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TABLE OF CONTENTS
Item 8. Financial Statements and Supplementary Data
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) |
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For the fiscal year ended November 30, 2008 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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Commission file 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
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Name of each exchange on which registered
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| Class A Common Stock, $0.01 par value per share Series A junior participating preferred stock purchase rights (attached to the Class A Common Stock) |
New York Stock Exchange |
Securities
registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ý YES o NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. o YES ý NO
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. ý YES o NO
Indicate by check mark if disclosure of delinquent filer pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K. ý
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 definition of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ý | Accelerated filer o | 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 Act). o YES ý NO
The aggregate market value of the voting and non-voting common equity held by non-affiliates, based upon the closing price for the Common Stock as reported on the New York Stock Exchange composite tape on the last business day of the Registrant's most recently completed second fiscal quarter, was approximately $2,156 million. All executive officers, directors, and holders of 5% or more of the outstanding Common Stock of the registrant have been deemed, solely for purposes of the foregoing calculation, to be "affiliates" of the registrant.
As of December 31, 2008, there were 64,798,001 shares of the registrant's Class A Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of the Form 10-K, to the extent not set forth herein, is incorporated herein by reference from the registrant's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 13, 2009, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the close of the registrant's fiscal year.
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We have made statements under the captions "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business and Properties" and in other sections of this Form 10-K that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as "may," "might," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," or "continue," the negative of these terms, and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties, and assumptions, may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance, or achievements to differ materially from the results, level of activity, performance, or achievements expressed or implied by the forward-looking statements. In particular, you should consider the risks outlined under "Risk Factors."
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward- looking statements. You should not rely upon forward-looking statements as predictions of future events.
We are under no duty to update any of these forward-looking statements after the date of this Form 10-K to conform our prior statements to actual results or revised expectations.
* * * *
Fiscal Year End
Our fiscal years end on November 30 of each year. Unless otherwise indicated, references in this Annual Report to an individual year means the fiscal year ended November 30. For example, "2008" refers to the fiscal year ended November 30, 2008.
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Overview
IHS is a leading provider and comprehensive source of Critical Information and Insight in a sizable and growing global information market. Our customers rely on our products and services to facilitate crucial decision-making, support key processes, and improve productivity. We provide Critical Information and Insight to meet our customers' needs, which include providing insight into global energy market movements, managing product lifecycles, meeting growing environmental challenges, assessing national or corporate security issues, and forecasting the broad economic outlook across the globe. IHS customers range from governments and large multinational corporations to small companies and technical professionals, doing business in more than 180 countries.
At the heart of our Critical Information products and services is data obtained from public sources, third parties, and our own proprietary databases. We transform that data into Critical Information and Insight that is both useful to our customers and available where and when they need it by combining data with our proprietary and third-party technology to create graphical user interfaces, interactive search and navigation tools, and online databases. Customers access these products primarily through Internet-based applications and portals. In many cases, the combination of our data with these Internet-based tools provides the customer with a unique solution. Some products are also delivered through traditional media such as print and DVD. We further transform our Critical Information into Insight products and services with analysis from our teams of experts.
IHS has a leading position in attractive markets. We sell our offerings primarily though online subscriptions to our numerous databases of critical information, software tools, search interfaces and other useful applications residing on top of the data, and analytical services. As a result of our subscription- based business model and historically high renewal rates, we generate recurring revenue and cash flow. IHS also has a scalable operating model that we believe offers significant operating leverage. Our compelling strategies, discussed later, combined with an experienced management team continue to drive profitable growth. IHS was organized as a Delaware corporation in 1994. IHS is celebrating its 50th anniversary in 2009 and employs approximately 3,800 people in 20 countries.
Vision
Our vision is to be the Source for Critical Information and Insight. When Critical Information or Insight—or both—are mission-critical to our customers in achieving their business goals anywhere around the globe, we intend to be the source that they trust, rely upon, and come to first. Over many years, we have established our reputation for providing valuable solutions to customers' information needs. In recent years, we have executed a shift to Internet-based tools and portals that better meet the demands of our customers' businesses.
Detailed below is a description of how we intend to achieve our vision. We have outlined a set of four corporate goals to ensure that we have a compass to guide us in the pursuit of our vision. We then established a primary corporate strategy to ensure that we successfully achieve our goals. And finally, we aligned our company structure to follow our strategy—with three customer-facing regions, global product teams, and shared corporate services, all in full support of our strategy.
Corporate Goals
In order to achieve our vision to be the Source for Critical Information and Insight, we have set four broad objectives—our goals—upon which we focus our efforts. These four goals are:
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- improving customer satisfaction ("Customer Delight");
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- fostering a culture that enables colleague success;
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- delivering profitable top- and bottom-line growth; and
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- providing an opportunity for shareholder success relative to our peer group.
We are committed to measuring our progress on these four goals using quantifiable, objective metrics. For instance, to measure Customer Delight and colleague success, we use third-party surveys and set goals based on those metrics. In 2009, our goal is to improve both of those measures by a minimum of ten percent. Our commitment to deliver profitable growth will be evident in each of our quarterly and annual reports to our shareholders. Our measure of shareholder success relative to our peer group will be derived from our peers' publicly reported financial results as compared to our own performance each year.
Corporate Strategy—our Information Domains
Our primary strategy is to continue to improve our leadership position for Information and Insight across four targeted information "domains"—Energy, Product Lifecycle, Security, and Environment. We target the information needs of our customers by focusing on these four specific information domains where we believe we have the best opportunity to be the Source for our customers.
Each of these four strategic information domains represents a significant market opportunity. Our goal is to be the leading source of Critical Information and Insight in each of them. In addition, these domains are often inter-related and inter-linked; thus the intersections between them represent areas of critical interest for our customers and a further market opportunity for IHS.
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We are in an ideal position to serve the broad strategic information and insight needs of our customers as well as their detailed needs in each of the four information domains where we specialize. We are at the center of many critical business decisions for our customers, whether they are of a strategic, investment, or policy-making level or critical decisions of an operating or technical nature.
Structure
To accommodate our strategic focus on customers, we shifted to a geographic structure that allows us to better serve our customers. We prepare our financial reports and analyze our business in accordance with our internal structure and how we run our business. Our three reportable geographic segments are: Americas, which includes the United States, Canada, and Latin America; EMEA, which includes Europe, the Middle East, and Africa, and India; and APAC, or Asia Pacific.
This new integrated global organization makes it easier for our customers to do business with us by providing a more cohesive, consistent, and effective sales-and-marketing approach in each geography. By structuring our business around customers and the regions in which they reside, we are better able to tailor and expand our offerings to meet the unique needs of our customers both globally and in local markets. We are also able to better manage our Critical Information and Insight activities according to the best practices of each. This new structure provides a solid foundation for profitable growth in each market for all of our capabilities. It allows us a more efficient method of bringing new products and services to customers, and supports growth in existing accounts and with new customers and markets. As a result of this transformation, our defined operating segments changed to geographic segments during the third quarter of 2008.
Information Domains and the Intersection of Domains
Energy
The Energy domain encompasses exploration and production of hydrocarbons through to distribution, power generation, and consumption. Examples of Critical Information and Insight in the Energy domain that are accessed through Internet-based tools and portals include:
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- energy activity data that consists of comprehensive current and future seismic, drilling, and development activities;
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- production data that tracks information on more than 90% of the world's oil and gas production;
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- oil and gas well data that includes comprehensive geological information on over four million current and historic wells around the world;
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- reservoir and basin data providing geological formation data used by customers to assess drilling feasibility;
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- strategic advisory services to assess energy markets, strategies, and industry trends; and
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- coal industry market activity and price information.
Product Lifecycle
The Product Lifecycle domain contains information required to take a product from conception to research and development on through to production, maintenance, and disposal. Examples of Critical Information and Insight tools accessed online through our portal in the Product Lifecycle domain include:
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- industry specifications and standards to aid in all phases of a product's lifecycle;
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- technical attributes and lifecycle information on component parts to drive part selection decisions;
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- design methods to aid in complex and capital-intensive research and development; and
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- services supporting the management of parts information in factories and plants, critical for maintaining plant uptime.
Security
The Security domain contains information and insight to assist in security planning, from preparation through to crisis response and military action. Examples of Critical Information and Insight on our online "intelligence center" that include analytical tools on an Internet-based portal in the Security domain include:
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- comprehensive information on defense, aerospace, and weapon systems world-wide;
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- analysis and insight on terrorist activities; and
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- insight supporting risk assessment on regions and supply chains.
Environment
The Environment domain contains information and tools that support compliance with environmental regulations and related issues. Examples of Critical Information and Insight in the Environment domain include:
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- interactive tools to track hazardous materials through a facility, critical for complying with federal and local
regulations;
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- information and insight on hazardous materials in products and parts;
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- environmental standards to aid in the design process;
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- information solutions to help customers manage their corporate sustainability programs;
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- tools to assist customers in managing the lifecycle of chemicals; and
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- design methods to improve energy efficiency.
Intersection of the Domains
While each of our domains represents a significant market opportunity on a stand-alone basis, we believe we have a unique competitive advantage and an even greater market opportunity at the
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intersection of these domains. The needs of our customers have expanded due to increasing globalization and the challenging economy, which creates a need to integrate decision-making across geopolitical, economic, environmental, regulatory and value chain issues. In response, we are deepening our domain expertise in our four domains and developing integrated offerings across and at the intersection of the domains. As a case in point, the acquisition of IHS Global Insight has created a platform to deliver unparalleled market outlook and forecasting capabilities for our business across ALL domains, increasing our cross-selling opportunities.
For example, in the intersection between the Security and Product Lifecycle domains, we believe we have an opportunity to help customers manage product cost with a better understanding of security related issues that may impact the sourcing of materials and products. Similarly, at the intersection of the Security and Energy information domains, we believe that we can help customers understand and manage security issues as a significant driver of cost in exploring for, producing, and delivering energy around the world.
At the intersection of the Energy and Environment information domains, we plan to help customers with their growing need for information and insight as they manage the increasingly important issue of environmental impact from energy exploration, production, and delivery. In addition, between the Environment and Product Lifecycle domains, we see an opportunity to help a wide range of customers understand and manage the cost of both regulatory compliance and the actual environmental impact in their manufacturing processes.
In all of these cases, our breadth of macroeconomic and cross-industry insights further deepens the quality of support we can offer our customers. We have the ability to offer customers products and services that span their detailed information needs by domain, their needs for broad perspectives about countries and industries around the globe, and their needs for real-time assistance in some of the most pressing and complicated issues they face; all of which provides customers with unparalleled offerings to their business decision-making needs. For example, we can help a wide variety of customers address the topic of "clean energy"—a widely recognized issue of concern for customers and non-customers
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alike—by offering Critical Information and Insight to help our customers understand and apply economic factors, regulations, energy sources, markets (including new markets such as carbon credits), and technology (including new and developing technologies, such as those employed in hybrid vehicles). After almost fifty years as a leading provider of information, we believe that we are ideally positioned to be the leading provider of Critical Information and Insight to customers facing new challenges in a rapidly changing world.
Critical Information and Insight
We deliver our products and services through a combination of Critical Information and Insight. At the heart of our Critical Information products and services is data obtained from public sources, third parties, and our own proprietary databases. We transform that data into Critical Information and Insight that is both useful to our customers and available where and when they need it by combining data with our proprietary and third-party technology to create graphical user interfaces, interactive search and navigation tools, and online databases. We deliver these products primarily through Internet-based applications and portals. In many cases, the combination of our data with these Internet-based tools provides the customer with a unique solution. Some products are also delivered through traditional media such as print and CD-ROMs. We further transform our Critical Information into Insight products and services with analysis from our teams of experts.
Critical Information
We provide Critical Information—a comprehensive collection of current and historical technical and business information that is highly relevant to customers in the information domains we serve—through our proprietary user interfaces and technology-driven offerings. We continually augment, update, organize, and refine this information for breadth, depth, usability, currency, and accuracy in order to deliver it according to industry requirements and customer needs. In addition, we offer our customers interactive tools, Internet-based portals, and user interfaces designed to enable informed and effective decisions in each customer's business. For instance, some of our portals provide interactive tools that produce graphical renditions of data or intuitive navigation systems that make data manageable. While we still offer customers some products on less robust media such as DVDs or print media, our goal is to offer the most useful and capable offerings possible using online technology. See below for specific examples of some of our technology.
Our Critical Information is gathered from various sources, including through our global network of industry sources and our longstanding relationships with government agencies, manufacturers, distributors, standard development organizations (SDOs), editors and freelance contributors from all around the world. Additionally, specific to some of our Energy and Security information domain offerings, we employ a network of independent contractors who each utilize an informal network of industry and government sources to obtain data. Each of these independent contractors has entered into a written agreement with IHS to follow our standards and applicable laws in the course of obtaining data. Several of our Energy products and several products in our IHS Jane's business rely heavily upon the work product of these independent contractors.
Our largest acquisition to date, IHS Global Insight, also enhanced our critical information capabilities. IHS Global Insight maintains one of the largest privately available time-series data collections in the world, covering macro and regional economic indicators, industry-specific statistics and metrics, financial market and securities indicators, and international trade data. Some clients purchase only historical databases; however, the majority of IHS Global Insight's customers use this raw data in conjunction with our value-added forecasts of key indicators and in the context of our analytical discussion of the importance and relevance of this information.
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Once we obtain data, we process it rigorously. For example, in our Energy information domain products, we test data accuracy, cross-reference it against numerous sources, verify applicable surface and subsurface attributes, and standardize and create common industry codes. We are recognized as an industry leader in setting information standards and codes, working with our global customer base and industry groups to define and maintain Critical Information standards and formats.
We offer this information to our customers in a timely and user-friendly manner primarily through online subscriptions. To a lesser extent, we may offer our information products on CD-ROM, DVD, or print media. Most of our Critical Information offerings are interactive software tools. Depending on the terms of a customer's subscription, they can be made available through Internet-based portals, installed on the customer's network for local access, or reproduced for local distribution and access.
We integrate Critical Information with technology and applications to meet the needs of a range of users across our four targeted information domains (Energy, Product Lifecycle, Security, and Environment) and from IHS Global Insight for macroeconomic and financial information. These tools enable our customers to integrate our information and their proprietary information within their workflows and business processes. Our decision-support tools range from easy-to-use "browse and search" applications, which are interfaces that allow customers to browse through all available information and search terms to locate specific information, to more sophisticated analytic systems. The underlying information could consist of a single database or multiple collections of information, depending on the subscription selected by the customer. In our more advanced decision-support tools, we strive to maintain a simple interface on the user's computer, but we design them to draw upon multiple sources of information and manipulate and organize the information into models, estimates, and other highly organized output. For example, within the energy information domain, our sophisticated engineering, cost analysis, and economics tools can help a customer estimate drilling costs, assess project economics, optimize exploration and production activities, and improve production yields.
Insight
IHS is the trusted source not only for in-depth, accurate information, but for the expert analysis that makes that information actionable. Accordingly, in addition to our proprietary skill at delivering Critical Information, IHS offers our customers a unique expertise in transforming that Critical Information into valuable insight. Within our information domains, our experts start with a core of relevant, data-driven information, then analyze, distill and sort it to a point of relevant, actionable intelligence: what we call Insight.
We provide our Insight to governments around the globe, major energy producers, security and defense agencies, and corporations in a wide range of industries. Our customers rely on the advantage of IHS thought leadership that results from transforming nearly 50 years of Critical Information management into vital Insight. Using our Insight products and services, our customers are better able to serve their customers, compete in global markets, and understand geopolitical and economic conditions.
With the acquisition of IHS Global Insight, we now have an additional set of broader, strategic insights based on its macroeconomic forecasts regarding over 200 countries and almost 200 industries. Through IHS Global Insight offerings, we provide those forecasts to a broad array of government and corporate clients. By blending our deep insight in our four traditional domains with the broad macroeconomic capabilities of IHS Global Insight, we have created a unique position in the information world. For example, our product lifecycle domain is further strengthened by the addition of price and sales forecasts for key industrial inputs and commodities as well as their production cost. IHS Global Insight's offerings are particularly relevant in our current environment of economic uncertainty, as its products and services are designed to guide businesses to accurate and realistic expectations for the future.
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IHS Global Insight's services are available through subscriptions or projects, and delivered through our website, printed publications, conferences, reports, and presentations. Through its predecessor companies, IHS Global Insight founded the modern economic forecasting industry more than 40 years ago. Always a leader in modeling and forecasting, IHS Global Insight has combined its analytical capabilities with the deep experience of industry professionals to provide unparalleled coverage in automotive, energy, agriculture, steel, telecommunications, trade, tourism, healthcare, construction, and many others. IHS Global Insight provides comprehensive economic, financial, and political coverage of countries, regions, and industries using a unique combination of expertise, models, data, and software within a common analytical framework to support planning and decision making.
Most of the IHS Global Insight offerings and the associated revenues exist at the intersection of our four domains—not fitting into any single one of domain, but supporting and addressing customer needs at the intersection of one or more. As examples, offerings within IHS Global Insight are grouped into categories that cover more than one domain: Country Intelligence; Sovereign Risk; Detailed North American Economic Analysis; Scenario Services; Pricing and Purchasing; World and U.S. Industry Analysis; Automotive; and Consulting.
The IHS focus on both broad economic Insight and the four information domains where our customers have critical business needs (Energy, Product Lifecycle, Security, and Environment) enables us to deliver Insight to customers not only within those domains, but also where those domains intersect and overlap. We believe that IHS is uniquely positioned within and across those four information domains to deliver Critical Information and Insight to our customers around the world.
Information Domains
Energy Information Domain
We are one of the leading global providers of Critical Energy Information and Insight. For more than four decades, we have provided comprehensive information to energy organizations around the world. We develop and deliver critical oil and gas industry data on exploration, development, production, and transportation to major oil and gas companies, national oil companies, electric power companies, financial institutions, and governments. We also provide operational, research, and strategic advisory services to these customers and to utilities and transportation, petrochemical, coal, and power companies.
We complement this information with economic, political, fiscal, and regulatory analysis, as well as operational, research, and strategic advisory services. By integrating our offerings, we help energy organizations and those for whom energy is a key cost factor analyze their operations and make better use of information, which we believe enhances their ability to effectively evaluate investment opportunities, reduce operating costs, and increase their productivity.
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Critical Information
Energy activity data. Our energy activity data includes comprehensive and timely information, organized by country, on current and future seismic, drilling, and development activities. This data also includes detailed reports on contractual activity and changes in legislation, regulation, petroleum rights, and fiscal matters. Our customers use this data daily to track global energy activities, actively assess and mitigate potential risks to energy assets and operations, react to competitive industry pressures, and capitalize on developing opportunities. This data includes continually updated online information on energy activities in more than 180 countries and 335 hydrocarbon-producing regions around the world; daily breaking energy news alerts; and country and region maps detailing wells, fields, licenses, pipelines, facilities, and other pertinent geological data.
Production data. Our production data tracks information on more than 90% of the world's oil and gas production, including monthly production volumes for wells and fields in more than 100 countries. This data includes cumulative statistics on monthly oil and gas production volumes for more than two million oil assets and more than 70,000 producing fields globally. It is used by reservoir engineers and commercial analysts to assess the productivity and longevity of energy producing assets, determine the current and future value of these assets, and develop and assess investment and operating plans.
Oil and gas well data. Our oil and gas well data includes as many as 20,000 elements, narrative comments, and other information from as far back as the mid-1800s on over four million wells around the world. This data includes comprehensive geological information on current and historic wells, including lease, operator, field, reservoir, fluid, linking well, permit, drilling activity, completion record, and other data, as well as digital geologic and reservoir images representing billions of feet of subsurface measurements. Geoscientists, petrophysicists, and reservoir engineers use this data to evaluate the production potential and economic value of current and future exploration and production wells.
Reservoir data. Our reservoir data includes reservoir pressure and geological formation data for assets in key energy-producing regions of the world. Geoscientists and engineers use this data to analyze reservoir potential and identify geological pressure hazards to optimize drilling activities by maximizing yields and reducing downtime.
Basin data. Our basin data includes information on more than 30,000 hydrocarbon basins around the world. It also includes location, development, contractual, and ownership information, as well as comprehensive geological data on each basin. This data is developed and maintained by industry experts and used by exploration geologists to evaluate hydrocarbon potential, analyze production opportunities, and assess the feasibility of drilling opportunities.
Infrastructure data. Our infrastructure data provides location, capacity, and ownership information on oil and gas wells and facilities. It also includes transportation and refining infrastructure data on pipelines, ports, refineries, capacity specifications, and tariffs and rates, including information on major industrial plants and key retail consumers. Customers use this data to evaluate transportation options and to analyze oil field and infrastructure projects.
Upstream data. Our upstream data contains legal, regulatory, economic, contractual, political, and risk information relating to upstream energy exploration and production activities in more than 100 countries. It is used by commercial analysts, economists, corporate planners, and lawyers to better understand investment environments and assess risk.
Exploration analysis. We integrate production, well, and reservoir information to enable geoscientists to search for and analyze oil and gas opportunities around the world. These tools provide surface and subsurface information, analysis, and graphical interfaces to facilitate geoscience workflows.
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Production engineering. We integrate current and historical production information with performance analysis software. Energy engineers use these tools to optimize their well and field production systems by monitoring oil and gas production, modeling well performance, and performing production gradient and flow assurance calculations.
Insight
Operational services. We offer our customers access to our expertise in subsurface analysis, engineering, economics, fiscal, and regulatory matters and asset optimization through several services, including the following:
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- Regulatory compliance services. These services assist our
customers in designing their procedures to achieve and maintain local legal and regulatory compliance. We support customers in more than 70 jurisdictions around the world using on-site
specialists and local partners and our integrated fiscal and regulatory databases.
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- Oil and gas asset optimization and management
services. These services provide comprehensive support to exploration and production organizations to improve the efficiency,
productivity, and long-term profitability of their operations. We use our global cost and economic databases, specialized decision-support tools, and operations expertise to assist
customers with asset management activities. These activities range from efficient lifecycle planning and automated monitoring of marginal fields to detailed operational analysis, assessment, and
identification of efficiencies in individuals asset operations.
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- New venture assessment services. These services assist customers in identifying investments that complement their strategic goals. These services include detailed evaluations of production assets, as well as comprehensive transaction support services such as due diligence and negotiation support.
Cost analysis. We produce detailed capital and operating cost estimates for planning activities and project optimization. Our customers use these tools to analyze the economic feasibility of competing projects, significantly reduce cycle times in engineering work flows, and ultimately reduce costs.
Economics. We evaluate the after-tax economics of projects, fields, licenses, and country and company portfolios based on more than 200 pre-modeled fiscal regimes and our other Critical Information to evaluate a variety of economic factors, such as reservoir and reserve performance, estimated ultimate recovery, and projected cash flows with the goal of enabling our customers to make rapid and informed acquisition, divestiture, and operations decisions.
Research and expert analysis. Through our research offerings, we provide customers with insight and analysis into challenges facing the energy industry, including economic, geopolitical, financial, technological, regulatory, environmental, and managerial matters. Our research helps customers anticipate trends in the industry in order to make informed strategic, investment, and market decisions. For example, both energy companies and financial institutions use research and analysis from IHS CERA to make informed decisions about energy investments and markets.
IHS CERA offers syndicated research services, each focusing on different combinations of segments and regions in the energy industry, as well as custom consulting. Examples of such research offerings include Global Oil, European Gas, China Energy, and Global Liquefied Natural Gas. In addition to these syndicated research offerings, we have engaged in a number of multi-client research studies, such as Securing the Future: Making Russian-European Gas Interdependence Work, Fueling the Dragon: China's Energy Future, The Next Prize: Strategic Positioning for a Global Gas Price, and Rising to the Challenge: A Study of North American Gas Supply to 2018.
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We also develop and organize executive research summits where high level industry, financial, and governmental decision makers interact with our senior research experts and discuss energy industry trends and market dynamics. These events provide a significant opportunity for our experts and customers to exchange knowledge and ideas. We conduct more than 75 events each year, including our premier event, CERAWeek. CERAWeek is an annual executive conference that has been addressing challenges facing international energy markets and companies for 28 years. Attracting more than 1,600 of the energy industry's leading executives and companies, financial executives, and policymakers annually, it is considered to be the most important meeting of its kind and ranked one of the top five CEO-level conferences in the world. In addition to CERAWeek, other examples of our executive research summits are the Global Power Forum, Eurasia Transportation Forum and the Capital Cost Analysis Forum at the "East Meets West" conference in Istanbul.
Strategic advisory services. We assist customers in assessing their strategic options by providing the Critical Information and Insight required for sound decision-making. Our services focus on a range of key issues, such as global oil and gas planning, exploration and production issues, alternative business line assessments, scenario planning and facilitation, market analysis, renewable energy, and corporate facilitation. For example, we recently completed a Russian and Ukrainian Power market Entry strategy. Other current projects include a North American regional Upstream Capital Cost Index comparing across six regions in North America. Most of these services are provided through the IHS CERA business.
The Chairman of IHS CERA is its co-founder, Dr. Daniel Yergin, who is a member of the Board of the United States Energy Association and the U.S. National Petroleum Council. He is also a Trustee of the Brookings Institution, the only foreign member of the Russian Academy of Oil and Gas, and chaired the US Department of Energy's Task Force on Strategic Energy Research and Development. Dr. Yergin is the author of the Pulitzer Prize-winning book titled The Prize: The Epic Quest for Oil, Money and Power.
Company financial and operational analysis. IHS Herold holds a leading position in energy company financial and operational analyses. IHS Herold, founded in 1948, is a uniquely positioned information services company, providing online transaction databases and deal analyses essential to understanding and executing energy mergers and acquisitions and capital markets transactions. Its client base is comprised of virtually every major oil and gas company, the world's leading commercial and investment banks, and top institutional and investment money managers. IHS Herold also serves clients with focused consulting services and the highly regarded annual Pacesetters Energy Conference.
Coal industry Insight. Our McCloskey publications keep our customer base of coal producers, traders, shippers, and coal consumers informed via eight print and online publications as well annual conferences and consulting services. Our goal is to be the reference point for information on the coal markets. For example, major transactions in the coal markets and steam coal deals in Europe are executed with McCloskey publications price information as their reference. Our McCloskey publication's leading role in global coal markets is highly complementary to our overall position in the Energy domain, aligning closely with the focus on data, markets, and fundamental analysis in the petroleum markets.
Product Lifecycle Information Domain
IHS is one of the leading providers of Critical Information and Insight supporting the product lifecycle from upfront R&D through design, production, maintenance, and obsolescence management. Our products and services are used by our customers in their workflows to enhance quality, reduce costs, and improve productivity.
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We have been providing product lifecycle information for almost five decades, and through this have built deep, trusted relationships with our customers globally. Through these offerings, we touch most industries and segments, with particularly large presences in the aerospace, defense, electronics, telecommunications, construction, energy and automotive industries.
Critical Information
Specifications and standards. We provide engineering organizations worldwide with single-source access to specifications and standards so they can control costs, improve decision speed and effectiveness, manage compliance, and reduce design times. We provide searchable documents and scanned document images containing commonly used and hard-to-find specifications and standards. Our online database contains over a million documents and images covering national, international, corporate, military, and other specifications and standards that we organize into hundreds of discrete data sets. For example, our military specifications and standards data set contains what we believe is the world's largest collection of unclassified U.S. military specifications and standards, with over 82,000 active and 387,000 historical military documents.
Our SDO (Standards Developing Organization) relationships are critical to our specifications and standards business. SDOs generally consist of manufacturer, service provider, and laboratory representatives who establish compliance guidelines, or specifications and standards, for an industry. Most engineering work is governed by a wide array of specifications and standards that are designed to ensure that products and component parts conform to generally accepted design practices, performance criteria, and quality, safety, and reliability requirements. We enter into licensing agreements with SDOs, including the SDOs that publish the most commonly used specifications and standards, to distribute this information to customers.
We supplement this SDO information with complementary content, including government and military specifications and standards, regulations, manufacturer and parts data, and logistics and procurement data. We use a number of methods, including proprietary technologies, to gather, update, organize, index, and cross-reference the information. These processes, along with our research and industry expertise, allow us to create unique packages of content to meet the specific business needs of our customers.
Our specification and standards information is delivered primarily through our proprietary web-based application—Standards Expert™ which was released in 2007 and was based on more than 45 years of experience and analysis of our customers' workflow. This application includes a number of critical tools and functionality such as:
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- Linking part information to relevant standards. This
allows our users to quickly determine whether a part that they have identified through our parts solutions is in compliance with the appropriate standard.
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- Identifying inter-dependent technical information. Our
solutions call out standards that are dependent or related to other standards.
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- Alerts. Our tools can alert a user when there has been a change in status to a standard or part that they are tracking.
Regulatory data. We provide access to critical regulations for our targeted industries, such as aviation, construction, and energy. For example, one of our regulatory offerings contains over one million pages of essential aviation regulations and related documents relating to the airworthiness, regulatory compliance, and safety of aircraft. This Internet-based database provides a wide range of information from U.S. and international aviation regulatory agencies. We also track regulations that affect multiple industries, such as occupational health and safety regulations. Our regulations data can
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be integrated with specifications and standards to provide customers with a broader range of compliance information.
Electronic components parts information. The IHS electronic components eCatalog is one of the leading sources of information for this critical component category. With our product, companies can instantly access product critical component information, including component alternates, part status, manufacturer documentation, datasheets, application notes, timing diagrams, and product change notifications (PCNs). This product also provides direct access to analytical predictive lifecycle information and alert part notifications, allowing users to proactively identify and quickly minimize lifecycle management challenges, accelerating ROI.
Obsolescence management tools. Utilizing the information in our electronic components parts product, IHS offers a tool for our customers to help them manage parts obsolescence. Bill of materials (BOM) or component manufacturer part number lists are imported and then automatically matched against our industry-reference component database. Provided for each matched manufacturer part number is current manufacturer availability, suggested Form-Fit-Function (FFF) alternate part numbers and our proprietary life cycle modeling and part availability predictive data.
Government parts information. IHS offers a parts and logistics management system, centered on parts procured by the U.S. government. We provide crucial integrated and interoperable logistics information so that processes can be automated, labor and research costs may be reduced and new levels of efficiency and return on investment can be realized. This product contains information on more than 100 million items in the U.S. Federal Supply Catalog and over 40 U.S. Army, Navy, Air Force, and related military databases. Access to the National Forging Tooling Database (NFTD) provides visibility to spare parts and tooling. Superior search engine capabilities enable users to search by a wide range of criteria, databases, or other commands to returns relevant results in seconds.
Fasteners parts information. The IHS Fasteners eCatalog provides decision support for the identification, specification and sourcing of Aerospace & Defense standard fasteners such as bolts, screws, nuts, washers, rivets, and studs. Designed with the engineering workflow in mind, the IHS Fasteners eCatalog helps solve time-consuming challenges that engineers experience when navigating through various "flat" standards. It simplifies the human element of incorporating approved standard parts into drawings and empowers the engineer with the ability to search for fasteners by part number, document number or parametric, based on the proprietary normalization and categorization of fastener physical and mechanical attributes.
Catalog information. Our solution delivers a valuable and comprehensive collection of manufacturer's catalogs to our customers' desktops with speed, accuracy, and reliability. This product contains more than 300,000 catalogs from over 16,000 manufacturers, directory listings on an additional 500,000 manufacturers, and more than 120 million part number references.
Maintenance, repair, and operations (MRO) project support. Utilizing our tools and proprietary MRO database, IHS offers project-based services to cleanse and enhance a customer's database of indirect parts. This service offering can be used to greatly reduce a customer's inventory and procurement costs and improve uptime.
Defense information services. IHS offers customers within the U.S. federal government a turnkey solution for managing parts information at federal facilities, primarily in the armed forces. Core elements of this service include integration of parts information and support through a dedicated team of information solutions professionals.
Integration services and support. We offer these services to integrate our content and tools into specific customer workflows and systems. Our goal is to create significant value for the customer by interweaving our tools and content directly into their core systems and business processes, with the
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additional goal of enhancing a long-term relationship with the customer and driving increased demand for our subscription tools and information.
Insight
Engineering methods. We have developed a comprehensive proprietary database of engineering processes, principles, and related equations. The database covers more than 250 specific structural and mechanical topics, including noise and vibration, stress and fatigue, metals and composites, structure, and dynamics.
Security Information Domain
Security needs of our customers are highly diverse, including support around key areas such as equipment, military forces, organizations, businesses, markets and geopolitics. In our increasingly competitive and uncertain world, planning for effective security protection in any realm begins with a full understanding of the types and sources of risk that organizations face to stay ahead of potential threats.
IHS Jane's provides the most up-to-date security information and intelligence so that our customers can accurately assess strength and vulnerability when making a security analysis. From its inception in 1898, IHS Jane's has built a global brand by providing impartial, accurate and reliable security information and insight to leading corporations, governments and agencies around the world. With a large team of dedicated editors, researchers, and analysts monitoring, evaluating, and reporting developments, IHS Jane's offerings blend public data, media content, and professional and academic sources with expert analysis to provide insight on global developments and trends. A variety of electronic and print formats are available for seamless integration into our customers' own intelligence and decision-making processes.
In 2008, IHS acquired a 50 percent investment in a joint venture with Lloyd's Register, the world's oldest international ship classification society. That joint venture, Lloyd's Register—Fairplay, supplies maritime information publications and electronic products to the world's maritime industry and maritime regulatory authorities. Regulatory bodies that rely upon Lloyd's Register—Fairplay include government agencies such as customs, military, and coast guards. Sophisticated computer databases developed by Lloyd's Register—Fairplay, including unique coding systems covering ship types, ports, and shipbuilders, cover the full life cycle (from creation to destruction) of all known, propelled, sea-going merchant ships in the world fleet of 100 gross tonnage and above. In 2008, this comprised over 100,000 ships. Detailed information includes full registration and technical details, ownership, construction, reported fixtures, Port State Control detentions, photographs, historic movements, and casualties and demolitions.
Critical Information
IHS Jane's. IHS Jane's collects critical information relating to national and international security, defense intelligence, terrorism and insurgency, transportation, law enforcement and public safety. However, to create IHS Jane's offerings, our staff of editors and experts interprets and enhances the information. Accordingly, we consider all of the IHS Jane's security solutions today to be under our Insight umbrella, as listed below.
Ports and terminals. The LRF Ports and Terminals database contains comprehensive details of over 10,000 ports and terminals worldwide. Customers can access AISLive for real time and historic ship movements. This covers Europe as well as regions in the Americas, the Caribbean, Mediterranean and Far East.
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Print publications. The flagship publication "Lloyd's Register of Ships" (first edition 1764) is published annually by Lloyd's Register—Fairplay. The weekly magazine "Fairplay International" and a host of other print products and statistical publications make the Lloyd's Register—Fairplay catalog of publications a critical source for customers with maritime interests throughout the world.
Defense forecasting. DS Forecast is our electronic subscription tool that forecasts defense equipment procurement 10 years into the future for 19 global defense and aerospace markets. DS Forecast provides users the capability to manipulate data and perform graphical analyses to develop relevant conclusions from the data. Users can analyze market share, market growth rates, track competitors, and identify opportunities, among other attributes.
Custom publications. Certain electronic data products may be customized specifically for individual client in-house systems. Included in these customer-designed services to major clients are joint-products with specialized software suppliers. These products are sold to most sectors of maritime business and government. The databases are used within business or regulatory processes and also by agencies engaged in maritime security, protection and law enforcement. The benefits in obtaining this information from Lloyd's Register—Fairplay is the convenience of standardized data coding within an aggregated database product as well as the independent checking of the data by its expert analysts.
Insight
Comprehensive coverage. IHS Jane's provides a broad array of content coverage including: worldwide news and features; reference content, images and video; company/organizations (profiles, capabilities, people, capacity, culture, strategy, performance and prospects); equipment (specifications, utilization, markets, inventories, manufacturers and forecasts); markets (demographics, history, current status and developments, trends and forecasts, and future opportunities); governments (the political parties, people, policies and budgets that underpin the national standing); countries (demographics, military forces, state stability, international relations, proliferation and procurement, risk assessments, terrorism, and other threats); and events (tracking the events, incidents and announcements that occur every day around the world).
National and international security. We conduct analyses of the internal and external dynamics of almost every country in the world and how their military and political environments and relationships influence the landscape, including major developments in the world's trouble spots and their predicted outcomes; accurate pinpointing and prediction of geopolitical threats and risk around the world; analysis on a country's sphere of influence, ambitions and risk levels; and assessments of military strength and vulnerability for threat analysis and strategy development.
Defense intelligence. Analysis on the latest defense equipment and technology, emerging systems and industry developments, including developments, programs, specifications on all currently operational defense equipment systems and armament; world renowned orders-of-battle breakdowns for most of the armies, navies and air forces around the world. The acquisition of Documental Solutions has enabled us to create the market-leading market intelligence tool for business development professionals in the commercial defense industry.
Terrorism and insurgency. A unique monitoring service which records and scales every significant terrorist or insurgent event in the world, including detailed breakdown of the characteristics, threat assessment, nature, motives and structure of significant terrorist and insurgent groups; country-by-country level of counter-terrorism ability; in-depth post-analysis of major terrorist events; and briefings on significant developments.
Transportation. Specialist reference looks across the global air, land and maritime environments, including airport developments, security analysis, airspace management, policy and regulation; financial
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news and information for both the debt and equity markets in aircraft, shipping and rail; products and services provided by specialist airport contractors; major new railway and urban transportation projects and programs, intermodal operations and traction and rolling stock reference; and design, build and operation of high-speed marine craft.
Law enforcement. IHS Jane's is a global resource on police and security equipment, including news and analysis on current UK policing issues and policy matters; product and service reference on equipment, armament, and personal protection for law enforcement personnel; and procedure, use, and technologies behind less-lethal weapons.
Public safety. Handbooks and guides to safeguard our global and local communities to prepare for and respond to incidents of violence, terrorism, and natural disasters, including chemical-biological attacks, crisis communications, facility security, mass casualty situations, school and teachers' safety, unconventional weapons response, and workplace security.
Intelligence centers. An extension to the news, analysis, imagery and reference information, Intelligence Centers integrate like topics with the analytical tools needed to discover in-depth and relevant insight, including advanced searching, data visualization, report building, active interlinking of content and related documents, alerting, personalized tools and data output capabilities. Topics include Chemical, Biological, Radiological and Nuclear Assessments; Defense Equipment and Technology; Defense Forecasts; Defense Industry and Markets; Military and Security Assessments, and Terrorism and Insurgency.
Strategic advisory services. IHS Jane's Strategic Advisory Services provide strategic consulting services to governments and businesses to carry out detailed, specialist research into key areas of concern, and to prepare reports to feed into customers strategic planning processes. A global network of expert analysts provides extensive experience in aerospace and defense, national security, geopolitics, threat/risk analysis, and corporate strategy development. Practice areas are split between Corporate and Government & Public Policy services. Corporate services include market forecasting, competitive analysis, customer analysis, program tracking and opportunity identification. In addition, a Mergers and Acquisitions service provides investment and divestment screening, M&A impact analysis, transactions support, due diligence, and regulatory risk analysis. The Government and Public Policy service offers training, collection and analysis of open source intelligence; special studies in the areas of threat assessments, policy analysis, order of battle studies, and regional/country assessments; procurement support in the way of technology assessments, budget and funding analysis, RFP support and bid analysis; as well as workshops and gaming exercises.
Maritime consulting. Lloyd's Register—Fairplay provides maritime consultancy services through its specialist staff in Gothenburg, Sweden. As with IHS consulting, the Lloyd's Register—Fairplay advisory offering are supported by a deep store of critical information and expertise developed through many years of experience in the industry.
Environment Information Domain
Drawing on our successes and experience in the other three domains, IHS is building a leading presence in providing Critical Information and Insight supporting decisions around the environment. With the acquisition of Dolphin Software, Inc and Environmental Software Providers (ESP) in 2008, we believe IHS is uniquely positioned to deliver a comprehensive environmental solution especially in the areas of climate change, environmental information management, and sustainability reporting and chemical lifecycle management.
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Critical Information
Climate change, green house gas and sustainability information. We have a leading position in enterprise information solutions to help companies manage their corporate wide sustainability programs. Our solutions include greenhouse gas, air and water emissions management as well as the management of emissions allowances and credit portfolios. These tools are critical in the growing areas of corporate sustainability, green house gas and climate change.
Supply chain greening information. We offer valuable tools and information for the growing area of supply chain greening. We provide a comprehensive solution that allows companies to reduce costs and regulatory risk while improving worker safety and reducing environmental impact by selecting less hazardous chemicals for their operations.
Chemical management information. Our chemical management tools and MSDS database information provide the foundation for companies, from single site to global enterprise, to move from basic compliance toward total chemical management. These tools are critical to maintain compliance with various regulations.
Hazardous materials compliance. We provide a hazardous materials management systems (HMMS). This tool allows facilities managers and compliance officers to track hazardous materials from the point they enter a facility, through usage, to disposal. This tool is critical to maintain compliance with reporting regulations.
Restriction of hazardous substances (RoHS) product data information. As a critical addition to our electronic parts database, we track and maintains content around several critical hazardous materials that may be found in certain electronic components. Certain regions forbid the importation and sales of products containing these materials, and our database is critical to ensure compliance with local regulations.
Product environmental compliance tool. We offer a tool that allows our customers to quickly match their component list against our list of hazardous materials, and offers suitable substitutions that allow our customer to remain compliant with local regulations
Hazardous materials parts management. We collect and standardize HAZMAT data according to a customer's specific requirements and compliance obligations, such as those cited in the EU RoHS/WEEE directives, in addition to other safety and regulatory requirements. We also provide services and software for integration into enterprise/parts management applications and ongoing maintenance systems. In support of our solution, we can provide a HAZMAT information database available to current and future customers.
Insight
Environmental consulting. We currently provide Environmental Insight primarily through consulting engagements. These engagements leverage our knowledge of the environmental and carbon emissions markets. Examples of the types of engagement include: assessment of voluntary carbon emissions markets; carbon emission policy analyses; market strategies for clients affected by new environmental policies; and corporate investment strategies in light of the changing environmental laws and regulations.
Critical Information and Insight at the Intersection of the Domains
As detailed earlier, we provide certain offerings that cannot be classified into a single Information Domain, but rather exist at the immediate intersection of the domains. Many of these offerings are part
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of IHS Global Insight and allow us to provide capabilities that uniquely position IHS to provide Critical Information and Insight on increasingly complex issues where the Domains intersect.
Country intelligence. A full range of country intelligence products cover over 200 countries, providing objective and up-to-the-minute analysis of the key factors driving country, regional, and global markets. These factors include economic analysis, data, and forecasts; political analysis; regulatory analysis; tax laws and their impacts; operational conditions; and security risk analysis—all through the prism of a daily-updated risk assessment model. On a daily basis, clients receive event-driven updates of our country risk analysis and ratings, expert analysis of key economic and political developments, and forecasts and perspectives for planning and decision making. Country Intelligence services deliver daily Same-Day Analysis articles via e-mail alerts, comprehensive country reports and country risk assessments updated as events dictate, and detailed economic forecasts.
Sovereign risk. IHS Global Insight's Sovereign Risk Service provides a unique assessment of sovereign credit risk for over 200 countries worldwide. Sovereign ratings are generated in a systematic and consistent manner using a transparent analytical model based on the experiences of global lending institutions. The ratings are derived principally from a detailed examination of each country's key liquidity and solvency ratios. The assessment process also incorporates the current condition and outlook for each country's economy and political situation into the ratings, including public sentiments and policymakers' attitudes toward foreign creditors.
Detailed North American economic analysis. IHS Global Insight's U.S. Macroeconomic Service provides in-depth forecasts and analyses on the dynamics shaping the U.S. economy—the largest economy in the world. We monitor and forecast all economic sectors and the forces that drive them, providing daily analysis and interpretation of key economic data releases and events, likely impacts of proposed policy changes—from an unbiased source, and anticipated changes in interest rates, exchange rates, and inflation. The Canadian economy is also covered in similar detail. The U.S. Regional Service provides analysis and forecasts for each state and metropolitan statistical area, and the U.S. Industry Services provides detailed forecasts for revenues, output, costs, and profitability for about 170 industries.
Scenario services. While most of IHS Global Insight's economic forecasting products include evaluation of alternative scenarios, the Global Executive Strategy Council focuses a small group of clients on the implications of long-term strategic issues. The Global Scenario Model provides the framework for quantification of the likely outcomes of the various what-if exercises that the Council identifies.
Pricing and purchasing. Pricing and Purchasing services cover more than 750 commodities and global wage and manufacturing costs, helping clients to improve the management of supply chains and negotiate better contracts. This service is used to benchmark commodity buys versus market averages, evaluate supplier quotes, quantify the sources of price changes, identify the best time to buy, negotiate contract escalator terms, and develop budgets, compensation plans, and COLAs (Cost of Living Adjustments).
World and U.S. industry analysis. The World Industry Service and the more detailed U.S. Industry and Risk Service are key tools for market sizing, covering 94 industries in more than 70 countries and 170 industries in the U.S. Used in sales and strategic planning functions, the service helps users to identify risk and opportunities across countries and sectors, develop sales and product plans, minimize credit risk, benchmark company and sector performance, and allocate resources effectively.
Automotive. IHS Global Insight's deepest industry coverage is in the automotive industry. We provide industry analysis, forecasts, data, and consulting services for manufacturers, component suppliers, financial organizations, transportation companies, and government agencies. Automotive
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products and services include global and regional analysis and forecasting, vehicle and component-level data, automotive same-day analysis, market profiles and monthly reports, manufacturer and supplier profiles, sustainable mobility, automotive conferences and seminars, and multi-client studies focused on the supplier industry through our SupplierBusiness Limited subsidiary. Clients use this information to evaluate a market's potential, risk, and opportunity; quantify market-segmentation shifts; analyze competitors' product, market, and manufacturing strategies; check the accuracy of internal and customer forecasts; and assess technology-related risks and opportunities.
Other "Intersection" offerings. In addition to our thorough global industry analysis and detailed U.S. Industry coverage, IHS Global Insight also has separate practices covering all major industries, with special emphasis and dedicated staff providing in-depth coverage of: agriculture, construction, consumer markets, information technology, steel, trade and transportation, and tourism. In five industries—automotive, banking energy, health care, and telecommunications—Same-Day Analysis provides a daily-update framework to country reports, regulatory analysis, and company reports.
Consulting service. IHS Global Insight's consulting services leverage our wealth of business, financial, and economic information to analyze problems and provide solutions. We apply the insight and expertise of our forecasting and analytical services to advise clients on specific issues that affect their competitive position, investment strategy, or policy positions by investigating marketplace and global economic dynamics; identifying the external market forces that will shape potential growth; and providing clear, concise recommendations to help maximize opportunity and mitigate risk.
Acquisitions
Since acquisitions play a key role in expanding our information domain leadership and driving profitable growth, we emphasize strategy and discipline in determining which targets to pursue and ultimately acquire. Our acquisition strategy is guided by our need to serve our customers most pressing business issues at both the strategic and operating level as well as our goal to deepen our expertise in our four targeted information domains (Energy, Product Lifecycle, Security, and Environment) and the intersection opportunities between the domains such as the area of supply chain management. To maintain a disciplined approach to acquisitions, we have established a set of guiding principles. In general, an acquisition should:
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- provide a strategic/synergistic fit by filling gaps within our targeted information domains, adding capabilities to our
suite of technologies and online tools, and enhancing our portfolio of products and services;
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- offer an opportunity to drive more customer value or product continuity with other offerings;
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- add a differentiated value proposition that would be difficult for us to replicate organically;
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- provide the opportunity to add to our human capital depth;
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- share our core values and have a culture complementary to ours;
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- be accretive over a reasonable period of time; and
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- meet our financial criteria.
We have completed 23 acquisitions over the last three years. Some were relatively large, others were small, but they all filled a strategic need. Our larger acquisitions enable us to achieve greater reach in a given or multiple domains—IHS Global Insight, for instance. Similarly, our "bolt-on" or "tuck-in" acquisitions, while generally smaller, tend to consist of databases or datasets (such as the acquisition from Divestco USA Inc.) that provide a strategic broadening of our Critical Information offerings. These bolt-on acquisitions often come with little to no overhead and deliver higher incremental margins than larger acquisitions.
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During 2008, we made the following acquisitions:
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- Global Insight, Inc (Global Insight). In October 2008, we
completed our acquisition of Global Insight, Inc. based in Lexington, Massachusetts—now called IHS Global Insight—the recognized leader in providing the most
comprehensive global economic information, analysis and consulting services to corporations, financial institutions and governments around the world. The acquisition closed for $117.2 million
in cash and approximately 1.3 million shares of IHS common stock, which were valued at $44.3 million based on the closing price of IHS on Oct. 10, 2008. Terms of the transaction
included a lock-up agreement restricting the salability of IHS shares with 10 percent of the shares restricted for one year, 50 percent for two years and 40 percent
for three years.
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- Divestco USA Inc. (Divestco). In September 2008,
we acquired the product portfolio of Divestco, a strategic provider of comprehensive data and analytical tools for the oil and gas industry, for approximately $3.0 million in cash.
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- Documental Solutions LLC (Documental Solutions). In
September 2008, we acquired Documental Solutions LLC of Falls Church, Virginia for approximately $22.2 million in cash. Documental Solutions is a leading provider of market intelligence
and analysis tools for the defense and aerospace industry.
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- JFA International (JFA). In March 2008, we acquired the
assets of JFA, a London, England based provider of strategic analysis to the energy industry's exploration and production sectors. JFA was acquired for £2.0 million, or
approximately $3.9 million based on the exchange rate as of the date of acquisition.
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- Environmental Software Providers (ESP). In March 2008, we
acquired Environmental Software Providers, the business name for Electric Software Products, Inc., based in Mountain View, California, for approximately $18.7 million in cash. ESP is a
provider of enterprise information solutions used by companies to assist in managing their environmental sustainability programs.
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- Dolphin Software, Inc. (Dolphin). In March 2008, we
acquired Dolphin of Lake Oswego, Oregon for approximately $23.7 million in cash. Dolphin is a leader in developing and using chemical data information and software used by companies to record
and track chemicals stored and used in their facilities.
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- Prime Publications Limited (Prime). In March 2008, we
acquired Prime, which owns a 50% interest in the Lloyd's Register-Fairplay Limited joint venture, a leading source of global maritime information. The investment in Lloyd's Register-Fairplay was the
primary asset of Prime. Lloyd's Register of London, England is the joint venture partner owning the other 50%. IHS accounts for the joint venture under the equity method of accounting. IHS acquired
100 percent of the stock of Prime for approximately £38.0 million, or approximately $76.1 million based on the exchange rate as of the date of acquisition, which
included £10.7 million, in non-interest bearing seller notes valued at $16.0 million as of November 30, 2008, and the remainder was paid in cash.
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- McCloskey Group Limited (McCloskey). In December 2007, we acquired McCloskey, the leading provider of news, Critical Information and Insight on the international coal markets located near London, England. We acquired McCloskey for £13.9 million, or approximately $28.2 million as of the date of acquisition, using cash on hand.
Our History
IHS has been a trusted name in the business of managing technical information since 1959. Over the years, we have expanded our offerings from a catalog database for aerospace engineers to become
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one of the leading providers of Critical Information and Insight in the Energy, Product Lifecycle, Security, and Environment information domains. In the late 1990s, we acquired several established energy information providers. The group that now comprises our Energy information domain offerings have accumulated and developed well production and geological information from industry and government sources dating back to the nineteenth century. With the evolution of new technologies, we transitioned our delivery methods from microfilm to the Internet and other electronic media. As our offerings have developed over the years, we have remained committed to providing our customers with solutions that facilitate decision-making, support key processes, and improve productivity.
Product Development and Technology
Our product development efforts and use of technology focus on the collection, management, and delivery of Critical Information and Insight to our customers through our offerings. We manage our comprehensive collection of critical technical information through what we refer to as our "strategic content framework." The data itself is stored in a network of information repositories, many of which are linked directly to our strategic content framework. The development, management, and expansion of our framework and information repositories are central to our product development efforts. We continuously update and enhance our strategic content framework and repositories through proprietary methods and the use of technology encompassing the following steps:
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- we gather raw data from thousands of sources around the world;
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- we transform raw data into Critical Information and Insight through a series of proprietary, knowledge-based workflows and
rule-driven technologies;
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- we translate this information into useable formats;
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- our proprietary technology and processes evaluate this information for relevant data points, tag it for a broad range of
attributes, and index it for ease of retrieval;
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- if the content is licensed from a third party, it undergoes a proprietary marking process to ensure compliance with
applicable license agreements; and
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- new information is added to our repositories and all of the tags, indexing, and other content generated by our experts and technology are integrated into our core schema.
Our strategic content framework and other information management tools allow content to be identified by a variety of search and cross-reference methods. We use proprietary and non-proprietary technologies that index Critical Information in a variety of ways, such as broad field categories, document type, document title, and industry segment. We employ robust, redundant storage technology to ensure that our Critical Information is highly available. Our processes allow for updating as soon as new and relevant information becomes available.
Our product development teams create customer solutions by integrating our data with proprietary and widely used decision-support technology, thus producing Critical Information designed for the needs of our customers. These teams also develop the user interfaces and search capabilities that our customers employ when using our offerings. Our offerings are designed and developed by cross-functional teams that include sales and marketing, product development, and customer support personnel as well as, in some cases, the customers themselves. Customer feedback is shared with these teams so that decision-support tools can be enhanced to address changing customer requirements.
Our product development teams have also created proprietary web services and application interfaces that enhance access to our Critical Information. These services enable our customers to integrate our Critical Information with other data, business processes, and applications (e.g., computer-aided design, enterprise resource planning, supply chain management, and product data/lifecycle management).
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We use a series of digital rights management methods and technologies to preserve our intellectual property rights and the intellectual property rights of third-party licensors. These methods and technologies (for certain of which we have patent applications pending) involve applying and tracking the license rights granted to a given customer, while simultaneously assuring that Critical Information outside of a customer's licensed rights is not accessible. They also permit customers to download files or produce hard copies that are "watermarked" with license information and security codes designed to discourage unauthorized distribution of the content. See "Risk Factors—We may not be able to protect intellectual property rights."
Our strategic content framework is driven by industry standard technologies. In addition, we have standardized hardware, decision-support tools, and application platforms from industry- leading companies. We also have proprietary technology to support our strategic content framework, information repositories, and offerings.
As a global company, we seek cost-efficient and technologically advanced locations for our data centers, data entry, quality assurance, and development functions. To that end we have established "Centers of Excellence" (COEs) to serve as our primary sites for handling data and technology. These COEs are located in the United States, the United Kingdom, Canada, India, and Malaysia. Our COEs are supported by "Off-Shore Development Centers" in India, China, and Eastern Europe.
Customers
We have a diverse customer base that includes many of the largest companies and government organizations. Our solutions are applicable in numerous industries, though we have a particularly large presence in the energy industry as well as customers in defense, aerospace, construction, manufacturing and other industries. Our customers range from large entities such as governments and large multinational companies to smaller companies and technical professionals. We are not dependent upon any single customer, or a few customers, the loss of which would have a material adverse effect.
We serve a global customer base with approximately half of our revenues coming from the United States and the other half coming from the rest of the world.
Government Contracts
We sell our products to various government agencies and entities. No individual contract is significant to our business. Although our government contracts are subject to terms that would allow renegotiation of profits or termination at the election of the government, we believe that no renegotiation or termination of any given contract or subcontract at the election of the government would have a material adverse effect on our financial results.
Sales and Marketing
Our sales and marketing teams are organized to support our three geographic segments. Thus, our customer facing efforts are aligned with our customers and their local markets to best serve them and their needs. "Customer First," our program to understand both current customer satisfaction levels and opportunities to be addressed, provides additional direction to sales and marketing about key areas of focus.
Within each of our geographic segments, our sales force is generally organized based on the size of our customers and our expertise in key customer industries. Our global account management teams address the needs of our largest customers. As the account size becomes progressively smaller, we organize sales and renewal efforts around field sales, inside sales (telesales or e-commerce), and our dealer network.
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Each global account team is comprised of a global account manager and product/solution experts. The global account manager is responsible for harnessing the knowledge of our product specialists bring the right IHS expertise to the customer's business needs. Teams range in size from eight to fifteen members. Senior executives at IHS are assigned to, and personally engage with, global accounts to understand needs and concerns.
We train all of our sales colleagues using a third-party sales methodology that is designed to facilitate revenue growth while improving sales productivity. This methodology includes account planning, managing complex sales opportunities, and effective sales calls. The account planning process is a continuous evaluation of customer business needs with the goal of retaining and extending the business relationship that we have with each customer. Our sales methodology facilitates revenue growth while improving sales productivity. Sales incentive compensation is based on renewing and growing accounts, winning new accounts, cross-selling additional products, and selling new products to additional customers.
New customer acquisition is largely conducted by our dedicated new business team. This team systematically identifies potential new customer opportunities and the sales approach for larger new business opportunities. Our inside sales team also pursues smaller new customer opportunities. We supplement our sales efforts with e-commerce capabilities, which enable customers to purchase offerings online.
We use an extensive dealer network to reach customers in locations where it is not cost-effective to use our sales teams or maintain a sales office. We have approximately 60 dealers that are independent contractors, each employing from one to five sales persons. Some dealers are focused on only our offerings, but many dealers provide other products and services as part of a broad array of information offerings for their customers in their select geography. Revenue generated by dealers represents less than 5% of our total revenue.
We review, on an annual basis, our go-to-market sales strategy. We do this to optimize the allocation of our sales resources across customer size and industries, to capture the most attractive new business opportunities, and to grow our customer base.
Our marketing teams are organized at the corporate, regional, and product levels. Our corporate team provides strategic marketing programs and training resources while also focusing on new directions for the product line-up. These teams are also responsible for overall coordination across marketing groups. Corporate marketing works closely with corporate communications and branding experts in continuing to raise the visibility of IHS products and services to new and continuing customers. Our regional marketing teams work alongside and support our regional sales teams both by driving brand awareness and demand generation at the local level. We tailor marketing programs by target audience and regionally leverage a marketing mix of events, e-marketing, advertising, sales collateral, and public relations.
Our product marketing teams are primarily responsible for ensuring that our offerings are meeting the needs of our customers. These teams conduct ongoing market research to understand changing needs within our targeted industries and customer types. They analyze industry investment patterns, competitive offerings, and work with our product development teams to ensure that we are creating Critical Information and Insight offerings that are relevant and deliver customer value. These teams also study industries we do not currently target to determine if there are potential users that could benefit from our offerings.
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Customer Support
Our customer support program includes customer service and customer training:
- •
- Customer Service: We maintain call centers in multiple
locations around the world. For larger customers, we assign specific call center representatives to respond to all in-bound calls from that customer.
- •
- Customer Training: We offer customer training on how to best use our Critical Information and Insight. Training can be delivered on-site for our customers or via the Internet. Our training services provide instruction across a customer's organization and track a participant's progress. Many of our training services are purchased as part of an annual subscription for our Critical Information and Insight products. Training services may also be purchased on a one-time basis, often associated with first-time purchases of our offerings.
Our customer service and customer training teams work with each other and with the sales teams representing our customers. This enables our customers to work with the same team of IHS employees for all their needs, which we believe results in greater customer satisfaction and stronger customer relationships.
We are proactive in managing ongoing customer needs by maintaining a key issues database that identifies patterns of customer service and support needs. This database is shared with product managers who, where appropriate, implement product improvements.
Starting in 2007, we initiated a companywide priority that puts our customers at the forefront of everything we do. Called "Customer First," this initiative utilizes detailed customer surveys using third party methodologies to assess customer sentiment, resulting in an overall "Customer Delight" score that we measure and track annually. The surveys also are used to determine priorities for product and service improvements in the coming year. Beginning in 2008, every IHS employee was given a personal objective tied to improving this score. Improvements made against this "Customer Delight" score correlate to a portion of each employee's annual salary adjustment. Between 2007 and 2008, we improved our "Customer Delight" score by ten percent, meeting the objective set at the beginning of the year by our Chief Executive Officer. For 2009, we have set a goal of improving that score by another ten percent.
Competition
We believe the principal competitive factors in our business include the depth, breadth, timeliness, and accuracy of information provided, quality of decision-support tools and services, quality and relevance of our analysis and insight, ease of use, customer support, and value for the price. We believe that we compete favorably on each of these factors. Although we do not believe that we have a direct competitor across all of the offerings we provide, we do face competition in specific industries and with respect to specific offerings.
In our Energy information domain, our U.S. well and production data offerings compete with offerings from TGS-NOPEC Geophysical Company and DrillingInfo, Inc., in addition to smaller companies. Certain of our Energy offerings compete with products from Wood Mackenzie Ltd. and Geologic Data Systems, Inc., in addition to other specialized companies. Our Energy domain's advisory services compete with PFC Energy in addition to other smaller consulting companies.
In the Product Lifecycle, Security, and Environment information domains, we compete against a fragmented set of companies. In the Product Lifecycle information domain, we compete with SAI Global's ILI, Thomson Corporation's Techstreet™, United Business Media's Barbour, and some of the SDOs. Also within that domain, our parts offerings compete with products from PartMiner, Inc., SAI Global's ILI, Total Parts Plus, Inc., GlobalSpec, and Thomas Publishing Company, among others. In the
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Security information domain, we compete against large publishers such as McGraw-Hill, and Gannett, and smaller niche players such as Armada International, Forecast International, Control Risks, and JSA Partners, among others. The Environment information domain is highly fragmented. Primary competition in this marketplace comes from internal customer resources, as well as small niche players. Our IHS Global Insight business competes with a variety of niche players as well as with the Economist Intelligence Unit.
Intellectual Property
We rely heavily on intellectual property, including the intellectual property we own and license. We regard our trademarks, copyrights, licenses, and other intellectual property as valuable assets and use intellectual property laws, as well as license and confidentiality agreements with our employees, dealers, and others, to protect our rights. In addition, we exercise reasonable measures to protect our intellectual property rights and enforce these rights when we become aware of any potential or actual violation or misuse.
Intellectual property licensed from third parties, including SDOs, is a vital component of our offerings and, in many cases, cannot be independently replaced or recreated by us or others. We have longstanding relationships with most of the SDOs, government agencies, and manufacturers from whom we license information. Almost all of the licenses that we rely upon are nonexclusive and expire within one to two years unless renewed.
We maintain more than 100 trademarks registered around the world that we will need to renew from time to time. In addition, we have applied for patents in the United States relating to digital rights management, remote access printing, and print on demand. See "Risk Factors—We may not be able to protect intellectual property rights."
Employees
As of November 30, 2008, we had approximately 3,800 employees, of which approximately 2,100 were located in the United States and approximately 1,700 were located abroad. None of our employees are represented by a collective bargaining agreement and we consider our employee relations to be good.
Available Information
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available, without charge, on our website, www.ihs.com, as soon as reasonably practicable after they are filed electronically with the SEC. We have also posted our code of ethics on our website. Copies are also available, without charge, from IHS Investor Relations and Corporate Communications, 15 Inverness Way East, Englewood, CO 80112.
We routinely post other important information on our website under the "Investor Relations" link, so please check www.ihs.com.
We are exposed to a variety of risks and uncertainties in conducting our business, including, but not limited to, the risks described below. This section includes forward-looking statements and future expectations as of the date of this annual report. You should carefully consider the risks described in this section and all of the other information provided in this annual report. If any of the events or developments described below actually occurs, our business, financial condition, and results of operations may be adversely affected. In that case, the trading price of our Class A common stock could decline and you could lose all or part of your investment.
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Our growth strategy may prove unsuccessful.
Our growth strategy involves enhancing our offerings to meet our customers' needs. Our success in meeting these needs depends in large part upon our ability to deliver consistent, high-quality, and timely offerings covering issues, developments and trends that our customers view as important. In addition, we plan to grow by achieving our strategy of being the leading source of Critical Information and Insight in our targeted information domains through profitable organic growth and acquisitions. We have already begun to invest in our growth strategy and it may take a considerable amount of time and expense to fully execute it or benefit from it. If we are unable to execute our growth strategy, or if we do so less capably than our competitors, our operating performance including our ability to generate additional revenues on a profitable basis may be adversely affected.
If we are unable to successfully identify or effectively integrate acquisitions, our financial results may be adversely affected.
We intend to continue to selectively pursue acquisitions to complement our organic growth. There can be no assurance that we will be able to identify suitable candidates for successful acquisitions at acceptable prices. In addition, our ability to achieve the expected returns and synergies from our past and future acquisitions and alliances depends in part upon our ability to integrate the offerings, technology, administrative functions, and personnel of these businesses into our business in an efficient and effective manner. We cannot assure you that we will be successful in integrating acquired businesses or that our acquired businesses will perform at the levels we anticipate. In addition, our past and future acquisitions may subject us to unanticipated risks or liabilities or disrupt our operations and divert management's attention from our day-to-day operations.
If we are unable to consistently renew subscriptions for our offerings, our results could weaken.
In 2008, we derived approximately 75% of our revenues from subscriptions to our offerings. These subscriptions are generally for a term of one year. Our results depend on our ability to achieve and sustain high annual renewal rates on existing subscriptions and to enter into new subscription arrangements on commercially acceptable terms. Our failure to achieve high annual renewal rates on commercially acceptable terms would have a material adverse effect on our business, financial condition, and operating results.
Our international operations are subject to exchange rate fluctuations and other risks relating to non-U.S. operations.
We operate in over 100 countries around the world and a significant part of our revenue comes from international sales. In 2008, we generated approximately half of our revenues from sales outside the United States, and we expect to increase our international presence over time. Operations outside of the United States may be affected by changes in trade protection laws, policies and measures, and other regulatory requirements affecting trade and investment; unexpected changes in regulatory requirements; social, political, labor or economic conditions in a specific country or region; and difficulties in staffing and managing foreign operations. In addition, we must manage the uncertainties of obtaining data and creating solutions that are relevant to particular geographic markets; the complexity of maintaining and monitoring effective policies and procedures in locations around the world; differing levels of intellectual property protection in various jurisdictions; and restrictions or limitations on the repatriation of funds.
Significant fluctuations in exchange rates between the U.S. dollar and foreign currencies may adversely affect our net revenues and operating profit. Our primary operations outside the United States are in the United Kingdom, Canada, and Switzerland.
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We are expanding our sales and marketing efforts in certain emerging markets. Expanding our business into emerging markets may present additional risks beyond those associated with more developed international markets. In any emerging market, we may face additional risks, including cash-based economies, inconsistent government policies, political instability and civil unrest, and sudden currency revaluations.
Continued disruption in credit markets and governmental policy changes may adversely affect our business, financial condition, and results of operations.
Recent disruptions in the financial and credit markets may adversely affect our business and our financial results. The tightening of credit markets may reduce the funds available to our customers to buy our products and services for an unknown, but perhaps lengthy, period. It may also result in customers extending times for payment and may result in our having higher customer receivables with increased default rates. General concerns about the fundamental soundness of domestic and foreign economies may also cause customers to reduce their purchases from us even if they have cash or if credit is available to them. If for any reason we lose access to our currently available lines of credit, or if we are required to raise additional capital, we may be unable to do so in the current credit and stock market environment, or we may be able to do so only on unfavorable terms.
The loss of, or the inability to attract and retain, key personnel could impair our future success.
Our future success depends in part on the continued service of our employees—including executive officers and other key management, sales, marketing, product development, and operations personnel—and on our ability to continue to attract, motivate, and retain additional highly qualified employees. The loss of the services of one or more of our key personnel or our inability to recruit replacements for such personnel or to otherwise attract, motivate, or retain qualified personnel could have an adverse effect on our business, operating results, and financial condition.
We may not be able to protect intellectual property rights.
We rely on copyright laws and nondisclosure, license, and confidentiality arrangements to protect our proprietary rights as well as the intellectual property rights of third parties whose content we license. However, it is not possible to prevent all unauthorized uses of these rights. We cannot assure you that the steps we have taken to protect our intellectual property rights, and the rights of those from whom we license intellectual property, are adequate to deter misappropriation or that we will be able to detect unauthorized uses and take timely and effective steps to remedy this unauthorized conduct. In particular, a significant portion of our revenues are derived internationally including jurisdiction where protecting intellectual property rights may prove even more challenging. To prevent or respond to unauthorized uses of our intellectual property, we might be required to engage in costly and time-consuming litigation and we may not ultimately prevail. In addition, our offerings could be less differentiated from those of our competitors, which could adversely affect the fees we are able to charge.
We rely on a network of independent contractors and dealers whose actions could have an adverse effect on our business.
We obtain some of our critical information from independent contractors, particularly in our Energy domain and for certain offerings of our IHS Jane's business. In addition, we rely on a network of dealers to sell our offerings in locations where we do not maintain a sales office or sales teams. These independent contractors and dealers are not employees of our company. As a result, we are limited in our ability to monitor and direct their activities. The loss of a significant number of these independent contractors or dealers could disrupt our information-gathering efforts or our sales, marketing, and distribution activities. In addition, if any actions or business practices of these
29
individuals or entities violate our policies or procedures or are otherwise deemed inappropriate or illegal, we could be subject to litigation, regulatory sanctions, or reputation damage, any of which could adversely affect our business.
As part of our strategic business model, we outsource certain operations and engage independent contractors to perform work in various locations around the world. Examples include "back office" services such as payroll as well as highly technical services such as data entry, programming, indexing, and testing. By entering into these independent contractor arrangements, we face risks that one or more independent contractors may unexpectedly cease operations, that they may perform work that deviates from our standards, that events in a given region may disrupt the independent contractor's operations, or that we may not be able to adequately protect our intellectual property. If these risks were to occur, they could adversely affect our business.
We are affected by conditions and trends in our targeted industries, which may inhibit our ability to grow or otherwise adversely affect our business.
Our business, financial condition, and results of operations depend upon conditions and trends affecting the industries in which our customers do business. Examples of such industries include energy, defense, aviation, and manufacturing. It is possible that the global economic decline or a decline in several of our customers' industries, for any reason, could adversely impact our customers and thus reduce our revenues. Our ability to grow will depend in part upon the growth of these industries as well as our ability to increase sales of our offerings to customers in these industries. It is possible that, if we fail to manage our sales and marketing efforts, consolidation of businesses could reduce our current and potential customers and could have a material adverse effect on our business. Moreover, the larger organizations resulting from consolidation could have greater bargaining power, which could adversely affect the pricing of our offerings. Factors that adversely affect revenues and cash flows in our customers' industries, including operating results, capital requirements, regulation, and litigation, could reduce the funds available to them to purchase our offerings. Our failure to maintain our revenues or margins could have a material adverse effect on our business, financial condition, and operating results.
Our investments in technology may not be sufficient and may not result in an increase in our revenue or decreases in our operating costs.
As the technological landscape continues to evolve, it may become increasingly difficult for us to make timely, cost-effective changes to our offerings in a manner that adequately differentiates them from those of our competitors. We cannot assure you that our investments have been or will be sufficient to maintain or improve our competitive position or that the development of new or improved technologies and products by our competitors will not have a material adverse effect on our businesses.
We operate in competitive markets, which may adversely affect our market share and financial results.
Some of our competitors focus on sub-markets within our targeted industries while others have significant financial and information-gathering resources, recognized brands, technological expertise, and market experience. We believe that competitors are continuously enhancing their products and services, developing new products and services, and investing in technology to better serve the needs of their existing customers and to attract new customers.
We face competition in specific industries and with respect to specific offerings. We may also face competition from organizations and businesses that have not traditionally competed with us but that could adapt their products and services to meet the demands of our customers. Increased competition may require us to reduce the prices of our offerings or make additional capital investments which would adversely affect our margins. If we are unable or unwilling to do so, we may lose market share in our target markets and our financial results may be adversely affected.
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Some of the critical information we use in our offerings is publicly available in raw form at little or no cost. The Internet and other electronic media have simplified the process of locating, gathering, and disseminating information. If users choose to obtain the critical information they need from our competitors, content providers such as standards bodies, or public sources, our business, financial condition, and results of operations could be adversely affected.
We could experience property damage, system failures, or capacity constraints, which could interrupt the delivery of our offerings to customers and ultimately cause us to lose customers.
Our ability to protect our data centers against damage from interruptions or breach of information systems security, fire, power loss, sabotage, telecommunications failure, or other accidents or disasters is critical. Material delays or failures in our systems or errors in the technology that we use to store and deliver our content to customers could harm our business. The growth of our customer base may also strain our systems in the future. In addition, our products could be affected by failures of third-party technology used in our products and we could have no control over remedying these failures. Material failures or problems with our systems or offerings could force us to incur significant costs to remedy the failures or problems, decrease customer demand for our products, tarnish our reputation, and harm our business.
We may be exposed to litigation related to content we make available to customers, and we may face legal liability or damage to our reputation if our customers are not satisfied with our offerings or if our offerings are misused.
As a provider of Critical Information and Insight, and as a user of third-party content, we face potential liability for, among other things, breach of contract, negligence, and copyright and trademark infringement. Our professional reputation is an important factor in attracting and retaining our customers and in building relationships with the third parties. If customers were to become dissatisfied with the quality of our offerings, our reputation could be damaged and our business could be materially adversely affected. In addition, if the information in our offerings is incorrect for any reason, or if it is misused or used inappropriately, we could be subject to reputation damage or litigation.
Our offerings could infringe on the intellectual property rights of others, which may require us to engage in costly litigation and could disrupt our business.
Third parties may assert infringement or other intellectual property claims against us based on their intellectual property rights. If such claims are successful, we may have to pay substantial damages, possibly including treble damages, for past infringement. We might also be prohibited from selling our offerings or providing certain information without first obtaining a license from the third party, which, if available at all, may require us to pay additional royalties. Even if infringement claims against us are without merit, defending a lawsuit takes significant time, may be expensive, and may divert our management's attention from other business concerns.
We depend on content obtained through agreements with third parties, including Standards Development Organizations (SDOs) for offerings in our Product Lifecycle domain, and the failure to maintain these agreements on commercially reasonable terms could prove harmful to our business.
Certain of our offerings—particularly our Specs and Standards offerings in the Product Lifecycle information domain—include content that is either purchased or licensed from third parties, including SDOs. Offerings that rely upon SDO information accounted for approximately 20% of our total revenue in 2008. We believe that the content licensed from many of these third parties, particularly the SDOs referred to above, cannot be obtained from alternate sources on favorable terms, if at all. Our license agreements with these third parties are generally nonexclusive and many are terminable on less than one year's notice. In addition, many of these third parties compete with one another and us. As a
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result, we may not be able to maintain or renew these agreements at cost-effective prices, and these third parties might restrict or withdraw their content from us for competitive or other reasons. If we are unable to maintain or renew a significant number of these third party content agreements, particularly those we have with SDOs, or if we renew a significant number of these agreements on terms that are less favorable to us, the quality of our offerings and our business, operating results, and financial condition may be adversely affected.
The price of our common stock may be volatile and may be affected by market conditions beyond our control.
Our share price is likely to fluctuate in the future because of the volatility of the stock market in general and a variety of factors, many of which are beyond our control. Sales of substantial amounts of our common stock in the public market, or the perception that such sales could occur, could adversely affect the market price of the shares.
Market fluctuations could result in volatility in the price of shares of our common stock, which could cause a decline in the value of your investment. In addition, if our operating results fail to meet the expectations of stock analysts or investors, we may experience an immediate and significant decline in the trading price of our common stock.
Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable.
Certain provisions in our governing documents could make a merger, tender offer, or proxy contest involving us difficult, even if such events would be beneficial to the interests of our stockholders. These provisions include our classified board, our supermajority voting requirements, and our adoption of a rights agreement, commonly known as a "poison pill." In addition, we are subject to certain Delaware anti-takeover provisions. Under Delaware law, a corporation may not engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Accordingly, our board of directors could rely upon these or other provisions in our governing documents and upon Delaware law to prevent or delay an acquisition of us.
Item 1B. Unresolved Staff Comments
None.
Facilities
We own two office buildings in Englewood, Colorado, which comprise our headquarters, and other office buildings in London and Tetbury, England; Geneva, Switzerland; and Johannesburg, South Africa. We lease space for a total of 76 offices in 24 countries, including offices in Cambridge and Lexington, Massachusetts; Dallas, Grapevine, Midland, Onalaska, and Houston, Texas; Salt Lake City, Utah; Arlington, Virginia; Tulsa and Oklahoma City, Oklahoma; Mountain View and San Francisco, California; New York, New York; Denver, Colorado; Norwalk, Connecticut; Washington, D.C.; Miami, Florida; Troy, Michigan; Lake Oswego, Oregon; Eddystone, Pennsylvania; Alexandria, Virginia; Moscow, Russia; Rio de Janeiro, Brazil; Stockholm, Sweden; Eastwood, Australia; Copenhagen, Denmark; Milan, Italy; and Gdansk, Poland. We also lease space at six locations in Canada, eleven locations in the United Kingdom, two locations in Germany, two locations in South Africa, two locations in Mexico, two locations in Malaysia, four locations in China, two locations in France, three locations in India, two locations in Japan, two locations in Singapore, and two locations in the United Arab Emirates. We believe that our properties, taken as a whole, are in good operating condition, are
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suitable and adequate for our current business operations, and that additional or alternative space will be available on commercially reasonable terms for future use and expansion.
Our ownership and operation of real property and our operation of our business is subject to various environmental protection and health and safety laws and regulations around the world. Some environmental laws hold current and previous owners and operators of businesses and real property liable for contamination on owned or operated property and on properties at which they disposed of hazardous waste, even if they did not know of and were not responsible for the contamination, and for claims for property damage or personal injury associated with the exposure to or the release of hazardous or toxic substances. We have not incurred and do not currently anticipate incurring any material liabilities in connection with such environmental laws.
We are not party to any material litigation and are not aware of any pending or threatened litigation that could have a material adverse effect upon our business, operating results, or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our stockholders during the fourth quarter of the fiscal year.
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Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our Class A common stock is quoted on the New York Stock Exchange under the symbol "IHS." The following table sets forth for the indicated periods the high and low sales prices per share for our Class A common stock on the New York Stock Exchange:
Fiscal Year 2008 Quarters Ended:
|
High | Low | |||||
|---|---|---|---|---|---|---|---|
February 29, 2008 |
$ | 72.19 | $ | 54.73 | |||
May 31, 2008 |
71.59 | 58.72 | |||||
August 31, 2008 |
70.94 | 56.08 | |||||
November 30, 2008 |
64.64 | 29.12 | |||||
Fiscal Year 2007 Quarters Ended:
|
High | Low | |||||
|---|---|---|---|---|---|---|---|
February 28, 2007 |
$ | 41.42 | $ | 34.96 | |||
May 31, 2007 |
45.02 | 35.91 | |||||
August 31, 2007 |
51.77 | 39.74 | |||||
November 30, 2007 |
70.49 | 49.94 | |||||
We have been advised by our transfer agent, American Stock Transfer, that we had 15 holders of record of our Class A Common Stock as of January 16, 2009. Based on reports of security position listings compiled for the 2008 annual meeting of shareholders, we believe we may have in excess of 3,300 beneficial holders of our Class A Common Stock.
Our authorized capital stock consisted of 80,000,000 shares of Class A common stock. The holders of our Class A common stock are entitled to one vote per share. Until September 2008, our capital stock also included 13,750,000 shares of Class B common stock. On September 18, 2008, the holders of those Class B shares converted them to 13,750,000 Class A common shares.
Dividend Policy
We currently anticipate that we will retain all available funds for use in the operation and expansion of our business, and we do not anticipate paying any dividends in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information as of the end of the fiscal year 2008 with respect to compensation plans under which equity securities are authorized for issuance.
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Equity Compensation Plan Information
Plan Category
|
Number of securities to be issued upon exercise of outstanding options, warrants and rights (in thousands) |
Weighted- average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (in thousands) |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(a) |
(b) |
(c) |
||||||||
Equity compensation plans approved by security holders |
2,583 | (1) | $ | 35.18 | (2) | 4,720 | |||||
Equity compensation plans not approved by security holders |
N/A | N/A | N/A | ||||||||
Total: |
2,583 | $ | 35.18 | 4,720 | |||||||
- (1)
- Includes
2.4 million restricted stock units and deferred stock units payable over the next four years that were issued to employees and directors
with no exercise price or other consideration. Performance-based units are reported at maximum payout levels. Excludes 109,993 restricted stock awards issued to employees that are currently counted in
our total shares of Class A common stock. As of November 30, 2008, there were 0.3 million stock options outstanding under our equity compensation plans approved by stockholders.
- (2)
- Calculation of the weighted-average exercise price is only applicable for the 0.3 million stock options described in footnote 1 above.
Unregistered Sales of Equity Securities
The issuances of the securities described in the transactions below were deemed to be exempt from registration under the Securities Act of 1933 in reliance on Rule 701 promulgated under the Securities Act as transactions pursuant to a compensatory benefit plan or a written contract related to compensation.
Issuer Purchases of Equity Securities
During 2008, we repurchased 1,199,595 shares of our Class A common stock for approximately $65.5 million, or $54.64 per share.
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Repurchases of equity securities during fiscal year 2008 are listed in the following table:
Period
|
Total Number of Shares Acquired |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 1 - December 31, 2007 |
— | $ | — | — | 1,000,000 | |||||||||
January 1 - January 31, 2008 |
66,300 | $ | 58.41 | 66,300 | 933,700 | |||||||||
February 1 - February 29, 2008 |
200 | $ | 60.02 | 200 | 933,500 | |||||||||
March 1 - March 31, 2008 |
27,700 | $ | 60.00 | 27,700 | 905,800 | |||||||||
April 1 - April 30, 2008 |
— | $ | — | — | 905,800 | |||||||||
May 1 - May 31, 2008 |
— | $ | — | — | 905,800 | |||||||||
June 1 - June 30, 2008 |
244,146 | $ | 58.82 | 244,146 | 661,654 | |||||||||
July 1 - July 31, 2008 |
302,572 | $ | 61.93 | 302,572 | 359,082 | |||||||||
August 1 - August 31, 2008 |
30,848 | $ | 61.53 | 30,848 | 328,234 | |||||||||
September 1 - September 30, 2008 |
378,600 | $ | 47.54 | 378,600 | (1) | |||||||||
October 1 - October 31, 2008 |
149,229 | $ | 46.93 | 149,229 | (1) | |||||||||
November 1 - November 30, 2008 |
— | $ | — | — | (1) | |||||||||
Total |
1,199,595 | $ | 54.64 | 1,199,595 | — | |||||||||
- (1)
- Effective September 22, 2008, our board of directors approved an expansion of our repurchase program for the remainder of fiscal year 2008 under which we were authorized to invest up to $25 million to repurchase additional shares.
In 2006, we initiated a program to reduce the dilutive effects of employee equity grants, which have consisted primarily of restricted stock. This program continued throughout 2008. We withhold shares to fund employee statutory withholding tax requirements. As shares vest and tax withholdings come due, we withhold enough shares in treasury to cover the tax liability and make a payment to the tax authority out of corporate cash. During the year ended November 30, 2008 we withheld $18.8 million of treasury stock under this program. The table below sets forth the total number of shares withheld and the average fair market value of those shares.
Period
|
Total Number of Shares Withheld |
Average Fair Market Value per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 1 - December 31, 2007 |
7,918 | $ | 68.38 | — | — | |||||||||
January 1 - January 31, 2008 |
80,920 | $ | 62.79 | — | — | |||||||||
February 1 - February 28, 2008 |
118,988 | $ | 61.71 | — | — | |||||||||
March 1 - March 31, 2008 |
175 | $ | 62.54 | — | — | |||||||||
April 1 - April 30, 2008 |
1,620 | $ | 64.45 | — | — | |||||||||
May 1 - May 31, 2008 |
635 | $ | 59.76 | — | — | |||||||||
June 1 - June 30, 2008 |
11,331 | $ | 63.07 | — | — | |||||||||
July 1 - July 31, 2008 |
37,528 | $ | 62.46 | — | — | |||||||||
August 1 - August 31, 2008 |
2,586 | $ | 63.46 | — | — | |||||||||
September 1 - September 30, 2008 |
22,572 | $ | 58.79 | — | — | |||||||||
October 1 - October 31, 2008 |
14,052 | $ | 38.94 | — | — | |||||||||
November 1 - November 30, 2008 |
18,256 | $ | 32.85 | — | — | |||||||||
Total |
316,581 | $ | 59.43 | — | (1) | — | (1) | |||||||
- (1)
- Since we simply withhold shares, rather than buying them in the open market, we do not consider this a share buyback program. Nevertheless, we anticipate that this program will help reduce the dilutive impact of employee equity awards.
36
Three-Year Financial Performance Graph: 2005-2008
The following graph compares our total shareholder return with the Standard & Poors Composite Stock Index (S&P 500) and a peer index representing the total price change of The Advisory Board Committee, The Dun & Bradstreet Corporation, Equifax Inc, The Corporate Executive Board Company, FactSet Research Systems Inc., Fair Isaac Corporation, Gartner, McGraw-Hill, Moody's, Risk Metrics Group, and The Thomson Corporation.
The graph assumes a $100 cash investment on November 11, 2005 (IHS first trading day as a public company) and the reinvestment of all dividends. This graph is not indicative of future financial performance.
37
Item 6. Selected Financial Data
You should read the following selected consolidated financial data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes appearing elsewhere in this Form 10-K.
| |
Years Ended November 30, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||
| |
(In thousands, except per-share amounts) |
|||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||
Revenue |
$ | 844,030 | $ | 688,392 | $ | 550,770 | $ | 476,117 | $ | 393,969 | ||||||||
Operating expenses: |
||||||||||||||||||
Cost of revenue(1) |
372,731 | 302,558 | 252,423 | 228,172 | 184,437 | |||||||||||||
Selling, general and administrative(1) |
295,523 | 249,583 | 200,719 | 166,845 | 152,936 | |||||||||||||
Depreciation and amortization |
39,410 | 25,478 | 15,714 | 11,419 | 9,642 | |||||||||||||
Restructuring and offering charges (credits) |
12,089 | (154 | ) | 3,103 | 13,703 | — | ||||||||||||
(Gain) loss on sales of assets, net |
(328 | ) | (758 | ) | 56 | (1,331 | ) | (5,532 | ) | |||||||||
Impairment of assets |
— | — | — | — | 1,972 | |||||||||||||
Net periodic pension and post-retirement benefits |
(3,704 | ) | (668 | ) | (2,745 | ) | (3,355 | ) | (5,133 | ) | ||||||||
Other expense (income), net |
(5,202 | ) | (4,249 | ) | 1,315 | (1,188 | ) | 2,736 | ||||||||||
Total operating expenses |
710,519 | 571,790 | 470,585 | 414,265 | 341,058 | |||||||||||||
Operating income |
133,511 | 116,602 | 80,185 | 61,852 | 52,911 | |||||||||||||
Gain on sale of investment in affiliate(2) |
— | — | — | — | 26,601 | |||||||||||||
Interest income |
3,162 | 6,784 | 5,974 | 3,485 | 1,140 | |||||||||||||
Interest expense |
(2,482 | ) | (720 | ) | (847 | ) | (768 | ) | (450 | ) | ||||||||
Non-operating income (expense), net |
680 | 6,064 | 5,127 | 2,717 | 27,291 | |||||||||||||
Income from continuing operations before income taxes, minority interests, and discontinued operations |
134,191 | 122,666 | 85,312 | 64,569 | 80,202 | |||||||||||||
Provision for income taxes |
(38,512 | ) | (38,827 | ) | (26,879 | ) | (20,376 | ) | (16,644 | ) | ||||||||
Income from continuing operations before minority interests, equity investment and discontinued operations |
95,679 | 83,839 | 58,433 | 44,193 | 63,558 | |||||||||||||
Income from equity investments |
3,327 | — | — | — | — | |||||||||||||
Minority interests |
(13 | ) | (64 | ) | (168 | ) | (146 | ) | (275 | ) | ||||||||
Income from continuing operations |
98,993 | 83,775 | 58,265 | 44,047 | 63,283 | |||||||||||||
Discontinued operations:(3) |
||||||||||||||||||
Loss from discontinued operations, net |
— | — | (1,920 | ) | (2,250 | ) | (1,969 | ) | ||||||||||
Net income |
$ | 98,993 | $ | 83,775 | $ | 56,345 | $ | 41,797 | $ | 61,314 | ||||||||
Income from continuing operations per share: |
||||||||||||||||||
Basic (Class A and Class B common stock) |
$ | 1.60 | $ | 1.41 | $ | 1.03 | $ | 0.80 | $ | 1.15 | ||||||||
Diluted (Class A and Class B common stock) |
$ | 1.57 | $ | 1.39 | $ | 1.03 | $ | 0.79 | $ | 1.15 | ||||||||
Net income per share: |
||||||||||||||||||
Basic (Class A and Class B common stock) |
$ | 1.60 | $ | 1.41 | $ | 1.00 | $ | 0.76 | $ | 1.11 | ||||||||
Diluted (Class A and Class B common stock) |
$ | 1.57 | $ | 1.39 | $ | 0.99 | $ | 0.75 | $ | 1.11 | ||||||||
Balance Sheet Data (as of period end): |
||||||||||||||||||
Cash and cash equivalents |
$ | 31,040 | $ | 148,484 | $ | 180,034 | $ | 132,365 | $ | 124,452 | ||||||||
Total assets |
1,436,180 | 1,323,807 | 944,301 | 807,156 | 752,644 | |||||||||||||
Total long-term debt and capital leases |
— | 37 | 74 | 262 | 607 | |||||||||||||
Total stockholders' equity |
801,055 | 840,908 | 565,191 | 477,180 | 421,051 | |||||||||||||
- (1)
- Includes stock-based compensation expense as follows:
| |
Years Ended November 30, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||
| |
(In thousands) |
|||||||||||||||
Cost of revenue |
$ | 1,361 | $ | 1,142 | $ | 2,882 | $ | 551 | $ | 4,437 | ||||||
Selling, general and administrative |
38,611 | 29,299 | 18,820 | 4,721 | 17,065 | |||||||||||
Discontinued operations |
— | — | 254 | — | 303 | |||||||||||
Total stock-based compensation expense |
$ | 39,972 | $ | 30,441 | $ | 21,956 | $ | 5,272 | $ | 21,805 | ||||||
38
- (2)
- Reflects
a pretax gain on the sale of our preferred stock investment in TriPoint Global Communications, Inc., a satellite antenna manufacturer, to a
subsidiary of TBG.
- (3)
- Our discontinued operations are shown net of tax benefits of $0.8 million, $1.2 million and $1.2 million for the years ended November 30, 2006, 2005 and 2004, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Some of the information in this Annual Report on Form 10-K includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this Form 10-K, including, without limitation, certain statements under this "Management's Discussion and Analysis of Financial Condition and Results of Operations," may constitute forward-looking statements. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those indicated in these statements as a result of certain factors as more fully discussed under the headings "Forward-Looking Statements" and "Risk Factors."
The following discussion of our financial condition and operating results should be read in conjunction with "Selected Financial Data" and our consolidated financial statements and accompanying notes included in this Form 10-K.
Executive Summary
As discussed more completely in "Business—Overview" above, IHS is a leading provider and comprehensive source of Critical Information and Insight in a sizable and growing global market. Our customers rely on our products and services to facilitate crucial decision-making, support key processes, and improve productivity. At the heart of our products and services is data obtained from public sources, third parties, and our own proprietary databases. We transform that data into Critical Information and Insight that is both useful to our customers and available where and when they make critical business decisions. The data is transformed into Critical Information when we combine it with our proprietary and third-party technology to create graphical user interfaces, search and navigation tools, and online delivery systems or we deliver as individual documents. We further transform that information into Insight products and services with analysis and interpretation from our teams of experts.
We sell our offerings primarily through subscriptions. As a result of our subscription-based business model and historically high renewal rates, we generate recurring revenue and cash flow. We generally recognize revenue from subscriptions (which are usually for one-year periods) ratably over the term of the subscription. Subscriptions are generally paid in full within one to two months after the subscription period commences. As a result, the timing of our cash flows generally precedes the recognition of revenue and income. Historically, our business has had seasonal aspects. However, with the continued organic growth in our subscription-based business model combined with several acquisitions in recent years, our seasonal aspects have diminished although our fourth quarter revenue and profit tends to be slightly higher than other quarters due to the product mix typically sold in the fourth quarter. Our first quarter also benefits from the inclusion of the results from CERAWeek, an annual energy executive gathering.
We serve some of the world's largest corporations across multiple industries, as well as governments and other organizations, in more than 100 countries. Our primary operations outside the United States are in the United Kingdom, Canada and Switzerland. We have structured our business around our customers and the geographies in which they reside: Americas (which includes the United States, Canada, and Latin America); EMEA (Europe, the Middle East, and Africa, with India also included in the region), and APAC (the Asia Pacific region, which includes many countries such as China, Japan, South Korea, Malaysia, and Australia). This allows us to tailor and expand the solutions we offer to meet the unique needs of our customers both globally and in local markets.
39
We have targeted four specific information "domains"—Energy, Product Lifecycle, Security, and Environment. Since these four information domains represent areas where our customers have needs for Critical Information and Insight, we use these domains to set priorities and design our business strategies. In addition, we have certain product lines that intersect multiple domains. We have categorized these products as Intersection and have not allocated them to any specific domain.
As we continue to deliver Critical Information and Insight in those four information domains, we prepare our financial reports and analyze our business across our three reportable geographic segments. As the information that our customers need to address their complex business issues continues to converge at the intersection of the information domains that we serve, we have reorganized our management structure in 2008 to a geographic focus, the point of contact with our customers. This new integrated global organization will make it easier for our customers to do business with us by providing a more cohesive, consistent, and effective sales and marketing approach in each region. By structuring our business around customers and the geographies in which they reside, we are able to tailor and expand the solutions we offer to meet the unique needs of our customers both globally and in local markets. We are also able to better manage our Critical Information and Insight activities according to the best practices of each. This new structure provides a solid foundation for growth in each market for all of our capabilities. It allows us a more efficient method of bringing new products and services to customers, and supports growth in existing accounts and with new customers and markets. As a result of this transformation, our defined operating segments changed to geographic segments during the third quarter of 2008.
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 shareholders. Our primary strategy is to achieve and strengthen a leading position in—and at the intersection of—our targeted information domains. We also intend to continue driving margin and quality improvement through operational transformation.
To support these strategies, we have several on-going cross-functional projects led by members of the senior leadership team. Our operational transformation is an evolution, one which started over three years ago and will continue for a few years to come. We have not designed these initiatives as purely cost-cutting events. Rather, they are multi-faceted endeavors designed to simultaneously improve the quality of our offerings while optimizing the efficiency and effectiveness of the processes involved.
Segments
We generate approximately half of our total revenue from outside the United States. Our primary operations outside the United States are in the United Kingdom, Canada, and Switzerland.
The table below presents the split of revenue by type of offering for each of our three segments:
| |
Americas | EMEA | APAC | ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2008 | 2007 | 2006 | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | ||||||||||||||||||||
Critical Information Products |
71 | % | 75 | % | 78 | % | 57 | % | 68 | % | 77 | % | 63 | % | 67 | % | 71 | % | |||||||||||
Critical Information Services |
9 | 8 | 9 | 2 | 2 | 2 | 1 | 2 | 1 | ||||||||||||||||||||
Insight Products |
14 | 10 | 8 | 29 | 19 | 11 | 28 | 19 | 11 | ||||||||||||||||||||
Insight Services |
6 | 7 | 5 | 12 | 11 | 10 | 8 | 12 | 17 | ||||||||||||||||||||
Total revenue |
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||
Each of our segments' results from operations is primarily driven by organic growth and acquisitions. Foreign currency also impacts the results of each of the segments. Organic growth is driven by several factors, including our ability to further penetrate existing customers, generate new
40
customers, raise prices, introduce new offerings, update existing offerings, execute our sales and marketing plans, and world economic and other events.
Within our Insight Services, we deliver consulting services to our customers. Consulting services for the year ended November 30, 2008 represented less than 7% of our total revenue.
Acquisitions
We have completed 23 strategic acquisitions over the last three years. Some were relatively large, others were small, but they all filled a strategic need. Our larger acquisitions enable us to achieve greater reach in a given or multiple domains—for example, the Global Insight business. Similarly, our "bolt-on" or "tuck-in" acquisitions, while generally smaller, tend to consist of databases or datasets (such as Divestco USA Inc.) that provide a strategic broadening of our Critical Information offerings. These bolt-on acquisitions often come with little to no overhead and deliver higher incremental margins than larger acquisitions.
During 2008, we made the following acquisitions:
- •
- Global Insight, Inc (Global Insight). In October 2008, we
completed our acquisition of Global Insight, Inc. based in Lexington, Massachusetts, the recognized leader in providing the most comprehensive global economic information, analysis and
consulting services to corporations, financial institutions and governments around the world. The acquisition closed for $117.2 million in cash and approximately 1.3 million shares of
IHS common stock, which are valued at $44.3 million based on the closing price of IHS on Oct. 10, 2008. Terms of the transaction include a lock-up agreement restricting the
salability of IHS shares with 10 percent of the shares restricted for one year, 50 percent for two years and 40 percent for three years. The acquisition of Global Insight puts IHS
at the center of today's most important business decisions and significantly enhances the value of our products and services by adding critical economic-focused offerings to the full range of
information and insight IHS already offers. As of November 30, 2008, we have begun the first phase of implementation of a plan to streamline the operations of Global Insight and eliminate
redundancies as a result of this acquisition. This plan contemplates certain reductions in personnel as well as certain facility consolidations related to this acquisition. In accordance with this
plan and initial implementation, we have recorded severance cost of approximately $8 million and facility consolidation costs of approximately $5 million in the preliminary purchase
accounting as assumed liabilities as of November 30, 2008. The cash payments will be incurred at various times through the first nine months of 2009.
- •
- Divestco USA Inc. (Divestco). In September 2008,
we acquired the U.S. product portfolio of Divestco, a strategic provider of comprehensive data and analytical tools for the oil and gas industry, for approximately $3.0 million in cash.
- •
- Documental Solutions LLC (Documental Solutions). In
September 2008, we acquired Documental Solutions LLC of Falls Church, Virginia for approximately $22.2 million in cash. Documental Solutions is a leading provider of market intelligence
and analysis tools for the defense and aerospace industry.
- •
- JFA International (JFA). In March 2008, we acquired the
assets of JFA, a London, England based provider of strategic analysis to the energy industry's exploration and production sectors. JFA was acquired for £2.0 million, or
approximately $3.9 million based on the exchange rate as of the date of acquisition.
- •
- Environmental Software Providers (ESP). In March 2008, we acquired Environmental Software Providers, the business name for Electric Software Products, Inc., based in Mountain View, California, for approximately $18.7 million in cash. ESP is a provider of enterprise information solutions used by companies to assist in managing their environmental sustainability programs.
41
- •
- Dolphin Software, Inc. (Dolphin). In March 2008, we
acquired Dolphin of Lake Oswego, Oregon for approximately $23.7 million in cash. Dolphin is a leader in developing and using chemical data information and software used by companies to record
and track chemicals stored and used in their facilities.
- •
- Prime Publications Limited (Prime). In March 2008, we
acquired Prime, which owns a 50% interest in the Lloyd's Register-Fairplay Limited (LRF) joint venture, a leading source of global maritime information. LRF is the pre-eminent brand name
in the maritime information industry and the only organization that provides comprehensive details of the current world merchant fleet (tankers, cargo, carrier and passenger ships) and a complete
range of products and services to assist the world's maritime community. The investment in LRF was the primary asset of Prime. Lloyd's Register of London, England is the joint venture partner owning
the other 50%. IHS accounts for the joint venture under the equity method of accounting. IHS acquired 100 percent of the stock of Prime for approximately £38.0 million, or
approximately $76.1 million based on the exchange rate as of the date of acquisition, which included £10.7 million, in non-interest bearing seller notes valued at
$16.0 million as of November 30, 2008, and the remainder was paid in cash.
- •
- McCloskey Group Limited (McCloskey). In December 2007, we acquired McCloskey, the leading provider of news, Critical Information and Insight on the international coal markets located near London, England. We acquired McCloskey for £13.9 million, or approximately $28.2 million based on the exchange rate as of the date of acquisition, using cash on hand.
Our consolidated financials include the results of operations and cash flows for these acquisitions beginning on their respective dates of acquisition.
Pricing information
Many of our sales are customized on an annual basis to meet individual customer needs and are based on a number of factors, including the number of customer locations, the number of simultaneous users and the breadth of the content to be included in the offering. In light of the customized nature of many of these offerings, pricing terms are also customized. In addition, the difficulty in contrasting price changes from period to period is exacerbated by the fact that the offering sets purchased by customers are often not constant between periods. As a result, we are not able to precisely differentiate between pricing and volume impacts on changes in revenue from these products from period to period.
Global operations
We serve some of the world's largest corporations across multiple industries, as well as governments and other organizations, in more than 100 countries. We generated revenue of $430.2 million of revenue outside the United States during the year ended November 30, 2008, which represented slightly more than half of our total revenue. Our primary operations outside the United States are in the United Kingdom, Canada, and Switzerland.
Our international operations expose us to foreign-currency risk. Fluctuations in foreign currency rates (decreased) increased our revenues by $(2.6) million, $15.0 million and $0.1 million for the years ended November 30, 2008, 2007 and 2006, respectively, and increased (decreased) our operating income by $1.0 million, $4.4 million and $(3.3) million for the same respective periods. See "Qualitative and Quantitative Disclosures About Market Risk—Foreign Currency Risk."
Restructuring and offering charges
During the third quarter of 2008, we executed a restructuring initiative that primarily affected the Americas and EMEA segments. One-time, involuntary benefit arrangements and other exit costs are
42
accounted for under the provisions of SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." Costs arising under our defined benefit pension plans from providing enhanced benefits are accounted for under the provisions of SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits." Restructuring and related expenses consist of direct and incremental costs associated with restructuring and related activities, including severance, outplacement, and other employee related benefits; facility closure including non-cash expenses related to fixed asset and leasehold improvement write-offs; and other expenses include legal expenses associated with employee terminations that were incurred during the quarter.
This initiative was undertaken to further the realignment of our resources around our regional organizational structure and to further transform our knowledge-based data accumulation operations to ensure continuous improvement in the quality of the Critical Information and Insight we deliver to our customers. During the course of the restructuring, we reduced our aggregate workforce by approximately 7%, we eliminated certain contractor positions and we closed certain offices. As a result of this initiative, we expect to realize an annual improvement to pre-tax income of between $8.0 million and $10.0 million beginning in the fourth quarter of 2008.
During the fourth quarter of 2006, we executed a restructuring initiative. This initiative was undertaken to further focus on offerings with the most growth potential, but it also had the added benefit of trimming the cost structure. During the course of the restructuring, we reduced our aggregate workforce by approximately 40 employees. The $2.5 million restructuring charge was incurred in its entirety during the fourth quarter of 2006 and comprised entirely of employee severance and other termination benefits costs.
We also incurred $0.8 million of costs associated with our 2006 secondary offering. We were required to expense these costs since we did not issue any shares in connection with the offering; rather, all shares in that offering were sold by existing shareholders.
Other items
Cost of operating our business. We incur our cost of revenue primarily to acquire, manage, and deliver our Critical Information and Insight. These costs include personnel, information technology, and occupancy costs related to these activities, as well as royalty payments to third-party information providers. Royalty payments generally vary based on subscription sales from certain product offerings. Our cost of revenue for our services offerings is primarily comprised of personnel costs. Our selling, general, and administrative expenses primarily include wages and other personnel costs, commissions, corporate occupancy costs, and marketing costs.
A large portion of our operating expenses are not directly variable with volume sold, particularly in our subscription based business. Within certain product offerings, a portion of our Critical Information revenue is driven from the sale of specifications and standards, the content for which is obtained from SDOs.
Stock-based compensation expense. We have issued equity-based compensatory awards, primarily restricted stock units, for which we will record the cost over its vesting period. The typical vesting period is three years, and none of the grants exceed five years. As of November 30, 2008, we had approximately 2.4 million stock-based awards outstanding, of which approximately 1.3 million were performance-based awards, assuming maximum potential payout of the performance awards. For our highest-ranking employees, 100 percent of their annual grants are typically performance-based awards. The vesting of the performance shares granted to date is principally based on achieving certain financial performance levels during the fiscal years 2009 and 2010.
43
As of November 30, 2008, we have estimated that the maximum number of shares issuable for the 2009 fiscal year will vest, and that the target number of shares issuable for the 2010 and 2011 fiscal years will vest. Using these estimates, projected share-based compensation expense for 2009 is estimated at $55 -$60 million, and incorporates these grants. A change in the actual performance levels achieved by the Company could result in a change in the actual amount of stock based compensation that we recognize. For example, in the event we do not achieve the projected performance metrics for 2009, 2010 or 2011, our stock based compensation expense would decrease.
Pension and post-retirement benefits. We have one defined benefit plan that covers the majority of our employees in the U.S. (US RIP), and another defined benefit plan that covers a limited number of our employees in the U.K. (UK RIP). Both of these plans were overfunded as of November 30, 2008. We also have postretirement plans in the U.S. that provide medical benefits for certain retirees and eligible dependents. Lastly, we have an unfunded Supplemental Income Plan (SIP), which is a non-qualified pension plan, for certain company personnel.
Net periodic pension and post-retirement benefits are historically comprised of U.S. pension income, U.K. pension expense, U.S. post-retirement benefit income and SIP expense shown on a net basis. Net periodic pension and post-retirement benefits income were comprised of the following:
| |
Years Ending November 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2008 | 2007 | 2006 | |||||||
| |
(In thousands) |
|||||||||
Net pension (income) expense |
$ | (1,681 | ) | $ | 1,281 | $ | (1,596 | ) | ||
Post-retirement benefit income |
(2,023 | ) | (1,949 | ) | (1,149 | ) | ||||
Net periodic pension and post-retirement benefits income |
$ | (3,704 | ) | $ | (668 | ) | $ | (2,745 | ) | |
Provision for income taxes. Our effective tax rate was 28.7%, 31.7%, and 31.5% in the years ended November 30, 2008, 2007, and 2006, respectively. We expect our fiscal year 2009 effective tax rate to be comparable to the fiscal year 2008 rate. See our consolidated financial statements included elsewhere in this Form 10-K.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or GAAP. To apply GAAP, we must make significant estimates that affect our reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. In many instances, we could reasonably have used different accounting estimates. In addition, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which are discussed further below.
Revenue Recognition
The majority of our offerings are provided under agreements containing standard terms and conditions. In our non-standard agreements, we make judgments to determine how to appropriately account for them. These judgments generally involve assessments regarding matters such as:
- •
- whether sufficient legally binding terms and conditions exist,
44
- •
- whether customer acceptance has been achieved, and
- •
- progress on certain consulting projects where revenue is recognized on a proportional performance basis.
We evaluate the binding nature of the terms and conditions of our agreements, as well as whether customer acceptance has been achieved, and evaluate progress on deliverables based on management's judgments, and as appropriate, advice from legal counsel.
Historically, our judgments have been accurate because we have not experienced significant disputes with our customers regarding the timing and acceptance of delivered products and services. However, our actual experience in future periods with respect to binding terms and conditions and customer acceptance may differ from our historical experience.
Business Combinations
We account for our business acquisitions in accordance with the provisions of SFAS No. 141, Business Combinations, using the purchase method of accounting. We allocate the total cost of an acquisition to the underlying net assets based on their respective estimated fair values. As part of this allocation process, we identify and attribute values and estimated lives to the intangible assets acquired. These determinations involve significant estimates and assumptions regarding multiple, highly subjective variables, including those with respect to future cash flows, discount rates, asset lives, and the use of different valuation models and therefore require considerable judgment. Our estimates and assumptions may be based, in part, on the availability of listed market prices or other transparent market data. These determinations will affect the amount of amortization expense recognized in future periods. We base our fair value estimates on assumptions we believe to be reasonable but are inherently uncertain. Depending on the size of the purchase price of a particular acquisition as well as the mix of intangible assets acquired, our financials results could be materially impacted by the application of a different set of assumptions and estimates.
Goodwill and Other Intangible Assets
We review the carrying values of identifiable intangible assets with indefinite lives and goodwill at least annually to assess impairment because these assets are not amortized. Additionally, we review the carrying value of any intangible asset or goodwill whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Examples of such events or changes in circumstances, many of which are subjective in nature, include significant negative industry or economic trends, significant changes in the manner of our use of the acquired assets or our strategy, a significant decrease in the market value of the asset, and a significant change in legal factors or in the business climate that could affect the value of the asset. We assess impairment by comparing the fair value of an identifiable intangible asset or goodwill with its carrying value. The determination of fair value involves significant management judgment as described further below. Impairments are expensed when incurred. Specifically, we test for impairment as follows:
Intangible assets subject to amortization
An intangible asset that is subject to amortization is reviewed when impairment indicators are present in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We compare the expected undiscounted future operating cash flows associated with finite-lived assets to their respective carrying values to determine if the asset is fully recoverable. If the expected future operating cash flows are not sufficient to recover the carrying value, we estimate the fair value of the asset. Impairment is recognized when the carrying amount of the asset is not recoverable and when the carrying value exceeds fair value. The projected cash flows require several assumptions related to, among other things, relevant market factors, revenue growth, if any, and operating margins.
45
We also assess the economic life of the assets and amortize the assets over these periods. While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on our financial results.
Indefinite-lived intangible assets
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we perform the impairment test for indefinite-lived intangible assets by comparing the asset's fair value to its carrying value on at least an annual basis. An impairment charge is recognized if the asset's estimated fair value is less than its carrying value.
We estimate the fair value based on projected discounted future cash flows, which, in turn, are based on our views of uncertain variables such as growth rates, anticipated future economic conditions and the appropriate discount rates relative to risk and estimates of residual values. The use of different estimates or assumptions within our discounted cash flow model when determining the fair value of our indefinite-lived intangible assets or using a methodology other than a discounted cash flow model could result in different values for our indefinite-lived intangible assets and could result in an impairment charge.
Goodwill
In accordance with SFAS No. 142, we test goodwill for impairment on a "reporting unit" level as defined by reference to SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information on at least an annual basis. A reporting unit is a group of businesses (i) for which discrete financial information is available and (ii) that have similar economic characteristics. We test goodwill for impairment using the following two-step approach:
- •
- We first determine the fair value of each reporting unit. If the fair value of a reporting unit is less than its carrying
value, this is an indicator that the goodwill assigned to that reporting unit might be impaired, which requires performance of the second step. We determine the fair value of our reporting units based
on projected future discounted cash flows, which, in turn, are based on our views of uncertain variables such as growth rates, anticipated future economic conditions and the appropriate discount rates
relative to risk and estimates of residual values.
- •
- If necessary, in the second step, we allocate the fair value of the reporting unit to the assets and liabilities of the reporting unit as if it had just been acquired in a business combination and as if the purchase price was equivalent to the fair value of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is referred to as the implied fair value of goodwill. We then compare that implied fair value of the reporting unit's goodwill to the carrying value of that goodwill. If the implied fair value is less than the carrying value we recognize an impairment loss for the excess.
The use of different estimates or assumptions within our discounted cash flow model when determining the fair value of our reporting units or using a methodology other than a discounted cash flow model could result in different values for reporting units and could result in an impairment charge.
Income Taxes
We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Significant judgment is required in determining our provision for income taxes, current tax assets and liabilities, deferred tax assets and liabilities, and our future taxable income for purposes of assessing our ability to realize future benefit from our deferred tax assets. A valuation allowance is established to reduce our deferred tax assets to the amount that is considered more likely than not to be realized through the generation of future taxable income and other tax planning opportunities. To the extent
46
that a determination is made to establish or adjust a valuation allowance, the expense or benefit is recorded in the period in which the determination is made.
On December 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Income Taxes (FIN No. 48), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Upon adoption of FIN No. 48, we recorded a cumulative effect adjustment of $1.4 million to increase beginning retained earnings. Following adoption of FIN No. 48, we include accrued interest and accrued penalties related to amounts accrued for unrecognized tax benefits in our provision for income taxes. We had previously included interest and penalties in interest income (expense) and other income (expense), respectively.
If actual results differ from estimates we have used, or if we adjust these estimates in future periods, our operating results and financial position could be materially affected.
Pension and Postretirement Benefits
We have defined benefit plans that cover the majority of our employees in the U.S. and some employees in the U.K. We also have postretirement plans in the U.S. that provide medical benefits for certain retirees and eligible dependents. The accounting for these plans is subject to the guidance provided in SFAS No. 87, Employers' Accounting for Pensions, and SFAS No. 106, Employers' Accounting for Postretirement Benefits Other than Pensions, and SFAS No. 158, Employers' Accounting for Defined Benefit Plans and Other Postretirement Plans. These statements require that management make certain assumptions relating to the long-term rate of return on plan assets, discount rates used to measure future obligations and expenses, salary increases, inflation, health-care-cost-trend rates and other assumptions. We believe that the accounting estimates related to our pension and postretirement plans are critical accounting estimates because they are highly susceptible to change from period to period based on market conditions.
Key assumptions in measuring the plan obligations include the discount rate, the rate of future salary increases, the long-term expected return on plan assets, and various demographic assumptions, as follows:
- •
- The methodology used to determine the discount rate discounts the projected plan cash flows to the measurement date using
the spot rates provided in the Citigroup Pension Discount Curve. A single discount rate is then computed so that the present value of the benefit cash flows using this single rate equals the present
value computed using the Citigroup Pension Discount Curve. A similar exercise is performed using high yield bonds. These values are compared to changes in corporate bond indices to determine a
discount rate.
- •
- Asset returns are based upon the anticipated average rate of earnings expected on invested funds of the plan over the
long-term.
- •
- Salary increase assumptions are based upon historical experience and anticipated future management actions.
- •
- Demographic assumptions, such as turnover, retirement and disability, are based upon historical experience and are
monitored on a continuing basis to determine if adjustments to these assumptions are warranted in order to better reflect anticipated future experience.
- •
- The IHS subsidy is capped at different rates per month depending on individual retirees' Medicare eligibility.
47
Depending on the assumptions and estimates used, our net periodic pension and postretirement benefit income could vary within a range of outcomes and have a material impact on our financial results.
Discount rates and expected rates of return on plan assets are selected at the end of a given fiscal year and impact expense in the subsequent year. A fifty-basis-point decrease in certain assumptions made at the beginning of 2008 would have had the following effects on 2008 pension expense:
| |
Impact to Pension Results—U.S. Plan | ||||||
|---|---|---|---|---|---|---|---|
Change in Assumption
|
Increase/(Decrease) on 2008 Pre-Tax Expense |
Increase/(Decrease) on November 30, 2008 PBO |
|||||
| |
(In thousands) |
||||||
50-basis-point decrease in discount rate |
$ | 646 | $ | 8,778 | |||
50-basis-point increase in discount rate |
$ | (19 | ) | $ | (8,100 | ) | |
50-basis-point decrease in expected return on assets |
$ | 1,302 | $ | — | |||
50-basis-point increase in expected return on assets |
$ | (1,301 | ) | $ | — | ||
| |
Impact to Pension Results—U.K. Plan | ||||||
|---|---|---|---|---|---|---|---|
Change in Assumption
|
Increase/(Decrease) on 2008 Pre-Tax Expense |
Increase/(Decrease) on November 30, 2008 PBO |
|||||
| |
(In thousands) |
||||||
50-basis-point decrease in discount rate |
£ | 119 | £ | 1,849 | |||
50-basis-point increase in discount rate |
£ | (113 | ) | £ | (1,620 | ) | |
50-basis-point decrease in expected return on assets |
£ | 87 | £ | — | |||
50-basis-point increase in expected return on assets |
£ | (87 | ) | £ | — | ||
Stock-Based Compensation
We have one share-based compensation plan, the Amended and Restated IHS Inc. 2004 Long-Term Incentive Plan (the "2004 Long-Term Incentive Plan"), that provides for the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares, cash-based awards, other stock- based awards, and covered employee annual incentive awards. Our Amended and Restated IHS Inc. 2004 Directors Stock Plan, a sub-plan under our 2004 Long-Term Incentive Plan, provides for the grant of restricted stock and restricted stock units to non-employee directors as defined in that plan.
As of November 30, 2008, we had approximately 2.4 million stock-based awards outstanding, of which approximately 1.3 million were performance-based awards, assuming maximum potential payout of the performance awards.
As of November 30, 2008, we have estimated that the maximum number of shares issuable for the 2009 fiscal year will vest, and that the target number of shares issuable for the 2010 and 2011 fiscal years will vest. Using these estimates, projected share-based compensation expense for 2009 is estimated at $55 -$60 million, and incorporates these grants. A change in the actual performance levels achieved by the Company could result in a change in the actual amount of stock based compensation that we recognize. For example, in the event we do not achieve the projected performance metrics for 2009, 2010 or 2011, our stock based compensation expense would decrease.
We believe that the assumptions related to our performance-based stock awards are critical because they are susceptible to change from period to period based on market and other uncertain conditions beyond our control.
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We determine the fair value of our stock options using the Black-Scholes pricing model. This valuation model requires management to make assumptions and to apply judgment to determine the fair value of our awards. These assumptions and judgments include estimating:
- •
- the future volatility of our stock price,
- •
- expected dividend yield,
- •
- future employee turnover rates, and
- •
- future employee stock option exercise behaviors.
Given that we only had 0.3 million options outstanding as of November 30, 2008, changes in these assumptions were not likely to materially affect our financial results. However, if the number of options granted materially increases in the future, the likelihood that changes in our valuation assumptions could materially impact our financial results also increases.
Results of Operations
Set forth below are our results of operations expressed as a percentage of revenue.
| |
Years Ended November 30, |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2008 | 2007 | 2006 | |||||||||
Revenue: |
||||||||||||
Products |
86 | % | 86 | % | 86 | % | ||||||
Services |
14 | 14 | 14 | |||||||||
Total revenue |
100 | 100 | 100 | |||||||||
Operating expenses: |
||||||||||||
Cost of revenue |
44 | 44 | 46 | |||||||||
Selling, general and administrative |
35 | 36 | 37 | |||||||||
Depreciation and amortization |
5 | 4 | 3 | |||||||||
Restructuring and offering charges |
1 | — | — | |||||||||
Gain on sales of assets, net |
— | — | — | |||||||||
Net periodic pension and post-retirement benefits |
— | — | (1 | ) | ||||||||
Other expense, net |
(1 | ) | (1 | ) | — | |||||||
Total operating expenses |
84 | 83 | 85 | |||||||||
Operating income |
16 | 17 | 15 | |||||||||
Interest income |
— | 1 | 1 | |||||||||
Interest expense |
— | — | — | |||||||||
Non-operating income, net |
— | 1 | 1 | |||||||||
Income from continuing operations before income taxes and minority interests |
16 | 18 | 16 | |||||||||
Provision for income taxes |
(4 | ) | (6 | ) | (5 | ) | ||||||
Income from continuing operations before minority interests |
12 | 12 | 11 | |||||||||
Minority interests |
— | — | — | |||||||||
Income from equity-method investment |
— | — | — | |||||||||
Income from continuing operations |
12 | 12 | 11 | |||||||||
Discontinued operations: |
||||||||||||
Loss from discontinued operations, net |
— | — | (1 | ) | ||||||||
Net income |
12 | % | 12 | % | 10 | % | ||||||
49
Set forth below is our revenue and operating income for our segments for the years ended November 30, 2008, 2007 and 2006. Certain shared-services functions are not allocated to our operating segments. Unallocated amounts include corporate-level restructuring and offering charges, stock-based compensation expense, net periodic pension and post-retirement benefits income, corporate-level impairments, and gains on sales of corporate assets.
| |
Years Ended November 30, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2008 | 2007 | 2006 | ||||||||
| |
(In thousands) |
||||||||||
Americas revenue |
$ | 520,925 | $ | 428,025 | $ | 346,283 | |||||
EMEA revenue |
263,457 | 210,299 | 163,624 | ||||||||
APAC revenue |
59,648 | 50,068 | 40,863 | ||||||||
Total revenue |
$ | 844,030 | $ | 688,392 | $ | 550,770 | |||||
Americas operating income |
$ | 160,757 | $ | 133,785 | $ | 91,357 | |||||
EMEA operating income |
44,258 | 35,200 | 30,138 | ||||||||
APAC operating income |
18,098 | 12,582 | 8,714 | ||||||||
Shared services operating expense |
(89,602 | ) | (64,965 | ) | (50,024 | ) | |||||
Total operating income |
$ | 133,511 | $ | 116,602 | $ | 80,185 | |||||
Year Ended November 30, 2008 Compared to the Year Ended November 30, 2007
Revenue. Revenue was $844.0 million for the year ended November 30, 2008, compared to $688.4 million for the year ended November 30, 2007, an increase of $155.6 million or 23%. This increase was driven in part by acquisitions which contributed $110.0 million and organic growth which contributed $48.2 million. The negative impact of foreign currency was $2.6 million.
Revenue for our Americas segment was $520.9 million for the year ended November 30, 2008, compared to $428.0 million for the year ended November 30, 2007, an increase of $92.9 million or 22%. This increase was driven primarily by acquisitions which added $60.4 million and organic growth which contributed $30.1 million. Favorable foreign currency rates added $2.4 million of revenue growth. Organic growth in 2008 was driven by price increases and growth in certain Critical Information subscription products, primarily within the Energy domain. Revenue from products was $440.7 million for 2008, up $76.7 million or 21% compared to 2007. Revenue from services was $80.3 million for 2008, up $16.2 million or 25% compared to 2007.
Revenue for our EMEA segment was $263.5 million for the year ended November 30, 2008, compared to $210.3 million for the year ended November 30, 2007, an increase of $53.2 million or 25%. This increase was driven primarily by acquisitions which contributed by $42.8 million and organic growth which contributed $15.4 million. Unfavorable foreign currency rates adversely impacted revenue by $5.0 million. Organic growth was driven primarily by price increases and growth in certain critical information subscription products, primarily within the Energy domain. Revenue from products was $227.5 million for 2008, up $45.0 million or 25% compared to 2007. Revenue from services was $35.9 million for 2008, up $8.2 million or 29% compared to 2007.
Revenue for our APAC segment was $59.6 million for the year ended November 30, 2008, compared to $50.1 million for year ended November 30, 2007, an increase of $9.5 million or 19%. This increase was driven in part by acquisitions which contributed $6.8 million and organic growth which contributed $2.7 million. Foreign currency rates had minimal impact on revenue. Organic growth was driven primarily by increased sales in our specifications-and-standards offerings in 2008.
Revenue from products was $722.3 million for 2008, up $132.7 million or 23% compared to 2007. This increase was primarily due to Critical Information products, which increased $57.8 million, or 12% in 2008. Revenue from services was $121.7 million for 2008, up $22.9 million or 23% compared to 2007.
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Services revenue growth was partly attributable to the acquisition of Global Insight as well as strong organic growth in the first half of 2008.
Revenue for the Energy domain was $442.9 million for the year ended November 30, 2008, an increase of $69.4 million, or 19% over the year ended November 30, 2007. This increase was primarily due to an increase in the Critical Information sales. Product Lifecycle domain revenue was $290.6 million for the year ended November 30, 2008, an increase of $12.4 million, or 4% over the year ended November 30, 2007. This increase was due to increases in Critical Information products. Revenue for the Security domain was $75.2 million for the year ended November 30, 2008, an increase of $39.9 million over the year ended November 30, 2007. This increase was primarily due to an increase in revenue from IHS Jane's offerings which was acquired in June 2007. Environment domain revenue was $22.5 million for the year ended November 30, 2008 and was from acquisitions made since the fourth quarter of 2007. Intersection revenue, which includes product lines that intersect multiple domains, was $12.8 million in 2008.
Cost of Revenue. Cost of revenue was $372.7 million for the year ended November 30, 2008, compared to $302.6 million for the year ended November 30, 2007, an increase of $70.2 million or 23%. As a percentage of revenue, cost of revenue increased to 44.2% from 44.0%. Cost of revenue as a percentage of revenue within our Americas segment decreased to 41.8% from 42.5% resulting from increased sales in our Critical Information products which have a relatively fixed-cost base. Cost of revenue as a percentage of revenue within our EMEA segment increased to 47.9% from 46.2%, principally due to an increase in lower margin services. Cost of revenue as a percentage of revenue within our APAC segment decreased to 41.1% from 45.1% principally due to an increase in the sale of higher margin Insight products.
Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses were $295.5 million for the year ended November 30, 2008, compared to $249.6 million for the year ended November 30, 2007, an increase of $45.9 million or 18%. Stock-based compensation expense included in SG&A increased $9.3 million to $38.6 million. Organic SG&A growth was $7.6 million as we incurred costs related to our quote-to-cash system implementation and other initiatives. Acquisitions contributed $31.0 million of the increase. Foreign currency movements decreased SG&A by $2.0 million. As a percentage of revenue and excluding stock-based compensation expense, SG&A was 30.4% for the year ended November 30, 2008, down from 32.0% for the year ended November 30, 2007.
Restructuring Charge. During the third quarter of 2008, we executed a restructuring initiative which primarily affected the Americas and EMEA segments. This initiative was undertaken to further the realignment of our resources around our regional organizational structure and to further transform our knowledge-based data accumulation operations to ensure continuous improvement in the quality of the Critical Information and Insight we deliver to our customers. During the course of the restructuring, we reduced our aggregate workforce by approximately 7%, we eliminated certain contractor positions and we closed certain offices. The restructuring charge of $12.5 million was incurred in its entirety during the third quarter of 2008 and was comprised primarily of employee severance and termination benefits and lease termination costs. During the fourth quarter of 2008, $0.4 million of this restructuring charge was reversed resulting in a $12.1 million charge for the full year 2008. Approximately $5.8 million of the charge related to our Americas segment, $5.9 million pertained to our EMEA segment and $0.4 million related to corporate costs.
Depreciation and Amortization Expenses. Depreciation and amortization expenses were $39.4 million for the year ended November 30, 2008, compared to $25.5 million for the year ended November 30, 2007, an increase of $13.9 million or 55%. The increase was primarily due to acquisitions.
51
Operating Income. Operating income was $133.5 million for the year ended November 30, 2008, compared to $116.6 million for the year ended November 30, 2007, an increase of $16.9 million or 15%. As a percentage of revenue, operating income decreased to 15.8% for the year ended November 30, 2008 from 16.9% for the year ended November 30, 2007, which was primarily due to the restructuring charge in 2008.
Operating income for our Americas segment was $160.8 million for the year ended November 30, 2008, compared to $133.8 million for the year ended November 30, 2007, an increase of $27.0 million or 20%. The increase was principally due to the additional revenue discussed above coupled with our ability to leverage a relatively fixed-cost structure with our subscriptions-based products. This was partially offset by an increase in amortization of assets related to our acquisitions as well as the restructuring charge in 2008. As a percentage of revenue, Americas operating income decreased to 30.9% from 31.3% in 2007.
Operating income for our EMEA segment was $44.3 million for the year ended November 30, 2008, compared to $35.2 million for the year ended November 30, 2007, an increase of $9.1 million or 26%. Operating income increased due to increased sales from both organic growth and acquisition revenue. This was partially offset by higher amortization of assets related to our acquisitions as well as the restructuring charge in 2008. As a percentage of revenue, EMEA operating income remained relatively flat at 16.8% for the year ended November 30, 2008 compared to 16.7% for the year ended November 30, 2007.
Operating income for our APAC segment was $18.1 million for the year ended November 30, 2008, compared to $12.6 million for the year ended November 30, 2007, an increase of $5.5 million or 44%. Operating income increased due to increased sales in our higher margin subscriptions-based products. As a percentage of revenue, APAC operating income increased to 30.3% for the year ended November 30, 2008 from 25.1% for the year ended November 30, 2007.
Operating expenses for our shared services were $89.6 million for the year ended November 30, 2008, compared to $65.0 million for the year ended November 30, 2007, an increase of $24.6 million or 38%. As a percentage of revenue, operating expenses for our shared services was 10.6%, up from 9.4% for the year ended November 30, 2007. Stock-based compensation increased $9.5 million to $40.0 million. The increase in costs is also due to our quote-to-cash system implementation and our ongoing transformational initiatives.
Provision for Income Taxes. Our effective tax rate for the year ended November 30, 2008 was 28.7%, compared to 31.7% for the year ended November 30, 2007. The 2008 rate reflects the impact of our recent internal legal entity reorganization within EMEA.
Year Ended November 30, 2007 Compared to the Year Ended November 30, 2006
Revenue. Revenue was $688.4 million for the year ended November 30, 2007 compared to $550.8 million for the year ended November 30, 2006, an increase of $137.6 million or 25%. The increase was driven by organic growth, which contributed $64.0 million and acquisitions which contributed $58.7 million and the impact of foreign currency contributed $15.0 million.
Revenue for our Americas segment was $428.0 million for the year ended November 30, 2007, compared to $346.3 million for the year ended November 30, 2006, an increase of $81.7 million, or 24%. The increase in revenue was driven by organic growth which contributed $45.8 million, or 13% and acquisitions which contributed $31.3 million, or 9%. Favorable foreign currency rates added $4.6 million, or 1%. Organic growth during the year ended November 30, 2007 was primarily driven by price increases, growth in certain Critical Information subscription products and Insight products. Organic growth was also partially driven by stronger results from CERAWeek and an increase in consulting related projects.
52
Revenue for our EMEA segment was $210.3 million for the year ended November 30, 2007, compared to $163.6 million for the year ended November 30, 2006, an increase of $46.7 million, or 29%. The increase in revenue was driven primarily by acquisitions which contributed $22.9 million, or 14%. Organic growth increased $14.4 million, or 9%. Organic growth was driven by increased sales of our specifications-and-standards and parts-management offerings. Favorable foreign currency rates added $9.4 million, or 6%.
Revenue for our APAC segment was $50.1 million for the year ended November 30, 2007, compared to $40.9 million for the year ended November 30, 2006, an increase of $9.2 million or 23%. The increase in revenue was driven in part by acquisitions which contributed $4.5 million, or 11% and in part by organic growth which contributed $3.7 million, or 9% due to growth in Energy domain products in the region. Foreign currency rates had a $1.0 million, or 2% favorable impact for the year ended November 30, 2008.
Revenue from products was $589.6 million for fiscal year 2007, up $114.9 million or 24% compared to 2006. Revenue from services was $98.8 million for 2007, up $22.7 million or 30% over 2006. Product revenue growth was driven by Critical Information subscription product growth as well as Insight product growth. The increase in services revenue was driven primarily by growth in Insight Services and stronger CERAWeek results for 2007.
Revenue for the Energy domain was $373.5 million for the year ended November 30, 2007, an increase of $79.2 million, or 27% over fiscal year 2006. This increase was primarily due to an increase in the Critical Information sales. Product Lifecycle domain revenue was $278.3 million for the year ended November 30, 2007, an increase of $21.8 million, or 8% over 2006. This increase was primarily due to an increase in sales of specifications and standards products. Revenue for the Security and Environment domains was $35.3 and $1.3 million, respectively for fiscal year 2007 which was the initial year for these domains based on acquisitions made in 2007.
Cost of Revenue. Cost of revenue was $302.6 million for the year ended November 30, 2007, compared to $252.4 million for the year ended November 30, 2006, an increase of $50.2 million, or 20%. As a percentage of revenue, cost of revenue improved to 44.0% from 45.8%. As a percentage of revenue, Americas cost of revenue decreased to 42.5% in 2007 from 45.3% in 2006. The decrease was principally due to the additional revenue discussed above coupled with our ability to leverage a relatively fixed-cost structure on the subscription-based products. As a percentage of revenue, EMEA cost of revenue increased to 46.2% in 2007 from 45.6% in 2006. The increase as a percentage of revenue was principally due to products from our IHS Jane's acquisition having lower margins than our overall portfolio and the modification of certain agency relationships in 2007. As a percentage of revenue, APAC cost of revenue increased to 45.1% in 2007 from 44.6% in 2006. The increase as a percentage of revenue was principally due to a higher percentage of revenue coming from lower margin services.
Selling, General and Administrative Expenses. SG&A expenses were $249.6 million for the year ended November 30, 2007, compared to $200.7 million for the year ended November 30, 2006, an increase of $48.9 million or 24%. Stock-based compensation expense included in SG&A increased $10.5 million to $29.3 million. Organic SG&A growth was $11.6 million which was due to several factors, including increased selling expense because of higher sales and a revised commission structure, costs associated with our human resources information system implementation and our ongoing transformational initiatives, and merit-based salary increases. Acquisitions contributed $22.8 million of the increase. Foreign currency movements increased SG&A by $4.0 million. As a percentage of revenue, excluding stock-based compensation expense, SG&A was 32.0% for the year ended November 30, 2007, down from 33.0% for the year ended November 30, 2006.
53
Depreciation and Amortization Expenses. Depreciation and amortization expenses were $25.5 million for the year ended November 30, 2007, compared to $15.7 million for the year ended November 30, 2006, an increase of $9.8 million, or 62%. The increase was primarily due to acquisitions.
Operating Income. Operating income was $116.6 million for the year ended November 30, 2007, compared to $80.2 million for the year ended November 30, 2006, an increase of $36.4 million, or 45%. As a percentage of revenue, operating income increased to 16.9% for the year ended November 30, 2007 from 14.6% for the year ended November 30, 2006.
Operating income for our Americas segment was $133.8 million for the year ended November 30, 2007, compared to $91.4 million for the year ended November 30, 2006, an increase of $42.4 million, or 46%. The increase was primarily attributable to increased revenue discussed above coupled with our ability to leverage a relatively fixed-cost structure. As a percentage of revenue, Americas operating income increased to 31.3% for 2007 from 26.4% for 2006.
Operating income for our EMEA segment was $35.2 million for the year ended November 30, 2007, compared to $30.1 million for the year ended November 30, 2006, an increase of $5.1 million, or 17%. Operating income increased due to increased sales from both organic growth and acquisition revenue. This was partially offset by higher amortization of assets related to our acquisitions in 2007. As a percentage of revenue, EMEA operating income decreased to 16.7% for 2007 from 18.4% for 2006.
Operating income for our APAC segment was $12.6 million for the year ended November 30, 2007, compared to $8.7 million for the year ended November 30, 2006, an increase of $3.9 million, or 44%. The increase was primarily attributable to increased revenue discussed above coupled with our ability to leverage a relatively fixed-cost structure. As a percentage of revenue, APAC operating income increased to 25.1% for 2007 from 21.3% for 2006.
Operating expenses for our shared services were $65.0 million for the year ended November 30, 2007, compared to $50.0 million for the year ended November 30, 2006, an increase of $15.0 million, or 30%. Increased stock- based compensation expense contributed $8.5 million. Costs associated with our human resources information system implementation and our ongoing transformational initiatives and merit-based salary increases also contributed to the increase.
Provision for Income Taxes. Our effective tax rate for the year ended November 30, 2007 was 31.7%, compared to 31.5% for the year ended November 30, 2006. The effective tax rate for 2007 reflects the benefits from the release of the valuation allowance on certain deferred tax assets, including foreign tax credits and the release of certain tax reserves, offset by the impact from changes to certain estimates. The effective tax rate for 2006 reflects the benefits from the release of certain tax reserves and tax-exempt interest income, offset by an increase in the valuation allowance on the realizability of foreign tax credits.
Financial Condition
Accounts Receivable. Accounts receivable has increased by $32.3 million, or 18%, to $207.8 million at November 30, 2008 compared to $175.5 million as of November 30, 2007. The increase is due to organic and acquisition related growth and a slight deterioration in our accounts receivable aging.
Prepaid Pension Asset. Prepaid pension asset was $8.8 million as of November 30, 2008, down $82.3 million from $91.1 million at November 30, 2007. The decrease is the result of adverse market conditions impacting the investments of the U.S. pension plan in the second half of 2008. This plan remains overfunded at November 30, 2008.
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Deferred Revenue. Deferred revenue was $288.1 million as of November 30, 2008, compared to $239.4 million as of November 30, 2007, an increase of $48.7 million, or 20%. After eliminating the impact of acquisitions and foreign currency, our deferred revenue growth was 17%. This increase was primarily due to the increase in subscription-based sales throughout 2008 and to a lesser extent, at the end of 2007, there were more pending renewals which reduced the deferred revenue balance as of November 30, 2007.
Liquidity and Capital Resources
As of November 30, 2008, we had cash and cash equivalents of $31.0 million and $96.0 million of short-term debt. We have generated strong cash flows from operations over the last few years. As a result of these factors, as well as the availability of funds under our credit facility, we believe we will have sufficient cash to meet our anticipated working capital and capital expenditure needs.
Our future capital requirements will depend on many factors, including the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products, our ongoing companywide initiatives, changing technology, and the continued market acceptance of our offerings. We could be required, or could elect, to seek additional funding through public or private equity or debt financing for possible future acquisitions. Additional funds may not be available on terms acceptable to us or at all. We expect our capital expenditures, excluding potential acquisitions, to be approximately $20 million for 2009.
Share Buyback Program
During 2006, our board of directors approved a program to reduce the dilutive effects of employee equity grants, by allowing employees to surrender shares back to the company for a value equal to their statutory tax liability. IHS then pays the statutory tax on behalf of the employee. Later in 2006, our board of directors approved an additional program—a stock buyback program—whereby IHS was authorized to acquire up to one million shares per year in the open market to more fully offset the dilutive effect of our employee equity programs. This program was renewed by the board of directors in late 2007 for fiscal year 2008. Later in 2008, our board of directors approved an expansion of our repurchase program for the remainder of fiscal year 2008 under which we could invest up to $25.0 million to repurchase additional shares. During the year ended November 30, 2008, we repurchased 1,199,595 shares of our Class A common stock for approximately $65.5 million, or $54.64 per share, pursuant to the stock buyback program and 316,581 shares for approximately $18.8 million, or $59.43 per share, related to shares withheld for taxes.
Cash Flow
Net cash provided by operating activities was $189.2 million for the year ended November 30, 2008, compared to $141.7 million for the year ended November 30, 2007. The increase was principally due to our business growing profitably year over year, primarily due to increased pricing, an expanding subscription base, increased sales and the continued positive impact of our acquisitions. Our subscription-based business model typically generates a high rate of cash flow and is aided by the following:
- •
- relatively low levels of required capital expenditures;
- •
- positive working capital characteristics that do not generally require substantial working capital increases to support
our growth;
- •
- a cash-for-tax rate that continues to trend lower than our effective tax rate; and
- •
- our well-capitalized balance sheet.
55
The positive cash flow impact of our growing business in 2008 was partially offset by the following:
- •
- annual bonus payments, which are paid in the first quarter each year, were approximately $6 million higher in 2008
than in 2007;
- •
- receivable collections were robust at the end of 2007, enhancing cash flow to the detriment of 2008; and
- •
- payments of approximately $11 million related to our third quarter restructuring charge in 2008.
Net cash provided by operating activities was $141.7 million for the year ended November 30, 2007, compared to $115.7 million for the year ended November 30, 2006. The increase was principally due to our business growing profitably year over year, primarily due to increased pricing, an expanding subscription base, increased sales and the positive impact of our acquisitions.
Net cash used in investing activities was $284.9 million for the year ended November 30, 2008, compared to $133.8 million for the year ended November 30, 2007. The increase in cash used in investing activities was primarily driven by acquisitions in 2008. In 2008, we used $272.8 million in acquisitions of businesses compared to $114.6 million in 2007.
Net cash used in investing activities was $133.8 million for the year ended November 30, 2007, compared to $72.3 million for the year ended November 30, 2006. The increase in cash used in investing activities was primarily driven by two events. First, we disbursed $30.2 million more on acquisitions during 2007 than we did in 2006. Second, we had an $8.5 million net cash outflow in 2007 due to the purchases and sales/maturities of investments. In contrast, we had a $25.7 million net cash inflow in 2006 due to the purchases and sales/maturities of investments.
Net cash used in financing activities was $3.5 million for the year ended November 30, 2008 compared to $38.0 million for the year ended November 30, 2007. The difference in cash flows was primarily caused by the net borrowings of $76.9 million in 2008 which was more than offset by $84.4 million of treasury stock repurchases in 2008.
Net cash used in financing activities was $38.0 million for the year ended November 30, 2007. Net cash provided by financing activities was $2.8 million for the year ended November 30, 2006. The difference in cash flows was primarily caused by the additional $30.9 million disbursed in 2007 for the buyback of our shares. Additionally, we recognized $9.5 million more tax benefit from equity compensation plans in 2006.
Credit Facility
On September 7, 2007, we entered into an amended and restated credit agreement (the "Revolver"). The $385 million unsecured revolving credit agreement allows us, under certain conditions, to increase the facility to a maximum of $500 million. The agreement expires in September 2012.
The interest rates for borrowing under the Revolver are based upon our Leverage Ratio, which is the ratio of Consolidated Funded Indebtedness to rolling four quarter Consolidated Earnings Before Interest Expense, Taxes, Depreciation, and Amortization (EBITDA), as defined in the Revolver. The rate ranges from the applicable LIBOR plus 50 basis points to 125 basis points or the agent bank's base rate. A commitment fee is payable periodically and ranges from 10 to 25 basis points based upon our Leverage Ratio. The Revolver contains certain financial and other covenants, including limitations on capital lease obligations and maximum Leverage and Interest Coverage Ratios, as defined in the Revolver.
56
As of November 30, 2008, we were in compliance with all of the covenants in the agreement and had $80.0 million of outstanding borrowings. In addition, we had outstanding letters of credit totaling approximately $1.2 million as of November 30, 2008.
Off-Balance Sheet Transactions
We have no off-balance sheet transactions.
Contractual Obligations and Commercial Commitments
We have various contractual obligations and commercial commitments which are recorded as liabilities in our consolidated financial statements. Other items, such as certain purchase commitments and other executory contracts, are not recognized as liabilities in our consolidated financial statements but are required to be disclosed. The following table summarizes our contractual obligations and commercial commitments at November 30, 2008, and the future periods in which such obligations are expected to be settled in cash:
| |
Payment due by period | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Contractual Obligations and Commercial Commitments
|
Total | Less than 1 year |
1 - 3 years | 4 - 5 years | More than 5 years |
||||||||||||
| |
(In thousands) |
||||||||||||||||
Operating leases |
$ | 74,987 | $ | 15,232 | $ | 20,989 | $ | 16,553 | $ | 22,213 | |||||||
Post-retirement medical-benefit plan contributions |
8,163 | 842 | 1,667 | 1,654 | 4,000 | ||||||||||||
Unconditional purchase obligations |
4,369 | 2,546 | 1,823 | — | — | ||||||||||||
Total |
$ | 87,519 | $ | 18,620 | $ | 24,479 | $ | 18,207 | $ | 26,213 | |||||||
We do not expect any required contributions to the U.S. RIP during 2009. However, we expect to contribute approximately $2.1 million to the UK RIP during 2009. We also expect to contribute approximately $0.5 million to the SIP during 2009. Employer contributions to the post-retirement benefit plan expected to be paid during the year ending November 30, 2009, are approximately $0.8 million.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Adoption of the provisions of SFAS No. 157 related to non-financial assets and liabilities has been delayed for fiscal years which begin after November 15, 2008. The provisions of SFAS No. 157 relating to financial assets and liabilities are effective for financial statements issued for fiscal years beginning after November 15, 2007. We adopted the provisions relating to financial assets and liabilities as of December 1, 2007 with no material impact on our consolidated financial statements. We are currently evaluating the impact of adopting the provisions within SFAS No. 157 related to non-financial assets and liabilities on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations and SFAS No. 160, Accounting and Reporting of Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51. These new standards will significantly change the accounting for and reporting of business combination transactions and noncontrolling (minority) interests in consolidated financial statements. SFAS Nos. 141(R) and 160 are required to be adopted simultaneously and are effective for the first annual reporting period beginning on or after December 15, 2008. Thus, we are required to adopt these standards on December 1, 2009, the first day of our 2010 fiscal year. Earlier adoption is
57
prohibited. We are currently evaluating the impact of adopting SFAS Nos. 141(R) and 160 on our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities. SFAS No. 161 requires additional disclosures related to the use of derivative instruments, the accounting for derivatives and how derivatives impact financial statements. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. Thus, we are required to adopt this standard on December 1, 2008, the first day of our 2009 fiscal year. SFAS No. 161 will not have a material impact to our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of General Accepted Accounting Principles. This statement documents the hierarchy of the various sources of accounting principles and the framework for selecting the principles used in preparing financial statements. This statement shall be effective 60 days following the Securities and Exchange Commission's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. SFAS No. 162 will not have a material impact to our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
As of November 30, 2008, we had no investments other than cash and cash equivalents and therefore we were not exposed to material interest rate risk on investments.
We may be exposed from time to time to changes in interest rates that may adversely affect our results of operations and financial position related to our debt. A 10% adverse change in interest rates would result in hypothetical increase of $0.3 million in interest expense.
Foreign Currency Risk
Our consolidated financial statements are expressed in U.S. dollars, but a portion of our business is conducted in currencies other than U.S. dollars. Changes in the exchange rates for such currencies into U.S. dollars can affect our revenues, earnings, and the carrying values of our assets and liabilities in our consolidated balance sheet, either positively or negatively. Fluctuations in foreign currency rates (decreased) increased our revenues by $(2.6) million, $15.0 million and $0.1 million for the year ended November 30, 2008, 2007 and 2006, respectively, and increased (decreased) our operating income by $1.0 million, $4.4 million and $(3.3) million for the same respective periods. The translation effects of changes in exchange rates in our consolidated balance sheet are recorded within the cumulative translation adjustment component of our stockholders' equity. In 2008, we recorded cumulative translation losses of $97.0 million, reflecting changes in exchange rates of various currencies compared to the U.S. dollar.
A 10% change in the currencies that we are primarily exposed to would have impacted our 2008 revenue and operating income by approximately $23.8 million and $1.0 million, respectively. Approximately 67% of total revenue was earned in subsidiaries with the U.S. dollar as the functional currency.
Credit Risk
We are exposed to credit risk associated with cash equivalents, investments, and trade receivables. We do not believe that our cash equivalents, investments, or foreign currency derivatives present significant credit risks because the counterparties to the instruments consist of major financial institutions that are financially sound or have been capitalized by the U.S. government and we manage the notional amount of contracts entered into with any one counterparty. Substantially all trade
58
receivable balances are unsecured. The concentration of credit risk with respect to trade receivables is limited by the large number of customers in our customer base and their dispersion across various industries and geographic areas. Although we have a large number of customers who are dispersed across different industries and geographic areas, the current economic downturn could increase our exposure to credit risk on our trade receivables. We perform ongoing credit evaluations of our customers and maintain an allowance for potential credit losses.
59
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
60
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of IHS Inc.
We have audited the accompanying consolidated balance sheets of IHS Inc. as of November 30, 2008 and 2007, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended November 30, 2008. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of IHS Inc. at November 30, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended November 30, 2008, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), IHS Inc.'s internal control over financial reporting as of November 30, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated January 20, 2009 expressed an unqualified opinion thereon.
| /s/ Ernst & Young LLP |
Denver,
Colorado
January 20, 2009
61
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of November 30, 2008, based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of November 30, 2008.
Our management's evaluation did not include assessing the effectiveness of internal control over financial reporting at IHS Global Insight, Inc ("IHS Global Insight"), which was acquired on October 18, 2008. IHS Global Insight was included in our consolidated financial statements and constituted $241.7 million and $168.5 million of total and net assets, respectively, as of November 30, 2008, and $18.5 million and $0.1 million of revenues and net loss, respectively, for the year then ended. The net loss incurred by the IHS Global Insight business includes amortization expense related to the acquired intangible assets.
Our independent registered public accounting firm has issued an audit report on our internal control over financial reporting. Their report appears on the following page.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Date: January 20, 2009
| /s/ JERRE L. STEAD Jerre L. Stead Chairman and Chief Executive Officer |
||
/s/ MICHAEL J. SULLIVAN Michael J. Sullivan Executive Vice President and Chief Financial Officer |
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders of IHS Inc.
We have audited IHS Inc.'s internal control over financial reporting as of November 30, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). IHS Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management's Report on Internal Control over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of IHS Global Insight which was acquired on October 13, 2008, which is included in the 2008 consolidated financial statements of IHS Inc. and constituted $241.7 million and $168.5 million of total and net assets, respectively, as of November 30, 2008 and $18.5 million and $0.1 million of revenues and net loss, respectively, for the year then ended. Our audit of internal control over financial reporting of IHS Inc. also did not include an evaluation of the internal control over financial reporting of IHS Global Insight.
In our opinion, IHS Inc. maintained, in all material respects, effective internal control over financial reporting as of November 30, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of IHS Inc. as of November 30, 2008 and 2007, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended November 30, 2008 and our report dated January 20, 2009 expressed an unqualified opinion thereon.
| /s/ Ernst & Young LLP |
Denver,
Colorado
January 20, 2009
63
IHS INC.
CONSOLIDATED BALANCE SHEETS
| |
As of November 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| |
2008 | 2007 | |||||||
| |
(In thousands) |
||||||||
Assets |
|||||||||
Current assets: |
|||||||||
Cash and cash equivalents |
$ | 31,040 | $ | 148,484 | |||||
Short-term investments |
— | 10,518 | |||||||
Accounts receivable, net |
207,815 | 175,542 | |||||||
Deferred subscription costs |
35,948 | 35,910 | |||||||
Deferred income taxes |
28,801 | 17,681 | |||||||
Other |
14,213 | 14,112 | |||||||
Total current assets |
317,817 | 402,247 | |||||||
Non-current assets: |
|||||||||
Property and equipment, net |
59,578 | 58,756 | |||||||
Intangible assets, net |
285,902 | 206,359 | |||||||
Equity investments |
56,139 | — | |||||||
Goodwill, net |
705,077 | 564,582 | |||||||
Prepaid pension asset |
8,768 | 91,116 | |||||||
Other |
2,899 | 747 | |||||||
Total non-current assets |
1,118,363 | 921,560 | |||||||
Total assets |
$ | 1,436,180 | $ | 1,323,807 | |||||
Liabilities and stockholders' equity |
|||||||||
Current liabilities: |
|||||||||
Short-term debt |
$ | 96,020 | $ | 3,062 | |||||
Accounts payable |
35,084 | 37,550 | |||||||
Accrued compensation |
39,083 | 37,014 | |||||||
Accrued royalties |
24,769 | 22,684 | |||||||
Other accrued expenses |
58,831 | 37,435 | |||||||
Income tax payable |
3,994 | 15,255 | |||||||
Deferred subscription revenue |
288,145 | 239,395 | |||||||
Total current liabilities |
545,926 | 392,395 | |||||||
Long-term debt |
— | 37 | |||||||
Accrued pension liabilities |
6,778 | 11,965 | |||||||
Accrued post-retirement benefits |
8,852 | 10,203 | |||||||
Deferred income taxes |
65,749 | 60,461 | |||||||
Other liabilities |
7,820 | 7,619 | |||||||
Minority interests |
— | 219 | |||||||
Commitments and contingencies |
|||||||||
Stockholders' equity: |
|||||||||
Class A common stock, $0.01 par value per share, 80,000,000 shares authorized, 64,090,207 and 49,831,293 shares issued, 62,802,179 and 48,758,518 shares outstanding at November 30, 2008 and 2007, respectively |
641 | 498 | |||||||
Class B common stock, $0.01 par value per share, 13,750,000 shares authorized, issued and outstanding at November 30, 2007 |
— | 138 | |||||||
Additional paid in capital |
408,007 | 381,124 | |||||||
Treasury stock, at cost; 1,288,028 and 1,072,775 shares at November 30, 2008 and 2007 |
(64,632 | ) | (46,045 | ) | |||||
Retained earnings |
584,219 | 483,804 | |||||||
Accumulated other comprehensive (loss) income |
(127,180 | ) | 21,389 | ||||||
Total stockholders' equity |
801,055 | 840,908 | |||||||
Total liabilities and stockholders' equity |
$ | 1,436,180 | $ | 1,323,807 | |||||
See accompanying notes.
64
IHS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
Years Ended November 30, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2008 | 2007 | 2006 | ||||||||||
| |
(In thousands, except per share amounts) |
||||||||||||
Revenue: |
|||||||||||||
Products |
$ | 722,311 | $ | 589,602 | $ | 474,705 | |||||||
Services |
121,719 | 98,790 | 76,065 | ||||||||||
Total revenue |
844,030 | 688,392 | 550,770 | ||||||||||
Operating expenses: |
|||||||||||||
Cost of revenue: |
|||||||||||||
Products |
294,929 | 240,634 | 189,056 | ||||||||||
Services |
77,802 | 61,924 | 63,367 | ||||||||||
Total cost of revenue (includes stock-based compensation expense at $1,361; $1,142; and $2,882 for the years ended November 30, 2008, 2007 and 2006, respectively) |
372,731 | 302,558 | 252,423 | ||||||||||
Selling, general and administrative (includes stock-based compensation expense of $38,611; $29,299; and $18,820 for the years ended November 30, 2008, 2007 and 2006, respectively) |
295,523 | 249,583 | 200,719 | ||||||||||
Depreciation and amortization |
39,410 | 25,478 | 15,714 | ||||||||||
Restructuring and offering charges (credits) |
12,089 | (154 | ) | 3,103 | |||||||||
(Gain) loss on sales of assets, net |
(328 | ) | (758 | ) | 56 | ||||||||
Net periodic pension and post-retirement benefits |
(3,704 | ) | (668 | ) | (2,745 | ) | |||||||
Other (income) expense, net |
(5,202 | ) | (4,249 | ) | 1.315 | ||||||||
Total operating expenses |
710,519 | 571,790 | 470,585 | ||||||||||
Operating income |
133,511 | 116,602 | 80,185 | ||||||||||
Interest income |
3,162 | 6,784 | 5,974 | ||||||||||
Interest expense |
(2,482 | ) | (720 | ) | (847 | ) | |||||||
Non-operating income, net |
680 | 6,064 | 5,127 | ||||||||||
Income from continuing operations before income taxes, equity investment and minority interests |
134,191 | 122,666 | 85,312 | ||||||||||
Provision for income taxes |
(38,512 | ) | (38,827 | ) | (26,879 | ) | |||||||
Income from continuing operations before minority interests |
95,679 | 83,839 | 58,433 | ||||||||||
Income from equity investment |
3,327 | — | — | ||||||||||
Minority interests |
(13 | ) | (64 | ) | (168 | ) | |||||||
Income from continuing operations |
98,993 | 83,775 | 58,265 | ||||||||||
Discontinued operations: |
|||||||||||||
Loss from discontinued operations, net |
— | — | (1,920 | ) | |||||||||
Net income |
$ | 98,993 | $ | 83,775 | $ | 56,345 | |||||||
Income from continuing operations per share: |
|||||||||||||
Basic (Class A common stock and Class B common stock) |
$ | 1.60 | $ | 1.41 | $ | 1.03 | |||||||
Diluted (Class A common stock and Class B common stock) |
$ | 1.57 | $ | 1.39 | $ | 1.03 | |||||||
Loss from discontinued operations per share: |
|||||||||||||
Basic (Class A common stock and Class B common stock) |
$ | — | $ | — | $ | (0.03 | ) | ||||||
Diluted (Class A common stock and Class B common stock) |
$ | — | $ | — | $ | (0.04 | ) | ||||||
Net income per share: |
|||||||||||||
Basic (Class A common stock and Class B common stock) |
$ | 1.60 | $ | 1.41 | $ | 1.00 | |||||||
Diluted (Class A common stock and Class B common stock) |
$ | 1.57 | $ | 1.39 | $ | 0.99 | |||||||
Weighted average shares: |
|||||||||||||
Basic (Class A common stock and Class B common stock) |
62,063 | 59,463 | 56,561 | ||||||||||
Diluted (Class A common stock and Class B common stock) |
62,957 | 60,426 | 56,656 | ||||||||||
See accompanying notes.
65
IHS INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
| |
Shares of Class A Common Stock |
Class A Common Stock |
Shares of Class B Common Stock |
Class B Common Stock |
Additional Paid-In Capital |
Treasury Stock |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Unearned Compensation |
Total | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(In thousands) |
|||||||||||||||||||||||||||||||
Balance at November 30, 2005 |
44,078 | 441 | 13,750 | 138 | 168,196 | — | 343,684 | (10,486 | ) | (24,793 | ) | 477,180 | ||||||||||||||||||||
Adoption of SFAS No. 123(R) |
— | — | — | — | (24,793 | ) | — | — | — | 24,793 | — | |||||||||||||||||||||
Stock-based award activity |
1,188 | 12 | — | — | 21,082 | — | — | — | — | 21,094 | ||||||||||||||||||||||
Excess tax benefit on vested shares |
— | — | — | — | 10,542 | — | — | — | — | 10,542 | ||||||||||||||||||||||
Repurchases of common stock |
(224 | ) | — | — | — | — | (7,551 | ) | — | — | — | (7,551 | ) | |||||||||||||||||||
Net income |
— | — | — | — | — | — | 56,345 | — | — | 56,345 | ||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||
Foreign currency translation adjustments |
— | — | — | — | — | — | — | 7,442 | — | 7,442 | ||||||||||||||||||||||
Minimum pension liability adjustment, net of tax |
— | — | — | — | — | — | — | (3,152 | ) | — | (3,152 | ) | ||||||||||||||||||||
Unrealized gains on short-term investments, net of tax |
— | — | — | — | — | — | — | 28 | — | 28 | ||||||||||||||||||||||
Unrealized gains on foreign-currency hedges, net of tax |
— | — | — | — | — | — | — | 3,263 | — | 3,263 | ||||||||||||||||||||||
Comprehensive income, net of tax |
63,926 | |||||||||||||||||||||||||||||||
Balance at November 30, 2006 |
45,042 | 453 | 13,750 | 138 | 175,027 | (7,551 | ) | 400,029 | (2,905 | ) | — | 565,191 | ||||||||||||||||||||
Stock-based award activity |
102 | 1 | — | — | 29,941 | (9,318 | ) | — | — | — | 20,624 | |||||||||||||||||||||
Excess tax benefit on vested shares |
— | — | — | — | 1,051 | — | — | — | — | 1,051 | ||||||||||||||||||||||
Repurchases of common stock |
(849 | ) | — | — | — | — | (29,176 | ) | — | — | — | (29,176 | ) | |||||||||||||||||||
Shares issued for acquisitions |
4,464 | 44 | — | — | 175,105 | — | — | — | — | 175,149 | ||||||||||||||||||||||
Adoption of SFAS No. 158, net of tax |
— | — | — | — | — | — | — | (918 | ) | — | (918 | ) | ||||||||||||||||||||
Net income |
— | — | — | — | — | — | 83,775 | — | — | 83,775 | ||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||
Foreign currency translation adjustments |
— | — | — | — | — | — | — | 18,047 | — | 18,047 | ||||||||||||||||||||||
Net pension liability adjustment, net of tax |
— | — | — | — | — | — | — | 7,165 | — | 7,165 | ||||||||||||||||||||||
Comprehensive income, net of tax |
108,987 | |||||||||||||||||||||||||||||||
Balance at November 30, 2007 |
48,759 | $ | 498 | 13,750 | $ | 138 | $ | 381,124 | $ | (46,045 | ) | $ | 483,804 | $ | 21,389 | $ | — | $ | 840,908 | |||||||||||||
Stock-based award activity |
192 | 5 | — | — | 38,995 | (18,817 | ) | — | — | — | 20,183 | |||||||||||||||||||||
Excess tax benefit on vested shares |
— | — | — | — | 9,353 | — | — | — | — | 9,353 | ||||||||||||||||||||||
Repurchases of common stock |
(1,200 | ) | — | — | — | (65,545 | ) | — | — | — | (65,545 | ) | ||||||||||||||||||||
Shares issued for acquisition |
1,301 | — | — | — | (21,465 | ) | 65,775 | — | — | — | 44,310 | |||||||||||||||||||||
Class B shares conversion to Class A shares |
13,750 | 138 | (13,750 | ) | (138 | ) | — | — | — | — | — | — | ||||||||||||||||||||
Net income |
— | — | — | — | — | — | 98,993 | — | — | 98,993 | ||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||
Foreign currency translation adjustments |
— | — | — | — | — | — | — | (96,977 | ) | — | (96,977 | ) | ||||||||||||||||||||
Net pension liability adjustment, net of tax |
— | — | — | — | — | — | — | (51,592 | ) | — | (51,592 | ) | ||||||||||||||||||||
Comprehensive income, net of tax |
(49,576 | ) | ||||||||||||||||||||||||||||||
Adoption of FIN No. 48 |
1,422 | 1,422 | ||||||||||||||||||||||||||||||
|
62,802 | $ | 641 | — | $ | — | $ | 408,007 | (64,632 | ) | $ | 584,219 | $ | (127,180 | ) | $ | — | $ | 801,055 | |||||||||||||
See accompanying notes.
66
IHS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
Years Ended November 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2008 | 2007 | 2006 | |||||||||
| |
(In thousands) |
|||||||||||
Operating activities |
||||||||||||
Net income |
$ | 98,993 | $ | 83,775 | $ | 56,345 | ||||||
Reconciliation of net income to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
39,410 | 25,478 | 15,714 | |||||||||
Stock-based compensation expense |
39,972 | 30,441 | 21,702 | |||||||||
(Gain) loss on sales of assets, net |
(328 | ) | (758 | ) | 56 | |||||||
Impairment of assets |
323 | — | — | |||||||||
Impairment of assets of discontinued operations |
— | — | 1,012 | |||||||||
Distributions from equity-method investment |
3,924 | — | — | |||||||||
Net non-cash periodic pension and post-retirement benefits income |
(5,551 | ) | (3,975 | ) | (4,421 | ) | ||||||
Undistributed earnings of affiliates, net |
(3,327 | ) | (31 | ) | — | |||||||
Minority interests |
(202 | ) | (168 | ) | 29 | |||||||
Deferred income taxes |
4,833 | 1,614 | (7,566 | ) | ||||||||
Change in assets and liabilities: |
||||||||||||
Accounts receivable, net |
(23,944 | ) | (5,545 | ) | (4,687 | ) | ||||||
Other current assets |
(1,314 | ) | (2,084 | ) | 1,198 | |||||||
Accounts payable |
(4,789 | ) | (15,640 | ) | 2,263 | |||||||
Accrued expenses |
8,398 | 4,892 | 4,476 | |||||||||
Income taxes |
(3,627 | ) | 11,151 | 3,500 | ||||||||
Deferred subscription revenue |
36,580 | 12,587 | 26,112 | |||||||||
Other liabilities |
(102 | ) | — | — | ||||||||
Net cash provided by operating activities |
189,249 | 141,737 | 115,733 | |||||||||
Investing activities |
||||||||||||
Capital expenditures on property and equipment |
(13,885 | ) | (11,890 | ) | (10,576 | ) | ||||||
Intangible assets acquired |
(4,000 | ) | — | (3,300 | ) | |||||||
Change in other assets and liabilities |
(3,979 | ) | (1,285 | ) | 114 | |||||||
Settlements of forward contracts |
(881 | ) | — | — | ||||||||
Purchases of investments |
— | (98,975 | ) | (5,351 | ) | |||||||
Sales and maturities of investments |
10,500 | 90,483 | 31,012 | |||||||||
Acquisitions of businesses, net of cash acquired |
(272,844 | ) | (114,626 | ) | (84,454 | ) | ||||||
Proceeds from sales of assets and investment in affiliate |
140 | 2,461 | 265 | |||||||||
Net cash used in investing activities |
(284,949 | ) | (133,832 | ) | (72,290 | ) | ||||||
Financing activities |
||||||||||||
Proceeds from borrowings |
160,000 | — | — | |||||||||
Repayment of borrowings |
(83,099 | ) | (537 | ) | (190 | ) | ||||||
Tax benefit from equity compensation plans |
3,952 | 1,051 | 10,542 | |||||||||
Purchases of treasury stock |
(84,362 | ) | (38,494 | ) | (7,551 | ) | ||||||
Net cash provided by (used in) financing activities |
(3,509 | ) | (37,980 | ) | 2,801 | |||||||
Foreign exchange impact on cash balance |
(18,235 | ) | (1,475 | ) | 1,425 | |||||||
Net (decrease) increase in cash and cash equivalents |
(117,444 | ) | (31,550 | ) | 47,669 | |||||||
Cash and cash equivalents at the beginning of the year |
148,484 | 180,034 | 132,365 | |||||||||
Cash and cash equivalents at the end of the year |
$ | 31,040 | $ | 148,484 | $ | 180,034 | ||||||
See accompanying notes.
67
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
IHS Inc. (IHS, the Company, we, our, or us) is a publicly traded Delaware corporation. IHS is a leading provider and comprehensive source of Critical Information and Insight in a sizable and growing global market. Our customers rely on our products and services to facilitate crucial decision-making, support key processes, and improve productivity. At the heart of our products and services is data obtained from public sources, third parties, and our own proprietary databases. We transform that data into Critical Information and Insight that is both useful to our customers and available where and when they make critical business decisions. The data becomes Critical Information when we combine it with our proprietary and third-party technology to create graphical user interfaces, search and navigation tools, and online delivery systems or we deliver as individual documents. We further transform that information into Insight products and services with analysis and interpretation from our teams of experts.
We serve some of the world's largest corporations across multiple industries, as well as governments and other organizations, in more than 100 countries. Our primary operations outside the United States are in the United Kingdom, Canada and Switzerland. We have structured our business around our customers and the geographies in which they reside: Americas (which includes the United States, Canada, and Latin America); EMEA (Europe, the Middle East, and Africa, with India also included in the region), and APAC (the Asia Pacific region, which includes many countries such as China, Japan, South Korea, Malaysia, and Australia). This allows us to tailor and expand the solutions we offer to meet the unique needs of our customers both globally and in local markets.
In addition to structuring our business around the regions, we have targeted four specific information "domains"—Energy, Product Lifecycle, Security, and Environment. Since these four information domains represent areas where our customers have needs for Critical Information and Insight, we use these domains to set priorities and design our business objectives. The information that our customers need to address their complex business issues continues to converge at the intersection of the information domains that we serve. As we continue to deliver Critical Information and Insight in those four information domains, we prepare our financial reports and analyze our business across our three geographic reportable segments: Americas; EMEA, and APAC.
2. Significant Accounting Policies
Fiscal Year End
Our fiscal years end on November 30 of each year. References herein to individual years mean the year ended November 30. For example, 2008 means the year ended November 30, 2008.
Consolidation Policy
The consolidated financial statements include the accounts of all wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in unconsolidated affiliated companies are accounted for under the equity method and are included in "Equity Investments" in the accompanying Consolidated Balance Sheets. Our proportionate share of income from the unconsolidated affiliates is included in "Income from Equity Investment" in the accompanying Consolidated Statements of Operations. We generally utilize the equity method of accounting when we have a non-controlling ownership interest of between 20% and 50% in an entity, provided we are able to exercise significant influence over the investee's operations.
68
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
Reclassifications
Certain prior-year amounts have been reclassified to conform to the current-year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates have been made in areas that include revenue recognition, useful lives of fixed and intangible assets, allocation of purchase price to acquired assets and liabilities, the recoverability of intangible assets and goodwill, income and other taxes, pension and post-retirement benefits, and stock-based compensation. Actual results could differ from those estimates.
Concentration of Credit Risk
We are exposed to credit risk associated with cash equivalents, investments and trade receivables. We do not believe that our cash equivalents or investments present significant credit risks because the counterparties to the instruments consist of major financial institutions that are financially sound or have been capitalized by the U.S. government and we manage the notional amount of contracts entered into with any counterparty. Substantially all trade receivable balances are unsecured. The concentration of credit risk with respect to trade receivables is limited by the large number of customers in our customer base and their dispersion across various industries and geographic areas. We perform ongoing credit evaluations of our customers and maintain an allowance for potential credit losses. The allowance is based upon management's assessment of known credit risks as well as general industry and economic conditions. Specific accounts receivable are written off upon notification of bankruptcy or once it is determined the account is significantly past due beyond the contractual payment terms and collection efforts are unsuccessful.
Fair Value of Financial Instruments
The carrying value of our financial instruments, including cash, accounts receivable, accounts payable, and short-term and long-term debt, approximates their fair value.
Revenue Recognition
Revenue is recognized when all of the following criteria have been met: (a) persuasive evidence of an arrangement exists, (b) delivery has occurred or services have been rendered, (c) the price to the customer is fixed or determinable, and (d) collectability is reasonably assured. Our revenue recognition policies are based on the guidance in Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, and, where applicable, Statement of Position (SOP) 97-2, Software Revenue Recognition.
Sales of Critical Information and Insight
The majority of our revenue is derived from the sale of subscriptions to our Critical Information, which is initially deferred and then recognized ratably as delivered over the subscription period.
69
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
Revenue is recognized upon delivery for non-subscription-based sales.
In certain locations, we use dealers to distribute our Critical Information and Insight. Revenue for products sold through dealers is recognized as follows:
- •
- For subscription-based services, revenue is recognized ratably as delivered to the end user over the subscription period.
- •
- For non-subscription-based products, revenue is recognized upon delivery to the dealer.
We do not defer the revenue for the limited number of sales of subscriptions in which we act as a sales agent for third parties and we have no continuing responsibility to maintain and update the underlying database. We recognize this revenue upon the sale of these subscriptions and delivery of the information and tools in accordance with Emerging Issues Task Force Issue 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent.
Services
We provide our customers with service offerings that are primarily sold on a stand-alone basis and on a significantly more limited basis as part of a multiple-element arrangement. Our service offerings are generally separately priced in a standard price book. For services that are not in a standard-price book, as the price varies based on the nature and complexity of the service offering, pricing is based on the estimated amount of time to be incurred at standard billing rates for the estimated underlying effort for executing the associated deliverable in the contract. Revenue related to services performed under time-and-material-based contracts is recognized in the period performed at standard billing rates. Revenue associated with fixed-price contracts is recognized upon completion of each specified performance obligation or proportionally based upon performance progress under the terms of the contract. See discussion of "multiple-element arrangements" below. If the contract includes acceptance contingencies, revenue is recognized in the period in which we receive documentation of acceptance from the customer.
Multiple-element arrangements
Occasionally, we may execute contracts with customers which contain multiple offerings. In our business, multiple-element arrangements refer to contracts with separate fees for decision-support tools, maintenance, and/or related services. We have established separate units of accounting as each offering is primarily sold on a stand-alone basis. Generally, if sufficient vendor-specific objective evidence of the fair value of each element of the arrangement exists based on stand-alone sales of these products and services, then the elements of the contract are unbundled and are recognized as follows:
- •
- Subscription offerings and license fees are recognized ratably over the license period as long as there is an associated
licensing period or a future obligation. Otherwise, revenue is recognized upon delivery.
- •
- For non-subscription offerings of a multiple-element arrangement, the revenue is generally recognized for each element in the period in which delivery of the product to the customer occurs, completion of services occurs or, for post-contract support, ratably over the term of the maintenance period.
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IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
- •
- In some instances, customer acceptance is required for consulting services rendered. For those transactions, the service revenue component of the arrangement is recognized in the period that customer acceptance is obtained.
In infrequent instances where a multiple-element arrangement includes offerings for which vendor-specific objective evidence is not available, we consider the substance of the whole arrangement to be a subscription and thus revenue is recognized ratably over the service period.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value.
Deferred Subscription Costs
Deferred subscription costs represent royalties and commissions associated with customer subscriptions. These costs are deferred and amortized to expense over the period of the subscriptions. Generally, subscription periods are 12 months in duration.
Property and Equipment
Land, buildings and improvements, machinery and equipment are stated at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets as follows:
Buildings and improvements |
7 to 30 years | |
Machinery and equipment |
3 to 10 years |
Leasehold improvements are depreciated over their estimated useful life, or the life of the lease, whichever is shorter. Maintenance, repairs and renewals of a minor nature are expensed as incurred. Betterments and major renewals which extend the useful lives of buildings, improvements, and equipment are capitalized.
Identifiable Intangible Assets and Goodwill
We account for our business acquisitions using the purchase method of accounting. We allocate the total cost of an acquisition to the underlying net assets based on their respective estimated fair values. As part of this allocation process, we must identify and attribute values and estimated lives to the intangible assets acquired.
Identifiable intangible assets with finite lives are amortized on a straight-line basis over their respective lives or other methods if they more accurately portray the proportional value.
We review the carrying values of identifiable intangible assets with indefinite lives and goodwill at least annually to assess impairment because these assets are not amortized. Additionally, we review the carrying value of any intangible asset or goodwill whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. We assess impairment by comparing the fair value of an indefinite-lived identifiable intangible asset or goodwill with its carrying value. Impairments are expensed when incurred.
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IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
Indefinite-lived intangible assets
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we perform the impairment test for indefinite-lived intangible assets by comparing the asset's fair value to its carrying value. An impairment charge is recognized if the asset's estimated fair value is less than its carrying value.
We estimate the fair value based on projected discounted future cash flows, which, in turn, are based on our views of uncertain variables such as growth rates, anticipated future economic conditions and the appropriate discount rates relative to risk and estimates of residual values. The use of different estimates or assumptions within our discounted cash flow model when determining the fair value of our indefinite-lived intangible assets or using a methodology other than a discounted cash flow model could result in different values for our indefinite-lived intangible assets and could result in an impairment charge.
Goodwill
In accordance with SFAS No. 142, we test goodwill for impairment on a "reporting unit" level as defined by reference to SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information on at least an annual basis. A reporting unit is a group of businesses (i) for which discrete financial information is available and (ii) that have similar economic characteristics. We test goodwill for impairment using the following two-step approach:
- •
- We first determine the fair value of each reporting unit. If the fair value of a reporting unit is less than its carrying
value, this is an indicator that the goodwill assigned to that reporting unit might be impaired, which requires performance of the second step. We determine the fair value of our reporting units based
on projected future discounted cash flows, which, in turn, are based on our views of uncertain variables such as growth rates, anticipated future economic conditions and the appropriate discount rates
relative to risk and estimates of residual values. There were no impairments in the fiscal years ended November 30, 2008, 2007 and 2006.
- •
- If necessary, in the second step, we allocate the fair value of the reporting unit to the assets and liabilities of the reporting unit as if it had just been acquired in a business combination and as if the purchase price was equivalent to the fair value of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is referred to as the implied fair value of goodwill. We then compare that implied fair value of the reporting unit's goodwill to the carrying value of that goodwill. If the implied fair value is less than the carrying value we recognize an impairment loss for the excess.
Income Taxes
Deferred income taxes are provided using tax rates enacted for periods of expected reversal on all temporary differences. Temporary differences relate to differences between the book and tax basis of assets and liabilities, principally intangible assets, property and equipment, deferred subscription revenue, pension assets, accruals, and stock-based compensation. Valuation allowances are established to reduce deferred tax assets to the amount that will more likely than not be realized. To the extent that a determination is made to establish or adjust a valuation allowance, the expense or benefit is recorded in the period in which the determination is made.
72
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
Judgment is required in determining the worldwide provision for income taxes. Additionally, the income tax provision is based on calculations and assumptions that are subject to examination by many different tax authorities and to changes in tax law and rates in many jurisdictions. We adjust our income tax provision in the period in which it becomes probable that actual results will differ from our estimates.
On December 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Income Taxes (FIN No. 48), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Upon adoption of FIN No. 48, we recorded a cumulative effect adjustment of $1.4 million to increase beginning retained earnings. Following adoption of FIN No. 48, we include accrued interest and accrued penalties related to amounts accrued for unrecognized tax benefits in our provision for income taxes. We had previously included interest and penalties in interest income (expense) and other income (expense), respectively.
Treasury Stock
For all IHS stock retention and buyback programs and transactions, we utilize the cost method of accounting. Regarding the inventory costing method for treasury stock transactions, we employ the weighted-average cost method.
Earnings per Share
Earnings per common share (EPS) are computed in accordance with SFAS No. 128, Earnings per Share (SFAS No. 128). Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares and dilutive potential common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities were exercised or converted into common shares. Prior to September 2008, we used the two-class method for computing basic and diluted EPS amounts as we had both Class A and Class B common stock outstanding. On September 18, 2008, the class B stockholders converted their shares to Class A common stock on a one-for-one basis.
Foreign Currency
Absent circumstances to the contrary, the functional currency of each of our foreign subsidiaries is such subsidiary's local currency. Assets and liabilities are translated at period-end exchange rates. Income and expense items are translated at weighted average rates of exchange prevailing during the year. Any translation adjustments are included in other comprehensive income. Transactions executed in different currencies resulting in exchange adjustments are translated at spot rates and resulting foreign-exchange-transaction gains and losses are included in the results of operations.
From time to time, we utilize forward-contract instruments to manage market risks associated with fluctuations in certain foreign-currency exchange rates as they relate to specific balances of accounts and notes receivable and payable denominated in foreign currencies. At the end of the reporting
73
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
period, non-functional foreign-currency-denominated receivable and cash balances are re-measured into the functional currency of the reporting entities at current market rates. The change in value from this re-measurement is reported as a foreign exchange gain or loss for that period in other income (expense) in the accompanying consolidated statements of operations. The resulting gains or losses from the forward foreign currency contracts described above, which are also included in other income (expense), mitigate the exchange rate risk of the associated assets.
Research and Development
Costs of research and development, which are included in cost of revenue, are expensed as incurred and amounted to approximately $4.3 million, $5.0 million and $3.1 million for 2008, 2007, and 2006, respectively.
Impairment of Long-Lived Assets
We account for long-lived assets, including finite-lived intangibles in accordance with Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We annually review the carrying amounts of long-lived assets to determine whether current events or circumstances warrant adjustment to such carrying amounts. A long-lived asset is considered to be impaired if its carrying value exceeds the estimated future undiscounted cash flows to be derived from it. Any impairment is measured by the amount that the carrying value of such assets exceeds their fair value, primarily based on estimated discounted cash flows. Considerable management judgment is necessary to estimate the fair value of assets. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value, less cost to sell.
Stock-Based Compensation
We account for stock-based compensation under SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123(R)) and the related SEC Staff Accounting Bulletin No. 107, Share-Based Payments. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.
SFAS No. 123(R) also requires forfeitures to be estimated at the grant date. Accordingly, compensation cost is recognized based on the number of awards expected to vest. There may be adjustments in future periods if actual forfeitures differ from our estimates. Our forfeiture rate is based upon historical experience as well as anticipated employee turnover considering certain qualitative factors. We amortize the value of nonvested share awards to expense over the vesting period on a straight-line basis. For awards with performance conditions, an evaluation is made each quarter as to the likelihood of the performance criteria being met. Compensation expense is then adjusted to reflect the number of shares expected to vest and the cumulative vesting period met to date. For stock options, we estimate the fair value of awards on the date of grant using the Black-Scholes pricing model. We amortize the value of stock options to expense over the vesting period on a straight-line basis.
74
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Adoption of the provisions of SFAS No. 157 related to non-financial assets and liabilities has been delayed for fiscal years which begin after November 15, 2008. The provisions of SFAS No. 157 relating to financial assets and liabilities are effective for financial statements issued for fiscal years beginning after November 15, 2007. We adopted the provisions relating to financial assets and liabilities as of December 1, 2007 with no material impact on our consolidated financial statements. We are currently evaluating the impact of adopting the provisions within SFAS No. 157 related to non-financial assets and liabilities on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS No. 141(R)) and SFAS No. 160, Accounting and Reporting of Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS No. 160). These new standards will significantly change the accounting for and reporting of business combination transactions and noncontrolling (minority) interests in consolidated financial statements. SFAS Nos. 141(R) and 160 are required to be adopted simultaneously and are effective for the first annual reporting period beginning on or after December 15, 2008. Thus, we are required to adopt these standards on December 1, 2009, the first day of our 2010 fiscal year. Earlier adoption is prohibited. We are currently evaluating the impact of adopting SFAS Nos. 141(R) and 160 on our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS No. 161). SFAS No. 161 requires additional disclosures related to the use of derivative instruments, the accounting for derivatives and how derivatives impact financial statements. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. Thus, we are required to adopt this standard on December 1, 2008, the first day of our 2009 fiscal year. The adoption of SFAS No. 161 will not have a material impact on our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of General Accepted Accounting Principles (SFAS No. 162). This statement documents the hierarchy of the various sources of accounting principles and the framework for selecting the principles used in preparing financial statements. This statement shall be effective 60 days following the Securities and Exchange Commission's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. SFAS No. 162 will not have a material impact to our consolidated financial statements.
3. Acquisitions
During 2008, we made the following acquisitions:
Global Insight, Inc (Global Insight). In October 2008, we completed our acquisition of Global Insight, Inc. based in Lexington, Massachusetts, now known as IHS Global Insight. The acquisition closed for $117.2 million in cash and approximately 1.3 million shares of IHS common stock, which were valued at $44.3 million based on the closing price of IHS on Oct. 10, 2008. Terms of the transaction include a lock-up agreement restricting the salability of IHS shares with 10 percent of the shares restricted for one year, 50 percent for two years and 40 percent for three years. As of
75
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions (Continued)
November 30, 2008, we have begun the first phase of implementation of a plan to streamline the operations of Global Insight and eliminate redundancies as a result of this acquisition. This plan contemplates certain reductions in personnel as well as certain facility consolidations related to this acquisition. In accordance with this plan and initial implementation, we have recorded severance cost of approximately $8 million and facility consolidation costs of approximately $5 million in the preliminary purchase accounting as assumed liabilities as of November 30, 2008. The cash payments will be incurred at various times through the first nine months of 2009.
Divestco USA Inc. (Divestco). In September 2008, we acquired the U.S. product portfolio of Divestco, a strategic provider of comprehensive data and analytical tools for the oil and gas industry, for approximately $3.0 million in cash.
Documental Solutions LLC (Documental Solutions). In September 2008, we acquired Documental Solutions LLC of Falls Church, Virginia for approximately $22.2 million in cash. Documental Solutions is a leading provider of market intelligence and analysis tools for the defense and aerospace industry.
JFA International (JFA). In March 2008, we acquired the assets of JFA, a London, England based provider of strategic analysis to the energy industry's exploration and production sectors. JFA was acquired for £2.0 million, or approximately $3.9 million based on the exchange rate as of the date of acquisition.
Environmental Software Providers (ESP). In March 2008, we acquired Environmental Software Providers, the business name for Electric Software Products, Inc., based in Mountain View, California, for approximately $18.7 million in cash. ESP is a provider of enterprise information solutions used by companies to assist in managing their environmental sustainability programs.
Dolphin Software, Inc. (Dolphin). In March 2008, we acquired Dolphin of Lake Oswego, Oregon for approximately $23.7 million in cash. Dolphin is a leader in developing and using chemical data information and software used by companies to record and track chemicals stored and used in their facilities.
Prime Publications Limited (Prime). In March 2008, we acquired Prime, which owns a 50% interest in the Lloyd's Register-Fairplay Limited (LRF) joint venture, a leading source of global maritime information. LRF is the pre-eminent brand name in the maritime information industry and the only organization that provides comprehensive details of the current world merchant fleet (tankers, cargo, carrier and passenger ships) and a complete range of products and services to assist the world's maritime community. The investment in LRF was the primary asset of Prime. Lloyd's Register of London, England is the joint venture partner owning the other 50%. IHS accounts for the joint venture under the equity method of accounting. IHS acquired 100 percent of the stock of Prime for approximately £38.0 million, or approximately $76.1 million based on the exchange rate as of the date of acquisition, which included £10.7 million, in non-interest bearing seller notes valued at $16.0 million as of November 30, 2008, and the remainder was paid in cash.
McCloskey Group Limited (McCloskey). In December 2007, we acquired McCloskey, the leading provider of news, Critical Information and Insight on the international coal markets located near London, England. We acquired McCloskey for £13.9 million, or approximately $28.2 million based on the exchange rate as of the date of acquisition, using cash on hand.
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IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions (Continued)
The purchase prices for these 2008 acquisitions, excluding acquired cash and including acquisition-related costs, were initially allocated as follows (in thousands):
| |
Global Insight(1) |
Prime | McCloskey | All others | Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets: |
|||||||||||||||||
Current assets |
$ | 24,413 | $ | 110 | $ | 774 | $ | 3,549 | $ | 28,846 | |||||||
Property and equipment |
4,130 | 6 | 114 | 771 | 5,021 | ||||||||||||
Intangible assets |
85,000 | 3,572 | 8,180 | 25,601 | 122,353 | ||||||||||||
Goodwill |
125,698 | 717 | 24,136 | 51,657 | 202,208 | ||||||||||||
Equity investment in joint venture |
— | 73,822 | — | 976 | 74,798 | ||||||||||||
Other long-term assets |
1,495 | — | — | 58 | 1,553 | ||||||||||||
Total assets |
240,736 | 78,227 | 33,204 | 82,612 | 434,779 | ||||||||||||
Liabilities: |
|||||||||||||||||
Current liabilities |
56,807 | 50 | 2,741 | 7,322 | 66,920 | ||||||||||||
Deferred taxes |
21,267 | 2,059 | 2,258 | 2,870 | 28,454 | ||||||||||||
Other long-term liabilities |
1,183 | 927 | 2,110 | ||||||||||||||
Total liabilities |
79,257 | 2,109 | 4,999 | 11,119 | 97,484 | ||||||||||||
Purchase price |
$ | 161,479 | $ | 76,118 | $ | 28,205 | $ | 71,493 | $ | 337,295 | |||||||
- (1)
- Pending final purchase price allocation.
During 2007, we made the following acquisitions:
Exploration Data Services (EDS). In October 2007, we acquired the assets of Livingston, TX-based EDS and its subsidiary, Geodigit LLC, which collectively maintain and market extensive geological data covering the subsurface Gulf of Mexico for $6.3 million using existing cash on hand. The acquired assets include EDS' catalog of interpreted formation tops on more than 25,000 offshore wells, www.EDSMaps.com, and Geodigit's MMS offshore well data, base maps, and other well header data.
EnvironMax. In October 2007, we acquired EnvironMax, Inc., of Salt Lake City, Utah. EnvironMax is a leading provider of environmental management information systems (EMIS) solutions sold primarily to government and defense markets. Terms of the purchase included $22.1 million paid from cash on hand and 65,000 shares of IHS stock issued with a one-year lock up, valued at $3.8 million for a total price of $25.4 million, net of cash acquired.
PCNAlert. In August 2007, we acquired the assets of PCNAlert from SupplyEdge, Inc., of Pasadena, Calif., for $10 million using existing cash on hand. PCNAlert delivers leading component event management solutions, including product change notifications and end-of-life notifications for the electronic components industry.
John S. Herold, Inc. (Herold). In August 2007, we acquired Norwalk, CT-based Herold, an independent research firm that provides in-depth analyses and key financial and operational data on more than 400 global oil and gas companies. We acquired Herold for approximately $47.2 million, net of acquired cash, using existing cash on hand.
77
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions (Continued)
Strategic Decision Group Corporation's Oil & Gas Consulting Practice (SDG). In July 2007, we acquired the assets of SDG's oil & gas consulting practice ("SDG"), a provider of strategic consulting services to leading enterprises in the global oil and gas industry, for $8.2 million using $5.1 million of existing cash on hand and by issuing a $3.1 million note payable.
Jane's Information Group (Jane's). In June 2007, we executed an agreement with Woodbridge International Holdings S.A. (Woodbridge) for the purchase of Jane's, a leading provider of information to the defense industry and governments. The parties completed the transaction on the same date. Terms of the transaction included delivery of 4,399,000 shares of our Class A Common Stock valued at $171.5 million and less than $0.1 million in cash in exchange for all of the outstanding equity and debt of Jane's. Woodbridge agreed to a three-year lock-up agreement that restricts its ability to sell any IHS shares.
Geological Consulting Services (GCS). In June 2007, we acquired the inventory and assets of GCS of Houston—a provider of formation tops data files in electronic and other media covering South Texas, East Texas, North Louisiana, South Arkansas, Mississippi, Alabama, and Florida—for $8.2 million using existing cash on hand.
RapiData. In March 2007, we acquired certain assets including the RapiData™ product, well known for its comprehensive well test, pressure, and completions data for the Western Canadian Sedimentary Basin. IHS purchased RapiData and other assets from Rapid Technology Corporation of Calgary, Alberta, Canada, for approximately $6.3 million using existing cash on hand.
Geological Data Services Inc. (GDS). In January 2007, we acquired the majority of the assets of GDS of Addison, Texas, a provider of interpreted subsurface data "formation-tops" covering the Permian Basin, U.S. mid-continent, and Rocky Mountain regions. We acquired GDS for $8.0 million using existing cash on hand.
The purchase prices for these 2007 acquisitions, excluding acquired cash and including acquisition-related costs, were initially allocated as follows (in thousands):
| |
Jane's | Herold | All others | Total | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets: |
||||||||||||||
Current assets |
$ | 18,444 | $ | 2,680 | $ | 3,615 | $ | 24,739 | ||||||
Property and equipment |
4,683 | 292 | 489 | 5,464 | ||||||||||
Intangible assets |
93,423 | 28,100 | 27,129 | 148,652 | ||||||||||
Goodwill |
115,631 | 32,752 | 47,680 | 196,063 | ||||||||||
Other long-term assets |
292 | — | — | 292 | ||||||||||
Total assets |
232,473 | 63,824 | 78,913 | 375,210 | ||||||||||
Liabilities: |
||||||||||||||
Current liabilities |
33,756 | 6,906 | 4,116 | 44,778 | ||||||||||
Deferred taxes |
25,278 | 9,701 | 2,437 | 37,416 | ||||||||||
Other long-term liabilities |
1,841 | 44 | — | 1,885 | ||||||||||
Total liabilities |
60,875 | 16,651 | 6,553 | 84,079 | ||||||||||
Purchase price |
$ | 171,598 | $ | 47,173 | $ | 72,360 | $ | 291,131 | ||||||
78
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions (Continued)
During 2006, we made the following acquisitions:
Canadian Hydrodynamics Ltd. (CHD). During July 2006, we acquired the assets of Calgary, Canada-based CHD for approximately $3.5 million using existing cash on hand. CHD is a leading provider of comprehensive drillstem test information for the Western Canadian Sedimentary Basin. The CHD database has been available exclusively through IHS AccuMap, one of our Energy product offerings, as a partner dataset since 1995.
GeoPLUS. During June 2006, we acquired the assets of GeoPLUS of Tulsa, Oklahoma, for approximately $42.1 million using existing cash on hand. GeoPLUS has a PC-based software family, PETRA®, which is a popular platform used by oil and gas companies to analyze subsurface data from existing oil and gas wells.
Construction Research Communications Limited (CRC). During June 2006, we acquired CRC Limited, of London, U.K., for approximately $5.8 million, net of acquired cash, using existing cash on hand. CRC was created by the Building Research Establishment (BRE) and Emap Construct to deliver a wide range of BRE products relating to the construction industry, ranging from environmental issues to fire safety.
CDS. During December 2005, we acquired the assets of a content-and-data-services (CDS) business for approximately $33.0 million that serves several of the industries targeted by our Product Lifecycle domain. The core product of this business is an extensive database that includes technical attributes and alternatives for, and obsolescence and environmental data on, electronic component parts.
The purchase prices for these 2006 acquisitions, excluding acquired cash, were initially allocated as follows (in thousands):
| |
CHD | GeoPLUS | CRC | CDS | Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets: |
|||||||||||||||||
Current assets |
$ | 317 | $ | 2,052 | $ | 591 | $ | — | $ | 2,960 | |||||||
Property and equipment |
— | 25 | — | 250 | 275 | ||||||||||||
Intangible assets |
1,949 | 19,380 | 1,844 | 15,420 | 38,593 | ||||||||||||
Goodwill |
1,586 | 23,576 | 3,635 | 21,685 | 50,482 | ||||||||||||
Deferred tax assets |
— | — | 2 | — | 2 | ||||||||||||
Total assets |
3,852 | 45,033 | 6,072 | 37,355 | 92,312 | ||||||||||||
Liabilities: |
|||||||||||||||||
Current liabilities |
317 | 2,919 | 243 | 4,379 | 7,858 | ||||||||||||
Long-term liabilities |
— | — | — | — | — | ||||||||||||
Total liabilities |
317 | 2,919 | 243 | 4,379 | 7,858 | ||||||||||||
Purchase price |
$ | 3,535 | $ | 42,114 | $ | 5,829 | $ | 32,976 | $ | 84,454 | |||||||
79
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Restructuring and Offering Charges (Credits)
A summary of the restructuring and offering charges (credits) follows (in thousands):
| |
Years Ended November 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2008 | 2007 | 2006 | |||||||
Restructuring charges (credits) |
$ | 12,089 | $ | (154 | ) | $ | 2,325 | |||
Offering costs |
— | — | 778 | |||||||
Total |
$ | 12,089 | $ | (154 | ) | $ | 3,103 | |||
2008 Restructuring
During the third quarter of 2008, we executed a restructuring initiative which primarily affected the Americas and EMEA segments. One-time, involuntary benefit arrangements and other exit costs are accounted for under the provisions of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Costs arising under our defined benefit pension plans from providing enhanced benefits are accounted for under the provisions of SFAS No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits. Restructuring and related expenses consist of direct and incremental costs associated with restructuring and related activities, including severance, outplacement and other employee related benefits; facility closure including non-cash expenses related to fixed asset and leasehold improvement write-offs; and other expenses include legal expenses associated with employee terminations which were incurred during the third quarter of 2008.
This initiative was undertaken to further the realignment of our resources around our regional organizational structure and to further transform our knowledge-based data accumulation operations to ensure continuous improvement in the quality of the Critical Information and Insight we deliver to our customers. During the course of the restructuring, we reduced our aggregate workforce by approximately 7%, we eliminated certain contractor positions and we closed certain offices.
The restructuring charge was incurred in its entirety during the third quarter of 2008. Approximately $5.8 million of the charge related to our Americas segment, $6.3 million pertained to our EMEA segment and $0.4 million related to shared services. The restructuring charge was comprised of the following (in thousands):
Employee severance and other termination benefits |
$ | 11,241 | |||
Contract termination costs |
639 | ||||
Other |
599 | ||||
Total |
$ | 12,479 | |||
80
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Restructuring and Offering Charges (Credits) (Continued)
A reconciliation of the related accrued restructuring liability as of November 30, 2008 was as follows:
| |
Employee Severance and Other Termination Benefits |
Contract Termination Costs |
Other | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(In thousands) |
||||||||||||
Balance at November 30, 2007 |
$ | — | $ | — | $ | — | $ | — | |||||
Add: Restructuring costs incurred |
11,241 | 639 | 599 | 12,479 | |||||||||
Less: Asset write-offs |
— | — | (323 | ) | (323 | ) | |||||||
Less: Amount reversed during the year ended November 30, 2008 |
(390 | ) | — | — | (390 | ) | |||||||
Less: Amount paid during the year ended November 30, 2008 |
(9,936 | ) | (540 | ) | (276 | ) | (10,752 | ) | |||||
Balance at November 30, 2008 |
$ | 915 | $ | 99 | $ | — | $ | 1,014 | |||||
2006 Restructuring
During the fourth quarter of 2006, we executed a restructuring initiative to facilitate continued growth through the focus on a narrower group of products and services, exit non-core legacy applications, and improve our operational effectiveness. During the course of the restructuring, we reduced our aggregate workforce by approximately 40 employees.
The restructuring charge was incurred in its entirety during the fourth quarter of 2006. The restructuring charge was comprised entirely of employee severance and other termination benefits costs.
A reconciliation of the related accrued restructuring liability as of November 30, 2007 was as follows:
| |
Employee Severance and Other Termination Benefits |
|||
|---|---|---|---|---|
| |
(In thousands) |
|||
Balance at November 30, 2006 |
$ | 2,046 | ||
Add: Restructuring costs incurred |
— | |||
Less: Amount paid during the year ended November 30, 2007 |
(1,892 | ) | ||
Less: Amount reversed during the year ended November 30, 2007 |
(154 | ) | ||
Balance at November 30, 2007 |
$ | — | ||
81
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Discontinued Operations
During 2006, we sold a business to an unrelated third party for approximately $0.3 million and recognized a loss of less than $0.1 million on the sale of the business. The loss on sale of discontinued operations is included in the loss on discontinued operations, net line item on our consolidated statement of operations.
For all of the periods presented, the related results of operations are shown as a discontinued operation, net of tax, in our consolidated statements of operations and cash flows.
Operating results of the discontinued operations for the years ended November 30, 2008, 2007 and 2006 were as follows:
| |
Years Ended November 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2008 | 2007 | 2006 | |||||||
| |
(In thousands) |
|||||||||
Revenue |
$ | — | $ | — | $ | 399 | ||||
Loss from discontinued operations |
$ | — | $ | — | $ | (2,766 | ) | |||
Tax benefit |
— | — | 846 | |||||||
Loss from discontinued operations, net |
$ | — | $ | — | $ | (1,920 | ) | |||
6. Marketable Securities
At November 30, 2008, we had no short-term investments.
At November 30, 2007, we owned the following short-term investments which were classified as available-for-sale securities and reported at fair value:
| |
Gross Amortized Cost |
Unrealized Holding Loss |
Estimated Fair Value |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(In thousands) |
|||||||||
Municipal securities |
$ | 10,518 | $ | — | $ | 10,518 | ||||
We use the specific identification method to account for gains and losses on securities. Realized gains on sales of marketable securities included within other income (expense) were immaterial for the years ended November 30, 2008, 2007 and 2006.
7. Accounts Receivable
Our accounts receivable balance consists of the following as of November 30:
| |
2008 | 2007 | |||||
|---|---|---|---|---|---|---|---|
| |
(In thousands) |
||||||
Accounts receivable |
$ | 212,605 | $ | 180,948 | |||
Less—accounts receivable allowance |
(4,790 | ) | (5,406 | ) | |||
Accounts receivable, net |
$ | 207,815 | $ | 175,542 | |||
82
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Accounts Receivable (Continued)
The activity in our accounts receivable allowance consists of the following as of November 30:
| |
2008 | 2007 | 2006 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(In thousands) |
|||||||||
Balance at beginning of year |
$ | 5,406 | $ | 4,551 | $ | 4,847 | ||||
Provision for bad debts |
1,967 | 2,178 | 1,188 | |||||||
Recoveries and other additions |
233 | 191 | 297 | |||||||
Write-offs and other deductions |
(2,816 | ) | (1,514 | ) | (1,781 | ) | ||||
Balance at end of year |
$ | 4,790 | $ | 5,406 | $ | 4,551 | ||||
8. Property and Equipment
Property and equipment consists of the following at November 30:
| |
2008 | 2007 | |||||
|---|---|---|---|---|---|---|---|
| |
(In thousands) |
||||||
Land, buildings and improvements |
$ | 66,459 | $ | 67,591 | |||
Machinery and equipment |
74,925 | 59,858 | |||||
|
141,384 | 127,449 | |||||
Less: accumulated depreciation |
(81,806 | ) | (68,693 | ) | |||
|
$ | 59,578 | $ | 58,756 | |||
Depreciation expense was approximately $13.6 million, $11.4 million and $6.9 million in 2008, 2007 and 2006, respectively.
9. Equity Investment
In March, 2008, we acquired Prime, which owns a 50% interest in the Lloyd's Register-Fairplay Limited (LRF) joint venture, a leading source of global maritime information. LRF is the pre-eminent brand name in the maritime information industry and the only organization that provides comprehensive details of the current world merchant fleet (tankers, cargo, carrier and passenger ships) and a complete range of products and services to assist the world's maritime community. The investment in LRF was the primary asset of Prime. Lloyd's Register of London, England is the joint venture partner owning the other 50%. IHS accounts for the joint venture under the equity method of accounting. The decrease in the investment balance from the date of acquisition to November 30, 2008 is primarily due to foreign currency exchange rate fluctuations.
The following table presents the summary balance sheet information for LRF as of November 30, 2008 (in thousands):
Current assets |
$ | 8,611 | ||
Non-current assets |
7,806 | |||
Current liabilities |
13,751 | |||
Non-current liabilities |
1,376 |
83
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Equity Investment (Continued)
The following table presents the summary statement of operations for LRF for the period from March 1, 2008 through November 30, 2008 (in thousands):
Revenue |
$ | 29,013 | ||
Operating expenses |
17,057 | |||
Operating income |
$ | 11,956 | ||
Net income |
$ | 8,667 | ||
50% of net income |
$ | 4,334 | ||
Amortization expense for purchased tangibles, net of taxes |
(1,007 | ) | ||
Income from equity method investment |
$ | 3,327 | ||
10. Goodwill and Intangible Assets
The following table presents details of our intangible assets, other than goodwill, as of November 30, 2008:
| |
Useful Life | Gross | Accumulated Amortization |
Net | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(Years) |
(In thousands) |
|||||||||||||
Intangible assets subject to amortization: |
|||||||||||||||
Information databases |
5 - 15 | $ | 176,637 | $ | (27,770 | ) | $ | 148,867 | |||||||
Customer relationships |
2 - 15 | 72,596 | (12,346 | ) | 60,250 | ||||||||||
Non-compete agreements |
5 | 5,851 | (4,098 | ) | 1,753 | ||||||||||
Developed computer software |
5 | 18,700 | (4,344 | ) | 14,356 | ||||||||||
Other |
3 - 11 | 5,872 | (3,190 | ) | 2,682 | ||||||||||
Total |
279,656 | (51,748 | ) | 227,908 | |||||||||||
Intangible assets not subject to amortization: |
|||||||||||||||
Trademarks |
56,844 | — | 56,844 | ||||||||||||
Perpetual licenses |
1,150 | — | 1,150 | ||||||||||||
Total intangible assets |
$ | 337,650 | $ | (51,748 | ) | $ | 285,902 | ||||||||
84
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Goodwill and Intangible Assets (Continued)
The following table presents details of our intangible assets, other than goodwill, as of November 30, 2007:
| |
Useful Life | Gross | Accumulated Amortization |
Net | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(Years) |
(In thousands) |
|||||||||||||
Intangible assets subject to amortization: |
|||||||||||||||
Information databases |
5 - 15 | $ | 137,317 | $ | (14,926 | ) | $ | 122,391 | |||||||
Customer relationships |
2 - 15 | 45,650 | (7,981 | ) | 37,669 | ||||||||||
Non-compete agreements |
5 | 5,514 | (2,889 | ) | 2,625 | ||||||||||
Developed computer software |
5 | 15,036 | (2,527 | ) | 12,509 | ||||||||||
Other |
3 - 11 | 1,009 | (984 | ) | 25 | ||||||||||
Total |
204,526 | (29,307 | ) | 175,219 | |||||||||||
Intangible assets not subject to amortization: |
|||||||||||||||
Trademarks |
29,602 | — | 29,602 | ||||||||||||
Perpetual licenses |
1,538 | — | 1,538 | ||||||||||||
Total intangible assets |
$ | 235,666 | $ | (29,307 | ) | $ | 206,359 | ||||||||
The estimated future amortization expense of intangible assets is as follows:
Year
|
Amount | |||
|---|---|---|---|---|
| |
(In thousands) |
|||
2009 |
$ | 30,330 | ||
2010 |
27,962 | |||
2011 |
26,808 | |||
2012 |
25,419 | |||
2013 |
24,255 | |||
Amortization expense of intangible assets was $25.8 million, $14.1 million and $8.7 million for the years ended November 30, 2008, 2007 and 2006, respectively.
Changes in our goodwill from November 30, 2007 to November 30, 2008 and from November 30, 2006 to November 30, 2007 were the result of acquisitions (see Note 3) and foreign currency exchange rate fluctuations.
11. Debt
On September 7, 2007, we entered into an amended and restated credit agreement (the Revolver). The $385 million unsecured revolving credit agreement allows us, under certain conditions, to increase the facility to a maximum of $500 million. The agreement expires in September 2012.
The interest rates for borrowing under the Revolver are based upon our Leverage Ratio, which is the ratio of Consolidated Funded Indebtedness to rolling four quarter Consolidated Earnings Before Interest Expense, Taxes, Depreciation and Amortization (EBITDA), as defined in the Revolver. The rate ranges from the applicable LIBOR plus 50 basis points to 125 basis points or the agent bank's base rate. A commitment fee is payable periodically and ranges from 10 to 25 basis points based upon our Leverage Ratio. The Revolver contains certain financial and other covenants, including limitations
85
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Debt (Continued)
on capital lease obligations and maximum Leverage and Interest Coverage Ratios, as defined in the Revolver.
As of November 30, 2008, we were in compliance with all of the covenants in the agreement and had $80.0 million of outstanding borrowings with an annual interest rate of 3.38%. In addition, we had outstanding letters of credit totaling approximately $1.2 million as of November 30, 2008.
As of November 30, 2008, we also had $16.0 million of non-interest bearing notes that were issued to the sellers of Prime. These notes are due upon demand and are therefore recorded in "Short-term Debt" in the accompanying Consolidated Balance Sheets.
12. Indemnifications
In the normal course of business, we are party to a variety of agreements under which we may be obligated to indemnify the other party for certain matters. These obligations typically arise in contracts where we customarily agree to hold the other party harmless against losses arising from a breach of representations or covenants for certain matters such as title to assets and intellectual property rights associated with the sale of products. We also have indemnification obligations to our officers and directors. The duration of these indemnifications varies, and in certain cases, is indefinite. In each of these circumstances, payment by us depends upon the other party making an adverse claim according to the procedures outlined in the particular agreement, which procedures generally allow us to challenge the other party's claims. In certain instances, we may have recourse against third parties for payments that we make.
We are unable to reasonably estimate the maximum potential amount of future payments under these or similar agreements due to the unique facts and circumstances of each agreement and the fact that certain indemnifications provide for no limitation to the maximum potential future payments under the indemnification. We have not recorded any liability for these indemnifications in the accompanying consolidated balance sheets; however, we accrue losses for any known contingent liability, including those that may arise from indemnification provisions, when the obligation is both probable and reasonably estimable.
13. Taxes on Income
The amounts of income from continuing operations before income taxes and minority interests by U.S. and foreign jurisdictions follow for the years ended November 30:
| |
2008 | 2007 | 2006 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(In thousands) |
|||||||||
U.S. |
$ | 23,993 | $ | 24,422 | $ | 10,948 | ||||
Foreign |
110,198 | 98,244 | 74,364 | |||||||
|
$ | 134,191 | $ | 122,666 | $ | 85,312 | ||||
86
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Taxes on Income (Continued)
The provision for income tax expense (benefit) from continuing operations, for the years ended November 30 was as follows:
| |
2008 | 2007 | 2006 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(In thousands) |
|||||||||||
Current: |
||||||||||||
U.S. |
$ | 8,560 | $ | 6,010 | $ | 8,666 | ||||||
Foreign |
22,321 | 28,628 | 23,961 | |||||||||
State |
2,798 | 2,575 | 1,818 | |||||||||
Total current |
33,679 | 37,213 | 34,445 | |||||||||
Deferred: |
||||||||||||
U.S. |
6,465 | 2,943 | (9,602 | ) | ||||||||
Foreign |
(1,860 | ) | (420 | ) | 1,479 | |||||||
State |
228 | (909 | ) | 557 | ||||||||
Total deferred |
4,833 | 1,614 | (7,566 | ) | ||||||||
Provision for income taxes |
$ | 38,512 | $ | 38,827 | $ | 26,879 | ||||||
The provision for income taxes from continuing operations recorded within the consolidated statements of operations differs from the provision determined by applying the U.S. statutory tax rate to pretax earnings as a result of the following for the years ended November 30:
| |
2008 | 2007 | 2006 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(In thousands) |
|||||||||
Statutory U.S. federal income tax |
$ | 46,967 | $ | 42,933 | $ | 29,858 | ||||
State income tax, net of federal benefit |
1,956 | 765 | 1,245 | |||||||
Foreign rate differential |
(16,764 | ) | (8,702 | ) | (4,167 | ) | ||||
U.S. tax on dividends from foreign affiliates, net of foreign tax credits (FTCs) |
7,828 | 8,304 | 3,348 | |||||||
Valuation allowance |
(1,042 | ) | (2,004 | ) | 1,211 | |||||
Tax-exempt interest |
(157 | ) | (1,414 | ) | (1,011 | ) | ||||
Change in reserves |
147 | (1,225 | ) | (917 | ) | |||||
Other |
(423 | ) | 170 | (2,688 | ) | |||||
Income tax expense |
$ | 38,512 | $ | 38,827 | $ | 26,879 | ||||
Effective tax rate expressed as a percentage of pretax earnings |
28.7 | % | 31.7 | % | 31.5 | % | ||||
Undistributed earnings of our foreign subsidiaries were approximately $101.0 million at November 30, 2008. Those earnings are considered to be indefinitely reinvested; accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon repatriation of those earnings, in the form of dividends or otherwise, we would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable due to the complexities associated with its hypothetical calculation. Withholding taxes of
87
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Taxes on Income (Continued)
approximately $2.4 million would be payable upon remittance of all previously unremitted earnings at November 30, 2008.
The significant components of deferred tax assets and liabilities at November 30 were:
| |
2008 | 2007 | |||||||
|---|---|---|---|---|---|---|---|---|---|
| |
(In thousands) |
||||||||
Deferred tax assets: |
|||||||||
Accruals and reserves |
$ | 4,056 | $ | 3,475 | |||||
Deferred revenue |
1,559 | 463 | |||||||
Depreciation |
2,256 | 1,389 | |||||||
Pension and post retirement benefits |
3,233 | — | |||||||
Tax credits |
14,952 | 22,755 | |||||||
Restructure reserves |
5,399 | — | |||||||
Deferred equity compensation |
17,559 | 13,245 | |||||||
Loss carryforwards |
8,340 | 6,383 | |||||||
Other |
1,056 | 396 | |||||||
Gross deferred tax assets |
58,410 | 48,106 | |||||||
Valuation allowance |
(3,897 | ) | (5,216 | ) | |||||
Realizable deferred tax assets |
54,513 | 42,890 | |||||||
Deferred tax liabilities: |
|||||||||
Pension and post-retirement benefits |
— | (26,288 | ) | ||||||
Intangibles |
(91,461 | ) | (59,382 | ) | |||||
Gross deferred tax liabilities |
(91,461 | ) | (85,670 | ) | |||||
Net deferred tax asset (liability) |
$ | (36,948 | ) | $ | (42,780 | ) | |||
As of November 30, 2008, we had loss carryforwards totaling approximately $24.4 million, comprised of $13.8 million of U.S. net operating loss carryforwards, $5.3 million U.S. capital-loss carryforwards, and $5.3 million of foreign loss carryforwards for tax purposes, which will be available to offset future taxable income. If not used, the U.S. net operating loss carryforwards will begin to expire in 2009, the U.S. capital loss carryforwards will expire in 2012, and the foreign tax loss carryforwards generally may be carried forward indefinitely. The U.S. net operating loss carryforwards increased as a result of the IHS Global Insight acquisition. These losses begin to expire in 2009 and are subject to prior Section 382 limits. Only losses deemed more likely than not of being realizable were recorded. The U.S. capital loss was incurred during 2007 as the previously deferred loss on stock investment was realized. We believe the realization of substantially the entire deferred tax assets related to the U.S. capital loss and to foreign net operating losses is not more likely than not to occur, and, accordingly, have placed a valuation allowance on these assets. Additionally, IHS Global Insight has existing foreign net operating losses which are still being analyzed to determine recoverability.
As of November 30, 2008, we had foreign tax credit (FTC) carryforwards of approximately $9.2 million, research and development (R&D) credit carryforwards of approximately $2.7 million, and Alternative Minimum Tax (AMT) credit carryforwards of approximately $3.1 million, which will be available to offset future U.S. tax liabilities. If not used, the FTC carryforwards will expire between
88
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Taxes on Income (Continued)
2011 and 2016, and the R&D credit carryforwards will expire between 2008 and 2027. The AMT credit carryforwards may be carried forward indefinitely. We believe that it is more likely than not that we will realize our FTC and AMT tax credit assets. As a result, during 2007 we released the valuation allowance of $1.2 million on the FTC deferred tax asset. We believe that a portion of the R&D tax credits will expire unused.
The valuation allowance for deferred tax assets decreased by $1.3 million in 2008. The decrease in this allowance was primarily due to a decrease on the allowance of foreign subsidiary deferred tax assets of $1.3 million.
We have provided what we believe to be an appropriate amount of tax for items that involve interpretation of the tax law. However, events may occur in the future that will cause us to reevaluate our current reserves and may result in an adjustment to the reserve for taxes.
On December 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Income Taxes (FIN No. 48), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Upon adoption of FIN No. 48, we recorded a cumulative effect adjustment of $1.4 million to increase beginning retained earnings. Following adoption of FIN No. 48, we include accrued interest and accrued penalties related to amounts accrued for unrecognized tax benefits in our provision for income taxes. We had previously included interest and penalties in interest income (expense) and other income (expense), respectively.
A summary of the activities associated with our FIN No. 48 reserve for unrecognized tax benefits, interest and penalties follows:
| |
Unrecognized Tax Benefits |
Interest | Penalties | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(In thousands) |
||||||||||
Balance at December 1, 2007 |
$ | 1,494 | $ | 123 | $ | 3 | |||||
Additions: |
|||||||||||
Acquisition of IHS Global Insight |
248 | — | — | ||||||||
Current year tax positions |
173 | — | — | ||||||||
Associated with interest |
— | 46 | — | ||||||||
Decreases |
|||||||||||
Prior year tax positions |
(94 | ) | (29 | ) | — | ||||||
Settlements |
(193 | ) | (31 | ) | — | ||||||
Lapse of statute of limitations |
(5 | ) | (3 | ) | (3 | ) | |||||
Impact of exchange rates |
(19 | ) | — | — | |||||||
Balance at November 30, 2008 |
$ | 1,604 | $ | 106 | $ | — | |||||
As of November 30, 2008, the total amount of unrecognized tax benefits was $1.7 million, of which $0.1 million related to interest.
Changes in the reserve for unrecognized tax benefits associated with current year tax positions were primarily related to uncertain tax filing requirements associated with our acquisition of IHS
89
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Taxes on Income (Continued)
Global Insight. Changes in the reserve for unrecognized tax benefits associated with prior year tax positions was primarily related to the closing of a foreign audit with no change and changes related to settlements related to a payment on a foreign audit.
It is reasonably possible that we will experience a $0.1 million decrease in the reserve for unrecognized tax benefits within the next twelve months. We would experience this decrease in relation to uncertainties associated with closing of statutes.
IHS or its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The tax years for IHS and our significant subsidiaries that remain subject to examination are as follows:
Jurisdiction
|
Years Under Examination | Additional Open Years | |||||
|---|---|---|---|---|---|---|---|
U.S. Federal |
— | 2005 - 2007 | |||||
United Kingdom |
— | 2005 - 2007 | |||||
Canada |
— | 2004 - 2007 | |||||
Switzerland |
— | 2006 - 2007 | |||||
90
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Other Comprehensive Income (Loss)
| |
Foreign currency translation adjustments |
Net pension and postretirement liability adjustment |
Unrealized losses on foreign-currency hedges |
Unrealized losses on short-term investments |
Accumulated other comprehensive income (loss) |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(In thousands) |
||||||||||||||||
Balances, November 30, 2005 |
$ | (2,011 | ) | $ | (5,443 | ) | $ | (3,004 | ) | $ | (28 | ) | $ | (10,486 | ) | ||
Foreign currency translation adjustments |
7,442 | — | — | — | 7,442 | ||||||||||||
Changes in unrealized losses on foreign-currency hedges |
— | — | 3,931 | — | 3,931 | ||||||||||||
Changes in unrealized losses on short- |
— | — | — | 46 | 46 | ||||||||||||
Minimum pension liability adjustment |
— | (4,596 | ) | — | — | (4,596 | ) | ||||||||||
Foreign currency effect on pension |
951 | (951 | ) | — | — | — | |||||||||||
Foreign currency effect on foreign-currency hedges |
312 | — | (312 | ) | — | — | |||||||||||
Tax benefit on pension |
— | 1,444 | (668 | ) | (18 | ) | 758 | ||||||||||
Foreign currency effect on tax benefit |
(338 | ) | 285 | 53 | — | — | |||||||||||
Balances, November 30, 2006 |
$ | 6,356 | $ | (9,261 | ) | $ | — | $ | — | $ | (2,905 | ) | |||||
Foreign currency translation adjustments |
18,047 | — | — | — | 18,047 | ||||||||||||
Net pension liability adjustment |
— | 10,243 | — | — | 10,243 | ||||||||||||
Adoption of SFAS No. 158 |
— | (1,184 | ) | — | — | (1,184 | ) | ||||||||||
Foreign currency effect on pension |
546 | (546 | ) | — | — | — | |||||||||||
Tax provision on pension |
— | (2,812 | ) | — | — | (2,812 | ) | ||||||||||
Foreign currency effect on tax benefit |
(164 | ) | 164 | — | — | — | |||||||||||
Balances, November 30, 2007 |
$ | 24,785 | $ | (3,396 | ) | $ | — | $ | — | $ | 21,389 | ||||||
Foreign currency translation adjustments |
(96,977 | ) | — | — | — | (96,977 | ) | ||||||||||
Net pension liability adjustment |
— | (83,805 | ) | — | — | (83,805 | ) | ||||||||||
Foreign currency effect on pension |
(884 | ) | 884 | — | — | — | |||||||||||
Tax provision on pension |
— | 32,213 | — | — | 32,213 | ||||||||||||
Foreign currency effect on tax benefit |
247 | (247 | ) | — | — | — | |||||||||||
Balances, November 30, 2008 |
$ | (72,829 | ) | $ | (54,351 | ) | $ | — | $ | — | $ | (127,180 | ) | ||||
15. Stock-Based Compensation
As of November 30, 2008, we had one share-based compensation plan: the Amended and Restated IHS Inc. 2004 Long-Term Incentive Plan, which is described further below.
Stock-based compensation expense for the three years ended November 30 was as follows:
| |
2008 | 2007 | 2006 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(In thousands) |
|||||||||
Cost of revenue |
$ | 1,361 | $ | 1,142 | $ | 2,882 | ||||
Selling, general and administrative expenses |
38,611 | 29,299 | 18,820 | |||||||
Discontinued operations |
— | — | 254 | |||||||
Total stock-based compensation expense |
$ | 39,972 | $ | 30,441 | $ | 21,956 | ||||
91
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Stock-Based Compensation (Continued)
Total income tax benefit recognized in the income statement for share-based compensation arrangements for the three years ended November 30 was as follows:
| |
2008 | 2007 | 2006 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(In thousands) |
|||||||||
Income tax benefit |
$ | 14,790 | $ | 11,263 | $ | 8,124 | ||||
No compensation cost was capitalized during the years ended November 30, 2008, 2007 and 2006.
Amended and Restated 2004 Long-Term Incentive Plan
The Amended and Restated 2004 Long-Term Incentive Plan provides for the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares, cash-based awards, other stock based awards and covered employee annual incentive awards. The 2004 Directors Stock Plan, a sub-plan under our Amended and Restated 2004 Long-Term Incentive Plan, provides for the grant of restricted stock and restricted stock units to non-employee directors as defined in that plan. We believe that such awards better align the interests of our employees and non-employee directors with those of our shareholders. We have authorized a maximum of 11.25 million shares.
Total compensation expense related to nonvested awards, both share awards and stock options, not yet recognized was $56.4 million as of November 30, 2008, with a weighted-average recognition period of approximately one and a half years.
Nonvested Stock. Share awards vest from one to four years. Share awards are generally subject to either cliff vesting or graded vesting. The fair value of nonvested stock is based on the fair value of our common stock on the date of grant. We amortize the value of share awards to expense over the vesting period on a straight-line basis. Approximately half of our outstanding awards are performance based. For those awards, an evaluation is made each quarter as to the likelihood of the performance criteria being met. Compensation expense is then adjusted to reflect the number of shares expected to vest and the cumulative vesting period met to date. Additionally, we estimate forfeitures at the grant date and recognize compensation cost based on the number of awards expected to vest. There may be adjustments in future periods if the likelihood of meeting performance criteria changes or if actual forfeitures differ from our estimates. Our forfeiture rate is based upon historical experience as well as anticipated employee turnover considering certain qualitative factors.
A summary of the status of our nonvested shares as of November 30, 2008, and changes during the year then ended were as follows:
| |
Shares | Weighted-Average Grant Date Fair Value |
||||||
|---|---|---|---|---|---|---|---|---|
| |
(in thousands) |
|
||||||
Balances, November 30, 2007 |
2,429 | $ | 32.16 | |||||
Granted |
1,026 | $ | 57.26 | |||||
Vested |
(950 | ) | $ | 26.33 | ||||
Forfeited |
(329 | ) | $ | 45.36 | ||||
Balances, November 30, 2008 |
2,176 | $ | 41.81 | |||||
92
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Stock-Based Compensation (Continued)
The total fair value of nonvested stock that vested during the year ended November 30, 2008, was $55.9 million based on the weighted-average fair value on the vesting date and $25.0 million based on the weighted-average fair value on the date of grant.
Stock Options. Option awards are generally granted with an exercise price equal to the fair market value of our stock at the date of grant. Options outstanding as of November 30, 2008, either cliff vest after 4 years of continuous service or vest in a graded fashion over three years of continuous service and have 8-year contractual terms. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the plan). No options were granted in the year ended November 30, 2008.
The fair value of each option award is estimated on the date of grant using the Black-Scholes pricing model that uses the assumptions noted in the following table:
| |
Year Ended November 30, 2007 |
Year Ended November 30, 2006 |
|||||
|---|---|---|---|---|---|---|---|
Dividend yield |
0.0 | % | 0.0 | % | |||
Expected volatility |
30.66 | % | 27.83 | % | |||
Risk-free interest rate |
4.92 | % | 5.00 | % | |||
Expected term (in years) |
5.0 | 6.0 | |||||
Weighted average fair value of stock options granted |
$ | 13.57 | $ | 11.77 | |||
Our dividend yield is 0.0% since we have no history of paying dividends and currently have no plan to do so. Our expected volatility is determined annually using a basket of peer company historical volatility rates until such time our stock history is equal to our contractual terms. Our risk-free interest rate is the treasury-bill rate for the period equal to the expected term based on the Treasury note strip principal rates as reported in well-known and widely used financial sources. Our expected term is the average of the contractual term of the option and the vesting period (i.e., the "shortcut method").
The following table summarizes changes in outstanding stock options during the year ended November 30, 2008, as well as options that are vested and expected to vest and stock options exercisable at November 30, 2008:
| |
Shares | Weighted-Average Exercise Price |
Weighted-Average Remaining Contractual Term |
Aggregate Intrinsic Value |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(in thousands) |
|
|
(in thousands) |
||||||||||
Outstanding at November 30, 2007 |
287 | $ | 35.29 | |||||||||||
Granted |
— | — | ||||||||||||
Exercised |
(10 | ) | $ | 37.65 | ||||||||||
Forfeited |
(2 | ) | — | |||||||||||
Outstanding at November 30, 2008 |
275 | $ | 35.18 | 0.8 | $ | 543 | ||||||||
Vested and expected to vest at November 30, 2008 |
275 | $ | 35.18 | 0.8 | $ | 543 | ||||||||
Exercisable at November 30, 2008 |
84 | $ | 33.62 | — | $ | 272 | ||||||||
93
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Stock-Based Compensation (Continued)
The aggregate intrinsic value amounts in the table above represent the difference between the closing price of our common stock on November 30, 2008, which was $36.29, and the exercise price, multiplied by the number of in-the-money stock options as of the same date. This represents the amount that would have been received by the stock option holders if they had all exercised their stock options on November 30, 2008. In future periods, this amount will change depending on fluctuations in our stock price. The total intrinsic value of stock options exercised during the year ended November 30, 2008, was $0.3 million.
During the years ended November 30, 2007 and 2006, we granted 0.2 million options and 0.1 million options with a weighted average grant-date fair value of $13.57 and $11.77, respectively.
16. Employee Retirement Benefits
Defined Benefit Plans
We sponsor a non-contributory, defined-benefit retirement plan (the US RIP) for all of our U.S. employees with at least one year of service. We also have a defined-benefit pension plan (the UK 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 company personnel. Benefits for all three plans are generally based on years of service and average base compensation. Plan funding strategies are influenced by employee benefit laws and tax laws. The UK RIP includes a provision for employee contributions and inflation-based benefit increases for retirees.
We adopted SFAS No. 158 for the year ending November 30, 2007. The standard, which is an amendment to SFAS Nos. 87, 88, 106, and 132(R), requires an employer to recognize the funded status of any defined benefit pension and/or other postretirement benefit plans as an asset or liability in its statement of financial position.
Total defined-benefit pension-plan (income) expense was $(1.7) million, $1.3 million and $(1.6) million for the years ending November 30, 2008, 2007, and 2006, respectively.
Both the US RIP and UK RIP plan assets consist primarily of equity securities with smaller holdings of bonds and alternative assets. Equity assets are diversified between international and domestic investments, with additional diversification in the domestic category through allocations to large-cap, mid-cap, and growth and value investments.
The US RIP's established investment policy seeks to balance the need to maintain a viable and productive capital base and yet achieve investment results superior to the actuarial rate consistent with our funds' investment objectives. The UK RIP's established investment policy is to match the liabilities for active and deferred members with equity investments and match the liabilities for pensioner members with fixed-income investments. Asset allocations are subject to ongoing analysis and possible modification as basic capital market conditions change over time (interest rates, inflation, etc.).
94
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Employee Retirement Benefits (Continued)
The following compares target asset allocation percentages as of the beginning of 2008 with actual asset allocations at the end of the 2008:
| |
US RIP Assets | UK RIP Assets | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Target Allocations |
Actual Allocations |
Target Allocations |
Actual Allocations |
|||||||||
Equities |
50 - 70 | % | 50 | % | 70 | % | 55 | % | |||||
Fixed Income |
25 - 30 | 31 | 30 | 40 | |||||||||
Alternatives/Other |
0 - 20 | 19 | — | 5 | |||||||||
Investment return assumptions for both plans have been determined by obtaining independent estimates of expected long-term rates of return by asset class and applying the returns to assets on a weighted-average basis.
We do not expect any required contributions to the U.S. RIP during 2009. However, we expect to contribute approximately $2.1 million to the UK RIP during 2009. We also expect to contribute approximately $0.5 million to the SIP during 2009.
The following table provides the expected benefit payments from our trustees for our pension plans:
| |
US RIP | UK RIP | SIP | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(In thousands) |
||||||||||||
2009 |
$ | 13,095 | $ | 652 | $ | 486 | $ | 14,233 | |||||
2010 |
13,512 | 672 | 524 | 14,708 | |||||||||
2011 |
15,134 | 692 | 534 | 16,360 | |||||||||
2012 |
15,064 | 713 | 525 | 16,302 | |||||||||
2013 |
15,476 | 735 | 515 | 16,726 | |||||||||
2014 - 2018 |
94,572 | 4,019 | 2,414 | 101,005 | |||||||||
The following represents our net periodic pension (income) expense:
| |
Year Ended November 30, 2008 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
U.S. RIP | U.K. RIP | SIP | Total | |||||||||
| |
(In thousands) |
||||||||||||
Service costs incurred |
$ | 6,289 | $ | 907 | $ | 286 | $ | 7,482 | |||||
Interest costs on projected benefit obligation |
11,998 | 2,055 | 456 | 14,509 | |||||||||
Expected return on plan assets |
(21,470 | ) | (2,141 | ) | — | (23,611 | ) | ||||||
Amortization of prior service cost (benefit) |
(473 | ) | — | 44 | (429 | ) | |||||||
Amortization of actuarial loss |
— | — | 203 | 203 | |||||||||
Amortization of transitional obligation/(asset) |
(568 | ) | — | 40 | (528 | ) | |||||||
SFAS No. 88 (settlement) expense |
693 | — | — | 693 | |||||||||
Net periodic pension benefit (income) expense |
$ | (3,531 | ) | $ | 821 | $ | 1,029 | $ | (1,681 | ) | |||
95
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Employee Retirement Benefits (Continued)
| |
Year Ended November 30, 2007 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
U.S. RIP | U.K. RIP | SIP | Total | |||||||||
| |
(In thousands) |
||||||||||||
Service costs incurred |
$ | 6,276 | $ | 1,165 | $ | 190 | $ | 7,631 | |||||
Interest costs on projected benefit obligation |
10,879 | 2,110 | 355 | 13,344 | |||||||||
Expected return on plan assets |
(20,310 | ) | (1,823 | ) | — | (22,133 | ) | ||||||
Amortization of prior service cost (benefit) |
(473 | ) | — | 43 | (430 | ) | |||||||
Amortization of actuarial loss |
1,499 | 1,223 | 100 | 2,822 | |||||||||
Amortization of transitional obligation/(asset) |
(568 | ) | — | 40 | (528 | ) | |||||||
SFAS No. 88 (settlement) expense |
— | — | 575 | 575 | |||||||||
Net periodic pension benefit (income) expense |
$ | (2,697 | ) | $ | 2,675 | $ | 1,303 | $ | 1,281 | ||||
| |
Year Ended November 30, 2006 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
U.S. RIP | U.K. RIP | SIP | Total | |||||||||
| |
(In thousands) |
||||||||||||
Service costs incurred |
$ | 4,752 | $ | 928 | $ | 138 | $ | 5,818 | |||||
Interest costs on projected benefit obligation |
10,664 | 1,548 | 387 | 12,599 | |||||||||
Expected return on plan assets |
(20,253 | ) | (1,475 | ) | — | (21,728 | ) | ||||||
Amortization of prior service cost (benefit) |
(380 | ) | — | 814 | 434 | ||||||||
Amortization of actuarial loss |
923 | 589 | 105 | 1,617 | |||||||||
Amortization of transitional obligation/(asset) |
(568 | ) | — | 40 | (528 | ) | |||||||
SFAS No. 88 (settlement) expense |
— | — | 192 | 192 | |||||||||
Net periodic pension benefit (income) expense |
$ | (4,862 | ) | $ | 1,590 | $ | 1,676 | $ | (1,596 | ) | |||
Costs arising under our defined benefit pension plans from providing enhanced benefits related to restructuring activities are accounted for under the provisions of SFAS No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits.
96
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Employee Retirement Benefits (Continued)
The changes in the projected benefit obligation, plan assets and the funded status of the pension plans were as follows:
| |
November 30, 2008 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Overfunded | Underfunded | |
|||||||||||||
| |
US RIP | UK RIP | Total | SIP | Consolidated | |||||||||||
| |
(In thousands) |
|||||||||||||||
Change in projected benefit obligation: |
||||||||||||||||
Net benefit obligation at November 30, 2007 |
$ | 190,898 | $ | 37,072 | $ | 227,970 | $ | 7,144 | $ | 235,114 | ||||||
Service costs incurred |
6,289 | 907 | 7,196 | 286 | 7,482 | |||||||||||
Employee contributions |
— | 315 | 315 | — | 315 | |||||||||||
Interest costs on projected benefit obligation |
11,998 | 2,055 | 14,053 | 456 | 14,509 | |||||||||||
Actuarial gain |
(17,649 | ) | (9,158 | ) | (26,807 | ) | (1,023 | ) | (27,830 | ) | ||||||
Gross benefits paid |
(12,762 | ) | (781 | ) | (13,543 | ) | (239 | ) | (13,782 | ) | ||||||
SFAS No. 88 (settlement) expense |
693 | — | 693 | 154 | 847 | |||||||||||
Foreign currency exchange rate change |
— | (8,115 | ) | (8,115 | ) | — | (8,115 | ) | ||||||||
Net benefit obligation at November 30, 2008 |
$ | 179,467 | $ | 22,295 | $ | 201,762 | $ | 6,778 | $ | 208,540 | ||||||
Change in plan assets: |
||||||||||||||||
Fair value of plan assets at November 30, 2007 |
$ | 282,014 | $ | 32,251 | $ | 314,265 | $ | — | $ | 314,265 | ||||||
Actual return on plan assets |
(82,352 | ) | (2,529 | ) | (84,881 | ) | — | (84,881 | ) | |||||||
Employer contributions |
— | 2,423 | 2,423 | 239 | 2,662 | |||||||||||
Employee contributions |
— | 315 | 315 | — | 315 | |||||||||||
Gross benefits and settlements paid |
(12,762 | ) | (781 | ) | (13,543 | ) | (239 | ) | (13,782 | ) | ||||||
Foreign currency exchange rate change |
— | (8,049 | ) | (8,049 | ) | — | (8,049 | ) | ||||||||
Fair value of plan assets at November 30, 2008 |
$ | 186,900 | $ | 23,630 | $ | 210,530 | $ | — | $ | 210,530 | ||||||
Funded status: |
||||||||||||||||
Projected benefit obligation at November 30, 2008 |
$ | (179,467 | ) | $ | (22,295 | ) | $ | (201,762 | ) | $ | (6,778 | ) | $ | (208,540 | ) | |
Fair value of plan assets at November 30, 2008 |
186,900 | 23,630 | 210,530 | — | 210,530 | |||||||||||
Funded status—Overfunded/(Underfunded) |
$ | 7,433 | $ | 1,335 | $ | 8,768 | $ | (6,778 | ) | $ | 1,990 | |||||
Amounts recognized in the Consolidated Balance Sheets: |
||||||||||||||||
Prepaid asset |
$ | 7,433 | $ | 1,335 | $ | 8,768 | $ | — | $ | 8,768 | ||||||
Accrued liability |
— | — | — | (6,778 | ) | (6,778 | ) | |||||||||
Net amount recognized at November 30, 2008 |
$ | 7,433 | $ | 1,335 | $ | 8,768 | $ | (6,778 | ) | $ | 1,990 | |||||
Amounts in Accumulated Other Comprehensive Income not yet recognized as components of net periodic pension (income) expense, pretax: |
||||||||||||||||
Net prior service cost (benefit) |
$ | (3,840 | ) | $ | — | $ | (3,840 | ) | $ | 162 | $ | (3,678 | ) | |||
Net actuarial loss (gain) |
94,537 | (1,019 | ) | 93,518 | 1,590 | 95,108 | ||||||||||
Net transitional obligation (asset) |
(229 | ) | — | (229 | ) | 318 | 89 | |||||||||
Total not yet recognized |
$ | 90,468 | $ | (1,019 | ) | $ | 89,449 | $ | 2,070 | $ | 91,519 | |||||
97
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Employee Retirement Benefits (Continued)
| |
November 30, 2007 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Overfunded | Underfunded | |
|||||||||||||
| |
US RIP | UK RIP | SIP | Total | Consolidated | |||||||||||
| |
(In thousands) |
|||||||||||||||
Actuarial present value of accumulated benefit obligation |
$ | 182,120 | $ | 35,241 | $ | 6,394 | $ | 41,635 | $ | 223,755 | ||||||
Change in projected benefit obligation: |
||||||||||||||||
Net benefit obligation at November 30, 2006 |
$ | 196,262 | $ | 41,134 | $ | 7,693 | $ | 48,827 | $ | 245,089 | ||||||
Service costs incurred |
6,276 | 1,165 | 190 | 1,355 | 7,631 | |||||||||||
Employee contributions |
— | 307 | — | 307 | 307 | |||||||||||
Interest costs on projected benefit obligation |
10,879 | 2,110 | 355 | 2,465 | 13,344 | |||||||||||
Actuarial loss (gain) |
(10,123 | ) | (8,619 | ) | 1,382 | (7,237 | ) | (17,360 | ) | |||||||
Gross benefits paid |
(12,396 | ) | (1,045 | ) | (227 | ) | (1,272 | ) | (13,668 | ) | ||||||
Settlements |
— | — | (2,249 | ) | (2,249 | ) | (2,249 | ) | ||||||||
Foreign currency exchange rate change |
— | 2,020 | — | 2,020 | 2,020 | |||||||||||
Net benefit obligation at November 30, 2007 |
$ | 190,898 | $ | 37,072 | $ | 7,144 | $ | 44,216 | $ | 235,114 | ||||||
Change in plan assets: |
||||||||||||||||
Fair value of plan assets at November 30, 2006 |
$ | 267,266 | $ | 26,820 | $ | — | $ | 26,820 | $ | 294,086 | ||||||
Actual return on plan assets |
27,960 | 2,852 | — | 2,852 | 30,812 | |||||||||||
Employer contributions (distributions) |
(816 | ) | 2,060 | 2,476 | 4,536 | 3,720 | ||||||||||
Employee contributions |
— | 307 | — | 307 | 307 | |||||||||||
Gross benefits and settlements paid |
(12,396 | ) | (1,045 | ) | (2,476 | ) | (3,521 | ) | (15,917 | ) | ||||||
Foreign currency exchange rate change |
— | 1,257 | — | 1,257 | 1,257 | |||||||||||
Fair value of plan assets at November 30, 2007 |
$ | 282,014 | $ | 32,251 | $ | — | $ | 32,251 | $ | 314,265 | ||||||
Funded status: |
||||||||||||||||
Projected benefit obligation at November 30, 2007 |
$ | (190,898 | ) | $ | (37,072 | ) | $ | (7,144 | ) | $ | (44,216 | ) | $ | (235,114 | ) | |
Fair value of plan assets at November 30, 2007 |
282,014 | 32,251 | — | 32,251 | 314,265 | |||||||||||
Funded status—Overfunded/(Underfunded) |
$ | 91,116 | $ | (4,821 | ) | $ | (7,144 | ) | $ | (11,965 | ) | $ | 79,151 | |||
Amounts recognized in the Consolidated Balance Sheets: |
||||||||||||||||
Prepaid asset |
$ | 91,116 | $ | — | $ | — | $ | — | $ | 91,116 | ||||||
Accrued liability |
— | (4,821 | ) | (7,144 | ) | (11,965 | ) | (11,965 | ) | |||||||
Net amount recognized at November 30, 2007 |
$ | 91,116 | $ | (4,821 | ) | $ | (7,144 | ) | $ | (11,965 | ) | $ | 79,151 | |||
Amounts in Accumulated Other Comprehensive Income not yet recognized as components of net periodic pension (income) expense, pretax: |
||||||||||||||||
Net prior service cost (benefit) |
$ | (4,313 | ) | $ | — | $ | 206 | $ | 206 | $ | (4,107 | ) | ||||
Net actuarial loss |
8,361 | 3,506 | 2,803 | 6,309 | 14,670 | |||||||||||
Net transitional obligation (asset) |
(796 | ) | — | 358 | 358 | (438 | ) | |||||||||
Total not yet recognized |
$ | 3,252 | $ | 3,506 | $ | 3,367 | $ | 6,873 | $ | 10,125 | ||||||
IHS Global Insight has a funded defined benefit pension plan for certain employees located in the UK. According to the most recently available actuarial report, this plan has average annual pension amounts of less than $0.1 million. This plan is closed to both new entrants and future accruals. As a
98
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Employee Retirement Benefits (Continued)
result of this plan, $0.5 million was recorded as a pension liability in the preliminary purchase price allocation at the time of acquisition using the most recent information available which is the actuarial report as of July 1, 2008.
Amortization Amounts Expected to be Recognized in Net Periodic Pension (Income) Expense during Fiscal Year Ending November 30, 2009, pretax:
| |
US RIP | UK RIP | SIP | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(In thousands) |
||||||||||||
Amortization of net actuarial loss |
$ | — | $ | — | $ | 85 | $ | 85 | |||||
Amortization of transitional obligation/(asset) |
$ | (229 | ) | $ | — | $ | 40 | $ | (189 | ) | |||
Amortization of net prior service cost (benefit) |
$ | (473 | ) | $ | — | $ | 44 | $ | (429 | ) | |||
Pension income is actuarially calculated annually based on data available at the beginning of each year. Assumptions used in the actuarial calculation include the discount rate selected and disclosed at the end of the previous year as well as other assumptions detailed in the table below, for the years ended November 30:
| |
US RIP | UK RIP | SIP | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2008 | 2007 | 2008 | 2007 | 2008 | 2007 | |||||||||||||
Weighted-average assumptions as of year-end |
|||||||||||||||||||
Discount rate |
7.50 | % | 6.50 | % | 7.00 | % | 6.00 | % | 7.50 | % | 6.50 | % | |||||||
Average salary increase rate |
4.50 | 4.50 | 4.50 | 4.90 | 4.50 | 4.50 | |||||||||||||
Expected long-term rate of return on assets |
8.25 | 8.25 | 7.00 | 7.00 | — | — | |||||||||||||
Defined Contribution Plan
Employees of certain subsidiaries may participate in defined contribution plans. Benefit expense relating to these plans was approximately $5.1 million, $4.0 million and $3.0 million for 2008, 2007 and 2006, respectively.
17. Post-retirement Benefits
We sponsor a contributory post-retirement 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, IHS subsidizes the cost of coverage for retiree-medical coverage for certain grandfathered employees. The IHS subsidy is capped at different rates per month depending on individual retirees' Medicare eligibility.
The obligation under our plan was determined by the application of the terms of medical and life insurance plans together with relevant actuarial assumptions. Effective 2006, IHS does not provide prescription drug coverage for Medicare-eligible retirees except through a Medicare Advantage fully insured option; therefore our liability does not reflect any impact of the Medicare Modernization Act Part D subsidy. The discount rate used in determining the accumulated post-retirement benefit obligation was 7.5%, 6.5% and 5.75% at November 30, 2008, 2007, and 2006, respectively.
99
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Post-retirement Benefits (Continued)
Our net periodic post-retirement benefit (income) expense and changes in the related projected benefit obligation were as follows:
| |
2008 | 2007 | 2006 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(In thousands) |
|||||||||
Service costs incurred |
$ | 100 | $ | 137 | $ | 294 | ||||
Interest costs |
634 | 592 | 728 | |||||||
Amortization of prior service cost(1) |
(3,229 | ) | (3,229 | ) | (2,655 | ) | ||||
Amortization of net actuarial loss |
472 | 551 | 484 | |||||||
Net periodic post-retirement benefit income |
$ | (2,023 | ) | $ | (1,949 | ) | $ | (1,149 | ) | |
| |
Year Ended November 30, 2008 |
Year Ended November 30, 2007 |
|||||
|---|---|---|---|---|---|---|---|
| |
(In thousands) |
(In thousands) |
|||||
Change in projected postretirement benefit obligation: |
|||||||
Post-retirement benefit obligation at beginning of year |
$ | 10,203 | $ | 10,763 | |||
Service costs |
100 | 137 | |||||
Interest costs |
634 | 592 | |||||
Actuarial gain |
(1,231 | ) | (454 | ) | |||
Benefits paid(2) |
(854 | ) | (835 | ) | |||
Post-retirement benefit obligation at end of year |
$ | 8,852 | $ | 10,203 | |||
Funded status—Unfunded: |
$ | (8,852 | ) | $ | (10,203 | ) | |
Amounts recognized in the Consolidated Balance Sheets: |
|||||||
Accrued liability |
$ | (8,852 | ) | $ | (10,203 | ) | |
Amounts in Accumulated Other Comprehensive Income not yet recognized as components of net periodic pension (income) expense, pretax: |
|||||||
Net prior service benefit |
$ | (6,783 | ) | $ | (10,012 | ) | |
Net actuarial loss |
3,095 | 4,800 | |||||
Net transitional obligation (assets) |
— | — | |||||
Total not yet recognized |
$ | (3,688 | ) | $ | (5,212 | ) | |
Amortization Amounts Expected to be Recognized in Net Periodic Pension (Income) Expense during Fiscal Year Ending November 30, 2009, pretax: |
|||||||
Amortization of net actuarial loss |
$ | 306 | $ | 472 | |||
Amortization of transitional obligation |
— | — | |||||
Amortization of net prior service benefit |
(3,229 | ) | (3,229 | ) | |||
- (1)
- We amended our plan in 2006. The plan was amended to limit benefits to be paid for future health-care costs. IHS no longer subsidizes the cost of coverage for retiree-medical coverage. Certain employees were grandfathered with the IHS subsidy capped at different rates per month
100
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Post-retirement Benefits (Continued)
depending on individual retirees' Medicare eligibility. This change resulted in a $15.9 million negative plan amendment to be amortized over a period of time resulting in net periodic postretirement benefit income in 2006 through 2010.
- (2)
- In accordance with IRS Code Section 420, the cost of coverage provided to the retirees under the retiree-medical plan may be paid through a transfer of excess assets of our U.S. pension plan. We elected to make such qualified transfer in 2007.
Employer contributions to the post-retirement benefit plan expected to be paid during the year ending November 30, 2009, are approximately $0.8 million.
The following table provides the expected cash out-flows for our post-retirement benefit plan (in thousands):
2009 |
$ | 842 | ||
2010 |
841 | |||
2011 |
826 | |||
2012 |
829 | |||
2013 |
825 | |||
2014 - 2018 |
4,000 |
A one-percentage-point change in assumed health-care-cost-trend rates would have the following effects:
| |
One-percentage- point increase |
One-percentage- point decrease |
|||||
|---|---|---|---|---|---|---|---|
| |
(In thousands) |
||||||
Increase/(decrease) on total of service and interest cost for the year ended November 30, 2008 |
$ | 1 | $ | (1 | ) | ||
Increase/(decrease) on post-retirement benefit obligation as of November 30, 2008 |
— | — | |||||
18. Common Stock and Earnings per Share
As of November 30, 2008, our authorized capital stock consisted of 80,000,000 shares of Class A common stock. Prior to September 18, 2008, our authorized capital stock consisted of 80,000,000 shares of Class A common stock and 13,750,000 shares of Class B common stock. These classes had equal dividend rights and liquidation rights. However, the holders of our Class A common stock were entitled to one vote per share and holders of our Class B common stock were entitled to ten votes per share on all matters to be voted upon by the stockholders. Each share of Class B common stock was convertible at any time at the option of the holder into one share of Class A common stock. On September 18, 2008, the holders of our 13,750,000 Class B common stock converted those shares to 13,750,000 Class A common shares. In exchange for this conversion, the number of allowable demand registrations available to that shareholder increased from two to four.
101
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Common Stock and Earnings per Share (Continued)
For 2006 and 2007, we used the two-class method for computing basic and diluted EPS amounts. For 2008, there was a single class of stock for the purposes of calculating EPS. Weighted average common shares outstanding were calculated as follows:
| |
Years Ended November 30, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2008 | 2007 | 2006 | ||||||||
| |
Class A and Class B |
Class A and Class B |
Class A and Class B |
||||||||
Weighted average common shares outstanding: |
|||||||||||
Shares used in basic per-share calculation |
62,063 | 59,463 | 56,561 | ||||||||
Effect of dilutive securities: |
|||||||||||
Deferred stock units |
40 | 6 | 52 | ||||||||
Restricted shares |
795 | 936 | 42 | ||||||||
Options |
59 | 21 | 1 | ||||||||
Shares used in diluted per-share calculation |
62,957 | 60,426 | 56,656 | ||||||||
Share Buyback Program
During 2006, our board of directors approved a program to reduce the dilutive effects of employee equity grants, by allowing employees to surrender shares back to the company for a value equal to their statutory tax liability. IHS then pays the statutory tax on behalf of the employee. Later in 2006, our board of directors approved an additional program—a stock buyback program—whereby IHS was authorized to acquire up to one million shares per year in the open market to more fully offset the dilutive effect of our employee equity programs. This program was renewed by the board of directors in late 2007 for fiscal year 2008. Later in 2008, our board of directors approved an expansion of our repurchase program for the remainder of fiscal year 2008 under which we could invest up to $25.0 million to repurchase additional shares. During the year ended November 30, 2008, we repurchased 1,199,595 shares of our Class A common stock for approximately $65.5 million, or $54.64 per share, pursuant to the stock buyback program and 316,581 shares for approximately $18.8 million, or $59.43 per share, related to shares withheld for taxes.
19. Long-Term Leases, Commitments and Contingencies
Rental charges in 2008, 2007, and 2006 approximated $21.2 million, $18.0 million and $15.7 million, respectively. Minimum rental commitments under non-cancelable operating leases in effect at November 30, 2008, are as follows (in thousands):
2009 |
$ | 15,232 | ||
2010 |
11,745 | |||
2011 |
9,244 | |||
2012 |
8,736 | |||
2013 |
7,817 | |||
2014 and thereafter |
22,213 | |||
Total |
$ | 74,987 | ||
102
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Long-Term Leases, Commitments and Contingencies (Continued)
We had outstanding letters of credit in the aggregate amount of approximately $1.2 million and $1.8 million at November 30, 2008 and 2007, respectively.
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 likely to have a material adverse effect on our results of operations or financial condition.
20. Supplemental Cash Flow Information
Net cash provided by operating activities reflects cash payments for interest and income taxes as shown below, for the years ended November 30:
| |
2008 | 2007 | 2006 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(In thousands) |
|||||||||
Interest paid |
$ | 1,088 | $ | 869 | $ | 298 | ||||
Income tax payments, net |
$ | 28,744 | $ | 28,369 | $ | 19,384 | ||||
Cash and cash equivalents amounting to approximately $31.0 million and $148.5 million reflected on the consolidated balance sheets at November 30, 2008 and 2007, respectively, are maintained primarily in U.S. Dollars, Canadian Dollars, British Pound Sterling, and Euros, and were subject to fluctuation in the current exchange rate.
21. Segment Information
We prepare our financial reports and analyze our business results within our three reportable geographic segments: Americas, EMEA and APAC. Prior to the third quarter of 2008, we reported as two segments: Energy and Engineering. However, during 2008 we reorganized our management structure to a geographic focus, the point of contact with our customers. This new integrated global organization will make it easier for our customers to do business with us by providing a more cohesive, consistent, and effective sales and marketing approach in each region. By structuring our business around our geographic segments, we are able to tailor and expand the solutions we offer to meet the unique needs of our customers both globally and in local markets. We are also able to manage our activities according to the best practices of each. This new structure provides a solid foundation for growth in each market for all of our capabilities. It allows us a more efficient method of bringing new products and services to customers, and supports growth in existing accounts and with new customers and markets.
Information as to the operations of our three segments is set forth below based on the nature of the offerings. Our Chairman and Chief Executive Officer represents our chief operating decision maker, and he evaluates segment performance based primarily on revenue and operating profit of these three segments. In addition, he also reviews revenue for the domains and Critical Information and Insight offerings. The accounting policies of our segments are the same as those described in the summary of significant accounting policies (see Note 2). The prior year information has been restated to conform to the current year presentation.
No single customer accounted for 10% or more of our total revenue for the year ended November 30, 2008. There are no material inter-segment revenues for any period presented.
103
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
21. Segment Information (Continued)
As shown below, certain corporate transactions are not allocated to the reportable segments. Amounts not allocated include, but are not limited to, such items as, stock-based compensation expense, net periodic pension and post-retirement benefits income, corporate-level impairments, and gain (loss) on sales of corporate assets.
| |
Americas | EMEA | APAC | Segment Totals |
Shared Services |
Consolidated Total |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(In thousands) |
||||||||||||||||||
2008 |
|||||||||||||||||||
Revenue |
$ | 520,925 | $ | 263,457 | $ | 59,648 | $ | 844,030 | $ | — | $ | 844,030 | |||||||
Operating income |
160,757 | 44,258 | 18,098 | 223,113 | (89,602 | ) | 133,511 | ||||||||||||
Depreciation and amortization |
23,187 | 12,997 | 132 | 36,316 | 3,094 | 39,410 | |||||||||||||
Assets |
958,234 | 333,691 | 59,804 | 1,351,729 | 84,451 | 1,436,180 | |||||||||||||
Goodwill |
499,758 | 173,968 | 31,351 | 705,077 | — | 705,077 | |||||||||||||
2007 |
|||||||||||||||||||
Revenue |
$ | 428,025 | $ | 210,299 | $ | 50,068 | $ | 688,392 | $ | — | $ | 688,392 | |||||||
Operating income |
133,785 | 35,200 | 12,582 | 181,567 | (64,965 | ) | 116,602 | ||||||||||||
Depreciation and amortization |
15,242 | 7,801 | 128 | 23,171 | 2,307 | 25,478 | |||||||||||||
Assets |
770,428 | 255,703 | 52,746 | 1,078,877 | 244,930 | 1,323,807 | |||||||||||||
Goodwill |
403,220 | 133,816 | 27,546 | 564,582 | — | 564,582 | |||||||||||||
2006 |
|||||||||||||||||||
Revenue |
$ | 346,283 | $ | 163,624 | $ | 40,863 | $ | 550,770 | $ | — | $ | 550,770 | |||||||
Operating income |
91,357 | 30,138 | 8,714 | 130,209 | (50,024 | ) | 80,185 | ||||||||||||
Depreciation and amortization |
11,138 | 3,342 | 127 | 14,607 | 1,107 | 15,714 | |||||||||||||
Assets |
537,095 | 103,941 | 21,055 | 662,091 | 282,210 | 944,301 | |||||||||||||
Goodwill |
284,716 | 55,083 | 11,097 | 350,896 | — | 350,896 | |||||||||||||
Revenue by information domain was as follows:
| |
Years Ended November 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2008 | 2007 | 2006 | |||||||
| |
(In thousands) |
|||||||||
Energy revenue |
$ | 442,919 | $ | 373,519 | $ | 294,276 | ||||
Product Lifecycle revenue |
290,637 | 278,273 | 256,494 | |||||||
Security revenue |
75,192 | 35,314 | — | |||||||
Environment revenue |
22,456 | 1,286 | — | |||||||
Intersection revenue |
12,826 | — | — | |||||||
Total revenue |
$ | 844,030 | $ | 688,392 | $ | 550,770 | ||||
104
IHS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
21. Segment Information (Continued)
Revenue by product category was as follows:
| |
Years Ended November 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2008 | 2007 | 2006 | |||||||
| |
(In thousands) |
|||||||||
Critical Information Products |
$ | 555,058 | $ | 497,301 | $ | 425,254 | ||||
Critical Information Services |
53,934 | 41,147 | 36,418 | |||||||
Insight Products |
167,253 | 92,301 | 49,452 | |||||||
Insight Services |
67,785 | 57,643 | 39,646 | |||||||
Total revenue |
$ | 844,030 | $ | 688,392 | $ | 550,770 | ||||
22. Quarterly Results of Operations (Unaudited)
The following summarizes certain quarterly results of operations:
| |
Three Months Ended | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
February 29/28 | May 31 | August 31 | November 30 | ||||||||||
| |
(In thousands) |
|||||||||||||
2008 |
||||||||||||||
Revenue |
$ | 198,777 | $ | 207,193 | $ | 207,434 | $ | 230,626 | ||||||
Net income |
21,431 | 23,258 | 21,024 | 33,280 | ||||||||||
Earnings per share (Class A and Class B): |
||||||||||||||
Basic |
$ | 0.35 | $ | 0.37 | $ | 0.34 | $ | 0.54 | ||||||
Diluted |
$ | 0.34 | $ | 0.37 | $ | 0.33 | $ | 0.53 | ||||||
2007 |
||||||||||||||
Revenue |
$ | 152,621 | $ | 154,900 | $ | 183,356 | $ | 197,515 | ||||||
Net income |
18,377 | 18,582 | 21,731 | 25,085 | ||||||||||
Earnings per share (Class A and Class B): |
||||||||||||||
Basic |
$ | 0.32 | $ | 0.32 | $ | 0.36 | $ | 0.41 | ||||||
Diluted |
$ | 0.32 | $ | 0.32 | $ | 0.35 | $ | 0.40 | ||||||
105
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. The Company's disclosure controls and procedures have also been designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company's management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
Evaluation of Internal Control over Financial Reporting
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, the Company has included a report on management's assessment of the design and effectiveness of its internal control over financial reporting as part of this Annual Report on Form 10-K for the fiscal year ended November 30, 2008. The Company's independent registered public accounting firm also audited, and reported on, the effectiveness of internal control over financial reporting. Management's report and the independent registered public accounting firm's report are included under the captions entitled "Management's Report on Internal Control Over Financial Reporting" and "Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting" in Item 8 of this Annual Report on Form 10-K and are incorporated herein by reference.
Based on their evaluation as of November 30, 2008, the principal executive officer and principal financial officer of the Company have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the period covered by this Annual Report on Form 10-K that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
106
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item concerning our executive officers, directors, compliance with Section 16 of the Securities and Exchange Act of 1934 and our code of ethics that applies to our principal executive officer, principal financial officer and principal accounting officer is incorporated by reference to the information set forth in the sections entitled "Election of Directors," "Section 16(a) Beneficial Ownership Reporting Compliance" and "Election of Directors—Corporate Governance Matters—Code of Conduct" in our Proxy Statement for our 2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than March 30, 2009, which is 120 days after the fiscal year ended November 30, 2008.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the information set forth in the sections entitled "Election of Directors—Director Compensation" and "Executive Compensation" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference to the information set forth in the sections entitled "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to the information set forth in the section entitled "Certain Transactions" in the Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to the information set forth in the section entitled "Ratification of Appointment of Independent Registered Public Accounting Firm—Accounting Fees" in the Proxy Statement.
107
Item 15. Exhibits and Financial Statement Schedules
- (a)
- Index of Financial Statements
- (b)
- Index of Exhibits
The Financial Statements listed in the Index to Consolidated Financial Statements are filed as part of this report on Form 10-K (see Part II, Item 8—Financial Statements and Supplementary Data).
The following exhibits are filed as part of this report:
EXHIBIT INDEX
| Exhibit Number |
Description | ||
|---|---|---|---|
| 3.1* | Form of Amended and Restated Certificate of Incorporation | ||
3.2* |
Form of Amended and Restated By-Laws |
||
4.1* |
Form of Class A Common Stock Certificate |
||
4.2* |
Rights Agreement between IHS Inc. and Computershare Trust Company, Inc., as Rights Agent |
||
4.3†† |
Amendment to Rights Agreement Designating American Stock Transfer & Trust as Rights Agent |
||
10.1† |
Amended and Restated IHS Inc. 2004 Long-Term Incentive Plan |
||
10.2†† |
Amended and Restated IHS Inc. 2004 Directors Stock Plan |
||
10.3* |
IHS Inc. Employee Stock Purchase Plan |
||
10.4* |
IHS Supplemental Income Plan |
||
10.5† |
Summary of Non-Employee Director Compensation |
||
10.6* |
Form of Indemnification Agreement between the Company and its Directors |
||
10.7* |
IHS Executive Relocation Policy (2004) |
||
10.8** |
IHS Inc. 2004 Long-Term Incentive Plan, Form of 2007 Stock Option Award—Senior Executive Level |
||
10.9** |
IHS Inc. 2004 Long-Term Incentive Plan, Form of 2007 Stock Option Award—Executive Level |
||
10.10** |
IHS Inc. 2004 Long-Term Incentive Plan, Form of 2007 Restricted Stock Unit Award—Senior Executive Level |
||
10.11** |
IHS Inc. 2004 Long-Term Incentive Plan, Form of 2007 Restricted Stock Unit Award—Time-Based |
||
10.12** |
IHS Inc. 2004 Long-Term Incentive Plan, Form of 2007 Restricted Stock Unit Award—Performance-Based |
||
10.13* |
Employment Agreement by and between IHS Inc. and Michael J. Sullivan, dated as of November 1, 2004 |
||
108
| Exhibit Number |
Description | ||
|---|---|---|---|
| 10.14‡ | Employment Agreement by and between IHS Inc. and Jeffrey R. Tarr, dated as of December 1, 2004 | ||
10.15‡ |
Employment Agreement by and between IHS Inc. and Rohinton Mobed, dated as of November 1, 2004 |
||
10.16†† |
Separation Agreement by and between IHS Inc. and Rohinton Mobed, dated as of November 30, 2008 |
||
10.17†† |
Amendment to Separation Agreement by and between IHS Inc. and Rohinton Mobed, dated as of December 9, 2008 |
||
10.18†† |
Amendment to Separation Agreement by and between IHS Inc. and Rohinton Mobed, dated as of December 22, 2008 |
||
10.19** |
Employment Agreement by and between IHS Energy Group Inc. and Daniel H. Yergin, dated as of September 1, 2004 |
||
10.20** |
Non-Competition Agreement by and between IHS Energy Group Inc. and Daniel H. Yergin, dated as of September 1, 2004 |
||
21†† |
List of Subsidiaries of the Registrant |
||
23.1†† |
Consent of Independent Registered Public Accounting Firm |
||
24†† |
Power of Attorney |
||
31.1†† |
Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
||
31.2†† |
Certification of the Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
||
32.1†† |
Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
||
- *
- Previously
filed with the Securities and Exchange Commission as an exhibit to the Registration Statement on Form S-1
(No. 333-122565) of the Registrant and incorporated herein by reference.
- **
- Previously
filed with the Securities and Exchange Commission as an exhibit to the Registrant's Annual Report on Form 10-K for the period
ended November 30, 2006, and incorporated herein by reference.
- ‡
- Previously
filed with the Securities and Exchange Commission as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended February 28, 2006, and incorporated herein by reference.
- ‡‡
- Previously
filed with the Securities and Exchange Commission as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the period ended August 31, 2006, and incorporated herein by reference.
- †
- Previously
filed with the Securities and Exchange Commission as an exhibit to the Registrant's Registration Statement on
Form S-8 (No. 333-151082) and incorporated herein by reference.
- ††
- Filed
electronically herewith.
- (c)
- Financial Statement Schedules
All schedules for the Registrant have been omitted since the required information is not present or because the information is included in the financial statements or notes thereto.
109
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on January 23, 2009.
IHS INC. |
||||
By: |
/s/ STEPHEN GREEN Name: Stephen Green Title: Senior Vice President and General Counsel |
|||
Pursuant to the requirements of the Securities Act of 1933, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on January 23, 2009.
Signature
|
Title
|
|||
|---|---|---|---|---|
/s/ JERRE L. STEAD |
Chairman and Chief Executive Officer (Principal Executive Officer) |
|||
/s/ MICHAEL J. SULLIVAN |
Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
|||
/s/ HEATHER MATZKE-HAMLIN |
Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) |
|||
* |
Director |
|||
* |
Director |
|||
* |
Director |
|||
* |
Director |
|||
* |
Director |
|||
* |
Director |
|||
* |
Director |
|||
* |
Director |
|||
* |
Director |
|||
*By: |
/s/ STEPHEN GREEN |
|||
110
| Exhibit Number |
Description | ||
|---|---|---|---|
| 3.1* | Form of Amended and Restated Certificate of Incorporation | ||
3.2* |
Form of Amended and Restated By-Laws |
||
4.1* |
Form of Class A Common Stock Certificate |
||
4.2* |
Rights Agreement between IHS Inc. and Computershare Trust Company, Inc., as Rights Agent |
||
4.3†† |
Amendment to Rights Agreement Designating American Stock Transfer & Trust as Rights Agent |
||
10.1† |
Amended and Restated IHS Inc. 2004 Long-Term Incentive Plan |
||
10.2†† |
Amended and Restated IHS Inc. 2004 Directors Stock Plan |
||
10.3* |
IHS Inc. Employee Stock Purchase Plan |
||
10.4* |
IHS Supplemental Income Plan |
||
10.5† |
Summary of Non-Employee Director Compensation |
||
10.6* |
Form of Indemnification Agreement between the Company and its Directors |
||
10.7* |
IHS Executive Relocation Policy (2004) |
||
10.8** |
IHS Inc. 2004 Long-Term Incentive Plan, Form of 2007 Stock Option Award—Senior Executive Level |
||
10.9** |
IHS Inc. 2004 Long-Term Incentive Plan, Form of 2007 Stock Option Award—Executive Level |
||
10.10** |
IHS Inc. 2004 Long-Term Incentive Plan, Form of 2007 Restricted Stock Unit Award—Senior Executive Level |
||
10.11** |
IHS Inc. 2004 Long-Term Incentive Plan, Form of 2007 Restricted Stock Unit Award—Time-Based |
||
10.12** |
IHS Inc. 2004 Long-Term Incentive Plan, Form of 2007 Restricted Stock Unit Award—Performance-Based |
||
10.13* |
Employment Agreement by and between IHS Inc. and Michael J. Sullivan, dated as of November 1, 2004 |
||
10.14‡ |
Employment Agreement by and between IHS Inc. and Jeffrey R. Tarr, dated as of December 1, 2004 |
||
10.15‡ |
Employment Agreement by and between IHS Inc. and Rohinton Mobed, dated as of November 1, 2004 |
||
10.16†† |
Separation Agreement by and between IHS Inc. and Rohinton Mobed, dated as of November 30, 2008 |
||
10.17†† |
Amendment to Separation Agreement by and between IHS Inc. and Rohinton Mobed, dated as of December 9, 2008 |
||
10.18†† |
Amendment to Separation Agreement by and between IHS Inc. and Rohinton Mobed, dated as of December 22, 2008 |
||
10.19** |
Employment Agreement by and between IHS Energy Group Inc. and Daniel H. Yergin, dated as of September 1, 2004 |
||
| Exhibit Number |
Description | ||
|---|---|---|---|
| 10.20** | Non-Competition Agreement by and between IHS Energy Group Inc. and Daniel H. Yergin, dated as of September 1, 2004 | ||
21†† |
List of Subsidiaries of the Registrant |
||
23.1†† |
Consent of Independent Registered Public Accounting Firm |
||
24†† |
Power of Attorney |
||
31.1†† |
Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
||
31.2†† |
Certification of the Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
||
32.1†† |
Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
||
- *
- Previously
filed with the Securities and Exchange Commission as an exhibit to the Registration Statement on Form S-1
(No. 333-122565) of the Registrant and incorporated herein by reference.
- **
- Previously
filed with the Securities and Exchange Commission as an exhibit to the Registrant's Annual Report on Form 10-K for the period
ended November 30, 2006, and incorporated herein by reference.
- ‡
- Previously
filed with the Securities and Exchange Commission as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended February 28, 2006, and incorporated herein by reference.
- ‡‡
- Previously
filed with the Securities and Exchange Commission as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the period ended August 31, 2006, and incorporated herein by reference.
- †
- Previously
filed with the Securities and Exchange Commission as an exhibit to the Registrant's Registration Statement on
Form S-8 (No. 333-151082) and incorporated herein by reference.
- ††
- Filed electronically herewith.