Note 1 – Basis of Condensed Consolidated Financial Statements
CoreLogic, Inc., together with its subsidiaries (collectively "we", "us" or "our"), is a leading global property information, analytics and data-enabled solutions provider operating in North America, Western Europe and Asia Pacific. Our combined data from public, contributory and proprietary sources provides detailed coverage of property, mortgages and other encumbrances, consumer credit, tenancy, location, hazard risk and related performance information. The markets we serve include real estate and mortgage finance, insurance, capital markets and the public sector. We deliver value to clients through unique data, analytics, work flow technology, advisory and managed solutions. Clients rely on us to help identify and manage growth opportunities, improve performance and mitigate risk.
Our condensed consolidated financial information included in this report has been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the condensed consolidated financial statements and accompanying notes. Actual amounts may differ from these estimated amounts. Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The 2015 year-end condensed consolidated balance sheet was derived from the Company's audited financial statements for the year ended
December 31, 2015
. Interim financial information does not require the inclusion of all the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended
December 31, 2015
.
The accompanying unaudited condensed consolidated interim financial statements reflect all adjustments, consisting of only normal recurring items which, in the opinion of management, are necessary for a fair statement of the results of operations for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full year or for any future periods.
Client Concentration
We generate the majority of our revenues from clients with operations in the U.S. residential real estate, mortgage origination and mortgage servicing markets. Approximately
43.0%
and
38.0%
of our operating revenues for the
three
months ended
June 30, 2016
and
2015
, respectively, and approximately
43.0%
and
34.0%
of our operating revenues for the
six
months ended
June 30, 2016
and
2015
, respectively, were generated from our ten largest clients, who consist of the largest U.S. mortgage originators and servicers.
Two
of our clients accounted for approximately
15.0%
and
11.0%
of our operating revenues for the
three
months ended
June 30, 2016
, and approximately
14.0%
and
12.0%
of our operating revenues for the
six
months ended
June 30, 2016
.
No
client accounted for
10.0%
or more of our operating revenues for the
three
and
six
months ended
June 30, 2015
.
Out-of-Period Adjustment
During the first quarter of 2015, we identified an error which overstated our interest expense by
$5.2 million
(
$3.1 million
, net of tax), reflected within continuing operations, for the year ended December 31, 2014. We recorded an out-of-period adjustment to correct the error in the quarter ended March 31, 2015, which increased basic and diluted net income per share by
$0.03
. We assessed the materiality of this error and concluded the error was not material to the results of operations or financial condition for the prior annual or interim periods.
Comprehensive Income
Comprehensive income includes all changes in equity except those resulting from investments by owners and distributions to owners. Specifically, foreign currency translation adjustments, amounts related to supplemental benefit plans, unrealized gains and losses on interest rate swap transactions and unrealized gains and losses on investment are recorded in other comprehensive income/(loss).
The following table shows the components of accumulated other comprehensive loss, net of taxes as of
June 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Cumulative foreign currency translation
|
$
|
(109,117
|
)
|
|
$
|
(114,427
|
)
|
|
Cumulative supplemental benefit plans
|
(3,753
|
)
|
|
(3,540
|
)
|
|
Net unrecognized losses on interest rate swap
|
(5,737
|
)
|
|
(2,699
|
)
|
|
Net unrealized gains on marketable securities
|
463
|
|
|
550
|
|
|
Accumulated other comprehensive loss
|
$
|
(118,144
|
)
|
|
$
|
(120,116
|
)
|
Marketable Securities
Debt securities are carried at fair value and consist primarily of investments in obligations of various corporations and mortgage-backed securities. Equity securities are carried at fair value and consist primarily of investments in marketable common and preferred stock. We classify our publicly traded debt and equity securities as available-for-sale and carry them at fair value with unrealized gains or losses classified as a component of accumulated other comprehensive loss. As of
June 30, 2016
and
December 31, 2015
, our marketable securities consisted primarily of investments in preferred stock of
$22.6 million
and
$22.7 million
, respectively. There were no gains or losses recognized on sales of marketable securities for the
three
and
six
months ended
June 30, 2016
and
2015
.
Mandatorily Redeemable Noncontrolling Interest
Mandatorily redeemable noncontrolling interests for which there is a contractual requirement for purchasing the interest are included as a liability of NZD
$27.8 million
, or
$19.0 million
, in our accompanying condensed consolidated balance sheet as of
December 31, 2015
. In January 2016, we acquired the remaining
40.0%
interest in New Zealand-based Property IQ Ltd. ("PIQ") and settled the mandatorily redeemable noncontrolling interest. See
Note 12 - Acquisitions
for further discussion.
Tax Escrow Disbursement Arrangements
We administer tax escrow disbursements as a service to our clients in connection with our tax services business. These deposits are maintained in segregated accounts for the benefit of our clients. Tax escrow deposits totaled
$804.9 million
as of
June 30, 2016
and
$340.3 million
as of
December 31, 2015
. Because these deposits are held on behalf of our clients, they are not our funds and, therefore, are not included in the accompanying condensed consolidated balance sheets.
These deposits generally remain in the accounts for a period of
two
to
five
business days and we invest the funds in a highly-rated, liquid investment, such as bank deposit products or AAA-rated money market funds. We earn interest income or earnings credits from these investments and bear the risk of any losses. However, we have not historically incurred any investment losses and do not anticipate incurring any future investment losses. As a result, we do not maintain any reserves for losses in value of these investments.
Under our contracts with our clients, if we make a payment in error or fail to pay a taxing authority when a payment is due, we could be held liable to our clients for all or part of the financial loss they suffer as a result of our act or omission. We maintained claim reserves relating to incorrect disposition of assets of
$19.3 million
and
$21.2 million
as of
June 30, 2016
and
December 31, 2015
, respectively, which is reflected in our accompanying condensed consolidated balance sheets as a component of other liabilities.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued guidance for accounting of credit losses affecting the impairment model for most financial assets and certain other instruments. Entities will be required to use a new forward-looking current expected credit loss model for trade and other receivables, held-to-maturity debt securities, loans and other instruments, which will generally lead to an earlier recognition of loss allowances. Entities will recognize losses on available-for-sale debt securities as allowances rather than a reduction in amortized cost of the security while the measurement process of this loss does not change. Disclosure requirements are expanded regarding an entity’s assumptions, models and methods of estimations of the allowance. The guidance is effective for fiscal years beginning after December 15, 2019, and
interim periods within those fiscal years. Earlier adoption is permitted but we do not anticipate electing early adoption. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In March 2016, the FASB issued guidance to simplify some provisions in stock compensation accounting. The accounting for income taxes allows all excess tax benefits and tax deficiencies to be recognized through income tax expense. The statement of cash flows presentation of excess tax benefits should be classified with other income tax cash flows as an operating activity. An entity may also make an entity-wide election to either continue estimating the number of awards that are expected to vest or account for forfeitures as they occur. The requirements to qualify for equity classification permits tax withholding up to the maximum statutory tax rates in the applicable jurisdictions. Lastly, payments of cash by an employer for tax-withholding purposes, when directly withholding shares, are classified as a financing activity on the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Earlier adoption is permitted but we do not anticipate electing early adoption. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In March 2016, the FASB issued guidance on equity method accounting related to joint venture investments. The standard eliminates the requirement to retroactively adopt the equity method of accounting as a result of an increase in the level of ownership or degree of influence related to an investment. The guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Earlier adoption is permitted but we do not anticipate electing early adoption. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In March 2016, the FASB issued guidance on derivatives and hedging. The standard clarifies the four-step decision sequence required for assessing whether contingent put and call options that can speed up the payment for a debt instrument’s principal are clearly and closely related to the debt to which they are attached. The standard also clarifies that provided all other hedge accounting criteria continue to be met, a change in the counterparty to a derivative instrument does not in itself disqualify designation of the hedge. The guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Earlier adoption is permitted but we do not anticipate electing early adoption. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued guidance on lease accounting. The standard requires all leases in excess of 12-months to be recognized on the balance sheet as lease assets and lease liabilities. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not changed significantly from prior GAAP. For operating leases, a lessee is required to 1) recognize a right-of-use asset and lease liability, initially measured at the present value of the lease payment, 2) recognize a single lease cost over the lease term generally on a straight-line basis, and 3) classify all cash payments within operating activities on the cash flow statement. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Earlier adoption is permitted but we do not anticipate electing early adoption. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.
In January 2016, the FASB issued guidance on accounting for equity investments and financial liabilities. The standard does not apply to equity method investments or investments in consolidated subsidiaries. The update provides that equity investments with readily determinable values be measured at fair value and changes in the fair value flow through net income. These changes historically have run through other comprehensive income. Equity investments without readily determinable fair values have the option to be measured at fair value or at cost adjusted for changes in observable prices minus impairment. Changes in either method are also recognized in net income. The standard requires a qualitative assessment of impairment indicators at each reporting period. For financial liabilities, entities that elect the fair value option must recognize the change in fair value attributable to instrument-specific credit risk in other comprehensive income rather than net income. Lastly, regarding deferred tax assets, the need for a valuation allowance on a deferred tax asset will need to be assessed related to available-for-sale debt securities. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Earlier adoption is permitted but we do not anticipate electing early adoption. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In November 2015, the FASB issued guidance which requires all deferred tax assets and liabilities, as well as any related valuation allowance, to be classified as non-current on the balance sheet. The guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and earlier adoption is permitted. As of March 31, 2015, we elected early adoption on a prospective basis and, as of
June 30, 2016
, we presented
$2.2 million
of deferred income tax assets, long term and
$101.9 million
of deferred income tax liabilities, long term in the accompanying condensed consolidated balance sheet.
Note 2 – Investment in Affiliates, Net
Investments in affiliates are accounted for under the equity method of accounting when we are deemed to have significant influence over the affiliate but do not control or have a majority voting interest in the affiliate. Investments are carried at the cost of acquisition, including subsequent capital contributions and loans from us, plus our equity in undistributed earnings or losses since inception of the investment.
One of our subsidiaries previously owned a
50.1%
interest in RELS LLC ("RELS"), a provider of appraisals and appraisal management services used in connection with mortgage loan originations. This investment contributed
85.9%
and
84.9%
of our total equity in earnings of affiliates, net of tax, for the three and
six
months ended
June 30, 2015
, respectively. We acquired the remaining interest in RELS in December 2015. See
Note 12 - Acquisitions
for further discussion. The following summarizes the financial information for this investment (assuming
100%
ownership interest):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
(in thousands)
|
June 30, 2015
|
|
June 30, 2015
|
|
Statements of income
|
|
|
|
|
Total revenues
|
$
|
69,759
|
|
|
$
|
128,205
|
|
|
Expenses and other
|
56,806
|
|
|
105,068
|
|
|
Net income attributable to RELS LLC
|
$
|
12,953
|
|
|
$
|
23,137
|
|
|
CoreLogic equity in earnings of affiliate
|
$
|
6,489
|
|
|
$
|
11,592
|
|
We recorded equity in earnings of affiliates, net of tax of
$0.1 million
and
$4.7 million
for the three months ended
June 30, 2016
and
2015
, respectively, and equity in losses of affiliates, net of tax of less than
$0.1 million
and equity in earnings of affiliates, net of tax of
$8.4 million
for the
six
months ended
June 30, 2016
and
2015
, respectively. For the three months ended
June 30, 2016
and
2015
, we recorded
$2.7 million
and
$5.2 million
, respectively, of operating revenues and
$2.9 million
and
$3.1 million
, respectively, of operating expenses related to our investment in affiliates. In addition, for the
six
months ended
June 30, 2016
and
2015
, we recorded
$5.2 million
and
$9.4 million
, respectively, of operating revenues and
$5.5 million
and
$6.5 million
, respectively, of operating expenses related to our investment in affiliates.
Note 3 - Property and Equipment, Net
Property and equipment, net as of
June 30, 2016
and
December 31, 2015
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2016
|
|
2015
|
|
Land
|
$
|
7,476
|
|
|
$
|
4,000
|
|
|
Buildings
|
6,294
|
|
|
111
|
|
|
Furniture and equipment
|
62,308
|
|
|
62,140
|
|
|
Capitalized software
|
865,957
|
|
|
759,925
|
|
|
Leasehold improvements
|
31,135
|
|
|
29,038
|
|
|
|
973,170
|
|
|
855,214
|
|
|
Less accumulated depreciation
|
(517,732
|
)
|
|
(479,560
|
)
|
|
Property and equipment, net
|
$
|
455,438
|
|
|
$
|
375,654
|
|
Depreciation expense for property and equipment was approximately
$21.4 million
and
$19.2 million
for the three months ended
June 30, 2016
and
2015
, respectively, and
$40.6 million
and
$37.1 million
for the
six
months ended
June 30, 2016
and
2015
, respectively.
Note 4 – Goodwill, Net
A reconciliation of the changes in the carrying amount of goodwill and accumulated impairment losses, by operating segment and reporting unit, for the
six
months ended
June 30, 2016
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
PI
|
|
RMW
|
|
Consolidated
|
|
Balance as of January 1, 2016
|
|
|
|
|
|
|
Goodwill
|
$
|
963,680
|
|
|
$
|
925,392
|
|
|
$
|
1,889,072
|
|
|
Accumulated impairment losses
|
(600
|
)
|
|
(6,925
|
)
|
|
(7,525
|
)
|
|
Goodwill, net
|
963,080
|
|
|
918,467
|
|
|
1,881,547
|
|
|
Acquisitions
|
212,450
|
|
|
—
|
|
|
212,450
|
|
|
Translation adjustments
|
5,176
|
|
|
—
|
|
|
5,176
|
|
|
Balance as of June 30, 2016
|
|
|
|
|
|
|
Goodwill, net
|
$
|
1,180,706
|
|
|
$
|
918,467
|
|
|
$
|
2,099,173
|
|
In April 2016, we recorded
$211.5 million
of goodwill, within our Property Intelligence ("PI") reporting unit, in connection with our acquisition of FNC, Inc. ("FNC"). Further, in May 2016, we recorded
$0.9 million
of goodwill, within our PI reporting unit, related to an acquisition that was not significant. See
Note 12 - Acquisitions
for additional information.
Note 5 – Other Intangible Assets, Net
Other intangible assets, net consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
(in thousands)
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
Client lists
|
$
|
639,404
|
|
|
$
|
(238,965
|
)
|
|
$
|
400,439
|
|
|
$
|
496,192
|
|
|
$
|
(219,887
|
)
|
|
$
|
276,305
|
|
|
Non-compete agreements
|
28,113
|
|
|
(8,946
|
)
|
|
19,167
|
|
|
9,302
|
|
|
(7,983
|
)
|
|
1,319
|
|
|
Trade names and licenses
|
121,341
|
|
|
(33,152
|
)
|
|
88,189
|
|
|
102,297
|
|
|
(27,773
|
)
|
|
74,524
|
|
|
|
$
|
788,858
|
|
|
$
|
(281,063
|
)
|
|
$
|
507,795
|
|
|
$
|
607,791
|
|
|
$
|
(255,643
|
)
|
|
$
|
352,148
|
|
Amortization expense for other intangible assets, net was
$13.2 million
and
$9.8 million
for the
three
months ended
June 30, 2016
and
2015
, respectively, and
$24.9 million
and
$19.6 million
for the
six
months ended
June 30, 2016
and
2015
, respectively.
Estimated amortization expense for other intangible assets, net is as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Remainder of 2016
|
$
|
30,840
|
|
|
2017
|
61,951
|
|
|
2018
|
61,147
|
|
|
2019
|
58,792
|
|
|
2020
|
56,639
|
|
|
Thereafter
|
238,426
|
|
|
|
$
|
507,795
|
|
Note 6 – Long-Term Debt, Net of Current
Our long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
(in thousands)
|
Gross
|
|
Debt Issuance Costs
|
|
Net
|
|
Gross
|
|
Debt Issuance Costs
|
|
Net
|
|
Acquisition-related note:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing acquisition note, $5.0 million installment due March 2016
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,924
|
|
|
$
|
—
|
|
|
$
|
4,924
|
|
|
Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.25% senior notes due June 2021
|
393,000
|
|
|
(10,189
|
)
|
|
382,811
|
|
|
393,000
|
|
|
(11,121
|
)
|
|
381,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.55% senior debentures due April 2028
|
59,645
|
|
|
(222
|
)
|
|
59,423
|
|
|
59,645
|
|
|
(231
|
)
|
|
59,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan facility borrowings due April 2020, weighted-average interest rate of
2.19% and 1.96% as of June 30, 2016 and December 31, 2015, respectively
|
807,500
|
|
|
(8,431
|
)
|
|
799,069
|
|
|
828,750
|
|
|
(9,720
|
)
|
|
819,030
|
|
|
|
Revolving line of credit borrowings due April 2020, weighted-average interest rate of 2.19% and 1.96% as of June 30, 2016 and December 31, 2015, respectively
|
390,000
|
|
|
(5,526
|
)
|
|
384,474
|
|
|
75,000
|
|
|
(6,262
|
)
|
|
68,738
|
|
|
Other debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Various debt instruments with maturities through 2019
|
3,033
|
|
|
—
|
|
|
3,033
|
|
|
2,689
|
|
|
—
|
|
|
2,689
|
|
|
Total long-term debt
|
1,653,178
|
|
|
(24,368
|
)
|
|
1,628,810
|
|
|
1,364,008
|
|
|
(27,334
|
)
|
|
1,336,674
|
|
|
Less current portion of long-term debt
|
43,863
|
|
|
—
|
|
|
43,863
|
|
|
48,497
|
|
|
—
|
|
|
48,497
|
|
|
Long-term debt, net of current portion
|
$
|
1,609,315
|
|
|
$
|
(24,368
|
)
|
|
$
|
1,584,947
|
|
|
$
|
1,315,511
|
|
|
$
|
(27,334
|
)
|
|
$
|
1,288,177
|
|
As of
June 30, 2016
and
December 31, 2015
, we have recorded
$3.6 million
of accrued interest expense on our debt-related instruments.
Senior Notes
In May 2011, we issued
$400.0 million
aggregate principal amount of
7.25%
senior notes due 2021 (the "Notes"). In July 2016, we completed the redemption of all outstanding balances under the Notes. See
Note 15 - Subsequent Events
for further discussion. Prior to redemption, the Notes were guaranteed on a senior unsecured basis by each of our direct and indirect subsidiaries that guarantee our Credit Agreement (defined below).
Credit Agreement
In April 2015, we amended and restated our senior secured credit facility (the "Credit Agreement") with Bank of America, N.A. as administrative agent and other financial institutions. As of
June 30, 2016
, the Credit Agreement provided for an
$850.0 million
five-year term loan facility (the "Term Facility") and a
$550.0 million
revolving credit facility (the "Revolving Facility"). The Revolving Facility included a
$100.0 million
multicurrency revolving sub-facility and a
$50.0 million
letter of credit sub-facility. The Credit Agreement also provided for the ability to increase the Term Facility and Revolving Facility by up to
$750.0 million
in the aggregate. As of
June 30, 2016
, we were in compliance with all of our covenants under the Credit Agreement.
In July 2016, effective June 2016, we amended our Credit Agreement with Bank of America, N.A. as administrative agent and other financial institutions, which allowed us to complete
$525.0 million
of incremental term loan borrowings. See
Note 15 - Subsequent Events
for further discussion. The Term Facility matures and the Revolving Facility expires on April
2020.
Debt Issuance Costs
In connection with the amendment and restatement of the Credit Agreement in 2015, we incurred approximately
$6.5 million
of debt issuance costs of which
$0.4 million
were expensed in the accompanying condensed consolidated statements of operations for the
six
months ended June 30, 2015. We capitalized the remaining
$6.1 million
of debt issuance costs within long-term debt, net in the accompanying condensed consolidated balance sheets, and will amortize these costs over the term of the Credit Agreement.
When we amended and restated the Credit Agreement in 2015, we had unamortized costs of
$14.8 million
related to previously recorded debt issuance costs, which we will amortize over the term of the Credit Agreement. In connection with the amendment and restatement of the Credit Agreement, during the
six
months ended June 30, 2015, we wrote-off
$1.6 million
of unamortized debt issuance costs.
7.55% Senior Debentures
In April 1998, we issued
$100.0 million
in aggregate principal amount of
7.55%
senior debentures due 2028. In April 2010, in anticipation of the spin-off of our financial services businesses into a new, publicly-traded, New York Stock Exchange-listed company called First American Financial Corporation ("FAFC") in June 2010 ("Separation"), we commenced a cash tender offer for these debentures and also solicited consent from the holders thereof to expressly affirm that the Separation would not conflict with the terms of the debentures. See
Note 11 - Litigation and Regulatory Contingencies
for further discussion on the Separation. In April 2010, we announced that valid consents were tendered representing over
50.0%
of the outstanding debentures. Accordingly, we received the requisite approvals from debenture holders and amended the related indentures. The indentures governing these debentures, as amended, contain limited restrictions on the Company.
Interest Rate Swaps
In May 2014, we entered into amortizing interest rate swap transactions ("Swaps"). The Swaps became effective in December 2014 and terminate in March 2019. The Swaps are for an initial notional balance of
$500.0 million
, with a fixed interest rate of
1.57%
, and amortize quarterly by
$12.5 million
through December 31, 2017 and
$25.0 million
through December 31, 2018, with a remaining notional amount of
$250.0 million
. We entered into the Swaps in order to convert a portion of our interest rate exposure on the Term Facility floating rate borrowings from variable to fixed. We have designated the Swaps as cash flow hedges. The estimated fair value of these cash flow hedges resulted in a liability of
$9.3 million
and
$4.4 million
as of
June 30, 2016
and
December 31, 2015
, respectively, which is included in the accompanying condensed consolidated balance sheets as a component of other liabilities.
Unrealized losses of
$0.4 million
(net of
$0.3 million
in deferred taxes) and unrealized gains of
$1.1 million
(net of
$0.7 million
in deferred taxes) for the
three
months ended
June 30, 2016
and
2015
, respectively, and unrealized losses of
$3.0 million
(net of
$1.9 million
in deferred taxes) and
$1.1 million
(net of
$0.7 million
in deferred taxes) for the
six
months ended
June 30, 2016
and
2015
, respectively, were recognized in other comprehensive (loss)/income related to the Swaps.
Note 7 – Income Taxes
The effective income tax rate for income taxes as a percentage of income from continuing operations before equity in earnings of affiliates and income taxes was
33.5%
and
33.1%
for the three months ended
June 30, 2016
and
2015
, respectively, and
34.7%
and
32.0%
for the
six
months ended
June 30, 2016
and
2015
, respectively.
For the three and
six
months ended
June 30, 2016
when compared to
2015
, the increase in the effective tax rate was due to non-recurring favorable discrete items occurring in 2015, partially offset by current year favorable rate reductions related to federal research credits being permanently enacted, the release of a capital loss valuation allowance related to a capital gain, a current year favorable discrete item related to prior year uncertain foreign tax benefits and a current year unfavorable discrete item from acquisition-related costs.
Income taxes included in equity in earnings of affiliates were
$0.3 million
and
$3.1 million
for the three months ended
June 30, 2016
and
2015
, respectively, and
$0.4 million
and
$5.5 million
for the
six
months ended
June 30, 2016
and
2015
, respectively. For the purpose of segment reporting, these amounts are included in corporate and therefore not reflected in our reportable segments.
We are currently under examination for the years 2005 to 2011 by the U.S. federal and various state taxing authorities. It is reasonably possible the amount of unrecognized tax benefit with respect to certain unrecognized tax positions could significantly increase or decrease within the next twelve months. We estimate the unrecognized tax benefit could decrease by up to
$21.5 million
within the next twelve months. The estimated change is primarily related to IRS audits, subject to the FAFC indemnification, and may have minimal impact to net income. See
Note 11 - Litigation and Regulatory Contingencies
for further discussion on FAFC.
Note 8 – Earnings Per Share
The following is a reconciliation of net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
$
|
40,424
|
|
|
$
|
33,006
|
|
|
$
|
67,964
|
|
|
$
|
62,297
|
|
|
Loss from discontinued operations, net of tax
|
(4
|
)
|
|
(217
|
)
|
|
(62
|
)
|
|
(329
|
)
|
|
Net income attributable to CoreLogic
|
$
|
40,420
|
|
|
$
|
32,789
|
|
|
$
|
67,902
|
|
|
$
|
61,968
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares for basic income per share
|
88,572
|
|
|
89,654
|
|
|
88,441
|
|
|
89,702
|
|
|
Dilutive effect of stock options and restricted stock units
|
1,396
|
|
|
1,309
|
|
|
1,506
|
|
|
1,336
|
|
|
Weighted-average shares for diluted income per share
|
89,968
|
|
|
90,963
|
|
|
89,947
|
|
|
91,038
|
|
|
Income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
$
|
0.46
|
|
|
$
|
0.37
|
|
|
$
|
0.77
|
|
|
$
|
0.69
|
|
|
Loss from discontinued operations, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net income attributable to CoreLogic
|
$
|
0.46
|
|
|
$
|
0.37
|
|
|
$
|
0.77
|
|
|
$
|
0.69
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
$
|
0.45
|
|
|
$
|
0.36
|
|
|
$
|
0.76
|
|
|
$
|
0.68
|
|
|
Loss from discontinued operations, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net income attributable to CoreLogic
|
$
|
0.45
|
|
|
$
|
0.36
|
|
|
$
|
0.76
|
|
|
$
|
0.68
|
|
The dilutive effect of stock-based compensation awards has been calculated using the treasury-stock method. For both the
three
months ended
June 30, 2016
and
2015
, an aggregate of less than
0.1 million
restricted stock units ("RSUs"), performance-based restricted stock units ("PBRSUs") and stock options were excluded from the weighted-average diluted common shares outstanding due to their anti-dilutive effect. For the
six
months ended
June 30, 2016
and
2015
, an aggregate of less than
0.1 million
and
0.2 million
RSUs, PBRSUs and stock options, respectively, were excluded from the weighted-average diluted common shares outstanding due to their anti-dilutive effect.
Note 9 – Fair Value of Financial Instruments
Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable.
The market approach is applied for recurring fair value measurements and endeavors to utilize the best available information. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Fair value balances are classified based on the observability of those inputs.
A fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Level 2 measurements utilize observable inputs in markets other than active markets.
In estimating the fair value of the financial instruments presented, we used the following methods and assumptions:
Cash and cash equivalents
For cash and cash equivalents, we believe that the carrying value is a reasonable estimate of fair value due to the short-term nature of the instruments.
Restricted cash
Restricted cash is comprised of certificates of deposit that are pledged for various letters of credit. We deem the carrying value to be a reasonable estimate of fair value due to the nature of these instruments.
Marketable securities
Marketable securities are classified as available-for-sale securities and are valued using quoted prices in active markets.
Contingent consideration
The fair value of the contingent consideration was estimated using the Monte Carlo simulation model, which relies on significant assumption and estimates including discount rates and future market conditions, among others.
Long-term debt
The fair value of long-term debt was estimated based on the current rates available to us for similar debt of the same remaining maturities and consideration of our default and credit risk.
Interest rate swap agreements
The fair value of the interest rate swap agreements was estimated based on market-value quotes received from the counterparties to the agreements.
The fair values of our financial instruments as of
June 30, 2016
are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
(in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
72,367
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
72,367
|
|
|
Restricted cash
|
—
|
|
|
11,009
|
|
|
—
|
|
|
11,009
|
|
|
Marketable securities
|
22,570
|
|
|
—
|
|
|
—
|
|
|
22,570
|
|
|
Total Financial Assets
|
$
|
94,937
|
|
|
$
|
11,009
|
|
|
$
|
—
|
|
|
$
|
105,946
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,900
|
|
|
$
|
8,900
|
|
|
Total debt
|
—
|
|
|
1,677,100
|
|
|
—
|
|
|
1,677,100
|
|
|
Total Financial Liabilities
|
$
|
—
|
|
|
$
|
1,677,100
|
|
|
$
|
8,900
|
|
|
$
|
1,686,000
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
Liability for interest rate swap agreements
|
$
|
—
|
|
|
$
|
9,291
|
|
|
$
|
—
|
|
|
$
|
9,291
|
|
The fair values of our financial instruments as of
December 31, 2015
are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
(in thousands)
|
Level 1
|
|
Level 2
|
|
Fair Value
|
|
Financial Assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
99,090
|
|
|
$
|
—
|
|
|
$
|
99,090
|
|
|
Restricted cash
|
—
|
|
|
10,926
|
|
|
10,926
|
|
|
Marketable securities
|
22,709
|
|
|
—
|
|
|
22,709
|
|
|
Total Financial Assets
|
$
|
121,799
|
|
|
$
|
10,926
|
|
|
$
|
132,725
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
Total debt
|
$
|
—
|
|
|
$
|
1,315,473
|
|
|
$
|
1,315,473
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
Liability for interest rate swap agreements
|
$
|
—
|
|
|
$
|
4,370
|
|
|
$
|
4,370
|
|
There were no transfers between Level 1, Level 2 or Level 3 securities during the
three
and
six
months ended
June 30, 2016
. In connection with the contingent consideration, we recorded
$0.9 million
of unrealized losses in our condensed consolidated statement of operations for the three and
six
months ended
June 30, 2016
.
Note 10 – Stock-Based Compensation
We currently issue equity awards under the Amended and Restated CoreLogic, Inc. 2011 Performance Incentive Plan, which was initially approved by our stockholders at our Annual Meeting held on May 19, 2011 with an amendment and restatement approved by our stockholders at our Annual Meeting held on July 29, 2014 (the “Plan”). The Plan includes the ability to grant RSUs, PBRSUs and stock options. The Plan provides for up to
21,909,000
shares of the Company's common stock to be available for award grants. Prior to the approval of the Plan, we issued share-based awards under the CoreLogic, Inc. 2006 Incentive Plan.
We primarily utilize RSUs and PBRSUs as our share-based compensation instruments for employees and directors. The fair value of any share-based compensation instrument grant is based on the market value of our shares on the date of grant and is recognized as compensation expense over its vesting period.
Restricted Stock Units
For the
six
months ended
June 30, 2016
and
2015
, we awarded
942,973
and
939,354
RSUs, respectively, with an estimated grant-date fair value of
$32.7 million
and
$33.2 million
, respectively. The majority of the RSU awards will vest ratably over
three
years from their grant date.
RSU activity for the
six
months ended
June 30, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Weighted-Average
Grant-Date
|
|
(in thousands, except weighted-average fair value prices)
|
Shares
|
|
Fair Value
|
|
Unvested RSUs outstanding at December 31, 2015
|
1,537
|
|
|
$
|
32.92
|
|
|
RSUs granted
|
943
|
|
|
$
|
34.68
|
|
|
RSUs vested
|
(690
|
)
|
|
$
|
32.57
|
|
|
RSUs forfeited
|
(57
|
)
|
|
$
|
34.48
|
|
|
Unvested RSUs outstanding at June 30, 2016
|
1,733
|
|
|
$
|
33.96
|
|
As of
June 30, 2016
, there was
$43.6 million
of total unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a weighted-average period of
2.2 years
. The fair value of RSUs is based on the market value of our common stock on the date of grant.
Performance-Based Restricted Stock Units
For the
six
months ended
June 30, 2016
and
2015
, we awarded
278,799
and
222,788
PBRSUs, respectively, with an estimated grant-date fair value of
$9.8 million
and
$7.6 million
, respectively. These awards are subject to service-based, performance-based and market-based vesting conditions. For the PBRSUs awarded during the
six
months ended
June 30, 2016
, the performance period is from January 1, 2016 to December 31, 2018 and the performance metric is adjusted earnings per share and market-based conditions. Subject to satisfaction of the performance criteria, the majority of the 2016 awards will vest on December 31, 2018.
The performance period for the PBRSUs awarded during the
six
months ended
June 30, 2015
is from January 1, 2015 to December 31, 2017 and the performance metric is adjusted earnings per share and market-based conditions. Subject to satisfaction of the performance criteria, the majority of the 2015 awards will vest on December 31, 2017.
The fair values of the 2016 and 2015 awards were estimated using Monte-Carlo simulation with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
Expected dividend yield
|
—
|
%
|
|
—
|
%
|
|
Risk-free interest rate
(1)
|
0.99
|
%
|
|
0.93
|
%
|
|
Expected volatility
(2)
|
25.12
|
%
|
|
24.01
|
%
|
|
Average total stockholder return
(2)
|
1.48
|
%
|
|
8.37
|
%
|
|
|
|
|
(1)
|
The risk-free interest rate for the periods within the contractual term of the PBRSUs is based on the U.S. Treasury yield curve in effect at the time of the grant.
|
|
|
|
|
(2)
|
The expected volatility and average total stockholder return are measures of the amount by which a stock price has fluctuated or is expected to fluctuate based primarily on our and our peers' historical data.
|
PBRSU activity for the
six
months ended
June 30, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Weighted-Average
Grant-Date
|
|
(in thousands, except weighted-average fair value prices)
|
Shares
|
|
Fair Value
|
|
Unvested PBRSUs outstanding at December 31, 2015
|
659
|
|
|
$
|
29.15
|
|
|
PBRSUs granted
|
279
|
|
|
$
|
35.30
|
|
|
PBRSUs vested
|
(88
|
)
|
|
$
|
26.04
|
|
|
PBRSUs forfeited
|
(91
|
)
|
|
$
|
19.50
|
|
|
Unvested PBRSUs outstanding at June 30, 2016
|
758
|
|
|
$
|
34.10
|
|
As of
June 30, 2016
, there was
$23.0 million
of total unrecog
n
ized compensation cost related to unvested PBRSUs that is expected to be recognized over a weighted-average period of
2.1
years. The fair value of PBRSUs is based on the market value of our common stock on the date of grant.
Stock Options
Prior to 2015, we issued stock options as incentive compensation for certain employees. Option activity for the
six
months ended
June 30, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except weighted-average price)
|
Number of
Shares
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic
Value
|
|
Options outstanding at December 31, 2015
|
1,826
|
|
|
$
|
21.33
|
|
|
|
|
|
|
Options exercised
|
(251
|
)
|
|
$
|
22.03
|
|
|
|
|
|
|
Options outstanding at June 30, 2016
|
1,575
|
|
|
$
|
21.22
|
|
|
5.0
|
|
$
|
27,152
|
|
|
Options vested and expected to vest at June 30, 2016
|
1,571
|
|
|
$
|
21.20
|
|
|
5.0
|
|
$
|
27,136
|
|
|
Options exercisable at June 30, 2016
|
1,495
|
|
|
$
|
20.68
|
|
|
4.9
|
|
$
|
26,618
|
|
As of
June 30, 2016
, there was
$0.6 million
of total unrecognized compensation cost related to unvested stock options that is expected to be recognized over a weighted-average period of
9 months
.
The intrinsic value of options exercised was
$3.2 million
and
$5.9 million
for the
six
months ended
June 30, 2016
and
2015
, respectively. This intrinsic value represents the difference between the fair market value of our common stock on the date of exercise and the exercise price of each option.
Employee Stock Purchase Plan
The employee stock purchase plan allows eligible employees to purchase our common stock at
85.0%
of the lesser of the closing price on the first day or the last day of each quarter. Our employee stock purchase plan was approved by our stockholders at our 2012 annual meeting of stockholders and the first offering period commenced in October 2012. We recognized an expense for the amount equal to the estimated fair value of the discount during each offering period.
The following table sets forth the stock-based compensation expense recognized for the three and
six
months ended
June 30, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
(in thousands)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
RSUs
|
$
|
6,560
|
|
|
$
|
6,819
|
|
|
$
|
13,578
|
|
|
$
|
12,833
|
|
|
PBRSUs
|
2,701
|
|
|
2,272
|
|
|
4,514
|
|
|
4,052
|
|
|
Stock options
|
217
|
|
|
474
|
|
|
601
|
|
|
1,037
|
|
|
Employee stock purchase plan
|
297
|
|
|
242
|
|
|
625
|
|
|
617
|
|
|
|
$
|
9,775
|
|
|
$
|
9,807
|
|
|
$
|
19,318
|
|
|
$
|
18,539
|
|
The above includes
$1.4 million
and
$0.8 million
of stock-based compensation expense within cost of services in the accompanying condensed consolidated statements of operations for the three months ended
June 30, 2016
and
2015
, respectively, and
$2.9 million
and
$1.4 million
for the
six
months ended
June 30, 2016
and
2015
, respectively.
Note 11 – Litigation and Regulatory Contingencies
We have been named in various lawsuits and we may from time to time be subject to audit or investigation by governmental agencies. Currently, governmental agencies are auditing or investigating certain of our operations.
With respect to matters where we have determined that a loss is both probable and reasonably estimable, we have recorded a liability representing our best estimate of the financial exposure based on known facts. While the ultimate disposition of each such audit, investigation or lawsuit is not yet determinable, we do not believe that the ultimate resolution of these matters, either individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations or cash flows. In addition, we do not believe there is a reasonable possibility that a material loss exceeding amounts already accrued may be incurred. The ability to predict the ultimate outcome of such matters involves judgments, estimates and inherent uncertainties. The actual outcome of such matters could differ materially from management’s estimates. We record expenses for legal fees as incurred.
Separation
Following the Separation, we are responsible for a portion of FAFC's contingent and other corporate liabilities. In the Separation and Distribution Agreement we entered into in connection with the Separation (the "Separation and Distribution Agreement"), we agreed with FAFC to share equally in the cost of resolution of a small number of corporate-level lawsuits, including certain consolidated securities litigation matters from which we have since been dropped. There were no liabilities incurred in connection with the consolidated securities matters. Responsibility to manage each case has been assigned to either FAFC or us, with the managing party required to update the other party regularly and consult with the other party prior to certain important decisions, such as settlement. The managing party will also have primary responsibility for determining the ultimate total liability, if any, related to the applicable case. We will record our share of any such liability when the responsible party determines a reserve is necessary. At
June 30, 2016
,
no
reserves were considered necessary.
In addition, the Separation and Distribution Agreement provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our predecessor, The First American Corporation's ("FAC") financial services business, with FAFC and financial responsibility for the obligations and liabilities of FAC's information solutions business with us. Specifically, each party will, and will cause its subsidiaries and affiliates to, indemnify, defend and hold harmless the other party, its respective affiliates and subsidiaries and each of its respective officers, directors, employees and agents for any losses arising out of or otherwise in connection with the liabilities each such party assumed or retained pursuant to the Separation and Distribution Agreement; and any breach by such party of the Separation and Distribution Agreement.
Note 12 – Acquisitions
In April 2016, we completed the acquisition of FNC for up to
$475.0 million
, with
$400.0 million
in cash paid at closing, subject to certain closing adjustments, and up to
$75.0 million
to be paid in cash in 2018, contingent upon the achievement of certain revenue targets in fiscal 2017. We fair-valued the contingent payment using the Monte Carlo simulation model and preliminarily recorded
$8.0 million
as contingent consideration. FNC is a leading provider of real estate collateral information technology and solutions that automates property appraisal ordering, tracking, documentation and review for lender compliance with government regulations and is included as a component of our PI reporting segment. The acquisition continues to expand our property valuation capabilities. The purchase price was allocated to the assets acquired and liabilities assumed using a variety of valuation techniques including discounted cash flow analysis, which included significant unobservable inputs. The purchase price allocation is subject to change based on our final determination of fair value in connection with intangible assets and working capital matters. We preliminarily recorded a deferred tax liability of
$83.5 million
, property and equipment of
$79.8 million
with an estimated average life of
12 years
, customer lists of
$141.8 million
with an estimated average life of
16 years
, trade names of
$15.9 million
with an estimated average life of
19 years
, non-compete agreements of
$18.8 million
with an estimated average life of
5 years
, other intangibles of
$2.9 million
with an estimated average life of
10 years
and goodwill of
$211.5 million
. This business combination did not have a material impact on our condensed consolidated statements of operations.
In January 2016, we completed the acquisition of the remaining
40%
mandatorily redeemable noncontrolling interest in PIQ for NZD
$27.8 million
, or
$19.0 million
, and settled the mandatorily redeemable noncontrolling interest. PIQ is included as a component of our PI reporting segment.
In December 2015, we completed the acquisition of the remaining interest in RELS for approximately
$65.0 million
and recorded an investment gain of approximately
$34.3 million
due to the step-up in fair value on the previously held
50.1%
interest, which is included in gain on investment and other, net in the accompanying condensed consolidated statements of operations. RELS is included as a component of our PI reporting segment. The acquisition of RELS expands our real estate asset valuation and appraisal solutions in connection with loan originations. The purchase price was allocated to the assets acquired and liabilities assumed using a variety of valuation techniques including a discounted cash flow analysis, which included significant unobservable inputs. The purchase price allocation is subject to change based on our final determination of fair value in connection with intangible assets and working capital matters. We preliminarily recorded property and equipment of
$27.0 million
with an estimated average life of
10 years
, customer lists of
$48.4 million
with an estimated average life of
10 years
, other intangibles of
$5.0 million
with an estimated average life of
10 years
and goodwill of
$23.1 million
, of which
$11.5 million
is deductible for tax purposes. This business combination did not have a material impact on our condensed consolidated statements of operations.
In October 2015, we completed the acquisition of Cordell Information Pty Limited ("Cordell") for AUD
$70.0 million
, or
$49.1 million
, subject to working capital adjustments, which is included as a component of our PI reporting segment. The acquisition of Cordell further expands our property information capabilities in Australia. The purchase price was allocated to the assets acquired and liabilities assumed using a variety of valuation techniques including discounted cash flow analysis, which included significant unobservable inputs. The purchase price allocation is subject to change based on our final determination of fair value in connection with intangible assets and working capital matters. We preliminarily recorded property and equipment of
$14.3 million
with an estimated average life of
10 years
, customer lists of
$5.5 million
with an estimated average life of
8 years
, trade names of
$0.6 million
with an estimated average life of
4 years
and goodwill of
$31.9 million
, which is fully deductible for tax purposes. This business combination did not have a material impact on our condensed consolidated statements of operations.
In September 2015, we completed the acquisition of LandSafe Appraisal Services, Inc. for $
122.0 million
, subject to working capital adjustments, which is included as a component of our PI reporting segment. The acquisition builds on our longstanding strategic relationship with a key client and continues to expand our property valuation capabilities. The purchase price was allocated to the assets acquired and liabilities assumed using a variety of valuation techniques including discounted cash flow analysis, which included significant unobservable inputs. The purchase price allocation is subject to change based on our final determination of fair value in connection with intangible assets and working capital matters. We preliminarily recorded customer lists of $
53.4 million
with an estimated average life of
10 years
, other intangibles of
$4.3 million
with an estimated average life of
10 years
and goodwill of
$64.6 million
, which is fully deductible for tax purposes. This business combination did not have a material impact on our condensed consolidated statements of operations.
We incurred
$5.1 million
and
$1.7 million
of acquisition-related costs within selling, general and administrative expenses on our consolidated statements of operations for the three months ended
June 30, 2016
and
2015
, respectively, and
$6.1 million
and
$1.8 million
for the
six
months ended
June 30, 2016
and
2015
, respectively.
Note 13 – Discontinued Operations
On September 30, 2014, we completed the sale of our collateral solutions and field services businesses, which were included in the former reporting segment Asset Management and Processing Solutions ("AMPS"), for total consideration of
$29.1 million
, subject to working capital adjustments. In September 2012, we completed the wind down of our consumer services business and our then-owned appraisal management company business, which were included in our PI and Risk Management and Workflow ("RMW") segments, respectively. In September 2011, we closed our marketing services business, which was included in our PI segment. Each of these businesses is reflected in our accompanying condensed consolidated financials statements as discontinued operations.
Summarized below are certain assets and liabilities classified as discontinued operations as of
June 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
As of June 30, 2016
|
|
PI
|
|
RMW
|
|
AMPS
|
|
Total
|
|
Deferred income tax asset and other current assets
|
|
$
|
326
|
|
|
$
|
(217
|
)
|
|
$
|
572
|
|
|
$
|
681
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
$
|
238
|
|
|
$
|
319
|
|
|
$
|
1,949
|
|
|
$
|
2,506
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
Deferred income tax asset and other current assets
|
|
$
|
326
|
|
|
$
|
(217
|
)
|
|
$
|
572
|
|
|
$
|
681
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
$
|
250
|
|
|
$
|
319
|
|
|
$
|
1,958
|
|
|
$
|
2,527
|
|
Summarized below are the components of our loss from discontinued operations for the
three
and
six
months ended
June 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2016
|
|
PI
|
|
RMW
|
|
AMPS
|
|
Total
|
|
Operating revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Loss from discontinued operations before income taxes
|
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
|
(6
|
)
|
|
Income tax benefit
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
|
Loss from discontinued operations, net of tax
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2015
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Loss from discontinued operations before income taxes
|
|
(292
|
)
|
|
(11
|
)
|
|
(48
|
)
|
|
(351
|
)
|
|
Income tax benefit
|
|
(67
|
)
|
|
(60
|
)
|
|
(7
|
)
|
|
(134
|
)
|
|
Loss from discontinued operations, net of tax
|
|
$
|
(225
|
)
|
|
$
|
49
|
|
|
$
|
(41
|
)
|
|
$
|
(217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2016
|
|
PI
|
|
RMW
|
|
AMPS
|
|
Total
|
|
Operating revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Loss from discontinued operations before income taxes
|
|
—
|
|
|
(4
|
)
|
|
(95
|
)
|
|
(99
|
)
|
|
Income tax benefit
|
|
—
|
|
|
(1
|
)
|
|
(36
|
)
|
|
(37
|
)
|
|
Loss from discontinued operations, net of tax
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
(59
|
)
|
|
$
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2015
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
Loss from discontinued operations before income taxes
|
|
(377
|
)
|
|
(13
|
)
|
|
(142
|
)
|
|
(532
|
)
|
|
Income tax benefit
|
|
(100
|
)
|
|
(60
|
)
|
|
(43
|
)
|
|
(203
|
)
|
|
Loss from discontinued operations, net of tax
|
|
$
|
(277
|
)
|
|
$
|
47
|
|
|
$
|
(99
|
)
|
|
$
|
(329
|
)
|
Note 14 – Segment Information
We have organized our reportable segments into
two
segments: PI and RMW.
Property Intelligence
. Our PI segment owns or licenses real property information, mortgage information and consumer information, which includes loan information, property sales and characteristic information, property risk and replacement cost, natural hazard data, geospatial data, parcel maps and mortgage-backed securities information. We have also developed proprietary technology and software platforms to access, automate or track our data and assist our clients with compliance regulations. We deliver this information directly to our clients in a standard format over the web, through customizable software platforms or in bulk data form. Our products and services include data licensing and analytics, data-enabled advisory services, platform solutions and valuation solutions in North America, Western Europe and Asia Pacific. The segment's primary clients are commercial banks, mortgage lenders and brokers, investment banks, fixed-income investors, real estate agents, Multiple Listing Service companies, property and casualty insurance companies, title insurance companies, government agencies and government-sponsored enterprises.
The operating results of our PI segment included intercompany revenues of
$1.5 million
for both the
three
months ended
June 30, 2016
and
2015
, and
$2.7 million
and
$3.0 million
for the
six
months ended
June 30, 2016
and
2015
, respectively. The segment also included intercompany expenses of
$1.2 million
for both the
three
months ended
June 30, 2016
and
2015
, and
$2.9 million
and
$2.4 million
for the
six
months ended
June 30, 2016
and
2015
, respectively.
Risk Management and Workflow.
Our RMW segment owns or licenses real property information, mortgage information and consumer information, which includes loan information, property sales and characteristic information, natural hazard data, parcel maps, employment verification, criminal records and eviction records. We have also developed proprietary technology and software platforms to access, automate or track our data and assist our clients with compliance regulations. Our products and services include credit and screening solutions, property tax processing, flood data services and technology solutions in North America. The segment’s primary clients are large, national mortgage lenders and servicers, but we also serve regional mortgage lenders and brokers, credit unions, commercial banks, fixed-income investors, government agencies and casualty insurance companies.
The operating results of our RMW segment included intercompany revenues of
$1.2 million
for both the
three
months ended
June 30, 2016
and
2015
, and
$2.9 million
and
$2.4 million
for the
six
months ended
June 30, 2016
and
2015
, respectively. The segment also included intercompany expenses of
$1.5 million
for both the
three
months ended
June 30, 2016
and
2015
, and
$2.7 million
and
$3.0 million
for the
six
months ended
June 30, 2016
and
2015
, respectively.
We also separately report on our corporate and eliminations. Corporate consists primarily of corporate personnel and other expenses associated with our corporate functions and facilities, investment gains and losses, equity in earnings of affiliates, net of tax, and interest expense.
It is impracticable to disclose revenues from external clients for each product and service offered.
Selected financial information by reportable segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2016
|
|
Operating Revenues
|
|
Depreciation and Amortization
|
|
Operating Income/(Loss)
|
|
Equity in Earnings/(Losses) of Affiliates, Net of Tax
|
|
Net Income/(Loss) From Continuing Operations
|
|
Capital Expenditures
|
|
PI
|
|
$
|
276,681
|
|
|
$
|
32,373
|
|
|
$
|
33,224
|
|
|
$
|
504
|
|
|
$
|
33,111
|
|
|
$
|
14,064
|
|
|
RMW
|
|
226,240
|
|
|
6,614
|
|
|
66,322
|
|
|
—
|
|
|
66,322
|
|
|
2,793
|
|
|
Corporate
|
|
7
|
|
|
4,304
|
|
|
(24,031
|
)
|
|
(426
|
)
|
|
(59,009
|
)
|
|
10,097
|
|
|
Eliminations
|
|
(2,724
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Consolidated (excluding discontinued operations)
|
|
$
|
500,204
|
|
|
$
|
43,291
|
|
|
$
|
75,515
|
|
|
$
|
78
|
|
|
$
|
40,424
|
|
|
$
|
26,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PI
|
|
$
|
161,105
|
|
|
$
|
24,365
|
|
|
$
|
17,057
|
|
|
$
|
7,685
|
|
|
$
|
24,570
|
|
|
$
|
10,213
|
|
|
RMW
|
|
227,611
|
|
|
8,003
|
|
|
64,934
|
|
|
—
|
|
|
64,930
|
|
|
3,486
|
|
|
Corporate
|
|
9
|
|
|
4,904
|
|
|
(21,284
|
)
|
|
(3,018
|
)
|
|
(56,236
|
)
|
|
3,863
|
|
|
Eliminations
|
|
(2,712
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Consolidated (excluding discontinued operations)
|
|
$
|
386,013
|
|
|
$
|
37,272
|
|
|
$
|
60,707
|
|
|
$
|
4,667
|
|
|
$
|
33,264
|
|
|
$
|
17,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PI
|
|
$
|
518,121
|
|
|
$
|
60,300
|
|
|
$
|
50,499
|
|
|
$
|
552
|
|
|
$
|
49,796
|
|
|
$
|
25,959
|
|
|
RMW
|
|
441,258
|
|
|
14,332
|
|
|
119,245
|
|
|
—
|
|
|
119,243
|
|
|
5,128
|
|
|
Corporate
|
|
3
|
|
|
8,303
|
|
|
(36,919
|
)
|
|
(563
|
)
|
|
(101,075
|
)
|
|
14,698
|
|
|
Eliminations
|
|
(5,635
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Consolidated (excluding discontinued operations)
|
|
$
|
953,747
|
|
|
$
|
82,935
|
|
|
$
|
132,825
|
|
|
$
|
(11
|
)
|
|
$
|
67,964
|
|
|
$
|
45,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PI
|
|
$
|
314,498
|
|
|
$
|
48,557
|
|
|
$
|
36,678
|
|
|
$
|
13,826
|
|
|
$
|
50,237
|
|
|
$
|
25,237
|
|
|
RMW
|
|
441,622
|
|
|
16,244
|
|
|
115,892
|
|
|
—
|
|
|
115,867
|
|
|
6,833
|
|
|
Corporate
|
|
32
|
|
|
8,449
|
|
|
(42,598
|
)
|
|
(5,392
|
)
|
|
(103,342
|
)
|
|
8,133
|
|
|
Eliminations
|
|
(5,368
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Consolidated (excluding discontinued operations)
|
|
$
|
750,784
|
|
|
$
|
73,250
|
|
|
$
|
109,972
|
|
|
$
|
8,434
|
|
|
$
|
62,762
|
|
|
$
|
40,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
As of
|
|
As of
|
|
Assets
|
|
June 30, 2016
|
|
December 31, 2015
|
|
PI
|
|
$
|
2,503,110
|
|
|
$
|
2,058,412
|
|
|
RMW
|
|
1,336,008
|
|
|
1,316,785
|
|
|
Corporate
|
|
5,608,361
|
|
|
5,318,990
|
|
|
Eliminations
|
|
(5,428,840
|
)
|
|
(5,021,152
|
)
|
|
Consolidated (excluding assets of discontinued operations)
|
|
$
|
4,018,639
|
|
|
$
|
3,673,035
|
|
Note 15 – Subsequent Events
In July 2016, we completed
$525.0 million
of incremental term loan borrowings by amending the Credit Agreement effective as of June 2016. A portion of the proceeds of the new borrowings were used to complete the redemption of all outstanding balances under the Notes in July 2016 at a price equal to
103.625%
of the principal amount of the Notes plus accrued and unpaid interest for approximately
$411.0 million
. The majority of the remaining portion of the proceeds were utilized to reduce our outstanding balance within the Revolving Facility by
$110.0 million
.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and certain information incorporated herein by reference contain forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Quarterly Report, other than statements that are purely historical, are forward-looking statements. Words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” “estimate,” “will,” “should,” “would,” “could,” “may,” and similar expressions also identify forward-looking statements. The forward-looking statements include, without limitation, statements regarding our future operations, financial condition and prospects,
operating results, revenues and earnings liquidity, our estimated income tax rate, unrecognized tax positions, amortization expenses, impact of recent accounting pronouncements, our cost management program, our acquisition strategy and our growth plans, expectations regarding our recent acquisitions, share repurchases, the level of aggregate U.S. mortgage originations and the reasonableness of the carrying value related to specific financial assets and liabilities.
Our expectations, beliefs, objectives, intentions and strategies regarding future results are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from results contemplated by our forward-looking statements. These risks and uncertainties include, but are not limited to:
|
|
|
|
•
|
limitations on access to or increase in prices for data from external sources, including government and public record sources;
|
|
|
|
|
•
|
changes in applicable government legislation, regulations and the level of regulatory scrutiny affecting our clients or us, including with respect to consumer financial services and the use of public records and consumer data;
|
|
|
|
|
•
|
compromises in the security of our data, including cyber-based attacks, the transmission of confidential information or systems interruptions;
|
|
|
|
|
•
|
difficult conditions in the mortgage and consumer lending industries and the economy generally;
|
|
|
|
|
•
|
reliance on our top ten clients for a significant portion of our revenue and profit;
|
|
|
|
|
•
|
our ability to protect proprietary technology rights;
|
|
|
|
|
•
|
our ability to realize the anticipated benefits of certain acquisitions and the timing thereof;
|
|
|
|
|
•
|
risks related to the outsourcing of services and international operations;
|
|
|
|
|
•
|
our cost-containment and growth strategies and our ability to effectively and efficiently implement them;
|
|
|
|
|
•
|
the level of our indebtedness, our ability to service our indebtedness and the restrictions in our various debt agreements;
|
|
|
|
|
•
|
intense competition in the market against third parties and the in-house capabilities of our clients;
|
|
|
|
|
•
|
our ability to attract and retain qualified management;
|
|
|
|
|
•
|
impairments in our goodwill or other intangible assets; and
|
|
|
|
|
•
|
the remaining tax sharing arrangements and other obligations associated with the spin-off of First American Financial Corporation ("FAFC").
|
We urge you to carefully consider these risks and uncertainties and review the additional disclosures we make concerning risks and uncertainties that may materially affect the outcome of our forward-looking statements and our future business and operating results, including those made in Item 1A of Part II below, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of the filing of this Quarterly Report on Form 10-Q.
Business Overview
We are a leading global property information, analytics and data-enabled solutions provider operating in North America, Western Europe and Asia Pacific. Our combined data from public, contributory and proprietary sources provides detailed coverage of property, mortgages and other encumbrances, consumer credit, tenancy, location, hazard risk and related performance information. We have more than one million users who rely on our data and predictive decision analytics to reduce risk, enhance transparency and improve the performance of their businesses.
We offer our clients a comprehensive national database of public, contributory and proprietary data covering real property and mortgage information, judgments and liens, building and replacement costs, parcel and geospatial data, criminal background records, eviction information, non-prime lending records, credit information, and tax information, among other data types. Our databases include over 900 million historical property transactions, over 96 million mortgage applications and
property-specific data covering approximately 99% of U.S. residential and commercial properties exceeding 149 million records. We believe the quality of the data we offer is distinguished by our broad range of data sources and our expertise in aggregating, organizing, normalizing, processing and delivering data to our clients.
With our data as a foundation, we have built strong analytics capabilities and a variety of value-added business services to meet our clients’ needs for mortgage and automotive credit reporting, property tax, property valuation, tenancy, hazard risk, property risk and replacement cost, flood plain location determination and other geospatial data and related services.
Reportable Segments
We have organized our reportable segments into the following two segments: Property Intelligence ("PI") and Risk Management and Workflow ("RMW").
Our PI segment owns or licenses real property, mortgage and consumer information, which includes loan information, property sales and characteristic information, property risk and replacement cost, natural hazard data, geospatial data, parcel maps and mortgage-backed securities information. We have also developed proprietary technology and software platforms to access, automate or track our data and assist our clients with compliance regulations. We deliver this information directly to our clients in a standard format over the web, through customizable software platforms or in bulk data form. Our products and services include data licensing and analytics, data-enabled advisory services, platform solutions and valuation solutions in North America, Western Europe and Asia Pacific.
Our RMW segment owns or licenses real property information, mortgage information and consumer information, which includes loan information, property sales and characteristic information, natural hazard data, parcel maps, employment verification, criminal records and eviction records. We have also developed proprietary technology and software platforms to access, automate or track our data and assist our clients with compliance regulations. Our products and services include credit and screening solutions, property tax processing, flood data services and technology solutions in North America.
RESULTS OF OPERATIONS
Overview of Business Environment and Company Developments
Business Environment
The volume of U.S. mortgage loan originations serves as a key market driver for approximately 70% of our business. We believe the volume of real estate and mortgage transactions is primarily affected by real estate prices, the availability of funds for mortgage loans, mortgage interest rates, employment levels and the overall state of the U.S. economy. We believe mortgage originations modestly increased in the second quarter of 2016 relative to the same period in 2015. We expect the mortgage origination market will continue to shift more towards a purchase-driven market, which will partially offset the expected continued decline of refinance activity in 2016. Overall, we expect full-year 2016 mortgage unit volumes to be consistent with 2015 levels.
We generate the majority of our revenues from clients with operations in the U.S. residential real estate, mortgage origination and mortgage servicing markets. Approximately
43.0%
and
38.0%
of our operating revenues for the
three
months ended
June 30, 2016
and
2015
, respectively, and approximately
43.0%
and
34.0%
of our operating revenues for the
six
months ended
June 30, 2016
and
2015
, respectively, were generated from our ten largest clients, who consist of the largest U.S. mortgage originators and servicers.
Two
of our clients accounted for
15.0%
and
11.0%
of our operating revenues for the
three
months ended
June 30, 2016
, respectively, and
14.0%
and
12.0%
of our operating revenues for the
six
months ended
June 30, 2016
, respectively.
No
client accounted for
10.0%
or more of our operating revenues for the
six
months ended
June 30, 2015
.
While the majority of our revenues are generated in the U.S., continued strengthening of the U.S. dollar versus other currencies in 2016 has unfavorably impacted the financial results translation of our international operations. For the
three
and
six
months ended
June 30, 2016
, our revenues were unfavorably impacted by
$1.4 million
and
$4.0 million
, respectively, due to foreign currency translation.
Acquisition
In April 2016, we completed the acquisition of FNC, Inc. ("FNC"), for up to
$475.0 million
, with
$400.0 million
in cash paid at closing, subject to certain closing adjustments, and up to
$75.0 million
to be paid in 2018 contingent upon the
achievement of certain revenue targets in fiscal 2017. We funded the transaction primarily by drawing
$390.0 million
on our Revolving Facility (defined below) and also used cash on hand. Subsequently, in July 2016, we completed
$525.0 million
of incremental term loan borrowings by amending our Credit Agreement in June 2016 . A portion of the proceeds of the new borrowings were used to complete the redemption of all outstanding balances under the Notes at a price equal to
103.625%
of the principal amount of the Notes plus accrued and unpaid interest for approximately
$411.0 million
. The majority of the remaining portion of the proceeds were utilized to reduce our outstanding balance under the Revolving Facility by
$110.0 million
.
Incremental Term Loan Borrowings and Notes Redemption
In July 2016, we completed
$525.0 million
of incremental term loan borrowings through an amendment to our Credit Agreement effective as of June 2016. A portion of the proceeds of the new borrowings were used to complete the redemption of all outstanding balances under the Notes at a price equal to
103.625%
of the principal amount of the Notes plus accrued and unpaid interest for approximately
$411.0 million
. The remaining portion of the proceeds were utilized to reduce our outstanding balance within the Revolving Facility (as defined below).
Productivity & Cost Management
In line with our commitment to operational excellence and margin expansion, in April 2015, we announced an expanded three-year productivity and cost management program, which is expected to reduce expense, on an annual run-rate basis, by approximately $60.0 million by 2018. Savings are expected to be realized through the reduction of selling, general and administrative costs, outsourcing certain business process functions, consolidation of facilities and other operational improvements. Cash and non-cash charges associated with this program are expected to aggregate approximately $20.0 million and will be incurred over the course of the three-year program.
Unless otherwise indicated, the Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q relate solely to the discussion of our continuing operations.
Consolidated Results of Operations
Three Months Ended
June 30, 2016
Compared to Three Months Ended
June 30, 2015
Operating Revenues
Our consolidated operating revenues were
$500.2 million
for the three months ended
June 30, 2016
, an increase of
$114.2 million
, or
29.6%
, when compared to
2015
, and consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except percentages)
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
PI
|
$
|
276,681
|
|
|
$
|
161,105
|
|
|
$
|
115,576
|
|
|
71.7
|
%
|
|
RMW
|
226,240
|
|
|
227,611
|
|
|
(1,371
|
)
|
|
(0.6
|
)
|
|
Corporate and eliminations
|
(2,717
|
)
|
|
(2,703
|
)
|
|
(14
|
)
|
|
0.5
|
|
|
Operating revenues
|
$
|
500,204
|
|
|
$
|
386,013
|
|
|
$
|
114,191
|
|
|
29.6
|
%
|
Our PI segment revenues increased by
$115.6 million
, or
71.7%
, when compared to
2015
. Acquisition activity contributed $117.9 million of additional revenues in
2016
. Excluding acquisition activity, the decrease of $2.3 million was due to lower property information and analytics revenues of $2.4 million, the impact of unfavorable foreign currency translation of $1.4 million and lower other revenues of $1.2 million. The variance was partially offset by higher revenues from our international operations of $1.6 million and higher insurance related revenues of $1.1 million.
Our RMW segment revenues decreased by
$1.4 million
, or
0.6%
, when compared to
2015
. The variance was primarily due to declines in our technology solutions revenues from reduced project-related revenues and the wind-down of non-core product lines of approximately $10.8 million, partially offset by improved pricing and market-share gains, which increased our revenues from property tax processing by $5.9 million, credit & screening solutions by $2.2 million and flood data services by $1.3 million.
Our corporate and eliminations were comprised of intercompany revenue eliminations between our operating segments.
Cost of Services
Our consolidated cost of services was
$264.7 million
for the three months ended
June 30, 2016
, an increase of
$75.0 million
, or
39.5%
, when compared to
2015
. Acquisition activity contributed $77.3 million of additional expense in
2016
. Excluding acquisition activity, the decrease of $2.3 million was due to lower operating revenues, productivity initiatives and favorable product mix.
Selling, General and Administrative Expense
Our consolidated selling, general and administrative expenses were
$116.7 million
for the three months ended
June 30, 2016
, an increase of
$18.4 million
, or
18.7%
, when compared to
2015
. Acquisition activity contributed $26.0 million of additional expense in
2016
. Excluding acquisition activity, the decrease of $7.6 million was primarily due to our on-going productivity and cost management initiatives, which contributed to lower compensation-related expenses of $12.3 million, lower professional fees of $4.5 million and lower facility and lease equipment costs of $1.6 million, partially offset by higher external services costs of $5.1 million (including cyber-security and compliance costs), higher acquisition-related costs of $4.8 million and higher other expenses of $0.9 million.
Depreciation and Amortization
Our consolidated depreciation and amortization expense was
$43.3 million
for the three months ended
June 30, 2016
, an increase of
$6.0 million
, or
16.1%
, when compared to
2015
. Acquisition activity contributed $9.4 million of additional expense in
2016
, partially offset by lower depreciation from assets that were fully depreciated in the prior year.
Operating Income
Our consolidated operating income was
$75.5 million
for the three months ended
June 30, 2016
, an increase of
$14.8 million
, or
24.4%
, when compared to
2015
, and consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except percentages)
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
PI
|
|
$
|
33,224
|
|
|
$
|
17,057
|
|
|
$
|
16,167
|
|
|
94.8
|
%
|
|
RMW
|
|
66,322
|
|
|
64,934
|
|
|
1,388
|
|
|
2.1
|
|
|
Corporate and eliminations
|
|
(24,031
|
)
|
|
(21,284
|
)
|
|
(2,747
|
)
|
|
12.9
|
|
|
Operating income
|
|
$
|
75,515
|
|
|
$
|
60,707
|
|
|
$
|
14,808
|
|
|
24.4
|
%
|
Our PI segment operating income increased by
$16.2 million
, or
94.8%
, when compared to
2015
. Acquisition activity contributed $5.3 million of operating income in
2016
. Excluding acquisition activity, operating income increased $10.9 million and operating margins increased 702 basis points primarily due to favorable product mix in property information and analytics and higher revenues from our international operations and insurance-related products.
Our RMW segment operating income increased by
$1.4 million
, or
2.1%
, when compared to
2015
primarily due to pricing, market-share gains and the impact of ongoing operational efficiency programs in our property tax processing, partially offset by declines in our technology solutions revenues from reduced project-related revenues and the wind-down of non-core product lines. Operating margins remained consistent at approximately 29%.
Corporate and eliminations had an unfavorable variance of
$2.7 million
primarily due to the result of our cost efficiency programs.
Total Interest Expense, Net
Our consolidated total interest expense, net was
$17.8 million
for the three months ended
June 30, 2016
, an increase of
$1.2 million
, or
7.5%
, when compared to
2015
. The increase was primarily due to higher average outstanding balance, partially offset by lower interest rates in the current year and lower fees of $0.4 million related to debt borrowed in the second quarter of 2015.
Gain/(Loss) on Investments and Other, Net
Our consolidated gain on investments and other, net was
$3.0 million
for the three months ended
June 30, 2016
, a favorable variance of
$4.3 million
when compared to
2015
, due primarily to higher realized gains on investments in the current year of $2.7 million and lower losses related to the extinguishment of debt of $1.6 million in connection with the 2015 refinancing of our outstanding debt.
Provision for Income Taxes
Our consolidated provision for income taxes from continuing operations before equity in earnings of affiliates and income taxes was
$20.3 million
and
$14.2 million
for the three months ended
June 30, 2016
and
2015
, respectively. The effective tax rate was
33.5%
and
33.1%
for the three months ended
June 30, 2016
and
2015
, respectively. The slight increase in the effective tax rate was due to non-recurring favorable discrete items occurring in 2015, partially offset by current year favorable rate reductions related to federal research credits being permanently enacted, the release of a capital loss valuation allowance related to a capital gain, a current year favorable discrete item related to prior year uncertain foreign tax benefits and a current year unfavorable discrete item from acquisition-related costs.
Equity in Earnings of Affiliates, Net of Tax
Our consolidated equity in earnings of affiliates, net of tax, was
$0.1 million
for the three months ended
June 30, 2016
, a decrease of
$4.6 million
, or
98.3%
, when compared to
2015
. We have equity interests in various affiliates that primarily provide settlement services in connection with residential mortgage loans. The variance was primarily due to the acquisition of the remaining interest in RELS in December 2015, which contributed $3.9 million of earnings in the second quarter of 2015. Following the acquisition, RELS is a consolidated subsidiary of ours and is no longer accounted for under the equity method of accounting.
Net Income Attributable to Noncontrolling Interests
Our consolidated net income attributable to noncontrolling interests decreased by
$0.3 million
for the three months ended
June 30, 2016
when compared to
2015
due to the acquisition of the remaining
40.0%
interest in New Zealand-based Property IQ Ltd. ("PIQ").
Six Months Ended
June 30, 2016
Compared to Six Months Ended
June 30, 2015
Operating Revenues
Our consolidated operating revenues were
$953.7 million
for the
six
months ended
June 30, 2016
, an increase of
$203.0 million
, or
27.0%
, when compared to
2015
, and consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except percentages)
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
PI
|
$
|
518,121
|
|
|
$
|
314,498
|
|
|
$
|
203,623
|
|
|
64.7
|
%
|
|
RMW
|
441,258
|
|
|
441,622
|
|
|
(364
|
)
|
|
(0.1
|
)
|
|
Corporate and eliminations
|
(5,632
|
)
|
|
(5,336
|
)
|
|
(296
|
)
|
|
5.5
|
|
|
Operating revenues
|
$
|
953,747
|
|
|
$
|
750,784
|
|
|
$
|
202,963
|
|
|
27.0
|
%
|
Our PI segment revenues increased by
$203.6 million
, or
64.7%
, when compared to
2015
. Acquisition activity accounted for $208.7 million of the increase in
2016
. Excluding acquisition activity, the decrease of $5.1 million was primarily due to lower property information and analytics revenues of $5.5 million, the impact of unfavorable foreign currency translation of $4.0 million and lower other revenues of $1.5 million. The variance was partially offset by higher revenues from our international operations of $4.0 million and higher insurance related revenues of $1.9 million.
Our RMW segment revenues decreased by
$0.4 million
, or
0.1%
, when compared to
2015
. The variance was primarily due to declines in our technology solutions revenues from reduced project-related revenues and the wind-down of non-core product lines of approximately $18.5 million, partially offset by improved pricing and market share gains, which increased our revenues from property tax processing by $13.4 million, credit & screening solutions by $3.2 million and flood data services by $1.5 million.
Our corporate and eliminations were comprised of intercompany revenue eliminations between our operating segments.
Cost of Services
Our consolidated cost of services was
$510.1 million
for the
six
months ended
June 30, 2016
, an increase of
$134.8 million
, or
35.9%
, when compared to
2015
. Acquisition activity contributed $139.5 million of additional expense in
2016
. Excluding acquisition activity, the decrease of $4.7 million was primarily due to lower operating revenues, productivity initiatives and favorable product mix.
Selling, General and Administrative Expense
Our consolidated selling, general and administrative expenses were
$227.9 million
for the
six
months ended
June 30, 2016
, an increase of
$35.6 million
, or
18.5%
, when compared to
2015
. Acquisition activity contributed $47.0 million of additional expense in
2016
. Excluding acquisition activity, the decrease of $11.4 million was primarily due to our on-going productivity and cost management initiatives which contributed to lower compensation-related expenses of $13.8 million, lower professional fees of $7.0 million, lower facility and lease equipment costs of $2.2 million, and lower other expenses of $1.5 million, partially offset by higher external services costs of $7.5 million (including cyber-security and compliance costs) and higher acquisition-related costs of $5.6 million.
Depreciation and Amortization
Our consolidated depreciation and amortization expense was
$82.9 million
for the
six
months ended
June 30, 2016
, an increase of
$9.7 million
, or
13.2%
, when compared to
2015
. Acquisition activity contributed $14.2 million of additional expense in
2016
, partially offset by lower depreciation from assets that were fully depreciated in the prior year.
Operating Income
Our consolidated operating income was
$132.8 million
for the
six
months ended
June 30, 2016
, an increase of
$22.9 million
, or
20.8%
, when compared to
2015
, and consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except percentages)
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
PI
|
|
$
|
50,499
|
|
|
$
|
36,678
|
|
|
$
|
13,821
|
|
|
37.7
|
%
|
|
RMW
|
|
119,245
|
|
|
115,892
|
|
|
3,353
|
|
|
2.9
|
|
|
Corporate and eliminations
|
|
(36,919
|
)
|
|
(42,598
|
)
|
|
5,679
|
|
|
(13.3
|
)
|
|
Operating income
|
|
$
|
132,825
|
|
|
$
|
109,972
|
|
|
$
|
22,853
|
|
|
20.8
|
%
|
Our PI segment operating income increased by
$13.8 million
, or
37.7%
, when compared to
2015
. Acquisition activity contributed $8.0 million of higher operating income in
2016
. Excluding acquisition activity, operating income increased by $5.8 million and operating margins increased 208 basis points primarily due to favorable product mix in property information and analytics, higher revenues from our international operations, higher insurance-related revenues and the impact of ongoing operational efficiency programs.
Our RMW segment operating income increased by
$3.4 million
, or
2.9%
, when compared to
2015
primarily due to improved pricing, market share gains and the impact of ongoing operational efficiency programs, partially offset by declines in our technology solutions revenues from reduced project-related revenues and the wind-down of non-core product lines. Operating margins increased 78 basis points to 27%.
Corporate and eliminations operating loss decreased
$5.7 million
, or
13.3%
, primarily due to the impact of ongoing operational efficiency programs.
Total Interest Expense, net
Our consolidated total interest expense, net was
$31.5 million
for the
six
months ended
June 30, 2016
, an increase of
$2.5 million
, or
8.7%
, when compared to
2015
. The increase was primarily due to an out-of-period adjustment which reduced interest expense by $5.2 million during the first quarter of 2015 and higher average outstanding balance in the second quarter of 2016, partially offset by lower interest rates.
Gain/(Loss) on Investments and Other, Net
Our consolidated gain on investments and other, net was
$2.7 million
for the
six
months ended
June 30, 2016
, a favorable variance of
$3.8 million
when compared to
2015
, due primarily to higher realized gains on investments in the current year of $2.2 million and lower losses related to the extinguishment of debt of $1.6 million in connection with the 2015 refinancing of our outstanding debt.
Provision for Income Taxes
Our consolidated provision for income taxes from continuing operations before equity in earnings of affiliates and income taxes was
$36.1 million
and
$25.6 million
for the
six
months ended
June 30, 2016
and
2015
, respectively. The effective tax rate was
34.7%
and
32.0%
for the
six
months ended
June 30, 2016
and
2015
, respectively. The increase in the effective tax rate was due to non-recurring favorable discrete items occurring in 2015, partially offset by current year favorable rate reductions related to federal research credits being permanently enacted, the release of a capital loss valuation allowance related to a capital gain, a current year favorable discrete item related to prior year uncertain foreign tax benefits and a current year unfavorable discrete item from acquisition-related costs.
Equity in (Losses)/Earnings of Affiliates, Net of Tax
Our consolidated equity in losses of affiliates, net of tax, fluctuated
$8.4 million
, or
100.1%
, when compared to
2015
. We have equity interests in various affiliates that primarily provide settlement services in connection with residential mortgage loans. The variance was primarily due to the acquisition of the remaining interest in RELS in December 2015, which
contributed $7.0 million of earnings in the first half of 2015. Following the acquisition, RELS is a consolidated subsidiary of ours and is no longer accounted for under the equity method of accounting.
Net Income Attributable to Noncontrolling Interests
Our consolidated net income attributable to noncontrolling interests decreased by
$0.5 million
for the
six
months ended
June 30, 2016
when compared to
2015
due to the acquisition of the remaining
40.0%
interest in PIQ.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at
June 30, 2016
totaled
$72.4 million
, a decrease of
$26.7 million
from
December 31, 2015
. Our cash balances held outside of the U.S. are primarily related to our international operations and, as of
June 30, 2016
, totaled $28.9 million. Most of the amounts held outside of the U.S. could be repatriated to the U.S. but, under current law, would be subject to U.S. federal income taxes, less applicable foreign tax credits. We plan to maintain significant cash balances outside the U.S. for the foreseeable future.
Restricted cash of
$11.0 million
at
June 30, 2016
and
$10.9 million
as of
December 31, 2015
represents cash pledged for various letters of credit provided in the ordinary course of business to certain vendors, including in connection with obtaining insurance and real property leases.
Cash Flow
Operating Activities.
Cash provided by operating activities reflects net income adjusted for certain non-cash items and changes in operating assets and liabilities. Total cash provided by operating activities was approximately
$173.2 million
and
$125.8 million
for the
six
months ended
June 30, 2016
and
2015
, respectively. The increase in cash provided by operating activities was primarily due to favorable changes in certain working capital items, namely income tax and accounts receivable.
Investing Activities.
Total cash used in investing activities was approximately
$461.3 million
and
$42.1 million
during the
six
months ended
June 30, 2016
and
2015
, respectively. The increase in investing activities is primarily related to net cash paid for acquisitions including $394.8 million for FNC and an acquisition that was not significant for $1.9 million. We also acquired the remaining
40.0%
interest in PIQ for
$18.0 million
. Further, for the
six
months ended
June 30, 2016
and
2015
, we had investments in property and equipment of
$27.9 million
and
$21.5 million
, respectively, and capitalized data and other intangible assets of
$17.9 million
and
$18.7 million
, respectively.
Financing Activities.
Total cash provided by financing activities was approximately
$261.7 million
for the
six
months ended
June 30, 2016
, which was primarily comprised of proceeds from debt issuance of
$390.0 million
and net proceeds from stock-based compensation-related transactions of
$2.5 million
, partially offset by share repurchases of
$29.1 million
and repayment of long-term debt of
$101.7 million
. Total cash used in financing activities was
$75.9 million
for the
six
months ended
June 30, 2015
, which was primarily comprised of share repurchases of
$58.7 million
, repayment of long-term debt of
$36.1 million
and debt issuance costs of
$6.5 million
, partially offset by proceeds from debt issuance of
$14.4 million
and net proceeds from stock-based compensation-related transactions of
$11.0 million
.
Financing and Financing Capacity
Total debt outstanding, gross, was
$1.7 billion
and
$1.4 billion
as of
June 30, 2016
and
December 31, 2015
, respectively. Our significant debt instruments and borrowing capacity are described below.
Senior Notes
In May 2011, we issued
$400.0 million
aggregate principal amount of
7.25%
senior notes due 2021 (the "Notes"). In July 2016, we completed the redemption of all outstanding balances under the Notes. See
Note 15 - Subsequent Events
of our condensed consolidated financial statements for further discussion. Prior to their redemption, the Notes were guaranteed on a senior unsecured basis by each of our direct and indirect subsidiaries that guarantee our Credit Agreement (defined below).
Credit Agreement
For a detailed description of our senior secured credit facility (the "Credit Agreement"), see
Note 6 - Long-Term Debt
of our condensed consolidated financial statements. As of
June 30, 2016
, we had additional borrowing capacity under the
Revolving Facility of
$160.0 million
and were in compliance with the financial and restrictive covenants of the Credit Agreement.
We amended the Credit Agreement to provide for incremental term loan borrowings of
$525.0 million
, which borrowings were completed in July 2016. A portion of the proceeds of the new borrowings were used to complete the redemption of the Notes and the majority of the remaining proceeds were utilized to reduce our outstanding balance under the revolving portion of the Credit Agreement.
The Credit Agreement consists of a $1.333 billion term loan facility (the "Term Facility") and a
$550.0 million
revolving credit facility (the "Revolving Facility") that expires in April 2020. The Revolving Facility includes a
$100.0 million
multicurrency revolving sub-facility and a
$50.0 million
letter of credit sub-facility. The Credit Agreement also provides for the ability to request an increase in the Term Facility and Revolving Facility by up to $225.0 million in the aggregate.
The Credit Agreement contains customary financial maintenance covenants, including a (i) maximum total leverage ratio not to exceed
4.50
to
1.00
; provided that such total leverage ratio shall step down to (a)
4.25
to
1.00
starting with the fiscal quarter ending June 30, 2016, (b)
4.00
to
1.00
starting with the fiscal quarter ending June 30, 2017, and (c)
3.50
to
1.00
starting with the fiscal quarter ending June 30, 2018, and is subject to additional adjustments if the Company completes a Qualified Acquisition (as defined in the Credit Agreement); and (ii) a minimum interest coverage ratio of not less than
3.00
to
1.00
.
The Credit Agreement provides that loans under the Term Facility shall be repaid in equal quarterly installments, commencing in the third quarter of 2016 and continuing on each three-month anniversary thereafter in an amount equal to $17.2 million for the first four quarterly payments, $34.4 million for the next four quarterly payments and $51.6 million for each quarterly payment thereafter. The outstanding balance of the term loan will be due on April 21, 2020. If we have a significant increase in our outstanding debt or if our EBITDA decreases significantly, we may be unable to incur additional indebtedness and the lenders under the Credit Agreement may be unwilling to permit us to amend the financial or restrictive covenants described above to provide additional flexibility.
Interest Rate Swaps
In May 2014, we entered into amortizing interest rate swap transactions ("Swaps"). The Swaps became effective in December 2014 and terminate in March 2019. The Swaps are for an initial notional balance of
$500.0 million
, with a fixed interest rate of
1.57%
, and amortize quarterly by
$12.5 million
through December 31, 2017 and
$25.0 million
through December 31, 2018, with a remaining notional amount of
$250.0 million
.
Liquidity and Capital Strategy
We believe that cash flow from operations and current cash balances, together with currently available lines of credit, will be sufficient to meet operating requirements through the next twelve months. Cash available from operations could be affected by any general economic downturn or any decline or adverse changes in our business such as a loss of clients, competitive pressures or other significant change in business environment.
We strive to pursue a balanced approach to capital allocation and will consider the repurchase of common shares, the retirement of outstanding debt and the pursuit of strategic acquisitions on an opportunistic basis.
Availability of Additional Capital
Our access to additional capital fluctuates as market conditions change. There may be times when the private capital markets and the public debt or equity markets lack sufficient liquidity or when our securities cannot be sold at attractive prices, in which case we would not be able to access capital from these sources. Based on current market conditions and our financial condition (including our ability to satisfy the conditions contained in our debt instruments that are required to be satisfied to permit us to incur additional indebtedness), we believe that we have the ability to effectively access these liquidity sources for capital or new borrowings. However, a weakening of our financial condition, including a significant decrease in our profitability or cash flows or a material increase in our leverage, could adversely affect our ability to access these markets and/or increase our cost of borrowings.
Critical Accounting Policies and Estimates
For additional information with respect to our critical accounting policies, which could have the most significant effect on our reported results and require subjective or complex judgments by management, see Item 7, “
Management's Discussion and Analysis of Financial Condition and Results of Operations
,” of our Annual Report on Form 10-K for the year ended
December 31, 2015
. As of
June 30, 2016
, there had been no material changes to this information.
