Q312 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
FORM 10-Q
___________________________________________________
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(Mark One) | |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 31, 2012
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-32511
___________________________________________________
IHS INC.
(Exact name of registrant as specified in its charter)
___________________________________________________
|
| | |
Delaware | | 13-3769440 |
(State or Other Jurisdiction of Incorporation or Organization) | | (IRS Employer Identification No.) |
15 Inverness Way East
Englewood, CO 80112
(Address of Principal Executive Offices)
(303) 790-0600
(Registrant’s telephone number, including area code)
___________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | x | Accelerated filer | | o |
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Non-accelerated filer | | o (Do not check if a smaller reporting company) | Smaller Reporting Company | | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
As of August 31, 2012, there were 65,937,011 shares of our Class A Common Stock outstanding.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
| |
Item 1. | Financial Statements |
IHS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per-share amounts)
|
| | | | | | | |
| As of | | As of |
| August 31, 2012 | | November 30, 2011 |
| (Unaudited) | | (Audited) |
Assets |
| |
|
Current assets: |
| |
|
Cash and cash equivalents | $ | 298,433 |
| | $ | 234,685 |
|
Accounts receivable, net | 289,548 |
| | 326,009 |
|
Income tax receivable | 19,932 |
| | 25,194 |
|
Deferred subscription costs | 45,229 |
| | 43,136 |
|
Deferred income taxes | 53,026 |
| | 45,253 |
|
Other | 27,924 |
| | 23,801 |
|
Total current assets | 734,092 |
| | 698,078 |
|
Non-current assets: |
| |
|
Property and equipment, net | 157,995 |
| | 128,418 |
|
Intangible assets, net | 578,597 |
| | 514,949 |
|
Goodwill, net | 1,959,663 |
| | 1,722,312 |
|
Prepaid pension asset | 9,042 |
| | — |
|
Other | 8,783 |
| | 9,280 |
|
Total non-current assets | 2,714,080 |
| | 2,374,959 |
|
Total assets | $ | 3,448,172 |
| | $ | 3,073,037 |
|
Liabilities and stockholders’ equity |
| |
|
Current liabilities: |
| |
|
Short-term debt | $ | 170,208 |
| | $ | 144,563 |
|
Accounts payable | 36,795 |
| | 32,428 |
|
Accrued compensation | 45,140 |
| | 57,516 |
|
Accrued royalties | 19,101 |
| | 26,178 |
|
Other accrued expenses | 67,138 |
| | 69,000 |
|
Deferred revenue | 516,188 |
| | 487,172 |
|
Total current liabilities | 854,570 |
| | 816,857 |
|
Long-term debt | 837,503 |
| | 658,911 |
|
Accrued pension liability | 7,672 |
| | 59,460 |
|
Accrued postretirement benefits | 9,006 |
| | 9,200 |
|
Deferred income taxes | 148,234 |
| | 123,895 |
|
Other liabilities | 22,548 |
| | 19,985 |
|
Commitments and contingencies |
| |
|
Stockholders’ equity: |
| |
|
Class A common stock, $0.01 par value per share, 160,000,000 shares authorized, 67,621,367 and 67,527,344 shares issued, and 65,937,011 and 65,121,884 shares outstanding at August 31, 2012 and November 30, 2011, respectively | 676 |
| | 675 |
|
Additional paid-in capital | 671,378 |
| | 636,440 |
|
Treasury stock, at cost: 1,684,356 and 2,405,460 shares at August 31, 2012 and November 30, 2011, respectively | (101,711 | ) | | (133,803 | ) |
Retained earnings | 1,042,367 |
| | 930,619 |
|
Accumulated other comprehensive loss | (44,071 | ) | | (49,202 | ) |
Total stockholders’ equity | 1,568,639 |
| | 1,384,729 |
|
Total liabilities and stockholders’ equity | $ | 3,448,172 |
| | $ | 3,073,037 |
|
See accompanying notes.
IHS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except for per-share amounts)
|
| | | | | | | | | | | | | | | |
| Three Months Ended August 31, | | Nine Months Ended August 31, |
| 2012 | | 2011 | | 2012 | | 2011 |
Revenue: |
| |
| | | | |
Products | $ | 339,946 |
| | $ | 295,328 |
| | $ | 964,444 |
| | 832,006 |
|
Services | 45,663 |
| | 43,390 |
| | 151,067 |
| | 122,976 |
|
Total revenue | 385,609 |
| | 338,718 |
| | 1,115,511 |
| | 954,982 |
|
Operating expenses: |
| |
| | | | |
Cost of revenue: |
| |
| | | | |
Products | 132,577 |
| | 120,638 |
| | 392,931 |
| | 343,437 |
|
Services | 21,169 |
| | 23,376 |
| | 72,676 |
| | 68,448 |
|
Total cost of revenue (includes stock-based compensation expense of $1,488; $854; $4,467 and $2,638 for the three and nine months ended August 31, 2012 and 2011, respectively) | 153,746 |
| | 144,014 |
| | 465,607 |
| | 411,885 |
|
Selling, general and administrative (includes stock-based compensation expense of $29,050; $21,570; $86,465 and $61,175 for the three and nine months ended August 31, 2012 and 2011, respectively) | 138,519 |
| | 117,352 |
| | 390,540 |
| | 324,792 |
|
Depreciation and amortization | 31,390 |
| | 23,496 |
| | 86,683 |
| | 62,411 |
|
Restructuring charges | 967 |
| | — |
| | 12,080 |
| | 702 |
|
Acquisition-related costs | 2,104 |
| | 1,540 |
| | 3,472 |
| | 6,089 |
|
Net periodic pension and postretirement expense | 2,001 |
| | 835 |
| | 5,998 |
| | 2,383 |
|
Other expense (income), net | 622 |
| | (197 | ) | | (680 | ) | | 416 |
|
Total operating expenses | 329,349 |
| | 287,040 |
| | 963,700 |
| | 808,678 |
|
Operating income | 56,260 |
| | 51,678 |
| | 151,811 |
| | 146,304 |
|
Interest income | 255 |
| | 163 |
| | 674 |
| | 654 |
|
Interest expense | (5,057 | ) | | (2,967 | ) | | (14,837 | ) | | (6,774 | ) |
Non-operating expense, net | (4,802 | ) | | (2,804 | ) | | (14,163 | ) | | (6,120 | ) |
Income from continuing operations before income taxes | 51,458 |
| | 48,874 |
| | 137,648 |
| | 140,184 |
|
Provision for income taxes | (7,384 | ) | | (8,183 | ) | | (25,908 | ) | | (27,951 | ) |
Income from continuing operations | 44,074 |
| | 40,691 |
| | 111,740 |
| | 112,233 |
|
Income from discontinued operations, net | 8 |
| | 118 |
| | 8 |
| | 454 |
|
Net income | $ | 44,082 |
| | $ | 40,809 |
| | $ | 111,748 |
| | 112,687 |
|
| | | | | | | |
Basic earnings per share: |
| |
|
| | | | |
Income from continuing operations | $ | 0.67 |
| | $ | 0.63 |
| | $ | 1.70 |
| | $ | 1.73 |
|
Income from discontinued operations, net | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.01 |
|
Net income | $ | 0.67 |
| | $ | 0.63 |
| | $ | 1.70 |
| | $ | 1.74 |
|
Weighted average shares used in computing basic earnings per share | 65,992 |
| | 65,022 |
| | 65,795 |
| | 64,864 |
|
| | | | | | | |
Diluted earnings per share: |
|
| |
|
| | | | |
Income from continuing operations | $ | 0.66 |
| | $ | 0.62 |
| | $ | 1.68 |
| | $ | 1.71 |
|
Income from discontinued operations, net | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.01 |
|
Net income | $ | 0.66 |
| | $ | 0.62 |
| | $ | 1.68 |
| | $ | 1.72 |
|
Weighted average shares used in computing diluted earnings per share | 66,808 |
| | 65,677 |
| | 66,602 |
| | 65,555 |
|
See accompanying notes.
IHS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
| | | | | | | |
| Nine Months Ended August 31, |
| 2012 | | 2011 |
Operating activities: |
| |
|
Net income | $ | 111,748 |
| | $ | 112,687 |
|
Reconciliation of net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 86,683 |
| | 62,411 |
|
Stock-based compensation expense | 90,932 |
| | 63,813 |
|
Excess tax benefit from stock-based compensation | (13,181 | ) | | (9,182 | ) |
Net periodic pension and postretirement expense | 5,998 |
| | 2,110 |
|
Pension and postretirement contributions | (67,023 | ) | | — |
|
Deferred income taxes | (7,082 | ) | | 11,120 |
|
Change in assets and liabilities: |
| |
|
Accounts receivable, net | 46,177 |
| | 35,737 |
|
Other current assets | (4,435 | ) | | (3,471 | ) |
Accounts payable | 7,806 |
| | (7,838 | ) |
Accrued expenses | (30,678 | ) | | (26,439 | ) |
Income tax payable | 16,742 |
| | (13,874 | ) |
Deferred revenue | 2,505 |
| | 25,832 |
|
Other liabilities | 64 |
| | 336 |
|
Net cash provided by operating activities | 246,256 |
| | 253,242 |
|
Investing activities: |
| |
|
Capital expenditures on property and equipment | (49,699 | ) | | (45,373 | ) |
Acquisitions of businesses, net of cash acquired | (306,268 | ) | | (699,992 | ) |
Intangible assets acquired | (3,700 | ) | | (2,985 | ) |
Change in other assets | 1,658 |
| | (1,203 | ) |
Settlements of forward contracts | (3,058 | ) | | (2,849 | ) |
Net cash used in investing activities | (361,067 | ) | | (752,402 | ) |
Financing activities: |
| |
|
Proceeds from borrowings | 680,001 |
| | 870,000 |
|
Repayment of borrowings | (476,399 | ) | | (353,368 | ) |
Payment of debt issuance costs | (740 | ) | | (6,326 | ) |
Excess tax benefit from stock-based compensation | 13,181 |
| | 9,182 |
|
Proceeds from the exercise of employee stock options | 2,938 |
| | 2,144 |
|
Repurchases of common stock | (35,358 | ) | | (28,032 | ) |
Net cash provided by financing activities | 183,623 |
| | 493,600 |
|
Foreign exchange impact on cash balance | (5,064 | ) | | 7,697 |
|
Net increase in cash and cash equivalents | 63,748 |
| | 2,137 |
|
Cash and cash equivalents at the beginning of the period | 234,685 |
| | 200,735 |
|
Cash and cash equivalents at the end of the period | $ | 298,433 |
| | $ | 202,872 |
|
See accompanying notes.
IHS INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Class A Common Stock | | Class A Common Stock | | Additional Paid-In Capital | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
Balance at November 30, 2011 (Audited) | 65,122 |
| | $ | 675 |
| | $ | 636,440 |
| | $ | (133,803 | ) | | $ | 930,619 |
| | $ | (49,202 | ) | | $ | 1,384,729 |
|
Stock-based award activity | 815 |
| | 1 |
| | 21,757 |
| | 32,092 |
| | — |
| | — |
| | 53,850 |
|
Excess tax benefit on vested shares | — |
| | — |
| | 13,181 |
| | — |
| | — |
| | — |
| | 13,181 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 111,748 |
| | — |
| | 111,748 |
|
Other comprehensive income, net of tax: |
| |
| |
| |
| |
| |
| |
|
Unrealized losses on hedging activities | — |
| | — |
| | — |
| | — |
| | — |
| | (457 | ) | | (457 | ) |
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | 5,588 |
| | 5,588 |
|
Comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 116,879 |
|
Balance at August 31, 2012 | 65,937 |
| | $ | 676 |
| | $ | 671,378 |
| | $ | (101,711 | ) | | $ | 1,042,367 |
| | $ | (44,071 | ) | | $ | 1,568,639 |
|
See accompanying notes.
IHS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| |
1. | Basis of Presentation and Significant Accounting Policies |
The accompanying unaudited condensed consolidated financial statements of IHS Inc. (IHS, we, our, or us) have been prepared on substantially the same basis as our annual consolidated financial statements and should be read in conjunction with our annual report on Form 10-K, as amended, for the year ended November 30, 2011. In our opinion, these condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented, and such adjustments are of a normal, recurring nature.
Our business has seasonal aspects. Our fourth quarter typically generates our highest quarterly levels of revenue and profit. Conversely, our first quarter generally has our lowest levels of revenue and profit. These trends have been further amplified by the product mix from recent acquisitions, which tend to generate a larger proportion of their sales in the fourth quarter. We also experience event-driven seasonality in our business; for instance, IHS CERAWeek, an annual energy executive gathering, is held during our second quarter. Another example is the triennial release of the Boiler Pressure Vessel Code (BPVC) engineering standard, which generates revenue for us predominantly in the third quarter of every third year. The BPVC benefit most recently occurred in the third quarter of 2010.
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (FASB) issued guidance on the presentation of comprehensive income that will become effective for us in the first quarter of 2013. Under the new guidance, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance does not change the components that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. We are evaluating our presentation options under this Accounting Standards Update (ASU); however, we do not expect these changes to impact the consolidated financial statements other than the change in presentation.
In September 2011, the FASB issued guidance on testing goodwill for impairment that will become effective for us in the first quarter of 2013; however, early adoption is permitted. Under the new guidance, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the entity determines that this threshold is not met, then performing the two-step impairment test is unnecessary. We are currently evaluating whether we will elect to adopt this new qualitative approach to impairment testing prior to the first quarter of 2013, but we do not expect that the adoption of this standard will have an impact on our consolidated financial statements.
In July 2012, the FASB issued guidance on testing indefinite-lived intangible assets for impairment that will become effective for us in the first quarter of 2013; however, early adoption is permitted. The new guidance permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. We are currently evaluating whether we will elect to adopt this new qualitative approach to impairment testing prior to the first quarter of 2013, but we do not expect that the adoption of this standard will have an impact on our consolidated financial statements.
During the nine months ended August 31, 2012, we completed the following acquisitions:
Acquisitions announced March 5, 2012. On March 5, 2012, we announced the completion of three strategic acquisitions: Displaybank Co., Ltd., a global authority in market research and consulting for the flat-panel display industry; the Computer Assisted Product Selection (CAPS™) electronic components database and tools business, including CAPS Expert, from PartMiner Worldwide; and certain digital oil and gas pipeline and infrastructure information assets from Hild Technology Services. The combined purchase price of the transactions was approximately $44 million. We expect that Displaybank will deepen our Asia Pacific research and analysis capabilities, that the CAPS family of products will significantly enhance our existing electronic parts information business, and that the digital oil and gas pipeline and infrastructure business will help us deliver a more robust product offering for energy producers and refiners in North America.
IMS Group Holdings Ltd. (IMS Research). On March 22, 2012, we acquired IMS Research, a leading independent provider of market research and consultancy to the global electronics industry, for approximately $44 million in cash, net of cash acquired. The acquisition of IMS Research will help us expand our products and services in the technology, media and telecommunications value chain, and we expect that it will better position us to deliver a more robust product offering to our customers in the global technology marketplace.
BDW Automotive GmbH (BDW). On March 29, 2012, we acquired BDW, a leader in the development of information and planning systems and intelligent processing of vehicle databases for the automotive industry, for approximately $7 million, net of cash acquired. We expect that this acquisition will significantly expand our capabilities in the automotive dealer and aftermarket data and systems market.
XēDAR Corporation (XēDAR). On May 11, 2012, we acquired XēDAR for approximately $28 million in cash, net of cash acquired. XēDAR is a leading developer and provider of geospatial information products and services. We expect that XēDAR’s proprietary geographic and land information system solutions will provide a valuable contribution to our energy technical information and analytical tools.
CyberRegs. On July 2, 2012, we acquired the CyberRegs business from Citation Technologies, Inc., for approximately $11 million in cash. The CyberRegs business is designed to help customers make business decisions about regulatory compliance for Enterprise Sustainability Management. We expect that this acquisition will allow customers to reduce IT system and workflow complexity by reducing the number of vendors they rely on to support their strategies for Enterprise Sustainability Management.
GlobalSpec, Inc. (GlobalSpec). On July 9, 2012, we acquired GlobalSpec, a leading specialized vertical search, product information, and digital media company serving the engineering, manufacturing, and related scientific and technical market segments, from Warburg Pincus LLC, for $136 million, net of cash acquired. We believe that the acquisition of GlobalSpec, Inc., will allow us to improve our product design portfolio and create an expanded destination for our products and services.
Invention Machine. On July 11, 2012, we acquired Invention Machine, a leader in semantic search technology that uncovers relevant insights held within a wealth of internal and external knowledge sources, for approximately $40 million, net of cash acquired. We expect to use Invention Machine's semantic search engine to help customers accelerate innovation and develop, maintain, and produce superior products and services.
The following table summarizes the preliminary purchase price allocation, net of acquired cash, for all acquisitions completed in 2012 (in thousands):
|
| | | | | | | | | | | |
| GlobalSpec | | All others | | Total |
Assets: | | | | | |
Current assets | $ | 5,512 |
| | $ | 11,702 |
| | $ | 17,214 |
|
Property and equipment | 1,880 |
| | 2,531 |
| | 4,411 |
|
Intangible assets | 45,200 |
| | 75,979 |
| | 121,179 |
|
Goodwill | 114,215 |
| | 118,117 |
| | 232,332 |
|
Other long-term assets | 2,157 |
| | 282 |
| | 2,439 |
|
Total assets | 168,964 |
| | 208,611 |
| | 377,575 |
|
Liabilities: | | | | | |
Current liabilities | 2,374 |
| | 8,191 |
| | 10,565 |
|
Deferred revenue | 12,238 |
| | 12,926 |
| | 25,164 |
|
Deferred taxes | 17,661 |
| | 17,706 |
| | 35,367 |
|
Other long-term liabilities | 211 |
| | — |
| | 211 |
|
Total liabilities | 32,484 |
| | 38,823 |
| | 71,307 |
|
Purchase price | $ | 136,480 |
| | $ | 169,788 |
| | $ | 306,268 |
|
| |
3. | Commitments and Contingencies |
From time to time, we are involved in litigation, most of which is incidental to our business. In our opinion, no litigation to which we currently are a party is expected to have a material adverse effect on our results of operations or financial condition.
Our comprehensive income for the three and nine months ended August 31, 2012 and 2011, was as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended August 31, | | Nine Months Ended August 31, |
| 2012 | | 2011 | | 2012 | | 2011 |
Net income | $ | 44,082 |
| | $ | 40,809 |
| | $ | 111,748 |
| | $ | 112,687 |
|
Other comprehensive income (loss): | | | | | | | |
Unrealized losses on hedging activities | (292 | ) | | (1,660 | ) | | (457 | ) | | (2,290 | ) |
Foreign currency translation adjustments | 15,458 |
| | (3,129 | ) | | 5,588 |
| | 26,228 |
|
Total comprehensive income | $ | 59,248 |
| | $ | 36,020 |
| | $ | 116,879 |
| | $ | 136,625 |
|
In the fourth quarter of 2011, we began to consolidate positions to our recently established accounting and customer care Centers of Excellence (COE) locations. During the first nine months of 2012, we have continued to consolidate positions to the COEs, as well as eliminating positions related to other identified operational efficiencies. We also began consolidating legacy data centers in 2012, including incurring certain contract termination costs. We expect to continue to incur costs related to these and other similar activities in future periods, resulting in additional restructuring charges.
During the first nine months of 2012, we recorded approximately $12.1 million of restructuring charges for direct and incremental costs associated with these activities. The activities included the movement or elimination of approximately 190 positions. During the nine months ended August 31, 2012, approximately $9.9 million of the charge was recorded in the Americas segment, $1.9 million was recorded in the EMEA segment, and $0.2 million was recorded in the APAC segment.
The following table provides a reconciliation of the restructuring liability as of August 31, 2012 (in thousands):
|
| | | | | | | | | | | | | | | |
| Employee Severance and Other Termination Benefits | | Contract Termination Costs | | Other | | Total |
Balance at November 30, 2011 | $ | 540 |
| | $ | — |
| | $ | — |
| | $ | 540 |
|
Add: Restructuring costs incurred | 9,177 |
| | 2,228 |
| | 597 |
| | 12,002 |
|
Revision to prior estimates | 78 |
| | — |
| | — |
| | 78 |
|
Less: Amounts paid | (7,599 | ) | | (723 | ) | | (538 | ) | | (8,860 | ) |
Balance at August 31, 2012 | $ | 2,196 |
| | $ | 1,505 |
| | $ | 59 |
| | $ | 3,760 |
|
As of August 31, 2012, approximately $3.0 million of the remaining liability was in the Americas segment and $0.8 million was in the EMEA segment.
| |
6. | Acquisition-related Costs |
During the first nine months of 2012, we recorded approximately $3.5 million of direct and incremental costs associated with recent acquisitions, including legal and professional fees, the elimination of certain positions, and a facility closure. Substantially all of the costs were incurred within the Americas segment.
The following table provides a reconciliation of the acquisition-related costs accrued liability as of August 31, 2012 (in thousands):
|
| | | | | | | | | | | | | | | |
| Employee Severance and Other Termination Benefits | | Contract Termination Costs | | Other | | Total |
Balance at November 30, 2011 | $ | 1,619 |
| | $ | 469 |
| | $ | 185 |
| | $ | 2,273 |
|
Add: Costs incurred | 1,485 |
| | 54 |
| | 1,933 |
| | 3,472 |
|
Less: Amounts paid | (1,976 | ) | | (523 | ) | | (2,086 | ) | | (4,585 | ) |
Balance at August 31, 2012 | $ | 1,128 |
| | $ | — |
| | $ | 32 |
| | $ | 1,160 |
|
As of August 31, 2012, the entire remaining $1.2 million liability was in the Americas segment.
| |
7. | Discontinued Operations |
Effective December 31, 2009, we sold our small non-core South African business. We have one remaining three-year note receivable that is secured by a pledge on the shares of the South African company.
During the fourth quarter of 2011, we discontinued operations of a small print-and-advertising business focused on a narrow, declining market. The abandonment of this business included certain intellectual property. We also discontinued a minor government-services business during that period.
Operating results of these discontinued operations for the three and nine months ended August 31, 2012 and 2011, respectively, were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended August 31, | | Nine Months Ended August 31, |
| 2012 | | 2011 | | 2012 | | 2011 |
Revenue | $ | — |
| | $ | 2,114 |
| | $ | — |
| | $ | 5,970 |
|
| | | | | | | |
Income from discontinued operations before income taxes | 18 |
| | 185 |
| | 18 |
| | 747 |
|
Tax expense | (10 | ) | | (67 | ) | | (10 | ) | | (293 | ) |
Income from discontinued operations, net | $ | 8 |
| | $ | 118 |
| | $ | 8 |
| | $ | 454 |
|
| |
8. | Stock-based Compensation |
Stock-based compensation expense for the three and nine months ended August 31, 2012 and 2011, respectively, was as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended August 31, | | Nine Months Ended August 31, |
| 2012 | | 2011 | | 2012 | | 2011 |
Cost of revenue | $ | 1,488 |
| | $ | 854 |
| | $ | 4,467 |
| | $ | 2,638 |
|
Selling, general and administrative | 29,050 |
| | 21,570 |
| | 86,465 |
| | 61,175 |
|
Total stock-based compensation expense | $ | 30,538 |
| | $ | 22,424 |
| | $ | 90,932 |
| | $ | 63,813 |
|
Total income tax benefits recognized for stock-based compensation arrangements were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended August 31, | | Nine Months Ended August 31, |
| 2012 | | 2011 | | 2012 | | 2011 |
Income tax benefits | $ | 10,797 |
| | $ | 7,842 |
| | $ | 32,151 |
| | $ | 22,444 |
|
No stock-based compensation cost was capitalized during the three or nine months ended August 31, 2012 and 2011.
As of August 31, 2012, there was $121.8 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to nonvested stock-based awards that will be recognized over a weighted average period of approximately 1.2 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.
Restricted Stock Units (RSUs). The following table summarizes RSU activity during the nine months ended August 31, 2012.
|
| | | | | | |
| Shares | | Weighted- Average Grant Date Fair Value |
| (in thousands) | | |
Balances, November 30, 2011 | 2,898 |
| | $ | 66.74 |
|
Granted | 1,308 |
| | $ | 87.51 |
|
Vested | (1,119 | ) | | $ | 61.01 |
|
Forfeited | (142 | ) | | $ | 75.60 |
|
Balances, August 31, 2012 | 2,945 |
| | $ | 77.71 |
|
The total fair value of RSUs that vested during the nine months ended August 31, 2012 was $103.7 million based on the weighted-average fair value on the vesting date.
Our effective tax rate is estimated based upon the effective tax rate expected to be applicable for the full fiscal year.
Our effective tax rate for the three and nine months ended August 31, 2012 was 14.3 percent and 18.8 percent, respectively, compared to 16.7 percent and 19.9 percent for the same periods of 2011. The lower 2012 rates reflect the benefits from discrete period items, including a reduction in the statutory tax rate in the United Kingdom, as well as domestic pre-tax income being a lesser portion of global pre-tax income in the period.
On August 29, 2012, we exercised an expansion feature under our syndicated bank credit agreement (the Credit Facility) to increase our borrowing capacity under the revolver to $1.0 billion. We also increased our term loan borrowings under the Credit Facility to $513 million. All borrowings under the Credit Facility are unsecured. The loan and revolver included in the Credit Facility have a five-year term ending in January 2016. The interest rates for borrowings under the Credit Facility will be the applicable LIBOR plus 1.00% to 1.75%, depending upon our Leverage Ratio, which is defined as the ratio of Consolidated Funded Indebtedness to rolling four-quarter Consolidated Earnings Before Interest Expense, Taxes, Depreciation and Amortization (EBITDA), as defined in the Credit Facility. A commitment fee on any unused balance is payable periodically and ranges from 0.15% to 0.30% based upon our Leverage Ratio. The Credit Facility contains certain financial and other covenants, including a maximum Leverage Ratio and a maximum Interest Coverage Ratio, as defined in the Credit Facility.
On August 29, 2012, we also entered into a new $250 million interest-only term loan agreement. The loan has a two-and-a-half year term ending in March 2015, and borrowings under the loan are unsecured. The interest for borrowing under the term loan, as well as certain financial and other covenants, including a maximum Leverage Ratio and a maximum Interest Coverage ratio, are identical to the existing Credit Facility term loan.
As of August 31, 2012, we were in compliance with all of the covenants in the Credit Facility and had approximately $250 million of outstanding borrowings under the revolver at a current annual interest rate of 1.50% and approximately $756 million of outstanding borrowings under the term loans at a current weighted average annual interest rate of 1.53%. We have classified $127 million of revolver borrowings as long-term and $123 million as short-term based upon our current estimate of expected repayments for the next twelve months. Short-term debt also includes $46 million of scheduled term loan principal repayments over the next twelve months. We had approximately $0.5 million of outstanding letters of credit under the Credit Facility as of August 31, 2012.
The carrying value of our short-term and long-term debt approximates their fair value.
| |
11. | Pensions and Postretirement Benefits |
We sponsor a non-contributory, defined-benefit retirement plan (the U.S. RIP) for all of our U.S. employees who have at least one year of service and who were hired or acquired before January 1, 2012. We also have a frozen defined-benefit pension plan (the U.K. RIP) that covers certain employees of a subsidiary based in the United Kingdom. We also have an unfunded Supplemental Income Plan (SIP), which is a non-qualified pension plan, for certain U.S. employees who earn over a federally stipulated amount. Benefits for all three plans are generally based on years of service and either average or cumulative base compensation. Plan funding strategies are influenced by employee benefit laws and tax laws. The U.K. RIP includes a provision for employee contributions and inflation-based benefit increases for retirees.
During the fourth quarter of 2011, we changed our method of accounting for actuarial gains and losses related to our pension and other postretirement benefit plans. Under the new method, the net actuarial gains or losses in excess of a corridor amount will be recognized immediately in our operating results during the fourth quarter of each fiscal year.
During the first quarter of 2012, we accelerated plan funding by contributing $65 million to the U.S. RIP. Approximately $57 million of this contribution allowed us to bring all deficit funding current through November 30, 2011 and pay fees and expenses associated with the third-party annuity contracts, with the remaining $8 million used to fund estimated 2012 pension service costs.
Our net periodic pension expense (income) for the three and nine months ended August 31, 2012 and 2011, respectively, was comprised of the following (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended August 31, 2012 | | Three Months Ended August 31, 2011 |
| U.S. RIP | | U.K. RIP | | SIP | | Total | | U.S. RIP | | U.K. RIP | | SIP | | Total |
Service costs incurred | 2,544 |
| | $ | 33 |
| | $ | 47 |
| | $ | 2,624 |
| | $ | 2,109 |
| | $ | 25 |
| | $ | 36 |
| | 2,170 |
|
Interest costs on projected benefit obligation | 1,736 |
| | 422 |
| | 97 |
| | 2,255 |
| | 2,969 |
| | 484 |
| | 99 |
| | 3,552 |
|
Expected return on plan assets | (2,122 | ) | | (551 | ) | | — |
| | (2,673 | ) | | (4,096 | ) | | (581 | ) | | — |
| | (4,677 | ) |
Amortization of prior service cost | (336 | ) | | — |
| | (2 | ) | | (338 | ) | | (337 | ) | | — |
| | (2 | ) | | (339 | ) |
Amortization of transitional obligation/(asset) | — |
| | — |
| | 11 |
| | 11 |
| | — |
| | — |
| | 11 |
| | 11 |
|
Special termination benefits | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 60 |
| | 60 |
|
Net periodic pension expense (income) | $ | 1,822 |
| | $ | (96 | ) | | $ | 153 |
| | $ | 1,879 |
| | $ | 645 |
| | $ | (72 | ) | | $ | 204 |
| | $ | 777 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended August 31, 2012 | | Nine Months Ended August 31, 2011 |
| U.S. RIP | | U.K. RIP | | SIP | | Total | | U.S. RIP | | U.K. RIP | | SIP | | Total |
Service costs incurred | 7,632 |
| | $ | 99 |
| | $ | 141 |
| | $ | 7,872 |
| | $ | 6,328 |
| | $ | 79 |
| | $ | 105 |
| | 6,512 |
|
Interest costs on projected benefit obligation | 5,208 |
| | 1,277 |
| | 291 |
| | 6,776 |
| | 8,907 |
| | 1,463 |
| | 297 |
| | 10,667 |
|
Expected return on plan assets | (6,366 | ) | | (1,666 | ) | | — |
| | (8,032 | ) | | (12,291 | ) | | (1,757 | ) | | — |
| | (14,048 | ) |
Amortization of prior service cost | (1,008 | ) | | — |
| | (6 | ) | | (1,014 | ) | | (1,008 | ) | | — |
| | (6 | ) | | (1,014 | ) |
Amortization of transitional obligation/(asset) | — |
| | — |
| | 31 |
| | 31 |
| | — |
| | — |
| | 32 |
| | 32 |
|
Special termination benefits | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 60 |
| | 60 |
|
Net periodic pension expense (income) | $ | 5,466 |
| | $ | (290 | ) | | $ | 457 |
| | $ | 5,633 |
| | $ | 1,936 |
| | $ | (215 | ) | | $ | 488 |
| | $ | 2,209 |
|
We sponsor a contributory postretirement medical plan. The plan grants access to group rates for retiree-medical coverage for all U.S. employees who leave IHS after age 55 with at least 10 years of service. Additionally, we subsidize the cost of coverage for retiree-medical coverage for certain grandfathered employees. Our subsidy is capped at different rates per
month depending on individual retirees’ Medicare eligibility.
Our net periodic postretirement expense was comprised of the following for the three and nine months ended August 31, 2012 and 2011, respectively (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended August 31, | | Nine Months Ended August 31, |
| 2012 | | 2011 | | 2012 | | 2011 |
Service costs incurred | $ | 4 |
| | $ | 7 |
| | $ | 13 |
| | $ | 21 |
|
Interest costs on projected benefit obligation | 118 |
| | 132 |
| | 352 |
| | 396 |
|
Amortization of prior service cost | — |
| | (81 | ) | | — |
| | (243 | ) |
Net periodic postretirement expense | $ | 122 |
| | $ | 58 |
| | $ | 365 |
| | $ | 174 |
|
Basic earnings per share (EPS) is computed on the basis of the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common shares.
Weighted average common shares outstanding for the three and nine months ended August 31, 2012 and 2011, respectively, were calculated as follows (in thousands):
|
| | | | | | | | | | | |
| Three Months Ended August 31, | | Nine Months Ended August 31, |
| 2012 | | 2011 | | 2012 | | 2011 |
Weighted average common shares outstanding: | | | | | | | |
Shares used in basic EPS calculation | 65,992 |
| | 65,022 |
| | 65,795 |
| | 64,864 |
|
Effect of dilutive securities: | | | | | | | |
Restricted stock units | 790 |
| | 616 |
| | 770 |
| | 609 |
|
Stock options and other stock-based awards | 26 |
| | 39 |
| | 37 |
| | 82 |
|
Shares used in diluted EPS calculation | 66,808 |
| | 65,677 |
| | 66,602 |
| | 65,555 |
|
In April and June 2011, to mitigate interest rate exposure on our outstanding credit facility debt, we entered into two interest rate derivative contracts that effectively swap $100 million of floating rate debt for fixed rate debt at a 3.05% weighted average interest rate, which rate includes the current credit facility spread. Both of these interest rate swaps expire in July 2015. Because the terms of the swaps and the variable rate debt coincide, we do not expect any ineffectiveness. We have designated and accounted for these instruments as cash flow hedges, with changes in fair value being deferred in accumulated other comprehensive loss in the consolidated balance sheets.
Since our swaps are not listed on an exchange, we have evaluated fair value by reference to similar transactions in active markets; consequently, we have classified the swaps within Level 2 of the fair value measurement hierarchy. As of August 31, 2012, the fair market value of our swaps was a loss of $3.8 million, and the current mark-to-market loss position is recorded in other liabilities in the consolidated balance sheets.
| |
14. | Goodwill and Intangible Assets |
The following table presents details of our intangible assets, other than goodwill, as of August 31, 2012 and November 30, 2011 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| As of August 31, 2012 | | As of November 30, 2011 |
| Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
Intangible assets subject to amortization: | | | | | | | | | | | |
Information databases | $ | 290,490 |
| | $ | (130,523 | ) | | $ | 159,967 |
| | $ | 259,524 |
| | $ | (105,078 | ) | | $ | 154,446 |
|
Customer relationships | 269,110 |
| | (57,835 | ) | | 211,275 |
| | 210,940 |
| | (43,468 | ) | | 167,472 |
|
Non-compete agreements | 4,571 |
| | (2,414 | ) | | 2,157 |
| | 8,515 |
| | (5,754 | ) | | 2,761 |
|
Developed computer software | 141,686 |
| | (42,560 | ) | | 99,126 |
| | 123,566 |
| | (25,718 | ) | | 97,848 |
|
Other | 51,512 |
| | (11,125 | ) | | 40,387 |
| | 27,667 |
| | (5,958 | ) | | 21,709 |
|
Total | $ | 757,369 |
| | $ | (244,457 | ) | | $ | 512,912 |
| | $ | 630,212 |
| | $ | (185,976 | ) | | $ | 444,236 |
|
Intangible assets not subject to amortization: | | | | | | | | | | | |
Trademarks | 64,498 |
| | — |
| | 64,498 |
| | 69,539 |
| | — |
| | 69,539 |
|
Perpetual licenses | 1,187 |
| | — |
| | 1,187 |
| | 1,174 |
| | — |
| | 1,174 |
|
Total intangible assets | $ | 823,054 |
| | $ | (244,457 | ) | | $ | 578,597 |
| | $ | 700,925 |
| | $ | (185,976 | ) | | $ | 514,949 |
|
Intangible assets amortization expense was $21.7 million for the three months and $60.8 million for the nine months ended August 31, 2012, as compared with $16.6 million for the three months and $44.3 million for the nine months ended August 31, 2011. The following table presents the estimated future amortization expense related to intangible assets held as of August 31, 2012 (in thousands):
|
| | | | |
Year | | Amount |
Remainder of 2012 | | $ | 21,750 |
|
2013 | | 82,810 |
|
2014 | | 72,016 |
|
2015 | | 66,292 |
|
2016 | | 64,991 |
|
Thereafter | | 205,053 |
|
Changes in our goodwill and gross intangible assets from November 30, 2011 to August 31, 2012 were primarily the result of our recent acquisition activities, in addition to foreign currency translation. The change in net intangible assets was primarily due to the addition of intangible assets associated with the acquisitions described in Note 2, Business Combinations, partially offset by current year amortization.
We prepare our financial reports and analyze our business results within our three reportable geographic segments: Americas, EMEA, and APAC. We evaluate segment performance primarily at the revenue and operating profit level for each of these three segments. We also evaluate revenues by transaction type and information domain.
Information about the operations of our three segments is set forth below. No single customer accounted for 10% or more of our total revenue for the three and nine months ended August 31, 2012 and 2011. There are no material inter-segment revenues for any period presented. Certain corporate transactions are not allocated to the reportable segments, including such items as stock-based compensation expense, net periodic pension and postretirement expense (income), corporate-level impairments, and gain (loss) on sale of corporate assets.
|
| | | | | | | | | | | | | | | | | | | |
| Americas | | EMEA | | APAC | | Shared Services | | Consolidated Total |
| (In thousands) |
Three Months Ended August 31, 2012 | | | | | | | | |
Revenue | $ | 232,369 |
| | $ | 108,505 |
| | $ | 44,735 |
| | $ | — |
| | $ | 385,609 |
|
Operating income | 70,086 |
| | 24,590 |
| | 10,001 |
| | (48,417 | ) | | 56,260 |
|
Depreciation and amortization | 23,281 |
| | 5,988 |
| | 390 |
| | 1,731 |
| | 31,390 |
|
Three Months Ended August 31, 2011 | | | | | | | | |
Revenue | $ | 205,728 |
| | $ | 95,946 |
| | $ | 37,044 |
| | $ | — |
| | $ | 338,718 |
|
Operating income | 57,484 |
| | 18,858 |
| | 10,911 |
| | (35,575 | ) | | 51,678 |
|
Depreciation and amortization | 18,082 |
| | 4,772 |
| | 48 |
| | 594 |
| | 23,496 |
|
| | | | | | | | | |
| Americas | | EMEA | | APAC | | Shared Services | | Consolidated Total |
| (In thousands) |
Nine Months Ended August 31, 2012 | | | | | | | | |
Revenue | $ | 669,757 |
| | $ | 321,438 |
| | $ | 124,316 |
| | $ | — |
| | $ | 1,115,511 |
|
Operating income | 190,071 |
| | 69,553 |
| | 29,489 |
| | (137,302 | ) | | 151,811 |
|
Depreciation and amortization | 65,039 |
| | 16,169 |
| | 711 |
| | 4,764 |
| | 86,683 |
|
Nine Months Ended August 31, 2011 | | | | | | | | |
Revenue | $ | 580,189 |
| | $ | 275,446 |
| | $ | 99,347 |
| | $ | — |
| | $ | 954,982 |
|
Operating income | 161,459 |
| | 55,104 |
| | 29,037 |
| | (99,296 | ) | | 146,304 |
|
Depreciation and amortization | 47,510 |
| | 13,062 |
| | 134 |
| | 1,705 |
| | 62,411 |
|
Revenue by transaction type was as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended August 31, | | Nine Months Ended August 31, |
| 2012 | | 2011 | | 2012 | | 2011 |
Subscription revenue | $ | 294,516 |
| | $ | 263,916 |
| | $ | 855,160 |
| | $ | 747,907 |
|
Non-subscription revenue | 91,093 |
| | 74,802 |
| | 260,351 |
| | 207,075 |
|
Total revenue | $ | 385,609 |
| | $ | 338,718 |
| | $ | 1,115,511 |
| | $ | 954,982 |
|
Revenue by information domain was as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended August 31, | | Nine Months Ended August 31, |
| 2012 | | 2011 | | 2012 | | 2011 |
Energy revenue | $ | 180,072 |
| | $ | 142,608 |
| | $ | 520,958 |
| | $ | 403,703 |
|
Product Lifecycle (PLC) revenue | 129,475 |
| | 114,140 |
| | 364,295 |
| | 321,124 |
|
Security revenue | 30,280 |
| | 32,204 |
| | 87,524 |
| | 88,570 |
|
Environment revenue | 24,738 |
| | 25,235 |
| | 71,878 |
| | 68,778 |
|
Macroeconomic Forecasting and Intersection revenue | 21,044 |
| | 24,531 |
| | 70,856 |
| | 72,807 |
|
Total revenue | $ | 385,609 |
| | $ | 338,718 |
| | $ | 1,115,511 |
| | $ | 954,982 |
|
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
In addition to historical information, this quarterly report on Form 10-Q contains forward-looking statements. These forward-looking statements generally are identified by the use of the words “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of these terms, and other similar expressions. Forward-looking statements are based on current expectations, assumptions, and projections that are subject to risks and uncertainties, which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is outlined under the “Risk Factors” section of our 2011 annual report on Form 10-K. We are under no
obligation to update or publicly revise these forward-looking statements, whether as a result of new information, future events, or otherwise.
Management’s discussion and analysis is intended to help the reader understand the financial condition and results of operations for IHS Inc. The following discussion should be read in conjunction with our annual report on Form 10-K, as amended, for the year ended November 30, 2011, the Condensed Consolidated Financial Statements and accompanying notes included in this quarterly report on Form 10-Q, and important information and disclosure that we routinely post to our website (www.ihs.com).
Executive Summary
Business Overview
We are the leading source of information, insight, and analytics in critical areas that shape today's business landscape. Businesses and governments in more than 165 countries around the globe rely on our comprehensive content, expert independent analysis, and flexible delivery methods to make high-impact decisions and develop strategies with speed and confidence. We have been in business since 1959, incorporated in the State of Delaware in 1994, and became a publicly traded company on the New York Stock Exchange in 2005. Headquartered in Englewood, Colorado, USA, we employ more than 6,000 people in more than 30 countries around the world.
Inherent in all of our strategies is a firm commitment to put our customers first in everything that we do. We believe that maintaining a disciplined “outside-in” approach will allow us to better serve our customers and our stockholders. To achieve that goal, we have organized our business around our customers and the geographies in which they reside: Americas, EMEA, and APAC. This structure allows us to tailor and expand the solutions we offer to meet the unique needs of our customers both globally and in local markets.
We sell our offerings primarily through subscriptions, which tend to generate recurring revenue and cash flow for us. Our subscriptions are usually for one-year periods and we have historically seen high renewal rates. Subscriptions are generally paid in full within one or two months after the subscription period commences; as a result, the timing of our cash flows generally precedes the recognition of revenue and income.
Our business has seasonal aspects. Our fourth quarter typically generates our highest quarterly levels of revenue and profit. Conversely, our first quarter generally has our lowest levels of revenue and profit. These trends have been further amplified by the product mix from recent acquisitions, which tend to generate a larger proportion of their sales in the fourth quarter. We also experience event-driven seasonality in our business; for instance, IHS CERAWeek, an annual energy executive gathering, is held during our second quarter. Another example is the triennial release of the Boiler Pressure Vessel Code (BPVC) engineering standard, which generates revenue for us predominantly in the third quarter of every third year. The BPVC benefit most recently occurred in the third quarter of 2010.
We are investing in our business at the highest rate in our company's history through a series of initiatives designed to boost colleague productivity, increase efficiencies, develop new and enhanced products, and create scalable platforms designed to accommodate future revenue growth without having to incur proportional increases in costs to support that growth. These initiatives include, but are not limited to:
| |
• | Vanguard – Vanguard is our program for consolidating and standardizing billing systems, general ledgers, sales-force automation capabilities, and all supporting business processes. We implemented the first two releases of Vanguard in calendar 2011 and completed our third release in June 2012. Approximately 60 percent of our revenue transactions now flow through our Vanguard system. We are working to migrate all of our remaining businesses to Vanguard during the next three quarters. |
| |
• | Customer Care Centers of Excellence – We have opened our three Customer Care Centers of Excellence, one in each region. These centers consolidate customer-care and transaction-processing capabilities, and simplify and standardize our approach to providing dedicated customer service. |
| |
• | Newton – Newton is our plan to centralize our various data centers over time, taking us from dozens of data centers currently to no more than three. This project is also designed to drive platform standardization. |
| |
• | Product development – We expect to introduce more new products and product enhancements in 2012 than in any prior year in our history. |
Global Operations
Approximately 50 percent of our revenue is transacted outside of the United States; however, only about 30 percent of our revenue is transacted in currencies other than the U.S. dollar. As a result, a strengthening U.S. dollar relative to certain currencies has a negative impact on our revenue; conversely, a weakening U.S. dollar has a positive impact on our revenue. However, the impact on operating income is diminished due to certain operating expenses denominated in currencies other than the U.S. dollar. Our largest foreign currency exposures, in order of magnitude, are the British Pound, the Canadian Dollar, and the Euro. We saw an increasingly adverse impact from currency fluctuations for the third quarter of 2012, and foreign currency movements have now had a negative $10 million impact on our year-to-date 2012 revenue results in comparison to prior year rates.
Global economic conditions are continuing to put downward pressure on our business. While the challenging economic environment is not having a significant impact on our subscription business in terms of renewals or cancellations, we are seeing some adverse impacts on new business development, the non-subscription business, and in the EMEA region in particular.
Key Performance Indicators
We believe that revenue growth, Adjusted EBITDA (both in dollars and margin), and free cash flow are the key measures of our success. Adjusted EBITDA and free cash flow are non-GAAP financial measures (as defined by the rules of the Securities and Exchange Commission) that are further discussed in the following paragraphs.
Revenue growth. We review year-over-year revenue growth in our segments as a key measure of our success in addressing customer needs in each region of the world. We measure revenue growth in terms of organic, acquisitive, and foreign currency impacts. We define these components as follows:
| |
• | Organic – We define organic revenue growth as total revenue growth from continuing operations for all factors other than acquisitions and foreign currency. We drive this type of revenue growth through value realization (pricing), expanding wallet share of existing customers through up-selling and cross-selling efforts, securing new customer business, and through the sale of new offerings. |
| |
• | Acquisitive – We define acquisition-related revenue as the revenue generated from acquired products and services from the date of acquisition to the first anniversary date of that acquisition. This type of growth comes as a result of our strategy to purchase, integrate, and leverage the value of assets we acquire. |
| |
• | Foreign currency – We define the foreign currency impact on revenue as the difference between current revenue at current exchange rates and current revenue at the corresponding prior period exchange rates. Due to the significance of revenue transacted in foreign currencies, we measure the impact of foreign currency movements on revenue. |
Non-GAAP measures. We use non-GAAP measures such as Adjusted EBITDA and free cash flow in our operational and financial decision-making, believing that such measures allow us to focus on what we deem to be more reliable indicators of ongoing operating performance (Adjusted EBITDA) and our ability to generate cash flow from operations (free cash flow). We also believe that investors may find non-GAAP financial measures useful for the same reasons, although we caution readers that non-GAAP financial measures are not a substitute for GAAP financial measures or disclosures. None of these non-GAAP financial measures are recognized terms under GAAP and do not purport to be an alternative to net income or operating cash flow as an indicator of operating performance or any other GAAP measure. Throughout this section on management’s discussion and analysis and on our IHS website, we provide reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures.
EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA are used by many of our investors, research analysts, investment bankers, and lenders to assess our operating performance. For example, a measure similar to Adjusted EBITDA is required by the lenders under our term loan and revolving credit agreement. We define EBITDA as net income plus or minus net interest, plus provision for income taxes, depreciation, and amortization. Our definition of Adjusted EBITDA further excludes (i) non-cash items (e.g., stock-based compensation expense and non-cash pension and postretirement expense) and (ii) items that management does not consider to be useful in assessing our operating performance (e.g., acquisition-related costs, restructuring charges, income or loss from discontinued operations, pension settlement and mark-to-market adjustments, and gain or loss on sale of assets).
Free Cash Flow. We define free cash flow as net cash provided by operating activities less capital expenditures.
Because not all companies use identical calculations, our presentation of non-GAAP financial measures may not be comparable to other similarly titled measures of other companies. However, these measures can still be useful in evaluating our performance against our peer companies because we believe the measures provide users with valuable insight into key components of GAAP financial disclosures. For example, a company with higher GAAP net income may not be as appealing to investors if its net income is more heavily comprised of gains on asset sales. Likewise, eliminating the effects of interest income and expense moderates the impact of a company’s capital structure on its performance.
Results of Operations
Total Revenue
Third quarter 2012 revenue increased 14 percent compared to the third quarter of 2011, and our year-to-date 2012 revenue increased 17 percent compared to the same period of 2011. The table below displays the percentage point change in revenue due to organic, acquisitive, and foreign currency factors when comparing the three and nine months ended August 31, 2012 to the three and nine months ended August 31, 2011.
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| | | | | | | | | | | | | | | | | |
| Three Month Change | | Nine Month Change |
(All amounts represent percentage points) | Organic | | Acquisitive | | Foreign Currency | | Organic | | Acquisitive | | Foreign Currency |
Increase in total revenue | 5 | % | | 11 | % | | (2 | )% | | 5 | % | | 13 | % | | (1 | )% |
The five percent organic revenue growth for the third quarter of 2012 was primarily attributable to continued strength in our subscription-based business, which has consistently provided an organic revenue growth rate of seven percent or higher over the last nine quarters. Non-subscription revenue had a negative five percent organic growth rate in the third quarter of 2012.
The five percent organic revenue growth for the nine months ended August 31, 2012 was also due to the strength of the subscription-based business. The subscription-based business increased eight percent organically, while the non-subscription businesses had mixed results.
The acquisition-related revenue growth for the quarter was primarily due to acquisitions we have made in the last twelve months, including the following:
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• | Seismic Micro-Technology in the third quarter of 2011; |
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• | Purvin & Gertz in the fourth quarter of 2011; |
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• | Displaybank Co., Ltd.; the CAPS™ electronic components database and tools business; IMS Group Holdings Ltd.; BDW Automotive GmbH; and XēDAR Corporation in the second quarter of 2012; and |
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• | CyberRegs, GlobalSpec, Inc., and Invention Machine in the third quarter of 2012. |
We evaluate revenue by geographic segment in order to better understand our customers’ needs in the geographies where they reside. We also supplementally review revenue by transaction type. Understanding revenue by transaction type helps us identify changes related to recurring revenue and product margin, which is particularly useful to us in evaluating our subscription and non-subscription revenue streams. We have historically reviewed revenue by information domain as a supplement to our revenue analysis, but we no longer do so and have therefore omitted it from the revenue discussion below.
Revenue by Segment (geography)
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| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended August 31, | | Percentage Change | | Nine Months Ended August 31, | | Percentage Change |
(In thousands, except percentages) | 2012 | | 2011 | | | 2012 | | 2011 | |
Americas revenue | $ | 232,369 |
| | $ | 205,728 |
| | 13 | % | | $ | 669,757 |
| | $ | 580,189 |
| | 15 | % |
As a percent of total revenue | 60 | % | | 61 | % | | | | 60 | % | | 61 | % | | |
EMEA revenue | 108,505 |
| | 95,946 |
| | 13 | % | | 321,438 |
| | 275,446 |
| | 17 | % |
As a percent of total revenue | 28 | % | | 28 | % | | | | 29 | % | | 29 | % | | |
APAC revenue | 44,735 |
| | 37,044 |
| | 21 | % | | 124,316 |
| | 99,347 |
| | 25 | % |
As a percent of total revenue | 12 | % | | 11 | % | | | | 11 | % | | 10 | % | | |
Total revenue | $ | 385,609 |
| | $ | 338,718 |
| | 14 | % | | $ | 1,115,511 |
| | $ | 954,982 |
| | 17 | % |
The percentage change in each geography segment is due to the factors described in the following table.
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| Three Month Change | | Nine Month Change |
(All amounts represent percentage points) | Organic | | Acquisitive | | Foreign Currency | | Organic | | Acquisitive | | Foreign Currency |
Americas revenue | 2 | % | | 11 | % | | (1 | )% | | 4 | % | | 12 | % | | (1 | )% |
EMEA revenue | 8 | % | | 9 | % | | (4 | )% | | 7 | % | | 12 | % | | (2 | )% |
APAC revenue | 11 | % | | 12 | % | | (1 | )% | | 9 | % | | 17 | % | | (1 | )% |
For the three and nine months of 2012, continued strength in our subscription-based offerings was the primary reason for the organic growth in all three regions. Organic growth for the Americas continued to be driven by subscriptions, which had a seven percent growth rate for the three and nine months of 2012. Non-subscription organic growth slowed particularly in the third quarter, which reflects significant increases in sales cycles and delays in customer decisions on key projects, primarily across software and services. Organic subscription revenue growth for EMEA had a nine percent growth rate in the second quarter of 2012, which slowed to a seven percent growth rate in the third quarter of 2012, reflecting weakening market conditions in the region. EMEA organic non-subscription revenue growth partially offset some of the subscription weakening, primarily because of seasonal events in the region. APAC organic subscription revenue growth continues to be strong, reflecting a good return on our investment in the region. APAC organic non-subscription revenue growth was negatively impacted in the third quarter as supply chains and economic growth slowed in Japan and China.
Revenue by Transaction Type
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| Three Months Ended August 31, | | Percentage Change | | Nine Months Ended August 31, | | Percentage Change |
(In thousands, except percentages) | 2012 | | 2011 | | | 2012 | | 2011 | |
Subscription revenue | $ | 294,516 |
| | $ | 263,916 |
| | 12 | % | | $ | 855,160 |
| | $ | 747,907 |
| | 14 | % |
As a percent of total revenue | 76 | % | | 78 | % | | | | 77 | % | | 78 | % | | |
Non-subscription revenue | 91,093 |
| | 74,802 |
| | 22 | % | | 260,351 |
| | 207,075 |
| | 26 | % |
As a percent of total revenue | 24 | % | | 22 | % | | | | 23 | % | | 22 | % | | |
Total revenue | $ | 385,609 |
| | $ | 338,718 |
| | 14 | % | | $ | 1,115,511 |
| | $ | 954,982 |
| | 17 | % |
We summarize our transaction type revenue into the following two categories:
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• | Subscription revenue represents the significant majority of our revenue, and is comprised of subscriptions to our various information offerings and software maintenance. |
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• | Non-subscription revenue represents consulting services (e.g. research and analysis, modeling, and forecasting), single-document product sales, software license sales and associated services, conferences and events, and advertising. |
Relative to the 12 percent subscription revenue growth for the third quarter, approximately eight percent is due to organic growth. This trend is especially important for us, as 76 percent of our third quarter 2012 revenue came from our subscription base. We are seeing good traction in our pricing practices and we are effectively managing the level of discounting. Renewal rates remain steady, but as sales cycles have lengthened, we are not seeing the level of acceleration in new subscriptions we had expected. New customer growth has positive momentum in APAC, but is slower than expected in the Americas and EMEA. The non-subscription portion of our business decreased five percent organically during the quarter. Non-subscription performance slowed in key service lines and in new license revenues as sales cycles extended for customers' discretionary
capital and expense items.
Relative to the 14 percent subscription revenue growth for the nine months of 2012, approximately eight percent is due to organic growth. The non-subscription portion of our business decreased four percent organically during the nine months. Part of the decrease is due to the fact that our non-subscription business, including enterprise software license sales, tends to have more volatility from quarter to quarter based on deal size, transaction timing, and events. For example, in the first quarter of 2012, we decided not to hold a chemical event because it was both unprofitable and non-strategic to us. In the second quarter of 2012, we held a new chemical conference (WPC) and had a successful IHS CERAWeek. For these reasons, we typically evaluate our non-subscription performance on a full-year basis.
Our non-subscription products and services are important to us, as they complement our subscription business in creating strong and comprehensive customer relationships.
Operating Expenses
The following table shows our operating expenses and the associated percentages of revenue.
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| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended August 31, | | Percentage Change | | Nine Months Ended August 31, | | Percentage Change |
(In thousands, except percentages) | 2012 | | 2011 | | | 2012 | | 2011 | |
Operating expenses: | | | | | | | | | | | |
Cost of revenue | $ | 153,746 |
| | $ | 144,014 |
| | 7 | % | | $ | 465,607 |
| | $ | 411,885 |
| | 13 | % |
As a percent of revenue | 40 | % | | 43 | % | | | | 42 | % | | 43 | % | | |
SG&A expense | $ | 138,519 |
| | $ | 117,352 |
| | 18 | % | | $ | 390,540 |
| | $ | 324,792 |
| | 20 | % |
As a percent of revenue | 36 | % | | 35 | % | | | | 35 | % | | 34 | % | | |
Depreciation and amortization expense | $ | 31,390 |
| | $ | 23,496 |
| | 34 | % | | $ | 86,683 |
| | $ | 62,411 |
| | 39 | % |
As a percent of revenue | 8 | % | | 7 | % | | | | 8 | % | | 7 | % | | |
Supplemental information: | | | | | | | | | | | |
SG&A expense excluding stock-based compensation | $ | 109,469 |
| | $ | 95,782 |
| | 14 | % | | $ | 304,075 |
| | $ | 263,617 |
| | 15 | % |
As a percent of revenue | 28 | % | | 28 | % | | | | 27 | % | | 28 | % | | |
Cost of Revenue and Sales Margins
For the three and nine months ended August 31, 2012, compared to 2011, cost of revenue grew at a slower pace than the increase in revenue. Total sales margins, which we define as revenue less cost of sales, divided by total sales, increased in total due to careful cost management. APAC sales margin has decreased as a result of investments in the region as we continue to expand our presence there. The following table shows the sales margin percentages and percentage point change by operating segment.
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| Three Months Ended August 31, | | Percentage Change | | Nine Months Ended August 31, | | Percentage Change |
(Percentages) | 2012 | | 2011 | | | 2012 | | 2011 | |
Americas sales margin | 63.5 | % | | 58.7 | % | | 4.8 | % | | 61.7 | % | | 58.2 | % | | 3.5 | % |
EMEA sales margin | 56.6 | % | | 54.3 | % | | 2.3 | % | | 54.2 | % | | 54.1 | % | | 0.1 | % |
APAC sales margin | 55.2 | % | | 62.3 | % | | (7.1 | )% | | 54.7 | % | | 60.6 | % | | (5.9 | )% |
Total sales margin | 60.1 | % | | 57.5 | % | | 2.6 | % | | 58.3 | % | | 56.9 | % | | 1.4 | % |
We anticipate that sales margin expansion will increase slightly for the near term.
Selling, General and Administrative (SG&A) Expense
We evaluate our SG&A expense excluding stock-based compensation expense. For the three and nine months ended August 31, 2012, compared to August 31, 2011, the increase in SG&A is due to acquisitions and costs associated with organic revenue growth. As a percentage of revenue, SG&A expense for the three and nine months ended August 31, 2012, remained relatively flat compared to the prior year. We expect to continue to invest only where necessary to drive scale and growth in key industries and core markets.
For the three and nine months ended August 31, 2012, compared to August 31, 2011, stock-based compensation expense increased as a result of an increase in the number of employees, an increase in the stock price, and the timing of stock grants.
Depreciation and Amortization Expense
For the three and nine months ended August 31, 2012, compared to 2011, depreciation and amortization expense increased primarily due to the increase in depreciable and amortizable assets from capital expenditures and acquisitions.
Restructuring
Please refer to Note 5 to the Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q for a discussion of our restructuring activities. During the first nine months of 2012, we incurred approximately $12.1 million of restructuring charges for direct and incremental costs associated with the consolidation of positions to our Centers of Excellence, the elimination of positions related to other identified operational efficiencies, and the consolidation of legacy data centers, including certain contract termination costs. It included the movement or elimination of approximately 190 positions. We expect to continue to incur costs related to these and other similar activities in future periods, resulting in additional restructuring charges.
Acquisition-related Costs
Please refer to Note 6 to the Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q for a discussion of costs associated with our integration and other acquisition-related activities. During the first nine months of 2012, we incurred approximately $3.5 million of acquisition-related costs, respectively, for direct and incremental costs associated with recent acquisitions, including legal and professional fees, the elimination of certain positions, and a facility closure. Because acquisitions are a key component of our growth strategy, we expect that we will continue to perform similar activities for future acquisitions.
Pension and Postretirement Expense
For the three and nine months ended August 31, 2012, compared to 2011, net periodic pension and postretirement expense increased due to higher service costs and lower expected returns on plan assets, partially offset by lower interest costs. In the fourth quarter of 2012, we expect to incur additional pension expense of approximately $13 to $17 million associated with the settlement charge for the payment of lump sum distributions and the fourth quarter mark-to-market pension adjustment.
Operating Income by Segment (geography)
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| Three Months Ended August 31, | | Percentage Change | | Nine Months Ended August 31, | | Percentage Change |
(In thousands, except percentages) | 2012 | | 2011 | | | 2012 | | 2011 | |
Americas operating income | $ | 70,086 |
| | $ | 57,484 |
| | 22 | % | | $ | 190,071 |
| | $ | 161,459 |
| | 18 | % |
As a percent of segment revenue | 30 | % | | 28 | % | | | | 28 | % | | 28 | % | | |
EMEA operating income | 24,590 |
| | 18,858 |
| | 30 | % | | 69,553 |
| | 55,104 |
| | 26 | % |
As a percent of segment revenue | 23 | % | | 20 | % | | | | 22 | % | | 20 | % | | |
APAC operating income | 10,001 |
| | 10,911 |
| | (8 | )% | | 29,489 |
| | 29,037 |
| | 2 | % |
As a percent of segment revenue | 22 | % | | 29 | % | | | | 24 | % | | 29 | % | | |
Shared services operating expense | (48,417 | ) | | (35,575 | ) | | | | (137,302 | ) | | (99,296 | ) | | |
Total operating income | $ | 56,260 |
| | $ | 51,678 |
| | 9 | % | | $ | 151,811 |
| | $ | 146,304 |
| | 4 | % |
As a percent of total revenue | 15 | % | | 15 | % | | | | 14 | % | | 15 | % | | |
For the three months ended August 31, 2012, compared to 2011, operating income as a percentage of revenue for the Americas segment increased primarily because of cost management in the region. For the first nine months of 2012, compared to 2011, the Americas segment operating income has been relatively flat as a percentage of revenue, with increases from cost management being offset by increased restructuring charges. For the three and nine months ended August 31, 2012, compared to 2011, the EMEA segment operating income has begun to increase as a result of cost management efforts. For the three and nine months ended August 31, 2012, APAC operating income as a percentage of revenue has decreased because of continued
cost of revenue and SG&A investment to drive growth opportunities in this emerging market.
Provision for Income Taxes
Our effective tax rate for the three and nine months ended August 31, 2012 was 14.3 percent and 18.8 percent, respectively, compared to 16.7 percent and 19.9 percent for the same periods of 2011. The lower 2012 rates reflect the benefits from discrete period items, including a reduction in the statutory tax rate in the United Kingdom, as well as domestic pre-tax income being a lesser portion of global pre-tax income in the period.
We currently expect that our full year effective tax rate will be approximately 20 percent.