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 February 29, 2008
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)
|
|
(IRS Employer
Identification No.)
|
15
Inverness Way East
Englewood, CO 80112
(Address of Principal Executive Offices)
(303)
790-0600
(Registrants 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 is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of large accelerated filer, and 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
|
|
Smaller Reporting Company
o
|
(Do not check if
a smaller reporting company)
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Act).
o
YES
x
NO
As of February 29,
2008, there were
48,723,478 shares of our Class A
Common Stock outstanding and 13,750,000 shares of our Class B Common Stock
outstanding.
PART I.
FINANCIAL
INFORMATION
Item 1
. Financial Statements
IHS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In
thousands except share data)
|
|
As of
February 29, 2008
|
|
As of
November 30, 2007
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
139,133
|
|
$
|
148,484
|
|
Short-term investments
|
|
|
|
10,518
|
|
Accounts receivable, net
|
|
192,993
|
|
175,542
|
|
Deferred subscription
costs
|
|
41,311
|
|
35,910
|
|
Deferred income taxes
|
|
16,369
|
|
17,681
|
|
Other
|
|
16,446
|
|
14,112
|
|
Total current assets
|
|
406,252
|
|
402,247
|
|
Non-current assets:
|
|
|
|
|
|
Property and equipment,
net
|
|
58,401
|
|
58,756
|
|
Intangible assets, net
|
|
205,588
|
|
206,359
|
|
Goodwill, net
|
|
585,246
|
|
564,582
|
|
Prepaid pension asset
|
|
92,173
|
|
91,116
|
|
Other
|
|
847
|
|
747
|
|
Total non-current assets
|
|
942,255
|
|
921,560
|
|
Total assets
|
|
$
|
1,348,507
|
|
$
|
1,323,807
|
|
Liabilities and stockholders equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Short-term debt
|
|
$
|
|
|
$
|
3,062
|
|
Accounts payable
|
|
32,446
|
|
37,550
|
|
Accrued compensation
|
|
14,169
|
|
37,014
|
|
Accrued royalties
|
|
23,537
|
|
22,684
|
|
Other accrued expenses
|
|
38,877
|
|
37,435
|
|
Income tax payable
|
|
8,049
|
|
15,255
|
|
Deferred subscription
revenue
|
|
283,163
|
|
239,395
|
|
Total current liabilities
|
|
400,241
|
|
392,395
|
|
Long-term debt
|
|
|
|
37
|
|
Accrued pension liability
|
|
11,641
|
|
11,965
|
|
Accrued post-retirement benefits
|
|
9,462
|
|
10,203
|
|
Deferred income taxes
|
|
58,062
|
|
60,461
|
|
Other liabilities
|
|
5,936
|
|
7,619
|
|
Minority interests
|
|
222
|
|
219
|
|
Commitments and contingencies
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
Class A common stock,
$0.01 par value per share, 80,000,000 shares authorized, 50,070,579 and
49,831,293 shares issued, 48,723,478 and 48,758,518 shares outstanding at
February 29, 2008 and November 30, 2007, respectively
|
|
500
|
|
498
|
|
Class B common stock,
$0.01 par value per share, 13,750,000 shares authorized, issued and
outstanding at February 29, 2008 and November 30, 2007
|
|
138
|
|
138
|
|
Additional paid-in capital
|
|
401,292
|
|
381,124
|
|
Treasury stock, at cost:
1,347,101 and 1,072,775 shares at February 29, 2008 and
November 30, 2007, respectively
|
|
(62,894
|
)
|
(46,045
|
)
|
Retained earnings
|
|
506,657
|
|
483,804
|
|
Accumulated other
comprehensive income
|
|
17,250
|
|
21,389
|
|
Total stockholders equity
|
|
862,943
|
|
840,908
|
|
Total liabilities and
stockholders equity
|
|
$
|
1,348,507
|
|
$
|
1,323,807
|
|
See accompanying notes.
3
IHS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per-share amounts)
|
|
Three Months Ended,
|
|
|
|
February 29,
2008
|
|
February 28,
2007
|
|
|
|
(Unaudited)
|
|
Revenue:
|
|
|
|
|
|
Products
|
|
$
|
159,689
|
|
$
|
122,979
|
|
Services
|
|
39,088
|
|
29,642
|
|
Total revenue
|
|
198,777
|
|
152,621
|
|
Operating expenses:
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
Products
|
|
63,094
|
|
48,733
|
|
Services
|
|
26,066
|
|
17,005
|
|
Total cost of revenue
(includes stock-based compensation expense of $311 and $351 for the three
months ended February 29, 2008 and February 28, 2007, respectively)
|
|
89,160
|
|
65,738
|
|
Selling, general and
administrative (includes stock-based compensation expense of $12,390 and
$6,985 for the three months ended February 29, 2008 and
February 28, 2007, respectively)
|
|
71,886
|
|
57,891
|
|
Depreciation and
amortization
|
|
8,823
|
|
4,580
|
|
Restructuring and offering
charges (credits)
|
|
|
|
(9
|
)
|
Gain on sales of assets,
net
|
|
(119
|
)
|
(751
|
)
|
Net periodic pension and
post-retirement benefits
|
|
(1,093
|
)
|
(268
|
)
|
Earnings in unconsolidated
affiliates
|
|
(49
|
)
|
(44
|
)
|
Other income, net
|
|
(764
|
)
|
(400
|
)
|
Total operating expenses
|
|
167,844
|
|
126,737
|
|
Operating income
|
|
30,933
|
|
25,884
|
|
Interest income
|
|
1,217
|
|
1,654
|
|
Interest expense
|
|
(136
|
)
|
(133
|
)
|
Non-operating income, net
|
|
1,081
|
|
1,521
|
|
Income from continuing operations before income taxes and
minority interests
|
|
32,014
|
|
27,405
|
|
Provision for income taxes
|
|
(10,599
|
)
|
(9,043
|
)
|
Income from continuing operations before minority
interests
|
|
21,415
|
|
18,362
|
|
Minority interests
|
|
16
|
|
15
|
|
Net income
|
|
$
|
21,431
|
|
$
|
18,377
|
|
Net income per share:
|
|
|
|
|
|
Basic (Class A and
Class B common stock)
|
|
$
|
0.35
|
|
$
|
0.32
|
|
Diluted (Class A and
Class B common stock)
|
|
$
|
0.34
|
|
$
|
0.32
|
|
Weighted average shares:
|
|
|
|
|
|
Basic (Class A common
stock)
|
|
48,221
|
|
43,844
|
|
Basic (Class B common
stock)
|
|
13,750
|
|
13,750
|
|
Diluted (Class A
common stock)
|
|
62,896
|
|
57,698
|
|
Diluted (Class B
common stock)
|
|
13,750
|
|
13,750
|
|
See accompanying notes.
4
IHS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
Three Months Ended,
|
|
|
|
February 29, 2008
|
|
February 28, 2007
|
|
|
|
(Unaudited)
|
|
Operating activities
|
|
|
|
|
|
Net income
|
|
$
|
21,431
|
|
$
|
18,377
|
|
Reconciliation of net
income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
8,823
|
|
4,580
|
|
Stock-based compensation expense
|
|
12,701
|
|
7,336
|
|
Gain on sales of assets, net
|
|
(119
|
)
|
(751
|
)
|
Non-cash net periodic pension and post-retirement benefits
|
|
(1,563
|
)
|
(980
|
)
|
Undistributed earnings of unconsolidated affiliates, net
|
|
(49
|
)
|
(44
|
)
|
Minority interests
|
|
(16
|
)
|
(206
|
)
|
Deferred income taxes
|
|
2,422
|
|
(447
|
)
|
Change in assets and liabilities:
|
|
|
|
|
|
Accounts receivable, net
|
|
(20,167
|
)
|
(10,523
|
)
|
Other current assets
|
|
(7,423
|
)
|
(4,797
|
)
|
Accounts payable
|
|
(3,239
|
)
|
(8,841
|
)
|
Accrued expenses
|
|
(20,928
|
)
|
(14,662
|
)
|
Income taxes
|
|
(2,126
|
)
|
1,883
|
|
Deferred subscription revenue
|
|
42,733
|
|
32,172
|
|
Net cash provided by operating
activities
|
|
32,480
|
|
23,097
|
|
Investing activities
|
|
|
|
|
|
Capital expenditures on
property and equipment
|
|
(3,073
|
)
|
(3,305
|
)
|
Change in other assets
|
|
(2,624
|
)
|
(1,137
|
)
|
Sales and maturities of
investments
|
|
10,500
|
|
2,008
|
|
Acquisitions of
businesses, net of cash acquired
|
|
(28,206
|
)
|
(8,269
|
)
|
Proceeds from sales of
assets
|
|
140
|
|
2,461
|
|
Net cash used in investing
activities
|
|
(23,263
|
)
|
(8,242
|
)
|
Financing activities
|
|
|
|
|
|
Net payments on debt
|
|
(3,099
|
)
|
(537
|
)
|
Excess tax benefit from
equity compensation plans
|
|
384
|
|
104
|
|
Repurchases of common
stock
|
|
(16,849
|
)
|
(7,763
|
)
|
Net cash used in financing
activities
|
|
(19,564
|
)
|
(8,196
|
)
|
Foreign exchange impact on
cash balance
|
|
996
|
|
(479
|
)
|
Net (decrease) increase in
cash and cash equivalents
|
|
(9,351
|
)
|
6,180
|
|
Cash and cash equivalents
at the beginning of the period
|
|
148,484
|
|
180,034
|
|
Cash and cash equivalents
at the end of the period
|
|
$
|
139,133
|
|
$
|
186,214
|
|
See accompanying notes.
5
IHS INC.
CONDENSED CONSOLIDATED STATEMENT
OF CHANGES IN STOCKHOLDERS EQUITY
(In thousands)
|
|
Shares of
Class A
Common
Stock
|
|
Class A
Common
Stock
|
|
Shares of
Class B
Common
Stock
|
|
Class B
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
Treasury Stock
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
|
|
|
|
(Unaudited)
|
|
Balance at November 30,
2007
|
|
48,759
|
|
$
|
498
|
|
13,750
|
|
$
|
138
|
|
$
|
381,124
|
|
$
|
(46,045
|
)
|
$
|
483,804
|
|
$
|
21,389
|
|
$
|
840,908
|
|
Stock-based
award activity
|
|
30
|
|
2
|
|
|
|
|
|
11,994
|
|
(12,965
|
)
|
|
|
|
|
(969
|
)
|
Excess
tax benefit on vested shares
|
|
|
|
|
|
|
|
|
|
8,174
|
|
|
|
|
|
|
|
8,174
|
|
Repurchase
of common stock
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
(3,884
|
)
|
|
|
|
|
(3,884
|
)
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,431
|
|
|
|
21,431
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,139
|
)
|
(4,139
|
)
|
Comprehensive
income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,292
|
|
Adoption
of FIN 48 as of December 1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,422
|
|
|
|
1,422
|
|
Balance at February 29, 2008
|
|
48,723
|
|
$
|
500
|
|
13,750
|
|
$
|
138
|
|
$
|
401,292
|
|
$
|
(62,894
|
)
|
$
|
506,657
|
|
$
|
17,250
|
|
$
|
862,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
6
IHS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. Basis
of Presentation and Significant Accounting Policies
Nature of Operations
IHS Inc. (IHS, the Company, we, our, or us) is a publicly traded
Delaware corporation. IHS is a leading provider and comprehensive source of
Critical Information and Insight in a sizable and growing global market. Our
customers rely on our products and services to facilitate crucial
decision-making, support key processes, and improve productivity. At the heart
of our products and services is data obtained from public sources, third
parties, and our own proprietary databases. We transform that data into
Critical Information and Insight that is both useful to our customers and
available where and when they make critical business decisions. The data
becomes Critical Information when we combine it with our proprietary and
third-party technology to create graphical user interfaces, search and
navigation tools, and online delivery systems. We further transform that
information into Insight products and services with analysis and interpretation
from our teams of experts.
We have targeted four specific information domainsEnergy, Product
Lifecycle, Security, and Environment. Since these four information domains
represent areas where our customers have needs for critical information and
insight, we use these domains to set priorities and design our business
objectives. As we continue to deliver Critical Information and Insight in those
four information domains, we prepare and analyze our financial reports to
include each of the four domains in our two reportable segments. Today, our
Energy segment includes the Energy information domain while our Engineering
segment includes the Product Lifecycle, Security, and Environment information
domains.
Consolidation Policy
The consolidated financial
statements include the accounts of all wholly owned and majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
Unaudited Condensed Consolidated
Financial Statements
The accompanying unaudited
condensed consolidated financial statements reflect all adjustments, consisting
of normal recurring accruals, which are necessary for a fair presentation of
the financial position, results of operations and cash flows for the periods
presented. The accompanying condensed consolidated financial statements include
our accounts and the accounts of our majority-owned domestic and foreign
subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements for the year ended November 30,
2007. The results of operations for the
three months ended February 29, 2008, are not necessarily indicative of
the results that may be achieved for the full fiscal year and cannot be used to
indicate financial performance for the entire year.
The year-end condensed consolidated
balance sheet data was derived from the audited November 30, 2007, balance
sheet.
Results Subject to Seasonal
Variations
Historically, our business
has had seasonal aspects. However, with
the continued organic growth in our subscription-based business model combined
with several acquisitions in recent years, our seasonal aspects have
diminished. Our first quarter does benefit from the inclusion of the results
from CERAWeek, an annual energy executive gathering.
Subscriptions
are generally paid in full within one to two months after the subscription
period commences. As a result, the timing of our cash flows generally precedes
the recognition of revenue and income.
Use of Estimates
The preparation
of interim
condensed consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires us to make
estimates and assumptions that affect the amounts
7
IHS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
reported
and disclosed in the financial statements and the accompanying notes.
Significant estimates have been made in areas that include revenue recognition,
useful lives of fixed and intangible assets, allocation of purchase price to
acquired assets and liabilities, the recoverability of intangible assets and
goodwill, income and other taxes, pension and post-retirement benefits, and
stock-based compensation. Actual results could differ from those estimates.
Reclassification
Certain prior-year
balances have been reclassified to conform to current-year presentation.
Income Taxes
Our effective quarterly rate is estimated
based upon the effective tax rate expected to be applicable for the full fiscal
year.
Our effective tax rate for the first
quarter of 2008 was 33.1% compared to 33.0% for the prior year period. The 2007 rate reflects the benefit from the
release of a portion of the valuation allowance carried on capital losses. The 2008 rate reflects the impact from the
decline in tax exempt interest income resulting from a forecasted reduction in
the balance of the investment in tax exempt securities which resulted in a higher
projected tax rate.
On December 1, 2007, the Company
adopted
Financial Accounting
Standards Board Interpretation Number 48,
Accounting for Uncertainty
in Income Taxes an interpretation of FASB Statement No. 109
(FIN
48), which provides clarification related to the process associated with
accounting for uncertain tax positions recognized in consolidated financial statements. FIN 48 prescribes a more-likely-than-not
threshold for financial statement recognition and measurement of a tax position
taken, or expected to be taken, in a tax return.
FIN 48 also provides guidance on
de-recognition of income tax assets and liabilities, classification of current
and deferred income tax assets and liabilities, accounting for interest and
penalties associated with tax positions, and income tax disclosures.
Adopting FIN 48 had the following impact
on our financial statements: current taxes payable decreased by $3.0 million,
other current liabilities increased by $0.3 million, long-term liabilities
increased by $0.1 million, net non-current deferred tax liabilities increased
by $1.2 million, and retained earnings increased by $1.4 million. As of December 1,
2007, we had $1.7 million of unrecognized tax benefits, of which $0.1 million
related to accruals for interest. If
recognized, essentially all of the unrecognized tax benefits would affect our
effective tax rate.
Prior
to adoption, the Company recognized interest and penalties related to
unrecognized
tax benefits in interest expense and penalties within operating expenses,
respectively.
With the adoption of FIN 48, we will be
recognizing
interest and penalties related to unrecognized tax benefits
within the provision for income taxes
.
As
of February 29, 2008, the total amount of unrecognized tax benefits was
$1.5 million, of which $0.1 million related to interest. The $0.2 million
reduction in unrecognized tax benefits was attributable to adjustments made to
the reserves during the first quarter of fiscal 2008, principally as a result
of the filing of certain amended non-U.S. tax returns.
We are subject to taxation and file
income tax returns in the U.S. and in many foreign jurisdictions. For U.S.
federal, Canadian and Swiss income tax purposes, effectively all years prior to
2004 are closed. For United Kingdom income tax purposes, all years prior to
2005 are effectively closed.
The open tax years contain matters that
could be subject to differing interpretations of applicable tax laws and
regulations as it relates to the amount and/or timing of income, deductions and
tax credits. Although the outcome of tax audits is always uncertain, we believe
that adequate amounts of tax and interest have been provided for any
adjustments that are expected to result from an audit of the open tax
years. Although timing of the resolution
and/or closure of audits is highly uncertain, we do not believe it is
reasonably possible that our unrecognized tax benefits will materially change
in the next 12 months.
8
IHS INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
New Accounting Pronouncements
In September 2006,
the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157). Among other requirements, SFAS No. 157 defines fair
value and establishes a framework for measuring fair value and also expands
disclosure about the use of fair value to measure assets and liabilities.
Subsequently, the FASB deferred the application of this pronouncement for
non-financial assets and liabilities to fiscal years beginning after November 15,
2008. SFAS No. 157 is effective for
financial assets and liabilities beginning the first fiscal year that begins
after November 15, 2007. We adopted SFAS No. 157 for financial assets
and liabilities on December 1, 2007, with no material impact to our
consolidated financial statements.
In February 2007,
the FASB issued SFAS No. 159,
The Fair Value Option for
Financial Assets and Financial Liabilities
(SFAS No. 159). SFAS
No. 159 expands the use of fair value measurement by permitting entities
to choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. SFAS No. 159
was effective beginning the first fiscal year that begins after November 15,
2007. We have opted not to electively adopt the provisions of SFAS No. 159
in the accompanying consolidated financial statements.
In December 2007,
the FASB issued SFAS No. 141(R),
Business
Combinations
and SFAS No. 160,
Accounting
and Reporting of Noncontrolling Interest in Consolidated Financial Statements,
an amendment of ARB No. 51
.
These new standards will significantly change the accounting for and
reporting of business combination transactions and noncontrolling (minority)
interests in consolidated financial statements. SFAS Nos. 141(R) and
160 are required to be adopted simultaneously and are effective for the first
annual reporting period beginning on or after December 15, 2008. Thus, we are required to adopt these standards
on December 1, 2009, the first day of our 2010 fiscal year. Earlier
adoption is prohibited. We are currently
evaluating the impact of adopting SFAS Nos. 141(R) and 160 on our
consolidated financial statements.
In March 2008,
the FASB issued SFAS No. 161,
Disclosures about
Derivative Instruments and Hedging Activities
. SFAS 161 requires additional disclosures
related to the use of derivative instruments, the accounting for derivatives
and how derivatives impact financial statements. SFAS No. 161 is effective for fiscal
years and interim periods beginning after November 15, 2008. Thus, we are required to adopt this standard
on December 1, 2008, the first day of our 2009 fiscal year. We are currently evaluating the impact of
adopting SFAS No. 161 on our consolidated financial statements.
2. Business Combinations (Continued)
In December 2007, we acquired
McCloskey Group Limited (McCloskey), the leading provider of news, critical
information and insight on the international coal markets located near London,
England. We acquired McCloskey for £13.9
million, or approximately $28.2 million using cash on hand.
This
acquisition was accounted for using the purchase method of accounting. Our
consolidated financial statements include all the assets and liabilities
acquired and the results of operations from the respective date of acquisition.
Pro forma results of the acquired business have not been presented as it did
not have a material impact on our results of operations.
9
IHS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The purchase
prices for this acquisition, excluding acquired cash and including
acquisition-related costs, was initially allocated as follows (in thousands):
|
|
Total
|
|
Assets:
|
|
|
|
Current assets
|
|
$
|
774
|
|
Property and equipment
|
|
114
|
|
Intangible assets
|
|
8,180
|
|
Goodwill
|
|
24,136
|
|
Total assets
|
|
33,204
|
|
Liabilities:
|
|
|
|
Current liabilities
|
|
2,700
|
|
Deferred taxes
|
|
2,298
|
|
Total liabilities
|
|
4,998
|
|
Purchase price
|
|
$
|
28,206
|
|
3.
Commitments and Contingencies
We are a
party to various legal proceedings that arise in the ordinary course of
business. In the opinion of management,
none of these actions, either individually or in the aggregate, is expected to
have a material adverse affect on our financial condition, liquidity or results
of operations.
4.
Other
Comprehensive Income
Our comprehensive income was as follows:
|
|
Three Months Ended,
|
|
|
|
February 29,
2008
|
|
February 28,
2007
|
|
Net income
|
|
$
|
21,431
|
|
$
|
18,377
|
|
Other comprehensive income
(loss):
|
|
|
|
|
|
Foreign currency
translation adjustment
|
|
(4,139
|
)
|
(2,569
|
)
|
Total other comprehensive income, net of tax
|
|
$
|
17,292
|
|
$
|
15,808
|
|
5.
Stock-based
Compensation
On February 29, 2008,
we had one share based
compensation plan: the Amended and Restated IHS Inc. 2004 Long-Term Incentive
Plan (LTIP).
The LTIP provides for
the grant of non-qualified stock options, incentive stock options, stock
appreciation rights, restricted stock, restricted stock units, performance
units and performance shares, cash-based awards, other stock based awards and
covered employee annual incentive awards. The 2004 Directors Stock Plan, a
sub-plan under the LTIP, provides for the grant of restricted stock and
restricted stock units to non-employee directors as defined in that plan. We
believe that such awards better align the interests of our employees and
non-employee directors with those of our shareholders.
We
have authorized a maximum of 7 million shares, less the number of shares
relating to any award granted and outstanding.
In our 2007 proxy statement, we have requested shareholder approval for
an additional authorization of 4,250,000 shares.
10
IHS INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Stock-based compensation expense that has been charged
against income for the plan was as follows:
|
|
Three Months Ended,
|
|
|
|
February 29,
2008
|
|
February 28,
2007
|
|
|
|
(In thousands)
|
|
Cost of revenue
|
|
$
|
311
|
|
$
|
351
|
|
Selling, general and
administrative
|
|
12,390
|
|
6,985
|
|
Stock-based compensation
expense
|
|
$
|
12,701
|
|
$
|
7,336
|
|
Total income tax benefit recognized in the statement
of operation for share-based compensation arrangements was as follows:
|
|
February 29, 2008
|
|
February 28, 2007
|
|
|
|
(In thousands)
|
|
Income tax benefit
|
|
$
|
4,699
|
|
$
|
2,714
|
|
|
|
|
|
|
|
|
|
No
compensation cost was capitalized during the three months ended February 29,
2008 and February 28, 2007.
Nonvested Stock.
Share awards generally vest from
one to four years. Share awards are generally subject to graded vesting but we
do have a limited number of share awards subject to cliff vesting. The fair
value of nonvested stock is based on the fair value of our common stock on the
date of grant. We amortize the value of share awards to expense over the
vesting period on a straight-line basis. For awards with performance
conditions, an evaluation is made each quarter as to the likelihood of the
performance criteria being met. Compensation expense is then adjusted to
reflect the number of shares expected to vest and the cumulative vesting period
met to date. Additionally, we estimate
forfeitures at the grant date and recognize compensation cost based on the
number of awards expected to vest. There may be adjustments in future periods
if the likelihood of meeting performance criteria changes or if actual
forfeitures differ from our estimates. Our forfeiture rate is based upon
historical experience as well as anticipated employee turnover considering
certain qualitative factors.
Total compensation expense related to nonvested awards,
both share awards and stock options, not yet recognized was $85.9 million
as of February 29, 2008, with a weighted-average recognition period of
approximately 2 years.
A summary of the status of our nonvested shares as of February 29,
2008, and changes during the three months ended February 29, 2008, was as
follows:
|
|
Shares
|
|
Weighted-
Average Grant
Date Fair Value
|
|
|
|
(in thousands)
|
|
|
|
Balances,
November 30, 2007
|
|
2,429
|
|
$
|
32.16
|
|
Granted
|
|
733
|
|
$
|
61.88
|
|
Vested
|
|
(585
|
)
|
$
|
25.48
|
|
Forfeited
|
|
(27
|
)
|
$
|
39.16
|
|
Balances,
February 29, 2008
|
|
2,550
|
|
$
|
42.16
|
|
The total fair value of nonvested stock that vested
during the three months ended February 29, 2008, was $36.5 million
based on the weighted-average fair value on the vesting date and
$14.9 million based on the weighted-average fair value on the date of
grant.
Stock Options.
Option awards are granted with
an exercise price equal to the fair market value of our stock at the date of
grant. Options outstanding as of February 29, 2008, vest in various ways
over a period of 3-to-4 years of continuous service and have 8-year
contractual terms. Certain option and share awards provide for accelerated
vesting if there is a change in control (as defined in the plans).
11
IHS INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarized changes in outstanding
stock options during the three months ended February 29, 2008, as well as
options that are vested and expected to vest and stock options exercisable at February 29,
2008:
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
(in thousands)
|
|
|
|
|
|
(in thousands)
|
|
Outstanding at
November 30, 2007
|
|
287
|
|
$
|
35.31
|
|
2.4
|
|
$
|
10,009
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(1
|
)
|
37.65
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
Outstanding at
February 29, 2008
|
|
286
|
|
$
|
35.28
|
|
2.0
|
|
$
|
7,539
|
|
Vested and expected to
vest at February 29, 2008
|
|
280
|
|
$
|
35.28
|
|
2.0
|
|
$
|
7,384
|
|
Exercisable at
February 29, 2008
|
|
61
|
|
$
|
37.65
|
|
|
|
$
|
1,474
|
|
The
aggregate intrinsic value amounts in the table above represent the difference
between the closing price of our common stock on February 29, 2008, which
was $61.65, and the exercise price, multiplied by the number of in-the-money
stock options as of the same date. This represents the amount that would have
been received by the stock option holders if they had all exercised their stock
options on February 29, 2008. In future periods, this amount will change
depending on fluctuations in our stock price. The total intrinsic value of
stock options exercised during the three months ended February 29, 2008
was less than $0.1 million.
6.
Pensions
and Postretirement Benefits
We
have defined-benefit plans and defined-contribution plans. Our defined-benefit
plans consist of a non-contributory retirement plan for all of our U.S.
employees with at least one year of service (U.S. RIP), a pension plan that
covers certain employees of one of our United Kingdom-based subsidiaries (U.K.
RIP), and a supplemental income plan (SIP) for certain company executives.
12
IHS INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our net periodic pension (income) expense was
comprised of the following:
|
|
Three Months Ended February 29, 2008
|
|
Three Months Ended February 28, 2007
|
|
|
|
U.S.
RIP
|
|
U.K.
RIP
|
|
SIP
|
|
Total
|
|
U.S.
RIP
|
|
U.K.
RIP
|
|
SIP
|
|
Total
|
|
|
|
(In thousands)
|
|
Service costs incurred
|
|
$
|
1,572
|
|
$
|
238
|
|
$
|
72
|
|
$
|
1,882
|
|
$
|
1,569
|
|
$
|
286
|
|
$
|
48
|
|
$
|
1,903
|
|
Interest costs on
projected benefit obligation
|
|
2,999
|
|
539
|
|
114
|
|
3,652
|
|
2,720
|
|
540
|
|
104
|
|
3,364
|
|
Expected return on plan
assets
|
|
(5,368
|
)
|
(562
|
)
|
|
|
(5,930
|
)
|
(5,078
|
)
|
(447
|
)
|
|
|
(5,525
|
)
|
Amortization of prior
service cost
|
|
(118
|
)
|
|
|
11
|
|
(107
|
)
|
(118
|
)
|
|
|
22
|
|
(96
|
)
|
Amortization of actuarial
loss
|
|
|
|
|
|
47
|
|
47
|
|
375
|
|
300
|
|
30
|
|
705
|
|
Amortization of
transitional obligation/(asset)
|
|
(142
|
)
|
|
|
10
|
|
(132
|
)
|
(142
|
)
|
|
|
10
|
|
(132
|
)
|
Net periodic pension benefit (income) expense
|
|
$
|
(1,057
|
)
|
$
|
215
|
|
$
|
254
|
|
$
|
(588
|
)
|
$
|
(674
|
)
|
$
|
679
|
|
$
|
214
|
|
$
|
219
|
|
Our net periodic post-retirement benefit income was
comprised of the following:
|
|
Three months ended,
|
|
|
|
February 29,
2008
|
|
February 28,
2007
|
|
|
|
(In thousands)
|
|
Service costs incurred
|
|
$
|
25
|
|
$
|
34
|
|
Interest costs
|
|
158
|
|
148
|
|
Amortization of prior
service amounts
|
|
(806
|
)
|
(807
|
)
|
Amortization of net
actuarial loss
|
|
118
|
|
138
|
|
Net periodic
post-retirement benefit income
|
|
$
|
(505
|
)
|
$
|
(487
|
)
|
7.
Earnings
per Share
Earnings per common share (EPS) are
computed in accordance with SFAS No. 128,
Earnings per
Share
. Basic EPS is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common shares.
Our authorized capital stock
consists of 80,000,000 shares of Class A common stock and 13,750,000
shares of Class B common stock.
These classes have equal dividend rights and liquidation rights.
However, the holders of our Class A common stock are entitled to one vote
per share and holders of our Class B common stock are entitled to ten
votes per share on all matters to be voted upon by the stockholders. Each share
of Class B common stock is convertible at any time at the option of the
holder into one share of Class A common stock and will automatically
convert, without any action by the holder, upon the earlier of the occurrence
of specified events or November 16, 2009.
13
IHS INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We use the
two-class method for computing basic and diluted EPS amounts. We calculated
undistributed earnings as follows:
|
|
Three Months Ended,
|
|
|
|
February 29,
2008
|
|
February 28,
2007
|
|
|
|
(In thousands)
|
|
Net income
|
|
$
|
21,431
|
|
$
|
18,377
|
|
Less: dividends
|
|
|
|
|
|
Undistributed earnings
|
|
$
|
21,431
|
|
$
|
18,377
|
|
Weighted
average common shares outstanding are calculated as follows:
|
|
Three Months Ended,
|
|
|
|
February 29, 2008
|
|
February 28, 2007
|
|
|
|
Class A
|
|
Class B
|
|
Class A
|
|
Class B
|
|
|
|
(In thousands)
|
|
Weighted average common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
Shares used in basic
per-share calculation
|
|
48,221
|
|
13,750
|
|
43,844
|
|
13,750
|
|
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
|
Deferred stock units
|
|
38
|
|
|
|
9
|
|
|
|
Restricted shares
|
|
821
|
|
|
|
95
|
|
|
|
Options
|
|
66
|
|
|
|
|
|
|
|
Assumed conversion of
Class B shares
|
|
13,750
|
|
|
|
13,750
|
|
|
|
Shares used in diluted
per-share calculation
|
|
62,896
|
|
13,750
|
|
57,698
|
|
13,750
|
|
Undistributed
earnings and calculated basic and diluted EPS amounts are calculated as
follows:
|
|
Three Months Ended,
|
|
|
|
February 29, 2008
|
|
February 28, 2007
|
|
|
|
Class A
|
|
Class B
|
|
Class A
|
|
Class B
|
|
|
|
(In thousands)
|
|
Basic
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding
|
|
48,221
|
|
13,750
|
|
43,844
|
|
13,750
|
|
Divided by: Total weighted average shares outstanding (Class A
and Class B)
|
|
61,971
|
|
61,971
|
|
57,594
|
|
57,594
|
|
Multiplied by:
Undistributed earnings
|
|
$
|
21,431
|
|
$
|
21,431
|
|
$
|
18,377
|
|
$
|
18,377
|
|
Subtotal
|
|
$
|
16,676
|
|
$
|
4,755
|
|
$
|
13,990
|
|
$
|
4,387
|
|
Divided by: Weighted
average shares outstanding
|
|
48,221
|
|
13,750
|
|
43,844
|
|
13,750
|
|
Earnings per share
|
|
$
|
0.35
|
|
$
|
0.35
|
|
$
|
0.32
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding
|
|
62,896
|
|
13,750
|
|
57,698
|
|
13,750
|
|
Divided by: Total weighted average shares outstanding (Class A
and Class B)
|
|
62,896
|
|
62,896
|
|
57,698
|
|
57,698
|
|
Multiplied by:
Undistributed earnings
|
|
$
|
21,431
|
|
$
|
21,431
|
|
$
|
18,377
|
|
$
|
18,377
|
|
Subtotal
|
|
$
|
21,431
|
|
$
|
4,685
|
|
$
|
18,377
|
|
$
|
4,379
|
|
Divided by: Weighted
average shares outstanding
|
|
62,896
|
|
13,750
|
|
57,698
|
|
13,750
|
|
Earnings per share
|
|
$
|
0.34
|
|
$
|
0.34
|
|
$
|
0.32
|
|
$
|
0.32
|
|
14
IHS INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Share Repurchase Program
During
2006, our board of directors approved a program to reduce the dilutive effects
of employee equity grants, by allowing employees to surrender shares back to
the company for a value equal to their statutory tax liability. IHS then pays the statutory tax on behalf of
the employee. Later in 2006, our board
of directors approved an additional programa stock buyback programwhereby IHS
acquires up to one million shares per year in the open market to more fully
offset the dilutive effect of our employee equity programs. This program was
renewed by the board of directors in late 2007 for fiscal year 2008. During the first quarter of 2008, we
repurchased 66,500 shares of our Class A common stock for approximately
$3.9 million, or $58.41 per share, pursuant to the stock buyback program. Additionally, we withheld 207,826 shares of
stock in treasury to cover employees statutory tax liability as discussed
above, for approximately $13.0 million, or $62.38 per share. Since the inception of these programs, we have
repurchased 756,462 shares of our Class A common stock for approximately
$33.1 million, or $43.71 per share, pursuant to the stock buyback program and
withheld for tax 590,639 shares for approximately $29.8 million, or $50.51 per
share.
8. Goodwill and Intangible Assets
The following table presents details of our intangible
assets, other than goodwill, as of February 29, 2008:
|
|
Useful Life
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
|
|
(Years)
|
|
|
|
(In thousands)
|
|
|
|
Intangible assets subject
to amortization:
|
|
|
|
|
|
|
|
|
|
Information databases
|
|
5-15
|
|
$
|
139,669
|
|
$
|
(19,217
|
)
|
$
|
120,452
|
|
Customer relationships
|
|
2-15
|
|
46,775
|
|
(9,014
|
)
|
37,761
|
|
Non-compete agreements
|
|
5
|
|
5,621
|
|
(3,209
|
)
|
2,412
|
|
Developed computer software
|
|
5
|
|
15,386
|
|
(2,984
|
)
|
12,402
|
|
Other
|
|
3-11
|
|
1,339
|
|
(1,182
|
)
|
157
|
|
Total
|
|
|
|
208,790
|
|
(35,606
|
)
|
173,184
|
|
Intangible assets not
subject to amortization:
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
31,056
|
|
|
|
31,056
|
|
Perpetual licenses
|
|
|
|
1,348
|
|
|
|
1,348
|
|
Total
|
|
|
|
32,404
|
|
|
|
32,404
|
|
Total intangible assets
|
|
|
|
$
|
241,194
|
|
$
|
(35,606
|
)
|
$
|
205,588
|
|
15
IHS INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following
table presents details of our intangible assets, other than goodwill, as of November 30,
2007:
|
|
Useful Life
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
|
|
(Years)
|
|
|
|
(In thousands)
|
|
|
|
Intangible assets subject
to amortization:
|
|
|
|
|
|
|
|
|
|
Information databases
|
|
5-15
|
|
$
|
137,317
|
|
$
|
(14,926
|
)
|
$
|
122,391
|
|
Customer relationships
|
|
2-15
|
|
45,650
|
|
(7,981
|
)
|
37,669
|
|
Non-compete agreements
|
|
5
|
|
5,514
|
|
(2,889
|
)
|
2,625
|
|
Developed computer software
|
|
5
|
|
15,036
|
|
(2,527
|
)
|
12,509
|
|
Other
|
|
3-11
|
|
1,009
|
|
(984
|
)
|
25
|
|
Total
|
|
|
|
204,526
|
|
(29,307
|
)
|
175,219
|
|
Intangible assets not
subject to amortization:
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
29,602
|
|
|
|
29,602
|
|
Perpetual licenses
|
|
|
|
1,538
|
|
|
|
1,538
|
|
Total
|
|
|
|
31,140
|
|
|
|
31,140
|
|
Total intangible assets
|
|
|
|
$
|
235,666
|
|
$
|
(29,307
|
)
|
$
|
206,359
|
|
The estimated amortization expense of intangible
assets for business combinations completed as of February 29, 2008 for
each of the next five years is as follows:
Year
|
|
Amount
|
|
|
|
(In thousands)
|
|
Remainder 2008
|
|
$
|
16,211
|
|
2009
|
|
19,829
|
|
2010
|
|
17,503
|
|
2011
|
|
16,349
|
|
2012
|
|
14,960
|
|
|
|
|
|
|
Amortization
expense of intangible assets was $5.8 million and $2.6 million for the three
months ended February 29, 2008 and February 28, 2007, respectively.
Changes
in our goodwill from November 30, 2007 to February 29, 2008 were
primarily the result of the McCloskey acquisition (see Note 2) and
foreign-currency exchange-rate fluctuations.
9.
Segment
Information
We have two reportable segments: Energy and Engineering. Our Energy
segment serves the Energy information domain where it develops and delivers
critical oil and gas industry data on exploration, development, production, and
transportation activities to major global energy producers and national and
independent oil companies. Our Energy segment also provides operational,
research, and strategic advisory services to these customers, as well as to
utilities and transportation, petrochemical, coal, and power companies. Our
Engineering segment is focused primarily on the Product Lifecycle, Security,
and Environment information domains where it provides solutions incorporating
technical specifications and standards, regulations, parts data, design guides,
security, environmental, and other information to customers in its targeted
industries. Both segments primarily derive their revenue from subscriptions.
Information as to the operations of our two segments is set forth below
based on the nature of the offerings. Our Chairman and Chief Executive Officer
and his direct reports represent our chief operating decision maker, and they
evaluate segment performance based primarily on revenue and operating profit.
The accounting policies of our segments are the same as those described in the
summary of significant accounting policies (see Note 2 to our consolidated
financial statements included in our 2007 Form 10-K).
16
IHS INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
No single customer accounted for 10% or more of our total revenue for
the three months ended February 29, 2008 or February 28, 2007. There
are no material inter-segment revenues for any period presented.
We continue in the process of consolidating back-office functions and
moving additional functions to a shared-services model. Consequently, we are
changing our internal structure causing the composition of our internal segments
to change. Additionally, as the
information that our customers need to address their complex business issues
continues to converge at the intersection of the information domains that we
serve, we are evolving our management structure to a geographic focus, the
point of contact with our customers. As
a result, our defined operating segments will change during the second quarter
of 2008.
As shown below, certain corporate transactions are not allocated to the
reportable segments. Amounts not allocated include, but are not limited to,
such items as, corporate-level restructuring and offering charges, stock-based
compensation expense, net periodic pension and post-retirement benefits income,
corporate-level impairments, and gain (loss) on sales of corporate assets.
|
|
Energy
|
|
Engineering
|
|
Shared
Services
|
|
Consolidated
Total
|
|
|
|
(In thousands)
|
|
Three Months Ended
February 29, 2008
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
110,299
|
|
$
|
88,478
|
|
$
|
|
|
$
|
198,777
|
|
Segment operating income
|
|
39,152
|
|
14,992
|
|
(23,211
|
)
|
30,933
|
|
Depreciation and
amortization
|
|
4,058
|
|
4,126
|
|
639
|
|
8,823
|
|
Three Months Ended
February 28, 2007
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
86,746
|
|
$
|
65,875
|
|
$
|
|
|
$
|
152,621
|
|
Segment operating income
|
|
27,045
|
|
12,985
|
|
(14,146
|
)
|
25,884
|
|
Depreciation and
amortization
|
|
2,678
|
|
1,405
|
|
497
|
|
4,580
|
|
10.
Subsequent Event
On March 3, 2008, we
acquired Prime Publications Limited (Prime), which owned a 50 percent interest
in the Lloyds Register-Fairplay Limited joint venture, a leading source of
global maritime information. IHS acquired
100 percent of the stock of Prime for approximately
£38.0 million, or
approximately $75.5 million, which included $21.3 million in non-interest bearing seller notes
and the remainder was paid in cash.
Also on March 3,
2008, we acquired Dolphin Software, Inc. (Dolphin) for approximately $23.5
million in cash. Dolphin is a leader in developing and using chemical data
information and software used by companies to record and track chemicals stored
and used in their facilities.
On March 13, 2008,
we acquired Environmental Software Providers (ESP), a provider of enterprise
information solutions used by companies to assist in managing their
environmental sustainability programs for approximately $20.0 million in cash.
Cash used for these
acquisitions came from cash on hand and a draw down of $50.0 million on our
$385 million unsecured line of credit.
17
Item 2.
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Forward-Looking Statements
This
discussion contains statements that relate to IHSs future plans, objectives,
expectations, performance, events and the like that may constitute forward-looking
statements within the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E
of the Securities Exchange Act of 1934. Words such as may, could, should,
would, believe, expect, anticipate, estimate, intend, seeks, plan,
project, continue, predict and other words or expressions of similar
meaning are intended to identify forward-looking statements, although not all
forward-looking statements contain these identifying words. These statements
are based on our current expectations about future events or results and
information that is currently available to us, involve assumptions, risks and
uncertainties, and speak only as of the date on which such statements are made.
Our actual results may differ materially from those expressed or implied in
these forward-looking statements. Those factors include, but are not limited
to, our ability to obtain content from third parties (including Standards
Development Organizations) on commercially reasonable terms, changes in demand
for IHSs products and services, changes in the energy industry, our ability to
develop new products and services, pricing and other competitive pressures,
risks associated with the integration of acquisitions, changes in laws and
regulations governing our business and certain other factors discussed under
the caption Risk Factors in the MD&A section of our 2007 Form 10-K,
and in our other filings with the SEC. IHS undertakes no duty to update,
whether as a result of new information, future events or otherwise, unless
required by law.
Overview
Results
of Operations
IHS Inc. is a publicly traded Delaware corporation. IHS is a
leading provider and comprehensive source of Critical Information and Insight
in a sizable and growing global market. Our customers rely on our products and
services to facilitate crucial decision-making, support key processes, and
improve productivity. At the heart of our products and services is data
obtained from public sources, third parties, and our own proprietary databases.
We transform that data into Critical Information and Insight that is both
useful to our customers and available where and when they make critical
business decisions. The data becomes Critical Information when we combine it
with our proprietary and third-party technology to create graphical user
interfaces, search and navigation tools, and online delivery systems. We
further transform that information into Insight products and services with
analysis and interpretation from our teams of experts.
We have targeted four specific information domainsEnergy, Product
Lifecycle, Security, and Environment. Since these four information domains
represent areas where our customers have needs for critical information and
insight, we use these domains to set priorities and design our business
objectives. As we continue to deliver Critical Information and Insight in those
four information domains, we prepare and analyze our financial reports to
include each of the four domains in our two reportable segments. Today, our
Energy segment includes the Energy information domain while our Engineering
segment includes the Product Lifecycle, Security, and Environment information
domains.
We continue in the process of consolidating back-office functions and
moving additional functions to a shared-services model. Consequently, we are
changing our internal structure causing the composition of our internal
segments to change. Additionally, as the
information that our customers need to address their complex business issues
continues to converge at the intersection of the information domains that we
serve, we are evolving our management structure to a geographic focus, the
point of contact with our customers. As
a result, our defined operating segments will change during the second quarter
of 2008.
18
We
sell our offerings primarily through subscriptions. As a result of our
subscription-based business model and historically high renewal rates, we
generate recurring revenue and cash flow. We generally recognize revenue from
subscriptions (which are usually for one-year periods) ratably over the term of
the subscription.
Historically,
our business has had seasonal aspects.
However, with the continued organic growth in our subscription-based
business model combined with several acquisitions in recent years, our seasonal
aspects have diminished. Our first
quarter does benefit from the inclusion of the results from CERAWeek, an annual
energy executive gathering.
Subscriptions are generally paid in full
within one to two months after the subscription period commences. As a result,
the timing of our cash flows generally precedes the recognition of revenue and
income.
We serve some of the worlds largest corporations across
multiple industries, as well as governments and other organizations, in more
than 100 countries. We generate approximately half of our total revenue from
outside the United States. Our primary operations outside the United States are
in the United Kingdom, Canada, and Switzerland. Our operating profit outside
the United States has historically exceeded our domestic operating profit. We
manage our business through our Energy and Engineering operating segments.
Business
Combinations
In December 2007, we acquired
McCloskey Group Limited (McCloskey), the leading provider of news, critical
information and insight on the international coal markets located near London,
England. We acquired McCloskey for £13.9
million, or approximately $28.2 million using cash on hand.
On
March 3, 2008, we acquired
Prime Publications Limited (Prime), which owned a 50 percent interest in the
Lloyds Register-Fairplay Limited joint venture, a leading source of global
maritime information. IHS acquired 100
percent of the stock of Prime for approximately £38.0 million, or approximately
$75.5 million, which included $21.3 million in non-interest bearing seller
notes and the remainder was paid in cash.
Also
on
March
3, 2008, we acquired Dolphin Software, Inc. (Dolphin) for approximately $23.5
million in cash. Dolphin is a leader in developing and using chemical data
information and software used by companies to record and track chemicals stored
and used in their facilities.
On
March 13, 2008, we acquired Environmental Software Providers (ESP), a provider
of enterprise information solutions used by companies to assist in managing
their environmental sustainability programs for approximately $20.0 million in
cash.
Segment
Information
|
|
Three Months
Ended
|
|
|
|
February 29,
2008
|
|
February 28,
2007
|
|
|
|
(In thousands)
|
|
Energy revenue
|
|
$
|
110,299
|
|
$
|
86,746
|
|
Engineering revenue
|
|
88,478
|
|
65,875
|
|
Total revenue
|
|
$
|
198,777
|
|
$
|
152,621
|
|
Energy
|
|
$
|
39,152
|
|
$
|
27,045
|
|
Engineering
|
|
14,992
|
|
12,985
|
|
Shared services
|
|
(23,211
|
)
|
(14,146
|
)
|
Operating income
|
|
$
|
30,933
|
|
$
|
25,884
|
|
Three
Months Ended February 29, 2008 Compared to the Three Months Ended February 28,
2007
Revenue.
Revenue was $198.8 million for the three
months ended February 29, 2008, compared to $152.6 million for the three
months ended February 28, 2007, an increase of $46.2 million or 30%.
Revenue increased due to organic growth which contributed $14.0 million,
acquisitions which contributed $28.4 million and foreign currency which added
$3.8 million.
Revenue for our Energy segment was
$110.3 million for the three months ended February 29, 2008, compared to
$86.7 million for the three months ended February 28, 2007, an increase of
$23.6 million or 27%. The increase was principally due to organic growth, which
contributed $12.9 million. Additionally,
acquisitions added $8.3 million and favorable foreign currency movements grew
revenue by $2.3 million. Organic growth during the first quarter of 2008 was
primarily driven by price increases, growth in certain critical information
subscription products and stronger results from CERAWeek.
Revenue for our Engineering segment
was $88.5 million for the three months ended February 29, 2008, compared
to $65.9 million for the three months ended February 28, 2007, an increase
of $22.6 million or 34%. Growth attributed to acquisitions accounted for $20.1
million. Organic growth contributed $1.1
million and foreign currency movements added $1.4 million. Organic growth was driven by increased sales
in our specifications-and-standards and parts-management offerings which was partially
offset by the transition out of a non-strategic agency business where we were a
sales agent for products outside of our traditional standards products.
19
Cost of Revenue
. Cost of revenue was $89.2 million for the
three months ended February 29, 2008, compared to $65.7 million for the
three months ended February 28, 2007, an increase of $23.5 million or 36%.
As a percentage of revenue, cost of revenue increased to 44.9% from 43.1%. Margins within our Energy segment remained
flat as data related margin expansion was substantially offset by decreases in
service margins. The decrease in Energy
service margins was principally due to the organizational re-alignment
of certain resources that previously were part of Sales, General and
Administrative functions. Margins within our Engineering segment
decreased principally due to the modification of certain agency
relationships. The transition of these
relationships is substantially complete and therefore should not have a
material impact on the comparability of the Engineering segment gross margins
going forward.
Selling, General and Administrative Expenses
. Selling, general and administrative expenses
(SG&A) were $71.9 million for the three months ended February 29,
2008, compared to $57.9 million for the three months ended February 28,
2007, an increase of $14.0 million or 24%.
SG&A growth attributed to acquisitions was $7.3 million. Organic SG&A increased $5.9 million due
principally to a $5.4 million increase in stock-based compensation
expense. Foreign-currency movements
increased SG&A by $0.8 million. As a percentage of revenue and excluding
stock-based compensation expense, SG&A was 29.9% for the three months ended
February 29, 2008, down from 33.4% for the three months ended February 28,
2007.
Depreciation and Amortization Expenses
. Depreciation and amortization expenses were
$8.8 million for the three months ended February 29, 2008, compared to
$4.6 million for the three months ended February 28, 2007, an increase of
$4.2 million or 93%. The increase was primarily due to amortization of
intangible assets related to acquisitions.
Operating Income
. Operating income was $30.9 million for the
three months ended February 29, 2008, compared to $25.9 million for the
three months ended February 28, 2007, an increase of $5.0 million or 20%.
As a percentage of revenue, operating income decreased to 15.6% for the three
months ended February 29, 2008 from 17.0% for the three months ended February 28,
2007.
Operating income for our Energy
segment was $39.2 million for the three months ended February 29, 2008,
compared to $27.0 million for the three months ended February 28, 2007, an
increase of $12.2 million or 45%. The increase was primarily attributable to
increased revenue discussed above coupled with contained operating
expenses. As a percentage of revenue,
operating income increased to 35.5% for the three months ended February 29,
2008 from 31.2% for the three months ended February 28, 2007.
Operating income for our Engineering segment
was $15.0 million for the three months ended February 29, 2008, compared
to $13.0 million for the three months ended February 28, 2007, an increase
of $2.0 million or 16%. Operating income increased due to higher sales in our
specifications-and-standards business and improved results in our
parts-management offerings. As a
percentage of revenue, operating income decreased to 16.9% for the three months
ended February 29, 2008 from 19.7% for the three months ended February 28,
2007 which was primarily due to the modification of certain agency
relationships as discussed above.
Operating loss for our shared
services was $23.2 million for the three months ended February 29, 2008,
compared to $14.1 million for the three months ended February 28, 2007, an
increase of $9.1 million or 64%.
Increased stock-based compensation expense contributed $5.4 million.
Annual merit salary increases, additional headcount and costs associated with
our ongoing transformational initiatives also contributed to the increase.
Provision for Income Taxes
. Our effective tax rate for the three months
ended February 29, 2008 was 33.1%, compared to 33.0% for the three months
ended February 28, 2007.
20
Financial
Condition
Accounts
Receivable
. Accounts
receivable has increased by $17.5
million, or 9.9%, to $193.0 million compared
to $175.5 million as of November 30, 2007. The increase is attributable to both the organic and acquisition related
growth.
Accrued Compensation.
Accrued compensation was $14.2 million as of February 29,
2008, compared to $37.0 million as of November 30, 2007, a decrease of
$22.8 million or 61.7%. The decrease was primarily attributable to disbursement
of annual incentive bonuses during the first quarter.
Deferred Revenue.
Deferred revenue was $283.2
million as of February 29, 2008, compared to $239.4 million as of November 30,
2007, an increase of $43.8 million or 18.3%. The increase was primarily
attributable to both the
organic and acquisition related growth.
Liquidity and
Capital Resources
As of February 29, 2008, we
had cash and cash equivalents of $139.1 million, and virtually no debt. We have
generated strong cash flows from operations over the last few years. As a
result of these factors, as well as the availability of funds under our $385.0
million credit facility, we believe we will have sufficient cash to meet our
working capital and capital expenditure needs.
Our future capital requirements
will depend on many factors, including the timing and extent of spending to
support product development efforts, future acquisitions, the expansion of
sales and marketing activities, the timing of introductions of new products,
changing technology, investments in our internal business applications and the
continued market acceptance of our offerings. We could be required, or could
elect, to seek additional funding through public or private equity or debt
financing for any possible future acquisitions. Additional funds may not be
available on terms acceptable to us or at all. We expect our capital
expenditures, excluding potential acquisitions, to be less than $15 million for
2008.
Share Repurchase Program
During
2006, our board of directors approved a program to reduce the dilutive effects
of employee equity grants, by allowing employees to surrender shares back to
the company for a value equal to their statutory tax liability. IHS then pays the statutory tax on behalf of
the employee. Later in 2006, our board
of directors approved an additional programa stock buyback programwhereby IHS
acquires up to one million shares per year in the open market to more fully
offset the dilutive effect of our employee equity programs. This program was
renewed by the board of directors in late 2007 for fiscal year 2008. During the first quarter of 2008, we
repurchased 66,500 shares of our Class A common stock for approximately
$3.9 million, or $58.41 per share, pursuant to the stock buyback program. Additionally, we withheld 207,826 shares of
stock in treasury to cover employees statutory tax liability as discussed
above, for approximately $13.0 million, or $62.38 per share. Since the inception of these programs, we
have repurchased 756,462 shares of our Class A common stock for approximately
$33.1 million, or $43.71 per share, pursuant to the stock buyback program and
withheld for tax 590,639 shares for approximately $29.8 million, or $50.51 per
share.
Cash Flows
Net cash provided by operating activities was $32.5 million
for the three months ended February 29, 2008, compared
to $23.1 million for the three months ended February 28, 2007, an increase
of $9.4 million
. The increase was principally due to our business
growing profitably year over year, primarily due to increased pricing, an
expanding subscription base, increased sales and the positive impact of our
acquisitions. Our subscription-based business model typically generates a high
rate of cash flow and is aided by the following:
·
Relatively low
levels of required capital expenditures;
·
Positive working
capital characteristics that do not generally require substantial working
capital increases to support our growth;
21
·
A cash-for-tax
rate that continues to trend lower than our effective tax rate; and
·
Our
well-capitalized balance sheet.
The positive cash flow impact of our growing business in the first
quarter of 2008 was partially offset by
the annual bonus payments, which are substantially paid in the first quarter
each year and were approximately $6.4 million higher in 2008 than in
2007. In addition, the first quarter of
2008 had one additional US payroll cycle.
Net cash used in investing
activities was approximately $23.3 million for the three months ended February 29,
2008, compared to $8.2 million for the three months ended February 28,
2007. The change is driven primarily by the McCloskey acquisition in December 2007. In the first quarter of 2007, we disbursed
$8.0 million for the purchase of the assets of an oil-and-gas-data company.
Net cash used in financing
activities was $19.6 million for the three months ended February 29,
2008. Net cash used in financing
activities was $8.2 million during the three months ended February 28,
2007. We repurchased a total of
approximately 275,000 shares for approximately $16.9 million for the three
months ended February 29, 2008 compared to approximately 200,000 shares
for $7.8 million for the comparable period of 2007.
Credit Facility
On September 7, 2007, we entered into an amended and restated
credit agreement (Revolver). The $385 million unsecured Revolver allows
us, under certain conditions, to increase the facility to a maximum of
$500 million. The agreement expires in September 2012.
The interest rates for borrowing under the Revolver are based upon our
Leverage Ratio, which is the ratio of Consolidated Funded Indebtedness to
rolling four quarter Consolidated Earnings Before Interest Expense, Taxes,
Depreciation and Amortization (EBITDA), as defined in the Revolver. The rate
ranges from the applicable LIBOR plus 50 basis points to 125 basis points or
the agent banks base rate. A commitment fee is payable periodically and ranges
from 10 to 25 basis points based upon our Leverage Ratio. The Revolver contains
certain financial and other covenants, including limitations on capital lease
obligations and maximum Leverage and Interest Coverage Ratios, as defined in
the Revolver.
As
of February 29, 2008, we were in compliance with all of the covenants in
the agreement and had no outstanding borrowings. However, we had letters of
credit totaling approximately $1.0 million as of February 29, 2008. On March 3, 2008, we borrowed $50.0
million under the Revolver at an annual rate of 3.6% to fund acquisitions which
were closed during the first two weeks of our second fiscal quarter. The use of the Revolver allows us to maintain
cash levels to fund the ongoing operational needs of the business and has tax
benefits as we did not have to repatriate cash from foreign locations to fund
the acquisitions.
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 Managements Discussion and
Analysis and Results of OperationsCritical Accounting Policies and Estimates
in our 2007 Form 10-K for a discussion of the estimates and judgments
necessary in our accounting for revenue recognition, valuation of long-lived
and intangible assets and goodwill, income taxes, pension and post-retirement benefits, and
stock-based compensation.
22
Item 3
. Quantitative
and Qualitative Disclosure About Market Risk
For
information regarding our exposure to certain market risk, see Item 7A, Quantitative
and Qualitative Disclosures About Market Risk, in our 2007 Form 10-K.
There were no material changes to our market risk exposure during the first
three months of 2008.
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Item 4
. Controls and
Procedures
(a) Evaluation
of disclosure controls and procedures.
Under
the supervision and with the participation of the Companys management,
including the Chief Executive Officer and Chief Financial Officer, the Company
has evaluated the effectiveness of its disclosure controls and procedures
pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as of the end of the period covered by this report. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended, are
effective in ensuring that all material information required to be filed in
this quarterly report has been made known to them in a timely fashion.
(b) Changes in internal control over
financial reporting.
There
were no changes in our internal control over financial reporting that occurred
during the period covered by this Form 10-Q that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
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