McGraw Hill Financial, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. The interim financial statements were reviewed by the independent accountant, not audited. The company stated that its planned rebranding to S&P Global was pending shareholder approval.
Financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $1.341 billion | $1.273 billion | +5% |
| Operating profit | $512 million | $501 million | +2% |
| Operating margin | 38% | 39% | Down 1 percentage point |
| Net income attributable to McGraw Hill Financial | $294 million | $303 million | -3% |
| Diluted EPS | $1.10 | $1.10 | Unchanged |
| Cash from continuing operating activities | $133 million | $(1.349) billion | Improved |
Revenue growth reflected higher results at Market Intelligence, Commodities & Commercial Markets (C&C), and S&P Dow Jones Indices, partly offset by a decline at S&P Ratings. Acquisitions contributed 6 percentage points to reported revenue growth and foreign exchange reduced it by 1 point; excluding those effects, revenue was flat. Subscription/non-transaction revenue rose 16% and represented 66% of revenue, while transaction revenue declined 11%.
Net income was $323 million, including $29 million attributable to noncontrolling interests. Net interest expense rose to $40 million from $16 million, primarily reflecting senior notes issued in 2015. The effective tax rate declined to 31.5% from 32.1%.
Segments and notable changes
- S&P Ratings: Revenue fell 9% to $552 million and operating profit fell 10% to $262 million. Lower U.S. and European issuance reduced transaction revenue 22%; non-transaction revenue increased 3%.
- S&P Global Market Intelligence: Revenue rose 27% to $407 million, with SNL acquisition contributing 21 percentage points. Operating profit rose 29% to $81 million, including a $24 million technology-related impairment charge.
- S&P Dow Jones Indices: Revenue increased 5% to $151 million and operating profit increased 6% to $101 million. Higher exchange-traded derivatives volumes were partly offset by lower average ETF assets under management.
- C&C: Revenue rose 13% to $254 million and operating profit rose 20% to $102 million, supported by Platts demand and acquisitions, including Used Car Guide.
Cash, debt and liquidity
- Cash and cash equivalents were $1.600 billion at March 31, up $119 million from year-end; approximately 90% was held abroad. The company noted that repatriating foreign cash for U.S. use could incur U.S. taxes.
- Total debt was $3.941 billion, including $472 million of short-term debt and $3.469 billion of long-term debt. Debt increased from $3.611 billion at December 31, 2015. Cash exceeded short-term debt, but total debt was substantially higher than cash.
- The company had about $728 million of additional borrowing availability under its $1.2 billion revolving credit facility. It reported that its debt-to-cash-flow covenant, capped at 4-to-1, had never been exceeded.
- Q1 free cash flow, a company-defined non-GAAP measure, was $84 million, versus $(1.395) billion in Q1 2015. Excluding specified legal settlement payments, insurance recoveries and tax effects, free cash flow was $192 million versus $106 million.
- Cash used for share repurchases was $226 million; shareholder dividends paid were $96 million. The quarterly dividend was increased from $0.33 to $0.36 per share.
The sharp year-over-year operating cash flow improvement largely reflects $1.559 billion of legal and regulatory settlement payments in Q1 2015, compared with $108 million in Q1 2016. Accordingly, the comparison is not a like-for-like indicator of underlying cash generation.
Outlook, transactions and risks
- Management said cash on hand, operating cash flows and available credit were expected to meet operating and recurring cash needs into the foreseeable future. The filing provides no specific earnings or revenue guidance and cautions that Q1 results are not necessarily indicative of full-year results.
- In April 2016, the company agreed to sell J.D. Power for $1.1 billion to XIO Group. J.D. Power assets and liabilities were classified as held for sale at quarter-end.
- The company agreed to sell SPSE and CMA to Intercontinental Exchange; closing remained subject to extended antitrust review.
- Legal and regulatory matters include financial-crisis ratings litigation, the ongoing Italian Trani criminal proceeding, and other claims and inquiries. The company said it could not reasonably estimate potential additional exposure in certain matters. It settled the City of Swan Australian case for AUD $144 million; court approval followed on April 12, 2016.
- Management cited market issuance and volatility, regulatory developments, litigation outcomes, acquisitions and divestitures, foreign exchange, cybersecurity, competition, and commodities-market conditions among factors that could affect results.
- Unrecognized tax benefits were $120 million, with $34 million of accrued interest and penalties. Management expected unrecognized benefits could decrease significantly within 12 months, but said audit outcomes could materially affect results or cash flows.
Most important facts for investors to verify
- Progress, final terms and proceeds from the J.D. Power sale, and the timing and regulatory status of the SPSE/CMA divestiture.
- Whether Ratings issuance activity recovers, given the 22% decline in transaction revenue and weaker U.S. and European issuance.
- Underlying cash generation after separating the unusually large prior-year legal settlement payments from operating trends.
- Debt and interest-cost trends, cash availability by location, and continued compliance with the credit-facility covenant.
- Potential financial exposure and developments in ratings-related litigation, regulatory matters and tax audits.