Filing summary: The McGraw-Hill Companies, Inc. (now S&P Global Inc.)
Reporting period: First quarter ended March 31, 2010; comparison is with Q1 2009 unless stated otherwise. The filing is under the historical McGraw-Hill Companies name. Financial statements are unaudited interim statements reviewed by the independent accountant, not audited statements. The company cautioned that results are seasonal and Q1 is not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Revenue | $1,190.4 million | $1,148.2 million | +3.7% |
| Operating income | $190.3 million | $124.3 million | +53.0% |
| Operating margin | 16.0% | 10.8% | +5.2 percentage points |
| Net income attributable to company | $103.3 million | $63.0 million | +63.9% |
| Diluted EPS | $0.33 | $0.20 | +65.0% |
| Cash provided by operating activities | $102.8 million | $67.1 million | +53.2% |
Product revenue increased 7.4% to $310.8 million; service revenue rose 2.4% to $879.6 million. Total expenses declined 2.3% to $1,000.1 million. The effective tax rate was 36.4% in both periods. The company declared a quarterly dividend of $0.235 per share, up from $0.225.
Segment results
- McGraw-Hill Education: Revenue rose 1.5% to $317.2 million; operating loss narrowed to $61.8 million from $76.6 million. Higher Education, Professional and International revenue grew 8.3%, while School Education revenue fell 9.0%.
- Financial Services: Revenue increased 9.3% to $667.0 million and operating profit rose 12.3% to $260.0 million. Growth reflected high-yield bond issuance, ratings information products and Capital IQ; investment research revenue declined.
- Information & Media: Revenue fell 8.5% to $206.2 million, primarily following the December 2009 sale of BusinessWeek. Operating profit increased to $27.8 million from $2.8 million, with cost reductions and commodities-product growth contributing.
Segment operating profit totaled $226.1 million, before $35.8 million of general corporate expense and $22.0 million of net interest expense; this differs from consolidated operating income of $190.3 million.
Cash, liquidity and debt
- Cash and equivalents were $1.209 billion at March 31, 2010, essentially unchanged from year-end 2009. Current assets were $2.775 billion and current liabilities $2.206 billion.
- Operating cash flow was $102.8 million; investing activities used $37.0 million and financing activities used $50.8 million. Cash dividends paid were $74.1 million. Cash-flow patterns are seasonal, and management noted cash flow is typically negative in the first half of the year.
- Total debt was $1.198 billion, nearly all long-term senior notes; there was no commercial paper outstanding at March 31, 2010. The company had a $1.2 billion commercial paper program backed by a $1.2 billion revolving credit facility. The facility’s financial covenant limits indebtedness to cash flow to 4:1; the company reported it had never exceeded the limit.
- Management said available liquidity was expected to meet anticipated short-term operating requirements. It also stated that ECN and promissory-note financing were unavailable in the then-current credit environment and were not planned for near-term use.
Material changes, outlook and risks
- Improved operating results reflected Financial Services growth and lower expenses, including productivity and cost-saving measures. Foreign exchange increased revenue by $17.9 million overall but reduced operating profit by $3.5 million.
- Management described the 2010 education adoption outlook as positive: the estimated available state new-adoption market was $875 million to $925 million, versus approximately $500 million in 2009. State funding levels remained uncertain. Expected prepublication investment for 2010 was $225 million to $235 million, compared with $177 million in 2009.
- Financial Services management expected corporate issuance to grow in 2010, particularly refinancing, while noting that regulatory changes could slow securitization activity and that recovery in mortgage-backed markets depended on economic and capital-market stability.
- Information & Media planned investment in digital capabilities and selected markets. Business conditions, advertising, commodities volatility, construction and automotive markets were among the factors affecting its outlook.
- Unusual item: $35.4 million of transfer taxes were incurred in Q1 from a European legal-entity reorganization. Management expected the amount to be offset in subsequent reporting periods and said it would not affect the effective tax rate.
- Restructuring reserves at March 31 included $7.7 million for the 2009 plan, $6.6 million for the 2008 plan and $6.2 million for the 2006 plan. No acquisitions or dispositions occurred in Q1 2010. The filing reported appeals of dismissals in two class actions and the closure of a derivative action after dismissal.
- Management identified economic, financial-market, regulatory, currency, education-funding, advertising and industry-demand uncertainties as risks to forward-looking statements. It reported no material changes to previously disclosed risk factors and no significant change in market-risk exposure.
Important facts for investors to verify
- Whether improved Financial Services transaction revenue and high-yield issuance persist, given the segment’s exposure to credit-market conditions.
- Education adoption-market size, state funding and the company’s ability to realize the anticipated 2010 adoption opportunities and planned prepublication investment.
- The durability of cost reductions and Information & Media profit improvement after the BusinessWeek divestiture.
- Cash conversion across the full year, seasonal working-capital needs, and the availability and terms of backup financing facilities.
- The timing and accounting treatment of the $35.4 million transfer-tax offset, remaining restructuring costs, and developments in the disclosed legal matters.