Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 001-34480

 

 

VERISK ANALYTICS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   26-2994223

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

545 Washington Boulevard

Jersey City, NJ

  07310-1686
(Address of principal executive offices)   (Zip Code)

(201) 469-2000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of October 26, 2012, there was the following number of shares outstanding of each of the issuer’s classes of common stock:

 

Class   

Shares Outstanding

Class A common stock $.001 par value

   166,798,524

 

 

 


Table of Contents

Verisk Analytics, Inc.

Index to Form 10-Q

Table of Contents

 

     Page Number  
PART I — FINANCIAL INFORMATION  

Item 1. Financial Statements (unaudited)

     3   

Condensed Consolidated Balance Sheets

     3   

Condensed Consolidated Statements of Operations

     4   

Condensed Consolidated Statements of Comprehensive Income

     5   

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

     6   

Condensed Consolidated Statements of Cash Flows

     7   

Notes to Condensed Consolidated Financial Statements

     8   

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

     26   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     34   

Item 4. Controls and Procedures

     34   

PART II — OTHER INFORMATION

  

Item 1. Legal Proceedings

     36   

Item 1A. Risk Factors

     36   

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

     36   

Item 3. Defaults Upon Senior Securities

     36   

Item 4. Mine Safety Disclosures

     36   

Item 5. Other Information

     36   

Item 6. Exhibits

     36   

SIGNATURES

     37   

Exhibit 10.1

  

Exhibit 31.1

  

Exhibit 31.2

  

Exhibit 32.1

  


Table of Contents

Item 1. Financial Statements

VERISK ANALYTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

As of September 30, 2012 and December 31, 2011

 

     2012
(unaudited)
    2011  
     (In thousands, except for share
and per share data)
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 97,770      $ 191,603   

Available-for-sale securities

     4,895        5,066   

Accounts receivable, net of allowance for doubtful accounts as of September 30, 2012 and December 31, 2011 of $4,203 and $4,158, respectively

     175,520        153,339   

Prepaid expenses

     25,387        21,905   

Deferred income taxes, net

     15,614        3,818   

Federal and foreign income taxes receivable

     8,538        25,242   

State and local income taxes receivable

     —          11,433   

Other current assets

     33,613        41,248   
  

 

 

   

 

 

 

Total current assets

     361,337        453,654   

Noncurrent assets:

    

Fixed assets, net

     144,799        119,411   

Intangible assets, net

     530,023        226,424   

Goodwill

     1,220,384        709,944   

Deferred income taxes, net

     —          10,480   

Other assets

     46,890        21,193   
  

 

 

   

 

 

 

Total assets

   $ 2,303,433      $ 1,541,106   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

    

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 176,464      $ 162,992   

Acquisition related liabilities

     —          250   

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

     265,794        5,554   

Pension and postretirement benefits, current

     2,912        4,012   

Fees received in advance

     219,800        176,842   

State and local income taxes payable

     3,287        —     
  

 

 

   

 

 

 

Total current liabilities

     668,257        349,650   

Noncurrent liabilities:

    

Long-term debt

     1,301,683        1,100,332   

Pension benefits

     22,522        109,161   

Postretirement benefits

     5,369        18,587   

Deferred income taxes, net

     80,755        —     

Other liabilities

     82,799        61,866   
  

 

 

   

 

 

 

Total liabilities

     2,161,385        1,639,596   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity (deficit):

    

Common stock, $.001 par value; 1,200,000,000 shares authorized; 544,003,038 shares issued and 166,259,163 and 164,285,227 outstanding as of September 30, 2012 and December 31, 2011, respectively

     137        137   

Unearned KSOP contributions

     (544     (691

Additional paid-in capital

     991,739        874,808   

Treasury stock, at cost, 377,743,875 and 379,717,811 shares as of September 30, 2012 and December 31, 2011, respectively

     (1,579,859     (1,471,042

Retained earnings

     807,428        576,585   

Accumulated other comprehensive losses

     (76,853     (78,287
  

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     142,048        (98,490
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity (deficit)

   $ 2,303,433      $ 1,541,106   
  

 

 

   

 

 

 

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

 

3


Table of Contents

VERISK ANALYTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

For The Three and Nine Months Ended September 30, 2012 and 2011

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2012     2011     2012     2011  
     (In thousands, except for share and per share data)  

Revenues (including amounts from related parties of $0 and $4,699 for the three months ended September 30, 2012 and 2011 and $0 and $13,882 for the nine months ended September 30, 2012 and 2011, respectively) (1)

   $ 398,863      $ 340,098      $ 1,118,590      $ 980,247   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Cost of revenues (exclusive of items shown separately below)

     156,749        137,619        437,153        393,360   

Selling, general and administrative

     58,707        51,475        175,159        156,640   

Depreciation and amortization of fixed assets

     12,714        10,798        37,448        32,958   

Amortization of intangible assets

     15,442        8,797        36,216        26,129   

Acquisition related liabilities adjustment

     —          —          —          (3,364
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     243,612        208,689        685,976        605,723   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     155,251        131,409        432,614        374,524   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Investment income

     136        99        397        99   

Realized (loss) gain on securities, net

     (638     (86     (338     401   

Interest expense

     (18,133     (14,593     (51,895     (39,093
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (18,635     (14,580     (51,836     (38,593
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     136,616        116,829        380,778        335,931   

Provision for income taxes

     (53,705     (45,842     (149,935     (133,491
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 82,911      $ 70,987      $ 230,843      $ 202,440   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income per share

   $ 0.50      $ 0.43      $ 1.39      $ 1.21   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per share

   $ 0.48      $ 0.41      $ 1.34      $ 1.16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding:

        

Basic

     165,978,080        164,195,325        165,587,027        166,728,786   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     171,660,543        171,169,658        171,637,571        174,255,965   
  

 

 

   

 

 

   

 

 

   

 

 

 

  

 

(1) See Note 13. Related Parties for further information.

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

 

4


Table of Contents

VERISK ANALYTCS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

For The Three and Nine Months Ended September 30, 2012 and 2011

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2012      2011     2012     2011  
     (In thousands)  

Net income

   $ 82,911       $ 70,987      $ 230,843      $ 202,440   
  

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

         

Unrealized holding gain (loss) on investments

     96         (290     (217     (542

Unrealized foreign currency gain (loss)

     4         (555     (130     18   

Pension and postretirement unfunded liability adjustment

     401         697        1,781        2,671   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     501         (148     1,434        2,147   
  

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 83,412       $ 70,839      $ 232,277      $ 204,587   
  

 

 

    

 

 

   

 

 

   

 

 

 

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

 

5


Table of Contents

VERISK ANALYTICS, INC.

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

For The Year Ended December 31, 2011 and The Nine Months Ended September 30, 2012

 

                                                    Accumulated        
                            Unearned     Additional                 Other     Total  
    Common Stock Issued           KSOP     Paid-in     Treasury     Retained     Comprehensive     Stockholders’  
    Class A     Class B (Series 1)     Class B (Series 2)     Par Value     Contributions     Capital     Stock     Earnings     Losses     Equity (Deficit)  
    (In thousands, except for share data)  

Balance, December 31, 2010

    150,179,126        198,327,962        193,665,008      $ 135      $ (988   $ 754,708      $ (1,106,321   $ 293,827      $ (55,803   $ (114,442

Net income

    —          —          —          —          —          —          —          282,758        —          282,758   

Other comprehensive loss

    —          —          —          —          —          —          —          —          (22,484     (22,484

Conversion of Class B (Series 1) common stock

    198,327,962        (198,327,962     —          —          —          —          —          —          —          —     

Conversion of Class B (Series 2) common stock

    193,665,008        —          (193,665,008     —          —          —          —          —          —          —     

Treasury stock acquired—Class A (11,326,624 shares)

    —          —          —          —          —          —          (380,710     —          —          (380,710

KSOP shares earned

    —          —          —          —          297        12,318        —          —          —          12,615   

Stock options exercised, including tax benefit of $57,684 (3,716,165 shares reissued from treasury stock)

    1,830,942        —          —          2        —          85,051        15,978        —          —          101,031   

Stock based compensation

    —          —          —          —          —          22,656        —          —          —          22,656   

Other stock issuances

    —          —          —          —          —          75        11        —          —          86   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

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

Net income

    —          —          —          —          —          —          —          230,843        —          230,843   

Other comprehensive income

    —          —          —          —          —          —          —          —          1,434        1,434   

Treasury stock acquired—Class A (2,776,655 shares)

    —          —          —          —          —          —          (127,826     —          —          (127,826

KSOP shares earned

    —          —          —          —          147        9,334        —          —          —          9,481   

Stock options exercised, including tax benefit of $63,461 (4,750,591 shares reissued from treasury stock)

    —          —          —          —          —          88,081        18,989        —          —          107,070   

Stock based compensation

    —          —          —          —          —          19,303        —          —          —          19,303   

Other stock issuances

    —          —          —          —          —          213        20        —          —          233   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2012

    544,003,038        —          —        $ 137      $ (544   $ 991,739      $ (1,579,859   $ 807,428      $ (76,853   $ 142,048   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

6


Table of Contents

VERISK ANALYTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

For The Nine Months Ended September 30, 2012 and 2011

 

     2012     2011  
     (In thousands)  

Cash flows from operating activities:

    

Net income

   $ 230,843      $ 202,440   

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

    

Depreciation and amortization of fixed assets

     37,448        32,958   

Amortization of intangible assets

     36,216        26,129   

Amortization of debt issuance costs and original issue discount

     1,649        1,206   

Allowance for doubtful accounts

     576        852   

KSOP compensation expense

     9,481        9,630   

Stock based compensation

     19,303        17,288   

Noncash charges associated with performance-based appreciation awards

     —          627   

Acquisition related liabilities adjustment

     —          (3,364

Realized loss (gain) on securities, net

     338        (401

Deferred income taxes

     (526     (2,083

Loss on disposal of assets

     88        635   

Excess tax benefits from exercised stock options

     (55,056     (5,470

Other operating

     215        133   

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

    

Accounts receivable

     (3,026     (24,445

Prepaid expenses and other assets

     7,126        (3,229

Federal and foreign income taxes

     84,621        48,925   

State and local income taxes

     14,887        5,382   

Accounts payable and accrued liabilities

     3,168        12,509   

Fees received in advance

     39,588        24,841   

Pension and postretirement benefits

     (97,809     (15,216

Other liabilities

     (8,133     (5,593
  

 

 

   

 

 

 

Net cash provided by operating activities

     320,997        323,754   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions, net of cash acquired for 2012 and 2011 of $36,113 and $590, respectively

     (743,091     (121,721

Purchase of non-controlling equity investment in non-public companies

     (2,000     —     

Earnout payments

     (250     (3,500

Escrow funding associated with acquisitions

     (37,800     (19,560

Purchases of fixed assets

     (55,724     (41,925

Purchases of available-for-sale securities

     (1,317     (1,422

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

     1,478        1,722   
  

 

 

   

 

 

 

Net cash used in investing activities

     (838,704     (186,406
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from issuance of long-term debt, net of original issue discount

     347,224        448,956   

Repayment of current portion of long-term debt

     —          (125,000

Repayment of short-term debt refinanced on a long-term basis

     (347,224     (295,000

Proceeds from issuance of short-term debt with original maturities greater than three months

     —          120,000   

Proceeds from short-term debt, net

     462,224        22,311   

Payment of debt issuance costs

     (3,623     (4,542

Repurchase of Class A common stock

     (128,073     (340,122

Proceeds from stock options exercised

     43,571        28,433   

Excess tax benefits from exercised stock options

     55,056        5,470   

Other financing, net

     (5,151     —     
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     424,004        (139,494
  

 

 

   

 

 

 

Effect of exchange rate changes

     (130     18   
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (93,833     (2,128

Cash and cash equivalents, beginning of period

     191,603        54,974   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 97,770      $ 52,846   
  

 

 

   

 

 

 

Supplemental disclosures:

    

Taxes paid

   $ 51,017      $ 82,526   
  

 

 

   

 

 

 

Interest paid

   $ 41,431      $ 25,876   
  

 

 

   

 

 

 

Noncash investing and financing activities:

    

Repurchase of Class A common stock included in accounts payable and accrued liabilities

   $ 953      $ 2,244   
  

 

 

   

 

 

 

Deferred tax (liability) asset established on date of acquisition

   $ (78,832   $ 1,280   
  

 

 

   

 

 

 

Capital lease obligations

   $ 3,544      $ 7,683   
  

 

 

   

 

 

 

Capital expenditures included in accounts payable and accrued liabilities

   $ 998      $ 778   
  

 

 

   

 

 

 

Increase in goodwill due to acquisition related escrow distributions

   $ 4,128      $ —     
  

 

 

   

 

 

 

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

 

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Table of Contents

VERISK ANALYTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except for share and per share data, unless otherwise stated)

1. Organization:

Verisk Analytics, Inc. and its consolidated subsidiaries (“Verisk” or the “Company”) enable risk-bearing businesses to better understand and manage their risks. The Company provides its customers proprietary data that, combined with analytic methods, create embedded decision support solutions. The Company is one of the largest aggregators and providers of data pertaining to property and casualty (“P&C”) insurance risks in the United States of America (“U.S.”). The Company offers solutions for detecting fraud in the U.S. P&C insurance, mortgage, financial services, and healthcare industries and sophisticated methods to predict and quantify loss in diverse contexts ranging from natural catastrophes to supply chain to health insurance. The Company provides solutions, including data, statistical models or tailored analytics, all designed to allow clients to make more logical decisions.

Verisk was established to serve as the parent holding company of Insurance Services Office, Inc. (“ISO”). ISO was formed in 1971 as an advisory and rating organization for the P&C insurance industry to provide statistical and actuarial services, to develop insurance programs and to assist insurance companies in meeting state regulatory requirements. Over the past decade, the Company has broadened its data assets, entered new markets, placed a greater emphasis on analytics, and pursued strategic acquisitions. Verisk’s Class A common stock trades under the ticker symbol “VRSK” on the NASDAQ Global Select Market.

2. Basis of Presentation and Summary of Significant Accounting Policies:

The accompanying unaudited condensed consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the U.S. (“U.S. GAAP”). The preparation of financial statements in conformity with these accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include acquisition purchase price allocations, the fair value of goodwill, the realization of deferred tax assets, acquisition related liabilities, fair value of stock based compensation, liabilities for pension and postretirement benefits, and the estimate for the allowance for doubtful accounts. Actual results may ultimately differ from those estimates. Certain reclassifications have been made related to the segment reporting within Decision Analytics’ revenue categories in the notes to the condensed consolidated financial statements to conform to the respective 2012 presentation.

The condensed consolidated financial statements as of September 30, 2012 and for the three and nine months ended September 30, 2012 and 2011, in the opinion of management, include all adjustments, consisting of normal recurring accruals, to present fairly the Company’s financial position, results of operations and cash flows. The operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements and related notes for the three and nine months ended September 30, 2012 have been prepared on the same basis as and should be read in conjunction with the annual report on Form 10-K for the year ended December 31, 2011. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules of the Securities and Exchange Commission (“SEC”). The Company believes the disclosures made are adequate to keep the information presented from being misleading.

Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02, Intangibles-Goodwill and Other (“ASU No. 2012-02”). Under ASU No. 2012-02, an entity has an option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. ASU No. 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company has elected not to early adopt. ASU 2012-02 is not expected to have a material impact on the Company’s consolidated financial statements as the Company has incorporated and will continue to incorporate consideration of qualitative factors in the indefinite-lived intangible asset impairment testing.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“ASU No. 2011-05”). Under ASU No. 2011-05, an entity has an option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. ASU No. 2011-05 was adopted by the Company on January 1, 2012 and did not have a material impact on the Company’s condensed consolidated financial statements.

3. Investments:

The following is a summary of available-for-sale securities:

 

            Gross      Gross        
     Adjusted      Unrealized      Unrealized        
     Cost      Gain      Loss     Fair Value  

September 30, 2012

          

Registered investment companies

   $ 4,812       $ 83       $ —        $ 4,895   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ 4,812       $ 83       $ —        $ 4,895   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2011

          

Registered investment companies

   $ 4,618       $ 439       $ —        $ 5,057   

Equity securities

     14         —           (5     9   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ 4,632       $ 439       $ (5   $ 5,066   
  

 

 

    

 

 

    

 

 

   

 

 

 

In addition to the available-for-sale securities above, the Company has equity investments in non-public companies in which the Company acquired non-controlling interests and for which no readily determinable market value exists. These securities were accounted for under the cost method in accordance with Accounting Standards Codification (“ASC”) 323-10-25, The Equity Method of Accounting for Investments in Common Stock. At September 30, 2012 and December 31, 2011, the carrying value of such securities was $4,764 and $3,443, respectively, and has been included in “Other assets” in the accompanying condensed consolidated balance sheets.

 

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4. Fair Value Measurements:

Certain assets and liabilities of the Company are reported at fair value in the accompanying condensed consolidated balance sheets. Such assets and liabilities include amounts for both financial and non-financial instruments. To increase consistency and comparability of assets and liabilities recorded at fair value, ASC 820-10, Fair Value Measurements (“ASC 820-10”) establishes a three-level fair value hierarchy to prioritize the inputs to valuation techniques used to measure fair value. ASC 820-10 requires disclosures detailing the extent to which companies measure assets and liabilities at fair value, the methods and assumptions used to measure fair value and the effect of fair value measurements on earnings. In accordance with ASC 820-10, the Company applied the following fair value hierarchy:

 

Level 1 -

   Assets or liabilities for which the identical item is traded on an active exchange, such as publicly-traded instruments.

Level 2 -

   Assets and liabilities valued based on observable market data for similar instruments.

Level 3 -

   Assets or liabilities for which significant valuation assumptions are not readily observable in the market; instruments valued based on the best available data, some of which is internally-developed, and considers risk premiums that market participant would require.

The following table provides information for such assets and liabilities as of September 30, 2012 and December 31, 2011. The fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and short-term debt approximate their carrying amounts because of the short-term maturity of these instruments. The short-term debt would be a Level 2 liability if it was measured at fair value on the condensed consolidated balance sheets. The fair value of the Company’s long-term debt was estimated at $1,584,181 and $1,181,788 as of September 30, 2012 and December 31, 2011, respectively, and would be a Level 2 liability if the long-term debt was measured at fair value on the condensed consolidated balance sheets. The long-term debt is based on quoted market prices if available, and if not, an estimate of interest rates available to the Company for debt with similar features, the Company’s current credit rating and spreads applicable to the Company. These assets and liabilities are not presented in the following table.

 

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

September 30, 2012

        

Cash equivalents—money-market funds

   $ 1,210       $ —         $ 1,210   

Registered investment companies (1)

   $ 4,895       $ 4,895       $ —     

December 31, 2011

        

Cash equivalents—money-market funds

   $ 2,449       $ —         $ 2,449   

Registered investment companies (1)

   $ 5,057       $ 5,057       $ —     

Equity securities (1)

   $ 9       $ 9       $ —     

 

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

5. Acquisitions:

2012 Acquisitions

On August 31, 2012, the Company acquired Argus Information & Advisory Services, LLC (“Argus”), a provider of information, competitive benchmarking, scoring solutions, analytics, and customized services to financial institutions and regulators in North America, Latin America, and Europe, for a net cash purchase price of approximately $404,995 and funded $20,000 of indemnity escrows. Within the Company’s Decision Analytics segment, this acquisition enhances the Company’s position as a provider of data, analytics, and decision-support solutions to financial institutions globally.

On July 2, 2012, the Company acquired the net assets of Aspect Loss Prevention, LLC (“ALP”), a provider of loss prevention and analytic solutions to the retail, entertainment, and food industries, for a net cash purchase price of approximately $6,917 and funded $800 of indemnity escrows. Within the Company’s Decision Analytics segment, ALP further advances the Company’s position as a provider of data, analytics, and decision-support solutions.

On March 30, 2012, the Company acquired 100% of the stock of MediConnect Global, Inc. (“MediConnect”), a service provider of medical record retrieval, digitization, coding, extraction, and analysis, for a net cash purchase price of approximately $331,405 and funded $17,000 of indemnity escrows. Within the Company’s Decision Analytics segment, MediConnect further supports the Company’s objective as the leading provider of data, analytics, and decision-support solutions to the healthcare and property casualty industry.

 

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The preliminary purchase price allocations of the acquisitions resulted in the following:

 

     MediConnect      ALP      Argus      Total  

Accounts receivable

   $ 7,077       $ 489       $ 12,165       $ 19,731   

Current assets

     14,918         —           568         15,486   

Fixed assets

     1,075         28         4,994         6,097   

Intangible assets

     157,905         5,736         176,174         339,815   

Goodwill

     223,982         2,228         279,228         505,438   

Other assets

     17,087         801         20,000         37,888   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets acquired

     422,044         9,282         493,129         924,455   
  

 

 

    

 

 

    

 

 

    

 

 

 

Current liabilities

     3,005         756         9,660         13,421   

Other liabilities

     70,634         809         58,474         129,917   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities assumed

     73,639         1,565         68,134         143,338   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net assets acquired

   $ 348,405       $ 7,717       $ 424,995       $ 781,117   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amounts assigned to intangible assets by type for the current year acquisitions are summarized in the table below:

 

     Weighted Average
Useful Life
     MediConnect      ALP      Argus      Total  

Technology-based

     10 years       $ 43,110       $ 1,225       $ 27,715       $ 72,050   

Marketing-related

     6 years         14,782         253         11,671         26,706   

Customer-related

     15 years         100,013         4,258         136,788         241,059   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total intangible assets

     13 years       $ 157,905       $ 5,736       $ 176,174       $ 339,815   
     

 

 

    

 

 

    

 

 

    

 

 

 

The allocations of the purchase prices (noted within the tables above) are all subject to revisions as additional information is obtained about the facts and circumstances that existed as of the acquisition date. The revisions may have an impact on the consolidated financial statements. The allocations of the purchase prices will be finalized once all information is obtained, but not to exceed one year from the acquisition dates.

The goodwill associated with the stock purchase of MediConnect is not deductible for tax purposes; whereas the goodwill associated with the asset purchase of ALP is deductible for tax purposes. The goodwill associated with the acquisition of Argus is partially deductible for income tax purposes as approximately 47% of the net cash purchase price represented an asset purchase. For the three and nine months ended September 30, 2012, the Company incurred transaction costs related to these acquisition of $681 and $1,508, respectively, included within “Selling, general and administrative” expenses in the accompanying condensed consolidated statements of operations.

Supplemental information on an unaudited pro forma basis is presented below as if the acquisitions of MediConnect and Argus occurred at the beginning of the year 2011. The pro forma information for the nine months ended September 30, 2012 and 2011 presented below is based on estimates and assumptions, which the Company believes are reasonable and not necessarily indicative of the consolidated financial position or results of operations in future periods or the results that actually would have been realized had these acquisitions been completed at the beginning of 2011. The unaudited pro forma information includes intangible asset amortization charges and incremental borrowing costs as a result of the acquisitions, net of related tax, estimated using the Company’s effective tax rate for continuing operations for the periods.

 

     For the Nine Months Ended September 30,  
     2012      2011  
     (unaudited)  

Pro forma revenues

   $ 1,173,420       $ 1,052,193   

Pro forma net income

   $ 222,840       $ 183,666   

Pro forma basic income per share

   $ 1.35       $ 1.10   

Pro forma diluted income per share

   $ 1.30       $ 1.05   

2011 Acquisitions

On June 17, 2011, the Company acquired the net assets of Health Risk Partners, LLC (“HRP”), a provider of solutions to optimize revenue, ensure compliance and improve quality of care for Medicare Advantage and Medicaid health plans, for a net cash purchase price of approximately $46,400 and funded $3,000 of indemnity escrows and $10,000 of contingency escrows. Within the Company’s Decision Analytics segment, this acquisition further advances the Company’s position as a major provider of data, analytics, and decision-support solutions to the healthcare market.

On April 27, 2011, the Company acquired 100% of the stock of Bloodhound Technologies, Inc. (“Bloodhound”), a provider of real-time pre-adjudication medical claims editing, for a net cash purchase price of approximately $75,321 and funded $6,560 of indemnity escrows. Within the Company’s Decision Analytics segment, Bloodhound addresses the need of healthcare payers to control fraud and waste in a real-time claims-processing environment, and these capabilities align with the Company’s existing fraud identification tools in the healthcare market.

The goodwill associated with Bloodhound is not deductible for tax purposes; whereas the goodwill associated with HRP is deductible for tax purposes as this was an asset purchase rather than a stock purchase. For the three and nine months ended September 30, 2012, the Company incurred no transaction costs related to these acquisitions. In accordance with ASC 805, the allocation of the purchase prices for HRP and Bloodhound was revised during the measurement period. Refer to Note 6. Goodwill and Intangible Assets for further discussion.

 

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Acquisition Escrows

Pursuant to the related acquisition agreements, the Company has funded various escrow accounts to satisfy pre-acquisition indemnity and tax claims arising subsequent to the acquisition dates, as well as a portion of the contingent payments. At September 30, 2012 and December 31, 2011, the current portion of the escrows amounted to $31,072 and $36,967, and the noncurrent portion of the escrow amounted to $25,800 and $4,508, respectively. The current and noncurrent portions of the escrows have been included in “Other current assets” and “Other assets” in the accompanying condensed consolidated balance sheets, respectively.

6. Goodwill and Intangible Assets:

The following is a summary of the change in goodwill from December 31, 2011 through September 30, 2012, both in total and as allocated to the Company’s operating segments:

 

     Risk
Assessment
     Decision
Analytics
     Total  

Goodwill at December 31, 2011 (1)

   $ 27,908       $ 682,036       $ 709,944   

Current year acquisitions

     —           467,638         467,638   

Acquisition related escrow funding

     —           37,800         37,800   

Purchase accounting reclassifications

     —           874         874   

Finalization of acquisition related escrows

     —           4,128         4,128   
  

 

 

    

 

 

    

 

 

 

Goodwill at September 30, 2012 (1)

   $ 27,908       $ 1,192,476       $ 1,220,384   
  

 

 

    

 

 

    

 

 

 

 

(1) These balances are net of accumulated impairment charges of $3,244 that occurred prior to January 1, 2009.

The Company finalized the purchase accounting for the acquisitions of HRP and Bloodhound during the quarter ended June 30, 2012. The Company’s purchase accounting reclassifications primarily related to the finalization of HRP and Bloodhound resulted in an increase in goodwill of $836, and an increase in liabilities of $1,233, an increase in other assets of $882 and a decrease in fixed assets of $226. The impact of these adjustments on the consolidated statements of operations for the nine months ended September 30, 2012 and 2011 was immaterial.

Goodwill and intangible assets with indefinite lives are subject to impairment testing annually as of June 30, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. Goodwill impairment testing compares the carrying value of each reporting unit to its fair value. If the fair value of the reporting unit exceeds the carrying value of the net assets, including goodwill assigned to that reporting unit, goodwill is not impaired. If the carrying value of the reporting unit’s net assets including goodwill exceeds the fair value of the reporting unit, then the Company will determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then an impairment loss is recorded for the difference between the carrying amount and the implied fair value of goodwill. The Company completed the required annual impairment test as of June 30, 2012, which resulted in no impairment of goodwill.

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

 

     Weighted
Average
Useful  Life
     Cost      Accumulated
Amortization
    Net  

September 30, 2012

          

Technology-based

     8 years       $ 307,704       $ (171,510   $ 136,194   

Marketing-related

     6 years         75,476         (38,125     37,351   

Contract-based

     6 years         6,555         (6,555     —     

Customer-related

     14 years         414,283         (57,805     356,478   
     

 

 

    

 

 

   

 

 

 

Total intangible assets

      $ 804,018       $ (273,995   $ 530,023   
     

 

 

    

 

 

   

 

 

 

December 31, 2011

          

Technology-based

     7 years       $ 235,654       $ (155,333   $ 80,321   

Marketing-related

     5 years         48,770         (33,190     15,580   

Contract-based

     6 years         6,555         (6,482     73   

Customer-related

     13 years         173,224         (42,774     130,450   
     

 

 

    

 

 

   

 

 

 

Total intangible assets

      $ 464,203       $ (237,779   $ 226,424   
     

 

 

    

 

 

   

 

 

 

Consolidated amortization expense related to intangible assets for the three months ended September 30, 2012 and 2011, was $15,442 and $8,797, respectively. Consolidated amortization expense related to intangible assets for the nine months ended September 30, 2012 and 2011, was $36,216 and $26,129, respectively. Estimated amortization expense in future periods through 2017 and thereafter for intangible assets subject to amortization is as follows:

 

Year

   Amount  

2012

   $ 16,777   

2013

     62,889   

2014

     54,858   

2015

     50,475   

2016

     48,914   

2017 and Thereafter

     296,110   
  

 

 

 
   $ 530,023   
  

 

 

 

 

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7. Income Taxes:

The Company’s effective tax rate for the three and nine months ended September 30, 2012 was 39.31% and 39.38%, respectively, compared to the effective tax rate for the three and nine months ended September 30, 2011 of 39.24% and 39.74%, respectively. The effective tax rate for the nine months ended September 30, 2012 is lower than the September 30, 2011 effective tax rate primarily due to the continued execution of tax planning strategies. The difference between statutory tax rates and the Company’s effective tax rate is primarily attributable to state taxes and non-deductible share appreciation from the ISO 401(k) Savings and Employee Stock Ownership Plan (“KSOP”).

8. Debt:

The following table presents short-term and long-term debt by issuance:

 

    Issuance     Maturity     September 30,     December 31,  
    Date     Date     2012     2011  

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

       

Syndicated revolving credit facility

    Various        Various      $ 115,000      $ —     

Prudential senior notes:

       

6.28% Series I senior notes

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

6.13% Series G senior notes

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

Aviva Investors senior notes:

       

6.46% Series A senior notes

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

Principal senior notes:

       

6.16% Series B senior notes

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

Capital lease obligations and other

    Various        Various        5,794        5,554   
     

 

 

   

 

 

 

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

        265,794        5,554   
     

 

 

   

 

 

 

Long-term debt:

       

Verisk senior notes:

       

5.800% senior notes, less unamortized discount of $888 and $967 as of September 30, 2012 and December 31, 2011, respectively

    4/6/2011        5/1/2021        449,112        449,033   

4.875% senior notes, less unamortized discount of $2,122 and $2,376 as of September 30, 2012 and December 31, 2011, respectively

    12/8/2011        1/15/2019        247,878        247,624   

4.125% senior notes, less unamortized discount of $2,762 and $0 as of September 30, 2012 and December 31, 2011, respectively

    9/12/2012        9/12/2022        347,238        —     

Prudential senior notes:

       

6.13% Series G senior notes

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

5.84% Series H senior notes

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

5.84% Series H senior notes

    10/26/2007        10/26/2015        17,500        17,500   

6.28% Series I senior notes

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

6.28% Series I senior notes

    4/29/2008        4/29/2015        85,000        85,000   

6.85% Series J senior notes

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

Principal senior notes:

       

6.16% Series B senior notes

    8/8/2006        8/8/2013        —          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 senior notes:

       

6.46% Series A senior notes

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

Capital lease obligations and other

    Various        Various        2,455        3,675   
     

 

 

   

 

 

 

Long-term debt

        1,301,683        1,100,332   
     

 

 

   

 

 

 

Total debt

      $ 1,567,477      $ 1,105,886   
     

 

 

   

 

 

 

On September 12, 2012, the Company completed an issuance of senior notes in the aggregate principal amount of $350,000. These senior notes are due on September 12, 2022 and accrue interest at a rate of 4.125%. The Company received net proceeds of $344,950 after deducting original issue discount, underwriting discount, and commissions of $5,050. The senior notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured and unsubordinated basis by ISO and certain subsidiaries that guarantee our syndicated revolving credit facility or any amendment, refinancing or replacement thereof (See Note 15. Condensed Consolidated Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries for further information). Interest will be payable semi-annually on March 12 and September 12 of each year, beginning on March 12, 2013. Interest accrues from September 12, 2012. The debt issuance costs will be amortized from the date of issuance to the maturity date. The senior notes rank equally with all of the Company’s existing and future senior unsecured and unsubordinated indebtedness. However, the senior notes are structurally subordinated to the indebtedness of any of the subsidiaries that do not guarantee the notes and are effectively subordinated to any future secured indebtedness to the extent of the value of the assets securing such indebtedness. The guarantees of the senior notes rank equally and ratably in right of payment with all other existing and future unsecured and unsubordinated indebtedness of the guarantors, and senior in right of payment to all future subordinated indebtedness of the guarantors. Because the guarantees of the notes are not secured, such guarantees will be effectively subordinated to any existing and future secured indebtedness of the applicable guarantor to the extent of the value of the collateral securing that indebtedness. The indenture governing the senior notes contains certain covenants that restrict the ability of the Company and its subsidiaries to, among other things, create certain liens, enter into sale/leaseback transactions and consolidate with, sell, lease, convey or otherwise transfer all or substantially all of its assets, or merge with or into, any other person or entity, in each case, subject to exceptions and qualifications described in the indenture. In addition, the indenture provides that upon a change of control event, the holders of the notes have the right to require the Company to repurchase all or any part of such holder’s notes at a purchase price in cash equal to 101% of the principal amount of the notes plus accrued and unpaid interest, if any, to the date of repurchase.

 

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On September 28, 2012, the Company amended its committed senior unsecured Syndicated Revolving Credit Facility (the “Credit Facility”) with Bank of America N.A., JPMorgan Chase Bank N.A., and a syndicate of banks to increase the borrowing capacity under the Credit Facility from $725,000 to $850,000, extend the maturity date from October 24, 2016 to October 24, 2017 and increase the maximum Consolidated Funded Debt Leverage Ratio from 3.25-to-1.0 to 3.50-to-1.0. As of September 30, 2012, the Company has an available borrowing capacity of $735,000 under the Credit Facility. Borrowings may be used for general corporate purposes, including working capital and capital expenditures, acquisitions and share repurchase programs. As of September 30, 2012 and December 31, 2011, the Company had $115,000 and $0, respectively, outstanding under the Credit Facility.

9. Stockholders’ Equity (Deficit):

The Company has 1,200,000,000 shares of authorized Class A common shares. The Class A common shares have rights to any dividend declared by the board of directors, subject to any preferential or other rights of any outstanding preferred stock, and voting rights to elect all eleven members of the board of directors.

Share Repurchase Program

The Company has authorized repurchases of up to $900,000 of its common stock through its share repurchase program (the “Repurchase Program”) and as of September 30, 2012, the Company had $178,951 available to repurchase shares. The Company has no obligation to repurchase stock under this program and intends to use this authorization as a means of offsetting dilution from the issuance of shares under the KSOP, the Verisk 2009 Equity Incentive Plan (the “Incentive Plan”) and the ISO 1996 Incentive Plan (the “Option Plan”), while providing flexibility to repurchase additional shares if warranted. This authorization has no expiration date and may be increased, reduced, suspended, or terminated at any time. Repurchased shares will be recorded as treasury stock and will be available for future issuance as part of the Repurchase Program.

During the nine months ended September 30, 2012, the Company repurchased 2,776,655 shares of Class A common stock as part of this program at a weighted average price of $46.04 per share. The Company utilized cash from operations and the proceeds from its senior notes and syndicated revolving credit facility to fund these repurchases. As treasury stock purchases are recorded based on trade date, the Company has included $953 in “Accounts payable and accrued liabilities” in the accompanying condensed consolidated balance sheets for those purchases that have not settled as of September 30, 2012.

Earnings Per Share (“EPS”)

Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding, using the treasury stock method, if the dilutive potential common shares, including stock options and nonvested restricted stock, had been issued.

The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the three and nine months ended September 30, 2012 and 2011:

 

     For the Three Months Ended September 30,      For the Nine Months Ended September 30,  
     2012      2011      2012      2011  

Numerator used in basic and diluted EPS:

           

Net income

   $ 82,911       $ 70,987       $ 230,843       $ 202,440   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Weighted average number of common shares used in basic EPS

     165,978,080         164,195,325         165,587,027         166,728,786   

Effect of dilutive shares:

           

Potential Class A common shares issuable from stock options and stock awards

     5,682,463         6,974,333         6,050,544         7,527,179   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     171,660,543         171,169,658         171,637,571         174,255,965   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic net income per share

   $ 0.50       $ 0.43       $ 1.39       $ 1.21   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net income per share

   $ 0.48       $ 0.41       $ 1.34       $ 1.16   
  

 

 

    

 

 

    

 

 

    

 

 

 

The potential shares of common stock that were excluded from diluted EPS were 932,045 and 1,555,507 for the nine months ended September 30, 2012 and 2011, respectively, because the effect of including these potential shares was anti-dilutive.

Accumulated Other Comprehensive Losses

The following is a summary of accumulated other comprehensive losses:

 

     September 30,     December 31,  
     2012     2011  

Unrealized gains on investments, net of tax

   $ 52      $ 269   

Unrealized foreign currency losses

     (1,105     (975

Pension and postretirement unfunded liability adjustment, net of tax

     (75,800     (77,581
  

 

 

   

 

 

 

Accumulated other comprehensive losses

   $ (76,853   $ (78,287
  

 

 

   

 

 

 

 

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10. Equity Compensation Plans:

All of the Company’s granted equity awards, including outstanding stock options and restricted stock, are covered under the Incentive Plan or the Option Plan. Awards under the Incentive Plan may include one or more of the following types: (i) stock options (both nonqualified and incentive stock options), (ii) stock appreciation rights, (iii) restricted stock, (iv) restricted stock units, (v) performance awards, (vi) other share based awards, and (vii) cash. Employees, directors and consultants are eligible for awards under the Incentive Plan. On July 1, 2011, the Company began issuing Class A common stock under these plans from the Company’s treasury shares. Cash received from stock option exercises for the nine months ended September 30, 2012 and 2011 was $43,571 and $28,433, respectively. During the three months ended September 30, 2012, the Company granted 4,777 shares of Class A common stock, 36,697 nonqualified stock options that were immediately vested and 96,750 nonqualified stock options with a one year service vesting period, to the directors of the Company. These options have an exercise price equal to the closing price of the Company’s Class A common stock on the grant date and a ten year contractual term. As of September 30, 2012, there were 5,770,689 shares of Class A common stock reserved and available for future issuance under the plans.

During the nine months ended September 30, 2012, the Company granted 810,568 nonqualified stock options and 236,280 shares of restricted stock to key employees. The nonqualified stock options have an exercise price equal to the closing price of the Company’s Class A common stock on the grant date, with a ten-year contractual term and a service vesting period of four years. The restricted stock is valued at the closing price of the Company’s Class A common stock on the grant date and has a service vesting period of four years. The Company recognizes the expense of the restricted stock ratably over the periods in which the restrictions lapse. The restricted stock is not assignable or transferrable until it becomes vested.

The fair value of the stock options granted during the nine months ended September 30, 2012 and 2011 was estimated using a Black-Scholes valuation model that uses the weighted average assumptions noted in the following table:

 

     2012     2011  

Option pricing model

     Black-Scholes        Black-Scholes   

Expected volatility

     32.25     30.44

Risk-free interest rate

     0.90     2.21

Expected term in years

     4.6        5.1   

Dividend yield

     0.00     0.00

Weighted average grant date fair value per stock option

   $ 13.59      $ 10.42   

The expected term for a majority of the stock options granted was estimated based on studies of historical experience and projected exercise behavior. However, for certain stock options granted, for which no historical exercise pattern exists, the expected term was estimated using the simplified method. The risk-free interest rate is based on the yield of U.S. Treasury zero coupon securities with a maturity equal to the expected term of the equity award. The volatility factor was based on the average volatility of the Company’s peers, calculated using historical daily closing prices over the most recent period that is commensurate with the expected term of the stock option award. The expected dividend yield was based on the Company’s expected annual dividend rate on the date of grant.

A summary of options outstanding under the Incentive Plan and the Option Plan as of December 31, 2011 and September 30, 2012 and changes during the interim period is presented below:

 

     Number
of Options
    Weighted
Average

Exercise  Price
     Aggregate
Intrinsic
Value
 

Outstanding at December 31, 2011

     18,896,405      $ 16.55       $ 445,510   
       

 

 

 

Granted

     944,015      $ 47.33      

Exercised

     (4,707,394   $ 7.33       $ 178,912   
       

 

 

 

Cancelled or expired

     (309,840   $ 14.81      
  

 

 

      

Outstanding at September 30, 2012

     14,823,186      $ 20.87       $ 396,444   
  

 

 

      

 

 

 

Options exercisable at September 30, 2012

     9,603,360      $ 16.58       $ 297,975   
  

 

 

      

 

 

 

Options exercisable at December 31, 2011

     12,153,311      $ 12.35       $ 337,647   
  

 

 

      

 

 

 

Intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the quoted price of Verisk’s common stock as of the reporting date. The aggregate intrinsic value of stock options outstanding and exercisable at September 30, 2012 was $396,444 and $297,975, respectively. In accordance with ASC 718, Stock Compensation, excess tax benefit from exercised stock options is recorded as an increase to additional paid-in capital and a corresponding reduction in income taxes payable. This tax benefit is calculated as the excess of the intrinsic value of options exercised in excess of compensation recognized for financial reporting purposes. The amount of the tax benefit that has been realized, as a result of those excess tax benefits, is presented as a financing cash inflow within the accompanying condensed consolidated statements of cash flows. For the nine months ended September 30, 2012 and 2011, the Company recorded excess tax benefit from stock options exercised of $63,461 and $35,643, respectively. The Company realized $55,056 and $5,470 of tax benefit within the Company’s quarterly tax payments through September 30, 2012 and 2011, respectively.

The Company estimates expected forfeitures of equity awards at the date of grant and recognizes compensation expense only for those awards that the Company expects to vest. The forfeiture assumption is ultimately adjusted to the actual forfeiture rate. Changes in the forfeiture assumptions may impact the total amount of expense ultimately recognized over the requisite service period and may impact the timing of expense recognized over the requisite service period.

 

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Table of Contents

A summary of the status of the restricted stock awarded under the Incentive Plan as of December 31, 2011 and September 30, 2012 and changes during the interim period is presented below:

 

     Number
of Shares
    Weighted Average
Grant Date Fair Value
 
              

Outstanding at December 31, 2011

     145,634      $ 33.32   

Granted

     236,280      $ 47.04   

Vested

     (37,632   $ 33.44   

Forfeited

     (6,518   $ 40.62   
  

 

 

   

Outstanding at September 30, 2012

     337,764      $ 42.74   
  

 

 

   

As of September 30, 2012, there was $43,274 of total unrecognized compensation costs, exclusive of the impact of vesting upon retirement eligibility, related to nonvested share-based compensation arrangements granted under the Incentive Plan and the Option Plan. That cost is expected to be recognized over a weighted average period of 2.57 years. As of September 30, 2012, there were 5,219,826 and 337,764 nonvested stock options and restricted stock, respectively, of which 4,611,326 and 287,434 are expected to vest. The total grant date fair value of options vested during the nine months ended September 30, 2012 and 2011 was $15,559 and $15,385, respectively. The total grant date fair value of restricted stock vested during the nine months ended September 30, 2012 and 2011 was $2,227 and $604, respectively.

On May 16, 2012, the Company’s stockholders approved the implementation of an employee stock purchase plan (“ESPP”). The ESPP commenced on October 1, 2012 and offers eligible employees the opportunity to authorize payroll deductions of up to 20.00% of their regular base salary and up to 50.00% of their short-term incentive compensation, both of which in total may not exceed $25 in any calendar year, to purchase shares of the Company’s Class A common stock at a 5.00% discount of its fair market value at the time of purchase. In accordance with ASC 718, the ESPP is noncompensatory as the purchase discount is 5.00% or less from the fair market value, substantially all employees that meet limited employment qualifications may participate, and it incorporates no option features.

11. Pension and Postretirement Benefits:

The Company maintained a qualified benefit pension plan for substantially all of its employees hired prior to March 1, 2005 through membership in the Pension Plan for Insurance Organizations (the “Pension Plan”), a multiple-employer trust. Future benefits provided to participants within the Pension Plan are determined using a cash balance formula. Under the cash balance formula, each participant has an account, which is credited annually based on salary rates determined by years of service, as well as the interest earned on their previous year-end cash balance. The Profit Sharing Plan, a defined contribution plan, replaced the Pension Plan for all eligible employees hired on or after March 1, 2005. The Company also has a nonqualified supplemental cash balance plan (“SERP”) for certain employees. The SERP is funded from the general assets of the Company.

On February 29, 2012, the Company instituted a hard freeze, which eliminated all future compensation and services credits, to participants in the Pension Plan and SERP. Accordingly, the Company remeasured the assets and liabilities of both plans and recognized a curtailment, resulting in a net reduction in the unfunded pension liability of $10,466 as of March 31, 2012. There is no longer a service cost component in the net periodic benefit cost as all participants are considered inactive in both plans. The Company generally amortized the actuarial gains and losses for the plans over the average future service period of the active participants. However, beginning February 29, 2012, the Company is amortizing the actuarial losses over the remaining life of the inactive plan participants since all are now considered inactive. The February 29, 2012 remeasurement utilized a weighted average discount rate of 4.73%, compared to the rate of 4.98% used for the year ended December 31, 2011.

The Company also provides certain healthcare and life insurance benefits for both active and retired employees. The Postretirement Health and Life Insurance Plan (the “Postretirement Plan”) is contributory, requiring participants to pay a stated percentage of the premium for coverage. As of October 1, 2001, the Postretirement Plan was amended to freeze benefits for current retirees and certain other employees at the January 1, 2002 level. Also, as of October 1, 2001, the Postretirement Plan had a curtailment, which eliminated retiree life insurance for all active employees and healthcare benefits for almost all future retirees, effective January 1, 2002.

The components of net periodic benefit (credit) cost and the amounts recognized in other comprehensive income for the three and nine months ended September 30, 2012 and 2011 are summarized below:

 

     Pension Plan and SERP     Postretirement Plan  
     For the Three Months Ended September 30,  
     2012     2011     2012     2011  

Service cost

   $ —        $ 1,590      $ —        $ —     

Interest cost

     4,903        5,442        175        251   

Expected return on plan assets

     (7,277     (6,449     (120     —     

Amortization of prior service credit

     —          (200     (38     (37

Amortization of net actuarial loss

     632        1,384        138        163   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit (credit) cost

   $ (1,742   $ 1,767      $ 155      $ 377   
  

 

 

   

 

 

   

 

 

   

 

 

 

Employer contributions

   $ 104      $ 6,489      $ 5,913      $ 1,125   
  

 

 

   

 

 

   

 

 

   

 

 

 
     For the Nine Months Ended September 30,  
     2012     2011     2012     2011  

Service cost

   $ 282      $ 4,771      $ —        $ —     

Interest cost

     14,940        16,280        525        753   

Expected return on plan assets

     (21,624     (19,348     (240     —     

Curtailment gain

     (779     —          —          —     

Amortization of prior service credit

     (133     (601     (113     (109

Amortization of net actuarial loss

     2,983        4,199        413        489   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit (credit) cost

   $ (4,331   $ 5,301      $ 585      $ 1,133   
  

 

 

   

 

 

   

 

 

   

 

 

 

Employer contributions

   $ 79,459      $ 19,144      $ 15,565      $ 2,507   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

In March 2012, the Company established a voluntary employees beneficiary association plan (the “VEBA Plan”) under Section 501(c)(9) of the Internal Revenue Code to fund the Postretirement Plan. The Company contributed $5,000 and $13,500 to the VEBA Plan for the three and nine months ended September 30, 2012, respectively. The contribution to the Postretirement Plan for the remaining quarter for the year ending December 31, 2012 is expected to be consistent with this quarter. In addition, in April 2012, the Company completed a voluntary prefunding to the Pension Plan of $72,000, which resulted in a total contribution of $78,837 for the year, of which $28,206 was the minimum contribution requirement for 2012. Since the Company has fulfilled the minimum contribution requirement for the year ending December 31, 2012, the Company does not expect to make any further contribution to the Pension Plan.

12. Segment Reporting:

ASC 280-10, Disclosures About Segments of an Enterprise and Related Information (“ASC 280-10”), establishes standards for reporting information about operating segments. ASC 280-10 requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company’s Chief Executive Officer and Chairman of the Board is identified as the CODM as defined by ASC 280-10. To align with the internal management of the Company’s business operations based on service offerings, the Company is organized into the following two operating segments, which are also the Company’s reportable segments:

Decision Analytics: The Company develops solutions that its customers use to analyze the three key processes in managing risk: ‘prediction of loss’, ‘detection and prevention of fraud’ and ‘quantification of loss’. The Company’s combination of algorithms and analytic methods incorporates its proprietary data to generate solutions in each of these three categories. In most cases, the Company’s customers integrate the solutions into their models, formulas or underwriting criteria in order to predict potential loss events, ranging from hurricanes and earthquakes to unanticipated healthcare claims. The Company develops catastrophe and extreme event models and offers solutions covering natural and man-made risks, including acts of terrorism. The Company also develops solutions that allow customers to quantify costs after loss events occur. Fraud solutions include data on claim histories, analysis of mortgage applications to identify misinformation, analysis of claims to find emerging patterns of fraud, and identification of suspicious claims in the insurance, mortgage and healthcare sectors. Effective December 31, 2011, the Company provided additional disclosure about its revenue within Decision Analytics segment based on the industry vertical groupings of insurance, mortgage and financial services, healthcare, and specialized markets. Previously, the Company disclosed revenues based on the classification of its solutions as fraud identification and detection solutions, loss prediction solutions and loss quantification solutions.

Risk Assessment: The Company is the leading provider of statistical, actuarial and underwriting data for the U.S. P&C insurance industry. The Company’s databases include cleansed and standardized records describing premiums and losses in insurance transactions, casualty and property risk attributes for commercial buildings and their occupants and fire suppression capabilities of municipalities. The Company uses this data to create policy language and proprietary risk classifications that are industry standards and to generate prospective loss cost estimates used to price insurance policies.

The two aforementioned operating segments represent the segments for which separate discrete financial information is available and upon which operating results are regularly evaluated by the CODM in order to assess performance and allocate resources. The Company uses EBITDA as the profitability measure for making decisions regarding ongoing operations. EBITDA is net income before interest expense, provision for income taxes, depreciation and amortization of fixed and intangible assets. In the second quarter of 2012, the Company changed its definition of EBITDA such that it only reflects the definition noted and no longer excludes investment income (loss) and realized gain (loss) on securities, net, for all periods presented. EBITDA is the measure of operating results used to assess corporate performance and optimal utilization of debt and acquisitions. Operating expenses consist of direct and indirect costs principally related to personnel, facilities, software license fees, consulting, travel, and third-party information services. Indirect costs are generally allocated to the segments using fixed rates established by management based upon estimated expense contribution levels and other assumptions that management considers reasonable. The Company does not allocate interest expense and provision for income taxes, since these items are not considered in evaluating the segment’s overall operating performance. The CODM does not evaluate the financial performance of each segment based on assets. On a geographic basis, no individual country outside of the U.S. accounted for 1.00% or more of the Company’s consolidated revenue for either the three and nine months ended September 30, 2012 or 2011. No individual country outside of the U.S. accounted for 1.00% or more of total consolidated long-term assets as of September 30, 2012 or December 31, 2011.

 

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Table of Contents

The following table provides the Company’s revenue and operating income by reportable segment for the three and nine months ended September 30, 2012 and 2011, as well as reconciliations to income before income taxes for all periods presented in the accompanying condensed consolidated statements of operations:

 

    For the Three Months Ended     For the Three Months Ended  
    September 30, 2012     September 30, 2011  
    Decision     Risk           Decision     Risk        
    Analytics     Assessment     Total     Analytics     Assessment     Total  

Revenues

  $ 254,996      $ 143,867      $ 398,863      $ 200,121      $ 139,977      $ 340,098   

Expenses:

           

Cost of revenues (exclusive of items shown separately below)

    111,709        45,040        156,749        88,410        49,209        137,619   

Selling, general and administrative

    38,971        19,736        58,707        31,410        20,065        51,475   

Acquisition related liabilities adjustment

    —          —          —          —          —          —     

Investment income and realized loss (gain) on securities, net

    —          502        502        —          (13     (13
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    104,316        78,589        182,905        80,301        70,716        151,017   

Depreciation and amortization of fixed assets

    9,436        3,278        12,714        7,444        3,354        10,798   

Amortization of intangible assets

    15,442        —          15,442        8,760        37        8,797   

Investment income and realized (loss) gain on securities, net

    —          (502     (502     —          13        13   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  $ 79,438      $ 75,813        155,251      $ 64,097      $ 67,312        131,409   
 

 

 

   

 

 

     

 

 

   

 

 

   

Investment income and realized (loss) gain on securities, net

        (502         13   

Interest expense

        (18,133         (14,593
     

 

 

       

 

 

 

Income before income taxes

      $ 136,616          $ 116,829   
     

 

 

       

 

 

 

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

  $ 15,715      $ 3,112      $ 18,827      $ 11,778      $ 2,117      $ 13,895   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    For the Nine Months Ended     For the Nine Months Ended  
    September 30, 2012     September 30, 2011  
    Decision     Risk           Decision     Risk        
    Analytics     Assessment     Total     Analytics     Assessment     Total  

Revenues

  $ 685,565      $ 433,025      $ 1,118,590      $ 559,197      $ 421,050      $ 980,247   

Expenses:

           

Cost of revenues (exclusive of items shown separately below)

    301,376        135,777        437,153        247,841        145,519        393,360   

Selling, general and administrative

    112,910        62,249        175,159        94,103        62,537        156,640   

Acquisition related liabilities adjustment

    —          —          —          (3,364     —          (3,364

Investment income and realized loss (gain) on securities, net

    —          (59     (59     —          (500     (500
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    271,279        235,058        506,337        220,617        213,494        434,111   

Depreciation and amortization of fixed assets

    26,942        10,506        37,448        21,756        11,202        32,958   

Amortization of intangible assets

    36,216        —          36,216        26,020        109        26,129   

Investment income and realized (loss) gain on securities, net

    —          59        59        —          500        500   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  $ 208,121      $ 224,493        432,614      $ 172,841      $ 201,683        374,524   
 

 

 

   

 

 

     

 

 

   

 

 

   

Investment income and realized (loss) gain on securities, net

        59            500   

Interest expense

        (51,895         (39,093
     

 

 

       

 

 

 

Income before income taxes

      $ 380,778          $ 335,931   
     

 

 

       

 

 

 

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

  $ 45,372      $ 11,457      $ 56,829      $ 39,342      $ 8,906      $ 48,248   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Operating segment revenue by type of service is provided below:

 

     For the Three Months Ended September 30,      For the Nine Months Ended September 30,  
     2012      2011      2012      2011  

Decision Analytics:

           

Insurance

   $ 126,301       $ 116,281       $ 364,847       $ 333,915   

Mortgage and financial services

     37,960         34,272         107,534         102,611   

Healthcare

     69,324         30,277         150,153         65,216   

Specialized markets

     21,411         19,291         63,031         57,455   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Decision Analytics

     254,996         200,121         685,565         559,197   
  

 

 

    

 

 

    

 

 

    

 

 

 

Risk Assessment:

           

Industry-standard insurance programs

     98,270         92,894         295,414         278,140   

Property-specific rating and underwriting information

     31,415         33,107         96,431         102,621   

Statistical agency and data services

     8,056         7,888         23,910         23,263   

Actuarial services

     6,126         6,088         17,270         17,026   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Risk Assessment

     143,867         139,977         433,025         421,050   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 398,863       $ 340,098       $ 1,118,590       $ 980,247   
  

 

 

    

 

 

    

 

 

    

 

 

 

13. Related Parties:

The Company considers its stockholders that own more than 5.00% of the outstanding stock within a respective class to be related parties as defined within ASC 850, Related Party Disclosures. In 2011, all of the Company’s outstanding Class B (Series 1) and Class B (Series 2) shares converted to Class A. As a result of the conversion, the Company had no related parties owning more than 5.00% of a class of stock as of September 30, 2012.

At September 30, 2011, there were three Class A and five Class B stockholders, each owning more than 5.00% of the respective outstanding class. The Company had revenues from related parties for the three months ended September 30, 2012 and 2011 of $0 and $4,699, respectively, and revenues of $0 and $13,882 for the nine months ended September 30, 2012 and 2011, respectively.

14. Commitments and Contingencies:

The Company is a party to legal proceedings with respect to a variety of matters in the ordinary course of business, including the matters described below. With respect to ongoing matters, the Company is unable, at the present time, to determine the ultimate resolution of or provide a reasonable estimate of the range of possible loss attributable to these matters or the impact it may have on the Company’s results of operations, financial position or cash flows. This is primarily because the matters are in early stages and discovery has either not commenced or been completed. Although the Company believes it has strong defenses and intends to vigorously defend these matters, the Company could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations, financial position or cash flows.

Citizens Insurance Litigation

On February 28, 2012, the Company was served with a complaint filed in the Florida State Circuit Court for Pasco County naming Citizens Property Insurance Corporation (“Citizens”) and the Company’s Xactware subsidiary. The complaint alleged a class action seeking declaratory and injunctive relief against defendants and was brought on behalf of “all individuals who have purchased a new or renewed a property casualty insurance policy from Citizens” where Citizens used Xactware’s 360Value product to determine replacement value of the property. On March 12, 2012, plaintiffs served their First Amended Complaint on Xactware additionally alleging that: (1) Citizens and Xactware knowingly made false statements to the plaintiff class concerning their properties’ replacement cost values; (2) fraud against Xactware based on its alleged misrepresentation of the replacement value of plaintiffs’ properties; (3) conspiracy against Citizens and Xactware based on their alleged artificial inflation of the value of plaintiffs’ properties; and (4) products liability against Xactware, claiming Xactware defectively designed 360Value as used in the Florida insurance market. The First Amended Complaint sought declaratory and injunctive relief, as well as unspecified monetary damages alleged to be in excess of $1,000 for the class. On May 31, 2012 plaintiff served his Second Amended Complaint which no longer alleges a class action, but continues to allege: (1) that Citizens and Xactware artificially inflated the replacement cost value of plaintiff’s property using 360Value; (2) fraud by Xactware; (3) a conspiracy between Citizens and Xactware; and (4) products liability against Xactware. The Second Amended Complaint similarly seeks declaratory and injunctive relief as well as damages representing the difference between the premium plaintiff paid to Citizens using 360Value and what the premium should have been if Citizens used an accurate replacement cost value for plaintiff’s property. Defendants’ motion to transfer was granted and the case was transferred to Leon County Circuit on September 17, 2012.

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

Intellicorp Records, Inc. Litigation

On April 20, 2012, the Company was served with a complaint filed in Alameda County Superior Court in California naming the Company’s subsidiary Intellicorp Records, Inc. titled Jane Roe v. Intellicorp Records, Inc. et al. The complaint alleged a nationwide putative class action on behalf of all persons who have been the subject of a consumer report furnished to a third party by Intellicorp for employment purposes and whose report contained any negative public record of criminal arrest, charge or conviction during the 5 years preceding the filing of the action until final resolution. The complaint alleged violations of the Fair Credit Reporting Act and claimed that Intellicorp failed to implement policies and procedures designed to ensure that criminal record information provided to employers is complete and up to date, and failed to notify class members contemporaneously of the fact that criminal record information was being provided to their employers and prospective employers. Intellicorp removed the case to the United States District Court of the Northern District of California. The District Court later granted Intellicorp’s motion to transfer the case, which is now pending in the United States District Court for the Northern District of Ohio. On October 24, 2012 plaintiffs served their First Amended Complaint (the “Complaint”) alleging a nationwide putative class action on behalf of all persons who have been the subject of a consumer report furnished to a third party by Intellicorp for employment purposes and whose report contained any negative public record of criminal arrest, charge or conviction without also disclosing the final disposition of the charges during the 5 years preceding the filing of the action through the date class certification is granted. The Complaint continues to allege the previously alleged violations of the Fair Credit Reporting Act and seeks statutory damages for the class in an amount not less than one hundred dollars and not more than one thousand dollars per violation, punitive damages, costs and attorneys fees as well as unspecified monetary damages for the named plaintiff.

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

 

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Table of Contents

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

In 2012 and 2011, Verisk Analytics, Inc. (the “Parent Company”) registered senior notes with full and unconditional and joint and several guarantees by certain of its 100 percent wholly-owned subsidiaries and issued certain other debt securities with full and unconditional and joint and several guarantees by certain of its subsidiaries. Accordingly, presented below is the condensed consolidating financial information for (i) the Parent Company, (ii) the guarantor subsidiaries of the Parent Company on a combined basis and (iii) all other non-guarantor subsidiaries of the Parent Company on a combined basis, as of September 30, 2012 and December 31, 2011 and for the three and nine months ended September 30, 2012 and 2011. The condensed consolidating financial information has been presented using the equity method of accounting, to show the nature of assets held, results of operations and cash flows of the Parent Company, the guarantor subsidiaries and the non-guarantor subsidiaries assuming all guarantor subsidiaries provide both full and unconditional, and joint and several guarantees to the Parent Company at the beginning of the periods presented. Effective as of December 31, 2011, ISO Staff Services, Inc. (“ISOSS”), a guarantor of the senior notes, merged with and into ISO, also a guarantor of the senior notes, pursuant to which ISO was the surviving corporation. By virtue of the merger, ISO expressly assumed all of the obligations of ISOSS, including the guarantee by ISOSS of the senior notes.

CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)

As of September 30, 2012

 

     Verisk
Analytics, Inc.
     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminating
Entries
    Consolidated  

ASSETS

             

Current assets:

             

Cash and cash equivalents

   $ 378       $ 41,459       $ 55,933       $ —        $ 97,770   

Available-for-sale securities

     —           4,895         —           —          4,895   

Accounts receivable, net of allowance for doubtful accounts of $4,203

     —           125,456         50,064         —          175,520   

Prepaid expenses

     —           22,839         2,548         —          25,387   

Deferred income taxes, net

     —           2,558         13,056         —          15,614   

Federal and foreign income taxes receivable

     10,349         7,150         —           (8,961     8,538   

State and local income taxes receivable

     806         —           190         (996     —     

Intercompany receivables

     375,417         194,718         216,560         (786,695     —     

Other current assets

     12,005         12,887         8,721         —          33,613   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     398,955         411,962         347,072         (796,652     361,337   

Noncurrent assets:

             

Fixed assets, net

     —           117,436         27,363         —          144,799   

Intangible assets, net

     —           67,140         462,883         —          530,023   

Goodwill

     —           486,250         734,134         —          1,220,384   

Deferred income taxes, net

     —           49,557         —           (49,557     —     

Investment in subsidiaries

     852,866         900,914         —           (1,753,780     —     

Other assets

     14,171         30,661         2,058         —          46,890   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,265,992       $ 2,063,920       $ 1,573,510       $ (2,599,989   $ 2,303,433   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

Current liabilities:

             

Accounts payable and accrued liabilities

   $ 15,434       $ 103,094       $ 57,936       $ —        $ 176,464   

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

     —           265,398         396         —          265,794   

Pension and postretirement benefits, current

     —           2,912         —           —          2,912   

Fees received in advance

     —           185,267         34,533         —          219,800   

Intercompany payables

     64,282         531,164         191,249         (786,695     —     

Federal and foreign income taxes payable

     —           —           8,961         (8,961     —     

State and local income taxes payable

     —           4,283         —           (996     3,287   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     79,716         1,092,118         293,075         (796,652     668,257   

Noncurrent liabilities:

             

Long-term debt

     1,044,228         257,388         67         —          1,301,683   

Pension and postretirement benefits

     —           27,891         —           —          27,891   

Deferred income taxes, net

     —           —           130,312         (49,557     80,755   

Other liabilities

     —           51,406         31,393         —          82,799   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,123,944         1,428,803         454,847         (846,209     2,161,385   

Total stockholders’ equity

     142,048         635,117         1,118,663         (1,753,780     142,048   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,265,992       $ 2,063,920       $ 1,573,510       $ (2,599,989   $ 2,303,433   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

19


Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEET

As of December 31, 2011

 

     Verisk
Analytics, Inc.
    Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminating
Entries
    Consolidated  

ASSETS

            

Current assets:

            

Cash and cash equivalents

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

Available-for-sale securities

     —          5,066         —           —          5,066   

Accounts receivable, net of allowance for doubtful accounts of $4,158

     —          128,214         25,125         —          153,339   

Prepaid expenses

     —          20,090         1,815         —          21,905   

Deferred income taxes, net

     —          2,557         1,261         —          3,818   

Federal and foreign income taxes receivable

     7,905        23,024         —           (5,687     25,242   

State and local income taxes receivable

     618        10,392         423         —          11,433   

Intercompany receivables

     250,177        482,172         147,996         (880,345     —     

Other current assets

     —          26,094         15,154         —          41,248   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     334,938        774,422         230,326         (886,032     453,654   

Noncurrent assets:

            

Fixed assets, net

     —          102,202         17,209         —          119,411   

Intangible assets, net

     —          81,828         144,596         —          226,424   

Goodwill

     —          481,736         228,208         —          709,944   

Deferred income taxes, net

     —          50,267         —           (39,787     10,480   

Investment in subsidiaries

     601,380        104,430         —           (705,810     —     

Other assets

     6,218        13,059         1,916         —          21,193   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 942,536      $ 1,607,944       $ 622,255       $ (1,631,629   $ 1,541,106   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY

            

Current liabilities:

            

Accounts payable and accrued liabilities

   $ 6,328      $ 117,759       $ 38,905       $ —        $ 162,992   

Acquisition related liabilities

     —          —           250         —          250   

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

     —          5,161         393         —          5,554   

Pension and postretirement benefits, current

     —          4,012         —           —          4,012   

Fees received in advance

     —          152,948         23,894         —          176,842   

Intercompany payables

     338,041        354,362         187,942         (880,345     —     

Federal and foreign income taxes payable

     —          —           5,687         (5,687     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     344,369        634,242         257,071         (886,032     349,650   

Noncurrent liabilities:

            

Long-term debt

     696,657        403,586         89         —          1,100,332   

Pension and postretirement benefits

     —          127,748         —           —          127,748   

Deferred income taxes, net

     —          —           39,787         (39,787     —     

Other liabilities

     —          58,158         3,708         —          61,866   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,041,026        1,223,734         300,655         (925,819     1,639,596   

Total stockholders’ (deficit) equity

     (98,490     384,210         321,600         (705,810     (98,490
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ (deficit) equity

   $ 942,536      $ 1,607,944       $ 622,255       $ (1,631,629   $ 1,541,106   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)

For The Three Month Period Ended September 30, 2012

 

     Verisk
Analytics, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated  

Revenues

   $ —        $ 322,796      $ 81,124      $ (5,057   $ 398,863   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

          

Cost of revenues (exclusive of items shown separately below)

     —          124,451        34,771        (2,473     156,749   

Selling, general and administrative

     —          47,208        14,083        (2,584     58,707   

Depreciation and amortization of fixed assets

     —          10,156        2,558        —          12,714   

Amortization of intangible assets

     —          4,868        10,574        —          15,442   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     —          186,683        61,986        (5,057     243,612   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     —          136,113        19,138        —          155,251   

Other income (expense):

          

Investment income

     4        48        84        —          136   

Realized loss on securities, net

     —          (638     —          —          (638

Interest expense

     (10,669     (7,452     (12     —          (18,133
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expense) income, net

     (10,665     (8,042     72        —          (18,635
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (10,665     128,071        19,210        —          136,616   

Equity in net income of subsidiaries

     89,654        12,729        —          (102,383     —     

Provision for income taxes

     3,922        (54,752     (2,875     —          (53,705
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 82,911      $ 86,048      $ 16,335      $ (102,383   $ 82,911   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)

For The Nine Month Period Ended September 30, 2012

 

     Verisk
Analytics, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated  

Revenues

   $ —        $ 949,149      $ 185,507      $ (16,066   $ 1,118,590   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

          

Cost of revenues (exclusive of items shown separately below)

     —          362,603        82,971        (8,421     437,153   

Selling, general and administrative

     —          141,747        41,057        (7,645     175,159   

Depreciation and amortization of fixed assets

     —          30,524        6,924        —          37,448   

Amortization of intangible assets

     —          14,688        21,528        —          36,216   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     —          549,562        152,480        (16,066     685,976   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     —          399,587        33,027        —          432,614   

Other income (expense):

          

Investment income

     40        148        209        —          397   

Realized loss on securities, net

     —          (338     —          —          (338

Interest expense

     (30,413     (21,447     (35     —          (51,895
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expense) income, net

     (30,373     (21,637     174        —          (51,836
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (30,373     377,950        33,201        —          380,778   

Equity in net income of subsidiaries

     250,061        15,982        —          (266,043)        —     

Provision for income taxes

     11,155        (151,547     (9,543     —          (149,935
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 230,843      $ 242,385      $ 23,658      $ (266,043   $ 230,843   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)

For The Three Month Period Ended September 30, 2011

 

     Verisk
Analytics, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated  

Revenues

   $ —        $ 300,548      $ 43,434      $ (3,884   $ 340,098   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

          

Cost of revenues (exclusive of items shown separately below)

     —          120,206        19,471        (2,058     137,619   

Selling, general and administrative

     —          40,536        12,765        (1,826     51,475   

Depreciation and amortization of fixed assets

     —          8,985        1,813        —          10,798   

Amortization of intangible assets

     —          5,207        3,590        —          8,797   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     —          174,934        37,639        (3,884     208,689   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     —          125,614        5,795        —          131,409   

Other income (expense):

          

Investment income

     36        905        34        (876     99   

Realized loss on securities, net

     —          (86     —          —          (86

Interest expense

     (7,517     (7,915     (37     876        (14,593
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (7,481     (7,096     (3     —          (14,580
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (7,481     118,518        5,792        —          116,829   

Equity in net income of subsidiaries

     75,729        1,741        —          (77,470     —     

Provision for income taxes

     2,739        (47,300     (1,281     —          (45,842
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 70,987      $ 72,959      $ 4,511      $ (77,470   $ 70,987   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)

For The Nine Month Period Ended September 30, 2011

 

     Verisk
Analytics, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated  

Revenues

   $ —        $ 869,481      $ 122,398      $ (11,632   $ 980,247   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

          

Cost of revenues (exclusive of items shown separately below)

     —          343,109        56,130        (5,879     393,360   

Selling, general and administrative

     —          122,950        39,443        (5,753     156,640   

Depreciation and amortization of fixed assets

     —          27,166        5,792        —          32,958   

Amortization of intangible assets

     —          15,324        10,805        —          26,129   

Acquisition related liabilities adjustment

     —          (2,800     (564     —          (3,364
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     —          505,749        111,606        (11,632     605,723   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     —          363,732        10,792        —          374,524   

Other income (expense):

          

Investment income (loss)

     36        2,376        (8     (2,305     99   

Realized gain on securities, net

     —          401        —          —          401   

Interest expense

     (15,198     (26,072     (128     2,305        (39,093
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (15,162     (23,295     (136     —          (38,593
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (15,162     340,437        10,656        —          335,931   

Equity in net income of subsidiaries

     212,033        3,355        —          (215,388     —     

Provision for income taxes

     5,569        (135,378     (3,682     —          (133,491
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 202,440      $ 208,414      $ 6,974      $ (215,388   $ 202,440   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

For The Three Months Ended September 30, 2012

 

     Verisk
Analytics,  Inc.
     Guarantor
Subsidiaries
     Non-
Guarantor
Subsidiaries
     Eliminating
Entries
    Consolidated  

Net income

   $ 82,911       $ 86,048       $ 16,335       $ (102,383   $ 82,911   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other comprehensive income, net of tax:

             

Unrealized holding gain on investments

     96         96         —           (96     96   

Unrealized foreign currency gain

     4         170         3         (173     4   

Pension and postretirement unfunded liability adjustment

     401         401         —           (401     401   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total other comprehensive income

     501         667         3         (670     501   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 83,412       $ 86,715       $ 16,338       $ (103,053   $ 83,412   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

For The Nine Months Ended September 30, 2012

 

     Verisk
Analytics,  Inc.
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated  

Net income

   $ 230,843      $ 242,385      $ 23,658      $ (266,043   $ 230,843   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax:

          

Unrealized holding loss on investments

     (217     (217     —          217        (217

Unrealized foreign currency (loss) gain on investments

     (130     74        (110     36        (130

Pension and postretirement unfunded liability adjustment

     1,781        1,781        —          (1,781     1,781   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     1,434        1,638        (110     (1,528     1,434   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 232,277      $ 244,023      $ 23,548      $ (267,571   $ 232,277   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

For The Three Months Ended September 30, 2011

 

     Verisk
Analytics,  Inc.
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated  

Net income

   $ 70,987      $ 72,959      $ 4,511      $ (77,470   $ 70,987   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax:

          

Unrealized holding loss on investments

     (290     (290     —          290        (290

Unrealized foreign currency loss

     (555     (243     (516     759        (555

Pension and postretirement unfunded liability adjustment

     697        697        —          (697     697   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     (148     164        (516     352        (148
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 70,839      $ 73,123      $ 3,995      $ (77,118   $ 70,839   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

For The Nine Months Ended September 30, 2011

 

     Verisk
Analytics,  Inc.
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
     Eliminating
Entries
    Consolidated  

Net income

   $ 202,440      $ 208,414      $ 6,974       $ (215,388   $ 202,440   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income, net of tax:

           

Unrealized holding loss on investments

     (542     (542     —           542        (542

Unrealized foreign currency gain

     18        115        96         (211     18   

Pension and postretirement unfunded liability adjustment

     2,671        2,671        —           (2,671     2,671   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total other comprehensive income

     2,147        2,244        96         (2,340     2,147   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 204,587      $ 210,658      $ 7,070       $ (217,728   $ 204,587   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

23


Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)

For The Nine Month Period Ended September 30, 2012

 

     Verisk
Analytics, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated  

Net cash (used in) provided by operating activities

   $ (20,367   $ 236,212      $ 105,152      $ —        $ 320,997   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Acquisitions, net of cash acquired of $36,113

     —          (736,174     (6,917     —          (743,091

Earnout payments

     —          —          (250     —          (250

Purchase of non-controlling equity investments in non-public companies

     —          (2,000     —          —          (2,000

Escrow funding associated with acquisitions

     —          (37,000     (800     —          (37,800

Repayments received from other subsidiaries

     19,400        537,342        —          (556,742     —     

Advances provided to other subsidiaries

     —          (49,400     —          49,400        —     

Purchases of fixed assets

     —          (44,776     (10,948     —          (55,724

Purchases of available-for-sale securities

     —          (1,317     —          —          (1,317

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

     —          1,478        —          —          1,478   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     19,400        (331,847     (18,915     (507,342     (838,704
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Proceeds from issuance of long-term debt, net of original issue discount

     347,224        —          —          —          347,224   

Repayments of short-term debt refinanced on a long-term basis

     —          (347,224     —          —          (347,224

Proceeds from short-term debt, net

     —          462,224        —          —          462,224   

Repurchase of Class A common stock

     —          (128,073     —          —          (128,073

Repayment of advances to other subsidiaries

     (419,842     (19,400     (117,500     556,742        —     

Advances received from other subsidiaries

     —          —          49,400        (49,400     —     

Payment of debt issuance cost

     (2,275     (1,348     —          —          (3,623

Excess tax benefits from exercised stock options

     —          55,056        —          —          55,056   

Proceeds from stock options exercised

     —          43,571        —          —          43,571   

Other financing, net

     —          (4,505     (646     —          (5,151
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (74,893     60,301        (68,746     507,342        424,004   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes

     —          (20     (110     —          (130
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

     (75,860     (35,354     17,381        —          (93,833

Cash and cash equivalents, beginning of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 378      $ 41,459      $ 55,933      $ —        $ 97,770   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental disclosures:

          

Increase in intercompany balances from the purchase of MediConnect and Argus by ISO

   $ 17,000      $ 773,174      $ 756,174      $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 128,073      $ 128,073      $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 43,571      $ 43,571      $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

24


Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)

For The Nine Month Period Ended September 30, 2011

 

     Verisk
Analytics, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated  

Net cash provided by operating activities

   $ 36      $ 297,400      $ 26,318      $ —        $ 323,754   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Acquisition, net of cash acquired of $590

     —          (121,721     —          —          (121,721

Earnout payments

     —          —          (3,500     —          (3,500

Escrow funding associated with acquisition

     —          (19,560     —          —          (19,560

Advances provided to other subsidiaries

     (3,454     —          (59,793     63,247        —     

Repayments received from other subsidiaries

     —          7,332        —          (7,332     —     

Proceeds from repayment of intercompany note receivable

     —          452,761        —          (452,761     —     

Purchases of fixed assets

     —          (35,074     (6,851     —          (41,925

Purchases of available-for-sale securities

     —          (1,422     —          —          (1,422

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

     —          1,722        —          —          1,722   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (3,454     284,038        (70,144     (396,846     (186,406
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Proceeds from issuance of long-term debt, net of original issue discount

     448,956        —          —          —          448,956   

Repayment of short-term debt refinanced on a long-term basis

     —          (295,000     —          —          (295,000

Proceeds from issuance of short-term debt with original maturities greater than three months

     —          120,000        —          —          120,000   

Proceeds (repayments) of short-term debt

     —          22,685        (374     —          22,311   

Repayment of current portion of long-term debt

     —          (125,000     —          —          (125,000

Repayments of advances to other subsidiaries

     —          (2,510     —          2,510        —     

Repayment of intercompany note payables

     (452,761     —          —          452,761        —     

Advances received from other subsidiaries

     10,344        —          48,081        (58,425     —     

Payment of debt issuance cost

     (2,925     (1,617     —          —          (4,542

Repurchase of Class A common stock

     —          (340,122     —          —          (340,122

Excess tax benefits from exercised stock options

     —          5,470        —          —          5,470   

Proceeds from stock options exercised

     —          28,433        —          —          28,433   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     3,614        (587,661     47,707        396,846        (139,494
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes

     —          (78     96        —          18   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     196        (6,301     3,977        —          (2,128

Cash and cash equivalents, beginning of period

     1        31,576        23,397        —          54,974   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 197      $ 25,275      $ 27,374      $ —        $ 52,846   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental disclosures:

          

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

   $ 340,122      $ 340,122      $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 28,433      $ 28,433      $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Issuance of intercompany note payable (receivable)from amounts previously recorded as intercompany payables (receivables)

   $ 615,000      $ (615,000   $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


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

The following discussion should be read in conjunction with our historical financial statements and the related notes included in our annual report on Form 10-K dated and filed with the Securities and Exchange Commission on February 28, 2012. 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, financial services, and healthcare industries and sophisticated methods to predict and quantify loss in diverse contexts ranging from natural catastrophes to supply chain to health insurance.

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

We organize our business in two segments: Risk Assessment and Decision Analytics. Our Risk Assessment segment provides statistical, actuarial and underwriting data for the U.S. P&C insurance industry. Our Risk Assessment segment revenues represented approximately 39% and 43% of our revenues for the nine months ended September 30, 2012 and 2011, respectively. Our Decision Analytics segment provides solutions our customers use to analyze the processes of the Verisk Risk Analytics Framework: loss prediction, fraud identification and detection, and loss quantification. Our Decision Analytics segment revenues represented approximately 61% and 57% of our revenues for the nine months ended September 30, 2012 and 2011, respectively.

Executive Summary

Key Performance Metrics

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

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

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

Revenues

We earn revenues through subscriptions 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, our claims fraud database or our actuarial services throughout the subscription period. For our subscriptions arrangements, we experience minimal revenue seasonality within the business. Our long-term agreements are generally for periods of three to five years. We recognize revenue from subscriptions ratably over the term of the subscription and most long-term agreements are recognized ratably over the term of the agreement.

Certain of our solutions are also paid for by our customers on a transactional basis. For example, we have solutions that allow our customers to access fraud detection tools in the context of an individual mortgage application or loan, obtain property-specific rating and underwriting information to price a policy on a commercial building, or compare a P&C insurance, medical or workers’ compensation claim with information in our databases. For the nine-month periods ended September 30, 2012 and 2011, our revenues derived from providing transactional solutions were 32% and 31%, respectively. 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 87% and 85% of the revenues in our Risk Assessment segment for the nine-month periods ended September 30, 2012 and 2011, respectively, were derived from subscriptions and long-term agreements for our solutions. Our customers in this segment include most of the P&C insurance providers in the United States. Approximately 55% and 57% of the revenues in our Decision Analytics segment, for the nine-month periods ended September 30, 2012 and 2011, were derived from subscriptions and long-term agreements for our solutions. In this segment, our tools service the insurance, healthcare, mortgage and financial services, and specialized markets verticals.

Principal Operating Costs and Expenses

Personnel expenses are the major component of both our cost of revenues and selling, general and administrative expenses. Personnel expenses 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 63% and 66% of our total expenses for the nine months ended September 30, 2012 and 2011, 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. 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.

 

26


Table of Contents

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

We acquired five businesses since January 1, 2011. As a result of these acquisitions, our consolidated results of operations may not be comparable between periods presented herein. See Note 5 in our condensed consolidated financial statements included in this quarterly report on Form 10-Q for further information.

On August 31, 2012, we acquired Argus Information & Advisory Services, LLC, or Argus, a provider of information, competitive benchmarking, scoring solutions, analytics, and customized services to financial institutions and regulators in North America, Latin America, and Europe. Within our Decision Analytics segment, this acquisition enhances our position as a provider of data, analytics, and decision-support solutions to financial institutions globally.

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

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

On June 17, 2011, we acquired the net assets of Health Risk Partners, LLC, or HRP, a provider of solutions to optimize revenue, ensure compliance and improve quality of care for Medicare Advantage and Medicaid health plans. Within our Decision Analytics segment, this acquisition further advances our position as a major provider of data, analytics, and decision-support solutions to the healthcare industry.

On April 27, 2011, we acquired 100% of the common stock of Bloodhound Technologies, Inc. or Bloodhound, a provider of real-time pre-adjudication medical claims editing. Within our Decision Analytics segment, Bloodhound addresses the need of healthcare payers to control fraud and waste in a real-time claims-processing environment, and these capabilities align with our existing fraud identification tools in the healthcare market.

Equity Compensation Costs

We have a leveraged 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, shares are 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 had no ESOP allocation expense for the nine months ended September 30, 2012 and 2011. We accrue compensation expense over the reporting period equal to the fair value of the ESOP loan collateral to be released to the ESOP.

The amount of our equity compensation costs recognized for the three and nine months ended September 30, 2012 and 2011 is as follows:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2012      2011      2012      2011  
     (In thousands)  

ESOP costs by contribution type:

           

401(k) matching contribution expense

   $ 3,295       $ 2,762       $ 9,481       $ 8,188   

Profit sharing contribution expense

     —           460         —           1,442   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total ESOP costs

   $ 3,295       $ 3,222       $ 9,481       $ 9,630   
  

 

 

    

 

 

    

 

 

    

 

 

 

ESOP costs by segment:

           

Risk Assessment ESOP costs

   $ 1,355       $ 1,772       $ 4,080       $ 5,360   

Decision Analytics ESOP costs

     1,940         1,450         5,401         4,270   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total ESOP costs

   $ 3,295       $ 3,222       $ 9,481       $ 9,630   
  

 

 

    

 

 

    

 

 

    

 

 

 

In addition, the portion of the ESOP allocation expense related to the appreciation of the value of the shares in the ESOP above the value of those shares when the ESOP was first established is not tax deductible.

Under the terms of our approved equity compensation plans, stock options and other equity awards may be granted to employees. Prior to our IPO, we granted to key employees nonqualified stock options covered under the Insurance Services Office, Inc. 1996 Incentive Plan, or the Option Plan. Subsequent to the IPO, equity awards, including nonqualified stock options and restricted stock, granted to key employees are covered under the Verisk Analytics, Inc. 2009 Equity Incentive Plan, or the Incentive Plan. All of our outstanding stock options and restricted stock are covered under the Incentive Plan or the Option Plan. See Note 10 in our condensed consolidated financial statements included in this quarterly report on Form 10-Q.

We follow the substantive vesting period approach for awards granted after January 1, 2005, which requires that stock based compensation expense be recognized over the period from the date of grant to the date when the award is no longer contingent on the employee providing additional service. For the nine months ended September 30, 2012 and 2011, we recognized $4.7 million and $4.5 million in stock based compensation as a result of accelerated expense recognition on the equity awards granted on April 1, 2012 and 2011, respectively, because such awards were no longer contingent on the employee providing additional service based on our retirement qualifications.

 

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On May 16, 2012, our stockholders approved the implementation of an employee stock purchase plan, or ESPP. The ESPP commenced on October 1, 2012 and offers eligible employees the opportunity to authorize payroll deductions of up to 20.0% of their regular base salary and up to 50.0% of their short-term incentive compensation, both of which in total may not exceed twenty five thousand dollars in any calendar year, to purchase shares of our Class A common stock at a 5.0% discount of its fair market value at the time of purchase. The ESPP is noncompensatory as the purchase discount is 5.0% or less from the fair market value, substantially all employees that meet limited employment qualifications may participate, and it incorporates no option features.

Condensed Consolidated Results of Operations

 

     Three Months Ended September 30,     Percent     Nine Months Ended September 30,     Percent  
     2012     2011     Change     2012     2011     Change  
    

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

 

Statement of income data:

            

Revenues :

            

Risk Assessment revenues

   $ 143,867      $ 139,977        2.8   $ 433,025      $ 421,050        2.8

Decision Analytics revenues

     254,996        200,121        27.4     685,565        559,197        22.6
  

 

 

   

 

 

     

 

 

   

 

 

   

Revenues

     398,863        340,098        17.3     1,118,590        980,247        14.1
  

 

 

   

 

 

     

 

 

   

 

 

   

Expenses:

            

Cost of revenues (exclusive of items shown separately below)

     156,749        137,619        13.9     437,153        393,360        11.1

Selling, general and administrative

     58,707        51,475        14.0     175,159        156,640        11.8

Depreciation and amortization of fixed assets

     12,714        10,798        17.7     37,448        32,958        13.6

Amortization of intangible assets

     15,442        8,797        75.5     36,216        26,129        38.6

Acquisition related liabilities adjustment

     —          —          0.0     —          (3,364     (100.0 )% 
  

 

 

   

 

 

     

 

 

   

 

 

   

Total expenses

     243,612        208,689        16.7     685,976        605,723        13.2
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating income

     155,251        131,409        18.1     432,614        374,524        15.5
  

 

 

   

 

 

     

 

 

   

 

 

   

Other income/(expense):

            

Investment income

     136        99        37.4     397        99        301.0

Realized (loss)/gain on securities, net

     (638     (86     641.9     (338     401        (184.3 )% 

Interest expense

     (18,133     (14,593     24.3     (51,895     (39,093     32.7
  

 

 

   

 

 

     

 

 

   

 

 

   

Total other expense, net

     (18,635     (14,580     27.8     (51,836     (38,593     34.3
  

 

 

   

 

 

     

 

 

   

 

 

   

Income before income taxes

     136,616        116,829        16.9     380,778        335,931        13.4

Provision for income taxes

     (53,705     (45,842     17.2     (149,935     (133,491     12.3
  

 

 

   

 

 

     

 

 

   

 

 

   

Net income

   $ 82,911      $ 70,987        16.8   $ 230,843      $ 202,440        14.0
  

 

 

   

 

 

     

 

 

   

 

 

   

Basic net income per share

   $ 0.50      $ 0.43        16.3   $ 1.39      $ 1.21        14.9
  

 

 

   

 

 

     

 

 

   

 

 

   

Diluted net income per share

   $ 0.48      $ 0.41        17.1   $ 1.34      $ 1.16        15.5
  

 

 

   

 

 

     

 

 

   

 

 

   

Weighted average shares outstanding:

            

Basic

     165,978,080        164,195,325        1.1     165,587,027        166,728,786        (0.7 )% 
  

 

 

   

 

 

     

 

 

   

 

 

   

Diluted

     171,660,543        171,169,658        0.3     171,637,571        174,255,965        (1.5 )% 
  

 

 

   

 

 

     

 

 

   

 

 

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

EBITDA (1):

            

Risk Assessment EBITDA

   $ 78,589      $ 70,716        11.1   $ 235,058      $ 213,494        10.1

Decision Analytics EBITDA

     104,316        80,301        29.9     271,279        220,617        23.0
  

 

 

   

 

 

     

 

 

   

 

 

   

EBITDA

   $ 182,905      $ 151,017        21.1   $ 506,337      $ 434,111        16.6
  

 

 

   

 

 

     

 

 

   

 

 

   

The following is a reconciliation of net income to EBITDA:

            

Net income

   $ 82,911      $ 70,987        16.8   $ 230,843      $ 202,440        14.0

Depreciation and amortization

     28,156        19,595        43.7     73,664        59,087        24.7

Interest expense

     18,133        14,593        24.3     51,895        39,093        32.7

Provision for income taxes

     53,705        45,842        17.2     149,935        133,491        12.3
  

 

 

   

 

 

     

 

 

   

 

 

   

EBITDA

   $ 182,905      $ 151,017        21.1   $ 506,337      $ 434,111        16.6
  

 

 

   

 

 

     

 

 

   

 

 

   

 

(1) EBITDA is the financial measure which management uses to evaluate the performance of our segments. “EBITDA” is defined as net income before interest expense, provision for income taxes, and depreciation and amortization of fixed and intangible assets. In the second quarter of 2012, we changed our definition of EBITDA such that it only reflects the definition noted and no longer excludes investment income/(loss) and realized gain/(loss) on securities, net, for all periods presented. In addition, this Management’s Discussion and Analysis includes references to EBITDA margin, which is computed as EBITDA divided by revenues. See Note 12 of our condensed consolidated financial statements included in this Form 10-Q filing.

 

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

 

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

 

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

 

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

 

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

Consolidated Results of Operations

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Revenues

Revenues were $1,118.6 million for the nine months ended September 30, 2012 compared to $980.2 million for the nine months ended September 30, 2011, an increase of $138.4 million or 14.1%. In 2012 and 2011, we acquired five companies, Bloodhound, HRP, MediConnect, ALP, and Argus, collectively referred to as recent acquisitions, which we define as acquisitions not owned for a significant portion of both the current period and/or prior period and would therefore impact the comparability of the financial results. Bloodhound and HRP were excluded as recent acquisitions only for the first and second quarters of 2012 and 2011 as full quarter comparable revenues did not exist until the third quarter of 2012 due to the timing of the acquisitions. Recent acquisitions were within our Decision Analytics segment and provided an increase of $64.7 million in revenues for the nine months ended September 30, 2012. Excluding recent acquisitions, revenues increased $73.7 million or 7.5%, which included an increase in our Decision Analytics segment of $61.7 million or 11.1% and an increase in our Risk Assessment segment of $12.0 million or 2.8%. Refer to the Results of Operations by Segment within this section for further information regarding our revenues.

Cost of Revenues

Cost of revenues was $437.2 million for the nine months ended September 30, 2012 compared to $393.4 million for the nine months ended September 30, 2011, an increase of $43.8 million or 11.1%. Recent acquisitions, all within our Decision Analytics segment, accounted for an increase of $30.7 million in cost of revenues, primarily due to expenses related to salaries and employee benefit costs. Excluding the impact of our recent acquisitions, our cost of revenues increased $13.1 million or 3.3%. The increase was primarily due to increases in salaries and employee benefit costs of $8.2 million, information technology expenses of $2.4 million, data costs of $1.5 million, and office maintenance expenses of $1.0 million.

The increase in salaries and employee benefits of $8.2 million includes an increase of $15.8 million in annual salaries and employee benefits, medical costs, and long term equity compensation plan costs, and was partially offset by a decrease of $7.6 million in pension cost. The pension cost decreased primarily due to our pension plan freeze in 2012, which eliminated all future compensation and services credits to participants of our pension plan.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, or SGA, were $175.2 million for the nine months ended September 30, 2012 compared to $156.6 million for the nine months ended September 30, 2011, an increase of $18.6 million or 11.8%. Recent acquisitions, all within our Decision Analytics segment, accounted for an increase of $8.3 million, which was primarily related to salaries and employee benefits. Excluding costs associated with our recent acquisitions, SGA increased $10.3 million or 6.6%. The increase was primarily due to a net increase in salaries and employee benefits of $8.5 million, travel and travel related costs of $0.8 million, professional fees of $0.6 million, which includes legal and marketing costs, and other expenses of $0.4 million.

The increase in salaries and employee benefits of $8.5 million includes an increase of $10.5 million in annual salaries and employee benefits, medical costs, and long term equity compensation plan costs, and was partially offset by a decrease of $2.0 million in pension cost, primarily due to the our pension plan freeze.

Depreciation and Amortization of Fixed Assets

Depreciation and amortization of fixed assets was $37.4 million for the nine months ended September 30, 2012 compared to $33.0 million for the nine months ended September 30, 2011, an increase of $4.4 million or 13.6%. Depreciation and amortization of fixed assets includes depreciation of furniture and equipment, software, computer hardware, and related equipment. The majority of the increase relates to software and hardware costs to support data capacity expansion and revenue growth as well as depreciation and amortization associated with recent acquisitions.

Amortization of Intangible Assets

Amortization of intangible assets was $36.2 million for the nine months ended September 30, 2012 compared to $26.1 million for nine months ended September 30, 2011, an increase of $10.1 million or 38.6%. The increase was primarily related to amortization of intangible assets associated with recent acquisitions of $13.1 million, partially offset by $3.0 million of amortization of intangible assets primarily associated with prior acquisitions that have been fully amortized.

Acquisition Related Liabilities Adjustment

There was no acquisition related liabilities adjustment for the nine months ended September 30, 2012 and a benefit of $3.4 million for the nine months ended September 30, 2011. This benefit was a result of a reduction of $3.4 million to contingent consideration due to the reduced probability of the D2Hawkeye and Strategic Analytics acquisitions achieving the EBITDA and revenue earn-out targets for exceptional performance in fiscal year 2011 established at the time of acquisitions.

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

Investment income and realized (loss)/gain on securities, net, was a gain of $0.1 million for the nine months ended September 30, 2012 and $0.5 million for the nine months ended September 30, 2011.

 

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Interest Expense

Interest expense was $51.9 million for the nine months ended September 30, 2012 compared to $39.1 million for the nine months ended September 30, 2011, an increase of $12.8 million or 32.7%. This increase is primarily due to an increase in our long-term debt outstanding, which includes the issuance of our 4.875% and 4.125% senior notes in the aggregate principal amount of $250 million and $350 million, respectively.

Provision for Income Taxes

The provision for income taxes was $149.9 million for the nine months ended September 30, 2012 compared to $133.5 million for the nine months ended September 30, 2011, an increase of $16.4 million or 12.3%. The effective tax rate was 39.4% for the nine months ended September 30, 2012 compared to 39.7% for the nine months ended September 30, 2011. The effective rate for the nine months ended September 30, 2012 was lower than the September 30, 2011 effective tax rate primarily due to the continued execution of tax planning strategies.

EBITDA Margin

The EBITDA margin for our consolidated results was 45.3% for the nine months ended September 30, 2012 compared to 44.3% for the nine months ended September 30, 2011. For the nine months ended September 30, 2012, the recent acquisitions mitigated our margin expansion by 0.5%. The increase in margin is primarily attributed to operating leverage as well as cost efficiencies achieved in 2012. For the nine months ended September 30, 2011, the acquisition related liabilities adjustment positively impacted our EBITDA margin by 0.3%.

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Revenues

Revenues were $398.9 million for the three months ended September 30, 2012 compared to $340.1 million for the three months ended September 30, 2011, an increase of $58.8 million or 17.3%. Recent acquisitions, which were MediConnect, ALP and Argus, accounted for an increase of $29.8 million in revenues for the three months ended September 30, 2012, all of which were in Decision Analytics. Excluding recent acquisitions, revenues increased $29.0 million or 8.5%, which included an increase in our Decision Analytics segment of $25.1 million or 12.5% and an increase in our Risk Assessment segment of $3.9 million or 2.8%.

Cost of Revenues

Cost of revenues was $156.7 million for the three months ended September 30, 2012 compared to $137.6 million for the three months ended September 30, 2011, an increase of $19.1 million or 13.9%. The increase was partially due to costs related to recent acquisitions of $13.1 million primarily attributable to salaries and employee benefits costs. Excluding the impact of recent acquisitions, cost of revenue increased $6.0 million or 4.4%. The increase is primarily due to an increase in salaries and employee benefits costs of $3.2 million, which include annual salary increases and medical costs. Included within the net increase in salaries and employee benefits is an offsetting reduction in pension cost of $2.7 million. Other increases include data costs of $2.4 million and information technology costs of $1.3 million. These increases were partially offset by a decrease in other expenses of $0.8 million and office maintenance expenses of $0.1 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $58.7 million for the three months ended September 30, 2012 compared to $51.5 million for the three months ended September 30, 2011, an increase of $7.2 million or 14.0%. Excluding the impact of recent acquisitions of $2.6 million, our SGA increased $4.6 million or 9.1%. The increase was primarily due to a net increase in salaries and employee benefits costs of $2.2 million, which include annual salary increases, medical costs, commissions, and equity compensation expense. Included within the net increase in salaries and employee benefits is an offsetting reduction in pension cost of $0.7 million. Other increases include professional fees of $2.4 million, travel and travel related costs of $0.6 million. These increases were offset by a decrease in other expenses of $0.6 million.

Provision for Income Taxes

The provision for income taxes was $53.7 million for the three months ended September 30, 2012 compared to $45.8 million for the three months ended September 30, 2011, an increase of $7.9 million or 17.2%. The effective tax rate was 39.3% for the three months ended September 30, 2012 compared to 39.2% for the three months ended September 30, 2011.

EBITDA Margin

The EBITDA margin for our consolidated results was 45.9% for the three months ended September 30, 2012 and 44.4% for the three months ended September 30, 2011. For the three months ended September 30, 2012, recent acquisitions mitigated our margin expansion by 0.1%.

Results of Operations by Segment

Decision Analytics

Revenues

Revenues for our Decision Analytics segment were $685.6 million for the nine months ended September 30, 2012 compared to $559.2 million for the nine months ended September 30, 2011, an increase of $126.4 million or 22.6%. Recent acquisitions accounted for an increase of $64.7 million in revenues for the nine months ended September 30, 2012. Excluding recent acquisitions, our Decision Analytics revenue increased $61.7 million or 11.1%.

Our insurance revenue increased $31.0 million or 9.3%, and excluding recent acquisitions revenue of $0.4 million within this category, our insurance revenue increased $30.6 million or 9.1%, primarily due to an increase within our loss quantification solutions as a result of new customers and an increase in our catastrophe modeling services for existing customers, as well an increase in insurance fraud solutions revenue.

Our mortgage and financial services revenue increased $4.9 million or 4.8%, and excluding recent acquisitions revenue of $4.8 million within this category, our mortgage and financial services revenue increased $0.1 million or 0.2%, primarily due to the inclusion of property appraisal tools facing the mortgage market revenue of $9.1 million, which was previously reported as part of the property-specific rating and underwriting information category within our Risk Assessment segment in 2011. Excluding recent acquisitions and the property appraisal revenue, our mortgage and financial services revenue decreased $8.9 million or 8.7% reflecting lower volumes within forensic solutions due to the continued challenges in the mortgage market, partially offset by growth in our underwriting solutions.

 

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Our healthcare revenue increased $84.9 million or 130.2%, and excluding the recent acquisitions revenue of $59.5 million within this category, our healthcare revenue increased $25.4 million or 41.0% primarily due to an increase in our fraud services as customer contracts were implemented and new sales of risk solutions were achieved.

Our specialized markets revenue increased $5.6 million or 9.7% as a result of continued penetration of existing customers within our supply chain services and weather and climate risk solutions.

Revenues for our Decision Analytics segment were $255.0 million for the three months ended September 30, 2012 compared to $200.1 million for the three months ended September 30, 2011, an increase of $54.9 million or 27.4%. Recent acquisitions accounted for an increase of $29.8 million in revenues for the three months ended September 30, 2012. Excluding the impact of recent acquisitions, revenue increased $25.1 million or 12.5% for the three months ended September 30, 2012.

Our insurance revenue increased $10.0 million or 8.6%, and excluding recent acquisitions revenue of $0.4 million within this category, our insurance revenue increased $9.6 million or 8.3%, primarily due to an increase within our loss quantification solutions as a result of new customers and an increase in our catastrophe modeling services for existing customers, as well an increase in insurance fraud solutions revenue.

Our mortgage and financial services revenue increased $3.7 million or 10.8%, and excluding recent acquisitions revenue of $4.8 million within this category, our mortgage and financial services revenue decreased $1.1 million or 3.1%, primarily due to the inclusion of property appraisal tools facing the mortgage market revenue of $3.0 million, which was previously reported as part of the property-specific rating and underwriting information category within our Risk Assessment segment in 2011. Excluding recent acquisitions and the property appraisal revenue, our mortgage and financial services revenue decreased $4.1 million or 11.9% reflecting lower volumes within forensic solutions due to the continued challenges in the mortgage market, partially offset by growth in our underwriting solutions.

Our healthcare revenue increased $39.1 million or 129.0%, and excluding the recent acquisitions revenue of $24.6 million within this category, our healthcare revenue increased $14.5 million or 47.4%, primarily due to an increase in our fraud services as customer contracts were implemented and new sales of risk solutions were achieved.

Our specialized markets revenue increased $2.1 million or 11.0% as a result of continued penetration of existing customers within our supply chain services and weather and climate risk solutions.

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

 

     Three Months Ended September 30,      Percentage     Nine Months Ended September 30,      Percentage  
     2012      2011      Change     2012      2011      Change  
    

(In thousands)

 

Insurance

   $ 126,301       $ 116,281         8.6   $ 364,847       $ 333,915         9.3

Mortgage and financial services

     37,960         34,272         10.8     107,534         102,611         4.8

Healthcare

     69,324         30,277         129.0     150,153         65,216         130.2

Specialized markets

     21,411         19,291         11.0     63,031         57,455         9.7
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Decision Analytics

   $ 254,996       $ 200,121         27.4   $ 685,565       $ 559,197         22.6
  

 

 

    

 

 

      

 

 

    

 

 

    

Cost of Revenues

Cost of revenues for our Decision Analytics segment was $301.4 million for the nine months ended September 30, 2012 compared to $247.9 million for the nine months ended September 30, 2011, an increase of $53.5 million or 21.6%. Excluding the impact of recent acquisitions of $30.7 million, our cost of revenues increased by $22.8 million or 9.3%. This increase is primarily due to a net increase in salary and employee benefits of $16.1 million. Other increases include data costs of $2.5 million, information technology expenses of $2.9 million, office maintenance expenses of $0.8 million, and other operating costs of $0.5 million.

The increase in salaries and employee benefits of $16.1 million includes an increase of $17.3 million in annual salaries and employee benefits, medical costs, and long term equity compensation plan costs, and due to the reallocation of certain resources from Risk Assessment relating to property appraisal tools that began in January 2012. These increases were partially offset by a decrease of $1.2 million in pension cost primarily because of our pension plan freeze.

Cost of revenues for our Decision Analytics segment was $111.7 million for the three months ended September 30, 2012 compared to $88.4 million for the three months ended September 30, 2011, an increase of $23.3 million or 26.4%. The increase was primarily due to costs related to recent acquisitions of $13.1 million. Excluding the impact of recent acquisitions, our cost of revenues increased by $10.2 million or 11.5%. The increase is primarily due to a net increase in salaries and employee benefits costs of $6.6 million partially from the reallocation of certain resources from Risk Assessment. Also included within the net increase in salaries and employee benefits is an offsetting reduction in pension cost of $0.4 million. Other increases include data costs of $2.7 million and information technology expenses of $1.3 million and office maintenance expenses of $0.1 million. These increases were partially offset by a decrease in other expenses of $0.5 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for our Decision Analytics segment were $113.0 million for the nine months ended September 30, 2012 compared to $94.1 million for the nine months ended September 30, 2011, an increase of $18.9 million or 20.0%. Excluding the impact of recent acquisitions of $8.3 million, SGA increased $10.6 million or 11.4%. The increase was primarily due to an increase in salaries and employee benefits of $8.6 million, an increase in professional fees of $2.0 million and travel and travel related costs of $0.6 million. The increase is offset by a decrease of other expenses of $0.6 million.

The increase in salaries and employee benefits of $8.6 million includes an increase of $9.1 million in annual salaries and employee benefits, medical costs, commissions, and long term equity compensation plan costs, and was partially offset by a decrease of $0.5 million in pension cost, primarily due to the our pension plan freeze.

Selling, general and administrative expenses for our Decision Analytics segment were $39.0 million for the three months ended September 30, 2012 compared to $31.4 million for the three months ended September 30, 2011, an increase of $7.6 million or 24.1%. Excluding the impact of recent acquisitions of $2.6 million, our SGA increased by $5.0 million or 16.0%. The increase was primarily due to an increase in salaries and employee benefits costs of $2.6 million. Included within the net increase in salaries and employee benefits is an offsetting reduction in pension cost of $0.2 million. Other increases include professional fees of $2.7 million and travel and travel related costs of $0.5 million. These increases were offset by a decrease other expenses of $0.8 million.

EBITDA Margin

The EBITDA margin for our Decision Analytics segment was 39.6% for the nine months ended September 30, 2012 compared to 39.5% for the nine months ended September 30, 2011. For the nine months ended September 30, 2012, recent acquisitions mitigated our margin expansion by 0.2%. For the nine months ended September 30, 2011, the acquisition related liabilities adjustment positively impacted our EBITDA margin by 0.6%.

 

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Risk Assessment

Revenues

Revenues for our Risk Assessment segment were $433.0 million for the nine months ended September 30, 2012 as compared to $421.0 million for the nine months ended September 30, 2011, an increase of $12.0 million or 2.8%. Revenues were $143.9 million for the three months ended September 30, 2012 as compared to $140.0 million for the three months ended September 30, 2011, an increase of $3.9 million or 2.8%. The overall increase within this segment primarily resulted from an increase in prices derived from continued enhancements to the content of our industry-standard insurance programs’ solutions as well as selling expanded solutions to existing customers. As described with the Decision Analytics segment revenue, beginning January 1, 2012, we reallocated certain property appraisal tools revenue of $3.0 million and $9.1 million for three and nine months ended September 30, 2012, respectively, from the property-specific rating and underwriting information category to the mortgage and financial services category.

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

 

     Three Months Ended September 30,      Percentage     Nine Months Ended September 30,      Percentage  
     2012      2011      Change     2012      2011      Change  
    

(In thousands)

 

Industry-standard insurance programs

   $ 98,270       $ 92,894         5.8   $ 295,414       $ 278,140         6.2

Property-specific rating and underwriting information

     31,415         33,107         (5.1 )%      96,431         102,621         (6.0 )% 

Statistical agency and data services

     8,056         7,888         2.1     23,910         23,263         2.8

Actuarial services

     6,126         6,088         0.6     17,270         17,026         1.4
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Risk Assessment

   $ 143,867       $ 139,977         2.8   $ 433,025       $ 421,050         2.8
  

 

 

    

 

 

      

 

 

    

 

 

    

Cost of Revenues

Cost of revenues for our Risk Assessment segment was $135.8 million for the nine months ended September 30, 2012 compared to $145.5 million for the nine months ended September 30, 2011, a decrease of $9.7 million or 6.7%. The decrease was primarily due to a decrease in salaries and employee benefits costs of $7.9 million, primarily related to lower pension cost of $6.4 million, and the reallocation of certain resources to Decision Analytics relating to property appraisal tools that occurred in January 2012. Other decreases were related to data costs of $1.0 million, and information technology costs of $0.5 million and other costs of $0.5 million. These decreases were partially offset by an increase in office maintenance expenses of $0.2 million.

Cost of revenues for our Risk Assessment segment was $45.0 million for the three months ended September 30, 2012 compared to $49.2 million for the three months ended September 30, 2011, a decrease of $4.2 million or 8.5%. The decrease was primarily due to a decrease in salaries and employee benefits costs of $3.4 million. Included within the decrease in salaries and employee benefits is a reduction in pension cost of $2.3 million and the reallocation of certain resources to Decision Analytics. Other decreases include data costs of $0.3 million and office maintenance expenses of $0.2 million and other costs of $0.3 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for our Risk Assessment segment were $62.2 million for the nine months ended September 30, 2012 compared to $62.5 million for the nine months ended September 30, 2011, a decrease of $0.3 million or 0.5%. There was a net decrease in salaries and employee benefits of $0.1 million and professional fees of $1.4 million. These decreases in costs were partially offset by an increase in travel and travel related costs of $0.2 million and other expenses of $1.0 million.

The decrease in salaries and employee benefits of $0.1 million includes an increase of $1.4 million in annual salaries and employee benefits, medical costs, and long term equity compensation plan costs, and was partially offset by a decrease of $1.5 million in pension cost primarily due to our pension plan freeze.

Selling, general and administrative expenses for our Risk Assessment segment were $19.7 million for the three months ended September 30, 2012 compared to $20.1 million for the three months ended September 30, 2011, a decrease of $0.4 million or 1.7%. The decrease was primarily due to a decrease in salaries and employee benefits costs of $0.4 million, which includes a reduction in pension cost of $0.5 million and professional fees of $0.3 million. These decreases were partially offset by an increase in travel and travel related costs of $0.1 million and other expenses of $0.2 million.

EBITDA Margin

EBITDA margin for our Risk Assessment segment was 54.3% for the nine months ended September 30, 2012 compared to 50.7% for the nine months ended September 30, 2011. The increase in margin is primarily attributed to operating leverage in the segment as well as cost efficiencies.

Liquidity and Capital Resources

As of September 30, 2012 and December 31, 2011, we had cash and cash equivalents and available-for-sale securities of $102.7 million and $196.7 million, respectively. Subscriptions for our solutions are billed and generally paid in advance of rendering services either quarterly or in full upon commencement of the subscription period, which is usually for one year. Subscriptions are automatically renewed at the beginning of each calendar year. We have historically generated significant cash flows from operations. As a result of this factor, as well as the availability of funds under our Syndicated Revolving Credit Facility, or credit facility, we believe we will have sufficient cash to meet our working capital and capital expenditure needs, and to fuel our future growth plans.

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

 

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Our capital expenditures, which include noncash purchases of fixed assets and capital lease obligations, as a percentage of revenues for the nine months ended September 30, 2012 and 2011, were 5.1% and 4.9%, respectively. Expenditures related to developing and enhancing our solutions are predominately related to internal use software and are capitalized in accordance with ASC 350-40, “Accounting for Costs of Computer Software Developed or Obtained for Internal Use.” We also capitalize amounts in accordance with ASC 985-20, “Software to be Sold, Leased or Otherwise Marketed.” 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.

We historically used a portion of our cash for repurchases of our common stock from our stockholders. During the nine months ended September 30, 2012 and 2011, we repurchased $127.8 million and $340.1 million of our Class A common stock, respectively. See Note 9 to our condensed consolidated financial statements included in this quarterly report on Form 10-Q.

We provide pension and postretirement benefits to certain qualifying active employees and retirees. On February 29, 2012, we instituted a hard freeze, which eliminated all future compensation and service credits, to all participants in the pension plans. In April 2012, we completed a voluntary prefunding to our qualified pension plan of $72.0 million, which resulted in a contribution of $78.8 million for the year, of which $28.2 million was the minimum contribution requirement for 2012. We do not anticipate further contributions in 2012 to be made with respect to our qualified pension plan. 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. In March 2012, we established a voluntary employee’s beneficiary association plan, or VEBA plan, to fund the postretirement plan. We contributed $5.0 million and $13.5 million to the VEBA Plan for the three and nine months ended September 30, 2012, respectively. We expect the contribution to the postretirement plan for the remaining quarter for the year ending December 31, 2012 to be consistent with this quarter. See Note 11 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 $1,559.2 million and $1,096.7 million at September 30, 2012 and December 31, 2011, respectively. The debt at September 30, 2012 was issued under our credit facility, long-term private placement loan facilities and senior notes issued to finance our stock repurchases and acquisitions, to fund a portion of our unfunded pension obligations and to repay other indebtedness.

On September 12, 2012, we completed an issuance of senior notes in the aggregate principal amount of $350.0 million. These senior notes are due on September 12, 2022 and accrue interest at 4.125%. We received net proceeds of $344.9 million after deducting original issue discount, underwriting discount and commissions of $5.1 million. The senior notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured and unsubordinated basis by ISO and certain subsidiaries that guarantee our credit facility or any amendment, refinancing or replacement thereof. Interest will be payable semi-annually on March 12 and September 12 of each year, beginning on March 12, 2013. Interest accrued from September 12, 2012. We used the net proceeds to repay indebtedness incurred under our credit facility in connection with our acquisition of Argus on August 31, 2012 (See Notes 5 and 8 to our condensed consolidated financial statements included in this quarterly report on Form 10-Q for further information on the Argus acquisition and the 4.125% senior notes).

As of September 30, 2012, we had senior notes with aggregate principal amount of $1,050.0 million. The senior notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured and unsubordinated basis by ISO and certain subsidiaries that guarantee our credit facility, or any amendment, refinancing or replacement thereof. The indenture governing the senior notes restricts our ability and our subsidiaries’ ability to, among other things, create certain liens, enter into sale/leaseback transactions and consolidate with, sell, lease, convey or otherwise transfer all or substantially all of our assets, or merge with or into, any other person or entity.

On September 28, 2012, we amended our committed senior unsecured credit facility to increase the borrowing capacity under the credit facility from $725.0 million to $850.0 million, extend the maturity date from October 24, 2016 to October 24, 2017 and increase the maximum Consolidated Funded Debt Leverage Ratio from 3.25-to-1.0 to 3.50-to-1.0. We have financed and expect to finance our short-term working capital needs, stock repurchases and acquisitions through cash from operations and borrowings from a combination of our credit facility and long-term private placement facilities. As of September 30, 2012, we had $115.0 million outstanding under the credit facility. We borrowed $580.0 million from our credit facility and repaid $465.0 million of this balance during the nine months ended September 30, 2012. As of September 30, 2012, our credit facility had $735.0 million of available borrowing capacity.

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/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 we maintain a consolidated funded debt leverage ratio below 3.50-to-1.0. We were in compliance with all debt covenants under the credit facility as of September 30, 2012.

We also have long-term private placement loan facilities under uncommitted master shelf agreements with New York Life and Prudential Capital Group, or Prudential, with availabilities at September 30, 2012 in the amounts of $30.0 million and $190.0 million, respectively. We can borrow under the New York Life Master Shelf Agreement until March 16, 2013 and the Prudential Master Shelf Agreement until August 30, 2013.

The notes outstanding under these long-term private placement loan facilities mature over the next four 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 borrowings under these facilities was 6.3% for the nine months ended September 30, 2012. The uncommitted master shelf agreements contain certain covenants that limit our ability to create liens, enter into sale/leaseback transactions and consolidate, merge or sell assets to another company. Our shelf agreements also contains financial covenants that 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 a consolidated debt leverage ratio below 3.0-to-1.0 during any period of four fiscal quarters. We were in compliance with all debt covenants under our master shelf agreements as of September 30, 2012.

 

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Cash Flow

The following table summarizes our cash flow data for the nine months ended September 30, 2012 and 2011:

 

     For the Nine Months Ended September 30,  
     2012     2011  
     (In thousands)  

Net cash provided by operating activities

   $ 320,997      $ 323,754   

Net cash used in investing activities

   $ (838,704   $ (186,406

Net cash provided by/(used in) financing activities

   $ 424,004      $ (139,494

Operating Activities

Net cash provided by operating activities was $321.0 million for the nine months ended September 30, 2012 compared to $323.8 million for the nine months ended September 30, 2011. The decrease in net cash provided by operating activities was principally due to the voluntary prefunding to our qualified pension plan of $72.0 million in April 2012, and an increase in interest payments as a result of the issuance of senior notes with an aggregate principal amount of $700.0 million in 2011. This decrease was partially offset by an increase in cash receipts from customers during the nine months ended September 30, 2012.

Investing Activities

Net cash used in investing activities was $838.7 million for the nine months ended September 30, 2012 compared to $186.4 million for the nine months ended September 30, 2011. The increase in net cash used in investing activities was principally due to an increase in acquisition payments of $621.4 million, primarily related to the acquisitions of MediConnect and Argus in the first and third quarters of 2012, respectively, an increase in escrow funding associated with these acquisitions of $18.2 million and an increase in purchases of fixed assets of $13.8 million during the nine months ended Septembers 30, 2012.

Financing Activities

Net cash provided by/(used in) financing activities was $424.0 million for the nine months ended September 30, 2012 and $(139.5) million for the nine months ended September 30, 2011. Net cash provided by financing activities for the nine months ended September 30, 2012 was primarily related to an increase in total net debt of $458.6 million primarily related to the issuance of senior notes with an aggregate principal amount of $350.0 million on September 12, 2012 and borrowings from our credit facility. Net cash provided by financing activities also consisted of stock option related items of $98.6 million, offset by repurchases of our Class A common stock of $128.1 million. Net cash used in financing activities for the nine months ended September 30, 2011 was primarily related to repurchases of our Class A common stock of $340.1 million, partially offset by an increase in total net debt of $166.7 million.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

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 February 28, 2012 except as noted below.

Due to our voluntary prefunding and hard freeze of the pension plans (see Note 11 in our condensed consolidated financial statements included in this quarterly report on Form 10-Q), we expect our contractual obligations payments for the Pension and postretirement plans to decrease to the following amounts: 1-3 years $11.2 million, 3-5 years $7.3 million, and More than 5 years $15.4 million.

On September 12, 2012, we completed an issuance of senior notes in the aggregate principal amount of $350.0 million. These senior notes are due on September 12, 2022 and accrue interest at 4.125%. We received net proceeds of $344.9 million after deducting discounts and commissions of $5.1 million. The senior notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured and unsubordinated basis by ISO and certain subsidiaries that guarantee our credit facility or any amendment, refinancing or replacement thereof. Interest is payable semi-annually on March 12 and September 12 of each year, beginning on March 12, 2013. Interest accrued from September 12, 2012.

Critical Accounting Policies and Estimates

Our management’s 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 “Management’s 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 February 28, 2012. Since the date of our annual report on Form 10-K, there have been no material changes to our critical accounting policies and estimates.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risks at September 30, 2012 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 February 28, 2012.

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We 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 Commission’s 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.

 

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Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s 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 September 30, 2012, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

During the three month period ended September 30, 2012, 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.

 

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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. See Part I Item I. Note 14 to our condensed consolidated financial statements for the nine months ended September 30, 2012 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 February 28, 2012 except for the risk factor noted below contained in our current report on Form 8-K filed with the Securities and Exchange Commission on September 5, 2012.

Our acquisition of Argus increased our leverage; in addition, we may not realize the expected benefits of the acquisition.

On August 31, 2012, we completed our acquisition of Argus. In order to finance the acquisition, we incurred $380.0 million of indebtedness under our revolving credit facility. At August 31, 2012, our total debt increased to approximately $l,600.0 million and our leverage ratio (debt to EBITDA (last twelve months pro forma)) increased from 1.90x to 2.34x. Our increased leverage resulting from the Argus acquisition could adversely affect our business. In particular, it could increase our vulnerability to sustained, adverse macroeconomic weakness, limit our ability to obtain further financing and limit our ability to pursue certain operational and strategic opportunities. In addition, we may fail to realize the expected benefits of the acquisition.

 

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

On April 29, 2010, our board of directors authorized a $150.0 million share repurchase program, or the Repurchase Program, of our common stock. On October 19, 2010, March 11, 2011, and July 8, 2011, our board of directors authorized additional capacity of $150.0 million each, and on January 11, 2012, our board of directors authorized additional capacity of $300.0 million bringing the Repurchase Program to a total of $900.0 million. Under the Repurchase Program, we may repurchase stock in the open market or as otherwise determined by us. These authorizations have no expiration dates, although they may be suspended or terminated at any time. Our shares repurchased for the quarter ended September 30, 2012 are set forth below:

 

Period

   Total Number
of Shares
Purchased
     Average
Price Paid
per Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
     Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs
(in thousands)
 

July 1, 2012 through July 31, 2012

     220,000       $ 49.91         220,000       $ 188,758   

August 1, 2012 through August 31, 2012

     85,000       $ 48.15         85,000       $ 184,665   

September 1, 2012 through September 30, 2012

     120,000       $ 47.61         120,000       $ 178,951   
  

 

 

       

 

 

    
     425,000            425,000      
  

 

 

       

 

 

    

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

None.

 

Item 5. Other Information

On September 13, 2012, our board of directors approved the Verisk Analytics, Inc. Director Compensation Program (the “Director Compensation Program”), as amended, to increase the annual retainer fees and the chairpersons’ committee retainer fees. A copy of the Director Compensation Plan, as amended, is attached to this Form 10-Q as Exhibit 10.1 and is incorporated by reference herein.

 

Item 6. Exhibits

See Exhibit Index.

 

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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.

 

    Verisk Analytics, Inc.
    (Registrant)

Date: October 30, 2012

    By:  

/s/ Mark V. Anquillare

     

Mark V. Anquillare

Executive Vice President and Chief Financial Officer

(Principal Financial Officer and Duly Authorized Officer)

 

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EXHIBIT INDEX

 

Exhibit

Number

  

Description

10.1    Verisk Analytics, Inc. Director Compensation Program*
31.1    Certification of the Chief Executive Officer of Verisk Analytics, Inc. pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.*
31.2    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.*

 

* Filed herewith.

 

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