Business context and reporting period
McGraw Hill Financial, Inc. (the company identified in this 2013 filing; now known as S&P Global) reported unaudited results for the quarter and nine months ended September 30, 2013. Its four reporting segments were S&P Ratings, S&P Capital IQ, S&P Dow Jones Indices, and Commodities & Commercial Markets. McGraw-Hill Education (MHE) was sold on March 22, 2013, and is reported as a discontinued operation.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1.194 billion | $1.116 billion | $3.625 billion | $3.224 billion |
| Operating profit | $407 million | $275 million | $1.121 billion | $865 million |
| Operating margin | 34% | 25% | 31% | 27% |
| Continuing-operations income attributable to common shareholders | $235 million | $151 million | $638 million | $486 million |
| Diluted EPS from continuing operations | $0.84 | $0.53 | $2.27 | $1.71 |
| Net income attributable to the company | $215 million | $314 million | $1.204 billion | $653 million |
| Cash from continuing operations | Not presented quarterly | $499 million | $598 million | |
| Free cash flow (company-defined, non-GAAP) | Not presented quarterly | $388 million | $520 million |
At September 30, cash and equivalents were $1.577 billion; total debt was $799 million, all long-term, with no commercial paper outstanding. Cash included $992 million held abroad. Current assets were $2.828 billion and current liabilities were $2.359 billion. The quarterly dividend declared increased to $0.28 per share from $0.255.
Material changes versus the prior comparable period
- Q3 revenue rose 7% and nine-month revenue rose 12%. Growth reflected ratings activity, stronger index-related revenue, and demand for Platts content. International revenue increased 10% for the quarter and 14% year to date.
- Operating profit increased 48% in Q3 and 30% year to date; diluted continuing-operations EPS rose 58% and 33%, respectively. Lower restructuring and corporate costs helped the quarterly comparison.
- Nine-month cash from continuing operations fell 17%, to $499 million, and free cash flow fell to $388 million from $520 million. Management cited tax-payment timing, legal settlements, and higher incentive-compensation payments.
- Reported net income includes significant discontinued-operation effects: the nine-month 2013 period included a $592 million after-tax gain on the MHE sale; Q3 included a $20 million discontinued-operation loss, mainly from a working-capital adjustment. Therefore, reported net income comparisons differ materially from continuing-operations trends.
Guidance, outlook, commentary, risks and unusual items
- No specific full-year revenue, earnings, or cash-flow guidance is provided. Management said cash on hand, operating cash flow, and credit-facility availability should meet operating and recurring cash needs into the foreseeable future. Growth and Value Plan spending was expected to be minimal going forward.
- MHE was sold for $2.4 billion cash. The company used part of the proceeds to repay short-term debt and repurchase shares, and expected to use some for selective acquisitions and investments. It repaid $457 million of short-term debt and spent $850 million on share repurchases during the first nine months; the $500 million accelerated repurchase delivered 9.3 million shares.
- Other Q3 items included $24 million of net pre-tax gains on dispositions, including an $11 million Aviation Week gain and a $16 million CRISIL investment gain (partly offset by other items). Nine-month selling and general expenses included approximately $77 million of subprime litigation settlements.
- Legal exposures include the DOJ case, for which a motion to dismiss was denied, and state attorneys-general actions consolidated for pretrial proceedings; the court heard remand motions October 4, 2013. The company said it would vigorously defend the matters, but could not predict outcomes or potential losses. It believed pending matters were not expected to have a material adverse effect based on then-current knowledge.
- The European Commission inspected Platts’ London offices in May in connection with its price-assessment process; the filing said no allegations had been made against Platts. Benchmark and oil-price reporting principles were being implemented voluntarily; management did not expect significant negative operating effects.
- Key business sensitivities include debt issuance and capital-market conditions, interest rates, regulation, foreign exchange, litigation, competition, energy-market volatility, and conditions in automotive and construction markets. Management reported no significant change in market-risk exposure and no material effect from a hypothetical 10% adverse currency movement.
- The company disclosed that separation into two less-diversified businesses after the MHE sale could increase volatility in results, cash flows, working capital, and financing needs. Its interim financial statements received an auditor review, not a full audit.
Important facts for investors to verify
- How much of earnings growth reflects sustainable continuing operations versus the MHE sale, disposition gains, lower restructuring costs, and other unusual items.
- Whether ratings and index revenue growth can persist if debt issuance, ETF assets, or derivative volumes weaken.
- Cash conversion and free-cash-flow recovery, including the timing of tax payments, legal payments, and incentive compensation.
- Current status, expected costs, and potential outcomes of the DOJ, state attorneys-general, and other legal or regulatory matters; the filing does not provide a clear estimate of possible losses.
- Use of remaining MHE proceeds, ongoing repurchases, and the company’s liquidity and debt position, including cash held abroad and repatriation tax considerations.