UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No. 1)10-K
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| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20122015
OR
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-1023
McGraw Hill Financial, Inc.
(Exact name of registrant as specified in its charter)
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| New York | | 13-1026995 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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1221 Avenue of the Americas,55 Water Street, New York, New York | | 1002010041 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: 212-512-2000212-438-1000
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| Title of each class | | Name of exchange on which registered |
| Common Stock — $1 par value | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES þ¨ NO ¨þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES ¨ NO þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
YES þ NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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þ Large accelerated filer | | o Accelerated filer | | o Non-accelerated filer | | o Smaller reporting company |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ NO þ
The aggregate market value of voting stock held by non-affiliates of the Registrant as of the last business day of the second fiscal quarter ended June 30, 2012,2015, was $12.6$27.4 billion, based on the closing price of the common stock as reported on the New York Stock Exchange of $45.00$100.45 per common share. For purposes of this calculation, it is assumed that directors, executive officers and beneficial owners of more than 10% of the registrant outstanding stock are affiliates. The number of shares of common stock of the Registrant outstanding as of February 1, 2013January 22, 2016 was 280.8265.3 million shares.
Part III incorporates information by reference from the definitive proxy statement for the 20132016 annual meeting of shareholders.
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A (the "Amendment") amends the Form 10-K of The McGraw-Hill Companies, Inc. (the "Company") for the fiscal year ended December 31, 2012, as filed with the Securities and Exchange Commission on February 28, 2013 (the "Original Filing"). The Amendment is being filed for the purpose of correcting the following items:
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(i) | 2009 and 2008 revenue amounts, 2008 segment operating profit, 2009 and 2008 net income from continuing operations attributable to The McGraw-Hill Companies, Inc., 2009 and 2008 earnings per share from continuing operations and related operating statistics for 2009 and 2008 in “Item 6. Selected Financial Data” in the Original Filing on page 18 have been corrected. Revenue amounts were corrected as McGraw-Hill Education's gross profit was inadvertently subtracted from the Company's total revenue instead of subtracting McGraw-Hill Education's total revenue from the Company's total revenue. Additionally, segment operating profit, net income from continuing operations attributable to The McGraw-Hill Companies, Inc. and earnings per share from continuing operations were corrected as they were inadvertently impacted by discontinued operations adjustments that should not have affected those amounts. Therefore, "Item 6. Selected Financial Data" has been restated as follows: |
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| (in millions, except per share data) | 2009 | | 2008 |
| | Reported | Restated | | Reported | Restated |
| Revenue | $ | 4,132 |
| $ | 3,483 |
| | $ | 4,354 |
| $ | 3,609 |
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| Segment operating profit | | | | $ | 1,118 |
| $ | 1,143 |
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| Net income from continuing operations attributable to The McGraw-Hill Companies, Inc. | $ | 543 |
| $ | 546 |
| | $ | 582 |
| $ | 569 |
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| Earnings per share attributable to the McGraw-Hill Companies, Inc. common shareholders: | | | | | |
| Basic | $ | 1.74 |
| $ | 1.75 |
| | $ | 1.85 |
| $ | 1.80 |
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| Diluted | $ | 1.73 |
| $ | 1.74 |
| | $ | 1.83 |
| $ | 1.79 |
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| Income from continuing operations before taxes on income as a percent of revenue from continuing operations | 21.2 | % | 25.1 | % | | 21.4 | % | 25.8 | % |
| Net income from continuing operations as a percent of revenue from continuing operations | 13.6 | % | 16.1 | % | | 13.4 | % | 16.2 | % |
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(ii) | The approximate number of record holders of our common stock as of February 1, 2013 disclosed in “Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in the Original Filing on page 16 has been corrected as the Company inadvertently disclosed the number of shares of common stock outstanding as of February 1, 2013, which was 280.8 million. The correct number of record holders of our common stock as of February 1, 2013 was 3,885. |
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(iii) | A typographical error in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” in the Original Filing on page 27 has been corrected as the total intangible asset impairment charge and the impairment charge on certain prepublication and inventory assets for McGraw-Hill Education's School Education Group was inadvertently stated to be $497,000,000 million and $19,000,000 million, respectively. However, as dollar figures in Item 7 were presented in millions, this figure should have been stated as $497 million and $19 million, respectively. |
Except for these corrections, there have been no changes in any of the financial or other information contained in this Form 10-K/A. The Amendment does not reflect events occurring after the Original Filing, or modify or update the disclosures therein in any way other than as required to reflect the amendments set forth above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized, on the 20th day of March 2013.
The McGraw-Hill Companies, Inc.
/s/ Kenneth M. Vittor
Kenneth M. Vittor
Executive Vice President and General Counsel
TABLE OF CONTENTS
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| | PART II | | PART II | |
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| 7a. | | | | |
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| 9a. | | | | |
| 9b. | | | | |
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| | PART III | | PART III | |
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| | PART IV | | PART IV | |
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FORWARD-LOOKING STATEMENTS
This reportAnnual Report on Form 10-K contains forward-looking“forward-looking statements, including without limitation statements relating to our businesses and our prospects, new products, sales, expenses, tax rates, cash flows, and operating and capital requirements that are made pursuant to the safe harbor provisions of” as defined in the Private Securities Litigation Reform Act of 1995. These statements, which express management’s current views concerning future events, trends, contingencies or results, appear at various places in this report and use words like “anticipate,” “assume,” “believe,” “continue,” “estimate,” “expect,” “forecast,” “future,” “intend,” “plan,” “potential,” “predict,” “project,” “strategy,” “target” and similar terms, and future or conditional tense verbs like “could,” “may,” “might,” “should,” “will” and “would.” For example, management may use forward-looking statements are intended to provide management’s current expectationswhen addressing topics such as: the outcome of contingencies; future actions by regulators; changes in the Company’s business strategies and methods of generating revenue; the development and performance of the Company’s services and products; the expected impact of acquisitions and dispositions; the Company’s effective tax rates; and the Company’s cost structure, dividend policy, cash flows or plans for our future operating and financial performance and are based on assumptions management believes are reasonable at the time they are made.
liquidity.
Forward-looking statements can be identified by the use of words such as “believe,” “expect,” “plan,” “estimate,” “project,” “target,” “anticipate,” “intend,” “may,” “will,” “continue”are subject to inherent risks and other words of similar meaning in connection with a discussion of future operating or financial performance. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptionsuncertainties. Factors that are difficultcould cause actual results to predict; therefore, actual outcomes and results could differ materially from what is expectedthose expressed or forecasted. These risks and uncertaintiesimplied in forward-looking statements include, among others:other things:
the Company’s ability to make acquisitions and dispositions and to integrate, and realize expected synergies, savings or benefits from the businesses it acquires, including the impact of the acquisition of SNL on the Company’s results of operations, any failure to successfully integrate SNL into the Company’s operations and generate anticipated synergies and other cost savings, any failure to attract and retain key employees to execute the combined company’s growth strategy, any failure to realize the intended tax benefits of the acquisition, and the risk of litigation, competitive responses, or unexpected costs, charges or expenses resulting from or relating to the SNL acquisition;
the rapidly evolving regulatory environment, in the United States, Europe and elsewhere, affecting Standard & Poor’s Ratings Services, Platts, S&P Dow Jones Indices, S&P Capital IQ and SNL and the Company’s other businesses, including new and amended regulations and the Company’s compliance therewith;
the outcome of litigation, government and regulatory proceedings, investigations and inquiries;
worldwide economic, financial, political and regulatory conditions;
currency and foreign exchange volatility;
the effect of competitive products and pricing;
the level of success of new product development and global expansion;
the level of future cash flows;
the levels of capital investments;
income tax rates;
restructuring charges;
the health of debt and equity markets, including credit quality and spreads, the level of liquidity and future debt issuances;
the level of interest rates and the strength of the domestic and global credit and capital markets in the U.S.United States and abroad;
the demand and market for debtcredit ratings including collateralized debt obligations, residentialin and commercial mortgageacross the sectors and asset-backed securities and related asset classes;geographies where the Company operates;
concerns in the marketplace affecting the Company’s credibility or otherwise affecting market perceptions of the integrity or utility of independent credit ratings;
the stateCompany’s ability to maintain adequate physical, technical and administrative safeguards to protect the security of the credit marketsconfidential information and their impact on Standard & Poor’s Ratingsdata, and the economypotential of a system or network disruption that results in general;regulatory penalties, remedial costs or improper disclosure of confidential information or data;
the regulatory environment affecting Standard & Poor’s Ratingseffect of competitive products and our other businesses;pricing;
consolidation in the Company’s end-customer markets;
the likely outcome and impact of litigationcost-cutting pressures across the financial services industry;
a decline in the demand for credit risk management tools by financial institutions;
the level of success of new product developments and investigations on our operations and financial condition;global expansion;
the level of merger and acquisition activity in the U.S.United States and abroad;
continued investment by
the construction, automotive, computervolatility of the energy marketplace;
the health of the commodities markets;
the impact of cost-cutting pressures and aviation industries;reduced trading in oil and other commodities markets;
the level of the Company’s future cash flows;
the level of the Company’s capital investments;
the level of restructuring charges the Company incurs;
the strength and performance of the domestic and international automotive markets;
the volatility of the energy marketplace;
and the contract value of public works, manufacturing and single-family unit construction.Company’s ability to successfully recover should it experience a disaster or other business continuity problem from a hurricane, flood, earthquake, terrorist attack, pandemic, security breach, cyber-attack, power loss, telecommunications failure or other natural or man-made event;
In addition, there are certain risks and uncertainties relating to our previously announced Growth and Value Plan which contemplates a separation of our education business, including, but not limited to, changes in applicable tax or accounting requirements;
the impact on the Company’s net income caused by fluctuations in foreign currency exchange rates; and
the Company’s exposure to potential criminal sanctions or civil penalties if it fails to comply with foreign and possible disruption to our operations,U.S. laws and regulations that are applicable in the timingdomestic and certainty of completinginternational jurisdictions in which it operates, including trade sanctions laws, anti-corruption laws such as the transaction, unanticipated developments that may delay or negatively impact the transaction,U.S. Foreign Corrupt Practices Act and the ability of eachU.K. Bribery Act 2010, anti-bribery laws, anti-money laundering laws, and other financial crimes laws.
The factors noted above are not exhaustive. The Company and its subsidiaries operate in a dynamic business to operate as an independent entity upon completion ofenvironment in which new risks emerge frequently. Accordingly, the transaction. We cautionCompany cautions readers not to place undue reliance on any forward-looking statements.
statements, which speak only as of the dates on which they are made. The Company undertakes no obligation to update or revise any forward-looking statement to reflect events or circumstances arising after the date on which it is made, except as required by applicable law. Further information about the Company’s businesses, including information about factors that could materially affect its results of operations and financial condition, is contained in the Company’s filings with the SEC, including Item 1a, Risk Factors, in this Annual Report on Form 10-K.
PART I
Item 1. Business
Overview
The McGraw-Hill Companies,McGraw Hill Financial, Inc. (together with its consolidated subsidiaries, the “Company,” the “Registrant,” “we,” “us” or “our”) is a leading contentbenchmarks and ratings, analytics, data and research provider serving the global capital, commodities and commercial markets. The capital markets include asset managers, investment banks, commercial banks, insurance companies, exchanges, issuers and financial advisors;issuers; the commodities markets include producers, traders and intermediaries within energy, metals, petrochemicals and agriculture; and the commercial markets include professionals and corporate executives within automotive, construction, aerospace and defense,financial services, insurance and marketing / research information services. We serve our global customers through a broad range of products and services available through both third-party and proprietary distribution channels. We were incorporated in December of 1925 under the laws of the state of New York.
In the fourth quarter of 2015, we began exploring strategic alternatives for J.D. Power, included in our Commodities & Commercial segment. We committed to and initiated an active program to sell J.D. Power in its current state that we believe is probable in the next year. As a result, we have classified the assets and liabilities of J.D. Power as held for sale in our consolidated balance sheet as of December 31, 2015. The anticipated disposal does not represent a strategic shift that will have a major effect on operations and financial results, therefore, it is not classified as a discontinued operation.
On September 12, 2011,November 3, 2014, we announced that our Boardcompleted the sale of Directors had unanimously approved a comprehensive Growth and Value Plan that includes separation into two companies: McGraw Hill Financial ("MHF"), focusedConstruction, which has historically been part of our Commodities & Commercial segment, to Symphony Technology Group for $320 million in cash. We recorded an after-tax gain on providing essential informationthe sale of $160 million, which is included in discontinued operations, net in the consolidated statement of income for the year ended December 31, 2014. We used the after-tax proceeds from the sale to make selective acquisitions, investments, share repurchases and for general corporate purposes.
On March 22, 2013, we completed the capital, commodities and commercial markets, andsale of McGraw-Hill Education ("MHE"), focused on education products and services and digital learning. The Growth and Value Plan has been focused on accelerating growth and increasing shareholder value through not only this separation, but also through substantial cost-cutting initiatives and increased share repurchases.
As we approach the completion of our Growth and Value Plan we have achieved our objectives under our Growth and Value Plan relating to the separation of MHE, cost reductions, increased shareholder return and investing / divesting in targeted assets that position us for long-term growth.
Separation of MHE
Our Board of Directors determined that the separation would provide benefits to the Company, including:
Strategic Focus. Allow each independent company to design and implement corporate strategies and policies based on the industries that they serve and each specific business' unique characteristics, including customers, sales cycles and product life cycles.
Management Focus. Allow management of both companies to design and implement plans and policies in line with the specific business characteristics and strategic objectives of the respective companies.
Management and Employee Incentives. Enable both companies to create incentives for its management and employees that are more closely tied to its business performance. Separate compensation arrangements more closely align the interests of each company's management and employees with the interests of its stockholders and increase their ability to attract and retain personnel.
Access to Capital. Remove the need for the businesses to compete internally for capital. Instead, both companies would have the ability to tailor their capital structures and financial policies to fit their individual business needs.
Flexibility for Acquisitions and Partnerships. Provide each independent company increased strategic flexibility to make acquisitions and form partnerships and alliances in its target markets, unencumbered by considerations of the potential impact on the businesses of the other company.
Investor Choice. Provide investors in each company with a more targeted investment opportunity with different investment and business characteristics, including different opportunities for growth, capital structure, business models and financial returns. This will allow investors to evaluate the separate and distinct merits, performance and future prospects of each company.
The timing of completing the separation has been dependent on many factors, including whether the separation occurs through a spin-off to our shareholders or a sale. After carefully considering all of the options for creating shareholder value, our Board of Directors concluded that a sale of MHE would generate the best value and certainty for our shareholders and most favorably position MHE for long-term success.
As such, on November 26, 2012, we entered into a definitive agreement to sell MHE to investment funds affiliated with Apollo Global Management, LLC for a purchase price of $2.5$2.4 billion subject to certain closing adjustments. As partin cash. We recorded an after-tax gain on the sale of this transaction, McGraw-Hill will receive $250$589 million, which is included in senior unsecured notes issued by the purchaser at an annual interest rate of 8.5%. We are currentlydiscontinued operations, net in the processconsolidated statement of determiningincome for the fair value of these notes. For all periods presentedyear ended December 31, 2013. We used the after-tax proceeds from the sale to pay down short-term debt for the special dividend paid in this Form 10-K,2012, to make selective acquisitions, investments, share repurchases and for general corporate purposes.
In 2015, we continued to focus on investments in targeted financial assets, divesting selected non-core assets, reducing our real estate portfolio and increasing shareholder return.
In 2016, pending shareholder approval, the results of operations of MHE have been reclassified to reflectCompany will be re-branded S&P Global. This name better leverages the businessCompany's rich heritage as a discontinued operationfinancial data and analytics brand while signaling that we have a strong global footprint and broad portfolio.
Investments in Targeted Financial Assets / Divest Selected Non-Core Assets
During 2015, we continued to create a portfolio focused on scalable, industry leading, interrelated businesses in the assetscapital and liabilitiescommodity markets.
S&P Capital IQ and SNL— we acquired SNL Financial LC ("SNL"), a leading provider of news, data, and analytics to five sectors in the business have been reclassified as held for saleglobal economy: financial institutions, real estate, energy, media & communications, and metals & mining;
Commodities & Commercial:
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| ◦ | we acquired the entire issued share capital of Petromedia Ltd and its operating subsidiaries, an independent provider of data, intelligence, news and tools to the global fuels market that offers a suite of products providing clients with actionable data and intelligence that enables informed decisions, minimizes risk and increases efficiency; |
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| ◦ | we acquired National Automobile Dealers Association's Used Car Guide, a leading provider of U.S. retail, trade-in and auction used-vehicle valuation products, services and information. |
In 2015, we further reduced our real estate footprint by completing the consolidation of our corporate headquarters with our operations in our consolidated balance sheets. The sale of MHE is subject to variousNew York City.
closing conditionsDuring 2014, we continued to execute our strategy of investing for growth in markets that have size and is anticipated to closescale while exiting non-core assets.
Commodities & Commercial— we acquired Eclipse Energy Group AS which complements our North American natural gas capabilities, which we obtained from our Bentek Energy LLC acquisition in 2011;
S&P Ratings— we acquired BRC Investor Services S.A., a Colombia-based ratings firm providing risk classifications of banks, financial services providers, insurance companies, corporate bonds and structured issues that will expand our presence in the first quarter of 2013. See Item 1a,Latin American credit markets. Risk Factors,
In 2014, in this Form 10-K for updates to certain risk factors relatedaddition to the sale.divestiture of McGraw Hill Construction discussed above, we streamlined our infrastructure by reducing our real estate footprint through selling our data facility, initiating the consolidation of our corporate headquarters with our operations in New York City, as well as disposing of our corporate aircraft.
During 2013, we acquired an incremental 11 million equity shares representing 15.07% of CRISIL's total outstanding equity shares for $214 million, concurrently increasing our ownership percentage in CRISIL to 67.84% from 52.77%.
We planIn 2013, we also completed certain dispositions of our non-core assets that allow us to use the proceeds ofapply greater focus on our high-growth, high-margin benchmark businesses.
Commodities & Commercial— we completed the sale of Aviation Week to pay off any short-term borrowing obligations, to make selective acquisitions that enhance our portfolioPenton, a privately held business information company;
S&P Capital IQ and SNL— we completed the sale of brands and to sustain our share repurchase program.
Cost Reductions
FromFinancial Communications as well as the announcementclosure of our Growth and Value Plan we have been committed to on-going cost savings by year-end of greater than $100 million. We have surpassed that goal by approaching $175 million in savings by the end of 2012 through a focused effort on our cost structure, including:several non-core businesses.
select headcount reductions of approximately 670 employees within MHF and 530 employees within MHE,
the migration of numerous accounting work-streams, human resource processes and selected information-technology support services to world-class partners that specialize in these operations, and
redesigning the employee benefit plans including a freeze of our U.S. employee retirement plan.
These cost goals were focused across the entire Company, including MHE. Approximately two-thirds of these cost reductions benefited MHE. Cost savings at MHF were partially offset by costs that were previously allocated to MHE, such as costs for centralized departments, that could not be classified as discontinued operations due to the nature of the expense. We will continue to look to extend outsourcing efforts to enhance cost synergies and realign administrative support for a leaner overall cost structure.
Increased Shareholder Return
During the twothree years ended December 31, 2012,2015, we have returned $3.1$3.3 billion to our shareholders through a combination of share repurchases and our quarterly dividend and a special dividend.
Wedividends: we completed share repurchases of $1.8$2.3 billion and distributed regularlyregular quarterly dividends totaling approximately $600 million during the two years ended December 31, 2012. On December 6, 2012, our Board of Directors approved a special dividend in the amount of $2.50 per share on our common stock, payable on December 27, 2012 to shareholders on record on December 18, 2012. This returned an additional approximately $700 million to our shareholders.$997 million. Also, on January 30, 2013,27, 2016, the Board of Directors approved an increase in the quarterly common stock dividend from $0.255$0.33 per share to $0.28$0.36 per share.
Investing / Divesting Targeted Assets
During 2012, we completed several acquisitions that we believe will position us for long-term growth across all our segments.
S&P Dow Jones Indices - our transaction with CME Group, Inc. and CME Group Index Services LLC to form a new company, S&P Dow Jones Indices LLC;
S&P Capital IQ - Credit Market Analysis Limited, a provider of independent data concerning the over-the-counter markets; QuantHouse, an independent global provider of end-to-end systematic low-latency market data solutions; and R² Technologies, a provider of advanced risk and scenario-based analytics;
Commodities & Commercial - Kingsman SA, a privately-held, Switzerland-based provider of price information and analytics for the global sugar and biofuels markets;
Standard & Poor's Ratings - Coalition Development Ltd., a privately-held U.K. analytics company.
Refer to "Acquisitions and Partnerships" below for further discussion.
We completed the sale of our Broadcasting Group, previously included in our Commodities & Commercial segment, on December 30, 2011 and, accordingly, for the year ended December 31, 2011 and prior periods, the results of operations of the Broadcasting Group have been reclassified to reflect the business as a discontinued operation and assets and liabilities of the business have been removed from our consolidated balance sheet as of December 31, 2011.
The Growth and Value Plan has required us to incur non-recurring costs necessary to enable separation, reduce our cost structure, accelerate growth and increase shareholder value. The table below summarizes these costs including restructuring charges for the year ended December 31, 2012:
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| | Continuing | | Discontinued |
| Professional fees | $ | 117 |
| | $ | 17 |
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| Restructuring charges | 68 |
| | 39 |
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| Transaction costs for our S&P Dow Jones Indices LLC joint venture | 15 |
| | — |
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| Charges related to our lease commitments | 8 |
| | 3 |
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| Miscellaneous charges | 18 |
| | 2 |
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| | $ | 226 |
| | $ | 61 |
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Total costs incurred since the Growth and Value Plan was announced in September of 2011 have been $297 million. These one-time expenses are largely professional fees, as we need the support of various consultants, business process and information technology firms, and financial advisors.
Our Businesses
As a result of our transaction with CME Group, Inc. and CME Group Index Services LLC to form a new company, S&P Dow Jones Indices LLC and how we are managing this company, combined with the formation of MHF, we have separated our previously reported S&P Capital IQ / S&P Indices segment into two separate reportable segments. Our operations now consist of four reportable segments: Standard & Poor’s Ratings Services (“S&P Ratings”), S&P Capital IQ and SNL, S&P Dow Jones Indices ("S&P DJ Indices") and Commodities & Commercial (“C&C”). Our previously reported MHE segment is reported asFor a discontinued operation as discussed previously underdiscussion on the heading, "competitive conditions in our businesses, see “MD&A – Segment Review” contained in Item 7, SeparationManagement’s Discussion and Analysis of MHEFinancial Condition and Results of Operations"., in this Annual Report on Form 10-K.
S&P Ratings
S&P Ratings is aan independent provider of credit ratings, offeringresearch and analytics to investors, issuers and market participants information and independent ratings benchmarks.participants. Credit ratings are one of several tools that investors can use when making decisions about purchasing bonds and other fixed income investments. They are opinions about credit risk and our ratings express our opinion about the ability and willingness of an issuer, such as a corporation or state or city government, to meet its financial obligations in full and on time. Our credit ratings can also speakrelate to the credit quality of an individual debt issue, such as a corporate or municipal bond, and the relative likelihood that the issueissuer may default.
As the capital markets continue to evolve, S&P Ratings is well-positioned to capitalize on opportunities driven by continuing regulatory changes through its global network, well-established position in corporate markets and strong investor reputation.
With offices in over 2325 countries around the world, S&P Ratings is an important part of the world's financial infrastructure and has played a leading role for over 150 years in providing investors with information and independent benchmarks for their investment and financial decisions as well as access to the capital markets. The key constituents S&P Ratings serves are investors; corporations; governments; municipalities;investors, corporations, governments, municipalities, commercial and investment banks;banks, insurance companies;companies, asset managers;managers, and other debt issuers.
As the capital markets continue to evolve, S&P Ratings is well-positioned to capitalize on opportunities, driven by continuing regulatory changes, through its global network, well-established position in corporate markets and strong investor reputation.
S&P Ratings differentiates its revenue between transaction and non-transaction. Transaction revenue primarily includes fees associated with:
ratings related to new issuance of corporate and government debt instruments, and structured finance debt instruments;
bank loan ratings; and
corporate credit estimates, which are intended, based on an abbreviated analysis, to provide an indication of our opinion regarding creditworthiness of a company which does not currently have an S&P Ratings credit rating.
Non-transaction revenue primarily includes fees for surveillance of a credit rating, annual fees for customer relationship-based pricing programs and fees for entity credit ratings.
S&P Capital IQ and SNL
S&P Capital IQ and SNL is a global provider of digital and traditional financial research and analytical tools for capital market participants. It deploys the latest technology-driven strategies to deliver to customers an integrated portfolio of cross-asset analytics, desktop services, and investment recommendationsinformation in the rapidly growing financial information, data and analytics market. The key
constituents S&P Capital IQ and SNL serves are asset managers; investment banks; investors; brokers; financial advisors; insurance companies; investment sponsors; and companies’ back-office functions, including compliance, operations, risk, clearance, and settlement.
S&P Capital IQ'sIQ and SNL's portfolio of products brings together integrated data sets, indices, research, and analytic insights in an integrated desktop solutioncapabilities are designed to serve multiple investor segments acrosshelp the financial community. In addition, the segment has products that integrate its content for delivery to the financial market via feeds, as well as through on-demandcommunity track performance, generate better investment returns (alpha), identify new trading and customizable delivery tools. Specific products include:investment ideas, perform risk analysis, and develop mitigation strategies.
S&P Capital IQ - and SNL includes the following business lines:
S&P Capital IQ Desktop & Enterprise Solutions — a product suite that provides data, analytics and third-party research for global finance professionals, which includes the S&P Capital IQ Desktop and integrated bulk data feeds that can be customized, which include QuantHouse, S&P Securities Evaluations, CUSIP and Compustat;
Global Risk Services — commercial arm that sells Standard & Poor's Ratings Services' credit ratings and related data, analytics and research, which includes subscription-based offerings, RatingsDirect® and RatingsXpress®;
S&P Capital IQ Markets Intelligence — a comprehensive source of market research for financial professionals;professionals, which includes Global Markets Intelligence, Leveraged Commentary & Data and Equity Research Services; and
Global Credit Portal -SNL — a web-based solutionproduct suite that includes standardized and as-reported financials, sector-specific templates, asset-level data, mapping and regulatory data accessible through SNL Unlimited that provides real-time credit research, market information and risk analytics, which includes RatingsDirect®;
Global Data Solutions - combines high-quality, multi-asset class andin-depth coverage of industry-specific financial market data to help professional investors, traders,from over 6,500 public companies and analysts meetover 50,000 private companies across the new analytical, risk management, regulatoryglobe, comprehensive market data on a variety of assets, and front-to-back office operation requirements, which includes RatingsXpress®;M&A and Capital Market activities.
investment research products.
S&P DJDow Jones Indices
S&P DJ Indices is a global index provider that maintains a wide variety of investable and benchmark indices to meet an array of investor needs. S&P DJ Indices’ mission is to provide transparent benchmarks to help with decision making, collaborate with the financial community to create innovative products and provide investors with tools to monitor world markets.
S&P DJ Indices generates subscription revenue but primarily derivesgenerates revenue from non-subscription products based on the S&P and Dow Jones Indices, specifically through fees on exchange traded funds, mutual funds and insurance assets. Additionally, fees are generated through both over-the-counter derivative issuances as well as exchange traded derivatives.
S&P DJ Indices includes our transaction with CME Group, Inc. and CME Group Index Services LLC to form a new company, S&P Dow Jones Indices LLC. The combination of these businesses created the world's largest provider of market indices.
also generates subscription revenue. Specifically, S&P DJ Indices generate revenue through investmentfrom the following sources:
Investment vehicles —such as:
as exchange traded funds (“ETFs”), which are based on the S&P and Dow Jones IndicesIndices' benchmarks and generate revenue through fees based on assets and underlying funds;
index-related licensing fees, which are generally either annual fees based on assets under management or flat fees for over-the-counterExchange traded derivatives and retail-structured products;
data subscriptions, which support index fund management, portfolio analytics and research; and
listed derivatives,— which generate royalties based on trading volumes of derivatives contracts.contracts listed on various exchanges;
Index-related licensing fees — which are either fixed or variable annual and per-issue fees for over-the-counter derivatives and retail-structured products; and
Data and customized index subscription fees — which support index fund management, portfolio analytics and research.
Commodities & Commercial
C&C consists of business-to-business companies specializing in the commodities and commercial markets that deliver their customers access to high-value information, data, analytic services and pricing benchmarks. C&C includes such brands as the following brands:
Platts — provides essential price data, analytics, and industry insight that enable commodities markets to perform with greater transparency and efficiency; and
J.D. Power — provides essential consumer intelligence to help businesses measure, understand, and Associates, McGraw-Hill Constructionimprove the key performance metrics that drive growth and profitability.Aviation Week.
In the fourth quarter of 2015, we began exploring strategic alternatives for J.D. Power, included in our C&C segment. We committed to and initiated an active program to sell J.D. Power in its current state that we believe is probable in the next year. As a result, we have classified the assets and liabilities of J.D. Power as held for sale in our consolidated balance sheet as of December 31, 2015. The anticipated disposal does not represent a strategic shift that will have a major effect on operations and financial results, therefore, it is not classified as a discontinued operation.
The C&C business is driven by the need for high-value information and transparency in a variety of industries. C&C seeks to deliver premier content that is deeply embedded in customer workflows and decision making processes. Our commodities business serves producers, traders, and intermediaries within energy, metals and agriculture markets. Our commercial business serves professionals and executives within automotive, construction, aerospace and defensefinancial services, insurance and marketing / research services markets. C&C delivers premier content that is deeply embedded in customer workflows and decision making processes.
CommoditiesC&C's revenue is generated primarily through the following sources:
Subscription revenue —subscriptions to itsour real-time news, market data and price information; end-of-dayassessments, along with other information products, primarily serving the energy and the automotive industry; and
Non-subscription revenue — primarily from licensing of our proprietary market data; newsletters and reports; and geospatialprice data and maps;
price assessments to commodity exchanges, syndicated and trading services related products.proprietary research studies, commercial-oriented data and analytics, conference sponsorship, consulting engagements and events.
Commercial revenue is generated primarily from digital and print subscriptions for a variety of products, proprietary research and consulting, ad claims and industry conferences.
Our Strategy
We striveOur vision is to be the foremostleading provider of essential information such astransparent and independent benchmarks intelligence and ratings, analytics, data and research in the global capital, commodities and commercialcorporate markets. We seek to leverage the strength of our globally recognized brandsOur mission is to promote sustainable growth in these markets by bringing transparencyproviding customers with essential intelligence and independent insightssuperior service. We seek to those markets. Our strategy seeks to understandaccomplish our mission and vision within the key trends affecting our businesses and address them through the achievementframework of our enterprise objectives.
Four key trends are increasing the need for contentcore values of fairness, integrity and analyticstransparency. We intend to deliver our products and services through customer-centric distribution channels that enable mission-critical decisions in the markets we serve:
The globalizationour core customer sets of the capital markets: the global demand for capitalinvestment management, investment banking, commercial banking, insurance, specialty financial institutions and commodities markets trading and liquidity is expanding rapidly in both developed and growth markets;
The need for data-driven decision making tools: developments in technology, communications and data processing have increased the demand for time-critical, multi-asset class data and solutions;
Systemic regulatory change: new global legislation (e.g. Dodd-Frank, U.S. Commodity Futures Trading Commission and Basel III) is creating new and complex operating and capital models for banks and market participants; and
Increased volatility and risk: amplified uncertainty and market volatility around short-term events are driving the need for new methodologies to measure risk, return and profitability.corporates.
We are focused on deliveringaligning our efforts against these enterprise objectives:
•Extend Market Leadership: extend our position as a global leader in our market segments
•Build Scalable Capabilities: further institutionalizetwo key capabilities such as technology and risk management
•Foster Talent: attract and retain top talent
Create Shareholder Value: deliver high top-line and bottom-linestrategic priorities: creating growth and positive returns to shareholdersdriving performance.
Our enterprise strategy, which will support the achievement of these core objectives, includes the following components:
Organic Growth: support a portfolio of leading market brands that delivers high top-line and bottom-line growth
Global Expansion: expand our global footprint to capture opportunities in both mature and growth markets
Acquisitions and Partnerships: supplement organic growth with acquisitions and partnerships
Scalable Capabilities: create and leverage efficiency and effectiveness through common platforms, processes and standards
Talent Retention and Acquisition: leverage our position as a market leader to become an employer of choice in our chosen markets and geographiesCreating Growth
Organic Growth
Our businesses share a set of competitive advantages, including leading global brands, scalable technology and multi-channel distribution capabilities. We will leverage these capabilities to extend and expand our product offerings across high-value segments of the information value chain, such as benchmarks, pricing and valuation, analytics and tools, research and desktop / enterprise solutions. Additionally, we will seek out cross-business growth initiatives and synergies, in areas such as adjacent asset classes and parts of the value-chain. This will result in the creation of innovative new solutions that help investors face the evolving challenges of today's volatile and changing market landscape.
Global Expansion
Global growth remains a high priority for our Company as we continue to expand our footprint to capture opportunities in mature and growth markets. Our scale and leadership position within our core markets will enable us to identify and capitalize on growth trends and further extend our position in fast-developing growth markets. We are committed to enhancing our local data capabilities in growth markets for both local and global distribution.
Acquisitions and Partnerships
We will continuestrive to drive acquisitionsglobal growth by focusing on executing our strategic initiatives, strengthening core capabilities and partnerships that supplement organic growth and strengthen our market position in our target asset classes, high-value segments of the information value chain, and high-priority geographic markets. Our acquisition and partnership activity in 2012 included the following transactionscollaborating across all our segments:
S&P DJ Indices
On June 29, 2012, we closed our transaction with CME Group, Inc. (“CME Group”) and CME Group Index Services LLC, a joint venture between CME Group and Dow Jones & Company, Inc., to form a new company, S&P Dow Jones Indices LLC.businesses.
S&P Capital IQ
On June 29, 2012, we acquired Credit Market Analysis Limited (“CMA”) from the CME Group. CMA provides independent data concerning the over-the-counter markets. CMA's data and technology will enhance our capability to provide pricing and related over-the-counter information.
On April 3, 2012, we completed the acquisition of QuantHouse, an independent global provider of end-to-end systematic low-latency market data solutions. The acquisition allows us to offer real-time monitors, derived data sets and analytics as well as the ability to package and resell this data as part of a core solution.
On February 8, 2012, we completed the acquisition of R² Technologies (“R²”). R² provides advanced risk and scenario-based analytics to traders, portfolio and risk managers for pricing, hedging and capital management across asset classes. Driving Performance
C&C
On November 1, 2012, we completed the acquisition of Kingsman SA (“Kingsman”), a privately-held, Switzerland-based provider of price information and analytics for the global sugar and biofuels markets. The acquisition of Kingsman will expand our presence in sugar and biofuels information markets and has the potential to provide growth in the global agricultural information markets.
S&P Ratings
On July 4, 2012, CRISIL, our majority owned Indian credit rating agency, completed the acquisition of Coalition Development Ltd. (“Coalition”), a privately-held U.K. analytics company, and its subsidiaries. Coalition provides high-end analytics to leading global investment banks and other financial services firms. Coalition will be integrated into CRISIL's Global Research & Analytics business.
Scalable Capabilities
We will maximize the capabilities of our entire portfolio of assets through an operating model that allows usstrive to leverage infrastructure,deliver operational excellence, manage and more quicklymitigate risk and effectively combine assets to create new solutions. We will further institutionalize enterprise-wide functions, including: technologyenhance leadership and data operations; marketing, branding and communications; and risk management and compliance. This will allow us to create high-value, differentiated solutions and serve as a platform for growth.accountability.
Talent Retention and Acquisition
Consistent with our position as one of the leading content and analytics providers, we have a professional workforce of analysts, researchers and technologists, including the world's largest credit analytics teams, with over 1,400 analysts at S&P Ratings. We will promote a culture that is results-oriented and serves customers in a responsible and innovative way. We strive to recruit and retain the top talent required to deliver on our vision to be a leading provider of benchmarks, intelligence and analytics in the global capital, commodities and commercial markets.
There can be no assurance that we will achieve success in implementing any one or more of these strategies as a variety of factors could unfavorably impact operating results, including prolonged difficulties in the global credit markets and a change in the regulatory environment affecting our businesses. See Item 1a, Risk Factors, in this Annual Report on Form 10-K.
Further projections and discussion on our 2016 outlook for our segments can be found within “Results“MD&A – Results of Operations”.
Segment and Geographic Data
The relative contribution of our operating segments to operating revenue, operating profit, long-lived assets and geographic area for the three years ended December 31, 2012 is2015 are included in Note 1211 – Segment and Geographic Information to the consolidated financial statements under Item 8, Consolidated Financial Statements and Supplementary Data, in this Form 10-K.
Our Personnel
As of December 31, 2012,2015, we have 21,687had approximately 20,400 employees located worldwide, of which 9,942approximately 5,700 were employed in the United States. Of these 21,687 employees, approximately 5,000 were MHE employees.U.S.
Available Information
The Company's investor kit includes the current Annual Report, Proxy Statement, Form 10-Qs,Reports on Form 10-K, andProxy Statements, Quarterly Reports on Form 10-Q, current reports on Form 8-K, the current earnings release.release and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. For online access to the Digital Investor Kit, go to www.mcgraw-hill.com/investor_relations.http://investor.mhfi.com. Requests for printed copies, free of charge, can be e-mailed to investor_relations@mcgraw-hill.cominvestor.relations@mhfi.com or mailed to Investor Relations, The McGraw-Hill Companies,McGraw Hill Financial, Inc., 1221 Avenue of the Americas,55 Water Street, New York, NY 10020-1095.10041-0001. Interested parties can also call Investor Relations toll-free at 866-436-8502 (domestic callers) or 212-512-2192212-438-2192 (international callers). The information on our website is not, and shall not be deemed to be part hereof or incorporated into this or any of our filings with the SEC.
Access to more than 10 years of the Company's filings made with the Securities and Exchange Commission is available through the Company's Investor Relations Web site. Go to www.mcgraw-hill.com/investor_relationshttp://investor.mhfi.com and click on the SEC Filings link. In addition, these filings are available to the public on the Commission's Web site through their EDGAR filing system at www.sec.gov. Interested parties may also read and copy materials that the Company has filed with the Securities and Exchange Commission (“SEC”) at the SEC's public reference room located at 450 Fifth100 F Street, N.W., Room 1024,NE, Washington, D.C. 20549.20549 on official business days between the hours of 10AM and 3PM. Please call the Commission at 1-800-SEC-0330 for further information on the public reference room.
Item 1a. Risk Factors
We are providing the following cautionary statements which identify all known material risks, uncertainties and other factors that could cause our actual results to differ materially from historical and expected results.
We operate in the capital, commodities and commercial markets. The capital markets include asset managers, investment banks, commercial banks, insurance companies, exchanges, issuers and financial advisors;issuers; the commodities markets include producers, traders and intermediaries within energy, metals, petrochemicals and agriculture; and the commercial markets include professionals and corporate executives within automotive, construction, aerospace and defense,financial services, insurance and marketing / research information services. Certain risk factors are applicable to certain of our individual marketssegments while other risk factors are applicable company-wide.
Market Risks
Introduction of new products, services or technologies could impact our profitability
We operate in highly competitive markets that continue to change to adapt to customer needs. In order to maintain a competitive position, we must continue to invest in new offerings and new ways to deliver our products and services.
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◦ | These investments may not be profitable or may be less profitable than what we have experienced historically. |
We could experience threats to our existing businesses from the rise of new competitors due to the rapidly changing environment within which we operate.
We rely on our information technology environment and certain critical databases, systems and applications to support key product and service offerings. We believe we have appropriate policies, processes and internal controls to ensure the stability of our information technology, provide security from unauthorized access to our systems and maintain business continuity, but our business could be subject to significant disruption and our operating results may be adversely impacted by unanticipated system failures, data corruption or unauthorized access to our systems.
Exposure to litigation and government and regulatory proceedings, investigations and inquiries could have a material adverse effect on our business, financial position andcondition or results of operationsoperations.
WeIn the normal course of business, both in the United States and abroad, we and our subsidiaries are involveddefendants in numerous legal actionsproceedings and claims arising from our business practices,are often the subject of government and regulatory proceedings, investigations and inquiries, as discussed under Item 7, Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations, in this Annual Report on Form 10-K and in Note 13 –12 - Commitments and Contingencies to the consolidated financial statements under Item 8, Consolidated Financial Statements and Supplementary Data, in this Annual Report on Form 10-K, and we face the risk that additional actionsproceedings, investigations and claimsinquiries will be filedarise in the future. Due
Many of these proceedings, investigations and inquiries relate to the inherent uncertaintyratings activity of the litigation process, the resolutionS&P Ratings brought by issuers and alleged purchasers of any actionsrated securities. In addition, various government and self-regulatory agencies frequently make inquiries and conduct investigations into our compliance with applicable laws and regulations, including those related to ratings activities and antitrust matters.
Any of these proceedings, investigations or claims that may be broughtinquiries could ultimately result in the future,adverse judgments, damages, fines, penalties or the change in applicable legal standardsactivity restrictions, which could have a material adverse effect on our business, financial position andcondition or results of operations.
In view of the uncertainty inherent in litigation and government and regulatory enforcement matters, we cannot predict the eventual outcome of the matters we are currently facing or the timing of their resolution, or in most cases reasonably estimate what the eventual judgments, damages, fines, penalties or impact of activity restrictions may be. As a result, we cannot provide assurance that the outcome of the matters we are currently facing or that we may face in the future will not have a material adverse effect on our business, financial condition or results of operations.
As litigation or the process to resolve pending matters progresses, as the case may be, we continuously review the latest information available and assess our ability to predict the outcome of such matters and the effects, if any, on our consolidated financial condition, cash flows, business and competitive position, which may require that we record liabilities in the consolidated financial statements in future periods.
Legal proceedings impose additional expenses on the Company and require the attention of senior management to an extent that may significantly reduce their ability to devote time addressing other business issues.
Risks relating to legal proceedings may be heightened in foreign jurisdictions that lack the legal protections or liability standards comparable to those that exist in the United States. In addition, new laws and regulations have been and may continue to be enacted that establish lower liability standards, shift the burden of proof or relax pleading requirements, thereby increasing the risk of successful litigations against the Company in the United States and in foreign jurisdictions. These litigation risks are often difficult to assess or quantify and could have a material adverse effect on our business, financial condition or results of operations.
We may not have adequate insurance or reserves to cover these risks, and the existence and magnitude of these risks often remains unknown for substantial periods of time and could have a material adverse effect on our business, financial condition or results of operations.
Our acquisitions and other strategic transactions may not produce anticipated results.
We have made and expect to continue to make acquisitions or enter into other strategic transactions to strengthen our business and grow our Company.
Such transactions, including our recent acquisition of SNL Financial LC, present significant challenges and risks.
The market for acquisition targets and other strategic transactions is highly competitive, especially in light of industry consolidation, which may affect our ability to complete such transactions.
If we are unsuccessful in completing such transactions or if such opportunities for expansion do not arise, our business, financial condition or results of operations could be materially adversely affected.
If such transactions are completed, the anticipated growth and other strategic objectives of such transactions may not be fully realized, and a variety of factors may adversely affect any anticipated benefits from such transactions. For instance, the process of integration may require more resources than anticipated, we may assume unintended liabilities, there may be unexpected regulatory and operating difficulties and expenditures, we may fail to retain key personnel of the acquired business and such transactions may divert management’s focus from other business operations.
The anticipated benefits from an acquisition or other strategic transaction may not be realized fully, or may take longer to realize than expected. For instance, although we have identified approximately $100 million in synergies expected to be realized by 2019 largely from operational efficiencies and our ability to accelerate SNL Financial’s international growth through its global footprint, there is no guarantee that we will be able to achieve any or all of these synergies. As a result, the failure of acquisitions and other strategic transactions to perform as expected could have a material adverse effect on our business, financial condition or results of operations.
Changes in the volume of securities issued and traded in domestic and/or global capital markets and changes in interest rates and volatility in the financial markets could have a material impactadverse effect on our business, financial condition or results of operationsoperations.
UnfavorableOur business is impacted by general economic conditions and volatility in the United States and world financial markets. Therefore, since a significant component of our credit-rating based revenue is transaction-based, and is essentially dependent on the number and dollar volume of debt securities issued in the capital markets, unfavorable financial or economic conditions that either reduce investor demand for debt securities or reduce issuers'issuers’ willingness or ability to issue such securities could reduce the number and dollar volume of debt issuanceissuances for which S&P Ratings provides credit ratings.
Unfavorable financial or economic conditions could also adversely impacts S&P DJ Indices, which receives a portion of its revenue from fees based on derivatives trading volumes and index-based ETF assets under management.
Increases in interest rates or credit spreads, volatility in financial markets or the interest rate environment, significant political or economic events, defaults of significant issuers and other market and economic factors may negatively impact the general level of debt issuance, the debt issuance plans of certain categories of borrowers, the level of derivatives trading and/or the types of credit-sensitive products being offered.offered, any of which could have a material adverse effect on our business, financial condition or results of operations.
Any weakness in the macroeconomic environment could constrain customer budgets across the markets we serve, potentially leading to a reduction in their employee headcount and a decrease in demand for our subscription-based
products.
Increased domesticIncreasing regulation of our S&P Ratings business in the United States, Europe and foreign regulation may adversely impactelsewhere can increase our businesses
Ourcosts of doing business and therefore could have a material adverse effect on our business, financial condition or results could be adversely affected because of public statements or actions by market participants, government officials and others who may be advocates of increased regulation or regulatory scrutiny.operations.
The financial services industry is highly regulated, rapidly evolving and subject to the potential for increasing regulation in the United States, Europe and abroad.elsewhere. The businesses conducted by S&P Ratings are in certain cases regulated under the U.S. Credit Rating Agency Reform Act of 2006 (the “Reform Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the U.S. Securities Exchange Act of 1934 (the “Exchange Act”), and/or the laws of the states or other jurisdictions in which they conduct business.
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◦ | In the past several years, the U.S. Congress, the SEC and the European Commission, through regulators including the International Organization of Securities Commissions and the European Securities and Markets Authority, as well as regulators in other countries in which S&P Ratings operates have been reviewing the role of rating agencies and their processes and the need for greater oversight or regulations concerning the issuance of credit ratings or the activities of credit rating agencies. |
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▪ | We do not believe that the laws, regulations and rules that have been adopted as part of this process will have a material adverse effect on our financial condition or results of operations. |
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◦ | Other laws, regulations and rules relating to credit rating agencies are being considered by local, national, foreign and multinational bodies and are likely to continue to be considered in the future, including provisions seeking to reduce regulatory and investor reliance on credit ratings, rotation of credit rating agencies and liability standards applicable to credit rating agencies. The impact on us of the adoption of any such laws, regulations or rules remains uncertain, but could increase the costs and legal risks relating to S&P Rating's rating activities. |
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◦ | Additional information regarding rating agencies is provided under Item 7, Management'sIn the past several years, the U.S. Congress, the International Organization of Securities Commissions ("IOSCO"), the SEC and the European Commission, including through the European Securities Market Authority ("ESMA"), as well as regulators in other countries in which S&P Ratings operates, have been reviewing the role of rating agencies and their processes and the need for greater oversight or regulations concerning the issuance of credit ratings or the activities of credit rating agencies. Other laws, regulations and rules relating to credit rating agencies are being considered by local, national and multinational bodies and are likely to continue to be considered in the future, including provisions seeking to reduce regulatory and investor reliance on credit ratings, rotation of credit rating agencies and liability standards applicable to credit rating agencies. These laws and regulations, and any future rulemaking, could result in reduced demand for credit ratings and increased costs, which we may be unable to pass through to customers. In addition, there may be uncertainty over the scope, interpretation and administration of such laws and regulations. We may be required to incur significant expenses in order to comply with such laws and regulations and to mitigate the risk of fines, penalties or other sanctions. Legal proceedings could become increasingly lengthy and there may be uncertainty over and exposure to liability. It is difficult to accurately assess the future impact of legislative and regulatory requirements on our business and our customers’ businesses, and they may affect S&P Ratings’ communications with issuers as part of the rating assignment process, alter the manner in which S&P Ratings’ ratings are developed, affect the manner in which S&P Ratings or its customers or users of credit ratings operate, impact the demand for ratings and alter the economics of the credit ratings business. Each of these developments increase the costs and legal risk associated with the issuance of credit ratings and may have a material adverse effect on our operations, profitability and competitiveness, the demand for credit ratings and the manner in which such ratings are utilized. Additional information regarding rating agencies is provided under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Annual Report on Form 10-K. |
Our commodities business isS&P DJ Indices and C&C businesses are subject to the potential for increasing regulatory review in the United States, Europe and abroad.
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◦ | In the fall of 2011, the G20 Cannes Final Summit Declaration called upon the International Organization of Securities Commissions ("IOSCO"), International Energy Forum, International Energy Agency and the Organization of Petroleum Exporting Countries to prepare recommendations to improve the functioning and oversight of price reporting companies by mid-2012. |
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◦ | In a meeting with representatives of IOSCO in January 2012, principals at IOSCO advised Platts management that among the recommendations the regulatory group is considering is establishment of formal oversight of price reporting organizations and their processes, or a self-regulatory oversight regime. |
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◦ | In addition, new rules that are expected to be adopted by the U.S. Commodity Futures Trading Commission in 2013 affecting transactions in oil derivatives may hinder Platts in relation to its administration of the Platts electronic window (eWindow) as a means of determining price assessments in oil. Similar new rules and regulations in Europe are currently under consideration, albeit on a slower time frame. |
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◦ | On October 5, 2012, IOSCO issued its final report to the G-20, including Principles for Oil Price Reporting Agencies, which sets out principles IOSCO states are intended to enhance the reliability of oil price assessments that are referenced in derivative contracts subject to regulation by IOSCO members. On January 9, 2013, IOSCO held a meeting with the Price Reporting Organizations to discuss implementation of the Principles for Oil Price Reporting Agencies. At the meeting, Platts was able to obtain clarification from IOSCO on its expectations for voluntary implementation of the Principles by Platts and the other PROs and, with that clarification, Platts believes that the Principles will not have a significant negative impact on its ongoing business operations. |
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◦ | We do not believe that any new regulatory or self-regulatory oversight regime would have a material adverse effect on our financial condition or results of operations. |
Operating Risks
A significant increase in operating costsdoing business and expensestherefore could have a material adverse effect on our profitabilitybusiness, financial condition or results of operations.
Our major expenses include employee compensationIn addition to the extensive and capital investments.
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◦ | We offer competitive salary and benefit packages in order to attract and retain the quality employees required to grow and expand our businesses. Compensation costs are influenced by general economic factors, including those affecting the cost of health insurance and postretirement benefits, and any trends specific to the employee skill sets we require. |
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◦ | We make significant investments in information technology data centers and other technology initiatives. Although we believe we are prudent in our investment strategies and execution of our implementation plans, there is no assurance as to the ultimate recoverability of these investments. |
evolving U.S. laws and regulations, foreign jurisdictions, principally in Europe, have taken measures to increase regulation of the financial services and commodities industries.
Our abilityIn October of 2012, IOSCO issued its Principles for Oil Price Reporting Agencies ("PRA Principles"), which IOSCO states are intended to protect our intellectual property rightsenhance the reliability of oil price assessments that are referenced in derivative contracts subject to regulation by IOSCO members. Platts has taken steps to align its operations with the PRA Principles and, as recommended by IOSCO in its final report on the PRA Principles, has aligned to the PRA Principles for other commodities for which it publishes benchmarks.
In July of 2013, IOSCO issued its Principles for Financial Benchmarks ("Financial Benchmark Principles"), which are intended to promote the reliability of benchmark determinations, and address governance, benchmark quality and accountability mechanisms, including with regard to the indices published by S&P DJ Indices. S&P DJ Indices has taken steps to align its governance regime and operations with the Financial Benchmark Principles and engaged an independent auditor to perform a reasonable assurance review of such alignment.
The financial benchmarks industry is subject to the new pending benchmark regulation in the European Union (the “E.U. Benchmark Regulation”) as well as potential increased regulation in other jurisdictions. The proposed E.U. Benchmark Regulation has been released for final approval and is expected to be published later this year. The E.U. Benchmark
Regulation will likely require S&P DJ Indices and Platts in due course to obtain registration or authorization in connection with its benchmark activities in Europe. This legislation will likely cause additional operating obligations but they are not expected to be material at this time and until the regulation is finalized the exact impact is not certain.
The European Union has recently finalized a package of legislative measures known as MiFID II ("MiFID II"), which revise and update the existing E.U. Markets in Financial Instruments Directive framework. MiFID II will apply in full in all E.U. Member States from January 3, 2017. MiFID II includes provisions that, among other things: (i) impose new conditions and requirements on the licensing of benchmarks and provide for non-discriminatory access to exchanges and clearing houses; (ii) modify the categorization and treatment of certain classes of derivatives; (iii) expand the categories of trading venue that are subject to regulation; and (iv) provide for the mandatory trading of certain derivatives on exchanges (complementing the mandatory derivative clearing requirements in the E.U. Market Infrastructure Regulation of 2011). Although the MiFID II package is “framework” legislation (meaning that much of the detail of the rules will be set out in subordinate measures to be agreed upon in the period before 2017), it is possible that the introduction of these laws and rules could affect S&P DJ Indices’ and Platts’ abilities both to administer and license their indices and price assessments, respectively.
Changes to regulations in the United States, Europe and elsewhere may impact our competitive position
Our products contain intellectual property delivered through a variety of media, including printS&P Capital IQ and digital. Our ability to achieve anticipated results depends in part on our ability to defend our intellectual property against infringement. Our operating results may be adversely affectedSNL business by inadequate or changing legal and technological protections for intellectual property and proprietary rights in some jurisdictions and markets.
Riskincreasing the costs of doing business abroadglobally, which could have a material adverse effect on our business, financial condition or results of operations.
As we continueS&P Capital IQ and SNL operates regulated investment advisory businesses in the United States, the European Union and certain other countries. These and other S&P Capital IQ and SNL businesses may increasingly become subject to expand our operations overseas, we facenew or more stringent regulations that will increase the increased riskscost of doing business, abroad, including inflation, fluctuationwhich could have a material adverse effect on our business, financial condition or results of operations.
MiFID II and the Market Abuse Regulation (“MAR”) may impose additional regulatory burdens on S&P Capital IQ and SNL's activities in interest ratesthe European Union, although the exact severity and currency exchange rates, changescost are not yet known.
We may become subject to liability based on the use of our products by our clients.
Some of our products support the investment processes of our clients, which, in applicable laws and regulatory requirements, export and import restrictions, tariffs, nationalization, expropriation, limitsthe aggregate, manage trillions of dollars of assets. Use of our products as part of the investment process creates the risk that clients, or the parties whose assets are managed by our clients, may pursue claims against us for very significant dollar amounts, which could have a material adverse effect on repatriationour business, financial condition or results of funds, civil unrest, terrorism, unstable governments and legal systems,operations.
Any such claim, even if the outcome were to be ultimately favorable to us, would involve a significant commitment of our management, personnel, financial and other factors. Adverse developments in anyresources and could have a negative impact on our reputation. In addition, such claims and lawsuits could have a material adverse effect on our business, financial condition or results of these areas could cause actual results to differ materially from historical and/or expected operating results.
operations.
Increased competition could result in a loss of market share or revenuerevenue.
The markets for credit ratings, financial research, investment and advisory services, and index-based products, and commodities price assessments and related news and information about the commodities markets are intensely competitive. S&P Ratings, S&P Capital IQ and SNL, S&P DJ Indices and C&C compete domestically and internationally on the basis of a number of factors, including the quality of its ratings, research and advisory services, client service, reputation, price, geographic scope, range of products and technological innovation.
While our businesses face competition from traditional content and analytics providers, we also face competition from non-traditional providers such as exchanges, asset managers, investment banks and technology-led companies that are adding content and analytics capabilities to their core businesses.
In addition, in some of the countries in which S&P Ratings competes, governments may provide financial or other support to locally-based rating agencies and may from time to time establish official credit rating agencies, credit ratings criteria or procedures for evaluating local issuers.
Sustained downward pressure on oil and other commodities prices and trading activity in those markets could have a material adverse effect on the rate of growth of Platts’ revenue, including subscription and licensing fees.
Introduction of new products, services or technologies could impact our profitability.
We operate in highly competitive markets that continue to change to adapt to customer needs. In order to maintain a competitive position, we must continue to invest in new offerings and new ways to deliver our products and services. These investments may not be profitable or may be less profitable than what we have experienced historically.
We could experience threats to our existing businesses from the rise of new competitors due to the rapidly changing environment in which we operate.
We rely on our information technology environment and certain critical databases, systems and applications to support key product and service offerings. We believe we have appropriate policies, processes and internal controls to ensure the stability of our information technology, provide security from unauthorized access to our systems and maintain business continuity, but our business could be subject to significant disruption and our business, financial condition or results of operations could be materially and adversely affected by unanticipated system failures, data corruption or unauthorized access to our systems.
A significant increase in operating costs and expenses could have a material adverse effect on our profitability.
Our major expenditures include employee compensation and capital investments.
We offer competitive salary and benefit packages in order to attract and retain the quality employees required to grow and expand our businesses. Compensation costs are influenced by general economic factors, including those affecting the cost of health insurance and postretirement benefits, and any trends specific to the employee skill sets we require.
We make significant investments in information technology data centers and other technology initiatives and we cannot provide assurances that such investments will result in increased revenues.
Although we believe we are prudent in our investment strategies and execution of our implementation plans, there is no assurance as to the ultimate recoverability of these investments.
Consolidation of customers as well as staffing levels across our customer base could impact our available markets and revenue growthgrowth.
Our businesses within S&P Capital IQ and S&P DJ Indices have a customer base which is largely comprised of members from the financial services industry.and commodities industries. The current challenging business environment and the consolidation of customers resulting from mergers and acquisitions in the financial services industryand commodities industries can result in reductions in the number of firms and workforce which can impact the size of our customer base.
Customers within the financial services and commodities industries that strive to reduce their operating costs may seek to reduce their spending on our products and services. If a large number of smaller customers or a critical number of larger customers reduce their spending with us, our business, financial condition or results of operations could be materially and adversely affected.
Alternatively, customers may use other strategies to reduce their overall spending on financial and commodity market products and services by consolidating their spending with fewer vendors, including by selecting other vendors with lower-cost offerings, or by self-sourcing their need for financial and commodity market products and services. If customers elect to consolidate their spending on financial and commodity market products and services with other vendors and not us, if we lose business to lower priced competitors, or if customers elect to self-source their product and service needs, our business, financial condition or results of operations could be materially and adversely affected.
A material portion of our revenues in our S&P DJ Indices business is concentrated in some of our largest customers, who have significant assets under management in index funds and exchange-traded funds. A loss of a substantial portion of revenue from our largest customers could have a material and adverse effect on our business, financial condition or results of operations.
If we lose key outside suppliers of data and products or if the data or products of these suppliers have errors or are delayed, we may not be able to provide our clients with the information and products they desire.
Our ability to produce our products and develop new products is dependent upon the products of other suppliers, including certain data, software and service suppliers. Some of our products are dependent upon (and of little value without) updates from our data suppliers and most of our information and data products are dependent upon (and of little value without) continuing access to historical and current data.
We utilize certain data provided by third-party data sources in a variety of ways, including large volumes of data from certain stock exchanges around the world.
If the data from our suppliers has errors, is delayed, has design defects, is unavailable on acceptable terms or is not available at all, it could have a material adverse effect on our business, financial condition or results of operations.
Some of our agreements with data suppliers allow them to cancel on short notice. Termination of one or more of our significant data agreements or exclusion from, or restricted use of, or litigation in connection with, a data provider’s information could decrease the available information for us to use (and offer our clients) and could have a material adverse effect on our business, financial condition or results of operations.
Changes to our financial processing systems and the transition of certain of our support functions to selected outsource providers may adversely impact our business
We are in the process of changing certain of our financial processing systems to an enterprise-wide systems solution. There can be no certainty that these initiatives will deliver the expected benefits. The failure to implement these changes successfullylegislative, regulatory, and commercial environments in which we operate may materially and adversely impact our ability to process transactions accuratelycollect, compile, use, and efficientlypublish data and may impact our financial results.
Certain types of information we collect, compile, use, and publish, including offerings in our C&C business, are subject to regulation by governmental authorities in jurisdictions in which we operate. In addition, there is increasing concern among certain privacy advocates and government regulators regarding marketing and privacy matters, particularly as they relate to individual privacy interests.
These concerns may result in new or amended laws and regulations. Future laws and regulations with respect to the collection, compilation, use, and publication of information and consumer privacy could result in limitations on our operations, increased compliance or litigation expense, adverse publicity, or loss of revenue, which could have a material adverse effect on our business, financial condition, and results of operations. It is also possible that we could be prohibited from collecting or disseminating certain types of data, which could affect our ability to meet our customers’ needs.
Our ability to protect our intellectual property rights could impact our competitive position.
Our products contain intellectual property delivered through a variety of digital and other media. Our ability to achieve anticipated results depends in part on our ability to defend our intellectual property against infringement. Our business, financial condition or results of operations could be materially and adversely affected by inadequate or changing legal and technological protections for intellectual property and proprietary rights in some jurisdictions and markets.
We are exposed to multiple risks associated with the global nature of our operations.
The geographic breadth of our activities subjects us to significant legal, economic, operational, market, compliance and reputational risks. These include, among others, risks relating to:
economic and political conditions in foreign countries,
inflation,
fluctuation in interest rates and currency exchange rates,
limitations that foreign governments may impose on the conversion of currency or the payment of dividends or other remittances to us from our non-U.S. subsidiaries,
differing accounting principles and standards,
unexpected increases in taxes or changes in U.S. or foreign tax laws,
the costs of repatriating cash held by entities outside the United States, including withholding or other taxes that
foreign governments may impose on the payment of dividends or other remittances to us from our non-U.S. subsidiaries,
potential costs and difficulties in complying with a wide variety of foreign laws and regulations (including tax systems) administered by foreign government agencies, some of which may conflict with U.S. or other sources of law,
changes in applicable laws and regulatory requirements,
the possibility of nationalization, expropriation, price controls and other restrictive governmental actions,
competition with local rating agencies that have greater familiarity, longer operating histories and/or support from local governments or other institutions,
civil unrest, terrorism, unstable governments and legal systems, and other factors.
Adverse developments in any of these areas could have a material adverse effect on our business, financial condition or results of operations.
Additionally, we are subject to complex U.S., European and other local laws and regulations that are applicable to our operations abroad, including trade sanctions laws, anti-corruption laws such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act 2010, anti-bribery laws, anti-money laundering laws, and other financial crimes laws. Although we have implemented internal controls, policies and procedures and employee training and compliance programs to deter prohibited practices, such measures may not be effective in preventing employees, contractors or agents from violating or circumventing such internal policies and violating applicable laws and regulations. Any determination that we have violated trade sanctions, anti-bribery or anti-corruption laws could have a material adverse effect on our business, financial condition or results of operations.
Compliance with international and U.S. laws and regulations that apply to our international operations increases the cost of doing business in foreign jurisdictions. Violations of such laws and regulations may result in fines and penalties, criminal sanctions, administrative remedies, restrictions on business conduct and could leadhave a material adverse effect on our reputation, our ability to attract and retain employees, our business, disruption.financial condition or results of operations.
Our inability to successfully recover should we experience a disaster or other business continuity problem could cause material financial loss, loss of human capital, regulatory actions, reputational harm or legal liability.
Should we experience a local or regional disaster or other business continuity problem, such as an earthquake, hurricane, flood, terrorist attack, pandemic, security breach, cyber attack, power loss, telecommunications failure or other natural or man-made disaster, our ability to continue to operate will depend, in part, on the availability of our personnel, our office facilities and the proper functioning of our computer, telecommunication and other related systems and operations. In addition,such an event, we could experience operational challenges with regard to particular areas of our operations, such as key executive officers or personnel, that could have a material adverse effect on our business.
We regularly assess and plantake steps to outsourceimprove our existing business continuity plans and key management succession. However, a disaster on a significant scale or affecting certain of our key operating areas within or across regions, or our inability to successfully recover should we experience a disaster or other business continuity problem, could materially interrupt our business operations and result in material financial loss, loss of human capital, regulatory actions, reputational harm, damaged client relationships or legal liability.
Outsourcing certain aspects of our business could result in disruption and increased costs.
We have outsourced certain support functions to third-party service providers to leverage leading specialized capabilities and achieve cost savings and efficiencies. If the service providers to which we outsourcehave outsourced these functions to do not perform effectively, we
may not be able to achieve the expected cost savings and, depending on the function involved, we may experience business disruption, processing inefficiencies, or harm employee morale.
We rely heavily on network systems and the Internet and any failures or disruptions may adversely affect our ability to serve our customers.
Risks associatedMany of our products and services are delivered electronically, and our customers rely on our ability to process transactions rapidly and deliver substantial quantities of data on computer-based networks. Our customers also depend on the continued capacity, reliability and security of our electronic delivery systems, our websites and the Internet.
Our ability to deliver our products and services electronically may be impaired due to infrastructure or network failures, malicious or defective software, human error, natural disasters, service outages at third-party Internet providers or increased government regulation.
Delays in our ability to deliver our products and services electronically may harm our reputation and result in the loss of customers. In addition, a number of our customers entrust us with storing and securing their data and information on our servers.
Although we have disaster recovery plans that include backup facilities for our primary data centers, our systems are not always fully redundant, and our disaster planning may not always be sufficient or effective. As such, these disruptions may affect our ability to store, handle and secure such data and information.
Our operations and infrastructure may malfunction or fail, which could have a material adverse effect on our business, financial condition or results of operations.
Our ability to conduct business may be materially and adversely impacted by a disruption in the saleinfrastructure that supports our businesses and the communities in which we are located, including New York City, the location of McGraw-Hill Educationour headquarters, and major cities worldwide in which we have offices.
This may include a disruption involving physical or technological infrastructure used by us or third parties with or through whom we conduct business, whether due to human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, intentional acts of vandalism, acts of terrorism, political unrest, war or otherwise. Our efforts to secure and plan for potential disruptions of our major operating systems may not be successful.
We rely on third-party providers to provide certain essential services. While we believe that such providers are reliable, we have limited control over the performance of such providers. To the extent any of our third-party providers ceases to provide these services in an efficient, cost-effective manner or fail to adequately expand its services to meet our needs and the needs of our customers, we could experience lower revenues and higher costs.
We also do not have fully redundant systems for most of our smaller office locations and low-risk systems, and our disaster recovery plan does not include restoration of non-essential services. If a disruption occurs in one of our locations or systems and our personnel in those locations or those who rely on such systems are unable to utilize other systems or communicate with or travel to other locations, such persons’ ability to service and interact with our clients and customers may suffer.
We cannot predict with certainty all of the adverse effects that could result from our failure, or the failure of a third party, to efficiently address and resolve these delays and interruptions. A disruption to our operations or infrastructure could have a material adverse effect on our business, financial condition or results of operations.
We are exposed to risks related to cybersecurity and protection of confidential information.
Our operations rely on the secure processing, storage and transmission of confidential, sensitive and other types of information in our computer systems and networks and those of our third party vendors.
The sale will resultcyber risks we face range from cyber-attacks common to most industries, to more advanced threats that target us because of our prominence in two separate independent companies eachthe global marketplace, or due to our ratings of which issovereign debt. Breaches of our or our vendors’ technology and systems, whether from circumvention of security systems, denial-of-service attacks or other cyber-attacks, hacking, computer viruses or malware, employee error, malfeasance, physical breaches or other actions, may cause material interruptions or malfunctions in our or such vendors’ web sites, applications or data processing, or may compromise the confidentiality and integrity of material information regarding us or our business or customers.
Measures that we take to avoid or mitigate material incidents can be expensive, and may be insufficient, circumvented, or may become obsolete. Any material incidents could cause us to experience reputational harm, loss of customers, regulatory actions, sanctions or other statutory penalties, litigation or financial losses that are either not insured against or not fully covered through any insurance maintained by us.
Any of the foregoing could have a smaller, less diversified company than we currently were with a narrowermaterial adverse effect on our business, focus than we previously had. In addition, diversification of revenues, costs, and cash flows may diminish. As such, it is possible that thefinancial condition or results of operations, cash flows, working capital and financing requirements of the two separate businesses may be subject to increased volatility.
Completion of the sale requires significant time, effort and expense. Any delays in the anticipated completion of the transaction may increase the expenses which we incur to complete the transaction.
This transaction requires us to retain and develop our senior management and a highly skilled workforce. Any unplanned turnover or our failure to develop current leadership positions or to retain a skilled workforce could affect our institutional knowledge base and our competitive advantage. In addition, our operating results could be adversely affected by increased costs due to increased competition for employees and higher employee turnover.operations.
Item 1b. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters are located in leased premises located at 1221 Avenue of the Americas,55 Water Street, New York, NY 10020.10041. We lease office facilities at 103120 locations; 4241 are in the United States.U.S. In addition, we own real property at 67 locations, of which 2 are in the United States. The number of overall locations decreased from 2011 as a result of classifying MHE as a discontinued operation. MHE's anticipated divestiture will result in the loss of owned buildings. See Note 2 – Growth and Value Plan & Discontinued Operations under Item 8, Consolidated Financial Statements and Supplementary Data, in this Form 10-K for further detail.U.S. Our properties consist primarily of office space used by each of our segments. We believe that all of our facilities are well maintained and are suitable and adequate for our current needs.
Item 3. Legal Proceedings
InformationFor information on our legal proceedings, insee Note 1312 – Commitments and Contingencies under Item 8, Consolidated Financial Statements and Supplementary Data, in this Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
Executive Officers of the Registrant
The following individuals are the executive officers of the Company:
|
| | | | |
| Name | | Age | | Position |
Harold McGraw IIIJohn L. Berisford | | 6452 | | Chairman of the Board, President, and Chief Executive OfficerStandard & Poor's Ratings Services |
| Jack F. Callahan, Jr. | | 5457 | | Executive Vice President and Chief Financial Officer |
JohnMartina L. BerisfordCheung | | 4940 | | Executive Managing Director, Global Risk Services, S&P Capital IQ and SNL |
| Michael Chinn | | 43 | | President, S&P Capital IQ and SNL |
| Imogen Dillon Hatcher | | 53 | | President, Platts |
| Courtney Geduldig | | 40 | | Executive Vice President, Public Affairs |
| France M. Gingras | | 51 | | Executive Vice President, Human Resources |
D. Edward SmythDavid Goldenberg | | 6349 | | Executive Vice President, Corporate Affairs and Executive AssistantActing General Counsel |
| Donald Howard | | 56 | | to the Chairman, Chief of Risk and Compliance |
| Alex J. Matturri, Jr. | | 57 | | Chief Executive Officer, S&P Dow Jones Indices |
| Douglas L. Peterson | | 57 | | President and Chief Executive Officer |
Charles L. Teschner, Jr.Paul Sheard | | 52 | | Executive Vice President, Global Strategy |
Kenneth M. Vittor | | 6361 | | Executive Vice President and General CounselChief Economist |
| Ashu Suyash | | 49 | | Managing Director and Chief Executive Officer, CRISIL |
The following executive officers have been full-time employees and officers for less than five years: Mr. Callahan, Mr. Berisford Mr. Smyth and Mr. Teschner.
Mr. Callahan,, prior to becoming an officerPresident of Standard and Poor’s Ratings Services on November 3, 2015, was Executive Vice President, Human Resources since 2011. Prior to that, he held senior management positions at PepsiCo, including Senior Vice President, Human Resources for Pepsi Beverages Company.
Mr. Callahan, prior to becoming Executive Vice President and Chief Financial Officer on December 6, 2010, was Chief Financial Officer of Dean Foods. Prior to that, Mr. Callahan held senior management positions at PepsiCo, including Chief Financial Officer of Frito-Lay International.
Mr. Berisford,Ms. Cheung, prior to becoming an officerExecutive Managing Director, Global Risk Services, S&P Capital IQ and SNL on JanuaryNovember 3, 2011,2015, held management positions at Standard and Poor’s Ratings Services and was most recently MHFI’s Chief Strategy Officer. Prior to joining Standard & Poor’s, she worked in the consulting industry, first in Accenture’s Financial Services Strategy group and later as a Partner at Mitchell Madison Consulting.
Mr. Chinn, prior to becoming President of S&P Capital IQ and SNL on September 8, 2015, was Chief Executive Officer of SNL since 2010 and President of SNL since 2000.
Ms. Dillon Hatcher, prior to becoming President of Platts on September 8, 2015, was President of S&P Capital IQ since 2014. Prior to that, she was FTSE Group Executive Director Global Sales and FTSE Group Managing Director, EMEA.
Ms. Geduldig, prior to becoming Executive Vice President, Public Affairs on May 1, 2015, was Managing Director, Global Government and Public Policy since 2013, and Vice President of Global Regulatory Affairs at Standard & Poor’s. Prior to that, she was Managing Director and Head of Federal Government Relations at the Financial Services Forum.
Ms. Gingras, prior to becoming Executive Vice President, Human Resources on November 3, 2015, was Senior Vice President, Human Resources, for Pepsi Beverages Company.Total Rewards since 2012. Prior to that, he held senior Human Resources positions with Pepsi Bottling Group.she was Head of Compensation and Benefits at Time, Inc.
Mr. Smyth,Goldenberg, prior to becoming an officerActing General Counsel on February 17, 2009, served asOctober 14, 2015, was Chief AdministrativeLegal Officer for S&P Capital IQ and Senior Vice PresidentSNL since January, 2015. His prior roles include General Counsel of CorporateMercer and Government Affairs for H.J. Heinz Company.General Counsel at Lazard Asset Management.
Mr. Howard, prior to becoming Chief of Risk and Compliance on November 3, 2015 was Head of Enterprise Risk Management and Chief Risk and Compliance Officer since November, 2013. Prior to that, Mr. Smyth spent fifteen years as aHoward held senior Irish diplomat.management positions at Standard & Poor’s Ratings Services and Promontory Financial Group, LLC.
Mr. Teschner,Matturri, prior to becoming an officerChief Executive Officer at S&P Dow Jones Indices on March 23, 2009,July 2, 2012, served as Lead Partneran Executive Managing Director of S&P Indices. Prior to joining S&P Indices, Mr. Matturri served as Senior Vice President and senior client officer at the consulting firmDirector of Booz Allen Hamilton, where he lived or worked in more than 20 countries and served on various management committees.
Global Equity Index Management at Northern Trust Global Investments (NTGI). He previously held management positions with Deutsche Asset Management’s Index and Quantitative Investment business and The Bank of New York.
Mr. Peterson, prior to becoming President and Chief Executive Officer on November 1, 2013, was President of Standard & Poor's Ratings Services since 2011. Prior to that, he was Chief Operating Officer of Citibank, NA.
Mr. Sheard, prior to becoming Executive Vice President and Chief Economist on November 3, 2015, was Chief Global Economics and Head of Global Economics and Research of Standard & Poor’s Ratings Services. Prior to that, he held economist positions at Nomura Securities and at Lehman Brothers.
Ms. Suyash, prior to becoming an officer on June 1, 2015, was Chief Executive Officer of L&T Investment Management.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Price Range of Common Stock
On February 1, 2013,January 22, 2016, the closing price of our common stock was $58.34$85.50 per share as reported on the New York Stock Exchange (“NYSE”) under the ticker symbol “MHP”“MHFI”. The approximate number of record holders of our common stock as of February 1, 2013January 22, 2016 was 3,885.3,350. The high and low sales prices of the McGraw-Hill Companies’McGraw Hill Financials’ common stock on the NYSE for the past threetwo fiscal years are as follows:
| | | | 2012 | | 2011 | | 2010 | 2015 | | 2014 |
| First Quarter | $48.60 - $44.67 | | $40.56 - $36.20 | | $36.67 - $32.68 | $109.13 - $85.06 | | $72.83 - $82.39 |
| Second Quarter | 50.00 - 42.02 | | 43.50 - 38.09 | | 36.94 - 26.95 | 108.14 - 100.44 | | 71.93 - 84.81 |
| Third Quarter | 55.19 - 44.19 | | 46.99 - 34.95 | | 33.80 - 27.08 | 107.50 - 84.64 | | 77.70 - 87.28 |
| Fourth Quarter | 57.44 - 49.56 | | 45.77 - 38.68 | | 39.45 - 32.70 | 101.27 - 86.10 | | 73.96 - 93.94 |
| Year | 57.44 - 42.02 | | 46.99 - 34.95 | | 39.45 - 26.95 | 109.13 - 84.64 | | 71.93 - 93.94 |
The performance graph below compares our cumulative total shareholder return during the previous five years with a performance indicator of the overall market (i.e., S&P 500), and our peer group. The Peercurrent peer group consists of the following companies: Thomson Reuters Corporation, Moody’s Corporation, CME Group consistsInc., MSCI Inc., FactSet Research Systems Inc. and IHS Inc. Beginning in fiscal 2014, the Company selected a new peer group to more accurately reflect the Company's peers in terms of industry after the portfolio rationalization of certain businesses. The previous peer group consisted of the following companies: Thomson Reuters Corporation, Thomson Reuters PLC (through September of 2009), Reed Elsevier NV, Reed Elsevier PLC, Pearson PLC, Moody’s Corporation and Wolters Kluwer. Returns assume $100 invested on December 31, 20082010 and total return includes reinvestment of dividends through December 31, 2012.2015.
Dividend PolicyDividends
We expect to continue our policy of paying regular cash dividends, although there is no assurance as to future dividend payments because they depend on future earnings, capital requirements and our financial condition. Regular quarterly dividends per share of our common stock for 20122015 and 20112014 were as follows:
|
| | | | | | | |
| | 2012 | | 2011 |
| $0.255 per quarter in 2012 | $ | 1.02 |
| | |
| $0.250 per quarter in 2011 | | | $ | 1.00 |
|
|
| | | | | | | |
| | 2015 | | 2014 |
| $0.33 per quarter in 2015 | $ | 1.32 |
| | |
| $0.30 per quarter in 2014 | | | $ | 1.20 |
|
In addition, as part of our ongoing Growth and Value Plan to generate shareholder value, we paid a special dividend of $2.50 per share on our common stock on December 27, 2012 to shareholders of record on December 18, 2012.
On January 30, 2013,27, 2016, the Board of Directors approved an increase in the quarterly common stock dividend from $0.255$0.33 per share to $0.28$0.36 per share.
Transfer Agent and Registrar for Common Stock
Computershare is the transfer agent for The McGraw-Hill Companies.McGraw Hill Financial. Computershare maintains the records for the Company's registered shareholders and can assist with a variety of shareholder related services.
Shareholder correspondence should be mailed to:
Computershare
P.O. Box 4300630170
Providence, RI 02940-3006College Station, TX 77842-3170
Overnight correspondence should be mailed to:
Computershare
250 Royall Street211 Quality Circle, Suite 210
Canton, MA 02021College Station, TX 77845
Registered shareholders canVisit the Investor Center™ website to view and manage shareholder account online atonline: www.computershare.com/investor.investor
For shareholder assistance:
|
| |
| In the U.S. and Canada: | 888-201-5538 |
| Outside the U.S. and Canada: | 201-680-6578 |
| TDD for the hearing impaired: | 800-231-5469 |
| TDD outside the U.S. and Canada: | 201-680-6610 |
| E-mail address: | shareholder@computershare.com |
| Shareholder online inquiries | https://www-us.computershare.com/investor/Contact |
Repurchase of Equity Securities
On January 31, 2007,December 4, 2013, the Board of Directors approved a stock repurchase program authorizing the purchase of up to 4550 million shares of the Company’s common stock (the “2007"2013 Repurchase Program”Program"), which was approximately 13%18% of the totalCompany's outstanding shares of our outstanding common stock at that time. During the thirdfourth quarter of 2011,2015, we completed the repurchase of such shares.
On June 29, 2011, the Board of Directors approved a new stock repurchase program authorizing the purchase of up to 50repurchased 5.1 million shares (the “2011under the 2013 Repurchase Program”), which was approximately 17% of the total shares of our outstanding common stock at that time. During 2012, we repurchased 6.8 million sharesProgram and, as of December 31, 2012, 16.92015, 35.5 million shares remained available under the 20112013 Repurchase Program. The repurchased
Repurchased shares may be used for general corporate purposes, including the issuance of shares for stock compensation plans and to offset the dilutive effect of the exercise of employee stock options. The 20112013 Repurchase Program has no expiration date and purchases under this program may be made from time to time on the open market and in private transactions, depending on market conditions.
We did not make anyThe following table provides information on our purchases of our outstanding common stock during the fourth quarter of 20122015 pursuant to our current share repurchase program (column c). In addition to these purchases, the 2011 Repurchase Program.number of shares in column (a) include: 1) shares of common stock that are tendered to us to satisfy our employees’ tax withholding obligations in connection
with the vesting of awards of restricted shares (we repurchase such shares based on their fair market value on the vesting date), and 2) our shares deemed surrendered to us to pay the exercise price and to satisfy our employees’ tax withholding obligations in connection with the exercise of employee stock options. There were no other share repurchases during the quarter outside the repurchases noted below.
(amounts in millions, except per share price)
|
| | | | | | | | | | | | | |
| Period | | (a) Total Number of Shares Purchased | | (b) Average Price Paid per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Programs | | (d) Maximum Number of Shares that may yet be Purchased Under the Programs |
| Oct. 1 - Oct. 31, 2015 | | — |
| | $ | 89.31 |
| | — |
| | 40.6 |
|
| Nov. 1 - Nov. 30, 2015 | | 2.5 |
| | 96.40 |
| | 2.5 |
| | 38.1 |
|
| Dec. 1 - Dec. 31, 2015 | | 2.7 |
| | 95.96 |
| | 2.6 |
| | 35.5 |
|
| Total — Qtr | | 5.2 |
| | $ | 96.14 |
| | 5.1 |
| | 35.5 |
|
Equity Compensation Plan
For information on securities authorized under our equity compensation plans, see Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 6. Selected Financial Data
The results of operations of McGraw-Hill Education have been reclassified to reflect the business as a discontinued operation and the assets and liabilities of the business have been reclassified as held for sale in our consolidated balance sheets. As a result, the selected financial data relate to our continuing operations.
| | | (in millions, except per share data) | 2012 | | 2011 | | 2010 | | 2009 | | 2008 | | 2015 | | 2014 | | 2013 | | 2012 | | 2011 | |
| Income statement data: | | | | | | | | | | | | | | | | | | | | |
| Revenue | $ | 4,450 |
| | $ | 3,954 |
| | $ | 3,639 |
| | $ | 3,483 |
| | $ | 3,609 |
| | $ | 5,313 |
| | $ | 5,051 |
| | $ | 4,702 |
| | $ | 4,270 |
| | $ | 3,762 |
| |
| Segment operating profit | 1,517 |
| | 1,303 |
| | 1,230 |
| | 1,110 |
| | 1,143 |
| | |
| Operating profit | | 1,917 |
| | 113 |
| | 1,358 |
| | 1,170 |
| | 1,052 |
| |
| Income from continuing operations before taxes on income | 1,130 |
| 1 | 1,000 |
| 2 | 943 |
| 3 | 876 |
| 4 | 932 |
| 5 | 1,815 |
| 1 | 54 |
| 2 | 1,299 |
| 3 | 1,089 |
| 4 | 975 |
| 5 |
| Provision for taxes on income | 404 |
| | 374 |
| | 344 |
| | 315 |
| | 348 |
| | 547 |
| | 245 |
| | 425 |
| | 388 |
| | 364 |
| |
| Net income from continuing operations attributable to The McGraw-Hill Companies, Inc. | 676 |
| | 607 |
| | 582 |
| | 546 |
| | 569 |
| | |
| Earnings per share attributable to the McGraw-Hill Companies, Inc. common shareholders: | | | | | | | | | | | |
| Net income (loss) from continuing operations attributable to McGraw Hill Financial, Inc. | | 1,156 |
| | (293 | ) | | 783 |
| | 651 |
| | 592 |
| |
| Earnings (loss) per share from continuing operations attributable to the McGraw Hill Financial, Inc. common shareholders: | | | | | | | | | | | |
| Basic | 2.43 |
| | 2.03 |
| | 1.88 |
| | 1.75 |
| | 1.80 |
| | 4.26 |
| | (1.08 | ) | | 2.85 |
| | 2.33 |
| | 1.98 |
| |
| Diluted | 2.37 |
| | 2.00 |
| | 1.86 |
| | 1.74 |
| | 1.79 |
| | 4.21 |
| | (1.08 | ) | | 2.80 |
| | 2.29 |
| | 1.95 |
| |
| Dividends per share | 1.02 |
| | 1.00 |
| | 0.94 |
| | 0.90 |
| | 0.88 |
| | 1.32 |
| | 1.20 |
| | 1.12 |
| | 1.02 |
| | 1.00 |
| |
| Special dividend declared per common share | 2.50 |
| | | | | | | | | | — |
| | — |
| | — |
| | 2.50 |
| | — |
| |
| Operating statistics: | | | | | | | | | | | | | | | | | | | | |
| Return on average equity | 40.5 | % | | 48.2 | % | | 40.4 | % | | 45.7 | % | | 54.0 | % | | |
Return on average equity 6 | | 324.3 | % | | (1.4 | )% | | 134.2 | % | | 40.5 | % | | 48.2 | % | |
| Income from continuing operations before taxes on income as a percent of revenue from continuing operations | 25.4 | % | | 25.3 | % | | 25.9 | % | | 25.1 | % | | 25.8 | % | | 34.2 | % | | 1.1 | % | | 27.6 | % | | 25.5 | % | | 25.9 | % | |
| Net Income from continuing operations as a percent of revenue from continuing operations | 16.3 | % | | 15.8 | % | | 16.5 | % | | 16.1 | % | | 16.2 | % | | |
Balance sheet data: 6 | | | | | | | | | | | |
| Net income (loss) from continuing operations as a percent of revenue from continuing operations | | 23.9 | % | | (3.8 | )% | | 18.6 | % | | 16.4 | % | | 16.2 | % | |
Balance sheet data: 7 | | | | | | | | | | | |
| Working capital | $ | (1,044 | ) | | $ | (845 | ) | | $ | 262 |
| | $ | 2 |
| | $ | (771 | ) | | $ | 388 |
| | $ | 42 |
| | $ | 612 |
| | $ | (1,018 | ) | | $ | (812 | ) | |
| Total assets | 5,122 |
| | 4,112 |
| | 4,664 |
| | 4,010 |
| | 3,201 |
| | 8,183 |
| | 6,773 |
| | 6,060 |
| | 5,081 |
| | 4,061 |
| |
| Total debt | 1,256 |
| | 1,198 |
| | 1,198 |
| | 1,198 |
| | 1,268 |
| | 3,611 |
| | 795 |
| | 794 |
| | 1,251 |
| | 1,193 |
| |
| Redeemable noncontrolling interest | 811 |
| | — |
| | — |
| | — |
| | — |
| | 920 |
| | 810 |
| | 810 |
| | 810 |
| | — |
| |
| Equity | 840 |
| | 1,584 |
| | 2,292 |
| | 1,929 |
| | 1,353 |
| | 243 |
| | 539 |
| | 1,344 |
| | 840 |
| | 1,584 |
| |
| Number of employees | 21,687 |
| | 22,660 |
| | 20,755 |
| | 21,077 |
| | 21,649 |
| | |
Number of employees 7 | | 20,400 |
| | 17,000 |
| | 16,400 |
| | 15,900 |
| | 15,600 |
| |
| |
1 | Includes the impact of the following items: costs related to identified operating efficiencies primarily related to restructuring of $56 million, legal settlement charges partially offset by insurance recoveries of $54 million, acquisition-related costs of $37 million, and a gain of $11 million on the sale of our interest in a legacy McGraw Hill Construction investment. |
| |
2 | Includes the impact of the following items: $1.6 billion of legal and regulatory settlements, restructuring charges of $86 million, and $4 million of professional fees largely related to corporate development activities. |
| |
3 | Includes the impact of the following items: $77 million of legal settlements, $64 million charge for costs necessary to enable the separation of MHE and reduce our cost structure, a $36 million non-cash impairment charge related to the sale of our data center, a $28 million restructuring charge in the fourth quarter primarily related to severance, $13 million related to terminating various leases as we reduce our real estate portfolio and a $24 million net gain from our dispositions. |
| |
4 | Includes the impact of the following items: $135 million charge for Growthcosts necessary to enable the separation of MHE and Value Plan costs,reduce our cost structure, a $68$65 million restructuring charge, transaction costs of $15 million for our S&P Dow Jones Indices LLC joint venture, an $8 million charge related to a reduction in our lease commitments, partially offset by a vacation accrual reversal of $52 million. |
| |
25
| Includes the impact of a $32$31 million restructuring charge and a $10 million charge for Growthcosts necessary to enable the separation of MHE and Value Plan costs.reduce our cost structure. |
| |
3
| Includes the impact of the following items: a $16 million charge for subleasing excess space in our New York facilities, an $11 million restructuring charge and a $7 million gain on the sale of certain equity interests at S&P Ratings. |
| |
4
| Includes the impact of the following items: a $14 million loss on the sale of Vista Research, Inc., an $11 million gain on the sale of BusinessWeek anda $4 million net restructuring charge.
|
| |
5
| Includes a $48 million restructuring charge. |
| |
6 | Includes the impact of the gain on sale of McGraw Hill Construction in 2014, the gain on sale of McGraw-Hill Education in 2013 and the gain on sale of the Broadcasting Group in 2011. |
| |
7 | Excludes discontinued operations. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management Discussion and Analysis (“MD&A”) provides a narrative of the results of operations and financial condition of The McGraw-Hill Companies,McGraw Hill Financial, Inc. (together with its consolidated subsidiaries, the “Company,” “we,” “us” or “our”) for the years ended December 31, 20122015 and 2011,2014, respectively. The MD&A should be read in conjunction with the consolidated financial statements and accompanying notes included in this Form 10-K for the year ended December 31, 2012,2015, which have been prepared in accordance with accounting principles generally accepted in the United States of AmericaU.S. (“U.S. GAAP”).
The MD&A includes the following sections:
Overview
Results of Operations
Liquidity and Capital Resources
Reconciliation of Non-GAAP Financial Information
Critical Accounting Estimates
Recently Issued or Adopted Accounting Standards
Certain of the statements below are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, any projections of future results of operations and cash flows are subject to substantial uncertainty. See Forward-Looking Statements on page 4 of this report.
OVERVIEW
We are a leading contentbenchmarks and ratings, analytics, data and research provider serving the global capital, commodities and commercial markets. The capital markets include asset managers, investment banks, commercial banks, insurance companies, exchanges, issuers and financial advisors;issuers; the commodities markets include producers, traders and intermediaries within energy, metals, petrochemicals and agriculture; and the commercial markets include professionals and corporate executives within automotive, construction, aerospace and defensefinancial services, insurance and marketing / research information services.
As a result of our joint venture between CME Group and Dow Jones & Company, Inc., to form a new company, S&P Dow Jones Indices LLC and how we are managing this company, combined with the formation of McGraw Hill Financial, we have separated our previously reported S&P Capital IQ / S&P Indices segment into two separate reportable segments. Our operations now consist of four reportable segments: Standard & Poor’s Ratings Services (“S&P Ratings”), S&P Capital IQ and SNL, S&P Dow Jones Indices ("S&P DJ Indices") and Commodities & Commercial (“C&C”). Our previously reported MHE segment is reported as a discontinued operation as discussed under the heading, "Separation of MHE".
S&P Ratings is aan independent provider of credit ratings, research and analytics, offering investors and market participants with information, ratings and independent ratings benchmarks.
S&P Capital IQ and SNL is a global provider of digital and traditional financialmulti-asset-class data, research and analytical tools,capabilities, which integrate cross-asset analytics and desktop services.
S&P DJ Indices is a global index provider that maintains a wide variety of valuation and index benchmarks for investment advisors, wealth managers and institutional investors.
C&C consists of business-to-business companies specializing in commercial and commodities markets that deliver their customers access to high-value information, data, analytic services and pricing and quality benchmarks. As of August 1, 2013, we completed the sale of Aviation Week and the results have been included in C&C's results through that date.
GrowthIn the fourth quarter of 2015, we began exploring strategic alternatives for J.D. Power, included in our C&C segment. We committed to and Value Plan Actionsinitiated an active program to sell J.D. Power in its current state that we believe is probable in the next year. As a result, we have classified the assets and liabilities of J.D. Power as held for sale in our consolidated balance sheet as of December 31, 2015. The anticipated disposal does not represent a strategic shift that will have a major effect on operations and financial results, therefore, it is not classified as a discontinued operation.
On September 12, 2011,November 3, 2014, we announced that our Boardcompleted the sale of Directors had unanimously approved a comprehensive Growth and Value Plan that includes separation into two companies: McGraw Hill Financial ("MHF"), focusedConstruction, which has historically been part of our C&C segment, to Symphony Technology Group for $320 million in cash. We recorded an after-tax gain on providing essential informationthe sale of $160 million, which is included in discontinued operations, net in the consolidated statement of income for the year ended December 31, 2014. We used the after-tax proceeds from the sale to make selective acquisitions, investments, share repurchases and for general corporate purposes.
On March 22, 2013, we completed the capital, commodities and commercial markets, andsale of McGraw-Hill Education ("MHE"), focused on education products and services and digital learning. The Growth and Value Plan has been focused on accelerating growth and increasing shareholder value through not only this separation, but also through substantial cost-cutting initiatives and increased share repurchases.
As we approach the completion of the Growth and Value Plan we have achieved our objectives under our Growth and Value Plan relating to the separation of MHE, cost reductions, increased shareholder return and investing / divesting in targeted assets that position us for long-term growth.
Separation of MHE
The timing of completing the separation has been dependent on many factors, including whether the separation occurs through a spin-off to our shareholders or a sale. After carefully considering all of the options for creating shareholder value, our Board of Directors concluded that a sale of MHE would generate the best value and certainty for our shareholders and most favorably position MHE for long-term success.
As such, on November 26, 2012, we entered into a definitive agreement to sell MHE to investment funds affiliated with Apollo Global Management, LLC for a purchase price of $2.5$2.4 billion subject to certain closing adjustments. As partin cash. We recorded an after-tax gain on the sale of this transaction, McGraw-Hill will receive $250$589 million, which
is included in senior unsecured notes issued by the purchaser at an annual interest rate of 8.5%. We are currentlydiscontinued operations, net in the processconsolidated statement of determiningincome for the fair value of these notes. For all periods presented in this Form 10-K,year ended December 31, 2013. We used the results of operations of MHE have been reclassified to reflect the business as a discontinued operation and the assets and liabilities of the business have been reclassified as held for sale in our consolidated balance sheets. The sale of MHE is subject to various closing conditions and is anticipated to close in the first quarter of 2013. Unless otherwise indicated, all disclosures and amounts in the MD&A relate to our continuing operations. See Item 1a, Risk Factors, in this Form 10-K for updates to certain risk factors related to the sale.
We plan to use theafter-tax proceeds offrom the sale to pay off anydown short-term borrowing obligations,debt for the special dividend paid in 2012, to make selective acquisitions, that enhance our portfolio of brandsinvestments, share repurchases and to sustain our share repurchase program.for general corporate purposes.
Cost ReductionsIn 2015, we continued to focus on investments in targeted financial assets, divesting selected non-core assets, reducing in our real estate portfolio and increasing shareholder return.
From
Investments in Targeted Financial Assets / Divest Selected Non-Core Assets
During 2015, we continued to create a portfolio focused on scalable, industry leading, interrelated businesses in the announcementcapital and commodity markets.
S&P Capital IQ and SNL— we acquired SNL Financial LC ("SNL"), a leading provider of news, data, and analytics to five sectors in the global economy: financial institutions, real estate, energy, media & communications, and metals & mining;
Commodities & Commercial:
| |
| ◦ | we acquired the entire issued share capital of Petromedia Ltd and its operating subsidiaries, an independent provider of data, intelligence, news and tools to the global fuels market that offers a suite of products providing clients with actionable data and intelligence that enables informed decisions, minimizes risk and increases efficiency; |
| |
| ◦ | we acquired National Automobile Dealers Association's Used Car Guide, a leading provider of U.S. retail, trade-in and auction used-vehicle valuation products, services and information. |
In 2015, we further reduced our real estate footprint by completing the consolidation of our Growthcorporate headquarters with our operations in New York City.
During 2014, we continued to execute our strategy of investing for growth in markets that have size and Value Planscale while exiting non-core assets.
Commodities & Commercial— we have been committedacquired Eclipse Energy Group AS which complements our North American natural gas capabilities, which we obtained from our Bentek Energy LLC acquisition in 2011;
S&P Ratings— we acquired BRC Investor Services S.A., a Colombia-based ratings firm providing risk classifications of banks, financial services providers, insurance companies, corporate bonds and structured issues that will expand our presence in the Latin American credit markets.
In 2014, in addition to on-going cost savingsthe divestiture of McGraw Hill Construction discussed above, we streamlined our infrastructure by year-endreducing our real estate footprint through selling our data facility, initiating the consolidation of our corporate headquarters with our operations in New York City, as well as disposing of our corporate aircraft.
During 2013, we acquired an incremental 11 million equity shares representing 15.07% of CRISIL's total outstanding equity shares for $214 million, concurrently increasing our ownership percentage in CRISIL to 67.84% from 52.77%.
In 2013, we also completed certain dispositions of our non-core assets that allow us to apply greater than $100 million. We have surpassed that goal by approaching $175 million in savings by the end of 2012 through a focused effortfocus on our cost structure, including:high-growth, high-margin benchmark businesses.
select headcount reductionsCommodities & Commercial— we completed the sale of approximately 670 employees within MHFAviation Week to Penton, a privately held business information company;
S&P Capital IQ and 530 employees within MHE,
SNL— we completed the migrationsale of numerous accounting work-streams, human resource processes and selected information-technology support services to world-class partners that specialize in these operations, and
redesigningFinancial Communications as well as the employee benefit plans including a freezeclosure of our U.S. employee retirement plan.several non-core businesses.
These cost goals were focused across the entire Company, including MHE. Approximately two-thirds of these cost reductions benefited MHE. Cost savings at MHF were partially offset by costs that were previously allocated to MHE, such as costs for centralized departments, that could not be classified as discontinued operations due to the nature of the expense. We will continue to look to extend outsourcing efforts to enhance cost synergies and realign administrative support for a leaner overall cost structure.
Increased Shareholder Return
During the twothree years ended December 31, 2012,2015, we have returned $3.1$3.3 billion to our shareholders through a combination of share repurchases and our quarterly dividend and a special dividend.
Wedividends: we completed share repurchases of $1.8$2.3 billion and distributed regular quarterly dividends totaling approximately $600 million during$997 million. Also, on January 27, 2016, the two years ended December 31, 2012. During the fourth quarter of 2012, our Board of Directors approved on December 6, 2012 a special dividendan increase in the amount of $2.50quarterly common stock dividend from $0.33 per share on our common stock, payable on December 27, 2012 to shareholders on record on December 18, 2012. This returned an additional approximately $700 million to our shareholders.$0.36 per share.
Investing / Divesting Targeted Assets
During 2012, we completed several acquisitions that we believe will position us for long-term growth across all our segments.
S&P DJ Indices - our transaction with CME Group, Inc. and CME Group Index Services LLC to form a new company, S&P Dow Jones Indices LLC;
S&P Capital IQ - Credit Market Analysis Limited, a provider of independent data concerning the over-the-counter markets; QuantHouse, an independent global provider of end-to-end systematic low-latency market data solutions; and R² Technologies, a provider of advanced risk and scenario-based analytics;
C&C - Kingsman SA, a privately-held, Switzerland-based provider of price information and analytics for the global sugar and biofuels markets;
S&P Ratings - Coalition Development Ltd., a privately-held U.K. analytics company.
Refer to Note 3 – Acquisitions and Divestitures to our consolidated financial statements for further discussion.
In addition to the agreement to sell MHE, we completed the sale of our Broadcasting Group, previously included in our C&C segment, on December 30, 2011 and, accordingly, for the year ended December 31, 2011 and prior periods, the results of operations of the Broadcasting Group have been reclassified to reflect the business as a discontinued operation and assets and liabilities of the business have been removed from our consolidated balance sheet as of December 31, 2011.
The Growth and Value Plan has required us to incur non-recurring costs necessary to enable separation, reduce our cost structure, accelerate growth and increase shareholder value. The table below summarizes these costs including restructuring charges for the year ended December 31, 2012:
|
| | | | | | | |
| (in millions) | | | |
| | Continuing | | Discontinued |
| Professional fees | $ | 117 |
| | $ | 17 |
|
| Restructuring charges | 68 |
| | 39 |
|
| Transaction costs for our S&P Dow Jones Indices LLC joint venture | 15 |
| | — |
|
| Charges related to our lease commitments | 8 |
| | 3 |
|
| Miscellaneous charges | 18 |
| | 2 |
|
| | $ | 226 |
| | $ | 61 |
|
Total costs incurred since the Growth and Value Plan was announced in September of 2011 have been $297 million. These one-time expenses are largely professional fees, as we need the support of various consultants, business process and information technology firms, and financial advisors.
Key Results
| | | (in millions) | Years ended December 31, | | % Change 1 | Years ended December 31, | | % Change 1 |
| | 2012 | | 2011 | | 2010 | | ’12 vs ’11 | | ’11 vs ’10 | 2015 | | 2014 | | 2013 | | ’15 vs ’14 | | ’14 vs ’13 |
| Revenue | $ | 4,450 |
| | $ | 3,954 |
| | $ | 3,639 |
| | 13% | | 9% | $ | 5,313 |
| | $ | 5,051 |
| | $ | 4,702 |
| | 5% | | 7% |
| Operating profit | $ | 1,211 |
| | $ | 1,077 |
| | $ | 1,026 |
| | 12% | | 5% | |
Operating profit 2 | | $ | 1,917 |
| | $ | 113 |
| | $ | 1,358 |
| | N/M | | (92)% |
| % Operating margin | 27 | % | | 27 | % | | 28 | % | | 36 | % | | 2 | % | | 29 | % | |
| Diluted EPS from continuing operations | $ | 2.37 |
| | $ | 2.00 |
| | $ | 1.86 |
| | 19% | | 8% | |
| Diluted earnings (loss) per share from continuing operations | | $ | 4.21 |
| | $ | (1.08 | ) | | $ | 2.80 |
| | N/M | | N/M |
N/M - not meaningful
| |
1 | % changes in the tables throughout the MD&A are calculated off of the actual number, not the rounded number presented. |
| |
2 | 2015 includes legal settlements, partially offset by a benefit related to insurance recoveries of $54 million. 2014 includes legal and regulatory settlements of $1.6 billion and 2013 include legal settlements of $77 million. |
20122015
Revenue increased 5% driven by increases at S&P Ratings –RevenueCapital IQ and operating profit increased 15%SNL, C&C and 18%, respectively.S&P DJ Indices, partially offset by a decrease at S&P Ratings. Revenue growth at S&P Capital IQ and SNL was driven by strong high-yielddue to the acquisition of SNL in September of 2015 and investment grade corporate bond issuance related to robust refinancing activity and increases in bank loan ratings and structured finance. The increase was also impactedgrowth of the legacy S&P Capital IQ products driven by increases in public finance driven by strong municipal bond issuance in the United States. Operating profit increased compared to 2011 primarily due to the increases in revenue, partially offset by higher incentive costs due to improved financial performance, an increase in legal expenses, restructuring charges of $15 million in the second half of 2012 and unfavorable foreign exchange rates.
S&P Capital IQ – Revenue increased 9%, while operating profit decreased 3%.average contract values for each product. The revenue increase was primarily attributable to growth at Capital IQ driven by market share gains and increased contract values for existing accounts; and increases in our subscription base for the Global Credit Portal, which includes RatingsDirect®. Operating profitC&C was significantly impacted by restructuring charges of $19 million recorded in the second half of 2012, as well as increased costs to further develop our content and software. The acquisitions of R2 Technologies in February 2012, QuantHouse in April 2012 and Credit Market Analysis Limited ("CMA") in June 2012 also impacted the results, particularly amortization charges relating to the intangible assets.
S&P DJ Indices – Revenue and operating profit increased 20% and 12%, respectively. The revenue increases were primarily due to revenue from our S&P Dow Jones Indices LLC joint venture. Excluding revenue from the joint venture, revenue increased 3%, primarily due to higher average levels of assets under management for ETF products and higher mutual fund revenue. Operating profit was significantly impacted by expenses for our joint venture, higher data fees and additional personnel costs for targeted staff increases to drive future growth.
C&C – Revenue and operating profit increased 9% and 38%, respectively. These increases were primarily driven by continued demand for Platts’ proprietary content as annualized contract values increased;increased. Increases at J.D Power primarily due to an increase in auto consulting engagements in the U.S. and the acquisition of National Automobile Dealers Association's Used Car Guide (“UCG”) in July of 2015 driving the data and analytics revenue growth acrossat C&C. Revenue growth at S&P DJ Indices was due to higher average levels of assets under management for ETFs and mutual funds and higher volumes for exchange-traded derivatives. The revenue decrease at S&P Ratings was driven by the unfavorable impact of foreign exchange rates. The unfavorable impact of foreign exchange rates reduced revenue by 2 percentage points which was offset by the favorable impact from acquisitions of 2 percentage points.
The increase in operating profit was primarily due to the impact of $1.6 billion in legal and regulatory settlements in 2014 compared
to net legal settlement expenses of $54 million in 2015. In addition, 2015 includes costs related to identified operating efficiencies primarily related to restructuring of $56 million in 2015 compared to $86 million in 2014. 2015 also includes acquisition-related costs related to the acquisition of SNL of $37 million and an $11 million gain on the sale of our automotive sectorsinterest in a legacy McGraw Hill Construction investment. 2014 includes $4 million of professional fees largely related to corporate development activities. Excluding these items, operating profit increased 13%. This increase was driven by revenue growth at S&P Capital IQ and SNL, C&C, and S&P DJ Indices and cost containment efforts at S&P Ratings during 2015.
2014
Revenue increased 7% driven by increases at all of our segments. The increase at S&P Ratings was primarily driven by growth in both corporate and financial services bond ratings revenue, increases in bank loan ratings and higher annual fees. Revenue growth at S&P Capital IQ and SNL was driven by increases in average contract values for each product driven by new customer relationships and increases in existing accounts. Revenue growth at S&P DJ Indices was due to higher levels of assets under management for ETFs and mutual funds and higher volumes for exchange-traded derivatives. The revenue increase at C&C was primarily driven by continued demand for Platts' proprietary content as annualized contract values increased and increases at J.D. Power driven by strong demand for auto consulting engagements in the U.S. and Singapore. The unfavorable impact of foreign exchange rates reduced revenue by less than 1 percentage point.
Operating profit decreased 92% driven by the unfavorable impact of $1.6 billion of legal and regulatory settlement charges in 2014 compared to legal settlement charges of $77 million in 2013 and higher costs recorded in 2014 related to identified operating efficiencies primarily related to restructuring, partially offset by revenue growth at all of our segments. Excluding the unfavorable impact of legal and regulatory settlement charges of 111 percentage points, higher costs recorded in 2014 related to identified operating efficiencies primarily related to restructuring of 3 percentage points, partially offset by the favorable impact of costs necessary to enable the separation of MHE and reduce our cost structure recorded in 2013 of 5 percentage points and a net loss related to the sale of a data center, an equity investment at CRISIL, Aviation Week and Financial Communications in 2013 of 1 percentage point, operating profit increased 17%.
and Associates ("JDPA"), primarily in Asia and the United States; and a strong focus on the management of expenses across the brands. Partially offsetting the growth in the segment were additional costs related to revenue growth, incentive costs at Platts and JDPA and restructuring charges of $12 million recorded in the second half of 2012.
2011
S&P Ratings –Revenue increased 4% and operating profit declined 6%. Revenue growth was driven by an increase in non-transaction revenues due to growth in non-issuance related revenue at corporate ratings and increases at CRISIL, our majority owned Indian credit rating agency, partially offset by declines in structured finance. The decline in operating profit was driven by an increase in expenses resulting from staff increases and incremental compliance and regulatory costs as well as a decline in transaction revenue.
S&P Capital IQ –Revenue and operating profit increased 13% and 25%, respectively. Increases were primarily driven by Integrated Desktop Solutions due to growth at Capital IQ, revenue from TheMarkets.com acquired in September 2010 and our subscription base for the Global Credit Portal, which includes RatingsDirect; and increases at Enterprise Solutions driven by growth at Global Data Solutions, which includes RatingsXpress. Also impacting operating profit were higher expenses from personnel costs and additional costs to further develop infrastructure.
S&P DJ Indices – Revenue and operating profit increased 18% and 31%, respectively, due to growth in our exchange-traded fund products. Also impacting operating profit were higher expenses from personnel costs.
C&C – Revenue and operating profit increased 10% and 18%, primarily driven by strong demand for Platt’s’ proprietary content and growth in our syndicated studies and consulting services in the automotive and non-automotive sectors, partially offset by decreases in the construction business.
Outlook
We striveOur vision is to be the foremostleading provider of essential information such astransparent and independent benchmarks intelligence and ratings, analytics, data and research in the global capital, commodities and commercialcorporate markets. We seek to leverage the strength of our globally recognized brandsOur mission is to promote sustainable growth in these markets by bringing transparencyproviding customers with essential intelligence and independent insightssuperior service. We seek to those markets. Our strategy seeksaccomplish our mission and vision within the framework of our core values of fairness, integrity and transparency. We intend to understand the key trends affectingdeliver our businessesproducts and address them, thereby achievingservices through customer-centric distribution channels that enable mission-critical decisions in our enterprise objectives.
Four key trends are increasing the need for contentcore customer sets of investment management, investment banking, commercial banking, insurance, specialty financial institutions and analytics in the markets we serve:
The globalization of the capital markets: the global demand for capital and commodities markets trading and liquidity is expanding rapidly in both developed and growth markets;
The need for data-driven decision making tools: developments in technology, communications and data processing have increased the demand for time-critical, multi-asset class data and solutions;
Systemic regulatory change: new global legislation (e.g. Dodd-Frank, U.S. Commodity Futures Trading Commission and Basel III) is creating new and complex operating and capital models for banks and market participants; and
Increased volatility and risk: amplified uncertainty and market volatility around short-term events are driving the need for new methodologies to measure risk, return and profitability.corporates.
We are focused on deliveringaligning our efforts against these enterprise objectives:
Extend Market Leadership: extend our position as a global leader in our market segments
•Build Scalable Capabilities: further institutionalizetwo key capabilities such as technology and risk management
•Foster Talent: attract and retain top talent
Create Shareholder Value: deliver high top-line and bottom-linestrategic priorities: creating growth and positive returns to shareholdersdriving performance.
Our enterprise strategy, which will support the achievement of these core objectives, includes the following components:
Organic Growth: support a portfolio of leading market brands that delivers high top-line and bottom-line growth
Global Expansion: expand our global footprint to capture opportunities in both mature and growth markets
Acquisitions and Partnerships: supplement organic growth with acquisitions and partnerships
Scalable Capabilities: create and leverage efficiency and effectiveness through common platforms, processes and standards
Talent Retention and Acquisition: leverage our position as a market leader to become an employer of choice in our chosen markets and geographiesCreating Growth
We will strive to drive global growth by focusing on executing our strategic initiatives, strengthening core capabilities and collaborating across businesses.
Driving Performance
We will strive to deliver operational excellence, manage and mitigate risk and enhance leadership and accountability.
There can be no assurance that we will achieve success in implementing any one or more of these strategies as a variety of factors could unfavorably impact operating results, including prolonged difficulties in the global credit markets and a change in the regulatory environment affecting our businesses. See Item 1a, Risk Factors, in this Annual Report on Form 10-K.
Further projections and discussion on our 20132016 outlook for our segments can be found within “Segment Review”“ – Results of Operations”.
RESULTS OF OPERATIONS
Consolidated Review
| | | (in millions) | Years ended December 31, | | % Change | Years ended December 31, | | % Change |
| | 2012 | | 2011 | | 2010 | | '12 vs '11 | | '11 vs '10 | 2015 | | 2014 | | 2013 | | '15 vs '14 | | '14 vs '13 |
| Revenue | $ | 4,450 |
| | $ | 3,954 |
| | $ | 3,639 |
| | 13% | | 9% | $ | 5,313 |
| | $ | 5,051 |
| | $ | 4,702 |
| | 5% | | 7% |
| Expenses: | | | | | | | | | | | | |
| Operating-related expenses | 1,460 |
| | 1,392 |
| | 1,206 |
| | 5% | | 15% | 1,672 |
| | 1,627 |
| | 1,564 |
| | 3% | | 4% |
| Selling and general expenses | 1,709 |
| | 1,387 |
| | 1,318 |
| | 23% | | 5% | 1,578 |
| | 3,168 |
| | 1,631 |
| | (50)% | | 94% |
| Depreciation and amortization | 122 |
| | 111 |
| | 96 |
| | 11% | | 15% | 157 |
| | 134 |
| | 137 |
| | 17% | | (2)% |
| Total expenses | 3,291 |
| | 2,890 |
| | 2,620 |
| | 14% | | 10% | 3,407 |
| | 4,929 |
| | 3,332 |
| | (31)% | | 48% |
| Other income | 52 |
| | 13 |
| | 7 |
| | N/M | | 82% | |
| Other (income) loss | | (11 | ) | | 9 |
| | 12 |
| | N/M | | (25)% |
| Operating profit | 1,211 |
| | 1,077 |
| | 1,026 |
| | 12% | | 5% | 1,917 |
| | 113 |
| | 1,358 |
| | N/M | | (92)% |
| Interest expense, net | 81 |
| | 77 |
| | 83 |
| | 4% | | (7)% | 102 |
| | 59 |
| | 59 |
| | 73% | | (1)% |
| Provision for taxes on income | 404 |
| | 374 |
| | 344 |
| | 8% | | 9% | 547 |
| | 245 |
| | 425 |
| | N/M | | (42)% |
| Income from continuing operations | 726 |
| | 626 |
| | 599 |
| | 16% | | 5% | |
| (Loss) income from discontinued operations | (234 | ) | | 308 |
| | 252 |
| | N/M | | 22% | |
| Income (loss) from continuing operations | | 1,268 |
| | (191 | ) | | 874 |
| | N/M | | N/M |
| Discontinued operations, net | | — |
| | 178 |
| | 592 |
| | N/M | | (70)% |
| Less: net income from continuing operations attributable to noncontrolling interests | (50 | ) | | (19 | ) | | (19 | ) | | N/M | | 1% | (112 | ) | | (102 | ) | | (91 | ) | | 9% | | 12% |
| Less: net income from discontinuing operations attributable to noncontrolling interests | (5 | ) | | (4 | ) | | (4 | ) | | 6% | | (4)% | |
| Net income attributable to The McGraw-Hill Companies, Inc. | $ | 437 |
| | $ | 911 |
| | $ | 828 |
| | (52)% | | 10% | |
| Less: net loss from discontinuing operations attributable to noncontrolling interests | | — |
| | — |
| | 1 |
| | N/M | | N/M |
| Net income (loss) attributable to McGraw Hill Financial, Inc. | | $ | 1,156 |
| | $ | (115 | ) | | $ | 1,376 |
| | N/M | | N/M |
N/M - not meaningful
Revenue
|
| | | | | | | | | | | | | | | |
| (in millions) | Years ended December 31, | | % Change |
| | 2012 | | 2011 | | 2010 | | ’12 vs ’11 | | ’11 vs ’10 |
| Subscription / Non-transaction revenue | $ | 2,855 |
| | $ | 2,672 |
| | $ | 2,407 |
| | 7% | | 11% |
| Non-subscription / Transaction revenue | $ | 1,595 |
| | $ | 1,282 |
| | $ | 1,232 |
| | 24% | | 4% |
| | | | | | | | | | |
| Domestic revenue | $ | 2,684 |
| | $ | 2,373 |
| | $ | 2,253 |
| | 13% | | 5% |
| International revenue | $ | 1,766 |
| | $ | 1,581 |
| | $ | 1,386 |
| | 12% | | 14% |
2012
Revenue increased $496 million or 13% as compared to 2011, primarily due to strong high-yield investment grade corporate bond issuance, which impacted non-subscription / transaction revenue; growth in our global commodities products; growth for our Capital IQ product, strong municipal bond issuance in the U.S. and increases in bank loan ratings; increases in the subscription
baseRevenue
|
| | | | | | | | | | | | | | | |
| (in millions) | Years ended December 31, | | % Change |
| | 2015 | | 2014 | | 2013 | | ’15 vs ’14 | | ’14 vs ’13 |
| Subscription / Non-transaction revenue | $ | 3,264 |
| | $ | 3,045 |
| | $ | 2,849 |
| | 7% | | 7% |
| Non-subscription / Transaction revenue | $ | 2,049 |
| | $ | 2,006 |
| | $ | 1,853 |
| | 2% | | 8% |
| | | | | | | | | | |
| Domestic revenue | $ | 3,202 |
| | $ | 2,911 |
| | $ | 2,723 |
| | 10% | | 7% |
| International revenue | $ | 2,111 |
| | $ | 2,140 |
| | $ | 1,979 |
| | (1)% | | 8% |
| | | | | | | | | | |
| % of total revenue: | | | | | | | | | |
| Subscription / Non-transaction revenue | 61 | % | | 60 | % | | 61 | % | |
| |
|
| Non-subscription / Transaction revenue | 39 | % | | 40 | % | | 39 | % | |
| |
|
| | | | | | | | | | |
| Domestic revenue | 60 | % | | 58 | % | | 58 | % | |
| |
|
| International revenue | 40 | % | | 42 | % | | 42 | % | |
| |
|
2015
Revenue increased 5% as compared to 2014. Subscription / non-transaction revenue increased primarily due to growth at S&P Capital IQ and SNL due to an increase in the average contract values as well as continued demand for Global Data Solutions;Platts’ proprietary content. Non-subscription / transaction revenue increased primarily due to growth at S&P DJ Indices due to higher assets under management for ETFs and recent acquisitions, including, QuantHouse in April 2012mutual funds and CMA and ourhigher volumes for exchange-traded derivatives, partially offset by a decrease at S&P Dow Jones Indices LLC joint venture in June 2012.Ratings which includes the unfavorable impact of foreign exchange rates. See “Segment Review”" – Segment Review" below for further information.
Foreign exchange rates had anThe unfavorable impact of $40 million on revenue.foreign exchange rates reduced revenue by 2 percentage points. This impact refers to constant currency comparisons estimated by re-calculatingrecalculating current year results of foreign operations using the average exchange rate from the prior year. The unfavorable impact of foreign exchange rates on revenue primarily related to S&P Ratings and was driven by the weakening of the Euro to the U.S. dollar.
20112014
Revenue increased 7% as compared to 2013. Subscription / non-transaction revenue increased primarily due to growth in our global commodities products, growth at S&P Capital IQ revenue from TheMarkets.com acquired in September 2010, non-transaction revenue growth at CRISIL,and SNL due to an increase in ourthe average contract values, growth in non-issuance related revenue for corporate industrialratings primarily related to higher annual fees, and continued demand for Platts’ proprietary content. Non-subscription / transaction revenue increased primarily due to strong growth in corporate bond ratings revenue, an increase in bank loan ratings and higher sales of our exchange-traded fund products. This wasassets under management for ETFs and mutual funds at S&P DJ Indices, partially offset by a decline in our construction business, public finance,lower structured finance and investment research products.revenues. See " – Segment Review" below for further information.
ForeignThe unfavorable impact of foreign exchange rates had a favorable impact of $35 million on revenue. This impact refers to constant currency comparisons estimatedreduced revenue by re-calculating current year results of foreign operations using the average exchange rate from the prior year.less than 1 percentage point.
Total Expenses
The following tables provide an analysis by segment of our operating-related expenses and selling and general expenses for the years ended December 31, 2015, 2012 and 2011:2014:
|
| | | | | | | | | | | | | | | | | | | |
| (in millions) | 2012 | | 2011 | | % Change |
| | Operating- related expenses | | Selling and general expenses | | Operating- related expenses | | Selling and general expenses | | Operating- related expenses | | Selling and general expenses |
| S&P Ratings | $ | 677 |
| | $ | 479 |
| | $ | 657 |
| | $ | 362 |
| | 3% | | 33% |
| S&P Capital IQ | 456 |
| | 412 |
| | 383 |
| | 393 |
| | 19% | | 5% |
S&P DJ Indices 1 | 73 |
| | 96 |
| | 75 |
| | 56 |
| | (3)% | | 71% |
| C&C | 335 |
| | 368 |
| | 351 |
| | 356 |
| | (5)% | | 3% |
| Intersegment eliminations | (69 | ) | | — |
| | (63 | ) | | — |
| | (9)% | | —% |
| Total segments | 1,472 |
| | 1,355 |
| | 1,403 |
| | 1,167 |
| | 5% | | 16% |
Corporate 2 | (12 | ) | | 354 |
| | (11 | ) | | 220 |
| | 7% | | 61% |
| | $ | 1,460 |
| | $ | 1,709 |
| | $ | 1,392 |
| | $ | 1,387 |
| | 5% | | 23% |
|
| | | | | | | | | | | | | | | | | | | |
| (in millions) | 2015 | | 2014 | | % Change |
| | Operating- related expenses | | Selling and general expenses | | Operating- related expenses | | Selling and general expenses | | Operating- related expenses | | Selling and general expenses |
S&P Ratings 1 | $ | 725 |
| | $ | 583 |
| | $ | 777 |
| | $ | 2,219 |
| | (7)% | | (74)% |
S&P Capital IQ and SNL 2 | 614 |
| | 495 |
| | 549 |
| | 411 |
| | 12% | | 20% |
S&P DJ Indices 3 | 105 |
| | 92 |
| | 97 |
| | 101 |
| | 8% | | (8)% |
C&C 4 | 316 |
| | 269 |
| | 289 |
| | 289 |
| | 9% | | (7)% |
Intersegment eliminations 5 | (88 | ) | | — |
| | (86 | ) | | — |
| | (3)% | | N/M |
| Total segments | 1,672 |
| | 1,439 |
| | 1,626 |
| | 3,020 |
| | 3% | | (52)% |
Corporate 6 | — |
| | 139 |
| | 1 |
| | 148 |
| | (100)% | | (6)% |
| | $ | 1,672 |
| | $ | 1,578 |
| | $ | 1,627 |
| | $ | 3,168 |
| | 3% | | (50)% |
N/M - not meaningful
| |
1 | For 2012,In 2015, selling and general expenses includes transactioninclude legal settlements partially offset by a benefit related to legal insurance recoveries of $54million and restructuring costs of $15 million$13 million. In 2014, selling and general expenses include $1.6 billion for our S&P Dow Jones Indices LLC joint venture.legal and regulatory settlements and restructuring charges of $45 million.
|
| |
2 | For 2012,In 2015, selling and general expenses includes expenses of $156 million for our Growth and Value Plan, includinginclude acquisition-related costs related to the separationacquisition of MHE,SNL of $37 million and costs identified operating efficiencies primarily related to restructuring costsof $32 million. In 2014, selling and othergeneral expenses include $9 million of restructuring charges. |
| |
3 | In 2014, selling and general expenses include the impact of professional fees largely related non-recurring costs, partially offset by a vacation accrual reversalto corporate development activities of $52$4 million. |
| |
4 | In 2015 and 2014, selling and general expenses include restructuring charges of $1 million and $16 million, respectively. |
| |
5 | Intersegment eliminations relates to a royalty charged to S&P Capital IQ and SNL for the rights to use and distribute content and data developed by S&P Ratings. |
| |
6 | In 2015 and 2014, selling and general expenses include costs related to identified operating efficiencies primarily related to restructuring of $10 million and $16 million, respectively. |
Operating-Related Expenses
Operating-related expenses increased $6844 million or 5%3% as compared to 20112014,. Increases at S&P Capital IQ and SNL primarily driven by increasedhigher data processing costs and the acquisition of SNL in September of 2015 and increases at C&C due to higher incentive costs were partially offset by declines at S&P Ratings of $50 million or 9% and S&P Capital IQ of $37 million or 15%. These increases were primarily a result of higher personnel costs, including incentivedriven by our compensation at S&P Ratings and global staff increases at S&P Capital IQ. This was partially offset by lower compensation expense at C&C of $13 million or 15% due to a reduction in headcountcost containment efforts resulting from recent2014 restructuring actions.
Intersegment eliminations relates to a royalty charged to S&P Capital IQ for the rights to use and distribute content and data developed by S&P Ratings.
Selling and General Expenses
During 2012, weSelling and general expenses decreased 50%. Excluding the favorable net impact of legal settlement and regulatory settlement charges and insurance recoveries of 48 percentage points, higher costs recorded $226 million of Growth and Value Plan related costs necessary to enable separation and reduce our cost structure, which includes professional fees, severance charges, transaction costs for our S&P Dow Jones Indices LLC joint venture and a chargein 2014 related to a reduction in our lease commitments. Excluding theseidentified operating efficiencies primarily related to restructuring of 1 percentage point, partially offset by the unfavorable impact of acquisition-related costs and $10 millionrelated to the acquisition of Growth and Value Plan costs for 2011,SNL of 1 percentage point, selling and general expenses increased $106 million as compared to 2011,decreased 2%. The decline was due to higher costs associated with increased sales and additional stock-based compensation, mainly due to higher expected performance achievement and an increase in the grant price of our equity awards. Personnel costs increased $43 milliona decrease at S&P Ratings $26 million at C&C, $7 million at S&P DJ Indicesdriven by lower incentive and $5 millionlegal costs, partially offset by increased costs related to the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act and an increase at S&P Capital IQ as revenue growth improved 15%, 9%, 20%and 9%, respectively. In addition, S&P Ratings had increased legal costs as compared to 2011.SNL driven by the acquisition of SNL in September of 2015.
Depreciation and Amortization
Depreciation and amortization increased $1123 million or 11%17% as compared to 20112014, primarily due to additionalhigher intangible asset amortization relatedin 2015 due to our recent acquisitions, partially offset by reduced purchasesthe acquisition of furnitureSNL in September of 2015 and computer equipment last year as we focused on continued cost controls.the acquisition of UCG in July of 2015.
The following tables provide an analysis by segment of our operating-related expenses and selling and general expenses for the years ended December 31,, 2011 2014 and 2010:2013:
|
| | | | | | | | | | | | | | | | | | | |
| (in millions) | 2011 | | 2010 | | % Change |
| | Operating- related expenses | | Selling and general expenses | | Operating- related expenses | | Selling and general expenses | | Operating- related expenses | | Selling and general expenses |
| S&P Ratings | $ | 657 |
| | $ | 362 |
| | $ | 573 |
| | $ | 321 |
| | 15% | | 13% |
| S&P Capital IQ | 383 |
| | 393 |
| | 325 |
| | 408 |
| | 18% | | (4)% |
| S&P DJ Indices | 75 |
| | 56 |
| | 59 |
| | 70 |
| | 27% | | (20)% |
| C&C | 351 |
| | 356 |
| | 309 |
| | 328 |
| | 14% | | 9% |
| Intersegment eliminations | (63 | ) | | — |
| | (56 | ) | | — |
| | (13)% | | —% |
| Total segments | 1,403 |
| | 1,167 |
| | 1,210 |
| | 1,127 |
| | 16% | | 4% |
| Corporate | (11 | ) | | 220 |
| | (4 | ) | | 191 |
| | N/M | | 15% |
| | $ | 1,392 |
| | $ | 1,387 |
| | $ | 1,206 |
| | $ | 1,318 |
| | 15% | | 5% |
|
| | | | | | | | | | | | | | | | | | | |
| (in millions) | 2014 | | 2013 | | % Change |
| | Operating- related expenses | | Selling and general expenses | | Operating- related expenses | | Selling and general expenses | | Operating- related expenses | | Selling and general expenses |
S&P Ratings 1 | $ | 777 |
| | $ | 2,219 |
| | $ | 741 |
| | $ | 624 |
| | 5% | | N/M |
S&P Capital IQ and SNL 2 | 549 |
| | 411 |
| | 538 |
| | 390 |
| | 2% | | 5% |
S&P DJ Indices 3 | 97 |
| | 101 |
| | 92 |
| | 126 |
| | 5% | | (20)% |
C&C 4 | 289 |
| | 289 |
| | 271 |
| | 278 |
| | 7% | | 4% |
Intersegment eliminations 5 | (86 | ) | | — |
| | (76 | ) | | — |
| | (13)% | | N/M |
| Total segments | 1,626 |
| | 3,020 |
| | 1,566 |
| | 1,418 |
| | 4% | | N/M |
Corporate 6 | 1 |
| | 148 |
| | (2 | ) | | 213 |
| | N/M | | (30)% |
| | $ | 1,627 |
| | $ | 3,168 |
| | $ | 1,564 |
| | $ | 1,631 |
| | 4% | | 94% |
N/M - not meaningful
Operating-Related Expenses
Operating-related expenses increased $186 million or 15% as compared to 2010, primarily driven by increased personnel costs and additional costs to further develop infrastructure.
| |
1 | In 2014, selling and general expenses include $1.6 billion for legal and regulatory settlements and restructuring charges of $45 million. In 2013, selling and general expenses include $77 million for legal settlements, restructuring charges of $10 million, and the gain on sale of an equity investment held at CRISIL of $16 million. |
| |
2 | In 2014, selling and general expenses include $9 million of restructuring charges. In 2013, selling and general expenses include restructuring charges of $9 million and a loss related to the sale of Financial Communications of $3 million. |
| |
3 | In 2014, selling and general expenses include the impact of professional fees largely related to corporate development activities of $4 million. |
| |
4 | In 2014, selling and general expenses include restructuring charges of $16 million. In 2013, selling and general expenses include a pre-tax gain on the sale of Aviation Week of $11 million and restructuring charges of $9 million. |
| |
5 | Intersegment eliminations relates to a royalty charged to S&P Capital IQ and SNL for the rights to use and distribute content and data developed by S&P Ratings. |
| |
6 | In 2014, selling and general expenses include restructuring charges of $16 million. In 2013, selling and general expenses primarily include $64 million necessary to enable the separation of MHE and reduce our cost structure, restructuring charges and charges related to our reduction in our real estate portfolio. |
Operating-Related Expenses
Operating-related expenses increased $64 million or 4% as compared to 2013, primarily driven by increased costs at S&P Ratings, C&C and S&P Capital IQ and SNL. These increases were primarily attributable to an increase in compensation costs and higher technology costs.
Selling and General Expenses
Selling and general expenses increased $69 million or 5% as compared94%. Excluding the unfavorable impact of legal settlement charges of 94 percentage points and higher costs recorded in 2014 related to 2010,identified operating efficiencies primarily duerelated to restructuring of 3 percentage points, partially offset by the favorable impact of costs necessary to enable the separation of MHE and reduce our cost structure recorded in 2013 of 4 percentage points, selling and general expenses increased 1%. The increase was primarily driven by increased legal costs at S&P Ratings, increased commissions and incentives at S&P Capital IQ and SNL, partially offset by a decrease at S&P DJ Indices primarily related to a fourth quarter restructuring plan we initiated across the Company as part of our Growth and Value Plan which resulted$26 million non-cash impairment charge recorded in a $32 million charge; higher costs2013 associated with increased sales; higher compensation; and incremental compliance and regulatory costs, primarily in ouran intangible asset acquired with the formation of the S&P Ratings segment.Dow Jones Indices LLC joint venture.
Depreciation and Amortization
Depreciation and amortization increased $15decreased $3 million or 15%2% as compared to 2010,2013, primarily due to additionalan intangible asset amortization related to our recent acquisitions.that became fully amortized in 2013.
Other Income
In the fourth quarter of 2012, we recorded a pre-tax gain of $52 million within other income in the consolidated statement of income related to a change in our vacation policy. The change in our vacation policy modified the number of days that employees are entitled to for unused vacation time upon termination of employment as they will only be paid for vacation days equivalent to what they have earned in the current year.(Income) Loss
During 2011,2015, we recorded a pre-tax gain of $13 million within other income in the consolidated statement of income, which related tocompleted the sale of our interest in LinkedIn Corporationa legacy McGraw Hill Construction investment that resulted in their initial public offering.a pre-tax gain of $11 million within other (income) loss in the consolidated statement of income.
During 2014, we completed the following transactions that resulted in a pre-tax loss of $9 million within other (income) loss in the consolidated statement of income:
On July 31, 2014, we completed the sale of the Company's aircraft to Harold W. McGraw III, then Chairman of the Company's Board of Directors and former President and CEO of the Company ("Mr. McGraw") for a purchase price of $20 million, which is modestly higher than the independent appraisal obtained. During the second quarter of 2014, we recorded a non-cash impairment charge of $6 million within other (income) loss in our consolidated statement of income as a result of the pending sale. See Note 13 – Related Party Transactions to our consolidated financial statements for further discussion.
On June 30, 2014, we completed the sale of our data center to Quality Technology Services, LLC (“QTS”) which owns, operates, and manages data centers. Net proceeds from the sale of $58 million were received in July of 2014. The sale includes all of the facilities and equipment on the south campus of our East Windsor, New Jersey location, inclusive of the rights and obligations associated with an adjoining solar power field. The sale resulted in an expense of $3 million recorded within other (income) loss in our consolidated statement of income, which is in addition to the non-cash impairment charge we recorded in the fourth quarter of 2013.
During 2013, we recorded a net pre-tax loss of $12 million within other (income) loss in the consolidated statement of income:
During the fourth quarter of 2013, we recognized a non-cash impairment charge of $36 million related to the pending sale of our data center.
On September 30, 2013, we completed the sale of Financial Communications, which was part of our S&P Capital IQ and SNL segment.
On August 27, 2013, CRISIL sold its 49% equity interest in India Index Services & Products Ltd. This investment was held within our C&C segment.
During 2010, we recorded a pre-tax gain of $7 million within other income in the consolidated statement of income, which related to the sale of certain equity interests in India which were part of our S&P Ratings segment.
On August 1, 2013, we completed the sale of Aviation Week within our C&C segment to Penton, a privately held business information company.
Operating Profit
We consider operating profit to be an important measure for evaluating our operating performance and we define operating profit as revenues less the related cost of producing the revenues and selling and general expenses. We also further evaluate operating profit for each of the reportable business segments in which we operate.
We internally manage our operations by reference to “segment operating profit” andwith economic resources are allocated primarily based on segment operating profit. Segment operating profit is defined as operating profit before allocated expenses, which are centrally managed costs and do not affect the operating results of our segments.unallocated expense. Segment operating profit is one of the key metrics we use to evaluate operating performance. Segment operating profit is not, however, a measure of financial performance under U.S. GAAP, and may not be defined and calculated by other companies in the same manner.
The table below reconciles segment operating profit to total operating profit:
|
| | | | | | | | | | | | | |
| (in millions) | | | | | | % Change |
| | 2012 | | 2011 | 2010 | | '12 vs '11 | '11 vs '10 |
| S&P Ratings | $ | 849 |
| | $ | 720 |
| $ | 762 |
| | 18% | (6)% |
| S&P Capital IQ | 208 |
| | 214 |
| 171 |
| | (3)% | 25% |
S&P DJ Indices 1 | 212 |
| | 189 |
| 144 |
| | 12% | 31% |
| C&C | 248 |
| | 180 |
| 153 |
| | 38% | 18% |
| Total segment operating profit | 1,517 |
| | 1,303 |
| 1,230 |
| | 16% | 6% |
Unallocated expense 2 | (306 | ) | | (226 | ) | (204 | ) | | 36% | 11% |
| Total operating profit | $ | 1,211 |
| | $ | 1,077 |
| $ | 1,026 |
| | 12% | 5% |
|
| | | | | | | | | | | | | | | |
| (in millions) | Years ended December 31, | % Change |
| | 2015 | | 2014 | | 2013 | | '15 vs '14 | | '14 vs '13 |
S&P Ratings 1 | $ | 1,078 |
| | $ | (583 | ) | | $ | 882 |
| | N/M | | N/M |
S&P Capital IQ and SNL 2 | 228 |
| | 228 |
| | 189 |
| | —% | | 21% |
S&P DJ Indices 3 | 392 |
| | 347 |
| | 266 |
| | 13% | | 30% |
C&C 4 | 357 |
| | 290 |
| | 280 |
| | 23% | | 3% |
| Total segment operating profit | 2,055 |
| | 282 |
| | 1,617 |
| | N/M | | (83)% |
Unallocated expense 5 | (138 | ) | | (169 | ) | | (259 | ) | | (18)% | | (35)% |
| Total operating profit | $ | 1,917 |
| | $ | 113 |
| | $ | 1,358 |
| | N/M | | (92)% |
N/M - not meaningful
| |
1 | 20122015 includes transaction costs for our S&P Dow Jones Indices LLC joint venture.legal settlements, partially offset by a benefit related to insurance recoveries of $54 million, and restructuring charges of $13 million. 2014 includes legal and regulatory settlements of $1.6 billion and restructuring charges of $45 million. 2013 includes legal settlements of $77 million, restructuring charges of $10 million, and the gain on sale of an equity investment held at CRISIL of $16 million. |
| |
2 | Includes2015 includes acquisition-related costs related to the acquisition of SNL of $37 million and costs identified operating efficiencies primarily related to restructuring of $32 million. 2014 includes $9 million of restructuring charges. 2013 includes restructuring charges of $9 million and a loss related to the sale of Financial Communications of $3 million. |
| |
3 | 2014 includes the impact of professional fees largely related to corporate development activities of $4 million. |
| |
4 | 2015 and 2014 include restructuring charges of $1 million and $16 million, respectively. 2013 includes a pre-tax gain on the sale of Aviation Week of $11 million and restructuring charges of $9 million. |
| |
5 | 2015 and 2014 include costs related to identified operating efficiencies primarily related to restructuring of $10 million and $16 million, respectively. 2013 includes depreciation expense and expenses forcosts necessary to enable the separation of MHE and reduce our Growth and Value Plan,cost structure, including restructuring costs and other related non-recurring costs, partially offset bycosts. 2013 also includes a vacation accrual reversal.non-cash impairment charge related to the pending sale of our data center and charges related to a reduction in our real estate portfolio. |
20122015
Segment Operating Profit —– Increased $214 million,$1.8 billion, or 16%629% as compared to 20112014. Segment operating income margins were 34%2015 includes legal settlement charges partially offset by a benefit related to insurance recoveries of $54 million compared to legal and 33% for 2012regulatory settlement charges of $1.6 billion in 2014. Excluding the favorable net impact of lower legal and 2011, respectively. Restructuringregulatory settlement charges and other non-recurring charges as noted above mitigatedinsurance recoveries of 621 percentage points, higher costs recorded in 2014 related to identified operating efficiencies primarily related to restructuring of 9 percentage points and the margin improvementimpact of professional fees largely related to corporate development activities recorded in 2014 of 2 percentage points, partially offset by the unfavorable impact of acquisition-related costs related to the acquisition of SNL of 15 percentage points, segment operating profit increased 11%. Revenue growth at S&P Capital IQ and SNL, C&C and S&P DJ Indices, and cost containment efforts at S&P Ratings during 2015 were the primary drivers for the period.increase. See “Segment“ – Segment Review” below for further information. In addition, segment operating profit benefited from reduced pension costs as we froze our U.S. Employee Retirement Plan effective on April 1, 2012.
Unallocated Expense – Increased by $80 million— Decreased by $31 million or 36%18% as compared to 2011,2014. These expenses, included in selling and general expenses, mainly as a result of $156 million of Growth and Value Plan related costs necessary to enable separation and reduce our cost structure, which includes professional fees of $117 million and restructuring charges of $21 million. This was partially offset by a vacation accrual reversal of $52 million. Unallocated expenses also includes an increase for costs that were previously allocated to MHE, such asinclude costs for centralized departments, that could not be classifiedcorporate center functions, select initiatives, unoccupied office space and corporate overhead costs allocable to discontinued operations. Excluding the favorable impact of the sale of our interest in a legacy McGraw Hill Construction investment of 6 percentage points and higher costs recorded in 2014 related to identified operating efficiencies primarily related to restructuring of 4 percentage points, unallocated expense decreased by 9 percentage points as discontinued operations duecompared to 2014. This decrease was primarily driven by the impact of a $9 million loss recorded in the second quarter of 2014 related to the naturesale of the expense.Company's aircraft and the sale of our data center.
Foreign currency exchange rates had an unfavorablea negligible impact of $6 million on operating profit for 2012. Thisprofit. The foreign exchange rate impact refers to constant currency comparisons and the remeasurement of monetary assets and liabilities. Constant currency impacts are estimated by re-calculatingrecalculating current year results of foreign operations using the average exchange rate from the prior year. Remeasurement impacts are based on the variance between current-year and prior-year foreign exchange rate fluctuations on monetary assets and liabilities denominated in currencies other than the individual business' functional currency.
20112014
Segment Operating Profit —– Increased Decreased $73 million1.3 billion, or 6%83% as compared to 2010.2013. Excluding the unfavorable impact of legal and regulatory settlement charges of 94 percentage points, higher restructuring charges recorded in 2014 of 3 percentage points, and a net gain related to the sale of an equity investment at CRISIL, Aviation Week and Financial Communications in 2013 of 2 percentage points, operating profit increased 16%. This increase was primarily due to strong revenue growth at S&P Ratings, S&P Capital IQ and SNL, S&P DJ Indices and C&C. See “ – Segment operating income margins were and 33%34% for 2011 and 2010, respectively. Restructuring charges as noted above mitigated the margin improvement for the period. See “Segment Review” below for further information.
Unallocated Expense – Increased by $22 million— Decreased by $90 million or 11%35% as compared to 2010, mainly as a result2013. Excluding the favorable impact of $27 million of Growth and Value Plan related costs necessary to enable the separation of MHE and reduce our cost structure which includesrecorded in 2013 of 27 percentage points, a loss related to the sale of a data center in 2013 of 15 percentage points, and charges related to a reduction in our real estate portfolio in 2013 of 5 percentage points, partially offset by the unfavorable impact of higher restructuring charges recorded in 2014 of $175 percentage points, unallocated expense increased 7%. This increase was primarily driven by the impact of a $9 million loss recorded in the second quarter of 2014 related to the sale of the Company's aircraft and professional feesthe sale of $10 million.our data center, and an increase in unoccupied office space.
Foreign exchange rates had a favorable impact of $13 million on operating profit for 2011.of 2 percentage points. The favorable impact on 2014 was driven by the devaluation of the Argentinian peso as well as early strength of the British pound.
Interest Expense, net
Net interest expense for 2015 increased 4%73% as compared to 2011,2014, primarily due to increasedas a result of higher interest expense related to uncertain tax positions, as well as lower international interest income from our investmentsthe $700 million of senior notes issued in 2012 compared with 2011.the second quarter of 2015 and the $2.0 billion of senior notes issued in the third quarter of 2015. Net interest expense decreased 7%for 2014 remained relatively flat as compared to 2010 primarily due to higher international interest income from our investments in 2011 compared with 2010.2013, decreasing 1%.
Provision for Income Taxes
Our effective tax rate from continuing operations was 35.8%30.1%, 37.4%453.7% and 36.4%32.7% for 2012, 20112015, 2014 and 2010,2013, respectively. The decrease in the 2015 effective tax rate was primarily due to the reduction in charges for legal settlements, improved profitability in several lower tax jurisdictions outside of the United States, and continuing resolution of prior year tax audits. The increase in the 2014 effective tax rate from the prior year periodsperiod was primarily due to the partnership structureexpected tax treatment of the S&P Dow Jones Indices LLC joint venture, the Growth and Value Plan and restructuring costs incurred primarilycharges for legal settlements in the United States. Including discontinued operations, the effective tax rate was 45.8%, 36.5% and 36.4% for 2012, 2011 and 2010, respectively. The increase in the effective tax rate including discontinued operations for 2012 was due to the goodwill impairment recorded at MHE.2014.
Absent any impact of factors including intervening audit settlements, changes in federal, state or foreign law and changes in the geographical mix of our income, we expect our 2013 effective tax rate to decrease from our 2012 effective tax rate due to the full year effect of the S&P Dow Jones Indices LLC joint venture.Discontinued Operations, net
(Loss) Income from Discontinued Operations
2012
Loss from discontinued operations was $234$178 million in 20122014 as compared to income from discontinued operations of $308$592 million in 2011,2013, primarily as a result of revenue declinesthe after-tax gains of $160 million and several non-recurring items.
Revenue at MHE decreased $230$589 million or 10% as compared to 2011, primarily due to decreases in the adoption states as well as open territory sales at School Education Group. Also contributing to the reduction was a substantial increase in deferred revenue due to higher sales of programs that contain digital components that will be delivered over multiple years. In the Higher Education, Professional and International Group, sales of new editions have been impacted by the growth of the used book and rental market. However, digital sales across MHE continue to increase as compared to 2011.
Non-recurring items impacting the loss from discontinued operations included:
Intangible asset impairments of $497 million that consisted of goodwill, prepublication and inventory assets at MHE's School Education Group ("SEG").
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◦ | As a result of the offer we received from Apollo Global Management, LLC in the fourth quarter of 2012, we performed a goodwill impairment review at MHE, which resulted in a full impairment of goodwill of $478 million at SEG.
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◦ | An impairment charge of $19 million was recorded on certain prepublication and inventory assets as targeted school programs were shut down.
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Restructuring charges of $39 million consisting primarily of employee severance costs related to a workforce reduction of approximately 530 positions.
Direct transaction costs of $17 million for legal and professional fees related to the sale of MHE.
A charge related to a lease commitment of $3 million.
These charges were partially offset by a vacation accrual reversal of $17 million related to a changeMcGraw Hill Construction in our vacation policy.
2011
Income from discontinued operations increased 22%, primarily due to a gain of $74 million, net of tax, related to2014 and the sale of our Broadcasting Group completed on December 30, 2011. Excluding the gain, income from discontinued operations decreased 7% compared to 2010 as a result of revenue declines and restructuring charges at MHE of $34 million consisting primarily of employee severance costs. Revenue at MHE decreased $141 million or 6% as compared to 2010, primarily due to decreases in the adoption states as well as open territory sales at SEG.2013, respectively.
Segment Review
S&PStandard & Poor's Ratings Services
Credit ratings are one of several tools that investors can use when making decisions about purchasing bonds and other fixed income investments. They are opinions about credit risk and our ratings express our opinion about the ability and willingness of an issuer, such as a corporation or state or city government, to meet its financial obligations in full and on time. Our credit ratings can also relate to the credit quality of an individual debt issue, such as a corporate or municipal bond, and the relative likelihood that the issuer may default.
S&P Ratings differentiates its revenue between transaction and non-transaction. Transaction revenue primarily includes fees associated with:
ratings related to new issuance of corporate and government debt instruments, and structured finance debt instruments;
bank loan ratings; and
corporate credit estimates, which are intended, based on an abbreviated analysis, to provide an indication of our opinion regarding creditworthiness of a company which does not currently have an S&P Ratings credit rating.
Non-transaction revenue primarily includes fees for surveillance of a credit rating, annual fees for customer relationship-based pricing programs, and fees for entity credit ratings.
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| | | | | | | | | | | | | | | | | | |
| (in millions) | | Years ended December 31, | | % Change |
| | | 2012 | | 2011 | | 2010 | | ’12 vs ’11 | | ’11 vs ’10 |
| Revenue: | | | | | | | | | | |
| Transaction | | $ | 903 |
| | $ | 651 |
| | $ | 662 |
| | 39 | % | | (2 | )% |
| Non-transaction | | 1,131 |
| | 1,116 |
| | 1,033 |
| | 1 | % | | 8 | % |
| Total revenue | | $ | 2,034 |
| | $ | 1,767 |
| | $ | 1,695 |
| | 15 | % | | 4 | % |
| % of total revenue: | | | | | | | | | | |
| Transaction | | 44 | % | | 37 | % | | 39 | % | | | | |
| Non-transaction | | 56 | % | | 63 | % | | 61 | % | | | | |
| | | | | | | | | | | |
| Domestic revenue | | $ | 1,102 |
| | $ | 910 |
| | $ | 919 |
| | 21 | % | | (1 | )% |
| International revenue | | $ | 932 |
| | $ | 857 |
| | $ | 776 |
| | 9 | % | | 10 | % |
| | | | | | | | | | | |
| Operating profit | | $ | 849 |
| | $ | 720 |
| | $ | 762 |
| | 18 | % | | (6 | )% |
| % Operating margin | | 42 | % | | 41 | % | | 45 | % | | | | |
Revenue
2012
Transaction revenue grew significantly as compared to 2011 driven by strong high-yield and investment grade corporate bond issuance related to robust refinancing activity. Borrowers took advantage of low rates replacing existing bonds with cheaper debt, particularly in the second half of 2012 as issuers refinanced in advance of the uncertainty surrounding the U.S. fiscal cliff and Presidential election. The significant increase was also attributable to weak results in the second half of 2011 resulting from the impacts of the sovereign crisis in Europe and a slow economic recovery. Additionally, increases in 2012 in public finance contributed to growth in transaction revenue, primarily from strong municipal bond issuance in the U.S. as refunding activity increased dramatically over 2011. Strong growth in bank loan ratings, resulting from a favorable interest rate environment, was also a key driver contributing to the growth in structured finance revenues, specifically an increase to U.S. collateralized loan obligations ("CLO") transaction revenue. U.S. asset backed securities ("ABS") transaction revenue also increased due to favorable spreads, expansion of both bank & non-bank issuance and solid refinancing activity of student loans.
Non-transaction revenue remained relatively flat as growth in non-issuance related revenue at corporate ratings, primarily for entity credit ratings and rating evaluation services, was offset by declines in annual feesglobal research and program fees in structured finance. Annual fees include surveillance fees and other customer relationship-based fees. Additionally, CRISIL's acquisition of Coalition Development Ltd. in July of 2012 had a favorable impact on non-transactionanalytics. Non-transaction revenue in 2012. Non-transaction revenuealso includes an intersegment royalty charged to S&P Capital IQ and SNL for the rights to use and distribute content and data developed by S&P Ratings. Royalty revenue for 20122015, 2014 and 20112013 was $69$83 million, $77 million and $63$72 million,, respectively.
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| (in millions) | | Years ended December 31, | | % Change |
| | | 2015 | | 2014 | | 2013 | | ’15 vs ’14 | | ’14 vs ’13 |
| Revenue: | | | | | | | | | | |
| Transaction | | $ | 1,109 |
| | $ | 1,129 |
| | $ | 1,035 |
| | (2 | )% | | 9 | % |
| Non-transaction | | 1,319 |
| | 1,326 |
| | 1,239 |
| | — | % | | 7 | % |
| Total revenue | | $ | 2,428 |
| | $ | 2,455 |
| | $ | 2,274 |
| | (1 | )% | | 8 | % |
| % of total revenue: | | | | | | | | | | |
| Transaction | | 46 | % | | 46 | % | | 46 | % | | | | |
| Non-transaction | | 54 | % | | 54 | % | | 54 | % | | | | |
| | | | | | | | | | | |
| Domestic revenue | | $ | 1,390 |
| | $ | 1,305 |
| | $ | 1,214 |
| | 7 | % | | 8 | % |
| International revenue | | $ | 1,038 |
| | $ | 1,150 |
| | $ | 1,060 |
| | (10 | )% | | 8 | % |
| % of total revenue: | | | | | | | | | | |
| Domestic revenue | | 57 | % | | 53 | % | | 53 | % | |
| |
|
| International revenue | | 43 | % | | 47 | % | | 47 | % | |
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|
| | | | | | | | | | | |
Operating profit (loss) 1 | | $ | 1,078 |
| | $ | (583 | ) | | $ | 882 |
| | N/M |
| | N/M |
|
| % Operating margin | | 44 | % | | (24 | )% | | 39 | % | | | | |
N/M - not meaningful
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1 | 2015 includes legal settlements, partially offset by a benefit related to insurance recoveries of $54 million and restructuring charges of approximately $13 million. 2014 includes $1.6 billion of legal and regulatory settlements and restructuring charges of approximately $45 million. 2013 includes $77 million of legal settlements, restructuring charges of approximately $10 million, and a $16 million gain on the sale of an equity investment held by CRISIL. |
2015
Revenue decreased 1%, which includes the unfavorable impact of foreign exchange rates that reduced revenue by 4 percentage points. Excluding the unfavorable impact of foreign exchange rates, transaction revenue increased primarily due to an increase in U.S. Public Finance issuance, partially offset by a decline in structured finance revenue driven by reduced global market issuance. Excluding the unfavorable impact of foreign exchange rates, non-transaction revenue also increased due to growth in surveillance revenues and additional Ratings Evaluation Service activity, partially offset by lower revenue associated with new client relationships.
Operating profit increased 285%. Excluding the favorable net impact of legal and regulatory settlement charges and insurance recoveries of 273 percentage points and net higher restructuring costs recorded in 2014 of 6 percentage points, operating profit increased 7%. Foreign currency exchange rates had an unfavorable impact of $37 million1 percentage point on the operating profit growth of 7%. This increase was driven by decreased compensation costs primarily driven by lower incentive costs and cost containment resulting from 2014 restructuring actions and reduced legal fees following the resolution of a number of significant legal matters, partially offset by increased costs related to the implementation of the Dodd-Frank Wall Street Reform of the Consumer Protection Act and the decrease in revenue for 2012.discussed above.
20112014
Revenue increased compared to 2010 as8% driven by growth in both transaction and non-transaction revenue. Transaction revenue increased in 2014 primarily driven by growth in both corporate and financial services bond ratings revenue with strong growth in all regions and an increase in bank loan ratings revenue, partially offset the slightby a decline in transaction revenue.structured finance revenues. Non-transaction revenue includesincreased primarily due to an intersegment royalty charged to S&P Capital IQ forincrease in annual fees, increases in global research and analytics services and increased RES activity.
Operating profit decreased 166%. Excluding the rights to useunfavorable impact of legal and distribute contentregulatory settlements of 173 percentage points, the unfavorable impact of higher restructuring charges recorded in 2014 of 4 percentage points, and the unfavorable impact of the gain on sale of an equity investment held at CRISIL in 2013 of 2 percentage points, operating profit increased 13%. This increase was driven by the increase in revenue and the favorable impact of foreign exchange rates of 2 percentage points, partially offset by higher legal defense costs primarily driven by increased litigation activity including the Department of Justice case.
data developed by S&P Ratings. Royalty revenue for the years ended December 31, 2011 and 2010 was $63 million and $56 million, respectively. Foreign exchange rates had a favorable impact of $25 million on revenue for 2011.
The decrease in transaction revenue was driven primarily by declines in public finance and structured finance. These declines were partially offset by increases at corporate ratings due to growth in bank loan ratings and high-yield corporate bond ratings revenue. U.S. municipal bond issuance decreased as municipal market volume declined driven by the expiration of the Build America Bond program at the end of 2010. Declines in structured finance were driven by lower issuance volumes in the U.S. of residential mortgage-backed securities (“RMBS”), collateralized debt obligations (“CDO”) and ABS.
Revenue derived from non-transaction related sources increased compared to 2010, primarily as a result of growth in non-issuance related revenue at corporate ratings, primarily for entity credit ratings, ratings evaluation services and surveillance fees, and CRISIL, our majority owned Indian credit rating agency, primarily for outsourcing services and the acquisition of Pipal Research in December 2010. This was partially offset by declines in structured finance related to lower annual fees that were adversely impacted by increased deal maturities and defaults, primarily on CDO deals. Non-transaction revenue represented a larger percentage of total S&P Ratings revenue for 2011 compared to 2010 as transaction revenue decreased and non-transaction revenue increased in 2011 due to the factors discussed above.
Operating Profit
2012
Operating profit increased compared to 2011 primarily due to the increases in revenue as noted above. These increases were partially offset by increased expenses resulting from higher incentive costs due to improved financial performance, an increase in legal expenses, restructuring charges of $15 million in the second half of 2012 consisting of employee severance costs related to a workforce reduction of approximately 100 positions, CRISIL's acquisition of Coalition Development Ltd. in July of 2012 and an unfavorable impact from foreign exchange rates of $13 million.
2011
Operating profit decreased compared to 2010 due to increased expenses resulting from staff increases, incremental compliance and regulatory costs, restructuring charges of $9 million in the fourth quarter of 2011 consisting of employee severance costs related to a workforce reduction of approximately 30 positions and a decline in transaction revenue, partially offset by growth in non-transaction revenue as noted above and a favorable impact from foreign exchange rates of $12 million.
Issuance Volumes
We monitor issuance volumes as an indicator of trends in transaction revenue streams within S&P Ratings. Issuance volumes noted within the discussion that follows are based on the domicile of the issuer. Issuance volumes can be reported in two ways: by “domicile”"domicile", which is based on where an issuer is located or where the assets associated with an issue are located, or based on “marketplace”"marketplace", which is where the bonds are sold. The following tables depict changes in issuance levels as compared to the prior year, based on Thomson Financial, Harrison Scott Publications, Dealogic and S&P Rating’s internal estimates.
| | | | | 2012 Compared to 2011 | | 2015 Compared to 2014 |
| Corporate Issuance | | U.S. | | Europe | |
| Corporate Bond Issuance | | | U.S. | | Europe |
| High-Yield Issuance | | 51 | % | | 35 | % | | (13 | )% | | (30 | )% |
| Investment Grade | | 29 | % | | 20 | % | | 20 | % | | (21 | )% |
| Total New Issue Dollars—Corporate Issuance | | 35 | % | | 21 | % | | 12 | % | | (22 | )% |
Although the number of issuances were down, par value of corporate issuance in the U.S. was up in 2015 driven by an increase in investment-grade debt issuance reflecting high par value deals, as the number of deals was lower in the first nine months of the year. Strong M&A activity was a major driver of large financing transactions that resulted in increased issuance in the first nine months of the year. Investment-grade debt issuance was negatively impacted in the fourth quarter of 2015 as market volatility increased. The increase in U.S. investment-grade debt issuance was partially offset by weakness in U.S. high-yield debt issuance.
Corporate issuance in the U.S. and Europe was driven by strong high-yield debt issuance and investment grade debt issuance as borrowers took advantage of low funding rates to opportunistically refinance existing debt. Both investment gradefor both investment-grade and high-yield issuance comparisons also benefited from low volumesdecreased in 2011.
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| | | | | | |
| | | 2012 Compared to 2011 |
| Structured Finance | | U.S. | | Europe |
| Residential Mortgage-Backed Securities (“RMBS”) | | 49 | % | | (51 | )% |
| Commercial Mortgage-Backed Securities (“CMBS”) | | 46 | % | | * |
|
| Collateralized Debt Obligations (“CDO”) | | 115 | % | | * |
|
| Asset-Backed Securities (“ABS”) | | 43 | % | | (1 | )% |
| Covered Bonds | | * |
| | (46 | )% |
| Total New Issue Dollars—Structured Finance | | 54 | % | | (42 | )% |
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*
| Represents low issuance levels in 2012 and 2011. |
|
| | | | | | |
| | | 2015 Compared to 2014 |
| Structured Finance | | U.S. | | Europe |
| Asset-Backed Securities (“ABS”) | | (10 | )% | | (22 | )% |
| Collateralized Debt Obligations (“CDO”) | | (22 | )% | | (15 | )% |
| Commercial Mortgage-Backed Securities (“CMBS”) | | 7 | % | | 14 | % |
| Residential Mortgage-Backed Securities (“RMBS”) | | 45 | % | | 25 | % |
| Covered Bonds | | * |
| | 28 | % |
| Total New Issue Dollars—Structured Finance | | (6 | )% | | 13 | % |
RMBS volume is up in the U.S. due to higher re-REMIC activity. RMBS grew off of a low base in 2011. RMBS volumes in Europe were down reflecting issuers taking advantage of the Bank of England's Funding for Lending Scheme.
CMBS issuance is up in the U.S. as improving economic conditions, stabilizing delinquency rates and narrowing spreads have increased the attractiveness and competitiveness of the CMBS market, particularly in the fourth quarter. European CMBS issuance continued to remain constrained with low issuance levels in both periods.
Issuance in the CDO asset class in the U.S. was driven by strong CLO issuance due to an increase in corporate loan activity. European issuance in the CDO asset class was minimal due to economic uncertainty and increases compare to a very low level of* Represents no activity in 2011.2015 and 2014.
ABS issuance in the U.S. is upwas down, primarily duedriven by a decline in credit cards as banks continued to strengthuse deposit funding rather than securitization for alternative funding. ABS issuance in autos, partially due to growth in subprime lending as well as an expansion of bank lending on prime loans. An increasingly tighter spread environment has triggered a substantial return of credit card activity from banks andEurope was also resulted in significant refinancing opportunitiesdown, driven by declines across several sub-asset classes.
Issuance was down in the student loan sector whichU.S. and European Structured Credit markets driven by lower availability of leveraged loans and overall market volatility.
CMBS issuance in the U.S. was up reflecting favorable market conditions and investor demand during the first half of the year, partially offset by a decline in the second half of the year with the mix reflecting a lower proportion of single borrower transactions. European CMBS issuance was also contributed toup, although from a low 2014 base.
RMBS volume in the growth.U.S. was up driven by a mix of deal types, including servicing advance transactions. The increase in European ABSRMBS volume was predominantly driven by an increase in the average issuance levels remained in line with 2011.size.
Covered bond issuance (which are debt securities backed by cash flows from mortgages or public sector loans)other high-quality assets that remain on the issuer's balance sheet) in Europe is down resulting from uncertainty regarding sovereign risk and the potential unfavorable impact on this sector as well as lower funding requirementswas up due to additional liquidity provided by thehistorically low yields. The European Central Bank through its long-term refinancing operations.Bank's purchase program is also adding to the demand side, with banks and financial institutions taking advantage of attractive lower rates.
Industry Highlights and Outlook
Strong high-yieldRevenue declined in 2015 primarily due to the unfavorable impact of foreign exchange rates of 4 percentage points and investment gradereduced market issuance internationally primarily impacting corporate bond ratings revenue and structured finance revenues. These decreases were partially offset by an increase in U.S. Public Finance issuance in 2012 was driven by robust refinancing activitythe first nine months of the year as borrowersissuers took advantage of the low rates replacing existing bonds with cheaper debt. Duringinterest rate environment. However, issuance slowed in the second half, issuancefourth quarter of 2015 due to market volatility. Corporate bond ratings revenue in the U.S. was drivenfavorably impacted by issuers refinancing in advancethe low interest rate environment and M&A activity throughout the first nine months of the uncertainty surroundingyear. However, issuance declined in the U.S. fiscal clifffourth quarter of 2015 as market volatility increased and Presidential election. In 2013, opportunisticM&A activity slowed. Debt issuance is expected to continue at a slightly slower pace as many refinancings were completed in 2012, however, we believe the longer term outlook for the corporate bond market continues to be healthy.
Structured finance issuancevolatile in the U.S. continued its turnaround throughout 2012 and 2013 looks to build on this momentum. The U.S. RMBS market2016. M&A activity is expected to remain modest given continuing home pricing pressures, historically low mortgage origination levels,continue across the ratings spectrum. International economic and continued high unemployment nationally. European RMBS issuance volumes continuedpolitical uncertainties are likely to remain low during 2012 and we expect the Bank of England's Funding for Lending Scheme will continue to dampen European RMBS issuancecause market volatility in 2013. U.S. CMBS issuance experienced growth, particularly in the fourth quarter, due to improving economic conditions, low interest rates, stabilizing delinquency rates, and narrowing spreads. Healthier U.S. CMBS issuance levels are expected to continue in 2013.
The U.S. CDO market experienced strong CLO activity in 2012. We expect this activity to remain strong as we move into 2013. U.S. ABS issuance volume in 2012 was robust with strength in autos leading the way as vehicle sales have increased and the outlook for 2013 remains strong. European ABS issuance volume experienced strong growth in autos and credit cards in the fourth quarter of 2012. These trends are also expected to continue in 2013.2016.
Legal and Regulatory Environment
The financial services industry isLegal and Regulatory Environment
General
S&P Ratings and many of the securities that it rates are subject to the potential for increasedextensive regulation in both the U.S. and abroad. The businesses conducted by our S&P Ratings segment are, in certain cases, regulated underother countries, and therefore existing and proposed laws and regulations can impact the Credit Rating Agency Reform Act of 2006,Company’s operations and the U.S. Securities Exchange Act of 1934 and/or the laws of the states or other jurisdictions in which they conduct business.
Standard & Poor’s Ratings Services is a credit rating agency that is registered with the SEC as a Nationally Recognized Statistical Rating Organization (“NRSRO”). The SEC first began designating NRSROs in 1975 for use of their credit ratings in the determination of capital charges for registered brokers and dealers under the SEC’s Net Capital Rule.
The “Credit Rating Agency Reform Act of 2006” (the “Act”) created a new SEC registration system for rating agencies that choose to register as NRSROs. Under the Act, the SEC is given authority and oversight of NRSROs and can censure NRSROs, revoke their registration or limit or suspend their registration in certain cases. The rules implemented by the SEC pursuant to the Act address, among other things, prevention or misuse of material non-public information, conflicts of interest and improving transparency of ratings performance and methodologies. The public portions of the current version of S&P Ratings’s Form NRSRO are available on S&P Rating’s Web site.
Outside the U.S., regulators and government officials have been implementing formal oversight of credit rating agencies. S&P Ratings is subject to regulations in several foreign jurisdictionsmarkets in which it operatesoperates. Additional laws and continuesregulations have been adopted but not yet implemented or have been proposed or are being considered. In addition, in certain countries, governments may provide financial or other support to work closely with regulators globally, including the International Organization of Securities Commissions, the European Securities and Markets Authority and otherslocally-based rating agencies. For example, governments may from time to promote the global consistency of regulatory requirements. S&P Ratings expects regulators in additional countries to introduce new regulations in the future.
time establish official rating agencies or credit ratings criteria or procedures for evaluating local issuers. We have reviewed the new laws, regulations and rules which have been adopted and we have implemented, or are planning to implement, changes as required. We do not believe that such new laws, regulations or rules will have a materiallymaterial adverse effect on our financial condition or results of operations. Other laws, regulations and rules relating to credit rating agencies are being considered by local, national, foreign and multinational bodies and are likely to continue to be considered in the future, including provisions seeking to reduce regulatory and investor reliance on credit ratings, rotation of credit rating agencies and liability standards applicable to credit rating agencies. The impact on us of the adoption of any such laws, regulations or rules remains uncertain, but could increase the costs and legal risks relating to S&P Rating’sRatings’ rating activities.
For a further discussion of competitive and other risks inherentactivities, or adversely affect our ability to compete, or result in changes in the S&P Ratings business, see Item 1a, Risk Factors Specific to our Standard & Poor’s Ratings Segment, in this Form 10-K.
demand for credit ratings.
In the normal course of business both in the U.S. and abroad, S&P Ratings (or the Company and its subsidiarieslegal entities comprising S&P Ratings) are defendants in numerous legal proceedings and are involved, from timeoften the subject of government and regulatory proceedings, investigations and inquiries. Many of these proceedings, investigations and inquiries relate to time, in governmentalthe ratings activity of S&P Ratings brought by purchasers of rated securities. In addition, various government and self-regulatory agencyagencies frequently make inquiries and conduct investigations into S&P Ratings’ compliance with applicable laws and regulations. Any of these proceedings, which mayinvestigations or inquiries could ultimately result in adverse judgments, damages, fines, penalties or penalties. Also, various governmental and self-regulatory agencies regularly make inquiries and conduct investigations concerning compliance with applicable laws and regulations.activity restrictions, which could adversely impact our consolidated financial condition, cash flows, business or competitive position.
U.S.
The businesses conducted by our S&P Ratings segment are, in certain cases, regulated under the Credit Rating Agency Reform Act of 2006 (the “Reform Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd Frank Act”), the Securities Exchange Act of 1934 (the “Exchange Act”) and/or the laws of the states or other jurisdictions in which they conduct business. The financial services industry is subject to the potential for increased regulation in the U.S.
S&P Ratings is a credit rating agency that is registered with the SEC as a Nationally Recognized Statistical Rating Organization (“NRSRO”). The SEC first began informally designating NRSROs in 1975 for use of their credit ratings in the determination of capital charges for registered brokers and dealers under the SEC’s Net Capital Rule. The Reform Act created a new SEC registration system for rating agencies that choose to register as NRSROs. Under the Reform Act, the SEC is given authority and oversight of NRSROs and can censure NRSROs, revoke their registration or limit or suspend their registration in certain cases. The rules implemented by the SEC pursuant to the Reform Act, the Dodd Frank Act and the Exchange Act address, among other things, prevention or misuse of material non-public information, conflicts of interest, documentation and assessment of internal controls, and improving transparency of ratings performance and methodologies. The public portions of the current version of S&P Ratings’ Form NRSRO are available on S&P Ratings’ Web site.
European Union
In the European Union, the credit rating industry is registered and supervised through a pan-European regulatory framework which is a compilation of three sets of legislative actions. In 2009, the European Parliament passed a regulation (“CRA1”) that established an oversight regime for the credit rating industry in the European Union, which became effective in 2010. CRA1 requires the registration, formal regulation and periodic inspection of credit rating agencies operating in the European Union. S&P Ratings was granted registration in October of 2011. In January of 2011, the European Union established the European Securities and Markets Authority (“ESMA”), which, among other things, has direct supervisory responsibility for the registered credit rating industry throughout the European Union.
Additional rules augmenting the supervisory framework for credit rating agencies went into effect in 2013. Commonly referred to as CRA3, these rules, among other things:
impose various additional procedural requirements with respect to ratings of sovereign issuers;
require member states to adopt laws imposing liability on credit rating agencies for an intentional or grossly negligent failure to abide by the applicable regulations;
impose mandatory rotation requirements on credit rating agencies hired by issuers of securities for ratings of resecuritizations, which may limit the number of years a credit rating agency can issue ratings for such securities of a particular issuer;
impose restrictions on credit rating agencies or their shareholders if certain ownership thresholds are crossed; and
impose additional procedural and substantive requirements on the pricing of services.
The financial services industry is subject to the potential for increased regulation in the European Union.
Other Jurisdictions
Outside of the U.S. and the European Union, regulators and government officials have also been implementing formal oversight of credit rating agencies. S&P Ratings is subject to regulations in several foreign jurisdictions in which it operates and continues to work closely with regulators globally to promote the global consistency of regulatory requirements. S&P Ratings expects regulators in additional countries to introduce new regulations in the future.
SeeFor a further discussion of competitive and other risks inherent in our S&P Ratings business, see Item 1a, Risk Factors, in this Annual Report on Form 10-K. For a further discussion of the legal and regulatory environment in our S&P Ratings business, see Note 13 –12 - Commitments and Contingencies to ourthe consolidated financial statements for further discussion.under Item 8, Consolidated Financial Statements and Supplementary Data, in this Annual Report on Form 10-K.
S&P Capital IQ and SNL
S&P Capital IQ'sIQ and SNL's portfolio of products brings together integrated data sets, indices, research, and analytic insights in an integrated desktop solutioncapabilities are designed to serve multiple investor segments acrosshelp the financial community. In addition, the segment has products that integrates its content for delivery to the financial market via feeds, as well as through on-demandcommunity track performance, generate better investment returns (alpha), identify new trading and customizable delivery tools. Specific products include:investment ideas, perform risk analysis, and develop mitigation strategies.
S&P Capital IQ - and SNL includes the following business lines:
S&P Capital IQ Desktop & Enterprise Solutions — a product suite that provides data, analytics and third-party research for global finance professionals, which includes the S&P Capital IQ Desktop and integrated bulk data feeds that can be customized, which include QuantHouse, S&P Securities Evaluations, CUSIP and Compustat;
Global Risk Services — commercial arm that sells Standard & Poor's Ratings Services' credit ratings and related data, analytics and research, which includes subscription-based offerings, RatingsDirect® and RatingsXpress®;
S&P Capital IQ Markets Intelligence — a comprehensive source of market research for financial professionals;professionals, which includes Global Markets Intelligence, Leveraged Commentary & Data and Equity Research Services; and
Global Credit Portal -SNL — a web-based solutionproduct suite that includes standardized and as-reported financials, sector-specific templates, asset-level data, mapping and regulatory data accessible through SNL Unlimited that provides real-time credit research, market information and risk analytics, which includes RatingsDirect®;
Global Data Solutions - combines high-quality, multi-asset class andin-depth coverage of industry-specific financial market data to help professional investors, traders,from over 6,500 public companies and analysts meetover 50,000 private companies across the new analytical, risk management, regulatoryglobe, comprehensive market data on a variety of assets, and front-to-back office operation requirement, which includes RatingsXpress®;M&A and Capital Market activities.
investment research products.
| | | (in millions) | | Years ended December 31, | | % Change | | Years ended December 31, | | % Change |
| | | 2012 | | 2011 | | 2010 | | ’12 vs ’11 | | ’11 vs ’10 | | 2015 | | 2014 | | 2013 | | ’15 vs ’14 | | ’14 vs ’13 |
| Revenue | | $ | 1,124 |
| | $ | 1,031 |
| | $ | 916 |
| | 9 | % | | 13 | % | | $ | 1,405 |
| | $ | 1,237 |
| | $ | 1,170 |
| | 14 | % | | 6 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Subscription revenue | | $ | 1,014 |
| | $ | 922 |
| | $ | 812 |
| | 10 | % | | 14 | % | | $ | 1,270 |
| | $ | 1,118 |
| | $ | 1,056 |
| | 14 | % | | 6 | % |
| Non-subscription revenue | | $ | 110 |
| | $ | 109 |
| | $ | 104 |
| | 1 | % | | 5 | % | | $ | 135 |
| | $ | 119 |
| | $ | 114 |
| | 13 | % | | 4 | % |
| % of total revenue: | | | | | | | | | | | |
| Subscription revenue | | | 90 | % | | 90 | % | | 90 | % | | | | |
| Non-subscription revenue | | | 10 | % | | 10 | % | | 10 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Domestic revenue | | $ | 749 |
| | $ | 693 |
| | $ | 622 |
| | 8 | % | | 11 | % | | $ | 933 |
| | $ | 809 |
| | $ | 767 |
| | 15 | % | | 5 | % |
| International revenue | | $ | 375 |
| | $ | 338 |
| | $ | 294 |
| | 11 | % | | 15 | % | | $ | 472 |
| | $ | 428 |
| | $ | 403 |
| | 10 | % | | 6 | % |
| % of total revenue: | | | | | | | | | | | |
| Domestic revenue | | | 66 | % | | 65 | % | | 66 | % | | | | |
| International revenue | | | 34 | % | | 35 | % | | 34 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating profit | | $ | 208 |
| | $ | 214 |
| | $ | 171 |
| | (3 | )% | | 25 | % | |
Operating profit 1 | | | $ | 228 |
| | $ | 228 |
| | $ | 189 |
| | — | % | | 21 | % |
| % Operating margin | | 19 | % | | 21 | % | | 19 | % | | | | | | 16 | % | | 18 | % | | 16 | % | | | | |
| |
1 | 2015 includes acquisition costs of $37 million related to the acquisition of SNL and costs of $32 million related to identified operating efficiencies primarily related to restructuring. 2014 includes restructuring charges of $9 million. 2013 includes restructuring charges of approximately $9 million and a loss related to the sale of Financial Communications of $3 million. |
2015
Revenue increased 14% primarily due to 7 percentage points of growth in the S&P Capital IQ Desktop, RatingsXpress® and RatingsDirect® and 7 percentage points from the acquisition of SNL. Revenue growth of the legacy S&P Capital IQ products was primarily driven by increases in average contract values for each product from new customer relationships and increases from existing accounts. These increases were partially offset by declines in the equity research business, the unfavorable impact of foreign exchange rates which reduced revenue by 1 percentage point and the unfavorable impact related to the closure of a non-core business. The number of users on the S&P Capital IQ Desktop and the number of customers at RatingsXpress® continued to grow in 2015. RatingsXpress® continued to benefit from increased compliance requirements which have created a greater need for alternative risk tools. International revenue grew 10% over 2014, primarily driven by sales growth of the S&P Capital IQ Desktop and RatingsXpress® in Europe and Asia.
2012Operating profit remained flat. Excluding the unfavorable impact of acquisition-related costs related to the acquisition of SNL of 16 percentage points and higher costs recorded in 2015 related to identified operating efficiencies primarily related to restructuring of 10 percentage points, operating profit increased 25%. This increase is due to revenue growth and the favorable impact of foreign exchange rates of 7 percentage points, partially offset by higher technology costs, increased compensation costs and higher intangible asset amortization in 2015 related to the acquisition of SNL.
2014
Revenue grew compared to 2011,increased 6% primarily due to growth atfrom the S&P Capital IQ Global Data SolutionsDesktop, RatingsXpress® and the recent acquisitions of R² Technologies, QuantHouse and CMA.
The increase at Capital IQ wasRatingsDirect®, driven by market share gains and increased contract values for existing accounts, however headcount reductionsincreases in the financial services industry have tempered growth. The number of clients have still increased 7% from 2011 and the spend from the top accounts continues to grow. The client increase includes a certain percentage of clients on TheMarkets.com platform that have been migrated to the Capital IQ platform. The subscription base for the Global Credit Portal increased slightly as difficult market conditions due to budget constraints and reductions in headcount across the customer base affected revenue in 2012. Clients continue to reduce staff levels to manage their spending levels and layoffs have continued to be announced through the fourth quarter of 2012.
The subscription base for Global Data Solutions is growing from new client relationships and expanded relationships into existing accounts as the number of RatingsXpress® customers have increased 10% in 2012 as compared to 2011. However, average contract values for thoseeach product from new customer relationships and increases from existing accounts. This was partially offset by an unfavorable impact related to the closure of several non-core businesses. The number of users on the S&P Capital IQ Desktop and the number of customers have declined dueat RatingsXpress® increased in 2014 as compared to customer budget constraints amidst difficult market conditions. Client cancellations have also been higher than in2013. Increases for existing accounts were driven by bundled solution offerings integrated within the prior year due to increased mergerS&P Capital IQ Desktop, new datasets and acquisition activity during the year that caused those clients to reevaluate their subscriptions.
Traditionally, revenue has been primarily domestic, however, due to increases in Europe for the subscription base for RatingsXpress®, continued sales effortsexpanded coverage of existing datasets combined with improved functionality of the S&P Capital IQ desktopDesktop. RatingsXpress® benefited from improvements made to the speed and timeliness through delivery on the Xpressfeed platform. Additionally, RatingsXpress® benefited from increased compliance requirements which have created a greater need for alternative risk tools. RatingsDirect® also had revenue growth in Europe and Asia and recent acquisitions in Europe, international growth continued to occur throughout 2012.
2011
Revenue grew compared to 2010, primarily due to platform enhancements resulting in market share gains and2014 as increased contract values for existing accounts at Capital IQ;were driven by the acquisitionsale of TheMarkets.com in September 2010; and growth inbundled packages including the subscription base, both in new clients and in further expanding the existing customer base for the Global Credit Portal, which includes RatingsDirect®. Global Data Solutions also contributed to the increase driven primarily by growth in the subscription base from new client relationships and expanded relationships into existing accounts.
S&P Capital IQ continued to have significant client growth as the number of clients increased 14%Desktop. Additionally, S&P Capital IQ Desktop, RatingsXpress® and RatingsDirect® benefited in 2011 as2014 from a higher customer retention rate compared to 2010. Traditionally, subscription2013. International revenue has beengrew 6% over 2013, primarily domestic, however, due to the continued enhancementsdriven by sales growth of the S&P Capital IQ international database, strong sales for the Global Credit Portal and RatingsXpress®, particularlyDesktop in Europe, double-digit international growth occurred in 2011.
Operating Profit
2012
Operating profit decreased slightly as compared to 2011. 2012 was significantly impacted by restructuring charges of $19 million recorded in the second half of 2012 consisting of employee severance costs related to a workforce reduction of approximately 150 positions. The 2012 acquisitions also contributed to the decrease, particularly due to amortization charges relating to the intangible assets. Also impacting operating profit were staff increases, primarily in developing regions, increased technology costs to supportAsia and Canada.
Operating profit increased 21%. Excluding the favorable impact of a loss related to the sale of Financial Communications of 3 percentage points, operating profit increased 18%. This increase is due to revenue growth, inexpense savings from the employee base and costs to further develop our content and software. These decreases were partially offset by the increase in revenue discussed aboveclosure of several non-core businesses and a favorable impact from foreign exchange rates of $7 million.
2011
Operating4 percentage points. Partially offsetting the increases to operating profit were increased compared to 2010,compensation costs, primarily due to increases in the subscription base for the Global Credit Portal and Global Data Solutions and strong results in our CUSIP business. In addition, growth at Capital IQ and the acquisition of TheMarkets.com contributed to the increase. These increases were partially offset by higher personnel costs and staff increases internationally, mainly in India,improved sales performance and additional costs to build out our integrated data feed within Global Data Solutionsheadcount in developing regions, and costs to further develop our infrastructure.higher technology costs.
Industry Highlights and Outlook
The segment is focused on integrating and evolving its assets and capabilities into one scaled business that offers unique, high-value offerings across all asset classes.In 2015, S&P Capital IQ made significant progress in building new functionality filling critical capability gapsand SNL added scale to bolster their foundation for future growth. Specific strategic acquisitions included:
In February 2012, we completeddata, technology and commercial capabilities and created synergies with the existing legacy S&P Capital IQ portfolio through the acquisition of R² Technologies, a provider of advanced risk and scenario-based analytics to traders, portfolio and risk managers for pricing, hedging and capital management across asset classes, allowing us to offer an integrated view of market and credit risks across asset classes.SNL.
In April 2012, we completed2016, S&P Capital IQ and SNL will continue to focus on meeting or exceeding targeted revenue and costs synergies as a result of the acquisition of QuantHouse, an independent global provider of end-to-end systematic low-latency market data solutions, allowing usSNL. The segment will seek to offer unique real-time monitors, derived data setsdevelop new products, further penetrate core customer segments and analyticsgeographies, as well as the ability to packageenhance core capabilities in data, technology and resell this data as part of a core solution.
In June 2012, we completed the acquisition of CMA, a provider of independent data in the over-the-counter markets.
As a result of our focus on integration and these acquisitions, demand is expected to continue to increase for our Capital IQ and data and information offerings. Enhancements to the segments content and platforms will be a key focus in 2013. In addition, growing the client base will be another important area of focus. As the segment increases the integration of their services on their delivery platforms, specifically, RatingsDirect® on the Capital IQ platform and the delivery of RatingsXpress®, and continues to bring new analytic and data solutions to the marketplace, they expect additional customer growth to occur.market approach.
Legal and Regulatory Environment
The financial services industry is subject to the potential for increased regulation in the U.S. and abroad. The businesses conducted by S&P Capital IQ and SNL are in certain cases regulated under the U.S. Investment Advisers Act of 1940 the U.S. Securities Exchange Act of 1934(the “Investment Advisers Act”) and/or the laws of the states or other jurisdictions in which they conduct business.
Certain businesses of S&P Capital IQ and SNL are authorized and regulated in the United Kingdom by the Financial Conduct Authority (the “FCA”). As such, these businesses are authorized to arrange and advise on investments, and are entitled to exercise a passport right to provide specified cross border services into other European Economic Area (“EEA”) States, under and subject to the conditions in the E.U. Markets in Financial Instruments Directive (“MiFID”).
The markets for financial research, investment and advisory services are very competitive. S&P Capital IQ and SNL competes domestically and internationally on the basis of a number of factors, including the quality of its research and advisory services, client service, reputation, price, geographic scope, range of products and services, and technological innovation.
On November 17, 2009, the European Commission, Directorate-General for Competition (“EC”) sent For a Statementfurther discussion of Objections (“SO”) to the Company outlining the EC’s preliminary view that Standard & Poor’s CUSIP Service Bureau (an S&P Rating’s brand that is part ofcompetitive and other risks inherent in our S&P Capital IQ) was abusing its position as the sole-appointed National Numbering Agency for U.S. securities by requiring financial institutionsIQ and Information Service Providers to pay licensing fees for the use of International Securities Identification Numbers. As set forthSNL business, see Item 1a, Risk Factors, in the SO, the EC’s preliminary view was that this behavior amounted to unfair pricing and infringed European competition law. The Company believed these preliminary views were erroneous but in order to resolve the investigation, proposed a set of commitments to the EC. Following market testing of the commitments, further discussions between the parties and some limited modifications to the commitments, the ECAnnual Report on November 15, 2011 accepted and made those commitments legally binding and ended its investigation. Pursuant to the commitments, CUSIP Global Services will create and distribute a new data feed of US International Securities Identification Numbers tailored specifically to the institutions for their use within the European Economic Area within five months.
See Note 13 – Commitments and Contingencies to our consolidated financial statements for further discussion.Form 10-K.
S&P DJ Indices
S&P DJ Indices is a global index provider that maintains a wide variety of investable and benchmark indices to meet an array of investor needs. S&P DJ Indices’ mission is to provide transparent benchmarks to help with decision making, collaborate with the financial community to create innovative products and provide investors with tools to monitor world markets.
S&P DJ Indices generates subscription revenue but primarily derives revenue from non-subscription products
based on the S&P and Dow Jones Indices, specifically through fees on exchange traded funds ("ETFs"), mutual funds and insurance assets. Additionally, fees are generated through both over-the-counter derivative issuances as well as exchange traded derivatives.
S&P DJ Indices includes our transaction in June 2012 with CME Group, Inc. and CME Group Index Services LLC to form a new company, S&P Dow Jones Indices LLC. The combination of these businesses created the world's largest provider of financial market indices.
Indices. Specifically, S&P DJ Indices generate revenue through investmentfrom the following sources:
Investment vehicles —such as:
exchange traded funds,as ETFs, which are based on the S&P and Dow Jones IndicesIndices' benchmarks and generate revenue through fees based on assets and underlying funds;
index-related licensing fees, which are generally either annual fees based on assets under management or flat fees for over-the-counterExchange traded derivatives and retail-structured products;
data subscriptions, which support index fund management, portfolio analytics and research; and
listed derivatives,— which generate royalties based on trading volumes of derivatives contracts.contracts listed on various exchanges;
Index-related licensing fees — which are either fixed or variable annual and per-issue fees for over-the-counter derivatives and retail-structured products; and
Data and customized index subscription fees — which support index fund management, portfolio analytics and research.
| | | (in millions) | | Years ended December 31, | | % Change | | Years ended December 31, | | % Change |
| | | 2012 | | 2011 | | 2010 | | ’12 vs ’11 | | ’11 vs ’10 | | 2015 | | 2014 | | 2013 | | ’15 vs ’14 | | ’14 vs ’13 |
| Revenue | | $ | 388 |
| | $ | 323 |
| | $ | 273 |
| | 20% | | 18% | | $ | 597 |
| | $ | 552 |
| | $ | 493 |
| | 8% | | 12% |
| | | | | | | | | | | | | | | |
| Subscription revenue | | $ | 87 |
| | $ | 71 |
| | $ | 64 |
| | 22% | | 11% | | $ | 122 |
| | $ | 111 |
| | $ | 103 |
| | 10% | | 8% |
| Non-subscription revenue | | $ | 301 |
| | $ | 252 |
| | $ | 209 |
| | 19% | | 20% | | $ | 475 |
| | $ | 441 |
| | $ | 390 |
| | 8% | | 13% |
| % of total revenue: | | | | | | | | |
| Subscription revenue | | | 21 | % | | 20 | % | | 21 | % | |
| Non-subscription revenue | | | 79 | % | | 80 | % | | 79 | % | |
| | | | | | | | | | | | | | | |
| Domestic revenue | | $ | 301 |
| | $ | 248 |
| | $ | 207 |
| | 21% | | 20% | | $ | 488 |
| | $ | 440 |
| | $ | 385 |
| | 11% | | 14% |
| International revenue | | $ | 87 |
| | $ | 75 |
| | $ | 66 |
| | 16% | | 14% | | $ | 109 |
| | $ | 112 |
| | $ | 108 |
| | (2)% | | 4% |
| % of total revenue: | | | | | | | | |
| Domestic revenue | | | 82 | % | | 80 | % | | 78 | % | |
| International revenue | | | 18 | % | | 20 | % | | 22 | % | |
| | | | | | | | | | | | | | | |
| Operating profit | | $ | 212 |
| | $ | 189 |
| | $ | 144 |
| | 12% | | 31% | |
Operating profit 1 | | | $ | 392 |
| | $ | 347 |
| | $ | 266 |
| | 13% | | 30% |
| Less: net income attributable to noncontrolling interests | | $ | 34 |
| | $ | — |
| | $ | — |
| |
| |
| | $ | 101 |
| | $ | 92 |
| | $ | 73 |
| | 10% | | 25% |
| Net operating profit | | $ | 178 |
| | $ | 189 |
| | $ | 144 |
| | (6)% | | 31% | | $ | 291 |
| | $ | 255 |
| | $ | 193 |
| | 14% | | 32% |
| % Operating margin | | 55 | % | | 59 | % | | 53 | % | | | 66 | % | | 63 | % | | 54 | % | |
| % Net operating margin | | 46 | % | | 59 | % | | 53 | % | | | 49 | % | | 46 | % | | 39 | % | |
| |
1 | 2014 includes $4 million of professional fees largely related to corporate development activities. |
Revenue2015
2012
Revenue at S&P DJ Indices increased 20%8%, primarily driven by higher average levels of assets under management ("AUM") for ETFs and mutual funds. Volumes for exchange-traded derivatives continued to increase for certain products which also contributed to revenue growth. Additionally, the year-over-year revenue increase was slightly unfavorably impacted by the refinement of our process for estimating revenue for certain products that favorably impacted 2014 which caused a one-time revenue increase in the prior-year period. Ending AUM for ETFs decreased 2% to $815 billion in 2015 from $832 billion in 2014, primarily due to the flow of investment funds to the developed international equity markets and the impact of lower equity prices. The unfavorable impact of foreign exchange rates reduced revenue by 1 percentage point.
Operating profit grew 13%. Excluding the favorable impact of professional fees largely related to corporate development activities recorded in 2014 of 1 percentage point, operating profit increased 12%. This increase was primarily due to revenue growth as expenses remained relatively flat as a result of cost containment measures.
2014
Revenue at S&P DJ Indices increased 12%, primarily driven by higher average levels of AUM for ETFs and mutual funds. Higher volumes for exchange-traded derivatives also contributed to revenue growth. These increases were partially offset by the unfavorable impact of lower over-the-counter derivative trading volumes in 2014 driven by the expiration of a licensing arrangement for commodities indices in June of 2014. AUM for ETFs rose 25% to $832 billion in 2014 from $668 billion in 2013. The unfavorable impact of foreign exchange rates reduced revenue by less than 1 percentage point.
Operating profit grew 30%. Excluding the impact of professional fees largely related to corporate development activities recorded in 2014 of 2 percentage points, operating profit increased 32%. This increase was primarily due revenue growth and the favorable impact of a $26 million non-cash impairment charge recorded in 2013 associated with an intangible asset acquired with the formation of the S&P Dow Jones Indices LLC joint venture. Excluding revenue fromventure and a reduction of royalty expenses. The reduction of royalty expenses was the joint venture, S&P DJ Indices revenue increased 3% primarily due to higher average levels of assets under management for ETF products and higher mutual fund revenue. Both domestic and international revenue increased over prior year primarily due to the joint venture. Excluding this impact, domestic revenue was still up, however international decreased due lower reported over-the-counter derivative trades in Europe.
85 new ETFs were launched during 2012 compared to 77 launched during 2011. Assets under management for ETFs rose 28% to $402 billion in 2012 from $314 billion in 2011.
2011
Revenue at S&P DJ Indices increased 18% due to a mix of higher average levels of assets under management for ETF products linked to our indices, significant increases in exchange-traded derivatives from higher trading volumes as a result of market volatilitypurchases of intellectual property rights to certain commodities indices developed by Goldman Sachs, and Broad Market Indices (“BMI”) from Citigroup Global Markets Inc. as well as the expiration of a licensing arrangement for commodities indices in 2011, increased mutual fund revenue, higher sales from over-the-counter derivatives, and 77 new ETFs launched during 2011. Assets under management for ETFs rose 5% to $314 billion in 2011 from $300 billion in 2010. Also contributing to the increase in subscription revenueJune of 2014. These expense reductions were higher data and custom index sales.
Operating Profit
2012
Operating profit increased due to the increase in revenue discussed above, partially offset by thean increase in compensation costs related to additional headcount and higher incentive costs. The unfavorable impact of expenses for our S&P Dow Jones Indices LLC joint venture, higher data fees and additional personal costs for targeted staff increases.
2011
Operatingforeign exchange rates reduced operating profit increased compared to 2010, primarily due to growth in ETF products.by 1 percentage point.
Industry Highlights and Outlook
Products at S&P DJ Indices should continuecontinues to benefitbe the leading index provider for the ETF market space. In 2015, higher average levels of AUM for ETFs contributed to revenue growth, however, ending AUM for ETFs decreased 2% to $815 billion in 2013 as ETF assets grow globally. The segment2015 from $832 billion in 2014. S&P DJ Indices will also continueseek to launchdiversify their portfolio of index offerings through asset class expansion, new ETFs where they see a customer interest or opportunity. The business will continue to benefit from our S&P Dow Jones Indices LLC joint venture. The combination of these businesses creates the world's largest provider of financial market indices.geographies, and investment strategies. This group also should see opportunitieswill seek to expand its fixed income offering and grow its local presence in products internationally, primarily in the Middle East and Asia.emerging markets.
Legal and Regulatory Environment
The financial servicesbenchmarks industry is subject to the new pending benchmark regulation in the European Union (the “E.U. Benchmark Regulation”) as well as potential for increased regulation in other jurisdictions.
The proposed E.U. Benchmark Regulation has been released for final approval and is expected to be published later this year. The E.U. Benchmark Regulation will likely require S&P DJ Indices in due course to obtain registration or authorization in connection with its benchmark activities in Europe. This legislation will likely cause additional operating obligations but they are not expected to be material at this time and until the U.S.regulation is finalized the exact impact is not certain.
In addition, the European Union has recently finalized a package of legislative measures known as MiFID II, which revise and abroad. The businesses conductedupdate the existing E.U. Markets in Financial Instruments Directive framework. MiFID II will apply in full in all E.U. Member States from January 3, 2017. MiFID II includes provisions that, among other things: (i) impose new conditions and requirements on the licensing of benchmarks and provide for non-discriminatory access to exchanges and clearing houses; (ii) modify the categorization and treatment of certain classes of derivatives; (iii) expand the categories of trading venue that are subject to regulation; and (iv) provide for the mandatory trading of certain derivatives on exchanges (complementing the mandatory derivative clearing requirements in the E.U. Market Infrastructure Regulation of 2011). Although the MiFID II package is “framework” legislation (meaning that much of the detail of the rules will be set out in subordinate measures to be agreed upon in the period before 2017), it is possible that the introduction of these laws and rules could affect S&P DJ Indices’ ability both to administer and license its indices.
In July of 2013, the International Organization of Securities Commissions (“IOSCO”) issued Financial Benchmark Principles, which are intended to promote the reliability of benchmark determinations, and address governance, benchmark quality and accountability mechanisms, including with regard to the indices published by S&P DJ Indices. Even though the Financial Benchmark Principles are not binding law, S&P DJ Indices are in certain cases regulated underhas taken steps to align its governance regime and operations with the U.S. Investment Advisers ActFinancial Benchmark Principles and engaged an independent auditor to perform a reasonable assurance review of 1940, the U.S. Securities Exchange Act of 1934 and/or the laws of the states or other jurisdictions in which they conduct business.such alignment.
The markets for index providers are very competitive. S&P DJ Indices competes domestically and internationally on the basis of a number of factors, including the quality of its benchmark indices, client service, reputation, price, geographic scope, range of products and services (including geographic coverage) and technological innovation.
See Note 13 – For a further discussion of competitive and other risks inherent in our S&P DJ Indices business, see Item 1a, Commitments and Contingencies Risk Factorsto our consolidated financial statements for further discussion., in this Annual Report on Form 10-K.
Commodities & Commercial
C&C consists of business-to-business companies specializing in the commodities and commercial markets that deliver their customers access to high-value information, data, analytic services and pricing and quality benchmarks. C&C includes such brandsthe following brands:
Platts — provides essential price data, analytics, and industry insight that enable commodities markets to perform with greater transparency and efficiency; and
J.D. Power — provides essential consumer intelligence to help businesses measure, understand, and improve the key performance metrics that drive growth and profitability.
In the fourth quarter of 2015, we began exploring strategic alternatives for J.D. Power, included in our C&C segment. We committed to and initiated an active program to sell J.D. Power in its current state that we believe is probable in the next year. As a result, we have classified the assets and liabilities of J.D. Power as Platts, JDPA, McGraw-Hill Construction and Aviation Week. The Broadcasting Group had historically been part of C&C. Asheld for sale in our consolidated balance sheet as of December 30, 201131, 2015. The anticipated disposal does not represent a strategic shift that will have a major effect on operations and financial results, therefore, it is not classified as a discontinued operation.
On November 3, 2014, we completed the sale of the BroadcastingMcGraw Hill Construction, which has historically been part of our C&C segment, to Symphony Technology Group andfor $320 million in accordance with the presentation of the Broadcasting Group as discontinued operations,cash. Accordingly, the results of operations for the year ended December 31, 20112014 and all prior periods presented have been reclassified to reflect this change.the business as a discontinued operation. See Note 2 –— GrowthAcquisitions and Value Plan & Discontinued OperationsDivestitures to our consolidated financial statements for further discussion.
The C&C business is driven by the need for high-value information and transparency in a variety of industries. Our commodities business serves producers, traders and intermediaries within energy, metals and agriculture markets. Our commercial business serves professionals and executives within automotive, construction, aerospace and defense and marketing / research services markets. C&C deliversseeks to deliver premier content that is deeply embedded in customer workflows and decision making processes.
CommoditiesC&C's revenue is generated primarily through the following sources:
Subscription revenue —subscriptions to itsour real-time news, market data and price information; end-of-dayassessments, along with other information products, primarily serving the energy and automotive industry; and
Non-subscription revenue — primarily from licensing of our proprietary market data; newsletters and reports; and geospatialprice data and maps;
price assessments to commodity exchanges, syndicated and trading services related products.proprietary research studies, commercial-oriented data and analytics, conference sponsorship, consulting engagements, and events.
Commercial revenue is generated primarily from digitalAs of August 1, 2013, we completed the sale of Aviation Week and print subscriptionsresults have been included in C&C's results through that date. See Note 2 – Acquisitions and Divestitures to our consolidated financial statements for a variety of products, proprietary research and consulting, ad claims and industry conferences.further discussion.
|
| | | | | | | | | | | | | | | | | | |
| (in millions) | | Years ended December 31, | | % Change |
| | | 2015 | | 2014 | | 2013 | | ’15 vs ’14 | | ’14 vs ’13 |
| Total revenue | | $ | 971 |
| | $ | 893 |
| | $ | 841 |
| | 9 | % | | 6 | % |
| | | | | | | | | | | |
| Subscription revenue | | $ | 641 |
| | $ | 576 |
| | $ | 527 |
| | 11 | % | | 9 | % |
| Non-subscription revenue | | $ | 330 |
| | $ | 317 |
| | $ | 314 |
| | 4 | % | | 1 | % |
| % of total revenue: | | | | | | | | | | |
| Subscription revenue | | 66 | % | | 64 | % | | 63 | % | | | | |
| Non-subscription revenue | | 34 | % | | 36 | % | | 37 | % | | | | |
| | | | | | | | | | | |
| Domestic revenue | | $ | 435 |
| | $ | 401 |
| | $ | 394 |
| | 9 | % | | 2 | % |
| International revenue | | $ | 536 |
| | $ | 492 |
| | $ | 447 |
| | 9 | % | | 10 | % |
| % of total revenue: | | | | | | | | | | |
| Domestic revenue | | 45 | % | | 45 | % | | 47 | % | | | | |
| International revenue | | 55 | % | | 55 | % | | 53 | % | | | | |
| | | | | | | | | | | |
Operating profit 1 | | $ | 357 |
| | $ | 290 |
| | $ | 280 |
| | 23 | % | | 3 | % |
| % Operating margin | | 37 | % | | 32 | % | | 33 | % | | | | |
| |
1 | 2015 includes $1 million of restructuring charges. 2014 includes $16 million of restructuring charges. 2013 includes $9 million of restructuring charges and a pre-tax gain of $11 million on the sale of Aviation Week. |
|
| | | | | | | | | | | | | | | | | | |
| (in millions) | | Years ended December 31, | | % Change |
| | | 2012 | | 2011 | | 2010 | | ’12 vs ’11 | | ’11 vs ’10 |
| Revenue: | | | | | | | | | | |
| Commodities | | $ | 489 |
| | $ | 419 |
| | $ | 344 |
| | 17 | % | | 22 | % |
| Commercial | | 484 |
| | 477 |
| | 467 |
| | 1 | % | | 2 | % |
| Total revenue | | $ | 973 |
| | $ | 896 |
| | $ | 811 |
| | 9 | % | | 10 | % |
| | | | | | | | | | | |
| Subscription revenue | | $ | 622 |
| | $ | 562 |
| | $ | 498 |
| | 11 | % | | 13 | % |
| Non-subscription revenue | | $ | 351 |
| | $ | 334 |
| | $ | 313 |
| | 5 | % | | 7 | % |
| | | | | | | | | | | |
| Domestic revenue | | $ | 563 |
| | $ | 551 |
| | $ | 531 |
| | 2 | % | | 4 | % |
| International revenue | | $ | 410 |
| | $ | 345 |
| | $ | 280 |
| | 19 | % | | 23 | % |
| | | | | | | | | | | |
| Operating profit | | $ | 248 |
| | $ | 180 |
| | $ | 153 |
| | 38 | % | | 18 | % |
| % Operating margin | | 26 | % | | 20 | % | | 19 | % | | | | |
Revenue grew 9% driven by strength in Platts' proprietary content as Platts' revenue grew across all regions. This growth was mainly due to continued demand for Platts’ market data and price assessment products across all commodity sectors, led by petroleum. While petroleum is still the biggest driver, the revenue mix continues to become more diversified as other sectors showed positive annualized contract value growth including natural gas, petrochemicals, metals and agriculture. Additionally, growth has been driven by the continued licensing of our proprietary market price data and price assessments to various commodity exchanges. Platts' revenue for 2015 was also favorably impacted by the acquisitions of Eclipse Energy Group AS and its operating subsidiaries (“Eclipse”) in July of 2014 and Petromedia Ltd and its operating subsidiaries (“Petromedia”) in July of 2015. J.D. Power also contributed to the revenue increase driven by an increase in auto consulting engagements in the U.S., growth in the U.S. Power Information Network® ("PIN") business and the acquisition of National Automobile Dealers Association's Used Car Guide ("UCG") in July of 2015. The acquisitions of Eclipse, Petromedia and UCG had a favorable impact on revenue of 3 percentage points. See Note 2 — Acquisitions and Divestitures for further discussion. The unfavorable impact of foreign exchange rates reduced revenue by 1 percentage point.
2012Operating profit increased 23%. Excluding the favorable impact of higher restructuring charges recorded in 2014 of 6 percentage points, operating profit increased 17%. This increase is due to the increase in revenue and the favorable impact of foreign exchange rates of 4 percentage points, partially offset by higher incentive costs and outside consulting fees at Platts and higher compensation costs related to additional headcount at J.D. Power due to the acquisition of UCG.
2014
Revenue at C&C increased primarily6% due to continued demand for Platts’ proprietary content and by growth across our automotive sectors at JDPA, primarily in Asia and the United States.
as Platts’ revenue grew by 17% and represents 50% of total C&C revenue with growth across all regions. This growth was mainly driven by strength in Platts’ market data and price assessment products across all commodity sectors, led by petroleum and natural gas.petroleum. While petroleum is still the biggest driver, the revenue mix is becomingcontinues to become more diversified as other sectors continued to show positive annualized contract value growth including petrochemicals, natural gas, coal, metals and global trading servicesagriculture. Platts' revenue in 2014 was also favorably impacted by the acquisition of Eclipse in July of 2014. The acquisition of Eclipse had a favorable impact on revenue of less than 1 percentage point. See Note 2 — Acquisitions and Divestitures for further discussion. Additionally, growth at J.D. Power also contributed to the revenue increase driven by strong demand for auto consulting engagements in the U.S. and Singapore and growth in the U.S. PIN business. The increases in revenue were partially offset by the unfavorable impact of 3 percentage points related to the sale of Aviation Week on August 1, 2013 as the results have shown strong growth year over year.been included in C&C's results through that date.
Operating profit increased 3%. Excluding recent acquisitions, annualized contract values for Platts' top 250 customers have increased 13%the unfavorable impact of the pre-tax gain on the sale of Aviation Week recorded in 2013 of 4 percentage points and higher restructuring charges recorded in 2014 as compared to 2011 and those customers represent approximately 67%2013 of Platts' total annualized contract value. The two strategic acquisitions in 2011, Bentek Energy LLC in January and Steel Business Briefing Group in July, also contributed3 percentage points, operating profit increased 10%. This increase is due to the increase in revenue, at Platts. All commodity sectors have also shown very strong renewal rates for subscription products duringpartially offset by the year.
JDPA had revenue growth across their global automotive sectors, including automotive consulting and their Power Information Network® ("PIN"). PIN provides real-time automotive information and decision-support tools based on the collection and analysisunfavorable impact of daily new- and used-vehicle retail transaction data from thousands of automotive franchises. Growth occurred across the majority of regions, most notably China and Japan. International growth was 14% and represents 37% of the total revenue. Also contributing to the increase at JDPA was an increase in their roundtables and events as well as licensing revenue associated with syndicated studies.
Partially offsetting these increases at C&C were declines in McGraw-Hill Construction as market contraction declines have continued to impact revenue; however growth related to new products and enhancements is gaining traction.
2011
Revenue increased primarily by strong demand for Platts’ proprietary content and by growth in syndicated studies and consulting services across automotive and non-automotive sectors. Foreignforeign exchange rates had a favorable impact of $4 million on revenue.
Platts’ revenue grew by more than 21% and represents nearly 47% of total C&C revenue for the year. Platts’ global commodities products, primarily related to petroleum and natural gas, have shown strong growth as continued volatility in commodity prices drove the need for market information. The spread between the highest and lowest price for crude oil futures during 2011 was approximately 63% greater than the spread in 2010. The growth rate in international revenue across the commodities products was strong across all regions, particularly in Asia and Europe.
International growth for automotive revenue was strong in 2011 across all regions. Also contributing to revenue growth for 2011 was the final transitioning during 2010 of certain automotive syndicated studies to an online service platform. This resulted in revenue that was deferred in 2010 to be recognized in 2011.
Partially offsetting these increases at C&C were decreases in the construction business as market weakness has continued to impact revenue, although the rate of decline is moderating.
Operating Profit
2012
Operating profit1 percentage point, increased primarily due to the revenue growth described above and a strong focus on the management of expenses across the brands. The nonrecurring items that impacted operating profit in the prior year also contributed to the increase in 2012. Offsetting the increase were additional costs primarily related to revenue growth, additional incentive costs at Platts and JDPA and restructuring charges of $12 million that were recorded in the second half of 2012, consisting primarily of employee severance costsJ.D. Power related to a workforce reduction of approximately 110 positions.
2011
The key drivers foradditional headcount, merit increases, and other operating profit growth in the segment for 2011 were the revenue growth mentioned above along with lower compensation costs as a result of restructuring actions. Restructuring charges of $6 million were recorded in the fourth quarter, consisting primarily of employee severance costs related to a workforce reduction of approximately 100 positions. Additional costs from our acquisition of Bentek Energy LLC and Steel Business Briefing Group partially offset the growth in the segment. Also impacting operating profit were a number of nonrecurring items consisting of a write-off of deferred costs recorded in prior periods, offset by a gain on the sale of our interest in LinkedIn Corporation as discussed in more detail in Note 3 – Acquisitions and Divestitures to our consolidated financial statements, and insurance recoveries on costs incurred in prior periods.support business growth.
Industry Highlights and Outlook
C&C expects to continue to invest in digital capabilities that will enable our brands to become more integrated in our customers' workflows, compete more effectively in the marketplace, and create a foundation for the development of new products and revenue streams. The segment expects to further expand its presence in selected markets and geographies to help drive growth.
The continuingHigh growth in oilsupply and an uncertain pace of demand and the uncertainty of supplygrowth causes volatility in energy prices, which will drive market participant demand for Platts' proprietary content, including news, price assessments and analytics. However, if commodity prices remain at levels that are lower than in recent years, this is likely to have an adverse impact on the rate of growth for subscription and conference revenue in some of Platts’ customer segments. The International Energy Agency projects("IEA"), in its first monthly forecast of 2016, predicted that world oil consumption will rise to 90.895.7 million barrels per day in 2016, a gain of 0.91.2 million barrels per day compared to 2012.2015. The IEA expected non-OPEC total liquids supply to contract by nearly 600,000 barrels per day in 2016, following growth of 1.4 million barrels per day in 2015. In 2013,2016, Platts will continue to invest in technology and customer engagement activities to seek to drive additional revenue growth across all commodity sectors. They will also seek to continue to leverage the capabilities and content from recent acquisitions and expendexpand into adjacent markets. Similar to 2012,2015, they willexpect to continue to introduce a number of new products and price assessments within all commodity sectors. Platts will also continue to ensure readiness forcompleted its first annual assurance review confirming adherence to the International OrganizationIOSCO Principles for Oil Price Reporting Agencies (PRAs) for its oil benchmarks in 2013 and, as of Securities Commissions ("IOSCO")December 2015, had completed its fourth assurance review confirming its alignment with the PRA Principles for both its oil and whilenon-oil commodity benchmarks. On September 17, 2015, IOSCO announced that the PRAs have made the IOSCO PRA Principles focus on oil,an "integral part" of their price assessment practices and that IOSCO saw no need to continue its annual review of the Principles’ implementation. Platts isremains committed to ensuring thatits price assessment processes related continue
to fully align with the PRA Principles across all commodities are in adherence withand will continue to retain an independent accountancy firm to conduct voluntary reasonable assurance reviews of its alignment to the PRA Principles.
Demand for our automotive studies is driven by the performance of the automotive industry. In 2012,2015, global and U.S. light vehicle sales increased approximately 5%1% and 13%6%, respectively, compared to 2011,2014, with growth across all majormost primary markets except Europe.partially offset by decreases from Russia, Brazil and Japan. For 2013, JDPA2016, J.D. Power projects growth for global and U.S. light vehicles sales of 3%4% and 4%2%, respectively. In 2013, JDPA2016, J.D. Power will strive to grow the core business by strengthening their benchmark studies, leveraging new initiatives to drive operational efficiencies and enhance customer delivery and increasing the distribution of their syndicated studies. International growth will alsocontinue to be a key focus in 2016 as they will look to extend their product offerings by expanding their PIN business to Chinaincrease penetration in the Asia-Pacific region and Brazil.exploring growth opportunities in target growth markets (China, Brazil and Mexico).
Demand for our construction offerings is primarily dependent on the non-residential construction industry. Non-residential building construction in 2012 was down 9% from a year ago due to 12% decline for the institutional side and a 33% decline for manufacturing facilities. Residential building climbed 29%, compared to 2011. Non-building construction in 2012 increased 2% from prior year, as a 9% increase in electric utilities offset a 1% decline in public works. In 2013, total construction starts are forecast to rise 7% with residential building up 24% and the commercial building sector up 14%. McGraw-Hill Construction will continue to focus on expense management in 2013 and new business growth should begin to outweigh the historical loss of certain strategic accounts.
Legal and Regulatory Environment
OurPlatts’ commodities price assessment and information business is subject to the potential for increased regulationincreasing regulatory scrutiny in the U.S. and abroad. OnAs discussed above under the heading “S&P DJ Indices-Legal and Regulatory Environment”, the financial benchmarks industry is subject to the new pending benchmark regulation in the European Union (the “E.U. Benchmark Regulation”) as well as potential increased regulation in other jurisdictions. As a result of these measures, as well as measures that could be taken in other jurisdictions outside of Europe, Platts will likely be required in due course to obtain registration or authorization in connection with its benchmark and price assessment activities in Europe and potentially elsewhere.
Also as discussed above under the heading “S&P DJ Indices-Legal and Regulatory Environment”, the European Union has recently finalized a package of legislative measures known as MiFID II, which may also impact Platts’ business. Although the MiFID II package is “framework” legislation, it is possible that the introduction of these laws and rules could affect Platts’ ability both to administer and license its price assessments.
In October 5,of 2012, IOSCO issued its final report to the G-20, includingPRA Principles for Oil Price Reporting Agencies, which setsset out principles, IOSCO stateswhich are intended to enhance the reliability of oil price assessments that are referenced in derivative contracts subject to regulation by IOSCO members. On January 9, 2013, IOSCO held a meetingPlatts has taken steps to align its operations with the Price Reporting OrganizationsPRA Principles and as recommended by IOSCO in its final report on the PRA Principles, has aligned to discuss implementation of the PRA Principles for Oil Price Reporting Agencies. Atother commodities for which it publishes benchmarks.
The markets for commodities price assessments and information are very competitive. Platts competes domestically and internationally on the meeting, Platts was ablebasis of a number of factors, including the quality of its assessments and other information it provides to obtain clarification from IOSCOthe commodities and related markets, client service, reputation, price, range of products and services (including geographic coverage) and technological innovation. Furthermore, sustained downward pressure on its expectations for voluntary implementation of the Principles by Plattsoil and the other PROscommodities prices and with that clarification, Platts believes that the Principles will nottrading activity in those markets could have a significant negativematerial adverse impact on its ongoingthe rate of growth of Platts’ revenue. For a further discussion of competitive and other risks inherent in our Platts business, operations.
See Note 13 –see Item 1a, Commitments and ContingenciesRisk Factors to our consolidated financial statements for additional matters and discussion., in this Annual Report on Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
We continue to maintain a strong financial position. Our primary source of funds for operations is cash from our businesses and our core businesses have been strong cash generators. In 2013,2016, cash on hand, cash flows from operations and availability under our existing credit facility are expected to be sufficient to meet any additional operating and recurring cash needs into the foreseeable future. We use our cash for a variety of needs, including among others: ongoing investments in our businesses, strategic acquisitions, share repurchases, dividends, repayment of debt, capital expenditures and investment in our infrastructure.
Cash Flow Overview
Cash and cash equivalents were $760 million1.5 billion as of December 31, 2012,2015, a decrease of $75 million1.0 billion as compared to December 31, 2011,2014, and consisted of approximately 10% of domestic cash and 90% of $136 million and cash held abroad of $624 million.abroad. Typically, cash held outside the U.S. is anticipated to be utilized to fund international operations or to be reinvested outside of the U.S., as a significant portion of our opportunities for growth in the coming years is expected to be abroad. In the event funds from international operations are needed to fund operations in the U.S., we would be required to accrue for and pay taxes in the U.S. to repatriate these funds.
| | | (in millions) | | Years ended December 31, | | Years ended December 31, |
| | | 2012 | | 2011 | | 2010 | | 2015 | | 2014 | | 2013 |
| Net cash provided by (used for): | | | | | | | | | | | | |
| Operating activities from continuing operations | | $ | 747 |
| | $ | 924 |
| | $ | 704 |
| | $ | 195 |
| | $ | 1,209 |
| | $ | 782 |
|
| Investing activities from continuing operations | | (247 | ) | | (271 | ) | | (386 | ) | | (2,525 | ) | | (65 | ) | | (130 | ) |
| Financing activities from continuing operations | | (905 | ) | | (1,660 | ) | | (530 | ) | | 1,510 |
| | (462 | ) | | (1,743 | ) |
In 2012, we generated2015, free cash flow of $626decreased to $(48.0) million versus $809 million compared to $1.0 billion in 2011, a2014. The decrease of $183 million. The decline is primarily due to one-time costs related to the Growth and Value Plan and a $150 million fourth quarter pension contribution.decrease in cash provided from operating activities as discussed below. Free cash flow is a non-GAAP financial measure and reflects our cash flow provided by operating activities less capital expenditures and dividends and other payments paid to noncontrolling interests. Capital expenditures include purchases of property and equipment and additions to technology projects. See “Reconciliation“MDA – Reconciliation of Non-GAAP Financial Information” below for a reconciliation of cash flow provided by operating activities, the most directly comparable U.S. GAAP financial measure, to free cash flow.
Operating activities
Cash provided by operating activities decreased $177$1.0 billion to $195 million to $747 million in 2012,2015. The decrease is mainly due to an increasethe payment of legal and regulatory settlements in accounts receivable as a result2015 of higher billings at S&P Ratings, S&P Indices and S&P Capital IQ in 2012 compared to 2011 and higher pension plan contributions in 2012, partially offset by higher income taxes payable as the IRS extended the due date for the fourth quarter estimated income tax payment until the first quarter of 2013, and higher payments to vendors in 2011.$1.6 billion.
Cash provided by operating activities increased $220427 million to $924 million1.2 billion in 2011,2014. The increase is mainly due to higher pension plan contributions in 2010, an increase in accounts receivable in 2010 due to higher billings in 2010 compared to 2009 and a tax refund received in 2011 that did not occurthe first quarter of 2014 related to an overpayment in 2010,2013 and the timing of our estimated tax payment which was made in the first quarter of 2013 as compared to the fourth quarter of 2012. Additionally, improved collections in 2014 impacting accounts receivable also contributed to the increase. These increases were partially offset by increased payments to vendors, higher payments for incentives and higher legal and third-party consultingincentive payments in 2011. Higher incentive compensation payments in 2011 reflect greater achievement against targeted results in 2010 as2014 compared to achievement against targets in 2009.2013.
Investing activities
Our cash outflows from investing activities are primarily for acquisitions and capital expenditures, while cash inflows are primarily proceeds from dispositions.
Cash used for investing activities decreased $24 millionincreased to $247 million2.5 billion for 2012,2015 from $65 million in 2014, primarily due to a higher amountthe acquisition of cash inflows from short-term investments and a lower amountSNL in September of cash paid for acquisitions, partially offset by lower proceeds from dispositions due to the sale of our interest in LinkedIn Corporation in 2011.2015.
Cash used for investing activities decreased to $11565 million to $271for 2014 from $130 million in 2011,2013. This was primarily due to higher proceeds from dispositions in 2014 related to the sale of our data center to QTS and proceeds from the sale of the Company's aircraft. Additionally, lower capital expenditures in 2014 compared to 2013 contributed to the decrease. These decreases were partially offset by a higher amount of cash paid for acquisitions in 2010.2014 compared to 2013.
Refer to Note 32 – Acquisitions and Divestitures to our consolidated financial statements for further information.
Financing activities
Our cash outflows from financing activities consist primarily of share repurchases, dividends and repayment of debt, while cash inflows are primarily inflows from commercial paperlong-term and short-term debt borrowings and proceeds from the exercise of stock options.
Cash provided by financing activities was $1.5 billion in 2015 compared to cash used for financing activities of $462 million in 2014, driven by proceeds from the issuance of senior notes in 2015, partially offset by an increase in cash used for the repurchase of treasury shares.
Cash used for financing activities decreased $755 million1.3 billion to $905462 million in 2012. The2014. This decrease is primarily attributable to a decrease in cash used for share repurchases partially offset by an increaseand the repayment of short-term debt that occurred in dividend paid to shareholders due to a special dividend payment in 2012.the first quarter of 2013.
Cash used for financing activities increased $1,130 million to $1,660 million in 2011. The increase is primarily attributable to cash used to repurchase shares.
During 2012,2015, we used cash to repurchase 6.89.8 million shares for $295$974 million at an average price paid per share of $98.98, excluding commissions. An additional 0.3 million shares were repurchased in the fourth quarter of 2015 for approximately $26 million, which settled in January of 2016. Including these additional shares, we utilized cash to repurchase shares at an average price of $99.00, excluding commissions.
During 2014, we used cash to repurchase 4.6 million shares for $362 million at an average price paid per share of $79.02, excluding commissions. Included in the repurchase were 0.5 million shares of the Company's common stock from the personal holdings of Harold W. McGraw III, then Chairman of the Company's Board of Directors and former President and CEO of the Company ("Mr.
McGraw") The shares were purchased at a discount of 0.35% from the June 24, 2014 New York Stock Exchange closing price pursuant to a private transaction with Mr. McGraw. We repurchased these shares with cash for $41 million at an average price of $82.66 per share. This transaction was approved by the Nominating and Corporate Governance Committee of the Company's Board of Directors after consultation with members of the Financial Policy Committee.
During 2013, we used cash to repurchase 16.8 million shares for $978 million, including commissions. The average price per share, excluding commissions, was $50.35. During 2011,$58.36. An additional 0.1 million shares were repurchased in the fourth quarter of 2013 for approximately $10 million, which settled in January of 2014. Including these additional shares, we utilized cash to repurchase 34.7 million shares for $1.5 billion, including commissions. Theat an average price per share,of $58.52, excluding commissions, was $40.48. The average prices per share for 2012 and 2011 does not include the accelerated share repurchase transactions as discussed in more detail in Note 9 – Equity to our consolidated financial statements. We repurchased 8.7 million shares for $256 million, including commissions, during 2010. The average price per share, excluding commissions, was $29.37. The repurchased shares may be used for general corporate purposes, including the issuance of shares for stock compensation plans and to offset the dilutive effect of the exercise of employee stock options.commissions.
On June 29, 2011,December 4, 2013, the Board of Directors approved a new stock repurchase program authorizing the purchase of up to 50 million shares (the “2011“2013 Repurchase Program”), which was approximately 17%18% of the total shares of our outstanding common stock at that time. The 20112013 Repurchase Program has no expiration date and purchases under this program may be made from time to time on the open market and in private transactions, depending on market conditions. As of December 31, 2012, 16.92015, 35.5 million shares remained available under the 20112013 Repurchase Program.
Discontinued Operations
Cash flows from discontinued operations reflects the classification of MHEMcGraw Hill Construction and the Broadcasting GroupMHE as discontinued operations as discussed in Note 2 – Growth and Value Plan & Discontinued Operations.operations.
Cash flowsused for operating activities from discontinued operations of $129 million in 2015 relates to the tax payment on the gain on sale of McGraw Hill Construction. Cash provided by operating activities from discontinued operations increased $100 million to $520of $18 million in 20122014 relates to McGraw Hill Construction and decreased $333 million to $420cash used for operating activities of $231 million in 2011. The increase in 2012 is primarily due2013 relates both to a reduction in accounts receivables as a result of lower sales year over year at MHE higher unearned revenue at SEG and lower inventory purchases. The decrease in 2011 is primarily due to lower operating results, higher extended payment terms provided on a specific state adoption in the fourth quarter of 2011 and slower cash collections, accelerated payments to vendors and lower incentive compensation based on lower performance.McGraw Hill Construction.
Cash (used for) provided by investing activities from discontinued operations decreased $223 million to $(198)$320 million in 2012 and increased $237 million2014 compared to $25 million$2.1 billion in 2011, primarily2013 due to lower proceeds of $216 million received forfrom the sale of McGraw Hill Construction compared to the Broadcasting Group in 2011.proceeds received from MHE.
Cash used for financing activities increased $8 million to $12decreased $25 million in 2012 and 20112014 as there was comparable with 2010.no impact related to McGraw Hill Construction.
Additional Financing
We have the ability to borrow a total of $1.2 billion through our commercial paper program, which is supported by our credit facility described below. Commercial paper borrowings outstanding as of December 31, 2015 totaled $143 million with an average interest rate and term of 0.95% and 17 days. As of December 31, 2015, we can borrow approximately $1.1 billion in additional funds through the commercial paper program. There were no commercial paper borrowings outstanding under our credit facility as of December 31, 2014.
On June 30, 2015, we entered into a revolving $1.2 billion three-yearfive-year credit agreement (our “credit facility”"credit facility") that will terminate on JulyJune 30, 2013. 2020. This credit facility replaced our $1.0 billion four-year credit facility that was scheduled to terminate on June 19, 2017. The previous credit facility was canceled immediately after the new credit facility became effective. There were no outstanding borrowings under the previous credit facility when it was replaced.
We pay a commitment fee of 1510 to 3520 basis points for our credit facility, depending on our credit rating,indebtedness to cash flow ratio, whether or not amounts have been borrowed and currently pay a commitment fee of 2015 basis points. The interest rate on borrowings under our credit facility is, at our option, calculated using rates
that are primarily based on either the prevailing London Inter-Bank OfferOffered Rate, the prime rate determined by the administrative agent or the Federal funds rate.Funds Rate. For certain borrowings under ourthis credit facility, there is also a spread based on our credit ratingindebtedness to cash flow ratio added to the applicable rate.
In connection with the special dividend in the amount of $2.50 per share on our common stock we utilized our commercial paper program in December of 2012, and as a result, commercial paper borrowings outstanding as of December 31, 2012 totaled $457 million with an average interest rate and term of 0.48% and 28 days. As of December 31, 2012, we can borrow $743 million in additional funds through the commercial paper program. There were no outstanding commercial paper borrowings as of December 31, 2011.
Our credit facility contains certain covenants. The only financial covenant requires that our indebtedness to cash flow ratio, as defined in our credit facility, is not greater than 4 to 1, and this covenant level has never been exceeded.
On February 7, 2013,July 24, 2015, in connection with the acquisition of SNL, we entered into a commitment letter. Upon receipt of the proceeds from the issuance of $2.0 billion of senior notes on August 18, 2015, we terminated this commitment letter. See Note 5 —Debt for further information.
On January 22, 2015, Fitch Ratings downgradedrevised its ratings outlook from negative to stable and affirmed our creditBBB+ long-term debt rating to BBB+ from A- and placed our ratings on Rating Watch Negative.F2 short-term/commercial debt rating. On February 14, 2013,August 7, 2015, Moody's InvestorsInvestor Service downgraded our creditassigned a Baa1 long-term debt rating from A3 to Baa2 with negative outlook. There has been no change to our short-term /and P-2 commercial paper ratingsrating.
Dividends
On January 30, 2013,27, 2016, the Board of Directors approved an increase in the quarterly common stock dividend from $0.255$0.33 per share to $0.28$0.36 per share.
On December 6, 2012, our Board of Directors approved a special dividend in the amount of $2.50 per share on our common stock, payable on December 27, 2012 to shareholders on record on December 18, 2012.
Contractual Obligations
We typically have various contractual obligations, which are recorded as liabilities in our consolidated balance sheets, while other items, such as certain purchase commitments and other executory contracts, are not recognized, but are disclosed herein. For example, we are contractually committed to contracts for information-technology outsourcing, certain enterprise-wide information-technology software licensing and maintenance and make certain minimum lease payments for the use of property under operating lease agreements.
We believe that the amount of cash and cash equivalents on hand, cash flow expected from operations and availability under our credit facility will be adequate for us to execute our business strategy and meet anticipated requirements for lease obligations, capital expenditures, working capital and debt service for 2013.2016.
The following table summarizes our significant contractual obligations and commercial commitments as of December 31, 2012,2015, over the next several years that relate to our continuing operations. Additional details regarding these obligations are provided in the notes to our consolidated financial statements, as referenced in the footnotes to the table:
| | | (in millions) | Less than 1 Year | | 1-3 Years | | 4-5 Years | | After 5 Years | | Total | Less than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 Years | | Total |
Debt: 1 | | | | | | | | |
|
| | | | | | | | |
|
|
| Principal payments | $ | 457 |
| | $ | — |
| | $ | 400 |
| | $ | 399 |
| | $ | 1,256 |
| 143 |
| | 797 |
| | 695 |
| | 1,976 |
| | 3,611 |
|
| Interest payments | 52 |
| | 100 |
| | 100 |
| | 524 |
| | 776 |
| 150 |
| | 274 |
| | 225 |
| | 771 |
| | 1,420 |
|
Operating leases 2 | 166 |
| | 290 |
| | 244 |
| | 372 |
| | 1,072 |
| 136 |
| | 229 |
| | 150 |
| | 162 |
| | 677 |
|
Purchase obligations and other 3 | 113 |
| | 182 |
| | 151 |
| | 110 |
| | 556 |
| 83 |
| | 90 |
| | 6 |
| | — |
| | 179 |
|
| Total contractual cash obligations | $ | 788 |
| | $ | 572 |
| | $ | 895 |
| | $ | 1,405 |
| | $ | 3,660 |
| $ | 512 |
| | $ | 1,390 |
| | $ | 1,076 |
| | $ | 2,909 |
| | $ | 5,887 |
|
| |
1 | Our debt obligations are described in Note 65 – Debt to our consolidated financial statements. |
| |
2 | Amounts shown include taxes and escalation payments, see Note 1312 – Commitments and Contingencies to our consolidated financial statements for further discussion on our operating lease obligations. |
| |
3 | Other consists primarily of commitments for unconditional purchase obligations in contracts for information-technology outsourcing and certain enterprise-wide information-technology software licensing and maintenance. |
As of December 31, 2012,2015, we had $74$120 million of liabilities for unrecognized tax benefits. We have excluded the liabilities for unrecognized tax benefits from our contractual obligations table because reasonable estimates of the timing of cash settlements with the respective taxing authorities are not practicable.
As of December 31, 2015, we have recorded $920 million for our redeemable noncontrolling interest in our S&P Dow Jones Indices LLC partnership discussed in Note 8 – Equity to our consolidated financial statements. Specifically, this amount relates to the put option under the terms of the operating agreement of S&P Dow Jones Indices LLC, whereby, after December 31, 2017, CME Group and CME Group Index Services LLC ("CGIS") will have the right at any time to sell, and we are obligated to buy, at least 20% of their share in S&P Dow Jones Indices LLC. We have excluded this amount from our contractual obligations table because we are uncertain as to the timing and the ultimate amount of the potential payment we may be required to make.
We make contributions to our pension and postretirement plans in order to satisfy minimum funding requirements as well as additional contributions that we consider appropriate to improve the funded status of our plans. During 2012,2015, we contributed $193$15 million and $12$8 million to our domestic and international retirement and postretirement plans, respectively. Expected employer contributions in 20132016 are $30$7 million and $12$9 million for our domestic and international retirement and postretirement plans, respectively. In 2013,2016, we may elect to make additional non-required contributions depending on investment performance and the pension plan status. See Note 76 – Employee Benefits to our consolidated financial statements for further discussion.
Off-Balance Sheet Arrangements
As of December 31, 20122015 and 2011,2014, we did not have any relationships with unconsolidated entities, such as entities often referred to as specific purpose or variable interest entities where we are the primary beneficiary, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such we are not exposed to any financial liquidity, market or credit risk that could arise if we had engaged in such relationships.
RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION
Free cash flow is a non-GAAP financial measure and reflects our cash flow provided by operating activities less capital expenditures and dividends and other payments paid to noncontrolling interests. Capital expenditures include purchases of property and equipment and additions to technology projects. Our cash flow provided by operating activities is the most directly comparable U.S. GAAP financial measure to free cash flow. Additionally, we have considered certain items in evaluating free cash flow, which are included in the table below.
We believe the presentation of free cash flow and free cash flow excluding certain items allows our investors to evaluate the cash generated from our underlying operations in a manner similar to the method used by management. We use free cash flow to conduct and evaluate our business because we believe it typically presents a more conservative measure of cash flows since capital expenditures and dividends and other payments paid to noncontrolling interests are considered a necessary component of ongoing operations. Free cash flow is useful for management and investors because it allows management and investors to evaluate the cash available to us to service debt, make strategic acquisitions and investments, repurchase stock and fund ongoing operation and working capital needs.
The presentation of free cash flow isand free cash flow excluding certain items are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP. Free cash flow, as we calculate it, may not be comparable to similarly titled measures employed by other companies. The following table presents a reconciliation of our cash flow provided by operating activities to free cash flow:flow excluding the impact of the items below:
| | | (in millions) | | Years ended December 31, | | Years ended December 31, | | % Change |
| | | 2012 | | 2011 | | 2010 | | 2015 | | 2014 | | 2013 | | 2015 | | 2014 |
| Cash provided by operating activities | | $ | 747 |
| | $ | 924 |
| | $ | 704 |
| | $ | 195 |
| | $ | 1,209 |
| | $ | 782 |
| | (84)% |
| 55% |
| Capital expenditures | | (97 | ) | | (92 | ) | | (86 | ) | | (139 | ) | | (92 | ) | | (117 | ) | |
| |
|
| Dividends and other payments paid to noncontrolling interests | | (24 | ) | | (23 | ) | | (34 | ) | | (104 | ) | | (84 | ) | | (75 | ) | |
| |
|
| Free cash flow | | $ | 626 |
| | $ | 809 |
| | $ | 584 |
| | $ | (48 | ) |
| $ | 1,033 |
| | $ | 590 |
| | N/M | | 75% |
| Payment of legal and regulatory settlements | | | 1,624 |
| | 35 |
| | — |
| |
| |
|
| Legal settlement insurance recoveries | | | (101 | ) | | — |
| | — |
| |
| |
|
| Tax benefit from legal settlements | | | (250 | ) | | — |
| | — |
| |
| |
|
| Free cash flow excluding above items | | | $ | 1,225 |
| | $ | 1,068 |
| | $ | 590 |
| | 15% | | 81% |
CRITICAL ACCOUNTING ESTIMATES
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Unless otherwise indicated, all discussion and analysis of our financial condition and results of operations relate to our continuing operations.
On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowance for doubtful accounts, valuation of long-lived assets, goodwill and other intangible assets, pension plans, incentive compensation and stock-based compensation, income taxes, contingencies and redeemable noncontrolling interests. We base our estimates on historical experience, current developments and on various other assumptions that we believe to be reasonable under these circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that cannot readily be determined from other sources. There can be no assurance that actual results will not differ from those estimates.
Management considers an accounting estimate to be critical if it required assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate or different estimates could have a material effect on our results of operations.
Management has discussed the development and selection of our critical accounting estimates with the Audit Committee of our Board of Directors. The Audit Committee has reviewed our disclosure relating to them in this MD&A.
We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements:
Revenue recognition
Revenue is recognized as it is earned when goods are shipped to customers or services are rendered. We consider amounts to be earned once evidence of an arrangement has been obtained, services are performed, fees are fixed or determinable and collectability is reasonably assured. Revenue relating to products that provide for more than one deliverable is recognized based upon the relative fair value to the customer of each deliverable as each deliverable is provided. Revenue relating to agreements that provide for more than one service is recognized based upon the relative fair value to the customer of each service component as each component is earned. If the fair value to the customer for each service is not objectively determinable, we make our best estimate of the services’ stand alone selling price and recognize revenue as earned as the services are delivered. The allocation of consideration received from multiple element arrangements that involve initial assignment of ratings and the future surveillance of ratings is determined through an analysis that considers cash consideration that would be received for instances when the service components are sold separately. In such cases, we defer portions of rating fees that we estimate will be attributed to future surveillance and recognize the deferred revenue ratably over the estimated surveillance periods. Advertising revenue is recognized when the page is run. Subscription income is recognized over the related subscription period.
For the years ended December 31, 2012, 20112015, 2014 and 2010,2013, no significant changes have been made to the underlying assumptions related to estimates of revenue or the methodologies applied. Based on our current outlook these assumptions are not expected to significantly change in 2013.2016.
Allowance for doubtful accounts
The allowance for doubtful accounts reserve methodology is based on historical analysis, a review of outstanding balances and current conditions. In determining these reserves, we consider, amongst other factors, the financial condition and risk profile of our customers, areas of specific or concentrated risk as well as applicable industry trends or market indicators. The impact on operating profit for a one percentage point change in the allowance for doubtful accounts is approximately $10 million.
For the years ended December 31, 2012, 20112015, 2014 and 2010,2013, we made no material changes in our assumptions regarding the determination of the allowance for doubtful accounts. Based on our current outlook these assumptions are not expected to significantly change in 2013.2016.
Accounting for the impairment of long-lived assets (including other intangible assets)
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Upon such an occurrence, recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to current forecasts of undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized equal to the amount by which the carrying amount of the asset exceeds the fair value of the asset. For long-lived assets held for sale, assets are written down to fair value, less cost to sell. Fair value is determined based on market evidence, discounted cash flows, appraised values or management’s estimates, depending upon the nature of the assets. There were no material impairments of long-lived assets for the years ended December 31, 2012, 2011 and 2010.
On July 31, 2014, we completed the sale of the Company's aircraft to Harold W. McGraw III, then Chairman of the Company's Board of Directors and former President and CEO of the Company for a purchase price of $20 million. During the second quarter of 2014, we recorded a non-cash impairment charge of $6 million within other (income) loss in our consolidated statement of income as a result of the pending sale. See Note 13 – Related Party Transactions to our consolidated financial statements for further information.
On June 30, 2014, we completed the sale of our data center to Quality Technology Services, LLC (“QTS”) which owns, operates, and manages data centers. Net proceeds from the sale of $58 million were received in July of 2014. The sale includes all of the facilities and equipment on the south campus of our East Windsor, New Jersey location, inclusive of the rights and obligations associated with an adjoining solar power field. The sale resulted in an expense of $3 million recorded within other (income) loss in our consolidated statement of income, which is in addition to the non-cash impairment charge of $36 million we recorded in the fourth quarter of 2013 to adjust the value facilities and associated infrastructure classified as held for sale to their fair value.
During the fourth quarter of 2013, we also incurred a $26 million non-cash impairment charge associated with an intangible asset acquired through the formation of our S&P Dow Jones Indices LLC joint venture.
Goodwill and indefinite-lived intangible assets
Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. As of December 31, 20122015 and 2011,2014, the carrying value of goodwill and other indefinite-lived intangible assets was $3.6 billion and $2.1 billion, respectively. The increase was primarily due to the acquisition of SNL in September of 2015. See Note 2 – Acquisitions and $1.3 billion, respectively. Divestitures to our consolidated financial statements for further information.
Goodwill and other intangible assets with indefinite lives are not amortized, but instead are tested for impairment annually during the fourth quarter each year or more frequently if events or changes in circumstances indicate that the asset might be impaired.
Goodwill
As part of our annual impairment test of our 4four reporting units, we initially perform a qualitative analysis evaluating whether any events and circumstances occurred that provide evidence that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount. Our qualitative assessment included, but was not limited to, consideration of macroeconomic conditions, industry and market conditions, cost factors, cash flows, changes in key Company personnel and our share price. If,
based on our evaluation of the events and circumstances that occurred during the year we do not believe that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount, no quantitative impairment test is performed. Conversely, if the results of our qualitative assessment determine that it is more likely than not that the fair value of any of our reporting units is less than its respective carrying amount we perform a two-step quantitative impairment test. For 2012,2015, based on our qualitative assessments, with the exception of impairments in our SEG reporting unit previously discussed under the heading, “Discontinued Operations”, we determined that it is more likely than not that our reporting units’ fair value was greater than their respective carrying amounts. Our qualitative assessment included, but was not limited to, consideration of macroeconomic conditions, industry and market conditions, cost factors, cash flows, changes in key Company personnel and our share price.
If the fair value of the reporting unit is less than the carrying value, a second step is performed which compares the implied fair value of the reporting unit's goodwill to the carrying value of the goodwill. The implied fair value of the goodwill is determined based on the difference between the fair value of the reporting unit and the net fair value of the identifiable assets and liabilities of the reporting unit. If the implied fair value of the goodwill is less than the carrying value, the difference is recognized as an impairment charge.
Indefinite-Lived Intangible Assets
We evaluate the recoverability of indefinite-lived intangible assets by first performing a qualitative analysis evaluating whether any events and circumstances occurred that provide evidence that it is more likely than not that the indefinite-lived asset is impaired. If, based on our evaluation of the events and circumstances that occurred during the year we do not believe that it is more likely than not that the indefinite-lived asset is impaired, no quantitative impairment test is performed. Conversely, if the results of our qualitative assessment determine that it is more likely than not that the indefinite-lived asset is impaired a quantitative impairment test is performed. If necessary, the impairment test is performed by comparing the estimated fair value of the intangible asset to its carrying value. If the indefinite-lived intangible asset carrying value exceeds its fair value, an impairment analysis is performed using the income approach. The fair value of loss is recognized in an amount equal to that excess. Significant judgments inherent in these analyses include estimating the amount and timing of future cash flows and the selection of appropriate discount rates, royalty rates and long-term growth rate assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for this indefinite-lived intangible asset and could result in an impairment charge, which could be material to our financial position and results of operations.
We performed our impairment assessment of goodwill and indefinite-lived intangible assets at our S&P Ratings, S&P Capital IQ and SNL, S&P DJ Indices and C&C operating segments and concluded that no impairment existed for the years ended December 31, 2012, 2011,2015, 2014, and 2010.2013.
Retirement plans and postretirement healthcare and other benefits
Our employee pension and other postretirement benefit costs and obligations are dependent on assumptions concerning the outcome of future events and circumstances, including compensation increases, long-term return on pension plan assets, healthcare cost trends, discount rates and other factors. In determining such assumptions, we consult with outside actuaries and other advisors where deemed appropriate. In accordance with relevant accounting standards, if actual results differ from our assumptions, such differences are deferred and amortized over the estimated future working liferemaining lifetime of the plan participants. While we believe that the assumptions used in these calculations are reasonable, differences in actual experience or changes in assumptions could affect the expense and liabilities related to our pension and other postretirement benefits.
The following is a discussion of some significant assumptions that we make in determining costs and obligations for pension and other postretirement benefits:
Discount rate assumptions are based on current yields on high-grade corporate long-term bonds.
Salary growth assumptions are based on our long-term actual experience and future outlook.
Healthcare cost trend assumptions are based on historical market data, the near-term outlook and an assessment of likely long-term trends.
The expected return on assets assumption is calculated based on the plan’s asset allocation strategy and projected market returns over the long-term.
Our discount rate and return on asset assumptions used to determine the net periodic pension and postretirement benefit cost on our U.S. retirement plans are as follows:
| | | | | Retirement Plans | | Postretirement Plans | | Retirement Plans | | Postretirement Plans |
| January 1 | | 2013 | | 2012 | | 2011 | | 2013 | | 2012 | | 2011 | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
| Discount rate | | 4.1 | % | | 5.1 | % | | 5.4 | % | | 3.45 | % | | 4.45 | % | | 4.65 | % | |
Discount rate 1 | | | 4.47 | % | | 4.15 | % | | 5.00 | % | | 3.90 | % | | 3.60 | % | | 4.20 | % |
| Return on assets | | 7.25 | % | | 7.75 | % | | 8.0 | % | | | | | | | | 6.25 | % | | 6.25 | % | | 7.125 | % | | | | | | |
| Weighted-average healthcare cost rate | | | | | | | | 7.5 | % | | 8.0 | % | | 8.0 | % | | | | | | | | 7.00 | % | | 7.00 | % | | 7.00 | % |
| |
1 | At the end of 2015, we changed our approach used to measure service and interest costs on all of our retirement plans. For 2015 and prior periods presented, we measured service and interest costs utilizing the single weighted-average discount rate derived from the yield curve used to measure the benefit obligation. For 2016, we elected to measure service and interest costs by applying the specific spot rates along that yield curve to the plans' liability cash flows. We believe this new approach provides a more precise measurement of service and interest costs by aligning the timing of the plans' liability cash flows to the corresponding spot rates on the yield curve. This change does not affect the measurement of our benefit obligation. We have accounted for this change as a change in accounting estimate that is inseparable from a change in accounting principle and, accordingly, have accounted for it on a prospective basis. We expect pension and postretirement medical costs to decrease by approximately $13 million in 2016 as a result of this change. |
In addition to the assumptions in the above table, assumed mortality is also a key assumption in determining benefit obligations. Effective December 31, 2014, the Company updated the assumed mortality rates to reflect life expectancy improvements.
Stock-based compensation
Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized over the requisite service period, which typically is the vesting period. Stock-based compensation is classified as both operating-related expense and selling and general expense in our consolidated statements of income.
We use a lattice-based option-pricing model to estimate the fair value of options granted. The following assumptions were used in valuing the options granted (in 2012, stock options were not granted as part of employees' total stock-based incentive awards):granted:
| | | | | Years ended December 31, | | Years ended December 31, |
| | | 2011 | | 2010 | | 2015 | | 2014 | | 2013 |
| Risk-free average interest rate | | 0.2 - 3.5% | | 0.3-4.2% | | 0.2 - 1.9% |
| | 0.1 - 2.9% |
| | 0.1 - 2.9% |
|
| Dividend yield | | 2.5 - 3.0% | | 2.9-3.1% | | 1.4% |
| | 1.4 - 1.8% |
| | 2.07 - 2.09% |
|
| Volatility | | 21 - 51% | | 28 - 60% | | 21 - 39% |
| | 18 - 41% |
| | 29 - 45% |
|
| Expected life (years) | | 6.1 - 6.2 | | 5.8 - 7.0 | | 6.3 |
| | 6.21 - 6.25 |
| | 6.1 - 6.2 |
|
| Weighted-average grant-date fair value per option | | $10.61 | | $10.02 | | $ | 27.57 |
| | $ | 23.41 |
| | $ | 14.46 |
|
Because lattice-based option-pricing models incorporate ranges of assumptions, those ranges are disclosed. These assumptions are based on multiple factors, including historical exercise patterns, post-vesting termination rates, expected future exercise patterns and the expected volatility of our stock price. The risk-free interest rate is the imputed forward rate based on the U.S. Treasury yield at the date of grant. We use the historical volatility of our stock price over the expected term of the options to estimate the expected volatility. The expected term of options granted is derived from the output of the lattice model and represents the period of time that options granted are expected to be outstanding.
Income taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize liabilities for uncertain tax positions taken or expected to be taken in income tax returns. Accrued interest and penalties related to unrecognized tax benefits are recognized in interest expense and operating expense, respectively.
Judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and unrecognized tax benefits. In determining the need for a valuation allowance, the historical and projected financial performance of the operation that is recording a net deferred tax asset is considered along with any other pertinent information.
We file income tax returns in the U.S. federal jurisdiction, various states, and foreign jurisdictions, and we are routinely under audit by many different tax authorities. We believe that our accrual for tax liabilities is adequate for all open audit years based on our assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. It is possible that examinations will be settled prior to December 31, 2013.2016. If any of these tax audit settlements do occur within that period we would make any necessary adjustments to the accrual for unrecognized tax benefits. Until formal resolutions are reached between us and the tax authorities, the determination of a possible audit settlement range with respect to the impact on unrecognized tax benefits is not practicable. On the basis of present information, it is our opinion that any assessments resulting from the current audits will not have a material effect on our consolidated financial statements.
We have determined that the undistributed earnings of our foreign subsidiaries are permanently reinvested within those foreign operations. Accordingly, we have not provided deferred income taxes on these indefinitely reinvested earnings. A future distribution
by the foreign subsidiaries of these earnings could result in additional tax liability, which may be material to our future reported results, financial position and cash flows.
For the years ended December 31, 2012, 2011,2015, 2014 and 2010,2013, we made no material changes in our assumptions regarding the determination of the provision for income taxes. However, certain events could occur that would materially affect our estimates and assumptions regarding deferred taxes. Changes in current tax laws and applicable enacted tax rates could affect the valuation of deferred tax assets and liabilities, thereby impacting our income tax provision.
Contingencies
We are subject to a number of lawsuits and claims that arise in the ordinary course of business. We recognize a liability for such contingencies when both (a) information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements and (b) the amount of loss can reasonably be estimated. We continually assess the likelihood of any adverse judgments or outcomes to our contingencies, as well as potential amounts or ranges of probable losses, and recognize a liability, if any, for these contingencies based on an analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Because many of these matters are resolved over long periods of time, our estimate of liabilities may change due to new developments, changes in assumptions or changes in our strategy related to the matter. When we accrue for loss contingencies and the reasonable estimate of the loss is within a range, we record its best estimate within the range. We disclose an estimated possible loss or a range of loss when it is at least reasonably possible that a loss may have been incurred.
Redeemable Noncontrolling Interest
The fair value component of the redeemable noncontrolling interest in S&P DJ Indices business is based on a combination of an income and market valuation approach. Our income and market valuation approaches may incorporate Level 3 measures for instances when observable inputs are not available, including assumptions related to expected future net cash flows, long-term growth rates, the timing and nature of tax attributes, and the redemption features.
RECENT ACCOUNTING STANDARDS
See Note 1 – Accounting Policies, to the consolidated financial statements for a detailed description of recent accounting standards. We do not expect these recent accounting standards to have a material impact on our results of operations, financial condition, or liquidity in future periods.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
There have been no significant changes in our exposure to market risk during the year ended December 31, 2012.2015. Our exposure to market risk includes changes in foreign exchange rates. We have operations in various foreign countries where the functional currency is primarily the local currency. For international operations that are determined to be extensions of the parent company, the U.S. dollar is the functional currency. We typically have naturally hedged positions in most countries from a local currency perspective with offsetting assets and liabilities. As of December 31, 2012,2015, we have entered into an immaterial amount of foreign exchange forwards to hedge the effect of adverse fluctuations in foreign currency exchange rates. We have not entered into any derivative financial instruments for speculative purposes.
Item 8. Consolidated Financial Statements and Supplementary Data
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of The McGraw-Hill Companies,McGraw Hill Financial, Inc.
We have audited the accompanying consolidated balance sheets of The McGraw-Hill Companies,McGraw Hill Financial, Inc. (the "Company") as of December 31, 20122015 and 2011,2014, and the related consolidated statements of income, comprehensive income, cash flows and equity for each of the three years in the period ended December 31, 2012.2015. Our audits also included the financial statement schedule listed in Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The McGraw-Hill Companies,McGraw Hill Financial, Inc. at December 31, 20122015 and 2011,2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2012,2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The McGraw-Hill Companies,McGraw Hill Financial, Inc.’s internal control over financial reporting as of December 31, 2012,2015, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 28, 201311, 2016 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
New York, New York
February 28, 201311, 2016
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of The McGraw-Hill Companies,McGraw Hill Financial, Inc.
We have audited The McGraw-Hill Companies,McGraw Hill Financial, Inc.’s (the "Company") internal control over financial reporting as of December 31, 2012,2015, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). The McGraw-Hill Companies,McGraw Hill Financial, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on its Responsibility for the Company’s Financial Statements and Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of SNL Financial LC, which is included in the 2015 consolidated financial statements of McGraw Hill Financial, Inc. and constituted $2.5 billion and $2.3 billion of total and net assets, respectively, as of December 31, 2015 and $85 million and $9 million of revenues and net loss attributable to McGraw Hill Financial, Inc., respectively, for the year then ended. Our audit of internal control over financial reporting of McGraw Hill Financial, Inc. also did not include an evaluation of the internal control over financial reporting of SNL Financial LC.
In our opinion, The McGraw-Hill Companies,McGraw Hill Financial, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012,2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The McGraw-Hill Companies,McGraw Hill Financial, Inc. as of December 31, 20122015 and 2011,2014, and the related consolidated statements of income, comprehensive income, cash flows and equity for each of the three years in the period ended December 31, 2012 of The McGraw-Hill Companies, Inc.2015 and our report dated February 28, 201311, 2016 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
New York, New York
February 28, 201311, 2016
Consolidated Statements of Income
|
| | | | | | | | | | | |
| (in millions, except per share data) | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Revenue | $ | 5,313 |
| | $ | 5,051 |
| | $ | 4,702 |
|
| Expenses: | | | | | |
| Operating-related expenses | 1,672 |
| | 1,627 |
| | 1,564 |
|
| Selling and general expenses | 1,578 |
| | 3,168 |
| | 1,631 |
|
| Depreciation | 90 |
| | 86 |
| | 86 |
|
| Amortization of intangibles | 67 |
| | 48 |
| | 51 |
|
| Total expenses | 3,407 |
| | 4,929 |
| | 3,332 |
|
| Other (income) loss | (11 | ) | | 9 |
| | 12 |
|
| Operating profit | 1,917 |
| | 113 |
| | 1,358 |
|
| Interest expense, net | 102 |
| | 59 |
| | 59 |
|
| Income from continuing operations before taxes on income | 1,815 |
| | 54 |
| | 1,299 |
|
| Provision for taxes on income | 547 |
| | 245 |
| | 425 |
|
| Income (loss) from continuing operations | 1,268 |
| | (191 | ) | | 874 |
|
| Discontinued operations, net of tax: | | | | | |
| Income from discontinued operations | — |
| | 18 |
| | 3 |
|
| Gain on sale of discontinued operations (includes $(75) accumulated other comprehensive income reclassifications in 2013 for foreign currency translation adjustment) | — |
| | 160 |
| | 589 |
|
| Discontinued operations, net | — |
| | 178 |
| | 592 |
|
| Net income (loss) | 1,268 |
| | (13 | ) | | 1,466 |
|
| Less: net income from continuing operations attributable to noncontrolling interests | (112 | ) | | (102 | ) | | (91 | ) |
| Less: net loss from discontinued operations attributable to noncontrolling interests | — |
| | — |
| | 1 |
|
| Net income (loss) attributable to McGraw Hill Financial, Inc. | $ | 1,156 |
| | $ | (115 | ) | | $ | 1,376 |
|
| | | | | | |
| Amounts attributable to McGraw Hill Financial, Inc. common shareholders: | | | | | |
| Income (loss) from continuing operations | $ | 1,156 |
| | $ | (293 | ) | | $ | 783 |
|
| Income from discontinued operations | — |
| | 178 |
| | 593 |
|
| Net income (loss) | $ | 1,156 |
| | $ | (115 | ) | | $ | 1,376 |
|
| | | | | | |
| Earnings (loss) per share attributable to McGraw Hill Financial, Inc. common shareholders: | | | | | |
| Income (loss) from continuing operations: | | | | | |
| Basic | $ | 4.26 |
| | $ | (1.08 | ) | | $ | 2.85 |
|
| Diluted | $ | 4.21 |
| | $ | (1.08 | ) | | $ | 2.80 |
|
| Income from discontinued operations: | | | | | |
| Basic | $ | — |
| | $ | 0.66 |
| | $ | 2.16 |
|
| Diluted | $ | — |
| | $ | 0.66 |
| | $ | 2.12 |
|
| Net income (loss): | | | | | |
| Basic | $ | 4.26 |
| | $ | (0.42 | ) | | $ | 5.01 |
|
| Diluted | $ | 4.21 |
| | $ | (0.42 | ) | | $ | 4.91 |
|
| Weighted-average number of common shares outstanding: | | | | | |
| Basic | 271.6 |
| | 271.5 |
| | 274.5 |
|
| Diluted | 274.6 |
| | 271.5 |
| | 279.8 |
|
| | | | | | |
| Actual shares outstanding at year end | 265.2 |
| | 272.0 |
| | 270.4 |
|
| | | | | | |
| Dividend declared per common share | $ | 1.32 |
| | $ | 1.20 |
| | $ | 1.12 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Comprehensive Income
|
| | | | | | | | | | | |
| (in millions, except per share data) | Years ended December 31, |
| | 2012 | | 2011 | | 2010 |
| Revenue | $ | 4,450 |
| | $ | 3,954 |
| | $ | 3,639 |
|
| Expenses: | | | | | |
| Operating-related expenses | 1,460 |
| | 1,392 |
| | 1,206 |
|
| Selling and general expenses | 1,709 |
| | 1,387 |
| | 1,318 |
|
| Depreciation | 74 |
| | 78 |
| | 75 |
|
| Amortization of intangibles | 48 |
| | 33 |
| | 21 |
|
| Total expenses | 3,291 |
| | 2,890 |
| | 2,620 |
|
| Other income | 52 |
| | 13 |
| | 7 |
|
| Operating profit | 1,211 |
| | 1,077 |
| | 1,026 |
|
| Interest expense, net | 81 |
| | 77 |
| | 83 |
|
| Income from continuing operations before taxes on income | 1,130 |
| | 1,000 |
| | 943 |
|
| Provision for taxes on income | 404 |
| | 374 |
| | 344 |
|
| Income from continuing operations | 726 |
| | 626 |
| | 599 |
|
| (Loss) income from discontinued operations, net of tax | (234 | ) | | 308 |
| | 252 |
|
| Net income | 492 |
| | 934 |
| | 851 |
|
| Less: net income from continuing operations attributable to noncontrolling interests | (50 | ) | | (19 | ) | | (19 | ) |
| Less: net income from discontinued operations attributable to noncontrolling interests | (5 | ) | | (4 | ) | | (4 | ) |
| Net income attributable to The McGraw-Hill Companies, Inc. | $ | 437 |
| | $ | 911 |
| | $ | 828 |
|
| | | | | | |
| Amounts attributable to The McGraw-Hill Companies, Inc. common shareholders: | | | | | |
| Income from continuing operations | $ | 676 |
| | $ | 607 |
| | $ | 581 |
|
| (Loss) income from discontinued operations | (239 | ) | | 304 |
| | 247 |
|
| Net income | $ | 437 |
| | $ | 911 |
| | $ | 828 |
|
| | | | | | |
| Earnings per share attributable to The McGraw-Hill Companies, Inc. common shareholders: | | | | | |
| Basic: | | | | | |
| Income from continuing operations | $ | 2.43 |
| | $ | 2.03 |
| | $ | 1.88 |
|
| (Loss) income from discontinued operations | (0.86 | ) | | 1.02 |
| | 0.80 |
|
| Net income | $ | 1.57 |
| | $ | 3.05 |
| | $ | 2.68 |
|
| Diluted: | | | | | |
| Income from continuing operations | $ | 2.37 |
| | $ | 2.00 |
| | $ | 1.86 |
|
| (Loss) income from discontinued operations | (0.84 | ) | | 1.00 |
| | 0.79 |
|
| Net income | $ | 1.53 |
| | $ | 3.00 |
| | $ | 2.65 |
|
| Average number of common shares outstanding: | | | | | |
| Basic | 278.6 |
| | 298.1 |
| | 309.4 |
|
| Diluted | 284.6 |
| | 303.6 |
| | 312.2 |
|
| | | | | | |
| Dividend declared per common share | $ | 1.02 |
| | $ | 1.00 |
| | $ | 0.94 |
|
| Special dividend declared per common share | $ | 2.50 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | |
| (in millions) | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Net income (loss) | $ | 1,268 |
| | $ | (13 | ) | | $ | 1,466 |
|
| Other comprehensive income (loss): | | | | | |
| Foreign currency translation adjustment | (111 | ) | | (108 | ) | | 93 |
|
| Income tax effect | 1 |
| | 2 |
| | (2 | ) |
| | (110 | ) | | (106 | ) | | 91 |
|
| | | | | | |
| Pension and other postretirement benefit plans | 34 |
| | (357 | ) | | 385 |
|
| Income tax effect | (9 | ) | | 142 |
| | (154 | ) |
| | 25 |
| | (215 | ) | | 231 |
|
| | | | | | |
| Unrealized (loss) gain on investment and forward exchange contract | (1 | ) | | 4 |
| | 2 |
|
| Income tax effect | — |
| | (1 | ) | | (2 | ) |
| | (1 | ) | | 3 |
| | — |
|
| | | | | | |
| Comprehensive income (loss) | 1,182 |
| | (331 | ) | | 1,788 |
|
| Less: comprehensive income attributable to nonredeemable noncontrolling interests | (11 | ) | | (10 | ) | | (18 | ) |
| Less: comprehensive income attributable to redeemable noncontrolling interests | (101 | ) | | (92 | ) | | (73 | ) |
| Comprehensive income (loss) attributable to McGraw Hill Financial, Inc. | $ | 1,070 |
| | $ | (433 | ) | | $ | 1,697 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Balance Sheets
|
| | | | | | | |
| (in millions) | December 31, |
| | 2015 | | 2014 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,481 |
| | $ | 2,497 |
|
| Short-term investments | 6 |
| | 3 |
|
| Accounts receivable, net of allowance for doubtful accounts: 2015 - $37; 2014 - $38 | 991 |
| | 932 |
|
| Deferred income taxes | 109 |
| | 360 |
|
| Prepaid and other current assets | 206 |
| | 170 |
|
| Assets of a business held for sale | 503 |
| | — |
|
| Total current assets | 3,296 |
| | 3,962 |
|
| Property and equipment: | | | |
| Buildings and leasehold improvements | 352 |
| | 287 |
|
| Equipment and furniture | 503 |
| | 482 |
|
| Total property and equipment | 855 |
| | 769 |
|
| Less: accumulated depreciation | (585 | ) | | (563 | ) |
| Property and equipment, net | 270 |
| | 206 |
|
| Goodwill | 2,882 |
| | 1,387 |
|
| Other intangible assets, net | 1,522 |
| | 1,004 |
|
| Asset for pension benefits | 36 |
| | 28 |
|
| Other non-current assets | 177 |
| | 186 |
|
| Total assets | $ | 8,183 |
| | $ | 6,773 |
|
| LIABILITIES AND EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 206 |
| | $ | 191 |
|
| Accrued compensation and contributions to retirement plans | 383 |
| | 410 |
|
| Short-term debt | 143 |
| | — |
|
| Income taxes currently payable | 56 |
| | 54 |
|
| Unearned revenue | 1,421 |
| | 1,254 |
|
| Accrued legal and regulatory settlements | 121 |
| | 1,609 |
|
| Other current liabilities | 372 |
| | 402 |
|
| Liabilities of a business held for sale | 206 |
| | — |
|
| Total current liabilities | 2,908 |
| | 3,920 |
|
| Long-term debt | 3,468 |
| | 795 |
|
| Pension and other postretirement benefits | 276 |
| | 333 |
|
| Deferred income taxes | 23 |
| | 40 |
|
| Other non-current liabilities | 345 |
| | 336 |
|
| Total liabilities | 7,020 |
| | 5,424 |
|
| Redeemable noncontrolling interest | 920 |
| | 810 |
|
| Commitments and contingencies (Note 12) |
| |
|
| Equity: | | | |
| Common stock, $1 par value: authorized - 600 million shares; issued - 412 million shares in 2015 and 2014 | 412 |
| | 412 |
|
| Additional paid-in capital | 475 |
| | 493 |
|
| Retained income | 7,636 |
| | 6,946 |
|
| Accumulated other comprehensive loss | (600 | ) | | (514 | ) |
| Less: common stock in treasury - at cost: 2015 - 146 million shares; 2014 - 140 million shares | (7,729 | ) | | (6,849 | ) |
| Total equity – controlling interests | 194 |
| | 488 |
|
| Total equity – noncontrolling interests | 49 |
| | 51 |
|
| Total equity | 243 |
| | 539 |
|
| Total liabilities and equity | $ | 8,183 |
| | $ | 6,773 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Comprehensive Income
Cash Flows
|
| | | | | | | | | | | |
| (in millions) | Years ended December 31, |
| | 2012 | | 2011 | | 2010 |
| Net income | $ | 492 |
| | $ | 934 |
| | $ | 851 |
|
| Other comprehensive income: | | | | | |
| Foreign currency translation adjustment | 29 |
| | (35 | ) | | (9 | ) |
| Income tax effect | (19 | ) | | 11 |
| | 13 |
|
| | 10 |
| | (24 | ) | | 4 |
|
| | | | | | |
| Pension and other postretirement benefit plans | (164 | ) | | (45 | ) | | (37 | ) |
| Income tax effect | 63 |
| | 9 |
| | 11 |
|
| | (101 | ) | | (36 | ) | | (26 | ) |
| | | | | | |
| Unrealized (loss) gain on investment and forward exchange contract | (4 | ) | | (12 | ) | | 5 |
|
| Income tax effect | 2 |
| | 4 |
| | (2 | ) |
| | (2 | ) | | (8 | ) | | 3 |
|
| | | | | | |
| Comprehensive income | 399 |
| | 866 |
| | 832 |
|
| Less: comprehensive income attributable to nonredeemable noncontrolling interests | (20 | ) | | (13 | ) | | (27 | ) |
| Less: comprehensive income attributable to redeemable noncontrolling interests | (34 | ) | | — |
| | — |
|
| Comprehensive income attributable to The McGraw-Hill Companies, Inc. | $ | 345 |
| | $ | 853 |
| | $ | 805 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Balance Sheets
|
| | | | | | | |
| (in millions) | December 31, |
| | 2012 | | 2011 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and equivalents | $ | 760 |
| | $ | 835 |
|
| Short-term investments | 1 |
| | 29 |
|
| Accounts receivable, net of allowance for doubtful accounts: 2012 - $54; 2011 - $29 | 954 |
| | 702 |
|
| Deferred income taxes | 117 |
| | 110 |
|
| Prepaid and other current assets | 127 |
| | 128 |
|
| Assets held for sale | 1,940 |
| | 2,508 |
|
| Total current assets | 3,899 |
| | 4,312 |
|
| Property and equipment: | | | |
| Buildings and leasehold improvements | 439 |
| | 435 |
|
| Equipment and furniture | 701 |
| | 729 |
|
| Total property and equipment | 1,140 |
| | 1,164 |
|
| Less: accumulated depreciation | (772 | ) | | (791 | ) |
| Property and equipment, net | 368 |
| | 373 |
|
| Goodwill | 1,438 |
| | 1,104 |
|
| Other intangible assets, net | 1,081 |
| | 427 |
|
| Other non-current assets | 266 |
| | 404 |
|
| Total assets | $ | 7,052 |
| | $ | 6,620 |
|
| LIABILITIES AND EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 249 |
| | $ | 223 |
|
| Accrued compensation and contributions to retirement plans | 453 |
| | 415 |
|
| Short-term debt | 457 |
| | 400 |
|
| Income taxes currently payable | 158 |
| | 33 |
|
| Unearned revenue | 1,229 |
| | 1,187 |
|
| Other current liabilities | 457 |
| | 392 |
|
| Liabilities held for sale | 664 |
| | 719 |
|
| Total current liabilities | 3,667 |
| | 3,369 |
|
| Long-term debt | 799 |
| | 798 |
|
| Pension and other postretirement benefits | 529 |
| | 511 |
|
| Other non-current liabilities | 407 |
| | 358 |
|
| Total liabilities | 5,402 |
| | 5,036 |
|
| Redeemable noncontrolling interest | 810 |
| | — |
|
| Commitments and contingencies (Note 13) |
| |
|
| Equity: | | | |
| Common stock, $1 par value: authorized - 600 million shares; issued - 412 million shares in 2012 and 2011 | 412 |
| | 412 |
|
| Additional paid-in capital | 492 |
| | 94 |
|
| Retained income | 6,525 |
| | 7,667 |
|
| Accumulated other comprehensive loss | (517 | ) | | (425 | ) |
| Less: common stock in treasury - at cost: 2012 - 133 million shares; 2011 - 136 million shares | (6,145 | ) | | (6,240 | ) |
| Total equity – controlling interests | 767 |
| | 1,508 |
|
| Total equity – noncontrolling interests (including 2012 - $25 and 2011 - $33 attributable to discontinued operations) | 73 |
| | 76 |
|
| Total equity | 840 |
| | 1,584 |
|
| Total liabilities and equity | $ | 7,052 |
| | $ | 6,620 |
|
|
| | | | | | | | | | | |
| (in millions) | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Operating Activities: | | | | | |
| Net income (loss) | $ | 1,268 |
| | $ | (13 | ) | | $ | 1,466 |
|
| Less: income from discontinued operations | — |
| | 178 |
| | 592 |
|
| Net income (loss) from continuing operations | 1,268 |
| | (191 | ) | | 874 |
|
| Adjustments to reconcile income (loss) from continuing operations to cash provided by operating activities from continuing operations: | | | | | |
| Depreciation | 90 |
| | 86 |
| | 86 |
|
| Amortization of intangibles | 67 |
| | 48 |
| | 51 |
|
| Provision for losses on accounts receivable | 8 |
| | 11 |
| | 22 |
|
| Deferred income taxes | 280 |
| | (245 | ) | | 43 |
|
| Stock-based compensation | 78 |
| | 100 |
| | 96 |
|
| Accrued legal and regulatory settlements | 119 |
| | 1,587 |
| | — |
|
| Other | 46 |
| | 80 |
| | 96 |
|
| Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: | | | | | |
| Accounts receivable | (118 | ) | | (9 | ) | | (35 | ) |
| Prepaid and other current assets | (4 | ) | | (7 | ) | | (29 | ) |
| Accounts payable and accrued expenses | (92 | ) | | (130 | ) | | (94 | ) |
| Unearned revenue | 129 |
| | 78 |
| | 109 |
|
| Accrued legal and regulatory settlement | (1,624 | ) | | (35 | ) | | — |
|
| Other current liabilities | (78 | ) | | (16 | ) | | (89 | ) |
| Net change in prepaid / accrued income taxes | 61 |
| | (93 | ) | | (238 | ) |
| Net change in other assets and liabilities | (35 | ) | | (55 | ) | | (110 | ) |
| Cash provided by operating activities from continuing operations | 195 |
| | 1,209 |
| | 782 |
|
| Investing Activities: | | | | | |
| Capital expenditures | (139 | ) | | (92 | ) | | (117 | ) |
| Acquisitions, including contingent payments, net of cash acquired | (2,396 | ) | | (71 | ) | | (47 | ) |
| Proceeds from dispositions | 14 |
| | 83 |
| | 51 |
|
| Changes in short-term investments | (4 | ) | | 15 |
| | (17 | ) |
| Cash used for investing activities from continuing operations | (2,525 | ) | | (65 | ) | | (130 | ) |
| Financing Activities: | | | | | |
| Additions to / (payments on) short-term debt, net | 143 |
| | — |
| | (457 | ) |
| Proceeds from issuance of senior notes, net | 2,674 |
| | — |
| | — |
|
| Dividends paid to shareholders | (363 | ) | | (326 | ) | | (308 | ) |
| Dividends and other payments paid to noncontrolling interests | (104 | ) | | (84 | ) | | (75 | ) |
| Repurchase of treasury shares | (974 | ) | | (362 | ) | | (978 | ) |
| Exercise of stock options | 86 |
| | 193 |
| | 258 |
|
| Contingent consideration payment | (5 | ) | | (11 | ) | | (12 | ) |
| Purchase of additional CRISIL shares | (16 | ) | | — |
| | (214 | ) |
| Excess tax benefits from share-based payments | 69 |
| | 128 |
| | 43 |
|
| Cash provided by (used for) financing activities from continuing operations | 1,510 |
| | (462 | ) | | (1,743 | ) |
| Effect of exchange rate changes on cash from continuing operations | (67 | ) | | (65 | ) | | (1 | ) |
| Cash (used for) provided by continuing operations | (887 | ) | | 617 |
| | (1,092 | ) |
| Discontinued Operations: | | | | | |
| Cash (used for) provided by operating activities | (129 | ) | | 18 |
| | (231 | ) |
| Cash provided by investing activities | — |
| | 320 |
| | 2,129 |
|
| Cash used for financing activities | — |
| | — |
| | (25 | ) |
| Effect of exchange rate changes on cash | — |
| | — |
| | 1 |
|
| Cash (used for) provided by discontinued operations | (129 | ) | | 338 |
| | 1,874 |
|
| Net change in cash and cash equivalents | (1,016 | ) | | 955 |
| | 782 |
|
| Cash and cash equivalents at beginning of year | 2,497 |
| | 1,542 |
| | 760 |
|
| Cash and cash equivalents at end of year | $ | 1,481 |
| | $ | 2,497 |
| | $ | 1,542 |
|
| Cash paid during the year for: | | | | | |
| Interest (including discontinued operations) | $ | 65 |
| | $ | 50 |
| | $ | 50 |
|
| Income taxes (including discontinued operations) | $ | 260 |
| | $ | 419 |
| | $ | 787 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Cash Flows
|
| | | | | | | | | | | |
| (in millions) | Years ended December 31, |
| | 2012 | | 2011 | | 2010 |
| Operating Activities: | | | | | |
| Net income | $ | 492 |
| | $ | 934 |
| | $ | 851 |
|
| Less: (loss) income from discontinued operations | (234 | ) | | 308 |
| | 252 |
|
| Net income from continuing operations | 726 |
| | 626 |
| | 599 |
|
| Adjustments to reconcile income from continuing operations to cash provided by operating activities from continuing operations: | | | | | |
| Depreciation (including amortization of technology projects) | 93 |
| | 93 |
| | 87 |
|
| Amortization of intangibles | 48 |
| | 33 |
| | 21 |
|
| Provision for losses on accounts receivable | 32 |
| | 6 |
| | 13 |
|
| Deferred income taxes | 53 |
| | 17 |
| | 33 |
|
| Stock-based compensation | 93 |
| | 77 |
| | 51 |
|
| Gain on dispositions | — |
| | (13 | ) | | (7 | ) |
| Other | 16 |
| | 63 |
| | 33 |
|
| Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: | | | | | |
| Accounts receivable | (239 | ) | | 14 |
| | (73 | ) |
| Prepaid and other current assets | 3 |
| | (16 | ) | | (8 | ) |
| Accounts payable and accrued expenses | 60 |
| | (29 | ) | | 100 |
|
| Unearned revenue | 17 |
| | 44 |
| | 57 |
|
| Other current liabilities | (70 | ) | | (52 | ) | | (16 | ) |
| Net change in prepaid/accrued income taxes | 119 |
| | 55 |
| | (47 | ) |
| Net change in other assets and liabilities | (204 | ) | | 6 |
| | (139 | ) |
| Cash provided by operating activities from continuing operations | 747 |
| | 924 |
| | 704 |
|
| Investing Activities: | | | | | |
| Capital expenditures | (97 | ) | | (92 | ) | | (86 | ) |
| Acquisitions, including contingent payments, net of cash acquired | (177 | ) | | (194 | ) | | (327 | ) |
| Proceeds from dispositions | — |
| | 21 |
| | 25 |
|
| Changes in short-term investments | 27 |
| | (6 | ) | | 2 |
|
| Cash used for investing activities from continuing operations | (247 | ) | | (271 | ) | | (386 | ) |
| Financing Activities: | | | | | |
| Additions to short-term debt | 457 |
| | — |
| | — |
|
| Payments on senior notes | (400 | ) | | — |
| | — |
|
| Dividends paid to shareholders | (984 | ) | | (296 | ) | | (292 | ) |
| Dividends and other payments paid to noncontrolling interests | (24 | ) | | (23 | ) | | (34 | ) |
| Repurchase of treasury shares | (295 | ) | | (1,500 | ) | | (256 | ) |
| Exercise of stock options | 299 |
| | 139 |
| | 50 |
|
| Excess tax benefits from share-based payments | 42 |
| | 20 |
| | 2 |
|
| Cash used for financing activities from continuing operations | (905 | ) | | (1,660 | ) | | (530 | ) |
| Effect of exchange rate changes on cash from continuing operations | 5 |
| | (10 | ) | | (15 | ) |
| Cash used for continuing operations | (400 | ) | | (1,017 | ) | | (227 | ) |
| Discontinued Operations: | | | | | |
| Cash provided by operating activities | 520 |
| | 420 |
| | 753 |
|
| Cash (used for) provided by investing activities | (198 | ) | | 25 |
| | (212 | ) |
| Cash used for financing activities | (12 | ) | | (4 | ) | | (3 | ) |
| Effect of exchange rate changes on cash | 3 |
| | (5 | ) | | 4 |
|
| Effect of change in cash and equivalents | 12 |
| | — |
| | (17 | ) |
| Cash provided by discontinued operations | 325 |
| | 436 |
| | 525 |
|
| Net change in cash and equivalents | (75 | ) | | (581 | ) | | 298 |
|
| Cash and equivalents at beginning of year | 835 |
| | 1,416 |
| | 1,118 |
|
| Cash and equivalents at end of year | $ | 760 |
| | $ | 835 |
| | $ | 1,416 |
|
| Cash paid during the year for: | | | | | |
| Interest (including discontinued operations) | $ | 77 |
| | $ | 71 |
| | $ | 71 |
|
| Income taxes (including discontinued operations) | $ | 243 |
| | $ | 452 |
| | $ | 410 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Equity
| | | (in millions) | Common Stock $1 par | | Additional Paid-in Capital | | Retained Income | | Accumulated
Other Comprehensive Loss | | Less: Treasury Stock | | Total MHP Equity | | Noncontrolling Interests | | Total Equity | Common Stock $1 par | | Additional Paid-in Capital | | Retained Income | | Accumulated
Other Comprehensive Loss | | Less: Treasury Stock | | Total MHFI Equity | | Noncontrolling Interests | | Total Equity |
| Balance as of December 31, 2009 | $ | 412 |
| | $ | 5 |
| | $ | 6,523 |
| | $ | (344 | ) | | $ | 4,749 |
| | $ | 1,847 |
| | $ | 82 |
| | $ | 1,929 |
| |
| Comprehensive income | | | | | 828 |
| | (23 | ) | | | | 805 |
| | 27 |
| | 832 |
| |
| Balance as of December 31, 2012 | | $ | 412 |
| | $ | 492 |
| | $ | 6,525 |
| | $ | (517 | ) | | $ | 6,145 |
| | $ | 767 |
| | $ | 73 |
| | $ | 840 |
|
Comprehensive income 1 | | | | | | 1,376 |
| | 321 |
| | | | 1,697 |
| | 18 |
| | 1,715 |
|
| Dividends | | | | | (294 | ) | | | | | | (294 | ) | | (19 | ) | | (313 | ) | | | | | (315 | ) | | | | | | (315 | ) | | (10 | ) | | (325 | ) |
| Noncontrolling interest transactions | | | (8 | ) | | | | | | | | (8 | ) | | (9 | ) | | (17 | ) | |
| Noncontrolling interest adjustments related to discontinued operations | | | |
|
| |
| | | | | | — |
| | (22 | ) | | (22 | ) |
| Share repurchases | | | | | | | | | 256 |
| | (256 | ) | | | | (256 | ) | | |
|
| | | | | | 989 |
| | (989 | ) | |
| | (989 | ) |
| Employee stock plans, net of tax benefit | | | 70 |
| | | | | | (47 | ) | | 117 |
| | | | 117 |
| | | (45 | ) | | | | | | (388 | ) | | 343 |
| | | | 343 |
|
| Balance as of December 31, 2010 | $ | 412 |
| | $ | 67 |
| | $ | 7,057 |
| | $ | (367 | ) | | $ | 4,958 |
| | $ | 2,211 |
| | $ | 81 |
| | $ | 2,292 |
| |
| Comprehensive income | | | | | 911 |
| | (58 | ) | | | | 853 |
| | 13 |
| | 866 |
| |
| Change in redemption value of redeemable noncontrolling interest | | | | | | 11 |
| | | | | | 11 |
| | | | 11 |
|
| Increase in CRISIL ownership | | | | | | (216 | ) | | | | | | (216 | ) | | $ | (17 | ) | | (233 | ) |
| Other | | | | | | 3 |
| | | | | | 3 |
| | 1 |
| | 4 |
|
| Balance as of December 31, 2013 | | $ | 412 |
| | $ | 447 |
| | $ | 7,384 |
| | $ | (196 | ) | | $ | 6,746 |
| | $ | 1,301 |
| | $ | 43 |
| | $ | 1,344 |
|
Comprehensive loss 1 | | | | | | (115 | ) | | (318 | ) | | | | (433 | ) | | 10 |
| | (423 | ) |
| Dividends | | | | | (301 | ) | | | | | | (301 | ) | | (12 | ) | | (313 | ) | | | | | (324 | ) | | | | | | (324 | ) | | (8 | ) | | (332 | ) |
| Noncontrolling interest transactions | | | (3 | ) | | | | | | | | (3 | ) | | (4 | ) | | (7 | ) | |
| Share repurchases | | | (73 | ) | | | | | | 1,427 |
| | (1,500 | ) | | | | (1,500 | ) | |
| Employee stock plans, net of tax benefit | | | 103 |
| | | | | | (145 | ) | | 248 |
| | | | 248 |
| |
| Other | | | | | | | | | | | — |
| | (2 | ) | | (2 | ) | |
| Balance as of December 31, 2011 | $ | 412 |
| | $ | 94 |
| | $ | 7,667 |
| | $ | (425 | ) | | $ | 6,240 |
| | $ | 1,508 |
| | $ | 76 |
| | $ | 1,584 |
| |
Comprehensive income 1 | | | | | 437 |
| | (92 | ) | | | | 345 |
| | 20 |
| | 365 |
| |
| Dividends | | | | | (989 | ) | | | | | | (989 | ) | | (22 | ) | | (1,011 | ) | |
| Noncontrolling interest transactions | | | 350 |
| | (573 | ) | | | | | | (223 | ) | |
|
| | (223 | ) | |
| Share repurchases | | | 50 |
| | | | | | 345 |
| | (295 | ) | | (3 | ) | | (298 | ) | | |
| | | | | | 352 |
| | (352 | ) | | 6 |
| | (346 | ) |
| Employee stock plans, net of tax benefit | | | (2 | ) | | | | | | (440 | ) | | 438 |
| | | | 438 |
| | | 46 |
| | | | | | (249 | ) | | 295 |
| | | | 295 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | (17 | ) | | | | | | (17 | ) | | | | (17 | ) | | | | | (1 | ) | | | | | | (1 | ) | | | | (1 | ) |
| Other | | | | | | | | | | | — |
| | 2 |
| | 2 |
| | | | | 2 |
| | | | | | 2 |
| |
| | 2 |
|
| Balance as of December 31, 2012 | $ | 412 |
| | $ | 492 |
| | $ | 6,525 |
| | $ | (517 | ) | | $ | 6,145 |
| | $ | 767 |
| | $ | 73 |
| | $ | 840 |
| |
| Balance as of December 31, 2014 | | $ | 412 |
| | $ | 493 |
| | $ | 6,946 |
| | $ | (514 | ) | | $ | 6,849 |
| | $ | 488 |
| | $ | 51 |
| | $ | 539 |
|
Comprehensive income 1 | | | | | | 1,156 |
| | (86 | ) | | | | 1,070 |
| | 11 |
| | 1,081 |
|
| Dividends | | | | | | (359 | ) | | | | | | (359 | ) | | (9 | ) | | (368 | ) |
| Share repurchases | | | |
|
| | | | | | 1,000 |
| | (1,000 | ) | | (2 | ) | | (1,002 | ) |
| Employee stock plans, net of tax benefit | | | | (18 | ) | | | | | | (120 | ) | | 102 |
| | | | 102 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | | (107 | ) | | | | | | (107 | ) | | | | (107 | ) |
| Other | | | | | |
| | | | | | — |
| | (2 | ) | | (2 | ) |
| Balance as of December 31, 2015 | | $ | 412 |
| | $ | 475 |
| | $ | 7,636 |
| | $ | (600 | ) | | $ | 7,729 |
| | $ | 194 |
| | $ | 49 |
| | $ | 243 |
|
| |
1 | Excludes $34$101 million, $92 million and $73 million in 2015, 2014 and 2013, respectively, attributable to redeemable noncontrolling interest. |
See accompanying notes to the consolidated financial statements.
NotesRedeemable Noncontrolling Interest
The fair value component of the redeemable noncontrolling interest in S&P DJ Indices business is based on a combination of an income and market valuation approach. Our income and market valuation approaches may incorporate Level 3 measures for instances when observable inputs are not available, including assumptions related to expected future net cash flows, long-term growth rates, the Consolidated Financial Statementstiming and nature of tax attributes, and the redemption features.
1. Accounting Policies
Nature of operations
The McGraw-Hill Companies, Inc. (together with its consolidated subsidiaries, the “Company,” the “Registrant,” “we,” “us” or “our”) is a leading content and analytics provider serving the capital, commodities and commercial markets. The capital markets include asset managers, banks, exchanges, issuers and financial advisors; the commodities markets include producers, traders and intermediaries within energy, metals, and agriculture; and the commercial markets include professionals and corporate executives within automotive, construction, aerospace and defense and marketing / research information services.
As a result of our joint venture between CME Group and Dow Jones & Company, Inc., to form a new company, S&P Dow Jones Indices LLC and how we are managing this company, combined with the formation of McGraw Hill Financial, we have separated our previously reported S&P Capital IQ / S&P Indices segment into two separate reportable segments. Our operations now consist of four reportable segments: Standard & Poor’s Ratings (“S&P Ratings”), S&P Capital IQ, S&P Dow Jones Indices ("S&P DJ Indices") and Commodities & Commercial (“C&C”). Our previously reported McGraw-Hill Education segment is reported as a discontinued operation as discussed in Note 2 – RECENTGrowth and Value Plan & Discontinued OperationsACCOUNTING STANDARDS.
S&P Ratings is a provider of credit ratings, offering investors and market participants with information and independent ratings benchmarks.
S&P Capital IQ is a global provider of digital and traditional financial research and analytical tools, which integrate cross-asset analytics and desktop services.
S&P DJ Indices is a global leading index provider that maintains a wide variety of valuation and index benchmarks for investment advisors, wealth managers and institutional investors.
C&C consists of business-to-business companies specializing in commercial and commodities markets that deliver their customers access to high-value information, data, analytic services and pricing benchmarks.
See Note 121 – Segment and Geographic InformationAccounting Policies, to the consolidated financial statements for further discussiona detailed description of recent accounting standards. We do not expect these recent accounting standards to have a material impact on our operating segments, which are also our reportable segments.results of operations, financial condition, or liquidity in future periods.
Discontinued Operations
In determining whether a group of assets disposed or to be disposed of should be presented as a discontinued operation, we make a determination of whether the group of assets being disposed of comprises a component of the entity; that is, whether it has historic operationsItem 7a. Quantitative and cash flows that can be clearly distinguished both operationally and for financial reporting purposes. We also determine whether the cash flows associated with the group of assets have been or will be eliminated from our ongoing operations as a result of the disposal transaction and whether we will have significant continuing involvement in the operations of the group of assets after the disposal transaction. If we conclude that the cash flows have been eliminated and we have no significant continuing involvement, then the results of operations of the group of assets being disposed of (as well as any gain or loss on the disposal transaction) are aggregated for separate presentation apart from our continuing operating results in the consolidated financial statements. See Note 2 – Growth and Value Plan & Discontinued Operations for a summary of discontinued operations. Unless otherwise indicated, all disclosures and amounts in the notes to our consolidated financial statements relate to our continuing operations.Qualitative Disclosures about Market Risk
Changes in presentation
In the fourth quarter of 2012, we recorded a pre-tax gain of $52 million within other income in the consolidated statement of income related to a changeThere have been no significant changes in our vacation policy. The change in our vacation policy modified the number of days that employees are entitledexposure to for unused vacation time upon termination of employment as they will only be paid for vacation days equivalent to what they have earned in the current year.
Principles of consolidation
The consolidated financial statements include the accounts of all subsidiaries and our share of earnings or losses of joint ventures and affiliated companies under the equity method of accounting. All significant intercompany accounts and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents include ordinary bank deposits and highly liquid investments with original maturities of three months or less that consist primarily of money market funds with unrestricted daily liquidity and fixed term time deposits. Such investments and bank deposits are stated at cost, which approximates market value and were $760 million and $835 million as of December 31, 2012 and 2011, respectively. These investments are not subject to significant market risk.
Short-term investments
Short-term investments are securities with original maturities greater than 90 days that are available for use in our operations in the next twelve months. The short-term investments, primarily consisting of certificates of deposit, are classified as held-to-maturity and therefore are carried at cost. Interest and dividends are recorded into income when earned.
Accounts receivable
Credit is extended to customers based upon an evaluation of the customer’s financial condition. Accounts receivable, which include billings consistent with terms of contractual arrangements, are recorded at net realizable value.
Allowance for doubtful accounts
The allowance for doubtful accounts reserve methodology is based on historical analysis, a review of outstanding balances and current conditions. In determining these reserves, we consider, amongst other factors, the financial condition and risk profile of our customers, areas of specific or concentrated risk as well as applicable industry trends or market indicators.
Deferred technology costs
We capitalize certain software development and website implementation costs. Capitalized costs only include incremental, direct costs of materials and services incurred to develop the software after the preliminary project stage is completed, funding has been committed and it is probable that the project will be completed and used to perform the function intended. Incremental costs are expenditures that are out-of-pocket to us and are not part of an allocation or existing expense base. Software development and website implementation costs are expensed as incurred during the preliminary project stage. Capitalized costs are amortized from the year the software is ready for its intended use over its estimated useful life, three to seven years, using the straight-line method. Periodically, we evaluate the amortization methods, remaining lives and recoverability of such costs. Capitalized software development and website implementation costs are included in other non-current assets and are presented net of accumulated amortization. Gross deferred technology costs were $115 million and $90 million as of December 31, 2012 and 2011, respectively. Accumulated amortization of deferred technology costs was $58 million and $37 million as of December 31, 2012 and 2011, respectively.
Fair Value
Certain assets and liabilities are required to be recorded at fair value and classified within a fair value hierarchy based on inputs used when measuring fair value. We have an immaterial amount of forward exchange contracts that are adjusted to fair value on a recurring basis.
Other financial instruments, including cash and equivalents and short-term investments, are recorded at cost, which approximates fair value because of the short-term maturity and highly liquid nature of these instruments. The fair value of our long-term debt borrowings were $0.9 billion and $1.3 billion as of December 31, 2012 and 2011, respectively, and was estimated based on quoted market prices.
Accounting for the impairment of long-lived assets (including other intangible assets)
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Upon such an occurrence, recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to current forecasts of undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized equal to the amount by which the carrying amount of the asset exceeds the fair value of the asset. For long-lived assets held for sale, assets are written down to fair value, less cost to sell. Fair value is determined based on market evidence, discounted cash flows, appraised values or management’s estimates, depending upon the nature of the assets. There were no material impairments of long-lived assets for the years ended December 31, 2012, 2011 and 2010.
Goodwill and other indefinite-lived intangible assets
Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill and other intangible assets with indefinite lives are not amortized, but instead are tested for impairment annually during the fourth quarter each year or more frequently if events or changes in circumstances indicate that the asset might be impaired. We have four reporting units with goodwill that are evaluated for impairment.
We initially perform a qualitative analysis evaluating whether any events and circumstances occurred or exist that provide evidence that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount. If, based on our evaluation we do not believe that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount, no quantitative impairment test is performed. Conversely, if the results of our qualitative assessment determine that it is more likely than not that the fair value of any of our reporting units is less than their respective carrying amounts we perform a two-step quantitative impairment test.
When conducting the first step of our two step impairment test to evaluate the recoverability of goodwill at the reporting unit level, the estimated fair value of the reporting unit is compared to its carrying value including goodwill. Fair value of the reporting units are estimated using the income approach, which incorporates the use of a discounted free cash flow (“DCF”) analyses and are corroborated using the market approach, which incorporates the use of revenue and earnings multiples based on market data. The DCF analyses are based on the current operating budgets and estimated long-term growth projections for each reporting unit. Future cash flows are discounted based on a market comparable weighted average cost of capital rate for each reporting unit, adjusted for market and other risks where appropriate. In addition, we analyze any difference between the sum of the fair values of the reporting units and our total market capitalization for reasonableness, taking into account certain factors including control premiums.
If the fair value of the reporting unit is less than the carrying value, a second step is performed which compares the implied fair value of the reporting unit’s goodwill to the carrying value of the goodwill. The fair value of the goodwill is determined based on the difference between the fair value of the reporting unit and the net fair value of the identifiable assets and liabilities of the reporting unit. If the implied fair value of the goodwill is less than the carrying value, the difference is recognized as an impairment charge.
We evaluate the recoverability of indefinite-lived intangible assets by first performing a qualitative analysis evaluating whether any events and circumstances occurred that provide evidence that it is more likely than not that the indefinite-lived asset is impaired. If, based on our evaluation of the events and circumstances that occurred during the year we do not believe that it is more likely than not that the indefinite-lived asset is impaired, no quantitative impairment test is performed. Conversely, if the results of our qualitative assessment determine that it is more likely than not that the indefinite-lived asset is impaired a quantitative impairment test is performed. If necessary, the impairment test is performed by comparing the estimated fair value of the intangible asset to its carrying value. If the indefinite-lived intangible asset carrying value exceeds its fair value, an impairment analysis is performed using the income approach. The fair value of loss is recognized in an amount equal to that excess.
Significant judgments inherent in these analyses include estimating the amount and timing of future cash flows and the selection of appropriate discount rates, royalty rates and long-term growth rate assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit and indefinite-lived intangible asset and could result in an impairment charge, which could be material to our financial position and results of operations.
We performed our impairment assessment of goodwill and indefinite-lived intangible assets and concluded that no impairment existed for the years ended December 31, 2011, and 2010. As further discussed in Note 2 – Growth and Value Plan & Discontinued Operations, we determined that during the year ended December 31, 2012, the goodwill at MHE's School Education Group was impaired.
Foreign currency translation
2015. Our exposure to market risk includes changes in foreign exchange rates. We have operations in manyvarious foreign countries. For most international operations,countries where the localfunctional currency is primarily the functionallocal currency. For international operations that are determined to be extensions of the parent company, the U.S. dollar is the functional currency. ForWe typically have naturally hedged positions in most countries from a local currency operations,perspective with offsetting assets and liabilities are translatedliabilities. As of December 31, 2015, we have entered into U.S. dollars using endan immaterial amount of periodforeign exchange rates, and revenue and expenses are translated into U.S. dollars using weighted-averageforwards to hedge the effect of adverse fluctuations in foreign currency exchange rates. Foreign currency translation adjustments are accumulated in a separate component of equity.
Revenue recognition
Revenue is recognized as it is earned when goods are shipped to customers or services are rendered. We consider amounts to be earned once evidence of an arrangement has been obtained, services are performed, fees are fixed or determinable and collectability is reasonably assured. Revenue relating to products that providehave not entered into any derivative financial instruments for more than one deliverable is recognized based upon the relative fair value to the customer of each deliverable as each deliverable is provided. Revenue relating to agreements that provide for more than one service is recognized based upon the relative fair value to the customer of each service component as each component is earned. If the fair value to the customer for each service is not objectively determinable, management makes its best estimate of the services’ stand-alone selling price and records revenue as it is earned over the service period. For arrangements that include multiple services, fair value of the service components are determined using an analysis that considers cash consideration thatspeculative purposes.
would be received for instances when the service components are sold separately. Advertising revenue is recognized when the page is run. Subscription income is recognized over the related subscription period.Item 8. Consolidated Financial Statements and Supplementary Data
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
DepreciationThe Board of Directors and Shareholders of McGraw Hill Financial, Inc.
The costs
We have audited the accompanying consolidated balance sheets of propertyMcGraw Hill Financial, Inc. (the "Company") as of December 31, 2015 and equipment are depreciated using2014, and the straight-line method based upon the following estimated useful lives: buildingsrelated consolidated statements of income, comprehensive income, cash flows and improvements from 15 to 40 years and equipment and furniture from 2 to 10 years. The costs of leasehold improvements are amortized over the lesserequity for each of the useful lives orthree years in the terms of the respective leases.
Advertising expense
The cost of advertising is expensed as incurred. We incurred $34 million, $32 million and $30 million in advertising costs for the yearsperiod ended December 31, 2012, 20112015. Our audits also included the financial statement schedule listed in Item 15(a)(2). These financial statements and 2010, respectively.
Stock-based compensation
Stock-based compensation expenseschedule are the responsibility of the Company’s management. Our responsibility is measured at the grant dateto express an opinion on these financial statements and schedule based on the fair value of the award and is recognized over the requisite service period, which typically is the vesting period. Stock-based compensation is classified as both operating-related expense and selling and general expense in the consolidated statements of income.
Income taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize liabilities for uncertain tax positions taken or expected to be taken in income tax returns. Accrued interest and penalties related to unrecognized tax benefits are recognized in interest expense and operating expense, respectively.
Judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and unrecognized tax benefits. In determining the need for a valuation allowance, the historical and projected financial performance of the operation that is recording a net deferred tax asset is considered along with any other pertinent information.audits.
We file income tax returnsconducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the U.S. federal jurisdiction, various states,financial statements. An audit also includes assessing the accounting principles used and foreign jurisdictions, and we are routinely under auditsignificant estimates made by many different tax authorities.management, as well as evaluating the overall financial statement presentation. We believe that our accrualaudits provide a reasonable basis for tax liabilitiesour opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of McGraw Hill Financial, Inc. at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), McGraw Hill Financial, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 11, 2016 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
New York, New York
February 11, 2016
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of McGraw Hill Financial, Inc.
We have audited McGraw Hill Financial, Inc.’s (the "Company") internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). McGraw Hill Financial, Inc.’s management is adequateresponsible for all open audit yearsmaintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our assessmentaudit.
We conducted our audit in accordance with the standards of many factors including past experiencethe Public Company Accounting Oversight Board (United States). Those standards require that we plan and interpretationsperform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of tax law. This assessment reliesinternal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on estimatesthe assessed risk, and assumptionsperforming such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and may involve a seriesthe preparation of complex judgments about future events. It is possiblefinancial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that examinations will be settled prior to December 31, 2013. If any of these tax audit settlements do occur within that period we would make any necessary adjustments(1) pertain to the accrual for unrecognized tax benefits. Until formal resolutionsmaintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are reached between usrecorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the tax authorities,company are being made only in accordance with authorizations of management and directors of the determinationcompany; and (3) provide reasonable assurance regarding prevention or timely detection of a possible audit settlement range with respect tounauthorized acquisition, use, or disposition of the impact on unrecognized tax benefits is not practicable. On the basis of present information, our opinion iscompany’s assets that any assessments resulting from the current audits will notcould have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of SNL Financial LC, which is included in the 2015 consolidated financial statements of McGraw Hill Financial, Inc. and constituted $2.5 billion and $2.3 billion of total and net assets, respectively, as of December 31, 2015 and $85 million and $9 million of revenues and net loss attributable to McGraw Hill Financial, Inc., respectively, for the year then ended. Our audit of internal control over financial reporting of McGraw Hill Financial, Inc. also did not include an evaluation of the internal control over financial reporting of SNL Financial LC.
In our opinion, McGraw Hill Financial, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of McGraw Hill Financial, Inc. as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, cash flows and equity for each of the three years in the period ended December 31, 2015 and our report dated February 11, 2016 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
New York, New York
February 11, 2016
Consolidated Statements of Income
|
| | | | | | | | | | | |
| (in millions, except per share data) | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Revenue | $ | 5,313 |
| | $ | 5,051 |
| | $ | 4,702 |
|
| Expenses: | | | | | |
| Operating-related expenses | 1,672 |
| | 1,627 |
| | 1,564 |
|
| Selling and general expenses | 1,578 |
| | 3,168 |
| | 1,631 |
|
| Depreciation | 90 |
| | 86 |
| | 86 |
|
| Amortization of intangibles | 67 |
| | 48 |
| | 51 |
|
| Total expenses | 3,407 |
| | 4,929 |
| | 3,332 |
|
| Other (income) loss | (11 | ) | | 9 |
| | 12 |
|
| Operating profit | 1,917 |
| | 113 |
| | 1,358 |
|
| Interest expense, net | 102 |
| | 59 |
| | 59 |
|
| Income from continuing operations before taxes on income | 1,815 |
| | 54 |
| | 1,299 |
|
| Provision for taxes on income | 547 |
| | 245 |
| | 425 |
|
| Income (loss) from continuing operations | 1,268 |
| | (191 | ) | | 874 |
|
| Discontinued operations, net of tax: | | | | | |
| Income from discontinued operations | — |
| | 18 |
| | 3 |
|
| Gain on sale of discontinued operations (includes $(75) accumulated other comprehensive income reclassifications in 2013 for foreign currency translation adjustment) | — |
| | 160 |
| | 589 |
|
| Discontinued operations, net | — |
| | 178 |
| | 592 |
|
| Net income (loss) | 1,268 |
| | (13 | ) | | 1,466 |
|
| Less: net income from continuing operations attributable to noncontrolling interests | (112 | ) | | (102 | ) | | (91 | ) |
| Less: net loss from discontinued operations attributable to noncontrolling interests | — |
| | — |
| | 1 |
|
| Net income (loss) attributable to McGraw Hill Financial, Inc. | $ | 1,156 |
| | $ | (115 | ) | | $ | 1,376 |
|
| | | | | | |
| Amounts attributable to McGraw Hill Financial, Inc. common shareholders: | | | | | |
| Income (loss) from continuing operations | $ | 1,156 |
| | $ | (293 | ) | | $ | 783 |
|
| Income from discontinued operations | — |
| | 178 |
| | 593 |
|
| Net income (loss) | $ | 1,156 |
| | $ | (115 | ) | | $ | 1,376 |
|
| | | | | | |
| Earnings (loss) per share attributable to McGraw Hill Financial, Inc. common shareholders: | | | | | |
| Income (loss) from continuing operations: | | | | | |
| Basic | $ | 4.26 |
| | $ | (1.08 | ) | | $ | 2.85 |
|
| Diluted | $ | 4.21 |
| | $ | (1.08 | ) | | $ | 2.80 |
|
| Income from discontinued operations: | | | | | |
| Basic | $ | — |
| | $ | 0.66 |
| | $ | 2.16 |
|
| Diluted | $ | — |
| | $ | 0.66 |
| | $ | 2.12 |
|
| Net income (loss): | | | | | |
| Basic | $ | 4.26 |
| | $ | (0.42 | ) | | $ | 5.01 |
|
| Diluted | $ | 4.21 |
| | $ | (0.42 | ) | | $ | 4.91 |
|
| Weighted-average number of common shares outstanding: | | | | | |
| Basic | 271.6 |
| | 271.5 |
| | 274.5 |
|
| Diluted | 274.6 |
| | 271.5 |
| | 279.8 |
|
| | | | | | |
| Actual shares outstanding at year end | 265.2 |
| | 272.0 |
| | 270.4 |
|
| | | | | | |
| Dividend declared per common share | $ | 1.32 |
| | $ | 1.20 |
| | $ | 1.12 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Comprehensive Income
|
| | | | | | | | | | | |
| (in millions) | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Net income (loss) | $ | 1,268 |
| | $ | (13 | ) | | $ | 1,466 |
|
| Other comprehensive income (loss): | | | | | |
| Foreign currency translation adjustment | (111 | ) | | (108 | ) | | 93 |
|
| Income tax effect | 1 |
| | 2 |
| | (2 | ) |
| | (110 | ) | | (106 | ) | | 91 |
|
| | | | | | |
| Pension and other postretirement benefit plans | 34 |
| | (357 | ) | | 385 |
|
| Income tax effect | (9 | ) | | 142 |
| | (154 | ) |
| | 25 |
| | (215 | ) | | 231 |
|
| | | | | | |
| Unrealized (loss) gain on investment and forward exchange contract | (1 | ) | | 4 |
| | 2 |
|
| Income tax effect | — |
| | (1 | ) | | (2 | ) |
| | (1 | ) | | 3 |
| | — |
|
| | | | | | |
| Comprehensive income (loss) | 1,182 |
| | (331 | ) | | 1,788 |
|
| Less: comprehensive income attributable to nonredeemable noncontrolling interests | (11 | ) | | (10 | ) | | (18 | ) |
| Less: comprehensive income attributable to redeemable noncontrolling interests | (101 | ) | | (92 | ) | | (73 | ) |
| Comprehensive income (loss) attributable to McGraw Hill Financial, Inc. | $ | 1,070 |
| | $ | (433 | ) | | $ | 1,697 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Balance Sheets
|
| | | | | | | |
| (in millions) | December 31, |
| | 2015 | | 2014 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,481 |
| | $ | 2,497 |
|
| Short-term investments | 6 |
| | 3 |
|
| Accounts receivable, net of allowance for doubtful accounts: 2015 - $37; 2014 - $38 | 991 |
| | 932 |
|
| Deferred income taxes | 109 |
| | 360 |
|
| Prepaid and other current assets | 206 |
| | 170 |
|
| Assets of a business held for sale | 503 |
| | — |
|
| Total current assets | 3,296 |
| | 3,962 |
|
| Property and equipment: | | | |
| Buildings and leasehold improvements | 352 |
| | 287 |
|
| Equipment and furniture | 503 |
| | 482 |
|
| Total property and equipment | 855 |
| | 769 |
|
| Less: accumulated depreciation | (585 | ) | | (563 | ) |
| Property and equipment, net | 270 |
| | 206 |
|
| Goodwill | 2,882 |
| | 1,387 |
|
| Other intangible assets, net | 1,522 |
| | 1,004 |
|
| Asset for pension benefits | 36 |
| | 28 |
|
| Other non-current assets | 177 |
| | 186 |
|
| Total assets | $ | 8,183 |
| | $ | 6,773 |
|
| LIABILITIES AND EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 206 |
| | $ | 191 |
|
| Accrued compensation and contributions to retirement plans | 383 |
| | 410 |
|
| Short-term debt | 143 |
| | — |
|
| Income taxes currently payable | 56 |
| | 54 |
|
| Unearned revenue | 1,421 |
| | 1,254 |
|
| Accrued legal and regulatory settlements | 121 |
| | 1,609 |
|
| Other current liabilities | 372 |
| | 402 |
|
| Liabilities of a business held for sale | 206 |
| | — |
|
| Total current liabilities | 2,908 |
| | 3,920 |
|
| Long-term debt | 3,468 |
| | 795 |
|
| Pension and other postretirement benefits | 276 |
| | 333 |
|
| Deferred income taxes | 23 |
| | 40 |
|
| Other non-current liabilities | 345 |
| | 336 |
|
| Total liabilities | 7,020 |
| | 5,424 |
|
| Redeemable noncontrolling interest | 920 |
| | 810 |
|
| Commitments and contingencies (Note 12) |
| |
|
| Equity: | | | |
| Common stock, $1 par value: authorized - 600 million shares; issued - 412 million shares in 2015 and 2014 | 412 |
| | 412 |
|
| Additional paid-in capital | 475 |
| | 493 |
|
| Retained income | 7,636 |
| | 6,946 |
|
| Accumulated other comprehensive loss | (600 | ) | | (514 | ) |
| Less: common stock in treasury - at cost: 2015 - 146 million shares; 2014 - 140 million shares | (7,729 | ) | | (6,849 | ) |
| Total equity – controlling interests | 194 |
| | 488 |
|
| Total equity – noncontrolling interests | 49 |
| | 51 |
|
| Total equity | 243 |
| | 539 |
|
| Total liabilities and equity | $ | 8,183 |
| | $ | 6,773 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Cash Flows
|
| | | | | | | | | | | |
| (in millions) | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Operating Activities: | | | | | |
| Net income (loss) | $ | 1,268 |
| | $ | (13 | ) | | $ | 1,466 |
|
| Less: income from discontinued operations | — |
| | 178 |
| | 592 |
|
| Net income (loss) from continuing operations | 1,268 |
| | (191 | ) | | 874 |
|
| Adjustments to reconcile income (loss) from continuing operations to cash provided by operating activities from continuing operations: | | | | | |
| Depreciation | 90 |
| | 86 |
| | 86 |
|
| Amortization of intangibles | 67 |
| | 48 |
| | 51 |
|
| Provision for losses on accounts receivable | 8 |
| | 11 |
| | 22 |
|
| Deferred income taxes | 280 |
| | (245 | ) | | 43 |
|
| Stock-based compensation | 78 |
| | 100 |
| | 96 |
|
| Accrued legal and regulatory settlements | 119 |
| | 1,587 |
| | — |
|
| Other | 46 |
| | 80 |
| | 96 |
|
| Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: | | | | | |
| Accounts receivable | (118 | ) | | (9 | ) | | (35 | ) |
| Prepaid and other current assets | (4 | ) | | (7 | ) | | (29 | ) |
| Accounts payable and accrued expenses | (92 | ) | | (130 | ) | | (94 | ) |
| Unearned revenue | 129 |
| | 78 |
| | 109 |
|
| Accrued legal and regulatory settlement | (1,624 | ) | | (35 | ) | | — |
|
| Other current liabilities | (78 | ) | | (16 | ) | | (89 | ) |
| Net change in prepaid / accrued income taxes | 61 |
| | (93 | ) | | (238 | ) |
| Net change in other assets and liabilities | (35 | ) | | (55 | ) | | (110 | ) |
| Cash provided by operating activities from continuing operations | 195 |
| | 1,209 |
| | 782 |
|
| Investing Activities: | | | | | |
| Capital expenditures | (139 | ) | | (92 | ) | | (117 | ) |
| Acquisitions, including contingent payments, net of cash acquired | (2,396 | ) | | (71 | ) | | (47 | ) |
| Proceeds from dispositions | 14 |
| | 83 |
| | 51 |
|
| Changes in short-term investments | (4 | ) | | 15 |
| | (17 | ) |
| Cash used for investing activities from continuing operations | (2,525 | ) | | (65 | ) | | (130 | ) |
| Financing Activities: | | | | | |
| Additions to / (payments on) short-term debt, net | 143 |
| | — |
| | (457 | ) |
| Proceeds from issuance of senior notes, net | 2,674 |
| | — |
| | — |
|
| Dividends paid to shareholders | (363 | ) | | (326 | ) | | (308 | ) |
| Dividends and other payments paid to noncontrolling interests | (104 | ) | | (84 | ) | | (75 | ) |
| Repurchase of treasury shares | (974 | ) | | (362 | ) | | (978 | ) |
| Exercise of stock options | 86 |
| | 193 |
| | 258 |
|
| Contingent consideration payment | (5 | ) | | (11 | ) | | (12 | ) |
| Purchase of additional CRISIL shares | (16 | ) | | — |
| | (214 | ) |
| Excess tax benefits from share-based payments | 69 |
| | 128 |
| | 43 |
|
| Cash provided by (used for) financing activities from continuing operations | 1,510 |
| | (462 | ) | | (1,743 | ) |
| Effect of exchange rate changes on cash from continuing operations | (67 | ) | | (65 | ) | | (1 | ) |
| Cash (used for) provided by continuing operations | (887 | ) | | 617 |
| | (1,092 | ) |
| Discontinued Operations: | | | | | |
| Cash (used for) provided by operating activities | (129 | ) | | 18 |
| | (231 | ) |
| Cash provided by investing activities | — |
| | 320 |
| | 2,129 |
|
| Cash used for financing activities | — |
| | — |
| | (25 | ) |
| Effect of exchange rate changes on cash | — |
| | — |
| | 1 |
|
| Cash (used for) provided by discontinued operations | (129 | ) | | 338 |
| | 1,874 |
|
| Net change in cash and cash equivalents | (1,016 | ) | | 955 |
| | 782 |
|
| Cash and cash equivalents at beginning of year | 2,497 |
| | 1,542 |
| | 760 |
|
| Cash and cash equivalents at end of year | $ | 1,481 |
| | $ | 2,497 |
| | $ | 1,542 |
|
| Cash paid during the year for: | | | | | |
| Interest (including discontinued operations) | $ | 65 |
| | $ | 50 |
| | $ | 50 |
|
| Income taxes (including discontinued operations) | $ | 260 |
| | $ | 419 |
| | $ | 787 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Equity
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Common Stock $1 par | | Additional Paid-in Capital | | Retained Income | | Accumulated
Other Comprehensive Loss | | Less: Treasury Stock | | Total MHFI Equity | | Noncontrolling Interests | | Total Equity |
| Balance as of December 31, 2012 | $ | 412 |
| | $ | 492 |
| | $ | 6,525 |
| | $ | (517 | ) | | $ | 6,145 |
| | $ | 767 |
| | $ | 73 |
| | $ | 840 |
|
Comprehensive income 1 | | | | | 1,376 |
| | 321 |
| | | | 1,697 |
| | 18 |
| | 1,715 |
|
| Dividends | | | | | (315 | ) | | | | | | (315 | ) | | (10 | ) | | (325 | ) |
| Noncontrolling interest adjustments related to discontinued operations | | |
|
| |
| | | | | | — |
| | (22 | ) | | (22 | ) |
| Share repurchases | | |
|
| | | | | | 989 |
| | (989 | ) | |
| | (989 | ) |
| Employee stock plans, net of tax benefit | | | (45 | ) | | | | | | (388 | ) | | 343 |
| | | | 343 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | 11 |
| | | | | | 11 |
| | | | 11 |
|
| Increase in CRISIL ownership | | | | | (216 | ) | | | | | | (216 | ) | | $ | (17 | ) | | (233 | ) |
| Other | | | | | 3 |
| | | | | | 3 |
| | 1 |
| | 4 |
|
| Balance as of December 31, 2013 | $ | 412 |
| | $ | 447 |
| | $ | 7,384 |
| | $ | (196 | ) | | $ | 6,746 |
| | $ | 1,301 |
| | $ | 43 |
| | $ | 1,344 |
|
Comprehensive loss 1 | | | | | (115 | ) | | (318 | ) | | | | (433 | ) | | 10 |
| | (423 | ) |
| Dividends | | | | | (324 | ) | | | | | | (324 | ) | | (8 | ) | | (332 | ) |
| Share repurchases | | |
| | | | | | 352 |
| | (352 | ) | | 6 |
| | (346 | ) |
| Employee stock plans, net of tax benefit | | | 46 |
| | | | | | (249 | ) | | 295 |
| | | | 295 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | (1 | ) | | | | | | (1 | ) | | | | (1 | ) |
| Other | | | | | 2 |
| | | | | | 2 |
| |
| | 2 |
|
| Balance as of December 31, 2014 | $ | 412 |
| | $ | 493 |
| | $ | 6,946 |
| | $ | (514 | ) | | $ | 6,849 |
| | $ | 488 |
| | $ | 51 |
| | $ | 539 |
|
Comprehensive income 1 | | | | | 1,156 |
| | (86 | ) | | | | 1,070 |
| | 11 |
| | 1,081 |
|
| Dividends | | | | | (359 | ) | | | | | | (359 | ) | | (9 | ) | | (368 | ) |
| Share repurchases | | |
|
| | | | | | 1,000 |
| | (1,000 | ) | | (2 | ) | | (1,002 | ) |
| Employee stock plans, net of tax benefit | | | (18 | ) | | | | | | (120 | ) | | 102 |
| | | | 102 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | (107 | ) | | | | | | (107 | ) | | | | (107 | ) |
| Other | | | | |
| | | | | | — |
| | (2 | ) | | (2 | ) |
| Balance as of December 31, 2015 | $ | 412 |
| | $ | 475 |
| | $ | 7,636 |
| | $ | (600 | ) | | $ | 7,729 |
| | $ | 194 |
| | $ | 49 |
| | $ | 243 |
|
| |
1 | Excludes $101 million, $92 million and $73 million in 2015, 2014 and 2013, respectively, attributable to redeemable noncontrolling interest. |
See accompanying notes to the consolidated financial statements.
Redeemable Noncontrolling Interest
The fair value component of the redeemable noncontrolling interest in S&P DJ Indices business is based on a combination of an income and market valuation approach. Our income and market valuation approaches may incorporate Level 3 measures for instances when observable inputs are not available, including assumptions related to expected future net cash flows, long-term growth rates, the timing and nature of tax attributes, and the redemption features.
RECENTACCOUNTING STANDARDS
See Note 1 – Accounting Policies, to the consolidated financial statements for a detailed description of recent accounting standards. We do not expect these recent accounting standards to have a material impact on our results of operations, financial condition, or liquidity in future periods.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
There have been no significant changes in our exposure to market risk during the year ended December 31, 2015. Our exposure to market risk includes changes in foreign exchange rates. We have operations in various foreign countries where the functional currency is primarily the local currency. For international operations that are determined to be extensions of the parent company, the U.S. dollar is the functional currency. We typically have naturally hedged positions in most countries from a local currency perspective with offsetting assets and liabilities. As of December 31, 2015, we have entered into an immaterial amount of foreign exchange forwards to hedge the effect of adverse fluctuations in foreign currency exchange rates. We have not entered into any derivative financial instruments for speculative purposes.
Item 8. Consolidated Financial Statements and Supplementary Data
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of McGraw Hill Financial, Inc.
We have audited the accompanying consolidated balance sheets of McGraw Hill Financial, Inc. (the "Company") as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, cash flows and equity for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedule listed in Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of McGraw Hill Financial, Inc. at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), McGraw Hill Financial, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 11, 2016 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
New York, New York
February 11, 2016
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of McGraw Hill Financial, Inc.
We have audited McGraw Hill Financial, Inc.’s (the "Company") internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). McGraw Hill Financial, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of SNL Financial LC, which is included in the 2015 consolidated financial statements of McGraw Hill Financial, Inc. and constituted $2.5 billion and $2.3 billion of total and net assets, respectively, as of December 31, 2015 and $85 million and $9 million of revenues and net loss attributable to McGraw Hill Financial, Inc., respectively, for the year then ended. Our audit of internal control over financial reporting of McGraw Hill Financial, Inc. also did not include an evaluation of the internal control over financial reporting of SNL Financial LC.
In our opinion, McGraw Hill Financial, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of McGraw Hill Financial, Inc. as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, cash flows and equity for each of the three years in the period ended December 31, 2015 and our report dated February 11, 2016 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
New York, New York
February 11, 2016
Consolidated Statements of Income
|
| | | | | | | | | | | |
| (in millions, except per share data) | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Revenue | $ | 5,313 |
| | $ | 5,051 |
| | $ | 4,702 |
|
| Expenses: | | | | | |
| Operating-related expenses | 1,672 |
| | 1,627 |
| | 1,564 |
|
| Selling and general expenses | 1,578 |
| | 3,168 |
| | 1,631 |
|
| Depreciation | 90 |
| | 86 |
| | 86 |
|
| Amortization of intangibles | 67 |
| | 48 |
| | 51 |
|
| Total expenses | 3,407 |
| | 4,929 |
| | 3,332 |
|
| Other (income) loss | (11 | ) | | 9 |
| | 12 |
|
| Operating profit | 1,917 |
| | 113 |
| | 1,358 |
|
| Interest expense, net | 102 |
| | 59 |
| | 59 |
|
| Income from continuing operations before taxes on income | 1,815 |
| | 54 |
| | 1,299 |
|
| Provision for taxes on income | 547 |
| | 245 |
| | 425 |
|
| Income (loss) from continuing operations | 1,268 |
| | (191 | ) | | 874 |
|
| Discontinued operations, net of tax: | | | | | |
| Income from discontinued operations | — |
| | 18 |
| | 3 |
|
| Gain on sale of discontinued operations (includes $(75) accumulated other comprehensive income reclassifications in 2013 for foreign currency translation adjustment) | — |
| | 160 |
| | 589 |
|
| Discontinued operations, net | — |
| | 178 |
| | 592 |
|
| Net income (loss) | 1,268 |
| | (13 | ) | | 1,466 |
|
| Less: net income from continuing operations attributable to noncontrolling interests | (112 | ) | | (102 | ) | | (91 | ) |
| Less: net loss from discontinued operations attributable to noncontrolling interests | — |
| | — |
| | 1 |
|
| Net income (loss) attributable to McGraw Hill Financial, Inc. | $ | 1,156 |
| | $ | (115 | ) | | $ | 1,376 |
|
| | | | | | |
| Amounts attributable to McGraw Hill Financial, Inc. common shareholders: | | | | | |
| Income (loss) from continuing operations | $ | 1,156 |
| | $ | (293 | ) | | $ | 783 |
|
| Income from discontinued operations | — |
| | 178 |
| | 593 |
|
| Net income (loss) | $ | 1,156 |
| | $ | (115 | ) | | $ | 1,376 |
|
| | | | | | |
| Earnings (loss) per share attributable to McGraw Hill Financial, Inc. common shareholders: | | | | | |
| Income (loss) from continuing operations: | | | | | |
| Basic | $ | 4.26 |
| | $ | (1.08 | ) | | $ | 2.85 |
|
| Diluted | $ | 4.21 |
| | $ | (1.08 | ) | | $ | 2.80 |
|
| Income from discontinued operations: | | | | | |
| Basic | $ | — |
| | $ | 0.66 |
| | $ | 2.16 |
|
| Diluted | $ | — |
| | $ | 0.66 |
| | $ | 2.12 |
|
| Net income (loss): | | | | | |
| Basic | $ | 4.26 |
| | $ | (0.42 | ) | | $ | 5.01 |
|
| Diluted | $ | 4.21 |
| | $ | (0.42 | ) | | $ | 4.91 |
|
| Weighted-average number of common shares outstanding: | | | | | |
| Basic | 271.6 |
| | 271.5 |
| | 274.5 |
|
| Diluted | 274.6 |
| | 271.5 |
| | 279.8 |
|
| | | | | | |
| Actual shares outstanding at year end | 265.2 |
| | 272.0 |
| | 270.4 |
|
| | | | | | |
| Dividend declared per common share | $ | 1.32 |
| | $ | 1.20 |
| | $ | 1.12 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Comprehensive Income
|
| | | | | | | | | | | |
| (in millions) | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Net income (loss) | $ | 1,268 |
| | $ | (13 | ) | | $ | 1,466 |
|
| Other comprehensive income (loss): | | | | | |
| Foreign currency translation adjustment | (111 | ) | | (108 | ) | | 93 |
|
| Income tax effect | 1 |
| | 2 |
| | (2 | ) |
| | (110 | ) | | (106 | ) | | 91 |
|
| | | | | | |
| Pension and other postretirement benefit plans | 34 |
| | (357 | ) | | 385 |
|
| Income tax effect | (9 | ) | | 142 |
| | (154 | ) |
| | 25 |
| | (215 | ) | | 231 |
|
| | | | | | |
| Unrealized (loss) gain on investment and forward exchange contract | (1 | ) | | 4 |
| | 2 |
|
| Income tax effect | — |
| | (1 | ) | | (2 | ) |
| | (1 | ) | | 3 |
| | — |
|
| | | | | | |
| Comprehensive income (loss) | 1,182 |
| | (331 | ) | | 1,788 |
|
| Less: comprehensive income attributable to nonredeemable noncontrolling interests | (11 | ) | | (10 | ) | | (18 | ) |
| Less: comprehensive income attributable to redeemable noncontrolling interests | (101 | ) | | (92 | ) | | (73 | ) |
| Comprehensive income (loss) attributable to McGraw Hill Financial, Inc. | $ | 1,070 |
| | $ | (433 | ) | | $ | 1,697 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Balance Sheets
|
| | | | | | | |
| (in millions) | December 31, |
| | 2015 | | 2014 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,481 |
| | $ | 2,497 |
|
| Short-term investments | 6 |
| | 3 |
|
| Accounts receivable, net of allowance for doubtful accounts: 2015 - $37; 2014 - $38 | 991 |
| | 932 |
|
| Deferred income taxes | 109 |
| | 360 |
|
| Prepaid and other current assets | 206 |
| | 170 |
|
| Assets of a business held for sale | 503 |
| | — |
|
| Total current assets | 3,296 |
| | 3,962 |
|
| Property and equipment: | | | |
| Buildings and leasehold improvements | 352 |
| | 287 |
|
| Equipment and furniture | 503 |
| | 482 |
|
| Total property and equipment | 855 |
| | 769 |
|
| Less: accumulated depreciation | (585 | ) | | (563 | ) |
| Property and equipment, net | 270 |
| | 206 |
|
| Goodwill | 2,882 |
| | 1,387 |
|
| Other intangible assets, net | 1,522 |
| | 1,004 |
|
| Asset for pension benefits | 36 |
| | 28 |
|
| Other non-current assets | 177 |
| | 186 |
|
| Total assets | $ | 8,183 |
| | $ | 6,773 |
|
| LIABILITIES AND EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 206 |
| | $ | 191 |
|
| Accrued compensation and contributions to retirement plans | 383 |
| | 410 |
|
| Short-term debt | 143 |
| | — |
|
| Income taxes currently payable | 56 |
| | 54 |
|
| Unearned revenue | 1,421 |
| | 1,254 |
|
| Accrued legal and regulatory settlements | 121 |
| | 1,609 |
|
| Other current liabilities | 372 |
| | 402 |
|
| Liabilities of a business held for sale | 206 |
| | — |
|
| Total current liabilities | 2,908 |
| | 3,920 |
|
| Long-term debt | 3,468 |
| | 795 |
|
| Pension and other postretirement benefits | 276 |
| | 333 |
|
| Deferred income taxes | 23 |
| | 40 |
|
| Other non-current liabilities | 345 |
| | 336 |
|
| Total liabilities | 7,020 |
| | 5,424 |
|
| Redeemable noncontrolling interest | 920 |
| | 810 |
|
| Commitments and contingencies (Note 12) |
| |
|
| Equity: | | | |
| Common stock, $1 par value: authorized - 600 million shares; issued - 412 million shares in 2015 and 2014 | 412 |
| | 412 |
|
| Additional paid-in capital | 475 |
| | 493 |
|
| Retained income | 7,636 |
| | 6,946 |
|
| Accumulated other comprehensive loss | (600 | ) | | (514 | ) |
| Less: common stock in treasury - at cost: 2015 - 146 million shares; 2014 - 140 million shares | (7,729 | ) | | (6,849 | ) |
| Total equity – controlling interests | 194 |
| | 488 |
|
| Total equity – noncontrolling interests | 49 |
| | 51 |
|
| Total equity | 243 |
| | 539 |
|
| Total liabilities and equity | $ | 8,183 |
| | $ | 6,773 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Cash Flows
|
| | | | | | | | | | | |
| (in millions) | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Operating Activities: | | | | | |
| Net income (loss) | $ | 1,268 |
| | $ | (13 | ) | | $ | 1,466 |
|
| Less: income from discontinued operations | — |
| | 178 |
| | 592 |
|
| Net income (loss) from continuing operations | 1,268 |
| | (191 | ) | | 874 |
|
| Adjustments to reconcile income (loss) from continuing operations to cash provided by operating activities from continuing operations: | | | | | |
| Depreciation | 90 |
| | 86 |
| | 86 |
|
| Amortization of intangibles | 67 |
| | 48 |
| | 51 |
|
| Provision for losses on accounts receivable | 8 |
| | 11 |
| | 22 |
|
| Deferred income taxes | 280 |
| | (245 | ) | | 43 |
|
| Stock-based compensation | 78 |
| | 100 |
| | 96 |
|
| Accrued legal and regulatory settlements | 119 |
| | 1,587 |
| | — |
|
| Other | 46 |
| | 80 |
| | 96 |
|
| Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: | | | | | |
| Accounts receivable | (118 | ) | | (9 | ) | | (35 | ) |
| Prepaid and other current assets | (4 | ) | | (7 | ) | | (29 | ) |
| Accounts payable and accrued expenses | (92 | ) | | (130 | ) | | (94 | ) |
| Unearned revenue | 129 |
| | 78 |
| | 109 |
|
| Accrued legal and regulatory settlement | (1,624 | ) | | (35 | ) | | — |
|
| Other current liabilities | (78 | ) | | (16 | ) | | (89 | ) |
| Net change in prepaid / accrued income taxes | 61 |
| | (93 | ) | | (238 | ) |
| Net change in other assets and liabilities | (35 | ) | | (55 | ) | | (110 | ) |
| Cash provided by operating activities from continuing operations | 195 |
| | 1,209 |
| | 782 |
|
| Investing Activities: | | | | | |
| Capital expenditures | (139 | ) | | (92 | ) | | (117 | ) |
| Acquisitions, including contingent payments, net of cash acquired | (2,396 | ) | | (71 | ) | | (47 | ) |
| Proceeds from dispositions | 14 |
| | 83 |
| | 51 |
|
| Changes in short-term investments | (4 | ) | | 15 |
| | (17 | ) |
| Cash used for investing activities from continuing operations | (2,525 | ) | | (65 | ) | | (130 | ) |
| Financing Activities: | | | | | |
| Additions to / (payments on) short-term debt, net | 143 |
| | — |
| | (457 | ) |
| Proceeds from issuance of senior notes, net | 2,674 |
| | — |
| | — |
|
| Dividends paid to shareholders | (363 | ) | | (326 | ) | | (308 | ) |
| Dividends and other payments paid to noncontrolling interests | (104 | ) | | (84 | ) | | (75 | ) |
| Repurchase of treasury shares | (974 | ) | | (362 | ) | | (978 | ) |
| Exercise of stock options | 86 |
| | 193 |
| | 258 |
|
| Contingent consideration payment | (5 | ) | | (11 | ) | | (12 | ) |
| Purchase of additional CRISIL shares | (16 | ) | | — |
| | (214 | ) |
| Excess tax benefits from share-based payments | 69 |
| | 128 |
| | 43 |
|
| Cash provided by (used for) financing activities from continuing operations | 1,510 |
| | (462 | ) | | (1,743 | ) |
| Effect of exchange rate changes on cash from continuing operations | (67 | ) | | (65 | ) | | (1 | ) |
| Cash (used for) provided by continuing operations | (887 | ) | | 617 |
| | (1,092 | ) |
| Discontinued Operations: | | | | | |
| Cash (used for) provided by operating activities | (129 | ) | | 18 |
| | (231 | ) |
| Cash provided by investing activities | — |
| | 320 |
| | 2,129 |
|
| Cash used for financing activities | — |
| | — |
| | (25 | ) |
| Effect of exchange rate changes on cash | — |
| | — |
| | 1 |
|
| Cash (used for) provided by discontinued operations | (129 | ) | | 338 |
| | 1,874 |
|
| Net change in cash and cash equivalents | (1,016 | ) | | 955 |
| | 782 |
|
| Cash and cash equivalents at beginning of year | 2,497 |
| | 1,542 |
| | 760 |
|
| Cash and cash equivalents at end of year | $ | 1,481 |
| | $ | 2,497 |
| | $ | 1,542 |
|
| Cash paid during the year for: | | | | | |
| Interest (including discontinued operations) | $ | 65 |
| | $ | 50 |
| | $ | 50 |
|
| Income taxes (including discontinued operations) | $ | 260 |
| | $ | 419 |
| | $ | 787 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Equity
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Common Stock $1 par | | Additional Paid-in Capital | | Retained Income | | Accumulated
Other Comprehensive Loss | | Less: Treasury Stock | | Total MHFI Equity | | Noncontrolling Interests | | Total Equity |
| Balance as of December 31, 2012 | $ | 412 |
| | $ | 492 |
| | $ | 6,525 |
| | $ | (517 | ) | | $ | 6,145 |
| | $ | 767 |
| | $ | 73 |
| | $ | 840 |
|
Comprehensive income 1 | | | | | 1,376 |
| | 321 |
| | | | 1,697 |
| | 18 |
| | 1,715 |
|
| Dividends | | | | | (315 | ) | | | | | | (315 | ) | | (10 | ) | | (325 | ) |
| Noncontrolling interest adjustments related to discontinued operations | | |
|
| |
| | | | | | — |
| | (22 | ) | | (22 | ) |
| Share repurchases | | |
|
| | | | | | 989 |
| | (989 | ) | |
| | (989 | ) |
| Employee stock plans, net of tax benefit | | | (45 | ) | | | | | | (388 | ) | | 343 |
| | | | 343 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | 11 |
| | | | | | 11 |
| | | | 11 |
|
| Increase in CRISIL ownership | | | | | (216 | ) | | | | | | (216 | ) | | $ | (17 | ) | | (233 | ) |
| Other | | | | | 3 |
| | | | | | 3 |
| | 1 |
| | 4 |
|
| Balance as of December 31, 2013 | $ | 412 |
| | $ | 447 |
| | $ | 7,384 |
| | $ | (196 | ) | | $ | 6,746 |
| | $ | 1,301 |
| | $ | 43 |
| | $ | 1,344 |
|
Comprehensive loss 1 | | | | | (115 | ) | | (318 | ) | | | | (433 | ) | | 10 |
| | (423 | ) |
| Dividends | | | | | (324 | ) | | | | | | (324 | ) | | (8 | ) | | (332 | ) |
| Share repurchases | | |
| | | | | | 352 |
| | (352 | ) | | 6 |
| | (346 | ) |
| Employee stock plans, net of tax benefit | | | 46 |
| | | | | | (249 | ) | | 295 |
| | | | 295 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | (1 | ) | | | | | | (1 | ) | | | | (1 | ) |
| Other | | | | | 2 |
| | | | | | 2 |
| |
| | 2 |
|
| Balance as of December 31, 2014 | $ | 412 |
| | $ | 493 |
| | $ | 6,946 |
| | $ | (514 | ) | | $ | 6,849 |
| | $ | 488 |
| | $ | 51 |
| | $ | 539 |
|
Comprehensive income 1 | | | | | 1,156 |
| | (86 | ) | | | | 1,070 |
| | 11 |
| | 1,081 |
|
| Dividends | | | | | (359 | ) | | | | | | (359 | ) | | (9 | ) | | (368 | ) |
| Share repurchases | | |
|
| | | | | | 1,000 |
| | (1,000 | ) | | (2 | ) | | (1,002 | ) |
| Employee stock plans, net of tax benefit | | | (18 | ) | | | | | | (120 | ) | | 102 |
| | | | 102 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | (107 | ) | | | | | | (107 | ) | | | | (107 | ) |
| Other | | | | |
| | | | | | — |
| | (2 | ) | | (2 | ) |
| Balance as of December 31, 2015 | $ | 412 |
| | $ | 475 |
| | $ | 7,636 |
| | $ | (600 | ) | | $ | 7,729 |
| | $ | 194 |
| | $ | 49 |
| | $ | 243 |
|
| |
1 | Excludes $101 million, $92 million and $73 million in 2015, 2014 and 2013, respectively, attributable to redeemable noncontrolling interest. |
See accompanying notes to the consolidated financial statements.
Notes to the Consolidated Financial Statements
1. Accounting Policies
Nature of operations
McGraw Hill Financial, Inc. (together with its consolidated subsidiaries, the “Company,” the “Registrant,” “we,” “us” or “our”) is a leading benchmarks and ratings, analytics, data and research provider serving the global capital, commodities and commercial markets. The capital markets include asset managers, investment banks, commercial banks, insurance companies, exchanges, and issuers; the commodities markets include producers, traders and intermediaries within energy, metals, petrochemicals and agriculture; and the commercial markets include professionals and corporate executives within automotive, financial services, insurance and marketing / research information services.
Our operations consist of four reportable segments: Standard & Poor’s Ratings Services (“S&P Ratings”), S&P Capital IQ and SNL, S&P Dow Jones Indices ("S&P DJ Indices") and Commodities & Commercial (“C&C”).
S&P Ratings is an independent provider of credit ratings, research and analytics to investors, issuers and market participants.
S&P Capital IQ and SNL is a global provider of multi-asset-class data, research and analytical capabilities, which integrate cross-asset analytics and desktop services.
S&P DJ Indices is a global leading index provider that maintains a wide variety of valuation and index benchmarks for investment advisors, wealth managers and institutional investors.
C&C consists of business-to-business companies specializing in commercial and commodities markets that deliver their customers access to high-value information, data, analytic services and pricing and quality benchmarks. As of August 1, 2013, we completed the sale of Aviation Week and the results have been included in C&C's results through that date.
See Note 11 – Segment and Geographic Information for further discussion on our operating segments, which are also our reportable segments.
In the fourth quarter of 2015, we began exploring strategic alternatives for J.D. Power, included in our C&C segment. We committed to and initiated an active program to sell J.D. Power in its current state that we believe is probable in the next year. As a result, we have classified the assets and liabilities of J.D. Power as held for sale in our consolidated balance sheet as of December 31, 2015. The anticipated disposal does not represent a strategic shift that will have a major effect on operations and financial results, therefore, it is not classified as a discontinued operation.
On November 3, 2014, we completed the sale of McGraw Hill Construction, which has historically been part of our C&C segment, to Symphony Technology Group for $320 million in cash. Accordingly, the results of operations for the years ended December 31, 2014 and December 31, 2013 have been reclassified to reflect the business as a discontinued operation.
We completed the sale of our McGraw-Hill Education business ("MHE") on March 22, 2013 and, accordingly, the results of operations of MHE have been reclassified to reflect the business as a discontinued operation for the year ended December 31, 2013.
See Note 2 —Acquisitions and Divestitures for further discussion on discontinued operations.
Assets and Liabilities Held for Sale and Discontinued Operations
Assets and Liabilities Held for Sale
We classify a disposal group to be sold as held for sale in the period in which all of the following criteria are met: management, having the authority to approve the action, commits to a plan to sell the disposal group; the disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such disposal group; an active program to locate a buyer and other actions required to complete the plan to sell the disposal group have been initiated; the sale of the disposal group is probable, and transfer of the disposal group is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the disposal group beyond one year; the disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
An entity that is classified as held for sale is initially measured at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a disposal group until the date of sale.
The fair value of a disposal group less any costs to sell is assessed each reporting period it remains classified as held for sale and any subsequent changes are reported as an adjustment to the carrying value of the disposal group, as long as the new carrying value does not exceed the carrying value of the disposal group at the time it was initially classified as held for sale. Upon determining that a disposal group meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group as held for sale in the current period in our consolidated balance sheets.
Discontinued Operations
Beginning on January 1, 2015, we adopted revised guidance for discontinued operations that raises the threshold for a disposal to qualify as a discontinued operation. In determining whether a disposal of a component of an entity or a group of components of an entity is required to be presented as a discontinued operation, we make a determination whether the disposal represents a strategic shift that had, or will have, a major effect on our operations and financial results. A component of an entity comprises operations and cash flows that can be clearly distinguished both operationally and for financial reporting purposes. If we conclude that the disposal represents a strategic shift, then the results of operations of the group of assets being disposed of (as well as any gain or loss on the disposal transaction) are aggregated for separate presentation apart from our continuing operating results in the consolidated financial statements.
For the years ended December 31, 2014 and 2013, we applied the previous guidance for discontinued operations in determining whether a group of assets disposed or to be disposed of should be presented as a discontinued operation. We determined whether the group of assets being disposed of comprised a component of the entity. We also determined whether the cash flows associated with the group of assets had been or would have been eliminated from our ongoing operations as a result of the disposal transaction and whether we would have had significant continuing involvement in the operations of the group of assets after the disposal transaction. If we concluded that the cash flows had been eliminated and we had no significant continuing involvement, then the results of operations of the group of assets being disposed of (as well as any gain or loss on the disposal transaction) were aggregated for separate presentation for separate presentation apart from our continuing operating results in the consolidated financial statements.
See Note 2 – Acquisitions and Divestitures for a summary of discontinued operations. Unless otherwise indicated, all disclosures and amounts in the notes to our consolidated financial statements relate to our continuing operations.
Principles of consolidation
The consolidated financial statements include the accounts of all subsidiaries and our share of earnings or losses of joint ventures and affiliated companies under the equity method of accounting. All significant intercompany accounts and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents include ordinary bank deposits and highly liquid investments with original maturities of three months or less that consist primarily of money market funds with unrestricted daily liquidity and fixed term time deposits. Such investments and bank deposits are stated at cost, which approximates market value, and were $1.5 billion and $2.5 billion as of December 31, 2015 and 2014, respectively. These investments are not subject to significant market risk.
Short-term investments
Short-term investments are securities with original maturities greater than 90 days that are available for use in our operations in the next twelve months. The short-term investments, primarily consisting of certificates of deposit, are classified as held-to-maturity and therefore are carried at cost. Interest and dividends are recorded into income when earned.
Accounts receivable
Credit is extended to customers based upon an evaluation of the customer’s financial condition. Accounts receivable, which include billings consistent with terms of contractual arrangements, are recorded at net realizable value.
Allowance for doubtful accounts
The allowance for doubtful accounts reserve methodology is based on historical analysis, a review of outstanding balances and current conditions. In determining these reserves, we consider, amongst other factors, the financial condition and risk profile of our customers, areas of specific or concentrated risk as well as applicable industry trends or market indicators.
Deferred technology costs
We capitalize certain software development and website implementation costs. Capitalized costs only include incremental, direct costs of materials and services incurred to develop the software after the preliminary project stage is completed, funding has been committed and it is probable that the project will be completed and used to perform the function intended. Incremental costs are expenditures that are out-of-pocket to us and are not part of an allocation or existing expense base. Software development and website implementation costs are expensed as incurred during the preliminary project stage. Capitalized costs are amortized from the year the software is ready for its intended use over its estimated useful life, three to seven years, using the straight-line method. Periodically, we evaluate the amortization methods, remaining lives and recoverability of such costs. Capitalized software development and website implementation costs are included in other non-current assets and are presented net of accumulated amortization. Gross deferred technology costs were $128 million and $123 million as of December 31, 2015 and 2014, respectively. Accumulated amortization of deferred technology costs was $72 million and $55 million as of December 31, 2015 and 2014, respectively.
Fair Value
Certain assets and liabilities are required to be recorded at fair value and classified within a fair value hierarchy based on inputs used when measuring fair value. We have an immaterial amount of forward exchange contracts that are adjusted to fair value on a recurring basis.
Other financial instruments, including cash and cash equivalents and short-term investments, are recorded at cost, which approximates fair value because of the short-term maturity and highly liquid nature of these instruments. The fair value of our long-term debt borrowings were $3.6 billion and $0.9 billion as of December 31, 2015 and 2014, respectively, and was estimated based on quoted market prices.
Accounting for the impairment of long-lived assets (including other intangible assets)
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Upon such an occurrence, recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to current forecasts of undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized equal to the amount by which the carrying amount of the asset exceeds the fair value of the asset. For long-lived assets held for sale, assets are written down to fair value, less cost to sell. Fair value is determined based on market evidence, discounted cash flows, appraised values or management’s estimates, depending upon the nature of the assets.
On July 31, 2014, we completed the sale of the Company's aircraft to Harold W. McGraw III, then Chairman of the Company's Board of Directors and former President and CEO of the Company for a purchase price of $20 million. During the second quarter of 2014, we recorded a non-cash impairment charge of $6 million within other (income) loss in our consolidated statement of income as a result of the pending sale. See Note 13 – Related Party Transactions for further discussion.
On June 30, 2014, we completed the sale of our data center to Quality Technology Services, LLC (“QTS”) which owns, operates, and manages data centers. Net proceeds from the sale of $58 million were received in July of 2014. The sale includes all of the facilities and equipment on the south campus of our East Windsor, New Jersey location, inclusive of the rights and obligations associated with an adjoining solar power field. The sale resulted in an expense of $3 million recorded within other loss (income) in our consolidated statement of income, which is in addition to the non-cash impairment charge of $36 million we recorded in the fourth quarter of 2013 to adjust the value facilities and associated infrastructure classified as held for sale to their fair value.
During the fourth quarter of 2013, we also incurred a $26 million non-cash impairment charge associated with an intangible asset acquired through the formation of our S&P Dow Jones Indices LLC joint venture.
Goodwill and other indefinite-lived intangible assets
Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill and other intangible assets with indefinite lives are not amortized, but instead are tested for impairment annually during the fourth quarter each year, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We have four reporting units with goodwill that are evaluated for impairment.
We initially perform a qualitative analysis evaluating whether any events and circumstances occurred or exist that provide evidence that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount. If, based on our evaluation we do not believe that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount, no quantitative impairment test is performed. Conversely, if the results of our qualitative assessment determine that it is more likely than not that the fair value of any of our reporting units is less than their respective carrying amounts we perform a two-step quantitative impairment test.
When conducting the first step of our two step impairment test to evaluate the recoverability of goodwill at the reporting unit level, the estimated fair value of the reporting unit is compared to its carrying value including goodwill. Fair value of the reporting units are estimated using the income approach, which incorporates the use of a discounted free cash flow (“DCF”) analyses and are corroborated using the market approach, which incorporates the use of revenue and earnings multiples based on market data. The DCF analyses are based on the current operating budgets and estimated long-term growth projections for each reporting unit. Future cash flows are discounted based on a market comparable weighted average cost of capital rate for each reporting unit, adjusted for market and other risks where appropriate. In addition, we analyze any difference between the sum of the fair values of the reporting units and our total market capitalization for reasonableness, taking into account certain factors including control premiums.
If the fair value of the reporting unit is less than the carrying value, a second step is performed which compares the implied fair value of the reporting unit’s goodwill to the carrying value of the goodwill. The fair value of the goodwill is determined based on the difference between the fair value of the reporting unit and the net fair value of the identifiable assets and liabilities of the reporting unit. If the implied fair value of the goodwill is less than the carrying value, the difference is recognized as an impairment charge.
We evaluate the recoverability of indefinite-lived intangible assets by first performing a qualitative analysis evaluating whether any events and circumstances occurred that provide evidence that it is more likely than not that the indefinite-lived asset is impaired. If, based on our evaluation of the events and circumstances that occurred during the year we do not believe that it is more likely than not that the indefinite-lived asset is impaired, no quantitative impairment test is performed. Conversely, if the results of our qualitative assessment determine that it is more likely than not that the indefinite-lived asset is impaired a quantitative impairment test is performed. If necessary, the impairment test is performed by comparing the estimated fair value of the intangible asset to its carrying value. If the indefinite-lived intangible asset carrying value exceeds its fair value, an impairment analysis is performed using the income approach. The fair value of loss is recognized in an amount equal to that excess.
Significant judgments inherent in these analyses include estimating the amount and timing of future cash flows and the selection of appropriate discount rates, royalty rates and long-term growth rate assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit and indefinite-lived intangible asset and could result in an impairment charge, which could be material to our financial position and results of operations.
We performed our impairment assessment of goodwill and indefinite-lived intangible assets and concluded that no impairment existed for the years ended December 31, 2015, 2014 and 2013.
Foreign currency translation
We have operations in many foreign countries. For most international operations, the local currency is the functional currency. For international operations that are determined to be extensions of the parent company, the United States ("U.S.") dollar is the functional currency. For local currency operations, assets and liabilities are translated into U.S. dollars using end of period exchange rates, and revenue and expenses are translated into U.S. dollars using weighted-average exchange rates. Foreign currency translation adjustments are accumulated in a separate component of equity.
Revenue recognition
Revenue is recognized as it is earned when services are rendered. We consider amounts to be earned once evidence of an arrangement has been obtained, services are performed, fees are fixed or determinable and collectability is reasonably assured. Revenue relating to products that provide for more than one deliverable is recognized based upon the relative fair value to the customer of each deliverable as each deliverable is provided. Revenue relating to agreements that provide for more than one service is recognized based upon the relative fair value to the customer of each service component as each component is earned. If the fair value to the customer for each service is not objectively determinable, management makes its best estimate of the services’ stand-alone selling price and records revenue as it is earned over the service period. For arrangements that include multiple services, fair value of the service components are determined using an analysis that considers cash consideration that would be received for instances when the service components are sold separately. Advertising revenue is recognized when the page is run. Subscription income is recognized over the related subscription period.
Depreciation
The costs of property and equipment are depreciated using the straight-line method based upon the following estimated useful lives: buildings and improvements from 15 to 40 years and equipment and furniture from 2 to 10 years. The costs of leasehold improvements are amortized over the lesser of the useful lives or the terms of the respective leases.
Advertising expense
The cost of advertising is expensed as incurred. We incurred $33 million, $35 million and $41 million in advertising costs for the years ended December 31, 2015, 2014 and 2013, respectively.
Stock-based compensation
Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized over the requisite service period, which typically is the vesting period. Stock-based compensation is classified as both operating-related expense and selling and general expense in the consolidated statements of income.
Income taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize liabilities for uncertain tax positions taken or expected to be taken in income tax returns. Accrued interest and penalties related to unrecognized tax benefits are recognized in interest expense and operating expense, respectively.
Judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and unrecognized tax benefits. In determining the need for a valuation allowance, the historical and projected financial performance of the operation that is recording a net deferred tax asset is considered along with any other pertinent information.
We file income tax returns in the U.S. federal jurisdiction, various states, and foreign jurisdictions, and we are routinely under audit by many different tax authorities. We believe that our accrual for tax liabilities is adequate for all open audit years based on our assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. It is possible that examinations will be settled prior to December 31, 2016. If any of these tax audit settlements do occur within that period we would make any necessary adjustments to the accrual for unrecognized tax benefits. Until formal resolutions are reached between us and the tax authorities, the determination of a possible audit settlement range with respect to the impact on unrecognized tax benefits is not practicable. On the basis of present information, our opinion is that any assessments resulting from the current audits will not have a material effect on our consolidated financial statements.
Redeemable Noncontrolling Interest
The agreement with the minority partners of our S&P Dow Jones Indices LLC joint venture discussedestablished in Note 3 —Acquisitions and Divestitures,June of 2012 contains redemption features whereby interests held by our minority partners isare redeemable botheither (i) at the option of the holder andor (ii) upon the occurrence of an event that is not solely within our control. Since redemption of the noncontrolling interest is outside of our control, this interest is presented on our consolidated balance sheets under the caption “Redeemable noncontrolling interest.” If the interest were to be redeemed, we would be required to purchase all of such interest at fair value on the date of redemption. We adjust the redeemable noncontrolling interest each reporting period to its estimated redemption value, but never less than its initial fair value, using a combination of an income and market valuation approach. Our income and market valuation approaches may incorporate Level 3 measures for instances when observable inputs are not available, including assumptions related to expected future net cash flows, long-term growth rates, the timing and nature of tax attributes, and the redemption features. Any adjustments to the redemption value will impact retained income. See Note 98 – Equity, for further detail.
Contingencies
We accrue for loss contingencies when both (a) information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements and (b) the amount of loss can reasonably be estimated. We continually assess the likelihood of any adverse judgments or outcomes to our contingencies, as well as potential amounts or ranges of probable losses, and recognize a liability, if any, for these contingencies based on an analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Because many of these matters are resolved over long periods of time, our estimate of liabilities may change due to new developments, changes in assumptions or changes in our strategy related to the matter. When we accrue for loss contingencies and the reasonable estimate of the loss is within a range, we record its best estimate within the range. We disclose an estimated possible loss or a range of loss when it is at least reasonably possible that a loss may have been incurred.
Recent Accounting Standards
In February 2013,November of 2015, the Financial Accounting Standards Board (“FASB”("FASB") issued amended guidance expandingto simplify the disclosure requirements for amounts reclassified outpresentation of accumulated other comprehensive income.deferred income taxes. The amendments require an entity to present, either on the faceguidance requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of the statement where net income is presented or in the notes to its financial statements, details of significant items reclassified in their entirety out of accumulated other comprehensive income and identification of the respective line items effecting net income for instances when reclassification is required under U.S. GAAP. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity will be required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by type. The amendments are effective prospectively for our reporting period beginning January 1, 2013.
In July 2012, FASB issued guidance that simplified how an entity tests for impairment of indefinite-lived intangible assets. Under the revised guidance, an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity determines that it is more likely than not that the indefinite-lived intangible asset is impaired, then the entity is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value of the indefinite-lived intangible asset with its carrying amount. Otherwise, no further testing is required. Theposition. This guidance is effective for interim and annualreporting periods beginning after SeptemberDecember 15, 2012;2016; however, early adoption is permitted. We do not expect the adoption of this guidance to have a significant impact on our consolidated financial statements.
In September of 2015, the FASB issued guidance intended to simplify the accounting for measurement-period adjustments made to provisional amounts recognized in a business combination. The guidance eliminates the requirement to retrospectively account for those adjustments. This guidance is effective for reporting periods beginning after December 15, 2015. We do not expect the adoption of this guidance to have a significant impact on our consolidated financial statements.
In April of 2015, the FASB issued new accounting guidance intended to simplify the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with the presentation for debt discounts. This guidance is effective for reporting periods beginning after December 15, 2015 and must be applied on a retrospective basis with early adoption permitted. We adopted the FASB'sthis guidance during our fourth quarter endedupon issuance and prior year amounts have been reclassified to conform with current year presentation. As of December 31, 2012. Adoption2014, $4 million of debt issuance costs were reclassified from other non-current assets to long-term debt, less current portion. The adoption of this guidance did not have a significant impact on our consolidated financial position, results of operations or cash flows.statements.
In September 2011,February of 2015, the FASB issued guidance that simplified how an entity tests goodwill for impairment. The revised guidance provides an entity the optionrequires management to make a qualitative evaluation about the likelihood of goodwill impairment. Underevaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. This guidance an entity is permitted to first assess qualitative factors to determine whether goodwill impairment exists prior to performing analyses comparingeffective for reporting periods beginning after December 15, 2015; however, early adoption is permitted. We do not expect the fair value of a reporting unit to its carrying amount. If, after assessing the totality of events or circumstances, an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the quantitative impairment test is required. Otherwise, no further testing is required. We adopted the FASB’s guidance during our fourth quarter ended December 31, 2011. The adoption of thethis guidance did notto have a significant impact on our consolidated financial position, results of operations or cash flows.statements.
In June 2011,January of 2015, the FASB issued guidance that modified how comprehensive income is presented in an entity’s financial statements. The guidance issued requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements and eliminates the option to present the componentsconcept of other comprehensive income as part of the statement of equity. The revised financial statementreporting extraordinary items, but retains current presentation for comprehensive income was effective on January 1, 2012 and has been incorporated into this Form 10-K.
In May 2011, the FASB issued new guidance for fair value measurements intended to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards. The amended guidance providesfor an event or transaction that is of an unusual nature or of a consistent definitiontype that indicates infrequency of fair value to ensureoccurrence. Transactions that the fair value measurementmeet both criteria would now also follow such presentation and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. The amendedrequirements. This guidance changes certain fair value measurement principles and enhancesis effective for reporting periods beginning after December 15, 2015; however, early adoption is permitted. We do not expect the disclosure requirements, particularly for Level 3 fair value measurements. The amendedadoption of this guidance which went into effect for us beginning January 1, 2012, did notto have a significant impact on our consolidated financial position, results of operations or cash flows.statements.
ReclassificationIn August of 2014, the FASB issued guidance that requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. This guidance is effective for reporting periods beginning after December 15, 2016; however, early adoption is permitted. We do not expect the adoption of this guidance to have a significant impact on our consolidated financial statements.
In additionMay of 2014, the FASB and the International Accounting Standards Board (“IASB”) issued jointly a converged standard on the recognition of revenue from contracts with customers which is intended to improve the effectsfinancial reporting of revenue and comparability of the top line in financial statements globally. The core principle of the new standard is for the recognition of revenue to depict the transfer of goods or services to customers in amounts that reflect the payment to which the company expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced revenue disclosures, provide guidance for transactions that were not previously addressed comprehensively and improve guidance for multiple-element arrangements. In August of 2015, the FASB issued guidance deferring the effective date of the new revenue standard by one year. The new guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. While we will continue with our evaluation process, initially, we believe this guidance may have an impact on the accounting for certain proprietary consulting arrangements in our C&C segment as well as the accounting for certain integrated desktop service revenue arrangements offered in our S&P Capital IQ and SNL segment.
In April of 2014, the FASB issued final guidance that raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations presentation,and certain other disposals that do not meet the definition of a discontinued operation. The guidance is intended to reduce the frequency of disposals reported as discontinued operations by focusing on strategic shifts that have or will have a major effect on an entity’s operations and financial results. In addition, the guidance permits companies to have continuing cash flows and significant continuing involvement with the disposed component. We adopted the amendments to this guidance on January 1, 2015.
Reclassification
Certain prior year amounts have been reclassified for comparability purposes.
2. GrowthAcquisitions and Value Plan & Discontinued OperationsDivestitures
On September 12, 2011, we announced that our Board of Directors had unanimously approved a comprehensive Growth and Value Plan that includes separation into two companies: McGraw Hill Financial, focused on providing essential information to the capital, commodities and commercial markets, and McGraw-Hill Education ("MHE"), focused on education products and services and digital learning. The Growth and Value Plan has been focused on accelerating growth and increasing shareholder value through not only this separation, but also through substantial cost-cutting initiatives and increased share repurchases.2015
As we approach the completion of the Growth and Value Plan we have achieved our objectives under our Growth and Value Plan relating to the separation of MHE, cost reductions, increased shareholder return and investing / divesting in targeted assets that position us for long-term growth.
On November 26, 2012, we entered into a definitive agreement to sell MHE to investment funds affiliated with Apollo Global Management, LLC, for a purchase price of $2.5 billion subject to certain closing adjustments. As part of this transaction, McGraw-Hill will receive $250 million in senior unsecured notes issued by the purchaser at an annual interest rate of 8.5%. We are currently in the process of determining the fair value of these notes. For all periods presented in this Form 10-K, the results of operations of MHE have been reclassified to reflect the business as a discontinued operation and the assets and liabilities of the business have been reclassified as held for sale in the consolidated balance sheets. The sale of MHE is subject to various closing conditions and is anticipated to close in the first quarter of 2013. See Item 1a, Risk Factors, in this Form 10-K for updates to certain risk factors related to the sale.
The table below summarizes our costs related to the Growth and Value Plan including restructuring charges for the year ended December 31, 2012:
|
| | | | | | | |
| (in millions) | | | |
| | Continuing | | Discontinued |
| Professional fees | $ | 117 |
| | $ | 17 |
|
| Restructuring charges | 68 |
| | 39 |
|
| Transaction costs for our S&P Dow Jones Indices LLC joint venture | 15 |
| | — |
|
| Charges related to lease commitments | 8 |
| | 3 |
|
| Miscellaneous charges | 18 |
| | 2 |
|
| | $ | 226 |
| | $ | 61 |
|
These are costs necessary to enable separation, reduce our cost structure, accelerate growth and increase shareholder value. Total costs incurred since the Growth and Value Plan was announced in September of 2011 have been $297 million.
The Growth and Value Plan costs are included in selling and general expenses in our consolidated statements of income as follows:
|
| | | | | | | |
| (in millions) | Years ended December 31, |
| | 2012 | | 2011 |
| Growth and Value Plan costs | $ | 226 |
| | $ | 10 |
|
| Other selling and general expenses | 1,483 |
| | 1,377 |
|
| Total selling and general expenses | $ | 1,709 |
| | $ | 1,387 |
|
In addition to the sale of MHE, our discontinued operations for the years ended December 31, 2011 and 2010 also include the Broadcasting Group as we entered into a definitive agreement on October 3, 2011 with The E.W. Scripps Company to sell the Broadcasting Group. The sale was completed on December 30, 2011, when we received net proceeds of approximately $216 million. As a result of the sale, we recognized a pre-tax gain of $123 million, which was included in (loss) income from discontinued operations. For the year ended December 31, 2011 and prior periods presented, we reported our Broadcasting Group, previously included in our C&C segment, as a discontinued operation. The results of operations of the Broadcasting Group have been reclassified to reflect the business as a discontinued operation and assets and liabilities of the business have been removed from the consolidated balance sheet as of December 31, 2011.
The key components of (loss) income from discontinued operations consist of the following:
|
| | | | | | | | | | | |
| (in millions) | Years ended December 31, |
| | 2012 | | 2011 | | 2010 |
| Revenue | $ | 2,062 |
| | $ | 2,382 |
| | $ | 2,529 |
|
| Expenses | 2,287 |
| | 2,035 |
| | 2,135 |
|
| Operating (loss) profit | (225 | ) | | 347 |
| | 394 |
|
| Interest income, net | (2 | ) | | (3 | ) | | (2 | ) |
| (Loss) income before taxes on (loss) income | (223 | ) | | 350 |
| | 396 |
|
| Provision for taxes on (loss) income | 11 |
| | 116 |
| | 144 |
|
| (Loss) income from discontinued operations before gain on sale | (234 | ) | | 234 |
| | 252 |
|
| Gain from discontinued operations, net of taxes of $48 | — |
| | 74 |
| | — |
|
| (Loss) income from discontinued operations, net of tax | $ | (234 | ) | | $ | 308 |
| | $ | 252 |
|
Results from discontinued operations for the year ended December 31, 2012 included several non-recurring items:
Intangible asset impairments of $497 million that consisted of goodwill, prepublication and inventory assets at MHE's School Education Group ("SEG").
| |
◦ | As a result of the offer we received from Apollo Global Management, LLC in the fourth quarter of 2012, we performed a goodwill impairment review at MHE, which resulted in a full impairment of goodwill of $478 million at SEG.
|
| |
◦ | An impairment charge of $19 million was recorded on certain prepublication and inventory assets as targeted school programs were shut down.
|
Restructuring charges of $39 million consisting primarily of employee severance costs related to a workforce reduction of approximately 530 positions.
Direct transaction costs of $17 million for legal and professional fees related to the sale of MHE.
A charge related to a lease commitment of $3 million.
These charges were partially offset by a vacation accrual reversal of $17 million related to a change in our vacation policy as discussed in Note 1 –Accounting Policies.
The components of assets and liabilities classified as discontinued operations in the consolidated balance sheets consist of the following:
|
| | | | | | | |
| (in millions) | December 31, |
| | 2012 | | 2011 |
| Accounts receivable, net | $ | 333 |
| | $ | 343 |
|
| Property and equipment, net | 122 |
| | 127 |
|
| Goodwill | 469 |
| | 944 |
|
| Other intangible assets, net | 156 |
| | 181 |
|
| Inventories, net | 235 |
| | 262 |
|
| Prepublication costs | 304 |
| | 325 |
|
| Other assets | 321 |
| | 326 |
|
| Assets held for sale | $ | 1,940 |
| | $ | 2,508 |
|
| | | | |
| Accounts payable and accrued expenses | 123 |
| | 157 |
|
| Unearned revenue | 192 |
| | 117 |
|
| Other liabilities | 349 |
| | 445 |
|
| Liabilities held for sale | $ | 664 |
| | $ | 719 |
|
3. Acquisitions and Divestitures
Acquisitions
For the year ended December 31, 2012,2015, we paid cash for acquisitions, net of cash acquired, totaling $177 million. None$2.4 billion. We used the net proceeds of our acquisitions were material either individually or$2.0 billion of senior notes issued in August of 2015 and cash on hand to finance the aggregate, including the pro forma impact on earnings.acquisition of SNL. All other acquisitions were funded with cash flows from operations. Acquisitions completed during the year ended December 31, 20122015 by segment included:
S&P DJ Indices
On June 29, 2012, we closed our transaction with CME Group, Inc. (“CME Group”) and CME Group Index Services LLC (“CGIS”), a joint venture between CME Group and Dow Jones & Company, Inc., to form a new company, S&P Dow Jones Indices LLC. See below for further detail related to this transaction.
S&P Capital IQ and SNL
On June 29, 2012,September 1, 2015 (the "Acquisition Date"), we acquired Credit Market Analysis Limited (“CMA”SNL Financial LC ("SNL") fromfor $2.225 billion in cash, subject to working capital adjustments. SNL's results of operations have been included in our consolidated statements of income subsequent to the CME Group. CMA provides independent data concerning the over-the-counter markets. CMA's data and technology will enhance our capability to provide pricing and related over-the-counter information.
On April 3, 2012, we completed the acquisition of QuantHouse, an independentAcquisition Date. SNL is a global provider of end-to-end systematic low-latency marketnews, data, solutions. The acquisition allows usand analytical tools to offer real-time monitors, derived data sets and analytics as well as the ability to package and resell this data as part of a core solution.
On February 8, 2012, we completed the acquisition of R² Technologies (“R²”). R² provides advanced risk and scenario-based analytics to traders, portfolio and risk managers for pricing, hedging and capital management across asset classes.
C&C
On November 1, 2012, we completed the acquisition of Kingsman SA (“Kingsman”), a privately-held, Switzerland-based provider of price information and analytics for the global sugar and biofuels markets. The acquisition of Kingsman will expand our presence in sugar and biofuels information markets and has the potential to provide growthfive sectors in the global agriculturaleconomy: financial services, real estate, energy, media & communications, and metals & mining. SNL delivers information markets.through its suite of web, mobile and direct data feed platforms that helps clients, including investment and commercial banks, investors, corporations, and regulators make decisions, improve efficiency, and manage risk.
S&P Ratings
On July 4, 2012, CRISIL, our majority owned Indian credit rating agency, completed the acquisition of Coalition Development Ltd. (“Coalition”), a privately-held U.K. analytics company, and its subsidiaries. Coalition provides high-end analytics to leading global investment banks and other financial services firms. Coalition has been integrated into CRISIL's Global Research & Analytics business.
Our acquisitions during 2012 were accounted for using the purchase method. Under the purchase method, the excess of the purchase price over the fair value of the net assets acquired is allocated to goodwill and other intangibles. Intangible assets recorded for all transactions are amortized using the straight-line method for periods not exceeding 20 years. None of the goodwill acquired from our acquisitions during 2012 will be deductible for tax purposes.
Acquisition of Dow Jones Index Business
We own 73% and CME Group and CGIS collectively own 27% of S&P Dow Jones LLC. In exchange for their 27% minority interest, CME Group and CGIS contributed their Dow Jones Index (“DJI”) business; in exchange for our 73% and controlling interest, we contributed our Standard & Poor's Index (“S&P Index”) business. The DJI business focuses on the development of financial benchmarks used by licensees to create exchange-traded funds, option contracts and futures contracts traded on exchanges as well as used as a metric to evaluate economic performance. The combination of these businesses creates the world's premier provider of financial market indices; we expect to increase revenue through international and asset-class expansion, new product development, enhanced market data offerings and increased cross-selling opportunities. The pro forma impact on revenue and earnings from our joint venture with the DJI business was not material to our consolidated results for the year ended December 31, 2012.
The terms of the operating agreement of S&P Dow Jones Indices LLC contain redemption features whereby interests held by minority partners are redeemable. See Note 9 – Equity for further discussion.
Acquisition-Related Expenses
During the year ended December 31, 2012, we2015, the Company incurred $15approximately $37 million of acquisition-related costs related to the formationacquisition of S&P Dow Jones Indices LLC.SNL. These expenses are included in selling and general expenses in our consolidated statementstatements of income.
Preliminary Allocation of Purchase Price
Because we consolidate S&P Dow Jones Indices LLC, we have appliedOur acquisition of SNL was accounted for using the purchase method. Under the purchase method, the excess of accounting to the S&P Dow Jones Indices LLC contributed business. DJI's results of operations have been included in our consolidated results of operations subsequent to June 29, 2012 (the "Acquisition Date").
Thepurchase price over the fair value of the DJI businessnet assets acquired of $792 million was estimated by applying a market approachis allocated to goodwill and an income approach. This fair value measurementother intangibles. The goodwill recognized is based on significant inputs not observable in the marketlargely attributable to anticipated operational synergies and thus represents a Level 3 measurement. The fair value estimates of the proportionate shares of the contributed businesses are based on, but not limited to, future expected cash flows, appropriate discount rates ranging from 10% to 11%, long term growth rates of 2.5% to 3.5%, assumed financial multiples of companies deemed to be similar to the DJI, and market rate assumptions for contractual obligations. S&P Index continues to be recorded at its historical or carry-over basis.
At the Acquisition Date, our noncontrolling interest has been recorded at the fair value of DJI we acquired plus the proportionate interest of the S&P Index business at our carry-over basis. As of June 30, 2012, we recorded a redeemable noncontrolling interest in our consolidated financial statements (see Note 9 – Equity for further discussion) at the preliminary fair value of 27% of S&P Dow Jones Indices LLC or $792 million due to the redemption provisions described above, representing CME Group's and CGIS' interest in S&P Dow Jones Indices LLC.
The tables below present the consideration transferred and the allocation of purchase price to the assets and liabilities of the DJI business acquiredopportunities as a result of the transaction.
Consideration Transferred
|
| | | |
| (in millions) | |
| Fair value of 27% of S&P Index | $ | 571 |
|
| Fair value of redeemable noncontrolling interest associated with net assets acquired | 221 |
|
| Total | $ | 792 |
|
Purchase Price Allocation
|
| | | |
| (in millions) | |
| Current assets | $ | 79 |
|
| Intangible assets: | |
| Indefinite-lived intangibles | 470 |
|
| Customer relationships | 110 |
|
| Other intangibles | 33 |
|
| Goodwill | 111 |
|
| Current liabilities | (11 | ) |
| Total net assets | $ | 792 |
|
acquisition. The intangible assets, excluding goodwill and indefinite-lived intangibles, will be amortized over their anticipated useful lives of between 510 and 2018 years which will be determined when we finalize our purchase price allocation.
Income Taxes
We are responsible for the tax matters for S&P Dow Jones Indices LLC, including the filing of returns and the administration of any proceedings with taxing authorities. For U.S. federal income tax purposes, S&P Dow Jones Indices LLC is treated as a partnership. The income of S&P Dow Jones Indices LLC will flow through and be subject to tax at the partners' level. However S&P Dow Jones Indices LLC is expected to incur current and deferred income taxes in a limited number of states and localities and its foreign subsidiaries are expected to incur immaterial current and deferred foreign income taxes.
We recognized $216 million of non-current deferred tax liabilities in connection with CME Group and CGIS acquiring an indirect noncontrolling interest in the S&P Index business in exchange for our acquisition of a portion of our interest in the DJI business. Because we maintained control of the S&P Index business, the excess of fair value received over historical carrying value and the related tax impact were recorded in additional paid-in capital.
Goodwill and Identifiable Intangibles
Goodwill consists primarily of intangible assets that do not qualify for separate recognition, including assembled workforce, noncontractual relationships and agreements. The goodwill is not expected to be deductible for tax purposes.
ForThe following table presents the yearpreliminary allocation of purchase price to the assets and liabilities of SNL as a result of the acquisition.
|
| | | |
| (in millions) | |
| Current assets | $ | 23 |
|
| Property, plant and equipment | 19 |
|
| Goodwill | 1,563 |
|
| Other intangible assets, net: | |
| Databases and software | 421 |
|
| Customer relationships | 162 |
|
| Tradenames | 185 |
|
| Other intangibles | 4 |
|
| Other intangible assets, net | 772 |
|
| Other non-current assets | 1 |
|
| Total assets acquired | 2,378 |
|
| Current liabilities | (23 | ) |
| Unearned revenue | (117 | ) |
| Other non-current liabilities | (4 | ) |
| Total liabilities acquired | (144 | ) |
| Net assets acquired | $ | 2,234 |
|
The Company has performed a preliminary valuation analysis of the fair market value of assets and liabilities of the SNL Financial business. The final purchase price allocation will be determined when the Company has completed the detailed valuations and necessary calculations. The final allocation could differ materially from the preliminary allocation. The final allocation may include (1) changes in fair values of property, plant and equipment, (2) changes in allocations to intangible assets as well as goodwill and (3) other changes to assets and liabilities.
Supplemental Pro Forma Information
Supplemental information on an unaudited pro forma basis is presented below for the years ended December 31, 2011, we completed acquisitions totaling $194 million. None2015 and 2014 as if the acquisition of our acquisitions were material either individually or in the aggregate, including theSNL occurred on January 1, 2014. The pro forma impactfinancial information is presented for comparative purposes only, based on earnings. All acquisitions were funded with cash flows from operations. Acquisitionsestimates and assumptions, which the Company believes to be reasonable but not necessarily indicative of the consolidated financial position or results of operations in future periods or the results that actually would have been realized had this acquisition been completed duringat the year ended December 31, 2011 included:beginning of 2015. The unaudited pro forma information includes intangible asset charges and incremental borrowing costs as a result of the acquisition, net of related tax, estimated using the Company's effective tax rate for continuing operations for the periods presented.
On
|
| | | | | | |
| (in millions) | Year Ended December 31, |
| | 2015 | 2014 |
| Pro forma revenue | $ | 5,477 |
| $ | 5,275 |
|
| Pro forma net income (loss) from continuing operations | $ | 1,258 |
| $ | (251 | ) |
C&C
In July 1, 2011,of 2015, we acquired the entire issued share capital of Petromedia Ltd and outstanding sharesits operating subsidiaries (“Petromedia”), an independent provider of Steel Business Briefing Group (the “SBB Group”data, intelligence, news and tools to the global fuels market that offers a suite of products that provides clients with actionable data and intelligence that enable informed decisions, minimize risk and increase efficiency. We accounted for the acquisition of Petromedia using the purchase method of accounting. The acquisition of Petromedia is not material to our consolidated financial statements.
In July of 2015, we acquired National Automobile Dealers Association's Used Car Guide (“UCG”), a privately held U.K. company and leading provider of news, pricingU.S. retail, trade-in and analyticsauction used-vehicle values. The acquisition of UCG expanded our analytical and modeling capabilities while deepening our presence in auto finance and auto insurance, and enriching retail solutions. We accounted for the acquisition of UCG using the purchase method of accounting. The acquisition of UCG is not material to the global steel market. The SBB Group provides subscription-based, electronic products to the steel industry and its participants through two principal businesses, Steel Business Briefing and The Steel Index. The SBB Group is included within Platts, partour consolidated financial statements.
Following our acquisition of our C&C segment. In connection with the preliminaryUCG, we made a contingent purchase price allocation, estimates of the fair values of long-lived and intangible assets havepayment in 2015 for $5 million that has been determined utilizing currently available information and are subject to finalization.
On January 3, 2011, we acquired all of the issued and outstanding membership interest units of Bentek Energy LLC (“Bentek”), which is included as part of our C&C segment. Bentek offers its customers a comprehensive portfolio of data, information and analytics productsreflected in the natural gas and liquids sector. The primary purposeconsolidated statement of the acquisition was to acquire Bentek’s knowledge, skill and expertise in gathering high-quality detailed data and their ability to identify key relationships within the data critical to industry participants.cash flows as a financing activity.
OurFor acquisitions of the SBB Group and Bentekduring 2015 that were accounted for using the purchase method. Under the purchase method, the excess of the purchase price over the fair value of the net assets acquired is allocated to goodwill and other intangibles. Intangible assets recorded for all transactions are amortized using the straight-line method for periods not exceeding 12 years. The goodwill acquired from the Bentek acquisition will be deductible for tax purposes; the goodwill acquired from the SBB Group acquisition will not be deductible for tax purposes.18 years.
2014
For the year ended December 31, 2010, our acquisition and investment activities totaled $327 million.2014, we paid cash for acquisitions, net of cash acquired, totaling $82 million. None of our acquisitions or investments waswere material either individually or in the aggregate, including the pro forma impact on earnings. All acquisitions were funded with cash flows from operations. Acquisitions and investment activities completed during the year ended December 31, 20102014 by segment included:
S&P Ratings
On December 3, 2010,In October of 2014, we acquired BRC Investor Services S.A. (“BRC”), a Colombia-based ratings firm providing risk classifications of banks, financial services providers, insurance companies, corporate bonds and structured issues that will expand our majority owned subsidiary, Crisil Ltd., acquired substantially allpresence in the assets and certain liabilitiesLatin American credit markets. We accounted for the acquisition of Pipal Research Corporation (“Pipal”), an Indian-based knowledge process outsourcing company focused on providing information to enable management teams to make more informed strategic, operational, and marketing decisions across a broad rangeBRC using the purchase method of industries.accounting. The acquisition is not material to our consolidated financial statements.
Following CRISIL's acquisition of Pipal will enable Crisil, which is partCoalition Development Ltd. ("Coalition") that occurred in July of our S&P Ratings segment, to expand its service offerings that can be offered to its traditional customer base.
On September 20, 2010, we acquired substantially all the assets and certain liabilities of TheMarkets.com LLC, a company focused on providing real-time investment information to brokers and institutional investors. This acquisition is consistent with S&P Capital IQ's focus on creating strategic value through providing access to investment research, data, and analytics to customers that facilitates informed investment decisions.
In April of 2010,2012, we made a $5contingent purchase price payment in 2014 for $11 million contingent payment related to an asset acquisition that has been reflected in 2008, which is partthe consolidated statement of our S&P Capital IQ segment.
cash flows as a financing activity.
C&C
In July of 2014, we acquired Eclipse Energy Group AS and its operating subsidiaries (“Eclipse”), which provides a comprehensive suite of data and analytics products on the European natural gas and liquefied natural gas markets as well as a range of advisory services leveraging Eclipse’s knowledge base, data capabilities, and modeling suite of products. This transaction complements our North American natural gas capabilities, which we obtained from our Bentek Energy LLC acquisition in 2011. We accounted for the acquisition of Eclipse using the purchase method of accounting. The acquisition of Eclipse is not material to our consolidated financial statements.
S&P DJ Indices
In March of 2014, we acquired the intellectual property of a family of Broad Market Indices (“BMI”) from Citigroup Global Markets Inc. The BMI provides a broad measure of the global equities markets which includes approximately 11,000 companies in more than 52 countries covering both developed and emerging markets. We accounted for the acquisition of the intellectual property on a cost basis and it was not material to our consolidated financial statements.
For acquisitions during 2014 that were accounted for using the purchase method, the excess of the purchase price over the fair value of the net assets acquired is allocated to goodwill and other intangibles. Intangible assets recorded for all transactions are amortized using the straight-line method for periods not exceeding 7 years. None of the goodwill acquired from our acquisitions during 2014 will be deductible for tax purposes.
2013
For the year ended December 31, 2013, we paid cash for acquisitions, net of cash acquired, totaling $273 million. None of our acquisitions were material either individually or in the aggregate, including the pro forma impact on earnings. All acquisitions were funded with cash flows from operations. Acquisitions completed during the year ended December 31, 2013 by segment included:
S&P DJ Indices
In December of 2013, we purchased the intellectual property rights to a range of commodities indices developed by Goldman Sachs as well as a limited-use license to promote the commodities indices using the Goldman Sachs Commodity Index trademarks. The commodities indices provide us with a leading benchmark that measures general price movements and inflation in the world economy. We accounted for the acquisition of the intellectual property on a cost basis.
S&P Ratings
In June of 2013, we made a voluntary open offer to purchase up to an additional 22.23% of the total equity shares outstanding in CRISIL Limited ("CRISIL"), our majority owned Indian credit rating agency within our S&P Ratings segment. In August of 2013, at the conclusion of the tender offer period, we acquired approximately 11 million equity shares representing 15.07% of CRISIL's total outstanding equity shares for $214 million, increasing our ownership percentage in CRISIL to 67.84% from 52.77%.
Following CRISIL's acquisition of Coalition that occurred in July of 2012, we made a contingent purchase price payment in 2013 for $12 million that has been reflected in the consolidated statement of cash flows as a financing activity.
Intangible assets recorded for all transactions during 2013 are considered intangible assets with indefinite lives which are not amortized, but instead are tested for impairment annually during the fourth quarter each year or more frequently if events or changes in circumstances indicate that the asset might be impaired.
Goodwill consists primarily of intangible assets that do not qualify for separate recognition, including assembled workforce, noncontractual relationships and agreements. The goodwill is not expected to be deductible for tax purposes.
Non-cash investing activities
Liabilities assumed in conjunction with the acquisition of businesses are as follows:
| | | (in millions) | Years ended December 31, | Years ended December 31, |
| | 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 |
| Fair value of assets acquired | $ | 1,071 |
| | $ | 214 |
| | $ | 347 |
| $ | 2,576 |
| | $ | 67 |
| | $ | — |
|
| Fair value of consideration transferred for DJI business | 792 |
| | — |
| | — |
| |
| Cash paid (net of cash acquired) | 177 |
| | 194 |
| | 327 |
| 2,401 |
| | 52 |
| | — |
|
| Liabilities assumed | $ | 102 |
| | $ | 20 |
| | $ | 20 |
| |
Liabilities assumed 1 | | $ | 175 |
| | $ | 15 |
| | $ | — |
|
1 2013 acquisitions did not result in any liabilities assumed.
Divestitures - Continuing Operations
We did not complete any dispositions during the year ended December 31, 2012.
As discussed in Note 2 – Growth and Value Plan & Discontinued Operations, MHE is classified as a discontinued operation for all periods presented as we have entered into a definitive agreement to sell and the Broadcasting Group sale was completed on December 30, 2011.
During the year ended December 31, 2011,2015, we recorded a pre-tax gain of $13$11 million within other income(income) loss in the consolidated statement of income related to the sale of our interest in a legacy McGraw Hill Construction investment.
In the LinkedIn Corporationfourth quarter of 2015, we began exploring strategic alternatives for J.D. Power, included in Mayour C&C segment. We committed to and initiated an active program to sell J.D. Power in its current state that we believe is probable in the next year. As a result, we have classified the assets and liabilities of J.D. Power as held for sale in our consolidated balance sheet as of December 31, 2015. The anticipated disposal does not represent a strategic shift that will have a major effect on operations and financial results, therefore, it is not classified as a discontinued operation.
The components of assets and liabilities held for sale related to J.D. Power in the consolidated balance sheet consist of the following:
|
| | | |
| (in millions) | December 31, |
| | 2015 |
| Accounts receivable, net | $ | 58 |
|
| Goodwill | 75 |
|
| Other intangible assets, net | 335 |
|
| Other assets | 35 |
|
| Assets of a business held for sale | $ | 503 |
|
| | |
| Accounts payable and accrued expenses | $ | 42 |
|
| Unearned revenue | 64 |
|
| Other liabilities | 100 |
|
| Liabilities of a business held for sale | $ | 206 |
|
The operating profit of J.D. Power for the years ending December 31, 2015, 2014 and 2013 is as follows:
|
| | | | | | | | | | | |
| (in millions) | Years ended December 31, |
| | 2015 | | 2014 | | 2013 |
| J.D. Power operating profit | $ | 53 |
| | $ | 44 |
| | $ | 35 |
|
During the year ended December 31, 2014, we completed the following dispositions that resulted in a net pre-tax loss of $9 million, which was included in other (income) loss in the consolidated statement of income:
On July 31, 2014, we completed the sale of the Company's aircraft to Harold W. McGraw III, then Chairman of the Company's Board of Directors and former President and CEO of the Company for a purchase price of $20 million. During the second quarter of 2014, we recorded a non-cash impairment charge of $6 million within other (income) loss in our consolidated statement of income as a result of the pending sale. See Note 13 — Related Party Transactions for further information.
On June 30, 2014, we completed the sale of our data center to Quality Technology Services, LLC which owns, operates and manages data centers. Net proceeds from the sale of $58 million were received in July of 2014. The sale included all of the facilities and equipment on the south campus of our East Windsor, New Jersey location, inclusive of the rights
and obligations associated with an adjoining solar power field. The sale resulted in an expense of $3 million recorded within other (income) loss in our consolidated statement of income, which is in addition to the non-cash impairment charge we recorded in the fourth quarter of 2013.
During the year ended December 31, 2013, we completed the following dispositions that resulted in a net pre-tax gain of $24 million, which was included in other (income) loss in the consolidated statement of income:
On September 30, 2013, we completed the sale of Financial Communications, which was part of their initial public offering.our S&P Capital IQ segment.
On August 27, 2013, CRISIL sold its 49% equity interest in India Index Services & Products Ltd. This investment was held within our S&P Ratings segment.
On August 1, 2013, we completed the sale Aviation Week within our C&C segment.segment to Penton, a privately held business information company.
DuringAdditionally, S&P Capital IQ closed several of their non-core businesses during 2013.
Discontinued Operations
On November 3, 2014, we completed the year ended December 31, 2010, wesale of McGraw Hill Construction, which has historically been part of the C&C segment, to Symphony Technology Group for $320 million in cash. We recorded a pre-taxan after-tax gain on the sale of $7$160 million, within other income which is included in discontinued operations, net in the consolidated statement of income relatedfor the year ended December 31, 2014. We used the after-tax proceeds from the sale to make selective acquisitions, investments, share repurchases and for general corporate purposes.
On March 22, 2013, we completed the sale of certain equity interestsMHE to investment funds affiliated with Apollo Global Management, LLC for a purchase price of $2.4 billion in Septembercash. We recorded an after-tax gain on the sale of $589 million, which were a partis included in discontinued operations, net in the consolidated statement of our S&P Ratings segment. The gain was primarilyincome for the year ended December 31, 2013. We used the after-tax proceeds from the sale of an equity interestto pay down short-term debt for the special dividend paid in an Indian commodity exchange that was made2012, to comply with local regulations discouraging foreign-based entities from owning an interest in local Indian exchanges in excess of 5%.make selective acquisitions, investments, share repurchases and for general corporate purposes.
The key components of income from discontinued operations for the years ended December 31, 2014 and 2013 consist of the following:
|
| | | | | | | |
| (in millions) | Years ended December 31, |
| 2014 |
| 2013 |
| Revenue | $ | 139 |
|
| $ | 441 |
|
| Expenses | 110 |
|
| 436 |
|
| Operating income | 29 |
|
| 5 |
|
| Interest expense, net | — |
|
| 2 |
|
| Income before taxes on income | 29 |
|
| 3 |
|
| Provision for taxes on income | 11 |
|
| — |
|
| Income from discontinued operations, net of tax | 18 |
|
| 3 |
|
| Pre-tax gain on sale from discontinued operations | 289 |
|
| 888 |
|
| Provision for taxes on gain on sale | 129 |
|
| 299 |
|
| Gain on sale of discontinued operations, net of tax | 160 |
|
| 589 |
|
| Discontinued operations, net | 178 |
|
| 592 |
|
| Less: net loss attributable to noncontrolling interests | — |
|
| (1 | ) |
| Income from discontinued operations attributable to McGraw Hill Financial, Inc. common shareholders | $ | 178 |
|
| $ | 593 |
|
Results from discontinued operations for the year ended December 31, 2014 included the after-tax gain on sale of McGraw Hill Construction of $160 million.
Results from discontinued operations for the year ended December 31, 2013 included the after-tax gain on sale of MHE of $589 million.
3. Goodwill and Other Intangible Assets
Goodwill
Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired.
As a result of our joint venture between CME Group and Dow Jones & Company, Inc., to form a new company, S&P Dow Jones Indices LLC and how we are managing this company, combined with the formation of McGraw Hill Financial, we have separated our previously reported S&P Capital IQ / S&P Indices segment into two separate reportable segments. See Note 12 – Segment and Geographic Information for further discussion on our segments.
As a result, we reallocated the goodwill balance of S&P Capital IQ / S&P Indices to reflect the new segment based on a relative fair value approach. The change in the carrying amount of goodwill by segment is shown below:
|
| | | | | | | | | | | | | | | | | | | |
| (in millions) | S&P Ratings | | S&P Capital IQ | | S&P DJ Indices | | C&C | | Total |
| Balance as of December 31, 2010 | $ | 191 |
| | $ | 240 |
| | $ | 223 |
| | $ | 289 |
| | $ | 943 |
|
| Additions, net | — |
| | — |
| | — |
| | 159 |
| | 159 |
|
| Other (primarily Fx) | 6 |
| | (2 | ) | | — |
| | (2 | ) | | 2 |
|
| Balance as of December 31, 2011 | 197 |
| | 238 |
| | 223 |
| | 446 |
| | 1,104 |
|
| Additions | 29 |
| | 164 |
| | 111 |
| | 21 |
| | 325 |
|
| Transfers/reorganizations | (95 | ) | | 53 |
| | 45 |
| | — |
| | 3 |
|
| Other (primarily Fx) | (1 | ) | | 2 |
| | 1 |
| | 4 |
| | 6 |
|
| Balance as of December 31, 2012 | $ | 130 |
| | $ | 457 |
| | $ | 380 |
| | $ | 471 |
| | $ | 1,438 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | S&P Ratings | | S&P Capital IQ and SNL | | S&P DJ Indices | | C&C | | Total |
| Balance as of December 31, 2013 | $ | 125 |
| | $ | 469 |
| | $ | 376 |
| | $ | 439 |
| | $ | 1,409 |
|
| Acquisitions | 4 |
| — |
| — |
| | — |
| | 38 |
| | 42 |
|
| Dispositions | — |
| | — |
| | — |
| | (32 | ) | | (32 | ) |
| Other (primarily Fx) | (7 | ) | | (17 | ) | | — |
| | (8 | ) | | (32 | ) |
| Balance as of December 31, 2014 | 122 |
| | 452 |
| | 376 |
| | 437 |
| | 1,387 |
|
| Acquisitions | — |
| | 1,563 |
| | — |
| | 39 |
| | 1,602 |
|
Reclassifications 1 | — |
| | — |
| | — |
| | (75 | ) | | (75 | ) |
| Other (primarily Fx) | (8 | ) | | (17 | ) | | — |
| | (7 | ) | | (32 | ) |
| Balance as of December 31, 2015 | $ | 114 |
| | $ | 1,998 |
| | $ | 376 |
| | $ | 394 |
| | $ | 2,882 |
|
| |
1 | Relates to J.D. Power, which is classified as assets held for sale in our consolidated balance sheet as of December 31, 2015. |
Goodwill additions and dispositions in the table above relate to transactions discussed in Note 32 – Acquisitions and Divestitures.
Other Intangible Assets
Other intangible assets include both indefinite-lived assets not subject to amortization and definite-lived assets subject to amortization. We have indefinite-lived assets with a carrying value of $634$713 million and $164$693 million as of December 31, 20122015 and 2011, respectively, that consist of:2014, respectively.
$3802015 and 2014 both include $380 million and $90$90 million,, for Dow Jones Indices intellectual property and the Dow Jones tradename, respectively, that we recorded as part of the transaction to form S&P Dow Jones Indices LLC in 2012 further described in Note 3 – Acquisitions2012.
2015 includes $184 million within our S&P Capital IQ and Divestitures, and
SNL segment for the SNL tradename.$1642014 includes $164 million within our C&C segment for the J.D. Power and Associates tradename.
2015 and 2014 include $59 million within our S&P Dow Jones Indices segment for the Goldman Sachs Commodity Index intellectual property and the Broad Market Indices intellectual property.
The following table summarizes our definite-lived intangible assets:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | | | | | | | | | | |
| Cost | Databases and software | | Content | | Customer relationships | | Tradenames | | Other intangibles | | Total |
| Balance as of December 31, 2010 | $ | 82 |
| | $ | 139 |
| | $ | 104 |
| | $ | 37 |
| | $ | 60 |
| | $ | 422 |
|
| Additions, net | 27 |
| | — |
| | 11 |
| | 8 |
| | 2 |
| | 48 |
|
| Balance as of December 31, 2011 | 109 |
| | 139 |
| | 115 |
| | 45 |
| | 62 |
| | 470 |
|
| Additions, net | 17 |
| | — |
| | 110 |
| | 1 |
| | 108 |
| | 236 |
|
| Other (primarily Fx) | — |
| | — |
| | — |
| | (1 | ) | | 1 |
| | — |
|
| Balance as of December 31, 2012 | $ | 126 |
| | $ | 139 |
| | $ | 225 |
| | $ | 45 |
| | $ | 171 |
| | $ | 706 |
|
| | | | | | | | | | | | |
| Accumulated amortization | | | | | | | | | | | |
| Balance as of December 31, 2010 | $ | 64 |
| | $ | 3 |
| | $ | 36 |
| | $ | 24 |
| | $ | 47 |
| | $ | 174 |
|
| Current year amortization | 6 |
| | 14 |
| | 7 |
| | 3 |
| | 3 |
| | 33 |
|
| Balance as of December 31, 2011 | 70 |
| | 17 |
| | 43 |
| | 27 |
| | 50 |
| | 207 |
|
| Current year amortization | 10 |
| | 14 |
| | 11 |
| | 3 |
| | 10 |
| | 48 |
|
| Other (primarily Fx) | — |
| | — |
| | 1 |
| | — |
| | 3 |
| | 4 |
|
| Balance as of December 31, 2012 | $ | 80 |
| | $ | 31 |
| | $ | 55 |
| | $ | 30 |
| | $ | 63 |
| | $ | 259 |
|
| | | | | | | | | | | | |
| Net definite-lived intangibles: | | | | | | | | | | | |
| December 31, 2011 | $ | 39 |
| | $ | 122 |
| | $ | 72 |
| | $ | 18 |
| | $ | 12 |
| | $ | 263 |
|
| December 31, 2012 | $ | 46 |
| | $ | 108 |
| | $ | 170 |
| | $ | 15 |
| | $ | 108 |
| | $ | 447 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | | | | | | | | | | |
| Cost | Databases and software | | Content | | Customer relationships | | Tradenames | | Other intangibles | | Total |
| Balance as of December 31, 2013 | $ | 115 |
| | $ | 139 |
| | $ | 225 |
| | $ | 45 |
| | $ | 158 |
| | $ | 682 |
|
| Acquisitions | — |
| | — |
| | — |
| | — |
| | 13 |
| | 13 |
|
| Transfers | — |
| | — |
| | — |
| | — |
| | (44 | ) | | (44 | ) |
| Other (primarily Fx) | (2 | ) | | — |
| | 3 |
| | 1 |
| | (16 | ) | | (14 | ) |
| Balance as of December 31, 2014 | 113 |
| | 139 |
| | 228 |
| | 46 |
| | 111 |
| | 637 |
|
| Acquisitions | 421 |
| | — |
| | — |
| | — |
| | 177 |
| | 598 |
|
Reclassifications 1 | (19 | ) | | — |
| | (62 | ) | | (2 | ) | | (8 | ) | | (91 | ) |
| Other (primarily Fx) | (5 | ) | | — |
| | 2 |
| | 3 |
| | (11 | ) | | (11 | ) |
| Balance as of December 31, 2015 | $ | 510 |
| | $ | 139 |
| | $ | 168 |
| | $ | 47 |
| | $ | 269 |
| | $ | 1,133 |
|
| | | | | | | | | | | | |
| Accumulated amortization | | | | | | | | | | | |
| Balance as of December 31, 2013 | $ | 83 |
| | $ | 45 |
| | $ | 67 |
| | $ | 32 |
| | $ | 56 |
| | $ | 283 |
|
| Current year amortization | 6 |
| | 14 |
| | 13 |
| | 3 |
| | 12 |
| | 48 |
|
| Other (primarily Fx) | (1 | ) | | — |
| | — |
| | — |
| | (4 | ) | | (5 | ) |
| Balance as of December 31, 2014 | 88 |
| | 59 |
| | 80 |
| | 35 |
| | 64 |
| | 326 |
|
| Current year amortization | 20 |
| | 14 |
| | 9 |
| | 2 |
| | 22 |
| | 67 |
|
Reclassifications 1 | (18 | ) | | — |
| | (30 | ) | | (2 | ) | | (14 | ) | | (64 | ) |
| Other (primarily Fx) | (2 | ) | | — |
| | 1 |
| | 1 |
| | (5 | ) | | (5 | ) |
| Balance as of December 31, 2015 | $ | 88 |
| | $ | 73 |
| | $ | 60 |
| | $ | 36 |
| | $ | 67 |
| | $ | 324 |
|
| | | | | | | | | | | | |
| Net definite-lived intangibles: | | | | | | | | | | | |
| December 31, 2014 | $ | 25 |
| | $ | 80 |
| | $ | 148 |
| | $ | 11 |
| | $ | 47 |
| | $ | 311 |
|
| December 31, 2015 | $ | 422 |
| | $ | 66 |
| | $ | 108 |
| | $ | 11 |
| | $ | 202 |
| | $ | 809 |
|
| |
1 | Relates to J.D. Power, which is classified as assets held for sale in our consolidated balance sheet as of December 31, 2015. |
Definite-lived intangible assets are being amortized on a straight-line basis over periods of up to 40 years.20 years. The weighted-average life of the intangible assets as of December 31, 20122015 is approximately 11 years. 10 years.
Amortization expense for the years ended December 31, 2012, 20112015, 2014 and 2010,2013 was $67 million, $48 million, and the projected$51 million, respectively. Expected amortization expense for intangible assets over the next five years for the years ended December 31, assuming no further acquisitions or dispositions, is as follows:
|
| | | | | | | |
| (in millions) | Amortization expense | | Expected amortization expense |
| 2010 | $ | 21 |
| | |
| 2011 | 33 |
| | |
| 2012 | 48 |
| | |
| 2013 | | | $ | 51 |
|
| 2014 | | | 52 |
|
| 2015 | | | 49 |
|
| 2016 | | | 49 |
|
| 2017 | | | 46 |
|
|
| | | | | | | | | | | | | | | | | | | |
| (in millions) | 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
Amortization expense 1 | $ | 98 |
| | $ | 93 |
| | $ | 86 |
| | $ | 81 |
| | $ | 74 |
|
| |
1 | Amortization expense excludes J.D. Power, which is expected to be sold in the next year. |
65
5.4. Taxes on Income
Income before taxes on income resulted from domestic and foreign operations is as follows:
| | | (in millions) | Years ended December 31, | Year Ended December 31, |
| | 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 |
| Domestic operations | $ | 841 |
| | $ | 700 |
| | $ | 699 |
| $ | 1,266 |
| | $ | (423 | ) | | $ | 821 |
|
| Foreign operations | 289 |
| | 300 |
| | 244 |
| 549 |
| | 477 |
| | 478 |
|
| Total continuing income before taxes | $ | 1,130 |
| | $ | 1,000 |
| | $ | 943 |
| $ | 1,815 |
| | $ | 54 |
| | $ | 1,299 |
|
The provision/(benefit)provision for taxes on income consists of the following:
| | | (in millions) | Years ended December 31, | Year Ended December 31, |
| | 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 |
| Federal: | | | | | | | | | | |
| Current | $ | 194 |
| | $ | 238 |
| | $ | 159 |
| $ | 90 |
| | $ | 285 |
| | $ | 194 |
|
| Deferred | 74 |
| | (6 | ) | | 37 |
| 276 |
| | (213 | ) | | 51 |
|
| Total federal | 268 |
| | 232 |
| | 196 |
| 366 |
| | 72 |
| | 245 |
|
| Foreign: | | | | | | | | | | |
| Current | 91 |
| | 93 |
| | 109 |
| 111 |
| | 135 |
| | 152 |
|
| Deferred | (9 | ) | | 13 |
| | (14 | ) | (1 | ) | | 1 |
| | (19 | ) |
| Total foreign | 82 |
| | 106 |
| | 95 |
| 110 |
| | 136 |
| | 133 |
|
| State and local: | | | | | | | | | | |
| Current | 40 |
| | 36 |
| | 49 |
| 34 |
| | 62 |
| | 37 |
|
| Deferred | 14 |
| | — |
| | 4 |
| 37 |
| | (25 | ) | | 10 |
|
| Total state and local | 54 |
| | 36 |
| | 53 |
| 71 |
| | 37 |
| | 47 |
|
| Total provision for taxes for continuing operations | 404 |
| | 374 |
| | 344 |
| 547 |
| | 245 |
| | 425 |
|
| Provision for discontinued operations | 11 |
| | 164 |
| | 143 |
| — |
| | 140 |
| | 299 |
|
| Total provision for taxes | $ | 415 |
| | $ | 538 |
| | $ | 487 |
| $ | 547 |
| | $ | 385 |
| | $ | 724 |
|
A reconciliation of the U.S. federal statutory income tax rate to our effective income tax rate for financial reporting purposes is as follows:
| |
| Years ended December 31, | Year Ended December 31, |
| | 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 |
| U.S. federal statutory income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % | 35.0 | % | | 35.0 | % | | 35.0 | % |
| Legal and regulatory settlements | | — |
| | 524.1 |
| | — |
|
| State and local income taxes | 3.6 |
| | 2.4 |
| | 4.6 |
| 2.6 |
| | 64.2 |
| | 2.8 |
|
| Foreign operations | (2.6 | ) | | (3.0 | ) | | (1.6 | ) | (3.2 | ) | | (79.6 | ) | | (3.9 | ) |
| S&P Dow Jones Indices LLC joint venture | (1.1 | ) | | — |
| | — |
| (2.0 | ) | | (60.2 | ) | | (2.0 | ) |
| Tax credits and incentives | | (2.9 | ) | | (91.5 | ) | | (2.1 | ) |
| Other, net | 0.9 |
| | 3.0 |
| | (1.6 | ) | 0.6 |
| | 61.7 |
| | 2.9 |
|
| Effective income tax rate for continuing operations | 35.8 | % | | 37.4 | % | | 36.4 | % | 30.1 | % | | 453.7 | % | | 32.7 | % |
The principal temporary differences between the accounting for income and expenses for financial reporting and income tax purposes are as follows:
| | | (in millions) | December 31, | December 31, |
| | 2012 | | 2011 | 2015 | | 2014 |
| Deferred tax assets: | | | | | | |
| Postretirement benefits | $ | 201 |
| | $ | 202 |
| |
| Legal and regulatory settlements | | $ | 45 |
| | $ | 305 |
|
| Employee compensation | 123 |
| | 128 |
| 91 |
| | 99 |
|
| Accrued expenses | 105 |
| | 99 |
| 72 |
| | 94 |
|
| Postretirement benefits | | 126 |
| | 146 |
|
| Unearned revenue | 60 |
| | 58 |
| 39 |
| | 27 |
|
| Allowance for doubtful accounts | 17 |
| | 10 |
| 12 |
| | 13 |
|
| Loss carryforwards | 25 |
| | 8 |
| 114 |
| | 37 |
|
| Other | | 18 |
| | 14 |
|
| Total deferred tax assets | 531 |
| | 505 |
| 517 |
| | 735 |
|
| Deferred tax liabilities: | | | | | | |
Goodwill and intangible assets 1 | (379 | ) | | (131 | ) | |
| Goodwill and intangible assets | | (299 | ) | | (362 | ) |
| Fixed assets | (54 | ) | | (58 | ) | (9 | ) | | (8 | ) |
| Other | (1 | ) | | (7 | ) | — |
| | — |
|
| Total deferred tax liabilities | (434 | ) | | (196 | ) | (308 | ) | | (370 | ) |
| Net deferred income tax asset before valuation allowance | 97 |
| | 309 |
| |
| Net deferred income tax asset (liability) before valuation allowance | | 209 |
| | 365 |
|
| Valuation allowance | (7 | ) | | (7 | ) | (98 | ) | | (16 | ) |
| Net deferred income tax asset | $ | 90 |
| | $ | 302 |
| |
| Net deferred income tax asset (liability) | | $ | 111 |
| | $ | 349 |
|
| Reported as: | | | | | | |
| Current deferred tax assets | $ | 117 |
| | $ | 110 |
| $ | 109 |
| | $ | 360 |
|
| Current deferred tax liabilities | (7 | ) | | (2 | ) | (8 | ) | | (2 | ) |
| Non-current deferred tax assets | 36 |
| | 207 |
| 33 |
| | 31 |
|
| Non-current deferred tax liabilities | (56 | ) | | (13 | ) | (23 | ) | | (40 | ) |
| Net deferred income tax asset | $ | 90 |
| | $ | 302 |
| |
| Net deferred income tax asset (liability) | | $ | 111 |
| | $ | 349 |
|
| |
1
| See Note 3 – Acquisitions andDivestitures for further discussion regarding the impact related to the S&P Dow Jones Indices LLC.
|
We record valuation allowances against deferred income tax assets when we determine that it is more likely than not based upon all the available evidence that such deferred income tax assets will not be realized. The valuation allowance is primarily related to operating losses.
We have not recorded deferred income taxes applicable to undistributed earnings of foreign subsidiaries that are indefinitely reinvested in foreign operations. Undistributed earnings that are indefinitely reinvested in foreign operations amounted to $762$1,573 million at December 31, 2012.2015. Quantification of the deferred tax liability, if any, associated with indefinitely reinvested earnings is not practicable.
We made net income tax payments for continuing and discontinued operations totaling $243$260 million in 2012, $4522015, $419 million in 2011,2014, and $410$787 million in 2010.2013. As of December 31, 2012,2015, we had net operating loss carryforwards of $133$440 million, some of which will expire over varyingvarious periods.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | (in millions) | Years ended December 31, | Years ended December 31, |
| | 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 |
| Balance at beginning of year | $ | 58 |
| | $ | 53 |
| | $ | 37 |
| $ | 118 |
| | $ | 82 |
| | $ | 74 |
|
| Additions based on tax positions related to the current year | 14 |
| | 12 |
| | 14 |
| 22 |
| | 30 |
| | 27 |
|
| Additions for tax positions of prior years | 3 |
| | 3 |
| | 10 |
| 12 |
| | 33 |
| | 10 |
|
| Reduction for tax positions of prior years | (1 | ) | | (10 | ) | | (8 | ) | (14 | ) | | (11 | ) | | (9 | ) |
| Reduction for settlements | | (18 | ) | | (16 | ) | | (20 | ) |
| Balance at end of year | $ | 74 |
| | $ | 58 |
| | $ | 53 |
| $ | 120 |
| | $ | 118 |
| | $ | 82 |
|
The total amount of federal, state and local, and foreign unrecognized tax benefits as of December 31, 20122015, 2014 and 20112013 was $74$120 million, $118 million and $58$82 million,, respectively, exclusive of interest and penalties. The increase of $16$20 million in 20122015 (excluding settlements) is the amount of unrecognized tax benefits that unfavorably impacted tax expense. The unfavorable impact to the tax provision was partially offset by the favorable outcomeresolution of the completed state, local and foreign tax audits.audits in multiple jurisdictions.
We recognize accrued interest and penalties related to unrecognized tax benefits in interest expense and operating-related expense, respectively. In addition to the unrecognized tax benefits, as of December 31, 20122015 and 2011,2014, we had $14$31 million and $10$23 million,, respectively, of accrued interest and penalties associated with uncertain tax positions.
During 2012,2015, we completed the federal income tax audit for 2013. The U.S. federal income tax audits for 2014 and 2015 are in process. During 2015, we completed various state and foreign tax audits and, with few exceptions, we are no longer subject to federal, state and local, or non-U.S. income tax examinations by tax authorities for the years before 2003. During 2011, we effectively completed the U.S. federal tax audit for 2010 and we also completed various state and foreign tax audits. During 2010, we effectively completed the U.S. federal tax audit for 2009 and we also completed various state and foreign tax audits.2007. The impact to tax expense in 2012, 20112015, 2014 and 20102013 was not material. However, even though we have effectively completed the U.S. federal tax audit for the years 2010, 2009, 2008 and 2007, those years remained open pending the appeal of an unresolved issue. On February 5, 2013, the Appeals Office of the Internal Revenue Service issued a Notice of Deficiency determining that we are not eligible for the deduction for domestic production activities. We have 90 days to decide whether we will file a petition in Tax Court. We do not believe the outcome of this action will have a material adverse effect on our results of operations.
We file income tax returns in the U.S. federal jurisdiction, various states, and foreign jurisdictions, and we are routinely under audit by many different tax authorities. We believe that our accrual for tax liabilities is adequate for all open audit years based on an assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. It is possible that tax examinations will be settled prior to December 31, 2013.2016. If any of these tax audit settlements do occur within that period, we would make any necessary adjustments to the accrual for unrecognized tax benefits. Until formal resolutions are reached between us and the tax authorities, the determination of a possible audit settlement range with respect to the impact on unrecognized tax benefits is not practicable. On the basis of present information, it is our opinion that any assessments resulting from
Based on the current audits will not have a material effect on our consolidated financial statements.
Although the timingstatus of income tax audit resolution and negotiations with taxing authorities are highly uncertain,audits, we do not anticipate a significant change tobelieve that the total amount of unrecognized income tax benefits withinmay significantly decrease in the next twelve months. Although the ultimate resolution of our tax audits is unpredictable, the resulting change in our unrecognized tax benefits could have a material impact on our results of operations and/or cash flows.
6.5. Debt
A summary of short-term and long-term debt outstanding is as follows:
| | | (in millions) | December 31, | December 31, |
| | 2012 | | 2011 | 2015 | | 2014 |
| 5.375% Senior Notes, due 2012 | $ | — |
| | $ | 400 |
| |
5.9% Senior Notes, due 2017 1 | 400 |
| | 399 |
| $ | 399 |
| | $ | 399 |
|
6.55% Senior Notes, due 2037 2 | 399 |
| | 399 |
| |
2.5% Senior Notes, due 2018 2 | | 398 |
| | — |
|
3.3% Senior Notes, due 2020 3 | | 695 |
| | — |
|
4.0% Senior Notes, due 2025 4 | | 690 |
| | — |
|
4.4% Senior Notes, due 2026 5 | | 890 |
| | — |
|
6.55% Senior Notes, due 2037 6 | | 396 |
| | 396 |
|
| Commercial paper | 457 |
| | — |
| 143 |
| | — |
|
| Total debt | 1,256 |
| | 1,198 |
| 3,611 |
| | 795 |
|
| Less: short-term debt including current maturities | 457 |
| | 400 |
| 143 |
| | — |
|
| Long-term debt | $ | 799 |
| | $ | 798 |
| $ | 3,468 |
| | $ | 795 |
|
| |
1 | Interest payments are due semiannually on April 15 and October 15, and as of December 31, 2012,2015, the unamortized debt discount is $0.5 million. and issuance costs total $1 million. |
| |
2 | Interest payments are due semiannually on February 15 and August 15, beginning on February 15, 2016, and as of December 31, 2015, the unamortized debt discount and issuance costs total $2 million. |
| |
3 | Interest payments are due semiannually on February 14 and August 14, beginning on February 14, 2016, and as of December 31, 2015, the unamortized debt discount and issuance costs total $5 million. |
| |
4 | Interest payments are due semiannually on June 15 and December 15, and as of December 31, 2015, the unamortized debt discount and issuance costs total $10 million. |
| |
5 | Interest payments are due semiannually on February 15 and August 15, beginning on February 15, 2016, and as of December 31, 2015, the unamortized debt discount and issuance costs total $10 million. |
| |
6 | Interest payments are due semiannually on May 15 and November 15, and as of December 31, 2012,2015, the unamortized debt discount is $1.3and issuance costs total $4 million. |
On November 15, 2012, our $400 million, 5.375% Senior Notes matured and were fully repaid.
Annual long-term debt maturities are scheduled as follows based on book values as of December 31, 2012:2015: no amounts due from 2013-2016, approximately $400in 2016, $399 million due in 2017, $398 million due in 2018, no amounts due in 2019, $695 million due in 2020, and approximately $399 million$2.0 billion due thereafter.
On August 18, 2015, we issued $2.0 billion of senior notes (the "Notes"), consisting of $400 million of 2.5% senior notes due in 2018, $700 million of 3.3% senior notes due in 2020 and $900 million of 4.4% senior notes due in 2026. The Notes are fully and unconditionally guaranteed by our wholly-owned subsidiary, Standard & Poor's Financial Services LLC. We used the net proceeds to finance the acquisition of SNL.
On May 26, 2015, we issued $700 million of 4.0% senior notes due in 2025 and used a portion of the net proceeds for the repayment of short-term debt, including commercial paper. The 4.0% senior notes will mature on June 15, 2025 and are fully and unconditionally guaranteed by our wholly-owned subsidiary, Standard & Poor's Financial Services LLC.
We have the ability to borrow a total of $1.2 billion through our commercial paper program, which is supported by our credit facility described below. Commercial paper borrowings outstanding as of December 31, 2015 totaled $143 million with an average interest rate and term of 0.95% and 17 days. As of December 31, 2015, we can borrow approximately $1.1 billion in additional funds through the commercial paper program. There were no commercial paper borrowings outstanding under our credit facility as of December 31, 2014.$1.2
On June 30, 2015, we entered into a revolving $1.2 billion three-year five-year credit agreement (our “credit facility”"credit facility") that will terminate on JulyJune 30, 2013. 2020. This credit facility replaced our $1.0 billion four-year credit facility that was scheduled to terminate on June 19, 2017. The previous credit facility was canceled immediately after the new credit facility became effective. There were no outstanding borrowings under the previous credit facility when it was replaced.
We pay a commitment fee of 1510 to 3520 basis points for our credit facility, depending on our credit rating,indebtedness to cash flow ratio, whether or not amounts have been borrowed and currently pay a commitment fee of 2015 basis points. The interest rate on borrowings under our credit facility is, at our option, calculated using rates that are primarily based on either the prevailing London Inter-Bank OfferOffered Rate, the prime rate determined by the administrative agent or the Federal funds rate.Funds Rate. For certain borrowings under this credit facility, there is also a spread based on our credit ratingindebtedness to cash flow ratio added to the applicable rate.
In connection with the special dividend in the amount of $2.50 per share on our common stock we utilized our commercial paper program in December of 2012 and as a result, commercial paper borrowings outstanding as of December 31, 2012 totaled $457 million with an average interest rate and term of 0.48% and 28 days. See Note 9 – Equity for further discussion concerning the special dividend. As of December 31, 2012, we can borrow $743 million in additional funds through the commercial paper program. There were no outstanding commercial paper borrowings as of December 31, 2011.
Our credit facility contains certain covenants. The only financial covenant requires that our indebtedness to cash flow ratio, as defined in our credit facility, is not greater than 4 to 1, and this covenant level has never been exceeded.
On February 7, 2013, Fitch Ratings downgraded our credit rating to BBB+ from A- and placed our ratings on Rating Watch Negative. On February 14, 2013, Moody's Investors Service downgraded our credit rating from A3 to Baa2 with negative outlook. There has been no change to our short-term / commercial paper ratings of F2 from Fitch Ratings and P-2 from Moody's Investors Service.
7.6. Employee Benefits
We havemaintain a number of active defined contribution retirement plans for our employees. The majority of our defined benefit pension plans and defined contribution plans covering substantially all employees. Our primary U.S. pension plan isare frozen. As a noncontributory plan under which benefits are based on employee career employment compensation. In December 2011, our Board of Directors approved a plan amendment that froze our U.S. employee retirement plan (“U.S. ERP”) effective on April 1, 2012. Our U.S. ERP is a defined benefit plan. Under the amendment,result, no new employees will be permitted to enter the U.S. ERPthese plans and no additional benefits for current participants for future servicesin the frozen plans will be accrued.
We also have unfunded non-U.S. and supplemental benefit plans. The supplemental benefit plans that provide senior management with supplemental retirement, disability and death benefits. Certain supplemental retirement benefits are based on final monthly earnings. In addition, we sponsor voluntary 401(k) plans under which we may match employee contributions up to certain levels of compensation as well as profit-sharing plans under which we contribute a percentage of eligible employees’employees' compensation to the employees’employees' accounts.
We also provide certain postretirement medical, dental and life insurance benefits for active and retired employees and eligible dependents. The medical and dental plans and supplemental life insurance plan are contributory, while the basic life insurance plan is noncontributory. We currently do not prefund any of these plans.
We recognize the funded status of our retirement and postretirement plans in the consolidated balance sheets, with a corresponding adjustment to accumulated other comprehensive income, net of taxes. The amounts in accumulated other comprehensive income represent net unrecognized actuarial losses and unrecognized prior service costs. These amounts will be subsequently recognized as net periodic pension cost pursuant to our accounting policy for amortizing such amounts.
As part of the definitive agreement to sellsale of McGraw Hill Construction and MHE, to investment funds affiliated with Apollo Global Management, LLC, described further in Note 2 – GrowthAcquisitions and Value Plan & Discontinued OperationsDivestitures, we will retainretained the benefit obligations and plan assets related to MHE,McGraw Hill Construction and MHE; however, the benefit cost for periods presented is bifurcated between continuing and discontinued operations.
Benefit Obligation
A summary of the benefit obligation and the fair value of plan assets, as well as the funded status for the retirement and postretirement plans as of December 31, is as follows (benefits paid in the table below include only those amounts contributed directly to or paid directly from plan assets):
| | | (in millions) | Retirement Plans | | Postretirement Plans | Retirement Plans | | Postretirement Plans |
| | 2012 | | 2011 | | 2012 | | 2011 | 2015 | | 2014 | | 2015 | | 2014 |
| Net benefit obligation at beginning of year | $ | 1,834 |
| | $ | 1,794 |
| | $ | 129 |
| | $ | 144 |
| $ | 2,462 |
| | $ | 2,004 |
| | $ | 96 |
| | $ | 103 |
|
| Service cost | 24 |
| | 67 |
| | 3 |
| | 3 |
| 6 |
| | 5 |
| | — |
| | 1 |
|
| Interest cost | 93 |
| | 99 |
| | 5 |
| | 6 |
| 96 |
| | 99 |
| | 3 |
| | 4 |
|
| Plan participants’ contributions | 1 |
| | 1 |
| | 5 |
| | 5 |
| — |
| | — |
| | 4 |
| | 4 |
|
| Actuarial loss (gain) | 287 |
| | 59 |
| | 3 |
| | (14 | ) | |
| Actuarial (gain) loss | | (189 | ) | | 504 |
| | (12 | ) | | 5 |
|
| Gross benefits paid | (71 | ) | | (63 | ) | | (17 | ) | | (16 | ) | (150 | ) | | (125 | ) | | (12 | ) | | (13 | ) |
Plan amendments 1 | — |
| | (129 | ) | | — |
| | — |
| |
| Foreign currency effect | 11 |
| | 3 |
| | — |
| | — |
| (26 | ) | | (25 | ) | | — |
| | — |
|
| Federal subsidy benefits received | — |
| | — |
| | 1 |
| | 1 |
| |
| Other adjustments | (8 | ) | | 3 |
| | — |
| | — |
| — |
| | — |
| | 1 |
| | (8 | ) |
| Net benefit obligation at end of year | 2,171 |
| | 1,834 |
| | 129 |
| | 129 |
| 2,199 |
| | 2,462 |
| | 80 |
| | 96 |
|
| Fair value of plan assets at beginning of year | 1,505 |
| | 1,567 |
| | — |
| | — |
| 2,236 |
| | 2,088 |
| | — |
| | — |
|
| Actual return on plan assets | 212 |
| | (31 | ) | | — |
| | — |
| (57 | ) | | 270 |
| | — |
| | — |
|
| Employer contributions | 193 |
| | 29 |
| | 12 |
| | 10 |
| 15 |
| | 22 |
| | 8 |
| | 9 |
|
| Plan participants’ contributions | 1 |
| | 1 |
| | 5 |
| | 6 |
| — |
| | — |
| | 4 |
| | 4 |
|
| Gross benefits paid | (71 | ) | | (63 | ) | | (17 | ) | | (16 | ) | (150 | ) | | (125 | ) | | (12 | ) | | (13 | ) |
| Foreign currency effect | 11 |
| | 2 |
| | — |
| | — |
| (21 | ) | | (19 | ) | | — |
| | — |
|
| Fair value of plan assets at end of year | 1,851 |
| | 1,505 |
| | — |
| | — |
| 2,023 |
| | 2,236 |
| | — |
| | — |
|
| Funded status | $ | (320 | ) | | $ | (329 | ) | | $ | (129 | ) | | $ | (129 | ) | $ | (176 | ) | | $ | (226 | ) | | $ | (80 | ) | | $ | (96 | ) |
| Amounts recognized in consolidated balance sheets | | | | | | | | |
| Amounts recognized in consolidated balance sheets: | | | | | | | | |
| Non-current assets | $ | 97 |
| | $ | 68 |
| | $ | — |
| | $ | — |
| $ | 36 |
| | $ | 28 |
| | $ | — |
| | $ | — |
|
| Current liabilities | (6 | ) | | (6 | ) | | (11 | ) | | (9 | ) | (8 | ) | | (8 | ) | | (8 | ) | | (9 | ) |
| Non-current liabilities | (411 | ) | | (391 | ) | | (118 | ) | | (120 | ) | (204 | ) | | (246 | ) | | (72 | ) | | (87 | ) |
| | $ | (320 | ) | | $ | (329 | ) | | $ | (129 | ) | | $ | (129 | ) | $ | (176 | ) | | $ | (226 | ) | | $ | (80 | ) | | $ | (96 | ) |
| Accumulated benefit obligation | $ | 2,093 |
| | $ | 1,773 |
| | | | | $ | 2,190 |
| | $ | 2,440 |
| | | | |
| Plans with accumulated benefit obligation in excess of the fair value of plan assets | | | | | | | | |
| Plans with accumulated benefit obligation in excess of the fair value of plan assets: | | | | | | | | |
| Projected benefit obligation | $ | 1,773 |
| | $ | 1,487 |
| | | | | $ | 1,810 |
| | $ | 2,046 |
| | | | |
| Accumulated benefit obligation | $ | 1,756 |
| | $ | 1,480 |
| | | | | $ | 1,801 |
| | $ | 2,024 |
| | | | |
| Fair value of plan assets | $ | 1,356 |
| | $ | 1,090 |
| | | | | $ | 1,598 |
| | $ | 1,792 |
| | | | |
| Amounts recognized in accumulated other comprehensive loss, net of tax | | | | | | | | |
| Amounts recognized in accumulated other comprehensive loss, net of tax: | | | | | | | | |
| Net actuarial loss (gain) | $ | 455 |
| | $ | 359 |
| | $ | (3 | ) | | $ | (5 | ) | $ | 433 |
| | $ | 452 |
| | $ | (24 | ) | | $ | (8 | ) |
| Prior service credit | (4 | ) | | (6 | ) | | (1 | ) | | (2 | ) | 1 |
| | 1 |
| | (5 | ) | | (5 | ) |
| Total recognized | $ | 451 |
| | $ | 353 |
| | $ | (4 | ) | | $ | (7 | ) | $ | 434 |
| | $ | 453 |
| | $ | (29 | ) | | $ | (13 | ) |
| |
1
| In December 2011, our Board of Directors approved a plan amendment that froze our U.S. ERP effective on April 1, 2012. This amendment decreased our pension benefit liabilities by $129 million, and resulted in an after-tax decrease in accumulated other comprehensive loss of $82 million. We also recorded an immaterial amount of pension plan curtailment expense in 2011 as a result of the plan amendment.
|
The actuarial loss included in accumulated other comprehensive loss for our retirement plans and expected to be recognized in net periodic pension cost during the year ending December 31, 20132016 is $25 million.$16 million. There is an immaterial amount ofno prior service
credit included in accumulated other comprehensive loss for our retirement plans expected to be recognized in net periodic benefit cost during the year ending December 31, 2013.2016.
TheThere is an immaterial amount of actuarial loss and prior service credit included in accumulated other comprehensive loss for our postretirement plans and expected to be recognized in net periodic benefit cost during the year ending December 31, 2013 is $1 million. There is no actuarial loss in accumulated other comprehensive loss for our postretirement plans expected to be recognized in net periodic benefit cost during the year ending December 31, 2013.2016.
Net Periodic Cost
For purposes of determining annual pension cost, prior service costs are being amortized straight-line over the average expected remaining service periodlifetime of employeesplan participants expected to receive benefits.
A summary of net periodic benefit cost for our retirement and postretirement plans for the years ended December 31, is as follows:
| | | (in millions) | Retirement Plans | | Postretirement Plans | Retirement Plans | | Postretirement Plans |
| | 2012 | | 2011 | | 2010 | | 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 |
| Service cost | $ | 24 |
| | $ | 67 |
| | $ | 61 |
| | $ | 3 |
| | $ | 3 |
| | $ | 3 |
| $ | 6 |
| | $ | 5 |
| | $ | 10 |
| | $ | — |
| | $ | 1 |
| | $ | 2 |
|
| Interest cost | 93 |
| | 99 |
| | 94 |
| | 5 |
| | 6 |
| | 7 |
| 96 |
| | 99 |
| | 91 |
| | 3 |
| | 4 |
| | 5 |
|
| Expected return on assets | (124 | ) | | (127 | ) | | (112 | ) | | — |
| | — |
| | — |
| (127 | ) | | (138 | ) | | (129 | ) | |
|
| | — |
| | — |
|
| Amortization of: | | | | | | | | | | | |
| |
| |
| |
| |
| |
|
| Actuarial loss | 32 |
| | 31 |
| | 15 |
| | — |
| | — |
| | — |
| |
| Prior service credit | (1 | ) | | — |
| | — |
| | (1 | ) | | (1 | ) | | (1 | ) | |
| Actuarial loss (gain) | | 20 |
| | 11 |
| | 26 |
| | — |
| | (1 | ) | | — |
|
| Prior service cost (credit) | | — |
| | — |
| | 5 |
| | (1 | ) | | — |
| | (1 | ) |
Curtailment 1 | | — |
| | — |
| | (8 | ) | | — |
| | (1 | ) | | (12 | ) |
| Net periodic benefit cost | $ | 24 |
| | $ | 70 |
| | $ | 58 |
| | $ | 7 |
| | $ | 8 |
| | $ | 9 |
| $ | (5 | ) | | $ | (23 | ) | | $ | (5 | ) | | $ | 2 |
| | $ | 3 |
| | $ | (6 | ) |
| |
1 | The curtailment gain for our retirement plans in 2013 relates to a freeze of pension accruals for MHE employees as well as all remaining active employees in the United Kingdom ("U.K."). The curtailment gain for our postretirement plans in 2014 is a result of plan changes effective October 31, 2014 eliminating retiree medical and life insurance benefits for active employees not retiring by July 1, 2016. The curtailment gain for our postretirement plans in 2013 relates to the sale of MHE on March 22, 2013. |
Our United Kingdom (“U.K.”) retirement plan accounted for $3a benefit of $10 million in 20122015, $8 million in 2014, and 2011 and $6$10 million in 20102013, including the $8 million curtailment gain discussed above, of the net periodic benefit cost attributable to the funded plans.
Other changes in plan assets and benefit obligations recognized in other comprehensive income, net of tax for the years ended December 31, are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Retirement Plans | | Postretirement Plans |
| | 2012 | | 2011 | | 2010 | | 2012 | | 2011 | | 2010 |
| Net actuarial loss (gain) | $ | 116 |
| | $ | 65 |
| | $ | 41 |
| | $ | 2 |
| | $ | (12 | ) | | $ | (6 | ) |
| Recognized actuarial gain | (20 | ) | | (18 | ) | | (9 | ) | | — |
| | — |
| | — |
|
| Prior service credit | 2 |
| | — |
| | — |
| | 1 |
| | 1 |
| | 1 |
|
| Total recognized | $ | 98 |
| | $ | 47 |
| | $ | 32 |
| | $ | 3 |
| | $ | (11 | ) | | $ | (5 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Retirement Plans | | Postretirement Plans |
| | 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 |
| Net actuarial (gain) loss | $ | (6 | ) | | $ | 232 |
| | $ | (213 | ) | | $ | (17 | ) | | $ | 3 |
| | $ | (8 | ) |
| Recognized actuarial (gain) loss | (13 | ) | | (7 | ) | | (15 | ) | | — |
| | 1 |
| | — |
|
| Prior service cost (credit) | — |
| | — |
| | 5 |
| | 1 |
| | (5 | ) | | — |
|
| Total recognized | $ | (19 | ) | | $ | 225 |
| | $ | (223 | ) | | $ | (16 | ) | | $ | (1 | ) | | $ | (8 | ) |
The total cost for our retirement plans was $129$91 million for 2012, $1752015, $81 million for 20112014 and $156$96 million for 2010.2013. Included in the total retirement plans cost are defined contribution plans cost of $86$67 million for 2012, $882015, $74 million for 20112014 and $83$75 million 2010. for 2013.
Assumptions
|
| | | | | | | | | | | | | | | | | |
| | Retirement Plans | | Postretirement Plans |
| | 2012 | | 2011 | | 2010 | | 2012 | | 2011 | | 2010 |
Benefit obligation: 1 | | | | | | | | | | | |
| Discount rate | 4.1 | % | | 5.1 | % | | 5.4 | % | | 3.45 | % | | 4.45 | % | | 4.7 | % |
| Compensation increase factor | N/A |
| | 4.5 | % | | 4.5 | % | | | | | | |
| Net periodic cost: | | | | | | | | | | | |
Weighted-average healthcare cost rate 2 | | | | | | | 7.5 | % | | 8.0 | % | | 8.0 | % |
Discount rate - U.S. plan 3 | 5.1 | % | | 5.4 | % | | 5.95 | % | | 4.45 | % | | 4.65 | % | | 5.3 | % |
Discount rate - U.K. plan 3 | 5.1 | % | | 5.5 | % | | 5.9 | % | | | | | | |
| Compensation increase factor - U.S. plan | 4.5 | % | | 4.5 | % | | 5.5 | % | | | | | | |
| Compensation increase factor - U.K. plan | 5.85 | % | | 6.25 | % | | 6.25 | % | | | | | | |
Return on assets 4 | 7.75 | % | | 8.0 | % | | 8.0 | % | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | Retirement Plans | | Postretirement Plans |
| | 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 |
| Benefit obligation: | | | | | | | | | | | |
| Discount rate | 4.47 | % | | 4.15 | % | | 5.00 | % | | 3.90 | % | | 3.60 | % | | 4.20 | % |
| Net periodic cost: | | | | | | | | | | | |
Weighted-average healthcare cost rate 1 | | | | | | | 7.0 | % | | 7.0 | % | | 7.0 | % |
Discount rate - U.S. plan 2 | 4.15 | % | | 5.0 | % | | 4.1 | % | | 3.60 | % | | 4.125 | % | | 3.45 | % |
Discount rate - U.K. plan 2 | 3.8 | % | | 4.5 | % | | 4.8 | % | | | | | | |
| Compensation increase factor - U.S. plan | N/A |
| | N/A |
| | N/A |
| | | | | | |
| Compensation increase factor - U.K. plan | N/A |
| | N/A |
| | 5.75 | % | | | | | | |
Return on assets 3 | 6.25 | % | | 7.125 | % | | 7.25 | % | | | | | | |
| |
1 | These assumptions for the retirement plans relate to our U.S. ERP and a compensation increase factor is no longer applicable for 2012 because there are no further salary increases as the U.S. ERP was frozen in April 2012. |
| |
2
| The assumed weighted-average healthcare cost trend rate will decrease ratably from 7.5%7% in 20122015 to 5% in 20182024 and remain at that level thereafter. Assumed healthcare cost trends have an effect on the amounts reported for the healthcare plans. A one percentage point change in assumed healthcare cost trend creates the following effects: |
| | | (in millions) | 1% point increase | | 1% point decrease | 1% point increase | | 1% point decrease |
| Effect on postretirement obligation | $ | 4 |
| | $ | (4 | ) | $ | 4 |
| | $ | (3 | ) |
| |
32
| Effective January 1, 2013,2016, we changed our discount rate assumption on our U.S. retirement plans to 4.1%4.47% from 5.1%4.15% in 20122015 and changed our discount rate assumption on our U.K. plan to 4.8%3.84% from 5.1%3.8% in 2012. 2015. At the end of 2015, we changed our approach used to measure service and interest costs on all of our retirement plans. For 2015 and prior periods presented, we measured service and interest costs utilizing and single weighted-average discount rate derived from the yield curve used to measure the benefit obligation. For 2016, we elected to measure service and interest costs by applying the specific spot rates along that yield curve to the plans' liability cash flows. We believe this new approach provides a more precise measurement of service and interest costs by aligning the timing of the plans' liability cash flows to the corresponding spot rates on the yield curve. This change does not affect the measurement of our benefit obligation. We have accounted for this change as a change in accounting estimate that is inseparable from a change in accounting principle and, accordingly, have accounted for it on a prospective basis. We expect pension and postretirement medical costs to decrease by approximately $13 million in 2016 as a result of this change. |
| |
43
| The expected return on assets assumption is calculated based on the plan’s asset allocation strategy and projected market returns over the long-term. Effective January 1, 2013, we changed2016, our return on assets assumption for the U.S. plan and U.K. plan remained unchanged to 7.25% from 7.75% in 2012. 6.25%. |
In addition to the assumptions in the above table, assumed mortality is also a key assumption in determining benefit obligations. Effective December 31, 2014, the Company updated the assumed mortality rates to reflect life expectancy improvements.
Cash Flows
In December of 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was enacted. The Act established a prescription drug benefit under Medicare, known as “Medicare Part D”, and a federal subsidy to sponsors of retiree healthcare benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Our benefits provided to certain participants are at least actuarially equivalent to Medicare Part D, and, accordingly, we are entitled to a subsidy.
Expected employer contributions in 20132016 are $30$7 million for our retirement plans and $12$9 million for our postretirement plans. In 2013,2016, we may elect to make additional non-required contributions depending on investment performance and the pension plan status. Information about the expected cash flows for our retirement and postretirement plans and the impact of the Medicare subsidy is as follows:
|
| | | | | | | | | | | | | | | | | | | |
| (in millions) | | | Postretirement Plans 2 |
| | Retirement Plans 1 | | Gross payments | | Retiree contributions | | Medicare subsidy | | Net payments |
| 2013 | $ | 72 |
| | $ | 19 |
| | $ | (7 | ) | | $ | (1 | ) | | $ | 11 |
|
| 2014 | 75 |
| | 21 |
| | (8 | ) | | (1 | ) | | 12 |
|
| 2015 | 78 |
| | 22 |
| | (10 | ) | | (1 | ) | | 11 |
|
| 2016 | 82 |
| | 24 |
| | (12 | ) | | (1 | ) | | 11 |
|
| 2017 | 86 |
| | 25 |
| | (14 | ) | | (1 | ) | | 10 |
|
| 2018-2022 | 484 |
| | 151 |
| | (98 | ) | | (3 | ) | | 50 |
|
|
| | | | | | | | | | | | | | | | | | | |
| (in millions) | | | Postretirement Plans 2 |
| | Retirement 1 Plans | | Gross payments | | Retiree contributions | | Medicare subsidy | | Net payments |
| 2016 | $ | 91 |
| | $ | 13 |
| | $ | (4 | ) | | $ | (1 | ) | | $ | 8 |
|
| 2017 | 90 |
| | 13 |
| | (4 | ) | | (1 | ) | | 8 |
|
| 2018 | 93 |
| | 12 |
| | (4 | ) | | (1 | ) | | 7 |
|
| 2019 | 96 |
| | 12 |
| | (4 | ) | | (1 | ) | | 7 |
|
| 2020 | 99 |
| | 11 |
| | (4 | ) | | (1 | ) | | 6 |
|
| 2021-2025 | 539 |
| | 43 |
| | (12 | ) | | (3 | ) | | 28 |
|
| |
1 | Reflects the total benefits expected to be paid from the plans or from our assets including both our share of the benefit cost and the participants’ share of the cost. |
| |
2 | Reflects the total benefits expected to be paid from our assets. |
Fair Value of Plan Assets
In accordance with authoritative guidance for fair value measurements certain assets and liabilities are required to be recorded at fair value. Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value hierarchy has been established which requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs used to measure fair value are as follows:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The fair value of our defined benefit plans assets as of December 31, 20122015 and 2011,2014, by asset class is as follows:
| | | (in millions) | December 31, 2012 | December 31, 2015 |
| | Total | | Level 1 | | Level 2 | | Level 3 | Total | | Level 1 | | Level 2 | | Level 3 |
| Cash and short-term investments, and other | $ | 180 |
| | $ | 2 |
| | $ | 178 |
| | $ | — |
| |
| Equity securities: | | | | | | | | |
| Cash and short-term investments | | $ | 188 |
| | $ | 8 |
| | $ | 180 |
| | $ | — |
|
| Equities: | |
| |
| |
| |
|
U.S. indexes 1 | 399 |
| | 119 |
| | 280 |
| | — |
| 312 |
| | 63 |
| | 249 |
| | — |
|
| U.S. growth and value | 344 |
| | 307 |
| | 37 |
| | — |
| 132 |
| | 92 |
| | 40 |
| | — |
|
| U.K. | 154 |
| | 85 |
| | 69 |
| | — |
| 47 |
| | 34 |
| | 13 |
| | — |
|
| International, excluding U.K. | 225 |
| | 137 |
| | 87 |
| | 1 |
| 124 |
| | 40 |
| | 84 |
| | — |
|
| Fixed income securities: | | | | | | | | |
| Fixed income: | |
| |
| |
| |
|
Long duration strategy 2 | 370 |
| | — |
| | 370 |
| | — |
| 1,072 |
| | — |
| | 1,072 |
| | — |
|
| Intermediate duration securities | 3 |
| | — |
| | 3 |
| | — |
| 33 |
| | — |
| | 33 |
| | — |
|
| Agency mortgage backed securities | 13 |
| | — |
| | 13 |
| | — |
| 6 |
| | — |
| | 6 |
| | — |
|
| Asset backed securities | 10 |
| | — |
| | 10 |
| | — |
| 17 |
| | — |
| | 17 |
| | — |
|
Non-agency mortgage backed securities 3 | 52 |
| | — |
| | 52 |
| | — |
| 23 |
| | — |
| | 23 |
| | — |
|
U.K. 4 | 41 |
| | — |
| | 41 |
| | — |
| 6 |
| | — |
| | 6 |
| | — |
|
| International, excluding U.K. | 43 |
| | — |
| | 43 |
| | — |
| 48 |
| | — |
| | 48 |
| | — |
|
| Real estate: | | | | | | | | |
U.K. 5 | 17 |
| | — |
| | — |
| | 17 |
| |
| Other | | 15 |
| | — |
| | 15 |
| | — |
|
| Total | $ | 1,851 |
| | $ | 650 |
| | $ | 1,183 |
| | $ | 18 |
| $ | 2,023 |
| | $ | 237 |
| | $ | 1,786 |
| | $ | — |
|
| | | (in millions) | December 31, 2011 | December 31, 2014 |
| | Total | | Level 1 | | Level 2 | | Level 3 | Total | | Level 1 | | Level 2 | | Level 3 |
| Cash and short-term investments, and other | $ | 32 |
| | $ | 2 |
| | $ | 30 |
| | $ | — |
| |
| Equity securities: | | | | | | | | |
| Cash, short-term investments, and other | | $ | 176 |
| | $ | 17 |
| | $ | 159 |
| | $ | — |
|
| Equities: | |
| |
| |
| |
|
U.S. indexes 1 | 306 |
| | 125 |
| | 181 |
| | — |
| 293 |
| | 88 |
| | 205 |
| | — |
|
| U.S. growth and value | 370 |
| | 370 |
| | — |
| | — |
| 204 |
| | 147 |
| | 57 |
| | — |
|
| U.K. | 144 |
| | 78 |
| | 66 |
| | — |
| 67 |
| | 56 |
| | 11 |
| | — |
|
| International, excluding U.K. | 297 |
| | 157 |
| | 139 |
| | 1 |
| 139 |
| | 42 |
| | 97 |
| | — |
|
| Fixed income securities: | | | | | | | | |
| Fixed income: | |
| |
| |
| |
|
Long duration strategy 2 | 195 |
| | — |
| | 195 |
| | — |
| 1,165 |
| | — |
| | 1,165 |
| | — |
|
| Intermediate duration securities | | 25 |
| | — |
| | 25 |
| | — |
|
| Agency mortgage backed securities | | 6 |
| | — |
| | 6 |
| | — |
|
| Asset backed securities | | 18 |
| | — |
| | 18 |
| | — |
|
Non-agency mortgage backed securities 3 | 66 |
| | — |
| | 66 |
| | — |
| 37 |
| | — |
| | 37 |
| | — |
|
U.K. 4 | 45 |
| | — |
| | 45 |
| | — |
| 7 |
| | — |
| | 7 |
| | — |
|
| International, excluding U.K. | 28 |
| | — |
| | 28 |
| | — |
| 85 |
| | — |
| | 85 |
| | — |
|
| Real estate: | | | | | | | | |
U.K. 5 | 22 |
| | — |
| | — |
| | 22 |
| |
| Other | | 14 |
| | — |
| | 14 |
| | — |
|
| Total | $ | 1,505 |
| | $ | 732 |
| | $ | 750 |
| | $ | 23 |
| $ | 2,236 |
| | $ | 350 |
| | $ | 1,886 |
| | $ | — |
|
| |
1 | Includes securities that are tracked in the following indexes: S&P 500, S&P MidCap 400, S&P MidCap 400 Growth and S&P Smallcap 600. |
| |
2 | Includes securities that are investment grade obligations of issuers in the U.S. |
| |
3 | Includes U.S. mortgage-backed securities that are not backed by the U.S. government. |
| |
4 | Includes securities originated by the government of and other issuers from the U.K. |
| |
5
| Includes a fund which holds real estate properties in the U.K. |
For securities that are quoted in active markets, the trustee/custodian determines fair value by applying securities’ prices obtained from its pricing vendors. For commingled funds that are not actively traded, the trustee applies pricing information provided by investment management firms to the unit quantities of such funds. Investment management firms employ their own pricing vendors
to value the securities underlying each commingled fund. Underlying securities that are not actively traded derive their prices from investment managers, which in turn, employ vendors that use pricing models (e.g., discounted cash flow, comparables). The domestic defined benefit plans have no investment in our stock, except through the S&P 500 commingled trust index fund.
The trustee obtains estimated prices from vendors for securities that are not easily quotable and they are categorized accordingly as Level 3. The following tables details further information our plan assets where we have used significant unobservable inputs (Level 3):
|
| | | |
| (in millions) | |
| Beginning balance as of December 31, 2011 | $ | 23 |
|
| Capital distributions | (5 | ) |
| Ending balance as of December 31, 2012 | $ | 18 |
|
Pension Trusts’ Asset Allocations
There are two pension trusts, one in the U.S. and one in the U.K.
The U.S. pension trust had assets of $1.5$1.6 billion and $1.2$1.8 billion as of December 31, 20122015 and 2011,2014, respectively, and the target allocations in 20132015 include 50%26% domestic equities, 16%6% international equity securities,equities, and 34%68% debt securities and short-term investments.
The U.K. pension trust had assets of $318$425 million and $258$443 million as of December 31, 20122015 and 2011,2014, respectively, and the target allocations in 20132015 include 78%20% equities, 40% diversified growth funds and 16%40% fixed income, and 6% U.K. real estate.income.
The pension assets are invested with the goal of producing a combination of capital growth, income and income.a liability hedge. The mix of assets is established after consideration of the long-term performance and risk characteristics of asset classes. Investments are selected
based on their potential to enhance returns, preserve capital and reduce overall volatility. Holdings are diversified within each asset class. The portfolios employ a mix of index and actively managed equity strategies by market capitalization, style, geographic regions and economic sectors. The fixed income strategies include U.S. long duration securities, opportunistic fixed income securities and U.K. debt instruments. The short-term portfolio, whose primary goal is capital preservation for liquidity purposes, is composed of government and government-agency securities, un-investeduninvested cash, receivables and payables. The portfolios do not employ any financial leverage.
U.S. Defined Contribution Plans
Assets of the defined contribution plans in the U.S. consist primarily of investment options which include actively managed equity, indexed equity, actively managed equity/bond funds, McGraw-Hilltarget date funds, McGraw Hill Financial common stock, stable value and money market strategies. There is also a self-directed mutual fund investment option. The plans purchased 620,455223,656 shares and sold 869,199247,984 shares of McGraw-HillMcGraw Hill Financial common stock in 20122015 and purchased 695,632301,924 shares and sold 796,934629,086 shares of McGraw-HillMcGraw Hill Financial common stock in 2011.2014. The plans held approximately 3.71.8 million shares of McGraw-HillMcGraw Hill Financial common stock as of December 31, 20122015 and 4.01.9 million shares as of December 31, 2011,2014, with market values of $200$179 million and $178$165 million,, respectively. The plans received dividends on McGraw-HillMcGraw Hill Financial common stock of $13$2 million during the year ended December 31, 20122015 and $4$3 million during the year ended December 31, 2011.2014.
8.7. Stock-Based Compensation
We issue stock-based incentive awards to our eligible employees and Directors under two employee stock ownership plans (the 1993 andthe 2002 Employee Stock Incentive Plans)Plan and a Director Deferred Stock Ownership Plan.
1993 Employee Stock Incentive Plan – This plan provided for the granting of incentive stock options, nonqualified stock options, stock appreciation rights (“SARs”), restricted stock awards, or other stock-based awards. No further awards may be granted under this plan; although awards granted prior to the adoption of the 2002 Plan, as amended, remain outstanding under this plan in accordance with their terms. The remaining options under this plan will expire in the first quarter of 2013.
2002 Employee Stock Incentive Plan (the “2002 Plan”) – The 2002 Plan permits the granting of nonqualified stock options, SARs,stock appreciation rights, performance stock, restricted stock and other stock-based awards.
Director Deferred Stock Ownership Plan – Under this plan, common stock reserved may be credited to deferred stock accounts for eligible Directors. In general, the plan requires that 50% of eligible Directors’ annual compensation plus dividend equivalents be credited to deferred stock accounts. Each Director may also elect to defer all or a portion of the remaining compensation and have an equivalent number of shares credited to the deferred stock account. Recipients under this plan are not required to provide consideration to us other than rendering service. Shares will be delivered as of the date a recipient ceases to be a member of the Board of Directors or within five years thereafter, if so elected. The plan will remain in effect until terminated by the Board of Directors or until no shares of stock remain available under the plan.
The number of common shares reserved for issuance are as follows:
| | | (in millions) | December 31, | December 31, |
| | 2012 | | 2011 | 2015 | | 2014 |
| Shares available for granting under the 2002 Plan | 26.8 | | 19.2 | 32.8 | | 31.4 |
| Options outstanding | 18.6 | | 27.0 | 5.8 | | 8.1 |
Total shares reserved for issuance 1 | 45.4 | | 46.2 | 38.6 | | 39.5 |
| |
1 | Shares reserved for issuance under the Director Deferred Stock Ownership Plan are not included in the total, but are less thanapproximately 0.20.1 million. |
We issue treasury shares upon exercise of stock options and the issuance of restricted stock and unit awards. To offset the dilutive effect of the exercise of employee stock options, we periodically repurchase shares, seeshares. See Note 98 – Equity for further discussion.
Also impacting the common shares reserved for issuance was the special dividend announced in the fourth quarter of 2012. In conjunction with the special dividend, the Compensation and Leadership Development Committee of the Board of Directors decided that employees who hold stock options, performance share units and restricted unit awards under the employee stock ownership plans should receive the economic benefit of the special dividend. Therefore, employees' equity awards have been adjusted to maintain the value of the award prior to the special dividend.
Stock-based compensation expense and the corresponding tax benefit are as follows:
| | | (in millions) | Years ended December 31, | Year Ended December 31, |
| | 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 |
| Stock option expense | $ | 10 |
| | $ | 19 |
| | $ | 18 |
| $ | 14 |
| | $ | 21 |
| | $ | 13 |
|
| Restricted stock and unit awards expense | 83 |
| | 58 |
| | 33 |
| 64 |
| | 79 |
| | 83 |
|
| Total stock-based compensation expense | $ | 93 |
| | $ | 77 |
| | $ | 51 |
| $ | 78 |
| | $ | 100 |
| | $ | 96 |
|
| | | | | | | |
| Tax benefit | 36 |
| | 29 |
| | 20 |
| $ | 29 |
| | $ | 38 |
| | $ | 37 |
|
Included in total stock-based compensation expense are amounts related to employees at the Company's corporate offices who transferred to MHE of $5 million, $4 million and $2 million for the years ended December 31, 2012, 2011 and 2010. Additionally, stock-basedStock-based compensation of $16 million, $19$2 million and $14$10 million is recorded in discontinued operations for the years ended December 31, 2012, 20112014 and 2010,2013, respectively, as asa result of the definitive agreement to sellsale of MHE and McGraw Hill Construction described further in Note 2 – GrowthAcquisitions and Value Plan & Discontinued OperationsDivestitures.
Stock Options
Stock options which may not be granted at a price less than the fair market value of our common stock on the date of grant,grant. Stock options granted vest over a three year service period in equal annual installments and have a maximum term of 10 years. Stock option compensation costs are recognized from the date of grant, utilizing a three-year graded vesting method. Under this method, one-third of the costs are ratably recognized over the first twelve months, one-third of the costs are ratably recognized over a twenty-four month period starting from the date of grant with the remaining costs ratably recognized over a thirty-six month period starting from the date of grant.
Stock options granted in 2011 and prior years vest over a two yearsyear service period in equal annual installments and have a maximum term of 10 years. Therefore, stockStock option compensation costs for 2011 and prior year grants are recognized from the date of grant, utilizing a two-year graded vesting method. Under this method, fifty percent of the costs are ratably recognized over the first twelve months with the remaining costs ratably recognized over a twenty-four month period starting from the date of grant.
We use a lattice-based option-pricing model to estimate the fair value of options granted. The following assumptions were used in valuing the options granted (in 2012, stock options were not granted as part of employees' total stock-based incentive awards):granted:
| | | | | Years ended December 31, | Year Ended December 31, |
| | | 2011 | | 2010 | 2015 | | 2014 | | 2013 |
| Risk-free average interest rate | | 0.2-3.5% |
| | 0.3-4.2% |
| 0.2 - 1.9% |
| | 0.1 - 2.9% |
| | 0.1 - 2.9% |
|
| Dividend yield | | 2.5-3.0% |
| | 2.9-3.1% |
| 1.4% |
| | 1.4 - 1.8% |
| | 2.07 - 2.09% |
|
| Volatility | | 21-51% |
| | 28-60% |
| 21 - 39% |
| | 18 - 41% |
| | 29 - 45% |
|
| Expected life (years) | | 6.1-6.2 |
| | 5.8-7.0 |
| 6.3 |
| | 6.21 - 6.25 |
| | 6.1 - 6.2 |
|
| Weighted-average grant-date fair value per option | | $ | 10.61 |
| | $ | 10.02 |
| $ | 27.57 |
| | $ | 23.41 |
| | $ | 14.46 |
|
Because lattice-based option-pricing models incorporate ranges of assumptions, those ranges are disclosed. These assumptions are based on multiple factors, including historical exercise patterns, post-vesting termination rates, expected future exercise patterns and the expected volatility of our stock price. The risk-free interest rate is the imputed forward rate based on the U.S. Treasury yield at the date of grant. We use the historical volatility of our stock price over the expected term of the options to estimate the expected volatility. The expected term of options granted is derived from the output of the lattice model and represents the period of time that options granted are expected to be outstanding.
Stock option activity is as follows:
| | | (in millions, except per award amounts) | Shares | | Weighted average exercise price | | Weighted-average remaining years of contractual term | | Aggregate intrinsic value | Shares |
| Weighted average exercise price |
| Weighted-average remaining years of contractual term |
| Aggregate intrinsic value |
| Options outstanding as of December 31, 2011 | 27.0 |
| | $ | 39.96 |
| | | |
| Options outstanding as of December 31, 2014 | | 8.1 |
| | $ | 45.18 |
| | |
Granted 1 | 0.7 |
| 1 |
| — |
| | | — |
| | $ | 90.30 |
| | |
| Exercised | (8.4 | ) | | $ | 35.61 |
| | | (2.2 | ) | | $ | 76.08 |
| | |
| Canceled, forfeited and expired | (0.7 | ) | | $ | 52.85 |
| | | (0.1 | ) | | $ | 53.28 |
| | |
| Options outstanding as of December 31, 2012 | 18.6 |
| | $ | 39.58 |
| | 4.1 | | $ | 288 |
| |
| Options exercisable as of December 31, 2012 | 17.5 |
| | $ | 39.71 |
| | 3.8 | | $ | 270 |
| |
| Options outstanding as of December 31, 2015 | | 5.8 |
| | $ | 45.61 |
| | 4.5 | | $ | 308 |
|
| Options exercisable as of December 31, 2015 | | 5.0 |
| | $ | 42.10 |
| | 4.0 | | $ | 283 |
|
| |
1
| These shares relate to the adjustment in connection with the special dividend announced in the fourth quarter of 2012 and, as such, a weighted average exercise price was not calculated. |
| | | (in millions, except per award amounts) | Shares | | Weighted-average grant-date fair value | Shares |
| Weighted-average grant-date fair value |
| Nonvested options outstanding as of December 31, 2011 | 3.6 |
| | $ | 10.41 |
| |
Vested 1 | (2.4 | ) | | $ | 10.34 |
| |
| Nonvested options outstanding as of December 31, 2014 | | 1.6 |
| | $ | 19.00 |
|
Granted 1 | | — |
| | $ | 27.57 |
|
| Vested | | (0.7 | ) | | $ | 18.24 |
|
| Forfeited | (0.1 | ) | | $ | 10.41 |
| (0.1 | ) | | $ | 17.44 |
|
| Nonvested options outstanding as of December 31, 2012 | 1.1 |
| | $ | 10.61 |
| |
| Nonvested options outstanding as of December 31, 2015 | | 0.8 |
| | $ | 19.82 |
|
| Total unrecognized compensation expense related to nonvested options | $ | 1 |
| | | $ | 3 |
| | |
| Weighted-average years to be recognized over | 0.3 |
| | | 1.2 |
| | |
| |
1
| The majority of the share adjustment that was recorded in connection with the special dividend announced in the fourth quarter of 2012 related to options that have previously vested, therefore, the shares granted were offset by the equivalent vested amount. |
1 There were a minimal amount of stock options granted in 2015. During 2015, the Company stopped granting stock options.
The total fair value of our stock options that vested during the years ended December 31, 2012, 20112015, 2014 and 20102013 was $21$11 million,, $18 $6 million and $20$12 million,, respectively.
We receive a tax deduction for certain stock option exercises during the period in which the options are exercised, generally for the excess of the quoted market value of the stock at the time of the exercise of the options over the exercise price of the options (“intrinsic value”). For the years ended December 31, 2012, 20112015, 2014 and 2010, $422013, $69 million,, $20 $128 million and $2$43 million,, respectively, of excess tax benefits from stock options exercised are reported in our cash flows used for financing activities.
Information regarding our stock option exercises is as follows:
| | | (in millions) | Years ended December 31, | Year Ended December 31, |
| | 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 |
| Net cash proceeds from the exercise of stock options | $ | 299 |
| | $ | 139 |
| | $ | 50 |
| $ | 86 |
| | $ | 193 |
| | $ | 258 |
|
| Total intrinsic value of stock option exercises | $ | 120 |
| | $ | 41 |
| | $ | 16 |
| $ | 94 |
| | $ | 168 |
| | $ | 158 |
|
| Income tax benefit realized from stock option exercises | $ | 47 |
| | $ | 16 |
| | $ | 6 |
| $ | 49 |
| | $ | 73 |
| | $ | 61 |
|
Restricted Stock and Unit Awards
Restricted stock and unit awards (performance and non-performance) have been granted under the 2002 Plan. Restricted stock and unit performance awards will vest only if we achieve certain financial goals over the performance period. Restricted stock non-performance awards have various vesting periods (generally three years), with vesting beginning on the first anniversary of the awards. Recipients of restricted stock and unit awards are not required to provide consideration to us other than rendering service.
The stock-based compensation expense for restricted stock and unit awards is determined based on the market price of our stock at the grant date of the award applied to the total number of awards that are anticipated to fully vest. For restricted stock and unit performance awards, adjustments are made to expense dependent upon financial goals achieved.
Restricted stock and unit activity for performance and non-performance awards is as follows:
| | | (in millions, except per award amounts) | Shares | | Weighted-average grant-date fair value | Shares | | Weighted-average grant-date fair value |
| Nonvested shares as of December 31, 2011 | 4.4 |
| | $ | 36.78 |
| |
Granted 1 | 1.7 |
| | $ | 44.38 |
| |
| Nonvested shares as of December 31, 2014 | | 1.7 |
| | $ | 61.56 |
|
| Granted | | 1.3 |
| | $ | 77.06 |
|
| Vested | (2.5 | ) | | $ | 35.24 |
| (1.6 | ) | | $ | 96.00 |
|
| Forfeited | (0.2 | ) | | $ | 37.54 |
| (0.2 | ) | | $ | 81.70 |
|
| Nonvested shares as of December 31, 2012 | 3.4 |
| | $ | 40.49 |
| |
| Total unrecognized compensation expense related to nonvested options | $ | 115 |
| | | |
| Nonvested shares as of December 31, 2015 | | 1.2 |
| | $ | 92.39 |
|
| Total unrecognized compensation expense related to nonvested awards | | $ | 60 |
| | |
| Weighted-average years to be recognized over | 1.7 |
| | | 1.6 |
| | |
| |
| There are 0.2 million shares within the total amount granted during the year that relate to the adjustment in connection with the special dividend announced in the fourth quarter of 2012.
|
| | | | Years ended December 31, | Year Ended December 31, |
| | 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 |
| Weighted-average grant-date fair value per award | $ | 44.38 |
| | $ | 37.80 |
| | $ | 33.72 |
| $ | 77.06 |
| | $ | 77.74 |
| | $ | 44.22 |
|
| Total fair value of restricted stock and unit awards vested | $ | 90 |
| | $ | 1 |
| | $ | 1 |
| $ | 155 |
| | $ | 88 |
| | $ | 119 |
|
| Tax benefit relating to restricted stock activity | $ | 32 |
| | $ | 22 |
| | $ | 13 |
| $ | 24 |
| | $ | 30 |
| | $ | 33 |
|
9.8. Equity
Capital Stock
Two million shares of preferred stock, par value $1 per share, are authorized; none have been issued.
The following table provides detail of our dividend history. On December 6, 2012, our Board of Directors approved a special dividend in the amount of $2.50 per share on our common stock, payable on December 27, 2012 to shareholders on record on December 18, 2012. On January 30, 2013,27, 2016, the Board of Directors approved an increase in the dividends for 20132016 to a quarterly rate of $0.28$0.36 per common share.
| | | | Years ended December 31, | Year Ended December 31, |
| | 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 |
| Quarterly dividend rate | $ | 0.255 |
| | $ | 0.25 |
| | $ | 0.235 |
| $ | 0.33 |
| | $ | 0.30 |
| | $ | 0.28 |
|
| Annualized dividend rate | $ | 1.02 |
| | $ | 1.00 |
| | $ | 0.94 |
| $ | 1.32 |
| | $ | 1.20 |
| | $ | 1.12 |
|
| Special dividend | $ | 2.50 |
| | $ | — |
| | $ | — |
| |
| Dividends paid (in millions) | $ | 984 |
| | $ | 296 |
| | $ | 292 |
| $ | 363 |
| | $ | 326 |
| | $ | 308 |
|
Stock Repurchases
In 2007On December 4, 2013, the Board of Directors approved a stock repurchase program authorizing the purchase of up to 4550 million shares (the “2007"2013 Repurchase Program”Program"). On June 29,, which was approximately 18% of the total shares of our outstanding common stock at that time. In 2011, the Board of Directors approved a new stock repurchase program authorizing the purchase of up to 50 million shares (the “2011 Repurchase Program”), which was approximately 17% of the total shares of our outstanding common stock at that time.
Share repurchases were as follows:
|
| | | | | | | | | | | |
| (in millions, except average price) | Years ended December 31, |
| | 2012 | | 2011 | | 2010 |
Total number of shares purchased - 2011 Repurchase Program 1 | 6.8 |
| | 26.3 |
| | — |
|
| Total number of shares purchased - 2007 Repurchase Program | — |
| | 8.4 |
| | 8.7 |
|
Average price paid per share 2 | $ | 50.35 |
| | $ | 40.48 |
| | $ | 29.37 |
|
| Total cash utilized | $ | 295 |
| | $ | 1,500 |
| | $ | 256 |
|
|
| | | | | | | | | | | |
| (in millions, except average price) | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Total number of shares purchased - 2013 Repurchase Program | 10.1 |
| | 4.4 |
| | — |
|
Total number of shares purchased - 2011 Repurchase Program 1 | — |
| | — |
| | 16.9 |
|
Average price paid per share 2, 3 | $ | 99.00 |
| | $ | 79.06 |
| | $ | 58.52 |
|
Total cash utilized 2 | $ | 1,000 |
| | $ | 352 |
| | $ | 989 |
|
| |
1 | 20122013 includes shares received at the conclusionas part of the uncollared Accelerated Share Repurchase Agreementour accelerated share repurchase agreements as described in more detail below. |
| |
2 | AverageIn December of 2015, 0.3 million shares were repurchased for approximately $26 million, which settled in January of 2016. Excluding these 0.3 million shares, the average price paid per share information does not includewas $98.98. In December of 2013, 0.1 million shares were repurchased for |
approximately $10 million, which settled in January of 2014. Excluding these 0.1 million shares, the average price paid per share was $58.36. Cash used for financing activities only reflects those shares which settled during the year ended December 31, 2015 and 2014 resulting in $974 million and $362 million of cash used to repurchase shares, respectively.
| |
3 | On June 25, 2014, we repurchased 0.5 million shares of the accelerated share repurchase transaction as discussed in more detail below.Company's common stock from the personal holdings of Harold W. McGraw III, then Chairman of the Company's Board of Directors and former President and CEO of the Company, at a discount of 0.35% from the June 24, 2014 New York Stock Exchange closing price. We repurchased these shares with cash for $41 million at an average price of $82.66 per share. See Note 13 —Related Party Transactions for further information. |
Our purchased shares may be used for general corporate purposes, including the issuance of shares for stock compensation plans and to offset the dilutive effect of the exercise of employee stock options. As of December 31, 2012,2015, 16.935.5 million shares remained available under the 20112013 Repurchase Program. As of December 31, 2012,2015, there were no remaining shares available under the 20072011 Repurchase Program. The 20112013 Repurchase Program has no expiration date and purchases under this program may be made from time to time on the open market and in private transactions, depending on market conditions.
Accelerated Share Repurchase Program
On December 7, 2011 weWe entered into two separate Accelerated Share Repurchase Agreementsan accelerated share repurchase (“ASR Agreements”ASR”) agreement with a financial institution on March 25, 2013 to initiate share repurchases aggregating $500 million.
$500 million. The first ASR Agreement was structured as an uncollared ASR Agreement for the repurchase of $250 million of shares at a per share price equal to the volume weighted average price (“VWAP”) of our common stock between December 7, 2011 and February 22, 2012.
The second ASR Agreementagreement was structured as a capped ASR Agreement for the repurchase of $250agreement in which we paid $500 million of shares at a per share price that was capped based on 110% of the VWAP of our common stock during the period from December 7, 2011 through December 21, 2011. This capped price set the minimum number of shares that will be repurchased.
Uncollared ASR Agreement
We paid $250 million on December 12, 2011 and received an initial delivery of approximately 57.2 million shares fromduring the financial institution subject to a 20%, or $50three months ended March 31, 2013, with an additional 1.4 million, holdback. At shares received on April 1, 2013, in the conclusion of the uncollared ASR Agreement, which occurred on February 22, 2012, we received 0.8 million additional shares bringing the total shares repurchased under the uncollared ASR Agreement to approximately 6 million shares.
Capped ASR Agreement
We paid $250 million and received approximately 5 million sharesaggregate, representing the minimum number of shares of our common sharesstock to be repurchased based on a calculation using a specific capped price per share. AtThe total number of shares ultimately purchased was determined based on the conclusionvolume weighted-average share price (“VWAP”), minus a discount, of the capped ASR agreement, which occurred on April 23, 2012,our common stock from March 25, 2013 through July 22, 2013. On July 25, 2013 we received 0.1a final incremental delivery of 0.7 million additional shares determined using a VWAP of $53.7995 bringing the total shares repurchased under the capped ASR Agreement to approximately 5 million shares.
The ASR Agreements were accounted for as two transactions; a stock purchase transaction and a forward stock purchase contract. The initial deliveryamount of shares resulted in an immediate reduction of our outstanding shares usedreceived to determine our weighted average common shares outstanding for purposes of calculating basic and diluted net earnings per share. The forward stock purchase contract is classified as an equity instrument. As of December 31, 2012 and 2011, the excess amount paid on a per share basis for the minimum shares purchased under the capped ASR Agreement was recorded as a reduction to additional paid-in capital in our consolidated balance sheets. We have evaluated the capped ASR Agreement for its potential dilution and as a result, these additional shares were not included in our weighted average diluted earnings per share calculation because their effect would be antidilutive.
9.3 million.
Redeemable Noncontrolling Interests
The agreement with the minority partners of our S&P Dow Jones Indices LLC partnership discussed in Note 3 – Acquisitions and Divestitures contains redemption features whereby interests held by minority partners are redeemable either (i) at the option of the holder or (ii) upon the occurrence of an event that is not solely within our control. Specifically, under the terms of the operating agreement of S&P Dow Jones Indices LLC, after December 31, 2017, CME Group and CGISCME Group Index Services LLC ("CGIS") will have the right at any time to sell, and we are obligated to buy, at least 20% of their share in S&P Dow Jones Indices LLC. In addition, in the event there is a change of control of the Company, for the 15 days following a change in control, CME Group and CGIS will have the right to put their interest to us at the then fair value of CME Group's and CGIS' minority interest.
If interests were to be redeemed under this agreement, we would generally be required to purchase the interest at fair value on the date of redemption. This interest is presented on the consolidated balance sheetsheets outside of equity under the caption “Redeemable noncontrolling interest” with an initial value based on fair value for the portion attributable to the net assets we acquired, and based on our historical cost for the portion attributable to our S&P Index business. RedeemableWe adjust the redeemable noncontrolling interest will be adjusted each reporting period to its estimated redemption value, usingbut never less than its initial fair value, considering a combination of an income and market valuation approach, but in no eventapproach. Our income and market valuation approaches may incorporate Level 3 fair value measures for instances when observable inputs are not available, including assumptions related to an amount less than its initial fair value.expected future net cash flows, long-term growth rates, the timing and nature of tax attributes, and the redemption features. Any adjustments to the redemption value will impact retained income.
Noncontrolling interests that do not contain such redemption features are presented in equity.
Changes to redeemable noncontrolling interest during the year ended December 31, 20122015 were as follows:
| | | (in millions) | | |
| Opening redeemable noncontrolling interest | $ | 792 |
| |
| Balance as of December 31, 2014 | | $ | 810 |
|
| Net income attributable to noncontrolling interest | 34 |
| 101 |
|
| Distributions to noncontrolling interest | (33 | ) | (98 | ) |
| Redemption value adjustment | 17 |
| 107 |
|
| Ending redeemable noncontrolling interest | $ | 810 |
| |
| Balance as of December 31, 2015 | | $ | 920 |
|
10.Accumulated Other Comprehensive Loss
The following table summarizes the changes in the components of accumulated other comprehensive loss for the year ended December 31, 2015:
|
| | | | | | | | | | | | | | | | |
| (in millions) | Foreign Currency Translation Adjustment | | Pension and Postretirement Benefit Plans | | Unrealized Gain (Loss) on Forward Exchange Contracts | | Accumulated Other Comprehensive Loss |
| Balance as of December 31, 2014 | $ | (83 | ) | | $ | (431 | ) | | $ | — |
| | $ | (514 | ) |
| Other comprehensive income before reclassifications | (110 | ) | | 13 |
| | (1 | ) | | (98 | ) |
| Reclassifications from accumulated other comprehensive loss to net earnings |
| | 12 |
| 1 |
|
| | 12 |
|
| Net other comprehensive income | (110 | ) | | 25 |
| | (1 | ) | | (86 | ) |
| Balance as of December 31, 2015 | $ | (193 | ) | | $ | (406 | ) | | $ | (1 | ) | | $ | (600 | ) |
| |
1 | See Note 6 —Employee Benefits for additional details of items reclassed from accumulated other comprehensive loss to net earnings. |
The net actuarial loss and prior service cost related to pension and other postretirement benefit plans included in other comprehensive income is net of a tax provision of $7 million for the year ended December 31, 2015.
9. Earnings (Loss) per Share
Basic earnings (loss) per common share (“EPS”) is computed by dividing net income (loss) attributable to the common shareholders of the Company by the weighted-average number of common shares outstanding. Diluted EPSearnings (loss) per share is computed in the same manner as basic EPS,earnings (loss) per share, except the number of shares is increased to include additional common shares that would have been outstanding if potential common shares with a dilutive effect had been issued. Potential common shares consist primarily of stock options, restricted stock and restricted stock units calculated using the treasury stock method.
The calculation for basic and diluted EPSearnings (loss) per share is as follows:
|
| | | | | | | | | | | |
| (in millions, except per share data) | Years ended December 31, |
| | 2012 | | 2011 | | 2010 |
| Amount attributable to The McGraw-Hill Companies, Inc. common shareholders: | | | | | |
| Income from continuing operations | $ | 676 |
| | $ | 607 |
| | $ | 581 |
|
| (Loss) income from discontinued operations | (239 | ) | | 304 |
| | 247 |
|
| Net income attributable to the Company | $ | 437 |
| | $ | 911 |
| | $ | 828 |
|
| | | | | | |
| Basic weighted-average number of common shares outstanding | 278.6 |
| | 298.1 |
| | 309.4 |
|
| Effect of stock options and other dilutive securities | 6.0 |
| | 5.5 |
| | 2.8 |
|
| Diluted weighted-average number of common shares outstanding | 284.6 |
| | 303.6 |
| | 312.2 |
|
| | | | | | |
| Basic EPS: | | | | | |
| Income from continuing operations | $ | 2.43 |
| | $ | 2.03 |
| | $ | 1.88 |
|
| (Loss) income from discontinued operations | (0.86 | ) | | 1.02 |
| | 0.80 |
|
| Net income | $ | 1.57 |
| | $ | 3.05 |
| | $ | 2.68 |
|
| Diluted EPS: | | | | | |
| Income from continuing operations | $ | 2.37 |
| | $ | 2.00 |
| | $ | 1.86 |
|
| (Loss) income from discontinued operations | (0.84 | ) | | 1.00 |
| | 0.79 |
|
| Net income | $ | 1.53 |
| | $ | 3.00 |
| | $ | 2.65 |
|
|
| | | | | | | | | | | |
| (in millions, except per share data) | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Amount attributable to McGraw Hill Financial, Inc. common shareholders: | | | | | |
| Income (loss) from continuing operations | $ | 1,156 |
| | $ | (293 | ) | | $ | 783 |
|
| Income from discontinued operations | — |
| | 178 |
| | 593 |
|
| Net income (loss) attributable to the Company | $ | 1,156 |
| | $ | (115 | ) | | $ | 1,376 |
|
| | | | | | |
| Basic weighted-average number of common shares outstanding | 271.6 |
| | 271.5 |
| | 274.5 |
|
| Effect of stock options and other dilutive securities | 3.0 |
| | — |
| | 5.3 |
|
| Diluted weighted-average number of common shares outstanding | 274.6 |
| | 271.5 |
| | 279.8 |
|
| | | | | | |
| Income (loss) from continuing operations: | | | | | |
| Basic | $ | 4.26 |
| | $ | (1.08 | ) | | $ | 2.85 |
|
| Diluted | $ | 4.21 |
| | $ | (1.08 | ) | | $ | 2.80 |
|
| Income from discontinued operations: | | | | | |
| Basic | $ | — |
| | $ | 0.66 |
| | $ | 2.16 |
|
| Diluted | $ | — |
| | $ | 0.66 |
| | $ | 2.12 |
|
| Net income (loss): | | | | | |
| Basic | $ | 4.26 |
| | $ | (0.42 | ) | | $ | 5.01 |
|
| Diluted | $ | 4.21 |
| | $ | (0.42 | ) | | $ | 4.91 |
|
There were 1.4 million, 1.6 million91
Each period we have certain stock options and1.4 million restricted performance shares outstanding as of December 31, 2012, 2011 and 2010, respectively, that were not included inare excluded from the computation of diluted earnings (loss) per common share because the necessary vesting conditions have not yet been met.
share. The effect of the potential exercise of stock options is excluded from the computation of diluted earnings per share when the average market price of theour common stock is lower than the exercise price of the related option during the period or when a loss from continuing operations exists because the effect would have been antidilutive. ForAdditionally, restricted performance shares are excluded because the necessary vesting conditions had not been met or when a loss from continuing operations exists. As of December 31, 2015, there were no stock options excluded as compared to 2.9 million and 1.2 million stock options excluded for the years ended December 31, 2012, 20112014 and 2010, the number2013, respectively. Additionally, restricted performance shares outstanding of stock options excluded from the computation was 3.40.9 million,, 10.1 3.2 million and 23.20.9 million, respectively. as of December 31, 2015, 2014 and 2013, respectively, were excluded.
11.10. Restructuring
In orderDuring 2015 and 2014, we continued to contain costsevaluate our cost structure and mitigate the impact of currentfurther identified cost savings associated with streamlining our management structure and expected future economic conditions, as well as continued focus on process improvements, we have initiated variousour decision to exit non-strategic businesses. Our 2015 and 2014 restructuring plans over the last several years. The plans that are currently active withconsisted of a remaining liabilitycompany-wide workforce reduction of approximately 550 positions and 590 positions, respectively, and are further describeddetailed below. The charges for each restructuring plan are classified as selling and general expenses within the consolidated statements of income and the reserves are included in other current liabilities in the consolidated balance sheets.
In certain circumstances, reserves are no longer needed because of efficiencies in carrying out the plans or because employees previously identified for separation resigned from the Company and did not receive severance or were reassigned due to circumstances not foreseen when the original plans were initiated. In these cases, we reverse reserves through the consolidated statements of income during the period when it is determined they are no longer needed. As partThere was approximately $7 million of reserves from the definitive agreement to sell MHE to investment funds affiliated with Apollo Global Management, LLC, described further2014 restructuring plan that we have reversed in Note 2 – Growth and Value Plan & Discontinued Operations, we will retain MHE's2015, which offset the initial charge of $86 million recorded for the 2014 restructuring liabilities. Therefore the remaining reserves described below include MHE's restructuring liability, however, the charge associated with the reserve has been bifurcated between continuing and discontinued operations.plan.
During the second half of 2012, we continued to identify opportunities for cost savings through workforce reductions and other restructuring activities as part of our Growth and Value Plan, which includes creating two independent companies with focused cost structures. Approximately 45% of the headcount reduction related to our finance & accounting, human resource, information technology, and other support services within our shared service center as we transition various work to selected outsource providers. We recorded a pre-taxThe initial restructuring charge recorded and the ending reserve balance as of $68 million, consisting of employee severance costs related to a company-wide workforce reduction of approximately 670 positions. This charge consisted of $15 million for S&P Ratings, $19 million for S&P Capital IQ, $1 million for S&P DJ Indices, $12 million for C&C and $21 million for our corporate segment. The total reserve, including MHE, was $107 million. December 31, 2015 by segment is as follows:
|
| | | | | | | | | | | | | | | |
| | 2015 Restructuring Plan | | 2014 Restructuring Plan |
| (in millions) | Initial Charge Recorded | | Ending Reserve Balance | | Initial Charge Recorded | | Ending Reserve Balance |
| S&P Ratings | $ | 18 |
| | $ | 15 |
| | $ | 45 |
| | 6 |
|
| S&P Capital IQ and SNL | 31 |
| | 23 |
| | 9 |
| | 1 |
|
C&C 1 | 3 |
| | 2 |
| | 16 |
| | 1 |
|
| Corporate | 11 |
| | 10 |
| | 16 |
| | 5 |
|
| Total | $ | 63 |
| | $ | 50 |
| | $ | 86 |
| | $ | 13 |
|
| |
1 | As part of the sale of McGraw Hill Construction, which has historically been part of our C&C segment, to Symphony Technology Group, described further in Note 2 —Acquisitions and Divestitures, we retained McGraw Hill Construction's restructuring liabilities and the initial charge associated with the reserve has been bifurcated between continuing and discontinued operations. The 2014 restructuring plan includes an initial charge of $3 million. |
For the year ended December 31, 2012,2015, we have reduced the reserve by $15 millionfor cash payments for employee severance costs. The remaining reserve as of December 31, 2012 is $92 million.
During the fourth quarter of 2011, we initiated a2015 restructuring plan to create a flatterby $13 million and more agile organization as part of our Growth and Value Plan. We recorded a pre-tax restructuring charge of $32 million, consisting primarily of facility exit costs and employee severance costs related to a company-wide workforce reduction of approximately 250 positions. This charge consisted of $9 millionfor S&P Ratings, $6 million for C&C and $17 million for our corporate segment. The total reserve, including MHE, was $66 million. In the second quarter of 2012 we recorded an additional pre-tax restructuring charge of $5 million primarily for employee severance costs as part of the Growth and Value Plan. For the years ended December 31, 20122015 and December 31, 2011,2014, we have reduced the reserve for the 2014 restructuring plan by $47$64 million and $4$9 million,, respectively, respectively. The reductions primarily relatingrelated to cash payments for employee severance costs. The remaining reserve as of December 31, 2012 is $20 million.
As of December 31, 2012, our 2006 restructuring initiative still has a remaining reserve relating to facilities costs of $2 million.
12.11. Segment and Geographic Information
As discussed in Note 1 – Accounting Policies, we have four reportable segments: S&P Ratings, S&P Capital IQ and SNL, S&P DJ Indices and C&C. As a result of our joint venture between CME Group and Dow Jones & Company, Inc., to form a new company, S&P Dow Jones Indices LLC and how we are managing this company, combined with the formation of McGraw Hill Financial, we have separated our previously reported S&P Capital IQ / S&P Indices segment into two separate reportable segments. These changes had no impact on consolidated revenue or operating profit. Our previously reported MHE segment is reported as a discontinued operation as discussed in Note 2 – Growth and Value Plan & Discontinued Operations.
TheOur Chief Executive Committee, consisting of our principal corporate executives,Officer is our chief operating decision-maker and evaluates performance of our segments and allocates resources based primarily on operating profit. Segment operating profit does not include unallocated expense or interest expense, whichas these are centrally managed costs.costs that do not affect the operating results of our segments. We use the same accounting policies for our segments as those described in Note 1 – Accounting Policies.
Segment information for the years ended December 31 is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Revenue | | Operating Profit |
| | 2012 | 2011 | 2010 | | 2012 | 2011 | 2010 |
| S&P Ratings | $ | 2,034 |
| | $ | 1,767 |
| | $ | 1,695 |
| | $ | 849 |
| | $ | 720 |
| | $ | 762 |
|
| S&P Capital IQ | 1,124 |
| | 1,031 |
| | 916 |
| | 208 |
| | 214 |
| | 171 |
|
| S&P DJ Indices | 388 |
| | 323 |
| | 273 |
| | 212 |
| | 189 |
| | 144 |
|
| C&C | 973 |
| | 896 |
| | 811 |
| | 248 |
| | 180 |
| | 153 |
|
| Intersegment elimination | (69 | ) | | (63 | ) | | (56 | ) | | — |
| | — |
| | — |
|
| Total operating segments | 4,450 |
| | 3,954 |
| | 3,639 |
| | 1,517 |
| | 1,303 |
| | 1,230 |
|
| Unallocated expense | — |
| | — |
| | — |
| | (306 | ) | | (226 | ) | | (204 | ) |
| Total | $ | 4,450 |
| | $ | 3,954 |
| | $ | 3,639 |
| | $ | 1,211 |
| | $ | 1,077 |
| | $ | 1,026 |
|
| | | (in millions) | Depreciation & Amortization 1 | | Capital Expenditures | Revenue | | Operating Profit (Loss) |
| | 2012 | 2011 | 2010 | | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | | 2015 | 2014 | 2013 |
| S&P Ratings | $ | 43 |
| | $ | 40 |
| | $ | 37 |
| | $ | 43 |
| | $ | 40 |
| | $ | 39 |
| $ | 2,428 |
| | $ | 2,455 |
| | $ | 2,274 |
| | $ | 1,078 |
| | $ | (583 | ) | | $ | 882 |
|
| S&P Capital IQ | 50 |
| | 43 |
| | 28 |
| | 22 |
| | 21 |
| | 21 |
| |
| S&P Capital IQ and SNL | | 1,405 |
| | 1,237 |
| | 1,170 |
| | 228 |
| | 228 |
| | 189 |
|
| S&P DJ Indices | 8 |
| | 3 |
| | 3 |
| | 2 |
| | 2 |
| | 2 |
| 597 |
| | 552 |
| | 493 |
| | 392 |
| | 347 |
| | 266 |
|
| C&C | 23 |
| | 23 |
| | 22 |
| | 17 |
| | 14 |
| | 10 |
| 971 |
| | 893 |
| | 841 |
| | 357 |
| | 290 |
| | 280 |
|
Intersegment elimination 1 | | (88 | ) | | (86 | ) | | (76 | ) | | — |
| | — |
| | — |
|
| Total operating segments | 124 |
| | 109 |
| | 90 |
| | 84 |
| | 77 |
| | 72 |
| 5,313 |
| | 5,051 |
| | 4,702 |
| | 2,055 |
| | 282 |
| | 1,617 |
|
| Corporate | 17 |
| | 17 |
| | 18 |
| | 13 |
| | 15 |
| | 14 |
| |
Unallocated expense 2 | | — |
| | — |
| | — |
| | (138 | ) | | (169 | ) | | (259 | ) |
| Total | $ | 141 |
| | $ | 126 |
| | $ | 108 |
| | $ | 97 |
| | $ | 92 |
| | $ | 86 |
| $ | 5,313 |
| | $ | 5,051 |
| | $ | 4,702 |
| | $ | 1,917 |
| | $ | 113 |
| | $ | 1,358 |
|
| |
1 | Depreciation & AmortizationRevenue for S&P Ratings and expenses for S&P Capital IQ and SNL include an intersegment royalty charged to S&P Capital IQ and SNL for the rights to use and distribute content and data developed by S&P Ratings. |
| |
2 | The year ended December 31, 2015 includes amortizationa gain of technology projects.$11 million related to the sale of our interest in a legacy McGraw Hill Construction investment and costs related to identified operating efficiencies primarily related to restructuring of $10 million. The year ended December 31, 2014 includes restructuring charges of $16 million. The year ended December 31, 2013 includes costs necessary to enable the separation of MHE and reduce our cost structure of $64 million, a $36 million non-cash impairment charge related to the sale of a data center and $13 million related to terminating various leases as we reduce our real estate portfolio. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Depreciation & Amortization | | Capital Expenditures |
| | 2015 | 2014 | 2013 | | 2015 | 2014 | 2013 |
| S&P Ratings | $ | 43 |
| | $ | 43 |
| | $ | 45 |
| | $ | 48 |
| | $ | 33 |
| | $ | 40 |
|
| S&P Capital IQ and SNL | 70 |
| | 50 |
| | 49 |
| | 60 |
| | 38 |
| | 39 |
|
| S&P DJ Indices | 8 |
| | 7 |
| | 10 |
| | 4 |
| | 2 |
| | 4 |
|
| C&C | 29 |
| | 24 |
| | 22 |
| | 18 |
| | 11 |
| | 17 |
|
| Total operating segments | 150 |
| | 124 |
| | 126 |
| | 130 |
| | 84 |
| | 100 |
|
| Corporate | 7 |
| | 10 |
| | 11 |
| | 9 |
| | 8 |
| | 17 |
|
| Total | $ | 157 |
| | $ | 134 |
| | $ | 137 |
| | $ | 139 |
| | $ | 92 |
| | $ | 117 |
|
Segment information as of December 31 is as follows:
| | | (in millions) | Total Assets | Total Assets |
| | 2012 | | 2011 | 2015 | | 2014 |
| S&P Ratings | $ | 726 |
| | $ | 667 |
| $ | 620 |
| | $ | 624 |
|
| S&P Capital IQ | 1,123 |
| | 809 |
| |
| S&P Capital IQ and SNL | | 3,405 |
| | 1,011 |
|
| S&P DJ Indices | 1,133 |
| | 303 |
| 1,181 |
| | 1,166 |
|
| C&C | 1,000 |
| | 954 |
| 606 |
| | 918 |
|
| Total operating segments | 3,982 |
| | 2,733 |
| 5,812 |
| | 3,719 |
|
Corporate 1 | 1,130 |
| | 1,379 |
| 1,868 |
| | 3,054 |
|
| Assets held for sale | 1,940 |
| | 2,508 |
| |
Assets of a business held for sale 2 | | 503 |
| | — |
|
| Total | $ | 7,052 |
| | $ | 6,620 |
| $ | 8,183 |
| | $ | 6,773 |
|
| |
1 | Corporate assets consist principally of cash and cash equivalents, assets for pension benefits, deferred income taxes and leasehold improvements related to subleased areas. |
| |
2 | Includes J.D. Power as of December 31, 2015. |
We have operations with foreign revenue and long-lived assets in approximately 8090 countries. We do not have operations in any foreign country that represent more than 8% of our consolidated revenue. Transfers between geographic areas are recorded at agreed upon prices and intercompany revenue and profit are eliminated. No single customer accounted for more than 10% of our consolidated revenue.
The following is a schedule ofprovides revenue and long-lived assets by geographic region:
| | | (in millions) | Revenue | | Long-lived Assets | Revenue | | Long-lived Assets |
| | Years ended December 31, | | December 31, | Years ended December 31, | | December 31, |
| | 2012 | | 2011 | | 2010 | | 2012 | | 2011 | 2015 | | 2014 | | 2013 | | 2015 | | 2014 |
| United States | $ | 2,684 |
| | $ | 2,373 |
| | $ | 2,253 |
| | $ | 2,376 |
| | $ | 873 |
| |
| U.S. | | $ | 3,202 |
| | $ | 2,911 |
| | $ | 2,723 |
| | $ | 4,198 |
| | $ | 2,117 |
|
| European region | 1,067 |
| | 951 |
| | 839 |
| | 441 |
| | 638 |
| 1,265 |
| | 1,316 |
| | 1,226 |
| | 419 |
| | 430 |
|
| Asia | 454 |
| | 423 |
| | 357 |
| | 70 |
| | 406 |
| 566 |
| | 528 |
| | 483 |
| | 63 |
| | 54 |
|
| Rest of the world | 245 |
| | 207 |
| | 190 |
| | 57 |
| | 40 |
| 280 |
| | 296 |
| | 270 |
| | 50 |
| | 64 |
|
| Total | $ | 4,450 |
| | $ | 3,954 |
| | $ | 3,639 |
| | $ | 2,944 |
| | $ | 1,957 |
| $ | 5,313 |
| | $ | 5,051 |
| | $ | 4,702 |
| | $ | 4,730 |
| | $ | 2,665 |
|
|
| | | | | | | | | | | | | | |
| | Revenue | | Long-lived Assets |
| | Years ended December 31, | | December 31, |
| | 2015 | | 2014 | | 2013 | | 2015 | | 2014 |
| U.S. | 60 | % | | 58 | % | | 58 | % | | 89 | % | | 80 | % |
| European region | 24 |
| | 26 |
| | 26 |
| | 9 |
| | 16 |
|
| Asia | 11 |
| | 10 |
| | 10 |
| | 1 |
| | 2 |
|
| Rest of the world | 5 |
| | 6 |
| | 6 |
| | 1 |
| | 2 |
|
| Total | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
See Note 32 – Acquisitions and Divestitures, and Note 1110 – Restructuring, for actions that impacted the segment operating results.
13.12. Commitments and Contingencies
Rental Expense and Lease Obligations
We are committed under lease arrangements covering property, computer systems and office equipment. Leasehold improvements are amortized on a straight-line basis over the shorter of their economic lives or their lease term. Certain lease arrangements contain escalation clauses covering increased costs for various defined real estate taxes and operating services and the associated fees are recognized on a straight-line basis over the minimum lease period.
Rental expense for property and equipment under all operating lease agreements is as follows:
| | | (in millions) | Years ended December 31, | Years ended December 31, |
| | 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 |
| Gross rental expense | $ | 164 |
| | $ | 158 |
| | $ | 156 |
| $ | 182 |
| | $ | 199 |
| | $ | 202 |
|
| Less: sublease revenue | (4 | ) | | (2 | ) | | (2 | ) | (14 | ) | | (16 | ) | | (29 | ) |
| Less: Rock-McGraw rent credit | (19 | ) | | (18 | ) | | (18 | ) | (4 | ) | | (23 | ) | | (20 | ) |
| Net rental expense | $ | 141 |
| | $ | 138 |
| | $ | 136 |
| $ | 164 |
| | $ | 160 |
| | $ | 153 |
|
In December of 2003, we sold our 45% equity investment in Rock-McGraw, Inc., which ownsowned our then headquarters building in New York City, and remained an anchor tenant of what continues to be known as The McGraw-Hill Companies building by concurrently leasing back space from the buyer through 2020. As of December 31, 2012, we leased approximately 17% of the building space. Proceeds from the disposition were $382 million and the sale resulted in a pre-tax gain, net of transaction costs, of $131 million ($58 million after-tax) upon disposition. As a result of the amount of building space we retained through our leaseback, a pre-tax gain of $212 million ($126 million after-tax) was deferred upon the disposition in 2003. ThisIn December of 2013, we entered into an arrangement with the buyer to shorten the lease to December of 2015 in exchange for approximately $60 million which was recorded as a reduction to the unrecognized deferred gain is beingfrom the sale. The remaining gain was amortized over the remaining lease term as a reduction in rent expense, reducing the deferred gain to $123 million as of December 31, 2012.expense. The amount of gain recognized for the gain amortized during the yearyears ended December 31, 20122015, 2014 and 2013 was $13$4 million,. Interest expense associated with this operating $21 million and $15 million, respectively. The lease for the year ended terminated in December 31, 2012 was $6 million.of 2015.
Cash amounts for future minimum rental commitments, including rent payments on the sale-leaseback, under existing non-cancelable leases with a remaining term of more than one year, along with minimum sublease rental income to be received under non-cancelable subleases are shown in the following table.
| | | (in millions) | Rent commitment | | Sublease income | | Net rent | Rent commitment | | Sublease income | | Net rent |
| 2013 | $ | 166 |
| | $ | (8 | ) | | $ | 158 |
| |
| 2014 | 151 |
| | (7 | ) | | 144 |
| |
| 2015 | 138 |
| | (8 | ) | | 130 |
| |
| 2016 | 127 |
| | (7 | ) | | 120 |
| $ | 136 |
| | $ | (14 | ) | | $ | 122 |
|
| 2017 | 117 |
| | (6 | ) | | 111 |
| 120 |
| | (13 | ) | | 107 |
|
| 2018 and beyond | 373 |
| | (14 | ) | | 359 |
| |
| 2018 | | 109 |
| | (13 | ) | | 96 |
|
| 2019 | | 101 |
| | (13 | ) | | 88 |
|
| 2020 | | 49 |
| | (2 | ) | | 47 |
|
| 2021 and beyond | | 162 |
| | — |
| | 162 |
|
| Total | $ | 1,072 |
| | $ | (50 | ) | | $ | 1,022 |
| $ | 677 |
| | $ | (55 | ) | | $ | 622 |
|
Related Party AgreementsLegal & Regulatory Matters
In the normal course of business both in the United States and abroad, the Company, its subsidiary Standard & Poor’s Financial Services LLC (“S&P LLC”) and some of its other subsidiaries are defendants in numerous legal proceedings and are often the subject of government and regulatory proceedings, investigations and inquiries. Many of these proceedings, investigations and inquiries relate to the ratings activity of S&P Ratings brought by issuers and alleged purchasers of rated securities. In addition, various government and self-regulatory agencies frequently make inquiries and conduct investigations into our compliance with applicable laws and regulations, including those related to ratings activities and antitrust matters. Any of these proceedings, investigations or inquiries could ultimately result in adverse judgments, damages, fines, penalties or activity restrictions, which could adversely impact our consolidated financial condition, cash flows, business or competitive position.
The Company believes that it has meritorious defenses to the pending claims and potential claims in the matters described below and is diligently pursuing these defenses, and in some cases working to reach an acceptable negotiated resolution. However, in view of the uncertainty inherent in litigation and government and regulatory enforcement matters, we cannot predict the eventual outcome of these matters or the timing of their resolution, or in most cases reasonably estimate what the eventual judgments, damages, fines, penalties or impact of activity restrictions may be. As a result, we cannot provide assurance that the outcome of the matters described below will not have a material adverse effect on our consolidated financial condition, cash flows, business or competitive position. As litigation or the process to resolve pending matters progresses, as the case may be, we will continue to review the latest information available and assess our ability to predict the outcome of such matters and the effects, if any, on our consolidated financial condition, cash flows, business and competitive position, which may require that we record liabilities in the consolidated financial statements in future periods.
S&P Ratings
Financial Crisis Litigation
The Company and its subsidiaries continue to defend civil cases brought by private and public plaintiffs arising out of ratings activities prior to and during the global financial crisis of 2008-2009. Discovery in these cases is ongoing. We can provide no assurance that we will not be obligated to pay significant amounts in order to resolve these matters on terms deemed acceptable. At this time, however, we are unable to reasonably estimate the range of such additional amounts, if any.
U.S. Securities and Exchange Commission
As a nationally recognized statistical rating organization registered with the SEC under Section 15E of the Securities Exchange Act of 1934, S&P Ratings is in ongoing communication with the staff of the SEC regarding compliance with its extensive obligations under the federal securities laws. Although S&P Ratings seeks to promptly address any compliance issues that it detects or that the staff of the SEC raises, there can be no assurance that the SEC will not seek remedies against S&P Ratings for one or more compliance deficiencies.
Trani Prosecutorial Proceeding
The prosecutor in the Italian city of Trani has obtained criminal indictments against several current and former S&P Ratings managers and ratings analysts for alleged market manipulation, and against Standard & Poor’s Credit Market Services Europe under Italy’s vicarious liability statute, for having allegedly failed to properly supervise the ratings analysts and prevent them from committing market manipulation. The prosecutor’s theories are based on various actions by S&P Ratings taken with respect to Italian sovereign debt between May of 2011 and January of 2012. Trial commenced on February 4, 2015 and is ongoing. Apart from criminal penalties that might be imposed following a conviction, such conviction could also lead to civil damages claims and other sanctions against Standard & Poor's Credit Market Services Europe or the Company. Such claims and sanctions cannot be quantified at this stage.
Shareholder Derivative Actions
On August 3, 2015, two purported shareholders commenced a putative derivative action on behalf of the Company in New York State Supreme Court titled Retirement Plan for General Employees of the City of North Miami Beach and Robin Stein v. Harold McGraw III, et al. The complaint asserts claims for, inter alia, breach of fiduciary duty, waste of corporate assets, and mismanagement against the board of directors, certain former directors of the Company, and three former S&P Ratings employees. Plaintiffs seek recovery from the defendants based on allegations that S&P Ratings’ credit ratings practices for certain residential mortgage-backed securities and collateralized debt obligations misrepresented the credit risks of those securities, allegedly resulting in losses to the Company. The Company and the individual defendants filed motions to dismiss the complaint on October 9, 2015. Plaintiffs filed an opposition on December 8, 2015, and the Company and the individual defendants filed their reply on January 8, 2016. The court has scheduled oral argument on the motions to dismiss for April 22, 2016.
On January 28, 2016, a different purported shareholder commenced a separate putative derivative action on behalf of the Company in New York State Supreme Court titled L.A. Grika v. Harold McGraw III, et al. The allegations in the complaint are substantially similar to those in the North Miami Beach matter described above. The complaint asserts claims for, inter alia, breach of fiduciary duty, aiding and abetting breaches of fiduciary duty, unjust enrichment, contribution and indemnification against Harold McGraw III, Douglas L. Peterson, and nine former S&P Ratings employees. The Company is reviewing the plaintiff’s complaint and intends to vigorously defend this matter.
The City of Swan
Australian government municipal councils filed suit against the Company and S&P International LLC in a representative action in April of 2013 in connection with alleged investment losses in eight synthetic collateralized debt obligations (“CDOs”) rated by S&P Ratings. These same CDOs were at issue in an earlier lawsuit brought by the plaintiffs against its investment advisor, Lehman Brothers Australia (“LBA”), in which the plaintiffs secured a judgment against LBA, which is now in liquidation. The plaintiffs claim total losses of AUD$327 million from these investments and are seeking recovery from both LBA and the Company. The trial in the matter has been re-scheduled from October of 2015 to August of 2016. The Company and the plaintiffs are currently engaged in settlement discussions. The Company has established a reserve for potential settlement in an amount deemed adequate by management based on the facts and circumstances of the case. We can provide no assurance that the Company will not incur amounts in excess of amounts accrued to settle this matter on terms deemed acceptable. At this point, however, we are unable to reasonably estimate the range of such additional amounts, if any.
Commodities & Commercial Markets
McGraw Hill Construction
Under the terms of an asset purchase agreement with Skyline HoldCo LLC (“Skyline”) related to Skyline’s purchase of the McGraw Hill Construction business from the Company in November 2014, the Company agreed to retain liability with respect to the litigation captioned, Reed Construction Data Inc. v. The McGraw-Hill Companies, Inc. et al., 09 Civ. 8578 (JPO), in the United States District Court for the Southern District of New York, and any action instituted at any time by the parties thereto arising from substantially the same set of facts and circumstances.
Reed Construction Data filed this action in the U.S. District Court for the Southern District of New York in October of 2009, asserting a number of claims under various state and federal laws against the Company relating to alleged misappropriation and unfair competition by McGraw Hill Construction and seeking an unspecified amount of damages. In September of 2010, the Court granted the Company’s motion to dismiss some of the claims. In September of 2014, the Court granted summary judgment to the Company on all of Reed’s remaining claims with the exception of the unfair competition claim. In October of 2014, the parties submitted a joint stipulation to the Court agreeing to dismiss both Reed’s unfair competition claim and the Company’s counterclaims without prejudice to reinstatement in the event of a successful appeal of Reed’s dismissed claims. On January 7, 2016, the Second Circuit Court of Appeals affirmed the District Court’s grant of summary judgment.
| |
| 13. | Related Party Transactions |
On July 31, 2014, we completed the sale of the Company's aircraft to Harold W. McGraw III, then Chairman of the Company's Board of Directors and former President and CEO of the Company ("Mr. McGraw") for a purchase price of $20 million, which is modestly higher than the independent appraisal obtained. This transaction was approved by the Nominating and Corporate Governance Committee of the Company's Board of Directors after consultation with members of the Financial Policy Committee. During the second quarter of 2014, we recorded a non-cash impairment charge of $6 million within other (income) loss in our consolidated statement of income as a result of the pending sale.
On June 25, 2014, we repurchased 0.5 million shares of the Company's common stock from the personal holdings of Mr. McGraw. The shares were purchased at a discount of 0.35% from the June 24, 2014 New York Stock Exchange closing price pursuant to a
private transaction with Mr. McGraw. We repurchased these shares with cash for $41 million at an average price of $82.66 per share. This transaction was approved by the Nominating and Corporate Governance Committee of the Company's Board of Directors after consultation with members of the Financial Policy Committee.
In June of 2012, we entered into a new license agreement (the "License Agreement") with the holder of S&P Dow Jones Indices LLC noncontrolling interest, CME Group, which replaced the 2005 license agreement between S&P DJ Indices and CME Group. Under the terms of the License Agreement, S&P Dow Jones Indices LLC receives a share of the profits from the trading and clearing of CME Group's equity index products. During the yearyears ended December 31, 2012,2015, 2014 and 2013, S&P Dow Jones Indices LLC earned $21$63 million, $52 million and $46 million of revenue under the terms of the License Agreement.Agreement, respectively. The entire amount of this revenue is included in our consolidated statement of income and the portion related to the 27% noncontrolling interest is removed in the net income attributable to noncontrolling interests.
Legal Matters
In the normal course of business both in the United States and abroad, the Company and its subsidiaries are defendants in numerous legal proceedings and are involved, from time to time, in governmental and self-regulatory agency proceedings which may result in adverse judgments, damages, fines or penalties. Also, various governmental and self-regulatory agencies regularly make inquiries and conduct investigations concerning compliance with applicable laws and regulations.
A writ of summons was served on The McGraw-Hill Companies, SRL and on The McGraw-Hill Companies, SA (both indirect subsidiaries of the Company) (collectively, “Standard & Poor's”) on September 29, 2005 and October 7, 2005, respectively, in an action brought in the Tribunal of Milan, Italy by Enrico Bondi (“Bondi”), the Extraordinary Commissioner of Parmalat Finanziaria S.p.A. and Parmalat S.p.A. (collectively, “Parmalat”). Bondi had brought numerous other lawsuits in both Italy and the United States against entities and individuals who had dealings with Parmalat. In this suit, Parmalat claims that Standard & Poor's, which had issued investment grade ratings on Parmalat until shortly before Parmalat's collapse in December 2003, breached its duty to
issue an independent and professional rating and negligently and knowingly assigned inflated ratings in order to retain Parmalat's business. Alleging joint and several liability, Parmalat claims damages of euros 4,073,984,120 (representing the value of bonds issued by Parmalat and the rating fees paid by Parmalat) with interest, plus damages to be ascertained for Standard & Poor's alleged complicity in aggravating Parmalat's financial difficulties and/or for having contributed in bringing about Parmalat's indebtedness towards its bondholders, and legal fees. On June 29, 2011, the Court issued its final decision dismissing in its entirety Parmalat's main damages claim which was based on the value of the bonds issued. The Court ordered Standard & Poor's to pay Parmalat the sum of approximately euros 784,000 (approximately $1.1 million), representing the amount of rating fees paid to Standard & Poor's by Parmalat, plus interest from the date of service of the Writ of Summons. The Court also ordered Standard & Poor's to reimburse Parmalat for euros 47,390 (less than $0.1 million) in trial costs and for its share of fees paid to Court-appointed experts, amounting to euros 67,797 (also less than $0.1 million). On September 29, 2012, Parmalat submitted a brief to the Court of Appeals of Milan appealing the judgment issued by the Tribunal of Milan. An initial hearing on the appeal is scheduled to take place on May 29, 2013. Standard & Poor's response to the appeal, including a cross-appeal, if any, must be filed at least 20 days prior to the initial hearing.
In a separate proceeding, the prosecutor's office in Parma, Italy is conducting an investigation into the bankruptcy of Parmalat. In June 2006, the prosecutor's office issued a Note of Completion of an Investigation (“Note of Completion”) concerning allegations, based on Standard & Poor's investment grade ratings of Parmalat, that individual Standard & Poor's rating analysts conspired with Parmalat insiders and rating advisors to fraudulently or negligently cause the Parmalat bankruptcy. The Note of Completion was served on eight Standard & Poor's rating analysts. While not a formal charge, the Note of Completion indicates the prosecutor's intention that the named rating analysts should appear before a judge in Parma for a preliminary hearing, at which hearing the judge will determine whether there is sufficient evidence against the rating analysts to proceed to trial. No date has been set for the preliminary hearing. On July 7, 2006, a defense brief was filed with the Parma prosecutor's office on behalf of the rating analysts.
On October 8, 2009, an action was filed in the District Court for the Southern District of New York entitled Reed Construction Data, Inc. v. The McGraw-Hill Companies, Inc. in which Reed Construction Data asserted eleven claims under various state and federal laws against the Company relating to alleged misappropriation and unfair competition by McGraw-Hill Construction and seeking an unspecified amount of damages, plus attorneys' fees and costs. In response to the Company's motion to dismiss five of the eleven claims in the Reed action, Plaintiff filed an Amended Complaint on December 10, 2009, among other things adding an allegation that McGraw-Hill Construction misappropriated Plaintiff's confidential and trade secret information regarding specific construction projects. The Company filed a renewed motion to dismiss five of the eleven claims in the Amended Complaint on January 22, 2010. On September 14, 2010, the Court granted the Company's motion to dismiss three of the five claims, including claims that alleged violations by the Company of the Racketeer Influenced and Corrupt Organizations Act (RICO) and conspiracy to violate RICO. On May 31, 2011, the Court granted Plaintiff's motion to file a Second Amended Complaint that, among other things, added a false advertising claim under the Lanham Act, including a demand for treble damages and attorneys' fees. The Second Amended Complaint also contains allegations purporting to further support Reed's existing tort and antitrust claims. On June 3, 2011, the Court granted the Company's motion to file a counterclaim against Reed alleging, among other things, that Reed misappropriated the Company's trade secrets and engaged in unfair competition as a result of Reed's recruitment of former employees of the Company and use of information about the Company's customers obtained from the former employees to solicit those customers. The parties are currently engaged in fact discovery.
The Company and Standard & Poor's Ratings Services, together with other credit rating agencies, have been named in numerous lawsuits in U.S. State and Federal Courts, as well as in foreign jurisdictions, relating to the ratings activity of Standard & Poor's Ratings Services brought by alleged purchasers and issuers of rated securities. The Company and Standard & Poor's Ratings Services have also received numerous subpoenas and other government inquiries concerning the rating activity of Standard & Poor's Ratings Services in these areas and continue to respond to all such requests. Additional actions, investigations or proceedings may be initiated from time to time in the future.
In addition, the Company and certain of its officers and directors have been named in a putative class action brought under the federal securities laws by its shareholders and two putative class actions by participants in the Company's ERISA plans relating to alleged misrepresentations and omissions concerning the Company's ratings business:
On August 28, 2007, a putative shareholder class action titled Reese v. Bahash was filed in the District Court for the District of Columbia, and was subsequently transferred to the Southern District of New York. The Company and its CEO and former CFO were named as defendants in the suit, which alleged claims under the federal securities laws in connection with alleged misrepresentations and omissions made by the defendants relating to the Company's earnings and S&P's business practices. On November 3, 2008, the District Court denied Lead Plaintiff's motion to lift the discovery stay imposed by the Private Securities Litigation Reform Act in order to obtain documents S&P submitted to the SEC during the SEC's examination. The Company filed a motion to dismiss the Second Amended Complaint which was fully briefed and submitted as of May 2009. The Court granted
a motion by plaintiffs permitting the plaintiffs to amend the complaint on June 29, 2010 and the Third Amended Complaint was filed on July 1, 2010. Defendants' motion to dismiss the Third Amended Complaint was fully briefed. On April 2, 2012, the District Court entered judgment granting the Defendants' motion to dismiss, and dismissing all claims asserted against the Defendants in their entirety. The Lead Plaintiff appealed the dismissal order. On December 20, 2012, the United States Court of Appeals for the Second Circuit affirmed the dismissal in its entirety.
On September 10, 2008, a putative shareholder class action titled Patrick Gearren, et al. v. The McGraw-Hill Companies, Inc., et al. was filed in the District Court for the Southern District of New York against the Company, its Board of Directors, its Pension Investment Committee and the administrator of its pension plans. The Complaint alleged that the defendants breached fiduciary duties to participants in the Company's ERISA plans by allowing participants to continue to invest in Company stock as an investment option under the plans during a period when plaintiffs allege the Company's stock price to have been artificially inflated. The Complaint also asserted that defendants breached fiduciary duties under ERISA by making certain material misrepresentations and non-disclosures concerning the ratings business in plan communications and the Company's SEC filings. A virtually identical complaint was filed on June 12, 2009 in an action titled Sullivan v. The McGraw-Hill Companies, Inc. et al., Case No. 09-CV-5450 in the Southern District of New York. On February 10, 2010 both actions were dismissed in their entirety for failure to state a claim under applicable law. Both plaintiffs appealed and on October 19, 2011, the Court of Appeals for the Second Circuit affirmed the dismissals in their entirety. On February 23, 2012, the Court of Appeals denied the plaintiffs' petition for reconsideration by the full Court. Plaintiffs filed a petition with the United States Supreme Court asking it to review the decision. The Supreme Court has denied plaintiffs' request and the dismissals are now final.
On September 22, 2011 the Company received a “Wells Notice” from the staff of the U.S. Securities and Exchange Commission (the “Commission”) stating that the staff is considering recommending that the Commission institute a civil injunctive action against Standard & Poor's Ratings Services alleging violations of federal securities laws with respect to S&P's ratings for a particular 2007 offering of collateralized debt obligations, known as “Delphinus CDO 2007-1”. The Wells Notice is neither a formal allegation nor a finding of wrongdoing. It allows its recipients the opportunity to provide their perspective and to address the issues raised by the staff before any decision is made by the Commission on whether to authorize the commencement of an enforcement proceeding against its recipients. S&P has responded to the staff presenting its position on the issues raised and why the Commission should not commence enforcement proceedings.
In connection with a previously disclosed investigation by the Civil Division of the Department of Justice ("DOJ") of Standard & Poor's Financial Services LLC ("S&P"), the DOJ filed a civil complaint in the United States District Court for the Central District of California on February 4, 2013 against the Company and S&P alleging violations of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 regarding S&P's ratings in 2004-2007 of certain U.S. collateralized debt obligations and S&P's rating models for certain structured finance products. S&P was notified of related state lawsuits.
The Company believes that the claims in the proceedings described above have no basis and they will be vigorously defended by the Company and/or the subsidiaries involved.
In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories, involve a large number of parties or are in early stages of discovery, we cannot state with confidence what the eventual outcome of these pending matters will be, what the timing of the ultimate resolution of these matters will be or what the eventual loss, fines, penalties or impact related to each pending matter may be. We believe, based on our current knowledge, that the outcome of the legal actions, proceedings and investigations currently pending should not have a material, adverse effect on our consolidated financial condition.
14. Quarterly Financial Information (Unaudited)
The results of operations of MHE for all periods presented and the Broadcasting Group for 2011 have been reclassified to reflect MHE and the Broadcasting Group as discontinued operations. Refer to Note 2 – Growth and Value Plan & Discontinued Operations for further discussion.
|
| | | | | | | | | | | | | | | | | | | |
| (in millions, except per share data) | First quarter | | Second quarter | | Third quarter | | Fourth quarter | | Total year |
| 2012 | | | | | | | | | |
| Revenue | $ | 1,035 |
|
| $ | 1,072 |
|
| $ | 1,116 |
| | $ | 1,226 |
|
| $ | 4,450 |
|
| Income from continuing operations | $ | 163 |
|
| $ | 180 |
|
| $ | 172 |
| | $ | 211 |
|
| $ | 726 |
|
| (Loss) income from discontinued operations | $ | (36 | ) |
| $ | 40 |
|
| $ | 165 |
| | $ | (404 | ) |
| $ | (234 | ) |
| Net income (loss) | $ | 127 |
|
| $ | 220 |
|
| $ | 337 |
| | $ | (193 | ) |
| $ | 492 |
|
| Net income attributable to The McGraw-Hill Companies, Inc. common shareholders: | | | | | | |
| | |
| Income from continuing operations | $ | 158 |
|
| $ | 176 |
|
| $ | 151 |
| | $ | 190 |
|
| $ | 676 |
|
| (Loss) income from discontinued operations | (35 | ) |
| 39 |
|
| 162 |
| | (406 | ) |
| (239 | ) |
| Net income (loss) | $ | 123 |
|
| $ | 216 |
|
| $ | 314 |
|
| $ | (216 | ) |
| $ | 437 |
|
| Basic earnings (loss) per share: | | | | | | |
| | |
| Continuing operations | $ | 0.57 |
|
| $ | 0.63 |
|
| $ | 0.54 |
|
| $ | 0.68 |
|
| $ | 2.43 |
|
| Discontinued operations | (0.13 | ) |
| 0.14 |
|
| 0.58 |
|
| (1.46 | ) |
| (0.86 | ) |
| Net Income | $ | 0.44 |
|
| $ | 0.77 |
|
| $ | 1.13 |
|
| $ | (0.78 | ) |
| $ | 1.57 |
|
| Diluted earnings (loss) per share: | | | | | | |
| | |
| Continuing operations | $ | 0.56 |
|
| $ | 0.62 |
|
| $ | 0.53 |
|
| $ | 0.67 |
|
| $ | 2.37 |
|
| Discontinued operations | (0.13 | ) |
| 0.14 |
|
| 0.57 |
|
| (1.43 | ) |
| (0.84 | ) |
| Net Income | $ | 0.43 |
|
| $ | 0.76 |
|
| $ | 1.10 |
|
| $ | (0.76 | ) |
| $ | 1.53 |
|
| 2011 | | | | | | | | | |
| Revenue | $ | 959 |
|
| $ | 1,020 |
|
| $ | 971 |
| | $ | 1,004 |
|
| $ | 3,954 |
|
| Income from continuing operations | $ | 165 |
|
| $ | 181 |
|
| $ | 167 |
|
| $ | 113 |
|
| $ | 626 |
|
| (Loss) income from discontinued operations | $ | (41 | ) |
| $ | 34 |
|
| $ | 207 |
|
| $ | 108 |
|
| $ | 308 |
|
| Net income | $ | 124 |
|
| $ | 216 |
|
| $ | 374 |
|
| $ | 221 |
|
| $ | 934 |
|
| Net income attributable to The McGraw-Hill Companies, Inc. common shareholders: | | | | | | | | | |
| Income from continuing operations | $ | 160 |
|
| $ | 177 |
|
| $ | 161 |
| | $ | 108 |
| | $ | 607 |
|
| (Loss) income from discontinued operations | (40 | ) |
| 34 |
|
| 205 |
| | 106 |
| | 304 |
|
| Net income | $ | 120 |
|
| $ | 211 |
|
| $ | 366 |
|
| $ | 214 |
|
| $ | 911 |
|
| Basic earnings (loss) per share: | | | | | | | | | |
| Continuing operations | $ | 0.52 |
|
| $ | 0.59 |
|
| $ | 0.54 |
|
| $ | 0.38 |
|
| $ | 2.03 |
|
| Discontinued operations | (0.13 | ) |
| 0.11 |
|
| 0.69 |
|
| 0.37 |
|
| 1.02 |
|
| Net Income | $ | 0.39 |
|
| $ | 0.70 |
|
| $ | 1.23 |
|
| $ | 0.75 |
|
| $ | 3.05 |
|
| Diluted earnings (loss) per share: | | | | | | | | | |
| Continuing operations | $ | 0.52 |
|
| $ | 0.57 |
|
| $ | 0.53 |
|
| $ | 0.37 |
|
| $ | 2.00 |
|
| Discontinued operations | (0.13 | ) |
| 0.11 |
|
| 0.67 |
|
| 0.36 |
|
| 1.00 |
|
| Net Income | $ | 0.39 |
|
| $ | 0.68 |
|
| $ | 1.21 |
|
| $ | 0.73 |
|
| $ | 3.00 |
|
|
| | | | | | | | | | | | | | | | | | | |
| (in millions, except per share data) | First quarter | | Second quarter | | Third quarter | | Fourth quarter | | Total year |
| 2015 | | | | | | | | | |
| Revenue | $ | 1,273 |
|
| $ | 1,342 |
|
| $ | 1,324 |
| | $ | 1,374 |
|
| $ | 5,313 |
|
| Operating profit | $ | 501 |
| | $ | 582 |
| | $ | 410 |
| | $ | 424 |
| | $ | 1,917 |
|
| Income from continuing operations | $ | 329 |
|
| $ | 381 |
|
| $ | 281 |
| | $ | 276 |
|
| $ | 1,268 |
|
| Net income | $ | 329 |
|
| $ | 381 |
|
| $ | 281 |
| | $ | 276 |
|
| $ | 1,268 |
|
| Net income attributable to McGraw Hill Financial common shareholders: | | | | | | | | | |
| Income from continuing operations | $ | 303 |
|
| $ | 353 |
|
| $ | 252 |
| | $ | 248 |
|
| $ | 1,156 |
|
| Net income | $ | 303 |
|
| $ | 353 |
|
| $ | 252 |
|
| $ | 248 |
|
| $ | 1,156 |
|
| | | | | | | | | | |
| Earnings per share attributable to McGraw Hill Financial, Inc. common shareholders: | | | | | | | | | |
| Income from continuing operations: | | | | | | | | | |
| Basic | $ | 1.11 |
|
| $ | 1.29 |
|
| $ | 0.93 |
|
| $ | 0.92 |
|
| $ | 4.26 |
|
| Diluted | $ | 1.10 |
|
| $ | 1.28 |
|
| $ | 0.92 |
|
| $ | 0.91 |
|
| $ | 4.21 |
|
| Net income: | | | | | | | | | |
| Basic | $ | 1.11 |
|
| $ | 1.29 |
|
| $ | 0.93 |
|
| $ | 0.92 |
|
| $ | 4.26 |
|
| Diluted | $ | 1.10 |
|
| $ | 1.28 |
|
| $ | 0.92 |
|
| $ | 0.91 |
|
| $ | 4.21 |
|
| | | | | | | | | | |
| 2014 | | | | | | | | | |
| Revenue | $ | 1,196 |
|
| $ | 1,302 |
|
| $ | 1,263 |
| | $ | 1,290 |
|
| $ | 5,051 |
|
| Operating profit (loss) | $ | 420 |
| | $ | 476 |
| | $ | 366 |
| | $ | (1,148 | ) | | $ | 113 |
|
| Income (loss) from continuing operations | $ | 268 |
|
| $ | 310 |
|
| $ | 215 |
|
| $ | (984 | ) |
| $ | (191 | ) |
| Income from discontinued operations | $ | 7 |
|
| $ | 6 |
|
| $ | 2 |
|
| $ | 163 |
|
| $ | 178 |
|
| Net income (loss) | $ | 275 |
|
| $ | 316 |
|
| $ | 217 |
|
| $ | (821 | ) |
| $ | (13 | ) |
| Net income attributable to McGraw Hill Financial common shareholders: | | | | | | | | | |
| Income (loss) from continuing operations | $ | 241 |
|
| $ | 286 |
|
| $ | 188 |
| | $ | (1,009 | ) | | $ | (293 | ) |
| Income from discontinued operations | 7 |
|
| 6 |
|
| 2 |
| | 163 |
| | 178 |
|
| Net income (loss) | $ | 248 |
|
| $ | 292 |
|
| $ | 190 |
|
| $ | (846 | ) |
| $ | (115 | ) |
| | | | | | | | | | |
| Earnings (loss) per share attributable to McGraw Hill Financial, Inc. common shareholders: | | | | | | | | | |
| Income (loss) from continuing operations: | | | | | | | | | |
| Basic | $ | 0.89 |
|
| $ | 1.05 |
|
| $ | 0.69 |
|
| $ | (3.71 | ) |
| $ | (1.08 | ) |
| Diluted | $ | 0.87 |
|
| $ | 1.04 |
|
| $ | 0.68 |
|
| $ | (3.71 | ) |
| $ | (1.08 | ) |
| Income from discontinued operations: | | | | | | | | | |
| Basic | $ | 0.02 |
|
| $ | 0.02 |
|
| $ | 0.01 |
|
| $ | 0.60 |
|
| $ | 0.66 |
|
| Diluted | $ | 0.02 |
|
| $ | 0.02 |
|
| $ | 0.01 |
|
| $ | 0.60 |
|
| $ | 0.66 |
|
| Net income (loss): | | | | | | | | | |
| Basic | $ | 0.91 |
|
| $ | 1.08 |
|
| $ | 0.70 |
|
| $ | (3.11 | ) |
| $ | (0.42 | ) |
| Diluted | $ | 0.89 |
|
| $ | 1.06 |
|
| $ | 0.69 |
|
| $ | (3.11 | ) |
| $ | (0.42 | ) |
Note - Totals presented may not sum due to rounding.
Basic and diluted earnings per share are computed independently for each quarter and full year presented. The number of weighted-average shares outstanding changes as common shares are issued pursuant to employee stock plans, as shares are repurchased by us, and other activity occurs throughout the year. Accordingly, the sum of the quarterly earnings per share data may not agree with the calculated full year earnings per share.
15. Condensed Consolidating Financial Statements
On May 26, 2015, we issued $700 million of 4.0% senior notes due in 2025. On August 18, 2015, we issued $2.0 billion of senior notes, consisting of $400 million of 2.5% senior notes due in 2018, $700 million of 3.3% senior notes due in 2020 and $900 million of 4.4% senior notes due in 2026.
The senior notes described above are fully and unconditionally guaranteed by Standard & Poor's Financial Services LLC, a 100% owned subsidiary of the Company. The following condensed consolidating financial statements present the results of operations, financial position and cash flows of McGraw Hill Financial, Inc., Standard & Poor's Financial Services LLC, and the Non-Guarantor Subsidiaries of McGraw Hill Financial, Inc. and Standard & Poor's Financial Services LLC, and the eliminations necessary to arrive at the information for the Company on a consolidated basis.
|
| | | | | | | | | | | | | | | | | | | |
| | Statement of Income |
| | Year Ended December 31, 2015 |
| (in millions) | McGraw Hill Financial, Inc. | | Standard & Poor's Financial Services LLC | | Non-Guarantor Subsidiaries | | Eliminations | | McGraw Hill Financial Inc. Consolidated |
| Revenue | $ | 624 |
| | $ | 2,141 |
| | $ | 2,663 |
| | $ | (115 | ) | | $ | 5,313 |
|
| Expenses: | | | | | | | | | |
| Operating-related expenses | 73 |
| | 522 |
| | 1,192 |
| | (115 | ) | | 1,672 |
|
| Selling and general expenses | 248 |
| | 469 |
| | 861 |
| | — |
| | 1,578 |
|
| Depreciation | 40 |
| | 18 |
| | 32 |
| | — |
| | 90 |
|
| Amortization of intangibles | — |
| | — |
| | 67 |
| | — |
| | 67 |
|
| Total expenses | 361 |
| | 1,009 |
| | 2,152 |
| | (115 | ) | | 3,407 |
|
| Other income | — |
| | — |
| | (11 | ) | | — |
| | (11 | ) |
| Operating profit | 263 |
| | 1,132 |
| | 522 |
| | — |
| | 1,917 |
|
| Interest expense (income), net | 112 |
| | — |
| | (10 | ) | | — |
| | 102 |
|
| Non-operating intercompany transactions | 282 |
| | 222 |
| | (504 | ) | | — |
| | — |
|
| (Loss) income from continuing operations before taxes on income | (131 | ) | | 910 |
| | 1,036 |
| | — |
| | 1,815 |
|
| (Benefit) provision for taxes on income | (107 | ) | | 358 |
| | 296 |
| | — |
| | 547 |
|
| Equity in net income of subsidiaries | 1,473 |
| | 272 |
| | — |
| | (1,745 | ) | | — |
|
| Net income | 1,449 |
| | 824 |
| | 740 |
| | (1,745 | ) | | 1,268 |
|
| Less: net income from continuing operations attributable to noncontrolling interests | — |
| | — |
| | — |
| | (112 | ) | | (112 | ) |
| Net income attributable to McGraw Hill Financial, Inc. | $ | 1,449 |
| | $ | 824 |
| | $ | 740 |
| | $ | (1,857 | ) | | $ | 1,156 |
|
| Comprehensive income | $ | 1,446 |
| | $ | 822 |
| | $ | 655 |
| | $ | (1,741 | ) | | $ | 1,182 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Statement of Income |
| | Year Ended December 31, 2014 |
| (in millions) | McGraw Hill Financial, Inc. | | Standard & Poor's Financial Services LLC | | Non-Guarantor Subsidiaries | | Eliminations | | McGraw Hill Financial Inc. Consolidated |
| Revenue | $ | 598 |
| | $ | 2,043 |
| | $ | 2,525 |
| | $ | (115 | ) | | $ | 5,051 |
|
| Expenses: | | | | | | | | | |
| Operating-related expenses | 78 |
| | 389 |
| | 1,275 |
| | (115 | ) | | 1,627 |
|
| Selling and general expenses | 296 |
| | 2,350 |
| | 522 |
| | — |
| | 3,168 |
|
| Depreciation | 41 |
| | 17 |
| | 28 |
| | — |
| | 86 |
|
| Amortization of intangibles | 4 |
| | — |
| | 44 |
| | — |
| | 48 |
|
| Total expenses | 419 |
| | 2,756 |
| | 1,869 |
| | (115 | ) | | 4,929 |
|
| Other loss | 3 |
| | — |
| | 6 |
| | — |
| | 9 |
|
| Operating profit (loss) | 176 |
| | (713 | ) | | 650 |
| | — |
| | 113 |
|
| Interest expense (income), net | 66 |
| | — |
| | (7 | ) | | — |
| | 59 |
|
| Non-operating intercompany transactions | 193 |
| | 38 |
| | (231 | ) | | — |
| | — |
|
| (Loss) income from continuing operations before taxes on income | (83 | ) | | (751 | ) | | 888 |
| | — |
| | 54 |
|
| (Benefit) provision for taxes on income | (22 | ) | | 16 |
| | 251 |
| | — |
| | 245 |
|
| Equity in net (loss) income of subsidiaries | (443 | ) | | 248 |
| | — |
| | 195 |
| | — |
|
| (Loss) income from continuing operations | (504 | ) | | (519 | ) | | 637 |
| | 195 |
| | (191 | ) |
| Discontinued operations, net of tax: | | | | | | | | | |
| Income from discontinued operations | 18 |
| | — |
| | — |
| | — |
| | 18 |
|
| Gain on sale of discontinued operations | 160 |
| | — |
| | — |
| | — |
| | 160 |
|
| Discontinued operations, net | 178 |
| | — |
| | — |
| | — |
| | 178 |
|
| Net (loss) income | $ | (326 | ) | | $ | (519 | ) | | $ | 637 |
| | $ | 195 |
| | (13 | ) |
| Less: net income from continuing operations attributable to noncontrolling interests | — |
| | — |
| | — |
| | (102 | ) | | (102 | ) |
| Net (loss) income attributable to McGraw Hill Financial, Inc. | $ | (326 | ) | | $ | (519 | ) | | $ | 637 |
| | $ | 93 |
| | $ | (115 | ) |
| Comprehensive (loss) income | $ | (495 | ) | | $ | (544 | ) | | $ | 513 |
| | $ | 195 |
| | $ | (331 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Statement of Income |
| | Year Ended December 31, 2013 |
| (in millions) | McGraw Hill Financial, Inc. | | Standard & Poor's Financial Services LLC | | Non-Guarantor Subsidiaries | | Eliminations | | McGraw Hill Financial Inc. Consolidated |
| Revenue | $ | 570 |
| | $ | 1,931 |
| | $ | 2,306 |
| | $ | (105 | ) | | $ | 4,702 |
|
| Expenses: | | | | | | | | | |
| Operating-related expenses | 128 |
| | 556 |
| | 985 |
| | (105 | ) | | 1,564 |
|
| Selling and general expenses | 338 |
| | 532 |
| | 761 |
| | — |
| | 1,631 |
|
| Depreciation | 40 |
| | 19 |
| | 27 |
| | — |
| | 86 |
|
| Amortization of intangibles | 5 |
| | — |
| | 46 |
| | — |
| | 51 |
|
| Total expenses | 511 |
| | 1,107 |
| | 1,819 |
| | (105 | ) | | 3,332 |
|
| Other loss (income) | 25 |
| | 3 |
| | (16 | ) | | — |
| | 12 |
|
| Operating profit | 34 |
| | 821 |
| | 503 |
| | — |
| | 1,358 |
|
| Interest expense (income), net | 65 |
| | — |
| | (6 | ) | | — |
| | 59 |
|
| Non-operating intercompany transactions | 245 |
| | 66 |
| | (311 | ) | | — |
| | — |
|
| Income from continuing operations before taxes on income | (276 | ) | | 755 |
| | 820 |
| | — |
| | 1,299 |
|
| (Benefit) provision for taxes on income | (121 | ) | | 283 |
| | 263 |
| | — |
| | 425 |
|
| Equity in net income of subsidiaries | 1,937 |
| | 197 |
| | — |
| | (2,134 | ) | | — |
|
| Income from continuing operations | 1,782 |
| | 669 |
| | 557 |
| | (2,134 | ) | | 874 |
|
| Discontinued operations, net of tax: | | | | | | | | | |
| Income (loss) from discontinued operations | 82 |
| | — |
| | (79 | ) | | — |
| | 3 |
|
| Gain (loss) on sale of discontinued operations | 644 |
| | — |
| | (55 | ) | | — |
| | 589 |
|
| Discontinued operations, net | 726 |
| | — |
| | (134 | ) | | — |
| | 592 |
|
| Net income | $ | 2,508 |
| | $ | 669 |
| | $ | 423 |
| | $ | (2,134 | ) | | $ | 1,466 |
|
| Less: net income from continuing operations attributable to noncontrolling interests | — |
| | — |
| | — |
| | (91 | ) | | (91 | ) |
Less: net loss from discontinued operations attributable to noncontrolling interests
| — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Net income attributable to McGraw Hill Financial, Inc. | $ | 2,508 |
| | $ | 669 |
| | $ | 423 |
| | $ | (2,224 | ) | | $ | 1,376 |
|
| Comprehensive income | $ | 2,773 |
| | $ | 669 |
| | $ | 452 |
| | $ | (2,106 | ) | | $ | 1,788 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Balance Sheet |
| | December 31, 2015 |
| (in millions) | McGraw Hill Financial, Inc. | | Standard & Poor's Financial Services LLC | | Non-Guarantor Subsidiaries | | Eliminations | | McGraw Hill Financial Inc. Consolidated |
| ASSETS | | | | | | | | | |
| Current assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 167 |
| | $ | — |
| | $ | 1,314 |
| | $ | — |
| | $ | 1,481 |
|
| Accounts receivable, net of allowance for doubtful accounts | 116 |
| | 319 |
| | 556 |
| | — |
| | 991 |
|
| Intercompany receivable | 208 |
| | 1,872 |
| | 1,273 |
| | (3,353 | ) | | — |
|
| Deferred income taxes | 75 |
| | 10 |
| | 24 |
| | — |
| | 109 |
|
| Prepaid and other current assets | 120 |
| | 13 |
| | 80 |
| | (1 | ) | | 212 |
|
| Assets of a business held for sale | 4 |
| | — |
| | 499 |
| | — |
| | 503 |
|
| Total current assets | 690 |
| | 2,214 |
| | 3,746 |
| | (3,354 | ) | | 3,296 |
|
| Property and equipment, net of accumulated depreciation | 141 |
| | 3 |
| | 126 |
| | — |
| | 270 |
|
| Goodwill | 17 |
| | 40 |
| | 2,816 |
| | 9 |
| | 2,882 |
|
| Other intangible assets, net | — |
| | — |
| | 1,522 |
| | — |
| | 1,522 |
|
| Asset for pension benefits | — |
| | — |
| | 36 |
| | — |
| | 36 |
|
| Investments in subsidiaries | 4,651 |
| | 659 |
| | 7,316 |
| | (12,626 | ) | | — |
|
| Intercompany loans receivable | 16 |
| | 368 |
| | 1,733 |
| | (2,117 | ) | | — |
|
| Other non-current assets | 67 |
| | 19 |
| | 91 |
| | — |
| | 177 |
|
| Total assets | $ | 5,582 |
| | $ | 3,303 |
| | $ | 17,386 |
| | $ | (18,088 | ) | | $ | 8,183 |
|
| LIABILITIES AND EQUITY | | | | | | | | | |
| Current liabilities: | | | | | | | | | |
| Accounts payable | $ | 71 |
| | $ | 54 |
| | $ | 81 |
| | $ | — |
| | $ | 206 |
|
| Intercompany payable | 2,144 |
| | 675 |
| | 535 |
| | (3,354 | ) | | — |
|
| Accrued compensation and contributions to retirement plans | 127 |
| | 89 |
| | 167 |
| | — |
| | 383 |
|
| Short-term debt | 143 |
| | — |
| | — |
| | — |
| | 143 |
|
| Income taxes currently payable | 1 |
| | — |
| | 55 |
| | — |
| | 56 |
|
| Unearned revenue | 254 |
| | 586 |
| | 582 |
| | (1 | ) | | 1,421 |
|
| Accrued legal and regulatory settlements | — |
| | 115 |
| | 6 |
| | — |
| | 121 |
|
| Other current liabilities | 190 |
| | (50 | ) | | 232 |
| | — |
| | 372 |
|
| Liabilities of a business held for sale | 80 |
| | — |
| | 126 |
| | — |
| | 206 |
|
| Total current liabilities | 3,010 |
| | 1,469 |
| | 1,784 |
| | (3,355 | ) | | 2,908 |
|
| Long-term debt | 3,468 |
| | — |
| | — |
| | — |
| | 3,468 |
|
| Intercompany loans payable | 21 |
| | — |
| | 2,096 |
| | (2,117 | ) | | — |
|
| Pension and other postretirement benefits | 230 |
| | — |
| | 46 |
| | — |
| | 276 |
|
| Deferred income taxes | (246 | ) | | 17 |
| | 252 |
| | — |
| | 23 |
|
| Other non-current liabilities | 221 |
| | 81 |
| | 43 |
| | — |
| | 345 |
|
| Total liabilities | 6,704 |
| | 1,567 |
| | 4,221 |
| | (5,472 | ) | | 7,020 |
|
| Redeemable noncontrolling interest | — |
| | — |
| | — |
| | 920 |
| | 920 |
|
| Equity: | | | | | | | | | |
| Common stock | 412 |
| | — |
| | 2,337 |
| | (2,337 | ) | | 412 |
|
| Additional paid-in capital | (184 | ) | | 1,179 |
| | 10,174 |
| | (10,694 | ) | | 475 |
|
| Retained income | 6,701 |
| | 557 |
| | 987 |
| | (609 | ) | | 7,636 |
|
| Accumulated other comprehensive loss | (322 | ) | | — |
| | (322 | ) | | 44 |
| | (600 | ) |
| Less: common stock in treasury | (7,729 | ) | | — |
| | (12 | ) | | 12 |
| | (7,729 | ) |
| Total equity - controlling interests | (1,122 | ) | | 1,736 |
| | 13,164 |
| | (13,584 | ) | | 194 |
|
| Total equity - noncontrolling interests | — |
| | — |
| | 1 |
| | 48 |
| | 49 |
|
| Total equity | (1,122 | ) | | 1,736 |
| | 13,165 |
| | (13,536 | ) | | 243 |
|
| Total liabilities and equity | $ | 5,582 |
| | $ | 3,303 |
| | $ | 17,386 |
| | $ | (18,088 | ) | | $ | 8,183 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Balance Sheet |
| | December 31, 2014 |
| (in millions) | McGraw Hill Financial, Inc. | | Standard & Poor's Financial Services LLC | | Non-Guarantor Subsidiaries | | Eliminations | | McGraw Hill Financial Inc. Consolidated |
| ASSETS | | | | | | | | | |
| Current assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 1,402 |
| | $ | — |
| | $ | 1,095 |
| | $ | — |
| | $ | 2,497 |
|
| Accounts receivable, net of allowance for doubtful accounts | 120 |
| | 293 |
| | 519 |
| | — |
| | 932 |
|
| Intercompany receivable | 525 |
| | 2,125 |
| | 1,998 |
| | (4,648 | ) | | — |
|
| Deferred income taxes | 60 |
| | 334 |
| | (34 | ) | | — |
| | 360 |
|
| Prepaid and other current assets | 79 |
| | 27 |
| | 67 |
| | — |
| | 173 |
|
| Total current assets | 2,186 |
| | 2,779 |
| | 3,645 |
| | (4,648 | ) | | 3,962 |
|
| Property and equipment, net of accumulated depreciation | 111 |
| | 5 |
| | 90 |
| | — |
| | 206 |
|
| Goodwill | 109 |
| | 41 |
| | 1,228 |
| | 9 |
| | 1,387 |
|
| Other intangible assets, net | 13 |
| | — |
| | 991 |
| | — |
| | 1,004 |
|
| Asset for pension benefits | — |
| | — |
| | 28 |
| | — |
| | 28 |
|
| Investments in subsidiaries | 1,258 |
| | 653 |
| | 7,125 |
| | (9,036 | ) | | — |
|
| Intercompany loans receivable | 20 |
| | 358 |
| | 1,594 |
| | (1,972 | ) | | — |
|
| Other non-current assets | 71 |
| | 25 |
| | 90 |
| | — |
| | 186 |
|
| Total assets | $ | 3,768 |
| | $ | 3,861 |
| | $ | 14,791 |
| | $ | (15,647 | ) | | $ | 6,773 |
|
| LIABILITIES AND EQUITY | | | | | | | | | |
| Current liabilities: | | | | | | | | | |
| Accounts payable | $ | 59 |
| | $ | 45 |
| | $ | 87 |
| | $ | — |
| | $ | 191 |
|
| Intercompany payable | 2,566 |
| | 617 |
| | 1,376 |
| | (4,559 | ) | | — |
|
| Accrued compensation and contributions to retirement plans | 133 |
| | 121 |
| | 156 |
| | — |
| | 410 |
|
| Income taxes currently payable | 19 |
| | 1 |
| | 34 |
| | — |
| | 54 |
|
| Unearned revenue | 259 |
| | 520 |
| | 475 |
| | — |
| | 1,254 |
|
| Accrued legal and regulatory settlements | — |
| | 1,609 |
| | — |
| | — |
| | 1,609 |
|
| Other current liabilities | 194 |
| | — |
| | 208 |
| | — |
| | 402 |
|
| Total current liabilities | 3,230 |
| | 2,913 |
| | 2,336 |
| | (4,559 | ) | | 3,920 |
|
| Long-term debt | 795 |
| | — |
| | — |
| | — |
| | 795 |
|
| Intercompany loans payable | 109 |
| | — |
| | 1,952 |
| | (2,061 | ) | | — |
|
| Pension and other postretirement benefits | 272 |
| | — |
| | 61 |
| | — |
| | 333 |
|
| Deferred income taxes | (260 | ) | | 51 |
| | 249 |
| | — |
| | 40 |
|
| Other non-current liabilities | 219 |
| | 73 |
| | 44 |
| | — |
| | 336 |
|
| Total liabilities | 4,365 |
| | 3,037 |
| | 4,642 |
| | (6,620 | ) | | 5,424 |
|
| Redeemable noncontrolling interest | — |
| | — |
| | — |
| | 810 |
| | 810 |
|
| Equity: | | | | | | | | | |
| Common stock | 412 |
| | — |
| | 2,316 |
| | (2,316 | ) | | 412 |
|
| Additional paid-in capital | (116 | ) | | 1,153 |
| | 7,016 |
| | (7,560 | ) | | 493 |
|
| Retained income | 6,275 |
| | (329 | ) | | 1,060 |
| | (60 | ) | | 6,946 |
|
| Accumulated other comprehensive loss | (319 | ) | | — |
| | (236 | ) | | 41 |
| | (514 | ) |
| Less: common stock in treasury | (6,849 | ) | | — |
| | (7 | ) | | 7 |
| | (6,849 | ) |
| Total equity - controlling interests | (597 | ) | | 824 |
| | 10,149 |
| | (9,888 | ) | | 488 |
|
| Total equity - noncontrolling interests | — |
| | — |
| | — |
| | 51 |
| | 51 |
|
| Total equity | (597 | ) | | 824 |
| | 10,149 |
| | (9,837 | ) | | 539 |
|
| Total liabilities and equity | $ | 3,768 |
| | $ | 3,861 |
| | $ | 14,791 |
| | $ | (15,647 | ) | | $ | 6,773 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Statement of Cash Flows |
| | Year Ended December 31, 2015 |
| (in millions) | McGraw Hill Financial, Inc. | | Standard & Poor's Financial Services LLC | | Non-Guarantor Subsidiaries | | Eliminations | | McGraw Hill Financial Inc. Consolidated |
| Operating Activities: | | | | | | | | | |
| Net income | $ | 1,449 |
| | $ | 824 |
| | $ | 740 |
| | $ | (1,745 | ) | | $ | 1,268 |
|
| Adjustments to reconcile income from continuing operations to cash provided by (used for) operating activities from continuing operations: | | | | | | | | | |
| Depreciation | 40 |
| | 18 |
| | 32 |
| | — |
| | 90 |
|
| Amortization of intangibles | — |
| | — |
| | 67 |
| | — |
| | 67 |
|
| Provision for losses on accounts receivable | 1 |
| | 1 |
| | 6 |
| | — |
| | 8 |
|
| Deferred income taxes | 33 |
| | 290 |
| | (43 | ) | | — |
| | 280 |
|
| Stock-based compensation | 23 |
| | 24 |
| | 31 |
| | — |
| | 78 |
|
| Accrued legal and regulatory settlements | — |
| | 110 |
| | 9 |
| | — |
| | 119 |
|
| Other | 23 |
| | 16 |
| | 7 |
| | — |
| | 46 |
|
| Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: | | | | | | | | | |
| Accounts receivable | 3 |
| | (27 | ) | | (94 | ) | | — |
| | (118 | ) |
| Prepaid and current assets | (13 | ) | | 14 |
| | (5 | ) | | — |
| | (4 | ) |
| Accounts payable and accrued expenses | (75 | ) | | (34 | ) | | 17 |
| | — |
| | (92 | ) |
| Unearned revenue | (5 | ) | | 66 |
| | 68 |
| | — |
| | 129 |
|
| Accrued legal and regulatory settlement | — |
| | (1,624 | ) | | — |
| | — |
| | (1,624 | ) |
| Other current liabilities | (32 | ) | | (35 | ) | | (11 | ) | | — |
| | (78 | ) |
| Net change in prepaid/accrued income taxes | (54 | ) | | — |
| | 115 |
| | — |
| | 61 |
|
| Net change in other assets and liabilities | 78 |
| | 8 |
| | (121 | ) | | — |
| | (35 | ) |
| Cash provided by (used for) operating activities from continuing operations | 1,471 |
| | (349 | ) | | 818 |
| | (1,745 | ) | | 195 |
|
| Investing Activities: | | | | | | | | | |
| Capital expenditures | (67 | ) | | (10 | ) | | (62 | ) | | — |
| | (139 | ) |
| Acquisitions, net of cash acquired | (2,243 | ) | | — |
| | (153 | ) | | — |
| | (2,396 | ) |
| Proceeds from dispositions | — |
| | — |
| | 14 |
| | — |
| | 14 |
|
| Changes in short-term investments | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
| Cash used for investing activities from continuing operations | (2,310 | ) | | (10 | ) | | (205 | ) | | — |
| | (2,525 | ) |
| Financing Activities: | | | | | | | | | |
| Additions to short-term debt, net | 143 |
| | — |
| | — |
| | — |
| | 143 |
|
| Proceeds from issuance of senior notes, net | 2,674 |
| | — |
| | — |
| | — |
| | 2,674 |
|
| Dividends paid to shareholders | (363 | ) | | — |
| | — |
| | — |
| | (363 | ) |
| Dividends and other payments paid to noncontrolling interests | — |
| | — |
| | (104 | ) | | — |
| | (104 | ) |
| Repurchase of treasury shares | (974 | ) | | — |
| | — |
| | — |
| | (974 | ) |
| Exercise of stock options | 80 |
| | — |
| | 6 |
| | — |
| | 86 |
|
| Contingent payments | (5 | ) | | — |
| | — |
| | — |
| | (5 | ) |
| Purchase of additional CRISIL shares | — |
| | — |
| | (16 | ) | | — |
| | (16 | ) |
| Excess tax benefits from share-based payments | 69 |
| | — |
| | — |
| | — |
| | 69 |
|
| Intercompany financing activities | (2,020 | ) | | 359 |
| | (84 | ) | | 1,745 |
| | — |
|
| Cash (used for) provided by financing activities from continuing operations | (396 | ) | | 359 |
| | (198 | ) | | 1,745 |
| | 1,510 |
|
| Effect of exchange rate changes on cash from continuing operations | — |
| | — |
| | (67 | ) | | — |
| | (67 | ) |
| Cash (used for) provided by continuing operations | (1,235 | ) | | — |
| | 348 |
| | — |
| | (887 | ) |
| Discontinued Operations: | | | | | | | | | |
| Cash used for operating activities | — |
| | — |
| | (129 | ) | | — |
| | (129 | ) |
| Cash used for discontinued operations | — |
| | — |
| | (129 | ) | | — |
| | (129 | ) |
| Net change in cash and cash equivalents | (1,235 | ) | | — |
| | 219 |
| | — |
| | (1,016 | ) |
| Cash and cash equivalents at beginning of year | 1,402 |
| | — |
| | 1,095 |
| | — |
| | 2,497 |
|
| Cash and cash equivalents at end of year | $ | 167 |
| | $ | — |
| | $ | 1,314 |
| | $ | — |
| | $ | 1,481 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Statement of Cash Flows |
| | Year Ended December 31, 2014 |
| (in millions) | McGraw Hill Financial, Inc. | | Standard & Poor's Financial Services LLC | | Non-Guarantor Subsidiaries | | Eliminations | | McGraw Hill Financial Inc. Consolidated |
| Operating Activities: | | | | | | | | | |
| Net (loss) income | $ | (326 | ) | | $ | (519 | ) | | $ | 637 |
| | $ | 195 |
| | $ | (13 | ) |
| Less: discontinued operations, net | 178 |
| | — |
| | — |
| | — |
| | 178 |
|
| (Loss) income from continuing operations | (504 | ) | | (519 | ) | | 637 |
| | 195 |
| | (191 | ) |
| Adjustments to reconcile (loss) income from continuing operations to cash (used for) provided by operating activities from continuing operations: | | | | | | | | | |
| Depreciation | 41 |
| | 17 |
| | 28 |
| | — |
| | 86 |
|
| Amortization of intangibles | 4 |
| | — |
| | 44 |
| | — |
| | 48 |
|
| Provision for losses on accounts receivable | — |
| | 5 |
| | 6 |
| | — |
| | 11 |
|
| Deferred income taxes | 42 |
| | (272 | ) | | (15 | ) | | — |
| | (245 | ) |
| Stock-based compensation | 31 |
| | 34 |
| | 35 |
| | — |
| | 100 |
|
| Accrued legal and regulatory settlements | — |
| | 1,587 |
| | — |
| | — |
| | 1,587 |
|
| Other | 21 |
| | 39 |
| | 20 |
| | — |
| | 80 |
|
| Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: | | | | | | | | | |
| Accounts receivable | (11 | ) | | 47 |
| | (45 | ) | | — |
| | (9 | ) |
| Prepaid and current assets | (42 | ) | | (17 | ) | | 52 |
| | — |
| | (7 | ) |
| Accounts payable and accrued expenses | (83 | ) | | (47 | ) | | — |
| | — |
| | (130 | ) |
| Unearned revenue | 8 |
| | 26 |
| | 44 |
| | — |
| | 78 |
|
| Accrued legal and regulatory settlement | — |
| | (35 | ) | | — |
| | — |
| | (35 | ) |
| Other current liabilities | (51 | ) | | 45 |
| | (10 | ) | | — |
| | (16 | ) |
| Net change in prepaid/accrued income taxes | 13 |
| | 3 |
| | (109 | ) | | — |
| | (93 | ) |
| Net change in other assets and liabilities | (131 | ) | | 5 |
| | 71 |
| | — |
| | (55 | ) |
| Cash (used for) provided by operating activities from continuing operations | (662 | ) | | 918 |
| | 758 |
| | 195 |
| | 1,209 |
|
| Investing Activities: | | | | | | | | | |
| Capital expenditures | (26 | ) | | (14 | ) | | (52 | ) | | — |
| | (92 | ) |
| Acquisitions, net of cash acquired | — |
| | — |
| | (71 | ) | | — |
| | (71 | ) |
| Proceeds from dispositions | 63 |
| | — |
| | 20 |
| | — |
| | 83 |
|
| Changes in short-term investments | — |
| | — |
| | 15 |
| | — |
| | 15 |
|
| Cash provided by (used for) investing activities from continuing operations | 37 |
| | (14 | ) | | (88 | ) | | — |
| | (65 | ) |
| Financing Activities: | | | | | | | | | |
| Dividends paid to shareholders | (326 | ) | | — |
| | — |
| | — |
| | (326 | ) |
| Dividends and other payments paid to noncontrolling interests | — |
| | — |
| | (84 | ) | | — |
| | (84 | ) |
| Repurchase of treasury shares | (362 | ) | | — |
| | — |
| | — |
| | (362 | ) |
| Exercise of stock options | 184 |
| | — |
| | 9 |
| | — |
| | 193 |
|
| Contingent payments | — |
| | — |
| | (11 | ) | | — |
| | (11 | ) |
| Excess tax benefits from share-based payments | 128 |
| | — |
| | — |
| | — |
| | 128 |
|
| Intercompany financing activities | 1,377 |
| | (904 | ) | | (278 | ) | | (195 | ) | | — |
|
| Cash provided by (used for) financing activities from continuing operations | 1,001 |
| | (904 | ) | | (364 | ) | | (195 | ) | | (462 | ) |
| Effect of exchange rate changes on cash from continuing operations | 3 |
| | — |
| | (68 | ) | | — |
| | (65 | ) |
| Cash provided by continuing operations | 379 |
| | — |
| | 238 |
| | — |
| | 617 |
|
| Discontinued Operations: | | | | | | | | | |
| Cash provided by operating activities | 18 |
| | — |
| | — |
| | — |
| | 18 |
|
| Cash provided by investing activities | 320 |
| | — |
| | — |
| | — |
| | 320 |
|
| Cash provided by discontinued operations | 338 |
| | — |
| | — |
| | — |
| | 338 |
|
| Net change in cash and cash equivalents | 717 |
| | — |
| | 238 |
| | — |
| | 955 |
|
| Cash and cash equivalents at beginning of year | 685 |
| | — |
| | 857 |
| | — |
| | 1,542 |
|
| Cash and cash equivalents at end of year | $ | 1,402 |
| | $ | — |
| | $ | 1,095 |
| | $ | — |
| | $ | 2,497 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Statement of Cash Flows |
| | Year Ended December 31, 2013 |
| (in millions) | McGraw Hill Financial, Inc. | | Standard & Poor's Financial Services LLC | | Non-Guarantor Subsidiaries | | Eliminations | | McGraw Hill Financial Inc. Consolidated |
| Operating Activities: | | | | | | | | | |
| Net income | $ | 2,508 |
| | $ | 669 |
| | $ | 423 |
| | $ | (2,134 | ) | | $ | 1,466 |
|
| Less: discontinued operations, net | 726 |
| | — |
| | (134 | ) | | — |
| | 592 |
|
| Income from continuing operations | 1,782 |
| | 669 |
| | 557 |
| | (2,134 | ) | | 874 |
|
| Adjustments to reconcile income from continuing operations to cash provided by (used for) operating activities from continuing operations: | | | | | | | | | |
| Depreciation | 40 |
| | 19 |
| | 27 |
| | — |
| | 86 |
|
| Amortization of intangibles | 5 |
| | — |
| | 46 |
| | — |
| | 51 |
|
| Provision for losses on accounts receivable | 1 |
| | 7 |
| | 14 |
| | — |
| | 22 |
|
| Deferred income taxes | 39 |
| | — |
| | 4 |
| | — |
| | 43 |
|
| Stock-based compensation | 35 |
| | 33 |
| | 28 |
| | — |
| | 96 |
|
| Accrued legal and regulatory settlements | — |
| | — |
| | — |
| | — |
| | — |
|
| Other | 68 |
| | 10 |
| | 18 |
| | — |
| | 96 |
|
| Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: | | | | | | | | | |
| Accounts receivable | (2 | ) | | (4 | ) | | (29 | ) | | — |
| | (35 | ) |
| Prepaid and current assets | (14 | ) | | (7 | ) | | (8 | ) | | — |
| | (29 | ) |
| Accounts payable and accrued expenses | (120 | ) | | 18 |
| | 8 |
| | — |
| | (94 | ) |
| Unearned revenue | 17 |
| | 43 |
| | 49 |
| | — |
| | 109 |
|
| Other current liabilities | (43 | ) | | (24 | ) | | (22 | ) | | — |
| | (89 | ) |
| Net change in prepaid/accrued income taxes | (265 | ) | | (3 | ) | | 30 |
| | — |
| | (238 | ) |
| Net change in other assets and liabilities | (190 | ) | | 84 |
| | (4 | ) | | — |
| | (110 | ) |
| Cash provided by operating activities from continuing operations | 1,353 |
| | 845 |
| | 718 |
| | (2,134 | ) | | 782 |
|
| Investing Activities: | | | | | | | | | |
| Capital expenditures | (61 | ) | | (19 | ) | | (37 | ) | | — |
| | (117 | ) |
| Acquisitions, net of cash acquired | — |
| | — |
| | (47 | ) | | — |
| | (47 | ) |
| Proceeds from dispositions | 35 |
| | — |
| | 16 |
| | — |
| | 51 |
|
| Changes in short-term investments | — |
| | — |
| | (17 | ) | | — |
| | (17 | ) |
| Cash used for investing activities from continuing operations | (26 | ) | | (19 | ) | | (85 | ) | | — |
| | (130 | ) |
| Financing Activities: | | | | | | | | | |
| Payments on short-term debt | (457 | ) | | — |
| | — |
| | — |
| | (457 | ) |
| Dividends paid to shareholders | (308 | ) | | — |
| | — |
| | — |
| | (308 | ) |
| Dividends and other payments paid to noncontrolling interests | — |
| | — |
| | (75 | ) | | — |
| | (75 | ) |
| Repurchase of treasury shares | (978 | ) | | — |
| | — |
| | — |
| | (978 | ) |
| Exercise of stock options | 254 |
| | — |
| | 4 |
| | — |
| | 258 |
|
| Contingent payments | — |
| | — |
| | (12 | ) | | — |
| | (12 | ) |
| Purchase of additional CRISIL shares | — |
| | — |
| | (214 | ) | | — |
| | (214 | ) |
| Excess tax benefits from share-based payments | 43 |
| | — |
| | — |
| | — |
| | 43 |
|
| Intercompany financing activities | (43 | ) | | (826 | ) | | (1,265 | ) | | 2,134 |
| | — |
|
| Cash used for financing activities from continuing operations | (1,489 | ) | | (826 | ) | | (1,562 | ) | | 2,134 |
| | (1,743 | ) |
| Effect of exchange rate changes on cash from continuing operations | 8 |
| | — |
| | (9 | ) | | — |
| | (1 | ) |
| Cash used for continuing operations | (154 | ) | | — |
| | (938 | ) | | — |
| | (1,092 | ) |
| Discontinued Operations: | | | | | | | | | |
| Cash provided by (used for) operating activities | 720 |
| | — |
| | (951 | ) | | — |
| | (231 | ) |
| Cash provided by investing activities | — |
| | — |
| | 2,129 |
| | — |
| | 2,129 |
|
| Cash used for financing activities | — |
| | — |
| | (25 | ) | | — |
| | (25 | ) |
| Effect of exchange rate changes on cash | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Cash provided by discontinued operations | 720 |
| | — |
| | 1,154 |
| | — |
| | 1,874 |
|
| Net change in cash and cash equivalents | 566 |
| | — |
| | 216 |
| | — |
| | 782 |
|
| Cash and cash equivalents at beginning of year | 119 |
| | — |
| | 641 |
| | — |
| | 760 |
|
| Cash and cash equivalents at end of year | $ | 685 |
| | $ | — |
| | $ | 857 |
| | $ | — |
| | $ | 1,542 |
|
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.None.
Item 9a. Controls and Procedures
We have filed the required certifications under Section 302 of the Sarbanes-Oxley Act of 2002 incorporated herein by reference from Exhibits (31.1) and (31.2) to this Form 10-K. In addition we have filed the required certifications under Section 906 of the Sarbanes-Oxley Act of 2002 incorporated herein by reference from Exhibit (32) to this Form 10-K.
This Item 9a. includes information concerning the controls and control evaluations referred to in the required certifications.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensureso that information required to be disclosed in our reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.
As of December 31, 2012,2015, an evaluation was performed under the supervision and with the participation of management, including the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the U.S. Securities Exchange Act of 1934). Based on that evaluation, management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of December 31, 2012.2015.
Management’s Annual Report on Internal Control Over Financial Reporting
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and as defined in Rules 13a-15(f) and 15d-15(f) under the U.S. Securities Exchange Act, of 1934, management is required to provide the following report on our internal control over financial reporting:
| |
| 1. | Management is responsible for establishing and maintaining adequate internal control over financial reporting. |
| |
| 2. | Management has evaluated the system of internal control using the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework (“COSO”COSO 2013 framework”) framework.. Management has selected the COSO 2013 framework for its evaluation as it is a control framework recognized by the SEC and the Public Company Accounting Oversight Board that is free from bias, permits reasonably consistent qualitative and quantitative measurement of our internal controls, is sufficiently complete so that relevant controls are not omitted and is relevant to an evaluation of internal controls over financial reporting. |
| |
| 3. | Based on management’s evaluation under this framework, management has concluded that our internal controls over financial reporting were effective as of December 31, 2012.2015. There are no material weaknesses in our internal control over financial reporting that have been identified by management. |
| |
| 4. | Management has excluded SNL Financial LC ("SNL") from its assessment of internal control over financial reporting as of December 31, 2015, since it was acquired on September 1, 2015. SNL has $2.5 billion and $2.3 billion of total and net assets, respectively, as of December 31, 2015 and $85 million and $9 million of revenues and net loss attributable to McGraw Hill Financial, Inc., respectively, for the year then ended. |
| |
| 5. | Our independent registered public accounting firm, Ernst & Young LLP, has audited our consolidated financial statements for the year ended December 31, 2012,2015, and has issued their reports on the financial statements and the effectiveness of our internal control over financial reporting. These reports are located on pages 4756 and 4857 of this Form 10-K. |
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the most recent quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
However, we initiated a number
Item 9b. Other Information
Not applicable.IRAN THREAT REDUCTION AND SYRIA HUMAN RIGHTS ACT DISCLOSURE
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which amended the Securities Exchange Act of 1934, an issuer is required to disclose in its annual or quarterly reports, as applicable, whether, during the reporting period, it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable laws and regulations.
Revenue during 2015 attributable to the transactions or dealings by the Company described below was approximately $702,700, with net profit from such sales being a fraction of the revenues.
During 2015, one of the Company’s divisions, a provider of energy-related information in over 150 countries, sold information and informational materials, which are generally exempt from U.S. economic sanctions, to fifteen Iran-linked subscribers that are designated by the Treasury Department’s Office of Foreign Assets Control (“OFAC”) pursuant to Executive Order 13382 and/or are owned or controlled, or appear to be owned or controlled, by the Government of Iran (the “GOI”). The Company, among other things, offers customers that subscribe to its publications access to proprietary data, analytics, and industry information that enable commodities markets to perform with greater transparency and efficiency. This division provided such data related to the energy and petrochemicals markets to the Iran-linked subscribers referenced above, generating revenue that was a de minimis portion of both the division’s and the Company’s revenue. One of the fifteen Iran-linked customers was, at the time of the relevant transactions, designated by OFAC pursuant to Executive Order 13382, and appears, based on publicly available information, to be owned or controlled by GOI entities; one was, at the time of the relevant transactions, designated by OFAC pursuant to Executive Order 13382, and is designated by OFAC as a GOI entity; eight are designated by OFAC as GOI entities; and five appear, based on publicly available information, to be owned or controlled by GOI entities. We believe that these transactions were permissible under U.S. sanctions pursuant to certain statutory and regulatory exemptions for the exportation of information and informational materials. The Company will continue to monitor its provision of products and services to these Iranian customers so that such activity continues to be permissible under U.S. sanctions.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
IncorporatedInformation about our directors is contained under the caption “Board of Directors and Corporate Governance-Director Biographies” in our Proxy Statement for our 2016 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2015 (the “2016 Proxy Statement”) and is incorporated herein by reference from our definitive proxy statement for the 2013 annual meeting of shareholders. reference.
The information under the heading “Executive Officers of the Registrant” in Part I of this Form 10-K is also incorporated herein by reference.
Code of Ethics
We have adopted a Code of Ethics for our CEO and senior financial officers that applies to our CEO, CFO, and chief accounting officer.officer and senior financial officers. To access such code, go to the Corporate Governance section of our Investor Relations Web site at www.mcgraw-hill.com/investor_relations.http://investor.mhfi.com. Any waivers that may in the future be granted from such Code will be posted at such Web site address. In addition to our Code of Ethics for the CEO and senior financial officers noted above, the following documents may be found on our Web site at the above Web site address:
Code of Business Ethics for all employees;
Code of Business Conduct and Ethics for Directors;
Employee Complaint Procedures;
Certificate of Incorporation;
By-Laws;
Corporate Governance Guidelines;
Audit Committee Charter;
Compensation and Leadership Development Committee Charter;
Nominating and Corporate Governance Committee Charter;
Financial Policy Committee Charter; and
Executive Committee Charter.
The foregoing documents are also available in print, free of charge, to any shareholder who requests them. Requests for printed copies may be e-mailed to corporate_secretary@mcgraw-hill.comcorporate.secretary@mhfi.com or mailed to the Corporate Secretary, The McGraw-Hill Companies,McGraw Hill Financial, Inc., 1221 Avenue of the Americas,55 Water Street, New York, NY 10020-1095.10041-0001.
Information about the procedures by which security holders may recommend nominees to our Board of Directors can be found in our 2016 Proxy Statement under the caption “Board of Directors and Corporate Governance-Committees of the Board of Directors-Nominating and Corporate Governance Committee” and is incorporated herein by reference.
Information concerning the composition of the Audit Committee and our Audit Committee financial experts is contained in our 2016 Proxy Statement under the caption “Board of Directors and Corporate Governance-Committees of the Board of Directors-Audit Committee” and is incorporated herein by reference.
New York Stock Exchange Certification
Promptly following the 20132016 annual meeting of shareholders, we intend to file with the NYSE the CEO certification regarding our compliance with the NYSE’s corporate governance listing standards as required by NYSE Rule 303A.12. Last year, we filed this CEO certification with the NYSE on April 26, 2012.May 1, 2015.
Item 11. Executive Compensation
IncorporatedInformation about director and executive officer compensation, Compensation Committee interlocks and the Compensation Committee Report is contained in our 2016 Proxy Statement under the captions “2015 Director Compensation,” “Board of
Directors and Corporate Governance-Compensation Committee Interlocks and Insider Participation,” and is incorporated herein by reference from our definitive proxy statement for the 2013 annual meeting of shareholders.
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Incorporated herein by reference from our definitive proxy statementSet forth below is information with respect to securities authorized for the 2013 annual meeting of shareholders.issuance under equity compensation plans:
The following table details our equity compensation plans as of December 31, 2012:2015:
| | | | Equity Compensation Plans’ Information | | Equity Compensation Plans’ Information | |
| | (a) | | (b) | | (c) | | (a) | | (b) | | (c) | |
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
| Equity compensation plans approved by security holders | 18,636,354 |
| | $ | 39.58 |
| | 26,954,277 |
| | 5,814,328 |
| | $ | 45.61 |
| | 32,921,637 |
| |
| Equity compensation plans not approved by security holders | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Total | 18,636,354 |
| 1 | $ | 39.58 |
| | 26,954,277 |
| 2,3 | 5,814,328 |
| 1 | $ | 45.61 |
| | 32,921,637 |
| 2,3 |
| |
1 | Shares to be issued upon exercise of outstanding options under our Stock Incentive Plans. |
| |
2 | Included in this number are 166,63992,649 shares reserved for issuance under the Director Deferred Stock Ownership Plan. The remaining 26,787,63832,828,988 shares are reserved for issuance under the 2002 Stock Incentive Plan (the “2002 Plan”) for Performance Stock, Restricted Stock, Other Stock-Based Awards, Stock Options and Stock Appreciation Rights. |
| |
3 | Under the terms of the 2002 Plan, shares subject to an award or shares paid in settlement of a dividend equivalent reduce the number of shares available under the 2002 Plan by one share for each such share granted or paid. |
The 2002 Plan is also governed by certain share recapture provisions. The aggregate number of shares of stock available under the 2002 Plan for issuance are increased by the number of shares of stock granted as an award under the 2002 Plan or 1993 Employee Stock Incentive Plan (the “1993 Plan”) that are:
forfeited, cancelled, settled in cash or property other than stock, or otherwise not distributable under the 2002 Plan or 1993 Plan;
tendered or withheld to pay the exercise or purchase price of an award under the 2002 Plan or 1993 Plan or to satisfy applicable wage or other required tax withholding in connection with the exercise, vesting or payment of, or other event related to, an award under the 2002 Plan or 1993 Plan; or
repurchased by us with the option proceeds in respect of the exercise of a stock option under the 2002 Plan or 1993 Plan.
Information on the number of shares our common stock beneficially owned by each director and named executive officer, by all directors and executive officers as a group and on each beneficial owner of more than 5% of our common stock is contained under the caption “Ownership of Company Stock” in our 2016 Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
IncorporatedInformation with respect to certain relationships and related transactions and director independence is contained under the captions “Board of Directors and Corporate Governance-Transactions with Related Persons” in our 2016 Proxy Statement and is incorporated herein by reference from our definitive proxy statement for the 2013 annual meeting of shareholders.
reference.
Item 14. Principal AccountingAccountant Fees and Services
During the year ended December 31, 2012,2015, Ernst & Young LLP audited the consolidated financial statements of the Registrant and its subsidiaries.
Incorporated herein by reference from our definitive proxy statement for the 2013 annual meeting of shareholders.
Information on our Audit Committee’s pre-approval policy for audit services and information on our principal accountant fees and services is contained in our 2016 Proxy Statement under the caption “Independent Registered Public Accounting Firm’s Fees and Services” and is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this Form 10-K:
Report of Management
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Income for the three years ended December 31, 20122015
Consolidated Statements of Comprehensive Income for the three years ended December 31, 20122015
Consolidated Balance Sheets as of December 31, 20122015 and 20112014
Consolidated Statements of Cash Flows for the three years ended December 31, 20122015
Consolidated Statements of Equity for the three years ended December 31, 20122015
Notes to the Consolidated Financial Statements
Schedule II—Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto.
| |
| 3. | Exhibits – The exhibits filed as part of this Form 10-K are listed in the Exhibit Index immediately preceding such Exhibits, and such Exhibit Index is incorporated herein by reference. |
The McGraw Hill Companies, Inc.Financial
Schedule II – Valuation and Qualifying Accounts
(in millions)
| | | Additions/(deductions) | Balance at beginning of year | | Net charges to income | | Deductions and other 1 | | Balance at end of year | Balance at beginning of year | | Net charges to income | | Deductions and other 1 | | Balance at end of year |
| Year ended December 31, 2012 | | | | | | | | |
| Year ended December 31, 2015 | | | | | | | | |
| Allowance for doubtful accounts | $ | 29 |
| | $ | 32 |
| | $ | (7 | ) | | $ | 54 |
| $ | 38 |
| | $ | 12 |
| | $ | (13 | ) | | $ | 37 |
|
| | | | | | | | | | | | | | | |
| Year ended December 31, 2011 | | | | | | | | |
| Year ended December 31, 2014 | | | | | | | | |
| Allowance for doubtful accounts | $ | 38 |
| | $ | 26 |
| | $ | (35 | ) | | $ | 29 |
| $ | 50 |
| | $ | 2 |
| | $ | (14 | ) | | $ | 38 |
|
| | | | | | | | | | | | | | | |
| Year ended December 31, 2010 | | | | | | | | |
| Year ended December 31, 2013 | | | | | | | | |
| Allowance for doubtful accounts | $ | 38 |
| | $ | 13 |
| | $ | (13 | ) | | $ | 38 |
| $ | 51 |
| | $ | 20 |
| | $ | (21 | ) | | $ | 50 |
|
| |
1 | Primarily includes uncollectible accounts written off, net of recoveries, impact of acquisitions and divestitures and adjustments for foreign currency translation. |
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
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The McGraw-Hill Companies,McGraw Hill Financial, Inc. |
| Registrant |
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| By: |
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/s/ Kenneth M. VittorDouglas L. Peterson |
Kenneth M. VittorDouglas L. Peterson |
Executive Vice President and General CounselChief Executive Officer |
February 28, 201311, 2016
Each individual whose signature appears below constitutes and appoints Douglas L. Peterson and Jack F. Callahan, Jr. and Kenneth M. Vittor,, and each of them singly, his or her true and lawful attorneys-in-fact and agents with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Form 10-K filed with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all the said attorneys-in-fact and agents or any of them or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on February 28, 201311, 2016 on behalf of the Registrant by the following persons who signed in the capacities as set forth below under their respective names.
|
|
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/s/ Harold W. McGraw IIIDouglas L. Peterson |
Harold W. McGraw IIIDouglas L. Peterson |
Chairman, President and Chief Executive Officer and Director |
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/s/ Jack F. Callahan, Jr. |
| Jack F. Callahan, Jr. |
| Executive Vice President and Chief Financial Officer |
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/s/ Emmanuel N. Korakis Robert J. MacKay |
Emmanuel N. KorakisRobert J. MacKay |
| Senior Vice President and Corporate Controller |
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/s/ Pedro Aspe Charles E. Haldeman, Jr. |
Pedro AspeCharles E. Haldeman, Jr. |
| Chairman of the Board and Director |
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/s/Sir Winfried F.W. Bischoff |
| Sir Winfried F.W. Bischoff |
| Director |
|
|
| |
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| /s/ William D. Green |
| William D. Green |
| Director |
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/s/ Charles E. Haldeman, Jr.Rebecca Jacoby |
Charles E. Haldeman, Jr.Rebecca Jacoby |
| Director |
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/s/Linda Koch Lorimer |
Linda Koch Lorimer |
Director |
|
/s/ Robert P. McGraw
|
| Robert P. McGraw |
| Director |
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/s/Hilda Ochoa-Brillembourg |
| Hilda Ochoa-Brillembourg |
| Director |
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/s/ Sir Michael Rake |
| Sir Michael Rake |
| Director |
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/s/Edward B. Rust, Jr. |
| Edward B. Rust, Jr. |
| Director |
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/s/Kurt L. Schmoke |
| Kurt L. Schmoke |
| Director |
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/s/ Sidney Taurel |
| Sidney Taurel |
| Director |
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/s/Richard E. Thornburgh |
| Richard E. Thornburgh |
| Director |
|
| | |
Exhibit Number | Exhibit Index |
| | |
| (2.1 | ) | Purchase and Sale Agreement between the Registrant, McGraw-Hill Education LLC, various sellers named therein and MHE Acquisition, LLC, dated November 26, 2012 (“Sale Agreement”), incorporated by reference from Registrant's Form 8-K filed November 26, 2012. |
| | |
(32.2 | ) | Amendment No. 1 to Sale Agreement, dated March 4, 2013, incorporated by reference from Registrant’s Form 8-K filed March 5, 2013. |
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| (2.3 | ) | Agreement and Plan of Merger, dated as of July 24, 2015, among the Company, Venus Sub LLC, SNL Financial LC and New Mountain Partners III (AIV-C), L.P., as incorporated by reference from the Registrant’s Form 8-K filed on July 29, 2015. |
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| (3.1 | ) | Restated Certificate of Incorporation of Registrant, incorporated by reference from Registrant’s Form 8-K filed April 28, 2011. |
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(33.2 | ) | By-lawsCertificate of Amendment of the Certificate of Incorporation of Registrant, dated May 1, 2013, incorporated by reference from Registrant’s Form 10-Q8-K filed JuneMay 1, 2013. |
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| (3.3 | ) | By-Laws of Registrant, dated February 26, 2012.2014, incorporated by reference from the Registrant’s Form 8-K filed February 26, 2014. |
| |
| (3.4 | ) | Certificate of Change of the Certificate of Incorporation of the Company, as incorporated by reference from the Registrant’s Form 8-K filed on July 1, 2015. |
| | |
| (4.1 | ) | Indenture dated as of November 2, 2007 between the Registrant, as issuer, and The Bank of New York, as trustee, incorporated by reference from Registrant’s Form 8-K filed November 2, 2007. |
| | |
| (4.2 | ) | First Supplemental Indenture, dated January 1, 2009, between the Company and The Bank of New York Mellon, as trustee, incorporated by reference from Registrant’s Form 8-K filed January 2, 2009. |
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| (4.3 | ) | Indenture dated as of May 26, 2015, among the Company, Standard & Poor's Financial Services LLC and U.S. Bank National Association, as trustee, as incorporated by reference from the Registrant’s Form 8-K filed on May 26, 2015. |
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| (4.4 | ) | First Supplemental Indenture dated as of May 26, 2015, among the Company, Standard & Poor's Financial Services LLC and U.S. Bank National Association, as trustee, as incorporated by reference from the Registrant’s Form 8-K filed on May 26, 2015. |
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| (4.5 | ) | Second Supplemental Indenture dated as of August 18, 2015, among the Company, Standard & Poor’s Financial Services LLC and U.S. Bank National Association, as trustee, as incorporated by reference from the Registrant’s Form 8-K filed on August 18, 2015. |
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| (4.6 | ) | Form of 2.500% Senior Note due 2018. |
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| (4.7 | ) | Form of 3.300% Senior Note due 2020. |
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| (4.8 | ) | Form of 4.000% Senior Note due 2025. |
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| (4.9 | ) | Form of 4.400% Senior Note due 2026. |
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| (10.1 | ) | Form of Indemnification Agreement between Registrant and each of its directors and certain of its executive officers, incorporated by reference from Registrant’s Form 10-K for the fiscal year ended December 31, 2004. |
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| (10.2)* |
| Registrant’s Amended and Restated 1993 Employee Stock Incentive Plan, as amended and restated as of December 6, 2006, incorporated by reference from Registrant’s Form 10-K for the fiscal year ended December 31, 2006. |
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(10.3)* |
| Amendment to Registrant’s Amended and Restated 1993 Employee Stock Incentive Plan, effective as of January 1, 2010, incorporated by reference from the Registrant’s Form 10-K for the fiscal year ended December 31, 2009. |
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(10.4)* |
| Registrant’s Amended and Restated 2002 Stock Incentive Plan, as amended and restated as of January 28, 2009,February 26, 2014, incorporated by reference from the Registrant’s Form 10-K for the fiscal year ended December 31, 2008.10-Q filed April 29, 2014. |
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(10.5)(10.3)* |
| Form of Performance Share Unit Terms and Conditions, incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 2014. |
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|
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| (10.4)* |
| Form of Performance Share Unit Terms and Conditions, as incorporated by reference from the Registrant’s Form 10-Q forfiled on April 28, 2015. |
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| (10.5)* |
| Form of Restricted Stock Unit Award Terms and Conditions, as incorporated by reference from the fiscal quarter ended March 31, 2009.Registrant’s Form 10-Q filed on April 28, 2015. |
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| (10.6)* |
| Form of Stock Option Award, incorporated by reference from Registrant’sthe Registrant's Form 10-K for the fiscal year ended December 31, 2004.2013. |
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| (10.7)* |
| Registrant’s Key Executive Short Term Incentive Compensation Plan, as amended effective as of July 28, 2009,January 1, 2014, incorporated by reference from the Registrant’s Form 10-K for the fiscal year ended December 31, 2009.10-Q filed April 29, 2014. |
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| (10.8)* |
| Registrant’s Key Executive Short-Term Incentive Deferred Compensation Plan, as amended and restated as of January 1, 2008, incorporated by reference from Registrant’s Form 10-K for the fiscal year ended December 31, 2007. |
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| (10.9)* |
| Registrant’sResolutions terminating deferrals under the Key Executive Short-Term Deferred Compensation Plan, dated October 23, 2014, incorporated by reference from Registrant’s Form SE filed March 28, 1991 in connection with Registrant’s Form 10-K for the fiscal year ended December 31, 1990. |
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(10.10)* |
| Registrant’s Management Severance Plan, as amended and restated as of January 1, 2012, incorporated from the Registrant's Form 10-K for the fiscal year ended December 31, 2012.2014. |
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(10.10.1)(10.10)* |
| Amendment to Registrant's Management Severance Plan, effective as of January 1, 2013. |
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(10.11)* |
| Registrant’sSenior Executive Severance Plan, as amended and restated as of January 1, 2012,2015, incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 2012.2014. |
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(10.11.1)*(10.11 |
| Amendment to Registrant's Executive Severance Plan, effective as of January 1, 2013. |
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(10.12)* |
| Registrant’s Senior Executive Severance Plan, as amended and restated as of January 1, 2012, incorporated from the Registrant's Form 10-K for the fiscal year ended December 31, 2012. |
|
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Exhibit
Number
| Exhibit Index |
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(10.13) |
) | $1,200,000,000 Three-Year1,000,000,000 Four-Year Credit Agreement dated as of July 30, 2010 ("Credit Agreement")June 19, 2013 among the Registrant, Standard & Poor’s Financial Services LLC, as guarantor, the lenders listed therein, JP Morgan Chase Bank, N.A., as administrative agent, and Bank of America, N.A., as syndication agent, incorporated by reference from the Registrant’s Form 8-K filed August 2, 2010.June 20, 2013. |
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(10.13.1)(10.12 |
) | First Amendment toRevolving Five-Year Credit Agreement, dated as of January 11, 2012.June 30, 2015, among the Company, Standard & Poor's Financial Services LLC, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, as incorporated by reference from the Registrant’s Form 8-K filed on July 1, 2015. |
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(10.13.2) |
| Second Amendment to Credit Agreement, dated as of November 2, 2012. |
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(10.14)(10.13)* |
| Registrant’s Employee Retirement Plan Supplement, as amended and restated as of January 1, 2008, incorporated by reference from Registrant’s Form 10-K for the fiscal year ended December 31, 2007. |
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(10.15)(10.14)* |
| First Amendment to Registrant’s Employee Retirement Plan Supplement, effective as of January 1, 2009, incorporated by reference from the Registrant’s Form 10-K for the fiscal year ended December 31, 2009. |
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| (10.15)* |
| Second Amendment to Registrant’s Employee Retirement Plan Supplement, effective generally as of January 1, 2010, incorporated by reference from the Registrant’s Form 10-K for the fiscal year ended December 31, 2009. |
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| (10.16)* |
| SecondThird Amendment to Registrant’s Employee Retirement Plan Supplement, effective as of January 1, 2010, incorporated by reference from the Registrant’s Form 10-K for the fiscal year ended December 31, 2009. |
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(10.17)* |
| Third Amendment to Employee Retirement Plan Supplement, effectivegenerally as of January 1, 2012, incorporated from the Registrant's Form 10-K for the fiscal year ended December 31, 2012.2011. |
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| (10.17)* |
| Fourth Amendment to Registrant’s Employee Retirement Plan Supplement, effective generally as of May 1, 2013, incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 2013. |
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| (10.18)* |
| Standard & Poor’s Employee Retirement Plan Supplement, as amended and restated as of January 1, 2008, incorporated by reference from the Registrant’s Form 10-K for the fiscal year ended December 31, 2009. |
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| (10.19)* |
| First Amendment to Standard & Poor’s Employee Retirement Plan Supplement, effective as of January 1, 2010,December 2, 2009, incorporated by reference from the Registrant’s Form 10-K for the fiscal year ended December 31, 2009. |
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| (10.20)* |
| Second Amendment to Standard & Poor’s Employee Retirement Plan Supplement, effective as of January 1, 2010, incorporated by reference from the Registrant’s Form 10-K for the fiscal year ended December 31, 2009. |
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| (10.21)* |
| Third Amendment to Standard & Poor’s Employee Retirement Plan Supplement, effective as of January 1, 2012, incorporated from the Registrant's Form 10-K for the fiscal year ended December 31, 2012.2011. |
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|
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| (10.22)* |
| Fourth Amendment to Standard & Poor’s Employee Retirement Plan Supplement, effective generally as of January 1, 2014, incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 2013. |
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(10.22)(10.23)* |
| Fifth Amendment to Standard & Poor’s Employee Retirement Plan Supplement, dated December 23, 2014, incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 2014. |
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| (10.24)* |
| Registrant’s 401(k) Savings and Profit Sharing Supplement, as amended and restated as of January 1, 2008,2015, incorporated by reference from Registrant’sthe Registrant's Form 10-K for the fiscal year ended December 31, 2007.2014. |
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(10.23)* |
| Amendment to Registrant’s 401(k) Savings and Profit Sharing Supplement, effective as of January 1, 2010, incorporated by reference from the Registrant’s Form 10-K for the fiscal year ended December 31, 2009. |
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(10.23.1)* |
| Amendment to Registrant's 401(k) Savings and Profit Sharing Plan Supplement, effective January 1, 2013. |
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(10.24)(10.25)* |
| Registrant’s Management Supplemental Death and Disability Benefits Plan, as amended January 24, 2006,and restated effective as of September 23, 2014, incorporated by reference from Registrant’sthe Registrant's Form 10-K for the fiscal year ended December 31, 2005. |
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(10.25)* |
| Amendment to Registrant’s Management Supplemental and Disability Benefits Plan, effective as of January 1, 2010, incorporated by reference from the Registrant’s Form 10-K for the fiscal year ended December 31, 2009.2014. |
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| (10.26)* |
| Registrant’s Senior Executive Supplemental Death, Disability & Retirement Benefits Plan, as amended and restated as of January 1, 2008, incorporated by reference from Registrant's Form 10-K for the fiscal year ended December 31, 2007. |
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| (10.27)* |
| Amendment to Registrant’s Senior Executive Supplemental Death, Disability & Retirement Benefits Plan, effective as of January 1, 2010, incorporated by reference from the Registrant’s Form 10-K for the fiscal year ended December 31, 2009. |
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| (10.28)* |
| Registrant's Director Retirement Plan, incorporated by reference from Registrant’s Form SE filed March 29, 1990 in connection with Registrant’s Form 10-K for the fiscal year ended December 31, 1989. |
|
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Exhibit
Number
| Exhibit Index |
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| (10.29)* |
| Resolutions Freezing Existing Benefits and Terminating Additional Benefits under Registrant’s Directors Retirement Plan, as adopted on January 31, 1996, incorporated by reference from Registrant’s Form 10-K for the fiscal year ended December 31, 1996. |
| | |
| (10.30)* |
| Registrant’s Director Deferred Compensation Plan, as amended and restated as of January 1, 2008, incorporated by reference from Registrant’s Form 10-K for the fiscal year ended December 31, 2007. |
| | |
| (10.31)* |
| Registrant’s Director Deferred Stock Ownership Plan, incorporated by reference from Registrant’s Form 10-K for the fiscal year ended December 31, 2010. |
| | |
| (10.32)* |
| Amendment dated December 9, 2011 to offer letter dated November 2, 2010 to Jack F. Callahan, Jr., Executive Vice President and Chief Financial Officer, incorporated from the Registrant's Form 10-K for the fiscal year ended December 31, 2012.2011. |
| | |
| (10.33)* |
| Amendment dated December 9, 2011 to offer letter dated October 27, 2010 to John L. Berisford, Executive Vice President, Human Resources, incorporated from the Registrant's Form 10-K for the fiscal year ended December 31, 2012.2011. |
| | |
| (10.34)* |
| CommunicationLetter Agreement, dated July 11, 2013, with Harold McGraw III regarding his compensation arrangement for serving as Non-Executive Chairman of the Board, incorporated by reference from Registrant’s Form 8-K filed July 11, 2013. |
| |
| (10.35)* |
| Separation Agreement dated September 24, 2015 between the Company and Neeraj Sahai, as incorporated by reference from the Registrant’s Registration Statement on Form S-4 filed on October 30, 2015. |
| |
| (10.36)* |
| Registrant’s Pay Recovery Policy, restated effective as of January 25, 2012 regarding the equity enhancements under the Growth and Value Severance Program,1, 2015, incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 2012.2014. |
| | |
(12(10.37)* | )
| S&P Ratings Services Pay Recovery Policy, effective as of October 1, 2014, incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 2014. |
| |
| (10.38) |
| Settlement Agreement dated February 2, 2015 among the Company, Standard & Poor's Financial Services LLC, the United States, acting through the Department of Justice, and various States and the District of Columbia, acting through their respective Attorneys General, incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 2014. |
| |
| (12) |
| Computation of Ratio of Earnings to Fixed Charges. |
|
| | |
| | |
(21(21) | )
| Subsidiaries of the Registrant. |
| | |
(23(23) | )
| Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. |
| | |
(31.1(31.1) | )
| Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. |
| | |
(31.2(31.2) | )
| Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. |
| | |
(32(32) | )
| Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| (101.INS) |
| XBRL Instance Document |
| | |
| (101.SCH) |
| XBRL Taxonomy Extension Schema |
| | |
| (101.CAL) |
| XBRL Taxonomy Extension Calculation Linkbase |
| | |
| (101.LAB) |
| XBRL Taxonomy Extension Label Linkbase |
| | |
| (101.PRE) |
| XBRL Taxonomy Extension Presentation Linkbase |
| | |
| (101.DEF) |
| XBRL Taxonomy Extension Definition Linkbase |
| |
| (101.LAB) |
| XBRL Taxonomy Extension Label Linkbase |
| |
| (101.PRE) |
| XBRL Taxonomy Extension Presentation Linkbase |
| |
| (101.DEF) |
| XBRL Taxonomy Extension Definition Linkbase |
* These exhibits relate to management contracts or compensatory plan arrangements.
