e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31,
2009
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File
No. 001-34005
Lender Processing Services,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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26-1547801
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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601 Riverside Avenue
Jacksonville, Florida
(Address of principal
executive offices)
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32204
(Zip Code)
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(904) 854-5100
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class:
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Name of Each Exchange on Which Registered:
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Common Stock, par value $0.0001 per share
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New York Stock Exchange
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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 o No þ
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 o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
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
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants 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. o
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):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act) Yes
o No þ
The aggregate market value of the registrants common stock
held by non-affiliates was $2,647,315,044 based on the closing
sale price of $27.77 on June 30, 2009 as reported by the
New York Stock Exchange. For the purposes of the foregoing
sentence only, all directors and executive officers of the
registrant were assumed to be affiliates. The number of shares
outstanding of the registrants common stock,
$0.0001 par value per share, was 95,478,752 as of
January 31, 2010.
The information in Part III hereof is incorporated herein
by reference to the registrants Proxy Statement on
Schedule 14A for its 2010 annual meeting of shareholders,
to be filed within 120 days after the close of the fiscal
year that is the subject of this Report.
LENDER
PROCESSING SERVICES, INC.
2009
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
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Except as otherwise indicated or unless the context otherwise
requires, all references to LPS, we, the
Company, or the registrant are to Lender
Processing Services, Inc., a Delaware corporation that was
incorporated in December 2007 as a wholly-owned subsidiary of
FIS, and its subsidiaries; all references to FIS,
the former parent, or the holding
company are to Fidelity National Information Services,
Inc., a Georgia corporation formerly known as Certegy Inc., and
its subsidiaries, that owned all of LPSs shares until
July 2, 2008; all references to former FIS are
to Fidelity National Information Services, Inc., a Delaware
corporation, and its subsidiaries, prior to the merger of
Certegy, Inc. and former FIS; all references to old
FNF are to Fidelity National Financial, Inc., a Delaware
corporation that owned a majority of former FISs shares
through November 9, 2006; and all references to
FNF are to Fidelity National Financial, Inc.
(formerly known as Fidelity National Title Group, Inc.),
formerly a subsidiary of old FNF but now a stand-alone
company.
PART I
Overview
We are a provider of integrated technology and services to the
mortgage lending industry, with market leading positions in
mortgage processing and default management services in the
U.S. We conduct our operations through two reporting
segments, Technology, Data and Analytics and Loan Transaction
Services, which produced approximately 30% and 70%,
respectively, of our revenues for the year ended
December 31, 2009. A large number of financial institutions
use our solutions. Our technology solutions include our mortgage
processing system, which automates all areas of loan servicing,
from loan setup and ongoing processing to customer service,
accounting and reporting. Our technology solutions also include
our Desktop system, which is a middleware enterprise workflow
management application designed to streamline and automate
business processes. Our loan transaction services include our
default management services, which are used by mortgage lenders,
servicers, attorneys and trustees to reduce the expense of
managing defaulted loans, and our loan facilitation services,
which support most aspects of the closing of mortgage loan
transactions to national lenders and loan servicers.
Prior to July 2, 2008, the Company was a wholly-owned
subsidiary of FIS. In October 2007, the board of directors of
FIS approved a plan of restructuring pursuant to which FIS would
spin off its lender processing services segment to its
shareholders in a tax free distribution. Pursuant to this plan
of restructuring, on June 16, 2008, FIS contributed to us
all of its interest in the assets, liabilities, businesses and
employees related to FISs lender processing services
operations in exchange for shares of our common stock and
$1,585.0 million aggregate principal amount of our debt
obligations. On July 2, 2008, FIS distributed to its
shareholders a dividend of one-half share of our common stock,
par value $0.0001 per share, for each issued and outstanding
share of FIS common stock held on June 24, 2008, which we
refer to as the spin-off. Also on July 2, 2008,
FIS exchanged 100% of our debt obligations for a like amount of
FISs existing Tranche B Term Loans issued under its
Credit Agreement dated as of January 18, 2007. The spin-off
was tax-free to FIS and its shareholders, and the debt-for-debt
exchange undertaken in connection with the spin-off was tax-free
to FIS.
Information
about Reporting Segments
We offer a suite of solutions across the mortgage continuum,
including technology applications, data, analytics, loan
facilitation services and default management services. Our two
reportable segments are Technology, Data and Analytics and Loan
Transaction Services. We provide our solutions to many of the
top 50 U.S. banks, as well as a number of other financial
institutions, mortgage lenders and mortgage loan servicers,
attorneys, trustees and real estate professionals.
In our Technology, Data and Analytics segment, our principal
technology solutions are applications provided to mortgage
lenders and other lending institutions, together with related
support and services. Our technology solutions primarily consist
of mortgage processing and workflow management. The long term
nature of most of our contracts in this business provides us
with substantial recurring revenues. Our revenues from mortgage
processing are generally based on the number of mortgages
processed on our software. The number of mortgages processed
includes both new mortgages and existing mortgages that have
been originated in prior years and are still on the
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books of our lending customers. Our other technology solutions
include our Desktop application, which at present is deployed
primarily to customers utilizing our default management
services, but has broader applications in the areas of process
management, invoice management and document management. We
generally earn revenues from our Desktop application on a per
transaction basis. Our data and analytics offerings primarily
consist of our alternative valuation services, real estate and
mortgage data, fraud detection solutions, modeling and
forecasting and analytical tools. For 2009, the Technology, Data
and Analytics segment produced $707.5 million, or
approximately 30%, of our consolidated revenues.
Our Loan Transaction Services segment consists principally of
our loan facilitation services and our default management
services. Our loan facilitation services consist primarily of
settlement services, such as title agency and closing services,
traditional appraisals and appraisal management services and
other origination and real estate-related services. Each of
these services is provided through a centralized delivery
channel in accordance with a lenders specific
requirements, regardless of the geographic location of the
borrower or property. Our default management services, including
title, posting and publication, property preservation, asset
management, REO auction services and administrative support are
provided to attorneys, trustees, national lenders and loan
servicers to enable them to better manage some or all of the
business processes necessary to take a loan and the underlying
property through the default, foreclosure and disposition
process. Our revenues from our Loan Transaction Services segment
in 2009 were $1,684.6 million, or approximately 70%, of our
consolidated revenues.
In 2009, 2008 and 2007, all of our revenues were from sources
within the U.S. and Puerto Rico.
Technology,
Data and Analytics
Our Technology, Data and Analytics segment offers leading
software systems and information solutions that facilitate and
automate many of the business processes across the life cycle of
a mortgage. Our customers use our technology and services to
reduce their operating costs, improve their customer service and
enhance their competitive position. We continually work with our
customers to customize and integrate our software and services
in order to assist them in achieving the value proposition that
we offer to them.
Technology. We sell the most widely used
mortgage loan servicing platform in the U.S., which offers a
comprehensive set of mortgage servicing functions within a
single system. We also offer our Desktop application, which is a
middleware workflow management application that we have deployed
to automate workflow specific to our customers
requirements. The primary applications and services of our
technology businesses include:
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MSP. Our mortgage servicing platform,
or MSP, is an application that automates loan servicing,
including loan setup and ongoing processing, customer service,
accounting and reporting to the secondary mortgage market, and
federal regulatory reporting. MSP serves as the core application
through which our bank customers keep the primary records of
their mortgage loans, and as a result is an important part of
the banks underlying processing infrastructure. MSP
processes a wide range of loan products, including fixed-rate
mortgages, adjustable-rate mortgages, construction loans, equity
lines of credit and daily simple interest loans. We expanded our
capabilities on our MSP platform to include processing home
equity lines of credit, or HELOCs. Traditionally, the
software systems that many banks use to process HELOCs are based
on credit card systems, and we believe, as a result, are less
robust than MSP in addressing these real estate loans in areas
such as loss mitigation, escrow tracking and regulatory
reporting. We believe the banking industry is now beginning to
realize that it needs better processing systems for HELOCs than
most banks currently employ.
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When a bank hires us to process its mortgage portfolio, we
provide the hardware and the skilled personnel whose role is to
keep the system up and running 24 hours a day, seven days a
week; to keep the programs and interfaces running smoothly; and
to make the system and application changes needed to upgrade the
processes and ensure compliance with regulatory changes. We also
undertake to perform the processing securely. The bank customer
is responsible for all external communications and all keying or
other data input, such as reflecting when checks or other
payments are received from its loan customers. The majority of
our MSP customers use us as their processing partner and engage
us to perform all data processing functions in our technology
center in Jacksonville, Florida.
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Desktop. We have developed a web-based
workflow information system, which we refer to as Desktop. The
Desktop application can be used for managing and automating a
wide range of different workflow processes. It can also be used
to organize images of paper documents within a particular file,
to capture information from imaged documents, to manage invoices
and to provide multiple users access to key data needed for
various types of monitoring and process management. We
originally developed Desktop for use in our default management
businesses, although we are expanding its capabilities to handle
a wide range of other processes. The Desktop application enables
our customers to seamlessly manage different processes through a
single application and thus reduces our customers
processing time and application maintenance costs.
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Other software applications. We offer
various software applications and services that facilitate the
origination of mortgage loans in the U.S. For example, we
offer a loan origination software system, known as
Empower!, which is used by banks, savings &
loans and mortgage bankers to automate the loan origination
process. Empower! provides seamless credit bureau access and
interfaces with MSP, automated underwriting systems used by
Freddie Mac and Fannie Mae and various vendors providing
settlement services. We also offer a software system, known as
SoftPro, which is a real estate closing and title
insurance production application used to create the appropriate
forms necessary for the closing of residential and commercial
real estate transactions in the U.S. We also offer
RealEC, which is the leading collaborative vendor network
for the mortgage industry. The RealEC network enables lenders
and their business partners to electronically connect,
collaborate and automate their business processes and to
electronically order and route settlement services, resulting in
the elimination of paper, manual processing and other obstacles
in the origination and servicing of mortgage loans.
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We build all of our technology platforms to be scalable, highly
secure, flexible, standards-based, and web connected. Standards
and web connectivity ensure that our products are easy to use
for our customers. Further, we can bring solutions to market
quickly due to investments that we have made in integrating our
technology.
Data and analytics. In addition to our
technology applications, this segment provides data and
analytics solutions that are used in different steps in the life
cycle of a mortgage. Our primary data and analytics services are:
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Alternative valuation services. In
recent years, the increasing availability of reliable
information related to real estate and real estate transactions
has encouraged lenders and other real estate professionals to
use alternatives to traditional appraisals for both loan
origination and loss mitigation efforts. We offer our customers
a broad range of property valuation services beyond the
traditional appraisals offered by our Loan Transaction Services
segment that allow them to match their risk of loss with
alternative forms of property valuations, depending upon their
needs and regulatory requirements. These include, among others,
automated valuation models, broker price opinions, collateral
risk scores, appraisal review services and valuation
reconciliation services. To deliver these services, we utilize
artificial intelligence software, detailed real estate
statistical analysis, and modified physical property inspections.
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Data and information. We acquire and
aggregate real estate property and loan data on a national level
and make such data available to our customers in a single
database with a standard, normalized format. We also offer a
number of value added services that enable our customers to
utilize this data to assess risk, determine property values,
track market performance, generate leads and mitigate risk. Our
customers include lenders, realtors, investors, mortgage
brokers, title companies, direct marketers and appraisers.
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Fraud detection. We provide our
customers with automated verification solutions. These services
assist our customers to combat mortgage fraud and manage risk by
quickly verifying applicant income and identity against Internal
Revenue Service and Social Security Administration databases. We
also provide employment verification services.
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Advanced analytic and capital markets
services. We offer advanced analytic tools
that enable our customers to take proactive steps with respect
to their loan portfolios. For example, we provide prepayment and
default propensity tools as well as due diligence and property
valuation services in connection with the marketing and sale of
loan portfolios in the secondary market. Our due diligence
services consist of a review of a loan pools data files
for accuracy and completeness, analysis of the physical loan
files to determine
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compliance with internal underwriting guidelines and various
regulatory disclosure requirements, and the preparation and
presentation of reports reflecting our findings.
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The following table sets forth our revenues for the last three
years from our mortgage processing services and other services
in this segment (in millions):
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2009
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2008
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2007
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Mortgage processing
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$
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387.9
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$
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334.2
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$
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339.6
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Other Technology, Data and Analytics
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319.6
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231.5
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230.5
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Total segment revenues
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$
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707.5
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$
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565.7
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$
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570.1
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Loan
Transaction Services
Our Loan Transaction Services segment offers customized
outsourced business process and information solutions. We work
with our customers to set specific parameters regarding the
services they require, and where practicable, provide a single
point of contact with us for these services no matter where the
property is located.
Loan facilitation services. This segment
includes the following services:
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Settlement services. We offer
centralized title agency and closing services to our financial
institution clients. Our title agency services include
conducting title searches and preparing an abstract of title,
reviewing the status of title in a title commitment, resolving
any title exceptions, verifying the payment of existing loans
secured by a subject property, verifying the amount of prorated
expenses and arranging for the issuance of a title insurance
policy by a title insurance underwriter. Our closing management
services include preparing checks, deeds and affidavits and
recording appropriate documents in connection with the closing.
We maintain a network of independent closing agents that are
trained to close loans in accordance with the lenders
instructions, and a network of independent notaries who are
available to promptly assist with the closing.
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Appraisal services. This segment
provides traditional appraisals, as opposed to the alternative
property valuations our Technology, Data and Analytics segment
offers. Traditional property appraisals involve labor intensive
inspections of the real property in question and of comparable
properties in the same and similar neighborhoods, and typically
take weeks to complete. We have developed processes and
technologies that allow our lender customers to outsource their
appraisal management function to us and we provide our customers
with access to a nationwide network of independent, fully
licensed appraisers. Our traditional appraisal services are
typically provided in connection with first mortgages.
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Other origination services. We offer
lenders real estate tax information and federal flood zone
certifications in connection with the origination of new
mortgage loans. We also offer monitoring services that will
notify a lender of any change in flood zone status during the
life of a loan.
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We frequently customize our loan facilitation services to meet
the specific requirements of our customers. For example, we have
developed an automated process that enables selected customers
to offer special lending programs to their customers, such as
expedited refinance transactions. This process includes an
automated title search, which ultimately permits us to deliver
our services in a substantially shorter period of time compared
to the delivery of traditional services in the industry.
Default management services. In addition to
loan facilitation services, our Loan Transaction Services
segment offers default management services. These services allow
our customers to efficiently manage the business processes
necessary to take a loan and the underlying real estate securing
the loan through the default and foreclosure process. We offer a
full spectrum of services relating to the management of
defaulted loans, from initial property inspection through the
eventual disposition of our customers asset.
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Foreclosure services. As our lender and
servicing customers proceed toward the foreclosure of properties
securing defaulted loans, we provide services that facilitate
completing the foreclosure process. For example, we offer
lenders, servicers and attorneys certain administrative and
support services in connection with managing foreclosures. We
also offer comprehensive posting and publication of foreclosure
and
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auction notices, and conduct mandatory title searches, in each
case as necessary to meet state statutory requirements for
foreclosure. We also provide due diligence and research services
and various other title services in connection with the
foreclosure process.
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Property inspection and preservation
services. At the onset of a loan default, our
services are designed to assess and preserve the value of the
property securing the loan. For example, through a nationwide
network of independent inspectors, we provide inspection
services, including daily reports on vacant properties,
occupancy inspections and disaster and insurance inspections. We
also offer a national network of independent contractors to
perform property preservation and maintenance services, such as
lock changes, window replacement, lawn service and debris
removal.
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Asset management, default title and settlement
services. After a property has been
foreclosed, we provide services that aid our customers in
managing their real estate owned, or REO, properties, including
title services and property preservation field services. We also
offer a variety of title and settlement services relating to the
lenders ownership and eventual sale of REO properties.
Finally, we offer nationwide advisory and management services,
as well as a comprehensive REO auction solution, to facilitate a
lenders REO sales.
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Similar to our loan facilitation services, in our default
management services, we work with our customers to identify
specific parameters regarding the services they require and to
provide a single point of contact for these services. Based on a
customers needs, our services can be provided individually
or, more commonly, as part of a solution that integrates one or
more of the services with our technology applications, such as
the Desktop.
The following table sets forth our revenues for the last three
years from our loan facilitation and default management services
in this segment (in millions):
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2009
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2008
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2007
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Loan facilitation services
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$
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547.3
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$
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431.7
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$
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600.9
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Default management services
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1,137.3
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851.8
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473.0
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Total segment revenues
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$
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1,684.6
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$
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1,283.5
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$
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1,073.9
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Corporate
In addition to our two reporting segments, we also have a
corporate segment, which includes costs and expenses not
allocated to other segments as well as certain smaller
investments and operations.
Customers
We have numerous customers in each category of service that we
offer across the mortgage continuum. A significant focus of our
marketing efforts is on the top 50 U.S. banks, although we
also provide our services to a number of other financial
institutions, mortgage lenders, mortgage loan servicers,
attorneys, trustees and real estate professionals.
Our most significant customer relationships tend to be long-term
in nature and we typically provide an extensive number of
services to each customer. Because of the depth of these
relationships, we derive a significant portion of our aggregate
revenue from our largest customers. For example, in 2009, our
two largest customers, Wells Fargo Bank, N.A. (Wells
Fargo) and JPMorgan Chase Bank, N.A. (JPMorgan
Chase), each accounted for more than 10% of our aggregate
revenue and more than 10% of the revenue from each of our
Technology, Data and Analytics and Loan Transaction Services
segments, and our five largest customers accounted for
approximately 44.0% of our aggregate revenue and approximately
39.2% and 45.4% of the revenue of our Technology, Data and
Analytics and Loan Transaction Services segments, respectively.
However, these revenues in each case are spread across a range
of services, and are subject to multiple separate contracts.
Although the diversity of our services provided to each of these
customers reduces the risk that we would lose all of the
revenues associated with any of these customers, a significant
deterioration in our relationships with or the loss of any one
or more of these customers could have a significant impact on
our results of operations. See Risk Factors If
we were to lose any of our largest customers, our results of
operations could be significantly affected.
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Sales and
Marketing
Sales
Force
We have teams of experienced sales personnel with subject matter
expertise in particular services or in the needs of particular
types of customers. These individuals have important contacts at
our lending institution customers and play an important role in
prospecting for new accounts. They work collaboratively and are
compensated for sales they generate both within their areas of
expertise and outside of those areas. These individuals also
support the efforts of our Office of the Enterprise, discussed
below.
A significant portion of our potential customers in each of our
business lines is targeted via direct
and/or
indirect field sales, as well as inbound and outbound
telemarketing efforts. Marketing activities include direct
marketing, print advertising, media relations, public relations,
tradeshow and convention activities, seminars, and other
targeted activities. As many of our customers use a single
service, or a combination of services, our direct sales force
also targets existing customers to promote cross-selling
opportunities. Our strategy is to use the most efficient
delivery system available to successfully acquire customers and
build awareness of our services.
Office
of the Enterprise
The broad range of services we offer provides us with the
opportunity to expand our sales to our existing customer base
through cross-selling efforts. We have established a core team
of senior managers to lead account management and cross-selling
of the full range of our services to existing and potential
customers at the top 50 U.S. lending institutions. The
individuals who participate in this effort, which we coordinate
through our Office of the Enterprise, spend a significant amount
of their time on sales and marketing efforts.
As part of the Office of the Enterprise operations, we engage in
strategic account reviews, during which our executives share
their knowledge of clients and the market in order to determine
the best sales approach on a
client-by-client
basis. This enterprise approach benefits our clients in the
following ways:
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Our clients are better able to leverage the strength of all of
our solutions. When lenders are introduced to our enterprise
sales approach, they are able to take advantage of streamlined
processes to increase efficiencies, which reduce their internal
costs, shorten cycle times and, most importantly, create a
better customer experience.
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By offering a centralized point of contact at an executive
level, combined with access to subject matter experts across the
business lines, we are able to reduce confusion among our
clients and more effectively communicate the power of our
solutions.
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The benefit to us is a more cohesive sales force, with a
compensation plan that supports the sale of products across all
channels. This eliminates internal competition and confusion
over client responsibility. As a result, we have created an
effective cross-sell culture within our organization.
Patents,
Trademarks and Other Intellectual Property
We rely on a combination of contractual restrictions, internal
security practices, and copyright and trade secret law to
establish and protect our software, technology, and expertise.
Further, we have developed a number of brands that have
accumulated goodwill in the marketplace, and we rely on
trademark law to protect our rights in that area. We intend to
continue our policy of taking all measures we deem necessary to
protect our copyright, trade secret, and trademark rights.
Competition
A number of the businesses in which we engage are highly
competitive. The businesses that make up our Technology, Data
and Analytics segment compete with internal technology
departments within financial institutions and with third party
data processing or software development companies and data and
analytics companies. Competitive factors in processing
businesses include the quality of the technology-based
application or service, application features and functions, ease
of delivery and integration, ability of the provider to
maintain, enhance, and
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support the applications or services, and cost. We believe that
due to our integrated technology and economies of scale in the
mortgage processing business, we have a competitive advantage in
each of these categories.
With respect to our mortgage servicing platform, we principally
compete with our customers internal technology
departments. MSP is a leading mortgage processing software in
the U.S., and processes approximately 50% of all
U.S. residential mortgage loans by dollar volume.
Our Desktop application, which is a workflow information system
that can be used to manage a range of different workflow
processes, is currently the leading mortgage default management
application in the U.S. We compete primarily with our
customers in-house technology departments for this type of
business.
In our Data and Analytics businesses, we primarily compete with
First American Corporation/Corelogic, in-house capabilities and
certain niche providers. Recently, the national credit bureaus
have also begun providing competitive fraud detection offerings.
For the businesses that comprise our Loan Transaction Services
segment, key competitive factors include quality of the service,
convenience, speed of delivery, customer service and price. Our
title and closing services businesses principally compete with
large national title insurance underwriters. Our appraisal
services businesses principally compete with First American
Corporation, Fidelity National Financial, Inc. and small
independent appraisal providers, as well as our customers
in-house appraisers. Due to a lack of publicly available
information as to the national market for these services, we are
unable to determine our overall competitive position in the
national marketplace with respect to our loan facilitation
services businesses. Our default management services businesses
principally compete with in-house services performed directly by
our customers and, to a lesser extent, other third party vendors
that offer similar applications and services. Based in part on
the range and quality of default management services we offer
and our focus on technology and customer service, our default
management business has grown significantly and we believe we
are now one of the largest mortgage default management services
providers in the U.S.
Research
and Development
Our research and development activities have related primarily
to the design and development of our processing systems and
related software applications. We expect to continue our
practice of investing an appropriate level of resources to
maintain, enhance and extend the functionality of our
proprietary systems and existing software applications, to
develop new and innovative software applications and systems in
response to the needs of our customers, and to enhance the
capabilities surrounding our infrastructure. We work with our
customers to determine the appropriate timing and approach to
introducing technology or infrastructure changes to our
applications and services.
Government
Regulation
Various aspects of our businesses are subject to federal and
state regulation. Our failure to comply with any applicable laws
and regulations could result in restrictions on our ability to
provide certain services, as well as the possible imposition of
civil fines and criminal penalties.
As a provider of electronic data processing to financial
institutions, such as banks and credit unions, we are subject to
regulatory oversight and examination by the Federal Financial
Institutions Examination Council, an interagency body of the
Federal Deposit Insurance Corporation, the National Credit Union
Administration and various state regulatory authorities. In
addition, independent auditors annually review several of our
operations to provide reports on internal controls for our
customers auditors and regulators. We also may be subject
to possible review by state agencies that regulate banks in each
state in which we conduct our electronic processing activities.
Our financial institution clients are required to comply with
various privacy regulations imposed under state and federal law,
including the Gramm-Leach-Bliley Act. These regulations place
restrictions on the use of non-public personal information. All
financial institutions must disclose detailed privacy policies
to their customers and offer them the opportunity to direct the
financial institution not to share information with third
parties. The regulations, however, permit financial institutions
to share information with non-affiliated parties who perform
services for the financial institutions. As a provider of
services to financial institutions, we are required to comply
7
with the privacy regulations and are generally bound by the same
limitations on disclosure of the information received from our
customers as apply to the financial institutions themselves.
The Real Estate Settlement Procedures Act, or RESPA, and related
regulations generally prohibit the payment or receipt of fees or
any other item of value for the referral of real estate-related
settlement services. RESPA also prohibits fee shares or splits
or unearned fees in connection with the provision of residential
real estate settlement services, such as mortgage brokerage and
real estate brokerage. Notwithstanding these prohibitions, RESPA
permits payments for goods furnished or for services actually
performed, so long as those payments bear a reasonable
relationship to the market value of the goods or services
provided. RESPA and related regulations may to some extent
restrict our real estate-related businesses from entering into
certain preferred alliance arrangements. The
U.S. Department of Housing and Urban Development is
responsible for enforcing RESPA.
Real estate appraisers are subject to regulation in most states,
and some state appraisal boards have sought to prohibit our
automated valuation applications. Courts have limited such
prohibitions, in part on the ground of preemption by the federal
Financial Institutions Reform, Recovery, and Enforcement Act of
1989, but we cannot assure you that our valuation and appraisal
services business will not be subject to further regulation. In
fact, the Federal Housing Finance Agency (FHFA)
recently adopted a new Home Valuation Code of Conduct (the
FHFA Code) that contains new requirements for
appraisal management companies. However, the FHFA Code has been
challenged via federal legislation that is still pending in
Congress. Regardless of the outcome of the legislation, we
believe that our appraisal management operations will be able to
comply with the new requirements. Other proposals to regulate
the appraisal process have been proposed at the state and
federal level, and we monitor such proposals carefully.
The title agency and related services we provide are conducted
through an underwritten title company, title agencies, and
individual escrow officers. Our underwritten title company is
domiciled in California and is generally limited by requirements
to maintain specified levels of net worth and working capital,
and to obtain and maintain a license in each of the counties in
California in which it operates. The title agencies and
individual escrow officers are also subject to regulation by the
insurance or banking regulators in many jurisdictions. These
regulators generally require, among other items, that agents and
individuals obtain and maintain a license and be appointed by a
title insurer. We also own a title insurer which issues policies
generated by our agency operations in relatively limited
circumstances. This insurer is domiciled in New York and is
therefore subject to regulation by the insurance regulatory
authorities of that state. Among other things, no person may
acquire 10% or more of our common stock without the approval of
the New York insurance regulators.
In 2006, the California Department of Insurance adopted
regulations that include formulas that would require rate
reductions on title insurance that would begin in 2010. These
regulations were superceded in 2009, though the California
Department of Insurance may take similar action in the future.
The effect of any such new measures cannot be predicted with
certainty until they are adopted. Florida, New Mexico, and Texas
have also announced reviews of title insurance rates and other
states could follow. At this stage, we are unable to predict the
outcome of these or any similar processes. Any such rate
reductions could adversely affect our revenues from our title
agency services.
Although we do not believe that compliance with future laws and
regulations related to our businesses, including future consumer
protection laws and regulations, will have a material adverse
effect on our company, enactment of new laws and regulations may
increasingly affect the operations of our business, directly or
indirectly, which could result in substantial regulatory
compliance costs, litigation expense, adverse publicity,
and/or loss
of revenue.
Employees
As of December 31, 2009, we had approximately
8,900 employees, all of which were principally employed in
the U.S. None of our workforce currently is unionized. We
have not experienced any work stoppages, and we consider our
relations with employees to be good.
8
Available
Information
We file Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
and Current Reports on
Form 8-K
with the Securities and Exchange Commission (the
SEC). The public may read and copy any materials we
file with the SEC at the SECs Public Reference Room at
100 F Street, N.E., Washington, DC 20549. The public
may obtain information on the operation of the Public Reference
Room by calling the SEC at
1-800-SEC-0330.
We are an electronic filer, and the SEC maintains an Internet
site at www.sec.gov that contains the reports, proxy and
information statements and other information we file
electronically. We make available, free of charge, through our
website our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
and Current Reports on
Form 8-K,
and amendments to those reports, as soon as reasonably
practicable after we file them with, or furnish them to, the
SEC. Our Internet website address is
http://www.lpsvcs.com.
Our Corporate Governance Guidelines and Code of Business Conduct
and Ethics are also available on our website and are available
in print, free of charge, to any stockholder who mails a request
to the Corporate Secretary, Lender Processing Services, Inc.,
601 Riverside Avenue, Jacksonville, Florida 32204. Other
corporate governance-related documents can be found on our
website as well. However, the information found on our website
is not part of this or any other report.
In addition to the normal risks of business, we are subject to
significant risks and uncertainties, including those listed
below and others described elsewhere in this Annual Report on
Form 10-K.
Any of the risks described in this report could result in a
significant adverse effect on our results of operations and
financial condition.
If we
fail to adapt our services to changes in technology or in the
marketplace, or if our ongoing efforts to upgrade our technology
are not successful, we could lose customers and have difficulty
attracting new customers for our services.
The markets for our services are characterized by constant
technological changes, frequent introductions of new services
and evolving industry standards. Our future success will be
significantly affected by our ability to enhance our current
services, and develop and introduce new services that address
the increasingly sophisticated needs of our customers and their
customers. These initiatives carry the risks associated with any
new service development effort, including cost overruns, delays
in delivery, and performance issues. There can be no assurance
that we will be successful in developing, marketing and selling
new services that meet these changing demands, that we will not
experience difficulties that could delay or prevent the
successful development, introduction, and marketing of these
services, or that our new services and their enhancements will
adequately meet the demands of the marketplace and achieve
market acceptance.
The
strength of the economy and the housing market affect demand for
certain of our services.
Real estate sales are affected by a number of factors, including
mortgage interest rates, the availability of funds to finance
purchases, the level of home prices and general economic
conditions. As a result of the declining housing market and the
current economic downturn, the volume of refinancing
transactions in particular and mortgage originations in general
have declined over the last several years, most sharply in late
2007 and 2008, resulting in a reduction of revenues in some of
our businesses. Although various measures taken by the federal
government to reduce interest rates led to increased refinancing
activity beginning in the fourth quarter of 2008 through much of
2009, there can be no assurance that this trend will continue.
Our revenues for our loan facilitation business in future
periods will continue to be subject to these and other factors
which are beyond our control and, as a result, are likely to
fluctuate. Further, in the event that a difficult economy or
other factors led to a decline in levels of home ownership and a
reduction in the aggregate number of U.S. mortgage loans,
our revenues from mortgage processing could be adversely
affected.
In contrast, the weaker economy and housing market have tended
to increase the volume of consumer mortgage defaults, which has
favorably affected our default management operations, in which
we service residential mortgage loans in default. It has also
increased revenues from our Desktop solution, which is currently
primarily used in connection with default management. As a
result, our default management services have provided a natural
hedge against the volatility of the current real estate
origination business and its resulting impact on our
9
loan facilitation services. However, in the event that the
volume of consumer mortgage defaults decreased without a
corresponding increase in the level of mortgage originations to
increase revenues from our loan facilitation businesses, our
revenues could be adversely affected.
If we
were to lose any of our largest customers, our results of
operations could be significantly affected.
A small number of customers have accounted for a significant
portion of our revenues, and we expect that a limited number of
customers will continue to represent a significant portion of
our revenues for the foreseeable future. In 2009, our two
largest customers, Wells Fargo and JPMorgan Chase, each
accounted for more than 10% of our aggregate revenue and more
than 10% of the revenue from each of our Technology, Data and
Analytics and Loan Transaction Services segments, and our five
largest customers accounted for approximately 44.0% of our
aggregate revenue and approximately 39.2% and 45.4% of the
revenue of our Technology, Data and Analytics and Loan
Transaction Services segments, respectively. The revenues of our
five largest customers are spread across a range of services,
and we protect ourselves by utilizing separate contracts for
different services. However, our relationships with these and
other large customers are important to our future operating
results, and deterioration in any of those relationships could
significantly reduce our revenues. See
Business Customers.
We
operate in a competitive business environment, and if we are
unable to compete effectively our results of operations and
financial condition may be adversely affected.
The markets for our services are intensely competitive. Our
competitors vary in size and in the scope and breadth of the
services they offer. We compete for existing and new customers
against both third parties and the in-house capabilities of our
customers. Some of our competitors have substantial resources.
In addition, we expect that the markets in which we compete will
continue to attract new competitors and new technologies. There
can be no assurance that we will be able to compete successfully
against current or future competitors or that competitive
pressures we face in the markets in which we operate will not
materially adversely affect our business, financial condition
and results of operations.
Further, because many of our larger potential customers have
historically developed their key processing applications
in-house and therefore view their system requirements from a
make-versus-buy perspective, we often compete against our
potential customers in-house capacities. As a result,
gaining new customers in our mortgage processing business can be
difficult. For banks and other potential customers, switching
from an internally designed system to an outside vendor, or from
one vendor of mortgage processing services to a new vendor, is a
significant undertaking. Many potential customers worry about
potential disadvantages such as loss of accustomed
functionality, increased costs and business disruption. As a
result, potential customers often resist change. There can be no
assurance that our strategies for overcoming potential
customers reluctance to change will be successful, and
this resistance may adversely affect our growth.
Efforts
by the government, financial institutions and other parties to
address the troubled mortgage market and the current economic
and financial environment could affect us.
Several pieces of legislation have been enacted to address the
struggling mortgage market and the current economic and
financial environment, such as the Housing and Economic Recovery
Act of 2008, a piece of wide-ranging legislation aimed at
assisting the troubled housing market, and the American Recovery
and Reinvestment Act of 2009 (ARRA), a
$787 billion stimulus package. The ARRA, among other
things, provides an array of types of relief for homebuyers,
including an $8,000 tax credit available to first-time
homebuyers, and a $6,500 tax credit for existing homeowners, who
enter into purchase contracts for the purchase of a principal
residence by April 30, 2010. The tax credit stimulated home
sales in the latter half of 2009, which had a positive impact on
our originations businesses. We cannot predict whether the tax
credit will be further extended or whether it will have a
long-term impact on our results of operations.
In addition, various federal and state initiatives have been
proposed concerning foreclosure relief. At the federal level, in
the first half of 2009, the Treasury Department implemented its
Making Home Affordable (MHA) program, which includes
the Home Affordable Modification Program (HAMP).
HAMP provides mortgage loan servicers with a set of standardized
qualification guidelines for loan modifications aimed at
reducing
10
borrower monthly payments to affordable levels. Participating
servicers receive incentive payments for completing
modifications under the program. Although HAMP has produced a
large number of trial modifications, only a small portion of
those modifications have been converted to permanent
modifications to date. The Treasury Department may make
additional adjustments to its programs under the MHA, including
HAMP, in order to respond to the ongoing difficulties in the
housing market, although we cannot predict the form that any
such modifications may take. Decreases in the number of
foreclosures which result from the initiatives under the MHA
could negatively impact the results of our default services
businesses.
At the state level, a number of states are proposing to require
pre-foreclosure mediation programs as a way to help at-risk
homeowners. Other states have started to require state licensing
for loan originators involved in the loan
modification process. There are also proposals at both the state
and federal levels to require the registration and licensing of
appraisal management companies. We are actively involved in
these legislative discussions although it is too early to
determine the final form that any such legislation may take.
While we believe that we will be able to comply with any new
requirements, it is too early to predict the cost that we will
incur in order to comply with any new licensing or registration
requirements or the impact such requirements may have on our
results of operations.
In addition, Congress is currently considering financial reform
legislation that could have a significant impact on the entire
financial services sector. In December 2009, the House of
Representatives passed the Wall Street Reform and Consumer
Protection Act. Among its major provisions, this omnibus bill
would establish an independent Consumer Financial Protection
Agency with broad powers to promulgate rules, examine financial
institutions and initiate enforcement actions for violations.
The scope of authority is broad, covering all aspects of deposit
taking and consumer lending, as well as a broad swath of other
defined financial activities, including consumer
reporting, debt collection, real estate settlement services,
financial advisory services, and financial data processing used
by consumers or provided to other covered entities. The bill
also contains major reforms to the mortgage market intended to
prevent many of the subprime lending abuses that contributed to
the current mortgage market problems, new appraisal independence
standards and a requirement that state appraisal boards
implement minimum regulatory standards for appraisal management
companies. Although we will closely monitor the progress of this
bill and any similar proposed legislation, it is too early to
determine the final form that such legislation may take, when it
may be finalized, or the impact it may have on our business or
results of operations.
The current economic downturn and troubled housing market have
also resulted in increased scrutiny of all parties involved in
the mortgage industry, as well as investigations and lawsuits
against various parties commenced by various governmental
authorities and third parties. It has also resulted in
governmental review of aspects of the mortgage lending business,
which may lead to greater regulation in areas such as
appraisals, default management, loan closings and regulatory
reporting. Any of these trends could have an adverse effect on
our business or results of operations. As described in
Item 3. Legal Proceedings, we have become aware
of an inquiry by the U.S. Attorneys Office for the
Middle District of Florida into certain practices of one of our
subsidiaries, which practices we terminated. Although we have
taken the steps we believe are appropriate to remediate this
situation, at this stage we are unable to predict the ultimate
impact on us of this inquiry or any other adverse effect of
these practices.
We
have substantial indebtedness, which could have a negative
impact on our financing options and liquidity
position.
We have approximately $1,289.4 million of total debt
outstanding, consisting of (i) a senior secured credit
agreement divided into two tranches, a $700 million Term
Loan A under which $420.0 million was outstanding at
December 31, 2009, and a $510 million Term Loan B
under which $502.4 million was outstanding at
December 31, 2009, and (ii) $367.0 million of
senior unsecured notes outstanding at December 31, 2009. As
of December 31, 2009, we also had additional borrowing
capacity of approximately $138.8 million available under
our revolving credit facility. We also have other contractual
commitments and contingent obligations. See
Managements discussion and analysis of results of
operations and financial condition Contractual
obligations.
This high level of debt could have important consequences to us,
including the following:
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this debt level makes us more vulnerable to economic downturns
and adverse developments in our business, may cause us to have
difficulty borrowing money in the future in excess of amounts
available under our
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credit facility for working capital, capital expenditures,
acquisitions or other purposes and may limit our ability to
pursue other business opportunities and implement certain
business strategies;
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we will need to use a large portion of the money we earn to pay
principal and interest on our debt, which will reduce the amount
of money available to finance operations, acquisitions and other
business activities and pay stockholder dividends;
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approximately $242.4 million of the debt currently bears
interest at a floating rate, which exposes us to the risk of
increased interest rates (for example, a one percent increase in
interest rates would result in a $1 million increase in our
annual interest expense for every $100 million of floating
rate debt we incur, which may make it more difficult for us to
service our debt);
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while we have entered into various agreements limiting our
exposure to higher interest rates and may enter into additional
similar agreements in the future, any such agreements may not
offer complete protection from this risk, and we remain subject
to the risk that one or more of the counterparties to these
agreements may fail to satisfy their obligations under such
agreements; and
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we have a higher level of debt than certain of our competitors,
which may cause a competitive disadvantage and may reduce
flexibility in responding to changing business and economic
conditions, including increased competition.
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Despite our substantial indebtedness, we may be able to incur
additional debt in the future. The terms of our new credit
facilities and the indenture governing the notes allow us to
incur substantial amounts of additional debt, subject to certain
limitations. If new debt is added to our current debt levels,
the related risks we could face would be magnified.
Our
financing arrangements subject us to various restrictions that
could limit our operating flexibility.
The agreements governing our credit facilities and the indenture
governing the notes each impose operating and financial
restrictions on our activities. These restrictions include
compliance with, or maintenance of, certain financial tests and
ratios, including a minimum interest coverage ratio and maximum
leverage ratio, and limit or prohibit our ability to, among
other things:
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create, incur or assume any additional debt and issue preferred
stock;
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create, incur or assume certain liens;
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redeem
and/or
prepay certain subordinated debt we might issue in the future;
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pay dividends on our stock or repurchase stock;
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make certain investments and acquisitions;
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enter into or permit to exist contractual limits on the ability
of our subsidiaries to pay dividends to us;
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enter new lines of business;
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engage in consolidations, mergers and acquisitions;
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engage in specified sales of assets; and
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enter into transactions with affiliates.
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These restrictions on our ability to operate our business could
harm our business by, among other things, limiting our ability
to take advantage of financing, merger and acquisition and other
corporate opportunities.
If we
are unable to successfully consummate and integrate
acquisitions, our results of operations may be adversely
affected.
One of our strategies to grow our business is to
opportunistically acquire complementary businesses and services.
This strategy will depend on our ability to find suitable
acquisitions and finance them on acceptable terms. We may
require additional debt or equity financing for future
acquisitions, and doing so will be made more difficult
12
by our substantial debt. If we are unable to acquire suitable
acquisition candidates, we may experience slower growth.
Further, even if we successfully complete acquisitions, we will
face challenges in integrating any acquired business. These
challenges include eliminating redundant operations, facilities
and systems, coordinating management and personnel, retaining
key employees, managing different corporate cultures, and
achieving cost reductions and cross-selling opportunities.
Additionally, the acquisition and integration processes may
disrupt our business and divert our resources.
We
have substantial investments in recorded goodwill as a result of
prior acquisitions, and an economic downturn or troubled
mortgage market could cause these investments to become
impaired, requiring write-downs that would reduce our operating
income.
Goodwill was approximately $1,166.1 million, or
approximately 53% of our total assets, as of December 31,
2009. Current accounting rules require that goodwill be assessed
for impairment at least annually or whenever changes in
circumstances indicate that the carrying amount may not be
recoverable from estimated future cash flows. Factors that may
indicate the carrying value of our intangible assets, including
goodwill, may not be recoverable include, but are not limited
to, significant underperformance relative to historical or
projected future operating results, a significant decline in our
stock price and market capitalization, and negative industry or
economic trends.
The results of our fiscal year 2009 annual assessment of the
recoverability of goodwill indicated that the fair value of all
of the Companys reporting units were in excess of the
carrying value of those reporting units, and thus no goodwill
impairment existed as of December 31, 2009. However, if the
current economic downturn continues over a prolonged period or
if the mortgage market continues to struggle, the carrying
amount of our goodwill may no longer be recoverable, and we may
be required to record an impairment charge, which would have a
negative impact on our results of operations and financial
condition. We will continue to monitor our market capitalization
and the impact of the current economic downturn on our business
to determine if there is an impairment of goodwill in future
periods.
We
have a long sales cycle for many of our technology solutions and
if we fail to close sales after expending significant time and
resources to do so, our business, financial condition, and
results of operations may be adversely affected.
The implementation of many of our technology solutions often
involves significant capital commitments by our customers,
particularly those with smaller operational scale. Potential
customers generally commit significant resources to an
evaluation of available technology solutions and require us to
expend substantial time, effort and money educating them as to
the value of our technology solutions and services. We incur
substantial costs in order to obtain each new customer. We may
expend significant funds and management resources during the
sales cycle and ultimately fail to close the sale. Our sales
cycle may be extended due to our customers budgetary
constraints or for other reasons. If we are unsuccessful in
closing sales after expending significant funds and management
resources or if we experience delays, it could have a material
adverse effect on our business, financial condition and results
of operations.
We may
experience defects, development delays, installation
difficulties and system failures with respect to our technology
solutions, which would harm our business and reputation and
expose us to potential liability.
Many of our services are based on sophisticated software and
computing systems, and we may encounter delays when developing
new technology solutions and services. Further, the technology
solutions underlying our services have occasionally contained
and may in the future contain undetected errors or defects when
first introduced or when new versions are released. In addition,
we may experience difficulties in installing or integrating our
technologies on platforms used by our customers. Finally, our
systems and operations could be exposed to damage or
interruption from fire, natural disaster, power loss,
telecommunications failure, unauthorized entry and computer
viruses. Defects in our technology solutions, errors or delays
in the processing of electronic transactions, or other
difficulties could result in:
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interruption of business operations;
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delay in market acceptance;
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additional development and remediation costs;
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diversion of technical and other resources;
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loss of customers;
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negative publicity; or
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exposure to liability claims.
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Any one or more of the foregoing occurrences could have a
material adverse effect on our business, financial condition and
results of operations. Although we attempt to limit our
potential liability through disclaimers and
limitation-of-liability provisions in our license and customer
agreements, we cannot be certain that these measures will be
successful in limiting our liability.
Security
breaches or our own failure to comply with privacy regulations
imposed on providers of services to financial institutions could
harm our business by disrupting our delivery of services and
damaging our reputation.
As part of our business, we electronically receive, process,
store and transmit sensitive business information of our
customers. In addition, we collect personal consumer data, such
as names and addresses, social security numbers, drivers
license numbers and payment history records. Unauthorized access
to our computer systems or databases could result in the theft
or publication of confidential information or the deletion or
modification of records or could otherwise cause interruptions
in our operations. These concerns about security are increased
when we transmit information over the Internet.
Additionally, as a provider of services to financial
institutions, we are bound by the same limitations on disclosure
of the information we receive from our customers as apply to the
financial institutions themselves. If we fail to comply with
these regulations, we could be exposed to suits for breach of
contract or to governmental proceedings. In addition, if more
restrictive privacy laws or rules are adopted in the future on
the federal or state level, that could have an adverse impact on
us. Any inability to prevent security or privacy breaches could
cause our existing customers to lose confidence in our systems
and terminate their agreements with us, and could inhibit our
ability to attract new customers.
If our
applications or services are found to infringe the proprietary
rights of others, we may be required to change our business
practices and may also become subject to significant costs and
monetary penalties.
As our information technology applications and services develop,
we may become increasingly subject to infringement claims. Any
claims, whether with or without merit, could:
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be expensive and time-consuming to defend;
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cause us to cease making, licensing or using applications that
incorporate the challenged intellectual property;
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require us to redesign our applications, if feasible;
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divert managements attention and resources; and
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require us to enter into royalty or licensing agreements in
order to obtain the right to use necessary technologies.
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Our
historical financial information may not be indicative of our
future results as a stand-alone company.
The historical financial information we have included in this
report for periods ending prior to July 2, 2008 may
not reflect what our results of operations, financial condition
and cash flows would have been had we
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been a stand-alone company during the periods presented or be
indicative of what our results of operations, financial
condition and cash flows may be in the future now that we are a
stand-alone company. This is primarily a result of the following
factors:
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our historical financial information for periods ending prior to
July 2, 2008 does not reflect the debt and related interest
expense that we incurred as part of the spin-off, including debt
we incurred in order to issue debt obligations to FIS in partial
consideration of FISs contribution to us of our
operations; and
|
|
|
|
the historical financial information for periods ending prior to
July 2, 2008 does not reflect the increased costs
associated with being a stand-alone company, including changes
in our cost structure, personnel needs, financing and operations
of the contributed business as a result of the spin-off from FIS.
|
For additional information about the past financial performance
of our business and the basis of the presentation of the
historical financial statements, see our consolidated financial
statements and the accompanying notes.
If the
spin-off does not qualify as a tax-free transaction, tax could
be imposed on FIS and we may have to indemnify for the payment
of that tax and related losses.
On June 20, 2008, FIS received a favorable private letter
ruling from the Internal Revenue Service, which we refer to as
the IRS, regarding a series of transactions, including the
distribution of our common stock to FIS shareholders, which we
refer to as the spin-off.
Notwithstanding the favorable IRS ruling that the spin-off
qualified for tax-free treatment, it would become taxable to
FIS, pursuant to Section 355(e) of the Code, if 50% or more
of the shares of either its common stock or our common stock
were acquired, directly or indirectly, as part of a plan or
series of related transactions that included the spin-off. Such
determination could result in the recognition of substantial
gain by FIS under Section 355(e).
Although the taxes resulting from the spin-off not qualifying
for tax-free treatment pursuant to Section 355(e) of the
Code for United States federal income tax purposes would be
imposed on FIS, under the tax disaffiliation agreement entered
into by FIS and us in connection with the spin-off, we would be
required to indemnify FIS and its affiliates against all tax
related liabilities caused by the failure of the spin-off to
qualify for tax-free treatment for United States federal income
tax purposes as a result of Section 355(e) of the Code, to
the extent these liabilities arise as a result of any action
taken by us or any of our affiliates following the spin-off or
otherwise result from any breach of any representation, covenant
or obligation of ours or any of our affiliates under a tax
disaffiliation agreement we have entered into with FIS. The
amount of our indemnification obligation could be significant.
We
have agreed to certain restrictions to help preserve the
tax-free treatment to FIS of the spin-off, which may reduce our
strategic and operating flexibility.
In order to help preserve the tax-free treatment of the
spin-off, we have agreed not to take certain actions without
first securing the consent of certain FIS officers or securing
an opinion from a nationally recognized law firm or accounting
firm that such action will not cause the spin-off to be taxable.
In general, such actions would include:
(i) for a period of two years after the spin-off, engaging
in certain transactions involving (a) the acquisition of
our stock or (b) the issuance of shares of our stock;
(ii) repurchasing or repaying our debt prior to maturity
other than in accordance with its terms; and
(iii) making certain modifications to the terms of the debt
that could affect its characterization for federal income tax
purposes.
The covenants in, and our indemnity obligations under, our tax
disaffiliation agreement with FIS may limit our ability to
pursue strategic transactions or engage in new business or other
transactions that may maximize the value of our business. The
limitations on our ability to issue capital stock could, for
example, make it harder for us to raise capital if we need
additional funds to satisfy our debt service or other debt
obligations.
15
Statement
Regarding Forward-Looking Information
The statements contained in this report or in our other
documents or in oral presentations or other statements made by
our management that are not purely historical are
forward-looking statements, including statements regarding our
expectations, hopes, intentions, or strategies regarding the
future. These statements relate to, among other things, our
future financial and operating results. In many cases, you can
identify forward-looking statements by terminology such as
may, will, should,
expect, plan, anticipate,
believe, estimate, predict,
potential, or continue, or the negative
of these terms and other comparable terminology. Actual results
could differ materially from those anticipated in these
statements as a result of a number of factors, including, but
not limited to:
|
|
|
|
|
changes in general economic, business and political conditions,
including changes in the financial markets;
|
|
|
|
the impact of changes in the level of real estate activity on
demand for certain of our services;
|
|
|
|
the loss of any of our largest customers;
|
|
|
|
changes to the laws, rules and regulations that regulate our
businesses as a result of the current economic and financial
environment;
|
|
|
|
the effects of our substantial leverage on our ability to make
acquisitions and invest in our business;
|
|
|
|
our ability to adapt our services to changes in technology or
the marketplace;
|
|
|
|
risks associated with protecting information security and
privacy;
|
|
|
|
the impact of any potential defects, development delays,
installation difficulties or system failures on our business and
reputation;
|
|
|
|
risks associated with our spin-off from FIS, including those
relating to limitations on our strategic and operating
flexibility as a result of the tax-free nature of the
spin-off; and
|
|
|
|
other risks detailed elsewhere in this Annual Report on
Form 10-K.
|
We undertake no obligation to publicly update or revise any
forward-looking statement, whether as a result of new
information, future developments or otherwise.
|
|
Item 1B.
|
Unresolved
Staff Comments.
|
None.
Our corporate headquarters are located in Jacksonville, Florida,
in an owned facility. FNF and FIS occupy and pay us rent for
approximately 198,101 square feet in this facility. We also
own one facility in Sharon, Pennsylvania. We lease office space
as follows:
|
|
|
|
|
|
|
Number of
|
State
|
|
Locations (1)
|
|
California
|
|
|
21
|
|
Texas
|
|
|
10
|
|
Colorado, Florida
|
|
|
4
|
|
Pennsylvania
|
|
|
5
|
|
Georgia, Minnesota
|
|
|
3
|
|
Nevada, New York
|
|
|
2
|
|
Other
|
|
|
15
|
|
|
|
|
(1) |
|
Represents the number of locations in each state listed. |
16
We have no leased properties outside the United States. We
believe our properties are adequate for our business as
presently conducted.
|
|
Item 3.
|
Legal
Proceedings.
|
Litigation
In the ordinary course of business, we are involved in various
pending and threatened litigation matters related to our
operations, some of which include claims for punitive or
exemplary damages. Often, these matters do not include a
specific statement as to the dollar amount of damages demanded.
Instead, they include a demand in an amount to be proved at
trial. For these reasons, it is often not possible to make a
meaningful estimate of the amount or range of loss that could
result from these matters. Accordingly, we review matters on an
ongoing basis and follow the provisions of Financial Accounting
Standards Board (FASB) Accounting Standards
Codification (ASC) Topic 450, Contingencies,
when making accrual and disclosure decisions. When assessing
reasonably possible and probable outcomes, we base our decision
on our assessment of the ultimate outcome following all appeals.
We intend to vigorously defend all litigation matters that are
brought against us, and we do not believe that the ultimate
disposition of any of these lawsuits will have a material
adverse impact on our financial position or results of
operations. Finally, we believe that no actions, other than the
matter listed below, depart from customary litigation incidental
to our business.
Schneider, Kenneth, et al. vs. Lender Processing Services,
Inc., et al.
On February 17, 2010 this putative class action complaint
was filed in the United States District Court for the Southern
District of Florida. In a single count complaint, the plaintiffs
seek to recover unspecified damages for alleged violations of
the Fair Debt Collection Practices Act relating to the
preparation and use of assignments of mortgage in foreclosure
actions. The defendants include two large banks, as well as LPS
and our document solutions subsidiary. The complaint essentially
alleges that the industry practice of creating assignments of
mortgages after the actual date on which a loan was transferred
from one beneficial owner to another is unlawful. The complaint
also challenges the authority of individuals employed by our
document solutions subsidiary to execute such assignments as
officers of various banks and mortgage companies. Although we do
not believe that our conduct falls under the provisions of the
Fair Debt Collection Practices Act, at this early stage we are
unable to accurately predict the outcome of this matter.
Regulatory
Matters
Due to the heavily regulated nature of the mortgage industry,
from time to time we receive inquiries and requests for
information from various state and federal regulatory agencies,
including state insurance departments, attorneys general and
other agencies, about various matters relating to our business.
These inquiries take various forms, including informal or formal
requests, reviews, investigations and subpoenas. We attempt to
cooperate with all such inquiries. Recently, during an internal
review of the business processes used by our document solutions
subsidiary, we identified a business process that caused an
error in the notarization of certain documents, some of which
were used in foreclosure proceedings in various jurisdictions
around the country. The services performed by this subsidiary
were offered to a limited number of customers, were unrelated to
our core default management services and were immaterial to our
financial results. We immediately corrected the business process
and began to take remedial actions necessary to cure the defect
in an effort to minimize the impact of the error. We
subsequently received an inquiry relating to this matter from
the Clerk of Court of Fulton County, Georgia, which is the
regulatory body responsible for licensing the notaries used by
our document solutions subsidiary. In response, we met with the
Clerk of Court, along with members of her staff, and reported on
our identification of the error and the status of the corrective
actions that were underway. We have since completed our
remediation efforts with respect to the affected documents. Most
recently, we have learned that the U.S. Attorneys
office for the Middle District of Florida is reviewing the
business processes of this subsidiary. We have expressed our
willingness to fully cooperate with the U.S. Attorney. We
continue to believe that we have taken necessary remedial action
with respect to this matter.
17
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
None
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
Our common stock trades on the New York Stock Exchange under the
ticker symbol LPS. As of January 31, 2010,
there were approximately 8,800 registered holders of our common
stock. The table set forth below provides the high and low sales
prices of our common stock and the cash dividends declared per
share of common stock during the periods indicated. Prior to the
spin-off in the third quarter of 2008, we were a wholly-owned
subsidiary of FIS and there was no established public trading
market for our common stock. Accordingly, there is no data
available for the first and second quarters of 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
Dividend
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
31.50
|
|
|
$
|
24.21
|
|
|
$
|
0.10
|
|
Second Quarter
|
|
$
|
33.99
|
|
|
$
|
20.81
|
|
|
$
|
0.10
|
|
Third Quarter
|
|
$
|
39.05
|
|
|
$
|
26.55
|
|
|
$
|
0.10
|
|
Fourth Quarter
|
|
$
|
44.38
|
|
|
$
|
37.51
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Dividend
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
$
|
38.00
|
|
|
$
|
28.51
|
|
|
$
|
0.10
|
|
Fourth Quarter
|
|
$
|
31.75
|
|
|
$
|
15.21
|
|
|
$
|
0.10
|
|
We currently pay a dividend of $0.10 per common share on a
quarterly basis, and expect to continue to do so in the future.
The declaration and payment of future dividends is at the
discretion of the Board of Directors, and depends on, among
other things, our investment policy and opportunities, results
of operations, financial condition, cash requirements, future
prospects, and other factors that may be considered relevant by
our Board of Directors, including legal and contractual
restrictions. Additionally, the payment of cash dividends may be
limited by the terms of our debt agreements. A regular quarterly
dividend of $0.10 per common share is payable March 30,
2010 to stockholders of record as of the close of business on
March 16, 2010.
The following table provides information as of December 31,
2009, about our common stock which may be issued under our
equity compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities Remaining
|
|
|
|
Number of Securities to
|
|
|
Weighted-Average Exercise
|
|
|
Available for Future Issuance
|
|
|
|
be Issued upon Exercise
|
|
|
Price of Outstanding
|
|
|
Under Equity Compensation Plans
|
|
|
|
of Outstanding Options,
|
|
|
Options, Warrants and
|
|
|
(Excluding Securities Reflected in
|
|
Plan Category
|
|
Warrants and Rights(a)
|
|
|
Rights
|
|
|
Column (a))
|
|
|
Equity compensation plans approved by security holders
|
|
|
6,806,710
|
|
|
$
|
32.16
|
|
|
|
4,755,674
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,806,710
|
|
|
|
|
|
|
|
4,755,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On June 18, 2009, our Board of Directors approved a plan
authorizing repurchases of common stock
and/or
senior notes of up to $75.0 million, of which
$50.0 million was permitted to be used to repurchase our
senior notes.
18
On February 5, 2010, our Board of Directors authorized us
to repurchase shares of our common stock
and/or our
senior notes in an amount not to exceed $150.0 million.
This new authorization replaces the previous authorization and
subsumes all amounts remaining available thereunder. The new
plan is effective through March 31, 2012. Our ability to
repurchase shares of common stock or senior notes is subject to
restrictions contained in our senior secured credit agreement
and in the indenture governing our senior unsecured notes and
further may be subject to limitations necessary to preserve the
tax-free nature of the spin-off.
The following table summarizes our repurchase activity under our
repurchase authorization in each month of the fourth quarter of
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
Approximate Dollar Value
|
|
|
Total Number of
|
|
Average Price
|
|
Shares Purchased as Part
|
|
(In millions) of Shares that May Yet Be
|
Period
|
|
Shares Purchased
|
|
Paid per Share
|
|
of Publicly Announced Plans
|
|
Purchased Under the Plans (1) (2)
|
|
October 1 to October 31, 2009
|
|
|
243,847
|
|
|
$
|
40.56
|
|
|
|
243,847
|
|
|
$
|
47.0
|
|
November 1 to November 30, 2009
|
|
|
73,500
|
|
|
$
|
40.59
|
|
|
|
73,500
|
|
|
$
|
44.0
|
|
December 1 to December 31, 2009
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
44.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
317,347
|
|
|
|
|
|
|
|
317,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects amount remaining available under the $75.0 million
authorization approved by our Board of Directors on
June 18, 2009. |
|
(2) |
|
As of the last day of the respective month. |
19
Stock
Performance Graph
This graph depicts the Companys cumulative total
shareholder returns relative to the performance of the
Standard & Poors Midcap 400 Index and the
Standard & Poors 1500 Data
Processing & Outsourced Services Index for the period
commencing on July 3, 2008, the first trading day of the
Companys stock, and ending on December 31, 2009, the
last trading day of fiscal year 2009. The graph assumes $100
invested at the closing price of the Companys common stock
on the New York Stock Exchange on July 3, 2008 and each
index on June 30, 2008, and assumes that all dividends were
reinvested on the date paid.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/3/08
|
|
|
|
9/30/08
|
|
|
|
12/31/08
|
|
|
|
3/31/09
|
|
|
|
6/30/09
|
|
|
|
9/30/09
|
|
|
|
12/31/09
|
|
Lender Processing Services, Inc.
|
|
|
$
|
100.00
|
|
|
|
$
|
97.78
|
|
|
|
$
|
94.74
|
|
|
|
$
|
98.85
|
|
|
|
$
|
89.99
|
|
|
|
$
|
124.02
|
|
|
|
$
|
132.44
|
|
Standard & Poors Midcap 400 Index
|
|
|
|
100.00
|
|
|
|
|
89.13
|
|
|
|
|
66.36
|
|
|
|
|
60.61
|
|
|
|
|
71.98
|
|
|
|
|
86.36
|
|
|
|
|
91.16
|
|
Standard & Poors 1500 Data
Processing & Outsourced Services Index
|
|
|
|
100.00
|
|
|
|
|
88.83
|
|
|
|
|
71.27
|
|
|
|
|
72.34
|
|
|
|
|
78.37
|
|
|
|
|
91.35
|
|
|
|
|
103.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 6.
|
Selected
Financial Data.
|
The following table presents our selected historical financial
data and should be read in conjunction with Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations and Item 8.
Financial Statements and Supplementary Data included
elsewhere in this Annual Report on
Form 10-K.
Our financial information may not be indicative of our future
performance and does not necessarily reflect what our financial
position and results of operations would have been had we
operated as a separate, stand-alone entity for periods ending
prior to July 2, 2008 that are presented, including changes
that occurred in our operations and capitalization as a result
of our spin-off from FIS.
The consolidated statement of earnings data for the year ended
December 31, 2009 and the consolidated balance sheet data
as of December 31, 2009 is derived from our audited
financial statements included in this report. Except with
respect to pro forma shares and per share amounts, the
consolidated statement of earnings data for the years ended
December 31, 2008 and 2007 and the consolidated balance
sheet data as of December 31, 2008 is derived from our
audited financial statements included in this report. The
combined statement of earnings data for the year ended
December 31, 2006 and the combined balance sheet data as of
December 31, 2007 and 2006 is derived from our audited
financial statements not included in this report. The combined
statement of earnings data for the year ended December 31,
2005 and the combined balance sheet data as of December 31,
2005 are derived from unaudited financial statements not
included in this report. The unaudited financial statements have
been
20
prepared on the same basis as the audited financial statements
and, in the opinion of our management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a
fair presentation of the information set forth in this report.
We intend to continue to pay quarterly cash dividends to our
stockholders of $0.10 per share, although the payment of
dividends is at the discretion of our Board and subject to any
limits in our debt or other agreements and the requirements of
state and federal law.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Statement of Earnings
Data:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Processing and services revenues
|
|
$
|
2,370,548
|
|
|
$
|
1,837,590
|
|
|
$
|
1,638,622
|
|
|
$
|
1,404,839
|
|
|
$
|
1,286,428
|
|
Net earnings attributable to Lender Processing Services,
Inc.
|
|
|
275,729
|
|
|
|
230,888
|
|
|
|
256,805
|
|
|
|
201,055
|
|
|
|
195,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share basic(1)
|
|
$
|
2.88
|
|
|
$
|
2.42
|
|
|
$
|
2.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic(1)
|
|
|
95,632
|
|
|
|
95,353
|
|
|
|
97,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share diluted(1)
|
|
$
|
2.87
|
|
|
$
|
2.41
|
|
|
$
|
2.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted(1)
|
|
|
96,152
|
|
|
|
95,754
|
|
|
|
97,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Earnings per share data for the years ended December 31,
2008 and 2007 is reflected on a pro forma basis (discussed in
Note 2 of the notes to our consolidated financial
statements). |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
70,528
|
|
|
$
|
125,966
|
|
|
$
|
39,566
|
|
|
$
|
47,783
|
|
|
$
|
59,756
|
|
Total assets
|
|
|
2,197,304
|
|
|
|
2,103,633
|
|
|
|
1,962,043
|
|
|
|
1,879,800
|
|
|
|
1,542,802
|
|
Long-term debt
|
|
|
1,289,350
|
|
|
|
1,547,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Quarterly Financial Data (Unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
(In thousands, except per share amounts)
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processing and services revenues
|
|
$
|
529,817
|
|
|
$
|
613,171
|
|
|
$
|
619,427
|
|
|
$
|
608,133
|
|
Earnings from continuing operations before income taxes and
equity in losses of unconsolidated entity
|
|
|
82,546
|
|
|
|
122,530
|
|
|
|
122,528
|
|
|
|
121,378
|
|
Net earnings attributable to Lender Processing
Services, Inc.
|
|
|
50,046
|
|
|
|
75,240
|
|
|
|
75,542
|
|
|
|
74,901
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processing and services revenues
|
|
$
|
443,560
|
|
|
$
|
453,347
|
|
|
$
|
466,762
|
|
|
$
|
473,921
|
|
Earnings from continuing operations before income taxes and
equity in losses of unconsolidated entity
|
|
|
100,318
|
|
|
|
101,860
|
|
|
|
84,199
|
|
|
|
96,810
|
|
Net earnings attributable to Lender Processing
Services, Inc.
|
|
|
61,732
|
|
|
|
63,546
|
|
|
|
51,281
|
|
|
|
54,329
|
|
21
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion should be read in conjunction with
Item 8: Financial Statements and Supplementary Data and the
Notes thereto included elsewhere in this report.
Overview
We are a provider of integrated technology and services to the
mortgage lending industry, with market leading positions in
mortgage processing and default management services in the
U.S. We conduct our operations through two reporting
segments, Technology, Data and Analytics and Loan Transaction
Services, which produced approximately 30% and 70%,
respectively, of our revenues for the year ended
December 31, 2009. A large number of financial institutions
use our services. Our technology solutions include our mortgage
processing system, which automates all areas of loan servicing,
from loan setup and ongoing processing to customer service,
accounting and reporting. Our technology solutions also include
our Desktop system, which is a middleware enterprise workflow
management application designed to streamline and automate
business processes. Our loan transaction services include our
default management services, which are used by mortgage lenders,
servicers, attorneys and trustees to reduce the expense of
managing defaulted loans, and our loan facilitation services,
which support most aspects of the closing of mortgage loan
transactions by national lenders and loan servicers.
Our Technology, Data and Analytics segment principally includes:
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|
|
|
|
our mortgage processing services, which we conduct using our
mortgage servicing platform and our team of experienced support
personnel based primarily at our Jacksonville, Florida data
center;
|
|
|
|
our Desktop application, a workflow system that assists our
customers in managing business processes, which today is
primarily used in connection with mortgage loan default
management, but which has broader applications;
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|
|
|
our other software and related service offerings, including our
mortgage origination software, our real estate closing and title
insurance production software and our collaborative electronic
vendor network, which provides connectivity among mortgage
industry participants; and
|
|
|
|
our data and analytics businesses, the most significant of which
are our alternative property valuations business, which provides
a range of valuations other than traditional appraisals, our
aggregated property and loan data services, our fraud detection
solutions and our advanced analytic services, which assist our
customers in their loan marketing, loss mitigation and fraud
prevention efforts.
|
Our Loan Transaction Services segment offers a range of services
used mainly in the production of a mortgage loan, which we refer
to as our loan facilitation services, and in the management of
mortgage loans that go into default, which we refer to as
default management services.
Our loan facilitation services include:
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|
|
|
|
settlement services, which consist of title agency services, in
which we act as an agent for title insurers, and closing
services, in which we assist in the closing of real estate
transactions;
|
|
|
|
appraisal services, which consist of traditional appraisal and
appraisal management services; and
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|
|
|
other origination services, which consist of flood zone
information, which assists lenders in determining whether a
property is in a federally designated flood zone, and real
estate tax services, which provide lenders with information
about the tax status of a property.
|
Our default management services include, among others:
|
|
|
|
|
foreclosure management services, including administrative
services to a nationwide network of independent attorneys and
trustees, mandatory title searches, posting and publishing, and
other services;
|
|
|
|
property inspection and preservation services, designed to
preserve the value of properties securing defaulted
loans; and
|
22
|
|
|
|
|
asset management services, providing disposition services for
our customers real estate owned properties through a
network of independent real estate brokers, attorneys and other
vendors to facilitate the transaction.
|
Corporate overhead costs, including stock compensation expense,
and other operations that are not included in our operating
segments are included in Corporate and Other.
Prior to July 2, 2008, the Company was a wholly-owned
subsidiary of FIS. In October 2007, the board of directors of
FIS approved a plan of restructuring pursuant to which FIS would
spin off its lender processing services segment to its
shareholders in a tax free distribution. Pursuant to this plan
of restructuring, on June 16, 2008, FIS contributed to us
all of its interest in the assets, liabilities, businesses and
employees related to FISs lender processing services
operations in exchange for shares of our common stock and
$1,585.0 million aggregate principal amount of our debt
obligations. On July 2, 2008, FIS distributed to its
shareholders a dividend of one-half share of our common stock,
par value $0.0001 per share, for each issued and outstanding
share of FIS common stock held on June 24, 2008, which we
refer to as the spin-off. Also on July 2, 2008,
FIS exchanged 100% of our debt obligations for a like amount of
FISs existing Tranche B Term Loans issued under its
Credit Agreement dated as of January 18, 2007. The spin-off
was tax-free to FIS and its shareholders, and the
debt-for-debt
exchange undertaken in connection with the spin-off was tax-free
to FIS.
Business
Trends and Conditions
Revenues in our loan facilitation businesses and certain of our
data businesses are closely related to the level of residential
real estate activity in the U.S., which includes sales, mortgage
financing and mortgage refinancing. The level of real estate
activity is primarily affected by real estate prices, the
availability of funds for mortgage loans, mortgage interest
rates and the overall state of the U.S. economy. As a
result of the declining housing market and the current economic
downturn, the volume of refinancing transactions in particular
and mortgage originations in general have declined over the last
several years, most sharply in late 2007 and 2008, resulting in
a reduction of revenues in some of our businesses. Various
measures taken by the federal government to reduce interest
rates led to increased refinancing activity beginning in the
fourth quarter of 2008 through much of 2009, which also resulted
in an improvement in margins from our loan facilitation
businesses as compared to 2008. However, we can make no
assurances that interest rates or refinancing activity will
continue at their current levels.
Other steps taken by the U.S. government to relieve the
current economic situation may have a positive effect on our
refinancing activity. Under the Homeowner Affordability and
Stability Plan (the HASP), a $75 billion
program announced on February 18, 2009, homeowners with a
solid payment history on an existing mortgage owned by Fannie
Mae or Freddie Mac, who would otherwise be unable to get a
refinancing loan because of a loss in home value increasing
their
loan-to-value
ratio above 80%, would be able to get a refinancing loan. The
Treasury Department estimates that many of the 4 to
5 million homeowners who fit this description are eligible
to refinance their loans under this program.
According to the Mortgage Bankers Associations
(MBA) current Mortgage Finance Forecast,
U.S. mortgage originations (including refinancing) were
approximately $2.1 trillion, $1.5 trillion and $2.3 trillion in
2009, 2008 and 2007, respectively. The MBAs Mortgage
Finance Forecast currently estimates an approximately $1.3
trillion mortgage origination market for 2010, which would be a
decrease of approximately 94% from 2009. The MBA further
forecasts that this decrease will result primarily from
refinance transactions.
Our various businesses are impacted differently by the level of
mortgage originations and refinancing transactions. For
instance, while our loan facilitation and some of our data
businesses are directly affected by the volume of real estate
transactions and mortgage originations, our mortgage processing
business is generally less affected because it earns revenues
based on the total number of mortgage loans it processes, which
tends to stay more constant.
In contrast, we believe that a weaker economy tends to increase
the volume of consumer mortgage defaults, and thus favorably
affects our default management operations, in which we service
residential mortgage loans in default. These factors also
increase revenues from our Desktop solution, as the Desktop
application, at present, is primarily used in connection with
default management. Currently, our default management services
provide a
23
natural hedge against the volatility of the real estate
origination business and its resulting impact on our loan
facilitation services. However, the same government proposed
legislation aimed at mitigating the current downturn in the
housing market that we expect to have a positive effect on our
refinancing activity adversely affects our default management
operations. For example, in addition to providing refinancing
opportunities for borrowers who are current on their mortgage
payments but have been unable to refinance because their homes
have decreased in value, the HASP also provides for a loan
modification program targeted at borrowers who are at risk of
foreclosure because their incomes are not sufficient to make
their mortgage payments. The Homeowner Stability Initiative
under the HASP is designed to help as many as 3 to
4 million homeowners avoid foreclosure by providing
affordable and sustainable mortgage loans. It uses cost sharing
and incentives to encourage lenders to reduce homeowners
monthly payments to 31 percent of their gross monthly
income. We cannot predict the final form that the HASP and other
initiatives concerning foreclosure relief and loan modification
programs may take, how they may be implemented, when they may
become effective or the impact they may have on our default
management businesses.
Historically, some of our default management businesses,
particularly our field services and asset management solutions,
have had lower margins than our loan facilitation businesses due
to the higher level of cost of sales associated with their
operations. However, as our default volumes have increased, our
margins have improved significantly on the incremental sales
during 2008 and 2009, compared to 2007. Because we are often not
paid for our default services until completion of the
foreclosure, default does not contribute as quickly to our cash
flow from operations as it does to our revenues. Our trade
receivables balance increased by approximately
$57.9 million from December 31, 2007 to
December 31, 2008 and approximately $49.6 million from
December 31, 2008 to December 31, 2009, largely due to
the increase in our default management services businesses.
We have approximately $1,289.4 million in long-term debt
outstanding as of December 31, 2009, of which approximately
$1,047.0 million bears interest at a fixed rate
($680.0 million through interest rate swaps), while the
remaining portion bears interest at a floating rate. As a result
of our current level of debt, we are highly leveraged and
subject to risk from changes in interest rates. Having this
amount of debt also makes us more susceptible to negative
economic changes, as a large portion of our cash is committed to
servicing our debt. Therefore, in a bad economy or if interest
rates rise, it may be harder for us to attract executive talent,
invest in acquisitions or new ventures, or develop new services.
In a number of our business lines, we are also affected by the
decisions of potential customers to outsource the types of
functions our businesses provide or to perform those functions
internally. Generally, demand for outsourcing solutions has
increased over time as providers such as us realize economies of
scale and improve their ability to provide services that
increase customer efficiencies, reduce costs, improve processing
transparency and improve risk management. Further, in a slow
economy or struggling mortgage market, we believe that larger
financial institutions may seek additional outsourcing solutions
to avoid the fixed costs of operating or investing in internal
capabilities.
Some states have also enacted legislation requiring the
registration of appraisal management companies, and additional
legislation has been proposed at the federal level. Other state
legislative proposals are pending concerning the regulation of
certain appraisal management practices. It is too early to
predict with certainty what impact these measures may have on
our business or the results of our operations.
Recent
Developments
On February 4, 2010, our Board of Directors elected David
K. Hunt to serve on our Board of Directors. Mr. Hunt will
serve in Class I of our Board of Directors, and his term
will expire at the annual meeting of our stockholders to be held
in 2012.
On December 21, 2009, our Board of Directors accepted
Marshall Haines resignation from his position as a
director of the Company. Mr. Haines entered into a new
strategic business opportunity and therefore submitted his
resignation in accordance with the provisions of Section 5
of the Companys Corporate Governance Guidelines.
On October 30, 2009, our subsidiary LPS Auction Solutions,
LLC acquired substantially all of the assets of NRC Rising Tide
National Auction & REO Solutions, LLC (Rising
Tide) for $3.7 million. See note 4 to the notes
to consolidated financial statements for a detailed description
of the transaction.
24
On July 21, 2009, our subsidiary LPS Asset Management
Solutions, Inc. (Asset Management) acquired 22% of
the noncontrolling minority interest of RealEC Technologies,
Inc. (RealEC) for $2.6 million. On
November 12, 2009, Asset Management acquired the remaining
22% of the noncontrolling minority interest of RealEC for
$4.3 million. The transactions resulted in RealEC becoming
our wholly-owned subsidiary. See note 4 to the notes to
consolidated financial statements for a detailed description of
the transactions.
On June 19, 2009, we acquired Tax Verification Bureau,
Inc., which we have renamed LPS Verification Bureau, Inc.
(Verification Bureau), for $14.9 million (net
of cash acquired). See note 4 to the notes to consolidated
financial statements for a detailed description of the
transaction.
On March 15, 2009, William P. Foley, II retired from
our Board of Directors and from his position as chairman of the
Board and an officer of the Company. Daniel D. Lane and Cary H.
Thompson also retired from our Board on that date. Jeffrey S.
Carbiener, John F. Farrell, Jr. and Philip G. Heasley were
elected to our Board of Directors effective as of March 15,
2009 to fill the vacancies created by the retirement of
Messrs. Foley, Lane and Thompson. In addition, Lee A.
Kennedy was elected Chairman of our Board effective as of
March 15, 2009, and became our Executive Chairman effective
September 15, 2009. On April 22, 2009, our Board of
Directors elected Alvin R. Carpenter to serve on our Board.
On February 6, 2009, we acquired the remaining 61% of the
equity interest of FNRES Holdings, Inc. (FNRES),
which we subsequently renamed LPS Real Estate Group, Inc., from
FNF in exchange for all of our interests in Investment Property
Exchange Services, Inc. (IPEX). The exchange
resulted in FNRES becoming our wholly-owned subsidiary. See
note 4 to the notes to consolidated financial statements
for a detailed description of the transaction.
Factors
Affecting Comparability
The consolidated financial statements included in this report
that present our financial condition and operating results
reflect the following significant transactions:
|
|
|
|
|
On July 2, 2008, FIS exchanged 100% of our debt
obligations, which consisted of $1,210.0 million under bank
credit facilities and senior notes in an aggregate principal
amount of $375.0 million, for a like amount of FISs
existing term loans issued under its credit agreement dated as
of January 18, 2007. Prior to July 2, 2008 we had an
insignificant amount of interest expense.
|
As a result of the above transaction, the results of operations
in the periods covered by the consolidated financial statements
may not be directly comparable.
Critical
Accounting Policies
The accounting policies described below are those we consider
critical in preparing our consolidated financial statements.
These policies require management to make estimates, judgments
and assumptions that affect the reported amounts of assets and
liabilities and disclosures with respect to contingent
liabilities and assets at the date of the consolidated financial
statements and the reported amounts of revenues and expenses
during the reporting periods. Actual amounts could differ from
those estimates. See note 2 of the notes to our
consolidated financial statements for a more detailed
description of the significant accounting policies that have
been followed in preparing our consolidated financial statements.
Revenue
Recognition
We recognize revenues in accordance with Financial Accounting
Standards Board (FASB) Accounting Standards
Codification (ASC) Topic 605, Revenue Recognition
(ASC 605). Recording revenues requires judgment,
including determining whether an arrangement includes multiple
elements, whether any of the elements are essential to the
functionality of any other elements, and whether evidence of
fair value exists for those elements. Customers receive certain
contract elements over time and changes to the elements in an
arrangement, or in our ability to identify fair value for these
elements, could materially impact the amount of earned and
unearned revenue reflected in our financial statements.
25
The primary judgments relating to our revenue recognition are
determining when all of the following criteria are met:
(1) persuasive evidence of an arrangement exists;
(2) delivery has occurred or services have been rendered;
(3) the sellers price to the buyer is fixed or
determinable; and (4) collectibility is reasonably assured.
Judgment is also required to determine whether an arrangement
involving more than one deliverable contains more than one unit
of accounting and how the arrangement consideration should be
measured and allocated to the separate units of accounting.
If the deliverables under a contract are software related, we
determine the appropriate units of accounting and how the
arrangement consideration should be measured and allocated to
the separate units. This determination, as well as
managements ability to establish vendor specific objective
evidence (VSOE) for the individual deliverables, can
impact both the amount and timing of revenue recognition under
these agreements. The inability to establish VSOE for each
contract deliverable results in having to record deferred
revenues
and/or
applying the residual method. For arrangements where we
determine VSOE for software maintenance using a stated renewal
rate within the contract, we use judgment to determine whether
the renewal rate represents fair value for that element as if it
had been sold on a stand-alone basis. For a small percentage of
revenues, we use contract accounting when the arrangement with
the customer includes significant customization, modification,
or production of software. For elements accounted for under
contract accounting, revenue is recognized using the
percentage-of-completion
method since reasonably dependable estimates of revenues and
contract hours applicable to various elements of a contract can
be made.
Occasionally, we are party to multiple concurrent contracts with
the same customer. These situations require judgment to
determine whether the individual contracts should be aggregated
or evaluated separately for purposes of revenue recognition. In
making this determination we consider the timing of negotiating
and executing the contracts, whether the different elements of
the contracts are interdependent and whether any of the payment
terms of the contracts are interrelated.
Due to the large number, broad nature and average size of
individual contracts we are a party to, the impact of judgments
and assumptions that we apply in recognizing revenue for any
single contract is not likely to have a material effect on our
consolidated operations. However, the broader accounting policy
assumptions that we apply across similar arrangements or classes
of customers could significantly influence the timing and amount
of revenue recognized in our results of operations.
Goodwill
and Other Intangible Assets
We have significant intangible assets that were acquired through
business acquisitions. These assets consist of purchased
customer relationships, contracts, and the excess of purchase
price over the fair value of identifiable net assets acquired
(goodwill).
As of December 31, 2009 and 2008, goodwill was
$1,166.1 million and $1,091.1 million, respectively.
Goodwill is not amortized, but is tested for impairment annually
or more frequently if circumstances indicate potential
impairment. The process of determining whether or not an asset,
such as goodwill, is impaired or recoverable relies on
projections of future cash flows, operating results and market
conditions. Such projections are inherently uncertain and,
accordingly, actual future cash flows may differ materially from
projected cash flows. In evaluating the recoverability of
goodwill, we perform an annual goodwill impairment test on our
reporting units based on an analysis of the discounted future
net cash flows generated by the reporting units underlying
assets. Such analyses are particularly sensitive to changes in
estimates of future net cash flows and discount rates. Changes
to these estimates might result in material changes in the fair
value of the reporting units and determination of the
recoverability of goodwill which may result in charges against
earnings and a reduction in the carrying value of our goodwill.
As of December 31, 2009 and 2008, intangible assets, net of
accumulated amortization, were $72.8 million and
$83.5 million, respectively, which consist primarily of
purchased customer relationships and trademarks. Long-lived
assets and intangible assets with definite useful lives are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. The valuation of these assets involves
significant estimates and assumptions concerning matters such as
customer retention, future cash flows and discount rates. If any
of these assumptions change, it could affect the recoverability
of the carrying value of
26
these assets. Purchased customer relationships are amortized
over their estimated useful lives using an accelerated method
which takes into consideration expected customer attrition rates
over a period of up to ten years. All intangible assets that
have been determined to have indefinite lives are not amortized,
but are reviewed for impairment at least annually in accordance
with ASC 350. The determination of estimated useful lives and
the allocation of the purchase price to the fair values of the
intangible assets other than goodwill require significant
judgment and may affect the amount of future amortization of
such intangible assets. Amortization expense for intangible
assets other than goodwill was $30.7 million,
$40.0 million and $43.4 million in 2009, 2008 and
2007, respectively. Definite-lived intangible assets are
amortized over their estimated useful lives ranging from 5 to
10 years using accelerated methods. There is an inherent
uncertainty in determining the expected useful life of or cash
flows to be generated from intangible assets. We have not
historically experienced material changes in these estimates but
could be subject to them in the future.
Computer
Software
Computer software includes the fair value of software acquired
in business combinations, purchased software and capitalized
software development costs. As of December 31, 2009 and
2008, computer software, net of accumulated amortization was
$185.4 million and $157.5 million, respectively.
Purchased software is recorded at cost and amortized using the
straight-line method over its estimated useful life. Software
acquired in business combinations is recorded at its fair value
and amortized using straight-line or accelerated methods over
its estimated useful life, ranging from five to ten years.
Internally developed software costs are amortized using the
greater of the straight-line method over the estimated useful
life or based on the ratio of current revenues to total
anticipated revenue over the estimated useful lives. Useful
lives of computer software range from 3 to 10 years.
Capitalized software development costs are accounted for in
accordance with either ASC Topic 985, Software, Subtopic
20, Costs of Software to Be Sold, Leased, or Marketed
(ASC
985-20),
or ASC 350, Subtopic 40, Internal-Use Software (ASC
350-40).
For computer software products to be sold, leased, or otherwise
marketed (ASC
985-20
software), all costs incurred to establish the technological
feasibility are research and development costs, and are expensed
as they are incurred. Costs incurred subsequent to establishing
technological feasibility, such as programmers salaries and
related payroll costs and costs of independent contractors, are
development costs, and are capitalized and amortized on a
product by product basis commencing on the date of general
release to customers. We do not capitalize any costs once the
product is available for general release to customers. For
internal-use computer software products (ASC
350-40
software), internal and external costs incurred during the
preliminary project stage are expensed as they are incurred.
Internal and external costs incurred during the application
development stage are capitalized and amortized on a product by
product basis commencing on the date the software is ready for
its intended use. We do not capitalize any costs once the
software is ready for its intended use.
Amortization expense for computer software was
$35.3 million, $30.6 million and $32.0 million in
2009, 2008 and 2007, respectively. We also assess the recorded
value of computer software for impairment on a regular basis by
comparing the carrying value to the estimated future cash flows
to be generated by the underlying software asset. There is an
inherent uncertainty in determining the expected useful life of
or cash flows to be generated from computer software. We have
not historically experienced material changes in these estimates
but could be subject to them in the future.
Accounting
for Income Taxes
As part of the process of preparing the consolidated financial
statements, we are required to determine income taxes in each of
the jurisdictions in which we operate. This process involves
estimating actual current tax expense together with assessing
temporary differences resulting from differing recognition of
items for income tax and accounting purposes. These differences
result in deferred income tax assets and liabilities, which are
included within our consolidated balance sheets. We must then
assess the likelihood that deferred income tax assets will be
recovered from future taxable income and, to the extent we
believe that recovery is not likely, establish a valuation
allowance. To the extent we establish a valuation allowance or
increase this allowance in a period, we must reflect this
increase as an expense within income tax expense in the
statement of earnings. Determination of the income tax expense
requires estimates and can involve complex issues that may
require an extended period to resolve. Further, changes in the
geographic mix of revenues or in the estimated level of annual
pre-tax income can cause the overall effective income tax rate
to vary from period to period.
27
Recent
Accounting Pronouncements
Discussion of recent accounting pronouncements is included in
note 2 of the notes to our consolidated financial
statements.
Related
Party Transactions
We have historically conducted business with FNF and FIS.
Because William P. Foley, II serves as Executive Chairman
of the board of directors of FNF and served as Executive
Chairman of the Board of LPS prior to March 15, 2009, FNF
was considered a related party of the Company. Mr. Foley,
along with Daniel D. Lane and Cary H. Thompson, who also serve
as directors of FNF, retired from our Board of Directors on
March 15, 2009. Accordingly, for periods subsequent to
March 15, 2009, FNF is not a related party. Lee A. Kennedy,
who is an executive and a director of FIS, has served on our
Board of Directors since May 2008 and has served as Chairman of
our Board since March 15, 2009 and as Executive Chairman
since September 15, 2009. Therefore, FIS is a related party
of the Company. Additionally, Mr. Kennedy was appointed
interim Chairman and Chief Executive Officer of Ceridian
Corporation (Ceridian) on January 25, 2010, and
therefore, Ceridian will be a related party for periods during
the term of his interim service.
We have various agreements with FNF under which we provide title
agency services, software development and other data services.
Additionally, we have been allocated corporate costs from FIS
and will continue to receive certain corporate services from FIS
for a period of time, and have other agreements under which we
incur other expenses to, or receive revenues from, FIS and FNF.
A detail of related party items included in revenues for the
years ended December 31, 2009, 2008 and 2007 is as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 (1)
|
|
|
2008
|
|
|
2007
|
|
|
Title agency services
|
|
$
|
74.8
|
|
|
$
|
187.9
|
|
|
$
|
132.2
|
|
Software development services
|
|
|
13.4
|
|
|
|
55.7
|
|
|
|
59.5
|
|
Other data related services
|
|
|
3.4
|
|
|
|
12.0
|
|
|
|
19.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
91.6
|
|
|
$
|
255.6
|
|
|
$
|
211.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes revenues received from FNF under these agreements
through March 31, 2009. FNF ceased to be a related party of
the Company on March 15, 2009, however, it was
impracticable to estimate revenues received from FNF as of that
date. We continue to generate revenues from contracts that were
entered into while FNF was a related party. |
A detail of related party items included in expenses for the
years ended December 31, 2009, 2008 and 2007 is as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 (1)
|
|
|
2008
|
|
|
2007
|
|
|
Title plant information expense (2)
|
|
$
|
4.1
|
|
|
$
|
7.4
|
|
|
$
|
5.8
|
|
Corporate services expense (3)
|
|
|
7.3
|
|
|
|
34.8
|
|
|
|
35.7
|
|
Licensing, leasing and cost sharing agreements (3)
|
|
|
(3.1
|
)
|
|
|
(0.6
|
)
|
|
|
(14.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$
|
8.3
|
|
|
$
|
41.6
|
|
|
$
|
27.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes expense reimbursements paid to FNF under these
agreements through March 31, 2009. FNF ceased to be a
related party of the Company on March 15, 2009, however, it
was impracticable to estimate expense reimbursements paid to FNF
as of that date. We continue to incur expenses under contracts
that were entered into while FNF was a related party. |
|
(2) |
|
Included in cost of revenues. |
|
(3) |
|
Included in selling, general, and administrative expenses. |
28
Descriptions of these related party agreements and other related
party relationships are included in note 3 of the notes to
our consolidated financial statements.
Results
of Operations for the Years Ended December 31, 2009, 2008
and 2007
Consolidated
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of
Revenue(1)
(2)
|
|
Year Ended December 31,
|
|
2009 (2)
|
|
|
2008 (2)
|
|
|
2007 (2)
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions, except percentages)
|
|
|
Processing and services revenues
|
|
$
|
2,370.5
|
|
|
$
|
1,837.6
|
|
|
$
|
1,638.6
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
1,571.0
|
|
|
|
1,176.5
|
|
|
|
1,050.5
|
|
|
|
66.3
|
%
|
|
|
64.0
|
%
|
|
|
64.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
799.5
|
|
|
|
661.1
|
|
|
|
588.1
|
|
|
|
33.7
|
%
|
|
|
36.0
|
%
|
|
|
35.9
|
%
|
Gross margin
|
|
|
33.7
|
%
|
|
|
36.0
|
%
|
|
|
35.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
267.3
|
|
|
|
229.9
|
|
|
|
192.6
|
|
|
|
11.3
|
%
|
|
|
12.5
|
%
|
|
|
11.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
532.2
|
|
|
|
431.2
|
|
|
|
395.5
|
|
|
|
22.5
|
%
|
|
|
23.5
|
%
|
|
|
24.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
22.5
|
%
|
|
|
23.5
|
%
|
|
|
24.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
(83.2
|
)
|
|
|
(48.0
|
)
|
|
|
1.5
|
|
|
|
3.5
|
%
|
|
|
2.6
|
%
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes and
equity in losses of unconsolidated entity
|
|
|
449.0
|
|
|
|
383.2
|
|
|
|
397.1
|
|
|
|
18.9
|
%
|
|
|
20.9
|
%
|
|
|
24.2
|
%
|
Provision for income taxes
|
|
|
171.7
|
|
|
|
146.6
|
|
|
|
153.7
|
|
|
|
7.2
|
%
|
|
|
8.0
|
%
|
|
|
9.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before equity in losses of
unconsolidated entity
|
|
|
277.3
|
|
|
|
236.6
|
|
|
|
243.4
|
|
|
|
11.7
|
%
|
|
|
12.9
|
%
|
|
|
14.9
|
%
|
Equity in losses of unconsolidated entity, discontinued
operation and minority interest, net
|
|
|
(1.6
|
)
|
|
|
(5.7
|
)
|
|
|
13.4
|
|
|
|
nm
|
|
|
|
nm
|
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Lender Processing Services,
Inc.
|
|
$
|
275.7
|
|
|
$
|
230.9
|
|
|
$
|
256.8
|
|
|
|
11.6
|
%
|
|
|
12.6
|
%
|
|
|
15.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share attributable to Lender Processing
Services, Inc diluted
|
|
$
|
2.87
|
|
|
$
|
2.41
|
|
|
$
|
2.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain operating items are not material as a percentage of
revenues, indicated by nm. |
|
(2) |
|
Columns may not total due to rounding. |
Processing
and Services Revenues
Processing and services revenues increased $532.9 million,
or 29.0%, during 2009, when compared to 2008, and
$199.0 million, or 12.1%, during 2008, when compared to
2007. The increase during 2009, when compared to 2008, was
primarily driven by growth in our Loan Transaction Services
segment resulting from increased demand for our services that
support the default life cycle as well as from growth in certain
of our loan facilitation services due to increased refinance
activities resulting from the lower interest rate environment.
Additionally, the increase was driven by growth in our
Technology, Data and Analytics segment, primarily from growth in
our mortgage processing operation due to higher loan transaction
fees from our customers loss mitigation efforts and growth
in our loan modification programs, as well as higher project and
professional services revenues. Additionally, continued strong
demand for our Desktop application and applied analytics
services as well as incremental revenues from our acquisition of
FNRES, totaling $37.2 million, also contributed to revenue
growth during the current year. The increase during 2008, when
compared to 2007, was primarily driven by growth in our Loan
Transaction Services segment which resulted from growth in
default services, offset by a decline in loan facilitation
services due to ongoing weakness in the housing market and the
resulting impact on our loan origination services. Additionally,
the increase was supported by growth in our Desktop application
and applied analytics services.
29
Cost of
Revenues
Cost of revenues increased $394.5 million, or 33.5%, during
2009, when compared to 2008, and $126.0 million, or 12.0%,
during 2008, when compared to 2007. Cost of revenues as a
percentage of processing and services revenues was 66.3%, 64.0%
and 64.1% during 2009, 2008 and 2007, respectively. The
increases during 2009 when compared to 2008, and during 2008
when compared to 2007, were primarily due to a change in revenue
mix resulting from growth in several of our default management
services operations, including field services and asset
management solutions, which have a higher cost of revenue
associated with their operations. These increases were partially
offset by growth in our higher margin loan facilitation
services, loan origination software sales, and data and
analytics services. Additionally, the increase during 2009 when
compared to 2008 was due to the acquisition of FNRES in February
2009, which was neutral to our operating income.
Gross
Profit
Gross profit was $799.5 million, $661.1 million and
$588.1 million during 2009, 2008 and 2007, respectively.
Gross profit as a percentage of processing and services revenues
(gross margin) was 33.7%, 36.0% and 35.9% during
2009, 2008 and 2007, respectively. The changes in gross margin
during 2009 when compared to 2008, and during 2008 when compared
to 2007, were a result of the factors described above.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses increased
$37.4 million, or 16.3%, during 2009 when compared to 2008,
and $37.3 million, or 19.4%, during 2008 when compared to
2007. Selling, general and administrative expenses as a
percentage of processing and services revenues was 11.3%, 12.5%
and 11.8% during 2009, 2008 and 2007, respectively. The
increases during 2009 when compared to 2008, and during 2008
when compared to 2007, were primarily due to incremental public
company costs incurred since our spin-off from FIS, as well as
higher stock compensation and other incentive related costs.
Additionally, the increase during 2009 when compared to 2008 was
due to a $6.8 million charge recognized during 2009 related
to the retirement of three LPS directors. The increase during
2008 when compared to 2007 was also due to restructuring and
spin-off related charges recognized during 2008.
Operating
Income
Operating income increased $101.0 million, or 23.4%, during
2009 when compared to 2008, and $35.7 million, or 9.0%,
during 2008 when compared to 2007. Operating income as a
percentage of processing and services revenues (operating
margin) was 22.5%, 23.5% and 24.1% during 2009, 2008 and
2007, respectively. The decrease in operating margin during 2009
when compared to 2008, and during 2008 when compared to 2007,
was a result of the factors described above.
Other
Income (Expense)
Other income (expense), which consists of interest income,
interest expense and other items, totaled $(83.2) million,
$(48.0) million and $1.5 million during 2009, 2008 and
2007, respectively. The change during 2009 when compared to
2008, and during 2008 when compared to 2007 was primarily due to
increased interest expense from bank credit facilities entered
into and senior notes issued on July 2, 2008 in connection
with our spin-off from FIS. Interest expense was
$84.6 million, $49.9 million and $0.1 million
during 2009, 2008 and 2007, respectively.
Income
Taxes
Income taxes were $171.7 million, $146.6 million and
$153.7 million during 2009, 2008 and 2007, respectively.
The effective tax rate was 38.25%, 38.25% and 38.70% during
2009, 2008 and 2007, respectively.
30
Equity in
Losses of Unconsolidated Entity, Discontinued Operation and
Noncontrolling Minority Interest, Net
Equity in losses of unconsolidated entity, discontinued
operation and noncontrolling minority interest, net was
$(1.6) million, $(5.7) million and $13.4 million
during 2009, 2008 and 2007, respectively. The increase during
2009 when compared to 2008 was primarily due to the acquisition
of the remaining 61% equity interest of FNRES in February 2009,
for which we no longer recognize equity losses. The decrease
during 2008 when compared to 2007 was primarily due to decreased
earnings from our discontinued operation, IPEX, offset by
increased losses from our investment in FNRES.
Net
Earnings and Net Earnings Per Share Attributable to
LPS Diluted
Net earnings were $275.7 million, $230.9 million and
$256.8 million during 2009, 2008 and 2007, respectively.
The increase during 2009 when compared to 2008, and the decrease
in 2008 when compared to 2007, was a result of the factors
described above. Net earnings per diluted share was $2.87, $2.41
and $2.63 during 2009, 2008 and 2007, respectively.
Segment
Results of Operations Technology, Data and
Analytics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of Revenue
|
|
|
2009 vs. 2008
|
|
|
2008 vs. 2007
|
|
Year Ended December 31,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(In millions, except percentages)
|
|
|
Processing and services revenues
|
|
$
|
707.5
|
|
|
$
|
565.6
|
|
|
$
|
570.1
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
$
|
141.9
|
|
|
|
25.1
|
%
|
|
$
|
(4.5
|
)
|
|
|
(0.8
|
)%
|
Cost of revenues
|
|
|
402.4
|
|
|
|
310.0
|
|
|
|
313.7
|
|
|
|
56.9
|
%
|
|
|
54.8
|
%
|
|
|
55.0
|
%
|
|
|
(92.4
|
)
|
|
|
(29.8
|
)%
|
|
|
3.7
|
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
305.1
|
|
|
|
255.6
|
|
|
|
256.4
|
|
|
|
43.1
|
%
|
|
|
45.2
|
%
|
|
|
45.0
|
%
|
|
|
49.5
|
|
|
|
19.4
|
%
|
|
|
(0.8
|
)
|
|
|
(0.3
|
)%
|
Gross margin
|
|
|
43.1
|
%
|
|
|
45.2
|
%
|
|
|
45.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
70.7
|
|
|
|
64.6
|
|
|
|
64.8
|
|
|
|
10.0
|
%
|
|
|
11.4
|
%
|
|
|
11.4
|
%
|
|
|
(6.1
|
)
|
|
|
(9.4
|
)%
|
|
|
0.2
|
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
234.4
|
|
|
$
|
191.0
|
|
|
$
|
191.6
|
|
|
|
33.1
|
%
|
|
|
33.8
|
%
|
|
|
33.6
|
%
|
|
$
|
43.4
|
|
|
|
22.7
|
%
|
|
$
|
(0.6
|
)
|
|
|
(0.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
33.1
|
%
|
|
|
33.8
|
%
|
|
|
33.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processing
and Services Revenues
Processing and services revenues increased $141.9 million,
or 25.1%, during 2009 when compared to 2008; however, processing
and services revenues decreased nominally during 2008 when
compared to 2007. The increase during 2009 when compared to 2008
was driven by the acquisition of FNRES in February 2009 which
contributed $37.2 million to our 2009 revenue growth,
growth in our mortgage processing operation due to higher loan
transaction fees from our customers loss mitigation
efforts, growth in our loss mitigation programs, higher project
and professional services revenues and continued demand for our
Desktop application and applied analytics services. The decrease
during 2008 when compared to 2007 was primarily driven by
decreases in revenues in our loan origination software sales and
data and analytics services, partially offset by continued
growth in our Desktop application resulting from increased
foreclosure activity.
Cost of
Revenues
Cost of revenues increased $92.4 million, or 29.8%, during
2009 when compared to 2008; however, cost of revenues decreased
nominally during 2008 when compared to 2007. Cost of revenues as
a percentage of processing and services revenues was 56.9%,
54.8% and 55.0% during 2009, 2008 and 2007, respectively. The
increase during 2009 when compared to 2008 was primarily due to
the acquisition of FNRES in February 2009, which was neutral to
our operating income. The impact of the FNRES acquisition was
partially offset by growth in our mortgage processing operation
due to higher loan transaction fees from our customers
loss mitigation efforts, growth in our loan modification
programs, and higher project and professional services revenues,
all of which contribute higher
31
margins. The decrease in expenses during 2008 when compared to
2007 was primarily driven by changes in variable costs
associated with sales volume.
Gross
Profit
Gross profit was $305.1 million, $255.6 million and
$256.4 million during 2009, 2008 and 2007, respectively.
Gross margin was 43.1%, 45.2% and 45.0% during 2009, 2008 and
2007, respectively. The changes in gross margin during 2009 when
compared to 2008, and during 2008 when compared to 2007, were a
result of the factors described above.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses increased
$6.1 million, or 9.4%, during 2009 when compared to 2008;
however, selling, general and administrative expenses decreased
nominally during 2008 when compared to 2007. Selling, general
and administrative expenses as a percentage of processing and
services revenues was 10.0%, 11.4% and 11.4% during 2009, 2008
and 2007, respectively. The decrease in selling, general and
administrative expenses as a percentage of processing and
services revenues during 2009 when compared to 2008 was
primarily due to continued leverage of our existing overhead
infrastructure.
Operating
Income
Operating income increased $43.4 million, or 22.7%, during
2009 when compared to 2008; however, operating income decreased
nominally during 2008 when compared to 2007. Operating margin
was 33.1%, 33.8% and 33.6% during 2009, 2008 and 2007,
respectively. The decrease during 2009 when compared to 2008,
and the increase during 2008 when compared to 2007, was a result
of the factors described above.
Segment
Results of Operations Loan Transaction
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of Revenue
|
|
|
2009 vs. 2008
|
|
|
2008 vs. 2007
|
|
Year Ended December 31,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(In millions, except percentages)
|
|
|
Processing and services revenues
|
|
$
|
1,684.6
|
|
|
$
|
1,283.5
|
|
|
$
|
1,074.0
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
$
|
401.1
|
|
|
|
31.3
|
%
|
|
$
|
209.5
|
|
|
|
19.5
|
%
|
Cost of revenues
|
|
|
1,190.2
|
|
|
|
879.0
|
|
|
|
742.1
|
|
|
|
70.7
|
%
|
|
|
68.5
|
%
|
|
|
69.1
|
%
|
|
|
(311.2
|
)
|
|
|
(35.4
|
)%
|
|
|
(136.9
|
)
|
|
|
(18.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
494.4
|
|
|
|
404.5
|
|
|
|
331.9
|
|
|
|
29.3
|
%
|
|
|
31.5
|
%
|
|
|
30.9
|
%
|
|
|
89.9
|
|
|
|
22.2
|
%
|
|
|
72.6
|
|
|
|
21.9
|
%
|
Gross margin
|
|
|
29.3
|
%
|
|
|
31.5
|
%
|
|
|
30.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
107.8
|
|
|
|
105.3
|
|
|
|
94.9
|
|
|
|
6.4
|
%
|
|
|
8.2
|
%
|
|
|
8.8
|
%
|
|
|
(2.5
|
)
|
|
|
(2.4
|
)%
|
|
|
(10.4
|
)
|
|
|
(11.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
386.6
|
|
|
$
|
299.2
|
|
|
$
|
237.0
|
|
|
|
22.9
|
%
|
|
|
23.3
|
%
|
|
|
22.1
|
%
|
|
$
|
87.4
|
|
|
|
29.2
|
%
|
|
$
|
62.2
|
|
|
|
26.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
22.9
|
%
|
|
|
23.3
|
%
|
|
|
22.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processing
and Services Revenues
Processing and services revenues increased $401.1 million,
or 31.3%, during 2009 when compared to 2008, and
$209.5 million, or 19.5%, during 2008 when compared to
2007. The increases during 2009 when compared to 2008, and
during 2008 when compared to 2007, were primarily driven by our
default management services due to strong market growth as well
as continued market share gains. Additionally, during 2009 when
compared to 2008, our loan facilitation services, which includes
our front-end loan origination related services, also grew due
to increased refinance activities resulting from the lower
interest rate environment, partially offset by a decrease in our
tax outsourcing services. The increase during 2008 when compared
to 2007 was partially offset by declines in our loan
facilitation services due to weakness in the housing market.
32
Cost of
Revenues
Cost of revenues increased $311.2 million, or 35.4%, during
2009 when compared to 2008, and $136.9 million, or 18.4%,
during 2008 when compared to 2007. Cost of revenues as a
percentage of processing and services revenues was 70.7%, 68.5%
and 69.1% during 2009, 2008 and 2007, respectively. The increase
during 2009 when compared to 2008 was primarily due to the
growth in several of our default management operations,
including field services and asset management solutions, which
have a higher cost of revenue associated with their operations.
The decrease in cost of revenues as a percentage of processing
and services revenues during 2008 when compared to 2007 was
primarily due to the declining revenue in several of our loan
facilitation services, including our appraisal and tax
outsourcing services, which have higher cost of revenue
associated with their operations.
Gross
Profit
Gross profit was $494.4 million, $404.5 million and
$331.9 million during 2009, 2008 and 2007, respectively.
Gross margin was 29.3%, 31.5% and 30.9% during 2009, 2008 and
2007, respectively. The changes in gross margin during 2009 when
compared to 2008, and during 2008 when compared to 2007, were a
result of the factors described above.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses increased
$2.5 million, or 2.4%, during 2009 when compared to 2008,
and $10.4 million, or 11.0%, during 2008 when compared to
2007. Selling, general and administrative expenses as a
percentage of processing and services revenues was 6.4%, 8.2%
and 8.8% during 2009, 2008 and 2007, respectively. The dollar
increases during 2009 when compared to 2008, and during 2008
when compared to 2007, were primarily due to increased personnel
costs associated with the revenue growth in several of our
default management services.
Operating
Income
Operating income increased $87.4 million, or 29.2%, during
2009 when compared to 2008, and $62.2 million, or 26.2%,
during 2008 when compared to 2007. Operating margin was 22.9%,
23.3% and 22.1% during 2009, 2008 and 2007, respectively,
primarily due to the factors described above.
Segment
Results of Operations Corporate and
Other
The Corporate and Other segment consists of corporate overhead
costs that are not included in the other segments as well as
certain smaller operations. Net expenses for this segment were
$88.8 million, $59.0 million and $33.1 million
during 2009, 2008 and 2007, respectively. The increase in net
corporate expenses during 2009 when compared to 2008, and during
2008 when compared to 2007, were primarily due to incremental
public company costs incurred since our spin-off from FIS, as
well as higher stock compensation and other incentive related
costs. Additionally, the increase during 2009 when compared to
2008 was due to a $6.8 million charge recognized during
2009 related to the retirement of three LPS directors. The
increase during 2008 when compared to 2007 was also due to
restructuring and spin-off related charges recognized during
2008. Stock related compensation costs were $28.0 million,
$21.5 million and $14.1 million during 2009, 2008 and
2007, respectively.
Liquidity
and Capital Resources
Cash
Requirements
Our cash requirements include cost of revenues, selling, general
and administrative expenses, income taxes, debt service
payments, capital expenditures, systems development
expenditures, stockholder dividends, and business acquisitions.
Our principal sources of funds are cash generated by operations
and borrowings.
At December 31, 2009, we had cash on hand of
$70.5 million and debt of $1,289.4 million, including
the current portion. We expect that cash flows from operations
over the next twelve months will be sufficient to fund our
operating cash requirements and pay principal and interest on
our outstanding debt absent any unusual circumstances such as
adverse changes in the business environment.
33
We currently pay a dividend of $0.10 per common share on a
quarterly basis, and expect to continue to do so in the future.
The declaration and payment of future dividends is at the
discretion of the Board of Directors, and depends on, among
other things, our investment policy and opportunities, results
of operations, financial condition, cash requirements, future
prospects, and other factors that may be considered relevant by
our Board of Directors, including legal and contractual
restrictions. Additionally, the payment of cash dividends may be
limited by covenants in certain debt agreements. A regular
quarterly dividend of $0.10 per common share is payable
March 30, 2010 to stockholders of record as of the close of
business on March 16, 2010. We continually assess our
capital allocation strategy, including decisions relating to the
amount of our dividend, reduction of debt, repurchases of our
stock and the making of select acquisitions.
We intend to limit dilution caused by option exercises,
including anticipated exercises, by repurchasing shares on the
open market or in privately negotiated transactions. On
June 18, 2009, our Board of Directors approved a plan
authorizing repurchases of common stock
and/or
senior notes of up to $75.0 million, of which
$50.0 million was available to repurchase our senior notes.
On February 5, 2010, our Board of Directors authorized us
to repurchase shares of our common stock
and/or our
senior notes in an amount not to exceed $150.0 million.
This new authorization replaces the previous authorization and
subsumes all amounts remaining available thereunder. The new
plan is effective through March 31, 2012. Our ability to
repurchase shares of common stock or senior notes is subject to
restrictions contained in our senior secured credit agreement
and in the indenture governing our senior unsecured notes.
During the fourth quarter, we repurchased 317,347 shares of
our stock for $12.9 million, at an average price of $40.57
per share. As of December 31, 2009, we had
$44.0 million remaining available under our original
$75.0 million repurchase authorization approved by our
Board of Directors on June 18, 2009, of which
$41.8 million was available to repurchase our senior notes.
Since January 1, 2010, we repurchased 406,000 shares
of our stock for $16.4 million, at an average price of
$40.48 per share.
Operating
Activities
Cash provided by operating activities reflects net income
adjusted for certain non-cash items and changes in certain
assets and liabilities. Cash provided by operating activities
was approximately $443.7 million, $363.9 million and
$283.0 million during 2009, 2008 and 2007, respectively.
The increase in cash provided by operating activities during
2009 when compared to 2008 was primarily related to an increase
in earnings as adjusted for noncash items. The increase in cash
provided by operating activities during 2008 when compared to
2007 was primarily related to improvements in our billing and
collection processes, changes in billing practices for our REO
asset management services and deferred recognition of
implementation fees for several new mortgage processing
customers whom we are converting to our system over an
18-month
period, partially offset by a decrease in net earnings.
Investing
Activities
Investing cash flows consist primarily of capital expenditures
and acquisitions and dispositions. Cash used in investing
activities was approximately $179.7 million,
$82.2 million and $107.9 million during 2009, 2008 and
2007, respectively. The increase in cash used in investing
activities during 2009 when compared to 2008 was primarily
related to the disposition of our IPEX operation in exchange for
the remaining 61% of the equity interest in FNRES, the
acquisitions of Verification Bureau and Rising Tide, the payment
of acquisition related contingent earn-outs, the acquisition of
various title plants, which totaled $17.2 million in 2009,
and the increase in the level of capital expenditures. The
decrease in cash used in investing activities during 2008 when
compared to 2007 was related to a decrease in the level of
acquisitions and capital expenditures.
Our principal capital expenditures are for computer software
(purchased and internally developed) and additions to property
and equipment. We spent approximately $98.8 million,
$62.3 million and $70.6 million on capital
expenditures during 2009, 2008 and 2007, respectively.
Our 2009 acquisitions include Rising Tide, Verification Bureau
and FNRES. We spent (net of cash acquired) approximately
$31.1 million, $19.9 million and $37.3 million
($43.3 million including non-cash consideration) on
acquisitions during 2009, 2008 and 2007, respectively.
34
Financing
Activities
Prior to the spin-off, financing cash flows consisted entirely
of contributions by and distributions to FIS. These primarily
included distributions of excess cash flows to FIS, partially
offset by contributions by FIS to fund payroll, operating
expenses, corporate allocations, income taxes, capital
expenditures and acquisitions. Subsequent to the spin-off,
financing cash flows consist primarily of our borrowings,
related debt issuance costs and service payments, proceeds from
the sale of shares through our employee equity incentive plans,
repurchase of treasury shares, repurchase of noncontrolling
minority interests and payment of dividends to stockholders.
Cash used in financing activities was approximately
$319.4 million, $195.2 million and $183.4 million
during 2009, 2008 and 2007, respectively. The increase in cash
used in financing activities during 2009 when compared to 2008
was primarily related to an increase in debt service payments,
including payment of a portion of our 2010 principal
installments in the amount of $105.0 million, an increase
in dividends paid in 2009 as 2008 only reflected two quarterly
dividend payments following our spin-off from FIS, and an
increase in the level of treasury share repurchases, partially
offset by a decrease in the net distributions to FIS due to the
termination of cash sweep arrangements following our spin-off
from FIS. Approximately $114.9 million of the cash used in
financing activities during 2008 was related to net
distributions to FIS that occurred prior to the spin-off. The
increase in cash used in financing activities during 2008 when
compared to 2007 was primarily due to the payment of debt
issuance costs under our new credit facilities, as well as the
payment of shareholder dividends and debt service payments
following our spin-off from FIS. These items were partially
offset by a decrease in the net distributions to FIS due to the
termination of cash sweep arrangements following our spin-off
from FIS.
Financing
On July 2, 2008, we entered into a Credit Agreement (the
Credit Agreement) among JPMorgan Chase Bank, N.A.,
as Administrative Agent, Swing Line Lender and Letters of Credit
Issuer and various other lenders who are parties to the Credit
Agreement. The Credit Agreement consists of: (i) a
5-year
revolving credit facility in an aggregate principal amount
outstanding at any time not to exceed $140.0 million (with
a $25.0 million
sub-facility
for Letters of Credit) under which no borrowings were
outstanding at December 31, 2009; (ii) a Term A Loan
in an initial aggregate principal amount of $700.0 million
under which $420.0 million was outstanding at
December 31, 2009; and (iii) a Term B Loan in an
initial aggregate principal amount of $510.0 million under
which $502.4 million was outstanding at December 31,
2009. Proceeds from disbursements under the
5-year
revolving credit facility are to be used for general corporate
purposes.
The loans under the Credit Agreement bear interest at a floating
rate, which is an applicable margin plus, at our option, either
(a) the Eurodollar (LIBOR) rate or (b) the higher of
(i) the prime rate or (ii) the federal funds rate plus
0.5% (the higher of clauses (i) and (ii), the ABR
rate). The annual margin on the Term A Loan and the
revolving credit facility is a percentage per annum to be
determined in accordance with a leverage ratio-based pricing
grid and on the Term B Loan is 2.5% in the case of LIBOR loans
and 1.5% in the case of ABR rate loans. At December 31,
2009, the rate on the Term A Loan was 2.48% and the rate on
the Term B Loan was 2.73%.
In addition to the scheduled principal payments, the Term Loans
are (with certain exceptions) subject to mandatory prepayment
upon issuances of debt, casualty and condemnation events, and
sales of assets, as well as from up to 50% of excess cash flow
(as defined in the Credit Agreement) in excess of an agreed
threshold commencing with the cash flow for the year ended
December 31, 2009. Voluntary prepayments of the loans are
generally permitted at any time without fee upon proper notice
and subject to a minimum dollar requirement. However, optional
prepayments of the Term B Loan in the first year after issuance
made with the proceeds of certain loans having an interest
spread lower than the Term B Loan are required to be made at
101% of the principal amount repaid. Commitment reductions of
the revolving credit facility are also permitted at any time
without fee upon proper notice. The revolving credit facility
has no scheduled principal payments, but it will be due and
payable in full on July 2, 2013.
The obligations under the Credit Agreement are jointly and
severally, unconditionally guaranteed by certain of our domestic
subsidiaries. Additionally, the Company and such subsidiary
guarantors pledged substantially all of our respective assets as
collateral security for the obligations under the Credit
Agreement and our respective guarantees.
35
The Credit Agreement contains customary affirmative, negative
and financial covenants including, among other things, limits on
the creation of liens, limits on the incurrence of indebtedness,
restrictions on investments and dispositions, limits on the
payment of dividends and other restricted payments, a minimum
interest coverage ratio and a maximum leverage ratio. Upon an
event of default, the administrative agent can accelerate the
maturity of the loan. Events of default include events customary
for such an agreement, including failure to pay principal and
interest in a timely manner and breach of covenants. These
events of default include a cross-default provision that permits
the lenders to declare the Credit Agreement in default if
(i) we fail to make any payment after the applicable grace
period under any indebtedness with a principal amount in excess
of a specified amount or (ii) we fail to perform any other
term under any such indebtedness, as a result of which the
holders thereof may cause it to become due and payable prior to
its maturity.
On July 2, 2008, we issued senior notes (the
Notes) in an initial aggregate principal amount of
$375.0 million under which $367.0 million was
outstanding at December 31, 2009. The Notes were issued
pursuant to an Indenture dated July 2, 2008 (the
Indenture) among the Company, the guarantors party
thereto and U.S. Bank Corporate Trust Services, as
Trustee.
The Notes bear interest at a rate of 8.125% per annum. Interest
payments are due semi-annually each January 1 and July 1.
The maturity date of the Notes is July 1, 2016. From time
to time we may be in the market to repurchase portions of the
Notes, subject to limitations set forth in the Credit Agreement.
The Notes are our general unsecured obligations. Accordingly,
they rank equally in right of payment with all of our existing
and future unsecured senior debt; senior in right of payment to
all of our future subordinated debt; effectively subordinated to
our existing and future secured debt to the extent of the assets
securing such debt, including all borrowings under our credit
facilities; and effectively subordinated to all of the
liabilities of our non-guarantor subsidiaries, including trade
payables and preferred stock.
The Notes are guaranteed by each existing and future domestic
subsidiary that is a guarantor under our credit facilities. The
guarantees are general unsecured obligations of the guarantors.
Accordingly, they rank equally in right of payment with all
existing and future unsecured senior debt of our guarantors;
senior in right of payment with all existing and future
subordinated debt of such guarantors; and effectively
subordinated to such guarantors existing and future
secured debt to the extent of the assets securing such debt,
including the guarantees by the guarantors of obligations under
our credit facilities.
LPS has no independent assets or operations, our
subsidiaries guarantees are full and unconditional and
joint and several, and our subsidiaries, other than subsidiary
guarantors, are minor. There are no significant restrictions on
the ability of LPS or any of the subsidiary guarantors to obtain
funds from any of our subsidiaries by dividend or loan.
We may redeem some or all of the Notes on or after July 1,
2011, at the redemption prices described in the Indenture, plus
accrued and unpaid interest. Upon the occurrence of a change of
control, unless we have exercised our right to redeem all of the
Notes as described above, each holder may require us to
repurchase such holders Notes, in whole or in part, at a
purchase price equal to 101% of the principal amount thereof
plus accrued and unpaid interest to the purchase date. During
2009, we repurchased $8.0 million face value of the Notes
for $8.2 million.
The Indenture contains customary events of default, including a
cross default provision that, with respect to any other debt of
the Company or any of our restricted subsidiaries having an
outstanding principal amount equal to or more than a specified
amount in the aggregate for all such debt, occurs upon
(i) an event of default that results in such debt being due
and payable prior to its scheduled maturity or (ii) failure
to make a principal payment. Upon the occurrence of an event of
default (other than a bankruptcy default with respect to the
Company), the trustee or holders of at least 25% of the Notes
then outstanding may accelerate the Notes by giving us
appropriate notice. If, however, a bankruptcy default occurs
with respect to the Company, then the principal of and accrued
interest on the Notes then outstanding will accelerate
immediately without any declaration or other act on the part of
the trustee or any holder.
36
Interest
Rate Swaps
We have entered into interest rate swap transactions in order to
convert a portion of our interest rate exposure on our floating
rate debt from variable to fixed. We have designated these
interest rate swaps as cash flow hedges. It is our policy to
execute such instruments with credit-worthy banks and not to
enter into derivative financial instruments for speculative
purposes. See note 9 to the notes to consolidated financial
statements for a detailed description of our interest rate swaps.
Contractual
Obligations
Our long-term contractual obligations generally include our
debt, data processing and maintenance commitments and operating
lease payments on certain of our property and equipment and
deferred compensation obligations. As of December 31, 2009,
our required annual payments relating to these contractual
obligations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
|
Total
|
|
|
Long-term debt
|
|
$
|
40,100
|
|
|
$
|
145,100
|
|
|
$
|
145,100
|
|
|
$
|
110,100
|
|
|
$
|
481,950
|
|
|
$
|
367,000
|
|
|
$
|
1,289,350
|
|
Interest on long-term debt
|
|
|
69,771
|
|
|
|
52,764
|
|
|
|
49,157
|
|
|
|
44,872
|
|
|
|
36,551
|
|
|
|
59,725
|
|
|
|
312,840
|
|
Data processing and maintenance commitments
|
|
|
22,960
|
|
|
|
20,903
|
|
|
|
17,948
|
|
|
|
5,481
|
|
|
|
5,481
|
|
|
|
|
|
|
|
72,773
|
|
Operating lease payments
|
|
|
20,355
|
|
|
|
16,048
|
|
|
|
14,588
|
|
|
|
9,002
|
|
|
|
2,326
|
|
|
|
89
|
|
|
|
62,408
|
|
Deferred compensation (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,855
|
|
|
|
19,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
153,186
|
|
|
$
|
234,815
|
|
|
$
|
226,793
|
|
|
$
|
169,455
|
|
|
$
|
526,308
|
|
|
$
|
446,669
|
|
|
$
|
1,757,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Deferred compensation is presented as payable after 2014 because
of the uncertain timing of the payables. |
Indemnifications
and Warranties
We often indemnify our customers against damages and costs
resulting from claims of patent, copyright, or trademark
infringement associated with use of our software through
software licensing agreements. Historically, we have not made
any payments under such indemnifications, but continue to
monitor the conditions that are subject to the indemnifications
to identify whether a loss has occurred that is both probable
and estimable that would require recognition. In addition, we
warrant to customers that our software operates substantially in
accordance with the software specifications. Historically, no
costs have been incurred related to software warranties and none
are expected in the future, and as such no accruals for warranty
costs have been made.
Tax
Indemnification Agreement
Under the tax disaffiliation agreement entered into by our
former parent and us in connection with the distribution, we are
required to indemnify FIS against all tax related liabilities
caused by the failure of the spin-off to qualify for tax-free
treatment for United States Federal income tax purposes
(including as a result of Section 355(e) of the Code) to
the extent these liabilities arise as a result of any action
taken by us or any of our affiliates following the spin-off or
otherwise result from any breach of any representation, covenant
or obligation of our company or any of our affiliates under the
tax disaffiliation agreement.
Off-Balance
Sheet Arrangements
We do not have any material off-balance sheet arrangements other
than operating leases and the escrow arrangements described
below.
Escrow
Arrangements
In conducting our title agency, closing and tax services, we
routinely hold customers assets in escrow accounts,
pending completion of real estate related transactions. Certain
of these amounts are maintained in segregated accounts, and
these amounts have not been included in the accompanying
consolidated balance sheets.
37
As an incentive for holding deposits at certain banks, we
periodically have programs for realizing economic benefits
through favorable arrangements with these banks. As of
December 31, 2009, the aggregate value of all amounts held
in escrow in our title agency, closing and tax services
operations totaled $144.9 million.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
In the normal course of business, we are routinely subject to a
variety of risks, including those described in Item 1A:
Risk Factors of Part I of this report. For example, we are
exposed to the risk that decreased lending and real estate
activity, which depend in part on the level of interest rates,
may reduce demand for certain of our services and adversely
affect our results of operations. The risks related to our
business also include certain market risks that may affect our
debt and other financial instruments. In particular, we face the
market risks associated with our cash equivalents and interest
rate movements on our outstanding debt. We regularly assess
market risks and have established policies and business
practices to protect against the adverse effects of these
exposures.
Our cash equivalents are predominantly invested with high credit
quality financial institutions, and consist of short-term
investments such as money market accounts, money market funds
and time deposits.
We are a highly leveraged company, with approximately
$1,289.4 million in long-term debt outstanding as of
December 31, 2009. We have entered into interest rate swap
transactions which converted a portion of the interest rate
exposure on our floating rate debt from variable to fixed. We
performed a sensitivity analysis based on the principal amount
of our floating rate debt as of December 31, 2009, less the
principal amount of such debt that was then subject to an
interest rate swap. This sensitivity analysis takes into account
scheduled principal installments that will take place in the
next 12 months as well as the related notional amount of
interest rate swaps then outstanding. Further, in this
sensitivity analysis, the change in interest rates is assumed to
be applicable for the entire year. Of the remaining variable
rate debt not covered by the swap arrangements, we estimate that
a one percent increase in the LIBOR rate would increase our
annual interest expense by approximately $3.9 million.
38
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
|
|
|
|
|
|
|
Page
|
|
|
Number
|
|
|
|
|
40
|
|
|
|
|
41
|
|
|
|
|
42
|
|
|
|
|
43
|
|
|
|
|
44
|
|
|
|
|
45
|
|
|
|
|
46
|
|
|
|
|
47
|
|
39
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Lender Processing Services, Inc.:
We have audited Lender Processing Services, Inc.s and
subsidiaries (the Company) internal control over financial
reporting as of December 31, 2009, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
our assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Lender Processing Services, Inc. and
subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of
December 31, 2009, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Lender Processing Services, Inc.
and subsidiaries as of December 31, 2009 and 2008, and the
related consolidated statements of earnings, comprehensive
earnings, stockholders equity and cash flows for each of
the years in the three-year period ended December 31, 2009,
and our report dated February 23, 2010 expressed an
unqualified opinion on those consolidated financial statements.
February 23, 2010
Jacksonville, Florida
Certified Public Accountants
40
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Lender Processing Services, Inc.:
We have audited the accompanying consolidated balance sheets of
Lender Processing Services, Inc. and subsidiaries (the Company)
as of December 31, 2009 and 2008, and the related
consolidated statements of earnings, comprehensive earnings,
stockholders equity and cash flows for each of the years
in the three-year period ended December 31, 2009. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated statements referred to above
present fairly, in all material respects, the financial position
of Lender Processing Services, Inc. and subsidiaries as of
December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2009, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Lender Processing Services, Inc.s and subsidiaries
internal control over financial reporting as of
December 31, 2009, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated February 23, 2010 expressed an
unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.
As discussed in note 1 to the consolidated statements, the
Company completed its spin-off from Fidelity National
Information Services, Inc. on July 2, 2008.
February 23, 2010
Jacksonville, Florida
Certified Public Accountants
41
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
70,528
|
|
|
$
|
125,966
|
|
Trade receivables, net (note 2)
|
|
|
401,333
|
|
|
|
344,848
|
|
Other receivables
|
|
|
3,770
|
|
|
|
17,393
|
|
Due from affiliates
|
|
|
|
|
|
|
2,713
|
|
Prepaid expenses and other current assets
|
|
|
26,985
|
|
|
|
22,030
|
|
Deferred income taxes, net (note 12)
|
|
|
47,528
|
|
|
|
40,757
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
550,144
|
|
|
|
553,707
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net (note 5)
|
|
|
113,108
|
|
|
|
95,542
|
|
Computer software, net (note 6)
|
|
|
185,376
|
|
|
|
157,539
|
|
Other intangible assets, net (note 7)
|
|
|
72,796
|
|
|
|
83,489
|
|
Goodwill
|
|
|
1,166,142
|
|
|
|
1,091,056
|
|
Other non-current assets
|
|
|
109,738
|
|
|
|
122,300
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,197,304
|
|
|
$
|
2,103,633
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
40,100
|
|
|
$
|
145,101
|
|
Trade accounts payable
|
|
|
38,166
|
|
|
|
31,720
|
|
Accrued salaries and benefits
|
|
|
54,376
|
|
|
|
36,492
|
|
Recording and transfer tax liabilities
|
|
|
15,208
|
|
|
|
14,639
|
|
Due to affiliates
|
|
|
3,321
|
|
|
|
1,573
|
|
Other accrued liabilities
|
|
|
151,601
|
|
|
|
101,612
|
|
Deferred revenues
|
|
|
66,602
|
|
|
|
51,628
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
369,374
|
|
|
|
382,765
|
|
|
|
|
|
|
|
|
|
|
Deferred revenues
|
|
|
37,681
|
|
|
|
40,343
|
|
Deferred income taxes, net (note 12)
|
|
|
65,215
|
|
|
|
36,557
|
|
Long-term debt, net of current portion
|
|
|
1,249,250
|
|
|
|
1,402,350
|
|
Other non-current liabilities
|
|
|
19,926
|
|
|
|
39,217
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,741,446
|
|
|
|
1,901,232
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (note 10)
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Lender Processing Services, Inc. stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock $0.0001 par value; 50 million shares
authorized, none issued and outstanding at December 31,
2009 and 2008, respectively
|
|
|
|
|
|
|
|
|
Common stock $0.0001 par value; 500 million shares
authorized, 97.0 million and 95.3 million shares
issued and outstanding at December 31, 2009 and 2008,
respectively
|
|
|
10
|
|
|
|
9
|
|
Additional paid-in capital
|
|
|
173,424
|
|
|
|
111,849
|
|
Retained earnings
|
|
|
330,963
|
|
|
|
93,540
|
|
Accumulated other comprehensive earnings (loss)
|
|
|
(7,630
|
)
|
|
|
(13,667
|
)
|
Treasury stock $0.0001 par value; 1,209,920 shares and
19,870 shares at December 31, 2009 and 2008,
respectively, at cost
|
|
|
(40,909
|
)
|
|
|
(582
|
)
|
|
|
|
|
|
|
|
|
|
Total Lender Processing Services, Inc. stockholders equity
|
|
|
455,858
|
|
|
|
191,149
|
|
Noncontrolling minority interest
|
|
|
|
|
|
|
11,252
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
455,858
|
|
|
|
202,401
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
2,197,304
|
|
|
$
|
2,103,633
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
42
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
Years ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Processing and services revenues (note 3)
|
|
$
|
2,370,548
|
|
|
$
|
1,837,590
|
|
|
$
|
1,638,622
|
|
Cost of revenues (note 3)
|
|
|
1,571,003
|
|
|
|
1,176,479
|
|
|
|
1,050,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
799,545
|
|
|
|
661,111
|
|
|
|
588,136
|
|
Selling, general, and administrative expenses (note 3)
|
|
|
267,339
|
|
|
|
229,875
|
|
|
|
192,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
532,206
|
|
|
|
431,236
|
|
|
|
395,514
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,654
|
|
|
|
1,605
|
|
|
|
1,690
|
|
Interest expense
|
|
|
(84,630
|
)
|
|
|
(49,927
|
)
|
|
|
(146
|
)
|
Other expense, net
|
|
|
(248
|
)
|
|
|
273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(83,224
|
)
|
|
|
(48,049
|
)
|
|
|
1,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes and
equity in losses of unconsolidated entity
|
|
|
448,982
|
|
|
|
383,187
|
|
|
|
397,058
|
|
Provision for income taxes
|
|
|
171,735
|
|
|
|
146,569
|
|
|
|
153,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before equity in losses of
unconsolidated entity
|
|
|
277,247
|
|
|
|
236,618
|
|
|
|
243,374
|
|
Equity in losses of unconsolidated entity
|
|
|
(37
|
)
|
|
|
(4,687
|
)
|
|
|
(3,048
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
|
277,210
|
|
|
|
231,931
|
|
|
|
240,326
|
|
Discontinued operation, net of tax
|
|
|
(504
|
)
|
|
|
158
|
|
|
|
17,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
276,706
|
|
|
|
232,089
|
|
|
|
257,824
|
|
Net earnings attributable to noncontrolling minority interest
|
|
|
(977
|
)
|
|
|
(1,201
|
)
|
|
|
(1,019
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Lender Processing Services,
Inc.
|
|
$
|
275,729
|
|
|
$
|
230,888
|
|
|
$
|
256,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts attributable to Lender Processing Services, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations, net of tax
|
|
$
|
276,233
|
|
|
$
|
230,730
|
|
|
$
|
239,307
|
|
Discontinued operation, net of tax
|
|
|
(504
|
)
|
|
|
158
|
|
|
|
17,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
275,729
|
|
|
$
|
230,888
|
|
|
$
|
256,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share basic from continuing
operations
|
|
$
|
2.88
|
|
|
$
|
2.42
|
|
|
$
|
2.46
|
|
Net earnings per share basic from discontinued
operation
|
|
|
|
|
|
|
|
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share basic
|
|
$
|
2.88
|
|
|
$
|
2.42
|
|
|
$
|
2.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic(1)
|
|
|
95,632
|
|
|
|
95,353
|
|
|
|
97,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share diluted from continuing
operations
|
|
$
|
2.87
|
|
|
$
|
2.41
|
|
|
$
|
2.45
|
|
Net earnings per share diluted from discontinued
operation
|
|
|
|
|
|
|
|
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share diluted
|
|
$
|
2.87
|
|
|
$
|
2.41
|
|
|
$
|
2.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted(1)
|
|
|
96,152
|
|
|
|
95,754
|
|
|
|
97,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Earnings per share data for the years ended December 31,
2008 and 2007 is reflected on a pro forma basis (note 2) |
See accompanying notes to consolidated financial statements.
43
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
Years ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Net earnings attributable to Lender Processing Services,
Inc.
|
|
$
|
275,729
|
|
|
$
|
230,888
|
|
|
$
|
256,805
|
|
Other comprehensive earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on other investments, net of tax
|
|
|
(163
|
)
|
|
|
671
|
|
|
|
|
|
Unrealized gain (loss) on interest rate swaps, net of tax(1)
|
|
|
6,200
|
|
|
|
(14,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings
|
|
|
6,037
|
|
|
|
(13,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive earnings attributable to Lender Processing
Services, Inc.
|
|
$
|
281,766
|
|
|
$
|
217,221
|
|
|
$
|
256,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net of income tax expense (benefit) of $4.0 million and
$(9.0) million for the years ended December 31, 2009
and 2008. |
See accompanying notes to consolidated financial statements.
44
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
Years ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lender Processing Services, Inc. Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
FISs
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Earnings
|
|
|
Treasury
|
|
|
Treasury
|
|
|
Minority
|
|
|
Total
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Equity
|
|
|
Capital
|
|
|
Earnings
|
|
|
(Loss)
|
|
|
Shares
|
|
|
Stock
|
|
|
Interest
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Balances, December 31, 2006
|
|
|
|
|
|
$
|
|
|
|
$
|
1,577,531
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
9,032
|
|
|
$
|
1,586,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Lender Processing Services,
Inc.
|
|
|
|
|
|
|
|
|
|
|
256,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
256,805
|
|
Net earnings attributable to noncontrolling minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,019
|
|
|
|
1,019
|
|
Net distribution to FIS
|
|
|
|
|
|
|
|
|
|
|
(163,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(163,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
1,671,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,051
|
|
|
|
1,681,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Lender Processing Services, Inc.
(January 1, 2008 to June 20, 2008)
|
|
|
|
|
|
|
|
|
|
|
118,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118,295
|
|
Net earnings attributable to noncontrolling minority interest
(January 1, 2008 to June 20, 2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
562
|
|
|
|
562
|
|
Net contribution by (distribution to) FIS
|
|
|
|
|
|
|
|
|
|
|
(121,677
|
)
|
|
|
14,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107,043
|
)
|
Capitalization of Lender Processing Services, Inc.
|
|
|
1
|
|
|
|
|
|
|
|
(1,667,657
|
)
|
|
|
1,667,268
|
|
|
|
|
|
|
|
389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution of common stock
|
|
|
94,610
|
|
|
|
9
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of note payable to FIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,585,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,585,000
|
)
|
Net earnings attributable to Lender Processing Services, Inc.
(June 21, 2008 to December 31, 2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,593
|
|
Net earnings attributable to noncontrolling minority interest
(June 21, 2008 to December 31, 2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
639
|
|
|
|
639
|
|
Issuance of restricted stock
|
|
|
521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,053
|
)
|
Exercise of stock options and restricted stock vesting
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
2,030
|
|
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
(582
|
)
|
|
|
|
|
|
|
1,448
|
|
Tax benefit associated with equity compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
533
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,393
|
|
Unrealized gain on investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282
|
|
Unrealized loss on interest rate swaps, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2008
|
|
|
95,284
|
|
|
|
9
|
|
|
|
|
|
|
|
111,849
|
|
|
|
93,540
|
|
|
|
(13,667
|
)
|
|
|
(20
|
)
|
|
|
(582
|
)
|
|
|
11,252
|
|
|
|
202,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net distribution to FIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(434
|
)
|
Net earnings attributable to Lender Processing Services,
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275,729
|
|
Net earnings attributable to noncontrolling minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
977
|
|
|
|
977
|
|
Acquisition of outstanding noncontrolling minority interest
(note 4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,229
|
)
|
|
|
(6,850
|
)
|
Issuance of restricted stock
|
|
|
480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,306
|
)
|
Exercise of stock options and restricted stock vesting
|
|
|
1,285
|
|
|
|
1
|
|
|
|
|
|
|
|
25,667
|
|
|
|
|
|
|
|
|
|
|
|
(573
|
)
|
|
|
(17,570
|
)
|
|
|
|
|
|
|
8,098
|
|
Tax benefit associated with equity compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,921
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,042
|
|
Treasury stock repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(617
|
)
|
|
|
(22,757
|
)
|
|
|
|
|
|
|
(22,757
|
)
|
Unrealized gain on investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(163
|
)
|
Unrealized loss on interest rate swaps, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2009
|
|
|
97,049
|
|
|
$
|
10
|
|
|
$
|
|
|
|
$
|
173,424
|
|
|
$
|
330,963
|
|
|
$
|
(7,630
|
)
|
|
|
(1,210
|
)
|
|
$
|
(40,909
|
)
|
|
$
|
|
|
|
$
|
455,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Dividends were paid at $0.10 per common share per quarter.
|
See accompanying notes to consolidated financial statements.
45
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
Years ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
275,729
|
|
|
$
|
230,888
|
|
|
$
|
256,805
|
|
Adjustments to reconcile net earnings to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
97,922
|
|
|
|
93,416
|
|
|
|
102,607
|
|
Amortization of debt issuance costs
|
|
|
5,404
|
|
|
|
3,002
|
|
|
|
|
|
Gain on sale of discontinued operation
|
|
|
(2,574
|
)
|
|
|
|
|
|
|
|
|
Deferred income taxes, net
|
|
|
25,463
|
|
|
|
(28
|
)
|
|
|
12,840
|
|
Stock-based compensation cost
|
|
|
28,042
|
|
|
|
21,513
|
|
|
|
14,057
|
|
Income tax benefit from exercise of stock options
|
|
|
(2,921
|
)
|
|
|
(533
|
)
|
|
|
|
|
Equity in losses of unconsolidated entity
|
|
|
37
|
|
|
|
4,687
|
|
|
|
3,048
|
|
Minority interest
|
|
|
977
|
|
|
|
1,201
|
|
|
|
1,019
|
|
Changes in assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
(49,602
|
)
|
|
|
(57,918
|
)
|
|
|
(99,234
|
)
|
Other receivables
|
|
|
13,637
|
|
|
|
(9,423
|
)
|
|
|
28,325
|
|
Prepaid expenses and other assets
|
|
|
(11,578
|
)
|
|
|
11,666
|
|
|
|
(23,135
|
)
|
Deferred revenues
|
|
|
11,316
|
|
|
|
10,501
|
|
|
|
(29,946
|
)
|
Accounts payable, accrued liabilities and other liabilities
|
|
|
51,836
|
|
|
|
54,888
|
|
|
|
16,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
443,688
|
|
|
|
363,860
|
|
|
|
282,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
|
(40,890
|
)
|
|
|
(23,012
|
)
|
|
|
(20,754
|
)
|
Additions to capitalized software
|
|
|
(57,885
|
)
|
|
|
(39,276
|
)
|
|
|
(49,798
|
)
|
Acquisition of title plants
|
|
|
(17,219
|
)
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired
|
|
|
(31,103
|
)
|
|
|
(19,938
|
)
|
|
|
(37,305
|
)
|
Proceeds from sale of discontinued operations, net of cash
distributed
|
|
|
(32,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(179,735
|
)
|
|
|
(82,226
|
)
|
|
|
(107,857
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
|
|
|
|
25,700
|
|
|
|
|
|
Debt service payments
|
|
|
(254,497
|
)
|
|
|
(63,272
|
)
|
|
|
|
|
Capitalized debt issuance costs
|
|
|
|
|
|
|
(25,735
|
)
|
|
|
|
|
Exercise of stock options and restricted stock vesting
|
|
|
8,098
|
|
|
|
1,448
|
|
|
|
|
|
Tax benefit associated with equity compensation
|
|
|
2,921
|
|
|
|
533
|
|
|
|
|
|
Dividends paid
|
|
|
(38,306
|
)
|
|
|
(19,053
|
)
|
|
|
|
|
Treasury stock repurchases
|
|
|
(22,757
|
)
|
|
|
|
|
|
|
|
|
Bond repurchases
|
|
|
(8,000
|
)
|
|
|
|
|
|
|
|
|
Acquisition of outstanding noncontrolling minority interest
|
|
|
(6,850
|
)
|
|
|
|
|
|
|
|
|
Net distributions to FIS
|
|
|
|
|
|
|
(114,855
|
)
|
|
|
(183,354
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(319,391
|
)
|
|
|
(195,234
|
)
|
|
|
(183,354
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(55,438
|
)
|
|
|
86,400
|
|
|
|
(8,217
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
125,966
|
|
|
|
39,566
|
|
|
|
47,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
70,528
|
|
|
$
|
125,966
|
|
|
$
|
39,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
81,698
|
|
|
$
|
32,330
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$
|
154,595
|
|
|
$
|
62,229
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash contribution of stock compensation by FIS
|
|
$
|
|
|
|
$
|
9,120
|
|
|
$
|
14,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash contribution for Espiel acquisition
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash redistribution of assets to FIS
|
|
$
|
434
|
|
|
$
|
(1,308
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash exchange of FIS note
|
|
$
|
|
|
|
$
|
(1,585,000
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash consideration received from sale of discontinued
operation
|
|
$
|
40,310
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash consideration issued in acquisition of business
|
|
$
|
(5,162
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
46
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Except as otherwise indicated or unless the context otherwise
requires, all references to LPS, we, the
Company, or the registrant are to Lender
Processing Services, Inc., a Delaware corporation that was
incorporated in December 2007 as a wholly-owned subsidiary of
FIS, and its subsidiaries; all references to FIS,
the former parent, or the holding
company are to Fidelity National Information Services,
Inc., a Georgia corporation formerly known as Certegy Inc., and
its subsidiaries, that owned all of LPSs shares until
July 2, 2008; all references to former FIS are
to Fidelity National Information Services, Inc., a Delaware
corporation, and its subsidiaries, prior to the Certegy merger
described below; all references to old FNF are to
Fidelity National Financial, Inc., a Delaware corporation that
owned a majority of former FISs shares through
November 9, 2006; and all references to FNF are
to Fidelity National Financial, Inc. (formerly known as Fidelity
National Title Group, Inc.), formerly a subsidiary of old
FNF but now a stand-alone company.
|
|
(1)
|
Description
of Business
|
Lender
Processing Services, Inc. Spin-off Transaction
Our former parent, Fidelity National Information Services, Inc.,
is a Georgia corporation formerly known as Certegy Inc. In
February 2006, Certegy Inc. merged with and into Fidelity
National Information Services, Inc., a Delaware corporation,
which we refer to as former FIS. Certegy Inc. survived the
merger, which we refer to as the Certegy merger, to form our
former parent. Following the Certegy merger, Certegy Inc. was
renamed Fidelity National Information Services, Inc., which we
refer to as FIS. Prior to the Certegy merger, former FIS was a
majority-owned subsidiary of Fidelity National Financial, Inc.,
which we refer to as old FNF. Old FNF merged into our former
parent in November 2006 as part of a reorganization, which
included old FNFs spin-off of Fidelity National
Title Group, Inc. Fidelity National Title Group, Inc.
was renamed Fidelity National Financial, Inc. following this
reorganization, and we refer to it as FNF. FNF is now a
stand-alone company, but remained a related entity from an
accounting perspective through March 15, 2009.
In October 2007, the board of directors of FIS approved a plan
of restructuring pursuant to which FIS would spin off its lender
processing services segment to its shareholders in a tax free
distribution. Pursuant to this plan of restructuring, on
June 16, 2008, FIS contributed to us all of its interest in
the assets, liabilities, businesses and employees related to
FISs lender processing services operations in exchange for
shares of our common stock and $1,585.0 million aggregate
principal amount of our debt obligations, including our new
senior notes and debt obligations under our new credit facility
described in note 9. On June 20, 2008, FIS received a
private letter ruling from the Internal Revenue Service with
respect to the tax-free nature of the plan of restructuring and
distribution, and the Companys registration statement on
Form 10 with respect to the distribution was declared
effective by the Securities and Exchange Commission.
On July 2, 2008, FIS distributed to its shareholders a
dividend of one-half share of our common stock, par value
$0.0001 per share, for each issued and outstanding share of FIS
common stock held on June 24, 2008, which we refer to as
the spin-off. Also on July 2, 2008, FIS
exchanged 100% of our debt obligations for a like amount of
FISs existing Tranche B Term Loans issued under its
Credit Agreement dated as of January 18, 2007. The spin-off
was tax-free to FIS and its shareholders, and the
debt-for-debt
exchange undertaken in connection with the spin-off was tax-free
to FIS. On July 3, 2008, we commenced regular way trading
on the New York Stock Exchange under the trading symbol
LPS. Prior to the spin-off, we were a wholly-owned
subsidiary of FIS.
Reporting
Segments
We are a provider of integrated technology and outsourced
services to the mortgage lending industry, with mortgage
processing and default management services in the U.S. We
conduct our operations through two reporting segments,
Technology, Data and Analytics and Loan Transaction Services.
47
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our Technology, Data and Analytics segment principally includes:
|
|
|
|
|
our mortgage processing services, which we conduct using our
mortgage servicing platform and our team of experienced support
personnel based primarily at our Jacksonville, Florida data
center;
|
|
|
|
our Desktop application, a workflow system that assists our
customers in managing business processes, which today is
primarily used in connection with mortgage loan default
management, but which has broader applications;
|
|
|
|
our other software and related service offerings, including our
mortgage origination software, our real estate closing and title
insurance production software and our middleware application,
which provides collaborative network connectivity among mortgage
industry participants; and
|
|
|
|
our data and analytics businesses, the most significant of which
are our alternative property valuations business, which provides
a range of valuations other than traditional appraisals, our
aggregated property and loan data services, our fraud detection
solutions and our advanced analytic services, which assist our
customers in their loan marketing, loss mitigation and fraud
prevention efforts.
|
Our Loan Transaction Services segment offers a range of services
used mainly in the production of a mortgage loan, which we refer
to as our loan facilitation services, and in the management of
mortgage loans that go into default, which we refer to as
default management services.
Our loan facilitation services include:
|
|
|
|
|
settlement services, which consist of title agency services, in
which we act as an agent for title insurers, closing services,
in which we assist in the closing of real estate transactions,
and lien recording and release services;
|
|
|
|
appraisal services, which consist of traditional appraisal and
appraisal management services; and
|
|
|
|
other origination services, which consist of flood zone
information, which assists lenders in determining whether a
property is in a federally designated flood zone, and real
estate tax services, which provide lenders with information
about the tax status of a property.
|
Our default management services include, among others:
|
|
|
|
|
foreclosure management services, including access to a
nationwide network of independent attorneys, mandatory title
searches, posting and publishing, and recording and other
services;
|
|
|
|
property inspection and preservation services, designed to
preserve the value of properties securing defaulted
loans; and
|
|
|
|
asset management services, providing disposition services for
our customers real estate owned properties through a
network of independent real estate brokers, attorneys and other
vendors to facilitate the transaction.
|
Corporate overhead costs, including stock compensation expense,
and other operations that are not included in our operating
segments are included in Corporate and Other.
|
|
(2)
|
Significant
Accounting Policies
|
The following describes our significant accounting policies
which have been followed in preparing the accompanying
consolidated financial statements.
48
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(a) Principles
of Consolidation and Combination and Basis of
Presentation
The accompanying consolidated financial statements were prepared
in accordance with generally accepted accounting principles
(GAAP) and all adjustments considered necessary for
a fair presentation have been included. All significant
intercompany accounts and transactions have been eliminated. Our
investments in less than 50% owned affiliates are accounted for
using the equity method of accounting.
Prior to June 21, 2008, the historical financial statements
of the Company were presented on a combined basis. Our
historical financial statements include assets, liabilities,
revenues and expenses directly attributable to our operations.
Our historical financial statements also reflect allocations of
certain corporate expenses from FIS. These expenses have been
allocated to us on a basis that reflects most fairly or
reasonably the utilization of the services provided to or the
benefit obtained by our businesses. These expense allocations
reflect an allocation of a portion of the compensation of
certain senior officers and other personnel of FIS who are not
our employees after the spin-off but who historically provided
services to us. Certain of the amounts allocated reflect a
portion of amounts charged to FIS under agreements entered into
with FNF.
Our historical financial statements do not reflect the debt or
interest expense we might have incurred if we had been a
stand-alone entity. In addition, since the spin-off, we now
incur other expenses not reflected in our historical financial
statements, as a result of being a separate publicly traded
company. As a result, our historical financial statements do not
necessarily reflect what our financial position or results of
operations would have been if we had operated as a stand-alone
public entity during the periods covered, and may not be
indicative of our future results of operations or financial
position.
Beginning June 21, 2008, after all the assets and
liabilities of the lender processing services segment of FIS
were formally contributed by FIS to LPS, the historical
financial statements of the Company have been presented on a
consolidated basis for financial reporting purposes.
(b) Reclassifications
Certain amounts in prior fiscal years have been reclassified to
conform with the presentation adopted in the current fiscal year.
(c) Net
Distribution to FIS
Prior to the spin-off, we participated in a centralized cash
management program with FIS. A significant amount of our cash
disbursements were made through a centralized payable system
which was operated by FIS, and a significant amount of our cash
receipts were received by us and transferred to centralized
accounts maintained by FIS. There were no formal financing
arrangements with FIS and all cash receipts and disbursement
activity was recorded through FISs equity in our
consolidated balance sheets, and as net contributions by or
distributions to FIS in our consolidated statements of
stockholders equity and cash flows because such amounts
were considered to have been contributed by or distributed to
FIS. As a result, there was no net amounts due to or from FIS
which would have required settlement at the spin-off date. Cash
and cash equivalents reflected on our historical balance sheet
represents only those amounts held at our companys level.
The major components of the amounts contributed by or
distributed to FIS relate to our participation in a centralized
cash management program with FIS. These amounts primarily
included distributions of excess cash flows to FIS, partially
offset by contributions by FIS to fund payroll, operating
expenses, corporate allocations, income taxes, capital
expenditures and acquisitions.
49
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The major components of the net distributions to FIS for the
years ended December 31, 2008 and 2007 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
Distribution of cash collections
|
|
$
|
857,591
|
|
|
$
|
1,561,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution of cash disbursements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll
|
|
|
(270,497
|
)
|
|
|
(519,548
|
)
|
|
|
|
|
Other cost of revenues
|
|
|
(336,079
|
)
|
|
|
(576,679
|
)
|
|
|
|
|
Current provision for income taxes
|
|
|
(77,418
|
)
|
|
|
(151,894
|
)
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
(9,376
|
)
|
|
|
(20,754
|
)
|
|
|
|
|
Additions to capitalized software
|
|
|
(15,761
|
)
|
|
|
(49,798
|
)
|
|
|
|
|
Acquisitions, net of cash acquired
|
|
|
(15,488
|
)
|
|
|
(37,305
|
)
|
|
|
|
|
FIS corporate allocations
|
|
|
(18,117
|
)
|
|
|
(22,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(742,736
|
)
|
|
|
(1,378,034
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash distributions to FIS
|
|
|
114,855
|
|
|
|
183,354
|
|
|
|
|
|
Non-cash contribution of stock compensation by FIS
|
|
|
(9,120
|
)
|
|
|
(14,057
|
)
|
|
|
|
|
Non-cash contribution for Espiel acquisition
|
|
|
|
|
|
|
(6,000
|
)
|
|
|
|
|
Non-cash redistribution of assets to FIS
|
|
|
1,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net distribution to FIS
|
|
$
|
107,043
|
|
|
$
|
163,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other cost of revenues primarily includes payments to third
party contractors, occupancy costs, equipment costs, data
processing costs, travel and entertainment and professional fees.
(d) Fair
Value
Fair
Value of Financial Assets and Liabilities
FASB ASC Topic 820, Fair Value Measurements and
Disclosures, establishes the following fair value hierarchy:
|
|
|
|
|
Level 1 Inputs to the valuation methodology are unadjusted
quoted prices for identical assets or liabilities in active
markets that the Company has the ability to access.
|
|
|
|
Level 2 Inputs to the valuation methodology include:
|
|
|
|
|
|
quoted prices for similar assets or liabilities in active
markets;
|
|
|
|
quoted prices for identical or similar assets or liabilities in
inactive markets;
|
|
|
|
inputs other than quoted prices that are observable for the
asset or liability; and
|
|
|
|
inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
|
|
|
|
|
|
Level 3 Inputs to the valuation methodology are
unobservable and significant to the fair value measurement.
|
Assets are classified in their entirety based on the lowest
level of input that is significant to the fair value
measurement. Our valuation methods are appropriate and
consistent with other market participants. The use of different
methodologies or assumptions to determine the fair value of
certain financial instruments could result in a different fair
value measurement at the reporting date.
50
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth by level within the fair value
hierarchy our assets and liabilities measured at fair value on a
recurring basis, as of December 31, 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Classification
|
|
Carrying Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Cash and cash equivalents
|
|
Asset
|
|
$
|
70.5
|
|
|
$
|
70.5
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
70.5
|
|
Long-term debt (note 9)
|
|
Liability
|
|
|
1,289.4
|
|
|
|
390.7
|
|
|
|
912.3
|
|
|
|
|
|
|
|
1,303.0
|
|
Interest rate swaps (note 9)
|
|
Liability
|
|
|
13.2
|
|
|
|
|
|
|
|
13.2
|
|
|
|
|
|
|
|
13.2
|
|
The fair values of other financial instruments, which primarily
include trade receivables and payables and other receivables,
are estimated as of year-end and disclosed elsewhere in these
notes. These estimates are subjective in nature and involve
uncertainties and significant judgment in the interpretation of
current market data. Therefore, the values presented are not
necessarily indicative of amounts we could realize or settle
currently.
Fair
Value of Assets Acquired and Liabilities Assumed
The values of assets acquired and liabilities assumed in
business combinations are estimated using various assumptions.
The most significant assumptions, and those requiring the most
judgment, involve the estimated fair values of intangible assets
and software, with the remaining attributable to goodwill, if
any. The Company utilizes third-party experts to determine the
fair values of intangible assets and software purchased in
business combinations.
(e) Management
Estimates
The preparation of these consolidated financial statements in
conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting periods. The
accounting estimates that require our most significant,
difficult and subjective judgments include the recoverability of
long-lived assets and the recognition of revenue related to
software contracts. Actual results that we experience could
differ from our estimates.
(f) Cash
and Cash Equivalents
Highly liquid instruments purchased with original maturities of
three months or less are considered cash equivalents. Cash
equivalents are predominantly invested with high credit quality
financial institutions and consist of short-term investments,
such as money market accounts, money market funds and time
deposits. The carrying amounts of these instruments reported in
the consolidated balance sheets approximate their fair value
because of their immediate or short-term maturities.
(g) Trade
Receivables, Net
The carrying amounts reported in the consolidated balance sheets
for trade receivables approximate their fair value because of
their immediate or short-term maturities.
51
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of trade receivables, net of an allowance for doubtful
accounts, at December 31, 2009 and 2008 is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Trade receivables billed
|
|
$
|
421,717
|
|
|
$
|
366,411
|
|
Trade receivables unbilled
|
|
|
5,580
|
|
|
|
5,637
|
|
|
|
|
|
|
|
|
|
|
Total trade receivables
|
|
|
427,297
|
|
|
|
372,048
|
|
Allowance for doubtful accounts
|
|
|
(25,964
|
)
|
|
|
(27,200
|
)
|
|
|
|
|
|
|
|
|
|
Total trade receivables, net
|
|
$
|
401,333
|
|
|
$
|
344,848
|
|
|
|
|
|
|
|
|
|
|
The allowance for doubtful accounts represents managements
estimate of those balances that are uncollectible as of the
consolidated balance sheet dates. A summary of the roll forward
of allowance for doubtful accounts for the years ended
December 31, 2009, 2008 and 2007 is as follows (in
thousands):
|
|
|
|
|
Allowance for doubtful accounts as of December 31, 2006
|
|
$
|
(13,067
|
)
|
Bad debt expense
|
|
|
(11,353
|
)
|
Write offs
|
|
|
4,090
|
|
|
|
|
|
|
Allowance for doubtful accounts as of December 31, 2007
|
|
|
(20,330
|
)
|
Bad debt expense
|
|
|
(14,537
|
)
|
Transfers and acquisitions
|
|
|
(23
|
)
|
Write offs
|
|
|
7,690
|
|
|
|
|
|
|
Allowance for doubtful accounts as of December 31, 2008
|
|
|
(27,200
|
)
|
Bad debt expense
|
|
|
(15,443
|
)
|
Transfers and acquisitions
|
|
|
215
|
|
Write offs
|
|
|
16,464
|
|
|
|
|
|
|
Allowance for doubtful accounts as of December 31, 2009
|
|
$
|
(25,964
|
)
|
|
|
|
|
|
(h) Other
Receivables
The carrying amounts reported in the consolidated balance sheets
for other receivables approximate their fair value.
(i) Deferred
Contract Costs
Cost of software sales and outsourced data processing and
application management arrangements, including costs incurred
for bid and proposal activities, are generally expensed as
incurred. However, certain costs incurred upon initiation of a
contract are deferred and expensed over the contract life. These
costs represent incremental external costs or certain specific
internal costs that are directly related to the contract
acquisition or transition activities and are primarily
associated with installation of systems/processes and data
conversion.
In the event indications exist that a deferred contract cost
balance related to a particular contract may be impaired,
undiscounted estimated cash flows of the contract are projected
over its remaining term and compared to the unamortized deferred
contract cost balance. If the projected cash flows are not
adequate to recover the unamortized cost balance, the balance
would be adjusted to equal the contracts net realizable
value, including any termination fees provided for under the
contract, in the period such a determination is made.
52
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2009 and 2008, we had approximately
$27.3 million and $29.7 million, respectively,
recorded as deferred contract costs that were classified in
prepaid expenses and other current assets or other non-current
assets in our consolidated balance sheets. Amortization expense
for deferred contract costs was $5.8 million,
$2.3 million and $1.9 million for the years ended
December 31, 2009, 2008 and 2007, respectively, and is
included in cost of revenues in the accompanying consolidated
statements of earnings.
(j) Long-Lived
Assets
Long-lived assets and intangible assets with definite useful
lives are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is
recognized in the amount by which the carrying amount of the
asset exceeds the fair value of the asset. There have been no
impairment charges during the periods presented.
(k) Property
and Equipment
Property and equipment is recorded at cost, less accumulated
depreciation and amortization. Depreciation and amortization are
computed primarily using the straight-line method based on the
estimated useful lives of the related assets: thirty years for
buildings and three to seven years for furniture, fixtures and
computer equipment. Leasehold improvements are amortized using
the straight-line method over the lesser of the initial terms of
the applicable leases or the estimated useful lives of such
assets.
(l) Computer
Software
Computer software includes the fair value of software acquired
in business combinations, purchased software and capitalized
software development costs. Purchased software is recorded at
cost and amortized using the straight-line method over its
estimated useful life. Software acquired in business
combinations is recorded at its fair value and amortized using
straight-line or accelerated methods over its estimated useful
life, ranging from five to ten years.
Internally developed software costs are amortized using the
greater of the straight-line method over the estimated useful
life or based on the ratio of current revenues to total
anticipated revenue over the estimated useful lives. Useful
lives of computer software range from 3 to 10 years.
Capitalized software development costs are accounted for in
accordance with either ASC Topic 985, Software, Subtopic
20, Costs of Software to Be Sold, Leased, or Marketed
(ASC
985-20),
or ASC Topic 350, Intangibles Goodwill and Other
(ASC 350), Subtopic 40, Internal-Use Software
(ASC
350-40).
For computer software products to be sold, leased, or otherwise
marketed (ASC
985-20
software), all costs incurred to establish the technological
feasibility are research and development costs, and are expensed
as they are incurred. Costs incurred subsequent to establishing
technological feasibility, such as programmers salaries and
related payroll costs and costs of independent contractors, are
development costs, and are capitalized and amortized on a
product by product basis commencing on the date of general
release to customers. We do not capitalize any costs once the
product is available for general release to customers. For
internal-use computer software products (ASC
350-40
software), internal and external costs incurred during the
preliminary project stage are expensed as they are incurred.
Internal and external costs incurred during the application
development stage are capitalized and amortized on a product by
product basis commencing on the date the software is ready for
its intended use. We do not capitalize any costs once the
software is ready for its intended use. We also assess the
recorded value of computer software for impairment on a regular
basis by comparing the carrying value to the estimated future
cash flows to be generated by the underlying software asset.
53
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(m) Intangible
Assets
We have intangible assets which consist primarily of customer
relationships and trademarks that are recorded in connection
with acquisitions at their fair value based on the results of a
valuation analysis. Customer relationships are amortized over
their estimated useful lives using an accelerated method which
takes into consideration expected customer attrition rates over
a period of up to 10 years. Certain trademarks determined
to have indefinite lives are reviewed for impairment at least
annually.
(n) Goodwill
Goodwill represents the excess of cost over the fair value of
identifiable assets acquired and liabilities assumed in business
combinations. Goodwill is not amortized, but is tested for
impairment annually, or more frequently if circumstances
indicate potential impairment, through a comparison of fair
value to the carrying amount. We measure for impairment on an
annual basis during the fourth quarter using a
September 30th measurement date unless circumstances
require a more frequent measurement. Management has determined
that there was no impairment to goodwill during the periods
presented.
(o) Trade
Accounts Payable
The carrying amounts reported in the consolidated balance sheets
for trade accounts payable approximate their fair value because
of their immediate or short-term maturities.
(p) Deferred
Compensation Plan
LPS maintains a deferred compensation plan (the
Plan) which is available to certain LPS management
level employees and directors. The Plan permits participants to
defer receipt of part of their current compensation. Participant
benefits for the Plan are provided by a funded rabbi trust.
The compensation withheld from Plan participants, together with
investment income on the Plan, is recorded as a deferred
compensation obligation to participants and is included as a
long-term liability in the accompanying consolidated balance
sheets. The related plan assets are classified within other
non-current assets in the accompanying consolidated balance
sheets and are reported at market value. The balance of the
deferred compensation liability totaled $19.9 million and
$15.8 million as of December 31, 2009 and 2008,
respectively, and approximates the value of the corresponding
asset.
(q) Derivative
Instruments
We account for derivative financial instruments in accordance
with ASC Topic 815, Derivatives and Hedging (ASC
815). We engage in hedging activities relating to our
variable rate debt through the use of interest rate swaps. We
have designated these interest rate swaps as cash flow hedges.
(r) Revenue
Recognition
The following describes our primary types of revenues and our
revenue recognition policies as they pertain to the types of
transactions we enter into with our customers. We enter into
arrangements with customers to provide services, software and
software related services such as post-contract customer support
and implementation and training either individually or as part
of an integrated offering of multiple services. These services
occasionally include offerings from more than one segment to the
same customer. The revenues for services provided under these
multiple element arrangements are recognized in accordance with
the applicable revenue recognition accounting principles as
further described below.
54
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In our Technology, Data and Analytics segment, we recognize
revenues relating to mortgage processing, outsourced business
processing services, data and analytics services, along with
software licensing and software related services. In some cases,
these services are offered in combination with one another and
in other cases we offer them individually. Revenues from
processing services are typically volume-based depending on
factors such as the number of accounts processed, transactions
processed and computer resources utilized.
The substantial majority of the revenues in our Technology, Data
and Analytics segment are from outsourced data processing, data
and valuation related services, and application management
arrangements. Revenue is realized or realizable and earned when
all of the following criteria are met: (1) persuasive
evidence of an arrangement exists; (2) delivery has
occurred or services have been rendered; (3) the
sellers price to the buyer is fixed or determinable; and
(4) collectability is reasonably assured. Revenues and
costs related to implementation, conversion and programming
services associated with our data processing and application
management agreements during the implementation phase are
deferred and subsequently recognized using the straight-line
method over the term of the related services agreement. We
evaluate these deferred contract costs for impairment in the
event any indications of impairment exist.
In the event that our arrangements with our customers include
more than one service, we determine whether the individual
revenue elements can be recognized separately. We determine
whether an arrangement involving more than one deliverable
contains more than one unit of accounting and how the
arrangement consideration should be measured and allocated to
the separate units of accounting.
If the services are software related services we determine the
appropriate units of accounting and how the arrangement
consideration should be measured and allocated to the separate
units.
Initial license fees are recognized when a contract exists, the
fee is fixed or determinable, software delivery has occurred and
collection of the receivable is deemed probable, provided that
vendor-specific objective evidence (VSOE) has been
established for each element or for any undelivered elements. We
determine the fair value of each element or the undelivered
elements in multi-element software arrangements based on VSOE.
VSOE for each element is based on the price charged when the
same element is sold separately, or in the case of post-contract
customer support, when a stated renewal rate is provided to the
customer. If evidence of fair value of all undelivered elements
exists but evidence does not exist for one or more delivered
elements, then revenue is recognized using the residual method.
Under the residual method, the fair value of the undelivered
elements is deferred and the remaining portion of the
arrangement fee is recognized as revenue. If evidence of fair
value does not exist for one or more undelivered elements of a
contract, then all revenue is deferred until all elements are
delivered or fair value is determined for all remaining
undelivered elements. Revenue from post-contract customer
support is recognized ratably over the term of the agreement. We
record deferred revenue for all billings invoiced prior to
revenue recognition.
In our Loan Transaction Services segment, we recognize revenues
relating to loan facilitation services and default management
services. Revenue derived from software and service arrangements
included in the Loan Transaction Services segment is recognized
as discussed above. Loan facilitation services primarily consist
of centralized title agency services for various types of
lenders. Revenues relating to loan facilitation services are
typically recognized at the time of closing of the related real
estate transaction. Ancillary service fees are recognized when
the service is provided. Default management services assist
customers through the default and foreclosure process, including
property preservation and maintenance services (such as lock
changes, window replacement, debris removal and lawn service),
posting and publication of foreclosure and auction notices,
title searches, document preparation and recording services, and
referrals for legal and property brokerage services. Property
data or data-related services principally include appraisal and
valuation services, property records information, real estate
tax services and borrower credit and flood zone information.
Revenues derived from these services are recognized as the
services are performed as described above.
55
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In addition, our flood and tax units provide various services
including
life-of-loan-monitoring
services. Revenue for
life-of-loan
services is deferred and recognized ratably over the estimated
average life of the loan service period, which is determined
based on our historical experience and industry data. We
evaluate our historical experience on a periodic basis, and
adjust the estimated life of the loan service period
prospectively.
(s) Cost
of Revenue and Selling, General and Administrative
Costs
Cost of revenue includes payroll, employee benefits, occupancy
costs and other costs associated with personnel employed in
customer service roles, including program design and development
and professional services. Cost of revenue also includes data
processing costs, amortization of software and customer
relationship intangible assets and depreciation of operating
assets.
Selling, general, and administrative expenses include payroll,
employee benefits, occupancy and other costs associated with
personnel employed in sales, marketing, human resources and
finance roles. Selling, general, and administrative expenses
also include depreciation of non-operating assets, advertising
costs and other marketing-related programs.
(t) Stock-Based
Compensation Plans
We account for stock-based compensation in accordance with ASC
Topic 718, Compensation Stock Compensation
(ASC 718). Compensation cost is measured based
on the fair value of the award at the grant date and recognized
on a straight-line basis over the vesting period.
(u) Income
Taxes
Prior to the spin-off, our operating results were included in
FISs consolidated U.S. Federal and State income tax
returns and reflect the estimated income taxes we would have
paid as a stand-alone taxable entity. We recognize deferred
income tax assets and liabilities for temporary differences
between the financial reporting basis and the tax basis of our
assets and liabilities and expected benefits of utilizing net
operating loss and credit carryforwards. Deferred income tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. A
valuation allowance is established, if necessary, for the amount
of any tax benefits that, based on available evidence, are not
expected to be realized. The impact on deferred income taxes of
changes in tax rates and laws, if any, is reflected in the
consolidated financial statements in the period enacted. Our
obligation for taxes through the date of the spin-off has been
paid by FIS on our behalf and settled through equity.
(v) Net
Earnings Per Share
The basic weighted average shares and common stock equivalents
are generally computed in accordance with ASC Topic 260,
Earnings Per Share, using the treasury stock method.
However, due to the nature and timing of the spin-off, the
number of outstanding shares issued in the capitalization of the
Company were the only shares outstanding prior to the spin-off.
As such, management believes the resulting GAAP earnings per
share basic and diluted measures are not meaningful
for the years ended December 31, 2008 and 2007, and
therefore, the calculation has been excluded from the
Consolidated Statements of Earnings and the Notes thereto.
Unaudited pro forma weighted average shares
outstanding basic for the year ended
December 31, 2008 is calculated using the average of the
number of shares used to calculate the pro forma weighted
average shares outstanding basic for the three
months ended March 31, 2008 (97,376), June 30, 2008
(94,611), September 30, 2008 (94,667) and December 31,
2008 (94,757). Unaudited pro forma weighted average shares
outstanding diluted for the year ended
December 31, 2008 is calculated using the average of the
number of shares used to
56
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
calculate the pro forma weighted average shares
outstanding diluted for the three months ended
March 31, 2008 (97,597), June 30, 2008 (95,070),
September 30, 2008 (95,223) and December 31, 2008
(95,126).
Unaudited pro forma weighted average shares
outstanding basic for the year ended
December 31, 2007 is calculated using one-half the number
of outstanding shares of FIS as of December 31, 2007
because on completion of the spin-off, the number of shares of
our outstanding common stock was expected to equal one half of
the number of FIS outstanding shares on the date of the
spin-off. Unaudited pro forma weighted average shares
outstanding diluted for the year ended
December 31, 2007 is calculated using one-half the number
of dilutive FIS common stock equivalents as of the period end in
respect of those stock-based awards expected to be converted to
LPS stock awards.
The following table summarizes earnings per share for the year
ended December 31, 2009 and unaudited pro forma earnings
per share for the years ended December 31, 2008 and 2007
(in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Earnings from continuing operations, net of tax
|
|
$
|
276,233
|
|
|
$
|
230,730
|
|
|
$
|
239,307
|
|
Discontinued operation, net of tax
|
|
|
(504
|
)
|
|
|
158
|
|
|
|
17,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
275,729
|
|
|
$
|
230,888
|
|
|
$
|
256,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share basic from continuing
operations
|
|
$
|
2.88
|
|
|
$
|
2.42
|
|
|
$
|
2.46
|
|
Net earnings per share basic from discontinued
operation
|
|
|
|
|
|
|
|
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share basic
|
|
$
|
2.88
|
|
|
$
|
2.42
|
|
|
$
|
2.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic
|
|
|
95,632
|
|
|
|
95,353
|
|
|
|
97,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share diluted from continuing
operations
|
|
$
|
2.87
|
|
|
$
|
2.41
|
|
|
$
|
2.45
|
|
Net earnings per share diluted from discontinued
operation
|
|
|
|
|
|
|
|
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share diluted
|
|
$
|
2.87
|
|
|
$
|
2.41
|
|
|
$
|
2.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted
|
|
|
96,152
|
|
|
|
95,754
|
|
|
|
97,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase approximately 4.7 million and
6.0 million shares of our common stock for the years ended
December 31, 2009 and 2008, respectively, were not included
in the computation of diluted earnings per share because they
were antidilutive.
We intend to limit dilution caused by option exercises,
including anticipated exercises, by repurchasing shares on the
open market or in privately negotiated transactions. On
June 18, 2009, our Board of Directors approved a plan
authorizing repurchases of common stock
and/or
senior notes of up to $75.0 million, of which
$50.0 million was available to repurchase our senior notes.
On February 4, 2010, our Board of Directors authorized us
to repurchase shares of our common stock
and/or our
senior notes in an amount not to exceed $150.0 million.
This new authorization replaces the previous authorization and
subsumes all amounts remaining available thereunder. The new
plan is effective through March 31, 2012. Our ability to
repurchase shares of common stock or senior notes is subject to
restrictions contained in our senior secured credit agreement
and in the indenture governing our senior unsecured notes.
During the fourth quarter, we repurchased 317,347 shares of
our stock for $12.9 million, at an average price of $40.57
per share. As of December 31, 2009, we had
$44.0 million of authorized repurchases available under our
original $75.0 million authorization approved by our Board
of Directors on June 18, 2009, of which $41.8 million
was available to repurchase our senior notes.
57
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(w) Recent
Accounting Pronouncements
In September 2009, the Financial Accounting Standards Board
(FASB) issued guidance eliminating the requirement
that all undelivered elements have Vendor Specific Objective
Evidence (VSOE) or Third-Party Evidence (TPE) of standalone
selling price before an entity can recognize the portion of an
overall arrangement fee that is attributable to items that have
been delivered. In the absence of VSOE or TPE of the standalone
selling price for one or more delivered or undelivered elements
in a multiple-element arrangement, entities will be required to
estimate the selling prices of those elements. The overall
arrangement fee will be allocated to each element (both
delivered and undelivered items) based on their relative selling
prices, regardless of whether those selling prices are evidenced
by VSOE or TPE or are based on the entitys estimated
selling price. Application of the residual method of
allocating an overall arrangement fee between delivered and
undelivered elements will no longer be permitted upon adoption
of this new guidance. Additional disclosure will be required
about multiple-element revenue arrangements, as well as
qualitative and quantitative disclosure about the effect of the
change. The amendment is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Early adoption is
permitted at the beginning of a fiscal year or applied
retrospectively to the beginning of a fiscal year. Management is
currently evaluating the impact of the new guidance, but does
not believe it will materially affect the Companys
statements of financial condition or operations.
In April 2009, the FASB issued guidance for the initial
recognition and measurement, subsequent measurement and
accounting, and disclosure of assets and liabilities arising
from contingencies in a business combination. Effective
January 1, 2009, we adopted the FSP. The adoption of the
guidance did not materially affect the Companys statements
of financial condition or operations. In December 2007, the FASB
issued guidnace requiring an acquirer in a business combination
to recognize the assets acquired, the liabilities assumed, and
any noncontrolling interest in the acquiree at their fair values
at the acquisition date, with limited exceptions. The
transaction costs of the acquisition as well as any related
restructuring costs are expensed as incurred. Assets and
liabilities arising from contingencies in a business combination
are to be recognized at their fair value at the acquisition date
and adjusted prospectively as new information becomes available.
When the fair value of assets acquired exceeds the fair value of
consideration transferred plus any noncontrolling interest in
the acquiree, the excess is recognized as a gain. Effective
January 1, 2009, we adopted the guidance. The adoption of
the guidance did not materially affect the Companys
statements of financial condition or operations.
|
|
(3)
|
Transactions
with Related Parties
|
We have historically conducted business with FNF and FIS.
Because William P. Foley, II serves as Executive Chairman
of the board of directors of FNF and served as Executive
Chairman of the Board of LPS prior to March 15, 2009, FNF
was considered a related party of the Company. Mr. Foley,
along with Daniel D. Lane and Cary H. Thompson, who also serve
as directors of FNF, retired from our Board of Directors on
March 15, 2009. Accordingly, for periods subsequent to
March 15, 2009, FNF is not a related party. Lee A. Kennedy,
who is an executive and a director of FIS, has served on our
Board of Directors since May 2008 and has served as Chairman of
our Board since March 15, 2009 and as Executive Chairman
since September 15, 2009. Therefore, FIS is a related party
of the Company. Additionally, Mr. Kennedy was appointed
interim Chairman and Chief Executive Officer of Ceridian
Corporation (Ceridian) on January 25, 2010, and
therefore, Ceridian will be a related party for periods during
the term of his interim service.
We have various agreements with FNF under which we provide title
agency services, software development and other data services.
Additionally, we have been allocated corporate costs from FIS
and will continue to receive certain corporate services from FIS
for a period of time, and have other agreements under which we
incur other
58
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expenses to, or receive revenues from, FIS and FNF. A summary of
these agreements in effect as of December 31, 2009 is as
follows:
|
|
|
|
|
Agreements to provide title agency
services. These agreements allow us to provide
services to existing customers through loan facilitation
transactions, primarily with large national lenders. The
arrangement involves providing title agency services which
result in the issuance of title policies on behalf of title
insurance underwriters owned by FNF. Subject to certain early
termination provisions for cause, each of these agreements may
be terminated upon five years prior written notice, which notice
may not be given until after the fifth anniversary of the
effective date of each agreement, which ranges from July 2004
through September 2006 (thus effectively resulting in a minimum
ten year term and a rolling one-year term thereafter). Under
these agreements, we earn commissions which, in the aggregate,
are equal to at least 87% of the total title premium from title
policies that we place with subsidiaries of FNF. The commissions
we earn are subject to adjustment based on changes in FNFs
provision for claim losses, but under no circumstances are the
commissions less than 87%. We also perform similar functions in
connection with trustee sale guarantees, a form of title
insurance that subsidiaries of FNF issue as part of the
foreclosure process on a defaulted loan.
|
|
|
|
Agreements to provide software development and
services. Under these agreements, we are paid for
providing software development and services to FNF which consist
of developing software for use in the title operations of FNF.
|
|
|
|
Arrangements to provide other data
services. Under these arrangements, we are paid
for providing other data services to FNF, primarily consisting
of data services required by the FNF title insurance operations.
|
A detail of related party items included in revenues for the
years ended December 31, 2009, 2008 and 2007 is as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009(1)
|
|
|
2008
|
|
|
2007
|
|
|
Title agency services
|
|
$
|
74.8
|
|
|
$
|
187.9
|
|
|
$
|
132.2
|
|
Software development services
|
|
|
13.4
|
|
|
|
55.7
|
|
|
|
59.5
|
|
Other data related services
|
|
|
3.4
|
|
|
|
12.0
|
|
|
|
19.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
91.6
|
|
|
$
|
255.6
|
|
|
$
|
211.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes revenues received from FNF under these agreements
through March 31, 2009. FNF ceased to be a related party of
the Company on March 15, 2009, however, it was
impracticable to estimate revenues received from FNF as of that
date . We continue to generate revenues from contracts that were
entered into while FNF was a related party. |
|
|
|
|
|
Title plant access and title production
services. Under these agreements, we obtain
access to FNFs title plants for real property located in
various states, including access to their online databases,
physical access to title records, use of space, image system
use, and use of special software, as well as other title
production services. For the title plant access, we pay monthly
fees (subject to certain minimum charges) based on the number of
title reports or products ordered and other services received.
For the title production services, we pay for services based on
the number of properties searched, subject to certain minimum
use. The title plant access agreement has a term of 3 years
beginning in November 2006 and is automatically renewable for
successive 3 year terms unless either party gives
30 days prior written notice. The title production services
agreement can be terminated by either party upon 30 days
prior written notice.
|
|
|
|
Agreements to provide administrative corporate support
services to and from FIS and from
FNF. Historically, FNF provided to FIS certain
administrative corporate support services relating to general
management, statutory accounting, claims administration, and
other administrative support services. Prior to
|
59
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
the spin-off, as a part of FIS, we also received these
administrative corporate support services from FNF. In
connection with the spin-off, we entered into a separate
agreement with FNF for the provision of certain of these
administrative corporate support services by FNF. In addition,
prior to the spin-off, FIS provided general management,
accounting, treasury, payroll, human resources, internal audit,
and other corporate administrative support services to us. In
connection with the spin-off, we entered into corporate services
agreements with FIS under which we receive from FIS, and we
provide to FIS, certain transitional corporate support services.
The pricing for all of these services, both from FNF and FIS,
and to FIS, is on an at-cost basis. The term of the corporate
services agreements is two years, subject to early termination
because the services are no longer required by the party
receiving the services or upon mutual agreement of the parties
and subject to extension in certain circumstances. Management
believes the methods used to allocate the amounts included in
these financial statements for corporate services are reasonable.
|
|
|
|
|
|
Corporate aircraft use
agreements. Historically the Company has had
access to certain corporate aircraft owned or leased by FNF and
by FIS. Pursuant to an aircraft interchange agreement, LPS is
included as an additional permitted user of corporate aircraft
leased by FNF and FIS. FNF and FIS also continue to be permitted
users of any aircraft leased by LPS. LPS was also added as a
party to the aircraft cost sharing agreement that was previously
signed between FNF and FIS. Under this agreement, the Company
and FIS share the costs of one of FNFs aircraft that is
used by all of the entities. The cost for use of each aircraft
under the aircraft interchange agreement is calculated on the
same basis and reflects the costs attributable to the time the
aircraft is in use by the user. The aircraft interchange
agreement is terminable by any party on 30 days prior
notice. The costs under the aircraft cost sharing agreement are
shared equally among FNF, FIS and the Company, and the agreement
remains in effect so long as FNF has possession or use of the
aircraft (or any replacement) but may be terminated at any time
with the consent of FNF, FIS and the Company.
|
|
|
|
Real estate management, real estate lease and equipment lease
agreements. In connection with the spin-off and
the transfer of the real property located at the Companys
corporate headquarters campus from FIS to LPS, the Company
entered into new leases with FNF and FIS, as tenants, as well as
a new sublease with FNF, as sub landlord, for office space in
the building known as Building V, which is
leased by FNF and is located on the Companys corporate
headquarters campus. The Company also entered into a new
property management agreement with FNF with respect to Building
V. Included in the Companys expenses are amounts paid to
FNF for the lease of certain equipment and the sublease of
office space in Building V, together with furniture and
furnishings. In addition, the Companys financials include
amounts paid by FNF and FIS for the lease of office space
located at the Companys corporate headquarters campus and
property management services for FNF for Building V.
|
|
|
|
Licensing, cost sharing, business processing and other
agreements. These agreements provide for the
reimbursement of certain amounts from FNF and FIS related to
various licensing and cost sharing agreements, as well as the
payment of certain amounts by the Company to FNF or its
subsidiaries in connection with our use of certain intellectual
property or other assets of or services by FNF.
|
60
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A detail of related party items included in expenses for the
years ended December 31, 2009, 2008 and 2007 is as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009(1)
|
|
|
2008
|
|
|
2007
|
|
|
Title plant information expense(2)
|
|
$
|
4.1
|
|
|
$
|
7.4
|
|
|
$
|
5.8
|
|
Corporate services expense(3)
|
|
|
7.3
|
|
|
|
34.8
|
|
|
|
35.7
|
|
Licensing, leasing and cost sharing agreements(3)
|
|
|
(3.1
|
)
|
|
|
(0.6
|
)
|
|
|
(14.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$
|
8.3
|
|
|
$
|
41.6
|
|
|
$
|
27.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes expense reimbursements paid to FNF under these
agreements through March 31, 2009. FNF ceased to be a
related party of the Company on March 15, 2009, however, it
was impracticable to estimate expense reimbursements paid to FNF
as of that date. We continue to incur expenses under contracts
that were entered into while FNF was a related party. |
|
(2) |
|
Included in cost of revenues. |
|
(3) |
|
Included in selling, general, and administrative expenses. |
We believe the amounts earned from or charged by FNF or FIS
under each of the foregoing service arrangements are fair and
reasonable. We believe that the aggregate commission rate on
title insurance policies is consistent with the blended rate
that would be available to a third party title agent given the
amount and the geographic distribution of the business produced
and the low risk of loss profile of the business placed. The
software development services provided to FNF are priced within
the range of prices we offer to third parties. These
transactions between us and FIS and FNF are subject to periodic
review for performance and pricing.
Other
related party transactions:
FNRES
Holdings, Inc. and Investment Property Exchange Services,
Inc.
On December 31, 2006, FNF contributed $52.5 million to
FNRES Holdings, Inc. (FNRES), a FIS subsidiary, for
approximately 61% of the outstanding shares of FNRES. In June
2008, FIS contributed its remaining 39% equity investment in
FNRES to the Company in the spin-off (note 1). On
February 6, 2009, we acquired the remaining 61% of the
equity interest of FNRES from FNF in exchange for all of our
interests in Investment Property Exchange Services, Inc.
(IPEX) (note 4). The exchange resulted in FNRES
becoming our wholly-owned subsidiary.
|
|
(4)
|
Acquisitions
and Dispositions
|
The results of operations and financial position of other
entities acquired during the years ended December 31, 2009,
2008 and 2007 are included in the consolidated financial
statements from and after the date of acquisition. Businesses
acquired by FIS prior to June 20, 2008 and included in our
results of operations were contributed by FIS to us. The
purchase price of each acquisition was allocated to the assets
acquired and liabilities assumed based on their fair value with
any excess cost over fair value being allocated to goodwill. The
impact of the acquisitions made from January 1, 2007
through December 31, 2009 was not significant individually
or in the aggregate to our historical financial results.
NRC
Rising Tide National Auction & REO Solutions,
LLC
On October 30, 2009, our subsidiary, LPS Auction Solutions,
LLC, acquired substantially all of the assets of NRC Rising Tide
National Auction & REO Solutions, LLC (Rising
Tide) for a $3.7 million cash payment and a
contingent earn-out payment not to exceed $30.0 million. As
a result of the transaction, we recognized a contingent earn-out
liability totaling $28.2 million. We are in the process of
finalizing our review of contingent liabilities resulting from
the purchase. The acquisition has resulted in the recognition of
$29.0 million of goodwill and
61
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$2.9 million of other intangible assets and software. The
allocation of the purchase price to goodwill and intangible
assets was based on the valuations performed to determine the
values of such assets as of the acquisition date. The valuation
of Rising Tide was determined using a combination of the income
and cost approaches utilizing
Level 3-type
inputs. Rising Tide is now a part of the Loan Transaction
Services segment and it expands our default management services
by providing entry into the residential REO auction services
market.
RealEC
Technologies, Inc.
On July 21, 2009, our subsidiary, LPS Asset Management
Solutions, Inc. (Asset Management), acquired 22% of
the noncontrolling minority interest of RealEC Technologies,
Inc. (RealEC) for $2.6 million. On
November 12, 2009, Asset Management acquired the remaining
22% of the noncontrolling minority interest of RealEC for
$4.3 million. Prior to the acquisitions we owned 56% of the
interest of RealEC, which was consolidated as a part of the
Technology, Data and Analytics segment, and we reported
noncontrolling minority interest related to RealEC in the equity
section of our consolidated balance sheets. RealEC contributed
net earnings attributable to minority interest of
$1.0 million, $1.2 million and $1.0 million for
the years ended December 31, 2009, 2008 and 2007,
respectively. The transactions resulted in RealEC becoming our
wholly-owned subsidiary, and we no longer have any outstanding
noncontrolling minority interest.
Tax
Verification Bureau, Inc.
On June 19, 2009, we acquired Tax Verification Bureau,
Inc., which we have renamed LPS Verification Bureau, Inc.
(Verification Bureau), for $14.9 million (net
of cash acquired). As a result of the transaction, we recognized
a contingent consideration liability totaling $2.8 million
and a deferred tax liability totaling $3.1 million. The
acquisition resulted in the recognition of $12.8 million of
goodwill and $7.7 million of other intangible assets and
software. The allocation of the purchase price to goodwill and
intangible assets was based on the valuations performed to
determine the values of such assets as of the acquisition date.
The valuation of Verification Bureau was determined using a
combination of the income and cost approaches utilizing
Level 3-type
inputs. Verification Bureau is now a part of the Technology,
Data and Analytics segment and it expands our data and analytics
offerings and fraud solutions capabilities.
FNRES
Holdings, Inc.
On December 31, 2006, FNF contributed $52.5 million to
FNRES, an FIS subsidiary, for approximately 61% of the
outstanding shares of FNRES. In June 2008, FIS contributed its
remaining 39% equity investment in FNRES to the Company in the
spin-off (note 1). On February 6, 2009, we acquired
the remaining 61% of the equity interest of FNRES from FNF in
exchange for all of our interests in Investment Property
Exchange Services, Inc. (IPEX). FNRES is now a part
of the Technology, Data and Analytics segment and it expands our
data and analytics offerings and IT development capabilities.
IPEX was previously part of the Loan Transaction Services
segment and it provided qualified exchange intermediary services
for our customers who sought to engage in qualified exchanges
under Section 1031 of the Internal Revenue Code. The
exchange resulted in FNRES, which we subsequently renamed LPS
Real Estate Group, Inc., becoming our wholly-owned subsidiary.
In accordance with FASB ASC Topic 205, Presentation of
Financial Statements, the net earnings from IPEX, including
related party revenues and expense reimbursements, have been
reclassified as a discontinued operation in our consolidated
statements of earnings for the years ended December 31,
2009, 2008 and 2007.
FNRES and IPEX were valued at $66.6 million (including
$0.5 million in cash) and $37.8 million (including
$32.6 million in cash), respectively, resulting in the
recognition of a pre-tax gain of $2.6 million
($0.5 million after-tax) which is included as a
discontinued operation in our consolidated statements of
earnings for the periods presented. The valuation of FNRES was
determined using a combination of the market and income
approaches utilizing Level 2 and
Level 3-type
inputs, while the valuation of IPEX was determined using the
income approach
62
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
utilizing
Level 3-type
inputs. As a result of the transaction, we recognized
$32.6 million of goodwill and $14.2 million of other
intangible assets and software. The allocation of the purchase
price to goodwill and intangible assets is based on the
valuations performed to determine the values of such assets as
of the acquisition date. FNRES contributed revenues of
$37.2 million and pre-tax loss of $0.2 million for the
year ended December 31, 2009. IPEX contributed revenues of
$0.3 million, $24.3 million and $51.9 million for
the years ended December 31, 2009, 2008 and 2007,
respectively, and pre-tax (loss) profit of $(0.7) million,
$9.0 million and $28.5 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
Prior to the exchange we did not consolidate FNRES, but recorded
our 39% interest as an equity investment, carried on the
consolidated balance sheet in other non-current assets at
$25.8 million as of December 31, 2008. We recorded
equity losses (net of tax) from our investment in FNRES of
$2.0 million from January 1, 2009 to February 6,
2009 and $4.7 million and $3.0 million for the years
ended December 31, 2008 and 2007, respectively.
McDash
Analytics, LLC
In May 2008, we acquired McDash Analytics, LLC for
$15.5 million (net of cash acquired). As a result of the
transaction, we have paid contingent consideration totaling
$17.5 million, of which $13.0 million was paid in
2009. The acquisition has resulted in the recognition of
$28.0 million of goodwill and $4.4 million of other
intangible assets and software.
Espiel,
Inc. and Financial Systems Integrators, Inc.
In June 2007, we acquired Espiel, Inc. and Financial Systems
Integrators, Inc. (Espiel) for $43.3 million
(net of cash acquired) which resulted in the recognition of
$32.4 million of goodwill and $12.4 million of other
intangible assets and software.
|
|
(5)
|
Property
and Equipment
|
Property and equipment as of December 31, 2009 and 2008
consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Land
|
|
$
|
4,847
|
|
|
$
|
4,835
|
|
Buildings
|
|
|
71,143
|
|
|
|
68,829
|
|
Leasehold improvements
|
|
|
14,945
|
|
|
|
13,645
|
|
Computer equipment
|
|
|
123,617
|
|
|
|
119,043
|
|
Furniture, fixtures, and other equipment
|
|
|
44,776
|
|
|
|
31,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
259,328
|
|
|
|
237,919
|
|
Accumulated depreciation and amortization
|
|
|
(146,220
|
)
|
|
|
(142,377
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net of depreciation and amortization
|
|
$
|
113,108
|
|
|
$
|
95,542
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense on property and equipment
amounted to $26.1 million, $20.5 million and
$25.3 million for the years ended December 31, 2009,
2008 and 2007, respectively.
63
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Computer software as of December 31, 2009 and 2008 consists
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Software from business acquisitions
|
|
$
|
91,680
|
|
|
$
|
82,230
|
|
Capitalized software development costs
|
|
|
187,665
|
|
|
|
140,890
|
|
Purchased software
|
|
|
26,299
|
|
|
|
22,206
|
|
|
|
|
|
|
|
|
|
|
Computer software
|
|
|
305,644
|
|
|
|
245,326
|
|
Accumulated amortization
|
|
|
(120,268
|
)
|
|
|
(87,787
|
)
|
|
|
|
|
|
|
|
|
|
Computer software, net of accumulated amortization
|
|
$
|
185,376
|
|
|
$
|
157,539
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for computer software was
$35.3 million, $30.6 million and $32.0 million
for the years ended December 31, 2009, 2008 and 2007,
respectively, and is included in cost of revenues in the
accompanying consolidated statements of earnings.
Intangible assets, as of December 31, 2009, consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Customer relationships
|
|
$
|
373,019
|
|
|
$
|
300,478
|
|
|
$
|
72,541
|
|
Trademarks
|
|
|
4,211
|
|
|
|
3,956
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
377,230
|
|
|
$
|
304,434
|
|
|
$
|
72,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, as of December 31, 2008, consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Customer relationships
|
|
$
|
352,963
|
|
|
$
|
271,216
|
|
|
$
|
81,747
|
|
Trademarks
|
|
|
4,211
|
|
|
|
2,469
|
|
|
|
1,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
357,174
|
|
|
$
|
273,685
|
|
|
$
|
83,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets with definite lives
was $30.7 million, $40.0 million and
$43.4 million for the years ended December 31, 2009,
2008 and 2007, respectively. Intangible assets, other than those
with indefinite lives, are amortized over their estimated useful
lives ranging from 5 to 10 years using accelerated methods.
Estimated amortization expense for the next five years is
$24.1 million for 2010, $16.7 million for 2011,
$11.8 million for 2012, $6.3 million for 2013, and
$3.2 million for 2014.
64
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Changes in goodwill during the years ended December 31,
2009 and 2008 are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology,
|
|
|
Loan
|
|
|
|
|
|
|
Data and
|
|
|
Transaction
|
|
|
|
|
|
|
Analytics
|
|
|
Services
|
|
|
Total
|
|
|
Balance, December 31, 2007 (as restated)
|
|
|
686,654
|
|
|
|
391,500
|
|
|
|
1,078,154
|
|
Goodwill acquired during 2008 relating to McDash
|
|
|
15,022
|
|
|
|
|
|
|
|
15,022
|
|
Redistribution of goodwill to FIS
|
|
|
|
|
|
|
(2,120
|
)
|
|
|
(2,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
701,676
|
|
|
$
|
389,380
|
|
|
$
|
1,091,056
|
|
Goodwill acquired during 2009 relating to McDash
|
|
|
13,000
|
|
|
|
|
|
|
|
13,000
|
|
Goodwill acquired during 2009 relating to FNRES
|
|
|
32,614
|
|
|
|
|
|
|
|
32,614
|
|
Goodwill acquired during 2009 relating to Verification Bureau
|
|
|
12,791
|
|
|
|
|
|
|
|
12,791
|
|
Goodwill disposed of during 2009 relating to IPEX
|
|
|
|
|
|
|
(12,308
|
)
|
|
|
(12,308
|
)
|
Goodwill acquired during 2009 relating to Rising Tide
|
|
|
|
|
|
|
28,989
|
|
|
|
28,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
760,081
|
|
|
$
|
406,061
|
|
|
$
|
1,166,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill balances as of December 31, 2007 have been
restated to reflect the correction of an error. Prior to the
spin-off from FIS, we made an error in calculating the
allocation of goodwill between our segments. The correction was
not significant to the consolidated statements of earnings.
There is no effect on our prior period retained earnings, or any
other components of the statements of stockholders equity.
Long-term debt as of December 31, 2009 and 2008 consisted
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Term A Loan, secured, interest payable at LIBOR plus 2.25%
(2.48% at December 31, 2009), quarterly principal
amortization, maturing July 2013
|
|
$
|
420,000
|
|
|
$
|
665,000
|
|
Term B Loan, secured, interest payable at LIBOR plus 2.50%
(2.73% at December 31, 2009), quarterly principal
amortization, maturing July 2014
|
|
|
502,350
|
|
|
|
507,450
|
|
Revolving Loan, secured, interest payable at LIBOR plus 2.25%
(Eurocurrency Borrowings), Fed-funds plus 2.25% (Swingline
Borrowings) or Prime plus 1.25% (Base Rate Borrowings) (2.48%,
2.30% or 4.50%, respectively, at December 31, 2009),
maturing July 2013. Total of $138.8 million unused (net of
outstanding letters of credit) as of December 31, 2009
|
|
|
|
|
|
|
|
|
Senior unsecured notes, issued at par, interest payable
semiannually at 8.125%, due July 2016
|
|
|
367,000
|
|
|
|
375,000
|
|
Other promissory notes with various interest rates and maturities
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,289,350
|
|
|
|
1,547,451
|
|
Less current portion
|
|
|
(40,100
|
)
|
|
|
(145,101
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt, excluding current portion
|
|
$
|
1,249,250
|
|
|
$
|
1,402,350
|
|
|
|
|
|
|
|
|
|
|
65
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On July 2, 2008, we entered into a Credit Agreement (the
Credit Agreement) among JPMorgan Chase Bank, N.A.,
as Administrative Agent, Swing Line Lender and Letters of Credit
Issuer and various other lenders who are parties to the Credit
Agreement. The Credit Agreement consists of: (i) a
5-year
revolving credit facility in an aggregate principal amount
outstanding at any time not to exceed $140.0 million (with
a $25.0 million
sub-facility
for Letters of Credit); (ii) a Term A Loan in an initial
aggregate principal amount of $700.0 million; and
(iii) a Term B Loan in an initial aggregate principal
amount of $510.0 million. Proceeds from disbursements under
the 5-year
revolving credit facility are to be used for general corporate
purposes.
The loans under the Credit Agreement bear interest at a floating
rate, which is an applicable margin plus, at our option, either
(a) the Eurodollar (LIBOR) rate or (b) the higher of
(i) the prime rate or (ii) the federal funds rate plus
0.5% (the higher of clauses (i) and (ii), the ABR
rate). The annual margin on the Term A Loan and the
revolving credit facility is a percentage per annum to be
determined in accordance with a leverage ratio-based pricing
grid and on the Term B Loan is 2.5% in the case of LIBOR loans
and 1.5% in the case of ABR rate loans.
In addition to the scheduled principal payments, the Term Loans
are (with certain exceptions) subject to mandatory prepayment
upon issuances of debt, casualty and condemnation events, and
sales of assets, as well as from up to 50% of excess cash flow
(as defined in the Credit Agreement) in excess of an agreed
threshold commencing with the cash flow for the year ended
December 31, 2009. Voluntary prepayments of the loans are
generally permitted at any time without fee upon proper notice
and subject to a minimum dollar requirement. However, optional
prepayments of the Term B Loan in the first year after issuance
made with the proceeds of certain loans having an interest
spread lower than the Term B Loan are required to be made at
101% of the principal amount repaid. Commitment reductions of
the revolving credit facility are also permitted at any time
without fee upon proper notice. The revolving credit facility
has no scheduled principal payments, but it will be due and
payable in full on July 2, 2013.
The obligations under the Credit Agreement are jointly and
severally, unconditionally guaranteed by certain of our domestic
subsidiaries. Additionally, the Company and such subsidiary
guarantors pledged substantially all of our respective assets as
collateral security for the obligations under the Credit
Agreement and our respective guarantees.
The Credit Agreement contains customary affirmative, negative
and financial covenants including, among other things, limits on
the creation of liens, limits on the incurrence of indebtedness,
restrictions on investments and dispositions, limits on the
payment of dividends and other restricted payments, a minimum
interest coverage ratio and a maximum leverage ratio. Upon an
event of default, the administrative agent can accelerate the
maturity of the loan. Events of default include events customary
for such an agreement, including failure to pay principal and
interest in a timely manner and breach of covenants. These
events of default include a cross-default provision that permits
the lenders to declare the Credit Agreement in default if
(i) we fail to make any payment after the applicable grace
period under any indebtedness with a principal amount in excess
of a specified amount or (ii) we fail to perform any other
term under any such indebtedness, as a result of which the
holders thereof may cause it to become due and payable prior to
its maturity.
On July 2, 2008, we issued senior notes (the
Notes) in an aggregate principal amount of
$375.0 million. The Notes were issued pursuant to an
Indenture dated July 2, 2008 (the Indenture)
among the Company, the guarantors party thereto and
U.S. Bank Corporate Trust Services, as Trustee.
The Notes bear interest at a rate of 8.125% per annum. Interest
payments are due semi-annually each January 1 and
July 1. The maturity date of the Notes is July 1,
2016. From time to time we may be in the market to repurchase
portions of the Notes, subject to limitations set forth in the
Credit Agreement.
The Notes are our general unsecured obligations. Accordingly,
they rank equally in right of payment with all of our existing
and future unsecured senior debt; senior in right of payment to
all of our future subordinated debt; effectively subordinated to
our existing and future secured debt to the extent of the assets
securing such debt,
66
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
including all borrowings under our credit facilities; and
effectively subordinated to all of the liabilities of our
non-guarantor subsidiaries, including trade payables and
preferred stock.
The Notes are guaranteed by each existing and future domestic
subsidiary that is a guarantor under our credit facilities. The
guarantees are general unsecured obligations of the guarantors.
Accordingly, they rank equally in right of payment with all
existing and future unsecured senior debt of our guarantors;
senior in right of payment with all existing and future
subordinated debt of such guarantors; and effectively
subordinated to such guarantors existing and future
secured debt to the extent of the assets securing such debt,
including the guarantees by the guarantors of obligations under
our credit facilities.
LPS has no independent assets or operations, our
subsidiaries guarantees are full and unconditional and
joint and several, and our subsidiaries, other than subsidiary
guarantors, are minor. There are no significant restrictions on
the ability of LPS or any of the subsidiary guarantors to obtain
funds from any of our subsidiaries by dividend or loan.
We may redeem some or all of the Notes on or after July 1,
2011, at the redemption prices described in the Indenture, plus
accrued and unpaid interest. Upon the occurrence of a change of
control, unless we have exercised our right to redeem all of the
Notes as described above, each holder may require us to
repurchase such holders Notes, in whole or in part, at a
purchase price equal to 101% of the principal amount thereof
plus accrued and unpaid interest to the purchase date. During
2009, we repurchased $8.0 million face value of the Notes
for $8.2 million.
The Indenture contains customary events of default, including a
cross default provision that, with respect to any other debt of
the Company or any of our restricted subsidiaries having an
outstanding principal amount equal to or more than a specified
amount in the aggregate for all such debt, occurs upon
(i) an event of default that results in such debt being due
and payable prior to its scheduled maturity or (ii) failure
to make a principal payment. Upon the occurrence of an event of
default (other than a bankruptcy default with respect to the
Company), the trustee or holders of at least 25% of the Notes
then outstanding may accelerate the Notes by giving us
appropriate notice. If, however, a bankruptcy default occurs
with respect to the Company, then the principal of and accrued
interest on the Notes then outstanding will accelerate
immediately without any declaration or other act on the part of
the trustee or any holder.
The fair value of the Companys long-term debt at
December 31, 2009 is estimated to be approximately 101% of
the carrying value. We have estimated the fair value of the term
loans based on values of recent quoted market prices and
estimated the fair value of the notes based on values of recent
trades.
67
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Interest
Rate Swaps
On July 10, 2008, we entered into a
2-year
amortizing interest rate swap transaction, with the following
amortization periods remaining as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Pays
|
|
LPS Pays
|
Amortization Period
|
|
Notional Amount
|
|
Variable Rate of(1)
|
|
Fixed Rate of(2)
|
|
|
(In millions)
|
|
|
|
|
|
December 31, 2009 to March 31, 2010
|
|
$
|
330.0
|
|
|
|
1 Month LIBOR
|
|
|
|
3.275
|
%
|
March 31, 2010 to June 30, 2010
|
|
|
310.0
|
|
|
|
1 Month LIBOR
|
|
|
|
3.275
|
|
June 30, 2010 to July 31, 2010
|
|
|
290.0
|
|
|
|
1 Month LIBOR
|
|
|
|
3.275
|
|
On October 6, 2008, we entered into the following interest
rate swap transaction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Pays
|
|
|
LPS Pays
|
|
Effective Date
|
|
Termination Date
|
|
|
Notional Amount
|
|
|
Variable Rate of(1)
|
|
|
Fixed Rate of(2)
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
October 31, 2008
|
|
|
December 31, 2010
|
|
|
$
|
350.0
|
|
|
|
1 Month LIBOR
|
|
|
|
2.780
|
%
|
|
|
|
(1) |
|
0.23% as of December 31, 2009. |
|
(2) |
|
In addition to the fixed rate paid under the swaps, we pay an
applicable margin to our bank lenders on the Term A Loan and
Revolving Loan equal to 2.25% and on the Term B Loan equal to
2.50% as of December 31, 2009. |
We have entered into interest rate swap transactions in order to
convert a portion of our interest rate exposure on our floating
rate debt from variable to fixed. We have designated these
interest rate swaps as cash flow hedges. The estimated fair
value of these cash flow hedges resulted in liabilities of
$13.2 million, which is included in the accompanying
consolidated balance sheet in other accrued liabilities, as of
December 31, 2009, and $23.3 million, which is
included in the accompanying consolidated balance sheet in other
non-current liabilities, as of December 31, 2008. A portion
of the amount included in accumulated other comprehensive
earnings will be reclassified into interest expense as a yield
adjustment as interest payments are made on the Term Loans. The
inputs used to determine the estimated fair value of our
interest rate swaps are
Level 2-type
measurements. We considered our own credit risk when determining
the fair value of our interest rate swaps.
A summary of the effect of derivative instruments on amounts
recognized in other comprehensive earnings (OCE) and
on the accompanying consolidated statement of earnings are as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Amount of Loss Recognized in OCE on Derivatives
|
|
|
|
Year Ended December 31,
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
2009
|
|
|
2008
|
|
|
Interest rate swap contract
|
|
$
|
6.0
|
|
|
$
|
15.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Loss Reclassified from Accumulated OCE into
Income
|
|
|
|
Year Ended December 31,
|
|
Location of Loss Reclassified from Accumulated OCE into
Income
|
|
2009
|
|
|
2008
|
|
|
Interest expense
|
|
$
|
(12.2
|
)
|
|
$
|
(1.0
|
)
|
It is our policy to execute such instruments with credit-worthy
banks and not to enter into derivative financial instruments for
speculative purposes. As of December 31, 2009, we believe
our interest rate swap counterparties will be able to fulfill
their obligations under our agreements, and we believe we will
have debt outstanding through the various expiration dates of
the swaps such that the occurrence of future hedge cash flows
remains probable.
68
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Principal
Maturities of Debt
Principal maturities at December 31, 2009 for the next five
years and thereafter are as follows (in thousands):
|
|
|
|
|
2010
|
|
$
|
40,100
|
|
2011
|
|
|
145,100
|
|
2012
|
|
|
145,100
|
|
2013
|
|
|
110,100
|
|
2014
|
|
|
481,950
|
|
Thereafter
|
|
|
367,000
|
|
|
|
|
|
|
Total
|
|
$
|
1,289,350
|
|
|
|
|
|
|
|
|
(10)
|
Commitments
and Contingencies
|
Litigation
In the ordinary course of business, we are involved in various
pending and threatened litigation matters related to our
operations, some of which include claims for punitive or
exemplary damages. Often, these matters do not include a
specific statement as to the dollar amount of damages demanded.
Instead, they include a demand in an amount to be proved at
trial. For these reasons, it is often not possible to make a
meaningful estimate of the amount or range of loss that could
result from these matters. Accordingly, we review matters on an
ongoing basis and follow the provisions of FASB ASC Topic 450,
Contingencies, when making accrual and disclosure
decisions. When assessing reasonably possible and probable
outcomes, we base our decision on our assessment of the ultimate
outcome following all appeals. We intend to vigorously defend
all litigation matters that are brought against us, and we do
not believe that the ultimate disposition of any of these
lawsuits will have a material adverse impact on our financial
position or results of operations. Finally, we believe that no
actions, other than the matter listed below, depart from
customary litigation incidental to our business.
Schneider, Kenneth, et al. vs. Lender Processing Services,
Inc., et al.
On February 17, 2010 this putative class action complaint
was filed in the United States District Court for the Southern
District of Florida. In a single count complaint, the plaintiffs
seek to recover unspecified damages for alleged violations of
the Fair Debt Collection Practices Act relating to the
preparation and use of assignments of mortgage in foreclosure
actions. The defendants include two large banks, as well as LPS
and our document solutions subsidiary. The complaint essentially
alleges that the industry practice of creating assignments of
mortgages after the actual date on which a loan was transferred
from one beneficial owner to another is unlawful. The complaint
also challenges the authority of individuals employed by our
document solutions subsidiary to execute such assignments as
officers of various banks and mortgage companies. Although we do
not believe that our conduct falls under the provisions of the
Fair Debt Collection Practices Act, at this early stage we are
unable to accurately predict the outcome of this matter.
Regulatory
Matters
Due to the heavily regulated nature of the mortgage industry,
from time to time we receive inquiries and requests for
information from various state and federal regulatory agencies,
including state insurance departments, attorneys general and
other agencies, about various matters relating to our business.
These inquiries take various forms, including informal or formal
requests, reviews, investigations and subpoenas. We attempt to
cooperate with
69
LENDER
PROCESSING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
all such inquiries. Recently, during an internal review of the
business processes used by our document solutions subsidiary, we
identified a business process that caused an error in the
notarization of certain documents, some of which were used in
foreclosure proceedings in various jurisdictions around the
country. The services performed by this subsidiary were offered
to a limited number of customers, were unrelated to our core
default management services and were immaterial to our financial
results. We immediately corrected the business process and began
to take remedial actions necessary to cure the defect in an
effort to minimize the impact of the error. We subsequently
received an inquiry relating to this matter from the Clerk of
Court of Fulton County, Georgia, which is the regulatory body
responsible for licensing the notaries used by our document
solutions subsidiary. In response, we met with the Clerk of
Court, along with members of her staff, and reported on our
identification of the error and the status of the corrective
actions that were underway. We have since completed our
remediation efforts with respect to the affected documents. Most
recently, we have learned that the U.S. Attorneys
office for the Middle District of Florida is reviewing the
business processes of this subsidiary. We have expressed our
willingness to fully cooperate with the U.S. Attorney. We
continue to believe that we have taken necessary remedial action
with respect to this matter.
Leases
We lease certain of our property under leases which expire at
various dates. Several of these agreements include escalation
clauses and provide for purchases and renewal options for
periods ranging from one to five years.
Future minimum operating lease payments for leases with
remaining terms greater than one year for each of the years in
the five years and thereafter are as follows (in thousands):
|
|
|
|
|
2010
|
|
$
|
20,355
|
|
2011
|
|
|
16,048
|
|
2012
|
|
|
14,588
|
|
2013
|
|
|
9,002
|
|
2014
|
|
|
2,326
|
|
Thereafter
|
|
|
89
|
|
|
|
|
|
|
Total
|
|
$
|
62,408
|
|
|
|
|