McGraw Hill Financial, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2014. McGraw Hill Financial, now known as S&P Global, reported four segments: S&P Ratings, S&P Capital IQ, S&P Dow Jones Indices, and Commodities & Commercial Markets. The interim financial statements were reviewed by Ernst & Young, not audited.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $1,236 million | $1,181 million | +5% |
| Operating profit | $430 million | $278 million | +55% |
| Operating margin | 35% | 24% | +11 percentage points |
| Continuing-operations income | $275 million | $174 million | +58% |
| Diluted EPS from continuing operations | $0.89 | $0.54 | +66% |
| Net income attributable to common shareholders | $248 million | $735 million | −66% |
Operating profit improvement primarily reflects the prior-year quarter’s $44 million of McGraw-Hill Education separation and cost-reduction expenses and approximately $77 million of pre-tax legal settlements. Excluding those prior-year items, selling and general expenses declined $11 million, or 3%. Net income comparison is distorted by the 2013 after-tax gain of $612 million on the sale of McGraw-Hill Education, classified as discontinued operations.
Revenue growth was led by subscription/non-transaction revenue, up 7% to $775 million; non-subscription/transaction revenue was essentially flat at $461 million. Domestic revenue rose 3% and international revenue 7%.
| Segment | Revenue change | Operating profit change |
|---|---|---|
| S&P Ratings | +1% | −4% |
| S&P Capital IQ | +4% | +6% |
| S&P Dow Jones Indices | +18% | +43% |
| Commodities & Commercial Markets | +6% | +27% |
S&P Ratings revenue growth in non-transaction activity offset weaker issuance-related revenue; costs pressured segment profit. Indices benefited from higher ETF assets and derivatives volumes, as well as a revenue-recognition refinement for certain ETF licenses. Management said approximately half of the segment’s revenue increase reflected that refinement. C&C growth was driven mainly by Platts and J.D. Power.
Cash flow, liquidity and capital
- Cash and equivalents were $1.531 billion at quarter-end, down $11 million from year-end; $962 million was held abroad.
- Cash from continuing operating activities was $120 million, versus cash used of $47 million a year earlier. Management attributed the improvement chiefly to a tax refund, timing of estimated tax payments, and improved receivable collections.
- Capital expenditures were $20 million. Company-defined free cash flow, a non-GAAP measure after capital expenditures and payments to noncontrolling interests, was $85 million versus negative $86 million.
- Long-term debt was $799 million, unchanged from year-end. No commercial paper was outstanding. The company had a $1.0 billion credit facility, available through June 2017, and reported compliance with its debt-to-cash-flow covenant.
- Current assets were $2.864 billion and current liabilities $2.254 billion. The company stated cash, operating cash flow, and credit availability were expected to meet operating and recurring cash needs for the foreseeable future.
- Share repurchases used $164 million of cash in the quarter; 47.8 million shares remained under the 50 million-share authorization. The quarterly dividend was increased from $0.28 to $0.30 per share.
Changes, outlook and risks
Management identified growth and performance as 2014 strategic priorities, including product development, global expansion, technology and process improvements, and customer engagement. The filing provides no specific quantitative revenue, earnings, or cash-flow guidance. The company was evaluating strategic alternatives for McGraw Hill Construction to complete its portfolio rationalization.
Management cited market issuance levels, global economic and regulatory conditions, competition, foreign exchange, litigation and investigations, and demand in debt, energy, automotive, and construction markets as risks that could affect results. It said pending legal matters were not expected, based on current knowledge, to have a material adverse effect, while acknowledging outcomes and potential losses could not be predicted with confidence. Unrecognized tax benefits were $88 million; the company said these could significantly decrease over the next twelve months, but audit resolution could materially affect results or cash flows.
Other notable items: the company acquired Citigroup’s Broad Market Indices intellectual property in March; the acquisition was not material. It expected approximately $18 million of additional required pension contributions during the remainder of 2014. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of continuing revenue and profit growth is recurring, given the prior-year legal and separation costs and the ETF revenue-recognition refinement?
- Whether debt issuance trends, particularly U.S. high-yield and structured finance, improve or further weigh on S&P Ratings transaction revenue.
- How the June 2014 expiration of a commodities-index licensing arrangement affects S&P Dow Jones Indices revenue in the second half of the year.
- Developments in legal proceedings, tax audits and the possible reduction in unrecognized tax benefits.
- Progress and potential financial impact of the strategic review of McGraw Hill Construction and ongoing share repurchases.