S&P Global Inc. (then The McGraw-Hill Companies, Inc.) — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; filed July 28, 2011. The company reported four segments: Standard & Poor’s (S&P), McGraw-Hill Financial, McGraw-Hill Education (MHE), and Information & Media (I&M). Interim results are unaudited and subject to seasonal effects, particularly in education.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $1,580.8 million | $1,474.1 million | $2,862.7 million | $2,664.4 million |
| Operating income | $358.8 million | $326.3 million | $573.2 million | $516.5 million |
| Operating margin | 22.7% | 22.1% | 20.0% | 19.4% |
| Net income attributable to the company | $211.1 million | $191.1 million | $331.1 million | $294.4 million |
| Diluted EPS | $0.68 | $0.61 | $1.07 | $0.94 |
- Q2 revenue grew 7.2%, operating income 10.0%, and diluted EPS 11.9% year over year. For the first half, revenue rose 7.4%, operating income 11.0%, and diluted EPS 14.4%.
- Q2 service revenue increased 13.9%, while product revenue declined 4.0%. For the first half, service revenue rose 12.9% and product revenue fell 4.1%.
- Six-month cash provided by operations was $338.4 million versus $359.5 million. Capital expenditures were $44.6 million and prepublication investment was $60.2 million. Company-defined free cash flow, after those investments and dividends, was $72.5 million versus $98.1 million.
- Cash and equivalents were $1,300.2 million at June 30, down from $1,525.6 million at year-end; current assets were $3,126.4 million and current liabilities $2,523.2 million.
- Debt was approximately $1,198.0 million, principally senior notes, broadly unchanged from year-end. The company had an undrawn $1.2 billion credit facility, available through July 2013; it reported compliance with its debt-to-cash-flow covenant.
- The declared quarterly dividend increased to $0.25 per share from $0.235. Six-month share repurchases were $300.3 million, compared with $186.9 million in the prior-year period.
Segment results and material changes
- S&P: Q2 revenue rose 18.6% to $480.3 million and operating income rose 17.3% to $212.7 million. First-half revenue increased 14.5% and operating income 8.9%. Growth reflected stronger corporate high-yield issuance, bank-loan ratings, and non-transaction revenue; higher compliance, regulatory, and personnel costs weighed on results.
- McGraw-Hill Financial: Q2 revenue rose 13.5% to $333.4 million and operating income rose 17.3% to $97.8 million. First-half revenue increased 14.8% and operating income 25.6%, supported by subscription growth, ETF-related activity, Capital IQ, Global Credit Portal, Global Data Solutions, and TheMarkets.com.
- MHE: Q2 revenue declined 5.0% to $536.6 million and operating income fell 18.3% to $42.2 million. First-half revenue fell 4.9%, and the operating loss widened to $33.3 million from $10.2 million. Adoption-state weakness and technology and digital-development costs were key factors.
- I&M: Q2 revenue increased 9.7% to $246.0 million and operating income increased 5.9% to $50.3 million. First-half revenue rose 10.0% and operating income 16.4%, led by Platts and automotive-related research and consulting; construction remained weak.
Outlook, management commentary, and notable items
- Management expected 2011 prepublication investment to be below $200 million, compared with $150.8 million in 2010; capital expenditures of approximately $150 million; full-year free cash flow above $700 million; and interest expense broadly flat versus 2010. The effective tax rate was 36.4% for the first half and was not expected to vary significantly absent specified factors.
- Management’s strategy included digital product development, international growth, selective acquisitions, technology investment, and cost containment. It anticipated continued growth in financial information and ETF offerings, while investment research demand was expected to decline. Education results remain seasonal, and adoption and school-budget timing are significant factors.
- The company recorded a $13.2 million pretax gain from selling its LinkedIn investment. First-half acquisitions, including Bookette and Bentek Energy, totaled approximately $126 million. Platts’ acquisition of Steel Business Briefing Group closed July 1, after quarter-end.
- The company retained Morgan Stanley to explore a possible sale of its Broadcasting Group. The process was preliminary; timing, terms, completion, and proceeds were uncertain, and the business was not classified as held for sale at June 30.
- A new authorization permitted repurchases of up to 50 million shares; none were made under it in Q2. Separately, the company repurchased about 2.5 million shares from the McGraw trust and family foundation for $97 million at a stated 1.375% discount to the reference market price.
- S&P faced numerous rating-related lawsuits and government inquiries. The company said it would vigorously defend the matters and did not expect pending matters, based on current knowledge, to have a material adverse effect, while noting that outcomes and potential losses could not be predicted confidently. In the Parmalat matter, the court dismissed the main damages claim but ordered S&P to pay about €1.1 million plus interest and limited costs.
- The independent accountant performed an interim review, not an audit, and reported no material modifications needed for GAAP conformity. Management concluded disclosure controls were effective; it reported no material change in internal controls during the quarter.
Investor verification priorities
- Assess whether S&P’s transaction-driven growth is sustainable and how regulatory and compliance costs, rating litigation, and investigations may affect earnings.
- Track MHE adoption orders, education-market funding and seasonality, and whether digital investment can improve the segment’s operating performance.
- Reconcile reported operating cash flow and the company-defined free-cash-flow measure, including working-capital timing, investment spending, and dividends.
- Review capital allocation: the new 50-million-share repurchase authorization, the related-party repurchase terms, dividend commitments, and acquisition spending.
- Monitor the possible Broadcasting Group divestiture and the post-quarter Steel Business Briefing Group acquisition, including their eventual terms and financial effects.