filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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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, including the impact of the 2019 novel coronavirus ("COVID-19"). 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.”
This discussion includes a comparison of our results of operations, liquidity and capital resources, financing and financing capacity and cash flow for the years ended December 31, 2020 and 2019. A discussion of changes in our results of operations and cash flows for the years ended December 31, 2019 and 2018 can be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" within the annual report on Form 10-K for the year ended December 31, 2019 filed on February 18, 2020.
Verisk is a leading data analytics provider serving customers in insurance, energy and specialized markets, and financial services. Using advanced technologies to collect and analyze billions of records, we draw on unique data assets and deep domain expertise to provide innovations that may be integrated into customer workflows. We offer predictive analytics and decision support solutions to customers in rating, underwriting, claims, catastrophe and weather risk, natural resources intelligence, economic forecasting, commercial banking and finance, and many other fields. In the U.S., and around the world, we help customers protect people, property, and financial assets. Refer to Item 1. Business for further discussion.
Our customers use our solutions to make better decisions about risk and opportunities 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 customers to make more logical decisions. We believe our solutions for analyzing risk positively impact our customers’ revenues and help them better manage their costs.
Our Insurance segment provides underwriting and ratings, and claims insurance data for the U.S. P&C insurance industry. This segment's revenues represented approximately 71% of our revenues for the years ended December 31, 2020 and 2019. Our Energy and Specialized Markets segment provides research and consulting data analytics for the global energy, chemicals, and metals and mining industries. Our Energy and Specialized Markets segment's revenues represented approximately 23% and 22% of our revenues for the years ended December 31, 2020 and 2019, respectively. Our Financial Services segment provides competitive benchmarking, decisioning algorithms, business intelligence, and customized analytic services to financial institutions, payment networks and processors, alternative lenders, regulators and merchants. Our Financial Services segment's revenues represented approximately 6% and 7% of our revenues for the years ended December 31, 2020 and 2019, respectively.
COVID-19
Since January 2020, an outbreak of the 2019 novel coronavirus ("COVID-19") has evolved into a worldwide pandemic. We have modified our operations in line with our business continuity plans due to COVID-19. While our facilities generally remain open, we are making extensive use of the work-from-home model at this moment. On a daily basis, management is reviewing our operations and there have been to date minimal interruptions in our customer facing operations. Given the digital nature of our business and the move toward cloud enablement, we expect to remain operationally stable and fully available to our customers. We are in compliance with all financial and non-financial covenants and have not observed a loss of any significant customers, a significant deterioration in the collectability of receivables, a significant reduction in our liquidity, nor a significant decline in the subscription renewal rates.
We have analyzed our solutions and services to assess the impact of COVID-19 on our revenue streams. We have not identified any material impact stemming from COVID-19 on approximately 85% of our revenues at this point, as much of these revenues are subscription in nature and subject to long-term contracts. These revenues grew approximately 6% for the year ended December 31, 2020.
Of the remaining 15%, we have identified specific solutions and services, largely transactional in nature, that are being impacted by COVID-19. The primary causal factors are lower auto and travel insurance activity, the inability to enter commercial buildings to perform engineering analyses, decreased capital expenditure in the energy sector, and reduced levels of advertising by financial institutions and marketers. The portion of our revenue that is attributable to these solutions has been negatively impacted by COVID-19, and declined approximately 11% for the year ended December 31, 2020. The deepest impacts were in the categories of travel insurance analytics, auto underwriting and claims analytics in the insurance industry, consulting services in the energy industry, and spend informed analytic solutions in financial services. Although we have experienced a decline in revenue attributable to these specific solutions during the last two weeks of March 2020 and through the period ended December 31, 2020, currently we do not anticipate lasting impacts of a material nature to our long-term growth profile. As the global outbreak of COVID-19 is still rapidly evolving, management continues to closely monitor its impact on our business.
Executive Summary
Key Performance Metrics
We believe our business’s ability to grow recurring revenue and generate positive cash flow is the key indicator of the successful execution of our business strategy. We use year-over-year revenue and EBITDA growth as metrics to measure our performance. EBITDA and EBITDA margin are non-GAAP financial measures (see Note 3. within Item 6. Selected Financial Data section of Management’s Discussion and Analysis of Financial Condition and Results of Operations). The respective GAAP financial measures are net income and net income margin.
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 growth. We use EBITDA growth as a measure of our ability to balance the size of revenue growth with cost management and investing for future growth. EBITDA growth allows for greater transparency regarding our operating performance and facilitate period-to-period comparison.
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 agreements for hosted subscriptions, advisory/consulting services, and for transactional solutions, recurring and non-recurring. 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.
Approximately 82% of the revenues in our Insurance segment for the years ended December 31, 2020 and 2019 were derived from hosted subscriptions through agreements (generally one to five years) for our solutions. Our customers in this segment include most of the P&C insurance providers in the U.S. Approximately 84% and 78% of the revenues in our Energy and Specialized Markets segment for the years ended December 31, 2020 and 2019, respectively, were derived from hosted subscriptions with long-term agreements for our solutions. Our customers in this segment include most of the top 10 global energy providers around the world. Approximately 77% and 72% of the revenues in our Financial Services segment for the years ended December 31, 2020 and 2019, respectively, were derived from subscriptions with long-term agreements for our solutions, respectively. Our customers in this segment include financial institutions, payment networks and processors, alternative lenders, regulators, merchants, and the top 30 credit card issuers in North America, the United Kingdom, and Australia.
We also provide advisory/consulting services, which help our customers get more value out of our analytics and their subscriptions. In addition, certain of our solutions are paid for by our customers on a transactional basis, recurring and non-recurring. For example, we have solutions that allow our customers to access property-specific rating and underwriting information to price a policy on a commercial building, or compare a P&C insurance or a workers' compensation claim with information in our databases, or use our repair cost estimation solutions on a case-by-case basis. For the years ended December 31, 2020 and 2019, approximately 18% and 19% of our consolidated revenues were derived from providing transactional and advisory/consulting solutions, respectively.
Principal Operating Costs and Expenses
Personnel expenses are a major component of both our cost of revenues and selling, general and administrative expenses. Personnel expenses, which represented approximately 59% and 52% of our total operating expenses for the years ended December 31, 2020 and 2019, respectively, include salaries, benefits, incentive compensation, equity compensation costs, sales commissions, employment taxes, recruiting costs, and outsourced temporary agency costs.
We assign 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, salespeople, 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 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. However, part of our corporate strategy is to invest in new solutions and new businesses, which may offset margin expansion.
Cost of Revenues. Our cost of revenues consists primarily of personnel expenses. Cost of revenues also includes the expenses associated with the acquisition and verification of data, the maintenance of our existing solutions and the development and enhancement of our next-generation solutions. Our cost of revenues excludes depreciation and amortization.
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 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.
Trends Affecting Our Business
We serve customers in three primary vertical markets: P&C insurance, energy and specialized markets, and financial services. The industry trends in each of those markets can affect our business.
A significant change in P&C insurers’ profitability could affect the demand for our solutions. For insurers, the keys to profitability include increasing investment income, premium growth and disciplined underwriting of risks. Investment income remains under pressure as a result of low interest rates. Growth in P&C insurers’ direct written premiums is cyclical, with total industry premium growth receding from a peak of 14.8% in 2002 to a trough of negative 3.1% in 2009 and subsequently recovering to 4.4% in 2012, slowing down to 3.7% in 2015 and 2016, accelerating to 4.7% in 2017 and 5.5% in 2018, then again slowing down to 5.1% in 2019. In recent years, we have signed multi-year contracts with certain customers, and pricing is fixed at the beginning of each multi-year period; pricing for other customers is still linked to prior years' premiums. Based on the most recent results available, direct premium growth and net premium growth slowed down significantly in 2020 due to the COVID-19 pandemic. In 2020, insurers were also challenged by heightened catastrophic losses in 2020 associated with a record number of events ISO's Property Claims Service classified as catastrophes, including a major hurricane Laura and the Midwest derecho, both in August 2020, and multiple wildfires in the Western states. These events illustrate the need for broader coverages, such as flood to meet the changing needs of communities. We continue to provide the necessary resources to meet insurer needs. In the life insurance market, carriers are looking to modernize and digitize their core platforms, as well as offer streamlined underwriting decision-making process to expand the number of policies which can be offered more rapidly, and without cumbersome medical tests. Our no-code modular technology stack and advanced analytics (such as using electronic health records to model mortality and detecting of tobacco use through voice analysis) enable the digital transformation of our customers' core infrastructure and automate their decision-making processes across the policy lifecycle.
Trends in catastrophe and non-catastrophe weather losses can have an effect on our customers’ profitability, and therefore on their appetite for buying analytics to help them manage their risks. Any increase or decrease in frequency or severity of weather events over time could lead to an increased or decreased demand for our catastrophe modeling, catastrophe loss information, and repair cost solutions. Likewise, any structural changes in the reinsurance and related brokerage industry from the recent influx of alternative capital or newer technologies could affect demand for our products. We also have a portion of our revenue related to the number of claims processed due to losses, which can be impacted by seasonal storm activity. The need by our customers to fight insurance fraud - both in claims and at policy inception - could lead to increased demand for our underwriting and claims solutions.
Trends in the energy, chemicals, metals and mining sectors, and activity in financial markets can influence our revenues. The COVID-19 pandemic had a major impact on global economic growth, commodity flows and prices in 2020. Commodity markets in energy were disrupted with a negative impact on most of our major energy customers. Brent oil averaged $42 dollar per barrel in 2020 (and a monthly low of $19 dollars per barrel in April), down from $64 dollar per barrel in 2019; the downcycle in globally traded gas prices was exacerbated by weaker demand. Investment in the natural resources sector fell sharply as companies cut expenditure. We expect investment to increase with the recovery in the global economy though the natural resources industry will continue to demonstrate tight capital discipline which may affect our business. The energy transition is gathering pace with China, Japan, South Korea and Canada among the latest countries committing to net carbon neutral targets in 2020. The transition presents both a threat and an opportunity for the sector and our revenues. Fossil fuels will meet much of global demand for some decades, but investments in zero carbon energy (renewables and emerging technologies such as electric vehicles and energy storage) and the associated infrastructure will grow in importance. Electrification of economies will drive demand for base metals, some bulk commodities and battery raw materials. Climate change and decarbonization are rising up the agenda, and policy on environmental and social governance is intensifying. Attracting the capital needed to meet future energy demand is one of the industry’s challenges and data, analysis and insight will help our customers achieve this.
Trends in the banking and retail sectors, as well as material external factors can influence revenues in our Financial Services segment in many ways. COVID-19 has had a significant impact on our one-time consultative revenue streams over the past year as our clients sought to temporary reduce external expenditure while they focused on critical customer needs. Additionally, governmental intervention and actions to support indebted consumers by extending credit terms has created a lag in bankruptcy and similar filings which have adversely impacted our credit analytics business, but we do believe this is a temporary impact which will reverse over time. As retailers saw reduced consumer spend due to COVID-19 however, this created an opportunity for our spend analytics businesses to work more closely with retailers to help them understand and target emerging spend as the economies in our markets re-emerged. Our sector specific trends have remained broadly consistent with fraud and similar financial crimes continuing to impact our customers in ways ranging from regulatory risk and credit loss for financial institutions, to counterfeit loss and inventory shrinkage for merchants, with risks being elevated at times of financial stress. This can strengthen demand for our credit risk and fraud solutions ranging from enhanced brand protection solutions for retailers, through to enhanced artificial-intelligence led models to identify cross bank and cross-border fraudulent transactions. We continue to see increasing competition for traditional retail banks and consumer lenders from financial technology companies and other on-line lending new entrants, which provides opportunities for us to support many existing and potential clients, with our enhanced digital solutions and analytical tools providing new ways for us to communicate and engage with our clients today in our remote environment, and in the future.
Description of Acquisitions
We acquired thirteen businesses since January 1, 2018. These acquisitions affect the comparability of our consolidated results of operations between periods. See a description of our 2020 acquisitions below and Note 10. to our consolidated financial statements included in this annual report on Form 10-K for further discussions.
2020 Acquisitions
On December 16, 2020, the we acquired the stock of Lead Intelligence, Inc. ("Jornaya"), a leading provider of consumer behavioral data and intelligence. The acquisition added Jornaya's proprietary view of consumer buying journeys to our growing set of marketing solutions for the insurance and financial services markets, as well as provide customers with the intelligence and agility to time and tailor interactions based on actual in-market behaviors. Jornaya has become part of the underwriting & rating category within our Insurance segment.
On September 9, 2020, we acquired the stock of Franco Signor LLC ("Franco Signor"). Franco Signor is a Medicare Secondary Payer compliance solutions provider to large employers, insurers and third-party administrators in the U.S. Franco Signor has become part of the claims category within our Insurance segment and enhanced the solutions we currently offer, as well as added professional administrative services for Medicare Set Asides to our suite of solutions.
Description of Dispositions
In the first quarter of 2020, our data warehouse business within the Financial Services segment qualified as assets held for sale and was sold on March 1, 2020. We recorded a gain of $3.5 million in "Other operating loss (income)" within the accompanying consolidated statements of operations for the year ended December 31, 2020.
On February 14, 2020, the sale of the compliance background screening business was completed for net cash proceeds of $23.1 million. A gain of $15.9 million was included in "Other operating loss (income)" within the accompanying consolidated statements of operations for the year ended December 31, 2020.
On February 1, 2020, the sale of the aerial imagery sourcing group was completed. We contributed assets related to the disposed business, including cash of $63.8 million, in exchange for a non-controlling 35.0% ownership interest in a nonpublic company, Vexcel. We determined the fair value of the securities associated with the non-controlling ownership interest in Vexcel with the assistance of valuations performed by third-party specialists, including the discounted cash flow analysis and estimates made by management. The securities were concluded not to have a readily determinable fair value and did not qualify for the practical expedient to estimate fair value. The contributed assets approximated the fair value of the investment securities related to the non-controlling ownership interest; therefore, there was no gain or loss recorded in conjunction with this disposition for the year ended December 31, 2020.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Consolidated Results of Continuing Operations
Revenues
Revenues were $2,784.6 million for the year ended December 31, 2020 compared to $2,607.1 million for the year ended December 31, 2019, an increase of $177.5 million or 6.8%. Our recent acquisitions (BuildFax, FAST, Franco Signor, and Jornaya within the Insurance segment; the CaaS business and Genscape within the Energy and Specialized Markets segment; Commerce Signals within the Financial Services segment) and dispositions (the aerial imagery sourcing group and the compliance background screening business within the claims category of the Insurance segment, and the retail analytics solution business and the data warehouse business within the Financial Services segment) contributed net revenues of $92.0 million. The remaining consolidated revenues of $85.5 million or 3.4% is related to the following: revenues within our Insurance segment increased $96.5 million or 5.3%; offset by revenues within our Energy and Specialized Markets segment decreased $5.8 million or 1.1%; and revenues within our Financial Services segment decreased $5.2 million or 3.3%. Refer to the Results of Operations by Segment within this section for more information regarding our revenues.
| 2020 | 2019 | Percentage change | Percentage change excluding recent acquisitions, businesses held for sale and disposition | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | ||||||||||||||||
| Insurance | $ | 1,986.3 | $ | 1,865.2 | 6.5 | % | 5.3 | % | ||||||||
| Energy and Specialized Markets | 641.6 | 563.9 | 13.8 | % | (1.1 | )% | ||||||||||
| Financial Services | 156.7 | 178.0 | (12.0 | )% | (3.3 | )% | ||||||||||
| Total revenues | $ | 2,784.6 | $ | 2,607.1 | 6.8 | % | 3.4 | % |
Cost of Revenues
Cost of revenues was $993.9 million for the year ended December 31, 2020 compared to $976.8 million for the year ended December 31, 2019, an increase of $17.1 million or 1.8%. Our recent acquisitions and dispositions accounted for a net increase of $40.4 million in cost of revenues, which was primarily related to salaries and employee benefits. The remaining cost of revenues decreased $23.3 million or 2.5% primarily due to decreases in travel expenses of $28.5 million, data costs of $8.7 million, salaries and employee benefits of $5.5 million, and professional consulting costs of $2.1 million. The decrease in travel expense primarily resulted from travel restrictions in connection with the COVID-19 pandemic. These decreases were partially offset by increases in information technology expenses of $14.2 million and other operating costs of $7.3 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SGA") were $413.9 million for the year ended December 31, 2020 compared to $603.5 million for the year ended December 31, 2019, a decrease of $189.6 million or 31.4%. Our litigation reserve recorded for the year ended December 31, 2019 related to the Xactware Solutions, Inc. Patent Litigation ("EVT Litigation Reserve") accounted for a decrease of $125.0 million (See Note 21. Commitments and Contingencies to our consolidated financial statements included in this annual report on Form 10-K). Our acquisition-related costs (earn-outs) accounted for a decrease of $71.8 million (See Note 10. Acquisitions to our consolidated financial statements included in this annual report on Form 10-K). Our recent acquisitions and dispositions accounted for a net increase of $21.8 million primarily related to salaries and employee benefits. The remaining SGA decreased $14.6 million or 2.4% primarily due to decreases in travel expenses of $12.5 million, professional consulting costs of $9.6 million, and information technology expenses of $2.0 million. The decrease in travel expense primarily resulted from travel restrictions in connection with the COVID-19 pandemic. These decreases were partially offset by increases of salaries and employee benefits of $9.1 million and other operating costs of $0.4 million.
Depreciation and Amortization of Fixed Assets
Depreciation and amortization of fixed assets was $192.2 million for the year ended December 31, 2020 compared to $185.7 million for the year ended December 31, 2019, an increase of $6.5 million or 3.5%. The increase was primarily driven by assets placed in service of $20.5 million to support data capacity expansion and revenue growth and due to recent acquisitions of $7.9 million. These increases were partially offset by our recent dispositions of $21.9 million.
Amortization of Intangible Assets
Amortization of intangible assets was $165.9 million for the year ended December 31, 2020 compared to $138.0 million for the year ended December 31, 2019, an increase of $27.9 million or 20.2%. This was primarily driven by the additional amortization of intangible assets incurred in connection with our recent acquisitions.
Other Operating (Income) Loss
Other operating (income) loss was a gain of $19.4 million for the year ended December 31, 2020 compared to a loss of $6.2 million for the year ended December 31, 2019, an increase of $25.6 million, primarily related to gains associated with the dispositions of our compliance background screening business and data warehouse business for the year ended December 31, 2020 and the loss associated with the disposition of our retail analytics solution business for the year ended December 31, 2019.
Investment Loss and Others, Net
Investment loss and others, net was a loss of $2.4 million for the year ended December 31, 2020 compared to a loss of $1.7 million for the year ended December 31, 2019. The increase of $0.7 million was primarily due to a loss on foreign currencies.
Interest Expense
Interest expense was $138.2 million for the year ended December 31, 2020 compared to $126.8 million for the year ended December 31, 2019, an increase of $11.4 million or 9.0%. The increase was primarily driven by the additional senior notes of $500.0 million that were issued in the second quarter of 2020. The proceeds of these senior notes were used for general corporate purposes, including the repayment of the committed senior unsecured Syndicated Revolving Credit Facility (the "Credit Facility").
Provision for Income Taxes
The provision for income taxes was $184.8 million for the year ended December 31, 2020 compared to $118.5 million for the year ended December 31, 2019, an increase of $66.3 million or 55.9%. The effective tax rate was 20.6% for the year ended December 31, 2020 compared to 20.9% for the year ended December 31, 2019. The decrease in the effective tax rate in 2020 compared to 2019 was primarily due to the impact of higher tax benefits from equity compensation in the current period versus the prior period as well as lower nondeductible earn-out expenses in the current period. These benefits were partially offset by the deferred tax impact of the tax rate increase in the United Kingdom that was enacted and recorded in 2020.
Net Income
The net income margin for our consolidated results was 25.6% for the year ended December 31, 2020 compared to 17.3% for the year ended December 31, 2019. The increase in net income margin was primarily related to the EVT Litigation Reserve (2019), a decrease in acquisition-related costs (earn-outs), the gains on sales of our compliance background screening business and data warehouse business (2020), a reduction in travel expenses as a result of COVID-19, and cost discipline.
EBITDA Margin
The EBITDA margin for our consolidated results was 50.1% for the year ended December 31, 2020 compared to 39.1% for the year ended December 31, 2019. The increase in EBITDA margin was primarily related to the EVT Litigation Reserve (2019), a decrease in acquisition-related costs (earn-outs), the gains on sales of our compliance background screening business and data warehouse business (2020), a reduction in travel expenses as a result of COVID-19, and cost discipline.
Results of Continuing Operations by Segment
Insurance
Revenues
Revenues were $1,986.3 million for the year ended December 31, 2020 compared to $1,865.2 million for the year ended December 31, 2019, an increase of $121.1 million or 6.5%. Our underwriting & rating revenues increased $136.3 million or 10.9%. Our claims revenues decreased $15.2 million or 2.5%.
| 2020 | 2019 | Percentage change | Percentage change excluding recent acquisitions, businesses held for sale and disposition | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | ||||||||||||||||
| Underwriting & rating | $ | 1,390.6 | $ | 1,254.3 | 10.9 | % | 6.7 | % | ||||||||
| Claims | 595.7 | 610.9 | (2.5 | )% | 2.2 | % | ||||||||||
| Total Insurance | $ | 1,986.3 | $ | 1,865.2 | 6.5 | % | 5.3 | % |
Our recent acquisitions (BuildFax, FAST, Franco Signor and Jornaya) and dispositions (the aerial imagery sourcing group and the compliance screening business) contributed net revenues of $24.6 million and the remaining Insurance revenues increased $96.5 million or 5.3%. Our underwriting & rating revenues increased $84.3 million or 6.7% primarily due to an annual increase in prices derived from continued enhancements to the content of the solutions within our industry-standard insurance programs as well as selling expanded solutions to existing customers within commercial and personal lines. In addition, catastrophe modeling services contributed to the growth. Our claims revenues increased $12.2 million or 2.2%, primarily due to growth in our repair cost estimating solutions revenue. This increase was offset by the impact of the injunction ruling related to the roof measurement solutions in the fourth quarter of 2019 and a decline in certain transactional revenues in connection with the COVID-19 pandemic.
Cost of Revenues
Cost of revenues for our Insurance segment was $628.4 million for the year ended December 31, 2020 compared to $639.9 million for the year ended December 31, 2019, a decrease of $11.5 million or 1.8%. Our recent acquisitions and dispositions represented a net increase of $4.9 million in cost of revenues, which was primarily related to salaries and employee benefits. The remaining cost of revenues decreased $16.4 million or 2.7% primarily due to decreases in travel expenses of $14.4 million, data costs of $9.4 million, and salaries and employee benefits of $7.6 million. The decrease in travel expenses primarily resulted from travel restrictions in connection with the COVID-19 pandemic and a reduction in travel-related costs due to the sale of our aerial imagery sourcing group in February 2020. The decrease in salaries and employee benefits mostly resulted from a reduction in our annual short-term incentives. These decreases were partially offset by increases in information technology expenses of $9.8 million, professional consulting costs of $1.9 million, and other operating costs of $3.3 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for our Insurance segment were $243.3 million for the year ended December 31, 2020 compared to $402.7 million for the year ended December 31, 2019, a decrease of $159.4 million or 39.6%. Our EVT Litigation Reserve accounted for a decrease of $125.0 million. Our acquisition-related costs (earn-outs) accounted for a decrease of $29.9 million. Our recent acquisitions and dispositions accounted for an increase of $7.3 million primarily related to salaries and employee benefits. The remaining SGA decreased $11.8 million or 2.9% primarily due to decreases in professional consulting costs of $8.8 million, travel expenses of $7.1 million, information technology expenses of $2.5 million, and other operating costs of $1.2 million. These decreases were partially offset by an increase in salaries and employee benefits of $7.8 million.
Other Operating Income
Other operating income was a gain of $15.9 million for the year ended December 31, 2020 compared to $0 for the year ended December 31, 2019, a variance of $15.9 million, primarily related to a gain associated with the disposition of our compliance background screening business.
Investment (Loss) Income and Others, Net
Investment (loss) income and others, net was a loss of $1.2 million for the year ended December 31, 2020 compared to a gain of $0.7 million for the year ended December 31, 2019. The decrease of $1.9 million was primarily due to a loss on foreign currencies.
EBITDA Margin
EBITDA for our Insurance segment was $1,129.3 million for the year ended December 31, 2020 compared to $823.3 million for the year ended December 31, 2019. The EBITDA margin for our Insurance segment was 56.9% for the year ended December 31, 2020 compared to 44.1% for the year ended December 31, 2019. The increase in EBITDA margin was primarily related to the EVT Litigation Reserve (2019), a reduction in travel expenses as a result of COVID-19, and cost discipline.
Energy and Specialized Markets
Revenues
Revenues for our Energy and Specialized Markets segment were $641.6 million for the year ended December 31, 2020 compared to $563.9 million for the year ended December 31, 2019, an increase of $77.7 million or 13.8%. Our recent acquisitions, the CaaS business and Genscape, within this segment contributed revenues of $83.5 million. The remaining decrease in revenue of $5.8 million or 1.1% was primarily due to declines in cost intelligence solutions' implementation projects that did not reoccur and consulting revenue in connection with the COVID-19 pandemic. These declines were slightly offset by increases in our environmental health and safety service revenue and core research solutions.
Cost of Revenues
Cost of revenues for our Energy and Specialized Markets segment was $272.7 million for the year ended December 31, 2020 compared to $239.7 million for the year ended December 31, 2019, an increase of $33.0 million or 13.8%. Our recent acquisitions accounted for an increase of $36.6 million in cost of revenues, which was primarily related to salaries and employee benefits. The remaining cost of revenues decreased $3.6 million or 1.6% primarily due to decreases in travel expenses of $11.5 million and professional consulting fees of $4.3 million. The decrease in travel expenses primarily resulted from travel restrictions in connection with the COVID-19 pandemic. These decreases were partially offset by increases in salaries and employee benefits of $4.8 million, information technology expenses of $2.4 million, data costs of $1.0 million, and other operating costs of $4.0 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for our Energy and Specialized Markets segment were $150.9 million for the year ended December 31, 2020 compared to $181.1 million for the year ended December 31, 2019, a decrease of $30.2 million or 16.7%. Our acquisition-related costs (earn-out) accounted for a decrease of $41.9 million. Our recent acquisitions accounted for an increase of $14.6 million, primarily related to salaries and employee benefits. The remaining SGA decreased $2.9 million or 2.2% primarily due to decreases in travel expenses of $4.7 million and professional consulting costs of $0.7 million. The decrease in travel expenses primarily resulted from travel restrictions in connection with the COVID-19 pandemic. These decreases were partially offset by increases in information technology expenses of $0.7 million, salaries and employee benefits of $0.1 million, and other operating costs of $1.7 million.
Investment Loss and Others, Net
Investment loss and others, net was a loss of $1.2 million for the year ended December 31, 2020 compared to a loss of $1.9 million for the year ended December 31, 2019. The decrease of $0.7 million was primarily due to a gain on foreign currencies.
EBITDA Margin
EBITDA for our Energy and Specialized Markets segment was $216.8 million for the year ended December 31, 2020 compared to $141.2 million for the year ended December 31, 2019. The EBITDA margin for our Energy and Specialized Markets segment was 33.8% for the year ended December 31, 2020 compared to 25.0% for the year ended December 31, 2019. The increase in EBITDA margin was primarily related to cost-discipline, a reduction in travel expenses as a result of COVID-19, and a decrease in acquisition-related costs (earn-outs).
Financial Services
Revenues
Revenues for our Financial Services segment were $156.7 million for the year ended December 31, 2020 compared to $178.0 million for the year ended December 31, 2019, a decrease of $21.3 million or 12.0%. Our recent acquisition of Commerce Signals and dispositions of the retail analytics solution business and the data warehouse business contributed a net decrease in revenues of $16.1 million. The remaining decrease in revenue was $5.2 million or 3.3%, related to projects that did not reoccur and decrease in consulting revenue in connection with the COVID-19 pandemic.
Cost of Revenues
Cost of revenues for our Financial Services segment was $92.8 million for the year ended December 31, 2020 compared to $97.2 million for the year ended December 31, 2019, a decrease of $4.4 million or 4.5%. Our recent acquisition and dispositions represented a net decrease of $1.1 million, which was primarily related to salaries and employee benefits. The remaining cost of revenues decreased $3.3 million or 3.6% primarily due to decreases in salaries and employee benefits of $2.7 million, travel expenses of $2.6 million, and data costs of $0.3 million. The decrease in salaries and employee benefits mostly resulted from a reduction in our annual short-term incentives. The decrease in travel expenses primarily resulted from travel restrictions in connection with the COVID-19 pandemic. These decreases were partially offset by increases in information technology expenses of $2.0 million and professional consulting costs of $0.3 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for our Financial Services segment were $19.7 million for the years ended December 31, 2020 and December 31, 2019. Our recent acquisitions and dispositions represented a net decrease of $0.1 million. The remaining SGA increase of $0.1 million or 0.4% is primarily due to an increase in salaries and employee benefits of $1.2 million. This increase was partially offset by decreases in travel expenses of $0.7 million, information technology expenses of $0.2 million, professional consulting costs of $0.1 million, and other operating costs of $0.1 million.
Other Operating (Income) Loss
Other operating (income) loss was a gain of $3.5 million for the year ended December 31, 2020 compared to a loss of $6.2 million for the year ended December 31, 2019. The increase of $9.7 million was related to a gain of $3.5 million generated from the sale of our data warehouse business for the year ended December 31, 2020 and a loss of $6.2 million generated from the sale of our retail analytics solution business for the year ended December 31, 2019.
Investment Loss and Others, Net
Investment loss and others, net was $0 for the year ended December 31, 2020 compared to a loss of $0.5 million for the year ended December 31, 2019. The variance of $0.5 million was primarily due to a gain on foreign currencies.
EBITDA Margin
EBITDA for our Financial Services segment was $47.7 million for the year ended December 31, 2020 compared to $54.4 million for the year ended December 31, 2019. The EBITDA margin for our Financial Services segment was 30.4% for the year ended December 31, 2020 compared to 30.6% for the year ended December 31, 2019. The decrease in EBITDA margin is primarily related to the decrease in revenue.
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, 2020. In management’s opinion, the quarterly 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 Quarters Ended | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31, | June 30, | September 30, | December 31, | Full Year | ||||||||||||||||
| 2020 | 2020 | |||||||||||||||||||
| (in millions, except for per share data) | ||||||||||||||||||||
| Statement of operations data: | ||||||||||||||||||||
| Revenues | $ | 689.8 | $ | 678.8 | $ | 702.7 | $ | 713.3 | $ | 2,784.6 | ||||||||||
| Operating income | $ | 252.3 | $ | 259.7 | $ | 275.4 | $ | 250.7 | $ | 1,038.1 | ||||||||||
| Net income | $ | 171.7 | $ | 179.0 | $ | 185.8 | $ | 176.2 | $ | 712.7 | ||||||||||
| Basic net income per share | $ | 1.05 | $ | 1.10 | $ | 1.14 | $ | 1.08 | $ | 4.38 | ||||||||||
| Diluted net income per share | $ | 1.04 | $ | 1.08 | $ | 1.12 | $ | 1.07 | $ | 4.31 |
| For the Quarters Ended | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31, | June 30, | September 30, | December 31, | Full Year | ||||||||||||||||
| 2019 | 2019 | |||||||||||||||||||
| (in millions, except for per share data) | ||||||||||||||||||||
| Statement of operations data: | ||||||||||||||||||||
| Revenues | $ | 625.0 | $ | 652.6 | $ | 652.7 | $ | 676.8 | $ | 2,607.1 | ||||||||||
| Operating income | $ | 202.4 | $ | 218.3 | $ | 69.6 | $ | 206.6 | $ | 696.9 | ||||||||||
| Net income | $ | 134.4 | $ | 150.4 | $ | 32.9 | $ | 132.2 | $ | 449.9 | ||||||||||
| Basic net income per share | $ | 0.82 | $ | 0.92 | $ | 0.20 | $ | 0.81 | $ | 2.75 | ||||||||||
| Diluted net income per share | $ | 0.81 | $ | 0.90 | $ | 0.20 | $ | 0.80 | $ | 2.70 |
Liquidity and Capital Resources
As of December 31, 2020 and 2019, we had cash and cash equivalents and available-for-sale securities of $222.9 million and $188.2 million, respectively. Subscriptions for our solutions are billed and generally paid in advance of rendering services either quarterly or in full upon commencement of the subscription period, which is usually for one year. Subscriptions are automatically renewed at the beginning of each calendar year. We have historically generated significant cash flows from operations. As a result of this factor, as well as the availability of funds under our syndicated revolving credit facility, 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 (deferred revenues). 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 consolidated capital expenditures as a percentage of consolidated revenues for the years ended December 31, 2020 and 2019, were 8.9% and 8.3%, respectively. Expenditures related to developing and enhancing our solutions are predominately related to internal-use software and are capitalized in accordance with ASC 350-40, “Accounting for Costs of Computer Software Developed or Obtained for Internal Use.” We also capitalize amounts in accordance with ASC 985-20, “Software to be Sold, Leased or Otherwise Marketed.”
We have historically used a portion of our cash for repurchases of our common stock from our stockholders. For the years ended December 31, 2020, 2019 and 2018, we repurchased $348.8 million, $300.0 million and $438.6 million, respectively, of our common stock. For the year ended December 31, 2020, we also paid dividends of $175.8 million.
Financing and Financing Capacity
We had total debt, excluding finance lease obligations, unamortized discounts and premium, and debt issuance costs of $3,200.0 million and $3,145.0 million at December 31, 2020 and 2019, respectively. The debt at December 31, 2020 primarily consists of senior notes issued in 2020, 2019, 2015, 2012 and 2011 and borrowings outstanding under our committed senior unsecured Syndicated Revolving Credit Facility ("Credit Facility"), described below. Interest on the senior notes is payable semi-annually each year. The unamortized discount and debt issuance costs were recorded as "Long-term debt" in the accompanying consolidated balance sheets, and will be amortized to "Interest expense" in the accompanying consolidated statements of operations within this Form 10-K over the life of the respective senior note. The indenture governing the senior notes restricts our 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, 2020, we had senior notes with an aggregate principal amount of $3,150.0 million outstanding, and we were in compliance with our financial and non-financial debt covenants.
We have a Credit Facility with a borrowing capacity of $1,000.0 million with Bank of America N.A., HSBC Bank USA, N.A., JP Morgan Chase Bank, N.A., Wells Fargo Bank, National Association, Citibank, N.A., Credit Suisse AG, Cayman Islands Branch, Morgan Stanley Bank, N.A., TD Bank, N.A., and the Northern Trust Company. Interest on borrowings under the Credit Facility is payable at an interest rate of LIBOR plus 1.0% to 1.625%, depending upon the public debt rating. A commitment fee on any unused balance is payable periodically and may range from 8.0 to 20.0 basis points based upon the public debt rating. The Credit Facility also contains certain financial and other covenants that, among other things, impose certain restrictions on indebtedness, liens, investments, and capital expenditures. These covenants place restrictions on mergers, asset sales, sale/leaseback transactions, and certain transactions with affiliates. The financial covenants require that, at the end of any fiscal quarter, we have a consolidated funded debt leverage ratio of less than 3.5 to 1.0. At our election, the maximum consolidated funded debt leverage ratio could be permitted to increase one time each to 4.0 to 1.0 and 4.25 to 1.0. The Credit Facility may be used for general corporate purposes, including working capital needs and capital expenditures, acquisitions, dividends and the share repurchase program (the "Repurchase Program"). As of December 31, 2020, we were in compliance with all financial and other debt covenants under the Credit Facility. As of December 31, 2020 and 2019, the available capacity under the Credit Facility was $944.6 million and $500.2 million, net of the letters of credit of $5.4 million and $4.8 million, respectively. Subsequent to December 31, 2020, we had no borrowings and made repayments of $50.0 million under the Credit Facility.
Cash Flow
The following table summarizes our cash flow data for the years ended December 31:
| 2020 | 2019 | 2018 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | ||||||||||||
| Net cash provided by operating activities | $ | 1,068.2 | $ | 956.3 | $ | 934.4 | ||||||
| Net cash used in investing activities | $ | (595.8 | ) | $ | (927.9 | ) | $ | (265.4 | ) | |||
| Net cash (used in) provided by financing activities | $ | (445.2 | ) | $ | 10.9 | $ | (669.8 | ) |
Operating Activities
Net cash provided by operating activities was $1,068.2 million for the year ended December 31, 2020 compared to $956.3 million for the year ended December 31, 2019, an increase of $111.9 million or 11.7%. The increase was primarily due to an increase in collections, the deferral of certain employer payroll taxes resulting from the CARES Act and a reduction in travel payments as a result of COVID-19.
Net cash provided by operating activities was $956.3 million for the year ended December 31, 2019 compared to $934.4 million for the year ended December 31, 2018, an increase of $21.9 million or 2.3%. The increase was primarily related to an increase in cash receipts from customers driven by an increase in revenues and operating profit, partially offset by an increase in income tax payments.
Investing Activities
Net cash used in investing activities of $595.8 million for the year ended December 31, 2020 was primarily related to acquisitions of $285.1 million including escrow funding, capital expenditures of $246.8 million, and investments in non-public companies of $94.8 million.
Net cash used in investing activities of $927.9 million for the year ended December 31, 2019 was primarily related to acquisitions of $703.7 million including escrow funding and capital expenditures of $216.8 million.
Financing Activities
Net cash used in financing activities of $445.2 million for the year ended December 31, 2020 was driven by net debt repayments on our Credit Facility of $445.0 million, repurchases of common stock of $348.8 million, and dividend payments of $175.8 million, partially offset by proceeds from the issuance of long-term debt, inclusive of original issue premium and net of original discount, of $494.8 million, and proceeds from stock options exercised of $88.0 million.
Net cash provided by financing activities of $10.9 million for the year ended December 31, 2019 was driven by proceeds from issuance of long-term debt, inclusive of original issue premium and net of original discount, of $619.7 million, net debt proceeds on our Credit Facility of $80.0 million, and proceeds from stock options exercised of $52.4 million, partially offset by repurchases of common stock of $300.0 million, the repayment of our 4.875% senior notes of $250.0 million on January 15, 2019, and dividend payments of $163.5 million.
Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2020 and the future periods in which such obligations are expected to be settled in cash:
| Payments Due by Period | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | Less than 1 year | 2-3 years | 4-5 years | More than 5 years | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Contractual obligations | ||||||||||||||||||||
| Long-term debt, current portion of long-term debt and interest | $ | 4,602.3 | $ | 621.3 | $ | 556.4 | $ | 1,076.8 | $ | 2,347.8 | ||||||||||
| Operating leases | 376.9 | 50.5 | 87.9 | 67.1 | 171.4 | |||||||||||||||
| Pension and postretirement plans (1) | 15.5 | 2.0 | 3.8 | 3.3 | 6.4 | |||||||||||||||
| Finance lease obligations | 27.5 | 15.6 | 11.8 | 0.1 | — | |||||||||||||||
| Other long-term liabilities (2) | 0.5 | 0.1 | — | — | 0.4 | |||||||||||||||
| Total (3) | $ | 5,022.7 | $ | 689.5 | $ | 659.9 | $ | 1,147.3 | $ | 2,526.0 |
| (1) | Our funding policy is to contribute at least equal to the minimum legal funding requirement. | |
|---|---|---|
| (2) | Other long-term liabilities consist of our 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 $9.9 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 $3.9 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 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 postretirement benefits, stock-based compensation, and income taxes. Actual results may differ from these assumptions or conditions.
Revenue Recognition
We recognize revenue based on the transfer of promised goods or services to customers for the amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Revenue is recognized in a five-step model: 1) identify the contract with a customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations in the contract; and 5) recognize revenue when or as the company satisfies a performance obligation. Revenues for hosted subscription services are recognized ratably over the subscription term. Revenues from certain discrete project based advisory/consulting services are recognized over time by measuring the progress toward complete satisfaction of the performance obligation, based on the input method of consulting hours worked; this aligns with the results achieved and value transferred to the customer. Revenues from transactional solutions are recognized as the solutions are delivered or services performed at point in time.
We invoice our customers in annual, quarterly, or monthly installments. Amounts billed and collected in advance are recorded as deferred revenues on the balance sheet and are recognized as the services are performed and revenue recognition criteria are met.
Stock-Based Compensation
Stock-based compensation cost, including stock options, restricted stock, and performance share units ("PSUs"), 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. The fair value of stock options is measured 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. The fair value of the restricted stock is determined using the closing price of our common stock on the grant date. The fair value of PSUs is determined on the grant date using the Monte Carlo Simulation model.
Option grants and restricted stock awards are generally expensed ratably over the four-year vesting period. PSUs are generally expensed ratably over the three-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.
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, 2020, we had goodwill of $4,108.1 million, which represents 54.3% of our total assets. During 2020, we performed an impairment test as of June 30, 2020 and confirmed that no impairment charge was necessary. None of our reporting units are at risk of impairment as the fair value of each reporting unit exceeds its carrying value. There are many assumptions and estimates used that directly impact the results of impairment testing, including an estimate of future expected revenues, EBITDA, EBITDA margins and cash flows, useful lives and discount rates, and an estimate of value using multiples derived from the stock prices of publicly traded guideline companies applied to such expected cash flows and market approaches 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. There have been no goodwill impairment indicators subsequent to the impairment test performed as of June 30, 2020. For the year ended December 31, 2020, there were no impairment indicators related to our intangible assets.
We allocate the fair value of the purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. The estimates used in valuing the intangible assets are determined with the assistance of third-party specialists, a discounted cash flow analysis and estimates made by management. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
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.
We account for uncertain tax positions in accordance with 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.
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.
We estimate unrecognized tax positions of $5.8 million that may be recognized by December 31, 2021, due to expiration of statutes of limitations and resolution of audits with taxing authorities, net of additional uncertain tax positions.
As of December 31, 2020, we have gross federal, state, and foreign income tax net operating loss carryforwards of $221.1 million, which will expire at various dates from 2021 through 2040. Such net operating loss carryforwards expire as follows:
| Years Ending | (In millions) | ||||
|---|---|---|---|---|---|
| 2021 - 2028 | $ | 22.7 | |||
| 2029 - 2033 | 20.5 | ||||
| 2034 - 2040 | 177.9 | ||||
| Total | $ | 221.1 |
The net deferred income tax liability of $387.8 million consists primarily of timing differences involving depreciation and amortization.
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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