IHS Inc. - FORM 10-Q - September 29, 2015

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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, 2015

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 001-32511
 ___________________________________________________
IHS INC.
(Exact name of registrant as specified in its charter) 
 ___________________________________________________
Delaware
 
13-3769440
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
15 Inverness Way East
Englewood, CO 80112
(Address of Principal Executive Offices)
(303) 790-0600
(Registrant’s telephone number, including area code)
 ___________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    o  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
 
Large accelerated filer
 
x
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 Exchange Act).    o  Yes    x  No
As of August 31, 2015, there were 68,178,524 shares of our Class A Common Stock outstanding.


TABLE OF CONTENTS
 

Cautionary Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: “anticipate,” “intend,” “plan,” “goal,” “seek,” “aim,” “strive,” “believe,” “project,” “predict,” “estimate,” “expect,” “continue,” “strategy,” “future,” “likely,” “may,” “might,” “should,” “will,” the negative of these terms, and similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding: guidance and predictions relating to expected operating results, such as revenue growth and earnings; strategic actions, including acquisitions and dispositions, anticipated benefits from strategic actions, and our success in integrating acquired businesses; anticipated levels of capital expenditures in future periods; our belief that we have sufficient liquidity to fund our ongoing business operations; expectations of the effect on our financial condition of claims, litigation, environmental costs, contingent liabilities and governmental and regulatory investigations and proceedings; and our strategy for customer retention, growth, product development, market position, financial results, and reserves.

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following: economic and financial conditions, including volatility in interest and exchange rates; our ability to manage system failures, capacity constraints, and cyber risks; our ability to successfully manage risks associated with changes in demand for our products and services as well as changes in our targeted industries; our ability to develop new platforms to deliver our products and services, pricing, and other competitive pressures, and changes in laws and regulations governing our business; the extent to which we are successful in gaining new long-term relationships with customers or retaining existing ones and the level of service failures that could lead customers to use competitors' services; our ability to successfully identify and integrate acquisitions into our existing businesses and manage risks associated therewith; our ability to satisfy our debt obligations and our other ongoing business obligations; and the other factors described under the caption “Risk Factors” in our annual report on Form 10-K for the fiscal year ended November 30, 2014, along with our other filings with the U.S. Securities and Exchange Commission (SEC).

Any forward-looking statement made by us in this quarterly report on Form 10-Q is based only on information currently available to us and speaks only as of the date of this report. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments, or otherwise.

2


Website and Social Media Disclosure
 
We use our website (www.ihs.com) and corporate Twitter account (@IHS) as channels of distribution of company information. The information we post through these channels may be deemed material; therefore, investors should monitor these channels in addition to our press releases, SEC filings, and public conference calls and webcasts. None of the information provided on our website or through social media channels is incorporated into, or deemed to be a part of, this quarterly report on Form 10-Q.
 


3

PART I.   FINANCIAL INFORMATION
Item 1.
Financial Statements
IHS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per-share amounts)
 
As of
 
As of
 
August 31, 2015
 
November 30, 2014
 
(Unaudited)
 
(Audited)
Assets

 

Current assets:

 

Cash and cash equivalents
$
263,605

 
$
153,156

Accounts receivable, net
330,673

 
421,374

Income tax receivable
—

 
2,283

Deferred subscription costs
53,156

 
51,021

Deferred income taxes
78,027

 
81,780

Other
64,787

 
60,973

Total current assets
790,248

 
770,587

Non-current assets:

 

Property and equipment, net
322,802

 
301,419

Intangible assets, net
1,111,796

 
1,091,109

Goodwill
3,400,639

 
3,157,324

Other
24,114

 
27,991

Total non-current assets
4,859,351

 
4,577,843

Total assets
$
5,649,599

 
$
5,348,430

Liabilities and stockholders’ equity


 


Current liabilities:

 

Short-term debt
$
36,014

 
$
36,257

Accounts payable
57,713

 
52,245

Accrued compensation
88,978

 
101,875

Accrued royalties
23,984

 
37,346

Other accrued expenses
117,175

 
131,147

Income tax payable
31,733

 
—

Deferred revenue
607,073

 
596,187

Total current liabilities
962,670

 
955,057

Long-term debt
2,049,083

 
1,806,098

Accrued pension and postretirement liability
27,611

 
29,139

Deferred income taxes
355,932

 
347,419

Other liabilities
63,321

 
51,171

Commitments and contingencies

 

Stockholders’ equity:

 

Class A common stock, $0.01 par value per share, 160,000,000 shares authorized, 70,099,469 and 69,391,577 shares issued, and 68,178,524 and 68,372,176 shares outstanding at August 31, 2015 and November 30, 2014, respectively
701

 
694

Additional paid-in capital
1,014,093

 
956,381

Treasury stock, at cost: 1,920,945 and 1,019,401 shares at August 31, 2015 and November 30, 2014, respectively
(216,749
)
 
(105,873
)
Retained earnings
1,564,785

 
1,415,069

Accumulated other comprehensive loss
(171,848
)
 
(106,725
)
Total stockholders’ equity
2,190,982

 
2,159,546

Total liabilities and stockholders’ equity
$
5,649,599

 
$
5,348,430

See accompanying notes.

4

IHS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except for per-share amounts)
 
 
Three months ended August 31,
 
Nine months ended August 31,
 
2015
 
2014
 
2015
 
2014
Revenue
$
587,945

 
$
556,011

 
$
1,725,613

 
$
1,648,477

Operating expenses:
 
 
 
 
 
 
 
Cost of revenue
222,811

 
219,208

 
666,660

 
657,078

Selling, general and administrative
207,744

 
211,285

 
614,162

 
612,645

Depreciation and amortization
59,928

 
50,568

 
174,757

 
149,347

Restructuring charges
1,890

 
2,368

 
23,543

 
6,403

Acquisition-related costs
116

 
—

 
593

 
1,017

Net periodic pension and postretirement expense (income)
495

 
(1,328
)
 
1,488

 
4,342

Other expense, net
234

 
132

 
1,328

 
1,440

Total operating expenses
493,218

 
482,233

 
1,482,531

 
1,432,272

Operating income
94,727

 
73,778

 
243,082

 
216,205

Interest income
274

 
251

 
614

 
737

Interest expense
(18,125
)
 
(12,295
)
 
(52,573
)
 
(42,150
)
Non-operating expense, net
(17,851
)
 
(12,044
)
 
(51,959
)
 
(41,413
)
Income from continuing operations before income taxes
76,876

 
61,734

 
191,123

 
174,792

Provision for income taxes
(17,632
)
 
(15,217
)
 
(41,407
)
 
(40,361
)
Net income
$
59,244

 
$
46,517

 
$
149,716

 
$
134,431

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.87

 
$
0.68

 
$
2.18

 
$
1.97

Weighted average shares used in computing basic earnings per share
68,355

 
68,269

 
68,619

 
68,100

 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.86

 
$
0.68

 
$
2.16

 
$
1.95

Weighted average shares used in computing diluted earnings per share
68,820

 
68,911

 
69,170

 
68,810


See accompanying notes.


5



IHS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)

 
 
Three months ended August 31,
 
Nine months ended August 31,
 
 
2015
 
2014
 
2015
 
2014
Net income
 
$
59,244

 
$
46,517

 
$
149,716

 
$
134,431

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Unrealized gain (loss) on hedging activities (1)
 
(978
)
 
276

 
(3,932
)
 
(4,488
)
Net pension liability adjustment (2)
 
—

 
(885
)
 
—

 
(885
)
Foreign currency translation adjustment
 
(15,383
)
 
(3,557
)
 
(61,191
)
 
(473
)
Total other comprehensive loss
 
(16,361
)
 
(4,166
)
 
(65,123
)
 
(5,846
)
Comprehensive income
 
$
42,883

 
$
42,351

 
$
84,593

 
$
128,585

 
 
 
 
 
 
 
 
 
(1) Net of tax benefit (expense) of $638; $(180); $2,567; and $2,929 for the three and nine months ended August 31, 2015 and 2014, respectively.
(2) Net of tax benefit of $578 for the three and nine months ended August 31, 2014.


See accompanying notes.

6


IHS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
Nine months ended August 31,
 
2015
 
2014
Operating activities:

 

Net income
$
149,716

 
$
134,431

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

 

Depreciation and amortization
174,757

 
149,347

Stock-based compensation expense
101,169

 
127,723

Impairment of assets
1,243

 
—

Excess tax benefit from stock-based compensation
(5,880
)
 
(11,609
)
Net periodic pension and postretirement expense
1,488

 
4,342

Pension and postretirement contributions
(3,018
)
 
(2,080
)
Deferred income taxes
(21,264
)
 
8,337

Change in assets and liabilities:

 

Accounts receivable, net
101,289

 
93,234

Other current assets
(20,392
)
 
(11,490
)
Accounts payable
1,997

 
(9,682
)
Accrued expenses
(32,029
)
 
(2,878
)
Income tax
45,766

 
16,281

Deferred revenue
(1,344
)
 
43,465

Other liabilities
3,163

 
3,029

Net cash provided by operating activities
496,661

 
542,450

Investing activities:

 

Capital expenditures on property and equipment
(97,688
)
 
(83,314
)
Acquisitions of businesses, net of cash acquired
(369,908
)
 
(133,938
)
Intangible assets acquired
—

 
(714
)
Change in other assets
3,262

 
3,846

Settlements of forward contracts
838

 
1,345

Net cash used in investing activities
(463,496
)
 
(212,775
)
Financing activities:

 

Proceeds from borrowings
465,000

 
165,000

Repayment of borrowings
(222,258
)
 
(439,317
)
Excess tax benefit from stock-based compensation
5,880

 
11,609

Repurchases of common stock
(148,600
)
 
(51,282
)
Net cash provided by (used in) financing activities
100,022

 
(313,990
)
Foreign exchange impact on cash balance
(22,738
)
 
(12,239
)
Net increase in cash and cash equivalents
110,449

 
3,446

Cash and cash equivalents at the beginning of the period
153,156

 
258,367

Cash and cash equivalents at the end of the period
$
263,605

 
$
261,813


See accompanying notes.

7

IHS INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
 
 
Class A Common Stock
 
Additional
Paid-In
Capital
 
 
 
 
 
Accumulated Other
Comprehensive
Loss
 
 
 
Shares Outstanding
 
Amount
 
 
Treasury
Stock
 
Retained
Earnings
 
 
Total
Balance at November 30, 2014 (Audited)
68,372

 
$
694

 
$
956,381

 
$
(105,873
)
 
$
1,415,069

 
$
(106,725
)
 
$
2,159,546

Stock-based award activity
671

 
7

 
51,832

 
(4,865
)
 
—

 
—

 
46,974

Excess tax benefit on vested shares
—

 
—

 
5,880

 
—

 
—

 
—

 
5,880

Repurchases of common stock
(864
)
 
—

 
—

 
(106,011
)
 
—

 
—

 
(106,011
)
Net income
—

 
—

 
—

 
—

 
149,716

 
—

 
149,716

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
(65,123
)
 
(65,123
)
Balance at August 31, 2015
68,179

 
$
701

 
$
1,014,093

 
$
(216,749
)
 
$
1,564,785

 
$
(171,848
)
 
$
2,190,982

See accompanying notes.


8

IHS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.
Basis of Presentation and Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements of IHS Inc. (IHS, we, us, or our) have been prepared on substantially the same basis as our annual consolidated financial statements and should be read in conjunction with our annual report on Form 10-K for the year ended November 30, 2014. In our opinion, these condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented, and such adjustments are of a normal, recurring nature.

Our business has seasonal aspects. Our fourth quarter typically generates our highest quarterly levels of revenue and profit. Conversely, our first quarter generally has our lowest levels of revenue and profit. We also experience event-driven seasonality in our business; for instance, IHS Energy CERAWeek, an annual energy executive gathering, is held during our second quarter. Another example is the biennial release of the Boiler Pressure Vessel Code (BPVC) engineering standard, which generates revenue for us predominantly in the third quarter of every other year. We most recently recognized a benefit in connection with the BPVC release in the third quarter of 2015.

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The ASU is intended to reduce the frequency of disposals reported as discontinued operations by focusing on strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. The standard will be effective for us in the first quarter of our fiscal year 2016, although early adoption is permitted. We do not expect that the adoption of this ASU will have a significant impact on our consolidated financial statements other than changing the classification criteria and related disclosures for any potential future disposals.

In May 2014, the FASB issued ASU 2014-09, which establishes a comprehensive new revenue recognition model designed to depict the transfer of goods or services to a customer in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. The ASU allows for the use of either the full or modified retrospective transition method, and the standard will be effective for us in the first quarter of our fiscal year 2019, although early adoption is permitted. We are currently evaluating the impact of this new standard on our consolidated financial statements, as well as which transition method we intend to use.

In August 2014, the FASB issued ASU 2014-15, which requires that management evaluate the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. Disclosure is required if there is substantial doubt about the entity's ability to continue as a going concern. The standard will be effective for us in the fourth quarter of our fiscal year 2017, although early adoption is permitted. We do not expect that the adoption of this ASU will have a significant impact on our consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The standard will be effective for us in the first quarter of our fiscal 2017, although early adoption is permitted. We expect that the only impact of this ASU on our financial statements will be the change in balance sheet presentation of our debt issuance costs.

In April 2015, the FASB issued ASU 2015-05, which provides guidance about a customer's accounting for fees paid in cloud computing arrangements. If a cloud computing arrangement includes a software license, then the customer should account for the software license element consistent with the acquisition of other software licenses. If the arrangement does not contain a software license, the customer should account for the arrangement as a service contract. The standard will be effective for us in the first quarter of our fiscal year 2017, although early adoption is permitted. We anticipate that we will adopt this standard using the prospective transition method, and do not expect that the adoption of this ASU will have a significant impact on our consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The standard will be effective for us in the first quarter of our fiscal year 2017, although early adoption is

9

permitted. We do not expect that the adoption of this ASU will have a significant impact on our consolidated financial statements.

2.
Business Combinations

During the nine months ended August 31, 2015, we completed the following acquisitions, none of which were material either individually or in the aggregate:

JOC Group Inc. (JOC Group). On December 9, 2014, we acquired JOC Group, a global supplier of U.S. seaborne trade intelligence. We acquired JOC Group in support of our strategy to build integrated workflow solutions that target critical industry and government needs relating to global trade.

Infonetics Research, Inc. (Infonetics). On December 15, 2014, we acquired Infonetics, a provider of communications technology market intelligence. We acquired Infonetics to support our objective of providing customers with a global, end-to-end view of the information and communications technology supply chain.

Rushmore Associates Limited (Rushmore Reviews). On February 3, 2015, we acquired Rushmore Reviews, a service provider for drilling and completions solutions in the oil and gas industry. We acquired Rushmore Reviews in order to complement our existing set of well information assets and expand them globally.

Dataium. On March 25, 2015, we acquired Dataium, a U.S.-based company that provides business intelligence and analysis to the automotive industry. We acquired Dataium in order to enhance our automotive offerings with Dataium's compilation and analysis of online automotive shopping behavior and markets.

Root Wireless, Inc. (RootMetrics). On April 17, 2015, we acquired RootMetrics, a provider of mobile network analytics. We acquired RootMetrics in order to strengthen our position in telecommunications analytics and market intelligence, particularly related to the mobile user experience.

The aggregate purchase price for these acquisitions was approximately $370 million, net of cash acquired. We have preliminarily allocated $139 million of the aggregate purchase price to amortizing intangible assets and $271 million to goodwill.

3.
Intangible Assets

The following table presents details of our intangible assets, other than goodwill, as of August 31, 2015 and November 30, 2014 (in thousands): 
 
As of August 31, 2015
 
As of November 30, 2014
 
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
Intangible assets subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
Information databases
$
635,071

 
$
(248,002
)
 
$
387,069

 
$
607,655

 
$
(210,105
)
 
$
397,550

Customer relationships
596,027

 
(143,960
)
 
452,067

 
511,680

 
(116,138
)
 
395,542

Developed computer software
133,237

 
(72,778
)
 
60,459

 
138,940

 
(63,561
)
 
75,379

Trademarks
169,111

 
(33,595
)
 
135,516

 
163,739

 
(22,937
)
 
140,802

Other
28,521

 
(10,867
)
 
17,654

 
29,579

 
(8,844
)
 
20,735

Total
$
1,561,967

 
$
(509,202
)
 
$
1,052,765

 
$
1,451,593

 
$
(421,585
)
 
$
1,030,008

Intangible assets not subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
Trademarks
59,031

 
—

 
59,031

 
61,101

 
—

 
61,101

Total intangible assets
$
1,620,998

 
$
(509,202
)
 
$
1,111,796

 
$
1,512,694

 
$
(421,585
)
 
$
1,091,109



10

Intangible assets amortization expense was $37.7 million and $109.4 million for the three and nine months ended August 31, 2015, respectively, as compared to $33.2 million and $100.1 million for the three and nine months ended August 31, 2014. The following table presents the estimated future amortization expense related to intangible assets held as of August 31, 2015 (in thousands):
Year
 
Amount
Remainder of 2015
 
$
36,421

2016
 
$
139,226

2017
 
$
124,635

2018
 
$
109,731

2019
 
$
96,970

Thereafter
 
$
545,782

Goodwill, gross intangible assets, and net intangible assets were all subject to foreign currency translation effects. Changes in our goodwill and gross intangible assets from November 30, 2014 to August 31, 2015 were primarily the result of recent acquisitions, net of foreign currency effects. The change in net intangible assets was primarily due to current year amortization, partially offset by the acquisitions made in 2015.

4.
Debt

The following table summarizes total indebtedness as of August 31, 2015 and November 30, 2014 (in thousands):
 
 
August 31, 2015
 
November 30, 2014
2013 term loan
 
$
673,750

 
$
700,000

2014 revolving facility
 
655,000

 
385,000

5% senior notes due 2022
 
750,000

 
750,000

Capital leases
 
6,347

 
7,355

Total debt
 
$
2,085,097

 
$
1,842,355

Current portion
 
(36,014
)
 
(36,257
)
Total long-term debt
 
$
2,049,083

 
$
1,806,098


2013 term loan. In October 2014, we amended and restated our $700 million senior unsecured amortizing term loan agreement originally entered into in the third quarter of 2013 (2013 term loan). The 2013 term loan has a maturity date of October 2019. The interest rates for borrowings under the 2013 term loan are the applicable LIBOR plus a spread of 1.00 percent to 1.75 percent, depending upon our Leverage Ratio, which is defined as the ratio of Consolidated Funded Indebtedness to rolling four-quarter Consolidated Earnings Before Interest Expense, Taxes, Depreciation and Amortization (EBITDA), as such terms are defined in the term loan agreement.

2014 revolving facility. In October 2014, we entered into a $1.3 billion senior unsecured revolving credit agreement (2014 revolving facility). Commitments of $500 million are available for borrowing by certain of our foreign subsidiaries and $50 million is available for letters of credit. Subject to certain conditions, the 2014 revolving facility may be expanded by up to an aggregate of $500 million in additional commitments. Borrowings under the 2014 revolving facility mature in October 2019 and bear interest at the same rates and spreads as the 2013 term loan. A commitment fee on any unused balance is payable periodically and ranges from 0.13 percent to 0.30 percent based upon our Leverage Ratio. We had approximately $1.8 million of outstanding letters of credit under the 2014 revolving facility as of August 31, 2015, which reduces the available borrowing under the facility by an equivalent amount.

Both the 2013 term loan and the 2014 revolving facility contain certain financial and other covenants, including a maximum Leverage Ratio and a minimum Interest Coverage Ratio, as such terms are defined in the respective agreements. Both agreements allow for leverage up to 3.5x, with the ability to temporarily increase that leverage to 3.75x for two quarters.

5% senior notes due 2022 (5% Notes). In October 2014, we issued $750 million aggregate principal amount of senior unsecured notes due 2022 in an offering not subject to the registration requirements of the Securities Act of 1933, as amended (the Securities Act). In August 2015, we completed a registered exchange offer for the 5% Notes. The 5% Notes bear interest at a fixed rate of 5.000 percent and mature on November 1, 2022. Interest on the 5% Notes is due semiannually on May 1 and November 1 of each year, commencing May 1, 2015. We may redeem the 5% Notes in whole or in part at a redemption price

11

equal to 100% of the principal amount of the notes plus the Applicable Premium, as defined in the indenture governing the 5% Notes. Additionally, at the option of the holders of the notes, we may be required to purchase all or a portion of the notes upon occurrence of a Change of Control Triggering Event as defined in the indenture, at a price equal to 101 percent of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The indenture contains covenants that limit our ability to, among other things, incur or create liens and enter into sale and leaseback transactions. In addition, the indenture contains a covenant that limits our ability to consolidate or merge with another entity or to sell all or substantially all of our assets to another entity. The indenture contains customary default provisions.

As of August 31, 2015, we were in compliance with all of our debt covenants. We have classified short-term debt based on principal maturities and expected cash availability over the next 12 months. As of August 31, 2015, we had approximately $655 million of outstanding borrowings under the 2014 revolving facility at a current annual interest rate of 1.70 percent and approximately $674 million of outstanding borrowings under the 2013 term loan at a current weighted average annual interest rate of 2.51 percent, including the effect of the interest rate swaps described in Note 5.

The carrying value of our debt instruments other than our 5% Notes approximate their fair value because of the variable interest rates associated with those instruments. The fair value of the 5% Notes as of August 31, 2015 was approximately $763 million, and was measured using observable inputs in markets that are not active; consequently, we have classified the 5% Notes within Level 2 of the fair value hierarchy.

5.
Derivatives

Our business is exposed to various market risks, including interest rate and foreign currency risks. We utilize derivative instruments to help us manage these risks. We do not hold or issue derivatives for speculative purposes.

Interest Rate Swaps

To mitigate interest rate exposure on our outstanding floating rate debt, we utilize the following types of derivative instruments:

•
Interest rate derivative contracts that effectively swap $200 million of floating rate debt at a 2.80 percent weighted-average fixed interest rate, plus the applicable spread on our floating rate debt. We entered into these swap contracts in January 2014, and the contracts expire in May and August 2020.

•
Forward-starting interest rate derivative contracts that effectively swap $200 million of floating rate debt at a 2.93 percent weighted-average fixed interest rate, plus the applicable spread on our floating rate debt. We entered into these swap contracts in November 2013. The contracts take effect in November 2015, and the contracts expire in November 2020.

Because the terms of these swaps and the variable rate debt (as amended or extended over time) coincide, we do not expect any ineffectiveness. We have designated and accounted for these instruments as cash flow hedges, with changes in fair value being deferred in accumulated other comprehensive income/loss (AOCI) in our consolidated balance sheets.

Foreign Currency Forwards

To mitigate foreign currency exposure, we utilize the following derivative instruments:

•
Foreign currency forward contracts that hedge the foreign currency exposure on Euro-denominated receipts and British Pound-denominated expenses. Because the critical terms of the forward contracts and the forecasted cash flows coincide, there was no ineffectiveness associated with these contracts. We designated and accounted for these derivatives as cash flow hedges, with changes in fair value being deferred in AOCI in our consolidated balance sheets. There were no outstanding foreign currency forwards under these agreements as of August 31, 2015, and the notional amount of outstanding foreign currency forwards under these agreements as of November 30, 2014 was approximately $11.0 million.

•
Short-term foreign currency forward contracts that manage market risks associated with fluctuations in balances that are denominated in currencies other than the local functional currency. We account for these forward contracts at fair value and recognize the associated realized and unrealized gains and losses in other expense, net, since we have not designated these contracts as hedges for accounting purposes. The following

12

table summarizes the notional amounts of these outstanding foreign currency forward contracts as of August 31, 2015 and November 30, 2014 (in thousands):

 
 
August 31, 2015
 
November 30, 2014
Notional amount of currency pair:
 
 
 
 
Contracts to buy USD with CAD
 
$
47,318

 
$
51,194

Contracts to buy CAD with GBP
 
C$
79,000

 
C$
50,000

Contracts to buy USD with EUR
 
$
10,014

 
$
12,517

Contracts to buy CHF with USD
 
CHF
15,000

 
CHF
9,000

Contracts to buy GBP with EUR
 
£
4,270

 
£
4,774

Contracts to buy USD with GBP
 
$
21,000

 
$
48,000

Contracts to buy GBP with USD
 
£
63,883

 
£
—

Contracts to buy USD with JPY
 
$
—

 
$
8,778

Contracts to buy USD with KRW
 
$
—

 
$
10,000

Contracts to buy USD with CNY
 
$
3,865

 
$
—


Fair Value of Derivatives

Since our derivative instruments are not listed on an exchange, we have evaluated fair value by reference to similar transactions in active markets; consequently, we have classified all of our derivative instruments within Level 2 of the fair value measurement hierarchy. The following table shows the classification, location, and fair value of our derivative instruments as of August 31, 2015 and November 30, 2014 (in thousands):

 
 
Fair Value of Derivative Instruments
 
Location on consolidated balance sheets
 
 
August 31, 2015
 
November 30, 2014
 
Assets:
 
 
 
 
 
 
Derivatives designated as accounting hedges:
 
 
 
 
 
 
Foreign currency forwards
 
$
—

 
$
987

 
Other current assets
Derivatives not designated as accounting hedges:
 
 
 
 
 
 
Foreign currency forwards
 
1,218

 
1,005

 
Other current assets
Total
 
$
1,218

 
$
1,992

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Derivatives designated as accounting hedges:
 
 
 
 
 
 
Interest rate swaps
 
$
22,616

 
$
16,662

 
Other accrued expenses and other liabilities
Derivatives not designated as accounting hedges:
 
 
 
 
 
 
Foreign currency forwards
 
1,942

 
475

 
Other accrued expenses
Total
 
$
24,558

 
$
17,137

 
 

The net (gain) loss on foreign currency forwards that are not designated as hedging instruments for the three and nine months ended August 31, 2015 and 2014, respectively, was as follows (in thousands):

 
 
Amount of (gain) loss recognized in the consolidated statements of operations
 
 
 
 
Three months ended August 31,
 
Nine months ended August 31,
 
Location on consolidated statements of operations
 
 
2015
 
2014
 
2015
 
2014
 
Foreign currency forwards
 
$
4,077

 
$
(392
)
 
$
3,117

 
$
(1,323
)
 
Other expense, net


13

The following table provides information about the cumulative amount of unrecognized hedge losses recorded in AOCI, net of tax, as of August 31, 2015 and 2014, respectively, as well as the activity on our cash flow hedging instruments for the three and nine months ended August 31, 2015 and 2014, respectively (in thousands):
 
 
Three months ended August 31,
 
Nine months ended August 31,
 
 
2015
 
2014
 
2015
 
2014
Beginning balance
 
$
(12,436
)
 
$
(6,963
)
 
$
(9,482
)
 
$
(2,199
)
Amount of gain (loss) recognized in AOCI on derivative:
 
 
 
 
 
 
 
 
Interest rate swaps
 
(1,134
)
 
(366
)
 
(4,629
)
 
(5,645
)
Foreign currency forwards
 
55

 
212

 
879

 
41

Amount of loss (gain) reclassified from AOCI into income:
 
 
 
 
 
 
 
 
Interest rate swaps (1)
 
519

 
239

 
1,027

 
713

Foreign currency forwards (1)
 
(418
)
 
191

 
(1,209
)
 
403

Ending balance
 
$
(13,414
)
 
$
(6,687
)
 
$
(13,414
)
 
$
(6,687
)
 
 
 
 
 
 
 
 
 
(1) Pre-tax amounts reclassified from AOCI into income related to interest rate swaps are recorded in interest expense, and pre-tax amounts reclassified from AOCI into income related to foreign currency forwards are recorded in revenue.

The unrecognized gains relating to the foreign currency forwards are expected to be reclassified into revenue within the next 12 months, and approximately $8.3 million of the $22.6 million unrecognized pre-tax losses relating to the interest rate swaps are expected to be reclassified into interest expense within the next 12 months.
 
6.
Restructuring Charges

During the nine months ended August 31, 2015, we eliminated 329 positions as part of resource refinement and alignment across most of our business functions, and we incurred additional direct and incremental costs related to lease abandonments and further consolidation of our legacy data centers. We expect to continue to incur costs related to these and other similar activities in future periods, resulting in additional restructuring charges.

During the nine months ended August 31, 2015, we recorded approximately $23.5 million of restructuring charges for these activities. Of these charges, approximately $17.5 million was recorded in the Americas segment, $4.9 million was recorded in the EMEA segment, and $1.2 million was recorded in the APAC segment.

The following table provides a reconciliation of the restructuring liability as of August 31, 2015 (in thousands):
 
Employee
Severance and
Other
Termination
Benefits
 
Contract
Termination
Costs
 
Other
 
Total
Balance at November 30, 2014
$
2,967

 
$
17

 
$
140

 
$
3,124

Add: Restructuring costs incurred
22,093

 
611

 
1,381

 
24,085

Revision to prior estimates
(542
)
 
—

 
—

 
(542
)
Less: Amount paid
(22,406
)
 
(94
)
 
(1,413
)
 
(23,913
)
Balance at August 31, 2015
$
2,112

 
$
534

 
$
108

 
$
2,754


As of August 31, 2015, approximately $1.6 million of the remaining restructuring liability was in the Americas segment, approximately $0.9 million was in the EMEA segment, and approximately $0.3 million was in the APAC segment. The remaining $2.8 million restructuring liability is expected to be paid within the next 12 months.
 
7.
Acquisition-related Costs

During the nine months ended August 31, 2015, we recorded approximately $0.6 million of direct and incremental costs associated with acquisition-related activities, primarily legal and professional fees, most of which was recorded in the Americas segment.


14

The following table provides a reconciliation of the acquisition-related costs accrued liability as of August 31, 2015 (in thousands):
 
Employee
Severance and
Other
Termination
Benefits
 
Contract
Termination
Costs
 
Other
 
Total
Balance at November 30, 2014
$
586

 
$
115

 
$
417

 
$
1,118

Add: Costs incurred
—

 
166

 
463

 
629

Revision to prior estimates
(12
)
 
11

 
(35
)
 
(36
)
Less: Amount paid
(556
)
 
(139
)
 
(813
)
 
(1,508
)
Balance at August 31, 2015
$
18

 
$
153

 
$
32

 
$
203


As of August 31, 2015, the remaining acquisition-related costs accrued liability was primarily in the Americas segment. We expect that the remaining liability will be substantially paid within the next 12 months.

8.
Pensions and Postretirement Benefits

Our net periodic pension expense (income) for the three and nine months ended August 31, 2015 and 2014 was comprised of the following (in thousands): 
 
Three months ended August 31,
 
Nine months ended August 31,
 
2015
 
2014
 
2015
 
2014
Service costs incurred
$
496

 
$
1,516

 
$
1,485

 
$
7,609

Interest costs on projected benefit obligation
2,081

 
2,117

 
6,228

 
6,358

Expected return on plan assets
(2,183
)
 
(2,088
)
 
(6,528
)
 
(6,312
)
Amortization of prior service credit
—

 
(114
)
 
—

 
(790
)
Amortization of transitional obligation
—

 
11

 
—

 
33

Curtailment gain
—

 
(2,877
)
 
—

 
(2,877
)
Net periodic pension expense (income)
$
394

 
$
(1,435
)
 
$
1,185

 
$
4,021

Our net periodic postretirement expense was comprised of the following for the three and nine months ended August 31, 2015 and 2014 (in thousands):
 
Three months ended August 31,
 
Nine months ended August 31,
 
2015
 
2014
 
2015
 
2014
Service costs incurred
$
4

 
$
4

 
$
12

 
$
12

Interest costs
97

 
103

 
291

 
309

Net periodic postretirement expense
$
101

 
$
107

 
$
303

 
$
321


In September 2015, we made a $3.2 million contribution to our U.S. RIP in order to increase plan funding.

9.
Stock-based Compensation

Stock-based compensation expense for the three and nine months ended August 31, 2015 and 2014 was as follows (in thousands):
 
Three months ended August 31,
 
Nine months ended August 31,
 
2015
 
2014
 
2015
 
2014
Cost of revenue
$
2,114

 
$
2,906

 
$
4,972

 
$
6,277

Selling, general and administrative
31,221

 
44,821

 
96,197

 
121,446

Total stock-based compensation expense
$
33,335

 
$
47,727

 
$
101,169

 
$
127,723


15

Total income tax benefits recognized for stock-based compensation arrangements were as follows (in thousands):
 
Three months ended August 31,
 
Nine months ended August 31,
 
2015
 
2014
 
2015
 
2014
Income tax benefits
$
10,683

 
$
14,459

 
$
32,428

 
$
41,842

No stock-based compensation cost was capitalized during the three and nine months ended August 31, 2015 and 2014.
As of August 31, 2015, there was $125.4 million of unrecognized stock-based compensation cost, adjusted for estimated forfeitures, related to unvested stock-based awards that will be recognized over a weighted-average period of approximately 1.5 years. Total unrecognized stock-based compensation cost will be adjusted for future changes in estimated forfeitures and changes in estimated achievement of performance goals.
Restricted Stock Units (RSUs). The following table summarizes RSU activity during the nine months ended August 31, 2015:
 
Shares
 
Weighted-
Average Grant
Date Fair Value
 
(in thousands)
 
 
Balance at November 30, 2014
2,518

 
$
102.24

Granted
981

 
$
115.91

Vested
(1,043
)
 
$
115.61

Forfeited
(162
)
 
$
113.75

Balance at May 31, 2015
2,294

 
$
101.20

The total fair value of RSUs that vested during the nine months ended August 31, 2015 was $120.6 million.

10.
Income Taxes

Our effective tax rate is estimated based upon the effective tax rate expected to be applicable for the full year.
Our effective tax rate for the three and nine months ended August 31, 2015 was 22.9 percent and 21.7 percent, respectively, compared to 24.6 percent and 23.1 percent for the same periods of 2014, due to the benefit of certain discrete items.

11.
Commitments and Contingencies

From time to time, we are involved in litigation in the ordinary course of our business, including claims or contingencies that may arise related to matters occurring prior to our acquisition of businesses, such as the matter described below. At the present time, we can give no assurance as to the outcome of any pending litigation to which we are currently a party and we are unable to determine the ultimate resolution of or provide a reasonable estimate of the range of possible loss attributable to these matters or the effect they may have on us. However, we do not expect the outcome of such proceedings to have a material adverse effect on our results of operations or financial condition. We have and will continue to vigorously defend ourselves against these claims.

On April 23, 2013 (prior to our acquisition of R.L. Polk & Co.), our CARFAX subsidiary (CARFAX) was served with a complaint filed in the U.S. District Court for the Southern District of New York, purportedly on behalf of certain auto and light truck dealers. The complaint alleges, among other things that, in violation of antitrust laws, CARFAX entered into exclusive arrangements regarding the sale of CARFAX vehicle history reports with certain auto manufacturers and owners of two websites providing classified listings of used autos and light trucks. The complaint seeks three times the actual damages that a jury finds the plaintiffs have sustained, injunctive relief, costs and attorneys’ fees. On October 25, 2013, the plaintiffs served a second amended complaint with similar allegations purporting to name approximately 469 auto dealers as plaintiffs and counsel for plaintiffs have indicated that there may be additional claimants. There are significant legal and factual issues to be determined. We believe, however, that the probability that the outcome of the litigation will have a material adverse effect on our results of operations or financial condition is remote.


16

12.
Common Stock and Earnings per Share
Weighted-average shares of Class A common stock outstanding for the three and nine months ended August 31, 2015 and 2014 were calculated as follows (in thousands):
 
Three months ended August 31,
 
Nine months ended August 31,
 
2015
 
2014
 
2015
 
2014
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Shares used in basic EPS calculation
68,355

 
68,269

 
68,619

 
68,100

Effect of dilutive securities:
 
 
 
 
 
 
 
Restricted stock units
465

 
642

 
551

 
710

Shares used in diluted EPS calculation
68,820

 
68,911

 
69,170

 
68,810


Share Repurchase Programs
In January 2015, our board of directors authorized us to repurchase up to $100 million of our Class A common stock in open market purchases or through privately negotiated transactions in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the Exchange Act), subject to market conditions, applicable legal requirements and other relevant factors. We completed this program in June 2015, repurchasing 816,205 shares at an average price of approximately $122.52 per share.

In June 2015, our board of directors authorized us to repurchase up to $500 million of our Class A common stock in open market purchases or through privately negotiated transactions in compliance with Rule 10b-18 under the Exchange Act, subject to market conditions, applicable legal requirements and other relevant factors. The repurchase program does not obligate IHS to repurchase any set dollar amount or number of shares and is scheduled to expire on November 30, 2017, but may be suspended at any time at our discretion. The amount authorized under this program is inclusive of share repurchases of our Class A common stock surrendered by employees in an amount equal to the statutory tax liability associated with the vesting of their equity awards, for which we pay the statutory tax on behalf of the employee. During the third quarter of 2015, we repurchased 48,085 shares under this program for a total of approximately $6.0 million, at an average price of approximately $124.75 per share.

13.
Accumulated Other Comprehensive Income (Loss)

The following table summarizes the changes in AOCI by component (net of tax) for the nine months ended August 31, 2015 (in thousands):
 
 
Foreign currency translation
 
Net pension and OPEB liability
 
Unrealized losses on hedging activities
 
Total
Balance at November 30, 2014
 
$
(83,634
)
 
$
(13,609
)
 
$
(9,482
)
 
$
(106,725
)
Other comprehensive loss before reclassifications
 
(61,191
)
 
—

 
(3,750
)
 
(64,941
)
Reclassifications from AOCI to income
 
—

 
—

 
(182
)
 
(182
)
Balance at August 31, 2015
 
$
(144,825
)
 
$
(13,609
)
 
$
(13,414
)
 
$
(171,848
)

14.
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 product category.
Information about the operations of our three segments is set forth below. No single customer accounted for 10% or more of our total revenue for the three and nine months ended August 31, 2015 and 2014. There are no material inter-segment revenues for any period presented. Certain corporate transactions are not allocated to the reportable segments, including such items as stock-based compensation expense, net periodic pension and postretirement expense, corporate-level impairments, and gain (loss) on sale of corporate assets.

17

 
Americas
 
EMEA
 
APAC
 
Shared
Services
 
Consolidated
Total
 
(In thousands)
Three months ended August 31, 2015
 
 
 
 
 
 
 
 
Revenue
$
396,969

 
$
134,526

 
$
56,450

 
$
—

 
$
587,945

Operating income
$
92,703

 
$
38,170

 
$
15,153

 
$
(51,299
)
 
$
94,727

Depreciation and amortization
$
50,879

 
$
5,971

 
$
1,038

 
$
2,040

 
$
59,928

Three months ended August 31, 2014
 
 
 
 
 
 
 
 
Revenue
$
363,449

 
$
138,120

 
$
54,442

 
$
—

 
$
556,011

Operating income
$
90,178

 
$
35,166

 
$
10,587

 
$
(62,153
)
 
$
73,778

Depreciation and amortization
$
41,846

 
$
5,057

 
$
2,317

 
$
1,348

 
$
50,568

Nine months ended August 31, 2015
 
 
 
 
 
 
 
 
Revenue
$
1,164,931

 
$
398,203

 
$
162,479

 
$
—

 
$
1,725,613

Operating income
$
252,244

 
$
95,118

 
$
39,750

 
$
(144,030
)
 
$
243,082

Depreciation and amortization
$
146,381

 
$
18,505

 
$
3,951

 
$
5,920

 
$
174,757

Nine months ended August 31, 2014
 
 
 
 
 
 
 
 
Revenue
$
1,090,656

 
$
403,828

 
$
153,993

 
$
—

 
$
1,648,477

Operating income
$
261,375

 
$
94,226

 
$
33,587

 
$
(172,983
)
 
$
216,205

Depreciation and amortization
$
124,414

 
$
16,162

 
$
3,405

 
$
5,366

 
$
149,347

Revenue by transaction type was as follows (in thousands):
 
Three months ended August 31,
 
Nine months ended August 31,
 
2015
 
2014
 
2015
 
2014
Subscription revenue
$
466,600

 
$
432,128

 
$
1,374,088

 
$
1,275,848

Non-subscription revenue
121,345

 
123,883

 
351,525

 
372,629

Total revenue
$
587,945

 
$
556,011

 
$
1,725,613

 
$
1,648,477

Revenue by product category was as follows (in thousands):
 
Three months ended August 31,
 
Nine months ended August 31,
 
2015
 
2014
 
2015
 
2014
Resources revenue
$
217,713

 
$
229,107

 
$
669,955

 
$
690,477

Industrials revenue
228,227

 
185,267

 
645,353

 
538,336

Horizontal products revenue
142,005

 
141,637

 
410,305

 
419,664

Total revenue
$
587,945

 
$
556,011

 
$
1,725,613

 
$
1,648,477


15.
Supplemental Guarantor Information

Our 5% Notes are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by the following wholly owned subsidiaries of IHS Inc. (collectively, the Guarantor Subsidiaries):

•IHS Holding Inc.
•IHS Global Inc.
•R.L. Polk & Co.
•CARFAX, Inc.

The guarantees of our 5% Notes by the Guarantor Subsidiaries contain customary release provisions, which provide for the termination of such guarantees upon (i) the sale or other disposition (including by way of consolidation or merger) of the Guarantor Subsidiary or the sale or disposition of all or substantially all the assets of the Guarantor Subsidiary (in each case other than to the parent company (IHS Inc.) or another subsidiary of the parent company), (ii) the defeasance of the 5% Notes, (iii) at such time as the Guarantor Subsidiary ceases to be a guarantor of any significant indebtedness of the company, or (iv) if approved by the holders of the 5% Notes (except as provided in the indenture governing the 5% Notes).

18


The following supplemental tables present condensed consolidating financial information for the parent company, the Guarantor Subsidiaries on a combined basis, and the non-guarantor subsidiaries on a combined basis.

19



CONDENSED CONSOLIDATING BALANCE SHEET
AS OF AUGUST 31, 2015
(In thousands)
 
IHS Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
11,589

 
$
252,016

 
$
—

 
$
263,605

Accounts receivable, net
—

 
182,595

 
148,078

 
—

 
330,673

Income tax receivable
41,255

 
—

 
—

 
(41,255
)
 
—

Deferred subscription costs
—

 
52,941

 
31,820

 
(31,605
)
 
53,156

Deferred income taxes
55,841

 
28,585

 
5,783

 
(12,182
)
 
78,027

Intercompany receivables
539,653

 
81,434

 
181,748

 
(802,835
)
 
—

Other
1,855

 
43,137

 
19,795

 
—

 
64,787

Total current assets
638,604

 
400,281

 
639,240

 
(887,877
)
 
790,248

Non-current assets:
 
 
 
 
 
 
 
 
 
Property and equipment, net
—

 
269,507

 
53,295

 
—

 
322,802

Intangible assets, net
—

 
810,060

 
301,736

 
—

 
1,111,796

Goodwill
—

 
2,334,529

 
1,066,110

 
—

 
3,400,639

Investment in subsidiaries
2,336,071

 
1,759,565

 
—

 
(4,095,636
)
 
—

Intercompany notes receivable
—

 
—

 
724,039

 
(724,039
)
 
—

Other
10,498

 
12,234

 
1,382

 
—

 
24,114

Total non-current assets
2,346,569

 
5,185,895

 
2,146,562

 
(4,819,675
)
 
4,859,351

Total assets
$
2,985,173

 
$
5,586,176

 
$
2,785,802

 
$
(5,707,552
)
 
$
5,649,599

Liabilities and stockholders’ equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Short-term debt
$
—

 
$
36,014

 
$
—

 
$
—

 
$
36,014

Accounts payable
5

 
36,866

 
20,842

 
—

 
57,713

Accrued compensation
—

 
68,226

 
20,752

 
—

 
88,978

Accrued royalties
—

 
17,686

 
6,298

 
—

 
23,984

Other accrued expenses
12,800

 
72,005

 
32,370

 
—

 
117,175

Income tax payable
—

 
45,193

 
27,795

 
(41,255
)
 
31,733

Deferred revenue
—

 
350,723

 
287,955

 
(31,605
)
 
607,073

Intercompany payables
10,802

 
728,565

 
63,468

 
(802,835
)
 
—

Total current liabilities
23,607

 
1,355,278

 
459,480

 
(875,695
)
 
962,670

Long-term debt
750,000

 
1,299,083

 
—

 
—

 
2,049,083

Accrued pension and postretirement liability
19,795

 
8,658

 
(842
)
 
—

 
27,611

Deferred income taxes
—

 
283,897

 
84,217

 
(12,182
)
 
355,932

Intercompany notes payable
—

 
724,039

 
—

 
(724,039
)
 
—

Other liabilities
789

 
44,688

 
17,844

 
—

 
63,321

Total stockholders’ equity
2,190,982

 
1,870,533

 
2,225,103

 
(4,095,636
)
 
2,190,982

Total liabilities and stockholders’ equity
$
2,985,173

 
$
5,586,176

 
$
2,785,802

 
$
(5,707,552
)
 
$
5,649,599



20

CONDENSED CONSOLIDATING BALANCE SHEET
AS OF NOVEMBER 30, 2014
(In thousands)
 
IHS Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
32,314

 
$
120,842

 
$
—

 
$
153,156

Accounts receivable, net
—

 
212,711

 
208,663

 
—

 
421,374

Income tax receivable
18,000

 
16,384

 
—

 
(32,101
)
 
2,283

Deferred subscription costs
—

 
53,272

 
28,048

 
(30,299
)
 
51,021

Deferred income taxes
59,594

 
28,585

 
5,782

 
(12,181
)
 
81,780

Intercompany receivables
712,976

 
174,161

 
291,873

 
(1,179,010
)
 
—

Other
1,669

 
41,481

 
17,823

 
—

 
60,973

Total current assets
792,239

 
558,908

 
673,031

 
(1,253,591
)
 
770,587

Non-current assets:
 
 
 
 
 
 
 
 
 
Property and equipment, net
—

 
246,498

 
54,921

 
—

 
301,419

Intangible assets, net
—

 
826,152

 
264,957

 
—

 
1,091,109

Goodwill
—

 
2,258,393

 
898,931

 
—

 
3,157,324

Investment in subsidiaries
2,249,359

 
1,748,795

 
—

 
(3,998,154
)
 
—

Intercompany notes receivable
—

 
—

 
740,879

 
(740,879
)
 
—

Other
11,498

 
13,701

 
2,792

 
—

 
27,991

Total non-current assets
2,260,857

 
5,093,539

 
1,962,480

 
(4,739,033
)
 
4,577,843

Total assets
$
3,053,096

 
$
5,652,447

 
$
2,635,511

 
$
(5,992,624
)
 
$
5,348,430

Liabilities and stockholders’ equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Short-term debt
$
—

 
$
35,974

 
$
283

 
$
—

 
$
36,257

Accounts payable
93

 
31,083

 
21,069

 
—

 
52,245

Accrued compensation
—

 
57,651

 
44,224

 
—

 
101,875

Accrued royalties
—

 
24,590

 
12,756

 
—

 
37,346

Other accrued expenses
3,830

 
91,131

 
36,186

 
—

 
131,147

Income tax payable
—

 
—

 
32,101

 
(32,101
)
 
—

Deferred revenue
—

 
317,144

 
309,342

 
(30,299
)
 
596,187

Intercompany payables
119,268

 
1,056,664

 
3,078

 
(1,179,010
)
 
—

Total current liabilities
123,191

 
1,614,237

 
459,039

 
(1,241,410
)
 
955,057

Long-term debt
750,000

 
1,056,098

 
—

 
—

 
1,806,098

Accrued pension and postretirement liability
19,603

 
8,869

 
667

 
—

 
29,139

Deferred income taxes
—

 
311,796

 
47,804

 
(12,181
)
 
347,419

Intercompany notes payable
—

 
740,879

 
—

 
(740,879
)
 
—

Other liabilities
756

 
30,887

 
19,528

 
—

 
51,171

Total stockholders’ equity
2,159,546

 
1,889,681

 
2,108,473

 
(3,998,154
)
 
2,159,546

Total liabilities and stockholders’ equity
$
3,053,096

 
$
5,652,447

 
$
2,635,511

 
$
(5,992,624
)
 
$
5,348,430


21

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED AUGUST 31, 2015
(In thousands)


 
IHS Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Revenue
$
—

 
$
449,660

 
$
159,444

 
$
(21,159
)
 
$
587,945

Operating expenses:
 
 
 
 
 
 
 
 
 
Cost of revenue
—

 
222,391

 
21,579

 
(21,159
)
 
222,811

Selling, general and administrative
4,038

 
147,476

 
56,230

 
—

 
207,744

Depreciation and amortization
—

 
45,313

 
14,615

 
—

 
59,928

Restructuring charges
—

 
831

 
1,059

 
—

 
1,890

Acquisition-related costs
—

 
172

 
(56
)
 
—

 
116

Net periodic pension and postretirement expense (income)
7

 
566

 
(78
)
 
—

 
495

Other expense (income), net
—

 
(249
)
 
483

 
—

 
234

Total operating expenses
4,045

 
416,500

 
93,832

 
(21,159
)
 
493,218

Operating income (loss)
(4,045
)
 
33,160

 
65,612

 
—

 
94,727

Interest income
—

 
366

 
520

 
(612
)
 
274

Interest expense
(9,791
)
 
(8,946
)
 
—

 
612

 
(18,125
)
Non-operating expense, net
(9,791
)
 
(8,580
)
 
520

 
—

 
(17,851
)
Income (loss) from continuing operations before income taxes
(13,836
)
 
24,580

 
66,132

 
—

 
76,876

Benefit (provision) for income taxes
5,466

 
(9,709
)
 
(13,389
)
 
—

 
(17,632
)
Income (loss) from continuing operations
(8,370
)
 
14,871

 
52,743

 
—

 
59,244

Equity in net income (loss) of subsidiaries
67,614

 
(7,991
)
 
—

 
(59,623
)
 
—

Net income
$
59,244

 
$
6,880

 
$
52,743

 
$
(59,623
)
 
$
59,244



22

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED AUGUST 31, 2014
(In thousands)


 
IHS Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Revenue
$
—

 
$
378,031

 
$
182,011

 
$
(4,031
)
 
$
556,011

Operating expenses:
 
 
 
 
 
 
 
 
 
Cost of revenue
—

 
166,343

 
56,896

 
(4,031
)
 
219,208

Selling, general and administrative
3,394

 
150,425

 
57,466

 
—

 
211,285

Depreciation and amortization
—

 
43,408

 
7,160

 
—

 
50,568

Restructuring charges
—

 
1,337

 
1,031

 
—

 
2,368

Acquisition-related costs
—

 
—

 
—

 
—

 
—

Net periodic pension and postretirement income
(14
)
 
(1,314
)
 
—

 
—

 
(1,328
)
Other expense (income), net
—

 
(1,662
)
 
1,794

 
—

 
132

Total operating expenses
3,380

 
358,537

 
124,347

 
(4,031
)
 
482,233

Operating income (loss)
(3,380
)
 
19,494

 
57,664

 
—

 
73,778

Interest income
—

 
—

 
264

 
(13
)
 
251

Interest expense
—

 
(12,113
)
 
(195
)
 
13

 
(12,295
)
Non-operating income (expense), net
—

 
(12,113
)
 
69

 
—

 
(12,044
)
Income (loss) from continuing operations before income taxes
(3,380
)
 
7,381

 
57,733

 
—

 
61,734

Benefit (provision) for income taxes
1,335

 
(2,914
)
 
(13,638
)
 
—

 
(15,217
)
Income (loss) from continuing operations
(2,045
)
 
4,467

 
44,095

 
—

 
46,517

Equity in net income of subsidiaries
48,562

 
57,239

 
—

 
(105,801
)
 
—

Net income
$
46,517

 
$
61,706

 
$
44,095

 
$
(105,801
)
 
$
46,517



23

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED AUGUST 31, 2015
(In thousands)


 
IHS Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Revenue
$
—

 
$
1,238,424

 
$
537,294

 
$
(50,105
)
 
$
1,725,613

Operating expenses:
 
 
 
 
 
 
 
 
 
Cost of revenue
—

 
628,291

 
88,474

 
(50,105
)
 
666,660

Selling, general and administrative
10,710

 
407,800

 
195,652

 
—

 
614,162

Depreciation and amortization
—

 
125,717

 
49,040

 
—

 
174,757

Restructuring charges
—

 
14,589

 
8,954

 
—

 
23,543

Acquisition-related costs
—

 
522

 
71

 
—

 
593

Net periodic pension and postretirement expense (income)
22

 
1,697

 
(231
)
 
—

 
1,488

Other expense, net
—

 
112

 
1,216

 
—

 
1,328

Total operating expenses
10,732

 
1,178,728

 
343,176

 
(50,105
)
 
1,482,531

Operating income (loss)
(10,732
)
 
59,696

 
194,118

 
—

 
243,082

Interest income
10,349

 
446

 
1,569

 
(11,750
)
 
614

Interest expense
(29,393
)
 
(24,932
)
 
(9,998
)
 
11,750

 
(52,573
)
Non-operating expense, net
(19,044
)
 
(24,486
)
 
(8,429
)
 
—

 
(51,959
)
Income (loss) from continuing operations before income taxes
(29,776
)
 
35,210

 
185,689

 
—

 
191,123

Benefit (provision) for income taxes
11,762

 
(13,908
)
 
(39,261
)
 
—

 
(41,407
)
Income (loss) from continuing operations
(18,014
)
 
21,302

 
146,428

 
—

 
149,716

Equity in net income of subsidiaries
167,730

 
7,273

 
—

 
(175,003
)
 
—

Net income
$
149,716

 
$
28,575

 
$
146,428

 
$
(175,003
)
 
$
149,716



24

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED AUGUST 31, 2014
(In thousands)


 
IHS Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Revenue
$
—

 
$
1,139,857

 
$
539,240

 
$
(30,620
)
 
$
1,648,477

Operating expenses:
 
 
 
 
 
 
 
 
 
Cost of revenue
—

 
566,692

 
121,006

 
(30,620
)
 
657,078

Selling, general and administrative
9,235

 
385,177

 
218,233

 
—

 
612,645

Depreciation and amortization
—

 
112,233

 
37,114

 
—

 
149,347

Restructuring charges
—

 
3,159

 
3,244

 
—

 
6,403

Acquisition-related costs
—

 
466

 
551

 
—

 
1,017

Net periodic pension and postretirement expense
54

 
4,288

 
—

 
—

 
4,342

Other expense (income), net
—

 
(1,394
)
 
2,834

 
—

 
1,440

Total operating expenses
9,289

 
1,070,621

 
382,982

 
(30,620
)
 
1,432,272

Operating income (loss)
(9,289
)
 
69,236

 
156,258

 
—

 
216,205

Interest income
—

 
471

 
700

 
(434
)
 
737

Interest expense
—

 
(41,319
)
 
(1,265
)
 
434

 
(42,150
)
Non-operating expense, net
—

 
(40,848
)
 
(565
)
 
—

 
(41,413
)
Income (loss) from continuing operations before income taxes
(9,289
)
 
28,388

 
155,693

 
—

 
174,792

Benefit (provision) for income taxes
3,669

 
(11,213
)
 
(32,817
)
 
—

 
(40,361
)
Income (loss) from continuing operations
(5,620
)
 
17,175

 
122,876

 
—

 
134,431

Equity in net income of subsidiaries
140,051

 
73,239

 
—

 
(213,290
)
 
—

Net income
$
134,431

 
$
90,414

 
$
122,876

 
$
(213,290
)
 
$
134,431



25

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)

 
 
 
 
 
 
 
 
 
 
 
IHS Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Three months ended August 31, 2015
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
42,883

 
$
(9,118
)
 
$
36,997

 
$
(27,879
)
 
$
42,883

 
 
 
 
 
 
 
 
 
 
Three months ended August 31, 2014
 
 
 
 
 
 
 
 
 
Comprehensive income
$
42,351

 
$
57,139

 
$
40,938

 
$
(98,077
)
 
$
42,351

 
 
 
 
 
 
 
 
 
 
Nine months ended August 31, 2015
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
84,593

 
$
(36,218
)
 
$
84,907

 
$
(48,689
)
 
$
84,593

 
 
 
 
 
 
 
 
 
 
Nine months ended August 31, 2014
 
 
 
 
 
 
 
 
 
Comprehensive income
$
128,585

 
$
84,052

 
$
122,918

 
$
(206,970
)
 
$
128,585

 
 
 
 
 
 
 
 
 
 

26


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED AUGUST 31, 2015
(In thousands)

 
IHS Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Net cash provided by operating activities
$
—

 
$
285,931

 
$
210,730

 
$
—

 
$
496,661

Investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures on property and equipment
—

 
(85,879
)
 
(11,809
)
 
—

 
(97,688
)
Acquisitions of businesses, net of cash acquired
—

 
(324,393
)
 
(45,515
)
 
—

 
(369,908
)
Change in other assets
—

 
3,262

 
—

 
—

 
3,262

Settlements of forward contracts
—

 
—

 
838

 
—

 
838

Advances provided to other subsidiaries
—

 
—

 
(150
)
 
150

 
—

Investment in subsidiaries
—

 
(100
)
 
—

 
100

 
—

Net cash used in investing activities
—

 
(407,110
)
 
(56,636
)
 
250

 
(463,496
)
Financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from borrowings
—

 
465,000

 
—

 
—

 
465,000

Repayment of borrowings
—

 
(221,976
)
 
(282
)
 
—

 
(222,258
)
Excess tax benefit from stock-based compensation
—

 
5,880

 
—

 
—

 
5,880

Repurchases of common stock
—

 
(148,600
)
 
—

 
—

 
(148,600
)
Advances received from other subsidiaries
—

 
150

 
—

 
(150
)
 
—

Proceeds from issuance of intercompany equity
—

 
—

 
100

 
(100
)
 
—

Net cash provided by (used in) financing activities
—

 
100,454

 
(182
)
 
(250
)
 
100,022

Foreign exchange impact on cash balance
—

 
—

 
(22,738
)
 
—

 
(22,738
)
Net increase (decrease) in cash and cash equivalents
—

 
(20,725
)
 
131,174

 
—

 
110,449

Cash and cash equivalents at the beginning of the period
—

 
32,314

 
120,842

 
—

 
153,156

Cash and cash equivalents at the end of the period
$
—

 
$
11,589

 
$
252,016

 
$
—

 
$
263,605


27

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED AUGUST 31, 2014
(In thousands)

 
IHS Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Net cash provided by operating activities
$
—

 
$
318,991

 
$
223,459

 
$
—

 
$
542,450

Investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures on property and equipment
—

 
(72,329
)
 
(10,985
)
 
—

 
(83,314
)
Acquisitions of businesses, net of cash acquired
—

 
(130,319
)
 
(3,619
)
 
—

 
(133,938
)
Intangible assets acquired
—

 
—

 
(714
)
 
—

 
(714
)
Change in other assets
—

 
3,846

 
—

 
—

 
3,846

Settlements of forward contracts
—

 
—

 
1,345

 
—

 
1,345

Advances provided to other subsidiaries
—

 
—

 
(24,754
)
 
24,754

 
—

Investment in subsidiaries
—

 
(112
)
 
(50
)
 
162

 
—

Intercompany dividends received from subsidiaries
—

 
—

 
55,000

 
(55,000
)
 
—

Net cash provided by (used in) investing activities
—

 
(198,914
)
 
16,223

 
(30,084
)
 
(212,775
)
Financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from borrowings
—

 
165,000

 
—

 
—

 
165,000

Repayment of borrowings
—

 
(299,608
)
 
(139,709
)
 
—

 
(439,317
)
Excess tax benefit from stock-based compensation
—

 
11,609

 
—

 
—

 
11,609

Repurchases of common stock
—

 
(51,282
)
 
—

 
—

 
(51,282
)
Advances received from other subsidiaries
—

 
24,754

 
—

 
(24,754
)
 
—

Proceeds from issuance of intercompany equity
—

 
—

 
162

 
(162
)
 
—

Intercompany dividends paid to subsidiaries
—

 
—

 
(55,000
)
 
55,000

 
—

Net cash used in financing activities
—

 
(149,527
)
 
(194,547
)
 
30,084

 
(313,990
)
Foreign exchange impact on cash balance
—

 
—

 
(12,239
)
 
—

 
(12,239
)
Net increase (decrease) in cash and cash equivalents
—

 
(29,450
)
 
32,896

 
—

 
3,446

Cash and cash equivalents at the beginning of the period
—

 
56,207

 
202,160

 
—

 
258,367

Cash and cash equivalents at the end of the period
$
—

 
$
26,757

 
$
235,056

 
$
—

 
$
261,813



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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand the financial condition and results of operations of IHS Inc. (IHS, we, us, or our) as of and for the periods presented. The following discussion should be read in conjunction with our annual report on Form 10-K for the year ended November 30, 2014 and the Condensed Consolidated Financial Statements and accompanying notes included in this quarterly report on Form 10-Q. References to 2015 are to our fiscal year 2015, which began on December 1, 2014 and ends on November 30, 2015.

Executive Summary

Business Overview

We are a leading source of information, insight and analytics in critical areas that shape today's business landscape. Businesses and governments in more than 150 countries around the globe rely on our comprehensive content, expert independent analysis, and flexible delivery methods. Our aim is to embed our solutions within the entire spectrum of our customers’ organization, enabling executive-level capital deployment strategies and following decision-making activities throughout their organizations to front-line employees tasked with managing their company’s complex core daily operations. We have been in business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005.

28

Headquartered in Englewood, Colorado, USA, we are committed to sustainable, profitable growth and employ approximately 8,800 people in 32 countries around the world.

Inherent in all of our strategies is a firm commitment to put our customers first in everything that we do.  To best serve our customers and be as close to them as possible, we are organized by geographies into three business segments: Americas, EMEA, and APAC. Our integrated global organization is designed to make it easier for our customers to do business with us by providing a cohesive, consistent, and effective sales-and-marketing approach in each local region.

Subscriptions represented approximately 79 percent of our total revenue in the third quarter of 2015. Our subscription agreements are typically annual and non-cancellable for the term of the subscription and may contain provisions for minimum monthly payments. For subscription revenue, the timing of our cash flows generally precedes the recognition of revenue and income, and therefore, we typically have good revenue visibility.

Our business has seasonal aspects. Our fourth quarter typically generates our highest quarterly levels of revenue and profit. Conversely, our first quarter generally has our lowest levels of revenue and profit. We also experience event-driven seasonality in our business; for instance, IHS Energy CERAWeek, an annual energy executive gathering, is held during our second quarter. Another example is the biennial release of the Boiler Pressure Vessel Code (BPVC) engineering standard, which generates revenue for us predominantly in the third quarter of every other year. We most recently recognized a benefit in connection with the BPVC release in the third quarter of 2015.

In 2015, we continue to focus on our key strategic priorities:

•
Operational excellence. Operational excellence encompasses our efforts to continuously improve our internal systems and processes to help us become more efficient, as well as allow us to capture new growth and expand margins as we strive to fully leverage a common global infrastructure.

•
Commercial expansion. We expect to continue our pace of new and integrated product platform releases and offerings, and we continue to develop and release product platforms across the various workflows we service. We also continue to target high potential and new opportunity accounts through our sales initiatives.

Global Operations

Approximately 40 percent of our revenue is generated outside of the United States; however, only about 20 percent of our revenue is transacted in currencies other than the U.S. dollar. As a result, a strengthening U.S. dollar relative to certain currencies has historically resulted in a negative impact to our revenue; conversely, a weakening U.S. dollar has historically resulted in a positive impact to our revenue. However, the impact on operating income is diminished due to certain operating expenses denominated in currencies other than the U.S. dollar. Our largest foreign currency exposures are the British Pound, Canadian Dollar, and Euro.

Key Performance Indicators

We believe that revenue growth, Adjusted EBITDA (both in dollars and margin), and free cash flow are the key financial measures of our success. Adjusted EBITDA and free cash flow are financial measures that are not prepared in accordance with GAAP (non-GAAP).

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

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

•
Acquisitive – We define acquisitive revenue as the revenue generated from acquired products and services from the date of acquisition to the first anniversary date of that acquisition. This type of growth comes as a result of our strategy to purchase, integrate, and leverage the value of assets we acquire. We also include the impact of divestitures in this growth metric.


29

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

We also measure and report revenue by transaction type. Understanding revenue by transaction type helps us identify broad changes in product mix. We categorize our transaction type revenue into the following two categories:

•
Subscription revenue represents the significant majority of our revenue, and is comprised of subscriptions to our various information offerings and software maintenance.

•
Non-subscription revenue represents consulting (e.g., research and analysis, modeling, and forecasting), services, single-document product sales, software license sales and associated services, conferences and events, and advertising. Our non-subscription products and services are an important part of our business because they complement our subscription business in creating strong and comprehensive customer relationships.

We also measure and report revenue by product category, which helps us understand performance based on our capabilities within key vertical industries and horizontal workflows.

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

EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA are used by many of our investors, research analysts, investment bankers, and lenders to assess our operating performance. For example, a measure similar to Adjusted EBITDA is required by the lenders under our 2013 term loan and 2014 revolving facility. We define EBITDA as net income plus or minus net interest, plus provision for income taxes, depreciation, and amortization. Our definition of Adjusted EBITDA further excludes primarily non-cash items and other items that we do not consider to be useful in assessing our operating performance (e.g., stock-based compensation expense, restructuring charges, acquisition-related costs, asset impairment charges, gain or loss on sale of assets, gain or loss on debt extinguishment, pension mark-to-market and settlement expense, and income or loss from discontinued operations).

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

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

Results of Operations

Total Revenue

Third quarter 2015 revenue increased 6 percent compared to the third quarter of 2014, and our year-to-date 2015 revenue increased 5 percent compared to the same period in 2014. The table below displays the percentage change in revenue due to organic, acquisitive, and foreign currency factors when comparing the three and nine months ended August 31, 2015 to the three and nine months ended August 31, 2014.

30

 
Change in Total Revenue
(All amounts represent percentage points)
Organic
 
Acquisitive
 
Foreign
Currency
Third quarter 2015 vs. third quarter 2014
3
%
 
5
%
 
(2
)%
Year-to-date 2015 vs. year-to-date 2014
2
%
 
5
%
 
(2
)%

Organic growth for the three and nine months ended August 31, 2015, compared to the same periods of 2014, was primarily attributable to organic subscription growth, partially offset by negative non-subscription organic growth. Organic subscription growth was positive across the business, at 5 percent for the three and nine months ended August 31, 2015, compared to the same periods of 2014. We continue to benefit from strength in our Industrials product category, offset by lower Resources organic revenue growth from market pressure in our energy product offerings. Non-subscription organic revenue results were adversely impacted by lower consulting, software, and services revenue, mostly in our Resources product category, but were partially offset by the approximately $8 million positive sales impact associated with the biennial cycle of the BPVC, which was released in the third quarter of 2015.

Acquisitive revenue growth for the three and nine months ended August 31, 2015, compared to the same periods of 2014, was due to acquisitions we made in the last 12 months, including the following:

•Global Trade Information Services and PCI Acrylonitrile in the third quarter of 2014;
•DisplaySearch/Solarbuzz and PacWest Consulting Partners in the fourth quarter of 2014;
•JOC Group, Infonetics, and Rushmore Reviews in the first quarter of 2015; and
•Dataium and RootMetrics in the second quarter of 2015.

Foreign currency had an adverse effect on our year-over-year revenue growth as the U.S. dollar continued to maintain its strength against foreign currencies. We anticipate continued negative foreign currency impacts on year-over-year revenue comparisons through the remainder of 2015.

Revenue by Segment
 
Three months ended August 31,
 
Percentage
Change
 
Nine months ended August 31,
 
Percentage
Change
(In thousands, except percentages)
2015
 
2014
 
 
2015
 
2014
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Americas
$
396,969

 
$
363,449

 
9
 %
 
$
1,164,931

 
$
1,090,656

 
7
 %
EMEA
134,526

 
138,120

 
(3
)%
 
398,203

 
403,828

 
(1
)%
APAC
56,450

 
54,442

 
4
 %
 
162,479

 
153,993

 
6
 %
Total revenue
$
587,945

 
$
556,011

 
6
 %
 
$
1,725,613

 
$
1,648,477

 
5
 %
 
 
 
 
 
 
 
 
 
 
 
 
As a percent of total revenue:
 
 
 
 
 
 
 
 
 
 
 
Americas
68
%
 
65
%
 
 
 
68
%
 
66
%
 
 
EMEA
23
%
 
25
%
 
 
 
23
%
 
24
%
 
 
APAC
10
%
 
10
%
 
 
 
9
%
 
9
%
 
 

The percentage change in each geography segment is due to the factors described in the following table.
 
Increase (decrease) in revenue
 
Third quarter 2015 vs. third quarter 2014
 
Year-to-date 2015 vs. year-to-date 2014
(All amounts represent percentage points)
Organic
 
Acquisitive
 
Foreign
Currency
 
Organic
 
Acquisitive
 
Foreign
Currency
Americas
5
 %
 
6
%
 
(1
)%
 
3
 %
 
5
%
 
(1
)%
EMEA
(2
)%
 
4
%
 
(4
)%
 
—
 %
 
3
%
 
(4
)%
APAC
—
 %
 
6
%
 
(3
)%
 
1
 %
 
6
%
 
(2
)%

Americas revenue for the three and nine months ended August 31, 2015, compared to the same periods of 2014, experienced steady organic subscription growth at 6 percent for the three and nine months, benefiting primarily from strong Industrials performance, which offset lower Resources growth. Non-subscription organic growth was 2 percent for the three

31

months and negative 9 percent for the nine months. The positive third quarter result was primarily due to the biennial cycle of the BPVC release, while the results for the three and nine months have been adversely impacted by lower consulting, software, and services revenue, primarily in our Resources product category.

EMEA revenue for the three and nine months ended August 31, 2015, compared to the same periods of 2014, experienced organic subscription growth at 1 percent for the three months and 3 percent for the nine months, reflecting an overall slowing in the region. Non-subscription organic growth was negative 17 percent for the three months and negative 11 percent for the nine months, and was adversely impacted by lower software and consulting revenue.

APAC revenue for the three and nine months ended August 31, 2015, compared to the same periods of 2014, experienced organic subscription growth at 6 percent for the three and nine months, benefiting primarily from strong Industrials and Horizontal Products performance. Non-subscription organic growth was negative 14 percent for the three months and negative 13 percent for the nine months, and was adversely impacted primarily by lower software and consulting revenue in our Resources product category, partially offset by the increase in BPVC revenue in the Horizontal Products category.

Revenue by Transaction Type
 
Three months ended August 31,
 
Percent change
 
Nine months ended August 31,
 
Percent change
(in thousands, except percentages)
2015
 
2014
 
Total
 
Organic
 
2015
 
2014
 
Total
 
Organic
Subscription revenue
$
466,600

 
$
432,128

 
8
 %
 
5
 %
 
$
1,374,088

 
$
1,275,848

 
8
 %
 
5
 %
Non-subscription revenue
121,345

 
123,883

 
(2
)%
 
(4
)%
 
351,525

 
372,629

 
(6
)%
 
(10
)%
Total revenue
$
587,945

 
$
556,011

 
6
 %
 
3
 %
 
$
1,725,613

 
$
1,648,477

 
5
 %
 
2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As a percent of total revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subscription
79
%
 
78
%
 
 
 
 
 
80
%
 
77
%
 
 
 
 
Non-subscription
21
%
 
22
%
 
 
 
 
 
20
%
 
23
%
 
 
 
 

Subscription revenue grew at 5 percent organically for the three and nine months ended August 31, 2015, respectively, compared to the same periods of 2014, with Industrials subscription offerings providing the largest contribution to the growth and a smaller contribution from Resources due to energy market headwinds. We expect continued pressure on our Resources organic subscription growth rate, as lower current sales activity will be reflected in the earned revenue performance of future periods.
 
Non-subscription revenue decreased 4 percent and 10 percent organically for the three and nine months ended August 31, 2015, respectively, compared to the same periods of 2014, due to lower consulting, software, and services revenue, primarily in our Resources product category and energy market headwinds in our Horizontal Products category, partially offset by third quarter 2015 BPVC sales.

Revenue by Product Category
 
Three months ended August 31,
 
Percent change
 
Nine months ended August 31,
 
Percent change
(in thousands, except percentages)
2015
 
2014
 
Total
 
Organic
 
2015
 
2014
 
Total
 
Organic
Resources revenue
$
217,713

 
$
229,107

 
(5
)%
 
(4
)%
 
$
669,955

 
$
690,477

 
(3
)%
 
(3
)%
Industrials revenue
228,227

 
185,267

 
23
 %
 
11
 %
 
645,353

 
538,336

 
20
 %
 
8
 %
Horizontal products revenue
142,005

 
141,637

 
—
 %
 
4
 %
 
410,305

 
419,664

 
(2
)%
 
1
 %
Total revenue
$
587,945

 
$
556,011

 
6
 %
 
3
 %
 
$
1,725,613

 
$
1,648,477

 
5
 %
 
2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As a percent of total revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Resources
37
%
 
41
%
 
 
 


 
39
%
 
42
%
 
 
 
 
Industrials
39
%
 
33
%
 
 
 


 
37
%
 
33
%
 
 
 
 
Horizontal products
24
%
 
25
%
 
 
 


 
24
%
 
25
%
 
 
 
 


32

Total Resources revenue decreased 5 percent and 3 percent for the three and nine months ended August 31, 2015, respectively, compared to the same periods of 2014, and included organic subscription growth at 2 percent for the three months and 3 percent for the nine months. For the nine months ended August 31, 2015, on a constant currency basis, our Resources organic subscription base, which represents the annualized value of subscription contracts, has declined approximately $20 million, or about 3 percent, on a subscription base of approximately $750 million. We expect continued pressure on our Resources organic subscription growth rate, as lower current sales activity will be reflected in the earned revenue performance of future periods. Non-subscription organic growth was negative 30 percent for the three months and negative 26 percent for the nine months, and was adversely impacted by lower energy software, consulting, and services revenue.

Total Industrials revenue growth was 23 percent and 20 percent for the three and nine months ended August 31, 2015, respectively, compared to the same periods of 2014, and included organic subscription growth at 11 percent for the three months and 10 percent for the nine months, benefiting primarily from strong performance in our automotive product offerings. Non-subscription organic growth was 9 percent for the three months and 4 percent for the nine months, also due to strong performance in our automotive product offerings.

Total Horizontal Products revenue growth was flat and negative 2 percent for the three and nine months ended August 31, 2015, respectively, compared to the same periods of 2014, and included organic subscription growth at 2 percent for the three months and 3 percent for the nine months. Non-subscription organic growth was 8 percent for the three months and negative 7 percent for the nine months. The positive third quarter result was primarily due to the biennial cycle of the BPVC release, while the results for the three and nine months have been adversely impacted by energy market headwinds in our other Horizontal Products category offerings.

Operating Expenses

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)
2015
 
2014
 
 
2015
 
2014
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
$
222,811

 
$
219,208

 
2
 %
 
$
666,660

 
$
657,078

 
1
 %
 
 
 
 
 
 
 
 
 
 
 
 
SG&A expense
$
207,744

 
$
211,285

 
(2
)%
 
$
614,162

 
$
612,645

 
—
 %
Stock-based compensation expense allocated to SG&A
31,221

 
44,821

 
(30
)%
 
96,197

 
121,446

 
(21
)%
SG&A expense excluding stock-based compensation
$
176,523

 
$
166,464

 
6
 %
 
$
517,965

 
$
491,199

 
5
 %
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization expense
$
59,928

 
$
50,568

 
19
 %
 
$
174,757

 
$
149,347

 
17
 %
 
 
 
 
 
 
 
 
 
 
 
 
As a percent of revenue:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
38
%
 
39
%
 
 
 
39
%
 
40
%
 
 
SG&A expense
35
%
 
38
%
 
 
 
36
%
 
37
%
 
 
SG&A expense excluding stock-based compensation
30
%
 
30
%
 
 
 
30
%
 
30
%
 
 
Depreciation and amortization expense
10
%
 
9
%
 
 
 
10
%
 
9
%
 
 

Cost of Revenue

For the three and nine months ended August 31, 2015, cost of revenue decreased as a percentage of revenue, compared to the same periods in the prior year, primarily reflecting a product mix change towards our subscription offerings, which typically carry a higher margin. We are also focused on cost management across all areas. We continue to invest in areas such as our automotive and energy asset valuation offerings to drive future growth in the business.

33


Selling, General and Administrative (SG&A) Expense

We evaluate our SG&A expense after excluding stock-based compensation expense in order to focus on the ongoing operating performance of our SG&A activities. For the three and nine months ended August 31, 2015, compared to the same periods of 2014, SG&A expense excluding stock-based compensation as a percentage of revenue was largely unchanged.

For the three and nine months ended August 31, 2015, compared to the same periods of 2014, stock-based compensation expense decreased primarily due to the timing of changes in the number of shares expected to vest for performance-based awards in 2014, as well as the impact of forfeitures associated with restructuring activities. Please refer to Note 9 to the Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q for a discussion of stock-based compensation.

Depreciation and Amortization Expense

For the three and nine months ended August 31, 2015, compared to the same periods of 2014, depreciation and amortization expense increased primarily as a result of an increase in depreciable and amortizable assets from capital expenditures and acquisitions.

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 restructuring activities. During the nine months ended August 31, 2015, we incurred approximately $23.5 million of restructuring charges, primarily for severance related to resource refinement and alignment across most of our business functions, as well as other restructuring costs related to lease abandonments and further consolidation of our legacy data centers.

During the nine months ended August 31, 2015, we eliminated 329 positions related to these activities. We expect to continue to incur costs related to similar activities in future periods, resulting in additional restructuring charges.

Acquisition-related Costs

Please refer to Note 7 to the Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q for a discussion of costs associated with our integration and other acquisition-related activities. During the nine months ended August 31, 2015, we recorded approximately $0.6 million of direct and incremental costs associated with acquisition-related activities, primarily legal and professional fees.

Pension and Postretirement Expense

Net periodic pension and postretirement expense decreased from $4.3 million for the nine months ended August 31, 2014, to $1.5 million for the nine months ended August 31, 2015, primarily as a result of the pension freeze we implemented on our U.S. Retirement Income Plan (U.S. RIP) and Supplemental Income Plan (SIP) in July 2014. As a result of the pension freeze, we no longer have any expense related to participant service accruals, but continue to incur pension and postretirement expense related to plan administration, interest costs, and regulatory fees.

Our pension expense and associated pension liability as calculated under GAAP requires the use of assumptions about the estimated long-term rate of return on plan assets and the discount rate. Our pension investment strategy is designed to align the majority of our pension assets with the underlying pension liability and minimize volatility caused by changes in asset returns and discount rates. Our pension expense estimates are updated to reflect actual experience through the remeasurement process in the fourth quarter, or sooner if earlier remeasurements are required. For the nine months ended August 31, 2015, we used a 4.7 percent expected long-term rate of return on plan assets and a 4.2 percent discount rate for the U.S. RIP; the actual return on plan assets during that period was negative 1.9 percent. We anticipate that the difference between actual return on plan assets and expected return on plan assets will be largely mitigated by the offsetting change in the pension liability resulting from movements in the discount rate.


34

Operating Income by Segment (geography)
 
Three months ended August 31,
 
Percentage
Change
 
Nine months ended August 31,
 
Percentage
Change
(In thousands, except percentages)
2015
 
2014
 
 
2015
 
2014
 
Operating income:
 
 
 
 
 
 
 
 
 
 
 
Americas
$
92,703

 
$
90,178

 
3
%
 
$
252,244

 
$
261,375

 
(3
)%
EMEA
38,170

 
35,166

 
9
%
 
95,118

 
94,226

 
1
 %
APAC
15,153

 
10,587

 
43
%
 
39,750

 
33,587

 
18
 %
Shared services
(51,299
)
 
(62,153
)
 
 
 
(144,030
)
 
(172,983
)
 
 
Total operating income
$
94,727

 
$
73,778

 
28
%
 
$
243,082

 
$
216,205

 
12
 %
 
 
 
 
 
 
 
 
 
 
 
 
As a percent of segment revenue:
 
 
 
 
 
 
 
 
 
 
 
Americas
23
%
 
25
%
 
 
 
22
%
 
24
%
 
 
EMEA
28
%
 
25
%
 
 
 
24
%
 
23
%
 
 
APAC
27
%
 
19
%
 
 
 
24
%
 
22
%
 
 

For the three months ended August 31, 2015, compared to the same period of 2014, operating income as a percentage of revenue for the Americas segment decreased primarily due to higher depreciation and amortization expense associated with recent acquisitions and capital expenditures. A portion of the decrease was also attributable to the BPVC release cycle, as BPVC sales carry a lower margin than our typical product offerings. For the nine months ended August 31, 2015, compared to the same period of 2014, operating income as a percentage of revenue for the Americas segment decreased primarily because of severance expense associated with restructuring activities, as well as higher depreciation and amortization expense associated with recent acquisitions and capital expenditures. For the three and nine months ended August 31, 2015, compared to the same periods of 2014, the EMEA segment operating income as a percentage of revenue increased primarily as a result of product mix and lower selling expense, partially offset by increased restructuring expense and increased depreciation and amortization expense. For the three and nine months ended August 31, 2015, compared to the same periods of 2014, the APAC segment operating income as a percentage of revenue increased primarily as a result of product mix.

Provision for Income Taxes

Our effective tax rate for the three and nine months ended August 31, 2015 was 22.9 percent and 21.7 percent, respectively, compared to 24.6 percent and 23.1 percent for the same periods of 2014, due to the benefit of certain discrete items.

EBITDA and Adjusted EBITDA (non-GAAP measures)

The following table provides reconciliations of our net income to EBITDA and Adjusted EBITDA for the three and nine months ended August 31, 2015 and 2014.

35

 
Three months ended August 31,
 
Percentage
Change
 
Nine months ended August 31,
 
Percentage
Change
(In thousands, except percentages)
2015
 
2014
 
 
2015
 
2014
 
Net income
$
59,244

 
$
46,517

 
27
%
 
$
149,716

 
$
134,431

 
11
%
Interest income
(274
)
 
(251
)
 
 
 
(614
)
 
(737
)
 
 
Interest expense
18,125

 
12,295

 
 
 
52,573

 
42,150

 
 
Provision for income taxes
17,632

 
15,217

 
 
 
41,407

 
40,361

 
 
Depreciation
22,186

 
17,361

 
 
 
65,358

 
49,241

 
 
Amortization
37,742

 
33,207

 
 
 
109,399

 
100,106

 
 
EBITDA
$
154,655

 
$
124,346

 
24
%
 
$
417,839

 
$
365,552

 
14
%
Stock-based compensation expense
33,335

 
47,727

 
 
 
101,169

 
127,723

 
 
Restructuring charges
1,890

 
2,368

 
 
 
23,543

 
6,403

 
 
Acquisition-related costs
116

 
—

 
 
 
593

 
1,017

 
 
Impairment of assets
—

 
—

 
 
 
1,243

 
—

 
 
Loss on sale of assets
—

 
—

 
 
 
—

 
2,654

 
 
Adjusted EBITDA
$
189,996

 
$
174,441

 
9
%
 
$
544,387

 
$
503,349

 
8
%
Adjusted EBITDA as a percentage of revenue
32.3
%
 
31.4
%
 
 
 
31.5
%
 
30.5
%
 
 

Our Adjusted EBITDA for the three and nine months ended August 31, 2015, compared to the same periods of 2014, increased primarily because of recent acquisitions, as well as our continued focus on realization of operating efficiencies and cost containment.

Financial Condition
(In thousands, except percentages)
As of August 31, 2015
 
As of November 30, 2014
 
Dollar change
 
Percent change
Accounts receivable, net
$
330,673

 
$
421,374

 
$
(90,701
)
 
(22
)%
Accrued compensation
$
88,978

 
$
101,875

 
$
(12,897
)
 
(13
)%
Deferred revenue
$
607,073

 
$
596,187

 
$
10,886

 
2
 %

The decrease in accounts receivable is primarily due to the timing of billings and cash collections in 2015. We continue to experience the historical trend of seasonal decreases in our accounts receivable balances in the second and third fiscal quarters, as we typically have the most subscription renewals in our first and fourth fiscal quarters. The decrease in accrued compensation was primarily due to the 2014 bonus payout made in the first quarter of 2015 (partially offset by the current year accrual), as well as lower commission accruals. The increase in deferred revenue was primarily due to acquired deferred revenue balances, as well as foreign currency impacts.


36

Liquidity and Capital Resources

As of August 31, 2015, we had cash and cash equivalents of $264 million, of which approximately $246 million was held by our foreign subsidiaries. Cash held by our foreign subsidiaries could be subject to U.S. federal income tax if we decided to repatriate any of that cash to the U.S.; however, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not indicate a need to repatriate cash to fund our operations in jurisdictions outside of where they are held. We also had approximately $2.09 billion of debt as of August 31, 2015, comprised primarily of $750 million of senior notes, $655 million of revolving facility debt, and $674 million of term loan debt. As of August 31, 2015, we had approximately $645 million available under our revolving credit facility.

Due to our refinancing in the fourth quarter of 2014, a larger portion of our debt is now carried at a fixed interest rate, which has resulted in a higher average interest rate for overall debt and is the primary reason for the increase in interest expense for the three and nine months ended August 31, 2015, compared to the same periods of 2014. We expect that our increased debt, coupled with the higher effective interest rate, will result in higher interest expense in the near future.

In the first quarter of 2015, our board of directors authorized us to repurchase up to $100 million of outstanding stock. We completed this repurchase program in June 2015 and announced a new $500 million repurchase program for share repurchases through November 2017. This new repurchase program does not obligate us to repurchase any set dollar amount or number of shares. The amount authorized under the new program includes open market share repurchases, as well as repurchases for stock surrendered by employees in an amount equal to the statutory tax liability associated with the vesting of their equity awards, for which we pay the statutory tax on behalf of the employee. In the absence of larger scaled acquisition opportunities, we expect to accelerate repurchases under this repurchase program.

Because of our cash, debt, and cash flow positions, we believe we will have sufficient liquidity to meet our ongoing working capital and capital expenditure needs. Our future capital requirements will depend on many factors, including the number and magnitude of future acquisitions and share repurchase programs, the need for additional facilities or facility improvements, the timing and extent of spending to support product development efforts, information technology infrastructure investments, 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 financings; however, additional funds may not be available on terms acceptable to us. We expect that our capital expenditures for 2015 will be approximately 5 to 6 percent of revenue.

Cash Flows
 
Nine months ended August 31,
(In thousands, except percentages)
2015
 
2014
 
Dollar change
 
Percent change
Net cash provided by operating activities
$
496,661

 
$
542,450

 
$
(45,789
)
 
(8
)%
Net cash used in investing activities
$
(463,496
)
 
$
(212,775
)
 
$
(250,721
)
 
118
 %
Net cash provided by (used in) financing activities
$
100,022

 
$
(313,990
)
 
$
414,012

 
(132
)%

The decrease in net cash provided by operating activities was primarily due to increased cash payments associated with restructuring activities and interest expense in 2015, as well as less favorable working capital generation. Our subscription-based business model continues to be a cash-flow generator that is aided by positive working capital characteristics that do not generally require substantial working capital increases to support our growth.

The increase in net cash used in investing activities was principally due to the acquisitions of JOC Group, Infonetics, Rushmore Reviews, Dataium, and RootMetrics in the first half of 2015, as well as an increase in capital expenditures.

The increase in net cash provided by (used in) financing activities in 2015 was principally to help finance our acquisitions and share repurchase activities in the first nine months of 2015, versus our focus on reducing our debt leverage in 2014.

Free Cash Flow (non-GAAP measure)

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

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Nine months ended August 31,
(In thousands, except percentages)
2015
 
2014
 
Dollar change
 
Percent change
Net cash provided by operating activities
$
496,661

 
$
542,450

 
 
 
 
Capital expenditures on property and equipment
(97,688
)
 
(83,314
)
 
 
 
 
Free cash flow
$
398,973

 
$
459,136

 
$
(60,163
)
 
(13
)%

The decrease in free cash flow was due to moderating cash collections in 2015 compared to 2014, as well as an increase in capital expenditures from 5 percent of revenue in 2014 to 6 percent of revenue in 2015. Our free cash flow has historically been positive due to the robust cash generation attributes of our business model, and we expect that it will continue to be a significant source of funding for our business strategy of growth through organic and acquisitive means. On a trailing twelve-month basis, the ratio of free cash flow to Adjusted EBITDA was approximately 62 percent. Over the longer term, we anticipate that this ratio will continue to be in the mid-60s range.

Credit Facility and Other Debt

Please refer to Note 4 to the Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q for a discussion of the current status of our debt arrangements.

Share Repurchase Programs

Please refer to Note 12 to the Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q and to Part II, Item 2 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 of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our annual report on Form 10-K for fiscal year 2014 for a discussion of the estimates and judgments necessary in our accounting for revenue recognition, business combinations, goodwill and other intangible assets, income taxes, pension and postretirement benefits, and stock-based compensation.

Recent Accounting Pronouncements

Please refer to Note 1 to the Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q for a discussion of recent accounting pronouncements and their anticipated effect on our business.

Item 3.
Quantitative and Qualitative Disclosures 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 2014.

Borrowings under the 2014 revolving facility and 2013 term loan are subject to variable interest rates. We use interest rate swaps in order to fix a portion of our variable rate debt as part of our overall interest rate risk management strategy. As of August 31, 2015, we had approximately $1.329 billion of floating-rate debt at a 1.75 percent weighted-average interest rate, of which $200 million was subject to effective floating-to-fixed interest rate swaps. A hypothetical increase in interest rates of 100 basis points applied to our floating rate indebtedness would increase our annual interest expense by approximately $11 million ($13 million without giving effect to any of our interest rate swaps).


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Item 4.
Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of our management, including our 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 Exchange Act, as of the end of the period covered by this report. Based on that evaluation, our 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 SEC’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 quarterly report on 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

Please refer to Note 11 to the Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q for information about legal proceedings.

Item 1A. Risk Factors

There have been no material changes to the risk factors associated with our business previously disclosed in Part I of our annual report on Form 10-K for fiscal year 2014.


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Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides detail about our share repurchases during the three months ended August 31, 2015.
 
Total Number of Shares
Purchased
 
Average
Price Paid
per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (in thousands)
June 1 - June 30, 2015:
 
 
 
 
 
 
 
Share repurchase programs (1)
261,798

 
$
123.99

 
261,798

 
$
500,000

Employee transactions (2)
21,173

 
$
125.18

 
N/A

 
N/A

July 1 - July 31, 2015:
 
 
 
 
 
 
 
Share repurchase programs (1)
—

 
$
—

 
—

 
$
497,759

Employee transactions (2)
17,435

 
$
128.52

 
N/A

 
N/A

August 1 - August 31, 2015:
 
 
 
 
 
 
 
Share repurchase programs (1)
48,085

 
$
124.75

 
48,085

 
$
491,347

Employee transactions (2)
3,329

 
$
124.44

 
N/A

 
N/A

Total share repurchases
351,820

 
$
124.40

 
309,883

 
 

(1) In January 2015, our board of directors authorized us to repurchase up to $100 million of our Class A common stock. (the January 2015 Program). We completed this repurchase program in June 2015.

In June 2015, our board of directors authorized us to repurchase up to $500 million of our Class A common stock (the June 2015 Program). We may repurchase shares in open market purchases or through privately negotiated transactions in compliance with Rule 10b-18 of the Exchange Act, subject to market conditions, applicable legal requirements, and other relevant factors. The June 2015 Program does not obligate us to repurchase any set dollar amount or number of shares and is scheduled to expire on November 30, 2017, but may be suspended at any time at our discretion. The amount authorized under the June 2015 Program is inclusive of share repurchases of our Class A common stock surrendered by employees in an amount equal to the statutory tax liability associated with the vesting of their equity awards, for which we pay the statutory tax on behalf of the employee, as previously approved by our board of directors.

(2) Amounts represent common shares surrendered by employees in an amount equal to the statutory tax liability associated with the vesting of their equity awards. We then pay the statutory tax on behalf of the employee. Our board of directors approved this program in 2006 in an effort to reduce the dilutive effects of employee equity grants.

Item 5.    Other Information

Entry into Agreement with Executive Officer

On September 17, 2015, we announced that Brian Sweeney would be leaving his position as our Senior Vice President, Global Sales effective November 27, 2015.  In connection with his departure, IHS and Mr. Sweeney entered into an agreement on September 25, 2015 to define certain terms of Mr. Sweeney's resignation. The terms of the new agreement include provisions related to his continued service through November 27, 2015 (such date, or such earlier date as his employment may end by mutual agreement, being the Effective Termination Date). Provisions of the new agreement also include (i) payment, on the dates specified in the agreement, to Mr. Sweeney of $1,304,250, constituting 1.5 times base salary and “target” bonus,  (ii) acceleration of the vesting of 20,000 shares of IHS Class A common stock under previously granted performance-based equity awards, with such stock to be delivered following the Effective Termination Date, and (iii) an annual bonus payment for the fiscal year ended November 30, 2015 pursuant to the IHS Annual Incentive Plan (the AIP), based on actual achievement of the Company’s performance objectives for the fiscal year, to be paid on the date any such AIP payment is made to IHS executives generally.  In addition, in conjunction with the new agreement and as a condition to receipt of the consideration thereunder, Mr. Sweeney has executed a release that, along with other customary terms and conditions, releases IHS from any and all claims. The agreements are filed as Exhibit 10.1 and Exhibit 10.02 to this quarterly report on Form 10-Q.

Iran Threat Reduction and Syria Human Rights Act Disclosure
 
Under the Iran Threat Reduction and Syrian Human Rights Act of 2012, which added Section 13(r) of the Exchange Act, we are required to include certain disclosures in our periodic reports if we or any of our affiliates knowingly engaged in certain specified activities during the period covered by the report. Disclosure is generally required even if the transactions or dealings were conducted in compliance with applicable law and regulations. During the third quarter of 2014, we acquired Global Trade Information Services, a Virginia corporation (“GTIS”). GTIS publishes the Global Trade Atlas (the “GTA”), an online trade data system offering global merchandise trade statistics such as import and export data from official sources in more than 65 countries. Included in the GTA is certain trade data sourced from Iran for which GTIS pays an annual fee of approximately

40

$30,000. The procurement of this information is exempt from applicable economic sanctions laws and regulations as a funds transfer related to the exportation or importation of information and informational materials. Sales attributable to this Iranian trade data represented approximately $75,000 in gross revenue for GTIS in the third quarter of 2015 and would have represented approximately 0.01 percent of our third quarter 2015 consolidated revenues and gross profits. Subject to any changes in the exempt status of such activities, we intend to continue these business activities as permissible under applicable export control and economic sanctions laws and regulations.

Item 6.
Exhibits

(a)
Index of Exhibits

The following exhibits are filed as part of this report:
 
Exhibit
Number
 
Description
10.1
 
Agreement by and between IHS Inc. and Brian Sweeney, dated September 25, 2015.
 
 
 
10.2
 
Release Agreement by and between IHS Inc. and Brian Sweeney, dated September 25, 2015.
 
 
 
31.1
 
Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act
 
 
31.2
 
Certification of the Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the 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


41

SIGNATURE
Pursuant to the requirements 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 29, 2015.
 
IHS INC.
 
 
By:
 
/s/ Heather Matzke-Hamlin
 
 
Name:
 
Heather Matzke-Hamlin
 
 
Title:
 
Senior Vice President and Chief Accounting Officer


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