McGraw Hill Financial, Inc. — Form 10-Q for Q2 2013
Reporting period: Quarter and six months ended June 30, 2013. The filing is for McGraw Hill Financial, the company identified in the request as S&P Global. The interim statements were reviewed by the independent accountant, not audited.
Business context and performance
The company provided content, analytics, ratings and indices through S&P Ratings, S&P Capital IQ, S&P Dow Jones Indices and Commodities & Commercial Markets (C&C). McGraw-Hill Education (MHE) was sold on March 22, 2013 and is reported as discontinued operations.
| Metric ($ millions, except per-share data) | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | 1,250 | 1,072 | 2,431 | 2,108 |
| Operating profit | 436 | 308 | 714 | 590 |
| Operating margin | 35% | 29% | 29% | 28% |
| Income from continuing operations | 273 | 180 | 447 | 343 |
| Diluted EPS from continuing operations | $0.90 | $0.62 | $1.43 | $1.18 |
| Net income attributable to McGraw Hill Financial | 254 | 216 | 989 | 339 |
Q2 revenue rose 17%, operating profit 42%, and continuing-operations diluted EPS 46% year over year. First-half increases were 15%, 21%, and 22%, respectively. First-half attributable net income includes a $612 million after-tax gain on the MHE sale; it is not a measure of recurring operating performance.
Segments and drivers
- S&P Ratings: Q2 revenue increased 24% and operating profit 34%, mainly on strong corporate bond issuance, bank loan ratings and structured finance. Management noted issuance may be interrupted as markets respond to potential interest-rate increases; second-half growth comparisons would also face strong prior-year issuance.
- S&P Capital IQ: Revenue grew 3% in Q2, but operating profit declined 6%, reflecting acquisition-related, staffing, exchange-fee, technology and content costs.
- S&P Dow Jones Indices: Revenue increased 39% and operating profit 92%, primarily reflecting the 2012 joint venture. ETF assets under management were $546 billion, up 34% year over year.
- C&C: Revenue increased 8% and operating profit 16%, driven mainly by Platts; commercial-market results were mixed, including weakness at McGraw-Hill Construction. The Paris Air Show supported Aviation Week advertising.
Cash flow, debt and liquidity
- First-half cash from continuing operating activities was $226 million, compared with $219 million. Capital expenditures were $43 million. Company-defined free cash flow, a non-GAAP measure that also deducts dividends and other payments to noncontrolling interests, was $145 million versus $177 million; management cited tax-payment timing and legal settlements as factors.
- Continuing investing activities used $43 million; continuing financing activities used $1.044 billion, including repayment of $457 million of short-term debt and a $500 million share repurchase. Shareholder dividends paid were $156 million.
- Cash and equivalents were $1.900 billion at June 30, including $1.001 billion held abroad. Long-term debt was $799 million; no commercial paper was outstanding. Cash increased by $1.140 billion from year-end, substantially reflecting discontinued-operation cash flows, including sale proceeds.
- A new $1.0 billion four-year credit facility runs to June 2017 and supports a $1.0 billion commercial-paper program. Its financial covenant caps indebtedness-to-cash-flow at 3.25 to 1; the company reported it had never exceeded the limit.
Outlook, risks and unusual items
- No quantified company-wide earnings or revenue guidance is provided in the filing. Management said Growth and Value Plan spending should be minimal going forward after $54 million in first-half 2013 costs; the plan was described as completed with the MHE sale.
- The company recorded approximately $77 million of pretax expense for subprime litigation settlements in the first half; the cases were dismissed under the settlements. Management said pending legal matters were not expected, based on current knowledge, to materially adversely affect financial position, results or cash flows, while cautioning that outcomes and potential losses could not be predicted confidently.
- The court denied the company’s motion to dismiss the DOJ lawsuit on July 16, 2013. State attorneys-general cases were consolidated for pretrial proceedings, with remand arguments scheduled for October 2013. The European Commission inspected Platts’ London office in May concerning potential anticompetitive conduct; the filing said no allegations had been made against Platts at that time.
- Platts began voluntary alignment with IOSCO oil price reporting principles. Management did not expect a significant negative effect on ongoing operations. Broader risks include market conditions and issuance, regulation, litigation, foreign exchange, interest rates and demand in served industries.
- After quarter-end, the company announced an agreement to sell Aviation Week, subject to regulatory approval and customary closing conditions. The company also made a voluntary offer to acquire up to an additional 22.23% of CRISIL, which could raise its stake from 52.77% to 75% if fully accepted.
- Minority interests in S&P Dow Jones Indices include redemption rights; the balance-sheet carrying value of redeemable noncontrolling interest was $810 million. After December 31, 2017, specified minority holders can require the company to purchase at least 20% of their interest.
Important facts for investors to verify
- Separate recurring continuing-operations performance from the MHE sale gain and other discontinued-operation results.
- Assess the sensitivity of S&P Ratings transaction revenue to debt issuance, interest rates and second-half comparisons.
- Review the status, possible financial exposure and subsequent developments in the DOJ, state and other legal matters, including the $77 million settlement charge.
- Reconcile cash generation with the $500 million repurchase, debt repayment and management’s non-GAAP free-cash-flow definition; consider the location and potential tax cost of cash held abroad.
- Monitor the Aviation Week sale, CRISIL offer and S&P Dow Jones Indices minority-holder redemption provisions.