NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Except as otherwise indicated or unless the context otherwise requires, all references to "Black Knight," the "Company," "BKFS," "we," "us" or "our" (1) prior to the Distribution (as defined in Note 1 — Basis of Presentation), are to Black Knight Financial Services, Inc., a Delaware corporation, and its subsidiaries ("BKFS") and (2) after the Distribution, are to Black Knight, Inc., a Delaware corporation, and its subsidiaries.
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(1)
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Basis of Presentation
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The accompanying audited Consolidated Financial Statements were prepared in accordance with U.S. 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.
As a result of the Distribution and the THL Interest Exchange on September 29, 2017 (each as defined below), Black Knight, Inc. became the new public company and owns 100% of BKFS; therefore, there are no longer any noncontrolling interests of BKFS as of September 30, 2017. There was no change to our underlying business and, for this reason, there was no change in reporting entity in accordance with GAAP.
The periods presented represent the consolidated financial position, results of operations and cash flows of (1) Black Knight, Inc., for the period from September 30, 2017, the day subsequent to the Distribution, through December 31, 2017, (2) BKFS, for the period from May 26, 2015, the date we completed our initial public offering (the "IPO"), through September 29, 2017, the date of the Distribution and (3) Black Knight Financial Services, LLC ("BKFS LLC"), for the period from January 1, 2015 through May 25, 2015, the day prior to the IPO.
Description of Business
We are a leading provider of software, data and analytics solutions to the mortgage and consumer loan, real estate and capital market verticals. Our solutions facilitate and automate many of the mission-critical business processes across the homeownership lifecycle, from origination until asset disposition. BKFS was incorporated in the State of Delaware on October 27, 2014 and Black Knight, Inc. was incorporated in the State of Delaware on February 3, 2017.
Reporting Segments
We conduct our operations through
two
reporting segments, (1) Software Solutions (formerly known as the Technology segment) and (2) Data and Analytics. See further discussion in Note
17
—
Segment Information
.
Acquisition and Internal Reorganization by FNF and Other Transactions
On January 2, 2014, Fidelity National Financial, Inc. ("FNF") acquired Lender Processing Services, Inc. ("LPS") (the "Acquisition").
On January 3, 2014, LPS was converted into a Delaware limited liability company and was renamed Black Knight InfoServ, LLC ("BKIS"). Also on that date, BKIS distributed all of its limited liability company membership interests and equity interests in its subsidiaries engaged in the Transaction Services business to Black Knight Holdings, Inc. ("BKHI"). Following this distribution, BKHI contributed the Transaction Services subsidiaries to its wholly-owned subsidiary Black Knight Financial Services II, LLC, which has been renamed ServiceLink Holdings, LLC ("ServiceLink") and contributed BKIS to its subsidiary Black Knight Financial Services I, LLC, now known as BKFS LLC. Also on January 3, 2014, BKHI contributed its subsidiary, Fidelity National Commerce Velocity, LLC ("Commerce Velocity") to BKFS LLC, which then contributed Commerce Velocity to BKIS. In addition, BKIS sold its interest in National Title Insurance of New York, Inc. ("NTNY") to Chicago Title Insurance Company ("CTIC"), a wholly-owned subsidiary of FNF, on this date. All of these steps are referred to herein as the "Internal Reorganization."
Initial Public Offering
In connection with our IPO, which was completed on May 26, 2015, the following transactions occurred:
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•
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the amendment and restatement of our certificate of incorporation to authorize the issuance of
two
classes of common stock, Class A and Class B, which generally voted as a single class on all matters submitted for a vote to shareholders;
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|
•
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the issuance of shares of Class B common stock by BKFS to FNF and certain Thomas H. Lee Partners, L.P. ("THL") affiliates ("THL Affiliates"), former holders of membership interests in BKFS LLC ("Units"). BKFS Class B common stock was neither registered nor publicly traded and did not entitle the holders thereof to any of the economic rights, including rights to dividends and distributions upon liquidation, that would have been provided to holders of BKFS Class A common stock; and the total voting power of the BKFS Class B common stock was equal to the percentage of Units not held by us;
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BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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•
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the issuance of shares of BKFS Class A common stock and a
$17.3 million
cash payment to certain THL Affiliates, in connection with the merger of certain THL affiliated entities (the "THL Intermediaries") with and into us, pursuant to which we acquired the Units held by the THL Intermediaries;
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•
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the issuance of shares of Class A common stock by BKFS to the investors in the IPO;
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•
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our contribution of the net cash proceeds received in the IPO to BKFS LLC in exchange for
44.5%
of the Units and a managing member's membership interest in BKFS LLC;
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•
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the conversion of all outstanding equity incentive awards in the form of profits interests in BKFS LLC into restricted shares of BKFS Class A common stock; and
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•
|
the restatement of the limited liability company agreement ("LLC Agreement") to provide for the governance and control of BKFS LLC by BKFS as its managing member and to establish the terms upon which other holders of Units may exchange their Units, and a corresponding number of shares of BKFS Class B common stock for, at our option, shares of BKFS Class A common stock on a
one
-for-one basis or a cash payment from BKFS LLC.
|
We refer to the above transactions collectively as the "Offering Reorganization."
The IPO included
18,000,000
shares of BKFS Class A common stock, par value
$0.0001
per share ("Class A common stock"), at an offering price of
$24.50
per share. We granted the underwriters a
30
-day option to purchase an additional
2,700,000
shares of BKFS Class A common stock at the offering price, which was exercised in full. A total of
20,700,000
shares of BKFS Class A common stock were issued, with net proceeds of
$475.1 million
, after deducting
$32.1 million
for the underwriters' discount and IPO-related expenses.
The use of the proceeds from the IPO was as follows (in millions):
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|
Gross proceeds
|
|
$
|
507.2
|
|
Less:
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|
|
Underwriters' discount
|
|
27.9
|
|
IPO-related expenses
|
|
4.2
|
|
Partial redemption of 5.75% Senior Notes due 2023 (Note 11)
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|
204.8
|
|
Call premium on partial redemption of 5.75% Senior Notes due 2023
|
|
11.8
|
|
Interest on partial redemption of 5.75% Senior Notes due 2023
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|
1.4
|
|
Cash payment to THL Intermediaries
|
|
17.3
|
|
Partial repayment of principal on other outstanding long-term debt
|
|
203.0
|
|
Refinancing expenses
|
|
20.6
|
|
Cash to balance sheet
|
|
16.2
|
|
Unused proceeds
|
|
$
|
—
|
|
As a result of the organizational transactions and IPO described above, we owned
44.5%
of the Units of BKFS LLC; BKHI, CTIC and Fidelity National Title Insurance Company, all subsidiaries of FNF, collectively owned
54.5%
of the Units; and THL and THL Affiliates owned
1.0%
of the Units immediately following the IPO.
Distribution of FNF's Ownership Interest and Related Transactions
On September 29, 2017, we completed a tax-free plan whereby FNF distributed all
83.3 million
shares of BKFS common stock that it owned to FNF Group shareholders through a series of transactions (the "Distribution"). The Distribution was consummated through four newly-formed corporations, New BKH Corp. ("New BKH"), Black Knight, Inc. (formerly known as Black Knight Holdco Corp.), New BKH Merger Sub, Inc. ("Merger Sub One") and BKFS Merger Sub, Inc. ("Merger Sub Two"), as follows:
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•
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BKHI, a wholly-owned subsidiary of FNF, contributed all of its
83.3 million
shares of BKFS Class B common stock and all of its units of BKFS LLC to New BKH in exchange for 100% of the shares of New BKH common stock;
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•
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Following which BKHI converted into a limited liability company and distributed to FNF all of the shares of New BKH common stock held by BKHI;
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•
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Immediately thereafter, FNF distributed the shares of New BKH common stock to the holders of FNF Group common stock on a pro-rata basis (the "Spin-off");
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BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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•
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Immediately following the Spin-off, Merger Sub One merged with and into New BKH (the "New BKH merger");
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•
|
In the New BKH merger, each outstanding share of New BKH common stock (other than shares owned by New BKH) was exchanged for one share of Black Knight, Inc. common stock. New BKH shares owned by New BKH immediately prior to the New BKH merger were canceled for no consideration. As a result of the Spin-Off and the New BKH merger, FNF Group shareholders received
0.3066322
shares of Black Knight, Inc. common stock for each share of FNF Group common stock they held;
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•
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Immediately following the New BKH merger, Merger Sub Two merged with and into Black Knight Financial Services, Inc. (the "BKFS merger");
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•
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In the BKFS merger, each outstanding share of BKFS Class A common stock (other than shares owned by BKFS) was exchanged for one share of Black Knight, Inc. common stock. Shares of BKFS Class A common stock owned by BKFS, otherwise referred to as treasury stock, immediately prior to the BKFS merger were canceled for no consideration; and
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•
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Black Knight, Inc. is the public company following the completion of the Distribution.
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Shares of Black Knight, Inc. common stock are listed on the New York Stock Exchange under the trading symbol “BKI”, and began trading on October 2, 2017. Under the organizational documents of Black Knight, Inc., the rights of the holders of shares of Black Knight, Inc. common stock are substantially the same as the rights of former holders of BKFS Class A common stock.
On June 8, 2017, Black Knight, Inc., BKFS and certain affiliates of THL entered into an interest exchange agreement (the "THL Interest Exchange"). Immediately following the completion of the Distribution, affiliates of THL contributed to Black Knight, Inc. all of their BKFS Class B common stock and all of their BKFS LLC Units in exchange for a number of shares of Black Knight, Inc. common stock equal to the number of shares of BKFS Class B common stock contributed. Following the completion of the Distribution and the THL Interest Exchange, the shares of BKFS Class B common stock were canceled.
For additional details of the effects of the Distribution, the THL Interest Exchange and other related transactions, see "Share Repurchase Program" within this note, Note 2 —
Significant Accounting Policies
, Note
13
—
Equity-Based Compensation,
Note
14
—
Employee Stock Purchase Plan and 401(k) Plan and
Note
15
—
Income Taxes.
Realignment of Property Insight
Effective January 1, 2017, Property Insight, LLC ("Property Insight"), an indirect subsidiary of Black Knight that provides information used by title insurance underwriters, title agents and closing attorneys to source and underwrite title insurance for real property sales and transfer, realigned its commercial relationship with FNF. In connection with the realignment, Property Insight employees responsible for title plant posting and maintenance were transferred to FNF. Under the new commercial arrangement, we continue to own the title plant technology and retain sales responsibility for third parties, other than FNF. As a result of the realignment, we no longer recognize revenues or expenses related to title plant posting and maintenance, but charge FNF a license fee for use of the technology to access and maintain the title plant data. This transaction did not result in any gain or loss.
Share Repurchase Program
On January 31, 2017, our board of directors approved a
three
-year share repurchase program, effective February 3, 2017, authorizing us to repurchase up to
10.0 million
shares of BKFS Class A common stock from time to time through February 2, 2020, through open market purchases, negotiated transactions or other means, in accordance with applicable securities laws and other restrictions. In connection with the Distribution, our board of directors approved a share repurchase program authorizing the repurchase of shares of Black Knight, Inc. common stock consistent with the previous share repurchase program. The timing and volume of share repurchases will be determined by our management based on ongoing assessments of the capital needs of the business, the market price of our common stock and general market conditions.
During the year ended
December 31, 2017
, we repurchased approximately
1.2 million
shares of BKFS Class A common stock and
2.0 million
shares of Black Knight, Inc. common stock for an aggregate purchase price of
$136.7 million
, or an average of
$42.87
per share. As of
December 31, 2017
, we had approximately
6.8 million
shares remaining under our share repurchase authorization. Refer to Note
5
—
Related Party Transactions
for additional information related to the repurchase of shares of Black Knight, Inc. common stock.
On February 15, 2018, we repurchased
2.0 million
shares of our common stock for
$92.8 million
, or at a price of
$46.41
per share.
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(2)
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Significant Accounting Policies
|
The following describes our significant accounting policies that have been followed in preparing the accompanying Consolidated Financial Statements.
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Principles of Consolidation
Prior to the Distribution, BKFS LLC was subject to the consolidation guidance related to variable interest entities as set forth in Accounting Standards Codification ("ASC") Topic 810,
Consolidation
("ASC 810"). As the sole managing member of BKFS LLC, we had the exclusive authority to manage, control and operate the business and affairs of BKFS LLC and its subsidiaries, pursuant to the terms of the LLC Agreement. Under the terms of the LLC Agreement, we were authorized to manage the business of BKFS LLC, including the authority to enter into contracts, manage bank accounts, hire employees and agents, incur and pay debts and expenses, merge or consolidate with other entities and pay taxes. Because we were the primary beneficiary through our sole managing member interest and possessed the rights established in the LLC Agreement, in accordance with the requirements of ASC 810, we controlled BKFS LLC and appropriately consolidated the operations thereof.
We account for noncontrolling interests in accordance with ASC 810. Noncontrolling interests represented BKHI and certain of its affiliates' and THL and THL Affiliates' share of net earnings or loss and of equity in BKFS LLC. BKFS Class A shareholders indirectly controlled BKFS LLC through our managing member interest. BKFS Class B shareholders had a noncontrolling interest in BKFS LLC. Their share of equity in BKFS LLC is reflected in Noncontrolling interests in our Consolidated Balance Sheets and their share of net earnings or loss in BKFS LLC is reported in Net earnings attributable to noncontrolling interests in our Consolidated Statements of Earnings and Comprehensive Earnings. Net earnings or loss attributable to noncontrolling interests do not include expenses incurred directly by us, including income tax (benefit) expense attributable to us.
All earnings prior to the closing of our IPO on May 26, 2015 have been disclosed as Net earnings attributable to noncontrolling interests.
Fair Value
Fair Value of Financial Assets and Liabilities
The fair values of financial assets and liabilities are determined using the following fair value hierarchy:
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•
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Level 1 inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that we have the ability to access.
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•
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Level 2 inputs to the valuation methodology include:
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◦
|
quoted prices for similar assets or liabilities in active markets;
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◦
|
quoted prices for identical or similar assets or liabilities in inactive markets;
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|
◦
|
inputs other than quoted prices that are observable for the asset or liability; and
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|
◦
|
inputs that are derived principally from or corroborated by observable market data by correlation or other means.
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•
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Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
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Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. We believe 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.
Fair Value of Assets Acquired and Liabilities Assumed
The fair 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 value, if any, attributable to goodwill. We utilize third-party valuation specialists to assist with determining the fair values of intangible assets and software purchased in business combinations. These estimates are based on Level 2 and Level 3 inputs.
Management Estimates
The preparation of these financial statements in conformity with GAAP 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 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 determination of elements and allocation of fair value of our revenue arrangements and the recoverability of other intangible assets and goodwill. Actual results that we experience could differ from our estimates.
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Cash and Cash Equivalents
Highly liquid instruments purchased with original maturities of three months or less are considered cash equivalents. Cash equivalents are invested with high credit quality financial institutions and consist of short-term investments, such as demand deposit accounts, 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.
Cash and cash equivalents include the following (in millions):
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|
December 31,
|
|
2017
|
|
2016
|
Unrestricted:
|
|
|
|
Cash
|
$
|
13.1
|
|
|
$
|
129.8
|
|
Cash equivalents
|
1.3
|
|
|
1.8
|
|
Total unrestricted cash and cash equivalents
|
14.4
|
|
|
131.6
|
|
Restricted cash equivalents (1)
|
1.8
|
|
|
2.3
|
|
Total cash and cash equivalents
|
$
|
16.2
|
|
|
$
|
133.9
|
|
_______________
|
|
(1)
|
Restricted cash equivalents relate to our subsidiary, I-Net Reinsurance Limited, and are held in trust until the final reinsurance policy is canceled.
|
Trade Receivables, Net
The carrying amounts reported in the Consolidated Balance Sheets for Trade receivables, net approximate their fair value because of their short-term nature.
A summary of Trade receivables, net of allowance for doubtful accounts, as of
December 31, 2017
and
2016
is as follows (in millions):
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|
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|
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|
December 31,
|
|
2017
|
|
2016
|
Trade receivables — billed
|
$
|
159.6
|
|
|
$
|
115.4
|
|
Trade receivables — unbilled
|
44.1
|
|
|
42.6
|
|
Total trade receivables
|
203.7
|
|
|
158.0
|
|
Allowance for doubtful accounts
|
(1.9
|
)
|
|
(2.2
|
)
|
Total trade receivables, net
|
$
|
201.8
|
|
|
$
|
155.8
|
|
In addition to the amounts above, we have unbilled receivables that we do not expect to collect within the next year included in Other non-current assets in our Consolidated Balance Sheets. Billings for these receivables are primarily based on contractual terms. Refer to Note
10
—
Other Non-Current Assets.
The allowance for doubtful accounts represents management's estimate of those balances that are uncollectible as of the balance sheet date. We determine the allowance based on known troubled accounts, historical experience and other currently available evidence. We write off trade receivables when the likelihood of collection of a trade receivable balance is considered remote.
The rollforward of allowance for doubtful accounts for the years ended
December 31, 2017
,
2016
and
2015
is as follows (in millions):
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Beginning balance
|
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Bad debt expense
|
|
Write-offs, net of recoveries
|
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Transfers and acquisitions
|
|
Ending balance
|
Year ended December 31, 2015
|
|
$
|
(1.6
|
)
|
|
$
|
(2.1
|
)
|
|
$
|
1.1
|
|
|
$
|
0.1
|
|
|
$
|
(2.5
|
)
|
Year ended December 31, 2016
|
|
(2.5
|
)
|
|
(0.6
|
)
|
|
0.9
|
|
|
—
|
|
|
(2.2
|
)
|
Year ended December 31, 2017
|
|
(2.2
|
)
|
|
(0.8
|
)
|
|
1.1
|
|
|
—
|
|
|
(1.9
|
)
|
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Prepaid expenses
|
$
|
36.1
|
|
|
$
|
37.2
|
|
Other current assets
|
8.5
|
|
|
8.2
|
|
Prepaid expenses and other current assets
|
$
|
44.6
|
|
|
$
|
45.4
|
|
Property and Equipment, Net
Property and equipment, net is recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed primarily using the straight-line method based on the following estimated useful lives of the related assets:
30 years
for buildings and
3
to
7 years
for furniture, fixtures and computer equipment. Leasehold improvements are amortized using the straight-line method over the lesser of the initial term of the respective lease or the estimated useful life of such asset.
Computer Software, Net
Computer software, net includes the fair value of software acquired in business combinations, purchased software and internally developed software. Purchased software is recorded at cost and amortized using the straight-line method over its estimated useful life, ranging from
3
to
7 years
. Software acquired in business combinations is recorded at its fair value and amortized using the straight-line or accelerated methods over its estimated useful life.
Internal development costs are accounted for in accordance with ASC Topic 985,
Software
, Subtopic 20,
Costs of Software to Be Sold, Leased, or Otherwise Marketed
, or ASC Topic 350,
Intangibles - Goodwill and Other
, Subtopic 40,
Internal-Use Software
. For computer software products to be sold, leased or otherwise marketed, 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 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. Amortization expense is recorded using straight-line or accelerated methods over the estimated software life, which generally ranges from
5
to
10 years
. We also assess the recorded value 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.
For internal-use computer software products, 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 is recorded ratably over the software's estimated useful life, generally ranging from
5
to
7 years
.
Other Intangible Assets, Net
Other intangible assets, net 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 that takes into consideration expected customer attrition rates over a period of up to
10 years
from the acquisition date.
Our property records database, which is an intangible asset not subject to amortization, is included in Other non-current assets in our Consolidated Balance Sheets. Refer to Note
10
—
Other Non-Current Assets.
Impairment Testing
Long-lived assets, including property and equipment, computer software and other 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. We did not have any events or circumstances indicating impairment of our long-lived assets for the years ended
December 31, 2017
,
2016
or
2015
.
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 and is tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to the carrying amount. In evaluating the recoverability of goodwill, we perform an annual goodwill impairment analysis based on a review of qualitative factors to determine if events and circumstances exist that lead to a determination that the fair value of each reporting unit is more likely than not greater than its carrying amount. We have
three
reporting units that carry goodwill as of
December 31, 2017
: Servicing Software, Origination Software and Data and Analytics. We completed our most recent annual goodwill impairment analysis as of September 30, 2017. We did not have any events or circumstances indicating impairment of our goodwill during the years ended
December 31, 2017
,
2016
and
2015
.
Deferred Contract Costs
Cost of software sales, 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 not be recoverable, undiscounted estimated cash flows of the contract are projected over its remaining estimated 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 with a charge to earnings to equal the contract's net realizable value, including any termination fees provided for under the contract, in the period such a determination is made.
Our deferred contract costs are included in Other non-current assets in our Consolidated Balance Sheets. Refer to Note
10
—
Other Non-Current Assets.
Amortization expense for deferred contract costs is included in Depreciation and amortization in the accompanying Consolidated Statements of Earnings and Comprehensive Earnings.
Trade Accounts Payable and Other Accrued Liabilities
The carrying amount reported in the Consolidated Balance Sheets for Trade accounts payable and other accrued liabilities approximates fair value because of their short-term nature.
Loss Contingencies
ASC Topic 450,
Contingencies,
requires that we accrue for loss contingencies associated with outstanding litigation, claims and assessments, as well as unasserted claims for which management has determined it is probable that a loss contingency exists and the amount of loss can be reasonably estimated.
Deferred Compensation Plan
Prior to the Distribution, certain of our management level employees and directors participated in the FNF Deferred Compensation Plan (the "FNF Plan"). The FNF Plan permits participants to defer receipt of part of their current compensation. Participant benefits for the FNF Plan are provided by a funded rabbi trust. The compensation withheld from FNF Plan participants, together with investment income on the FNF Plan, was recorded as a deferred compensation obligation to participants. The underlying rabbi trust and the related liability was historically carried by FNF. As a result of the Distribution, the liability to Black Knight participants in the FNF Plan, as well as the related assets of the funded rabbi trust, were transferred to the newly-formed Black Knight Deferred Compensation Plan (the "Black Knight Plan") in a non-cash transaction. The terms of the Black Knight Plan are consistent with the terms of the former FNF Plan. As of
December 31, 2017
, the assets of the funded rabbi trust of
$11.7 million
are included in Other non-current assets,
$10.8 million
of the related liability is included in Other non-current liabilities and
$1.2 million
of the related liability is included in Trade accounts payable and other accrued liabilities on the Consolidated Balance Sheets.
Equity-Based Compensation
We expense employee equity-based payments under ASC Topic 718,
Compensation—Stock Compensation
, which requires compensation cost for the grant date fair value of equity-based payments to be recognized over the requisite service period. We estimated the grant date fair value of the equity-based awards issued in the form of profits interests using the Black-Scholes option pricing model. The fair value of our restricted stock awards is measured based on the closing market price of our stock on the grant date.
We adopted Accounting Standards Update ("ASU") 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
to Employee Share-Based Payment Accounting
("ASU 2016-09") on January 1, 2017. We no longer record excess tax benefits and certain tax deficiencies related to share-based awards in additional paid-in capital. Instead, income tax effects of awards are recorded in the income statement when the awards vest or are settled. In connection with this adoption, we also made a policy election to account for forfeitures as they occur. The adoption of this ASU did not have a material effect on our business, financial condition or our results of operations.
Earnings Per Share
Basic earnings per share is computed by dividing Net earnings attributable to Black Knight by the weighted average shares outstanding during the period. Diluted earnings per share is computed by dividing Net earnings attributable to Black Knight, adjusted as necessary for the effect of potentially dilutive securities, by the number of weighted-average shares outstanding during the period and the effect of securities that would have a dilutive effect on earnings per share. See Note
4
—
Earnings Per Share
for a more detailed discussion.
Revenue Recognition
The following describes our primary types of revenues and our revenue recognition policies as they pertain to the types of contractual arrangements we enter into with our customers to provide services, software licenses and software-related services either individually or as part of an integrated offering of multiple services. These arrangements occasionally include offerings from more than one segment to the same customer. We recognize revenues relating to hosted software, licensed software, software-related services, data and analytics services and valuation-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.
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 seller's price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. For hosting arrangements, revenues and costs related to implementation, conversion and programming services 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 recoverability in the event any indications exist that deferred contract costs may not be recoverable.
In the event that our arrangements with our customers include more than one element, we determine whether the individual revenue elements can be recognized separately. In arrangements with multiple deliverables, the delivered items are considered separate units of accounting if (1) they have value on a standalone basis and (2) performance of the undelivered items is considered probable and within our control. Arrangement consideration is then allocated to the separate units of accounting based on relative selling price. If it exists, vendor-specific objective evidence ("VSOE") of fair value is used to determine relative selling price, otherwise third-party evidence of selling price is used. If neither exists, the best estimate of selling price is used for the deliverable.
For multiple element software arrangements, 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 VSOE of fair value has been established for each element or for any undelivered elements. We determine the fair value of each element or the undelivered elements in multiple element software arrangements based on VSOE of fair value. VSOE of fair value 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.
Operating Expenses
Operating expenses include all costs, excluding depreciation and amortization, incurred by us to produce revenues. Operating expenses include personnel expense, employee benefits, occupancy costs, data processing costs, program design and development costs and professional services. Equity-based compensation is also included in Operating expenses within Corporate and Other in Note
17
—
Segment Information
.
General and administrative expenses, which are primarily included in Operating expenses within Corporate and Other in Note
17
—
Segment Information
, include personnel expense, employee benefits, occupancy and other costs associated with personnel
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
employed in marketing, human resources, legal, enterprise risk, finance and other support functions. General and administrative expenses also include certain professional and legal fees and costs of advertising and other marketing-related programs.
Depreciation and Amortization
Depreciation and amortization includes depreciation of property and equipment and amortization of computer software, deferred contract costs and other intangible assets. Depreciation and amortization on the Consolidated Statements of Earnings and Comprehensive Earnings include the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Property and equipment
|
$
|
29.0
|
|
|
$
|
28.4
|
|
|
$
|
28.4
|
|
Computer software
|
84.0
|
|
|
78.0
|
|
|
70.3
|
|
Other intangible assets
|
67.8
|
|
|
76.4
|
|
|
86.4
|
|
Deferred contract costs
|
25.7
|
|
|
25.5
|
|
|
9.2
|
|
Total
|
$
|
206.5
|
|
|
$
|
208.3
|
|
|
$
|
194.3
|
|
Deferred contract costs amortization for the years ended
December 31, 2017
and
2016
includes accelerated amortization of
$3.3 million
and
$4.1 million
, respectively.
Transition and Integration Costs
Transition and integration costs for the year ended December 31, 2017 primarily represent legal and professional fees related to the Distribution and transition-related costs as we transfer certain corporate functions from FNF. Transition and integration costs for the year ended December 31, 2016 primarily represent acquisition-related costs. In 2015, Transition and integration costs represent costs related to the IPO, as well as member management fees, substantially all of which, were incurred prior to the completion of the IPO on May 26, 2015.
Interest Expense
Interest expense consists primarily of interest on our borrowings, a guarantee fee that we paid FNF for their ongoing guarantee of the Senior Notes prior to the Senior Notes Redemption (as defined in Note
11
—Long Term Debt
), amortization of our debt issuance costs, bond premium and original issue discount, payments on our interest rate swaps and commitment fees on our revolving credit facility.
Income Taxes
We are subject to income tax in the U.S. and certain state jurisdictions in which we operate and record the tax effects as a part of the tax accounting process of preparing the Consolidated Financial Statements. Our subsidiary in India is subject to income tax in India. The tax accounting process involves calculating actual current tax expense together with assessing basis differences resulting from differing recognition of items for income tax and accounting purposes. These differences result in current and deferred income tax assets and liabilities, which are included within the Consolidated Balance Sheets. We must then assess the likelihood that deferred income tax assets will be recovered from future taxable earnings and, to the extent we believe that recovery is not likely, establish a valuation allowance. We believe that based on our historical pattern of taxable earnings, projections of future earnings, tax planning strategies, reversing taxable timing differences and other relevant evidence, we will produce sufficient earnings in the future to realize recorded deferred income tax assets. To the extent we establish a valuation allowance or increase an allowance in a period, we would reflect the increase as expense within Income tax expense in the Consolidated Statements of Earnings and Comprehensive Earnings. Determination of income tax expense requires estimates and can involve complex issues that may require an extended period to resolve. Further, the estimated level of annual earnings before income tax can cause the overall effective income tax rate to vary from period to period. We believe our tax positions comply with applicable tax law, and we adequately provide for any known tax contingencies. Final determination of prior-year tax liabilities, either by settlement with tax authorities or expiration of statutes of limitations, could be materially different than estimates reflected in assets and liabilities and historical income tax expense. The outcome of these final determinations could have a material effect on our income tax expense, net earnings or cash flows in the period that determination is made.
For the period through May 25, 2015, the day prior to the IPO, BKFS LLC was treated as a partnership under applicable federal and state income tax laws. Corporate subsidiaries were subject to applicable U.S. federal, foreign and state taxation.
For periods after the IPO, Black Knight is treated as a corporation under applicable federal and state income tax laws. Following the Distribution and THL Interest Exchange, we no longer have any noncontrolling interests. Deferred tax assets and liabilities
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
are recognized for temporary differences between the financial reporting basis and the tax basis of the corporate subsidiaries' assets and liabilities and expected benefits of utilizing net operating loss carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable earnings in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of changes in tax rates and laws in future periods, if any, is reflected in the Consolidated Financial Statements in the period enacted.
Treasury Shares
Shares held in treasury at the time of the Distribution were canceled for no consideration. In connection with this transaction, we made a policy election to charge the cost in excess of par value to Retained earnings when we cancel or retire repurchased shares.
Recent Accounting Pronouncements
Revenue Recognition (ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"))
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09,
Revenue from Contracts with Customers
("ASU 2014-09"), which was codified as ASC 606. This ASU supersedes the revenue recognition requirements in ASC Topic 605,
Revenue Recognition,
and most industry-specific guidance. The guidance requires a five-step analysis of transactions to determine when and how revenue is recognized based upon the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendment also requires additional disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers. The FASB has issued several additional ASUs since this time that add further clarification. Through ASC 340, Subtopic 40,
Other Assets and Deferred Costs - Contracts with Customers
, the topic also includes guidance on accounting for the incremental costs of obtaining and costs incurred to fulfill a contract with a customer. All of the new standards are effective for the Company on January 1, 2018.
In preparation for adoption of ASC 606, we formed a project team and engaged a third-party professional services firm to assist us with our evaluation. We applied an integrated approach to analyzing the effect of ASC 606 on our pattern of revenue recognition, including updating our accounting policies and practices, evaluating differences from applying the requirements of the new standard to our contracts and business practices and applying changes to our processes, accounting systems and design of internal controls. Based upon our assessment, we did not identify a material change to the pattern of revenue recognition related to revenue earned from the majority of our Software Solutions segment hosted software arrangements, Data and Analytics segment arrangements with transaction or volume-based fees or perpetual license arrangements in our Software Solutions and Data and Analytics segments. For contracts where the promised software license and ongoing services are not distinct from each other, the timing of revenue recognition will be over time, which is consistent with the treatment under the current revenue recognition standard. However, due to the complexity of certain of our contracts, including contracts for multiple products and services related to each of our segments, the final determination is dependent on contract-specific terms.
The primary effect of adopting the new standard relates to the timing of revenue recognition for professional services and certain distinct term license arrangements. We identified timing differences related to revenue recognition for distinct professional services performed during implementation of certain solutions within our origination software business, which will be recognized over the period the professional services are performed compared to deferred and recognized over the remaining contract term. Moreover, fees for certain post-implementation professional services related to minor customization of hosted software solutions, determined not to be distinct from the hosted software solutions, will be deferred and recognized over the remaining hosted software contract term compared to over the period the professional services are performed. Further, we identified timing differences related to recognizing the license portion of certain distinct term license arrangements within our Data and Analytics segment upon delivery compared to ratably over the license term.
In addition, based on our analysis of contract acquisition and fulfillment costs, we did not identify a material change to our current practice for capitalizing such costs; however, we will amortize certain capitalized contract costs over a longer time period for certain contracts based on the requirements of the new standard.
The standard allows companies to use either a full retrospective or a modified retrospective adoption approach. We will adopt the new standard using the modified retrospective transition approach. Under this transition approach, the cumulative effect of initially applying the new standard to the contracts that have remaining obligations as of the adoption date will be reflected as an adjustment to beginning retained earnings. We expect the net increase to Retained earnings at the time of adoption to be approximately
$9 million
, net of tax.
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Leases (ASC Topic 842, Leases ("ASC 842"))
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. Under this ASU, lessees will be required to recognize the following for all leases (with the exception of leases with a term of 12 months or less) at the commencement date: (1) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Under this ASU, lessor accounting remains largely unchanged. The FASB has issued additional ASUs since this time that add further clarification and other practical expedients. All of the new standards
ar
e effective for fiscal years, and interim periods within those years, beginning after December 15, 2018.
In preparation for adoption of ASC 842, we have formed a project team that is evaluating the requirements of ASC 842 and assessing the scope of existing lease agreements and other contract reviews for existing contracts that are not considered leases under the current guidance. We are applying an integrated approach to analyzing the effect of ASC 842, including a review of accounting policies and practices, evaluating differences from applying the requirements of the new standard to our existing agreements and business practices and assessing the need for any changes in our processes, accounting systems and design of relevant internal controls.
The ASU requires a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expire before the earliest comparative period presented. We are still in the process of quantifying the effects ASC 842 will have on our results of operations, financial position and related disclosures.
Other Accounting Pronouncements
In February 2018, the FASB issued ASU 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
. This ASU allows a reclassification from Accumulated other comprehensive earnings to Retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 ("Tax Reform Act"). As this update only relates to the reclassification of the income tax effects of the Tax Reform Act, the underlying guidance that requires the effect of a change in tax law or rates is included in income from continuing operations is not affected. This update also requires certain disclosures about stranded tax effects. This ASU is effective in fiscal years beginning after December 15, 2018, with early adoption permitted. The amendments within this ASU should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Act is recognized. We do not expect the adoption of this ASU to have a material effect on our consolidated financial statements and related disclosures.
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
. This ASU expands and refines hedge accounting for both non-financial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. This update also includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. This ASU is effective in fiscal years beginning after December 15, 2018 with early adoption permitted. We are currently evaluating the effect the adoption of this ASU will have on our consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
. This ASU provides clarity and reduces both diversity in practice and cost and complexity when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This ASU is effective prospectively in fiscal years beginning after December 15, 2017. We do not expect this update to have a material effect on our results of operations or our financial position.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. This ASU eliminates Step 2 of the goodwill impairment test that required a hypothetical purchase price allocation. Rather, entities should apply the same impairment assessment to all reporting units and recognize an impairment loss for the amount by which a reporting unit's carrying amount exceeds its fair value, without exceeding the total amount of goodwill allocated to that reporting unit. Entities will continue to have the option to perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This update is effective prospectively for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted. We do not expect this update to have a material effect on our results of operations or our financial position.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
. The amendments in this ASU introduce clarifications to the presentation of certain cash receipts and cash payments in the statement of cash flows. The primary updates include additions and clarifications of the classification of cash
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
flows related to certain debt repayment activities, contingent consideration payments related to business combinations, proceeds from insurance policies, distributions from equity method investees and cash flows related to securitized receivables. This update is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. This ASU requires retrospective application to all prior periods presented upon adoption. We do not expect this update to have a material effect on our statement of cash flows.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments
—
Credit Losses
. This guidance significantly changes how companies measure and recognize credit impairment for many financial assets. The new Current Expected Credit Loss Model will require companies to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets included in the scope of this standard, which include trade receivables. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for annual and interim periods in fiscal years beginning after December 15, 2018. We do not expect this update to have a material effect on our results of operations or our financial position.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
. This ASU enhances the reporting model and addresses certain aspects of recognition, measurement, presentation and disclosure for financial instruments. This ASU is effective in fiscal years beginning after December 15, 2017. We do not expect this update to have a material effect on our results of operations or our financial position.
|
|
(
3
)
|
Business Acquisitions
|
We include the results of operations of acquired businesses beginning on the respective acquisition dates. The purchase price is allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values, with the excess recorded as goodwill. Measurement period adjustments to provisional purchase price allocations are recognized in the period in which they are determined, with the effect on earnings of changes in depreciation, amortization or other income resulting from such changes calculated as if the accounting had been completed on the acquisition date. Acquisition-related costs are expensed as incurred.
During the
year
ended December 31, 2016, we completed the acquisitions of eLynx Holdings, Inc. ("eLynx") and Motivity Solutions, Inc. ("Motivity"). Neither acquisition meets the definition of "significant" pursuant to Article 3 of Regulation S-X (§210.3-05) either individually or in the aggregate. Further, the individual and aggregate results of operations are not material to our financial statements. Further details on each acquisition are discussed below.
Allocation of Purchase Price
The purchase price for each of the acquisitions was allocated to the assets acquired and liabilities assumed based on their estimated fair value at the acquisition date. The fair value of the acquired Computer software and Other intangible assets for both transactions was determined using a third-party valuation based on significant estimates and assumptions, including Level 3 inputs, which are judgmental in nature. These estimates and assumptions include the projected timing and amount of future cash flows, discount rates reflecting the risk inherent in the future cash flows and future market prices. The estimates for the eLynx acquisition were preliminary and subject to adjustments as of December 31, 2016 and were finalized in the first quarter of 2017. The estimates for the Motivity acquisition were finalized in the fourth quarter of 2016.
eLynx
On May 16, 2016, we completed our acquisition of eLynx, a leading lending document and data delivery platform that we now refer to as our eLending business. Our eLending business helps clients in the financial services and real estate industries electronically capture and manage documents and associated data throughout the document lifecycle. We purchased eLynx to augment our origination software business. This acquisition positions us to electronically support the full mortgage origination process.
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Total consideration paid, net of cash received, was
$115.0 million
for
100%
of the equity interests of eLynx. Additionally, we incurred direct transaction costs of
$1.2 million
for the
year
ended December 31, 2016 that are included in Transition and integration costs on the Consolidated Statements of Earnings and Comprehensive Earnings. The total consideration paid was as follows (in millions):
|
|
|
|
|
Cash paid from cash on hand
|
$
|
95.6
|
|
Cash paid from Revolving Credit Facility (Note 11)
|
25.0
|
|
Less: cash acquired
|
(5.6
|
)
|
Total consideration paid, net
|
$
|
115.0
|
|
The following table summarizes the total purchase price consideration and the fair value amounts recognized for the assets acquired and liabilities assumed as adjusted for the measurement period adjustments recorded in the first quarter of 2017 (in millions):
|
|
|
|
|
Total purchase price consideration
|
$
|
115.0
|
|
|
|
Trade receivables
|
$
|
3.8
|
|
Prepaid expenses and other current assets
|
3.9
|
|
Property and equipment
|
1.1
|
|
Computer software
|
11.4
|
|
Other intangible assets (Note 8)
|
35.1
|
|
Goodwill (Note 9)
|
67.0
|
|
Total assets acquired
|
122.3
|
|
Trade accounts payable and other accrued liabilities
|
4.5
|
|
Accrued compensation and benefits
|
1.4
|
|
Deferred revenues
|
1.4
|
|
Total liabilities assumed
|
7.3
|
|
Net assets acquired
|
$
|
115.0
|
|
The measurement period adjustments reflected in the purchase price consideration table above that were recorded during the first quarter of 2017 were as follows (in millions):
|
|
|
|
|
Goodwill
|
$
|
3.0
|
|
Computer software
|
(2.6
|
)
|
Accrued compensation and benefits
|
(0.3
|
)
|
Other intangible assets
|
(0.1
|
)
|
The goodwill adjustment of
$3.0 million
is included in the Software Solutions segment. An adjustment of
$0.5 million
to Depreciation and amortization was recorded in the first quarter of 2017 related to the changes in provisional values.
Motivity
On June 22, 2016, we completed our acquisition of Motivity, which provides customized mortgage business intelligence software solutions. Motivity, along with our LoanSphere product suite, including the LoanSphere Data Hub, provides clients with deeper insights into their origination and servicing operations and portfolios.
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Total consideration paid, net of cash received, was
$35.2 million
for
100%
of the equity interests of Motivity. Additionally, we incurred direct transaction costs of
$0.4 million
for the
year
ended December 31, 2016 that are included in Transition and integration costs on the Consolidated Statements of Earnings and Comprehensive Earnings. The total consideration paid was as follows (in millions):
|
|
|
|
|
Cash paid from Revolving Credit Facility (Note 11)
|
$
|
30.0
|
|
Cash paid from cash on hand
|
6.0
|
|
Less: cash acquired
|
(0.8
|
)
|
Total consideration paid, net
|
$
|
35.2
|
|
The following table summarizes the total purchase price consideration and the fair value amounts recognized for the assets acquired and liabilities assumed as of the acquisition date (in millions):
|
|
|
|
|
Total purchase price consideration
|
$
|
35.2
|
|
|
|
Trade receivables
|
$
|
0.4
|
|
Prepaid expenses and other current assets
|
0.7
|
|
Property and equipment
|
0.1
|
|
Computer software
|
5.7
|
|
Other intangible assets (Note 8)
|
10.5
|
|
Goodwill (Note 9)
|
19.7
|
|
Total assets acquired
|
37.1
|
|
Trade accounts payable and other accrued liabilities
|
1.4
|
|
Deferred revenues
|
0.5
|
|
Total liabilities assumed
|
1.9
|
|
Net assets acquired
|
$
|
35.2
|
|
Basic earnings per share is computed by dividing Net earnings attributable to Black Knight by the weighted-average number of shares of common stock outstanding during the period.
For the periods presented, potentially dilutive securities include unvested restricted stock awards and the shares of BKFS Class B common stock prior to the Distribution. The numerator in the diluted net earnings per share calculation is adjusted to reflect our income tax expense at an expected effective tax rate assuming the conversion of the shares of BKFS Class B common stock into shares of BKFS Class A common stock on a
one
-for-one basis, prior to the Distribution, for the year ended
December 31, 2017
. The effective tax rate for the year ended
December 31, 2017
was
(16.7)%
, including the effect of the benefit related to the revaluation of our net deferred income tax liability and certain other discrete items recorded during the year. The denominator includes approximately
63.1 million
shares of BKFS Class B common stock outstanding for the year ended
December 31, 2017
prior to the Distribution. However, the
84.8 million
shares of BKFS Class B common stock have been excluded in computing diluted net earnings per share because including them on an "if-converted" basis would have an antidilutive effect for the year ended
December 31, 2016
and the period from May 26, 2015 through December 31, 2015. The denominator also includes the dilutive effect of approximately
0.6 million
,
2.0 million
and
3.5 million
shares of unvested restricted shares of common stock for the years ended
December 31, 2017
and
2016
and the period from May 26, 2015 through December 31, 2015, respectively.
The shares of BKFS Class B common stock did not share in the earnings or losses of Black Knight and were, therefore, not participating securities. Accordingly, basic and diluted net earnings per share of BKFS Class B common stock have not been presented.
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
May 26, 2015
through
December 31, 2015
|
|
2017
|
|
2016
|
|
Basic:
|
|
|
|
|
|
Net earnings attributable to Black Knight
|
$
|
182.3
|
|
|
$
|
45.8
|
|
|
$
|
20.0
|
|
Shares used for basic net earnings per share:
|
|
|
|
|
|
Weighted average shares of common stock outstanding
|
88.7
|
|
|
65.9
|
|
|
64.4
|
|
Basic net earnings per share
|
$
|
2.06
|
|
|
$
|
0.69
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
Earnings before income taxes
|
$
|
192.4
|
|
|
|
|
|
Income tax benefit excluding the effect of noncontrolling interests
|
(32.2
|
)
|
|
|
|
|
Net earnings
|
$
|
224.6
|
|
|
|
|
|
Net earnings attributable to Black Knight
|
|
|
$
|
45.8
|
|
|
$
|
20.0
|
|
Shares used for diluted net earnings per share:
|
|
|
|
|
|
Weighted average shares of common stock outstanding
|
88.7
|
|
|
65.9
|
|
|
64.4
|
|
Dilutive effect of unvested restricted shares of common stock
|
0.6
|
|
|
2.0
|
|
|
3.5
|
|
Weighted average shares of BKFS Class B common stock outstanding
|
63.1
|
|
|
|
|
|
Weighted average shares of common stock, diluted
|
152.4
|
|
|
67.9
|
|
|
67.9
|
|
Diluted net earnings per share
|
$
|
1.47
|
|
|
$
|
0.67
|
|
|
$
|
0.29
|
|
Basic and diluted net earnings per share information is not applicable for reporting periods prior to the completion of the IPO.
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
(
5
)
|
Related Party Transactions
|
We are party to certain related party agreements, including those with FNF and THL. These parties became related parties of BKFS LLC on January 2, 2014 as a result of the Acquisition and Internal Reorganization and remain related parties after the completion of the Offering Reorganization. As a result of the Distribution, FNF no longer has an ownership interest in us; however, FNF is still considered to be a related party as of
December 31, 2017
, primarily due to the combination of certain shared board members, members of senior management and various agreements.
The following table sets forth the ownership interests of FNF, THL and other holders of our common stock (shares in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Shares
|
|
Ownership
percentage
|
|
Shares
|
|
Ownership
percentage
|
Black Knight, Inc. common stock:
|
|
|
|
|
|
|
|
THL and its affiliates
|
28.1
|
|
|
18.5
|
%
|
|
—
|
|
|
—
|
%
|
Restricted shares
|
1.6
|
|
|
1.1
|
%
|
|
—
|
|
|
—
|
%
|
Other, including those publicly traded
|
121.7
|
|
|
80.4
|
%
|
|
—
|
|
|
—
|
%
|
Total shares of Black Knight, Inc. common stock
|
151.4
|
|
|
100.0
|
%
|
|
—
|
|
|
—
|
%
|
BKFS Class A common stock:
|
|
|
|
|
|
|
|
THL and its affiliates
|
—
|
|
|
—
|
%
|
|
39.3
|
|
|
25.5
|
%
|
Restricted shares
|
—
|
|
|
—
|
%
|
|
2.9
|
|
|
1.9
|
%
|
Other, including those publicly traded
|
—
|
|
|
—
|
%
|
|
26.9
|
|
|
17.5
|
%
|
Total shares of BKFS Class A common stock
|
—
|
|
|
—
|
%
|
|
69.1
|
|
|
44.9
|
%
|
BKFS Class B common stock:
|
|
|
|
|
|
|
|
FNF
|
—
|
|
|
—
|
%
|
|
83.3
|
|
|
54.1
|
%
|
THL and its affiliates
|
—
|
|
|
—
|
%
|
|
1.5
|
|
|
1.0
|
%
|
Total shares of BKFS Class B common stock
|
—
|
|
|
—
|
%
|
|
84.8
|
|
|
55.1
|
%
|
Total shares of BKFS common stock outstanding
|
—
|
|
|
—
|
%
|
|
153.9
|
|
|
100.0
|
%
|
The underwritten secondary offering of
5.0 million
shares of BKFS Class A common stock (the “May 2017 Offering”) by affiliates of THL pursuant to a shelf registration statement on Form S-3 filed with the SEC on May 8, 2017 closed on May 12, 2017. Affiliates of THL in the May 2017 Offering granted the underwriter an option to purchase up to
0.75 million
additional shares (the “Overallotment Option"). The full exercise of the Overallotment Option closed on May 18, 2017.
The underwritten secondary offering of
7.0 million
shares of our common stock (the “November 2017 Offering”) by affiliates of THL pursuant to a post-effective amendment to the registration statement filed with the SEC on November 20, 2017 closed on November 24, 2017. We purchased from the underwriter
2.0 million
shares of our common stock at a per-share price equal to the price payable by the underwriter to affiliates of THL.
The underwritten secondary offering of
8.0 million
shares of our common stock (the “February 2018 Offering”) by affiliates of THL pursuant to a post-effective amendment to the registration statement filed with the SEC on November 20, 2017 closed on February 15, 2018. We purchased from the underwriter
2.0 million
shares of our common stock at a per-share price equal to the price payable by the underwriter to affiliates of THL. Immediately after the February 2018 Offering and related share repurchase, THL and its affiliates own
20.1 million
shares of our common stock, or approximately
13%
of the outstanding shares of our common stock.
We did not sell any shares and did not receive any proceeds related to the May 2017 Offering, Overallotment Option, November 2017 Offering or February 2018 Offering.
Transactions with FNF and THL are described below.
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
FNF
We have various agreements with FNF and certain FNF subsidiaries to provide software, data and analytics services, as well as corporate shared services and information technology. In addition, FNF provided certain management consulting and corporate administrative services. Following the IPO, we no longer pay management fees to FNF. We are also a party to certain other agreements under which we incur other expenses or receive revenues from FNF.
A detail of the revenues and expenses, net from FNF is set forth in the table below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Revenues
|
$
|
56.8
|
|
|
$
|
73.5
|
|
|
$
|
68.5
|
|
Operating expenses
|
12.3
|
|
|
15.6
|
|
|
8.0
|
|
Management fees (1)
|
—
|
|
|
—
|
|
|
2.3
|
|
Interest expense (2)
|
1.2
|
|
|
3.9
|
|
|
39.5
|
|
_______________
|
|
(1)
|
Amounts are included in Transition and integration costs on the Consolidated Statements of Earnings and Comprehensive Earnings.
|
|
|
(2)
|
Amounts include guarantee fee (see below).
|
We were party to intercompany notes with FNF through May 27, 2015 and recognized
$37.2 million
in Interest expense related to the intercompany notes for the year ended December 31, 2015. We had
no
outstanding intercompany notes as of
December 31, 2017
and
2016
.
Beginning on May 26, 2015, we paid to FNF a guarantee fee of
1.0%
of the outstanding principal of the Senior Notes (as defined in Note
11
—Long Term Debt
) in exchange for the ongoing guarantee by FNF of the Senior Notes. During the years ended
December 31, 2017
,
2016
and
2015
, we recognized
$1.2 million
,
$3.9 million
and
$2.3 million
, respectively, in Interest expense related to the guarantee fee. On April 26, 2017, the Senior Notes were redeemed and we are no longer required to pay a guarantee fee.
FNF subsidiaries held
$48.8 million
and
$49.3 million
of principal amount of our Term B Loan (as defined in Note
11
—Long Term Debt
) as of
December 31, 2017
and
2016
, respectively, from our credit agreement dated May 27, 2015, as amended.
THL
Two
managing directors of THL currently serve on our Board of Directors. We purchase software and systems services from certain entities over which THL exercises control. In addition, prior to the IPO, THL provided certain corporate services to us, including management and consulting services. Following the IPO, we no longer pay management fees to THL.
A detail of the expenses, net from THL is set forth in the table below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Operating expenses
|
$
|
0.3
|
|
|
$
|
1.3
|
|
|
$
|
1.6
|
|
Management fees (1)
|
—
|
|
|
—
|
|
|
1.3
|
|
Software and software-related purchases
|
—
|
|
|
1.1
|
|
|
1.4
|
|
_______________
|
|
(1)
|
Amounts are included in Transition and integration costs on the Consolidated Statements of Earnings and Comprehensive Earnings.
|
In connection with the IPO, we made a
$17.3 million
cash payment to certain THL Affiliates during the year ended December 31, 2015, in connection with the merger of certain THL intermediaries with and into us.
THL Affiliates held
$39.4 million
of principal amount of our Term B Loan (as defined in Note
11
—
Long Term Debt
) as of
December 31, 2016
from our credit agreement dated May 27, 2015. They did
no
t hold any of our debt as of
December 31, 2017
.
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Revenues and Expenses
A detail of related party items included in Revenues is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Data and analytics services
|
$
|
24.0
|
|
|
$
|
47.2
|
|
|
$
|
48.1
|
|
Servicing, origination and default software services
|
32.8
|
|
|
26.3
|
|
|
20.4
|
|
Total related party revenues
|
$
|
56.8
|
|
|
$
|
73.5
|
|
|
$
|
68.5
|
|
A detail of related party items included in Operating expenses (net of expense reimbursements) is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Data entry, indexing services and other operating expenses
|
$
|
5.1
|
|
|
$
|
9.6
|
|
|
$
|
8.7
|
|
Corporate services
|
9.2
|
|
|
10.4
|
|
|
8.8
|
|
Technology and corporate services
|
(1.7
|
)
|
|
(3.1
|
)
|
|
(7.9
|
)
|
Total related party expenses, net
|
$
|
12.6
|
|
|
$
|
16.9
|
|
|
$
|
9.6
|
|
Additionally, related party prepaid fees were
$0.1 million
as of
December 31, 2017
and
2016
, which are included in Prepaid expenses and other current assets on the Consolidated Balance Sheets.
We believe the amounts earned from or charged by us under each of the foregoing arrangements are fair and reasonable. We believe our service arrangements are priced within the range of prices we offer to third parties, except for certain corporate services provided to an FNF subsidiary and certain corporate services provided by FNF, which are at cost. However, the amounts we earned or that were charged under these arrangements were not negotiated at arm's length and may not represent the terms that we might have obtained from an unrelated third party.
(6) Property and Equipment
Property and equipment, net consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Land
|
$
|
11.9
|
|
|
$
|
11.9
|
|
Buildings and improvements
|
65.8
|
|
|
64.1
|
|
Leasehold improvements
|
5.4
|
|
|
4.8
|
|
Computer equipment
|
203.1
|
|
|
172.5
|
|
Furniture, fixtures and other equipment
|
9.3
|
|
|
9.2
|
|
Property and equipment
|
295.5
|
|
|
262.5
|
|
Accumulated depreciation and amortization
|
(115.6
|
)
|
|
(89.5
|
)
|
Property and equipment, net
|
$
|
179.9
|
|
|
$
|
173.0
|
|
Depreciation and amortization expense on property and equipment was
$29.0 million
,
$28.4 million
and
$28.4 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(7) Computer Software
Computer software, net consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Internally developed software
|
$
|
679.4
|
|
|
$
|
634.9
|
|
Purchased software
|
45.7
|
|
|
42.4
|
|
Computer software
|
725.1
|
|
|
677.3
|
|
Accumulated amortization
|
(308.3
|
)
|
|
(227.3
|
)
|
Computer software, net
|
$
|
416.8
|
|
|
$
|
450.0
|
|
Amortization expense on computer software was
$84.0 million
,
$78.0 million
and
$70.3 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. Internally developed software and purchased software are inclusive of amounts acquired through acquisitions.
Estimated amortization expense on computer software for the next five fiscal years is as follows (in millions):
|
|
|
|
|
2018 (1)
|
$
|
90.1
|
|
2019
|
83.7
|
|
2020
|
75.8
|
|
2021
|
62.0
|
|
2022
|
53.7
|
|
_______________________________________________________
|
|
(1)
|
Assumes assets not in service as of
December 31, 2017
are placed in service equally throughout the year.
|
(8) Other Intangible Assets
Other intangible assets, net consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
|
Gross carrying
amount
|
|
Accumulated
amortization
|
|
Net carrying
amount
|
|
Gross carrying
amount
|
|
Accumulated
amortization
|
|
Net carrying
amount
|
Customer relationships
|
|
$
|
555.9
|
|
|
$
|
(326.0
|
)
|
|
$
|
229.9
|
|
|
$
|
557.8
|
|
|
$
|
(260.7
|
)
|
|
$
|
297.1
|
|
Other
|
|
5.3
|
|
|
(3.6
|
)
|
|
1.7
|
|
|
12.5
|
|
|
(10.1
|
)
|
|
2.4
|
|
Total intangible assets
|
|
$
|
561.2
|
|
|
$
|
(329.6
|
)
|
|
$
|
231.6
|
|
|
$
|
570.3
|
|
|
$
|
(270.8
|
)
|
|
$
|
299.5
|
|
Intangible assets, other than those with indefinite lives, are amortized over their estimated useful lives ranging from
2
to
10
years from the acquisition date using either a straight-line or accelerated method. Amortization expense on intangible assets with definite lives is included in Depreciation and amortization in the accompanying Consolidated Statements of Earnings and Comprehensive Earnings and was
$67.8 million
,
$76.4 million
and
$86.4 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Estimated amortization expense on existing intangible assets for the next five fiscal years is as follows (in millions):
|
|
|
|
|
2018
|
$
|
56.5
|
|
2019
|
55.7
|
|
2020
|
45.0
|
|
2021
|
34.2
|
|
2022
|
23.5
|
|
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(9) Goodwill
Goodwill consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software Solutions
|
|
Data and Analytics
|
|
Corporate and Other
|
|
Total
|
Balance, December 31, 2015
|
$
|
2,048.0
|
|
|
$
|
172.1
|
|
|
$
|
—
|
|
|
$
|
2,220.1
|
|
Increases to goodwill related to:
|
|
|
|
|
|
|
|
eLynx acquisition (Note 3)
|
64.0
|
|
|
—
|
|
|
—
|
|
|
64.0
|
|
Motivity acquisition (Note 3)
|
—
|
|
|
19.7
|
|
|
—
|
|
|
19.7
|
|
Balance, December 31, 2016
|
2,112.0
|
|
|
191.8
|
|
|
—
|
|
|
2,303.8
|
|
Activity (Note 3)
|
3.0
|
|
|
—
|
|
|
—
|
|
|
3.0
|
|
Balance, December 31, 2017
|
$
|
2,115.0
|
|
|
$
|
191.8
|
|
|
$
|
—
|
|
|
$
|
2,306.8
|
|
Goodwill related to the eLynx and Motivity acquisitions is deductible for tax purposes. The increase in Goodwill in 2017 is related to the eLynx measurement period adjustment recorded during the first quarter of 2017.
(
10
) Other Non-Current Assets
Other non-current assets consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Deferred contract costs, net of accumulated amortization
|
$
|
136.1
|
|
|
$
|
113.3
|
|
Property records database
|
59.7
|
|
|
59.7
|
|
Unbilled receivables
|
14.6
|
|
|
14.8
|
|
Other
|
29.7
|
|
|
8.7
|
|
Other non-current assets
|
$
|
240.1
|
|
|
$
|
196.5
|
|
(
11
) Long-Term Debt
Long-term debt consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Principal
|
|
Debt
issuance
costs
|
|
Discount
|
|
Total
|
|
Principal
|
|
Debt
issuance
costs
|
|
Premium (discount)
|
|
Total
|
Term A Loan
|
$
|
1,004.3
|
|
|
$
|
(7.0
|
)
|
|
$
|
—
|
|
|
$
|
997.3
|
|
|
$
|
740.0
|
|
|
$
|
(7.0
|
)
|
|
$
|
—
|
|
|
$
|
733.0
|
|
Term B Loan
|
390.0
|
|
|
(2.5
|
)
|
|
(1.4
|
)
|
|
386.1
|
|
|
394.0
|
|
|
(3.4
|
)
|
|
(0.8
|
)
|
|
389.8
|
|
Revolving Credit Facility
|
55.0
|
|
|
(4.3
|
)
|
|
—
|
|
|
50.7
|
|
|
50.0
|
|
|
(3.7
|
)
|
|
—
|
|
|
46.3
|
|
Senior Notes, issued at par
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
390.0
|
|
|
—
|
|
|
11.1
|
|
|
401.1
|
|
Total long-term debt
|
1,449.3
|
|
|
(13.8
|
)
|
|
(1.4
|
)
|
|
1,434.1
|
|
|
1,574.0
|
|
|
(14.1
|
)
|
|
10.3
|
|
|
1,570.2
|
|
Less: Current portion of long-term debt
|
55.5
|
|
|
(0.4
|
)
|
|
—
|
|
|
55.1
|
|
|
64.0
|
|
|
(0.6
|
)
|
|
—
|
|
|
63.4
|
|
Long-term debt, net of current portion
|
$
|
1,393.8
|
|
|
$
|
(13.4
|
)
|
|
$
|
(1.4
|
)
|
|
$
|
1,379.0
|
|
|
$
|
1,510.0
|
|
|
$
|
(13.5
|
)
|
|
$
|
10.3
|
|
|
$
|
1,506.8
|
|
Credit Agreement
On May 27, 2015, our indirect subsidiary, BKIS, entered into a credit and guaranty agreement (the "Credit Agreement") with JPMorgan Chase Bank, N.A., as administrative agent, the guarantors party thereto and the other agents and lenders party thereto. The Credit Agreement provides for (i) an
$800.0 million
term loan A facility (the "Term A Loan"), (ii) a
$400.0 million
term loan B facility (the "Term B Loan") and (iii) a
$400.0 million
revolving credit facility (the "Revolving Credit Facility," and collectively with the Term A Loan and Term B Loan, the "Facilities"). The Facilities are guaranteed by substantially all of BKIS's wholly-owned domestic restricted subsidiaries and BKFS LLC, and are secured by associated collateral agreements that pledge a lien on virtually all of BKIS's assets, including fixed assets and intangible assets, and the assets of the guarantors.
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As of
December 31, 2017
, the Term A Loan and the Revolving Credit Facility bear interest at the Eurodollar rate plus a margin of
150
basis points, and the Term B Loan bears interest at the Eurodollar rate plus a margin of
225
basis points, subject to a Eurodollar rate floor of
75
basis points. As of
December 31, 2017
, we have
$445.0 million
of unused capacity on the Revolving Credit Facility and pay an unused commitment fee of
20
basis points. During the years ended
December 31, 2017
and
2016
, we borrowed
$180.0 million
and
$55.0 million
on our Revolving Credit Facility, respectively. We made payments of
$175.0 million
and
$105.0 million
on this facility during the years ended
December 31, 2017
and
2016
, respectively. As of
December 31, 2017
, the interest rates on the Term A Loan, Term B Loan and Revolving Credit Facility were
3.13%
,
3.88%
and
3.00%
, respectively.
Under the Credit Agreement, BKIS (and in certain circumstances, BKFS LLC) and its restricted subsidiaries are subject to customary affirmative, negative and financial covenants, and events of default for facilities of this type (with customary grace periods, as applicable, and lender remedies).
Term B Loan Repricing
On February 27, 2017, BKIS entered into a First Amendment to Credit and Guaranty Agreement (the "Credit Agreement First Amendment") with JPMorgan Chase Bank, N.A. as administrative agent. The Credit Agreement First Amendment reduces the pricing applicable to the loans under the Term B Loan by
75
basis points. Pursuant to the Credit Agreement First Amendment, the Term B Loan bears interest at rates based upon, at the option of BKIS, either (i) the base rate plus a margin of
125
basis points, or (ii) the Eurodollar rate plus a margin of
225
basis points, subject to a Eurodollar rate floor of
75
basis points. The Term B Loan matures on May 27, 2022. In addition, the terms of the Credit Agreement First Amendment permitted the Distribution. The amount included in Other expense, net on the Consolidated Statements of Earnings and Comprehensive Earnings related to the Term B Loan repricing was
$1.1 million
.
The Term B Loan is subject to amortization of principal, payable in equal quarterly installments on the last day of each fiscal quarter, which commenced on September 30, 2015, with
1.0%
of the initial aggregate advances thereunder to be payable each year prior to the maturity date of the Term B Loan, and the remaining initial aggregate advances thereunder to be payable at the Term B Loan maturity date.
Term A Loan and Revolver Refinancing
On April 26, 2017, BKIS entered into a Second Amendment to Credit and Guaranty Agreement (the “Credit Agreement Second Amendment”) with the JPMorgan Chase Bank, N.A. as administrative agent, the guarantors party thereto, the other agents party thereto and the lenders party thereto. The Credit Agreement Second Amendment increases (i) the aggregate principal amount of the Term A Loan by
$300.0 million
to
$1,030.0 million
and (ii) the aggregate principal amount of commitments under the Revolving Credit Facility by
$100.0 million
to
$500.0 million
. The Credit Agreement Second Amendment also reduces the pricing applicable to the loans under the Term A Loan and Revolving Credit Facility by
25
basis points and reduces the unused commitment fee applicable to the Revolving Credit Facility by
5
basis points. The Term A Loan and Revolving Credit Facility bear interest at rates based upon, at the option of BKIS, either (i) the base rate plus a margin of between
25
and
100
basis points depending on the total leverage ratio of BKFS LLC and its restricted subsidiaries on a consolidated basis (the “Consolidated Leverage Ratio”) or (ii) the Eurodollar rate plus a margin of between
125
and
200
basis points depending on the Consolidated Leverage Ratio, subject to a Eurodollar rate floor of
zero
basis points. In addition, BKIS will pay an unused commitment fee of between
15
and
30
basis points on the undrawn commitments under the Revolving Credit Facility, also depending on the Consolidated Leverage Ratio. Pursuant to the terms of the Credit Agreement Second Amendment, the Term A Loan and the Revolving Credit Facility mature on February 25, 2022. The amount included in Other expense, net on the Consolidated Statements of Earnings and Comprehensive Earnings related to the Term A Loan and Revolving Credit Facility refinancing was
$3.3 million
.
The Term A Loan is subject to amortization of principal, payable in quarterly installments on the last day of each fiscal quarter, as amended by the Credit Agreement Second Amendment, equal to the percentage set forth below of the initial aggregate principal amount of the Term A Loan for such fiscal quarter:
|
|
|
|
Payment Dates
|
|
Percentage
|
September 30, 2015 through and including June 30, 2019
|
|
1.25%
|
Commencing on September 30, 2019 through and including June 30, 2021
|
|
2.50%
|
Commencing on September 30, 2021 through and including December 31, 2021
|
|
3.75%
|
The remaining principal balance of the Term A Loan is due upon maturity.
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Intercompany and Mirror Notes
On January 2, 2014, BKHI issued (i) a Mirror Note (the "Original Mirror Note"), in the original principal amount of
$1,400.0 million
and (ii) an Intercompany Note (the "Original Intercompany Note"), in the original principal amount of
$1,175.0 million
to FNF. BKFS LLC entered into an assumption agreement, dated as of January 3, 2014, among BKFS LLC, BKHI and FNF pursuant to which BKFS LLC assumed
$820.0 million
of the debt issued under the Original Mirror Note and
$688.0 million
of the debt issued under the Original Intercompany Note (such amounts, the "BKFS LLC Assumed Amounts") and FNF released BKHI of its obligations with respect to the BKFS LLC Assumed Amounts. Subsequently, on January 6, 2014, BKFS LLC borrowed an additional sum of
$63.0 million
pursuant to an intercompany note (the "Second Intercompany Note") issued by BKFS LLC to FNF, and on March 31, 2014, BKFS LLC borrowed an additional sum of
$25.0 million
pursuant to the Second Intercompany Note. BKFS LLC amended and restated the Second Intercompany Note on May 30, 2014 to remove required amortization payments. The Second Intercompany Note, as amended and restated, is referred to herein as the "Amended and Restated Second Intercompany Note." BKFS LLC amended and restated the Original Intercompany Note on May 30, 2014 to remove required amortization payments and to reflect BKFS LLC as the Borrower with respect to the indebtedness assumed thereunder. The Original Intercompany Note, as amended and restated, is referred to herein as the "Amended and Restated Original Intercompany Note." We amended and restated each of the Amended and Restated Original Intercompany Note and the Original Mirror Note on March 30, 2015 so that the obligations of each borrower thereunder are evidenced by a separate note. The Amended and Restated Original Intercompany Note and the Original Mirror Note, as amended and restated, are referred to herein as the "Second Amended and Restated Original Intercompany Note" and "Amended and Restated Original Mirror Note," respectively. The Amended and Restated Original Mirror Note is also referred to herein as the "Former Mirror Note." The Second Amended and Restated Original Intercompany Note and the Amended and Restated Second Intercompany Note are collectively referred to herein as the "Former Intercompany Notes." The Intercompany Notes bore interest at a rate of
10.0%
per annum.
The Former Mirror Note was divided into
two
tranches known as Tranche "T" and Tranche "R". Tranche "T" in the original amount of
$644.0 million
bore interest at the rate or rates of interest charged on borrowings under FNF's term loan credit agreement, plus
100
basis points. Tranche "R" in the original amount of
$176.0 million
bore interest at the rate or rates of interest charged on borrowings under FNF's revolving credit agreement, plus
100
basis points. On May 27, 2015, we repaid the entire
$627.9 million
in outstanding principal on Tranche "T", as well as
$1.3 million
in accrued interest. We also repaid the entire
$176.0 million
in outstanding principal on Tranche "R", as well as
$0.3 million
in accrued interest. Additionally, on May 27, 2015, we repaid the entire
$699.0 million
in outstanding principal on the Amended and Restated Second Intercompany Note, as well as
$10.7 million
in accrued interest.
Senior Notes
Through April 25, 2017, the
5.75%
Senior Notes required interest payments semi-annually and were scheduled to mature on April 15, 2023. The Senior Notes were senior unsecured obligations, registered under the Securities Act of 1933 and contained customary affirmative, negative and financial covenants, and events of default for indebtedness of this type (with grace periods, as applicable, and lender remedies). On April 26, 2017, we redeemed the outstanding Senior Notes at a price of
104.825%
(the "Senior Notes Redemption") and paid
$0.7 million
in accrued interest. The amount included in Other expense, net on the Consolidated Statements of Earnings and Comprehensive Earnings related to the Senior Notes Redemption was
$8.2 million
.
On May 29, 2015, we redeemed approximately
$204.8 million
in aggregate principal of the outstanding Senior Notes at a price of
105.75%
(the "May 2015 Redemption"), and paid $
1.4 million
in accrued interest. We incurred a charge on the May 2015 Redemption of
$11.8 million
. We also reduced the bond premium by
$7.0 million
for the portion of the premium that related to the redeemed Senior Notes, resulting in a net loss on the May 2015 Redemption of
$4.8 million
. Following the May 2015 Redemption,
$390.0 million
in aggregate principal of the Senior Notes remained outstanding.
On May 27, 2015, BKIS, Black Knight Lending Solutions, Inc. ("BKLS," and, together with BKIS, the "Issuers"), the guarantors named therein (the "Guarantors") and U.S. Bank National Association, as trustee (the "Trustee"), entered into the Third Supplemental Indenture (the "Third Supplemental Indenture") to the Indenture, dated as of October 12, 2012, governing the Senior Notes, among the Issuers, the Guarantors party thereto and the Trustee (as supplemented to date, the "Indenture"). The Third Supplemental Indenture supplemented the Indenture to add the Guarantors as guarantors of the Issuers' obligations under the Indenture and the Senior Notes. As the Guarantors consisted of substantially all of the subsidiaries of BKHI, with the exception of two insignificant subsidiaries, the Consolidated Financial Statements present all of the required guarantor financial statements, and we have not presented separate guarantor financial statements.
On January 16, 2014, we issued an offer to purchase the Senior Notes pursuant to the change of control provisions under the related Indenture at a purchase price of
101%
of the principal amount plus accrued interest to the purchase date. As a result of the offer, bondholders tendered
$5.2 million
in principal of the Senior Notes, which were subsequently purchased by us on February
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
24, 2014. On February 7, 2014, BKIS, FNF, BKLS and the Trustee entered into a second Supplemental Indenture pursuant to which we paid
$0.7 million
to the holders of the Senior Notes in exchange for the removal of certain financial reporting covenants.
On January 2, 2014, upon consummation of the Acquisition, LPS entered into a Supplemental Indenture (the "Supplemental Indenture") with FNF, BKLS and the Trustee, to the Indenture dated as of October 12, 2012, among LPS, the subsidiary guarantors party thereto and the Trustee, related to the Senior Notes. Pursuant to the terms of the Supplemental Indenture, (i) FNF became a guarantor of LPS' obligations under the Senior Notes and agreed to fully and unconditionally guarantee the Senior Notes, on a joint and several basis with the guarantors named in the Indenture and (ii) BKLS became a "co-issuer" of the Senior Notes and agreed to become a co-obligor of LPS' obligations under the Indenture and the Senior Notes, on the same terms and subject to the same conditions as LPS, on a joint and several basis. As a result of FNF's guarantee of the Senior Notes, the Senior Notes were rated as investment grade, which resulted in the suspension of certain restrictive covenants in the Indenture. From May 26, 2015 through April 25, 2017, we paid to FNF a guarantee fee of
1.0%
of the outstanding principal of the Senior Notes in exchange for the guarantee by FNF of the Senior Notes.
As a result of the Acquisition, the Senior Notes were adjusted to fair value, resulting in our recording a premium on the Senior Notes of approximately
$23.3 million
. The premium was amortized over the remaining term of the Senior Notes using the effective interest method. During the
year
s ended
December 31, 2017
,
2016
and
2015
, we recognized
$0.5 million
,
$1.5 million
and
$1.7 million
of amortization, respectively, which is included as a component of Interest expense.
Fair Value of Long-Term Debt
The fair value of our Facilities approximates their carrying value at
December 31, 2017
as they are variable rate instruments with short reset periods (either monthly or quarterly), which reflect current market rates. The fair value of our Facilities is based upon established market prices for the securities using Level 2 inputs.
Interest Rate Swaps
On September 6, 2017, we entered into an interest rate swap agreement to hedge forecasted monthly interest rate payments on
$200.0 million
of our floating rate debt (the "September 2017 Swap Agreement"). Under the terms of the September 2017 Swap Agreement, we receive payments based on the 1-month LIBOR rate (equal to
1.63%
as of
December 31, 2017
) and pay a fixed rate of
1.69%
. The effective term for the September 2017 Swap Agreement is September 29, 2017 through September 30, 2021.
On March 7, 2017, we entered into an interest rate swap agreement to hedge forecasted monthly interest rate payments on
$200.0 million
of our floating rate debt (the "March 2017 Swap Agreement"). Under the terms of the March 2017 Swap Agreement, we receive payments based on the 1-month LIBOR rate (equal to
1.63%
as of
December 31, 2017
) and pay a fixed rate of
2.08%
. The effective term for the March 2017 Swap Agreement is March 31, 2017 through March 31, 2022.
On January 20, 2016, we entered into two interest rate swap agreements to hedge forecasted monthly interest rate payments on
$400.0 million
of our floating rate debt (
$200.0 million
notional value each) (the "January 2016 Swap Agreements", and together with the March 2017 Swap Agreement and September 2017 Swap Agreement, the "Swap Agreements"). Under the terms of the January 2016 Swap Agreements, we receive payments based on the 1-month LIBOR rate (equal to
1.63%
as of
December 31, 2017
) and pay a weighted average fixed rate of
1.01%
. The effective term for the January 2016 Swap Agreements is February 1, 2016 through January 31, 2019.
We entered into the Swap Agreements to convert a portion of the interest rate exposure on our floating rate debt from variable to fixed. We designated these Swap Agreements as cash flow hedges. A portion of the amount included in Accumulated other comprehensive earnings (loss) will be reclassified into Interest expense as a yield adjustment as interest payments are made on the hedged debt. The fair value of our Swap Agreements is based upon level 2 inputs. We have considered our own credit risk and the credit risk of the counterparties when determining the fair value of our Swap Agreements.
The estimated fair value of our Swap Agreements in the Consolidated Balance Sheets is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Balance Sheet Account
|
|
2017
|
|
2016
|
Other non-current assets
|
|
$
|
6.7
|
|
|
$
|
—
|
|
Other non-current liabilities
|
|
$
|
—
|
|
|
$
|
2.2
|
|
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As of
December 31, 2017
, a cumulative gain of
$6.7 million
(
$3.9 million
net of tax) is reflected in Accumulated other comprehensive earnings (loss). As of
December 31, 2016
, a cumulative loss of
$1.0 million
(
$0.6 million
net of tax) is reflected in Accumulated other comprehensive earnings (loss), and a cumulative loss of
$1.2 million
is reflected in Noncontrolling interests. Below is a summary of the effect of derivative instruments on amounts recognized in Other comprehensive earnings (loss) ("OCE") on the accompanying Consolidated Statements of Earnings and Comprehensive Earnings (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2017
|
|
Year ended December 31, 2016
|
|
Amount of gain
recognized
in OCE
|
|
Amount of loss reclassified from Accumulated OCE
into Net earnings
|
|
Amount of loss
recognized
in OCE
|
|
Amount of loss reclassified from Accumulated OCE
into Net earnings
|
Swap agreements
|
|
|
|
|
|
|
|
Attributable to noncontrolling interests
|
$
|
1.7
|
|
|
$
|
0.5
|
|
|
$
|
(2.2
|
)
|
|
$
|
1.0
|
|
Attributable to Black Knight
|
3.7
|
|
|
0.4
|
|
|
(1.1
|
)
|
|
0.5
|
|
Total
|
$
|
5.4
|
|
|
$
|
0.9
|
|
|
$
|
(3.3
|
)
|
|
$
|
1.5
|
|
Approximately
$2.8 million
(
$2.1 million
net of tax) of the balance in Accumulated other comprehensive earnings (loss) as of
December 31, 2017
is expected to be reclassified into Interest expense over the next 12 months.
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, 2017
, 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 cash flow hedges remains probable.
Principal Maturities of Debt
Principal maturities as of
December 31, 2017
for each of the next five years are as follows (in millions):
|
|
|
|
|
2018
|
$
|
55.5
|
|
2019
|
81.3
|
|
2020
|
107.0
|
|
2021
|
132.8
|
|
2022
|
1,072.7
|
|
Total
|
$
|
1,449.3
|
|
Scheduled maturities noted above exclude the effect of debt issuance costs of
$13.8 million
as well as original issue discount of
$1.4 million
associated with the Facilities.
|
|
(
12
)
|
Commitments and Contingencies
|
In the ordinary course of business, we are involved in various pending and threatened litigation and regulatory matters related to our operations, some of which include claims for punitive or exemplary damages. Our ordinary course litigation includes purported class action lawsuits, which make allegations related to various aspects of our business. From time to time, we also receive requests for information from various state and federal regulatory authorities, some of which take the form of civil investigative demands or subpoenas. Some of these regulatory inquiries may result in the assessment of fines for violations of regulations or settlements with such authorities requiring a variety of remedies. We believe that none of these actions depart from customary litigation or regulatory inquiries incidental to our business.
We review lawsuits and other legal and regulatory matters (collectively "legal proceedings") on an ongoing basis when making accrual and disclosure decisions. When assessing reasonably possible and probable outcomes, management bases its decision on its assessment of the ultimate outcome assuming all appeals have been exhausted. For legal proceedings where it has been determined that a loss is both probable and reasonably estimable, a liability based on known facts and which represents our best estimate has been recorded. Actual losses may materially differ from the amounts recorded and the ultimate outcome of our pending cases is generally not yet determinable. While some of these matters could be material to our operating results or cash flows for any particular period if an unfavorable outcome results, at present we do not believe that the ultimate resolution of currently pending legal proceedings, either individually or in the aggregate, will have a material adverse effect on our financial condition.
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Indemnifications and Warranties
We often agree to indemnify our clients against damages and costs resulting from claims of patent, copyright, trademark infringement or breaches of confidentiality 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 clients 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.
Indemnification Agreement
We are party to a cross-indemnity agreement dated December 22, 2014 with ServiceLink. Pursuant to this agreement, ServiceLink indemnifies us from liabilities relating to, arising out of or resulting from the conduct of ServiceLink's business or any action, suit or proceeding in which we or any of our subsidiaries are named by reason of being a successor to the business of LPS and the cause of such action, suit or proceeding relates to the business of ServiceLink. In return, we indemnify ServiceLink for liabilities relating to, arising out of, or resulting from the conduct of our business.
Operating 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 initial or remaining terms greater than one year for each of the next five years and thereafter are as follows (in millions):
|
|
|
|
|
2018
|
$
|
9.9
|
|
2019
|
8.5
|
|
2020
|
6.8
|
|
2021
|
3.0
|
|
2022
|
1.6
|
|
Thereafter
|
0.5
|
|
Total
|
$
|
30.3
|
|
Rent expense incurred under all operating leases during the years ended
December 31, 2017
,
2016
and
2015
was
$9.4 million
,
$11.0 million
and
$10.4 million
, respectively.
Capital Leases
On June 29, 2016, we entered into a
one
-year capital lease agreement with a bargain purchase option for certain computer equipment. The leased equipment has a useful life of
five
years and is depreciated on a straight-line basis over this period. The leased equipment was valued based on the net present value of the minimum lease payments, which was
$10.0 million
(net of imputed interest of
$0.1 million
) and is included in Property and equipment, net on the Consolidated Balance Sheets. The remaining capital lease obligation of
$5.0 million
as of
December 31, 2016
is included in Trade accounts payable and other accrued liabilities on the Consolidated Balance Sheets and represents the non-cash investing and financing activity for the year ended December 31, 2016.
We entered into a
one
-year capital lease agreement commencing January 1, 2017 with a bargain purchase option for certain computer equipment. The leased equipment has a useful life of
five years
and is depreciated on a straight-line basis over this period. The leased equipment was valued based on the net present value of the minimum lease payments, which was
$8.4 million
(net of imputed interest of
$0.1 million
).
There is no remaining capital lease obligation as of
December 31, 2017
.
Data Processing and Maintenance Services Agreements
We have various data processing and maintenance services agreements with vendors, which expire through 2021, for portions of our computer data processing operations and related functions.
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Payments for data processing and maintenance services agreements with initial or remaining terms greater than one year are as follows (in millions):
|
|
|
|
|
2018
|
$
|
27.8
|
|
2019
|
9.2
|
|
2020
|
3.1
|
|
2021
|
2.4
|
|
Total
|
$
|
42.5
|
|
However, these amounts could be more or less depending on various factors such as the inflation rate, the introduction of significant new technologies or changes in our data processing needs.
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements other than operating leases and interest rate swaps.
|
|
(
13
)
|
Equity-Based Compensation
|
Profits Interests Plan
Under the Black Knight Financial Services, LLC 2013 Management Incentive Plan (the "Incentive Plan"), we were authorized to issue up to
11,111,111
Class B units of BKFS LLC ("BKFS LLC profits interests") to eligible members of management and the Board of Managers. During the year ended December 31, 2014, we issued BKFS LLC profits interests to certain members of BKFS LLC management, the BKFS LLC Board of Managers and certain employees of FNF and ServiceLink, which vested over
three
years, with
50%
vesting after the second year and
50%
vesting after the third year.
Omnibus Incentive Plan
In 2015, we established the Black Knight Financial Services, Inc. 2015 Omnibus Incentive Plan (the "BKFS Omnibus Plan") authorizing the issuance of up to
11.0 million
shares of BKFS Class A common stock, subject to the terms of the BKFS Omnibus Plan. During 2017, the shares available for future awards was increased by 7.5 million shares. The BKFS Omnibus Plan has been renamed the “Black Knight, Inc. Amended and Restated 2015 Omnibus Incentive Plan” (the "Black Knight Omnibus Plan"). The BKFS board of directors adopted the Black Knight Omnibus Plan as of September 29, 2017, and the Black Knight Omnibus Plan was assumed by Black Knight, Inc. on September 29, 2017.
The Black Knight Omnibus Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, other cash and stock-based awards and dividend equi
valents.
Awards granted are approved by the Compensation Committee of the Board of Directors.
In connection with the IPO, we converted the
10,733,330
outstanding BKFS LLC profits interests units into
7,994,215
restricted shares of BKFS Class A common stock. The fair value of the restricted shares was not greater than the value of the BKFS LLC profits interests units immediately prior to the conversion; therefore, no additional compensation expense was recognized. We accelerated the vesting of
4,381,021
restricted shares of BKFS Class A common stock held by our directors, incurring an acceleration charge of
$6.2 million
during the year ended December 31, 2015. The remaining
3,596,344
unvested restricted shares continued to vest on the same schedule as the former BKFS LLC profits interests.
On December 21, 2015, we granted
318,000
restricted shares of BKFS Class A common stock with a grant date fair value of
$32.37
per share, which was based on the closing price of our common stock on the date of grant. These restricted shares vest over a
three
-year period; vesting is also based on certain operating performance criteria, which was met in February 2017.
On February 3, 2016, we granted
799,748
restricted shares of BKFS Class A common stock with a grant date fair value of
$28.29
per share, which was based on the closing price of our common stock on the date of grant. Of the
799,748
restricted shares granted,
247,437
restricted shares vest over a
three
-year period, and
552,311
restricted shares vest over a
four
-year period. The vesting of all the restricted shares granted on February 3, 2016 is also based on certain operating performance criteria, which was met in February 2017.
During 2016, we also granted
44,898
restricted shares of BKFS Class A common stock with a grant date fair value ranging from
$32.74
to
$34.84
, which was based on the closing price of our common stock on the date of grant. These vest over a
four
-year period.
On February 3, 2017, we granted
884,570
restricted shares of BKFS Class A common stock with a grant date fair value of
$37.90
per share, which was based on the closing price of our common stock on the date of grant. Of the
884,570
restricted shares granted,
203,160
restricted shares vest over a
three
-year period, and
681,410
restricted shares vest over a
four
-year period. The
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
vesting of all the restricted shares granted on February 3, 2017 is also based on certain operating performance criteria.
During the third quarter of 2017, we granted
98,194
restricted shares of BKFS Class A common stock with a grant date fair value ranging from
$41.90
to
$42.25
, which was based on the closing price of our common stock on the date of grant. These vest over a
two
-year period.
Restricted stock transactions under the Black Knight Omnibus plan for the years ended December 31, 2017, 2016 and 2015 are as follows (shares in millions):
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted average grant date fair value
|
Balance December 31, 2014
|
—
|
|
|
$
|
—
|
|
Converted
|
7,994,215
|
|
|
*
|
|
Granted
|
318,000
|
|
|
$
|
32.37
|
|
Forfeited
|
(16,850
|
)
|
|
*
|
|
Vested
|
(4,381,021
|
)
|
|
*
|
|
Balance December 31, 2015
|
3,914,344
|
|
|
*
|
|
Granted
|
844,646
|
|
|
$
|
28.56
|
|
Forfeited
|
(57,484
|
)
|
|
*
|
|
Vested
|
(1,793,132
|
)
|
|
*
|
|
Balance, December 31, 2016
|
2,908,374
|
|
|
*
|
|
Granted
|
982,764
|
|
|
$
|
38.31
|
|
Forfeited
|
(127,801
|
)
|
|
$
|
34.23
|
|
Vested
|
(2,181,626
|
)
|
|
*
|
|
Balance, December 31, 2017
|
1,581,711
|
|
|
$
|
34.48
|
|
_______________
|
|
*
|
The converted shares were originally BKFS LLC profits interests units with a weighted average grant date fair value of
$2.10
per unit. The fair value of the restricted shares at the date of conversion, May 20, 2015, was
$24.50
per share. The original grant date fair value of the forfeited and vested restricted shares, which were originally granted as profits interests units, ranges from
$2.01
to
$3.77
per unit.
|
On February 9, 2018, we granted
772,642
restricted shares of our common stock with a grant date fair value of
$45.85
per share, which was based on the closing price of our common stock on the date of grant. These restricted shares vest over a three-year period; vesting is also based on certain operating performance criteria.
Equity-based compensation expense is included in Operating expenses in the Consolidated Statements of Earnings and Comprehensive Earnings. Net earnings reflects equity-based compensation expense of
$18.9 million
,
$12.4 million
and
$11.4 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. As of
December 31, 2017
, the total unrecognized compensation cost related to non-vested restricted shares of our common stock is
$39.5 million
, which is expected to be recognized over a weighted average period of approximately
2.4
years.
|
|
(
14
)
|
Employee Stock Purchase Plan and 401(k) Plan
|
Employee Stock Purchase Plan ("ESPP")
Effective July 20, 2015, we adopted the Black Knight Financial Services, Inc. Employee Stock Purchase Plan (the "ESPP ") that allows our eligible employees to voluntarily make after-tax contributions ranging from
3%
to
15%
of eligible earnings. We contribute varying matching amounts as specified in the ESPP document. On September 29, 2017, the board of directors of Black Knight, Inc. approved, and Black Knight, Inc. assumed the ESPP and renamed it the Black Knight, Inc. Employee Stock Purchase Plan. There were no changes to the terms of the ESPP.
Prior to July 20, 2015, our employees were eligible to participate in the FNF Employee Stock Purchase Plan (the "FNF ESPP") that allowed eligible employees to make voluntary after-tax contributions ranging from
3%
to
15%
of eligible earnings. We contributed varying matching amounts as specified in the FNF ESPP document.
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
We recorded expense of
$6.0 million
,
$5.8 million
and
$5.0 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively, relating to the participation of our employees in the ESPP and the FNF ESPP.
401(k) Profit Sharing Plan
Prior to the Distribution, our employees participated in a qualified 401(k) plan sponsored by FNF. Under the terms of the plan and subsequent amendments, eligible employees may contribute up to
40%
of their pretax annual compensation, up to the amount allowed pursuant to the Internal Revenue Code ("IRC"). We generally match
37.5%
of each dollar of employee contribution up to
6%
of the employee's total eligible compensation. As a result of the Distribution, our employees no longer participate in this plan sponsored by FNF. Our indirect subsidiary, BKIS, adopted and established the Black Knight 401(k) Profit Sharing Plan (the “Black Knight 401(k) Plan”), effective September 29, 2017. The terms of the Black Knight 401(k) Plan are consistent with the terms of the 401(k) plan sponsored by FNF.
We recorded expense of
$5.8 million
,
$5.5 million
and
$5.2 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively, relating to the participation of our employees in the 401(k) plan.
(
15
) Income Taxes
The income tax (benefit) expense for the years ended
December 31, 2017
,
2016
and
2015
consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
Federal
|
$
|
10.4
|
|
|
$
|
15.3
|
|
|
$
|
0.5
|
|
State
|
5.3
|
|
|
6.0
|
|
|
0.7
|
|
Foreign
|
0.9
|
|
|
1.0
|
|
|
0.4
|
|
Total current
|
16.6
|
|
|
22.3
|
|
|
1.6
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(87.5
|
)
|
|
5.0
|
|
|
11.3
|
|
State
|
9.1
|
|
|
(1.1
|
)
|
|
0.5
|
|
Foreign
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
Total deferred
|
(78.4
|
)
|
|
3.5
|
|
|
11.8
|
|
Total income tax (benefit) expense
|
$
|
(61.8
|
)
|
|
$
|
25.8
|
|
|
$
|
13.4
|
|
For the period through May 25, 2015, the day prior to the IPO, BKFS LLC was treated as a partnership under applicable federal and state income tax laws. Corporate subsidiaries were subject to applicable U.S. federal, foreign and state taxation.
For periods after the IPO, Black Knight is treated as a corporation under applicable federal and state income tax laws. Following the Distribution and THL Interest Exchange, we no longer have any noncontrolling interests. Deferred tax assets and liabilities are recognized for temporary differences between the financial reporting basis and the tax basis of the corporate subsidiaries' assets and liabilities and expected benefits of utilizing net operating loss carryforwards.
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A reconciliation of the federal statutory income tax rate of
35.0%
to our effective income tax rate for the years ended
December 31, 2017
,
2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Federal statutory rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
2.9
|
|
|
2.0
|
|
|
1.3
|
|
Noncontrolling interests
|
(13.7
|
)
|
|
(19.2
|
)
|
|
(14.9
|
)
|
Partnership income not subject to tax
|
—
|
|
|
—
|
|
|
(7.7
|
)
|
Tax credits
|
(0.6
|
)
|
|
(0.6
|
)
|
|
(0.3
|
)
|
Transaction costs
|
1.4
|
|
|
—
|
|
|
—
|
|
Domestic production activities deduction
|
(0.5
|
)
|
|
(1.1
|
)
|
|
—
|
|
Effect of Tax Reform Act
|
(57.6
|
)
|
|
—
|
|
|
—
|
|
Other
|
1.0
|
|
|
0.1
|
|
|
0.6
|
|
Effective tax rate
|
(32.1
|
)%
|
|
16.2
|
%
|
|
14.0
|
%
|
On December 22, 2017, the Tax Reform Act was signed into law. Among other provisions, the Tax Reform Act reduces the Federal statutory corporate income tax rate from
35%
to
21%
. During the fourth quarter of 2017, we recorded a one-time, non-cash net tax benefit of
$110.9 million
related to the revaluation of our deferred income tax assets and liabilities as a result of the Tax Reform Act.
Prior to the Distribution and THL Interest Exchange, our net deferred tax liability was primarily related to our investment in BKFS LLC. Following the Distribution, we indirectly own 100% of BKFS LLC and recorded a non-cash transaction resulting in an increase of
$292.5 million
to Deferred income taxes with an offset to Additional paid-in capital on the Consolidated Balance Sheets to reflect the difference in the tax and financial reporting basis of our assets and liabilities. As of December 31, 2017, the components of deferred tax assets primarily relate to deferred revenues, equity-based compensation and deferred compensation. As of December 31, 2017, the components of deferred tax liabilities primarily relate to depreciation and amortization of intangible assets and property and equipment and deferred contract costs.
The significant components of deferred tax assets and liabilities as of
December 31, 2017
and
2016
consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
Deferred revenues
|
$
|
26.7
|
|
|
$
|
—
|
|
Net operating loss carryovers
|
1.3
|
|
|
—
|
|
State income tax
|
—
|
|
|
1.6
|
|
Other
|
12.8
|
|
|
0.4
|
|
Total deferred tax assets
|
40.8
|
|
|
2.0
|
|
Deferred tax liabilities:
|
|
|
|
Depreciation and amortization
|
(219.9
|
)
|
|
—
|
|
Deferred contract costs
|
(36.2
|
)
|
|
—
|
|
Partnership basis
|
—
|
|
|
(9.9
|
)
|
Other
|
(9.3
|
)
|
|
—
|
|
Total deferred tax liabilities
|
(265.4
|
)
|
|
(9.9
|
)
|
Net deferred tax liability
|
$
|
(224.6
|
)
|
|
$
|
(7.9
|
)
|
ASC Topic 740-10,
Accounting for Uncertain Tax Positions,
requires that a tax position be recognized or derecognized based on a more likely than not threshold. This applies to positions taken or expected to be taken on a tax return. As a result of the Distribution, we recorded an
$8.3 million
contingent tax liability for an uncertain tax position that was previously recorded at BKHI. As part of the Distribution, we entered into a tax matters agreement with FNF (the "Tax Matters Agreement"). The agreement
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
outlines requirements for items such as the filing of pre and post-spin tax returns, payment of tax liabilities, entitlements of refunds and certain other tax matters. Under the Tax Matters Agreement with FNF, we have an indemnification receivable for the full amount of the contingent tax liability included in Receivables from related parties on the Consolidated Balance Sheets as of
December 31, 2017
.There were
no
uncertain tax positions for us as of
December 31, 2016
.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2017 and 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Balance, January 1
|
$
|
—
|
|
|
$
|
—
|
|
Additions based on tax positions of prior years
|
8.3
|
|
|
—
|
|
Balance, December 31
|
$
|
8.3
|
|
|
$
|
—
|
|
As a result of the Distribution, we recorded a net operating loss carryover of
$1.3 million
from BKHI. Although the loss is limited under IRC Section 382, we expect it to be fully utilized before it expires in 2033.
We are currently under audit by the Internal Revenue Service ("IRS") for the 2014 and 2015 tax years. Our open tax years also include 2016 and 2017. We are currently under a state audit for Florida. We are not currently under audit for any other state jurisdiction or for India as of year end. We record interest and penalties related to income taxes, if any, as a component of Income tax (benefit) expense on the Consolidated Statements of Earnings and Comprehensive Earnings.
Tax Matters Agreement
Pursuant to the Tax Matters Agreement with FNF, we are obligated to indemnify FNF for (i) any action by Black Knight, or the failure to take any action within our control that negates the tax-free status of the transactions; or (ii) direct or indirect changes in ownership of Black Knight equity interests that cause the Distribution to be a taxable event to FNF as a result of the application of Section 355(e) of the Internal Revenue Code (“IRC”) or to be a taxable event as a result of a failure to satisfy the “continuity of interest” or “device” requirements for tax-free treatment under Section 355 of the IRC. No such events have occurred.
Tax Distributions
Prior to the Distribution, the taxable income of BKFS LLC was allocated to its members, including BKFS, and the members were required to reflect on their own income tax returns the items of income, gain, deduction and loss and other tax items of BKFS LLC that were allocated to them. BKFS LLC made tax distributions to its members for their allocable share of BKFS LLC's taxable income. Tax distributions are calculated based on allocations of income to a member for a particular taxable year without taking into account any losses allocated to the member in a prior taxable year. This practice is consistent with IRS regulations. Subject to certain reductions, tax distributions are generally made based on an assumed tax rate equal to the highest combined marginal federal, state and local income tax rate applicable to a U.S. corporation. BKFS LLC made tax distributions of
$75.3 million
,
$48.6 million
and
$17.4 million
during the years ended
December 31, 2017
,
2016
and
2015
, respectively. The 2017 tax distributions were for the 2016 tax year and 2017 tax year relating to the period before the Distribution.
|
|
(16)
|
Concentrations of Risk
|
We generate a significant amount of revenues from large customers, including a customer that accounted for
12%
of total revenues for the years ended
December 31, 2017
,
2016
and
2015
.
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, trade receivables and interest rate swaps.
|
|
(
17
)
|
Segment Information
|
ASC Topic 280,
Segment Reporting
("ASC 280"),
establishes standards for reporting information about segments and requires that a public business enterprise reports financial and descriptive information about its segments. Segments are components of an enterprise for which separate financial information is available and are evaluated regularly by the chief operating decision maker ("CODM") in deciding how to allocate resources and in assessing performance. Our chief executive officer is identified as the CODM as defined by ASC 280. To align with the internal management of our business operations based on service offerings, our business is organized into
two
segments:
|
|
•
|
Software Solutions —
offers software and hosting solutions that support loan servicing, loan origination and settlement services. The Software Solutions segment was formerly known as the Technology segment.
|
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
•
|
Data and Analytics —
offers data and analytics solutions to the mortgage, real estate and capital markets verticals. These solutions include property ownership data, lien data, servicing data, automated valuation models, collateral risk scores, prepayment and default models, lead generation, multiple listing service solutions and other data solutions.
|
Separate discrete financial information is available for these two segments and the operating results of each segment are regularly evaluated by the CODM in order to assess performance and allocate resources. We use EBITDA as the primary profitability measure for making decisions regarding ongoing operations. EBITDA is earnings before Interest expense, Income tax expense and Depreciation and amortization. We do not allocate Interest expense, Other expense, net, Income tax expense, equity-based compensation and certain other items, such as purchase accounting adjustments and acquisition-related costs to the segments, since these items are not considered in evaluating the segments' overall operating performance.
Summarized financial information concerning our segments is shown in the tables below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2017
|
|
Software Solutions
|
|
Data and Analytics
|
|
Corporate and Other
|
|
Total
|
Revenues
|
$
|
893.8
|
|
|
$
|
162.3
|
|
|
$
|
(4.5
|
)
|
(1)
|
$
|
1,051.6
|
|
Expenses:
|
|
|
|
|
|
|
|
Operating expenses
|
370.8
|
|
|
130.4
|
|
|
68.3
|
|
|
569.5
|
|
Transition and integration costs
|
—
|
|
|
—
|
|
|
13.1
|
|
|
13.1
|
|
EBITDA
|
523.0
|
|
|
31.9
|
|
|
(85.9
|
)
|
|
469.0
|
|
Depreciation and amortization
|
98.9
|
|
|
15.1
|
|
|
92.5
|
|
(2)
|
206.5
|
|
Operating income (loss)
|
424.1
|
|
|
16.8
|
|
|
(178.4
|
)
|
|
262.5
|
|
Interest expense
|
|
|
|
|
|
|
(57.5
|
)
|
Other expense, net
|
|
|
|
|
|
|
(12.6
|
)
|
Earnings before income taxes
|
|
|
|
|
|
|
192.4
|
|
Income tax expense
|
|
|
|
|
|
|
(61.8
|
)
|
Net earnings
|
|
|
|
|
|
|
$
|
254.2
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
Total assets
|
$
|
3,175.9
|
|
|
$
|
352.3
|
|
|
$
|
127.7
|
|
|
$
|
3,655.9
|
|
Goodwill
|
$
|
2,115.0
|
|
|
$
|
191.8
|
|
|
$
|
—
|
|
|
$
|
2,306.8
|
|
_______________________________________________________
Note: The Software Solutions segment was formerly known as the Technology segment.
|
|
(1)
|
Revenues for Corporate and Other represent deferred revenue purchase accounting adjustments recorded in accordance with GAAP.
|
|
|
(2)
|
Depreciation and amortization for Corporate and Other primarily represents net incremental depreciation and amortization adjustments associated with the application of purchase accounting recorded in accordance with GAAP.
|
BLACK KNIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
Software Solutions
|
|
Data and Analytics
|
|
Corporate and Other
|
|
Total
|
Revenues
|
$
|
855.8
|
|
|
$
|
177.5
|
|
|
$
|
(7.3
|
)
|
(1)
|
$
|
1,026.0
|
|
Expenses:
|
|
|
|
|
|
|
|
Operating expenses
|
368.0
|
|
|
151.0
|
|
|
63.6
|
|
|
582.6
|
|
Transition and integration costs
|
—
|
|
|
—
|
|
|
2.3
|
|
|
2.3
|
|
EBITDA
|
487.8
|
|
|
26.5
|
|
|
(73.2
|
)
|
|
441.1
|
|
Depreciation and amortization
|
106.2
|
|
|
8.8
|
|
|
93.3
|
|
(2)
|
208.3
|
|
Operating income (loss)
|
381.6
|
|
|
17.7
|
|
|
(166.5
|
)
|
|
232.8
|
|
Interest expense
|
|
|
|
|
|
|
(67.6
|
)
|
Other expense, net
|
|
|
|
|
|
|
(6.4
|
)
|
Earnings before income taxes
|
|
|
|
|
|
|
158.8
|
|
Income tax expense
|
|
|
|
|
|
|
25.8
|
|
Net earnings
|
|
|
|
|
|
|
$
|
133.0
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
Total assets
|
$
|
3,196.7
|
|
|
$
|
355.6
|
|
|
$
|
209.7
|
|
|
$
|
3,762.0
|
|
Goodwill
|
$
|
2,112.0
|
|
|
$
|
191.8
|
|
|
$
|
—
|
|
|
$
|
2,303.8
|
|
_______________________________________________________
Note: The Software Solutions segment was formerly known as the Technology segment.
|
|
(1)
|
Revenues for Corporate and Other represent deferred revenue purchase accounting adjustments recorded in accordance with GAAP.
|
|
|
(2)
|
Depreciation and amortization for Corporate and Other primarily represents net incremental depreciation and amortization adjustments associated with the application of purchase accounting recorded in accordance with GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
Software Solutions
|
|
Data and Analytics
|
|
Corporate and Other
|
|
Total
|
Revenues
|
$
|
765.8
|
|
|
$
|
174.3
|
|
|
$
|
(9.4
|
)
|
(1)
|
$
|
930.7
|
|
Expenses:
|
|
|
|
|
|
|
|
Operating expenses
|
341.4
|
|
|
145.5
|
|
|
51.3
|
|
|
538.2
|
|
Transition and integration costs
|
—
|
|
|
—
|
|
|
8.0
|
|
|
8.0
|
|
EBITDA
|
424.4
|
|
|
28.8
|
|
|
(68.7
|
)
|
|
384.5
|
|
Depreciation and amortization
|
93.3
|
|
|
7.2
|
|
|
93.8
|
|
(2)
|
194.3
|
|
Operating income (loss)
|
331.1
|
|
|
21.6
|
|
|
(162.5
|
)
|
|
190.2
|
|
Interest expense
|
|
|
|
|
|
|
(89.8
|
)
|
Other expense, net
|
|
|
|
|
|
|
(4.6
|
)
|
Earnings before income taxes
|
|
|
|
|
|
|
95.8
|
|
Income tax expense
|
|
|
|
|
|
|
13.4
|
|
Net earnings
|
|
|
|
|
|
|
$
|
82.4
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
Total assets
|
$
|
3,126.7
|
|
|
$
|
312.1
|
|
|
$
|
264.9
|
|
|
$
|
3,703.7
|
|
Goodwill
|
$
|
2,048.0
|
|
|
$
|
172.1
|
|
|
$
|
—
|
|
|
$
|
2,220.1
|
|
_______________________________________________________
Note: The Software Solutions segment was formerly known as the Technology segment.
|
|
(1)
|
Revenues for Corporate and Other represent deferred revenue purchase accounting adjustments recorded in accordance with GAAP.
|
|
|
(2)
|
Depreciation and amortization for Corporate and Other primarily represents net incremental depreciation and amortization adjustments associated with the application of purchase accounting recorded in accordance with GAAP.
|