VERISK ANALYTICS, INC. – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Edgar Online, Inc.

 The following discussion should be read in conjunction with our historical financial statements and the related notes included elsewhere in this annual report on Form 10-K, as well as the discussion under "Selected Consolidated Financial Data." This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in or implied by any of the forward-looking statements as a result of various factors, including but not limited to those listed under "Risk Factors" and "Special Note Regarding Forward-Looking Statements."  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.  Our customers use our solutions to make better risk decisions with greater efficiency and discipline. We refer to these products and services as 'solutions' due to the integration among our products and the flexibility that enables our customers to purchase components or the comprehensive package of products. These solutions take various forms, including data, statistical models or tailored analytics, all designed to allow our clients to make more logical decisions. We believe our solutions for analyzing risk positively impact our customers' revenues and help them better manage their costs.  On May 23, 2008, in contemplation of our IPO, Insurance Service Office, Inc., or ISO, formed Verisk Analytics, Inc., or Verisk, a Delaware corporation, to be the holding company for our business. Verisk was initially formed as a wholly-owned subsidiary of ISO. On October 6, 2009 in connection with our IPO, we effected a reorganization whereby ISO became a wholly-owned subsidiary of Verisk.  On October 1, 2010, we completed a follow-on public offering. We did not receive any proceeds from the sale of common stock in the offering. The primary purpose of the offering was to manage and organize the sale by Class B insurance company shareholders while providing incremental public float. Concurrently with the closing of the offering, we repurchased shares of common stock, for an aggregate purchase price of $192.5 million, directly from selling shareholders owning Class B common stock. We converted all Class B shares to Class A shares in 2011 and currently have no outstanding Class B shares.  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 42.3 % and 47.6% of our revenues for the years ended December 31, 2011 and 2010, respectively. Our Decision Analytics segment provides solutions our customers use to analyze the processes of the Verisk Risk Analysis Framework: Prediction of Loss, Detection and Prevention of Fraud, and Quantification of Loss. Effective December 31, 2011, we realigned the revenue categories within Decision Analytics segment, including fraud identification and detection solutions, loss prediction solutions and loss quantification solutions, into four vertical market-related groupings of insurance, mortgage and financial services, healthcare, and specialized markets. We believe that this enhances financial reporting transparency and helps investors better understand the themes within the Decision Analytics segment. Our Decision Analytics segment revenues represented approximately 57.7% and 52.4% of our revenues for the years ended December 31, 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

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  as metrics to measure our performance. EBITDA and EBITDA margin are non-GAAP financial measures (see Note 4. within Item 6. Selected Financial Data section of 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, 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.  Certain of our solutions are also paid for by our customers on a transactional basis. For example, we have solutions that allow our customers to access fraud detection tools in the context of an individual mortgage application or loan, obtain property-specific rating and underwriting information to price a policy on a commercial building, or compare a P&C insurance, medical or workers' compensation claim with information in our databases. For the years ended December 31, 2011 and 2010, 31.1% and 30.2% of our revenues, respectively, were derived from providing transactional solutions. We earn transactional revenues as our solutions are delivered or services performed. In general, transactions are billed monthly at the end of each month.  Approximately 85.7% and 84.0% of the revenues in our Risk Assessment segment for the years ended December 31, 2011 and 2010, 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 56.6% and 56.8% of the revenues in our Decision Analytics segment, for the years ended December 31, 2011 and 2010, respectively, were derived from subscriptions and long-term agreements for our solutions.  

Principal Operating Costs and Expenses

  Personnel expenses are the major component of both our cost of revenues and selling, general and administrative expenses. Personnel expenses include salaries, benefits, incentive compensation, equity compensation costs (described under "Equity Compensation Costs" below), sales commissions, employment taxes, recruiting costs, and outsourced temporary agency costs, which represented 65.3% and 65.4% of our total expenses for the years ended December 31, 2011 and 2010, respectively.  We allocate personnel expenses between two categories, cost of revenues and selling, general and administrative costs, based on the actual costs associated with each employee. We categorize employees who maintain our solutions as cost of revenues, and all other personnel, including executive managers, sales people,                                           35 

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marketing, business development, finance, legal, human resources, and administrative services, as selling, general and administrative expenses. A significant portion of our other operating costs, such as facilities and communications, are also either captured within cost of revenues or selling, general and administrative expense based on the nature of the work being performed.

  While we expect to grow our headcount over time to take advantage of our market opportunities, we believe that the economies of scale in our operating model will allow us to grow our personnel expenses at a lower rate than revenues. Historically, our EBITDA margin has improved because we have been able to increase revenues without a proportionate corresponding increase in expenses.  Cost of Revenues. Our cost of revenues consists primarily of personnel expenses. Cost of revenues also includes the expenses associated with the acquisition and verification of data, the maintenance of our existing solutions and the development and enhancement of our next-generation solutions. Our cost of revenues excludes depreciation and amortization.  Selling, General and Administrative Expense. Our selling, general and administrative expense also consists primarily of personnel costs. A portion of the other operating costs such as facilities, insurance and communications are also allocated to selling, general and administrative costs based on the nature of the work being performed by the employee. Our selling, general and administrative expenses excludes depreciation and amortization.  

Description of Acquisitions

We acquired eight businesses since January 1, 2009. As a result of these acquisitions, our consolidated results of operations may not be comparable between periods.

  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. See Note 10 to our consolidated financial statements included in this annual report on Form 10-K for the preliminary purchase allocation.  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. See Note 10 to our consolidated financial statements included in this annual report on Form 10-K for the preliminary purchase allocation.  On December 16, 2010, we acquired 100% of 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, we believe that 3E's platform is consistent with our historical expertise in regulatory and compliance matters.  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 to the property/casualty insurance industry. Within our Decision Analytics segment, CP offers solutions for complying with the Medicare Secondary Payer (MSP) Act, 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.                                           36

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  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, SA's solutions and application set will allow our customers to take advantage of state-of-the-art loss forecasting, stress testing, and economic capital requirement tools to better understand and forecast the risk associated within their credit portfolios.  On October 30, 2009, we acquired the net assets of Enabl-u Technology Corporation, Inc, or Enabl-u, a privately owned provider of data management, training and communication solutions to companies with regional, national or global work forces. We believe this acquisition will enhance our ability to provide solutions for customers to measure loss prevention and improve asset management through the use of software and software services.  On July 24, 2009, we acquired the net assets of TierMed Systems, LLC, or TierMed, a privately owned provider of Healthcare Effectiveness Data and Information Set, or HEDIS, solutions to healthcare organizations that have HEDIS or quality-reporting needs. We believe this acquisition will enhance our ability to provide solutions for customers to measure and improve healthcare quality and financial performance through the use of software and software services.  On January 14, 2009, we acquired 100% of the stock of D2 Hawkeye, Inc., or D2, a privately-owned provider of data mining, decision support, clinical quality analysis, and risk analysis tools for the healthcare industry. We believe this acquisition will enhance our position in the healthcare analytics and predictive modeling market by providing new market, cross-sell, and diversification opportunities for the Company's expanding healthcare solutions.  

Equity Compensation Costs

  We have a leveraged ESOP, funded with intercompany debt that includes 401(k), ESOP and profit sharing components to provide employees with equity participation. We make quarterly cash contributions to the plan equal to the debt service requirements. As the debt is repaid, shares are released to the ESOP to fund 401(k) matching and profit sharing contributions and the remainder is allocated annually to active employees in proportion to their eligible compensation in relation to total participants' eligible compensation.  We accrue compensation expense over the reporting period equal to the fair value of the shares to be released to the ESOP. Depending on the number of shares released to the plan during the quarter and the fluctuation in the fair value of the shares, a corresponding increase or decrease in compensation expense will occur. The amount of our equity compensation costs recognized for the years ended December 31, 2011, 2010 and 2009 are as follows:                                                        Year Ended December 31,                                                  2011         2010         2009                                                          (In thousands)         ESOP costs by contribution type:         401(k) matching contribution expense   $ 10,835     $  9,932     $  7,604         Profit sharing contribution expense       1,780        1,641        1,139         ESOP allocation expense                       -            -       67,322          Total ESOP costs                       $ 12,615     $ 11,573     $ 76,065          ESOP costs by segment:         Risk Assessment ESOP costs             $  6,953     $  6,861     $ 43,641         Decision Analytics ESOP costs             5,662        4,712       32,424          Total ESOP costs                       $ 12,615     $ 11,573     $ 76,065                                             37 

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  In connection with our IPO, on October 6, 2009, we accelerated our future ESOP allocation contribution through the end of the ESOP in 2013, to all participants eligible for a contribution in 2009. This resulted in a non-recurring, non-cash charge of approximately $57.7 million in the fourth quarter of 2009. As a result, subsequent to the offering, the non-cash ESOP allocation expense was substantially reduced. Excluding the ESOP allocation, expense relating specifically to our 401(k) and profit sharing plans were $12.6 million, $11.6 million and $8.7 million for the years ended December 31, 2011, 2010 and 2009, respectively.  

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.

  Prior to our IPO, our Class A stock and vested stock options were recorded within redeemable common stock at full redemption value at each balance sheet date, as the redemption of these securities was not solely within the control of the Company (see Note 14 of our consolidated financial statements). Effective with the corporate reorganization that occurred on October 6, 2009, we are no longer obligated to redeem Class A stock and therefore are not required to present our Class A stock and vested stock options at redemption value. Our financial results for the fourth quarter of 2009 reflect a reversal of the redeemable common stock. The reversal of the redeemable common stock of $1,064.9 million on October 6, 2009 resulted in the elimination of accumulated deficit of $440.6 million, an increase of $0.1 million to Class A common stock at par value, an increase of $624.3 million to additional paid-in-capital, and a reclassification of the ISO Class A unearned common stock KSOP shares balance of $1.3 million to unearned KSOP contribution. See Note 14 in our consolidated financial statements included in this annual report on Form 10-K.  

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Consolidated Results of Operations

Revenues

  Revenues were $1,331.8 million for the year ended December 31, 2011 compared to $1,138.3 million for the year ended December 31, 2010, an increase of $193.5 million or 17.0%. In 2011 and in 2010, we acquired five companies, HRP, Bloodhound, CP, 3E, and SA, 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 were within our Decision Analytics segment and provided an increase of $106.9 million in revenues for the year ended December 31, 2011. Excluding recent acquisitions, revenues increased $86.6 million, which included an increase in our Risk Assessment segment of $21.2 million and an increase in our Decision Analytics segment of $65.4 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 $533.7 million for the year ended December 31, 2011 compared to $463.5 million for the year ended December 31, 2010, an increase of $70.2 million or 15.2%. Recent acquisitions caused an increase of $46.6 million in cost for the year ended December 31, 2011. Excluding the impact of our recent acquisitions, our cost of revenues increased $23.6 million or 5.1%. The increase was primarily due to increases in salaries and employee benefits cost of $16.6 million. Other increases include leased software expenses of $3.4 million, travel and travel related costs of $1.3 million, office maintenance expense of $0.4 million and other operating costs of $4.1 million. These increases in costs were partially offset by a $2.2 million decrease in data costs primarily within in our Decision Analytics segment.  The increase in salaries and employee benefits of $16.6 million includes an increase of $19.4 million in annual salaries and employee benefits such as medical costs and equity incentive plan, and was partially offset by a decrease of $2.8 million in pension costs. The pension cost decreased primarily due to the partial recovery in 2010 of the fair value of our pension investments.                                           38

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Selling, General and Administrative Expenses

  Selling, general and administrative expenses, or SGA, were $209.5 million for the year ended December 31, 2011 compared to $166.4 million for the year ended December 31, 2010, an increase of $43.1 million or 25.9%. Excluding costs associated with our recent acquisitions of $31.6 million, SGA increased $11.5 million or 7.0%. The increase was primarily due to an increase in salaries and employee benefits of $8.8 million which includes annual salary increases, medical costs, commissions, and equity compensation. Other increases were cost related to travel and travel related items of $1.1 million, rent and maintenance of $0.4 million and other general expenses of $1.2 million.  

Depreciation and Amortization of Fixed Assets

  Depreciation and amortization of fixed assets was $43.8 million for the year ended December 31, 2011 compared to $40.7 million for the year ended December 31, 2010, an increase of $3.1 million or 7.6%. 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.  

Amortization of Intangible Assets

  Amortization of intangible assets was $34.8 million for the year ended December 31, 2011 compared to $27.4 million for the year ended December 31, 2010, an increase of $7.4 million or 27.0%. The increase was primarily related to amortization of intangible assets associated with recent acquisitions of $13.4 million, partially offset by $6.0 million of amortization of intangible assets associated with prior acquisitions that have been fully amortized.  

Acquisition Related Liabilities Adjustment

  Acquisition related liabilities adjustment was a benefit of $3.4 million for the year ended December 31, 2011 and $0.5 million for the year ended December 31, 2010. This benefit was a result of a reduction of <money>$3.4 million to contingent consideration due to the reduced probability of the D2 and SA acquisitions achieving the EBITDA and revenue earnout targets for exceptional performance in fiscal year 2011 established at the time of acquisition. In 2010, we reevaluated the probability of TierMed achieving the specified predetermined EBITDA and revenue targets and reversed $0.5 million of contingent consideration related to this acquisition.  

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

  Investment income and realized gain/(loss) on securities, net, was a gain of $0.9 million for the year ended December 31, 2011 as compared to a gain of $0.4 million for the year ended December 31, 2010, an increase of $0.5 million.  

Interest Expense

  Interest expense was $53.8 million for the year ended December 31, 2011 compared to $34.7 million for the year ended December 31, 2010, a increase of $19.1 million or 55.3%. This increase is primarily due to the issuance of our 5.800% and 4.875% senior notes in the aggregate principal of $450.0 million and $250.0 million, respectively.  Provision for Income Taxes 

The provision for income taxes was $177.7 million for the year ended December 31, 2011 compared to $164.1 million for the year ended December 31, 2010, an increase of $13.6 million or 8.3%. The effective tax

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  rate was 38.6% for the year ended December 31, 2011 compared to 40.4% for the year ended December 31, 2010. The effective rate for the year ended December 31, 2011 was lower due to settlements and resolution of uncertain tax positions, as well as a decrease in deferred taxes and a corresponding increase in tax expense in 2010 of $2.4 million resulting from reduced tax benefits of Medicare subsidies associated with legislative changes in 2010.  

EBITDA Margin

  The EBITDA margin for our consolidated results was 44.4% for the year ended December 31, 2011 compared to 44.7% for the year ended December 31, 2010. For the year ended December 31, 2011, the recent acquisitions mitigated our margin expansion by 1.7% and was partially offset by the acquisition related liabilities adjustment which positively impacted our EBITDA margin by 0.3%.  

Results of Operations by Segment

Decision Analytics

Revenues

  Revenues for our Decision Analytics segment were $768.5 million for the year ended December 31, 2011 compared to $596.2 million for the year ended December 31, 2010, an increase of $172.3 million or 28.9%. Recent acquisitions accounted for an increase of $106.9 million in revenues for the year ended December 31, 2011. Excluding the recent acquisitions, our insurance revenue increased $54.4 million primarily due to an increase within our loss quantification solutions as a result of new customers and of higher volumes related to various natural disasters, particularly the increased storm activity within the U.S. In addition, there was an increase in our catastrophe modeling services for existing and new customers, as well an increase in insurance fraud solutions revenue. Excluding the recent acquisitions, our healthcare revenue increased $11.5 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, excluding recent acquisitions, increased $3.2 million as a result of continued penetration of existing customers within our weather and climate risk solutions. These increases were partially offset by a decrease in our mortgage and financial services of $3.7 million, excluding recent acquisitions, primarily due to lower volumes within our underwriting and forensic solutions due to the continued challenges within the mortgage market.  

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

                                                  Year Ended                                               December 31,            Percentage                                            2011          2010           Change                                              (In thousands)        Insurance                         $ 451,216     $ 372,843             21.0 %        Mortgage and financial services     134,702       137,365             (1.9 )%        Healthcare                          103,722        57,972             78.9 %        Specialized markets                  78,839        28,025            181.3 %         Total Decision Analytics          $ 768,479     $ 596,205             28.9 %    Cost of Revenues  Cost of revenues for our Decision Analytics segment was $340.0 million for the year ended December 31, 2011 compared to $268.8 million for the year ended December 31, 2010, an increase of $71.2 million or 26.5%. Excluding the impact of recent acquisitions of $46.6 million, our cost of revenues increased by $24.6 million or 9.2%. This increase is primarily due to a net increase in salary and employee benefits of $18.6 million. The net increase in salaries and employee benefits includes an offsetting reduction in pension cost of $0.4 million. Other                                           40 

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  increases include leased software costs of $3.3 million, office maintenance expenses of $1.2 million, travel and travel related costs of $0.8 million and other general expenses of $3.1 million. These increases were offset by a $2.4 million decrease in data costs.  

Selling, General and Administrative Expenses

  Selling, general and administrative expenses for our Decision Analytics segment were $126.0 million for the year ended December 31, 2011 compared to $87.4 million for the year ended December 31, 2010, an increase of $38.6 million or 44.1%. Excluding the impact of recent acquisitions of $31.6 million, SGA increased $7.0 million or 8.2%. The increase was primarily due to an increase in salaries and employee benefits of $5.0 million which includes annual salary increases, medical costs, commissions, and equity compensation. Other increases were costs related to travel expenses of $0.8 million, office maintenance expense of $0.3 million, and in other general expenses of $0.9 million.  

EBITDA Margin

  The EBITDA margin for our Decision Analytics segment was 39.8% for the year ended December 31, 2011 compared to 40.4% for the year ended December 31, 2010. For the year ended December 31, 2011, the recent acquisitions mitigated our margin expansion by 2.4% and a reallocation of information technology and corporate resources also mitigated our margin. These mitigating factors were partially offset by the acquisition related liabilities adjustment, which positively impacted our EBITDA margin by 0.4%.  

Risk Assessment

Revenues

  Revenues were $563.3 million for the year ended December 31, 2011 as compared to $542.1 million for the year ended December 31, 2010, an increase of $21.2 million or 3.9%. 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.  

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

                                                             Year Ended                                                          December 31,             Percentage                                                      2011           2010            Change                                                         (In thousands) Industry-standard insurance programs               $ 371,894      $ 353,501               5.2 % Property-specific rating and underwriting information                                          137,133        137,071               0.0 % Statistical agency and data services                  31,518         29,357               7.4 % Actuarial services                                    22,816         22,209               2.7 %  Total Risk Assessment                              $ 563,361      $ 542,138               3.9 %    Cost of Revenues  Cost of revenues for our Risk Assessment segment was $193.7 million for the year ended December 31, 2011 compared to $194.7 million for the year ended December 31, 2010, a decrease of $1.0 million or 0.5%. The decrease was primarily due to decrease in salaries and employee benefits costs of $2.0 million, primarily related to lower pension cost of $2.4 million. Salaries and employee benefit costs, excluding pension costs, increased only moderately due to a reallocation of information technology resources to our Decision Analytics segment. Other decreases were related to office maintenance expense of $0.8 million. These decreases were partially offset by an increase in travel and travel related costs of $0.5 million, data and consultant costs of $0.2 million, leased software $0.1 million and other general expenses of $1.0 million.                                           41

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Selling, General and Administrative Expenses

  Selling, general and administrative expenses for our Risk Assessment segment were $83.5 million for the year ended December 31, 2011 compared to $79.0 million for the year ended December 31, 2010, an increase of $4.5 million or 5.7%. The increase was primarily due to an increase in salaries and employee benefits of $3.8 million which includes annual salary increases, medical costs, commissions, and equity compensation. Other increases included travel costs of $0.3 million, an increase in other general expenses of $0.3 million, and rent and maintenance cost of $0.1 million.  

EBITDA Margin

  The EBITDA margin for our Risk Assessment segment was 50.8% for the year ended December 31, 2011 compared to 49.5% for the year ended December 31, 2010. The increase in margin is primarily attributed to operating leverage in the segment as well as cost efficiencies achieved in 2011 and a reallocation of information technology and corporate resources to our Decision Analytics segment during the year ended December 31, 2011.  

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Consolidated Results of Operations

Revenues

  Revenues were $1,138.3 million for the year ended December 31, 2010 compared to $1,027.1 million for the year ended December 31, 2009, an increase of $111.2 million or 10.8%. In 2010 and the latter half of 2009, we acquired five companies, TierMed, Enabl-u, Strategic Analytics, CP, and 3E, 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 provided an increase of $10.5 million in revenues for the year ended December 31, 2010. Excluding recent acquisitions, revenues increased $100.7 million, which included an increase in our Risk Assessment segment of $18.1 million and an increase in our Decision Analytics segment of $82.6 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 $463.5 million for the year ended December 31, 2010 compared to $491.3 million for the year ended December 31, 2009, a decrease of $27.8 million or 5.7%. This decrease was primarily due to the accelerated ESOP allocation that occurred in 2009, which resulted in the elimination of substantially all future ESOP allocation expense. In 2010 and 2009, our ESOP allocation expense for the year was $0.0 million and $51.9 million, respectively. The reduction in our cost of revenues was offset by recent acquisitions, which provided an increase of $6.4 million in cost for the year ended December 31, 2010. Excluding the impact of the accelerated ESOP allocation in 2009 and the cost associated with our recent acquisitions, our cost of revenues increased $17.7 million or 4.0%. The increase was primarily due to increases in salaries and employee benefits cost of $16.9 million; $4.1 million of data and consultants costs incurred in connection with the growth in our property-specific rating and underwriting information, and fraud identification and detection solutions; and other general expenses of $0.3 million. These increases in costs were partially offset by a $2.7 million increase in state employment tax credit and a reduction in office maintenance expense of $0.9 million.  The increase in salaries and employee benefits of $16.9 million includes an increase of $24.6 million in annual salaries and employee benefits such as medical costs and long-term incentive plan, and was partially offset by a decrease of $7.7 million in pension costs. The increase in salaries and benefit costs is related to a modest increase in employee headcount, primarily in Decision Analytics. The pension cost decreased $7.7 million primarily due to the partial recovery in 2009 of the fair value of our pension investments.                                           42

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Selling, General and Administrative

  Selling, general and administrative expenses, or SGA, were $166.4 million for the year ended December 31, 2010 compared to $162.6 million for the year ended December 31, 2009, an increase of $3.8 million or 2.3%. Excluding the impact of the accelerated ESOP allocation in 2009 of $15.4 million and costs associated with our recent acquisitions of $4.8 million, SGA increased $14.4 million or 9.8%. The increase was primarily due to an increase in salaries and employee benefits of $14.4 million, which includes annual salary increases, medical costs, commissions, and long-term incentive plan. Other increases were costs related to advertising and marketing of $2.5 million and other general expenses of $2.1 million. These increases were partially offset by a decrease in legal costs primarily related to our IPO in 2009 of $2.8 million and a reduction in pension cost of $1.8 million.  

Depreciation and Amortization of Fixed Assets

  Depreciation and amortization of fixed assets was $40.7 million for the year ended December 31, 2010 compared to $38.6 million for the year ended December 31, 2009, an increase of $2.1 million or 5.6%. 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.  

Amortization of Intangible Assets

  Amortization of intangible assets was $27.4 million for the year ended December 31, 2010 compared to $32.6 million for the year ended December 31, 2009, a decrease of $5.2 million or 16.0%. This decrease was primarily related to a decrease of $6.3 million of amortization of intangible assets associated with prior acquisitions that have been fully amortized; partially offset by $1.1 million of amortization of intangible assets associated with recent acquisitions.  

Acquisition Related Liabilities Adjustment

  Acquisition related liabilities adjustment was a benefit of $0.5 million for the year ended December 31, 2010; there was no such adjustment in 2009. This benefit was as a result of a reduction of $0.5 million to contingent consideration due to the reduced probability of TierMed, a recent acquisition, achieving the EBITDA and revenue earnout targets set at the time of the acquisition.  

Investment Income and Realized Gains/(Losses) on Securities, Net

  Investment income and realized gains/(losses) on securities, net, was a gain of $0.4 million for the year ended December 31, 2010 as compared to a loss of $2.1 million for the year ended December 31, 2009, an increase of $2.5 million.  

Interest Expense

  Interest expense was $34.7 million for the year ended December 31, 2010 compared to $35.3 million for the year ended December 31, 2009, a decrease of $0.6 million or 1.7%. This decrease was primarily due to reduced interest costs as a result of a decrease in average debt outstanding of approximately $605 million in 2010 compared to approximately $650 million in 2009, coupled with a decrease in our interest rate on borrowings from our syndicated revolving credit facility from LIBOR plus 2.50% to LIBOR plus 1.75%. The decrease in borrowing rate was the result of an amendment to the facility on September 10, 2010. These reductions were partially offset by an increase in the amortization of debt issuance costs related to the syndicated credit facility, which had been entered into in July of 2009.  Provision for Income Taxes 

The provision for income taxes was $164.1 million for the year ended December 31, 2010 compared to $138.0 million for the year ended December 31, 2009, an increase of $26.1 million or 18.9%. The effective tax

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  rate was 40.4% for the year ended December 31, 2010 compared to 52.2% for the year ended December 31, 2009. The effective rate for the year ended December 31, 2010 was lower due to a decrease in nondeductible expenses in 2010 versus 2009 related to the KSOP.  EBITDA Margin  The EBITDA margin for our consolidated results was 44.7% for the year ended December 31, 2010 compared to 36.3% for the year ended December 31, 2009. Our EBITDA margin does not reflect any ESOP allocation expense in 2010 due to the accelerated ESOP allocation that occurred in 2009. The ESOP allocation expense of $67.3 million in 2009 negatively impacted our 2009 EBITDA margin by approximately 6.6%. Also included in the calculation of our 2009 EBITDA margin are costs of $7.0 million associated with the preparation of our IPO for the year ended December 31, 2009, which also negatively impacted our margin by 0.7%. For our 2010 EBITDA margin, a decrease in pension costs of $9.5 million positively impacted our margin by approximately 0.8%.  

Results of Operations by Segment

Decision Analytics

Revenues

  Revenues for our Decision Analytics segment were $596.2 million for the year ended December 31, 2010 compared to $503.1 million for the year ended December 31, 2009, an increase of $93.1 million or 18.5%. Recent acquisitions accounted for an increase of $10.5 million of revenues. Excluding the recent acquisitions, our insurance services revenue increased $39.0 million primarily due to increase penetration of existing and new solutions within our loss quantification to existing customers as well as to new customers. Furthermore, there was an increase in insurance fraud solutions and our catastrophe modeling services. Excluding the recent acquisitions, our mortgage and financial services increased $28.9 million primarily due to an increase in services sold in our fraud detection and forensic audit services for the mortgage lenders and mortgage insurance industries. Excluding the recent acquisitions, our healthcare revenue increased $4.5 million primarily due to an increase in our fraud services and risk solutions. Our specialized markets revenue, excluding recent acquisitions increased $10.2 million as a result of continued growth from our weather and climate risk services.  

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

                                                   Year Ended                                                December 31,           Percentage                                             2010          2009          Change                                               (In thousands)         Insurance                         $ 372,843     $ 331,587            12.4 %

Mortgage and financial services 137,365 105,627

 30.0 %         Healthcare                           57,972        50,064            15.8 %         Specialized markets                  28,025        15,850            76.8 % 

Total Decision Analytics $ 596,205$ 503,128

 18.5 %    Cost of Revenues  Cost of revenues for our Decision Analytics segment was $268.8 million for the year ended December 31, 2010 compared to $260.8 million for the year ended December 31, 2009, an increase of $8.0 million or 3.0%. Excluding the impact of the accelerated ESOP allocation in 2009 of $22.2 million and costs associated with recent acquisitions of $6.4 million, our cost of revenues increased by $23.8 million or 10.0%. This increase is primarily due to an increase in salary and employee benefits of $20.0 million; data and consultant costs of $3.1 million incurred primarily related to the revenue growth in our fraud identification and detection solutions; other general expenses of $1.0 million; and office maintenance expense of $0.2 million offset by a $0.5 million increase in state employment tax credit.                                           44

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  The increase in salaries and employee benefits of $20.0 million includes $21.2 million increase in salaries and employee benefit costs, medical expense, and long-term incentive plans, including the IPO stock option grant; and is partially offset by decreases in pension of $1.2 million. The increase in salaries and benefit costs is related to a modest increase in employee headcount relative to the 18.5% revenue growth in our Decision Analytic revenues.  

Selling, General and Administrative Expenses

  Selling, general and administrative expenses for our Decision Analytics segment were $87.4 million for the year ended December 31, 2010 compared to $80.1 million for the year ended December 31, 2009, an increase of $7.3 million or 9.2%. Excluding the impact of the accelerated ESOP allocation in 2009 of $6.7 million and cost associated with recent acquisitions of $4.8 million, SGA increased $9.2 million or 12.5%. The increase was primarily due to an increase in salaries and employee benefits of $8.3 million, which includes annual salary increases, medical costs, commissions, and long-term incentive plan. Other increases were costs related to advertising and marketing of $2.4 million and an increase in other general expenses of $0.8 million. These increases were partially offset by a decrease in legal costs primarily related to our IPO of $1.9 million and decreased pension cost of $0.4 million.  

EBITDA Margin

  The EBITDA margin for our Decision Analytics segment was 40.4% for the year ended December 31, 2010 compared to 32.3% for the year ended December 31, 2009. The impact of the accelerated ESOP allocation of $28.9 million in 2009 negatively affected our margin by approximately 5.8%. In addition, included in our 2009 EBITDA margin are IPO related costs of $3.0 million, which negatively impacted our margin by 0.6%.  

Risk Assessment

Revenues

  Revenues were $542.1 million for the year ended December 31, 2010 as compared to $524.0 million for the year ended December 31, 2009, an increase of $18.1 million or 3.5%. 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 and the addition of new customers. The increase of $5.0 million or 3.8% within property-specific rating and underwriting information revenues is due partially to growth in property appraisal solutions and community rating services.  

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

                                                                    Year Ended                                                                 December 31,              Percentage                                                             2010            2009            Change                                                                (In thousands) Industry-standard insurance programs                      $ 353,501       $ 341,079          3.6% Property-specific rating and underwriting information       137,071         132,027          3.8% Statistical agency and data services                         29,357          28,619          2.6% Actuarial services                                           22,209          22,251         (0.2)%  Total Risk Assessment                                     $ 542,138       $ 523,976          3.5%    Cost of Revenues  Cost of revenues for our Risk Assessment segment was $194.7 million for the year ended December 31, 2010 compared to $230.5 million for the year ended December 31, 2009, a decrease of $35.8 million or 15.5%. Excluding the impact of the accelerated ESOP allocation in 2009 of $29.7 million, our cost of revenues decreased                                           45 

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  by $6.1 million or 3.0%. This decrease was primarily due to decrease in salaries and employee benefits costs of $3.1 million, a $2.2 million increase in state employment tax credit, office maintenance expense of $1.1 million and $0.7 million of other general expenses. These decreases were partially offset by an increase in data and consultant costs of $1.0 million incurred primarily in connection with the revenues from our property-specific rating and underwriting information solutions.  The decrease in salaries and employee benefits of $3.1 million includes $6.5 million reduction in pension costs and was partially offset by an increase of $3.4 million in salary and employee benefit costs, which include annual salary increases and long-term incentive plans across a relatively constant employee headcount.  

Selling, General and Administrative

  Selling, general and administrative expenses for our Risk Assessment segment were $79.0 million for the year ended December 31, 2010 compared to $82.5 million for the year ended December 31, 2009, a decrease of $3.5 million or 4.3%. Excluding the impact of the accelerated ESOP allocation in 2009 of $8.7 million, SGA increased $5.2 million or 7.0%. The increase was primarily due to an increase in salaries and employee benefits of $6.1 million, which includes annual salary increases, medical costs, commissions, and long-term incentive plan expense and an increase in other general expenses of $1.4 million. These increases were partially offset by a decrease in pension cost of $1.4 million and decrease in legal costs primarily related to our IPO in 2009 of $0.9 million.  

EBITDA Margin

  The EBITDA margin for our Risk Assessment segment was 49.5% for the year ended December 31, 2010 compared to 40.3% for the year ended December 31, 2009. The impact of the accelerated ESOP allocation of $38.4 million in 2009 negatively affected our margin by approximately 7.3%. In addition, included in our 2009 EBITDA margin are costs of $4.0 million associated with the preparation of our IPO for the year ended December 31, 2009, which negatively impacted our margin of 0.8%. For our 2010 EBITDA margin, decreased pension costs of $7.9 million positively impacted our margin by approximately 1.5%.  

Quarterly Results of Operations

  The following table sets forth our quarterly unaudited consolidated statement of operations data for each of the eight quarters in the period ended December 31, 2011. In management's opinion, the data has been prepared on the same basis as the audited consolidated financial statements included in this annual report on Form 10-K, and reflects all necessary adjustments for a fair presentation of this data. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.                                                            For the Quarter Ended                                                                    For the Quarter Ended                                   March 31,       June 30,        September 30,        December 31,        Full Year       March 31,       June 30,    

September 30, December 31, Full Year

                                                                 2011                                        2011                                         2010                                        2010 Statement of income data: Revenues                          $  312,869$ 327,280      $       340,098      $      351,593      $ 1,331,840$  276,154$ 281,677      $       287,354      $      293,158      $ 1,138,343 Operating income                  $  119,297$ 123,818      $       131,409      $      138,857      $   513,381$  106,414$ 107,075      $       113,718      $      113,707      $   440,914 Net income                        $   65,876$  65,577      $        70,987      $       80,318      $   282,758$   55,375$  58,404      $        62,880      $       65,893      $   242,552 Basic net income per share:       $     0.39      $    0.39      $          0.43      $         0.49      $      1.70      $     0.31      $    0.32   

$ 0.35 $ 0.38 $ 1.36 Diluted net income per share: $ 0.37$ 0.38 $ 0.41 $ 0.47 $ 1.63 $ 0.29$ 0.31

$ 0.34 $ 0.37 $ 1.30

Liquidity and Capital Resources

As of December 31, 2011 and 2010, we had cash and cash equivalents and available-for-sale securities of $196.7 million and $60.6 million, respectively. Subscriptions for our solutions are billed and generally paid in

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  advance of rendering services either quarterly or in full upon commencement of the subscription period, which is usually for one year. Subscriptions are automatically renewed at the beginning of each calendar year. We have historically generated significant cash flows from operations. As a result of this factor, as well as the availability of funds under our syndicated revolving credit facility, we believe we will have sufficient cash to meet our working capital and capital expenditure needs, and to fuel our future growth plans.  We have historically managed the business with a working capital deficit due to the fact that, as described above, we offer our solutions and services primarily through annual subscriptions or long-term contracts, which are generally prepaid quarterly or annually in advance of the services being rendered. When cash is received for prepayment of invoices, we record an asset (cash and cash equivalents) on our balance sheet with the offset recorded as a current liability (fees received in advance). This current liability is deferred revenue that does not require a direct cash outflow since our customers have prepaid and are obligated to purchase the services. In most businesses, growth in revenue typically leads to an increase in the accounts receivable balance causing a use of cash as a company grows. Unlike these businesses, our cash position is favorably affected by revenue growth, which results in a source of cash due to our customers prepaying for most of our services.  Our capital expenditures, which include non-cash purchases of fixed assets and capital lease obligations, as a percentage of revenues for the years ended December 31, 2011 and 2010, were 5.1% and 3.6%, respectively. We estimate our capital expenditures for 2012 will be approximately $75.0 million, which primarily include expenditures on our technology infrastructure and our continuing investments in developing and enhancing our solutions. Expenditures related to developing and enhancing our solutions are predominately related to internal use software and are capitalized in accordance with ASC 350-40, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use." We also capitalize amounts in accordance with ASC 985-20, "Software to be Sold, Leased or Otherwise Marketed."  We have also historically used a portion of our cash for repurchases of our common stock from our stockholders. For the years ended December 31, 2011, 2010 and 2009 we repurchased $380.7 million, $422.3 million and redeemed $46.7 million, respectively, of our common stock. Included in the 2010 share repurchases are repurchases of $209.8 million of Class B, including $199.9 million and $9.9 million of Verisk Class B-1 and Class B-2, respectively, which were not a part of the Repurchase Program. A portion of the share redemptions in 2009 included in the total above was completed pursuant to the terms of the Insurance Service Office, Inc. 1996 Incentive Plan, or the Option Plan.  We provide pension and postretirement benefits to certain qualifying active employees and retirees. On January 12, 2012, we announced a hard freeze, which will eliminate all future compensation and service credits, to be instituted on February 29, 2012 to all participants in the pension plans. Based on the pension funding policy, we are required to contribute a minimum of approximately $28.9 million to the pension plans in 2012. In addition, we are contemplating a voluntary prefunding to our qualified pension plan of an amount between $70.0 million and $90.0 million, which may occur in the first half of 2012. Under the postretirement plan, we provide certain healthcare and life insurance benefits to qualifying participants; however, participants are required to pay a stated percentage of the premium coverage. We expect to contribute approximately $3.4 million to the postretirement plan in 2012. See Note 17 to our consolidated financial statements included in this annual report on Form 10-K.  

Financing and Financing Capacity

  We had total debt, excluding capital lease and other obligations, of $1,096.7 million and $835.0 million at December 31, 2011 and 2010, respectively. The debt at December 31, 2011 is issued under long-term private placement loan facilities and senior notes issued in 2011 to finance our stock repurchases and acquisitions.  

On April 6, 2011, we completed an issuance of senior notes in the aggregate principal amount of $450.0 million. These senior notes are due on May 1, 2021 and accrue interest at a rate of 5.800%. We received

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  net proceeds of $446.0 million after deducting original issue discount, underwriting discount, and commissions of $4.0 million. These underwriters' discounts and commissions will be amortized over the ten-year period, which is consistent with the remaining life of the notes. Interest is payable semi-annually on May 1st and November 1st each year, beginning on November 1, 2011.  On December 8, 2011, we completed a second issuance of senior notes in the aggregate principal of $250.0 million. These senior notes are due on January 15, 2019 and accrue interest at a rate of 4.875%. We received new proceeds of $246.0 million after deducting original issue discount, underwriting discount, and commissions of $4.0 million. These discounts and commissions will be amortized over a seven-year period, which is consistent with the remaining life of the notes. Interest is payable semi-annually on January 15th and July 15th of each year beginning on July 15, 2012.  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, ("credit facility"), or any amendment, refinancing or replacement thereof . We expect to redraw from our 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 December 31, 2011, our $725.0 million syndicated revolving credit facility due October 2016, 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 acquisition contingent payments through cash from operations and borrowings from a combination of our credit facility and long-term private placement facilities. We had borrowings of $310.0 million from our credit facility outstanding as of December 31, 2010. On April 8, 2011 and December 8, 2011, we repaid $295.0 million and $145.0 million respectively, of our outstanding borrowings from the credit facility from proceeds of our senior notes discussed above. As of December 31, 2011, our credit facility had no outstanding borrowings and $725.0 million of borrowing capacity was 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 during any period of four fiscal quarters, 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 December 31, 2011.  Our credit facility at December 31, 2010 totaled $575.0 million and on March 16, 2011, The Northern Trust Company joined the credit facility to increase the capacity from $575.0 million to $600.0 million. On March 28, 2011, we entered into amendments to our credit facility and our master shelf agreements to, among other things permit the issuance of the senior notes and guarantees noted above. On October 25, 2011, we amended and restated the credit facility to increase the capacity from $600.0 million to $700.0 million, extended the credit facility through October 24, 2016 and named ISO and Verisk as co-borrowers. The amended credit agreement also resulted in a decrease in the applicable interest rates. The interest rates for borrowing under the amended credit agreement will now be the applicable LIBOR plus 1.250% to 1.875%, depending upon the result of certain ratios defined in the amended credit agreement. On November 14, 2011, TD Bank joined the credit facility to increase the capacity from $700.0 million to $725.0 million. We paid a one-time commitment fee, which will be amortized over a five year period, which is consistent with the remaining life of the credit facility.  

We also have long-term private placement loan facilities under uncommitted master shelf agreements with New York Life and Prudential Capital Group, or Prudential. On June 13, 2011, we repaid our $50.0 million

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  Prudential Series E notes. On August 8, 2011, we repaid our $25.0 million Prudential Series F notes and $50.0 million Principal Series A notes. As of December 31, 2011, we had available capacity of $30.0 million and $190.0 million with New York Life and Prudential, respectively. The master shelf agreement with Aviva Investors North America expired on December 10, 2011 and we did not extend the agreement.  The notes outstanding under these long-term private placement loan 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 5.76% and 6.07% for the years ended December 31, 2011 and 2010, respectively and amounts outstanding were $8.6 and $4.6 million, respectively. 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 leverage ratio 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 December 31, 2011.  

Cash Flow

The following table summarizes our cash flow data for the years ended December 31, 2011, 2010 and 2009:

                                                     For the Year Ended December 31,                                                 2011            2010            2009                                                            (In thousands)

Net cash provided by operating activities $ 375,721$ 336,032

$ 326,401

Net cash used in investing activities $ (204,129 ) $ (243,689 )

$ (185,340 )

Net cash used in financing activities $ (34,780 ) $ (108,787 )

 $ (102,809 )   Operating Activities  Net cash provided by operating activities increased to $375.7 million for the year ended December 31, 2011 compared to $336.0 million for the year ended December 31, 2010. The increase in operating activities was primarily due to an increase in cash receipts from customers, partially offset by an increase in operating expense and tax payments during the year ended December 31, 2011. Increased pension contributions of $6.0 million in 2011 mitigated the growth in our operating cash flow during the year ended December 31, 2011.  Net cash provided by operating activities increased to $336.0 million for the year ended December 31, 2010 compared to $326.4 million for the year ended December 31, 2009. The increase in operating activities was primarily due to an increase in cash receipts from customers and a reduction in interest payments, partially offset by an increase in operating expense and tax payments during the year ended December 31, 2010. Increased pension contributions of $15.0 million in 2010, as well as the timing of certain annual bonus payments, mitigated the growth in our operating cash flow during the year ended December 31, 2010.  

Investing Activities

  Net cash used in investing activities was $204.1 million for the year ended December 31, 2011 and $243.7 million for the year ended December 31, 2010. The decrease in cash used in investing activities was primarily due to a decrease in acquisitions, including escrow funding and earnout payments, of $60.8 million partially offset by an increase in fixed assets purchases of $21.2 million.  Net cash used in investing activities was $243.7 million for the year ended December 31, 2010 and $185.3 million for the year ended December 31, 2009. The increase in cash used in investing activities was primarily due to an increase in acquisitions, including escrow funding, of $136.6 million partially offset by a decrease in earnout payments of $78.1 million</money>.                                           49

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Financing Activities

  Net cash used in financing activities was $34.8 million for the year ended December 31, 2011 and $108.8 million for the year ended December 31, 2010. Net cash used in financing activities for the year ended December 31, 2011 was primarily related to the issuance of senior notes of $696.6 million, proceeds from issuance of short-term debt of $122.2 million, proceeds from stock option exercises of $96.5 million, partially offset by refinancing of $440.0 million on the borrowings of our credit facility on a long-term basis, share repurchases of $381.8 million, and repayments of long-term debt of $125.0 million.  

Net cash used in financing activities was $108.8 million for the year ended December 31, 2010 and $102.8 million for the year ended December 31, 2009. Net cash used in financing activities for the year ended December 31, 2010 was primarily related to the proceeds from issuance of short-term debt of $248.2 million, net proceeds from stock option exercises of $69.4 million, partially offset by share repurchases of $420.1 million.

Contractual Obligations

The following table summarizes our contractual obligations and commercial commitments at December 31, 2011 and the future periods in which such obligations are expected to be settled in cash:

                                                                   Payments Due by Period                                                        Less than                                    More than                                           Total          1 year       1-3 years      3-5 years       5 years                                                                    (In thousands) Contractual obligations Long-term debt                         $ 1,399,942     $   64,623     $  291,095     $  305,949     $  738,275 Capital lease obligations                    9,124          5,391          3,658             75              - Operating leases                           205,596         28,192         54,628         45,760         77,016 Earnout and contingent payments                250            250              -              -              - 

Pension and postretirement plans (1) 175,977 32,292 63,925 58,041 21,719 Other long-term liabilities(2)

              12,095            678          8,322            223          2,872  Total (3)                              $ 1,802,984     $  131,426     $  421,628     $  410,048     $  839,882     

(1) Our funding policy is to contribute at least equal to the minimum legal

    funding requirement.    

(2) Other long-term liabilities consist of our ESOP contributions and

employee-related deferred compensation plan. We also have a deferred

compensation plan for our Board of Directors; however, based on past

performance and the uncertainty of the dollar amounts to be paid, if any, we

    have excluded such amounts from the above table.    

(3) Unrecognized tax benefits of approximately $17.9 million have been recorded

as liabilities in accordance with ASC 740, which have been omitted from the

table above, and we are uncertain as to if or when such amounts may be

settled, with the exception of those amounts subject to a statute of

limitation. Related to the unrecognized tax benefits, we also have recorded a

liability for potential penalties and interest of $4.7 million.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Policies and Estimates

  Our management's discussion and analysis of financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles                                           50

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  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.  

Revenue Recognition

  The Company's revenues are primarily derived from sales of services and revenue is recognized as services are performed and information is delivered to our customers. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, fees and/or price are fixed or determinable and collectability is reasonably assured. Revenues for subscription services are recognized ratably over the subscription term, usually one year. Revenues from transaction-based fees are recognized as information is delivered to customers, assuming all other revenue recognition criteria are met.  The Company also has term based software licenses where the only remaining undelivered element is post-contract customer support or PCS, including unspecified upgrade rights on a when and if available basis. The Company recognizes revenue for these licenses ratably over the duration of the license term. The PCS associated with these arrangements is coterminous with the duration of the license term. The Company also provides hosting or software solutions that provide continuous access to information and include PCS and recognizes revenue ratably over the duration of the license term. In addition, the determination of certain of our services revenues requires the use of estimates, principally related to transaction volumes in instances where these volumes are reported to us by our clients on a monthly basis in arrears. In these instances, we estimate transaction volumes based on average actual volumes reported by our customers in the past. Differences between our estimates and actual final volumes reported are recorded in the period in which actual volumes are reported. We have not experienced significant variances between our estimates of these services revenues reported to us by our customers and actual reported volumes in the past.  We invoice our customers in annual, quarterly, or monthly installments. Amounts billed and collected in advance are recorded as fees received in advance on the balance sheet and are recognized as the services are performed and revenue recognition criteria are met.  

Stock Based Compensation

  The fair value of equity awards is measured on the date of grant using a Black-Scholes option-pricing model, which requires the use of several estimates, including expected term, expected risk-free interest rate, expected volatility and expected dividend yield.  Stock based compensation cost is measured at the grant date, based on the fair value of the awards granted, and is recognized as expense over the requisite service period. Option grants and restricted stock awards are expensed ratably over the four-year vesting period. We follow the substantive vesting period approach for awards granted after January 1, 2005, which requires that stock based compensation expense be recognized over the period from the date of grant to the date when the award is no longer contingent on the employee providing additional service.  

We estimate expected forfeitures of equity awards at the date of grant and recognize compensation expense only for those awards expected to vest. The forfeiture assumption is ultimately adjusted to the actual forfeiture rate.

  Prior to our IPO, the fair value of the common stock underlying the stock based compensation was determined quarterly on or about the final day of the quarter. The valuation methodology was based on a variety                                           51

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  of qualitative and quantitative factors including the nature of the business and history of the enterprise, the economic outlook in general, the condition of the specific industries in which we operate, the financial condition of the business, our ability to generate free cash flow, and goodwill or other intangible asset value.  Prior to our IPO, the fair value of our common stock was determined using generally accepted valuation methodologies, including the use of the guideline company method. This determination of fair market value employs both a comparable company analysis, which examines the valuation multiples of public companies deemed comparable, in whole or in part, to us and a discounted cash flow analysis that determines a present value of the projected future cash flows of the business. The comparable companies are comprised of a combination of public companies in the financial services information and technology businesses. These methodologies have been consistently applied since 1997. We regularly assess the underlying assumptions used in the valuation methodologies, including the comparable companies to be used in the analysis, the future forecasts of revenue and earnings, and the impact of market conditions on factors such as the weighted average cost of capital. These assumptions are reviewed quarterly, with a more comprehensive evaluation performed annually. For the comparable company analysis, the share price and financial performance of these comparables were updated quarterly based on the most recent public information. Our stock price was also impacted by the number of shares outstanding. As the number of shares outstanding has declined over time, our share price has increased. The determination of the fair value of our common stock required us to make judgments that were complex and inherently subjective. If different assumptions are used in future periods, stock based compensation expense could be materially impacted in the future.  

Goodwill and Intangibles

  Goodwill represents the excess of acquisition costs over the fair value of tangible net assets and identifiable intangible assets of the businesses acquired. Goodwill and intangible assets deemed to have indefinite lives are not amortized. Intangible assets determined to have definite lives are amortized over their useful lives. 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, using the guidance and criteria described in the accounting standard for Goodwill and Other Intangible Assets. This testing compares carrying values to fair values and, when appropriate, the carrying value of these assets is reduced to fair value.  As of December 31, 2011, we had goodwill and net intangible assets of $936.4 million, which represents 60.8% of our total assets. During fiscal year 2011, we performed an impairment test as of June 30, 2011 and confirmed that no impairment charge was necessary. There are many assumptions and estimates used that directly impact the results of impairment testing, including an estimate of future expected revenues, earnings and cash flows, useful lives and discount rates applied to such expected cash flows in order to estimate fair value. We have the ability to influence the outcome and ultimate results based on the assumptions and estimates we choose for determining the fair value of our reporting units. To mitigate undue influence, we set criteria and benchmarks that are reviewed and approved by various levels of management and reviewed by other independent parties. The determination of whether or not goodwill or indefinite-lived acquired intangible assets have become impaired involves a significant level of judgment in the assumptions and estimates underlying the approach used to determine the value of our reporting units. Changes in our strategy or market conditions could significantly impact these judgments and require an impairment to be recorded to intangible assets and goodwill. Our valuation has not indicated any impairment of our goodwill asset of $709.9 million as of December 31, 2011. For the year ended December 31, 2011, there were no impairment indicators related to our intangible assets.  

Pension and Postretirement

  We account for our pension and postretirement benefit plans in accordance with the accounting standard for Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans. This standard requires that employers recognize on a prospective basis the funded status of their defined benefit pension and other postretirement benefit plans on their consolidated balance sheets and recognize as a component of other                                           52

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  comprehensive income/(loss), net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost. Additional minimum pension liabilities and related intangible assets are also derecognized upon adoption of the new standard.  Certain assumptions are used in the determination of our annual net period benefit cost and the disclosure of the funded status of these plans. The principal assumptions concern the discount rate used to measure the projected benefit obligation, the expected return on plan assets and the expected rate of future compensation increases. We revise these assumptions based on an annual evaluation of long-term trends and market conditions that may have an impact on the cost of providing retirement benefits.  In determining the discount rate, we utilize quoted rates from long-term bond indices, and changes in long-term bond rates over the past year, cash flow models and other data sources we consider reasonable based upon the profile of the remaining service life of eligible employees. As part of our evaluation, we calculate the approximate average yields on securities that were selected to match our separate projected cash flows for both the pension and postretirement plans. Our separate benefit plan cash flows are input into actuarial models that include data for corporate bonds rated AA or better at the measurement date. The output from the actuarial models are assessed against the prior year's discount rate and quoted rates for long-term bond indices. For our pension plans at December 31, 2011, we determined this rate to be 4.98%, a decrease of 0.51% from the 5.49% rate used at December 31, 2010. Our postretirement rate is 3.50% at December 31, 2011, a decrease of 0.50% from the 4.00% used at December 31, 2010.  The expected return on plan assets is determined by taking into consideration our analysis of our actual historical investment returns to a broader long-term forecast adjusted based on our target investment allocation, and the current economic environment. Our investment guidelines target an investment portfolio allocation of 40.0% debt securities and 60.0% equity securities. As of December 31, 2011, the plan assets were allocated 47.0% debt, 51.0% equity securities, and 2.0% to other investments. We have used our target investment allocation to derive the expected return as we believe this allocation will be retained on an ongoing basis that will be commensurate with the projected cash flows of the plan. The expected return for each investment category within our target investment allocation is developed using average historical rates of return for each targeted investment category, considering the projected cash flow of the qualified pension plan. The difference between this expected return and the actual return on plan assets is generally deferred and recognized over subsequent periods through future net periodic benefit costs. We believe these considerations provide the basis for reasonable assumptions with respect to the expected long-term rate of return on plan assets.  The rate of compensation increase is based on our long-term plans for such increases. The measurement date used to determine the benefit obligation and plan assets is December 31. The future benefit payments for the postretirement plan are net of the federal medical subsidy. As a result of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, the tax treatment of federal subsidies paid to sponsors of retiree health benefit plans that provide prescription drug benefits that are at least actuarially equivalent to the corresponding benefits provided under Medicare Part D was effectively changed. This legislative change reduces future tax benefits of the coverage we provided to participants in the Postretirement Plan. We are required to account for this change in the period during which the law is enacted. As a result, we recorded a non-cash tax charge to the provision for income taxes of $2.4 million as of December 31, 2010.  On January 12, 2012, we announced a hard freeze, which will eliminate all future compensation and service credits, to be instituted on February 29, 2012 to all participants in the pension plans. The freeze in 2012 will reduce the unfunded pension liability by approximately $10.2 million and we will realize a curtailment gain of approximately $0.7 million.                                           53

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A one percent change in discount rate, future rate of return on plan assets and the rate of future compensation would have the following effects:

                                                              Pension                                                         Post Retirement                                        1% Decrease                       1% Increase                       1% Decrease                       1% Increase                                                                                         (In thousands)                                                Projected                         Projected                          Projected                        Projected                                Benefit          Benefit          Benefit          Benefit           Benefit          Benefit          Benefit         Benefit                                  Cost          Obligation          Cost          Obligation          Cost           Obligation         Cost          Obligation Discount Rate                  $  2,664       $     47,431       $ (1,811 )     $    (36,816 )     $     (94 )     $      1,161      $      83      $     (1,067 ) Expected Rate on Asset         $  3,127       $          -       $ (3,127 )     $          -       $       -       $          -      $       -      $          - Rate of Compensation           $   (340 )     $     (2,016 )     $    524       $      2,191       $       -       $          -      $       -      $          -   Income Taxes  In projecting future taxable income, we develop assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage the underlying businesses. The calculation of our tax liabilities also involves dealing with uncertainties in the application and evolution of complex tax laws and regulations in other jurisdictions.  On January 1, 2007, we adopted Accounting for Uncertainty in Income Taxes - an interpretation of ASC 740, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this interpretation, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. As a result of the implementation of this interpretation, we recognized an increase in the liability for unrecognized tax benefits of approximately <money>$10.3 million, which was accounted for as an increase to the January 1, 2007 balance of retained earnings/(accumulated deficit).  We recognize and adjust our liabilities when our judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined.  As of December 31, 2011, we have gross federal, state, and foreign income tax net operating loss carryforwards of $87.1 million, which will expire at various dates from 2012 through 2031. Such net operating loss carryforwards expire as follows:                                            (In thousands)                           2012 - 2019   $        11,374                           2020 - 2024            17,168                           2025 - 2031            58,530                                          $        87,072    We estimate unrecognized tax positions of $6.3 million that may be recognized by December 31, 2012, due to expiration of statutes of limitations and resolution of audits with taxing authorities, net of additional uncertain tax positions.  

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, refer to Note 2(s) to the audited consolidated financial statements included elsewhere in this annual report on Form 10-K.

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