Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 001-32511

 

 

IHS INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   13-3769440

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

15 Inverness Way East

Englewood, CO 80112

(Address of Principal Executive Offices)

(303) 790-0600

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

As of August 31, 2010, there were 64,196,232 shares of our Class A Common Stock outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page
PART I      

Item 1.

   Financial Statements    3

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    14

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    21

Item 4.

   Controls and Procedures    21
PART II      

Item 1.

   Legal Proceedings    21

Item 1A.

   Risk Factors    21

Item 6.

   Exhibits    21
SIGNATURE    22

 

2


Table of Contents

PART I.   FINANCIAL INFORMATION

Item 1. Financial Statements

IHS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except for share and per-share amounts)

 

     As of
August 31, 2010
    As of
November 30, 2009
 
     (Unaudited)     (Audited)  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 257,151      $ 124,201   

Accounts receivable, net

     189,455        203,500   

Deferred subscription costs

     37,381        40,279   

Deferred income taxes

     29,540        30,970   

Other

     19,751        14,284   
                

Total current assets

     533,278        413,234   
                

Non-current assets:

    

Property and equipment, net

     84,293        74,798   

Intangible assets, net

     297,446        309,795   

Goodwill, net

     926,968        875,742   

Other

     4,101        2,019   
                

Total non-current assets

     1,312,808        1,262,354   
                

Total assets

   $ 1,846,086      $ 1,675,588   
                

Liabilities and stockholders’ equity

    

Current liabilities:

    

Short-term debt

   $ 143,888      $ 92,577   

Accounts payable

     29,147        26,470   

Accrued compensation

     31,604        44,196   

Accrued royalties

     14,487        25,666   

Other accrued expenses

     45,642        39,385   

Income tax payable

     1,896        1,720   

Deferred subscription revenue

     351,740        319,163   
                

Total current liabilities

     618,404        549,177   

Long-term debt

     95        141   

Accrued pension liability

     22,224        19,194   

Accrued post-retirement benefits

     7,845        9,914   

Deferred income taxes

     71,125        68,334   

Other liabilities

     17,034        15,150   

Commitments and contingencies

    

Stockholders’ equity:

    

Class A common stock, $0.01 par value per share, 160,000,000 and 80,000,000 shares authorized, 66,184,152 and 64,801,035 shares issued, and 64,196,232 and 63,283,947 shares outstanding at August 31, 2010 and November 30, 2009, respectively

     661        648   

Additional paid-in capital

     523,450        472,791   

Treasury stock, at cost: 1,987,920 and 1,517,088 shares at August 31, 2010 and November 30, 2009, respectively

     (100,597     (75,112

Retained earnings

     819,042        719,182   

Accumulated other comprehensive loss

     (133,197     (103,831
                

Total stockholders’ equity

     1,109,359        1,013,678   
                

Total liabilities and stockholders’ equity

   $ 1,846,086      $ 1,675,588   
                

See accompanying notes.

 

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IHS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except for per-share amounts)

 

     Three Months Ended August 31,     Nine Months Ended August 31,  
     2010     2009     2010     2009  
     (Unaudited)  

Revenue:

        

Products

   $ 240,027      $ 213,505      $ 678,149      $ 618,533   

Services

     32,032        25,980        101,125        91,639   
                                

Total revenue

     272,059        239,485        779,274        710,172   

Operating expenses:

        

Cost of revenue:

        

Products

     98,446        87,037        279,099        251,476   

Services

     17,345        14,670        54,836        50,808   
                                

Total cost of revenue (includes stock-based compensation expense of $446; $450; $3,203 and $1,910 for the three and nine months ended August 31, 2010 and 2009, respectively)

     115,791        101,707        333,935        302,284   

Selling, general and administrative (includes stock-based compensation expense of $12,336; $12,371; $46,521 and $42,352 for the three and nine months ended August 31, 2010 and 2009, respectively)

     86,203        79,369        259,914        248,423   

Depreciation and amortization

     14,406        12,771        42,505        36,031   

Restructuring charges (credits)

     9,104        —          9,022        (416

Net periodic pension and post-retirement expense (income)

     1,191        (679     3,579        (2,057

Other expense (income), net

     262        60        (852     (409
                                

Total operating expenses

     226,957        193,228        648,103        583,856   
                                

Operating income

     45,102        46,257        131,171        126,316   

Interest income

     188        219        386        782   

Interest expense

     (413     (416     (1,073     (1,677
                                

Non-operating loss, net

     (225     (197     (687     (895
                                

Income from continuing operations before income taxes

     44,877        46,060        130,484        125,421   

Provision for income taxes

     (10,314     (11,322     (30,494     (29,250
                                

Net income from continuing operations

     34,563        34,738        99,990        96,171   

Loss from discontinued operations, net

     (4     (32     (130     (263
                                

Net income

     34,559        34,706        99,860        95,908   

Less: Net income attributable to noncontrolling interests

     —          —          —          (2,144
                                

Net income attributable to IHS Inc.

   $ 34,559      $ 34,706      $ 99,860      $ 93,764   
                                

Income from continuing operations attributable to IHS Inc. per share:

        

Basic

   $ 0.54      $ 0.55      $ 1.57      $ 1.49   
                                

Diluted

   $ 0.53      $ 0.54      $ 1.55      $ 1.47   
                                

Loss from discontinued operations per share:

        

Basic

   $ —        $ —        $ —        $ —     
                                

Diluted

   $ —        $ —        $ —        $ —     
                                

Net income attributable to IHS Inc. per share:

        

Basic

   $ 0.54      $ 0.55      $ 1.56      $ 1.49   
                                

Diluted

   $ 0.53      $ 0.54      $ 1.55      $ 1.47   
                                

Weighted average shares:

        

Basic

     64,122        63,160        63,881        62,998   
                                

Diluted

     64,720        64,024        64,574        63,837   
                                

See accompanying notes.

 

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IHS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Nine Months Ended August 31,  
     2010     2009  
     (Unaudited)  

Operating activities:

    

Net income

   $ 99,860      $ 95,908   

Reconciliation of net income to net cash provided by operating activities:

    

Depreciation and amortization

     42,505        36,031   

Stock-based compensation expense

     49,724        44,262   

Excess tax benefit from stock-based compensation

     (5,024     (9,796

Non-cash net periodic pension and post-retirement expense (income)

     2,555        (3,004

Deferred income taxes

     347        11,380   

Change in assets and liabilities:

    

Accounts receivable, net

     14,591        50,793   

Other current assets

     (1,098     1,541   

Accounts payable

     2,221        (18,196

Accrued expenses

     (17,363     (36,036

Income tax payable

     2,825        (1,308

Deferred subscription revenue

     30,770        2,038   

Other liabilities

     (598     (914
                

Net cash provided by operating activities

     221,315        172,699   
                

Investing activities:

    

Capital expenditures on property and equipment

     (23,187     (17,872

Acquisitions of businesses, net of cash acquired

     (83,567     (62,985

Change in other assets

     (889     818   

Settlements of forward contracts

     (71     952   
                

Net cash used in investing activities

     (107,714     (79,087
                

Financing activities:

    

Proceeds from borrowings

     95,000        94,000   

Repayment of borrowings

     (43,270     (113,266

Excess tax benefit from stock-based compensation

     5,024        9,796   

Proceeds from the exercise of employee stock options

     618        2,044   

Repurchases of common stock

     (25,485     (9,522
                

Net cash provided by (used in) financing activities

     31,887        (16,948
                

Foreign exchange impact on cash balance

     (12,538     10,767   
                

Net increase in cash and cash equivalents

     132,950        87,431   

Cash and cash equivalents at the beginning of the period

     124,201        31,040   
                

Cash and cash equivalents at the end of the period

   $ 257,151      $ 118,471   
                

See accompanying notes.

 

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IHS INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands)

 

     Shares of
Class A
Common
Stock
   Class A
Common
Stock
   Additional
Paid-In
Capital
   Treasury
Stock
    Retained
Earnings
   Accumulated
Other
Comprehensive
Loss
    Total  

Balance at November 30, 2009 (Audited)

   63,284    $ 648    $ 472,791    $ (75,112   $ 719,182    $ (103,831   $ 1,013,678   

Stock-based award activity

   912      13      47,195      (25,485     —        —          21,723   

Excess tax benefit on vested shares

   —        —        3,464      —          —        —          3,464   

Net income attributable to IHS Inc.

   —        —        —        —          99,860      —          99,860   

Other comprehensive income:

                  

Foreign currency translation adjustments

   —        —        —        —          —        (29,366     (29,366
                        

Comprehensive income, net of tax

   —        —        —        —          —        —          70,494   
                                                  

Balance at August 31, 2010

   64,196    $ 661    $ 523,450    $ (100,597   $ 819,042    $ (133,197   $ 1,109,359   
                                                  

See accompanying notes.

 

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IHS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of Presentation and Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements of IHS Inc. (IHS, we, our, or us) have been prepared on substantially the same basis as our annual consolidated financial statements and should be read in conjunction with our annual report on Form 10-K for the year ended November 30, 2009. In our opinion, these condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented, and such adjustments are of a normal, recurring nature.

Historically, our business has had seasonal aspects. The third quarter of 2010 benefited from the inclusion of revenue generated by the once-every-three-year release of the Boiler Pressure Vessel Code (BPVC) engineering standard.

Certain prior-year balances have been reclassified to conform to the current-year presentation. In December 2007, the Financial Accounting Standards Board (FASB) issued new guidance related to noncontrolling interests in consolidated financial statements, which modifies reporting for noncontrolling interests (formerly minority interests) in consolidated financial statements. As required, we adopted the new guidance effective December 1, 2009, the beginning of our 2010 fiscal year. Upon adoption, we revised our prior period financial statements to comply with the retrospective application guidance for the presentation of our noncontrolling interests. The impact of the retrospective application of this guidance is as follows:

 

   

Consolidated Statements of Operations – reclassifies Minority interests to Net income attributable to noncontrolling interests;

 

   

Consolidated Statements of Cash Flows – reclassifies distributions of cumulative income to minority/noncontrolling interests from operating activities to financing activities and reclassifies purchases of minority/noncontrolling interests from investing activities to financing activities. Additionally, reclassifies Minority interests to Net income; and

 

   

Notes to the Consolidated Financial Statements – adjusts references to noncontrolling interests to reflect the new changes.

Recent Accounting Pronouncements

In October 2009, the FASB issued guidance on revenue recognition that will become effective for us beginning December 1, 2010, with earlier adoption permitted. Under the new guidance, when vendor specific objective evidence (VSOE) or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. We are currently evaluating the impact of the update on our financial position and results of operations and do not plan to early adopt the new guidance.

 

2. Business Combinations

Effective December 1, 2009, our accounting for business combinations follows the new accounting guidance for business combinations and noncontrolling interests. The adoption of this guidance did not have a significant impact on our financial position or results of operations.

On February 10, 2010, we acquired Emerging Energy Research, LLC (EER) for approximately $19 million. EER is a leading advisory firm whose mission is to help clients understand, leverage, and exploit the technological, regulatory and competitive trends in the global emerging energy sector. We recorded approximately $5 million of amortizing intangible assets and $14 million of goodwill as a result of the transaction.

On March 17, 2010, we acquired CSM Worldwide, Inc. for approximately $27 million. CSM Worldwide is a leading automotive market forecasting firm dedicated to providing automotive suppliers with market information and production, powertrain, and sales forecasting through trusted automotive market forecasting services, and strategic advisory solutions to the world’s top automotive manufacturers, suppliers, and financial organizations. We recorded approximately $8 million of amortizing intangible assets and $25 million of goodwill as a result of the transaction.

 

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On May 5, 2010, we acquired Quantitative Micro Software, LLC (QMS) for approximately $40 million. QMS is a worldwide leader in Windows-based econometric and forecasting software applications. We recorded approximately $12 million of amortizing intangible assets and $29 million of goodwill as a result of the transaction.

 

3. Commitments and Contingencies

We are a party to various legal proceedings that arise in the ordinary course of business. In the opinion of management, none of these actions, either individually or in the aggregate, is expected to have a material adverse affect on our financial condition, liquidity or results of operations.

 

4. Comprehensive Income

Our comprehensive income for the three and nine months ended August 31, 2010 and 2009, was as follows:

 

     Three Months Ended August 31,    Nine Months Ended August 31,  
     2010    2009    2010     2009  
     (In thousands)  

Net income

   $ 34,559    $ 34,706    $ 99,860      $ 95,908   

Other comprehensive income (loss):

          

Foreign currency translation adjustment

     13,882      4,692      (29,366     34,838   
                              

Total comprehensive income

     48,441      39,398      70,494        130,746   

Less: comprehensive income attributable to noncontrolling interest

     —        —        —          (2,144
                              

Comprehensive income attributable to IHS Inc.

   $ 48,441    $ 39,398    $ 70,494      $ 128,602   
                              

 

5. Discontinued Operations

Effective December 31, 2009, we sold our small non-core South African business for approximately $2 million with no gain or loss on sale. The sale of this business included a building and certain intellectual property. In exchange for the sale of these assets, we received two three-year notes receivable, one secured by a mortgage on the building and the second secured by a pledge on the shares of the South African company. Operating results of the discontinued operations for the three and nine months ended August 31, 2010 and 2009, respectively, were as follows:

 

     Three Months Ended August 31,     Nine Months Ended August 31,  
     2010     2009     2010     2009  
     (In thousands)  

Loss from discontinued operations

   $ (6   $ (41   $ (165   $ (295

Tax benefit

     2        9        35        32   
                                

Loss from discontinued operations, net

   $ (4   $ (32   $ (130   $ (263
                                

 

6. Restructuring Charge

We continually evaluate our business to identify opportunities to operate more efficiently. During the third quarter of 2010, we announced various plans to streamline operations and merge functions. As a result, we reduced our aggregate workforce by approximately 3% and consolidated several locations. The changes primarily affected the Americas and EMEA segments.

The restructuring charge that we recorded consists of direct and incremental costs associated with restructuring and related activities, including severance, outplacement and other employee related benefits; facility closures and relocations; and legal expenses associated with employee terminations incurred during the quarter. The entire $9.1 million restructuring charge was recorded during the third quarter of 2010. Approximately $7.7 million of the charge related to our Americas segment and $1.3 million pertained to our EMEA segment, with the remainder in APAC. The restructuring charge was comprised of the following (in thousands):

 

Employee severance and other termination benefits

   $ 8,024

Contract termination costs

     972

Other

     108
      

Total

   $ 9,104
      

 

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A reconciliation of the related accrued restructuring liability as of August 31, 2010 was as follows:

 

     Employee
Severance and
Other
Termination
Benefits
    Contract
Termination
Costs
    Other     Total  
     (In thousands)  

Beginning balance

   $ —        $ —        $ —        $ —     

Add: Restructuring costs incurred

     8,024        972        108        9,104   

Less: Amount paid during the quarter ended August 31, 2010

     (4,140     (375     (61     (4,576
                                

Balance at August 31, 2010

   $ 3,884      $ 597      $ 47      $ 4,528   
                                

 

7. Stock-based Compensation

Just under half of our nonvested shares have performance-based vesting provisions. We evaluate our performance-based vesting awards each quarter to identify any required adjustments to the expected vesting schedule, remaining unrecognized compensation cost, and stock-based compensation expense. Stock-based compensation expense for the three and nine months ended August 31, 2010 and 2009, respectively, was as follows:

 

     Three Months Ended August 31,    Nine Months Ended August 31,
     2010    2009    2010    2009
     (In thousands)

Cost of revenue

   $ 446    $ 450    $ 3,203    $ 1,910

Selling, general and administrative

     12,336      12,371      46,521      42,352
                           

Total stock-based compensation expense

   $ 12,782    $ 12,821    $ 49,724    $ 44,262
                           

Total income tax benefits recognized for stock-based compensation arrangements were as follows:

 

     Three Months Ended August 31,    Nine Months Ended August 31,
     2010    2009    2010    2009
     (In thousands)

Income tax benefits

   $ 4,444    $ 4,742    $ 18,113    $ 16,375

No stock-based compensation cost was capitalized during the three and nine months ended August 31, 2010 and 2009.

As of August 31, 2010, there was $83.6 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to nonvested stock-based awards that will be recognized over a weighted average period of approximately 1.4 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

Nonvested Shares. The following table summarizes changes in nonvested shares during the nine months ended August 31, 2010.

 

     Shares     Weighted-
Average Grant
Date Fair Value
     (in thousands)      

Balances, November 30, 2009

   2,674      $ 46.38

Granted

   1,641      $ 54.53

Vested

   (1,382   $ 44.71

Forfeited

   (246   $ 50.93
        

Balances, August 31, 2010

   2,687      $ 51.71
        

The total fair value of nonvested shares that vested during the nine months ended August 31, 2010 was $74.8 million based on the weighted-average fair value on the vesting date and $61.8 million based on the weighted-average fair value on the grant date.

 

8. Income Taxes

Our effective tax rate is estimated based upon the effective tax rate expected to be applicable for the full fiscal year.

Our effective tax rates for the three and nine months ended August 31, 2010 were 23.0% and 23.4%, respectively, compared to 24.6% and 23.3% for the same periods in 2009. The 2010 effective tax rates reflect the benefit from a tax election made during the second quarter of 2010. The 2009 rates reflect the impact from discrete period tax benefits recognized from the successful outcome of an appeal and a favorable ruling, both in EMEA.

 

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As of August 31, 2010, the total amount of unrecognized tax benefits was $1.5 million, of which $0.1 million related to interest. Unrecognized tax benefits decreased less than $0.1 million during the first nine months of 2010.

 

9. Debt

As of August 31, 2010, we were in compliance with all of the covenants in our revolving credit agreement and had $140 million of outstanding borrowings with a current annual interest rate of 0.8%. We also had approximately $0.4 million of outstanding letters of credit under the agreement as of August 31, 2010. See Note 14 for a description of additional amounts that we borrowed under the agreement after the end of the third quarter of 2010.

Our debt as of August 31, 2010 also included approximately $3.9 million of non-interest bearing notes that were issued to the sellers of Prime Publications Limited, a company that we purchased in 2008.

 

10. Pensions and Postretirement Benefits

Our defined-benefit plans consist of a non-contributory retirement plan for all of our U.S. employees with at least one year of service (U.S. RIP), a pension plan that covers certain employees of one of our United Kingdom-based subsidiaries (U.K. RIP), and a supplemental income plan (SIP) for certain US employees who earn over a federally stipulated amount. Our net periodic pension expense (income) for the three and nine months ended August 31, 2010 and 2009, respectively, was comprised of the following:

 

     Three Months Ended August 31, 2010     Three Months Ended August 31, 2009  
     U.S.
RIP
    U.K.
RIP
    SIP    Total     U.S.
RIP
    U.K.
RIP
    SIP    Total  
     (In thousands)  

Service costs incurred

   $ 2,004      $ 158      $ 53    $ 2,215      $ 1,728      $ 139      $ 58    $ 1,925   

Interest costs on projected benefit obligation

     2,993        443        104      3,540        3,230        419        123      3,772   

Expected return on plan assets

     (5,038     (533     —        (5,571     (5,227     (459     —        (5,686

Amortization of prior service cost

     (120     —          10      (110     (118     —          11      (107

Amortization of actuarial loss

     1,497        49        46      1,592        —          —          21      21   

Amortization of transitional obligation/(asset)

     —          —          10      10        (57     —          12      (45
                                                              

Net periodic pension expense (income)

   $ 1,336      $ 117      $ 223    $ 1,676      $ (444   $ 99      $ 225    $ (120
                                                              
     Nine Months Ended August 31, 2010     Nine Months Ended August 31, 2009  
     U.S.
RIP
    U.K.
RIP
    SIP    Total     U.S.
RIP
    U.K.
RIP
    SIP    Total  
     (In thousands)  

Service costs incurred

   $ 6,012      $ 477      $ 159    $ 6,648      $ 5,184      $ 387      $ 174    $ 5,745   

Interest costs on projected benefit obligation

     8,979        1,333        312      10,624        9,690        1,166        369      11,225   

Expected return on plan assets

     (15,114     (1,604     —        (16,718     (15,681     (1,278     —        (16,959

Amortization of prior service cost

     (358     —          32      (326     (354     —          33      (321

Amortization of actuarial loss

     4,490        148        137      4,775        —          —          63      63   

Amortization of transitional obligation/(asset)

     —          —          30      30        (171     —          38      (133
                                                              

Net periodic pension expense (income)

   $ 4,009      $ 354      $ 670    $ 5,033      $ (1,332   $ 275      $ 677    $ (380
                                                              

Our net periodic post-retirement income was comprised of the following for the three and nine months ended August 31, 2010 and 2009, respectively:

 

     Three Months Ended August 31,     Nine Months Ended August 31,  
     2010     2009     2010     2009  
     (In thousands)  

Service costs incurred

   $ 12      $ 14      $ 36      $ 42   

Interest costs

     140        158        420        474   

Amortization of prior service amounts

     (809     (807     (2,425     (2,421

Amortization of net actuarial loss

     172        76        515        228   
                                

Net periodic post-retirement income

   $ (485   $ (559   $ (1,454   $ (1,677
                                

 

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11. Earnings per Share

Basic earnings per share (EPS) is computed on the basis of the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common shares.

Weighted average common shares outstanding for the three and nine months ended August 31, 2010 and 2009, respectively, were calculated as follows:

 

     Three Months Ended August 31,    Nine Months Ended August 31,
     2010    2009    2010    2009
     (In thousands)

Weighted average common shares outstanding:

           

Shares used in basic EPS calculation

   64,122    63,160    63,881    62,998

Effect of dilutive securities:

           

Deferred stock units

   71    56    73    55

Restricted stock units

   463    770    562    750

Stock options

   64    38    58    34
                   

Shares used in diluted EPS calculation

   64,720    64,024    64,574    63,837
                   

Share Repurchase 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 to IHS in an amount equal to their statutory tax liability. IHS then pays the statutory tax on behalf of the employee. Additionally, our board of directors periodically approves additional buyback programs whereby IHS acquires shares in the open market to more fully offset the dilutive effect of our employee equity programs. The table below summarizes share repurchase activity for the three and nine months ended August 31, 2010.

 

     Three Months Ended August 31, 2010    Nine Months Ended August 31, 2010
     Shares
Repurchased
   Average
Price Paid
per Share
   Total Dollar
Value Paid
for Shares
   Shares
Repurchased
   Average Price
Paid per Share
   Total Dollar
Value Paid for
Shares
     (In thousands, except for share and per-share amounts)

Shares repurchased under tax withholding program

   49,811    $ 60.71    $ 3,024    470,832    $ 54.13    $ 25,485

Shares repurchased under open market buyback program

   —      $ —      $ —      —      $ —      $ —  
                             

Total share repurchases

   49,811    $ 60.71    $ 3,024    470,832    $ 54.13    $ 25,485
                             

 

12. Goodwill and Intangible Assets

The following table presents details of our intangible assets, other than goodwill, as of August 31, 2010 and November 30, 2009:

 

     As of August 31, 2010    As of November 30, 2009
     Gross    Accumulated
Amortization
    Net    Gross    Accumulated
Amortization
    Net
     (In thousands)

Intangible assets subject to amortization:

               

Information databases

   $ 195,048    $ (66,884   $ 128,164    $ 195,286    $ (51,427   $ 143,859

Customer relationships

     93,379      (25,720     67,659      84,209      (19,777     64,432

Non-compete agreements

     7,485      (5,694     1,791      5,856      (5,134     722

Developed computer software

     41,953      (12,490     29,463      33,986      (8,375     25,611

Other

     10,942      (9,163     1,779      13,075      (7,687     5,388
                                           

Total

   $ 348,807    $ (119,951   $ 228,856    $ 332,412    $ (92,400   $ 240,012

Intangible assets not subject to amortization:

               

Trademarks

     67,442      —          67,442      68,583      —          68,583

Perpetual licenses

     1,148      —          1,148      1,200      —          1,200
                                           

Total intangible assets

   $ 417,397    $ (119,951   $ 297,446    $ 402,195    $ (92,400   $ 309,795
                                           

 

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Intangible assets amortization expense was $9.6 million for the three months and $28.7 million for the nine months ended August 31, 2010, as compared with $9.1 million for the three months and $24.9 million for the nine months ended August 31, 2009. The following table presents the estimated future amortization expense related to intangible assets held as of August 31, 2010:

 

Year

   Amount
     (In thousands)

Remainder of 2010

   $ 9,170

2011

     36,985

2012

     34,963

2013

     30,702

2014

     28,643

Changes in our goodwill and intangible assets from November 30, 2009 to August 31, 2010 were primarily the result of the intangible assets recorded in connection with the acquisitions of EER, CSM Worldwide, and QMS. Net intangibles decreased primarily because of amortization expense and foreign currency translation.

 

13. Segment Information

We prepare our financial reports and analyze our business results within our three reportable geographic segments: Americas, EMEA and APAC. We evaluate segment performance primarily at the revenue and operating profit level for each of these three segments. We also evaluate revenues by transaction type and information domain.

Information about the operations of our three segments is set forth below. No single customer accounted for 10% or more of our total revenue for the three or nine months ended August 31, 2010 and 2009. There are no material inter-segment revenues for any period presented. Certain corporate transactions are not allocated to the reportable segments, including such items as stock-based compensation expense, net periodic pension and post-retirement expense (income), corporate-level impairments, and gain (loss) on sale of corporate assets.

 

     Americas    EMEA    APAC    Segment
Totals
   Shared
Services
    Consolidated
Total
     (In thousands)

Three Months Ended August 31, 2010

                

Revenue

   $ 170,359    $ 77,985    $ 23,715    $ 272,059    $ —        $ 272,059

Operating income

     46,812      16,360      7,974      71,146      (26,044     45,102

Depreciation and amortization

     10,042      3,796      24      13,862      544        14,406

Three Months Ended August 31, 2009

                

Revenue

   $ 147,682    $ 72,606    $ 19,197    $ 239,485    $ —        $ 239,485

Operating income

     48,539      14,393      6,261      69,193      (22,936     46,257

Depreciation and amortization

     7,755      4,461      27      12,243      528        12,771
     Americas    EMEA    APAC    Segment
Totals
   Shared
Services
    Consolidated
Total
     (In thousands)

Nine Months Ended August 31, 2010

                

Revenue

   $ 490,381    $ 223,783    $ 65,110    $ 779,274    $ —        $ 779,274

Operating income

     147,910      47,754      20,749      216,413      (85,242     131,171

Depreciation and amortization

     29,213      11,614      74      40,901      1,604        42,505

Nine Months Ended August 31, 2009

                

Revenue

   $ 444,668    $ 209,056    $ 56,448    $ 710,172    $ —        $ 710,172

Operating income

     140,223      41,204      17,771      199,198      (72,882     126,316

Depreciation and amortization

     23,161      10,956      78      34,195      1,836        36,031

Revenue by transaction type was as follows:

 

     Three Months Ended August 31,    Nine Months Ended August 31,
     2010    2009    2010    2009
     (In thousands)

Subscription revenue

   $ 209,245    $ 191,100    $ 610,453    $ 553,872

Consulting revenue

     16,330      12,702      43,300      41,313

Transaction revenue

     21,134      15,567      44,759      44,276

Other revenue

     25,350      20,116      80,762      70,711
                           

Total revenue

   $ 272,059    $ 239,485    $ 779,274    $ 710,172
                           

 

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Revenue by information domain was as follows:

 

     Three Months Ended August 31,    Nine Months Ended August 31,
     2010    2009    2010    2009
     (In thousands)

Energy revenue

   $ 117,391    $ 109,188    $ 350,440    $ 335,598

Product Lifecycle (PLC) revenue

     90,750      76,510      248,659      220,116

Security revenue

     28,891      27,526      81,243      75,681

Environment revenue

     13,315      6,319      37,913      20,768

Macroeconomic Forecasting and Intersection revenue

     21,712      19,942      61,019      58,009
                           

Total revenue

   $ 272,059    $ 239,485    $ 779,274    $ 710,172
                           

 

14. Subsequent Events

On September 7, 2010, we announced the acquisition of the chemical and energy portfolio assets of Access Intelligence LLC for approximately $80 million. On September 22, 2010, we announced the acquisitions of Atrion International Inc. and Syntex Management Systems, Inc. for a combined $80 million. Atrion is a company that combines regulatory expertise and industry-leading technology to streamline the generation, management, and distribution of hazardous materials communication documents and reports. Syntex is a leading provider of operational risk management software and services that helps companies ensure the health and safety of their workers while protecting the environment and managing costs. In September 2010, we borrowed an additional $70 million against our revolving credit agreement to help fund a portion of these acquisitions.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

In addition to historical information, this quarterly report on Form 10-Q contains forward-looking statements. These forward-looking statements generally are identified by the use of the words “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of these terms, and other similar expressions. Forward-looking statements are based on current expectations, assumptions, and projections that are subject to risks and uncertainties, which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is outlined under the “Risk Factors” section of our 2009 annual report on Form 10-K. We are under no obligation to update or publicly revise these forward-looking statements, whether as a result of new information, future events, or otherwise.

Management’s discussion and analysis is intended to help the reader understand the financial condition and results of operations for IHS Inc. The following discussion should be read in conjunction with our annual report on Form 10-K for the year ended November 30, 2009, the Condensed Consolidated Financial Statements and accompanying notes included in this quarterly report on Form 10-Q, and important information and disclosure that we routinely post to our website (www.ihs.com).

Executive Summary

Business Overview

IHS is a leading source of information and insight in pivotal areas that shape today’s business landscape: energy, economics, geopolitical risk, sustainability and supply chain management. Businesses and governments around the globe rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to make high-impact decisions and develop strategies. IHS has been in business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005. Headquartered in Englewood, Colorado, USA, IHS employs more than 4,500 people in more than 30 countries around the world. We source raw data and transform it into information through a series of transformational steps that reduce the uncertainty that is inherent in unrefined data and enhances its usefulness.

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. To achieve that goal, we have organized our business around our customers and the geographies in which they reside: Americas, EMEA, and APAC. This structure allows us to tailor and expand the solutions we offer to meet the unique needs of our customers both globally and in local markets. Approximately 50% of our revenue is transacted outside of the United States; however, only about 30% of our revenue is transacted in currencies other than the U.S. dollar. As a result, a strengthening U.S. dollar relative to certain currencies has a negative impact on our revenue; conversely, a weakening U.S. dollar has a positive impact on our revenue. However, the impact on operating income is diminished due to certain operating expenses denominated in currencies other than the U.S. dollar. Our largest foreign currency exposures, in order of magnitude, are the British Pound, the Canadian Dollar and the Euro.

We sell our offerings primarily through subscriptions, which tend to generate recurring revenue and cash flow for us. Our subscriptions are usually for one-year periods, and we have historically seen high renewal rates. Subscriptions are generally paid in full within one or two months after the subscription period commences; as a result, the timing of our cash flows generally precedes the recognition of revenue and income.

Historically, our business has had seasonal aspects. The third quarter of 2010 benefited from the inclusion of revenue generated by the once-every-three-year release of the Boiler Pressure Vessel Code (BPVC) engineering standard.

Key Performance Indicators

We believe that revenue growth, adjusted EBITDA (both in dollars and margin), and free cash flow are the key measures of our success. Adjusted EBITDA and free cash flow are non-GAAP financial measures (as defined by the rules of the Securities and Exchange Commission) that are further discussed in the following paragraphs.

Revenue growth. We review year-over-year revenue growth in our segments as a key measure of our success in addressing customer needs in each region of the world. We measure revenue growth in terms of organic, acquisitive, and foreign currency impacts. We define these components as follows:

 

   

Organic – We define organic revenue growth as total revenue growth due to all factors other than acquisitions and foreign currency. We drive this type of revenue growth through value realization (pricing), expanding wallet share of existing customers through up-selling and cross-selling efforts, securing new customer business, and through the sale of new offerings.

 

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Acquisitive – We define acquisition-related revenue as the revenue generated from acquired products and services from the date of acquisition to the first anniversary date of that acquisition. This type of growth comes as a result of our strategy to purchase, integrate, and leverage the value of assets we acquire.

 

   

Foreign currency – We define the foreign currency impact on revenue as the difference between current revenue at current exchange rates and current revenue at prior period exchange rates. Due to the significance of revenue transacted in foreign currencies, we measure the impact of foreign currency movements on revenue.

Non-GAAP measures. We use non-GAAP measures such as adjusted EBITDA and free cash flow in our operational and financial decision-making, believing that such measures allow us to focus on what we deem to be more reliable indicators of ongoing operating performance and our ability to generate cash flow from operations. We also believe that investors may find non-GAAP financial measures useful for the same reasons, although we caution readers that non-GAAP financial measures are not a substitute for GAAP financial measures or disclosures. None of these non-GAAP financial measures are recognized terms under GAAP and do not purport to be an alternative to net income or operating cash flow as an indicator of operating performance or any other GAAP measure. Throughout this section on management’s discussion and analysis and on our IHS website, we provide reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures.

Adjusted EBITDA. EBITDA and adjusted EBITDA are used by many of our research analysts, investment bankers and lenders to assess our operating performance. For example, a measure similar to EBITDA is required by the lenders under our revolving credit agreement. We define EBITDA as net income plus or minus net interest, plus provision for income taxes, depreciation and amortization. Our definition of adjusted EBITDA also excludes non-cash items such as stock-based compensation expense and net periodic pension and postretirement benefits expense, and gains and losses on sales of assets, restructuring charges, and other items that management does not utilize in assessing our operating performance.

Free Cash Flow. We define free cash flow as net cash provided by operating activities less capital expenditures.

Because not all companies use identical calculations, our presentation of non-GAAP financial measures may not be comparable to other similarly titled measures of other companies. However, these measures can still be useful in evaluating our performance against our peer companies because we believe the measures provide users with valuable insight into key components of GAAP financial disclosures. For example, a company with higher GAAP net income may not be as appealing to investors if its net income is more heavily comprised of gains on asset sales. Likewise, eliminating the effects of interest income and expense moderates the impact of a company’s capital structure on its performance.

Results of Operations

Total Revenue

Third quarter 2010 revenue increased 14% compared to the third quarter of 2009, and our year-to-date 2010 revenue increased 10% compared to 2009. The table below displays the percentage point change in revenue due to organic, acquisitive, and foreign currency factors when comparing the three and nine months ended August 31, 2010 to their respective periods in 2009.

 

     Three Month Change     Nine Month Change  

(All amounts represent percentage points)

   Organic     Acquisitive     Foreign
Currency
    Organic     Acquisitive     Foreign
Currency
 

Increase in total revenue

   10   5   (2 )%    5   4   1

The 10% organic revenue growth for the three months was driven primarily by a 6.5% increase in our subscription-based business, which is demonstrating steady sequential growth. We also benefited from growth within the non-subscription parts of the business, as well as the inclusion of the once-every-three-year release of the Boiler Pressure Vessel Code (BPVC) engineering standard. The nine-month organic revenue growth was likewise a reflection of the increasing strength of our subscription-based business.

The acquisition-related revenue growth was due to acquisitions we have made in the last twelve months, including the following:

 

   

LogTech Canada Ltd. (LogTech) and Environmental Support Solutions, Inc. (ESS) in the fourth quarter of 2009;

 

   

Emerging Energy Research (EER) in the first quarter of 2010; and

 

   

CSM Worldwide (CSM) and Quantitative Micro Software (QMS) in the second quarter of 2010.

 

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We evaluate revenue by segment in order to better understand our customers’ needs in the geographies where they reside. We also supplementally review revenue by transaction type and information domain. Understanding revenue by transaction type helps us and the reader identify changes related to recurring revenue and product margin, while revenue by information domain helps us and the reader understand performance on a product class basis.

Revenue by Segment (geography)

 

     Three Months Ended August 31,     Percentage
Change
    Nine Months Ended August 31,     Percentage
Change
 

(In thousands, except percentages)

   2010     2009       2010     2009    

Americas revenue

   $ 170,359      $ 147,682      15   $ 490,381      $ 444,668      10

As a percent of total revenue

     62     62       63     63  

EMEA revenue

     77,985        72,606      7     223,783        209,056      7

As a percent of total revenue

     29     30       29     29  

APAC revenue

     23,715        19,197      24     65,110        56,448      15

As a percent of total revenue

     9     8       8     8  
                                    

Total revenue

   $ 272,059      $ 239,485        $ 779,274      $ 710,172     
                                    

The percentage change in each geography segment is due to the factors described in the following table.

 

     Three Month Change     Nine Month Change  

(All amounts represent percentage points)

   Organic     Acquisitive     Foreign
Currency
    Organic     Acquisitive     Foreign
Currency
 

Americas revenue

   9   6   0   4   5   1

EMEA revenue

   11   2   (6 )%    6   1   0

APAC revenue

   12   12   (1 )%    6   8   2

For the three and nine months of 2010, we experienced organic revenue growth in all three geographies as a result of increased subscription-based revenue, as well as some growth in the non-subscription portion of the business and the inclusion of BPVC sales. Revenue from the BPVC release benefited organic revenue growth in all three geographies.

Revenue by Transaction Type (supplemental)

 

     Three Months Ended August 31,     Percentage
Change
    Nine Months Ended August 31,     Percentage
Change
 

(In thousands, except percentages)

   2010     2009       2010     2009    

Subscription revenue

   $ 209,245      $ 191,100      9   $ 610,453      $ 553,872      10

As a percent of total revenue

     77     80       78     78  

Consulting revenue

     16,330        12,702      29     43,300        41,313      5

As a percent of total revenue

     6     5       6     6  

Transaction revenue

     21,134        15,567      36     44,759        44,276      1

As a percent of total revenue

     8     7       6     6  

Other revenue

     25,350        20,116      26     80,762        70,711      14

As a percent of total revenue

     9     8       10     10  
                                    

Total revenue

   $ 272,059      $ 239,485        $ 779,274      $ 710,172     
                                    

Relative to the 9% subscription revenue growth for the third quarter, approximately 6.5% is due to organic growth, which continues the trend of sequentially stronger quarters for subscription revenue. This trend is especially important for us, as 77% of our revenue currently comes from our subscription base. Consulting revenue for the quarter increased 16% organically compared to the prior year, and we are encouraged by our trend of sequentially higher consulting revenue dollars. Transaction revenue for the quarter increased 46% organically compared to the prior year as a result of the BPVC sales in the third quarter of 2010. Other revenue increased 10% organically for the quarter.

 

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Revenue by Information Domain (supplemental)

 

     Three Months Ended August 31,     Percentage
Change
    Nine Months Ended August 31,     Percentage
Change
 

(In thousands, except percentages)

   2010     2009       2010     2009    

Energy revenue

   $ 117,391      $ 109,188      8   $ 350,440      $ 335,598      4

As a percent of total revenue

     43     46       45     47  

Product Lifecycle (PLC) revenue

     90,750        76,510      19     248,659        220,116      13

As a percent of total revenue

     33     32       32     31  

Security revenue

     28,891        27,526      5     81,243        75,681      7

As a percent of total revenue

     11     11       10     11  

Environment revenue

     13,315        6,319      111     37,913        20,768      83

As a percent of total revenue

     5     3       5     3  

Macroeconomic Forecasting and Intersection revenue

     21,712        19,942      9     61,019        58,009      5

As a percent of total revenue

     8     8       8     8  
                                    

Total revenue

   $ 272,059      $ 239,485        $ 779,274      $ 710,172     
                                    

Our energy domain revenue continues to be our most significant source of revenue, and grew during the three and nine months as we continue to see improving trends in our core Energy subscription offerings. Product Lifecycle revenue increases were driven by inclusion of the BPVC sales, as well as continuing solid organic growth. Double-digit organic growth in Security revenue resulted from continued strength in sales of our maritime offerings, and were partially offset by foreign currency effects. Environment’s quarterly and year-to-date increases were due to a combination of recent acquisitions and positive organic growth. The Macroeconomic Forecasting and Intersection revenue supports all of the other domains, and increased consistent with the increases we saw in the other domains.

Operating Expenses

We continuously evaluate our operating expenses and look for opportunities to improve margins and manage expenses. As part of a companywide review, we identified opportunities to operate more efficiently by streamlining operations and merging functions. At the beginning of our fiscal third quarter, this review led to the elimination of approximately three percent of our worldwide workforce. Another example of our efforts to continually evaluate and improve our existing processes is our Vanguard initiative. Through Vanguard, we plan to consolidate and standardize billing systems, general ledgers, sales-force automation capabilities and all supporting business processes. We are taking a phased implementation approach to Vanguard in order to ensure no disruption to our business or our customers.

The following table shows our operating expenses and the associated percentages of revenue.

 

     Three Months Ended August 31,     Percentage
Change
    Nine Months Ended August 31,     Percentage
Change
 

(In thousands, except percentages)

   2010     2009       2010     2009    

Operating expenses:

            

Cost of revenue

   $ 115,791      $ 101,707      14   $ 333,935      $ 302,284      10

As a percent of revenue

     43     42       43     43  

SG&A expense

   $ 86,203      $ 79,369      9   $ 259,914      $ 248,423      5

As a percent of revenue

     32     33       33     35  

Depreciation and amortization expense

   $ 14,406      $ 12,771      13   $ 42,505      $ 36,031      18

As a percent of revenue

     5     5       5     5  

Supplemental information:

            

SG&A expense excluding stock-based compensation

   $ 73,867      $ 66,998      10   $ 213,393      $ 206,071      4

As a percent of revenue

     27     28       27     29  

Cost of Revenue and Sales Margins

For the three and nine months ended August 31, 2010, compared to 2009, cost of revenue increased in line with the increase in revenue. Sales margins, which we define as revenue less cost of sales, divided by total sales, were also largely unchanged in total for the three and nine month periods. The following table shows the sales margin percentages and percentage point change by operating segment.

 

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     Three Months Ended August 31,     Percentage
Change
    Nine Months Ended August 31,     Percentage
Change
 

(Percentages)

   2010     2009       2010     2009    

Americas sales margin

   59   59   0   59   59   0

EMEA sales margin

   55   55   0   55   55   0

APAC sales margin

   62   62   0   61   62   (1 )% 

Total sales margin

   57   58   (1 )%    57   57   0

As we have been discussing in recent quarters, the rate of sales margin expansion has been slowing due to product mix changes, and we anticipate that this trend will likely continue in the near term.

Selling, General and Administrative (SG&A) Expense

We evaluate our SG&A expense excluding stock-based compensation expense. The improvements in this category, based on its percentage of our total revenue, for the three and nine months ended August 31, 2010, compared to 2009, demonstrate our continued focus on the cost structure of our business.

Depreciation and Amortization Expense

For the three and nine months ended August 31, 2010, compared to 2009, depreciation and amortization expense increased primarily due to the increase in depreciable and amortizable assets from acquisitions and capital expenditures.

Restructuring

Please refer to Note 6 to the Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q for a discussion of our third quarter 2010 restructuring activities. We incurred $9.1 million of restructuring charges in the third quarter, and we expect to realize an $8-10 million improvement annually to pre-tax income and adjusted EBITDA beginning in our fourth fiscal quarter of 2010 as a result of our actions.

Operating Income by Segment (geography)

 

     Three Months Ended August 31,     Percentage
Change
    Nine Months Ended August 31,     Percentage
Change
 

(In thousands, except percentages)

   2010     2009       2010     2009    

Americas operating income

   $ 46,812      $ 48,539      (4 )%    $ 147,910      $ 140,223      5

As a percent of segment revenue

     27     33       30     32  

EMEA operating income

     16,360        14,393      14     47,754        41,204      16

As a percent of segment revenue

     21     20       21     20  

APAC operating income

     7,974        6,261      27     20,749        17,771      17

As a percent of segment revenue

     34     33       32     31  

Shared services operating income

     (26,044     (22,936       (85,242     (72,882  
                                    

Total operating income

   $ 45,102      $ 46,257      (2 )%    $ 131,171      $ 126,316      4
                                    

As a percent of total revenue

     17     19       17     18  

The decrease in Americas operating income was primarily due to the third quarter 2010 restructuring charge, of which $7.7 million related to the Americas segment. The increase in operating income for the EMEA segment during the three and nine months of 2010 was primarily due to the high organic growth rate within revenue, the leveraging of the EMEA cost structure, and the positive benefit of recent acquisitions in the region. The EMEA increase was partially offset by the EMEA portion of the third quarter 2010 restructuring charge ($1.3 million).

Provision for Income Taxes

Our effective tax rates for the three and nine months ended August 31, 2010 were 23.0% and 23.4%, respectively, compared to 24.6% and 23.3% for the same periods in 2009. All of these rates were lower than what we would normally expect. The 2010 effective tax rates reflect the benefit from a tax election made during the second quarter of 2010. The 2009 rates reflect the impact from discrete period tax benefits recognized from the successful outcome of an appeal and a favorable ruling, both in EMEA. We currently expect our full year 2010 GAAP tax rate to be about 24%.

 

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Adjusted EBITDA (non-GAAP measure)

All of the reconciling items included in the following table are either (i) non-cash items (e.g., depreciation and amortization) or (ii) items that we do not consider to be useful in assessing our operating performance (e.g., income taxes, restructuring charges, and gain on sale of assets). In the case of the non-cash items, we believe that investors can better assess our operating performance if the measures are presented without such items because, unlike cash expenses, these adjustments do not affect our ability to generate free cash flow or invest in our business. For example, by eliminating depreciation and amortization from EBITDA, users can compare operating performance without regard to different accounting determinations such as useful life. In the case of the other items, we believe that investors can better assess operating performance if the measures are presented without these items because their financial impact does not reflect ongoing operating performance.

 

     Three Months Ended August 31,     Percentage
Change
    Nine Months Ended August 31,     Percentage
Change
 

(In thousands, except percentages)

   2010     2009       2010     2009    
     (Unaudited)  

Net income attributable to IHS Inc.

   $ 34,559      $ 34,706      0   $ 99,860      $ 93,764      7

Interest income

     (188     (219       (386     (782  

Interest expense

     413        416          1,073        1,677     

Provision for income taxes

     10,314        11,322          30,494        29,250     

Depreciation and amortization

     14,406        12,771          42,505        36,031     
                                    

EBITDA

   $ 59,504      $ 58,996      1   $ 173,546      $ 159,940      9

Stock-based compensation expense

     12,782        12,821          49,724        44,262     

Restructuring charges (credits)

     9,104        —            9,022        (416  

Non-cash net periodic pension and post-retirement expense (income)

     851        (1,002       2,555        (3,004  

Loss from discontinued operations, net

     4        32          130        263     
                                    

Adjusted EBITDA

   $ 82,245      $ 70,847      16   $ 234,977      $ 201,045      17
                                    

Our quarter and year-to-date adjusted EBITDA for 2010 increased primarily because of our improving organic revenue growth, the acquisitions we have made, our focus on costs, and the leverage in our business model.

Financial Condition

 

(In thousands, except percentages)

   As of August 31, 2010    As of November 30, 2009    Dollar change     Percent change  

Accounts receivable, net

   $ 189,455    $ 203,500    $ (14,045   (7 )% 

Accrued compensation

     31,604      44,196      (12,592   (28 )% 

Deferred subscription revenue

     351,740      319,163      32,577      10

We have historically experienced seasonal decreases in our accounts receivable balance in the second and third quarters, as we typically have the most subscription renewals in our first and fourth fiscal quarters. This trend continued in 2010. The change in accrued compensation is primarily due to the 2009 bonus payout made in early 2010. The increase in deferred subscription revenue was primarily attributable to organic growth, but also includes the effects of acquisition-related growth offset by foreign currency translation effects. The organic growth rate within deferred subscription revenue was 10% as of August 31, 2010. While this is a good leading indicator for us, we rely on it primarily as a directionally accurate indicator.

Liquidity and Capital Resources

As of August 31, 2010, we had cash and cash equivalents of $257 million and $144 million of debt. We have generated strong cash flows from operations over the last few years. On a trailing twelve month basis our conversion of Adjusted EBITDA to free cash flow was 80%. Because of our cash, debt, and cash flow positions, as well as the remaining availability of funds under our $385 million credit facility, we believe we will have sufficient cash to meet our working capital and capital expenditure needs.

Our future capital requirements will depend on many factors, including the level of future acquisitions, 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, changing technology, investments in our internal business applications 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 any possible future acquisitions; however, additional funds may not be available on terms acceptable to us or at all.

 

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Cash Flows

 

     Nine Months Ended August 31,              

(In thousands, except percentages)

   2010     2009     Dollar change     Percent change  

Net cash provided by operating activities

   $ 221,315      $ 172,699      $ 48,616      28

Net cash used in investing activities

     (107,714     (79,087     (28,627   36

Net cash provided by (used in) financing activities

     31,887        (16,948     48,835      288

The increase in net cash provided by operating activities was principally due to increased billings and collections in the first nine months of 2010, as evidenced by a lower accounts receivable balance and a higher deferred subscription revenue balance. Our subscription-based business model continues to be a cash flow generator that is aided by the following factors:

 

   

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.

The increase in net cash used in investing activities was principally due to increased acquisition activity in 2010 compared to 2009, as well as increased capital expenditures during 2010.

The increase in net cash provided by financing activities was principally due to a reduction in repayments on borrowings, partially offset by an increase in repurchases of our common stock through our share repurchase program used for statutory withholding requirements associated with the vesting of shares under our employee stock program.

Free Cash Flow (non-GAAP measure)

The following table reconciles our non-GAAP free cash flow measure to net cash provided by operating activities.

 

     Nine Months Ended August 31,             

(In thousands, except percentages)

   2010     2009     Dollar change    Percent change  

Net cash provided by operating activities

   $ 221,315      $ 172,699        

Capital expenditures on property and equipment

     (23,187     (17,872     
                     

Free cash flow

   $ 198,128      $ 154,827      $ 43,301    28
                     

As discussed previously, our free cash flow continues to be very healthy as a result of our strong base of subscription revenue and our growth in billings and collection trends.

Credit Facility and Other Debt

Please refer to Note 9 and Note 14 to the Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q for a discussion of the current status of our credit facility and other debt.

For the quarter and nine months ended August 31, 2010, we made additional borrowings against our revolving credit agreement in order to fund acquisitions and working capital requirements.

Share Repurchase Program

Please refer to Note 11 to the Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q for a discussion of our share repurchase programs.

Off-Balance Sheet Transactions

We have no off-balance sheet transactions.

Critical Accounting Policies

Our management makes a number of significant estimates, assumptions and judgments in the preparation of our financial statements. See “Management’s Discussion and Analysis and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for fiscal year 2009 for a discussion of the estimates and judgments necessary in our accounting for revenue recognition, valuation of long-lived and intangible assets and goodwill, income taxes, pension and post-retirement benefits, and stock-based compensation.

 

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Item 3. Quantitative and Qualitative Disclosure About Market Risk

For information regarding our exposure to certain market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for fiscal year 2009. There were no material changes to our market risk exposure during the first nine months of fiscal 2010.

 

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act are effective at a reasonable assurance level to ensure that information required to be disclosed in the reports required to be filed or submitted under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

(b) 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 Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.   OTHER INFORMATION

 

Item 1. Legal Proceedings

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.

 

Item 1A. Risk Factors

There have been no material changes to the risk factors associated with the business previously disclosed in Part I, Item 1A of our 2009 Annual Report on Form 10-K.

 

Item 6. Exhibits

 

  (a) Index of Exhibits

The following exhibits are filed as part of this report:

 

Exhibit
Number

 

Description

      31.1*     Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act.
      31.2*     Certification of the Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act.
       32*   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.
101.INS**   XBRL Instance Document
101.SCH**     XBRL Taxonomy Extension Schema Document
101.CAL**     XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**     XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**     XBRL Taxonomy Extension Label Linkbase Document
101.PRE**     XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed electronically herewith.
** XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or Prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

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SIGNATURE

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 September 24, 2010.

 

IHS INC.
By:  

/s/ Heather Matzke-Hamlin

  Name:   Heather Matzke-Hamlin
  Title:   Senior Vice President and Chief Accounting Officer

 

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