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. 33
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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 ("ECR"), and TMT benchmarking 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 85 percent of our total revenue in 2019. 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, we typically hold our annual CERAWeek, World Petrochemical, and TPM conferences 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 2019. During 2019, we focused our efforts on increasing revenue and Adjusted EBITDA profit margin, innovating and developing new product offerings, rebalancing our asset portfolio, and updating our capital allocation policy. We delivered 6 percent organic revenue growth during 2019 and increased our Adjusted EBITDA profit margin by 130 basis points. We continued to introduce or enhance many of our product offerings, and we strengthened our product portfolio by acquiring Agribusiness. We divested the majority of our TMT market intelligence assets portfolio inAugust 2019 , and we divested our A&D business line onDecember 2, 2019 . During 2019, we termed out most of our debt, repurchased$500 million of our common shares, and de-levered to a 2.9x leverage ratio, which is within our capital policy target leverage ratio of 2.0-3.0x.
For 2020, 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 to innovate using our existing data sets
and industry expertise, converting core information to higher value
advanced analytics. Our investment priorities are primarily in energy,
automotive, and financial services, and we intend to continue to invest
across our business to increase our customer value proposition.
• Balance capital allocation. We will continue to manage to our capital
policy target leverage ratio, and we have updated our capital policy to reflect our intent to return 50 to 75 percent of our annual capital capacity to shareholders through share repurchases and a quarterly dividend. We will continue to evaluate the long-term potential and strategic fit of our asset portfolio, and we will also continue to
evaluate potential 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. 34
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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 through the sale of new or enhanced product offerings.
• Acquisitive - We define acquisitive revenue as the revenue generated
from acquired products and services from the date of acquisition to the
first anniversary date of that acquisition. This type of growth comes as
a result of our strategy to purchase, integrate, and leverage the value
of assets we acquire. We also include the impact of divestitures in this
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. The fixed fee is typically paid annually or more
periodically in advance, and may contain provisions for minimum monthly
payments. 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. 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. 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. 35
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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.
Strategic Acquisitions
Acquisitions have historically been an important part of our growth strategy. We completed three acquisitions during the year endedNovember 30, 2019 for a total purchase price of approximately$0.1 billion , offset by one divestiture for approximately$0.2 billion . We also completed the A&D divestiture onDecember 2, 2019 , for approximately$0.5 billion . We completed three acquisitions during the year endedNovember 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 . 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.
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. 36
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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 sales, 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, 2019 , we had approximately 8.2 million unvested RSUs/RSAs and 0.4 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 85 percent of our 2019 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 2019, 2018, and 2017, we recorded approximately$61.5 million ,$745.3 million , and$113.8 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 37
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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 estimate the compensation expense associated with the remaining equity interests to be approximately$70 to$75 million , of which approximately$30 million had been recognized as ofNovember 30, 2019 , 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, 2019 and 2018, we had approximately$4.2 billion and$4.5 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, 2019 and 2018, we had approximately$9.8 billion 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 2019 and 2018, 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.
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 calculate stock-based compensation cost by multiplying the grant date fair market value by the number of option shares 38
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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 2019 increased 10 percent compared to the same period of 2018. Total revenue for 2018 increased 11 percent compared to the same period of 2017. The table below displays the percentage point change in revenue due to organic, acquisitive, and foreign currency factors when comparing 2019 to 2018 and 2018 to 2017. Increase (Decrease) in Total Revenue Foreign (All amounts represent percentage points) Organic Acquisitive Currency 2019 vs. 2018 6 % 5 % (1 )% 2018 vs. 2017 6 % 5 % 1 % Organic revenue growth in 2019 and 2018 was attributable to both recurring and nonrecurring revenue growth. The recurring-based business represented 85 percent of total revenue in 2019, compared to 84 percent and 83 percent of total revenue in 2018 and 2017, respectively. The recurring-based business increased 6 percent organically in 2019 and 2018, led in each year by Financial Services and Transportation offerings, with Resources also contributing to the organic growth. The non-recurring business increased 6 percent organically in 2019 and 2018, led by Transportation and Resources offerings, with Financial Services offerings also contributing to the organic growth in 2019. 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$8 million of growth in the 2019 results. Acquisition-related revenue growth for 2019 was primarily due to the Ipreo acquisition in the third quarter of 2018, as well as the Agribusiness acquisition in the third quarter of 2019, partially offset by the TMT market intelligence assets divestiture in the third quarter of 2019. Acquisition-related revenue growth for 2018 was primarily due to the Ipreo acquisition in the third quarter of 2018 and the aM acquisition in the fourth quarter of 2017. Foreign currency movements had a slightly negative effect on our 2019 revenue growth and a slightly positive impact on our 2018 revenue growth. Due to the extent of our global operations, foreign currency movements could continue to positively or negatively affect our results in the future. Revenue by Segment Year ended November 30, % Change (In millions, except % Change 2019 2018 vs. percentages) 2019 2018 2017 vs. 2018 2017 Revenue: Financial Services$ 1,701.5 $ 1,419.7 $ 1,232.9 20 % 15 % Transportation 1,246.1 1,160.2 991.6 7 % 17 % Resources 933.8 876.5 839.3 7 % 4 % CMS 533.2 552.8 535.9 (4 )% 3 % Total revenue$ 4,414.6 $ 4,009.2 $ 3,599.7 10 % 11 %
The percentage change in revenue for each segment is due to the factors described in the following table.
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Table of Contents 2019 vs. 2018 2018 vs. 2017 (All amounts represent Foreign Foreign percentage points) Organic Acquisitive Currency Organic Acquisitive Currency Financial Services revenue 6 % 15 % (1 )% 6 % 8 % 1 % Transportation revenue 8 % - % (1 )% 11 % 6 % 1 % Resources revenue 5 % 2 % - % 4 % - % - % CMS revenue 1 % (4 )% (1 )% 2 % 1 % 1 % Financial Services revenue experienced strong total organic growth in both 2019 and 2018. Within our Information product offerings, we experienced 4 percent organic growth in 2019 and 7 percent organic growth in 2018, primarily due to the solid performance of our pricing, indices, and valuation services offerings. Solutions organic revenue growth of 8 percent in 2019 and 9 percent in 2018 benefitted from broad-based growth across the portfolio, led by our managed loan services and EDM product offerings. Our Processing offerings declined 2 percent organically in 2019 and 1 percent organically in 2018. The 2019 Processing decline was due to lower loan processing revenue, partially offset by improved derivative processing revenue, while the 2018 Processing decline was due to both lower loan processing and derivative processing organic revenue. The Ipreo acquisition in the third quarter of 2018 accounted for the acquisitive growth in 2018 and 2019, as well as providing a strong contribution to organic revenue growth in the last four months of 2019. Transportation revenue increases for 2019 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 new automotive technologies. The aM acquisition in the fourth quarter of 2017 accounted for the acquisitive growth in 2018. Resources revenue for 2019 and 2018 increased both in the recurring and non-recurring categories. Recurring organic revenue growth was 5 percent in 2019 and 4 percent in 2018. Total and recurring organic revenue growth benefited by less than 1 percentage point as a result of the adoption of ASC Topic 606. On a constant currency basis, our Resources annual contract value ("ACV"), which represents the annualized value of recurring revenue contracts, increased 3 percent in both 2019 and 2018. Non-recurring organic revenue growth was 8 percent in both 2019 and 2018. The Agribusiness acquisition in the third quarter of 2019 accounted for the acquisitive Resources revenue growth in 2019. CMS organic revenue growth for 2019 was due to recurring revenue growth in our Product Design offerings and the BPVC release in the current year, partially offset by the non-renewal of a contract in our TMT benchmarking product offerings. The acquisitive decline was due to the TMT market intelligence assets divestiture. CMS organic revenue growth in 2018 was primarily due to recurring organic revenue growth in our Product Design offerings, as well as recurring and non-recurring revenue growth in our ECR and TMT product offerings; our non-recurring organic revenue decline in Product Design in 2018 was primarily due to the BPVC release in 2017. Revenue by Transaction Type Year ended November 30, % Change 2019 vs. 2018 % Change 2018 vs. 2017 (In millions, except percentages) 2019 2018 2017 Total Organic Total Organic Revenue: Recurring fixed$ 3,162.4 $ 2,861.5 $ 2,550.0 11 % 6 % 12 % 6 % Recurring variable 572.9 506.3 449.0 13 % 4 % 13 % 6 % Non-recurring 679.3 641.4 600.7 6 % 6 % 7 % 6 % Total revenue$ 4,414.6 $ 4,009.2 $ 3,599.7 10 % 6 % 11 % 6 % As a percent of total revenue: Recurring fixed 72 % 71 % 71 % Recurring variable 13 % 13 % 12 % Non-recurring 15 % 16 % 17 % Recurring revenue represents a steady and predictable source of revenue for us. Recurring fixed revenue increased 6 percent organically for 2019 and 2018. Recurring variable revenue was comprised entirely of Financial Services revenue for all 40
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periods, and grew 4 percent organically in 2019 and 6 percent organically in 2018, with the decelerating growth largely due to lower loan processing volumes in 2019. Transportation recurring revenue offerings provided the largest contribution to the growth, at 10 percent organic growth for 2019 and 11 percent organic growth for 2018. Financial Services recurring revenue provided 5 percent organic growth in 2019 and 7 percent organic growth in 2018. Resources recurring offerings increased 5 percent organically in 2019 and 4 percent organically in 2018. CMS recurring offerings were flat in 2019, compared to 3 percent organic growth in 2018, with Product Design increases offset by TMT decreases for 2019. Non-recurring revenue grew 6 percent organically in 2019 and 2018. The 2019 increase was primarily driven by continued growth in our automotive and Resources product offerings, as well as positive contributions from Financial Services and the benefit from the 2019 BPVC release, while the 2018 increase was primarily driven by strength in our automotive and Resources product offerings.
Operating Expenses
The following table shows our operating expenses and the associated percentages of revenue. Year ended November 30, % Change % Change (In millions, except 2019 vs. 2018 vs. percentages) 2019 2018 2017 2018 2017 Operating expenses: Cost of revenue$ 1,657.0 $ 1,495.7 $ 1,348.4 11 % 11 % SG&A expense 1,197.9 1,192.8 1,096.0 - % 9 % Total cost of revenue and SG&A expense$ 2,854.9 $ 2,688.5 $ 2,444.4 6 % 10 % Depreciation and amortization expense$ 573.1 $ 541.2 $ 492.5 6 % 10 % As a percent of revenue: Total cost of revenue and SG&A expense 65 % 67 % 68 % Depreciation and amortization expense 13 % 13 % 14 %
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 increase in absolute total costs in 2019 and 2018 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 solid organic growth in 2019, 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 5 percent, 6 percent, and 7 percent for the years endedNovember 30, 2019 , 2018, and 2017, respectively. The higher stock-based compensation percentages in 2018 and 2017 are primarily due to the assumption and revaluation of legacy outstanding awards at the Merger date and the acceleration of certain share awards associated with severance activities post-Merger. We continue to manage our stock-based compensation expense to be a smaller percentage of revenue.
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. Acquisition-Related Costs In 2019, 2018, and 2017, we incurred$70 million ,$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$42 million in 2019,$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 an additional$40 to$45 million of acquisition-related costs related to the aM performance awards over the next three years. 41
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Table of Contents Segment Adjusted EBITDA Year ended November 30, % Change (In millions, except % Change 2019 2018 vs. percentages) 2019 2018 2017 vs. 2018 2017 Adjusted EBITDA: Financial Services$ 786.2 $ 636.9 $ 553.7 23 % 15 % Transportation 520.9 479.3 408.6 9 % 17 % Resources 403.5 369.4 360.2 9 % 3 % CMS 121.1 127.4 125.2 (5 )% 2 % Shared services (52.8 ) (48.1 ) (57.8 ) 10 % (17 )% Total Adjusted EBITDA$ 1,778.9 $ 1,564.9 $ 1,389.9 14 % 13 % As a percent of segment revenue: Financial Services 46.2 % 44.9 % 45.0 % Transportation 41.8 % 41.3 % 41.0 % Resources 43.2 % 42.1 % 43.0 % CMS 22.7 % 23.0 % 23.0 % For 2019 and 2018, Adjusted EBITDA increased due to recent acquisitions and the leverage in our business model, as incremental revenue drives higher margins. We continue to focus our efforts on organic revenue growth, cost management, and acquisition integration to improve overall margins. As a percent of segment revenue, segment Adjusted EBITDA margins in 2019 increased primarily due to organic revenue growth and the associated leverage benefits. Segment Adjusted EBITDA margin growth in 2018 was partially offset by lower aM and Ipreo margins. Provision for Income Taxes Our effective tax rate for continuing operations for the year endedNovember 30, 2019 was 32.7 percent, compared to negative 27.2 percent in 2018 and negative 13.4 percent in 2017. The increase in our tax rate for 2019, compared to 2018, is primarily due to net tax expense associated withU.S. treasury regulations retroactive to 2018 of approximately$150 million . The reduction in our tax rate for 2018, compared to 2017, is primarily due to net tax benefits associated withU.S. tax reform of$141 million . 42
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EBITDA and Adjusted EBITDA (non-GAAP measure)
Year ended November 30, % Change (In millions, except % Change 2019 2018 vs. percentages) 2019 2018 2017 vs. 2018 2017 Net income attributable to IHS Markit Ltd.$ 502.7 $ 542.3 $ 416.9 (7 )% 30 % Interest income (1.9 ) (3.1 ) (2.2 ) Interest expense 259.7 225.7 154.3 Provision (benefit) for income taxes 242.6 (115.4 ) (49.9 ) Depreciation 196.1 175.1 157.0 Amortization 377.0 366.1 335.5 EBITDA$ 1,576.2 $ 1,190.7 $ 1,011.6 32 % 18 % Stock-based compensation expense 223.8 241.7 261.9 Restructuring charges 17.3 1.7 - Acquisition-related costs 28.8 80.7 103.1 Acquisition-related performance compensation 41.5 54.1 9.9 Loss on debt extinguishment 7.0 4.7 - Gain on sale of assets (115.3 ) - - Pension mark-to-market and settlement (gain) expense 1.8 (6.5 ) 5.4 Share of joint venture results not attributable to Adjusted EBITDA 0.9 0.5 (1.2 ) Adjusted EBITDA attributable to noncontrolling interest (3.1 ) (2.7 ) (0.8 ) Adjusted EBITDA$ 1,778.9 $ 1,564.9 $ 1,389.9 14 % 13 % Adjusted EBITDA as a percentage of revenue 40.3 % 39.0 % 38.6 % As a percentage of revenue, Adjusted EBITDA increased 130 basis points in 2019 and 40 basis points in 2018, primarily as a result of strengthening revenue results and the associated business leverage benefit. The 2019 Adjusted EBITDA increase was positively impacted by 30 basis points due to foreign currency movements, while the 2018 Adjusted EBITDA increase was negatively impacted by 60 basis points due to foreign currency movements and the recent Ipreo acquisition. Adjusted EBITDA margin performance also improved as a result of our ongoing integration and cost management efforts. We expect to continue to drive margin improvement through leveraging our business model and continued focus on efficiency and cost management efforts.
Financial Condition (In millions, except As of November As of November percentages)
30, 2019 30, 2018 Dollar change Percent change Accounts receivable, net $ 890.7 $ 792.9 $ 97.8 12 % Accrued compensation $ 215.2 $ 214.1 $ 1.1 1 % Deferred revenue $ 879.7 $ 886.8 $ (7.1 ) (1 )% The increase in our accounts receivable balance was primarily due to increased billing activity in 2019 and the impacts of the adoption of ASC Topic 606. The decrease in deferred revenue was primarily due to the transition adjustment to ASC Topic 606, the reclassification of A&D deferred revenue to the held-for-sale category, and the decrease associated with the TMT market intelligence assets divestiture, partially offset by increased billings and the Agribusiness acquisition in 2019.
Liquidity and Capital Resources
As ofNovember 30, 2019 , we had cash and cash equivalents of$112 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$5.13 billion of debt as ofNovember 30, 2019 , consisting primarily of$237 million of 43
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revolving facility debt,
In 2019, we completed the following activities related to our debt structure:
• We repaid the
acquisition, using cash on hand and borrowings under the revolving credit
facility.
• We issued
notes at a 3.625 percent interest rate, due 2024, and
aggregate principal amount of senior unsecured notes at a 4.250 percent
interest rate, due 2029. Net proceeds from this offering, along with minor additional borrowings under the revolving credit facility, were used to repay all of our term loan debt. • We issued an additional$350 million aggregate principal amount of the
4.250 percent senior unsecured notes due 2029 at an effective 3.25 percent
interest rate and used the proceeds to repay borrowings under the revolving credit facility. • We entered into a new$250 million 364-day credit agreement for a term
loan credit facility to reduce our revolving credit facility borrowings.
• We terminated our previous revolving credit facility and entered into a
new revolving credit facility agreement with a total borrowing capacity of
$1.25 billion .
Our interest expense in each of 2017, 2018, and 2019 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, and higher short-term interest rates.
Our Board of Directors terminated our previous share repurchase program and has authorized a new 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. InDecember 2019 , we entered into an ASR to repurchase$500 million under this authorization. Our Board of Directors has separately authorized, subject to applicable regulatory requirements, the repurchase of our common shares surrendered by employees in an amount equal to the exercise price, if applicable, and statutory tax liability associated with the vesting of their equity awards, for which we pay the statutory tax on behalf of the employee and forgo receipt of the exercise price of the award from the employee, if applicable. Such repurchases have been authorized in addition to the share repurchase program described above. Based on our cash, debt, and cash flow positions, we believe that we will have sufficient liquidity to meet our ongoing working capital and capital expenditure needs. Our future capital requirements will depend on many factors, including the number and magnitude of future acquisitions, amount of share repurchases and cash dividends, the need for additional facilities or facility improvements, the timing and extent of spending to support product development efforts, information technology infrastructure investments, investments in our internal business applications, and the continued market acceptance of our offerings. We could be required, or could elect, to seek additional funding through public or private equity or debt financings; however, additional funds may not be available on terms acceptable to us.
See "Item 8 - Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 8" in Part II of this Form 10-K for additional information about our debt obligations.
Cash Flows Year ended November 30, % Change % Change (In millions, except 2019 vs. 2018 vs. percentages) 2019 2018 2017 2018 2017 Net cash provided by operating activities$ 1,251.3 $ 1,289.5 $ 961.5 (3 )% 34 % Net cash used in investing activities$ (271.5 ) $ (2,112.1 ) $ (646.3 ) (87 )% 227 % Net cash (used in) provided by financing activities$ (958.0 ) $ 873.0 $ (329.3 ) (210 )% (365 )% 44
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Net cash provided by operating activities in 2019 decreased primarily due to a one-time tax payment associated withU.S. treasury regulations that were retroactive to 2018. In 2018, net cash provided by operating activities increased primarily because of better operating performance and working capital improvements. 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. Net cash used in investing activities for 2018 increased from 2017 primarily due to the Ipreo acquisition, partially offset by lower capital expenditures compared to the prior year. 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. 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 in 2018 as compared to 2017.
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 (In millions, except % Change 2019 2018 vs. percentages) 2019 2018 2017 vs. 2018 2017 Net cash provided by operating activities$ 1,251.3 $ 1,289.5 $ 961.5 Capital expenditures on property and equipment (278.1 ) (222.7 ) (260.2 ) Free cash flow$ 973.2 $ 1,066.8 $ 701.3 (9 )% 52 % 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. The increase in free cash flow in 2018 was primarily due to higher net cash provided by operating activities and lower capital expenditure activity, as 2017 cash flow was partially used to pay for Merger-related consolidation and integration activities. 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.
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, 2019 , 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): 45
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Table of Contents Payment due by period Contractual Obligations and Commercial More than 5 Commitments Total Less than 1 year 1 - 3 years 3 - 5 years years Term loans, notes, and interest$ 6,487.0 $ 471.9$ 1,177.6 $ 1,464.3 $ 3,373.2 Operating lease obligations 412.0 63.2 108.2 81.2 159.4 Unconditional purchase obligations 96.6 49.8 41.0 5.6 0.2 Total$ 6,995.6 $ 584.9$ 1,326.8 $ 1,551.1 $ 3,532.8 We do not expect to contribute a significant amount to our pension plans in 2020, although we believe we will need to pay a premium to annuitize the remaining obligations under theU.S. Retirement Income Plan that we terminated inDecember 2018 . We have taken initial steps to terminate theU.K. Retirement Income Plan and expect to complete the termination by the end of 2020. 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$70-$75 million . In addition to the term loans and notes, as ofNovember 30, 2019 , we also had$237 million of outstanding borrowings under our 2019 revolving facility at a current annual interest rate of 2.95 percent. The facility has a five-year term ending inJune 2023 . We also had approximately$7 million in capital lease obligations as ofNovember 30, 2019 .
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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