Form 10-Q
Table of Contents

 

 

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 March 31, 2013

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

(Registrant’s 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 April 25, 2013, there was the following number of shares outstanding of each of the issuer’s classes of common stock:

 

Class

 

Shares Outstanding

Class A common stock $.001 par value

  168,395,302

 

 

 


Table of Contents

Verisk Analytics, Inc.

Index to Form 10-Q

Table of Contents

 

   

Page Number

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

 

Condensed Consolidated Balance Sheets

  1

Condensed Consolidated Statements of Operations

  2

Condensed Consolidated Statements of Comprehensive Income

  3

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)

  4

Condensed Consolidated Statements of Cash Flows

  5

Notes to Condensed Consolidated Financial Statements

  6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

  30

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  40

Item 4. Controls and Procedures

  40
PART II — OTHER INFORMATION  

Item 1. Legal Proceedings

  42

Item 1A. Risk Factors

  42

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

  42

Item 3. Defaults Upon Senior Securities

  42

Item 4. Mine Safety Disclosures

  42

Item 5. Other Information

  42

Item 6. Exhibits

  42

SIGNATURES

  43

Exhibit 31.1

 

Exhibit 31.2

 

Exhibit 32.1

 


Table of Contents

Item 1. Financial Statements

VERISK ANALYTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

As of March 31, 2013 and December 31, 2012

 

     2013        
     (unaudited)     2012  
     (In thousands, except for
share and per share data)
 
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 267,358      $ 89,819   

Available-for-sale securities

     5,141        4,883   

Accounts receivable, net of allowance for doubtful accounts of $5,019 and $4,753, respectively

     190,917        178,430   

Prepaid expenses

     31,955        21,946   

Deferred income taxes, net

     10,463        10,397   

Income taxes receivable

     15,080        45,975   

Other current assets

     31,629        39,109   
  

 

 

   

 

 

 

Total current assets

     552,543        390,559   

Noncurrent assets:

    

Fixed assets, net

     167,129        154,084   

Intangible assets, net

     503,728        520,935   

Goodwill

     1,248,261        1,247,459   

Other assets

     44,686        47,299   
  

 

 

   

 

 

 

Total assets

   $ 2,516,347      $ 2,360,336   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 150,261      $ 187,648   

Short-term debt and current portion of long-term debt

     183,979        195,263   

Pension and postretirement benefits, current

     1,734        1,734   

Fees received in advance

     314,448        200,705   
  

 

 

   

 

 

 

Total current liabilities

     650,422        585,350   

Noncurrent liabilities:

    

Long-term debt

     1,266,467        1,266,162   

Pension benefits

     35,386        38,655   

Postretirement benefits

     2,565        2,627   

Deferred income taxes, net

     134,499        133,761   

Other liabilities

     74,484        78,190   
  

 

 

   

 

 

 

Total liabilities

     2,163,823        2,104,745   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Class A common stock, $.001 par value; 1,200,000,000 shares authorized; 544,003,038 shares issued and 168,433,622 and 167,727,073 outstanding, respectively

     137        137   

Unearned KSOP contributions

     (442     (483

Additional paid-in capital

     1,077,758        1,044,746   

Treasury stock, at cost, 375,569,416 and 376,275,965 shares, respectively

     (1,622,240     (1,605,376

Retained earnings

     986,238        905,727   

Accumulated other comprehensive losses

     (88,927     (89,160
  

 

 

   

 

 

 

Total stockholders’ equity

     352,524        255,591   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,516,347      $ 2,360,336   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1


Table of Contents

VERISK ANALYTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

For The Three Months Ended March 31, 2013 and 2012

 

     2013     2012  
     (In thousands, except for share
and per share data)
 

Revenues

    
   $ 403,323      $ 346,501   
  

 

 

   

 

 

 

Expenses:

    

Cost of revenues (exclusive of items shown separately below)

     164,449        133,330   

Selling, general and administrative

     59,028        53,979   

Depreciation and amortization of fixed assets

     15,214        11,644   

Amortization of intangible assets

     17,207        8,587   
  

 

 

   

 

 

 

Total expenses

     255,898        207,540   
  

 

 

   

 

 

 

Operating income

     147,425        138,961   
  

 

 

   

 

 

 

Other income (expense):

    

Interest expense

     (20,090     (16,385

Investment income

     48        105   

Realized (loss) gain on available-for-sale securities, net

     (193     330   
  

 

 

   

 

 

 

Total other expense, net

     (20,235     (15,950
  

 

 

   

 

 

 

Income before income taxes

     127,190        123,011   

Provision for income taxes

     (46,679     (48,410
  

 

 

   

 

 

 

Net income

   $ 80,511      $ 74,601   
  

 

 

   

 

 

 

Basic net income per share

   $ 0.48      $ 0.45   
  

 

 

   

 

 

 

Diluted net income per share

   $ 0.47      $ 0.44   
  

 

 

   

 

 

 

Weighted average shares outstanding:

    

Basic

     168,078,589        164,836,992   
  

 

 

   

 

 

 

Diluted

     172,760,641        171,350,820   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2


Table of Contents

VERISK ANALYTCS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

For The Three Months Ended March 31, 2013 and 2012

 

     2013     2012  
     (In thousands)  

Net income

   $ 80,511      $ 74,601   
  

 

 

   

 

 

 

Other comprehensive income, net of tax:

    

Unrealized holding loss on available-for-sale securities

     (230     (197

Pension and postretirement unfunded liability adjustment

     869        928   

Unrealized foreign currency (loss) gain

     (406     153   
  

 

 

   

 

 

 

Total other comprehensive income

     233        884   
  

 

 

   

 

 

 

Comprehensive income

   $ 80,744      $ 75,485   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3


Table of Contents

VERISK ANALYTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED)

For The Year Ended December 31, 2012 and The Three Months Ended March 31, 2013

 

                                             Accumulated        
                   Unearned     Additional                   Other     Total  
     Class A             KSOP     Paid-in      Treasury     Retained      Comprehensive     Stockholders’  
     Common Stock      Par Value      Contributions     Capital      Stock     Earnings      Losses     Equity (Deficit)  
     (In thousands, except for share data)  

Balance, December 31, 2011

     544,003,038       $ 137       $ (691   $ 874,808       $ (1,471,042   $ 576,585       $ (78,287   $ (98,490

Net income

     —           —           —          —           —          329,142         —          329,142   

Other comprehensive loss

     —           —           —          —           —          —           (10,873     (10,873

Treasury stock acquired (3,491,591 shares)

     —           —           —          —           (162,586     —           —          (162,586

KSOP shares earned

     —           —           208        12,903         —          —           —          13,111   

Stock options exercised, including tax benefit of $88,185 (6,880,678 shares reissued from treasury stock)

     —           —           —          131,824         28,039        —           —          159,863   

Restricted stock lapsed, including tax benefit of $202 (41,908 shares reissued from treasury stock)

     —           —           —          34         167        —           —          201   

Employee stock purchase plan (6,074 shares issued from treasury stock)

     —           —           —          268         26        —           —          294   

Stock based compensation

     —           —           —          24,696         —          —           —          24,696   

Other stock issuances (4,777 shares reissued from treasury stock)

     —           —           —          213         20        —           —          233   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Balance, December 31, 2012

     544,003,038         137         (483     1,044,746         (1,605,376     905,727         (89,160     255,591   

Net income

     —           —           —          —           —          80,511         —          80,511   

Other comprehensive income

     —           —           —          —           —          —           233        233   

Treasury stock acquired (381,800 shares)

     —           —           —          —           (21,534     —           —          (21,534

KSOP shares earned

     —           —           41        3,529         —          —           —          3,570   

Stock options exercised, including tax benefit of $16,336 (1,031,850 shares reissued from treasury stock)

     —           —           —          24,375         4,426        —           —          28,801   

Restricted stock lapsed, including tax benefit of $370 (49,467 shares reissued from treasury stock)

     —           —           —          156         214        —           —          370   

Employee stock purchase plan (7,032 shares issued from treasury stock)

     —           —           —          381         30        —           —          411   

Stock based compensation

     —           —           —          4,571         —          —           —          4,571   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Balance, March 31, 2013

     544,003,038       $ 137       $ (442   $ 1,077,758       $ (1,622,240   $ 986,238       $ (88,927   $ 352,524   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4


Table of Contents

VERISK ANALYTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

For The Three Months Ended March 31, 2013 and 2012

 

     2013     2012  
     (In thousands)  

Cash flows from operating activities:

    

Net income

   $ 80,511      $ 74,601   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization of fixed assets

     15,214        11,644   

Amortization of intangible assets

     17,207        8,587   

Amortization of debt issuance costs and original issue discount

     688        545   

Allowance for doubtful accounts

     298        355   

KSOP compensation expense

     3,570        2,931   

Stock based compensation

     4,571        4,446   

Realized loss (gain) on available-for-sale securities, net

     193        (330

Deferred income taxes

     622        (349

Loss (gain) on disposal of fixed assets

     426        (7

Excess tax benefits from exercised stock options

     (36,128     —     

Other operating activities, net

     (7     10   

Changes in assets and liabilities, net of effects from acquisitions:

    

Accounts receivable

     (12,785     (34,479

Prepaid expenses and other assets

     (2,624     (2,881

Income taxes

     47,600        47,265   

Accounts payable and accrued liabilities

     (36,206     (20,966

Fees received in advance

     113,743        112,100   

Pension and postretirement benefits

     (1,930     (11,590

Other liabilities

     (3,706     (2,269
  

 

 

   

 

 

 

Net cash provided by operating activities

     191,257        189,613   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions, net of cash acquired for 2012 of $29,387

     —          (330,777

Purchase of non-controlling interest in non-public companies

     —          (2,000

Escrow funding associated with acquisitions

     —          (17,000

Purchases of fixed assets

     (28,065     (17,442

Purchases of available-for-sale securities

     (3,747     (791

Proceeds from sales and maturities of available-for-sale securities

     3,765        898   

Other investing activities, net

     439        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (27,608     (367,112
  

 

 

   

 

 

 

Cash flows from financing activities:

    

(Repayments) proceeds of short-term debt, net

     (10,000     125,000   

Excess tax benefits from exercised stock options

     36,128        —     

Repurchase of common stock

     (22,130     (36,792

Proceeds from stock options exercised

     12,455        14,589   

Other financing activities, net

     (2,157     (2,124
  

 

 

   

 

 

 

Net cash provided by financing activities

     14,296        100,673   
  

 

 

   

 

 

 

Effect of exchange rate changes

     (406     153   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     177,539        (76,673

Cash and cash equivalents, beginning of period

     89,819        191,603   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 267,358      $ 114,930   
  

 

 

   

 

 

 

Supplemental disclosures:

    

Taxes paid

   $ 189      $ 1,239   
  

 

 

   

 

 

 

Interest paid

   $ 19,619      $ 6,359   
  

 

 

   

 

 

 

Noncash investing and financing activities:

    

Repurchase of common stock included in accounts payable and accrued liabilities

   $ 915      $ 3,332   
  

 

 

   

 

 

 

Deferred tax asset (liability) established on date of acquisition

   $ 343      $ (40,358
  

 

 

   

 

 

 

Capital lease obligations

   $ 998      $ 422   
  

 

 

   

 

 

 

Capital expenditures included in accounts payable and accrued liabilities

   $ 4,410      $ 1,505   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5


Table of Contents

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, 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. Verisk’s 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 combinations have been made related to federal and state income taxes and to the segment reporting within revenue categories in the condensed consolidated financial statements and the notes to conform to the respective 2013 presentation.

The condensed consolidated financial statements as of March 31, 2013 and for the three months ended March 31, 2013 and 2012, in the opinion of management, include all adjustments, consisting of normal recurring accruals, to present fairly the Company’s financial position, results of operations and cash flows. The operating results for the three months ended March 31, 2013 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 months ended March 31, 2013 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, 2012. 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 February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU No. 2013-02”). Under ASU No. 2013-02, an entity is required to provide information about the

 

6


Table of Contents

amounts reclassified out of accumulated other comprehensive income by component, either on the face of the financial statement where net income is presented or in the notes thereto. ASU No. 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012. ASU 2013-02 was adopted by the Company on January 1, 2013. The Company elected to present the information as a separate disclosure in the notes to the condensed consolidated financial statements. Refer to Note 9 for further discussion.

In February 2013, the FASB issued ASU No. 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (“ASU No. 2013-04”). Under ASU No. 2013-04, an entity is required to measure and disclose the amounts and nature of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. ASU No. 2013-04 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. Early adoption is permitted. The Company has elected not to early adopt. The adoption of ASU 2013-04 will not have a material impact on the Company’s condensed consolidated financial statements as the long-term debt resulting from joint and several liability arrangements has been measured on a gross basis and disclosed in Note 8. Other obligations resulting from joint and several liability arrangements, such as contingencies, retirement benefits and income taxes, are excluded from the scope of this ASU.

In March 2013, the FASB issued ASU No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU No. 2013-05”). Under ASU No. 2013-05, an entity is required to release any related cumulative translation adjustment into net income upon cessation to have a controlling financial interest in a subsidiary or group of assets within a foreign entity. ASU 2013-05 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. Early adoption is permitted. The Company has elected not to early adopt. The adoption of ASU 2013-05 is not expected to have a material impact on the Company’s condensed consolidated financial statements.

3. Investments:

Available-for-sale securities consisted of the following:

 

     Adjusted
Cost
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
    Fair Value  

March 31, 2013

          

Registered investment companies

   $ 5,459       $  —         $ (318   $ 5,141   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2012

          

Registered investment companies

   $ 4,830       $ 53       $ —        $ 4,883   
  

 

 

    

 

 

    

 

 

   

 

 

 

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 March 31, 2013 and December 31, 2012, the carrying value of such securities was $3,736 and $5,015, respectively, and has been included in “Other assets” in the accompanying condensed consolidated balance sheets.

 

7


Table of Contents

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 are internally-developed, and considers risk premiums that market participant would require.

The following table provides information for such assets and liabilities as of March 31, 2013 and December 31, 2012. The fair values of cash and cash equivalents (other than money-market funds, which are recorded on a reported net asset value basis disclosed below), accounts receivable, accounts payable and accrued liabilities, acquisition related liabilities prior to the adoption of ASC 805, Business Combinations (“ASC 805”), short-term debt, and short-term debt expected to be refinanced approximate their carrying amounts because of the short-term nature of these instruments.

 

            Quoted Prices         
            in Active Markets      Significant Other  
            for Identical      Observable  
     Total      Assets (Level 1)      Inputs (Level 2)  

March 31, 2013

        

Cash equivalents - money-market funds

   $ 1,291       $ —         $ 1,291   

Registered investment companies (1)

   $ 5,141       $ 5,141       $ —     

December 31, 2012

        

Cash equivalents - money-market funds

   $ 760       $ —         $ 760   

Registered investment companies (1)

   $ 4,883       $ 4,883       $ —     

 

(1) Registered investment companies are classified as available-for-sale securities and are valued using quoted prices in active markets multiplied by the number of shares owned.

The Company has not elected to carry its long-term debt at fair value. The carrying value of the long-term debt represents amortized cost. The Company assesses the fair value of its long-term debt 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 Company’s current credit rating and spreads applicable to the Company. The fair value of the long-term debt would be a Level 2 liability if the long-term debt was measured at fair value on the condensed consolidated balance sheets. The following table summarizes the carrying value and estimated fair value of the long-term debt as of March 31, 2013 and December 31, 2012, respectively:

 

     2013      2012  
     Carrying
Value
     Estimated
Fair Value
     Carrying
Value
     Estimated
Fair Value
 

Financial instrument not carried at fair value:

           

Long-term debt

   $ 1,450,446       $ 1,584,482       $ 1,461,425       $ 1,575,950   

 

8


Table of Contents

5. Acquisitions:

2012 Acquisitions

On December 20, 2012, the Company acquired the net assets of Insurance Risk Management Solutions (“IRMS”). IRMS provided integrated property risk assessment technology underlying one of the Company’s geographic information system (“GIS”) underwriting solutions. At the end of 2012, the long-term contract with IRMS was expiring and precipitated a change in the business relationship. Instead of continuing forward with a new service agreement, the Company acquired IRMS as this will enable the Company to better manage, enhance and continue to use the solutions as part of its Risk Assessment segment. The Company paid a net cash purchase price of $26,422 and funded $1,000 of indemnity escrows.

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. Argus leverages its comprehensive payment data sets and provides proprietary solutions to a client base that includes credit and debit card issuers, retail banks and other consumer financial services providers, payment processors, insurance companies, and other industry stakeholders. Within the Company’s Decision Analytics segment, this acquisition enhances the Company’s 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 Company’s Decision Analytics segment, ALP further advances the Company’s position as a provider of data, crime 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 Company’s Decision Analytics segment, MediConnect further supports the Company’s objective as the leading provider of data, analytics, and decision-support solutions to the healthcare and property casualty industry.

The preliminary allocations of the purchase prices for IRMS, Argus and ALP as disclosed as of December 31, 2012 are all subject to revisions as additional information is obtained about the facts and circumstances that existed as of the acquisition dates. The revisions may have an impact on the condensed 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.

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 2012. The pro forma information for the three months ended March 31, 2012 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 2012. The unaudited pro forma information includes intangible asset amortization

 

9


Table of Contents

charges and incremental borrowing costs as a result of the acquisitions, net of related tax, estimated using the Company’s effective tax rate for continuing operations for the three months ended March 31:

 

     2012  
     (unaudited)  

Pro forma revenues

   $ 375,882   

Pro forma net income

   $ 70,183   

Pro forma basic income per share

   $ 0.43   

Pro forma diluted income per share

   $ 0.41   

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 March 31, 2013 and December 31, 2012, the current portion of the escrows amounted to $29,131 and $29,277, and the noncurrent portion of the escrow amounted to $26,007 and $26,803, 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, 2012 through March 31, 2013, both in total and as allocated to the Company’s operating segments:

 

     Risk
Assessment
     Decision
Analytics
     Total  

Goodwill at December 31, 2012 (1)

   $ 55,555       $ 1,191,904       $ 1,247,459   

Purchase accounting reclassifications

     —           802         802   
  

 

 

    

 

 

    

 

 

 

Goodwill at March 31, 2013 (1)

   $ 55,555       $ 1,192,706       $ 1,248,261   
  

 

 

    

 

 

    

 

 

 

 

(1) These balances are net of accumulated impairment charges of $3,244 that occurred prior to December 31, 2012.

The Company finalized the purchase accounting for the acquisition of MediConnect during the quarter ended March 31, 2013. The impact of the finalization of the purchase accounting for MediConnect was immaterial to the condensed consolidated statements of operations for the three months ended March 31, 2013.

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 unit’s net assets including goodwill exceeds the fair value of the reporting unit, then the Company will determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s 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.

 

10


Table of Contents

The Company’s intangible assets and related accumulated amortization consisted of the following:

 

     Weighted
Average
Useful Life
     Cost      Accumulated
Amortization
    Net  

March 31, 2013

          

Technology-based

     8 years       $ 313,590       $ (184,390   $ 129,200   

Marketing-related

     5 years         79,101         (43,890     35,211   

Contract-based

     6 years         6,555         (6,555     —     

Customer-related

     13 years         413,043         (73,726     339,317   
     

 

 

    

 

 

   

 

 

 

Total intangible assets

      $ 812,289       $ (308,561   $ 503,728   
     

 

 

    

 

 

   

 

 

 

December 31, 2012

          

Technology-based

     8 years       $ 313,590       $ (177,929   $ 135,661   

Marketing-related

     5 years         79,101         (41,079     38,022   

Contract-based

     6 years         6,555         (6,555     —     

Customer-related

     13 years         413,043         (65,791     347,252   
     

 

 

    

 

 

   

 

 

 

Total intangible assets

      $ 812,289       $ (291,354   $ 520,935   
     

 

 

    

 

 

   

 

 

 

Amortization expense related to intangible assets for the three months ended March 31, 2013 and 2012 was $17,207 and $8,587, respectively. Estimated amortization expense in future periods through 2018 and thereafter for intangible assets subject to amortization is as follows:

 

Year

   Amount  

2013

   $ 47,098   

2014

     57,168   

2015

     51,252   

2016

     49,421   

2017

     48,518   

2018 and Thereafter

     250,271   
  

 

 

 
   $ 503,728   
  

 

 

 

7. Income Taxes:

The Company’s effective tax rate for the three months ended March 31, 2013 was 36.70%, compared to the effective tax rate for the three months ended March 31, 2012 of 39.35%. The effective tax rate for the three months ended March 31, 2013 is lower than the March 31, 2012 effective tax rate primarily due to the continued execution of tax planning strategies and the benefits of the R&D tax credit. The American Taxpayer Relief Act of 2012 was enacted on January 2, 2013 which retroactively extended the R&D tax credit for the years 2012 and 2013 and enabled the Company to recognize the tax benefit of the 2012 credit in the first quarter of 2013. The difference between statutory tax rates and the Company’s effective tax rate is primarily attributable to state taxes and nondeductible share appreciation from the ISO 401(k) Savings and Employee Stock Ownership Plan (“KSOP”).

 

11


Table of Contents

8. Debt:

The following table presents short-term and long-term debt by issuance as of March 31, 2013 and December 31, 2012:

 

     Issuance      Maturity                
     Date      Date      2013      2012  

Short-term debt and current portion of long-term debt:

           

Syndicated revolving credit facility

     Various         Various       $ —         $ 10,000   

Aviva Investors senior notes:

           

6.46% Series A senior notes

     4/27/2009         4/27/2013         30,000         30,000   

New York Life senior notes:

           

5.87% Series A senior notes

     10/26/2007         10/26/2013         17,500         17,500   

Principal senior notes:

           

6.16% Series B senior notes

     8/8/2006         8/8/2013         25,000         25,000   

Prudential senior notes:

           

6.13% Series G senior notes

     8/8/2006         8/8/2013         75,000         75,000   

5.84% Series H senior notes

     10/26/2007         10/26/2013         17,500         17,500   

6.28% Series I senior notes

     4/29/2008         4/29/2013         15,000         15,000   

Capital lease obligations and other

     Various         Various         3,979         5,263   
        

 

 

    

 

 

 

Short-term debt and current portion of long-term debt

           183,979         195,263   
        

 

 

    

 

 

 

Long-term debt:

           

Verisk senior notes:

           

5.800% senior notes, less unamortized discount of $836 and $862, respectively

     4/6/2011         5/1/2021         449,164         449,138   

4.875% senior notes, less unamortized discount of $1,952 and $2,037, respectively

     12/8/2011         1/15/2019         248,048         247,963   

4.125% senior notes, less unamortized discount of $2,623 and $2,692, respectively

     9/12/2012         9/12/2022         347,377         347,308   

New York Life senior notes:

           

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   

Prudential senior notes:

           

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         4/29/2015         85,000         85,000   

6.85% Series J senior notes

     6/15/2009         6/15/2016         50,000         50,000   

Capital lease obligations and other

     Various         Various         1,878         1,753   
        

 

 

    

 

 

 

Long-term debt

           1,266,467         1,266,162   
        

 

 

    

 

 

 

Total debt

         $ 1,450,446       $ 1,461,425   
        

 

 

    

 

 

 

As of March 31, 2013, the Company has an $850,000 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. Borrowings may be used for general corporate purposes, including working capital needs and capital expenditures, acquisitions and the share repurchase program (the “Repurchase Program”). As of March 31, 2013 and December 31, 2012, the Company had $0 and $10,000, respectively, outstanding under the Credit Facility.

9. Stockholders’ Equity:

The Company has 1,200,000,000 shares of authorized Class A common stock. The 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 twelve members of the board of directors.

 

12


Table of Contents

Share Repurchase Program

The Company has authorized repurchases up to $900,000 of its common stock through its Repurchase Program and as of March 31, 2013, the Company had $122,658 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 three months ended March 31, 2013, the Company repurchased 381,800 shares of common stock as part of this program at a weighted average price of $56.40 per share. The Company utilized cash from operations to fund these repurchases. As treasury stock purchases are recorded based on trade date, the Company has included $915 in “Accounts payable and accrued liabilities” in the accompanying condensed consolidated balance sheets for those purchases that have not settled as of March 31, 2013.

Treasury Stock

As of March 31, 2013, the Company’s treasury stock consisted of 375,569,416 shares of common stock. During the three months ended March 31, 2013, the Company reissued 1,088,349 shares of common stock from the treasury shares at a weighted average price of $4.29 per share.

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 months ended March 31, 2013 and 2012:

 

     2013      2012  

Numerator used in basic and diluted EPS:

     

Net income

   $ 80,511       $ 74,601   
  

 

 

    

 

 

 

Denominator:

     

Weighted average number of common shares used in basic EPS

     168,078,589         164,836,992   

Effect of dilutive shares:

     

Potential common shares issuable from stock options and stock awards

     4,682,052         6,513,828   
  

 

 

    

 

 

 

Weighted average number of common shares and dilutive potential common shares used in diluted EPS

     172,760,641         171,350,820   
  

 

 

    

 

 

 

Basic net income per share

   $ 0.48       $ 0.45   
  

 

 

    

 

 

 

Diluted net income per share

   $ 0.47       $ 0.44   
  

 

 

    

 

 

 

The potential shares of common stock that were excluded from diluted EPS were 34,062 and 3,619 for the three months ended March 31, 2013 and 2012, respectively, because the effect of including these potential shares was anti-dilutive.

 

13


Table of Contents

Accumulated Other Comprehensive Losses

The following is a summary of accumulated other comprehensive losses as of March 31, 2013 and December 31, 2012:

 

      2013     2012  

Unrealized (losses) gains on available-for-sale securities, net of tax

   $ (158   $ 72   

Pension and postretirement unfunded liability adjustment, net of tax

     (87,403     (88,272

Unrealized foreign currency losses

     (1,366     (960
  

 

 

   

 

 

 

Accumulated other comprehensive losses

   $ (88,927   $ (89,160
  

 

 

   

 

 

 

The before tax and after tax amounts of other comprehensive income for the three months ended March 31, 2013 and 2012 are summarized below:

 

     Before Tax     Tax Benefit (Expense)     After Tax  

March 31, 2013

      

Unrealized holding loss on available-for-sale securities before reclassifications

   $ (1,018   $ 379      $ (639

Amount reclassified from accumulated other comprehensive losses (1)

     647        (238     409   
  

 

 

   

 

 

   

 

 

 

Unrealized holding loss on available-for-sale securities

     (371     141        (230
  

 

 

   

 

 

   

 

 

 

Pension and postretirement unfunded liability adjustment before reclassifications

     2,802        (1,046     1,756   

Amortization of prior service benefit reclassified from accumulated other comprehensive losses (2)

     38        (14     24   

Amortization of net actuarial loss reclassified from accumulated other comprehensive losses (2)

     (1,439     528        (911
  

 

 

   

 

 

   

 

 

 

Pension and postretirement unfunded liability adjustment

     1,401        (532     869   
  

 

 

   

 

 

   

 

 

 

Unrealized foreign currency loss

     (406     —          (406
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income

   $ 624      $ (391   $ 233   
  

 

 

   

 

 

   

 

 

 

March 31, 2012

      

Unrealized holding loss on available-for-sale securities before reclassifications

   $ (651   $ 254      $ (397

Amount reclassified from accumulated other comprehensive losses (1)

     330        (130     200   
  

 

 

   

 

 

   

 

 

 

Unrealized holding loss on available-for-sale securities

     (321     124        (197
  

 

 

   

 

 

   

 

 

 

Pension and postretirement unfunded liability adjustment before reclassifications

     3,416        (1,452     1,964   

Amortization of prior service benefit reclassified from accumulated other comprehensive losses (2)

     171        (67     104   

Amortization of net actuarial loss reclassified from accumulated other comprehensive losses (2)

     (1,879     739        (1,140
  

 

 

   

 

 

   

 

 

 

Pension and postretirement unfunded liability adjustment

     1,708        (780     928   
  

 

 

   

 

 

   

 

 

 

Unrealized foreign currency gain

     153        —          153   
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income

   $ 1,540      $ (656   $ 884   
  

 

 

   

 

 

   

 

 

 

 

14


Table of Contents

 

(1) Unrealized holding loss on available-for-sale securities, before tax, reclassified to net income is included under “Realized (loss) gain on available-for-sale securities, net” in the accompanying condensed consolidated statements of operations.
(2) Amortization of prior service benefit and amortization of net actuarial loss, before tax, reclassified to net income are included under “Cost of revenues” and “Selling, general and administrative” in the accompanying condensed consolidated statements of operations. These components are also included in the computation of net periodic (benefit) cost (see Note. 11 Pension and Postretirement Benefits for additional details).

10. Equity Compensation Plans:

All of the Company’s outstanding equity awards, including 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 (including cash) and, (vi) other share based awards. Employees, directors and consultants are eligible for awards under the Incentive Plan. The Company issued common stock under these plans from the Company’s treasury shares. Cash received from stock option exercises for the three months ended March 31, 2013 and 2012 was $12,455 and $14,589, respectively. The Company did not grant any equity awards for the three months ended March 31, 2013 and 2012. As of March 31, 2013, there were 5,733,463 shares of common stock reserved and available for future issuance under the plans.

On April 1, 2013, the Company granted 804,726 nonqualified stock options and 208,881 shares of restricted stock to key employees, and 20,445 deferred stock units to the directors of the Company. The nonqualified stock options have an exercise price equal to the closing price of the Company’s 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 Company’s 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 vesting period. The restricted stock is not assignable or transferrable until it becomes vested. The deferred stock units are valued at the closing price of the Company’s common stock on the grant date, have a one-year vesting period, and will be distributed to the directors upon retirement or other separation from the Board of Directors.

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 Company’s 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 Company’s expected annual dividend rate on the date of grant.

 

15


Table of Contents

A summary of the options outstanding under the Incentive Plan and the Option Plan as of December 31, 2012 and March 31, 2013 and changes during the interim period are presented below:

 

     Number
of Options
    Weighted
Average

Exercise  Price
     Aggregate
Intrinsic
Value
 

Outstanding at December 31, 2012

     12,573,298      $ 22.21       $ 361,653   
       

 

 

 

Exercised

     (1,031,850   $ 12.08       $ 45,642   
       

 

 

 

Cancelled or expired

     (24,160   $ 39.50      
  

 

 

      

Outstanding at March 31, 2013

     11,517,288      $ 23.08       $ 443,907   
  

 

 

      

 

 

 

Options exercisable at March 31, 2013

     8,187,899      $ 20.02       $ 340,589   
  

 

 

      

 

 

 

Options exercisable at December 31, 2012

     8,796,996      $ 18.37       $ 286,806   
  

 

 

      

 

 

 

Intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the quoted price of the Company’s common stock as of the reporting date. 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 three months ended March 31, 2013 and 2012, the Company recorded excess tax benefit from stock options exercised of $16,706 and $29,705, respectively. The Company realized $36,128 and $0 of tax benefit within the Company’s quarterly tax payments through March 31, 2013 and 2012, 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.

A summary of the status of the restricted stock awarded under the Incentive Plan as of December 31, 2012 and March 31, 2013 and changes during the interim period is presented below:

 

     Number     Weighted Average Grant
Date Fair Value Per  Share
 
   of Shares    

Outstanding at December 31, 2012

     331,013      $ 42.78   

Vested

     (49,467   $ 42.30   

Forfeited

     (4,615   $ 47.95   
  

 

 

   

Outstanding at March 31, 2013

     276,931      $ 42.98   
  

 

 

   

As of March 31, 2013, there was $31,495 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. That cost is expected to be recognized over a weighted average period of 2.29 years. As of March 31, 2013, there were 3,329,389 and 276,931 nonvested stock options and restricted stock, respectively, of which 2,824,338 and 208,371 are expected to vest. The total grant date fair value of options vested during the three months ended March 31, 2013 and 2012 was $4,530 and $4,989, respectively. The total grant date fair value of restricted stock vested during the three months ended March 31, 2013 and 2012 was $961 and $305, respectively.

 

16


Table of Contents

The Company’s employee stock purchase plan (“ESPP”) commenced on October 1, 2012 and offers eligible employees the opportunity to authorize payroll deductions of up to 20.0% of their regular base salary and up to 50.0% of their short-term incentive compensation, both of which in total may not exceed $25 in any calendar year, to purchase shares of the Company’s common stock at a 5.0% 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 5.0% or less from the fair market value, substantially all employees that meet limited employment qualifications may participate, and it incorporates no option features. During the three months ended March 31, 2013, the Company issued 7,032 shares of common stock at a discounted price of $58.54.

11. Pension and Postretirement Benefits:

The Company maintained a qualified defined benefit pension plan for certain of its employees through membership in the Pension Plan for Insurance Organizations (the “Pension Plan”), a multiple-employer trust. The Company has applied a cash balance formula to determine future benefits. 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 the previous year-end cash balance. The Company also has a non-qualified supplemental cash balance plan (“SERP”) for certain employees. The SERP is funded from the general assets of the Company. On January 12, 2012, the Company announced a hard freeze, which eliminated all future compensation and service credits, to be instituted on February 29, 2012 to all participants in the Pension Plan and SERP.

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) cost for the three months ended March 31 are summarized below:

 

     Pension Plan and SERP     Postretirement Plan  
     2013     2012     2013     2012  

Service cost

   $ —        $ 282      $ —        $ —      

Interest cost

     4,427        5,154        150        175   

Expected return on plan assets

     (7,597     (7,068     (212     —      

Curtailment gain

     —          (779     —          —      

Amortization of prior service benefit

     —          (133     (38     (38

Amortization of net actuarial loss

     1,289        1,741        150        138   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic (benefit) cost

   $ (1,881   $ (803   $ 50      $ 275   
  

 

 

   

 

 

   

 

 

   

 

 

 

Employer contributions

   $ 100      $ 6,993      $ —        $ 4,069   
  

 

 

   

 

 

   

 

 

   

 

 

 

The expected contributions to the Pension Plan, SERP and Postretirement Plan for the year ending December 31, 2013 are consistent with the amounts previously disclosed as of December 31, 2012.

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.

 

17


Table of Contents

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 Company’s Chief Executive Officer and President is identified as the CODM as defined by ASC 280-10. To align with the internal management of the Company’s business operations based on service offerings, the Company is organized into the following two operating segments, which are also the Company’s 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 Company’s combination of algorithms and analytic methods incorporates its proprietary data to generate solutions in each of these three categories. In most cases, the Company’s 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. The Company discloses revenue within this segment based on the industry vertical groupings of insurance, financial services, healthcare and specialized markets.

Risk Assessment: The Company is the leading provider of statistical, actuarial and underwriting data for the U.S. P&C insurance industry. The Company’s 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. Effective December 31, 2012, the Company combined the statistical agency and data services and actuarial services into industry-standard insurance programs within the Risk Assessment segment. There have been no changes in reportable segments in accordance with ASC 280-10 for the three months ended March 31, 2012.

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 and realized (loss) gain on available-for-sale 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 segment’s 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 Company’s consolidated revenue for the three months ended March 31, 2013 or 2012. No individual country outside of the U.S. accounted for 1.00% or more of total consolidated long-term assets as of March 31, 2013 or December 31, 2012.

 

18


Table of Contents

The following table provides the Company’s revenue and operating income by reportable segment for the three months ended March 31, 2013 and 2012, as well as reconciliations to income before income taxes for all periods presented in the accompanying condensed consolidated statements of operations:

 

     2013     2012  
     Decision
Analytics
     Risk
Assessment
    Total     Decision
Analytics
     Risk
Assessment
    Total  

Revenues

   $ 250,710       $ 152,613      $ 403,323      $ 201,532       $ 144,969      $ 346,501   

Expenses:

              

Cost of revenues (exclusive of items shown separately below)

     117,632         46,817        164,449        87,898         45,432        133,330   

Selling, general and administrative

     39,455         19,573        59,028        34,377         19,602        53,979   

Investment income and realized loss (gain) on available-for-sale securities, net

     —            145        145        —            (435     (435
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

EBITDA

     93,623         86,078        179,701        79,257         80,370        159,627   

Depreciation and amortization of fixed assets

     11,876         3,338        15,214        8,485         3,159        11,644   

Amortization of intangible assets

     17,119         88        17,207        8,587         —           8,587   

Investment income and realized (loss) gain on available-for-sale securities, net

     —            (145     (145     —            435        435   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

   $ 64,628       $ 82,797        147,425      $ 62,185       $ 76,776        138,961   
  

 

 

    

 

 

     

 

 

    

 

 

   

Investment income and realized (loss) gain on available-for-sale securities, net

          (145          435   

Interest expense

          (20,090          (16,385
       

 

 

        

 

 

 

Income before income taxes

        $ 127,190           $ 123,011   
       

 

 

        

 

 

 

Capital expenditures, including noncash purchases of fixed assets and capital lease obligations

   $ 21,190       $ 7,337      $ 28,527      $ 13,232       $ 2,700      $ 15,932   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating segment revenue by type of service is provided below for the three months ended March 31:

 

     2013      2012  

Decision Analytics:

     

Insurance

   $ 126,549       $ 116,336   

Financial services

     43,908         34,275   

Healthcare

     59,049         30,448   

Specialized markets

     21,204         20,473   
  

 

 

    

 

 

 

Total Decision Analytics

     250,710         201,532   
  

 

 

    

 

 

 

Risk Assessment:

     

Industry-standard insurance programs

     116,450         112,412   

Property-specific rating and underwriting information

     36,163         32,557   
  

 

 

    

 

 

 

Total Risk Assessment

     152,613         144,969   
  

 

 

    

 

 

 

Total revenues

   $ 403,323       $ 346,501   
  

 

 

    

 

 

 

 

19


Table of Contents

13. Related Parties:

The Company considers its stockholders that own more than 5.00% of the outstanding common stock to be related parties as defined within ASC 850, Related Party Disclosures. As of March 31, 2013 and December 31, 2012, the Company had no related parties owning more than 5.00% of its common stock.

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 Company’s 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.

Intellicorp Records, Inc. Litigation

        On April 20, 2012, the Company was served with a class action complaint filed in Alameda County Superior Court in California naming the Company’s subsidiary Intellicorp Records, Inc. (“Intellicorp”) titled Jane Roe v. Intellicorp Records, Inc. The complaint alleged violations of the Fair Credit Reporting Act (“FCRA”) and claimed that Intellicorp failed to implement reasonable procedures to assure maximum possible accuracy of the adverse information contained in the background reports, failed to maintain strict procedures 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 California Court later granted Intellicorp’s 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 “Roe Complaint”) alleging a nationwide putative class action on behalf of all persons who were the subject of a Criminal SuperSearch or other “instant” consumer background 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 this action through the date class certification is granted. The Roe Complaint 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. On February 4, 2013, the Court granted plaintiffs’ motion to amend the Roe Complaint to eliminate the named plaintiff’s individual claim for compensatory damages. This amendment did not change the breadth or scope of the request for relief sought on behalf of the proposed class. Plaintiffs later amended their class definition in their motion for class certification to include only those consumers whose (1) Criminal SuperSearch returned results, but Single County search returned no result; (2) Criminal SuperSearch returned one or more criminal charges without a disposition, but the Single County search returned a disposition other than “conviction” or “guilty” and (3) Criminal SuperSearch returned a higher level of offense (felony or misdemeanor) for one or more criminal charges than the Single County search (misdemeanor or infraction.) This amendment reduces the size of the potential class, but does not alter the time period for which the plaintiffs seek to certify a class or the scope of the request for relief sought on behalf of the proposed class. Plaintiffs’ motion for class certification was fully submitted on March 18, 2013.

On November 1, 2012, the Company was served with a complaint filed in the United States District Court for the Northern District of Ohio naming the Company’s subsidiary Intellicorp Records, Inc. titled Michael R. Thomas v. Intellicorp Records, Inc. On January 7, 2013 plaintiff served its First Amended Complaint (the “Thomas Complaint”) to add Mark A. Johnson (the plaintiff in the Johnson v. iiX matter described below) as a

 

20


Table of Contents

named plaintiff. The Thomas Complaint alleges a nationwide putative class action for violations of FCRA on behalf of “[a]ll natural persons residing in the United States (a) who were the subject of a report sold by Intellicorp to a third party, (b) that was furnished for an employment purpose, (c) that contained at least one public record of a criminal conviction or arrest, civil lien, bankruptcy or civil judgment, (d) within five years next preceding the filing of this action and during its pendency, and (e) to whom Intellicorp did not place in the United States mail postage-prepaid, on the day it furnished any part of the report, a written notice that it was furnishing the subject report and containing the name of the person that was to receive the report.” The Thomas Complaint proposes an alternative subclass as follows: “[a]ll natural persons residing in Ohio or Tennessee (a) who were the subject of a report sold by Intellicorp to a third party, (b) that was furnished for an employment purpose, (c) that contained at least one public record of a criminal conviction or arrest, civil lien, bankruptcy or civil judgment, (d) within five years next preceding the filing of this action and during its pendency, (e) when a mutual review of the record would reveal that the identity associated with the public record does not match the identity of the class member about whom the report was furnished, and (f) to whom Intellicorp did not place in the United States mail postage pre-paid, on the day it furnished any part of the report, a written notice that it was furnishing the subject report and containing the name of the person that was to receive the report.” Similar to the Roe action, the Thomas Complaint alleges that Intellicorp violated the FCRA, asserting that Intellicorp violated section 1681k(a)(1) of the FCRA because it failed to provide notice to the plaintiffs “at the time” the adverse public record information was reported. The named plaintiffs also allege individual claims under section 1681e(b) claiming that Intellicorp failed to follow reasonable procedures to assure maximum possible accuracy in the preparation of the consumer report it furnished pertaining to plaintiffs. The Thomas Complaint 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 compensatory and punitive damages on behalf of the named plaintiffs.

iiX Litigation

On January 3, 2013 the Company received service of a complaint filed in the United States District Court for the Southern District of Ohio naming the Company’s subsidiary Insurance Information Exchange (“iiX”) titled Mark A. Johnson v. Insurance Information Exchange, LLC (the “Johnson Complaint”) . The Johnson Complaint alleges a nationwide putative class action on behalf of “[a]ll natural persons residing in the United States who were the subject of a consumer report prepared by iiX for employment purposes within five (5) years prior to the filing of this Complaint and to whom iiX did not provide notice of the fact that public record information which is likely to have an adverse effect upon the consumer’s ability to obtain employment, is being reported by iiX, together with the name and address of the person to whom such information is being reported at the time such public record information is reported to the user of such consumer report.” Similar to the Thomas matter, the Johnson Complaint alleges violations of section 1681k(a) of the FCRA claiming that iiX failed to notify customers contemporaneously that criminal record information was provided to a prospective employer and failed to maintain strict procedures to ensure that the information reported is complete and up to date. The Johnson Complaint 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.

At this time, it is not possible to determine the ultimate resolution of, or estimate the liability related to these matters.

15. Condensed Consolidated Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries

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

 

21


Table of Contents

of the Parent Company on a combined basis, as of March 31, 2013 and December 31, 2012 and for the three months ended March 31, 2013 and 2012. 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.

 

22


Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)

As of March 31, 2013

 

     Verisk
Analytics, Inc.
     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminating
Entries
    Consolidated  
     (In thousands)  
ASSETS              

Current assets:

             

Cash and cash equivalents

   $ 128       $ 174,678       $ 92,552       $ —         $ 267,358   

Available-for-sale securities

     —            5,141         —            —           5,141   

Accounts receivable, net

     —            134,589         56,328         —           190,917   

Prepaid expenses

     —            28,576         3,379         —           31,955   

Deferred income taxes, net

     —            375         10,088         —           10,463   

Income taxes receivable

     5,013         21,534         —            (11,467     15,080   

Intercompany receivables

     478,484         266,962         214,382         (959,828     —      

Other current assets

     12,011         11,810         7,808         —           31,629   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     495,636         643,665         384,537         (971,295     552,543   

Noncurrent assets:

             

Fixed assets, net

     —            138,054         29,075         —           167,129   

Intangible assets, net

     —            61,366         442,362         —           503,728   

Goodwill

     —            515,705         732,556         —           1,248,261   

Deferred income taxes, net

     —            1,570         —            (1,570     —      

Investment in subsidiaries

     1,035,980         905,221         —            (1,941,201     —      

Other assets

     13,619         30,316         751         —           44,686   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,545,235       $ 2,295,897       $ 1,589,281       $ (2,914,066   $ 2,516,347   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY              

Current liabilities:

             

Accounts payable and accrued liabilities

   $ 20,005       $ 76,796       $ 53,460       $ —         $ 150,261   

Short-term debt and current portion of long-term debt

     —            183,795         184         —           183,979   

Pension and postretirement benefits, current

     —            1,734         —            —           1,734   

Fees received in advance

     —            280,690         33,758         —           314,448   

Intercompany payables

     128,118         632,060         199,650         (959,828     —      

Income taxes payable

     —            —            11,467         (11,467     —      
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     148,123         1,175,075         298,519         (971,295     650,422   

Noncurrent liabilities:

             

Long-term debt

     1,044,588         221,848         31         —           1,266,467   

Pension and postretirement benefits

     —            37,951         —            —           37,951   

Deferred income taxes, net

     —            —            136,069         (1,570     134,499   

Other liabilities

     —            44,038         30,446         —           74,484   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,192,711         1,478,912         465,065         (972,865     2,163,823   

Total stockholders’ equity

     352,524         816,985         1,124,216         (1,941,201     352,524   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,545,235       $ 2,295,897       $ 1,589,281       $ (2,914,066   $ 2,516,347   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

23


Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEET

As of December 31, 2012

 

     Verisk
Analytics, Inc.
     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminating
Entries
    Consolidated  
     (In thousands)  
ASSETS              

Current assets:

             

Cash and cash equivalents

   $ 128       $ 35,571       $ 54,120       $ —         $ 89,819   

Available-for-sale securities

     —            4,883         —            —           4,883   

Accounts receivable, net

     —            124,212         54,218         —           178,430   

Prepaid expenses

     —            19,340         2,606         —           21,946   

Deferred income taxes, net

     —            375         10,022         —           10,397   

Income taxes receivable

     15,834         37,180         —            (7,039     45,975   

Intercompany receivables

     424,927         206,165         211,792         (842,884     —      

Other current assets

     12,008         19,124         7,977         —           39,109   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     452,897         446,850         340,735         (849,923     390,559   

Noncurrent assets:

             

Fixed assets, net

     —            126,481         27,603         —           154,084   

Intangible assets, net

     —            66,045         454,890         —           520,935   

Goodwill

     —            515,705         731,754         —           1,247,459   

Deferred income taxes, net

     —            2,584         —            (2,584     —      

Investment in subsidiaries

     946,612         904,198         —            (1,850,810     —      

Other assets

     13,896         31,801         1,602         —           47,299   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,413,405       $ 2,093,664       $ 1,556,584       $ (2,703,317   $ 2,360,336   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY              

Current liabilities:

             

Accounts payable and accrued liabilities

   $ 14,638       $ 113,512       $ 59,498       $ —         $ 187,648   

Short-term debt and current portion of long-term debt

     —            194,980         283         —           195,263   

Pension and postretirement benefits, current

     —            1,734         —            —           1,734   

Fees received in advance

     —            167,962         32,743         —           200,705   

Intercompany payables

     98,768         575,907         168,209         (842,884     —      

Income taxes payable

     —            —            7,039         (7,039     —      
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     113,406         1,054,095         267,772         (849,923     585,350   

Noncurrent liabilities:

             

Long-term debt

     1,044,408         221,706         48         —           1,266,162   

Pension and postretirement benefits

     —            41,282         —            —           41,282   

Deferred income taxes, net

     —            —            136,345         (2,584     133,761   

Other liabilities

     —            46,892         31,298         —           78,190   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,157,814         1,363,975         435,463         (852,507     2,104,745   

Total stockholders’ equity

     255,591         729,689         1,121,121         (1,850,810     255,591   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,413,405       $ 2,093,664       $ 1,556,584       $ (2,703,317   $ 2,360,336   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

24


Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)

For The Three Months Ended March 31, 2013

 

     Verisk
Analytics, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated  
     (In thousands)  

Revenues

   $ —         $ 329,026      $ 79,220      $ (4,923   $ 403,323   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

          

Cost of revenues (exclusive of items shown separately below)

     —          126,568        40,215        (2,334     164,449   

Selling, general and administrative

     —          46,897        14,720        (2,589     59,028   

Depreciation and amortization of fixed assets

     —          12,093        3,121        —          15,214   

Amortization of intangible assets

     —          4,680        12,527        —          17,207   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     —          190,238        70,583        (4,923     255,898   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     —          138,788        8,637        —          147,425   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

          

Interest expense

     (13,637     (6,448     (5     —          (20,090

Investment income

     —          —          48        —          48   

Realized loss on available-for-sale securities, net

     —          (193     —          —          (193
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (13,637     (6,641     43        —          (20,235
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before equity in net income of subsidiaries and income taxes

     (13,637     132,147        8,680        —          127,190   

Equity in net income of subsidiaries

     89,135        1,273        —          (90,408     —     

Provision for income taxes

     5,013        (46,492     (5,200     —          (46,679
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 80,511      $ 86,928      $ 3,480      $ (90,408   $ 80,511   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)

For The Three Months Ended March 31, 2012

 

     Verisk
Analytics, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated  
     (In thousands)  

Revenues

   $ —         $ 307,099      $ 43,601      $ (4,199   $ 346,501   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

          

Cost of revenues (exclusive of items shown separately below)

     —          116,339        19,372        (2,381     133,330   

Selling, general and administrative

     —          43,337        12,460        (1,818     53,979   

Depreciation and amortization of fixed assets

     —          9,551        2,093        —          11,644   

Amortization of intangible assets

     —          4,928        3,659        —          8,587   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     —          174,155        37,584        (4,199     207,540   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     —          132,944        6,017        —          138,961   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

          

Interest expense

     (9,869     (6,507     (9     —          (16,385

Investment income

     18        74        13        —          105   

Realized gain on available-for-sale securities, net

     —          330        —          —          330   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expense) income, net

     (9,851     (6,103     4        —          (15,950
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before equity in net income of subsidiary and income taxes

     (9,851     126,841        6,021        —          123,011   

Equity in net income of subsidiary

     80,836        286        —          (81,122     —     

Provision for income taxes

     3,616        (48,320     (3,706     —          (48,410
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 74,601      $ 78,807      $ 2,315      $ (81,122   $ 74,601   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

For The Three Months Ended March 31, 2013

 

     Verisk
Analytics, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated  
     (In thousands)  

Net income

   $ 80,511      $ 86,928      $ 3,480      $ (90,408   $ 80,511   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax:

          

Unrealized holding loss on available-for-sale securities

     (230     (230     —           230        (230

Unrealized foreign currency loss

     (406     (271     (385     656        (406

Pension and postretirement unfunded liability adjustment

     869        869        —           (869     869   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     233        368        (385     17        233   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 80,744      $ 87,296      $ 3,095      $ (90,391   $ 80,744   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

For The Three Months Ended March 31, 2012

 

     Verisk
Analytics, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
     Eliminating
Entries
    Consolidated  
     (In thousands)  

Net income

   $ 74,601      $ 78,807      $ 2,315       $ (81,122   $ 74,601   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income, net of tax:

           

Unrealized holding loss on available-for-sale securities

     (197     (197     —            197        (197

Unrealized foreign currency gain

     153        152        141         (293     153   

Pension and postretirement unfunded liability adjustment

     928        928        —            (928     928   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total other comprehensive income

     884        883        141         (1,024     884   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 75,485      $ 79,690      $ 2,456       $ (82,146   $ 75,485   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

27


Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)

For The Three Months Ended March 31, 2013

 

     Verisk
Analytics, Inc.
     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated  
     (In thousands)  

Net cash provided by operating activities

   $ —         $ 150,329      $ 40,928      $ —        $ 191,257   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

           

Repayments received from other subsidiaries

     —            7,439        7,439        (14,878     —      

Advances provided to other subsidiaries

     —            (3,000     —           3,000        —      

Purchases of fixed assets

     —            (23,069     (4,996     —           (28,065

Purchases of available-for-sale securities

     —            (3,747     —           —           (3,747

Proceeds from sales and maturities of available-for-sale securities

     —            3,765        —           —           3,765   

Other investing, net

     —            439        —           —           439   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     —            (18,173     2,443        (11,878     (27,608
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

           

Repayments of short-term debt, net

     —            (10,000     —           —           (10,000

Excess tax benefits from exercised stock options

     —            36,128        —           —           36,128   

Repurchase of common stock

     —            (22,130     —           —           (22,130

Proceeds from stock options exercised

     —            12,455        —           —           12,455   

Repayment of advances to other subisdiaries

     —            (7,439     (7,439     14,878        —      

Advances received from other subsidiaries

     —            —           3,000        (3,000     —      

Other financing activities, net

     —            (2,042     (115     —           (2,157
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     —            6,972        (4,554     11,878        14,296   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes

     —            (21     (385     —           (406
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Increase in cash and cash equivalents

     —            139,107        38,432        —           177,539   

Cash and cash equivalents, beginning of period

     128         35,571        54,120        —           89,819   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $  128       $ 174,678      $ 92,552      $ —        $ 267,358   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental disclosures:

           

Increase in intercompany balances from the purchase of treasury stock by Verisk funded directly by ISO

   $ 22,130       $ 22,130      $  —        $  —        $  —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Increase in intercompany balances from proceeds received by ISO related to issuance of Verisk common stock from options exercised

   $ 12,455       $ 12,455      $  —        $  —        $  —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)

For The Three Months Ended March 31, 2012

 

     Verisk
Analytics, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated  
     (In thousands)  

Net cash provided by operating activities

   $ —        $ 163,339      $ 26,274      $ —        $ 189,613   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Acquisitions, net of cash acquired of $29,387

     —          (330,777     —          —          (330,777

Purchase of non-controlling interest in non-public companies

     —          (2,000     —          —          (2,000

Escrow funding associated with acquisitions

     —          (17,000     —          —          (17,000

Repayments received from other subsidiaries

     —          93,983        —          (93,983     —     

Advances provided to other subsidiaries

     —          (32,087     —          32,087        —     

Purchases of fixed assets

     —          (13,737     (3,705     —          (17,442

Purchases of available-for-sale securities

     —          (791     —          —          (791

Proceeds from sales and maturities of available-for-sale securities

     —          898        —          —          898   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     —          (301,511     (3,705     (61,896     (367,112
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Proceeds of short-term debt, net

     —          125,000        —          —          125,000   

Repayments of advances to other subsidiaries

     (74,983     —          (19,000     93,983        —     

Advances received from other subsidiaries

     —          —          32,087        (32,087     —     

Repurchase of Class A common stock

     —          (36,792     —          —          (36,792

Proceeds from stock options exercised

     —          14,589        —          —          14,589   

Other financing activities, net

     —          (2,001     (123     —          (2,124
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in)/provided by financing activities

     (74,983     100,796        12,964        61,896        100,673   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes

     —          12        141        —          153   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Decrease)/increase in cash and cash equivalents

     (74,983     (37,364     35,674        —          (76,673

Cash and cash equivalents, beginning of period

     76,238        76,813        38,552        —          191,603   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 1,255      $ 39,449      $ 74,226      $ —        $ 114,930   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental disclosures:

          

Increase in intercompany balances from the purchase of MediConnect by ISO

   $ 17,000      $ 347,777      $ 330,777      $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase in intercompany balances from the purchase of treasury stock by Verisk funded directly by ISO

   $ 36,792      $ 36,792      $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase in intercompany balances from proceeds received by ISO related to issuance of Verisk common stock from options exercised

   $ 14,589      $ 14,589      $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our historical financial statements and the related notes included in our annual report on Form 10-K, or 2012 10-K, dated and filed with the Securities and Exchange Commission on February 26, 2013. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in or implied by any of the forward-looking statements as a result of various factors, including but not limited to those listed under “Risk Factors” and “Special Note Regarding Forward Looking Statements” in our 2012 10-K.

We enable risk-bearing businesses to better understand and manage their risks. We provide value to our customers by supplying proprietary data that, combined with our analytic methods, creates embedded decision support solutions. We are the largest aggregator and provider of data pertaining to U.S. property and casualty, or P&C, insurance risks. We offer solutions for detecting fraud in the U.S. P&C insurance, 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.

Our customers use our solutions to make better risk decisions with greater efficiency and discipline. We refer to these products and services as “solutions” due to the integration among our products and the flexibility that enables our customers to purchase components or the comprehensive package of products. These solutions take various forms, including data, statistical models or tailored analytics, all designed to allow our clients to make more logical decisions. We believe our solutions for analyzing risk positively impact our customers’ revenues and help them better manage their costs.

We organize our business in two segments: Risk Assessment and Decision Analytics. Our Risk Assessment segment provides statistical, actuarial and underwriting data for the U.S. P&C insurance industry. Our Risk Assessment segment revenues represented approximately 38% and 42% of our revenues for three months ended March 31, 2013 and 2012, respectively. Our Decision Analytics segment provides solutions to our customers within four vertical market-related groupings of insurance, financial services, healthcare, and specialized markets. Our Decision Analytics segment revenues represented approximately 62% and 58% of our revenues for three months ended March 31, 2013 and 2012, respectively.

Executive Summary

Key Performance Metrics

We believe our business’s ability to generate recurring revenue and positive cash flow is the key indicator of the successful execution of our business strategy. We use year over year revenue growth and EBITDA margin as metrics to measure our performance. EBITDA and EBITDA margin are non-GAAP financial measures within the meaning of Regulation G under the Securities Exchange Act of 1934 (See footnote 1 within the Condensed Consolidated Results of Operations section of Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations).

Revenue growth. We use year over year revenue growth as a key performance metric. We assess revenue growth based on our ability to generate increased revenue through increased sales to existing customers, sales to new customers, sales of new or expanded solutions to existing and new customers, and strategic acquisitions of new businesses.

EBITDA margin. We use EBITDA margin as a metric to assess segment performance and scalability of our business. We assess EBITDA margin based on our ability to increase revenues while controlling expense growth.

Revenues

We earn revenues through subscriptions, long-term agreements and on a transactional basis. Subscriptions for our solutions are generally paid in advance of rendering services either quarterly or in full upon commencement of the subscription period, which is usually for one year and automatically renewed each year.

 

30


Table of Contents

As a result, the timing of our cash flows generally precedes our recognition of revenues and income and our cash flow from operations tends to be higher in the first quarter as we receive subscription payments. Examples of these arrangements include subscriptions that allow our customers to access our standardized coverage language, our claims fraud database or our actuarial services throughout the subscription period. For our subscriptions arrangements, in general, we experience minimal revenue seasonality within the business. Our long-term agreements are generally for periods of three to five years. We recognize revenue from subscriptions ratably over the term of the subscription and most long-term agreements are recognized ratably over the term of the agreement.

Certain of our solutions are also paid for by our customers on a transactional basis. For example, we have solutions that allow our customers to access fraud detection tools in the context of an individual mortgage application or loan, obtain property-specific rating and underwriting information to price a policy on a commercial building, or compare a P&C insurance, medical or workers’ compensation claim with information in our databases. For both of the three months ended March 31, 2013 and 2012, 31% and 29% of our revenues, respectively, were derived from providing transactional solutions. We earn transactional revenues as our solutions are delivered or services performed. In general, transactions are billed monthly at the end of each month.

        Approximately 88% and 87% of the revenues in our Risk Assessment segment for the three months ended March 31, 2013 and 2012, respectively, were derived from subscriptions and long-term agreements for our solutions. Our customers in this segment include most of the P&C insurance providers in the United States. Approximately 57% and 60% of the revenues in our Decision Analytics segment, for the three months ended March 31, 2013 and 2012, respectively, were derived from subscriptions and long-term agreements for our solutions. In this segment, our customer bases are within the insurance, healthcare, financial services, and specialized markets verticals.

Principal Operating Costs and Expenses

Personnel expenses are the major component of both our cost of revenues and selling, general and administrative expenses. Personnel expenses which include salaries, benefits, incentive compensation, equity compensation costs, sales commissions, employment taxes, recruiting costs, and outsourced temporary agency costs, represented 62% and 67% of our total expenses for the three months ended March 31, 2013 and 2012, respectively.

We allocate personnel expenses between two categories, cost of revenues and selling, general and administrative expenses, based on the actual costs associated with each employee. We categorize employees who maintain our solutions as cost of revenues, and all other personnel, including executive managers, sales people, marketing, business development, finance, legal, human resources, and administrative services, as selling, general and administrative expenses. A significant portion of our other operating costs, such as facilities and communications, is also either captured within cost of revenues or selling, general and administrative expenses based on the nature of the work being performed.

While we expect to grow our headcount over time to take advantage of our market opportunities, we believe that the economies of scale in our operating model will allow us to grow our personnel expenses at a lower rate than revenues. Historically, our EBITDA margin has improved because we have been able to increase revenues without a proportionate corresponding increase in expenses. However, part of our corporate strategy is to invest in new solutions which may offset margin expansion.

Cost of Revenues. Our cost of revenues consists primarily of personnel expenses. Cost of revenues also includes the expenses associated with the acquisition and verification of data, the maintenance of our existing solutions and the development and enhancement of our next-generation solutions. Our cost of revenues excludes depreciation and amortization.

 

31


Table of Contents

Selling, General and Administrative Expense. Our selling, general and administrative expenses also consist primarily of personnel costs. A portion of the other operating costs, such as facilities, insurance and communications, are also allocated to selling, general and administrative expenses based on the nature of the work being performed by the employee. Our selling, general and administrative expenses exclude depreciation and amortization.

Description of Acquisitions

As a result of the below acquisitions, our consolidated results of operations may not be comparable between periods. See Note 5 to our condensed consolidated financial statements included in this quarterly report on Form 10-Q for more information.

On December 20, 2012, we acquired the net assets of Insurance Risk Management Solutions, or IRMS. IRMS provided integrated property risk assessment technology underlying one of our GIS (geographic information system) underwriting solutions. At the end of 2012, this long-term contract (since 1992) with IRMS was expiring and precipitated a change in our business relationship. Instead of continuing forward with a new services agreement, we acquired the technology and service assets of IRMS as this will enable us to better manage, enhance and continue to use the solutions as part of our Risk Assessment segment.

On August 31, 2012 we acquired Argus Information & Advisory Services, LLC, or 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. Argus leverages its comprehensive payment data sets and provides proprietary solutions to a client base that includes credit and debit card issuers, retail banks and other consumer financial services providers, payment processors, insurance companies and other industry stakeholders. Within our Decision Analytics segment, this acquisition enhances our position as a provider of data, analytics, and decision-support solutions to financial institutions globally.

On July 2, 2012, we acquired the net assets of Aspect Loss Prevention, LLC, or ALP, a provider of loss prevention and analytic solutions to the retail, entertainment, and food industries. Within our Decision Analytics segment, this acquisition further advances our position as a provider of data, crime analytics, and decision-support solutions.

On March 30, 2012, we acquired 100% of the stock of MediConnect Global, Inc., or MediConnect, a service provider of medical record retrieval, digitization, coding, extraction, and analysis. Within our Decision Analytics segment, MediConnect further supports our objective to be the leading provider of data, analytics, and decision-support solutions to the healthcare and property casualty industries.

 

32


Table of Contents

Condensed Consolidated Results of Operations

 

     Three Months Ended March 31,     Percentage
Change
 
     2013     2012    
     (In thousands, except for share and per
share data)
       

Statement of income data:

      

Revenues :

      

Decision Analytics revenues

   $ 250,710      $ 201,532        24.4

Risk Assessment revenues

     152,613        144,969        5.3
  

 

 

   

 

 

   

Revenues

     403,323        346,501        16.4
  

 

 

   

 

 

   

Expenses:

      

Cost of revenues (exclusive of items shown separately below)

     164,449        133,330        23.3

Selling, general and administrative

     59,028        53,979        9.4

Depreciation and amortization of fixed assets

     15,214        11,644        30.7

Amortization of intangible assets

     17,207        8,587        100.4
  

 

 

   

 

 

   

Total expenses

     255,898        207,540        23.3
  

 

 

   

 

 

   

Operating income

     147,425        138,961        6.1

Other income/(expense):

      

Investment income

     48        105        (54.3 %) 

Realized (loss) gain on securities, net

     (193     330        (158.5 %) 

Interest expense

     (20,090     (16,385     22.6
  

 

 

   

 

 

   

Total other expense, net

     (20,235     (15,950     26.9
  

 

 

   

 

 

   

Income before income taxes

     127,190        123,011        3.4

Provision for income taxes

     (46,679     (48,410     (3.6 %) 
  

 

 

   

 

 

   

Net income

   $ 80,511      $ 74,601        7.9
  

 

 

   

 

 

   

Basic net income per share

   $ 0.48      $ 0.45        6.7
  

 

 

   

 

 

   

Diluted net income per share

   $ 0.47      $ 0.44        6.8
  

 

 

   

 

 

   

Weighted average shares outstanding:

      

Basic

     168,078,589        164,836,992        2.0
  

 

 

   

 

 

   

Diluted

     172,760,641        171,350,820        0.8
  

 

 

   

 

 

   
The financial operating data below sets forth the information we believe is useful for investors in evaluating our overall financial performance:    

Other data:

      

EBITDA (1):

      

Decision Analytics EBITDA

   $ 93,623      $ 79,257        18.1

Risk Assessment EBITDA

     86,078        80,370        7.1
  

 

 

   

 

 

   

EBITDA

   $ 179,701      $ 159,627        12.6
  

 

 

   

 

 

   

The following is a reconciliation of net income to EBITDA:

      

Net income

   $ 80,511      $ 74,601        7.9

Depreciation and amortization

     32,421        20,231        60.3

Interest expense

     20,090        16,385        22.6

Provision for income taxes

     46,679        48,410        (3.6 %) 
  

 

 

   

 

 

   

EBITDA

   $ 179,701      $ 159,627        12.6
  

 

 

   

 

 

   

 

33


Table of Contents
(1) EBITDA is the financial measure which management uses to evaluate the performance of our segments. “EBITDA” is defined as net income before interest expense, provision for income taxes, and depreciation and amortization of fixed and intangible assets. In addition, this Management’s Discussion and Analysis includes references to EBITDA margin, which is computed as EBITDA divided by revenues. See Note 12 of our condensed consolidated financial statements included in this Form 10-Q filing.

Although EBITDA is a non-GAAP financial measure, EBITDA is frequently used by securities analysts, lenders and others in their evaluation of companies. EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for an analysis of our results of operations or cash flows from operating activities reported under GAAP. Management uses EBITDA in conjunction with traditional GAAP operating performance measures as part of its overall assessment of company performance. Some of these limitations are:

 

   

EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

 

   

EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

Although depreciation and amortization are noncash charges, the assets being depreciated and amortized often will have to be replaced in the future and EBITDA does not reflect any cash requirements for such replacements; and

 

   

Other companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure.

Consolidated Results of Operations

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Revenues

Revenues were $403.3 million for the three months ended March 31, 2013 compared to $346.5 million for the three months ended March 31, 2012, an increase of $56.8 million or 16.4%. In 2012, we acquired the following companies, MediConnect, ALP, and Argus, collectively referred to as recent acquisitions, which we define as acquisitions not owned for a significant portion of both the current period and/or prior period and would therefore impact the comparability of the financial results. These recent acquisitions were within our Decision Analytics segment and provided an increase of $33.4 million in revenues for the quarter ended March 31, 2013. Excluding recent acquisitions, revenues increased $23.4 million or 6.8%, which included an increase in our Decision Analytics segment of $15.8 million or 7.8% and an increase in our Risk Assessment segment of $7.6 million or 5.3%. Revenue growth within Decision Analytics was primarily driven by strong increases in our healthcare revenue category and contributions from our insurance revenue category. Revenue growth within Risk Assessment was primarily driven by our industry-standard insurance programs. Refer to the Results of Operations by Segment within this section for further information regarding our revenues.

Cost of Revenues

Cost of revenues was $164.4 million for the three months ended March 31, 2013 compared to $133.3 million for the three months ended March 31, 2012, an increase of $31.1 million or 23.3%. Recent acquisitions accounted for an increase of $19.3 million in cost which were primarily related to salaries and employee benefits. Excluding the impact of our recent acquisitions, our cost of revenues increased $11.8 million or 8.9%. The increase was primarily due to increases in salaries and employee benefits cost of $8.9 million. Other increases include information technology expenses of $1.5 million and other general expenses of $1.4 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, or SGA, were $59.0 million for the three months ended March 31, 2013 compared to $54.0 million for the three months ended March 31, 2012, an increase of

 

34


Table of Contents

$5.0 million or 9.4%. Excluding costs associated with our recent acquisitions of $2.7 million which were primarily related to salaries and employee benefits, SGA increased $2.3 million or 4.2%. The increase was primarily due to an increase in professional fees of $1.9 million and other general expenses of $0.4 million.

Depreciation and Amortization of Fixed Assets

Depreciation and amortization of fixed assets was $15.2 million for the three months ended March 31, 2013 compared to $11.6 million for the three months ended March 31, 2012, an increase of $3.6 million or 30.7%. Depreciation and amortization of fixed assets includes depreciation of furniture and equipment, software, computer hardware, and related equipment. The majority of the increase relates to software and hardware costs to support data capacity expansion and revenue growth as well as due to recent acquisitions of $1.0 million.

Amortization of Intangible Assets

Amortization of intangible assets was $17.2 million for the three months ended March 31, 2013 compared to $8.6 million for three months ended March 31, 2012, an increase of $8.6 million or 100.4%. The increase was primarily related to amortization of intangible assets associated with recent acquisitions of $8.9 million, partially offset by $0.3 million of amortization of intangible assets associated with prior acquisitions that have been fully amortized.

Investment Income and Realized (Loss) Gain on Securities, Net

Investment income and realized (loss) gain on securities, net, was a loss of $0.1 million for the three months ended March 31, 2013 as compared to a gain of $0.4 million for the three months ended March 31, 2012, a decrease of $0.5 million.

Interest Expense

Interest expense was $20.1 million for the three months ended March 31, 2013 compared to $16.4 million for the three months ended March 31, 2012, an increase of $3.7 million or 22.6%. This increase is primarily due to the issuance of 4.125% senior notes in September 2012 in an aggregate principal amount of $350.0 million.

Provision for Income Taxes

                The provision for income taxes was $46.7 million for the three months ended March 31, 2013 compared to $48.4 million for the three months ended March 31, 2012, a decrease of $1.7 million or 3.6%. The effective tax rate was 36.7% for the three months ended March 31, 2013 compared to 39.4% for the three months ended March 31, 2012. The effective rate for the three months ended March 31, 2013 was lower than the March 31, 2012 effective tax rate primarily due to the continued execution of tax planning strategies and the benefits of the R&D tax credit. The American Taxpayer Relief Act of 2012 was enacted on January 2, 2013, which retroactively extended the R&D tax credit for the years 2012 and 2013 and enabled the Company to recognize the tax benefit of the 2012 credit in the first quarter of 2013.

EBITDA Margin

The EBITDA margin for our consolidated results was 44.6% for the three months ended March 31, 2013 compared to 46.1% for the three months ended March 31, 2012. For the three months ended March 31, 2013, the recent acquisitions mitigated our margin expansion by 1.0%. The decrease in margin is further attributed to our investment initiatives for new solution development.

 

35


Table of Contents

Results of Operations by Segment

Decision Analytics

Revenues

Revenues for our Decision Analytics segment were $250.7 million for the three months ended March 31, 2013 compared to $201.5 million for the three months ended March 31, 2012, an increase of $49.2 million or 24.4%. Recent acquisitions accounted for an increase of $33.4 million in revenues for the three months ended March 31, 2013. Excluding recent acquisitions, our Decision Analytics revenue increased $15.8 million or 7.8%.

Our revenue by category for the periods presented is set forth below:

 

     Three Months Ended
March 31,
     Percentage  
     2013      2012      Change  
     (In thousands)         

Insurance

   $ 126,549       $ 116,336         8.8

Financial services

     43,908         34,275         28.1

Healthcare

     59,049         30,448         93.9

Specialized markets

     21,204         20,473         3.6
  

 

 

    

 

 

    

Total Decision Analytics

   $ 250,710       $ 201,532         24.4
  

 

 

    

 

 

    

Our insurance revenue increased $10.3 million or 8.8%, and excluding recent acquisitions (ALP) revenue of $0.5 million within this category, our insurance revenue increased $9.7 million or 8.3%, primarily due to an increase within our underwriting solutions, catastrophe modeling services for existing customers, an increase in insurance fraud revenue, and an increase in loss quantification solutions as a result of new customers.

Our financial services revenue increased $9.6 million or 28.1%, and excluding recent acquisitions (Argus) revenue of $16.2 million within this category, our financial services revenue decreased $6.5 million or 19.1%, reflecting lower volumes within forensic and underwriting solutions due to the continued challenges in the mortgage market.

Our healthcare revenue increased $28.6 million or 93.9%, and excluding the recent acquisitions (MediConnect) revenue of $16.7 million within this category, our healthcare revenue increased $11.9 million or 39.0% primarily due to an increase in transactions within our revenue and quality intelligence solutions and due to increase in payment accuracy solutions as customer contracts were implemented.

Our specialized markets revenue increased $0.7 million or 3.6% as a result of continued penetration of existing customers within our supply chain services and weather and climate risk solutions.

Cost of Revenues

Cost of revenues for our Decision Analytics segment was $117.6 million for the three months ended March 31, 2013 compared to $87.9 million for the three months ended March 31, 2012, an increase of $29.7 million or 33.8%. Excluding the impact of recent acquisitions of $19.3 million, our cost of revenues increased by $10.4 million or 11.9%. This increase is primarily due to a net increase salary and employee benefits of $8.7 million, which includes annual salary increases and increase in headcount. Other increases include information technology costs of $1.1 million and other general expenses of $0.6 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for our Decision Analytics segment were $39.4 million for the three months ended March 31, 2013 compared to $34.4 million for the three months ended March 31, 2012, an increase of $5.0 million or 14.8%. Excluding the impact of recent acquisitions of $2.7 million, SGA increased

 

36


Table of Contents

$2.3 million or 6.7%. The increase was due to an increase in salaries and employee benefits of $0.9 million, which includes annual salary increases, medical costs, commissions, and equity compensation. Other increases included an increase in professional fees of $1.1 million and other general expenses of $0.3 million.

EBITDA Margin

The EBITDA margin for our Decision Analytics segment was 37.3% for the three months ended March 31, 2013 compared to 39.3% for the three months ended March 31, 2012. For the quarter ended March 31, 2013, the recent acquisitions mitigated our margin expansion by 0.5%. The decrease in margin is further attributed to our investment initiatives for new solution development.

Risk Assessment

Revenues

Revenues for our Risk Assessment segment were $152.6 million for the three months ended March 31, 2013 as compared to $145.0 million for the three months ended March 31, 2012, an increase of $7.6 million or 5.3%. The overall increase within this segment primarily resulted from an increase in prices derived from continued enhancements to the content of our industry-standard insurance programs’ solutions, selling expanded solutions to existing customers as well as the expiration of a revenue sharing agreement.

Our revenue by category for the periods presented is set forth below:

 

     Three Months Ended
March 31,
     Percentage
Change
 
     2013      2012     
     (In thousands)         

Industry-standard insurance programs

   $ 116,450       $ 112,412         3.6

Property-specific rating and underwriting information

     36,163         32,557         11.1
  

 

 

    

 

 

    

Total Risk Assessment

   $ 152,613       $ 144,969         5.3
  

 

 

    

 

 

    

Cost of Revenues

Cost of revenues for our Risk Assessment segment was $46.8 million for the three months ended March 31, 2013 compared to $45.4 million for the three months ended March 31, 2012, an increase of $1.4 million or 3.1%. The increase was due to an increase in salaries and employee benefits of $0.2 million, which includes annual salary increases, medical costs, commissions, and equity compensation. Other increases include an increase in information technology expenses of $0.4 million and other general expenses of $0.8 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for our Risk Assessment segment were $19.6 million for both the three months ended March 31, 2013 and 2012. The activity within SGA was primarily due to a net decrease in salaries of $0.9 million. This decrease was offset by an increase in professional fees of $0.8 million and other general expenses of $0.1 million.

EBITDA Margin

The EBITDA margin for our Risk Assessment segment was 56.4% for the three months ended March 31, 2013 compared to 55.4% for the three months ended March 31, 2012. The increase in the margin is primarily attributed to improved operating leverage in the segment as well as cost efficiencies achieved in 2012.

 

37


Table of Contents

Liquidity and Capital Resources

As of March 31, 2013 and December 31, 2012, we had cash and cash equivalents and available-for-sale securities of $272.5 million and $94.7 million, respectively. Subscriptions for our solutions are billed and generally paid in advance of rendering services either quarterly or in full upon commencement of the subscription period, which is usually for one year. Subscriptions are automatically renewed at the beginning of each calendar year. We have historically generated significant cash flows from operations. As a result of this factor, as well as the availability of funds under our $850.0 million syndicated revolving credit facility, or Credit Facility, we believe we will have sufficient cash to meet our working capital and capital expenditure needs, and to fuel our future growth plans.

We have historically managed the business with a working capital deficit due to the fact that, as described above, we offer our solutions and services primarily through annual subscriptions or long-term contracts, which are generally prepaid quarterly or annually in advance of the services being rendered. When cash is received for prepayment of invoices, we record an asset (cash and cash equivalents) on our balance sheet with the offset recorded as a current liability (fees received in advance). This current liability is deferred revenue that does not require a direct cash outflow since our customers have prepaid and are obligated to purchase the services. In most businesses, growth in revenue typically leads to an increase in the accounts receivable balance causing a use of cash as a company grows. Unlike these businesses, our cash position is favorably affected by revenue growth, which results in a source of cash due to our customers prepaying for our services.

Our capital expenditures, which include noncash purchases of fixed assets and capital lease obligations, as a percentage of revenues for the three months ended March 31, 2013 and 2012, were 7.1% and 4.6%, respectively. The expected capital expenditures for the year ending December 31, 2013, of $115.0 million, are consistent with the amounts previously disclosed as of December 31, 2012, which we expect to primarily include expenditures on our technology infrastructure and our continuing investments in developing and enhancing our solutions. Expenditures related to developing and enhancing our solutions are predominately related to internal use software and are capitalized in accordance with ASC 350-40, “ Accounting for Costs of Computer Software Developed or Obtained for Internal Use. “ We also capitalize amounts in accordance with ASC 985-20, “ Software to be Sold, Leased or Otherwise Marketed .”

We have historically used a portion of our cash for repurchases of our common stock from our stockholders. For the three months ended March 31, 2013 and 2012, we repurchased $21.