S&P Global Inc. (then The McGraw-Hill Companies, Inc.) — Q2 2012 Form 10-Q
Business context and reporting period. This filing covers the quarter and six months ended June 30, 2012. The company operated four reportable segments: S&P Ratings, S&P Capital IQ / S&P Indices, Commodities & Commercial, and McGraw-Hill Education (MHE). The interim financial statements were reviewed, not audited; the auditor reported no material modifications it believed were needed for U.S. GAAP conformity.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $1,547m | $1,557m | $2,878m | $2,818m |
| Operating income | $365m | $358m | $586m | $573m |
| Net income attributable to company | $216m | $211m | $339m | $331m |
| Diluted EPS | $0.76 | $0.68 | $1.19 | $1.07 |
| Operating margin | 24% reported | 23% reported | 20% reported | 20% reported |
- Q2 revenue fell 1% as product revenue declined 12%, partly offset by 5% service revenue growth. First-half revenue rose 2%, with product down 8% and service up 6%.
- Operating income and net income attributable to the company each increased 2% in both comparison periods. Diluted EPS rose 11% in each period, alongside a lower diluted weighted-average share count: 285.3m versus 309.2m in Q2 and 284.5m versus 309.4m for the first half.
- Segment results were mixed. Q2 revenue/operating income: S&P Ratings $483m/$208m; S&P Capital IQ / S&P Indices $366m/$100m; C&C $241m/$71m; MHE $474m/$57m. For the first half, MHE revenue fell 8% to $770m and its operating loss narrowed to $8m from $33m. C&C and Capital IQ / Indices grew; S&P Ratings operating income declined 2% in both periods.
Cash flow, debt and liquidity
- First-half operating cash flow was $155m, down from $338m. Investing used $243m; financing used $15m. Free cash flow, the company’s non-GAAP measure after prepublication investment, capital expenditure and dividends, was negative $122m versus positive $72m.
- Management attributed lower operating cash flow mainly to accelerated vendor payments during an ERP transition, Growth and Value Plan cash outlays, reductions in payables and accruals, and higher receivables. It expected payment patterns to normalize in Q3.
- At June 30, cash and equivalents were $836m; total debt was $1.199bn, including $400m of short-term debt and $799m long-term debt. The $400m 5.375% notes mature November 15, 2012. A $1.2bn credit facility supporting commercial paper was undrawn and scheduled to terminate July 30, 2013. The company said cash, operating cash flow and facility availability should meet foreseeable needs.
- Current assets were $2.640bn versus current liabilities of $2.879bn. Cash held abroad was $552m; repatriation for U.S. use could trigger U.S. tax. The debt covenant limits the defined indebtedness-to-cash-flow ratio to 4:1; the company reported it had never exceeded the limit.
Material changes and unusual items
- The Growth and Value Plan proposed separating MHE into a separate public company, with shareholders to receive one MHE share for every three McGraw-Hill shares. The company expected a tax-free spin-off by year-end 2012, subject to approvals and other conditions, while also evaluating a potential sale of MHE.
- Plan-related costs were $42m in Q2 and $75m in the first half; cumulative costs were $85m. Management estimated a further $80m of one-time separation expenses for the rest of 2012 and approximately $65m of restructuring expense for full-year 2012.
- On June 29, the company formed S&P/Dow Jones Indices, owning 73% and consolidating the venture. Its preliminary purchase allocation recorded $792m of redeemable noncontrolling interest, including $633m of identifiable intangibles and $96m of goodwill. Valuations remained preliminary. Minority partners have redemption rights, including rights exercisable after 2017 and following a change of control.
- Other acquisitions included CMA and QuantHouse; CRISIL completed its Coalition acquisition on July 4, after quarter-end. The filing characterized their pro forma consolidated impact as not material.
- First-half cash dividends to shareholders were $145m. The quarterly dividend increased from $0.250 to $0.255 per share. No cash was used for share repurchases in the first half, although shares were delivered at the conclusion of prior accelerated repurchase agreements.
Outlook, commentary and risks
- No consolidated earnings guidance was provided. Management expected the MHE separation by year-end, while acknowledging execution, timing, approval and stand-alone operating risks.
- Management expected corporate bond issuance to remain subdued until market volatility stabilized, with a longer-term recovery possible; structured finance was expected to increase modestly in the second half. It projected the 2012 U.S. PreK-12 market could decline approximately 10% versus 2011.
- Management cited global credit-market conditions, regulatory change, education funding and spending, foreign exchange, market volatility, and execution of the Growth and Value Plan as risks. S&P Ratings also faced weak European issuance and reduced high-yield issuance in Q2.
- The DOJ and SEC were investigating potential civil-law violations relating to S&P structured-product ratings. The company said it was cooperating in discussions, intended to defend claims, and believed pending matters should not materially adversely affect its financial position, results or cash flows; it could not predict outcomes or potential losses.
- The company reported no material change in disclosed risk factors, no significant change in market-risk exposure, and effective disclosure controls as of June 30, 2012.
Important facts for investors to verify
- Whether the MHE separation or a sale proceeded, and the final transaction terms, costs and timing.
- Whether operating cash flow recovered after the ERP-related payment acceleration and how working capital and free cash flow developed.
- How the November 2012 debt maturity was refinanced or repaid, and whether liquidity or covenant headroom changed.
- Final purchase accounting and redemption-value exposure for S&P/Dow Jones Indices, including the effect of minority-partner rights.
- Developments in the DOJ/SEC structured-ratings investigation and any other material legal contingencies.
- Whether education-market weakness and credit-market issuance trends matched management’s stated outlook.