Business context and reporting period
McGraw Hill Financial, Inc. (the company now known as S&P Global) filed this Form 10-K for the fiscal year ended December 31, 2013. Its continuing businesses were S&P Ratings, S&P Capital IQ, S&P Dow Jones Indices, and Commodities & Commercial. The March 2013 sale of McGraw-Hill Education (MHE) for $2.4 billion in cash is reported as discontinued operations.
Key financial metrics
Unless otherwise stated, amounts are U.S. dollars. Results are for continuing operations unless noted.
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $4.875 billion | $4.450 billion | +10% |
| Operating profit | $1.405 billion | $1.211 billion | +16% |
| Operating margin | 29% | 27% | +2 percentage points |
| Income from continuing operations attributable to the company | $812 million | $676 million | +20% |
| Diluted EPS from continuing operations | $2.90 | $2.37 | +22% |
| Net income attributable to the company, including discontinued operations | $1.376 billion | $437 million | Includes MHE sale gain |
Net income included a $589 million after-tax gain on the MHE sale. Continuing-operations net margin was 18.5%, versus 16.3% in 2012. Interest expense, net, declined to $59 million from $81 million; the continuing-operations effective tax rate fell to 32.9% from 35.8%.
Cash flow and liquidity: Cash from continuing operating activities was $816 million, up from $747 million. Company-defined free cash flow was $624 million, essentially flat with $626 million. Year-end cash and equivalents were $1.542 billion, including $847 million held abroad. Total debt was $799 million, down from $1.256 billion; no commercial paper was outstanding. Working capital was $564 million versus negative $1.044 billion in 2012. The company said cash, operating cash flow, and its credit facility should cover foreseeable operating and recurring cash needs.
2013 fourth quarter: Revenue was $1.250 billion versus $1.226 billion in Q4 2012; operating profit was $284 million versus $347 million; continuing-operations income was $190 million versus $211 million; diluted continuing-operations EPS was $0.62 versus $0.67.
Material changes versus the prior comparable period
- S&P Ratings revenue rose 12% to $2.274 billion and operating profit rose 18% to $1.000 billion, driven by corporate bond issuance, refinancing, bank loan ratings, and structured finance activity.
- S&P Capital IQ revenue increased 4% to $1.170 billion, while operating profit edged up 1% to $211 million; subscription growth was partly offset by costs and discontinued non-core offerings.
- S&P Dow Jones Indices revenue increased 27% to $493 million and operating profit rose 31% to $278 million, benefiting substantially from the joint venture and higher ETF assets under management.
- Commodities & Commercial revenue increased 4% to $1.014 billion and operating profit rose 25% to $311 million. Platts and J.D. Power improved; McGraw-Hill Construction remained weaker.
- The company repurchased approximately 16.9 million shares for about $989 million in 2013. A new authorization for up to 50 million shares remained unused at year-end. Regular dividends paid were $308 million; the 2012 comparison included a special dividend.
Outlook, commentary, risks and unusual items
- No consolidated numerical 2014 earnings or revenue guidance is provided in the supplied filing text. Management expected debt issuance and bank loan rating activity to grow at a slower pace after substantial 2013 refinancing, while anticipating continued structured-finance recovery and longer-term growth in ETF assets.
- Management described growth and performance as strategic priorities, including investment in products, technology, data, customer service, compliance, and international expansion. It cautioned that execution and results remain subject to market and regulatory conditions.
- Unusual 2013 items included approximately $77 million of pre-tax legal settlements, $64 million of Growth and Value Plan costs, a $36 million non-cash data-center impairment, a $26 million non-cash index-joint-venture intangible impairment, and $13 million of lease termination costs. Dispositions contributed a net pre-tax gain of $24 million.
- Significant legal and regulatory exposure includes the DOJ civil complaint concerning historical structured-finance ratings, ongoing state and other ratings-related matters, and a potential Italian claim described as not less than €234 billion. The company disputed the claims and said outcomes and potential losses could not be predicted with confidence; it believed pending matters should not materially adversely affect consolidated financial condition.
- Other risks include dependence on debt issuance, financial-market activity and subscription budgets; competition; evolving regulation of ratings, benchmarks and commodity price reporting; litigation; foreign exchange; technology or cybersecurity disruption; and execution of systems and outsourcing changes.
- A $810 million redeemable noncontrolling interest relates to S&P Dow Jones Indices LLC. After December 31, 2017, minority partners have specified put rights, including a right to sell at least 20% of their interest; timing and ultimate payment are uncertain.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management reported effective controls and no identified material weaknesses.
Important facts for investors to verify
- Separate recurring continuing-operations earnings from the MHE disposal gain and the listed legal, restructuring, and impairment items.
- Track credit issuance and refinancing trends, structured-finance activity, ETF assets and trading volumes, and recurring subscription growth.
- Review subsequent developments and potential financial exposure in the DOJ, state, Italian, and other legal or regulatory matters.
- Assess the timing and potential funding implications of S&P Dow Jones Indices LLC redemption rights, alongside debt maturities and liquidity needs.
- Consider the location of cash: $847 million was held abroad, and repatriation to the U.S. could incur tax.