McGraw Hill Financial, Inc. (now S&P Global) — Q2 2015 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2015. The company provided ratings, benchmarks, analytics, data and research through S&P Ratings, S&P Capital IQ, S&P Dow Jones Indices and Commodities & Commercial Markets. Interim statements are unaudited; the independent accountant performed a review, not an audit.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $1.342B | $1.302B | $2.615B | $2.498B |
| Operating profit | $582M | $476M | $1.083B | $896M |
| Operating margin | 43% | 37% | 41% | 36% |
| Net income attributable to company | $353M | $292M | $656M | $540M |
| Diluted EPS from continuing operations | $1.28 | $1.04 | $2.38 | $1.91 |
- Revenue rose 3% in Q2 and 5% year to date. Domestic revenue increased 8% and 9%, respectively; international revenue declined 4% and 1%, reflecting foreign-exchange pressure.
- Q2 segment revenue and operating profit increased at Capital IQ (6% and 15%), Indices (11% and 16%) and Commodities & Commercial Markets (7% and 13%). Ratings revenue declined 1%, while its operating profit rose 17%.
- Profit growth included substantial legal-settlement insurance recoveries: $45M in Q2 and $80M for the first six months, partly offset by legal settlement charges of $4M and $34M, respectively. Management reported segment operating profit growth excluding these and restructuring/legal items of 13% for Q2 and 14% year to date.
- Six-month cash used by continuing operating activities was $897M, versus $446M provided in 2014. The principal driver was $1.609B of legal and regulatory settlement payments. Free cash flow was negative $988M, or $621M excluding those settlement payments, versus $379M in 2014.
- Cash and equivalents were $1.720B at June 30, down $777M from year-end. Long-term debt was $1.494B, up from $799M at year-end, following issuance of $700M of 4.0% senior notes due 2025. The company reported no commercial paper or credit-facility borrowings outstanding at June 30.
- Current assets were $3.213B and current liabilities $2.240B. The accrued legal and regulatory settlements balance fell to $23M from $1.609B at year-end, consistent with the substantial settlement payments.
- The quarterly dividend increased to $0.33 per share from $0.30. The company repurchased 2.6 million shares for $274M during the first half.
Material changes and management commentary
- All four segments reported year-to-date revenue growth. Ratings benefited from U.S. corporate and public-finance issuance but faced weaker international activity, lower bank-loan ratings revenue and foreign-exchange headwinds. Capital IQ cited subscription growth and improved retention; Indices cited higher ETF and mutual-fund assets and derivatives/data revenue; C&C cited demand for Platts content and growth at J.D. Power.
- Cost reductions, lower incentive compensation and reduced legal fees supported profitability. Restructuring charges were $30M for the 2015 plan during the first half; management also cited higher technology, compliance, consulting and growth-related costs in certain businesses.
- Management said cash on hand, operating cash flows, its revolving credit facility and committed acquisition financing were expected to meet operating and recurring cash needs for the foreseeable future. The $1.2B five-year revolving facility runs to June 2020 and has a maximum indebtedness-to-cash-flow covenant ratio of 4:1; the company said it had never exceeded the limit.
- No full-year earnings or revenue guidance was provided in the filing. Management cautioned that interim results are not necessarily indicative of full-year results.
Outlook, risks and unusual items
- On July 24, 2015, after quarter-end, the company agreed to acquire SNL Financial for $2.225B in cash, subject to adjustments and regulatory approvals. It secured a commitment for up to $1B of unsecured bridge financing. The company identified approximately $70M of expected synergies by 2019, while warning that these benefits are not assured and integration, financing, approval and execution risks remain.
- Significant legal and regulatory uncertainties include financial-crisis-related ratings litigation, SEC compliance matters, Italian proceedings involving S&P Ratings, and an ongoing European Commission inspection concerning Platts’ price-assessment process. The company said outcomes and potential financial effects generally could not be estimated reliably.
- Other notable items include an $11M pretax gain from selling a legacy investment, a non-recurring tax benefit recorded in Q1, and the $129M discontinued-operations cash outflow related to tax paid on the prior-year sale of McGraw Hill Construction.
- The filing disclosed approximately $181,000 of Q2 revenue from information sales to 14 Iran-linked subscribers. The company stated that it believed the transactions were permissible under information-material exemptions and was reviewing whether to continue them.
- Management cited exposure to regulatory change, litigation, credit and capital-market conditions, foreign exchange, cybersecurity and business continuity, competition, and acquisition/integration risks. It reported no material change in market-risk exposure from its prior annual report.
Most important facts for investors to verify
- How much of earnings growth reflects recurring operations versus insurance recoveries, lower legal costs, restructuring and other unusual items.
- Whether cash generation normalizes after settlement payments, and how much cash held abroad is practically available for U.S. needs without tax costs.
- Final financing, regulatory approval, purchase accounting, integration progress and realized synergies for the SNL acquisition.
- Developments and potential financial exposure in ratings-related litigation, regulatory proceedings and tax audits; unrecognized tax benefits were $138M at June 30.
- Whether segment growth can continue amid international foreign-exchange pressure, variable debt issuance and changing ETF assets under management.