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SLH > SEC Filings for SLH > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for SOLERA HOLDINGS, INC

Form 10-Q for SOLERA HOLDINGS, INC


6-Nov-2012

Quarterly Report


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

The following discussion of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2012 filed with the SEC on August 29, 2012. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

All percentage amounts and ratios were calculated using the underlying data in whole dollars and may reflect rounding adjustments. Operating results for the three months ended September 30, 2012 are not necessarily indicative of the results that may be expected for any future period. We describe the effects on our results that are attributed to the change in foreign currency exchange rates by measuring the incremental difference between translating the current and prior period results at the monthly average rates for the same period from the prior year.

Overview of the Business

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

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

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

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

We serve over 75,000 customers and are active in over 60 countries across six continents with approximately 2,500 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 successful customer retention rate.

Segments

We have aggregated our operating segments into two reportable segments: EMEA and Americas. 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.

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.


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The table below sets forth our revenues by reportable segment and as a percentage of our total revenues for the periods indicated (dollars in millions):

Three Months Ended September 30,

                   2012                     2011
EMEA     $   110.1          56.3 %   $ 118.6     59.7 %
Americas      85.6          43.7        80.1     40.3 %
Total    $   195.7         100.0 %   $ 198.7    100.0 %

For the three months ended September 30, 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

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 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.


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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; professional and legal fees; and share-based compensation expense.

Depreciation and amortization

Depreciation includes depreciation attributable to buildings, leasehold improvements, data processing and computer equipment, purchased software, and furniture and fixtures. Amortization includes amortization attributable to 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 Information Services, LLC ("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 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 expense, net

Other 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

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 the three months ended September 30, 2012 and 2011, we generated approximately 68% and 71%, respectively, of our revenues 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


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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 $16.3 million and $(34.8) million for the three months ended September 30, 2012 and 2011, respectively, which are recorded as a component of accumulated other comprehensive income (loss) in stockholders' equity. Foreign currency transaction losses (income) recognized in our consolidated statements of income were $0.5 million and $(0.1) million during the three months ended September 30, 2012 and 2011, 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 during fiscal year 2013. 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 2012:

                                                                                              Average Pound
                                                            Average Euro-to-U.S. Dollar      Sterling-to-U.S.
Period                                                             Exchange Rate           Dollar Exchange Rate
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
Quarter ended September 30, 2012                                                  1.25                   1.58

During the three months ended September 30, 2012 as compared to the three months ended September 30, 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 11.6% and the Pound Sterling by 2.0%, which decreased our revenues and expenses for the three months ended September 30, 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 $6.7 million during the three months ended September 30, 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 gain or loss 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. 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


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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.

Automobile usage-number of miles driven. Several factors can influence miles driven including gasoline prices and economic conditions. Through August of calendar year 2012, miles driven in the United States increased by 0.9% compared to the same period in the prior year. Higher miles driven can result in a greater number of automobile accidents, which can increase 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.

Share-based compensation expense. We incurred pre-tax, non-cash share-based compensation charges of $4.0 million and $3.6 million during the three months ended September 30, 2012 and 2011, respectively. We expect to recognize additional pre-tax, non-cash share-based compensation charges related to share-based awards outstanding at September 30, 2012 of approximately $43.3 million ratably over the remaining weighted-average vesting period of 3.0 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.


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The table below sets forth statement of income data, including the amount and percentage changes for the periods indicated (dollars in thousands):

                                                     Three Months Ended September 30,
                                                 2012        2011       Change
                                                  $            $           $           %
Revenues                                       195,719     198,693      (2,974 )      (1.5 )
Cost of revenues:
Operating expenses                              42,340      43,618      (1,278 )      (2.9 )
Systems development and programming costs       17,857      19,045      (1,188 )      (6.2 )
Total cost of revenues (excluding
depreciation and amortization)                  60,197      62,663      (2,466 )      (3.9 )
Selling, general & administrative expenses      50,909      48,421       2,488         5.1
Depreciation and amortization                   24,195      26,008      (1,813 )      (7.0 )
Restructuring charges, asset impairments and
other costs associated with exit and disposal
activities                                       1,454         198       1,256       634.3
Acquisition and related costs                    3,158       1,356       1,802       132.9
Interest expense                                17,300      12,294       5,006        40.7
Other expense, net                                 398          55         343       623.6
                                               157,611     150,995       6,616         4.4
Income before provision for income taxes        38,108      47,698      (9,590 )     (20.1 )
Income tax provision                             1,697      13,252     (11,555 )     (87.2 )
Net income                                      36,411      34,446       1,965         5.7
Less: Net income attributable to
noncontrolling interests                         2,770       3,207        (437 )     (13.6 )
Net income attributable to Solera Holdings,
Inc.                                            33,641      31,239       2,402         7.7

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

                                                               Three Months Ended
                                                                  September 30,
                                                               2012           2011
Revenues                                                       100.0 %         100.0 %
Cost of revenues:
Operating expenses                                              21.6            22.0
Systems development and programming costs                        9.1             9.6
Total cost of revenues (excluding depreciation and
amortization)                                                   30.8            31.5
Selling, general & administrative expenses                      26.0            24.4
Depreciation and amortization                                   12.4            13.1
Restructuring charges, asset impairments and other costs
associated with exit and disposal activities                     0.7             0.1
Acquisition and related costs                                    1.6             0.7
Interest expense                                                 8.8             6.2
Other expense, net                                               0.2               -
                                                                80.5            76.0
Income before provision for income taxes                        19.5            24.0
Income tax provision                                             0.9             6.7
Net income                                                      18.6            17.3
Less: Net income attributable to noncontrolling interests        1.4             1.6
Net income attributable to Solera Holdings, Inc.                17.2 %          15.7 %


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Revenues

During the three months ended September 30, 2012, revenues decreased $3.0 million, or 1.5%. After adjusting for changes in foreign currency exchange rates, revenues increased $11.6 million, or 5.8%, during the three months ended September 30, 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 decreased $8.5 million, or 7.1%, to $110.1 million. After adjusting for changes in foreign currency exchange rates, EMEA revenues increased $3.5 million, or 2.9%, during the three months ended September 30, 2012 resulting from growth in transaction 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 $5.5 million, or 6.9%, to $85.6 million. After adjusting for changes in foreign currency exchange rates, Americas revenues increased $8.1 million, or 10.2%, during the three months ended September 30, 2012 resulting from incremental revenue contributions from immaterial acquisitions completed in fiscal year 2012, revenue growth in our Explore business due to an increase in drivers and households monitored, and 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 in Latin America.

Set forth below are revenues from each of our principal customer categories and as a percentage of revenues for the periods indicated (dollars in millions):

                                     Three Months Ended September 30,               Three Months Ended September 30,
                                                   2012                                           2011
Insurance companies            $            88.9                     45.4 %   $            90.1                     45.4 %
Collision repair facilities                 64.4                     32.9                  64.6                     32.5
Independent assessors                       17.6                      9.0                  19.2                      9.7
Automotive recyclers and other              24.8                     12.7                  24.8                     12.4
Total                          $           195.7                    100.0 %   $           198.7                    100.0 %

Revenue growth for each of our customer categories was as follows:

                                           Three Months Ended
. . .
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