2011 Q2 10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ___________________________________________________
FORM 10-Q
  ___________________________________________________
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2011

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
(Registrant’s telephone number, including area code)
 ___________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    o  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
x
Accelerated filer
 
o
 
 
 
 
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
Smaller Reporting Company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  Yes    x  No
As of May 31, 2011, there were 64,874,828 shares of our Class A Common Stock outstanding.
Table of Contents

TABLE OF CONTENTS
 
 
  
 
Page
  
 
 
Item 1.
  
Item 2.
  
Item 3.
  
Item 4.
  
 
 
 
  
 
 
Item 1.
  
Item 1A.
  
Item 2.
  
Item 6.
  
 
 


2
Table of Contents

PART I.   FINANCIAL INFORMATION
Item 1.
Financial Statements
IHS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per-share amounts)
 
As of
 
As of
 
May 31, 2011
 
November 30, 2010
 
(Unaudited)
 
(Audited)
Assets

 

Current assets:

 

Cash and cash equivalents
$
147,114

 
$
200,735

Accounts receivable, net
244,239

 
256,552

Income tax receivable
6,665

 
—

Deferred subscription costs
47,827

 
41,449

Deferred income taxes
34,419

 
33,532

Other
28,563

 
20,466

Total current assets
508,827

 
552,734

Non-current assets:

 

Property and equipment, net
117,676

 
93,193

Intangible assets, net
453,146

 
384,568

Goodwill, net
1,291,025

 
1,120,830

Other
8,169

 
4,377

Total non-current assets
1,870,016

 
1,602,968

Total assets
$
2,378,843

 
$
2,155,702

Liabilities and stockholders’ equity

 

Current liabilities:

 

Short-term debt
$
17,120

 
$
19,054

Accounts payable
40,430

 
35,854

Accrued compensation
33,859

 
51,233

Accrued royalties
20,161

 
24,338

Other accrued expenses
52,891

 
51,307

Income tax payable
—

 
4,350

Deferred subscription revenue
492,051

 
392,132

Total current liabilities
656,512

 
578,268

Long-term debt
277,553

 
275,095

Accrued pension liability
29,047

 
25,104

Accrued post-retirement benefits
10,182

 
10,056

Deferred income taxes
87,344

 
73,586

Other liabilities
16,680

 
17,512

Commitments and contingencies

 

Stockholders’ equity:

 

Class A common stock, $0.01 par value per share, 160,000,000 shares authorized, 67,152,304 and 66,250,283 shares issued, and 64,874,828 and 64,248,547 shares outstanding at May 31, 2011 and November 30, 2010, respectively
672

 
662

Additional paid-in capital
590,627

 
541,108

Treasury stock, at cost: 2,277,476 and 2,001,736 shares at May 31, 2011 and November 30, 2010, respectively
(123,804
)
 
(101,554
)
Retained earnings
929,935

 
860,497

Accumulated other comprehensive loss
(95,905
)
 
(124,632
)
Total stockholders’ equity
1,301,525

 
1,176,081

Total liabilities and stockholders’ equity
$
2,378,843

 
$
2,155,702

See accompanying notes.

3
Table of Contents

IHS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per-share amounts)
 
 
Three Months Ended May 31,
 
Six Months Ended May 31,
 
2011
 
2010
 
2011
 
2010
 
(Unaudited)
 
(Unaudited)
Revenue:

 

 
 
 
 
Products
$
276,375

 
$
225,440

 
$
537,244

 
438,122

Services
48,742

 
41,040

 
82,875

 
69,093

Total revenue
325,117

 
266,480

 
620,119

 
507,215

Operating expenses:

 

 
 
 
 
Cost of revenue:

 

 
 
 
 
Products
116,533

 
91,530

 
226,091

 
180,653

Services
26,446

 
21,408

 
45,072

 
37,491

Total cost of revenue (includes stock-based compensation expense of $930; $1,325; $1,784 and $2,757 for the three and six months ended May 31, 2011 and 2010, respectively)
142,979

 
112,938

 
271,163

 
218,144

Selling, general and administrative (includes stock-based compensation expense of $18,361; $16,315; $39,605 and $34,185 for the three and six months ended May 31, 2011 and 2010, respectively)
105,668

 
89,059

 
207,440

 
173,711

Depreciation and amortization
20,714

 
14,269

 
38,915

 
28,099

Restructuring charges (credits)
702

 
(82
)
 
702

 
(82
)
Acquisition-related costs
1,243

 
—

 
4,549

 
—

Net periodic pension and post-retirement expense
2,733

 
1,194

 
5,465

 
2,388

Other expense (income), net
108

 
(229
)
 
613

 
(1,114
)
Total operating expenses
274,147

 
217,149

 
528,847

 
421,146

Operating income
50,970

 
49,331

 
91,272

 
86,069

Interest income
306

 
94

 
491

 
198

Interest expense
(2,145
)
 
(295
)
 
(3,807
)
 
(660
)
Non-operating expense, net
(1,839
)
 
(201
)
 
(3,316
)
 
(462
)
Income from continuing operations before income taxes
49,131

 
49,130

 
87,956

 
85,607

Provision for income taxes
(10,401
)
 
(10,652
)
 
(18,517
)
 
(20,180
)
Income from continuing operations
38,730

 
38,478

 
69,439

 
65,427

Loss from discontinued operations, net
(8
)
 
—

 
(1
)
 
(126
)
Net income
$
38,722

 
$
38,478

 
$
69,438

 
65,301


 
 
 
 
 
 
 
Basic earnings per share:

 


 
 
 
 
Income from continuing operations
$
0.60

 
$
0.60

 
$
1.07

 
$
1.03

Loss from discontinued operations, net
$
—

 
$
—

 
$
—

 
$
—

Net income
$
0.60

 
$
0.60

 
$
1.07

 
$
1.02

Weighted average shares used in computing basic earnings per share
64,952

 
63,981

 
64,784

 
63,759


 
 
 
 
 
 
 
Diluted earnings per share:


 


 
 
 
 
Income from continuing operations
$
0.59

 
$
0.60

 
$
1.06

 
$
1.01

Loss from discontinued operations, net
$
—

 
$
—

 
$
—

 
$
—

Net income
$
0.59

 
$
0.60

 
$
1.06

 
$
1.01

Weighted average shares used in computing diluted earnings per share
65,547

 
64,569

 
65,493

 
64,498


See accompanying notes.

4
Table of Contents

IHS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
 
Six Months Ended May 31,
 
2011
 
2010
 
(Unaudited)
Operating activities:

 

Net income
$
69,438

 
$
65,301

Reconciliation of net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
38,915

 
28,099

Stock-based compensation expense
41,389

 
36,942

Excess tax benefit from stock-based compensation
(8,412
)
 
(4,674
)
Non-cash net periodic pension and post-retirement expense
5,207

 
1,704

Deferred income taxes
2,981

 
8,893

Change in assets and liabilities:

 

Accounts receivable, net
32,166

 
21,161

Other current assets
(9,730
)
 
(8,812
)
Accounts payable
1,001

 
1,992

Accrued expenses
(24,365
)
 
(20,260
)
Income tax payable
(7,781
)
 
(6,394
)
Deferred subscription revenue
60,105

 
55,951

Other liabilities
67

 
(747
)
Net cash provided by operating activities
200,981

 
179,156

Investing activities:

 

Capital expenditures on property and equipment
(32,531
)
 
(16,339
)
Acquisitions of businesses, net of cash acquired
(202,745
)
 
(83,567
)
Intangible assets acquired
(2,985
)
 
—

Change in other assets
(2,317
)
 
(943
)
Settlements of forward contracts
(3,170
)
 
(1,310
)
Net cash used in investing activities
(243,748
)
 
(102,159
)
Financing activities:

 

Proceeds from borrowings
335,000

 
75,000

Repayment of borrowings
(334,601
)
 
(43,278
)
Payment of debt issuance costs
(6,326
)
 
—

Excess tax benefit from stock-based compensation
8,412

 
4,674

Proceeds from the exercise of employee stock options
2,144

 
223

Repurchases of common stock
(22,250
)
 
(22,461
)
Net cash provided by (used in) financing activities
(17,621
)
 
14,158

Foreign exchange impact on cash balance
6,767

 
(12,534
)
Net increase (decrease) in cash and cash equivalents
(53,621
)
 
78,621

Cash and cash equivalents at the beginning of the period
200,735

 
124,201

Cash and cash equivalents at the end of the period
$
147,114

 
$
202,822


See accompanying notes.


5
Table of Contents

IHS INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
 
 
Shares of
Class A
Common
Stock
 
Class A
Common
Stock
 
Additional
Paid-In
Capital
 
Treasury
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Balance at November 30, 2010 (Audited)
64,249

 
$
662

 
$
541,108

 
$
(101,554
)
 
$
860,497

 
$
(124,632
)
 
$
1,176,081

Stock-based award activity
626

 
10

 
41,107

 
(22,250
)
 
—

 
—

 
18,867

Excess tax benefit on vested shares
—

 
—

 
8,412

 
—

 
—

 
—

 
8,412

Net income
—

 
—

 
—

 
—

 
69,438

 
—

 
69,438

Other comprehensive income:

 

 

 

 

 

 

Unrealized losses on hedging activities
—

 
—

 
—

 
—

 
—

 
(630
)
 
(630
)
Foreign currency translation adjustments
—

 
—

 
—

 
—

 
—

 
29,357

 
29,357

Comprehensive income, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
98,165

Balance at May 31, 2011
64,875

 
$
672

 
$
590,627

 
$
(123,804
)
 
$
929,935

 
$
(95,905
)
 
$
1,301,525

See accompanying notes.


6
Table of Contents

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

The accompanying unaudited condensed consolidated financial statements of IHS Inc. (IHS, we, our, or us) have been prepared on substantially the same basis as our annual consolidated financial statements and should be read in conjunction with our annual report on Form 10-K for the year ended November 30, 2010. In our opinion, these condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented, and such adjustments are of a normal, recurring nature.

Our business has seasonal aspects. For instance, our second quarter results benefit from the inclusion of revenue from CERAWeek, an annual energy executive gathering. In addition, every three years, our third quarter benefits from the inclusion of revenue generated by the triennial release of the Boiler Pressure Vessel Code (BPVC) engineering standard. The BPVC benefit most recently occurred in the third quarter of 2010. Our fourth quarter revenues and profits are modestly higher than the other three quarters; we attribute that trend to non-subscription revenue increases that tend to occur towards year-end.
Recent Accounting Pronouncements
In October 2009, the FASB issued guidance on revenue recognition that became effective for us in the first quarter of 2011. Under the new guidance, when vendor specific objective evidence (VSOE) or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. The adoption of the update did not have a material impact on our financial position or results of operations.

2.
Business Combinations

During the six months ended May 31, 2011, we completed the following acquisitions, among others:

ODS-Petrodata (Holdings) Ltd. (ODS-Petrodata). On April 16, 2011, we acquired ODS-Petrodata for approximately $75 million, net of cash acquired. ODS-Petrodata is a premier provider of data, information, and market intelligence to the offshore energy industry. We preliminarily recorded approximately $22 million of finite-lived intangible assets and $62 million of goodwill as a result of the transaction.

Dyadem International, Ltd. (Dyadem). On April 26, 2011, we acquired Dyadem for approximately $52 million, net of cash acquired. Dyadem is a market leader in Operational Risk Management and Quality Risk Management solutions. We preliminarily recorded $31 million of finite-lived intangible assets and $23 million of goodwill as a result of the transaction.

Chemical Market Associates, Inc. (CMAI). On May 2, 2011, we acquired CMAI for approximately $73 million, net of cash acquired. CMAI is a leading provider of market and business advisory services for the worldwide petrochemical, specialty chemicals, fertilizer, plastics, fibers, and chlor-alkali industries. We preliminarily recorded approximately $37 million of finite-lived intangible assets and $61 million of goodwill as a result of the transaction.

3.
Commitments and Contingencies

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

4.
Comprehensive Income

Our comprehensive income for the three and six months ended May 31, 2011 and 2010, was as follows:

7
Table of Contents

 
Three Months Ended May 31,
 
Six Months Ended May 31,
 
2011
 
2010
 
2011
 
2010
 
(In thousands)
Net income
$
38,722

 
$
38,478

 
$
69,438

 
$
65,301

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized losses on hedging activities
(630
)
 
—

 
(630
)
 
—

Foreign currency translation adjustment
5,941

 
(16,680
)
 
29,357

 
(43,248
)
Total comprehensive income
$
44,033

 
$
21,798

 
$
98,165

 
$
22,053


5.
Discontinued Operations

Effective December 31, 2009, we sold our small non-core South African business for approximately $2 million with no gain or loss on sale. The sale of this business included a building and certain intellectual property. In exchange for the sale of these assets, we received two three-year notes receivable, one secured by a mortgage on the building and the second secured by a pledge on the shares of the South African company. In December 2010, we received full payment of the note receivable that was secured by a mortgage on the building. Operating results of the discontinued operations for the three months ended May 31, 2011 and 2010, respectively, were as follows:
 
Three Months Ended May 31,
 
Six Months Ended May 31,
 
2011
 
2010
 
2011
 
2010
 
(In thousands)
Loss from discontinued operations
$
(12
)
 
$
—

 
$
(1
)
 
$
(159
)
Tax benefit
4

 
—

 
—

 
33

Loss from discontinued operations, net
$
(8
)
 
$
—

 
$
(1
)
 
$
(126
)

6.
Acquisition-related Costs

During the first and second quarters of 2011, we incurred acquisition-related costs to close deals and leverage synergies from recent business combinations. As a result, we eliminated approximately 25 positions and closed one of the acquired offices. The changes only affected the Americas and EMEA segments.
The acquisition-related charges that we have recorded consists of direct and incremental costs associated with severance, outplacement, and other employee-related benefits; facility closure costs; and legal, due diligence, and valuation service fees associated with the recent acquisitions that were incurred during the six months of 2011. Approximately $4.1 million of the charge related to our Americas segment and $0.4 million pertained to our EMEA segment. The charge was comprised of the following:
 
Three Months Ended February 28, 2011
 
Three Months Ended May 31, 2011
 
Six Months Ended May 31, 2011
 
(In thousands)
Employee severance and other termination benefits
$
2,280

 
$
—

 
$
2,280

Contract termination costs
606

 
—

 
606

Other
420

 
1,243

 
1,663

Total
$
3,306

 
$
1,243

 
$
4,549


A reconciliation of the related accrued liability as of May 31, 2011 was as follows:

8
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Employee
Severance and
Other
Termination
Benefits
 
Contract
Termination
Costs
 
Other
 
Total
 
(In thousands)
Balance at November 30, 2010
$
—

 
$
—

 
$
—

 
$
—

Add: Costs incurred
2,280

 
606

 
1,663

 
4,549

Less: Amount paid during the six months ended May 31, 2011
(2,212
)
 
(35
)
 
(1,435
)
 
(3,682
)
Balance at May 31, 2011
$
68

 
$
571

 
$
228

 
$
867


As of May 31, 2011, the entire remaining $0.9 million liability was in the Americas segment.

7.
Restructuring Charge

During the third quarter of 2010, we announced various plans to streamline operations and merge functions. As a result, we reduced our aggregate workforce by approximately 3% and consolidated several locations. The changes primarily affected the Americas and EMEA segments.
The restructuring charge that we recorded consisted of direct and incremental costs associated with restructuring and related activities, including severance, outplacement and other employee related benefits; facility closures and relocations; and legal expenses associated with employee terminations incurred during the quarter. The entire $9.1 million restructuring charge was recorded during the third quarter of 2010. Approximately $7.7 million of the charge related to our Americas segment and $1.3 million pertained to our EMEA segment, with the remainder in APAC. The restructuring charge was comprised of the following (in thousands):
Employee severance and other termination benefits
$
8,024

Contract termination costs
972

Other
108

Total
$
9,104


In the second quarter of 2011, we recorded an additional $0.7 million of net restructuring costs in the Americas segment, which represents a revision to our third quarter 2010 estimate of cost to exit space in one of our facilities, partially offset by favorable resolution of employee severance costs. The following table provides a reconciliation of the restructuring liability as of May 31, 2011:
 
Employee
Severance and
Other
Termination
Benefits
 
Contract
Termination
Costs
 
Other
 
Total
 
(In thousands)
Balance at November 30, 2010
$
1,286

 
$
122

 
$
47

 
$
1,455

Add: Restructuring costs incurred
—

 
—

 
—

 
—

Less: Amount paid during the six months ended May 31, 2011
(892
)
 
(1,015
)
 
—

 
(1,907
)
Revision to prior estimates
$
(394
)
 
$
1,143

 
$
(47
)
 
$
702

Balance at May 31, 2011
$
—

 
$
250

 
$
—

 
$
250


As of May 31, 2011, the entire remaining $0.3 million liability was in the Americas segment.
 
8.
Stock-based Compensation

A little more than a third of our nonvested shares have performance-based vesting provisions. We evaluate our performance-based vesting awards each quarter to identify any required adjustments to the expected vesting schedule, remaining unrecognized compensation cost, and stock-based compensation expense. Stock-based compensation expense for the three and six months ended May 31, 2011 and 2010, respectively, was as follows:

9
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Three Months Ended May 31,
 
Six Months Ended May 31,
 
2011
 
2010
 
2011
 
2010
 
(In thousands)
Cost of revenue
$
930

 
$
1,325

 
$
1,784

 
$
2,757

Selling, general and administrative
18,361

 
16,315

 
39,605

 
34,185

Total stock-based compensation expense
$
19,291

 
$
17,640

 
$
41,389

 
$
36,942

Total income tax benefits recognized for stock-based compensation arrangements were as follows:
 
Three Months Ended May 31,
 
Six Months Ended May 31,
 
2011
 
2010
 
2011
 
2010
 
(In thousands)
Income tax benefits
$
6,815

 
$
6,527

 
$
14,602

 
$
13,669

No stock-based compensation cost was capitalized during the three or six months ended May 31, 2011 and 2010.
As of May 31, 2011, there was $116.9 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to nonvested stock-based awards that will be recognized over a weighted average period of approximately 1.5 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.
Nonvested Shares. The following table summarizes changes in nonvested shares during the six months ended May 31, 2011.
 
Shares
 
Weighted-
Average Grant
Date Fair Value
 
(in thousands)
 
 
Balances, November 30, 2010
2,732

 
$
48.40

Granted
1,119

 
$
80.47

Vested
(840
)
 
$
53.12

Forfeited
(105
)
 
$
53.90

Balances, May 31, 2011
2,906

 
$
63.46

The total fair value of nonvested shares that vested during the six months ended May 31, 2011 was $67.8 million based on the weighted-average fair value on the vesting date and $44.6 million based on the weighted-average fair value on the grant date.

9.
Income Taxes

Our effective tax rate is estimated based upon the effective tax rate expected to be applicable for the full fiscal year.
Our effective tax rate for the three and six months ended May 31, 2011 was 21.2% and 21.1% , respectively, compared to 21.7% and 23.6% for the same respective periods of 2010. The 2011 effective tax rates reflect the full-year benefit from a tax election made during the second quarter of 2010.

As of May 31, 2011, the total amount of unrecognized tax benefits was $1.8 million, of which $0.2 million related to interest. Unrecognized tax benefits increased less than $0.1 million during the first six months of 2011.

10.
Debt
On January 5, 2011, we entered into a $1 billion syndicated bank credit facility consisting of a $300 million term loan and a $700 million revolver (collectively, the Credit Facility). All borrowings under the Credit Facility are unsecured. The loan and revolver included in the Credit Facility have a five-year term ending in January 2016. The interest rates for borrowings under the Credit Facility will be the applicable LIBOR plus 1.25% to 2.00%, depending upon our Leverage Ratio, which is defined as the ratio of Consolidated Funded Indebtedness to rolling four-quarter Consolidated Earnings Before Interest Expense, Taxes, Depreciation and Amortization (EBITDA), as defined in the Credit Facility. A commitment fee on any unused balance is payable periodically and ranges from 0.20% to 0.35% based upon our Leverage Ratio. The Credit Facility contains certain financial and other covenants, including a maximum Leverage Ratio and a maximum Interest Coverage Ratio, as defined in the Credit Facility. The old revolving credit agreement was retired immediately upon consummation of the new financing.

10
Table of Contents

As of May 31, 2011, we were in compliance with all of the covenants in the Credit Facility and had $293 million of outstanding borrowings under the agreement at a current annual interest rate of 1.56%. We also had approximately $0.4 million of outstanding letters of credit under the agreement as of May 31, 2011.
Our debt as of May 31, 2011 also included approximately $2 million of non-interest bearing notes that were issued to the sellers of Prime Publications Limited, a company that we purchased in 2008. These notes are due upon demand and are therefore recorded in short-term debt in the consolidated balance sheets.

11.
Pensions and Post-retirement Benefits

Our defined-benefit plans consist of a non-contributory retirement plan for all of our U.S. employees with at least one year of service (U.S. RIP), a pension plan that covers certain employees of one of our United Kingdom-based subsidiaries (U.K. RIP), and a supplemental income plan (SIP) for certain US employees who earn over a federally stipulated amount. During 2010, we approved a plan design change to the U.S. RIP that was effective March 1, 2011, and we also made the decision to discontinue future benefit accruals under the U.K. RIP. Our net periodic pension expense (income) for the three and six months ended May 31, 2011 and 2010, respectively, was comprised of the following: 
 
Three Months Ended May 31, 2011
 
Three Months Ended May 31, 2010
 
U.S.
RIP
 
U.K.
RIP
 
SIP
 
Total
 
U.S.
RIP
 
U.K.
RIP
 
SIP
 
Total
 
(In thousands)
Service costs incurred
2,110

 
$
36

 
$
35

 
$
2,181

 
$
2,004

 
$
158

 
$
53

 
2,215

Interest costs on projected benefit obligation
2,969

 
489

 
99

 
3,557

 
2,993

 
440

 
104

 
3,537

Expected return on plan assets
(4,830
)
 
(591
)
 
—

 
(5,421
)
 
(5,038
)
 
(530
)
 
—

 
(5,568
)
Amortization of prior service cost
(336
)
 
—

 
(2
)
 
(338
)
 
(119
)
 
—

 
11

 
(108
)
Amortization of actuarial loss (gain)
2,463

 
10

 
42

 
2,515

 
1,497

 
49

 
46

 
1,592

Amortization of transitional obligation/(asset)
—

 
—

 
11

 
11

 
—

 
—

 
10

 
10

Net periodic pension expense (income)
$
2,376

 
$
(56
)
 
$
185

 
$
2,505

 
$
1,337

 
$
117

 
$
224

 
$
1,678


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Six Months Ended May 31, 2011
 
Six Months Ended May 31, 2010
 
U.S.
RIP
 
U.K.
RIP
 
SIP
 
Total
 
U.S.
RIP
 
U.K.
RIP
 
SIP
 
Total
 
(In thousands)
Service costs incurred
4,219

 
$
73

 
$
70

 
$
4,362

 
$
4,008

 
$
319

 
$
106

 
4,433

Interest costs on projected benefit obligation
5,938

 
985

 
198

 
7,121

 
5,986

 
890

 
208

 
7,084

Expected return on plan assets
(9,660
)
 
(1,190
)
 
—

 
(10,850
)
 
(10,076
)
 
(1,071
)
 
—

 
(11,147
)
Amortization of prior service cost
(672
)
 
—

 
(4
)
 
(676
)
 
(238
)
 
—

 
22

 
(216
)
Amortization of actuarial loss (gain)
4,926

 
20

 
84

 
5,030

 
2,993

 
99

 
91

 
3,183

Amortization of transitional obligation/(asset)
—

 
—

 
22

 
22

 
—

 
—

 
20

 
20

Net periodic pension expense (income)
$
4,751

 
$
(112
)
 
$
370

 
$
5,009

 
$
2,673

 
$
237

 
$
447

 
$
3,357

Our net periodic post-retirement expense (income) was comprised of the following for the three and six months ended May 31, 2011 and 2010, respectively:
 
Three Months Ended May 31,
 
Six Months Ended May 31,
 
2011
 
2010
 
2011
 
2010
 
(In thousands)
Service costs incurred
$
7

 
$
12

 
$
14

 
$
24

Interest costs on projected benefit obligation
132

 
140

 
264

 
280

Amortization of prior service cost
(81
)
 
(808
)
 
(162
)
 
(1,616
)
Amortization of net actuarial loss
170

 
172

 
340

 
343

Net periodic post-retirement expense (income)
$
228

 
$
(484
)
 
$
456

 
$
(969
)

12.
Earnings per Share

Basic earnings per share (EPS) is computed on the basis of the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common shares.
Weighted average common shares outstanding for the three and six months ended May 31, 2011 and 2010, respectively, were calculated as follows:
 
Three Months Ended May 31,
 
Six Months Ended May 31,
 
2011
 
2010
 
2011
 
2010
 
(In thousands)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Shares used in basic EPS calculation
64,952

 
63,981

 
64,784

 
63,759

Effect of dilutive securities:
 
 
 
 
 
 
 
Restricted stock units
551

 
449

 
659

 
603

Stock options and other stock-based awards
44

 
139

 
50

 
136

Shares used in diluted EPS calculation
65,547

 
64,569

 
65,493

 
64,498


13.
Derivatives

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In April 2011, to mitigate interest rate exposure on our $300 million term loan, we entered into an interest rate derivative contract that effectively swaps $50 million of floating rate debt for fixed rate debt. Because the terms of the swap and the variable rate debt coincide, we do not expect any ineffectiveness. We have designated and accounted for this instrument as a cash flow hedge, with changes in fair value being deferred in accumulated other comprehensive loss in the consolidated balance sheets.

Since our swap is not listed on an exchange, we have evaluated its fair value by reference to similar transactions in active markets; consequently, we have classified the swap within Level 2 of the fair value measurement hierarchy. As of May 2011, the fair market value of our swap was a loss of $1.0 million, and the current mark-to-market loss position is recorded in other accrued expenses in the consolidated balance sheets.

In June 2011, we entered into a second $50 million interest rate derivative contract with the same terms and maturity date as the initial swap described above.

14.
Goodwill and Intangible Assets

The following table presents details of our intangible assets, other than goodwill, as of May 31, 2011 and November 30, 2010:
 
 
As of
May 31, 2011
 
As of
November 30, 2010
 
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
 
(In thousands)
Intangible assets subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
Information databases
$
273,035

 
$
(91,049
)
 
$
181,986

 
$
237,888

 
$
(73,815
)
 
$
164,073

Customer relationships
168,629

 
(34,595
)
 
134,034

 
132,878

 
(28,533
)
 
104,345

Non-compete agreements
9,868

 
(7,110
)
 
2,758

 
9,551

 
(5,934
)
 
3,617

Developed computer software
75,099

 
(19,964
)
 
55,135

 
52,258

 
(15,926
)
 
36,332

Other
16,050

 
(13,403
)
 
2,647

 
14,944

 
(10,273
)
 
4,671

Total
$
542,681

 
$
(166,121
)
 
$
376,560

 
$
447,519

 
$
(134,481
)
 
$
313,038

Intangible assets not subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
Trademarks
75,356

 
—

 
75,356

 
70,366

 
—

 
70,366

Perpetual licenses
1,230

 
—

 
1,230

 
1,164

 
—

 
1,164

Total intangible assets
$
619,267

 
$
(166,121
)
 
$
453,146

 
$
519,049

 
$
(134,481
)
 
$
384,568


Intangible assets amortization expense was $14.5 million for the three months and $27.6 million for the six months ended May 31, 2011, as compared with $9.8 million for the three months and $19.1 million for the six months ended May 31, 2010. The following table presents the estimated future amortization expense related to intangible assets held as of May 31, 2011:
                
Year
 
Amount (in thousands)
Remainder of 2011
 
$
31,587

2012
 
63,004

2013
 
57,696

2014
 
48,120

2015
 
44,900

Changes in our goodwill and gross intangible assets from November 30, 2010 to May 31, 2011 were primarily the result of our recent acquisition activities, in addition to foreign currency translation. Net intangibles increased primarily because of the addition of intangible assets associated with the acquisitions.

15.
Segment Information

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

As our APAC operations have evolved, the management structure of the region has also evolved and now includes responsibility for overseeing India. Accordingly, we have included India's 2011 results in the APAC geographic segment, and we have reclassified India's 2010 results from EMEA to APAC.
Information about the operations of our three segments is set forth below. No single customer accounted for 10% or more of our total revenue for the three and six months ended May 31, 2011 and 2010. There are no material inter-segment revenues for any period presented. Certain corporate transactions are not allocated to the reportable segments, including such items as stock-based compensation expense, net periodic pension and post-retirement expense (income), corporate-level impairments, and gain (loss) on sale of corporate assets.
 
Americas
 
EMEA
 
APAC
 
Shared
Services
 
Consolidated
Total
 
(In thousands)
Three Months Ended May 31, 2011
 
 
 
 
 
 
 
 
Revenue
$
196,559

 
$
95,628

 
$
32,930

 
$
—

 
$
325,117

Operating income
54,786

 
19,614

 
9,865

 
(33,295
)
 
50,970

Depreciation and amortization
15,319

 
4,798

 
47

 
550

 
20,714

Three Months Ended May 31, 2010
 
 
 
 
 
 
 
 
Revenue
$
168,054

 
$
75,248

 
$
23,178

 
$
—

 
$
266,480

Operating income
54,430

 
17,312

 
7,875

 
(30,286
)
 
49,331

Depreciation and amortization
9,955

 
3,758

 
25

 
531

 
14,269

 
 
 
 
 
 
 
 
 
 
 
Americas
 
EMEA
 
APAC
 
Shared
Services
 
Consolidated
Total
 
(In thousands)
Six Months Ended May 31, 2011
 
 
 
 
 
 
 
 
Revenue
$
377,750

 
$
180,066

 
$
62,303

 
$
—

 
$
620,119

Operating income
104,105

 
36,111

 
18,126

 
(67,070
)
 
91,272

Depreciation and amortization
29,428

 
8,290

 
86

 
1,111

 
38,915

Six Months Ended May 31, 2010
 
 
 
 
 
 
 
 
Revenue
$
320,022

 
$
143,444

 
$
43,749

 
$
—

 
$
507,215

Operating income
101,098

 
29,993

 
14,176

 
(59,198
)
 
86,069

Depreciation and amortization
19,171

 
7,818

 
50

 
1,060

 
28,099

Revenue by transaction type was as follows:
 
Three Months Ended May 31,
 
Six Months Ended May 31,
 
2011
 
2010
 
2011
 
2010
 
(In thousands)
Subscription revenue
$
250,541

 
$
205,722

 
$
484,313

 
$
401,208

Consulting revenue
18,953

 
15,085

 
35,469

 
26,970

Transaction revenue
14,327

 
12,235

 
27,665

 
23,625

Other revenue
41,296

 
33,438

 
72,672

 
55,412

Total revenue
$
325,117

 
$
266,480

 
$
620,119

 
$
507,215


Revenue by information domain was as follows:

14
Table of Contents

 
Three Months Ended May 31,
 
Six Months Ended May 31,
 
2011
 
2010
 
2011
 
2010
 
(In thousands)
Energy revenue
$
139,445

 
$
123,114

 
$
261,096

 
$
233,049

Product Lifecycle (PLC) revenue
108,493

 
83,175

 
210,273

 
157,909

Security revenue
30,111

 
26,953

 
56,931

 
52,352

Environment revenue
22,568

 
13,391

 
43,543

 
24,598

Macroeconomic Forecasting and Intersection revenue
24,500

 
19,847

 
48,276

 
39,307

Total revenue
$
325,117

 
$
266,480

 
$
620,119

 
$
507,215


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

In addition to historical information, this quarterly report on Form 10-Q contains forward-looking statements. These forward-looking statements generally are identified by the use of the words “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of these terms, and other similar expressions. Forward-looking statements are based on current expectations, assumptions, and projections that are subject to risks and uncertainties, which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is outlined under the “Risk Factors” section of our 2010 annual report on Form 10-K. We are under no obligation to update or publicly revise these forward-looking statements, whether as a result of new information, future events, or otherwise.
Management’s discussion and analysis is intended to help the reader understand the financial condition and results of operations for IHS Inc. The following discussion should be read in conjunction with our annual report on Form 10-K for the year ended November 30, 2010, the Condensed Consolidated Financial Statements and accompanying notes included in this quarterly report on Form 10-Q, and important information and disclosure that we routinely post to our website (www.ihs.com).

Executive Summary

Business Overview

IHS is a leading source of information and insight in critical areas that shape today’s business landscape, including energy and power; design and supply chain; defense, risk and security; environmental, health and safety (EHS) and sustainability; country and industry forecasting; and commodities, pricing and cost. Businesses and governments around the globe rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to make high-impact decisions and develop strategies with speed and confidence. IHS has been in business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005. Headquartered in Englewood, Colorado, USA, IHS employs more than 5,100 people in more than 30 countries around the world. We source raw data and transform it into information through a series of transformational steps that reduce the uncertainty that is inherent in unrefined data and enhances its usefulness.

Inherent in all of our strategies is a firm commitment to put our customers first in everything that we do. We believe that maintaining a disciplined “outside-in” approach will allow us to better serve our customers and our shareholders. To achieve that goal, we have organized our business around our customers and the geographies in which they reside: Americas, EMEA, and APAC. This structure allows us to tailor and expand the solutions we offer to meet the unique needs of our customers both globally and in local markets.

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

Our business has seasonal aspects. For instance, our second quarter results benefit from the inclusion of revenue from CERAWeek, an annual energy executive gathering. In addition, every three years, our third quarter benefits from the inclusion of revenue generated by the triennial release of the Boiler Pressure Vessel Code (BPVC) engineering standard. The BPVC benefit most recently occurred in the third quarter of 2010. Fourth quarter revenues and profits are modestly higher than the other three quarters; we attribute that trend to non-subscription revenue increases that tend to occur towards year-end.

15
Table of Contents


Global Operations

Approximately 50% of our revenue is transacted outside of the United States; however, only about 30% of our revenue is transacted in currencies other than the U.S. dollar. As a result, a strengthening U.S. dollar relative to certain currencies has a negative impact on our revenue; conversely, a weakening U.S. dollar has a positive impact on our revenue. However, the impact on operating income is diminished due to certain operating expenses denominated in currencies other than the U.S. dollar. Our largest foreign currency exposures, in order of magnitude, are the British Pound, the Canadian Dollar, and the Euro.

Key Performance Indicators

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

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

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

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

•
Foreign currency – We define the foreign currency impact on revenue as the difference between current revenue at current exchange rates and current revenue at 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.

Non-GAAP measures. We use non-GAAP measures such as Adjusted EBITDA and free cash flow in our operational and financial decision-making, believing that such measures allow us to focus on what we deem to be more reliable indicators of ongoing operating performance (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 IHS website, we provide reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures.

Adjusted EBITDA. EBITDA and Adjusted EBITDA are used by many of our investors, research analysts, investment bankers, and lenders to assess our operating performance. For example, a measure similar to EBITDA is required by the lenders under our term loan 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 (i) non-cash items (e.g., stock-based compensation expense and non-cash pension and post-retirement expense) and (ii) items that management does not consider to be useful in assessing our operating performance (e.g., acquisition-related costs, restructuring charges, income or loss from discontinued operations, and gain or loss on sale of assets).

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

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

16
Table of Contents

income and expense moderates the impact of a company’s capital structure on its performance.

Results of Operations

Total Revenue

Second quarter 2011 revenue increased 22% compared to the second quarter of 2010, and our year-to-date 2011 revenue also increased 22% compared to the same period of 2010. The table below displays the percentage point change in revenue due to organic, acquisitive, and foreign currency factors when comparing the three and six months ended May 31, 2011 to the three and six months ended May 31, 2010.
 
Three Month Change
 
Six Month Change
(All amounts represent percentage points)
Organic
 
Acquisitive
 
Foreign
Currency
 
Organic
 
Acquisitive
 
Foreign
Currency
Increase in total revenue
7
%
 
13
%
 
3
%
 
8
%
 
13
%
 
2
%

The 7% organic revenue growth for the second quarter of 2011 was broad-based in nature, with most transaction types and all domains contributing to the growth. We experienced an 8% organic revenue increase in our subscription-based business, which continues to demonstrate the strength of the subscription-based business. We also benefited from positive organic growth within the transaction and other categories of our non-subscription business, which led to a combined 3% organic growth rate for the non-subscription business in the second quarter of 2011.

The 8% organic revenue growth for the six months of 2011 was also broad-based in nature, with all transaction types and all domains contributing to the growth. The subscription-based business increased 8% organically, and the non-subscription businesses all contributed positively to the overall growth.

The acquisition-related revenue growth for the quarter and year-to-date periods was primarily due to acquisitions we have made in the last twelve months, including the following:

•
Quantitative Micro Software (QMS) in the second quarter of 2010;
•
Certain chemical and energy portfolio business assets of Access Intelligence, as well as the acquisition of Atrion International Inc.; Syntex Management Systems, Inc.; and iSuppli Inc. in the fourth quarter of 2010; and
•
ODS-Petrodata; Dyadem International, Ltd.; and Chemical Market Associates, Inc. in the second quarter of 2011.

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

Revenue by Segment (geography)
 
Three Months Ended May 31,
 
Percentage
Change
 
Six Months Ended May 31,
 
Percentage
Change
(In thousands, except percentages)
2011
 
2010
 
 
2011
 
2010
 
Americas revenue
$
196,559

 
$
168,054

 
17
%
 
$
377,750

 
$
320,022

 
18
%
As a percent of total revenue
60
%
 
63
%
 
 
 
61
%
 
63
%
 
 
EMEA revenue
95,628

 
75,248

 
27
%
 
180,066

 
143,444

 
26
%
As a percent of total revenue
29
%
 
28
%
 
 
 
29
%
 
28
%
 
 
APAC revenue
32,930

 
23,178

 
42
%
 
62,303

 
43,749

 
42
%
As a percent of total revenue
10
%
 
9
%
 
 
 
10
%
 
9
%
 
 
Total revenue
$
325,117

 
$
266,480

 
22
%
 
$
620,119

 
$
507,215

 
22
%

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

17
Table of Contents

 
Three Month Change
 
Six Month Change
(All amounts represent percentage points)
Organic
 
Acquisitive
 
Foreign
Currency
 
Organic
 
Acquisitive
 
Foreign
Currency
Americas revenue
6
%
 
10
%
 
1
%
 
7
%
 
10
%
 
1
%
EMEA revenue
5
%
 
16
%
 
6
%
 
7
%
 
16
%
 
3
%
APAC revenue
19
%
 
19
%
 
4
%
 
17
%
 
22
%
 
3
%

As our APAC operations have evolved, the management structure of the region has also evolved and now includes responsibility for overseeing India. Accordingly, we have included India's 2011 results in the APAC geographic segment, and we have reclassified India's 2010 results from EMEA to APAC.

For the three and six months of 2011, we experienced broad-based organic revenue growth in all three geographies, with subscription-based revenue and Energy domain revenue providing key contributions to the growth.

Revenue by Transaction Type
 
Three Months Ended May 31,
 
Percentage
Change
 
Six Months Ended May 31,
 
Percentage
Change
(In thousands, except percentages)
2011
 
2010
 
 
2011
 
2010
 
Subscription revenue
$
250,541

 
$
205,722

 
22
%
 
$
484,313

 
$
401,208

 
21
%
As a percent of total revenue
77
%
 
77
%
 
 
 
78
%
 
79
%
 
 
Consulting revenue
18,953

 
15,085

 
26
%
 
35,469

 
26,970

 
32
%
As a percent of total revenue
6
%
 
6
%
 
 
 
6
%
 
5
%
 
 
Transaction revenue
14,327

 
12,235

 
17
%
 
27,665

 
23,625

 
17
%
As a percent of total revenue
4
%
 
5
%
 
 
 
4
%
 
5
%
 
 
Other revenue
41,296

 
33,438

 
24
%
 
72,672

 
55,412

 
31
%
As a percent of total revenue
13
%
 
13
%
 
 
 
12
%
 
11
%
 
 
Total revenue
$
325,117

 
$
266,480

 
22
%
 
$
620,119

 
$
507,215

 
22
%

We summarize our transaction type revenue by the following categories:

•
Subscription revenue represents the significant majority of our revenue, and is comprised of subscriptions to our various information databases.
•
Consulting revenue represents customer relationships where we are engaged to perform various professional services such as research and analysis, modeling and forecasting, and other similar work. Our consulting offerings are primarily focused on Energy/Resources, Manufacturing/Services, and the Public Sector.
•
Transaction revenue represents single-document product sales, which are typically sold through ecommerce and telesales channels. We usually deliver these products to our customers as part of a one-time, unique sale.
•
Other revenue consists of a variety of revenue streams, including conferences and events, advertising, data storage services, parts optimization software and services, and Environmental, Health, and Safety (EHS) & Sustainability enterprise software sales and services.

Relative to the 22% subscription revenue growth for the second quarter, approximately 8% is due to organic growth. This trend is especially important for us, as 77% of our revenue currently comes from our subscription base. Each of the three components of our non-subscription business also contributed positively to the overall revenue growth, with a combined 3% organic growth rate. While the three points of growth reduced the overall growth rate of the company, it is the fourth consecutive quarter of positive organic growth for our non-subscription business. Our CERAWeek conference showed nice growth over the prior year, representative of the strength in our Energy end market.

Relative to the 21% subscription revenue growth for the six months of 2011, approximately 8% is due to organic growth. Year-to-date, all three components of the non-subscription part of the business had positive organic growth, which signals to us that our business is experiencing steady growth in all areas. We think it is important to understand that our non-subscription products and services are critical to us, as they complement our subscription business in creating strong and comprehensive customer relationships.

Revenue by Information Domain

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Three Months Ended May 31,
 
Percentage
Change
 
Six Months Ended May 31,
 
Percentage
Change
(In thousands, except percentages)
2011
 
2010
 
 
2011
 
2010
 
Energy revenue
$
139,445

 
$
123,114

 
13
%
 
$
261,096

 
$
233,049

 
12
%
As a percent of total revenue
43
%
 
46
%
 
 
 
42
%
 
46
%
 
 
Product Lifecycle (PLC) revenue
108,493

 
83,175

 
30
%
 
210,273

 
157,909

 
33
%
As a percent of total revenue
33
%
 
31
%
 
 
 
34
%
 
31
%
 
 
Security revenue
30,111

 
26,953

 
12
%
 
56,931

 
52,352

 
9
%
As a percent of total revenue
9
%
 
10
%
 
 
 
9
%
 
10
%
 
 
Environment revenue
22,568

 
13,391

 
69
%
 
43,543

 
24,598

 
77
%
As a percent of total revenue
7
%
 
5
%
 
 
 
7
%
 
5
%
 
 
Macroeconomic Forecasting and Intersection revenue
24,500

 
19,847

 
23
%
 
48,276

 
39,307

 
23
%
As a percent of total revenue
8
%
 
7
%
 
 
 
8
%
 
8
%
 
 
Total revenue
$
325,117

 
$
266,480

 
22
%
 
$
620,119

 
$
507,215

 
22
%

For the three and six months of 2011, our Energy domain revenue is still our most significant source of revenue, and our revenue growth in that domain highlights the continued strength of our Energy offerings across all geographic segments. Product Lifecycle revenue increases were primarily due to the fourth quarter 2010 acquisition of iSuppli, as well as steady performance in the other PLC offerings. Security revenue continues to be particularly strengthened by our maritime offerings. Environment’s increases are primarily due to recent acquisitions, with solid organic growth contributing to the increase as well. The Macroeconomic Forecasting and Intersection revenue supports all of the other domains, and has experienced double digit organic growth in both the three and six months of 2011.

Operating Expenses

We continuously evaluate our operating expenses and look for opportunities to improve margins and manage expenses. In 2010, we eliminated approximately three percent of our worldwide workforce. In the first and second quarters of 2011, we incurred acquisition-related costs to close deals and leverage synergies from recent business combinations. We continue to make progress on our Vanguard initiative, which is our plan for consolidating and standardizing billing systems, general ledgers, sales-force automation capabilities, and all supporting business processes. We are also in the process of reducing the number of global data centers that we employ to manage our business.

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)
2011
 
2010
 
 
2011
 
2010
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
$
142,979

 
$
112,938

 
27
%
 
$
271,163

 
$
218,144

 
24
%
As a percent of revenue
44
%
 
42
%
 
 
 
44
%
 
43
%
 
 
SG&A expense
$
105,668

 
$
89,059

 
19
%
 
$
207,440

 
$
173,711

 
19
%
As a percent of revenue
33
%
 
33
%
 
 
 
33
%
 
34
%
 
 
Depreciation and amortization expense
$
20,714

 
$
14,269

 
45
%
 
$
38,915

 
$
28,099

 
38
%
As a percent of revenue
6
%
 
5
%
 
 
 
6
%
 
6
%
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
SG&A expense excluding stock-based compensation
$
87,307

 
$
72,744

 
20
%
 
$
167,835

 
$
139,526

 
20
%
As a percent of revenue
27
%
 
27
%
 
 
 
27
%
 
28
%
 
 

Cost of Revenue and Sales Margins

For the three and six months ended May 31, 2011, compared to 2010, cost of revenue increased in line with the increase in revenue. Total sales margins, which we define as revenue less cost of sales, divided by total sales, are modestly lower in the three and six months of 2011, primarily because of lower sales margins in our recent acquisitions. The following table shows

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the sales margin percentages and percentage point change by operating segment.
 
Three Months Ended May 31,
 
Percentage
Change
 
Six Months Ended May 31,
 
Percentage
Change
(Percentages)
2011
 
2010
 
 
2011
 
2010
 
Americas sales margin
56.8
%
 
59.0
%
 
(2.2
)%
 
57.6
%
 
58.6
%
 
(1.0
)%
EMEA sales margin
54.3
%
 
55.6
%
 
(1.3
)%
 
53.7
%
 
54.8
%
 
(1.1
)%
APAC sales margin
60.2
%
 
62.5
%
 
(2.3
)%
 
59.6
%
 
61.5
%
 
(1.9
)%
Total sales margin
56.0
%
 
57.6
%
 
(1.6
)%
 
56.3
%
 
57.0
%
 
(0.7
)%

In general, sales margins generated by our recent acquisitions caused decreases in each of the segment margins, but were offset to some degree by operational improvements, including organic growth increases and cost control.

Selling, General and Administrative (SG&A) Expense

We evaluate our SG&A expense excluding stock-based compensation expense. We are investing more heavily in our colleagues, with enhanced 2011 compensation and increased training and development opportunities. Even with this increased focus on our people, we continue to manage the cost structure of our business, and SG&A expense has consequently remained flat as a percentage of revenue compared to the prior-year periods.

Depreciation and Amortization Expense

For the three and six months ended May 31, 2011, compared to 2010, depreciation and amortization expense increased primarily due to the increase in depreciable and amortizable assets from capital expenditures and acquisitions.

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 our first and second quarter 2011 costs incurred for integration and other acquisition-related activities. We incurred $1.2 million of costs in the second quarter of 2011, and have incurred $4.5 million of costs year-to-date for these activities. Because acquisitions are a key component of our growth strategy, we expect that we will continue to perform similar activities for future acquisitions, and we intend to identify these costs in a separate line item of our financial statements.

Restructuring

Please refer to Note 7 to the Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q for a discussion of our third quarter 2010 restructuring activities. We incurred $9.1 million of restructuring charges in the third quarter of 2010. In the second quarter of 2011, we increased our restructuring cost estimate by a net $0.7 million, which represented increased contract termination costs to exit space in one of our facilities, partially offset by favorable resolution of employee severance costs.

Operating Income by Segment (geography)
 
Three Months Ended May 31,
 
Percentage
Change
 
Six Months Ended May 31,
 
Percentage
Change
(In thousands, except percentages)
2011
 
2010
 
 
2011
 
2010
 
Americas operating income
$
54,786

 
$
54,430

 
1
%
 
$
104,105

 
$
101,098

 
3
%
As a percent of segment revenue
28
%
 
32
%
 
 
 
28
%
 
32
%
 
 
EMEA operating income
19,614

 
17,312

 
13
%
 
36,111

 
29,993

 
20
%
As a percent of segment revenue
21
%
 
23
%
 
 
 
20
%
 
21
%
 
 
APAC operating income
9,865

 
7,875

 
25
%
 
18,126

 
14,176

 
28
%
As a percent of segment revenue
30
%
 
34
%
 
 
 
29
%
 
32
%
 
 
Shared services operating income
(33,295
)
 
(30,286
)
 
 
 
(67,070
)
 
(59,198
)
 
 
Total operating income
$
50,970

 
$
49,331

 
3
%
 
$
91,272

 
$
86,069

 
6
%
As a percent of total revenue
16
%
 
19
%
 
 
 
15
%
 
17
%
 
 

For the three and six months ended May 31, 2011, compared to 2010, the decrease in Americas and EMEA operating

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Table of Contents

income as a percentage of revenue is primary due to recent acquisition activity. Depreciation and amortization associated with the intangible assets of the recent acquisitions has primarily impacted the Americas and EMEA segments, and we have incurred acquisition-related costs as part of the integration efforts for those acquisitions. The increase in APAC operating income is driven primarily by a combination of acquisitions and organic growth.

Provision for Income Taxes

Our effective tax rate for the three and six months ended May 31, 2011 was 21.2% and 21.1%, respectively, compared to 21.7% and 23.6% for the same respective periods of 2010. The 2011 effective tax rate reflects the full-year benefit from a tax election made during the second quarter of 2010. We currently expect our full year 2011 GAAP tax rate to be in the 21-22% range.

Adjusted EBITDA (non-GAAP measure)

All of the reconciling items included in the following table are either (i) non-cash items (e.g., depreciation and amortization, stock-based compensation, non-cash pension and post-retirement expense) or (ii) items that we do not consider to be useful in assessing our operating performance (e.g., income taxes, acquisition-related costs, restructuring charges, income or loss from discontinued operations, and gain or loss on sale of assets). In the case of the non-cash items, we believe that investors can better assess our operating performance if the measures are presented without such items because, unlike cash expenses, these adjustments do not affect our ability to generate free cash flow or invest in our business. For example, by eliminating depreciation and amortization from EBITDA, users can compare operating performance without regard to different accounting determinations such as useful life. In the case of the other items, we believe that investors can better assess operating performance if the measures are presented without these items because their financial impact does not reflect ongoing operating performance.
 
Three Months Ended May 31,
 
Percentage
Change
 
Six Months Ended May 31,
 
Percentage
Change
(In thousands, except percentages)
2011
 
2010
 
 
2011
 
2010
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
38,722

 
$
38,478

 
1
%
 
$
69,438

 
$
65,301

 
6
%
Interest income
(306
)
 
(94
)
 
 
 
(491
)
 
(198
)
 
 
Interest expense
2,145

 
295

 
 
 
3,807

 
660

 
 
Provision for income taxes
10,401

 
10,652

 
 
 
18,517

 
20,180

 
 
Depreciation and amortization
20,714

 
14,269

 
 
 
38,915

 
28,099

 
 
EBITDA
$
71,676

 
$
63,600

 
13
%
 
$
130,186

 
$
114,042

 
14
%
Stock-based compensation expense
19,291

 
17,640

 
 
 
41,389

 
36,942

 
 
Restructuring charges (credits)
702

 
(82
)
 
 
 
702

 
(82
)
 
 
Acquisition-related costs
1,243

 
—

 
 
 
4,549

 
—

 
 
Non-cash net periodic pension and post-retirement expense
2,604

 
853

 
 
 
5,207

 
1,704

 
 
Loss from discontinued operations, net
8

 
—

 
 
 
1

 
126

 
 
Adjusted EBITDA
$
95,524

 
$
82,011

 
16
%
 
$
182,034

 
$
152,732

 
19
%
Adjusted EBITDA as a percentage of revenue
29.4
%
 
30.8
%
 
 
 
29.4
%
 
30.1
%
 
 

Our Adjusted EBITDA for 2011 increased primarily because of our improving organic revenue growth, the acquisitions we have made, and the leverage in our business model. Consistent with performance in the past two quarters, acquisitions completed in the last twelve months suppressed margins by about 160 basis points during the second quarter of 2011, and foreign currency impacts held margins down by another 50 basis points. After considering these impacts, our operational margin expansion was about 70 basis points over the second quarter of 2010. Relative to the margin drag from acquisitions, we expect the aggregate margins of our recent acquisitions to steadily improve over the next four to eight quarters, becoming accretive by the end of 2012.

Financial Condition

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Table of Contents

(In thousands, except percentages)
As of May 31, 2011
 
As of November 30, 2010
 
Dollar change
 
Percent change
Accounts receivable, net
$
244,239

 
$
256,552

 
$
(12,313
)
 
(5
)%
Accrued compensation
33,859

 
51,233

 
(17,374
)
 
(34
)%
Deferred subscription revenue
492,051

 
392,132

 
99,919

 
25
 %

We have historically experienced seasonal decreases in our accounts receivable balance in the second and third quarters, as we typically have the most subscription renewals in our fiscal first and fourth quarters. This trend continued in 2011. The change in accrued compensation is primarily due to the 2010 bonus payout made in early 2011, partially offset by current year accruals. The increase in deferred subscription revenue was primarily attributable to organic and acquisition-related growth, as well as successfully completing annual renewals on time. Year-over-year, our deferred revenue balance increased $120 million, or 32%, and the organic growth rate within deferred subscription revenue was approximately 12% as of May 31, 2011. This organic growth rate metric is a directional, and not a precise, indicator of future revenue performance.

Liquidity and Capital Resources

As of May 31, 2011, we had cash and cash equivalents of $147 million, of which approximately $117 million is currently held by our foreign subsidiaries. We also had $295 million of debt as of May 31, 2011. We have generated strong cash flows from operations over the last few years. On a trailing twelve-month basis, our conversion of Adjusted EBITDA to free cash flow was 68%. The conversion ratio was held down by an increase in receivables aging, but we expect that ratio to revert to approximately 70% in the coming quarters. Because of our cash, debt, and cash flow positions, as well as the new financing that we secured in January 2011, we believe we will have sufficient cash to meet our working capital and capital expenditure needs.

Our future capital requirements will depend on many factors, including the level of future acquisitions, the need for additional facilities or facility improvements, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products, changing technology, investments in our internal business applications, and the continued market acceptance of our offerings. We could be required, or could elect, to seek additional funding through public or private equity or debt financing for any possible future acquisitions; however, additional funds may not be available on terms acceptable to us or at all. We expect to incur approximately $50-55 million in capital expenditures in 2011.

Cash Flows
 
Six Months Ended May 31,
(In thousands, except percentages)
2011
 
2010
 
Dollar change
 
Percent change
Net cash provided by operating activities
$
200,981

 
$
179,156

 
$
21,825

 
12
 %
Net cash used in investing activities
(243,748
)
 
(102,159
)
 
(141,589
)
 
139
 %
Net cash provided by (used in) financing activities
(17,621
)
 
14,158

 
(31,779
)
 
(224
)%

The increase in net cash provided by operating activities was principally due to increased billings and collections in the first six months of 2011. Our subscription-based business model continues to be a cash flow generator that is aided by the following factors:

•
positive working capital characteristics that do not generally require substantial working capital increases to support our growth;
•
relatively low levels of required capital expenditures; and
•
our well-capitalized balance sheet.

The increase in net cash used in investing activities was principally due to significant acquisition activity in the second quarter of 2011, as well as a significant increase in capital expenditures for our various investment initiatives in facilities and infrastructure.

The increase in net cash used in financing activities for the six months of 2011 was principally due to reduced net borrowings, as well as the payment of debt issuance costs.

Free Cash Flow (non-GAAP measure)

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Table of Contents


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)
2011
 
2010
 
Dollar change
 
Percent change
Net cash provided by operating activities
$
200,981

 
$
179,156

 
 
 
 
Capital expenditures on property and equipment
(32,531
)
 
(16,339
)
 
 
 
 
Free cash flow
$
168,450

 
$
162,817

 
$
5,633

 
3
%

Our free cash flow has historically been very healthy, and we expect that it will continue to be a significant source of funding for our business strategy of growth through organic and acquisitive means. We expect capital expenditures to stay in the range of 3-4% of revenue for the near term.

Credit Facility and Other Debt

Please refer to Note 10 to the Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q for a discussion of the current status of our new term loan 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 and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for fiscal year 2010 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.

Item 3.
Quantitative and Qualitative Disclosure About Market Risk

For information regarding our exposure to certain market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for fiscal year 2010.

Our $300 million term loan is subject to variable interest rates. In April and June of 2011, we entered into interest rate derivative contracts that swap variable interest rates for fixed on $100 million of the term loan. A hypothetical 10% adverse movement in interest rates related to the contracts would not have a material impact on our financial position and results of operations.

Item 4.
Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

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


23
Table of Contents

(b) Changes in internal control over financial reporting.

There were no changes in our internal control over financial reporting that occurred during the period covered by this Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.   OTHER INFORMATION

Item 1.
Legal Proceedings

From time to time, we are involved in litigation, most of which is incidental to our business. In our opinion, no litigation to which we currently are a party is likely to have a material adverse effect on our results of operations or financial condition.

Item 1A. Risk Factors

There have been no material changes to the risk factors associated with the business previously disclosed in Part I, Item 1A of our 2010 Annual Report on Form 10-K.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides detail about our share repurchases during the three months ended May 31, 2011.

 
Total Number of Shares
Purchased (1)
 
Average
Price Paid
per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs (2)
March 1 - March 31, 2011
13

 
$
88.62

 
—

 
1,000,000

April 1 - April 30, 2011
5,388

 
89.10

 
—

 
1,000,000

May 1 - May 31, 2011
3,048

 
86.89

 
—

 
1,000,000

Total share repurchases
8,449

 
$
88.30

 
—

 
 
_____________________________

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

(2) To more fully offset the dilutive effect of our employee equity programs, in March 2011, our board of directors approved a plan authorizing us to buy back up to one million shares per year in the open market. We may execute on this program at our discretion, balancing dilution offset with other investment opportunities of the business, including acquisitions. This plan does not have an expiration date.

Item 6.
Exhibits

(a)
Index of Exhibits

The following exhibits are filed as part of this report:
 

24
Table of Contents

Exhibit
Number
 
Description
31.1*  
 
Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act.
 
 
31.2*  
 
Certification of the Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act.
 
 
32*
 
Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101.INS**
 
XBRL Instance Document
 
 
101.SCH**  
 
XBRL Taxonomy Extension Schema Document
 
 
101.CAL**  
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF**  
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB**  
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE**  
 
XBRL Taxonomy Extension Presentation Linkbase Document
 ___________________
*
Filed electronically herewith.
**
XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or Prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.


25
Table of Contents

SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on June 27, 2011.
 
IHS INC.
 
 
By:
 
/s/ Heather Matzke-Hamlin
 
 
Name:
 
Heather Matzke-Hamlin
 
 
Title:
 
Senior Vice President and Chief Accounting Officer


26