Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
OR
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o |
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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)
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Delaware
(State or other jurisdiction of incorporation
or organization)
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26-2994223
(I.R.S. Employer
Identification No.) |
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545 Washington Boulevard |
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Jersey City, NJ
(Address of principal executive offices)
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07310-1686
(Zip Code) |
(201) 469-2000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
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 o No o
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.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of
August 3, 2010 there was the following number of shares outstanding of each of the issuers
classes of common stock:
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Class |
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Shares Outstanding |
Class A common stock $.001 par value
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124,731,552 |
Class B (Series 1) common stock $.001 par value
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27,118,975 |
Class B (Series 2) common stock $.001 par value
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27,118,975 |
Verisk Analytics, Inc.
Index to Form 10-Q
Table of Contents
2
Item 1. Financial Statements
VERISK ANALYTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 2010 and December 31, 2009
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2010 |
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unaudited |
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2009 |
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(In thousands, except for share and per share data) |
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ASSETS
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Current assets: |
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Cash and cash equivalents |
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$ |
106,827 |
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$ |
71,527 |
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Available-for-sale securities |
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5,067 |
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5,445 |
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Accounts
receivable, net of allowance for doubtful accounts of $3,946 and
$3,844 (including amounts from related parties of $925 and
$1,353) in 2010 and 2009, respectively (1) |
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118,470 |
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89,436 |
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Prepaid expenses |
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21,684 |
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16,155 |
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Deferred income taxes, net |
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4,405 |
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4,405 |
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Federal and foreign income taxes
receivable |
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19,206 |
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16,721 |
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State and local income taxes receivable |
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1,869 |
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Other current assets |
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7,962 |
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21,656 |
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Total current assets |
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285,490 |
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225,345 |
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Noncurrent assets: |
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Fixed assets, net |
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86,253 |
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89,165 |
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Intangible assets, net |
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100,228 |
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108,526 |
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Goodwill |
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501,996 |
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490,829 |
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Deferred income taxes, net |
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63,920 |
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66,257 |
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State income taxes receivable |
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4,933 |
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6,536 |
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Other assets |
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10,448 |
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10,295 |
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Total assets |
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$ |
1,053,268 |
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$ |
996,953 |
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LIABILITIES AND STOCKHOLDERS EQUITY/(DEFICIT)
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Current liabilities: |
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Accounts payable and accrued liabilities |
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$ |
81,571 |
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$ |
101,401 |
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Acquisition related liabilities |
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544 |
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Short-term debt and current portion of long-term debt |
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53,935 |
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66,660 |
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Pension and postretirement benefits,
current |
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5,284 |
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5,284 |
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Fees received in advance (including amounts from related parties of $3,116 and
$439) (1) |
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182,275 |
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125,520 |
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State and local income taxes payable |
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1,414 |
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Total current liabilities |
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323,609 |
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300,279 |
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Noncurrent liabilities: |
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Long-term debt |
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476,767 |
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527,509 |
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Pension benefits |
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94,900 |
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102,046 |
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Postretirement benefits |
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23,586 |
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25,108 |
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Other liabilities |
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80,831 |
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76,960 |
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Total liabilities |
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999,693 |
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1,031,902 |
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Commitments and contingencies |
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Stockholders equity/(deficit): |
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Verisk Class A common stock, $.001 par value; 1,200,000,000 shares
authorized; 127,658,986 and 125,815,600 shares issued and 125,485,880 and
125,815,600 outstanding as of June 30, 2010 and December 31, 2009,
respectively |
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32 |
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30 |
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Verisk Class B (Series 1) common stock, $.001 par value; 400,000,000 shares
authorized; 205,637,925 shares issued and 27,118,975 outstanding as of June
30, 2010 and December 31, 2009 |
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50 |
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50 |
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Verisk Class B (Series 2) common stock, $.001 par value; 400,000,000 shares
authorized; 205,637,925 shares issued and 27,118,975 outstanding as of June
30, 2010 and December 31, 2009 |
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50 |
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50 |
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Unearned KSOP contributions |
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(1,167 |
) |
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(1,305 |
) |
Additional paid-in capital |
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690,635 |
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652,573 |
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Treasury stock, at cost, 359,211,006 and 357,037,900 shares as of June 30,
2010 and December 31, 2009 |
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(748,895 |
) |
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(683,994 |
) |
Retained earnings |
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165,054 |
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51,275 |
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Accumulated other comprehensive loss |
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(52,184 |
) |
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(53,628 |
) |
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Total stockholders equity/(deficit) |
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53,575 |
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(34,949 |
) |
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Total liabilities and stockholders equity/(deficit) |
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$ |
1,053,268 |
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$ |
996,953 |
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(1) |
|
See Note 14. Related Parties for further information. |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
VERISK ANALYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For The Three and Six Month Periods Ended June 30, 2010 and 2009
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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(In thousands, except for share and per share data) |
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Revenues (include revenues from related parties of $15,280 and
$24,056 for the three months ended June 30, 2010 and 2009 and
$30,413 and $48,143 for the six months ended June 30, 2010 and
2009, respectively) (1) |
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$ |
281,677 |
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$ |
257,916 |
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$ |
557,831 |
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$ |
503,667 |
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Expenses: |
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Cost of revenues (exclusive of items shown separately below) |
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115,000 |
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112,978 |
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229,993 |
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220,501 |
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Selling, general and administrative |
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42,638 |
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38,905 |
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80,152 |
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72,225 |
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Depreciation and amortization of fixed assets |
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9,944 |
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9,718 |
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19,873 |
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18,913 |
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Amortization of intangible assets |
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7,020 |
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|
8,464 |
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|
14,324 |
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|
16,974 |
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Total expenses |
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174,602 |
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|
170,065 |
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|
344,342 |
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328,613 |
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Operating income |
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107,075 |
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|
|
87,851 |
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|
213,489 |
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|
175,054 |
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Other income/(expense): |
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Investment income |
|
|
92 |
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|
49 |
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|
124 |
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|
92 |
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Realized gains/(losses) on securities, net |
|
|
29 |
|
|
|
33 |
|
|
|
61 |
|
|
|
(365 |
) |
Interest expense |
|
|
(8,445 |
) |
|
|
(8,523 |
) |
|
|
(16,911 |
) |
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(16,677 |
) |
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Total other expense, net |
|
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(8,324 |
) |
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(8,441 |
) |
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(16,726 |
) |
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(16,950 |
) |
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|
|
|
|
|
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|
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|
|
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|
Income before income taxes |
|
|
98,751 |
|
|
|
79,410 |
|
|
|
196,763 |
|
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|
158,104 |
|
Provision for income taxes |
|
|
(40,347 |
) |
|
|
(33,471 |
) |
|
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(82,984 |
) |
|
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(67,250 |
) |
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|
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Net income |
|
$ |
58,404 |
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$ |
45,939 |
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$ |
113,779 |
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$ |
90,854 |
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Basic net income per share of Class A and Class B (2): |
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$ |
0.32 |
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$ |
0.27 |
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$ |
0.63 |
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$ |
0.52 |
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Diluted net income per share of Class A and Class B (2): |
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$ |
0.31 |
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$ |
0.26 |
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$ |
0.60 |
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$ |
0.50 |
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Weighted average shares outstanding: |
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|
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|
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|
|
|
|
|
|
|
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Basic (2) |
|
|
180,492,106 |
|
|
|
172,887,331 |
|
|
|
180,272,828 |
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|
|
173,409,800 |
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|
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|
|
|
|
|
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|
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Diluted (2) |
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|
189,541,893 |
|
|
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179,824,479 |
|
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189,498,324 |
|
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|
180,204,300 |
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|
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(1) |
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See Note 14. Related Parties for further information. |
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(2) |
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All share and per share data throughout this report has been adjusted to reflect a
fifty-for-one stock split. See Note 1 for further information. |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
VERISK ANALYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY/(DEFICIT)
(UNAUDITED)
For The
Year Ended December 31, 2009 and The Six Months Ended June 30, 2010
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(Accumulated |
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Accumulated |
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Total |
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Common Stock Issued |
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Unearned |
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Additional |
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Deficit)/ |
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Other |
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Stockholders |
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Verisk |
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Verisk |
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|
KSOP |
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Paid-in |
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Treasury |
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Retained |
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Comprehensive |
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(Deficit)/ |
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Verisk Class A |
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|
ISO Class B |
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Class B (Series 1) |
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Class B (Series 2) |
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Par Value |
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Contributions |
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Capital |
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Stock |
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Earnings |
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Loss |
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Equity |
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(In thousands, except for share data) |
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Balance, January 1, 2009 |
|
|
|
|
|
|
500,225,000 |
|
|
|
|
|
|
|
|
|
|
$ |
100 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(683,994 |
) |
|
$ |
(243,495 |
) |
|
$ |
(82,434 |
) |
|
$ |
(1,009,823 |
) |
Comprehensive income: |
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|
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Net income |
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|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
126,614 |
|
|
|
|
|
|
|
126,614 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
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|
|
|
|
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|
|
|
|
|
|
|
|
28,806 |
|
|
|
28,806 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
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|
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|
|
|
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|
155,420 |
|
Increase in redemption value of ISO Class
A common stock |
|
|
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|
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|
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|
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|
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|
(272,428 |
) |
|
|
|
|
|
|
(272,428 |
) |
Conversion of ISO Class B common
stock upon corporate reorganization
(Note 10) |
|
|
88,949,150 |
|
|
|
(500,225,000 |
) |
|
|
205,637,925 |
|
|
|
205,637,925 |
|
|
|
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Conversion of ISO Class A redeemable
common stock upon corporate
reorganization (Note 9) |
|
|
34,768,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 |
|
|
|
(1,305 |
) |
|
|
624,282 |
|
|
|
|
|
|
|
440,584 |
|
|
|
|
|
|
|
1,063,591 |
|
KSOP shares earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
725 |
|
Stock options exercised (including tax
benefit of $18,253) |
|
|
2,097,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
23,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,348 |
|
Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
|
125,815,600 |
|
|
|
|
|
|
|
205,637,925 |
|
|
|
205,637,925 |
|
|
$ |
130 |
|
|
$ |
(1,305 |
) |
|
$ |
652,573 |
|
|
$ |
(683,994 |
) |
|
$ |
51,275 |
|
|
$ |
(53,628 |
) |
|
$ |
(34,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,779 |
|
|
|
|
|
|
|
113,779 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,444 |
|
|
|
1,444 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,223 |
|
Treasury stock acquired Class A
(2,173,106 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64,901 |
) |
|
|
|
|
|
|
|
|
|
|
(64,901 |
) |
KSOP shares earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138 |
|
|
|
5,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,729 |
|
Stock options exercised (including tax
benefit of $20,507) |
|
|
2,346,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
37,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,240 |
|
Net share settlement of taxes upon
exercise of stock options |
|
|
(503,043 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,051 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,051 |
) |
Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2010 |
|
|
127,658,986 |
|
|
|
|
|
|
|
205,637,925 |
|
|
|
205,637,925 |
|
|
$ |
132 |
|
|
$ |
(1,167 |
) |
|
$ |
690,635 |
|
|
$ |
(748,895 |
) |
|
$ |
165,054 |
|
|
$ |
(52,184 |
) |
|
$ |
53,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
VERISK ANALYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The Six Months Ended June 30, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
113,779 |
|
|
$ |
90,854 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization of fixed assets |
|
|
19,873 |
|
|
|
18,913 |
|
Amortization of intangible assets |
|
|
14,324 |
|
|
|
16,974 |
|
Amortization of debt issuance costs |
|
|
789 |
|
|
|
|
|
Allowance for doubtful accounts |
|
|
526 |
|
|
|
509 |
|
KSOP compensation expense |
|
|
5,729 |
|
|
|
10,738 |
|
Stock-based compensation |
|
|
10,284 |
|
|
|
5,515 |
|
Non-cash charges associated with performance based appreciation awards |
|
|
792 |
|
|
|
1,385 |
|
Realized (gains)/losses on securities, net |
|
|
(61 |
) |
|
|
365 |
|
Deferred income taxes |
|
|
507 |
|
|
|
(199 |
) |
Other operating |
|
|
30 |
|
|
|
30 |
|
Loss on disposal of assets |
|
|
38 |
|
|
|
308 |
|
Non-cash charges associated with lease termination |
|
|
|
|
|
|
196 |
|
Excess tax benefits from exercised stock options |
|
|
(10,036 |
) |
|
|
(658 |
) |
Changes in assets and liabilities, net of effects from acquisitions: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(28,694 |
) |
|
|
(20,256 |
) |
Prepaid expenses and other assets |
|
|
(5,504 |
) |
|
|
(3,964 |
) |
Federal and foreign income taxes |
|
|
17,929 |
|
|
|
9,538 |
|
State and local income taxes |
|
|
(1,387 |
) |
|
|
(3,901 |
) |
Accounts payable and accrued liabilities |
|
|
(18,327 |
) |
|
|
(11,196 |
) |
Acquisition related liabilities |
|
|
|
|
|
|
(300 |
) |
Fees received in advance |
|
|
55,959 |
|
|
|
60,452 |
|
Other liabilities |
|
|
(3,316 |
) |
|
|
9,226 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
173,034 |
|
|
|
184,529 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired of $1,556 and $9,477 |
|
|
(6,386 |
) |
|
|
(51,618 |
) |
Earnout payments |
|
|
|
|
|
|
(78,100 |
) |
Proceeds from release of acquisition related escrows |
|
|
283 |
|
|
|
|
|
Escrow funding associated with acquisitions |
|
|
(1,500 |
) |
|
|
(7,000 |
) |
Purchases of available-for-sale securities |
|
|
(262 |
) |
|
|
(398 |
) |
Proceeds from sales and maturities of available-for-sale securities |
|
|
511 |
|
|
|
628 |
|
Purchases of fixed assets |
|
|
(15,570 |
) |
|
|
(16,195 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(22,924 |
) |
|
|
(152,683 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
|
|
|
|
|
80,000 |
|
Proceeds from issuance of short-term debt, net |
|
|
|
|
|
|
40,000 |
|
Redemption of ISO Class A common stock |
|
|
|
|
|
|
(38,282 |
) |
Repurchase of Verisk Class A common stock |
|
|
(62,266 |
) |
|
|
|
|
Net share
settlement of taxes upon exercise of stock options |
|
|
(15,051 |
) |
|
|
|
|
Repayment of current portion of long-term debt |
|
|
|
|
|
|
(100,000 |
) |
Repayment of short-term debt, net |
|
|
(64,069 |
) |
|
|
(2,659 |
) |
Excess tax benefits from exercised stock options |
|
|
10,036 |
|
|
|
658 |
|
Proceeds from stock options exercised |
|
|
16,733 |
|
|
|
1,126 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(114,617 |
) |
|
|
(19,157 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes |
|
|
(193 |
) |
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
35,300 |
|
|
|
12,777 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
71,527 |
|
|
|
33,185 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
106,827 |
|
|
$ |
45,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
Taxes paid |
|
$ |
63,545 |
|
|
$ |
60,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
16,299 |
|
|
$ |
16,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Repurchase of Verisk Class A common stock included in accounts payable and
accrued
liabilities |
|
$ |
2,635 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of ISO Class A common stock used to fund the exercise of stock options |
|
$ |
|
|
|
$ |
456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability established on date of acquisition |
|
$ |
(732 |
) |
|
$ |
(8,744 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations |
|
$ |
602 |
|
|
$ |
1,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures included in accounts payable and accrued liabilities |
|
$ |
668 |
|
|
$ |
619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in goodwill due to finalization of acquisition related liabilities |
|
$ |
|
|
|
$ |
(4,300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in goodwill due to acquisition related escrow distributions |
|
$ |
6,996 |
|
|
$ |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
VERISK ANALYTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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, creates embedded decision support
solutions. The Company is one of the largest aggregators and providers of data pertaining to
property and casualty (P&C) or P&C insurance risks in the United States of America (U.S.). The
Company offers solutions for detecting fraud in the U.S. P&C insurance, mortgage and healthcare
industries and sophisticated methods to predict and quantify loss in diverse contexts ranging from
natural catastrophes 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 on May 23, 2008 to serve as the parent holding company of Insurance
Services Office, Inc. (ISO) upon completion of the initial public offering (IPO). 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. On October 6, 2009, ISO effected a corporate reorganization whereby the Class A and
Class B common stock of ISO were exchanged by the current stockholders for the common stock of
Verisk on a one-for-one basis. Verisk immediately thereafter effected a fifty-for-one stock split
of its Class A and Class B common stock and equally sub-divided the Class B common stock into two
new series of stock, Verisk Class B (Series 1) and Verisk Class B (Series 2). All share and per share information in the condensed consolidated
financial statements gives effect to the fifty-for-one stock split that occurred immediately after
the reorganization.
On October 9, 2009, the Company completed its IPO. Upon completion of the IPO, the selling
stockholders sold 97,995,750 shares of Class A common stock of Verisk, which included the
12,745,750 over-allotment option, at the IPO price of $22.00 per share. The Company did not
receive any proceeds from the sales of common stock in the offering. Verisk trades on the NASDAQ
Global Select Market under the ticker symbol VRSK.
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.
The condensed consolidated financial statements as of June 30, 2010 and for the three and six
month periods ended June 30, 2010 and 2009, in the opinion of management, include all adjustments,
consisting of normal recurring accruals, to present fairly the Companys financial position,
results of operations and cash flows. The operating results for the three and six month periods
ended June 30, 2010 are not necessarily indicative of the results to be expected for the full year.
The condensed consolidated financial statements and related notes for the three and six month
periods ended June 30, 2010 have been prepared on the same basis as and should be read in
conjunction with our annual report on Form 10-K for the year ended December 31, 2009. 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
7
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures
(ASU No. 2010-06). ASU No. 2010-06 provides guidance on improving disclosures on fair value
measurements, such as the transfers between Level 1, Level 2 and Level 3 inputs and the
disaggregated activity in the rollforward for Level 3 fair value measurements. ASU No. 2010-06 is
effective for interim and annual reporting periods beginning after December 15, 2009, except for
the disclosures about the disaggregated activity in the rollforward for Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010
and for interim periods within those fiscal periods. The adoption of the portion of ASU No.
2010-06 that discusses the transfers between Level 1, Level 2 and Level 3 inputs, effective January
1, 2010, did not have a material impact on the Companys consolidated financial statements. The
Company is currently evaluating the impact of the portion of ASU No. 2010-06 that discusses the
disclosures about the disaggregated activity in the rollforward for Level 3 fair value measurements
on its consolidated financial statements.
In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements
(ASU No. 2009-13). ASU No. 2009-13 establishes the accounting and reporting guidance for
arrangements under which the vendor will perform multiple revenue-generating activities.
Specifically, ASU No. 2009-13 addresses how to separate deliverables and how to measure and
allocate arrangement consideration to one or more units of accounting. ASU No. 2009-13 is
effective prospectively for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010. Early adoption is permitted. The Company has elected
not to early adopt and is currently evaluating the impact of ASU No. 2009-13 on its consolidated
financial statements.
3. Investments:
The following is a summary of available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Adjusted |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies |
|
$ |
4,342 |
|
|
$ |
716 |
|
|
$ |
|
|
|
$ |
5,058 |
|
Equity securities |
|
|
14 |
|
|
|
|
|
|
|
(5 |
) |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
$ |
4,356 |
|
|
$ |
716 |
|
|
$ |
(5 |
) |
|
$ |
5,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies |
|
$ |
4,530 |
|
|
$ |
905 |
|
|
$ |
|
|
|
$ |
5,435 |
|
Equity securities |
|
|
14 |
|
|
|
|
|
|
|
(4 |
) |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
$ |
4,544 |
|
|
$ |
905 |
|
|
$ |
(4 |
) |
|
$ |
5,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
addition to the available-for-sale securities above, the Company has
two investments in private equity securities 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
ASC 323-10-25, The Equity Method of Accounting for Investments in Common Stock (ASC
323-10-25). At June 30, 2010 and December 31, 2009, the carrying value of such securities was
$3,841 for each period and have been included in Other assets in the accompanying condensed
consolidated balance sheets.
8
4. Fair Value Measurements:
Certain assets and liabilities of the Company are reported at fair value in the accompanying
condensed consolidated balance sheets. Such assets and liabilities include amounts for both
financial and non-financial instruments. To increase consistency and comparability of assets and
liabilities recorded at fair value, ASC 820-10, Fair Value Measurements (ASC 820-10) establishes
a three-level fair value hierarchy to prioritize the inputs to valuation techniques used to measure
fair value. ASC 820-10 requires disclosures detailing the extent to which companies measure assets
and liabilities at fair value, the methods and assumptions used to measure fair value and the
effect of fair value measurements on earnings. In accordance with ASC 820-10, the Company applied
the following fair value hierarchy:
|
|
|
Level 1
|
|
Assets or liabilities for which the identical item is traded on an active exchange,
such as publicly-traded instruments. |
|
|
|
Level 2
|
|
Assets and liabilities valued based on observable market data for similar
instruments. |
|
|
|
Level 3
|
|
Assets or liabilities for which significant valuation assumptions are not readily
observable in the market; instruments valued based on the best available data, some of
which is internally-developed, and considers risk premiums that a market participant would
require. |
The following tables provide information for such assets and liabilities as of June 30, 2010
and December 31, 2009. The fair values of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities, acquisitions related liabilities, and short-term debt approximate
their carrying amounts because of the short-term maturity of these instruments. The fair value of
the Companys long-term debt was estimated at $579,162 and $578,804 as of June 30, 2010 and
December 31, 2009, respectively, and is based on an estimate of interest rates available to the
Company for debt with similar features, the Companys current credit rating and spreads applicable
to the Company. These assets and liabilities are not presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active Markets |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
|
for Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
Total |
|
|
Assets (Level 1) |
|
|
Inputs (Level 2) |
|
|
Inputs (Level 3) |
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies (1) |
|
$ |
5,058 |
|
|
$ |
5,058 |
|
|
$ |
|
|
|
$ |
|
|
Equity securities (1) |
|
$ |
9 |
|
|
$ |
9 |
|
|
$ |
|
|
|
$ |
|
|
Contingent consideration under ASC 805 (2) |
|
$ |
(3,853 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(3,853 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies (1) |
|
$ |
5,435 |
|
|
$ |
5,435 |
|
|
$ |
|
|
|
$ |
|
|
Equity securities (1) |
|
$ |
10 |
|
|
$ |
10 |
|
|
$ |
|
|
|
$ |
|
|
Cost based investment recorded at fair value on
a non-recurring basis (3) |
|
$ |
1,809 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,809 |
|
Contingent consideration under ASC 805 (2) |
|
$ |
(3,344 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(3,344 |
) |
|
|
|
(1) |
|
Registered investment companies and equity securities are classified as available-for-sale
securities and are valued using quoted prices in active markets multiplied by the number of
shares owned. |
|
(2) |
|
Under ASC 805 Business Combinations (ASC 805), contingent consideration is recognized at
fair value at the end of each reporting period for acqusitions after January 1, 2009.
Subsequent changes in the fair value of contingent consideration is recorded in the statement
of operations. See Note 6 for further information regarding the 2010 and 2009 acquisitions.
For the six months ended June
30, 2010, no adjustments to the initial assessment were required. |
|
(3) |
|
Cost based investment consists of a non-controlling interest in a private equity security with
no readily determinable market value.
This investment was recorded at fair value on a non-recurring basis as a result of an
other-than-temporary impairment of $2,012 at December 31, 2009. In establishing the
estimated fair value of this investment, the Company took into consideration the financial
condition and operating results of the underlying company and other indicators of fair
values, such as fair value utilized by the Companys private equity offering. This
investment was recorded at adjusted cost as of June 30, 2010. |
9
The tables below include a rollforward of the Companys contingent consideration under ASC 805
for the three and six month periods ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, 2010 |
|
|
June 30, 2009 |
|
|
June 30, 2010 |
|
|
June 30, 2009 |
|
Beginning balance |
|
$ |
3,840 |
|
|
$ |
2,800 |
|
|
$ |
3,344 |
|
|
$ |
|
|
Acquisitions (1) |
|
|
|
|
|
|
|
|
|
|
491 |
|
|
|
2,800 |
|
Accretion on acquisition related liabilities |
|
|
13 |
|
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
3,853 |
|
|
$ |
2,800 |
|
|
$ |
3,853 |
|
|
$ |
2,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Under ASC 805, contingent consideration is recognized at fair value at the end of each
reporting period for acqusitions after January 1, 2009. Subsequent changes in the fair value of
contingent consideration is recorded in the statement of operations. See Note 6 for
further information regarding the acquisitions. |
5. Goodwill and Intangible Assets:
The following is a summary of the change in goodwill from December 31, 2009 through June 30,
2010, both in total and as allocated to the Companys operating segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk |
|
|
Decision |
|
|
|
|
|
|
Assessment |
|
|
Analytics |
|
|
Total |
|
Goodwill at December 31, 2009 (1) |
|
$ |
27,908 |
|
|
$ |
462,921 |
|
|
$ |
490,829 |
|
Current year acquisitions |
|
|
|
|
|
|
3,124 |
|
|
|
3,124 |
|
Purchase accounting reclassifications |
|
|
|
|
|
|
1,047 |
|
|
|
1,047 |
|
Finalization of acquisition related escrows |
|
|
|
|
|
|
6,996 |
|
|
|
6,996 |
|
|
|
|
|
|
|
|
|
|
|
Goodwill at June 30, 2010 (1) |
|
$ |
27,908 |
|
|
$ |
474,088 |
|
|
$ |
501,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These balances are net of accumulated impairment charges of $3,244 that occurred
prior to the periods included within the condensed consolidated financial statements. |
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. The Company completed the required annual impairment test as
of June 30, 2010, which resulted in no impairment of goodwill.
Based on the results of the impairment assessment as of June 30,
2010, the Company confirmed that the fair value of its reporting
units exceeded their respective carrying values. This testing compares the carrying
value of each reporting unit to its fair value. If the fair value of the reporting unit exceeds the
carrying value of the net assets, including goodwill assigned to that reporting unit, goodwill is
not impaired. If the carrying value of the reporting units net assets including goodwill exceeds
the fair value of the reporting unit, then the Company will determine the implied fair value of the
reporting units goodwill. If the carrying value of a reporting units goodwill exceeds its implied
fair value, then an impairment loss is recorded for the difference between the carrying amount and
the implied fair value of goodwill.
10
The Companys intangible assets and related accumulated amortization consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Useful Life |
|
Cost |
|
|
Amortization |
|
|
Net |
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology-based |
|
6 years |
|
$ |
177,234 |
|
|
$ |
(127,384 |
) |
|
$ |
49,850 |
|
Marketing-related |
|
4 years |
|
|
36,124 |
|
|
|
(26,725 |
) |
|
|
9,399 |
|
Contract-based |
|
6 years |
|
|
6,555 |
|
|
|
(6,190 |
) |
|
|
365 |
|
Customer-related |
|
12 years |
|
|
70,279 |
|
|
|
(29,665 |
) |
|
|
40,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
$ |
290,192 |
|
|
$ |
(189,964 |
) |
|
$ |
100,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Useful Life |
|
Cost |
|
|
Amortization |
|
|
Net |
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology-based |
|
6 years |
|
$ |
174,973 |
|
|
$ |
(117,986 |
) |
|
$ |
56,987 |
|
Marketing-related |
|
4 years |
|
|
35,104 |
|
|
|
(24,690 |
) |
|
|
10,414 |
|
Contract-based |
|
6 years |
|
|
6,555 |
|
|
|
(6,092 |
) |
|
|
463 |
|
Customer-related |
|
12 years |
|
|
67,534 |
|
|
|
(26,872 |
) |
|
|
40,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
$ |
284,166 |
|
|
$ |
(175,640 |
) |
|
$ |
108,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated amortization expense related to intangible assets for the three months ended June
30, 2010 and 2009, was $7,020 and $8,464, respectively. Consolidated amortization
expense related to intangible assets for the six months ended June 30, 2010 and 2009, was
$14,324 and $16,974, respectively. Estimated amortization expense in future periods
through 2014 and thereafter for intangible assets subject to amortization is as follows:
|
|
|
|
|
Year |
|
Amount |
|
2010 |
|
$ |
13,827 |
|
2011 |
|
$ |
22,234 |
|
2012 |
|
$ |
18,250 |
|
2013 |
|
$ |
12,087 |
|
2014 |
|
$ |
5,036 |
|
Thereafter |
|
$ |
28,794 |
|
6. Acquisitions:
2010 Acquisitions
On February 26, 2010, the Company acquired 100% of the stock of Strategic Analytics, Inc.
(Strategic Analytics), a privately owned provider of credit risk and capital management solutions
to consumer and mortgage lenders, for a net cash purchase price of approximately $6,386 and the
Company funded $1,500 of indemnity escrows. Within the Decision Analytics segment, the Company
believes Strategic Analytics solutions and application set will allow customers to take advantage
of state-of-the-art loss forecasting, stress testing, and economic capital requirement tools to
better understand and forecast the risk associated within their credit portfolios.
11
The preliminary allocation of purchase price resulted in the following:
|
|
|
|
|
|
|
Purchase Price |
|
|
|
Allocation |
|
Accounts receivable |
|
$ |
866 |
|
Current assets |
|
|
56 |
|
Fixed assets |
|
|
159 |
|
Intangible assets |
|
|
6,026 |
|
Goodwill |
|
|
3,124 |
|
|
|
|
|
Total assets acquired |
|
|
10,231 |
|
|
Deferred income taxes |
|
|
732 |
|
Current liabilities |
|
|
1,122 |
|
Other liabilities |
|
|
1,991 |
|
|
|
|
|
Total liabilities assumed |
|
|
3,845 |
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
6,386 |
|
|
|
|
|
Other liabilities consist of a $1,500 payment due to the sellers of Strategic Analytics,
assuming no pre-acquisition indemnity claims arise subsequent to the acquisition date through
December 31, 2012, which was funded into escrow at close. The remaining balance is contingent
consideration of $491, which was estimated as of the acquisition date by averaging the probability
of achieving each of the specific predetermined EBITDA of the acquired
entity, and revenue targets, which could result in
a payment ranging from $0 to $18,000 for the fiscal year ending December 31, 2011. The terms of
the contingent consideration include a range that allows the sellers to benefit from the potential
growth of Strategic Analytics; however, the amount recorded as of the purchase allocation date
represents managements best estimate based on the prior financial results as well as managements
current best estimate of the future growth of revenue and EBITDA. Subsequent changes in the fair
value of contingent consideration are recorded in the statement of operations.
The amounts assigned to intangible assets by type for current year acquisitions are summarized in
the table below:
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
Useful Life |
|
Total |
|
Technology-based |
|
7 years |
|
$ |
2,261 |
|
Marketing-related |
|
5 years |
|
|
1,020 |
|
Customer-related |
|
10 years |
|
|
2,745 |
|
|
|
|
|
|
|
Total intangible assets |
|
8 years |
|
$ |
6,026 |
|
|
|
|
|
|
|
2009 Acquisitions
On October 30, 2009, the Company acquired the net assets of Enabl-u Technology Corporation,
Inc. (Enabl-u), a privately owned provider of data management, training and communication
solutions to companies with regional, national or global work forces, for a net cash purchase price
of $2,502 and the Company funded $136 of indemnity escrows and $100 of contingency escrows. The
Company believes this acquisition will enhance the Companys ability to provide solutions for
customers to measure loss prevention and improve asset management through the use of software and
software services.
On July 24, 2009, the Company acquired the net assets of TierMed Systems LLC (TierMed), a
privately owned provider of Healthcare Effectiveness Data and Information Set (HEDIS) solutions
to healthcare organizations that have HEDIS or quality-reporting needs, for a net cash purchase
price of $7,230 and the Company funded $400 of indemnity escrows. The Company believes this
acquisition will enhance the Companys ability to provide solutions for customers to measure and
improve healthcare quality and financial performance through the use of software and software
services.
On January 14, 2009, the Company acquired 100% of the stock of D2 Hawkeye (D2), a
privately-owned provider of data mining, decision support, clinical quality analysis, and risk
analysis tools for the healthcare industry, for a net cash purchase price of $51,618 and the
Company funded $7,000 of indemnity escrows. The Company believes this acquisition will enhance
the Companys position in the healthcare analytics and predictive modeling market by providing new
market, cross-sell, and diversification opportunities for the Companys expanding healthcare
solutions.
12
The total net cash purchase price of these three acquisitions was $61,350 and the Company
funded $7,636 of escrows, of which $7,000 and $236 was recorded in Other current assets and
Other assets, respectively, in the accompanying condensed consolidated balance sheets. The
preliminary allocation of purchase price, including working capital adjustments, resulted in
accounts receivable of $4,435, current assets of $573, fixed assets of $2,387, finite lived
intangible assets with no residual value of $25,265, goodwill of $49,776, current liabilities of
$4,879, other liabilities of $10,479, and deferred tax liabilities of $5,728. Other liabilities
consisted of $7,236 payment due to the sellers of D2 and Enabl-u at the conclusion of the escrows
funded at close, assuming no pre-acquisition indemnity claims arise subsequent to the acquisition
date, and $3,344 of contingent consideration, which was estimated as of the acquisition date by
averaging the probability of achieving each of the specific predetermined EBITDA and revenue
targets, which could result in a payment ranging from $0 to $65,700 for the fiscal year ending
December 31, 2011 for D2 and a payment ranging from $0 to $6,000 for the fiscal year ending
December 31, 2010 for TierMed. Under ASC 805, contingent consideration is recognized at fair value
at the end of each reporting period. Subsequent changes in the fair value of contingent
consideration is recorded in the statement of operations.
The amounts assigned to intangible assets by type for acquisitions during the year ended December
31, 2009 are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Useful Life |
|
|
Total |
|
Technology-based |
|
12 years |
|
$ |
9,282 |
|
Marketing-related |
|
5 years |
|
|
4,698 |
|
Customer-related |
|
8 years |
|
|
11,285 |
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
9 years |
|
$ |
25,265 |
|
|
|
|
|
|
|
|
|
The preliminary allocation of the purchase price for the 2010 and 2009 acquisitions to
intangible assets, goodwill, accrued liabilities, and the determination of an ASC 740-10-25,
Accounting for Uncertainty in Income Taxes (ASC 740-10-25), liability is subject to revisions,
which may have a material impact on the Companys consolidated financial statements. As the values
of such assets and liabilities are preliminary in nature, they are subject to adjustment as
additional information is obtained about the facts and circumstances that existed as of the
acquisition date. In accordance with ASC 805, the allocation of the purchase price will be
finalized once all information is obtained, but not to exceed one year from the acquisition date.
The value of goodwill associated with these acquisitions is currently included within the Decision
Analytics segment. The goodwill for the Enabl-u and TierMed acquisitions are expected to be
deductible for tax purposes over fifteen years. The goodwill for the D2 and Strategic Analytics
acquisitions are not deductible for tax purposes. Included within the condensed consolidated
statements of operations for the three and six month periods ended June 30, 2010 are revenues of
$796 and $890 and an operating loss of $506 and $978, associated with the Strategic Analytics
acquisition. Excluding the final resolution of contingent consideration, the Company finalized the
purchase accounting for the acquisition of D2 in the first quarter of 2010, and there have been no
adjustments since December 31, 2009. Excluding the final resolution of indemnity escrows and
contingent consideration, the Company finalized the purchase accounting for the acquisition of
TierMed in the second quarter of 2010, which resulted in an increase in goodwill of $746 and
current liabilities of $746.
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 date, as
well as a portion of the contingent payments. At June 30, 2010 and December 31, 2009, the current
portion of the escrows amounted to $6,116 and $20,142, respectively, and has been included in
Other current assets in the accompanying condensed consolidated balance sheets. During the
second quarter of 2010, the Company released $13,931 of escrows to sellers primarily related to the
D2 and Xactware acquisitions. In accordance with ASC 805, the escrows
related to the D2 acquisition were recorded within goodwill at the
time of acquisition, as those escrows were expected to be released to
the sellers. In the current period, the release of $6,935 related to
D2 was recorded as a reduction of other current assets and a
corresponding reduction in accounts payable and accrued liabilities. At June 30, 2010 and December 31, 2009,
the noncurrent portion of the escrow amounted to $1,501 and $236, respectively.
7. Income Taxes:
The Companys effective tax rate for the six months ended June 30, 2010 was 42.2% compared to
the effective tax rate for the six months ended June 30, 2009 of 42.5%. The effective rate for
the six months ended June 30, 2010 was lower due to a decrease in nondeductible expenses in 2010
versus 2009 related to the ISO 401 (k) Savings and Employee Stock Ownership Plan (KSOP). This
benefit was partially offset by a non-cash charge of $2,362 resulting from reduced tax benefits of
Medicare subsidies associated with legislative changes in the first quarter of 2010. Excluding
this charge, the effective rate for the six months ended June 30, 2010 would have been 41.0%. The
difference between statutory tax rates and the Companys effective tax rate is primarily
attributable to state taxes and nondeductible share appreciation from the KSOP.
13
The Companys effective tax rate for the three months ended June 30, 2010 was 40.9% compared
to the effective tax rate for the three months ended June 30, 2009 of 42.2%. The effective rate
for the three months ended June 30, 2010 was lower than the prior period due to lower
nondeductible expenses in 2010 related to the KSOP.
8. Debt:
The following table presents short-term and long-term debt by issuance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance |
|
Maturity |
|
June 30, |
|
|
December 31, |
|
|
|
Date |
|
Date |
|
2010 |
|
|
2009 |
|
Short-term debt and current portion of long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
Syndicated Revolving Credit Facility |
|
12/16/2009 |
|
1/19/2010 |
|
$ |
|
|
|
$ |
10,000 |
|
Syndicated Revolving Credit Facility |
|
12/23/2009 |
|
1/25/2010 |
|
|
|
|
|
|
50,000 |
|
Prudential senior notes: |
|
|
|
|
|
|
|
|
|
|
|
|
4.60% Series E senior notes |
|
6/14/2005 |
|
6/13/2011 |
|
|
50,000 |
|
|
|
|
|
Capital lease obligations |
|
Various |
|
Various |
|
|
3,650 |
|
|
|
5,488 |
|
Other |
|
Various |
|
Various |
|
|
285 |
|
|
|
1,172 |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt and current portion of long-term debt |
|
|
|
|
|
$ |
53,935 |
|
|
$ |
66,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
Prudential senior notes: |
|
|
|
|
|
|
|
|
|
|
|
|
4.60% Series E senior notes |
|
6/14/2005 |
|
6/13/2011 |
|
$ |
|
|
|
$ |
50,000 |
|
6.00% Series F senior notes |
|
8/8/2006 |
|
8/8/2011 |
|
|
25,000 |
|
|
|
25,000 |
|
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 |
|
5.84% Series H senior notes |
|
10/26/2007 |
|
10/26/2015 |
|
|
17,500 |
|
|
|
17,500 |
|
6.28% Series I senior notes |
|
4/29/2008 |
|
4/29/2013 |
|
|
15,000 |
|
|
|
15,000 |
|
6.28% Series I senior notes |
|
4/29/2008 |
|
4/29/2015 |
|
|
85,000 |
|
|
|
85,000 |
|
6.85% Series J senior notes |
|
6/15/2009 |
|
6/15/2016 |
|
|
50,000 |
|
|
|
50,000 |
|
Principal senior notes: |
|
|
|
|
|
|
|
|
|
|
|
|
6.03% Series A senior notes |
|
8/8/2006 |
|
8/8/2011 |
|
|
50,000 |
|
|
|
50,000 |
|
6.16% Series B senior notes |
|
8/8/2006 |
|
8/8/2013 |
|
|
25,000 |
|
|
|
25,000 |
|
New York Life senior notes: |
|
|
|
|
|
|
|
|
|
|
|
|
5.87% Series A senior notes |
|
10/26/2007 |
|
10/26/2013 |
|
|
17,500 |
|
|
|
17,500 |
|
5.87% Series A senior notes |
|
10/26/2007 |
|
10/26/2015 |
|
|
17,500 |
|
|
|
17,500 |
|
6.35% Series B senior notes |
|
4/29/2008 |
|
4/29/2015 |
|
|
50,000 |
|
|
|
50,000 |
|
Aviva Investors North America: |
|
|
|
|
|
|
|
|
|
|
|
|
6.46% Series A senior notes |
|
4/27/2009 |
|
4/27/2013 |
|
|
30,000 |
|
|
|
30,000 |
|
Other obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations |
|
Various |
|
Various |
|
|
1,580 |
|
|
|
2,094 |
|
Other |
|
Various |
|
Various |
|
|
187 |
|
|
|
415 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
|
$ |
476,767 |
|
|
$ |
527,509 |
|
|
|
|
|
|
|
|
|
|
|
|
On January 19, 2010 and January 25, 2010, the Company paid $10,000 and $50,000, respectively,
of its outstanding borrowings from its syndicated revolving credit facility as of December 31,
2009.
In March 2010, the Company amended the New York Life Master Shelf Agreement to increase the
authorization of additional senior promissory notes by $15,000, from $100,000, to $115,000, and to
extend the maturity of the agreement through March 2013. As of June 30, 2010 and December 31,
2009, the Company had long-term debt outstanding of $85,000 under this agreement.
14
9. Redeemable Common Stock:
Prior to the corporate reorganization on October 6, 2009, the Company followed ASC
480-10-S99-1, Presentation in Financial Statements of Preferred Redeemable Stock (ASC
480-10-S99-1). ASC 480-10-S99-1 required the Company to record ISO Class A common stock and vested
stock options at full redemption value at each balance sheet date as the redemption of these
securities was not solely within the control of the Company. Effective with the corporate
reorganization, the Company is no longer obligated to redeem shares of ISO Class A common stock and
is therefore no longer required to record the ISO Class A common stock and vested stock options at
redemption value under ASC 480-10-S99-1. The reversal of the redeemable common stock of $1,064,896
on October
6, 2009 resulted in the elimination of accumulated deficit of $440,584, an increase of $30 to
Class A common stock at par value, an increase of $624,282 to additional paid-in-capital, and a
reclassification of the ISO Class A unearned common stock KSOP shares balance of $1,305 to unearned
KSOP contributions.
During the six months ended June 30, 2009, 2,452,350 shares of ISO Class A common stock were
redeemed by the Company at a weighted average price of $15.80 per share.
10. Stockholders Equity/(Deficit):
On November 18, 1996, the Company authorized 335,000,000 shares of ISO Class A redeemable
common stock. Effective with the corporate reorganization on October 6, 2009, the ISO Class A
redeemable common stock and all Verisk Class B shares sold into the IPO were converted to Verisk
Class A common stock on a one-for-one basis. In addition, the Verisk Class A common stock
authorized was increased to 1,200,000,000 shares. The Verisk Class A common shares have rights to
any dividend declared by the board of directors, subject to any preferential or other rights of any
outstanding preferred stock, and voting rights to elect nine of the twelve members of the board of
directors.
On November 18, 1996, the Company authorized 1,000,000,000 ISO Class B shares and issued
500,225,000 shares. On October 6, 2009, the Company completed a corporate reorganization whereby
the ISO Class B common stock and treasury stock were converted to Verisk Class B common stock on a
one-for-one basis. All Verisk Class B shares sold into the IPO were converted to Verisk Class A
common stock on a one-for-one basis. In addition, the Verisk Class B common stock authorized was
reduced to 800,000,000 shares, sub-divided into 400,000,000 shares of Class B (Series 1) (Class
B-1) and 400,000,000 shares of Class B (Series 2) (Class B-2). Each share of Class B-1 common
stock shall convert automatically, without any action by the stockholder, into one share of Verisk
Class A common stock on April 6, 2011. Each share of Class B-2 common stock shall convert
automatically, without any action by the stockholder, into one share of Verisk Class A common stock
on October 6, 2011. The Class B shares have the same rights as Verisk Class A shares with respect
to dividends and economic ownership, but have voting rights to elect three of the twelve directors.
The Company did not repurchase any Class B shares during the six months ended June 30, 2010 and
2009.
On October 6, 2009, the Company authorized 80,000,000 shares of preferred stock, par value
$0.001 per share, in connection with the reorganization. The preferred shares have preferential
rights over the Verisk Class A and Class B common shares with respect to dividends and net
distribution upon liquidation. The Company did not issue any preferred shares from the
reorganization date through June 30, 2010.
Share Repurchase Program
On April 29, 2010, the Companys board of directors authorized a $150,000 share repurchase
program of the Companys Class A common stock. Under this repurchase program, the Company may
repurchase stock in the open market or as otherwise determined by the Company. 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 Analytics, Inc. 2009
Equity Incentive Plan (the Incentive Plan) and the Insurance Services Office, Inc. 1996 Incentive
Plan (the Option Plan). This authorization has no expiration date and may be suspended or
terminated at any time. Repurchased shares will be recorded as treasury stock and will be
available for future issuance. During the six months ended June 30, 2010, 2,173,106 shares of
Verisk Class A common stock were repurchased by the Company as part of this program at a weighted average price of $29.87
per share. As treasury stock purchases are recorded based on trade date, the Company has included
$2,635 in Accounts payable and accrued liabilities in the accompanying condensed consolidated
balance sheets for those purchases that have not settled as of June 30, 2010.
Earnings Per Share (EPS)
As disclosed in Note 1 Organization, on October 6, 2009 Verisk became the new parent
holding company of ISO. In connection with the IPO, the stock of ISO was exchanged for the stock
of Verisk on a one-for-one basis and Verisk effected a fifty-for-one stock split of its Verisk
Class A and Class B common stock. As a result of the stock split on October 6, 2009, all share and
per share data throughout this report has been adjusted to reflect the fifty-for-one stock split.
15
Basic earnings per common share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during the period. Prior
to the IPO, the Company had common stock within the Employee Stock Ownership Plan (ESOP) that had
been committed to be released and those shares were subtracted from the weighted average number of
common shares outstanding to arrive at the denominator used in
calculating EPS for the three and six months
ended June 30, 2009. 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, such as stock awards and stock options, had been issued.
The following is a reconciliation of the numerators and denominators of the basic and diluted
EPS computations for the three and six month periods ended June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Numerator used in basic and diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
58,404 |
|
|
$ |
45,939 |
|
|
$ |
113,779 |
|
|
$ |
90,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares used in basic EPS |
|
|
180,492,106 |
|
|
|
172,887,331 |
|
|
|
180,272,828 |
|
|
|
173,409,800 |
|
Effect of dilutive shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential Class A redeemable common stock issuable upon the
exercise of stock options |
|
|
9,049,787 |
|
|
|
6,937,148 |
|
|
|
9,225,496 |
|
|
|
6,794,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares and dilutive
potential common shares used in diluted EPS |
|
|
189,541,893 |
|
|
|
179,824,479 |
|
|
|
189,498,324 |
|
|
|
180,204,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS of Class A and Class B |
|
$ |
0.32 |
|
|
$ |
0.27 |
|
|
$ |
0.63 |
|
|
$ |
0.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS of Class A and Class B |
|
$ |
0.31 |
|
|
$ |
0.26 |
|
|
$ |
0.60 |
|
|
$ |
0.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The potential shares of common stock that were excluded from diluted EPS were 2,004,390 and
5,301,650 for the six months ended June 30, 2010 and 2009, respectively, because the effect of
including these potential shares was anti-dilutive.
Accumulated Other Comprehensive Loss
The following is a summary of accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Unrealized gains on investments |
|
$ |
416 |
|
|
$ |
526 |
|
Unrealized foreign currency losses |
|
|
(876 |
) |
|
|
(683 |
) |
Pension and postretirement unfunded liability adjustment |
|
|
(51,724 |
) |
|
|
(53,471 |
) |
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
(52,184 |
) |
|
$ |
(53,628 |
) |
|
|
|
|
|
|
|
16
The before tax and after tax amounts of other comprehensive income for the six months ended
June 30, 2010 and 2009 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Benefit/ |
|
|
|
|
|
|
Before Tax |
|
|
(Expense) |
|
|
After Tax |
|
For the Six Months Ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses on investments arising during the year |
|
$ |
(190 |
) |
|
$ |
80 |
|
|
$ |
(110 |
) |
Unrealized foreign currency losses |
|
|
(193 |
) |
|
|
|
|
|
|
(193 |
) |
Pension and postretirement unfunded liability adjustment |
|
|
2,926 |
|
|
|
(1,179 |
) |
|
|
1,747 |
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income |
|
$ |
2,543 |
|
|
$ |
(1,099 |
) |
|
$ |
1,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on investments arising during the year |
|
$ |
104 |
|
|
$ |
(41 |
) |
|
$ |
63 |
|
Reclassification adjustment for amounts included in net income |
|
|
386 |
|
|
|
(156 |
) |
|
|
230 |
|
Unrealized foreign currency gains |
|
|
88 |
|
|
|
|
|
|
|
88 |
|
Pension and postretirement unfunded liability adjustment |
|
|
4,900 |
|
|
|
(1,977 |
) |
|
|
2,923 |
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income |
|
$ |
5,478 |
|
|
$ |
(2,174 |
) |
|
$ |
3,304 |
|
|
|
|
|
|
|
|
|
|
|
11. Stock Option Plan:
All of the Companys outstanding stock options are covered under the Incentive Plan or the
Option Plan. Awards under the Incentive Plan may include one or more of the following types: (i)
stock options (both nonqualified and incentive stock options), (ii) stock appreciation rights,
(iii) restricted stock, (iv) restricted stock units, (v) performance awards, (vi) other share-based
awards, and (vii) cash. Employees, directors and consultants are eligible for awards under the
Incentive Plan. Cash received from stock option exercises for the six months ended June 30, 2010
and 2009 was $16,733 and $1,126, respectively. On April 1, 2010 and June 1, 2010, the Company
granted 2,011,390 and 5,000, respectively, of nonqualified stock options to key employees with an
exercise price equal to the closing price of the Companys Class A common stock on March 31, 2010
and May 28, 2010, with a ten year contractual term and a service vesting period of four years. As
of June 30, 2010, there are 8,857,739 shares of Class A common stock reserved and available for
future issuance. On July 1, 2010, the Company granted 31,906 nonqualified stock options that were
immediately vested and 138,120 nonqualified stock options with a one year service vesting period,
to the directors of the Company. These options have an exercise price equal to the closing price
of the Companys Class A commons stock on the grant date and a ten year contractual term.
The fair value of the stock options granted during the six months ended June 30, 2010 and 2009
were estimated using a Black-Scholes valuation model that uses assumptions noted in the following
table:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
June 30, 2009 |
|
Option pricing model |
|
Black-Scholes |
|
|
Black-Scholes |
|
Expected volatility |
|
|
30.99 |
% |
|
|
30.95 |
% |
Risk-free interest rate |
|
|
2.47 |
% |
|
|
1.98 |
% |
Expected term in years |
|
|
4.8 |
|
|
|
5.7 |
|
Dividend yield |
|
|
0.00 |
% |
|
|
1.00 |
% |
Weighted average grant date fair value per stock option |
|
$ |
8.70 |
|
|
$ |
4.69 |
|
The expected term for a majority of the awards granted was estimated based on studies of
historical experience and projected exercise behavior. However, for certain awards granted, for
which no historical exercise pattern exist, the expected term was estimated using the simplified
method. The risk-free interest rate is based on the yield of U.S. Treasury zero coupon securities
with a maturity equal to the expected term of the equity award. The volatility factor was based on
the average volatility of the Companys peers, calculated using historical daily closing prices
over the most recent period that commensurates with the expected term of the stock option award.
The expected dividend yield was based on the Companys expected annual dividend rate on the date of
grant.
17
Exercise prices for options outstanding and exercisable at June 30, 2010 ranged from $1.84 to
$30.25 as outlined in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Weighted- |
|
|
|
Average |
|
|
Stock |
|
|
Weighted- |
|
|
Remaining |
|
|
Stock |
|
|
Average |
|
Range of |
|
Remaining |
|
|
Options |
|
|
Average |
|
|
Contractual |
|
|
Options |
|
|
Exercise |
|
Exercise Prices |
|
Contractual Life |
|
|
Outstanding |
|
|
Exercise Price |
|
|
Life |
|
|
Exercisable |
|
|
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.84 to $2.20 |
|
|
1.0 |
|
|
|
515,270 |
|
|
$ |
2.04 |
|
|
|
1.0 |
|
|
|
515,270 |
|
|
$ |
2.04 |
|
$2.21 to $2.96 |
|
|
2.7 |
|
|
|
1,996,600 |
|
|
$ |
2.84 |
|
|
|
2.7 |
|
|
|
1,996,600 |
|
|
$ |
2.84 |
|
$2.97 to $4.62 |
|
|
2.8 |
|
|
|
5,439,750 |
|
|
$ |
3.56 |
|
|
|
2.8 |
|
|
|
5,439,750 |
|
|
$ |
3.56 |
|
$4.63 to $8.90 |
|
|
4.8 |
|
|
|
4,154,400 |
|
|
$ |
8.31 |
|
|
|
4.8 |
|
|
|
4,154,400 |
|
|
$ |
8.31 |
|
$8.91 to $13.62 |
|
|
5.7 |
|
|
|
1,653,600 |
|
|
$ |
11.84 |
|
|
|
5.6 |
|
|
|
1,603,600 |
|
|
$ |
11.79 |
|
$13.63 to $15.10 |
|
|
6.6 |
|
|
|
1,617,875 |
|
|
$ |
15.10 |
|
|
|
6.6 |
|
|
|
1,122,875 |
|
|
$ |
15.10 |
|
$15.11 to $17.78 |
|
|
8.3 |
|
|
|
5,824,801 |
|
|
$ |
16.65 |
|
|
|
8.0 |
|
|
|
1,921,486 |
|
|
$ |
16.81 |
|
$17.79 to $30.25 |
|
|
9.4 |
|
|
|
5,082,011 |
|
|
$ |
24.26 |
|
|
|
8.0 |
|
|
|
208,250 |
|
|
$ |
17.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,284,307 |
|
|
|
|
|
|
|
|
|
|
|
16,962,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of options outstanding under the Incentive Plan as of June 30, 2010 and changes
during the six months then ended are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Aggregate |
|
|
|
Number |
|
|
Average |
|
|
Intrinsic |
|
|
|
of Options |
|
|
Exercise Price |
|
|
Value |
|
Outstanding at December 31, 2009 |
|
|
26,761,221 |
|
|
$ |
10.74 |
|
|
$ |
522,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
2,016,390 |
|
|
$ |
28.21 |
|
|
|
|
|
Exercised |
|
|
(2,346,429 |
) |
|
$ |
7.13 |
|
|
$ |
(52,196 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled or expired |
|
|
(146,875 |
) |
|
$ |
18.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2010 |
|
|
26,284,307 |
|
|
$ |
12.36 |
|
|
$ |
461,043 |
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 30, 2010 |
|
|
16,962,231 |
|
|
$ |
7.81 |
|
|
$ |
374,699 |
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic value for stock options is calculated based on the exercise price of the underlying
awards and the quoted price of Verisks common stock as of the reporting date. The aggregate
intrinsic value of stock options outstanding and exercisable at June 30, 2010 was $461,043 and
$374,699, respectively. In accordance with ASC 718, Stock Compensation, excess tax benefit from
exercised stock options is recorded as an addition to paid-in-capital and a corresponding reduction
in 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 in the
statement of cash flows as a financing cash inflow. For the six months ended June 30, 2010, the
Company recorded an excess tax benefit from stock options exercised of $20,507, of which $10,036
has been realized as a tax benefit within the Companys quarterly tax payments through June 30,
2010 and presented as a financing cash inflow within the accompanying condensed consolidated
statements of cash flows.
For the six months ended June 30, 2010, certain employees exercised stock options and covered
the statutory minimum tax withholdings of $15,051 through a net settlement of 503,043 shares. The
payment of taxes related to these exercises were recorded as a reduction to additional-paid-in
capital. This transaction is reflected within Net share settlement of taxes upon exercise of stock options within
cash flows from financing activities in the accompanying condensed consolidated statements of cash
flows.
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.
As of June 30, 2010, there was $49,561 of total unrecognized compensation cost 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 2.97 years.
As of June 30, 2010, there were 9,322,076 nonvested stock options, of which 8,269,610 are
expected to vest. The total grant date fair value of options vested during the six months ended
June 30, 2010 and 2009 was $10,030 and $6,316, respectively.
18
12. Pension and Postretirement Benefits:
Prior to January 1, 2002, the Company maintained a qualified defined benefit pension plan for
substantially all of its employees through membership in the Pension Plan for Insurance
Organizations (the Pension Plan), a multiple-employer trust. The Company has applied the
projected unit credit cost method for its pension plan, which attributes an equal portion of total
projected benefits to each year of employee service. Effective January 1, 2002, the Company amended
the Pension Plan to determine future benefits using a cash balance formula. Under the cash balance
formula, each participant has an account, which is credited annually based on salary rates
determined by years of service, as well as the interest earned on their previous year-end cash
balance. Prior to December 31, 2001, pension plan benefits were based on years of service and the
average of the five highest consecutive years earnings of the last ten years. Effective March 1,
2005, the Company established the Profit Sharing Plan, a defined contribution plan, to replace the
Pension Plan for all eligible employees hired on or after March 1, 2005. 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.
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 and the amounts recognized in other comprehensive
income for the three and six month periods ended June 30, 2010 and 2009 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, |
|
|
|
Pension Plan |
|
|
Postretirement Plan |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Service cost |
|
$ |
1,397 |
|
|
$ |
1,915 |
|
|
$ |
|
|
|
$ |
|
|
Interest cost |
|
|
5,408 |
|
|
|
5,329 |
|
|
|
211 |
|
|
|
400 |
|
Amortization of transition obligation |
|
|
|
|
|
|
|
|
|
|
(42 |
) |
|
|
50 |
|
Expected return on plan assets |
|
|
(5,687 |
) |
|
|
(4,608 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
(201 |
) |
|
|
(200 |
) |
|
|
(73 |
) |
|
|
|
|
Amortization of net actuarial loss |
|
|
1,622 |
|
|
|
2,550 |
|
|
|
229 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
2,539 |
|
|
$ |
4,986 |
|
|
$ |
325 |
|
|
$ |
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer contributions |
|
$ |
5,546 |
|
|
$ |
1,440 |
|
|
$ |
1,298 |
|
|
$ |
766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, |
|
|
|
Pension Plan |
|
|
Postretirement Plan |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Service cost |
|
$ |
3,207 |
|
|
$ |
3,830 |
|
|
$ |
|
|
|
$ |
|
|
Interest cost |
|
|
10,683 |
|
|
|
10,658 |
|
|
|
531 |
|
|
|
800 |
|
Amortization of transition obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
|
Expected return on plan assets |
|
|
(11,325 |
) |
|
|
(9,216 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
(401 |
) |
|
|
(400 |
) |
|
|
(73 |
) |
|
|
|
|
Amortization of net actuarial loss |
|
|
3,033 |
|
|
|
5,100 |
|
|
|
367 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
5,197 |
|
|
$ |
9,972 |
|
|
$ |
825 |
|
|
$ |
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer contributions |
|
$ |
9,711 |
|
|
$ |
2,885 |
|
|
$ |
2,053 |
|
|
$ |
1,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The expected contributions to the Pension Plan and the Postretirement Plan for the year ended
December 31, 2010 are consistent with the amounts previously disclosed as of December 31, 2009.
19
13. Segment Reporting:
ASC 280-10, Disclosures About Segments of an Enterprise and Related Information (ASC
280-10), establishes standards for reporting information about operating segments. ASC 280-10
requires that a public business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an enterprise about which
separate
financial information is available that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing performance. The Companys CEO and
Chairman of the Board is identified as the chief operating decision maker (CODM) as defined by
ASC 280-10. To align with the internal management of the Companys business operations based on
product and service offerings, the Company is organized into the following two operating segments:
Risk Assessment: The Company is the leading provider of statistical, actuarial and
underwriting data for the U.S. P&C insurance industry. The Companys databases include cleansed
and standardized records describing premiums and losses in insurance transactions, casualty and
property risk attributes for commercial buildings and their occupants and fire suppression
capabilities of municipalities. The Company uses this data to create policy language and
proprietary risk classifications that are industry standards and to generate prospective loss
cost estimates used to price insurance policies.
Decision Analytics: The Company develops solutions that its customers use to analyze the three
key processes in managing risk: prediction of loss, detection and prevention of fraud, and
quantification of loss. The Companys combination of algorithms and analytic methods
incorporates its proprietary data to generate solutions in each of these four categories. In
most cases, the Companys customers integrate the solutions into their models, formulas or
underwriting criteria in order to predict potential loss events, ranging from hurricanes and
earthquakes to unanticipated healthcare claims. The Company develops catastrophe and extreme
event models and offers solutions covering natural and man-made risks, including acts of
terrorism. The Company also develops solutions that allow customers to quantify costs after loss
events occur. Fraud solutions include data on claim histories, analysis of mortgage applications
to identify misinformation, analysis of claims to find emerging patterns of fraud and
identification of suspicious claims in the insurance, mortgage and healthcare sectors.
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 segment EBITDA as the
profitability measure for making decisions regarding ongoing operations. Segment EBITDA is income
from continuing operations before investment income and interest expense, income taxes,
depreciation and amortization. Segment EBITDA is the measure of operating results used to assess
corporate performance and optimal utilization of debt and acquisitions. Segment 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 investment income, realized gains/(losses) on securities, net, interest expense or
income tax expense, since these items are not considered in evaluating the segments overall
operating performance. The CODM does not evaluate the financial performance of each segment based
on assets. On a geographic basis, no individual country outside of the United States accounted for
1% or more of the Companys consolidated revenue for either the
three or six month periods ended
June 30, 2010 or 2009. No individual country outside of the United States accounted for 1% or more
of total consolidated long-term assets as of June 30, 2010 or December 31, 2009.
20
The following tables provide the Companys revenue and operating income performance by
reportable segment for the three and six month periods ended June 30, 2010 and 2009, as well as a
reconciliation to income before income taxes for all periods presented in the accompanying
condensed consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Three Months Ended |
|
|
|
June 30, 2010 |
|
|
June 30, 2009 |
|
|
|
Risk |
|
|
Decision |
|
|
|
|
|
|
Risk |
|
|
Decision |
|
|
|
|
|
|
Assessment |
|
|
Analytics |
|
|
Total |
|
|
Assessment |
|
|
Analytics |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
134,289 |
|
|
$ |
147,388 |
|
|
$ |
281,677 |
|
|
$ |
133,307 |
|
|
$ |
124,609 |
|
|
$ |
257,916 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of items shown separately
below) |
|
|
48,652 |
|
|
|
66,348 |
|
|
|
115,000 |
|
|
|
52,968 |
|
|
|
60,010 |
|
|
|
112,978 |
|
Selling, general and administrative |
|
|
19,439 |
|
|
|
23,199 |
|
|
|
42,638 |
|
|
|
19,741 |
|
|
|
19,164 |
|
|
|
38,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment EBITDA |
|
|
66,198 |
|
|
|
57,841 |
|
|
|
124,039 |
|
|
|
60,598 |
|
|
|
45,435 |
|
|
|
106,033 |
|
Depreciation and amortization of fixed assets |
|
|
4,163 |
|
|
|
5,781 |
|
|
|
9,944 |
|
|
|
4,737 |
|
|
|
4,981 |
|
|
|
9,718 |
|
Amortization of intangible assets |
|
|
37 |
|
|
|
6,983 |
|
|
|
7,020 |
|
|
|
137 |
|
|
|
8,327 |
|
|
|
8,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
61,998 |
|
|
|
45,077 |
|
|
|
107,075 |
|
|
|
55,724 |
|
|
|
32,127 |
|
|
|
87,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
|
|
|
|
|
|
|
|
92 |
|
|
|
|
|
|
|
|
|
|
|
49 |
|
Realized gains on securities, net |
|
|
|
|
|
|
|
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
33 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
(8,445 |
) |
|
|
|
|
|
|
|
|
|
|
(8,523 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income before income taxes |
|
|
|
|
|
|
|
|
|
$ |
98,751 |
|
|
|
|
|
|
|
|
|
|
$ |
79,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, including non-cash purchases of
fixed assets and capital lease obligations |
|
$ |
1,500 |
|
|
$ |
6,452 |
|
|
$ |
7,952 |
|
|
$ |
1,141 |
|
|
$ |
6,061 |
|
|
$ |
7,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, 2010 |
|
|
June 30, 2009 |
|
|
|
Risk |
|
|
Decision |
|
|
|
|
|
|
Risk |
|
|
Decision |
|
|
|
|
|
|
Assessment |
|
|
Analytics |
|
|
Total |
|
|
Assessment |
|
|
Analytics |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
268,867 |
|
|
$ |
288,964 |
|
|
$ |
557,831 |
|
|
$ |
262,873 |
|
|
$ |
240,794 |
|
|
$ |
503,667 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of items shown separately
below) |
|
|
98,550 |
|
|
|
131,443 |
|
|
|
229,993 |
|
|
|
104,467 |
|
|
|
116,034 |
|
|
|
220,501 |
|
Selling, general and administrative |
|
|
38,623 |
|
|
|
41,529 |
|
|
|
80,152 |
|
|
|
37,209 |
|
|
|
35,016 |
|
|
|
72,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment EBITDA |
|
|
131,694 |
|
|
|
115,992 |
|
|
|
247,686 |
|
|
|
121,197 |
|
|
|
89,744 |
|
|
|
210,941 |
|
Depreciation and amortization of fixed assets |
|
|
8,486 |
|
|
|
11,387 |
|
|
|
19,873 |
|
|
|
9,549 |
|
|
|
9,364 |
|
|
|
18,913 |
|
Amortization of intangible assets |
|
|
73 |
|
|
|
14,251 |
|
|
|
14,324 |
|
|
|
306 |
|
|
|
16,668 |
|
|
|
16,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
123,135 |
|
|
|
90,354 |
|
|
|
213,489 |
|
|
|
111,342 |
|
|
|
63,712 |
|
|
|
175,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
|
|
|
|
|
|
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
92 |
|
Realized gains/(losses) on securities, net |
|
|
|
|
|
|
|
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
(365 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
(16,911 |
) |
|
|
|
|
|
|
|
|
|
|
(16,677 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income before income taxes |
|
|
|
|
|
|
|
|
|
$ |
196,763 |
|
|
|
|
|
|
|
|
|
|
$ |
158,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, including non-cash purchases of
fixed assets and capital lease obligations |
|
$ |
3,389 |
|
|
$ |
13,451 |
|
|
$ |
16,840 |
|
|
$ |
4,045 |
|
|
$ |
14,741 |
|
|
$ |
18,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Operating segment revenue by type of service is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Risk Assessment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry standard insurance programs |
|
$ |
87,427 |
|
|
$ |
87,046 |
|
|
$ |
175,471 |
|
|
$ |
172,193 |
|
Property-specific rating and underwriting
information |
|
|
34,267 |
|
|
|
33,868 |
|
|
|
68,226 |
|
|
|
65,869 |
|
Statistical agency and data services |
|
|
7,190 |
|
|
|
7,077 |
|
|
|
14,369 |
|
|
|
14,135 |
|
Actuarial services |
|
|
5,405 |
|
|
|
5,316 |
|
|
|
10,801 |
|
|
|
10,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk Assessment |
|
|
134,289 |
|
|
|
133,307 |
|
|
|
268,867 |
|
|
|
262,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decision Analytics: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fraud identification and detection solutions |
|
|
79,195 |
|
|
|
66,633 |
|
|
|
157,990 |
|
|
|
130,475 |
|
Loss prediction solutions |
|
|
39,779 |
|
|
|
35,943 |
|
|
|
76,707 |
|
|
|
66,896 |
|
Loss quantification solutions |
|
|
28,414 |
|
|
|
22,033 |
|
|
|
54,267 |
|
|
|
43,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Decision Analytics |
|
|
147,388 |
|
|
|
124,609 |
|
|
|
288,964 |
|
|
|
240,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenues |
|
$ |
281,677 |
|
|
$ |
257,916 |
|
|
$ |
557,831 |
|
|
$ |
503,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14. Related Parties:
The Company considers its Verisk Class A and Class B stockholders that own more than 5% of the
outstanding stock within the respective class to be related parties as defined within ASC 850,
Related Party Disclosures. At June 30, 2010, the related parties were six Class B stockholders
each owning more than 5% of the outstanding Class B shares compared to seven Class B stockholders
at June 30, 2009 of which three remained unchanged. At
June 30, 2010, there were five Class A stockholders owning more than 5% of the outstanding Class A shares. The Company had accounts receivable,
net of $925 and $1,353 and fees received in advance of $3,116 and $439 from related parties as of
June 30, 2010 and December 31, 2009, respectively. In addition, the Company had revenues from
related parties for the three months ended June 30, 2010 and 2009 of $15,280 and $24,056 and
$30,413 and $48,143 for the six months ended June 30, 2010 and 2009, respectively. As of June 30,
2010, one of these Class B stockholders has an employee that serves on the Companys board of
directors.
The Company incurred expenses associated with the payment of insurance coverage premiums to
certain of the related parties aggregating $18 and $114 for the three months ended June 30, 2010
and 2009 and $21 and $226 for the six months ended June 30, 2010 and 2009, respectively. These
costs are included in Cost of revenues and Selling, general and administrative expenses in the
accompanying condensed consolidated statements of operations.
15. 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 those matters described below. 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 they may have on the Companys
results of operations, financial position or cash flows. This is primarily because many of these
cases remain in their early stages and only limited discovery has taken place. Although the Company
believes it has strong defenses for the litigation proceedings described below, 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.
Claims Outcome Advisor Litigation
Hensley, et al. v. Computer Sciences Corporation et al. was a putative nationwide class action
complaint, filed in February 2005, in Miller County, Arkansas state court. Defendants include
numerous insurance companies and providers of software products used by insurers in paying claims.
The Company is among the named defendants. Plaintiffs allege that certain software products,
including the Companys Claims Outcome Advisor product and a competing software product sold by
Computer Sciences Corporation, improperly estimated the amount to be paid by insurers to their
policyholders in connection with claims for bodily injuries.
The Company entered into settlement agreements with plaintiffs asserting claims relating to
the use of Claims Outcome Advisor by defendants Hanover Insurance Group, Progressive Car Insurance
and Liberty Mutual Insurance Group. Each of these settlements was granted final approval by the
court and together the settlements resolve the claims asserted in this case against the Company
with respect to the above insurance companies, who settled the claims against them as well. A
provision was made in 2006 for this proceeding and the total amount the Company paid in 2008 with
respect to these settlements was less than $2,000. A fourth defendant, The Automobile Club of
California, which is alleged to have used Claims Outcome Advisor, was dismissed from the action. On
August 18, 2008, pursuant to the agreement of the parties the Court ordered that the claims against
the Company be dismissed with prejudice.
22
Subsequently, Hanover Insurance Group made a demand for reimbursement, pursuant to an
indemnification provision contained in a December 30, 2004 License Agreement between Hanover and
the Company, of its settlement and defense costs in the Hensley class action. Specifically, Hanover
demanded $2,536 including $600 in attorneys fees and expenses. The Company disputes that Hanover
is entitled to any reimbursement pursuant to the License Agreement. In July 2010, after the Company
and Hanover were unable to resolve the dispute in mediation, Hanover served a summons and complaint
seeking indemnity and contribution from the Company. At this time, it is not possible to
determine the ultimate resolution of or estimate the liability related to this matter.
Xactware Litigation
The following two lawsuits have been filed by or on behalf of groups of Louisiana insurance
policyholders who claim, among other things, that certain insurers who used products and price
information supplied by the Companys Xactware subsidiary (and those of another provider) did not
fully compensate policyholders for property damage covered under their insurance policies. The
plaintiffs seek to recover compensation for their damages in an amount equal to the difference
between the amount paid by the defendants and the fair market repair/restoration costs of their
damaged property.
Schafer v. State Farm Fire & Cas. Co., et al. was a putative class action pending against the
Company and State Farm Fire & Casualty Company filed in March 2007 in the Eastern District of
Louisiana. The complaint alleged antitrust violations, breach of contract, negligence, bad faith,
and fraud. The court dismissed the antitrust claim as to both defendants and dismissed all claims
against the Company other than fraud, which will proceed to the discovery phase along with the
remaining claims against State Farm. Judge Duval denied plaintiffs motion to certify a class with
respect to the fraud and breach of contract claims on August 3, 2009 and the time to appeal that
decision has expired. The matter now a single action was reassigned to Judge Africk. The
plaintiffs agreed to settle the matter with the Company and State Farm and a Settlement Agreement
and Release was executed by all parties in June 2010.
Mornay v. Travelers Ins. Co., et al. is a putative class action pending against the Company
and Travelers Insurance Company filed in November 2007 in the Eastern District of Louisiana. The
complaint alleged antitrust violations, breach of contract, negligence, bad faith, and fraud. As in
Schafer, the court dismissed the antitrust claim as to both defendants and dismissed all claims
against the Company other than fraud. Judge Duval stayed all proceedings in the case pending an
appraisal of the lead plaintiffs insurance claim. The matter has been re-assigned to Judge
Barbier, who on September 11, 2009 issued an order administratively closing the matter pending
completion of the appraisal process.
At this time, it is not possible to determine the ultimate resolution of or estimate the
liability related to the Mornay matter.
iiX Litigation
In March 2007, the Companys subsidiary, Insurance Information Exchange, or iiX, as well as
other information providers and insurers in the State of Texas, were served with a summons and
class action complaint filed in the United States District Court for the Eastern District of Texas
alleging violations of the Driver Privacy Protection Act, or the DPPA, entitled Sharon Taylor, et
al. v. Acxiom Corporation, et al. Plaintiffs brought the action on their own behalf and on behalf
of all similarly situated individuals whose personal information is contained in any motor vehicle
record maintained by the State of Texas and who have not provided express consent to the State of
Texas for the distribution of their personal information for purposes not enumerated by the DPPA
and whose personal information has been knowingly obtained and used by the defendants. The class
complaint alleges that the defendants knowingly obtained personal information for a purpose not
authorized by the DPPA and seeks liquidated damages in the amount of $3 for each instance of a
violation of the DPPA, punitive damages and the destruction of any illegally obtained personal
information. The Court granted iiXs motion to dismiss the complaint based on failure to state a
claim and for lack of standing. Oral arguments on the plaintiffs appeal of that dismissal were
held on November 4, 2009. The Court of Appeals for the Fifth Circuit Court affirmed the District
Courts dismissal of the complaint on July 14, 2010.
23
Similarly, in April 2010, the Companys subsidiary, iiX, as well as other information
providers in the State of Missouri were served with a summons and class action complaint filed in
the United States District Court for the Western District of Missouri alleging violations of the
Driver Privacy Protection Act, or the DPPA, entitled Janice Cook, et al. v. ACS State & Local
Solutions, et al. Plaintiffs brought the action on their own behalf and on behalf of all similarly
situated individuals whose personal information is contained in any motor vehicle record maintained
by the State of Missouri and who have not provided express consent to the State of Missouri for the
distribution of their personal information for purposes not enumerated by the DPPA and whose
personal information has been knowingly obtained and used by the defendants. The class complaint
alleges that the defendants knowingly obtained personal information for a purpose not authorized by
the DPPA and seeks liquidated damages in the amount of $3 for each instance of a violation of the
DDPA, punitive damages and the destruction of any illegally obtained personal information.
At this time, it is not possible to determine the ultimate resolution of or estimate the
liability related to this matter.
Interthinx Litigation
In September 2009, the Companys subsidiary, Interthinx, Inc., was served with a putative
class action entitled Renata Gluzman v. Interthinx, Inc. The plaintiff, a former Interthinx
employee, filed the class action on August 13, 2009 in the Superior Court of the State of
California, County of Los Angeles on behalf of all Interthinx information technology employees for
unpaid overtime and missed meals and rest breaks, as well as various related claims claiming that
the information technology employees were misclassified as exempt employees and, as a result, were
denied certain wages and benefits that would have been received if they were properly classified as
non-exempt employees. The pleadings include, among other things, a violation of Business and
Professions Code 17200 for unfair business practices which allows plaintiffs to include as class
members all information technology employees employed at Interthinx for four years prior to the
date of filing the complaint. The complaint seeks compensatory damages, penalties that are
associated with the various statutes, restitution, interest, costs and attorney fees. Although no
assurance can be given concerning the outcome of this matter, in the opinion of management the
lawsuit is not expected to have a material adverse effect on our financial condition or results of
operations.
**************
24
Item 2. Managements 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 within our annual report on Form 10-K dated and filed
with the Securities and Exchange Commission on March 9, 2010. 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.
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, mortgage and healthcare industries and sophisticated
methods to predict and quantify loss in diverse contexts ranging from natural catastrophes 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.
On May 23, 2008, in contemplation of our initial public offering, or IPO, we formed Verisk
Analytics, Inc., or Verisk, a Delaware corporation, to be the holding company for our business.
Verisk was initially formed as a wholly-owned subsidiary of Insurance Services Office, Inc., or
ISO. On October 6, 2009, in connection with our initial public offering, we effected a
reorganization whereby ISO became a wholly-owned subsidiary of Verisk. Verisk had no operations
prior to the initial public offering.
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 48% and 52%
of our revenues for the six months ended June 30, 2010 and 2009, respectively. Our Decision
Analytics segment provides solutions our customers use to analyze the three processes of the
Verisk Risk Analysis Framework: Prediction of Loss, Detection and Prevention of Fraud, and
Quantification of Loss. Our Decision Analytics segment revenues represented approximately 52%
and 48% of our revenues for the six months ended June 30, 2010 and 2009, respectively.
Executive Summary
Key Performance Metrics
We believe our businesss 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 2 within the Condensed Consolidated Results of Operations section of
Item 2. Managements 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. 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 or
our actuarial services throughout the subscription period. In general, we experience minimal
seasonality within the business. Our long-term agreements are generally for periods of three to
seven 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.
25
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, 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
the six month periods ended June 30, 2010 and 2009, respectively, 31% and 28% of our revenues 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 84% of the revenues in our Risk Assessment segment for each of the six month
periods ended June 30, 2010 and 2009 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, and we have retained approximately 99% of our P&C insurance customer base in
each of the last five years. More than 55% and 59% of the revenues in our Decision Analytics
segment, for the six months ended June 30, 2010 and 2009, respectively, were derived from
subscriptions and long-term agreements for our solutions.
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 include salaries, benefits, incentive
compensation, equity compensation costs (described under Equity Compensation Costs below),
sales commissions, employment taxes, recruiting costs, and outsourced temporary agency costs,
which represented 65% of our total expenses for each of the six months periods ended June 30,
2010 and 2009, respectively.
We allocate personnel expenses between two categories, cost of revenues and selling,
general and administrative costs, 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, are
also either captured within cost of revenues or selling, general and administrative expense
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.
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.
Selling, General and Administrative Expense. Our selling, general and administrative
expense also consists 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 costs based on the nature of the work being performed by the employee. Our
selling, general and administrative expense excludes depreciation and amortization.
Description of Acquisitions
Since January 1, 2009 we acquired four businesses. As a result of these acquisitions, our
consolidated results of operations may not be comparable between periods.
On February 26, 2010, we acquired 100% of the stock of Strategic Analytics, Inc., or
Strategic Analytics, a privately owned provider of credit risk and capital management solutions
to consumer and mortgage lenders. We believe this acquisition will allow our customers to take
advantage of state-of-the-art loss forecasting, stress testing, and economic capital requirement
tools to better understand and forecast the risk associated within their credit portfolios.
On October 30, 2009, we acquired the net assets of Enabl-u Technology Corporation, Inc, or
Enabl-u, a privately owned provider of data management, training and communication solutions to
companies with regional, national or global work forces. We believe this acquisition will
enhance our ability to provide solutions for customers to measure loss prevention and improve
asset management through the use of software and software services.
On July 24, 2009, we acquired the net assets of TierMed Systems, LLC, or TierMed, a
privately owned provider of Healthcare Effectiveness Data and Information Set, or HEDIS,
solutions to healthcare organizations that have HEDIS or quality-reporting needs. We believe
this acquisition will enhance our ability to provide solutions for customers to measure and
improve healthcare quality and financial performance through the use of software and software
services.
26
On January 14, 2009, we acquired 100% of the stock of D2 Hawkeye, Inc., or D2, a privately
owned provider of data mining, decision support, clinical quality analysis, and risk analysis
tools for the healthcare industry. We believe this acquisition will enhance our position in the
healthcare analytics and predictive modeling market by providing new market, cross-sell, and
diversification opportunities for the Companys expanding healthcare solutions.
Equity Compensation Costs
We have a leveraged employee stock ownership plan, or ESOP, funded with intercompany debt
that includes 401(k), ESOP and profit sharing components to provide employees with equity
participation. We make quarterly cash contributions to the plan equal to the debt service
requirements. As the debt is repaid, a percentage of the ESOP loan collateral is released to the
ESOP to fund 401(k) matching and profit sharing contributions and the remainder is allocated
annually to active employees in proportion to their eligible compensation in relation to total
participants eligible compensation.
We accrue compensation expense over the reporting period equal to the fair value of the
ESOP loan collateral to be released to the ESOP.
In connection with our initial public offering, on October 6, 2009, we accelerated our
future ESOP allocation contribution through the end of the ESOP in 2013, to all participants
eligible for a contribution in 2009. This resulted in a non-recurring non-cash charge of
approximately $57.7 million in the fourth quarter of 2009. As a result, subsequent to the
offering, the non-cash ESOP allocation expense has been reduced to zero in 2010.
The amount of our ESOP costs recognized for the three and six months ended June 30, 2010
and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
ESOP costs by contribution type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401(k) matching contribution expense |
|
$ |
2,495 |
|
|
$ |
2,149 |
|
|
$ |
4,848 |
|
|
$ |
4,253 |
|
Profit sharing contribution expense |
|
|
384 |
|
|
|
315 |
|
|
|
881 |
|
|
|
705 |
|
ESOP allocation expense |
|
|
|
|
|
|
3,147 |
|
|
|
|
|
|
|
5,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ESOP costs |
|
$ |
2,879 |
|
|
$ |
5,611 |
|
|
$ |
5,729 |
|
|
$ |
10,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESOP costs by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Assessment ESOP costs |
|
$ |
1,688 |
|
|
$ |
3,233 |
|
|
$ |
3,415 |
|
|
$ |
6,208 |
|
Decision Analytics ESOP costs |
|
|
1,191 |
|
|
|
2,378 |
|
|
|
2,314 |
|
|
|
4,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ESOP costs |
|
$ |
2,879 |
|
|
$ |
5,611 |
|
|
$ |
5,729 |
|
|
$ |
10,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition, the portion of the ESOP allocation expense related to the appreciation of the
value of the ESOP loan collateral in the ESOP above the value of the contribution made when the
ESOP was first established is not tax deductible. Therefore, the accelerated ESOP allocation in
the fourth quarter of 2009 will result in a reduction to our effective tax rate in the year 2010
and should have a similar impact in future periods.
Trends Affecting Our Business
A portion of our revenues is related to changes in historical insurance premiums;
therefore, our revenues could be positively or negatively affected by growth or declines in
premiums for the lines of insurance for which we perform services. The pricing of these
solutions is based on an individual customers premiums in a prior period, so the pricing is
fixed at the inception of each calendar year. The impact of insurance premiums has a more
significant impact on the Risk Assessment segment than it does on the Decision Analytics
segment. Since 2005, premium growth in the P&C insurance industry has slowed and we expect
little or no growth for most industry insurance lines during 2010. A significant portion of our
revenues is from insurance companies. Although business and new sales from these companies have
generally remained strong, the current economic environment could negatively impact buying
demand for our solutions.
A portion of our revenues in the Decision Analytics segment is tied to the volume of
applications for new mortgages or refinancing of existing mortgages. Turmoil in the mortgage
market since 2007 has adversely affected revenue in this segment of our business. This trend
began to reverse in late 2008 spurred by lower mortgage interest rates. As a result of the rise
in foreclosures and early pay defaults, we have seen and expect to see in the future an increase
in revenues from our solutions that help our customers focus on improved underwriting quality of
mortgage loans. These solutions help to ensure the application data is accurate and identify and
rapidly settle bad loans, which may have been originated based upon fraudulent information.
27
Condensed Consolidated Results of Operations
From January 1, 2009 to June 30, 2010 we have acquired four businesses, which may affect
the comparability of our financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Percentage |
|
|
Six Months Ended June 30, |
|
|
Percentage |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
(In thousands, except for share and per share data) |
|
Statement of income data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Assessment revenues |
|
$ |
134,289 |
|
|
$ |
133,307 |
|
|
|
0.7 |
% |
|
$ |
268,867 |
|
|
$ |
262,873 |
|
|
|
2.3 |
% |
Decision Analytics revenues |
|
|
147,388 |
|
|
|
124,609 |
|
|
|
18.3 |
% |
|
|
288,964 |
|
|
|
240,794 |
|
|
|
20.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
281,677 |
|
|
|
257,916 |
|
|
|
9.2 |
% |
|
|
557,831 |
|
|
|
503,667 |
|
|
|
10.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of items shown
separately below) |
|
|
115,000 |
|
|
|
112,978 |
|
|
|
1.8 |
% |
|
|
229,993 |
|
|
|
220,501 |
|
|
|
4.3 |
% |
Selling, general and administrative |
|
|
42,638 |
|
|
|
38,905 |
|
|
|
9.6 |
% |
|
|
80,152 |
|
|
|
72,225 |
|
|
|
11.0 |
% |
Depreciation and amortization of fixed assets |
|
|
9,944 |
|
|
|
9,718 |
|
|
|
2.3 |
% |
|
|
19,873 |
|
|
|
18,913 |
|
|
|
5.1 |
% |
Amortization of intangible assets |
|
|
7,020 |
|
|
|
8,464 |
|
|
|
(17.1 |
)% |
|
|
14,324 |
|
|
|
16,974 |
|
|
|
(15.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
174,602 |
|
|
|
170,065 |
|
|
|
2.7 |
% |
|
|
344,342 |
|
|
|
328,613 |
|
|
|
4.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
107,075 |
|
|
|
87,851 |
|
|
|
21.9 |
% |
|
|
213,489 |
|
|
|
175,054 |
|
|
|
22.0 |
% |
|
Other income/(expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
92 |
|
|
|
49 |
|
|
|
87.8 |
% |
|
|
124 |
|
|
|
92 |
|
|
|
34.8 |
% |
Realized gains/(losses) on securities, net |
|
|
29 |
|
|
|
33 |
|
|
|
(12.1 |
)% |
|
|
61 |
|
|
|
(365 |
) |
|
|
(116.7 |
)% |
Interest expense |
|
|
(8,445 |
) |
|
|
(8,523 |
) |
|
|
(0.9 |
)% |
|
|
(16,911 |
) |
|
|
(16,677 |
) |
|
|
1.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
(8,324 |
) |
|
|
(8,441 |
) |
|
|
(1.4 |
)% |
|
|
(16,726 |
) |
|
|
(16,950 |
) |
|
|
(1.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
98,751 |
|
|
|
79,410 |
|
|
|
24.4 |
% |
|
|
196,763 |
|
|
|
158,104 |
|
|
|
24.5 |
% |
Provision for income taxes |
|
|
(40,347 |
) |
|
|
(33,471 |
) |
|
|
20.5 |
% |
|
|
(82,984 |
) |
|
|
(67,250 |
) |
|
|
23.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
58,404 |
|
|
$ |
45,939 |
|
|
|
27.1 |
% |
|
$ |
113,779 |
|
|
$ |
90,854 |
|
|
|
25.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share (1) |
|
$ |
0.32 |
|
|
$ |
0.27 |
|
|
|
18.5 |
% |
|
$ |
0.63 |
|
|
$ |
0.52 |
|
|
|
21.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share (1) |
|
$ |
0.31 |
|
|
$ |
0.26 |
|
|
|
19.2 |
% |
|
$ |
0.60 |
|
|
$ |
0.50 |
|
|
|
20.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
180,492,106 |
|
|
|
172,887,331 |
|
|
|
4.4 |
% |
|
|
180,272,828 |
|
|
|
173,409,800 |
|
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
189,541,893 |
|
|
|
179,824,479 |
|
|
|
5.4 |
% |
|
|
189,498,324 |
|
|
|
180,204,300 |
|
|
|
5.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The financial operating data below sets forth the information we believe is useful for investors in evaluating our overall financial performance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Assessment EBITDA |
|
$ |
66,198 |
|
|
$ |
60,598 |
|
|
|
9.2 |
% |
|
$ |
131,694 |
|
|
$ |
121,197 |
|
|
|
8.7 |
% |
Decision Analytics EBITDA |
|
|
57,841 |
|
|
|
45,435 |
|
|
|
27.3 |
% |
|
|
115,992 |
|
|
|
89,744 |
|
|
|
29.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
124,039 |
|
|
$ |
106,033 |
|
|
|
17.0 |
% |
|
$ |
247,686 |
|
|
$ |
210,941 |
|
|
|
17.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of net
income to EBITDA: |
Net income |
|
$ |
58,404 |
|
|
$ |
45,939 |
|
|
|
27.1 |
% |
|
$ |
113,779 |
|
|
$ |
90,854 |
|
|
|
25.2 |
% |
Depreciation and amortization |
|
|
16,964 |
|
|
|
18,182 |
|
|
|
(6.7 |
)% |
|
|
34,197 |
|
|
|
35,887 |
|
|
|
(4.7 |
)% |
Investment income and realized
(gains)/losses on securities, net |
|
|
(121 |
) |
|
|
(82 |
) |
|
|
47.6 |
% |
|
|
(185 |
) |
|
|
273 |
|
|
|
(167.8 |
)% |
Interest expense |
|
|
8,445 |
|
|
|
8,523 |
|
|
|
(0.9 |
)% |
|
|
16,911 |
|
|
|
16,677 |
|
|
|
1.4 |
% |
Provision for income taxes |
|
|
40,347 |
|
|
|
33,471 |
|
|
|
20.5 |
% |
|
|
82,984 |
|
|
|
67,250 |
|
|
|
23.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
124,039 |
|
|
$ |
106,033 |
|
|
|
17.0 |
% |
|
$ |
247,686 |
|
|
$ |
210,941 |
|
|
|
17.4 |
% |
|
|
|
(1) |
|
In conjunction with our initial public offering, the stock of
Insurance Services Office, Inc. converted to stock of Verisk
Analytics, Inc, which effected a fifty-for-one stock split of its
common stock. The numbers in the above table reflect this stock split. |
|
(2) |
|
EBITDA is the financial measure, which management uses to evaluate the
performance of our segments. EBITDA is defined as net income before
investment income and realized (gains)/losses on securities, net,
interest expense, provision for income taxes, and depreciation and
amortization of fixed and intangible assets. In addition, this
Managements Discussion and Analysis includes references to EBITDA
margin, which is computed as EBITDA divided by revenues. See Note 13
of our unaudited condensed consolidated financial statements included
in this 10-Q filing. |
28
Although EBITDA is a non-GAAP financial measure, EBITDA is frequently used by securities analysts, lenders and
other 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 flow 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 requirement for, our working capital needs; |
|
|
|
Although depreciation and amortization are non-cash 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
Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009
Revenues
Revenues were $557.8 million for the six months ended June 30, 2010 compared to $503.7
million for the six months ended June 30, 2009, an increase of $54.1 million or 10.8%. In the
first quarter of 2010 and the latter half of 2009, we acquired three companies, Strategic
Analytics, Enabl-u, and TierMed, collectively referred to as recent acquisitions, which
accounted for an increase of $4.0 million in revenues for the six months ended June 30, 2010.
Excluding recent acquisitions, revenues increased $50.1 million, which included an increase in our Risk Assessment segment of $6.0 million
and an increase in our Decision Analytics segment of $44.1 million. During the second quarter
of 2009, we recognized $2.1 million of revenue that was previously deferred, which lowered our revenue growth for the six months ended June
30, 2010 by 0.5%.
Cost of Revenues
Cost of revenues was $230.0 million for the six months ended June 30, 2010 compared to
$220.5 million for the six months ended June 30, 2009, an increase of $9.5 million or 4.3%. The
increase was primarily due to costs related to recent acquisitions of $2.9 million, an increase
in data and consultant costs of $4.5 million, and an increase in salaries and employee benefits
costs of $3.7 million, which include annual salary increases and medical costs, but reflects no
ESOP allocation expense in 2010 due to the accelerated ESOP allocation prior to our initial
public offering in the fourth quarter of 2009. ESOP allocation expense for the six months ending
June 30, 2009 was $4.5 million. Also within the salaries and employee benefits increase is an
offsetting reduction in pension cost of $3.9 million. The pension cost decreased primarily due
to the partial recovery in 2009 of the fair value of our pension
investments. These increases were partially offset by a
slight decrease in other operating expenses of $1.6 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $80.1 million for the six months ended
June 30, 2010 compared to $72.2 million for the six months ended June 30, 2009, an increase of
$7.9 million or 11.0%. The increase was primarily due to costs attributable to recent
acquisitions of $1.0 million and increased salaries and employee benefits costs of
$6.6 million, which include annual salary increases, medical costs, commissions, and stock
option expense, including the IPO grant. Salaries and employee benefits costs reflect no ESOP
allocation expense for the six months ended June 30, 2010 as compared to $1.3 million for the
six months ended June 30, 2009. Also within the salaries and employee benefits increase is an
offsetting reduction in pension cost of $0.9 million. The pension cost decreased primarily due
to the partial recovery in 2009 of the fair value of our pension
investments. Other increases were within other
general expenses of $2.0 million, which include advertising cost. These increases were partially
offset by a decrease in legal costs of $1.7 million.
29
Depreciation and Amortization of Fixed Assets
Depreciation and amortization of fixed assets was $19.9 million for the six months ended
June 30, 2010 compared to $18.9 million for the six months ended June 30, 2009, an increase of
$1.0 million or 5.1%. 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.
Amortization of Intangible Assets
Amortization of intangible assets was $14.3 million for the six months ended June 30, 2010
compared to $17.0 million for the six months ended June 30, 2009, a decrease of $2.7 million or
15.6%. This decrease was primarily related to a decrease of $3.7 million in intangible assets associated with
acquisitions that have been fully amortized in prior years and was partially offset
by $1.0 million of amortization of intangible assets associated with the three recent
acquisitions.
Investment Income and Realized Gains/(Losses) on Securities, Net
Investment
income and realized gains/(losses) on securities, net was a gain of $0.2 million
for the six months ended June 30, 2010 compared to a loss of $0.3 million for the six months
ended June 30, 2009, an increase of $0.5 million.
Interest Expense
Interest expense was $16.9 million for the six months ended June 30, 2010 compared to $16.7
million for the six months ended June 30, 2009, an increase of $0.2 million or 1.4%. This
increase is primarily due to the amortization of debt issuance costs during the six months ended
June 30, 2010.
Provision for Income Taxes
The provision for income taxes was $83.0 million for the six months ended June 30, 2010
compared to $67.3 million for the six months ended June 30, 2009, an increase of $15.7 million
or 23.4%. The effective tax rate was 42.2% for the six months ended June 30, 2010 compared to
42.5% for the six months ended June 30, 2009. The effective rate for the six months ended June
30, 2010 was lower due to a decrease in nondeductible expenses in 2010 versus 2009 related to
the ISO 401(k) Savings and Employee Stock Ownership Plan, or KSOP. This benefit was partially offset by a non-cash
charge of $2.4 million resulting from reduced tax benefits of Medicare subsidies associated with
legislative changes in the first quarter. Excluding this charge, the effective rate for the six
months ended June 30, 2010 would have been 41.0%.
EBITDA Margin
The EBITDA margin for our consolidated results was 44.4% for
the six months ended June 30,
2010 compared to 41.9% for the six months ended June 30, 2009. Our EBITDA margin reflects no
ESOP allocation expense in 2010 due to the accelerated ESOP allocation prior to our initial
public offering in the fourth quarter of 2009. This resulted in an increase of our EBITDA margin
for the six months ended June 30, 2010, due to the reduction of ESOP allocation expense of
$5.8 million, which positively impacted our EBITDA margin by approximately 1.0%. Also included
in the calculation of our EBITDA margin are decreased pension costs of
$4.8 million, which positively impacted our
EBITDA margin by approximately 0.9%.
Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009
Revenues
Revenues were $281.7 million for the three months ended June 30, 2010 compared to $257.9
million for the three months ended June 30, 2009, an increase of $23.8 million or 9.2%. In the
first quarter of 2010 and the latter half of 2009, we acquired three companies, Strategic
Analytics, Enabl-u, and TierMed, collectively referred to as recent acquisitions, which
accounted for an increase of $2.5 million in revenues for the three months ended June 30, 2010.
Excluding recent acquisitions, revenues increased $21.3 million, which included an increase in
our Risk Assessment segment of $1.0 million and an increase in our Decision Analytics segment of
$20.3 million. During the second quarter of 2009, we recognized $2.1 million of revenue that was
previously deferred, which lowered our
revenue growth for the three months ended June 30, 2010 by 0.9%.
Cost of Revenues
Cost of revenues was $115.0 million for the three months ended June 30, 2010 compared to
$113.0 million for the three months ended June 30, 2009, an increase of $2.0 million or 1.8%.
The increase was primarily due to costs related to recent acquisitions of $1.6 million, and an
increase in salaries and employee benefits costs of $1.7 million, which include annual salary
increases and medical costs, but reflects no ESOP allocation expense in 2010 due to the
accelerated ESOP allocation prior to our initial public offering in the fourth quarter of 2009.
ESOP allocation expense for the three months ending June 30, 2009 was $2.4 million. Also within
the salaries and employee benefits increase is an offsetting reduction in pension cost of $2.0
million. Other increases include data and consultant costs of $0.9 million primarily in our
Decision Analytics segment, offset by a decrease in other operating expenses of $2.2
million.
30
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $42.6 million for the three months ended
June 30, 2010 compared to $38.9 million for the three months ended June 30, 2009, an increase of
$3.7 million or 9.6%. The increase was primarily due to costs attributable to recent
acquisitions of $0.6 million and increased salaries and employee benefits costs of $2.7 million,
which include annual salary increases, medical costs, commissions, and stock option expense,
including the IPO grant. Salaries and employee benefits costs reflect no ESOP allocation expense
for the three months ended June 30, 2010 as compared to $0.7 million for the three months ended
June 30, 2009. Also within the salaries and employee benefits increase is an offsetting
reduction in pension cost of $0.5 million. Other increases were other general expenses of $1.5
million. This increase was partially offset by a decrease in legal costs of $1.1 million.
Provision for Income Taxes
The provision for income taxes was $40.3 million for the three months ended June 30, 2010
compared to $33.5 million for the three months ended June 30, 2009, an increase of $6.8 million
or 20.5%. The effective tax rate was 40.9% for the three months ended June 30, 2010 compared to
42.2% for the three months ended June 30, 2009. The effective rate for the three months ended
June 30, 2010 was lower than the prior period due to lower nondeductible KSOP expenses in 2010.
EBITDA Margin
The EBITDA margin for our consolidated results was 44.0% for the three months ended June
30, 2010 compared to 41.1% for the three months ended June 30, 2009. Our EBITDA margin reflects
no ESOP allocation expense in 2010 due to the accelerated ESOP allocation prior to our initial
public offering in the fourth quarter of 2009. This resulted in an increase in our EBITDA margin
for the three months ended June 30, 2010, due to the reduction of ESOP allocation expense of
$3.1 million, which positively impacted our EBITDA margin by approximately 1.1%. Also included in the calculation of our EBITDA
margin are decreased pension costs of $2.6 million, which positively
impacted our EBITDA margin by approximately 0.9%.
Results of Operations by Segment
Risk Assessment Results of Operations
Revenues
Revenues were $268.9 million for the six months ended June 30, 2010 as compared to $262.9
million for the six months ended June 30, 2009, an increase of $6.0 million or 2.3% and $134.3
million for the three months ended June 30, 2010 as compared to $133.3 million for the three
months ended June 30, 2009, an increase of $1.0 million or 0.7%. During the second quarter of 2009,
we recognized $2.1 million of revenue that was previously deferred, which lowered our revenue growth for the six months and three
months ended June 30, 2010 by 0.8% and 1.6%, respectively. The overall increase within this
segment primarily resulted from an increase in prices derived from continued enhancements to the
content of our solutions and the addition of new customers.
Our revenue by category for the periods presented is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Percentage |
|
|
Six Months Ended June 30, |
|
|
Percentage |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
(In thousands) |
|
|
|
|
|
(In thousands) |
|
|
|
|
Industry standard insurance programs |
|
$ |
87,427 |
|
|
$ |
87,046 |
|
|
|
0.4 |
% |
|
$ |
175,471 |
|
|
$ |
172,193 |
|
|
|
1.9 |
% |
Property-specific rating and
underwriting information |
|
|
34,267 |
|
|
|
33,868 |
|
|
|
1.2 |
% |
|
|
68,226 |
|
|
|
65,869 |
|
|
|
3.6 |
% |
Statistical agency and data services |
|
|
7,190 |
|
|
|
7,077 |
|
|
|
1.6 |
% |
|
|
14,369 |
|
|
|
14,135 |
|
|
|
1.7 |
% |
Actuarial services |
|
|
5,405 |
|
|
|
5,316 |
|
|
|
1.7 |
% |
|
|
10,801 |
|
|
|
10,676 |
|
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk Assessment |
|
$ |
134,289 |
|
|
$ |
133,307 |
|
|
|
0.7 |
% |
|
$ |
268,867 |
|
|
$ |
262,873 |
|
|
|
2.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
Cost of Revenues
Cost of revenues for our Risk Assessment segment was $98.6 million for the six months ended
June 30, 2010 compared to $104.5 million for the six months ended June 30, 2009, a decrease of
$5.9 million or 5.7%. The decrease was primarily due to a decrease in salaries and employee
benefits costs of $4.1 million, which was primarily due to no ESOP allocation expense in 2010 as
compared to $2.5 million in 2009. Also within the salaries and
employee benefits decrease is a reduction in pension cost of $3.3 million. Other decreases were in other general
expenses of $2.1 million, which was partially offset by an increase in data and consultant costs
of $0.3 million.
Cost of revenues for our Risk Assessment segment was $48.7 million for the three months
ended June 30, 2010 compared to $53.0 million for the three months ended June 30, 2009, a
decrease of $4.3 million or 8.1%. The decrease was primarily due to a decrease in salaries and
employee benefits costs of $2.2 million, which was primarily due to no ESOP allocation expense
in 2010 as compared to $1.3 million in 2009. Also within the salaries and employee benefits
decrease is a reduction in pension cost of $1.7 million. Other decreases were in
other general expenses of $2.3 million costs, which was partially offset by an increase in data
and consultant costs of $0.2 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for our Risk Assessment segment were $38.6
million for the six months ended June 30, 2010 compared to $37.2 million for the six months
ended June 30, 2009, an increase of $1.4 million or 3.8%. The increase was primarily due to an
increase in salaries and employee benefit costs of $1.9 million, which include annual salary
increases, medical costs, commissions, and stock option expense, including the IPO grant.
Salaries and employee benefits costs reflect no ESOP allocation expense for the six months ended
June 30, 2010 as compared to $0.7 million for the six months ended June 30, 2009. Also within
the salaries and employee benefits increase is an offsetting reduction in pension cost of $0.7
million. This increase was partially offset by a decrease in legal costs of $0.4 million and
other general expenses of $0.1 million.
Selling, general and administrative expenses for our Risk Assessment segment were $19.4
million for the three months ended June 30, 2010 compared to $19.7 million for the three months
ended June 30, 2009, a decrease of $0.3 million or 1.5%. The decrease was primarily due to a
decrease in legal expenses of $0.6 million and other general expenses of $0.1 million. The
decrease was partially offset by an increase in salaries and employee benefit costs of
$0.4 million, which include annual salary increases, medical costs, commissions, and stock option expense, including the IPO grant.
Salaries and employee benefits costs reflect no ESOP allocation expense for the three months
ended June 30, 2010 as compared to $0.3 million for the three months ended June 30, 2009. Also
within the salaries and employee benefits increase is an offsetting reduction in pension cost of
$0.4 million.
EBITDA Margin
The EBITDA margin for our Risk Assessment segment was 49.0% for the six months ended June
30, 2010 compared to 46.1% for the six months ended June 30, 2009. The primary reason for the
increase in our EBITDA margin for the six months ended June 30, 2010 is the reduction of ESOP
allocation expense of $3.2 million, resulting in a 1.1% positive impact on our EBITDA margin.
Decision Analytics Results of Operations
Revenues
Revenues for our Decision Analytics segment were $288.9 million for the six months ended
June 30, 2010 compared to $240.8 million for the six months ended June 30, 2009, an increase of
$48.1 million or 20.0%. In the first quarter of 2010 and the latter half of 2009, we acquired
three companies. Recent acquisitions accounted for an increase of $4.0 million in revenues for
the six months ended June 30, 2010. Excluding the impact of recent acquisitions, revenue
increased $44.1 million for the six months ended June 30, 2010. Our fraud identification and
detection solutions revenue increased $27.5 million or 21.1%, primarily in our fraud detection
and forensic audit services for the home mortgage and mortgage insurance industries, as well as
an increase in services sold in response to the increased scrutiny and refinancing within the
mortgage industry. Increased revenue in our loss prediction solutions of $9.8 million or 14.7%,
was primarily due to increased penetration of our existing customers. Our loss quantification solution revenues increased $10.8 million or 25.0%, as a
result of new customer contracts and claims volume increases associated with severe weather
conditions and other damages caused by disasters experienced in the United States.
32
Revenues for our Decision Analytics segment were $147.4 million for the three months ended
June 30, 2010 compared to $124.6 million for the three months ended June 30, 2009, an increase
of $22.8 million or 18.3%. In the first quarter of 2010 and the latter half of 2009, we acquired
three companies. Recent acquisitions accounted for an increase of $2.5 million in revenues for
the three months ended June 30, 2010. Excluding the impact of recent acquisitions, revenue
increased $20.3 million for the three months ended June 30, 2010. Our fraud identification and
detection solutions revenue increased $12.6 million or 18.9% primarily in our fraud detection
and forensic audit services for the home mortgage and mortgage insurance industries, as well as
an increase in services sold in response to the increased scrutiny and refinancing within the
mortgage industry. Our loss prediction solutions increase of $3.8 million or 10.7% was primarily
from increased penetration of our existing customers. Revenue in our loss quantification solution revenues increased $6.4 million or 29.0%
as a result of new customer contracts and claims volume increases associated with severe weather
conditions and other damages caused by disasters experienced in the United States.
Our revenue by category for the periods presented is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Percentage |
|
|
Six Months Ended June 30, |
|
|
Percentage |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
(In thousands) |
|
|
|
|
|
(In thousands) |
|
|
|
|
Fraud
identification
and detection
solutions |
|
$ |
79,195 |
|
|
$ |
66,633 |
|
|
|
18.9 |
% |
|
$ |
157,990 |
|
|
$ |
130,475 |
|
|
|
21.1 |
% |
Loss prediction
solutions |
|
|
39,779 |
|
|
|
35,943 |
|
|
|
10.7 |
% |
|
|
76,707 |
|
|
|
66,896 |
|
|
|
14.7 |
% |
Loss
quantification
solutions |
|
|
28,414 |
|
|
|
22,033 |
|
|
|
29.0 |
% |
|
|
54,267 |
|
|
|
43,423 |
|
|
|
25.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Decision Analytics |
|
$ |
147,388 |
|
|
$ |
124,609 |
|
|
|
18.3 |
% |
|
$ |
288,964 |
|
|
$ |
240,794 |
|
|
|
20.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
Cost of revenues for our Decision Analytics segment was $131.4 million for the six months
ended June 30, 2010 compared to $116.0 million for the six months ended June 30, 2009, an
increase of $15.4 million or 13.3%. The increase included $2.9 million in costs attributable to
recent acquisitions. Excluding the impact of these acquisitions, the cost of revenues increased
$12.5 million, primarily due to an increase in salaries and employee benefits of $7.8 million,
which include annual salary increases and increased medical costs. Salaries and employee
benefits costs reflect no ESOP allocation expense for the six months ended June 30, 2010 as
compared to $2.0 million for the six months ended June 30, 2009. Also within the salaries and
employee benefits increase is an offsetting reduction in pension cost of $0.6 million. Other
increases include data and consultant costs of $4.2 million, and other operating expenses of
$0.5 million.
Cost of revenues for our Decision Analytics segment was $66.3 million for the three months
ended June 30, 2010 compared to $60.0 million for the three months ended June 30, 2009, an
increase of $6.3 million or 10.6%. The increase included $1.6 million in costs attributable to
recent acquisitions. Excluding the impact of these acquisitions, the cost of revenues increased
$4.7 million, primarily due to an increase in salaries and employee benefits of $3.9 million,
which include annual salary increases and increased medical costs. Salaries and employee
benefits costs reflect no ESOP allocation expense for the six months ended June 30, 2010 as
compared to $1.1 million for the six months ended June 30, 2009. Also within the salaries and
employee benefits increase is an offsetting reduction in pension cost of $0.3 million. Other
increases include data and consultant costs of $0.7 million and other operating expenses of $0.1
million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $41.5 million for the six months ended
June 30, 2010 compared to $35.0 million for the six months ended June 30, 2009, an increase of
$6.5 million or 18.6%. The increase was due to costs attributable to recent acquisitions of $1.0
million and an increase in salaries and employee benefits costs of $4.7 million, which include
annual salary increases, medical costs, commissions, and stock option expense, including the IPO
grant. Salaries and employee benefits costs reflect no ESOP allocation expense for the six
months ended June 30, 2010 as compared to $0.6 million for the six months ended June 30, 2009.
Also within the salaries and employee benefits increase is an offsetting reduction in pension
cost of $0.2 million. Other increases include an increase in general expenses of $2.1 million.
These increases are partially offset by a decrease in legal expense of $1.3 million.
Selling, general and administrative expenses were $23.2 million for the three months ended
June 30, 2010 compared to $19.2 million for the three months ended June 30, 2009, an increase of
$4.0 million or 21.1%. The increase was due to costs attributable to recent acquisitions of $0.6
million and an increase in salaries and employee benefits costs of $2.3 million, which include
annual salary increases, medical costs, commissions, and stock option expense, including the IPO
grant. Salaries and employee benefits costs reflect no ESOP allocation expense for the three
months ended June 30, 2010 as compared to $0.4 million for the three months ended June 30, 2009.
Also within the salaries and employee benefits increase is an offsetting reduction in pension
cost of $0.1 million. Other increases include an increase in general expenses of $1.6 million.
These increases are partially offset by a decrease in legal expense of $0.5 million.
33
EBITDA Margin
The EBITDA margin for our Decision Analytics segment was 40.1% for the six months ended
June 30, 2010 compared to 37.3% for the six months ended June 30, 2009. Included within the
increase in our EBITDA margin for the six months ended June 30, 2010 is the reduction of ESOP
allocation expense of $2.6 million, resulting in a 0.9% positive impact on our EBITDA margin.
Liquidity and Capital Resources
As of June 30, 2010 and December 31, 2009, we had cash and cash equivalents and
available-for-sale securities of $111.9 million and $77.0 million, respectively. Subscriptions
for our solutions are billed and generally paid in advance of rendering service either quarterly
or in full upon commencement of the subscription period, which is usually for one year, and they
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 committed credit facilities, we believe we will have sufficient cash to meet
our working capital and capital expenditure needs, including acquisition contingent payments.
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 those
businesses, our cash position is favorably affected by revenue growth, which results in a source
of cash due to our customers prepaying for most of our services.
Our capital expenditures, which include non-cash purchases of fixed assets, as a percentage
of revenues for the six months ended June 30, 2010 and 2009, were 3.0% and 3.7%, respectively.
Expenditures related to developing and enhancing our solutions are predominately related to
internal use software and are capitalized in accordance with the accounting guidance for costs
of computer software developed or obtained for internal use. The amounts capitalized in
accordance with the accounting guidance for software to be sold, leased or otherwise marketed
are not significant to the financial statements.
To provide liquidity to our stockholders, we have historically used our cash for
repurchases of our common stock from our stockholders. During the six months ended June 30,
2009, we redeemed $38.3 million of our ISO Class A common stock. A substantial portion of the
share redemptions included in the total above was completed pursuant to the terms of the
Insurance Service Office, Inc. 1996 Incentive Plan, or the Option Plan. The obligation to redeem
shares issued under the Option Plan terminated upon completion of our initial public offering.
On April 29, 2010, our board of directors authorized a $150.0 million stock repurchase program.
See Note 10 to our condensed consolidated financial statements included in this quarterly report
on Form 10-Q. During the six months ended June 30, 2010, we repurchased $64.9 million of our
publicly traded Class A common stock and $15.1 million of shares used in the settlement of taxes upon
the exercise of stock options.
We provide pension and postretirement benefits to certain qualifying active employees and
retirees. Based on the pension funding policy, we contributed
$9.7 million to the pension plan during the six months ended June 30, 2010 and expect to contribute approximately $11.3 million to
the pension plan in the remaining periods of 2010. Under the postretirement plan, we provide certain
healthcare and life insurance benefits to qualifying participants; however, participants are
required to pay a stated percentage of the premium coverage. We contributed approximately $2.1
million to the postretirement plan during the six months ended June 30, 2010 and expect to
contribute approximately $2.8 million in the remaining periods of 2010. See Note 12 to our
condensed consolidated financial statements included in this quarterly report on Form 10-Q.
Financing and Financing Capacity
We had total debt, excluding capital lease and other obligations, of $525.0 million and
$585.0 million at June 30, 2010 and December 31, 2009, respectively. The debt at June 30, 2010
was held under long-term loan facilities drawn to finance our stock repurchases and
acquisitions.
As of June 30, 2010, all of our long-term loan facilities are uncommitted facilities and
our syndicated revolving credit facility is a committed facility. We have financed and expect to
finance our short-term working capital needs and acquisition contingent payments through cash
from operations and borrowings from a combination of our long-term shelf facilities and our
syndicated revolving credit facility, which is made at variable rates of interest based on LIBOR
plus 2.50%. On January 19, 2010 and January 25, 2010, we repaid $10.0 million and $50.0 million,
respectively, of our outstanding borrowings from the syndicated revolving credit facility. We had no borrowings from our syndicated revolving credit facility
outstanding as of June 30, 2010 and $60.0 million
outstanding as of December 31, 2009. We had available capacity of
$418.5 million from our syndicated revolving credit facility at June 30, 2010.
34
We have long-term loan facilities under uncommitted master shelf agreements with New York
Life and Aviva Investors North America, or Aviva, with available capacity at June 30, 2010 in
the amount of $30.0 million and $20.0 million, respectively. We can borrow under the New York
Life facility until March 16, 2013, and under the Aviva facility until December 10, 2011. Our
long-term uncommitted master shelf facility with Prudential Capital Group, or Prudential,
expired on February 28, 2010. This facility contained additional available capacity of
$115.0 million. We expect to extend the facility with Prudential during the third quarter of
2010.
Notes outstanding under these facilities mature over the next six years. Individual
borrowings are made at a fixed rate of interest determined at the time of the borrowing and
interest is payable quarterly. The weighted average rate of interest with respect to our
outstanding long-term borrowings was 6.15% and 5.80% for the six months ended June 30, 2010 and
2009, respectively. The uncommitted master shelf agreements contain certain covenants that limit
our ability to create liens, enter into sale and leaseback transactions and consolidate, merge
or sell assets to another company. The uncommitted master shelf agreements also contain
financial covenants that require us to maintain a fixed charge coverage ratio of no less than
275% and a leverage ratio of no more than 300%. We were in compliance with all debt covenants as
of June 30, 2010, due to our low leverage and strong operating performance, and we have
additional liquidity under our debt covenants.
We have a $420.0 million syndicated revolving credit facility with Bank of America, N.A.
The credit facility contains certain customary financial and other covenants that, among other
things, impose certain restrictions on indebtedness, liens, investments, and capital expenditures. These covenants also place restrictions on mergers,
asset sales, sale and leaseback transactions, payments between us and our subsidiaries, and
certain transactions with affiliates. The financial covenants require that, at the end of any
fiscal quarter, we have a consolidated interest coverage ratio of at least 3.0 to 1.0 and that
during any period of four fiscal quarters we maintain a consolidated funded debt leverage ratio
of below 3.0 to 1.0. We were in compliance with all debt covenants as of June 30, 2010, due to
our low leverage and strong operating performance, and we have additional liquidity under our
debt covenants.
Cash Flow
The following table summarizes our cash flow data:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Net cash provided by operating activities |
|
$ |
173,034 |
|
|
$ |
184,529 |
|
Net cash used in investing activities |
|
$ |
(22,924 |
) |
|
$ |
(152,683 |
) |
Net cash used in financing activities |
|
$ |
(114,617 |
) |
|
$ |
(19,157 |
) |
Operating Activities
Net cash provided by operating activities decreased to $173.0 million for the six months
ended June 30, 2010 from $184.5 million for the six months ended June 30, 2009. The decrease in
net cash provided by operating activities was principally due to an increase in salary and
employee related payments of approximately $11.0 million due to an additional pay-cycle that
occurred in June 2010. In the prior year, this additional pay-cycle occurred in July 2009. Our
payroll is processed on a bi-weekly basis thereby requiring an additional pay-cycle in certain
periods. The increased pension contributions as well as the timing of certain items such as the
accelerated collection of our first quarter customer invoices in the fourth quarter of 2009, the
additional pay-cycle, and the timing of certain annual bonus payments mitigated the growth in
our operating cash flow during the first-half of 2010.
Investing Activities
Net cash used in investing activities was $22.9 million for the six months ended June 30,
2010 compared to $152.7 million for the six months ended June 30, 2009. The decrease in net cash
used in investing activities was principally due to a decrease in acquisition and earnout related payments of
$129.0 million.
Financing Activities
Net cash used in financing activities was $114.6 million for the six months ended June 30,
2010 and $19.2 million for the six months ended June 30, 2009. The increase in net cash used in
financing activities is principally due to an increase in net debt repayments of $81.4 million,
and increased stock repurchases and redemptions of $39.1 million, partially offset by increases
in proceeds from stock options exercised of $15.6 million and excess tax benefits from exercised
stock options of $9.4 million.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
35
Contractual Obligations
There have been no material changes to our contractual obligations outside the ordinary
course of our business from those reported in our annual report on Form 10-K and filed with the
Securities and Exchange Commission on March 9, 2010.
Critical Accounting Estimates
Our managements discussion and analysis of financial condition and results of operations
are based on our condensed consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation
of these financial statements require management to make estimates and judgments that affect reported amounts of assets and liabilities and related disclosures of contingent assets and
liabilities at the dates of the financial statements and revenue and expenses during the
reporting periods. These estimates are based on historical experience and on other assumptions
that are believed to be reasonable under the circumstances. On an ongoing basis, management
evaluates its estimates, including those related to revenue recognition, goodwill and intangible
assets, pension and other post retirement benefits, stock-based compensation, and income taxes.
Actual results may differ from these assumptions or conditions. Some of the judgments that
management makes in applying its accounting estimates in these areas are discussed under the
heading Managements Discussion and Analysis of Financial Condition and Results of Operations
in our annual report on Form 10-K dated and filed with the Securities and Exchange Commission on
March 9, 2010. Since the date of our annual report on Form 10-K, there have been no material
changes to our critical accounting estimates except as noted below.
As a result of the Patient Protection and Affordable Care Act and the Health Care and
Education Reconciliation Act of 2010, the tax treatment of federal subsidies paid to sponsors of
retiree health benefit plans that provide prescription drug benefits that are at least
actuarially equivalent to the corresponding benefits provided under Medicare Part D was
effectively changed. This legislative change reduces future tax benefits of the coverage we
provided to participants in the Postretirement Plan. We are required to account for this change
in the period during which the law is enacted. As a result, we recorded a non-cash tax charge to
the provision for income taxes of $2.4 million for the six months ended June 30, 2010.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
Market risks at June 30, 2010 have not materially changed from those discussed under
Item 7A in our annual report on Form 10-K dated and filed with the Securities and Exchange
Commission on March 9, 2010.
Item 4. Controls and Procedures
We will be required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 when we
file our annual report on Form 10-K for the year ending December 31, 2010.
Disclosure Controls and Procedures
We are required to maintain disclosure controls and procedures (as that term is defined in
Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) that
are designed to ensure that information required to be disclosed in our reports under the
Exchange Act is recorded, processed, summarized, and reported within the time periods specified
in the Securities and Exchange Commissions rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives.
Our management, with the participation of the Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Companys disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by
this quarterly report on Form 10-Q. Based upon the foregoing assessments, our Chief Executive
Officer and Chief Financial Officer have concluded that, as of June 30, 2010, our disclosure
controls and procedures were effective.
Changes in Internal Control over Financial Reporting
During the six month period ending June 30, 2010, there has been no change in our internal
control over financial reporting that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
36
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are party to legal proceedings with respect to a variety of matters in the ordinary
course of business, including those matters described below. We are 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 they may have on our results of
operations, financial position or cash flows. This is primarily because many of these cases
remain in their early stages and only limited discovery has taken place. Although we believe we
have strong defenses for the litigation proceedings described below, we could in the future
incur judgments or enter into settlements of claims that could have a material adverse effect on
our results of operations, financial position or cash flows.
See Note 15 to our condensed consolidated financial statements for the six months ended
June 30, 2010 for a description of our significant current legal proceedings, which is
incorporated by reference herein.
Item 1A. Risk Factors
There has been no material change in the information provided under the heading Risk
Factors in our annual report on Form 10-K dated and filed with the Securities and Exchange
Commission on March 9, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent
Sales of Unregistered Securities
There
were no unregistered sales of equity securities by the Company during
the period covered by this report.
Issuer
Purchases of Equity Securities (1)
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Maximum Dollar |
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Total Number of |
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Value of Shares that |
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Shares Purchased |
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May Yet Be |
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Average |
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as Part of Publicly |
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Purchased Under the |
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Total Number of |
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Price Paid |
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Announced Plans |
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Plans or Programs (in |
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Period |
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Shares Purchased |
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per Share (3) |
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or Programs |
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thousands) |
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April 29, 2010 through April 30, 2010 |
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$ |
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$ |
150,000 |
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May 1,
2010 through May 31, 2010 (2) |
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1,487,743 |
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$ |
29.60 |
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984,700 |
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$ |
120,854 |
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June 1, 2010 through June 30, 2010 |
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1,188,406 |
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$ |
30.09 |
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1,188,406 |
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$ |
85,099 |
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2,676,149 |
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$ |
29.87 |
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2,173,106 |
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$ |
85,099 |
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(1) |
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On April 29, 2010, the Companys board of directors authorized a $150.0 million share
repurchase program of the Companys Class A common stock. Under this repurchase program, the
Company may repurchase stock in the open market or as otherwise determined by the Company. This
authorization has no expiration date and may be suspended or terminated at any time. |
|
(2) |
|
In May 2010, certain employees exercised stock options and
covered the statutory minimum tax withholdings of $15,051 through a net settlement of 503,043
shares, based on and consistent with the closing stock price on the
exercise dates. See Note 11 of our condensed consolidated financial statements included in this
quarterly report on Form 10-Q. |
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(3) |
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The average price paid per
share relates to shares purchased as part of the publicly announced
program, excluding the effect of the net share settlement described in footnote 2 above. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. (Removed and Reserved)
Item 5. Other Information
None.
Item 6. Exhibits
See Exhibit Index.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
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Verisk Analytics, Inc.
(Registrant)
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By: |
/s/ Mark V. Anquillare
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Date: August 4, 2010 |
|
Mark V. Anquillare |
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Senior Vice President and Chief Financial Officer
(Principal Financial Officer and
Duly Authorized
Officer) |
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38
EXHIBIT INDEX
|
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Exhibit |
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Number |
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Description |
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31.1 |
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Certification of the Chief Executive Officer of
Verisk Analytics, Inc. pursuant to Rule 13a-14
under the Securities Exchange Act of 1934.* |
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31.2 |
|
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Certification of the Chief Financial Officer of
Verisk Analytics, Inc. pursuant to Rule 13a-14
under the Securities Exchange Act of 1934.* |
|
32.1 |
|
|
Certification of the Chief Executive Officer and
Chief Financial Officer of Verisk Analytics,
Inc. pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.* |
39