Filing summary
Issuer and period: The filing is by The McGraw-Hill Companies, Inc., for the three months ended March 31, 2013, compared with Q1 2012. The request identifies S&P Global Inc.; verify the historical issuer/entity mapping. Financial statements are unaudited and were reviewed by Ernst & Young, not audited.
Business context and key financials
The continuing business reported four segments: S&P Ratings, S&P Capital IQ, S&P Dow Jones Indices, and Commodities & Commercial Markets. McGraw-Hill Education (MHE) was sold on March 22, 2013, and is presented as a discontinued operation.
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $1,181 million | $1,035 million |
| Operating profit | $278 million | $282 million |
| Operating margin | 24% | 27% |
| Continuing-operations income | $174 million | $163 million |
| Continuing-operations diluted EPS attributable to common shareholders | $0.54 | $0.56 |
| Net income attributable to the company | $735 million | $123 million |
| Cash from continuing operating activities | $(47) million | $26 million |
| Free cash flow (company-defined, non-GAAP) | $(86) million | $16 million |
Net income included a $612 million after-tax gain on the MHE sale; it should not be read as a comparable measure of recurring performance. Revenue rose 14%, while operating profit fell 1% and continuing-operations diluted EPS fell 4%. Segment operating profit increased 24% to $444 million, but unallocated expense rose to $166 million from $75 million, including Growth and Value Plan costs and approximately $77 million of legal settlements.
Segment results: S&P Ratings revenue increased 20% and operating profit 39%; Capital IQ revenue increased 5% but operating profit declined 9%; S&P Dow Jones Indices revenue increased 45% and operating profit 47%, largely reflecting the joint venture; C&C revenue increased 1% and operating profit declined 2%.
Liquidity, debt, and capital allocation
Cash and equivalents were $1.905 billion at March 31, up from $760 million at year-end, with the increase primarily reflecting cash received from the MHE sale. The company reported $799 million of long-term debt and no commercial paper outstanding, down from $457 million of short-term commercial paper debt at December 31. A $1.2 billion commercial-paper program was supported by a $1.2 billion credit facility due to terminate July 30, 2013; the company stated that available cash, operating cash flows, and facility capacity should meet foreseeable needs. Its debt-to-cash-flow covenant limit was 4-to-1 and had not been exceeded.
Q1 continuing-operations financing outflows were $971 million, including $457 million of short-term debt repayment, $500 million for an accelerated share repurchase, and $79 million of shareholder dividends. The quarterly dividend was raised from $0.255 to $0.28 per share. The company expected approximately $20 million of additional required pension contributions during the rest of 2013.
Material changes, outlook, and risks
- MHE divestiture: Sold for $2.4 billion in cash; the company recorded a $612 million after-tax gain. Management said proceeds would support debt repayment, resumed repurchases, and selective acquisitions. Transition services to the buyer were expected to continue for three to twelve months.
- Business trends: Management cited strong bond issuance and refinancing, structured-finance growth, and expansion in commodities data. It expected corporate issuance in 2013 to continue at a slightly slower pace than 2012, while describing the longer-term corporate bond outlook as healthy. It also expected continued opportunities in indices, data, and analytics; no consolidated earnings or revenue guidance was provided in the supplied text.
- Cash flow: Continuing operating cash flow and free cash flow turned negative year over year, which management attributed mainly to estimated tax-payment timing and higher incentive-compensation payments.
- Legal matters: Approximately $77 million pre-tax for subprime litigation settlements was included in selling and general expenses; the cases were settled in April 2013 and dismissed under the settlements. The company also discussed DOJ and state litigation and said outcomes and potential losses could not be predicted, while stating it did not expect pending matters to have a material adverse effect based on then-current knowledge.
- Other risks: The filing highlighted exposure to credit and capital-market conditions, regulation and litigation, foreign exchange, competition, and cyclical commercial markets. It warned that separation from MHE could reduce diversification and increase volatility. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification points
- Confirm the reporting-entity relationship between the issuer named in this 2013 filing and S&P Global Inc.
- Separate recurring continuing-business results from the MHE sale gain and discontinued-operation results; assess the effect of the approximately $77 million settlement and Growth and Value Plan costs.
- Review cash conversion and working-capital timing, including negative continuing operating cash flow and free cash flow, alongside cash generated by the divestiture.
- Check the final settlement and share count under the capped $500 million accelerated repurchase agreement, and the status of the credit facility scheduled to terminate in July 2013.
- Track the DOJ and state litigation, as well as pension obligations retained in connection with the MHE sale.