S&P Global Inc. (then The McGraw-Hill Companies, Inc.) — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. The interim financial statements are unaudited; the independent accountant performed a review, not an audit. Results are seasonal and are not necessarily indicative of full-year performance.
Business context and financial performance
The company reported three segments: McGraw-Hill Education, Financial Services (Standard & Poor’s), and Information & Media.
- Q2 revenue: $1.474 billion, up 0.6% year over year. Product revenue rose 3.7%; service revenue declined 1.1%.
- Q2 operating income: $326.3 million, versus $296.3 million. Operating margin was 22.1%, versus 20.2%. Segment operating profit, before corporate expense and interest, was $363.8 million, up 16.7%; segment margin was 24.7%, versus 21.3%.
- Q2 net income attributable to the company: $191.1 million, up 16.4%; diluted EPS was $0.61, versus $0.52.
- First-half revenue: $2.664 billion, up 2.0%. Operating income was $516.5 million, versus $420.7 million; operating margin was 19.4%, versus 16.1%. Segment operating profit rose 25.6% to $589.9 million.
- First-half net income attributable to the company: $294.4 million, up 29.6%; diluted EPS was $0.94, versus $0.73. The prior-year period included a $13.8 million pretax loss on the sale of Vista Research.
- Cash flow, first half: Operating cash flow was $359.5 million, compared with $294.1 million. Investing used $100.9 million and financing used $321.5 million; financing outflow included $186.9 million of share repurchases and $148.2 million of shareholder dividends.
Liquidity, debt, and balance sheet
- At June 30, cash and equivalents were $1.118 billion and short-term investments were $26.8 million. Current assets were $2.908 billion and current liabilities $2.360 billion.
- Total debt was $1.198 billion, essentially unchanged from year-end 2009; long-term debt was $1.198 billion, with only $22,000 classified as short-term. Cash and short-term investments exceeded reported debt by about $53 million.
- The company had a $1.2 billion commercial paper program backed by a $1.2 billion revolving credit facility. No commercial paper or revolving-credit borrowings were outstanding at June 30, 2010. The $433.3 million 364-day facility was due to terminate August 13, 2010; the $766.7 million three-year facility was due to terminate September 12, 2011.
- Management said cash and operating resources were expected to meet anticipated short-term needs. It noted that operating cash flow is typically negative in the first half because of education-business seasonality, then improves in the third and fourth quarters.
Material changes and segment trends
- Education: Q2 revenue increased 1.8% and operating profit rose to $51.6 million from $21.0 million. Higher Education growth and cost reductions outweighed declines in School Education open-territory sales and discontinued testing contracts. First-half segment revenue rose 1.7%; operating loss narrowed to $10.2 million from $55.6 million.
- Financial Services: Q2 revenue increased 1.6%, but operating profit declined 4.2% to $264.7 million, with weakness in structured finance partly offset by growth in index, ratings-information, and Capital IQ services. First-half revenue rose 5.3% and operating profit 3.3%.
- Information & Media: Q2 revenue fell 5.1%, primarily reflecting the 2009 BusinessWeek divestiture, while operating profit rose to $47.5 million from $14.4 million. First-half revenue fell 6.8%; operating profit was $75.3 million versus $17.2 million.
- Q2 and first-half results benefited from lower operating-related expenses and cost initiatives. The 2009 comparison also included restructuring charges; Q2 2009 included the Vista Research disposal loss.
Outlook, risks, and contingencies
- The filing provides no consolidated EPS or revenue guidance. Management described 2010 education adoption conditions as positive but dependent on state funding; the estimated available state new-adoption market was $825–$875 million, versus approximately $500 million in 2009. Management cautioned that budget pressures could constrain purchases.
- Management expected 2010 prepublication investment of $195–$205 million and capital expenditures of $90–$100 million, largely reflecting technology spending. It expected the effective tax rate to remain 36.4% for the remainder of 2010, absent specified changes or other factors.
- Financial Services outlook was exposed to capital-market issuance, credit spreads, liquidity, and the European sovereign-debt situation. Management anticipated possible gradual improvement in RMBS and CMBS markets if economic recovery and market stability continued; new and proposed securitization rules could raise issuer costs.
- The July 21, 2010 Dodd-Frank Act was disclosed as a subsequent development. Management anticipated added compliance costs and potentially increased litigation costs for credit-rating agencies, but did not then expect a material adverse effect; the full impact remained uncertain.
- Legal matters included an amended complaint in the Reese class action and appeals from dismissals in two other class actions. The company reported that a derivative action against the company and executives had been dismissed and closed. The filing refers investors to its commitments-and-contingencies disclosure for details.
- Other items to note: $35.4 million of transfer taxes were incurred in Q1 2010 from a European legal-entity reorganization; management said these were expected to be offset in subsequent reporting periods and would not affect the effective tax rate. The company expected about $13.9 million of additional retirement-plan contributions in the remainder of 2010.
- Management reported no material change in previously disclosed risk factors or market-risk exposure, and stated that disclosure controls were effective as of June 30, 2010.
Important facts for investors to verify
- Whether education adoption sales and state funding met management’s expectations, including the timing of deferred Texas K-12 orders.
- Whether Financial Services revenue and margins recovered amid credit-market volatility, regulatory changes, and uncertain issuance trends.
- Whether projected prepublication spending, capital expenditures, retirement contributions, and tax-rate assumptions were realized.
- The status and potential exposure of the cited legal proceedings, and the eventual financial and compliance effects of Dodd-Frank.
- The July 2010 expiry of the 364-day credit facility and subsequent renewal, extension, or replacement terms.