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CORELOGIC, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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 Annual 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 acquisition and divestiture strategy and
our growth plans for 2013, the Company's share repurchases, the level of
aggregate U.S. mortgage originations and inventory of delinquent mortgage loans
and loans in foreclosure 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 customers 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 transmissions,including the
transmission of confidential information or systems interruptions;
• difficult conditions in the mortgage and consumer lending industries
and the economy generally together with customer concentration and
the impact of these factors thereon;
• our ability to protect proprietary technology rights;
• our indebtedness and the restrictions in our various debt agreements;
• our growth strategies and cost reduction plans and our ability to
effectively and efficiently implement them;
• risks related to the outsourcing of services and our international operations;
• impairments in our goodwill or other intangible assets; and
• the inability to realize the benefits of the Separation as a result
of the factors described immediately above, as well as, among other
factors, increased borrowing costs, competition between the
resulting companies, increased operating or other expenses or the
triggering of rights and obligations by the transaction or any
litigation arising out of or related to the Separation.
We assume no obligation to update any forward-looking statements, whether as a
result of new information, future events, or otherwise. You are cautioned not to
place undue reliance on forward-looking statements, which speak only as of the
date of the filing of this Annual Report on Form 10-K. These risks and
uncertainties, along with the risk factors above under "Item 1A. Risk Factors"
should be considered in evaluating any forward-looking statements contained
herein.
Business Overview
We are a leading provider of property, financial and consumer information,
analytics and services to mortgage originators and servicers, financial
institutions and other businesses, government and government-sponsored
enterprises. Our data, query, analytical and business outsourcing services help
our customers to identify, manage and mitigate credit and interest rate risk. 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.
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We believe that we offer our customers among the most comprehensive databases of
public, contributory and proprietary data covering real property and mortgage
information, judgments and liens, parcel and geospatial data, motor vehicle
records, criminal background records, national coverage eviction information,
non-prime lending records, credit information, and tax information, among other
data types. Our databases include over 795 million historical property
transactions, over 93 million mortgage applications and property-specific data
covering over 99% of U.S. residential properties exceeding 147 million records.
We believe the quality of the data we offer is distinguished by our broad range
of data sources and our core expertise in aggregating, organizing, normalizing,
processing and delivering data to our customers.
With our data as a foundation, we have built strong analytics capabilities and a
variety of value-added business services to meet our customers' needs for
mortgage and automotive credit reporting, property tax, property valuation,
flood plain location determination and other geospatial data, data, analytics
and related services.
Critical Accounting Policies and Estimates
Our significant accounting policies are discussed in Note 2- Significant
Accounting Policies. We consider the accounting policies described below to be
critical in preparing our consolidated financial statements. These policies
require us to make estimates and judgments that affect the reported amounts of
certain assets, liabilities, revenues, expenses and related disclosures of
contingencies. Our assumptions, estimates and judgments are based on historical
experience, current trends and other factors that we believe to be relevant at
the time we prepare the consolidated financial statements. Although we believe
that our estimates and assumptions are reasonable, we cannot determine future
events. As a result, actual results could differ materially from our assumptions
and estimates.
Basis of presentation and consolidation. Our discussion and analysis of
financial condition and results of operations is based upon our audited
consolidated financial statements, which have been prepared in accordance with
GAAP. Our operating results for the years ended December 31, 2012, 2011 and 2010
include results for any acquired entities from the applicable acquisition date
forward and all prior periods have been adjusted to properly reflect
discontinued operations. All significant intercompany transactions and balances
have been eliminated.
Revenue recognition. We derive our revenues principally from U.S. mortgage
originators and servicers with good creditworthiness. Our product and service
deliverables are generally comprised of data or other related services. Our
revenue arrangements with our customers generally include a work order or
written agreement specifying the data products or services to be delivered and
related terms of sale including payment amounts and terms. The primary revenue
recognition-related judgments we exercise are to determine when all of the
following criteria have been met: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred or services have been rendered; (3) our price
to the buyer is fixed or determinable; and (4) collectability is reasonably
assured.
For products or services where delivery occurs at a point in time, we recognize
revenue upon delivery. These products or services include sales of tenancy data
and analytics, credit solutions for mortgage and automotive industries,
under-banked credit services, flood and data services, real estate owned asset
management, claims management, asset management and processing solutions, broker
price opinions, and field services where we perform property preservation
services.
For products or services where delivery occurs over time, we recognize revenue
ratably on a subscription basis over the contractual service period once initial
delivery has occurred. Generally these service periods range from one to three
years. Products or services recognized on a license or subscription basis
include information and analytic products, flood database licenses, realtor
solutions, and lending solutions.
Tax service revenues are comprised of periodic loan fees and life-of-loan fees.
For periodic loans, we generate monthly fees at a contracted fixed rate for as
long as we service the loan. Loans serviced with a one-time, life-of-loan fee
are billed once the loan is boarded to our tax servicing system in accordance
with a customer tax servicing agreement. Life-of-loan fees are then deferred and
recognized ratably over the expected service period. The rates applied to
recognize revenues assume a 10-year contract life and are adjusted to reflect
prepayments. We review the tax service contract portfolio quarterly to determine
if there have been changes in contract lives, deferred on-boarding costs,
expected service period, and/or changes in the number and/or timing of
prepayments. Accordingly, we may adjust the rates to reflect current trends.
Cost of services. Cost of services represents costs incurred in the creation and
delivery of our products and services. Cost of services consists primarily of
data acquisition and royalty fees; customer service costs, which include:
personnel costs to collect, maintain and update our proprietary databases, to
develop and maintain software application platforms and to provide consumer and
customer call center support; hardware and software expense associated with
transaction processing
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systems; telecommunication and computer network expense; and occupancy costs
associated with facilities where these functions are performed by employees.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of personnel-related costs, direct and
indirect selling costs, restructuring costs, corporate costs, fees for
professional and consulting services, advertising costs, uncollectible accounts
and other costs of administration such as marketing, human resources, finance
and administrative roles.
Purchase accounting. The purchase method of accounting requires companies to
assign values to assets and liabilities acquired based upon their fair values.
In most instances there is not a readily defined or listed market price for
individual assets and liabilities acquired in connection with a business,
including intangible assets. The determination of fair value for assets and
liabilities in many instances requires a high degree of estimation. The
valuation of intangible assets, in particular, is very subjective. We generally
obtain third-party valuations to assist us in estimating fair values. The use of
different valuation techniques and assumptions could change the amounts and
useful lives assigned to the assets and liabilities acquired, including goodwill
and other identifiable intangible assets and related amortization expense.
Goodwill and other intangible assets. We perform an annual impairment test for
goodwill and other indefinite-lived intangible assets for each reporting unit
every fourth quarter. In addition to our annual impairment test, we periodically
assess whether events or circumstances have occurred that potentially indicate
the carrying amounts of these assets may not be recoverable. In assessing the
overall carrying value of our goodwill and other intangibles, we first assess
qualitative factors to determine whether the existence of events or
circumstances leads to a determination that it is more likely than not that the
fair value of a reporting unit is less than its carrying amount. Examples of
such events or circumstances include the following: cost factors, financial
performance, legal and regulatory factors, entity-specific events, industry and
market factors, macroeconomic conditions and other considerations.
If, after assessing the totality of events or circumstances, we determine that
it is more likely than not that the fair value of a reporting unit is less than
its carrying value, then management's impairment testing process may include two
additional steps. The first step ("Step 1") compares the fair value of each
reporting unit to its book value. The fair value of each reporting unit is
determined by using discounted cash flow analysis and market approach
valuations. If the fair value of the reporting unit exceeds its book value, then
goodwill is not considered impaired and no additional analysis is required.
However, if the book value is greater than the fair value, a second step ("Step
2") must be completed to determine if the fair value of the goodwill exceeds the
book value of the goodwill.
Step 2 involves calculating an implied fair value of goodwill for each reporting
unit for which Step 1 indicated impairment. The implied fair value of goodwill
is determined in a manner similar to the amount of goodwill calculated in a
business combination, by measuring the excess of the estimated fair value of the
reporting unit, as determined in Step 1, over the aggregate estimated fair
values of the individual assets, liabilities and identifiable intangibles as if
the reporting unit was being acquired in a business combination. If the implied
fair value of goodwill exceeds the carrying value of goodwill assigned to the
reporting unit, there is no impairment. If the carrying value of goodwill
assigned to a reporting unit exceeds the implied fair value of the goodwill, an
impairment loss is recorded for the excess. An impairment loss cannot exceed the
carrying value of goodwill assigned to a reporting unit, and the loss
establishes a new basis in the goodwill. Subsequent reversal of goodwill
impairment losses is not permitted. The valuation of goodwill requires
assumptions and estimates of many critical factors including revenue growth,
cash flows, market multiples and discount rates. Forecasts of future operations
are based, in part, on operating results and our expectations as to future
market conditions. These types of analysis contain uncertainties because they
require us to make assumptions and to apply judgments to estimate industry
economic factors and the profitability of future business strategies. However,
if actual results are not consistent with our estimates and assumptions, we may
be exposed to an additional impairment loss that could be material.
These tests utilize a variety of valuation techniques, all of which require us
to make estimates and judgments. Fair value is determined by employing an
expected present value technique, which utilizes multiple cash flow scenarios
that reflect a range of possible outcomes and an appropriate discount rate. The
use of comparative market multiples (the "market approach") compares the
reporting unit to other comparable companies (if such comparables are present in
the marketplace) based on valuation multiples to arrive at a fair value. We also
use certain of these valuation techniques in accounting for business
combinations, primarily in the determination of the fair value of acquired
assets and liabilities. In assessing the fair value, we utilize the results of
the valuations (including the market approach to the extent comparables are
available) and consider the range of fair values determined under all methods
and the extent to which the fair value exceeds the book value of the equity. As
of December 31, 2012, our reporting units are data and analytics, mortgage
origination services, and asset management and processing solutions.
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In connection with our acquisition of CDS Business Mapping, LLC ("CDS"), we
separated our spatial solutions business line from our mortgage origination
services segment and consolidated it with CDS, effectively creating the
geospatial solutions business unit within the data and analytics segment. As a
result, we revised our reporting for segment disclosure purposes and reassessed
our reporting units for purposes of evaluating the carrying value of our
goodwill. This assessment required us to perform a fourth quarter reassignment
of our goodwill to each reporting unit impacted using the relative fair value
approach, based on the fair values of the reporting units as of December 31,
2012.
Determining the fair value of a reporting unit is judgmental in nature and
requires the use of significant estimates and assumptions, including revenue
growth rates, operating margins, discount rates and future market conditions,
among others. Key assumptions used to determine the fair value of our mortgage
origination services reporting unit and geospatial solutions business unit in
our testing were: (a) expected cash flow for the period from 2013 to 2018; and
(b) a discount rate ranging from 11.0% to 15.0%, which was based on management's
best estimate of the after-tax weighted average cost of capital.
We performed a qualitative analysis on our reporting units and examined relevant
events and circumstances such as: cost factors, financial performance, legal and
regulatory factors, entity-specific events, industry and market factors,
macroeconomic conditions and other considerations. We also considered the
reassignment analysis of geospatial solutions' goodwill to each reporting unit
impacted using the relative fair value approach. Based on the qualitative
analysis performed, we determined that it is more likely than not that goodwill
attributable to our reporting units is not impaired as of December 31, 2012. It
is reasonably possible that changes in the facts, judgments, assumptions and
estimates used in assessing the fair value of the goodwill could cause a
reporting unit to become impaired.
Income taxes. We account for income taxes under the asset and liability method,
whereby we recognize deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases as well as expected benefits of utilizing net operating loss and credit
carryforwards. We measure deferred tax assets and liabilities using enacted tax
rates we expect to apply in the years in which we expect to recover or settle
those temporary differences. We recognize in income the effect of a change in
tax rates on deferred tax assets and liabilities in the period that includes the
enactment date.
We recognize the effect of income tax positions only if sustaining those
positions is more likely than not. We reflect changes in recognition or
measurement of uncertain tax positions in the period in which a change in
judgment occurs. We recognize interest and penalties, if any, related to
uncertain tax positions within income tax expense. Accrued interest and
penalties are included within the related tax liability line in the consolidated
balance sheet.
We evaluate the need to establish a valuation allowance based upon expected
levels of taxable income, future reversals of existing temporary differences,
tax planning strategies, and recent financial operations. We establish a
valuation allowance to reduce deferred tax assets to the extent we believe it is
more likely than not that some or all of the deferred tax assets will not be
realized.
Useful lives of assets. We are required to estimate the useful lives of several
asset classes, including capitalized data, internally developed software and
other intangible assets. The estimation of useful lives requires a significant
amount of judgment related to matters such as future changes in technology,
legal issues related to allowable uses of data and other matters.
Stock-based compensation. We measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award. The cost is recognized over the period during which an employee is
required to provide services in exchange for the award. We used the binomial
lattice option-pricing model to estimate the fair value for any options granted
after December 31, 2006 through December 31, 2009. For the options granted in
2012, 2011 and 2010, we used the Black-Scholes model to estimate the fair value.
We utilize the straight-line single option method of attributing the value of
stock-based compensation expense unless another expense attribution model is
required. As stock-based compensation expense recognized in the results of
operations is based on awards ultimately expected to vest, it has been reduced
for estimated forfeitures. Forfeitures are estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. We apply the long-form method for determining the pool of
windfall tax benefits.
Currently, our primary means of stock-based compensation is granting restricted
stock units ("RSUs"). The fair value of any RSU grant is based on the market
value of our shares on the date of grant and is generally recognized as
compensation expense over the vesting period. RSUs granted to certain key
employees have graded vesting and have a service and performance requirement,
and are therefore expensed using the accelerated multiple-option method to
record stock-based
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compensation expense. All other RSU awards have graded vesting and service is
the only requirement to vest in the award, and are therefore generally expensed
using the straight-line single option method to record stock-based compensation
expense.
In addition to stock options and RSUs, through September 2011 we had an employee
stock purchase plan that allowed eligible employees to purchase common stock of
the Company at 85.0% of the closing price on the last day of each quarter. We
recognized an expense in the amount equal to the discount. The employee stock
purchase plan expired in September 2011. Our 2012 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.
Reclassifications. Prior to the Separation, we operated primarily as a title
insurance company regulated under Article 7 of Regulation S-X and were not
subject to the requirements of Article 5 of Regulation S-X. Rule 5-03 of
Regulation S-X requires Article 5 companies, such as us, to classify expenses in
a functional manner. We have reclassified external cost of revenues, salaries
and benefits and other operating expenses into cost of services and selling,
general and administrative ("SG&A") expenses, in our income statement within our
annual report on Form 10-K for the years ended December 31, 2012, 2011 and 2010.
The reclassification of these expenses on a functional basis was not material to
the financial statements as a whole, as it had no impact to operating revenues,
total operating expenses, operating income, net income or earnings per share
previously reported. In addition, there was no impact on our balance sheets or
statements of cash flows.
Recent Accounting Pronouncements
In August 2012, the Financial Accounting Standards Board ("FASB") issued updated
guidance related to the testing of indefinite-lived intangible assets other than
goodwill for impairment. The guidance provides that an entity has the option to
first assess qualitative factors to determine whether the existence of events or
circumstances leads to a determination that it is more likely than not that the
fair value of an indefinite-lived intangible assets other than goodwill is less
than its carrying amount. If, after assessing the totality of events or
circumstances, an entity determines it is not more likely than not that the fair
value of an indefinite-lived intangible asset other than goodwill is less than
its carrying amount, then performing the two-step impairment test is
unnecessary. The updated guidance is effective for annual and interim impairment
tests performed for fiscal years beginning after September 15, 2012. The
adoption of this guidance did not have a material impact on our consolidated
financial statements.
In December 2011 and January 2013, the FASB issued updated guidance related to
the presentation of offsetting (netting) assets and liabilities in the financial
statements. The guidance requires the disclosure of both gross information and
net information on instruments and transactions eligible for offset in the
statement of financial position and instruments and transactions subject to an
agreement similar to a master netting arrangement. This scope would include
derivatives, sale and repurchase agreements and reverse sale and repurchase
agreements, and securities borrowing and securities lending arrangements. The
updated guidance is effective for annual reporting periods beginning on or after
January 1, 2013, and interim periods within those annual periods. Management
does not expect the adoption of this guidance to have a material impact on our
consolidated financial statements.
In September 2011, the FASB issued updated guidance related to the testing of
goodwill for impairment. The guidance provides that an entity has the option to
first assess qualitative factors to determine whether the existence of events or
circumstances leads to a determination that it is more likely than not that the
fair value of a reporting unit is less than its carrying amount. If, after
assessing the totality of events or circumstances, an entity determines it is
not more likely than not that the fair value of a reporting unit is less than
its carrying amount, then performing the two-step impairment test is
unnecessary. The updated guidance is effective for annual and interim goodwill
impairment tests performed for fiscal years beginning after December 15, 2011.
The adoption of this guidance did not have a material impact on our consolidated
financial statements.
In June 2011, the FASB issued updated guidance related to the presentation of
comprehensive income. The guidance provides that an entity has the option to
present the total of comprehensive income, the components of net income, and the
components of other comprehensive income either in a single continuous statement
of comprehensive income or in two separate but consecutive statements. The
updated guidance is effective for annual financial reporting periods beginning
after December 15, 2011 and for interim periods within the fiscal year. The
adoption of this guidance did not have a material impact on our consolidated
financial statements.
In May 2011, the FASB issued updated guidance related to fair value measurements
and disclosures. The update provides amendments to achieve common fair value
measurements and disclosure requirements in GAAP and International Financial
Reporting Standards. The amendments in this update explain how to measure fair
value. They do not require additional fair value measurements and are not
intended to establish valuation standards or affect valuation practices outside
of
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financial reporting. The updated guidance is effective during interim and annual
financial reporting periods beginning after December 15, 2011. The adoption of
this guidance did not have a material impact on our consolidated financial
statements.
Results of Operations
Overview
We generate the majority of our revenues from clients with operations in the
U.S. residential real estate, mortgage origination and mortgage servicing
markets. We believe the volume of real estate 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.
Throughout 2012 we benefited from the improvement in the U.S. residential real
estate and mortgage lending industries, particularly from higher refinancing
transactions, which resulted in higher levels of mortgage applications and
originations. This, combined with recovering home prices and home purchase
activity, created an improved market environment for our businesses in 2012.
Approximately 42.6% of our operating revenues for the year ended December 31,
2012 were generated from the ten largest United States mortgage
originators. Based on statistics published by the Mortgage Bankers' Association
("MBA") and data from significant mortgage originators, we estimate that total
mortgage originations increased approximately 32.0% in 2012 relative to the same
period of 2011. MBA estimates that mortgage applications increased 24% in 2012
relative to the same period of 2011. Given that many of our origination-related
products and services are provided early in the origination cycle, application
volumes are a leading indicator of demand for these products and services. In
2012, the level of mortgage originations, particularly refinancing transactions,
were relatively high due to historical lows in long-term interest rates, the
accommodative policy stance of the Federal Reserve, and the presence of Federal
Government programs targeting mortgage loan refinancing and modification
activity. We anticipate the level of mortgage originations to modestly decline
in the near term.
Based on our internal estimates, the level of loans seriously delinquent (loans
delinquent 90 days or more) or in foreclosure decreased approximately 15% in the
year ended December 31, 2012 relative to the same period of 2011. Additionally,
based on our internal analysis and market estimates, we believe the inventory of
seriously delinquent mortgage loans and loans in foreclosure will continue to
decline.
In December 2012, we completed our acquisition of CDS, a leading provider of
geographic underwriting information for the property and casualty insurance
industry, for a cash purchase price of $78.8 million. CDS is included in our
data and analytics reporting segment.
In the third quarter of 2012, we completed the disposition of our transportation
services business (American Driving Records) and completed the shutdown of our
appraisal management company and consumer services businesses.
As part of our on-going cost efficiency programs, in July 2012, we announced the
launch of our TTI with Dell Services. The objective of the TTI is to convert our
existing technology infrastructure to a new platform which is expected to
provide new functionality, increased performance, and a reduction in application
management and development costs. Following an initial transition period of
thirty months, we expect net operating expense reductions of approximately $35.0
to $40.0 million per year compared to 2012 cost levels. For the year ended
December 31, 2012, expenses incurred related to the initiative were $33.2
million, of which $16.3 million are non-cash charges.
On a consolidated basis, our operating revenues increased $229.1 million, or
17.1%, for the year ended December 31, 2012 compared to 2011. Data and analytics
segment operating revenues increased $68.0 million, or 12.4%, in 2012 compared
to 2011, primarily due to higher document retrieval services and the impact of
acquisition activity. Mortgage origination services segment operating revenues
increased $153.5 million, or 31.8%, in 2012 compared to 2011, primarily due to
higher mortgage origination volumes and the impact of acquisition activity.
Asset management and processing solutions segment operating revenues increased
$6.0 million, or 1.8%, in 2012 compared to 2011, due to higher loss mitigation
services and higher field services revenues, partially offset by a decrease in
other revenues. On a consolidated basis, operating revenues increased $58.3
million, or 4.6%, for the year ended December 31, 2011 compared to 2010. Data
and analytics segment operating revenues increased $84.6 million, or 18.3%, in
2011 compared to 2010, due to higher analytical revenues, growth in advisory
projects and the impact of acquisition activity. Mortgage origination services
segment revenues increased $16.0 million, or 3.4%, in 2011 compared to 2010, due
to the impact of acquisition activity, partially offset by lower origination
volumes. Asset management and processing solutions segment revenues decreased
$39.3 million, or 10.7%, in 2011 compared to 2010, primarily due to lower
default-related activity and the exit of unprofitable product lines.
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Our total operating expense increased $95.5 million, or 7.6%, for the year ended
December 31, 2012 compared to 2011, primarily due to higher cost of services
from increased volumes, higher depreciation and amortization from the impact
from acquisitions, partially offset by lower selling, general and administrative
expenses from our cost-reduction initiatives. Our total operating expense
increased $83.3 million, or 7.1%, for the year ended December 31, 2011 compared
to 2010, primarily due to higher cost of services from increased volumes, higher
depreciation and amortization due to the impact of write-offs of certain
non-performing assets and the impact of acquisitions, partially offset by lower
selling, general and administrative expenses from our cost-reduction
initiatives.
Total interest expense, net decreased $5.8 million, or 10.0%, for the year ended
December 31, 2012 compared to 2011, due to lower write-offs of deferred
financing costs of $9.9 million, partially offset by higher interest expense due
to higher average outstanding debt balances as a result of the issuance of
$400.0 million principal amount of senior notes in May 2011. Total interest
expense, net increased $28.1 million, or 92.9%, for the year ended December 31,
2011 compared to 2010, due to a $10.2 million write-off of unamortized debt
issuance costs related to our extinguished bank debt facilities to interest
expense and increased levels of total debt and capitalized debt issuance cost.
Loss on investments and other income totaled $2.5 million and $10.9 million for
the year ended December 31, 2012 and 2010, respectively. Gain on investments and
other income was $60.0 million for the year ended December 31, 2011. The
variance in 2012 compared to 2011 and the variance in 2011 compared to 2010 are
primarily due to the $24.9 million pre-tax gain on the sale of our remaining
investment in DealerTrack Holdings, Inc. in January 2011 and the $58.9 million
pre-tax gain from our acquisition of the remaining interest in RP Data Limited
("RP Data") in May 2011. The variance in 2011 compared to 2010 was partially
offset by non-cash impairment charges in our investments in affiliates, net, due
to other than temporary loss in value and continued changes in regulatory
environment.
Net income attributable to CoreLogic increased from a net loss by $186.9
million, or 250.5%, for the year ended December 31, 2012 compared to 2011,
primarily due to higher net income from continuing operations of $69.4 million,
lower losses from discontinued operations of $112.1 million due to the exit of
various discontinued operations during 2012, partially offset by higher loss
from sale of discontinued operations of $3.8 million and lower non-controlling
interests of $1.6 million. Net loss increased $18.3 million, or 32.5%, for the
year ended December 31, 2011 compared to 2010, primarily due to higher losses
from discontinued operations of $43.6 million, lower net income from continuing
operations of $30.4 million, partially offset by lower non-controlling interests
of $36.7 million and lower loss from sale of discontinued operations of $19.0
million. For the year ended December 31, 2011, losses from discontinued
operations included impairment charges of $165.4 million, of which $137.7
million was for goodwill, $17.1 million was for intangibles, and a non-cash
impairment charge of $10.6 million for internally-developed software. In
addition, we incurred bad debt expense of $8.9 million for accounts receivable
we deemed to be uncollectible. Finally, we incurred $1.8 million in expense to
write off various other assets and to accrue for expenses related to the closure
of businesses. The decrease in net income attributed to noncontrolling interests
was largely due to our purchase of the remaining redeemable noncontrolling
interests of CoreLogic Information Solutions Holdings, Inc. during the first
quarter of 2011.
For additional information related to our results of operations for each of our
reportable segments please see the discussions under "Data and Analytics,"
"Mortgage Origination Services" and ""Asset Management and Processing Solutions"
below.
Our historical consolidated financial statements have been recast to account for
our marketing services business and our consumer services, transportation
services, and appraisal management company businesses, FAFC and our employer and
litigation services business, each as discontinued operations for all periods
presented. Accordingly, we have reflected the results of operations of these
businesses as discontinued operations in the consolidated statements of
operations and the consolidated statements of cash flows.
Unless otherwise indicated, the Management's Discussion and Analysis of
Financial Condition and Results of Operations in this Annual Report on Form 10-K
relate solely to the discussion of our continuing operations.
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Data and Analytics
2012 vs. 2011 2011 vs. 2010
(in thousands,
except
percentages) 2012 2011 2010 $ Change % Change $ Change % Change
Operating revenue $ 616,110 $ 548,146 $ 463,513 $ 67,964 12.4 % $ 84,633 18.3 %
Cost of services
(exclusive of
depreciation and
amortization
below) 287,910 242,474 202,520 45,436 18.7 % 39,954 19.7 %
Selling, general
and administrative
expenses 146,786 163,005 124,011 (16,219 ) -10.0 % 38,994 31.4 %
Depreciation and
amortization 72,391 67,230 48,722 5,161 7.7 % 18,508 38.0 %
Total operating
expenses 507,087 472,709 375,253 34,378 7.3 % 97,456 26.0 %
Operating income 109,023 75,437 88,260 33,586 44.5 % (12,823 ) -14.5 %
Total interest
expense, net (1,553 ) (365 ) (293 ) (1,188 ) 325.5 % (72 ) 24.6 %
Gain/(loss) on
investments and
other, net 2,488 (821 ) 280 3,309 -403.0 % (1,101 ) -393.2 %
Income from
continuing
operations before
income taxes 109,958 74,251 88,247 35,707 48.1 % (13,996 ) -15.9 %
Income from
continuing
operations before
equity in earnings
of affiliates 109,958 74,251 88,247 35,707 48.1 % (13,996 ) -15.9 %
Equity in earnings
of affiliates 2,197 1,512 4,606 685 45.3 % (3,094 ) -67.2 %
Income from
continuing
operations $ 112,155 $ 75,763 $ 92,853 $ 36,392 48.0 % $ (17,090 ) -18.4 %
Operating Revenues
Data and analytics segment operating revenues were $616.1 million, $548.1
million and $463.5 million for the years ended December 31, 2012, 2011 and 2010,
respectively, an increase of $68.0 million, or 12.4%, in 2012 compared to 2011;
and an increase of $84.6 million, or 18.3%, in 2011 compared to 2010.
Acquisition activity accounted for $34.2 million and $47.9 million of the
increase in 2012 and 2011, respectively. For the year ended December 31, 2012,
excluding acquisition activity, the increase of $33.8 million was due to higher
document retrieval services revenues of $17.9 million, growth in analytics
revenues of $15.4 million, higher data licensing revenues of $6.1 million,
higher Multiple Listing Services solutions revenues of $2.0 million, partially
offset by decreased information report revenues of $1.1 million, and lower other
revenues of $6.5 million. Information report revenues for 2012 were negatively
impacted by challenging market conditions in our tenancy services business and
regulatory conditions affecting certain customers of our under-banked credit
services business. For the year ended December 31, 2011, excluding acquisition
activity, the increase of $36.8 million was due to growth in advisory revenues
including project-based revenues of $16.2 million and document retrieval
services revenues of $14.7 million. In addition, we experienced higher data
licensing revenues of $7.7 million, higher geospatial solutions services
revenues of $4.0 million and higher other revenues of $1.3 million; these were
partially offset by the decline in information reports revenues of $4.5 million
and service revenues of $2.6 million.
Cost of Services
Data and analytics segment cost of services were $287.9 million, $242.5 million
and $202.5 million for the years ended December 31, 2012, 2011 and 2010,
respectively, an increase of $45.4 million, or 18.7%, for 2012 compared to 2011
and an increase of $40.0 million, or 19.7%, for 2011 compared to 2010.
Acquisition activity accounted for $11.3 million and $15.3 million of the
increase in 2012 and 2011, respectively. For the year ended December 31, 2012,
excluding acquisition activity, the increase of $34.1 million was due to higher
revenues and a shift in product mix primarily related to higher document
retrieval services. For the year ended December 31, 2011, excluding acquisition
activity, the increase of $24.6 million was due to product mix shift relating to
the increase in project-based revenues and document retrieval services.
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Selling, General and Administrative Expense
Data and analytics segment selling, general and administrative expenses were
$146.8 million, $163.0 million and $124.0 million for the years ended
December 31, 2012, 2011 and 2010, respectively, a decrease of $16.2 million, or
10.0%, in 2012 compared to 2011 and an increase of $39.0 million, or 31.4%, in
2011 compared to 2010. Acquisition activity accounted for $13.1 million and
$18.4 million of the increase in 2012 and 2011, respectively. For the year ended
December 31, 2012, excluding acquisition activity, the decrease of $29.4 million
was due to lower corporate shared service costs of $18.7 million in connection
with our cost-reduction initiatives, lower legal expense due to proceeds from
the settlement of litigation to enforce patent and other intellectual property
rights of $7.0 million, lower external services of $3.4 million, lower other
expense of $3.9 million, lower marketing expense of $1.3 million, partially
offset by higher compensation expenses of $2.5 million and higher licensing
software expense of $2.4 million. We allocate expenses, from corporate, to our
business segments for various shared service costs such as human resources,
legal, accounting and finance, and technology infrastructure cost. For the year
ended December 31, 2011, excluding acquisition activity, selling, general and
administrative expense increased $20.6 million due to higher corporate shared
service costs of $32.3 million, partially offset by lower professional fees of
$8.6 million, lower compensation expenses of $2.3 million and lower other
expense of $0.8 million.
Depreciation and Amortization
Data and analytics segment depreciation and amortization expense were $72.4
million, $67.2 million and $48.7 million for the years ended December 31, 2012,
2011 and 2010, respectively, an increase of $5.2 million or 7.7%, in 2012
compared to 2011, and an increase of $18.5 million, or 38.0%, in 2011 compared
to 2010. Acquisition activity accounted for $9.2 million and $13.7 million of
the increase in 2012 and 2011, respectively. For the years ended December 31,
2012 and 2011, excluding acquisition activity, the decrease of $4.1 million and
the increase of $4.8 million, respectively, were primarily due to write-offs of
certain non-performing assets in 2011.
Gain/(Loss) on Investments and Other, Net
Data and analytics segment gain on investments and other, net were $2.5 million
and $0.3 million for the years ended December 31, 2012 and 2010, respectively,
and a loss of $0.8 million for the year ended 2011; a variance of $3.3 million,
or 403.0%, in 2012 compared to 2011, and a variance of $1.1 million, or 393.2%,
in 2011 compared to 2010. Acquisition activity accounted for $1.2 million and
$0.1 million of the variance in 2012 and 2011, respectively. For the year ended
December 31, 2012, excluding acquisition activity, the increase of $2.1 million
was due to the gain on sale of an investment in an affiliate. For the year ended
December 31, 2011, excluding acquisition activity, the decrease of $1.2 million,
was primarily related to a loss on sale of affiliate of $0.8 million during the
third quarter of 2011.
Equity in Earnings of Affiliates
Data and analytics segment equity in earnings of affiliates were $2.2 million,
$1.5 million and $4.6 million for the years ended December 31, 2012, 2011 and
2010, respectively, an increase of $0.7 million, or 45.3%, in 2012 compared to
2011, and a decrease of $3.1 million, or 67.2%, in 2011 compared to 2010.
Acquisition activity accounted for $0.9 million and $0.3 million of the increase
in 2012 and 2011, respectively. For the year ended December 31, 2011, excluding
acquisition activity, the decrease of $3.4 million was due to lower volumes in
minority investments related to market conditions and the acquisition of the
remaining controlling interest in RP Data in May of 2011.
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Mortgage Origination Services
2012 vs. 2011 2011 vs. 2010
(in thousands,
except
percentages) 2012 2011 2010 $ Change % Change $ Change % Change
Operating revenue $ 635,615 $ 482,076 $ 466,117 $ 153,539 31.8 % $ 15,959 3.4 %
Cost of services
(exclusive of
depreciation and
amortization
below) 335,769 284,914 259,152 50,855 17.8 % 25,762 9.9 %
Selling, general
and administrative
expenses 102,338 102,810 106,346 (472 ) -0.5 % (3,536 ) -3.3 %
Depreciation and
amortization 26,013 22,510 17,844 3,503 15.6 % 4,666 26.1 %
Total operating
expenses 464,120 410,234 383,342 53,886 13.1 % 26,892 7.0 %
Operating income 171,495 71,842 82,775 99,653 138.7 % (10,933 ) -13.2 %
Total interest
(expense)/income,
net (591 ) 2,895 1,483 (3,486 ) -120.4 % 1,412 95.2 %
Gain/(loss) on
investments and
other, net 263 (1,519 ) (1,183 ) 1,782 -117.3 % (336 ) 28.4 %
Income from
continuing
operations before
income taxes 171,167 73,218 83,075 97,949 133.8 % (9,857 ) -11.9 %
Income from
continuing
operations before
equity in earnings
of affiliates 171,167 73,218 83,075 97,949 133.8 % (9,857 ) -11.9 %
Equity in earnings
of affiliates 55,571 47,673 64,588 7,898 16.6 % (16,915 ) -26.2 %
Income from
continuing
operations $ 226,738 $ 120,891 $ 147,663 $ 105,847 87.6 % $ (26,772 ) -18.1 %
Operating Revenues
Mortgage origination services segment operating revenues were $635.6 million,
$482.1 million and $466.1 million for the years ended December 31, 2012, 2011
and 2010, respectively, an increase of $153.5 million, or 31.8%, in 2012
compared to 2011; and an increase of $16.0 million, or 3.4%, in 2011 compared to
2010. Acquisition activity accounted for $11.8 million and $30.0 million of the
increase in 2012 and 2011, respectively. For the year ended December 31, 2012,
excluding acquisition activity, the increase of $141.8 million was due to higher
mortgage origination volumes from higher refinancing activity, which increased
credit services revenues by $64.6 million, tax services revenues by $56.2
million, flood certification revenues by $18.9 million and other revenues by
$2.1 million. For the year ended December 31, 2011, excluding acquisition
activity, the decrease of $14.1 million was primarily due to lower tax services
revenues which were impacted by lower mortgage origination activity and lower
deferred revenue recognition as we experienced a smaller life-of-loan servicing
pool.
Cost of Services
Mortgage origination services segment cost of services were $335.8 million,
$284.9 million and $259.2 million for the years ended December 31, 2012, 2011
and 2010, respectively, an increase of $50.9 million, or 17.8%, in 2012 compared
to 2011; and an increase of $25.8 million, or 9.9%, in 2011 compared to 2010.
Acquisition activity accounted for $8.9 million and $21.5 million of the
increase in 2012 and 2011, respectively. For the year ended December 31, 2012,
excluding acquisition activity, the increase of $42.0 million was due to higher
origination volumes which resulted in higher credit bureau-related expense of
$38.9 million primarily for our credit services business and higher other costs
of services of $3.1 million. For the year ended December 31, 2011, excluding
acquisition activity, the increase of $4.3 million was due to higher credit
bureau-related expenses of $4.8 million related to our credit services business,
partially offset by declines in other costs of services of $0.5 million.
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Selling, General and Administrative Expenses
Mortgage origination services segment selling, general and administrative
expenses were $102.3 million, $102.8 million and $106.3 million for the years
ended December 31, 2012, 2011 and 2010, respectively, a decrease of $0.5
million, or 0.5%, in 2012 compared to 2011; and a decrease of $3.5 million, or
3.3%, in 2011 compared to 2010. Acquisition activity accounted for $6.3 million
and $9.0 million in 2012 and 2011, respectively. For the year ended December 31,
2012, excluding acquisition activity, the decrease of $6.7 million was due to
lower corporate shared service costs of $20.1 million in connection with our
cost-reduction initiatives, lower facilities costs of $5.8 million, partially
offset by higher external services costs of $10.4 million, higher compensation
expenses of $6.8 million and higher other expenses of $2.0 million. For the year
ended December 31, 2011, excluding acquisition activity, the decrease of $12.5
million was primarily attributable to lower compensation expenses of $10.0
million from decreased headcount, lower management fees for investment in
affiliates of $5.4 million, lower other expenses of $4.7 million, lower
facilities costs of $2.3 million, lower external services of $1.9 million,
partially offset by higher corporate shared service costs of $9.1 million and
higher professional fees of $2.7 million.
Depreciation and Amortization
Mortgage origination services segment depreciation and amortization expense were
$26.0 million, $22.5 million and $17.8 million for the years ended December 31,
2012, 2011 and 2010, respectively, an increase of $3.5 million, or 15.6%, in
2012 compared to 2011; and an increase of $4.7 million, or 26.1%, in 2011
compared to 2010. Acquisition activity accounted for $1.2 million and $4.8
million of the increase in 2012 and 2011, respectively. The remaining variances
relative to the prior periods are not significant.
Gain/(Loss) on Investments and Other, Net
Mortgage origination services segment gain on investments and other was $0.3
million for the year ended December 31, 2012 and losses of $1.5 million and $1.2
million for the years ended December 31, 2011 and 2010, respectively, a variance
of $1.8 million, or 117.3%, in 2012 compared to 2011; and a variance of $0.3
million, or 28.4%, in 2011 compared to 2010. For the year ended December 31,
2012, the gain was primarily comprised of excess distribution from the closure
of an investment in affiliate. For the year ended December 31, 2011, the
increase was primarily related to the $24.9 million pre-tax gain on the sale of
our remaining investment in DealerTrack Holdings, Inc., which was sold during
the first quarter of 2011, partially offset by $29.6 million in non-cash
impairments due to other-than-temporary loss in value from the absence of an
ability to recover the carrying amount of the investment from the
under-performance of several investments in affiliates and continued changes in
the regulatory environment.
Equity in Earnings of Affiliates
Mortgage origination services segment equity in earnings of affiliates were
$55.6 million, $47.7 million and $64.6 million for the years ended December 31,
2012, 2011 and 2010, respectively, an increase of $7.9 million, or 16.6%, in
2012 compared to 2011; and a decrease of $16.9 million, or 26.2%, in 2011
compared to 2010. For the year ended December 31, 2012, the increase was
primarily due to higher mortgage loan refinance activity in 2012. For the year
ended December 31, 2011, the decrease was due to lower loan origination activity
and the closure by a major joint venture customer of an origination division
that focused on Federal Housing Administration loans.
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Asset Management and Processing Solutions
2012 vs. 2011 2011 vs. 2010
(in thousands,
except
percentages) 2012 2011 2010 $ Change % Change $ Change % Change
Operating revenue $ 335,224 $ 329,273 $ 368,536 $ 5,951 1.8 % $ (39,263 ) -10.7 %
Cost of services
(exclusive of
depreciation and
amortization
below) 230,417 235,596 239,966 (5,179 ) -2.2 % (4,370 ) -1.8 %
Selling, general
and administrative
expenses 44,777 41,107 45,919 3,670 8.9 % (4,812 ) -10.5 %
Depreciation and
amortization 11,930 7,484 5,446 4,446 59.4 % 2,038 37.4 %
Total operating
expenses 287,124 284,187 291,331 2,937 1.0 % (7,144 ) -2.5 %
Operating income 48,100 45,086 77,205 3,014 6.7 % (32,119 ) -41.6 %
Total interest
income/(expense),
net 284 214 (3 ) 70 32.7 % 217 -7,233.3 %
(Loss)/gain on
investment and
other, net - (745 ) 3,353 745 -100.0 % (4,098 ) -122.2 %
Income from
continuing
operations before
income taxes 48,384 44,555 80,555 3,829 8.6 % (36,000 ) -44.7 %
Income from
continuing
operations before
equity in earnings
of affiliates 48,384 44,555 80,555 3,829 8.6 % (36,000 ) -44.7 %
Equity in
earnings/(losses)
of affiliates - (245 ) 755 245 -100.0 % (1,000 ) -132.5 %
Income from
continuing
operations $ 48,384 $ 44,310 $ 81,310 $ 4,074 9.2 % $ (37,000 ) -45.5 %
Operating Revenues
Asset management and processing solutions segment operating revenues were $335.2
million, $329.3 million and $368.5 million for the years ended December 31,
2012, 2011 and 2010, respectively, an increase of $6.0 million, or 1.8%, in 2012
compared to 2011; and a decrease of $39.3 million, or 10.7%, in 2011 compared to
2010. Acquisition activity accounted for $8.3 million of the variance in 2011.
For the year ended December 31, 2012, the increase was due to higher loss
mitigation services revenues of $22.3 million from stronger volumes and pricing
and higher field services revenues of $7.2 million, partially offset by lower
volumes in real estate owned asset management and other default revenues of
$12.6 million, lower claims management revenue of $3.4 million, lower other
revenues of $3.1 million, lower technology revenues of $2.9 million and lower
broker price opinion revenues of $1.5 million. For the year ended December 31,
2011, excluding acquisition activity, the decrease of $47.6 million was
primarily driven by a $27.5 million decline in broker price opinion revenues as
two major customers moved to in-source their business and as changing market
conditions reduced the demand for our services. Further, the continued slow-down
in the processing of delinquent mortgages by servicers and the previously
disclosed loss of a technology solutions customer negatively impacted our
default services revenues by $15.1 million and other businesses by $16.5 million
in 2011. Revenues for this segment were also impacted negatively by the exit of
our second lien outsourcing service line in the first quarter of 2011, which
contributed approximately $8.1 million of the decline in revenue in 2011
compared to 2010. These decreases were partially offset by an improvement in
revenues of $19.6 million from greater volume, new customer signings and pricing
improvements in our field services business.
Cost of Services
Asset management and processing solutions segment cost of services were $230.4
million, $235.6 million and $240.0 million for the years ended December 31,
2012, 2011 and 2010, respectively, a decrease of $5.2 million, or 2.2%, in 2012
compared to 2011; and a decrease of $4.4 million, or 1.8%, in 2011 compared to
2010. Acquisition activity accounted for $3.1 million of the variance for the
year ended December 31, 2011. For the year ended December 31, 2012, the decrease
was primarily due to a shift in product mix with higher margin services provided
during the year and the impact of lower headcount
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and higher efficiency in connection with our cost-reduction initiatives. For the
year ended December 31, 2011, excluding acquisition activity, the decrease of
$7.5 million was due to significantly decreased volumes of services.
Selling, General and Administrative Expenses
Asset management and processing solutions segment selling, general and
administrative expenses were $44.8 million, $41.1 million and $45.9 million for
the years ended December 31, 2012, 2011 and 2010, respectively, an increase of
$3.7 million, or 8.9%, in 2012 compared to 2011; and a decrease of $4.8 million,
or 10.5%, in 2011 compared to 2010. Acquisition activity accounted for $1.2
million of the variance for the year ended December 31, 2011. For the year ended
December 31, 2012, the increase was primarily due to higher corporate shared
service costs of $7.2 million, higher other expenses of $0.7 million, partially
offset by lower compensation expenses of $2.5 million and lower marketing
expenses of $1.7 million. For the year ended December 31, 2011, excluding
acquisition activity, the decrease of $5.9 million was due to lower professional
fees of $2.7 million, lower compensation expenses of $2.4 million, lower
corporate shared service costs of $1.8 million, partially offset by higher other
expenses of $1.0 million.
Depreciation and Amortization
Asset management and processing solutions segment depreciation and amortization
expense were $11.9 million, $7.5 million and $5.4 million for the years ended
December 31, 2012, 2011 and 2010, respectively, an increase of $4.4 million, or
59.4%, in 2012 compared to 2011; and an increase of $2.0 million, or 37.4%, in
2011 compared to 2010. For the year ended December 31, 2012, the increase was
primarily due to write-offs of certain non-performing assets. Acquisition
activity accounted for $1.1 million of the increase for the year ended
December 31, 2011.
(Loss)/Gain on Investments and Other, Net
Asset management and processing solutions segment loss on investments and other
was $0.7 million and a gain of $3.4 million for the years ended December 31,
2011 and 2010, respectively. No gain or loss was recorded for the year ended
December 31, 2012. The 2011 balance reflects the loss incurred on the exit of
our second lien outsourcing service line. The 2010 balance primarily represents
a gain associated with the acquisition of a controlling interest in an
investment that was previously accounted for as an investment in an affiliate.
Equity in Earnings/(Losses) of Affiliates
Asset management and processing solutions segment equity in losses of affiliates
was $0.2 million and equity in earnings of affiliates was $0.8 million for the
years ended December 31, 2011 and 2010, respectively. No equity in
earnings/(losses) of affiliates was recorded for the year ended December 31,
2012. Equity in earnings of affiliates is not a significant balance for the
asset management and processing solutions segment.
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Corporate
2012 vs. 2011 2011 vs. 2010
(in thousands,
except
percentages) 2012 2011 2010 $ Change % Change $ Change % Change
Operating revenue $ 640 $ 41,789 $ 59,125 $ (41,149 ) -98.5 % $ (17,336 ) -29.3 %
Cost of services
(exclusive of
depreciation and
amortization
below) - 33,934 44,587 (33,934 ) -100.0 % (10,653 ) -23.9 %
Selling, general
and administrative
expenses 83,618 93,213 126,226 (9,595 ) -10.3 % (33,013 ) -26.2 %
Depreciation and
amortization 23,515 19,163 23,676 4,352 22.7 % (4,513 ) -19.1 %
Total operating
expenses 107,133 146,310 194,489 (39,177 ) -26.8 % (48,179 ) -24.8 %
Operating loss (106,493 ) (104,521 ) (135,364 ) (1,972 ) 1.9 % 30,843 -22.8 %
Total interest
expense, net (50,608 ) (61,034 ) (31,412 ) 10,426 -17.1 % (29,622 ) 94.3 %
(Loss)/gain on
investment and
other, net (5,267 ) 63,090 (13,335 ) (68,357 ) -108.3 % 76,425 -573.1 %
Loss from
continuing
operations before
income taxes (162,368 ) (102,465 ) (180,111 ) (59,903 ) 58.5 % 77,646 -43.1 %
Provision for
income taxes 80,396 67,175 30,323 13,221 19.7 % 36,852 121.5 %
Loss from
continuing
operations before
equity in earnings
of affiliates (242,764 ) (169,640 ) (210,434 ) (73,124 ) 43.1 % 40,794 -19.4 %
Equity in losses
of affiliates (21,785 ) (18,670 ) (28,308 ) (3,115 ) 16.7 % 9,638 -34.0 %
Net loss from
continuing
operations $ (264,549 ) $ (188,310 ) $ (238,742 ) $ (76,239 ) 40.5 % $ 50,432 -21.1 %
Operating Revenues
Corporate operating revenues were $0.6 million, $41.8 million and $59.1 million
for the years ended December 31, 2012, 2011 and 2010, respectively. For the
years ended December 31, 2012 and 2011, the decrease in corporate operating
revenues was related to the outsourcing of certain IT and business process
functions in connection with the sale of CoreLogic Global Services Private
Limited ("CoreLogic India"), our India-based back-office operations, to
Cognizant in August 2011. We also had an allocation of $3.4 million in purchase
accounting reserves to revenue in the first quarter of 2010.
Cost of Services
Corporate cost of services were $33.9 million and $44.6 million for the years
ended December 31, 2011 and 2010, respectively. There was no cost of services
record in corporate for the year ended December 31, 2012. For the years ended
December 31, 2012 and 2011, the decrease in corporate cost of services is
related to the outsourcing of certain IT and business process functions in
connection with the sale of CoreLogic India in August 2011.
Selling, General and Administrative Expenses
Corporate selling, general and administrative expenses were $83.6 million, $93.2
million and $126.2 million for the years ended December 31, 2012, 2011 and 2010,
respectively, a decrease of $9.6 million, or 10.3%, in December 31, 2012
compared to 2011; and a decrease of $33.0 million, or 26.2%, in 2011 compared to
2010. For the year ended December 31, 2012, the decrease was primarily due to
our cost-reduction initiatives which resulted in reduced salaries and benefits
of $14.9 million related to corporate workforce reductions and the outsourcing
of our technology infrastructure to Dell as part of our TTI in July 2012, lower
facility costs of $18.0 million related to our prior year exit from certain
leased buildings in Westlake, Texas and decreased professional fees of $23.4
million. During 2011, we incurred significant professional fees associated with
the outsourcing of our business process functions and other corporate
initiatives. Offsetting these decreases during 2012 were
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lower corporate costs of 23.8 million being allocated to our operating segments,
increased services fees of $11.1 million, an early equipment lease termination
fee of $3.1 million related to the TTI, a gain of $8.1 million on the sale of a
building in Poway, California in 2011 and other expense increases of $0.6
million. For the year ended December 31, 2011, the decrease was due to reduced
compensation-related expenses of $10.1 million, a gain of $8.1 million on the
sale of a building in Poway, California and higher corporate cost allocated to
our operating segments of $40.7 million. Offsetting these decreases during 2011
were higher salaries of $11.1 million in connection with the transfer of segment
level employees effective January 1, 2011 to our new corporate shared service
function, a $14.2 million charge related to our exit from certain leased
buildings in Westlake, Texas and other expense increases of $0.6 million.
Depreciation and Amortization
Corporate group depreciation and amortization expense were $23.5 million, $19.2
million and $23.7 million for the years ended December 31, 2012, 2011 and 2010,
respectively, an increase of $4.4 million, or 22.7%, in 2012 compared to 2011;
and a decrease of $4.5 million, or 19.1%, in 2011 compared to 2010. The 2012
increase related to accelerated depreciation of technology infrastructure assets
as part of our TTI. The 2011 decrease was primarily due to the amortization in
the prior year of certain corporate deferred assets with useful lives that have
since expired.
Total Interest Expense, net
Net interest expense was $50.6 million, $61.0 million and $31.4 million for the
years ended December 31, 2012, 2011 and 2010, respectively, a decrease of $10.4
million, or 17.1%, in 2012 compared to 2011; and an increase of $29.6 million,
or 94.3%, in 2011 compared to 2010. For the year ended December 31, 2012, the
decrease was due to the expensing of deferred financing costs of $10.2 million
in the prior year in connection with the refinancing of our new credit facility.
For the year ended December 31, 2011, the increase was primarily due to higher
average outstanding debt balances as a result of new credit facilities and the
issuance of $400 million of our senior unsecured notes in May 2011. In addition,
deferred financing costs in the amount of $10.2 million associated with our
prior credit facility were expensed in the second quarter of 2011.
(Loss)/Gain on Investments and Other, Net
Loss on investments and other, net was $5.3 million and $13.3 million for the
years ended December 31, 2012 and 2010, respectively, and a gain on investment
and other, net of $63.1 million for the year ended December 31, 2011, a variance
of $68.4 million, or 108.3%, in 2012 compared to 2011; and a variance of $76.4
million, or 573.1%, in 2011 compared to 2010. For the year ended December 31,
2012, the variance was primarily due to an impairment loss of $7.5 million on
land held for investment and a gain in the prior year of $58.9 million upon
step-up of our initial investment in RP Data to fair value following our
acquisition of the remaining outstanding shares in May 2011. For the year ended
December 31, 2011, the variance is primarily due to a gain of $58.9 million upon
step-up of our initial investment in RP Data to fair value following our
acquisition of the remaining outstanding shares in May 2011 and an impairment
loss of $14.5 million on an investment in 2010.
Equity in Losses of Affiliates
Equity in losses of affiliates were $21.8 million, $18.7 million and $28.3
million for the years ended December 31, 2012, 2011 and 2010, respectively, an
increase of $3.1 million, or 16.7%, in 2012 compared to 2011; and a decrease of
$9.6 million, or 34.0%, in 2011 compared to 2010. Corporate recognizes the
income tax expense on the equity in earnings from our investment in affiliates.
The 2012 and 2011 variances are directly correlated to income taxes on the
equity in earnings of our affiliates held as investment in our operating
segments.
Provision for Income Taxes
Provision for income taxes from continuing operations was $80.4 million, $67.2
million and $30.3 million for the years ended December 31, 2012, 2011 and 2010,
respectively. Our effective income tax rate was 47.9% for 2012, 75.0% for 2011
and 71.3% for 2010. In addition to our normal recurring rate impacting items,
such as our state and foreign income taxes, uncertain tax positions, and return
to provision items, we have non recurring rate impacting items. During the year
ended December, 31, 2012, we recorded out of period adjustments primarily for
periods prior to 2010. We also increased our valuation allowance on federal and
state capital loss carryovers, state net operating loss carryovers, and foreign
deferred tax assets and net operating loss carryovers principally as a result of
valuation allowances provided on a foreign subsidiary. For the year ended
December 31, 2011, we had a reversal of deferred taxes related to our interest
in Dorado when it was held as an equity method investment and excess tax gain on
the sale of CoreLogic India. For the year ended December 31, 2010, we had
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non-deductible transaction costs incurred in connection with the Separation and
the taxes associated with the restructuring of our India subsidiary.
Liquidity and Capital Resources
Cash and cash equivalents totaled $148.9 million and $259.3 million as of
December 31, 2012 and 2011, respectively; a decrease of $110.4 million compared
to 2011 and a decrease of $166.9 million compared to 2010.
We hold our cash balances inside and outside of the U.S. Our cash balances held
outside of the U.S. are primarily related to our international operations. At
December 31, 2012, we held $34.1 million in foreign jurisdictions. 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 $22.1 million and $22.0 million at December 31, 2012 and
2011, respectively, represents cash pledged for various letters of credit
secured by the Company.
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 $363.1 million,
$160.9 million and $206.2 million for the years ended December 31, 2012, 2011
and 2010, respectively. Cash provided by discontinued operating activities was
approximately $0.8 million and $42.0 million for the years ended December 31,
2012 and 2010, respectively, and cash used in by discontinued operating
activities was $10.7 million for the year ended December 31, 2011. The increase
in cash provided by operating activities in 2012 compared to 2011 was primarily
due to higher profitability levels in the current period, higher dividends
received from investments in affiliates and timing of payments for accounts
payable and accrued expenses. The decrease in cash provided by continuing
operating activities in 2011 compared to 2010 was primarily due to lower
profitability levels and declining dividends from our investments in affiliates
experienced in 2011.
Investing Activities. Total cash used in investing activities consists primarily
of capital expenditures, acquisitions and dispositions. Cash used in investing
activities was approximately $146.9 million, and $188.0 million for the years
ended December 31, 2012 and 2011, respectively. Cash provided by investing
activities was $61.2 million for the year ended 2010. Cash used in discontinued
investing activities was approximately $4.1 million, $4.5 million, and $82.7
million for the years ended December 31, 2012, 2011 and 2010, respectively.
Cash used in investing activities during 2012 was primarily related to
investments in property and equipment and capitalized data of $52.6 million and
$31.9 million, respectively, and the acquisition of CDS for $78.8 million in
December, 2012; partially offset by net proceeds of $10.0 million from the sale
of subsidiaries, proceeds of $8.0 million from the sale of our investment in
Lone Wolf Real Estate Technologies and proceeds from the sale of property and
equipment of $1.9 million.
Cash used in investing activities during 2011 was primarily related to greater
acquisition activity in 2011 including the acquisition of Dorado Network Systems
Corporation for $31.6 million in cash in March 2011, the investment in STARS for
$20.0 million in cash in March 2011, $157.2 million used to acquire the
remaining interest in RP Data in May 2011 and the acquisition of Tarasoft
Corporation in September 2011 for $30.3 million. The use of cash was partially
offset by proceeds from the sale of our investments of $74.6 million, primarily
DealerTrack Holdings Inc., our sale of CoreLogic India for net proceeds of $28.1
million after working capital adjustments, and the sale of certain land and
buildings located in Poway, California for $25.0 million. In addition, we
invested cash for property and equipment and capitalized data of $45.2 million
and $27.0 million, respectively. The 2011 increase in cash used in investing
activities compared to 2010 was primarily due to proceeds from sale of
discontinued operations of $265.0 million in 2010, which did not recur in 2011
and cash paid for 2011 acquisitions.
For the year ending December 31, 2013, the Company anticipates investing between
$80 million and $90 million in capital expenditures for property and equipment,
and capitalized data. Capital expenditures are expected to be funded by existing
cash balances, cash generated from operations or additional borrowings.
Financing Activities. Total cash used in financing activities was approximately
$332.4 million, $149.9 million and $311.9 million for the years ended
December 31, 2012, 2011 and 2010, respectively. Cash used in discontinued
financing activities was $0.1 million for the year ended December 31, 2012 and
cash provided by discontinued financing activities was approximately $0.1
million, and $29.1 million for the years ended December 31, 2011 and 2010,
respectively.
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Net cash used in financing activities during 2012 was primarily comprised of
repayment of long-term debt of $166.7 million and share repurchases of $226.6
million, partially offset by proceeds from issuance of stock related to stock
options and employee benefit plans of $13.5 million and proceeds from issuance
of long-term debt of $50.0 million to replace our A$50.0 million borrowed under
the multicurrency revolving sub-facility.
For the year ended December 31, 2011, we repurchased $176.5 million of our
common stock and purchased the remaining noncontrolling interest in CoreLogic
Information Solutions Holdings, Inc. for $72.0 million in February 2011. In May
2011, we issued $400.0 million aggregate principal amount of senior notes in a
private placement and entered into a credit agreement which provides for a
$350.0 million five-year term loan facility and a $550.0 million five-year
revolving credit facility (which 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 increase the term loan
facility and revolving facility commitments provided that the total credit
exposure thereunder does not exceed $1.4 billion in the aggregate. Proceeds from
the aforementioned senior notes and credit agreement were partially used to
repay interest-bearing acquisition notes, and to repay the previous revolving
line of credit and term loan facility. Proceeds from these financing activities
for the year ended December 31, 2011 were $858.2 million and repayments were
$733.4 million for the year ended December 31, 2011. Net cash used in continuing
financing activities was lower primarily due to lower purchases of redeemable
noncontrolling interest of $313.8 million, partially offset by higher levels of
share repurchases relative to 2010.
Financing and Financing Capacity
We had total debt outstanding of $792.4 million and $908.3 million as of
December 31, 2012 and 2011, respectively. Our significant debt instruments are
described below.
Senior Notes
On May 20, 2011, we issued $400.0 million aggregate principal amount of 7.25%
senior notes due 2021 (the "Notes"). The Notes are guaranteed on a senior
unsecured basis by each of our existing and future direct and indirect
subsidiaries that guarantee our Credit Agreement. The Notes bear interest at
7.25% per annum and mature on June 1, 2021. Interest is payable semi-annually in
arrears on June 1 and December 1 of each year, beginning on December 1, 2011.
The Notes are our senior unsecured obligations and: (i) rank equally with any of
our existing and future senior unsecured indebtedness; (ii) rank senior to all
our existing and future subordinated indebtedness; (iii) are subordinated to any
of our secured indebtedness (including indebtedness under our credit facility)
to the extent of the value of the assets securing such indebtedness; and (iv)
are structurally subordinated to all of the existing and future liabilities
(including trade payables) of each of our subsidiaries that do not guarantee the
Notes. The guarantees will: (i) rank equally with any existing and future senior
unsecured indebtedness of the guarantors; (ii) rank senior to all existing and
future subordinated indebtedness of the guarantors; and (iii) are subordinated
in right of payment to any secured indebtedness of the guarantors (including the
guarantee of our credit facility) to the extent of the value of the assets
securing such indebtedness.
The Notes are redeemable by us, in whole or in part on or after June 1, 2016 at
a price up to 103.63% of the aggregate principal amount of the Notes, plus
accrued and unpaid interest, if any, to the applicable redemption date, subject
to other limitations. We may also redeem up to 35.00% of the original aggregate
principal amount of the Notes at any time prior to June 1, 2014 with the
proceeds from certain equity offerings at a price equal to 107.25% of the
aggregate principal amount of the Notes, together with accrued and unpaid
interest, if any, to the applicable redemption date, subject to certain other
limitations. We may also redeem some or all of the Notes before June 1, 2016 at
a redemption price equal to 100.00% of the aggregate principal amount of the
Notes, plus a "make-whole premium," plus accrued and unpaid interest, if any, to
the redemption date.
Upon the occurrence of specific kinds of change of control events, holders of
the Notes have the right to cause us to purchase some or all of the Notes at
101.00% of their principal amount, plus accrued and unpaid interest, if any, to
the date of purchase.
The indenture governing the Notes contains restrictive covenants that limit,
among other things, our ability and that of our restricted subsidiaries to incur
additional indebtedness or issue certain preferred equity, pay dividends or make
other distributions or other restricted payments, make certain investments,
create restrictions on distributions from restricted subsidiaries, create liens
on properties and certain assets to secure debt, sell certain assets,
consolidate, merge, sell or otherwise dispose of all or substantially all of its
assets, enter into certain transactions with affiliates and designate our
subsidiaries as unrestricted subsidiaries. The indenture also contains customary
events of default, including upon the failure to make timely payments on the
Notes or other material indebtedness, the failure to satisfy certain covenants
and specified events of
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bankruptcy and insolvency. If we have a significant increase in our outstanding
debt or if our EBITDA decreases significantly, we may be unable to incur
additional amounts of indebtedness, and the holders of the notes may be
unwilling to permit us to amend the restrictive covenants to provide additional
flexibility. In addition, the indenture contains a financial covenant for the
incurrence of additional indebtedness that requires that the interest coverage
ratio be at least 2.00 to 1.00 on a pro forma basis after giving effect to any
new indebtedness. There are carve-outs that permit us to incur certain
indebtedness notwithstanding satisfaction of this ratio, but they are limited.
Based on our EBITDA and interest charges as of December 31, 2012, we would be
able to incur additional indebtedness without breaching the limitation on
indebtedness covenant contained in the indenture
and we are in compliance with all of our covenants under the indenture.
Credit Agreement
On May 23, 2011, the Company, CoreLogic Australia Pty Limited and the guarantors
named therein entered into a senior secured credit facility agreement (the
"Credit Agreement") with Bank of America, N.A. as administrative agent and other
financial institutions. The Credit Agreement provides for a $350.0 million
five-year term loan facility (the "Term Facility") and a $550.0 million
revolving credit facility (the "Revolving Facility"). The Revolving Facility
includes a $100.0 million multicurrency revolving sub-facility and a $50.0
million letter of credit sub-facility. As of December 31, 2011, A$50.0 million,
or $51.0 million, was outstanding under the multicurrency revolving sub-facility
related to our acquisition of RP Data . As of December 31, 2012, we replaced our
A$50.0 million under the multicurrency revolving sub-facility through our
domestic revolving sub-facility. The Credit Agreement also provides for the
ability to increase the Term Facility and Revolving Facility commitments
provided that the total credit exposure under the Credit Agreement does not
exceed $1.4 billion in the aggregate.
The loans under the Credit Agreement bear interest, at our election, at (i) the
Alternate Base Rate (as defined in the Credit Agreement) plus the Applicable
Rate (as defined in the Credit Agreement) or (ii) the London interbank offering
rate for Eurocurrency borrowings, or the LIBO Rate, adjusted for statutory
reserves, or the Adjusted LIBO Rate plus the Applicable Rate. The initial
Applicable Rate for Alternate Base Rate borrowings is 1.00% and for Adjusted
LIBO Rate borrowings is 2.00%. Starting with the full fiscal quarter after the
closing date, the Applicable Rate will vary depending on our leverage ratio. The
minimum Applicable Rate for Alternate Base Rate borrowings will be 0.75% and the
maximum will be 1.75%. The minimum Applicable Rate for Adjusted LIBO Rate
borrowings will be 1.75% and the maximum will be 2.75%. The Credit Agreement
also requires us to pay commitment fees for the unused portion of the Revolving
Facility, which will be a minimum of 0.30% and a maximum of 0.50%, depending on
our leverage ratio.
The Company's and the guarantors' senior secured obligations under the Credit
Agreement are collateralized by a lien on substantially all of our and the
guarantors' personal property assets and mortgages or deeds of trust on our and
the guarantors' real property with a fair market value of $10.0 million or more
(collectively, the "Collateral") and rank senior to any of our and the
guarantors' unsecured indebtedness (including the Notes) to the extent of the
value of the Collateral.
The Credit Agreement provides that loans under the Term Facility shall be repaid
in quarterly installments, commencing on September 30, 2011 and continuing on
each three-month anniversary thereafter until and including March 31, 2016 in an
amount equal to $4.4 million on each repayment date from September 30, 2011
through June 30, 2013, $8.8 million on each repayment date from September 30,
2013 through June 30, 2014 and $13.1 million on each repayment date from
September 30, 2014 through March 31, 2016. For the year ended December 31, 2012,
we paid $61.3 million of outstanding indebtedness under the Term Facility of
which $43.8 million was a prepayment. This prepayment was applied to the most
current portion of the term loan amortization schedule. The outstanding balance
of the term loan will be due on the fifth anniversary of the closing date of the
Credit Agreement. The Term Facility is also subject to prepayment from (i) the
net cash proceeds of certain debt incurred or issued by us and the guarantors
and (ii) the net cash proceeds received by us or the guarantors from certain
asset sales and recovery events, subject to certain reinvestment rights.
The Credit Agreement contains financial maintenance covenants, including a (i)
maximum total leverage ratio not to exceed 4.25 to 1.00 (stepped down to 4.00 to
1.00 starting in the fourth quarter of 2012, with a further step down to 3.50 to
1.00 starting in the fourth quarter of 2013), (ii) a minimum interest coverage
ratio of not less than 3.00 to 1.00, and (iii) a maximum senior secured leverage
ratio not to exceed 3.25 to 1.00 (stepped down to 3.00 to 1.00 in the fourth
quarter of 2012).
The Credit Agreement also contains restrictive covenants that limit, among other
things, our ability and that of our subsidiaries to, incur additional
indebtedness or issue certain preferred equity, pay dividends or make other
distributions or other restricted payments, make certain investments, create
restrictions on distributions from subsidiaries, to enter into sale leaseback
transactions, amend the terms of certain other indebtedness, create liens on
certain assets to secure debt, sell certain assets, consolidate, merge, sell or
otherwise dispose of all or substantially all of our assets and enter into
certain transactions with affiliates. The Credit Agreement also contains
customary events of default, including upon the failure to make timely payments
under the Term Facility and the Revolving Facility or other material
indebtedness, the failure to satisfy certain
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covenants, the occurrence of a change of control and specified events of
bankruptcy and insolvency. If we have a significant increase in our outstanding
debt or if our EBITDA decreases significantly, we may be unable to incur
additional amounts of 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. At December 31, 2012, we had
borrowing capacity under the revolving lines of credit of $500.0 million, and
were in compliance with the financial and restrictive covenants of our Credit
Agreement.
Debt Issuance Costs
In connection with issuing the Notes and entering into the Credit Agreement and
the related extinguishment of our previously outstanding bank debt, we wrote-off
$0.3 million of unamortized debt issuance costs related to our extinguished bank
debt facilities to interest expense in the accompanying consolidated statements
of operations for the year ended December 31, 2012. We amortize debt issuance
costs to interest expense over the term of the Notes and Credit Agreement, as
applicable.
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 the Company's business such as a loss of customers, competitive
pressures or other significant change in business environment.
The Company strives to pursue a balanced approach to capital allocation and will
consider the repurchase of common shares and the retirement of outstanding debt,
and will pursue 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 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.
Contractual Obligations
A summary, by due date, of our total contractual obligations at December 31,
2012, is as follows:
Less than 1 More than 5
(in thousands) Year 1-3 Years 3-5 Years Years Total
Operating leases $ 41,583 $ 53,224 $ 31,577 $ 26,196 $ 152,580
Long-term debt (1) 102 84,676 256,250 452,645 793,673
Interest payments related to
debt (2) 14,342 85,795 69,063 176,503 345,703
Service agreement (3) 62,012 122,087 93,525 - 277,624
Total (4) $ 118,039 $ 345,782 $ 450,415 $ 655,344 $ 1,569,580
(1) Includes an acquisition-related note payable of $15.0 million, which is
non-interest bearing and discounted to $8.8 million.
(2) Estimated interest payments are calculated assuming current interest rates
over minimum maturity periods specified in debt agreements.
(3) Net minimum commitment with Cognizant.
(4) Excludes a net tax liability of $8.5 million related to uncertain tax
positions and deferred compensation of $32.2 million due to uncertainty of
payment period.
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