Q214 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 May 31, 2014
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)
___________________________________________________
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| | |
Delaware | | 13-3769440 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. 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 May 31, 2014, there were 68,123,301 shares of our Class A Common Stock outstanding.
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: “anticipate,” “intend,” “plan,” “goal,” “seek,” “aim,” “strive,” “believe,” “project,” “predict,” “estimate,” “expect,” “continue,” “strategy,” “future,” “likely,” “may,” “might,” “should,” “will,” the negative of these terms, and similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding: guidance and predictions relating to expected operating results, such as revenue growth and earnings; strategic actions, including acquisitions and dispositions, anticipated benefits from strategic actions, and our success in integrating acquired businesses; anticipated levels of capital expenditures in future periods; our belief that we have sufficient liquidity to fund our ongoing business operations; expectations of the effect on our financial condition of claims, litigation, environmental costs, contingent liabilities and governmental and regulatory investigations and proceedings; and our strategy for customer retention, growth, product development, market position, financial results, and reserves.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following: economic and financial conditions, including volatility in interest and exchange rates; our ability to successfully manage risks associated with changes in demand for our products and services as well as changes in our targeted industries; our ability to develop new platforms to deliver our products and services, pricing, and other competitive pressures, and changes in laws and regulations governing our business; the extent to which we are successful in gaining new long-term relationships with customers or retaining existing ones and the level of service failures that could lead customers to use competitors' services; our ability to successfully identify and integrate acquisitions into our existing businesses and manage risks associated therewith; and the other factors described under the caption “Risk Factors” in our annual report on Form 10-K for the fiscal year ended November 30, 2013, along with our other filings with the U.S. Securities and Exchange Commission (SEC).
Any forward-looking statement made by us in this quarterly report on Form 10-Q is based only on information currently available to us and speaks only as of the date of this report. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments, or otherwise.
PART I. FINANCIAL INFORMATION
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Item 1. | Financial Statements |
IHS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per-share amounts)
|
| | | | | | | |
| As of | | As of |
| May 31, 2014 | | November 30, 2013 |
| (Unaudited) | | (Audited) |
Assets |
| |
|
Current assets: |
| |
|
Cash and cash equivalents | $ | 220,998 |
| | $ | 258,367 |
|
Accounts receivable, net | 416,771 |
| | 459,263 |
|
Income tax receivable | 164 |
| | — |
|
Deferred subscription costs | 63,289 |
| | 49,327 |
|
Deferred income taxes | 59,757 |
| | 70,818 |
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Other | 59,896 |
| | 43,065 |
|
Total current assets | 820,875 |
| | 880,840 |
|
Non-current assets: |
| |
|
Property and equipment, net | 267,250 |
| | 245,566 |
|
Intangible assets, net | 1,077,083 |
| | 1,144,464 |
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Goodwill | 3,064,631 |
| | 3,065,181 |
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Other | 18,627 |
| | 23,562 |
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Total non-current assets | 4,427,591 |
| | 4,478,773 |
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Total assets | $ | 5,248,466 |
| | $ | 5,359,613 |
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Liabilities and stockholders’ equity |
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Current liabilities: |
| |
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Short-term debt | $ | 140,911 |
| | $ | 395,527 |
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Accounts payable | 57,372 |
| | 57,001 |
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Accrued compensation | 60,979 |
| | 89,460 |
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Accrued royalties | 33,652 |
| | 36,289 |
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Other accrued expenses | 112,949 |
| | 98,187 |
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Income tax payable | — |
| | 9,961 |
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Deferred revenue | 667,264 |
| | 560,010 |
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Total current liabilities | 1,073,127 |
| | 1,246,435 |
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Long-term debt | 1,715,595 |
| | 1,779,065 |
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Accrued pension and postretirement liability | 31,210 |
| | 27,191 |
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Deferred income taxes | 349,434 |
| | 361,267 |
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Other liabilities | 51,775 |
| | 38,692 |
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Commitments and contingencies |
| |
|
Stockholders’ equity: |
| |
|
Class A common stock, $0.01 par value per share, 160,000,000 shares authorized, 69,051,356 and 67,901,101 shares issued, and 68,123,301 and 67,382,298 shares outstanding at May 31, 2014 and November 30, 2013, respectively | 691 |
| | 679 |
|
Additional paid-in capital | 870,215 |
| | 788,670 |
|
Treasury stock, at cost: 928,055 and 518,803 shares at May 31, 2014 and November 30, 2013, respectively | (93,374 | ) | | (45,945 | ) |
Retained earnings | 1,308,434 |
| | 1,220,520 |
|
Accumulated other comprehensive loss | (58,641 | ) | | (56,961 | ) |
Total stockholders’ equity | 2,027,325 |
| | 1,906,963 |
|
Total liabilities and stockholders’ equity | $ | 5,248,466 |
| | $ | 5,359,613 |
|
See accompanying notes.
IHS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except for per-share amounts)
|
| | | | | | | | | | | | | | | |
| Three months ended May 31, | | Six months ended May 31, |
| 2014 | | 2013 | | 2014 | | 2013 |
Revenue | $ | 568,008 |
| | $ | 418,143 |
| | $ | 1,092,466 |
| | $ | 800,668 |
|
Operating expenses: | | | | | | | |
Cost of revenue | 224,945 |
| | 172,424 |
| | 437,870 |
| | 332,499 |
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Selling, general and administrative | 203,644 |
| | 143,609 |
| | 401,360 |
| | 285,838 |
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Depreciation and amortization | 49,142 |
| | 32,877 |
| | 98,779 |
| | 65,356 |
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Restructuring charges | 860 |
| | 3,231 |
| | 4,035 |
| | 8,019 |
|
Acquisition-related costs | 77 |
| | 1,665 |
| | 1,017 |
| | 3,560 |
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Net periodic pension and postretirement expense | 2,834 |
| | 2,242 |
| | 5,670 |
| | 4,482 |
|
Other expense (income), net | (267 | ) | | 511 |
| | 1,308 |
| | 2,930 |
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Total operating expenses | 481,235 |
| | 356,559 |
| | 950,039 |
| | 702,684 |
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Operating income | 86,773 |
| | 61,584 |
| | 142,427 |
| | 97,984 |
|
Interest income | 235 |
| | 303 |
| | 486 |
| | 647 |
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Interest expense | (14,610 | ) | | (6,164 | ) | | (29,855 | ) | | (12,284 | ) |
Non-operating expense, net | (14,375 | ) | | (5,861 | ) | | (29,369 | ) | | (11,637 | ) |
Income from continuing operations before income taxes | 72,398 |
| | 55,723 |
| | 113,058 |
| | 86,347 |
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Provision for income taxes | (16,906 | ) | | (12,840 | ) | | (25,144 | ) | | (18,793 | ) |
Income from continuing operations | 55,492 |
| | 42,883 |
| | 87,914 |
| | 67,554 |
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Income from discontinued operations, net | — |
| | 7 |
| | — |
| | 7 |
|
Net income | $ | 55,492 |
| | $ | 42,890 |
| | $ | 87,914 |
| | $ | 67,561 |
|
| | | | | | | |
Basic earnings per share | | | | | | | |
Income from continuing operations | $ | 0.81 |
| | $ | 0.65 |
| | $ | 1.29 |
| | $ | 1.03 |
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Income from discontinued operations, net | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
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Net income | $ | 0.81 |
| | $ | 0.65 |
| | $ | 1.29 |
| | $ | 1.03 |
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Weighted average shares used in computing basic earnings per share | 68,216 |
| | 65,888 |
| | 68,015 |
| | 65,840 |
|
| | | | | | | |
Diluted earnings per share | | | | | | | |
Income from continuing operations | $ | 0.81 |
| | $ | 0.65 |
| | $ | 1.28 |
| | $ | 1.01 |
|
Income from discontinued operations, net | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Net income | $ | 0.81 |
| | $ | 0.65 |
| | $ | 1.28 |
| | $ | 1.01 |
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Weighted average shares used in computing diluted earnings per share | 68,697 |
| | 66,421 |
| | 68,730 |
| | 66,584 |
|
See accompanying notes.
IHS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
|
| | | | | | | | | | | | | | | | |
| | Three months ended May 31, | | Six months ended May 31, |
| | 2014 | | 2013 | | 2014 | | 2013 |
Net income | | $ | 55,492 |
| | $ | 42,890 |
| | $ | 87,914 |
| | $ | 67,561 |
|
Other comprehensive income (loss), net of tax: | | | | | | | | |
Unrealized gain (loss) on hedging activities (1) | | (2,289 | ) | | 393 |
| | (4,764 | ) | | 561 |
|
Foreign currency translation adjustment | | 2,872 |
| | 1,052 |
| | 3,084 |
| | (33,088 | ) |
Total other comprehensive income (loss) | | 583 |
| | 1,445 |
| | (1,680 | ) | | (32,527 | ) |
Comprehensive income | | $ | 56,075 |
| | $ | 44,335 |
| | $ | 86,234 |
| | $ | 35,034 |
|
| | | | | | | | |
(1) Net of tax benefit (expense) of $1,494; $(241); $3,109; and $(344) for the three and six months ended May 31, 2014 and 2013, respectively. |
See accompanying notes.
IHS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
| | | | | | | |
| Six months ended May 31, |
| 2014 | | 2013 |
Operating activities: |
| |
|
Net income | $ | 87,914 |
| | $ | 67,561 |
|
Reconciliation of net income to net cash provided by operating activities: |
| |
|
Depreciation and amortization | 98,779 |
| | 65,356 |
|
Stock-based compensation expense | 79,996 |
| | 70,561 |
|
Impairment of assets | — |
| | 1,629 |
|
Excess tax benefit from stock-based compensation | (10,327 | ) | | (11,802 | ) |
Net periodic pension and postretirement expense | 5,670 |
| | 4,482 |
|
Pension and postretirement contributions | (1,650 | ) | | (11,876 | ) |
Deferred income taxes | 28,907 |
| | (26,462 | ) |
Change in assets and liabilities: |
| |
|
Accounts receivable, net | 38,871 |
| | 37,053 |
|
Other current assets | (23,153 | ) | | (15,803 | ) |
Accounts payable | 119 |
| | (10,430 | ) |
Accrued expenses | (16,666 | ) | | (11,585 | ) |
Income tax payable | (20,656 | ) | | 27,561 |
|
Deferred revenue | 105,570 |
| | 75,998 |
|
Other liabilities | 1,600 |
| | (1,077 | ) |
Net cash provided by operating activities | 374,974 |
| | 261,166 |
|
Investing activities: |
| |
|
Capital expenditures on property and equipment | (51,036 | ) | | (42,436 | ) |
Acquisitions of businesses, net of cash acquired | — |
| | (155,505 | ) |
Intangible assets acquired | (714 | ) | | — |
|
Change in other assets | 2,762 |
| | (2,317 | ) |
Settlements of forward contracts | 1,309 |
| | 128 |
|
Net cash used in investing activities | (47,679 | ) | | (200,130 | ) |
Financing activities: |
| |
|
Proceeds from borrowings | 30,000 |
| | 45,000 |
|
Repayment of borrowings | (348,086 | ) | | (97,001 | ) |
Excess tax benefit from stock-based compensation | 10,327 |
| | 11,802 |
|
Proceeds from the exercise of employee stock options | — |
| | 285 |
|
Repurchases of common stock | (47,429 | ) | | (83,365 | ) |
Net cash used in financing activities | (355,188 | ) | | (123,279 | ) |
Foreign exchange impact on cash balance | (9,476 | ) | | (15,634 | ) |
Net decrease in cash and cash equivalents | (37,369 | ) | | (77,877 | ) |
Cash and cash equivalents at the beginning of the period | 258,367 |
| | 345,008 |
|
Cash and cash equivalents at the end of the period | $ | 220,998 |
| | $ | 267,131 |
|
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, 2013 (Audited) | 67,382 |
| | $ | 679 |
| | $ | 788,670 |
| | $ | (45,945 | ) | | $ | 1,220,520 |
| | $ | (56,961 | ) | | $ | 1,906,963 |
|
Stock-based award activity | 741 |
| | 12 |
| | 71,218 |
| | (47,429 | ) | | — |
| | — |
| | 23,801 |
|
Excess tax benefit on vested shares | — |
| | — |
| | 10,327 |
| | — |
| | — |
| | — |
| | 10,327 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 87,914 |
| | — |
| | 87,914 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | (1,680 | ) | | (1,680 | ) |
Balance at May 31, 2014 | 68,123 |
| | $ | 691 |
| | $ | 870,215 |
| | $ | (93,374 | ) | | $ | 1,308,434 |
| | $ | (58,641 | ) | | $ | 2,027,325 |
|
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, us, or our) 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 for the year ended November 30, 2013. 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. We also experience event-driven seasonality in our business; for instance, IHS Energy CERAWeek, an annual energy executive gathering, is held during our second quarter. Another example is the biennial release (previously triennial release) of the Boiler Pressure Vessel Code (BPVC) engineering standard, which generates revenue for us predominantly in the third quarter of every other year. We most recently recognized a benefit in connection with the BPVC release in the third quarter of 2013.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-2, which provides guidance on the reporting of reclassifications out of accumulated other comprehensive income (AOCI). This standard became effective for us in the first quarter of 2014. Under the new guidance, an entity is required to report the effect of significant reclassifications out of AOCI on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. For amounts not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other GAAP disclosures that provide additional detail about those amounts. The adoption of this standard did not have an impact on our consolidated financial statements other than the change in disclosures.
In April 2014, the FASB issued ASU 2014-08, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The ASU is intended to reduce the frequency of disposals reported as discontinued operations by focusing on strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. The standard will be effective for us in the first quarter of our fiscal year 2016, although early adoption is permitted. We do not expect that the adoption of this ASU will have a significant impact on our consolidated financial statements other than changing the classification criteria and related disclosures for any potential future disposals.
In May 2014, the FASB issued ASU 2014-09, which establishes a comprehensive new revenue recognition model designed to depict the transfer of goods or services to a customer in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. The ASU allows for the use of either the full or modified retrospective transition method, and the standard will be effective for us in the first quarter of our fiscal year 2018; early adoption is not permitted. We are currently evaluating the impact of this new standard on our consolidated financial statements, as well as which transition method we intend to use.
The following table presents details of our intangible assets, other than goodwill, as of May 31, 2014 and November 30, 2013 (in thousands):
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| | | | | | | | | | | | | | | | | | | | | | | |
| As of May 31, 2014 | | As of November 30, 2013 |
| Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
Intangible assets subject to amortization: | | | | | | | | | | | |
Information databases | $ | 616,946 |
| | $ | (209,911 | ) | | $ | 407,035 |
| | $ | 633,347 |
| | $ | (194,904 | ) | | $ | 438,443 |
|
Customer relationships | 460,277 |
| | (99,959 | ) | | 360,318 |
| | 470,632 |
| | (90,827 | ) | | 379,805 |
|
Non-compete agreements | 2,595 |
| | (1,871 | ) | | 724 |
| | 2,717 |
| | (1,653 | ) | | 1,064 |
|
Developed computer software | 151,700 |
| | (66,452 | ) | | 85,248 |
| | 159,413 |
| | (64,514 | ) | | 94,899 |
|
Trademarks | 166,834 |
| | (19,288 | ) | | 147,546 |
| | 167,179 |
| | (13,300 | ) | | 153,879 |
|
Other | 17,516 |
| | (5,373 | ) | | 12,143 |
| | 25,404 |
| | (13,423 | ) | | 11,981 |
|
Total | $ | 1,415,868 |
| | $ | (402,854 | ) | | $ | 1,013,014 |
| | $ | 1,458,692 |
| | $ | (378,621 | ) | | $ | 1,080,071 |
|
Intangible assets not subject to amortization: | | | | | | | | | | | |
Trademarks | 62,792 |
| | — |
| | 62,792 |
| | 63,144 |
| | — |
| | 63,144 |
|
Perpetual licenses | 1,277 |
| | — |
| | 1,277 |
| | 1,249 |
| | — |
| | 1,249 |
|
Total intangible assets | $ | 1,479,937 |
| | $ | (402,854 | ) | | $ | 1,077,083 |
| | $ | 1,523,085 |
| | $ | (378,621 | ) | | $ | 1,144,464 |
|
Intangible assets amortization expense was $33.1 million and $66.9 million for the three and six months ended May 31, 2014, respectively, as compared to $22.0 million and $44.6 million for the same respective periods of 2013. The following table presents the estimated future amortization expense related to intangible assets held as of May 31, 2014 (in thousands):
|
| | | | |
Year | | Amount |
Remainder of 2014 | | $ | 65,863 |
|
2015 | | $ | 127,849 |
|
2016 | | $ | 118,678 |
|
2017 | | $ | 104,239 |
|
2018 | | $ | 92,224 |
|
Thereafter | | $ | 504,161 |
|
Goodwill, gross intangible assets, and net intangible assets were all subject to foreign currency translation effects. Changes in our goodwill and gross intangible assets from November 30, 2013 to May 31, 2014 were primarily the result of foreign currency translation effects. The change in net intangible assets was primarily due to current year amortization.
The following table summarizes total indebtedness as of May 31, 2014 and November 30, 2013 (in thousands):
|
| | | | | | | | |
| | May 31, 2014 | | November 30, 2013 |
Credit Facility: | | | | |
Revolver | | $ | 505,000 |
| | $ | 770,000 |
|
Term loans | | 394,326 |
| | 446,904 |
|
2012 term loan | | 250,000 |
| | 250,000 |
|
2013 term loan | | 700,000 |
| | 700,000 |
|
Capital leases | | 7,180 |
| | 7,688 |
|
Total debt | | $ | 1,856,506 |
| | $ | 2,174,592 |
|
Current portion | | (140,911 | ) | | (395,527 | ) |
Total long-term debt | | $ | 1,715,595 |
| | $ | 1,779,065 |
|
Credit Facility. Our Credit Facility is a syndicated bank credit agreement that consists of amortizing term loans and a $1.0 billion revolver. All borrowings under the Credit Facility are unsecured. The term loans and revolver included in the
Credit Facility have a maturity date of January 2016. The interest rates for borrowings under the Credit Facility are the applicable LIBOR plus a spread of 1.00 percent to 2.25 percent, 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 such terms are defined in the Credit Facility. A commitment fee on any unused balance is payable periodically and ranges from 0.15 percent to 0.40 percent 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 such terms are defined in the Credit Facility.
2012 term loan. During the third quarter of 2012, we entered into a $250 million interest-only term loan agreement with a maturity date of March 2015. Borrowings under this loan are unsecured. The interest rates for borrowings under this loan, as well as certain financial and other covenants, including a maximum Leverage Ratio and a maximum Interest Coverage Ratio, are consistent with our Credit Facility described above. We intend to repay this loan with additional borrowings from the Revolver; consequently, we have continued to classify this amount as long-term debt.
2013 term loan. During the third quarter of 2013, we entered into a $700 million amortizing term loan agreement to facilitate a portion of the funding for the R.L. Polk & Co. acquisition (Polk acquisition). This loan has a maturity date of July 2018, and borrowings under this loan are unsecured. The interest rates for borrowings under this loan, as well as certain financial and other covenants, including a maximum Leverage Ratio and a maximum Interest Coverage Ratio, are consistent with our Credit Facility described above.
As of May 31, 2014, we were in compliance with all of our debt covenants. Our credit agreements require a systematic reduction in our Leverage Ratio each quarter for the first year, unless we elect to trigger an increased Leverage Ratio under the terms specified in the credit agreements in connection with future acquisitions, and we are in compliance with those terms. We have classified short-term debt based on principal maturities and expected cash availability over the next 12 months. As of May 31, 2014, we had approximately $505 million of outstanding borrowings under the revolver at a current annual interest rate of 2.44 percent and approximately $1.344 billion of aggregate outstanding borrowings under our term loans at a current weighted average annual interest rate of 2.55 percent, including the effect of the interest rate swaps described in Note 4.
We also had approximately $0.5 million of outstanding letters of credit under the Credit Facility as of May 31, 2014, which reduced the available borrowing under the Credit Facility by an equivalent amount.
The carrying value of our short-term and long-term debt approximates their fair value.
Our business is exposed to various market risks, including interest rate and foreign currency risks. We utilize derivative instruments to help us manage these risks. We do not hold or issue derivatives for speculative purposes.
Interest Rate Swaps
To mitigate interest rate exposure on our outstanding Credit Facility debt, we utilize the following derivative instruments:
| |
• | Interest rate derivative contracts that swap $100 million of floating rate debt at a 1.80 percent weighted-average fixed interest rate, plus the applicable Credit Facility spread. We entered into these swap contracts in 2011, and both contracts expire in July 2015. |
| |
• | Forward-starting interest rate derivative contracts that swap $400 million of floating rate debt at a 2.86 percent weighted-average fixed interest rate, plus the applicable Credit Facility spread. We entered into these swap contracts in November 2013 and January 2014. The contracts take effect between May 2015 and November 2015, with respective expiration dates between May 2020 and November 2020. |
Because the terms of these 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 our consolidated balance sheets.
Foreign Currency Forwards
To mitigate foreign currency exposure, we utilize the following derivative instruments:
| |
• | Foreign currency forward contracts that hedge the foreign currency exposure on Euro-denominated receipts in our U.S. Dollar functional entities. We utilize a rolling 12-month hedging program to mitigate a portion of this exposure. Because the critical terms of the forward contracts and the forecasted cash flows coincide, we do not expect any ineffectiveness associated with these contracts. We have designated and accounted for these derivatives as cash flow hedges, with changes in fair value being deferred in AOCI in our consolidated balance sheets. The notional amount of outstanding foreign currency forwards under these agreements as of May 31, 2014 and November 30, 2013 was approximately $16.2 million and $15.9 million, respectively. |
| |
• | Short-term foreign currency forward contracts that manage market risks associated with fluctuations in balances that are denominated in currencies other than the local functional currency. We account for these forward contracts at fair value and recognize the associated realized and unrealized gains and losses in other expense (income), net, since we have not designated these contracts as hedges for accounting purposes. The following table summarizes the notional amounts of these outstanding foreign currency forward contracts as of May 31, 2014 and November 30, 2013 (in thousands): |
|
| | | | | | | | |
| | May 31, 2014 | | November 30, 2013 |
Notional amount of currency pair: | | | | |
Contracts to buy USD with CAD | | $ | 61,557 |
| | $ | 142,606 |
|
Contracts to buy CAD with GBP | | C$ | — |
| | C$ | 28,741 |
|
Contracts to buy USD with EUR | | $ | 20,567 |
| | $ | 17,522 |
|
Contracts to buy CHF with USD | | $ | 13,504 |
| | $ | 15,308 |
|
Contracts to buy GBP with EUR | | £ | 5,720 |
| | £ | 5,866 |
|
Contracts to buy USD with GBP | | £ | 2,982 |
| | £ | 1,863 |
|
Fair Value of Derivatives
Since our derivative instruments are not listed on an exchange, we have evaluated fair value by reference to similar transactions in active markets; consequently, we have classified all of our derivative instruments within Level 2 of the fair value measurement hierarchy. The following table shows the classification, location, and fair value of our derivative instruments as of May 31, 2014 and November 30, 2013 (in thousands):
|
| | | | | | | | | | |
| | Fair Value of Derivative Instruments | | |
| | May 31, 2014 | | November 30, 2013 | | Balance Sheet Location |
Assets: | | | | | | |
Derivatives designated as accounting hedges: | | | | | | |
Foreign currency forwards | | $ | 67 |
| | $ | 8 |
| | Other current assets |
Derivatives not designated as accounting hedges: | | | | | | |
Foreign currency forwards | | 160 |
| | 1,548 |
| | Other current assets |
Total | | $ | 227 |
| | $ | 1,556 |
| | |
| | | | | | |
Liabilities: | | | | | | |
Derivatives designated as accounting hedges: | | | | | | |
Interest rate swaps | | $ | 11,392 |
| | $ | 3,366 |
| | Other accrued expenses |
Foreign currency forwards | | 185 |
| | 423 |
| | Other accrued expenses |
Derivatives not designated as accounting hedges: | | | | | | |
Foreign currency forwards | | 294 |
| | 957 |
| | Other accrued expenses |
Total | | $ | 11,871 |
| | $ | 4,746 |
| | |
The net gain (loss) on foreign currency forwards that are not designated as hedging instruments for the three and six months ended May 31, 2014 and 2013, respectively, was as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | |
| | Amount of gain (loss) recognized in the consolidated statements of operations | | |
| | Three months ended May 31, | | Six months ended May 31, | | |
| | 2014 | | 2013 | | 2014 | | 2013 | | Location on consolidated statements of operations |
Foreign currency forwards | | $ | (1,274 | ) | | $ | 1,598 |
| | $ | 931 |
| | $ | 3,955 |
| | Other expense (income), net |
The following table provides information about the cumulative amount of unrecognized hedge losses recorded in AOCI as of May 31, 2014 and November 30, 2013, as well as the activity on our cash flow hedging instruments for the three and six months ended May 31, 2014 and 2013, respectively (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three months ended May 31, | | Six months ended May 31, |
| | 2014 | | 2013 | | 2014 | | 2013 |
Beginning balance | | $ | (4,674 | ) | | $ | (2,057 | ) | | $ | (2,199 | ) | | $ | (2,225 | ) |
Amount of gain (loss) recognized in AOCI on derivative: | | | | | | | | |
Interest rate swaps | | (2,792 | ) | | 55 |
| | (5,279 | ) | | 33 |
|
Foreign currency forwards | | 120 |
| | 143 |
| | (171 | ) | | 85 |
|
Amount of loss (gain) reclassified from AOCI into income: | | | | | | | | |
Interest rate swaps (1) | | 239 |
| | 235 |
| | 474 |
| | 461 |
|
Foreign currency forwards (1) | | 144 |
| | (40 | ) | | 212 |
| | (18 | ) |
Ending balance | | $ | (6,963 | ) | | $ | (1,664 | ) | | $ | (6,963 | ) | | $ | (1,664 | ) |
| | | | | | | | |
(1) Amounts reclassified from AOCI into income related to interest rate swaps are recorded in interest expense, and amounts reclassified from AOCI into income related to foreign currency forwards are recorded in revenue. |
The unrecognized losses relating to the foreign currency forwards are expected to be reclassified into revenue within the next 12 months, and approximately $0.9 million of the unrecognized losses relating to the interest rate swaps are expected to be reclassified into interest expense within the next 12 months.
During the six months ended May 31, 2014, we eliminated 89 positions and incurred additional direct and incremental costs related to identified operational efficiencies (including lease abandonments), continued consolidation of positions to our accounting and customer care Centers of Excellence (COE) locations, and further consolidation of our legacy data centers. We expect to continue to incur costs related to these and other similar activities in future periods, resulting in additional restructuring charges.
During the six months ended May 31, 2014, we recorded approximately $4.0 million of restructuring charges for these activities. Of these charges, approximately $1.8 million was recorded in the Americas segment, $1.9 million was recorded in the EMEA segment, and $0.3 million was recorded in the APAC segment.
The following table provides a reconciliation of the restructuring liability as of May 31, 2014 (in thousands):
|
| | | | | | | | | | | | | | | |
| Employee Severance and Other Termination Benefits | | Contract Termination Costs | | Other | | Total |
Balance at November 30, 2013 | $ | 2,569 |
| | $ | 103 |
| | $ | 23 |
| | $ | 2,695 |
|
Add: Restructuring costs incurred | 4,179 |
| | 396 |
| | 487 |
| | 5,062 |
|
Revision to prior estimates | (1,476 | ) | | 449 |
| | — |
| | (1,027 | ) |
Less: Amount paid | (3,846 | ) | | (629 | ) | | (510 | ) | | (4,985 | ) |
Balance at May 31, 2014 | $ | 1,426 |
| | $ | 319 |
| | $ | — |
| | $ | 1,745 |
|
As of May 31, 2014, approximately $0.5 million of the remaining restructuring liability was in the Americas segment and approximately $1.2 million was in the EMEA segment. The entire $1.7 million restructuring liability is expected to be paid within the next 12 months.
| |
6. | Acquisition-related Costs |
During the six months ended May 31, 2014, we recorded approximately $1.0 million of direct and incremental costs associated with acquisition-related activities, including severance, lease abandonments, and professional fees. Approximately $0.7 million of the total charge was recorded in the Americas segment and $0.3 million was recorded in the EMEA segment.
The following table provides a reconciliation of the acquisition-related costs accrued liability as of May 31, 2014 (in thousands):
|
| | | | | | | | | | | | | | | |
| Employee Severance and Other Termination Benefits | | Contract Termination Costs | | Other | | Total |
Balance at November 30, 2013 | $ | 5,859 |
| | $ | 201 |
| | $ | 71 |
| | $ | 6,131 |
|
Add: Costs incurred | 743 |
| | 515 |
| | 27 |
| | 1,285 |
|
Revision to prior estimates | (285 | ) | | 17 |
| | — |
| | (268 | ) |
Less: Amount paid | (4,116 | ) | | (478 | ) | | (98 | ) | | (4,692 | ) |
Balance at May 31, 2014 | $ | 2,201 |
| | $ | 255 |
| | $ | — |
| | $ | 2,456 |
|
As of May 31, 2014, approximately $1.0 million of the remaining acquisition-related costs accrued liability was in the Americas segment and $1.5 million was in the EMEA segment. We expect that the remaining liability will be substantially paid in 2014.
| |
7. | Pensions and Postretirement Benefits |
Our net periodic pension expense (income) for the three and six months ended May 31, 2014 and 2013 was comprised of the following (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended May 31, | | Six months ended May 31, |
| 2014 | | 2013 | | 2014 | | 2013 |
Service costs incurred | $ | 3,048 |
| | $ | 2,608 |
| | $ | 6,093 |
| | $ | 5,206 |
|
Interest costs on projected benefit obligation | 2,140 |
| | 1,768 |
| | 4,241 |
| | 3,461 |
|
Expected return on plan assets | (2,134 | ) | | (1,903 | ) | | (4,224 | ) | | (3,724 | ) |
Amortization of prior service credit | (338 | ) | | (336 | ) | | (676 | ) | | (672 | ) |
Amortization of transitional obligation | 11 |
| | — |
| | 22 |
| | — |
|
Net periodic pension expense | $ | 2,727 |
| | $ | 2,137 |
| | $ | 5,456 |
| | $ | 4,271 |
|
Our net periodic postretirement expense was comprised of the following for the three and six months ended May 31, 2014 and 2013 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended May 31, | | Six months ended May 31, |
| 2014 | | 2013 | | 2014 | | 2013 |
Service costs incurred | $ | 4 |
| | $ | 5 |
| | $ | 8 |
| | $ | 11 |
|
Interest costs | 103 |
| | 100 |
| | 206 |
| | 200 |
|
Net periodic postretirement expense | $ | 107 |
| | $ | 105 |
| | $ | 214 |
| | $ | 211 |
|
We plan to freeze future accruals to our U.S. Retirement Income Plan (U.S. RIP) effective July 11, 2014. The financial impact of this change will be determined through the remeasurement process in the third quarter of 2014, but we do not believe that the remeasurement will have a material impact on our consolidated financial statements. We plan to provide an annual company non-elective contribution to the 401(k) accounts of affected eligible employees if they are active employees at the end of the calendar year.
| |
8. | Stock-based Compensation |
Stock-based compensation expense for the three and six months ended May 31, 2014 and 2013 was as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended May 31, | | Six months ended May 31, |
| 2014 | | 2013 | | 2014 | | 2013 |
Cost of revenue | $ | 1,511 |
| | $ | 1,294 |
| | $ | 3,371 |
| | $ | 2,976 |
|
Selling, general and administrative | 34,521 |
| | 29,505 |
| | 76,625 |
| | 67,585 |
|
Total stock-based compensation expense | $ | 36,032 |
| | $ | 30,799 |
| | $ | 79,996 |
| | $ | 70,561 |
|
Total income tax benefits recognized for stock-based compensation arrangements were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended May 31, | | Six months ended May 31, |
| 2014 | | 2013 | | 2014 | | 2013 |
Income tax benefits | $ | 12,322 |
| | $ | 8,208 |
| | $ | 27,384 |
| | $ | 21,926 |
|
No stock-based compensation cost was capitalized during the three and six months ended May 31, 2014 and 2013.
As of May 31, 2014, there was $154.4 million of unrecognized stock-based compensation cost, adjusted for estimated forfeitures, related to unvested stock-based awards that will be recognized over a weighted-average period of approximately 1.7 years. Total unrecognized stock-based compensation cost will be adjusted for future changes in estimated forfeitures and changes in estimated achievement of performance goals.
Restricted Stock Units (RSUs). The following table summarizes RSU activity during the six months ended May 31, 2014:
|
| | | | | | |
| Shares | | Weighted- Average Grant Date Fair Value |
| (in thousands) | | |
Balance at November 30, 2013 | 3,017 |
| | $ | 92.93 |
|
Granted | 866 |
| | $ | 113.68 |
|
Vested | (1,151 | ) | | $ | 90.32 |
|
Forfeited | (98 | ) | | $ | 101.84 |
|
Balance at May 31, 2014 | 2,634 |
| | $ | 100.56 |
|
The total fair value of RSUs that vested during the six months ended May 31, 2014 was $133.3 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 six months ended May 31, 2014 was 23.4 percent and 22.2 percent, respectively, compared to 23.0 percent and 21.8 percent for the same periods of 2013.
| |
10. | Commitments and Contingencies |
From time to time, we are involved in litigation in the ordinary course of our business, including claims or contingencies that may arise related to matters occurring prior to our acquisition of businesses, such as the matter described below. At the present time, primarily because the matters are generally in early stages, we can give no assurance as to the outcome of any pending litigation to which we are currently a party and we are unable to determine the ultimate resolution of or provide a reasonable estimate of the range of possible loss attributable to these matters or the effect they may have on us. However, we do not expect the outcome of such proceedings to have a material adverse effect on our results of operations or financial condition. We have and will continue to vigorously defend ourselves against these claims.
On April 23, 2013 (prior to the Polk acquisition), our CARFAX subsidiary (“CARFAX”) was served with a complaint filed in the U.S. District Court for the Southern District of New York, purportedly on behalf of certain auto and light truck dealers. The complaint alleges, among other things that, in violation of antitrust laws, CARFAX entered into exclusive
arrangements regarding the sale of CARFAX vehicle history reports with certain auto manufacturers and owners of two websites providing classified listings of used autos and light trucks. The complaint seeks three times the actual damages that a jury finds the plaintiffs have sustained, injunctive relief, costs and attorneys’ fees. On October 25, 2013, the plaintiffs served a second amended complaint with similar allegations purporting to name approximately 469 auto dealers as plaintiffs. The proceedings are in an early stage and there are significant legal and factual issues to be determined. We believe, however, that the probability that the outcome of the litigation will have a material adverse effect on our results of operations or financial condition is remote.
Weighted-average shares of Class A common stock outstanding for the three and six months ended May 31, 2014 and 2013 were calculated as follows (in thousands):
|
| | | | | | | | | | | |
| Three months ended May 31, | | Six months ended May 31, |
| 2014 | | 2013 | | 2014 | | 2013 |
Weighted-average shares outstanding: | | | | | | | |
Shares used in basic EPS calculation | 68,216 |
| | 65,888 |
| | 68,015 |
| | 65,840 |
|
Effect of dilutive securities: | | | | | | | |
Restricted stock units | 481 |
| | 530 |
| | 715 |
| | 740 |
|
Stock options and other stock-based awards | — |
| | 3 |
| | — |
| | 4 |
|
Shares used in diluted EPS calculation | 68,697 |
| | 66,421 |
| | 68,730 |
| | 66,584 |
|
| |
12. | Accumulated Other Comprehensive Income (Loss) |
ASU 2013-2 requires disclosure of additional information about changes in AOCI balances by component, including the effect of reclassifications out of AOCI on the respective line items in net income. The following table summarizes the changes in AOCI by component (net of tax) for the six months ended May 31, 2014 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Foreign currency translation | | Net pension and OPEB liability | | Unrealized losses on hedging activities | | Total |
Balance at November 30, 2013 | | $ | (46,565 | ) | | $ | (8,197 | ) | | $ | (2,199 | ) | | $ | (56,961 | ) |
Other comprehensive income (loss) before reclassifications | | 3,084 |
| | — |
| | (5,450 | ) | | (2,366 | ) |
Reclassifications from AOCI to income | | — |
| | — |
| | 686 |
| | 686 |
|
Balance at May 31, 2014 | | $ | (43,481 | ) | | $ | (8,197 | ) | | $ | (6,963 | ) | | $ | (58,641 | ) |
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 product category.
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 six months ended May 31, 2014 and 2013. 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, corporate-level impairments, and gain (loss) on sale of corporate assets.
|
| | | | | | | | | | | | | | | | | | | |
| Americas | | EMEA | | APAC | | Shared Services | | Consolidated Total |
| (In thousands) |
Three months ended May 31, 2014 | | | | | | | | |
Revenue | $ | 376,787 |
| | $ | 138,847 |
| | $ | 52,374 |
| | $ | — |
| | $ | 568,008 |
|
Operating income | $ | 93,587 |
| | $ | 34,465 |
| | $ | 12,938 |
| | $ | (54,217 | ) | | $ | 86,773 |
|
Depreciation and amortization | $ | 41,395 |
| | $ | 5,314 |
| | $ | 475 |
| | $ | 1,958 |
| | $ | 49,142 |
|
Three months ended May 31, 2013 | | | | | | | | |
Revenue | $ | 257,625 |
| | $ | 112,944 |
| | $ | 47,574 |
| | $ | — |
| | $ | 418,143 |
|
Operating income | $ | 79,515 |
| | $ | 20,485 |
| | $ | 10,248 |
| | $ | (48,664 | ) | | $ | 61,584 |
|
Depreciation and amortization | $ | 25,181 |
| | $ | 5,474 |
| | $ | 476 |
| | $ | 1,746 |
| | $ | 32,877 |
|
Six months ended May 31, 2014 | | | | | | | | |
Revenue | $ | 727,207 |
| | $ | 265,708 |
| | $ | 99,551 |
| | $ | — |
| | $ | 1,092,466 |
|
Operating income | $ | 171,197 |
| | $ | 59,060 |
| | $ | 23,000 |
| | $ | (110,830 | ) | | $ | 142,427 |
|
Depreciation and amortization | $ | 82,568 |
| | $ | 11,105 |
| | $ | 1,088 |
| | $ | 4,018 |
| | $ | 98,779 |
|
Six months ended May 31, 2013 | | | | | | | | |
Revenue | $ | 486,791 |
| | $ | 222,415 |
| | $ | 91,462 |
| | $ | — |
| | $ | 800,668 |
|
Operating income | $ | 141,648 |
| | $ | 36,471 |
| | $ | 19,997 |
| | $ | (100,132 | ) | | $ | 97,984 |
|
Depreciation and amortization | $ | 49,465 |
| | $ | 11,391 |
| | $ | 937 |
| | $ | 3,563 |
| | $ | 65,356 |
|
Revenue by transaction type was as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended May 31, | | Six months ended May 31, |
| 2014 | | 2013 | | 2014 | | 2013 |
Subscription revenue | $ | 426,346 |
| | $ | 313,923 |
| | $ | 843,720 |
| | $ | 621,650 |
|
Non-subscription revenue | 141,662 |
| | 104,220 |
| | 248,746 |
| | 179,018 |
|
Total revenue | $ | 568,008 |
| | $ | 418,143 |
| | $ | 1,092,466 |
| | $ | 800,668 |
|
Revenue by product category was as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended May 31, | | Six months ended May 31, |
| 2014 | | 2013 | | 2014 | | 2013 |
Resources revenue | $ | 243,876 |
| | $ | 221,680 |
| | $ | 461,370 |
| | $ | 412,196 |
|
Industrials revenue | 181,346 |
| | 64,359 |
| | 353,069 |
| | 126,848 |
|
Horizontal products revenue | 142,786 |
| | 132,104 |
| | 278,027 |
| | 261,624 |
|
Total revenue | $ | 568,008 |
| | $ | 418,143 |
| | $ | 1,092,466 |
| | $ | 800,668 |
|
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following Management’s Discussion and Analysis is intended to help the reader understand the financial condition and results of operations of IHS Inc. (IHS, we, us, or our). The following discussion should be read in conjunction with our annual report on Form 10-K for the year ended November 30, 2013, 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). However, none of the information provided on our website is incorporated into, or deemed to be a part of, this quarterly report on Form 10-Q.
Executive Summary
Business Overview
We are a 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. Our aim is to embed our solutions within the entire spectrum of our
customers’ organization, enabling executive level capital deployment strategies and following decision-making activities throughout their organizations to front-line employees tasked with managing their company’s complex core daily operations. We have been in business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005. Headquartered in Englewood, Colorado, USA, we are committed to sustainable, profitable growth and employ approximately 8,000 people in 31 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.
Subscriptions represented approximately 75 percent of our total revenue in the second quarter of 2014. We sell our offerings primarily through subscriptions, which tend to generate recurring revenue and cash flow for us. Our subscription agreements are typically non-cancellable and may contain provisions for minimum monthly payments. For subscription revenue, 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. We also experience event-driven seasonality in our business; for instance, IHS Energy CERAWeek, an annual energy executive gathering, is held during our second quarter. Another example is the biennial release (previously triennial release) of the Boiler Pressure Vessel Code (BPVC) engineering standard, which generates revenue for us predominantly in the third quarter of every other year. We most recently recognized a benefit in connection with the BPVC release in the third quarter of 2013.
In 2014, we are focused on the following two priorities:
| |
• | Operational excellence. We expect to capitalize on infrastructure investments to allow our employees to do their jobs more efficiently and effectively, including engaging and supporting new and existing customers. During the first six months of 2014, we made progress in core process and system enhancements that we believe will allow us to meet our goals. |
| |
• | Commercial expansion. We expect to continue our pace of new and integrated product platform releases and offerings, and we are on track with the development and release of product platforms across the various workflows we service. We are also hiring new global account executives to drive new and expanded business in key geo-markets and are re-aligning our field and inside sales forces in an effort to maximize the customer experience. |
Global Operations
Approximately 40 percent of our revenue is generated outside of the United States; however, just over 20 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 historically resulted in a negative impact to our revenue; conversely, a weakening U.S. dollar has historically resulted in a positive impact to 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, Canadian Dollar, and Euro.
Key Performance Indicators
We believe that revenue growth, Adjusted EBITDA (both in dollars and margin), and free cash flow are the key financial measures of our success. Adjusted EBITDA and free cash flow are financial measures that are not prepared in accordance with GAAP (non-GAAP).
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 in which we operate. 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 movements. 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 or enhanced product offerings. |
| |
• | Acquisitive – We define acquisitive 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. We also include the impact of divestitures in this growth metric. |
| |
• | 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. |
We also measure and report revenue by transaction type. Understanding revenue by transaction type helps us identify broad changes in product mix. 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 (e.g., research and analysis, modeling, and forecasting), services, single-document product sales, software license sales and associated services, conferences and events, and advertising. Our non-subscription products and services are an important part of our business because they complement our subscription business in creating strong and comprehensive customer relationships. |
Non-GAAP measures. We use non-GAAP financial measures such as EBITDA, Adjusted EBITDA, and free cash flow in our operational and financial decision-making, and believe 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 website (www.ihs.com), 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 loans 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 primarily non-cash items and other items that we do not consider to be useful in assessing our operating performance (e.g., stock-based compensation expense, restructuring charges, acquisition-related costs, asset impairment charges, gain or loss on sale of assets, pension mark-to-market and settlement expense, and income or loss from discontinued operations).
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, excluding the effects of interest income and expense moderates the impact of a company’s capital structure on its performance.
Results of Operations
Total Revenue
Second quarter 2014 revenue increased 36 percent compared to the second quarter of 2013, and our year-to-date 2014 revenue increased 36 percent compared to the same period in 2013. The table below displays the percentage change in revenue due to organic, acquisitive, and foreign currency factors when comparing the three and six months ended May 31, 2014 to the three and six months ended May 31, 2013.
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| | | | | | | | |
| Increase in Total Revenue |
(All amounts represent percentage points) | Organic | | Acquisitive | | Foreign Currency |
Second quarter 2014 vs. second quarter 2013 | 6 | % | | 30 | % | | 1 | % |
Year-to-date 2014 vs. year-to-date 2013 | 5 | % | | 31 | % | | — | % |
Organic growth for the three and six months ended May 31, 2014, compared to the same periods of 2013, was primarily attributable to subscription growth performance, with non-subscription growth also contributing positively to the increase.
Acquisitive revenue growth was primarily due to the Polk acquisition in the third quarter of 2013, as well as other acquisitions we have made in the last twelve months, including the following:
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• | Fekete Associates in April 2013, and |
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• | PFC Energy in June 2013. |
Foreign currency had a negligible impact on the year-over-year increase in revenue.
Revenue by Segment
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| | | | | | | | | | | | | | | | | | | | | |
| Three months ended May 31, | | Percentage Change | | Six months ended May 31, | | Percentage Change |
(In thousands, except percentages) | 2014 | | 2013 | | | 2014 | | 2013 | |
Revenue: | | | | | | | | | | | |
Americas | $ | 376,787 |
| | $ | 257,625 |
| | 46 | % | | $ | 727,207 |
| | $ | 486,791 |
| | 49 | % |
EMEA | 138,847 |
| | 112,944 |
| | 23 | % | | 265,708 |
| | 222,415 |
| | 19 | % |
APAC | 52,374 |
| | 47,574 |
| | 10 | % | | 99,551 |
| | 91,462 |
| | 9 | % |
Total revenue | $ | 568,008 |
| | $ | 418,143 |
| | 36 | % | | $ | 1,092,466 |
| | $ | 800,668 |
| | 36 | % |
| | | | | | | | | | | |
As a percent of total revenue: | | | | | | | | | | | |
Americas | 66 | % | | 62 | % | | | | 67 | % | | 61 | % | | |
EMEA | 24 | % | | 27 | % | | | | 24 | % | | 28 | % | | |
APAC | 9 | % | | 11 | % | | | | 9 | % | | 11 | % | | |
The percentage change in each geography segment is due to the factors described in the following table.
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| | | | | | | | | | | | | | | | | |
| Increase (decrease) in revenue |
| Second quarter 2014 vs. second quarter 2013 | | Year-to-date 2014 vs. year-to-date 2013 |
(All amounts represent percentage points) | Organic | | Acquisitive | | Foreign Currency | | Organic | | Acquisitive | | Foreign Currency |
Americas | 4 | % | | 43 | % | | (1 | )% | | 5 | % | | 45 | % | | (1 | )% |
EMEA | 10 | % | | 9 | % | | 4 | % | | 8 | % | | 9 | % | | 3 | % |
APAC | 4 | % | | 6 | % | | — | % | | 2 | % | | 7 | % | | (1 | )% |
Americas revenue for the three and six months ended May 31, 2014, compared to the same periods of 2013, experienced organic growth in both subscriptions (at five percent for the three and six months) and non-subscriptions (at three percent for the three months and five percent for the six months). The subscription growth was primarily due to resources offerings, while the non-subscription growth was primarily due to conference events, along with consulting and services growth.
EMEA revenue for the three and six months ended May 31, 2014, compared to the same periods of 2013, had solid organic subscription growth at nine percent for the three months and eight percent for the six months. Non-subscription organic growth was also very positive, with 14 percent growth for the three months and seven percent growth for the six months. EMEA's performance is reflective of continued improvements in infrastructure, sales systems and process, and sales leadership and field sales teams.
APAC revenue for the three and six months ended May 31, 2014, compared to the same periods of 2013, experienced 10 percent total growth for the three months and nine percent total growth for the six months, led by strong organic subscription
revenue growth of 10 percent for the three months and seven percent for the six months. Non-subscription organic growth decreased 10 percent for the three months and nine percent for the six months, and was negatively impacted by quarterly variability in non-recurring offerings and a difficult comparison against the strong organic growth we experienced in APAC in the second quarter and six months of 2013.
Revenue by Transaction Type
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| Three months ended May 31, | | Percent change | | Six months ended May 31, | | Percent change |
(in thousands, except percentages) | 2014 | | 2013 | | Total | | Organic | | 2014 | | 2013 | | Total | | Organic |
Subscription revenue | $ | 426,346 |
| | $ | 313,923 |
| | 36 | % | | 6 | % | | $ | 843,720 |
| | $ | 621,650 |
| | 36 | % | | 6 | % |
Non-subscription revenue | 141,662 |
| | 104,220 |
| | 36 | % | | 4 | % | | 248,746 |
| | 179,018 |
| | 39 | % | | 3 | % |
Total revenue | $ | 568,008 |
| | $ | 418,143 |
| | 36 | % | | 6 | % | | $ | 1,092,466 |
| | $ | 800,668 |
| | 36 | % | | 5 | % |
| | | | | | | | | | | | | | | |
As a percent of total revenue: | | | | | | | | | | | | | | | |
Subscription | 75 | % | | 75 | % | | | | | | 77 | % | | 78 | % | | | | |
Non-subscription | 25 | % | | 25 | % | | | | | | 23 | % | | 22 | % | | | | |
Subscription revenue grew at six percent organically for the three and six months ended May 31, 2014, compared to the same periods of 2013, with resources and product design subscription offerings providing the largest contributions to the growth. Subscriptions continue to provide a stable revenue stream that generates significant cash flow. Consistent with the prior year, our subscription revenue for the three and six months ended May 31, 2014 continues to represent approximately 75 percent of our total revenue.
Non-subscription revenue increased four percent organically during the three months and three percent during the six months ended May 31, 2014, compared to the same periods of 2013, driven primarily by strong consulting, services, and events performance.
Revenue by Product Category
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended May 31, | | Percent change | | Six months ended May 31, | | Percent change |
(in thousands, except percentages) | 2014 | | 2013 | | Total | | Organic | | 2014 | | 2013 | | Total | | Organic |
Resources revenue | $ | 243,876 |
| | $ | 221,680 |
| | 10 | % | | 6 | % | | $ | 461,370 |
| | $ | 412,196 |
| | 12 | % | | 7 | % |
Industrials revenue | 181,346 |
| | 64,359 |
| | 182 | % | | 1 | % | | 353,069 |
| | 126,848 |
| | 178 | % | | — | % |
Horizontal products revenue | 142,786 |
| | 132,104 |
| | 8 | % | | 7 | % | | 278,027 |
| | 261,624 |
| | 6 | % | | 6 | % |
Total revenue | $ | 568,008 |
| | $ | 418,143 |
| | 36 | % | | 6 | % | | $ | 1,092,466 |
| | $ | 800,668 |
| | 36 | % | | 5 | % |
Resources revenue for the three and six months ended May 31, 2014, compared to the same periods of 2013, experienced continued strength across the portfolio, benefiting from energy data offerings and solid consulting and events delivery.
Industrials revenue for the three and six months ended May 31, 2014, compared to the same periods of 2013, remained relatively flat on an organic growth basis, with solid growth in automotive offerings and improving trends in maritime offerings and technology sales. We continue to build and evolve our offerings in aerospace and defense.
Horizontal products revenue for the three and six months ended May 31, 2014, compared to the same periods of 2013, had organic growth improvements, led by Operational Excellence & Risk Management software sales and associated maintenance, as well as Economics & Country Risk offerings. Our Product Design offerings also showed modest positive growth.
Operating Expenses
The following table shows our operating expenses and the associated percentages of revenue.
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| | | | | | | | | | | | | | | | | | | | | |
| Three months ended May 31, | | Percentage Change | | Six months ended May 31, | | Percentage Change |
(In thousands, except percentages) | 2014 | | 2013 | | | 2014 | | 2013 | |
Operating expenses: | | | | | | | | | | | |
Cost of revenue | $ | 224,945 |
| | $ | 172,424 |
| | 30 | % | | $ | 437,870 |
| | $ | 332,499 |
| | 32 | % |
SG&A expense | $ | 203,644 |
| | $ | 143,609 |
| | 42 | % | | $ | 401,360 |
| | $ | 285,838 |
| | 40 | % |
Depreciation and amortization expense | $ | 49,142 |
| | $ | 32,877 |
| | 49 | % | | $ | 98,779 |
| | $ | 65,356 |
| | 51 | % |
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As a percent of revenue: | | | | | | | | | | | |
Cost of revenue | 40 | % | | 41 | % | | | | 40 | % | | 42 | % | | |
SG&A expense | 36 | % | | 34 | % | | | | 37 | % | | 36 | % | | |
Depreciation and amortization expense | 9 | % | | 8 | % | | | | 9 | % | | 8 | % | | |
| | | | | | | | | | | |
Supplemental information: | | | | | | | | | | | |
SG&A expense, excluding stock-based compensation | $ | 169,123 |
| | $ | 114,104 |
| | 48 | % | | $ | 324,735 |
| | $ | 218,253 |
| | 49 | % |
As a percent of revenue | 30 | % | | 27 | % | | | | 30 | % | | 27 | % | | |
Cost of Revenue
For the three and six months ended May 31, 2014, cost of revenue remained relatively consistent as a percentage of revenue, compared to the same periods in the prior year. We continue to invest in our people, platforms, processes, and products in support of our goals to increase top- and bottom-line growth.
Selling, General and Administrative (SG&A) Expense
We evaluate our SG&A expense after excluding stock-based compensation expense. For the three and six months ended May 31, 2014, compared to the same periods of 2013, SG&A expense as a percentage of revenue increased primarily due to recent acquisitions and increased compensation expense.
For the three and six months ended May 31, 2014, compared to the same periods of 2013, stock-based compensation expense increased as a result of an increase in the number of employees, an increase in our stock price, and the achievement or overachievement of certain company performance metrics. As a percentage of revenue, stock-based compensation decreased by one percentage point for the three and six months ended May 31, 2014, compared to the same periods of 2013, as we are effectively managing to a targeted annual burn rate of two percent of outstanding shares. Please refer to Note 8 to the Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q for a discussion of stock-based compensation.
Depreciation and Amortization Expense
For the three and six months ended May 31, 2014, compared to the same periods of 2013, depreciation and amortization expense increased in both amount and as a percentage of revenue, primarily due to the increase in depreciable and amortizable assets from capital expenditures and acquisitions, particularly the Polk acquisition.
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 six months ended May 31, 2014, we incurred approximately $4.0 million of restructuring charges for direct and incremental costs associated with identified operational efficiencies (including lease abandonments), continued consolidation of positions to our accounting and customer care Centers of Excellence (COE) locations, and further consolidation of our legacy data centers.
During the six months ended May 31, 2014, we eliminated 89 positions related to these activities. 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 six months ended May 31, 2014, we recorded approximately $1.0 million of direct and incremental costs associated with acquisition-related activities, including severance, lease abandonments, and professional fees. 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 six months ended May 31, 2014, compared to the same periods of 2013, net periodic pension and postretirement expense experienced a modest increase. We plan to freeze future accruals to our U.S. Retirement Income Plan (U.S. RIP) effective July 11, 2014. The financial impact of this change will be determined through the remeasurement process in the third quarter of 2014, but we do not believe that the remeasurement will have a material impact on our consolidated financial statements. We plan to provide an annual company non-elective contribution to the 401(k) accounts of affected eligible employees if they are active employees at the end of the calendar year.
Our pension expense and associated pension liability as calculated under GAAP requires the use of assumptions about the estimated long-term rate of return on plan assets and the discount rate. Our pension investment strategy is designed to align the majority of our pension assets with the underlying pension liability and minimize volatility caused by changes in asset returns and discount rates. Our pension expense estimates are updated to reflect actual experience through the remeasurement process in the fourth quarter, or sooner if earlier remeasurements are required. For the six months ended May 31, 2014, we used a 5.4 percent expected long-term rate of return on plan assets and a 4.9 percent discount rate for the U.S. RIP; the actual return on plan assets during that period was 9.9 percent. We anticipate that the difference between actual return on plan assets and expected return on plan assets will be largely mitigated by the offsetting change in the pension liability resulting from movements in the discount rate.
Operating Income by Segment (geography)
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| Three months ended May 31, | | Percentage Change | | Six months ended May 31, | | Percentage Change |
(In thousands, except percentages) | 2014 | | 2013 | | | 2014 | | 2013 | |
Operating income: | | | | | | | | | | | |
Americas | $ | 93,587 |
| | $ | 79,515 |
| | 18 | % | | $ | 171,197 |
| | $ | 141,648 |
| | 21 | % |
EMEA | 34,465 |
| | 20,485 |
| | 68 | % | | 59,060 |
| | 36,471 |
| | 62 | % |
APAC | 12,938 |
| | 10,248 |
| | 26 | % | | 23,000 |
| | 19,997 |
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