S&P Global Inc. (then McGraw Hill Financial, Inc.) — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing, not a standalone fourth-quarter report; the filing also provides unaudited Q4 results. The company operated four segments: S&P Ratings, S&P Capital IQ, S&P Dow Jones Indices, and Commodities & Commercial (Platts and J.D. Power).
Key financial metrics
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $5.051 billion | $4.702 billion |
| Operating profit | $113 million | $1.358 billion |
| Operating margin | 2% | 29% |
| Income (loss) from continuing operations | $(191) million | $874 million |
| Net income (loss) attributable to McGraw Hill Financial | $(115) million | $1.376 billion |
| Diluted EPS from continuing operations | $(1.08) | $2.80 |
| Cash from continuing operating activities | $1.209 billion | $782 million |
| Free cash flow (non-GAAP) | $1.033 billion | $590 million |
Revenue rose 7%; subscription/non-transaction revenue grew 7% and non-subscription/transaction revenue 8%. Domestic revenue increased 7% and international revenue 8%. The reported earnings collapse chiefly reflects $1.6 billion of legal and regulatory settlement charges and $86 million of restructuring charges. The effective tax rate on continuing operations was 453.7%, primarily reflecting the expected tax treatment of the legal settlements.
Fourth quarter: Revenue was $1.290 billion; operating loss was $1.148 billion; loss from continuing operations was $984 million; and net loss attributable to the company was $846 million, or $(3.11) diluted EPS. Discontinued operations contributed $163 million of income in the quarter.
Balance sheet and liquidity at December 31, 2014: Cash and equivalents were $2.497 billion, total debt was $799 million, total assets were $6.771 billion, and equity was $539 million. Working capital was negative $1 million, with current liabilities including $1.609 billion of accrued legal and regulatory settlements. The company had no commercial paper outstanding and access to a $1.0 billion revolving credit facility, which expires June 2017. Management said cash, operating cash flow, and facility availability should cover anticipated 2015 needs. About 40% of cash was held abroad; repatriation for U.S. use could incur taxes.
Material changes and segment performance
- S&P Ratings: Revenue increased 8% to $2.455 billion, but the segment recorded an operating loss of $583 million, versus $882 million profit in 2013, primarily because of legal and regulatory settlements. Corporate and financial-services bond ratings, bank-loan ratings, and annual fees grew; structured-finance revenue declined.
- S&P Capital IQ: Revenue rose 6% to $1.237 billion and operating profit rose 21% to $228 million, supported by higher contract values and customer growth in Desktop, RatingsXpress, and RatingsDirect.
- S&P Dow Jones Indices: Revenue rose 12% to $552 million and operating profit rose 30% to $347 million. ETF and mutual-fund assets under management increased; ETF AUM rose 25% to $832 billion.
- Commodities & Commercial: Revenue grew 6% to $893 million and operating profit 3% to $290 million, led by Platts content and J.D. Power auto consulting. McGraw Hill Construction was sold in November 2014 for $320 million cash and reported as discontinued operations; the after-tax gain was $160 million.
Cash increased by $955 million during the year. Continuing operating cash flow benefited from a tax refund, tax-payment timing, and improved collections, partly offset by higher incentive payments. Financing cash outflow fell to $462 million, including $362 million of share repurchases and $326 million of shareholder dividends. The company repurchased 4.6 million shares during 2014; 45.6 million shares remained authorized under its repurchase program.
Outlook, risks, contingencies, and unusual items
- Management’s stated priorities were growth through customer focus and innovation, and improved operating performance, productivity, risk management, and compliance. The filing gives segment-level 2015 expectations rather than a consolidated earnings forecast: ratings activity was expected to grow but more slowly; structured-finance issuance was expected to recover further; ETF growth was expected to support index assets; and J.D. Power projected 3% growth in global and U.S. light-vehicle sales.
- Management expected to pay the accrued legal and regulatory settlement charges in 2015. A February 2015 agreement, after the fiscal year-end, provided for $687.5 million to the U.S. Department of Justice and $687.5 million to states and the District of Columbia; a separate CalPERS settlement was $125 million. The filing also describes SEC and state settlements totaling $77 million and a one-year restriction on new U.S. conduit/fusion CMBS ratings. Further private and public litigation remained, with additional potential payments not reasonably estimable.
- Other notable exposures include evolving regulation of ratings and benchmarks, market-sensitive issuance and trading volumes, volatility and lower commodity prices, competition, customer concentration in index products, cybersecurity and service disruptions, and possible liability claims arising from use of company products.
- Additional items to note: the company sold its data center for net proceeds of $58 million and its aircraft to the board chairman for $20 million; the aircraft sale followed a $6 million impairment. It recorded $86 million of restructuring charges associated with plans affecting about 590 positions. Auditors gave unqualified opinions on the financial statements and internal controls; management reported effective controls and no material weaknesses.
Important facts for investors to verify
- Reconcile the $1.6 billion legal and regulatory charge and $1.609 billion year-end accrual with the specific settlements, payment timing, and any remaining litigation exposure.
- Assess normalized earnings and margins excluding settlement and restructuring charges, and distinguish continuing operations from discontinued-operation sale gains.
- Review cash conversion and the non-GAAP free-cash-flow calculation, including its deductions for capital expenditures and payments to noncontrolling interests.
- Monitor liquidity, the negative working-capital position, debt maturities, overseas cash repatriation costs, and the $810 million redeemable noncontrolling interest in S&P Dow Jones Indices LLC.
- Check whether segment growth and the stated 2015 market assumptions materialized, particularly ratings issuance, benchmark regulation, ETF assets, and Platts exposure to commodity-market conditions.