UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended SeptemberJune 30, 2011

2012

OR

¨
oTRANSITION 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
Delaware

(State or other jurisdiction of

incorporation
or organization)

 26-2994223

(I.R.S. Employer

Identification No.)

545 Washington Boulevard

Jersey City, NJ

 07310-1686
545 Washington Boulevard
Jersey City, NJ

(Address of principal executive offices)
 
07310-1686

(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.    Yesþx    Noo¨

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).    Yesþx    Noo¨

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 filerþx  Accelerated filero ¨
Non-accelerated filero Smaller reporting companyo¨
(Do  (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).    Yeso¨    Noþx

As of October 28, 2011July 27, 2012, there was the following number of shares outstanding of each of the issuer’s classes of common stock:

Class

 

Shares Outstanding

ClassShares Outstanding

Class A common stock $.001 par value

 163,540,097

165,833,557

 

 


Verisk Analytics, Inc.

Index to Form 10-Q

Table of Contents

   Page Number 
  

  

   3  

   4  

   5  

   6  

   7  

Notes to Condensed Consolidated Financial Statements

   8  

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

   3325  

   4633  

   4633  

Item 1. Legal Proceedings

   34  

Item 1. Legal Proceedings1A. Risk Factors

   4634  
46

   4734  

   4734  

Item 4. Mine Safety Disclosures

   34  

Item 4. (Removed and Reserved)5. Other Information

   4734  

Item 6. Exhibits

   34  

Item 5. Other InformationSIGNATURES

   4735  
47
48
Exhibit 31.1
Exhibit 31.2

Exhibit 32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT


Item 1.

Exhibit 31.2

  

Exhibit 32.1

Exhibit 99.1


Item 1.Financial Statements

VERISK ANALYTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

As of SeptemberJune 30, 20112012 and December 31, 2010

         
  2011    
  unaudited  2010 
  (In thousands, except for share and per share data) 
ASSETS
        
Current assets:        
Cash and cash equivalents $52,846  $54,974 
Available-for-sale securities  4,828   5,653 
Accounts receivable, net of allowance for doubtful accounts of $4,432 and $4,028 (including amounts from related parties of $471 and $515, respectively) (1)  152,803   126,564 
Prepaid expenses  23,591   17,791 
Deferred income taxes, net  3,681   3,681 
Federal and foreign income taxes receivable  2,141   15,783 
State and local income taxes receivable  3,606   8,923 
Other current assets  28,268   7,066 
       
Total current assets  271,764   240,435 
         
Noncurrent assets:        
Fixed assets, net  110,328   93,409 
Intangible assets, net  232,533   200,229 
Goodwill  712,561   632,668 
Deferred income taxes, net  23,340   21,879 
State income taxes receivable  1,708   1,773 
Other assets  27,699   26,697 
       
Total assets $1,379,933  $1,217,090 
       
         
LIABILITIES AND STOCKHOLDERS’ DEFICIT
        
Current liabilities:        
Accounts payable and accrued liabilities $146,358  $111,995 
Acquisition related liabilities     3,500 
Short-term debt and current portion of long-term debt  165,670   437,717 
Pension and postretirement benefits, current  4,663   4,663 
Fees received in advance (including amounts from related parties of $1,329 and $1,231, respectively) (1)  189,310   163,007 
       
Total current liabilities  506,001   720,882 
         
Noncurrent liabilities:        
Long-term debt  853,580   401,826 
Pension benefits  78,090   95,528 
Postretirement benefits  21,329   23,083 
Other liabilities  79,806   90,213 
       
Total liabilities  1,538,806   1,331,532 
         
Commitments and contingencies        
Stockholders’ equity/(deficit):        
Verisk Class A common stock, $.001 par value; 1,200,000,000 shares authorized; 350,338,030 and 150,179,126 shares issued and 148,621,259 and 143,067,924 outstanding as of September 30, 2011 and December 31, 2010, respectively  88   39 
Verisk Class B (Series 1) common stock, $.001 par value; 0 and 400,000,000 shares authorized; 0 and 198,327,962 shares issued and 0 and 12,225,480 outstanding as of September 30, 2011 and December 31, 2010, respectively     47 
Verisk Class B (Series 2) common stock, $.001 par value; 400,000,000 shares authorized; 193,665,008 shares issued and 14,771,340 outstanding as of September 30, 2011 and December 31, 2010, respectively  49   49 
Unearned KSOP contributions  (779)  (988)
Additional paid-in capital  837,473   754,708 
Treasury stock, at cost, 380,610,439 and 372,107,352 shares as of September 30, 2011 and December 31, 2010, respectively  (1,438,315)  (1,106,321)
Retained earnings  496,267   293,827 
Accumulated other comprehensive losses  (53,656)  (55,803)
       
Total stockholders’ deficit  (158,873)  (114,442)
       
Total liabilities and stockholders’ deficit $1,379,933  $1,217,090 
       
(1)See Note 13. Related Parties for further information.
2011

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

ASSETS

  

 

Current assets:

   

Cash and cash equivalents

  $97,198   $191,603  

Available-for-sale securities

   4,782    5,066  

Accounts receivable, net of allowance for doubtful accounts as of June 30, 2012 and December 31, 2011 of $4,088 and $4,158, respectively

   173,607    153,339  

Prepaid expenses

   28,492    21,905  

Deferred income taxes, net

   15,613    3,818  

Federal and foreign income taxes receivable

   27,705    25,242  

State and local income taxes receivable

   3,638    11,433  

Other current assets

   46,460    41,248  
  

 

 

  

 

 

 

Total current assets

   397,495    453,654  

Noncurrent assets:

   

Fixed assets, net

   133,731    119,411  

Intangible assets, net

   363,555    226,424  

Goodwill

   934,762    709,944  

Deferred income taxes, net

   —      10,480  

Other assets

   23,800    21,193  
  

 

 

  

 

 

 

Total assets

  $1,853,343   $1,541,106  
  

 

 

  

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY/(DEFICIT)

  

 

Current liabilities:

   

Accounts payable and accrued liabilities

  $153,684   $162,992  

Acquisition related liabilities

   —      250  

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

   201,783    5,554  

Pension and postretirement benefits, current

   2,912    4,012  

Fees received in advance

   253,880    176,842  
  

 

 

  

 

 

 

Total current liabilities

   612,259    349,650  

Noncurrent liabilities:

   

Long-term debt

   1,054,395    1,100,332  

Pension benefits

   24,997    109,161  

Postretirement benefits

   10,624    18,587  

Deferred income taxes, net

   41,880    —    

Other liabilities

   62,506    61,866  
  

 

 

  

 

 

 

Total liabilities

   1,806,661    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 165,721,412 and 164,285,227 outstanding as of June 30, 2012 and December 31, 2011, respectively

   137    137  

Unearned KSOP contributions

   (591  (691

Additional paid-in capital

   963,052    874,808  

Treasury stock, at cost, 378,281,626 and 379,717,811 shares as of June 30, 2012 and December 31, 2011, respectively

   (1,563,079  (1,471,042

Retained earnings

   724,517    576,585  

Accumulated other comprehensive losses

   (77,354  (78,287
  

 

 

  

 

 

 

Total stockholders’ equity/(deficit)

   46,682    (98,490
  

 

 

  

 

 

 

Total liabilities and stockholders’ equity/(deficit)

  $1,853,343   $1,541,106  
  

 

 

  

 

 

 

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

3


VERISK ANALYTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

For The Three and Nine Month PeriodsSix Months Ended SeptemberJune 30, 20112012 and 2010

                 
  Three Months Ended September 30,  Nine Months Ended September 30, 
  2011  2010  2011  2010 
  (In thousands, except for share and per share data) 
Revenues (including amounts from related parties of $4,699 and $14,789 for the three months ended September 30, 2011 and 2010 and $13,882 and $45,202 for the nine months ended September 30, 2011 and 2010, respectively) (1) $340,098  $287,354  $980,247  $845,185 
                 
Expenses:                
Cost of revenues (exclusive of items shown separately below)  137,619   117,005   393,360   346,998 
Selling, general and administrative  51,475   40,982   156,640   121,134 
Depreciation and amortization of fixed assets  10,798   10,035   32,958   29,908 
Amortization of intangible assets  8,797   6,158   26,129   20,482 
Acquisition related liabilities adjustment     (544)  (3,364)  (544)
             
Total expenses  208,689   173,636   605,723   517,978 
             
                 
Operating income  131,409   113,718   374,524   327,207 
                 
Other income/(expense):                
Investment income  99   59   99   183 
Realized (loss)/gain on securities, net  (86)  9   401   70 
Interest expense  (14,593)  (8,484)  (39,093)  (25,395)
             
Total other expense, net  (14,580)  (8,416)  (38,593)  (25,142)
             
                 
Income before income taxes  116,829   105,302   335,931   302,065 
Provision for income taxes  (45,842)  (42,422)  (133,491)  (125,406)
             
Net income $70,987  $62,880  $202,440  $176,659 
             
                 
Basic net income per share of Class A and Class B: $0.43  $0.35  $1.21  $0.98 
             
                 
Diluted net income per share of Class A and Class B: $0.41  $0.34  $1.16  $0.94 
             
                 
Weighted average shares outstanding:                
Basic  164,195,325   178,687,236   166,728,786   179,744,297 
             
                 
Diluted  171,169,658   187,188,667   174,255,965   188,728,438 
             
2011

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

Revenues (including amounts from related parties of $0 and $4,787 for the three months ended June 30, 2012 and 2011 and $0 and $9,183 for the six months ended June 30, 2012 and 2011, respectively) (1)

  $373,226   $327,280   $719,727   $640,149  
  

 

 

  

 

 

  

 

 

  

 

 

 

Expenses:

     

Cost of revenues (exclusive of items shown separately below)

   147,074    131,185    280,404    255,741  

Selling, general and administrative

   62,473    55,909    116,452    105,165  

Depreciation and amortization of fixed assets

   13,090    10,855    24,734    22,160  

Amortization of intangible assets

   12,187    8,877    20,774    17,332  

Acquisition related liabilities adjustment

   —      (3,364  —      (3,364
  

 

 

  

 

 

  

 

 

  

 

 

 

Total expenses

   234,824    203,462    442,364    397,034  
  

 

 

  

 

 

  

 

 

  

 

 

 

Operating income

   138,402    123,818    277,363    243,115  

Other income/(expense):

     

Investment income/(loss)

   156    (10  261    —    

Realized (loss)/gain on securities, net

   (30  125    300    487  

Interest expense

   (17,377  (14,885  (33,762  (24,500
  

 

 

  

 

 

  

 

 

  

 

 

 

Total other expense, net

   (17,251  (14,770  (33,201  (24,013
  

 

 

  

 

 

  

 

 

  

 

 

 

Income before income taxes

   121,151    109,048    244,162    219,102  

Provision for income taxes

   (47,820  (43,471  (96,230  (87,649
  

 

 

  

 

 

  

 

 

  

 

 

 

Net income

  $73,331   $65,577   $147,932   $131,453  
  

 

 

  

 

 

  

 

 

  

 

 

 

Basic net income per share

  $0.44   $0.39   $0.89   $0.78  
  

 

 

  

 

 

  

 

 

  

 

 

 

Diluted net income per share

  $0.43   $0.38   $0.86   $0.75  
  

 

 

  

 

 

  

 

 

  

 

 

 

Weighted average shares outstanding:

     

Basic

   165,946,009    166,960,806    165,391,500    167,995,517  
  

 

 

  

 

 

  

 

 

  

 

 

 

Diluted

   171,901,349    174,634,046    171,626,084    175,799,120  
  

 

 

  

 

 

  

 

 

  

 

 

 

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

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

4

VERISK ANALYTCS, INC.


VERISK ANALYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICITCOMPREHENSIVE INCOME (UNAUDITED)

For The Year Ended December 31, 2010Three and The NineSix Months Ended SeptemberJune 30, 2012 and 2011

                                         
                                  Accumulated  Total 
  Common Stock Issued      Unearned  Additional          Other  Stockholders’ 
      Verisk  Verisk      KSOP  Paid-in  Treasury  Retained  Comprehensive  (Deficit)/ 
  Verisk Class A  Class B (Series 1)  Class B (Series 2)  Par Value  Contributions  Capital  Stock  Earnings  Losses  Equity 
  (In thousands, except for share data) 
Balance, January 1, 2010  125,815,600   205,637,925   205,637,925  $130  $(1,305) $652,573  $(683,994) $51,275  $(53,628) $(34,949)
Comprehensive income:                                        
Net income                       242,552      242,552 
Other comprehensive loss                          (2,175)  (2,175)
                                        
Comprehensive income                                      240,377 
Conversion of Class B-1 common stock upon follow-on public offering (Note 1)  7,309,963   (7,309,963)                        
Conversion of Class B-2 common stock upon follow-on public offering (Note 1)  11,972,917      (11,972,917)                     
Treasury stock acquired - Class A (7,111,202 shares)                    (212,512)        (212,512)
Treasury stock acquired - Class B-1 (7,583,532 shares)                    (199,936)        (199,936)
Treasury stock acquired - Class B-2 (374,718 shares)                    (9,879)        (9,879)
KSOP shares earned              317   11,256            11,573 
Stock options exercised (including tax benefit of $49,015)  5,579,135         5      84,492            84,497 
Net share settlement of taxes upon exercise of stock options  (503,043)              (15,051)           (15,051)
Stock based compensation                 21,298            21,298 
Other stock issuances  4,554               140            140 
                               
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)
                               
Comprehensive income:                                        
Net income                       202,440      202,440 
Other comprehensive income                          2,147   2,147 
                                        
Comprehensive income                                      204,587 
Conversion of Class B-1 common stock (Note 1)  198,327,962   (198,327,962)                        
Treasury stock acquired - Class A (10,215,240 shares)                    (340,101)        (340,101)
KSOP shares earned              209   9,421            9,630 
Stock options exercised (including tax benefit of $35,643)  1,830,942         2      55,980   8,096         64,078 
Stock-based compensation                 17,288            17,288 
Other stock issuances                 76   11         87 
                               
Balance, September 30, 2011  350,338,030      193,665,008  $137  $(779) $837,473  $(1,438,315) $496,267  $(53,656) $(158,873)
                               

   Three Months Ended June 30,  Six Months Ended June 30, 
   2012  2011  2012  2011 
   (In thousands) 

Net income

  $73,331   $65,577   $147,932   $131,453  
  

 

 

  

 

 

  

 

 

  

 

 

 

Other comprehensive income, net of tax:

     

Unrealized holding loss on investments

   (116  (126  (313  (252

Unrealized foreign currency (loss)/gain

   (287  235    (134  573  

Pension and postretirement unfunded liability adjustment

   452    1,220    1,380    1,974  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total other comprehensive income

   49    1,329    933    2,295  
  

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive income

  $73,380   $66,906   $148,865   $133,748  
  

 

 

  

 

 

  

 

 

  

 

 

 

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

5


VERISK ANALYTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN STOCKHOLDERS’ EQUITY/(DEFICIT) (UNAUDITED)

For The NineYear Ended December 31, 2011 and The Six Months Ended SeptemberJune 30, 2011 and 2010

         
  2011  2010 
  (In thousands) 
Cash flows from operating activities:        
Net income $202,440  $176,659 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization of fixed assets  32,958   29,908 
Amortization of intangible assets  26,129   20,482 
Amortization of debt issuance costs  1,155   1,156 
Amortization of debt original issue discount  51    
Allowance for doubtful accounts  852   562 
KSOP compensation expense  9,630   8,651 
Stock-based compensation  17,288   15,990 
Non-cash charges associated with performance based appreciation awards  627   515 
Acquisition related liabilities adjustment  (3,364)  (544)
Realized gain on securities, net  (401)  (70)
Deferred income taxes  (2,083)  (1,893)
Other operating  133   183 
Loss on disposal of assets  635   81 
Excess tax benefits from exercised stock options  (5,470)  (15,083)
         
Changes in assets and liabilities, net of effects from acquisitions:        
Accounts receivable  (24,445)  (40,654)
Prepaid expenses and other assets  (3,229)  (1,331)
Federal and foreign income taxes  48,925   27,005 
State and local income taxes  5,382   2,768 
Accounts payable and accrued liabilities  12,509   (3,255)
Fees received in advance  24,841   29,551 
Other liabilities  (20,809)  (8,874)
       
Net cash provided by operating activities  323,754   241,807 
         
Cash flows from investing activities:        
Acquisitions, net of cash acquired of $590 and $1,556, respectively  (121,721)  (6,386)
Earnout payments  (3,500)   
Proceeds from release of acquisition related escrows     283 
Escrow funding associated with acquisitions  (19,560)  (1,500)
Purchases of available-for-sale securities  (1,422)  (324)
Proceeds from sales and maturities of available-for-sale securities  1,722   645 
Purchases of fixed assets  (41,925)  (22,206)
       
Net cash used in investing activities  (186,406)  (29,488)
         
Cash flows from financing activities:        
Proceeds from issuance of long-term debt, net of original issue discount  448,956    
Repayment of short-term debt refinanced on a long-term basis  (295,000)   
Repurchase of Verisk Class A common stock  (340,122)  (129,762)
Repayment of current portion of long-term debt  (125,000)   
Proceeds from issuance of short-term debt with original maturities of three months or greater  120,000   
Proceeds/(repayments) of short-term debt, net  22,311   (65,230)
Payment of debt issuance cost  (4,542)  (1,781)
Net share settlement of taxes upon exercise of stock options     (15,051)
Excess tax benefits from exercised stock options  5,470   15,083 
Proceeds from stock options exercised  28,433   20,161 
       
Net cash used in financing activities  (139,494)  (176,580)
       
         
Effect of exchange rate changes  18   (11)
       
         
(Decrease)/Increase in cash and cash equivalents  (2,128)  35,728 
         
Cash and cash equivalents, beginning of period  54,974   71,527 
       
Cash and cash equivalents, end of period $52,846  $107,255 
       
         
Supplemental disclosures:        
Taxes paid $82,526  $96,745 
       
         
Interest paid $25,876  $24,351 
       
         
Non-cash investing and financing activities:        
Repurchase of Verisk Class A common stock included in accounts payable and accrued liabilities $2,244  $5,808 
       
         
Deferred tax asset/(liability) established on date of acquisition $1,280  $(349)
       
         
Capital lease obligations $7,683  $1,265 
       
         
Capital expenditures included in accounts payable and accrued liabilities $778  $743 
       
         
Increase in goodwill due to acquisition related escrow distributions $  $6,996 
       
         
Accrual of acquisition related liabilities $  $2,000 
       
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

  —      —      —      —      —      —      —      147,932    —      147,932  

Other comprehensive income

  —      —      —      —      —      —      —      —      933    933  

Treasury stock acquired—Class A (2,351,655 shares)

  —      —      —      —      —      —      (107,041  —      —      (107,041

KSOP shares earned

  —      —      —      —      100    6,086    —      —      —      6,186  

Stock options exercised, including tax benefit of $49,974 (3,787,840 shares reissued from treasury stock)

  —      —      —      —      —      68,505    15,004    —      —      83,509  

Stock based compensation

  —      —      —      —      —      13,653    —      —      —      13,653  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance, June 30, 2012

  544,003,038    —      —     $137   $(591 $963,052   $(1,563,079 $724,517   $(77,354 $46,682  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

6


VERISK ANALYTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

For The Six Months Ended June 30, 2012 and 2011

   2012  2011 
   (In thousands) 

Cash flows from operating activities:

   

Net income

  $147,932   $131,453  

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

   

Depreciation and amortization of fixed assets

   24,734    22,160  

Amortization of intangible assets

   20,774    17,332  

Amortization of debt issuance costs and original issue discount

   1,096    754  

Allowance for doubtful accounts

   461    557  

KSOP compensation expense

   6,186    6,408  

Stock based compensation

   13,653    12,331  

Noncash charges associated with performance-based appreciation awards

   —      583  

Acquisition related liabilities adjustment

   —      (3,364

Realized gain on securities, net

   (300  (487

Deferred income taxes

   (535  1,660  

Loss on disposal of assets

   21    221  

Excess tax benefits from exercised stock options

   (31,624  (5,470

Other operating

   (18  30  

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

   

Accounts receivable

   (13,652  (16,979

Prepaid expenses and other assets

   4,289    (8,082

Federal and foreign income taxes

   51,957    7,703  

State and local income taxes

   7,972    (140

Accounts payable and accrued liabilities

   (24,124  (15,190

Fees received in advance

   77,038    50,520  

Pension and postretirement benefits

   (90,808  (9,747

Other liabilities

   (7,617  (5,166
  

 

 

  

 

 

 

Net cash provided by operating activities

   187,435    187,087  
  

 

 

  

 

 

 

Cash flows from investing activities:

   

Acquisitions, net of cash acquired for 2012 and 2011 of $29,387 and $590, respectively

   (331,330  (121,721

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

   (2,000  —    

Earnout payments

   (250  (3,500

Escrow funding associated with acquisitions

   (17,000  (19,560

Purchases of fixed assets

   (36,532  (28,171

Purchases of available-for-sale securities

   (1,128  (1,338

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

   1,203    1,704  
  

 

 

  

 

 

 

Net cash used in investing activities

   (387,037  (172,586
  

 

 

  

 

 

 

Cash flows from financing activities:

   

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

   —      448,956  

Repayment of current portion of long-term debt

   —      (50,000

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

   —      (295,000

Proceeds/(repayments) of short-term debt, net

   150,000    72,919  

Payment of debt issuance costs

   —      (4,434

Repurchase of Class A common stock

   (106,305  (214,021

Proceeds from stock options exercised

   33,453    18,032  

Excess tax benefits from exercised stock options

   31,624    5,470  

Other financing, net

   (3,441  —    
  

 

 

  

 

 

 

Net cash provided by/(used in) financing activities

   105,331    (18,078
  

 

 

  

 

 

 

Effect of exchange rate changes

   (134  573  
  

 

 

  

 

 

 

Decrease in cash and cash equivalents

   (94,405  (3,004

Cash and cash equivalents, beginning of period

   191,603    54,974  
  

 

 

  

 

 

 

Cash and cash equivalents, end of period

  $97,198   $51,970  
  

 

 

  

 

 

 

Supplemental disclosures:

   

Taxes paid

  $37,736   $80,924  
  

 

 

  

 

 

 

Interest paid

  $26,619   $17,997  
  

 

 

  

 

 

 

Noncash investing and financing activities:

   

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

  $1,936   $5,292  
  

 

 

  

 

 

 

Deferred tax liability established on date of acquisition

  $40,358   $1,280  
  

 

 

  

 

 

 

Capital lease obligations

  $3,043   $8,013  
  

 

 

  

 

 

 

Capital expenditures included in accounts payable and accrued liabilities

  $1,864   $307  
  

 

 

  

 

 

 

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

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 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 on May 23, 2008 to serve as the parent holding company of Insurance Services Office, Inc. (“ISO”) upon completion of the initial public offering (“IPO”). ISO was formed in 1971 as an advisory and rating organization for the P&C insurance industry to provide statistical and actuarial services, to develop insurance programs and to assist insurance companies in meeting state regulatory requirements. Over the past decade, the Company has broadened its data assets, entered new markets, placed a greater emphasis on analytics, and pursued strategic acquisitions. On October 6, 2009, ISO effected a corporate reorganization whereby the Class A and Class B common stock of ISO were exchanged by the current stockholders for the common stock of Verisk on a one-for-one basis. Verisk immediately thereafter effected a fifty-for-one stock split of its Class A and Class B common stock and equally sub-divided the Class B common stock into two new series of stock, Verisk Class B (Series 1) (“Class B-1”) and Verisk Class B (Series 2) (“Class B-2”).

On October 9, 2009, the Company completed its IPO. Upon completion of the IPO, the selling stockholders sold 97,995,750 shares ofVerisk’s Class A common stock of Verisk, which included the 12,745,750 over-allotment option, at the IPO price of $22.00 per share. The Company did not receive any proceeds from the sales of common stock in the offering. Verisk trades under the ticker symbol “VRSK” on the NASDAQ Global Select Market.
On October 1, 2010, the Company completed a follow-on public offering. Upon completion of this offering, the selling stockholders sold 2,602,212 and 19,282,880 shares of Class A and Class B common stock of Verisk, respectively, which included the underwriters’ 2,854,577 over-allotment option, at the public offering price of $27.25 per share. Class B common stock sold into this offering was automatically converted into Class A common stock. The Company did not receive any proceeds from the sale of common stock in the offering. Concurrently with the closing of this offering, the Company also repurchased 7,300,000 shares of Class B common stock at $26.3644 per share, which represents the net proceeds per share the selling stockholders received in the public offering. The Company funded a portion of this repurchase with proceeds from borrowings of $160,000 under its syndicated revolving credit facility. Upon consummation of the offering and the repurchase, the Company’s Class B-1 and Class B-2 common stock outstanding was 12,554,605 and 15,100,465 shares, respectively. The Class B-1 shares converted to Class A common stock on April 6, 2011 and the remaining Class B-2 shares converted to Class A common stock on October 6, 2011. The conversion of Class B-2 shares is not reflected in the accompanying unaudited condensed consolidated financial statements.

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 and liabilities, acquisition related liabilities, fair value of stock-basedstock 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.

7


The condensed consolidated financial statements as of SeptemberJune 30, 20112012 and for the three-three and nine-month periodssix months ended SeptemberJune 30, 20112012 and 2010,2011, 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-three and nine-month periodssix months ended SeptemberJune 30, 20112012 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-three and nine-month periodssix months ended SeptemberJune 30, 20112012 have been prepared on the same basis as and should be read in conjunction with ourthe annual report on Form 10-K for the year ended December 31, 2010.2011. 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 PronouncementsPronouncement

In SeptemberJune 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-08,Testing Goodwill for Impairment(“ASU 2011-08”). Under ASU 2011-08, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. ASU 2011-08 is effective for fiscal years beginning after December 15, 2011. Early adoption is permitted. As the Company has already performed its annual impairment testing as of June 30, 2011, the Company has elected not to early adopt. The Company is currently evaluating the impact of ASU 2011-08 on its consolidated financial statements.

In June 2011, the FASB issued ASUNo. 2011-05,Presentation of Comprehensive Income(“ (“ASU No. 2011-05”). Under ASU No. 2011-05, an entity has the 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 is effective for fiscal years,was adopted by the Company on January 1, 2012 and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company has electeddid not to early adopt. ASU 2011-05 is not expected to have a material impact on the Company’s condensed consolidated financial statements as this guidance does not result in a change in the items that are required to be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.
In May 2011, the FASB issued ASU 2011-04,Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs(“ASU 2011-04”). ASU 2011-04 clarifies FASB’s intent about the application of existing fair value measurement and develops common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is not permitted. ASU 2011-04 is not expected to have a material impact on the Company’s consolidated financial statements as this guidance does not result in a change in the application of the requirements in Accounting Standards Codification (“ASC”) 820-10,Fair Value Measurements.
statements.

3. Investments:

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

                 
      Gross  Gross    
  Adjusted  Unrealized  Unrealized    
  Cost  Gains  Losses  Fair Value 
September 30, 2011
                
Registered investment companies $4,499  $323  $  $4,822 
Equity securities  14      (8)  6 
             
Total available-for-sale securities $4,513  $323  $(8) $4,828 
             
                 
December 31, 2010
                
Registered investment companies $4,398  $1,248  $  $5,646 
Equity securities  14      (7)  7 
             
Total available-for-sale securities $4,412  $1,248  $(7) $5,653 
             

 

       Gross   Gross    
   Adjusted   Unrealized   Unrealized    
   Cost   Gain   Loss  Fair Value 

June 30, 2012

       

Registered investment companies

  $4,857    $—      $(75 $4,782  
  

 

 

   

 

 

   

 

 

  

 

 

 

Total available-for-sale securities

  $4,857    $—      $(75 $4,782  
  

 

 

   

 

 

   

 

 

  

 

 

 

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  
  

 

 

   

 

 

   

 

 

  

 

 

 

8


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 ASCAccounting Standards Codification (“ASC”) 323-10-25,The Equity Method of Accounting for Investments in Common Stock(“ASC 323-10-25”). At SeptemberJune 30, 20112012 and December 31, 2010,2011, the carrying value of such securities was $5,443 and $3,443, and $3,642 for each periodrespectively, and has been included in “Other assets” in the accompanying condensed consolidated balance sheets.

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 tables providetable provides information for such assets and liabilities as of SeptemberJune 30, 20112012 and December 31, 2010.2011. The fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, acquisitions related liabilities prior to the adoption of ASC 805,Business Combinations(“ASC 805”), 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 $939,769$1,209,082 and $584,361$1,181,788 as of SeptemberJune 30, 20112012 and December 31, 2010,2011, 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  Significant 
      for Identical  Observable  Unobservable 
  Total  Assets (Level 1)  Inputs (Level 2)  Inputs (Level 3) 
September 30, 2011
                
Cash equivalents — money-market funds $289  $  $289  $ 
Registered investment companies (1) $4,822  $4,822  $  $ 
Equity securities (1) $6  $6  $  $ 
                 
December 31, 2010
                
Cash equivalents — money-market funds $2,273  $  $2,273  $ 
Registered investment companies (1) $5,646  $5,646  $  $ 
Equity securities (1) $7  $7  $  $ 
Contingent consideration under ASC 805 (2) $(3,337) $  $  $(3,337)

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

June 30, 2012

      

Cash equivalents—money-market funds

  $553    $—      $553  

Registered investment companies (1)

  $4,782    $4,782    $—    

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.
(2)Under ASC 805, contingent consideration is recognized at fair value at the end of each reporting period for acquisitions after January 1, 2009. The Company records the initial recognition of the fair value of contingent consideration in other liabilities on the condensed consolidated balance sheets. Subsequent changes in the fair value of contingent consideration are recorded in the statement of operations.

5. Acquisitions:

9

2012 Acquisition


The table below includes a rollforwardOn 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 $331,330 and funded $17,000 of indemnity escrows. Within the Company’s contingent consideration liability underDecision Analytics segment, MediConnect further supports the Company’s objective as the leading provider of data, analytics, and decision-support solutions to the healthcare and property casualty industry.

The preliminary purchase price allocation of the acquisition resulted in the following:

   MediConnect 

Accounts receivable

  $7,077  

Current assets

   14,918  

Fixed assets

   1,075  

Intangible assets

   157,905  

Goodwill

   223,982  

Other assets

   17,087  
  

 

 

 

Total assets acquired

   422,044  

Current liabilities

   3,005  

Other liabilities

   70,634  
  

 

 

 

Total liabilities assumed

   73,639  
  

 

 

 

Net assets acquired

  $348,405  
  

 

 

 

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

   Weighted
Average Useful
Life
  MediConnect 

Technology-based

  10 years  $43,110  

Marketing-related

  4 years   14,782  

Customer-related

  10 years   100,013  
    

 

 

 

Total intangible assets

  9 years  $157,905  
    

 

 

 

The allocations of the purchase price (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 price will be finalized once all information is obtained, but not to exceed one year from the acquisition date.

The goodwill associated with MediConnect is not deductible for tax purposes. For the three and six months ended June 30, 2012, the Company incurred transaction costs related to this acquisition of $17 and $827, 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 acquisition of MediConnect occurred at the beginning of the year 2011. The pro forma information for the six months ended June 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 this acquisition 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 acquisition, net of related tax, estimated using the Company’s effective tax rate for continuing operations for the periods.

   For the Six Months Ended June 30, 
   2012   2011 
   (unaudited) 

Pro forma revenues

  $736,885    $661,491  

Pro forma net income

  $146,691    $123,877  

Pro forma basic income per share

  $0.89    $0.74  

Pro forma diluted income per share

  $0.85    $0.70  

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 vertical 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 vertical 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 six months ended June 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 three- and nine-month periods ended September 30, 2011 and 2010:

                 
  For the Three Months Ended  For the Nine Months Ended 
  September 30, 2011  September 30, 2010  September 30, 2011  September 30, 2010 
Beginning balance $  $3,853  $3,337  $3,344 
Acquisitions (1)           491 
Acquisition related liabilities adjustment (1)     (544)  (3,364)  (544)
Accretion on acquisition related liabilities     14   27   32 
             
Ending balance $  $3,323  $  $3,323 
             
(1)Under ASC 805, contingent consideration is recognized at fair value at the end of each reporting period for acquisitions after January 1, 2009. The Company records the initial recognition of the fair value of contingent consideration in Other Liabilities on the condensed consolidated balance sheets. Subsequent changes in the fair value of contingent consideration is recorded in the statement of operations. See Note 6 for condensed further information regarding the acquisition related liabilities adjustment associated with D2 Hawkeye, Inc., Strategic Analytics, Inc. and TierMed.
5.measurement period. Refer to Note 6. Goodwill and Intangible Assets for further discussion.

Acquisition Escrows

Pursuant to the related acquisition agreements, the Company has funded various escrow accounts to satisfy pre-acquisition indemnity and tax claims arising subsequent to the acquisition date, as well as a portion of the contingent payments. At June 30, 2012 and December 31, 2011, the current portion of the escrows amounted to $45,508 and $36,967, and the noncurrent portion of the escrow amounted to $5,000 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, 20102011 through SeptemberJune 30, 2011,2012, both in total and as allocated to the Company’s operating segments:

             
  Risk
Assessment
  Decision
Analytics
  Total 
Goodwill at December 31, 2010 (1) $27,908  $604,760  $632,668 
Current year acquisitions     79,893   79,893 
          
Goodwill at September 30, 2011 (1) $27,908  $684,653  $712,561 
          

   Risk
Assessment
   Decision
Analytics
   Total 

Goodwill at December 31, 2011 (1)

  $27,908    $682,036    $709,944  

Current year acquisition

   —       223,982     223,982  

Purchase accounting reclassifications

   —       836     836  
  

 

 

   

 

 

   

 

 

 

Goodwill at June 30, 2012 (1)

  $27,908    $906,854    $934,762  
  

 

 

   

 

 

   

 

 

 

(1)These balances are net of accumulated impairment charges of $3,244 that occurred prior to January 1, 2010.2009.

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 six months ended June 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, 2011,2012, which resulted in no impairment of goodwill. Based on the results of the impairment assessment as of June 30, 2011, the Company determined that the fair value of its reporting units exceeded their respective carrying value. Given the limited amount of time between the acquisition date and the timing of the Company’s annual impairment test, the fair value of certain reporting units exceeded their carrying value by a moderate amount. There were no goodwill impairment indicators after the date of the last annual impairment test.

10


The Company’s intangible assets and related accumulated amortization consisted of the following:
                 
  Weighted           
  Average      Accumulated    
  Useful Life  Cost  Amortization  Net 
September 30, 2011
                
Technology-based 7 years $234,755  $(150,718) $84,037 
Marketing-related 5 years  48,103   (32,167)  15,936 
Contract-based 6 years  6,555   (6,433)  122 
Customer-related 13 years  172,236   (39,798)  132,438 
              
Total intangible assets     $461,649  $(229,116) $232,533 
              
                 
December 31, 2010
                
Technology-based 7 years $210,212  $(136,616) $73,596 
Marketing-related 5 years  40,882   (28,870)  12,012 
Contract-based 6 years  6,555   (6,287)  268 
Customer-related 13 years  145,567   (31,214)  114,353 
              
Total intangible assets     $403,216  $(202,987) $200,229 
              

   Weighted
Average
Useful Life
  Cost   Accumulated
Amortization
  Net 

June 30, 2012

       

Technology-based

  7 years  $278,764    $(165,511 $113,253  

Marketing-related

  5 years   63,552     (35,907  27,645  

Contract-based

  6 years   6,555     (6,555  —    

Customer-related

  12 years   273,237     (50,580  222,657  
    

 

 

   

 

 

  

 

 

 

Total intangible assets

    $622,108    $(258,553 $363,555  
    

 

 

   

 

 

  

 

 

 

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 SeptemberJune 30, 2012 and 2011, was $12,187 and 2010, was $8,797 and $6,158,$8,877, respectively. Consolidated amortization expense related to intangible assets for the ninesix months ended SeptemberJune 30, 2012 and 2011, was $20,774 and 2010, was $26,129 and $20,482,$17,332, respectively. Estimated amortization expense in future periods through 20162017 and thereafter for intangible assets subject to amortization is as follows:

     
Year Amount 
2011 $8,652 
2012  33,927 
2013  28,414 
2014  21,288 
2015  21,063 
2016-Thereafter  119,189 
    
  $232,533 
    
6. Acquisitions:
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 industry.
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.

 

Year

  Amount 

2012

  $24,092  

2013

   42,977  

2014

   35,851  

2015

   33,387  

2016

   32,255  

2017 and Thereafter

   194,993  
  

 

 

 
  $363,555  
  

 

 

 

11


The preliminary purchase price allocations of the acquisitions resulted in the following:
             
  Bloodhound  HRP  Total 
Accounts receivable $2,278  $378  $2,656 
Current assets  6,646   297   6,943 
Fixed assets  1,091   1,147   2,238 
Intangible assets  34,433   24,000   58,433 
Goodwill  44,870   35,023   79,893 
Other assets  16   13,000   13,016 
Deferred income taxes  1,280      1,280 
          
Total assets acquired  90,614   73,845   164,459 
             
Current liabilities  6,869   1,445   8,314 
Other liabilities  1,864   13,000   14,864 
          
Total liabilities assumed  8,733   14,445   23,178 
          
             
Net assets acquired $81,881  $59,400  $141,281 
          
The amounts assigned to intangible assets by type for current year acquisitions are summarized in the table below:
                 
  Weighted          
  Average          
  Useful Life  Bloodhound  HRP  Total 
Technology-based 10 years $16,043  $8,500  $24,543 
Marketing-related 6 years  2,221   5,000   7,221 
Customer-related 10 years  16,169   10,500   26,669 
              
Total intangible assets     $34,433  $24,000  $58,433 
              
Due to the timing of the acquisitions, the allocations of the purchase price for HRP, Bloodhound, 3E Company, and Crowe Paradis Services Corporation are subject to revisions as additional information is obtained about the facts and circumstances that existed as of the acquisition dates. The revisions may have an impact on the consolidated financial statements. The allocations of the purchase price will be finalized once all information is obtained, but not to exceed one year from the acquisition dates.
2010 Acquisitions
On December 16, 2010, the Company acquired 100% of the stock of 3E Company (“3E”), a global source for a comprehensive suite of environmental health and safety compliance solutions, for a net cash purchase price of approximately $99,603 and funded $7,730 of indemnity escrows. The allocation of the purchase price will be finalized in fourth quarter 2011. Within the Company’s Decision Analytics segment, 3E overlaps the customer sets served by the other supply chain risk management solutions and helps the Company’s customers across a variety of vertical markets address their environmental health and safety issues.
On December 14, 2010, the Company acquired 100% of the stock of Crowe Paradis Services Corporation (“CP”), a provider of claims analysis and compliance solutions to the P&C insurance industry, for a net cash purchase price of approximately $83,589 and funded $6,750 of indemnity escrows. The allocation of the purchase price will be finalized in fourth quarter 2011. Within the Company’s Decision Analytics segment, CP offers solutions for complying with the Medicare Secondary Payer Act, and provides services to P&C insurance companies, third-party administrators and self-insured companies, which the Company believes further enhances the solution it currently offers.

12


On February 26, 2010, the Company acquired 100% of the stock of Strategic Analytics (“SA”), a provider of credit risk and capital management solutions to consumer and mortgage lenders, for a net cash purchase price of approximately $6,386 and the Company funded $1,500 of indemnity escrows. Within the Decision Analytics segment, the Company believes that SA solutions and application set allows customers to take advantage of state-of-the-art loss forecasting, stress testing, and economic capital requirement tools to better understand and forecast the risk associated within their credit portfolios.
Acquisition Escrows
Pursuant to the related acquisition agreements, the Company has funded various escrow accounts to satisfy pre-acquisition indemnity and tax claims arising subsequent to the acquisition date, as well as a portion of the contingent payments. At September 30, 2011 and December 31, 2010, the current portion of the escrows amounted to $26,959 and $6,167, and the noncurrent portion of the escrow amounted to $14,506 and $15,953, respectively. The current and noncurrent portion of the escrows have been included in “Other current assets” and “Other assets” in the accompanying condensed consolidated balance sheets, respectively.
Acquisition Related Liabilities
Based on the results of operations of Atmospheric and Environmental Research, Inc. (“AER”), which was acquired in 2008, the Company recorded an increase of $3,500 to acquisition related liabilities and goodwill during the year ended December 31, 2010. AER was acquired in 2008 and therefore, accounted for under the transition provisions of FASB No. 141 (Revised),Business Combinations(“FAS No. 141(R)”). In April 2011, the Company finalized the AER acquisition contingent liability for the year ending December 31, 2010 and made a payment of $3,500.
As of June 30, 2011, the Company reevaluated the probability of D2 Hawkeye, Inc. and SA achieving the specific predetermined EBITDA and revenue earn out targets for exceptional performance in fiscal year 2011 and reversed its contingent consideration related to these acquisitions. These reversals resulted in a reduction of $3,364 to contingent consideration and a decrease of $3,364 to “Acquisition related liabilities adjustment” in the accompanying condensed consolidated statements of operations during the nine-month period ended September 30, 2011. Thus, based on current estimates, the sellers of D2 Hawkeye, Inc. and SA will not receive any acquisition contingent payments.
7. Income Taxes:

The Company’s effective tax rate for the three and six months ended SeptemberJune 30, 20112012 was 39.2%39.47% and 39.41%, respectively, compared to the effective tax rate for the three and six months ended SeptemberJune 30, 20102011 of 40.3%.39.86% and 40.00%, respectively. The SeptemberJune 30, 20112012 effective tax rate is lower than the SeptemberJune 30, 20102011 effective tax rate primarily due to favorable audit settlements, the continued execution of tax planning strategies and the benefits associated with enacted research and development legislation. Under IR-2011-87, the Internal Revenue Service is providing tax relief to businesses impacted by Hurricane Irene. The relief postponed certain tax filings and payment deadlines to October 31, 2011. As such, the Company deferred its third quarter estimated payment of $22,800 until such date.

The Company’s effective tax rate for the nine months ended September 30, 2011 was 39.7% compared to the effective tax rate for the nine months ended September 30, 2010 of 41.5%. The effective rate for the nine months ended September 30, 2011 was lower primarily due to a change in deferred tax assets of $2,362 resulting from reduced tax benefits of Medicare subsidies associated with legislative changes in the three-month period ended March 31, 2010. Without this charge, the effective rate for the prior period would have been 40.7%. The Company’s September 30, 2011 effective tax rate is also lower than the September 30, 2010 effective tax rate due to favorable audit settlements, the continued execution of tax planning strategies and the benefits associated with enacted research and development legislation.strategies. The difference between statutory tax rates and the company’sCompany’s effective tax rate areis primarily attributable to state taxes and non-deductible share appreciation from the KSOP.
As a result of the Patient ProtectionISO 401(K) Savings and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, the tax treatment of federal subsidies paid to sponsors of retiree health benefit plans that provide prescription drug benefits that are at least actuarially equivalent to the corresponding benefits provided under Medicare Part D was effectively changed. The legislative change reduces the future tax benefits of the coverage provided by the Company to participants in the postretirement plan. The Company was required to account for this change in the period for which the law is enacted. As a result, the Company recorded a non-cash tax charge of $2,362 for the three months ended March 31, 2010.

Employee Stock Ownership Plan (“KSOP”).

13


8. Debt:

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

               
  Issuance Maturity  September 30,  December 31, 
  Date Date  2011  2010 
Short-term debt and current portion of long-term debt:              
Syndicated revolving credit facility Various Various  $160,000  $310,000 
Prudential senior notes:              
4.60% Series E senior notes 6/14/2005 6/13/2011      50,000 
6.00% Series F senior notes 8/8/2006 8/8/2011      25,000 
Principal senior notes:              
6.03% Series A senior notes 8/8/2006 8/8/2011      50,000 
Capital lease obligations and other Various Various   5,670   2,717 
             
Short-term debt and current portion of long-term debt       $165,670  $437,717 
               
Long-term debt:              
Verisk senior notes:              
5.80% senior notes, less unamortized discount of $993 4/6/2011 5/1/2021  $449,007  $ 
Prudential senior notes:              
6.13% Series G senior notes 8/8/2006 8/8/2013   75,000   75,000 
5.84% Series H senior notes 10/26/2007 10/26/2013   17,500   17,500 
5.84% Series H senior notes 10/26/2007 10/26/2015   17,500   17,500 
6.28% Series I senior notes 4/29/2008 4/29/2013   15,000   15,000 
6.28% Series I senior notes 4/29/2008 4/29/2015   85,000   85,000 
6.85% Series J senior notes 6/15/2009 6/15/2016   50,000   50,000 
Principal senior notes:              
6.16% Series B senior notes 8/8/2006 8/8/2013   25,000   25,000 
New York Life senior notes:              
5.87% Series A senior notes 10/26/2007 10/26/2013   17,500   17,500 
5.87% Series A senior notes 10/26/2007 10/26/2015   17,500   17,500 
6.35% Series B senior notes 4/29/2008 4/29/2015   50,000   50,000 
Aviva Investors North America:              
6.46% Series A senior notes 4/27/2009 4/27/2013   30,000   30,000 
Capital lease obligations and other Various Various   4,573   1,826 
             
Long-term debt       $853,580  $401,826 
             
               
Total debt       $1,019,250  $839,543 
             
On March 16, 2011, The Northern Trust

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

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

        

Syndicated revolving credit facility

  Various  Various  $150,000    $—    

Prudential senior notes:

        

6.28% Series I senior notes

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

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   6,783     5,554  
      

 

 

   

 

 

 

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

       201,783     5,554  
      

 

 

   

 

 

 

Long-term debt:

        

Verisk senior notes:

        

5.800% senior notes, less unamortized discount of $915 and $967 as of June 30, 2012 and December 31, 2011, respectively

  4/6/2011  5/1/2021   449,085     449,033  

4.875% senior notes, less unamortized discount of $2,207 and $2,376 as of June 30, 2012 and December 31, 2011, respectively

  12/8/2011  1/15/2019   247,793     247,624  

Prudential senior notes:

        

6.13% Series G senior notes

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

5.84% Series H senior notes

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

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     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   2,517     3,675  
      

 

 

   

 

 

 

Long-term debt

       1,054,395     1,100,332  
      

 

 

   

 

 

 

Total debt

      $1,256,178    $1,105,886  
      

 

 

   

 

 

 

As of June 30, 2012, the Company joinedhas a borrowing capacity of $725,000 under the syndicated revolving credit facility to increase the capacity by $25,000,with Bank of America N.A., JPMorgan Chase Bank N.A., Morgan Stanley Bank N.A., Wells Fargo Bank N.A., Sovereign Bank, RBS Citizens, N.A., Sun Trust Bank, The Northern Trust Company, and TD Bank N.A. Borrowings may be used for a $600,000 total commitment. On March 28,general corporate purposes, including working capital and capital expenditures, acquisitions and share repurchase programs. This committed senior unsecured facility expires in October 2016. As of June 30, 2012 and December 31, 2011, the Company entered into amendments to its revolving credit facilityhad $150,000 and its master shelf agreements to, among other things, permit$0 outstanding under this agreement, respectively. On July 2, 2012, the issuanceCompany repaid $10,000 of the senior notes and guarantees noted below.

14


On April 6, 2011,outstanding balance of the Company completed an issuance of senior notes in the aggregate principal amount of $450,000. These senior notes are due on May 1, 2021 and accrue interest at a rate of 5.80%. The Company received net proceeds of $446,031 after deducting original issue discount, underwriting discount, and commissions of $3,969. 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 May 1st and November 1st of each year, beginning on November 1, 2011. Interest accrued from April 6, 2011. The debt issuance costs are 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. 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.
On October 25, 2011, the Company amended and restated its credit agreement to increase the total revolving credit facility from $600,000 to $700,000, extended the maturity date from September 2014 to October 2016 and modified certain conditions to borrowing, covenants, and events of default. Verisk Analytics, Inc. and ISO are co-borrowers under the amended credit agreement. The amended credit agreement also resulted in a decrease to applicable interest rates. The interest rates for borrowing under the amended credit agreement will now be the LIBOR plus 1.25% to 1.875%, depending upon the result of certain ratios defined in the amended credit agreement. All borrowings under the amended credit agreement continue to be unsecured.
facility.

9. Stockholders’ Deficit:

On November 18, 1996, theEquity/(Deficit):

The Company authorized 335,000,000has 1,200,000,000 shares of ISO Class A redeemable common stock. Effective with the corporate reorganization on October 6, 2009, the ISO Class A redeemable common stock and all Verisk Class B shares sold into the IPO were converted to Veriskauthorized Class A common stock on a one-for-one basis. In addition, the Verisk Class A common stock authorized was increased to 1,200,000,000 shares. The Verisk Class A common shares have rights to any dividend declared by the board of directors, subject to any preferential or other rights of any outstanding preferred stock, and voting rights to elect eight of theall eleven members of the board of directors. The eleventh seat on the board of directors is held by the CEO of the Company.

On November 18, 1996, the Company authorized 1,000,000,000 ISO Class B shares and issued 500,225,000 shares. On October 6, 2009, the Company completed a corporate reorganization whereby the ISO Class B common stock and ISO Class B treasury stock were converted to Verisk Class B common stock and Verisk Class B treasury stock on a one-for-one basis. All Verisk Class B shares sold into the IPO were converted to Verisk Class A common stock on a one-for-one basis. In addition, the Verisk Class B common stock authorized was reduced to 800,000,000 shares, sub-divided into 400,000,000 shares of Class B-1 and 400,000,000 shares of Class B-2. Each share of Class B-1 common stock converted automatically, without any action by the stockholder, into one share of Verisk Class A common stock on April 6, 2011. Each share of Class B-2 common stock converted automatically, without any action by the stockholder, into one share of Verisk Class A common stock on October 6, 2011. The Class B shares had the same rights as Verisk Class A shares with respect to dividends and economic ownership, but had voting rights to elect three of the eleven directors. The Company did not repurchase any Class B shares during the nine months ended September 30, 2011 and 2010.
On October 6, 2009, the Company authorized 80,000,000 shares of preferred stock, par value $0.001 per share, in connection with the reorganization. The preferred shares have preferential rights over the Verisk Class A and Class B common shares with respect to dividends and net distribution upon liquidation. The Company did not issue any preferred shares from the reorganization date through September 30, 2011.

Share Repurchase Program

On April 29, 2010, the Company’s board

The Company has authorized repurchases of directors authorized aup to $900,000 of its common stock through its share repurchase program of the Company’s common stock (the “Repurchase Program”). Under the Repurchase Program, and as of June 30, 2012, the Company mayhad $199,737 available to repurchase up to $600,000 of stock, in the open market or as otherwise determined by the Company.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 Analytics, Inc. 2009 Equity Incentive Plan (the “Incentive Plan”) and the Insurance Services Office, Inc.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.

15


During the ninesix months ended SeptemberJune 30, 2011, 10,215,2402012, the Company repurchased 2,351,655 shares of Verisk Class A common stock were repurchased by the Company as part of this program at a weighted average price of $33.29$45.52 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 $2,244$1,936 in “Accounts payable and accrued liabilities” in the accompanying condensed consolidated balance sheets for those purchases that have not settled as of SeptemberJune 30, 2011. The Company had $47,387 available to repurchase shares under the Repurchase Program as of September 30, 2011.
Treasury Stock
As of September 30, 2011, the Company’s treasury stock consisted of 201,716,771 Class A common stock and 178,893,668 Class B-2 common stock. Consistent with the Class B-1 and Class B-2 common stock, the Company’s Class B-1 treasury stock converted to Class A treasury stock on April 6, 2011 and the Class B-2 treasury stock converted to Class A treasury stock on October 6, 2011.
2012.

Earnings Per Share (“EPS”)

Basic earnings per common shareEPS 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-month periodsthree and six months ended SeptemberJune 30, 20112012 and 2010:

                 
  For the Three Months Ended  For the Nine Months Ended 
  September 30,  September 30,  September 30,  September 30, 
  2011  2010  2011  2010 
Numerator used in basic and diluted EPS:                
                 
Net income $70,987  $62,880  $202,440  $176,659 
             
                 
Denominator:                
Weighted average number of common shares used in basic EPS  164,195,325   178,687,236   166,728,786   179,744,297 
Effect of dilutive shares:                
Potential Class A common stock issuable from stock options and stock awards  6,974,333   8,501,431   7,527,179   8,984,141 
             
                 
Weighted average number of common shares and dilutive potential common shares used in diluted EPS  171,169,658   187,188,667   174,255,965   188,728,438 
             
                 
Basic EPS of Class A and Class B $0.43  $0.35  $1.21  $0.98 
             
                 
Diluted EPS of Class A and Class B $0.41  $0.34  $1.16  $0.94 
             
2011:

   For the Three Months Ended   For the Six Months Ended 
   June 30, 2012   June 30, 2011   June 30, 2012   June 30, 2011 

Numerator used in basic and diluted EPS:

        

Net income

  $73,331    $65,577    $147,932    $131,453  
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

        

Weighted average number of common shares used in basic EPS

   165,946,009     166,960,806     165,391,500     167,995,517  

Effect of dilutive shares:

        

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

   5,955,340     7,673,240     6,234,584     7,803,603  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   171,901,349     174,634,046     171,626,084     175,799,120  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income per share

  $0.44    $0.39    $0.89    $0.78  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per share

  $0.43    $0.38    $0.86    $0.75  
  

 

 

   

 

 

   

 

 

   

 

 

 

The potential shares of common stock that were excluded from diluted EPS were 1,555,507781,505 and 2,151,6461,402,980 for the ninesix months ended SeptemberJune 30, 20112012 and 2010,2011, 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, 
  2011  2010 
Unrealized gains on investments, net of tax $183  $725 
Unrealized foreign currency losses  (774)  (792)
Pension and postretirement unfunded liability adjustment, net of tax  (53,065)  (55,736)
       
Accumulated other comprehensive losses $(53,656) $(55,803)
       

 

   June 30,  December 31, 
   2012  2011 

Unrealized (losses)/gains on investments, net of tax

  $(44 $269  

Unrealized foreign currency losses

   (1,109  (975

Pension and postretirement unfunded liability adjustment, net of tax

   (76,201  (77,581
  

 

 

  

 

 

 

Accumulated other comprehensive losses

  $(77,354 $(78,287
  

 

 

  

 

 

 

16


The before tax and after tax amounts of other comprehensive income for the nine months ended September 30, 2011 and 2010 are summarized below:
             
      Tax Benefit/    
  Before Tax  (Expense)  After Tax 
For the Nine Months Ended September 30, 2011
            
Unrealized holding loss on investments arising during the year $(926) $384  $(542)
Unrealized foreign currency gain  18      18 
Pension and postretirement unfunded liability adjustment  3,978   (1,307)  2,671 
          
Total other comprehensive income $3,070  $(923) $2,147 
          
             
For the Nine Months Ended September 30, 2010
            
Unrealized holding gain on investments arising during the year $156  $(65) $91 
Unrealized foreign currency loss  (11)     (11)
Pension and postretirement unfunded liability adjustment  4,278   (1,682)  2,596 
          
Total other comprehensive income $4,423  $(1,747) $2,676 
          
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-basedshare 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 ninesix months ended SeptemberJune 30, 2012 and 2011 was $33,453 and 2010 was $28,433 and $20,161,$18,032, respectively. On July 1, 2011,2012, the Company granted 2,5063,174 shares of Class A common stock, 34,01123,027 nonqualified stock options that were immediately vested and 125,50096,750 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 June 30, 2012, there were 5,941,673 shares of Class A common stock reserved and available for future issuance under the plans.

On April 1, 2011,2012, the Company granted 1,401,308785,079 nonqualified stock options and 146,664229,009 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,March 30, 2012, 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 date of grantMarch 30, 2012 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. As of September 30, 2011, there were 6,955,761 shares of Class A common stock reserved and available for future issuance.

The fair value of the stock options granted during the ninesix months ended SeptemberJune 30, 20112012 and 20102011 was estimated using a Black-Scholes valuation model that uses the weighted average assumptions noted in the following table:

         
  September 30, 2011  September 30, 2010 
Option pricing model Black-Scholes  Black-Scholes 
Expected volatility 30.44%  31.08% 
Risk-free interest rate 2.21%  2.39% 
Expected term in years 5.1  4.8 
Dividend yield 0.00%  0.00% 
Weighted average grant date fair value per stock option $10.42  $8.73 

  2012  2011 

Option pricing model

  Black-Scholes    Black-Scholes  

Expected volatility

  32.25  30.04

Risk-free interest rate

  0.97  2.32

Expected term in years

  4.8    5.3  

Dividend yield

  0.00  0.00

Weighted average grant date fair value per stock option

 $13.70   $10.48  

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.

17


Exercise prices for options outstanding and exercisable at September 30, 2011 ranged from $2.16 to $34.91 as outlined in the following table:
                         
  Options Outstanding  Options Exercisable 
   Weighted      Weighted  Weighted      Weighted 
   Average  Stock  Average  Average  Stock  Average 
Range of  Remaining  Options  Exercise Price  Remaining  Options  Exercise Price 
Exercise Prices  Contractual Life  Outstanding  Per Share  Contractual Life  Exercisable  Per Share 
$2.16 to $2.96  1.3   750,980  $2.74   1.3   750,980  $2.74 
$2.97 to $4.80  1.9   2,970,500  $3.91   1.9   2,970,500  $3.91 
$4.81 to $8.90  3.7   3,649,100  $8.52   3.7   3,649,100  $8.52 
$8.91 to $15.10  5.0   2,129,805  $13.56   5.0   2,129,805  $13.56 
$15.11 to $17.84  7.0   5,147,527  $16.68   6.9   3,067,652  $16.85 
$17.85 to $22.00  8.0   2,707,879  $22.00   8.0   411,646  $22.00 
$22.01 to $34.91  9.0   3,577,496  $30.58   8.6   647,660  $29.08 
                       
       20,933,287           13,627,343     
                       
A summary of options outstanding under the Incentive Plan and the Option Plan as of December 31, 20102011 and SeptemberJune 30, 20112012 and changes during the interim period areis presented below:
             
      Weighted    
      Average  Aggregate 
  Number  Exercise Price  Intrinsic 
  of Options  Per Share  Value 
Outstanding at December 31, 2010  23,057,857  $13.35  $478,014 
            
Granted  1,574,705  $33.46     
Exercised  (3,540,589) $8.03  $90,706 
            
Cancelled or expired  (158,686) $22.44     
            
Outstanding at September 30, 2011  20,933,287  $15.69  $399,354 
           
Options exercisable at September 30, 2011  13,627,343  $11.25  $320,578 
           
Options exercisable at December 31, 2010  14,820,447  $9.22  $368,466 
           

   Number
of Options
  Weighted
Average
Exercise Price
   Aggregate
Intrinsic
Value
 

Outstanding at December 31, 2011

   18,896,405   $16.55    $445,510  
     

 

 

 

Granted

   785,079   $46.97    

Exercised

   (3,750,300 $8.94    $133,338  
     

 

 

 

Cancelled or expired

   (256,133 $11.88    
  

 

 

    

Outstanding at June 30, 2012

   15,675,051   $19.97    $459,054  
  

 

 

    

 

 

 

Options exercisable at June 30, 2012

   10,387,287   $15.68    $348,780  
  

 

 

    

 

 

 

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 SeptemberJune 30, 20112012 was $399,354$459,054 and $320,578,$348,780, 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 ninesix months ended SeptemberJune 30, 20112012 and 2010,2011, the Company recorded excess tax benefit from stock options exercised of $35,643$49,974 and $23,442,$16,530, respectively. The Company realized $5,470$31,624 and $15,083$5,470 of tax benefit within the Company’s quarterly tax payments through SeptemberJune 30, 2012 and 2011, and 2010, respectively.

18


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

A summary of the status of the restricted stock awarded under the Incentive Plan as of December 31, 20102011 and SeptemberJune 30, 20112012 and changes during the interim period areis presented below:

         
  Number  Weighted average grant 
  of shares  date fair value per share 
Outstanding at December 31, 2010    $ 
Granted  150,187   33.27 
Forfeited  (2,441)  33.30 
        
Outstanding at September 30, 2011  147,746  $33.27 
        

   Number  Weighted average
grant date fair value
 
  of shares  

Outstanding at December 31, 2011

   145,634   $ 33.32  

Granted

   229,009   $46.97  

Vested

   (36,752 $33.48  

Forfeited

   (2,779 $38.44  
  

 

 

  

Outstanding at June 30, 2012

   335,112   $42.57  
  

 

 

  

As of SeptemberJune 30, 2011,2012, there was $44,186$47,945 of total unrecognized compensation costcosts 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 2.522.75 years. As of SeptemberJune 30, 2011,2012, there were 7,305,9445,287,764 and 147,746335,112 nonvested stock options and restricted stock, respectively, of which 6,301,9924,673,449 and 122,125285,007 are expected to vest. The total grant date fair value of options vested during the ninesix months ended SeptemberJune 30, 2012 and 2011 was $10,053 and 2010 was $15,385 and $11,749,$9,838, respectively. The total grant date fair value of restricted stock vested during the ninesix months ended SeptemberJune 30, 2012 and 2011 was $604.

$1,263 and $305, respectively.

On May 16, 2012, the Company’s stockholders approved the implementation of an employee stock purchase plan (“ESPP”). The ESPP will commence on October 1, 2012 and offer 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:

Prior to January 1, 2002, the

The Company maintained a qualified defined 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. The Company has applied the projected unit credit cost method for its Pension Plan, which attributes an equal portion of total projectedFuture benefits provided to each year of employee service. Effective January 1, 2002, the Company amendedparticipants within the Pension Plan to determine future benefitsare 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. Prior to December 31, 2001, pension plan benefits were based on years of service and the average of the five highest consecutive years’ earnings of the last ten years. Effective March 1, 2005, the Company established theThe Profit Sharing Plan, a defined contribution plan, to replacereplaced 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.

19


The components of net periodic benefit (credit)/cost and the amounts recognized in other comprehensive income for the three-three and nine-month periodssix months ended SeptemberJune 30, 20112012 and 20102011 are summarized below:
                 
  For the Three Months Ended September 30, 
  Pension Plan  Postretirement Plan 
  2011  2010  2011  2010 
Service cost $1,590  $1,603  $  $ 
Interest cost  5,442   5,341   251   377 
Expected return on plan assets  (6,449)  (5,662)      
Amortization of prior service cost  (200)  (200)  (37)  (37)
Amortization of net actuarial loss  1,384   1,517   163   72 
             
Net periodic benefit cost $1,767  $2,599  $377  $412 
             
Employer contributions $6,489  $5,512  $1,125  $891 
             
                 
  For the Nine Months Ended September 30, 
  Pension Plan  Postretirement Plan 
  2011  2010  2011  2010 
Service cost $4,771  $4,810  $  $ 
Interest cost  16,280   16,024   753   908 
Expected return on plan assets  (19,348)  (16,987)      
Amortization of prior service cost  (601)  (601)  (109)  (110)
Amortization of net actuarial loss  4,199   4,550   489   439 
             
Net periodic benefit cost $5,301  $7,796  $1,133  $1,237 
             
Employer contributions $19,144  $15,223  $2,507  $2,944 
             

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

Service cost

  $—     $1,611   $—     $—    

Interest cost

   4,883    5,397    175    251  

Expected return on plan assets

   (7,279  (6,434  (120  —    

Amortization of prior service credit

   —      (201  (37  (36

Amortization of net actuarial loss

   610    1,406    137    163  
  

 

 

  

 

 

  

 

 

  

 

 

 

Net periodic benefit (credit)/cost

  $(1,786 $1,779   $155   $378  
  

 

 

  

 

 

  

 

 

  

 

 

 

Employer contributions

  $72,362   $6,487   $5,583   $1,067  
  

 

 

  

 

 

  

 

 

  

 

 

 
   For the Six Months Ended June 30, 
   2012  2011  2012  2011 

Service cost

  $282   $3,181   $—     $—    

Interest cost

   10,037    10,838    350    502  

Expected return on plan assets

   (14,347  (12,899  (120  —    

Curtailment gain

   (779  —      —      —    

Amortization of prior service credit

   (133  (401  (75  (72

Amortization of net actuarial loss

   2,351    2,815    275    326  
  

 

 

  

 

 

�� 

 

 

  

 

 

 

Net periodic benefit (credit)/cost

  $(2,589 $3,534   $430   $756  
  

 

 

  

 

 

  

 

 

  

 

 

 

Employer contributions

  $79,355   $12,655   $9,652   $1,382  
  

 

 

  

 

 

  

 

 

  

 

 

 

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 expected contributionsCompany contributed $5,000 and $8,500 to the PensionVEBA Plan for the three and six months ended June 30, 2012, respectively. The contribution to the Postretirement Plan for the remaining quarters for the year ending December 31, 2011 are2012 is expected to be consistent with this quarter. In addition, in April 2012, the amounts previously disclosed asCompany 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, 2010.

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 CEOChief 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:

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.

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.

20Risk 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 segment EBITDA as the profitability measure for making decisions regarding ongoing operations. Segment 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)/income, and realized gaingain/(loss) on securities, net, interest expense, income taxes, and depreciation and amortization. Beginning 2011, the Company’s definition of Segment EBITDA includes acquisition related liabilities adjustment for all periods presented. Segment EBITDA is the measure of operating results used to assess corporate performance and optimal utilization of debt and acquisitions. Segment operatingOperating expenses consist of direct and indirect costs principally related to personnel, facilities, software license fees, consulting, travel, and third-party information services. Indirect costs are generally allocated to the segments using fixed rates established by management based upon estimated expense contribution levels and other assumptions that management considers reasonable. The Company does not allocate investment income, realized (loss)/gain on securities, net, interest expense and provision for income tax expense,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%1.00% or more of the Company’s consolidated revenue for either the three-three and six months ended June 30, 2012 or nine-month periods ended September 30, 2011 or 2010.2011. No individual country outside of the U.S. accounted for 1%1.00% or more of total consolidated long-term assets as of SeptemberJune 30, 20112012 or December 31, 2010.

2011.

21


The following tables providetable provides the Company’s revenue and operating income performance by reportable segment for the three-three and nine-month periodssix months ended SeptemberJune 30, 20112012 and 2010,2011, as well as a reconciliationreconciliations 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, 2011  September 30, 2010 
  Risk  Decision      Risk  Decision    
  Assessment  Analytics  Total  Assessment  Analytics  Total 
                         
Revenues $139,977  $200,121  $340,098  $136,269  $151,085  $287,354 
Expenses:                        
Cost of revenues (exclusive of items shown separately below)  49,209   88,410   137,619   49,526   67,479   117,005 
Selling, general and administrative  20,065   31,410   51,475   20,341   20,641   40,982 
Acquisition related liabilities adjustment              (544)  (544)
                   
Segment EBITDA  70,703   80,301   151,004   66,402   63,509   129,911 
Depreciation and amortization of fixed assets  3,354   7,444   10,798   4,231   5,804   10,035 
Amortization of intangible assets  37   8,760   8,797   36   6,122   6,158 
                   
Operating income  67,312   64,097   131,409   62,135   51,583   113,718 
                   
Unallocated expenses:                        
Investment income          99           59 
Realized (loss)/gain on securities, net          (86)          9 
Interest expense          (14,593)          (8,484)
                       
Income before income taxes         $116,829          $105,302 
                       
                         
Capital expenditures, including non-cash purchases of fixed assets and capital lease obligations $2,117  $11,778  $13,895  $3,154  $4,220  $7,374 
                   
                         
  For the Nine Months Ended  For the Nine Months Ended 
  September 30, 2011  September 30, 2010 
  Risk  Decision      Risk  Decision    
  Assessment  Analytics  Total  Assessment  Analytics  Total 
                         
Revenues $421,050  $559,197  $980,247  $405,136  $440,049  $845,185 
Expenses:                        
Cost of revenues (exclusive of items shown separately below)  145,519   247,841   393,360   148,076   198,922   346,998 
Selling, general and administrative  62,537   94,103   156,640   58,964   62,170   121,134 
Acquisition related liabilities adjustment     (3,364)  (3,364)     (544)  (544)
                   
Segment EBITDA  212,994   220,617   433,611   198,096   179,501   377,597 
Depreciation and amortization of fixed assets  11,202   21,756   32,958   12,717   17,191   29,908 
Amortization of intangible assets  109   26,020   26,129   109   20,373   20,482 
                   
Operating income  201,683   172,841   374,524   185,270   141,937   327,207 
                   
Unallocated expenses:                        
Investment income          99           183 
Realized gain on securities, net          401           70 
Interest expense          (39,093)          (25,395)
                       
Income before income taxes         $335,931          $302,065 
                       
                         
Capital expenditures, including non-cash purchases of fixed assets and capital lease obligations $8,906  $39,342  $48,248  $6,543  $17,671  $24,214 
                   

 

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

Revenues

  $229,037    $144,189   $373,226   $186,750   $140,530   $327,280  

Expenses:

        

Cost of revenues (exclusive of items shown separately below)

   101,769     45,305    147,074    82,132    49,053    131,185  

Selling, general and administrative

   39,562     22,911    62,473    32,564    23,345    55,909  

Acquisition related liabilities adjustment

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

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

   —       (126  (126  —      (115  (115
  

 

 

   

 

 

  

 

 

  

 

 

  

 

��

  

 

 

 

EBITDA

   87,706     76,099    163,805    75,418    68,247    143,665  

Depreciation and amortization of fixed assets

   9,021     4,069    13,090    7,325    3,530    10,855  

Amortization of intangible assets

   12,187     —      12,187    8,841    36    8,877  

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

   —       126    126    —      115    115  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating income

  $66,498    $71,904    138,402   $59,252   $64,566    123,818  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

      126      115  

Interest expense

      (17,377    (14,885
     

 

 

    

 

 

 

Income before income taxes

     $121,151     $109,048  
     

 

 

    

 

 

 

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

  $16,425    $5,645   $22,070   $12,219   $3,394   $15,613  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

22

   For the Six Months Ended  For the Six Months Ended 
   June 30, 2012  June 30, 2011 
   Decision   Risk     Decision  Risk    
   Analytics   Assessment  Total  Analytics  Assessment  Total 

Revenues

  $430,569    $289,158   $719,727   $359,076   $281,073   $640,149  

Expenses:

        

Cost of revenues (exclusive of items shown separately below)

   189,667     90,737    280,404    159,431    96,310    255,741  

Selling, general and administrative

   73,939     42,513    116,452    62,693    42,472    105,165  

Acquisition related liabilities adjustment

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

Investment income and realized gain on securities, net

   —       (561  (561  —      (487  (487
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

EBITDA

   166,963     156,469    323,432    140,316    142,778    283,094  

Depreciation and amortization of fixed assets

   17,506     7,228    24,734    14,312    7,848    22,160  

Amortization of intangible assets

   20,774     —      20,774    17,260    72    17,332  

Investment income and realized gain on securities, net

   —       561    561    —      487    487  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating income

  $128,683    $148,680    277,363   $108,744   $134,371    243,115  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Investment income and realized gain on securities, net

      561      487  

Interest expense

      (33,762    (24,500
     

 

 

    

 

 

 

Income before income taxes

     $244,162     $219,102  
     

 

 

    

 

 

 

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

  $29,657    $8,345   $38,002   $27,564   $6,789   $34,353  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 


Operating segment revenue by type of service is provided below:
                 
  For the Three Months Ended  For the Nine Months Ended 
  September 30,  September 30,  September 30,  September 30, 
  2011  2010  2011  2010 
Risk Assessment:                
Industry-standard insurance programs $92,894  $88,644  $278,140  $264,115 
Property-specific rating and underwriting information  33,107   34,507   102,621   102,733 
Statistical agency and data services  7,888   7,510   23,263   21,879 
Actuarial services  6,088   5,608   17,026   16,409 
             
                 
Total Risk Assessment  139,977   136,269   421,050   405,136 
             
                 
Decision Analytics:                
Fraud identification and detection solutions  94,663   81,584   274,317   239,574 
Loss prediction solutions  64,680   38,079   173,026   114,786 
Loss quantification solutions  40,778   31,422   111,854   85,689 
             
Total Decision Analytics  200,121   151,085   559,197   440,049 
             
                 
Total revenues $340,098  $287,354  $980,247  $845,185 
             

   For the Three Months Ended   For the Six Months Ended 
   June 30,
2012
   June 30,
2011
   June 30,
2012
   June 30,
2011
 

Decision Analytics:

        

Insurance

  $122,210    $112,334    $238,546    $217,634  

Mortgage and financial services

   35,299     35,643     69,574     68,339  

Healthcare

   50,381     19,322     80,829     34,939  

Specialized markets

   21,147     19,451     41,620     38,164  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Decision Analytics

   229,037     186,750     430,569     359,076  
  

 

 

   

 

 

   

 

 

   

 

 

 

Risk Assessment:

        

Industry-standard insurance programs

   98,010     92,389     197,144     185,246  

Property-specific rating and underwriting information

   32,459     35,017     65,016     69,514  

Statistical agency and data services

   8,130     7,633     15,854     15,375  

Actuarial services

   5,590     5,491     11,144     10,938  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Risk Assessment

   144,189     140,530     289,158     281,073  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  $373,226    $327,280    $719,727    $640,149  
  

 

 

   

 

 

   

 

 

   

 

 

 

13. Related Parties:

The Company considers its Verisk Class A and Class B stockholders that own more than 5% of the outstanding stock within thea 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% of a class of stock as of June 30, 2012.

At SeptemberJune 30, 2011, the related partiesthere were three Class A and five Class B stockholders, each owning more than 5% of the respective outstanding Class B shares compared to six Class B stockholders at September 30, 2010 of which four remained unchanged. At September 30, 2011 and 2010, there were three and five Class A stockholders owning more than 5% of the outstanding Class A shares, respectively.class. The Company had accounts receivable, net of $471 and $515 and fees received in advance of $1,329 and $1,231 from related parties as of September 30, 2011 and December 31, 2010, respectively. In addition, the Company had revenues from related parties for the three months ended SeptemberJune 30, 2012 and 2011 of $0 and 2010 of $4,699 and $14,789,$4,787, respectively, and revenues of $13,882$0 and $45,202$9,183 for the ninesix months ended SeptemberJune 30, 2012 and 2011, and 2010, respectively. Although the customers that make up the Company’s related parties have changed from the prior periods, the Company continues to generate revenues from these customers. As of October 6, 2011, the remaining Class B shares converted to Class A common stock (See Notes 1 and 9 for further information). Subsequently, the Company’s related parties will consist of Verisk Class A stock holders that own more than 5% of the outstanding stock.

14. Commitments and Contingencies:

The Company is a party to legal proceedings with respect to a variety of matters in the ordinary course of business, including thosethe matters described below. TheWith 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 theyit may have on the Company’s results of operations, financial position or cash flows. This is primarily because many of these cases remainthe matters are in their early stages and only limited discovery has taken place.either not commenced or been completed. Although the Company believes it has strong defenses for the litigation proceedings described below,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.

Claims Outcome AdvisorCitizens Insurance Litigation

Hensley, et al. v. Computer Sciences Corporation et al.

On February 28, 2012, the Company was served with a putative nationwide class action complaint filed in February 2005, in Millerthe Florida State Circuit Court for Pasco County Arkansas state court. Defendants included numerous insurance companiesnaming Citizens Property Insurance Corporation (“Citizens”) and providers of software products used by insurers in paying claims. The Company was among the named defendants. Plaintiffs alleged that certain software products, including the Company’s Claims Outcome Advisor productXactware subsidiary. The complaint alleged a class action seeking declaratory and a competing software product sold by Computer Sciences Corporation, improperly estimated the amount to be paid by insurers to their policyholders in connection with claims for bodily injuries.

23


The Company entered into settlement agreements with plaintiffs asserting claims relating to the use of Claims Outcome Advisor byinjunctive relief against defendants Hanover Insurance Group, Progressive Car Insurance and Liberty Mutual Insurance Group. Each of these settlements was granted final approval by the court and together the settlements resolve the claims asserted in this case against the Company with respect to the above insurance companies, who settled the claims against them as well. A provision was made in 2006 for this proceeding and the total amount the Company paid in 2008 with respect to these settlements was less than $2,000. A fourth defendant, The Automobile Club of California, which is alleged to have used Claims Outcome Advisor, was dismissed from the action. On August 18, 2008, pursuant to the agreement of the parties the Court ordered that the claims against the Company be dismissed with prejudice.
Subsequently, Hanover Insurance Group made a demand for reimbursement, pursuant to an indemnification provision contained in a December 30, 2004 License Agreement between Hanover and the Company, of its settlement and defense costs in theHensleyclass action. Specifically, Hanover demanded $2,536 including $600 in attorneys’ fees and expenses. The Company disputed that Hanover is entitled to any reimbursement pursuant to the License Agreement. In July 2010, after the Company and Hanover were unable to resolve the dispute in mediation, Hanover served a summons and complaint seeking indemnity and contribution from the Company. The parties resolved this matter with no material adverse consequences to the Company in a Settlement Agreement and Release executed on August 25, 2011.
Xactware Litigation
The following two lawsuits were filed by orbrought on behalf of groups“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 Louisianathe 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 policyholders who claim, among other things,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 certain insurers who usedCitizens 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 price information supplied by the Company’s Xactware subsidiary (and those of another provider) did not fully compensate policyholders for property damage covered under their insurance policies. The plaintiffs seek to recover compensation for theirinjunctive relief as well as damages in an amount equal torepresenting the difference between the amountpremium plaintiff paid byto Citizens using 360Value and what the defendants and the fair market repair/restoration costs of their damagedpremium should have been if Citizens used an accurate replacement cost value for plaintiff’s property.
Schafer v. State Farm Fire & Cas. Co.,et al.was a putative class action pending against the Company and State Farm Fire & Casualty Company filed in March 2007 in the Eastern District of Louisiana. The complaint alleged antitrust violations, breach of contract, negligence, bad faith, and fraud. The court dismissed the antitrust claim as to both defendants and dismissed all claims against the Company other than fraud. Judge Duval denied plaintiffs’ motion to certify a class with respect to the fraud and breach of contract claims on August 3, 2009. After the single action was reassigned to Judge Africk plaintiffs agreed to settle the matter with the Company and State Farm and a Settlement Agreement and Release was executed by all parties in June 2010. The settlement agreement was not considered material to the Company.
Mornay v. Travelers Ins. Co.,et al.is a putative class action pending against the Company and Travelers Insurance Company filed in November 2007 in the Eastern District of Louisiana. The complaint alleged antitrust violations, breach of contract, negligence, bad faith, and fraud. As in Schafer, the court dismissed the antitrust claim as to both defendants and dismissed all claims against the Company other than fraud. Judge Duval stayed all proceedings in the case pending an appraisal of the lead plaintiff’s insurance claim. The matter was re-assigned to Judge Barbier, who on September 11, 2009 issued an order administratively closing the matter pending completion of the appraisal process. The appraisal process has been completed, the stay has been lifted and defendants have filed a motion to strike the class allegations and dismiss the fraud claim.

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

iiXIntellicorp Records, Inc. Litigation

In

On April 2010,20, 2012, the Company was served with a complaint filed in Alameda County Superior Court in California naming the Company’s subsidiary Insurance Information Exchange or iiX, as well as other information providers in the State of Missouri were served with a summons and class actionIntellicorp Records, Inc. The complaint filed in the United States District Court for the Western District of Missouri alleging violations of the Driver Privacy Protection Act, or the DPPA, entitledtitledJanice Cook, et al.Jane Roe v. ACS State & Local Solutions,Intellicorp Records, Inc. et al.Plaintiffs brought thealleges a nationwide putative class action on their own behalf and on behalf of all similarly situated individuals whose personal information is contained in any motor vehicle record maintained by the State of Missouri andpersons who have not provided express consentbeen the subject of a consumer report furnished to the State of Missouria third party by Intellicorp for the distribution of their personal information foremployment purposes not enumerated by the DPPA and whose personal information has been knowingly obtained and used byreport contained any negative public record of criminal arrest, charge or conviction during the defendants.5 years preceding the filing of the action until final resolution. The class complaint alleges 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 defendants knowingly obtained personalfact that criminal record information was being provided to their employers and prospective employers. The complaint seeks statutory damages for a purposethe class in an amount not authorized by the DPPA and seeks liquidated damages in the amount of two thousand fiveless than one hundred dollars for each instance of aand not more than one thousand dollars per violation, of the DPPA, punitive damages, costs and attorneys fees as well as unspecified monetary damages for the destruction of any illegally obtained personal information. The court granted iiX’s motion to dismiss the complaint based on a failure to state a claim on November 19, 2010. Plaintiffs filed a notice of appeal on December 17, 2010 and oral argument was heard by the Eighth Circuit on September 18, 2011. named plaintiff.

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

24


Interthinx Litigation
In September 2009, the Company’s subsidiary, Interthinx, Inc., was served with a putative class action entitledRenata Gluzman v. Interthinx, Inc.The plaintiff, a former Interthinx employee, filed the class action on August 13, 2009 in the Superior Court of the State of California, County of Los Angeles on behalf of all Interthinx information technology employees for unpaid overtime and missed meals and rest breaks, as well as various related claims claiming that the information technology employees were misclassified as exempt employees and, as a result, were denied certain wages and benefits that would have been received if they were properly classified as non-exempt employees. The pleadings included, among other things, a violation of Business and Professions Code 17200 for unfair business practices, which allowed plaintiffs to include as class members all information technology employees employed at Interthinx for four years prior to the date of filing the complaint. The complaint sought compensatory damages, penalties that are associated with the various statutes, restitution, interest costs, and attorney fees. On June 2, 2010, plaintiffs agreed to settle their claims with Interthinx and the court granted final approval to the settlement on February 23, 2011. The settlement agreement was not considered material to the Company.
15. Condensed Consolidated Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries

In April and December 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 SeptemberJune 30, 20112012 and December 31, 20102011 and for the three and ninesix months ended SeptemberJune 30, 20112012 and 2010.2011. 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. The Company corrected certain classifications on the Condensed Consolidating Statement of Cash Flows for the six-month period ended June 30, 2011 within the Guarantor Subsidiaries, which removed a gross-up in the repayments received from other subsidiaries and repayments of advances to other subsidiaries reflected in cash flows from investing activities and cash flows from financing activities, respectively. This correction did not have any impact on the net cash position of the Guarantor Subsidiaries.

25


CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)

As of SeptemberJune 30, 2011

                     
  Verisk  Guarantor  Non-Guarantor  Eliminating    
  Analytics, Inc.  Subsidiaries  Subsidiaries  Entries  Consolidated 
  (In thousands) 
ASSETS
                    
Current assets:                    
Cash and cash equivalents $197  $25,275  $27,374  $  $52,846 
Available-for-sale securities     4,828         4,828 
Accounts receivable, net of allowance for doubtful accounts of $4,432 (including amounts from related parties of $471)     128,926   23,877      152,803 
Prepaid expenses     21,515   2,076      23,591 
Deferred income taxes, net     2,745   936      3,681 
Federal and foreign income taxes receivable  5,166         (3,025)  2,141 
State and local income taxes receivable  403   2,348   855      3,606 
Intercompany receivables  196,007   386,106   122,998   (705,111)   
Other current assets     13,412   14,856      28,268 
                
Total current assets  201,773   585,155   192,972   (708,136)  271,764 
                     
Noncurrent assets:                    
Fixed assets, net     93,591   16,737      110,328 
Intangible assets, net     83,982   148,551      232,533 
Goodwill     484,088   228,473      712,561 
Deferred income taxes, net     64,565      (41,225)  23,340 
State income taxes receivable     1,708         1,708 
Intercompany note receivable     162,239      (162,239)   
Investment in subsidiaries  540,524   105,260      (645,784)   
Other assets  4,103   21,638   1,958      27,699 
                
Total assets $746,400  $1,602,226  $588,691  $(1,557,384) $1,379,933 
                
                     
LIABILITIES AND STOCKHOLDERS’ (DEFICIT)/EQUITY
                    
Current liabilities:                    
Accounts payable and accrued liabilities $14,932  $97,357  $34,069  $  $146,358 
Short-term debt and current portion of long-term debt     165,154   516      165,670 
Pension and postretirement benefits, current     4,663         4,663 
Fees received in advance (including amounts from related parties of $1,329)     168,207   21,103      189,310 
Intercompany payables  279,095   256,519   169,497   (705,111)   
Federal and foreign income taxes payable     2,002   1,023   (3,025)   
                
Total current liabilities  294,027   693,902   226,208   (708,136)  506,001 
                     
Noncurrent liabilities:                    
Long-term debt  449,007   404,459   114      853,580 
Intercompany note payables  162,239         (162,239)   
Pension and postretirement benefits     99,419         99,419 
Deferred income taxes, net        41,225   (41,225)   
Other liabilities     76,159   3,647      79,806 
                
Total liabilities  905,273   1,273,939   271,194   (911,600)  1,538,806 
                     
Total stockholders’ (deficit)/equity  (158,873)  328,287   317,497   (645,784)  (158,873)
                
Total liabilities and stockholders’ (deficit)/equity $746,400  $1,602,226  $588,691  $(1,557,384) $1,379,933 
                
2012

 

26

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

Current assets:

         

Cash and cash equivalents

  $511    $47,729    $48,958    $—     $97,198  

Available-for-sale securities

   —       4,782     —       —      4,782  

Accounts receivable, net of allowance for doubtful accounts of $4,088

   —       128,269     45,338     —      173,607  

Prepaid expenses

   —       26,043     2,449     —      28,492  

Deferred income taxes, net

   —       2,557     13,056     —      15,613  

Federal and foreign income taxes receivable

   6,717     27,429     —       (6,441  27,705  

State and local income taxes receivable

   516     2,757     365     —      3,638  

Intercompany receivables

   349,949     528,301     182,176     (1,060,426  —    

Other current assets

   12,000     25,898     8,562     —      46,460  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total current assets

   369,693     793,765     300,904     (1,066,867  397,495  

Noncurrent assets:

         

Fixed assets, net

   —       113,471     20,260     —      133,731  

Intangible assets, net

   —       72,008     291,547     —      363,555  

Goodwill

   —       482,110     452,652     —      934,762  

Deferred income taxes, net

   —       49,957     —       (49,957  —    

Investment in subsidiaries

   762,711     456,126     —       (1,218,837  —    

Other assets

   10,932     11,411     1,457     —      23,800  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total assets

  $1,143,336    $1,978,848    $1,066,820    $(2,335,661 $1,853,343  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 
LIABILITIES AND STOCKHOLDERS' EQUITY         

Current liabilities:

         

Accounts payable and accrued liabilities

  $13,166    $93,173    $47,345    $—     $153,684  

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

   —       201,248     535     —      201,783  

Pension and postretirement benefits, current

   —       2,912     —       —      2,912  

Fees received in advance

   —       216,848     37,032     —      253,880  

Intercompany payables

   386,610     471,317     202,499     (1,060,426  —    

Federal and foreign taxes payable

   —       —       6,441     (6,441  —    
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total current liabilities

   399,776     985,498     293,852     (1,066,867  612,259  

Noncurrent liabilities:

         

Long-term debt

   696,878     357,416     101     —      1,054,395  

Pension and postretirement benefits

   —       35,621     —       —      35,621  

Deferred income taxes, net

   —       —       91,837     (49,957  41,880  

Other liabilities

   —       51,909     10,597     —      62,506  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total liabilities

   1,096,654     1,430,444     396,387     (1,116,824  1,806,661  

Total stockholders’ equity

   46,682     548,404     670,433     (1,218,837  46,682  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total liabilities and stockholders’ equity

  $1,143,336    $1,978,848    $1,066,820    $(2,335,661 $1,853,343  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 


CONDENSED CONSOLIDATING BALANCE SHEET

As of December 31, 2010

                     
  Verisk  Guarantor  Non-Guarantor  Eliminating    
  Analytics, Inc.  Subsidiaries  Subsidiaries  Entries  Consolidated 
  (In thousands) 
ASSETS
                    
Current assets:                    
Cash and cash equivalents $1  $31,576  $23,397  $  $54,974 
Available-for-sale securities     5,653         5,653 
Accounts receivable, net of allowance for doubtful accounts of $4,028 (including amounts from related parties of $515)     98,817   27,747      126,564 
Prepaid expenses     15,566   2,225      17,791 
Deferred income taxes, net     2,745   936      3,681 
Federal and foreign income taxes receivable     13,590   2,193      15,783 
State and local income taxes receivable     7,882   1,041      8,923 
Intercompany receivables  101,470   668,906   59,021   (829,397)   
Other current assets     6,720   346      7,066 
                
Total current assets  101,471   851,455   116,906   (829,397)  240,435 
                     
Noncurrent assets:                    
Fixed assets, net     78,928   14,481      93,409 
Intangible assets, net     75,307   124,922      200,229 
Goodwill     449,065   183,603      632,668 
Deferred income taxes, net     64,421      (42,542)  21,879 
State income taxes receivable     1,773         1,773 
Investment in subsidiaries  326,387   20,912      (347,299)   
Other assets     10,248   16,449      26,697 
                
Total assets $427,858  $1,552,109  $456,361  $(1,219,238) $1,217,090 
                
                     
LIABILITIES AND STOCKHOLDERS’ (DEFICIT)/EQUITY
                    
Current liabilities:                    
Accounts payable and accrued liabilities $  $95,425  $16,570  $  $111,995 
Acquisition related liabilities        3,500      3,500 
Short-term debt and current portion of long-term debt     437,457   260      437,717 
Pension and postretirement benefits, current     4,663         4,663 
Fees received in advance (including amounts from related parties of $1,231)     137,521   25,486      163,007 
Intercompany payables  542,300   165,681   121,416   (829,397)   
                
Total current liabilities  542,300   840,747   167,232   (829,397)  720,882 
                     
Noncurrent liabilities:                    
Long-term debt     401,788   38      401,826 
Pension and postretirement benefits     118,611         118,611 
Deferred income taxes, net        42,542   (42,542)   
Other liabilities     71,663   18,550      90,213 
                
Total liabilities  542,300   1,432,809   228,362   (871,939)  1,331,532 
                     
Total stockholders’ (deficit)/equity  (114,442)  119,300   227,999   (347,299)  (114,442)
                
Total liabilities and stockholders’ (deficit)/equity $427,858  $1,552,109  $456,361  $(1,219,238) $1,217,090 
                
2011

 

27

   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  
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 


CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)

For The Three Month Period Ended SeptemberJune 30, 2011

                     
  Verisk  Guarantor  Non-Guarantor  Eliminating    
  Analytics, Inc.  Subsidiaries  Subsidiaries  Entries  Consolidated 
  (In thousands) 
                     
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 subsidiary and income taxes  (7,481)  118,518   5,792      116,829 
Equity in net income of subsidiary  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 
                
2012

 

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

Revenues

  $—     $319,254   $60,782   $(6,810 $373,226  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Expenses:

      

Cost of revenues (exclusive of items shown separately below)

   —      121,813    28,828    (3,567  147,074  

Selling, general and administrative

   —      51,202    14,514    (3,243  62,473  

Depreciation and amortization of fixed assets

   —      10,817    2,273    —      13,090  

Amortization of intangible assets

   —      4,892    7,295    —      12,187  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total expenses

   —      188,724    52,910    (6,810  234,824  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating income

   —      130,530    7,872    —      138,402  

Other income/(expense):

      

Investment income

   18    26    112    —      156  

Realized loss on securities, net

   —      (30  —      —      (30

Interest expense

   (9,875  (7,488  (14  —      (17,377
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total other (expense)/income, net

   (9,857  (7,492  98    —      (17,251
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

   (9,857  123,038    7,970    —      121,151  

Equity in net income of subsidiaries

   79,571    2,967    —      (82,538  —    

Provision for income taxes

   3,617    (48,475  (2,962  —      (47,820
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income

  $73,331   $77,530   $5,008   $(82,538 $73,331  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

28


CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)

For The NineSix Month Period Ended SeptemberJune 30, 2011

                     
  Verisk  Guarantor  Non-Guarantor  Eliminating    
  Analytics, Inc.  Subsidiaries  Subsidiaries  Entries  Consolidated 
  (In thousands) 
                     
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 subsidiary and income taxes  (15,162)  340,437   10,656      335,931 
Equity in net income of subsidiary  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 
                
2012

 

29

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

Revenues

  $—     $626,353   $104,383   $(11,009 $719,727  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Expenses:

      

Cost of revenues (exclusive of items shown separately below)

   —      238,152    48,200    (5,948  280,404  

Selling, general and administrative

   —      94,539    26,974    (5,061  116,452  

Depreciation and amortization of fixed assets

   —      20,368    4,366    —      24,734  

Amortization of intangible assets

   —      9,820    10,954    —      20,774  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total expenses

   —      362,879    90,494    (11,009  442,364  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating income

   —      263,474    13,889    —      277,363  

Other income/(expense):

      

Investment income

   36    100    125    —      261  

Realized gain on securities, net

   —      300    —      —      300  

Interest expense

   (19,744  (13,995  (23  —      (33,762
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total other (expense)/income, net

   (19,708  (13,595  102    —      (33,201
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

   (19,708  249,879    13,991    —      244,162  

Equity in net income of subsidiaries

   160,407    3,253    —      (163,660  —    

Provision for income taxes

   7,233    (96,795  (6,668  —      (96,230
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income

  $147,932   $156,337   $7,323   $(163,660 $147,932  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 


CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)

For The Three Month Period Ended SeptemberJune 30, 2010

                     
  Verisk  Guarantor  Non-Guarantor  Eliminating    
  Analytics, Inc.  Subsidiaries  Subsidiaries  Entries  Consolidated 
  (In thousands) 
                     
Revenues $  $272,287  $16,494  $(1,427) $287,354 
                     
Expenses:                    
Cost of revenues (exclusive of items shown separately below)     108,320   9,247   (562)  117,005 
Selling, general and administrative     36,467   5,380   (865)  40,982 
Depreciation and amortization of fixed assets     8,794   1,241      10,035 
Amortization of intangible assets     5,402   756      6,158 
Acquisition related liabilities adjustment     (544)        (544)
                
Total expenses     158,439   16,624   (1,427)  173,636 
                
                     
Operating income/(loss)     113,848   (130)     113,718 
                     
Other income/(expense):                    
Investment income     33   9  17   59 
Realized gain on securities, net     9         9 
Interest expense     (8,467)     (17)  (8,484)
                
Total other (expense)/income, net     (8,425)  9      (8,416)
                
                     
Income/(loss) before equity in net income/(loss) of subsidiary and income taxes     105,423   (121)     105,302 
Equity in net income/(loss) of subsidiary  62,880   (133)     (62,747)   
Provision for income taxes     (42,410)  (12)     (42,422)
                
Net income/(loss) $62,880  $62,880  $(133) $(62,747) $62,880 
                
2011

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

Revenues

  $—     $289,353   $43,842   $(5,915 $327,280  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Expenses:

      

Cost of revenues (exclusive of items shown separately below)

   —      114,120    19,906    (2,841  131,185  

Selling, general and administrative

   —      45,936    13,047    (3,074  55,909  

Depreciation and amortization of fixed assets

   —      8,739    2,116    —      10,855  

Amortization of intangible assets

   —      4,797    4,080    —      8,877  

Acquisition related liabilities adjustment

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total expenses

   —      170,792    38,585    (5,915  203,462  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating income

   —      118,561    5,257    —      123,818  

Other income/(expense):

      

Investment income/(loss)

   —      1,457    (38  (1,429  (10

Realized gain on securities, net

   —      125    —      —      125  

Interest expense

   (7,681  (8,562  (71  1,429    (14,885
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total other expense, net

   (7,681  (6,980  (109  —      (14,770
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

   (7,681  111,581    5,148    —      109,048  

Equity in net income of subsidiaries

   70,428    2,702    —      (73,130  —    

Provision for income taxes

   2,830    (44,525  (1,776  —      (43,471
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income

  $65,577   $69,758   $3,372   $(73,130 $65,577  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)

For The Six Month Period Ended June 30, 2011

  

  

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

Revenues

  $—     $568,933   $78,964   $(7,748 $640,149  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Expenses:

      

Cost of revenues (exclusive of items shown separately below)

   —      222,903    36,659    (3,821  255,741  

Selling, general and administrative

   —      82,414    26,678    (3,927  105,165  

Depreciation and amortization of fixed assets

   —      18,181    3,979    —      22,160  

Amortization of intangible assets

   —      10,117    7,215    —      17,332  

Acquisition related liabilities adjustment

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total expenses

   —      330,815    73,967    (7,748  397,034  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating income

   —      238,118    4,997    —      243,115  

Other income/(expense):

      

Investment income/(loss)

   —      1,471    (42  (1,429  —    

Realized gain on securities, net

   —      487    —      —      487  

Interest expense

   (7,681  (18,157  (91  1,429    (24,500
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total other expense, net

   (7,681  (16,199  (133  —      (24,013
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

   (7,681  221,919    4,864    —      219,102  

Equity in net income of subsidiaries

   136,304    1,614    —      (137,918  —    

Provision for income taxes

   2,830    (88,078  (2,401  —      (87,649
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income

  $131,453   $135,455   $2,463   $(137,918 $131,453  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONSCOMPREHENSIVE INCOME (UNAUDITED)

For The Nine Month PeriodThree Months Ended SeptemberJune 30, 2010

                     
  Verisk  Guarantor  Non-Guarantor  Eliminating    
  Analytics, Inc.  Subsidiaries  Subsidiaries  Entries  Consolidated 
  (In thousands) 
                     
Revenues $  $804,186  $45,649  $(4,650) $845,185 
                     
Expenses:                    
Cost of revenues (exclusive of items shown separately below)     321,650   27,563   (2,215)  346,998 
Selling, general and administrative     107,605   15,229   (1,700)  121,134 
Depreciation and amortization of fixed assets     26,588   4,055   (735)  29,908 
Amortization of intangible assets     18,401   2,081      20,482 
Acquisition related liabilities adjustment     (544)        (544)
                
Total expenses     473,700   48,928   (4,650)  517,978 
                
                     
Operating income/(loss)     330,486   (3,279)     327,207 
                     
Other income/(expense):                    
Investment income     124   82   (23)  183 
Realized gain on securities, net     70         70 
Interest expense     (25,352)  (66)  23   (25,395)
                
Total other (expense)/income, net     (25,158)  16      (25,142)
                
                     
Income/(loss) before equity in net income/(loss) of subsidiary and income taxes     305,328   (3,263)     302,065 
Equity in net income/(loss) of subsidiary  176,659   (2,396)     (174,263)   
Provision for income taxes     (126,273)  867      (125,406)
                
Net income/(loss) $176,659  $176,659  $(2,396) $(174,263) $176,659 
                
2012

 

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

Net income

  $73,331   $77,530   $5,008   $(82,538 $73,331  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Other comprehensive income, net of tax:

      

Unrealized holding loss on investments

   (116  (116  —      116    (116

Unrealized foreign currency loss

   (287  (248  (254  502    (287

Pension and postretirement unfunded liability adjustment

   452    452    —      (452  452  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total other comprehensive income

   49    88    (254  166    49  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive income

  $73,380   $77,618   $4,754   $(82,372 $73,380  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

30

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)


For The Six Months Ended June 30, 2012

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

Net income

  $147,932   $156,337   $7,323   $(163,660 $147,932  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Other comprehensive income, net of tax:

      

Unrealized holding loss on investments

   (313  (313  —      313    (313

Unrealized foreign currency loss

   (134  (96  (113  209    (134

Pension and postretirement unfunded liability adjustment

   1,380    1,380    —      (1,380  1,380  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total other comprehensive income

   933    971    (113  (858  933  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive income

  $148,865   $157,308   $7,210   $(164,518 $148,865  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

For The Three Months Ended June 30, 2011

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

Net income

  $65,577   $69,758   $3,372    $(73,130 $65,577  
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Other comprehensive income, net of tax:

       

Unrealized holding loss on investments

   (126  (126  —       126    (126

Unrealized foreign currency gain

   235    57    234     (291  235  

Pension and postretirement unfunded liability adjustment

   1,220    1,220    —       (1,220  1,220  
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Total other comprehensive income

   1,329    1,151    234     (1,385  1,329  
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Comprehensive income

  $66,906   $70,909   $3,606    $(74,515 $66,906  
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

For The Six Months Ended June 30, 2011

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

Net income

  $131,453   $135,455   $2,463    $(137,918 $131,453  
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Other comprehensive income, net of tax:

       

Unrealized holding loss on investments

   (252  (252  —       252    (252

Unrealized foreign currency gain

   573    358    612     (970  573  

Pension and postretirement unfunded liability adjustment

   1,974    1,974    —       (1,974  1,974  
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Total other comprehensive income

   2,295    2,080    612     (2,692  2,295  
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Comprehensive income

  $133,748   $137,535   $3,075    $(140,610 $133,748  
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)

For The NineSix Month Period Ended SeptemberJune 30, 2011

                     
  Verisk  Guarantor  Non-Guarantor  Eliminating    
  Analytics, Inc.  Subsidiaries  Subsidiaries  Entries  Consolidated 
  (In thousands) 
                     
Net cash provided by operating activities $36  $297,400  $26,318  $ $323,754 
                     
Cash flows from investing activities:                    
Acquisitions, net of cash acquired of $590     (121,721)        (121,721)
Earnout payments        (3,500)     (3,500)
Escrow funding associated with acquisitions     (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 available-for-sale securities     (1,422)        (1,422)
Proceeds from sales and maturities of available-for-sale securities     1,722         1,722 
Purchases of fixed assets     (35,074)  (6,851)     (41,925)
                
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 of three months or greater     120,000        120,000
Proceeds/(repayments) of short-term debt     22,685   (374)     22,311 
Repurchase of Verisk Class A common stock     (340,122)        (340,122)
Repayments of advances to other subsidiaries     (2,510)     2,510    
Repayment of current portion of long-term debt     (125,000)        (125,000)
Repayment of intercompany note payable  (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)
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) $  $  $ 
                
2012

 

31

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

Net cash (used in)/provided by operating activities

  $(13,015 $143,124   $57,326   $—     $187,435  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash flows from investing activities:

      

Acquisitions, net of cash acquired of $29,387

   —      (331,330  —      —      (331,330

Earnout payments

   —      —      (250  —      (250

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

   —      (2,000  —      —      (2,000

Escrow funding associated with acquisitions

   —      (17,000  —      —      (17,000

Repayments received from other subsidiaries

   12,100    148,000    —      (160,100  —    

Advances provided to other subsidiaries

   —      (33,475  —      33,475    —    

Purchases of fixed assets

   —      (30,002  (6,530  —      (36,532

Purchases of available-for-sale securities

   —      (1,128  —      —      (1,128

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

   —      1,203    —      —      1,203  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash provided by/(used in) investing activities

   12,100    (265,732  (6,780  (126,625  (387,037
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash flows from financing activities:

      

Proceeds from short-term debt, net

   —      150,000    —      —      150,000  

Repurchase of Verisk Class A common stock

   —      (106,305  —      —      (106,305

Repayment of advances to other subsidiaries

   (75,000  (12,100  (73,000  160,100    —    

Advances received from other subsidiaries

   188    —      33,287    (33,475  —    

Excess tax benefits from exercised stock options

   —      31,624    —      —      31,624  

Proceeds from stock options exercised

   —      33,453    —      —      33,453  

Other financing, net

   —      (3,127  (314  —      (3,441
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash (used in)/provided by financing activities

   (74,812  93,545    (40,027  126,625    105,331  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Effect of exchange rate changes

   —      (21  (113  —      (134
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(Decrease)/increase in cash and cash equivalents

   (75,727  (29,084  10,406    —      (94,405

Cash and cash equivalents, beginning of period

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash and cash equivalents, end of period

  $511   $47,729   $48,958   $—     $97,198  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Supplemental disclosures:

      

Increase in intercompany balances from the purchase of MediConnect by ISO

  $17,000   $348,330   $331,330   $—     $—    
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

  $106,305   $106,305   $—     $—     $—    
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

  $33,453   $33,453   $—     $—     $—    
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)

For The NineSix Month Period Ended June 30, 2011

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

Net cash provided by operating activities

  $—     $173,935   $13,152   $—     $187,087  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash flows from investing activities:

      

Acquisitions, net of cash acquired of $590

   —      (121,721  —      —      (121,721

Earnout payments

   —      —      (3,500  —      (3,500

Escrow funding associated with acquisitions

   —      (19,560  —      —      (19,560

Advances provided to other subsidiaries

   —      —      (31,996  31,996    —    

Repayments received from other subsidiaries

   —      (13,618  —      13,618    —    

Proceeds from repayment of intercompany note receivable

   —      440,950    —      (440,950  —    

Purchases of fixed assets

   —      (23,189  (4,982  —      (28,171

Purchases of available-for-sale securities

   —      (1,338  —      —      (1,338

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

   —      1,704    —      —      1,704  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash provided by/(used in) investing activities

   —      263,228    (40,478  (395,336  (172,586
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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/(repayments) of short-term debt, net

   —      73,114    (195  —      72,919  

Repayment of current portion of long-term debt

   —      (50,000  —      —      (50,000

Repayments of advances to other subsidiaries

   —      13,618    —      (13,618  —    

Repayment of intercompany note payables

   (440,950  —      —      440,950    —    

Advances received from other subsidiaries

   —      —      31,996    (31,996  —    

Payment of debt issuance cost

   (2,925  (1,509  —      —      (4,434

Repurchase of Class A common stock

   —      (214,021  —      —      (214,021

Excess tax benefits from exercised stock options

   —      5,470    —      —      5,470  

Proceeds from stock options exercised

   —      18,032    —      —      18,032  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash provided by/(used in) financing activities

   5,081    (450,296  31,801    395,336    (18,078
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Effect of exchange rate changes

   —      (39  612    —      573  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Increase/(decrease) in cash and cash equivalents

   5,081    (13,172  5,087    —      (3,004

Cash and cash equivalents, beginning of period

   1    31,576    23,397    —      54,974  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash and cash equivalents, end of period

  $5,082   $18,404   $28,484    —     $51,970  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Supplemental disclosures:

      

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

  $214,021   $214,021   $—     $—     $—    
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

  $18,032   $18,032   $—     $—     $—    
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

16. Subsequent Event:

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. This acquisition further advances the Company’s position within the Decision Analytics segment as a provider of data, analytics, and decision–support solutions in the insurance industry. The cash paid will be adjusted subsequent to close to reflect final balances of certain working capital accounts and other closing adjustments. Due to the limited time since the acquisition date and limitations on access to ALP information prior to the acquisition date, the initial accounting for the business combination is incomplete at this time. As a result, the Company is unable to provide amounts recognized as of the acquisition date for major classes of assets and liabilities acquired and resulting from the transaction, including the information required for contingencies, intangible assets and goodwill. This information will be included in the quarterly report on Form 10-Q for the nine months ending September 30, 2010

                     
  Verisk  Guarantor  Non-Guarantor  Eliminating    
  Analytics, Inc.  Subsidiaries  Subsidiaries  Entries  Consolidated 
  (In thousands) 
                     
Net cash provided by/(used in) operating activities $  $247,517  $(5,710) $  $241,807 
                     
Cash flows from investing activities:                    
Acquisitions, net of cash acquired of $1,556     (6,386)        (6,386)
Proceeds from release of acquisition related escrows     274   9      283 
Escrow funding associated with acquisitions     (1,500)        (1,500)
Advances provided to other subsidiaries     (28,716)  (5,142)  33,858    
Purchases of available-for-sale securities     (324)        (324)
Proceeds from sales and maturities of available-for-sale securities     645         645 
Purchases of fixed assets     (18,356)  (3,850)     (22,206)
                
Net cash used in investing activities     (54,363)  (8,983)  33,858   (29,488)
                     
Cash flows from financing activities:                    
Repayments of short-term debt, net     (65,199)  (31)     (65,230)
Repurchase of Verisk Class A common stock     (129,762)        (129,762)
Net share settlement of taxes upon exercise of stock options     (15,051)        (15,051)
Advance received from other subsidiaries     16,489   17,369   (33,858)   
Payment of debt issuance costs     (1,781)        (1,781)
Excess tax benefits from exercised stock options     15,083         15,083 
Proceeds from stock options exercised     20,161         20,161 
                
Net cash (used in)/provided by financing activities     (160,060)  17,338   (33,858)  (176,580)
                     
Effect of exchange rate changes     1   (12)     (11)
                
                     
Increase in cash and cash equivalents     33,095   2,633      35,728 
                     
Cash and cash equivalents, beginning of period  1   51,005   20,521      71,527 
                
Cash and cash equivalents, end of period $1  $84,100  $23,154  $  $107,255 
                
                     
Supplemental disclosure:                    
Increase in intercompany balances from the purchase of treasury stock by Verisk funded directly by ISO $129,762  $129,762  $  $  $ 
                
                     
Increase in intercompany balances from proceeds received by ISO related to issuance of Verisk common stock from options exercised $20,161  $20,161  $  $  $ 
                

2012.

32


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 withinin our annual report onForm 10-K dated and filed with the Securities and Exchange Commission on February 28, 2011.2012. 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 and healthcare industries and sophisticated methods to predict and quantify loss in diverse contexts ranging from natural catastrophes to supply chain to health insurance to supply chain.

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’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 43%40% and 48%44% of our revenues for the ninesix months ended SeptemberJune 30, 20112012 and 2010,2011, respectively. Our Decision Analytics segment provides solutions our customers use to analyze the processes of the Verisk Risk AnalysisAnalytics Framework: Loss Prediction, Fraud Identificationloss prediction, fraud identification and Detection,detection, and Loss Quantification.loss quantification. Our Decision Analytics segment revenues represented approximately 57%60% and 52%56% of our revenues for the ninesix months ended SeptemberJune 30, 2012 and 2011, and 2010, respectively.

Executive Summary

Key Performance Metrics

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

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

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

Revenues

We earn revenues through subscriptions long-term agreements and on a transactional basis. Subscriptions for our solutions are generally paid in advance of rendering services either quarterly or in full upon commencement of the subscription period, which is usually for one year and automatically renewed each year. 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. In general,For our subscriptions arrangements, we experience minimal revenue seasonality within the business. Our long-term agreements are generally for periods of three to seven years. We recognize revenue from subscriptions ratably over the term of the subscription and most long-term agreements are recognized ratably over the term of the agreement.

33


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 file,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 each of the nine-monthsix-month periods ended SeptemberJune 30, 20112012 and 2010,2011, 31% of our revenues were derived from providing transactional solutions. We earn transactional revenues as our solutions are delivered or services performed. In general, transactions are billed monthly at the end of each month.

Approximately 85%87% and 84% of the revenues in our Risk Assessment segment for the nine-monthsix-month periods ended SeptemberJune 30, 20112012 and 2010,2011, 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 57% and 56% of the revenues in our Decision Analytics segment, for each of the nine monthssix-month periods ended SeptemberJune 30, 20112012 and 2010, respectively,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 65% and 66% of our total expenses for each of the nine-month periodssix months ended SeptemberJune 30, 2012 and 2011, and 2010, respectively. Our annual salary increases are effective on April 1st of each year. As a result, our personnel expenses increase beginning in the second quarter of each year.

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

While we expect to grow our headcount over time to take advantage of our market opportunities, we believe that the economies of scale in our operating model will allow us to grow our personnel expenses at a lower rate than revenues. Historically, our EBITDA margin excluding the impact of new acquisitions, has improved because we have been able to increase revenues without a proportionate corresponding increase in expenses.

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

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

Description of Acquisitions

Since

We acquired four businesses since January 1, 2010, we acquired five businesses.2011. As a result of these acquisitions, our consolidated results of operations may not be comparable between periods. See Note 6 to5 in our condensed consolidated financial statements included in this quarterly report on Form 10-Q.

10-Q for further information.

34

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 in the insurance industry. Due to the timing of this acquisition, there was no impact on our income statement for ALP for the three and six months ended June 30, 2012.


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.

2011 Acquisitions
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.

2010 Acquisitions
On December 16, 2010, we acquired 100% oftools in the common stock of 3E Company, or 3E, a global source for a comprehensive suite of environmental health and safety compliance solutions. Within our Decision Analytics segment, 3E overlaps the customer sets served by our other supply chain risk management solutions and helps our customers across a variety ofhealthcare vertical markets address their environmental health and safety issues.
On December 14, 2010, we acquired 100% of the common stock of Crowe Paradis Services Corporation, or CP, a leading provider of claims analysis and compliance solutions for the P&C insurance industry. Within our Decision Analytics segment, CP offers solutions for complying with the Medicare Secondary Payer (MSP) Act, and provides services to many of the largest worker’s compensation insurers, third-party administrators (TPAs), and self-insured companies, which enhances solutions we currently offer.
On February 26, 2010, we acquired 100% of the common stock of Strategic Analytics, Inc., or SA, a privately-owned provider of credit risk and capital management solutions to consumer and mortgage lenders. Within our Decision Analytics segment, we believe that SA’s solutions and application set allows our customers to take advantage of state-of-the-art loss forecasting, stress testing, and economic capital requirement tools to better understand and forecast the risk associated within their credit portfolios.
market.

Equity Compensation Costs

We have a leveraged employee stock ownership plan, or ESOP, funded with intercompany debt that includes 401(k), ESOP and profit sharing components to provide employees with equity participation. We make quarterly cash contributions to the plan equal to the debt service requirements or as needed to fund employee benefits.requirements. As the debt is repaid, a percentage of the ESOP loan collateral isshares are released to the ESOP to fund 401(k) matching and profit sharing contributions and the remainder if any, 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-month periodssix months ended SeptemberJune 30, 20112012 and 2010.2011. 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 amountsamount of our ESOPequity compensation costs recognized for the three and ninesix months ended SeptemberJune 30, 2012 and 2011 and 2010 areis as follows:

                 
  Three Months Ended September 30,  Nine Months Ended September 30, 
  2011  2010  2011  2010 
  (In thousands)  (In thousands) 
ESOP costs by contribution type:
                
401(k) matching contribution expense $2,762  $2,537  $8,188  $7,385 
Profit sharing contribution expense  460   385   1,442   1,266 
             
Total ESOP costs $3,222  $2,922  $9,630  $8,651 
             
                 
ESOP costs by segment:
                
Risk Assessment ESOP costs $1,772  $1,710  $5,360  $5,125 
Decision Analytics ESOP costs  1,450   1,212   4,270   3,526 
             
Total ESOP costs $3,222  $2,922  $9,630  $8,651 
             

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2012   2011   2012   2011 
   

(In thousands)

 

ESOP costs by contribution type:

    

401(k) matching contribution expense

  $3,255    $2,771    $6,186    $5,426  

Profit sharing contribution expense

   —       526     —       982  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total ESOP costs

  $3,255    $3,297    $6,186    $6,408  
  

 

 

   

 

 

   

 

 

   

 

 

 

ESOP costs by segment:

        

Risk Assessment ESOP costs

  $1,370    $1,840    $2,725    $3,588  

Decision Analytics ESOP costs

   1,885     1,457     3,461     2,820  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total ESOP costs

  $3,255    $3,297    $6,186    $6,408  
  

 

 

   

 

 

   

 

 

   

 

 

 

35


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.
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.

36We 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 three months ended June 30, 2012 and 2011, we recognized $4.4 million and $4.2 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.


On May 16, 2012, our stockholder’s approved the implementation of an employee stock purchase plan, or ESPP. The ESPP will commence on October 1, 2012 and offer 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      Nine Months Ended    
  September 30,  Percentage  September 30,  Percentage 
  2011  2010  Change  2011  2010  Change 
  (In thousands, except for share and per share data)     
Statement of income data:
                        
Revenues:                        
Risk Assessment revenues $139,977  $136,269   2.7% $421,050  $405,136   3.9%
Decision Analytics revenues  200,121   151,085   32.5%  559,197   440,049   27.1%
                     
Revenues  340,098   287,354   18.4%  980,247   845,185   16.0%
                     
                         
Expenses:                        
Cost of revenues (exclusive of items shown separately below)  137,619   117,005   17.6%  393,360   346,998   13.4%
Selling, general and administrative  51,475   40,982   25.6%  156,640   121,134   29.3%
Depreciation and amortization of fixed assets  10,798   10,035   7.6%  32,958   29,908   10.2%
Amortization of intangible assets  8,797   6,158   42.9%  26,129   20,482   27.6%
Acquisition related liabilities adjustment     (544)  (100.0)%  (3,364)  (544)  518.4%
                     
Total expenses  208,689   173,636   20.2%  605,723   517,978   16.9%
                     
                         
Operating income  131,409   113,718   15.6%  374,524   327,207   14.5%
                         
Other income/(expense):                        
Investment income  99   59   67.8%  99   183   (45.9)%
Realized (loss)/gain on securities, net  (86)  9   (1055.6)%  401   70   472.9%
Interest expense  (14,593)  (8,484)  72.0%  (39,093)  (25,395)  53.9%
                     
Total other expense, net  (14,580)  (8,416)  73.2%  (38,593)  (25,142)  53.5%
                     
                         
Income before income taxes  116,829   105,302   10.9%  335,931   302,065   11.2%
Provision for income taxes  (45,842)  (42,422)  8.1%  (133,491)  (125,406)  6.4%
                     
Net income $70,987  $62,880   12.9% $202,440  $176,659   14.6%
                     
                         
Basic net income per share
 $0.43  $0.35   22.9% $1.21  $0.98   23.5%
                     
                         
Diluted net income per share
 $0.41  $0.34   20.6% $1.16  $0.94   23.4%
                     
                         
Weighted average shares outstanding:                        
Basic  164,195,325   178,687,236   (8.1)%  166,728,786   179,744,297   (7.2)%
                     
Diluted  171,169,658   187,188,667   (8.6)%  174,255,965   188,728,438   (7.7)%
                     
                         
The financial operating data below sets forth the information we believe is useful for investors in evaluating our overall financial performance:
                         
Other data:            
EBITDA (1):                        
Risk Assessment EBITDA $70,703  $66,402   6.5% $212,994  $198,096   7.5%
Decision Analytics EBITDA  80,301   63,509   26.4%  220,617   179,501   22.9%
                     
EBITDA $151,004  $129,911   16.2% $433,611  $377,597   14.8%
                     
                         
The following is a reconciliation of net income to EBITDA:
                        
Net income $70,987  $62,880   12.9% $202,440  $176,659   14.6%
Depreciation and amortization  19,595   16,193   21.0%  59,087   50,390   17.3%
Investment income and realized gain on securities, net  (13)  (68)  (80.9)%  (500)  (253)  97.6%
Interest expense  14,593   8,484   72.0%  39,093   25,395   53.9%
Provision for income taxes  45,842   42,422   8.1%  133,491   125,406   6.4%
                     
EBITDA $151,004  $129,911   16.2% $433,611  $377,597   14.8%
                     

   Three Months Ended June 30,  Percent  Six Months Ended June 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

  $144,189   $140,530    2.6 $289,158   $281,073    2.9

Decision Analytics revenues

   229,037    186,750    22.6  430,569    359,076    19.9
  

 

 

  

 

 

   

 

 

  

 

 

  

Revenues

   373,226    327,280    14.0  719,727    640,149    12.4
  

 

 

  

 

 

   

 

 

  

 

 

  

Expenses:

       

Cost of revenues (exclusive of items shown separately below)

   147,074    131,185    12.1  280,404    255,741    9.6

Selling, general and administrative

   62,473    55,909    11.7  116,452    105,165    10.7

Depreciation and amortization of fixed assets

   13,090    10,855    20.6  24,734    22,160    11.6

Amortization of intangible assets

   12,187    8,877    37.3  20,774    17,332    19.9

Acquisition related liabilities adjustment

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

 

 

  

 

 

   

 

 

  

 

 

  

Total expenses

   234,824    203,462    15.4  442,364    397,034    11.4
  

 

 

  

 

 

   

 

 

  

 

 

  

Operating income

   138,402    123,818    11.8  277,363    243,115    14.1

Other income/(expense):

       

Investment income/(loss)

   156    (10  (1660.0)%   261    —      100.0

Realized (loss)/gain on securities, net

   (30  125    (124.0)%   300    487    (38.4)% 

Interest expense

   (17,377  (14,885  16.7  (33,762  (24,500  37.8
  

 

 

  

 

 

   

 

 

  

 

 

  

Total other expense, net

   (17,251  (14,770  16.8  (33,201  (24,013  38.3
  

 

 

  

 

 

   

 

 

  

 

 

  

Income before income taxes

   121,151    109,048    11.1  244,162    219,102    11.4

Provision for income taxes

   (47,820  (43,471  10.0  (96,230  (87,649  9.8
  

 

 

  

 

 

   

 

 

  

 

 

  

Net income

  $73,331   $65,577    11.8 $147,932   $131,453    12.5
  

 

 

  

 

 

   

 

 

  

 

 

  

Basic net income per share

  $0.44   $0.39    12.8 $0.89   $0.78    14.1
  

 

 

  

 

 

   

 

 

  

 

 

  

Diluted net income per share

  $0.43   $0.38    13.2 $0.86   $0.75    14.7
  

 

 

  

 

 

   

 

 

  

 

 

  

Weighted average shares outstanding:

       

Basic

   165,946,009    166,960,806    (0.6)%   165,391,500    167,995,517    (1.6)% 
  

 

 

  

 

 

   

 

 

  

 

 

  

Diluted

   171,901,349    174,634,046    (1.6)%   171,626,084    175,799,120    (2.4)% 
  

 

 

  

 

 

   

 

 

  

 

 

  

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

financial performance:

  

  

Other data:

       

EBITDA (1):

       

Risk Assessment EBITDA

  $76,099   $68,247    11.5 $156,469   $142,778    9.6

Decision Analytics EBITDA

   87,706    75,418    16.3  166,963    140,316    19.0
  

 

 

  

 

 

   

 

 

  

 

 

  

EBITDA

  $163,805   $143,665    14.0 $323,432   $283,094    14.2
  

 

 

  

 

 

   

 

 

  

 

 

  

The following is a reconciliation of net income to EBITDA:

       

Net income

  $73,331   $65,577    11.8 $147,932   $131,453    12.5

Depreciation and amortization

   25,277    19,732    28.1  45,508    39,492    15.2

Interest expense

   17,377    14,885    16.7  33,762    24,500    37.8

Provision for income taxes

   47,820    43,471    10.0  96,230    87,649    9.8
  

 

 

  

 

 

   

 

 

  

 

 

  

EBITDA

  $163,805   $143,665    14.0 $323,432   $283,094    14.2
  

 

 

  

 

 

   

 

 

  

 

 

  

(1)EBITDA is the financial measure which management uses to evaluate the performance of our segments. “EBITDA” is defined as net income before investment income and realized gain on securities, net, interest expense, provision for income taxes, and depreciation and amortization of fixed and intangible assets. Beginning 2011,In the second quarter of 2012, we changed our definition of EBITDA includes acquisition related liabilities adjustmentsuch 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.

37


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 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 non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future and EBITDA does not reflect any cash requirements for such replacements; and
Other companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure.

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

NineSix Months Ended SeptemberJune 30, 20112012 Compared to NineSix Months Ended SeptemberJune 30, 20102011

Revenues

Revenues were $980.2$719.7 million for the ninesix months ended SeptemberJune 30, 20112012 compared to $845.2$640.1 million for the ninesix months ended SeptemberJune 30, 2010,2011, an increase of $135.0$79.6 million or 16.0%12.4%. In 20112012 and 2010,2011, we acquired three companies Bloodhound, HRP, Bloodhound, 3E, CP, and SA,MediConnect, 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. Recent acquisitions allwere within theour Decision Analytics segment contributedin the healthcare category and provided an increase of $70.6$34.8 million in revenues for the ninesix months ended SeptemberJune 30, 2011.2012. Excluding recent acquisitions, revenues increased $64.4$44.8 million or 7.0%, which included an increase in our Decision Analytics segment of $36.7 million and an increase in our Risk Assessment segment of $15.9$8.1 million. Refer to the Results of Operations by Segment within this section for further information regarding our revenues.

Cost of Revenues

Cost of revenues was $280.4 million andfor the six months ended June 30, 2012 compared to $255.7 million for the six months ended June 30, 2011, an increase inof $24.7 million or 9.6%. Recent acquisitions, all within our Decision Analytics segment, of $48.5 million.

Cost of Revenues
Cost of revenues was $393.4 millionaccounted for the nine months ended September 30, 2011 compared to $347.0 million for the nine months ended September 30, 2010, an increase of $46.4$17.6 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 $7.1 million or 13.4%2.8%. The increase was primarily due to increases in salaries and employee benefit costs of $4.9 million. Other increases include rent and maintenance office expenses of $1.1 million, information technology expenses of $1.1 million, travel and travel related to recent acquisitionscosts of $29.8$0.2 million and another operating expenses of $0.6 million. These increases in costs were partially offset by a $0.8 million decrease in data related costs.

The increase in salaries and employee benefits of $4.9 million includes an increase of $9.7 million in annual salaries and employee benefits, medical costs, and long term equity compensation plan costs, and was partially offset by a decrease of $13.9$4.8 million in pension cost. The pension cost decreased primarily due to our pension plan freeze, 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 $116.5 million for the six months ended June 30, 2012 compared to $105.2 million for the six months ended June 30, 2011, an increase of $11.3 million or 10.7%. Recent acquisitions, all within our Decision Analytics segment, accounted for an increase of $5.7 million, which include annual salary increases, medicalwas primarily related to salaries and employee benefits. Excluding costs pension costs, and equity compensation.associated with our recent acquisitions, SGA increased $5.6 million or 5.3%. The increase was primarily due to a net increase in salaries and employee benefits includes an offsetting reduction in pension cost of $2.1 million. Other increases include leased software expenses$6.4 million, travel and travel related costs of $2.7 million, rent and maintenance expense of $0.1$0.2 million and other operating costsexpenses of $2.3$0.9 million. These increases in costs were partially offset by a decreasedecreases in data costsprofessional fees of $2.4$1.9 million primarily within our Decision Analytics segment.

Selling, Generalwhich includes legal and Administrative Expenses
Selling, general and administrative expenses were $156.6 million for the nine months ended September 30, 2011 compared to $121.1 million for the nine months ended September 30, 2010, an increase of $35.5 million or 29.3%. marketing costs.

The increase was primarily due to costs attributable to recent acquisitions of $25.2 million and an increase in salaries and employee benefits costs of $8.4$6.4 million which includeincludes an increase of $7.7 million in annual salary increases,salaries and employee benefits, medical costs, and equity compensation. Ourlong term equity compensation expense, included within salaries, increasedplan costs, and was partially offset by $1.8a decrease of $1.3 million over the prior year periodin pension cost, primarily due to the accelerated expense recognition, which is required when awards granted to employees are no longer contingent on the employee providing additional service based on our retirement qualifications. Other increases were costs attributable to legal and accounting costs of $0.3 million, and other general expenses of $1.6 million.

pension plan freeze.

38


Depreciation and Amortization of Fixed Assets

Depreciation and amortization of fixed assets was $33.0$24.7 million for the ninesix months ended SeptemberJune 30, 20112012 compared to $29.9$22.2 million for the ninesix months ended SeptemberJune 30, 2010,2011, an increase of $3.1$2.5 million or 10.2%11.6%. 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.

growth as well as depreciation and amortization associated with recent acquisitions.

Amortization of Intangible Assets

Amortization of intangible assets was $26.1$20.8 million for the ninesix months ended SeptemberJune 30, 20112012 compared to $20.5$17.3 million for the ninesix months ended SeptemberJune 30, 2010,2011, an increase of $5.6$3.5 million or 27.6%19.9%. The increase was primarily related to amortization of intangible assets associated with recent acquisitions of $10.3 million. This increase was$6.1 million, partially offset by a decrease of $4.7$2.6 million of amortization of intangible assets primarily associated with prior acquisitions that have been fully amortized.

Acquisition Related Liabilities Adjustment

Acquisition

There was no acquisition related liabilities adjustment wasfor the six months ended June 30, 2012 and a benefit of $3.4 million for the ninesix months ended SeptemberJune 30, 2011 compared to the $0.5 million for the nine months ended September 30, 2010.2011. This benefit was a result of a reduction of $3.4 million to contingent consideration due to the reduced probability of the D2 Hawkeye, Inc.D2Hawkeye and SAStrategic Analytics acquisitions achieving the EBITDA and revenue earn-out targets for exceptional performance in fiscal year 2011 established at the time of acquisition.

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

Investment incomeincome/(loss) and realized (loss)/gain on securities, net, was a gain of $0.6 million for the six months ended June 30, 2012 and $0.5 million for the ninesix months ended SeptemberJune 30, 2011 compared to a gain of $0.32011.

Interest Expense

Interest expense was $33.8 million for the ninesix months ended SeptemberJune 30, 2010,2012 compared to $24.5 million for the six months ended June 30, 2011, an increase of $0.2 million.

Interest Expense
Interest expense was $39.1 million for the nine months ended September 30, 2011 compared to $25.4 million for the nine months ended September 30, 2010, an increase of $13.7$9.3 million or 53.9%37.8%. This increase is primarily due to an increase in our long-term debt outstanding, which includes the issuance of our 5.800% and 4.875% senior notes in the aggregate principal amount of $450.0 million which accrues at an interest rate of 5.8%. These notes are due May 1, 2021.
and $250.0 million, respectively.

Provision for Income Taxes

The provision for income taxes was $133.5$96.2 million for the nine monthssix month ended SeptemberJune 30, 20112012 compared to $125.4$87.6 million for the ninesix months ended SeptemberJune 30, 2010,2011, an increase of $8.1$8.6 million or 6.4%9.8%. The effective tax rate was 39.7%39.4% for the ninesix months ended SeptemberJune 30, 20112012 compared to 41.5%40.0% for the ninesix months ended SeptemberJune 30, 2010.2011. The effective rate for the ninesix months ended SeptemberJune 30, 20112012 was lower primarily due to a change in deferred tax assets of $2.4 million resulting from reduced tax benefits of Medicare subsidies associated with legislative changes inthan the period ended March 31, 2010. Excluding this charge, the effective rate for the prior period would have been 40.7%. The SeptemberJune 30, 2011 effective tax rate is also lower than the September 30, 2010 effective tax rateprimarily due to favorable audit settlements, the continued execution of tax planning strategies and the benefits associated with enacted research and development legislation.

strategies.

EBITDA Margin

The EBITDA margin for our consolidated results was 44.9% for the six months ended June 30, 2012 compared to 44.2% for the ninesix months ended SeptemberJune 30, 2011 compared to 44.7% for2011. For the ninesix months ended SeptemberJune 30, 2010. For the nine months ended September 30, 2011,2012, the recent acquisitions mitigated our margin expansion by 1.8%, and was partially offset by0.7%. The increase in margin is primarily attributed to operating leverage as well as cost efficiencies achieved in 2012. For the six months ended June 30, 2011, the acquisition related liabilities adjustment which positively impacted our EBITDA margin by 0.3%0.5%.

39


Three Months Ended SeptemberJune 30, 20112012 Compared to Three Months Ended SeptemberJune 30, 20102011

Revenues

Revenues were $340.1$373.2 million for the three months ended SeptemberJune 30, 20112012 compared to $287.4$327.3 million for the three months ended SeptemberJune 30, 2010,2011, an increase of $52.7$45.9 million or 18.4%14.0%. Recent acquisitions accounted for an increase of $31.1$25.1 million in revenues for the three months ended SeptemberJune 30, 2011.2012, all of which were in Decision Analytics in the healthcare category. Excluding recent acquisitions, revenues increased $21.6$20.8 million or 6.4%, which included an increase in our Decision Analytics segment of $17.1 million and an increase in our Risk Assessment segment of $3.7 million and an increase in our Decision Analytics segment of $17.9 million.

Cost of Revenues

Cost of revenues was $137.6$147.1 million for the three months ended SeptemberJune 30, 20112012 compared to $117.0$131.2 million for the three months ended SeptemberJune 30, 2010,2011, an increase of $20.6$15.9 million or 17.6%12.1%. The increase was primarily due to costs related to recent acquisitions of $14.6$12.8 million, and a net increase in salaries and employee benefits costs of $4.1$1.6 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 $0.7$2.8 million. Other increases include leased software costs of $1.3 million, rent and maintenance expensefees of $1.0 million, information technology expenses of $0.5 million and other operating expenses of $0.5$0.7 million. These increases were partially offset by a decrease in data costs of $0.9 million primarily within our Decision Analytics segment.

$0.7 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $51.5$62.5 million for the three months ended SeptemberJune 30, 20112012 compared to $41.0$55.9 million for the three months ended SeptemberJune 30, 2010,2011, an increase of $10.5$6.6 million or 25.6%11.7%. The increase was primarily due to costs attributable to recent acquisitions of $7.7$3.5 million, an increase in salaries and employee benefits costs of $2.4$3.3 million, which include annual salary increases, medical costs, commissions, and equity compensation expense, and an increase in other general expenses of $0.6 million. These increases were offset by a decrease of $0.2 million in legal and audit fees.

Provision for Income Taxes
The provision for income taxes was $45.8 million for the three months ended September 30, 2011 compared to $42.4 million for the three months ended September 30, 2010, an increase of $3.4 million or 8.1%. The effective tax rate was 39.2% for the three months ended September 30, 2011 compared to 40.3% for the three months ended September 30, 2010. The effective tax rate for the three months ended September 30, 2011 was lower than the effective tax rate for the three months ended September 30, 2010 due to favorable audit settlements, the continued execution of tax planning strategies and the benefits associated with enacted research and development legislation.
EBITDA Margin
The EBITDA margin for our consolidated results was 44.4% for the three months ended September 30, 2011 compared to 45.2% for the three months ended September 30, 2010. For the three months ended September 30, 2011, the recent acquisitions mitigated our margin by 1.6%.
Results of Operations by Segment
Risk Assessment Results of Operations
Revenues
Revenues were $421.0 million for the nine months ended September 30, 2011 as compared to $405.1 million for the nine months ended September 30, 2010, an increase of $15.9 million or 3.9%. Revenues were $140.0 million for the three months ended September 30, 2011 as compared to $136.3 million for the three months ended September 30, 2010, an increase of $3.7 million or 2.7%. The overall increase for both periods within this segment primarily resulted from annual price increases derived from continued enhancements to the content of our solutions and increased penetration with our existing customers.

40


Our revenue by category for the periods presented is set forth below:
                         
  Three Months Ended September 30,  Percentage  Nine Months Ended September 30,  Percentage 
  2011  2010  Change  2011  2010  Change 
  (In thousands)      (In thousands)     
Industry-standard insurance programs $92,894  $88,644   4.8% $278,140  $264,115   5.3%
Property-specific rating and underwriting information  33,107   34,507   (4.1)%  102,621   102,733   (0.1)%
Statistical agency and data services  7,888   7,510   5.0%  23,263   21,879   6.3%
Actuarial services  6,088   5,608   8.6%  17,026   16,409   3.8%
                     
Total Risk Assessment
 $139,977  $136,269   2.7% $421,050  $405,136   3.9%
                     
Cost of Revenues
Cost of revenues for our Risk Assessment segment was $145.5 million for the nine months ended September 30, 2011 compared to $148.1 million for the nine months ended September 30, 2010, a decrease of $2.6 million or 1.7%. The decrease was primarily due to a decrease in salaries and employee benefits costs of $1.2 million, primarily related to lower pension cost of $1.8 million. Salaries and employee benefit costs, excluding pension cost, increased only moderately due to a reallocation of information technology resources to our Decision Analytics segment. Other decreases consisted of rent and maintenance of $0.8 million and other expense of $0.6 million.
Cost of revenues for our Risk Assessment segment was $49.2 million for the three months ended September 30, 2011 compared to $49.5 million for the three months ended September 30, 2010, a decrease of $0.3 million or 0.6%. The decrease was primarily due to a decrease in data costs of $0.3 million and other expenses of $0.7 million. These decreases were partially offset by a net increase in salaries and employee benefits costs of $0.3 million and rent and maintenance costs of $0.4 million.expense. Included within the net increase in salaries and employee benefits is an offsetting reduction in pension cost of $0.6$0.7 million.
Selling, General Travel and Administrative Expenses
Selling, general and administrative expenses for our Risk Assessment segment were $62.5 million for the nine months ended September 30, 2011 compared to $59.0 million for the nine months ended September 30, 2010, an increase of $3.5 million or 6.1%. The increase was primarily due to an increase in salaries and employee benefittravel related costs of $2.8 million, which include annual salary increases, medical costs, and commissions. Our equity compensation expense, included within salaries,also increased by $1.8 million over the prior year period primarily due to the accelerated expense recognition for our 2011 equity awards. Other$0.6 million. These increases includedwere partially offset by a decrease in professional fees that include legal and accountingmarketing costs of $0.5 million and other general expenses of $0.2$0.3 million.
Selling, general and administrative expenses

Provision for our Risk Assessment segment were $20.1Income Taxes

The provision for income taxes was $47.8 million for the three months ended SeptemberJune 30, 20112012 compared to $20.4$43.5 million for the three months ended SeptemberJune 30, 2010, a decrease2011, an increase of $0.3$4.3 million or 1.4%10.0%. The decreaseeffective tax rate was 39.5% for the three months ended June 30, 2012 compared to 39.9% for the three months ended June 30, 2011. The effective tax rate for the three months ended June 30, 2012 was lower than the effective tax rate for the three months ended June 30, 2011 primarily due to a decrease in legal and audit feesthe continued execution of $0.2 million, and other general expenses of $0.3 million. These decreases were offset by an increase in salaries and employee benefit costs of $0.2 million, which included annual salary increases, medical costs and commissions.

tax planning strategies.

EBITDA Margin

The EBITDA margin for our Risk Assessment segmentconsolidated results was 50.6%43.9% for the ninethree months ended SeptemberJune 30, 2012 and 2011. For the three months ended June 30, 2012, recent acquisitions mitigated our margin expansion by 1.0%. For the three months ended June 30, 2011, compared to 48.9% for the nine months ended September 30, 2010. The increase inacquisition related liabilities adjustment positively impacted our EBITDA margin is primarily attributed to operating leverage in the segment as well as cost efficiencies and a reallocation of information technology and corporate resources to our Decision Analytics segment.

Decision Analytics by 1.0%.

Results of Operations

by Segment

Decision Analytics

Revenues

Revenues for our Decision Analytics segment were $559.2$430.6 million for the ninesix months ended SeptemberJune 30, 20112012 compared to $440.1$359.1 million for the ninesix months ended SeptemberJune 30, 2010,2011, an increase of $119.1$71.5 million or 27.1%19.9%. Recent acquisitions, which are all within the healthcare category, accounted for an increase of $34.8 million in revenues for the six months ended June 30, 2012. Excluding recent acquisitions, our Decision Analytics revenue increased $36.7 million or 10.3%. Our insurance revenue increased $20.9 million 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. Excluding the recent acquisitions, our healthcare revenue increased $11.1 million primarily due to an increase in our fraud services as customer contracts were implemented and new sales of risk solutions. Our specialized markets revenue increased $3.5 million as a result of continued penetration of existing customers within our supply chain services and weather and climate risk solutions. Our mortgage and financial services revenue increased $1.2 million, primarily due to the inclusion of property appraisal tools facing the mortgage market revenue of $6.1 million, which was previously reported as part of property-specific rating and underwriting information category within our Risk Assessment segment in 2011. Excluding the property appraisal revenue, our mortgage and financial services revenue decreased $4.9 million from lower volumes within forensic solutions due to the continued challenges in the mortgage market, partially offset by growth in our underwriting solutions.

Revenues for our Decision Analytics segment were $229.0 million for the three months ended June 30, 2012 compared to $186.8 million for the three months ended June 30, 2011, an increase of $42.2 million or 22.6%. Recent acquisitions accounted for an increase of $70.6$25.1 million in revenues for the ninethree months ended SeptemberJune 30, 2011.2012. Excluding the impact of recent acquisitions, revenue increased $48.5 million for the nine months ended September 30, 2011. Our loss quantification solution revenues increased $26.2 million, or 30.5%, as a result of new customer contracts and claims volume increases associated with severe weather conditions and other damages experienced in the United States. Our loss prediction solutions revenue, excluding recent acquisitions, increased $13.0 million, or 11.4%, primarily from increased penetration of our existing customers and new projects.

41


Our fraud identification and detection solutions revenue, excluding recent acquisitions, increased $9.3 million, or 3.9%, due to an increase in revenues of insurance and healthcare fraud services, partially offset by a decrease in mortgage solutions.
Revenues for our Decision Analytics segment were $200.1$17.1 million for the three months ended SeptemberJune 30, 2011 compared2012. Our insurance revenue increased $9.9 million primarily due to $151.1 million for the three months ended September 30, 2010, an increase of $49.0 million or 32.5%. Recent acquisitions accounted for an increase of $31.1 million in revenues for the three months ended September 30, 2011. Excluding the impact of recent acquisitions, revenue increased $17.9 million for the three months ended September 30, 2011. Increased revenue inwithin our loss quantification solution of $9.3 million, or 29.8%, is primarilysolutions as a result of new customer contractscustomers and claims volume increases associated with severe weather conditions and other damages experiencedan increase in our catastrophe modeling services for existing customers, as well an increase in insurance fraud solutions revenue. Excluding the United States. Our fraud identification and detection solutionsrecent acquisitions, our healthcare revenue increased $3.2$5.9 million or 4.0%, primarily due to an increase in revenuesour fraud services as customer contracts were implemented and new sales of insurance and healthcare fraud services.risk solutions. Our loss prediction solutions’specialized markets revenue increased $1.7 million as a result of $5.4 million, or 14.2%, was primarily from increasedcontinued penetration of our existing customers within our supply chain services and new projects.
weather and climate risk solutions. Excluding the property appraisal revenue, our mortgage and financial services revenue decreased $3.5 million from lower volumes within our forensic solutions due to the continued challenges in the mortgage market.

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

                         
  Three Months Ended September 30,  Percentage  Nine Months Ended September 30,  Percentage 
  2011  2010  Change  2011  2010  Change 
  (In thousands)      (In thousands)     
Fraud identification and detection solutions $94,663  $81,584   16.0% $274,317  $239,574   14.5%
Loss prediction solutions  64,680   38,079   69.9%  173,026   114,786   50.7%
Loss quantification solutions  40,778   31,422   29.8%  111,854   85,689   30.5%
                     
Total Decision Analytics
 $200,121  $151,085   32.5% $559,197  $440,049   27.1%
                     

   For Three Months Ended June 30,   Percentage  For Six Months Ended June 30,   Percentage 
   2012   2011   Change  2012   2011   Change 
   

(In thousands)

 

Insurance

  $122,210    $112,334     8.8 $238,546    $217,634     9.6

Mortgage and financial services

   35,299     35,643     (1.0)%   69,574     68,339     1.8

Healthcare

   50,381     19,322     160.7  80,829     34,939     131.3

Specialized markets

   21,147     19,451     8.7  41,620     38,164     9.1
  

 

 

   

 

 

    

 

 

   

 

 

   

Total Decision Analytics

  $229,037    $186,750     22.6 $430,569    $359,076     19.9
  

 

 

   

 

 

    

 

 

   

 

 

   

Cost of Revenues

Cost of revenues for our Decision Analytics segment was $247.9$189.7 million for the ninesix months ended SeptemberJune 30, 20112012 compared to $198.9$159.4 million for the ninesix months ended SeptemberJune 30, 2010,2011, an increase of $49.0$30.3 million or 24.6%19.0%. The increase included $29.8 million in costs attributable to recent acquisitions. Excluding the impact of theserecent acquisitions theof $17.6 million, our cost of revenues increased $19.2by $12.7 million or 8.0%. This increase is primarily due to a net increase in salary and employee benefits of $9.4 million. Other increases include information technology expenses of $1.4 million, rent and maintenance office expenses of $0.7 million, travel and travel related costs of $0.7 million and other operating expenses of $0.6 million. These increases in costs were partially offset by a $0.1 million decrease in data related costs.

The increase in salaries and employee benefits of $9.4 million includes an increase of $10.2 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 $0.8 million in pension cost primarily because of our pension plan freeze.

Cost of revenues for our Decision Analytics segment was $101.8 million for the three months ended June 30, 2012 compared to $82.1 million for the three months ended June 30, 2011, an increase of $19.7 million or 23.9%. The increase was primarily due to costs related to recent acquisitions of $12.8 million, and a net increase in salaries and employee benefits costs of $15.1$5.3 million which include annual salary increases and increased medical costs, andpartially from the reallocation of information and technologycertain resources from Risk Assessment. Included within the net increase in salaries and employee benefits is an offsetting reduction in pension cost of $0.3$0.4 million. Other increases include rent and maintenance costsfees of $0.9$0.6 million, leased software costsinformation technology expenses of $2.7$0.7 million and other operating expenses of $2.9$0.7 million. These increases were partially offset by a decrease in data costs of $2.4$0.4 million.

Cost of revenues

Selling, General and Administrative Expenses

Selling, general and administrative expenses for our Decision Analytics segment was $88.4were $74.0 million for the threesix months ended SeptemberJune 30, 20112012 compared to $67.5$62.7 million for the threesix months ended SeptemberJune 30, 2010,2011, an increase of $20.9$11.3 million or 31.0%17.9%. The increase included $14.6 million in costs attributable to recent acquisitions. Excluding the impact of theserecent acquisitions the cost of revenues$5.7 million, SGA increased $6.3$5.6 million or 8.9%. The increase was primarily due to an increase in salaries and employee benefits of $3.8$6.1 million and an increase in other expenses of $0.2 million. These increases in costs were partially offset by a decrease in professional fees of $0.7 million which include annual salary increasesincludes legal and increased medicalmarketing costs.

The net increase in salaries and employee benefits of $6.1 million includes an offsetting reductionincrease of $6.4 million in pension cost of $0.1 million. Other increases include leased softwareannual salaries and employee benefits, medical costs, of $1.3 million, rentcommissions, and maintenancelong term equity compensation plan costs, of $0.6 million and other operating expenses of $1.2 million. These increases werewas partially offset by a decrease of $0.3 million in data costs of $0.6 million.

Selling, General and Administrative Expenses
pension cost, primarily due to the our pension plan freeze.

Selling, general and administrative expenses for our Decision Analytics segment were $94.1$39.6 million for the ninethree months ended SeptemberJune 30, 20112012 compared to $62.1$32.6 million for the ninethree months ended SeptemberJune 30, 2010,2011, an increase of $32.0$7.0 million or 51.4%21.5%. The increase was primarily due to costs attributable to recent acquisitions of $25.2$3.5 million, and an increase in salaries and employee benefits costs of $5.6 million, which include increases$3.7 million. Included within the net increase in annual salary, medicalsalaries and employee benefits is an offsetting reduction in pension cost of $0.2 million. Travel and travel related costs commissions, and equity compensation. Other general expenses also increased $1.4by $0.3 million. These increases were partially offset by a decrease in legal and accounting costs of $0.2 million.

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Selling, general and administrative expenses were $31.4 million for the three months ended September 30, 2011 compared to $20.6 million for the three months ended September 30, 2010, an increase of $10.8 million or 52.2%. The increase was due to costs attributable to recent acquisitions of $7.7 million, an increase in salaries and employee benefits costs of $2.2 million, which include annual salary increases, medical costs, commissions, and equity compensation; and an increase in other operating expenses of $0.9$0.5 million.

EBITDA Margin

The EBITDA margin for our Decision Analytics segment was 39.5%38.8% for the ninesix months ended SeptemberJune 30, 20112012 compared to 40.8%39.1% for the ninesix months ended SeptemberJune 30, 2010.2011. For the ninesix months ended SeptemberJune 30, 2011,2012, recent acquisitions mitigated our margin expansion by 2.5%, and a reallocation of information technology and corporate resources mitigated our margin. These mitigating factors were partially offset by0.8%. For the six months ended June 30, 2011, the acquisition related liabilities adjustment which positively impacted our EBITDA margin by 0.6%0.9%.

Risk Assessment

Revenues

Revenues for our Risk Assessment segment were $289.1 million for the six months ended June 30, 2012 as compared to $281.0 million for the six months ended June 30, 2011, an increase of $8.1 million or 2.9%. Revenues were $144.2 million for the three months ended June 30, 2012 as compared to $140.5 million for the three months ended June 30, 2011, an increase of $3.7 million or 2.6%. 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 $3.2 million and $6.1 million for three and six months ended June 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:

   For Three Months Ended June 30,   Percentage  For Six Months Ended June 30,   Percentage 
   2012   2011   Change  2012   2011   Change 
   

(In thousands)

 

Industry-standard insurance programs

  $98,010    $92,389     6.1 $197,144    $185,246     6.4

Property-specific rating and underwriting information

   32,459     35,017     (7.3)%   65,016     69,514     (6.5)% 

Statistical agency and data services

   8,130     7,633     6.5  15,854     15,375     3.1

Actuarial services

   5,590     5,491     1.8  11,144     10,938     1.9
  

 

 

   

 

 

    

 

 

   

 

 

   

Total Risk Assessment

  $144,189    $140,530     2.6 $289,158    $281,073     2.9
  

 

 

   

 

 

    

 

 

   

 

 

   

Cost of Revenues

Cost of revenues for our Risk Assessment segment was $90.7 million for the six months ended June 30, 2012 compared to $96.3 million for the six months ended June 30, 2011, a decrease of $5.6 million or 5.8%. The decrease was primarily due to a decrease in salaries and employee benefits costs of $4.5 million, primarily related to lower pension cost of $4.0 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 $0.7 million, travel and travel related costs of $0.5 million, and information technology costs of $0.3 million. These decreases were partially offset by an increase in rent and maintenance office expenses of $0.4 million.

Cost of revenues for our Risk Assessment segment was $45.3 million for the three months ended June 30, 2012 compared to $49.1 million for the three months ended June 30, 2011, a decrease of $3.8 million or 7.6%. The decrease was primarily due to a decrease in salaries and employee benefits costs of $3.7 million. Included within the decrease in salaries and employee benefits is a reduction in pension cost of $2.4 million and the reallocation of certain resources to Decision Analytics. Other decreases include information technology expenses of $0.2 and data costs of $0.3 million. These decreases were partially offset by an increase in rent and office maintenance of $0.4 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for our Risk Assessment segment were $42.5 million for the six months ended June 30, 2012 and 2011. There was a net increase in salaries and employee benefits of $0.3 million, travel and travel related costs of $0.2 million and other expenses of $0.7 million. These increases in costs were partially offset by a decrease in professional fees of $1.2 million which includes legal and marketing costs.

The increase in salaries and employee benefits of $0.3 million includes an increase of $1.3 million in annual salaries and employee benefits, medical costs, and long term equity compensation plan costs, and was partially offset by a decrease of $1.0 million in pension cost primarily due to our pension plan freeze.

Selling, general and administrative expenses for our Risk Assessment segment were $22.9 million for the three months ended June 30, 2012 compared to $23.3 million for the three months ended June 30, 2011, a decrease of $0.4 million or 1.9%. 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. Other decreases were professional fees that include legal and marketing costs of $0.5 million. These decreases were partially offset by an increase in travel and travel related costs of $0.3 and other expenses of $0.2 million.

EBITDA Margin

EBITDA margin for our Risk Assessment segment was 54.1% for the six months ended June 30, 2012 compared to 50.8% for the six months ended June 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 SeptemberJune 30, 20112012 and December 31, 2010,2011, we had cash and cash equivalents and available-for saleavailable-for-sale securities of $57.7$102.0 million and $60.6$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, and manyyear. 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, we believe we will have sufficient cash to meet our working capital and capital expenditure needs, including acquisition contingent payments, 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.

Our capital expenditures, which include non-cashnoncash purchases of fixed assets and capital lease obligations, as a percentage of revenues for the ninesix months ended SeptemberJune 30, 2012 and 2011, were 5.3% and 2010, were 4.9% and 2.9%5.4%, respectively. Expenditures related to developing and enhancing our solutions are predominately related to internal use software and are capitalized in accordance with the accounting guidanceASC 350-40, “Accounting for costsCosts of computer software developedComputer Software Developed or obtainedObtained for internal use.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 ninesix months ended SeptemberJune 30, 2012 and 2011, we repurchased $340.1$107.0 million of our Class A common stock. During the nine months ended September 30, 2010, we repurchased $135.6and $217.0 million of our Class A common stock, and $15.1 million of shares used in the settlement of taxes upon the exercise of stock options. On July 8, 2011, our board of directors authorized an additional $150.0 million of share repurchases under the Repurchase Program.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. Based onOn February 29, 2012, we instituted a hard freeze, which eliminated all future compensation and service credits, to all participants in the pension funding policy,plans. In April 2012, we contributed $19.1 million and $15.2 millioncompleted a voluntary prefunding to theour qualified pension plan of $72.0 million, which resulted in a contribution of $78.8 million for the nine months ended September 30, 2011 and 2010, respectively, and expectyear, of which $28.2 million was the minimum contribution requirement for 2012. We do not anticipate further contributions in 2012 to contribute approximately $6.7 millionbe made with respect to theour qualified pension plan in remaining periods of 2011.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 approximately $2.5$5.0 million and $2.9$8.5 million to the VEBA Plan for the three and six months ended June 30, 2012, respectively. We expect the contribution to the postretirement plan in the nine months ended September 30, 2011 and 2010 and expect to contribute approximately $1.7 million infor the remaining periods of 2011.quarters 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.

43


Financing and Financing Capacity

We had total debt, excluding capital lease and other obligations, of $1,009.0$1,246.9 million and $835.0$1,096.7 million at SeptemberJune 30, 20112012 and December 31, 2010,2011, respectively. The debt at SeptemberJune 30, 2011 primarily consisted of2012 was issued under our Syndicated Revolving Credit facility (“credit facility”), long-term private placement loan facilities and senior notes and loan facilities drawnissued in 2011 to finance our stock repurchases and acquisitions.

Our credit facility, due October 2016 of $725.0 million, is a committed facility and all of our long-term private placement loan facilities are uncommitted facilities. 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 June 30, 2012, we had $150.0 million outstanding under the credit facility. We borrowed $200.0 million from our credit facility and repaid $50.0 million of this balance during the six months ended June 30, 2012. On April 6, 2011,July 2, 2012, we completedrepaid an issuanceadditional $10.0 million related to the outstanding balance of the credit facility. As of June 30, 2012, our credit facility had $575.0 million of borrowing capacity available.

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 3.25 to 1.0. We were in compliance with all debt covenants under the credit facility as of June 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 June 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 six months ended June 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 June 30, 2012.

As of June 30, 2012, we had senior notes in thewith aggregate principal amount of $450.0 million. These senior notes are due on May 1, 2021 and accrue interest at 5.80%. We received net proceeds of $446.0 million after deducting original issue discount, underwriting discount, and commissions of $4.0$700.0 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 syndicated revolving credit facility, or any amendment, refinancing or replacement thereof. Interest will be payable semi-annually on May 1st and November 1st of each year, beginning on November 1, 2011. Interest accrued from April 6, 2011. We used a portion of the proceeds to repay amounts outstanding under our revolving credit facility. We expect to redraw from our syndicated revolving credit facility over time as needed for our corporate strategy, including for general corporate purposes and acquisitions. 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.

As of September 30, 2011, we had a $600.0 million committed revolving credit facility with a syndicate of lenders due September 2014. On March 16, 2011, The Northern Trust Company joined the syndicated revolving credit facility to increase the capacity by $25.0 million, for a $600.0 million total commitment. On March 28, 2011, we entered into amendments to our revolving credit facility and our master shelf agreements to, among other things, permit the issuance of the senior notes and guarantees noted above.
The $600.0 million syndicated revolving 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 asset sales, sale and leaseback transactions, payments between us and our subsidiaries, cross defaults, and certain transactions with affiliates. The financial covenants require that, at the end of any fiscal quarter, we have a consolidated interest coverage ratio of at least 3.0 to 1.0 and that during any period of four fiscal quarters we maintain a consolidated funded debt leverage ratio of below 3.0 to 1.0. We were in compliance with all debt covenants under the credit facility as of September 30, 2011.
On October 25, 2011, we amended and restated our revolving credit agreement to increase the total revolving credit facility from $600.0 million to $700.0 million, extended the maturity date from September 2014 to October 2016 and modified certain conditions to borrowing, covenants, and events of default. Verisk Analytics, Inc. and Insurance Services Office, Inc. are co-borrowers under the amended credit agreement. The amended credit agreement also resulted in a decrease to applicable interest rates. The interest rates for borrowing under the amended credit agreement will now be the applicable LIBOR plus 1.25% to 1.875%, depending upon the result of certain ratios defined in the amended credit agreement. All borrowings under the amended credit agreement continue to be unsecured.
We also have long-term loan facilities under uncommitted master shelf agreements with Aviva Investors North America, or Aviva, New York Life and Prudential Capital Group, or Prudential, with availabilities at September 30, 2011 in the amounts of $20.0 million, $30.0 million and $190.0 million, respectively. We can borrow under the Aviva Master Shelf Agreement until December 10, 2011, 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 facilities mature over the next five 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 6.13% for the nine months ended September 30, 2011. The uncommitted master shelf agreements contain certain covenants that limit our ability to create liens, enter into sale and leaseback transactions and consolidate, merge or sell assets to another company. 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 leverage ratio of below 3.0 to 1.0 at the end of any fiscal quarter. We were in compliance with all debt covenants under our master shelf agreements as of September 30, 2011.

44


Cash Flow

The following table summarizes our cash flow data for the ninesix months ended SeptemberJune 30, 20112012 and 2010:

         
  For the Nine Months Ended September 30, 
  2011  2010 
  (In thousands) 
Net cash provided by operating activities $323,754  $241,807 
Net cash used in investing activities $(186,406) $(29,488)
Net cash used in financing activities $(139,494) $(176,580)
2011:

   For the Six Months Ended June 30, 
   2012  2011 
   (In thousands) 

Net cash provided by operating activities

  $187,435   $187,087  

Net cash used in investing activities

  $(387,037 $(172,586

Net cash provided by/(used in) financing activities

  $105,331   $(18,078

Operating Activities

Net cash provided by operating activities increased to $323.8$187.4 million for the ninesix months ended SeptemberJune 30, 20112012 from $241.8$187.1 million for the ninesix months ended SeptemberJune 30, 2010.2011. The slight increase in net cash provided by operating activities was principally due to an increase in cash receipts from customers during the ninesix months ended SeptemberJune 30, 2011 and the deferral of our third quarter 2011 federal tax payment to the fourth quarter 2011 as a result of a temporary federal tax relief program related to Hurricane Irene.2012. This increase was partially offset by an increase in operating expense and interest payments primarily related to increased pension contributions during the ninesix months ended SeptemberJune 30, 20112012 compared to the ninesix months ended SeptemberJune 30, 2010.

2011. The growth in operating cash flow was mitigated by the pre-funding of our pension plan in April 2012 of $72.0 million, partially offset by the tax benefit associated with these deductible contributions.

Investing Activities

Net cash used in investing activities was $186.4$387.0 million for the ninesix months ended SeptemberJune 30, 20112012 compared to $29.5$172.6 million for the ninesix months ended SeptemberJune 30, 2010.2011. The increase in net cash used in investing activities was principally due to an increase in acquisition and escrow related payments of $133.4$209.6 million, primarily related to the acquisitionsacquisition of Bloodhound and HRPMediConnect in the secondfirst quarter of 2011,2012, and an increase in the purchases of fixed assets of $19.7 million.

$8.4 million during the six months ended June 30, 2012.

Financing Activities

Net cash provided by/(used inin) financing activities was $139.5$105.3 million for the ninesix months ended SeptemberJune 30, 20112012 and $176.6$(18.1) million for the ninesix months ended SeptemberJune 30, 2010.2011. Net cash provided by financing activities for the six months ended June 30, 2012 was primarily related to an increase in total net debt of $150.0 million and option exercises of $65.1 million, partially offset by repurchases of our Class A common stock of $106.3 million. Net cash used in financing activities for the ninesix months ended SeptemberJune 30, 2011 was primarily related to a repurchases of our Class A common stock of $340.1$214.0 million partially offset by an increase in total net debt of $166.7$172.4 million. Net cash used in financing activities for the nine months ended September 30, 2010 was primarily related to a decrease in total debt of $67.0 million and repurchases of our Class A common stock of $129.8 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, 20112012 except as noted below.

On April 6, 2011,

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 completed an issuance of senior notes inexpect our contractual obligations payments for the aggregate principal amount of $450.0 million. These senior notes are due on May 1, 2021Pension and accrue interest at 5.80%. We received net proceeds of $446.0 million after deducting discounts and commissions of $4.0 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 syndicated revolving credit facility or any amendment, refinancing or replacement thereof. Interest is payable semi-annually on May 1st and November 1st of each year, beginning on November 1, 2011. Interest accrued from April 6, 2011.

On October 25, 2011, we amended and restated our revolving credit agreementpostretirement plans to increase the total revolving credit facility from $600.0 million to $700.0 million, extended the maturity date from September 2014 to October 2016 and modified certain conditions to borrowing, covenants, and events of default. Verisk Analytics, Inc. and Insurance Services Office, Inc. are co-borrowers under the amended credit agreement. The amended credit agreement also resulted in a decrease to applicable interest rates. The interest rates for borrowing under the amended credit agreement will now be the applicable LIBOR plus 1.25% to 1.875%, depending upon the result of certain ratios defined in the amended credit agreement. All borrowings under the amended credit agreement continue to be unsecured.

following amounts:1-3 years $11.2 million,3-5 years $7.3 million, andMore than 5 years $15.4 million.

45


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, 2011.2012. Since the date of our annual report on Form 10-K, there have been no material changes to our critical accounting policies and estimates except for the policy clarification noted below.

Regarding revenue recognition for software arrangements related to property-specific rating and underwriting information and loss prediction solutions that include post-contract customer support, or PCS, the PCS associated with these arrangements is coterminous with the duration of the license term.
estimates.

Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 3.Quantitative and Qualitative Disclosures About Market Risk

Market risks at SeptemberJune 30, 20112012 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, 2011.

2012.

Item 4. Controls and Procedures
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.

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 SeptemberJune 30, 2011,2012, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

During the three month period ended SeptemberJune 30, 2011,2012, 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.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings
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 ninesix months ended SeptemberJune 30, 20112012 for a description of our significant current legal proceedings, which is incorporated by reference herein.

Item 1A. Risk Factors
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, 2011 except for the updated disclosure set forth below.

2012.

 

46


Our revenue from customers in the mortgage vertical is largely transactional and subject to changing conditions of the U.S. mortgage market.
Revenue derived from solutions we provide the U.S. mortgage and mortgage-related industries accounted for approximately 13% of our total revenue in the year ended December 31, 2010. Our forensic audit business and business with government-sponsored entities in the mortgage business accounted for approximately 65% of our total mortgage and mortgage-related revenue in 2010. Because our business relies on transaction volumes based on both new mortgage applications and forensic audit of funded loans, reductions in either the volume of mortgage loans originated or the number or quality of funded loans could reduce our revenue. Mortgage origination volumes in 2010 declined versus 2009. This decline had continued through June 30, 2011, and may continue based on changes in the mortgage market related to the U.S. mortgage crisis.
Recently there have been proposals to restructure or eliminate the roles of Fannie Mae and Freddie Mac. The restructuring or elimination of either Fannie Mae or Freddie Mac could have a negative effect on the U. S. mortgage market and on our revenue derived from the solutions we provide to the mortgage industry. If origination volumes and applications for mortgages decline, our revenue in this part of the business may decline if we are unable to increase the percentage of mortgages examined for existing customers or add new customers. Our forensic audit business has benefited from the high amount of bad loans to be examined by mortgage insurers and other parties as a result of the U.S. mortgage crisis. Certain mortgage insurers who have been operating under regulatory waivers of capital sufficiency requirements have announced that they are currently unable to write new mortgage insurance policies unless regulatory relief is provided. Such a development could impact the volume of loans to be examined in our forensic audit business and could reduce our revenue and profitability. Additionally, a withdrawal of mortgage insurers from the mortgage loan market could potentially reduce the volume of loan originations, which could reduce the revenue in our origination-related business. Two customers represented the majority of our mortgage revenue in 2010 and if their volumes decline and we are not able to replace such volumes with new customers, our revenue may decline.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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 $600.0$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 SeptemberJune 30, 20112012 are set forth below:

                 
              Approximate Dollar 
          Total Number of  Value of Shares that 
          Shares Purchased  May Yet Be 
  Total Number  Average  as Part of Publicly  Purchased Under the 
  of Shares  Price Paid  Announced Plans  Plans or Programs 
Period Purchased  per Share  or Programs  (in thousands) 
July 1, 2011 through July 31, 2011  1,066,497  $33.95   1,066,497  $134,232 
August 1, 2011 through August 31, 2011  2,100,159  $32.43   2,100,159  $66,116 
September 1, 2011 through September 30, 2011  549,372  $34.09   549,372  $47,387 
               
Total  3,716,028       3,716,028     
               

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

April 1, 2012 through April 30, 2012

   221,200    $46.79     221,200    $257,504  

May 1, 2012 through May 31, 2012

   543,443    $47.95     543,443    $231,449  

June 1, 2012 through June 30, 2012

   669,025    $47.40     669,025    $199,737  
  

 

 

     

 

 

   
   1,433,668       1,433,668    
  

 

 

     

 

 

   

Item 3. Defaults Upon Senior Securities
Item 3.Defaults Upon Senior Securities

None.

Item 4. (Removed and Reserved)

Item 4.Mine Safety Disclosures

None.

Item 5. Other Information
Item 5.Other Information

None.

Item 6. Exhibits
Item 6.Exhibits

See Exhibit Index.

47

SIGNATURES


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)
 (Registrant)
Date: November 1, 2011July 31, 2012 By: /s/ Mark V. Anquillare
 

Mark V. Anquillare

Executive Vice President and Chief Financial Officer

(Principal Financial Officer and Duly Authorized Officer)

EXHIBIT INDEX

 

48


Exhibit

Number

  
EXHIBIT INDEX

Description

Exhibit
NumberDescription
10.1Amended and Restated Credit Agreement dated October 25, 2011 among Verisk Analytics, Inc., as co-borrower, Insurance Services Office, Inc., as co-borrower, the guarantors party thereto, and the lenders party thereto, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated October 26, 2011.
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.Inc, pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
99.1  Verisk Analytics, Inc. 2012 Employee Stock Purchase Plan, as amended*

*Filed herewith.

 

4936