News Column

SOLERA HOLDINGS, INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 29, 2014

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K.



All percentage amounts and ratios were calculated using the underlying data in thousands. Operating results for fiscal years 2014, 2013 and 2012 are not necessarily indicative of the results that may be expected for any future period. We describe

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the effects on our results that are attributed to the change in foreign currency exchange rates by measuring the incremental difference between translating the current and prior period results at the monthly average rates for the same period from the prior year.



Overview of the Business

Solera is the leading global provider of software and services for the automobile claims processing industry. We are expanding beyond our global-leading position in collision repair and U.S. based mechanical repair presence to bring data driven productivity and decision support solutions to other aspects of vehicle ownership such as vehicle validation, glass repair, driver violation monitoring, vehicle salvage and electronic titling. We are also taking our core competencies of data, software and connectivity from the auto to the home. We help our customers:



estimate the costs to repair damaged vehicles and determine pre-collision

fair market values for damaged vehicles for which the repair costs exceed

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



improve their ability to monitor and manage their businesses through data

reporting and analysis.

We serve over 165,000 customers and are active in 70 countries across six continents with more than 3,600 employees. Our customers include more than 4,000 automobile insurance companies, 60,500 collision repair facilities, 12,500 independent assessors, 44,500 service, maintenance and repair facilities and 43,500 automotive recyclers, auto dealers and others. We derive revenues from many of the world's largest automobile insurance companies, including the ten largest automobile insurance companies in Europe and eight of the ten largest automobile insurance companies in North America. At the core of our software and services are our proprietary databases, which are localized to each geographical market we serve. Our insurance claims processing software and services are typically integrated into our customers' systems, operations and processes, making it costly and time consuming to switch to another provider. This customer integration, along with our products and long-standing customer relationships, has contributed to our very high customer retention rate. Segments We have aggregated our operating segments into two reportable segments: EMEA and Americas. Our EMEA reportable segment encompasses our operations in Europe, the Middle East, Africa, Asia and Australia, while our Americas reportable segment encompasses our operations in North, Central and South America. Our chief operating decision maker is our Chief Executive Officer. We evaluate the performance of our reportable segments based on revenues, income before provision for income taxes and adjusted EBITDA, a non-GAAP financial measure that represents GAAP net income excluding interest expense, provision for income taxes, depreciation and amortization, share-based compensation expense, restructuring charges, asset impairments and other costs associated with exit and disposal activities, acquisition and related costs, litigation related expenses and other (income) expense, net. We do not allocate certain costs to reportable segments, including costs related to our financing activities, business development and oversight, and tax, audit and other professional fees, to our reportable segments. Instead, we manage these costs at the Corporate level.



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

Fiscal Years Ended June 30, 2014 2013 2012 EMEA $ 517.8 52.4 % $ 471.2 56.2 % $ 464.4 58.8 % Americas 469.5 47.6 366.9 43.8 325.8 41.2 Total $ 987.3 100.0 % $ 838.1 100.0 % $ 790.2 100.0 %



For fiscal year 2014, the United States and the United Kingdom were the only countries that individually represented more than 10% of total revenues.

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Components of Revenues and Expenses

Revenues

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



fixed monthly amount for a prescribed number of transactions;

fixed monthly subscription rate;

price per set of services rendered; and

price per system delivered.

Our software and services are often sold as packages, without individual pricing for each component. Our revenues are reflected net of customer sales allowances, which we estimate based on both our examination of a subset of customer accounts and historical experience. Our core offering is our estimating and workflow software, which is used by our insurance company, collision repair facility and independent assessor customers, representing the majority of our revenues. Our salvage and recycling software, business intelligence and consulting services, vehicle data validation, salvage disposition, driver violation reporting services, service, maintenance and repair solutions and other offerings represent in the aggregate a smaller portion of our revenues. We believe that our estimating and workflow software will continue to represent the majority of our revenue for the foreseeable future.



Cost of revenues (excluding depreciation and amortization)

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

Operating expenses

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



Systems development and programming costs

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



Selling, general and administrative expenses

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

Share-based compensation expense

Our share-based compensation expense represents the recognition of the grant-date fair value of stock awards granted to employees, officers, members of our board of directors and others pursuant to our equity compensation plans. We recognize the grant date fair value as share-based compensation expense over the requisite service period. 40



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Depreciation and amortization

Depreciation includes depreciation attributable to buildings, leasehold improvements, data processing and computer equipment, purchased software, and furniture and fixtures. Amortization includes amortization attributable to software developed or obtained for internal use and intangible assets acquired in business combinations, particularly our acquisitions of Claims Services Group, Inc. ("CSG"), Explore and SRS.



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

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



Acquisition and related costs

Acquisition and related costs include legal and other professional fees and other transaction costs associated with completed and contemplated business combinations and asset acquisitions, costs associated with integrating acquired businesses, including costs incurred to eliminate workforce redundancies and for product rebranding, and other charges incurred as a direct result of our acquisition efforts. These other charges include changes to the fair value of contingent purchase consideration, acquired assets and assumed liabilities subsequent to the completion of the purchase price allocation, purchase consideration that is deemed to be compensatory in nature, and incentive compensation arrangements with continuing employees of acquired companies. Acquisitions and related costs include the legal and other professional fees associated with the Federal Trade Commission's investigation of our acquisition of Actual Systems and the divestiture of Actual Systems' U.S. and Canadian Businesses.



Interest expense

Interest expense consists primarily of interest on our debt and amortization of related debt issuance costs, net of premium amortization.

Other expense, net

Other expense, net consists of foreign exchange gains and losses on notes receivable and notes payable to affiliates, changes in the fair value of derivative instruments, losses on debt extinguishment, investment income and other miscellaneous income and expense.

Income tax provision

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

Net income attributable to noncontrolling interests

Several of our customers and other entities own noncontrolling interests in six of our operating subsidiariesas well as SRS. Net income attributable to noncontrolling interests reflect such owners' proportionate interest in the earnings of such subsidiaries.

Factors Affecting Our Operating Results

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

Foreign currency. During fiscal years 2014, 2013 and 2012, we generated approximately 63%, 68% and 70% of our revenues, respectively, and incurred a majority of our costs, in currencies other than the U.S. dollar, primarily the Euro. We translate our local currency financial results into U.S. dollars based on average exchange rates prevailing during a reporting period for our consolidated statement of income and certain components of stockholders' equity and the exchange rate at the end of that period for the consolidated balance sheet. These translations resulted in foreign currency translation adjustments of $39.1 million and $8.4 million for fiscal years 2014 and 2013, respectively, which are recorded as a component of accumulated other comprehensive income (loss) in stockholders' equity. Foreign currency transaction losses recognized in our consolidated 41



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statements of income (loss) were $11.0 million, $(5.5) million, $(8.0) million during fiscal years 2014, 2013, and 2012, respectively.

Exchange rates between most of the major foreign currencies we use to transact our business and the U.S. dollar have fluctuated significantly over the last few years and we expect that they will continue to fluctuate. The majority of our revenues and costs are denominated in Euros, Pound Sterling, Swiss francs, Canadian dollars and other foreign currencies. The following table provides the average quarterly exchange rates for the Euro and Pound Sterling since the beginning of fiscal year 2013: Average Pound Average Euro-to-U.S. Dollar Sterling-to-U.S. Dollar Period Exchange Rate Exchange Rate Quarter Ended September 30, 2012 $ 1.25 $ 1.58 Quarter Ended December 31, 2012 1.30 1.61 Quarter Ended March 31, 2013 1.32 1.55 Quarter Ended June 30, 2013 1.31 1.54 Quarter Ended September 30, 2013 1.32 1.55 Quarter Ended December 31, 2013 1.36 1.62 Quarter Ended March 31, 2014 1.37 1.65 Quarter Ended June 30, 2014 1.37 1.68 During fiscal year 2014, as compared to fiscal year 2013, the U.S. dollar weakened against most major foreign currencies we use to transact our business. The average U.S. dollar weakened versus the Euro by 4.9% and the Pound Sterling by 3.7%, which increased our revenues and expenses during fiscal year 2014. A hypothetical 5% increase or decrease in the U.S. dollar versus other currencies in which we transact our business would have resulted in an increase or decrease, as the case may be, to our revenues of $31.0 million during fiscal year 2014. Factors that affect business volume. The following external factors have or may have an effect on the number of claims that are submitted and/or our volume of transactions, any of which can affect our revenues:



Number of insurance claims made. In fiscal year 2014, the number of

insurance claims made increased slightly versus fiscal year 2013. In

several of our large western European markets, the number of insurance

claims for vehicle damage submitted by owners to their insurance carriers

declined slightly. The number of insurance claims made can be influenced

by factors such as unemployment levels, the number of miles driven, rising

gasoline prices, the number of uninsured drivers, rising insurance premiums and insured opting for lower coverage or higher deductible levels, among other things. Fewer claims made can reduce the transaction-based fees that we generate.



Sales of new and used vehicles. According to industry sources, global new

vehicle sales grew by 3.7% in 2012 to 79.5 million units and by 4.2% in 2013 to 82.8 million units. In markets where automobile insurance is generally government-mandated and claims processing is automated



("advanced markets"), sales are projected to grow at 1.3% compound annual

growth rate through 2020. In other markets, sales are projected to grow at

8.1% compound annual growth rate through 2020. Fewer new light vehicle

sales can result in fewer insured vehicles on the road and fewer

automobile accidents, which can reduce the transaction-based fees that we

generate. Damaged vehicle repair costs. The cost to repair damaged vehicles, also



known as severity, includes labor, parts and other related costs. Severity

has steadily risen for a number of years. According to industry sources,

from 2001 through 2010, the price index for body work has increased by

30.5% compared with a 23.2% increase in the general cost of living index.

Insurance companies purchase our products and services to help standardize

the cost of repair. Should the cost of labor, parts and other related

items continue to increase over time, insurance companies may seek to

purchase and utilize an increasing number of our products and services to

help improve the standardization of the cost of repair.



Penetration Rate of Vehicle Insurance. An increasing rate of procuring

vehicle insurance will result in an increase in the number of insurance

claims made for damaged vehicles. An increasing number of insurance claims

submitted can increase the transaction-based fees that we generate for

partial-loss and total-loss estimates. This is due in part to both

increased regulation and increased use of financing in the purchase of new

and used vehicles. We expect that the rate of vehicle insurance in our less mature international markets will continue to increase during the next eighteen months. 42



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Automobile usage-number of miles driven. Several factors can influence

miles driven including gasoline prices and economic conditions. According

to industry sources, miles driven in the United States remained flat from

January through May of calendar year 2013 compared to the same period in

prior year. Fewer miles driven can result in fewer automobile accidents,

which can reduce the transaction-based fees that we generate.



Seasonality. Our business is subject to seasonal and other fluctuations.

In particular, we have historically experienced higher revenues during the

second quarter and third quarter versus the first quarter and fourth

quarter during each fiscal year. This seasonality is caused primarily by

more days of inclement weather during the second quarter and third quarter

in most of our markets, which contributes to a greater number of vehicle

accidents and damage during these periods. In addition, our business is

subject to fluctuations caused by other factors, including the occurrence

of extraordinary weather events and the timing of certain public holidays.

For example, the Easter holiday occurs during the third quarter in certain

fiscal years and occurs during the fourth quarter in other fiscal years,

resulting in a change in the number of business days during the quarter in

which the holiday occurs.

Share-based compensation expense. We incurred pre-tax, non-cash share-based compensation charges of $37.5 million, $25.8 million and $18.4 million during fiscal years 2014, 2013, and 2012, respectively. We expect to recognize additional pre-tax, non-cash share-based compensation charges related to share-based awards outstanding at June 30, 2014. The estimated total remaining unamortized share-based compensation expense, net of forfeitures, was $57.5 million which we expect to recognized over a weighted-average period of 2.7 years. Restructuring charges. We have incurred restructuring charges in each period presented and also expect to incur additional restructuring charges, primarily relating to severance costs, over the next several quarters as we work to improve efficiencies in our business. We do not expect reduced revenues or an increase in other expenses as a result of continued implementation of our restructuring initiatives.



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

gain and loss of customers;

pricing pressures;

acquisitions, joint ventures or similar transactions;

expenses to develop new software or services; and

expenses and restrictions related to indebtedness.

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

Results of Operations

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

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

Fiscal Year 2014 to Fiscal Fiscal Year 2013 to Fiscal Fiscal Years Ended June 30, Year 2013 Change Year 2012 Change 2014 2013 2012 $ % $ % (dollars in thousands) Revenues $ 987,259$ 838,103$ 790,207$ 149,156 17.8 % $ 47,896 6.1 %



Cost of revenues: Operating expenses 222,262 181,448 171,763 40,814

22.5 9,685 5.6



Systems development and programming costs 90,735 79,083 73,914 11,652

14.7 5,169 7.0 Total cost of revenues (excluding depreciation and amortization) 312,997 260,531 245,677 52,466 20.1 14,854 6.0 Selling, general and administrative expenses 259,786 208,989 188,245 50,797 24.3 20,744 11.0



Share-based

compensation expense 37,515 25,753 18,394 11,762 45.7 7,359 40.0 Depreciation and amortization 122,283 103,239 103,510 19,044 18.4 (271 ) (0.3 ) Restructuring charges, asset impairments, and other costs associated with exit and disposal activities 6,527 5,435 7,057 1,092 20.1 (1,622 ) (23.0 ) Acquisition and related costs 41,512 26,945 7,962 14,567 54.1 18,983 238.4



Interest expense 107,422 69,511 53,593 37,911

54.5 15,918 29.7



Other expense, net 63,991 1,860 1,665 62,131 3,340.4

195 11.7 952,033 702,263 626,103 249,770 35.6 76,160 12.2 Income before provision for income taxes 35,226 135,840 164,104



(100,614 ) (74.1 ) (28,264 ) (17.2 ) Income tax provision 30,058 30,797 45,718

(739 ) (2.4 ) (14,921 ) (32.6 ) Net income

5,168 105,043 118,386 (99,875 ) (95.1 ) (13,343 ) (11.3 ) Less: Net income attributable to noncontrolling interests 13,878 11,159 11,398 2,719 24.4 (239 ) (2.1 ) Net income (loss) attributable to Solera Holdings, Inc. $ (8,710 )$ 93,884$ 106,988$ (102,594 ) (109.3 )% $ (13,104 ) (12.2 )% Amounts and percentages in the above table and throughout our discussion and analysis of financial conditions and results of operations may reflect rounding adjustments. 44



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

Fiscal Years Ended June 30, 2014 2013 2012 Revenues 100.0 % 100.0 % 100.0 % Cost of revenues: Operating expenses 22.5 21.6 21.7 Systems development and programming costs 9.2 9.4



9.4

Total cost of revenues (excluding depreciation and amortization)

31.7 31.1



31.1

Selling, general and administrative expenses 26.3 24.9



23.8

Share-based compensation expense 3.8 3.1



2.3

Depreciation and amortization 12.4 12.3



13.1

Restructuring charges, asset impairments, and other costs associated with exit and disposal activities 0.7

0.6



0.9

Acquisition and related costs 4.2 3.2 1.0 Interest expense 10.9 8.3 6.8 Other expense, net 6.5 0.2 0.2 96.4 83.8 79.2 Income before provision for income taxes 3.6 16.2 20.8 Income tax provision 3.0 3.7 5.8 Net income 0.6 12.5 15.0 Less: Net income attributable to noncontrolling interests 1.4 1.3



1.4

Net income (loss) attributable to Solera Holdings, Inc. (0.8 )% 11.2 % 13.6 % Revenues



Fiscal Year 2014 vs. Fiscal Year 2013. During fiscal year 2014, revenues increased $149.2 million, or 17.8% and include revenues from SRS of $74.0 million. After adjusting for changes in foreign currency exchange rates and excluding revenues from SRS, revenues increased $66.5 million, or 7.9%, during fiscal year 2014.

Our EMEA revenues increased $46.6 million, or 9.9%, to $517.8 million. After adjusting for changes in foreign currency exchange rates, EMEA revenues increased $30.2 million, or 6.4%, during fiscal year 2014 resulting from growth in transaction revenues in several countries from sales to new customers and increased transaction volume from and sales of new software and services to existing customers and incremental revenue contributions from recently-acquired businesses. Our Americas revenues increased $102.6 million, or 28.0%, to $469.5 million and include revenues from SRS of $74.0 million. After adjusting for changes in foreign currency exchange rates and excluding revenues from SRS, Americas revenues increased $36.4 million, or 9.9%, during fiscal year 2014 resulting from incremental revenue contributions from recently-acquired businesses other than SRS, revenue growth in our AudaExplore re-underwriting business due to an increase in drivers and households monitored, and growth in transaction and subscription revenues from sales to new customers and increased transaction volume from and sales of new software and services to existing customers.



Fiscal Year 2013 vs. Fiscal Year 2012. During fiscal year 2013, revenues increased $47.9 million, or 6.1%. After adjusting for changes in foreign currency exchange rates, revenues increased $67.3 million, or 8.5%, during fiscal year 2013 due to revenue growth in both our EMEA and Americas segments.

Our EMEA revenues increased $6.8 million, or 1.5%, to $471.2 million. After adjusting for changes in foreign currency exchange rates, EMEA revenues increased $21.6 million, or 4.6%, during fiscal year 2013 resulting from growth in transaction revenues in several countries from sales to new customers and increased transaction volume from and sales of new software and services to existing customers, and incremental revenue contributions from recently-acquired businesses.



Our Americas revenues increased $41.1 million, or 12.6%, to $366.9 million. After adjusting for changes in foreign currency exchange rates, Americas revenues increased $45.7 million, or 14.0%, during fiscal year 2013 resulting from

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incremental revenue contributions from recently-acquired businesses, revenue growth in our AudaExplore re-underwriting business due to an increase in drivers and households monitored, and growth in transaction and subscription revenues from sales to new customers and increased transaction volume from and sales of new software and services to existing customers in Latin America and Canada, offset by a decline in revenue in our AudaExplore claims-related business due to the non-renewal of a customer agreement with a top U.S. insurance company, as previously announced in December 2011, that completed its transition to a new provider in December 2012.



We expect AudaExplore to continue to expand its Explore re-underwriting offerings into additional U.S. states, and we expect AudaExplore's revenues to increase in connection with this expansion.

Set forth below is our revenues from each of our principal customer categories and as a percentage of revenues for the periods indicated (dollars in millions): Fiscal Years Ended June 30, 2014 2013 2012 Insurance companies $ 385.5 39.0 % $ 374.0 44.6 % $ 359.9 45.5 % Collision repair facilities 292.7 29.6 266.3 31.8 257.5 32.6 Independent assessors 78.5 8.0 72.9 8.7 74.4 9.4 Service, maintenance and repair facilities 74.0 7.5 - - - - Automotive recyclers, salvage, dealerships and others 156.6 15.9 124.9 14.9 98.4 12.5 Total $ 987.3 100.0 % $ 838.1 100.0 % $ 790.2 100.0 %



Revenue growth for each of our customer categories was as follows (dollars in millions):

Fiscal Year 2014 vs Fiscal Year 2013



Fiscal Year 2013 vs Fiscal Year 2012

Revenue Percentage Customer category Growth Change Revenue Growth Percentage Change Insurance companies $ 11.5 3.1 % $ 14.1 3.9 % Collision repair facilities 26.4 9.9 8.8 3.4 Independent assessors 5.6 7.7 (1.5 ) (2.0 ) Service, maintenance and repair facilities 74.0 100.0 - - Automotive recyclers, salvage, dealerships and others 31.7 25.4 26.5 26.9 Total $ 149.2 17.8 % $ 47.9 6.1 %



Revenue growth for each of our customer categories after adjusting for changes in foreign currency exchange rates was as follows (dollars in millions):

Fiscal Year 2014 vs Fiscal Fiscal Year 2013 vs Fiscal Year 2013 Year 2012 Revenue Percentage Percentage Customer category Growth Change Revenue Growth Change Insurance companies $ 11.1 3.0 % $ 22.5 6.3 % Collision repair facilities 22.6 8.5 15.5 6.0 Independent assessors 3.4 4.6 1.6 2.1 Service, maintenance and repair facilities 74.0 100.0 - - Automotive recyclers, salvage, dealerships and others 29.5 23.6 27.7 28.1 Total $ 140.6 16.8 % $ 67.3 8.5 %



Revenues from service, maintenance and repair facilities represent revenue contributions from our acquisition of SRS. The increase in revenues from automotive recyclers, salvage and others in fiscal year 2014 and 2013 is primarily due to revenue contributions from recently-acquired businesses.

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Operating expenses

Fiscal Year 2014 vs. Fiscal Year 2013. During fiscal year 2014, operating expenses increased $40.8 million, or 22.5% and include operating expenses of SRS of $16.5 million. After adjusting for changes in foreign currency exchange rates and excluding operating expenses from SRS, operating expenses increased $22.3 million, or 12.3%, during fiscal year 2014. Our EMEA operating expenses increased $12.2 million, or 14.3%. After adjusting for changes in foreign currency exchange rates, EMEA operating expenses increased $8.9 million, or 10.5%, during fiscal year 2014 primarily due to an increase in personnel related expenses due to increased headcount and incremental operating expenses contributions from recently-acquired businesses, mainly personnel related expenses. Our Americas operating expenses increased $29.1 million or 30.3% and include operating expenses from SRS of $16.5 million. After adjusting for changes in foreign currency exchange rates and excluding operating expenses of SRS, Americas operating expenses increased $13.8 million, or 14.3%, during fiscal year 2014 primarily due to incremental operating expenses contributions from recently-acquired businesses other than SRS, mainly personnel related expenses and purchased data costs and an increase in the costs of data purchased from state departments of motor vehicles consistent with the revenue growth in our AudaExplore re-underwriting business. Fiscal Year 2013 vs. Fiscal Year 2012. During fiscal year 2013, operating expenses increased $9.7 million, or 5.6%. After adjusting for changes in foreign currency exchange rates, operating expenses increased $13.0 million, or 7.6%, during fiscal year 2013 primarily due to an increase in operating expenses in our Americas segment. Our EMEA operating expenses decreased $3.2 million, or 3.7%. After adjusting for changes in foreign currency exchange rates, EMEA operating expenses decreased $0.5 million, or 0.6%, during fiscal year 2013 primarily due to ongoing waste reduction and cost containment initiatives, partially offset by incremental operating expenses contributions from recently-acquired businesses, primarily personnel related expenses and third party license fees. Our Americas operating expenses increased $12.9 million or 15.4%. After adjusting for changes in foreign currency exchange rates, Americas operating expenses increased $13.5 million, or 16.1%, during fiscal year 2013 primarily due to incremental operating expenses contributions from recently-acquired businesses, primarily personnel related expenses and purchased data costs, and an increase in the costs of data purchased from state departments of motor vehicles consistent with the revenue growth in our AudaExplore re-underwriting business. We expect AudaExplore's operating expenses, primarily relating to costs for data utilized in Explore's re-underwriting offerings, to increase in absolute dollars as AudaExplore expands its offerings into additional U.S. states.



Systems development and programming costs

Fiscal Year 2014 vs. Fiscal Year 2013. During fiscal year 2014, systems development and programming costs ("SD&P") increased $11.7 million, or 14.7% and include SD&P from SRS of $7.1 million. After adjusting for changes in foreign currency exchange rates and excluding SD&P from SRS, SD&P increased $2.9 million, or 3.7%, during fiscal year 2014 due to increases in SD&P expenses in our Americas segment.



Our EMEA SD&P increased $1.1 million, or 2.2%. After adjusting for changes in foreign currency exchange rates, EMEA SD&P decreased $0.9 million, or 1.9%, during fiscal year 2014 primarily due to a decrease in external programming costs resulting from ongoing expense reduction initiatives.

Our Americas SD&P increased $10.6 million, or 33.6% and include SD&P from SRS of $7.1 million. After adjusting for changes in foreign currency exchange rates and excluding SD&P from SRS, Americas SD&P increased $3.8 million, or 12.1%, during fiscal year 2014 primarily due to an increase in personnel related expenses due to increased product development investment and incremental SD&P contributions from recently-acquired businesses other than SRS, primarily personnel related expenses and increased professional fees. Fiscal Year 2013 vs. Fiscal Year 2012. During fiscal year 2013, systems development and programming costs ("SD&P") increased $5.2 million, or 7.0%. After adjusting for changes in foreign currency exchange rates, SD&P increased $7.1 million, or 9.6%, during fiscal year 2013 due to increases in SD&P expenses in both our EMEA and Americas segments.



Our EMEA SD&P decreased $1.6 million, or 3.2%. After adjusting for changes in foreign currency exchange rates, EMEA SD&P increased $0.2 million, or 0.4%, during fiscal year 2013 primarily due to incremental SD&P contributions from

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recently-acquired businesses, partially offset by a decrease in personnel related expenses resulting from ongoing waste reduction and cost containment initiatives.

Our Americas SD&P increased $6.8 million, or 27.2%. After adjusting for changes in foreign currency exchange rates, Americas SD&P increased $6.9 million, or 27.6%, during fiscal year 2013 primarily due to an increase in personnel related expenses resulting from increased investment in new product development at AudaExplore, and incremental SD&P contributions from recently-acquired businesses, primarily personnel related expenses.



Selling, general and administrative expenses

Fiscal Year 2014 vs. Fiscal Year 2013. During fiscal year 2014, selling, general and administrative expenses ("SG&A") increased $50.8 million, or 24.3% and include SG&A from SRS of $20.6 million. After adjusting for changes in foreign currency exchange rates and excluding SG&A from SRS, SG&A increased $28.0 million, or 13.4%, primarily due to: incremental SG&A contributions from recently-acquired businesses other than SRS of $4.5 million; a $15.6 million increase in personnel related expenses in our EMEA and Americas segments due to continued growth in our business; $1.8 million increase in facilities expenses; $1.0 million increase in bad debt expense; $2.9 million increase in personnel, travel and recruiting expenses; a $0.8 million increase in advertising and marketing expenses; a $0.5 million increase in professional fees. Fiscal Year 2013 vs. Fiscal Year 2012. During fiscal year 2013, selling, general and administrative expenses ("SG&A") increased $20.7 million, or 11.0%. After adjusting for changes in foreign currency exchange rates, SG&A increased $25.3 million, or 13.4%, primarily due to: incremental SG&A contributions from recently-acquired businesses of $7.8 million; a $6.3 million increase in personnel, travel and recruiting expenses in our Corporate function to support continued organizational growth; a $5.7 million increase in personnel related expenses in our EMEA and Americas segments due to continued growth in our business; a $1.5 million increase in advertising and marketing expenses; a $1.4 million increase in professional fees; a $1.4 million increase in legal fees incurred in connection with our patent infringement lawsuit against Mitchell International; and a $1.1 million increase in other administrative expenses.



Share-based compensation expense

Fiscal Year 2014 vs. Fiscal Year 2013 and Fiscal Year 2013 vs. Fiscal Year 2012. During fiscal years 2014, 2013, and 2013, we incurred share-based compensation expense of $37.5 million, $25.8 million and $18.4 million. The increase in share-based compensation expense in fiscal year 2014 is primarily due to share-based compensation expense associated with the long-term incentive awards granted to our executive officers in March 2013 and more extensive use of equity-based incentive compensation in our compensation plans to incent personnel for continued contributions to increasing our profitability and value during the first phase of our previously-announced strategic mission, Mission 2020.



The increase in share-based compensation expense in fiscal year 2013 is primarily due to more extensive use of equity-based incentive compensation in our compensation plans to incent personnel for continued contributions to increasing our profitability and value during the first phase of our previously-announced strategic mission, Mission 2020.

Depreciation and amortization

Fiscal Year 2014 vs. Fiscal Year 2013. During fiscal year 2014, depreciation and amortization increased by $19.0 million, or 18.4%, and include depreciation and amortization contributions from SRS of $17.9 million. After adjusting for changes in foreign currency exchange rates and excluding depreciation and amortization from SRS, depreciation and amortization decreased $0.7 million, or 0.7%, during fiscal year 2014 primarily due to the continued decrease in amortization expense related to the intangible assets acquired in the CSG Acquisition and the acquisition of Explore since these intangible assets are being amortized on an accelerated basis. Fiscal Year 2013 vs. Fiscal Year 2012. During fiscal year 2013, depreciation and amortization decreased by $0.3 million, or 0.3%. After adjusting for changes in foreign currency exchange rates, depreciation and amortization increased $1.5 million, or 1.4%, during fiscal year 2013 primarily due to the additional intangibles amortization expense associated with businesses acquired during fiscal year 2013, partially offset by the continued decrease in amortization expense related to the intangible assets acquired in the CSG Acquisition and the acquisition of Explore since these intangible assets are being amortized on an accelerated basis. We generally amortize intangible assets on an accelerated basis to reflect the pattern in which the economic benefits of the intangible assets are realized. Accordingly, notwithstanding the impact of fluctuations in the value of the U.S. dollar versus 48



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certain foreign currencies in which we transact business and absent future significant acquisitions, we anticipate that our annual depreciation and amortization expense will decrease over the next several years.

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

Fiscal Year 2014 vs. Fiscal Year 2013 and Fiscal Year 2013 vs. Fiscal Year 2012. During fiscal years 2014, 2013 and 2012, we incurred restructuring charges, asset impairments and other costs associated with exit or disposal activities of $6.5 million, $5.4 million and $7.1 million, respectively. The restructuring charges, asset impairments and other costs associated with exit and disposal activities incurred in fiscal years 2014, 2013 and 2012 consist primarily of employee termination benefits and other costs incurred in relation to ongoing restructuring initiatives.



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

Acquisition and related costs

Fiscal Year 2014 vs. Fiscal Year 2013 and Fiscal Year 2013 vs. Fiscal Year 2012. During fiscal years 2014, 2013 and 2012 we incurred acquisition and related costs of $41.5 million, $26.9 million and $8.0 million, respectively.

Acquisition and related costs incurred in fiscal year 2014 primarily consists of contingent purchase consideration that is deemed compensatory in nature of $25.4 million, $7.1 million of legal and professional fees incurred in connection with completed and contemplated business combinations and $9.0 million in other acquisition related costs. Acquisition and related costs incurred in fiscal year 2013 primarily consists of contingent purchase consideration that is deemed compensatory in nature of $15.7 million, $5.8 million of legal and professional fees incurred in connection with completed and contemplated business combinations and associated with the Federal Trade Commission's investigation of our acquisition of Actual Systems and the subsequent divestiture of Actual Systems' businesses in the U.S. and Canada in August 2013, and other costs associated with completed acquisitions of $5.4 million. Acquisition and related costs incurred in fiscal year 2012 primarily consists of legal and professional fees incurred in connection with completed and contemplated business combinations of $2.1 million and contingent purchase consideration that is deemed compensatory in nature and other costs associated with completed acquisitions of $5.9 million. We expect to incur additional acquisition and related costs in future years as we continue to pursue potential business combinations and asset acquisitions as part of our plan to grow our business.



Interest expense

Fiscal Year 2014 vs. Fiscal Year 2013 and Fiscal Year 2013 vs. Fiscal Year 2012. During fiscal year 2014, interest expense increased $37.9 million, or 54.5%, due primarily to the increase in our total outstanding debt to approximately $1.9 billion resulting from the issuance of additional senior unsecured notes in fiscal year 2014. During fiscal year 2013, interest expense increased $15.9 million, or 29.7%, due primarily to interest expense related to the senior unsecured notes issued in April 2012. During fiscal year 2012, interest expense increased $22.5 million, or 72.3%, due primarily to interest expense related to the senior unsecured notes issued in June 2011 and April 2012, partially offset by a decrease in interest expense resulting from the expiration of our interest rate swaps in June 2011. We expect that our annual interest expense will increase in fiscal year 2015, as compared to fiscal year 2014, as a result of the issuance of additional senior unsecured notes in fiscal year 2014.



Other expense, net

Fiscal Year 2014 vs. Fiscal Year 2013 and Fiscal Year 2013 vs. Fiscal Year 2012. During fiscal year 2014, other expense, net increased by $62.1 million primarily due to a $63.3 million loss on debt extinguishment associated with the redemption of our senior unsecured notes due 2018 in November 2013 and the repayment of the outstanding term loans under our senior 49



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secured credit facility in July 2013 offset by an $18.0 million increase in gains on derivative instruments, a $16.5 million increase in net foreign currency transaction gains on transactions denominated in a currency other than the functional currency of the local company and a $3.0 million increase in gains on asset sales.

During fiscal years 2013 and 2012, other expense, net increased by $0.2 million and decreased by $6.2 million, respectively, primarily due to net foreign currency transaction losses on transactions denominated in a currency other than the functional currency of the local company.



Income tax provision

Fiscal Year 2014 vs. Fiscal Year 2013 and Fiscal Year 2013 vs. Fiscal Year 2012. During fiscal years 2014, 2013 and 2012, we recorded an income tax provision of $30.1 million, $30.8 million and $45.7 million, respectively, which resulted in an effective tax rate of 85.3%, 22.7% and 27.9%, respectively. The increase in the effective tax rate was primarily attributable to the recognition of a $24.8 million valuation allowance on our U.S. deferred tax assets, partially offset by earnings in jurisdictions with lower income tax rates which are indefinitely reinvested. Factors that impact our income tax provision include, but are not limited to, the mix of jurisdictional earnings and varying jurisdictional income tax rates, establishment and release of valuation allowances in certain jurisdictions, permanent differences resulting from the book and tax treatment of certain items, and discrete items. Future changes in tax laws or tax rulings may have a significant adverse impact on our effective tax rate. As of June 30, 2014, the management concluded that it was not more-likely-than-not that all of our U.S. net deferred tax assets will be realized in accordance with U.S. GAAP. Accordingly, we established a valuation allowance against our U.S. net deferred tax assets of $24.8 million due to the limitation in our ability to utilize foreign tax credit carryforwards prior to the expiration of the carryforward periods.



Liquidity and Capital Resources

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

In July 2013, we issued senior unsecured notes due 2021 in the aggregate principal amount of $850.0 million ("2021 Senior Notes"), resulting in net proceeds of $845.6 million. The 2021 Senior Notes accrue interest at 6.000% per annum, payable semi-annually, and become due and payable on June 15, 2021. We used $289.5 million of the net proceeds from the issuance of the 2021 Senior Notes to repay in full all of the outstanding term loans under our Amended and Restated First Lien Credit and Guaranty Agreement (the "Amended Credit Facility"), including accrued unpaid interest through the repayment date. Upon repayment of the outstanding term loans, the Amended Credit Facility was terminated. We intend to use the remainder of the net proceeds for working capital and other general corporate purposes, including strategic initiatives such as future acquisitions, joint ventures, investments or other business development opportunities. In November 2013, we issued additional 2021 Senior Notes in the aggregate principal amount of $510.0 million under the indenture governing the 2021 Senior Notes that were issued in July 2013. The 2021 Senior Notes issued in November 2013 were issued at an original issue price of 101.75% plus accrued interest from July 2013. In June 2014, we issued additional 2021 Senior Notes in the aggregate principal amount of $150.0 million under the indenture governing the 2021 Senior Notes that were issued in July 2013. The 2021 Senior Notes in June 2014 were issued at an original issue price of 106.50% plus accrued interest from December 2013.



The 2021 Senior Notes include redemption provisions that allow us, at our option, to redeem all or a portion of the aggregate principal amount of the 2021 Senior Notes as follows:

At any time prior to June 15, 2016, we may redeem up to 35% of the

aggregate principal amount of the 2021 Senior Notes at a redemption price

equal to 106.000% of the principal amount of the notes redeemed, plus

accrued and unpaid interest, if any, through the date of redemption.

At any time prior to June 15, 2017, we may redeem the 2021 Senior Notes,

in whole or in part, at a redemption price equal to 100% of the principal

amount of the notes redeemed plus a premium and accrued and unpaid interest to the 50



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redemption date. The premium at the applicable redemption date is the greater of: (1) 1.0% of the then outstanding principal amount of the notes; or (2) the excess of: (a) the present value at such redemption date of the sum of the redemption price of the notes at June 15, 2017 plus all required interest payments due on the notes through June 15, 2017 (excluding accrued but unpaid interest to the redemption date), computed using a discount rate equal to the Treasury Rate as of such redemption date plus 50 basis points; over (b) the then outstanding principal amount of the notes.



At any time on or after June 15, 2017, we may redeem the 2021 Senior

Notes, in whole or in part, at the following redemption prices, plus accrued and unpaid interest, if any, through the date of redemption: (i) if the redemption occurs on or after June 15, 2017 but prior to June 15, 2018, the redemption price is 103.000% of the principal amount of the



notes; (ii) if the redemption occurs on or after June 15, 2018 but prior

to June 15, 2019, the redemption price is 101.500% of the principal amount

of the notes; and (iii) if the redemption occurs on or after June 15, 2019, the redemption price is 100.000% of the principal amount of the notes. In November 2013, we also issued senior unsecured notes due 2023 in the aggregate principal amount of $340.0 million (the "2023 Senior Notes"). The 2023 Senior Notes accrue interest at 6.125% per annum, payable semi-annually, and become due and payable on November 1, 2023.



The 2023 Senior Notes include redemption provisions that allow us, at our option, to redeem all or a portion of the aggregate principal amount of the 2023 Senior Notes as follows:

At any time prior to November 1, 2016, we may redeem up to 35% of the

aggregate principal amount of the 2023 Senior Notes at a redemption price

equal to 106.125% of the principal amount of the notes redeemed, plus

accrued and unpaid interest, if any, through the date of redemption.

At any time prior to November 1, 2018, we may redeem the 2023 Senior

Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the notes redeemed plus a premium and accrued and



unpaid interest to the redemption date. The premium at the applicable

redemption date is the greater of: (1) 1.0% of the then outstanding

principal amount of the notes; or (2) the excess of: (a) the present value

at such redemption date of the sum of the redemption price of the notes at

November 1, 2018 plus all required interest payments due on the notes

through November 1, 2018 (excluding accrued but unpaid interest to the

redemption date), computed using a discount rate equal to the Treasury

Rate as of such redemption date plus 50 basis points; over (b) the then outstanding principal amount of the notes.



At any time on or after November 1, 2018, we may redeem the 2023 Senior

Notes, in whole or in part, at the following redemption prices, plus accrued and unpaid interest, if any, through the date of redemption: (i) if the redemption occurs on or after November 1, 2018 but prior to



November 1, 2019, the redemption price is 103.063% of the principal amount

of the notes; (ii) if the redemption occurs on or after November 1, 2019

but prior to November 1, 2020, the redemption price is 102.042% of the

principal amount of the notes; (iii) if the redemption occurs on or after

November 1, 2020 but prior to November 1, 2021, the redemption price is

101.021% of the principal amount of the notes; and (iv) if the redemption

occurs on or after November 1, 2021, the redemption price is 100.000% of

the principal amount of the notes.

Upon the occurrence of a change of control, we are required to offer to redeem the 2021 Senior Notes and the 2023 Senior Notes at a redemption price equal to 101% of the principal amount of the notes redeemed, plus accrued and unpaid interest, if any, through the redemption date. We used the net proceeds from the November 2013 issuance of the 2021 Senior Notes and the 2023 Senior Notes of $855.4 million, together with existing cash on hand, to redeem the outstanding senior unsecured notes due June 2018 (the "2018 Senior Notes"). The redemption price for the 2018 Senior Notes was $932.8 million, consisting of (i) the unpaid principal amount of the 2018 Senior Notes of $850.0 million, (ii) accrued unpaid interest through the redemption date of $24.4 million, and (iii) a redemption premium of $58.4 million. The indentures governing the 2021 Senior Notes and the 2023 Senior Notes contain limited covenants, including those restricting our and our subsidiaries' ability to incur certain liens, engage in sale and leaseback transactions and consolidate, merge with, or convey, transfer or lease substantially all of our or their assets to, another person, and, in the case of any of our subsidiaries that did not issue or guarantee such notes, incur indebtedness. We are in compliance with the specified covenants of the 2021 Senior Notes and the 2023 Senior Notes at June 30, 2014. 51



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In April 2012, in order to mitigate the variability of the Euro-denominated cash flows associated with two intercompany loans, we entered into two pay fixed Euros / received fixed U.S. dollar cross-currency swaps in the aggregate notional amount of 109.0 million. We pay Euro fixed coupon payments at 6.99% and receive U.S. dollar fixed coupon payments at 6.75% on the notional amount. The maturity date of the swaps is June 15, 2018. In September 2013, in order to hedge our exposure to variability in the Euro-denominated cash flows associated with two intercompany loans, we entered into two pay floating Euros / received floating U.S. dollar cross-currency swaps in the aggregate notional amount of 141.1 million. We pay Euro floating coupon payments at 6-month EURIBOR plus 35 basis points and receive U.S. dollar floating coupon payments at 6-month LIBOR on the notional amount. The maturity date of the swaps is June 15, 2018. In June 2014, we settled one of the intercompany loans and the associated pay floating Euros / receive floating U.S. dollar cross-currency swaps. The noncontrolling stockholders of certain of our subsidiaries have the right to require us to redeem their shares. We do not have any indication that the exercise of any remaining redemption rights is probable within the next twelve months. Further, we do not believe the occurrence of conditions precedent to the exercise of certain of these redemption rights is probable within the next twelve months. If the stockholders exercise their redemption rights within the next twelve months, we believe that we have sufficient liquidity to fund such redemptions. In November 2011, our Board of Directors approved a share repurchase program for up to a total of $180.0 million of our common stock through November 20, 2013. In October 2013, our Board of Directors approved a new share repurchase program, replacing the share repurchase program authorized in November 2011, for up to a total of $200.0 million of our common stock through November 10, 2015. Share repurchases are made from time to time, through an accelerated stock purchase agreement, in open market transactions at prevailing market prices or in privately negotiated transactions. The repurchase program does not require us to purchase any specific number or amount of shares, and the timing and amount of such purchases will be determined by management based upon market conditions and other factors. In addition, the program may be amended or terminated at the discretion of our Board of Directors. Through September 30, 2013, we repurchased approximately 2.9 million shares for $136.6 million under the share repurchase program that was authorized in November 2011. Through June 30, 2014, we have repurchased approximately 0.8 million shares for $52.8 million under the share repurchase program that was authorized in October 2013. In fiscal year 2014, we paid quarterly cash dividends with a value of $0.17 per outstanding share of common stock and per outstanding restricted stock unit to our stockholders and restricted stock unit holders of record. The aggregate dividend payments for fiscal year 2014 were $47.2 million. On August 26, 2014, we announced that our Board of Directors approved the payment of a cash dividend of $0.195 per share of outstanding common stock and per outstanding restricted stock unit. The Board of Directors also approved a quarterly stock dividend equivalent of $0.195 per outstanding restricted stock unit granted to certain of our executive officers during fiscal years 2013 and 2014 in lieu of the cash dividend, which dividend equivalent will be paid to the restricted stock unit holders as the restricted stock unit vests. The dividends are payable on September 23, 2014 to stockholders and restricted stock unit holders of record at the close of business on September 9, 2014. Any determination to pay dividends in future periods will be at the discretion of our Board of Directors. The bond indentures include restrictions on our ability to pay dividends on our common stock. As of June 30, 2014 and 2013, we had cash and cash equivalents of $837.8 million and $464.2 million, respectively. At June 30, 2014, our total current and long-term debt obligations were approximately $1.9 billion, consisting of $1.5 billion related to the 2021 Senior Notes and $340.0 million related to the 2023 Senior Notes. On May 12, 2014, we signed a definitive agreement to acquire the Insurance and Services Division of Pittsburgh Glass Works, LLC ("I&S"). On July 29, 2014, we completed our acquisition of I&S for cash consideration of approximately $280 million. We believe that our existing cash on hand and cash flow from operations will be sufficient to fund currently anticipated working capital and debt service requirements, as well as investment in acquisition and other strategic opportunities, including the investment of capital pursuant to Phase I of our Mission 2020 goal, for at least the next twelve months. Our management believes that our cash is best utilized by investing in the future growth of our business to support the achievement of our Mission 2020 goal, either through acquisitions or penetration of new geographic markets and other strategic opportunities, and maximizing stockholder return through the payment of cash dividends and stock repurchases. We regularly review acquisition and other strategic opportunities, which may require additional debt or equity financing. If we raise additional funds by issuing equity securities, further dilution to our then-existing stockholders may result. Additional debt financing may include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, 52



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making capital expenditures or declaring dividends. Any equity or debt financing may contain terms, such as liquidation and other preferences, that are not favorable to us or our stockholders.

We consider the undistributed earnings of our foreign subsidiaries as of June 30, 2014 to be indefinitely reinvested and, accordingly, no U.S. income taxes have been provided thereon. At June 30, 2014, the amount of cash associated with permanently reinvested foreign earnings was approximately $288.9 million. We have not, nor do we anticipate the need to, repatriate funds to the U.S. in order to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements. If we were to repatriate such foreign earnings in the future, we would incur incremental U.S. federal and state income taxes. However, our intent is to continue to indefinitely reinvest our foreign earnings and our current plans do not demonstrate a need to repatriate foreign earnings to fund our U.S. operations. The following summarizes our primary sources and uses of cash in the periods presented: Fiscal Years Ended June 30, Amount Changed from 2014 2013 2012 2013 to 2014 2012 to 2013 (in thousands) Operating activities $ 248.5$ 226.7$ 223.0$ 21.8$ 3.7 Investing activities $ (417.6 )$ (181.5 )$ (47.8 )$ (236.1 )$ (133.7 ) Financing activities $ 542.1$ (88.5 )$ (18.0 )$ 630.6$ (70.5 ) Operating activities. The $21.8 million increase in cash provided by operating activities during fiscal year 2014 was primarily attributable to operating cash flows generated by business acquired during fiscal year 2014, including SRS. Investing activities. The $236.1 million increase in cash used in investing activities in fiscal year 2014 was primarily attributable to an increase in cash used in business combinations, net of cash acquired, of $220.0 million, due to the acquisition of six businesses during fiscal year 2014, an increase in acquisitions and capitalization of intangible assets of $13.8 million and an increase in capital expenditures of $1.2 million. Financing activities. The $630.6 million increase in cash provided by financing activities in fiscal year 2014 was primarily attributable to the proceeds from the issuance of the 2021 Senior Notes and the 2023 Senior Notes, net of the repayment of the outstanding term loans under the Amended Credit Facility and the redemption of the 2018 Senior Notes, including the payment of the redemption premium, of $661.9 million. The increase in cash provided by financing activities is offset by a $30.0 million increase in stock repurchases due to the adoption of a new share repurchase program in October 2013 and a $12.4 million increase in dividend payments due to the increase in our annual dividend to $0.68 per share in fiscal year 2014.



Contractual Obligations

The following table reflects our cash contractual obligations as of June 30, 2014: Payments Due by Period Less than More than Total 1 Year 1-3 Years 3-5 Years 5 Years (in thousands)



Long-term debt obligations (1) $ 2,664,437$ 111,425$ 222,850

$ 222,850$ 2,107,312 Contingent purchase consideration obligations (2) 128,724 37,060 80,864 10,800 - Purchase obligations 19,920 6,078 7,854 5,981 7 Lease obligations (3) 35,350 9,737 14,888 8,028 2,697 Total $ 2,848,431$ 164,300$ 326,456$ 247,659$ 2,110,016



(1) Represents principal and interest payments due on our senior unsecured notes.

(2) Represents the maximum potential future contingent cash consideration

associated with business combinations and asset acquisitions as of June 30,

2014. The amount and timing of future payments are based on the achievement

of specific targets.

(3) Lease obligations include operating and capital leases and are net of

sublease income. 53



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In addition to the contractual obligations identified in the preceding table, the noncontrolling owners of certain of our majority-owned subsidiaries have the right to require us to redeem their shares at the then fair market value. As of June 30, 2014, we estimate that the aggregate fair value of these redeemable noncontrolling interests was approximately $86.0 million. Pursuant to the terms of our SRS joint venture, WCAS has the right to require that we purchase its equity ownership interest in SRS up to four times per year, subject to an annual cap of $250 million and a $25 million per exercise minimum (the "Annual Put Right") at a price based on SRS's trailing twelve month EBITDA. In addition, WCAS has additional rights to require that we purchase either half or all (depending on the triggering event) of their equity ownership interest of SRS at a price, subject to certain adjustments, equal to a specified multiple of WCAS's cost basis of such equity ownership interest (the "Special Put Right"). The triggering events for the Special Put Right include, among others, a drop in our corporate credit rating below certain specified levels or if SRS is required to become a guarantor of any of the indebtedness of Solera or its subsidiaries (other than SRS) or at any time beginning on August 1, 2018 and ending on the earlier of (x) December 31, 2018 and (y) the consummation of any Annual Put Right after August 1, 2018. The redemption of these noncontrolling interests is not within our control and the timing is uncertain.



Excluded from the table above is a liability for unrecognized tax benefits of $13.2 million as of June 30, 2014. The timing and amount of the future cash flows related to this liability is uncertain and cannot be practically determined.

Off-Balance Sheet Arrangements and Related Party Transactions

As of June 30, 2014, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Certain minority stockholders of our international subsidiaries are also commercial purchasers and users of our software and services. Revenue transactions with all of the minority stockholders in the aggregate were less than 10% of our consolidated revenue for fiscal years 2014, 2013 and 2012, respectively, and aggregate accounts receivable from the noncontrolling stockholders represent less than 10% of consolidated accounts receivable at June 30, 2014 and 2013, respectively.

On February 12, 2013, we entered into a Facilities Use Agreement with Aquila Guest Ranch, LLC ("AGR"), an entity owned by the family of our Chief Executive Officer, Tony Aquila, pursuant to which we shall pay AGR a fixed annual fee of $140,000 in exchange for our use during calendar year 2013 of certain guest ranch facilities in Wyoming (the "Wyoming Facility"). On December 26, 2013, we entered into an amendment to the Facilities Use Agreement with AGR and Chaparral Lane Investment, LLC ("CLI"), an entity owned by our Chief Executive Officer and his family, to (i) add an additional facility in Roanoke, Texas (the "Roanoke Facility") to the Facilities Use Agreement and (ii) increase the fixed annual fee to $170,000 in exchange for our use during calendar year 2014 of the Wyoming Facility. This fee increase is due to increased operating expenses of the Wyoming Facility and an increase in the number of days during which we use the Wyoming Facility.



Critical Accounting Policies and Estimates

Our consolidated financial statements included in this Annual Report on Form 10-K have been prepared in accordance with generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts reported in our consolidated financial statements. On an ongoing basis, we evaluate estimates. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results could differ from our estimates under different assumptions or conditions. Our significant accounting policies, which may be affected by our estimates and assumptions, are more fully described in Note 2 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We believe that the following significant accounting policies and assumptions may involve a higher degree of judgment and complexity than others. Goodwill and Indefinite-Lived Intangible Assets. Goodwill and intangible assets with indefinite useful lives are not amortized, but instead are tested for impairment annually or more frequently if impairment indicators arise. Impairment indicators arise when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable, such as a significant downturn in industry or economic trends with a direct impact on the business, an expectation that a reporting unit will be sold or otherwise disposed of for less than the carrying value, loss of key personnel, or a significant decline in the market price of an asset or asset group. 54



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We test goodwill for impairment annually at a reporting unit level using a two-step process. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, we then perform the second step of the goodwill impairment test to determine the amount of the potential impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit's goodwill with the carrying value of that goodwill. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. We determine the fair value of our reporting units through a combination of an income approach, utilizing a discounted cash flow model, and a market approach, which considers comparable companies and transactions. Under the income approach, the discounted cash flow model determines the fair value of each reporting unit based on the present value of projected reporting unit cash flows over a specific projection period and a residual value related to future cash flows beyond the projection period. Both values are discounted to reflect the degree of risk inherent in an investment in the reporting unit and achieving the projected cash flows. A weighted average cost of capital of a market participant is used as the discount rate. The residual value is generally determined by applying a constant terminal growth rate to the estimated reporting unit net cash flows at the end of the projection period. Alternatively, the present value of the residual value may be determined by applying a market multiple at the end of the projection period. In addition to the projected reporting unit cash flows, the key assumptions in the discounted cash flow model include a discount rate and a long-term growth rate. The discount rate used in the determination of the estimated fair value of the reporting units as of June 30, 2014 using the income approach ranged between 10.5% and 15.5%, with a weighted average discount rate of 11.4%. The long-term growth rate used in the determination of the estimated fair value of the reporting units as of June 30, 2014 using the income approach ranged between 1.5% and 6.0%, with a weighted average long-term growth rate of 3.8%. Under the market approach, the fair value of each reporting unit is determined based on multiples of revenues and earnings before interest, taxes, depreciation and amortization for each reporting unit. The multiples were determined based on a selection of comparable companies and acquisition transactions, discounted for each reporting unit to reflect the relative size, diversification and risk of the reporting unit in comparison to the indexed companies and transactions. In our annual goodwill impairment assessment for fiscal year 2014, we concluded that the fair values of the reporting units to which goodwill was assigned exceeded their respective carrying values by at least 32% and by over 126% on average. Accordingly, we did not identify any goodwill impairment. Our estimates of the fair value of our reporting units can be affected by many assumptions that require significant judgment. For example, the projected reporting unit cash flows used in the discounted cash flow model under the income approach reflect assumptions related to existing customer penetration, new customer acquisition, product innovation and development, total addressable market, pricing, market share, competition and technology obsolescence. Our estimates of fair value may differ materially from that determined by others who use different assumptions. New information may arise in the future that affects our fair value estimates and could result in adjustments to our estimates in the future, which could have an adverse impact on our results of operations. We test indefinite-lived intangible assets at the unit of accounting level by making a determination of the fair value of the intangible asset. If the fair value of the intangible asset is less than its carrying value, an impairment loss is recognized in an amount equal to the difference. We also evaluate the remaining useful life of our intangible assets that are not subject to amortization on an annual basis to determine whether events and circumstances continue to support an indefinite useful life. If an intangible asset that is not being amortized is subsequently determined to have a finite useful life, that asset is tested for impairment. After recognition of the impairment, if any, the asset is amortized prospectively over its estimated remaining useful life and accounted for in the same manner as other intangible assets that are subject to amortization. We determine the fair value of our indefinite-lived intangible assets under an income approach using the relief from royalty method, which assumes value to the extent that the acquired company is relieved of the obligation to pay royalties for the benefits received from the assets. In our annual indefinite-lived intangible asset impairment assessment for fiscal year 2014, we concluded that the fair value of our indefinite-lived intangible assets exceeded their respective carrying value and, accordingly, we did not identify any impairment of indefinite-lived intangible assets. Long-Lived Assets. We review long-lived assets, including intangible assets with finite lives and property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the market price of an asset or asset group, a significant adverse change in the extent or manner in which an asset or asset group is being used, the loss of legal ownership or title to the asset, significant negative industry or economic trends or the presence of other factors that 55



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would indicate that the carrying amount of an asset or asset group is not recoverable. We consider a long-lived asset to be impaired if the estimated undiscounted future cash flows resulting from the use of the asset and its eventual disposition are not sufficient to recover the carrying value of the asset. If we deem an asset to be impaired, the amount of the impairment loss represents the excess of the asset's carrying value compared to its estimated fair value.



Revenue Recognition. Revenues are recognized only after services are provided, when persuasive evidence of an arrangement exists, the fee is fixed and determinable, and when collectability is probable. Our multiple element arrangements primarily include a combination of software licenses, hosted database and other services, installation and set-up services, hardware, maintenance services and transaction-based deliverables.

We generate a significant majority of our revenue from subscription-based contracts (where a monthly fee is charged), transaction-based contracts (where a fee per transaction is charged) and subscription-based contracts with additional transaction-based fees (where a monthly fee and a fee per transaction are charged). Subscription-based and transaction-based contracts generally include the delivery of software, access to our database through a hosted service, upfront fees for the implementation and set-up activities necessary for the client to use/access the software and maintenance. Under a subscription arrangement, we consider delivery of software, access to the hosted database and maintenance to be a combined unit of accounting and recognize related revenues at the end of each month upon the completion of the monthly service. A transaction-based fee represents a payment for the right to use the software, access to the hosted database and maintenance. We consider the fee to be fixed and determinable only at the time actual usage occurs, and, accordingly, we recognize revenue at the time of actual usage. Implementation services and set-up activities are necessary for the client to receive services/software. We defer up-front fees billed during the implementation/set-up phase and recognize such revenues on a straight-line basis over the estimated customer life. Recognition of this deferred revenue will commence upon the start of the monthly service. Implementation and set-up costs that are direct and incremental to the contract are capitalized and amortized on a straight-line basis over the estimated customer life. Revenues are reflected net of customer sales allowances, which are based on both specific identification of certain accounts and a predetermined percentage of revenue based on historical experience. Share-Based Compensation. We expense share-based payment awards made to employees and directors, including stock options, restricted stock units and performance share units. We estimate the value of stock options with vesting contingent upon the achievement of service conditions as of the date the award was granted using the Black-Scholes option pricing model. The Black-Scholes option-pricing model requires the use of certain input variables, as follows:



Expected Volatility. Volatility is a measure of the amount the stock price will fluctuate during the expected life of an award. We determine the expected volatility based on the historical volatility of our stock price.

Risk-Free Interest Rate. Our assumption of the risk-free interest rate is based on the implied yield available on U.S. constant rate treasury securities in effect at the time of the grant with remaining terms equivalent to the respective expected terms of the share-based award.

Expected Dividend Yield. Our assumption of the dividend yield is based on our history and expectation of future dividend payouts and may be subject to substantial change in the future.

Expected Award Life. Because we have a limited history of stock option exercises, we determine the expected award life using the simplified method, which defines the life as the average of the contractual term and the vesting period. In addition to the variables above, we are also required to estimate at the grant date the likelihood that the award will ultimately vest (the "pre-vesting forfeiture rate"), and revise the estimate, if necessary, in future periods if the actual forfeiture rate differs. We determine the pre-vesting forfeiture rate of an award based on industry and employee turnover data as well as historical pre-vesting forfeitures occurring over the previous year. We recognize additional share-based compensation expense if the actual forfeiture rate is lower than estimated and a recovery of previously recognized share-based compensation expense if the actual forfeiture rate is higher than estimated.



The fair value of restricted stock units with vesting contingent upon the achievement of service conditions and performance share units with vesting contingent upon the achievement of performance conditions equals the intrinsic value on the date the award was granted.

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To estimate the grant date fair value of performance share units and stock options with vesting contingent upon the achievement of market conditions, we utilize a Monte-Carlo simulation model which simulates a range of possible future stock prices for us and the identified peer companies.

Income Taxes. Income tax expenses or benefits are recognized for the amount of taxes payable or refundable for the current year and for deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. The measurement of current and deferred tax assets and liabilities are based on provisions of currently enacted tax laws. The effects of future enactments of changes in tax laws or rates are not contemplated. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional tax liabilities are more likely than not to be assessed. If we ultimately determine that the obligation is unwarranted, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. This may occur for a variety of reasons, such as the expiration of the statute of limitations with respect to a particular tax return or the signing of a final settlement agreement with the respective tax authority. We record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be. As part of the process of preparing consolidated financial statements, we are required to estimate our income taxes and tax contingencies in each of the jurisdictions in which we operate prior to the completion and filing of tax returns for such periods. This process involves estimating actual current tax expense together with assessing temporary differences, or reversing book-tax differences, resulting from differing treatment of items, such as amortization of intangibles, for tax and accounting purposes. These differences result in net deferred tax assets and liabilities. We regularly assess the likelihood that our deferred tax assets will be realizable using the more-likely-than-not standard. In our assessment, we consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies. If we determine that our deferred tax assets do not meet the more-likely-than-not standard, we establish a valuation allowance. We exercise significant judgment relating to the projection of future taxable income. If judgments regarding recoverability of deferred tax assets change in future periods, we may need to adjust our valuation allowances, which could impact our results of operations in the period in which such determination is made. During fiscal year 2014, management concluded that it was not more-likely-than-not that all of our U.S. net deferred tax assets will be realized in accordance with U.S. GAAP. Accordingly, we established a valuation allowance against our U.S. net deferred tax assets of $24.8 million due to the limitation in our ability to utilize foreign tax credit carryforwards prior to the expiration of the carryforward periods. In assessing the future realization of our U.S. deferred tax assets, all available evidence was considered, including our U.S. cumulative income or loss position over the 12 quarters ended June 30, 2014 which included recent increases to interest expense. The U.S. cumulative loss position reduced the weight given to subjective evidence such as projections for future growth. As of each reporting date, our management considers new evidence, both positive and negative, that could impact management's view with regards to future realization of deferred tax assets. The Company relies heavily on Subpart F income as a future source of taxable income to support the conclusion that the domestic deferred tax assets were more-likely-than-not realizable. We believe that our estimate of future taxable income is reasonable but inherently uncertain, and if our current or future operations and investments generate taxable income different than the anticipated amounts or US tax law changes reduce future Subpart F income, adjustments to the valuation allowance are possible. Derivative Financial Instruments. Derivative financial instruments are used principally in the management of foreign currency and interest rate exposures and are recorded in the consolidated balance sheets at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized as a charge or credit to earnings. If the derivative is designated as a cash flow hedge, the effective portions of the changes in the fair value of the derivative are initially recorded in accumulated other comprehensive income (loss) and are subsequently reclassified into earnings when the hedged transactions occur and affect earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized as a charge or credit to earnings. Derivative instruments not designated as hedges are marked-to-market at the end of each accounting period with the results included in results of operations. 57



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In April 2012, in order to hedge our exposure to variability in the Euro-denominated cash flows associated with two intercompany loans, we entered into two pay fixed Euros / receive fixed U.S. dollar cross-currency swaps in the aggregate notional amount of 109.0 million. These cross-currency swaps were designated, at inception, as cash flow hedges of the intercompany loans. The effective portion of the gain or loss on these hedges is reported as a component of accumulated other comprehensive income (loss) in stockholders' equity and reclassified into earnings when the hedged transaction affects earnings. Accordingly, any foreign exchange gains or losses recognized in our consolidated statements of income resulting from the periodic re-measurement of the intercompany loans into U.S. dollars is mitigated by an offsetting gain or loss, as the case may be, resulting from the change in the fair value of the swaps. In September 2013, in order to hedge our exposure to variability in the Euro-denominated cash flows associated with two intercompany loans, we entered into two pay floating Euros / receive floating U.S. dollar cross-currency swaps in the aggregate notional amount of 141.1 million. These cross-currency swaps were not designated as hedges at inception. We recognize the change in the fair value of the swaps in other (income) expense, net in our consolidated statements of income. In June 2014, we settled one of the intercompany loans and the associated pay floating Euros / receive floating U.S. dollar cross-currency swaps. We determined the estimated fair value of our derivatives using an income approach and standard valuation techniques that utilize market-based observable inputs including spot and forward interest and foreign currency exchange rates, volatilities and interest rate curves at observable intervals. Our estimate of fair value also considers the risk that the swap contracts will not be fulfilled.



Redeemable Noncontrolling Interests. Certain of the ownership interests in our consolidated subsidiaries held by noncontrolling owners are considered redeemable outside of our control. Accordingly, we have presented these redeemable noncontrolling interests as a mezzanine item in our consolidated balance sheet.

If redeemable at fair value, the redeemable noncontrolling interests are reported at their fair value with any adjustment of the carrying value to fair value recorded to common shares in stockholders' equity. We estimate the fair value of our noncontrolling interests through an income approach, utilizing a discounted cash flow model, and a market approach, which considers comparable companies and transactions. Under the income approach, the discounted cash flow model determines fair value based on the present value of projected cash flows over a specific projection period and a residual value related to future cash flows beyond the projection period. Both values are discounted to reflect the degree of risk inherent in an investment in the reporting unit and achieving the projected cash flows. A weighted average cost of capital of a market participant is used as the discount rate. The residual value is generally determined by applying a constant terminal growth rate to the estimated net cash flows at the end of the projection period. Alternatively, the present value of the residual value may be determined by applying a market multiple at the end of the projection period. Under the market approach, fair value is determined based on multiples of revenues and earnings before interest, taxes, depreciation and amortization for each reporting unit. The multiples were determined based on a selection of comparable companies and acquisition transactions, discounted for each reporting unit to reflect the relative size, diversification and risk of the reporting unit in comparison to the indexed companies and transactions. Although we considered the fair value under both the income and market approaches, we ultimately determined the fair value of our redeemable noncontrolling interests based solely upon the income approach, which utilizes a discounted cash flow as we believe this is the best indicator of fair value. The key assumptions in the discounted cash flow model include a discount rate and a long-term growth rate. The discount rate used in the determination of the estimated fair value of the redeemable noncontrolling interests as of June 30, 2014 using the income approach ranged between 13.7% and 15.7%, with a weighted average discount rate of 13.8%, reflecting a market participant's perspective as a noncontrolling shareholder in a privately-held subsidiary. The long-term growth rate used in the determination of the estimated fair value of the redeemable noncontrolling interests as of June 30, 2014 using the income approach ranged between 3.0% and 4.0%, with a weighted average long-term growth rate of 3.9%.



Recent Accounting Pronouncements Not Yet Adopted

In July 2013, the FASB issued ASU Topic No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which requires an entity to present

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certain unrecognized tax benefits as reductions to deferred tax assets rather than as liabilities in balance sheets when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The ASU does not affect the recognition or measurement of uncertain tax positions under ASC 740. ASU Topic No. 2013-11 is effective for our fiscal year 2015, although early adoption is permitted. In May 2014, the FASB issued ASU Topic No. 2014-09, Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in ASC Topic No. 605, Revenue Recognition, and most industry-specific guidance. This guidance primarily requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for our fiscal year 2017.


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