S&P Global Inc. (then The McGraw-Hill Companies, Inc.) — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a standalone fourth-quarter report. The issuer operated across credit ratings, financial information and indices, commodities and commercial information, and education.
Financial performance and position
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Revenue | $6.246 billion | $6.072 billion | +3% |
| Operating income | $1.422 billion | $1.413 billion | +1% |
| Operating margin | 23% | 23% | Flat |
| Income from continuing operations | $858 million | $848 million | +1% |
| Net income attributable to the company | $911 million | $828 million | +10% |
| Diluted EPS | $3.00 | $2.65 | +13% |
| Cash from operating activities | $1.344 billion | $1.458 billion | −8% |
| Free cash flow (non-GAAP) | $807 million | $881 million | −8% |
- Net income included $76 million after tax from discontinued operations, including a $74 million after-tax gain on the Broadcasting Group sale. Continuing-operations diluted EPS was $2.75.
- Cash and equivalents were $944 million at year-end, down $582 million. Cash from investing activities was an outflow of $246 million; financing activities were an outflow of $1.665 billion, largely reflecting $1.5 billion of share repurchases.
- Total debt was $1.198 billion, unchanged year over year: $400 million of 5.375% notes due in 2012 and $798 million due thereafter. A $1.2 billion revolving credit facility was undrawn at year-end and expires July 2013.
- Working capital was negative $451 million versus positive $694 million in 2010. Current liabilities included $400 million of debt classified as short term.
- Dividends were $1.00 per share for 2011; the board later approved a quarterly increase to $0.255 for 2012.
Material changes versus 2010
- S&P Ratings: Revenue rose 4% to $1.767 billion, but operating income fell 6% to $719 million; margin declined to 41% from 45%. Non-transaction revenue grew 8%, while transaction revenue fell 2% amid weaker issuance, especially in structured finance and public finance.
- S&P Capital IQ / S&P Indices: Revenue grew 14% to $1.354 billion and operating income increased 28% to $403 million. Growth reflected subscriptions, Capital IQ, TheMarkets.com, Global Credit Portal and ETF/index products.
- Commodities & Commercial: Revenue increased 10% to $896 million and operating income rose 18% to $180 million, led by Platts and consulting/research services; construction remained weak.
- McGraw-Hill Education: Revenue decreased 6% to $2.292 billion and operating income fell 12% to $320 million. School Education revenue declined 14%, primarily reflecting weaker adoption-state and open-territory sales; Higher Education, Professional and International revenue rose 1%.
- Product revenue fell 6%, while service revenue increased 8%. Operating expenses rose 4%, including increased service costs and restructuring-related expenses.
Outlook, strategy, risks and unusual items
- Management expected to separate the company into McGraw-Hill Financial and McGraw-Hill Education through a tax-free education spin-off by the end of 2012, subject to approvals, including an IRS tax ruling. The filing gives no consolidated numeric earnings guidance.
- Management described continued investment in digital products, integrated financial-data offerings, global expansion, and cost reduction. It forecast the 2012 U.S. PreK-12 market could decline about 9%; it expected a modest increase in U.S. credit issuance versus 2011, contingent on market stabilization. These are market expectations, not company guidance.
- The company recorded a $66 million pretax restructuring charge in Q4, associated primarily with facility exits and a workforce reduction of about 800 positions; it also recorded approximately $10 million of Growth and Value Plan costs. It announced a 10% planned education workforce reduction and a U.S. defined-benefit pension freeze effective April 1, 2012.
- The Broadcasting Group sale closed December 30, 2011 for approximately $216 million net proceeds. Its results were presented as discontinued operations. The company also agreed to combine its S&P Indices business with the CME/Dow Jones indices business; the planned joint venture was subject to approvals and targeted for closing by the end of Q2 2012.
- Key risks include credit-market weakness and reduced debt issuance, changing rating-agency and commodities-price reporting regulation, education funding and adoption cycles, competition and technology execution, and risks or delays in the planned separation. The filing also describes numerous legal matters, including ratings-related litigation and an SEC Wells Notice concerning a 2007 CDO rating; management stated it would defend the matters and could not reliably estimate their outcomes.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and no identified material weaknesses.
Most important facts for investors to verify
- Whether reported EPS growth is sustainable apart from the one-time Broadcasting Group disposal gain and the impact of share repurchases.
- Whether the planned separation and index joint venture closed on the expected terms and timeline, and what costs or operational effects resulted.
- Whether S&P Ratings can stabilize transaction revenue and margins amid issuance volatility, regulatory change and pending legal matters.
- Whether education sales and margins recover given adoption timing, state funding pressure and the company’s own forecast of a smaller 2012 PreK-12 market.
- How the $400 million 2012 debt maturity, negative working capital, pension funding needs and planned capital returns affect liquidity.