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IHS INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following Management's Discussion and Analysis is intended to help the reader understand the financial condition and results of operations of IHS Inc. (IHS, we, us, or our). The following discussion should be read in conjunction with our annual report on Form 10-K for the year ended November 30, 2013 and the Condensed Consolidated Financial Statements and accompanying notes included in this quarterly report on Form 10-Q. Executive Summary Business Overview We are a leading source of information, insight and analytics in critical areas that shape today's business landscape. Businesses and governments in more than 165 countries around the globe rely on our comprehensive content, expert independent analysis, and flexible delivery methods. Our aim is to embed our solutions within the entire spectrum of our customers' organization, enabling executive level capital deployment strategies and following decision-making activities throughout their organizations to front-line employees tasked with managing their company's complex core daily operations. We have been in business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005. Headquartered in Englewood, Colorado, USA, we are committed to sustainable, profitable growth and employ approximately 8,000 people in 31 countries around the world. Inherent in all of our strategies is a firm commitment to put our customers first in everything that we do. We believe that maintaining a disciplined "outside-in" approach will allow us to better serve our customers and our stockholders. To achieve that goal, we have organized our business around our customers and the geographies in which they reside: Americas, EMEA, and APAC. This structure allows us to tailor and expand the solutions we offer to meet the unique needs of our customers both globally and in local markets. Subscriptions represented approximately 78 percent of our total revenue in the third quarter of 2014. We sell our offerings primarily through subscriptions, which tend to generate recurring revenue and cash flow for us. Our subscription agreements are typically non-cancellable and may contain provisions for minimum monthly payments. For subscription revenue, the timing of our cash flows generally precedes the recognition of revenue and income. Our business has seasonal aspects. Our fourth quarter typically generates our highest quarterly levels of revenue and profit. Conversely, our first quarter generally has our lowest levels of revenue and profit. We also experience event-driven seasonality in our business; for instance, IHS Energy CERAWeek, an annual energy executive gathering, is held during our second quarter. Another example is the biennial release (previously triennial release) of the Boiler Pressure Vessel Code (BPVC) engineering standard, which generates revenue for us predominantly in the third quarter of every other year. We most recently recognized a benefit in connection with the BPVC release in the third quarter of 2013. In 2014, we are focused on the following two priorities: 18-------------------------------------------------------------------------------- Table of Contents • Operational excellence. We expect to capitalize on infrastructure investments to allow our employees to do their jobs more efficiently and effectively, including engaging and supporting new and existing customers. During the first nine months of 2014, we made progress in core process and system enhancements that we believe will allow us to meet our goals. • Commercial expansion. We expect to continue our pace of new and integrated product platform releases and offerings, and we are on track with the development and release of product platforms across the various workflows we service. We are also hiring global account executives to drive new and expanded business in key geo-markets and are re-aligning our field and inside sales forces in an effort to maximize the customer experience. Global Operations Approximately 40 percent of our revenue is generated outside of the United States; however, just over 20 percent of our revenue is transacted in currencies other than the U.S. dollar. As a result, a strengthening U.S. dollar relative to certain currencies has historically resulted in a negative impact to our revenue; conversely, a weakening U.S. dollar has historically resulted in a positive impact to our revenue. However, the impact on operating income is diminished due to certain operating expenses denominated in currencies other than the U.S. dollar. Our largest foreign currency exposures, in order of magnitude, are the British Pound, Canadian Dollar, and Euro. Key Performance Indicators We believe that revenue growth, Adjusted EBITDA (both in dollars and margin), and free cash flow are the key financial measures of our success. Adjusted EBITDA and free cash flow are financial measures that are not prepared in accordance with GAAP (non-GAAP). Revenue growth. We review year-over-year revenue growth in our segments as a key measure of our success in addressing customer needs in each region of the world in which we operate. We measure revenue growth in terms of organic, acquisitive, and foreign currency impacts. We define these components as follows: • Organic - We define organic revenue growth as total revenue growth from continuing operations for all factors other than acquisitions and foreign currency movements. We drive this type of revenue growth through value realization (pricing), expanding wallet share of existing customers through up-selling and cross-selling efforts, securing new customer business, and through the sale of new or enhanced product offerings. • Acquisitive - We define acquisitive revenue as the revenue generated from acquired products and services from the date of acquisition to the first anniversary date of that acquisition. This type of growth comes as a result of our strategy to purchase, integrate, and leverage the value of assets we acquire. We also include the impact of divestitures in this growth metric. • Foreign currency - We define the foreign currency impact on revenue as the difference between current revenue at current exchange rates and current revenue at the corresponding prior period exchange rates. Due to the significance of revenue transacted in foreign currencies, we measure the impact of foreign currency movements on revenue. We also measure and report revenue by transaction type. Understanding revenue by transaction type helps us identify broad changes in product mix. We summarize our transaction type revenue into the following two categories: • Subscription revenue represents the significant majority of our revenue, and is comprised of subscriptions to our various information offerings and software maintenance. • Non-subscription revenue represents consulting (e.g., research and analysis, modeling, and forecasting), services, single-document product sales, software license sales and associated services, conferences and events, and advertising. Our non-subscription products and services are an important part of our business because they complement our subscription business in creating strong and comprehensive customer relationships. Non-GAAP measures. We use non-GAAP financial measures such as EBITDA, Adjusted EBITDA, and free cash flow in our operational and financial decision-making, and believe that such measures allow us to focus on what we deem to be more reliable indicators of ongoing operating performance (Adjusted EBITDA) and our ability to generate cash flow from operations (free cash flow). We also believe that investors may find non-GAAP financial measures useful for the same reasons, although 19-------------------------------------------------------------------------------- Table of Contents we caution readers that non-GAAP financial measures are not a substitute for GAAP financial measures or disclosures. None of these non-GAAP financial measures are recognized terms under GAAP and do not purport to be an alternative to net income or operating cash flow as an indicator of operating performance or any other GAAP measure. Throughout this section on management's discussion and analysis and on our website (www.ihs.com), we provide reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures. EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA are used by many of our investors, research analysts, investment bankers, and lenders to assess our operating performance. For example, a measure similar to Adjusted EBITDA is required by the lenders under our term loans and revolving credit agreement. We define EBITDA as net income plus or minus net interest, plus provision for income taxes, depreciation, and amortization. Our definition of Adjusted EBITDA further excludes primarily non-cash items and other items that we do not consider to be useful in assessing our operating performance (e.g., stock-based compensation expense, restructuring charges, acquisition-related costs, asset impairment charges, gain or loss on sale of assets, pension mark-to-market and settlement expense, and income or loss from discontinued operations). Free Cash Flow. We define free cash flow as net cash provided by operating activities less capital expenditures. Because not all companies use identical calculations, our presentation of non-GAAP financial measures may not be comparable to other similarly titled measures of other companies. However, these measures can still be useful in evaluating our performance against our peer companies because we believe the measures provide users with valuable insight into key components of GAAP financial disclosures. For example, a company with higher GAAP net income may not be as appealing to investors if its net income is more heavily comprised of gains on asset sales. Likewise, excluding the effects of interest income and expense moderates the impact of a company's capital structure on its performance. Results of Operations Total Revenue Third quarter 2014 revenue increased 16 percent compared to the third quarter of 2013, and our year-to-date 2014 revenue increased 29 percent compared to the same period in 2013. The table below displays the percentage change in revenue due to organic, acquisitive, and foreign currency factors when comparing the three and nine months ended August 31, 2014 to the three and nine months ended August 31, 2013. Increase in Total Revenue Foreign(All amounts represent percentage points) Organic Acquisitive Currency Third quarter 2014 vs. third quarter 2013 3 % 11 % 1 % Year-to-date 2014 vs. year-to-date 2013 4 % 24 % 1 % Organic growth for the three and nine months ended August 31, 2014, compared to the same periods of 2013, was primarily attributable to subscription growth performance, with non-subscription growth adversely impacted by the biennial cycle of the BPVC standard, which was last released in the third quarter of 2013. Normalizing for the BPVC release cycle, we had positive non-subscription organic revenue growth for the three and nine months ended August 31, 2014. Total organic revenue growth after normalizing for the BPVC impact was 5 percent for both the three and nine months ended August 31, 2014. Acquisitive revenue growth was due to the Polk acquisition in the third quarter of 2013, and foreign currency had a negligible impact on the year-over-year increase in revenue. 20-------------------------------------------------------------------------------- Table of Contents Revenue by Segment Three months ended August 31, Nine months ended August 31, (In thousands, except Percentage Percentage percentages) 2014 2013 Change 2014 2013 Change Revenue: Americas $ 363,449 $ 307,281 18 % $ 1,090,656 $ 794,072 37 % EMEA 138,120 122,247 13 % 403,828 344,662 17 % APAC 54,442 50,760 7 % 153,993 142,222 8 % Total revenue $ 556,011 $ 480,288 16 % $ 1,648,477 $ 1,280,956 29 % As a percent of total revenue: Americas 65 % 64 % 66 % 62 % EMEA 25 % 25 % 24 % 27 % APAC 10 % 11 % 9 % 11 % The percentage change in each geography segment is due to the factors described in the following table. Increase (decrease) in revenue Third quarter 2014 vs. third quarter 2013 Year-to-date 2014 vs. year-to-date 2013 (All amounts represent Foreign Foreign percentage points) Organic Acquisitive Currency Organic Acquisitive Currency Americas 2 % 17 % - % 4 % 34 % (1 )% EMEA 7 % 2 % 4 % 7 % 6 % 3 % APAC 5 % 2 % - % 3 % 5 % - % Americas revenue for the three and nine months ended August 31, 2014, compared to the same periods of 2013, experienced organic subscription growth at 5 percent for the three and nine months. Non-subscription organic growth was negative 9 percent for the three months and negative 1 percent for the nine months, and was adversely impacted by the biennial cycle of the BPVC release. Normalized for the BPVC impact, non-subscription organic growth was negative 2 percent for the three months and positive 1 percent for the nine months, and total organic growth was 3 percent for the three months and 4 percent for the nine months. EMEA revenue for the three and nine months ended August 31, 2014, compared to the same periods of 2013, experienced organic subscription growth at 8 percent for the three and nine months. Non-subscription organic growth was also positive, with 3 percent growth for the three months and 6 percent growth for the nine months in spite of the BPVC release cycle in the 2013 period. Normalized for the BPVC impact, non-subscription organic growth was 8 percent for the three months and 7 percent for the nine months, and total organic growth was 8 percent for both the three and nine months. EMEA's performance is reflective of continued operating improvements, including infrastructure, sales systems and processes, and sales leadership and field sales teams. APAC revenue for the three and nine months ended August 31, 2014, compared to the same periods of 2013, experienced organic subscription growth at 6 percent for the three and nine months. Non-subscription organic growth was mixed at 3 percent for the three months and negative 5 percent for the nine months. Normalized for the BPVC impact, non-subscription organic growth was 6 percent for the three months and negative 4 percent for the nine months, and total organic growth was 6 percent for the three months and 3 percent for the nine months. 21-------------------------------------------------------------------------------- Table of Contents Revenue by Transaction Type Three months ended August 31, Percent change Nine months ended August 31, Percent change (in thousands, except percentages) 2014 2013 Total Organic 2014 2013 Total Organic Subscription revenue $ 432,128 $ 365,025 18 % 6 % $ 1,275,848 $ 986,675 29 % 6 % Non-subscription revenue 123,883 115,263 7 % (5 )% 372,629 294,281 27 % - % Total revenue $ 556,011 $ 480,288 16 % 3 % $ 1,648,477 $ 1,280,956 29 % 4 % As a percent of total revenue: Subscription 78 % 76 % 77 % 77 % Non-subscription 22 % 24 % 23 % 23 % Subscription revenue grew at 6 percent organically for the three and nine months ended August 31, 2014, compared to the same periods of 2013, with resources subscription offerings providing the largest contribution to the growth in both the three and nine months, and automotive offerings providing additional strength in the three months. Subscriptions continue to provide a stable revenue stream that generates significant cash flow. Consistent with the prior year, our subscription revenue for the three and nine months ended August 31, 2014 represents approximately 78 percent of our total revenue. Non-subscription revenue decreased 5 percent organically during the three months and was flat during the nine months ended August 31, 2014, compared to the same periods of 2013, driven primarily by the BPVC release cycle impact. Normalized for the BPVC impact, non-subscription organic revenue growth was 1 percent for the three months and 2 percent for the nine months. Revenue by Product Category Three months ended August 31, Percent change Nine months ended August 31, Percent change (in thousands, except percentages) 2014 2013 Total Organic 2014 2013 Total Organic Resources revenue $ 229,107 $ 218,345 5 % 6 % $ 690,477 $ 630,541 10 % 6 % Industrials revenue 185,267 119,149 55 % 6 % 538,336 245,997 119 % 3 % Horizontal products revenue 141,637 142,794 (1 )% (3 )% 419,664 404,418 4 % 3 % Total revenue $ 556,011 $ 480,288 16 % 3 % $ 1,648,477 $ 1,280,956 29 % 4 % Resources revenue for the three and nine months ended August 31, 2014, compared to the same periods of 2013, experienced stable growth across the portfolio, benefiting from the roll-out of additional energy and chemicals content on our IHS Connect platform. Industrials revenue for the three and nine months ended August 31, 2014, compared to the same periods of 2013, improved as a result of continued solid growth in automotive offerings associated with new product revenue synergies realized from the Polk acquisition. We saw improving growth trends in technology sales and maritime offerings, with a slight improvement in aerospace and defense as well. Horizontal products revenue for the three and nine months ended August 31, 2014, compared to the same periods of 2013, had mixed organic growth results, primarily due to the negative impact of the BPVC release cycle in our product design space. Normalized for the BPVC impact, organic growth was 2 percent for the three months and 4 percent for the nine months. Operating Expenses The following table shows our operating expenses and the associated percentages of revenue. 22-------------------------------------------------------------------------------- Table of Contents Three months ended August 31, Nine months ended August 31, (In thousands, except Percentage Percentage percentages) 2014 2013 Change 2014 2013 Change Operating expenses: Cost of revenue $ 219,208 $ 198,279 11 % $ 657,078 $ 530,778 24 % SG&A expense $ 211,285 $ 179,344 18 % $ 612,645 $ 465,182 32 % Depreciation and amortization expense $ 50,568 $ 42,431 19 % $ 149,347 $ 107,787 39 % As a percent of revenue: Cost of revenue 39 % 41 % 40 % 41 % SG&A expense 38 % 37 % 37 % 36 % Depreciation and amortization expense 9 % 9 % 9 % 8 % Supplemental information: SG&A expense, excluding stock-based compensation $ 166,464 $ 137,760 21 % $ 491,199 $ 356,013 38 % As a percent of revenue 30 % 29 % 30 % 28 % Cost of Revenue For the three and nine months ended August 31, 2014, cost of revenue was slightly down as a percentage of revenue, compared to the same periods in the prior year, reflecting a continued focus on cost discipline. We continue to invest in our people, platforms, processes, and products in support of our goals to increase top- and bottom-line growth. Selling, General and Administrative (SG&A) Expense We evaluate our SG&A expense after excluding stock-based compensation expense. For the three and nine months ended August 31, 2014, compared to the same periods of 2013, SG&A expense as a percentage of revenue increased slightly primarily due to recent acquisitions and increased compensation expense. For the three and nine months ended August 31, 2014, compared to the same periods of 2013, stock-based compensation expense increased as a result of an increase in the number of employees, an increase in our stock price, and the achievement or overachievement of certain company performance metrics. As a percentage of revenue, stock-based compensation decreased by one percentage point for the three and nine months ended August 31, 2014, compared to the same periods of 2013, as we are effectively managing to a targeted annual burn rate of 2 percent of outstanding shares. Please refer to Note 9 to the Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q for a discussion of stock-based compensation. Depreciation and Amortization Expense For the three and nine months ended August 31, 2014, compared to the same periods of 2013, depreciation and amortization expense increased in amount, but was relatively flat as a percentage of revenue. The increased expense was primarily due to an increase in depreciable and amortizable assets from capital expenditures and acquisitions, particularly the Polk acquisition. Restructuring Please refer to Note 6 to the Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q for a discussion of our restructuring activities. During the nine months ended August 31, 2014, we incurred approximately $6.4 million of restructuring charges for direct and incremental costs associated with identified operational efficiencies (including lease abandonments), continued consolidation of positions to our accounting and customer care Centers of Excellence (COE) locations, and further consolidation of our legacy data centers. 23-------------------------------------------------------------------------------- Table of Contents During the nine months ended August 31, 2014, we eliminated 120 positions related to these activities. We expect to continue to incur costs related to these and other similar activities in future periods, resulting in additional restructuring charges. Acquisition-related Costs Please refer to Note 7 to the Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q for a discussion of costs associated with our integration and other acquisition-related activities. During the nine months ended August 31, 2014, we recorded approximately $1.0 million of direct and incremental costs associated with acquisition-related activities, including severance, lease abandonments, and professional fees. Because acquisitions are a key component of our growth strategy, we expect that we will continue to perform similar activities for future acquisitions. Pension and Postretirement Expense For the three and nine months ended August 31, 2014, compared to the same periods of 2013, net periodic pension and postretirement expense declined, primarily as a result of the pension freeze we implemented on our U.S. Retirement Income Plan (U.S. RIP) and Supplemental Income Plan (SIP). Effective July 11, 2014, we discontinued future accruals to the U.S. RIP and SIP, which necessitated a remeasurement of our U.S. RIP obligation and resulted in a curtailment gain of $2.9 million that we recorded in the third quarter of 2014. Although we will no longer record expense related to participant service accruals, we will continue to incur pension and postretirement expense related to plan administration, interest costs, and regulatory fees. In lieu of future accruals to the U.S. RIP and SIP, we will now provide an annual company non-elective contribution of 1.5% of eligible salary to the 401(k) accounts of affected eligible employees if they are active employees at the end of the calendar year. Our pension expense and associated pension liability as calculated under GAAP requires the use of assumptions about the estimated long-term rate of return on plan assets and the discount rate. Our pension investment strategy is designed to align the majority of our pension assets with the underlying pension liability and minimize volatility caused by changes in asset returns and discount rates. Our pension expense estimates are updated to reflect actual experience through the remeasurement process in the fourth quarter, or sooner if earlier remeasurements are required, such as at June 30, 2014, when we implemented the U.S. RIP pension freeze. As a result of the June remeasurement, for the nine months ended August 31, 2014, we used a 4.9 percent expected long-term rate of return on plan assets and a 4.4 percent discount rate for the U.S. RIP; the actual return on plan assets during that period was 13.5 percent. We anticipate that the difference between actual return on plan assets and expected return on plan assets will be largely mitigated by the offsetting change in the pension liability resulting from movements in the discount rate. Operating Income by Segment (geography) Three months ended August 31, Nine months ended August 31, (In thousands, except Percentage Percentage percentages) 2014 2013 Change 2014 2013 Change Operating income: Americas $ 90,178 $ 71,366 26 % $ 261,375 $ 213,014 23 % EMEA 35,166 19,788 78 % 94,226 56,259 67 % APAC 10,587 8,967 18 % 33,587 28,964 16 % Shared services (62,153 ) (60,695 ) (172,983 ) (160,827 ) Total operating income $ 73,778 $ 39,426 87 % $ 216,205 $ 137,410 57 % As a percent of segment revenue: Americas 25 % 23 % 24 % 27 % EMEA 25 % 16 % 23 % 16 % APAC 19 % 18 % 22 % 20 % For the three and nine months ended August 31, 2014, compared to the same periods of 2013, operating income as a percentage of revenue for the Americas segment was negatively impacted by amortization expense associated with intangible assets acquired in the Polk acquisition; however, the impact of the amortization on Americas operating income for the three months ended August 31, 2014 was more than offset by improved operating profit in the Americas business during that period. For the three and nine months ended August 31, 2014, compared to the same periods of 2013, the EMEA segment operating income as a percentage of revenue increased primarily because of revenue growth and prior investment in scaled infrastructure. 24-------------------------------------------------------------------------------- Table of Contents For the three and nine months ended August 31, 2014, compared to the same periods of 2013, the APAC segment operating income as a percentage of revenue was largely unchanged. Provision for Income Taxes Our effective tax rate for the three and nine months ended August 31, 2014 was 24.6 percent and 23.1 percent, respectively, compared to 0.5 percent and 17.2 percent for the same periods of 2013. The lower tax rate in 2013 reflects the impact of discrete period items, including certain one-time expenses related to the Polk acquisition. EBITDA and Adjusted EBITDA (non-GAAP measures) Three months ended August 31, Nine months ended August 31, (In thousands, except Percentage Percentage percentages) 2014 2013 Change 2014 2013 Change Net income $ 46,517 $ 23,362 99 % $ 134,431 $ 90,923 48 % Interest income (251 ) (232 ) (737 ) (879 ) Interest expense 12,295 16,072 42,150 28,356 Provision for income taxes 15,217 116 40,361 18,909 Depreciation 17,361 12,964 49,241 33,695 Amortization 33,207 29,467 100,106 74,092 EBITDA $ 124,346 $ 81,749 52 % $ 365,552 $ 245,096 49 % Stock-based compensation expense 47,727 44,233 127,723 114,794 Restructuring charges 2,368 3,264 6,403 11,283 Acquisition-related costs - 14,499 1,017 18,059 Impairment of assets - - - 1,629 Loss (gain) on sale of assets - - 2,654 1,241 Income from discontinued operations, net - 108 - 101 Adjusted EBITDA $ 174,441 $ 143,853 21 % $ 503,349 $ 392,203 28 % Adjusted EBITDA as a percentage of revenue 31.4 % 30.0 % 30.5 % 30.6 % Our Adjusted EBITDA for the three and nine months ended August 31, 2014, compared to the same periods of 2013, increased primarily because of the realization of operating efficiencies and improved margins on the operations of our recent acquisitions. Financial Condition (In thousands, except As of November 30, percentages) As of August 31, 2014 2013 Dollar change Percent change Accounts receivable, net $ 365,591 $ 459,263 $ (93,672 ) (20 )% Accrued compensation $ 86,418 $ 89,460 $ (3,042 ) (3 )% Deferred revenue $ 613,134 $ 560,010 $ 53,124 9 % The decrease in accounts receivable is primarily due to the timing of billings and strong cash collections. We continue to experience the historical trend of seeing seasonal decreases in our accounts receivable balances in our second and third quarters, as we typically have the most subscription renewals in our first and fourth quarters. The change in accrued compensation was primarily due to the 2013 bonus payout made in the first quarter of 2014, partially offset by the current year accrual. The increase in deferred revenue was primarily due to organic revenue growth, with minor impacts from acquisitions and foreign currency effects. 25-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources As of August 31, 2014, we had cash and cash equivalents of $262 million, of which approximately $217 million was held by our foreign subsidiaries. Cash held by our foreign subsidiaries could be subject to U.S. federal income tax if we decided to repatriate any of that cash to the U.S. We also had approximately $1.90 billion of debt as of August 31, 2014, which has resulted in an increase in interest expense in 2014, and we expect that the increased debt will continue to result in increased interest expense for the near future. On a trailing twelve-month basis, the ratio of free cash flow to Adjusted EBITDA was approximately 87 percent. Over the longer term, we anticipate that this ratio will be in the mid-60s range, reflecting increased interest expense and an increase in our cash taxes. Because of our cash, debt, and cash flow positions, we believe we will have sufficient liquidity to meet our ongoing working capital and capital expenditure needs. During the third quarter of 2013, we completed the Polk acquisition, which we funded with a combination of cash and stock. We funded the cash portion of the transaction consideration using cash on hand, cash from our existing revolver, and a new bank term loan. Our credit agreements require a systematic reduction in our Leverage Ratio (as defined in Note 4 to the Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q) of 25 basis points per quarter for the first year, ending at a 3.0 to 1.0 ratio effective for the quarter ending August 31, 2014 and thereafter, unless we elect to trigger an increased Leverage Ratio under the terms specified in the credit agreements in connection with future acquisitions. As of August 31, 2014, our Leverage Ratio was 2.81x compared to a maximum permitted Leverage Ratio at August 31, 2014 of 3.00x, reflecting a continued reduction in our Leverage Ratio. In September 2014, we made a $10 million contribution to our U.S. RIP in order to increase plan funding and avoid certain additional variable rate premium costs. Our future capital requirements will depend on many factors, including the number and magnitude of future acquisitions, the need for additional facilities or facility improvements, the timing and extent of spending to support product development efforts, information technology infrastructure investments, investments in our internal business applications, and the continued market acceptance of our offerings. We could be required, or could elect, to seek additional funding through public or private equity or debt financings; however, additional funds may not be available on terms acceptable to us. We expect that our capital expenditures for 2014 will be approximately 5 to 5.5 percent of revenue. Cash Flows Nine months ended August 31, (In thousands, except percentages) 2014 2013 Dollar change Percent change Net cash provided by operating activities $ 542,450 $ 344,369 $ 198,081 58 % Net cash used in investing activities $ (212,775 ) $ (1,549,436 ) $ 1,336,661 (86 )% Net cash provided by (used in) financing activities $ (313,990 ) $ 1,154,434 $ (1,468,424 ) (127 )% The increase in net cash provided by operating activities was primarily due to continued business performance improvements, including strong cash collections in 2014. Part of the increase also came from decreased funding of our pension plans ($2.1 million for the nine months ended August 31, 2014, compared to $12.6 million for the same period of 2013) and additive cash flow from acquisitions (most notably from the Polk acquisition). Our subscription-based business model continues to be a cash-flow generator that is aided by positive working capital characteristics that do not generally require substantial working capital increases to support our growth. The decrease in net cash used in investing activities was principally due to the $1.5 billion of cash used for businesses that we acquired in the first nine months of 2013, compared to $134 million of cash used for acquisitions in the first nine months of 2014. The increase in net cash used in financing activities in 2014 was principally due to the repayment of borrowings as we reduced our debt leverage. The net cash provided by financing activities in 2013 was principally due to our increased borrowings to fund the Polk acquisition. Free Cash Flow (non-GAAP measure) The following table reconciles our non-GAAP free cash flow measure to net cash provided by operating activities. 26-------------------------------------------------------------------------------- Table of Contents Nine months ended August 31, (In thousands, except percentages) 2014 2013 Dollar change Percent change Net cash provided by operating activities $ 542,450 $ 344,369 Capital expenditures on property and equipment (83,314 ) (65,411 ) Free cash flow $ 459,136 $ 278,958 $ 180,178 65 % Increased free cash flow in 2014 was driven in part by significant improvement in our cash collections and working capital position. Our free cash flow has historically been positive due to the robust cash generation attributes of our business model, providing us with operational and capital structure flexibility as we de-lever the business. Credit Facility and Other Debt Please refer to Note 4 to the Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q for a discussion of the current status of our term loans and revolving credit agreement. Share Repurchase Program Please refer to Part II, Item 2 in this quarterly report on Form 10-Q for a discussion of our share repurchase programs. Off-Balance Sheet Transactions We have no off-balance sheet transactions. Critical Accounting Policies Our management makes a number of significant estimates, assumptions and judgments in the preparation of our financial statements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in our annual report on Form 10-K for fiscal year 2013 for a discussion of the estimates and judgments necessary in our accounting for revenue recognition, business combinations, goodwill and other intangible assets, income taxes, pension and postretirement benefits, and stock-based compensation. Recent Accounting Pronouncements Please refer to Note 1 to the Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q for a discussion of recent accounting pronouncements and their anticipated effect on our business. |