Exhibit 99.3
McGRAW HILL FINANCIAL, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
McGraw Hill Financial, Inc. (“MHFI” or the “Company”) acquired SNL Financial LC (“SNL Financial”) for total cash consideration of approximately $2.225 billion on September 1, 2015 (the "Acquisition Date"). The Company financed the acquisition with a combination of cash on hand and the issuance of senior notes, which are fully and unconditionally guaranteed by the Company’s wholly-owned subsidiary Standard & Poor’s Financial Services LLC.
The following unaudited pro forma condensed combined financial statements are based on our historical consolidated financial statements and SNL Financial’s historical consolidated financial statements as adjusted to give effect to the Company’s acquisition of SNL Financial and the related financing transactions. The unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2015 and the twelve months ended December 31, 2014 give effect to these transactions as if they had occurred on January 1, 2014. The unaudited pro forma condensed combined balance sheet as of June 30, 2015 gives effect to these transactions as if they had occurred on June 30, 2015.
The determination and preliminary allocation of the purchase consideration used in the unaudited pro forma condensed combined financial information are based upon preliminary estimates, which are subject to change during the measurement period (up to one year from the Acquisition Date) as we finalize the valuations of the net tangible and intangible assets acquired.
The unaudited pro forma adjustments are not necessarily indicative of or intended to represent the results that would have been achieved had the transaction been consummated as of the dates indicated or that may be achieved in the future. The actual results reported by the combined company in periods following the acquisition may differ significantly from those reflected in these unaudited pro forma condensed combined financial information for a number of reasons, including cost saving synergies from operating efficiencies and the effect of the incremental costs incurred to integrate the two companies.
The assumptions and estimates underlying the unaudited adjustments to the pro forma condensed combined financial statements are described in the accompanying notes, which should be read together with the pro forma condensed combined financial statements.
The unaudited pro forma condensed combined financial statements should be read together with the Company’s historical financial statements, which are included in the Company’s latest annual report on Form 10-K and quarterly report on Form 10-Q, and SNL Financial’s historical information included herein.
| Combined Balance Sheet | |||||||||||||||
| June 30, 2015 | |||||||||||||||
| Historical | |||||||||||||||
| (in millions) | McGraw Hill Financial, Inc. | SNL Financial LC and Subsidiaries | Pro Forma Adjustments | Pro Forma Combined | |||||||||||
| ASSETS | |||||||||||||||
| Current assets: | |||||||||||||||
| Cash and equivalents | $ | 1,720 | $ | 15 | $ | (294 | ) | a | $ | 1,441 | |||||
| Accounts receivable, net of allowance for doubtful accounts | 1,063 | 11 | — | 1,074 | |||||||||||
| Deferred income taxes | 203 | — | — | 203 | |||||||||||
| Prepaid and other current assets | 227 | 7 | — | 234 | |||||||||||
| Total current assets | 3,213 | 33 | (294 | ) | 2,952 | ||||||||||
| Property and equipment, net of accumulated depreciation | 208 | 22 | 230 | ||||||||||||
| Capitalized software development costs, net | — | 5 | (5 | ) | b | — | |||||||||
| Goodwill | 1,383 | 304 | 1,256 | c | 2,943 | ||||||||||
| Other intangible assets, net | 977 | 155 | 617 | b | 1,749 | ||||||||||
| Other non-current assets | 232 | 10 | 14 | d | 256 | ||||||||||
| Total assets | $ | 6,013 | $ | 529 | $ | 1,588 | $ | 8,130 | |||||||
| LIABILITIES AND EQUITY | |||||||||||||||
| Current liabilities: | |||||||||||||||
| Accounts payable | $ | 181 | $ | 11 | $ | 2 | e | $ | 194 | ||||||
| Current maturities of long-term debt, net of discount | — | 3 | (3 | ) | f | — | |||||||||
| Accrued compensation and contributions to retirement plans | 264 | 16 | — | 280 | |||||||||||
| Unearned revenue | 1,387 | 126 | (6 | ) | g | 1,507 | |||||||||
| Accrued legal and regulatory settlements | 23 | — | — | 23 | |||||||||||
| Other current liabilities | 385 | — | — | 385 | |||||||||||
| Total current liabilities | 2,240 | 156 | (7 | ) | 2,389 | ||||||||||
| Long-term debt | 1,494 | 267 | 1,729 | f | 3,490 | ||||||||||
| Deferred rent | — | 3 | (3 | ) | h | — | |||||||||
| Deferred tax liability | — | 3 | — | 3 | |||||||||||
| Pension and postretirement benefits | 285 | — | — | 285 | |||||||||||
| Other non-current liabilities | 369 | 1 | — | 370 | |||||||||||
| Total liabilities | 4,388 | 430 | 1,719 | 6,537 | |||||||||||
| Redeemable noncontrolling interest | 810 | 810 | |||||||||||||
| Equity: | |||||||||||||||
| Common stock | 412 | — | — | 412 | |||||||||||
| Additional paid-in capital | 435 | — | — | 435 | |||||||||||
| Retained income (loss) | 7,438 | (100 | ) | 68 | i | 7,406 | |||||||||
| Accumulated other comprehensive loss | (511 | ) | (5 | ) | 5 | j | (511 | ) | |||||||
| Less: common stock in treasury | (7,011 | ) | — | — | (7,011 | ) | |||||||||
| Members' interest | — | 204 | (204 | ) | i | — | |||||||||
| Total equity - controlling interests | 763 | 99 | (131 | ) | 731 | ||||||||||
| Total equity - noncontrolling interests | 52 | — | 52 | ||||||||||||
| Total equity | 815 | 99 | (131 | ) | 783 | ||||||||||
| Total liabilities and equity | $ | 6,013 | $ | 529 | $ | 1,588 | $ | 8,130 | |||||||
See accompanying notes to the unaudited pro forma condensed combined financial information.
| Combined Statement of Income | |||||||||||||||
| Year Ended December 31, 2014 | |||||||||||||||
| Historical | |||||||||||||||
| (in millions, except per share data) | McGraw Hill Financial, Inc. | SNL Financial LC and Subsidiaries | Pro Forma Adjustments | Pro Forma Combined | |||||||||||
| Revenue | $ | 5,051 | $ | 224 | $ | — | $ | 5,275 | |||||||
| Expenses: | |||||||||||||||
| Operating-related expenses | 1,627 | 58 | 55 | k | 1,740 | ||||||||||
| Selling and general expenses | 3,168 | 76 | — | 3,244 | |||||||||||
| Product development | — | 55 | (55 | ) | k | — | |||||||||
| Depreciation | 86 | — | 7 | k | 93 | ||||||||||
| Amortization of intangibles | 48 | — | 53 | k,l | 101 | ||||||||||
| Depreciation and amortization | — | 43 | (43 | ) | k | — | |||||||||
| Total expenses | 4,929 | 232 | 17 | 5,178 | |||||||||||
| Other loss | 9 | — | — | 9 | |||||||||||
| Operating profit (loss) | 113 | (8 | ) | (17 | ) | 88 | |||||||||
| Loss on extinguishment of debt | — | 3 | (3 | ) | n | — | |||||||||
| Interest expense, net | 59 | 16 | 54 | m | 129 | ||||||||||
| Other expense, net | — | 1 | — | 1 | |||||||||||
| Income (loss) from continuing operations before taxes on income | 54 | (28 | ) | (67 | ) | (41 | ) | ||||||||
| Provision for taxes on income | 245 | — | (35 | ) | 210 | ||||||||||
| Loss from continuing operations | (191 | ) | (28 | ) | (32 | ) | (251 | ) | |||||||
| Income from discontinued operations, net of tax | 178 | — | — | 178 | |||||||||||
| Net loss | (13 | ) | (28 | ) | (32 | ) | o | (73 | ) | ||||||
| Less: net income from continuing operations attributable to noncontrolling interests | (102 | ) | (1 | ) | — | (103 | ) | ||||||||
| Net loss attributable to McGraw Hill Financial, Inc. | $ | (115 | ) | $ | (28 | ) | $ | (32 | ) | $ | (175 | ) | |||
| Earnings per share attributable to McGraw Hill Financial, Inc. common shareholders: | |||||||||||||||
| Loss from continuing operations: | |||||||||||||||
| Basic | $ | (1.08 | ) | $ | (1.30 | ) | |||||||||
| Diluted | $ | (1.08 | ) | $ | (1.30 | ) | |||||||||
| Income from discontinued operations: | |||||||||||||||
| Basic | $ | 0.66 | $ | 0.66 | |||||||||||
| Diluted | $ | 0.66 | $ | 0.66 | |||||||||||
| Net loss: | |||||||||||||||
| Basic | $ | (0.42 | ) | $ | (0.64 | ) | |||||||||
| Diluted | $ | (0.42 | ) | $ | (0.64 | ) | |||||||||
| Weighted-average number of common shares outstanding: | |||||||||||||||
| Basic | 271.5 | 271.5 | |||||||||||||
| Diluted | 271.5 | 271.5 | |||||||||||||
See accompanying notes to the unaudited pro forma condensed combined financial information.
| Combined Statement of Income | |||||||||||||||
| Six Months Ended June 30, 2015 | |||||||||||||||
| Historical | |||||||||||||||
| (in millions, except per share data) | McGraw Hill Financial, Inc. | SNL Financial LC and Subsidiaries | Pro Forma Adjustments | Pro Forma Combined | |||||||||||
| Revenue | $ | 2,615 | $ | 121 | $ | — | $ | 2,736 | |||||||
| Expenses: | |||||||||||||||
| Operating-related expenses | 812 | 29 | 27 | k | 868 | ||||||||||
| Selling and general expenses | 665 | 38 | — | 703 | |||||||||||
| Product development | — | 27 | (27 | ) | k | — | |||||||||
| Depreciation | 43 | — | 4 | k | 47 | ||||||||||
| Amortization of Intangibles | 23 | — | 27 | k,l | 50 | ||||||||||
| Depreciation and amortization | — | 21 | (21 | ) | k | — | |||||||||
| Total expenses | 1,543 | 115 | 9 | 1,667 | |||||||||||
| Other income | (11 | ) | — | — | (11 | ) | |||||||||
| Operating profit | 1,083 | 6 | (9 | ) | 1,080 | ||||||||||
| Interest expense, net | 32 | 7 | 30 | m | 69 | ||||||||||
| Other expense, net | — | 1 | — | 1 | |||||||||||
| Income (loss) from continuing operations before taxes on income | 1,051 | (2 | ) | (39 | ) | 1,010 | |||||||||
| Provision for taxes on income | 340 | 1 | (17 | ) | o | 324 | |||||||||
| Net income (loss) | 711 | (3 | ) | (22 | ) | 686 | |||||||||
| Less: net income from continuing operations attributable to noncontrolling interests | (55 | ) | — | (55 | ) | ||||||||||
| Other comprehensive loss: Foreign currency translation adjustments | — | (1 | ) | — | (1 | ) | |||||||||
| Net income (loss) attributable to McGraw Hill Financial, Inc. | $ | 656 | $ | (4 | ) | $ | (22 | ) | $ | 630 | |||||
| Earnings per share attributable to McGraw Hill Financial, Inc. common shareholders: | |||||||||||||||
| Income from continuing operations: | |||||||||||||||
| Basic | $ | 2.40 | $ | 2.31 | |||||||||||
| Diluted | $ | 2.38 | $ | 2.28 | |||||||||||
| Net income: | |||||||||||||||
| Basic | $ | 2.40 | $ | 2.31 | |||||||||||
| Diluted | $ | 2.38 | $ | 2.28 | |||||||||||
| Weighted-average number of common shares outstanding: | |||||||||||||||
| Basic | 273.3 | 273.3 | |||||||||||||
| Diluted | 276.0 | 276.0 | |||||||||||||
See accompanying notes to the unaudited pro forma condensed combined financial information.
Notes to Unaudited Pro Forma Condensed Combined Financial Information
(in millions)
| 1. | Basis of Presentation |
The historical consolidated financial statements have been adjusted in the pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the business combination, (2) factually supportable and (3) with respect to the pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results following the business combination.
The business combination was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. As the acquirer for accounting purposes, the Company has estimated the fair value of SNL Financial’s assets acquired and liabilities assumed and conformed the accounting policies of SNL Financial to its own accounting policies.
The pro forma combined financial statements do not necessarily reflect what the combined company’s financial condition or results of operations would have been had the acquisition occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of operations of the combined company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.
The combined pro forma financial information does not reflect the realization of any expected cost savings or other synergies from the acquisition of SNL Financial as a result of restructuring activities and other planned cost savings initiatives following the completion of the business combination.
| 2. | Financing transactions |
The Company completed the acquisition of SNL Financial for approximately $2.225 billion in cash. The Company partially financed the purchase by issuing $2 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 $900 million of 4.4% senior notes due in 2026. These senior notes are fully and unconditionally guaranteed by Standard & Poor's Financial Services, LLC, a wholly-owned subsidiary of the Company.
| 3. | Preliminary purchase price allocation |
The Company has performed a preliminary valuation analysis of the fair market value of assets and liabilities of the SNL Financial business. This preliminary purchase price allocation has been used to prepare pro forma adjustments in the pro forma balance sheet and income statement. The final purchase price allocation will be determined when the Company has completed the detailed valuations and necessary calculations. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. The final allocation may include (1) changes in fair values of property, plant and equipment, (2) changes in allocations to intangible assets as well as goodwill and (3) other changes to assets and liabilities.
Our acquisition of SNL Financial was accounted for using the acquisition method. Under the acquisition method, the excess of the purchase price over the fair value of the net assets acquired is allocated to goodwill and other intangibles. The intangible assets, excluding goodwill and indefinite-lived intangibles, will be amortized over their anticipated useful lives between 10 and 18 years which will be determined when we finalize our purchase price allocation.
The following table presents the preliminary allocation of purchase price to the assets and liabilities of SNL Financial as a result of the acquisition.
| ($ in millions) | |||
| Current assets | $ | 33 | |
| Property, plant and equipment | 22 | ||
| Goodwill | 1,560 | ||
| 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 | 10 | ||
| Total assets acquired | 2,397 | ||
| Current liabilities | (27 | ) | |
| Unearned revenue | (120 | ) | |
| Other non-current liabilities | (4 | ) | |
| Total liabilities acquired | (151 | ) | |
| Net assets acquired | $ | 2,246 | |
| 4. | Pro forma adjustments |
The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma condensed combined financial information:
| (a) | Represents payment for the portion of the SNL Financial purchase price paid with cash on hand of $262 million and the payment of transaction costs related to the acquisition of $31.5 million. |
| (b) | Reflects the adjustment of historical intangible assets acquired by the Company to their estimated fair values. As part of the preliminary valuation analysis, the Company identified intangible assets, including, database content, trade names, customer relationships, software, and a favorable lease. Since all information required to complete our detailed valuation analysis of SNL Financial's intangible assets could not be obtained as of the date of this filing, for purposes of these unaudited pro forma condensed combined financial statements the Company made preliminary assumptions that may be subject to change. |
| ($ in millions) | Value | Life | Annual Amortization | |||||
| Database content | $ | 376 | 10 | $ | 38 | |||
| Trade names | 185 | — | ||||||
| Customer relationships | 162 | 15 | 11 | |||||
| Software | 45 | 10 | 4 | |||||
| Favorable lease | 4 | 18 | 0.2 | |||||
| Total intangible assets | $ | 772 | $ | 53.2 | ||||
These preliminary estimates of fair value and estimated useful lives will likely differ from final amounts the Company will calculate after completing a detailed valuation analysis, and the difference could have a material impact on the accompanying unaudited pro forma condensed combined financial statements.
| (c) | Represents the goodwill resulting from the acquisition. The preliminary purchase price allocation is subject to change, and the impact of such changes may be material. |
| (d) | Represents deferred financing costs associated with the issue of $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. |
| (e) | Represents amounts owed for professional fees incurred for financing costs associated with the $2.0 billion of senior notes. |
| (f) | Represents the effects of extinguishing SNL Financial's short-term debt upon completion of the acquisition. The net increase in debt includes: |
| ($ in millions) | |||
| Issuance of new term debt, net of debt discount of $4 | $ | 1,996 | |
| Decrease for extinguishment of existing SNL Financial debt | (270 | ) | |
| Pro forma adjustment to debt | $ | 1,726 | |
| (g) | Represents the estimated adjustment to decrease the assumed deferred revenue obligations to a fair value of approximately $120 million, a $6 million decrease from the carrying value. The calculation of fair value is preliminary and subject to change. The fair value was determined based on the estimated costs to fulfill the remaining obligations plus a normal profit margin. |
| (h) | Adjustment of deferred rent liability to fair value upon application of acquisition accounting. |
| (i) | Represents the elimination of the historical equity of SNL Financial and the impact of payment of transaction costs of $32 million by the Company at the close of the transaction. |
| (j) | Represents the elimination of the historical other comprehensive income of SNL Financial. |
| (k) | Certain reclassifications have been made to the historical presentation of SNL Financial to conform to the financial statement presentation of the Company. |
| (l) | Represents the amortization of identified intangibles assets acquired by the Company described in note (b). |
The preliminary estimates of fair value and estimated useful lives of the identified intangible asset may differ from final amounts the Company will calculate after completing a detailed valuation analysis, and the difference could have a material impact on the accompanying unaudited pro forma condensed combined financial statements.
| (m) | Represents the net increase to interest expense resulting from interest on the new debt to finance the acquisition of SNL Financial and extinguish its existing debt and the amortization of related debt issuance costs as follows: |
| ($ in millions) | Six Months Ended June 30, 2015 | Year Ended December 31, 2014 | |||||
| Elimination of interest expense and amortization of debt issuance costs - outstanding SNL Financial debt | $ | (7 | ) | $ | (16 | ) | |
| Interest expense on new debt | 36 | 67 | |||||
| Amortization of new debt issuance costs and debt discount | 1 | 3 | |||||
| Pro forma adjustments - interest expense | $ | 30 | $ | 54 | |||
| (n) | Represents reversal of a loss on extinguishment of debt as a result of SNL Financial’s restructuring of its credit facility during the year ended December 31, 2014. |
| (o) | To record the pro forma adjustments to reflect benefits from income tax at the weighted average Estimated statutory income tax rates applicable to the jurisdictions in which the pro forma adjustments are expected to be recorded. |