S&P Global Inc. (then The McGraw-Hill Companies, Inc.) — Q3 2009 Form 10-Q
Reporting period: Three and nine months ended September 30, 2009; comparisons are with the corresponding 2008 periods. Financial statements are unaudited. The independent accountant performed an interim review, not an audit, and reported no material modifications known to be needed.
Financial results
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $1,875.9 million | $2,048.5 million | $4,489.3 million | $4,939.6 million |
| Income from operations | $556.0 million | $652.9 million | $976.6 million | $1,168.7 million |
| Net income attributable to the company | $336.1 million | $390.2 million | $563.2 million | $683.6 million |
| Diluted EPS | $1.07 | $1.23 | $1.80 | $2.13 |
| Operating margin (MD&A segment operating profit basis) | 31.1% | 32.3% | 23.5% | 25.2% |
- Q3 revenue fell 8.4%, net income attributable to the company fell 13.9%, and diluted EPS fell 13.0%. For the first nine months, revenue fell 9.1%, net income fell 17.6%, and diluted EPS fell 15.5%.
- Q3 revenue declines affected all three segments: McGraw-Hill Education fell 11.6%, Financial Services 2.2%, and Information & Media 10.1%. Segment operating profit fell 15.9% and 10.1% in Education and Financial Services, respectively, but rose 29.3% in Information & Media, partly because of higher prior-year restructuring charges.
- Education’s weakness primarily reflected lower school adoption sales and constrained school budgets. Financial Services was pressured by structured finance, investment research and index services; corporate ratings and Capital IQ growth provided some offset. Information & Media faced weak advertising and automotive-study sales.
- Q3 net interest expense was $17.8 million, down 19.0%; nine-month net interest expense was $56.9 million, down 5.4%. The effective tax rate was 36.4% in 2009, versus 37.1% for Q3 2008 and 37.0% for the first nine months of 2008.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $896.4 million, up from $713.9 million. Management attributed the increase mainly to lower incentive compensation payments and inventory purchases.
- Investing activities used $167.4 million, compared with $321.5 million in 2008. Financing activities used $269.8 million, compared with $292.9 million.
- Cash and equivalents were $957.3 million at September 30, up $485.6 million from December 31, 2008. Current assets were $2,856.9 million and current liabilities $2,516.1 million.
- Total debt was $1,197.8 million, primarily long-term senior notes; commercial paper outstanding was zero. The company had an undrawn $1.2 billion revolving credit facility, with tranches terminating in August 2010 and September 2011. The facility includes a maximum indebtedness-to-cash-flow covenant of 4:1; the company stated it had never exceeded it.
- No shares were repurchased in the first nine months of 2009; the company paid $212.7 million in dividends. The quarterly dividend was increased to $0.225 per share from $0.22.
Material changes, outlook and risks
- Consolidated results were weighed down by lower education adoption activity, weak credit-market and advertising conditions, foreign-exchange effects, and $39.6 million of higher incentive compensation expense over the first nine months versus the prior-year period. The nine-month comparison also included a $13.8 million pretax loss on the May sale of Vista Research.
- The 2009 restructuring program recorded a net pretax charge of $15.2 million after reversals, principally for severance; it involved a workforce reduction of about 550 positions. Approximately $17.0 million remained reserved at September 30. The company also recorded reserves for prior-year restructuring programs.
- Management expected a 36.4% effective tax rate for the rest of 2009, absent specified changes such as audit settlements, tax-law changes or shifts in geographic income mix. It estimated 2009 capital expenditures of $75–$80 million and prepublication investment of about $200 million.
- Education’s estimated 2009 state new-adoption market was $500–$510 million, versus about $980 million in 2008. Management expected stimulus funding to reach instructional-materials purchasing more in Q4 2009 and 2010, but said timing and impact were uncertain.
- Management described corporate bond issuance as strong but warned that structured-finance markets, particularly CDO and CMBS, could remain illiquid through 2009. Longer-term RMBS prospects depended on housing-market recovery; the effectiveness of government and central-bank support measures was uncertain.
- BusinessWeek was subject to an October 13, 2009 divestiture agreement, expected to close in Q4, with a projected pretax gain of $9.3 million. The filing also describes new and evolving U.S. and European credit-rating regulation; management did not expect adopted rules to materially harm results but said the impact of future rules remained uncertain.
- Risks included weak education spending and state budgets, continued credit-market stress and reduced debt issuance, advertising and consumer-spending weakness, currency volatility, competitive pressures, and increased regulation. The company disclosed numerous rating-related lawsuits and government inquiries; it could not predict ultimate outcomes or losses, but stated that pending matters were not expected to have a material adverse effect on consolidated financial condition.
Important facts for investors to verify
- Whether school adoption spending and education funding recover as management anticipated, and how much deferred stimulus funding reaches the market.
- Whether structured-finance activity, corporate ratings demand, Capital IQ growth and credit-market conditions support Financial Services results.
- Whether advertising, automotive studies and construction-related demand improve, and the outcome and timing of the BusinessWeek divestiture.
- Whether cash generation, the undrawn revolver and compliance with debt covenants remain adequate through seasonal working-capital needs.
- Developments in rating-agency litigation, government investigations and new regulation, including any material change to expected costs or exposure.