McGraw Hill Financial, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. The company provided ratings, indices, analytics, data and research through four segments: S&P Ratings, S&P Capital IQ and SNL, S&P Dow Jones Indices, and Commodities & Commercial Markets. The interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $1.324 billion | $1.263 billion | $3.938 billion | $3.761 billion |
| Operating profit | $410 million | $366 million | $1.493 billion | $1.261 billion |
| Operating margin | 31% | 29% | 38% | 34% |
| Net income attributable to McGraw Hill Financial | $252 million | $190 million | $909 million | $731 million |
| Diluted continuing-operations EPS | $0.92 | $0.68 | $3.30 | $2.59 |
Revenue increased 5% in both comparisons. Operating profit rose 12% for the quarter and 18% year to date; diluted continuing-operations EPS increased 35% and 27%, respectively. Q3 revenue growth reflected Capital IQ and SNL, Commodities & Commercial, and Indices, partly offset by lower Ratings revenue. Year-to-date revenue increased across all segments.
Segment revenue and operating profit for the nine months were: S&P Ratings, $1.851 billion and $846 million; Capital IQ and SNL, $1.000 billion and $178 million; S&P Dow Jones Indices, $446 million and $297 million; and Commodities & Commercial, $707 million and $265 million. Reported segment results include specified legal, insurance-recovery, restructuring, and acquisition items.
Cash flow, debt and liquidity
- Continuing-operations operating cash flow was negative $356 million for the first nine months, versus positive $820 million a year earlier. The company attributed the decline mainly to payment of legal and regulatory settlements.
- Investing cash outflow was $2.456 billion, primarily reflecting acquisitions, including SNL. Financing provided $1.927 billion, principally from senior-note issuance.
- Cash and cash equivalents were $1.441 billion at September 30, down from $2.497 billion at year-end 2014. The company reported that approximately 90% of cash was held abroad and that U.S. repatriation could entail tax.
- Long-term debt increased to $3.489 billion from $799 million at year-end 2014. The company issued $700 million of 4.0% notes due 2025 and $2.0 billion of notes due 2018, 2020 and 2026; proceeds were used for debt repayment and to finance SNL.
- A $1.2 billion revolving credit facility runs to June 2020. No commercial paper or facility borrowings were outstanding at September 30. The company said its 4-to-1 indebtedness-to-cash-flow covenant had never been exceeded and expected cash, operating flows and facility availability to cover foreseeable operating and recurring needs.
- Reported free cash flow, a non-GAAP measure, was negative $497 million versus positive $737 million. Excluding disclosed settlement-related payments, insurance recoveries and tax benefit, the company presented free cash flow of $776 million.
Material changes and notable items
- Acquired SNL Financial on September 1 for approximately $2.225 billion in cash. Preliminary purchase accounting included $1.558 billion of goodwill and $772 million of intangible assets; allocation remained subject to final valuation. The company estimated about $53 million of annual incremental SNL amortization beginning in 2016 over each of the next five years and identified approximately $70 million of expected synergies by 2019, with no assurance they will be achieved.
- Q3 revenue excluding acquisition contribution increased 2%; foreign exchange reduced revenue by 2 percentage points. Ratings faced weaker international issuance and bank-loan ratings revenue, while U.S. corporate and public-finance issuance supported year-to-date performance.
- Effective tax rates on continuing operations fell to 25.9% for Q3 and 30.7% year to date, from 39.2% and 35.1%. Management cited audit resolutions, more income in lower-tax jurisdictions, and the prior-year effect of nondeductible regulatory charges.
- The quarterly dividend increased from $0.30 to $0.33 per share. The company repurchased 4.9 million shares for $501 million during the first nine months.
- Management was evaluating strategic options for J.D. Power; the filing gave no decision or quantified outlook. It also reported a $14.5 million settlement with Parmalat and a $11 million gain on sale of a legacy investment.
Outlook, risks and contingencies
The filing contains no quantified earnings or revenue guidance. Management’s stated priorities were growth through customer focus and innovation, and performance through productivity, risk management, compliance and talent development. Results may be affected by credit-market issuance and demand for ratings, market and foreign-exchange conditions, regulation, acquisition integration and realization of SNL benefits, and litigation.
Significant legal and regulatory matters remained unresolved, including financial-crisis ratings litigation, an Italian criminal proceeding involving S&P Ratings, and the Australian City of Swan litigation. The company said outcomes, timing and potential additional costs could not generally be estimated and could materially affect financial condition, cash flows, business or competitive position. A European Commission inspection concerning Platts’ price-assessment process was also disclosed; the company stated that no allegations had been made against Platts at that time.
Investor verification checklist
- Track SNL integration, final purchase-price allocation, amortization, and delivery of the stated synergy expectations.
- Reconcile settlement cash payments and insurance/tax benefits to operating cash flow and the company’s non-GAAP free-cash-flow presentation.
- Monitor debt levels, interest expense, liquidity and compliance with the credit-facility covenant.
- Assess the durability of segment growth, particularly Ratings issuance trends, Capital IQ and SNL margins, and Indices’ assets under management and trading volumes.
- Follow developments and potential financial exposure in ratings litigation, regulatory matters, Platts inquiries, and the strategic review of J.D. Power.