|IHS MARKIT LTD. filed this Form 10-K on 01/18/2019|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal year ended November 30, 2018
For the transition period from to
Commission file number 001-36495
IHS MARKIT LTD.
(Exact name of registrant as specified in its charter)
4th Floor, Ropemaker Place
25 Ropemaker Street
(Address of Principal Executive Offices)
+44 20 7260 2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes o No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. o Yes x No
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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
The aggregate market value of the voting and non-voting common equity held by non-affiliates, based upon the closing price for the common shares as reported on the NASDAQ Global Select Market on the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $13.4 billion. All executive officers, directors, and holders of five percent or more of the outstanding common shares of the registrant have been deemed, solely for purposes of the foregoing calculation, to be “affiliates” of the registrant.
As of December 31, 2018, there were 397,359,890 of our common shares outstanding, excluding 25,219,470 outstanding common shares held by the Markit Group Holdings Limited Employee Benefit Trust.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
The following definitions apply throughout this Annual Report on Form 10-K unless the context requires otherwise:
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. These statements, which express management’s current views concerning future business, events, trends, contingencies, financial performance, or financial condition, appear at various places in this report and use words like “aim,” “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “future,” “goal,” “intend,” “likely,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “see,” “seek,” “should,” “strategy,” “strive,” “target,” “will,” and “would” and similar expressions, and variations or negatives of these words. Examples of forward-looking statements include, among others, statements we make regarding: guidance and predictions relating to expected operating results, such as revenue growth and earnings; strategic actions such as acquisitions, joint ventures, and dispositions, the anticipated benefits therefrom, and our success in integrating acquired businesses; anticipated levels of capital expenditures in future periods; our belief that we have sufficient liquidity to fund our ongoing business operations; expectations of the effect on our financial condition of claims, litigation, environmental costs, contingent liabilities, and governmental and regulatory investigations and proceedings; and our strategy for customer retention, growth, product development, market position, financial results, and reserves. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on management’s current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict and many of which are outside of our control. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following: economic and financial conditions, including volatility in interest and exchange rates; our ability to develop new products and services; our ability to manage system failures or capacity constraints; our ability to manage fraudulent or unpermitted data access or other cyber-security or privacy breaches; our ability to successfully manage risks associated with changes in demand for our products and services; our ability to manage our relationships with third-party service providers; legislative, regulatory, and economic developments, including any new or proposed U.S. Treasury rule changes; the extent to which we are successful in gaining new long-term relationships with customers or retaining existing ones and the level of service failures that could lead customers to use competitors’ services; the anticipated tax treatment, unforeseen liabilities, future capital expenditures, revenues, expenses, earnings, synergies, economic performance, indebtedness, financial condition, losses, future prospects, business and management strategies for the management, expansion, and growth of our operations; our ability to retain and hire key personnel; our ability to satisfy our debt obligations and our other ongoing business obligations; and the occurrence of any catastrophic events, including acts of terrorism or outbreak of war or hostilities. These risks, as well as other risks which would cause actual results to be significantly different from those expressed or implied by these forward-looking statements, are more fully discussed under the caption “Risk Factors” in this Annual Report on Form 10-K, along with our other filings with the U.S. Securities and Exchange Commission (“SEC”). While the list of factors presented here is considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements. Consequences of material differences in results as
compared with those anticipated in the forward-looking statements could include, among other things, business disruption, operational problems, financial loss, legal liability to third parties and similar risks, any of which could have a material adverse effect on our consolidated financial condition, results of operations, credit rating, or liquidity. Therefore, you should not rely on any of these forward-looking statements. Any forward-looking statement made by us in this Annual Report on Form 10-K is based only on information currently available to our management and speaks only as of the date of this report. We do not assume any obligation to publicly provide revisions or updates to any forward-looking statements, whether as a result of new information, future developments or otherwise, should circumstances change, except as otherwise required by securities and other applicable laws.
Website and Social Media Disclosure
We use our website (www.ihsmarkit.com) and corporate Twitter account (@IHSMarkit) as routine channels of distribution of company information, including news releases, analyst presentations, and supplemental financial information, as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Accordingly, investors should monitor our website and our corporate Twitter account in addition to following press releases, SEC filings, and public conference calls and webcasts. Additionally, we provide notifications of news or announcements as part of our investor relations website. Investors and others can receive notifications of new information posted on our investor relations website in real time by signing up for email alerts.
None of the information provided on our website, in our press releases, public conference calls, and webcasts, or through social media channels is incorporated into, or deemed to be a part of, this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our website or our social media channels are intended to be inactive textual references only.
We operate on a November 30 fiscal year end. Unless otherwise indicated, references in this Annual Report on Form 10-K to an individual year means the fiscal year ended November 30. For example, “2018” refers to the fiscal year ended November 30, 2018.
Trademarks, Service Marks, and Copyrights
We own or have rights to use the trademarks, service marks, and trade names that we use in connection with the operation of our business; other trademarks, service marks, and trade names referred to in this Annual Report on Form 10-K are, to our knowledge, the property of their respective owners. We also own or have the rights to copyrights that protect aspects of our products and services. Solely for convenience, the trademarks, service marks, trade names, and copyrights referred to in this Annual Report on Form 10-K are listed without the ®, ™, and © symbols, but we will assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks, and trade names.
Item 1. Business
History and Development of the Company
On July 12, 2016, IHS Inc. (“IHS”), a Delaware corporation, Markit Ltd. (“Markit”), a Bermuda exempted company, and Marvel Merger Sub, Inc. (“Merger Sub”), a Delaware corporation and an indirect and wholly owned subsidiary of Markit, completed a merger (“Merger”) pursuant to which Merger Sub merged with and into IHS, with IHS surviving the Merger as an indirect and wholly owned subsidiary of Markit. Upon completion of the Merger, Markit became the combined group holding company and was renamed IHS Markit Ltd. (“IHS Markit” or “we” or “us” or “our”). In accordance with the terms of the Merger agreement, IHS stockholders received 3.5566 common shares of IHS Markit for each share of IHS common stock they owned. IHS was treated as the acquiring entity for accounting purposes, which is reflected in the results of operations, financial position, financial statements, and Management’s Discussion and Analysis of Financial Condition and Results of Operations. Other sections of this report refer to legacy Markit and legacy IHS, as the context requires, for each of the entities prior to the Merger, and to IHS Markit, the combined company after completion of the Merger.
IHS was in business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005. Markit was founded in 2003 and was incorporated pursuant to the laws of Bermuda in 2014 to become the holding company for Markit’s business in connection with its initial public offering on the NASDAQ Stock Market (“NASDAQ”) in June 2014. IHS Markit’s common shares are traded on the NASDAQ under the symbol “INFO.”
Our principal executive offices are located at 4th Floor, Ropemaker Place, 25 Ropemaker Street, London, England EC2Y 9LY. Our telephone number at this address is +44 20 7260 2000. We maintain a registered office in Bermuda at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda. The telephone number of our registered office is +1 441 295 5950.
Our vision is to be our customers’ leading source for critical information, analytics, and insight. Our purpose is to help our customers grow, enabling better decision making and operational efficiency.
We deliver data, insight, and software that combine our expertise, unique content sets, and leading technology to the world’s major industries, financial markets, and governments. Our analytics reveal interdependencies across complex industries, which enhances transparency, reduces risk, and improves operational efficiency for our customers. Our information, analytics, and solutions are significant components in the systems and workflows of many of our customers and continue to become increasingly important to our customers’ operations. We leverage leading technologies and our industry expertise to create innovative products and services that provide information and insight to our customers to help them be more efficient and make more informed decisions. We are committed to sustainable, profitable growth.
Our core competency is using our expertise to source and transform data into information and analytics that our customers can use when making operational and strategic decisions. We are a dependable resource for our customers, who require and demand the most accurate and robust information available. We are dedicated to providing the information and analysis our customers need to make critical decisions that drive growth and value for their operations.
By integrating and connecting our information and analytics with proprietary and widely used decision-support technology on scalable platforms, we produce critical information and insight designed to meet our customers’ needs. Our product development teams have also created proprietary Web services and application interfaces that enhance access to our information and allow our customers to integrate our offerings with other data, business processes, and applications (such as computer-aided design, enterprise resource planning (“ERP”), supply chain management, and product data/lifecycle management).
To achieve our vision, we are focusing our efforts primarily on the following areas:
We benchmark our progress annually against these objectives using external and internal metrics. For example, to measure customer and employee satisfaction, we use third-party surveys and develop goals based on those metrics.
Our strategy is to bring together information, research, analytics, and technology to deliver integrated offerings to customers in separate but interconnected industries. We believe that we can best implement our strategy by using our strong foundation of leading assets, talent, and competitive positioning in large growing global markets to achieve the following:
Our Global Organizational Structure
To serve our customers, we are organized into the following four industry-focused segments:
•Resources, which includes our Energy and Chemicals product offerings;
We believe that this sales and operating model helps our customers do business with us by providing a cohesive, consistent, and effective product, sales, and marketing approach by segment.
Our Competitive Strengths
We believe that our competitive strengths include the following:
anticipate, understand, and address our customers’ needs. The Merger increased our capacity to address new markets and opportunities, and our global footprint allows us to serve our customers throughout the world and to introduce our products and services to customers in new markets. Our product offerings are well established and recognized in multiple industries. We also own a number of well-known brands, including CARFAX, CERAWeek, Jane’s, the Purchasing Managers Index series, Bigdough, and the iBoxx indices.
We have a diverse customer base, with more than 50,000 business and government customers, including 80 percent of the Fortune Global 500 and 70 percent of the Fortune U.S. 1000. Our customers operate in global interconnected industries and financial markets, and we continue to build on our existing scale to integrate our comprehensive content, expertise, tools, technology, and research and analysis to produce a differentiated offering that makes us an important part of many of our customers’ core workflows. In 2018, no customer or group of affiliated customers represented more than 10 percent of our revenue.
Our Operating Segments
We develop our products and services based on customer needs in the target industries we serve and in the workflows that our customers use. We have organized our business to address the following key industries:
Our Resources segment includes our Energy offerings, which represent approximately 87 percent of Resources revenue, and our Chemicals offerings, which make up the balance of the segment’s revenue.
Our Energy offerings are focused on upstream, midstream, downstream, and power/gas/coal/renewables (“PGCR”) services. Within those offerings, we also offer proprietary physical commodity pricing through our OPIS Price Reporting Agency Group.
and 6,200 marine vessels, and a database of 47,000 merger and acquisition transactions. We do this through a combination of energy technical information, analytical tools, and market forecasting and consulting. For instance, strategic planners, geoscientists, and engineers use our insight and leading geotechnical database and analytical tools to facilitate exploration, development, and production of energy assets. Some of our key offerings include the following:
Our Chemicals offerings include data for manufacturing processes, as well as capital expenditure, cost, price, production, trade, demand, and capacity industry analysis and forecasts for more than 250 chemicals in more than 110 countries. We also have an extensive library of detailed techno-economic analyses of chemicals and refining process technologies. We provide a number of consulting services, including training, strategy development, and project development offerings to the chemical and related industries. Our business information services track current events, supply high-velocity information, and hold conferences related to the chemical industry. Our chemical data, insights, and analysis help companies develop and deploy robust plans pertaining to capital deployment, operations, and risk mitigation.
In addition, we leverage our market leadership in these industries to convene global industry, government, and regulatory leaders in global and regional events, such as our annual CERAWeek and World Petrochemical conferences.
Our Transportation segment includes our Automotive offerings, which represent about 84 percent of the segment’s revenue, and our Maritime & Trade and Aerospace, Defense & Security offerings, which make up the balance of the segment’s revenue.
Within the new car market, we provide authoritative analysis and forecasts of sales and production for light vehicles, medium and heavy commercial vehicles, powertrain, components, and technology systems across all major markets. Our comprehensive forecast database covers 99 percent of global light vehicle sales and production. We forecast sales and production of more than 50,000 unique vehicle model variants, as well as more than 100 different vehicle systems, sub-systems, and components.
We also provide a wide range of performance measurement and marketing tools for carmakers, dealers, and agencies. We continue to leverage analytics and innovation to develop product and service offerings aimed at addressing needs across the value chain, including strategy and planning, marketing, sales, dealer services, and after sales. In the US,
our sales and marketing offerings draw on a database of more than 7 billion ownership records, covering 760 million vehicles and more than 240 million US households over a period of 25 years. We also offer a range of vehicle recall solutions to carmakers, including identifying households to be contacted, providing accurate measurement of recall program completion, and in some cases, providing a full turnkey solution that manages the entire fulfillment process for their safety recall campaigns.
Our automotiveMastermind (“aM”) offering provides predictive analytics and marketing automation software for the new car dealer market, enabling dealers to improve their customer retention and extend their customer portfolio through “conquest” campaigns.
Within the used car market, we support dealers, insurers, and consumers through our CARFAX products. These offerings provide critical information for used car dealers and their customers in the used car buying process. For example, CARFAX vehicle history reports provide maintenance, accident, odometer, and commercial use information on cars in the United States. This history, based on more than 20 billion records collected from more than 112,000 data sources, provides confidence to dealers and consumers in the car buying process. We have expanded our product line under CARFAX to include a used car listing service for dealers and vehicle-specific valuation offerings.
Consolidated Markets & Solutions (“CMS”)
Our CMS segment includes our Product Design offerings, which represent approximately 60 percent of the segment’s revenue, and our Technology, Media & Telecom and Economics and Country Risk offerings, which make up the balance of the segment’s revenue.
share, supply chain, and adoption, as well as forecasts for key technology markets on a geographic, industry, and company level.
Our Financial Services segment provides pricing and reference data, indices, valuation and trading services, trade processing, enterprise software, and managed services. Financial Services end users include front- and back-office professionals, such as traders, portfolio managers, risk managers, research professionals, and other financial markets participants, as well as operations, compliance, and enterprise data managers. This segment includes our Information, Processing, and Solution offerings, as well as offerings from our recent acquisition of Ipreo, a leading financial services solutions and data provider.
In August 2018, we added Ipreo to our Financial Services offerings. Ipreo is a leading financial services solutions and data provider that supports market participants in the capital-raising process, corporate activities, and private capital markets, including banks, public and private companies, and institutional and individual investors, as well as research, asset management, and wealth management firms. Our primary Ipreo offerings include the following:
Sales and Marketing
Our sales teams are located throughout the world and are organized within their respective business lines to align with our customers. In addition to field experience, we also conduct regular customer surveys to understand both current customer satisfaction levels and potential opportunities for product and coverage improvement.
Our financial services and corporate account management teams are part of our overall sales organization and are responsible for the delivery of the full breadth of our products and services to new and existing customers. The account management teams are also responsible for our overall relationship with our larger customers, focusing on developing new business, increasing our sales pipeline, and developing strategic transactions.
Our marketing organization is aligned with our sales organization, and defines our marketing strategy and executes marketing programs. A primary focus for marketing strategy is to empower IHS Markit brand awareness, revenue acceleration, and market leadership across our key industries for all products and services globally. Functionally, this includes corporate marketing, product marketing, and field marketing.
We believe the principal competitive factors in our business include the following:
•Quality of decision-support tools and services
•Quality and relevance of our analysis and insight
•Ease of use
•Value for price
We believe that we compete favorably on each of these factors. Although we face competition in specific industries and with respect to specific offerings, we do not believe that we have a direct competitor across all of the industries we serve due to the depth and breadth of our offerings. Competitors within specific industries or with respect to specific offerings are described below.
We sell our products to various government agencies and entities. No individual contract is significant to our business. Although some of our government contracts are subject to terms that would allow renegotiation of profits or termination at the election of the government, we believe that no renegotiation or termination of any individual contract or subcontract at the election of the government would have a material adverse effect on our financial results.
We rely heavily on intellectual property, including the intellectual property we own and license. We regard our trademarks, copyrights, licenses, and other intellectual property as valuable assets and use intellectual property laws, as well as license and confidentiality agreements with our employees, customers, channel and strategic partners, and others, to protect our rights. In addition, we exercise reasonable measures to protect our intellectual property rights and enforce these rights when we become aware of any potential or actual violation or misuse.
We use intellectual property licensed from third parties, including SDOs, government agencies, public sources, market data providers, financial institutions, and manufacturers, as a component of our offerings and, in many cases, it cannot be independently replaced or recreated by us or others. We have longstanding relationships with most of the third parties from whom we license information. Almost all of the licenses that we rely upon are nonexclusive and expire within one to two years, unless renewed, although we have longer licenses with some of those third parties, particularly in the Financial Services segment.
We maintain registered trademarks and service marks in jurisdictions around the world. In addition, we have obtained patents and applied for patents in the United States, primarily related to our software portfolio, including our Kingdom,
Goldfire, Indices, and Digital products. For more information relating to our intellectual property rights, see “Item 1A. Risk Factors - We may not be able to protect our intellectual property rights and confidential information.”
As of November 30, 2018, we had approximately 14,900 employees located in 35 countries around the world.
Our business has seasonal aspects. Our first quarter generally has our lowest quarterly levels of revenue and profit. We also experience event-driven seasonality in our business; for instance, CERAWeek, an annual energy conference, is typically held in the second quarter of each year. Another example is the biennial release of the Boiler Pressure Vessel Code (“BPVC”) engineering standard, which generates revenue for us predominantly in the third quarter of every other year. The most recent BPVC release was in the third quarter of 2017.
Financial Information about Segments
See “Item 8 - Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 17” in Part II of this Form 10-K for information with respect to each segment’s revenues, profits, and total assets and for information with respect to our revenues and long-lived assets for the U.S., U.K., and the rest of the world in aggregate. See also “Item 1A. Risk Factors - Our international operations are subject to risks relating to worldwide operations.”
IHS Markit files annual, quarterly, and current reports, proxy statements, and other information with the Securities and Exchange Commission (“SEC”). The SEC maintains a website that contains annual, quarterly, and current reports, proxy statements, and other information regarding issuers that file electronically with the SEC (including IHS Markit). The SEC’s website is www.sec.gov.
We maintain an internet website for investors at http://investor.ihsmarkit.com. On this website, we make available, free of charge, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Forms 3, 4, and 5 filed on behalf of directors and executive officers, and all amendments to any of those reports or filings, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. Unless specifically incorporated by reference, information on our website is not a part of this Annual Report on Form 10-K.
Also available on the website for investors at http://investor.ihsmarkit.com are our Amended and Restated Bye-laws, Corporate Governance Guidelines, Audit Committee Charter, Risk Committee Charter, Human Resources Committee Charter, Nominating and Governance Committee Charter, Business Code of Conduct, and Compliance Hotline and Reporting Misconduct Policy. Our corporate governance documents are available in print, free of charge to any shareholder who requests them, by contacting IHS Markit Investor Relations and Corporate Communications at 15 Inverness Way East, Englewood, CO 80112 or by calling (303) 790-0600.
Item 1A. Risk Factors
In addition to the other information provided in this Form 10-K, you should carefully consider the risks described in this section. The risks described below are not the only risks that could adversely affect our business; other risks currently deemed immaterial or additional risks not currently known to us could also adversely affect us. These and other factors could have a material adverse effect on the value of your investment in our securities, meaning that you could lose all or part of your investment.
Note that this section includes forward-looking statements and future expectations as of the date of this Form 10-K. This discussion of Risk Factors should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes in Part II of this Form 10-K.
Our business performance might not be sufficient for us to meet the full-year financial guidance that we provide publicly.
We provide full-year financial guidance to the public based upon our assumptions regarding our expected financial performance. For example, we provide assumptions regarding our ability to grow revenue, our expenses and tax rates, and our ability to achieve our profitability targets. While we believe that our annual financial guidance provides investors and analysts
with insight to our view of the company’s future performance, such financial guidance is based on assumptions that may not always prove to be accurate and may vary from actual results. If we fail to meet the full-year financial guidance that we provide, or if we find it necessary to revise such guidance during the year, the market value of our common shares could be adversely affected.
We operate in competitive markets, which may adversely affect our financial results.
While we do not believe that we have a direct competitor across all of the industries we serve, we face competition across all markets for our products and services, including by larger or smaller competitors that may be able to adopt new or emerging technologies to address customer requirements more quickly than we can. We may also face competition from incumbent companies with strong market share in specific markets or organizations and businesses that have not traditionally competed with us but that could adapt their products and services or utilize significant financial and information-gathering resources, recognized brands, or technological expertise to begin competing with us. We believe that competitors are continuously enhancing their products and services, developing new products and services, investing in technology, and consolidating or acquiring new businesses to better serve the needs of their existing customers and to attract new customers. Increased competition could require us to make additional capital investments. The impact of cost-cutting pressures across the industries we serve could lower demand for our products and services, as customers intensify their focus on containing or reducing costs. Our competitors may choose to sell products and services competitive with ours at lower prices or bundled with other offerings, which may require us to reduce the prices of our offerings or offer additional products or services to compete. An increase in our capital investments, price reductions for our offerings or reduced spending by our customers could negatively impact our revenues, margins and results of operations.
We may be unsuccessful in achieving our growth and profitability objectives.
We seek to achieve our growth objectives by enhancing our offerings to meet the needs of our customers through organic development, including by delivering integrated workflow platforms, cross-selling our products across our existing customer base and acquiring new customers, entering into strategic partnerships, acquisitions, and by implementing operational efficiency initiatives. If we are unable to successfully execute on our strategies to achieve our growth objectives or drive operational efficiencies, or if we experience higher than expected operating costs that cannot be adjusted accordingly, our growth and profitability rates could be adversely affected. An additional factor that may adversely affect our growth rates is global economic uncertainty, particularly in our energy and financial end markets. Our resources and financial markets segments in particular may be adversely affected by industry dynamics, including decisions on the part of our customers to defer capital spending in uncertain economic environments.
If we are unable to develop successful new products and services or adapt to rapidly changing technology, our business could suffer serious harm.
The information services industry is characterized by rapidly changing technology, evolving industry standards and changing regulatory requirements. Our growth and success depend upon our ability to enhance our existing products and services and to develop and introduce new products and services to keep pace with such changes and developments and to meet changing and increasingly sophisticated customer needs. The process of developing our products and services is complex and may become increasingly complex and expensive in the future due to the introduction of new platforms, operating systems, technologies and customer expectations. Current areas of significant technological change include artificial intelligence, mobility, cloud-based computing, blockchain, speed of availability of data, and the storing, processing, and analysis of large amounts of data. We may find it difficult or costly to update our services and software and to develop new products and services quickly enough to work effectively with new or changed technologies and regulations, to keep the pace with evolving industry standards or to meet our customers’ needs. If we are unable to develop new products or services, or to successfully enhance or update existing products and services, we may not be able to grow our business as quickly as we anticipate.
Fraudulent or unpermitted data access or other cyber-security or privacy breaches may negatively impact our business and harm our reputation.
Many of our products and services involve the storage and transmission of proprietary information and sensitive or confidential data. Similar to other global multinational companies that provide services online, we experience cyber-threats, cyber-attacks and security breaches of varying degrees of severity on our information technology systems, which can include unauthorized attempts to access, disable, improperly modify or degrade our information, systems and networks, the introduction of computer viruses and other malicious codes and fraudulent “phishing” e-mails that seek to misappropriate data and information or install malware onto users’ computers. For example, in 2018, unauthorized actors obtained access to
certain employee email accounts by sending phishing messages, a breach that we determined was not material to our business or operations. Cyber-threats in particular vary in technique and sources, are persistent, frequently change, and increasingly are more sophisticated, targeted, and difficult to detect and prevent against. Other recent, highly publicized data security breaches and cyber-attacks of other companies have further heightened awareness of this issue and may embolden individuals or groups to target our systems.
While we have dedicated resources at our company who are responsible for maintaining appropriate levels of cyber-security and training our business teams on cyber-security, and while we utilize third party technology products and services to help identify, protect, and remediate our information technology systems and infrastructure against security breaches and cyber-incidents, our responsive and precautionary measures may not be adequate or effective to prevent, identify, or mitigate attacks by hackers, foreign governments, or other actors or breaches caused by employee error, malfeasance, or other disruptions. We are also dependent on security measures that some of our third-party suppliers and customers are taking to protect their own systems and infrastructures. For example, our outsourcing of certain functions requires us to sometimes grant network access to third-party suppliers. If our third-party suppliers do not maintain adequate security measures, do not require their sub-contractors to maintain adequate security measures, do not perform as anticipated and in accordance with contractual requirements, or become targets of cyber-attacks, we may experience operational difficulties and increased costs. In addition, if a customer experiences a data security breach that results in the misappropriation of some of our proprietary business information, our reputation could be harmed, even if we were not responsible for the breach. While we maintain what we believe is sufficient insurance coverage that may (subject to certain policy terms and conditions, including deductibles) cover certain aspects of third-party security and cyber-risks and business interruption, our insurance coverage may not always cover all costs or losses.
We collect, store, use, and transmit our employees’, customers’, and suppliers’ data on our networks, including information from public and private sources, intellectual property, proprietary business information, personally identifiable information, and information that may be confidential, sensitive, or material and nonpublic. We rely on a system of physical and technological security measures, internal processes and controls, contractual precautions and business continuity plans, and policies, procedures, and training to protect the confidentiality of such data. It is not always possible to prevent misconduct or misuse of such information or data by employees or third parties. The precautions we take to detect and prevent such activity, including trading and contractual obligations, may not be effective in all cases.
Any fraudulent, malicious, or accidental breach of data security controls could also result in unintentional disclosure of, or unauthorized access to, or misappropriation or misuse of, customer, vendor, employee, or other confidential or sensitive data or information, which could potentially result in additional costs to our company to enhance security or to respond to occurrences, lost sales, violations of regulations or laws relating to the privacy of personal or payment card information, penalties, or litigation. Similarly, if any confidential or embargoed data is inadvertently disclosed or deliberately misused prior to our authorization, customers and financial markets could be negatively affected, and any resulting need to change our procedures for handling and sharing this data may diminish the value of such offerings. In addition, media or other reports of perceived security vulnerabilities to our systems or those of our third-party suppliers, even if no breach has been attempted or occurred, could also adversely impact our reputation and materially impact our business.
Misappropriation, misuse, improper modification, or disclosure, destruction, corruption, or unavailability of data and information or ransom demands due to cyber-attacks or other security breaches could damage our brand and reputation, and customers and data suppliers could lose confidence in our processes, security measures, and reliability, which would harm our ability to retain customers and data suppliers and gain new ones. We could also face litigation or other claims from impacted individuals as well as substantial regulatory sanctions or fines. We may be required to incur significant costs to minimize or alleviate the effects of cyber-attacks or other security vulnerabilities and to protect against damage caused by disruptions, security breaches, or cyber-attacks of the nature we have already incurred, in the future. If any of these were to occur, it could have a material adverse effect on our business and results of operations.
We could experience system failures or capacity constraints that could negatively impact our business.
Our ability to provide reliable service largely depends on the efficient and uninterrupted operation of complex systems, relying on people, processes, and technology to function effectively. Most of our products and services are delivered electronically, and our customers rely on our ability to process and deliver substantial quantities of information and other services on computer-based networks. Some elements of these systems have been outsourced to third-party providers, including critical data inputs received from third-party suppliers. Some of our systems have been consolidated for the purpose of enhancing scalability and efficiency, which increases our dependency on a smaller number of systems. Any failure of, or significant interruption, delay or disruption to, or security breaches affecting, our systems could result in: disruption to our
operations; significant expense to repair, replace or remediate systems, equipment or facilities; a loss of customers; legal or regulatory claims, proceedings or fines; damage to our reputation; and harm to our business.
System interruption, failures or security breaches could result from a wide variety of causes, including: human error, natural disasters (such as hurricanes and floods), infrastructure or network failures (including failures at third-party data centers, by third party cloud-computing providers, or of aging technology assets), disruptions to the internet, malicious attacks or cyber incidents such as unauthorized access, ransomware, loss or destruction of data (including confidential and/or personal customer information), account takeovers, computer viruses or other malicious code, and the loss or failure of systems over which we have no control. In addition, significant growth of our customer base or increases in the number of products or services or in the speed at which we are required to provide products and services may also strain our systems in the future. We may also face significant increases in our use of power and data storage and may experience a shortage of capacity and increased costs associated with such usage. We may also face additional strain on our systems and networks due to aging or end-of-life technology that we have not yet updated or replaced. While we generally have disaster recovery and business continuity plans that utilize industry standards and best practices for much of our business, including back-up facilities for our primary data centers, a testing program and staff training, our systems are not always fully redundant and our disaster recovery and business continuity plans may not always be sufficient or effective. In the past when we have experienced slow operation of our systems or service interruptions, some of our products or services have been unavailable for a limited period of time, but none of these occurrences have been material to our business. However, any of the above factors could individually or in the aggregate adversely affect our business, and our insurance may not be adequate to compensate us for all failures, interruptions, delays, disruptions or security breaches.
Design defects, errors, failures or delays associated with our products or services could negatively impact our business.
Despite testing, software, products and services that we develop, license or distribute may contain errors or defects when first released or when major new updates or enhancements are released that cause the software, product or service to operate incorrectly or less effectively. Many of our products and services also rely on data and services provided by third-party providers over which we have no control and may be provided to us with defects, errors or failures. We may also experience delays while developing and introducing new products and services for various reasons, such as difficulties in licensing data inputs or adapting to particular operating environments. Defects, errors or delays in our products or services that are significant, or are perceived to be significant, could result in rejection or delay in market acceptance, damage to our reputation, loss of revenue, a lower rate of license renewals or upgrades, diversion of development resources, product liability claims or regulatory actions, or increases in service and support costs. We may also need to expend significant capital resources to eliminate or work around defects, errors, failures or delays. In each of these ways, our business, financial condition or results of operations could be materially adversely impacted.
We depend on externally obtained content and services to support our offerings, and the inability to continue to obtain access could prove harmful to our business.
We obtain data from a wide variety of external sources that we transform into critical information and analytics and use to create integrated product and service offerings for our customers. Many of our offerings include content and information that is purchased or licensed from third parties, including from public record sources or parties that are our customers or our competitors, or obtained using independent contractors. In addition, we often rely on third-party dealers to sell or distribute some of our offerings, such as in locations where we do not maintain a sales office or sales teams or for methods of distribution to which we do not have direct access. For instance, our industry standards offerings that are part of our Product Design workflow rely on information licensed from standards developing organizations, and many of our financial institution customers provide us with data which is a critical input for many of our Financial Services offerings. We believe that the content licensed from many of these third parties might not be able to be obtained from alternate sources on favorable terms, if at all.
Our license agreements with these third parties are often nonexclusive and many are terminable on less than one year’s notice. In addition, many of these third parties compete with one another and with us, including by providing data to our competitors or becoming competitors themselves, which may cause them to reduce their willingness to supply, or increase the price of, data and content that are important to our products and services. Our competitors could also enter into exclusive contracts with our data sources, which may preclude us from receiving certain data from these suppliers or restricted in our use of such data. We could also become subject to legislative, regulatory, judicial or contractual restrictions on the use of data, such as if such data is not collected by the third parties in a way which allows us to process the data or use it legally. We are also limited in our ability to monitor and direct the activities of our independent contractors, but if any actions or business practices of these individuals or entities violate our policies or procedures or are otherwise deemed inappropriate or illegal, we could lose access to the data they collect, as well as be subject to litigation, regulatory sanctions, or reputational damage.
If we lose access to, or are restricted in receiving, a significant number of data sources and cannot replace the data through alternative sources or we are unable to obtain information licensed to us consistently, in a timely manner, or on terms commercially reasonable to us, specific products, services and customer solutions may be impacted or disrupted and our business, reputation, financial condition, operating results and cash flow could be materially adversely affected.
Our relationships with third-party service providers may not be successful or may change, which could adversely affect our results of operations.
We have commercial relationships with third-party service providers whose capabilities complement our own, for integral services, software and technologies. Many of our products and services are developed using third-party service providers’ data or services, or are made available to our customers or are integrated for our customers’ use through integral infrastructure, information and technology solutions provided by such third-party service providers. For example, we outsource certain functions involving our data transformation process and data hosting functions to business partners who we believe offer us deep expertise in these areas, as well as scalability and cost effective services. In some cases, these providers are also our competitors or may in the future become our competitors as we expand our product and service offerings, which could impact our relationships.
The priorities and objectives of these providers may differ from ours, which may make us vulnerable to changes or terminations of our commercial relationships and could reduce our access over time to information and technology. We have little control over these third-party providers, which increases our vulnerability to errors, failures, interruptions or disruptions or problems with their services or technologies. We also face risks that one or more service providers may perform work that deviates from our standards or that we may not be able to adequately protect our intellectual property. Any errors, failures to perform, interruptions, delays or terminations of service experienced in connection with these third-party providers, or if we do not obtain the expected benefits from our relationships with third-party service providers, we may be less competitive, our products and services may be negatively affected, and our results of operations could be adversely impacted.
Some of the critical information we use in our offerings is publicly available in raw form at little or no cost.
The internet, widespread availability of sophisticated search engines, pervasive wireless data delivery, and public sources of free or relatively inexpensive information and solutions have simplified the process of locating, gathering, and disseminating data, potentially diminishing the perceived value of our offerings. While we believe our offerings are distinguished by such factors as currency, accuracy and completeness, and our analysis and other added value, our customers could choose to obtain the information and solutions they need from public, regulatory, governmental or other sources. To the extent that customers become more self-sufficient, demand for our offerings may be reduced, and our business, financial condition, and results of operations could be adversely affected.
The loss of, or the inability to attract and retain, key personnel could impair our future success.
Our future success depends to a large extent on the continued service of our highly skilled, educated and trained employees, including our experts in research and analysis, information technology, the industries in which we operate, and colleagues in sales, marketing, product development, operations, technology and management, including our executive officers. We do not carry any “key person” insurance policies that could offset potential loss of service under applicable circumstances. We must maintain our ability to attract, motivate, compensate and retain highly qualified colleagues in order to support our customers and achieve business results. The loss of the services of key personnel and any inability to recruit effective replacements or to otherwise attract, motivate, or retain highly qualified personnel could have a material adverse effect on our business, financial condition, and operating results.
We may not be able to protect our intellectual property rights and confidential information.
Our success depends in part on our proprietary technology, processes, methodologies and information. We rely on a combination of copyright, trademark, trade secret, patent and other intellectual property laws and nondisclosure, license, assignment and confidentiality arrangements to establish, maintain and protect our proprietary rights as well as the intellectual property rights of third parties whose assets we license. However, we cannot assure that the steps we have taken to protect our intellectual property rights, and the rights of those from whom we license intellectual property, are adequate to prevent unauthorized use, misappropriation, or theft of our intellectual property. Intellectual property laws in various jurisdictions in which we operate are also subject to change at any time and could further restrict our ability to protect our intellectual property and proprietary rights. In particular, a portion of our revenues are derived from jurisdictions where adequately protecting intellectual property rights may prove more challenging or impossible. We may also not be able to detect unauthorized uses or take timely and effective steps to remedy unauthorized conduct. To prevent or respond to unauthorized
uses of our intellectual property, we might be required to engage in costly and time-consuming litigation or other proceedings and we may not ultimately prevail. Any failure to establish, maintain or protect our intellectual property or proprietary rights could have a material adverse effect on our business, financial condition or results of operations.
We may be exposed to litigation related to products we make available to customers and we may face legal liability or damage to our reputation.
Companies in our industry have increasingly pursued patent and other intellectual property protection for their data, technologies and business methods. As we do not actively monitor third-party intellectual property, if any of our data, technologies or business methods are covered or become covered by third-party intellectual property protection and used without license or if we misuse data, technologies or business methods outside the terms of our licenses, we may be subject to claims or threats of infringement, misappropriation or other violation of intellectual property rights, or have the use of our data, technologies and business methods otherwise challenged. We have also in the past been, and may in the future be, called upon to defend partners, customers, suppliers or distributors against such third-party claims under indemnification clauses in our agreements.
Responding to such claims or threats, regardless of merit, can consume valuable time and resources, result in costly or unfavorable litigation or settlements that could exceed the limits of applicable insurance coverage, delay operations of our business, require redesign of our products and services, or require new royalty and licensing agreements. It could also damage our reputation for any reason which could adversely affect our ability to attract and retain customers, employees, and information suppliers. Any such factors could have a material adverse effect on our financial condition or results of operations.
We are subject to litigation and investigation risks which could adversely affect our business, results of operations, and financial condition.
We are from time to time involved in various litigation matters and claims, including regulatory proceedings, administrative proceedings, lawsuits, governmental investigations, and contract disputes, as they relate to our products, services, and business. We may face potential commercial or intellectual property claims or liability for, among other things, breach of contract, defamation, libel, fraud, or negligence, with respect to the use of our offerings by our customers, particularly if the information in our offerings was incorrect for any reason, or if it were misused or used inappropriately. We may also face employment-related litigation and investigations, including claims of age discrimination, sexual harassment, gender discrimination, racial discrimination, immigration violations, or other local, state, and federal labor, environmental, health, and safety violations. In addition, we may receive routine requests for information from governmental agencies in connection with their regulatory or investigatory authority. Because of the uncertain nature of litigation, investigations, and insurance coverage decisions, we cannot predict the outcome of these matters, which could have a material adverse effect on our business, results of operations, and financial condition. Litigation and investigations are very costly, and the costs associated with prosecuting and defending litigation and investigation matters could have a material adverse effect on our business, results of operations, and financial condition. In light of the potential cost and uncertainty involved in litigation and investigations, we may settle matters even when we believe we have a meritorious defense. We are unable to estimate precisely the ultimate dollar amount of exposure to loss or the amounts we actually pay in connection with litigation and investigation matters, due to inherent uncertainties and the inherent shortcomings of the estimation process, the uncertainties involved in litigation, and other factors.
Our use of open source software could result in litigation or impose unanticipated restrictions on our ability to commercialize our products and services.
We use open source software in our technology, most often as small components within a larger product or service. Open source code is also contained in some third-party software we rely on. The terms of many open source licenses are ambiguous and have not been interpreted by U.S. or other courts, and these licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to commercialize our products and services, license the software on unfavorable terms, require us to re-engineer our products and services or take other remedial actions, any of which could have a material adverse effect on our business. We could also be subject to suits by parties claiming breach of the terms of licenses, which could be costly for us to defend.
Our brand and reputation are key assets and competitive advantages of our company and our business may be affected by how we are perceived in the marketplace.
The integrity and external perceptions of our brand and reputation are key to our ability to remain a trusted source of products and services and to attract and retain customers. Reputational damage from negative perceptions or publicity, or
actual, alleged, or perceived issues regarding any of our products or services, could damage our reputation and relationships with customers, prospects, and the public generally. Although we monitor developments, including social media, for areas of potential risk to our brand and reputation, negative perceptions or publicity may adversely impact our credibility as a trusted source for critical information, analytics, and insight and may have a negative impact on our business.
We enter into redistribution arrangements that allow other firms to represent certain of our products and services as partners or agents. It is difficult to monitor whether the representation of our products and services by such partners or agents is accurate. Poor representation of our products and services by our partners or agents could have an adverse effect on our brand, reputation, and our business.
Cost-cutting pressures and consolidation in our customer markets could lower demand for our products and services.
Our customers are focused on controlling or reducing spending as a result of the continued financial challenges and market uncertainty many of them face. Customers within the financial services, shipping and energy industries in particular strive to reduce their operating costs, and may use strategies that result in a reduction in their spending on our products and service, such as by consolidating their spending with fewer or lower cost vendors or by internally developing products, services and functionality. In addition, mergers or consolidations among our customers could reduce the number of our customers and potential customers, which could cause them to discontinue or reduce their use of our products and services. All such developments could materially and adversely affect our business, financial condition, operating results and cash flow.
Declining activity levels in our core end markets, or weak or declining financial performance of companies in our end markets, could lower demand for certain of our products and services.
Many of our products and services are dependent upon the robustness of the core end markets in which we operate, as well as the financial health of the participants in those markets and the general economy. In addition, a proportion of our revenue in our Financial Services segment is variable and depends upon transaction volumes, investment levels (i.e., assets under management), or the number of positions we value. Unfavorable or uncertain economic conditions or lower activity levels in the end markets in which we operate could result in cancellations, reductions, or delays for our products and services or in lower revenues, and could have a material adverse effect on our financial condition or results of operations.
Some of our products and services typically face long selling cycles to secure new contracts, which require significant resource commitments and result in long lead times before we receive revenue.
For certain new products and services, and especially for complex products and services, we often face long selling cycles to secure new contracts and customers and there can be a long preparation period before we commence providing products and services. For instance, some of our Financial Services products and services can require active engagement with potential customers and can take 12 months or more to reach deal closure. Some products’ success is also dependent on building a network of users, and may not be profitable while such a network is developing. We can incur significant business development expenses during the selling cycle and we may not succeed in winning a new customer’s business, in which case we receive no revenue and may receive no reimbursement for such expenses. Selling cycle periods have historically lengthened and could lengthen further, causing us to incur even higher business development expenses with no guarantee of winning a new customer’s business. Even if we succeed in developing a relationship with a potential new customer, we may not be successful in obtaining contractual commitments after the selling cycle or in maintaining contractual commitments after the implementation cycle, and our business, financial condition, and results of operations could be adversely affected.
If we are unable to consistently renew and enter into new subscriptions for our offerings, our results could weaken.
The majority of our revenue is recurring, typically based on subscription agreement to our offerings. In 2018, approximately 84 percent of our revenues were recurring fixed and recurring variable revenues. Our operating results depend on our ability to achieve and sustain high renewal rates on our existing subscription base and to enter into new subscription arrangements at acceptable prices and other commercially acceptable terms. Failure to meet one or more of these subscription objectives could have a material adverse effect on our business, financial condition, and operating results.
Changes in the legislative, regulatory, and commercial environments in which we operate may adversely impact our ability to collect, compile, use, transfer, publish, or sell data, subject us to increased regulation or decreased demand of our products and services, or prevent us from offering certain products or services, which could adversely affect our financial condition and operating results.
Certain types of information we collect, compile, store, use, transfer, publish and/or sell, and certain of our products and services, are subject to regulation by governmental authorities in various jurisdictions in which we operate.
There is an increasing public concern regarding privacy, data, and consumer protection issues, and the number of jurisdictions with data protection laws has been increasing. Certain types of information we collect, compile, use, and publish, including offerings in our Automotive businesses, are subject to laws and regulations by governmental authorities in jurisdictions in which we operate. These laws and regulations pertain primarily to “personally identifiable information” and “personal data” (i.e., information relating to an identified or identifiable individual), constrain whether and how we collect that data, how that data may be used and stored, and whether, to whom, and where that data may be transferred, as well as notification and other requirements that must be followed in the event data is accessed by unauthorized persons. To conduct our operations, we regularly move data across national borders, and consequently are subject to a variety of continuously evolving and developing laws and regulations regarding privacy, data protection, and data security. Many jurisdictions have passed laws in this area, such as the European Union General Data Protection Regulation (the “GDPR”) and the cyber-security law adopted by China in June 2017, and other jurisdictions are considering imposing additional restrictions. These laws and regulations are increasing in complexity and number, change frequently and increasingly conflict among the various countries in which we operate, which has resulted in greater compliance risk and cost for us. It is possible that we could be prohibited or constrained from collecting or disseminating certain types of data or from providing certain products or services. If we fail to comply with these laws or regulations, we could be subject to significant litigation, civil or criminal penalties, monetary damages, regulatory enforcement actions or fines in one or more jurisdictions. For example, a failure to comply with the GDPR could result in fines up to the greater of €20 million or 4% of annual global revenues.
In addition, many of our customers rely on many of our products and services to meet their operational, regulatory, or compliance needs. Our financial industry customers, for example, operate within a highly regulated environment and must comply with governmental and quasi-governmental legislation, regulations, directives, and standards. Complex and ever-evolving legislative and regulatory changes around the world that impact our customers’ industries may impact how we provide products and services to our customers and may affect the structure and regulation of, and possibly the demand for, certain products and services we offer, such as indices, benchmark administration, intermediating and clearing services, and offerings in which we function as a “third-party service provider.”
It is very difficult to predict the future impact of the broad and expanding laws, rules, regulations or standards affecting our business, our products and services, and our customers. There can be no assurance that changes in laws, rules or regulations will not have a material adverse effect on our business, financial condition or results of operations. If we fail to comply with any applicable laws, rules, regulations, or standards, or fail to obtain regulatory approval to conduct certain operations or provide certain products or services, we could be subject to fines or other penalties. Additionally, we may be required to comply with multiple and potentially conflicting laws, rules, or regulations in various jurisdictions, or investigate, defend, or remedy actual or alleged violations, which could, individually or in the aggregate, result in materially higher compliance costs to us. New legislation, or a significant change in laws, rules, regulations, or standards could also result in some of our products and services becoming obsolete or prohibited, reduce demand for our products and services, increase expenses as we modify our products and services to comply with new requirements and retain relevancy, impose limitations on our operations, and increase compliance or litigation expense, each of which could have a material adverse effect on our business, financial condition and results of operations.
Our operations are subject to risks relating to worldwide operations, and our compliance and risk management methods might not be effective and may result in outcomes that could adversely affect our reputation, financial condition, and operating results.
Operating in many jurisdictions around the world, we may be affected by numerous, and sometimes conflicting, legal and regulatory regimes, including: changes in tax rates and tax laws or their interpretation, including changes related to tax holidays or tax incentives; trade protection laws, policies and measures, and other regulatory requirements affecting trade and investment, including export controls and economic sanctions laws; unexpected changes in regulatory requirements; political conditions and events, including embargoes; different liability standards and legal systems that may be less developed and less predictable than those in the United States and the United Kingdom, restrictive actions by the United States, the United Kingdom, the European Union, and foreign governments that could limit our ability to provide services in specific countries; and potential noncompliance with a wide variety of laws and regulations. We must also manage social, political, labor, or economic conditions in a specific country or region; difficulties in staffing and managing local operations; difficulties with local or grassroots activism; difficulties in penetrating new markets because of established and entrenched competitors; uncertainties of obtaining data and creating products and services that are relevant to particular geographic markets; lack of recognition of our brands, products, or services; unavailability of local joint venture partners; restrictions or limitations on outsourcing contracts or services abroad; differing levels of data privacy and intellectual property protection in various
jurisdictions; potential adverse tax consequences on the repatriation of funds and from taxation reform affecting multinational companies; and exposure to adverse government action in countries where we may conduct reporting activities. Because of the varying degrees of development of the legal systems of the countries in which we operate, local laws might be insufficient to protect our rights. Compliance with diverse legal and regulatory requirements is costly and time-consuming, and requires significant resources. Violations could result in significant fines or monetary damages, criminal sanctions, prohibitions, suspensions, or restrictions on doing business and damage to our reputation.
As we operate our business around the world, we must manage the potential conflicts between locally accepted business practices in any given jurisdiction and our obligations to comply with laws and regulations, including anti-corruption laws or regulations applicable to us, such as the U.S. Foreign Corrupt Practices Act (the “FCPA”) and the UK Bribery Act 2010 (the “UKBA”). The U.S., U.K., and other foreign agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against companies for violations of export controls, the FCPA, the UKBA, and other laws, rules, sanctions, embargoes, and regulations, including those established by the Office of Foreign Assets Control (“OFAC”). For example, the United States, the European Union, and other countries have imposed significant sanctions measures against Russia targeting the energy, defense, and financial sectors of Russia’s economy, as well as specific Russian officials and businesses that they own. Although we believe all our business activities are permissible under all current applicable laws, rules, sanctions, embargoes and regulations, we may be required to discontinue or limit our business activities in the future. Further, the implementation of new legislation or regulations, or changes in or unfavorable interpretations of existing regulations by courts or regulatory bodies, could require us to incur significant compliance costs and impede our ability to operate, expand, and enhance our products and services as necessary to remain competitive and grow our business.
Our ability to comply with applicable complex and changing laws and rules, including anti-corruption laws, is largely dependent on our establishment and maintenance of compliance, surveillance, audit and reporting systems, as well as our ability to attract and retain qualified compliance and other risk management personnel. We have developed and instituted a corporate compliance program intended to promote and facilitate compliance with all applicable laws which includes, among other things, employee training and the creation of appropriate policies and procedures defining employee behavior that mandate adherence to laws. We also have policies, procedures, and controls designed to comply with all applicable laws, rules, sanctions, embargoes, and regulations. However, we cannot assure you that these measures will always be effective, and we may fail to appropriately monitor or evaluate the risks to which we are or may be exposed or identify business activities that violate laws, rules, sanctions, embargoes, and regulations. We may also not always be successful in detecting if our employees, contractors, agents, and suppliers, including those independent companies to which we outsource certain business operations, are engaging in misconduct, fraud, or other errors, or otherwise taking actions in violation of our policies, procedures, and controls. In addition, some of our risk management methods depend upon evaluation of information regarding markets, customers, or other matters that are publicly available or otherwise accessible by us. That information may not in all cases be accurate, complete, up-to-date, or properly evaluated. In case of non-compliance or alleged non-compliance with applicable laws or regulations by us or our employees, contractors, agents, or suppliers, we could be subject to investigations and proceedings that may be very expensive to defend and may result in criminal enforcement actions, penalties for non-compliance, or civil actions or lawsuits, including by customers, for damages which can be significant.
Any of these outcomes could adversely affect our business, reputation, financial condition, and operating results.
The U.K. electorate voted in favor of a U.K. exit from the E.U. in a referendum, which could adversely impact our business, results of operations and financial condition.
The U.K. Government held an in-or-out referendum on the United Kingdom’s membership of the European Union in June 2016, which resulted in the electorate voting in favor of a U.K. exit from the European Union (“Brexit”). A process of negotiation is now taking place to determine the future terms of the United Kingdom’s relationship with the European Union, with the United Kingdom due to exit the European Union on March 29, 2019. We are headquartered and tax domiciled in the United Kingdom and conduct business in Europe primarily through our U.K. subsidiaries. Depending on the final terms of Brexit, we could face new regulatory costs and challenges. For instance, the United Kingdom could lose access to the single E.U. market and to the global trade deals negotiated by the European Union on behalf of its members, and we may be required to move certain operations to other European Union member states to maintain such access. A decline in trade could affect the attractiveness of the United Kingdom as a global investment center and, as a result, could have a detrimental impact on U.K. growth. Although we have an international customer base, we could be adversely affected by reduced growth and greater volatility in the Pound Sterling and the U.K. economy. Changes to U.K. immigration policy could likewise occur as a result of Brexit. Although the United Kingdom would likely retain its diverse pool of talent, London’s role as a global financial center may decline, particularly if financial institutions shift their operations to the European Union and the E.U. financial services passport is not maintained. Any adjustments we make to our business and operations as of Brexit could
result in significant time and expense to complete. Any of the foregoing factors could have a material adverse effect on our business, results of operations or financial condition.
Our international operations are subject to exchange rate fluctuations.
We operate in many countries around the world and a significant part of our revenue comes from international sales. In 2018, we generated approximately 40 percent of our revenues from sales outside the United States. Approximately 20 percent of our revenue was transacted in currencies other than the U.S. dollar in 2018. We earn revenues, pay expenses, own assets, and incur liabilities in countries using currencies other than the U.S. dollar, including, but not limited to, the British Pound, the Euro, the Canadian Dollar, the Singapore Dollar, and the Indian Rupee. As we continue to leverage our global delivery model, more of our expenses will likely be incurred in currencies other than those in which we bill for the related products and services. An increase in the value of certain currencies against the U.S. dollar could increase costs for delivery of services at offshore sites by increasing labor and other costs that are denominated in local currency. Because our consolidated financial statements are presented in U.S. dollars, we must translate revenues, income, expenses, and the value of assets and liabilities into U.S. dollars at exchange rates in effect during or at the end of each reporting period. We may use derivative financial instruments to reduce our net exposure to currency exchange rate fluctuations. Nevertheless, increases or decreases in the value of the U.S. dollar against other major currencies can materially affect our net operating revenues, operating income, and the value of balance sheet items denominated in other currencies.
International hostilities, terrorist or cyber-terrorist activities, natural disasters, pandemics, and infrastructure disruptions could prevent us from effectively serving our customers and thus adversely affect our results of operations.
Acts of terrorist violence, cyber-terrorism, political unrest, war, civil disturbance, armed regional and international hostilities and international responses to these hostilities, natural disasters, including hurricanes or floods, global health risks or pandemics or the threat of or perceived potential for these events could have a negative impact on us. These events could adversely affect our customers’ levels of business activity and precipitate sudden significant changes in regional and global economic conditions and cycles. These events also pose significant risks to our employees and our physical facilities and operations around the world, whether the facilities are ours or those of our third-party service providers or customers. By disrupting communications and travel and increasing the difficulty of obtaining and retaining highly skilled and qualified personnel, these events could make it difficult or impossible for us to deliver products and services to our customers. Extended disruptions of electricity, other public utilities or network services at our facilities, as well as system failures at our facilities or otherwise, could also adversely affect our ability to serve our customers. We may be unable to protect our employees, facilities and systems against all such occurrences. We generally do not have insurance for losses and interruptions caused by terrorist attacks, conflicts and wars. If these disruptions prevent us from effectively serving our customers, our results of operations could be adversely affected.
Acquisitions, joint ventures, partnerships, alliances, or similar strategic relationships, or dispositions of any of our businesses, and the related integration or separation risks may disrupt or otherwise have a material adverse effect on our business and financial results.
As part of our business strategy, we pursue selective acquisitions of complementary businesses, products or technologies, or joint ventures, partnerships, alliances, or similar strategic transactions and relationships with third parties, to support our business, such as the Merger of IHS and Markit in June 2016 and the acquisition of Ipreo, a leading financial services solutions and data provider, in August 2018. We may also undertake dispositions of certain of our businesses or products. We seek to be disciplined in a highly competitive market, and there can be no assurance that we will be able to identify suitable candidates on favorable terms to successfully complete acquisitions, joint ventures, partnerships, alliances, or strategic relationships, or dispositions of businesses. In addition, we typically fund our acquisitions through our credit facilities. Although we have capacity under our credit facilities, those may not be sufficient. Therefore, future acquisitions or strategic relationships may require us to obtain additional financing through debt or equity, which may not be available on favorable terms or at all and could result in dilution.
If such acquisitions or other strategic transactions are completed, the anticipated growth and other strategic objectives of such transactions may not be fully realized, and a variety of factors may adversely affect any anticipated benefits from such transactions. The success of such transactions depends on, among other things, our ability to combine the various businesses in a manner that realizes anticipated synergies and exceeds the projected stand-alone cost savings and revenue growth trends we have identified, which is a complex, costly, and time-consuming process. We expect to benefit from cost synergies driven by a number of strategies, such as integrating corporate functions, reducing technology spending by optimizing IT infrastructure, using centers of excellence in cost-competitive locations, and optimizing real estate and other costs, as well as greater tax efficiencies from global management and global cash movement. We may also enjoy revenue synergies, including
product and service cross-selling, a more diversified and expanded product offering, and balance across geographic regions.
We cannot assure you that we will be successful in integrating acquired businesses or other strategic transactions, or that they will perform at the levels we anticipate or achieve the cost or revenue synergies expected. The completion of such transactions may have material unanticipated difficulties, expenses, liabilities, competitive responses, and diversion of management focus and attention, such as:
Many of these factors are outside of our control, and any one of them could result in increased costs, decreased expected revenues, and diversion of management time and energy. The anticipated benefits from an acquisition or other strategic transaction may take longer to realize than expected or may not be realized fully. We may also have difficulty integrating and operating businesses in countries and geographies where we do not currently have a significant presence, and acquisitions of businesses having a significant presence outside of the United States or the United Kingdom will increase our exposure to risks of conducting operations in international markets. Similarly, any divestitures will be accompanied by risks commonly encountered in the sale of businesses. As a result, the failure of acquisitions, dispositions, and other strategic transactions to perform as expected could have a material adverse effect on our business, financial condition, or results of operations. Future acquisitions or dispositions could also result in the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill and other intangible assets, any of which could harm our financial condition.
We may be subject to antitrust litigation or government investigation in the future, which may result in an award of money damages or force us to change the way we do business.
In the past, certain of our business practices have been investigated by government antitrust or competition agencies, and we have on multiple occasions been sued by private parties for alleged violations of the antitrust and competition laws of various jurisdictions. Following some of these actions, we have changed certain of our business practices to reduce the likelihood of future litigation. Although each of these material prior legal actions has been resolved, there is a risk based upon the leading position of certain of our business operations or the relationships between our customers in using our products and services that we could, in the future, be the target of investigations by government entities or actions by private parties challenging the legality of our business practices. Depending on the outcome of any future claims or investigations, we may be required to change the way we offer particular products or services, which could result in material disruptions to and costs incurred by our business, and we may be subject to substantial fines, penalties, damages or an injunction or other equitable remedies. Future claims or investigations (regardless of outcome) may also affect how parties interact with us, including the manner or type of data provided to us and the manner or type of data products and services purchased from us. Any antitrust or competition-related claim or investigation could be costly for our company in terms of time and expense incurred defending such claims or investigations. Any of the above impacts, individually or together, could have a material adverse effect on our business, financial condition or results of operations.
Our indebtedness could adversely affect our business, financial condition, and results of operations.
Our indebtedness could have significant consequences on our future operations, including:
Our ability to meet our payment and other obligations under our debt instruments depends on our ability to generate significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. We cannot be certain that our business will generate cash flow from operations, or that future borrowings will be available to us under our existing or any future credit facilities or otherwise, in an amount sufficient to enable us to meet our indebtedness obligations and to fund other liquidity needs. We may incur substantial additional indebtedness, including secured indebtedness, for many reasons, including to fund acquisitions. If we add additional indebtedness or other liabilities, the related risks that we face could intensify.
A downgrade to our credit ratings would increase our cost of borrowing under our credit facilities and adversely affect our ability to access the capital markets.
We are party to a $2.0 billion senior unsecured revolving agreement that matures in June 2023 and a $1.206 billion term loan facility that matures in July 2021 (collectively, the Senior Credit Facilities). The cost of borrowing under the Senior Credit Facilities and our ability and the terms under which we may access the credit markets are affected by credit ratings assigned to us by the major credit rating agencies. These ratings are premised on our performance under assorted financial metrics and other measures of financial strength, business and financial risk, industry conditions, timeliness of financial reporting, and other factors determined by the credit rating agencies. Our current ratings have served to lower our borrowing costs and facilitate access to a variety of lenders. However, there can be no assurance that our credit ratings or outlook will not be lowered in the future in response to adverse changes in these metrics and factors caused by our operating results or by actions that we take, that reduce our profitability, or that require us to incur additional indebtedness for items such as substantial acquisitions, significant increases in costs and capital spending in security and IT systems, significant costs related to settlements of litigation or regulatory requirements, or by returning excess cash to shareholders through dividends or under our share repurchase program. A downgrade of our credit ratings would increase our cost of borrowing under the Senior Credit Facilities, negatively affect our ability to access the capital markets on advantageous terms, or at all, negatively affect the trading price of our securities, and have a significant negative impact on our business, financial condition, and results of operations.
The price of our common shares may be volatile and may be affected by market conditions beyond our control.
Our share price is likely to fluctuate in the future because of the volatility of the stock market in general and a variety of factors, many of which are beyond our control. Market fluctuations could result in volatility in the price of our common shares, one possible outcome of which could be a decline in the value of your investment. In addition, if our operating results fail to meet the expectations of stock analysts or investors, or if we are perceived by the market to suffer material business or reputational damage, we may experience a significant decline in the trading price of our common shares.
Sales of substantial amounts of our common shares in the public market, or the perception that these sales may occur, could cause the market price of our shares to decline.
Sales of substantial amounts of our common shares in the public market, or the perception that these sales may occur, could depress the market price of our common shares and could impair our ability to raise capital through the sale of additional equity securities. We have entered into a registration rights agreement with certain of our shareholders. These shareholders have the right to demand that we file a registration statement covering the offer and sale of their securities under the Securities Act, for as long as each holds unregistered securities. In addition, many of our largest shareholders are able to sell their common shares in the public market from time to time without registration, subject to limitations on the timing, amount, and method of those sales imposed by securities laws. Sales of common shares by these or any other shareholders, including through the exercise of options and the sale of shares by our employees, could have a material adverse effect on the
trading price of our common shares. We cannot predict the effect, if any, that future sales and issuances of shares would have on the market price of our common shares.
There is no assurance that the share repurchase programs approved by our Board of Directors will be fully consummated and any share repurchases under such programs may not result in enhanced value to shareholders and may negatively affect our share price.
Between August 2016 and October 2017, our Board of Directors authorized a share repurchase program of up to $3.25 billion of IHS Markit common shares through November 30, 2019. As of November 30, 2018, the remaining authorization under the share repurchase program was approximately $1.01 billion. Under the share repurchase program, we are authorized to repurchase our common shares on the open market from time to time, in privately negotiated transactions, or through accelerated share repurchase agreements, subject to availability of common shares, price, market conditions, alternative uses of capital, and applicable regulatory requirements, at management’s discretion. The share repurchase program does not, however, obligate us to repurchase any set dollar amount or number of shares and may be modified, suspended, or terminated at any time without prior notice. The share repurchase program carries risks and uncertainties, including, among other things, that the authorized purchases will not be completed within the expected timing or will not be made at the best possible price. In connection with our acquisition of Ipreo, we suspended our share repurchase program until we return to our capital policy target leverage ratio of 2.0-3.0x. Accordingly, there can be no assurance that we will pursue or be successful in completing the execution of the share repurchase program in the time period authorized by our Board of Directors or any future repurchase program. Additionally, the existence of a share repurchase program could cause the market price of our common shares to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our shares. As a result, any repurchase program may not ultimately result in enhanced value to our shareholders and may not prove to be the best use of our cash resources.
The U.S. Internal Revenue Service (the “IRS”) may not agree that, after the Merger, IHS Markit should be treated as a foreign corporation for U.S. federal income tax purposes, and/or that we are not subject to certain other adverse U.S. federal income tax laws relating to certain transactions that we may undertake in the future. In addition, future changes to U.S. tax laws could adversely affect us.
Although IHS Markit is incorporated in Bermuda and is and has been treated as tax resident in the United Kingdom, the IRS may assert that IHS Markit should be treated as a U.S. corporation (and, therefore, a U.S. tax resident) for U.S. federal income tax purposes pursuant to Section 7874 of the Code (referred to as “Section 7874”). Section 7874 provides that if, following an acquisition of a U.S. corporation by a non-U.S. corporation, at least 80% of the acquiring non-U.S. corporation’s stock (by vote or value) is considered to be held by former shareholders of the U.S. corporation by reason of holding stock of such U.S. corporation (such percentage referred to as the “ownership percentage” and such test referred to as the “ownership test”) and the “expanded affiliated group” which includes the acquiring non-U.S. corporation does not have substantial business activities in the country in which the acquiring non-U.S. corporation is created or organized, then the non-U.S. corporation would be treated as a U.S. corporation for U.S. federal income tax purposes even though it is a corporation created and organized outside the United States.
Moreover, if the ownership percentage is 60% or more (but less than 80%), the acquired U.S. corporation and its U.S. affiliates could be prohibited from using foreign tax credits or other attributes to offset the income or gain recognized by reason of the transfer of property to a foreign related person or any income received or accrued by reason of a license of any property by the acquired U.S. corporation to a foreign related person. In addition, in such case, a combined company may have a limited ability to integrate certain of its non-U.S. operations or access cash earned by the acquired U.S. corporation’s non-U.S. subsidiaries, in each case without incurring substantial U.S. tax liabilities.
We believe that, based on current law, Section 7874 did not to apply to us after the Merger because the former IHS stockholders held, for purposes of the relevant Section 7874 rules, less than 60% of our common shares (by vote and value) after the Merger by reason of holding IHS common stock. However, there is limited guidance regarding the application of Section 7874, and there can be no assurance that the IRS will agree with the position that the former IHS stockholders will be treated as holding less than 60% of our common shares (by vote and value) after the Merger by reason of holding IHS common stock for purposes of the ownership test. Further, a subsequent change in law might cause IHS stockholders to be treated as owning either 60% or more, or 80% or more, of our common shares after the Merger for U.S. federal income tax purposes, including with retroactive effect to the date of the Merger.
If IHS stockholders were treated as having acquired 80% of our common shares for U.S. federal income tax purposes, IHS Markit would be treated as a U.S. corporation for U.S. federal income tax purposes, and we could be liable for substantial additional U.S. federal income tax on its operations and income following the closing of the Merger. Additionally, non-U.S.
shareholders would be subject to U.S. withholding tax on the gross amount of any dividends we pay to such shareholders. If IHS stockholders were treated as having acquired 60% or more (but less than 80%) of our common shares for U.S. federal income tax purposes, while IHS Markit would not be treated as a U.S. corporation for U.S. federal income tax purposes, we could be subject to the other adverse tax consequences described above.
Finally, recent legislative proposals have aimed to expand the scope of U.S. corporate tax residence, including in such a way as would cause IHS Markit to be treated as a U.S. corporation if the management and control of IHS Markit and its affiliates were determined to be located primarily in the United States, or would reduce the ownership percentage at or above which IHS Markit would be treated as a U.S. corporation. Thus, the rules under Section 7874 and other relevant provisions of U.S. tax law could change on a prospective or retroactive basis in a manner that could adversely affect us.
Audits, investigations and tax proceedings could have a material adverse effect on our results of operations and financial condition.
We are subject to direct and indirect taxes in numerous jurisdictions. We calculate and provide for such taxes in each tax jurisdiction in which we operate. The amount of tax we pay is subject to our interpretation of applicable tax laws in the jurisdictions in which we file. We have taken and will continue to take tax positions based on our interpretation of tax laws, but tax accounting often involves complex matters and judgment is required in determining our worldwide provision for taxes and other tax liabilities. Although we believe that we have complied with all applicable tax laws, we have been and expect to continue to be subject to ongoing tax audits in various jurisdictions, and tax authorities have disagreed, and may in the future disagree, with some of our interpretations of applicable tax law. We regularly assess the likely outcomes of these audits to determine the appropriateness of our tax provisions. However, our judgments may not be sustained on completion of these audits, and the amounts ultimately paid could be different from the amounts previously recorded, which may have a material adverse effect on our results of operations and financial condition.
Future changes in tax laws, including in the rates of taxation, could have a material adverse effect on our results of operations and financial condition.
Our tax liabilities and effective tax rate in the future could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities and changes in tax laws. Tax laws, including tax rates, in the jurisdictions in which we operate may change as a result of macroeconomic, political or other factors, and such changes could have a negative impact on our profitability. For example, the U.S. Congress, the Organisation for Economic Co-operation and Development (“OECD”) and other government agencies have had an extended focus on issues related to the taxation of multinational corporations. One example is in the area of “base erosion and profit shifting.” The G20 finance ministers have endorsed a comprehensive plan set forth by the OECD to create an agreed set of international rules for fighting base erosion and profit shifting. As a result, the tax laws in the United States, the United Kingdom, and other countries in which we operate could change on a prospective or retroactive basis, and any such changes could adversely affect us. In addition, changes in tax laws, treaties or regulations, or their interpretation or enforcement, may be unpredictable, particularly in less developed markets, and could become more stringent, which could materially adversely affect our tax position. Any of these occurrences could have a material adverse effect on our results of operations and financial condition.
On December 22, 2017, a law commonly known as the Tax Cuts and Jobs Act (“TCJA”) was enacted in the United States. Among other things, the TCJA reduces the U.S. federal corporate income tax rate to 21 percent and implements a new system of taxation for non-U.S. earnings, including by imposing a one-time tax on the deemed repatriation of undistributed earnings of non-U.S. subsidiaries. Our financial statements for the current year now reflect the effects of the TCJA based on current guidance, including the effects of the one-time transition tax on certain unrepatriated foreign earnings and the remeasurement of our deferred tax assets and liabilities, as well as the effects of the reduced rate of U.S. corporate income tax and certain other provisions of the TCJA on our effective tax rate and operating results. However, in the absence of guidance on various uncertainties and ambiguities in the application of certain provisions of the TCJA, we will use what we believe are reasonable interpretations and assumptions in applying the TCJA, but it is possible that the IRS as well as state tax authorities could issue subsequent guidance or take positions on audit that differ from our prior interpretations and assumptions, which could have a material adverse effect on our cash tax liabilities, results of operations, and financial condition. In addition, the TCJA could be subject to potential amendments and technical corrections, any of which could materially lessen or increase certain adverse impacts of the legislation on us and our business. We will continue to evaluate the effects of the TCJA on us as federal and state tax authorities issue additional regulations and guidance, and if and when amendments and technical corrections are enacted with respect to the TCJA, which could cause our consolidated financial results to differ from previous estimates and could materially affect our financial position.
Bermuda law differs from the laws in effect in the United States and may afford less protection to holders of our common shares, including enforcing judgments against us or our directors and executive officers.
We are organized under the laws of Bermuda, as a Bermuda exempted company. As a result, our corporate affairs and the rights of holders of our common shares are governed by Bermuda law, including the Companies Act 1981 (the “Companies Act”), which differs in some material respects from laws typically applicable to U.S. corporations and shareholders, including the provisions relating to interested directors, amalgamations, mergers and acquisitions, takeovers, shareholder lawsuits and indemnification of directors. Generally, the duties of directors and officers of a Bermuda company are owed to the company only. Shareholders of Bermuda companies typically do not have rights to take action against directors or officers of the company and may only do so in limited circumstances. Class actions are not available under Bermuda law. The circumstances in which derivative actions may be available under Bermuda law are substantially more proscribed and less clear than they would be to shareholders of U.S. corporations. The Bermuda courts, however, would ordinarily be expected to permit a shareholder to commence an action in the name of a company to remedy a wrong to the company where the act complained of is alleged to be beyond the corporate power of the company or illegal, or would result in the violation of the company’s memorandum of association or bye-laws. Furthermore, consideration would be given by a Bermuda court to acts that are alleged to constitute a fraud against the minority shareholders or, for instance, where an act requires the approval of a greater percentage of the company’s shareholders than that which actually approved it.
When the affairs of a company are being conducted in a manner that is oppressive or prejudicial to the interests of some shareholders, one or more shareholders may apply to the Supreme Court of Bermuda, which may make such order as it sees fit, including an order regulating the conduct of the company’s affairs in the future or ordering the purchase of the shares of any shareholders by other shareholders or by the company. Additionally, under our bye-laws and as permitted by Bermuda law, each shareholder has waived any claim or right of action against our directors or officers for any action taken by directors or officers in the performance of their duties, except for actions involving fraud or dishonesty. In addition, the rights of holders of our common shares and the fiduciary responsibilities of our directors under Bermuda law are not as clearly established as under statutes or judicial precedent in existence in jurisdictions in the United States, particularly the State of Delaware. It is also doubtful whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the United States, against us or our directors or officers under the securities laws of those jurisdictions or entertain actions in Bermuda against us or our directors or officers under the securities laws of other jurisdictions. Therefore, holders of our common shares may have more difficulty protecting their interests than would shareholders of a corporation incorporated in a jurisdiction within the United States.
We have anti-takeover provisions in our bye-laws that may discourage a change of control.
Our bye-laws contain provisions that could make it more difficult for a third party to acquire us without the consent of our Board of Directors. These provisions provide for:
These provisions could make it more difficult for a third party to acquire us, even if the third party’s offer may be considered beneficial by many shareholders. As a result, shareholders may be limited in their ability to obtain a premium for their shares.
Item 1B. Unresolved Staff Comments
Item 2. Properties
Our colleagues work in offices at 113 locations around the world, comprised of 54 offices in the Americas (44 in the United States), 34 offices in Europe, the Middle East and Africa, and 25 offices in the Asia Pacific region. We own the buildings at three of our locations. All of our other facilities are leased with terms ranging from month-to-month at some locations to an expiration date in 2032 for one of our facilities. We believe that our properties, taken as a whole, are in good operating condition, are suitable and adequate for our current business operations, and that additional or alternative space will be available on commercially reasonable terms for future use and expansion.
Item 3. Legal Proceedings
See “Item 8 - Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 13” in Part II of this Form 10-K for information about legal proceedings.
Item 4. Mine Safety Disclosures
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common shares are traded on the NASDAQ Stock Market under the symbol “INFO.”
As of December 31, 2018, we had 81 holders of record of our common shares and approximately 175,000 beneficial holders of our common shares.
Our authorized share capital of $30 million consists of 3,000,000,000 shares of common shares, par value $0.01 per share, and undesignated shares, par value $0.01 per share, that our Board of Directors is authorized to designate from time to time as common shares or as preference shares. As of November 30, 2018, no preference shares were issued and outstanding. The holders of our common shares are entitled to one vote per share.
Under Bermuda law, there are currently no restrictions on the export or import of capital, including foreign exchange controls or restrictions that affect the remittance of dividends, interest or other payments to non-resident holders of our common shares.
We have been designated by the Bermuda Monetary Authority as a non-resident for Bermuda exchange control purposes. This designation allows us to engage in transactions in currencies other than the Bermuda dollar, and there are no restrictions on our ability to transfer funds (other than funds denominated in Bermuda dollars) in and out of Bermuda or to pay dividends to U.S. residents who are holders of our common shares.
Under Bermuda law, “exempted” companies are companies formed for the purpose of conducting business outside Bermuda from a principal place of business in Bermuda. As an exempted company, we may not carry on certain business in Bermuda without a license or consent granted by the Minister responsible for the Companies Act 1981.
We have not previously paid a dividend. We periodically review our capital allocation policy with our Board of Directors and could pay a dividend in the future.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information as of November 30, 2018, the last day of fiscal year 2018, with respect to compensation plans under which equity securities are authorized for issuance.
Issuer Purchases of Equity Securities
The following table provides detail about our share repurchases during the three months ended November 30, 2018. See “Item 8 - Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 14” in Part II of this Form 10-K for information regarding our stock repurchase programs.
(1) For the fourth quarter of 2018, we repurchased approximately $9.5 million of common shares related to employee transactions. These amounts represent common shares repurchased from 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 has approved this program in an effort to reduce the dilutive effects of employee equity grants.
The following graph compares our total cumulative stockholder return with the Standard & Poor’s Composite Stock Index (“S&P 500”) and a peer index representing the total price change of The Dun & Bradstreet Corporation; Equifax Inc.; FactSet Research Systems Inc.; Gartner, Inc.; Moody’s Corporation; MSCI Inc.; Nielsen Holdings N.V.; S&P Global Inc.; TransUnion; Thomson Reuters Corporation; and Verisk Analytics, Inc.
The graph assumes a $100 cash investment on June 19, 2014 (our first trading day as a public company) and the reinvestment of all dividends (which we did not pay). This graph is not indicative of future financial performance.
Comparison of Cumulative Total Return Among IHS Markit, S&P 500 Index, and Peer Group
The following sets forth material Bermuda and U.K. income tax consequences of owning and disposing of our common shares. It is based upon laws and relevant interpretations thereof as of the date of this Form 10-K, all of which are subject to change. This discussion does not address all possible tax consequences relating to an investment in our common shares, such as the tax consequences under U.S. federal, state, local, and other tax laws.
Bermuda Tax Considerations
At the present time, there is no Bermuda income or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty, or inheritance tax payable by us or by our shareholders in respect of our shares. We have obtained an assurance from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act 1966 that, in the event that any legislation is enacted in Bermuda imposing any tax computed on profits or income, or computed on any capital asset, gain or appreciation or any tax in the nature of estate duty or inheritance tax, such tax shall not, until March 31, 2035, be applicable to
us or to any of our operations or to our shares, debentures, or other obligations except insofar as such tax applies to persons ordinarily resident in Bermuda or is payable by us in respect of real property owned or leased by us in Bermuda.
United Kingdom Taxation
The following is a description of the material U.K. tax consequences of an investment in our common shares. It is intended only as a general guide to the position under current U.K. tax law and what is understood to be the current published practice of HMRC and may not apply to certain classes of investors, such as dealers in securities, persons who acquire (or are deemed to acquire) their securities by reason of an office or employment, insurance companies, and collective investment schemes. Rates of tax, thresholds, and allowances are given for the U.K. tax year 2018-19. Any person who is in doubt as to his tax position is strongly recommended to consult his own professional tax adviser. To the extent this description applies to U.K. resident and, if individuals, domiciled shareholders, it applies only to those shareholders who beneficially hold their shares as an investment (unless expressly stated otherwise) and hold less than 5 percent of the shares. This description does not apply to shareholders to whom split year treatment applies.
It is the intention of the directors to conduct the affairs of IHS Markit Ltd. so that the central management and control of IHS Markit Ltd. is exercised in the United Kingdom such that IHS Markit Ltd. is treated as resident in the United Kingdom for U.K. tax purposes.
Taxation of dividends
We will not be required to withhold U.K. tax at source on any dividends paid to shareholders in respect of our common shares.
U.K. resident shareholders
Individuals resident in the United Kingdom for taxation purposes will pay no tax on the first £2,000 of dividend income received in a tax year (the “nil rate amount”). The rates of income tax on dividends received above the nil rate amount for the 2018-19 tax year are: (a) 7.5 percent for dividends taxed in the basic rate band; (b) 32.5 percent for dividends taxed in the higher rate band; and (c) 38.1 percent for dividends taxed in the additional rate band. Dividend income that is within the nil rate amount counts towards an individual’s basic or higher rate limits. In calculating into which tax band any dividend income over the nil rate amount falls, dividend income is treated as the highest part of an individual’s income.
A U.K. resident shareholder who holds common shares in an individual savings account will be exempt from income tax on dividends in respect of such shares. Subject to certain exceptions, including for traders in securities and insurance companies, dividends paid by us and received by a corporate shareholder resident in the United Kingdom for tax purposes should be within the provisions set out in Part 9A of the Corporation Tax Act 2009 which exempt certain classes of dividend from corporation tax. Each shareholder’s position will depend on its own individual circumstances, although it would normally be expected that the dividends paid by us would fall into an exempt class and will not be subject to corporation tax.
Non-U.K. resident shareholders
Non-U.K. resident shareholders are not subject to tax (including withholding tax) in the United Kingdom on dividends received on our common shares unless they carry on a trade, profession, or vocation in the United Kingdom through a branch or agency (or, in the case of a non-U.K. resident corporate shareholder, a permanent establishment) to which the common shares are attributable.
Taxation of capital gains
U.K. resident shareholders
A disposal of common shares by an individual shareholder who is (at any time in the relevant U.K. tax year) resident in the United Kingdom for tax purposes, may give rise to a chargeable gain or an allowable loss for the purposes of U.K. taxation of chargeable gains, depending on the shareholder’s circumstances and subject to any allowable deductions and any available exemption or relief including the annual exempt amount (being £11,700 for 2018-19). Capital gains tax is charged on chargeable gains at a rate of 10 percent or 20 percent (or a combination of both rates) depending on whether the individual is a basic rate taxpayer or a higher or additional rate taxpayer.
For shareholders within the charge to U.K. corporation tax on chargeable gains in respect of the common shares, indexation allowance, frozen with effect from December 31, 2017, may be available to reduce the amount of any chargeable gain realized on a disposal of common shares (but not to create or increase any loss).
A shareholder who is not resident in the United Kingdom for tax purposes will not be subject to U.K. taxation of capital gains on the disposal or deemed disposal of common shares unless they carry on a trade, profession, or vocation in the United Kingdom through a branch or agency (or, in the case of a non-U.K. resident corporate shareholder, a permanent establishment) to which the common shares are attributable, in which case they will be subject to the same rules which apply to U.K. resident shareholders.
A shareholder who is an individual and who is temporarily resident for tax purposes outside the United Kingdom at the date of disposal of common shares may also be liable, on his return, to U.K. taxation of chargeable gains (subject to any available exemption or relief).
Stamp duty and stamp duty reserve tax (“SDRT”)
The statements below summarize the current law and are intended as a general guide only to stamp duty and SDRT. Special rules apply to agreements made by broker dealers and market makers in the ordinary course of their business and to transfers, agreements to transfer, or issues to certain categories of person (such as depositaries and clearance services) which may be liable to stamp duty or SDRT at a higher rate.
No stamp duty reserve tax will be payable on any agreement to transfer the common shares, provided that the common shares are not registered in a register kept in the United Kingdom. It is not intended that such a register will be kept in the United Kingdom. Further, no stamp duty will be payable on transfer of the common shares provided that (i) any instrument of transfer is not executed in the United Kingdom; and (ii) such instrument of transfer does not relate to any property situated, or any matter or thing done or to be done, in the United Kingdom.
U.K. inheritance tax may be chargeable on the death of, or on a gift of common shares by, a U.K. domiciled shareholder. For inheritance tax purposes, a transfer of assets at less than full market value may be treated as a gift and particular rules apply to gifts where the donor reserves or retains some benefit. Special rules also apply to the trustees of settlements who hold common shares. Potential investors should consult an appropriate professional adviser if they make a gift or transfer at less than full market value or they intend to hold common shares through trust arrangements.
The common shares are eligible for inclusion in the stocks and shares component of an ISA, subject, where applicable, to the annual subscription limits for new investments into an ISA (for the tax year 2018-19, this is £20,000). Sums received by a shareholder on a disposal of common shares will not count towards the shareholder’s annual limit, but a disposal of common shares held in an ISA will not serve to make available again any part of the annual subscription limit that has already been used by the shareholder in that tax year.
Item 6. Selected Financial Data
You should read the following selected consolidated financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing in Part II of this Form 10-K.
The following discussion of our financial condition and operating results should be read in conjunction with other information and disclosures elsewhere in this Form 10-K, including “Selected Financial Data,” our consolidated financial statements and accompanying notes, and “Website and Social Media Disclosure.” The following discussion includes forward-looking statements as described in “Cautionary Note Regarding Forward-Looking Statements” in this Form 10-K. 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 “Item 1A. Risk Factors” in this Form 10-K.
This MD&A includes the financial results of Markit Ltd. beginning July 12, 2016. The comparability of our operating results for fiscal 2017 to fiscal 2016 is significantly impacted by the Merger. As a result of the Merger, we created a new Financial Services segment, which consists entirely of legacy Markit’s business (and also includes Ipreo from the date of acquisition in August 2018), and we have included revenue and expense attributable to legacy Markit in the Financial Services segment from the date of the Merger. In our discussion and analysis of comparative periods, we have quantified the legacy Markit contribution wherever we have deemed such amounts to be meaningful. While identified amounts may provide indications of general trends, the analysis cannot completely address the effects attributable to the Merger.
We are a world leader in critical information, analytics, and solutions for the major industries and markets that drive economies worldwide. We deliver next-generation information, analytics, and solutions to customers in business, finance, and government, improving their operational efficiency and providing deep insights that lead to well-informed, confident decisions. We have more than 50,000 business and government customers, including 80 percent of the Fortune Global 500 and the world’s leading financial institutions. Headquartered in London, we are committed to sustainable, profitable growth.
On July 12, 2016, the Merger was completed pursuant to the Merger Agreement between IHS, Markit, and Merger Sub, and Merger Sub merged with and into IHS, with IHS continuing as the surviving corporation and an indirect and wholly owned subsidiary of IHS Markit. Upon completion of the Merger, Markit became the combined group holding company and was renamed IHS Markit Ltd. In accordance with the terms of the Merger Agreement, IHS stockholders received 3.5566 common shares of IHS Markit for each share of IHS common stock they owned.
To best serve our customers, we are organized into the following four industry-focused segments:
•Resources, which includes our Energy and Chemicals product offerings;
We believe that this sales and operating model helps our customers do business with us by providing a cohesive, consistent, and effective product, sales, and marketing approach by segment.
Our recurring fixed revenue and recurring variable revenue represented approximately 84 percent of our total revenue in 2018. Our recurring revenue is generally stable and predictable, and we have long-term relationships with many of our customers.
Our business has seasonal aspects. Our first quarter generally has our lowest quarterly levels of revenue and profit. We also experience event-driven seasonality in our business; for instance, CERAWeek, an annual energy conference, is typically held in the second quarter of each year. Another example is the biennial release of the BPVC engineering standard, which generates revenue for us predominantly in the third quarter of every other year. The most recent BPVC release was in the third quarter of 2017.
During 2018, we focused our efforts on integrating our organizational structure, innovating and developing new product offerings, and managing our capital allocation. In 2018, we completed our key Merger integration activities. We also introduced
or enhanced many of our product offerings, and we took advantage of the opportunity to further enhance our Financial Services product portfolio with the Ipreo acquisition. Related to our capital structure, our corporate credit rating improved to investment-grade in the second quarter of 2018.
For 2019, we expect to focus our efforts on the following actions:
Key Performance Indicators
We believe that revenue growth, Adjusted EBITDA (both in dollars and margin), and free cash flow are key financial measures of our success. Adjusted EBITDA and free cash flow are financial measures that are not recognized terms under U.S. generally accepted accounting principles (“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. We measure revenue growth in terms of organic, acquisitive, and foreign currency impacts. We define these components as follows:
In addition to measuring and reporting revenue by segment, we also measure and report revenue by transaction type. Understanding revenue by transaction type helps us identify and address broad changes in product mix. We summarize our transaction type revenue into the following three categories:
annual and non-cancellable for the term of the subscription and may contain provisions for minimum monthly payments.
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. We 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 these non-GAAP financial measures useful for the same reasons, although we caution readers that non-GAAP financial measures are not a substitute for U.S. GAAP financial measures or disclosures. None of these non-GAAP financial measures are recognized terms under U.S. 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 U.S. GAAP measure. Throughout this MD&A, we provide reconciliations of these non-GAAP financial measures to the most directly comparable U.S. 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 loan and revolving credit agreements. 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 and performance compensation, exceptional litigation, net other gains and losses, pension mark-to-market and other adjustments, the impact of joint ventures and noncontrolling interests, and discontinued operations).
Free Cash Flow. We define free cash flow as net cash provided by operating activities less capital expenditures.
Non-GAAP measures are frequently used by securities analysts, investors, and other interested parties in their evaluation of companies comparable to us, many of which present non-GAAP measures when reporting their results. These measures can be useful in evaluating our performance against our peer companies because we believe the measures provide users with valuable insight into key components of U.S. GAAP financial disclosures. For example, a company with higher U.S. 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. However, non-GAAP measures have limitations as an analytical tool. 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. They are not presentations made in accordance with U.S. GAAP, are not measures of financial condition or liquidity, and should not be considered as an alternative to profit or loss for the period determined in accordance with U.S. GAAP or operating cash flows determined in accordance with U.S. GAAP. As a result, these performance measures should not be considered in isolation from, or as a substitute analysis for, results of operations as determined in accordance with U.S. GAAP.
Acquisitions have historically been an important part of our growth strategy. We completed three acquisitions during the year ended November 30, 2018 for a total purchase price of approximately $1.9 billion. In 2017, we completed two acquisitions for a total purchase price of approximately $0.4 billion. We paid a total purchase price of approximately $1.1 billion for two acquisitions we completed during the year ended November 30, 2016, in addition to the Merger. Our consolidated financial statements include the results of operations and cash flows for these business combinations beginning on their respective dates of acquisition. For a more detailed description of our recent acquisition activity, see “Item 8 - Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 3” in Part II of this Form 10-K.
Approximately 40 percent of our revenue is transacted outside of the United States; however, only about 20 percent of our revenue is transacted in currencies other than the U.S. dollar. As a result, a strengthening U.S. dollar relative to certain currencies has historically resulted in a negative impact on our revenue; conversely, a weakening U.S. dollar has historically resulted in 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 are the British Pound, Euro, Canadian Dollar, Singapore Dollar, and Indian Rupee. See “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Exchange Rate Risk” for additional discussion of the impacts of foreign currencies on our operations.
We customize many of our sales offerings to meet individual customer needs and base our pricing on a number of factors, including various price segmentation models which utilize customer attributes, value attributes, and other data sources. Attributes can include a proxy for customer size (e.g., barrels of oil equivalent and annual revenue), industry, users, usage, breadth of the content to be included in the offering, and multiple other factors. Because of the level of offering customization we employ, it is difficult for us to evaluate pricing impacts on a period-to-period basis with absolute certainty. This analysis is further complicated by the fact that the offering sets purchased by customers are often not constant between periods. As a result, we are not able to precisely differentiate between pricing and volume impacts on changes in revenue comprehensively across the business.
Cost of operating our business. We incur our cost of revenue primarily through acquiring, managing, and delivering our offerings. These costs include personnel, information technology, data acquisition, and occupancy costs, as well as royalty payments to third-party information providers. Our sales, general, and administrative expenses include wages and other personnel costs, commissions, corporate occupancy costs, and marketing costs. A large portion of our operating expenses are not directly commensurate with volume sold, particularly in our recurring revenue business model.
Stock-based compensation expense. We issue equity awards to our employees primarily in the form of restricted stock units, performance stock units, and stock options, for which we record cost over the respective vesting periods. The typical vesting period is three years. As of November 30, 2018, we had approximately 8.8 million unvested RSUs/RSAs and 6.2 million unvested stock options outstanding.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. In applying U.S. GAAP, we make significant estimates and judgments that affect our reported amounts of assets, liabilities, revenues, and expenses, as well as disclosure of contingent assets and liabilities. We believe that our accounting estimates and judgments are reasonable when made, but in many instances, alternative estimates and judgments would also be acceptable. In addition, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates on historical experience and other assumptions that we believe are reasonable, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which are discussed further below.
Revenue Recognition. The majority of our offerings are provided under agreements containing standard terms and conditions. Approximately 84 percent of our 2018 revenue was derived from recurring revenue arrangements, which are initially deferred and then recognized ratably as delivered over the term of the agreement for annual contractual periods billed up front, or is billed and recognized on a periodic basis. These standard agreements typically do not require any significant judgments about when revenue should be recognized. For non-standard agreements, we generally make judgments about revenue recognition matters such as whether sufficient legally binding terms and conditions exist and whether customer acceptance has been received.
We review customer agreements and utilize advice from legal counsel, as appropriate, in evaluating the binding nature of contract terms and conditions, as well as whether customer acceptance has been achieved. We estimate progress on consulting project deliverables based on our knowledge and judgment about the current status of individual consulting engagements.
Historically, our judgments and estimates have been reasonably accurate, as we have not experienced significant disputes with our customers regarding the timing and acceptance of delivered products and services. However, our actual experience in future periods with respect to binding terms and conditions and customer acceptance may differ from our historical experience.
In the first quarter of 2019, we will adopt Accounting Standards Update (“ASU”) 2014-09, 2016-08, 2016-10, and 2016-12. These standards establish a comprehensive new revenue recognition model designed to depict the transfer of goods or services to a customer in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. We will adopt the new revenue guidance using the modified retrospective transition method, which results in a cumulative effect adjustment to the opening balance of retained earnings as of the date of adoption. We currently estimate an increase of approximately $50 million to the opening balance of retained earnings for this transition for the change in revenue recognition, primarily related to the change in accounting for the license rights associated with certain term-based software license arrangements, which were historically recognized over the term of the contract, but will now be recognized at contract inception based on estimated stand-alone selling price.
The expected $50 million transition adjustment pertains solely to the impact to retained earnings as of December 1, 2018 on our consolidated balance sheet, and is not indicative of the impact the new standards are expected to have on our future consolidated financial statements. We do not believe that implementation of the new standards will have a significant impact on our annual results of operations, although we anticipate that there may be more quarterly fluctuations in revenue due to the change in accounting treatment for our term-based software license arrangements. We do not expect that application of the new guidance will affect our cash flows or the economics of our business.
Business Combinations. We apply the purchase method of accounting to our business combinations. All of the assets acquired, liabilities assumed, and contingent consideration are allocated based on their estimated fair values. Fair value determinations involve significant estimates and assumptions about several highly subjective variables, including future cash flows, discount rates, and expected business performance. There are also different valuation models and inputs for each component, the selection of which requires considerable judgment. Our estimates and assumptions may be based, in part, on the availability of listed market prices or other transparent market data. These determinations will affect the amount of amortization expense recognized in future periods. We base our fair value estimates on assumptions we believe are reasonable, but recognize that the assumptions are inherently uncertain. Depending on the size of the purchase price of a particular acquisition, the mix of intangible assets acquired, and expected business performance, the purchase price allocation could be materially impacted by applying a different set of assumptions and estimates. In 2018, 2017, and 2016, we recorded approximately $745.3 million, $113.8 million, and $3.6 billion, respectively, of intangible assets associated with business combinations.
The structure of certain business combinations may also require the application of significant assumptions and estimates. For example, in 2017, we acquired 78 percent of aM; in exchange for the remaining 22 percent, we issued equity interests in aM’s immediate parent holding company to aM’s founders and certain employees. We will pay cash to acquire these interests over the five years post-acquisition based on put/call provisions that tie the valuation to the underlying adjusted EBITDA performance of aM. Since the purchase of the remaining 22 percent of the business requires continued service of the founders and employees, we are accounting for the arrangement as compensation expense that is remeasured based on changes in the fair value of the equity interests. We had preliminarily estimated a range of $200 million to $225 million of unrecognized compensation expense related to this transaction, to be recognized over a weighted-average remaining recognition period of approximately 4 years. In the third quarter of 2018, upon reassessment of near-term financial expectations and their impact on the earn-out calculations, we reduced our estimated compensation expense range to $150.0 million to $175.0 million, to be recognized over a weighted-average recognition period of approximately 3.5 years. This change did not significantly impact 2018 expense. This arrangement requires the use of a number of significant judgments and estimates, including the expected put/call exercise pattern and the expected value of the cash payout at the time of exercise.
Goodwill and Other Intangible Assets. We make various assumptions about our goodwill and other intangible assets, including their estimated useful lives and whether any potential impairment events have occurred. We perform impairment analyses on the carrying values of goodwill and other intangible assets at least annually. Additionally, we review the carrying value of goodwill and other intangible assets whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Examples of such events or changes in circumstances, many of which are subjective in nature, include the following:
•Significant negative industry or economic trends;
•A significant change in the manner of our use of the acquired assets or our strategy;
•A significant decrease in the market value of the asset;
•A significant change in legal factors or in the business climate that could affect the value of the asset; and
•A change in segments.
If an impairment indicator is present, we perform an analysis to confirm whether an impairment has actually occurred and if so, the amount of the required charge.
As of November 30, 2018 and 2017, we had approximately $4.5 billion and $4.2 billion, respectively, of finite-lived intangible assets. For finite-lived intangible assets, we review the carrying amount at least annually to determine whether current events or circumstances indicate a triggering event which could require an adjustment to the carrying amount. A finite-lived intangible asset is considered to be impaired if its carrying value exceeds the estimated future undiscounted cash flows to be derived from it. We exercise judgment in selecting the assumptions used in the estimated future undiscounted cash flows analysis. Any impairment is measured by the amount that the carrying value of such assets exceeds their fair value.
As of November 30, 2018 and 2017, we had approximately $9.8 billion and $8.8 billion, respectively, of goodwill. For goodwill, we use both qualitative and quantitative analysis to determine whether we believe it is more likely than not that goodwill has been impaired. In 2018 and 2017, we used a qualitative analysis for each reporting unit with goodwill in determining that no impairment indicators were present. That determination requires a number of significant assumptions and judgments, including assumptions about future economic conditions, revenue growth, and operating margins, among other factors. The use of different estimates or assumptions could result in significantly different fair values for our goodwill and other intangible assets.
Income Taxes. We exercise significant judgment in determining our provision for income taxes, current tax assets and liabilities, deferred tax assets and liabilities, future taxable income (for purposes of assessing our ability to realize future benefit from our deferred tax assets), our permanent reinvestment assertion regarding foreign earnings, and recorded reserves related to uncertain tax positions. A valuation allowance is established to reduce our deferred tax assets to the amount that is considered more likely than not to be realized through the generation of future taxable income and other tax planning opportunities. To the extent that a determination is made to establish or adjust a valuation allowance, the expense or benefit is recorded in the period in which the determination is made.
If actual results differ from estimates we have used, or if we adjust these estimates in future periods, our operating results and financial position could be materially affected.
The TCJA significantly changed existing U.S. tax law and includes numerous provisions that affect our business. We have recognized a tax charge of $31 million due to transition tax liability and a tax benefit of $172 million due to the impact of the reduction in U.S. tax rates in the period when the TCJA was enacted as a component of our provision for income taxes from continuing operations. We have completed the accounting for all the impacts of the TCJA. See “Item 8 - Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 10” in Part II of this Form 10-K for further information about these changes. These computations are based on the regulations and guidance already provided by federal and state tax authorities. We will continue to assess the impact of the further guidance from federal and state tax authorities on our business and consolidated financial statements. Any future adjustments will be recognized as discrete income tax expense or benefit in the period the guidance is issued.
Pension Accounting. During the fourth quarter of each fiscal year (or upon any remeasurement date), we immediately recognize net actuarial gains or losses in excess of a corridor in our operating results. The corridor amount is equivalent to 10 percent of the greater of the market-related value of plan assets or the plan’s benefit obligation at the beginning of the year. We use the actual fair value of plan assets at the measurement date as the measure of the market-related value of plan assets.
Our pension expense and associated pension liability requires the use of judgment in determining assumptions about the estimated long-term rate of return on plan assets and the discount rate, as well as various demographic assumptions. Our pension investment strategy is designed to align the majority of our pension assets with the underlying pension liability, which should minimize volatility caused by changes in asset returns and discount rates. Our pension expense estimates are updated for actual experience through the remeasurement process in the fourth quarter, or sooner if earlier remeasurements are required. For 2018, we used a 4.3 percent expected long-term rate of return on plan assets and a 3.8 percent discount rate for the U.S. Retirement Income Plan (RIP). The actual return on U.S. RIP plan assets during 2018 was negative 4.5 percent.
Discount rates and expected rates of return on plan assets are selected at the end of a given fiscal year and will impact expense in the subsequent year. A 50-basis-point change in certain assumptions made at the beginning of 2018 would have resulted in the following effects on 2018 pension expense and the projected benefit obligation (“PBO”) as of November 30, 2018 for the U.S. and U.K. RIP plans (in millions):
We have taken initial steps to terminate the U.S. RIP and are awaiting regulatory approval before proceeding. For the year ending November 30, 2018, we have used the same accounting estimate methodology as in prior years.
Stock-Based Compensation. Our stock plans provide for the grant of various equity awards, including performance-based awards. For time-based restricted stock unit grants, we calculate stock-based compensation cost by multiplying the grant date fair market value by the number of shares granted, reduced for estimated forfeitures. For time-based stock option grants, we calculate stock-based compensation cost by multiplying the grant date fair market value by the number of option shares granted, reduced for estimated forfeitures. The estimated forfeiture rate is based on historical experience, and we periodically review our forfeiture assumptions based on actual experience.
For performance-based restricted stock unit grants, including those with a market-based adjustment factor, we calculate stock-based compensation cost by multiplying the grant date fair market value by the number of shares granted, reduced for estimated forfeitures. Each quarter, we evaluate the probability of the number of shares that are expected to vest and adjust our stock-based compensation expense accordingly.
Results of Operations
Total revenue for 2018 increased 11 percent compared to the same period of 2017. Total revenue for 2017 increased 32 percent compared to the same period in 2016. The table below displays the percentage point change in revenue due to organic, acquisitive, and foreign currency factors when comparing 2018 to 2017 and 2017 to 2016. Markit’s revenue of $1.233 billion for the year ended November 30, 2017, less the $68 million increase from the year ended November 30, 2016, has been included in the calculation of acquisitive growth in the table immediately below, and the components of Markit’s $68 million revenue growth from 2016 to 2017 have been included in their related factors in the table further below. We have noted Financial Services growth percentages as not meaningful (N/M) where applicable, as absolute growth percentages are not meaningful comparisons due to the timing of the Merger in 2016.
Organic revenue growth in 2018 and 2017 was attributable to both recurring and nonrecurring revenue growth. The recurring-based business represented 84 percent of total revenue in 2018, compared to 83 percent and 82 percent of total revenue in 2017 and 2016, respectively. The recurring-based business increased 6 percent organically in 2018 and 3 percent organically in 2017, led in each year by Transportation and Financial Services offerings, with Resources also contributing to the organic growth in 2018. The non-recurring business increased 6 percent organically in 2018, led by Transportation and Resources offerings, and increased 9 percent organically in 2017, led by Transportation and Financial Services offerings. The non-recurring revenue increase in 2017 was also partially due to the timing of the biennial cycle of the BPVC standard, which contributed approximately $12 million of revenue in the 2017 results.
Acquisition-related revenue growth for 2018 was primarily due to the Ipreo acquisition in the third quarter of 2018 and the aM acquisition in the fourth quarter of 2017. Acquisition-related revenue growth for 2017 was primarily due to the Merger, as well as the run-out of the CARPROOF and OPIS acquisitions from the first quarter of 2016.
Foreign currency movements had a slightly positive effect on our 2018 revenue growth and a slightly negative impact on our 2017 revenue growth. Due to the extent of our global operations, foreign currency movements could continue to positively or negatively affect our results in the future.
Revenue by Segment
The percentage change in revenue for each segment is due to the factors described in the following table.
Resources revenue had encountered significant energy industry headwinds in 2016 and into early 2017 due to lower energy prices and reduced industry spending. However, we saw a more stable price environment and more favorable capital spending budgets as 2017 progressed, and those trends have continued through 2018. During 2016, on a constant currency basis, our Resources annual contract value (“ACV”), which represents the annualized value of recurring revenue contracts, declined approximately 10 percent; in 2017, ACV was relatively flat, and in 2018, ACV increased 3 percent. As a result, Resources recurring revenue improved from a 9 percent organic decline in 2016 to a 5 percent organic decline in 2017 to 4 percent organic growth in 2018. The energy industry improvements have also led to an improvement in our Resources non-recurring revenue results, going from a 12 percent organic decline in 2016 to 3 percent organic growth in 2017 and 8 percent organic growth in 2018.
Transportation revenue increases for 2017 and 2018 were driven by continued solid organic recurring and non-recurring growth, primarily in our various automotive product offerings. We continue to see strong organic growth in our automotive product category due to continued growth in our used car product offerings and benefits from ongoing innovation in new car product offerings as a result of the increasing use of digital marketing, new automotive technologies, and global regulatory pressure to curb fuel consumption and emissions, along with strong recall activity. The aM acquisition in the fourth quarter of 2017 contributed the acquisitive growth in each of 2018 and 2017.
CMS organic revenue growth in 2018 was primarily due to recurring and non-recurring revenue growth in our ECR and TMT product offerings, as well as recurring organic revenue growth in our Product Design offerings; our non-recurring organic revenue decline in Product Design in 2018 was primarily due to the prior year BPVC release. CMS organic revenue growth in 2017 was primarily due to growth in our Product Design offerings, including the BPVC release.
Financial Services revenue experienced strong total organic growth in both 2018 and 2017. Within our Information product offerings, we experienced 7 percent organic growth in both 2017 and 2018, primarily due to the strong performance of our pricing, indices, and valuation services offerings. Our Processing offerings declined 1 percent organically in 2018, compared to 6 percent organic revenue growth in 2017. The 2017 growth was driven by our loans processing products associated with the strong leveraged finance and syndicated loans markets, partially offset by derivatives processing decreases due to lower credit volumes. The 2018 Processing decline was due to both lower loan processing and derivative processing
organic revenue. Solutions organic revenue growth of 8 percent in 2017 and 9 percent in 2018 benefitted from broad-based growth across the portfolio, led by our managed loan services and EDM product offerings.
Revenue by Transaction Type
Recurring revenue represents a steady and predictable source of revenue for us. Recurring fixed revenue increased 6 percent organically for 2018, compared to 2017, and increased 2 percent organically for 2017, compared to 2016. Recurring variable revenue was comprised entirely of Financial Services revenue for all periods, and grew 6 percent organically in 2018 and 9 percent organically in 2017. These trends are especially important for us, as recurring revenue is at the core of our business model. Transportation recurring revenue offerings provided the largest contribution to the growth, at 11 percent organic growth for 2018 and 10 percent organic growth for 2017. Financial Services recurring revenue provided 7 percent organic growth in 2018 and 6 percent organic growth in 2017. Resources recurring offerings increased 4 percent organically in 2018 and declined 5 percent organically in 2017. CMS recurring offerings delivered 3 percent organic growth in 2018 and 1 percent organic growth in 2017.
Non-recurring revenue grew 6 percent organically in 2018 and 9 percent organically in 2017. The 2018 increase was primarily driven by strength in our automotive and Resources product offerings, while the 2017 increase was primarily driven by our automotive and Financial Services product offerings, as well as some positive contribution from Resources and the benefit from the 2017 BPVC release.
The following table shows our operating expenses and the associated percentages of revenue.
Cost of Revenue and SG&A Expense
In managing our business, we evaluate our costs by type (e.g., salaries) rather than by income statement classification. The increase in absolute total costs in 2018 and 2017 was primarily due to recent acquisitions and the Merger. As a percent of revenue, cost of revenue and SG&A expense have steadily decreased since 2015, primarily because of the higher margin
Financial Services segment, as well as ongoing cost management and rationalization efforts associated with acquisition integration.
Within our cost of revenue and SG&A expense, stock-based compensation expense as a percentage of revenue was 6 percent, 7 percent, and 7 percent for the years ended November 30, 2018, 2017, and 2016, respectively. The higher stock-based compensation percentages in 2017 and 2016 are primarily due to the assumption and revaluation of legacy Markit outstanding awards at the Merger date and the acceleration of certain share awards associated with severance activities post-Merger.
Depreciation and Amortization Expense
Depreciation expense has been increasing primarily as a result of increases in capital expenditures for our various infrastructure and software development initiatives, as well as assets acquired through the Merger. Amortization expense has increased primarily because of intangible assets associated with the Merger and subsequent acquisitions.
In 2018 and 2017, we incurred $135 million and $113 million, respectively, of costs associated with acquisitions, including employee severance charges and retention costs, contract termination costs for facility consolidations, legal and professional fees, and compensation costs of $54 million in 2018 and $10 million in 2017 related to the performance awards granted in connection with the purchase of aM. We expect to incur additional acquisition-related costs related to the aM performance awards over the next four years.
We incurred $161 million of acquisition-related costs in 2016, primarily for the Merger, including $90 million of costs related to advisory and banker fees and another $60 million for costs to achieve Merger synergy targets, including employee severance and retention costs, as well as contract termination costs primarily related to the consolidation of our legacy facilities.
Segment Adjusted EBITDA
For 2017 and 2018, Adjusted EBITDA increased due to the Merger and subsequent acquisitions, profit delivery from revenue growth in Transportation and Financial Services, and ongoing cost management and rationalization efforts associated with acquisition integration.
As a percentage of segment revenue, Adjusted EBITDA improved in 2017 and remained flat in 2018 as a result of strengthening revenue results, Merger integration, business leveraging efforts, and recent acquisitions. Transportation segment Adjusted EBITDA margin increases in 2018 and 2017 were aided by margin flow through from high revenue growth in that segment, partially offset in 2018 by lower aM margins. Financial Services segment Adjusted EBITDA margin was also strengthened in 2017 and 2018 by margin flow-through from high revenue growth, partially offset in 2018 by lower Ipreo margins.
Provision for Income Taxes
Our effective tax rate for continuing operations for the year ended November 30, 2018 was negative 27.2 percent, compared to negative 13.4 percent in 2017 and negative 3.6 percent in 2016. The reduction in our tax rate for 2018, compared to 2017, is primarily due to net tax benefits associated with U.S. tax reform of $141 million. The reduction in our tax rate for 2017, compared to 2016, is primarily due to tax benefits associated with our capital structure, the benefit from Merger-related expenses, the release of a $29.3 million valuation allowance on tax attributes in the third quarter of 2017, and excess tax benefits on stock-based compensation.
In December 2017, the TCJA was enacted in the United States. The TCJA enacted significant changes affecting our fiscal year 2018, including, but not limited to, (1) reducing the U.S. federal corporate income tax rate to 21% and (2) imposing a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries of U.S. companies that had not been previously taxed in the U.S.
The TJCA also establishes new tax provisions affecting our fiscal year 2019, including, but not limited to, (1) creating a new provision designed to tax global intangible low-tax income (“GILTI”); (2) generally eliminating U.S. federal taxes on dividends from foreign subsidiaries; (3) eliminating the corporate alternative minimum tax (“AMT”); (4) creating the base erosion anti-abuse tax (“BEAT”); (5) establishing a deduction for foreign derived intangible income ("FDII"); (6) repealing domestic production activity deduction; and (7) establishing new limitations on deductible interest expense and certain executive compensation.
The TCJA reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. Due to our fiscal year end, the lower corporate tax rate will be phased in, resulting in a U.S. statutory federal rate of 22.19 percent for our fiscal year ending November 30, 2018 and 21 percent for subsequent fiscal years.
ASC 740, Income Taxes, requires companies to recognize the effect of the tax law changes in the period of enactment. However, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) which allowed companies to record provisional amounts during a measurement period not extending beyond one year from the TJCA enactment date. For the year ended November 30, 2018, we recognized income tax benefit related to the TCJA of $141 million which includes (1) an expense of $31 million for U.S. transition tax liability and correlative items on deemed repatriated earnings of non-U.S. subsidiaries and (2) a benefit of $172 million associated with the impact on deferred taxes resulting from the decreased U.S. federal corporate income tax rate as described below. As of November 30, 2018, we have completed the accounting for all the impacts of the TCJA.
Deemed Repatriation Transition Tax (“Transition Tax”): The Transition Tax is based on the total unrepatriated post-1986 earnings and profits (“E&P”) of our foreign subsidiaries and the amount of non-U.S. taxes paid (Tax Pools) on such earnings. Historically, we permanently reinvested a significant portion of post-1986 E&P outside the U.S. For the remaining portion, we previously accrued deferred taxes. Since the TCJA required all foreign earnings to be taxed currently, we recorded an income tax expense of $31 million for our one-time transition tax liability, which will be paid over 8 years in accordance with the election available under the TCJA. We have completed our accounting for charges related to the Transition Tax.
Reduction of U.S. Federal Corporate Tax Rate: The reduction of the U.S. federal corporate income tax rate requires that we remeasure our deferred tax assets and liabilities as of the date of enactment. The amount recorded for the year ended November 30, 2018 for the remeasurement due to tax rate change is $172 million. We have completed our accounting for the measurement of deferred taxes.
GILTI: The TCJA subjects a U.S. corporation to tax on its GILTI. U.S. GAAP allows companies to make an accounting policy election to either (1) treat taxes due on future GILTI inclusions in U.S. taxable income as a current-period expense when incurred (“period cost method”) or (2) factor such amounts into the measurement of its deferred taxes (“deferred method”). We have elected to use the period cost method.
Indefinite Reinvestment Treatment: Prior to the enactment of the TCJA, we treated a significant portion of our undistributed earnings from legacy foreign subsidiaries of IHS as indefinitely reinvested. As a result of the enactment of the TCJA, we have reevaluated our historic assertion and no longer consider certain earnings of legacy foreign subsidiaries of IHS to be indefinitely reinvested. We have recorded a deferred tax liability of $12 million for foreign withholding taxes on repatriation of remaining undistributed earnings.
EBITDA and Adjusted EBITDA (non-GAAP measure)
Our Adjusted EBITDA margin performance increased each year primarily because of the Merger and our integration and cost management efforts, partially offset by recent acquisitions. In 2017 and 2018, we also benefitted from margin flow-through from our organic revenue growth. We expect to continue to drive margin improvement through leveraging our business model and continued focus on efficiency and cost management efforts.
The increase in our accounts receivable balance was primarily due to the acquisition of Ipreo, along with increased revenue in the current year. The increase in accrued compensation was due primarily to the attainment of certain performance objectives associated with our annual incentive plan as compared to the prior year, along with the acquisition of Ipreo. The increase in deferred revenue was primarily due to the acquisition of Ipreo, as well as increased billings in 2018.
Liquidity and Capital Resources
As of November 30, 2018, we had cash and cash equivalents of $120 million. Our principal sources of liquidity include cash generated by operating activities, cash and cash equivalents on the balance sheet, and amounts available under a revolving credit facility. We had approximately $5.68 billion of debt as of November 30, 2018, consisting primarily of $1.1 billion of
revolving facility debt, $1.31 billion of term loan debt, and $3.31 billion of senior notes. As of November 30, 2018, we had approximately $0.9 billion available under our revolving credit facility.
In 2018, we entered into the following arrangements:
Our interest expense in each of 2016, 2017, and 2018 increased primarily because of a higher average debt balance as a result of acquisitions and share repurchases, a higher effective interest rate due to an increased amount of fixed-rate debt, financing fees incurred in conjunction with acquisition and Merger activity, and higher short-term interest rates. We expect that our interest expense will continue to be higher in 2019 compared to 2018 and 2017, primarily due to increasing debt balances and a higher percentage of fixed-rate debt as we execute additional long-term fixed-rate financing.
Our Board of Directors has authorized a share repurchase program of up to $3.25 billion of IHS Markit common shares through November 30, 2019, to be funded using our existing cash, cash equivalents, marketable securities and future cash flows, or through the incurrence of short- or long-term indebtedness, at management’s discretion. This repurchase program does not obligate us to repurchase any set dollar amount or number of shares and may be modified, suspended, or terminated at any time without prior notice. Under this program, we are authorized to repurchase our common shares on the open market from time to time, in privately negotiated transactions, or through accelerated share repurchase agreements, subject to availability of common shares, price, market conditions, alternative uses of capital, and applicable regulatory requirements, at management’s discretion. As of November 30, 2018, we had repurchased approximately $2.24 billion under this authorization.
Our Board of Directors has separately authorized, subject to applicable regulatory requirements, the repurchase of our common shares surrendered by employees in an amount equal to the exercise price, if applicable, and statutory tax liability associated with the vesting of their equity awards, for which we pay the statutory tax on behalf of the employee and forgo receipt of the exercise price of the award from the employee, if applicable. Such repurchases have been authorized in addition to the share repurchase program described above.
Based on our cash, debt, and cash flow positions, we believe we will have sufficient liquidity to meet our ongoing working capital and capital expenditure needs. Our future capital requirements will depend on many factors, including the number and magnitude of future acquisitions, amount of share repurchases, 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.
See “Item 8 - Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 8” in Part II of this Form 10-K for additional information about our debt obligations.
Net cash provided by operating activities in 2018 increased primarily by continued increasing operating performance and working capital improvements. In 2017, net cash provided by operating activities increased significantly, primarily as a result of the Merger.
Net cash used in investing activities for 2018 increased from 2017 primarily due to the Ipreo acquisition in 2018, partially offset by lower capital expenditures compared to the prior year. Net cash used in investing activities for 2017 decreased from 2016 primarily due to lower cost acquisitions, partially offset by increased capital expenditures primarily due to the Merger.
Net cash provided by financing activities increased in 2018 primarily due to borrowings to fund the Ipreo acquisition and lower share repurchases, partially offset by lower proceeds from stock option exercises. Net cash used in financing activities in 2017 consists primarily of repurchases of common shares in the open market and for payments related to tax withholding for stock-based compensation, partially offset by increased borrowings and cash from stock option exercises.
Free Cash Flow (non-GAAP measure)
The following table reconciles our non-GAAP free cash flow measure to net cash provided by operating activities.
The increase in free cash flow was primarily due to higher net cash provided by operating activities and lower capital expenditure activity. Our free cash flow has historically been positive due to the robust cash generation attributes of our business model, and we expect that it will continue to be a significant source of funding for our business strategy of growth through organic and acquisitive means.
Credit Facility and Other Debt
Please refer to “Item 8 - Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 8” in Part II of this Form 10-K for a discussion of the current status of our debt arrangements.
Share Repurchase Programs
Please refer to Part II, Item 5 and “Item 8 - Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 14” in Part II of this Form 10-K for a discussion of our share repurchase programs.
Off-Balance Sheet Transactions
We have no off-balance sheet transactions.
Contractual Obligations and Commercial Commitments
We have various contractual obligations and commercial commitments that are recorded as liabilities in our consolidated financial statements. Other items, such as certain purchase commitments and other executory contracts, are not recognized as liabilities in our consolidated financial statements but are required to be disclosed. The following table summarizes our contractual obligations and commercial commitments as of November 30, 2018, along with the obligations associated with our term loans and notes, and the future periods in which such obligations are expected to be settled in cash (in millions):
We expect to contribute approximately $2 million to our pension and postretirement benefit plans in 2019.
Over the next one to four years, we expect to pay cash to acquire the remaining 22 percent of aM’s equity interests. The amount of cash to be paid is based on put/call provisions that tie the valuation to underlying adjusted EBITDA performance of aM. Based on our current estimates, we believe that the purchase price for the remaining equity interests will be in a range of $150 million to $175 million.
In addition to the term loans and notes, as of November 30, 2018, we also had $1.1 billion of outstanding borrowings under our $2.0 billion 2018 revolving facility at a current annual interest rate of 3.69 percent. The facility has a five-year term ending in June 2023. We also had approximately $7 million in capital lease obligations as of November 30, 2018.
Recent Accounting Pronouncements
Please refer to “Item 8 - Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 2” in Part II of this Form 10-K for a discussion of recent accounting pronouncements and their anticipated effect on our business.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk refers to potential losses from adverse changes in market rates and prices. We are exposed to market risk primarily in the form of interest rate, foreign currency exchange rate, and credit risk. We actively monitor these exposures. In order to manage these exposures, we use derivative financial instruments, including interest rate swaps and foreign currency forwards. Our objective is to reduce fluctuations in revenue, earnings, and cash flows resulting from changes in interest rates and foreign currency rates. We do not use derivatives for speculative purposes.
Interest Rate Risk
As of November 30, 2018, we had no significant investments other than cash and cash equivalents and therefore we were not exposed to material interest rate risk on investments.
Our 2018 revolving facility, our 2018 term loans, and our 364-day credit agreement are subject to variable interest rates. We use interest rate swaps in order to fix a portion of our variable rate debt as part of our overall interest rate risk management strategy. As of November 30, 2018, we had $2.413 billion of floating-rate debt at a 3.76 percent weighted-average interest rate, of which $400 million was subject to effective floating-to-fixed interest rate swaps. A hypothetical increase in interest rates of 100 basis points applied to our floating rate indebtedness would increase annual interest expense by approximately $20 million ($24 million without giving effect to any of our interest rate swaps).
Foreign Currency Exchange Rate Risk
Our consolidated financial statements are expressed in U.S. dollars, but a portion of our business is conducted in currencies other than U.S. dollars. Changes in the exchange rates for such currencies into U.S. dollars can affect our revenues, earnings, and the carrying values of our assets and liabilities in our consolidated balance sheet, either positively or negatively. Fluctuations in foreign currency rates increased (decreased) our revenues by approximately $24 million, $(27) million, and $(50) million for the years ended November 30, 2018, 2017, and 2016, respectively, and had no material impact on operating income for the same respective periods. The translation effects of changes in exchange rates in our consolidated balance sheet are recorded within the cumulative translation adjustment component of our shareholders’ equity. In 2018, we recorded a cumulative translation loss of $220 million, reflecting changes in exchange rates of various currencies compared to the U.S. dollar.
A hypothetical ten percent change in the currencies that we are primarily exposed to would have impacted our 2018 revenue by approximately $91 million and would not have had a material impact on operating income. Approximately 75% of total revenue was earned in subsidiaries with the U.S. dollar as the functional currency.
We are exposed to credit risk associated with cash equivalents, foreign currency and interest rate derivatives, and trade receivables. We do not believe that our cash equivalents or foreign currency and interest rate derivatives present significant credit risks because the counterparties to the instruments consist of major financial institutions that are financially sound, and we manage the notional amount of contracts entered into with any one counterparty. Substantially all trade receivable balances are unsecured. The concentration of credit risk with respect to trade receivables is limited by the large number of customers in our customer base and their dispersion across various industries and geographic areas. We perform ongoing credit evaluations of our customers and maintain an allowance for potential credit losses.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and the Shareholders of IHS Markit Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of IHS Markit Ltd. (the Company) as of November 30, 2018 and 2017, the related consolidated statements of operations, comprehensive income, cash flows, and changes in equity for each of the three years in the period ended November 30, 2018 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at November 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended November 30, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of November 30, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated January 18, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2001.
January 18, 2019
IHS MARKIT LTD.
CONSOLIDATED BALANCE SHEETS
(In millions, except for per-share amount)
See accompanying notes.
IHS MARKIT LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except for per-share amounts)