|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
The following Management’s Discussion and Analysis is intended to help the reader understand the financial condition and results of operations of IHS Inc. (IHS, we, us, or our). The following discussion should be read in conjunction with our annual report on Form 10-K for the year ended
November 30, 2013
, the Condensed Consolidated Financial Statements and accompanying notes included in this quarterly report on Form 10-Q, and important information and disclosure that we routinely post to our website (
www.ihs.com
). However, none of the information provided on our website is incorporated into, or deemed to be a part of, this quarterly report on Form 10-Q.
Executive Summary
Business Overview
We are a leading source of information, insight and analytics in critical areas that shape today's business landscape. Businesses and governments in more than 165 countries around the globe rely on our comprehensive content, expert independent analysis, and flexible delivery methods. Our aim is to embed our solutions within the entire spectrum of our
customers’ organization, enabling executive level capital deployment strategies and following decision-making activities throughout their organizations to front-line employees tasked with managing their company’s complex core daily operations. We have been in business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005. Headquartered in Englewood, Colorado, USA, we are committed to sustainable, profitable growth and employ approximately 8,000 people in 31 countries around the world.
Inherent in all of our strategies is a firm commitment to put our customers first in everything that we do. We believe that maintaining a disciplined “outside-in” approach will allow us to better serve our customers and our stockholders. To achieve that goal, we have organized our business around our customers and the geographies in which they reside: Americas, EMEA, and APAC. This structure allows us to tailor and expand the solutions we offer to meet the unique needs of our customers both globally and in local markets.
Subscriptions represented approximately
75 percent
of our total revenue in the second quarter of 2014. We sell our offerings primarily through subscriptions, which tend to generate recurring revenue and cash flow for us. Our subscription agreements are typically non-cancellable and may contain provisions for minimum monthly payments. For subscription revenue, the timing of our cash flows generally precedes the recognition of revenue and income.
Our business has seasonal aspects. Our fourth quarter typically generates our highest quarterly levels of revenue and profit. Conversely, our first quarter generally has our lowest levels of revenue and profit. We also experience event-driven seasonality in our business; for instance, IHS Energy CERAWeek, an annual energy executive gathering, is held during our second quarter. Another example is the biennial release (previously triennial release) of the Boiler Pressure Vessel Code (BPVC) engineering standard, which generates revenue for us predominantly in the third quarter of every other year. We most recently recognized a benefit in connection with the BPVC release in the third quarter of 2013.
In 2014, we are focused on the following two priorities:
|
|
•
|
Operational excellence.
We expect to capitalize on infrastructure investments to allow our employees to do their jobs more efficiently and effectively, including engaging and supporting new and existing customers. During the first six months of 2014, we made progress in core process and system enhancements that we believe will allow us to meet our goals.
|
|
|
•
|
Commercial expansion.
We expect to continue our pace of new and integrated product platform releases and offerings, and we are on track with the development and release of product platforms across the various workflows we service. We are also hiring new global account executives to drive new and expanded business in key geo-markets and are re-aligning our field and inside sales forces in an effort to maximize the customer experience.
|
Global Operations
Approximately 40 percent of our revenue is generated outside of the United States; however, just over 20 percent of our revenue is transacted in currencies other than the U.S. dollar. As a result, a strengthening U.S. dollar relative to certain currencies has historically resulted in a negative impact to our revenue; conversely, a weakening U.S. dollar has historically resulted in a positive impact to our revenue. However, the impact on operating income is diminished due to certain operating expenses denominated in currencies other than the U.S. dollar. Our largest foreign currency exposures, in order of magnitude, are the British Pound, Canadian Dollar, and Euro.
Key Performance Indicators
We believe that revenue growth, Adjusted EBITDA (both in dollars and margin), and free cash flow are the key financial measures of our success. Adjusted EBITDA and free cash flow are financial measures that are not prepared in accordance with GAAP (non-GAAP).
Revenue growth
. We review year-over-year revenue growth in our segments as a key measure of our success in addressing customer needs in each region of the world in which we operate. We measure revenue growth in terms of organic, acquisitive, and foreign currency impacts. We define these components as follows:
|
|
•
|
Organic
– We define organic revenue growth as total revenue growth from continuing operations for all factors other than acquisitions and foreign currency movements. We drive this type of revenue growth through value realization (pricing), expanding wallet share of existing customers through up-selling and cross-selling efforts, securing new customer business, and through the sale of new or enhanced product offerings.
|
|
|
•
|
Acquisitive
– We define acquisitive revenue as the revenue generated from acquired products and services from the date of acquisition to the first anniversary date of that acquisition. This type of growth comes as a result of our strategy to purchase, integrate, and leverage the value of assets we acquire. We also include the impact of divestitures in this growth metric.
|
|
|
•
|
Foreign currency
– We define the foreign currency impact on revenue as the difference between current revenue at current exchange rates and current revenue at the corresponding prior period exchange rates. Due to the significance of revenue transacted in foreign currencies, we measure the impact of foreign currency movements on revenue.
|
We also measure and report revenue by transaction type. Understanding revenue by transaction type helps us identify broad changes in product mix. We summarize our transaction type revenue into the following two categories:
|
|
•
|
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.
|
Non-GAAP measures
. We use non-GAAP financial measures such as EBITDA, Adjusted EBITDA, and free cash flow in our operational and financial decision-making, and believe that such measures allow us to focus on what we deem to be more reliable indicators of ongoing operating performance (Adjusted EBITDA) and our ability to generate cash flow from operations (free cash flow). We also believe that investors may find non-GAAP financial measures useful for the same reasons, although we caution readers that non-GAAP financial measures are not a substitute for GAAP financial measures or disclosures. None of these non-GAAP financial measures are recognized terms under GAAP and do not purport to be an alternative to net income or operating cash flow as an indicator of operating performance or any other GAAP measure. Throughout this section on management’s discussion and analysis and on our website (
www.ihs.com
), we provide reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures.
EBITDA and Adjusted EBITDA
. EBITDA and Adjusted EBITDA are used by many of our investors, research analysts, investment bankers, and lenders to assess our operating performance. For example, a measure similar to Adjusted EBITDA is required by the lenders under our term loans and revolving credit agreement. We define EBITDA as net income plus or minus net interest, plus provision for income taxes, depreciation, and amortization. Our definition of Adjusted EBITDA further excludes primarily non-cash items and other items that we do not consider to be useful in assessing our operating performance (e.g., stock-based compensation expense, restructuring charges, acquisition-related costs, asset impairment charges, gain or loss on sale of assets, pension mark-to-market and settlement expense, and income or loss from discontinued operations).
Free Cash Flow
. We define free cash flow as net cash provided by operating activities less capital expenditures.
Because not all companies use identical calculations, our presentation of non-GAAP financial measures may not be comparable to other similarly titled measures of other companies. However, these measures can still be useful in evaluating our performance against our peer companies because we believe the measures provide users with valuable insight into key components of GAAP financial disclosures. For example, a company with higher GAAP net income may not be as appealing to investors if its net income is more heavily comprised of gains on asset sales. Likewise, excluding the effects of interest income and expense moderates the impact of a company’s capital structure on its performance.
Results of Operations
Total Revenue
Second quarter 2014
revenue increased
36 percent
compared to the
second quarter
of
2013
, and our year-to-date
2014
revenue increased
36 percent
compared to the same period in
2013
. The table below displays the percentage change in revenue due to organic, acquisitive, and foreign currency factors when comparing the
three and six months ended
May 31, 2014
to the
three and six months ended
May 31, 2013
.
|
|
|
|
|
|
|
|
|
|
|
Increase in Total Revenue
|
(All amounts represent percentage points)
|
Organic
|
|
Acquisitive
|
|
Foreign
Currency
|
Second quarter 2014 vs. second quarter 2013
|
6
|
%
|
|
30
|
%
|
|
1
|
%
|
Year-to-date 2014 vs. year-to-date 2013
|
5
|
%
|
|
31
|
%
|
|
—
|
%
|
Organic growth for the
three and six months ended
May 31, 2014
, compared to the same periods of
2013
, was primarily attributable to subscription growth performance, with non-subscription growth also contributing positively to the increase.
Acquisitive revenue growth was primarily due to the Polk acquisition in the third quarter of 2013, as well as other acquisitions we have made in the last twelve months, including the following:
|
|
•
|
Fekete Associates in April 2013, and
|
|
|
•
|
PFC Energy in June 2013.
|
Foreign currency had a negligible impact on the year-over-year increase in revenue.
Revenue by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended May 31,
|
|
Percentage
Change
|
|
Six months ended May 31,
|
|
Percentage
Change
|
(In thousands, except percentages)
|
2014
|
|
2013
|
|
|
2014
|
|
2013
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
376,787
|
|
|
$
|
257,625
|
|
|
46
|
%
|
|
$
|
727,207
|
|
|
$
|
486,791
|
|
|
49
|
%
|
EMEA
|
138,847
|
|
|
112,944
|
|
|
23
|
%
|
|
265,708
|
|
|
222,415
|
|
|
19
|
%
|
APAC
|
52,374
|
|
|
47,574
|
|
|
10
|
%
|
|
99,551
|
|
|
91,462
|
|
|
9
|
%
|
Total revenue
|
$
|
568,008
|
|
|
$
|
418,143
|
|
|
36
|
%
|
|
$
|
1,092,466
|
|
|
$
|
800,668
|
|
|
36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
66
|
%
|
|
62
|
%
|
|
|
|
67
|
%
|
|
61
|
%
|
|
|
EMEA
|
24
|
%
|
|
27
|
%
|
|
|
|
24
|
%
|
|
28
|
%
|
|
|
APAC
|
9
|
%
|
|
11
|
%
|
|
|
|
9
|
%
|
|
11
|
%
|
|
|
The percentage change in each geography segment is due to the factors described in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in revenue
|
|
Second quarter 2014 vs. second quarter 2013
|
|
Year-to-date 2014 vs. year-to-date 2013
|
(All amounts represent percentage points)
|
Organic
|
|
Acquisitive
|
|
Foreign
Currency
|
|
Organic
|
|
Acquisitive
|
|
Foreign
Currency
|
Americas
|
4
|
%
|
|
43
|
%
|
|
(1
|
)%
|
|
5
|
%
|
|
45
|
%
|
|
(1
|
)%
|
EMEA
|
10
|
%
|
|
9
|
%
|
|
4
|
%
|
|
8
|
%
|
|
9
|
%
|
|
3
|
%
|
APAC
|
4
|
%
|
|
6
|
%
|
|
—
|
%
|
|
2
|
%
|
|
7
|
%
|
|
(1
|
)%
|
Americas revenue for the
three and six months ended
May 31, 2014
, compared to the same periods of
2013
, experienced organic growth in both subscriptions (at five percent for the three and six months) and non-subscriptions (at three percent for the three months and five percent for the six months). The subscription growth was primarily due to resources offerings, while the non-subscription growth was primarily due to conference events, along with consulting and services growth.
EMEA revenue for the
three and six months ended
May 31, 2014
, compared to the same periods of
2013
, had solid organic subscription growth at nine percent for the three months and eight percent for the six months. Non-subscription organic growth was also very positive, with 14 percent growth for the three months and seven percent growth for the six months. EMEA's performance is reflective of continued improvements in infrastructure, sales systems and process, and sales leadership and field sales teams.
APAC revenue for the
three and six months ended
May 31, 2014
, compared to the same periods of
2013
, experienced 10 percent total growth for the three months and nine percent total growth for the six months, led by strong organic subscription
revenue growth of 10 percent for the three months and seven percent for the six months. Non-subscription organic growth decreased 10 percent for the three months and nine percent for the six months, and was negatively impacted by quarterly variability in non-recurring offerings and a difficult comparison against the strong organic growth we experienced in APAC in the second quarter and six months of 2013.
Revenue by Transaction Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended May 31,
|
|
Percent change
|
|
Six months ended May 31,
|
|
Percent change
|
(in thousands, except percentages)
|
2014
|
|
2013
|
|
Total
|
|
Organic
|
|
2014
|
|
2013
|
|
Total
|
|
Organic
|
Subscription revenue
|
$
|
426,346
|
|
|
$
|
313,923
|
|
|
36
|
%
|
|
6
|
%
|
|
$
|
843,720
|
|
|
$
|
621,650
|
|
|
36
|
%
|
|
6
|
%
|
Non-subscription revenue
|
141,662
|
|
|
104,220
|
|
|
36
|
%
|
|
4
|
%
|
|
248,746
|
|
|
179,018
|
|
|
39
|
%
|
|
3
|
%
|
Total revenue
|
$
|
568,008
|
|
|
$
|
418,143
|
|
|
36
|
%
|
|
6
|
%
|
|
$
|
1,092,466
|
|
|
$
|
800,668
|
|
|
36
|
%
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription
|
75
|
%
|
|
75
|
%
|
|
|
|
|
|
77
|
%
|
|
78
|
%
|
|
|
|
|
Non-subscription
|
25
|
%
|
|
25
|
%
|
|
|
|
|
|
23
|
%
|
|
22
|
%
|
|
|
|
|
Subscription revenue grew at
six percent
organically for the
three and six months ended
May 31, 2014
, compared to the same periods of
2013
, with resources and product design subscription offerings providing the largest contributions to the growth. Subscriptions continue to provide a stable revenue stream that generates significant cash flow. Consistent with the prior year, our subscription revenue for the
three and six months ended
May 31, 2014
continues to represent approximately
75 percent
of our total revenue.
Non-subscription revenue increased
four percent
organically during the three months and
three percent
during the six months ended
May 31, 2014
, compared to the same periods of
2013
, driven primarily by strong consulting, services, and events performance.
Revenue by Product Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended May 31,
|
|
Percent change
|
|
Six months ended May 31,
|
|
Percent change
|
(in thousands, except percentages)
|
2014
|
|
2013
|
|
Total
|
|
Organic
|
|
2014
|
|
2013
|
|
Total
|
|
Organic
|
Resources revenue
|
$
|
243,876
|
|
|
$
|
221,680
|
|
|
10
|
%
|
|
6
|
%
|
|
$
|
461,370
|
|
|
$
|
412,196
|
|
|
12
|
%
|
|
7
|
%
|
Industrials revenue
|
181,346
|
|
|
64,359
|
|
|
182
|
%
|
|
1
|
%
|
|
353,069
|
|
|
126,848
|
|
|
178
|
%
|
|
—
|
%
|
Horizontal products revenue
|
142,786
|
|
|
132,104
|
|
|
8
|
%
|
|
7
|
%
|
|
278,027
|
|
|
261,624
|
|
|
6
|
%
|
|
6
|
%
|
Total revenue
|
$
|
568,008
|
|
|
$
|
418,143
|
|
|
36
|
%
|
|
6
|
%
|
|
$
|
1,092,466
|
|
|
$
|
800,668
|
|
|
36
|
%
|
|
5
|
%
|
Resources revenue for the
three and six months ended
May 31, 2014
, compared to the same periods of
2013
, experienced continued strength across the portfolio, benefiting from energy data offerings and solid consulting and events delivery.
Industrials revenue for the
three and six months ended
May 31, 2014
, compared to the same periods of
2013
, remained relatively flat on an organic growth basis, with solid growth in automotive offerings and improving trends in maritime offerings and technology sales. We continue to build and evolve our offerings in aerospace and defense.
Horizontal products revenue for the
three and six months ended
May 31, 2014
, compared to the same periods of
2013
, had organic growth improvements, led by Operational Excellence & Risk Management software sales and associated maintenance, as well as Economics & Country Risk offerings. Our Product Design offerings also showed modest positive growth.
Operating Expenses
The following table shows our operating expenses and the associated percentages of revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended May 31,
|
|
Percentage
Change
|
|
Six months ended May 31,
|
|
Percentage
Change
|
(In thousands, except percentages)
|
2014
|
|
2013
|
|
|
2014
|
|
2013
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
$
|
224,945
|
|
|
$
|
172,424
|
|
|
30
|
%
|
|
$
|
437,870
|
|
|
$
|
332,499
|
|
|
32
|
%
|
SG&A expense
|
$
|
203,644
|
|
|
$
|
143,609
|
|
|
42
|
%
|
|
$
|
401,360
|
|
|
$
|
285,838
|
|
|
40
|
%
|
Depreciation and amortization expense
|
$
|
49,142
|
|
|
$
|
32,877
|
|
|
49
|
%
|
|
$
|
98,779
|
|
|
$
|
65,356
|
|
|
51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
40
|
%
|
|
41
|
%
|
|
|
|
40
|
%
|
|
42
|
%
|
|
|
SG&A expense
|
36
|
%
|
|
34
|
%
|
|
|
|
37
|
%
|
|
36
|
%
|
|
|
Depreciation and amortization expense
|
9
|
%
|
|
8
|
%
|
|
|
|
9
|
%
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
SG&A expense, excluding stock-based compensation
|
$
|
169,123
|
|
|
$
|
114,104
|
|
|
48
|
%
|
|
$
|
324,735
|
|
|
$
|
218,253
|
|
|
49
|
%
|
As a percent of revenue
|
30
|
%
|
|
27
|
%
|
|
|
|
30
|
%
|
|
27
|
%
|
|
|
Cost of Revenue
For the
three and six months ended
May 31, 2014
, cost of revenue remained relatively consistent as a percentage of revenue, compared to the same periods in the prior year. We continue to invest in our people, platforms, processes, and products in support of our goals to increase top- and bottom-line growth.
Selling, General and Administrative (SG&A) Expense
We evaluate our SG&A expense after excluding stock-based compensation expense. For the
three and six months ended
May 31, 2014
, compared to the same periods of
2013
, SG&A expense as a percentage of revenue increased primarily due to recent acquisitions and increased compensation expense.
For the
three and six months ended
May 31, 2014
, compared to the same periods of
2013
, stock-based compensation expense increased as a result of an increase in the number of employees, an increase in our stock price, and the achievement or overachievement of certain company performance metrics. As a percentage of revenue, stock-based compensation decreased by one percentage point for the
three and six months ended
May 31, 2014
, compared to the same periods of
2013
, as we are effectively managing to a targeted annual burn rate of two percent of outstanding shares. Please refer to Note 8 to the Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q for a discussion of stock-based compensation.
Depreciation and Amortization Expense
For the
three and six months ended
May 31, 2014
, compared to the same periods of
2013
, depreciation and amortization expense increased in both amount and as a percentage of revenue, primarily due to the increase in depreciable and amortizable assets from capital expenditures and acquisitions, particularly the Polk acquisition.
Restructuring
Please refer to Note 5 to the Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q for a discussion of our restructuring activities. During the six months ended
May 31, 2014
, we incurred approximately
$4.0 million
of restructuring charges for direct and incremental costs associated with identified operational efficiencies (including lease abandonments), continued consolidation of positions to our accounting and customer care Centers of Excellence (COE) locations, and further consolidation of our legacy data centers.
During the six months ended
May 31, 2014
, we eliminated
89
positions related to these activities. We expect to continue to incur costs related to these and other similar activities in future periods, resulting in additional restructuring charges.
Acquisition-related Costs
Please refer to Note 6 to the Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q for a discussion of costs associated with our integration and other acquisition-related activities. During the six months ended
May 31, 2014
, we recorded approximately
$1.0 million
of direct and incremental costs associated with acquisition-related activities, including severance, lease abandonments, and professional fees. Because acquisitions are a key component of our growth strategy, we expect that we will continue to perform similar activities for future acquisitions.
Pension and Postretirement Expense
For the
three and six months ended
May 31, 2014
, compared to the same periods of
2013
, net periodic pension and postretirement expense experienced a modest increase. We plan to freeze future accruals to our U.S. Retirement Income Plan (U.S. RIP) effective July 11, 2014. The financial impact of this change will be determined through the remeasurement process in the third quarter of 2014, but we do not believe that the remeasurement will have a material impact on our consolidated financial statements. We plan to provide an annual company non-elective contribution to the 401(k) accounts of affected eligible employees if they are active employees at the end of the calendar year.
Our pension expense and associated pension liability as calculated under GAAP requires the use of assumptions about the estimated long-term rate of return on plan assets and the discount rate. Our pension investment strategy is designed to align the majority of our pension assets with the underlying pension liability and minimize volatility caused by changes in asset returns and discount rates. Our pension expense estimates are updated to reflect actual experience through the remeasurement process in the fourth quarter, or sooner if earlier remeasurements are required. For the six months ended
May 31, 2014
, we used a 5.4 percent expected long-term rate of return on plan assets and a 4.9 percent discount rate for the U.S. RIP; the actual return on plan assets during that period was 9.9 percent. We anticipate that the difference between actual return on plan assets and expected return on plan assets will be largely mitigated by the offsetting change in the pension liability resulting from movements in the discount rate.
Operating Income by Segment (geography)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended May 31,
|
|
Percentage
Change
|
|
Six months ended May 31,
|
|
Percentage
Change
|
(In thousands, except percentages)
|
2014
|
|
2013
|
|
|
2014
|
|
2013
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
93,587
|
|
|
$
|
79,515
|
|
|
18
|
%
|
|
$
|
171,197
|
|
|
$
|
141,648
|
|
|
21
|
%
|
EMEA
|
34,465
|
|
|
20,485
|
|
|
68
|
%
|
|
59,060
|
|
|
36,471
|
|
|
62
|
%
|
APAC
|
12,938
|
|
|
10,248
|
|
|
26
|
%
|
|
23,000
|
|
|
19,997
|
|
|
15
|
%
|
Shared services
|
(54,217
|
)
|
|
(48,664
|
)
|
|
|
|
(110,830
|
)
|
|
(100,132
|
)
|
|
|
Total operating income
|
$
|
86,773
|
|
|
$
|
61,584
|
|
|
41
|
%
|
|
$
|
142,427
|
|
|
$
|
97,984
|
|
|
45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of segment revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
25
|
%
|
|
31
|
%
|
|
|
|
24
|
%
|
|
29
|
%
|
|
|
EMEA
|
25
|
%
|
|
18
|
%
|
|
|
|
22
|
%
|
|
16
|
%
|
|
|
APAC
|
25
|
%
|
|
22
|
%
|
|
|
|
23
|
%
|
|
22
|
%
|
|
|
For the
three and six months ended
May 31, 2014
, compared to the same periods of
2013
, operating income as a percentage of revenue for the Americas segment decreased primarily because of amortization expense associated with intangible assets acquired in the Polk acquisition. For the
three and six months ended
May 31, 2014
, compared to the same periods of
2013
, the EMEA segment operating income as a percentage of revenue increased primarily because of revenue growth and prior investment in scaled infrastructure. For the
three and six months ended
May 31, 2014
, compared to the same periods of
2013
, the APAC segment operating income as a percentage of revenue was largely unchanged.
Provision for Income Taxes
Our effective tax rate for the
three and six months ended
May 31, 2014
was
23.4 percent
and
22.2 percent
, respectively, compared to
23.0 percent
and
21.8 percent
for the same periods of
2013
.
EBITDA and Adjusted EBITDA (non-GAAP measures)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended May 31,
|
|
Percentage
Change
|
|
Six months ended May 31,
|
|
Percentage
Change
|
(In thousands, except percentages)
|
2014
|
|
2013
|
|
|
2014
|
|
2013
|
|
Net income
|
$
|
55,492
|
|
|
$
|
42,890
|
|
|
29
|
%
|
|
$
|
87,914
|
|
|
$
|
67,561
|
|
|
30
|
%
|
Interest income
|
(235
|
)
|
|
(303
|
)
|
|
|
|
(486
|
)
|
|
(647
|
)
|
|
|
Interest expense
|
14,610
|
|
|
6,164
|
|
|
|
|
29,855
|
|
|
12,284
|
|
|
|
Provision for income taxes
|
16,906
|
|
|
12,840
|
|
|
|
|
25,144
|
|
|
18,793
|
|
|
|
Depreciation
|
16,090
|
|
|
10,851
|
|
|
|
|
31,880
|
|
|
20,731
|
|
|
|
Amortization
|
33,052
|
|
|
22,026
|
|
|
|
|
66,899
|
|
|
44,625
|
|
|
|
EBITDA
|
$
|
135,915
|
|
|
$
|
94,468
|
|
|
44
|
%
|
|
$
|
241,206
|
|
|
$
|
163,347
|
|
|
48
|
%
|
Stock-based compensation expense
|
36,032
|
|
|
30,799
|
|
|
|
|
79,996
|
|
|
70,561
|
|
|
|
Restructuring charges
|
860
|
|
|
3,231
|
|
|
|
|
4,035
|
|
|
8,019
|
|
|
|
Acquisition-related costs
|
77
|
|
|
1,665
|
|
|
|
|
1,017
|
|
|
3,560
|
|
|
|
Impairment of assets
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
1,629
|
|
|
|
Loss (gain) on sale of assets
|
(151
|
)
|
|
—
|
|
|
|
|
2,654
|
|
|
1,241
|
|
|
|
Income from discontinued operations, net
|
—
|
|
|
(7
|
)
|
|
|
|
—
|
|
|
(7
|
)
|
|
|
Adjusted EBITDA
|
$
|
172,733
|
|
|
$
|
130,156
|
|
|
33
|
%
|
|
$
|
328,908
|
|
|
$
|
248,350
|
|
|
32
|
%
|
Adjusted EBITDA as a percentage of revenue
|
30.4
|
%
|
|
31.1
|
%
|
|
|
|
30.1
|
%
|
|
31.0
|
%
|
|
|
Our Adjusted EBITDA for the
three and six months ended
May 31, 2014
, compared to the same periods of
2013
, increased primarily because of acquisitions, organic revenue growth, and the leverage in our business model. Adjusted EBITDA margin was somewhat muted in the first half of the year due to the inclusion of acquired revenue, new product investment, and negative foreign currency impact.
Financial Condition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
As of May 31, 2014
|
|
As of November 30, 2013
|
|
Dollar change
|
|
Percent change
|
Accounts receivable, net
|
$
|
416,771
|
|
|
$
|
459,263
|
|
|
$
|
(42,492
|
)
|
|
(9
|
)%
|
Accrued compensation
|
$
|
60,979
|
|
|
$
|
89,460
|
|
|
$
|
(28,481
|
)
|
|
(32
|
)%
|
Deferred revenue
|
$
|
667,264
|
|
|
$
|
560,010
|
|
|
$
|
107,254
|
|
|
19
|
%
|
The decrease in accounts receivable is primarily due to the timing of billings and strong cash collections in the second quarter of 2014. We continue to experience the historical trend of seeing 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 change in accrued compensation was primarily due to the
2013
bonus payout made in the first quarter of
2014
, partially offset by the current year accrual. The increase in deferred revenue was primarily due to the high level of subscription renewals that occur in the first and fourth quarters.
Liquidity and Capital Resources
As of May 31, 2014
, we had cash and cash equivalents of
$221 million
, of which approximately
$175 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. We also had
$1.86 billion
of debt as of
May 31, 2014
, which has resulted in an increase in interest expense in
2014
, and we expect that the increased debt will continue to result in increased interest expense for the near future. On a trailing twelve-month basis, the ratio of free cash flow to Adjusted EBITDA was approximately 80 percent. 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.
During the third quarter of 2013, we completed the Polk acquisition, which we funded with a combination of cash and stock. We funded the cash portion of the transaction consideration using cash on hand, cash from our existing revolver, and a new bank term loan. Our credit agreements require a systematic reduction in our Leverage Ratio (as defined in Note 3 to the
Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q) of 25 basis points per quarter for the first year, ending at a 3.0 to 1.0 ratio effective for the quarter ending August 31, 2014 and thereafter, unless we elect to trigger an increased Leverage Ratio under the terms specified in the credit agreements in connection with future acquisitions.
As of May 31, 2014
, our Leverage Ratio was 2.85x compared to a maximum permitted Leverage Ratio at
May 31, 2014
of 3.25x, reflecting a continued reduction in our Leverage Ratio.
Our future capital requirements will depend on many factors, including the number and magnitude of future acquisitions, 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 currently expect our capital expenditures to be approximately five to six percent of revenue in 2014.
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended May 31,
|
(In thousands, except percentages)
|
2014
|
|
2013
|
|
Dollar change
|
|
Percent change
|
Net cash provided by operating activities
|
$
|
374,974
|
|
|
$
|
261,166
|
|
|
$
|
113,808
|
|
|
44
|
%
|
Net cash used in investing activities
|
$
|
(47,679
|
)
|
|
$
|
(200,130
|
)
|
|
$
|
152,451
|
|
|
(76
|
)%
|
Net cash used in financing activities
|
$
|
(355,188
|
)
|
|
$
|
(123,279
|
)
|
|
$
|
(231,909
|
)
|
|
188
|
%
|
The increase in net cash provided by operating activities was primarily due to continued business performance improvements, including strong cash collections in the second quarter of 2014. Part of the increase also came from decreased funding of our pension plans ($1.7 million for the six months ended
May 31, 2014
, compared to $11.9 million for the same period of 2013) and additive cash flow from acquisitions (most notably from the Polk acquisition). 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 decrease in net cash used in investing activities was principally due to the $156 million of acquisitions we made in the first six months of 2013, as we had no acquisitions in the first six months of 2014.
The increase in net cash used in financing activities was principally due to the repayment of borrowings as we reduced our debt leverage.
Free Cash Flow (non-GAAP measure)
The following table reconciles our non-GAAP free cash flow measure to net cash provided by operating activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended May 31,
|
(In thousands, except percentages)
|
2014
|
|
2013
|
|
Dollar change
|
|
Percent change
|
Net cash provided by operating activities
|
$
|
374,974
|
|
|
$
|
261,166
|
|
|
|
|
|
Capital expenditures on property and equipment
|
(51,036
|
)
|
|
(42,436
|
)
|
|
|
|
|
Free cash flow
|
$
|
323,938
|
|
|
$
|
218,730
|
|
|
$
|
105,208
|
|
|
48
|
%
|
Our free cash flow has historically been positive due to the robust cash generation attributes of our business model, providing us with operational and capital structure flexibility as we de-lever the business.
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 term loans and revolving credit agreement.
Share Repurchase Program
Please refer 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
2013
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.