XNYS:SLH Solera Holdings Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012

OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from         to   
     
Commission File Number 001-33461
  
 
Solera Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)
  
 
 
 
 
Delaware
 
26-1103816
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
7 Village Circle, Suite 100
Westlake, Texas 76262
 
(817) 961-2100
(Address of Principal Executive Offices, including Zip Code)
 
(Registrant’s Telephone Number, Including Area Code)
(Former name, former address and former fiscal year, if changed since last report.)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x   No  ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer
x
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨

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

The number of shares outstanding of the issuer’s common stock as of April 30, 2012 was 69,486,221.



TABLE OF CONTENTS
 
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS.

SOLERA HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
 
 
March 31,
2012
 
June 30,
2011
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
372,800

 
$
371,101

Accounts receivable, net of allowance for doubtful accounts of $2,657 and $2,769 at March 31, 2012 and June 30, 2011, respectively
129,339

 
135,589

Other receivables
23,253

 
19,037

Other current assets
20,245

 
24,895

Deferred income tax assets
13,044

 
10,321

Total current assets
558,681

 
560,943

Property and equipment, net
57,480

 
64,485

Goodwill
1,027,762

 
1,059,749

Intangible assets, net
352,731

 
416,100

Other noncurrent assets
16,926

 
19,462

Noncurrent deferred income tax assets
45,200

 
48,396

Total assets
$
2,058,780

 
$
2,169,135

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
23,862

 
37,798

Accrued expenses and other current liabilities
146,257

 
140,270

Income taxes payable
12,519

 
10,837

Deferred income tax liabilities
2,679

 
1,187

Current portion of long-term debt
5,741

 
24,042

Total current liabilities
191,058

 
214,134

Long-term debt
989,644

 
1,020,383

Other noncurrent liabilities
23,505

 
24,127

Noncurrent deferred income tax liabilities
23,455

 
30,541

Total liabilities
1,227,662

 
1,289,185

Redeemable noncontrolling interests
88,462

 
94,841

Stockholders’ equity:
 
 
 
Solera Holdings, Inc. stockholders’ equity:
 
 
 
Common shares, $0.01 par value: 150,000 shares authorized; 69,454 and 70,795 issued and outstanding as of March 31, 2012 and June 30, 2011, respectively
585,884

 
587,265

Retained earnings
149,403

 
151,366

Accumulated other comprehensive income (loss)
(2,818
)
 
36,413

Total Solera Holdings, Inc. stockholders’ equity
732,469

 
775,044

Noncontrolling interests
10,187

 
10,065

Total stockholders’ equity
742,656

 
785,109

Total liabilities and stockholders’ equity
$
2,058,780

 
$
2,169,135

See accompanying notes to condensed consolidated financial statements.

3


SOLERA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
March 31,
 
Nine Months Ended
March 31,
 
2012
 
2011
 
2012
 
2011
Revenues
$
197,997

 
$
175,545

 
$
591,832

 
$
502,613

Cost of revenues:
 
 
 
 
 
 
 
Operating expenses
43,697

 
33,569

 
129,314

 
98,408

Systems development and programming costs
18,537

 
16,905

 
55,475

 
49,664

Total cost of revenues (excluding depreciation and amortization)
62,234

 
50,474

 
184,789

 
148,072

Selling, general and administrative expenses
51,129

 
50,095

 
151,560

 
136,768

Depreciation and amortization
25,802

 
20,575

 
77,580

 
60,481

Restructuring charges, asset impairments, and other costs associated with exit and disposal activities
5,777

 
716

 
6,088

 
2,215

Acquisition and related costs
1,906

 
1,144

 
5,658

 
2,981

Interest expense
11,868

 
7,506

 
36,514

 
22,189

Other (income) expense, net
619

 
(3,154
)
 
1,372

 
(481
)
 
159,335

 
127,356

 
463,561

 
372,225

Income before provision for income taxes
38,662

 
48,189

 
128,271

 
130,388

Income tax provision (benefit)
9,139

 
(35,165
)
 
33,166

 
(18,842
)
Net income
29,523

 
83,354

 
95,105

 
149,230

Less: Net income attributable to noncontrolling interests
2,798

 
3,261

 
8,918

 
9,094

Net income attributable to Solera Holdings, Inc.
$
26,725

 
$
80,093

 
$
86,187

 
$
140,136

Net income attributable to Solera Holdings, Inc. per common share:
 
 
 
 
 
 
 
Basic
$
0.38

 
$
1.13

 
$
1.22

 
$
1.99

Diluted
$
0.38

 
$
1.13

 
$
1.21

 
$
1.98

Dividends paid per share
$
0.10

 
$
0.08

 
$
0.30

 
$
0.23

Weighted-average shares used in the calculation of net income attributable to Solera Holdings, Inc. per common share:
 
 
 
 
 
 
 
Basic
70,081

 
70,480

 
70,487

 
70,235

Diluted
70,411

 
70,818

 
70,849

 
70,563


See accompanying notes to condensed consolidated financial statements.


4


SOLERA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Nine Months Ended
March 31,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income
$
95,105

 
$
149,230

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
77,580

 
60,481

Provision for doubtful accounts
1,959

 
1,344

Stock-based compensation
13,910

 
10,388

Deferred income taxes
(3,608
)
 
(56,113
)
Other
685

 
(738
)
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
 
 
 
Increase in accounts receivable
(2,415
)
 
(14,777
)
Increase in other assets
(10,751
)
 
(7,193
)
(Decrease) increase in accounts payable
(5,998
)
 
2,079

Increase in accrued expenses and other liabilities
13,681

 
18,876

Net cash provided by operating activities
180,148

 
163,577

Cash flows from investing activities:
 
 
 
Capital expenditures
(19,680
)
 
(13,913
)
Acquisitions and capitalization of intangible assets
(2,761
)
 
(1,561
)
Proceeds from sale of property and equipment
1,104

 
1,380

Acquisitions of and investments in businesses, net of cash acquired
(10,582
)
 
(5,030
)
Proceeds from sales and maturities of short-term investments

 
42,826

Purchases of short-term investments

 
(42,826
)
(Increase) decrease in restricted cash
(341
)
 
3,185

Net cash used in investing activities
(32,260
)
 
(15,939
)
Cash flows from financing activities:
 
 
 
Proceeds from sale of shares in a majority-owned subsidiary
2,139

 

Acquisition of additional shares in majority-owned subsidiary
(9,491
)
 
(13,080
)
Payments of debt issuance costs
(560
)
 

Payments of contingent purchase consideration
(100
)
 
(413
)
Principal payments on financed asset acquisitions
(1,802
)
 
(1,923
)
Repayments of long-term debt
(22,332
)
 
(4,334
)
Cash dividends paid on common shares and participating securities
(21,317
)
 
(15,910
)
Cash dividends paid to noncontrolling interests
(8,270
)
 
(6,373
)
Cash paid to repurchase common stock
(76,366
)
 

Proceeds from stock purchase plan and exercise of stock options
2,466

 
10,796

Net cash used in financing activities
(135,633
)
 
(31,237
)
Effect of foreign currency exchange rate changes on cash and cash equivalents
(10,556
)
 
31,598

Net change in cash and cash equivalents
1,699

 
147,999

Cash and cash equivalents, beginning of period
371,101

 
240,522

Cash and cash equivalents, end of period
$
372,800

 
$
388,521

Supplemental cash flow information:
 
 
 
Cash paid for interest
$
28,638

 
$
23,250

Cash paid for income taxes
$
28,752

 
$
27,961

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Capital assets financed
$
366

 
$
2,179

Accrued contingent purchase consideration
$
3,293

 
$
800


See accompanying notes to condensed consolidated financial statements.


5


SOLERA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation and Significant Accounting Policies

Description of Business

Solera Holdings, Inc. and subsidiaries (the “Company”, “Solera”, “we”, “us” or “our”) is a leading global provider of software and services to the automobile insurance claims processing industry. Our software and services help our customers: estimate the costs to repair damaged vehicles; determine pre-collision fair market values for vehicles damaged beyond repair; automate steps of the claims process; outsource steps of the claims process that insurance companies have historically performed internally; and monitor and manage their businesses through data reporting and analysis. We are active in over 60 countries and derive most of our revenues from our estimating and workflow software. Through our acquisitions of HPI, Ltd. (“HPI”) in December 2008 and AUTOonline GmbH In-formationssysteme (“AUTOonline”) in October 2009, we also provide used vehicle validation services in the United Kingdom and operate an eSalvage vehicle exchange platform in several European and Latin American countries as well as India. Through our acquisition of Explore Information Services, LLC (“Explore”) in June 2011, we also provide data and analytics services used by automotive property and casualty insurers in the United States (“U.S.”).

Financial Statement Preparation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”), and therefore, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, the accompanying condensed consolidated financial statements for the periods presented reflect all adjustments, consisting of only normal, recurring adjustments, necessary to fairly state our financial position, results of operations and cash flows. These condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the fiscal year ended June 30, 2011, included in our Annual Report on Form 10-K filed with the SEC on August 29, 2011. Our operating results for the three and nine month periods ended March 31, 2012 are not necessarily indicative of the results that may be expected for any future periods.

Principles of Consolidation

The unaudited condensed consolidated financial statements include our accounts and those of our wholly-owned and majority-owned subsidiaries. Our consolidated, majority-owned subsidiaries include AUTOonline, our subsidiaries located in Belgium, France, Portugal, Spain, and certain of our subsidiaries in Mexico. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the accompanying unaudited condensed consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the U.S. requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results could differ from those estimates. The reported amounts of assets, liabilities, revenues and expenses are affected by estimates and assumptions which are used for, but not limited to, the accounting for sales allowances, allowance for doubtful accounts, fair value of derivatives, valuation of goodwill and intangible assets, amortization of intangibles, restructurings, liabilities under defined benefit plans, stock-based compensation, redeemable noncontrolling interests and income taxes.

Recently Adopted Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) Topic No. 2011-04, Fair Value Measurement (Topic 820)—Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which expands the disclosure requirements for fair value measurements using level 3 inputs. We adopted ASU Topic No. 2011-04 in the third quarter of our fiscal year 2012. The disclosures required by ASU Topic No. 2011-04 are provided in Note 9.

6



New Accounting Pronouncements Not Yet Adopted

In June 2011, the FASB issued ASU Topic No. 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income, which updates the presentation requirements related to comprehensive income. The total of comprehensive income, the components of net income, and the components of other comprehensive income may be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU No. 2011-05 also eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The update is effective for annual periods beginning after December 15, 2011, other than the provisions for which adoption was deferred indefinitely in accordance with ASU Topic No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, issued in December 2011. Upon our adoption of ASU Topic No. 2011-05 in the first quarter of our fiscal year ending June 30, 2013, we will select a comprehensive income presentation option under the standard. Other than the change in the presentation of comprehensive income, we do not anticipate that our adoption of ASU Topic No. 2011-05 will have a significant impact on our consolidated financial position, results of operations or cash flows.

In September 2011, the FASB issued ASU Topic No. 2011-08, Testing Goodwill for Impairment, which amends current guidance on testing goodwill for impairment to provide entities with the option of performing a qualitative assessment before calculating the fair value of the reporting unit. If it is determined that the fair value of the reporting unit is more likely than not less than the carrying amount based on qualitative factors, the two-step impairment test would be required. ASU Topic No. 2011-08 is effective for our annual goodwill impairment assessment for the fiscal year ended June 30, 2013.

2.
Net Income Attributable to Solera Holdings, Inc. Per Common Share

Our restricted common shares subject to repurchase and substantially all of our restricted stock units have the right to receive non-forfeitable dividends on an equal basis with common stock and therefore are considered participating securities that must be included in the calculation of net income per share using the two-class method. Under the two-class method, basic and diluted net income per share is determined by calculating net income per share for common stock and participating securities based on the cash dividends paid and participation rights in undistributed earnings. Diluted net income per share also considers the dilutive effect of in-the-money stock options and unvested restricted stock units and performance share units that have the right to forfeitable dividends, calculated using the treasury stock method. Under the treasury stock method, the amount of assumed proceeds from unexercised stock options and unvested restricted stock units includes the amount of compensation cost attributable to future services not yet recognized, proceeds from the exercise of the options, and any excess income tax benefit or liability.


7


The computation of basic and diluted net income attributable to Solera Holdings, Inc. per common share using the two-class method is as follows for the periods indicated (in thousands, except per share amounts):
 
 
Three Months Ended
March 31,
 
Nine Months Ended
March 31,
 
2012
 
2011
 
2012
 
2011
Basic net income attributable to Solera Holdings, Inc. per common share:
 
 
 
 
 
 
 
Net income attributable to Solera Holdings, Inc.
$
26,725

 
$
80,093

 
$
86,187

 
$
140,136

Less: Dividends paid and undistributed earnings allocated to participating securities
(173
)
 
(381
)
 
(444
)
 
(707
)
Net income attributable to common shares – basic
$
26,552

 
$
79,712

 
$
85,743

 
$
139,429

Weighted-average number of common shares
70,081

 
70,521

 
70,487

 
70,304

Less: Weighted-average common shares subject to repurchase

 
(41
)
 

 
(69
)
Weighted-average number of common shares used to compute basic net income attributable to Solera Holdings, Inc. per common share
70,081

 
70,480

 
70,487

 
70,235

Basic net income attributable to Solera Holdings, Inc. per common share
$
0.38

 
$
1.13

 
$
1.22

 
$
1.99

Diluted net income attributable to Solera Holdings, Inc. per common share:
 
 
 
 
 
 
 
Net income attributable to Solera Holdings, Inc.
$
26,725

 
$
80,093

 
$
86,187

 
$
140,136

Less: Dividends paid and undistributed earnings allocated to participating securities
(173
)
 
(379
)
 
(442
)
 
(704
)
Net income attributable to common shares – diluted
$
26,552

 
$
79,714

 
$
85,745

 
$
139,432

Weighted-average number of common shares used to compute basic net income attributable to Solera Holdings, Inc. per common share
70,081

 
70,480

 
70,487

 
70,235

Dilutive effect of options to purchase common stock, restricted stock units and performance share units
330

 
338

 
362

 
328

Weighted-average number of common shares used to compute diluted net income attributable to Solera Holdings, Inc. per common share
70,411

 
70,818

 
70,849

 
70,563

Diluted net income attributable to Solera Holdings, Inc. per common share
$
0.38

 
$
1.13

 
$
1.21

 
$
1.98


The following securities that could potentially dilute earnings per share in the future are not included in the determination of diluted net income attributable to Solera Holdings, Inc. per common share (in thousands):
 
 
Three Months Ended
March 31,
 
Nine Months Ended
March 31,
 
2012
 
2011
 
2012
 
2011
Antidilutive options to purchase common stock and restricted stock units
213

 
32

 
524

 
90


3.
Contingent Purchase Consideration

In connection with business combinations completed since fiscal year 2009, we may be required to make contingent cash payments through fiscal year 2014 subject to the achievement of certain financial performance and product-related targets. At March 31, 2012, the maximum aggregate amount of remaining contingent cash payments to be paid is $20.1 million, of which $3.3 million was accrued at the acquisition date and included in the purchase price, and the remaining $16.8 million will be charged to acquisition and related costs in the statement of income as earned.


8


4.
Goodwill and Intangible Assets

Intangible Assets

Intangible assets consist of the following (in thousands):
 
 
March 31, 2012
 
June 30, 2011
 
Gross Carrying Amount
 
Accumulated Amortization
 
Intangible Assets, net
 
Gross Carrying Amount
 
Accumulated Amortization
 
Intangible Assets, net
Amortized intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Internally developed software
$
23,222

 
$
(9,655
)
 
$
13,567

 
$
22,197

 
$
(7,454
)
 
$
14,743

Purchased customer relationships
296,738

 
(146,958
)
 
149,780

 
304,688

 
(131,141
)
 
173,547

Purchased tradenames and trademarks
34,821

 
(22,140
)
 
12,681

 
36,323

 
(20,811
)
 
15,512

Purchased software and database technology
419,899

 
(279,468
)
 
140,431

 
435,125

 
(262,358
)
 
172,767

Other
5,920

 
(3,063
)
 
2,857

 
6,433

 
(1,636
)
 
4,797

 
$
780,600

 
$
(461,284
)
 
$
319,316

 
$
804,766

 
$
(423,400
)
 
$
381,366

Intangible assets not subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
Purchased tradenames and trademarks with indefinite lives
33,415

 

 
33,415

 
34,734

 

 
34,734

 
$
814,015

 
$
(461,284
)
 
$
352,731

 
$
839,500

 
$
(423,400
)
 
$
416,100


Goodwill

The following table summarizes the activity in goodwill for the nine months ended March 31, 2012 (in thousands):
 
 
Balance at Beginning of Period
 
Current year Acquisitions
 
Other (2)
 
Foreign Currency Translation Effect
 
Balance at End of Period
EMEA (1)
$
615,358

 
$

 
$

 
$
(38,243
)
 
$
577,115

Americas (1)
444,391

 
212

 
7,401

 
(1,357
)
 
450,647

Total
$
1,059,749

 
$
212

 
$
7,401

 
$
(39,600
)
 
$
1,027,762


(1)
As described further in Note 13, in the first quarter of fiscal year 2012, we transferred our Netherlands operating segment from our Americas reportable segment to our EMEA reportable segment. The balances presented above reflect the inclusion of our Netherlands operating segment in our EMEA reportable segment for all periods.
(2)
Primarily represents contingent cash consideration paid in connection with a business combination consummated in fiscal year 2009.

5.
Restructuring Initiatives and Other Exit and Disposal Activities

The objectives of our restructuring initiatives and other exit and disposal activities have primarily been to eliminate waste and improve operational efficiencies. The liabilities associated with our restructuring initiatives and other exit and disposal activities are included in accrued expenses and other current liabilities and in other noncurrent liabilities in the accompanying consolidated balance sheets. We report all amounts incurred in connection with our restructuring initiatives and other exit and disposal activities in restructuring charges, asset impairments and other costs associated with exit and disposal activities in the accompanying consolidated statements of income. We expect to incur additional restructuring charges in future years as we continue to undertake additional efforts to improve efficiencies in our business.


9


The following table summarizes the activity in the liabilities associated with our restructuring initiatives and other exit and disposal activities for the nine months ended March 31, 2012 (in thousands):
 
 
Employee Termination Benefits
 
Leases
 
Other
 
Total
Balance at June 30, 2011
$
1,226

 
$
6,309

 
$

 
$
7,535

Restructuring charges
5,838

 
(327
)
 
577

 
6,088

Cash payments
(297
)
 
(2,809
)
 
(577
)
 
(3,683
)
Other
(110
)
 
456

 

 
346

Effect of foreign exchange
(6
)
 

 

 
(6
)
Balance at March 31, 2012
$
6,651

 
$
3,629

 
$

 
$
10,280


In the third quarter of fiscal year 2012, we initiated a restructuring plan in our EMEA segment (the “EMEA 2012 Restructuring Plan”). The primary objective of the EMEA 2012 Restructuring Plan is to better align the skill sets and capabilities of our German operations with our core mission and promote efficiency and profitable innovation within the region. Under the EMEA 2012 Restructuring Plan, we terminated approximately 30 employees and incurred employee termination benefits and related expenses of approximately €4.3 million. The restructuring charges incurred under the EMEA 2012 Restructuring Plan are expected to be paid through fiscal year 2013.

In fiscal year 2011, we announced the relocation of our corporate headquarters and global executive team from San Diego, California to the Dallas-Fort Worth, Texas metroplex (the “Corporate Relocation Plan”). The primary objectives of the Corporate Relocation Plan are to provide us with access to a broader employee recruitment pool; improved labor arbitrage and other cost efficiencies; and improved mobility and access to our markets around the world. The relocation is expected to improve the effectiveness of our senior management team and our operations, and result in long-term cost savings. Under the Corporate Relocation Plan, we anticipate incurring expenses of approximately $2.5 million, primarily consisting of relocation benefits paid to current employees, facility relocation costs and termination benefits for corporate employees that are not relocating. The remaining restructuring charges anticipated to be incurred under the Corporate Relocation Plan of approximately $0.4 million are expected to be paid in fiscal year 2012. During the three and nine months ended March 31, 2012, we reversed previously accrued restructuring charges of $0.1 million and incurred restructuring charges of $0.1 million, respectively, under the Corporate Relocation Plan.

In prior fiscal years, we initiated restructuring plans in our Americas and EMEA segments (the “Prior Restructuring Plans”). Under the Prior Restructuring Plans, as of March 31, 2012, we have a remaining liability for employee termination benefits of $0.8 million, which we will pay through fiscal year 2013, and a remaining lease-related restructuring liability of $3.6 million, which we will pay through July 2013. During the nine months ended March 31, 2012, we reversed previously accrued restructuring charges of $0.1 million, respectively, under the Prior Restructuring Plans.


10


The following table summarizes restructuring charges, asset impairments and other costs associated with exit and disposal activities for the periods indicated (in thousands):
 
 
Corporate Relocation Plan
 
EMEA 2012 Restructuring Plan

 
Other Restructuring Plans
 
Prior Restructuring Plans
 
Total
Three Months Ended March 31, 2012
 
 
 
 
 
 
 
 
 
Employee termination benefits
$

 
$
5,377

 
$
218

 
$

 
$
5,595

Leases
(357
)
 

 

 

 
(357
)
Other
284

 
255

 

 

 
539

Total restructuring charges, asset impairments, and other costs associated with exit and disposal activities
$
(73
)
 
$
5,632

 
$
218

 
$

 
$
5,777

Three Months Ended March 31, 2011
 
 
 
 
 
 
 
 
 
Employee termination benefits
$

 
$

 
$
429

 
$
(142
)
 
$
287

Leases
410

 

 

 
(127
)
 
283

Other
85

 

 

 
61

 
146

Total restructuring charges, asset impairments, and other costs associated with exit and disposal activities
$
495

 
$

 
$
429

 
$
(208
)
 
$
716

Nine Months Ended March 31, 2012
 
 
 
 
 
 
 
 
 
Employee termination benefits
$
86

 
$
5,377

 
$
535

 
$
(160
)
 
$
5,838

Leases
(357
)
 

 

 
30

 
(327
)
Other
322

 
255

 

 

 
577

Total restructuring charges, asset impairments, and other costs associated with exit and disposal activities
$
51

 
$
5,632

 
$
535

 
$
(130
)
 
$
6,088

Nine Months Ended March 31, 2011
 
 
 
 
 
 
 
 
 
Employee termination benefits
$
295

 
$

 
$
884

 
$
(93
)
 
$
1,086

Leases
410

 

 

 
1,374

 
1,784

Other
1,089

 

 

 
(1,744
)
 
(655
)
Total restructuring charges, asset impairments, and other costs associated with exit and disposal activities
$
1,794

 
$

 
$
884

 
$
(463
)
 
$
2,215



11


6.
Stockholders’ Equity and Redeemable Noncontrolling Interests

The following table summarizes the activity in stockholders’ equity and redeemable noncontrolling interests for the periods indicated (in thousands):
 
 
Stockholders’ Equity Attributable to Solera Holdings, Inc.
 
 
 
 
 
 
 
Common Shares
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Solera Holdings, Inc. Stockholders’ Equity
 
Noncontrolling
Interests
 
Total
Stockholders’
Equity
 
Redeemable
Noncontrolling
Interests
Balance at June 30, 2011
70,795

 
$
587,265

 
$
151,366

 
$
36,413

 
$
775,044

 
$
10,065

 
$
785,109

 
$
94,841

Components of comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to Solera Holdings, Inc. and noncontrolling interests

 

 
86,187

 

 
86,187

 
3,432

 
89,619

 
5,486

Foreign currency translation adjustments

 

 

 
(39,231
)
 
(39,231
)
 
21

 
(39,210
)
 
(7,585
)
Total comprehensive income
 
 
 
 
 
 
 
 
46,956

 
3,453

 
50,409

 
(2,099
)
Stock-based compensation

 
13,910

 

 

 
13,910

 

 
13,910

 

Purchases of Solera Holdings, Inc. common shares(1)
(1,602
)
 
(13,453
)
 
(62,913
)
 

 
(76,366
)
 

 
(76,366
)
 

Issuance of common shares under stock award plans, net
261

 
2,253

 

 

 
2,253

 

 
2,253

 

Dividends paid on common stock and participating securities

 

 
(21,317
)
 

 
(21,317
)
 

 
(21,317
)
 

Dividends paid to noncontrolling owners

 

 

 

 

 
(3,433
)
 
(3,433
)
 
(4,837
)
Sale of shares of majority-owned subsidiary(2)

 
2,037

 

 

 
2,037

 
102

 
2,139

 

Acquisition of additional ownership interest in majority-owned subsidiary(3)

 

 
137

 

 
137

 

 
137

 
(9,628
)
Revaluation of and additions to noncontrolling interests

 
(6,128
)
 
(4,057
)
 

 
(10,185
)
 

 
(10,185
)
 
10,185

Balance at March 31, 2012
69,454

 
$
585,884

 
$
149,403

 
$
(2,818
)
 
$
732,469

 
$
10,187

 
$
742,656

 
$
88,462



12


 
Stockholders’ Equity Attributable to Solera Holdings, Inc.
 
 
 
 
 
 
 
Common Shares
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total Solera Holdings, Inc. Stockholders’ Equity
 
Noncontrolling Interests
 
Total Stockholders’ Equity
 
Redeemable Noncontrolling Interests
Balance at June 30, 2010
70,017

 
$
545,048

 
$
22,550

 
$
(60,583
)
 
$
507,015

 
$
5,800

 
$
512,815

 
$
94,431

Components of comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to Solera Holdings, Inc. and noncontrolling interests

 

 
140,136

 

 
140,136

 
3,266

 
143,402

 
5,828

Foreign currency translation adjustments

 

 

 
67,475

 
67,475

 
831

 
68,306

 
15,830

Unrealized gains on derivative instruments, net of tax

 

 

 
6,319

 
6,319

 

 
6,319

 

Total comprehensive income
 
 
 
 
 
 
 
 
213,930

 
4,097

 
218,027

 
21,658

Stock-based compensation

 
10,388

 

 

 
10,388

 

 
10,388

 

Issuance of common shares under stock award plans, net
591

 
10,796

 

 

 
10,796

 

 
10,796

 

Dividends paid on common stock and participating securities

 

 
(15,910
)
 

 
(15,910
)
 

 
(15,910
)
 

Dividends paid to noncontrolling owners

 

 

 

 

 
(1,418
)
 
(1,418
)
 
(4,955
)
Acquisition of additional ownership interest in majority-owned subsidiary

 
2,863

 

 

 
2,863

 

 
2,863

 
(15,994
)
Revaluation of and additions to noncontrolling interests

 
(8,894
)
 
(5,717
)
 

 
(14,611
)
 
596

 
(14,015
)
 
14,015

Balance at March 31, 2011
70,608

 
560,201

 
141,059

 
13,211

 
714,471

 
9,075

 
723,546

 
109,155


(1)
Please refer to Note 7 for further information on repurchases of our common stock. In accordance with ASC Topic No. 505-30-30, we have allocated the cost of the shares repurchased between paid-in capital and retained earnings based on the excess of the repurchase price over the stated value.
(2)
In September 2011, we sold a 2.5% ownership interest in one of our majority-owned subsidiaries for €1.5 million ($2.1 million).
(3)
In November 2011, we acquired an additional 6.7% ownership interest in AUTOonline for €7.1 million ($9.5 million).


13


7.
Share Repurchase Program

In November 2011, our Board of Directors approved a share repurchase program for up to a total of $180 million of our common stock through November 10, 2013. Share repurchases are made from time to time in open market transactions at prevailing market prices or in privately negotiated transactions. The repurchase program does not require us to purchase any specific number or amount of shares, and the timing and amount of such purchases will be determined by management based upon market conditions and other factors. In addition, the program may be amended or terminated at the discretion of our Board of Directors. Through March 31, 2012, we have repurchased approximately 1.6 million shares for $76.4 million.

8.
Comprehensive Income

Comprehensive income consists of the following for the periods indicated (in thousands):
 
 
Three Months Ended
March 31,
 
Nine Months Ended
March 31,
 
2012
 
2011
 
2012
 
2011
Net income
$
29,523

 
$
83,354

 
$
95,105

 
$
149,230

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
22,642

 
40,756

 
(46,795
)
 
84,136

Unrealized net gain on derivative instruments

 
1,025

 

 
6,319

Total comprehensive income
$
52,165

 
$
125,135

 
$
48,310

 
$
239,685

Comprehensive income attributable to noncontrolling interests
5,744

 
11,388

 
1,354

 
25,755

Comprehensive income attributable to Solera Holdings, Inc.
$
46,421

 
$
113,747

 
$
46,956

 
$
213,930


The majority of our assets and liabilities, including goodwill, intangible assets and long-term debt, are carried in functional currencies other than the U.S. dollar, primarily the Euro, Pound Sterling, and Swiss franc. We translate our local currency financial results into U.S. dollars based on average exchange rates prevailing during a reporting period for our condensed consolidated statement of income and certain components of stockholders’ equity, and the exchange rate at the end of that period for the condensed consolidated balance sheet. These translations resulted in a foreign currency translation adjustment of $(39.2) million during the nine months ended March 31, 2012, which was caused by a strengthening in the value of the U.S. dollar versus certain foreign currencies, including the Euro, during the period. Generally, the strengthening of the U.S. dollar during the nine months ended March 31, 2012 resulted in decreases to the U.S. dollar value of certain of our assets and liabilities from June 30, 2011 to March 31, 2012, as presented in the accompanying condensed consolidated balance sheets, although the corresponding local currency balances may have increased or remain unchanged.


14


9.
Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes our assets and liabilities that require fair value measurements on a recurring basis and their respective input levels based on the fair value hierarchy (in thousands):

 
 
 
Fair Value Measurements Using:
 
Fair Value
 
Quoted Market Prices for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Fair value at March 31, 2012:
 
 
 
 
 
 
 
Cash and cash equivalents
$
372,800

 
$
372,800

 
$

 
$

Restricted cash (1)
3,263

 
3,263

 

 

Accrued contingent purchase consideration (2)
3,293

 

 

 
3,293

Redeemable noncontrolling interests (3)
73,068

 

 

 
73,068

Fair value at June 30, 2011:
 
 
 
 
 
 
 
Cash and cash equivalents
$
371,101

 
$
371,101

 
$

 
$

Restricted cash (1)
3,246

 
3,246

 

 

Accrued contingent purchase consideration (2)
1,189

 

 

 
1,189

Redeemable noncontrolling interests (3)
71,641

 

 

 
71,641


(1)
Included in other current assets and other noncurrent assets in the accompanying consolidated balance sheets. The restricted cash primarily relates to funds held in escrow for the benefit of customers and the sellers of acquired businesses, and facility lease deposits.
(2)
Included in accrued expenses and other current liabilities in the accompanying consolidated balance sheet.
(3)
Does not include the redeemable noncontrolling interest of AUTOonline, which is not measured at fair value on a recurring basis.

Cash and cash equivalents and restricted cash. Our cash and cash equivalents and restricted cash, primarily consist of bank deposits, money market funds and bank certificates of deposit. The fair value of our cash and cash equivalents and restricted cash are determined using quoted market prices for identical assets (Level 1 inputs).

Accrued contingent purchase consideration. We accrue contingent future cash payments related to acquisitions completed after June 30, 2009 at fair value as of the acquisition date and re-measure the payments at fair value at each reporting date. We estimate the fair value of future contingent purchase consideration based on the weighted probabilities of potential future payments that would be earned upon achievement by the acquired business of certain financial performance, integration and product-related targets. We determined such probabilities using information as of the reporting date, including recent financial performance of the acquired businesses (Level 3 inputs). The net increase in accrued contingent purchase consideration during the nine months ended March 31, 2012 was primarily due to contingent purchase consideration related to current period business combinations, the effect of fluctuations in foreign currency exchange rates, adjustments to our estimate of the consideration to be earned and paid, and payments of previously accrued contingent consideration.

Redeemable noncontrolling interests. We estimate the fair value of our redeemable noncontrolling interests through an income approach, utilizing a discounted cash flow model, and a market approach, which considers comparable companies and transactions, including transactions with the noncontrolling stockholders of our majority-owned subsidiaries.

Under the income approach, the discounted cash flow model determines fair value based on the present value of projected cash flows over a specific projection period and a residual value related to future cash flows beyond the projection period. Both values are discounted to reflect the degree of risk inherent in an investment in the reporting unit and achieving the projected cash flows. A weighted average cost of capital of a market participant, which is an unobservable input, is used as the discount rate. The residual value is generally determined by applying a constant terminal growth rate to the estimated net cash flows at the end of the projection period. Alternatively, the present value of the residual value may be determined by applying a market multiple at the end of the projection period.

15



Under the market approach, fair value is determined based on multiples of revenues and earnings before interest, taxes, depreciation and amortization for each reporting unit. For our calculation, we determined the multiples based on a selection of comparable companies and acquisition transactions, discounted for each reporting unit to reflect the relative size, diversification and risk of the reporting unit in comparison to the indexed companies and transactions.

At March 31, 2012 and June 30, 2011, we estimated the fair value of the redeemable noncontrolling interest in one of our majority-owned subsidiaries based on recent stock transactions with the noncontrolling stockholders, a Level 2 input, and a discounted cash flow model, a Level 3 input.

The discount rate used in the determination of the estimated fair value of the redeemable noncontrolling interests as of March 31, 2012 using the income approach ranged between 13.6% and 14.1%, reflecting a market participant's perspective as a noncontrolling shareholder in a privately-held subsidiary.

The following table summarizes the activity in redeemable noncontrolling interests which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3 inputs) (in thousands):
 
Three Months Ended
March 31,
 
2012
 
2011
Balance at beginning of period
$
70,937

 
$
99,078

Net income attributable to redeemable noncontrolling interests
1,551

 
1,606

Change in fair value
2,425

 
212

Dividends paid to noncontrolling owners
(3,688
)
 
(3,328
)
Acquisition of an additional 15% ownership interest in Audatex Espana from noncontrolling owners

 
(15,994
)
Transfer of the remaining Audatex Espana redeemable noncontrolling interest to Level 2

 
(8,745
)
Effect of foreign exchange
1,843

 
6,407

Balance at end of period
$
73,068

 
$
79,236

 
 
Nine Months Ended
March 31,
 
2012
 
2011
Balance at beginning of period
$
71,641

 
$
81,641

Net income attributable to redeemable noncontrolling interests
4,507

 
4,706

Change in fair value
6,145

 
8,994

Dividends paid to noncontrolling owners
(3,688
)
 
(4,723
)
Acquisition of an additional 15% ownership interest in Audatex Espana from noncontrolling owners

 
(15,994
)
Transfer of the remaining Audatex Espana redeemable noncontrolling interest to Level 2

 
(8,745
)
Effect of foreign exchange
(5,537
)
 
13,357

Balance at end of period
$
73,068

 
$
79,236


Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

No assets or liabilities were required to be measured at fair value on a nonrecurring basis during the three and nine months ended March 31, 2012.

Fair Value of Other Financial Instruments

The carrying amounts of certain of our financial instruments, including accounts receivable, accounts payable and accrued expenses, approximate fair value due to their short-term nature. The carrying value of our senior secured credit facility approximates fair value due to the facility’s variable interest rate. Based on the original issue price of the senior unsecured notes that we issued in April 2012 (as described in Note 14), we believe that the fair value of the senior unsecured notes issued in June 2011 is approximately $462.2 million as compared to the carrying value at March 31, 2012 of $450.0 million.


16


10.
Share-Based Compensation

Share-Based Award Activity

The following table summarizes restricted common shares subject to repurchase, restricted stock unit, and performance share unit activity during the nine months ended March 31, 2012:
 
 
Number of Shares
(in thousands)
 
Weighted Average Grant Date Fair Value per Share
Nonvested at June 30, 2011
356

 
$
44.21

Granted
329

 
$
52.99

Vested
(149
)
 
$
38.89

Forfeited
(43
)
 
$
36.75

Nonvested at March 31, 2012
493

 
$
52.33


Each performance share unit represents the right to receive one share of our common stock based on our total stockholder return (“TSR”) and/or the achievement of certain financial performance targets during applicable performance periods. The number of shares reflected in the table above assumes the target number of performance share units will be earned. For the performance share units granted during the nine months ended March 31, 2012, approximately 70% of the value of the awards is subject to financial performance targets and approximately 30% of the value of the awards is subject to relative TSR targets.

The following table summarizes stock option activity during the nine months ended March 31, 2012:
 
Number of Shares
(in thousands)
 
Weighted Average Exercise Price per Share
 
Weighted Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value (in thousands)
Outstanding at June 30, 2011
1,533

 
$
33.78

 
 
 
 
Granted
579

 
$
55.74

 
 
 
 
Exercised
(107
)
 
$
24.21

 
 
 
 
Canceled
(135
)
 
$
36.96

 
 
 
 
Outstanding at March 31, 2012
1,870

 
$
40.73

 
5.6

 
$
16,754

Exercisable at March 31, 2012
746

 
$
31.04

 
5.3

 
$
11,242


Of the stock options outstanding at March 31, 2012, approximately 1,870,000 are vested or expected to vest.

Cash received from the exercise of stock options was $2.5 million during the nine months ended March 31, 2012. The intrinsic value of stock options exercised during the nine months ended March 31, 2012 and 2011 totaled $2.7 million and $9.8 million, respectively.

Valuation of Share-Based Awards

We utilized the Black-Scholes option pricing model for estimating the grant date fair value of stock options with the following assumptions:
 
 
Risk-Free Interest Rate
 
Expected Term (in years)
 
Weighted  Average Expected Stock Price Volatility
 
Expected Dividend Yield
 
Weighted Average Per Share Grant Date Fair Value
Nine Months Ended March 31, 2012
1.1
%
 
4.6

 
33
%
 
0.7
%
 
$
15.28

Nine Months Ended March 31, 2011
1.4
%
 
4.6

 
33
%
 
0.7
%
 
$
12.09


We based the risk-free interest rates on the implied yield available on U.S. Treasury constant maturities in effect at the

17


time of the grant with remaining terms equivalent to the respective expected terms of the options. Because we have a limited history of stock option exercises, we calculated the expected award life as the average of the contractual term and the vesting period. We determined the expected volatility based on a combination of implied market volatilities, our historical stock price volatility and other factors. The dividend yield is based on our quarterly dividend of $0.10 and $0.075 per share declared and paid during fiscal year 2012 and 2011, respectively.

The weighted average grant date fair value of restricted stock units and performance share units granted during the nine months ended March 31, 2012 and 2011, excluding performance share units that are earned based on our relative TSR, was $52.99 and $46.24, respectively, determined based on the market price of our common stock on the date of grant, which approximates the intrinsic value.

To estimate the grant date fair value of performance share units that are earned based on our relative TSR, we utilized a Monte-Carlo simulation model which simulates a range of our possible future stock prices and certain peer companies and assumes that the performance share units will be earned at target. Based on the Monte-Carlo simulation model, the grant date fair value of performance share units granted during the nine months ended March 31, 2012 that are earned based on our relative TSR was $54.61 per share.

Share-Based Compensation Expense

Share-based compensation expense, which is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income, was $5.8 million and $13.9 million for the three and nine months ended March 31, 2012, respectively, and $5.6 million and $10.4 million for the three and nine months ended March 31, 2011, respectively. At March 31, 2012, the estimated total remaining unamortized share-based compensation expense, net of forfeitures, was $37.5 million, which we expect to recognize over a weighted-average period of 3.1 years.


18


11.
Defined Benefit Pension Plans

Our foreign subsidiaries sponsor various defined benefit pension plans and individual defined benefit arrangements covering certain eligible employees. We base the benefits under these pension plans on years of service and compensation levels. Funding is limited to statutory requirements.

The components of net pension expense were as follows for the periods indicated (in thousands):
 
 
Three Months Ended
March 31,
 
Nine Months Ended
March 31,
 
2012
 
2011
 
2012
 
2011
Service cost — benefits earned during the period
$
982

 
$
823

 
$
3,000

 
$
2,382

Interest cost on projected benefits
919

 
936

 
2,795

 
2,687

Expected return on plan assets
(646
)
 
(647
)
 
(1,966
)
 
(1,856
)
Amortization of gain
23

 

 
71

 

Net pension expense
$
1,278

 
$
1,112

 
$
3,900

 
$
3,213


12.
Provision For Income Taxes

We recorded an income tax provision of $9.1 million and $33.2 million for the three and nine months ended March 31, 2012, respectively, and an income tax benefit of $(35.2) million and $(18.8) million for the three and nine months ended March 31, 2011, respectively. The expected tax provision derived from applying the U.S. federal statutory rate to our income before tax provision for the three and nine months ended March 31, 2012 differed from our recorded income tax provision primarily due to higher earnings in jurisdictions with lower income tax rates which are indefinitely reinvested and the impact of discrete items recorded during the quarter.

The income tax benefit recognized during the nine months ended March 31, 2011 was the result of our release of $50.7 million of the $54.1 million valuation allowance on our U.S. net deferred tax assets. The release of the valuation allowance on our U.S. net deferred tax assets was the result of our sustained history of operating profitability and the determination by management that the future realization of the net deferred tax assets was judged to be more-likely-than-not. We exercise significant judgment relating to the projection of future taxable income to determine the recoverability of any tax assets recorded on the balance sheet. If judgments regarding recoverability of deferred tax assets change in future periods, we could be required to record valuation allowances against deferred tax assets in future periods.

Gross unrecognized tax benefits as of March 31, 2012 and June 30, 2011 were $8.9 million and $6.2 million, respectively. No significant interest and penalties have been accrued during fiscal year 2012. We do not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next twelve months.

Pursuant to the terms of the acquisition agreements, the sellers in our business combinations have indemnified us for all tax liabilities related to the pre-acquisition periods. We are liable for any tax assessments for the post-acquisition periods for our U.S. and foreign jurisdictions.

13.
Segment and Geographic Information

We have aggregated our operating segments into two reportable segments: EMEA and Americas. In the first quarter of fiscal year 2012, we announced the formation of the Netherlands, Germany, Austria and Switzerland (“NGAS”) Region to leverage the operational and technological achievements and investments we made in the Highly Established Markets Initiative (“HEMI”) Region across our markets.

As a result of the creation of the NGAS Region, we transferred our Netherlands operating segment from our Americas reportable segment to our EMEA reportable segment in the first quarter of fiscal year 2012. Accordingly, our EMEA reportable segment encompasses our operations in Europe, the Middle East, Africa, Asia and Australia, while our Americas reportable segment encompasses our operations in North, Central and South America. All prior period segment information has been restated to conform to the current presentation.

Our chief operating decision maker is our Chief Executive Officer. We evaluate the performance of our reportable segments based on revenues, income before provision for income taxes and adjusted EBITDA, a non-GAAP financial measure

19


that represents GAAP net income excluding interest expense, provision for income taxes, depreciation and amortization, stock-based compensation expense, restructuring charges, asset impairments and other costs associated with exit and disposal activities, acquisition and related costs, litigation related expenses, and other (income) expense, net. We do not allocate certain costs to reportable segments, including costs related to our financing activities, business development and oversight, and tax, audit and other professional fees, to our reportable segments. Instead, we manage these costs at the Corporate level.
(in thousands)
EMEA
 
Americas
 
Corporate
 
Total
Three Months Ended March 31, 2012
 
 
 
 
 
 
 
Revenues
$
115,446

 
$
82,551

 
$

 
$
197,997

Income (loss) before provision for income taxes
36,788

 
31,192

 
(29,318
)
 
38,662

Significant items included in income (loss) before provision for income taxes:
 
 
 
 
 
 
 
Depreciation and amortization
12,753

 
13,013

 
36

 
25,802

Interest expense
31

 
1

 
11,836

 
11,868

Other (income) expense, net
684

 
(169
)
 
104

 
619

Capital expenditures
1,120

 
1,374

 

 
2,494

Three Months Ended March 31, 2011
 
 
 
 
 
 
 
Revenues
$
117,190

 
$
58,355

 
$

 
$
175,545

Income (loss) before provision for income taxes
44,084

 
26,120

 
(22,015
)
 
48,189

Significant items included in income (loss) before provision for income taxes:
 
 
 
 
 
 
 
Depreciation and amortization
14,240

 
6,335

 

 
20,575

Interest expense
364

 
8

 
7,134

 
7,506

Other (income) expense, net
(1,456
)
 
(196
)
 
(1,502
)
 
(3,154
)
Capital expenditures
5,266

 
674

 

 
5,940

Nine Months Ended March 31, 2012
 
 
 
 
 
 
 
Revenues
$
350,307

 
$
241,525

 
$

 
$
591,832

Income (loss) before provision for income taxes
124,708

 
86,730

 
(83,167
)
 
128,271

Significant items included in income (loss) before provision for income taxes:
 
 
 
 
 
 
 
Depreciation and amortization
38,724

 
38,801

 
55

 
77,580

Interest expense
705

 
15

 
35,794

 
36,514

Other (income) expense, net
(224
)
 
560

 
1,036

 
1,372

Capital expenditures
14,491

 
5,189

 

 
19,680

Nine Months Ended March 31, 2011
 
 
 
 
 
 
 
Revenues
$
333,567

 
$
169,046

 
$

 
$
502,613

Income (loss) before provision for income taxes
117,703

 
71,901

 
(59,216
)
 
130,388

Significant items included in income (loss) before provision for income taxes:
 
 
 
 
 
 
 
Depreciation and amortization
41,676

 
18,805

 

 
60,481

Interest expense
1,086

 
31

 
21,072

 
22,189

Other (income) expense, net
(147
)
 
(683
)
 
349

 
(481
)
Capital expenditures
9,216

 
4,697

 

 
13,913

Total assets at March 31, 2012
1,196,581

 
760,914

 
101,285

 
2,058,780

Total assets at June 30, 2011
1,207,539

 
796,750

 
164,846

 
2,169,135



20


Geographic revenue information is based on the location of the customer and was as follows for the periods presented (in thousands):

 
Europe *
 
United States
 
United Kingdom
 
Germany
 
All Other
 
Total
Three Months Ended March 31, 2012
66,941

 
59,868

 
24,766

 
20,187

 
26,235

 
197,997

Three Months Ended March 31, 2011
67,373

 
36,346

 
26,068

 
20,333

 
25,425

 
175,545

Nine Months Ended March 31, 2012
200,883

 
174,626

 
74,463

 
64,470

 
77,390

 
591,832

Nine Months Ended March 31, 2011
189,558

 
107,374

 
75,020

 
59,431

 
71,230

 
502,613


*    Excludes the United Kingdom and Germany.


21


14.
Subsequent Events

On May 8, 2012, we announced that the Audit Committee of our Board of Directors approved the payment of a cash dividend of $0.10 per share of outstanding common stock and per outstanding restricted stock unit. The Audit Committee has also approved a quarterly stock dividend equivalent of $0.10 per outstanding restricted stock unit granted to certain of our executive officers during fiscal years 2011 and 2012 in lieu of the cash dividend, which dividend equivalent will be paid to the restricted stock unit holders as the restricted stock unit vests. The dividends are payable on June 5, 2012 to stockholders and restricted stock unit holders of record at the close of business on May 22, 2012.
 
On April 13, 2012, we announced the closing of a private offering of $400 million aggregate principal amount of senior notes (the “2012 Senior Notes”). The 2012 Senior Notes accrue interest at 6.75% per annum, payable semi-annually, were issued at an original issue price of 102.72% plus accrued interest from December 15, 2011 and become due and payable on June 15, 2018. The 2012 Senior Notes were issued as additional notes pursuant to an indenture, dated June 14, 2011, under which we previously issued $450 million of 6.75% senior notes due 2018 (the “2011 Senior Notes”). The proceeds from the issuance of the 2012 Senior Notes were used to repay approximately $246.7 million of the outstanding term loans under our existing senior credit facility that did not elect to extend their loans, and we intend to use the remainder of any such net proceeds for working capital and other general corporate purposes, including strategic initiatives such as future acquisitions, joint ventures, investments or other business development opportunities.

On April 13, 2012, we also entered into an Amended and Restated First Lien Credit and Guaranty Agreement (the “Amended Credit Facility”), which agreement amended and restated the Amended and Restated First Lien Credit and Guaranty Agreement, dated as of May 16, 2007. The Amended Credit Facility consists of a U.S. term loan facility in an aggregate principal amount of approximately $106.5 million and European term loans in an aggregate principal amount of approximately €142.8 million. The U.S. term loan bears interest at LIBOR plus 3.0% and the European term loans bear interest at EUROLIBOR plus 3.0%. The maturity date for all of the term loans is May 16, 2017.


22


CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are identified by the use of terms and phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” and similar terms and phrases, including references to assumptions. However, these words are not the exclusive means of identifying such statements. These statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies and include, but are not limited to, statements about: benefits of our Corporate Relocation Plan; increase in customer demand for our software and services; growth rates for the automobile insurance claims industry; growth rates for vehicle purchases and car parcs; customer adoption rates for automated claims processing software and services; increases in customer spending on automated claims processing software and services; efficiencies resulting from automated claims processing; performance and benefits of our products and services; development or acquisition of claims processing products and services in areas other than automobile insurance; our relationship with insurance company customers as they continue global expansion; revenue growth resulting from the launch of new software and services; improvements in operating margins resulting from operational efficiency initiatives; increased utilization of our software and services resulting from increased severity; our expectations regarding the growth rates for vehicle insurance; changes in the amount of our existing unrecognized tax benefits; our revenue mix; our income taxes; restructuring plans, potential restructuring charges and their impact on our revenues; our operating expense growth and operating expenses as a percentage of our revenues; stability of our development and programming costs; growth of our selling, general and administrative expenses; increase in total depreciation and amortization expense; increase in interest expense and possible impact of future foreign currency fluctuations; growth of our acquisition and related costs; our ability to realize our U.S. deferred tax assets during the respective carryforward and reversal periods; our use of cash and liquidity position going forward; cash needs to service our debt; and our ability to grow in all types of markets.

Actual results could differ materially from those projected, implied or anticipated by our forward-looking statements. Some of the factors that could cause actual results to differ include: those set forth in the sections titled “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and elsewhere as described in this Quarterly Report on Form 10-Q. These factors include, but are not limited to: our reliance on a limited number of customers for a substantial portion of our revenues; effects of competition on our software and service pricing and our business; unpredictability and volatility of our operating results, which include the volatility associated with foreign currency exchange risks, our sales cycle, seasonality, changes in the amount of our income tax provision (benefit) or other factors; effects of the global economic downturn on demand for or utilization of our products and services; risks associated with and possible negative consequences of acquisitions, joint ventures, divestitures and similar transactions, including risks related to our ability to successfully integrate our acquired businesses; our ability to increase market share, successfully introduce new software and services and expand our operations to new geographic locations; time and expenses associated with customers switching from competitive software and services to our software and services; rapid technology changes in our industry; effects of changes in or violations by us or our customers of government regulations; costs and possible future losses or impairments relating to our acquisitions; use of cash to service our debt; country-specific risks associated with operating in multiple countries; damage to our business or reputation resulting from system failures, delays and other problems; and other factors that are described from time to time in our periodic filings with the SEC.

All forward-looking statements are qualified in their entirety by this cautionary statement, and we undertake no obligation to revise or update this Quarterly Report on Form 10-Q to reflect events or circumstances after the date hereof.

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2011 filed with the SEC on August 29, 2011. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

All percentage amounts and ratios were calculated using the underlying data in whole dollars and may reflect rounding adjustments. Operating results for the three and nine months ended March 31, 2012 are not necessarily indicative of the results that may be expected for any future period. We describe the effects on our results that are attributed to the change in foreign currency exchange rates by measuring the incremental difference between translating the current and prior period results at the monthly average rates for the same period from the prior year.

23



Overview of the Business

We are the leading global provider of software and services to the automobile insurance claims processing industry. At the core of our software and services are our proprietary databases, each of which has been adapted to our local markets. We also provide products and services that complement our insurance claims processing software and services and extend beyond our core offerings. These products and services include used vehicle validation, fraud detection software and services, disposition of salvage vehicles and data and analytics services used by automotive property and casualty insurers in the U.S. Our automobile insurance claims processing customers include insurance companies, collision repair facilities, independent assessors and automotive recyclers. We help our customers:

estimate the costs to repair damaged vehicles and determine pre-collision fair market values for damaged vehicles for which the repair costs exceed the vehicles’ value;

automate and outsource steps of the claims process that insurance companies have historically performed internally; and

improve their ability to monitor and manage their businesses through data reporting and analysis.

We serve over 75,000 customers and are active in over 60 countries across six continents with approximately 2,400 employees. Our customers include more than 1,500 automobile insurance companies, 36,500 collision repair facilities, 7,000 independent assessors and 30,000 automotive recyclers, auto dealers and others. We derive revenues from many of the world’s largest automobile insurance companies, including the ten largest automobile insurance companies in Europe and eight of the ten largest automobile insurance companies in North America.

At the core of our software and services are our proprietary databases, which are localized to each geographical market we serve. Our insurance claims processing software and services are typically integrated into our customers’ systems, operations and processes, making it costly and time consuming to switch to another provider. This customer integration, along with our long-standing customer relationships, has contributed to our successful customer retention rate.

Segments

We have aggregated our operating segments into two reportable segments: EMEA and Americas. In the first quarter of fiscal year 2012, we announced the formation of the Netherlands, Germany, Austria and Switzerland (“NGAS”) Region to leverage the operational and technological achievements and investments we made in the Highly Established Markets Initiative (“HEMI”) Region across our markets. As a result of the creation of the NGAS Region, we transferred our Netherlands operating segment from our Americas reportable segment to our EMEA reportable segment in the first quarter of fiscal year 2012. Accordingly, our EMEA reportable segment encompasses our operations in Europe, the Middle East, Africa, Asia and Australia, while our Americas reportable segment encompasses our operations in North, Central and South America. All prior period segment information has been restated to conform to the current presentation.

We evaluate the performance of our reportable segments based on revenues, income before provision for income taxes and adjusted EBITDA, a non-GAAP financial measure that represents GAAP net income excluding interest expense, provision for income taxes, depreciation and amortization, stock-based compensation expense, restructuring charges, asset impairments and other costs associated with exit and disposal activities, acquisition and related costs, litigation related expenses and other (income) expense. We do not allocate certain costs to reportable segments, including costs related to our financing activities, business development and oversight, and tax, audit and other professional fees, to our reportable segments. Instead, we manage these costs at the Corporate level.

The table below sets forth our revenues by reportable segment and as a percentage of our total revenues for the periods indicated (dollars in millions):
 
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2012
 
2011
 
2012
 
2011
EMEA
$
115.4