Business context and reporting period
The McGraw-Hill Companies, Inc. (the historical issuer identified in this filing; the request labels the company S&P Global Inc.) filed this unaudited Form 10-Q for the three months ended March 31, 2012. Its four reportable segments were S&P Ratings, S&P Capital IQ / S&P Indices, Commodities & Commercial (C&C), and McGraw-Hill Education (MHE). Results are seasonal and the company cautioned that first-quarter performance is not necessarily indicative of full-year results. The auditor conducted an interim review, not an audit.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Revenue | $1,331 million | $1,261 million; up 6% |
| Operating income and margin | $221 million; 17% | $216 million; 17% |
| Net income attributable to the company | $123 million | $120 million; up 3% |
| Diluted EPS | $0.43 | $0.39; up 12% |
| Cash from operating activities | $(25) million | $49 million |
| Free cash flow (company-defined, non-GAAP) | $(118) million | $(74) million |
| Cash and equivalents at quarter-end | $908 million | $1,270 million at March 31, 2011 |
| Total debt at quarter-end | $1,198 million | Unchanged from March 31, 2011 |
At March 31, 2012, current assets were $2,578 million and current liabilities were $2,858 million. Debt comprised $400 million of short-term debt and $798 million of long-term debt. The company reported $1.2 billion of unused commercial-paper capacity supported by a $1.2 billion credit facility, which was not drawn; its sole financial covenant required indebtedness to cash flow of no more than 4:1 and had never been exceeded. Cash included $708 million held abroad, which may incur U.S. tax if repatriated.
Material changes and segment performance
- Service revenue rose 8% to $1,037 million, while product revenue declined 1% to $294 million. Expenses rose 6%, matching revenue growth; selling and general expenses increased 8%, including separation-plan costs.
- S&P Ratings revenue increased 5% to $466 million, but operating income fell 2% to $186 million and margin declined to 40% from 43%. Record U.S. high-yield issuance and stronger public finance helped revenue; structured finance weakness, higher personnel costs, and legal expenses weighed on results.
- S&P Capital IQ / S&P Indices revenue grew 9% to $353 million and operating income rose 11% to $107 million. Growth came from subscription products, data solutions, and ETF-linked index products.
- C&C revenue increased 13% to $233 million and operating income rose 64% to $64 million, led by Platts and syndicated studies and consulting. Construction-market weakness partly offset growth.
- MHE revenue declined 2% to $296 million, while operating loss narrowed to $65 million from $75 million. School Education revenue weakness was partly offset by cost reductions and growth in digital offerings.
- General corporate expense increased to $71 million from $34 million, chiefly reflecting $33 million of Growth and Value Plan costs. Total plan costs incurred through Q1 were approximately $43 million.
Outlook, risks, and unusual items
- The company expected to separate into McGraw-Hill Financial and McGraw-Hill Education through a tax-free education spin-off by year-end 2012, subject to regulatory approvals and final Board approval. It received a favorable IRS tax ruling on April 23, 2012, after quarter-end. Separation execution, timing, disruption, and the ability of the businesses to operate independently were identified as risks.
- A joint venture with CME Group/Dow Jones for the index businesses was expected to close by the end of Q2 2012, subject to approvals and customary conditions. The company expected to own 73%; CME Group/CGIS would own 27%. The agreement includes a provision allowing CME Group to require a purchase of some or all of its interest under specified conditions.
- Management described a subdued near-term corporate bond issuance outlook pending more stable markets, with potential recovery thereafter; structured finance was expected to increase modestly. The company projected the 2012 U.S. school education market could decline approximately 10% from 2011.
- Operating cash flow turned negative, primarily due to receivables growth and slower collections, a pension contribution, and higher tax payments. The company cited first-half cash-flow seasonality, particularly from education publishing.
- Other risks include credit-market and regulatory conditions, legal and government reviews affecting S&P Ratings, education funding and adoption trends, construction and automotive demand, energy-market volatility, foreign exchange, and execution of strategic plans.
- Pending legal matters were described as difficult to predict; management believed currently pending actions, proceedings, and investigations should not materially adversely affect financial position, results, or cash flows. A court dismissed all claims in the Reese matter on April 2, 2012, subject to possible appeal; an appellate court denied reconsideration in Gearren and Sullivan.
- The U.S. defined-benefit pension plan was frozen effective April 1, 2012. The company contributed $22 million to retirement plans in Q1 and expected approximately $23 million of additional required contributions during the rest of 2012.
Most important facts for investors to verify
- Whether the planned education spin-off and S&P/Dow Jones Indices joint venture closed as expected, and their final terms, approvals, and financial effects.
- Whether first-quarter negative operating cash flow and free cash flow reflect seasonality and working-capital timing or persist; review receivables collections and cash held overseas.
- The refinancing or repayment of the $400 million note due November 2012 and ongoing access to commercial-paper and credit-facility funding.
- Whether S&P Ratings legal and regulatory costs, issuance trends, and structured-finance demand materially change segment profitability.
- Progress against MHE market expectations and the company’s projected 2012 school-market decline, alongside digital-product performance.