McGraw Hill Financial's Q3 net income down 31% year-over-year to US$215M, net sales up 7% to US$1.19B

Kendall Sinclair

NEW YORK , October 22, 2013 (press release) – Revenue Increased 7% (8% Organic)

Diluted EPS from Continuing Operations Increased 58% to $0.84

Adjusted Diluted EPS from Continuing Operations Increased 13% to $0.80

Adjusted Diluted EPS Guidance Increased to a Range of $3.25 to $3.30

McGraw Hill Financial, Inc. (NYSE: MHFI) today reported third quarter 2013 results with revenue of $1.19 billion, an increase of 7% compared to the same period last year and 8% excluding the impact of the sale of Aviation Week. Net income and diluted earnings per share from continuing operations were $235 million and $0.84, respectively.

Adjusted net income from continuing operations increased 11% to $222 million and adjusted diluted earnings per share from continuing operations increased 13% to $0.80. The adjustments exclude the impact of the gain on sale of Aviation Week and India Index Services by CRISIL, as well as one-time costs related primarily to the Growth and Value Plan.
"The strength of our portfolio was clearly demonstrated this quarter as both S&P Dow Jones Indices and S&P Capital IQ delivered record quarterly revenue, and Commodities & Commercial Markets reported record adjusted operating margin, driving each of these segments to double-digit adjusted operating profit growth," said Harold McGraw III, Chairman, President, and Chief Executive Officer of McGraw Hill Financial. "As a leader in providing ratings, benchmarks and analytics, McGraw Hill Financial offers investors a unique opportunity to benefit from the essential intelligence that we provide to our customers. This world-class portfolio of businesses is the culmination of my tenure as President and CEO of this Company. As Doug Peterson assumes his new role as President and CEO on November 1, I couldn't be more pleased with his appointment or more proud of the strength of the portfolio we have assembled and the employees who made it happen."

The Outlook: 2013 adjusted earnings per share guidance is increased to a range of $3.25 to $3.30 from $3.15 to $3.25 despite likely market volatility due in part to the Federal debt debate as well as evolving expectations for interest rates.

Standard & Poor's Ratings Services: Despite a decrease in global debt issuance, quarterly revenue increased 8% to $540 million compared to the same period last year, driven by strength in bank loan ratings, entity credit ratings, and rating evaluation services. Adjusted operating profit increased 5% to $227 million with a margin of 42%.

Transaction revenue grew 6% to $227 million compared to the same period last year as a result of a 73% increase in bank loan ratings. Issuance, the traditional driver of overall segment revenue growth, decreased during the quarter with a 9% increase in structured issuance more than offset by an 11% decrease in corporate and public issuance.

Non-transaction revenue increased 9% in the quarter and represented 58% of Standard & Poor's Ratings' total revenue compared to 57% for the same period last year. Non-transaction growth was driven primarily by entity credit ratings and rating evaluation services.

Domestic revenue increased 6% and international revenue increased 10%. Foreign exchange rates had a negligible impact on results. International revenue represented 46% of Standard & Poor's Ratings' total third-quarter revenue.

Tender for CRISIL Shares: On August 6, the Company completed a voluntary tender offer for additional shares of CRISIL Limited, a publicly traded company in India. As a result, the Company's ownership in CRISIL increased from 52.8% to 67.8% which represented an incremental investment of $214 million.

S&P Capital IQ: Revenue increased 3% to $293 million in the third quarter of 2013 compared to the same period last year. Excluding ongoing portfolio rationalization, organic revenue growth was 5%. This was the highest revenue quarter for the segment. Adjusted operating profit returned to growth with an increase of 10% to $59 million.

Desktop Solutions, Enterprise Solutions and Ratings IP all delivered mid single-digit revenue growth while Proprietary Research revenue declined mid single-digits.
S&P Capital IQ's international revenue increased by 8% to $100 million in the third quarter and represented 34% of the segment's total revenue.

Efforts continue to invest in the more promising pieces of the business to create unique product offerings such as the new Portfolio Risk Solution and Events Driven Alerts.
Simultaneously, the segment continued to fine tune its portfolio resulting in the sale of Financial Communications and the exploration of strategic options for FMR Europe.

S&P Dow Jones Indices: Revenue increased 14% to $124 million in the third quarter of 2013 compared to the same period last year. Adjusted quarterly operating profit increased 23% to $80 million.

Exchange-traded funds and exchange-traded derivatives were two key drivers of revenue growth. Assets under management in exchange-traded funds based on the S&P Dow Jones Indices increased 29% to $585 billion at the end of the quarter. Trading volume of the exchange-traded derivatives SPX (S&P 500 Index) and VIX (CBOE Volatility Index) increased 18% and 26%, respectively.

Revenue growth was partially mitigated by declines in mutual funds and modest growth in the data subscription business.

Commodities & Commercial Markets: Revenue increased 7% to $255 million. Adjusted operating profit increased 24% to $82 million in the third quarter compared to the same period last year.

Platts continued to experience steady revenue growth, delivering a 17% increase to $142 million for the period. Growth in petroleum product subscriptions continued to be the primary driver of double-digit growth. In addition, metals & agriculture product subscriptions delivered double-digit revenue growth while petrochemicals and power & gas reported single-digit revenue increases.

Commercial Markets' revenue decreased 4%, however, organic revenue grew 1% excluding the sale of Aviation Week. J.D. Power delivered mid single-digit growth primarily from its strong auto business in China.

Unallocated Expense: Unallocated expense includes corporate functions and centrally managed costs. Adjusted unallocated expense increased by 10% to $52 million in the third quarter primarily due to increased unoccupied office space.

Non-GAAP Adjustments to Continuing Operations: During the third quarter, approximately $11 million of net pre-tax benefits were excluded from the adjusted results. These included $27 million of gains on the sale of Aviation Week and the sale of India Index Services by CRISIL. These gains more than offset restructuring and Growth and Value Plan costs as well as a loss from the sale of Financial Communications.

Share Repurchase: During the quarter, the Company repurchased approximately 5.7 million shares. Year-to-date, the Company has spent $850 million and repurchased approximately 15 million shares. The Company now has approximately 1.9 million shares remaining under the existing authorization from the Board of Directors and expects to continue share repurchases completing this authorization by year-end.

Balance Sheet and Cash Flow: Cash and equivalents at the end of the third quarter were $1.6 billion, up from $760 million at the end of 2012. In the first nine months of the year, free cash flow from continuing operations was $388 million, a decrease of $132 million from the same period in 2012. The decline was impacted by legal settlements and the timing of tax payments.

Comparison of Adjusted Information to U.S. GAAP Information: Adjusted diluted earnings per share, adjusted diluted earnings per share from continuing operations, adjusted net income, adjusted operating profit, adjusted unallocated expense and free cash flow are non-GAAP financial measures contained in this earnings release that are derived from the Company's continuing operations. This information is provided in order to allow investors to make meaningful comparisons of the Company's operating performance between periods and to view the Company's business from the same perspective as Company management. These non-GAAP measures may be different than similar measures used by other companies. Reconciliations for the differences between non-GAAP measures used in this earnings release and comparable financial measures calculated in accordance with U.S. GAAP are attached as Exhibits 5 and 8.

Conference Call/Webcast Details: The Company's senior management will review the third quarter earnings results on a conference call scheduled for this morning, October 22, 2013, at 8:30 a.m. Eastern Time. This call is open to all interested parties. Discussions may include forward-looking information. Additional information presented on the conference call may be made available on the Company's Investor Relations Website at http://investor.mhfi.com.

The Webcast will be available live and in replay at

http://investor.mhfi.com/phoenix.zhtml?p=irol-eventDetails&c=96562&eventID=5031496. (Please copy and paste URL into Web browser.)

Telephone access is available. Domestic participants may call (888) 391-6568; international participants may call +1 (415) 228-4733 (long distance charges will apply). The passcode is "McGraw Hill" and the conference leader is Harold McGraw III. A recorded telephone replay will be available approximately two hours after the meeting concludes and will remain available until November 22, 2013. Domestic participants may call (800) 839-1169; international participants may call +1 (203) 369-3036 (long distance charges will apply). No passcode is required.

The forward-looking statements in this news release involve risks and uncertainties and are subject to change based on various important factors, including worldwide economic, financial, liquidity, political and regulatory conditions; the health of debt (including U.S. residential mortgage-backed securities and collateralized debt obligations) and equity markets, including possible future interest rate changes; the health of the economy; the successful marketing of competitive products; and the effect of competitive products and pricing.

About McGraw Hill Financial: McGraw Hill Financial is a leading financial intelligence company providing the global capital and commodity markets with independent benchmarks, credit ratings, portfolio and enterprise risk solutions, and analytics. The Company's iconic brands include Standard & Poor's Ratings Services, S&P Capital IQ, S&P Dow Jones Indices, Platts, CRISIL, J.D. Power and McGraw Hill Construction. The Company has approximately 17,000 employees in 27 countries. Additional information is available at www.mhfi.com

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