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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-K
 
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
COMMISSION FILE NUMBER: 001-33461
 
Solera Holdings, Inc.
 
(Exact name of registrant as specified in its charter)
Delaware
 
26-1103816
(State or other jurisdiction of incorporation organization)
 
(I.R.S. Employer Identification No.)
 
 
 
7 Village Circle, Suite 100
Westlake, Texas 76262
 
(817) 961-2100
(Address of Principal Executive Offices, including Zip Code)
 
(Registrant’s Telephone Number, Including Area Code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of exchange on which registered
Common Stock, par value $0.01 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
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 it was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  ý    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $2,679,000,000 as of December 31, 2013 (based upon the closing sale price on The New York Stock Exchange for such date). For this purpose, all shares held by directors, executive officers and stockholders beneficially owning five percent or more of the registrant’s common stock have been treated as held by affiliates.
The number of shares of the registrant’s common stock outstanding as of August 21, 2014 was 68,608,932.



DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement to be delivered to stockholders in connection with registrants 2014 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent stated herein.



TABLE OF CONTENTS
 
PART I
 
 
Item 1.
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
 
 
 
 
 
PART III
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
PART IV
 
 
Item 15.
 




CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are identified by the use of terms and phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” and similar terms and phrases, including references to assumptions. However, these words are not the exclusive means of identifying such statements. These statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies and include, but are not limited to, statements about: increase in customer demand for our software and services; growth rates for the automobile insurance claims industry; growth rates for vehicle purchases and car parcs; customer adoption rates for automated claims processing software and services; increases in customer spending on automated claims processing software and services; efficiencies resulting from automated claims processing; performance and benefits of our products and services; development or acquisition of claims processing products and services in areas other than automobile insurance; our relationship with insurance company customers as they continue global expansion; revenue growth resulting from the launch of new software and services; growth and expansion in our service, maintenance and repair platform and customer’s customer platform; execution of our Mission 2020 strategy to grow our business to $2 billion in revenue and $840 million in Adjusted EBITDA by fiscal year 2020; execution of our Leverage, Diversity and Disruption growth strategy; execution of our Management, Margin and Core strategy related to acquisitions and joint ventures; our ability to acquire over time additional interests in our Service Repair Solutions, Inc. joint venture and to successfully integrate it into our existing businesses; improvements in operating margins resulting from operational efficiency initiatives; expectations regarding AudaExplore revenue; increased utilization of our software and services resulting from increased severity; our expectations regarding the growth rates for vehicle insurance; changes in the amount of our existing unrecognized tax benefits; our revenue mix; our income taxes; restructuring plans, potential restructuring charges and their impact on our revenues; our operating expense growth and operating expenses as a percentage of our revenues; stability of our development and programming costs; growth of our selling, general and administrative expenses; decrease of total depreciation and amortization expense; increase in interest expense and possible impact of future foreign currency fluctuations; growth of our acquisition and related costs; our ability to realize our U.S. and foreign deferred tax assets during the respective carryforward and reversal periods; our use of cash and liquidity position going forward; cash needs to service our debt; and our ability to grow in all types of markets.
Actual results could differ materially from those projected, implied or anticipated by our forward-looking statements. Some of the factors that could cause actual results to differ include: those set forth in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this Annual Report on Form 10-K.
Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. All forward-looking statements included in this Annual Report on Form 10-K are based on information available to us as of the date of this report. All forward-looking statements are qualified in their entirety by this cautionary statement, and we undertake no obligation to revise or update this Annual Report on Form 10-K to reflect events or circumstances after the date hereof. You are advised, however, to consult any further disclosures that we make on related subjects in our Quarterly Reports on Form 10-Q and Periodic Reports on Form 8-K filed with the Securities and Exchange Commission (the “SEC”). You also should read the section titled “Use of Estimates” included in Note 2 of Notes to Consolidated Financial Statements included pursuant to Item 8 of this Annual Report on Form 10-K.
 



PART I
ITEM 1.
BUSINESS

General

References and Fiscal Year

The terms “we,” “us,” “our,” “our company” and “our business” refer to the consolidated operations of Solera Holdings, Inc. Our fiscal year ends on June 30 of each year. Fiscal years are identified in this Annual Report on Form 10-K according to the calendar year in which they end. For example, the fiscal year ended June 30, 2014 is referred to as “fiscal year 2014.”

Our Company

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

As of June 30, 2014, we served over 165,000 customers and were active in more than 70 countries across six continents with more than 3,600 employees. Our customers include more than 4,000 automobile insurance companies, 60,500 collision repair facilities, 12,500 independent assessors, 44,500 service, maintenance and repair facilities and 43,500 automotive recyclers, auto dealers and others. We derive revenues from many of the world’s largest automobile insurance companies, including the ten largest automobile insurance companies in Europe and eight of the ten largest automobile insurance companies in North America. No single customer accounted for more than 2.6% of our revenue for fiscal year ended June 30, 2014.

Our Vision

In the future, we believe the digital lifestyles of our customers-customers (we work with the end customer in mind but always offer our services through our business customers, hence the term, customers-customers) will require all aspects of auto and home ownership to be digitally enabled and connected .We believe that Solera, with its diverse data based platforms, will be uniquely positioned to serve this need. We will therefore serve the complete auto lifecycle needs and leverage our core competencies of data, software and networking to digitize property claims management as well.

Our History

Our operations began in 1966, when Swiss Re Corporation founded our predecessor, the Claims Services Group (“CSG”). Solera Holdings, LLC was founded in March 2005 by Tony Aquila, our Chairman of the Board, Chief Executive Officer and President; and affiliates of GTCR Golder Rauner II, L.L.C. (“GTCR”), a private equity firm. In April 2006, subsidiaries of Solera Holdings, LLC acquired CSG from Automatic Data Processing, Inc. (“ADP”) for approximately $1.0 billion (the “CSG Acquisition”). Prior to the CSG Acquisition, Solera Holdings, LLC’s operations consisted primarily of developing our business plan, recruiting personnel, providing consulting services, raising capital and identifying and evaluating operating assets for acquisition.

In connection with our initial public offering in May 2007, we converted from Solera Holdings, LLC, a Delaware limited liability company, into Solera Holdings, Inc., a Delaware corporation, and all of the Class A Common Units and Class B Preferred Units of Solera Holdings, LLC were converted into shares of our common stock.

Platforms

We currently operate three platforms - Auto, Customer’s Customer and Property. At the core of our software and services are our proprietary databases. Each of our databases has been adapted for use in our local markets. Over the last 5 years, we have invested over $100 million annually to maintain and expand our proprietary databases and related software applications. Our primary databases include our repair estimating database, our total loss database, our claims database, our vehicle validation database, our motor vehicle record database, our salvage parts database, our service maintenance and repair databases and our property database.


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Auto Platform

Through our Auto Platform, we facilitate efficient, cost effective collision repair, vehicle maintenance and repair, glass repair, vehicle salvage and parts procurement.

Collision Repair

The Automobile Insurance Claims Process

An overview of the automobile insurance claims process and its complexities provides a framework for understanding how our customers can derive value from our software and services. The automobile insurance claims process generally begins following an automobile collision and consists of the following steps: 
First Notice of Loss
 
The policyholder initiates the claim process with the insurance company.
 
 
The insurance company assigns the claim to an assessor and/or a collision repair facility.
Investigation
 
The assessor conducts interviews, examines photos and reviews police reports.
 
 
The insurance company, assessor or collision repair facility estimates the cost to repair the vehicle.
 
 
In the case of a heavily damaged vehicle, the assessor or collision repair facility may request a pre-accident vehicle valuation.
Evaluation
 
The insurance company reviews the estimate and/or pre-accident valuation and confirms the results of the investigation.
 
 
The insurance company may request additional information and/or require follow-up investigation.
Decision
 
The insurance company determines whether the vehicle should be repaired or declared a total loss.
 
 
Based on its evaluation, the insurance company determines who is liable for the claim and the repair or total loss amount it intends to pay.
Settlement
 
The insurance company notifies the policyholder or the collision repair facility of the amount it intends to pay.
 
 
The policyholder or collision repair facility may negotiate the final payment amount with the insurance company.
 
 
In some cases, two or more insurance companies may settle claims amongst themselves depending on fault or payment liability.
Vehicle Repair
 
The collision repair facility repairs the vehicle if it is not a total loss.
 
 
The collision repair facility or the insurance company may periodically communicate the repair status to the insured policyholder.
 
 
The collision repair facility purchases replacement parts from original equipment manufacturers, or OEMs, aftermarket parts makers or automotive recyclers.
 
 
Further revisions to the claim payment amount may occur if additional damage or cost savings are identified.
Payment
 
The insurance company pays the policyholder or the collision repair facility in the case of a repairable vehicle.
 
 
The insurance company pays the policyholder the pre-accident value (less the amount of the insurance deductible) of the vehicle in the case of a total loss.
 
 
The insurance company is paid the actual cash value of the total loss vehicle by the buyer of the salvage vehicle.

Each of these steps consists of multiple actions requiring significant and complex interaction among several parties. For example, the investigation step generally involves insurance companies, assessors, collision repair facilities and automotive recyclers and includes conducting interviews, taking and examining photographs, obtaining and reviewing police reports and estimating repair costs and salvage values. When performed manually, many of these tasks, such as the mailing of vehicle photographs or the estimating of vehicle repair costs, can be time-consuming. In addition, without an efficient means of communication that facilitates real-time access to data, claim-related negotiations can result in increased cycle times and unnecessary costs.


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The Automobile Insurance Claims Processing Industry

The primary participants in the automobile insurance claims processing industry with whom we do business are automobile insurance companies, collision repair facilities, independent assessors and automotive recyclers. We believe that the principal drivers of demand for our software and services are:

Automobile Insurance Industry

We estimate that the global automobile insurance industry processes more than 100 million claims each year, representing more than $155 billion in repair, loss adjustment expense and other related costs. We believe the industry is relatively concentrated with a number of large automobile insurance companies accounting for the majority of global automobile insurance premiums. Over the past decade, the largest insurers in the U.S., as a group, have been steadily growing and increasing their market share (measured by the premiums written) so that today over half of all private passenger auto insurance in the United States is issued by just five companies, and in 2011, the top 15 companies issued more than 75 percent.

In 2013, global, non-life insurance premiums, which includes premiums for lines of business in addition to automobile insurance, grew by 2.8% compared to 2012. In 2013, approximately 80% of these premiums were generated in industrialized countries (of which North America grew by 2.8% and Western Europe declined by 1.2% compared to 2012) and 20% of the premium volumes were generated in emerging markets (of which Latin America grew by 9.0% and Emerging Asia grew by 11.7% compared to 2012).

Claims Database. Our claims database enables our customers to evaluate their internal claims process performance, as well as measure the performance of their business partners. Our employees also use this database to provide consulting services to our customers and develop new software and services. Customers use this database to benchmark their performance against their local peer group through detailed analyses of comprehensive industry data. Compiled over the past 15 years, this database contains approximately two billion data records representing over 340 million automobile repair claims and over $200 billion in claims payments. We update this database by incorporating more than 650,000 additional repair estimates every week.

Collision Repair Industry

The collision repair industry is highly fragmented. We estimate there are approximately 100,000 collision repair facilities in our markets. The operating costs of these facilities have increased substantially over the past decade due to continued increases in sophisticated technologies and advanced materials used in vehicle manufacture, inflation in collision repair labor rates and changes in environmental regulations. In addition, collision repair facilities have increasingly established preferred relationships with insurance companies. These arrangements, known in the U.S. as direct repair programs, allow collision repair facilities to generate increased repair volumes through insurance company referrals. Insurance companies benefit by establishing a trusted network of collision repair facilities across which they can negotiate labor rates and implement standard procedures and best practices. Insurance companies often require collision repair facilities to use specified automated claims processing software and related services to participate in their programs. We believe the combination of these factors will increase demand for software and services that help collision repair facilities manage their workflow and increase their efficiency.

Repair Estimating Database. We have developed our repair estimating database over 47 years through the development, collection, organization and management of automobile-related information. The data in this database enables our customers to estimate the cost to repair a damaged vehicle. This database:
contains detailed cost data for each part and the required labor operations needed to complete repairs on over 5,500 vehicle types;
covers over 99% of the vehicle models in our core markets;
includes vehicles data dating back to 1967;
includes over 7.7 million parts for vehicles with multiple model years, editions, option packages and country-specific variations;
includes over 6.5 million aftermarket parts; and,
includes over 5.3 million graphics.

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We update this database with data provided to us by third parties, including original equipment manufacturers, or OEMs, and aftermarket part suppliers, and automotive recyclers, along with data we develop through our proprietary analyses of local labor repair times and damage repair techniques. The quality and accuracy of the database, which are very important to each of our customers, are continuously monitored and maintained using rigorous quality control processes, which include updating over 2.3 million data records every month.
Independent Assessors

Independent assessors are often used to estimate vehicle repair costs, particularly where automobile insurance companies have chosen not to employ their own assessors or do not have a sufficient number of employee assessors and where governments mandate the use of independent assessors.

In some markets, we believe changing government regulations and improved claims technology will result in a decrease in the number of independent assessors. However, in other markets, insurance companies are reducing their employee assessor staff to contain costs, which we believe will lead to a growth in the number of independent assessors. We believe the combination of these offsetting factors will result in a modest overall increase in the number of independent assessors and, therefore, the demand for automobile insurance claims processing software and services.

Automotive Recycling Industry

The automotive recycling industry is highly fragmented with over $25 billion in estimated U.S. annual sales by over 7,000 independent salvage and recycling facilities. Participants in the automotive recycling industry are a valuable source of economical and often hard-to-find used vehicle replacement parts. In addition, this industry has become more sophisticated and technology-driven in order to keep pace with more stringent fulfillment requirements. Additionally, insurance companies are increasingly mandating the use of aftermarket and recycled parts to lower the costs to repair damaged vehicles. We believe these factors will result in increased demand for salvage yard management software and services, as automotive recyclers seek to manage their workflows, maximize the value of their inventories and increase efficiency.

Recycled Parts Databases The Hollander Interchange™ is a part identification index of millions of auto parts and their interchangeable equivalents that spans over 80 years.  The Hollander Interchange is the language used by parts buyers and sellers to inventory, locate and sell a significant percentage of recycled parts.  EDEN® is a dynamic parts database that contains approximately 160 million unique automobile parts that are held in inventory at any given point by a network of approximately 3,000 automotive recyclers.  EDEN is used by our customers to quickly find locally available automobile parts.
Salvage Vehicle Database. Our salvage vehicle database helps our customers buy, sell and estimate the value of salvage vehicles. Through our eSalvage exchange each year, our customers list approximately 1.2 million salvage vehicles for sale and more than 10,600 qualified bidders enter approximately 8 million bids for the purchase of salvage vehicles.

Key Drivers of Automobile Insurance Claims Processing Demand

We believe that the principal drivers of demand for our software and services are:

Claims process fragmentation. The automobile insurance claims process involves many parties and consists of many steps, which are often managed through paper, fax and other labor intensive processes. Our software and services simplify and streamline the claims process, allowing our customers to process claims faster and reduce their costs.

Asymmetrical information. Collision repair facilities typically have more information about vehicles in their shops than do insurance companies who often must make their damage estimates remotely or with limited information. Our databases provide insurance companies access to detailed information about vehicle damage, repair times and replacement costs, allowing them to more accurately estimate fair settlement values and reduce overpayment on claims.

Disparate claims data. Claims-related data generated by automobile insurance companies often is not stored, shared with other parties or captured in a format that is easily transferable to other applications. This, combined with the inability to transfer and manipulate data easily across multiple applications, hinders comparisons of repairs and claims. Our databases are constantly updated for actual claims data from industry participants. Having access to our databases helps insurance companies generate more accurate repair estimates and identify top-performing collision repair facilities.

Conflicting interests of industry participants. Collision repair facilities benefit from high repair costs, which increase their revenues. Conversely, insurance companies benefit from low repair costs, which reduce their expenses. This conflict can

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result in high settlement costs and delays. Our software and services provide repair cost estimates that rely on common data sources which in turn reduce these costs and delays.

Inefficient collision repair facility workflow. Many collision repair facilities manage their complex workflows manually or without specialized software. Manual workflow management leads to increased processing time, higher costs and more errors, problems that generally intensify as vehicles become more technologically complex, the number of vehicle models proliferate and as repair facilities grow. Our claims processing software and services assist collision repair facilities in effectively managing their workflows and obtaining detailed part availability and pricing information.

Importance of communications between insurance and repair companies and their customers. Insurance policyholders and collision repair customers increasingly rank communications and access to information as critical factors in their satisfaction. These factors directly impact their decision-making process as well as their willingness to recommend body shops to their insureds. Our software and services enable our insurance and collision repair customers to provide transparent communications, increasing both customer retention and new customer acquisition.

Our Automotive Claims Platform and Solutions

Our software and services include the following general categories: estimating and workflow software, salvage, salvage disposition and recycling software, electronic titling, subrogation solutions, business intelligence and consulting services, vehicle validation, and insurance re-underwriting. The majority of our customers access our software and services through a standard Web browser utilizing a “software on demand” model. By subscribing to our services, our customers can reduce upfront investments in software, hardware, implementation services and IT staff that they would typically make with traditional software solutions.

Estimating and Workflow Software

Our core offering is our estimating and workflow software. Our estimating and workflow software helps our customers manage the overall claims process, estimate the cost to repair a damaged vehicle, and calculate the pre-collision fair market value of a vehicle. Key functions of our estimating and workflow software include: capturing first notice of loss information; assigning, managing and monitoring claims and claim-related events; accessing and exchanging claims-related information; calculating, submitting, tracking and storing repair and total loss estimates; reviewing, assessing and reporting estimate variations based upon pre-set rules; routing shop estimates for manual review; and scheduling repairs and automating parts ordering.

Salvage Disposition Software

Generally, if the estimated cost to repair a vehicle reaches a threshold or percentage of the actual cash value of the vehicle, it is declared a total loss. Our salvage disposition software and networks help insurers maximize the proceeds of disposing of the totaled vehicle by connecting buyers and sellers via an electronic auction network. Key functions of our salvage disposition software include: determining the value of a vehicle in real-time as the repair estimate is being written to determine the actual cash value as an aid in determining if a vehicle is a total loss; determining the actual cash value of a vehicle allowing the insurance company to maximize its yield; and connecting sellers with qualified buyers.

Vehicle Maintenance and Mechanical Repair

An overview of the automobile maintenance and repair process and its complexities provides a framework for understanding how our customers can derive value from our software and services.

Mechanical Repair Process

OEMS typically provide a warranty on new vehicles for a period of years or miles covered. These warranties cover specified repairs and sometimes maintenance during the warranty period and these services are typically performed at the automobile dealer. Motor vehicle service is a series of maintenance procedures carried out at a set time interval or after the vehicle has travelled a certain distance. The vehicle manufacturer specifies service intervals and some modern cars display the due date for the next service electronically on the instrument panel.

There are 18,700 automobile dealers in the U.S. According to the National Automobile Dealers Association ("NADA") in 2013 warranty worked performed by franchised dealers was valued at $14.4 billion in service and parts---all at no cost to the

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vehicle owner. Additionally, NADA estimated Americans spent at franchised dealerships a total of $84.5 billion in 2013 on for repairs, maintenance, tires, batteries, oil and accessories for automobiles and light trucks used in personal transportation.

After the OEM warranty expires, vehicle owners typically have their vehicles serviced and maintained at either an automobile dealer or at chain or independent repair facility.

There are approximately 275,000 chain and independent repair facilities in the U.S. A National Highway Traffic Safety Administration ("NHTSA") analysis led to a primary estimate that approximately 40 percent of the costs associated with auto repair were unnecessary. The NHTSA reports that the consumer losses associated with improper repair and maintenance are attributable to (among other factors):

Unneeded repairs due to inadequate diagnosis;
Unneeded repairs sold with possible fraudulent intent;
Wasteful over-frequent preventive maintenance;
Accidents due to under maintenance or faulty repairs; and
Cars prematurely retired due to under maintenance or faulty repairs

Our Service Maintenance & Repair Platform & Solutions

The automotive service and repair market is driven by a structural and growing imbalance between supply and demand. Supply is constrained by a diminishing number of highly qualified auto technicians (due to aging/retirement of the technician population and fewer technicians becoming certified) capable of efficiently diagnosing and servicing today’s increasingly complex vehicles. Demand, on the other hand, is increasing due to a confluence of several factors, including:

Near-record high of 240 million vehicles in operation in the U.S., and growing, with new-vehicle sales expected to reach pre-2008 recession levels of over 16.4 million units by 2014, according to NADA;
The average age of vehicles on the road in the U.S. is at a record high of almost 11 years according to the Automotive Aftermarket Industry Association;
Increasing vehicle complexity.
One of the most efficient ways to bridge the growing gap between fewer and less experienced technicians servicing a greater number of more technologically complex vehicles, is to empower those technicians through the implementation and application of technology.

Vehicle service and repair generates the overwhelming majority of operating profits for both aftermarket shops and dealerships, reinforcing their imperative to meet growing market demand effectively. In this context, the ability to increase the quality and efficiency of automotive service and repair, and improve vehicle owner satisfaction and retention, represents a significant value proposition. Our Identifix and AutoPoint services play a unique, vital and growing role in the automotive ecosystem by helping to meet this high-value need with proprietary data, technology and workflow optimization solutions.

With proprietary data covering more than 750,000 real world vehicle issues and growing every day, our online subscription solutions deliver the most comprehensive, authoritative, accurate and reliable information for vehicle service and repair in the world.

The primary source of the original fix data is our Identifix Repair Hotline, a pay-per-call technical assistance service that connects professional automotive technicians across North America live with Automotive Service Excellence ("ASE") certified master mechanics who provide diagnostic services and repair guidance to service and repair professionals. The information from Identifix Repair Hotline calls, including more than 4 million inbound technical assistance calls over the last 25 years, is continually added to the database, providing an ongoing source of new proprietary data regarding vehicle problems and the best way to fix them, and further acting as a critical source of proprietary real-world fix data that keeps our solution current, highly relevant and uniquely valuable to our customers.

Supplementing the Identifix Repair Hotline data is content from a number of third party sources, including most notably OEMs. Our solution synthesizes and categorizes authentic OEM-authored information and factory manual content, and integrates this data to provide full 360-degree solutions for vehicle problems of any type. With over 15 million pages of content

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from most major OEMs this authentic OEM information supplements the real-world diagnostic data with factory-accurate protocols, guidelines and diagrams governing how to repair diagnosed vehicle problems.

Additionally, we enhance the service ecosystem by offering comprehensive vehicle inspection workflow software with powerful data-driven tools and analytics, service center management and sales solutions, and a suite of customer relationship management products for service centers to manage and improve their relationships with vehicle owners. A core mission is to improve service center efficiency and vehicle owner loyalty to generate significant and measurable increases in revenue and profitability.

Our AutoPoint service center workflow software provides:

Proprietary data-driven solutions that leverage the power of over 150 million repair orders and completed inspections to deliver customer specific recommendations for maintenance and repair
Proven and measurable customer return on investment for users of the data and software; and
Dramatic and lasting impact on service center business processes.
We drive behavioral change throughout a service center, from owners to managers to technicians to the parts department to consumer-facing service advisers, by institutionalizing transparency and standardization, both internally and externally. service center employees communicate with each other more efficiently and effectively utilizing automated workflow tools and communicate with vehicle owners more professionally and with more helpful context and personalized information, and service center managers gain enhanced and more actionable clarity into the performance of their business unit. The net result is rapid and long-lasting gains to vehicle service quality, vehicle owner’s satisfaction and loyalty, and service center top- and bottom-line performance.

Automotive Glass Repair

Overview

Claims involving the breakage of vehicle glass, are characterized as high-frequency, low-severity and have long been considered a burden in claim operations for many major insurance carriers. Since auto glass-only claims represent a small fraction of total auto severity, carriers often outsource these claims in order to focus on the higher dollar cases, such as total loss and auto/medical claims. There are about 14 million glass repair or replacements performed annually in the U.S. Approximately one-half of these are insured claims.

Our Solutions

Operating under the brand names of LYNX Services, GTS Services and GLAXIS, we provide software and business management tools, third-party claims administration, first notice of loss and network management services to the U.S. auto insurers, glass repair facilities and suppliers specializing in glass claims. Our services allow insurance companies to cost-effectively handle glass claims while providing high levels of customer service to their customers. In addition, through our software services, we allow glass repair facilities to operate more efficiently through enhanced workflow and scheduling. We also create efficiency within the supply chain by connecting glass repair facilities and suppliers.
 
Automotive Recycling Industry

Overview

The automotive recycling industry is highly fragmented. For example, in the US market there is $25 billion in estimated annual sales by more than 7,000 independent salvage and recycling facilities. These facilities play an important role in the ecological and economical disposal and recycling of inoperable motor vehicles. The automotive recycling industry is a valuable source of cost-effective and often hard-to-find used vehicle replacement parts. Solera serves the automotive recycling industry through Hollander and APU Solutions in North American and Hollander International in Australia and selected European countries.

Our data, software and services help customers to keep pace with more stringent buyer requirements, increased government regulations and complexity of new vehicles. Additionally, some insurance companies in some countries are mandating the use of aftermarket and recycled parts to lower the costs to repair damaged vehicles. For example, in the U.S., aftermarket and recycled parts make up approximately 37% of parts usage in collision repair. We believe these factors will

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result in increased demand for automotive recycling software and services, as recyclers seek to manage their workflows, maximize the value of their inventories and increase efficiency. In many other countries, use of recycled parts is still in the early development stages. Foreign buyers now account for 32 percent of vehicles purchased at salvage auctions.

Recycling Summary

Although the process differs by country, an automobile generally has 80 percent of its parts and fluids recycled, making motor vehicles among the most efficient recyclable item. The recycling process begins with inoperable motor vehicles being taken to a salvage yard, where the hazardous and recyclable fluids are drained for proper disposal or reuse. The yard then disassembles undamaged parts of the vehicle. These parts are then cleaned, tested, inventoried and stored in a warehouse until they are sold for second life use. The remainder of the damaged vehicle is then sold to the scrapping industry that reprocesses the core elements.

The Process

Incoming cars are inspected for leaks as soon as they are brought in. Any leaks that are found will have drip pans placed underneath them to collect the remaining fluid from the damaged area. The fuel, refrigerants and battery are then removed shortly after, as well as the mercury switches from the hood and/or trunk and the anti-lock braking system sensors. Any remaining fluid in the car is then drained. Refrigerants are removed as required by the U.S. Environmental Protection Agency. These measures protect the environment and keep the operators safe. Once done, images are then taken of each part to facilitate online purchasing. These “second-life” parts are then posted through various online channels for sale, or are sold in the yard’s brick and mortar store. Recyclers can also communicate with others in the industry to buy parts for their customers using parts locating networks.

Our Salvage and Parts Solutions

Through our Hollander brand, we provide solutions that enable automotive recyclers to sell more parts to more customers. We facilitate part location and procurement with the Hollander Interchange™ - a part identification index of millions of auto parts and their interchangeable equivalents that spans over 80 years.  The Hollander Interchange is the language used by parts buyers and sellers to inventory, locate and sell a significant percentage of recycled parts. 

EDEN® is a dynamic parts database that contains approximately 160 million unique automobile parts that are held in inventory at any given point by a network of approximately 3,000 automotive recyclers.  EDEN is used by our customers to quickly find locally available automobile parts.

Powerlink® is a software application used to manage salvage yard operations in North America, Pinnacle Professional is a software application used to manage salvage yard operations outside of North America. These applications are used by more than 3,000 salvage yards to operate more efficiently, make better decisions, open new markets and sell more parts.

PartsNetwork®, powered by APU, is a web-based solution that provides insurance adjusters and collision repair centers an automated process for sourcing, pricing and purchasing alternative parts (that is, second life, aftermarket, OEM surplus parts). Using PartsNetwork, our customers process more than 101 million parts quotes, representing approximately $19 billion in quotes, annually. PartsNetwork provides real-time results for parts availability, description, quality, and pricing thereby lowering costs for insurers, simplifying workflow for repairers, and driving sales for part suppliers.

eCommerce

Hollander’s ecommerce platform, HollanderParts.com, provides recycling yards solutions to sell parts to prospective buyers electronically, opening up new markets and profitable new channels of demand.

Our Customer’s Customer Platform

Our customer’s customer platform enables the digital auto and property ownership experience. We seek to empower the end user with our data and software tools so that their ownership experience is enhanced. We provide these tools while working with and through our insurance customers, hence customer’s customer. An example is the self-service tool, Go Time Driver, now available to the customers of some of our US customers. With this smart phone based application the customer’s customer is able to self-assess collision damage and begin the repair process at their convenience. Our insurance and Collision Repair Shops customers support the use of this self service capability as it enhances their customers experience and lifestyles (such as by lessening or eliminating the wait time for assessors) and saves assessor costs and cuts cycle time. In the future we envision

8


our data and software powering the total ownership experience for auto and property owners. Our customer’s customer platform consists of our vehicle insurance re-underwriting, electronic tilting, subrogation and vehicle validation businesses.
Vehicle Insurance Re-Underwriting

As a result of our acquisitions of Explore and LMI, we provide property and casualty insurers with driver violation reporting services for a substantial number of their insured drivers in the U.S. This cost-effective service allows insurance companies to re-assess their risk and, where appropriate, impose a premium surcharge on insured drivers to reflect such risk.

Driver Violation Database:  Through Explore, in the U.S., we collect driver violation data from 129 sources in 46 states allowing for driver violation reporting on over 56 million insured drivers. This database collects over 34 million moving violation records annually.

Electronic Titling

Through TitleTec, we provide a driver information services platform that allows automotive dealerships in the U.S. to streamline operations and improve the customer purchasing experience by assembling and processing the data necessary to electronically register a vehicle, produce a title, and issue a permanent or temporary tag real-time at the point of sale.

Subrogation

Through HyperQuest, we provide web-based subrogation solutions that lower processing costs, automate processes for efficiency, provide objectivity, and increase accuracy for both subrogation claims and out-of-network claims in the U.S. This drives consumer satisfaction by allowing insurance companies, assessors, and collision repair shops to seamlessly process out-of-network claims, regardless of the estimating platform being used.

Vehicle Validation

Through HPI and CarweB, we provide private car buyers, car dealers, finance houses and the insurance industry with access to information on all registered vehicles in the United Kingdom. Through our databases, we can inform a customer if a vehicle has outstanding car finance, is recorded as stolen or has previously been written-off. Through our access to the National Mileage Register, the United Kingdom's largest database of mileages, we can alert car buyers and dealers to potential mileage discrepancies.

Vehicle Validation Database. Using our vehicle validation database, private car buyers, car dealers, finance companies and the insurance industry customers can verify who the owner is, whether there is a finance-related lien, whether the vehicle has been recorded as stolen or if it has been declared a total loss by an insurance company. We acquire data from a number of public and private data sources including the Great Britain Driver and Vehicle Licensing Agency, motor dealers and manufacturers and finance and insurance companies. The database contains information on approximately 108 million vehicles (including 42 million vehicles currently licensed for use in the United Kingdom) and approximately 179 million mileage readings. The database is updated daily, weekly or periodically depending on the specific data element and its source.

Our Property Platform

In addition to automobile insurance, many of our insurance customers also provide property insurance. Through the use of our products and services, we can now deliver efficiency, standardization and transparency to the property repair process. Insurers face many of the same the challenges in property insurance claims as in auto collision repair:

Claims process fragmentation. The property insurance claims process involves many parties and consists of many steps, which are often managed through paper, fax and other labor intensive processes. Our software and services simplify and streamline the claims process, allowing our customers to process claims faster and reduce their costs.

Asymmetrical information. Property repair contractors typically have more information about the repair process than do insurance companies who often must make their damage estimates remotely or with limited information. Our databases provide insurance companies access to detailed information about property damage, repair times and replacement costs, allowing them to more accurately estimate fair settlement values and reduce overpayment on claims.

Disparate claims data. Claims-related data generated by property insurance companies often is not stored, shared with other parties or captured in a format that is easily transferable to other applications. This, combined with the inability to transfer

9


and manipulate data easily across multiple applications, hinders comparisons of repairs and claims. Our databases are constantly updated for actual claims data from industry participants. Having access to our databases helps insurance companies generate more accurate repair estimates and identify top-performing property repair contractors.

Conflicting interests of industry participants. Property repair contractors benefit from high repair costs, which increase their revenues. Conversely, insurance companies benefit from low repair costs, which reduce their expenses. This conflict can result in high settlement costs and delays. Our software and services provide repair cost estimates that rely on common data sources which in turn reduce these costs and delays.

Through Sachcontrol, we now have a proprietary property database of approximately 160 million data points which delivers significant value to insurers by providing fast and accurate property claims invoice checking resulting in claims cost reduction. Sachcontrol’s data set, the most comprehensive of its kind in Germany and Austria, is localized across 3,700 zip codes and covers 19,000 repair steps and over 20 construction trades.

Our Growth Strategy

Our Leverage, Diversify and Disrupt ("LDD") growth strategy is a framework for innovation and sustained, scalable growth.

Leverage refers to expanding our geographic footprint to increase the number of claims we process, and, to increase the number of services we provide in each claim to drive incremental return on investment for our insurance customers. Once a new market begins to adopt our electronic claims processing solutions and as our revenue-per-claim increases as we provide higher returns on investment to our customers, we enjoy scale benefits associated with our business model.

As our penetration of electronic claims processing increases in a geography, we begin to diversify to add more services from in our auto platform as well as our customer’s customer and property platforms. These diversifications add to our growth opportunities while diversifying from a reliance on collision-related claims.

Longer term, our objective is to disrupt the market by connecting our platforms and enabling the digital lifestyles of our customer’s customer. Thus we envision the auto as another smart appliance within the home and with the owners looking to use digital tools to manage their auto and home ownership experiences including purchase, maintenance and accident repair.

Our Markets

We categorize each of the 70 countries in which we are active into one of the three following market types (from most digitized to least): (i) Advanced; (ii) Evolving; and (iii) Emerging.

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Market Type
 
 
Market Characteristics
Advanced Market
 
•  
Automated claims processing is widespread among industry participants.
 
 
•  
Vehicle insurance is generally government-mandated and a condition to obtaining vehicle financing.
 
 
•  
Number of cars on the road (“car parc”) growing at a lower rate relative to other market types.
 
 
•  
Advanced Markets include North America and Western Europe.
Evolving Market
 
•  
Increasing adoption from manual claims processing to digitized claims processing; limited use of automated claims processing by industry participants.
 
 
•  
Higher accident frequencies than advanced markets.
 
 
•  
Growing adoption of government-mandated vehicle insurance and insurance as a condition to vehicle financing.
 
 
•  
Size of car parc increasing.
 
 
•  
Evolving Markets include Latin America and Central and Eastern Europe.
Emerging Market
 
•  
Insurance companies focused on underwriting policies and establishing market share.
 
 
•  
Substantial majority of claims are manually processed; significant opportunity for industry participants to increase operational efficiency through the adoption of automated claims processing.
 
 
•  
Early stage adoption of government-mandated vehicle insurance and insurance as a condition to vehicle financing.
 
 
•  
The highest accident frequencies among the three market types.
 
 
•  
Size of car parc increasing at the fastest rate among the three market types.
 
 
•  
Emerging Markets include China, India and Morocco

Growth in the Automobile Insurance Claims Processing Industry

One of the primary growth drivers for our industry is the number of insurance claims made. Insurance claims made is determined by several factors, including the size and growth of the car parc and the frequency of collisions. Another growth driver is the insurance industry focus on increasing claims processing efficiency and reducing claims cost severity. Each of these factors influences industry growth differently in our three market types.

Advanced Markets. In our Advanced Markets, automobile insurance is generally government-mandated and claims processing is generally automated. Automobile insurance companies achieve growth in these highly competitive markets by gaining additional market share and generally compete on price, quality and range of policyholder service. To remain competitive, insurance companies increasingly seek additional automated claims processing products and services to minimize costs and improve policyholder service. In these markets, the car parc is stable, for example, in the United States, the number of registered vehicles declined in 2010 and increased in 2011 and 2012, while the average vehicle age has been increasing.

Evolving Markets. In our Evolving Markets, the car parc is generally growing. Automobile insurance companies achieve growth in these markets by focusing on writing new vehicle insurance policies and increasing market share. A significant number of claims are processed manually in these markets, presenting opportunities for insurance companies to increase their operational efficiencies by automating claims processing.

Emerging Markets. In our Emerging Markets, the car parc is growing at the fastest rate among the three market types. Automobile insurance companies achieve growth in these markets by focusing on writing new vehicle insurance policies and increasing market share. The vast majority of claims are processed manually or using homegrown solutions in these markets, presenting opportunities for insurance companies to increase their operational efficiencies by digitizing claims processing and leveraging global OEM data and repair methods.

According to industry sources, global new vehicle sales grew by 3.7% in 2012 to 79.5 million units and by 4.2% in 2013 to 82.8 million units. In markets where automobile insurance is generally government-mandated and claims processing is automated (characterized as “advanced markets”), sales are projected to grow at 1.3% compound annual growth rate through 2020. In other markets, sales are projected to grow at 8.1% compound annual growth rate through 2020. Fewer new light vehicle sales can result in fewer insured vehicles on the road and fewer automobile accidents, which can reduce the transaction-based fees that we generate.

While automation of claims processing can result in significant cost savings for our insurance company customers, improving their competitive positioning and customer satisfaction, the cost of automated claims processing software and

11


services generally represents a relatively small portion of automobile insurance companies' claims costs. We believe automobile insurance companies will increase their spending on automated claims processing software and services that improve their customers experience because such incremental investments can result in significant cost reductions and customer satisfaction improvements.

Our Customers

The primary participants in the automobile insurance claims processing industry with whom we do business are automobile insurance companies, collision repair facilities, independent assessors and automobile dealers, service, maintenance and repair facilities, and automotive recyclers, salvage, and dealerships. We believe that the principal drivers of demand for our software and services are:

Automobile Insurance Companies

We estimate that the global automobile insurance industry processes more than 100 million claims each year, representing more than $155 billion in repair, loss adjustment expense and other related costs. We believe the industry is relatively concentrated with a number of large automobile insurance companies accounting for the majority of global automobile insurance premiums. Over the past decade, the largest insurers in the U.S., as a group, have been steadily growing and increasing their market share (measured by the premiums written) so that today 70.3% all private passenger auto insurance in the United States is issued by just ten companies, and in 2000, the top 10 companies issued more than 59.3% percent.

In 2013, global, non-life insurance premiums, which includes premiums for lines of business in addition to automobile insurance, grew by 2.8% compared to 2012. In 2013, approximately 80% of these premiums were generated in industrialized countries (of which North America grew by 2.8% and Western Europe declined by 1.2% compared to 2012) and 20% of the premium volumes were generated in emerging markets (of which Latin America grew by 9.0% and Emerging Asia grew by 11.7% compared to 2012).

Collision Repair Facilities

The collision repair industry is highly fragmented. We estimate there are approximately 100,000 collision repair facilities in our markets. The operating costs of these facilities have increased substantially over the past decade due to continued increases in sophisticated technologies and advanced materials used in vehicle manufacture, inflation in collision repair labor rates and changes in environmental regulations. In addition, collision repair facilities have increasingly established preferred relationships with insurance companies. These arrangements, known in the U.S. as direct repair programs, allow collision repair facilities to generate increased repair volumes through insurance company referrals. Insurance companies benefit by establishing a trusted network of collision repair facilities across which they can negotiate labor rates and implement standard procedures and best practices. Insurance companies often require collision repair facilities to use specified automated claims processing software and related services to participate in their programs. We believe the combination of these factors will increase demand for software and services that help collision repair facilities manage their workflow and increase their efficiency.

Independent Assessors

Independent assessors are often used to estimate vehicle repair costs, particularly where automobile insurance companies have chosen not to employ their own assessors or do not have a sufficient number of employee assessors and where governments mandate the use of independent assessors.

In some markets, we believe changing government regulations and improved claims technology will result in a decrease in the number of independent assessors. However, in other markets, insurance companies are reducing their employee assessor staff to contain costs, which we believe will lead to a growth in the number of independent assessors. We believe the combination of these offsetting factors will result in a modest overall increase in the number of independent assessors and, therefore, the demand for automobile insurance claims processing software and services.

Automobile Dealers

According to NADA, at the end of 2013, there were 17,635 new car dealerships in the U.S., down from 20,010 at the end of 2009, but up slightly from 17,540 at the end of 2012.


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Service, Maintenance and Repair Facilities ("SMR")

According to the North American Industry Classification system, there are approximately 265,000 chain and independent automobile repair facilities in the U.S. These include service stations and independent garages, car and light truck dealers, specialty repair shops (i.e., muffler, brakes, and quick-lube shops), auto parts stores with bays, and discount stores/mass merchandisers.

Automotive Recyclers, Salvage, Dealerships and Others

The automotive recycling industry is highly fragmented with over $25 billion in estimated U.S. annual sales by over 7,000 independent salvage and recycling facilities. Participants in the automotive recycling industry are a valuable source of economical and often hard-to-find used vehicle replacement parts. Further this industry has become more sophisticated and technology-driven in order to keep pace with more stringent fulfillment requirements. Additionally, insurance companies are increasingly mandating the use of aftermarket and recycled parts to lower the costs to repair damaged vehicles. Recycled parts in particular represent an economic and environmental opportunity. In our company we call these recycled parts “second life” parts and we are working with insurers, recyclers and governments to ensure a win-win outcome for all. We believe these factors will result in increased demand for salvage yard management software and services, as automotive recyclers seek to manage their workflows, maximize the value of their inventories and increase efficiency.

Our Acquisitions
We have a disciplined acquisition strategy with an initial focus on Management, Margin and Core ("MMC") of the acquisition target followed by a Return on Invested Capital ("ROIC") analysis - targets must generally meet both criteria. We seek acquisition targets with strong, entrepreneurial management teams that can be incented to drive achievement of targets, often in conjunction with performance based earn-outs. We seek acquisition targets that can achieve acceptable margin levels within a reasonable amount of time. Finally, acquisition targets must have a strategic fit with our core operations. Acquisition targets that meet our MMC hurdles are then subject to achievement of certain ROIC thresholds.
In general, our acquisition targets fall into the leverage, diversification or disruption categories of our LDD strategy. Acquisition targets that fall into the leverage category generally either provide us a claims footprint in a new geography or bring new claims related products that we can distribute across our global claims platform. Acquisition targets that fall into the diversification category generally provide us entry into non-claims related businesses that build on our auto, customer’s customer or property platforms. Acquisition targets that fall into the disruption category provide us with abilities that disrupt the market by connecting our platforms and enabling the digital lifestyles of our customer’s customer.

We have completed numerous acquisitions, both domestically and abroad, which are detailed below:

Historical Acquisitions Prior to Fiscal Year 2014
 
Fiscal Year
Acquired Company
Company Description
2009
HPI, Ltd. (“HPI”)
Leading provider of used vehicle validation services in the United Kingdom
2009
UC Universal Consulting Software GmbH (“UCS”)
Leading provider of software and services to collision repair facilities in Germany
2009
Inpart Servicos Ltda. (“Inpart”)
Leading electronic exchange for the purchase and sale of vehicle replacement parts in Brazil and other markets in Latin America and Europe
2010
AUTOonline GmbH In-formationssysteme (“AUTOonline”) (1)
Provider of an eSalvage vehicle exchange platform in several European countries and Latin American countries as well as India
2010
Softwaresysteme GTLDATA GmbH (“GTLDATA”)
Leading assessor management system provider in Austria
2010
Market Scan Holding B.V. (“Market Scan”)
Leading data analytics and software company serving the Dutch insurance industry

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Historical Acquisitions Prior to Fiscal Year 2014 (continued)

Fiscal Year
Acquired Company
Company Description
2011
Explore Information Services, LLC (“Explore”)
Leading U.S. provider of innovative data and analytic tools used by automotive property and casualty insurers
2011
New Era Software LLC (“New Era”)
U.S.-based provider of body shop management systems
2011
Digidentity B.V (2)
Dutch provider of next-generation E-identification certificates for authentication of online identities
2012
See Progress, Inc. (“See Progress”)
Market-leading U.S.-based provider of vehicle repair status software applications
2012
Inventory Technology Systems, Inc. (“ITS”) (3)
U.S.-based provider of innovative solutions that enhance salvage yard profitability by managing recycled parts logistics and increasing inventory turnover
2012
K&S Beheer B.V. (“Commerce Delta”)
Leading Netherlands-based collision repair shop management system provider
2012
Sinexia Corporacion Tecnologica (“Sinexia”) (4)
Developer of a leading software application for processing property and casualty insurance claims in Spain
2012
Actual Systems companies (“Actual Systems”) (5)
Global provider of premier parts recycling yard management systems that are sold under the "Pinnacle" brand name
2013
License Monitor (“LMI”)
Provider of sophisticated driver violation monitoring solutions that enable operators of government and commercial vehicle fleets to quickly ascertain driver violation activity and license status change

2013
Title Technologies (“TitleTec”)

Provider of a proprietary web-based platform that allows automotive dealerships to streamline operations by assembling and processing the data necessary to electronically register a vehicle, produce a title, and issue a permanent or temporary tag real-time at the point of sale
2013
Mensaelect S.A. ("Mensaelect")
Provider of a proprietary, web-based solution that streamlines the invoicing process between Spanish body shops and insurers
2013
CarweB Limited ("CarweB")
Provider of vehicle history and vehicle-specific technical data products and services in the United Kingdom
2013
HyperQuest, Inc. ("HyperQuest")
Provider of proprietary, web-based subrogation solutions and software tools that lower processing costs and provide objectivity to both subrogation claims and out-of-network claims
2013
Eziworks Pty Ltd ("Eziworks")
Australian company that operates as Car Quote, a leading body shop management system, which forms a communication link between insurers and body shops that allows them to exchange collision data
2013
PS Holdings, L.L.C. (“APU”) (3)
A cloud-based locator of recycled, aftermarket, reconditioned and surplus original equipment parts for the U.S. vehicle repair industry

(1)
Acquisition of 85% controlling ownership interest in fiscal year 2010. We subsequently acquired the remaining 15% noncontrolling ownership in fiscal years 2012 and 2013.
(2)
Acquisition of noncontrolling ownership interest.
(3)
Acquisition of substantially all operating assets.
(4)
Acquisition of controlling ownership interest.
(5)
Acquisition effected through a series of three interrelated transactions. In August 2013, we divested the United States and Canada business of Actual Systems.


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Fiscal Year 2014 Acquisitions

Fiscal Year
Acquired Company
Company Description
2014
Autosoft S.r.l. (“Autosoft”)
A leading platform that provides workflow, damage assessment and claims management for insurance companies, vehicle repairers and assessors in Italy
2014
Distribution Services Technologies, Inc. (“DST”)
A leading provider of B2B e-Commerce, ERP support and analytics solutions for automotive mechanical part distributors in North America
2014
Pusula Otomotiv Danýþmanlik Ekspertiz Hizmetleri Anonim Þirketi (“Pusula”)
A leading provider of vehicle disposition and titling services in Turkey
2014
Servicios Informaticos Serinfo S.A. (“Serinfo”)
The leading provider of dealership and bodyshop management systems software in Chile
2014
sachcontrol AG (“Sachcontrol”)
A leading property claims management provider in Germany
2014
Service Repair Solutions, Inc. (“SRS”) (1)
A leading provider in the U.S. service, maintenance and repair market with proprietary databases and workflow solutions
2014
Auto Point, LLC and Mobile Productivity, LLC (together, “AutoPoint”)
A software and services platform that leverages a proprietary database of more than 100 million repair orders and 55 million completed inspections to enhance drivers’ service, maintenance and repair experiences at over 1,000 North American auto dealers

(1)
Acquisition of 50% of the outstanding equity interests in a parent entity of SRS. We have control of SRS as defined by accounting principles generally accepted in the United States and therefore consolidated its assets, liabilities, and financial results from the acquisition closing date.

Acquisitions Subsequent to Fiscal Year 2014

Fiscal Year
Acquired Company
Company Description
2015
Claims related business of the Sherwood Group

A leading provider of innovative exchanges, settlement platforms, and data analytics focused on the insurance industry in the United Kingdom, including car rental billing services and pet insurance claims

2015
Insurance & Services Division of Pittsburgh Glass Works, LLC ("I&S")

A leading provider of software and business management tools, third-party claims administration, first notice of loss and network management services to the U.S. auto and property repair industries, specializing in glass claims


Our Global Operations

We are active in 70 countries on six continents. We manage our business operations through two reportable segments: EMEA and Americas. Our EMEA reportable segment accounted for approximately 48% of our revenues during fiscal year 2014. EMEA comprises our activities in 52 countries in Europe, the Middle East, Africa, Asia and Australia. Our Americas reportable segment accounted for approximately 52% of our revenues during fiscal year 2014. Americas comprises our activities in 18 countries in North, Central and South America. For information regarding operating results and total assets of our segments, please see Note 16 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.


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The table below sets forth the revenues we derived from the following geographic areas, based on the location of the customer, during each of the previous three fiscal years: 
 
Fiscal Years Ended June 30,
 
2014
 
2013
 
2012
 
(in thousands)
United States
$
368,151

 
$
269,165

 
$
236,239

United Kingdom
116,334

 
101,815

 
98,673

Germany
95,799

 
85,035

 
84,832

Rest of Europe (excluding United Kingdom and Germany)
289,790

 
268,686

 
266,634

Other
117,185

 
113,402

 
103,829


The increase in the revenues derived from the United States market is primarily due to revenue contributions from acquisitions, including SRS, acquired in November 2013.

Sales and Marketing

As of June 30, 2014, our sales and marketing staff included 545 professionals. Our sales and marketing personnel identify and target specific sales opportunities and manage customer relationships. They also design, plan, and launch strategies for new software and services, and plan and facilitate customer conferences and tradeshows. Our country managers are also involved in the sales and marketing process, though they are not counted as full-time sales professionals.

Customer Support and Training

We believe that providing high quality customer support and training services is critical to our success. As of June 30, 2014, we had 624 customer support and training personnel, who provide telephone support, as well as on- and off-site implementation and training. Our customer support and training staff generally consists of individuals with expertise in both our software and services and in the automobile insurance and/or collision repair industries.

Software and Database Development

We devote significant resources to the continued development of our software and databases. We have created sophisticated processes and tools to achieve high-quality software development and data accuracy. Our ability to maintain and grow our leading position in the automobile insurance claims processing industry is dependent upon our ability to enhance and broaden the scope of our software and services, as well as continuing to expand and improve our repair estimating, total loss, claims, vehicle validation, motor vehicle record and parts salvage databases. We often collaborate with our customers in the development process to focus on addressing their specific needs. We then incorporate what we have learned from our customers’ workflow experiences and needs to deliver quality, workflow-oriented software and services to the marketplace quickly. We believe these efforts provide a significant competitive advantage in the development of new software and services.

As of June 30, 2014, our software development staff consisted of 812 professionals across six international software development centers and our database staff consisted of 370 professionals across five international database development centers.

Competition

We compete primarily on the value and functionality of our software and services, the integrity and breadth of our data, customer service and price. The competitive dynamics of the global automobile insurance claims processing industry vary by region, and our competitors are present in a subset of markets in which we operate. In Europe, our largest competitors include DAT GmbH, EurotaxGlass’ Group and GT Motive Einsa Group, with whom we compete in multiple countries. In North America, our largest competitors include CCC Information Services Inc. in the U.S. and Mitchell International Inc. in the U.S. and Canada. We also encounter regional or country-specific competition in the markets for automobile insurance claims processing software and services and our complementary products and services. For example, Experian® is our principal competitor in the United Kingdom in the vehicle validation market, and car.tv is our principal competitor in Germany in the online salvage vehicle disposition market and, as a result of our acquisition of Explore, ChoicePoint is our principal competitor in the U.S. in the automobile re-underwriting solutions market. The principal competitors of SRS in the U.S. service, repair and maintenance software and solutions market are ALLDATA and the Mitchell1 repair manuals.

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Intellectual Property and Licenses

We enter into license agreements with our customers, granting each customer a license to use our software and services while ensuring the protection of our ownership and the confidentiality of the embedded information and technology contained in our software. As a general practice, employees, contractors and other parties with access to our confidential information sign agreements that prohibit the unauthorized use or disclosure of our proprietary rights, information and technology.

We own registered trademarks and service marks that we use in connection with our software and services, including their advertising and marketing. For example, our trademark Audatex is registered in over 50 countries.

We license much of the data used in our software and services through short-term contracts with third parties, including contracts with OEMs, aftermarket parts suppliers, data aggregators, automobile dealerships and vehicle repair facilities, to whom we pay royalties.

Employees

As of June 30, 2014, we had 3,638 associates, including 1,735 employees in our EMEA reportable segment, 1,834 employees in our Americas reportable segment, and 69 employees in corporate roles. None of our employees are subject to a collective bargaining agreement.

Available Information

Our Internet website address is www.solerainc.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Our website and the information contained or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K.

ITEM 1A.
RISK FACTORS

In addition to the cautionary statement regarding forward-looking statements included above in this Annual Report on Form 10-K, we also provide the following cautionary discussion of risks and uncertainties relevant to our business. These risks and uncertainties, as well as other factors that we may not be aware of, could cause our actual results to differ materially from expected and historical results and could cause assumptions that underlie our business plans, expectations and statements in this Annual Report on Form 10-K to be inaccurate.

We depend on a limited number of customers for a substantial portion of our revenues, and the loss of, or a significant reduction in volume from, any of these customers would harm our financial results.

We derive a substantial portion of our revenues from sales to large insurance companies and collision repair facilities that have relationships with these insurance companies. During fiscal year 2014, we derived 15.6% of our revenues from our ten largest insurance company customers. The largest three of these customers accounted for 2.6%, 2.3%, and 2.1%, respectively, of our revenues during fiscal year 2014. A loss of one or more of these customers would result in a significant decrease in our revenues, including the business generated by collision repair facilities associated with those customers. Furthermore, many of our arrangements with European customers are terminable by them on short notice or at any time. In December 2011, we were notified by a U.S. insurance company customer that it will not renew its contract with us, and this customer transitioned to another provider during fiscal year 2013. This contract accounted for approximately 0.8% of our total revenues in fiscal year 2013. In addition, disputes with customers may lead to delays in payments to us, terminations of agreements or litigation. Additional terminations or non-renewals of customer contracts or reductions in business from our large customers would harm our business, financial condition and results of operations.

Our industry is highly competitive, and our failure to compete effectively could result in a loss of customers and market share, which could harm our revenues and operating results.

The markets for our automobile insurance claims processing software and services are highly competitive. In the United
States, our principal competitors are CCC Information Services Group Inc. and Mitchell International Inc. In Europe, our principal competitors are EurotaxGlass’s Group, DAT GmbH and GT Motive Einsa Group. Mitchell International recently

17


consummated a strategic relationship with GT Motive Enisa Group, including an equity investment. We also encounter regional or country-specific competition in the markets for automobile insurance claims processing software and services and our
other products and services. For example Experian® is our principal competitor in the United Kingdom in the vehicle validation market, car.tv is our principal competitor in Germany in the online salvage vehicle disposition market and ChoicePoint is our principal competitor in the United States in the automobile reunderwriting solutions market. The principal competitors of SRS in the U.S. service, repair and maintenance software and solutions market are ALLDATA and the Mitchell1 repair manuals. If one or more of our competitors develop software or services that are superior to ours or are more effective in marketing their software or services, our market share could decrease, thereby reducing our revenues. In addition, if one or more of our competitors retain existing or attract new customers for which we have developed new software or services, we may not realize expected revenues from these new offerings, thereby reducing our profitability.

Some of our current or future competitors may have or develop closer customer relationships, develop stronger brands, have greater access to capital, lower cost structures and/or more attractive system design and operational capabilities than we have. Consolidation within our industry could result in the formation of competitors with substantially greater financial, management or marketing resources than we have, and such competitors could utilize their substantially greater resources and economies of scale in a manner that affects our ability to compete in the relevant market or markets. As a result of consolidation, our competitors may be able to adapt more quickly to new technologies and customer needs, devote greater resources to promoting or selling their products and services, initiate and withstand substantial price competition, expand into new markets, hire away our key employees, change or limit access to key information and systems, take advantage of acquisition or other strategic opportunities more readily and develop and expand their product and service offerings more quickly than we can. In addition, our competitors may form strategic or exclusive relationships with each other, such as the equity interest in GT Motive purchased by Mitchell International, and with other companies in attempts to compete more successfully against us. These relationships may increase our competitors’ ability, relative to ours, to address customer needs with their software and service offerings, which may enable them to rapidly increase their market share.

Moreover, many insurance companies have historically entered into agreements with automobile insurance claims processing service providers like us and our competitors whereby the insurance company agrees to use that provider on an exclusive or preferred basis for particular products and services and agrees to require collision repair facilities, independent
assessors and other vendors to use that provider. If our competitors are more successful than we are at negotiating these exclusive or preferential arrangements, we may lose market share even in markets where we retain other competitive advantages.

In addition, our insurance company customers have varying degrees of in-house development capabilities, and one or more of them have expanded and may seek to further expand their capabilities in the areas in which we operate. Many of our customers are larger and have greater financial and other resources than we do and could commit significant resources to product development. Our software and services have been, and may in the future be, replicated by our insurance company customers in-house, which could result in our loss of those customers and their associated repair facilities, independent assessors and other vendors, resulting in decreased revenues and net income.

The time and expense associated with switching from our competitors’ software and services to ours may limit our growth.

The costs for an insurance company to switch providers of claims processing software and services can be significant and the process can sometimes take 12 to 18 months to complete. As a result, potential customers may decide that it is not worth the time and expense to begin using our software and services, even if we offer competitive and economic advantages. If we are unable to convince these customers to switch to our software and services, our ability to increase market share will be limited and could harm our revenues and operating results.

Our operating results may be subject to volatility as a result of exposure to foreign currency exchange risks.

We derive most of our revenues, and incur most of our costs, in currencies other than the U.S. dollar, mainly the Euro. In our historical financial statements, we translate our local currency financial results into U.S. dollars based on average exchange rates prevailing during a reporting period for our consolidated statement of income and certain components of stockholders’ equity or the exchange rate at the end of that period for the consolidated balance sheet. These translations resulted in a net foreign currency translation adjustment of $39.1 million and $8.4 million for fiscal years 2014 and 2013, respectively. Ongoing global economic conditions have impacted currency exchange rates.

Exchange rates between most of the major foreign currencies we use to transact our business and the U.S. dollar have fluctuated significantly over the last few years and we expect that they will continue to fluctuate. The majority of our revenues

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and costs are denominated in Euros, Pound Sterling, Swiss francs, Canadian dollars and other foreign currencies. The following table provides the average quarterly exchange rates for the Euro and Pound Sterling since the beginning of fiscal year 2013: 
Period
Average Euro-to-U.S. Dollar Exchange Rate
 
Average Pound Sterling-to-U.S. Dollar Exchange Rate
Quarter Ended September 30, 2012
$
1.25

 
$
1.58

Quarter Ended December 31, 2012
1.30

 
1.61

Quarter Ended March 31, 2013
1.32

 
1.55

Quarter Ended June 30, 2013
1.31

 
1.54

Quarter Ended September 30, 2013
1.32

 
1.55

Quarter Ended December 31, 2013
1.36

 
1.62

Quarter Ended March 31, 2014
1.37

 
1.65

Quarter Ended June 30, 2014
1.37

 
1.68


During fiscal year 2014, as compared to fiscal year 2013, the U.S. dollar weakened against most major foreign currencies we use to transact our business. The average U.S. dollar weakened versus the Euro by 4.9% and the Pound Sterling by 3.7%, which increased our revenues and expenses during fiscal year 2014. A hypothetical 5% increase or decrease in the U.S. dollar versus other currencies in which we transact our business would have resulted in an increase or decrease, as the case may be, to our revenues of $31.0 million during fiscal year 2014.

In April 2012, in order to hedge our exposure to variability in the Euro-denominated cash flows associated with two intercompany loans, we entered into two pay fixed Euros / received fixed U.S. dollar cross-currency swaps in the aggregate notional amount of €109.0 million. These cross-currency swaps were designated, at inception, as cash flow hedges of the intercompany loans. We report the effective portion of the gain or loss on these hedges as a component of accumulated other comprehensive income (loss) in stockholders' equity and reclassify these gains or losses into earnings when the hedged transaction affects earnings. Accordingly, any foreign exchange gain or loss recognized in our consolidated statements of income resulting from the periodic re-measurement of the intercompany loans into U.S. dollars is mitigated by an offsetting gain or loss, as the case may be, resulting from the change in the fair value of the swaps. To date, there has been no hedge ineffectiveness.

In September 2013, in order to hedge our exposure to variability in the Euro-denominated cash flows associated with two intercompany loans, we entered into two pay floating Euros / received floating U.S. dollar cross-currency swaps in the aggregate notional amount of €141.1 million. These cross-currency swaps were not designated as hedges at inception. We recognize the change in the fair value of the swaps in other (income) expense, net in our consolidated statements of income.

During the fiscal years ended June 30, 2014, 2013, and 2012, we recognized net foreign currency transaction gains (losses) in our consolidated statements of income (loss) of $11.0 million, $(5.5) million, and $(8.0) million, respectively.

Further fluctuations in exchange rates against the U.S. dollar could decrease our revenues and associated profits and, therefore, harm our future operating results.

Current uncertainty in global economic conditions makes it particularly difficult to predict product demand, utilization and other related matters and makes it more likely that our actual results could differ materially from expectations.

Our operations and performance depend on worldwide economic conditions, which have deteriorated significantly in many countries where our products and services are sold, and may remain depressed for the foreseeable future. These conditions make it difficult for our customers and potential customers to accurately forecast and plan future business activities, and could cause our customers and potential customers to slow, reduce or refrain from spending on our products. In addition, external factors that affect our business have been and may continue to be impacted by the global economic slowdown. Examples include:

Number of Insurance Claims Made: In fiscal year 2014, the number of insurance claims made increased slightly versus fiscal year 2013. However, in several of our large western European markets, the number of insurance claims for vehicle damage submitted by owners to their insurance carriers declined slightly. The number of insurance claims made can be influenced by factors such as unemployment levels, the number of miles driven, rising gasoline prices,

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

Sales of New and Used Vehicles: According to industry sources, global new vehicle sales grew by 3.7% in 2012 to 79.5 million units and by 4.2% in 2013 to 82.8 million units. In markets where automobile insurance is generally government-mandated and claims processing is automated (“advanced markets”), sales are projected to grow at 1.3% compound annual growth rate through 2020. In other markets, sales are projected to grow at 8.1% compound annual growth rate through 2020. Fewer new light vehicle sales can result in fewer insured vehicles on the road and fewer automobile accidents, which can reduce the transaction-based fees that we generate.

Used Vehicle Retail and Wholesale Values: Declines in retail and wholesale used vehicle values can impact vehicle owner and insurance carrier decisions about which damaged vehicles should be repaired and which should be declared a total loss. The lower the retail and wholesale used vehicle values, the more likely it is that a greater percentage of automobiles are declared a total loss versus a partial loss. The fewer number of vehicles that owners and insurance carriers decide to repair can reduce the transaction-based fees that we generate for partial-loss estimates, but may have a beneficial impact on the transaction-based fees that we generate for total-loss estimates.

Automobile Usage—Number of Miles Driven: Several factors can influence miles driven, including gasoline prices and economic conditions. According to industry sources, miles driven in the United States remained flat from January through May of calendar year 2013 compared to the same period in prior year. For calendar year 2012, cumulative miles driven in the United States increased by 0.6% compared to the same period in the prior year. For calendar year 2011, cumulative miles driven in the United States declined compared to the same period in the prior year. In calendar year 2010, the number of miles driven in the United States increased compared to calendar years 2009 and 2008. Fewer miles driven can result in fewer automobile accidents, which can reduce the transaction-based fees that we generate.

Many of our markets around the world continue to experience or have recently experienced volatility. Accordingly, we cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery, worldwide or in particular economic markets. These and other economic factors could have a material adverse effect on demand for or utilization of our products and on our financial condition and operating results.

We may engage in acquisitions, joint ventures, dispositions or similar transactions that could disrupt our operations, cause us to incur substantial expenses, result in dilution to our stockholders and harm our business or results of operations.

Our growth is dependent upon market growth and our ability to enhance our existing products and introduce new products on a timely basis. We have addressed and will continue to address the need to introduce new products both through internal development and through acquisitions of other companies and technologies that would complement or extend our business or enhance our technological capability. In fiscal year 2011, we acquired two businesses, including Explore. The acquisition of Explore is our largest acquisition to date. In fiscal year 2012, we acquired three businesses, substantially all of the assets of another business and a majority of the outstanding shares of a fifth business. In fiscal year 2013, we acquired six businesses and substantially all of the assets of another business. In fiscal year 2014, we acquired six businesses as well as a 50% ownership interest in SRS.

Our ability to realize the anticipated benefits of our acquisitions will depend, to a varying extent, on our ability to continue to expand the acquired business' products and services and integrate them with our products and services. Our management will be required to devote significant attention and resources to these efforts, which may disrupt our core business, the acquired business or both and, if executed ineffectively, could preclude realization of the full benefits we expect. Failure to realize the anticipated benefits of our acquisitions could cause an interruption of, or a loss of momentum in, the operations of the acquired business. In addition, the efforts required to realize the benefits of our acquisitions may result in material unanticipated problems, expenses, liabilities, competitive responses, loss of customer relationships, and the diversion of management’s attention, and may cause our stock price to decline. The risks associated with our acquisitions and future acquisitions include:

adverse effects on existing customer or supplier relationships, such as cancellation of orders or the loss of key customers or suppliers;

difficulties in integrating or retaining key employees of the acquired company;


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difficulties in integrating the operations of the acquired company, such as information technology resources, and financial and operational data;

entering geographic or product markets in which we have no or limited prior experience;

difficulties in assimilating product lines or integrating technologies of the acquired company into our products;

disruptions to our operations;

diversion of our management’s attention;

potential incompatibility of business cultures;

potential dilution to existing stockholders if we issue shares of common stock or other securities as consideration in an acquisition or if we issue any such securities to finance acquisitions;

prohibitions against completing acquisitions as a result of regulatory restrictions or disruptions in connection with regulatory investigations of completed acquisitions;

limitations on the use of net operating losses or tax benefits;

negative market perception, which could negatively affect our stock price;

the assumption of debt and other liabilities, both known and unknown; and

additional expenses associated with the amortization of intangible assets or impairment charges related to purchased intangibles and goodwill, or write-offs, if any, recorded as a result of the acquisition.

Many of these factors will be outside of our control, and any one of them could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy.

Our merger and acquisition activities are subject to antitrust and competition laws, which laws could impact our ability to pursue strategic transactions. If we were found to violate antitrust and competition laws, we would be subject to various remedies, including divestiture of the acquired businesses. For example, we recently announced that the U.S. Federal Trade Commission (the "FTC") closed its investigation into our acquisition of Actual Systems. Pursuant to the termination of the investigation, and without admitting any violation of the law, we agreed to enter into a consent order with the FTC relating to the salvage yard management system business and effected a voluntary divestiture of the United States and Canadian businesses of Actual Systems in August 2013 to a purchaser group substantially composed of the former shareholders of Actual Systems.

We (i) participate in our SRS joint venture with an affiliate of Welsh, Carson, Anderson & Stowe ("WCAS"), (ii) participate in joint ventures in some countries and, (iii) may participate in future joint ventures. Our partners in these ventures may have interests and goals that are inconsistent with or different from ours, which could result in the joint venture taking actions that negatively impact our growth in the local market and consequently harm our business or financial condition. If we are unable to find suitable partners or if suitable partners are unwilling to enter into joint ventures with us, our growth into new geographic markets may slow, which would harm our results of operations.

Additionally, we may finance future acquisitions and acquisitions of additional interests in our SRS joint venture and/or additional joint ventures with cash from operations, additional indebtedness and/or the issuance of additional securities, any of which may impair the operation of our business or present additional risks, such as reduced liquidity or increased interest expense. For example, we financed the purchase price for the Explore acquisition with a private offering of $450.0 million aggregate principal amount of senior unsecured notes, which resulted in a decrease of our ratio of earnings to fixed charges. We may also seek to restructure our business in the future by disposing of certain of our assets, which may harm our future operating results, divert significant managerial attention from our operations and/or require us to accept non-cash consideration, the market value of which may fluctuate. The ability of WCAS to require us to purchase its equity interests in our SRS joint venture is outside of our control and, as a result, we may be required to purchase such equity interests at a time in which we would otherwise want to use such funds for another purpose, including funding capital expenditures or other strategic initiatives.


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Failure to implement our acquisition strategy, including successfully integrating acquired businesses or joint ventures, could have an adverse effect on our business, financial condition and results of operations.

Our operating results may vary widely from period to period due to the sales cycle, seasonal fluctuations and other factors.

Our contracts with insurance companies generally require time-consuming authorization procedures by the customer, which can result in additional delays between when we incur development costs and when we begin generating revenues from those software or service offerings. In addition, we incur significant operating expenses while we are researching and designing new software and related services, and we typically do not receive corresponding payments in those same periods. As a result, the number of new software and service offerings that we are able to implement, successfully or otherwise, can cause significant variations in our cash flow from operations, and we may experience a decrease in our net income as we incur the expenses necessary to develop and design new software and services. Accordingly, our quarterly and annual revenues and operating results may fluctuate significantly from period to period.

Our business is subject to seasonal and other fluctuations. In particular, we have historically experienced higher revenues during the second quarter and third quarter versus the first quarter and fourth quarter during each fiscal year. This seasonality is caused primarily by more days of inclement weather during the second quarter and third quarter in most of our markets, which contributes to a greater number of vehicle accidents and damage during these periods. In addition, our business is subject to fluctuations caused by other factors, including the occurrence of extraordinary weather events and the timing of certain public holidays. For example, the Easter holiday occurs during the third quarter in certain fiscal years and occurs during the fourth quarter in other fiscal years, resulting in a change in the number of business days during the quarter in which the holiday occurs.

We anticipate that our revenues will continue to be subject to seasonality and therefore our financial results will vary from period to period. However, actual results from operations may or may not follow these normal seasonal patterns in a given year leading to performance that is not in alignment with expectations.

We also may experience variations in our earnings due to other factors beyond our control, such as:

the introduction of new software or services by our competitors;

customer acceptance of new software or services;

the volume of usage of our offerings by existing customers;

variations of vehicle accident rates due to factors such as changes in fuel prices, number of miles driven or new vehicle purchases and their impact on vehicle usage;

competitive conditions, or changes in competitive conditions, in our industry generally;

prolonged system failures during which time customers cannot submit or process transactions; or

prolonged interruptions in our access to third-party data incorporated in our software and services.

We may also incur significant or unanticipated expenses when contracts expire, are terminated or are not renewed. Any of these events could harm our financial condition and results of operations and cause our stock price to decline.


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Our industry is subject to rapid technological changes, and if we fail to keep pace with these changes, our market share and revenues will decline.

Our industry is characterized by rapidly changing technology, evolving industry standards and frequent introductions of, and enhancements to, existing software and services, all with an underlying pressure to reduce cost. Industry changes could render our offerings less attractive or obsolete, and we may be unable to make the necessary adjustments to our offerings at a competitive cost, or at all. We also incur substantial expenses in researching, developing, designing, purchasing, licensing and marketing new software and services. The development or adaptation of these new technologies may result in unanticipated expenditures and capital costs that would not be recovered in the event that our new software or services are unsuccessful. The research, development, production and marketing of new software and services are also subject to changing market requirements, access to and rights to use third-party data, the satisfaction of applicable regulatory requirements and customers’ approval procedures and other factors, each of which could prevent us from successfully marketing any new software and services or responding to competing technologies. The success of new software in our industry also often depends on the ability to be first to market, and our failure to be first to market with any particular software project could limit our ability to recover the development expenses associated with that project. If we cannot develop or acquire new technologies, software and services or any of our existing software or services are rendered obsolete, our revenues and income could decline and we may lose market share to our competitors, which would impact our future operations and financial results.

We are currently making, and anticipate making additional, strategic decisions and investments to leverage and expand our product and service offerings, including offerings in addition to the automotive sector.

We have invested, and expect to continue to invest, significant management attention and financial resources to develop, integrate and implement new business strategies, products, services, features, applications, and functionality. Such endeavors may involve significant risks and uncertainties, including distraction of management from current core operations, insufficient revenues to offset liabilities assumed and expenses associated with these new investments, inadequate return of capital on our investments, and unanticipated issues or problems that arise during our implementation of such strategies and offerings. Because these new endeavors are inherently risky, our business strategies and product and service offerings may not be successful and may adversely affect our business, financial condition and results of operations.

Some of our strategies and offerings may be outside the insurance claims industry (such as our SRS joint venture), may be outside of the automotive sector (such as our property claims business), or may be consumer-based. We have limited historical experience directly serving consumers or customers outside of the automotive sector and our products and services may not be accepted or widely utilized by such consumers or customers. These offerings may also subject us to new or additional laws and regulations (including those relating to consumer protection) and may lead to increased legal and regulatory compliance, risk and liability.

Changes in or violations by us or our customers of applicable government regulations could reduce demand for or limit our ability to provide our software and services in those jurisdictions.

Our insurance company customers are subject to extensive government regulations, mainly at the state level in the United States and at the country level in our non-U.S. markets. Some of these regulations relate directly to our software and services, including regulations governing the use of total loss and estimating software. If our insurance company customers fail to comply with new or existing insurance regulations, including those applicable to our software and services, they could lose their certifications to provide insurance and/or reduce their usage of our software and services, either of which would reduce our revenues. Also, we are subject to direct regulation in some markets, and our failure to comply with these regulations could significantly reduce our revenues or subject us to government sanctions. In addition, future regulations could force us to implement costly changes to our software and/or databases or have the effect of prohibiting or rendering less valuable one or more of our offerings. Moreover, some states in the United States have changed and are contemplating changes to their regulations to permit insurance companies to use book valuations or public source valuations for total loss calculations, making our total loss software potentially less valuable to insurance companies in those states. Some states have adopted total loss regulations that, among other things, require insurers use a methodology deemed acceptable to the respective government agency.

We submit our methodology to such agencies, and if they do not approve our methodology, we will not be able to perform total loss valuations in their respective states. Other states are considering legislation that would limit the data that our software can provide to our insurance company customers. In the event that demand for or our ability to provide our software and services decreases in particular jurisdictions due to regulatory changes, our revenues and margins may decrease.


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There is momentum to create a U.S. federal government oversight mechanism for the insurance industry. There is also legislation under consideration by the U.S. legislature relating to the vehicle repair industry. Federal regulatory oversight of or legislation relating to the insurance industry in the United States could result in a broader impact on our business versus similar oversight or legislation at the U.S. state level.

Regulatory developments could negatively impact our business.

We acquire and distribute personal, public and non-public information, store it in our some of our databases and provide it in various forms to certain of our customers in accordance with applicable law and contracts. We are subject to government regulation and, from time to time, companies in similar lines of business to us are subject to adverse publicity concerning the use of such data. We provide many types of data and services that are subject to regulation under the Fair Credit Reporting Act, Gramm-Leach-Bliley Act, Driver’s Privacy Protection Act, Health Insurance Portability and Accountability Act, the European Union’s Data Protection Directive, the United Kingdom's Financial Services and Markets Act 2000 Order 2001, and, to a lesser extent, various other international, federal, state and local laws and regulations. These laws and regulations are designed to protect the privacy of the public and to prevent the misuse of personal information. Our suppliers that provide us with protected and regulated data face similar regulatory requirements and, consequently, they may cease to be able to provide data to us or may substantially increase the fees they charge us for this data which may make it financially burdensome or impossible for us to acquire data that is necessary to offer our certain of our products and services. Additionally, many consumer advocates, privacy advocates, and government regulators believe that the existing laws and regulations do not adequately protect privacy of personal information. They have become increasingly concerned with the use of personal information, particularly social security numbers, department of motor vehicle data and dates of birth. As a result, they are lobbying for further restrictions on the dissemination or commercial use of personal information to the public and private sectors. The following legal and regulatory developments also could have a material adverse affect on our business, financial position, results of operations or cash flows:

amendment, enactment, or interpretation of laws and regulations which restrict the access, use and distribution of personal information and limit the supply of data available to customers;

changes in cultural and consumer attitudes to favor further restrictions on information collection and sharing, which may lead to regulations that prevent full utilization of our services;

failure of our services to comply with current or amended laws and regulations; and

failure of our services to adapt to changes in the regulatory environment in an operational effective, efficient, cost-effective manner.

We require a significant amount of cash to service our indebtedness, which reduces the cash available to finance our organic growth, make strategic acquisitions and enter into alliances and joint ventures; our bond indentures contain restrictive covenants that limit our ability to engage in certain activities.

We have a significant amount of indebtedness. As of June 30, 2014, our indebtedness, including current maturities, was $1.9 billion, which consists of $1.5 billion related to the 2021 Senior Notes and $340.0 million related to the 2023 Senior Notes. In July 2013, we completed a private offering of an additional $850.0 million aggregate principal amount of senior unsecured notes. A portion of the proceeds from the July 2013 issuance of senior unsecured notes were used to repay the outstanding term loans under a previously existing credit facility that was terminated subsequent to the repayment.

In November 2013, we completed a private offering of an additional $510.0 million aggregate principal amount of 2021 Senior Notes and $340.0 million in aggregate principal amount of 2023 Senior Notes. The proceeds from such offerings were used to redeem all of our outstanding 2018 Senior Notes.

In June 2014, we completed a private offering of an additional $150.0 million aggregate principal amount of senior unsecured notes.

During fiscal year 2014, our aggregate interest expense was $107.4 million and cash paid for interest was $117.0 million. As a result of our issuance of senior unsecured notes in July 2013, November 2013 and June 2014, we expect our interest expense and cash interest expense to increase in fiscal year 2015 as compared to previous periods.

Our indebtedness could:


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make us more vulnerable to unfavorable economic conditions and reduce our revenues;

make it more difficult to obtain additional financing in the future for working capital, capital expenditures or other general corporate purposes;

require us to dedicate or reserve a large portion of our cash flow from operations for making payments on our indebtedness which would prevent us from using it for other purposes including product development;

to the extent that we have variable rate debt that is not covered by interest rate derivative agreements, make us susceptible to fluctuations in market interest rates that affect the cost of our borrowings; and

make it more difficult to pursue strategic acquisitions, joint ventures, alliances and collaborations.

Our ability to service our indebtedness will depend on our future performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors. Some of these factors are beyond our control. If we cannot generate sufficient cash flow from operations to service our indebtedness and to meet our other obligations and commitments, we may be required to refinance our debt, to dispose of assets or to repatriate foreign earnings to obtain funds for such purpose. We cannot assure you that debt refinancings or asset dispositions could be completed on a timely basis or on satisfactory terms, if at all, or would be permitted by the terms of our debt instruments. If we were to repatriate foreign earnings, we would incur incremental U.S. federal and state income taxes. 

Our bond indentures contain covenants that restrict our and our subsidiaries' ability to incur certain liens, engage in sale and leaseback transactions and consolidate, merge with, or convey, transfer or lease substantially all of our or their assets to, another person, and, in the case of any of our subsidiaries that did not issue or guarantee our senior notes, incur indebtedness.

Our failure to comply with any of these covenants could result in the acceleration of our outstanding indebtedness. If acceleration occurs, we would not be able to repay our debt and it is unlikely that we would be able to borrow sufficient additional funds to refinance our debt. Even if new financing is made available to us, it may not be available on acceptable or reasonable terms. An acceleration of our indebtedness would impair our ability to operate as a going concern.

Pursuant to agreements entered into prior to the CSG Acquisition, the noncontrolling stockholders of certain of our majority-owned subsidiaries have the right to require us to redeem their shares at the then fair market value. For financial statement reporting purposes, the estimated fair market value of these redeemable noncontrolling interests was $86.0 million at June 30, 2014.

We are active in 70 countries, where we are subject to country-specific risks that could adversely impact our business and results of operations.

During fiscal year 2014 and 2013, we generated approximately 63% and 68% of our revenues, respectively, outside the U.S. and we expect revenues from non-U.S. markets to continue to represent a majority of our total revenues. Business and operations in individual countries are subject to changes in local government regulations and policies, including those related to tariffs and trade barriers, investments, taxation, currency exchange controls and repatriation of earnings. Our results are also subject to the difficulties of coordinating our activities across 70 different countries. Furthermore, our business strategy includes expansion of our operations into new and developing markets, which will require even greater international coordination, expose us to additional local government regulations and involve markets in which we do not have experience or established operations. In addition, our operations in each country are vulnerable to changes in socio-economic conditions and monetary and fiscal policies, intellectual property protection disputes, the settlement of legal disputes through foreign legal systems, the collection of receivables through foreign legal systems, exposure to possible expropriation or other governmental actions, unsettled political conditions, possible terrorist attacks and pandemic disease. These and other factors may harm our operations in those countries and therefore our business, financial condition and results of operations.

We have a large amount of goodwill and other intangible assets as a result of acquisitions. Our earnings will be harmed if we suffer an impairment of our goodwill or other intangible assets.

We have a large amount of goodwill and other intangible assets and are required to perform an annual, or in certain situations a more frequent, assessment for possible impairment for accounting purposes. At June 30, 2014, we had goodwill and other intangible assets of $2.2 billion, or approximately 64% of our total assets. If we do not achieve our planned operating results or other factors impair these assets, we may be required to incur a non-cash impairment charge. Any impairment charges in the future will adversely affect our results of operations.

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We may incur significant restructuring and severance charges in future periods, which would harm our operating results and cash position or increase debt.

We incurred restructuring charges of $6.5 million and $5.4 million during fiscal years 2014 and 2013, respectively. These charges consist primarily of relocation and termination benefits paid or to be paid to employees, lease obligations associated with vacated facilities and other costs incurred related to our restructuring initiatives. As of June 30, 2014, our remaining restructuring and severance obligations associated with these restructuring initiatives were $1.3 million.

We regularly evaluate our existing operations and capacity, and we expect to incur additional restructuring charges as a result of future personnel reductions, related restructuring, and productivity and technology enhancements, which could exceed the levels of our historical charges. In addition, we may incur certain unforeseen costs as existing or future restructuring activities are implemented. Any of these potential charges could harm our operating results and significantly reduce our cash position.

Our software and services rely on information generated by third parties and any interruption of our access to such information could materially harm our operating results.

We believe that our success depends significantly on our ability to provide our customers access to data from many different sources. For example, a substantial portion of the data used in our repair estimating software is derived from parts and repair data provided by, among others, original equipment manufacturers, or OEMs, aftermarket parts suppliers, data aggregators, automobile dealerships, government organizations and vehicle repair facilities. We obtain much of our data about vehicle parts and components and collision repair labor and costs through license agreements with OEMs, automobile dealers, and other providers; and we obtain much of our data in our vehicle validation database and motor violation database from government organizations. EurotaxGlass’s Group, one of our primary competitors in Europe, provides us with valuation and paint data for use in our European markets pursuant to a similar arrangement, and Mitchell International, one of our primary competitors in the United States, provides us with vehicle glass data for use in our U.S. markets pursuant to a similar arrangement. In some cases, the data included in our products and services is licensed from sole-source suppliers. Many of the license agreements through which we obtain data are for terms of one year and may be terminated without cost to the provider on short notice.

We are in discussions with Mitchell International regarding the vehicle glass data license agreement following our receipt of a notice of termination of the agreement. We continue to investigate Mitchell International's claim that we have breached the agreement, and we cannot be certain about the outcome of these discussions or our continued access to the data.

If one or more of our licenses are terminated or if we are unable to renew one or more of these licenses on favorable terms or at all, we may be unable to access the information (in the case of information licensed from sole-service suppliers) or unable to access alternative data sources that would provide comparable information without incurring substantial additional costs. Some OEM sources have indicated to us that they intend to materially increase the licensing costs for their data. While we do not believe that our access to many of the individual sources of data is material to our operations, prolonged industry-wide price increases or reductions in data availability could make receiving certain data more difficult and could result in significant cost increases, which would materially harm our operating results.

System failures, delays and other problems could harm our reputation and business, cause us to lose customers and expose us to customer liability.

Our success depends on our ability to provide accurate, consistent and reliable services and information to our customers on a timely basis. Our operations could be interrupted by any damage to or failure of:

our computer software or hardware or our customers’ or third-party service providers’ computer software or hardware;

our networks, our customers’ networks or our third-party service providers’ networks; and

our connections to and outsourced service arrangements with third parties, such as Acxiom, which hosts data and applications for us and our customers.

Our systems and operations are also vulnerable to damage or interruption from:


26


power loss or other telecommunications failures;

earthquakes, fires, floods, hurricanes and other natural disasters;

computer viruses or software defects;

physical or electronic break-ins, sabotage, intentional acts of vandalism and similar events; and

errors by our employees or third-party service providers.

As part of our ongoing process improvements efforts, we have and will continue to migrate product and system platforms to next generation platforms and we may increase data and applications that we host ourselves, and the risks noted above will be exacerbated by these efforts. Because many of our services play a mission-critical role for our customers, any damage to or failure of the infrastructure we rely on (even if temporary), including those of our customers and vendors, could disrupt our ability to deliver information to and provide services for our customers in a timely manner, which could harm our reputation and result in the loss of current and/or potential customers or reduced business from current customers. In addition, we generally indemnify our customers to a limited extent for damages they sustain related to the unavailability of, or errors in, the software and services we provide; therefore, a significant interruption of, or errors in, our software and services could expose us to significant customer liability.

Fraudulent data access and other security breaches may negatively impact our business and harm our reputation.

Security breaches in our facilities, computer networks, and databases may cause harm to our business and reputation and result in a loss of customers and data suppliers. Our systems may be vulnerable to physical break-ins, computer viruses, attacks by hackers and similar disruptive problems. If users gain improper access to our databases, they may be able to steal, publish, delete or modify confidential third-party information that is stored or transmitted on our networks.

In addition, customers’ misuse of our information services could cause harm to our business and reputation and result in loss of customers. Any such misappropriation and/or misuse of our information could result in us, among other things, being in breach of certain data protection and related legislation.

A security or privacy breach may affect us in the following ways:

deterring customers from using our solutions;

deterring data suppliers from supplying data to us;

harming our reputation;

exposing us to liability;

increasing operating expenses to correct problems caused by the breach;

affecting our ability to meet customers’ expectations; or

causing inquiry from governmental authorities.

We may detect incidents in which consumer data has been fraudulently or improperly acquired. The number of potentially affected consumers identified by any future incidents is obviously unknown. Any such incident could materially and adversely affect our business, reputation, financial condition, operating results and cash flows.

Privacy concerns could require us to exclude data from our software and services, which may reduce the value of our offerings to our customers, damage our reputation and deter current and potential users from using our software and services.

In the United States, European Union and other jurisdictions, there are significant restrictions on the use of personal and consumer data. Our violations of these laws could harm our business. In addition, these restrictions may place limits on the information that we can collect from and provide to our customers. Furthermore, concerns about our collection, use or sharing

27


of automobile insurance claims information, moving violation information or other privacy-related matters, even if unfounded, could damage our reputation and operating results.

We depend on a limited number of key personnel who would be difficult to replace. If we lose the services of these individuals, or are unable to attract new talent, our business will be adversely affected.

We depend upon the ability and experience of our key personnel, who have substantial experience with our operations, the rapidly changing automobile insurance claims processing industry and the markets in which we offer our software and services. The loss of the services of one or more of our senior executives or key employees, particularly our Chairman of the Board, Chief Executive Officer and President, Tony Aquila, could harm our business and operations.

Our success depends on our ability to continue to attract, manage and retain other qualified management, sales and technical personnel as we grow. We may not be able to continue to attract or retain such personnel in the future.

We may require additional capital in the future, which may not be available on favorable terms, or at all.

Our future capital requirements depend on many factors, including our ability to develop and market new software and services and to generate revenues at levels sufficient to cover ongoing expenses or possible acquisition or similar transactions. If we need to raise additional capital, equity or debt financing may not be available at all or may be available only on terms that are not favorable to us. In the case of equity financings, dilution to our stockholders could result, and in any case such securities may have rights, preferences and privileges that are senior to our outstanding common stock. In the case of debt financings, we may have to grant additional security interests in our assets to lenders and agree to restrictive business and operating covenants. If we cannot obtain adequate capital on favorable terms or at all, we may be unable to support future growth or operating requirements and, accordingly, our business, financial condition and results of operations could be harmed.

Our business depends on our brands, and if we are not able to maintain and enhance our brands, our business and operating results could be harmed.

We believe that the brand identity we have developed and acquired has significantly contributed to the success of our business. We also believe that maintaining and enhancing our brands, such as Audatex, ABZ, Hollander, Informex, Sidexa, HPI, AUTOonline, Market Scan, IMS, Identifix, AutoPoint and Explore, are critical to the expansion of our software and services to new customers in both existing and new markets. Maintaining and enhancing our brands may require us to make substantial investments and these investments may not be successful. If we fail to promote and maintain our brands or if we incur excessive expenses in this effort, our business, operating results and financial condition will be harmed. We anticipate that, as our markets become increasingly competitive, maintaining and enhancing our brands may become increasingly difficult and expensive. Maintaining and enhancing our brands will depend largely on our ability to be a technology innovator, to continue to provide high quality software and services and protect and defend our brand names and trademarks, which we may not do successfully. To date, we have not engaged in extensive direct brand promotion activities, and we may not successfully implement brand enhancement efforts in the future.

Third parties may claim that we are infringing upon their intellectual property rights, and we could be prevented from selling our software or suffer significant litigation expense even if these claims have no merit.

Our competitive position is driven in part by our intellectual property and other proprietary rights. Third parties, however, may claim that our software, products or technology, including claims data or other data, which we obtain from other parties, are infringing or otherwise violating their intellectual property rights. We may also develop software, products or technology, unaware of pending patent applications of others, which software products or technology may infringe a third party patent once that patent is issued. Any claims of intellectual property infringement or other violation, even claims without merit, could be costly and time-consuming to defend and could divert our management and key personnel from operating our business. In addition, if any third party has a meritorious or successful claim that we are infringing or violating its intellectual property rights, we may be forced to change our software or enter into licensing arrangements with third parties, which may be costly or impractical. These claims may also require us to stop selling our software and/or services as currently designed, which could harm our competitive position. We also may be subject to significant damages or injunctions that prevent the further development and sale of certain of our software or services and may result in a material loss in revenue. Currently, one of our trademarks is subject to a nullification proceeding in front of the Brazil trademark authority.


28


We may be unable to protect our intellectual property and property rights, either without incurring significant costs or at all, which would harm our business.

We rely on a combination of trade secrets, copyrights, know-how, trademarks, patents, license agreements and contractual provisions, as well as internal procedures, to establish and protect our intellectual property rights. The steps we have taken and will take to protect our intellectual property rights may not deter infringement, duplication, misappropriation or violation of our intellectual property by third parties. In addition, any of the intellectual property we own or license from third parties may be challenged, invalidated, circumvented or rendered unenforceable, or may not be of sufficient scope or strength to provide us with any meaningful information. Furthermore, because of the differences in foreign patent, trademark and other laws concerning proprietary rights, our software and other intellectual property rights may not receive the same degree of protection in foreign countries as they would in the U.S., if at all. We may be unable to protect our rights in trade secrets and unpatented proprietary technology in these countries. We may also be unable to prevent the unauthorized disclosure or use of our technical knowledge, trade secrets or other proprietary information by consultants, vendors, former employees or current employees, despite the existence of nondisclosure and confidentiality agreements, intellectual property assignments and other contractual restrictions. It is also possible that others will independently develop the technology that is the same or similar to ours. If our trade secrets and other proprietary information become known or we are unable to maintain the proprietary nature of our intellectual property, we may not receive any return on the resources expended to create the intellectual property or generate any competitive advantage based on it.

We rely on our brands to distinguish our products and services from the products and services of our competitors, and have registered or applied to register trademarks covering many of these brands. We cannot assure you that our trademark applications will be approved. Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products and services, which could result in loss of brand recognition, and could require us to devote resources advertising and marketing new brands.

Third parties, including competitors, may infringe our intellectual property right and we may not have adequate resources to enforce our intellectual property rights. Pursuing infringers of our intellectual property could result in significant monetary costs and diversion of management resources, and any failure to pursue or successfully litigate claims against infringers or otherwise enforce our intellectual property rights could result in competitors using our technology and offering similar products and services, potentially resulting in loss of our competitive advantage and decreased revenues.

Currently, we believe that one or more of our customers in our EMEA segment may be infringing our intellectual property by making and distributing unauthorized copies of our software. We have also filed a trademark revocation application with the European Union trademark authority seeking revocation of a registered trademark held by a company in the United Kingdom that is similar to one of the trademarks we use. Enforcement of our intellectual property rights may be difficult and may require considerable resources.

Our lawsuit against Mitchell International, Inc. for patent infringement will be costly to litigate, could be decided adversely to us, and could adversely affect our intellectual property rights, distract our management and technical staff, and cause our stock price to decline.

On February 6, 2012, we filed a lawsuit against Mitchell International, Inc. in the United States District Court for the District of Delaware for infringement of one of our U.S. patents. We expect that our lawsuit, if we cannot resolve it before trial, could require several years to litigate, and at this stage we cannot predict the duration or cost of such litigation. We also expect that our lawsuit, even if it is determined in our favor or settled by us on favorable terms, will be costly to litigate, and that the cost of such litigation could have an adverse financial impact on our operating results. The litigation could also distract our management team and technical personnel from our other business operations, to the detriment of our business results. It is possible that we might not prevail in our lawsuit against Mitchell International, in which case our costs of litigation would not be recovered, and we could effectively lose some of our patent rights. It is also possible that Mitchell International might respond to our lawsuit by asserting counterclaims against us. Delays in the litigation, and any or all of these potential adverse results, could cause a substantial decline in our stock price.

Current or future litigation could have a material adverse impact on us.

We have been and continue to be involved in legal proceedings, claims and other litigation that arise in the ordinary course of business. For example, we have been involved in disputes with collision repair facilities, acting individually and as a group in some situations that claim that we have colluded with our insurance company customers to depress the repair time estimates generated by our repair estimating software. We have also been involved in litigation alleging that we have colluded

29


with our insurance company customers to cause the estimates of vehicle fair market value generated by our total loss estimation software to be unfairly low. On February 28, 2014, Solera, Explore, and Audatex North America, Inc. were each served with a civil complaint filed against them and another defendant by an insurance company third party claimant in Minnesota state court.  The complaint seeks state-wide class action status for similarly situated claimants, claiming that the defendant’s methodology for determining the value of total loss vehicles violates Minnesota law.  We filed a motion to dismiss on April 18, 2014.  The complaint was subsequently removed to the U.S. District Court for the District of Minnesota and an amended complaint was filed on July 16, 2014. We and our co-defendant have moved to dismiss the amended complaint. Furthermore, we are also subject to assertions by our customers and strategic partners that we have not complied with the terms of our agreements with them or that the agreements are not enforceable against them, some of which are the subject of pending litigation and any of which could in the future lead to arbitration or litigation. While we do not expect the outcome of any such pending or threatened litigation to have a material adverse effect on our financial position, litigation is unpredictable and excessive verdicts, both in the form of monetary damages and injunction, could occur. In the future, we could incur judgments or enter into settlements of claims that could harm our financial position and results of operations.

We are subject to periodic changes in the amount of our income tax provision (benefit) and these changes could adversely affect our operating results; we may not be able to utilize all of our tax benefits before they expire.

Our effective tax rate could be adversely affected by our mix of earnings in countries with high versus low tax rates; by changes in the valuation of our deferred tax assets and liabilities; by a change in our assertion that our foreign earnings are indefinitely reinvested; by the outcomes of examinations, audits or disputes by or with relevant tax authorities; or by changes in tax laws and regulations.

For purposes of concluding our domestic deferred tax assets are more-likely-than-not realizable we currently rely on Subpart F income as a source of future taxable income.  A change in U.S. tax law that would reduce Subpart F income, and accordingly future taxable income, would require us to assess the need for a valuation allowance against our domestic deferred tax assets.

Significant judgment is required to determine the recognition and measurement attributes prescribed in ASC Topic No. 740-10, Income Taxes. In addition, ASC Topic No. 740-10 applies to all income tax positions, including the potential recovery of previously paid taxes, which if settled unfavorably could adversely impact our provision for income taxes or additional paid-in capital.

We began paying dividends in fiscal year 2010 and we may not be able to pay dividends on our common stock and restricted stock units in the future; as a result, your only opportunity to achieve a return on your investment may be if the price of our common stock appreciates.

We began paying quarterly cash dividends to holders of our outstanding of common stock and restricted stock units in the quarter ended September 30, 2009. On August 26, 2014, we announced that our Board of Directors approved the payment of a quarterly cash dividend of $0.195 per outstanding share of common stock and per outstanding restricted stock unit. The Board of Directors also approved a quarterly stock dividend equivalent of $0.195 per outstanding restricted stock unit granted to certain of our executive officers since fiscal year 2011 in lieu of the cash dividend, which dividend equivalent will be paid to the restricted stock unit holders as the restricted stock unit vests. The dividends are payable on September 23, 2014 to stockholders and restricted stock unit holders of record at the close of business on September 9, 2014. Any determination to pay dividends in future periods will be at the discretion of our Board of Directors. Our ability to pay dividends to holders of our common stock and restricted stock units in future periods may be limited by restrictive covenants under our Amended Credit Facility and the indenture for the senior unsecured notes. As a result, your only opportunity to achieve a return on your investment in us could be if the market price of our common stock appreciates and you sell your shares at a profit. We cannot assure you that the market price for our common stock will ever exceed the price that you pay.

Requirements associated with being a public company increase our costs significantly, as well as divert significant company resources and management attention.

The expenses that are required as a result of being a public company are and will likely continue to be material. Compliance with the various reporting and other requirements applicable to public companies also require considerable time and attention of management. In addition, any changes we make may not be sufficient to allow us to satisfy our obligations as a public company on a timely basis.

We continue to work with our legal, independent accounting and financial advisors to identify those areas in which changes should be made to our financial and management control systems to manage our growth and our obligations as a

30


public company. These areas include corporate governance, corporate control, internal audit, disclosure controls and procedures and financial reporting and accounting systems. We have made, and will continue to make, changes in these and other areas. In addition, we are taking steps to address new U.S. federal legislation relating to corporate governance matters and are monitoring other proposed and recently-enacted U.S. federal and state legislation relating to corporate governance and other regulatory matters and how the legislation could affect our obligations as a public company.

In addition, being a public company could make it more difficult or more costly for us to obtain certain types of insurance, including directors’ and officers’ liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

Our certificate of incorporation and by-laws contain provisions that could discourage another company from acquiring us and may prevent attempts by our stockholders to replace or remove our current management.

Some provisions of our certificate of incorporation and by-laws may have the effect of delaying, discouraging or preventing a merger or acquisition that our stockholders may consider favorable, including transactions in which stockholders may receive a premium for their shares. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace or remove our board of directors. These provisions include:

authorization of the issuance of “blank check” preferred stock without the need for action by stockholders;

the removal of directors only by the affirmative vote of the holders of two-thirds of the shares of our capital stock entitled to vote;

any vacancy on the board of directors, however occurring, including a vacancy resulting from an enlargement of the board, may only be filled by vote of the directors then in office;

inability of stockholders to call special meetings of stockholders and limited ability of stockholders to take action by written consent; and

advance notice requirements for board nominations and proposing matters to be acted on by stockholders at stockholder meetings.

We are monitoring proposed U.S. federal and state legislation relating to stockholder rights and related regulatory matters and how the legislation could affect, among other things, the nomination and election of directors and our charter documents.

ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.

ITEM 2.
PROPERTIES

Our Corporate headquarters are located in Westlake, Texas, where we currently lease approximately 15,000 square feet of space.

Our principal leased EMEA facilities are located in Zurich, Switzerland and Zeist, the Netherlands. Our principal leased Americas facilities are located in San Diego, California; Ann Arbor, Michigan; Plymouth and Eagan, Minnesota; and Milwaukie, Oregon. We also lease a number of other facilities in countries where we operate. We own real estate in Brussels, Belgium; Reading, United Kingdom; Salisbury, United Kingdom; and Harrogate, United Kingdom.

We believe that our existing space is adequate for our current operations. We believe that suitable replacement and additional space, if necessary, will be available in the future on commercially reasonable terms.

ITEM 3.
LEGAL PROCEEDINGS

In the normal course of business, various claims, charges and litigation are asserted or commenced against us, including:


31


We have been the subject of allegations that our repair estimating and total loss software and services produced results that favored our insurance company customers, one of which is the subject of pending litigation.
We are subject to assertions by our customers, suppliers and strategic partners that we have not complied with the terms of our agreements with them or our agreements with them are not enforceable.

We have and will continue to vigorously defend ourselves against these claims. We believe that final judgments, if any, which may be rendered against us in current litigation, are adequately reserved for, covered by insurance or would not have a material adverse effect on our financial position.

ITEM 4.
MINE SAFETY DISCLOSURES

None.


32


PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock has been traded on The New York Stock Exchange since May 16, 2007 under the symbol “SLH”. Prior to that time, there was no public market for our common stock. The following table sets forth the high and low sales prices for our common stock as reported on the New York Stock Exchange for the periods indicated.
 
Fiscal Year 2014:
High
 
Low
First Quarter
$
58.29

 
$
51.00

Second Quarter
$
70.76

 
$
52.66

Third Quarter
$
70.41

 
$
62.55

Fourth Quarter
$
67.76

 
$
61.71

Fiscal Year 2013:
 
 
 
First Quarter
$
44.94

 
$
36.81

Second Quarter
$
54.36

 
$
43.03

Third Quarter
$
58.75

 
$
52.87

Fourth Quarter
$
58.15

 
$
51.13


Holders of Record

As of August 21, 2014, there were approximately 7 holders of record of our common stock, which is not reflective of the beneficial owners of our common stock.

Dividends

In fiscal years 2014 and 2013, we paid quarterly cash dividends of $0.17 and $0.125, respectively, per share outstanding of common stock and per outstanding restricted stock unit to stockholders and restricted stock unit holders of record. We also issued quarterly stock dividend equivalents of $0.17 per outstanding restricted stock unit granted to certain of our executive officers since fiscal year 2011 in lieu of the cash dividend, which dividend equivalent will be paid to the restricted stock unit holders as the restricted stock unit vests. Cash dividends paid in fiscal years 2014 and 2013 were as follows (in thousands, except per share data):
 
Fiscal Year 2014:
Per Share
 
Total
 
Cumulative by Fiscal Year
First Quarter
0.17

 
$
11,800

 
$
11,800

Second Quarter
0.17

 
11,825

 
23,625

Third Quarter
0.17

 
11,813

 
35,438

Fourth Quarter
0.17

 
11,769

 
47,207

 
0.68

 
$
47,207

 
 
Fiscal Year 2013:
 
 
 
 
 
First Quarter
0.125

 
$
8,682

 
$
8,682

Second Quarter
0.125

 
8,700

 
17,382

Third Quarter
0.125

 
8,724

 
26,106

Fourth Quarter
0.125

 
8,708

 
34,814

 
0.500

 
$
34,814

 
 

On August 26, 2014, we announced that our Board of Directors approved the payment of a quarterly cash dividend of $0.195 per outstanding share of common stock and per outstanding restricted stock unit. The Board of Directors also approved a quarterly stock dividend equivalent of $0.195 per outstanding restricted stock unit granted to certain of our executive officers

33


since fiscal year 2011 in lieu of the cash dividend, which dividend equivalent will be paid to the restricted stock unit holders as the restricted stock unit vests. Any determination to pay dividends in future periods will be at the discretion of our board of directors.

Unregistered Sales of Equity Securities

None.

Equity Compensation Plan Information

The following table sets forth certain information regarding our equity compensation plans as of June 30, 2014 (shares in thousands):
 
Plan Category
Number of securities to be issued upon exercise of outstanding options purchase rights and vesting of restricted stock units
 
Weighted-average exercise price of outstanding options and unvested restricted stock units
 
Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by stockholders:
 
 
 
 
 
2006 Securities Purchase Plan

 
$

 

2007 Long-Term Equity Incentive Plan (1)
152

 
22.72

 

2007 Employee Stock Purchase Plan

 

 
1,403

2008 Omnibus Equity Incentive Plan (1)
4,948
 (2)
 
51.35

 
3,972
(3)
Equity compensation plans not approved by stockholders

 

 

Total
5,100

 
 
 
5,375

 
(1)
Following our stockholders’ approval of the 2008 Omnibus Equity Incentive Plan (the “2008 Plan”) on November 12, 2008, we ceased granting equity awards under our 2007 Long-Term Equity Incentive Plan (the “2007 Plan”). All equity awards granted after November 12, 2008 have been granted pursuant to the 2008 Plan. Subject to certain exceptions, all outstanding equity awards under the 2007 Plan that are forfeited, expired or settled in cash will be returned to and made available for issuance under the 2008 Plan. Under the 2008 Plan, each award granted, other than stock options and stock appreciation rights, reduces the number of securities available for issuance under the 2008 Plan by 2.05 shares.
(2)
Assumes the target amount of outstanding performance share units will be earned.
(3)
Reflects the maximum amount of performance share units that could be earned.

Performance Graph

The following graph compares our cumulative total stockholder return on our common stock with the cumulative total returns of the Russell 2000 Index and an aggregate of peer issuers in the information services industry. The peer issuers used for this graph are The Thomson Corporation, Equifax Inc., The Dun & Bradstreet Corporation, FactSet Research Systems Inc., Fair Isaac Corporation, DealerTrack Holdings, Inc. and CoStar Group, Inc. Each peer issuer was weighted according to its respective capitalization on May 16, 2007, the date our common stock began trading on the New York Stock Exchange.


34


The graph assumes that the value of the investment in our common stock and each index was $100 on May 16, 2007.


 
Cumulative Total Return
 
Solera Holdings, Inc.
 
Russell 2000 Index
 
Information Service Peers
May 16, 2007
$
100.00

 
$
100.00

 
$
100.00

June 29, 2007
$
110.74

 
$
101.82

 
$
101.97

June 29, 2008
$
158.06

 
$
85.33

 
$
79.75

June 30, 2009
$
145.14

 
$
63.99

 
$
73.38

June 30, 2010
$
208.44

 
$
77.73

 
$
87.56

June 30, 2011
$
342.72

 
$
106.81

 
$
101.20

June 30, 2012
$
244.06

 
$
104.59

 
$
92.38

June 30, 2013
$
328.27

 
$
129.91

 
$
113.72

June 30, 2014
$
400.51

 
$
160.62

 
$
134.98


The information in the graph and table above is not “soliciting material,” is not deemed “filed” with the Securities and Exchange Commission and is not to be incorporated by reference in any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, except to the extent that we specifically incorporate such information by reference.

Issuer Purchases of Equity Securities

In November 2011, our Board of Directors approved a share repurchase program for up to a total of $180.0 million of our common stock through November 2013. In October 2013, our Board of Directors approved a new share repurchase program, replacing the share repurchase program authorized in November 2011, for up to a total of $200.0 million of our common stock through November 10, 2015. Share repurchases are made from time to time, through an accelerated stock purchase agreement, in open market transactions at prevailing market prices or in privately negotiated transactions. The repurchase program does not require us to purchase any specific number or amount of shares, and the timing and amount of such purchases will be determined by management based upon market conditions and other factors. In addition, the program may be amended or terminated at the discretion of our Board of Directors. The following table provides the amount of shares repurchased under the new repurchase program during each month to date (in thousands, except per share amounts):
 

35


 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
(in thousands)
October 2013

 
$

 

 
$
200,000

November 2013
136

 
$
64.73

 
136

 
$
191,183

December 2013
14

 
$
68.43

 
14

 
$
190,236

January 2014

 
$

 

 
$
190,236

February 2014
250

 
$
66.91

 
250

 
$
173,503

March 2014
50

 
$
66.74

 
50

 
$
170,165

April 2014

 
$

 

 
$
170,165

May 2014
153

 
$
66.45

 
153

 
$
159,974

June 2014
195

 
$
65.61

 
195

 
$
147,171

Total
798

 
$
66.15

 
798

 
$
147,171


ITEM 6.
SELECTED FINANCIAL DATA

The following table sets forth selected historical financial information regarding our business and should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.


36


Our results of operations include the results of operations of acquired companies from the date of the respective acquisitions. 
 
Fiscal Years Ended June 30,
 
2014 (1)
 
2013 (2)
 
2012 (3)
 
2011 (4)
 
2010 (5)
Statement of Income Data:
 
 
 
 
 
 
 
 
 
Revenues
$
987,259

 
$
838,103

 
$
790,207

 
$
684,697

 
$
631,348

Cost of revenues:
 
 
 
 
 
 
 
 
 
Operating expenses
222,262

 
181,448

 
171,763

 
134,649

 
130,852

Systems development and programming costs
90,735

 
79,083

 
73,914

 
68,932

 
67,926

Total cost of revenues (excluding depreciation and amortization)
312,997

 
260,531

 
245,677

 
203,581

 
198,778

Selling, general and administrative expenses
259,786

 
208,989

 
188,245

 
174,122

 
160,955

Share-based compensation expense
37,515

 
25,753

 
18,394

 
13,579

 
9,607

Depreciation and amortization
122,283

 
103,239

 
103,510

 
83,088

 
88,978

Restructuring charges, asset impairments, and other costs associated with exit and disposal activities
6,527

 
5,435

 
7,057

 
7,093

 
5,910

Acquisition and related costs
41,512

 
26,945

 
7,962

 
9,687

 
4,032

Interest expense
107,422

 
69,511

 
53,593

 
31,102

 
32,782

Other expense, net (6)
63,991

 
1,860

 
1,665

 
7,815

 
3,964

 
952,033

 
702,263

 
626,103

 
530,067

 
505,006

Income before provision for income taxes
35,226

 
135,840

 
164,104

 
154,630

 
126,342

Income tax provision (benefit)
30,058

 
30,797

 
45,718

 
(14,427
)
 
32,171

Net income
5,168

 
105,043

 
118,386

 
169,057

 
94,171

Less: Net income attributable to noncontrolling interests
13,878

 
11,159

 
11,398

 
11,680

 
9,739

Net income (loss) attributable to Solera Holdings, Inc.
(8,710
)
 
93,884

 
106,988

 
157,377

 
84,432

Net income (loss) attributable to Solera Holdings, Inc. per common share:
 
 
 
 
 
 
 
 
 
Basic
$
(0.13
)
 
$
1.35

 
$
1.52

 
$
2.23

 
$
1.20

Diluted 
$
(0.13
)
 
$
1.35

 
$
1.51

 
$
2.22

 
$
1.20

Dividends paid per share
$
0.68

 
$
0.50

 
$
0.40

 
$
0.30

 
$
0.25



37


 
Fiscal Years Ended June 30,
 
2014 (1)
 
2013 (2)
 
2012 (3)
 
2011 (4)
 
2010 (5)
Weighted average common shares used in the calculation of net (loss) income attributable to Solera Holdings, Inc. per common share:
 
 
 
 
 
 
 
 
 
Basic
68,817

 
68,843

 
70,178

 
70,349

 
69,587

Diluted
68,817

 
69,139

 
70,527

 
70,683

 
69,763

Cash Flow Data:
 
 
 
 
 
 
 
 
 
Cash flows provided by (used in):
 
 
 
 
 
 
 
 
 
Operating activities
$
248,526

 
$
226,708

 
$
222,992

 
$
211,531

 
$
190,284

Investing activities (7)
(417,578
)
 
(181,485
)
 
(47,819
)
 
(543,558
)
 
(111,287
)
Financing activities (8)
542,147

 
(88,517
)
 
(17,966
)
 
410,901

 
(28,927
)
Balance Sheet Data (as of the end of period):
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
837,751

 
$
464,239

 
$
371,101

 
$
371,101

 
$
240,522

Total assets (9)
3,400,086

 
2,257,541

 
2,169,135

 
2,169,135

 
1,356,653

Long-term debt, net of current portion (10)
1,867,808

 
1,144,462

 
1,020,383

 
1,020,383

 
538,018

Total stockholders’ equity
697,500

 
748,239

 
785,109

 
785,109

 
512,815

 
(1)
The results of operations of Pusula, Serinfo, SRS, DST, AutoPoint, Autosoft, and Sachcontrol AG, acquired in fiscal year 2014, are included from the respective dates of the acquisitions, which are not the first day of fiscal year 2014.
(2)
The results of operations of LMI, TitleTec, APU, Mensaelect, CarweB, HyperQuest and Eziworks, acquired in fiscal year 2013, are included from the respective dates of the acquisitions, which are not the first day of fiscal year 2013.
(3)
The results of operations of See Progress, Commerce Delta, Sinexia and Actual Systems, acquired in fiscal year 2012, are included from the respective dates of the acquisitions, which are not the first day fiscal year 2012.
(4)
The results of operations of Explore and New Era, acquired in fiscal year 2011, are included from the respective dates of the acquisitions, which are not the first day of fiscal year 2011.
(5)
The results of operations of AUTOonline, GTLDATA and Market Scan, acquired in fiscal year 2010, are included from the respective dates of the acquisitions, which are not the first day of fiscal year 2010.
(6)
Other expense, net for fiscal year 2014 includes a $63.3 million loss on debt extinguishment consisting of the redemption premium on our senior unsecured notes due 2018 of $58.4 million and the write-off of unamortized debt issuance costs associated with the repayment of the outstanding term loans under our senior credit facility in July 2013 and our senior unsecured notes due 2018.
(7)
Cash flows used in investing activities primarily consists of cash used to acquire businesses. The significant increases in cash flows used in investing activities in fiscal year 2014 and fiscal year 2011 are due to our acquisitions of SRS in November 2013 and Explore in June 2011, respectively.
(8)
Cash flows from financing activities primarily consists of the net proceeds from the issuance of our senior unsecured notes. Cash flows from financing activities in fiscal year 2014 primarily reflect the $661.9 million of net proceeds from our issuance of senior unsecured notes in July 2013, November 2013, and June 2014, net of the repayment of the remaining $289.5 million of the outstanding term loans under our senior credit facility and the $850 million principal balance of the senior unsecured notes due 2018. Cash flows from financing activities in fiscal year 2011 primarily reflect the $444.3 million of net proceeds from our issuance of senior unsecured notes in June 2011.
(9)
The increase in total assets in fiscal year 2014 primarily reflects the goodwill and acquired intangible assets from our acquisition of SRS.
(10)
The increases in long-term debt, net of current portion primarily reflect our issuance of senior unsecured notes.

ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

38


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

Overview of the Business

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

We help our customers:

estimate the costs to repair damaged vehicles and determine pre-collision fair market values for damaged vehicles for which the repair costs exceed the vehicles’ value;
automate and outsource steps of the claims process that insurance companies have historically performed internally; and
improve their ability to monitor and manage their businesses through data reporting and analysis.

We serve over 165,000 customers and are active in 70 countries across six continents with more than 3,600 employees. Our customers include more than 4,000 automobile insurance companies, 60,500 collision repair facilities, 12,500 independent assessors, 44,500 service, maintenance and repair facilities and 43,500 automotive recyclers, auto dealers and others. We derive revenues from many of the world’s largest automobile insurance companies, including the ten largest automobile insurance companies in Europe and eight of the ten largest automobile insurance companies in North America.

At the core of our software and services are our proprietary databases, which are localized to each geographical market we serve. Our insurance claims processing software and services are typically integrated into our customers’ systems, operations and processes, making it costly and time consuming to switch to another provider. This customer integration, along with our products and long-standing customer relationships, has contributed to our very high customer retention rate.

Segments

We have aggregated our operating segments into two reportable segments: EMEA and Americas. Our EMEA reportable segment encompasses our operations in Europe, the Middle East, Africa, Asia and Australia, while our Americas reportable segment encompasses our operations in North, Central and South America.

Our chief operating decision maker is our Chief Executive Officer. We evaluate the performance of our reportable segments based on revenues, income before provision for income taxes and adjusted EBITDA, a non-GAAP financial measure that represents GAAP net income excluding interest expense, provision for income taxes, depreciation and amortization, share-based compensation expense, restructuring charges, asset impairments and other costs associated with exit and disposal activities, acquisition and related costs, litigation related expenses and other (income) expense, net. We do not allocate certain costs to reportable segments, including costs related to our financing activities, business development and oversight, and tax, audit and other professional fees, to our reportable segments. Instead, we manage these costs at the Corporate level.

The table below sets forth our revenues by reportable segment and as a percentage of our total revenues for the periods indicated (dollars in millions):
 
Fiscal Years Ended June 30,
 
2014
 
2013
 
2012
EMEA
$
517.8

 
52.4
%
 
$
471.2

 
56.2
%
 
$
464.4

 
58.8
%
Americas
469.5

 
47.6

 
366.9

 
43.8

 
325.8

 
41.2

Total
$
987.3

 
100.0
%
 
$
838.1

 
100.0
%
 
$
790.2

 
100.0
%

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


39


Components of Revenues and Expenses

Revenues

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

price per transaction;
fixed monthly amount for a prescribed number of transactions;
fixed monthly subscription rate;
price per set of services rendered; and
price per system delivered.

Our software and services are often sold as packages, without individual pricing for each component. Our revenues are reflected net of customer sales allowances, which we estimate based on both our examination of a subset of customer accounts and historical experience.

Our core offering is our estimating and workflow software, which is used by our insurance company, collision repair facility and independent assessor customers, representing the majority of our revenues. Our salvage and recycling software, business intelligence and consulting services, vehicle data validation, salvage disposition, driver violation reporting services, service, maintenance and repair solutions and other offerings represent in the aggregate a smaller portion of our revenues. We believe that our estimating and workflow software will continue to represent the majority of our revenue for the foreseeable future.

Cost of revenues (excluding depreciation and amortization)

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

Operating expenses

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

Systems development and programming costs

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

Selling, general and administrative expenses

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

Share-based compensation expense

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


40


Depreciation and amortization

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

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

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

Acquisition and related costs

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

Interest expense

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

Other expense, net

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

Income tax provision

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

Net income attributable to noncontrolling interests

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

Factors Affecting Our Operating Results

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

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

41


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

Exchange rates between most of the major foreign currencies we use to transact our business and the U.S. dollar have fluctuated significantly over the last few years and we expect that they will continue to fluctuate. The majority of our revenues and costs are denominated in Euros, Pound Sterling, Swiss francs, Canadian dollars and other foreign currencies. The following table provides the average quarterly exchange rates for the Euro and Pound Sterling since the beginning of fiscal year 2013:
Period
Average Euro-to-U.S. Dollar Exchange Rate
 
Average Pound Sterling-to-U.S. Dollar Exchange Rate
Quarter Ended September 30, 2012
$
1.25

 
$
1.58

Quarter Ended December 31, 2012
1.30

 
1.61

Quarter Ended March 31, 2013
1.32

 
1.55

Quarter Ended June 30, 2013
1.31

 
1.54

Quarter Ended September 30, 2013
1.32

 
1.55

Quarter Ended December 31, 2013
1.36

 
1.62

Quarter Ended March 31, 2014
1.37

 
1.65

Quarter Ended June 30, 2014
1.37

 
1.68


During fiscal year 2014, as compared to fiscal year 2013, the U.S. dollar weakened against most major foreign currencies we use to transact our business. The average U.S. dollar weakened versus the Euro by 4.9% and the Pound Sterling by 3.7%, which increased our revenues and expenses during fiscal year 2014. A hypothetical 5% increase or decrease in the U.S. dollar versus other currencies in which we transact our business would have resulted in an increase or decrease, as the case may be, to our revenues of $31.0 million during fiscal year 2014.

Factors that affect business volume. The following external factors have or may have an effect on the number of claims that are submitted and/or our volume of transactions, any of which can affect our revenues:

Number of insurance claims made. In fiscal year 2014, the number of insurance claims made increased slightly versus fiscal year 2013. In several of our large western European markets, the number of insurance claims for vehicle damage submitted by owners to their insurance carriers declined slightly. The number of insurance claims made can be influenced by factors such as unemployment levels, the number of miles driven, rising gasoline prices, the number of uninsured drivers, rising insurance premiums and insured opting for lower coverage or higher deductible levels, among other things. Fewer claims made can reduce the transaction-based fees that we generate.

Sales of new and used vehicles. According to industry sources, global new vehicle sales grew by 3.7% in 2012 to 79.5 million units and by 4.2% in 2013 to 82.8 million units. In markets where automobile insurance is generally government-mandated and claims processing is automated (“advanced markets”), sales are projected to grow at 1.3% compound annual growth rate through 2020. In other markets, sales are projected to grow at 8.1% compound annual growth rate through 2020. Fewer new light vehicle sales can result in fewer insured vehicles on the road and fewer automobile accidents, which can reduce the transaction-based fees that we generate.

Damaged vehicle repair costs. The cost to repair damaged vehicles, also known as severity, includes labor, parts and other related costs. Severity has steadily risen for a number of years. According to industry sources, from 2001 through 2010, the price index for body work has increased by 30.5% compared with a 23.2% increase in the general cost of living index. Insurance companies purchase our products and services to help standardize the cost of repair. Should the cost of labor, parts and other related items continue to increase over time, insurance companies may seek to purchase and utilize an increasing number of our products and services to help improve the standardization of the cost of repair.

Penetration Rate of Vehicle Insurance. An increasing rate of procuring vehicle insurance will result in an increase in the number of insurance claims made for damaged vehicles. An increasing number of insurance claims submitted can increase the transaction-based fees that we generate for partial-loss and total-loss estimates. This is due in part to both increased regulation and increased use of financing in the purchase of new and used vehicles. We expect that the rate of vehicle insurance in our less mature international markets will continue to increase during the next eighteen months.

42



Automobile usage—number of miles driven. Several factors can influence miles driven including gasoline prices and economic conditions. According to industry sources, miles driven in the United States remained flat from January through May of calendar year 2013 compared to the same period in prior year. Fewer miles driven can result in fewer automobile accidents, which can reduce the transaction-based fees that we generate.

Seasonality. Our business is subject to seasonal and other fluctuations. In particular, we have historically experienced higher revenues during the second quarter and third quarter versus the first quarter and fourth quarter during each fiscal year. This seasonality is caused primarily by more days of inclement weather during the second quarter and third quarter in most of our markets, which contributes to a greater number of vehicle accidents and damage during these periods. In addition, our business is subject to fluctuations caused by other factors, including the occurrence of extraordinary weather events and the timing of certain public holidays. For example, the Easter holiday occurs during the third quarter in certain fiscal years and occurs during the fourth quarter in other fiscal years, resulting in a change in the number of business days during the quarter in which the holiday occurs.

Share-based compensation expense. We incurred pre-tax, non-cash share-based compensation charges of $37.5 million, $25.8 million and $18.4 million during fiscal years 2014, 2013, and 2012, respectively. We expect to recognize additional pre-tax, non-cash share-based compensation charges related to share-based awards outstanding at June 30, 2014. The estimated total remaining unamortized share-based compensation expense, net of forfeitures, was $57.5 million which we expect to recognized over a weighted-average period of 2.7 years.

Restructuring charges. We have incurred restructuring charges in each period presented and also expect to incur additional restructuring charges, primarily relating to severance costs, over the next several quarters as we work to improve efficiencies in our business. We do not expect reduced revenues or an increase in other expenses as a result of continued implementation of our restructuring initiatives.

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

gain and loss of customers;
pricing pressures;
acquisitions, joint ventures or similar transactions;
expenses to develop new software or services; and
expenses and restrictions related to indebtedness.

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

Results of Operations

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


43


The table below sets forth our results of operations data, including the amount and percentage changes for the periods indicated:
 
 
Fiscal Years Ended June 30,
 
Fiscal Year 2014 to Fiscal Year 2013 Change
 
Fiscal Year 2013 to Fiscal Year 2012 Change
 
2014
 
2013
 
2012
 
$
 
%
 
$
 
%
 
(dollars in thousands)
Revenues
$
987,259

 
$
838,103

 
$
790,207

 
$
149,156

 
17.8
 %
 
$
47,896

 
6.1
 %
Cost of revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
222,262

 
181,448

 
171,763

 
40,814

 
22.5

 
9,685

 
5.6

Systems development and programming costs
90,735

 
79,083

 
73,914

 
11,652

 
14.7

 
5,169

 
7.0

Total cost of revenues (excluding depreciation and amortization)
312,997

 
260,531

 
245,677

 
52,466

 
20.1

 
14,854

 
6.0

Selling, general and administrative expenses
259,786

 
208,989

 
188,245

 
50,797

 
24.3

 
20,744

 
11.0

Share-based compensation expense
37,515

 
25,753

 
18,394

 
11,762

 
45.7

 
7,359

 
40.0

Depreciation and amortization
122,283

 
103,239

 
103,510

 
19,044

 
18.4

 
(271
)
 
(0.3
)
Restructuring charges, asset impairments, and other costs associated with exit and disposal activities
6,527

 
5,435

 
7,057

 
1,092

 
20.1

 
(1,622
)
 
(23.0
)
Acquisition and related costs
41,512

 
26,945

 
7,962

 
14,567

 
54.1

 
18,983

 
238.4

Interest expense
107,422

 
69,511

 
53,593

 
37,911

 
54.5

 
15,918

 
29.7

Other expense, net
63,991

 
1,860

 
1,665

 
62,131

 
3,340.4

 
195

 
11.7

 
952,033

 
702,263

 
626,103

 
249,770

 
35.6

 
76,160

 
12.2

Income before provision for income taxes
35,226

 
135,840

 
164,104

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

 
30,797

 
45,718

 
(739
)
 
(2.4
)
 
(14,921
)
 
(32.6
)
Net income
5,168

 
105,043

 
118,386

 
(99,875
)
 
(95.1
)
 
(13,343
)
 
(11.3
)
Less: Net income attributable to noncontrolling interests
13,878

 
11,159

 
11,398

 
2,719

 
24.4

 
(239
)
 
(2.1
)
Net income (loss) attributable to Solera Holdings, Inc.
$
(8,710
)
 
$
93,884

 
$
106,988

 
$
(102,594
)
 
(109.3
)%
 
$
(13,104
)
 
(12.2
)%
 
Amounts and percentages in the above table and throughout our discussion and analysis of financial conditions and results of operations may reflect rounding adjustments.


44


The table below sets forth our results of operations data expressed as a percentage of revenues for the periods indicated:
 
 
Fiscal Years Ended June 30,
 
2014
 
2013
 
2012
Revenues
100.0
 %
 
100.0
%
 
100.0
%
Cost of revenues:
 
 
 
 
 
Operating expenses
22.5

 
21.6

 
21.7

Systems development and programming costs
9.2

 
9.4

 
9.4

Total cost of revenues (excluding depreciation and amortization)
31.7

 
31.1

 
31.1

Selling, general and administrative expenses
26.3

 
24.9

 
23.8

Share-based compensation expense
3.8

 
3.1

 
2.3

Depreciation and amortization
12.4

 
12.3

 
13.1

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

 
0.6

 
0.9

Acquisition and related costs
4.2

 
3.2

 
1.0

Interest expense
10.9

 
8.3

 
6.8

Other expense, net
6.5

 
0.2

 
0.2

 
96.4

 
83.8

 
79.2

Income before provision for income taxes
3.6

 
16.2

 
20.8

Income tax provision
3.0

 
3.7

 
5.8

Net income
0.6

 
12.5

 
15.0

Less: Net income attributable to noncontrolling interests
1.4

 
1.3

 
1.4

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

Revenues

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

Our EMEA revenues increased $46.6 million, or 9.9%, to $517.8 million. After adjusting for changes in foreign currency exchange rates, EMEA revenues increased $30.2 million, or 6.4%, during fiscal year 2014 resulting from growth in transaction revenues in several countries from sales to new customers and increased transaction volume from and sales of new software and services to existing customers and incremental revenue contributions from recently-acquired businesses.

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

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

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

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

45


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

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

Set forth below is our revenues from each of our principal customer categories and as a percentage of revenues for the periods indicated (dollars in millions):
 
Fiscal Years Ended June 30,
 
2014
 
2013
 
2012
Insurance companies
$
385.5

 
39.0
%
 
$
374.0

 
44.6
%
 
$
359.9

 
45.5
%
Collision repair facilities
292.7

 
29.6

 
266.3

 
31.8

 
257.5

 
32.6

Independent assessors
78.5

 
8.0

 
72.9

 
8.7

 
74.4

 
9.4

Service, maintenance and repair facilities
74.0

 
7.5

 

 

 

 

Automotive recyclers, salvage, dealerships and others
156.6

 
15.9

 
124.9

 
14.9

 
98.4

 
12.5

Total
$
987.3

 
100.0
%
 
$
838.1

 
100.0
%
 
$
790.2

 
100.0
%

Revenue growth for each of our customer categories was as follows (dollars in millions): 
 
 
Fiscal Year 2014 vs Fiscal Year 2013
 
Fiscal Year 2013 vs Fiscal Year 2012
Customer category
 
Revenue Growth
 
Percentage Change
 
Revenue Growth
 
Percentage Change
Insurance companies
 
$
11.5

 
3.1
%
 
$
14.1

 
3.9
 %
Collision repair facilities
 
26.4

 
9.9

 
8.8

 
3.4

Independent assessors
 
5.6

 
7.7

 
(1.5
)
 
(2.0
)
Service, maintenance and repair facilities
 
74.0

 
100.0

 

 

Automotive recyclers, salvage, dealerships and others
 
31.7

 
25.4

 
26.5

 
26.9

Total
 
$
149.2

 
17.8
%
 
$
47.9

 
6.1
 %

Revenue growth for each of our customer categories after adjusting for changes in foreign currency exchange rates was as follows (dollars in millions): 
 
 
Fiscal Year 2014 vs Fiscal Year 2013
 
Fiscal Year 2013 vs Fiscal Year 2012
Customer category
 
Revenue Growth
 
Percentage Change
 
Revenue Growth
 
Percentage Change
Insurance companies
 
$
11.1

 
3.0
%
 
$
22.5

 
6.3
%
Collision repair facilities
 
22.6

 
8.5

 
15.5

 
6.0

Independent assessors
 
3.4

 
4.6

 
1.6

 
2.1

Service, maintenance and repair facilities
 
74.0

 
100.0

 

 

Automotive recyclers, salvage, dealerships and others
 
29.5

 
23.6

 
27.7

 
28.1

Total
 
$
140.6

 
16.8
%
 
$
67.3

 
8.5
%

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


46


Operating expenses

Fiscal Year 2014 vs. Fiscal Year 2013. During fiscal year 2014, operating expenses increased $40.8 million, or 22.5% and include operating expenses of SRS of $16.5 million. After adjusting for changes in foreign currency exchange rates and excluding operating expenses from SRS, operating expenses increased $22.3 million, or 12.3%, during fiscal year 2014.

Our EMEA operating expenses increased $12.2 million, or 14.3%. After adjusting for changes in foreign currency exchange rates, EMEA operating expenses increased $8.9 million, or 10.5%, during fiscal year 2014 primarily due to an increase in personnel related expenses due to increased headcount and incremental operating expenses contributions from recently-acquired businesses, mainly personnel related expenses.

Our Americas operating expenses increased $29.1 million or 30.3% and include operating expenses from SRS of $16.5 million. After adjusting for changes in foreign currency exchange rates and excluding operating expenses of SRS, Americas operating expenses increased $13.8 million, or 14.3%, during fiscal year 2014 primarily due to incremental operating expenses contributions from recently-acquired businesses other than SRS, mainly personnel related expenses and purchased data costs and an increase in the costs of data purchased from state departments of motor vehicles consistent with the revenue growth in our AudaExplore re-underwriting business.

Fiscal Year 2013 vs. Fiscal Year 2012. During fiscal year 2013, operating expenses increased $9.7 million, or 5.6%. After adjusting for changes in foreign currency exchange rates, operating expenses increased $13.0 million, or 7.6%, during fiscal year 2013 primarily due to an increase in operating expenses in our Americas segment.

Our EMEA operating expenses decreased $3.2 million, or 3.7%. After adjusting for changes in foreign currency exchange rates, EMEA operating expenses decreased $0.5 million, or 0.6%, during fiscal year 2013 primarily due to ongoing waste reduction and cost containment initiatives, partially offset by incremental operating expenses contributions from recently-acquired businesses, primarily personnel related expenses and third party license fees.

Our Americas operating expenses increased $12.9 million or 15.4%. After adjusting for changes in foreign currency exchange rates, Americas operating expenses increased $13.5 million, or 16.1%, during fiscal year 2013 primarily due to incremental operating expenses contributions from recently-acquired businesses, primarily personnel related expenses and purchased data costs, and an increase in the costs of data purchased from state departments of motor vehicles consistent with the revenue growth in our AudaExplore re-underwriting business.

We expect AudaExplore's operating expenses, primarily relating to costs for data utilized in Explore's re-underwriting offerings, to increase in absolute dollars as AudaExplore expands its offerings into additional U.S. states.

Systems development and programming costs