S&P Global Inc. (then The McGraw-Hill Companies, Inc.) — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed February 28, 2013. This is an annual report, not a standalone fourth-quarter filing. Unless noted, financial results below are for continuing operations. McGraw-Hill Education (MHE) was classified as discontinued operations and held for sale.
Business context
The continuing business comprised S&P Ratings, S&P Capital IQ, S&P Dow Jones Indices, and Commodities & Commercial. The company was executing its Growth and Value Plan, including the planned sale of MHE, cost reductions, acquisitions, and increased shareholder returns.
Key financial results
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $4.450 billion | $3.954 billion | +13% |
| Operating profit | $1.211 billion | $1.077 billion | +12% |
| Operating margin | 27% | 27% | Broadly unchanged |
| Income from continuing operations | $726 million | $626 million | +16% |
| Diluted EPS from continuing operations | $2.37 | $2.00 | +19% |
| Net income attributable to the company | $437 million | $911 million | -52% |
| Cash from continuing operating activities | $747 million | $924 million | Down $177 million |
| Free cash flow, company-defined non-GAAP | $626 million | $809 million | Down $183 million |
Continuing-operations revenue growth reflected stronger debt issuance and refinancing, growth in commodities products and Capital IQ, the S&P Dow Jones Indices joint venture, and acquisitions. Segment operating profit rose 16% to $1.517 billion; higher unallocated costs, including plan-related charges, left consolidated operating profit growth at 12%.
Segment highlights: S&P Ratings revenue rose 15% and operating profit 18%; S&P Capital IQ revenue rose 9% while operating profit fell 3%; S&P Dow Jones Indices revenue rose 20% and operating profit 12%; Commodities & Commercial revenue rose 9% and operating profit 38%.
Balance sheet, debt, and liquidity
- Cash and equivalents were $760 million at year-end, including $624 million held abroad. Management said repatriating foreign cash for U.S. use could trigger tax.
- Total debt was $1.256 billion: $457 million of commercial paper and $799 million of long-term debt. The commercial paper carried an average rate of 0.48% and an average term of 28 days; $743 million of program capacity remained.
- The $1.2 billion credit facility was scheduled to terminate July 30, 2013. Its leverage covenant was not reported as breached. The filing reports negative working capital of $1.044 billion for continuing operations.
- Total assets were $7.052 billion and total equity was $840 million; the balance sheet separately reported $810 million of redeemable noncontrolling interest.
Material changes, outlook, and unusual items
- MHE sale: A definitive agreement to sell MHE to Apollo-affiliated funds for $2.5 billion, subject to closing adjustments, was signed November 26, 2012. Consideration also included $250 million of purchaser senior unsecured notes bearing 8.5% interest; their fair value had not yet been determined. Closing was anticipated in first-quarter 2013. Proceeds were intended for short-term borrowings, selective acquisitions, and continued repurchases.
- Discontinued operations: 2012 included a $234 million after-tax loss, versus $308 million of income in 2011. MHE revenue declined 10% to $2.062 billion. Charges included a $478 million goodwill impairment and $19 million of other asset impairments, plus restructuring and sale-related costs.
- Plan costs and savings: Growth and Value Plan costs were $226 million in continuing operations and $61 million in discontinued operations for 2012; cumulative costs since the plan began were $297 million. The company reported approaching $175 million in savings by year-end 2012, exceeding its $100 million target.
- Other unusual item: A $52 million pretax gain from a vacation-policy change benefited 2012 other income. Continuing-operations free cash flow fell partly due to plan costs and a $150 million fourth-quarter pension contribution.
- Capital returns: The company paid a $2.50-per-share special dividend in December 2012. The board later raised the quarterly dividend from $0.255 to $0.28 per share. The company repurchased $295 million of shares in 2012.
- Management outlook: Management expected cash, operating cash flow, and available credit to cover foreseeable operating and recurring cash requirements. It expected the 2013 effective tax rate to decline from 2012, partly due to the full-year effect of the indices joint venture. Segment commentary anticipated continued but slower opportunistic corporate issuance, ongoing U.S. CLO activity, and growth opportunities in ETFs, data products, commodities, automotive, and construction. These expectations were subject to market and regulatory uncertainty.
- Credit and legal risks: After year-end, Fitch downgraded the company to BBB+ with negative watch and Moody’s to Baa2 with negative outlook. In February 2013, the U.S. Department of Justice filed a civil complaint concerning S&P ratings of certain 2004–2007 collateralized debt obligations; related state suits were also reported. The filing also describes other ratings-related litigation and investigations, including an SEC Wells Notice. Management said it would defend the claims; ultimate outcomes and losses could not be estimated with confidence.
Most important facts for investors to verify
- Completion terms and proceeds of the MHE sale, including closing adjustments and the fair value and collectability of the $250 million notes.
- Whether continuing-operations cash generation can sustain dividends, buybacks, acquisitions, and debt service after the special dividend and credit-rating downgrades.
- Subsequent developments, potential exposure, and expected defense costs in the DOJ, SEC, state, and other ratings-related matters.
- Durability of 2012 rating-issuance growth and segment margins, given refinancing-driven demand, restructuring costs, acquisition amortization, and ongoing regulatory change.
- Effects of negative working capital, pension funding needs, and the July 2013 credit-facility expiration on liquidity.
The filing reports unqualified audit opinions on the financial statements and internal control over financial reporting; management reported no material weaknesses.