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. 34 --------------------------------------------------------------------------------
Table of Contents Executive Summary Business Overview 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 inLondon , we are committed to sustainable, profitable growth.
To best serve our customers, we are organized into the following four industry-focused segments:
•Financial Services, which includes our financial Information, Solutions, and Processing product offerings; •Transportation, which includes our Automotive and Maritime & Trade product offerings; •Resources, which includes our Upstream and Downstream product offerings; and •Consolidated Markets & Solutions, which includes our Product Design, Economics & Country Risk, and TMT benchmarking product offerings. Our recurring revenue streams represented approximately 88 percent of our total revenue in 2020. Our recurring revenue is generally stable and predictable, and we have long-term relationships with many of our customers. During 2020, we focused our efforts on increasing revenue and Adjusted EBITDA profit margin, innovating and developing new product offerings, managing our capital allocation policy, and responding effectively to the COVID-19 pandemic, including the following results and activities: •Our total organic revenue declined slightly, largely due to the adverse effects of COVID-19 on both our recurring and non-recurring revenue streams. •Our Adjusted EBITDA profit margin increased by 250 basis points, primarily as a result of cost reduction efforts to moderate the negative impact of revenue declines. •We continued to introduce or enhance many of our product offerings, including ourIHS Markit Data Lake . •We divested our A&D business line onDecember 2, 2019 . •We repurchased$950 million of our common shares. •We initiated a quarterly dividend in the first quarter of 2020.
For 2021, we expect to focus our efforts on the following actions:
•Increase in geographic, product, and customer penetration. We believe there are continued opportunities to add new customers and to increase the use of our products and services by existing customers. We plan to add new customers and build our relationships with existing customers by leveraging our existing sales channels, broad product portfolio, global footprint, and industry expertise to anticipate and respond to the changing demands of our end markets. •Introduce innovative offerings and enhancements. In recent years, we have launched several new product offerings addressing a wide array of customer needs, and we expect to continue innovating using our existing data sets and industry expertise, converting core information to higher value advanced analytics. We also intend to continue to invest across our business to increase our customer value proposition. •Improve efficiency, productivity, and financial strength. We are striving to strengthen our operational excellence by consistently improving productivity and efficiency, particularly as we work through the effects of the COVID-19 pandemic. We also continue to build on our strong financial foundation, balancing capital allocation between returning capital to shareholders (targeting an annual capital return of 50 to 75 percent of our annual capital capacity through share repurchases and cash dividends) and completing mergers and acquisitions, focused primarily on targeted transactions in our core end markets that will allow us to continue to build out our strategic position. We intend to continue to operate at the high end of our capital policy target leverage ratio of 2.0-3.0x. OnNovember 29, 2020 , we, S&P Global Inc., aNew York corporation ("S&P Global"), andSapphire Subsidiary, Ltd. , aBermuda exempted company limited by shares and a wholly-owned subsidiary of S&P Global ("Merger Sub"), entered into an agreement and plan of merger, which was subsequently amended onJanuary 20, 2021 , pursuant to which Merger Sub will merge with and intoIHS Markit , withIHS Markit surviving such merger as a wholly-owned, direct subsidiary of S&P Global (the "merger"). The merger intends to bring together two world-class organizations, a unique portfolio of highly complementary 35 -------------------------------------------------------------------------------- Table of Contents assets in attractive markets, and cutting-edge innovation and technology capability to accelerate growth and enhance value creation. At the completion of the merger, eachIHS Markit share that is issued and outstanding (other than dissenting shares and shares held byIHS Markit in treasury) will be converted into the right to receive 0.2838 fully paid and nonassessable shares of S&P Global common stock, and, if applicable, cash in lieu of fractional shares, without interest, and less any applicable withholding taxes. If the merger is completed,IHS Markit shares will cease to be listed on theNew York Stock Exchange andIHS Markit shares will be deregistered under the Securities Exchange Act. The merger is subject to shareholder approval, antitrust and regulatory approvals, and other customary closing conditions.
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 underU.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:
•Organic - We define organic revenue growth as total revenue growth from continuing operations for all factors other than acquisitions and foreign currency movements. We drive this type of revenue growth through value realization (pricing), expanding wallet share of existing customers through up-selling and cross-selling efforts, securing new customer business, and selling new or enhanced product offerings.
•Acquisitive - We define acquisitive revenue as the revenue generated from acquired products and services from the date of acquisition to the first anniversary date of that acquisition. This type of growth comes as a result of our strategy to purchase, integrate, and leverage the value of assets we acquire. We also include the impact of divestitures in this metric. •Foreign currency - We define the foreign currency impact on revenue as the difference between current revenue at current exchange rates and current revenue at the corresponding prior period exchange rates. Due to the significance of revenue transacted in foreign currencies, we believe it is important to measure the impact of foreign currency movements on revenue. 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: •Recurring fixed revenue represents revenue generated from contracts specifying a relatively fixed fee for services delivered over the life of the contract. The initial term of these contracts is typically annual (with some longer-term arrangements) and non-cancellable for the term of the subscription, and may contain provisions for minimum monthly payments. The fixed fee is typically paid annually or more periodically in advance. These contracts typically consist of subscriptions to our various information offerings and software maintenance, which provide continuous access to our platforms and associated data over the contract term. Subscription revenue is usually recognized ratably over the contract term or, for term-based software license arrangements, annually on renewal. •Recurring variable revenue represents revenue from contracts that specify a fee for services, which is typically not fixed. The variable fee is usually paid monthly in arrears. Recurring variable revenue is based on, among other factors, the number of trades processed, assets under management, or the number of positions we value, and revenue is recognized based on the specific factor used (e.g., for usage-based contracts, we recognize revenue in line with usage in the period). Most of these contracts have an initial term ranging from one to five years, with auto-renewal periods thereafter. Recurring variable revenue was derived entirely from the Financial Services segment for all periods presented. •Non-recurring revenue represents consulting, services, single-document product sales, perpetual license sales and associated services, conferences and events, and advertising. Our non-recurring products and services are an important part of our business because they complement our recurring business in creating strong and comprehensive customer relationships. 36 -------------------------------------------------------------------------------- Table of Contents 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 forU.S. GAAP financial measures or disclosures. None of these non-GAAP financial measures are recognized terms underU.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 otherU.S. GAAP measure. Throughout this MD&A, we provide reconciliations of these non-GAAP financial measures to the most directly comparableU.S. GAAP measures. EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA are used by securities analysts, investors, and other interested parties to assess our operating performance. For example, a measure similar to Adjusted EBITDA is required by the lenders under our revolving credit agreement. We define EBITDA as net income plus or minus net interest, plus provision for income taxes, depreciation, and amortization. Our definition of Adjusted EBITDA further excludes primarily non-cash items and other items that we do not consider to be useful in assessing our operating performance (e.g., stock-based compensation expense, restructuring charges, acquisition-related costs and performance compensation, exceptional litigation, net other gains and losses, pension mark-to-market, settlement, and other expense, 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 ofU.S. GAAP financial disclosures. For example, a company with higherU.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 withU.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 withU.S. GAAP or operating cash flows determined in accordance withU.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 withU.S. GAAP.
Global Operations
Approximately 40 percent of our revenue is transacted outside ofthe United States ; however, only about 20 percent of our revenue is transacted in currencies other than theU.S. dollar. As a result, a strengtheningU.S. dollar relative to certain currencies has historically resulted in a negative impact on our revenue; conversely, a weakeningU.S. dollar has historically resulted in a positive impact on our revenue. The largest foreign currency exposures for revenue are the British Pound, Euro, and Canadian Dollar. The impact of foreign currency movements on operating income is mitigated due to offsetting revenue and operating expense exposures denominated in currencies other than theU.S. dollar. Our largest net foreign currency exposures are the Indian Rupee, Euro, Canadian Dollar, and Singapore Dollar. 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.
Pricing Information
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. 37 -------------------------------------------------------------------------------- Table of Contents Other Items 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 selling, general and administrative expense includes 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 and performance stock units, for which we record cost over the respective vesting periods. The typical vesting period is three years. As ofNovember 30, 2020 , we had approximately 6.8 million unvested RSUs and 0.1 million unvested stock options outstanding.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance withU.S. GAAP. In applyingU.S. GAAP, we make significant estimates and judgments that affect our reported amounts of assets, liabilities, revenue, and expense, 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. Most of our offerings are provided under agreements containing standard terms and conditions. Approximately 88 percent of our 2020 revenue was derived from recurring revenue arrangements, which generally are initially deferred and then recognized ratably over the contract term. These recurring revenue arrangements typically do not require any significant judgments about when revenue should be recognized. A limited number of recurring revenue arrangements and certain non-recurring revenue arrangements contain multiple performance obligations. We apply judgment in identifying the separate performance obligations to be delivered under the arrangement and allocating the transaction price based on the estimated standalone selling price of each performance obligation. 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 2020, 2019, and 2018, we recorded approximately$3.7 million ,$61.5 million , and$745.3 million , 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. The acquisition of these interests over the five years post-acquisition is based on put/call provisions that tie the valuation to the underlying adjusted EBITDA performance of aM. Since the purchase of these interests 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 four 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 million to$175 million , to be recognized over a weighted-average recognition period of approximately 3.5 years. This change did not significantly impact 2018 expense. InNovember 2019 , the option holders exercised 62.5 percent of their remaining 22 percent for$76 million , which was paid inDecember 2019 , and we estimated the compensation expense associated with the remaining equity interests to be approximately$70 to$75 million . In 38 -------------------------------------------------------------------------------- Table of ContentsNovember 2020 , upon reassessment of near-term financial expectations and their impact on the earn-out calculations, we further reduced our estimated compensation expense range for the remaining equity interests to$60 million to$65 million , of which approximately$37 million has been recognized as ofNovember 30, 2020 , with the remaining amount to be recognized throughSeptember 2022 . We will acquire the remaining 8 percent of aM no later thanDecember 2022 based on an earn-out mechanic tied to preceding year Adjusted EBITDA performance.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 divestiture or other disposition activity; •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 ofNovember 30, 2020 and 2019, we had approximately$3.8 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 ofNovember 30, 2020 and 2019, we had approximately$9.9 billion and$9.8 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 2020, we used a quantitative analysis in evaluating each of our reporting units, determining that we had a material excess of fair value over carrying value for each reporting unit. In 2019, we used a qualitative analysis for each reporting unit in determining that no impairment indicators were present. Our qualitative and quantitative analyses require 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.
We monitor and evaluate tax law changes; for example, the Tax Cuts and Jobs Act significantly changed existingU.S. tax law and included numerous provisions that affect our business. Subsequent regulations and interpretations can change our initial estimates and assumptions. We assess the impact of new guidance or regulations fromU.K. ,U.S. , and other tax authorities on our corporate structure and transactions between our consolidated entities. Adjustments to our consolidated financial statements are recognized as discrete income tax expense or benefit in the period the guidance is issued. 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 39 -------------------------------------------------------------------------------- Table of Contents 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
Total revenue for 2020 decreased 3 percent compared to the same period of 2019. Total revenue for 2019 increased 10 percent compared to the same period of 2018. The table below displays the percentage point change in revenue due to organic, acquisitive, and foreign currency factors when comparing 2020 to 2019 and 2019 to 2018.
Increase (Decrease) in Total Revenue
Foreign (All amounts represent percentage points) Organic Acquisitive Currency 2020 vs. 2019 (1) % (2) % - % 2019 vs. 2018 6 % 5 % (1) % Organic revenue growth in Financial Services for 2020, compared to 2019, was more than offset by either flat or negative organic revenue growth in the Resources, Transportation, and CMS segments, primarily due to the current economic environment impacting Resources Upstream product offerings, the cancellations of Resources and Transportation events in the second quarter of 2020, and the off-year cycle of the Boiler PressureVessel Code ("BPVC") biennial release, which was last released in the third quarter of 2019 and impacts our CMS segment. Additionally, our dealer-facing products in the Transportation segment were most negatively impacted in the second quarter of 2020, with recovery beginning in the third and fourth quarters of 2020. Organic revenue growth in 2019, compared to 2018, was attributable to both recurring and nonrecurring revenue growth. The recurring-based business increased 6 percent organically in 2019, led by Financial Services and Transportation offerings, with Resources also contributing to the organic growth. The non-recurring business increased 6 percent organically in 2019, led by Transportation and Resources offerings, with Financial Services offerings also contributing to the organic growth. The non-recurring revenue increase in 2019 was also partially due to the timing of the biennial cycle of the BPVC standard, which contributed approximately$8 million of growth in the 2019 results. The acquisition-related revenue decline for 2020 was primarily due to the A&D business line divestiture that we completed at the beginning of 2020 and the TMT market intelligence assets divestiture in the third quarter of 2019, partially offset by the Agribusiness acquisition in the third quarter of 2019. Acquisition-related revenue growth for 2019 was primarily due to the Ipreo acquisition in the third quarter of 2018, as well as the Agribusiness acquisition, partially offset by the TMT market intelligence assets divestiture in the third quarter of 2019. Foreign currency movements had minimal effect on our 2020 revenue growth and a slightly negative effect on our 2019 revenue growth. Due to the extent of our global operations, foreign currency movements could continue to positively or negatively affect our results in the future. 40 -------------------------------------------------------------------------------- Table of Contents Revenue by Segment Year ended November 30, % Change 2020 % Change 2019 (In millions, except percentages) 2020 2019 2018 vs. 2019 vs. 2018 Revenue: Financial Services$ 1,784.0 $ 1,701.5 $ 1,419.7 5 % 20 % Transportation 1,151.6 1,246.1 1,160.2 (8) % 7 % Resources 863.1 933.8 876.5 (8) % 7 % CMS 489.1 533.2 552.8 (8) % (4) % Total revenue$ 4,287.8 $ 4,414.6 $ 4,009.2 (3) % 10 % As a percent of total revenue: Financial Services 42 % 39 % 35 % Transportation 27 % 28 % 29 % Resources 20 % 21 % 22 % CMS 11 % 12 % 14 %
The percentage change in revenue for each segment is due to the factors described in the following table.
2020 vs. 2019 2019 vs. 2018 (All amounts represent percentage Foreign Foreign points) Organic Acquisitive Currency Organic Acquisitive Currency Financial Services revenue 5 % - % - % 6 % 15 % (1) % Transportation revenue (2) % (6) % - % 8 % - % (1) % Resources revenue (9) % 1 % - % 5 % 2 % - % CMS revenue - % (8) % - % 1 % (4) % (1) % Financial Services revenue experienced strong total organic growth in both 2020 and 2019. Within our Information product offerings, we experienced 5 percent organic revenue growth in 2020 and 4 percent organic growth in 2019, primarily due to the solid performance of our core pricing, valuation, equities, and indices offerings. Solutions organic revenue growth of 5 percent in 2020 was due to strength in global and private capital markets offerings, as well as in corporate actions offerings. Solutions organic revenue growth of 8 percent in 2019 benefitted from broad-based growth across the portfolio, led by our managed loan services and EDM product offerings. Processing organic revenue growth of 2 percent in 2020 was primarily due to solid derivative processing activity in the second quarter of 2020 resulting from increased market volatility during that period. Processing organic revenue decline of 2 percent in 2019 was due to lower loan processing revenue, partially offset by improved derivative processing revenue. The Ipreo acquisition in the third quarter of 2018 accounted for the acquisitive growth in 2019, as well as providing a strong contribution to organic revenue growth in the last four months of 2019. The Transportation organic revenue decline for 2020 was due to the onset of the COVID-19 pandemic in the second quarter of 2020. Revenue from the dealer-facing portion of our automotive offerings in the second quarter of 2020 was negatively impacted by our temporary price relief for dealer customers, a pause in new sales activity, and cancellations from financially distressed customers, but we saw positive organic growth in this portion of our offerings in the latter half of 2020 as the COVID-19 impacts began to stabilize. Non-recurring Transportation organic revenue for 2020 declined significantly, primarily reflecting lower recall and marketing revenues. The Transportation organic revenue increase for 2019 was driven by solid organic recurring and non-recurring growth, primarily in our various automotive product offerings. Our automotive product offerings continue to provide the largest contribution to Transportation revenue, and our diversification in used and new car product offerings allows for balanced opportunities for growth. We anticipate a return to more normal organic growth rates in 2021 as we begin to pivot to a post-pandemic economic recovery. The A&D business line divestiture in the first quarter of 2020 accounted for the 6 percent decline in acquisitive revenue activity for Transportation. 41 -------------------------------------------------------------------------------- Table of Contents The pronounced Resources organic revenue decline for 2020 was primarily a result of the COVID-19 pandemic, which resulted in significant pressure on the Upstream portion of our Resources revenue and the cancellation of our annual CERAWeek event inMarch 2020 . Our Resources annual contract value ("ACV"), which represents the annualized value of recurring revenue contracts, decreased$74 million , or 9 percent, during 2020. As a result of the COVID-19 pandemic and the current economic environment, we anticipate continued pressure on the Upstream portion of our Resources organic revenue growth over the near term. Resources revenue for 2019 increased both in the recurring and non-recurring categories, with recurring organic revenue growth of 5 percent and non-recurring organic revenue growth of 8 percent. The Agribusiness acquisition in the third quarter of 2019 accounted for the majority of the acquisitive Resources revenue growth in 2019 and 2020. CMS organic revenue growth for 2020 was flat compared to 2019, with recurring revenue improvements in Product Design offerings offset by the off-year cycle of the BPVC biennial release. CMS organic revenue growth for 2019 was due to recurring revenue growth in our Product Design offerings and the BPVC release in that year, partially offset by the non-renewal of a contract in our TMT benchmarking product offerings. The acquisitive declines in 2019 and 2020 were due to the TMT market intelligence assets divestiture.
Revenue by Transaction Type
Year ended November 30, % Change 2020 vs. 2019 % Change 2019 vs.
2018
(In millions, except percentages) 2020 2019 2018 Total Organic Total Organic Revenue: Recurring fixed$ 3,165.2 $ 3,162.4 $ 2,861.5 - % 2 % 11 % 6 % Recurring variable 616.3 572.9 506.3 8 % 7 % 13 % 4 % Non-recurring 506.3 679.3 641.4 (25) % (21) % 6 % 6 % Total revenue$ 4,287.8 $ 4,414.6 $ 4,009.2 (3) % (1) % 10 % 6 % As a percent of total revenue: Recurring fixed 74 % 72 % 71 % Recurring variable 14 % 13 % 13 % Non-recurring 12 % 15 % 16 % The recurring-based business represented 88 percent of total revenue in 2020, compared to 85 percent and 84 percent of total revenue in 2019 and 2018, respectively. Recurring revenue represents a steady and predictable source of revenue for us. Recurring fixed revenue increased 2 percent and 6 percent organically for 2020 and 2019. Financial Services offerings provided the largest contribution to the recurring fixed organic growth in 2020, at 6 percent, compared to 5 percent growth in 2019. Transportation recurring revenue increased 3 percent in 2020, down from its 10 percent organic growth rate for 2019 as a result of the effects of the COVID-19 pandemic. Resources recurring offerings declined 3 percent in 2020, compared to an organic increase of 5 percent in 2019, again due to the effects of the COVID-19 pandemic on our customer base. CMS recurring offerings increased 2 percent in 2020, and were flat in 2019. Recurring variable revenue was comprised entirely of Financial Services revenue for all periods, and grew 7 percent organically in 2020 and 6 percent organically in 2019. Non-recurring revenue decreased 21 percent organically in 2020, compared to an organic 6 percent increase in 2019. The non-recurring organic revenue decline for 2020 was due primarily to the COVID-19 pandemic that led to the cancellation of our large customer events in the second quarter of 2020, lower OEM activity within our Transportation segment, and lower energy consulting revenue, as well as a difficult year-over-year comparison in Financial Services and the off-year cycle of the BPVC biennial release. We anticipate a return to non-recurring organic revenue growth in 2021 as customers begin to return to more normal activity. The 2019 increase was primarily driven by growth in our automotive and Resources product offerings, as well as positive contributions from Financial Services and the benefit from the 2019 BPVC release. 42 -------------------------------------------------------------------------------- Table of Contents Operating Expenses
The following table shows our operating expenses and the associated percentages of revenue.
Year ended November 30, % Change 2020 % Change 2019 (In millions, except percentages) 2020 2019 2018 vs. 2019 vs. 2018 Operating expenses: Cost of revenue$ 1,590.0 $ 1,657.0 $ 1,495.7 (4) % 11 % SG&A expense 1,128.0 1,197.9 1,192.8 (6) % - %
Total cost of revenue and SG&A expense
$ 2,688.5 (5) % 6 %
Depreciation and amortization expense
$ 541.2 3 % 6 % As a percent of revenue: Total cost of revenue and SG&A expense 63 % 65 % 67 % Depreciation and amortization expense 14 % 13 % 13 %
Cost of Revenue and SG&A Expense
In managing our business, we evaluate our costs by type (e.g., salaries and benefits, facilities, IT) rather than by income statement classification. The decrease in absolute total cost of revenue and SG&A expense in 2020 was primarily due to the execution of cost reduction activities we put in place at the onset of the COVID-19 pandemic. The increase in absolute total costs in 2019 was primarily due to recent acquisitions. As a percent of revenue, cost of revenue and SG&A expense have been steadily decreasing, primarily because of the ongoing cost management and rationalization efforts associated with acquisition integration, as well as the incremental cost reduction efforts in 2020 to mitigate the effects of the COVID-19 pandemic and organic revenue growth in 2019. Within our cost of revenue and SG&A expense, stock-based compensation expense as a percentage of revenue was 6 percent, 5 percent, and 6 percent, respectively, for the years endedNovember 30, 2020 , 2019, and 2018. The higher stock-based compensation percentage in 2020 was largely due to our higher share price, related employer tax impacts associated with the exercise of stock options, and accelerations for employees impacted by cost reduction activities.
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 investments, while amortization expense has leveled off as our last significant acquisition was in 2018. Acquisition-Related Costs In 2020, 2019, and 2018, we incurred$45.3 million ,$70.3 million , and$134.8 million , respectively, of costs associated with acquisitions, including employee severance charges and retention costs, contract termination costs for facility consolidations (prior to the adoption of ASC Topic 842), legal and professional fees, and compensation costs of$6.9 million in 2020,$41.5 million in 2019, and$54.1 million in 2018, related to the performance awards granted in connection with the purchase of aM. We expect to incur an additional$23 to$28 million of acquisition-related costs related to the aM performance awards over the next two years. 43 -------------------------------------------------------------------------------- Table of Contents Segment Adjusted EBITDA Year ended November 30, % Change 2020 % Change 2019 (In millions, except percentages) 2020 2019 2018 vs. 2019 vs. 2018 Adjusted EBITDA: Financial Services$ 886.1 $ 786.2 $ 636.9 13 % 23 % Transportation 514.7 520.9 479.3 (1) % 9 % Resources 357.3 403.5 369.4 (11) % 9 % CMS 126.5 121.1 127.4 4 % (5) % Shared services (47.9) (52.8) (48.1) (9) % 10 % Total Adjusted EBITDA$ 1,836.7 $ 1,778.9 $ 1,564.9 3 % 14 % As a percent of segment revenue: Financial Services 49.7 % 46.2 % 44.9 % Transportation 44.7 % 41.8 % 41.3 % Resources 41.4 % 43.2 % 42.1 % CMS 25.9 % 22.7 % 23.0 % Total Adjusted EBITDA for 2020 increased primarily because of the leverage in our business model and cost reduction efforts, partially offset by the sale of our A&D business line and the impact of the COVID-19 pandemic and the associated economic disruption on our revenue growth. Financial Services segment Adjusted EBITDA and associated margin continued to increase because of organic revenue growth, favorable product mix, and cost management activities related to the pandemic. We expect some moderation in Financial Services margin due to increased investment and an anticipated increase in lower margin services revenue. Transportation segment Adjusted EBITDA was lower due to the negative organic revenue growth in 2020 as a result of the COVID-19 pandemic, as well as the first quarter 2020 divestiture of the A&D business line; however, Transportation Adjusted EBITDA margin increased as we carefully managed costs in a lower revenue environment. Resources Adjusted EBITDA and associated margin decreased due to the slowdown in organic revenue growth as a result of the COVID-19 pandemic. In 2019, Adjusted EBITDA increased due to recent acquisitions and the leverage in our business model, as incremental revenue drives higher margins. As a percent of segment revenue, segment Adjusted EBITDA margins in 2019 also increased primarily due to organic revenue growth and the associated leverage benefits. We continue to carefully monitor the progress of global efforts to mitigate the effects of the COVID-19 pandemic and will focus our efforts on returning to stronger organic revenue growth and continuing to manage cost to improve overall margins. Provision for Income Taxes Our effective tax rate for continuing operations for the year endedNovember 30, 2020 was 1.5 percent, compared to 32.7 percent in 2019 and negative 27.2 percent in 2018. The decrease in our tax rate for 2020, compared to 2019, is primarily due to an increase in excess tax benefits on stock-based compensation of approximately$51 million and the tax-efficient divestiture of the A&D business line (U.K. share sales are exempt from tax) of approximately$63 million , partially offset byU.S. minimum tax of$47 million and aU.K. tax rate change that resulted in incremental tax of approximately$22 million . The increase in our tax rate for 2019, compared to 2018, is primarily due to a one-time net tax expense associated withU.S. treasury regulations retroactive to 2018 of approximately$150 million . 44 -------------------------------------------------------------------------------- Table of Contents EBITDA and Adjusted EBITDA (non-GAAP measure) Year ended November 30, % Change 2020 % Change 2019 (In millions, except percentages) 2020 2019 2018 vs. 2019 vs. 2018 Net income attributable to IHS Markit Ltd.$ 870.7 $ 502.7 $ 542.3 73 % (7) % Interest income (1.0) (1.9) (3.1) Interest expense 236.6 259.7 225.7 Provision (benefit) for income taxes 13.3 242.6 (115.4) Depreciation 217.5 196.1 175.1 Amortization 374.1 377.0 366.1 EBITDA$ 1,711.2 $ 1,576.2 $ 1,190.7 9 % 32 % Stock-based compensation expense 265.7 223.8 241.7 Restructuring and impairment charges 161.1 17.3 1.7 Acquisition-related costs 38.4 28.8 80.7 Acquisition-related performance compensation 6.9 41.5 54.1 Loss on debt extinguishment - 7.0 4.7 Gain on sale of assets (377.3) (115.3) - Pension mark-to-market and settlement expense (gain) 31.2 1.8 (6.5) Share of joint venture results not attributable to Adjusted EBITDA 0.6 0.9 0.5 Adjusted EBITDA attributable to noncontrolling interest (1.1) (3.1) (2.7) Adjusted EBITDA$ 1,836.7 $ 1,778.9 $ 1,564.9 3 % 14 % Adjusted EBITDA as a percentage of revenue 42.8 % 40.3 % 39.0 % As a percentage of revenue, Adjusted EBITDA increased 250 basis points in 2020 and 130 basis points in 2019. The 2020 increase was primarily due to cost reduction efforts to moderate the negative impact of revenue declines in the current COVID-19 and economic environment. The 2019 increase was primarily a result of strengthening revenue results and the associated business leverage benefit. We expect to continue to drive margin improvement through leveraging our business model and continuing to focus on efficiency and cost management efforts. Financial Condition (In millions, except As of November As of November percentages) 30, 2020 30, 2019 Dollar change Percent change Accounts receivable, net $ 891.7 $ 890.7 $ 1.0 - % Accrued compensation $ 206.1 $ 215.2 $ (9.1) (4) % Deferred revenue $ 886.2 $ 879.7 $ 6.5 1 % The decrease in accrued compensation is primarily due to a lower current year accrual for employee bonuses due to financial results coming in at a lower achievement rate than in 2019. Accounts receivable and deferred revenue balances were relatively flat in 2020 compared to 2019, primarily due to the adverse COVID-19 impacts on our business.
Liquidity and Capital Resources
As ofNovember 30, 2020 , we had cash and cash equivalents of$126 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$4.91 billion of debt as ofNovember 30, 2020 , consisting primarily of$250 million of term loan debt and$4.68 billion of senior notes. As ofNovember 30, 2020 , we had approximately$1.2 billion available under our revolving credit facility. Subject to certain exceptions, the merger agreement with S&P Global restricts our ability to borrow more than$500 million in the aggregate without the prior consent of S&P Global. We do not believe this restriction will impact our liquidity to meet our ongoing working capital and capital expenditure needs. 45
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Our interest expense in 2020 decreased from 2019 primarily because of lower floating interest rates and decreased borrowings on our revolving facility debt. Our interest expense in 2019 increased from 2018 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, and higher short-term interest rates.
Our Board of Directors approved quarterly cash dividends of
Our Board of Directors has authorized a share repurchase program of up to$2.5 billion ofIHS Markit common shares throughNovember 30, 2021 , 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. The merger agreement with S&P Global restricts our ability to purchase our shares and therefore our share repurchase program is currently suspended throughNovember 2021 , other than for the repurchase of shares associated with tax withholding requirements for share-based compensation, as described below. 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 that 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 and dividends, 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. Given current market conditions as a result of COVID-19, we are focused on maintaining higher levels of liquidity and capital structure flexibility. We maintain a solid balance sheet, investor grade rating, a well-positioned debt maturity ladder, and a strong diversified bank group. We expect to continue to operate within our capital policy target range of 2.0x-3.0x gross leverage.
See " Item 8 - Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 10 " in Part II of this Form 10-K for additional information about our debt obligations.
Cash Flows
Year ended November 30, % Change 2020 % Change 2019 (In millions, except percentages) 2020 2019 2018 vs. 2019 vs. 2018
Net cash provided by operating activities
$ 1,289.5 (9) % (3) % Net cash provided by (used in) investing activities$ 205.0 $ (271.5) $ (2,112.1) 176 % (87) % Net cash (used in) provided by financing activities$ (1,344.6) $ (958.0) $ 873.0 40 % (210) % The decrease in net cash provided by operating activities in 2020 was primarily due to$75.9 million of payments for acquisition-related performance compensation associated with the aM acquisition, as well as distributions associated with the settlement of ourU.S. andU.K. pension plans, cash payments related to restructuring activities, and negative impacts on working capital from the current market conditions. The decrease in net cash provided by operating activities in 2019 was primarily due to a one-time tax payment associated withU.S. treasury regulations that were retroactive to 2018. The increase in net cash provided by investing activities in 2020 was primarily due to the sale of the A&D business line. Net cash used in investing activities for 2019 decreased from 2018 primarily due to the net inflow of proceeds from acquisition and divestiture activity compared to the cash outflow in 2018 for the purchase of Ipreo. 46 -------------------------------------------------------------------------------- Table of Contents The increase in net cash used in financing activities is primarily due to the$950 million in share repurchases that we made, as well as our$270 million in dividend payouts. Net cash used in financing activities decreased in 2019 primarily due to the repayment of borrowings made for the Ipreo acquisition, partially offset by fewer share repurchases.
Free Cash Flow (non-GAAP measure)
The following table reconciles our non-GAAP free cash flow measure to net cash provided by operating activities.
Year ended November 30, % Change 2020 % Change 2019 (In millions, except percentages) 2020 2019 2018 vs. 2019 vs. 2018 Net cash provided by operating activities$ 1,138.8 $ 1,251.3 $ 1,289.5 Payments for acquisition-related performance compensation 75.9 - - Capital expenditures on property and equipment (274.8) (278.1) (222.7) Free cash flow$ 939.9 $ 973.2 $ 1,066.8 (3) % (9) % The decrease in free cash flow in 2020 was primarily due to distributions associated with the settlement of ourU.S. andU.K. pension plans, cash payments related to restructuring activities, and negative impacts on working capital from the current market conditions. The decrease in 2019 free cash flow was primarily due to lower net cash provided by operating activities due to higher tax payments and higher 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 10 " 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 1 7 " in Part II of this Form 10-K for a discussion of our share repurchase programs.
Dividends
Please refer to Part II, Item 5 of this Form 10-K for a discussion of our dividend policy.
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 ofNovember 30, 2020 , 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): Payment due by period Contractual Obligations and Less than 1 More than 5 Commercial Commitments Total year 1 - 3 years 3 - 5 years years Term loans, notes, and interest$ 6,013.6 $ 457.7
389.5 69.7 107.5 81.2 131.1 Unconditional purchase obligations 607.6 120.5 187.9 152.5 146.7 Total$ 7,010.7 $ 647.9 $ 1,919.6 $ 1,707.2 $ 2,736.0 47
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In 2022, we expect to pay cash to acquire the remaining aM 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 approximately$60-$65 million . In addition to the term loans and notes, as ofNovember 30, 2020 , we also had$17 million of outstanding borrowings under our 2019 revolving facility at a current annual interest rate of 1.40 percent. The facility has a five-year term ending inJune 2023 . We also had approximately$6 million in finance lease obligations as ofNovember 30, 2020 .
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.
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