Business context and reporting period
McGraw Hill Financial, Inc. (the registrant named in this filing) reported unaudited results for the three months ended March 31, 2015, compared with the same period in 2014. Its four segments were S&P Ratings, S&P Capital IQ, S&P Dow Jones Indices, and Commodities & Commercial Markets (C&C). The interim financial statements received an independent accountant’s review, not an audit.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 or prior balance |
|---|---|---|
| Revenue | $1.273 billion | $1.196 billion; up 6% |
| Operating profit | $501 million | $420 million; up 19% |
| Operating margin | 39% | 35% |
| Continuing income attributable to common shareholders | $303 million | $241 million |
| Diluted EPS from continuing operations | $1.10 | $0.87; up 26% |
| Cash from continuing operating activities | $(1.349) billion | $114 million provided |
| Cash and equivalents at March 31 | $1.176 billion | $2.497 billion at December 31, 2014 |
| Total debt at March 31 | $1.164 billion | $799 million at December 31, 2014 |
| Current assets / current liabilities | $2.688 billion / $2.579 billion | $3.966 billion / $3.967 billion at December 31, 2014 |
Revenue growth included subscription/non-transaction revenue of $761 million, up 3%, and transaction/non-subscription revenue of $512 million, up 13%. The effective tax rate was 32.1%, versus 33.9%; the reduction primarily reflected a non-recurring benefit. The company declared a quarterly dividend of $0.33 per share, increased from $0.30.
Material changes versus the prior comparable period
- All four segments reported higher revenue and operating profit. S&P Ratings revenue rose 6% and operating profit 21%; Capital IQ rose 6% and 18%; Indices rose 5% and 4%; and C&C rose 7% and 23%.
- Ratings transaction revenue increased 18%, driven mainly by corporate bond and U.S. public finance activity; non-transaction revenue declined 2%. Ratings operating profit included $35 million of legal-settlement insurance recoveries, partly offset by $29 million of legal-settlement charges.
- Domestic revenue grew 10%, while international revenue increased 1%; foreign exchange reduced revenue by $24 million overall.
- Operating cash flow swung sharply to an outflow, principally because $1.559 billion of accrued legal and regulatory settlements was paid. The company also used $129 million of discontinued-operations cash for tax on the gain from the 2014 sale of McGraw Hill Construction.
- Short-term borrowings increased to $365 million, consisting of $190 million of commercial paper and $175 million drawn on the revolving credit facility. Long-term debt remained $799 million.
- Comprehensive income attributable to the company was $224 million, down from $254 million, including an $82 million foreign-currency translation loss.
Outlook, risks, contingencies and unusual items
Management said cash on hand, operating cash flows and available credit were expected to meet operating and recurring cash needs for the foreseeable future. No specific earnings or revenue guidance was provided; management cautioned that quarterly results are not necessarily indicative of full-year results. Strategy priorities were growth through customer focus and innovation, and improved productivity, operational excellence, risk management and compliance.
- Liquidity and financing: Cash declined substantially after settlement payments. The $1.0 billion commercial-paper program is supported by a $1.0 billion credit facility maturing June 2017. Its financial covenant limits indebtedness to cash flow to 3.25 to 1; the company reported that it had not exceeded the covenant.
- Litigation and regulation: The company could not predict outcomes or reasonably estimate potential exposure in many ratings-related cases and investigations, and warned that adverse outcomes could materially affect financial condition, cash flows or business. The Trani, Italy criminal proceeding against current and former ratings personnel and a subsidiary was ongoing; potential related civil claims were not quantifiable. The Prosecutor General of Italy’s Corte dei Conti dismissed a potential claim in December 2014, announced in February 2015.
- Other unusual items: Updated pension assumptions increased quarterly pre-tax retirement expense by approximately $8 million. The company recorded $18 million of restructuring-reserve reductions during the quarter. Management expected unrecognized tax benefits could decrease significantly within 12 months, but audit outcomes could materially affect results or cash flows.
- Sanctions disclosure: An energy-information division reported approximately $168,344 of first-quarter revenue from information products sold to 12 Iran-linked subscribers. The company said it believed the transactions were covered by exemptions for information materials and was reviewing whether to continue supplying them.
- Other risks: Management identified regulatory change, litigation, credit and capital-market conditions, ratings demand and reputation, data security, competition, foreign exchange, commodities-market conditions and execution of growth initiatives as risks. It reported no material change in previously disclosed risk factors or market-risk exposure.
Important facts for investors to verify
- Settlement-payment timing and any remaining legal or regulatory obligations, including whether further payments or new accruals are likely.
- Underlying operating performance excluding the $35 million insurance recovery, $29 million legal charge and one-time tax benefit.
- Cash availability and the location of cash: approximately 90% of quarter-end cash was held abroad; repatriation for U.S. use could incur taxes.
- Short-term debt refinancing, credit-facility availability and covenant headroom after settlement-related borrowing.
- Future ratings transaction volumes, particularly corporate, public finance and bank-loan activity, and the effect of market and regulatory changes.
- Developments in ratings-related litigation and investigations, the Iran-linked customer review, and the resolution of uncertain tax positions.