(Exact name of registrant as specified in its charter)
iDelaware
i95-1068610
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i40 Pacifica
iIrvine
iCalifornia
i92618
(Street
Address)
(City)
(State)
(Zip Code)
(i949) i214-1000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Trading symbol(s)
Name of exchange on which registered
iCommon
Stock, $0.00001 par value
iCLGX
iNew York Stock Exchange
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate by check mark whether the
registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
iYes☒ No ☐
Indicate by check mark whether the
registrant: is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge accelerated
filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
☐If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes i☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
On
October 21, 2019 there were i79,518,536 shares of common stock outstanding.
Preferred stock, $0.00001 par value; 500 shares authorized, no shares issued or outstanding
i—
i—
Common
stock, $0.00001 par value; 180,000 shares authorized; 79,519 and 80,092 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively
i1
i1
Additional
paid-in capital
i124,872
i160,870
Retained
earnings
i994,673
i975,375
Accumulated
other comprehensive loss
(i186,685
)
(i135,748
)
Total
stockholders' equity
i932,861
i1,000,498
Total
liabilities and equity
$
i4,138,455
$
i4,168,990
The
accompanying notes are an integral part of these condensed consolidated financial statements.
1
CoreLogic, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
For
the Three Months Ended
For the Nine Months Ended
September 30,
September 30,
(in thousands, except per share amounts)
2019
2018
2019
2018
Operating
revenues
$
i458,957
$
i451,768
$
i1,336,203
$
i1,385,069
Cost
of services (excluding depreciation and amortization shown below)
i228,186
i230,419
i674,457
i709,154
Selling,
general and administrative expenses
i111,276
i113,075
i362,298
i340,049
Depreciation
and amortization
i45,717
i48,461
i142,042
i141,948
Impairment
loss
i78
i33
i47,912
i82
Total
operating expenses
i385,257
i391,988
i1,226,709
i1,191,233
Operating
income
i73,700
i59,780
i109,494
i193,836
Interest
expense:
Interest income
i349
i299
i1,728
i1,053
Interest
expense
i19,852
i19,382
i59,137
i56,061
Total
interest expense, net
(i19,503
)
(i19,083
)
(i57,409
)
(i55,008
)
Gain/(loss)
on investments and other, net
i224
i2,835
(i1,926
)
i5,124
Tax
indemnification release
i—
i—
(i13,394
)
i—
Income
from continuing operations before equity in earnings/(losses) of affiliates and income taxes
i54,421
i43,532
i36,765
i143,952
Provision
for income taxes
i14,481
i20,836
i508
i37,432
Income
from continuing operations before equity in earnings/(losses) of affiliates
i39,940
i22,696
i36,257
i106,520
Equity
in earnings/(losses) of affiliates, net of tax
i605
(i161
)
i497
i2,909
Net
income from continuing operations
i40,545
i22,535
i36,754
i109,429
Loss
from discontinued operations, net of tax
(i17,362
)
(i84
)
(i17,456
)
(i175
)
Net
income
$
i23,183
$
i22,451
$
i19,298
$
i109,254
Basic
income per share:
Net income from continuing operations
$
i0.51
$
i0.28
$
i0.46
$
i1.35
Loss
from discontinued operations, net of tax
(i0.22
)
i—
(i0.22
)
i—
Net
income
$
i0.29
$
i0.28
$
i0.24
$
i1.35
Diluted
income per share:
Net income from continuing operations
$
i0.50
$
i0.27
$
i0.45
$
i1.33
Loss
from discontinued operations, net of tax
(i0.21
)
i—
(i0.21
)
i—
Net
income
$
i0.29
$
i0.27
$
i0.24
$
i1.33
Weighted-average
common shares outstanding:
Basic
i79,761
i80,680
i80,138
i81,073
Diluted
i80,914
i82,017
i81,205
i82,528
The
accompanying notes are an integral part of these condensed consolidated financial statements.
2
CoreLogic, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
For
the Three Months Ended
For the Nine Months Ended
September 30,
September 30,
(in thousands)
2019
2018
2019
2018
Net
income
$
i23,183
$
i22,451
$
i19,298
$
i109,254
Other
comprehensive loss
Adoption of new accounting standards
i—
i—
i—
i408
Market
value adjustments on interest rate swaps, net of tax
(i8,121
)
i2,532
(i41,415
)
i10,770
Reclassification
adjustment for gain on terminated interest rate swap included in net income
i—
i—
(i67
)
i—
Foreign
currency translation adjustments
(i13,529
)
(i6,129
)
(i9,007
)
(i23,729
)
Supplemental
benefit plans adjustments, net of tax
(i149
)
(i124
)
(i448
)
(i371
)
Total
other comprehensive loss
(i21,799
)
(i3,721
)
(i50,937
)
(i12,922
)
Comprehensive
income/(loss)
$
i1,384
$
i18,730
$
(i31,639
)
$
i96,332
The
accompanying notes are an integral part of these condensed consolidated financial statements.
3
CoreLogic, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For
the Nine Months Ended
September 30,
(in thousands)
2019
2018
Cash flows from operating activities:
Net income
$
i19,298
$
i109,254
Less:
Loss from discontinued operations, net of tax
(i17,456
)
(i175
)
Net
income from continuing operations
i36,754
i109,429
Adjustments
to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation and amortization
i142,042
i141,948
Amortization
of debt issuance costs
i3,836
i4,103
Amortization
of operating lease assets
i11,675
i—
Impairment
loss
i47,912
i82
Provision
for bad debt and claim losses
i11,546
i11,113
Share-based
compensation
i26,863
i29,574
Equity
in earnings of affiliates, net of taxes
(i497
)
(i2,909
)
Gain
on sale of property and equipment
(i3
)
(i19
)
Loss
on early extinguishment of debt
i1,453
i—
Deferred
income tax
(i10,642
)
i10,279
Loss/(gain)
on investments and other, net
i473
(i5,124
)
Tax
indemnification release
i13,394
i—
Change
in operating assets and liabilities, net of acquisitions:
The
accompanying notes are an integral part of these condensed consolidated financial statements.
6
Note 1 – iBasis
of Condensed Consolidated Financial Statements
CoreLogic, Inc., together with its subsidiaries (collectively “the Company”, “we”, “us” or “our”), is a leading global property information, insight, analytics and data-enabled solutions provider operating in North America, Western Europe and Asia Pacific. Our combined data from public, contributory and proprietary sources provides detailed coverage of property, mortgages and other encumbrances, consumer credit, tenancy, location, hazard risk and related performance information. The markets we serve include real estate and mortgage finance, insurance, capital markets and the public sector. We deliver value to clients through unique
data, analytics, workflow technology, advisory and managed solutions. Clients rely on us to help identify and manage growth opportunities, improve performance and mitigate risk.
Our condensed consolidated financial information included in this report has been prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States ("US") for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the condensed consolidated financial statements and accompanying notes. Actual amounts may differ from these estimated amounts. Certain information and disclosures normally included in financial statements prepared in accordance
with GAAP have been condensed or omitted pursuant to such rules and regulations. The 2018 year-end condensed consolidated balance sheet was derived from the Company’s audited financial statements for the year ended December 31, 2018. Interim financial information does not require the inclusion of all the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018.
The accompanying unaudited condensed consolidated interim financial statements reflect
all adjustments, consisting of only normal recurring items which, in the opinion of management, are necessary for a fair statement of the results of operations for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full year or for any future periods.
i
Client Concentration
We generate the majority of our operating revenues from clients with operations in the US residential real estate, mortgage origination and mortgage servicing markets.
Approximately i31% and i32%
of our operating revenues for the three months ended September 30, 2019 and 2018, respectively, were generated from our top ten clients, who consist of the largest US mortgage originators and servicers. None of our clients individually accounted for greater than 10% of our operating revenues for the three months ended September 30, 2019 nor 2018. Approximately i30%
and i32% of our operating revenues for the nine months ended September 30, 2019 and 2018, respectively,
were generated from our top ten clients with none of our clients individually accounting for greater than 10% of our operating revenues during these periods.
/
i
Cash, Cash Equivalents and Restricted Cash
We deem the carrying value of cash, cash equivalents and restricted
cash to be a reasonable estimate of fair value due to the nature of these instruments. Restricted cash is comprised of certificates of deposit that are pledged for various letters of credit/bank guarantees secured by us, escrow accounts due to acquisitions and divestitures as well as short-term investments within our deferred compensation plan trust. iThe following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts shown in the statement of cash flows:
Restricted
cash included in prepaid expenses and other current assets
i2,002
i1,070
Total
cash, cash equivalents and restricted cash
$
i101,856
$
i109,309
7
i
Operating
Revenue Recognition
We derive our operating revenues primarily from US mortgage lenders, servicers and insurance companies with good creditworthiness. Operating revenue arrangements are written and specify the products or services to be delivered, pricing, and payment terms. Operating revenue is recognized when the distinct good, service, or performance obligation is delivered and control has been transferred to the client. Generally, clients contract with us to provide products and services that are highly interrelated and not separately identifiable. Therefore, the entire contract is accounted for as one performance obligation. At times, some of our contracts
have multiple performance obligations where we allocate the total price to each performance obligation based on the estimated relative standalone selling price using observable sales or the cost-plus-margin approach.
For products or services where delivery occurs at a point in time, we recognize operating revenue when the client obtains control of the products upon delivery. When delivery occurs over time, we generally recognize operating revenue ratably over the service period, once initial delivery has occurred. For certain of our products or services, clients may also pay upfront fees, which we defer and recognize as operating revenue over the longer of the contractual term or the expected client relationship period.
Licensing arrangements that provide our clients with the right to
access or use our intellectual property are considered functional licenses for which we generally recognize operating revenue based on usage. For arrangements that provide a stand-ready obligation or substantive updates to the intellectual property which the client is contractually or practically required to use, we recognize operating revenue ratably over the contractual term.
Client payment terms are standard with no significant financing components or extended payment terms granted. In limited cases, we allow for client cancellations for which we estimate a reserve.
See further discussion in Note 8 - Operating Revenues.
i
Comprehensive
Loss
Comprehensive loss includes all changes in equity except those resulting from investments by shareholders and distributions to shareholders. Specifically, foreign currency translation adjustments, amounts related to supplemental benefit plans, unrealized gains and losses on interest rate swap transactions and investments are recorded in other comprehensive income/(loss). iThe following table shows the components of accumulated other
comprehensive loss, net of taxes, as of September 30, 2019 and December 31, 2018:
(in thousands)
2019
2018
Cumulative
foreign currency translation
$
(i138,413
)
$
(i129,406
)
Cumulative
supplemental benefit plans
(i5,406
)
(i4,958
)
Net
unrecognized losses on interest rate swaps
(i42,799
)
(i1,384
)
Reclassification
adjustment for gain on terminated interest rate swap included in net income
(i67
)
i—
Accumulated
other comprehensive loss
$
(i186,685
)
$
(i135,748
)
8
i
Investment
in Affiliates, net
Investments in affiliates are accounted for under the equity method of accounting when we are deemed to have significant influence over the affiliate but do not control or have a majority voting interest in the affiliate. Investments are carried at the cost of acquisition, including subsequent impairments, capital contributions and loans from us, plus our equity in undistributed earnings or losses since inception of the investment, less dividends received.
For the three and nine months ended September 30, 2019, we did not have any operating revenues related to our investment in affiliates
and had $i0.3 million and $i0.9 million for the three and nine
months ended September 30, 2018, respectively. We recorded operating expenses of $i0.4 million and $i1.0
million related to our investment in affiliates for the three months ended September 30, 2019 and 2018, respectively, and $i1.1 million and $i6.3
million for the nine months ended September 30, 2019 and 2018, respectively.
During the three and nine months ended September 30, 2019, we recorded a non-cash impairment charge of $i1.5
million in our investment in affiliates, net, due to an other-than-temporary loss because we do not foresee an ability to recover the carrying amount of the investment. This loss was recorded within gain/(loss) on investments and other, net in our condensed consolidated statements of operations. iNo such impairments were recorded in the three and nine months ended September 30,
2018.
In September 2014, we completed the sale of our collateral solutions and field services businesses, which were included in the former reporting segment Asset Management and Processing Solutions. In September 2012, we completed the wind-down of our consumer services business and our former appraisal management company business. In September 2011, we closed our marketing services business. In December 2010, we completed the sale of our Employer and Litigation Services businesses.
In connection with previous divestitures, we retained certain contingent liabilities of the businesses that were disposed of. These contingent liabilities include, among other items, liability for certain litigation matters, indemnification obligations and potential breaches of representations or warranties. With
respect to our Employer and Litigation Services divestiture, we retained certain liabilities and, in September 2016, a jury returned an unfavorable verdict against this discontinued operating unit, which we appealed. In August 2019, the verdict was upheld on appeal. We have accrued a potential loss of $i21.7 million as of September 30, 2019 with respect to this verdict, although we are pursuing further review of the verdict.
The liability is reflected in our results from discontinued operations.
/
As of September 30, 2019, and December 31, 2018, we recorded assets of discontinued operations of $i6.3
million and $0.6 million, respectively, within prepaid expenses and other current assets within our condensed consolidated balance sheets, mainly consisting of tax-related assets. Additionally, as of September 30, 2019 and December 31, 2018, we recorded liabilities of $i24.1
million and $i2.2 million, respectively, within accounts payable and other accrued expenses, which mainly consisted of legal-related accruals.
i
Tax
Escrow Disbursement Arrangements
We administer tax escrow disbursements as a service to our clients in connection with our tax services business. These deposits are maintained in segregated accounts for the benefit of our clients and totaled $i1.3 billion and $i0.7
billion as of September 30, 2019 and December 31, 2018, respectively. Because these deposits are held on behalf of our clients, they are not our funds and, therefore, are not included in the accompanying condensed consolidated balance sheets.
These deposits generally remain in the accounts for a period of two to five business days. We record credits from these activities as a reduction to related administrative expenses, including the cost of bank fees and other administration costs.
Under
our contracts with our clients, if we make a payment in error or fail to pay a taxing authority when a payment is due, we could be held liable to our clients for all or part of the financial loss they suffer as a result of our act or omission. We maintained total claim reserves relating to incorrect disposition of assets of $i21.4 million and $i21.2
million as of September 30, 2019 and December 31, 2018, respectively. Within these amounts, $i9.3 million and $i9.2
million, respectively, are short-term and are reflected within accounts payable and other accrued expenses within our accompanying condensed consolidated balance sheets. The remaining reserves are reflected within other liabilities.
/
9
i
Recent
Accounting Pronouncements
In April 2019, the Financial Accounting Standards Board (“FASB”) issued guidance to amend or clarify certain areas within three previously issued standards related to financial instruments which includes clarification for fair value using the measurement alternative, measuring credit losses and accounting for derivatives and hedging. The amendments in this guidance are largely effective for fiscal years beginning after December 15, 2019 with early adoption permitted. We have not elected early adoption and do not anticipate that this guidance will have a material impact on our consolidated financial statements.
In August 2017, the FASB issued guidance to amend and improve the accounting for hedging activities.
The amendment eliminates the requirement to separately measure and report hedge ineffectiveness. An initial quantitative assessment to establish that the hedge is highly effective is still required but the amendment allows until the end of the first quarter it is designated to perform the assessment. After initial qualification, a qualitative assessment can be performed if the hedge is highly effective and the documentation at inception can reasonably support an expectation of high effectiveness throughout the hedge’s term. The amendment requires companies to present all hedged accounting elements that affect earnings in the same income statement line as the hedged item. For highly effective cash flow hedges, fair value changes will be recorded in other comprehensive loss and reclassified to earnings when the hedged item impacts earnings. The guidance became effective prospectively for fiscal years beginning after December
15, 2018. In October 2018, the FASB issued incremental guidance to this update to permit the Overnight Index Swap Rate and the Secured Overnight Financing Rate to be utilized as US benchmark interest rates for hedge accounting purposes. We have adopted this guidance beginning with fiscal year 2019 as required, which has not had a material impact on our consolidated financial statements.
In February 2016, the FASB issued guidance on lease accounting which requires leases, regardless of classification, to be recognized on the balance sheet as lease assets and liabilities. The objective of this standard is to provide greater transparency on the amount, timing and uncertainty of cash flows arising from leasing arrangements. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee depends upon its classification as a finance or operating
lease. On January 1, 2019, we adopted the new lease accounting standard, and all related amendments, using the modified retrospective approach. Comparative information has not been restated and continues to be reported under the standards in effect for those prior periods as allowed by the guidance. As part of our adoption we elected the package of practical expedients permitted under the transition guidance which allows us to carry forward our historical lease classification of pre-existing leases, treatment of pre-existing indirect costs, as well as our conclusions of whether a pre-existing contract contains a lease. We have implemented internal controls to enable the preparation of financial information upon our adoption in the first quarter of 2019.
Adoption
of the new lease accounting standard resulted in the recording of operating lease assets and lease liabilities of approximately $i67.7 million and $i103.9
million, respectively, as of January 1, 2019. There was no impact to opening equity as a result of adoption as the difference between the asset and liability balance is attributable to reclassifications of pre-existing balances, such as deferred and prepaid rent, into the lease asset balance. The adoption of this standard has not materially impacted our consolidated statement of operations or presentation of cash flows and we do not anticipate a material impact in the future based on our current operations. See below for our accounting policy reflecting the updated guidance.
i
Leases
We
determine if an arrangement contains a lease at inception and determine the classification of the lease, as either operating or finance, at commencement.
Operating and finance lease assets and liabilities are recorded based on the present value of future lease payments which factors in certain qualifying initial direct costs incurred as well as any lease incentives received. If an implicit rate is not readily determinable, we utilize our incremental borrowing rate and inputs from third-party lenders to determine the appropriate discount rate. Lease expense for operating lease payments are recognized on a straight-line basis over the lease term. Finance leases incur interest expense using the effective interest method in addition to amortization of the leased asset on a straight-line basis, both over the applicable lease term. Lease terms may factor in options to extend or terminate
the lease.
We adhere to the short-term lease recognition exemption for all classes of assets (i.e. facilities and equipment). As a result, leases with an initial term of twelve months or less are not recorded on the balance sheet and are recognized on a straight-line basis over the lease term. In addition, for certain equipment leases, we account for lease and non-lease components, such as services, as a single lease component as permitted.
Depreciation
expense for property and equipment, net was approximately $i22.1 million and $i22.6 million for the three months ended September 30,
2019 and 2018, respectively, and $i68.0 million and $i66.8 million
for the nine months ended September 30, 2019 and 2018, respectively.
Impairment losses for property and equipment, net of $i0.1 million and $i12.3
million were recorded for the three and nine months ended September 30, 2019, respectively. For the three and nine months ended September 30, 2018, impairment losses were less than $i0.1
million. See Note 7 - Fair Value for further discussion.
Note 3 – iGoodwill, Net
i
A
reconciliation of the changes in the carrying amount of goodwill and accumulated impairment losses, by reporting unit, for the nine months ended September 30, 2019 is as follows:
Amortization
expense for other intangible assets, net was $i14.4 million and $i16.3 million for the three
months ended September 30, 2019 and 2018, respectively, and $i46.4 million and $i47.8
million for the nine months ended September 30, 2019 and 2018, respectively.
For the nine months ended September 30, 2019, impairment losses for other intangible assets, net of $i35.6
million were recorded, all of which were incurred in the second quarter of 2019. For both the three and nine months ended September 30, 2018, there were ino impairment losses recorded. See Note 7 - Fair Value for further discussion.
i
Estimated
amortization expense for other intangible assets, net is as follows:
Term
loan facility borrowings due May 2024, weighted-average interest rate of 4.00% as of September 30, 2019
$
i1,706,250
$
(i15,747
)
$
i1,690,503
$
i—
$
i—
$
i—
Revolving
line of credit borrowings due May 2024, weighted-average interest rate of 4.00% as of September 30, 2019
i—
(i6,786
)
(i6,786
)
i—
i—
i—
Term
loan facility borrowings due August 2022, weighted-average interest rate of 4.05% as of December 31, 2018, modified May 2019
i—
i—
i—
i1,597,500
(i13,043
)
i1,584,457
Revolving
line of credit borrowings due August 2022, weighted-average interest rate of 4.05% as of December 31, 2018, modified May 2019
i—
i—
i—
i178,146
(i5,216
)
i172,930
Notes:
7.55%
senior debentures due April 2028
i14,524
(i41
)
i14,483
i14,645
(i44
)
i14,601
Other
debt:
Various
debt instruments with maturities through March 2024
i6,319
i—
i6,319
i7,188
i—
i7,188
Total
long-term debt
i1,727,093
(i22,574
)
i1,704,519
i1,797,479
(i18,303
)
i1,779,176
Less
current portion of long-term debt
i68,247
i—
i68,247
i26,935
i—
i26,935
Long-term
debt, net of current portion
$
i1,658,846
$
(i22,574
)
$
i1,636,272
$
i1,770,544
$
(i18,303
)
$
i1,752,241
/
As
of September 30, 2019 and December 31, 2018, we recorded $i1.4 million and $i0.7
million, respectively, of accrued interest expense on our debt-related instruments within accounts payable and other accrued expenses.
Credit Agreement
In May 2019, we amended and restated our credit agreement (the “Credit Agreement”) with Bank of America, N.A., as the administrative agent, and other financial institutions. The Credit Agreement provides for a $i1.8
billionfive-year term loan A facility (the “Term Facility”), and a $i750.0 million five-year revolving credit facility (the “Revolving Facility”). The Term Facility matures, and the Revolving Facility expires, in May 2024. The Revolving Facility includes a $i100.0
million multi-currency revolving sub-facility and a $i50.0 million letter of credit sub-facility. The Credit Agreement also provides for the ability to increase the Term Facility and Revolving Facility by up to $i300.0
million in the aggregate; however, the lenders are not obligated to do so.
The loans under the Credit Agreement bear interest, at the election of the Company, at (i) the Alternate Base Rate (defined as the greater of (a) Bank of America's "prime rate", (b) the Federal Funds effective rate plus i0.50%
and (c) the reserve adjusted London interbank offering rate for a one-month Eurocurrency borrowing plus i1.00%) plus the Applicable Rate (as defined in the Credit Agreement) or (ii) the London interbank offering rate for Eurocurrency borrowings, adjusted for statutory reserves ("Adjusted Eurocurrency Rate") plus the Applicable Rate. The initial Applicable Rate for Alternate Base Rate borrowings
is i0.75% and for Adjusted Eurocurrency Rate borrowings is i1.75%.
After September 2019, the Applicable Rate will vary depending upon the Company's leverage ratio. The minimum Applicable Rate for Alternate Base Rate borrowings will be i0.25% and the maximum will be i1.00%.
The minimum Applicable Rate for Adjusted Eurocurrency Rate borrowings will be i1.25% and the maximum will be i2.00%.
The Credit Agreement also requires the Company to pay a commitment fee for the unused portion of the Revolving Facility, which will be a minimum of i0.20% and a maximum of i0.35%,
depending on the Company's leverage ratio.
13
The Credit Agreement provides that loans under the Term Facility shall be repaid in equal quarterly installments of $i21.9
million, commencing on September 30, 2019 and continuing on each three-month anniversary thereafter, subject to the application of prepayments to quarterly installments. The outstanding balance of the term loans will be due in May 2024.
The Credit Agreement contains the following financial maintenance covenants: (i) a maximum total leverage ratio not to exceed i4.50:1.00
(stepped down to i4.25:1.00 starting with the fiscal quarter ending on September 2020, with a further step down to i4.00:1.00
starting with the fiscal quarter ending on September 2021, followed by a final step down to i3.75:1.00 starting with the fiscal quarter ending on September 2022) and (ii) a minimum interest coverage ratio of i3.00:1.00.
As
of September 30, 2019, we had a remaining borrowing capacity of $i750.0 million under the Revolving Facility and we were in compliance with all financial and restrictive covenants under the Credit Agreement.
Debt
Issuance Costs
In connection with the amendment and restatement of the Credit Agreement, in May 2019, we incurred approximately $i9.7 million of debt issuance costs of which $i9.6
million were initially capitalized within long-term debt, net of current in the accompanying condensed consolidated balance sheets. In addition, when we amended and restated the Credit Agreement, we wrote-off previously unamortized debt issuance costs of $i1.5 million within gain/(loss) on investments and other, net in the accompanying consolidated statement of operations, which resulted in a remaining $i14.6
million of previously unamortized costs. We will amortize all of these costs over the term of the Credit Agreement. For the three months ended September 30, 2019 and 2018, $i1.2 million and $i1.4
million, respectively, were recognized in the accompanying condensed consolidated statements of operations related to the amortization of debt issuance costs. For the nine months ended September 30, 2019 and 2018, $i3.8 million and $i4.1
million, respectively, were recognized in the accompanying condensed consolidated statements of operations related to the amortization of debt issuance costs.
7.55% Senior Debentures
In April 1998, we issued $i100.0 million
in aggregate principal amount of i7.55% senior debentures due 2028. The indentures governing these debentures, as amended, contain limited restrictions on us.
Interest Rate Swaps
We
have entered into amortizing interest rate swaps (“Swaps”) in order to convert a portion of our interest rate exposure on the Term Facility floating rate borrowings from variable to fixed. Under the Swaps, we agree to exchange floating rate for fixed rate interest payments periodically over the life of the agreement. The floating rates in our Swaps are based on the one-month London interbank offering rate. The notional balances, terms and maturities of our Swaps are designed to have at least 50% of our debt as fixed rate.
As of September 30, 2019, the Swaps have a combined remaining notional balance of $i1.3
billion, a weighted average fixed interest rate of i2.05% (rates range from i1.03%
to i2.98%), and scheduled terminations through December 2025. Notional balances under our Swaps are scheduled to increase and decrease based on our expectations of the level of variable rate debt to be in effect in future periods. Currently, we have scheduled notional amounts of between $i1.3
billion and $i1.2 billion through September 2021, then $i1.1
billion and $i1.0 billion through August 2022, and $i416.0
million and $i400.0 million thereafter until December 2025. Approximate weighted average fixed interest rates for the aforementioned time intervals are i2.39%,
i2.64%, and i2.95%,
respectively.
We have designated the Swaps as cash flow hedges. The estimated fair values of these cash flow hedges are recorded in prepaid expenses and other current assets as well as other assets and other liabilities in the accompanying condensed consolidated balance sheets. As of September 30, 2019, the estimated fair value of certain of these cash flow hedges resulted in an asset of $i1.2
million recorded within prepaid and other current assets, as well as a liability of $i58.3 million. As of December 31, 2018, the estimated fair value of certain of these cash flow hedges resulted in an
asset of $i13.3 million, of which $i0.6 million
was recorded within prepaid expenses and other current assets, as well as a liability of $i15.2 million.
Unrealized losses of $i8.1
million (net of $i2.7 million in deferred taxes) and unrealized gains of $i2.5
million (net of $i0.8 million in deferred taxes) for the three months ended September 30, 2019 and 2018,
respectively, were recognized in other comprehensive loss related to the Swaps. Unrealized losses of $i41.4 million (net of $i13.8
million in deferred taxes) and unrealized gains of $i10.8 million (net of $i3.6
million in deferred taxes) for the nine months ended September 30, 2019 and 2018, respectively, were recognized in other comprehensive loss related to the Swaps.
14
Note 6 – iLeases
We
have entered into renewable commitment agreements for certain real estate facilities and equipment, such as computers and printers, which we individually classify as either operating or finance leases. We possess contractual options to renew certain leases ranging from i2 months to i5
years at a time, as well as, in certain instances, contractual options to terminate leases with varying notification requirements and potential termination fees. As of September 30, 2019, our leases with initial terms greater than twelve months had remaining lease terms of up to i13 years.
i
The
following table provides a breakdown of lease balances within our condensed consolidated balance sheet as of September 30, 2019 and December 31, 2018:
(1)
As permitted, December 31, 2018 is presented under the guidance in effect at that time. As such, 2018 does not contain comparable operating assets and/or liabilities. See Note 1 - Basis for Condensed Consolidated Financial Statements for further details.
/
i
For
the three and nine months ended September 30, 2019, the components of lease cost are as follows:
Total
lease cost for all operating leases, including month-to-month rentals, for the three and nine months ended September 30, 2018, excluding taxes, was $i5.5 million and $i16.8
million, respectively.
/
15
Other supplementary information for the nine months ended September 30, 2019 are as follows:
(in
thousands)
Other Information
Finance Leases
Operating Leases
Cash paid for amounts included in measurement of liabilities
Operating
cash outflows
$
i107
$
i19,714
Financing
cash outflows
$
i2,306
$
—
Right-of-use
assets obtained in exchange for lease liabilities
$
i3,537
$
i9,587
Weighted
average remaining lease term (years)
i2.8
i8.4
Weighted
average discount rate
i3.78
%
i6.34
%
ii
Maturities
of lease liabilities as of September 30, 2019 are as follows:
(in thousands)
Finance Leases
Operating Leases
2019
$
i759
$
i4,122
2020
i2,621
i24,732
2021
i1,737
i19,760
2022
i1,117
i12,911
2023
i446
i10,596
Thereafter
i70
i63,691
Total
lease payments
i6,750
i135,812
Less
imputed interest
(i431
)
(i33,129
)
Total
$
i6,319
$
i102,683
//
i
Future
minimum lease commitments, undiscounted, as of December 31, 2018 were as follows:
(in thousands)
2019
$
i26,738
2020
i25,413
2021
i19,214
2022
i12,149
2023
i8,908
Thereafter
i57,179
Total
$
i149,601
/
As
of September 30, 2019, we have ithree operating leases for facilities which have not yet commenced with a combined initial lease liability of approximately $i4.6
million and initial terms ranging from i2 to i8
years. These liabilities are not reflected in our condensed consolidated balance sheet or the maturity schedule as of September 30, 2019 shown above.
16
Note 7 –i
Fair Value
Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable.
The market approach is applied for recurring fair value measurements and endeavors to utilize the best available information. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Fair value balances are classified based on
the observability of those inputs.
A fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Level 2 measurements utilize observable inputs in active markets for similar assets and liabilities, or, quoted prices in markets that are not active.
In estimating fair value, we used the following methods and assumptions:
Cash and Cash Equivalents
For cash and cash equivalents, the carrying
value is a reasonable estimate of fair value due to the short-term nature of the instruments.
Restricted Cash
Restricted cash is comprised of certificates of deposit that are pledged for various letters of credit/bank guarantees secured by us, escrow accounts due to acquisitions and divestitures and short-term investments within our deferred compensation plan trust. We deem the carrying value to be a reasonable estimate of fair value due to the nature of these instruments.
Other Investments
Other investments is currently comprised of a minority equity investment in a foreign enterprise which we measure at
cost and adjust to fair value on a quarterly basis when there are observable price changes in orderly transactions for the identical, or similar, investments. Changes in fair value are recorded within gain/(loss) on investments and other, net in our condensed consolidated statement of operations.
Contingent Consideration
The fair value of our contingent consideration was estimated using the Monte-Carlo simulation model, which relies on significant assumptions and estimates including discount rates and future market conditions, among others.
Long-Term Debt
The fair value of debt was estimated based on the
current rates available to us for similar debt of the same remaining maturities and consideration of our default and credit risk.
Interest Rate Swaps
The fair values of the Swaps were estimated based on market-value quotes received from the counterparties to the agreements.
17
The fair values of our financial instruments as of September 30, 2019 are presented in the following table:
The
following non-financial instruments were measured at fair value, on a non-recurring basis, as of and for the nine months ended September 30, 2019:
Fair
Value Measurements Using
(in thousands)
Remaining
Fair Value (1)
Level 1
Level 2
Level 3
Impairment
Losses
Other intangible assets, net
$
—
$
—
$
—
$
—
$
i35,600
Property
and equipment, net
$
—
$
—
$
—
$
—
$
i12,312
Investment
in affiliates, net
$
—
$
—
$
—
$
—
$
i1,511
$
—
$
—
$
—
$
—
$
49,423
(1) Remaining fair value represents the post-impairment fair value related to the specifically impaired asset(s)
/
18
For the nine months ended September 30, 2019, we recorded non-cash impairment charges of $i35.6
million in other intangible assets, net, which were all incurred in the second quarter of 2019. For the three and nine months ended September 30, 2019, non-cash impairment charges of $i0.1 million and $i12.3
million, respectively, were recorded in property and equipment, net related to capitalized software. The current year impairments are primarily due to ongoing business transformation activities of our appraisal management company within our Underwriting & Workflow Solutions (“UWS”) segment. The impairments were derived using an undiscounted cash flow methodology. The impairments within other intangible assets, net include $i32.3
million for client lists and $i3.3 million for licenses. For the three and nine months ended September 30, 2019, we also recorded a $i1.5
million non-cash impairment charge in investment in affiliates, net, which is included within gain/(loss) on investments and other, net in our condensed consolidated statement of operations.
In connection with the 2017 acquisitions of Myriad Development, Inc. and an insignificant business, we entered into contingent consideration agreements for up to $i20.5
million in cash by 2022 upon the achievement of certain revenue targets ending in fiscal year 2021. These contingent payments were originally recorded at a fair value of $i6.2 million using the Monte-Carlo simulation model. In connection with the 2019 acquisition of National Tax Search, LLC (“NTS”), we entered into a contingent consideration agreement for up to $i7.5
million in cash based upon certain revenue targets in fiscal years 2020 and 2021. This contingent consideration has been initially assessed with no fair value using the Monte-Carlo simulation model. The contingent payments are fair-valued quarterly, and changes are recorded within gain/(loss) on investments and other, net in our condensed consolidated statement of operations. During the nine months ended September 30, 2019, we decreased the fair value of our contingent considerations by $i0.2
million and recorded the gain in our condensed consolidated statement of operations. During the three months ended September 30, 2019, there were no adjustments to our contingent consideration. During the three and nine months ended September 30, 2018, we recorded a loss of $i0.1
million and a gain of $i1.0 million, respectively.
Due to observable price changes in an inactive market, in the first half of 2019, we recorded a combined unfavorable fair value adjustment of $i6.6
million to a minority equity investment, which was recorded within gain/(loss) on investments and other, net in our condensed consolidated statement of operations for the nine months ended September 30, 2019. As a result of the observable price change in the current year, we transferred the minority equity investment classification from Level 3 to Level 2 within the fair value hierarchy above.
19
Note 8 – iOperating
Revenues
i
Operating revenues by solution type consist of the following:
Our property insights solutions combine our patented predictive analytics and proprietary and contributed data to enable our clients to improve customer acquisition and retention, detect and prevent fraud, improve mortgage transaction cycle time and cost efficiency, identify real estate trends and neighborhood characteristics, track market performance, and increase market share. Our data is comprised of real estate information with crime, site inspection, neighborhood, document images and other information from proprietary sources. We also provide verification of applicant income, identity and certain employment verification services. We typically license data in one of two forms: bulk data licensing and transactional licensing. Operating revenue for bulk data licensing contracts
that provide a stand-ready obligation or include substantive updates to the intellectual property is recognized ratably over the contractual term; otherwise, operating revenue is recognized upon delivery. For transactional licensing, we recognize operating revenue based on usage.
Insurance and Spatial Solutions
Our insurance and spatial solutions provide originators and property and casualty insurers the solutions required to more effectively locate, assess and manage property-level assets and risks through location-based data and analytics. We also provide cloud-based property claims workflow technology for property and casualty insurers. The licensed intellectual property data is generally provided to our clients on a subscription or usage basis. For subscription contracts,
operating revenue is recognized ratably over the contractual term once initial delivery has occurred. For contracts to provide a license to data which is delivered via report or data file, operating revenue is recognized when the client obtains control of the products, which is upon delivery.
Property Tax Solutions
Our property tax solutions are built from aggregated property tax information from over 20,000 taxing authorities. We use this information to advise mortgage lenders and servicers of the property tax payment status of loans in their portfolio and to monitor that status over the life of the loans. If a mortgage lender or servicer requires tax payments to be impounded on behalf of its borrowers,
we can also facilitate the transfer of these funds to the taxing authorities and provide the lender or servicer with payment confirmation. Property tax processing revenues are primarily comprised of periodic loan fees and life-of-loan fees. For periodic fee arrangements, we generate monthly fees at a contracted rate for as long as we service the loan. For life-of-loan fee arrangements, we charge a one-time fee when the loan is set-up in our tax servicing system. Life-of-loan fees are deferred and recognized ratably over the expected service period of i10
years and adjusted for early loan cancellation. Revenue recognition rates of loan portfolios are regularly analyzed and adjusted monthly to reflect current trends.
Valuation Solutions
Our valuation solutions represent property valuation-related data driven services and analytics combined with collateral valuation workflow technologies which assist our clients in assessing risk of loss using both traditional and alternative forms of property valuation, driving process efficiencies as well as ensuring compliance with lender and governmental regulations. We provide collateral information technology and solutions that automate property appraisal ordering, tracking, documentation and review for lender compliance with government regulations. Revenue for the property
appraisal service is recognized when the appraisal service is performed and delivered to the client. In addition, to the extent that we provide continuous access to the hosted software platform, we recognize operating revenue over the term of the arrangement.
Credit Solutions
Our credit solutions provide credit and income verification services to the mortgage and automotive industries. We provide comprehensive information, typically in the form of a report, about credit history, income verification and home address history. We normalize the data to provide a broad range of advanced business information solutions designed to reduce risk and improve business performance to mortgage and automotive lenders. Operating revenue is recognized when the report or information is delivered to the
client.
Flood Data Services
Our flood data services provide flood zone determinations primarily to mortgage lenders in accordance with US Federal legislation passed in 1994, which requires that most lenders obtain a determination of the current flood zone status at the time each loan is originated and obtain applicable updates during the life of the loan if contracted to do so. We also provide flood zone determinations to insurance companies. We generally recognize operating revenue upon delivery of the initial determination. If contracted for life of loan monitoring, we recognize operating revenue over the estimated service period, as adjusted for early loan cancellation.
Incremental costs to obtain or fulfill client contracts are recognized as an asset. As of September 30, 2019, we had $i9.5 million of current deferred contract
costs which are presented in prepaid expenses and other current assets, as well as $i21.4 million of long-term deferred contract costs which are presented in other assets in our condensed consolidated balance sheet. As of December 31, 2018, we had $i9.7
million of current deferred contract costs and $i20.8 million of long-term deferred contract costs. Our deferred contract costs primarily include certain set-up and acquisition costs related
to property tax solutions, which amortize ratably over an expected 10-year life, adjusted for early loan cancellations. For the three months ended September 30, 2019 and 2018, we recorded amortization associated with deferred contract costs of $i3.4
million and $i3.8 million, respectively, and $i9.8 million
and $i10.7 million, respectively, for the nine months ended September 30, 2019 and 2018.
We
record a contract liability when amounts are invoiced, which is generally prior to the satisfaction of the performance obligation. For property tax solutions, we invoice upfront fees to clients for services to be performed over time. For property insights and insurance and spatial solutions we invoice quarterly and annually, commencing upon execution of the contracts or at the beginning of the license term, as applicable.
As of September 30, 2019, we had $i853.9
million in contract liabilities compared to $i833.0 million as of December 31, 2018. The overall change of $i20.9
million in contract liability balances are primarily due to $i453.9 million of new deferred billings in the current year, partially offset by $i433.9
million of operating revenue recognized, of which $i253.6 million related to contracts previously deferred, and other increases of $i0.9
million.
Remaining Performance Obligations
The majority of our arrangements are between one and three years with a significant portion being one year or less. For the remaining population of non-cancellable and fixed arrangements greater than one year, as of September 30, 2019 we had $i968.4
million of remaining performance obligations. We expect to recognize approximately i9% percent of this remaining revenue backlog in 2019, i31%
in 2020, i21% in 2021 and i39%
thereafter. See further discussion of performance obligations in Note 1 - Basis for Condensed Consolidated Financial Statements.
22
Note 9 –i
Share-Based Compensation
We currently issue equity awards under the CoreLogic, Inc. 2018 Performance Incentive Plan (the “Plan”), which was approved by our stockholders at our Annual Meeting held in May 2018. The Plan includes the ability to grant share-based instruments such as restricted stock units (“RSUs”), performance-based restricted stock units (“PBRSUs”) and stock options. Prior to the approval of the Plan, we issued share-based awards under the CoreLogic, Inc. 2011 Performance Incentive Plan, as amended, which was preceded by the CoreLogic, Inc. 2006 Incentive Plan. The Plan provides for up to i15,139,084
shares of the Company's common stock to be available for award grants.
We have primarily utilized RSUs and PBRSUs as our share-based compensation instruments for employees and directors. The fair value of any share-based compensation instrument grant is based on the market value of our common stock on the date of grant and is recognized as compensation expense over its vesting period.
Restricted Stock Units
For the nine months ended September 30, 2019 and 2018,
we awarded i640,339 and i537,022
RSUs, respectively, with an estimated grant-date fair value of $i23.5 million and $i25.1
million, respectively. The RSU awards will vest ratably over 3 years. iRSU activity for the nine months ended September 30, 2019 is as follows:
Number
of Shares
Weighted-Average
Grant-Date Fair Value
(in thousands, except weighted-average fair value prices)
As
of September 30, 2019, there was $i26.7 million of total unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a weighted-average period of i1.9
years. The fair value of RSUs are based on the market value of our common stock on the date of grant.
Performance-Based Restricted Stock Units
For the nine months ended September 30, 2019 and 2018, we awarded i203,464
and i408,097 PBRSUs, respectively, with an estimated grant-date fair value of $i7.5
million and $i19.2 million, respectively. These awards are generally subject to service-based, performance-based and market-based vesting conditions. The service and performance period for the 2019 grants is from January 2019 to December 2021 and the performance metric is adjusted earnings per share.
The
performance and service period for the PBRSUs awarded during 2018 is from January 2018 to December 2020 and the performance metrics are generally adjusted earnings per share and market-based conditions. These grants include i232,225 PBRSUs that do not include a market-based
condition but have adjusted margin or operating revenue as the performance metric through the service period ending December 2020 or December 2021.
23
i
The fair values of the awards containing market-based vesting conditions were estimated using Monte-Carlo simulation with the following weighted-average
assumptions:
(1)
The risk-free interest rate for the periods within the contractual term of the PBRSUs is based on the US Treasury yield curve in effect at the time of the grant.
(2) The expected volatility and average total stockholder return are measures of the amount by which a stock price has fluctuated or is expected to fluctuate based primarily on our and our peers' historical data.
/
i
PBRSU
activity for the nine months ended September 30, 2019 is as follows:
Number of Shares
Weighted-Average
Grant-Date Fair Value
(in
thousands, except weighted-average fair value prices)
As
of September 30, 2019, there was $i16.3 million of total unrecognized compensation cost related to unvested PBRSUs that is expected to be recognized over a weighted-average period of i1.7
years. The fair value of PBRSUs are based on the market value of our common stock on the date of grant.
Stock Options
Prior to 2015, we issued stock options as incentive compensation for certain employees. iOption activity for the nine months ended September 30,
2019 is as follows:
As
of September 30, 2019, there was ino unrecognized compensation cost related to unvested stock options.
The intrinsic value of options exercised was $i1.4
million and $i14.3 million for the nine months ended September 30, 2019 and 2018,
respectively. This intrinsic value represents the difference between the fair market value of our common stock on the date of exercise and the exercise price of each option.
24
Employee Stock Purchase Plan
The employee stock purchase plan allows eligible employees to purchase our common stock at i85.0%
of the lesser of the closing price on the first day or the last day of each quarter. Our employee stock purchase plan was approved by our stockholders at our 2012 annual meeting of stockholders and the first offering period commenced in October 2012. We recognize an expense for the amount equal to the estimated fair value of the discount during each offering period.
i
The following table sets
forth the share-based compensation expense recognized for the three and nine months ended September 30, 2019 and 2018:
For
the Three Months Ended
For the Nine Months Ended
September 30,
September 30,
(in thousands)
2019
2018
2019
2018
RSUs
$
i4,715
$
i5,752
$
i17,639
$
i20,385
PBRSUs
i4,001
i3,621
i7,659
i7,780
Stock
options
i—
i—
i—
i—
Employee
stock purchase plan
i392
i402
i1,565
i1,409
$
i9,108
$
i9,775
$
i26,863
$
i29,574
/
The
table above includes $i0.6 million and $i1.0
million of share-based compensation expense within cost of services in the accompanying condensed consolidated statements of operations for the three months ended September 30, 2019 and 2018, respectively, and $i2.0 million
and $i4.4 million for the nine months ended September 30, 2019 and 2018, respectively.
Note
10 – iLitigation and Regulatory Contingencies
We have been named in various lawsuits and we are from time to time subject to audit or investigation by governmental agencies arising in the ordinary course of business.
With respect to matters where we have determined that a loss is both probable and reasonably estimable, we have recorded a liability representing our best estimate of the financial exposure based
on known facts. For matters where a settlement has been reached, we have recorded the expected amount of such settlements. With respect to audits, investigations or lawsuits that are ongoing, although their final dispositions are not yet determinable, we do not believe that the ultimate resolution of such matters, either individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations or cash flows. The ability to predict the ultimate outcome of such matters involves judgments, estimates and inherent uncertainties. The actual outcome of such matters could differ materially from management’s estimates. We record expenses for legal fees as incurred.
Fair Credit Reporting Act Class Actions
In July 2017, Rental Property Solutions, LLC
(“RPS”) was named as a defendant in Claudinne Feliciano, et. al., v. CoreLogic SafeRent, LLC, a putative class action lawsuit in the US District Court for the Southern District of New York. The named plaintiff alleges that RPS prepared a background screening report about her that contained a record of a New York Housing Court action without noting that the action had previously been dismissed. On this basis, she seeks damages under the Fair Credit Reporting Act and the New York Fair Credit Reporting Act on behalf of herself and a class of similarly situated consumers with respect to reports issued during the period of July 2015 to the present. In July 2019, the District Court issued an order certifying a class of approximately i2,000
consumers. We have filed a petition for review of the certification order to the Second Circuit Court of Appeals. The petition is pending.
25
Separation
Following the Separation, we are responsible for a portion of First American Financial Corporation's (“FAFC”) contingent and other corporate liabilities. In the Separation and Distribution Agreement we entered into in connection with the Separation (the “Separation and Distribution Agreement”), we agreed with FAFC to share equally in the cost of resolution of a small number of corporate-level lawsuits, including certain consolidated securities litigation matters from which we have since been dropped.
There were no liabilities incurred in connection with the consolidated securities matters. Responsibility to manage each case has been assigned to either FAFC or us, with the managing party required to update the other party regularly and consult with each other prior to certain important decisions, such as settlement. The managing party will also have primary responsibility for determining the ultimate total liability, if any, related to the applicable case. We will record our share of any such liability when the responsible party determines a reserve is necessary. As of September 30, 2019, ino
reserves were considered necessary by the applicable responsible party.
In addition, the Separation and Distribution Agreement provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our predecessor, The First American Corporation's (“FAC”) financial services business, with FAFC and financial responsibility for the obligations and liabilities of FAC's information solutions business with us. Specifically, each party will, and will cause its subsidiaries and affiliates to, indemnify, defend and hold harmless the other party, its respective affiliates and subsidiaries and each of its respective officers, directors, employees and
agents for any losses arising out of or otherwise in connection with the liabilities each such party assumed or retained pursuant to the Separation.
Note 11 – iIncome Taxes
The effective income tax rate for income taxes as a percentage of income from continuing operations before equity in earnings/(losses)
of affiliates and income taxes was i26.6% and i47.9%
for the three months ended September 30, 2019 and 2018, respectively, and i1.4% and i26.0%
for the nine months ended September 30, 2019 and 2018, respectively.
For the three months ended September 30, 2019, when compared to 2018, the decrease in the effective income tax rate was primarily due to a one-time charge of $i12.5
million for the transition tax (in connection with the Tax Cuts and Jobs Act) which was recorded in the prior year.
For the nine months ended September 30, 2019, when compared to 2018, the decrease in the effective income tax rate was primarily due to a $i15.3 million discrete benefit recorded during the current
year for the release of state tax reserves and a prior year one-time charge of $i12.5 million for the transition tax.
We are currently under examination for the years 2010 through 2012 and 2016, by the US Internal Revenue Service, our primary taxing authority, and for other years by various state taxing authorities. It is reasonably possible the amount of the unrecognized
benefits with respect to certain unrecognized tax positions could significantly increase or decrease within the next twelve months and have an impact on our net income. Currently, we expect expiration of statutes of limitations, within the next twelve months, for which we have tax reserves recorded of approximately $i0.9 million as of September 30,
2019.
26
Note 12 – iEarnings Per Share
i
The
following is a reconciliation of net income per share:
Numerator for basic and diluted net income per share:
Net
income from continuing operations
$
i40,545
$
i22,535
$
i36,754
$
i109,429
Loss
from discontinued operations, net of tax
(i17,362
)
(i84
)
(i17,456
)
(i175
)
Net
income
$
i23,183
$
i22,451
$
i19,298
$
i109,254
Denominator:
Weighted-average
shares for basic income/(loss) per share
i79,761
i80,680
i80,138
i81,073
Dilutive
effect of stock options and RSUs
i1,153
i1,337
i1,067
i1,455
Weighted-average
shares for diluted income/(loss) per share
i80,914
i82,017
i81,205
i82,528
Income/(loss)
per share
Basic:
Net
income from continuing operations
$
i0.51
$
i0.28
$
i0.46
$
i1.35
Loss
from discontinued operations, net of tax
(i0.22
)
i—
(i0.22
)
i—
Net
income
$
i0.29
$
i0.28
$
i0.24
$
i1.35
Diluted:
Net
income from continuing operations
$
i0.50
$
i0.27
$
i0.45
$
i1.33
Loss
from discontinued operations, net of tax
(i0.21
)
i—
(i0.21
)
i—
Net
income
$
i0.29
$
i0.27
$
i0.24
$
i1.33
/
The
dilutive effect of share-based compensation awards has been calculated using the treasury-stock method. For both the three months ended September 30, 2019 and 2018, an aggregate of less than i0.1
million RSUs were excluded from the weighted-average diluted common shares outstanding due to their anti-dilutive effect. For both the nine months ended September 30, 2019 and 2018, an aggregate of less than 0.1 million of RSUs and PBRSUs were excluded from the weighted-average diluted common shares outstanding due to their anti-dilutive effect.
Note 13 – iAcquisitions
In
August 2019, we completed the acquisition of National Tax Search LLC ("NTS") for $i15.0 million, subject to certain working capital adjustments, and up to $i7.5
million to be paid in cash by 2022, contingent upon the achievement of certain revenue targets in fiscal years 2020 and 2021 (see Note 7 - Fair Value for further details). NTS is a leading provider of commercial property tax payment services and specializes in identifying potential collateral loss related to unpaid property tax, homeowners association fee management, and inaccurate flood zone determination. The NTS acquisition increases the Company's commercial property information offerings and is expected to drive future growth in the US. NTS is included as a component of our UWS segment. The purchase price was allocated to the assets acquired and liabilities assumed using a variety of valuation techniques including discounted cash flow analysis, which included significant unobservable inputs. We have preliminarily
recorded client lists of $i4.6 million with an estimated useful life of i10
years, proprietary technology of $i3.2 million with an estimated useful life of i7
years, trademarks of $i0.9 million with an estimated useful life of i7
years, non-compete agreements of $i0.3 million with an estimated useful life of i5
years, contract liabilities of $i1.8 million, and goodwill of $i6.6
million, all of which is deductible for tax purposes.
In December 2018, we acquired the remaining i72.0% of Symbility Solutions Inc. (“Symbility”) for C$i107.1
million, or approximately US $i80.0 million, subject to certain working capital adjustments. Symbility is a leading global provider of cloud-based property claims workflow solutions for the property and casualty insurance industry, headquartered in Canada. This acquisition further progresses our long-term strategic plan by adding scale to our insurance and spatial businesses and international presence. Symbility is included
as a component of our Property Intelligence & Risk Management (“PIRM”) segment. The purchase price was allocated to the assets acquired and liabilities assumed using a variety of valuation techniques including discounted cash flow analysis, which included significant unobservable inputs. We have preliminarily recorded
27
proprietary technology of $i14.9
million with an estimated useful life of i8 years, client lists of $i6.4
million with an estimated useful life of i12 years, trademarks of $i1.2
million with an estimated useful life of i4 years, $i5.3
million of deferred tax liabilities, and goodwill of $i75.6 million. In connection with this acquisition, we remeasured our existing i28.0%
investment ownership in Symbility which resulted in a $i13.3 million step-up gain that we recorded within gain/(loss) on investments and other, net in our consolidated statement of operations in the fourth quarter of 2018. For the nine months ended September 30, 2019,
goodwill decreased by $i0.2 million as a result of a change in the purchase price allocation for certain working capital adjustments.
In December 2018, we completed the acquisition of Breakaway Holdings, LLC d.b.a Homevisit (“HomeVisit”) for $i12.7
million, subject to certain working capital adjustments. HomeVisit is a leading provider of marketing focused real estate solutions, including property listing photography, videography, 3D modeling, drone imagery and related services. Given anticipated synergy with our pre-existing real estate solutions platforms, this acquisition is expected to enable the next generation of property marketing solutions for real estate professionals, multiple listing services (“MLSs”), brokers and agents across North America. HomeVisit is included as a component of our PIRM segment. The purchase price was allocated to the assets acquired and liabilities assumed using a variety of valuation techniques including discounted cash flow analysis, which included significant unobservable inputs. We have preliminarily recorded $i1.4
million for non-compete agreements with an estimated useful life of i5 years, client lists of $i0.9
million with an estimated useful life of i11 years, trademarks of $i0.2
million with an estimated useful life of i3 years, and goodwill of $i10.4
million, all of which is deductible for tax purposes. For the nine months ended September 30, 2019, goodwill increased by $i0.1 million as a result of a change in the purchase price allocation for certain working capital adjustments.
In
April 2018, we completed the acquisition of a la mode technologies, LLC (“a la mode”) for $i120.0 million, exclusive of working capital adjustments. a la mode is a provider of subscription-based software solutions that facilitate the aggregation of data, imagery and photographs in a government-sponsored enterprise compliant format for the completion of US residential appraisals. This acquisition contributes to our continual development and scaling of our
end-to-end valuation solutions workflow suite, which includes data and market insights, analytics as well as data-enabled services and platforms. a la mode is included as a component of our UWS reporting segment. The purchase price was allocated to the assets acquired and liabilities assumed using a variety of valuation techniques including discounted cash flow analysis, which included significant unobservable inputs. We recorded contract liabilities of $i7.5
million, proprietary technology of $i15.8 million with an estimated useful life of i7
years, customer lists of $i32.5 million with an estimated average useful life of i13
years, tradenames of $i9.0 million with an estimated useful life of i8
years, non-compete agreements of $i5.7 million with an estimated useful life of i5
years, and goodwill of $i63.6 million, of which $i61.4
million is deductible for tax purposes.
In February 2018, we completed the acquisition of eTech Solutions Limited (“eTech”) for cash of approximately £i15.0 million, or approximately $i21.0
million, exclusive of working capital adjustments. eTech is a leading provider of innovative mobile surveying and workflow management software that enhances productivity and mitigates risk for participants in the United Kingdom (“UK”) valuation market. This acquisition expands our UK presence and strengthens our technology platform offerings. eTech is included as a component of our PIRM reporting segment. The purchase price was allocated to the assets acquired and liabilities assumed using a variety of valuation techniques including discounted cash flow analysis, which included significant unobservable inputs. We recorded a deferred tax liability of $i1.6
million, proprietary technology of $i7.0 million with an estimated useful life of i5
years, customer lists of $i1.7 million with an estimated average useful life of i9
years, and goodwill of $i14.1 million.
These business combinations did not have a material impact on our condensed consolidated statements of operations.
We incurred $i0.1
million and $i0.2 million of acquisition-related costs within selling, general and administrative expenses on our condensed consolidated statement of operations for the three months ended September 30, 2019 and 2018, respectively, and $i0.3
million and $i1.9 million for the nine months ended September 30, 2019 and 2018, respectively.
28
Note
14 – iSegment Information
We have organized into itwo reportable segments:
PIRM and UWS.
Property Intelligence & Risk Management Solutions. Our PIRM segment combines property information, mortgage information and consumer information to deliver unique housing market and property-level insights, predictive analytics and risk management capabilities. We have also developed proprietary technology and software platforms to access, automate or track this information and assist our clients with decision-making and compliance tools in the real estate industry, insurance industry and the single and multifamily industry. We deliver this information directly to our clients in a standard format over the web, through hosted software platforms or in bulk data form. Our solutions include property insights and insurance and spatial solutions in North America, Western Europe and Asia Pacific. The segment's primary clients are commercial banks,
mortgage lenders and brokers, investment banks, fixed-income investors, real estate agents, MLS companies, property and casualty insurance companies, title insurance companies, government agencies and government-sponsored enterprises.
The operating results of our PIRM segment included intercompany revenues of $i2.7 million and $i1.7
million for the three months ended September 30, 2019 and 2018, respectively, and $i6.7 million and $i4.9
million for the nine months ended September 30, 2019 and 2018, respectively. The segment also included intercompany expenses of $i0.8 million and $i0.7
million for the three months ended September 30, 2019 and 2018, respectively, and $i2.6 million and $i2.3
million for the nine months ended September 30, 2019 and 2018, respectively.
Underwriting & Workflow Solutions. Our UWS segment combines property information, mortgage information and consumer information to provide comprehensive mortgage origination and monitoring solutions, including, underwriting-related solutions and data-enabled valuations and appraisals. We have also developed proprietary technology and software platforms to access, automate or track this information and assist our clients with vetting and onboarding prospects, meeting compliance regulations and understanding, diagnosing
and monitoring property values. Our solutions include property tax solutions, valuation solutions, credit solutions and flood services in North America. The segment’s primary clients are large, national mortgage lenders and servicers, but we also serve regional mortgage lenders and brokers, credit unions, commercial banks, fixed-income investors, government agencies and property and casualty insurance companies.
The operating results of our UWS segment included intercompany revenues of $i0.8
million and $i0.7 million for the three months ended September 30, 2019 and 2018, respectively, and $i2.6
million and $i2.3 million for the nine months ended September 30, 2019 and 2018, respectively. The segment also included intercompany expenses of $i2.7
million and $i1.7 million for the three months ended September 30, 2019 and 2018, respectively, and $i6.7
million and $i4.9 million for the nine months ended September 30, 2019 and 2018, respectively.
We
also separately report on our corporate and eliminations. Corporate consists primarily of corporate personnel and other expenses associated with our corporate functions and facilities, investment gains and losses, equity in earnings/(losses) of affiliates, net of tax, and interest expense.
29
i
Selected financial information by reportable segment is as follows:
(in
thousands)
Operating Revenues
Depreciation and Amortization
Operating Income/(Loss)
Equity in Earnings/(Losses) of Affiliates, Net of Tax
This Quarterly Report on Form 10-Q and certain information incorporated herein by reference contain forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Quarterly Report, other than statements that are purely historical, are forward-looking statements. Words such as “anticipate,”“expect,”“intend,”“plan,”“believe,”“seek,”“estimate,”“will,”“should,”“would,”“could,”“may,” and similar expressions also identify forward-looking statements. The forward-looking statements include, without limitation, statements regarding our future operations, financial condition and prospects,operating results, revenues and earnings liquidity, our estimated income tax rate, unrecognized tax positions, amortization expenses, impact of recent accounting pronouncements, our cost management program, our acquisition strategy and our growth plans, expectations regarding our recent acquisitions, share repurchases, the level of aggregate US mortgage originations and the reasonableness of the carrying value related to specific financial assets and liabilities.
Our expectations, beliefs, objectives, intentions and strategies regarding future results are not guarantees of future performance
and are subject to risks and uncertainties that could cause actual results to differ materially from results contemplated by our forward-looking statements. These risks and uncertainties include, but are not limited to:
•
compromises in the security or stability of our data and systems, including from cyber-based attacks, the unauthorized transmission of confidential information or systems interruptions;
•
limitations on access to, or increase in prices for, data from external sources, including
government and public record sources;
•
changes in applicable government legislation, regulations and the level of regulatory scrutiny affecting our clients or us, including with respect to consumer financial services and the use of public records and consumer data;
•
difficult or uncertain conditions in the mortgage and consumer lending industries and the economy generally;
•
reliance
on our top ten clients for a significant portion of our revenue and profit;
•
intense competition in the market against third parties and the in-house capabilities of our clients;
•
risks related to the outsourcing of services and international operations;
•
our ability to realize the anticipated
benefits of certain acquisitions and the timing thereof;
•
our cost-reduction program and growth strategies, and our ability to effectively and efficiently implement them;
•
our ability to protect proprietary technology rights and avoid infringement of others’ proprietary technology rights;
•
the
level of our indebtedness, our ability to service our indebtedness and the restrictions in our various debt agreements;
•
our ability to attract and retain qualified management;
•
impairments in our goodwill or other intangible assets; and
•
the remaining tax sharing arrangements and other obligations
associated with the spin-off of First American Financial Corporation (“FAFC”).
We urge you to carefully consider these risks and uncertainties and review the additional disclosures we make concerning risks and uncertainties that may materially affect the outcome of our forward-looking statements and our future business and operating results, including those made in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2018, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. You are cautioned not to place
undue reliance on forward-looking statements, which speak only as of the date of the filing of this Quarterly Report on Form 10-Q.
31
Business Overview
We are a leading global property information, analytics and data-enabled software platforms and services provider operating in North America, Western Europe and Asia Pacific. Our combined data from public, contributory and proprietary sources provides detailed coverage of property, mortgages and other encumbrances, property risk and replacement cost, consumer credit, tenancy, location, hazard risk and related performance information. We have more than one
million users who rely on our data and predictive decision analytics to reduce risk, enhance transparency and improve the performance of their businesses.
We offer our clients a comprehensive national database covering real property and mortgage information, judgments and liens, building and replacement costs, parcel and geospatial data, criminal background records, eviction information, non-prime lending records, credit information, and tax information, among other data types. Our databases include over 900 million historical property transactions, over 100 million mortgage applications and property-specific data covering approximately 99% of US residential properties, as well as commercial locations, totaling nearly
150 million records. We are also the industry's first parcel-based geocoder and have developed a proprietary parcel database covering more than 150 million parcels across the United States (“US”). We believe the quality of the data we offer is distinguished by our broad range of data sources and our expertise in aggregating, organizing, normalizing, processing and delivering data to our clients.
With our data as a foundation, we have built strong analytics capabilities and a variety of value-added business services to meet our clients’ needs for property tax processing, property valuation, mortgage and automotive credit reporting, tenancy screening, hazard risk, property risk and replacement cost, flood plain location determination, other geospatial data analytics, and related services.
Reportable
Segments
We have organized into the following two reportable segments:
Our Property Intelligence & Risk Management (“PIRM”) segment combines property information, mortgage information, and consumer information to deliver unique housing market and property-level insights, predictive analytics and risk management capabilities. We have also developed proprietary technology and software platforms to access, automate or track this information and assist our clients with decision-making and compliance tools in the real estate industry, insurance industry and the single and multifamily industry. We deliver this information directly to our clients in a standard format over the web, through hosted software platforms or in bulk data form. Our solutions include property insights as well
as insurance and spatial solutions in North America, Western Europe and Asia Pacific.
Our Underwriting & Workflow Solutions (“UWS”) segment combines property information, mortgage information and consumer information to provide comprehensive mortgage origination and monitoring solutions, including underwriting-related solutions and data-enabled valuations and appraisals. We have also developed proprietary technology and software platforms to access, automate or track this information and assist our clients with vetting and on-boarding prospects, meeting compliance regulations and understanding, diagnosing and monitoring property values. Our solutions include property tax solutions, valuation solutions, credit solutions and flood services in North America.
32
Results
of Operations
Overview of Business Environment and Company Developments
Business Environment
The volume of US mortgage loan originations serves as a key market driver for more than half of our business. We believe the volume of real estate and mortgage transactions is primarily affected by real estate prices, the availability of funds for mortgage loans, mortgage interest rates, housing supply, employment levels and the overall state of the US economy. We believe mortgage unit volumes were approximately 20% to 25% higher in the third quarter of 2019 relative to the same period in 2018,
primarily due to a continued low interest rate environment during which the 10 year US Treasury yield and mortgage interest rates significantly declined. As a result, refinance volumes activity has strengthened and we now expect full-year 2019 mortgage unit volumes to be approximately 8% to 10% higher than 2018 levels.
We generate the majority of our operating revenues from clients with operations in the US residential real estate, mortgage origination and mortgage servicing markets. Approximately 31% and 32% of our operating revenues for the three months ended September 30, 2019 and 2018,
respectively, were generated from our top ten clients, who consist of the largest US mortgage originators and servicers. None of our clients individually accounted for greater than 10% of our operating revenues for the three months ended September 30, 2019 nor 2018. Approximately 30% and 32% of our operating revenues for the nine months ended September 30, 2019 and 2018, respectively, were generated from our top ten
clients with none of our clients individually accounting for greater than 10% of our operating revenues during these periods.
While the majority of our revenues are generated in the US, continued strengthening of the US dollar versus other currencies in 2019 unfavorably impacted the translation of the financial results of our international operating revenues by $8.2 million for the nine months ended September 30, 2019.
Acquisitions
In August 2019, we completed the acquisition of National Tax Search, LLC (“NTS”) for $15.0 million, subject to certain
working capital adjustments. NTS is included as a component of our UWS segment. See Note 13 - Acquisitions for further discussion.
Business Exits & Transformation
In December 2018, we announced the intent to exit a loan origination software unit and our remaining legacy default management related platforms, as well as accelerate our appraisal management company (“AMC”) transformation program. We believe these actions will expand our overall profit margins and provide for enhanced long-term organic growth trends. In September 2019, we divested our default technology-related platforms and received proceeds of $3.8 million and expect the AMC transformation to be concluded by December 31,
2019. For the three and nine months ended September 30, 2019, we incurred lower revenues of approximately $16.0 million and $30.0 million, respectively, attributable to our business exits and strategic transformation. We also recorded non-cash impairment charges of $47.8 million and severance expense of $5.4 million in 2019 relating to the AMC transformation program.
Productivity and Cost Management
In line with our on-going commitment to operational excellence and margin expansion, we are targeting a cost reduction of at least $20.0 million in 2019. Savings are expected to be realized through the reduction of operating costs, selling, general and administrative costs, outsourcing certain business process functions, consolidation of
facilities and other operational improvements.
Our consolidated operating revenues were $459.0 million for the three months ended September 30, 2019, an increase of $7.2 million, or 1.6% when compared to the comparable period in 2018, and consisted of the following:
(in
thousands, except percentages)
2019
2018
$ Change
% Change
PIRM
$
181,649
$
180,607
$
1,042
0.6
%
UWS
280,828
273,625
7,203
2.6
Corporate
and eliminations
(3,520
)
(2,464
)
(1,056
)
42.9
Operating revenues
$
458,957
$
451,768
$
7,189
1.6
%
Our
PIRM segment operating revenues increased by $1.0 million, or 0.6%, for the three months ended September 30, 2019 when compared to 2018. Excluding acquisition activity of $11.1 million, operating revenues decreased $10.1 million due to lower property insights revenues of $5.6 million which included unfavorable foreign exchange of $2.5 million and weaker market conditions in Australia of $3.1 million. Insurance and spatial solutions revenues decreased by $1.9 million primarily due to softer market demand mainly in catastrophic risk modeling. Other revenues decreased by $2.6 million.
Our UWS segment revenues increased by $7.2 million, or 2.6%,
for the three months ended September 30, 2019 when compared to 2018. The variance is primarily due to higher mortgage market volumes and market share gains across our property tax, flood data and valuation solutions, partially offset by the impact of our business exits and transformation initiatives which lowered our revenues by approximately $16.0 million within valuation solutions and other revenues. Refer to "Business Exits & Transformation" discussion above for further details.
Our corporate and eliminations were comprised of intercompany revenue eliminations between our operating segments.
Cost of Services (excluding depreciation and amortization)
Our
consolidated cost of services was $228.2 million for the three months ended September 30, 2019, a decrease of $2.2 million, or 1.0%, when compared to 2018. Excluding acquisition activity of $6.2 million, the decrease of $8.4 million was primarily due to lower operating revenues and favorable product mix.
Selling, General and Administrative Expenses
Our consolidated selling, general and administrative expenses was $111.3 million for the three months ended September 30,
2019, a decrease of $1.8 million, or 1.6%, when compared to 2018. Excluding acquisition activity of $5.4 million, the decrease of $7.2 million was primarily due to lower professional fees of $7.9 million, lower outsourced services of $4.4 million, and personnel-related savings of $1.7 million. These were offset by higher productivity-related investments of $6.1 million and higher other expenses of $0.7 million.
Depreciation and Amortization
Our consolidated depreciation and amortization expense was $45.7 million for the three months ended September 30,
2019, a decrease of $2.7 million, or 5.7%, when compared to 2018. Excluding acquisition activity of $1.2 million, the decrease of $3.9 million was primarily due to assets that were fully impaired during the previous quarter.
34
Operating Income
Our consolidated operating income was $73.7 million for the three months ended September 30,
2019, an increase of $13.9 million, or 23.3%, when compared to 2018, and consisted of the following:
(in thousands, except percentages)
2019
2018
$
Change
% Change
PIRM
$
23,443
$
22,978
$
465
2.0
%
UWS
77,758
61,850
15,908
25.7
Corporate
and eliminations
(27,501
)
(25,048
)
(2,453
)
9.8
Operating income
$
73,700
$
59,780
$
13,920
23.3
%
Our
PIRM segment operating income increased by $0.5 million, or 2.0%, for the three months ended September 30, 2019 when compared to 2018. Excluding acquisition activity of $0.1 million operating income increased by $0.6 million and margins increased by 108 basis points, primarily due to the impact of our ongoing operational efficiency programs.
Our UWS segment operating income increased by $15.9 million, or 25.7%, for the three months ended September 30, 2019 when compared to 2018. Excluding acquisition activity
of $0.1 million, operating income increased by $16.0 million and margins increased by 517 basis points, primarily driven by higher revenues, favorable product mix, and the impact of our ongoing operational efficiency programs.
Corporate and eliminations had an unfavorable variance of $2.5 million, or 9.8%, for the three months ended September 30, 2019 when compared to 2018, primarily due to higher investments in data and technology capabilities.
Total Interest Expense, net
Our consolidated total interest expense, net was $19.5 million
for the three months ended September 30, 2019, an increase of $0.4 million, or 2.2%, when compared to 2018. The increase was primarily due to higher interest rates on our interest rate swaps (“Swaps”). See Note 5 - Long-Term Debt for further discussion on the Swaps.
Gain/(Loss) on Investments and Other, net
Our consolidated gain on investments and other, net was $0.2 million for the three months ended September 30,
2019, an unfavorable variance of $2.6 million, when compared to 2018. The current period net primarily includes $1.3 million gain related to the sale of a non-core business unit and other gains of $0.4 million, largely offset by a loss of $1.5 million related to a non-cash impairment charge on an equity method investment. The prior year period primarily reflects $1.0 million in gains related to supplemental benefit plans as well as a $1.7 million gain from the sale of a non-core business-line.
Provision for Income Taxes
Our consolidated provision for income taxes from continuing operations before equity in earnings/(losses) of affiliates and income taxes was $14.5
million and $20.8 million for the three months ended September 30, 2019 and 2018, respectively. The effective tax rate was 26.6% and 47.9% for the three months ended September 30, 2019 and 2018, respectively. The change in the effective income tax rate was primarily due to the one-time charge of $12.5 million for the transition tax (in connection with the Tax Cuts and Jobs Act) which we
recorded in the prior year.
Equity in Earnings/(Losses) of Affiliates, net of tax
Our consolidated equity in earnings of affiliates, net of tax was $0.6 million for the three months ended September 30, 2019, a favorable variance of $0.8 million when compared to 2018. We have equity interests in various affiliates which had earnings in the current period compared to prior year losses causing the favorable variance.
Loss from Discontinued Operations, net of tax
Our
consolidated loss from discontinued operations, net of tax was $17.4 million for the three months ended September 30, 2019. This loss principally related to the impact of an appellate court decision in August 2019 pertaining to a discontinued operating unit, for which we recorded a liability of $21.7 million as of September 30, 2019. See Note 1 - Basis of Condensed Consolidated Financial Statements for further information.
Our consolidated operating revenues were $1.3 billion for the nine months ended September 30, 2019, a decrease of $48.9 million, or 3.5%, when compared to 2018,
and consisted of the following:
(in thousands, except percentages)
2019
2018
$ Change
%
Change
PIRM
$
541,174
$
537,029
$
4,145
0.8
%
UWS
804,363
855,270
(50,907
)
(6.0
)
Corporate
and eliminations
(9,334
)
(7,230
)
(2,104
)
29.1
Operating revenues
$
1,336,203
$
1,385,069
$
(48,866
)
(3.5
)%
Our
PIRM segment revenues increased by $4.1 million, or 0.8%, for the nine months ended September 30, 2019 when compared to 2018. Excluding acquisition activity of $37.7 million, the decrease of $33.6 million was primarily due to lower property insight revenues of $24.7 million as well as lower insurance and spatial solutions revenues of $2.6 million primarily due to lower volumes. Property insights included unfavorable foreign exchange of $8.2 million and weaker market conditions in Australia, which negatively impacted revenues by $7.3 million. Other revenues decreased by $6.3 million.
Our UWS segment revenues decreased by $50.9 million, or 6.0%,
for the nine months ended September 30, 2019 when compared to 2018. Excluding acquisition activity of $9.4 million, the decrease of $60.3 million was primarily due to lower property tax solutions of $19.3 million primarily driven by a prior year benefit of accelerated revenue recognition and lower credit solutions of $24.5 million primarily related to lower volumes. Additionally, our valuation solutions and other revenues reflect the impact of our business exits and transformation initiatives which lowered our segment revenues by approximately $30.0 million. Refer to "Business Exits & Transformation" discussion above for further details. The decrease was partially offset by higher flood data and valuations solutions due to increased market volumes.
Our
corporate and eliminations were comprised of intercompany revenue eliminations between our operating segments.
Cost of Services (excluding depreciation and amortization)
Our consolidated cost of services was $674.5 million for the nine months ended September 30, 2019, a decrease of $34.7 million, or 4.9%, when compared to 2018. Excluding acquisition activity of $20.8 million, the decrease of $55.5 million was primarily due to lower operating revenues.
Selling,
General and Administrative Expenses
Our consolidated selling, general and administrative expenses were $362.3 million for the nine months ended September 30, 2019, an increase of $22.2 million, or 6.5%, when compared to 2018. Excluding acquisition activity of $20.4 million, the increase of $1.8 million was primarily due to higher productivity-related investments of $14.0 million, higher severance expense of $5.5 million, higher professional fees of $2.4 million, partially offset by lower outsourced services of $16.0 million, personnel-related savings of $3.9
million, and lower other expenses of $0.2 million.
Depreciation and Amortization
Our consolidated depreciation and amortization expense was $142.0 million for the nine months ended September 30, 2019, an increase of $0.1 million, or 0.1%, when compared to 2018. Excluding acquisition activity of $5.6 million, the decrease of $5.5 million is primarily due to assets that were fully impaired during the current year.
Impairment
Loss
Our consolidated impairment loss totaled $47.9 million for the nine months ended September 30, 2019, primarily representing write-offs of client lists of $32.3 million, software of $12.3 million, and licenses of $3.3 million related to ongoing business transformation activities of our AMC business within our UWS segment.
36
Operating
Income
Our consolidated operating income was $109.5 million for the nine months ended September 30, 2019, a decrease of $84.3 million, or 43.5%, when compared to 2018, and consisted of the following:
(in
thousands, except percentages)
2019
2018
$ Change
% Change
PIRM
$
60,821
$
72,730
$
(11,909
)
(16.4
)%
UWS
143,389
195,800
(52,411
)
(26.8
)
Corporate
and eliminations
(94,716
)
(74,694
)
(20,022
)
26.8
Operating income
$
109,494
$
193,836
$
(84,342
)
(43.5
)%
Our
PIRM segment operating income decreased by $11.9 million, or 16.4%, for the nine months ended September 30, 2019 when compared to 2018. Excluding acquisition activity of $0.7 million, operating income decreased by $11.2 million and margins decreased by 124 basis points primarily due to lower operating revenues, partially offset by the impact of our ongoing operational efficiency programs.
Our UWS segment operating income decreased by $52.4 million, or 26.8%, for the nine months ended September 30, 2019 when compared to 2018.
Excluding acquisition activity of $1.0 million, operating income decreased by $53.4 million, primarily impacted by an impairment loss of $47.9 million, lower revenues driven by a prior year benefit of accelerated revenue recognition and higher severance charges related to ongoing business transformation activities of our AMC business, partially offset by the impact of our ongoing operational efficiency programs.
Corporate and eliminations had an unfavorable variance of $20.0 million, or 26.8%, for the nine months ended September 30, 2019 primarily due to higher investments in data and technology capabilities as well as higher severance.
Total Interest
Expense, net
Our consolidated total interest expense, net was $57.4 million for the nine months ended September 30, 2019, an increase of $2.4 million, or 4.4%, when compared to 2018. The increase was primarily due to higher interest rates on our Swaps. See Note 5 - Long-Term Debt for further discussion on the Swaps.
Gain/(Loss) on Investments and Other, net
Our
consolidated loss on investments and other, net was $1.9 million for the nine months ended September 30, 2019, an unfavorable variance of $7.1 million, or 137.6%, when compared to 2018. The unfavorable variance was primarily due to a loss of $6.6 million related to a fair value adjustment on an equity investment, a loss of $1.5 million related to a non-cash impairment charge on an equity method investment, a write-off of $1.5 million of unamortized debt issuance costs due to financing activities in May 2019, and a prior year gain of $1.0 million on our contingent consideration agreements. These were partially
offset by higher realized gains related to our supplemental benefit plans of $1.7 million, a current period gain of $1.3 million related to the sale of a non-core business unit, and other gains of $0.5 million.
Tax Indemnification Release
During the second quarter of 2019, we recorded a $13.4 million loss related to the release of a tax indemnification receivable due to the expiration of the statutes of limitations in our principal state jurisdictions. Associated state tax reserves of $15.3 million were also released and recognized as income tax benefit through the provision for income taxes.
Provision for Income Taxes
Our
consolidated provision for income taxes from continuing operations before equity in earnings/(losses) of affiliates and income taxes was $0.5 million and $37.4 million for the nine months ended September 30, 2019 and 2018, respectively. The effective tax rate was 1.4% and 26.0% for the nine months ended September 30, 2019 and 2018,
respectively. The decrease in the effective income tax rate was primarily due to a $15.3 million discrete benefit recorded during the second quarter of 2019 for the reversal of state tax reserves in addition to the one-time charge of $12.5 million for the transition tax (in connection with the Tax Cuts and Jobs Act) which was recorded in the prior year.
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Equity in Earnings/(Losses) of Affiliates, net of tax
Our consolidated equity in earnings of affiliates, net of tax was $0.5 million for the nine
months ended September 30, 2019, an unfavorable variance of $2.4 million, or 82.9% when compared to 2018. The decrease was primarily related to the acquisition of Symbility in December 2018 which had previously been an equity method investment.
Loss from Discontinued Operations, net of tax
Our consolidated loss from discontinued operations, net of tax was $17.5 million for the nine months ended September 30,
2019. This loss principally related to the impact of an appellate court decision in August 2019 pertaining to a discontinued operating unit, for which we recorded a liability of $21.7 million as of September 30, 2019. See Note 1 - Basis of Condensed Consolidated Financial Statements for further information.
Liquidity and Capital Resources
Cash and cash equivalents as of September 30, 2019 totaled $88.2
million, a decrease of $3.0 million from December 31, 2018. As of September 30, 2019, our cash balances held in foreign jurisdictions totaled $41.1 million and are primarily related to our international operations. We plan to maintain significant cash balances outside of the US for the foreseeable future.
Restricted cash of $13.6 million as of September 30, 2019 and $13.0 million as of December 31,
2018 was comprised of certificate of deposits that are pledged for various letters of credit/bank guarantees secured by us, escrow accounts due to acquisitions and divestitures, as well as short-term investments within our deferred compensation plan trust.
Cash Flow
Operating Activities. Cash provided by operating activities reflects net income adjusted for certain non-cash items and changes in operating assets and liabilities. Total cash provided by operating activities was approximately $247.1 million and $252.3 million for the nine months ended September 30,
2019 and 2018, respectively. The decrease in cash provided by operating activities was primarily due to lower net income from continuing operations, as adjusted for non-cash activities, offset by favorable changes in working capital items.
Investing Activities. Total cash used in investing activities was approximately $96.9 million and $202.6 million during the nine months ended September 30, 2019 and 2018,
respectively. The decrease was primarily related to lower net cash paid for acquisitions of $127.7 million partially offset by higher investments in technology and innovation of $26.6 million.
Financing Activities. Total cash used in financing activities was approximately $147.2 million for the nine months ended September 30, 2019, which was primarily comprised of repayments of long-term debt of $1.8 billion, debt issuance costs of $9.6 million, share repurchases of $61.6
million, net outflows from share-based compensation-related transactions of $1.3 million, partially offset by proceeds from long-term debt of $1.8 billion. Total cash used in financing activities was approximately $74.6 million for the nine months ended September 30, 2018, which was primarily comprised of repayment of long-term debt of $114.6 million and share repurchases of $87.0 million, partially offset by proceeds from long-term debt of $120.1 million and net proceeds from share-based compensation-related transactions of $7.0
million.
Financing and Financing Capacity
Total debt outstanding, gross, was $1.7 billion and $1.8 billion, respectively, for the periods as of September 30, 2019 and December 31, 2018. Our significant debt instruments and borrowing capacity are described below.
Credit Agreement
In May 2019, we amended
and restated our credit agreement (the “Credit Agreement”). The Credit Agreement provides for a $1.8 billion term loan facility (the “Term Facility”), and a $750.0 million revolving credit facility (the “Revolving Facility”). The Term Facility matures and the Revolving Facility expires on May 31, 2024. The Revolving Facility includes a $100.0 million multi-currency 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 Facility and Revolving Facility by up to $300.0 million in the aggregate; however, the lenders are not obligated to do so. As of September 30,
2019, we had borrowing capacity under the Revolving Facility of $750.0 million and were in compliance with the financial and restrictive covenants of the Credit Agreement. See Note 5 - Long-Term Debt for further discussion.
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Interest Rate Swaps
We have entered into amortizing Swaps in order to convert a portion of our interest rate exposure on the Term Facility floating rate borrowings from variable to fixed. Under the Swaps, we agree to exchange floating rate for fixed rate interest payments periodically
over the life of the agreement. The floating rates in our Swaps are based on the one-month London interbank offering rate. The notional balances, terms, and maturities of our Swaps are designed to have at least 50% of our debt as fixed rate.
As of September 30, 2019, the Swaps have a combined remaining notional balance of $1.3 billion, a weighted average fixed interest rate of 2.05% (rates range from 1.03% to 2.98%), and scheduled terminations through December 2025. Notional balances under our Swaps are scheduled
to increase and decrease over their contract lengths based on our expectations of the level of variable rate debt to be in effect in future periods. Currently, we have scheduled notional amounts of between $1.3 billion and $1.2 billion through September 2021, then $1.1 billion and $1.0 billion through August 2022, and $416.0 million and $400.0 million thereafter until December 2025. Approximate weighted average fixed interest rates for the aforementioned time intervals are
2.39%, 2.64%, and 2.95%, respectively.
Liquidity and Capital Strategy
We expect that cash flow from operations and current unrestricted cash balances, together with available borrowings under our Revolving Facility, will be sufficient to meet operating requirements through the next twelve months. Cash available from operations, however, could be affected by any general economic downturn or any decline or adverse changes in our business such as a loss of clients, market and or competitive pressures or other significant change in business environment.
We strive
to pursue a balanced approach to capital allocation and will consider the repurchase of common shares, the retirement of outstanding debt, investments and the pursuit of strategic acquisitions on an opportunistic basis.
During the quarter ended September 30, 2019, we repurchased 0.7 million shares of our common stock for $32.6 million. See Unregistered Sales of Equity Securities and Use of Proceeds - Purchases of Equity Securities by the Issuer and Affiliated Purchasers for further discussion.
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 or at all, in which case we would not be able to access capital from these sources. Based on current market conditions and our financial condition, we believe that we have the ability to effectively access these liquidity sources for new borrowings if and when needed for the next twelve months. However, a weakening of our financial condition, including a significant decrease in our profitability or cash flows or a material increase in our leverage, could adversely affect our ability to access these markets and/or increase our cost of borrowings.
Critical
Accounting Policies and Estimates
For additional information with respect to our critical accounting policies, which are those that could have the most significant effect on our reported results and require subjective or complex judgments by management, see Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the year ended December 31, 2018. Management believes there have been no material changes to this information. See also Note 1 – Basis for Condensed Consolidated Financial Statements for updates on our accounting policies over lease accounting.
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Item
3. Quantitative and Qualitative Disclosures about Market Risk.
Our primary exposure to market risk relates to interest-rate risk associated with certain financial instruments. We monitor our risk associated with fluctuations in interest rates and currently use derivative financial instruments to hedge some of these risks.
As of September 30, 2019, we had approximately $1.7 billion in gross, long-term debt outstanding, predominately all of which was variable-interest-rate debt. An increase in interest rates could increase the costs of our variable-interest-rate debt obligations. Rising interest rates could also limit our ability to refinance our debt when it matures
or cause us to pay higher interest rates upon refinancing and increase interest expense on refinanced indebtedness.
To manage our interest rate risk we have entered into Swaps in order to convert a portion of our interest rate exposure on the Term Facility floating rate borrowings from variable to fixed. Under the Swaps, we agree to exchange floating rate for fixed rate interest payments periodically over the life of the agreement. The notional balances, terms and maturities of our Swaps are currently designed to have at least 50% of our debt as fixed rate. As of September 30, 2019, the combined remaining notional balance of the Swaps was $1.3 billion, with a weighted average fixed interest
rate of 2.05% (rates range from 1.03% to 2.98%), and scheduled terminations through December 2025. Notional balances under our Swaps are scheduled to increase and decrease over their contract lengths based on our expectations of the level of variable rate debt to be in effect in future periods. A hypothetical 1% increase or decrease in interest rates would result in an approximately $0.9 million change to interest expense on our existing indebtedness as of September 30, 2019 on a quarterly basis.
Although we are subject to foreign currency exchange rate risk as a result of our operations in certain foreign countries, the foreign exchange exposure related to these operations, in the aggregate, is
not material to our financial condition or results of operations.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer have concluded that, as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, were effective, based on the evaluation of these controls and procedures required by Rule 13a-15(b).
Changes
in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that occurred during the quarter ended September 30, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II: OTHER INFORMATION
Item 1. Legal
Proceedings.
For a description of our legal proceedings, see Note 1 - Basis for Condensed Consolidated Financial Statements and Note 10 – Litigation and Regulatory Contingencies of our condensed consolidated financial statements, which is incorporated by reference in response to this item.
Item 1A. Risk Factors.
We have described in our Annual Report on Form 10-K for the fiscal year ended December 31,
2018, the primary risks related to our business, and we may periodically update those risks for material developments. Those risks are not the only ones we face, but do represent those risks that we believe are material to us. Our business is also subject to the risks that affect many other companies, such as general economic conditions, geopolitical events and employment relations. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business. Please read the cautionary notice regarding forward-looking statements under the heading “Management's Discussion and Analysis of Financial Condition and Results of Operations.” You should carefully consider the risks and uncertainties our business faces.
There have been no material changes to the Risk Factors described in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2018.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Unregistered Sales of Equity Securities
During the quarter ended September 30, 2019,
we did not issue any unregistered shares of our common stock.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In October 2018, the Board of Directors canceled all prior repurchase authorizations and established a new share repurchase authorization of up to $500.0 million. As of September 30, 2019, we have $416.4 million in value of shares of common stock (inclusive of commissions and fees) available to be repurchased under the plan. The stock repurchase authorization has no expiration date and repurchases may be made in the open market, in privately negotiated transactions or pursuant to a Rule 10b5-1 plan.
Under
our Credit Agreement, our stock repurchase capacity is restricted to $150.0 million per fiscal year, with the ability to undertake an additional amount of repurchases in such fiscal year provided that, on a pro forma basis after giving effect to the stock repurchase, our total leverage ratio does not exceed 3.5 to 1.0. While we continue to preserve the capacity to execute stock repurchases under our existing share repurchase authorization, going forward we will strive to pursue a balanced approach to capital allocation and will consider the repurchase of shares of our common stock, the retirement of outstanding debt and the pursuit of strategic acquisitions on an opportunistic basis.
During the quarter ended September 30, 2019, we repurchased 0.7 million
shares of our common stock in open market purchases pursuant to the terms of our stock repurchase authorization.
Issuer
Purchases of Equity Securities
Period
Total Number of Shares Purchased
Average Price Paid per Share (1)
Total Number of Shares Purchased as Part of
Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
The
following unaudited consolidated financial statements for the quarter ended September 30, 2019 included in this quarterly report on Form 10-Q formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statement of Stockholders' Equity, and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tagsü
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Cover
Page Interactive Data File (formatted in Inline XBRL and included in the interactive data files submitted as Exhibit 101)ü
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.