XNYS:SLH Solera Holdings Inc Annual Report 10-K Filing - 6/30/2012

Effective Date 6/30/2012

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SLH 6.30.2012 10K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-K
 
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
COMMISSION FILE NUMBER: 001-33461
 
Solera Holdings, Inc.
 
(Exact name of registrant as specified in its charter)
Delaware
 
26-1103816
(State or other jurisdiction of incorporation 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)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of exchange on which registered
Common Stock, par value $0.01 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
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 it was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    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  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  ý    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $1,727,000,000 as of December 31, 2011 (based upon the closing sale price on The New York Stock Exchange for such date). For this purpose, all shares held by directors, executive officers and stockholders beneficially owning five percent or more of the registrant’s common stock have been treated as held by affiliates.
The number of shares of the registrant’s common stock outstanding as of August 16, 2012 was 69,934,832.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement to be delivered to stockholders in connection with registrants 2012 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent stated herein.



TABLE OF CONTENTS
 
PART I
 
 
Item 1.
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
 
 
 
 
 
PART III
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
PART IV
 
 
Item 15.
 




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: 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; decrease of total depreciation and amortization expense; decrease 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. and foreign 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 “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this Annual Report on Form 10-K.
Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. All forward-looking statements included in this Annual Report on Form 10-K are based on information available to us as of the date of this report. All forward-looking statements are qualified in their entirety by this cautionary statement, and we undertake no obligation to revise or update this Annual Report on Form 10-K to reflect events or circumstances after the date hereof. You are advised, however, to consult any further disclosures that we make on related subjects in our Quarterly Reports on Form 10-Q and Periodic Reports on Form 8-K filed with the Securities and Exchange Commission (the “SEC”). You also should read the section titled “Use of Estimates” included in Note 2 of Notes to Consolidated Financial Statements included pursuant to Item 8 of this Annual Report on Form 10-K.
 



PART I
ITEM 1.
BUSINESS

General

Our operations began in 1966, when Swiss Re Corporation founded our predecessor, the Claims Services Group (“CSG”). Solera Holdings, LLC was founded in March 2005 by Tony Aquila, our Chairman of the Board, Chief Executive Officer and President, and affiliates of GTCR Golder Rauner II, L.L.C. (“GTCR”), a private equity firm. In April 2006, subsidiaries of Solera Holdings, LLC acquired CSG from Automatic Data Processing, Inc. (“ADP”) for approximately $1.0 billion (the “CSG Acquisition”). Prior to the CSG Acquisition, Solera Holdings, LLC’s operations consisted primarily of developing our business plan, recruiting personnel, providing consulting services, raising capital and identifying and evaluating operating assets for acquisition.

In connection with our initial public offering in May 2007, we converted from Solera Holdings, LLC, a Delaware limited liability company, into Solera Holdings, Inc., a Delaware corporation, and all of the Class A Common Units and Class B Preferred Units of Solera Holdings, LLC were converted into shares of our common stock.

In November 2008, we completed a secondary public offering of 4.5 million shares of our common stock, raising $86.0 million in net proceeds which was used in the purchase of the outstanding share capital of HPI, Ltd. (“HPI”) in December 2008. In December 2008, we acquired 100% of the outstanding share capital of HPI from a subsidiary of Aviva Plc., the leading provider of used vehicle validation services in the United Kingdom, for an initial cash payment of £67.1 million ($103.3 million), a subordinated note payable with a principal amount of £11.3 million ($18.0 million at June 30, 2011), and contingent cash consideration of up to £4.8 million if HPI achieves certain financial performance targets, of which £2.4 million ($3.8 million) was earned and paid. The acquisition of HPI enhances our delivery of decision support data and software applications to our customers. In fiscal year 2009, we also acquired UC Universal Consulting Software GmbH (“UCS”), a leading provider of software and services to collision repair facilities in Germany, and Inpart Servicos Ltda. (“Inpart”), a leading electronic exchange for the purchase and sale of vehicle replacement parts in Brazil and other markets in Mexico.

In fiscal year 2010, we acquired an 85% ownership interest in AUTOonline GmbH In-formationssysteme (“AUTOonline”), a German limited liability company and provider of an eSalvage vehicle exchange platform in several European countries and Latin American countries as well as India, for cash payments totaling €59.5 million ($86.8 million). In November 2011, we acquired an additional 6.7% ownership interest in AUTOonline for €7.1 million ($9.5 million). After July 1, 2012, we have the right to acquire and the minority owners have the right to sell to us the remaining ownership interest in AUTOonline. The acquisition of AUTOonline extends our core offering to include the disposition of salvage vehicles. In fiscal year 2010, we also acquired Softwaresysteme GTLDATA GmbH (“GTLDATA”), the leading assessor management system provider in Austria, and Market Scan Holding B.V. (“Market Scan”), a leading data analytics and software company serving the Dutch insurance industry.

In June 2011, we acquired 100% of the membership interests of Explore Information Services, LLC (“Explore”), a leading U.S. provider of innovative data and analytic tools used by automotive property and casualty insurers, for a cash payment of $519.2 million. The purchase price was funded through the issuance of notes with an aggregate principal balance of $450.0 million in June 2011 and cash on hand. In fiscal year 2011, we also acquired New Era Software LLC (“New Era”), a U.S.-based provider of bodyshop management systems, and acquired a minority stake in Digidentity B.V., a Dutch company that is a provider of next-generation E-identification certificates for authentication of online identities.

In fiscal year 2012, we acquired See Progress, Inc. (“See Progress”), a market-leading, U.S.-based provider of vehicle repair status software applications, purchased the assets of Inventory Technology Systems, Inc. (“ITS”), a U.S.-based provider of innovative solutions that enhance salvage yard profitability by managing recycled parts logistics and increasing inventory turnover, acquired K&S Beheer B.V. (“Commerce Delta”), a leading, Netherlands-based collision repair shop management system provider, acquired a majority of the outstanding capital shares of Sinexia Corporacion Tecnologica ("Sinexia"), the developer of a leading software application for processing property and casualty insurance claims in Spain, and, through a series of three transactions, acquired Actual Systems, a global provider of premier parts recycling yard management systems that are sold under the "Pinnacle" brand name ("Actual Systems").

The terms “we,” “us,” “our,” “our company” and “our business” refer to the consolidated operations of Solera Holdings, Inc. Our fiscal year ends on June 30 of each year. Fiscal years are identified in this Annual Report on Form 10-K according to the calendar year in which they end. For example, the fiscal year ended June 30, 2012 is referred to as “fiscal year 2012.”


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Our Company

We are the leading global provider of software and services to the automobile insurance claims processing industry. We also provide products and services that complement our insurance claims processing software and services, including used vehicle validation, fraud detection software and services, salvage yard management software, disposition of salvage vehicles and data and analytics used by insurers in the re-underwriting of their insured drivers. 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.

As of June 30, 2012, we served over 75,000 customers and were active in over 60 countries across six continents with approximately 2,500 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. No single customer accounted for more than 2.5% of our revenue for fiscal year ended June 30, 2012.

The Automobile Insurance Claims Process

An overview of the automobile insurance claims process and its complexities provides a framework for understanding how our customers can derive value from our software and services. The automobile insurance claims process generally begins following an automobile collision and consists of the following steps: 

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First Notice of Loss
 
The policyholder initiates the claim process with the insurance company.
 
 
The insurance company assigns the claim to an assessor and/or a collision repair facility.
Investigation
 
The assessor conducts interviews, examines photos and reviews police reports.
 
 
The insurance company, assessor or collision repair facility estimates the cost to repair the vehicle.
 
 
In the case of a heavily damaged vehicle, the assessor or collision repair facility may request a pre-accident vehicle valuation.
Evaluation
 
The insurance company reviews the estimate and/or pre-accident valuation and confirms the results of the investigation.
 
 
The insurance company may request additional information and/or require follow-up investigation.
Decision
 
The insurance company determines whether the vehicle should be repaired or declared a total loss.
 
 
Based on its evaluation, the insurance company determines who is liable for the claim and the repair or total loss amount it intends to pay.
Settlement
 
The insurance company notifies the policyholder or the collision repair facility of the amount it intends to pay.
 
 
The policyholder or collision repair facility may negotiate the final payment amount with the insurance company.
Vehicle Repair
 
The collision repair facility repairs the vehicle if it is not a total loss.
 
 
The collision repair facility or the insurance company may periodically communicate the repair status to the insured policyholder.
 
 
The collision repair facility purchases replacement parts from original equipment manufacturers, or OEMs, aftermarket parts makers or automotive recyclers.
 
 
Further revisions to the claim payment amount may occur if additional damage or cost savings are identified.
Payment
 
The insurance company pays the policyholder or the collision repair facility in the case of a repairable vehicle.
 
 
The insurance company pays the policyholder the pre-accident value (less the amount of the insurance deductible) of the vehicle in the case of a total loss.
 
 
The insurance company is paid the actual cash value of the total loss vehicle by the buyer of the salvage vehicle.

Each of these steps consists of multiple actions requiring significant and complex interaction among several parties. For example, the investigation step generally involves insurance companies, assessors, collision repair facilities and automotive recyclers and includes conducting interviews, taking and examining photographs, obtaining and reviewing police reports and estimating repair costs and salvage values. When performed manually, many of these tasks, such as the mailing of vehicle photographs or the estimating of vehicle repair costs, can be time-consuming. In addition, without an efficient means of communication that facilitates real-time access to data, claim-related negotiations can result in increased cycle times and unnecessary costs.

The Automobile Insurance Claims Processing Industry

The primary participants in the automobile insurance claims processing industry with whom we do business are automobile insurance companies, collision repair facilities, independent assessors and automotive recyclers. We believe that the principal drivers of demand for our software and services are:

Automobile Insurance Industry

We estimate that the global automobile insurance industry processes more than 100 million claims each year, representing approximately $150 billion in repair costs. We believe the industry is relatively concentrated with a number of large automobile insurance companies accounting for the majority of global automobile insurance premiums. Over the past decade, the largest insurers in the U.S., as a group, have been steadily growing and increasing their market share (measured by the premiums written) so that today over half of all private passenger auto insurance in the United States is issued by just five companies, and in 2011, the top 15 companies issued more than 75 percent.

In 2011, global, non-life insurance premiums, which includes premiums for lines of business in addition to automobile

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insurance, grew by 1.9% compared to 2010. In 2011, approximately 84% of these premiums were generated in industrialized countries (which grew 0.5% compared to 2010) and 16% of the premium volumes were generated in emerging markets (which grew 9.1% compared to 2010).

Collision Repair Industry

The collision repair industry is highly fragmented. We estimate there are approximately 100,000 collision repair facilities in our markets. The operating costs of these facilities have increased substantially over the past decade due to continued increases in sophisticated technologies and advanced materials used in vehicle manufacture, inflation in collision repair labor rates and changes in environmental regulations. In addition, collision repair facilities have increasingly established preferred relationships with insurance companies. These arrangements, known in the U.S. as direct repair programs, allow collision repair facilities to generate increased repair volumes through insurance company referrals. Insurance companies benefit by establishing a trusted network of collision repair facilities across which they can negotiate labor rates and implement standard procedures and best practices. Insurance companies often require collision repair facilities to use specified automated claims processing software and related services to participate in their programs. We believe the combination of these factors will increase demand for software and services that help collision repair facilities manage their workflow and increase their efficiency.

Independent Assessors

Independent assessors are often used to estimate vehicle repair costs, particularly where automobile insurance companies have chosen not to employ their own assessors or do not have a sufficient number of employee assessors and where governments mandate the use of independent assessors.

In some markets, we believe changing government regulations and improved claims technology will result in a decrease in the number of independent assessors. However, in other markets, insurance companies are reducing their employee assessor staff to contain costs, which we believe will lead to a growth in the number of independent assessors. We believe the combination of these offsetting factors will result in a modest overall increase in the number of independent assessors and, therefore, the demand for automobile insurance claims processing software and services.

Automotive Recycling Industry

The automotive recycling industry is highly fragmented with over $25 billion in estimated U.S. annual sales by over 7,000 independent salvage and recycling facilities. Participants in the automotive recycling industry are a valuable source of economical and often hard-to-find used vehicle replacement parts. In addition, this industry has become more sophisticated and technology-driven in order to keep pace with more stringent fulfillment requirements. Additionally, insurance companies are increasingly mandating the use of aftermarket and recycled parts to lower the costs to repair damaged vehicles. We believe these factors will result in increased demand for salvage yard management software and services, as automotive recyclers seek to manage their workflows, maximize the value of their inventories and increase efficiency.

Key Drivers of Automobile Insurance Claims Processing Demand

We believe that the principal drivers of demand for our software and services are:

Inefficiencies in the Automobile Insurance Claims Process

Claims process fragmentation. The automobile insurance claims process involves many parties and consists of many steps, which are often managed through paper, fax and other labor intensive processes. Our software and services simplify and streamline the claims process, allowing our customers to process claims faster and reduce their costs.

Asymmetrical information. Collision repair facilities typically have more information about vehicles in their shops than do insurance companies who often must make their damage estimates remotely or with limited information. Our databases provide insurance companies access to detailed information about vehicle damage, repair times and replacement costs, allowing them to more accurately estimate fair settlement values and reduce overpayment on claims.

Disparate claims data. Claims-related data generated by automobile insurance companies often is not stored, shared with other parties or captured in a format that is easily transferable to other applications. This, combined with the inability to transfer and manipulate data easily across multiple applications, hinders comparisons of repairs and claims. Our databases are constantly updated for actual claims data from industry participants. Having access to our databases helps insurance companies

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generate more accurate repair estimates and identify top-performing collision repair facilities.

Conflicting interests of industry participants. Collision repair facilities benefit from high repair costs, which increase their revenues. Conversely, insurance companies benefit from low repair costs, which reduce their expenses. This conflict can result in high settlement costs and delays. Our software and services provide repair cost estimates that rely on common data sources which in turn reduce these costs and delays.

Inefficient collision repair facility workflow. Many collision repair facilities manage their complex workflows manually or without specialized software. Manual workflow management leads to increased processing time, higher costs and more errors, problems that generally intensify as vehicles become more technologically complex, the number of vehicle models proliferate and as repair facilities grow. Our claims processing software and services assist collision repair facilities in effectively managing their workflows and obtaining detailed part availability and pricing information.

Solera’s Markets

We categorize each of the over 60 countries in which we are active into one of the three following market types (from most mature to least mature): (i) Advanced; (ii) Evolving; and (iii) Emerging.
Market Type
 
 
Market Characteristics
Advanced Market
 
•  
Automated claims processing is widespread among industry participants.
 
 
•  
Vehicle insurance is generally government-mandated and a condition to obtaining vehicle financing.
 
 
•  
Number of cars on the road (“car parc”) growing at a lower rate relative to other market types.
 
 
•  
Advanced Markets include North America and Western Europe.
Evolving Market
 
•  
Increasing adoption from manual claims processing to automated claims processing; limited use of automated claims processing by industry participants.
 
 
•  
Higher accident frequencies than advanced markets.
 
 
•  
Growing adoption of government-mandated vehicle insurance and insurance as a condition to vehicle financing.
 
 
•  
Size of car parc increasing.
 
 
•  
Evolving Markets include Latin America and Central and Eastern Europe.
Emerging Market
 
•  
Insurance companies focused on underwriting policies and establishing market share.
 
 
•  
Substantial majority of claims are manually processed; significant opportunity for industry participants to increase operational efficiency through the adoption of automated claims processing.
 
 
•  
Early stage adoption of government-mandated vehicle insurance and insurance as a condition to vehicle financing.
 
 
•  
The highest accident frequencies among the three market types.

 
 
•  
Size of car parc increasing at the fastest rate among the three market types.
 
 
•  
Emerging Markets include China and India.

Growth in the Automobile Insurance Claims Processing Industry

One of the primary growth drivers for our industry is the number of insurance claims made. Insurance claims made is determined by several factors, including: the size and growth of the car parc; the frequency of collisions; and insurance company focus on increasing claims processing efficiency and reducing claims cost severity. Each of these factors influences industry growth differently in each of our three market types.

Advanced Markets. In our Advanced Markets, automobile insurance is generally government-mandated and claims processing is generally automated. Automobile insurance companies achieve growth in these highly competitive markets by gaining additional market share, and generally compete on price and quality of policyholder service. To remain competitive, insurance companies increasingly seek additional automated claims processing products and services to minimize costs and improve policyholder service. In the United States, the number of registered vehicles declined in 2009 and 2010, and increased in 2011, while the average vehicle age has been increasing.

Evolving Markets. In our Evolving Markets, the car parc is generally growing. Automobile insurance companies achieve growth in these markets by focusing on writing new vehicle insurance policies and increasing market share. A significant number of claims are processed manually in these markets, presenting opportunities for insurance companies to increase their

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operational efficiencies by automating claims processing.

Emerging Markets. In our Emerging Markets, the car parc is generally growing at the fastest rate among the three market types. Automobile insurance companies achieve growth in these markets by focusing on writing new vehicle insurance policies and increasing market share. A significant number of claims are processed manually in these markets, presenting opportunities for insurance companies to increase their operational efficiencies by automating claims processing.

According to industry sources, new vehicle sales in Advanced Markets fell in 2008, 2009 and 2010, and increased in 2011. Sales in these markets are projected to grow at a 0.9% compound annual growth rate through 2020. At the same time, sales in Evolving Markets and Emerging Markets continued to grow through the period from 2008 through 2011 and are projected to grow at a 5.7% compound annual growth rate through 2020. Evolving Markets and Emerging Markets now make up a larger percentage of global vehicle sales than Advanced Markets. As the number of insured vehicles on the road continues to expand, we believe the need for automobile insurance claims processing products and services will continue to grow.

While automation of claims processing can result in significant cost savings for our insurance company customers, improving their competitive positioning and customer satisfaction, the cost of automated claims processing software and services generally represents a relatively small portion of automobile insurance companies' claims costs. We believe automobile insurance companies will increase their spending on automated claims processing software and services because incremental investments can result in significant cost reductions.

Our Software and Services

Our software and services can be organized into five general categories: estimating and workflow software, salvage, salvage disposition and recycling software, business intelligence and consulting services, other and vehicle insurance re-underwriting. The majority of our customers access our software and services through a standard Web browser utilizing a “software on demand” model. By subscribing to our services, our customers can reduce upfront investments in software, hardware, implementation services and IT staff that they would typically make with traditional software solutions.

Estimating and Workflow Software

Our core offering is our estimating and workflow software. Our estimating and workflow software helps our customers manage the overall claims process, estimate the cost to repair a damaged vehicle, and calculate the pre-collision fair market value of a vehicle. Key functions of our estimating and workflow software include:

capturing first notice of loss information;
assigning, managing and monitoring claims and claim-related events;
accessing and exchanging claims-related information;
calculating, submitting, tracking and storing repair and total loss estimates;
reviewing, assessing and reporting estimate variations based upon pre-set rules;
routing shop estimates for manual review; and
scheduling repairs and automating parts ordering.

Salvage, Salvage Disposition and Recycling Software

Our salvage, salvage disposition and recycling software helps automotive recyclers manage their inventories in order to facilitate the location, sale and exchange of vehicle parts for use in the repair of a damaged vehicle. This software helps insurers determine if a vehicle is a total loss and reduce costs associated with total losses. Key functions of our salvage, salvage disposition and recycling software include:

managing inventory;
connecting to collision repair facilities to facilitate the use of recycled or aftermarket parts in the repair of a damaged vehicle;
locating vehicle parts by price, year, model and/or geographic area;
determining the interchangeability of automobile parts across vehicle models;
exchanging vehicle parts with other recyclers;

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determining vehicle residual values, in combination with subsequent sales and purchase options;
optimizing proceeds from the sale of salvage vehicles;
preparing invoices and managing accounts receivable;
generating management reports; and
facilitating the offer and sale of salvage vehicles among buyers and sellers.

Business Intelligence and Consulting Services

Our business intelligence and consulting services help our insurance company customers monitor and assess their performance through customized data, reports and analyses. Key elements of our business intelligence and consulting services include:

analyzing claims amounts and payments;
creating customized statistical reports on claims data and activity;
measuring our customers’ performance against industry standards; and
monitoring key performance indicators, such as alternative parts utilization in the repair process and repair cycle time.

Vehicle Insurance Re-Underwriting

As a result of our acquisition of Explore, in the U.S., we provide property and casualty insurers with driver violation reporting services for a substantial number of their insured drivers. This cost-effective service allows insurance companies to re-assess their risk, and, where appropriate, impose a premium surcharge on insured drivers to reflect such risk.

Other

We provide other services and products to our customers, which include leasing hardware for use with our software, training and call center technical support services. We also offer services that allow our customers to access operational and technical support in times of high demand following natural disasters.

We also provide products and services that complement our automobile insurance claims processing software and services, including:

In the United Kingdom, we provide private car buyers, car dealers, finance houses and the insurance industry with access to information on all registered vehicles in the United Kingdom. Through our databases, we can inform a customer if a vehicle has outstanding car finance, is recorded as stolen or has previously been written-off. Through our access to the National Mileage Register, the United Kingdom’s largest database of mileages, we can alert car buyers and dealers to potential mileage discrepancies.
In Brazil and Mexico, we provide an electronic exchange for the purchase and sale of vehicle replacement parts.
In the Netherlands, we provide data analytics to insurance companies and brokers.

Our Databases

At the core of our software and services are our proprietary databases. Each of our databases has been adapted for use in our local markets. We have invested over $200 million in the last twelve years to maintain and expand our proprietary databases. Our primary databases include our repair estimating database, our total loss database, our claims database, our vehicle validation database, our motor vehicle record database and our salvage parts databases.

Repair Estimating Database. We have created our repair estimating database over 43 years through the development, collection, organization and management of automobile-related information. The data in this database enables our customers to estimate the cost to repair a damaged vehicle. This database:

contains detailed cost data for each part and the required labor operations needed to complete repairs on over 4,500 vehicle types;
covers over 98% of the vehicle models in our core markets;

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includes vehicles data dating back to 1970;
includes over 8.5 million parts for vehicles with multiple model years, editions, option packages and country-specific variations;
includes over 30 million aftermarket parts; and
includes over 2.4 million graphics.

We update this database with data provided to us by third parties, including original equipment manufacturers, or OEMs, and aftermarket part suppliers, and automotive recyclers, along with data we develop through our proprietary analyses of local labor repair times and damage repair techniques. The quality and accuracy of the database, which are very important to each of our customers, are continuously monitored and maintained using rigorous quality control processes, which include updating over 2.5 million data records every month.

Total Loss Database. Our total loss database helps our customers determine the pre-collision fair market values of vehicles that have been damaged beyond the point where repair is economically feasible, as well as the amounts they pay policyholders for total losses. Additionally, our employees use this database to provide total loss valuation services to our customers. This database has been designed to accurately reflect the local fair market value of a vehicle rather than simply delivering a market value based on national or regional averages. Each year, we collect more than 180 million “for sale” and “sold” vehicle records from over 8,500 automobile dealer sources, which we have combined with local market purchase and sale data collected from over 3,200 different sources, including websites, local newspapers, magazines and private listings. We update this database by incorporating nearly three million data records per week which include the latest vehicle purchase and sale information including specific models, option packages, vehicle condition and mileage.

Claims Database. Our claims database enables our customers to evaluate their internal claims process performance, as well as measure the performance of their business partners. Our employees also use this database to provide consulting services to our customers and develop new software and services. Customers use this database to benchmark their performance against their local peer group through detailed analyses of comprehensive industry data. Compiled over the past 15 years, this database contains approximately two billion data records representing over 100 million automobile repair claims and over $200 billion in claims payments. We update this database by incorporating approximately 200,000 additional repair estimates every week.

Salvage Parts Databases. Our salvage parts databases contain data on approximately 145 million automobile parts through a network of approximately 3,000 automotive recyclers. These databases are used by our customers to quickly find locally available automobile parts and identify interchangeable parts across different vehicles.

Our primary databases relating to our salvage disposition and other products and services include our salvage vehicle database and vehicle validation database and, as a result of our acquisition of Explore, our motor vehicle record database.

Salvage Vehicle Database. Our salvage vehicle database helps our customers buy, sell and estimate the value of salvage vehicles. Through our eSalvage exchange, our customers list approximately one million salvage vehicles for sale and more than 3,000 bidders enter approximately five million bids for the purchase of salvage vehicles each year.

Vehicle Validation Database. Our vehicle validation database supports the previously owned car market in the United Kingdom by providing private car buyers, car dealers, finance companies and the insurance industry with access to information on all vehicles registered in the United Kingdom. By using our vehicle validation database, customers can verify who the owner is, whether there is a finance-related lien, whether the vehicle has been recorded as stolen or if it has been declared a total loss by an insurance company. We acquire data from a number of public and private data sources including the GB Driver and Vehicle Licensing Agency, motor dealers and manufacturers and finance and insurance companies. The database contains information on approximately 70 million vehicles (including 30 million vehicles currently licensed for use in the United Kingdom) and approximately 135 million mileage readings. The database is updated daily, weekly or periodically depending on the specific data element and its source.

Motor Violation Database. As a result of our acquisition of Explore, in the U.S., we collect moving violation data from 94 sources in 40 states allowing for driver violation reporting on over 40 million insured drivers. This database collects over 22 million moving violation records annually.

Our Global Operations

We are active in over 60 countries on six continents. We manage our business operations through two reportable segments: EMEA and Americas. Our EMEA reportable segment accounted for approximately 59% of our revenues during

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fiscal year 2012. EMEA comprises our activities in 46 countries in Europe, the Middle East, Africa, Asia and Australia. Our Americas reportable segment accounted for approximately 41% of our revenues during fiscal year 2012. Americas comprises our activities in 16 countries in North, Central and South America.

The table below sets forth the revenues we derived from the following geographic areas, based on the location of the customer, during each of the previous three fiscal years: 
 
Fiscal Years Ended June 30,
 
2012
 
2011
 
2010
 
(in thousands)
United States
$
236,239

 
$
147,351

 
$
140,607

United Kingdom
98,673

 
100,620

 
95,178

Germany
84,832

 
81,500

 
73,854

Rest of Europe (excluding United Kingdom and Germany)
266,634

 
257,813

 
240,256

Other
103,829

 
97,413

 
81,453


The increase in the revenues derived from the United States market is primarily due to revenue contributions from Explore, acquired in June 2011.

Sales and Marketing

As of June 30, 2012, our sales and marketing staff included 346 professionals. Our sales and marketing personnel identify and target specific sales opportunities and manage customer relationships. They also design, plan, and launch strategies for new software and services, and plan and facilitate customer conferences and tradeshows. Our country managers are also involved in the sales and marketing process, though they are not counted as full-time sales professionals.

Customer Support and Training

We believe that providing high quality customer support and training services is critical to our success. As of June 30, 2012, we had 415 customer support and training personnel, who provide telephone support, as well as on- and off-site implementation and training. Our customer support and training staff generally consists of individuals with expertise in both our software and services and in the automobile insurance and/or collision repair industries.

Software and Database Development

We devote significant resources to the continued development of our software and databases. We have created sophisticated processes and tools to achieve high-quality software development and data accuracy. Our ability to maintain and grow our leading position in the automobile insurance claims processing industry is dependent upon our ability to enhance and broaden the scope of our software and services, as well as continuing to expand and improve our repair estimating, total loss, claims, vehicle validation, motor vehicle record and parts salvage databases. We often collaborate with our customers in the development process to focus on addressing their specific needs. We then incorporate what we have learned from our customers’ workflow experiences and needs to deliver quality, workflow-oriented software and services to the marketplace quickly. We believe these efforts provide a significant competitive advantage in the development of new software and services.

As of June 30, 2012, our software development staff consisted of 569 professionals across six international software development centers and our database staff consisted of 351 professionals across five international database development centers.

Competition

We compete primarily on the value and functionality of our software and services, the integrity and breadth of our data, customer service and price. The competitive dynamics of the global automobile insurance claims processing industry vary by region, and our competitors are present in a subset of markets in which we operate. In Europe, our largest competitors include DAT GmbH, EurotaxGlass’ Group and GT Motive Einsa Group, with whom we compete in multiple countries. In North America, our largest competitors include CCC Information Services Inc. in the U.S. and Mitchell International Inc. in the U.S. and Canada. We also encounter regional or country-specific competition in the markets for automobile insurance claims processing software and services and our complementary products and services. For example, Experian® is our principal

9


competitor in the United Kingdom in the vehicle validation market, and car.tv is our principal competitor in Germany in the online salvage vehicle disposition market and, as a result of our acquisition of Explore, ChoicePoint is our principal competitor in the U.S. in the automobile re-underwriting solutions market.

Intellectual Property and Licenses

We enter into license agreements with our customers, granting each customer a license to use our software and services while ensuring the protection of our ownership and the confidentiality of the embedded information and technology contained in our software. As a general practice, employees, contractors and other parties with access to our confidential information sign agreements that prohibit the unauthorized use or disclosure of our proprietary rights, information and technology.

We own registered trademarks and service marks that we use in connection with our software and services, including their advertising and marketing. For example, our trademark Audatex is registered in over 50 countries.

We license much of the data used in our software and services through short-term contracts with third parties, including OEMs, aftermarket parts suppliers, data aggregators, automobile dealerships and vehicle repair facilities, to whom we pay royalties.

Employees

As of June 30, 2012, we had 2,483 associates, including 1,451 employees in our EMEA reportable segment, 984 employees in our Americas reportable segment, and 48 employees in corporate roles. None of our employees are subject to a collective bargaining agreement.

Available Information

Our Internet website address is www.solerainc.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Our website and the information contained or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K.

ITEM 1A.
RISK FACTORS

In addition to the cautionary statement regarding forward-looking statements included above in this Annual Report on Form 10-K, we also provide the following cautionary discussion of risks and uncertainties relevant to our business. These risks and uncertainties, as well as other factors that we may not be aware of, could cause our actual results to differ materially from expected and historical results and could cause assumptions that underlie our business plans, expectations and statements in this Annual Report on Form 10-K to be inaccurate.

We depend on a limited number of customers for a substantial portion of our revenues, and the loss of, or a significant reduction in volume from, any of these customers would harm our financial results.

We derive a substantial portion of our revenues from sales to large insurance companies and collision repair facilities that have relationships with these insurance companies. During fiscal year 2012, we derived 12.7% of our revenues from our ten largest insurance company customers. The largest three of these customers accounted for 2.3%, 2.1%, and 1.7%, respectively, of our revenues during fiscal year 2012. A loss of one or more of these customers would result in a significant decrease in our revenues, including the business generated by collision repair facilities associated with those customers. Furthermore, many of our arrangements with European customers are terminable by them on short notice or at any time. In December 2011, we were notified by a U.S. insurance company customer that it will not renew its contract with us, and we expect this customer to transition to another provider during fiscal year 2013. This contract accounted for approximately 2% of our total revenues in fiscal year 2012. In addition, disputes with customers may lead to delays in payments to us, terminations of agreements or litigation. Additional terminations or non-renewals of customer contracts or reductions in business from our large customers would harm our business, financial condition and results of operations.

Our industry is highly competitive, and our failure to compete effectively could result in a loss of customers and market share, which could harm our revenues and operating results.

The markets for our automobile insurance claims processing software and services are highly competitive. In the United

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States, our principal competitors are CCC Information Services Group Inc. and Mitchell International Inc. In Europe, our principal competitors are EurotaxGlass's Group, DAT, GmbH and GT Motive Einsa Group. We also encounter regional or country-specific competition in the markets for automobile insurance claims processing software and services and our other products and services. For example Experian® is our principal competitor in the United Kingdom in the vehicle validation market, car.tv is our principal competitor in Germany in the online salvage vehicle disposition market and ChoicePoint is our principal competitor in the United States in the automobile reunderwriting solutions market. If one or more of our competitors develop software or services that are superior to ours or are more effective in marketing their software or services, our market share could decrease, thereby reducing our revenues. In addition, if one or more of our competitors retain existing or attract new customers for which we have developed new software or services, we may not realize expected revenues from these new offerings, thereby reducing our profitability.

Some of our current or future competitors may have or develop closer customer relationships, develop stronger brands, have greater access to capital, lower cost structures and/or more attractive system design and operational capabilities than we have. Consolidation within our industry could result in the formation of competitors with substantially greater financial, management or marketing resources than we have, and such competitors could utilize their substantially greater resources and economies of scale in a manner that affects our ability to compete in the relevant market or markets. As a result of consolidation, our competitors may be able to adapt more quickly to new technologies and customer needs, devote greater resources to promoting or selling their products and services, initiate and withstand substantial price competition, expand into new markets, hire away our key employees, change or limit access to key information and systems, take advantage of acquisition or other strategic opportunities more readily and develop and expand their product and service offerings more quickly than we can. In addition, our competitors may form strategic or exclusive relationships with each other and with other companies in attempts to compete more successfully against us. These relationships may increase our competitors' ability, relative to ours, to address customer needs with their software and service offerings, which may enable them to rapidly increase their market share.
 
Moreover, many insurance companies have historically entered into agreements with automobile insurance claims processing service providers like us and our competitors whereby the insurance company agrees to use that provider on an exclusive or preferred basis for particular products and services and agrees to require collision repair facilities, independent assessors and other vendors to use that provider. If our competitors are more successful than we are at negotiating these exclusive or preferential arrangements, we may lose market share even in markets where we retain other competitive advantages.
 
In addition, our insurance company customers have varying degrees of in-house development capabilities, and one or more of them have expanded and may seek to further expand their capabilities in the areas in which we operate. Many of our customers are larger and have greater financial and other resources than we do and could commit significant resources to product development. Our software and services have been, and may in the future be, replicated by our insurance company customers in-house, which could result in our loss of those customers and their associated repair facilities, independent assessors and other vendors, resulting in decreased revenues and net income.

The time and expense associated with switching from our competitors’ software and services to ours may limit our growth.

The costs for an insurance company to switch providers of claims processing software and services can be significant and the process can sometimes take 12 to 18 months to complete. As a result, potential customers may decide that it is not worth the time and expense to begin using our software and services, even if we offer competitive and economic advantages. If we are unable to convince these customers to switch to our software and services, our ability to increase market share will be limited and could harm our revenues and operating results.

Our operating results may be subject to volatility as a result of exposure to foreign currency exchange risks.

We derive most of our revenues, and incur most of our costs, including a portion of our debt service costs, in currencies other than the U.S. dollar, mainly the Euro. In our historical financial statements, we translate our local currency financial results into U.S. dollars based on average exchange rates prevailing during a reporting period for our consolidated statement of income and certain components of stockholders’ equity or the exchange rate at the end of that period for the consolidated balance sheet. These translations resulted in a net foreign currency translation adjustment of $(73.5) million and $83.5 million for fiscal years 2012 and 2011, respectively. Ongoing global economic conditions have impacted currency exchange rates.

Exchange rates between most of the major foreign currencies we use to transact our business and the U.S. dollar have fluctuated significantly over the last few years and we expect that they will continue to fluctuate. The majority of our revenues

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and costs are denominated in Euros, Pound Sterling, Swiss francs, Canadian dollars and other foreign currencies. The following table provides the average quarterly exchange rates for the Euro and Pound Sterling since the beginning of fiscal year 2011: 
Period
Average Euro-to-U.S. Dollar Exchange Rate
 
Average Pound Sterling-to-U.S. Dollar Exchange Rate
Quarter Ended September 30, 2010
$
1.29

 
$
1.55

Quarter Ended December 31, 2010
1.36

 
1.58

Quarter Ended March 31, 2011
1.37

 
1.60

Quarter Ended June 30, 2011
1.44

 
1.63

Quarter Ended September 30, 2011
1.42

 
1.61

Quarter Ended December 31, 2011
1.35

 
1.57

Quarter Ended March 31, 2012
1.31

 
1.57

Quarter Ended June 30, 2012
1.28

 
1.58


During fiscal year 2012, as compared to fiscal year 2011, the U.S. dollar strengthened against most major foreign currencies we use to transact our business. The average U.S. dollar strengthened versus the Euro by 1.8% and the Pound Sterling by 0.4%, which decreased our revenues and expenses during fiscal year 2012. A hypothetical 5% increase or decrease in the U.S. dollar versus other currencies in which we transact our business would have resulted in an increase or decrease, as the case may be, to our revenues of $27.7 million during fiscal year 2012.

In April 2012, in order to hedge our exposure to variability in the Euro-denominated cash flows associated with two intercompany loans, we entered into two pay fixed Euros / received fixed U.S. dollar cross-currency swaps in the aggregate notional amount of €109.0 million. These cross-currency swaps were designated, at inception, as cash flow hedges of the intercompany loans. Accordingly, any foreign exchange gains or losses recognized in our consolidated statements of income resulting from the periodic re-measurement of the intercompany loans into U.S. dollars is mitigated by an offsetting gain or loss, as the case may be, resulting from the change in the fair value of the swaps. During the fiscal years ended June 30, 2012, 2011, and 2010, we recognized net foreign currency transaction losses in our consolidated statements of income of $1.4 million, $10.0 million, and $5.8 million, respectively.

Further fluctuations in exchange rates against the U.S. dollar could decrease our revenues and associated profits and, therefore, harm our future operating results.

Current uncertainty in global economic conditions makes it particularly difficult to predict product demand, utilization and other related matters and makes it more likely that our actual results could differ materially from expectations.

Our operations and performance depend on worldwide economic conditions, which have deteriorated significantly in many countries where our products and services are sold, and may remain depressed for the foreseeable future. These conditions make it difficult for our customers and potential customers to accurately forecast and plan future business activities, and could cause our customers and potential customers to slow, reduce or refrain from spending on our products. In addition, external factors that affect our business have been and may continue to be impacted by the global economic slowdown. Examples include:

Number of Insurance Claims Made: In fiscal year 2012, the number of insurance claims made increased slightly versus fiscal year 2011. However, in several of our large western European markets, the number of insurance claims for vehicle damage submitted by owners to their insurance carriers declined slightly. The number of insurance claims made can be influenced by factors such as unemployment levels, the number of miles driven, rising gasoline prices, the number of uninsured drivers, rising insurance premiums and insured drivers opting for lower coverage or higher deductible levels, among other things. Fewer claims made can reduce the transaction-based fees that we generate.

Sales of New and Used Vehicles: According to industry sources, new vehicle sales in Advanced Markets fell in 2008, 2009, 2010 and 2011. Sales in these markets are projected to grow at a 0.9% compound annual growth rate through 2020. At the same time, sales in Evolving and Emerging Markets continued to grow through the period from 2008 through 2011 and are projected to grow at a 5.7% compound annual growth rate through 2020. Fewer new light vehicle sales can result in fewer insured vehicles on the road and fewer automobile accidents, which can reduce the transaction-based fees that we generate.


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Used Vehicle Retail and Wholesale Values: Declines in retail and wholesale used vehicle values can impact vehicle owner and insurance carrier decisions about which damaged vehicles should be repaired and which should be declared a total loss. The lower the retail and wholesale used vehicle values, the more likely it is that a greater percentage of automobiles are declared a total loss versus a partial loss. The fewer number of vehicles that owners and insurance carriers decide to repair can reduce the transaction-based fees that we generate for partial-loss estimates, but may have a beneficial impact on the transaction-based fees that we generate for total-loss estimates.

Automobile Usage—Number of Miles Driven: Several factors can influence miles driven, including gasoline prices and economic conditions. For calendar year 2011, cumulative miles driven in the United States declined by 1.2% compared to the same period in the prior year. In calendar year 2010, the number of miles driven in the United States increased compared to calendar years 2009 and 2008. In calendar year 2009, the number of miles driven in the United States and several of our large western European markets declined due to higher gasoline prices and difficult economic conditions. Fewer miles driven can result in fewer automobile accidents, which can reduce the transaction-based fees that we generate.

Many of our markets around the world continue to experience or have recently experienced volatility. Accordingly, we cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery, worldwide or in particular economic markets. These and other economic factors could have a material adverse effect on demand for or utilization of our products and on our financial condition and operating results.

We may engage in acquisitions, joint ventures, dispositions or similar transactions that could disrupt our operations, cause us to incur substantial expenses, result in dilution to our stockholders and harm our business or results of operations.

Our growth is dependent upon market growth and our ability to enhance our existing products and introduce new products on a timely basis. We have addressed and will continue to address the need to introduce new products both through internal development and through acquisitions of other companies and technologies that would complement or extend our business or enhance our technological capability. In fiscal year 2011, we acquired two businesses, including Explore. The acquisition of Explore is our largest acquisition to date. In fiscal year 2012, we have acquired three businesses, substantially all of the assets of another business and a majority of the outstanding shares of a fifth business.

Our ability to realize the anticipated benefits of the Explore will depend, to a large extent, on our ability to continue to expand Explore's products and services and integrate them with our products and services. Our management will be required to devote significant attention and resources to these efforts, which may disrupt the business of either or both of the companies and, if executed ineffectively, could preclude realization of the full benefits we expect. Failure to realize the anticipated benefits of the acquisition could cause an interruption of, or a loss of momentum in, the operations of Explore. In addition, the efforts required to realize the benefits of the acquisition may result in material unanticipated problems, expenses, liabilities, competitive responses, loss of customer relationships, and the diversion of management's attention, and may cause our stock price to decline. The risks associated with the Explore acquisition and our other past or future acquisitions include:

adverse effects on existing customer or supplier relationships, such as cancellation of orders or the loss of key customers or suppliers;
 
difficulties in integrating or retaining key employees of the acquired company;

difficulties in integrating the operations of the acquired company, such as information technology resources, and financial and operational data;

entering geographic or product markets in which we have no or limited prior experience;

difficulties in assimilating product lines or integrating technologies of the acquired company into our products;

disruptions to our operations;

diversion of our management's attention;

potential incompatibility of business cultures;

potential dilution to existing stockholders if we issue shares of common stock or other securities as consideration in

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an acquisition or if we issue any such securities to finance acquisitions;

prohibitions against completing acquisitions as a result of regulatory restrictions or disruptions in connection with regulatory investigations of completed acquisitions;

limitations on the use of net operating losses or tax benefits;

negative market perception, which could negatively affect our stock price;

the assumption of debt and other liabilities, both known and unknown; and/or

additional expenses associated with the amortization of intangible assets or impairment charges related to purchased intangibles and goodwill, or write-offs, if any, recorded as a result of the acquisition.

Many of these factors will be outside of our control, and any one of them could result in increased costs, decreases in the amount of expected revenues and diversion of management's time and energy.

We have been notified by the Federal Trade Commission (“FTC”) that it has commenced a formal investigation of a recently completed, non-material acquisition and a voluntary, non-public investigation of a pending, non-material transaction to determine whether the transactions violate U.S. antitrust law. While the investigations are at an early stage and we are therefore not able to predict its outcome, the transactions may be subject to various remedies, including divestiture of the acquired business and/or a prohibition against completing the pending transaction. Moreover, the investigations and/or their outcome could expose us to negative publicity, which might adversely affect our brands, reputation and/or customer preference for our products. In addition, our merger and acquisition activities in the same or similar markets as the subject businesses are subject to antitrust and competition laws, which laws could impact our ability to pursue strategic transactions in these markets.

We participate in joint ventures in some countries, and we may participate in future joint ventures. Our partners in these ventures may have interests and goals that are inconsistent with or different from ours, which could result in the joint venture taking actions that negatively impact our growth in the local market and consequently harm our business or financial condition. If we are unable to find suitable partners or if suitable partners are unwilling to enter into joint ventures with us, our growth into new geographic markets may slow, which would harm our results of operations.

Additionally, we may finance future acquisitions and/or joint ventures with cash from operations, additional indebtedness and/or the issuance of additional securities, any of which may impair the operation of our business or present additional risks, such as reduced liquidity or increased interest expense. For example, we financed the purchase price for the Explore acquisition with a private offering of $450.0 million aggregate principal amount of senior unsecured notes, which resulted in a decrease of our ratio of earnings to fixed charges and adversely affected the leverage measures in our senior secured credit facility. We may also seek to restructure our business in the future by disposing of certain of our assets, which may harm our future operating results, divert significant managerial attention from our operations and/or require us to accept non-cash consideration, the market value of which may fluctuate.

Failure to implement our acquisition strategy, including successfully integrating acquired businesses, could have an adverse effect on our business, financial condition and results of operations.

Our operating results may vary widely from period to period due to the sales cycle, seasonal fluctuations and other factors.

Our contracts with insurance companies generally require time-consuming authorization procedures by the customer, which can result in additional delays between when we incur development costs and when we begin generating revenues from those software or service offerings. In addition, we incur significant operating expenses while we are researching and designing new software and related services, and we typically do not receive corresponding payments in those same periods. As a result, the number of new software and service offerings that we are able to implement, successfully or otherwise, can cause significant variations in our cash flow from operations, and we may experience a decrease in our net income as we incur the expenses necessary to develop and design new software and services. Accordingly, our quarterly and annual revenues and operating results may fluctuate significantly from period to period.
 
Our business is subject to seasonal and other fluctuations. In particular, we have historically experienced higher revenues during the second quarter and third quarter versus the first quarter and fourth quarter during each fiscal year. This seasonality is caused primarily by more days of inclement weather during the second quarter and third quarter in most of our markets, which

14


contributes to a greater number of vehicle accidents and damage during these periods. In addition, our business is subject to fluctuations caused by other factors, including the occurrence of extraordinary weather events and the timing of certain public holidays. For example, the Easter holiday occurs during the third quarter in certain fiscal years and occurs during the fourth quarter in other fiscal years, resulting in a change in the number of business days during the quarter in which the holiday occurs.

We anticipate that our revenues will continue to be subject to seasonality and therefore our financial results will vary from period to period. However, actual results from operations may or may not follow these normal seasonal patterns in a given year leading to performance that is not in alignment with expectations.

We also may experience variations in our earnings due to other factors beyond our control, such as:

the introduction of new software or services by our competitors;

customer acceptance of new software or services;

the volume of usage of our offerings by existing customers;

variations of vehicle accident rates due to factors such as changes in fuel prices, number of miles driven or new vehicle purchases and their impact on vehicle usage;

competitive conditions, or changes in competitive conditions, in our industry generally;

prolonged system failures during which time customers cannot submit or process transactions; or

prolonged interruptions in our access to third-party data incorporated in our software and services.

We may also incur significant or unanticipated expenses when contracts expire, are terminated or are not renewed. Any of these events could harm our financial condition and results of operations and cause our stock price to decline.

Our industry is subject to rapid technological changes, and if we fail to keep pace with these changes, our market share and revenues will decline.

Our industry is characterized by rapidly changing technology, evolving industry standards and frequent introductions of, and enhancements to, existing software and services, all with an underlying pressure to reduce cost. Industry changes could render our offerings less attractive or obsolete, and we may be unable to make the necessary adjustments to our offerings at a competitive cost, or at all. We also incur substantial expenses in researching, developing, designing, purchasing, licensing and marketing new software and services. The development or adaptation of these new technologies may result in unanticipated expenditures and capital costs that would not be recovered in the event that our new software or services are unsuccessful. The research, development, production and marketing of new software and services are also subject to changing market requirements, access to and rights to use third-party data, the satisfaction of applicable regulatory requirements and customers' approval procedures and other factors, each of which could prevent us from successfully marketing any new software and services or responding to competing technologies. The success of new software in our industry also often depends on the ability to be first to market, and our failure to be first to market with any particular software project could limit our ability to recover the development expenses associated with that project. If we cannot develop or acquire new technologies, software and services or any of our existing software or services are rendered obsolete, our revenues and income could decline and we may lose market share to our competitors, which would impact our future operations and financial results.

Changes in or violations by us or our customers of applicable government regulations could reduce demand for or limit our ability to provide our software and services in those jurisdictions.

Our insurance company customers are subject to extensive government regulations, mainly at the state level in the United States and at the country level in our non-U.S. markets. Some of these regulations relate directly to our software and services, including regulations governing the use of total loss and estimating software. If our insurance company customers fail to comply with new or existing insurance regulations, including those applicable to our software and services, they could lose their certifications to provide insurance and/or reduce their usage of our software and services, either of which would reduce our revenues. Also, we are subject to direct regulation in some markets, and our failure to comply with these regulations could significantly reduce our revenues or subject us to government sanctions. In addition, future regulations could force us to implement costly changes to our software and/or databases or have the effect of prohibiting or rendering less valuable one or

15


more of our offerings. Moreover, some states in the United States have changed and are contemplating changes to their regulations to permit insurance companies to use book valuations or public source valuations for total loss calculations, making our total loss software potentially less valuable to insurance companies in those states. Some states have adopted total loss regulations, that, among other things, require insurers use a methodology deemed acceptable to the respective government agency.

We submit our methodology to such agencies, and if they do not approve our methodology, we will not be able to perform total loss valuations in their respective states. Other states are considering legislation that would limit the data that our software can provide to our insurance company customers. In the event that demand for or our ability to provide our software and services decreases in particular jurisdictions due to regulatory changes, our revenues and margins may decrease.
 
There is momentum to create a U.S. federal government oversight mechanism for the insurance industry. There is also legislation under consideration by the U.S. legislature relating to the vehicle repair industry. Federal regulatory oversight of or legislation relating to the insurance industry in the United States could result in a broader impact on our business versus similar oversight or legislation at the U.S. state level.

Regulatory developments could negatively impact our business.

We acquire and distribute personal, public and non-public information, store it in our some of our databases and provide it in various forms to certain of our customers in accordance with applicable law and contracts. We are subject to government regulation and, from time to time, companies in similar lines of business to us are subject to adverse publicity concerning the use of such data. We provide many types of data and services that are subject to regulation under the Fair Credit Reporting Act, Gramm-Leach-Bliley Act, Driver's Privacy Protection Act, Health Insurance Portability and Accountability Act, the European Union's Data Protection Directive and, to a lesser extent, various other international, federal, state and local laws and regulations. These laws and regulations are designed to protect the privacy of the public and to prevent the misuse of personal information. Our suppliers that provide us with protected and regulated data face similar regulatory requirements and, consequently, they may cease to be able to provide data to us or may substantially increase the fees they charge us for this data which may make it financially burdensome or impossible for us to acquire data that is necessary to offer our certain of our products and services. Additionally, many consumer advocates, privacy advocates, and government regulators believe that the existing laws and regulations do not adequately protect privacy of personal information. They have become increasingly concerned with the use of personal information, particularly social security numbers, department of motor vehicle data and dates of birth. As a result, they are lobbying for further restrictions on the dissemination or commercial use of personal information to the public and private sectors. The following legal and regulatory developments also could have a material adverse affect on our business, financial position, results of operations or cash flows:

amendment, enactment, or interpretation of laws and regulations which restrict the access, use and distribution of personal information and limit the supply of data available to customers;

changes in cultural and consumer attitudes to favor further restrictions on information collection and sharing, which may lead to regulations that prevent full utilization of our services;

failure of our services to comply with current or amended laws and regulations; and

failure of our services to adapt to changes in the regulatory environment in an operational effective, efficient, cost-effective manner.

We require a significant amount of cash to service our indebtedness, which reduces the cash available to finance our organic growth, make strategic acquisitions and enter into alliances and joint ventures; our Amended Credit Facility contains restrictive covenants that limit our ability to engage in certain activities.

We have a significant amount of indebtedness. As of June 30, 2012, our indebtedness, including current maturities, was $1.1 billion, of which $285.4 million matures in May 2017 and $850.0 million matures in June 2018.

During fiscal year 2012, our aggregate interest expense was $53.6 million and cash paid for interest was $60.6 million. As a result of our issuance of senior unsecured notes in June 2011 and April 2012, we expect our interest expense and cash interest expense to significantly increase in fiscal year 2013 as compared to previous periods.

Our indebtedness could:


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make us more vulnerable to unfavorable economic conditions and reduce our revenues;

make it more difficult to obtain additional financing in the future for working capital, capital expenditures or other general corporate purposes;

require us to dedicate or reserve a large portion of our cash flow from operations for making payments on our indebtedness which would prevent us from using it for other purposes including software development;

make us susceptible to fluctuations in market interest rates that affect the cost of our borrowings to the extent that our variable rate debt is not covered by interest rate derivative agreements; and

make it more difficult to pursue strategic acquisitions, joint ventures, alliances and collaborations.

Our ability to service our indebtedness will depend on our future performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors. Some of these factors are beyond our control. If we cannot generate sufficient cash flow from operations to service our indebtedness and to meet our other obligations and commitments, we may be required to refinance our debt, to dispose of assets or to repatriate foreign earnings to obtain funds for such purpose. We cannot assure you that debt refinancings or asset dispositions could be completed on a timely basis or on satisfactory terms, if at all, or would be permitted by the terms of our debt instruments. If we were to repatriate foreign earnings, we would incur incremental U.S. federal and state income taxes. 

In June 2011 and again in April 2012, we completed private offerings of $450.0 million and $400.0 million, respectively, aggregate principal amount of senior unsecured notes. The senior unsecured notes, in addition to our Amended Credit Facility contain covenants that restrict our and our subsidiaries’ ability to make certain distributions with respect to our capital stock, prepay other debt, encumber our assets, incur additional indebtedness, make capital expenditures above specified levels, engage in business combinations, redeem shares in our operating subsidiaries held by noncontrolling owners or undertake various other corporate activities. These covenants may also require us also to maintain certain specified financial ratios, including those relating to total leverage and interest coverage.

Our failure to comply with any of these covenants could result in the acceleration of our outstanding indebtedness under the Amended Credit Facility. If acceleration occurs, we would not be able to repay our debt and it is unlikely that we would be able to borrow sufficient additional funds to refinance our debt. Even if new financing is made available to us, it may not be available on acceptable or reasonable terms. An acceleration of our indebtedness would impair our ability to operate as a going concern.

Pursuant to agreements entered into prior to the CSG Acquisition, the noncontrolling stockholders of certain of our majority-owned subsidiaries have the right to require us to redeem their shares at the then fair market value. For financial statement reporting purposes, the estimated fair market value of these redeemable noncontrolling interests was $74.1 million at June 30, 2012.

We are active in over 60 countries, where we are subject to country-specific risks that could adversely impact our business and results of operations.

During fiscal year 2012 and 2011, we generated approximately 70% and 79% of our revenues, respectively, outside the U.S. and we expect revenues from non-U.S. markets to continue to represent a majority of our total revenues. Business and operations in individual countries are subject to changes in local government regulations and policies, including those related to tariffs and trade barriers, investments, taxation, currency exchange controls and repatriation of earnings. Our results are also subject to the difficulties of coordinating our activities across over 60 different countries. Furthermore, our business strategy includes expansion of our operations into new and developing markets, which will require even greater international coordination, expose us to additional local government regulations and involve markets in which we do not have experience or established operations. In addition, our operations in each country are vulnerable to changes in socio-economic conditions and monetary and fiscal policies, intellectual property protection disputes, the settlement of legal disputes through foreign legal systems, the collection of receivables through foreign legal systems, exposure to possible expropriation or other governmental actions, unsettled political conditions, possible terrorist attacks and pandemic disease. These and other factors may harm our operations in those countries and therefore our business and results of operations.

We have a large amount of goodwill and other intangible assets as a result of acquisitions. Our earnings will be harmed if we suffer an impairment of our goodwill or other intangible assets.


17


We have a large amount of goodwill and other intangible assets and are required to perform an annual, or in certain situations a more frequent, assessment for possible impairment for accounting purposes. At June 30, 2012, we had goodwill and other intangible assets of $1.3 billion, or approximately 62% of our total assets. If we do not achieve our planned operating results or other factors impair these assets, we may be required to incur a non-cash impairment charge. Any impairment charges in the future will adversely affect our results of operations.

We may incur significant restructuring and severance charges in future periods, which would harm our operating results and cash position or increase debt.

We incurred restructuring charges of $7.1 million during each of fiscal years 2012 and 2011. These charges consist primarily of relocation and termination benefits paid or to be paid to employees, lease obligations associated with vacated facilities and other costs incurred related to our restructuring initiatives. As of June 30, 2012, our remaining restructuring and severance obligations associated with these restructuring initiatives were $8.6 million.

We regularly evaluate our existing operations and capacity, and we expect to incur additional restructuring charges as a result of future personnel reductions, related restructuring, and productivity and technology enhancements, which could exceed the levels of our historical charges. In addition, we may incur certain unforeseen costs as existing or future restructuring activities are implemented. Any of these potential charges could harm our operating results and significantly reduce our cash position.

Our software and services rely on information generated by third parties and any interruption of our access to such information could materially harm our operating results.

We believe that our success depends significantly on our ability to provide our customers access to data from many different sources. For example, a substantial portion of the data used in our repair estimating software is derived from parts and repair data provided by, among others, original equipment manufacturers, or OEMs, aftermarket parts suppliers, data aggregators, automobile dealerships, government organizations and vehicle repair facilities. We obtain much of our data about vehicle parts and components and collision repair labor and costs through license agreements with OEMs, automobile dealers, and other providers, and we obtain much of our data in our vehicle validation database and motor violation database from government organizations. EurotaxGlass's Group, one of our primary competitors in Europe, provides us with valuation and paint data for use in our European markets pursuant to a similar arrangement, and Mitchell International, one of our primary competitors in the United States, provides us with vehicle glass data for use in our U.S. markets pursuant to a similar arrangement. In some cases, the data included in our products and services is licensed from sole-source suppliers. Many of the license agreements through which we obtain data are for terms of one year and may be terminated without cost to the provider on short notice.

If one or more of our licenses are terminated or if we are unable to renew one or more of these licenses on favorable terms or at all, we may be unable to access the information (in the case of information licensed from sole-service suppliers) or unable to access alternative data sources that would provide comparable information without incurring substantial additional costs. Some OEM sources have indicated to us that they intend to materially increase the licensing costs for their data. While we do not believe that our access to many of the individual sources of data is material to our operations, prolonged industry-wide price increases or reductions in data availability could make receiving certain data more difficult and could result in significant cost increases, which would materially harm our operating results.

System failures, delays and other problems could harm our reputation and business, cause us to lose customers and expose us to customer liability.

Our success depends on our ability to provide accurate, consistent and reliable services and information to our customers on a timely basis. Our operations could be interrupted by any damage to or failure of:

our computer software or hardware or our customers’ or third-party service providers’ computer software or hardware;

our networks, our customers’ networks or our third-party service providers’ networks; and

our connections to and outsourced service arrangements with third parties, such as Acxiom, which hosts data and applications for us and our customers.

Our systems and operations are also vulnerable to damage or interruption from:

18



power loss or other telecommunications failures;

earthquakes, fires, floods, hurricanes and other natural disasters;

computer viruses or software defects;

physical or electronic break-ins, sabotage, intentional acts of vandalism and similar events; and

errors by our employees or third-party service providers.

As part of our ongoing process improvements efforts, we have and will continue to migrate product and system platforms to next generation platforms and we may increase data and applications that we host ourselves, and the risks noted above will be exacerbated by these efforts. Because many of our services play a mission-critical role for our customers, any damage to or failure of the infrastructure we rely on (even if temporary), including those of our customers and vendors, could disrupt our ability to deliver information to and provide services for our customers in a timely manner, which could harm our reputation and result in the loss of current and/or potential customers or reduced business from current customers. In addition, we generally indemnify our customers to a limited extent for damages they sustain related to the unavailability of, or errors in, the software and services we provide; therefore, a significant interruption of, or errors in, our software and services could expose us to significant customer liability.

Fraudulent data access and other security breaches may negatively impact our business and harm our reputation.

Security breaches in our facilities, computer networks, and databases may cause harm to our business and reputation and result in a loss of customers and data suppliers. Our systems may be vulnerable to physical break-ins, computer viruses, attacks by hackers and similar disruptive problems. If users gain improper access to our databases, they may be able to steal, publish, delete or modify confidential third-party information that is stored or transmitted on our networks.

In addition, customers’ misuse of our information services could cause harm to our business and reputation and result in loss of customers. Any such misappropriation and/or misuse of our information could result in us, among other things, being in breach of certain data protection and related legislation.

A security or privacy breach may affect us in the following ways:

deterring customers from using our solutions;

deterring data suppliers from supplying data to us;

harming our reputation;

exposing us to liability;

increasing operating expenses to correct problems caused by the breach;

affecting our ability to meet customers’ expectations; or

causing inquiry from governmental authorities.

We may detect incidents in which consumer data has been fraudulently or improperly acquired. The number of potentially affected consumers identified by any future incidents is obviously unknown. Any such incident could materially and adversely affect our business, reputation, financial condition, operating results and cash flows.

Privacy concerns could require us to exclude data from our software and services, which may reduce the value of our offerings to our customers, damage our reputation and deter current and potential users from using our software and services.

In the United States, European Union and other jurisdictions, there are significant restrictions on the use of personal and consumer data. Our violations of these laws could harm our business. In addition, these restrictions may place limits on the information that we can collect from and provide to our customers. Furthermore, concerns about our collection, use or sharing

19


of automobile insurance claims information, moving violation information or other privacy-related matters, even if unfounded, could damage our reputation and operating results.

We depend on a limited number of key personnel who would be difficult to replace. If we lose the services of these individuals, or are unable to attract new talent, our business will be adversely affected.

We depend upon the ability and experience of our key personnel, who have substantial experience with our operations, the rapidly changing automobile insurance claims processing industry and the markets in which we offer our software and services. The loss of the services of one or more of our senior executives or key employees, particularly our Chairman of the Board, Chief Executive Officer and President, Tony Aquila, could harm our business and operations.

Our success depends on our ability to continue to attract, manage and retain other qualified management, sales and technical personnel as we grow. We may not be able to continue to attract or retain such personnel in the future.

We may require additional capital in the future, which may not be available on favorable terms, or at all.

Our future capital requirements depend on many factors, including our ability to develop and market new software and services and to generate revenues at levels sufficient to cover ongoing expenses or possible acquisition or similar transactions. If we need to raise additional capital, equity or debt financing may not be available at all or may be available only on terms that are not favorable to us. In the case of equity financings, dilution to our stockholders could result, and in any case such securities may have rights, preferences and privileges that are senior to our outstanding common stock. In the case of debt financings, we may have to grant additional security interests in our assets to lenders and agree to restrictive business and operating covenants. If we cannot obtain adequate capital on favorable terms or at all, we may be unable to support future growth or operating requirements and, accordingly, our business, financial condition and results of operations could be harmed.

Our business depends on our brands, and if we are not able to maintain and enhance our brands, our business and operating results could be harmed.

We believe that the brand identity we have developed and acquired has significantly contributed to the success of our business. We also believe that maintaining and enhancing our brands, such as Audatex, ABZ, Hollander, Informex, Sidexa, HPI, AUTOonline, Market Scan, IMS and Explore, are critical to the expansion of our software and services to new customers in both existing and new markets. Maintaining and enhancing our brands may require us to make substantial investments and these investments may not be successful. If we fail to promote and maintain our brands or if we incur excessive expenses in this effort, our business, operating results and financial condition will be harmed. We anticipate that, as our markets become increasingly competitive, maintaining and enhancing our brands may become increasingly difficult and expensive. Maintaining and enhancing our brands will depend largely on our ability to be a technology innovator, to continue to provide high quality software and services and protect and defend our brand names and trademarks, which we may not do successfully. To date, we have not engaged in extensive direct brand promotion activities, and we may not successfully implement brand enhancement efforts in the future.

Third parties may claim that we are infringing upon their intellectual property rights, and we could be prevented from selling our software or suffer significant litigation expense even if these claims have no merit.

Our competitive position is driven in part by our intellectual property and other proprietary rights. Third parties, however, may claim that our software, products or technology, including claims data or other data, which we obtain from other parties, are infringing or otherwise violating their intellectual property rights. We may also develop software, products or technology, unaware of pending patent applications of others, which software products or technology may infringe a third party patent once that patent is issued. Any claims of intellectual property infringement or other violation, even claims without merit, could be costly and time-consuming to defend and could divert our management and key personnel from operating our business. In addition, if any third party has a meritorious or successful claim that we are infringing or violating its intellectual property rights, we may be forced to change our software or enter into licensing arrangements with third parties, which may be costly or impractical. These claims may also require us to stop selling our software and/or services as currently designed, which could harm our competitive position. We also may be subject to significant damages or injunctions that prevent the further development and sale of certain of our software or services and may result in a material loss in revenue. Currently, one of our trademarks is subject to a nullification proceeding in front of the Brazil trademark authority.

We may be unable to protect our intellectual property and property rights, either without incurring significant costs or at all, which would harm our business.


20


We rely on a combination of trade secrets, copyrights, know-how, trademarks, patents, license agreements and contractual provisions, as well as internal procedures, to establish and protect our intellectual property rights. The steps we have taken and will take to protect our intellectual property rights may not deter infringement, duplication, misappropriation or violation of our intellectual property by third parties. In addition, any of the intellectual property we own or license from third parties may be challenged, invalidated, circumvented or rendered unenforceable, or may not be of sufficient scope or strength to provide us with any meaningful information. Furthermore, because of the differences in foreign patent, trademark and other laws concerning proprietary rights, our software and other intellectual property rights may not receive the same degree of protection in foreign countries as they would in the U.S., if at all. We may be unable to protect our rights in trade secrets and unpatented proprietary technology in these countries. We may also be unable to prevent the unauthorized disclosure or use of our technical knowledge, trade secrets or other proprietary information by consultants, vendors, former employees or current employees, despite the existence of nondisclosure and confidentiality agreements, intellectual property assignments and other contractual restrictions. It is also possible that others will independently develop the technology that is the same or similar to ours. If our trade secrets and other proprietary information become known or we are unable to maintain the proprietary nature of our intellectual property, we may not receive any return on the resources expended to create the intellectual property or generate any competitive advantage based on it.

We rely on our brands to distinguish our products and services from the products and services of our competitors, and have registered or applied to register trademarks covering many of these brands. We cannot assure you that our trademark applications will be approved. Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products and services, which could result in loss of brand recognition, and could require us to devote resources advertising and marketing new brands.

Third parties, including competitors, may infringe our intellectual property right and we may not have adequate resources to enforce our intellectual property rights. Pursuing infringers of our intellectual property could result in significant monetary costs and diversion of management resources, and any failure to pursue or successfully litigate claims against infringers or otherwise enforce our intellectual property rights could result in competitors using our technology and offering similar products and services, potentially resulting in loss of our competitive advantage and decreased revenues.

Currently, we believe that one or more of our customers in our EMEA segment may be infringing our intellectual property by making and distributing unauthorized copies of our software. We have also filed a trademark revocation application with the European Union trademark authority seeking revocation of a registered trademark held by a company in the United Kingdom that is similar to one of the trademarks we use. Enforcement of our intellectual property rights may be difficult and may require considerable resources.

Our lawsuit against Mitchell International, Inc. for patent infringement will be costly to litigate, could be decided adversely to us, and could adversely affect our intellectual property rights, distract our management and technical staff, and cause our stock price to decline.

On February 6, 2012, we filed a lawsuit against Mitchell International, Inc. (“Mitchell”) in the United States District Court for the District of Delaware for infringement of one of our U.S. patents. We expect that our lawsuit, if we cannot resolve it before trial, could require several years to litigate, and at this stage we cannot predict the duration or cost of such litigation. We also expect that our lawsuit, even if it is determined in our favor or settled by us on favorable terms, will be costly to litigate, and that the cost of such litigation could have an adverse financial impact on our operating results. The litigation could also distract our management team and technical personnel from our other business operations, to the detriment of our business results. It is possible that we might not prevail in our lawsuit against Mitchell, in which case our costs of litigation would not be recovered, and we could effectively lose some of our patent rights. It is also possible that Mitchell might respond to our lawsuit by asserting counterclaims against us. Delays in the litigation, and any or all of these potential adverse results, could cause a substantial decline in our stock price.

Current or future litigation could have a material adverse impact on us.

We have been and continue to be involved in legal proceedings, claims and other litigation that arise in the ordinary course of business. For example, we have been involved in disputes with collision repair facilities, acting individually and as a group in some situations that claim that we have colluded with our insurance company customers to depress the repair time estimates generated by our repair estimating software. We have also been involved in litigation alleging that we have colluded with our insurance company customers to cause the estimates of vehicle fair market value generated by our total loss estimation software to be unfairly low. Furthermore, we are also subject to assertions by our customers and strategic partners that we have not complied with the terms of our agreements with them or that the agreements are not enforceable against them, some of

21


which are the subject of pending litigation and any of which could in the future lead to arbitration or litigation. While we do not expect the outcome of any such pending or threatened litigation to have a material adverse effect on our financial position, litigation is unpredictable and excessive verdicts, both in the form of monetary damages and injunction, could occur. In the future, we could incur judgments or enter into settlements of claims that could harm our financial position and results of operations.

We are subject to periodic changes in the amount of our income tax provision (benefit) and these changes could adversely affect our operating results; we may not be able to utilize all of our tax benefits before they expire.

Our effective tax rate could be adversely affected by our mix of earnings in countries with high versus low tax rates; by changes in the valuation of our deferred tax assets and liabilities; by a change in our assertion that our foreign earnings are indefinitely reinvested; by the outcomes of examinations, audits or disputes by or with relevant tax authorities; or by changes in tax laws and regulations. There have been several U.S. domestic and international laws recently enacted that would significantly impact how U.S. multinational corporations are taxed on foreign earnings. Such enacted tax laws could have a material adverse impact on our tax expense.

Significant judgment is required to determine the recognition and measurement attributes prescribed in ASC Topic No. 740-10, Income Taxes. In addition, ASC Topic No. 740-10 applies to all income tax positions, including the potential recovery of previously paid taxes, which if settled unfavorably could adversely impact our provision for income taxes or additional paid-in capital.

We began paying dividends in fiscal year 2010 and we may not be able to pay dividends on our common stock and restricted stock units in the future; as a result, your only opportunity to achieve a return on your investment may be if the price of our common stock appreciates.

We began paying quarterly cash dividends to holders of our outstanding of common stock and restricted stock units in the quarter ended September 30, 2009. On August 23, 2012, we announced that the Board of Directors approved the payment of a quarterly cash dividend of $0.125 per outstanding share of common stock and per outstanding restricted stock unit. The Board of Directors also approved a quarterly stock dividend equivalent of $0.125 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 September 18, 2012 to stockholders and restricted stock unit holders of record at the close of business on September 6, 2012. Any determination to pay dividends in future periods will be at the discretion of our Board of Directors. Our ability to pay dividends to holders of our common stock and restricted stock units in future periods may be limited by restrictive covenants under our Amended Credit Facility and the indenture for the senior unsecured notes. As a result, your only opportunity to achieve a return on your investment in us could be if the market price of our common stock appreciates and you sell your shares at a profit. We cannot assure you that the market price for our common stock will ever exceed the price that you pay.

Requirements associated with being a public company increase our costs significantly, as well as divert significant company resources and management attention.

Prior to our initial public offering in May 2007, we were not subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or the other rules and regulations of the SEC or any securities exchange relating to public companies. We continue to work with our legal, independent accounting and financial advisors to identify those areas in which changes should be made to our financial and management control systems to manage our growth and our obligations as a public company. These areas include corporate governance, corporate control, internal audit, disclosure controls and procedures and financial reporting and accounting systems. We have made, and will continue to make, changes in these and other areas. In addition, we are taking steps to address new U.S. federal legislation relating to corporate governance matters and are monitoring other proposed and recently-enacted U.S. federal and state legislation relating to corporate governance and other regulatory matters and how the legislation could affect our obligations as a public company.

The expenses that are required as a result of being a public company are and will likely continue to be material. Compliance with the various reporting and other requirements applicable to public companies also require considerable time and attention of management. In addition, any changes we make may not be sufficient to allow us to satisfy our obligations as a public company on a timely basis.

In addition, being a public company could make it more difficult or more costly for us to obtain certain types of insurance, including directors’ and officers’ liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make

22


it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

Our certificate of incorporation and by-laws contain provisions that could discourage another company from acquiring us and may prevent attempts by our stockholders to replace or remove our current management.

Some provisions of our certificate of incorporation and by-laws may have the effect of delaying, discouraging or preventing a merger or acquisition that our stockholders may consider favorable, including transactions in which stockholders may receive a premium for their shares. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace or remove our board of directors. These provisions include:

authorization of the issuance of “blank check” preferred stock without the need for action by stockholders;

the removal of directors only by the affirmative vote of the holders of two-thirds of the shares of our capital stock entitled to vote;

any vacancy on the board of directors, however occurring, including a vacancy resulting from an enlargement of the board, may only be filled by vote of the directors then in office;

inability of stockholders to call special meetings of stockholders and limited ability of stockholders to take action by written consent; and

advance notice requirements for board nominations and proposing matters to be acted on by stockholders at stockholder meetings.

We are monitoring proposed U.S. federal and state legislation relating to stockholder rights and related regulatory matters and how the legislation could affect, among other things, the nomination and election of directors and our charter documents.

ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.

ITEM 2.
PROPERTIES

Our Corporate headquarters are located in Westlake, Texas, where we currently lease approximately 15,000 square feet of space.

Our principal leased EMEA facilities are located in Zurich, Switzerland and Zeist, the Netherlands. Our principal leased Americas facilities are located in San Diego, California; Ann Arbor, Michigan; Plymouth and Eagan, Minnesota; and Milwaukie, Oregon. We also lease a number of other facilities in countries where we operate. We own real estate in Brussels, Belgium; Reading, United Kingdom; Salisbury, United Kingdom; and Harrogate, United Kingdom.

We believe that our existing space is adequate for our current operations. We believe that suitable replacement and additional space, if necessary, will be available in the future on commercially reasonable terms.

ITEM 3.
LEGAL PROCEEDINGS

In the normal course of business, various claims, charges and litigation are asserted or commenced against us, including:

We have been the subject of allegations that our repair estimating and total loss software and services produced results that favored our insurance company customers, one of which is the subject of pending litigation.
We are subject to assertions by our customers and strategic partners that we have not complied with the terms of our agreements with them or our agreements with them are not enforceable.

We have and will continue to vigorously defend ourselves against these claims. We believe that final judgments, if any, which may be rendered against us in current litigation, are adequately reserved for, covered by insurance or would not have a material adverse effect on our financial position.

23



ITEM 4.
MINE SAFETY DISCLOSURES

None.


24


PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock has been traded on The New York Stock Exchange since May 16, 2007 under the symbol “SLH”. Prior to that time, there was no public market for our common stock. The following table sets forth the high and low sales prices for our common stock as reported on the New York Stock Exchange for the periods indicated.
 
Fiscal Year 2012:
High
 
Low
First Quarter
$
62.35

 
$
48.84

Second Quarter
$
55.12

 
$
44.15

Third Quarter
$
51.43

 
$
42.71

Fourth Quarter
$
46.60

 
$
40.19

Fiscal Year 2011:
 
 
 
First Quarter
$
44.67

 
$
35.93

Second Quarter
$
53.12

 
$
42.42

Third Quarter
$
54.80

 
$
47.88

Fourth Quarter
$
59.51

 
$
49.49


Holders of Record

As of August 16, 2012, there were approximately 15 holders of record of our common stock, which is not reflective of the beneficial owners of our common stock.

Dividends

In fiscal years 2012 and 2011, we paid quarterly cash dividends of $0.10 and $0.075, respectively, per share outstanding of common stock and per outstanding restricted stock unit to stockholders and restricted stock unit holders of record. We also issued quarterly stock dividend equivalents of $0.10 per outstanding restricted stock unit granted to certain of our executive officers during fiscal year 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. Cash dividends paid in fiscal years 2012 and 2011 were as follows (in thousands, except per share data):
 
Fiscal Year 2012:
Per Share
 
Total
 
Cumulative by Fiscal Year
First Quarter
0.1000

 
$
7,127

 
$
7,127

Second Quarter
0.1000

 
7,138

 
14,265

Third Quarter
0.1000

 
7,052

 
21,317

Fourth Quarter
0.1000

 
6,967

 
28,284

 
0.4000

 
$
28,284

 
 
Fiscal Year 2011:
 
 
 
 
 
First Quarter
0.0750

 
$
5,285

 
$
5,285

Second Quarter
0.0750

 
5,305

 
10,590

Third Quarter
0.0750

 
5,320

 
15,910

Fourth Quarter
0.0750

 
5,321

 
21,231

 
0.3000

 
$
21,231

 
 

On August 23, 2012, we announced that our Board of Directors approved the payment of a cash dividend of $0.125 per share of outstanding common stock and per outstanding restricted stock unit. The Board of Directors also approved a quarterly stock dividend equivalent of $0.125 per outstanding restricted stock unit granted to certain of our executive officers during

25


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. Any determination to pay dividends in future periods will be at the discretion of our board of directors. Our ability to pay dividends to holders of our common stock and restricted stock units in future periods may be limited by restrictive covenants under our Amended Credit Facility.

Unregistered Sales of Equity Securities

None.

Equity Compensation Plan Information

The following table sets forth certain information regarding our equity compensation plans as of June 30, 2012 (shares in thousands):
 
Plan Category
Number of securities to be issued upon exercise of outstanding options purchase rights and vesting of restricted stock units
 
Weighted-average exercise price of outstanding options and unvested restricted stock units
 
Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by stockholders:
 
 
 
 
 
2006 Securities Purchase Plan

 
$

 

2007 Long-Term Equity Incentive Plan (1)
318

 
23.34

 

2007 Employee Stock Purchase Plan

 

 
1,428

2008 Omnibus Equity Incentive Plan (1)
2,133
 (2)
 
37.77

 
8,873
(3)
Equity compensation plans not approved by stockholders

 

 

Total
2,451

 
 
 
10,301

 
(1)
Following our stockholders’ approval of the 2008 Omnibus Equity Incentive Plan (the “2008 Plan”) on November 12, 2008, we ceased granting equity awards under our 2007 Long-Term Equity Incentive Plan (the “2007 Plan”). All equity awards granted after November 12, 2008 have been granted pursuant to the 2008 Plan. Subject to certain exceptions, all outstanding equity awards under the 2007 Plan that are forfeited, expired or settled in cash will be returned to and made available for issuance under the 2008 Plan. Under the 2008 Plan, each award granted, other than stock options and stock appreciation rights, reduces the number of securities available for issuance under the 2008 Plan by 2.05 shares.
(2)
Assumes the target amount of outstanding performance share units will be earned.
(3)
Reflects the maximum amount of performance share units that could be earned.

Performance Graph

The following graph compares our cumulative total stockholder return on our common stock with the cumulative total returns of the Russell 2000 Index and an aggregate of peer issuers in the information services industry. The peer issuers used for this graph are The Thomson Corporation, Equifax Inc., The Dun & Bradstreet Corporation, FactSet Research Systems Inc., Fair Isaac Corporation, DealerTrack Holdings, Inc. and CoStar Group, Inc. Each peer issuer was weighted according to its respective capitalization on May 16, 2007, the date our common stock began trading on the New York Stock Exchange.

The graph assumes that the value of the investment in our common stock and each index was $100 on May 16, 2007.


26


 
Cumulative Total Return
 
Solera Holdings, Inc.
 
Russell 2000 Index
 
Information Service Peers
May 16, 2007
$
100.00

 
$
100.00

 
$
100.00

June 29, 2007
$
110.74

 
$
101.65

 
$
107.46

June 29, 2008
$
158.06

 
$
84.08

 
$
93.10

June 30, 2009
$
145.14

 
$
61.97

 
$
83.34

June 30, 2010
$
208.44

 
$
77.73

 
$
87.56

June 30, 2011
$
342.72

 
$
106.81

 
$
101.20

June 30, 2012
$
244.06

 
$
104.59

 
$
92.38


The information in the graph and table above is not “soliciting material,” is not deemed “filed” with the Securities and Exchange Commission and is not to be incorporated by reference in any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, except to the extent that we specifically incorporate such information by reference.

Issuer Purchases of Equity Securities

In November 2011, our Board of Directors approved a share repurchase program for up to a total of $180.0 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. The following table provides the amount of shares repurchased during each month to date (in thousands, except per share amounts):
 
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
(in thousands)
November 2011
347

 
$
47.03

 
347

 
$
163,659

December 2011
557

 
$
46.33

 
557

 
$
137,855

February 2012
600

 
$
49.31

 
600

 
$
108,226

March 2012
98

 
$
47.00

 
98

 
$
103,634

May 2012
600

 
$
45.20

 
600

 
$
76,504

Total
2,202

 
$
46.97

 
2,202

 
$
76,504



27


ITEM 6.
SELECTED FINANCIAL DATA

The following table sets forth selected historical financial information regarding our business and should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.

Our results of operations include the results of operations of acquired companies from the date of the respective acquisitions.
 
 
Fiscal Years Ended June 30,
 
2012 (1)
 
2011 (2)
 
2010 (3)
 
2009 (4)
 
2008
Statement of Income Data:
 
 
 
 
 
 
 
 
 
Revenues
$
790,207

 
$
684,697

 
$
631,348

 
$
557,691

 
$
539,853

Cost of revenues:
 
 
 
 
 
 
 
 
 
Operating expenses
171,763

 
134,649

 
130,852

 
128,101

 
131,751

Systems development and programming costs
73,914

 
68,932

 
67,926

 
59,941

 
66,666

Total cost of revenues (excluding depreciation and amortization)
245,677

 
203,581

 
198,778

 
188,042

 
198,417

Selling, general and administrative expenses
206,639

 
187,701

 
170,562

 
159,414

 
153,384

Depreciation and amortization
103,510

 
83,088

 
88,978

 
86,146

 
95,266

Restructuring charges, asset impairments, and other costs associated with exit and disposal activities
7,057

 
7,093

 
5,910

 
3,952

 
13,286

Acquisition and related costs
7,962

 
9,687

 
4,032

 
4,427

 
1,112

Interest expense
53,593

 
31,102

 
32,782

 
38,565

 
45,730

Other (income) expense, net
1,665

 
7,815

 
3,964

 
(15,656
)
 
(9,518
)
 
626,103

 
530,067

 
505,006

 
464,890

 
497,677

Income before provision for income taxes
164,104

 
154,630

 
126,342

 
92,801

 
42,176

Income tax provision (benefit)
45,718

 
(14,427
)
 
32,171

 
26,168

 
35,106

Net income
118,386

 
169,057

 
94,171

 
66,633

 
7,070

Less: Net income attributable to noncontrolling interests
11,398

 
11,680

 
9,739

 
8,326

 
7,243

Net income (loss) attributable to Solera Holdings, Inc.
106,988

 
157,377

 
84,432

 
58,307

 
(173
)
Net income (loss) attributable to Solera Holdings, Inc. per common share:
 
 
 
 
 
 
 
 
 
Basic
$
1.52

 
$
2.23

 
$
1.20

 
$
0.86

 
$
0.00

Diluted 
$
1.51

 
$
2.22

 
$
1.20

 
$
0.86

 
$
0.00

Dividends paid per share
$
0.40

 
$
0.30

 
$
0.25

 
$

 
$



28


 
Fiscal Years Ended June 30,
 
2012 (1)
 
2011 (2)
 
2010 (3)
 
2009 (4)
 
2008
Weighted average common shares used in the calculation of net income attributable to Solera Holdings, Inc. per common share (5):
 
 
 
 
 
 
 
 
 
Basic
70,178

 
70,349

 
69,587

 
67,252

 
63,500

Diluted
70,527

 
70,683

 
69,763

 
67,295

 
63,500

Cash Flow Data:
 
 
 
 
 
 
 
 
 
Cash flows provided by (used in):
 
 
 
 
 
 
 
 
 
Operating activities
$
222,992

 
$
211,531

 
$
190,284

 
$
133,405

 
$
122,615

Investing activities (5)
(47,819
)
 
(543,558
)
 
(111,287
)
 
(121,876
)
 
(19,135
)
Financing activities (6)
(17,966
)
 
410,901

 
(28,927
)
 
72,214

 
(56,548
)
Balance Sheet Data (as of the end of period):
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
508,246

 
$
371,101

 
$
240,522

 
$
223,420

 
$
149,311

Total assets (7)
2,151,816

 
2,169,135

 
1,356,653

 
1,418,609

 
1,331,755

Long-term debt, net of current portion (8)
1,143,012

 
1,020,383

 
538,018

 
592,200

 
624,570

Total stockholders’ equity
687,381

 
785,109

 
512,815

 
492,815

 
395,813

 
(1)
The results of operations of See Progress, Commerce Delta, Sinexia and Actual Systems, acquired in fiscal year 2012, are included from the respective dates of the acquisitions, which are not the first day of the applicable fiscal year.
(2)
The results of operations of Explore and New Era, acquired in fiscal year 2011, are included from the respective dates of the acquisitions, which are not the first day of the applicable fiscal year.
(3)
The results of operations of AUTOonline, GTLDATA and Market Scan, acquired in fiscal year 2010, are included from the respective dates of the acquisitions, which are not the first day of the applicable fiscal year.
(4)
The results of operations of HPI, UCS and Inpart, acquired in fiscal year 2009, are included from the respective dates of the acquisitions, which are not the first day of the applicable fiscal year.
(5)
Cash flows used in investing activities in fiscal year 2011 primarily reflect the $520.0 million paid to acquire Explore in June 2011.
(6)
Cash flows from financing activities in fiscal year 2012 reflect the $410.5 million of net proceeds from our issuance of senior unsecured notes in April 2012, the use of a portion of the proceeds therefrom to repay $246.7 million of the outstanding term loans under our senior credit facility and repurchases of our common stock totaling $103.5 million. Cash flows from financing activities in fiscal year 2011 primarily reflect the $444.3 million of net proceeds from our issuance of senior unsecured notes in June 2011.
(7)
The increase in total assets in fiscal year 2011 primarily reflects the goodwill and acquired intangible assets from our acquisition of Explore.
(8)
The increases in long-term debt, net of current portion in fiscal years 2012 and 2011 primarily reflect our issuance of senior unsecured notes in April 2012 and June 2011.

ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 to those statements included elsewhere in this Annual Report on Form 10-K.

All percentage amounts and ratios were calculated using the underlying data in thousands. Operating results for fiscal years 2012, 2011 and 2010 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.

Overview of the Business

We are the leading global provider of software and services to the automobile insurance claims processing industry. At

29


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, including used vehicle validation, fraud detection software and services and disposition of salvage vehicles. 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 2,500 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 very high 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, in the first quarter of fiscal year 2012 we transferred our Netherlands operating segment from our Americas reportable segment to our EMEA reportable segment. 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 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.

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):
 
Fiscal Years Ended June 30,
 
2012
 
2011
 
2010
EMEA
$
464.4

 
58.8
%
 
$
453.1

 
66.2
%
 
$
420.7

 
66.6
%
Americas
325.8

 
41.2

 
231.6

 
33.8

 
210.6

 
33.4

Total
$
790.2

 
100.0
%
 
$
684.7

 
100.0
%
 
$
631.3

 
100.0
%

For fiscal year 2012, the United States, the United Kingdom and Germany were the only countries that individually represented more than 10% of total revenues.

Components of Revenues and Expenses

Revenues

30



We generate revenues from the sale of software and services to our customers pursuant to negotiated contracts or pricing agreements. Pricing for our software and services is set forth in these agreements and negotiated with each customer. We generally bill our customers monthly under one or more of the following bases:

price per transaction;
fixed monthly amount for a prescribed number of transactions;
fixed monthly subscription rate;
price per set of services rendered; and
price per system delivered.

Our software and services are often sold as packages, without individual pricing for each component. Our revenues are reflected net of customer sales allowances, which we estimate based on both our examination of a subset of customer accounts and historical experience.

Our core offering is our estimating and workflow software, which is used by our insurance company, collision repair facility and independent assessor customers, representing the majority of our revenues. Our salvage and recycling software, business intelligence and consulting services, vehicle data validation, salvage disposition, driver violation reporting services and other offerings represent in the aggregate a smaller portion of our revenues. We believe that our estimating and workflow software will continue to represent the majority of our revenue for the foreseeable future.

Cost of revenues (excluding depreciation and amortization)

Our costs and expenses applicable to revenues represent the total of operating expenses and systems development and programming costs, which are discussed below.

Operating expenses

Our operating expenses include: compensation and benefit costs for our operations, database development and customer service personnel; other costs related to operations, database development and customer support functions; third-party data and royalty costs; costs related to computer software and hardware used in the delivery of our software and services; and, as a result of our acquisition of Explore, the costs of purchased data from state departments of motor vehicles.

Systems development and programming costs

Systems development and programming costs include: compensation and benefit costs for our product development and product management personnel; other costs related to our product development and product management functions; and costs related to external software consultants involved in systems development and programming activities.

Selling, general and administrative expenses

Our selling, general and administrative expenses include: compensation and benefit costs for our sales, marketing, administration and corporate personnel; costs related to our facilities; and professional and legal fees.

Depreciation and amortization

Depreciation includes depreciation attributable to buildings, leasehold improvements, data processing and computer equipment, furniture and fixtures. Amortization includes amortization attributable to software purchases and software developed or obtained for internal use and intangible assets acquired in business combinations, particularly our acquisition of the Claims Services Group from Automated Data Processing, Inc. in 2006 (the “CSG Acquisition”) and our acquisition of Explore.

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

Restructuring charges, asset impairments and other costs associated with exit and disposal activities primarily represent costs incurred in relation to our restructuring initiatives. Restructuring charges primarily include employee termination benefits charges and charges related to the lease and vendor contract liabilities that we do not expect to provide future economic

31


benefits due to the implementation of our restructuring initiatives.

Acquisition and related costs

Acquisition and related costs include legal and other professional fees and other transaction costs associated with completed and contemplated business combinations and asset acquisitions, costs associated with integrating acquired businesses, including costs incurred to eliminate workforce redundancies and for product rebranding, and other charges incurred as a direct result of our acquisition efforts. These other charges include changes to the fair value of contingent purchase consideration, acquired assets and assumed liabilities subsequent to the completion of the purchase price allocation purchase consideration that is deemed to be compensatory in nature, incentive compensation arrangements with continuing employees of acquired companies and gains and losses resulting from the settlement of a pre-existing contractual relationship with an acquiree as a result of the applicable acquisition.

Interest expense

Interest expense consists primarily of payments of interest on our debt and amortization of related debt issuance costs.

Other (income) expense, net

Other (income) expense, net consists of foreign exchange gains and losses on notes receivable and notes payable to affiliates, interest income and other miscellaneous income and expense.

Income tax provision (benefit)

Income taxes have been provided for all items included in the statements of income included herein, regardless of when such items were reported for tax purposes or when the taxes were actually paid or refunded.

Net income attributable to noncontrolling interests

Several of our customers and other entities own noncontrolling interests in seven of our operating subsidiaries. Net income attributable to noncontrolling interests reflect such owners’ proportionate interest in the earnings of such operating subsidiaries.

Factors Affecting Our Operating Results

Below is a summary description of several external factors that have or may have an effect on our operating results.

Foreign currency. During fiscal years 2012, 2011 and 2010, we generated approximately 70%, 79% and 78% of our revenues, respectively, and incurred a majority of our costs, in currencies other than the U.S. dollar, primarily the Euro. We translate our local currency financial results into U.S. dollars based on average exchange rates prevailing during a reporting period for our consolidated statement of income and certain components of stockholders’ equity and the exchange rate at the end of that period for the consolidated balance sheet. These translations resulted in foreign currency translation adjustments of $(73.5) million and $83.5 million for fiscal years 2012 and 2011, respectively, which are recorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Foreign currency transaction losses recognized in our consolidated statements of income were $1.4 million, $10.0 million, $5.8 million during fiscal years 2012, 2011, and 2010, respectively.

Exchange rates between most of the major foreign currencies we use to transact our business and the U.S. dollar have fluctuated significantly over the last few years and we expect that they will continue to fluctuate. The majority of our revenues and costs are denominated in Euros, Pound Sterling, Swiss francs, Canadian dollars and other foreign currencies. The following table provides the average quarterly exchange rates for the Euro and Pound Sterling since the beginning of fiscal year 2011:

32


Period
Average Euro-to-U.S. Dollar Exchange Rate
 
Average Pound Sterling-to-U.S. Dollar Exchange Rate
Quarter Ended September 30, 2010
$
1.29

 
$
1.55

Quarter Ended December 31, 2010
1.36

 
1.58

Quarter Ended March 31, 2011
1.37

 
1.60

Quarter Ended June 30, 2011
1.44

 
1.63

Quarter Ended September 30, 2011
1.42

 
1.61

Quarter Ended December 31, 2011
1.35

 
1.57

Quarter Ended March 31, 2012
1.31

 
1.57

Quarter Ended June 30, 2012
1.28

 
1.58


During fiscal year 2012, as compared to fiscal year 2011, the U.S. dollar strengthened against most major foreign currencies we use to transact our business. The average U.S. dollar strengthened versus the Euro by 1.8% and the Pound Sterling by 0.4%, which decreased our revenues and expenses during fiscal year 2012. A hypothetical 5% increase or decrease in the U.S. dollar versus other currencies in which we transact our business would have resulted in an increase or decrease, as the case may be, to our revenues of $27.7 million during fiscal year 2012.

In April 2012, in order to hedge our exposure to variability in the Euro-denominated cash flows associated with two intercompany loans, we entered into two pay fixed Euros / received fixed U.S. dollar cross-currency swaps in the aggregate notional amount of €109.0 million. These cross-currency swaps were designated, at inception, as cash flow hedges of the intercompany loans. Accordingly, any foreign exchange gains or losses recognized in our consolidated statements of income resulting from the periodic re-measurement of the intercompany loans into U.S. dollars is mitigated by an offsetting gain or loss, as the case may be, resulting from the change in the fair value of the swaps.

Factors that affect business volume. The following external factors have or may have an effect on the number of claims that are submitted and/or our volume of transactions, any of which can affect our revenues:

Number of insurance claims made. In fiscal year 2012, the number of insurance claims made increased slightly versus fiscal year 2011. However, in several of our large western European markets, the number of insurance claims for vehicle damage submitted by owners to their insurance carriers declined slightly. The number of insurance claims made can be influenced by factors such as unemployment levels, the number of miles driven, rising gasoline prices, the number of uninsured drivers, rising insurance premiums and insured opting for lower coverage or higher deductible levels, among other things. Fewer claims made can reduce the transaction-based fees that we generate.

Sales of new and used vehicles. According to industry sources, new vehicle sales fell in 2008, 2009, 2010 and 2011 in markets wherein automobile insurance is generally government-mandated and claims processing is automated (“advanced markets”). Sales in these markets are projected to grow at a 0.9% compound annual growth rate through 2020. At the same time, in other markets, sales continued to grow from 2008 through 2011, and are projected to grow at a 5.7% compound annual growth rate through 2020. Fewer new light vehicle sales can result in fewer insured vehicles on the road and fewer automobile accidents, which can reduce the transaction-based fees that we generate.

Damaged vehicle repair costs. The cost to repair damaged vehicles, also known as severity, includes labor, parts and other related costs. Severity has steadily risen for a number of years. According to the Insurance Information Institute, from 2001 through 2010, the price index for body work has increased by 30.5% compared with a 23.2% increase in the general cost of living index. Insurance companies purchase our products and services to help standardize the cost of repair. Should the cost of labor, parts and other related items continue to increase over time, insurance companies may seek to purchase and utilize an increasing number of our products and services to help improve the standardization of the cost of repair.

Penetration Rate of Vehicle Insurance. An increasing rate of procuring vehicle insurance will result in an increase in the number of insurance claims made for damaged vehicles. An increasing number of insurance claims submitted can increase the transaction-based fees that we generate for partial-loss and total-loss estimates. This is due in part to both increased regulation and increased use of financing in the purchase of new and used vehicles. We expect that the rate of vehicle insurance in our less mature international markets will continue to increase during the next eighteen months.

33



Automobile usage—number of miles driven. Several factors can influence miles driven including gasoline prices and economic conditions. For calendar year 2011, cumulative miles driven in the United States declined by 1.2% compared to the same period in the prior year. Fewer miles driven can result in fewer automobile accidents, which can reduce the transaction-based fees that we generate.

Seasonality. Our business is subject to seasonal and other fluctuations. In particular, we have historically experienced higher revenues during the second quarter and third quarter versus the first quarter and fourth quarter during each fiscal year. This seasonality is caused primarily by more days of inclement weather during the second quarter and third quarter in most of our markets, which contributes to a greater number of vehicle accidents and damage during these periods. In addition, our business is subject to fluctuations caused by other factors, including the occurrence of extraordinary weather events and the timing of certain public holidays. For example, the Easter holiday occurs during the third quarter in certain fiscal years and occurs during the fourth quarter in other fiscal years, resulting in a change in the number of business days during the quarter in which the holiday occurs.

Non-cash share-based compensation charges. We incurred pre-tax, non-cash share-based compensation charges of $18.4 million, $13.6 million and $9.6 million during fiscal years 2012, 2011, and 2010, respectively. At June 30, 2012, the estimated total remaining unamortized share-based compensation expense, net of forfeitures, was $32.1 million which is expected to be recognized over a weighted-average period of 2.7 years.

Restructuring charges. We have incurred restructuring charges in each period presented and also expect to incur additional restructuring charges, primarily relating to severance costs, over the next several quarters as we work to improve efficiencies in our business. We do not expect reduced revenues or an increase in other expenses as a result of continued implementation of our restructuring initiatives.

Other factors. Other factors that have or may have an effect on our operating results include:

gain and loss of customers;
pricing pressures;
acquisitions, joint ventures or similar transactions;
expenses to develop new software or services; and
expenses and restrictions related to indebtedness.

We do not believe inflation has had a material effect on our financial condition or results of operations in recent years.

Results of Operations

Our results of operations include the results of operations of acquired companies from the date of the respective acquisitions.

The table below sets forth our results of operations data, including the amount and percentage changes for the periods indicated:
 

34


 
Fiscal Years Ended June 30,
 
Fiscal Year 2012 to Fiscal Year 2011 Change
 
Fiscal Year 2011 to Fiscal Year 2010 Change
 
2012
 
2011
 
2010
 
$
 
%
 
$
 
%
 
(dollars in thousands)
Revenues
$
790,207

 
$
684,697

 
$
631,348

 
$
105,510

 
15.4
 %
 
$
53,349

 
8.4
 %
Cost of revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
171,763

 
134,649

 
130,852

 
37,114

 
27.6

 
3,797

 
2.9

Systems development and programming costs
73,914

 
68,932

 
67,926

 
4,982

 
7.2

 
1,006

 
1.5

Total cost of revenues (excluding depreciation and amortization)
245,677

 
203,581

 
198,778

 
42,096

 
20.7

 
4,803

 
2.4

Selling, general and administrative expenses
206,639

 
187,701

 
170,562

 
18,938

 
10.1

 
17,139

 
10.0

Depreciation and amortization
103,510

 
83,088

 
88,978

 
20,422

 
24.6

 
(5,890
)
 
(6.6
)
Restructuring charges, asset impairments, and other costs associated with exit and disposal activities
7,057

 
7,093

 
5,910

 
(36
)
 
(0.5
)
 
1,183

 
20.0

Acquisition and related costs
7,962

 
9,687

 
4,032

 
(1,725
)
 
(17.8
)
 
5,655

 
140.2

Interest expense
53,593

 
31,102

 
32,782

 
22,491

 
72.3

 
(1,680
)
 
(5.1
)
Other expense, net
1,665

 
7,815

 
3,964

 
(6,150
)
 
(78.7
)
 
3,851

 
97.1

 
626,103

 
530,067

 
505,006

 
96,036

 
18.1

 
25,061

 
5.0

Income before provision for income taxes
164,104

 
154,630

 
126,342

 
9,474

 
6.1

 
28,288

 
22.4

Income tax provision (benefit)
45,718

 
(14,427
)
 
32,171

 
60,145

 
(416.9
)
 
(46,598
)
 
(144.8
)
Net income
118,386

 
169,057

 
94,171

 
(50,671
)
 
(30.0
)
 
74,886

 
79.5

Less: Net income attributable to noncontrolling interests
11,398

 
11,680

 
9,739

 
(282
)
 
(2.4
)
 
1,941

 
19.9

Net income attributable to Solera Holdings, Inc.
$
106,988

 
$
157,377

 
$
84,432

 
$
(50,389
)
 
(32.0
)%
 
$
72,945

 
86.4
 %
 
Amounts and percentages in the above table and throughout our discussion and analysis of financial conditions and results of operations may reflect rounding adjustments.

The table below sets forth our results of operations data expressed as a percentage of revenues for the periods indicated:
 

35


 
Fiscal Years Ended June 30,
 
2012
 
2011
 
2010
Revenues
100.0
%
 
100.0
 %
 
100.0
%
Cost of revenues:
 
 
 
 
 
Operating expenses
21.7

 
19.7

 
20.7

Systems development and programming costs
9.4

 
10.1

 
10.8

Total cost of revenues (excluding depreciation and amortization)
31.1

 
29.7

 
31.5

Selling, general and administrative expenses
26.1

 
27.4

 
27.0

Depreciation and amortization
13.1

 
12.1

 
14.1

Restructuring charges, asset impairments, and other costs associated with exit and disposal activities
0.9

 
1.0

 
0.9

Acquisition and related costs
1.0

 
1.4

 
0.6

Interest expense
6.8

 
4.5

 
5.2

Other expense, net
0.2

 
1.1

 
0.6

 
79.2

 
77.4

 
80.0

Income before provision for income taxes
20.8

 
22.6

 
20.0

Income tax provision (benefit)
5.8

 
(2.1
)
 
5.1

Net income
15.0

 
24.7

 
14.9

Less: Net income attributable to noncontrolling interests
1.4

 
1.7

 
1.5

Net income attributable to Solera Holdings, Inc.
13.6
%
 
23.0
 %
 
13.4
%

Revenues

Fiscal Year 2012 vs. Fiscal Year 2011. During fiscal year 2012, revenues increased $105.5 million, or 15.4%, and include revenues from Explore of $90.0 million. After adjusting for changes in foreign currency exchange rates and excluding revenues from Explore, revenues increased $33.1 million, or 4.9%, during fiscal year 2012 resulting from growth in transaction and subscription revenues in several countries from sales to new customers and increased transaction volume from and sales of new software and services to existing customers.

Our EMEA revenues increased $11.3 million, or 2.5%, to $464.4 million. After adjusting for changes in foreign currency exchange rates, EMEA revenues increased $21.2 million, or 4.7%, during fiscal year 2012 resulting from growth in transaction and subscription revenues in several countries from sales to new customers and increased transaction volume from and sales of new software and services to existing customers.

Our Americas revenues increased $94.2 million, or 40.7%, to $325.8 million and include revenue from Explore of $90.0 million. After adjusting for changes in foreign currency exchange rates and excluding revenue from Explore, Americas revenues increased $11.8 million, or 5.2%, during fiscal year 2012 resulting from growth in transaction and subscription revenues from sales to new customers and increased transaction volume from and sales of new software and services to existing customers, primarily in Latin America.

Fiscal Year 2011 vs. Fiscal Year 2010. During fiscal year 2011, revenues increased $53.4 million, or 8.4%. After adjusting for changes in foreign currency exchange rates, revenues increased $50.9 million, or 8.1%, during fiscal year 2011 relating to revenue contributions from AUTOonline, which we acquired in October 2009, of $11.3 million, and Explore, which we acquired in June 2011, of $4.0 million, as well as growth in transaction and subscription revenues in several countries from sales to new customers and increased transaction volume from and sales of new software and services to existing customers.

Our EMEA revenues increased $32.4 million, or 7.7%, to $453.1 million. After adjusting for changes in foreign currency exchange rates, EMEA revenues increased $34.7 million, or 8.3%, during fiscal year 2011 resulting from increases in revenue contributions from AUTOonline of $11.3 million, as well as growth in transaction and subscription revenues in several countries from sales to new customers and increased transaction volume from and sales of new software and services to existing customers.

Our Americas revenues increased $21.0 million, or 10.0%, to 231.6 million. After adjusting for changes in foreign currency exchange rates, Americas revenues increased $16.2 million, or 7.7%, during fiscal year 2011 resulting from increases

36


in revenue contributions from Explore of $4.0 million, as well as growth in transaction and subscription revenues in several countries from sales to new customers and increased transaction volume from and sales of new software and services to existing customers.

Set forth below is our revenues from each of our principal customer categories and as a percentage of revenues for the periods indicated (dollars in millions):
 
Fiscal Years Ended June 30,
 
2012
 
2011
 
2010
Insurance companies
$
359.9

 
45.5
%
 
$
275.1

 
40.2
%
 
$
250.9

 
39.7
%
Collision repair facilities
257.5

 
32.6

 
243.6

 
35.6

 
225.6

 
35.7

Independent assessors
74.4

 
9.4

 
71.0

 
10.4

 
66.6

 
10.6

Automotive recyclers and others
98.4

 
12.5

 
95.0

 
13.8

 
88.2

 
14.0

Total
$
790.2

 
100.0
%
 
$
684.7

 
100.0
%
 
$
631.3

 
100.0
%

The increase in the revenues from insurance companies in fiscal year 2012 is primarily due to revenue contributions from Explore, acquired in June 2011.

Revenue growth for each of our customer categories was as follows (dollars in millions): 
 
 
Fiscal Year 2012 vs.
Fiscal Year 2011
 
Fiscal Year 2011 vs.
Fiscal Year 2010
Customer category
 
Revenue Growth
 
Percentage Change
 
Revenue Growth
 
Percentage Change
Insurance companies
 
$
84.8

 
30.8
%
 
$
24.2

 
9.6
%
Collision repair facilities
 
13.9

 
5.7

 
18.0

 
8.0

Independent assessors
 
3.4

 
4.7

 
4.4

 
6.6

Automotive recyclers and other
 
3.4

 
3.7

 
6.8

 
7.6

Total
 
$
105.5

 
15.4
%
 
$
53.4

 
8.4
%

Revenue growth for each of our customer categories after adjusting for changes in foreign currency exchange rates was as follows (dollars in millions): 
 
 
Fiscal Year 2012 vs.
Fiscal Year 2011
 
Fiscal Year 2011 vs.
Fiscal Year 2010
Customer category
 
Revenue Growth
 
Percentage Change
 
Revenue Growth
 
Percentage Change
Insurance companies
 
$
91.0

 
33.1
%
 
$
22.1

 
8.8
%
Collision repair facilities
 
19.1

 
7.9

 
17.5

 
7.8

Independent assessors
 
5.1

 
7.1

 
5.2

 
7.8

Automotive recyclers and other
 
3.8

 
4.0

 
6.1

 
6.9

Total
 
$
119.0

 
17.4
%
 
$
50.9

 
8.1
%

Operating expenses

Fiscal Year 2012 vs. Fiscal Year 2011. During fiscal year 2012, operating expenses increased $37.1 million, or 27.6%, and include operating expenses from Explore of $39.5 million. After adjusting for changes in foreign currency exchange rates and excluding operating expenses of Explore, operating expenses decreased $0.1 million, during fiscal year 2012 primarily due to a decrease in operating expenses in our EMEA segment.

Our EMEA operating expenses decreased $1.1 million, or 1.2%. After adjusting for changes in foreign currency exchange rates, EMEA operating expenses decreased $1.1 million, or 1.3%, during fiscal year 2012 primarily due to a decrease in personnel related expenses.

Our Americas operating expenses increased $37.9 million, or 83.1%, and include operating expenses from Explore of $39.5 million. After adjusting for changes in foreign currency exchange rates and excluding the operating expenses of Explore,

37


Americas operating expenses increased $0.7 million, or 1.6%, during fiscal year 2012 due primarily to an increase in personnel related expenses in Latin America resulting from the increase in revenue over the same period.

Fiscal Year 2011 vs. Fiscal Year 2010. During fiscal year 2011, operating expenses increased $3.8 million, or 2.9%. After adjusting for changes in foreign currency exchange rates, operating expenses increased $2.0 million, or 1.5%, during fiscal year 2011 due to an increase in costs in our EMEA segment and expense contributions from Explore, offset by cost reductions in our Americas segment resulting from restructuring initiatives.

Our EMEA operating expenses increased $4.4 million, or 5.2%. After adjusting for changes in foreign currency exchange rates, EMEA operating expenses increased $3.1 million, or 3.7%, during fiscal year 2011 primarily due the increased revenue in our EMEA segment during the same period which caused increases in personnel expenses of $2.1 million and third party license fees of $0.8 million, due largely to an increase in expense contributions from AUTOonline of $0.9 million.

Our Americas operating expenses decreased $0.6 million, or 1.2%. After adjusting for changes in foreign currency exchange rates, Americas operating expenses decreased $1.1 million, or 2.4%, during fiscal year 2011 due principally to $2.9 million in expense reductions resulting from the restructuring initiatives implemented in our Americas segment, offset by expense contributions from Explore of $1.9 million.

Systems development and programming costs

Fiscal Year 2012 vs. Fiscal Year 2011. During fiscal year 2012, systems development and programming costs (“SD&P”) increased $5.0 million, or 7.2%, and include SD&P from Explore of $2.9 million. After adjusting for changes in foreign currency exchange rates and excluding SD&P of Explore, SD&P increased $1.7 million, or 2.5%, during fiscal year 2012 due to increases in SD&P expenses in both our EMEA and Americas segments.

Our EMEA SD&P increased $1.5 million, or 3.0%. After adjusting for changes in foreign currency exchange rates, EMEA SD&P increased $0.8 million, or 1.7%, during fiscal year 2012 primarily due to an increase in external development costs.

Our Americas SD&P increased $3.5 million, or 16.6%, and include SD&P from Explore of $2.9 million. After adjusting for changes in foreign currency exchange rates and excluding SD&P of Explore, Americas SD&P increased $0.9 million, or 4.2%, during fiscal year 2012 primarily due to an increase in personnel related expenses.

Fiscal Year 2011 vs. Fiscal Year 2010. During fiscal year 2011, SD&P increased $1.0 million, or 1.5%. After adjusting for changes in foreign currency exchange rates, SD&P decreased $0.7 million, or 1.1%, during fiscal year 2011 primarily due to cost reductions in our Americas segment partially offset by increased expenses in our EMEA segment.

Our EMEA SD&P increased $3.7 million, or 8.3%. After adjusting for changes in foreign currency exchange rates, EMEA SD&P increased $2.1 million, or 4.7%, during fiscal year 2011 primarily due to an increase in personnel costs of $3.3 million resulting from sales growth and geographic expansion and increases in SD&P contributions from AUTOonline of $1.0 million, offset by a reduction in external development costs of $1.4 million resulting from ongoing cost saving initiatives.

Our Americas SD&P decreased $2.6 million, or 11.1%. After adjusting for changes in foreign currency exchange rates, Americas SD&P decreased $2.8 million, or 11.8%, during fiscal year 2011 primarily due to decreases in personnel costs and professional fees of $1.2 million and $1.4 million, respectively, pursuant to our restructuring initiatives, offset by expense contributions from Explore of $0.2 million.

Selling, general and administrative expenses

Fiscal Year 2012 vs. Fiscal Year 2011. During fiscal year 2012, selling, general and administrative expenses (“SG&A”) increased $18.9 million, or 10.1%, and include SG&A from Explore of $4.0 million. After adjusting for changes in foreign currency exchange rates and excluding SG&A of Explore, SG&A increased $17.2 million, or 9.2%, primarily due to a $5.1 million increase in personnel and recruiting expenses, a $3.4 million increase in professional fees, and a $2.9 million increase in advertising and other general and administrative expenses primarily related to the expansion of our corporate and regional functions to support continued growth, as well as a $4.8 million increase in stock-based compensation expense and $0.6 million of legal fees incurred in connection with our patent infringement lawsuit against Mitchell.

Fiscal Year 2011 vs. Fiscal Year 2010. During fiscal year 2011, SG&A increased $17.1 million, or 10.0%. After adjusting for changes in foreign currency exchange rates, SG&A increased $15.5 million, or 9.1%, primarily due to an increase in

38


personnel expenses and advertising expenses of $10.9 million and $0.7 million, respectively, resulting from sales growth and geographic expansion as well as the expansion of certain of our corporate and administrative functions, a $4.0 million increase in stock-based compensation expense, SG&A contributions from AUTOonline and Explore totaling $1.5 million and a $0.7 million increase in other administrative expenses, offset by a decrease in facilities costs of $1.2 million pursuant to our restructuring initiatives and professional fees of $1.1 million.

Notwithstanding the impact of fluctuations in the value of the U.S. dollar versus certain foreign currencies in which we transact business, we expect SG&A to continue to increase in the future in absolute dollars as we continue to expand our business into new markets, incur costs related to acquisitions and continue to incur costs associated with being a public company.

Depreciation and amortization

Fiscal Year 2012 vs. Fiscal Year 2011. During fiscal year 2012, depreciation and amortization increased by $20.4 million, or 24.6%, and include depreciation and amortization contributions from Explore of $28.2 million. After adjusting for changes in foreign currency exchange rates and excluding depreciation and amortization of Explore, depreciation and amortization decreased $7.3 million, or 8.9%, during fiscal year 2012 primarily due to the continued decrease in amortization expense related to the intangible assets acquired in the CSG Acquisition since these intangible assets are being amortized on an accelerated basis.

Fiscal Year 2011 vs. Fiscal Year 2010. During fiscal year 2011, depreciation and amortization decreased by $5.9 million, or 6.6%. After adjusting for changes in foreign currency exchange rates, depreciation and amortization decreased $8.8 million, or 9.9%, during fiscal year 2011 primarily due to the continued decrease in amortization expense primarily related to the intangible assets acquired in the CSG Acquisition of $10.6 million since these intangible assets are being amortized on an accelerated basis, offset by depreciation and amortization contributions from Explore and AUTOonline of $1.2 million and $0.6 million, respectively.

We generally amortize intangible assets on an accelerated basis to reflect the pattern in which the economic benefits of the intangible assets are realized. Notwithstanding the impact of fluctuations in the value of the U.S. dollar versus certain foreign currencies in which we transact business, we anticipate that our annual depreciation and amortization expense will increase over the next several years as a result of the amortization of the intangible assets acquired in business combinations and asset acquisitions.

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

Fiscal Year 2012 vs. Fiscal Year 2011 and Fiscal Year 2011 vs. Fiscal Year 2010. During fiscal years 2012, 2011 and 2010, we incurred restructuring charges, asset impairments and other costs associated with exit or disposal activities of $7.1 million, $7.1 million and $5.9 million, respectively.

The restructuring charges, asset impairments and other costs associated with exit and disposal activities incurred in fiscal year 2012 consist primarily of employee termination benefits incurred in relation to the implementation of the EMEA 2012 Restructuring Plan. The restructuring charges incurred under the EMEA 2012 Restructuring Plan are expected to be paid through fiscal year 2013.

The restructuring charges, asset impairments and other costs associated with exit and disposal activities incurred in fiscal year 2011 consisted of $3.8 million in charges resulting from vacating our office facility in San Ramon, California, $2.0 million in charges related to the relocation of our corporate headquarters and global executive team to the Dallas-Fort Worth, Texas metroplex, and $3.1 million in other restructuring charges primarily relating to employee termination benefits associated with other restructuring initiatives, offset by the reversal of $1.8 million of a previously recognized restructuring charge related to a vendor contract under which, pursuant to a settlement and release agreement, we do not have any further obligations.

The restructuring charges, asset impairments and other costs associated with exit and disposal activities incurred in fiscal year 2010 consisted of $2.9 million in charges resulting from vacating our office facility in San Ramon, California, $1.9 million in charges related to the above-mentioned vendor contract that will not provide future economic benefit, and $1.1 million of depreciation expense associated with property and equipment abandoned in connection with restructuring activities.

We expect to incur additional restructuring charges in future years as we continue to undertake additional efforts to improve efficiencies in our business.


39


Acquisition and Related Costs

Fiscal Year 2012 vs. Fiscal Year 2011 and Fiscal Year 2011 vs. Fiscal Year 2010. During fiscal years 2012, 2011 and 2010 we incurred acquisition and related costs of $8.0 million, $9.7 million and $4.0 million, respectively.

Acquisition and related costs incurred in fiscal year 2012 primarily consists of legal and professional fees incurred in connection with completed and contemplated business combinations of $2.1 million and contingent purchase consideration that is deemed compensatory in nature and other costs associated with completed acquisitions of $5.9 million.

Acquisition and related costs incurred in fiscal year 2011 primarily consists of legal and professional fees incurred in connection with completed and contemplated business combinations, including our acquisition of Explore, of $6.8 million and contingent purchase consideration that is deemed compensatory in nature and other costs associated with complete acquisitions of $2.9 million.

Acquisition and related costs incurred in fiscal year 2010 primarily consist of legal and professional fees incurred in connection with completed and contemplated business combinations completed in fiscal year 2010, including our acquisition of AUTOonline, of $2.0 million, costs incurred to eliminate workforce redundancies identified as we integrate acquired businesses of $1.5 million and contingent purchase consideration that is deemed compensatory in nature and other costs associated with complete acquisitions of $0.5 million.

We expect to incur additional acquisition and related costs in future years as we continue to pursue potential business combinations and asset acquisitions as part of our plan to grow our business.

Interest expense

Fiscal Year 2012 vs. Fiscal Year 2011 and Fiscal Year 2011 vs. Fiscal Year 2010. During fiscal year 2012, interest expense increased $22.5 million, or 72.3%, due primarily to interest expense related to the senior unsecured notes issued in June 2011 and April 2012, partially offset by a decrease in interest expense resulting from the expiration of our interest rate swaps in June 2011.

During fiscal year 2011, interest expense decreased $1.7 million, or 5.1%, primarily due to declines in the notional amounts of our interest rate swaps, which expired in June 2011, offset by accrued interest expense related to the senior unsecured notes issued in June 2011.

Notwithstanding fluctuations in the value of the U.S. dollar versus the Euro, we expect that our annual interest expense will increase in fiscal year 2013 as a result of the interest on the senior unsecured notes issued in April 2012.

Other expense, net

Fiscal Year 2012 vs. Fiscal Year 2011 and Fiscal Year 2011 vs. Fiscal Year 2010. During fiscal year 2012, other expense, net decreased by $6.2 million primarily due to net foreign currency transaction losses on transactions denominated in a currency other than the functional currency of the local company.

During fiscal year 2011, other expense, net increased by $3.9 million primarily due to the weakening of the U.S. dollar which resulted in net foreign currency transaction losses on transactions denominated in a currency other than the functional currency of the local company.

Income tax provision (benefit)

Fiscal Year 2012 vs. Fiscal Year 2011 and Fiscal Year 2011 vs. Fiscal Year 2010. During fiscal years 2012, 2011 and 2010, we recorded an income tax provision (benefit) of $45.7 million, $(14.4) million and $32.2 million, respectively, which resulted in an effective tax rate of 27.9%, (9.3)% and 25.5%, respectively. The change in the effective tax rate on a period-to-period basis is primarily attributable to the release of $55.2 million of the valuation allowance on our U.S. net deferred tax assets during fiscal year 2011.

We released $55.2 million of the $55.8 million valuation allowance on our U.S. net deferred tax assets during fiscal year 2011. 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

40


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 prior to expiration.

Factors that impact our income tax provision include, but are not limited to, the mix of jurisdictional earnings and varying jurisdictional income tax rates, establishment of valuation allowances in certain jurisdictions, permanent differences resulting from the book and tax treatment of certain items, and discrete items. Future changes in tax laws or tax rulings may have a significant adverse impact on our effective tax rate. There have been several U.S. domestic and international laws recently enacted that would significantly impact how U.S. multinational corporations are taxed on foreign earnings. Such enacted tax laws could have a material adverse impact on our tax expense.

Liquidity and Capital Resources

Our principal sources of cash have included cash generated from operations, proceeds from our May 2007 initial public offering and our November 2008 secondary public stock offering, borrowings under our senior secured credit facilities and the proceeds from the issuance of the senior unsecured notes in June 2011 and April 2012. Our principal uses of cash have been, and we expect them to continue to be, for business combinations, debt service, stock repurchases, dividends, capital expenditures and working capital.

In June 2011, we issued senior unsecured notes in the aggregate principal amount of $450.0 million (collectively with the senior unsecured notes issued in April 2012, the “Senior Notes”), resulting in net proceeds of $444.3 million. The proceeds from the issuance of the Senior Notes in June 2011 were used to acquire Explore.

In April 2012, we issued additional Senior Notes in the aggregate principal amount of $400.0 million. The Senior Notes issued in April 2012 were issued at an original issue price of 102.72% plus accrued interest from December 15, 2011, resulting in net proceeds of $410.5 million. The proceeds from the issuance of the Senior Notes in April 2012 were used to repay approximately $246.7 million of the outstanding term loans under our existing senior credit facility held by lenders that did not elect to extend their loans, and we intend to use the remainder of 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.

The Senior Notes accrue interest at 6.75% per annum, payable semi-annually, and become due and payable in full on June 15, 2018. The Senior Notes include redemption provisions that allow us, at our option, to redeem all or a portion of the aggregate principal amount as follows:

At any time prior to June 15, 2014, we may redeem up to 35% of the aggregate principal amount of the 2011 and 2012 Senior Notes at a redemption price equal to 106.75% of the principal amount of the notes redeemed, plus accrued and unpaid interest, if any, through the date of redemption, using the net cash proceeds from the issuance of common stock.

At any time prior to June 15, 2014, we may redeem the Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the notes redeemed plus a premium as of, and accrued and unpaid interest to, the redemption date. The amount of the premium is the greater of (i) 1.0% of the then outstanding principal amount of the notes redeemed or (ii) the excess of (a) the present value at the redemption date of the sum of the redemption price of the notes redeemed at June 15, 2014 plus all required interest payments due on the notes redeemed through June 15, 2014 (excluding accrued but unpaid interest to the redemption date), calculated using a discount rate equal to the yield maturity on the redemption date of U.S. Treasury Securities with a constant maturity most nearly equal to the period from the redemption date to June 15, 2014 plus 50 basis points, over (b) the principal amount of the notes.

At any time on or after June 15, 2014, we may redeem the Senior Notes at the following redemption prices, plus accrued and unpaid interest, if any, through the date of redemption: (i) if the redemption occurs on or after June 15, 2014 but prior to June 15, 2015, the redemption price is 103.375% of the principal amount of the notes redeemed; (ii) if the redemption occurs on or after June 15, 2015 but prior to June 15, 2016, the redemption price is 101.688% of the principal amount of the notes redeemed; and (iii) if the redemption occurs on or after June 15, 2016, the redemption price is 100.000% of the principal amount of the notes redeemed.

Upon the occurrence of a change of control, we are required to offer to redeem the Senior Notes at a redemption price equal to 101% of the principal amount of the notes redeemed, plus accrued and unpaid interest, if any, through the redemption date.


41


The Senior Notes contain certain covenants including, among others, restrictions related to dividends, distributions, repurchases of equity, prepayments of debt or additional indebtedness, investments; liens on assets; mergers with another company, dispositions of assets, and transactions with affiliates. We are in compliance with the specified financial covenants of the Senior Notes at June 30, 2012.

In April 2012, we entered into an Amended and Restated First Lien Credit and Guaranty Agreement (the “Amended Credit Facility”), which 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 maturity date for all of the term loans is May 16, 2017.

As of June 30, 2012, we had $106.2 million and $179.2 million (€142.5 million) in outstanding loans under the U.S. term loan and European term loan, respectively. Currently, the U.S. term loan bears interest at 3-month LIBOR plus a 3.0% margin (3.5% at June 30, 2012) and the European term loans bear interest at 3-month EURIBOR plus a 3.0% margin (3.7% at June 30, 2012). Interest is payable quarterly.

The Amended Credit Facility contains a leverage ratio, which is applicable only if specified minimum borrowings are outstanding during a quarter. In addition, the Amended Credit Facility contains covenants restricting us from undertaking specified corporate actions, including but not limited to asset dispositions, acquisitions, payment of dividends and other specified payments, changes of control, incurrence of indebtedness, capital expenditures, creation of liens, making loans and investments and transactions with affiliates. We are in compliance with the specified financial covenants of the Amended Credit Facility at June 30, 2012.

The Amended Credit Facility provides us with the ability to add up to $100.0 million of incremental revolving loans. On July 19, 2012, we established a committed incremental revolving credit facility of $85.0 million with a group of banks.

In order to mitigate the variability of the Euro-denominated cash flows associated with two intercompany loans, in April 2012, we entered into two pay fixed Euros / received fixed U.S. dollar cross-currency swaps in the aggregate notional amount of €109.0 million.

In order to reduce our exposure to interest rate volatility associated with our USD and Euro denominated term loans, in August 2012, we entered into two pay fixed / receive floating interest rate swaps with notional amounts of $80.0 million and €64.5 million, respectively. The maturity date of both swaps is May 16, 2017 which coincides with the maturity of our USD and Euro denominated term loans and bear an interest rate of .8225% plus a 3.0% margin for the US dollar denominated swap and .7550% plus a 3.0% margin for the Euro denominated swap. Both swaps will become effective as of September 15, 2012.

Pursuant to agreements entered into prior to the CSG Acquisition, the noncontrolling stockholders of certain of our majority-owned subsidiaries have the right to require us to redeem their shares at the then fair market value. We do not have any indication that the exercise any remaining redemption rights is probable within the next twelve months. Further, we do not believe the occurrence of conditions precedent to the exercise of certain of these redemption rights is probable within the next twelve months. If the stockholders exercised their redemption rights, we believe that we have sufficient liquidity to fund such redemptions.

The remaining 7% noncontrolling ownership interest in our majority-owned AUTOonline subsidiary is subject to a put-call option. The option may be exercised by any party beginning in fiscal year 2013 at a redemption value equal to ten times AUTOonline’s consolidated EBITDA for the fiscal year ended prior to the exercise date, subject to adjustment under certain circumstances.

In December 2010, we acquired a minority ownership interest in Digidentity B.V., a Dutch company that is a leading provider of next-generation E-identification certificates for authentication of online identities. Pursuant to the terms of the acquisition, the majority owners of Digidentity may put their shares to us through fiscal year 2013 if Digidentity achieves certain financial performance targets. The purchase price of the shares is calculated based on a multiple of Digidentity’s actual versus target earnings before interest expense, income tax expense, depreciation and amortization for the twelve-month period ended prior to the exercise date.

In November 2011, our Board of Directors approved a share repurchase program for up to a total of $180.0 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

42


upon market conditions and other factors. In addition, the program may be amended or terminated at the discretion of our Board of Directors. Through June 30, 2012, we have repurchased approximately 2.2 million shares for $103.5 million.

In fiscal year 2012, we paid quarterly cash dividends with a value of $0.10 per outstanding share of common stock and per outstanding restricted stock unit to our stockholders and restricted stock unit holders of record. The aggregate dividend payments for fiscal year 2012 were $28.3 million. On August 23, 2012, we announced that our Board of Directors approved the payment of a cash dividend of $0.125 per share of outstanding common stock and per outstanding restricted stock unit. The Board of Directors also approved a quarterly stock dividend equivalent of $0.125 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 September 18, 2012 to stockholders and restricted stock unit holders of record at the close of business on September 6, 2012. Any determination to pay dividends in future periods will be at the discretion of our Board of Directors. The indenture governing the Senior Notes and the Amended Credit Facility include restrictions on our ability to pay dividends on our common stock.

As of June 30, 2012 and 2011, we had cash and cash equivalents of $508.2 million and $371.1 million, respectively. At June 30, 2012, our total current and long-term debt obligations were $1.1 billion, consisting of $850.0 million related to the Senior Notes due in June 2018, and $285.4 million related to the Amended Credit Facility due in May 2017. We believe that our existing cash on hand and cash flow from operations will be sufficient to fund currently anticipated working capital, capital spending and debt service requirements, as well as acquisition and strategic opportunities, for at least the next twelve months.

Our management believes that our cash is best utilized by investing in the future growth of our business, either through penetration of new geographic markets or acquisitions and other strategic opportunities, and maximizing stockholder return through the payment of cash dividends and stock repurchases. We regularly review acquisition and other strategic opportunities, which may require additional debt or equity financing. If we raise additional funds by issuing equity securities, further dilution to our then-existing stockholders may result. Additional debt financing may include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any equity or debt financing may contain terms, such as liquidation and other preferences, that are not favorable to us or our stockholders.
 
We consider the undistributed earnings of our foreign subsidiaries as of June 30, 2012 to be indefinitely reinvested and, accordingly, no U.S. income taxes have been provided thereon. At June 30, 2012, the amount of cash associated with permanently reinvested foreign earnings was approximately $207.5 million. During fiscal years 2011 and 2010, we completed non-recurring repatriations of foreign earnings to the U.S. of approximately $107.6 million (of which approximately $99.1 million was treated as return of basis for tax reporting purposes) and $24.5 million, respectively. The purpose of the repatriation in fiscal year 2011 was to fund our acquisition of Explore. The purpose of the repatriation in fiscal year 2010 was to realize significant U.S. income tax benefits in the form of foreign tax credits which would have been substantially diluted if not realized in fiscal year 2010. We have not, nor do we anticipate the need to, repatriate funds to the U.S. in order to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements. If we were to repatriate such foreign earnings in the future, we would incur incremental U.S. federal and state income taxes. However, our intent is to continue to indefinitely reinvest our foreign earnings and our current plans do not demonstrate a need to repatriate foreign earnings to fund our U.S. operations.

The following summarizes our primary sources and uses of cash in the periods presented:
 
Fiscal Years Ended June 30,
 
Amount Changed from
 
2012
 
2011
 
2010
 
2011 to 2012
 
2010 to 2011
 
(in thousands)
Operating activities
$
223.0

 
$
211.5

 
$
190.3

 
$
11.5

 
$
21.2

Investing activities
$
(47.8
)
 
$
(543.6
)
 
$
(111.3
)
 
$
495.8

 
$
(432.3
)
Financing activities
$
(18.0
)
 
$
410.9

 
$
(28.9
)
 
$
(428.9
)
 
$
439.8


Operating activities. The $11.5 million increase in cash provided by operating activities during fiscal year 2012 was primarily the result of an increase in net income, after considering non-cash adjustments, of $21.2 million, the operating cash flows generated by Explore, acquired in June 2011, and changes in working capital.

Investing activities. The $47.8 million of cash used in investing activities in fiscal year 2012 was primarily attributable to capital expenditures and business combinations and asset acquisitions. The $543.6 million of cash used in investing activities in fiscal year 2011 was primarily attributable to the $520.0 million paid to acquire Explore in June 2011 as well as capital

43


expenditures.

Financing activities. The $18.0 million of cash used in investing activities in fiscal year 2012 was primarily attributable to repayments of long-term debt of $272.3 million, repurchases of common stock of $103.5 million and dividends paid to shareholders of $28.3 million, offset by the net proceeds from the issuance of the Senior Notes in April 2012 of $401.7 million. The $410.9 million of cash provided by financing activities in fiscal year 2011 was primarily attributable to the net proceeds from the issuance of the Senior Notes in June 2011 of $444.3 million.

Contractual Obligations

The following table reflects our cash contractual obligations as of June 30, 2012:
 
 
Payments Due by Period
 
Total
 
Less than 1 Year