||
Fees received in advance |
| 152,948 | 23,894 | | 176,842 | |||||||||||||||
Intercompany payables |
338,041 | 354,362 | 187,942 | (880,345 | ) | | ||||||||||||||
Federal and foreign income taxes payable |
| | 5,687 | (5,687 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
344,369 | 634,242 | 257,071 | (886,032 | ) | 349,650 | ||||||||||||||
Noncurrent liabilities: |
||||||||||||||||||||
Long-term debt |
696,657 | 403,586 | 89 | | 1,100,332 | |||||||||||||||
Pension and postretirement benefits |
| 127,748 | | | 127,748 | |||||||||||||||
Deferred income taxes, net |
| | 39,787 | (39,787 | ) | | ||||||||||||||
Other liabilities |
| 58,158 | 3,708 | | 61,866 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
1,041,026 | 1,223,734 | 300,655 | (925,819 | ) | 1,639,596 | ||||||||||||||
Total stockholders (deficit) equity |
(98,490 | ) | 384,210 | 321,600 | (705,810 | ) | (98,490 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities and stockholders (deficit) equity |
$ | 942,536 | $ | 1,607,944 | $ | 622,255 | $ | (1,631,629 | ) | $ | 1,541,106 | |||||||||
|
|
|
|
|
|
|
|
|
|
20
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
For The Three Month Period Ended September 30, 2012
Verisk Analytics, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminating Entries |
Consolidated | ||||||||||||||||
Revenues |
$ | | $ | 322,796 | $ | 81,124 | $ | (5,057 | ) | $ | 398,863 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Expenses: |
||||||||||||||||||||
Cost of revenues (exclusive of items shown separately below) |
| 124,451 | 34,771 | (2,473 | ) | 156,749 | ||||||||||||||
Selling, general and administrative |
| 47,208 | 14,083 | (2,584 | ) | 58,707 | ||||||||||||||
Depreciation and amortization of fixed assets |
| 10,156 | 2,558 | | 12,714 | |||||||||||||||
Amortization of intangible assets |
| 4,868 | 10,574 | | 15,442 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total expenses |
| 186,683 | 61,986 | (5,057 | ) | 243,612 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income |
| 136,113 | 19,138 | | 155,251 | |||||||||||||||
Other income (expense): |
||||||||||||||||||||
Investment income |
4 | 48 | 84 | | 136 | |||||||||||||||
Realized loss on securities, net |
| (638 | ) | | | (638 | ) | |||||||||||||
Interest expense |
(10,669 | ) | (7,452 | ) | (12 | ) | | (18,133 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other (expense) income, net |
(10,665 | ) | (8,042 | ) | 72 | | (18,635 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(Loss) income before equity in net income of subsidiaries and income taxes |
(10,665 | ) | 128,071 | 19,210 | | 136,616 | ||||||||||||||
Equity in net income of subsidiaries |
89,654 | 12,729 | | (102,383 | ) | | ||||||||||||||
Provision for income taxes |
3,922 | (54,752 | ) | (2,875 | ) | | (53,705 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 82,911 | $ | 86,048 | $ | 16,335 | $ | (102,383 | ) | $ | 82,911 | |||||||||
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
For The Nine Month Period Ended September 30, 2012
Verisk Analytics, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminating Entries |
Consolidated | ||||||||||||||||
Revenues |
$ | | $ | 949,149 | $ | 185,507 | $ | (16,066 | ) | $ | 1,118,590 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Expenses: |
||||||||||||||||||||
Cost of revenues (exclusive of items shown separately below) |
| 362,603 | 82,971 | (8,421 | ) | 437,153 | ||||||||||||||
Selling, general and administrative |
| 141,747 | 41,057 | (7,645 | ) | 175,159 | ||||||||||||||
Depreciation and amortization of fixed assets |
| 30,524 | 6,924 | | 37,448 | |||||||||||||||
Amortization of intangible assets |
| 14,688 | 21,528 | | 36,216 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total expenses |
| 549,562 | 152,480 | (16,066 | ) | 685,976 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income |
| 399,587 | 33,027 | | 432,614 | |||||||||||||||
Other income (expense): |
||||||||||||||||||||
Investment income |
40 | 148 | 209 | | 397 | |||||||||||||||
Realized loss on securities, net |
| (338 | ) | | | (338 | ) | |||||||||||||
Interest expense |
(30,413 | ) | (21,447 | ) | (35 | ) | | (51,895 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other (expense) income, net |
(30,373 | ) | (21,637 | ) | 174 | | (51,836 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(Loss) income before equity in net income of subsidiaries and income taxes |
(30,373 | ) | 377,950 | 33,201 | | 380,778 | ||||||||||||||
Equity in net income of subsidiaries |
250,061 | 15,982 | | (266,043) | | |||||||||||||||
Provision for income taxes |
11,155 | (151,547 | ) | (9,543 | ) | | (149,935 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 230,843 | $ | 242,385 | $ | 23,658 | $ | (266,043 | ) | $ | 230,843 | |||||||||
|
|
|
|
|
|
|
|
|
|
21
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
For The Three Month Period Ended September 30, 2011
Verisk Analytics, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminating Entries |
Consolidated | ||||||||||||||||
Revenues |
$ | | $ | 300,548 | $ | 43,434 | $ | (3,884 | ) | $ | 340,098 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Expenses: |
||||||||||||||||||||
Cost of revenues (exclusive of items shown separately below) |
| 120,206 | 19,471 | (2,058 | ) | 137,619 | ||||||||||||||
Selling, general and administrative |
| 40,536 | 12,765 | (1,826 | ) | 51,475 | ||||||||||||||
Depreciation and amortization of fixed assets |
| 8,985 | 1,813 | | 10,798 | |||||||||||||||
Amortization of intangible assets |
| 5,207 | 3,590 | | 8,797 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total expenses |
| 174,934 | 37,639 | (3,884 | ) | 208,689 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income |
| 125,614 | 5,795 | | 131,409 | |||||||||||||||
Other income (expense): |
||||||||||||||||||||
Investment income |
36 | 905 | 34 | (876 | ) | 99 | ||||||||||||||
Realized loss on securities, net |
| (86 | ) | | | (86 | ) | |||||||||||||
Interest expense |
(7,517 | ) | (7,915 | ) | (37 | ) | 876 | (14,593 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other expense, net |
(7,481 | ) | (7,096 | ) | (3 | ) | | (14,580 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(Loss) income before equity in net income of subsidiaries and income taxes |
(7,481 | ) | 118,518 | 5,792 | | 116,829 | ||||||||||||||
Equity in net income of subsidiaries |
75,729 | 1,741 | | (77,470 | ) | | ||||||||||||||
Provision for income taxes |
2,739 | (47,300 | ) | (1,281 | ) | | (45,842 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 70,987 | $ | 72,959 | $ | 4,511 | $ | (77,470 | ) | $ | 70,987 | |||||||||
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
For The Nine Month Period Ended September 30, 2011
Verisk Analytics, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminating Entries |
Consolidated | ||||||||||||||||
Revenues |
$ | | $ | 869,481 | $ | 122,398 | $ | (11,632 | ) | $ | 980,247 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Expenses: |
||||||||||||||||||||
Cost of revenues (exclusive of items shown separately below) |
| 343,109 | 56,130 | (5,879 | ) | 393,360 | ||||||||||||||
Selling, general and administrative |
| 122,950 | 39,443 | (5,753 | ) | 156,640 | ||||||||||||||
Depreciation and amortization of fixed assets |
| 27,166 | 5,792 | | 32,958 | |||||||||||||||
Amortization of intangible assets |
| 15,324 | 10,805 | | 26,129 | |||||||||||||||
Acquisition related liabilities adjustment |
| (2,800 | ) | (564 | ) | | (3,364 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total expenses |
| 505,749 | 111,606 | (11,632 | ) | 605,723 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income |
| 363,732 | 10,792 | | 374,524 | |||||||||||||||
Other income (expense): |
||||||||||||||||||||
Investment income (loss) |
36 | 2,376 | (8 | ) | (2,305 | ) | 99 | |||||||||||||
Realized gain on securities, net |
| 401 | | | 401 | |||||||||||||||
Interest expense |
(15,198 | ) | (26,072 | ) | (128 | ) | 2,305 | (39,093 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other expense, net |
(15,162 | ) | (23,295 | ) | (136 | ) | | (38,593 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(Loss) income before equity in net income of subsidiaries and income taxes |
(15,162 | ) | 340,437 | 10,656 | | 335,931 | ||||||||||||||
Equity in net income of subsidiaries |
212,033 | 3,355 | | (215,388 | ) | | ||||||||||||||
Provision for income taxes |
5,569 | (135,378 | ) | (3,682 | ) | | (133,491 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 202,440 | $ | 208,414 | $ | 6,974 | $ | (215,388 | ) | $ | 202,440 | |||||||||
|
|
|
|
|
|
|
|
|
|
22
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
For The Three Months Ended September 30, 2012
Verisk Analytics, Inc. |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminating Entries |
Consolidated | ||||||||||||||||
Net income |
$ | 82,911 | $ | 86,048 | $ | 16,335 | $ | (102,383 | ) | $ | 82,911 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other comprehensive income, net of tax: |
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Unrealized holding gain on investments |
96 | 96 | | (96 | ) | 96 | ||||||||||||||
Unrealized foreign currency gain |
4 | 170 | 3 | (173 | ) | 4 | ||||||||||||||
Pension and postretirement unfunded liability adjustment |
401 | 401 | | (401 | ) | 401 | ||||||||||||||
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Total other comprehensive income |
501 | 667 | 3 | (670 | ) | 501 | ||||||||||||||
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Comprehensive income |
$ | 83,412 | $ | 86,715 | $ | 16,338 | $ | (103,053 | ) | $ |