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1ESSENTIAL
2INTELLIGENCE
3McGraw Hill Financial 2015 Annual Report
4EVOLVING.
5GROWING.
6McGraw Hill Financial (NYSE: MHFI) is a leading financial intelligence company providing the global
7capital and commodity markets with independent benchmarks, credit ratings, portfolio and
8enterprise risk solutions, and analytics. The Company's iconic brands include Standard & Poor’s
9Ratings Services, S&P Global Market Intelligence, S&P Dow Jones Indices, Platts and CRISIL.
10McGraw Hill Financial
11Financial Highlights
12Years ended December 31
13(in millions, except per share data) 2015 2014 % Change
14Revenue $5,313 $5,051 5
15Adjusted income from continuing operations (attributable to the Company’s
16common shareholders)* 1,244 (c) 1,073 (d) 16
17Adjusted diluted earnings per common share from continuing operations* $ 4.53 (c) $ 3.88 (d) 17
18Dividends per common share (e) $ 1.32 $ 1.20 10
19Total assets $8,183 $6,773 21
20Capital expenditures (f) 139 92 51
21Total debt 3,611 795 N/M
22Equity (including redeemable noncontrolling interest) 1,163 1,349 (14)
23N/M—not meaningful
24*Refer to “Reconciliation of Non-GAAP Financial Information” on page 11 of this report for a discussion of the Company’s non-GAAP financial
25measures.
26(a) Assumes $100 invested on December 31, 2010 and total return includes reinvestment of dividends through December 31, 2015.
27(b) The current peer group consists of the following companies: Thomson Reuters Corporation, Moody’s Corporation, CME Group Inc., MSCI Inc.,
28FactSet Research Systems Inc. and IHS Inc. Beginning in fiscal 2014, the Company selected a new peer group to more accurately reflect
29the Company’s peers in terms of industry after the portfolio rationalization of certain businesses. The previous peer group consisted of the
30following companies: Thomson Reuters Corporation, Thomson Reuters PLC (through September of 2009), Reed Elsevier NV, Reed Elsevier PLC,
31Pearson PLC, Moody’s Corporation and Wolters Kluwer.
32(c) Excludes the impact of the following items: costs related to identified operating efficiencies primarily related to restructuring of $56 million,
33legal settlement charges partially offset by insurance recoveries of $54 million, acquisition-related costs of $37 million, and a gain of $11
34million on the sale of our interest in a legacy McGraw Hill Construction investment.
35(d) Excludes the impact of the following items: $1.6 billion of legal and regulatory settlements, restructuring charges of $86 million, and $4 million
36of professional fees largely related to corporate development activities.
37(e) Dividends paid were $0.33 per quarter in 2015 and $0.30 per quarter in 2014.
38(f) Includes purchases of property and equipment and additions to technology projects.
39YEAR-END
40SHARE PRICE
41YEAR-END
42SHARE PRICE
430
4420
4540
4660
4780
48100
49’15
50$98.58
51’14
52$88.98
53’13
54$78.20
55’12
56$54.67
57’11
58$44.97
59DIVIDENDS
60PER SHARE
61DIVIDENDS
62PER SHARE
630.0
640.3
650.6
660.9
671.2
681.5
69’15
70$1.32
71’14
72$1.20
73’13
74$1.12
75’12
76$1.02
77’11
78$1.00
79REVENUE
80(in millions)
81REVENUE
820
831000
842000
853000
864000
875000
886000
89’15
90$5,313
91’10
92MHFI
93’11 ’12 ’13 ’14 ’15
94$311
95$181
96$173
97’14
98$5,051
99’13
100$4,702
101’12
102$4,270
103’11
104$3,762
105SHAREHOLDER RETURN
106FIVE-YEAR CUMULATIVE
107TOTAL RETURN (a)
108(12/31/10–12/31/15)
1090
110100
111200
112300
113$400
1140
115100
116200
117300
118400
119S&P 500 Peer Group (b)
120YEAR-END
121SHARE PRICE
122YEAR-END
123SHARE PRICE
1240
12520
12640
12760
12880
129100
130’15
131$98.58
132’14
133$88.98
134’13
135$78.20
136’12
137$54.67
138’11
139$44.97
140DIVIDENDS
141PER SHARE
142DIVIDENDS
143PER SHARE
1440.0
1450.3
1460.6
1470.9
1481.2
1491.5
150’15
151$1.32
152’14
153$1.20
154’13
155$1.12
156’12
157$1.02
158’11
159$1.00
160REVENUE
161(in millions)
162REVENUE
1630
1641000
1652000
1663000
1674000
1685000
1696000
170’15
171$5,313
172’10
173MHFI
174’11 ’12 ’13 ’14 ’15
175$311
176$181
177$173
178’14
179$5,051
180’13
181$4,702
182’12
183$4,270
184’11
185$3,762
186SHAREHOLDER RETURN
187FIVE-YEAR CUMULATIVE
188TOTAL RETURN (a)
189(12/31/10–12/31/15)
1900
191100
192200
193300
194$400
1950
196100
197200
198300
199400
200S&P 500 Peer Group (b)
201YEAR-END
202SHARE PRICE
203YEAR-END
204SHARE PRICE
2050
20620
20740
20860
20980
210100
211’15
212$98.58
213’14
214$88.98
215’13
216$78.20
217’12
218$54.67
219’11
220$44.97
221DIVIDENDS
222PER SHARE
223DIVIDENDS
224PER SHARE
2250.0
2260.3
2270.6
2280.9
2291.2
2301.5
231’15
232$1.32
233’14
234$1.20
235’13
236$1.12
237’12
238$1.02
239’11
240$1.00
241REVENUE
242(in millions)
243REVENUE
2440
2451000
2462000
2473000
2484000
2495000
2506000
251’15
252$5,313
253’10
254MHFI
255’11 ’12 ’13 ’14 ’15
256$311
257$181
258$173
259’14
260$5,051
261’13
262$4,702
263’12
264$4,270
265’11
266$3,762
267SHAREHOLDER RETURN
268FIVE-YEAR CUMULATIVE
269TOTAL RETURN (a)
270(12/31/10–12/31/15)
2710
272100
273200
274300
275$400
2760
277100
278200
279300
280400
281S&P 500 Peer Group (b)
282YEAR-END
283SHARE PRICE
284YEAR-END
285SHARE PRICE
2860
28720
28840
28960
29080
291100
292’15
293$98.58
294’14
295$88.98
296’13
297$78.20
298’12
299$54.67
300’11
301$44.97
302DIVIDENDS
303PER SHARE
304DIVIDENDS
305PER SHARE
3060.0
3070.3
3080.6
3090.9
3101.2
3111.5
312’15
313$1.32
314’14
315$1.20
316’13
317$1.12
318’12
319$1.02
320’11
321$1.00
322REVENUE
323(in millions)
324REVENUE
3250
3261000
3272000
3283000
3294000
3305000
3316000
332’15
333$5,313
334’10
335MHFI
336’11 ’12 ’13 ’14 ’15
337$311
338$181
339$173
340’14
341$5,051
342’13
343$4,702
344’12
345$4,270
346’11
347$3,762
348SHAREHOLDER RETURN
349FIVE-YEAR CUMULATIVE
350TOTAL RETURN (a)
351(12/31/10–12/31/15)
3520
353100
354200
355300
356$400
3570
358100
359200
360300
361400
362S&P 500 Peer Group (b)
363Our Company has undergone profound,
364positive change in recent years. The
365management team has dramatically
366sharpened the Company’s strategic
367focus and invested in fast-growing,
368high-margin businesses serving the
369global capital and commodities markets.
370The evolution of McGraw Hill Financial
371continued in 2015. Doug and his team
372made excellent progress strengthening
373the portfolio of businesses—including
374the decision to evaluate strategic alternatives
375for J.D. Power—putting significant
376legal matters behind the Company and
377reshaping the senior leadership team.
378The exciting transformation of McGraw
379Hill Financial is ongoing. The team has
380proposed rebranding the Company
381S&P Global* to better reflect our core
382businesses and capitalize on one of
383the most recognizable brands in financial
384markets. The Board unanimously
385endorses this move and we ask shareholders
386to support the name change
387at our Annual Meeting on April 27.
388I encourage you to read Doug’s letter
389in which he explains why the Company is
390moving in this direction.
391In the midst of all of this change, McGraw
392Hill Financial continues to produce
393excellent financial results and create
394value for shareholders.
395As a former investment manager, I value
396the return of capital to shareholders. In
397this regard, McGraw Hill Financial has a
398strong record. Last year, the Company
399returned $1.3 billion to shareholders
400through dividends and share repurchases.
401Since the start of 2011, McGraw Hill
402Financial has returned more than $6 billion
403in the form of dividends and share
404buybacks. Additionally, the Company’s
405total shareholder return of 12.3% significantly
406outperformed the 1.4% gain
407in the S&P 500 in 2015. To demonstrate
408the Company’s ongoing commitment to
409maximizing shareowner value, the Board
410approved in January a 9% increase in
411the quarterly cash dividend to an annualized
412rate of $1.44.
413The Board takes its fiduciary responsibilities
414seriously and holds management
415to a very high standard. I am pleased that
416Doug has taken a hands-on approach to
417enhancing the Company’s already strong
418risk management and compliance culture
419as he aligns relevant functions across
420the enterprise and within each business.
421Our Company is entering a new era with
422a fresh but well-known and trusted
423brand identity. It is well positioned to
424continue to provide strong shareholder
425returns. And I know that Doug and the
426leadership team are energized to drive
427profitable growth with an eye on managing
428and mitigating risk. I look to the
429future with great optimism.
430Sincerely,
431CHARLES E. “ED” HALDEMAN, JR.
432Chairman of the Board
433EVOLVING.
434GROWING.
435Dear Fellow Shareholders:
436ON BEHALF OF THE BOARD OF DIRECTORS, I THANK YOU FOR YOUR INTEREST AND SUPPORT OF McGRAW HILL FINANCIAL. I WILL
437SOON COMPLETE MY FIRST YEAR AS NON-EXECUTIVE CHAIRMAN AND I FEEL PRIVILEGED TO HAVE THE OPPORTUNITY TO SERVE
438THE COMPANY IN THIS ROLE.
439*The name S&P Global is subject to shareholders’ approval. McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 1
440Letter from the President
441and Chief Executive Officer:
442Steady growth has been a hallmark
443for us. In fact, over the last five years
444our Company has generated doubledigit
445compound annual growth rates
446(CAGR) in adjusted operating profit
447and adjusted EPS while increasing
448revenue at a CAGR of 9%.
449I extend my gratitude to our employees
450for their dedication to achieve these
451results and for their ongoing commitment
452to operating with integrity in
453everything they do.
454I am proud of our recent performance.
455This letter affords me the opportunity
456to summarize our progress. But I also
457want to tell you about our long-term
458future. As we look ahead to the rest
459of this year and beyond, we are even
460more excited by what’s in store. We are
461guided by a growth and performance
462plan built on a focused set of strategic
463initiatives.
464One of the pillars of our plan is to take
465the next step in the evolution of this
466Company by changing its name. A key
467strength of our business stems from
468trusted, iconic brands. Markets all
469around the globe depend on the credit
470ratings, research, data and deep
471analytics behind the name Standard &
472Poor’s (S&P).
473Although we have a diverse portfolio of
474businesses, they are all united around
475a central thread: we provide the intelligence
476that is essential to how participants
477of the capital and commodity
478markets make decisions with confidence.
479Every decision is only as good
480as the intelligence used to make it. As
481we grow into the future, it will be by
482finding ways to strengthen and enrich
483this essential intelligence.
484The S&P franchise has built enormous
485brand equity through more than 150
486years in business. To harness this power,
487we announced in February that we are
488proposing to change the Company’s
489name to S&P Global*. The S&P name
490leverages the rich heritage of Standard
491& Poor’s and Global communicates our
492wide geographic footprint, the broad
493range of industries we cover and the
494full suite of services we have to offer.
495Over the years the S&P name has stood
496for transparency and trusted financial
497information, which enables our clients
498to make informed business choices.
499This remains the core of our business.
500$1.3B
501RETURNED TO
502SHAREHOLDERS IN 2015
503McGRAW HILL FINANCIAL PRODUCED ANOTHER YEAR OF STRONG GROWTH AND
504PERFORMANCE IN 2015 IN THE FACE OF DRAMATIC VOLATILITY IN THE FIXED-INCOME
505AND EQUITY MARKETS. LAST YEAR, REVENUE INCREASED 5%, ADJUSTED OPERATING
506PROFIT WAS UP 13%, ADJUSTED DILUTED EARNINGS PER SHARE GREW 17% AND WE
507GENERATED MORE THAN $1.2 BILLION IN FREE CASH FLOW, EXCLUDING LEGAL AND
508REGULATORY SETTLEMENTS AND INSURANCE RECOVERIES.
509THE BRAND OF OUR FUTURE
510S&P
511GLOBAL
512THE COMPANY ANNOUNCED IN
513FEBRUARY 2016 IT HAS PROPOSED
514CHANGING ITS NAME, PENDING
515SHAREHOLDER APPROVAL
516*The name S&P Global is subject to shareholders'
517approval.
5182 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
519INCREASE IN 2016
520+9%
521ANNUAL CASH DIVIDEND
522~$100M
523OF POTENTIAL
524SYNERGIES
525BY COMBINING
526S&P CAPITAL IQ
527AND SNL FINANCIAL
528BY 2019
529Simply put, S&P Global is the brand
530of our future. This brand connects
531our employees, unifies them around a
532common mission of providing essential
533intelligence, aligns with our long-term
534business strategy and offers a familiar
535master brand to the marketplace.
536The enthusiasm we share with our
537Board for our new name is matched
538by the many significant opportunities
539we see ahead to drive more growth
540and higher levels of performance.
541ADDING COMPLEMENTARY CAPABILITIES
542For starters, we have been investing
543in our future growth by adding complementary
544capabilities to the Company.
545As you know, in 2015, we acquired SNL
546Financial LC, a standout data and analytics
547business with excellent leadership.
548Since closing the transaction in
549the fall we have made great progress
550integrating this business. SNL is a “must
551have” product for countless global customers
552and we believe we can unlock
553tremendous revenue opportunities and
554cost synergies. The combination of the
555two companies, now called S&P Global
556Market Intelligence, should enable us to
557generate approximately $100 million
558of EBITDA synergies by 2019.
559We are constantly on the lookout for new
560opportunities to diversify and expand
561Platts’ coverage. Last year we added
562Petromedia, a specialist provider of
563news, daily prices and analysis for the
564global shipping and oil industries. This
565purchase helps extend Platts’ coverage
566beyond traditional marine fuels and
567market fundamentals, and offers clients
568the ability to help manage counterparty
569risk and monitor marine fuel quality.
570ORGANIC GROWTH
571Our growth is not dependent solely on
572transactions. Our first priority when
573determining how to allocate capital is to
574invest in organic growth. On this front,
575we are increasing the breadth and depth
576of our product offerings. Last year we
577launched the market’s first-ever index
578that tracks the debt of the companies
579in the S&P 500. We’ve received a tremendous
580response from the marketplace
581with the index to be used as the
582basis for several soon to be launched
583exchange traded funds (ETFs).
584In addition, we created China Oil Analytics.
585This uniquely comprehensive analytical
586product enables clients to consider the
587myriad factors affecting China’s oil balance.
588Combining Platts’ local and global
589market analysis with news, data and an
590intuitive analytical tool, this new offering
591helps traders, producers and analysts
592make the decisions they need to do
593their jobs.
594EVOLVING.
595GROWING.
596McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 3
597EVALUATING STRATEGIC ALTERNATIVES
598While adding to our capabilities has
599been a priority, so too has been an
600effort to become a more focused and
601highly interrelated global portfolio of
602businesses. To this end we initiated an
603active program to sell J.D. Power and
604we have received considerable interest
605from third parties. J.D. Power is a phenomenal
606brand with sales projected to
607approach $350 million.
608INVESTING IN PEOPLE
609As a business that relies on the intellectual
610capital of its people, we are continually
611investing in our employees. This
612year we are devoting more resources to
613onboarding, training and development
614programs.
615We have excellent leaders throughout
616the organization. In 2015, we appointed
617a number of people to new positions on
618the Executive Committee, including:
619• Ashu Suyash who joined us as the CEO
620of CRISIL, India’s leading credit ratings
621agency and a global analytics firm.
622Ashu previously was CEO of L&T Investment
623Management Ltd. and has worked
624for Fidelity and Citigroup in India.
625• Martina Cheung who was leading
626corporate strategy is now heading
627Global Risk Services, a response to
628clients’ continuing need for credit
629solutions from S&P. This is a new team
630that brings together this Company’s
631formidable assets into a single
632business focused on monetizing
633research, data, methodologies and
634solutions.
635• Mike Chinn who we quickly decided
636should serve as President of S&P
637Global Market Intelligence, the new
638name for the combined S&P Capital IQ
639and SNL franchise, after he did an
640excellent job running SNL.
641• John Berisford, who is a trusted partner,
642is now the President of S&P
643Ratings Services. John is doing an
644outstanding job in aligning the organization
645to focus on quality analytics
646within an environment that promotes
647a culture of risk and compliance
648consciousness.
649• France Gingras who was promoted to
650Executive Vice President, Human
651Resources after leading our total
652rewards program.
653• Imogen Dillon Hatcher who has taken
654on the role of leading Platts after a
655successful term as President of S&P
656Capital IQ. I commend Imogen and her
657team for managing Platts through volatile
658market conditions.
659• David Goldenberg who is our acting
660General Counsel. He previously was
661Chief Legal Officer for S&P Capital IQ.
662• And Courtney Geduldig who has taken
663on the broader responsibility of leading
664our public affairs organization
665after successfully running our government
666affairs and public policy team.
667$1.2B
668ADJUSTED FREE CASH
669FLOW IN 2015*
670+9%
671MHFI
672REVENUE CAGR
6732011–2015
674*Excluding after-tax payments associated with
675legal and regulatory settlements and insurance
676recoveries
6774 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
6785
679They all are doing great work, and I am
680grateful for all of the contributions from
681the entire team both at the office and
682in their communities.
683MANAGING FOR THE FUTURE
684Before I conclude I want to touch on
685some important themes that are important
686contributors to creating long-term
687growth and value for the global economy
688and for our Company.
689These issues present opportunities for
690the private sector to demonstrate leadership,
691especially by seeking out publicprivate
692partnerships in ways that will
693enable economies, communities and
694companies to grow and people to prosper
695over the long term.
696For example, the significantly underfunded
697infrastructure needs of governments
698in the U.S. and around the globe
699present both a significant challenge and
700large opportunity. The Bipartisan Policy
701Center has estimated a $1 trillion gap
702between the current pace of infrastructure
703funding and our country’s needs.
704Working closely with our government
705partners, the private sector can identify
706critical regulatory barriers to investment
707and find pragmatic solutions to
708overcome them. And we can promote
709the use of more standard and transparent
710data and allow long-term investors
711to more carefully assess project risks.
712With my fellow Trustees of the World
713Economic Forum’s Global Challenge
714Initiative on Long-Term Investing, Infrastructure
715and Development, I support
716more public-private collaboration as a
717key to advancing this important issue.
718Environmental, Social and Governance
719(ESG) criteria are also receiving increasing
720attention from long-term investors.
721By balancing good corporate governance,
722environmental risk and strategic corporate
723citizenship all companies can derive
724sustainable long-term benefit without
725sacrificing corporate performance in
726the short term.
727In terms of our own Company, there are
728three points to make:
729First, ESG performance is critical to
730how we operate. We have an enduring
731commitment to minimizing our environmental
732impact, enhancing the diversity
733of our workforce and a particular focus
734on facilitating access to capital for
735female entrepreneurs.
736Second, I want to emphasize that we
737are committed to a balanced decisionmaking
738process that is driven by longterm,
739sustainable objectives and financial
740quality through measurable nearterm
741performance.
742Third, the essential intelligence we provide
743our clients and the capital markets
744is at the very heart of the balanced
745decision-making necessary to support
746the needs of long-term investors. For
747example, in early 2016, we launched the
748S&P Long-Term Value Creation Global
749Index, designed to measure companies
750that have the potential to create longterm
751value based on sustainability criteria
752and financial quality. We are proud
753of this initiative and the interest it has
754received.
755Throughout the global economy and the
756private sector, short-term thinking is
757holding back investment. We all have a
758role to play to encourage public policies
759and corporate decisions designed to
760achieve long-term value creation.
761CONCLUSION
762To sum up, 2015 was an excellent year
763with growth for our Company, our
764employees and our shareholders. We
765expect more profitable growth and
766higher levels of performance under the
767banner of S&P Global in 2016. I am fortunate
768to work with a Board of Directors
769that understands the need for making
770the investments and commitments
771necessary for sustainable, long-term
772growth and performance. I look forward
773to working with our Board, employees
774and partners to accomplish our goals,
775and continuing to speak with customers,
776policy makers and shareholders about
777the evolution and growth of S&P Global.
778Best regards,
779DOUGLAS L. PETERSON
780President and Chief Executive Officer
781EVOLVING.
782GROWING.
783McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 5
7842015: ANOTHER YEAR
785OF GROWTH
786$5.31B
787REVENUE
788(+5% Increase from 2014)
789$4.53
790ADJUSTED
791DILUTED EARNINGS
792PER SHARE*
793(+17% Increase from 2014)
79438.7%
795ADJUSTED
796OPERATING
797PROFIT MARGIN*
798(+280 BPS from 2014)
799A GLOBAL COMPANY
80020,400
801EMPLOYEES
80231
803COUNTRIES
804IN
805~40%
806REVENUE
807GENERATED
808OUTSIDE THE U.S.
809REVENUE BREAKDOWN
810BY GEOGRAPHIC REGION
811North America $3.4B
812EMEA $1.3B
813Latin America $0.1B
814Asia Pacific $0.5B
815*Excluding deal-related amortization of $67 million
816($44 million after tax), adjusted operating profit
817margin and adjusted diluted EPS were 39.9% and
818$4.69, respectively.
8196 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
820THE ACQUISITION OF SNL FINANCIAL IN 2015 AND ITS INTEGRATION WITH S&P
821CAPITAL IQ HAS CREATED ONE OF THE MOST POWERFUL RESEARCH, DATA AND
822ANALYTICS PLATFORMS SERVING THE CAPITAL AND CORPORATE MARKETS.
823S&P Capital IQ + SNL Financial = S&P Global Market Intelligence
824As SNL and S&P Capital IQ unite, it is
825important that the combined business
826conveys not only that it provides intelligence
827about the markets, but that it
828also provides real insights that enable
829its clients to make smarter, faster
830investment decisions. That is why this
831division has been rebranded S&P Global
832Market Intelligence in 2016.
833OUTLOOK
834S&P Global Market Intelligence is pursuing
835significant opportunities to grow
836and support clients through three key
837initiatives:
838• Introducing new products and diversifying
839its client base
840The S&P brand has a rich history of
841credit analysis, and the combined
842team is very well positioned to help
843clients deal with the growing need to
844address counterparty credit risk and
845compliance issues created by volatile
846and rapidly changing markets and regulatory
847regimes. President Mike Chinn
848sees opportunities to introduce new
849products to support all parts of the
850credit world. Helping companies evaluate
851risk in their supply chains is but
852one example where S&P Global Market
853Intelligence could play a larger role.
854It wasn’t that long ago that SNL’s
855customer base was concentrated in
856the investment bank and investment
857management sectors. Now the business
858has a robust and fast-growing
859presence in the corporate markets,
860serving commercial banks and insurers
861but also companies that operate
862in the power and gas, real estate,
863mining, media, and communications
864sectors.
865• Pursuing global growth opportunities
866Nearly all of SNL’s revenue has been
867generated in the Americas. With the
868creation of one team that can leverage
869S&P Capital IQ’s presence in Europe,
870Latin America and Asia, increasing
871SNL’s global reach is a clear and immediate
872opportunity.
873• Integrating technology platforms
874Both S&P Capital IQ and SNL possess
875strong and sophisticated content
876delivery platforms, and the combined
877team is now determining how to most
878effectively consolidate into one bestin-breed
879product platform. As an initial
880step, the team will deliver SNL content
881through S&P Capital IQ’s direct feeds
882product. Looking ahead, the goal is to
883introduce an integrated technology
884approach with one distribution platform.
885A COMMITMENT TO GOOD
886CORPORATE CITIZENSHIP:
887COMMUNITY IMPACT MONTH
888Volunteered to
889Build Thriving
890Communities in
891Covering
892Supporting
893Mike Chinn
894President of
895S&P Global Market Intelligence
8965,000
897EMPLOYEES
89817
899COUNTRIES
9005
901CONTINENTS
90270
903NON-PROFIT
904PARTNERS
905EVOLVING.
906GROWING.
907McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 7
908Committed to Serving
909ESG Investors
910As part of McGraw Hill Financial’s broad commitment
911to promoting inclusive, sustainable
912communities and financial markets, the
913Company provides a range of capabilities
914to clients whose focus is on Environmental,
915Social and Governance (ESG) investing.
916The market for sustainable investments is
917increasing rapidly—rising by 76% to $6.6
918trillion in the U.S. from 2012 to 2014 and
919by 33% to €9.9 trillion in Europe.
920The Company’s products and services support
921more sustainable markets and help pave
922the way for policy makers and businesses to
923adopt effective risk management strategies.
924Snapshot of MHFI’s Offerings:
925• Standard & Poor’s RatingsDirect Climate
926Risk Reports
927• Dow Jones Sustainability Index
928• S&P Global Market Intelligence Small and
929Medium-sized Enterprises (SME) Scorecard
93027
931COUNTRIES WITH
932S&P RATINGS OFFICES
9331.14
934MILLION RATINGS
935OUTSTANDING
936$46.3
937TRILLION OF RATED
938GLOBAL DEBT OUTSTANDING
939Standard & Poor's Ratings Services
940When companies need to finance a growing business or governments need to build a highway, they often turn to the
941debt markets. To facilitate the flow of capital, Standard & Poor’s Ratings Services brings transparency and comparability
942to debt markets worldwide by helping investors and others measure and manage credit risk through independent
943ratings, research and analytics.
944OUTLOOK
945Two trends indicate that S&P is poised for continued long-term growth. First, over the next few years, there is a
946substantial potential need for funding as companies look to meet debt refinancing needs. S&P estimates that about
947$9.5 trillion in global rated corporate debt is scheduled to mature from 2016 through the end of 2020. The second and
948potentially more significant trend is the expansion of debt capital markets in emerging economies. According to one
949study, by 2030, 36% of global corporate bonds will be issued by companies in emerging markets, compared to the
95014% issued in 2014, representing a $47 trillion increase.*
951*Credit Suisse Research Institute, Emerging capital markets: The road to 2030
9528 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
953$815B
954AUM IN ETFs BASED ON
955S&P DOW JONES INDICES IN 2015
956$597M
9572015 REVENUE
958(+8% Increase from 2014)
959454
960NEW INDICES LAUNCHED
961IN 2015
962S&P Dow Jones Indices
963S&P Dow Jones Indices is the world’s leading provider of financial market indices, and the leading resource for indexbased
964innovation data and research. The flagships S&P 500 and Dow Jones Industrial Average garner the headlines.
965Less well known is that this business calculates and publishes more than 1 million indices every day, spanning asset
966classes, geographies, and investment strategies.
967OUTLOOK
968The steady rise of passive investments as cash shifts from actively managed funds is a powerful movement benefiting
969S&P Dow Jones Indices. Underscoring this trend, assets under management in exchange traded funds globally
970is expected to reach $5 trillion in 2020, up from $2.6 trillion in 2014, which represents a 10% annual growth rate,
971according to research from PwC. (S&P Dow Jones Indices earns licensing fees on assets invested in products linked
972to its indices.)
973McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 9
974OF PLATTS REVENUE
97560+%
976COMES FROM OUTSIDE
977THE U.S.
978OF PLATTS REVENUE IS
97990%
980SUBSCRIPTION BASED
981CUSTOMERS IN
982180
983COUNTRIES
984Platts
985Platts enables global commodities markets to perform
986with greater transparency and efficiency. It is a leader in
987energy, petrochemicals, metals, and agriculture information,
988and is a premier source of benchmark price assessments
989and analytics for those markets. The business has
990a strong and expanding international footprint, serving
991approximately 10,000 customers in more than 180 countries.
992In fact, Platts is McGraw Hill Financial’s most global
993business. Platts delivered strong revenue growth in 2015,
994demonstrating resiliency despite low commodity prices
995and a steep slide in the price of oil. In fact, in volatile
996markets, the need for the sort of trusted, independent
997information Platts provides is as critical as ever.
998OUTLOOK
999The continuing globalization and increasing sophistication
1000and interconnectedness of the commodities markets
1001positions Platts for continued growth. As emerging countries
1002open their markets, there will be an even greater
1003demand for price discovery. For example, in early 2016,
1004Mexico's federal government entered into an exclusive
1005agreement with Platts to utilize its oil and natural gas
1006price data in the nation's pricing formulas as part of its
1007energy reform policy. In addition to Latin America, Platts
1008sees growth opportunities in emerging economies
1009throughout the Middle East and Asia. Diversification
1010beyond the petroleum markets is another key growth
1011driver for this business.
101210 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
1013Reconciliation of Non-GAAP Financial Information
1014The following is provided to supplement certain non-GAAP financial measures discussed in the letter to shareholders and the financial highlights section of this
1015report (pages IFC–5) both as reported (on a GAAP basis) and as adjusted by excluding certain items (non-GAAP) as explained below. This information is provided in
1016order to allow investors to make meaningful comparisons of the Company’s operating performance between periods and to view the Company’s business from the
1017same perspective as Company management. These non-GAAP measures may be different than similar measures used by other companies.
1018Operating Results by Segment — Reported vs. Performance
1019Years ended December 31, 2015 and 2014
10202015 2014 % Change
1021(dollars in millions, except per share data)
1022(unaudited) Reported
1023Non-GAAP
1024Adjustments Performance Reported
1025Non-GAAP
1026Adjustments Performance Reported Performance
1027S&P Ratings Services $1,078 $ 68 a $1,146 $ (583) $1,657 e $1,074 N/M 7%
1028S&P Capital IQ and SNL 228 69 b 297 228 9 c 237 —% 25%
1029S&P Dow Jones Indices 392 — 392 347 4 f 351 13% 12%
1030Commodities & Commercial Markets 357 1 c 358 290 16 c 306 23% 17%
1031Segment operating profit 2,055 138 2,192 282 1,686 1,968 N/M 11%
1032Unallocated expense (138) (2)
1033 d (139) (169) 16 c (152) (18)% (9)%
1034Operating profit 1,917 136 2,053 113 1,702 1,815 N/M 13%
1035Interest expense, net 102 — 102 59 — 59 73% 73%
1036Income before taxes on income 1,815 136 1,951 54 1,702 1,756 N/M 11%
1037Provision for taxes on income 547 48 595 245 336 581 N/M 2%
1038Income (loss) from continuing operations 1,268 88 1,356 (191) 1,366 1,175 N/M 15%
1039Income from discontinued operations — — — 178 (178) — N/M N/M
1040Net income (loss) 1,268 88 1,356 (13) 1,188 1,175 N/M 15%
1041Less: NCI net income — continuing (112) — (112) (102) — (102) 9% 9%
1042Net income (loss) — continuing 1,156 88 1,244 (293) 1,366 1,073 N/M 16%
1043Net income — discontinued — — — 178 (178) — N/M N/M
1044Net income (loss) attributable to MHFI $1,156 $ 88 $1,244 $ (115) $1,188 $1,073 N/M 16%
1045Diluted EPS — continuing $ 4.21 $0.32 $ 4.53 $(1.08) $ 4.96 $ 3.88 g N/M 17%
1046Diluted EPS — total $ 4.21 $0.32 $ 4.53 $(0.42) $ 4.30 $ 3.88 g N/M 17%
1047N/M — not meaningful
1048Note — Totals presented may not sum across due to rounding.
1049(a) The twelve months ended December 31, 2015 include legal settlement charges partially offset by a benefit related to insurance recoveries of $54 million and restructuring charges
1050of $13 million.
1051(b) The twelve months ended December 31, 2015 include costs of $32 million related to identified operating efficiencies primarily related to restructuring and acquisition-related costs
1052of $37 million.
1053(c) The twelve months ended December 31, 2015 and 2014 include restructuring charges.
1054(d) The twelve months ended December 31, 2015 include restructuring charges and a gain of $11 million on the sale of our interest in a legacy McGraw Hill Construction investment.
1055(e) The twelve months ended December 31, 2014 includes restructuring charges and legal and regulatory settlements of $1.6 billion.
1056(f) The twelve months ended December 31, 2014 include professional fees largely related to corporate development activities.
1057(g) Diluted weighted-average shares outstanding of 276.2 million were used to calculate adjusted diluted EPS for the twelve months ended December 31, 2014. This amount includes
1058securities that had an antidilutive effect to reported diluted EPS due to a loss from continuing operations.
1059Computation of Free Cash Flow and Free Cash Flow Excluding Certain Items
1060Years ended December 31, 2015
1061(dollars in millions)
1062(unaudited) 2015
1063Cash provided by operating activities from continuing operations $ 195
1064Capital expenditures (139)
1065Dividends and other payments paid to noncontrolling interests (104)
1066 Free cash flow $ (48)
1067Payment of legal and regulatory settlements 1,624
1068Legal settlement insurance recoveries (101)
1069Tax benefit from legal settlements (250)
1070 Free Cash Flow Excluding Above Items $1,225
1071McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 11
107214 Management’s Discussion and Analysis
107344 Consolidated Statements of Income
107445 Consolidated Statements of Comprehensive Income
107546 Consolidated Balance Sheets
107647 Consolidated Statements of Cash Flows
107748 Consolidated Statements of Equity
107849 Notes to the Consolidated Financial Statements
107988 Five Year Financial Review
108089 Report of Management
108190 Report of Independent Registered Public Accounting Firm
108292 Shareholder Information
1083IBC Directors and Principal Executives
108412 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
10852015 FINANCIAL
1086PERFORMANCE
1087Management’s Discussion and Analysis of
1088Financial Condition and Results of Operations
1089The following Management Discussion and Analysis (“MD&A”)
1090provides a narrative of the results of operations and financial
1091condition of McGraw Hill Financial, Inc. (together with its consolidated
1092subsidiaries, the “Company,” “we,” “us” or “our”) for
1093the years ended December 31, 2015 and 2014, respectively. The
1094MD&A should be read in conjunction with the consolidated
1095financial statements and accompanying notes included in our
1096Form 10-K for the year ended December 31, 2015, which have
1097been prepared in accordance with accounting principles generally
1098accepted in the U.S. (“U.S. GAAP”).
1099The MD&A includes the following sections:
1100 Overview
1101 Results of Operations
1102 Liquidity and Capital Resources
1103 Reconciliation of Non-GAAP Financial Information
1104 Critical Accounting Estimates
1105 Recently Issued or Adopted Accounting Standards
1106Certain of the statements below are forward-looking statements
1107within the meaning of the Private Securities Litigation Reform
1108Act of 1995. In addition, any projections of future results of
1109operations and cash flows are subject to substantial uncertainty.
1110See Forward-Looking Statements on page 42 of this report.
1111Overview
1112We are a leading benchmarks and ratings, analytics, data and
1113research provider serving the global capital, commodities and
1114commercial markets. The capital markets include asset managers,
1115investment banks, commercial banks, insurance companies,
1116exchanges, and issuers; the commodities markets include
1117producers, traders and intermediaries within energy, metals,
1118petrochemicals and agriculture; and the commercial markets
1119include professionals and corporate executives within automotive,
1120financial services, insurance and marketing / research
1121information services.
1122Our operations consist of four reportable segments: Standard
1123& Poor’s Ratings Services (“S&P Ratings”), S&P Capital IQ
1124and SNL, S&P Dow Jones Indices (“S&P DJ Indices”) and
1125Commodities & Commercial (“C&C”).
1126 S&P Ratings is an independent provider of credit ratings,
1127research and analytics, offering investors and market participants
1128information, ratings and benchmarks.
1129 S&P Capital IQ and SNL is a global provider of multi-assetclass
1130data, research and analytical capabilities, which integrate
1131cross-asset analytics and desktop services.
1132 S&P DJ Indices is a global index provider that maintains a
1133wide variety of valuation and index benchmarks for investment
1134advisors, wealth managers and institutional investors.
1135 C&C consists of business-to-business companies specializing
1136in commercial and commodities markets that deliver their
1137customers access to high-value information, data, analytic
1138services and pricing and quality benchmarks. As of August 1,
11392013, we completed the sale of Aviation Week and the results
1140have been included in C&C’s results through that date.
1141In the fourth quarter of 2015, we began exploring strategic
1142alternatives for J.D. Power, included in our C&C segment. We
1143committed to and initiated an active program to sell J.D. Power
1144in its current state that we believe is probable in the next year.
1145As a result, we have classified the assets and liabilities of
1146J.D. Power as held for sale in our consolidated balance sheet
1147as of December 31, 2015. The anticipated disposal does not
1148represent a strategic shift that will have a major effect on operations
1149and financial results, therefore, it is not classified as a
1150discontinued operation.
1151On November 3, 2014, we completed the sale of McGraw Hill
1152Construction, which has historically been part of our C&C segment,
1153to Symphony Technology Group for $320 million in cash.
1154We recorded an after-tax gain on the sale of $160 million, which
1155is included in discontinued operations, net in the consolidated
1156statement of income for the year ended December 31, 2014. We
115714 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
1158used the after-tax proceeds from the sale to make selective
1159acquisitions, investments, share repurchases and for general
1160corporate purposes.
1161On March 22, 2013, we completed the sale of McGraw-Hill
1162Education (“MHE”) to investment funds affiliated with Apollo
1163Global Management, LLC for a purchase price of $2.4 billion in
1164cash. We recorded an after-tax gain on the sale of $589 million,
1165which is included in discontinued operations, net in the consolidated
1166statement of income for the year ended December 31,
11672013. We used the after-tax proceeds from the sale to pay down
1168short-term debt for the special dividend paid in 2012, to make
1169selective acquisitions, investments, share repurchases and for
1170general corporate purposes.
1171In 2015, we continued to focus on investments in targeted
1172financial assets, divesting selected non-core assets, reducing
1173in our real estate portfolio and increasing shareholder return.
1174Investments in Targeted Financial Assets /
1175Divest Selected Non-Core Assets
1176During 2015, we continued to create a portfolio focused on
1177scalable, industry leading, interrelated businesses in the capital
1178and commodity markets.
1179 S&P Capital IQ and SNL — we acquired SNL Financial LC
1180(“SNL”), a leading provider of news, data, and analytics to
1181five sectors in the global economy: financial institutions,
1182real estate, energy, media & communications, and metals
1183& mining;
1184 Commodities & Commercial:
1185 we acquired the entire issued share capital of Petromedia
1186Ltd and its operating subsidiaries, an independent provider
1187of data, intelligence, news and tools to the global fuels
1188market that offers a suite of products providing clients
1189with actionable data and intelligence that enables informed
1190decisions, minimizes risk and increases efficiency;
1191 we acquired National Automobile Dealers Association’s
1192Used Car Guide, a leading provider of U.S. retail, trade-in
1193and auction used-vehicle valuation products, services and
1194information.
1195In 2015, we further reduced our real estate footprint by completing
1196the consolidation of our corporate headquarters with our
1197operations in New York City.
1198During 2014, we continued to execute our strategy of investing
1199for growth in markets that have size and scale while exiting
1200non-core assets.
1201 Commodities & Commercial — we acquired Eclipse Energy
1202Group AS which complements our North American natural gas
1203capabilities, which we obtained from our Bentek Energy LLC
1204acquisition in 2011;
1205 S&P Ratings — we acquired BRC Investor Services S.A., a
1206Colombia-based ratings firm providing risk classifications of
1207banks, financial services providers, insurance companies,
1208corporate bonds and structured issues that will expand our
1209presence in the Latin American credit markets.
1210In 2014, in addition to the divestiture of McGraw Hill Construction
1211discussed above, we streamlined our infrastructure by reducing
1212our real estate footprint through selling our data facility, initiating
1213the consolidation of our corporate headquarters with our
1214operations in New York City, as well as disposing of our corporate
1215aircraft.
1216During 2013, we acquired an incremental 11 million equity
1217shares representing 15.07% of CRISIL’s total outstanding equity
1218shares for $214 million, concurrently increasing our ownership
1219percentage in CRISIL to 67.84% from 52.77%.
1220In 2013, we also completed certain dispositions of our non-core
1221assets that allow us to apply greater focus on our high-growth,
1222high-margin benchmark businesses.
1223 Commodities & Commercial — we completed the sale of
1224Aviation Week to Penton, a privately held business information
1225company;
1226 S&P Capital IQ and SNL — we completed the sale of Financial
1227Communications as well as the closure of several non-core
1228businesses.
1229Increased Shareholder Return
1230During the three years ended December 31, 2015, we have
1231returned $3.3 billion to our shareholders through a combination
1232of share repurchases and our quarterly dividends: we completed
1233share repurchases of $2.3 billion and distributed regular quarterly
1234dividends totaling approximately $997 million. Also, on
1235January 27, 2016, the Board of Directors approved an increase
1236in the quarterly common stock dividend from $0.33 per share to
1237$0.36 per share.
1238McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 15
1239KEY RESULTS
1240Years ended December 31, % Change 1
1241(in millions) 2015 2014 2013 ’15 vs ’14 ’14 vs ’13
1242Revenue $5,313 $5,051 $4,702 5% 7%
1243Operating profit 2 $1,917 $ 113 $1,358 N/M (92)%
1244% Operating margin 36% 2% 29%
1245Diluted earnings (loss) per share from continuing operations $ 4.21 $ (1.08) $ 2.80 N/M N/M
1246N/M — not meaningful
12471 % changes in the tables throughout the MD&A are calculated off of the actual number, not the rounded number presented.
12482 2015 includes legal settlements, partially offset by a benefit related to insurance recoveries of $54 million. 2014 includes legal and regulatory settlements of
1249$1.6 billion and 2013 include legal settlements of $77 million.
12502015
1251Revenue increased 5% driven by increases at S&P Capital IQ and
1252SNL, C&C and S&P DJ Indices, partially offset by a decrease at
1253S&P Ratings. Revenue growth at S&P Capital IQ and SNL was
1254due to the acquisition of SNL in September of 2015 and growth
1255of the legacy S&P Capital IQ products driven by increases in
1256average contract values for each product. The revenue increase
1257at C&C was primarily driven by continued demand for Platts’
1258proprietary content as annualized contract values increased.
1259Increases at J.D. Power primarily due to an increase in auto consulting
1260engagements in the U.S. and the acquisition of National
1261Automobile Dealers Association’s Used Car Guide (“UCG”) in July
1262of 2015 driving the data and analytics revenue growth at C&C.
1263Revenue growth at S&P DJ Indices was due to higher average
1264levels of assets under management for ETFs and mutual funds
1265and higher volumes for exchange-traded derivatives. The revenue
1266decrease at S&P Ratings was driven by the unfavorable
1267impact of foreign exchange rates. The unfavorable impact of
1268foreign exchange rates reduced revenue by 2 percentage points
1269which was offset by the favorable impact from acquisitions of
12702 percentage points.
1271The increase in operating profit was primarily due to the impact
1272of $1.6 billion in legal and regulatory settlements in 2014 compared
1273to net legal settlement expenses of $54 million in 2015.
1274In addition, 2015 includes costs related to identified operating
1275efficiencies primarily related to restructuring of $56 million in
12762015 compared to $86 million in 2014. 2015 also includes
1277acquisition-related costs related to the acquisition of SNL of
1278$37 million and an $11 million gain on the sale of our interest in
1279a legacy McGraw Hill Construction investment. 2014 includes
1280$4 million of professional fees largely related to corporate
1281development activities. Excluding these items, operating profit
1282increased 13%. This increase was driven by revenue growth
1283at S&P Capital IQ and SNL, C&C, and S&P DJ Indices and cost
1284containment efforts at S&P Ratings during 2015.
12852014
1286Revenue increased 7% driven by increases at all of our segments.
1287The increase at S&P Ratings was primarily driven by
1288growth in both corporate and financial services bond ratings
1289revenue, increases in bank loan ratings and higher annual fees.
1290Revenue growth at S&P Capital IQ and SNL was driven by
1291increases in average contract values for each product driven by
1292new customer relationships and increases in existing accounts.
1293Revenue growth at S&P DJ Indices was due to higher levels of
1294assets under management for ETFs and mutual funds and
1295higher volumes for exchange-traded derivatives. The revenue
1296increase at C&C was primarily driven by continued demand for
1297Platts’ proprietary content as annualized contract values
1298increased and increases at J.D. Power driven by strong demand
1299for auto consulting engagements in the U.S. and Singapore. The
1300unfavorable impact of foreign exchange rates reduced revenue
1301by less than 1 percentage point.
1302Operating profit decreased 92% driven by the unfavorable
1303impact of $1.6 billion of legal and regulatory settlement charges
1304in 2014 compared to legal settlement charges of $77 million in
13052013 and higher costs recorded in 2014 related to identified
1306operating efficiencies primarily related to restructuring, partially
1307offset by revenue growth at all of our segments. Excluding
1308the unfavorable impact of legal and regulatory settlement
1309charges of 111 percentage points, higher costs recorded in
13102014 related to identified operating efficiencies primarily
1311related to restructuring of 3 percentage points, partially offset
1312by the favorable impact of costs necessary to enable the separation
1313of MHE and reduce our cost structure recorded in 2013
1314of 5 percentage points and a net loss related to the sale of
1315a data center, an equity investment at CRISIL, Aviation Week
1316and Financial Communications in 2013 of 1 percentage point,
1317operating profit increased 17%.
131816 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
1319OUTLOOK
1320Our vision is to be the leading provider of transparent and independent
1321benchmarks and ratings, analytics, data and research
1322in the global capital, commodities and corporate markets. Our
1323mission is to promote sustainable growth in these markets by
1324providing customers with essential intelligence and superior
1325service. We seek to accomplish our mission and vision within
1326the framework of our core values of fairness, integrity and
1327transparency. We intend to deliver our products and services
1328through customer-centric distribution channels that enable
1329mission-critical decisions in our core customer sets of investment
1330management, investment banking, commercial banking,
1331insurance, specialty financial institutions and corporates.
1332We are aligning our efforts against two key strategic priorities:
1333creating growth and driving performance.
1334Creating Growth
1335 We will strive to drive global growth by focusing on executing
1336our strategic initiatives, strengthening core capabilities and
1337collaborating across businesses.
1338Driving Performance
1339 We will strive to deliver operational excellence, manage and
1340mitigate risk and enhance leadership and accountability.
1341There can be no assurance that we will achieve success in
1342implementing any one or more of these strategies as a variety of
1343factors could unfavorably impact operating results, including
1344prolonged difficulties in the global credit markets and a change
1345in the regulatory environment affecting our businesses. See
1346Item 1a, Risk Factors, in our Annual Report on Form 10-K.
1347Further projections and discussion on our 2016 outlook for our
1348segments can be found within “— Results of Operations”.
1349Results of Operations
1350CONSOLIDATED REVIEW
1351Years ended December 31, % Change
1352(in millions) 2015 2014 2013 ’15 vs ’14 ’14 vs ’13
1353Revenue $5,313 $5,051 $4,702 5% 7%
1354Expenses:
1355Operating-related expenses 1,672 1,627 1,564 3% 4%
1356Selling and general expenses 1,578 3,168 1,631 (50)% 94%
1357Depreciation and amortization 157 134 137 17% (2)%
1358 Total expenses 3,407 4,929 3,332 (31)% 48%
1359Other (income) loss (11) 9 12 N/M (25)%
1360Operating profit 1,917 113 1,358 N/M (92)%
1361Interest expense, net 102 59 59 73% (1)%
1362Provision for taxes on income 547 245 425 N/M (42)%
1363Income (loss) from continuing operations 1,268 (191) 874 N/M N/M
1364Discontinued operations, net — 178 592 N/M (70)%
1365 Less: net income from continuing operations attributable
1366to noncontrolling interests (112) (102) (91) 9% 12%
1367 Less: net loss from discontinuing operations attributable
1368to noncontrolling interests — — 1 N/M N/M
1369Net income (loss) attributable to McGraw Hill Financial, Inc. $1,156 $ (115) $1,376 N/M N/M
1370N/M — not meaningful
1371McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 17
1372REVENUE
1373Years ended December 31, % Change
1374(in millions) 2015 2014 2013 ’15 vs ’14 ’14 vs ’13
1375Subscription / Non-transaction revenue $3,264 $3,045 $2,849 7% 7%
1376Non-subscription / Transaction revenue $2,049 $2,006 $1,853 2% 8%
1377Domestic revenue $3,202 $2,911 $2,723 10% 7%
1378International revenue $2,111 $2,140 $1,979 (1)% 8%
1379% of total revenue:
1380Subscription / Non-transaction revenue 61% 60% 61%
1381Non-subscription / Transaction revenue 39% 40% 39%
1382Domestic revenue 60% 58% 58%
1383International revenue 40% 42% 42%
13842015
1385Revenue increased 5% as compared to 2014. Subscription /
1386non-transaction revenue increased primarily due to growth at
1387S&P Capital IQ and SNL due to an increase in the average contract
1388values as well as continued demand for Platts’ proprietary
1389content. Non-subscription / transaction revenue increased
1390primarily due to growth at S&P DJ Indices due to higher assets
1391under management for ETFs and mutual funds and higher
1392volumes for exchange-traded derivatives, partially offset by a
1393decrease at S&P Ratings which includes the unfavorable impact
1394of foreign exchange rates. See “— Segment Review” below for
1395further information.
1396The unfavorable impact of foreign exchange rates reduced revenue
1397by 2 percentage points. This impact refers to constant
1398currency comparisons estimated by recalculating current year
1399results of foreign operations using the average exchange rate
1400from the prior year. The unfavorable impact of foreign exchange
1401rates on revenue primarily related to S&P Ratings and was
1402driven by the weakening of the Euro to the U.S. dollar.
14032014
1404Revenue increased 7% as compared to 2013. Subscription /
1405non-transaction revenue increased primarily due to growth
1406at S&P Capital IQ and SNL due to an increase in the average
1407contract values, growth in non-issuance related revenue for
1408corporate ratings primarily related to higher annual fees, and
1409continued demand for Platts’ proprietary content. Nonsubscription
1410/ transaction revenue increased primarily due
1411to strong growth in corporate bond ratings revenue, an increase
1412in bank loan ratings and higher assets under management for
1413ETFs and mutual funds at S&P DJ Indices, partially offset by
1414lower structured finance revenues. See “— Segment Review”
1415below for further information.
1416The unfavorable impact of foreign exchange rates reduced revenue
1417by less than 1 percentage point.
141818 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
1419TOTAL EXPENSES
1420The following tables provide an analysis by segment of our operating-related expenses and selling and general expenses for the
1421years ended December 31, 2015 and 2014:
14222015 2014 % Change
1423(in millions)
1424Operatingrelated
1425
1426expenses
1427Selling and
1428general
1429expenses
1430Operatingrelated
1431
1432expenses
1433Selling and
1434general
1435expenses
1436Operatingrelated
1437
1438expenses
1439Selling and
1440general
1441expenses
1442S&P Ratings 1 $ 725 $ 583 $ 777 $2,219 (7)% (74)%
1443S&P Capital IQ and SNL 2 614 495 549 411 12% 20%
1444S&P DJ Indices 3 105 92 97 101 8% (8)%
1445C&C 4 316 269 289 289 9% (7)%
1446Intersegment eliminations 5 (88) — (86) — (3)% N/M
1447Total segments 1,672 1,439 1,626 3,020 3% (52)%
1448Corporate 6 — 139 1 148 (100)% (6)%
1449$1,672 $1,578 $1,627 $3,168 3% (50)%
1450N/M — not meaningful
14511 In 2015, selling and general expenses include legal settlements partially offset by a benefit related to legal insurance recoveries of $54 million and restructuring
1452costs of $13 million. In 2014, selling and general expenses include $1.6 billion for legal and regulatory settlements and restructuring charges of $45 million.
14532 In 2015, selling and general expenses include acquisition-related costs related to the acquisition of SNL of $37 million and costs identified operating efficiencies
1454primarily related to restructuring of $32 million. In 2014, selling and general expenses include $9 million of restructuring charges.
14553 In 2014, selling and general expenses include the impact of professional fees largely related to corporate development activities of $4 million.
14564 In 2015 and 2014, selling and general expenses include restructuring charges of $1 million and $16 million, respectively.
14575 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.
14586 In 2015 and 2014, selling and general expenses include costs related to identified operating efficiencies primarily related to restructuring of $10 million and
1459$16 million, respectively.
1460Operating-Related Expenses
1461Operating-related expenses increased $44 million or 3% as
1462compared to 2014. Increases at S&P Capital IQ and SNL primarily
1463driven by higher data processing costs and the acquisition of
1464SNL in September of 2015 and increases at C&C due to higher
1465incentive costs were partially offset by declines at S&P Ratings
1466driven by our compensation cost containment efforts resulting
1467from 2014 restructuring actions.
1468Selling and General Expenses
1469Selling and general expenses decreased 50%. Excluding the
1470favorable net impact of legal settlement and regulatory settlement
1471charges and insurance recoveries of 48 percentage points,
1472higher costs recorded in 2014 related to identified operating
1473efficiencies primarily related to restructuring of 1 percentage
1474point, partially offset by the unfavorable impact of acquisitionrelated
1475costs related to the acquisition of SNL of 1 percentage
1476point, selling and general expenses decreased 2%. The decline
1477was due to a decrease at S&P Ratings driven by lower incentive
1478and legal costs, partially offset by increased costs related to the
1479implementation of the Dodd-Frank Wall Street Reform and
1480Consumer Protection Act and an increase at S&P Capital IQ and
1481SNL driven by the acquisition of SNL in September of 2015.
1482Depreciation and Amortization
1483Depreciation and amortization increased $23 million or 17% as
1484compared to 2014 primarily due to higher intangible asset
1485amortization in 2015 due to the acquisition of SNL in September
1486of 2015 and the acquisition of UCG in July of 2015.
1487McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 19
1488The following tables provide an analysis by segment of our operating-related expenses and selling and general expenses for the
1489years ended December 31, 2014 and 2013:
14902014 2013 % Change
1491(in millions)
1492Operatingrelated
1493
1494expenses
1495Selling and
1496general
1497expenses
1498Operatingrelated
1499
1500expenses
1501Selling and
1502general
1503expenses
1504Operatingrelated
1505
1506expenses
1507Selling and
1508general
1509expenses
1510S&P Ratings 1 $ 777 $2,219 $ 741 $ 624 5% N/M
1511S&P Capital IQ and SNL 2 549 411 538 390 2% 5%
1512S&P DJ Indices 3 97 101 92 126 5% (20)%
1513C&C 4 289 289 271 278 7% 4%
1514Intersegment eliminations 5 (86) — (76) — (13)% N/M
1515Total segments 1,626 3,020 1,566 1,418 4% N/M
1516Corporate 6 1 148 (2) 213 N/M (30)%
1517$1,627 $3,168 $1,564 $1,631 4% 94%
1518N/M — not meaningful
15191 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
1520expenses 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.
15212 In 2014, selling and general expenses include $9 million of restructuring charges. In 2013, selling and general expenses include restructuring charges of $9 million
1522and a loss related to the sale of Financial Communications of $3 million.
15233 In 2014, selling and general expenses include the impact of professional fees largely related to corporate development activities of $4 million.
15244 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
1525Aviation Week of $11 million and restructuring charges of $9 million.
15265 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.
15276 In 2014, selling and general expenses include restructuring charges of $16 million. In 2013, selling and general expenses primarily include $64 million necessary to
1528enable the separation of MHE and reduce our cost structure, restructuring charges and charges related to our reduction in our real estate portfolio.
1529Operating-Related Expenses
1530Operating-related expenses increased $64 million or 4% as
1531compared to 2013, primarily driven by increased costs at S&P
1532Ratings, C&C and S&P Capital IQ and SNL. These increases were
1533primarily attributable to an increase in compensation costs and
1534higher technology costs.
1535Selling and General Expenses
1536Selling and general expenses increased 94%. Excluding the
1537unfavorable impact of legal settlement charges of 94 percentage
1538points and higher costs recorded in 2014 related to identified
1539operating efficiencies primarily related to restructuring of
15403 percentage points, partially offset by the favorable impact of
1541costs necessary to enable the separation of MHE and reduce
1542our cost structure recorded in 2013 of 4 percentage points,
1543selling and general expenses increased 1%. The increase was
1544primarily driven by increased legal costs at S&P Ratings,
1545increased commissions and incentives at S&P Capital IQ and
1546SNL, partially offset by a decrease at S&P DJ Indices primarily
1547related to a $26 million non-cash impairment charge recorded
1548in 2013 associated with an intangible asset acquired with the
1549formation of the S&P Dow Jones Indices LLC joint venture.
1550Depreciation and Amortization
1551Depreciation and amortization decreased $3 million or 2% as
1552compared to 2013, primarily due to an intangible asset that
1553became fully amortized in 2013.
1554OTHER (INCOME) LOSS
1555During 2015, we completed the sale of our interest in a legacy
1556McGraw Hill Construction investment that resulted in a pre-tax
1557gain of $11 million within other (income) loss in the consolidated
1558statement of income.
1559During 2014, we completed the following transactions that
1560resulted in a pre-tax loss of $9 million within other (income)
1561loss in the consolidated statement of income:
1562 On July 31, 2014, we completed the sale of the Company’s
1563aircraft to Harold W. McGraw III, then Chairman of the
1564Company’s Board of Directors and former President and CEO
1565of the Company (“Mr. McGraw”) for a purchase price of $20
1566million, which is modestly higher than the independent
1567appraisal obtained. During the second quarter of 2014, we
1568recorded a non-cash impairment charge of $6 million within
1569other (income) loss in our consolidated statement of income
157020 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
1571as a result of the pending sale. See Note 13 — Related Party
1572Transactions to our consolidated financial statements for further
1573discussion.
1574 On June 30, 2014, we completed the sale of our data center to
1575Quality Technology Services, LLC (“QTS”) which owns, operates,
1576and manages data centers. Net proceeds from the sale
1577of $58 million were received in July of 2014. The sale includes
1578all of the facilities and equipment on the south campus of our
1579East Windsor, New Jersey location, inclusive of the rights and
1580obligations associated with an adjoining solar power field. The
1581sale resulted in an expense of $3 million recorded within other
1582(income) loss in our consolidated statement of income, which
1583is in addition to the non-cash impairment charge we recorded
1584in the fourth quarter of 2013.
1585During 2013, we recorded a net pre-tax loss of $12 million within
1586other (income) loss in the consolidated statement of income:
1587 During the fourth quarter of 2013, we recognized a non-cash
1588impairment charge of $36 million related to the pending sale
1589of our data center.
1590 On September 30, 2013, we completed the sale of Financial
1591Communications, which was part of our S&P Capital IQ and
1592SNL segment.
1593 On August 27, 2013, CRISIL sold its 49% equity interest in
1594India Index Services & Products Ltd. This investment was held
1595within our S&P Ratings segment.
1596 On August 1, 2013, we completed the sale of Aviation Week
1597within our C&C segment to Penton, a privately held business
1598information company.
1599OPERATING PROFIT
1600We consider operating profit to be an important measure for
1601evaluating our operating performance and we evaluate operating
1602profit for each of the reportable business segments in which
1603we operate.
1604We internally manage our operations by reference to “segment
1605operating profit” with economic resources allocated primarily
1606based on segment operating profit. Segment operating profit is
1607defined as operating profit before unallocated expense.
1608Segment operating profit is one of the key metrics we use to
1609evaluate operating performance. Segment operating profit is
1610not, however, a measure of financial performance under U.S.
1611GAAP, and may not be defined and calculated by other companies
1612in the same manner.
1613The table below reconciles segment operating profit to total operating profit:
1614Years ended December 31, % Change
1615(in millions) 2015 2014 2013 ’15 vs ’14 ’14 vs ’13
1616S&P Ratings 1 $1,078 $(583) $ 882 N/M N/M
1617S&P Capital IQ and SNL 2 228 228 189 —% 21%
1618S&P DJ Indices 3 392 347 266 13% 30%
1619C&C 4 357 290 280 23% 3%
1620Total segment operating profit 2,055 282 1,617 N/M (83)%
1621Unallocated expense 5 (138) (169) (259) (18)% (35)%
1622Total operating profit $1,917 $ 113 $1,358 N/M (92)%
1623N/M — not meaningful
16241 2015 includes legal settlements, partially offset by a benefit related to insurance recoveries of $54 million, and restructuring charges of $13 million. 2014 includes
1625legal and regulatory settlements of $1.6 billion and restructuring charges of $45 million. 2013 includes legal settlements of $77 million, restructuring charges of
1626$10 million, and the gain on sale of an equity investment held at CRISIL of $16 million.
16272 2015 includes acquisition-related costs related to the acquisition of SNL of $37 million and costs identified operating efficiencies primarily related to restructuring
1628of $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
1629Communications of $3 million.
16303 2014 includes the impact of professional fees largely related to corporate development activities of $4 million.
16314 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
1632restructuring charges of $9 million.
16335 2015 and 2014 include costs related to identified operating efficiencies primarily related to restructuring of $10 million and $16 million, respectively. 2013 includes
1634depreciation expense and costs necessary to enable the separation of MHE and reduce our cost structure, including restructuring costs and other related nonrecurring
1635costs. 2013 also includes a non-cash impairment charge related to the pending sale of our data center and charges related to a reduction in our real
1636estate portfolio.
1637McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 21
16382015
1639SEGMENT OPERATING PROFIT — Increased $1.8 billion, or 629%
1640as compared to 2014. 2015 includes legal settlement charges
1641partially offset by a benefit related to insurance recoveries
1642of $54 million compared to legal and regulatory settlement
1643charges of $1.6 billion in 2014. Excluding the favorable net
1644impact of lower legal and regulatory settlement charges and
1645insurance recoveries of 621 percentage points, higher costs
1646recorded in 2014 related to identified operating efficiencies
1647primarily related to restructuring of 9 percentage points and
1648the impact of professional fees largely related to corporate
1649development activities recorded in 2014 of 2 percentage points,
1650partially offset by the unfavorable impact of acquisition-related
1651costs related to the acquisition of SNL of 15 percentage points,
1652segment operating profit increased 11%. Revenue growth at
1653S&P Capital IQ and SNL, C&C and S&P DJ Indices, and cost
1654containment efforts at S&P Ratings during 2015 were the
1655primary drivers for the increase. See “— Segment Review” below
1656for further information.
1657UNALLOCATED EXPENSE — Decreased by $31 million or 18% as
1658compared to 2014. These expenses, included in selling and general
1659expenses, mainly include costs for corporate center functions,
1660select initiatives, unoccupied office space and corporate
1661overhead costs allocable to discontinued operations. Excluding
1662the favorable impact of the sale of our interest in a legacy
1663McGraw Hill Construction investment of 6 percentage points
1664and higher costs recorded in 2014 related to identified operating
1665efficiencies primarily related to restructuring of 4 percentage
1666points, unallocated expense decreased by 9 percentage
1667points as compared to 2014. This decrease was primarily driven
1668by the impact of a $9 million loss recorded in the second quarter
1669of 2014 related to the sale of the Company’s aircraft and the
1670sale of our data center.
1671Foreign currency exchange rates had a negligible impact on
1672operating profit. The foreign exchange rate impact refers to
1673constant currency comparisons and the remeasurement of
1674monetary assets and liabilities. Constant currency impacts are
1675estimated by recalculating current year results of foreign operations
1676using the average exchange rate from the prior year.
1677Remeasurement impacts are based on the variance between
1678current-year and prior-year foreign exchange rate fluctuations
1679on monetary assets and liabilities denominated in currencies
1680other than the individual business’ functional currency.
16812014
1682SEGMENT OPERATING PROFIT — Decreased $1.3 billion, or 83%
1683as compared to 2013. Excluding the unfavorable impact of legal
1684and regulatory settlement charges of 94 percentage points,
1685higher restructuring charges recorded in 2014 of 3 percentage
1686points, and a net gain related to the sale of an equity investment
1687at CRISIL, Aviation Week and Financial Communications in 2013
1688of 2 percentage points, operating profit increased 16%. This
1689increase was primarily due to strong revenue growth at S&P
1690Ratings, S&P Capital IQ and SNL, S&P DJ Indices and C&C. See
1691“— Segment Review” below for further information.
1692UNALLOCATED EXPENSE — Decreased by $90 million or 35% as
1693compared to 2013. Excluding the favorable impact of costs
1694necessary to enable the separation of MHE and reduce our cost
1695structure recorded in 2013 of 27 percentage points, a loss
1696related to the sale of a data center in 2013 of 15 percentage
1697points, and charges related to a reduction in our real estate
1698portfolio in 2013 of 5 percentage points, partially offset by the
1699unfavorable impact of higher restructuring charges recorded in
17002014 of 5 percentage points, unallocated expense increased
17017%. This increase was primarily driven by the impact of a $9
1702million loss recorded in the second quarter of 2014 related
1703to the sale of the Company’s aircraft and the sale of our data
1704center, and an increase in unoccupied office space.
1705Foreign exchange rates had a favorable impact on operating
1706profit of 2 percentage points. The favorable impact on 2014 was
1707driven by the devaluation of the Argentinian peso as well as early
1708strength of the British pound.
1709INTEREST EXPENSE, NET
1710Net interest expense for 2015 increased 73% as compared to
17112014, primarily as a result of higher interest expense related to
1712the $700 million of senior notes issued in the second quarter of
17132015 and the $2.0 billion of senior notes issued in the third
1714quarter of 2015. Net interest expense for 2014 remained relatively
1715flat as compared to 2013, decreasing 1%.
1716PROVISION FOR INCOME TAXES
1717Our effective tax rate from continuing operations was 30.1%,
1718453.7% and 32.7% for 2015, 2014 and 2013, respectively. The
1719decrease in the 2015 effective tax rate was primarily due to the
1720reduction in charges for legal settlements, improved profitability
1721in several lower tax jurisdictions outside of the United
172222 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
1723States, and continuing resolution of prior year tax audits. The
1724increase in the 2014 effective tax rate from the prior year period
1725was primarily due to the expected tax treatment of charges for
1726legal settlements in 2014.
1727DISCONTINUED OPERATIONS, NET
1728Income from discontinued operations was $178 million in 2014
1729as compared to $592 million in 2013, primarily as a result of the
1730after-tax gains of $160 million and $589 million recorded on the
1731sale of McGraw Hill Construction in 2014 and the sale of MHE in
17322013, respectively.
1733Segment Review
1734STANDARD & POOR’S RATINGS SERVICES
1735Credit ratings are one of several tools that investors can use when making decisions about purchasing bonds and other fixed
1736income investments. They are opinions about credit risk and our ratings express our opinion about the ability and willingness of an
1737issuer, such as a corporation or state or city government, to meet its financial obligations in full and on time. Our credit ratings can
1738also relate to the credit quality of an individual debt issue, such as a corporate or municipal bond, and the relative likelihood that the
1739issuer may default.
1740S&P Ratings differentiates its revenue between transaction and non-transaction. Transaction revenue primarily includes fees
1741associated with:
1742 ratings related to new issuance of corporate and government debt instruments, and structured finance debt instruments;
1743 bank loan ratings; and
1744 corporate credit estimates, which are intended, based on an abbreviated analysis, to provide an indication of our opinion regarding
1745creditworthiness of a company which does not currently have an S&P Ratings credit rating.
1746Non-transaction revenue primarily includes fees for surveillance of a credit rating, annual fees for customer relationship-based
1747pricing programs, fees for entity credit ratings and global research and analytics. Non-transaction revenue also includes an
1748intersegment royalty charged to S&P Capital IQ and SNL for the rights to use and distribute content and data developed by S&P
1749Ratings. Royalty revenue for 2015, 2014 and 2013 was $83 million, $77 million and $72 million, respectively.
1750Years ended December 31, % Change
1751(in millions) 2015 2014 2013 ’15 vs ’14 ’14 vs ’13
1752Revenue:
1753Transaction $1,109 $1,129 $1,035 (2)% 9%
1754Non-transaction 1,319 1,326 1,239 —% 7%
1755Total revenue $2,428 $2,455 $2,274 (1)% 8%
1756% of total revenue:
1757Transaction 46% 46% 46%
1758Non-transaction 54% 54% 54%
1759Domestic revenue $1,390 $1,305 $1,214 7% 8%
1760International revenue $1,038 $1,150 $1,060 (10)% 8%
1761% of total revenue:
1762Domestic revenue 57% 53% 53%
1763International revenue 43% 47% 47%
1764Operating profit (loss) 1 $1,078 $ (583) $ 882 N/M N/M
1765% Operating margin 44% (24)% 39%
1766N/M — not meaningful
17671 2015 includes legal settlements, partially offset by a benefit related to insurance recoveries of $54 million and restructuring charges of approximately $13 million.
17682014 includes $1.6 billion of legal and regulatory settlements and restructuring charges of approximately $45 million. 2013 includes $77 million of legal settlements,
1769restructuring charges of approximately $10 million, and a $16 million gain on the sale of an equity investment held by CRISIL.
1770McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 23
17712015
1772Revenue decreased 1%, which includes the unfavorable impact
1773of foreign exchange rates that reduced revenue by 4 percentage
1774points. Excluding the unfavorable impact of foreign exchange
1775rates, transaction revenue increased primarily due to an
1776increase in U.S. Public Finance issuance, partially offset by a
1777decline in structured finance revenue driven by reduced global
1778market issuance. Excluding the unfavorable impact of foreign
1779exchange rates, non-transaction revenue also increased due to
1780growth in surveillance revenues and additional Ratings Evaluation
1781Service activity, partially offset by lower revenue associated
1782with new client relationships.
1783Operating profit increased 285%. Excluding the favorable net
1784impact of legal and regulatory settlement charges and insurance
1785recoveries of 273 percentage points and net higher
1786restructuring costs recorded in 2014 of 6 percentage points,
1787operating profit increased 7%. Foreign currency exchange rates
1788had an unfavorable impact of 1 percentage point on the operating
1789profit growth of 7%. This increase was driven by decreased
1790compensation costs primarily driven by lower incentive costs
1791and cost containment resulting from 2014 restructuring actions
1792and reduced legal fees following the resolution of a number of
1793significant legal matters, partially offset by increased costs
1794related to the implementation of the Dodd-Frank Wall Street
1795Reform of the Consumer Protection Act and the decrease in
1796revenue discussed above.
17972014
1798Revenue increased 8% driven by growth in both transaction and
1799non-transaction revenue. Transaction revenue increased in
18002014 primarily driven by growth in both corporate and financial
1801services bond ratings revenue with strong growth in all regions
1802and an increase in bank loan ratings revenue, partially offset
1803by a decline in structured finance revenues. Non-transaction
1804revenue increased primarily due to an increase in annual fees,
1805increases in global research and analytics services and
1806increased RES activity.
1807Operating profit decreased 166%. Excluding the unfavorable
1808impact of legal and regulatory settlements of 173 percentage
1809points, the unfavorable impact of higher restructuring charges
1810recorded in 2014 of 4 percentage points, and the unfavorable
1811impact of the gain on sale of an equity investment held at CRISIL
1812in 2013 of 2 percentage points, operating profit increased 13%.
1813This increase was driven by the increase in revenue and the
1814favorable impact of foreign exchange rates of 2 percentage
1815points, partially offset by higher legal defense costs primarily
1816driven by increased litigation activity including the Department
1817of Justice case.
1818Issuance Volumes
1819We monitor issuance volumes as an indicator of trends in transaction
1820revenue streams within S&P Ratings. Issuance volumes
1821noted within the discussion that follows are based on the domicile
1822of the issuer. Issuance volumes can be reported in two ways:
1823by “domicile”, which is based on where an issuer is located or
1824where the assets associated with an issue are located, or based
1825on “marketplace”, which is where the bonds are sold. The following
1826tables depict changes in issuance levels as compared to the
1827prior year, based on Thomson Financial, Harrison Scott
1828Publications, Dealogic and S&P Rating’s internal estimates.
18292015
1830Compared to
18312014
1832Corporate Bond Issuance U.S. Europe
1833High-Yield Issuance (13)% (30)%
1834Investment Grade 20% (21)%
1835Total New Issue Dollars — Corporate Issuance 12% (22)%
1836 Although the number of issuances were down, par value of
1837corporate issuance in the U.S. was up in 2015 driven by an
1838increase in investment-grade debt issuance reflecting high
1839par value deals, as the number of deals was lower in the first
1840nine months of the year. Strong M&A activity was a major
1841driver of large financing transactions that resulted in
1842increased issuance in the first nine months of the year.
1843Investment-grade debt issuance was negatively impacted in
1844the fourth quarter of 2015 as market volatility increased. The
1845increase in U.S. investment-grade debt issuance was partially
1846offset by weakness in U.S. high-yield debt issuance.
1847 Corporate issuance in Europe for both investment-grade and
1848high-yield decreased in 2015 as a result of economic and
1849political uncertainty in the European markets.
18502015
1851Compared to
18522014
1853Structured Finance U.S. Europe
1854Asset-Backed Securities (“ABS”) (10)% (22)%
1855Collateralized Debt Obligations (“CDO”) (22)% (15)%
1856Commercial Mortgage-Backed Securities (“CMBS”) 7% 14%
1857Residential Mortgage-Backed Securities (“RMBS”) 45% 25%
1858Covered Bonds * 28%
1859Total New Issue Dollars — Structured Finance (6)% 13%
1860*Represents no activity in 2015 and 2014.
186124 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
1862 ABS issuance in the U.S. was down, primarily driven by a
1863decline in credit cards as banks continued to use deposit
1864funding rather than securitization for alternative funding. ABS
1865issuance in Europe was also down, driven by declines across
1866several sub-asset classes.
1867 Issuance was down in the U.S. and European Structured Credit
1868markets driven by lower availability of leveraged loans and
1869overall market volatility.
1870 CMBS issuance in the U.S. was up reflecting favorable market
1871conditions and investor demand during the first half of the
1872year, partially offset by a decline in the second half of the year
1873with the mix reflecting a lower proportion of single borrower
1874transactions. European CMBS issuance was also up, although
1875from a low 2014 base.
1876 RMBS volume in the U.S. was up driven by a mix of deal types,
1877including servicing advance transactions. The increase in
1878European RMBS volume was predominantly driven by an
1879increase in the average issuance size.
1880 Covered bond issuance (which are debt securities backed by
1881mortgages or other high-quality assets that remain on the
1882issuer’s balance sheet) in Europe was up due to historically
1883low yields. The European Central Bank’s purchase program is
1884also adding to the demand side, with banks and financial
1885institutions taking advantage of attractive lower rates.
1886Industry Highlights and Outlook
1887Revenue declined in 2015 primarily due to the unfavorable
1888impact of foreign exchange rates of 4 percentage points and
1889reduced market issuance internationally primarily impacting
1890corporate bond ratings revenue and structured finance revenues.
1891These decreases were partially offset by an increase in
1892U.S. Public Finance issuance in the first nine months of the year
1893as issuers took advantage of the low interest rate environment.
1894However, issuance slowed in the fourth quarter of 2015 due to
1895market volatility. Corporate bond ratings revenue in the U.S. was
1896favorably impacted by the low interest rate environment and
1897M&A activity throughout the first nine months of the year.
1898However, issuance declined in the fourth quarter of 2015 as
1899market volatility increased and M&A activity slowed. Debt issuance
1900is expected to continue to be volatile in 2016. M&A activity
1901is expected to continue across the ratings spectrum.
1902International economic and political uncertainties are likely to
1903continue to cause market volatility in 2016.
1904Legal and Regulatory Environment
1905General
1906S&P Ratings and many of the securities that it rates are subject
1907to extensive regulation in both the U.S. and in other countries,
1908and therefore existing and proposed laws and regulations can
1909impact the Company’s operations and the markets in which it
1910operates. Additional laws and regulations have been adopted
1911but not yet implemented or have been proposed or are being
1912considered. In addition, in certain countries, governments may
1913provide financial or other support to locally-based rating agencies.
1914For example, governments may from time to time establish
1915official rating agencies or credit ratings criteria or procedures
1916for evaluating local issuers. We have reviewed the new laws,
1917regulations and rules which have been adopted and we have
1918implemented, or are planning to implement, changes as required.
1919We do not believe that such new laws, regulations or rules will
1920have a material adverse effect on our financial condition or
1921results of operations. Other laws, regulations and rules relating
1922to credit rating agencies are being considered by local, national,
1923foreign and multinational bodies and are likely to continue to be
1924considered in the future, including provisions seeking to reduce
1925regulatory and investor reliance on credit ratings, rotation of
1926credit rating agencies and liability standards applicable to credit
1927rating agencies. The impact on us of the adoption of any such
1928laws, regulations or rules remains uncertain, but could increase
1929the costs and legal risks relating to S&P Ratings’ rating activities,
1930or adversely affect our ability to compete, or result in
1931changes in the demand for credit ratings.
1932In the normal course of business both in the U.S. and abroad,
1933S&P Ratings (or the legal entities comprising S&P Ratings) are
1934defendants in numerous legal proceedings and are often the
1935subject of government and regulatory proceedings, investigations
1936and inquiries. Many of these proceedings, investigations
1937and inquiries relate to the ratings activity of S&P Ratings
1938brought by purchasers of rated securities. In addition, various
1939government and self-regulatory agencies frequently make
1940inquiries and conduct investigations into S&P Ratings’ compliance
1941with applicable laws and regulations. Any of these proceedings,
1942investigations or inquiries could ultimately result in
1943adverse judgments, damages, fines, penalties or activity
1944restrictions, which could adversely impact our consolidated
1945financial condition, cash flows, business or competitive position.
1946McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 25
1947U.S.
1948The businesses conducted by our S&P Ratings segment are, in
1949certain cases, regulated under the Credit Rating Agency Reform
1950Act of 2006 (the “Reform Act”), the Dodd-Frank Wall Street
1951Reform and Consumer Protection Act (the “Dodd Frank Act”),
1952the Securities Exchange Act of 1934 (the “Exchange Act”) and /
1953or the laws of the states or other jurisdictions in which they
1954conduct business. The financial services industry is subject to
1955the potential for increased regulation in the U.S.
1956S&P Ratings is a credit rating agency that is registered with the
1957SEC as a Nationally Recognized Statistical Rating Organization
1958(“NRSRO”). The SEC first began informally designating NRSROs
1959in 1975 for use of their credit ratings in the determination of
1960capital charges for registered brokers and dealers under the
1961SEC’s Net Capital Rule. The Reform Act created a new SEC
1962registration system for rating agencies that choose to register
1963as NRSROs. Under the Reform Act, the SEC is given authority
1964and oversight of NRSROs and can censure NRSROs, revoke their
1965registration or limit or suspend their registration in certain
1966cases. The rules implemented by the SEC pursuant to the
1967Reform Act, the Dodd Frank Act and the Exchange Act address,
1968among other things, prevention or misuse of material nonpublic
1969information, conflicts of interest, documentation and
1970assessment of internal controls, and improving transparency of
1971ratings performance and methodologies. The public portions of
1972the current version of S&P Ratings’ Form NRSRO are available
1973on S&P Ratings’ Web site.
1974European Union
1975In the European Union, the credit rating industry is registered
1976and supervised through a pan-European regulatory framework
1977which is a compilation of three sets of legislative actions. In
19782009, the European Parliament passed a regulation (“CRA1”)
1979that established an oversight regime for the credit rating industry
1980in the European Union, which became effective in 2010.
1981CRA1 requires the registration, formal regulation and periodic
1982inspection of credit rating agencies operating in the European
1983Union. S&P Ratings was granted registration in October of
19842011. In January of 2011, the European Union established
1985the European Securities and Markets Authority (“ESMA”),
1986which, among other things, has direct supervisory responsibility
1987for the registered credit rating industry throughout the
1988European Union.
1989Additional rules augmenting the supervisory framework for
1990credit rating agencies went into effect in 2013. Commonly
1991referred to as CRA3, these rules, among other things:
1992 impose various additional procedural requirements with
1993respect to ratings of sovereign issuers;
1994 require member states to adopt laws imposing liability on
1995credit rating agencies for an intentional or grossly negligent
1996failure to abide by the applicable regulations;
1997 impose mandatory rotation requirements on credit rating
1998agencies hired by issuers of securities for ratings of resecuritizations,
1999which may limit the number of years a credit
2000rating agency can issue ratings for such securities of a particular
2001issuer;
2002 impose restrictions on credit rating agencies or their shareholders
2003if certain ownership thresholds are crossed; and
2004 impose additional procedural and substantive requirements
2005on the pricing of services.
2006The financial services industry is subject to the potential for
2007increased regulation in the European Union.
2008Other Jurisdictions
2009Outside of the U.S. and the European Union, regulators and
2010government officials have also been implementing formal
2011oversight of credit rating agencies. S&P Ratings is subject to
2012regulations in several foreign jurisdictions in which it operates
2013and continues to work closely with regulators globally to promote
2014the global consistency of regulatory requirements. S&P
2015Ratings expects regulators in additional countries to introduce
2016new regulations in the future.
2017For a further discussion of competitive and other risks inherent
2018in our S&P Ratings business, see Item 1a, Risk Factors, in our
2019Annual Report on Form 10-K. For a further discussion of the
2020legal and regulatory environment in our S&P Ratings business,
2021see Note 12 — Commitments and Contingencies to the consolidated
2022financial statements under Item 8, Consolidated Financial
2023Statements and Supplementary Data, in our Annual Report on
2024Form 10-K.
202526 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
2026S&P CAPITAL IQ AND SNL
2027S&P Capital IQ and SNL’s portfolio of capabilities are designed to help the financial community track performance, generate better
2028investment returns (alpha), identify new trading and investment ideas, perform risk analysis, and develop mitigation strategies.
2029S&P Capital IQ and SNL includes the following business lines:
2030 S&P Capital IQ Desktop & Enterprise Solutions — a product suite that provides data, analytics and third-party research for global
2031finance professionals, which includes the S&P Capital IQ Desktop and integrated bulk data feeds that can be customized, which
2032include QuantHouse, S&P Securities Evaluations, CUSIP and Compustat;
2033 Global Risk Services — commercial arm that sells Standard & Poor’s Ratings Services’ credit ratings and related data, analytics
2034and research, which includes subscription-based offerings, RatingsDirect® and RatingsXpress®;
2035 S&P Capital IQ Markets Intelligence — a comprehensive source of market research for financial professionals, which includes
2036Global Markets Intelligence, Leveraged Commentary & Data and Equity Research Services; and
2037 SNL — a product suite that includes standardized and as-reported financials, sector-specific templates, asset-level data,
2038mapping and regulatory data accessible through SNL Unlimited that provides in-depth coverage of industry-specific financial
2039market data from over 6,500 public companies and over 50,000 private companies across the globe, comprehensive market data
2040on a variety of assets, and M&A and Capital Market activities.
2041Years ended December 31, % Change
2042(in millions) 2015 2014 2013 ’15 vs ’14 ’14 vs ’13
2043Revenue $1,405 $1,237 $1,170 14% 6%
2044Subscription revenue $1,270 $1,118 $1,056 14% 6%
2045Non-subscription revenue $ 135 $ 119 $ 114 13% 4%
2046% of total revenue:
2047Subscription revenue 90% 90% 90%
2048Non-subscription revenue 10% 10% 10%
2049Domestic revenue $ 933 $ 809 $ 767 15% 5%
2050International revenue $ 472 $ 428 $ 403 10% 6%
2051% of total revenue:
2052Domestic revenue 66% 65% 66%
2053International revenue 34% 35% 34%
2054Operating profit 1 $ 228 $ 228 $ 189 —% 21%
2055% Operating margin 16% 18% 16%
20561 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
2057to restructuring. 2014 includes restructuring charges of $9 million. 2013 includes restructuring charges of approximately $9 million and a loss related to the sale of
2058Financial Communications of $3 million.
20592015
2060Revenue increased 14% primarily due to 7 percentage points
2061of growth in the S&P Capital IQ Desktop, RatingsXpress® and
2062RatingsDirect® and 7 percentage points from the acquisition of
2063SNL. Revenue growth of the legacy S&P Capital IQ products was
2064primarily driven by increases in average contract values for each
2065product from new customer relationships and increases from
2066existing accounts. These increases were partially offset by
2067declines in the equity research business, the unfavorable impact
2068of foreign exchange rates which reduced revenue by 1 percentage
2069point and the unfavorable impact related to the closure of
2070a non-core business. The number of users on the S&P Capital
2071IQ Desktop and the number of customers at RatingsXpress®
2072continued to grow in 2015. RatingsXpress® continued to benefit
2073from increased compliance requirements which have created a
2074greater need for alternative risk tools. International revenue
2075grew 10% over 2014, primarily driven by sales growth of the S&P
2076Capital IQ Desktop and RatingsXpress® in Europe and Asia.
2077Operating profit remained flat. Excluding the unfavorable impact
2078of acquisition-related costs related to the acquisition of SNL of
207916 percentage points and higher costs recorded in 2015 related
2080to identified operating efficiencies primarily related to restructuring
2081of 10 percentage points, operating profit increased 25%.
2082This increase is due to revenue growth and the favorable impact
2083of foreign exchange rates of 7 percentage points, partially offset
2084by higher technology costs, increased compensation costs
2085and higher intangible asset amortization in 2015 related to the
2086acquisition of SNL.
2087McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 27
20882014
2089Revenue increased 6% primarily due to growth from the S&P
2090Capital IQ Desktop, RatingsXpress® and RatingsDirect®, driven
2091by increases in average contract values for each product from
2092new customer relationships and increases from existing
2093accounts. This was partially offset by an unfavorable impact
2094related to the closure of several non-core businesses. The number
2095of users on the S&P Capital IQ Desktop and the number of
2096customers at RatingsXpress® increased in 2014 as compared to
20972013. Increases for existing accounts were driven by bundled
2098solution offerings integrated within the S&P Capital IQ Desktop,
2099new datasets and expanded coverage of existing datasets
2100combined with improved functionality of the S&P Capital IQ
2101Desktop. RatingsXpress® benefited from improvements made to
2102the speed and timeliness through delivery on the Xpressfeed
2103platform. Additionally, RatingsXpress® benefited from increased
2104compliance requirements which have created a greater need for
2105alternative risk tools. RatingsDirect® also had revenue growth
2106in 2014 as increased contract values were driven by the sale
2107of bundled packages including the S&P Capital IQ Desktop.
2108Additionally, S&P Capital IQ Desktop, RatingsXpress® and
2109RatingsDirect® benefited in 2014 from a higher customer
2110retention rate compared to 2013. International revenue grew
21116% over 2013, primarily driven by sales growth of the S&P
2112Capital IQ Desktop in Europe, Asia and Canada.
2113Operating profit increased 21%. Excluding the favorable impact
2114of a loss related to the sale of Financial Communications of 3
2115percentage points, operating profit increased 18%. This
2116increase is due to revenue growth, expense savings from the
2117closure of several non-core businesses and a favorable impact
2118from foreign exchange rates of 4 percentage points. Partially
2119offsetting the increases to operating profit were increased
2120compensation costs, primarily due to improved sales performance
2121and additional headcount in developing regions, and
2122higher technology costs.
2123Industry Highlights and Outlook
2124In 2015, S&P Capital IQ and SNL added scale to data, technology
2125and commercial capabilities and created synergies with the
2126existing legacy S&P Capital IQ portfolio through the acquisition
2127of SNL.
2128In 2016, S&P Capital IQ and SNL will continue to focus on meeting
2129or exceeding targeted revenue and costs synergies as a
2130result of the acquisition of SNL. The segment will seek to develop
2131new products, further penetrate core customer segments and
2132geographies, as well as enhance core capabilities in data, technology
2133and market approach.
2134Legal and Regulatory Environment
2135The financial services industry is subject to the potential for
2136increased regulation in the U.S. and abroad. The businesses
2137conducted by S&P Capital IQ and SNL are in certain cases
2138regulated under the U.S. Investment Advisers Act of 1940 (the
2139“Investment Advisers Act”) and / or the laws of the states or
2140other jurisdictions in which they conduct business.
2141Certain businesses of S&P Capital IQ and SNL are authorized
2142and regulated in the United Kingdom by the Financial Conduct
2143Authority (the “FCA”). As such, these businesses are authorized
2144to arrange and advise on investments, and are entitled to exercise
2145a passport right to provide specified cross border services
2146into other European Economic Area (“EEA”) States, under and
2147subject to the conditions in the E.U. Markets in Financial
2148Instruments Directive (“MiFID”).
2149The markets for financial research, investment and advisory
2150services are very competitive. S&P Capital IQ and SNL competes
2151domestically and internationally on the basis of a number of
2152factors, including the quality of its research and advisory services,
2153client service, reputation, price, geographic scope, range
2154of products and services, and technological innovation. For a
2155further discussion of competitive and other risks inherent in our
2156S&P Capital IQ and SNL business, see Item 1a, Risk Factors, in
2157our Annual Report on Form 10-K.
215828 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
2159S&P DJ INDICES
2160S&P DJ Indices is a global index provider that maintains a wide variety of indices to meet an array of investor needs. S&P DJ Indices’
2161mission is to provide transparent benchmarks to help with decision making, collaborate with the financial community to create
2162innovative products and provide investors with tools to monitor world markets.
2163S&P DJ Indices generates subscription revenue but primarily derives revenue from non-subscription products based on the S&P
2164and Dow Jones Indices. Specifically, S&P DJ Indices generate revenue from the following sources:
2165 Investment vehicles — such as ETFs, which are based on the S&P Dow Jones Indices’ benchmarks and generate revenue through
2166fees based on assets and underlying funds;
2167 Exchange traded derivatives — which generate royalties based on trading volumes of derivatives contracts listed on various
2168exchanges;
2169 Index-related licensing fees — which are either fixed or variable annual and per-issue fees for over-the-counter derivatives and
2170retail-structured products; and
2171 Data and customized index subscription fees — which support index fund management, portfolio analytics and research.
2172Years ended
2173December 31, % Change
2174(in millions) 2015 2014 2013 ’15 vs ’14 ’14 vs ’13
2175Revenue $597 $552 $493 8% 12%
2176Subscription revenue $122 $111 $103 10% 8%
2177Non-subscription revenue $475 $441 $390 8% 13%
2178% of total revenue:
2179Subscription revenue 21% 20% 21%
2180Non-subscription revenue 79% 80% 79%
2181Domestic revenue $488 $440 $385 11% 14%
2182International revenue $109 $112 $108 (2)% 4%
2183% of total revenue:
2184Domestic revenue 82% 80% 78%
2185International revenue 18% 20% 22%
2186Operating profit 1 $392 $347 $266 13% 30%
2187Less: net income attributable to noncontrolling interests $101 $ 92 $ 73 10% 25%
2188Net operating profit $291 $255 $193 14% 32%
2189% Operating margin 66% 63% 54%
2190% Net operating margin 49% 46% 39%
21911 2014 includes $4 million of professional fees largely related to corporate development activities.
21922015
2193Revenue at S&P DJ Indices increased 8%, primarily driven by
2194higher average levels of assets under management (“AUM”) for
2195ETFs and mutual funds. Volumes for exchange-traded derivatives
2196continued to increase for certain products which also contributed
2197to revenue growth. Additionally, the year-over-year
2198revenue increase was slightly unfavorably impacted by the
2199refinement of our process for estimating revenue for certain
2200products that favorably impacted 2014 which caused a onetime
2201revenue increase in the prior-year period. Ending AUM
2202for ETFs decreased 2% to $815 billion in 2015 from $832 billion
2203in 2014, primarily due to the flow of investment funds to the
2204developed international equity markets and the impact of lower
2205equity prices. The unfavorable impact of foreign exchange rates
2206reduced revenue by 1 percentage point.
2207Operating profit grew 13%. Excluding the favorable impact of
2208professional fees largely related to corporate development
2209activities recorded in 2014 of 1 percentage point, operating
2210profit increased 12%. This increase was primarily due to revenue
2211growth as expenses remained relatively flat as a result of cost
2212containment measures.
2213McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 29
22142014
2215Revenue at S&P DJ Indices increased 12%, primarily driven by
2216higher average levels of AUM for ETFs and mutual funds. Higher
2217volumes for exchange-traded derivatives also contributed to
2218revenue growth. These increases were partially offset by the
2219unfavorable impact of lower over-the-counter derivative trading
2220volumes in 2014 driven by the expiration of a licensing arrangement
2221for commodities indices in June of 2014. AUM for ETFs
2222rose 25% to $832 billion in 2014 from $668 billion in 2013. The
2223unfavorable impact of foreign exchange rates reduced revenue
2224by less than 1 percentage point.
2225Operating profit grew 30%. Excluding the impact of professional
2226fees largely related to corporate development activities recorded
2227in 2014 of 2 percentage points, operating profit increased 32%.
2228This increase was primarily due revenue growth and the favorable
2229impact of a $26 million non-cash impairment charge
2230recorded in 2013 associated with an intangible asset acquired
2231with the formation of the S&P Dow Jones Indices LLC joint
2232venture and a reduction of royalty expenses. The reduction of
2233royalty expenses was the result of purchases of intellectual
2234property rights to certain commodities indices developed by
2235Goldman Sachs, and Broad Market Indices (“BMI”) from Citigroup
2236Global Markets Inc. as well as the expiration of a licensing
2237arrangement for commodities indices in June of 2014. These
2238expense reductions were partially offset by an increase in compensation
2239costs related to additional headcount and higher
2240incentive costs. The unfavorable impact of foreign exchange
2241rates reduced operating profit by 1 percentage point.
2242Industry Highlights and Outlook
2243S&P DJ Indices continues to be the leading index provider for
2244the ETF market space. In 2015, higher average levels of AUM
2245for ETFs contributed to revenue growth, however, ending AUM
2246for ETFs decreased 2% to $815 billion in 2015 from $832 billion
2247in 2014. S&P DJ Indices will also seek to diversify their portfolio
2248of index offerings through asset class expansion, new geographies,
2249and investment strategies. This group will seek to
2250expand its fixed income offering and grow its local presence in
2251emerging markets.
2252Legal and Regulatory Environment
2253The financial benchmarks industry is subject to the new pending
2254benchmark regulation in the European Union (the “E.U. Benchmark
2255Regulation”) as well as potential increased regulation in
2256other jurisdictions.
2257The proposed E.U. Benchmark Regulation has been released for
2258final approval and is expected to be published later this year. The
2259E.U. Benchmark Regulation will likely require S&P DJ Indices in
2260due course to obtain registration or authorization in connection
2261with its benchmark activities in Europe. This legislation will likely
2262cause additional operating obligations but they are not expected
2263to be material at this time and until the regulation is finalized
2264the exact impact is not certain.
2265In addition, the European Union has recently finalized a package
2266of legislative measures known as MiFID II, which revise and
2267update the existing E.U. Markets in Financial Instruments
2268Directive framework. MiFID II will apply in full in all E.U. Member
2269States from January 3, 2017. MiFID II includes provisions that,
2270among other things: (i) impose new conditions and requirements
2271on the licensing of benchmarks and provide for nondiscriminatory
2272access to exchanges and clearing houses;
2273(ii) modify the categorization and treatment of certain classes
2274of derivatives; (iii) expand the categories of trading venue that
2275are subject to regulation; and (iv) provide for the mandatory
2276trading of certain derivatives on exchanges (complementing the
2277mandatory derivative clearing requirements in the E.U. Market
2278Infrastructure Regulation of 2011). Although the MiFID II package
2279is “framework” legislation (meaning that much of the detail
2280of the rules will be set out in subordinate measures to be agreed
2281upon in the period before 2017), it is possible that the introduction
2282of these laws and rules could affect S&P DJ Indices’ ability
2283both to administer and license its indices.
2284In July of 2013, the International Organization of Securities
2285Commissions (“IOSCO”) issued Financial Benchmark Principles,
2286which are intended to promote the reliability of benchmark
2287determinations, and address governance, benchmark quality
2288and accountability mechanisms, including with regard to the
2289indices published by S&P DJ Indices. Even though the Financial
2290Benchmark Principles are not binding law, S&P DJ Indices
2291has taken steps to align its governance regime and operations
2292with the Financial Benchmark Principles and engaged an independent
2293auditor to perform a reasonable assurance review of
2294such alignment.
2295The markets for index providers are very competitive. S&P DJ
2296Indices competes domestically and internationally on the basis
2297of a number of factors, including the quality of its benchmark
2298indices, client service, reputation, price, range of products and
2299services (including geographic coverage) and technological
2300innovation. For a further discussion of competitive and other
2301risks inherent in our S&P DJ Indices business, see Item 1a, Risk
2302Factors, in our Annual Report on Form 10-K.
230330 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
2304COMMODITIES & COMMERCIAL
2305C&C consists of business-to-business companies specializing
2306in the commodities and commercial markets that deliver their
2307customers access to high-value information, data, analytic
2308services and pricing and quality benchmarks. C&C includes the
2309following brands:
2310 Platts — provides essential price data, analytics, and industry
2311insight that enable commodities markets to perform with
2312greater transparency and efficiency; and
2313 J.D. Power — provides essential consumer intelligence to help
2314businesses measure, understand, and improve the key performance
2315metrics that drive growth and profitability.
2316In the fourth quarter of 2015, we began exploring strategic
2317alternatives for J.D. Power, included in our C&C segment. We
2318committed to and initiated an active program to sell J.D. Power
2319in its current state that we believe is probable in the next year.
2320As a result, we have classified the assets and liabilities of
2321J.D. Power as held for sale in our consolidated balance sheet
2322as of December 31, 2015. The anticipated disposal does not
2323represent a strategic shift that will have a major effect on
2324operations and financial results, therefore, it is not classified as
2325a discontinued operation.
2326On November 3, 2014, we completed the sale of McGraw Hill
2327Construction, which has historically been part of our C&C
2328segment, to Symphony Technology Group for $320 million in
2329cash. Accordingly, the results of operations for the year ended
2330December 31, 2014 and all prior periods presented have been
2331reclassified to reflect the business as a discontinued operation.
2332See Note 2 — Acquisitions and Divestitures for further discussion.
2333The C&C business is driven by the need for high-value information
2334and transparency in a variety of industries. C&C seeks to
2335deliver premier content that is deeply embedded in customer
2336workflows and decision making processes.
2337C&C’s revenue is generated primarily through the following sources:
2338 Subscription revenue — subscriptions to our real-time news, market data and price assessments, along with other information
2339products, primarily serving the energy and automotive industry; and
2340 Non-subscription revenue — primarily from licensing of our proprietary market price data and price assessments to commodity
2341exchanges, syndicated and proprietary research studies, commercial-oriented data and analytics, conference sponsorship,
2342consulting engagements, and events.
2343As of August 1, 2013, we completed the sale of Aviation Week and results have been included in C&C’s results through that date. See
2344Note 2 — Acquisitions and Divestitures to our consolidated financial statements for further discussion.
2345Years ended
2346December 31, % Change
2347(in millions) 2015 2014 2013 ’15 vs ’14 ’14 vs ’13
2348Total revenue $971 $893 $841 9% 6%
2349Subscription revenue $641 $576 $527 11% 9%
2350Non-subscription revenue $330 $317 $314 4% 1%
2351% of total revenue:
2352Subscription revenue 66% 64% 63%
2353Non-subscription revenue 34% 36% 37%
2354Domestic revenue $435 $401 $394 9% 2%
2355International revenue $536 $492 $447 9% 10%
2356% of total revenue:
2357Domestic revenue 45% 45% 47%
2358International revenue 55% 55% 53%
2359Operating profit 1 $357 $290 $280 23% 3%
2360% Operating margin 37% 32% 33%
23611 2015 includes $1 million of restructuring charges. 2014 includes $16 million of restructuring charges. 2013 includes $9 million of restructuring charges and a
2362pre-tax gain of $11 million on the sale of Aviation Week.
2363McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 31
23642015
2365Revenue grew 9% driven by strength in Platts’ proprietary content
2366as Platts’ revenue grew across all regions. This growth was
2367mainly due to continued demand for Platts’ market data and
2368price assessment products across all commodity sectors, led by
2369petroleum. While petroleum is still the biggest driver, the revenue
2370mix continues to become more diversified as other sectors
2371showed positive annualized contract value growth including
2372natural gas, petrochemicals, metals and agriculture. Additionally,
2373growth has been driven by the continued licensing of our proprietary
2374market price data and price assessments to various commodity
2375exchanges. Platts’ revenue for 2015 was also favorably
2376impacted by the acquisitions of Eclipse Energy Group AS and its
2377operating subsidiaries (“Eclipse”) in July of 2014 and Petromedia
2378Ltd and its operating subsidiaries (“Petromedia”) in July of
23792015. J.D. Power also contributed to the revenue increase driven
2380by an increase in auto consulting engagements in the U.S.,
2381growth in the U.S. Power Information Network® (“PIN”) business
2382and the acquisition of National Automobile Dealers Association’s
2383Used Car Guide (“UCG”) in July of 2015. The acquisitions of
2384Eclipse, Petromedia and UCG had a favorable impact on revenue
2385of 3 percentage points. See Note 2 — Acquisitions and Divestitures
2386for further discussion. The unfavorable impact of foreign
2387exchange rates reduced revenue by 1 percentage point.
2388Operating profit increased 23%. Excluding the favorable impact
2389of higher restructuring charges recorded in 2014 of 6 percentage
2390points, operating profit increased 17%. This increase is due to
2391the increase in revenue and the favorable impact of foreign
2392exchange rates of 4 percentage points, partially offset by
2393higher incentive costs and outside consulting fees at Platts and
2394higher compensation costs related to additional headcount
2395at J.D. Power due to the acquisition of UCG.
23962014
2397Revenue increased 6% due to continued demand for Platts’ proprietary
2398content as Platts’ revenue grew across all regions. This
2399growth was mainly driven by strength in Platts’ market data and
2400price assessment products across all commodity sectors, led by
2401petroleum. While petroleum is still the biggest driver, the revenue
2402mix continues to become more diversified as other sectors
2403continued to show positive annualized contract value growth
2404including petrochemicals, natural gas, coal, metals and agriculture.
2405Platts’ revenue in 2014 was also favorably impacted by the
2406acquisition of Eclipse in July of 2014. The acquisition of Eclipse
2407had a favorable impact on revenue of less than 1 percentage
2408point. See Note 2 — Acquisitions and Divestitures for further
2409discussion. Additionally, growth at J.D. Power also contributed
2410to the revenue increase driven by strong demand for auto
2411consulting engagements in the U.S. and Singapore and growth
2412in the U.S. PIN business. The increases in revenue were partially
2413offset by the unfavorable impact of 3 percentage points related
2414to the sale of Aviation Week on August 1, 2013 as the results
2415have been included in C&C’s results through that date.
2416Operating profit increased 3%. Excluding the unfavorable impact
2417of the pre-tax gain on the sale of Aviation Week recorded in
24182013 of 4 percentage points and higher restructuring charges
2419recorded in 2014 as compared to 2013 of 3 percentage points,
2420operating profit increased 10%. This increase is due to the
2421increase in revenue, partially offset by the unfavorable impact
2422of foreign exchange rates of 1 percentage point, increased costs
2423at Platts and J.D. Power related to additional headcount, merit
2424increases, and other operating costs to support business growth.
2425Industry Highlights and Outlook
2426C&C expects to continue to invest in digital capabilities that will
2427enable our brands to become more integrated in our customers’
2428workflows, compete more effectively in the marketplace, and
2429create a foundation for the development of new products
2430and revenue streams. The segment expects to further expand
2431its presence in selected markets and geographies to help
2432drive growth.
2433High growth in supply and an uncertain pace of demand growth
2434causes volatility in energy prices, which will drive market participant
2435demand for Platts’ proprietary content, including news,
2436price assessments and analytics. However, if commodity prices
2437remain at levels that are lower than in recent years, this is likely
2438to have an adverse impact on the rate of growth for subscription
2439and conference revenue in some of Platts’ customer segments.
2440The International Energy Agency (“IEA”), in its first monthly
2441forecast of 2016, predicted that world oil consumption will rise
2442to 95.7 million barrels per day in 2016, a gain of 1.2 million
2443barrels per day compared to 2015. The IEA expected non-OPEC
2444total liquids supply to contract by nearly 600,000 barrels per day
2445in 2016, following growth of 1.4 million barrels per day in 2015.
2446In 2016, Platts will continue to invest in technology and customer
2447engagement activities to seek to drive additional revenue
2448growth across all commodity sectors. They will also seek to
2449continue to leverage the capabilities and content from recent
2450acquisitions and expand into adjacent markets. Similar to 2015,
2451they expect to continue to introduce a number of new products
2452and price assessments within all commodity sectors. Platts
245332 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
2454completed its first annual assurance review confirming adherence
2455to the IOSCO Principles for Oil Price Reporting Agencies
2456(PRAs) for its oil benchmarks in 2013 and, as of December
24572015, had completed its fourth assurance review confirming
2458its alignment with the PRA Principles for both its oil and non-oil
2459commodity benchmarks. On September 17, 2015, IOSCO
2460announced that the PRAs have made the IOSCO PRA Principles
2461an “integral part” of their price assessment practices and
2462that IOSCO saw no need to continue its annual review of the
2463Principles’ implementation. Platts remains committed to
2464ensuring its price assessment processes continue to fully
2465align with the PRA Principles across all commodities and will
2466continue to retain an independent accountancy firm to conduct
2467voluntary reasonable assurance reviews of its alignment to the
2468PRA Principles.
2469Demand for our automotive studies is driven by the performance
2470of the automotive industry. In 2015, global and U.S. light vehicle
2471sales increased approximately 1% and 6%, respectively, compared
2472to 2014, with growth across most primary markets
2473partially offset by decreases from Russia, Brazil and Japan.
2474For 2016, J.D. Power projects growth for global and U.S. light
2475vehicles sales of 4% and 2%, respectively. In 2016, J.D. Power
2476will strive to grow the core business by strengthening their
2477benchmark studies, leveraging new initiatives to drive operational
2478efficiencies and enhance customer delivery and increasing
2479the distribution of their syndicated studies. International
2480growth will continue to be a key focus in 2016 as they will look
2481to extend product offerings to increase penetration in the
2482Asia-Pacific region and exploring growth opportunities in target
2483growth markets (China, Brazil and Mexico).
2484Legal and Regulatory Environment
2485Platts’ commodities price assessment and information business
2486is subject to increasing regulatory scrutiny in the U.S. and
2487abroad. As discussed above under the heading “S&P DJ IndicesLegal
2488and Regulatory Environment”, the financial benchmarks
2489industry is subject to the new pending benchmark regulation in
2490the European Union (the “E.U. Benchmark Regulation”) as well
2491as potential increased regulation in other jurisdictions. As a
2492result of these measures, as well as measures that could be
2493taken in other jurisdictions outside of Europe, Platts will likely be
2494required in due course to obtain registration or authorization in
2495connection with its benchmark and price assessment activities
2496in Europe and potentially elsewhere.
2497Also as discussed above under the heading “S&P DJ IndicesLegal
2498and Regulatory Environment”, the European Union has
2499recently finalized a package of legislative measures known as
2500MiFID II, which may also impact Platts’ business. Although the
2501MiFID II package is “framework” legislation, it is possible that
2502the introduction of these laws and rules could affect Platts’
2503ability both to administer and license its price assessments.
2504In October of 2012, IOSCO issued its PRA Principles which set
2505out principles, which are intended to enhance the reliability of oil
2506price assessments referenced in derivative contracts subject to
2507regulation by IOSCO members. Platts has taken steps to align its
2508operations with the PRA Principles and as recommended by
2509IOSCO in its final report on the PRA Principles, has aligned to the
2510PRA Principles for other commodities for which it publishes
2511benchmarks.
2512The markets for commodities price assessments and information
2513are very competitive. Platts competes domestically and
2514internationally on the basis of a number of factors, including the
2515quality of its assessments and other information it provides to
2516the commodities and related markets, client service, reputation,
2517price, range of products and services (including geographic
2518coverage) and technological innovation. Furthermore, sustained
2519downward pressure on oil and other commodities prices and
2520trading activity in those markets could have a material adverse
2521impact on the rate of growth of Platts’ revenue. For a further
2522discussion of competitive and other risks inherent in our Platts
2523business, see Item 1a, Risk Factors, in our Annual Report on
2524Form 10-K.
2525Liquidity and Capital Resources
2526We continue to maintain a strong financial position. Our primary
2527source of funds for operations is cash from our businesses and
2528our core businesses have been strong cash generators. In 2016,
2529cash on hand, cash flows from operations and availability under
2530our existing credit facility are expected to be sufficient to meet
2531any additional operating and recurring cash needs into the foreseeable
2532future. We use our cash for a variety of needs, including
2533among others: ongoing investments in our businesses, strategic
2534acquisitions, share repurchases, dividends, repayment of debt,
2535capital expenditures and investment in our infrastructure.
2536McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 33
2537CASH FLOW OVERVIEW
2538Cash and cash equivalents were $1.5 billion as of December 31,
25392015, a decrease of $1.0 billion as compared to December 31,
25402014, and consisted of approximately 10% of domestic cash
2541and 90% of cash held abroad. Typically, cash held outside the
2542U.S. is anticipated to be utilized to fund international operations
2543or to be reinvested outside of the U.S., as a significant portion of
2544our opportunities for growth in the coming years is expected to
2545be abroad. In the event funds from international operations are
2546needed to fund operations in the U.S., we would be required to
2547accrue for and pay taxes in the U.S. to repatriate these funds.
2548Years ended December 31,
2549(in millions) 2015 2014 2013
2550Net cash provided by (used for):
2551 Operating activities from
2552continuing operations $ 195 $1,209 $ 782
2553 Investing activities from
2554continuing operations (2,525) (65) (130)
2555 Financing activities from
2556continuing operations 1,510 (462) (1,743)
2557In 2015, free cash flow decreased to $(48.0) million compared
2558to $1.0 billion in 2014. The decrease is primarily due to the
2559decrease in cash provided from operating activities as discussed
2560below. Free cash flow is a non-GAAP financial measure
2561and reflects our cash flow provided by operating activities less
2562capital expenditures and dividends and other payments paid
2563to noncontrolling interests. Capital expenditures include purchases
2564of property and equipment and additions to technology
2565projects. See “MDA — Reconciliation of Non-GAAP Financial
2566Information” below for a reconciliation of cash flow provided by
2567operating activities, the most directly comparable U.S. GAAP
2568financial measure, to free cash flow.
2569Operating Activities
2570Cash provided by operating activities decreased $1.0 billion to
2571$195 million in 2015. The decrease is mainly due to the payment
2572of legal and regulatory settlements in 2015 of $1.6 billion.
2573Cash provided by operating activities increased $427 million to
2574$1.2 billion in 2014. The increase is mainly due to a tax refund
2575received in the first quarter of 2014 related to an overpayment
2576in 2013 and the timing of our estimated tax payment which was
2577made in the first quarter of 2013 as compared to the fourth
2578quarter of 2012. Additionally, improved collections in 2014
2579impacting accounts receivable also contributed to the increase.
2580These increases were partially offset by higher incentive payments
2581in 2014 compared to 2013.
2582Investing Activities
2583Our cash outflows from investing activities are primarily for
2584acquisitions and capital expenditures, while cash inflows are
2585primarily proceeds from dispositions.
2586Cash used for investing activities increased to $2.5 billion for
25872015 from $65 million in 2014, primarily due to the acquisition
2588of SNL in September of 2015.
2589Cash used for investing activities decreased to $65 million for
25902014 from $130 million in 2013. This was primarily due to higher
2591proceeds from dispositions in 2014 related to the sale of our
2592data center to QTS and proceeds from the sale of the Company’s
2593aircraft. Additionally, lower capital expenditures in 2014 compared
2594to 2013 contributed to the decrease. These decreases
2595were partially offset by a higher amount of cash paid for acquisitions
2596in 2014 compared to 2013.
2597Refer to Note 2 — Acquisitions and Divestitures to our consolidated
2598financial statements for further information.
2599Financing Activities
2600Our cash outflows from financing activities consist primarily of
2601share repurchases, dividends and repayment of debt, while cash
2602inflows are primarily inflows from long-term and short-term
2603debt borrowings and proceeds from the exercise of stock options.
2604Cash provided by financing activities was $1.5 billion in 2015
2605compared to cash used for financing activities of $462 million in
26062014, driven by proceeds from the issuance of senior notes in
26072015, partially offset by an increase in cash used for the repurchase
2608of treasury shares.
2609Cash used for financing activities decreased $1.3 billion to $462
2610million in 2014. This decrease is primarily attributable to a
2611decrease in cash used for share repurchases and the repayment
2612of short-term debt that occurred in the first quarter of 2013.
2613During 2015, we used cash to repurchase 9.8 million shares for
2614$974 million at an average price paid per share of $98.98,
2615excluding commissions. An additional 0.3 million shares were
2616repurchased in the fourth quarter of 2015 for approximately
2617$26 million, which settled in January of 2016. Including these
2618additional shares, we utilized cash to repurchase shares at an
2619average price of $99.00, excluding commissions.
2620During 2014, we used cash to repurchase 4.6 million shares for
2621$362 million at an average price paid per share of $79.02,
2622excluding commissions. Included in the repurchase were 0.5
2623million shares of the Company’s common stock from the personal
2624holdings of Harold W. McGraw III, then Chairman of the
262534 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
2626Company’s Board of Directors and former President and CEO of
2627the Company (“Mr. McGraw”). The shares were purchased at a
2628discount of 0.35% from the June 24, 2014 New York Stock
2629Exchange closing price pursuant to a private transaction with
2630Mr. McGraw. We repurchased these shares with cash for $41
2631million at an average price of $82.66 per share. This transaction
2632was approved by the Nominating and Corporate Governance
2633Committee of the Company’s Board of Directors after consultation
2634with members of the Financial Policy Committee.
2635During 2013, we used cash to repurchase 16.8 million shares for
2636$978 million, including commissions. The average price per share,
2637excluding commissions, was $58.36. An additional 0.1 million
2638shares were repurchased in the fourth quarter of 2013 for
2639approximately $10 million, which settled in January of 2014.
2640Including these additional shares, we utilized cash to repurchase
2641shares at an average price of $58.52, excluding commissions.
2642On December 4, 2013, the Board of Directors approved a new
2643stock repurchase program authorizing the purchase of up to 50
2644million shares (the “2013 Repurchase Program”), which was
2645approximately 18% of the total shares of our outstanding common
2646stock at that time. The 2013 Repurchase Program has no
2647expiration date and purchases under this program may be made
2648from time to time on the open market and in private transactions,
2649depending on market conditions. As of December 31,
26502015, 35.5 million shares remained available under the 2013
2651Repurchase Program.
2652Discontinued Operations
2653Cash flows from discontinued operations reflects the classification
2654of McGraw Hill Construction and MHE as discontinued
2655operations.
2656Cash used for operating activities from discontinued operations
2657of $129 million in 2015 relates to the tax payment on the gain
2658on sale of McGraw Hill Construction. Cash provided by operating
2659activities from discontinued operations of $18 million in 2014
2660relates to McGraw Hill Construction and cash used for operating
2661activities of $231 million in 2013 relates both to MHE and
2662McGraw Hill Construction.
2663Cash provided by investing activities from discontinued operations
2664decreased to $320 million in 2014 compared to $2.1 billion
2665in 2013 due to lower proceeds received from the sale of McGraw
2666Hill Construction compared to the proceeds received from MHE.
2667Cash used for financing activities decreased $25 million in 2014
2668as there was no impact related to McGraw Hill Construction.
2669ADDITIONAL FINANCING
2670We have the ability to borrow a total of $1.2 billion through our
2671commercial paper program, which is supported by our credit
2672facility described below. Commercial paper borrowings outstanding
2673as of December 31, 2015 totaled $143 million with an
2674average interest rate and term of 0.95% and 17 days. As of
2675December 31, 2015, we can borrow approximately $1.1 billion in
2676additional funds through the commercial paper program. There
2677were no commercial paper borrowings outstanding under our
2678credit facility as of December 31, 2014.
2679On June 30, 2015, we entered into a revolving $1.2 billion fiveyear
2680credit agreement (our “credit facility”) that will terminate
2681on June 30, 2020. This credit facility replaced our $1.0 billion
2682four-year credit facility that was scheduled to terminate on June
268319, 2017. The previous credit facility was canceled immediately
2684after the new credit facility became effective. There were no
2685outstanding borrowings under the previous credit facility when
2686it was replaced.
2687We pay a commitment fee of 10 to 20 basis points for our credit
2688facility, depending on our indebtedness to cash flow ratio,
2689whether or not amounts have been borrowed and currently pay a
2690commitment fee of 15 basis points. The interest rate on borrowings
2691under our credit facility is, at our option, calculated using
2692rates that are primarily based on either the prevailing London
2693Inter-Bank Offered Rate, the prime rate determined by the
2694administrative agent or the Federal Funds Rate. For certain borrowings
2695under this credit facility, there is also a spread based on
2696our indebtedness to cash flow ratio added to the applicable rate.
2697Our credit facility contains certain covenants. The only financial
2698covenant requires that our indebtedness to cash flow ratio, as
2699defined in our credit facility, is not greater than 4 to 1, and this
2700covenant level has never been exceeded.
2701On July 24, 2015, in connection with the acquisition of SNL, we
2702entered into a commitment letter. Upon receipt of the proceeds
2703from the issuance of $2.0 billion of senior notes on August 18,
27042015, we terminated this commitment letter. See Note 5 — Debt
2705for further information.
2706On January 22, 2015, Fitch Ratings revised its ratings outlook
2707from negative to stable and affirmed our BBB+ long-term debt
2708rating and F2 short-term / commercial debt rating. On August 7,
27092015, Moody’s Investor Service assigned a Baa1 long-term debt
2710rating and P-2 commercial paper rating.
2711McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 35
2712DIVIDENDS
2713On January 27, 2016, the Board of Directors approved an increase
2714in the quarterly common stock dividend from $0.33 per share to
2715$0.36 per share.
2716CONTRACTUAL OBLIGATIONS
2717We typically have various contractual obligations, which are
2718recorded as liabilities in our consolidated balance sheets, while
2719other items, such as certain purchase commitments and
2720other executory contracts, are not recognized, but are disclosed
2721herein. For example, we are contractually committed to contracts
2722for information-technology outsourcing, certain enterprisewide
2723information-technology software licensing and maintenance
2724and make certain minimum lease payments for the use of
2725property under operating lease agreements.
2726We believe that the amount of cash and cash equivalents on
2727hand, cash flow expected from operations and availability under
2728our credit facility will be adequate for us to execute our business
2729strategy and meet anticipated requirements for lease obligations,
2730capital expenditures, working capital and debt service
2731for 2016.
2732The following table summarizes our significant contractual obligations and commercial commitments as of December 31, 2015,
2733over the next several years that relate to our continuing operations. Additional details regarding these obligations are provided in
2734the notes to our consolidated financial statements, as referenced in the footnotes to the table:
2735(in millions)
2736Less than
27371 Year 1–3 Years 3–5 Years
2738More than
27395 Years Total
2740Debt: 1
2741Principal payments $143 $ 797 $ 695 $1,976 $3,611
2742Interest payments 150 274 225 771 1,420
2743Operating leases 2 136 229 150 162 677
2744Purchase obligations and other 3 83 90 6 — 179
2745Total contractual cash obligations $512 $1,390 $1,076 $2,909 $5,887
27461 Our debt obligations are described in Note 5 — Debt to our consolidated financial statements.
27472 Amounts shown include taxes and escalation payments, see Note 12 — Commitments and Contingencies to our consolidated financial statements for further discussion
2748on our operating lease obligations.
27493 Other consists primarily of commitments for unconditional purchase obligations in contracts for information-technology outsourcing and certain enterprise-wide
2750information-technology software licensing and maintenance.
2751As of December 31, 2015, we had $120 million of liabilities for
2752unrecognized tax benefits. We have excluded the liabilities for
2753unrecognized tax benefits from our contractual obligations
2754table because reasonable estimates of the timing of cash settlements
2755with the respective taxing authorities are not practicable.
2756As of December 31, 2015, we have recorded $920 million for our
2757redeemable noncontrolling interest in our S&P Dow Jones
2758Indices LLC partnership discussed in Note 8 — Equity to our
2759consolidated financial statements. Specifically, this amount
2760relates to the put option under the terms of the operating
2761agreement of S&P Dow Jones Indices LLC, whereby, after
2762December 31, 2017, CME Group and CME Group Index Services
2763LLC (“CGIS”) will have the right at any time to sell, and we are
2764obligated to buy, at least 20% of their share in S&P Dow Jones
2765Indices LLC. We have excluded this amount from our contractual
2766obligations table because we are uncertain as to the timing and
2767the ultimate amount of the potential payment we may be
2768required to make.
2769We make contributions to our pension and postretirement plans
2770in order to satisfy minimum funding requirements as well as
2771additional contributions that we consider appropriate to improve
2772the funded status of our plans. During 2015, we contributed
2773$15 million and $8 million to our domestic and international
2774retirement and postretirement plans, respectively. Expected
2775employer contributions in 2016 are $7 million and $9 million for
2776our domestic and international retirement and postretirement
2777plans, respectively. In 2016, we may elect to make additional
2778non-required contributions depending on investment performance
2779and the pension plan status. See Note 6 — Employee
2780Benefits to our consolidated financial statements for further
2781discussion.
2782OFF-BALANCE SHEET ARRANGEMENTS
2783As of December 31, 2015 and 2014, we did not have any relationships
2784with unconsolidated entities, such as entities often
2785referred to as specific purpose or variable interest entities
278636 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
2787where we are the primary beneficiary, which would have been
2788established for the purpose of facilitating off-balance sheet
2789arrangements or other contractually narrow or limited purposes.
2790As such we are not exposed to any financial liquidity,
2791market or credit risk that could arise if we had engaged in such
2792relationships.
2793Reconciliation of Non-GAAP
2794Financial Information
2795Free cash flow is a non-GAAP financial measure and reflects our
2796cash flow provided by operating activities less capital expenditures
2797and dividends and other payments paid to noncontrolling
2798interests. Capital expenditures include purchases of property
2799and equipment and additions to technology projects. Our cash
2800flow provided by operating activities is the most directly
2801comparable U.S. GAAP financial measure to free cash flow. Additionally,
2802we have considered certain items in evaluating free
2803cash flow, which are included in the table below.
2804We believe the presentation of free cash flow and free cash flow
2805excluding certain items allows our investors to evaluate the
2806cash generated from our underlying operations in a manner
2807similar to the method used by management. We use free cash
2808flow to conduct and evaluate our business because we believe it
2809typically presents a more conservative measure of cash flows
2810since capital expenditures and dividends and other payments
2811paid to noncontrolling interests are considered a necessary
2812component of ongoing operations. Free cash flow is useful for
2813management and investors because it allows management and
2814investors to evaluate the cash available to us to service debt,
2815make strategic acquisitions and investments, repurchase stock
2816and fund ongoing operation and working capital needs.
2817The presentation of free cash flow and free cash flow excluding certain items are not intended to be considered in isolation or as a
2818substitute for the financial information prepared and presented in accordance with U.S. GAAP. Free cash flow, as we calculate it,
2819may not be comparable to similarly titled measures employed by other companies. The following table presents a reconciliation of
2820our cash flow provided by operating activities to free cash flow excluding the impact of the items below:
2821Years ended December 31, % Change
2822(in millions) 2015 2014 2013 2015 2014
2823Cash provided by operating activities $ 195 $1,209 $ 782 (84)% 55%
2824Capital expenditures (139) (92) (117)
2825Dividends and other payments paid to noncontrolling interests (104) (84) (75)
2826Free cash flow $ (48) $1,033 $ 590 N/M 75%
2827Payment of legal and regulatory settlements 1,624 35 —
2828Legal settlement insurance recoveries (101) — —
2829Tax benefit from legal settlements (250) — —
2830Free cash flow excluding above items $1,225 $1,068 $ 590 15% 81%
2831Critical Accounting Estimates
2832Our discussion and analysis of our financial condition and results
2833of operations is based upon our consolidated financial statements,
2834which have been prepared in accordance with U.S. GAAP.
2835The preparation of these financial statements requires us to
2836make estimates and judgments that affect the reported
2837amounts of assets, liabilities, revenues and expenses and
2838related disclosure of contingent assets and liabilities. Unless
2839otherwise indicated, all discussion and analysis of our financial
2840condition and results of operations relate to our continuing
2841operations.
2842On an ongoing basis, we evaluate our estimates and assumptions,
2843including those related to revenue recognition, allowance
2844for doubtful accounts, valuation of long-lived assets, goodwill
2845and other intangible assets, pension plans, incentive compensation
2846and stock-based compensation, income taxes, contingencies
2847and redeemable noncontrolling interests. We base our
2848estimates on historical experience, current developments and
2849on various other assumptions that we believe to be reasonable
2850under these circumstances, the results of which form the basis
2851for making judgments about carrying values of assets and liabilities
2852that cannot readily be determined from other sources.
2853There can be no assurance that actual results will not differ
2854from those estimates.
2855McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 37
2856Management considers an accounting estimate to be critical if
2857it required assumptions to be made that were uncertain at the
2858time the estimate was made and changes in the estimate or
2859different estimates could have a material effect on our results
2860of operations. Management has discussed the development and
2861selection of our critical accounting estimates with the Audit
2862Committee of our Board of Directors. The Audit Committee has
2863reviewed our disclosure relating to them in this MD&A.
2864We believe the following critical accounting policies require us to
2865make significant judgments and estimates in the preparation of
2866our consolidated financial statements:
2867REVENUE RECOGNITION
2868Revenue is recognized as it is earned when services are rendered.
2869We consider amounts to be earned once evidence of
2870an arrangement has been obtained, services are performed,
2871fees are fixed or determinable and collectability is reasonably
2872assured. Revenue relating to products that provide for more
2873than one deliverable is recognized based upon the relative fair
2874value to the customer of each deliverable as each deliverable is
2875provided. Revenue relating to agreements that provide for more
2876than one service is recognized based upon the relative fair value
2877to the customer of each service component as each component
2878is earned. If the fair value to the customer for each service is not
2879objectively determinable, we make our best estimate of the
2880services’ stand alone selling price and recognize revenue as
2881earned as the services are delivered. The allocation of consideration
2882received from multiple element arrangements that
2883involve initial assignment of ratings and the future surveillance
2884of ratings is determined through an analysis that considers
2885cash consideration that would be received for instances when
2886the service components are sold separately. In such cases, we
2887defer portions of rating fees that we estimate will be attributed
2888to future surveillance and recognize the deferred revenue
2889ratably over the estimated surveillance periods. Advertising
2890revenue is recognized when the page is run. Subscription income
2891is recognized over the related subscription period.
2892For the years ended December 31, 2015, 2014 and 2013, no significant
2893changes have been made to the underlying assumptions
2894related to estimates of revenue or the methodologies
2895applied. Based on our current outlook these assumptions are
2896not expected to significantly change in 2016.
2897ALLOWANCE FOR DOUBTFUL ACCOUNTS
2898The allowance for doubtful accounts reserve methodology is
2899based on historical analysis, a review of outstanding balances
2900and current conditions. In determining these reserves, we
2901consider, amongst other factors, the financial condition and risk
2902profile of our customers, areas of specific or concentrated
2903risk as well as applicable industry trends or market indicators.
2904The impact on operating profit for a one percentage point
2905change in the allowance for doubtful accounts is approximately
2906$10 million.
2907For the years ended December 31, 2015, 2014 and 2013, we
2908made no material changes in our assumptions regarding the
2909determination of the allowance for doubtful accounts. Based on
2910our current outlook these assumptions are not expected to significantly
2911change in 2016.
2912ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
2913ASSETS (INCLUDING OTHER INTANGIBLE ASSETS)
2914We evaluate long-lived assets for impairment whenever events
2915or changes in circumstances indicate that the carrying amount
2916of an asset may not be recoverable. Upon such an occurrence,
2917recoverability of assets to be held and used is measured by
2918comparing the carrying amount of an asset to current forecasts
2919of undiscounted future net cash flows expected to be generated
2920by the asset. If the carrying amount of the asset exceeds its
2921estimated future cash flows, an impairment charge is recognized
2922equal to the amount by which the carrying amount of the
2923asset exceeds the fair value of the asset. For long-lived assets
2924held for sale, assets are written down to fair value, less cost
2925to sell. Fair value is determined based on market evidence,
2926discounted cash flows, appraised values or management’s
2927estimates, depending upon the nature of the assets.
2928On July 31, 2014, we completed the sale of the Company’s aircraft
2929to Harold W. McGraw III, then Chairman of the Company’s
2930Board of Directors and former President and CEO of the
2931Company for a purchase price of $20 million. During the second
2932quarter of 2014, we recorded a non-cash impairment charge
2933of $6 million within other (income) loss in our consolidated
2934statement of income as a result of the pending sale. See
2935Note 13 — Related Party Transactions to our consolidated financial
2936statements for further information.
293738 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
2938On June 30, 2014, we completed the sale of our data center to
2939Quality Technology Services, LLC (“QTS”) which owns, operates,
2940and manages data centers. Net proceeds from the sale of $58
2941million were received in July of 2014. The sale includes all of the
2942facilities and equipment on the south campus of our East
2943Windsor, New Jersey location, inclusive of the rights and obligations
2944associated with an adjoining solar power field. The sale
2945resulted in an expense of $3 million recorded within other
2946(income) loss in our consolidated statement of income, which is
2947in addition to the non-cash impairment charge of $36 million
2948we recorded in the fourth quarter of 2013 to adjust the value
2949facilities and associated infrastructure classified as held for
2950sale to their fair value.
2951During the fourth quarter of 2013, we also incurred a $26 million
2952non-cash impairment charge associated with an intangible
2953asset acquired through the formation of our S&P Dow Jones
2954Indices LLC joint venture.
2955GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS
2956Goodwill represents the excess of purchase price and related
2957costs over the value assigned to the net tangible and identifiable
2958intangible assets of businesses acquired. As of December 31,
29592015 and 2014, the carrying value of goodwill and other
2960indefinite-lived intangible assets was $3.6 billion and $2.1
2961billion, respectively. The increase was primarily due to the acquisition
2962of SNL in September of 2015. See Note 2 — Acquisitions
2963and Divestitures to our consolidated financial statements for
2964further information. Goodwill and other intangible assets with
2965indefinite lives are not amortized, but instead are tested for
2966impairment annually during the fourth quarter each year or
2967more frequently if events or changes in circumstances indicate
2968that the asset might be impaired.
2969Goodwill
2970As part of our annual impairment test of our four reporting units,
2971we initially perform a qualitative analysis evaluating whether
2972any events and circumstances occurred that provide evidence
2973that it is more likely than not that the fair value of any of our
2974reporting units is less than its carrying amount. Our qualitative
2975assessment included, but was not limited to, consideration of
2976macroeconomic conditions, industry and market conditions,
2977cost factors, cash flows, changes in key Company personnel and
2978our share price. If, based on our evaluation of the events and
2979circumstances that occurred during the year we do not believe
2980that it is more likely than not that the fair value of any of our
2981reporting units is less than its carrying amount, no quantitative
2982impairment test is performed. Conversely, if the results of our
2983qualitative assessment determine that it is more likely than not
2984that the fair value of any of our reporting units is less than its
2985respective carrying amount we perform a two-step quantitative
2986impairment test. For 2015, based on our qualitative assessments,
2987we determined that it is more likely than not that
2988our reporting units’ fair value was greater than their respective
2989carrying amounts.
2990If the fair value of the reporting unit is less than the carrying
2991value, a second step is performed which compares the implied
2992fair value of the reporting unit’s goodwill to the carrying value of
2993the goodwill. The implied fair value of the goodwill is determined
2994based on the difference between the fair value of the reporting
2995unit and the net fair value of the identifiable assets and liabilities
2996of the reporting unit. If the implied fair value of the goodwill
2997is less than the carrying value, the difference is recognized as
2998an impairment charge.
2999Indefinite-Lived Intangible Assets
3000We evaluate the recoverability of indefinite-lived intangible
3001assets by first performing a qualitative analysis evaluating
3002whether any events and circumstances occurred that provide
3003evidence that it is more likely than not that the indefinite-lived
3004asset is impaired. If, based on our evaluation of the events and
3005circumstances that occurred during the year we do not believe
3006that it is more likely than not that the indefinite-lived asset
3007is impaired, no quantitative impairment test is performed.
3008Conversely, if the results of our qualitative assessment determine
3009that it is more likely than not that the indefinite-lived asset
3010is impaired a quantitative impairment test is performed. If necessary,
3011the impairment test is performed by comparing the
3012estimated fair value of the intangible asset to its carrying value.
3013If the indefinite-lived intangible asset carrying value exceeds its
3014fair value, an impairment analysis is performed using the income
3015approach. The fair value of loss is recognized in an amount equal
3016to that excess. Significant judgments inherent in these analyses
3017include estimating the amount and timing of future cash flows
3018and the selection of appropriate discount rates, royalty rates
3019and long-term growth rate assumptions. Changes in these estimates
3020and assumptions could materially affect the determination
3021of fair value for this indefinite-lived intangible asset and
3022could result in an impairment charge, which could be material to
3023our financial position and results of operations.
3024McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 39
3025We performed our impairment assessment of goodwill and
3026indefinite-lived intangible assets at our S&P Ratings, S&P
3027Capital IQ and SNL, S&P DJ Indices and C&C operating segments
3028and concluded that no impairment existed for the years ended
3029December 31, 2015, 2014, and 2013.
3030RETIREMENT PLANS AND POSTRETIREMENT HEALTHCARE
3031AND OTHER BENEFITS
3032Our employee pension and other postretirement benefit costs
3033and obligations are dependent on assumptions concerning
3034the outcome of future events and circumstances, including
3035compensation increases, long-term return on pension plan
3036assets, healthcare cost trends, discount rates and other factors.
3037In determining such assumptions, we consult with outside
3038actuaries and other advisors where deemed appropriate. In
3039accordance with relevant accounting standards, if actual results
3040differ from our assumptions, such differences are deferred
3041and amortized over the estimated remaining lifetime of the
3042plan participants. While we believe that the assumptions used
3043in these calculations are reasonable, differences in actual
3044experience or changes in assumptions could affect the expense
3045and liabilities related to our pension and other postretirement
3046benefits.
3047The following is a discussion of some significant assumptions
3048that we make in determining costs and obligations for pension
3049and other postretirement benefits:
3050 Discount rate assumptions are based on current yields on
3051high-grade corporate long-term bonds.
3052 Healthcare cost trend assumptions are based on historical
3053market data, the near-term outlook and an assessment of
3054likely long-term trends.
3055 The expected return on assets assumption is calculated
3056based on the plan’s asset allocation strategy and projected
3057market returns over the long-term.
3058Our discount rate and return on asset assumptions used to determine the net periodic pension and postretirement benefit cost on
3059our U.S. retirement plans are as follows:
3060Retirement Plans Postretirement Plans
3061January 1 2016 2015 2014 2016 2015 2014
3062Discount rate 1 4.47% 4.15% 5.00% 3.90% 3.60% 4.20%
3063Return on assets 6.25% 6.25% 7.125%
3064Weighted-average healthcare cost rate 7.00% 7.00% 7.00%
30651 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
3066measured service and interest costs utilizing the single weighted-average discount rate derived from the yield curve used to measure the benefit obligation. For
30672016, 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
3068new 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
3069rates 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
3070that is inseparable from a change in accounting principle and, accordingly, have accounted for it on a prospective basis. We expect pension and postretirement
3071medical costs to decrease by approximately $13 million in 2016 as a result of this change.
3072In addition to the assumptions in the above table, assumed
3073mortality is also a key assumption in determining benefit obligations.
3074Effective December 31, 2014, the Company updated
3075the assumed mortality rates to reflect life expectancy
3076improvements.
3077STOCK-BASED COMPENSATION
3078Stock-based compensation expense is measured at the grant
3079date based on the fair value of the award and is recognized over
3080the requisite service period, which typically is the vesting period.
3081Stock-based compensation is classified as both operatingrelated
3082expense and selling and general expense in our consolidated
3083statements of income.
3084We use a lattice-based option-pricing model to estimate the
3085fair value of options granted. The following assumptions were
3086used in valuing the options granted:
3087Years ended December 31,
30882015 2014 2013
3089Risk-free average interest rate 0.2–1.9% 0.1–2.9% 0.1–2.9%
3090Dividend yield 1.4% 1.4–1.8% 2.07–2.09%
3091Volatility 21–39% 18–41% 29–45%
3092Expected life (years) 6.3 6.21–6.25 6.1–6.2
3093Weighted-average grant-date
3094fair value per option $27.57 $23.41 $14.46
309540 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
3096Because lattice-based option-pricing models incorporate
3097ranges of assumptions, those ranges are disclosed. These
3098assumptions are based on multiple factors, including historical
3099exercise patterns, post-vesting termination rates, expected
3100future exercise patterns and the expected volatility of our stock
3101price. The risk-free interest rate is the imputed forward rate
3102based on the U.S. Treasury yield at the date of grant. We use the
3103historical volatility of our stock price over the expected term of
3104the options to estimate the expected volatility. The expected
3105term of options granted is derived from the output of the lattice
3106model and represents the period of time that options granted
3107are expected to be outstanding.
3108INCOME TAXES
3109Deferred tax assets and liabilities are recognized for the future
3110tax consequences attributable to differences between financial
3111statement carrying amounts of existing assets and liabilities
3112and their respective tax bases. Deferred tax assets and liabilities
3113are measured using enacted tax rates expected to be
3114applied to taxable income in the years in which those temporary
3115differences are expected to be recovered or settled. We recognize
3116liabilities for uncertain tax positions taken or expected to
3117be taken in income tax returns. Accrued interest and penalties
3118related to unrecognized tax benefits are recognized in interest
3119expense and operating expense, respectively.
3120Judgment is required in determining our provision for income
3121taxes, deferred tax assets and liabilities and unrecognized tax
3122benefits. In determining the need for a valuation allowance, the
3123historical and projected financial performance of the operation
3124that is recording a net deferred tax asset is considered along
3125with any other pertinent information.
3126We file income tax returns in the U.S. federal jurisdiction, various
3127states, and foreign jurisdictions, and we are routinely under
3128audit by many different tax authorities. We believe that our
3129accrual for tax liabilities is adequate for all open audit years
3130based on our assessment of many factors including past experience
3131and interpretations of tax law. This assessment relies on
3132estimates and assumptions and may involve a series of complex
3133judgments about future events. It is possible that examinations
3134will be settled prior to December 31, 2016. If any of these tax
3135audit settlements do occur within that period we would make
3136any necessary adjustments to the accrual for unrecognized tax
3137benefits. Until formal resolutions are reached between us and
3138the tax authorities, the determination of a possible audit settlement
3139range with respect to the impact on unrecognized tax
3140benefits is not practicable. On the basis of present information,
3141it is our opinion that any assessments resulting from the current
3142audits will not have a material effect on our consolidated
3143financial statements.
3144We have determined that the undistributed earnings of our
3145foreign subsidiaries are permanently reinvested within those
3146foreign operations. Accordingly, we have not provided deferred
3147income taxes on these indefinitely reinvested earnings. A future
3148distribution by the foreign subsidiaries of these earnings could
3149result in additional tax liability, which may be material to our
3150future reported results, financial position and cash flows.
3151For the years ended December 31, 2015, 2014 and 2013, we
3152made no material changes in our assumptions regarding the
3153determination of the provision for income taxes. However, certain
3154events could occur that would materially affect our estimates
3155and assumptions regarding deferred taxes. Changes in
3156current tax laws and applicable enacted tax rates could affect
3157the valuation of deferred tax assets and liabilities, thereby
3158impacting our income tax provision.
3159CONTINGENCIES
3160We are subject to a number of lawsuits and claims that arise in
3161the ordinary course of business. We recognize a liability for such
3162contingencies when both (a) information available prior to
3163issuance of the financial statements indicates that it is probable
3164that a liability had been incurred at the date of the financial
3165statements and (b) the amount of loss can reasonably be
3166estimated. We continually assess the likelihood of any adverse
3167judgments or outcomes to our contingencies, as well as potential
3168amounts or ranges of probable losses, and recognize a
3169liability, if any, for these contingencies based on an analysis of
3170each matter with the assistance of outside legal counsel and, if
3171applicable, other experts. Because many of these matters are
3172resolved over long periods of time, our estimate of liabilities may
3173change due to new developments, changes in assumptions or
3174changes in our strategy related to the matter. When we accrue
3175for loss contingencies and the reasonable estimate of the loss is
3176within a range, we record its best estimate within the range. We
3177disclose an estimated possible loss or a range of loss when it is
3178at least reasonably possible that a loss may have been incurred.
3179McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 41
3180REDEEMABLE NONCONTROLLING INTEREST
3181The fair value component of the redeemable noncontrolling
3182interest in S&P DJ Indices business is based on a combination
3183of an income and market valuation approach. Our income and
3184market valuation approaches may incorporate Level 3 measures
3185for instances when observable inputs are not available, including
3186assumptions related to expected future net cash flows, longterm
3187growth rates, the timing and nature of tax attributes, and
3188the redemption features.
3189Recent Accounting Standards
3190See Note 1 — Accounting Policies, to the consolidated financial
3191statements for a detailed description of recent accounting
3192standards. We do not expect these recent accounting standards
3193to have a material impact on our results of operations, financial
3194condition, or liquidity in future periods.
3195Forward-Looking Statements
3196Our Annual Report on Form 10-K contains “forward-looking
3197statements,” as defined in the Private Securities Litigation
3198Reform Act of 1995. These statements, which express management’s
3199current views concerning future events, trends,
3200contingencies or results, appear at various places in this report
3201and use words like “anticipate,” “assume,” “believe,” “continue,”
3202“estimate,” “expect,” “forecast,” “future,” “intend,” “plan,”
3203“potential,” “predict,” “project,” “strategy,” “target” and similar
3204terms, and future or conditional tense verbs like “could,” “may,”
3205“might,” “should,” “will” and “would.” For example, management
3206may use forward-looking statements when addressing topics
3207such as: the outcome of contingencies; future actions by
3208regulators; changes in the Company’s business strategies and
3209methods of generating revenue; the development and performance
3210of the Company’s services and products; the expected
3211impact of acquisitions and dispositions; the Company’s effective
3212tax rates; and the Company’s cost structure, dividend policy,
3213cash flows or liquidity.
3214Forward-looking statements are subject to inherent risks and
3215uncertainties. Factors that could cause actual results to differ
3216materially from those expressed or implied in forward-looking
3217statements include, among other things:
3218 the Company’s ability to make acquisitions and dispositions
3219and to integrate, and realize expected synergies, savings or
3220benefits from the businesses it acquires, including the impact
3221of the acquisition of SNL on the Company’s results of operations,
3222any failure to successfully integrate SNL into the
3223Company’s operations and generate anticipated synergies
3224and other cost savings, any failure to attract and retain key
3225employees to execute the combined company’s growth strategy,
3226any failure to realize the intended tax benefits of the
3227acquisition, and the risk of litigation, competitive responses,
3228or unexpected costs, charges or expenses resulting from or
3229relating to the SNL acquisition;
3230 the rapidly evolving regulatory environment, in the United
3231States, Europe and elsewhere, affecting Standard & Poor’s
3232Ratings Services, Platts, S&P Dow Jones Indices, S&P Capital
3233IQ and SNL and the Company’s other businesses, including
3234new and amended regulations and the Company’s compliance
3235therewith;
3236 the outcome of litigation, government and regulatory proceedings,
3237investigations and inquiries;
3238 worldwide economic, financial, political and regulatory
3239conditions;
3240 the health of debt and equity markets, including credit quality
3241and spreads, the level of liquidity and future debt issuances;
3242 the level of interest rates and the strength of the domestic
3243and global credit and capital markets in the United States and
3244abroad;
3245 the demand and market for credit ratings in and across the
3246sectors and geographies where the Company operates;
3247 concerns in the marketplace affecting the Company’s credibility
3248or otherwise affecting market perceptions of the integrity
3249or utility of independent credit ratings;
325042 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
3251 the Company’s ability to maintain adequate physical, technical
3252and administrative safeguards to protect the security of
3253confidential information and data, and the potential of a system
3254or network disruption that results in regulatory penalties,
3255remedial costs or improper disclosure of confidential information
3256or data;
3257 the effect of competitive products and pricing;
3258 consolidation in the Company’s end-customer markets;
3259 the impact of cost-cutting pressures across the financial
3260services industry;
3261 a decline in the demand for credit risk management tools by
3262financial institutions;
3263 the level of success of new product developments and global
3264expansion;
3265 the level of merger and acquisition activity in the United
3266States and abroad;
3267 the volatility of the energy marketplace;
3268 the health of the commodities markets;
3269 the impact of cost-cutting pressures and reduced trading in
3270oil and other commodities markets;
3271 the level of the Company’s future cash flows;
3272 the level of the Company’s capital investments;
3273 the level of restructuring charges the Company incurs;
3274 the strength and performance of the domestic and international
3275automotive markets;
3276 the Company’s ability to successfully recover should it experience
3277a disaster or other business continuity problem from a
3278hurricane, flood, earthquake, terrorist attack, pandemic,
3279security breach, cyber-attack, power loss, telecommunications
3280failure or other natural or man-made event;
3281 changes in applicable tax or accounting requirements;
3282 the impact on the Company’s net income caused by fluctuations
3283in foreign currency exchange rates; and
3284 the Company’s exposure to potential criminal sanctions or
3285civil penalties if it fails to comply with foreign and U.S. laws
3286and regulations that are applicable in the domestic and international
3287jurisdictions in which it operates, including trade
3288sanctions laws, anti-corruption laws such as the U.S. Foreign
3289Corrupt Practices Act and the U.K. Bribery Act 2010, antibribery
3290laws, anti-money laundering laws, and other financial
3291crimes laws.
3292The factors noted above are not exhaustive. The Company and
3293its subsidiaries operate in a dynamic business environment in
3294which new risks emerge frequently. Accordingly, the Company
3295cautions readers not to place undue reliance on any forwardlooking
3296statements, which speak only as of the dates on which
3297they are made. The Company undertakes no obligation to update
3298or revise any forward-looking statement to reflect events or
3299circumstances arising after the date on which it is made, except
3300as required by applicable law. Further information about the
3301Company’s businesses, including information about factors
3302that could materially affect its results of operations and financial
3303condition, is contained in the Company’s filings with the
3304SEC, including Item 1a, Risk Factors, in our Annual Report on
3305Form 10-K.
3306McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 43
3307Consolidated Statements of Income
3308Year Ended December 31,
3309(in millions, except per share data) 2015 2014 2013
3310Revenue $5,313 $5,051 $4,702
3311Expenses:
3312Operating-related expenses 1,672 1,627 1,564
3313Selling and general expenses 1,578 3,168 1,631
3314Depreciation 90 86 86
3315Amortization of intangibles 67 48 51
3316Total expenses 3,407 4,929 3,332
3317Other (income) loss (11) 9 12
3318Operating profit 1,917 113 1,358
3319Interest expense, net 102 59 59
3320Income from continuing operations before taxes on income 1,815 54 1,299
3321Provision for taxes on income 547 245 425
3322Income (loss) from continuing operations 1,268 (191) 874
3323Discontinued operations, net of tax:
3324Income from discontinued operations — 18 3
3325 Gain on sale of discontinued operations (includes $(75) accumulated other comprehensive
3326income reclassifications in 2013 for foreign currency translation adjustment) — 160 589
3327Discontinued operations, net — 178 592
3328Net income (loss) 1,268 (13) 1,466
3329Less: net income from continuing operations attributable to noncontrolling interests (112) (102) (91)
3330Less: net loss from discontinued operations attributable to noncontrolling interests — — 1
3331Net income (loss) attributable to McGraw Hill Financial, Inc. $1,156 $ (115) $1,376
3332Amounts attributable to McGraw Hill Financial, Inc. common shareholders:
3333Income (loss) from continuing operations $1,156 $ (293) $ 783
3334Income from discontinued operations — 178 593
3335Net income (loss) $1,156 $ (115) $1,376
3336Earnings (loss) per share attributable to McGraw Hill Financial, Inc. common shareholders:
3337Income (loss) from continuing operations:
3338 Basic $ 4.26 $ (1.08) $ 2.85
3339 Diluted $ 4.21 $ (1.08) $ 2.80
3340Income from discontinued operations:
3341 Basic $ — $ 0.66 $ 2.16
3342 Diluted $ — $ 0.66 $ 2.12
3343Net income (loss):
3344 Basic $ 4.26 $ (0.42) $ 5.01
3345 Diluted $ 4.21 $ (0.42) $ 4.91
3346Weighted-average number of common shares outstanding:
3347 Basic 271.6 271.5 274.5
3348 Diluted 274.6 271.5 279.8
3349Actual shares outstanding at year end 265.2 272.0 270.4
3350Dividend declared per common share $ 1.32 $ 1.20 $ 1.12
3351See accompanying notes to the consolidated financial statements.
335244 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
3353Consolidated Statements of Comprehensive Income
3354Year Ended December 31,
3355(in millions) 2015 2014 2013
3356Net income (loss) $1,268 $ (13) $1,466
3357Other comprehensive income (loss):
3358Foreign currency translation adjustment (111) (108) 93
3359Income tax effect 1 2 (2)
3360(110) (106) 91
3361Pension and other postretirement benefit plans 34 (357) 385
3362Income tax effect (9) 142 (154)
336325 (215) 231
3364Unrealized (loss) gain on investment and forward exchange contract (1) 4 2
3365Income tax effect — (1) (2)
3366(1) 3 —
3367Comprehensive income (loss) 1,182 (331) 1,788
3368Less: comprehensive income attributable to nonredeemable noncontrolling interests (11) (10) (18)
3369Less: comprehensive income attributable to redeemable noncontrolling interests (101) (92) (73)
3370Comprehensive income (loss) attributable to McGraw Hill Financial, Inc. $1,070 $(433) $1,697
3371See accompanying notes to the consolidated financial statements.
3372McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 45
3373Consolidated Balance Sheets
3374December 31,
3375(in millions) 2015 2014
3376ASSETS
3377Current assets:
3378Cash and cash equivalents $ 1,481 $ 2,497
3379Short-term investments 6 3
3380Accounts receivable, net of allowance for doubtful accounts: 2015 — $37; 2014 — $38 991 932
3381Deferred income taxes 109 360
3382Prepaid and other current assets 206 170
3383Assets of a business held for sale 503 —
3384 Total current assets 3,296 3,962
3385Property and equipment:
3386Buildings and leasehold improvements 352 287
3387Equipment and furniture 503 482
3388 Total property and equipment 855 769
3389Less: accumulated depreciation (585) (563)
3390 Property and equipment, net 270 206
3391Goodwill 2,882 1,387
3392Other intangible assets, net 1,522 1,004
3393Asset for pension benefits 36 28
3394Other non-current assets 177 186
3395 Total assets $ 8,183 $ 6,773
3396LIABILITIES AND EQUITY
3397Current liabilities:
3398Accounts payable $ 206 $ 191
3399Accrued compensation and contributions to retirement plans 383 410
3400Short-term debt 143 —
3401Income taxes currently payable 56 54
3402Unearned revenue 1,421 1,254
3403Accrued legal and regulatory settlements 121 1,609
3404Other current liabilities 372 402
3405Liabilities of a business held for sale 206 —
3406 Total current liabilities 2,908 3,920
3407Long-term debt 3,468 795
3408Pension and other postretirement benefits 276 333
3409Deferred income taxes 23 40
3410Other non-current liabilities 345 336
3411 Total liabilities 7,020 5,424
3412Redeemable noncontrolling interest 920 810
3413Commitments and contingencies (Note 12)
3414Equity:
3415Common stock, $1 par value: authorized — 600 million shares; issued — 412 million shares in 2015 and 2014 412 412
3416Additional paid-in capital 475 493
3417Retained income 7,636 6,946
3418Accumulated other comprehensive loss (600) (514)
3419Less: common stock in treasury — at cost: 2015 — 146 million shares; 2014 — 140 million shares (7,729) (6,849)
3420 Total equity — controlling interests 194 488
3421 Total equity — noncontrolling interests 49 51
3422 Total equity 243 539
3423 Total liabilities and equity $ 8,183 $ 6,773
3424See accompanying notes to the consolidated financial statements.
342546 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
3426Consolidated Statements of Cash Flows
3427Year Ended December 31,
3428(in millions) 2015 2014 2013
3429Operating Activities:
3430Net income (loss) $ 1,268 $ (13) $1,466
3431Less: income from discontinued operations — 178 592
3432Net income (loss) from continuing operations 1,268 (191) 874
3433Adjustments to reconcile income (loss) from continuing operations to cash provided by
3434operating activities from continuing operations:
3435Depreciation 90 86 86
3436Amortization of intangibles 67 48 51
3437Provision for losses on accounts receivable 8 11 22
3438Deferred income taxes 280 (245) 43
3439Stock-based compensation 78 100 96
3440Accrued legal and regulatory settlements 119 1,587 —
3441Other 46 80 96
3442Changes in operating assets and liabilities, net of effect of acquisitions and dispositions:
3443Accounts receivable (118) (9) (35)
3444Prepaid and other current assets (4) (7) (29)
3445Accounts payable and accrued expenses (92) (130) (94)
3446Unearned revenue 129 78 109
3447Accrued legal and regulatory settlement (1,624) (35) —
3448Other current liabilities (78) (16) (89)
3449Net change in prepaid / accrued income taxes 61 (93) (238)
3450Net change in other assets and liabilities (35) (55) (110)
3451Cash provided by operating activities from continuing operations 195 1,209 782
3452Investing Activities:
3453Capital expenditures (139) (92) (117)
3454Acquisitions, including contingent payments, net of cash acquired (2,396) (71) (47)
3455Proceeds from dispositions 14 83 51
3456Changes in short-term investments (4) 15 (17)
3457Cash used for investing activities from continuing operations (2,525) (65) (130)
3458Financing Activities:
3459Additions to / (payments on) short-term debt, net 143 — (457)
3460Proceeds from issuance of senior notes, net 2,674 — —
3461Dividends paid to shareholders (363) (326) (308)
3462Dividends and other payments paid to noncontrolling interests (104) (84) (75)
3463Repurchase of treasury shares (974) (362) (978)
3464Exercise of stock options 86 193 258
3465Contingent consideration payment (5) (11) (12)
3466Purchase of additional CRISIL shares (16) — (214)
3467Excess tax benefits from share-based payments 69 128 43
3468Cash provided by (used for) financing activities from continuing operations 1,510 (462) (1,743)
3469Effect of exchange rate changes on cash from continuing operations (67) (65) (1)
3470Cash (used for) provided by continuing operations (887) 617 (1,092)
3471Discontinued Operations:
3472Cash (used for) provided by operating activities (129) 18 (231)
3473Cash provided by investing activities — 320 2,129
3474Cash used for financing activities — — (25)
3475Effect of exchange rate changes on cash — — 1
3476Cash (used for) provided by discontinued operations (129) 338 1,874
3477Net change in cash and cash equivalents (1,016) 955 782
3478Cash and cash equivalents at beginning of year 2,497 1,542 760
3479Cash and cash equivalents at end of year $ 1,481 $2,497 $1,542
3480Cash paid during the year for:
3481Interest (including discontinued operations) $ 65 $ 50 $ 50
3482Income taxes (including discontinued operations) $ 260 $ 419 $ 787
3483See accompanying notes to the consolidated financial statements.
3484McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 47
3485Consolidated Statements of Equity
3486(in millions)
3487Common
3488Stock
3489$1 par
3490Additional
3491Paid-in
3492Capital
3493Retained
3494Income
3495Accumulated
3496Other
3497Comprehensive
3498Loss
3499Less:
3500Treasury
3501Stock
3502Total
3503MHFI
3504Equity
3505Noncontrolling
3506Interests
3507Total
3508Equity
3509Balance as of December 31, 2012 $ 412 $ 492 $6,525 $(517) $6,145 $ 767 $ 73 $ 840
3510Comprehensive income 1 1,376 321 1,697 18 1,715
3511Dividends (315) (315) (10) (325)
3512 Noncontrolling interest adjustments
3513related to discontinued operations — (22) (22)
3514Share repurchases 989 (989) (989)
3515Employee stock plans, net of tax benefit (45) (388) 343 343
3516 Change in redemption value of
3517redeemable noncontrolling interest 11 11 11
3518Increase in CRISIL ownership (216) (216) (17) (233)
3519Other 3 3 1 4
3520Balance as of December 31, 2013 $412 $447 $7,384 $(196) $6,746 $ 1,301 $ 43 $ 1,344
3521Comprehensive loss 1 (115) (318) (433) 10 (423)
3522Dividends (324) (324) (8) (332)
3523Share repurchases 352 (352) 6 (346)
3524Employee stock plans, net of tax benefit 46 (249) 295 295
3525 Change in redemption value of
3526redeemable noncontrolling interest (1) (1) (1)
3527Other 2 2 2
3528Balance as of December 31, 2014 $412 $ 493 $6,946 $(514) $6,849 $ 488 $ 51 $ 539
3529Comprehensive income 1 1,156 (86) 1,070 11 1,081
3530Dividends (359) (359) (9) (368)
3531Share repurchases 1,000 (1,000) (2) (1,002)
3532Employee stock plans, net of tax benefit (18) (120) 102 102
3533 Change in redemption value of
3534redeemable noncontrolling interest (107) (107) (107)
3535Other — (2) (2)
3536Balance as of December 31, 2015 $412 $475 $7,636 $(600) $7,729 $ 194 $ 49 $ 243
35371 Excludes $101 million, $92 million and $73 million in 2015, 2014 and 2013, respectively, attributable to redeemable noncontrolling interest.
3538See accompanying notes to the consolidated financial statements.
353948 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
3540Notes to the Consolidated Financial Statements
35411. Accounting Policies
3542NATURE OF OPERATIONS McGraw Hill Financial, Inc. (together
3543with its consolidated subsidiaries, the “Company,” the “Registrant,”
3544“we,” “us” or “our”) is a leading benchmarks and ratings,
3545analytics, data and research provider serving the global capital,
3546commodities and commercial markets. The capital markets
3547include asset managers, investment banks, commercial banks,
3548insurance companies, exchanges, and issuers; the commodities
3549markets include producers, traders and intermediaries within
3550energy, metals, petrochemicals and agriculture; and the commercial
3551markets include professionals and corporate executives
3552within automotive, financial services, insurance and marketing /
3553research information services.
3554Our operations consist of four reportable segments: Standard &
3555Poor’s Ratings Services (“S&P Ratings”), S&P Capital IQ and
3556SNL, S&P Dow Jones Indices (“S&P DJ Indices”) and Commodities
3557& Commercial (“C&C”).
3558 S&P Ratings is an independent provider of credit ratings,
3559research and analytics to investors, issuers and market
3560participants.
3561 S&P Capital IQ and SNL is a global provider of multi-assetclass
3562data, research and analytical capabilities, which integrate
3563cross-asset analytics and desktop services.
3564 S&P DJ Indices is a global leading index provider that maintains
3565a wide variety of valuation and index benchmarks for
3566investment advisors, wealth managers and institutional
3567investors.
3568 C&C consists of business-to-business companies specializing
3569in commercial and commodities markets that deliver their
3570customers access to high-value information, data, analytic
3571services and pricing and quality benchmarks. As of August 1,
35722013, we completed the sale of Aviation Week and the results
3573have been included in C&C’s results through that date.
3574See Note 11 — Segment and Geographic Information for further
3575discussion on our operating segments, which are also our
3576reportable segments.
3577In the fourth quarter of 2015, we began exploring strategic
3578alternatives for J.D. Power, included in our C&C segment. We
3579committed to and initiated an active program to sell J.D. Power
3580in its current state that we believe is probable in the next year.
3581As a result, we have classified the assets and liabilities of
3582J.D. Power as held for sale in our consolidated balance sheet
3583as of December 31, 2015. The anticipated disposal does not
3584represent a strategic shift that will have a major effect on
3585operations and financial results, therefore, it is not classified as
3586a discontinued operation.
3587On November 3, 2014, we completed the sale of McGraw Hill
3588Construction, which has historically been part of our C&C
3589segment, to Symphony Technology Group for $320 million in
3590cash. Accordingly, the results of operations for the years ended
3591December 31, 2014 and December 31, 2013 have been reclassified
3592to reflect the business as a discontinued operation.
3593We completed the sale of our McGraw-Hill Education business
3594(“MHE”) on March 22, 2013 and, accordingly, the results of
3595operations of MHE have been reclassified to reflect the business
3596as a discontinued operation for the year ended December
359731, 2013.
3598See Note 2 — Acquisitions and Divestitures for further discussion
3599on discontinued operations.
3600Assets and Liabilities Held for Sale and
3601Discontinued Operations
3602ASSETS AND LIABILITIES HELD FOR SALE We classify a disposal
3603group to be sold as held for sale in the period in which all of the
3604following criteria are met: management, having the authority to
3605approve the action, commits to a plan to sell the disposal group;
3606the disposal group is available for immediate sale in its present
3607condition subject only to terms that are usual and customary for
3608sales of such disposal group; an active program to locate a
3609buyer and other actions required to complete the plan to sell
3610the disposal group have been initiated; the sale of the disposal
3611group is probable, and transfer of the disposal group is expected
3612to qualify for recognition as a completed sale within one year,
3613except if events or circumstances beyond our control extend
3614the period of time required to sell the disposal group beyond one
3615year; the disposal group is being actively marketed for sale at a
3616price that is reasonable in relation to its current fair value; and
3617actions required to complete the plan indicate that it is unlikely
3618that significant changes to the plan will be made or that the plan
3619will be withdrawn.
3620McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 49
3621An entity that is classified as held for sale is initially measured
3622at the lower of its carrying value or fair value less any costs to
3623sell. Any loss resulting from this measurement is recognized in
3624the period in which the held for sale criteria are met. Conversely,
3625gains are not recognized on the sale of a disposal group until the
3626date of sale.
3627The fair value of a disposal group less any costs to sell is
3628assessed each reporting period it remains classified as held for
3629sale and any subsequent changes are reported as an adjustment
3630to the carrying value of the disposal group, as long as the
3631new carrying value does not exceed the carrying value of the
3632disposal group at the time it was initially classified as held for
3633sale. Upon determining that a disposal group meets the criteria
3634to be classified as held for sale, the Company reports the assets
3635and liabilities of the disposal group as held for sale in the current
3636period in our consolidated balance sheets.
3637DISCONTINUED OPERATIONS Beginning on January 1, 2015, we
3638adopted revised guidance for discontinued operations that
3639raises the threshold for a disposal to qualify as a discontinued
3640operation. In determining whether a disposal of a component of
3641an entity or a group of components of an entity is required to be
3642presented as a discontinued operation, we make a determination
3643whether the disposal represents a strategic shift that had,
3644or will have, a major effect on our operations and financial
3645results. A component of an entity comprises operations and
3646cash flows that can be clearly distinguished both operationally
3647and for financial reporting purposes. If we conclude that the
3648disposal represents a strategic shift, then the results of operations
3649of the group of assets being disposed of (as well as any
3650gain or loss on the disposal transaction) are aggregated for
3651separate presentation apart from our continuing operating
3652results in the consolidated financial statements.
3653For the years ended December 31, 2014 and 2013, we applied
3654the previous guidance for discontinued operations in determining
3655whether a group of assets disposed or to be disposed of
3656should be presented as a discontinued operation. We determined
3657whether the group of assets being disposed of comprised
3658a component of the entity. We also determined whether the
3659cash flows associated with the group of assets had been or
3660would have been eliminated from our ongoing operations as a
3661result of the disposal transaction and whether we would have
3662had significant continuing involvement in the operations of the
3663group of assets after the disposal transaction. If we concluded
3664that the cash flows had been eliminated and we had no significant
3665continuing involvement, then the results of operations of
3666the group of assets being disposed of (as well as any gain or loss
3667on the disposal transaction) were aggregated for separate
3668presentation apart from our continuing operating results in the
3669consolidated financial statements.
3670See Note 2 — Acquisitions and Divestitures for a summary of
3671discontinued operations. Unless otherwise indicated, all disclosures
3672and amounts in the notes to our consolidated financial
3673statements relate to our continuing operations.
3674PRINCIPLES OF CONSOLIDATION The consolidated financial
3675statements include the accounts of all subsidiaries and our
3676share of earnings or losses of joint ventures and affiliated companies
3677under the equity method of accounting. All significant
3678intercompany accounts and transactions have been eliminated.
3679USE OF ESTIMATES The preparation of financial statements in
3680conformity with generally accepted accounting principles in the
3681United States of America requires management to make estimates
3682and assumptions that affect the amounts reported in the
3683financial statements and accompanying notes. Actual results
3684could differ from those estimates.
3685CASH AND CASH EQUIVALENTS Cash and cash equivalents
3686include ordinary bank deposits and highly liquid investments
3687with original maturities of three months or less that consist primarily
3688of money market funds with unrestricted daily liquidity
3689and fixed term time deposits. Such investments and bank
3690deposits are stated at cost, which approximates market value,
3691and were $1.5 billion and $2.5 billion as of December 31, 2015
3692and 2014, respectively. These investments are not subject to
3693significant market risk.
3694SHORT-TERM INVESTMENTS Short-term investments are securities
3695with original maturities greater than 90 days that are
3696available for use in our operations in the next twelve months.
3697The short-term investments, primarily consisting of certificates
3698of deposit, are classified as held-to-maturity and therefore are
3699carried at cost. Interest and dividends are recorded into income
3700when earned.
3701ACCOUNTS RECEIVABLE Credit is extended to customers based
3702upon an evaluation of the customer’s financial condition.
3703Accounts receivable, which include billings consistent with
3704terms of contractual arrangements, are recorded at net realizable
3705value.
3706ALLOWANCE FOR DOUBTFUL ACCOUNTS The allowance for
3707doubtful accounts reserve methodology is based on historical
3708analysis, a review of outstanding balances and current conditions.
3709In determining these reserves, we consider, amongst
3710other factors, the financial condition and risk profile of our
3711customers, areas of specific or concentrated risk as well as
3712applicable industry trends or market indicators.
371350 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
3714DEFERRED TECHNOLOGY COSTS We capitalize certain software
3715development and website implementation costs. Capitalized
3716costs only include incremental, direct costs of materials and
3717services incurred to develop the software after the preliminary
3718project stage is completed, funding has been committed and it
3719is probable that the project will be completed and used to perform
3720the function intended. Incremental costs are expenditures
3721that are out-of-pocket to us and are not part of an allocation or
3722existing expense base. Software development and website
3723implementation costs are expensed as incurred during the preliminary
3724project stage. Capitalized costs are amortized from the
3725year the software is ready for its intended use over its estimated
3726useful life, three to seven years, using the straight-line
3727method. Periodically, we evaluate the amortization methods,
3728remaining lives and recoverability of such costs. Capitalized
3729software development and website implementation costs are
3730included in other non-current assets and are presented net of
3731accumulated amortization. Gross deferred technology costs
3732were $128 million and $123 million as of December 31, 2015 and
37332014, respectively. Accumulated amortization of deferred technology
3734costs was $72 million and $55 million as of December 31,
37352015 and 2014, respectively.
3736FAIR VALUE Certain assets and liabilities are required to be
3737recorded at fair value and classified within a fair value hierarchy
3738based on inputs used when measuring fair value. We have an
3739immaterial amount of forward exchange contracts that are
3740adjusted to fair value on a recurring basis.
3741Other financial instruments, including cash and cash equivalents
3742and short-term investments, are recorded at cost, which
3743approximates fair value because of the short-term maturity
3744and highly liquid nature of these instruments. The fair value of
3745our long-term debt borrowings were $3.6 billion and $0.9 billion
3746as of December 31, 2015 and 2014, respectively, and was estimated
3747based on quoted market prices.
3748ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
3749(INCLUDING OTHER INTANGIBLE ASSETS) We evaluate long-lived
3750assets for impairment whenever events or changes in circumstances
3751indicate that the carrying amount of an asset may not
3752be recoverable. Upon such an occurrence, recoverability of
3753assets to be held and used is measured by comparing the carrying
3754amount of an asset to current forecasts of undiscounted
3755future net cash flows expected to be generated by the asset. If
3756the carrying amount of the asset exceeds its estimated future
3757cash flows, an impairment charge is recognized equal to the
3758amount by which the carrying amount of the asset exceeds the
3759fair value of the asset. For long-lived assets held for sale, assets
3760are written down to fair value, less cost to sell. Fair value is
3761determined based on market evidence, discounted cash flows,
3762appraised values or management’s estimates, depending upon
3763the nature of the assets.
3764On July 31, 2014, we completed the sale of the Company’s aircraft
3765to Harold W. McGraw III, then Chairman of the Company’s
3766Board of Directors and former President and CEO of the
3767Company for a purchase price of $20 million. During the second
3768quarter of 2014, we recorded a non-cash impairment charge of
3769$6 million within other (income) loss in our consolidated statement
3770of income as a result of the pending sale. See Note 13 —
3771Related Party Transactions for further discussion.
3772On June 30, 2014, we completed the sale of our data center to
3773Quality Technology Services, LLC (“QTS”) which owns, operates,
3774and manages data centers. Net proceeds from the sale of $58
3775million were received in July of 2014. The sale includes all of the
3776facilities and equipment on the south campus of our East
3777Windsor, New Jersey location, inclusive of the rights and obligations
3778associated with an adjoining solar power field. The sale
3779resulted in an expense of $3 million recorded within other loss
3780(income) in our consolidated statement of income, which is in
3781addition to the non-cash impairment charge of $36 million we
3782recorded in the fourth quarter of 2013 to adjust the value facilities
3783and associated infrastructure classified as held for sale to
3784their fair value.
3785During the fourth quarter of 2013, we also incurred a $26 million
3786non-cash impairment charge associated with an intangible
3787asset acquired through the formation of our S&P Dow Jones
3788Indices LLC joint venture.
3789GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS
3790Goodwill represents the excess of purchase price and related
3791costs over the value assigned to the net tangible and identifiable
3792intangible assets of businesses acquired. Goodwill and other
3793intangible assets with indefinite lives are not amortized, but
3794instead are tested for impairment annually during the fourth
3795quarter each year, or more frequently if events or changes
3796in circumstances indicate that the asset might be impaired.
3797We have four reporting units with goodwill that are evaluated
3798for impairment.
3799We initially perform a qualitative analysis evaluating whether
3800any events and circumstances occurred or exist that provide
3801evidence that it is more likely than not that the fair value of any
3802of our reporting units is less than its carrying amount. If, based
3803on our evaluation we do not believe that it is more likely than not
3804that the fair value of any of our reporting units is less than
3805its carrying amount, no quantitative impairment test is performed.
3806Conversely, if the results of our qualitative assessment
3807McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 51
3808determine that it is more likely than not that the fair value of any
3809of our reporting units is less than their respective carrying
3810amounts we perform a two-step quantitative impairment test.
3811When conducting the first step of our two step impairment
3812test to evaluate the recoverability of goodwill at the reporting
3813unit level, the estimated fair value of the reporting unit is
3814compared to its carrying value including goodwill. Fair value of
3815the reporting units are estimated using the income approach,
3816which incorporates the use of a discounted free cash flow
3817(“DCF”) analyses and are corroborated using the market
3818approach, which incorporates the use of revenue and earnings
3819multiples based on market data. The DCF analyses are based on
3820the current operating budgets and estimated long-term growth
3821projections for each reporting unit. Future cash flows are discounted
3822based on a market comparable weighted average cost
3823of capital rate for each reporting unit, adjusted for market and
3824other risks where appropriate. In addition, we analyze any difference
3825between the sum of the fair values of the reporting units
3826and our total market capitalization for reasonableness, taking
3827into account certain factors including control premiums.
3828If the fair value of the reporting unit is less than the carrying
3829value, a second step is performed which compares the implied
3830fair value of the reporting unit’s goodwill to the carrying value of
3831the goodwill. The fair value of the goodwill is determined based
3832on the difference between the fair value of the reporting unit
3833and the net fair value of the identifiable assets and liabilities of
3834the reporting unit. If the implied fair value of the goodwill is less
3835than the carrying value, the difference is recognized as an
3836impairment charge.
3837We evaluate the recoverability of indefinite-lived intangible
3838assets by first performing a qualitative analysis evaluating
3839whether any events and circumstances occurred that provide
3840evidence that it is more likely than not that the indefinite-lived
3841asset is impaired. If, based on our evaluation of the events and
3842circumstances that occurred during the year we do not believe
3843that it is more likely than not that the indefinite-lived asset
3844is impaired, no quantitative impairment test is performed.
3845Conversely, if the results of our qualitative assessment determine
3846that it is more likely than not that the indefinite-lived
3847asset is impaired a quantitative impairment test is performed.
3848If necessary, the impairment test is performed by comparing
3849the estimated fair value of the intangible asset to its carrying
3850value. If the indefinite-lived intangible asset carrying value
3851exceeds its fair value, an impairment analysis is performed
3852using the income approach. The fair value of loss is recognized
3853in an amount equal to that excess.
3854Significant judgments inherent in these analyses include estimating
3855the amount and timing of future cash flows and the
3856selection of appropriate discount rates, royalty rates and longterm
3857growth rate assumptions. Changes in these estimates and
3858assumptions could materially affect the determination of fair
3859value for each reporting unit and indefinite-lived intangible
3860asset and could result in an impairment charge, which could be
3861material to our financial position and results of operations.
3862We performed our impairment assessment of goodwill and
3863indefinite-lived intangible assets and concluded that no impairment
3864existed for the years ended December 31, 2015, 2014
3865and 2013.
3866FOREIGN CURRENCY TRANSLATION We have operations in many
3867foreign countries. For most international operations, the local
3868currency is the functional currency. For international operations
3869that are determined to be extensions of the parent company,
3870the United States (“U.S.”) dollar is the functional currency.
3871For local currency operations, assets and liabilities are
3872translated into U.S. dollars using end of period exchange
3873rates, and revenue and expenses are translated into U.S. dollars
3874using weighted-average exchange rates. Foreign currency
3875translation adjustments are accumulated in a separate component
3876of equity.
3877REVENUE RECOGNITION Revenue is recognized as it is earned
3878when services are rendered. We consider amounts to be earned
3879once evidence of an arrangement has been obtained, services
3880are performed, fees are fixed or determinable and collectability
3881is reasonably assured. Revenue relating to products that provide
3882for more than one deliverable is recognized based upon the
3883relative fair value to the customer of each deliverable as each
3884deliverable is provided. Revenue relating to agreements that
3885provide for more than one service is recognized based upon the
3886relative fair value to the customer of each service component
3887as each component is earned. If the fair value to the customer
3888for each service is not objectively determinable, management
3889makes its best estimate of the services’ stand-alone selling
3890price and records revenue as it is earned over the service period.
3891For arrangements that include multiple services, fair value
3892of the service components are determined using an analysis
3893that considers cash consideration that would be received
3894for instances when the service components are sold separately.
3895Advertising revenue is recognized when the page is
3896run. Subscription income is recognized over the related subscription
3897period.
389852 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
3899DEPRECIATION The costs of property and equipment are depreciated
3900using the straight-line method based upon the following
3901estimated useful lives: buildings and improvements from 15 to
390240 years and equipment and furniture from 2 to 10 years. The
3903costs of leasehold improvements are amortized over the lesser
3904of the useful lives or the terms of the respective leases.
3905ADVERTISING EXPENSE The cost of advertising is expensed as
3906incurred. We incurred $33 million, $35 million and $41 million in
3907advertising costs for the years ended December 31, 2015, 2014
3908and 2013, respectively.
3909STOCK-BASED COMPENSATION Stock-based compensation
3910expense is measured at the grant date based on the fair value of
3911the award and is recognized over the requisite service period,
3912which typically is the vesting period. Stock-based compensation
3913is classified as both operating-related expense and selling and
3914general expense in the consolidated statements of income.
3915INCOME TAXES Deferred tax assets and liabilities are recognized
3916for the future tax consequences attributable to differences
3917between financial statement carrying amounts of existing
3918assets and liabilities and their respective tax bases. Deferred
3919tax assets and liabilities are measured using enacted tax rates
3920expected to be applied to taxable income in the years in which
3921those temporary differences are expected to be recovered or
3922settled. We recognize liabilities for uncertain tax positions taken
3923or expected to be taken in income tax returns. Accrued interest
3924and penalties related to unrecognized tax benefits are recognized
3925in interest expense and operating expense, respectively.
3926Judgment is required in determining our provision for income
3927taxes, deferred tax assets and liabilities and unrecognized tax
3928benefits. In determining the need for a valuation allowance, the
3929historical and projected financial performance of the operation
3930that is recording a net deferred tax asset is considered along
3931with any other pertinent information.
3932We file income tax returns in the U.S. federal jurisdiction, various
3933states, and foreign jurisdictions, and we are routinely under
3934audit by many different tax authorities. We believe that our
3935accrual for tax liabilities is adequate for all open audit years
3936based on our assessment of many factors including past experience
3937and interpretations of tax law. This assessment relies on
3938estimates and assumptions and may involve a series of complex
3939judgments about future events. It is possible that examinations
3940will be settled prior to December 31, 2016. If any of these tax
3941audit settlements do occur within that period we would make
3942any necessary adjustments to the accrual for unrecognized tax
3943benefits. Until formal resolutions are reached between us and
3944the tax authorities, the determination of a possible audit settlement
3945range with respect to the impact on unrecognized tax
3946benefits is not practicable. On the basis of present information,
3947our opinion is that any assessments resulting from the current
3948audits will not have a material effect on our consolidated financial
3949statements.
3950REDEEMABLE NONCONTROLLING INTEREST The agreement with
3951the minority partners of our S&P Dow Jones Indices LLC joint
3952venture established in June of 2012 contains redemption features
3953whereby interests held by our minority partners are
3954redeemable either (i) at the option of the holder or (ii) upon the
3955occurrence of an event that is not solely within our control.
3956Since redemption of the noncontrolling interest is outside of our
3957control, this interest is presented on our consolidated balance
3958sheets under the caption “Redeemable noncontrolling interest.”
3959If the interest were to be redeemed, we would be required to
3960purchase all of such interest at fair value on the date of redemption.
3961We adjust the redeemable noncontrolling interest each
3962reporting period to its estimated redemption value, but never
3963less than its initial fair value, using a combination of an income
3964and market valuation approach. Our income and market valuation
3965approaches may incorporate Level 3 measures for instances
3966when observable inputs are not available, including assumptions
3967related to expected future net cash flows, long-term growth
3968rates, the timing and nature of tax attributes, and the redemption
3969features. Any adjustments to the redemption value will
3970impact retained income. See Note 8 — Equity, for further detail.
3971CONTINGENCIES We accrue for loss contingencies when both
3972(a) information available prior to issuance of the financial statements
3973indicates that it is probable that a liability had been
3974incurred at the date of the financial statements and (b) the
3975amount of loss can reasonably be estimated. We continually
3976assess the likelihood of any adverse judgments or outcomes
3977to our contingencies, as well as potential amounts or ranges
3978of probable losses, and recognize a liability, if any, for these contingencies
3979based on an analysis of each matter with the assistance
3980of outside legal counsel and, if applicable, other experts.
3981Because many of these matters are resolved over long periods
3982of time, our estimate of liabilities may change due to new developments,
3983changes in assumptions or changes in our strategy
3984related to the matter. When we accrue for loss contingencies
3985and the reasonable estimate of the loss is within a range, we
3986record its best estimate within the range. We disclose an estimated
3987possible loss or a range of loss when it is at least reasonably
3988possible that a loss may have been incurred.
3989McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 53
3990RECENT ACCOUNTING STANDARDS In November of 2015, the
3991Financial Accounting Standards Board (“FASB”) issued guidance
3992to simplify the presentation of deferred income taxes. The
3993guidance requires that deferred tax liabilities and assets be
3994classified as noncurrent in a classified statement of financial
3995position. This guidance is effective for reporting periods beginning
3996after December 15, 2016; however, early adoption is permitted.
3997We do not expect the adoption of this guidance to have a
3998significant impact on our consolidated financial statements.
3999In September of 2015, the FASB issued guidance intended to
4000simplify the accounting for measurement-period adjustments
4001made to provisional amounts recognized in a business combination.
4002The guidance eliminates the requirement to retrospectively
4003account for those adjustments. This guidance is effective
4004for reporting periods beginning after December 15, 2015. We do
4005not expect the adoption of this guidance to have a significant
4006impact on our consolidated financial statements.
4007In April of 2015, the FASB issued new accounting guidance
4008intended to simplify the presentation of debt issuance costs.
4009The guidance requires that debt issuance costs related to a recognized
4010debt liability be presented on the balance sheet as a
4011direct deduction from the carrying amount of the debt liability,
4012consistent with the presentation for debt discounts. This guidance
4013is effective for reporting periods beginning after December
401415, 2015 and must be applied on a retrospective basis with early
4015adoption permitted. We adopted this guidance upon issuance
4016and prior year amounts have been reclassified to conform with
4017current year presentation. As of December 31, 2014, $4 million
4018of debt issuance costs were reclassified from other non-current
4019assets to long-term debt, less current portion. The adoption of
4020this guidance did not have a significant impact on our consolidated
4021financial statements.
4022In February of 2015, the FASB issued guidance that requires
4023management to evaluate whether they should consolidate certain
4024legal entities. All legal entities are subject to reevaluation
4025under the revised consolidation model. This guidance is effective
4026for reporting periods beginning after December 15, 2015;
4027however, early adoption is permitted. We do not expect the
4028adoption of this guidance to have a significant impact on our
4029consolidated financial statements.
4030In January of 2015, the FASB issued guidance that eliminates
4031the concept of reporting extraordinary items, but retains current
4032presentation and disclosure requirements for an event or
4033transaction that is of an unusual nature or of a type that
4034indicates infrequency of occurrence. Transactions that meet
4035both criteria would now also follow such presentation and
4036disclosure requirements. This guidance is effective for reporting
4037periods beginning after December 15, 2015; however, early
4038adoption is permitted. We do not expect the adoption of this
4039guidance to have a significant impact on our consolidated
4040financial statements.
4041In August of 2014, the FASB issued guidance that requires
4042management to evaluate, at each annual and interim reporting
4043period, whether there are conditions or events that raise substantial
4044doubt about the entity’s ability to continue as a going
4045concern within one year after the date the financial statements
4046are issued and provide related disclosures. This guidance is
4047effective for reporting periods beginning after December 15,
40482016; however, early adoption is permitted. We do not expect
4049the adoption of this guidance to have a significant impact on our
4050consolidated financial statements.
4051In May of 2014, the FASB and the International Accounting
4052Standards Board (“IASB”) issued jointly a converged standard
4053on the recognition of revenue from contracts with customers
4054which is intended to improve the financial reporting of revenue
4055and comparability of the top line in financial statements globally.
4056The core principle of the new standard is for the recognition
4057of revenue to depict the transfer of goods or services to customers
4058in amounts that reflect the payment to which the company
4059expects to be entitled in exchange for those goods or
4060services. The new standard will also result in enhanced revenue
4061disclosures, provide guidance for transactions that were not
4062previously addressed comprehensively and improve guidance
4063for multiple-element arrangements. In August of 2015, the
4064FASB issued guidance deferring the effective date of the new
4065revenue standard by one year. The new guidance will be effective
4066for annual reporting periods beginning after December 15, 2017,
4067including interim reporting periods within that reporting period.
4068Early adoption is permitted only as of annual reporting periods
4069beginning after December 15, 2016, including interim reporting
4070periods within that reporting period. While we will continue with
4071our evaluation process, initially, we believe this guidance may
4072have an impact on the accounting for certain proprietary consulting
4073arrangements in our C&C segment as well as the
4074accounting for certain integrated desktop service revenue
4075arrangements offered in our S&P Capital IQ and SNL segment.
4076In April of 2014, the FASB issued final guidance that raises the
4077threshold for a disposal to qualify as a discontinued operation
4078and requires new disclosures of both discontinued operations
4079and certain other disposals that do not meet the definition of a
4080discontinued operation. The guidance is intended to reduce the
4081frequency of disposals reported as discontinued operations by
408254 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
4083focusing on strategic shifts that have or will have a major effect
4084on an entity’s operations and financial results. In addition, the
4085guidance permits companies to have continuing cash flows
4086and significant continuing involvement with the disposed component.
4087We adopted the amendments to this guidance on
4088January 1, 2015.
4089RECLASSIFICATION
4090Certain prior year amounts have been reclassified for comparability
4091purposes.
40922. Acquisitions and Divestitures
40932015
4094For the year ended December 31, 2015, we paid cash for acquisitions,
4095net of cash acquired, totaling $2.4 billion. We used the
4096net proceeds of our $2.0 billion of senior notes issued in August
4097of 2015 and cash on hand to finance the acquisition of SNL. All
4098other acquisitions were funded with cash flows from operations.
4099Acquisitions completed during the year ended December 31,
41002015 by segment included:
4101S&P Capital IQ and SNL
4102 On September 1, 2015 (the “Acquisition Date”), we acquired
4103SNL Financial LC (“SNL”) for $2.225 billion in cash, subject to
4104working capital adjustments. SNL’s results of operations have
4105been included in our consolidated statements of income
4106subsequent to the Acquisition Date. SNL is a global provider
4107of news, data, and analytical tools to five sectors in the
4108global economy: financial services, real estate, energy, media
4109& communications, and metals & mining. SNL delivers information
4110through its suite of web, mobile and direct data feed
4111platforms that helps clients, including investment and commercial
4112banks, investors, corporations, and regulators make
4113decisions, improve efficiency, and manage risk.
4114ACQUISITION-RELATED EXPENSES During the year ended
4115December 31, 2015, the Company incurred approximately $37
4116million of acquisition-related costs related to the acquisition of
4117SNL. These expenses are included in selling and general
4118expenses in our consolidated statements of income.
4119PRELIMINARY ALLOCATION OF PURCHASE PRICE Our acquisition
4120of SNL was accounted for using the purchase method. Under the
4121purchase method, the excess of the purchase price over the fair
4122value of the net assets acquired is allocated to goodwill and
4123other intangibles. The goodwill recognized is largely attributable
4124to anticipated operational synergies and growth opportunities
4125as a result of the acquisition. The intangible assets, excluding
4126goodwill and indefinite-lived intangibles, will be amortized over
4127their anticipated useful lives between 10 and 18 years which will
4128be determined when we finalize our purchase price allocation.
4129The goodwill is expected to be deductible for tax purposes.
4130The following table presents the preliminary allocation of purchase
4131price to the assets and liabilities of SNL as a result of the
4132acquisition.
4133(in millions)
4134Current assets $ 23
4135Property, plant and equipment 19
4136Goodwill 1,563
4137Other intangible assets, net:
4138Databases and software 421
4139Customer relationships 162
4140Tradenames 185
4141Other intangibles 4
4142 Other intangible assets, net 772
4143Other non-current assets 1
4144Total assets acquired 2,378
4145Current liabilities (23)
4146Unearned revenue (117)
4147Other non-current liabilities (4)
4148Total liabilities acquired (144)
4149 Net assets acquired $2,234
4150The Company has performed a preliminary valuation analysis of
4151the fair market value of assets and liabilities of the SNL Financial
4152business. The final purchase price allocation will be determined
4153when the Company has completed the detailed valuations and
4154necessary calculations. The final allocation could differ materially
4155from the preliminary allocation. The final allocation may
4156include (1) changes in fair values of property, plant and equipment,
4157(2) changes in allocations to intangible assets as well as
4158goodwill and (3) other changes to assets and liabilities.
4159SUPPLEMENTAL PRO FORMA INFORMATION Supplemental information
4160on an unaudited pro forma basis is presented below for
4161the years ended December 31, 2015 and 2014 as if the acquisition
4162of SNL occurred on January 1, 2014. The pro forma financial
4163information is presented for comparative purposes only, based
4164on estimates and assumptions, which the Company believes to
4165be reasonable but not necessarily indicative of the consolidated
4166financial position or results of operations in future periods or
4167the results that actually would have been realized had this
4168acquisition been completed at the beginning of 2015. The unaudited
4169pro forma information includes intangible asset charges
4170and incremental borrowing costs as a result of the acquisition,
4171McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 55
4172net of related tax, estimated using the Company’s effective tax
4173rate for continuing operations for the periods presented.
4174Year Ended
4175December 31,
4176(in millions) 2015 2014
4177Pro forma revenue $5,477 $5,275
4178Pro forma net income (loss) from
4179continuing operations $1,258 $ (251)
4180C&C
4181 In July of 2015, we acquired the entire issued share capital of
4182Petromedia Ltd and its operating subsidiaries (“Petromedia”),
4183an independent provider of data, intelligence, news and tools
4184to the global fuels market that offers a suite of products that
4185provides clients with actionable data and intelligence that
4186enable informed decisions, minimize risk and increase efficiency.
4187We accounted for the acquisition of Petromedia using
4188the purchase method of accounting. The acquisition of
4189Petromedia is not material to our consolidated financial
4190statements.
4191 In July of 2015, we acquired National Automobile Dealers
4192Association’s Used Car Guide (“UCG”), a leading provider of
4193U.S. retail, trade-in and auction used-vehicle values. The
4194acquisition of UCG expanded our analytical and modeling
4195capabilities while deepening our presence in auto finance and
4196auto insurance, and enriching retail solutions. We accounted
4197for the acquisition of UCG using the purchase method of
4198accounting. The acquisition of UCG is not material to our consolidated
4199financial statements.
4200Following our acquisition of UCG, we made a contingent purchase
4201price payment in 2015 for $5 million that has been
4202reflected in the consolidated statement of cash flows as a
4203financing activity.
4204For acquisitions during 2015 that were accounted for using the
4205purchase method, the excess of the purchase price over the fair
4206value of the net assets acquired is allocated to goodwill and
4207other intangibles. Intangible assets recorded for all transactions
4208are amortized using the straight-line method for periods not
4209exceeding 18 years.
42102014
4211For the year ended December 31, 2014, we paid cash for acquisitions,
4212net of cash acquired, totaling $82 million. None of our
4213acquisitions were material either individually or in the aggregate,
4214including the pro forma impact on earnings. All acquisitions
4215were funded with cash flows from operations. Acquisitions
4216completed during the year ended December 31, 2014 by segment
4217included:
4218S&P Ratings
4219 In October of 2014, we acquired BRC Investor Services S.A.
4220(“BRC”), a Colombia-based ratings firm providing risk classifications
4221of banks, financial services providers, insurance
4222companies, corporate bonds and structured issues that will
4223expand our presence in the Latin American credit markets.
4224We accounted for the acquisition of BRC using the purchase
4225method of accounting. The acquisition is not material to our
4226consolidated financial statements.
4227 Following CRISIL’s acquisition of Coalition Development Ltd.
4228(“Coalition”) that occurred in July of 2012, we made a contingent
4229purchase price payment in 2014 for $11 million that has
4230been reflected in the consolidated statement of cash flows as
4231a financing activity.
4232C&C
4233 In July of 2014, we acquired Eclipse Energy Group AS and its
4234operating subsidiaries (“Eclipse”), which provides a comprehensive
4235suite of data and analytics products on the European
4236natural gas and liquefied natural gas markets as well as a
4237range of advisory services leveraging Eclipse’s knowledge
4238base, data capabilities, and modeling suite of products. This
4239transaction complements our North American natural gas
4240capabilities, which we obtained from our Bentek Energy LLC
4241acquisition in 2011. We accounted for the acquisition of
4242Eclipse using the purchase method of accounting. The acquisition
4243of Eclipse is not material to our consolidated financial
4244statements.
4245S&P DJ Indices
4246 In March of 2014, we acquired the intellectual property of a
4247family of Broad Market Indices (“BMI”) from Citigroup Global
4248Markets Inc. The BMI provides a broad measure of the global
4249equities markets which includes approximately 11,000 companies
4250in more than 52 countries covering both developed
4251and emerging markets. We accounted for the acquisition of
4252the intellectual property on a cost basis and it was not material
4253to our consolidated financial statements.
4254For acquisitions during 2014 that were accounted for using the
4255purchase method, the excess of the purchase price over the fair
4256value of the net assets acquired is allocated to goodwill and
4257other intangibles. Intangible assets recorded for all transactions
4258are amortized using the straight-line method for periods not
4259exceeding 7 years. None of the goodwill acquired from our
4260acquisitions during 2014 will be deductible for tax purposes.
426156 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
42622013
4263For the year ended December 31, 2013, we paid cash for acquisitions,
4264net of cash acquired, totaling $273 million. None of
4265our acquisitions were material either individually or in the
4266aggregate, including the pro forma impact on earnings. All
4267acquisitions were funded with cash flows from operations.
4268Acquisitions completed during the year ended December 31,
42692013 by segment included:
4270S&P DJ Indices
4271 In December of 2013, we purchased the intellectual property
4272rights to a range of commodities indices developed by
4273Goldman Sachs as well as a limited-use license to promote
4274the commodities indices using the Goldman Sachs Commodity
4275Index trademarks. The commodities indices provide us with a
4276leading benchmark that measures general price movements
4277and inflation in the world economy. We accounted for the
4278acquisition of the intellectual property on a cost basis.
4279S&P Ratings
4280 In June of 2013, we made a voluntary open offer to purchase
4281up to an additional 22.23% of the total equity shares outstanding
4282in CRISIL Limited (“CRISIL”), our majority owned
4283Indian credit rating agency within our S&P Ratings segment.
4284In August of 2013, at the conclusion of the tender offer period,
4285we acquired approximately 11 million equity shares representing
428615.07% of CRISIL’s total outstanding equity shares
4287for $214 million, increasing our ownership percentage in
4288CRISIL to 67.84% from 52.77%.
4289Following CRISIL’s acquisition of Coalition that occurred in July
4290of 2012, we made a contingent purchase price payment in 2013
4291for $12 million that has been reflected in the consolidated
4292statement of cash flows as a financing activity.
4293Intangible assets recorded for all transactions during 2013 are
4294considered intangible assets with indefinite lives which are not
4295amortized, but instead are tested for impairment annually
4296during the fourth quarter each year or more frequently if events
4297or changes in circumstances indicate that the asset might
4298be impaired.
4299Goodwill consists primarily of intangible assets that do not
4300qualify for separate recognition, including assembled workforce,
4301noncontractual relationships and agreements. The goodwill is
4302not expected to be deductible for tax purposes.
4303Non-cash investing activities
4304Liabilities assumed in conjunction with the acquisition of businesses
4305are as follows:
4306Years ended December 31,
4307(in millions) 2015 2014 2013
4308Fair value of assets acquired $2,576 $67 $—
4309Cash paid (net of cash acquired) 2,401 52 —
4310Liabilities assumed 1 $ 175 $15 $—
43111 2013 acquisitions did not result in any liabilities assumed.
4312DIVESTITURES — CONTINUING OPERATIONS
4313During the year ended December 31, 2015, we recorded a pretax
4314gain of $11 million within other (income) loss in the consolidated
4315statement of income related to the sale of our interest in
4316a legacy McGraw Hill Construction investment.
4317In the fourth quarter of 2015, we began exploring strategic
4318alternatives for J.D. Power, included in our C&C segment. We
4319committed to and initiated an active program to sell J.D. Power
4320in its current state that we believe is probable in the next
4321year. As a result, we have classified the assets and liabilities of
4322J.D. Power as held for sale in our consolidated balance sheet as
4323of December 31, 2015. The anticipated disposal does not represent
4324a strategic shift that will have a major effect on operations
4325and financial results, therefore, it is not classified as a discontinued
4326operation.
4327The components of assets and liabilities held for sale related
4328to J.D. Power in the consolidated balance sheet consist of the
4329following:
4330December 31,
4331(in millions) 2015
4332Accounts receivable, net $ 58
4333Goodwill 75
4334Other intangible assets, net 335
4335Other assets 35
4336Assets of a business held for sale $503
4337Accounts payable and accrued expenses $ 42
4338Unearned revenue 64
4339Other liabilities 100
4340Liabilities of a business held for sale $206
4341McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 57
4342The operating profit of J.D. Power for the years ending December
434331, 2015, 2014 and 2013 is as follows:
4344Years ended
4345December 31,
4346(in millions) 2015 2014 2013
4347J.D. Power operating profit $53 $44 $35
4348During the year ended December 31, 2014, we completed the
4349following dispositions that resulted in a net pre-tax loss of $9
4350million, which was included in other (income) loss in the consolidated
4351statement of income:
4352 On July 31, 2014, we completed the sale of the Company’s
4353aircraft to Harold W. McGraw III, then Chairman of the
4354Company’s Board of Directors and former President and CEO
4355of the Company for a purchase price of $20 million. During
4356the second quarter of 2014, we recorded a non-cash impairment
4357charge of $6 million within other (income) loss in our
4358consolidated statement of income as a result of the pending
4359sale. See Note 13 — Related Party Transactions for further
4360information.
4361 On June 30, 2014, we completed the sale of our data center to
4362Quality Technology Services, LLC which owns, operates and
4363manages data centers. Net proceeds from the sale of $58
4364million were received in July of 2014. The sale included all of
4365the facilities and equipment on the south campus of our East
4366Windsor, New Jersey location, inclusive of the rights and obligations
4367associated with an adjoining solar power field. The
4368sale resulted in an expense of $3 million recorded within other
4369(income) loss in our consolidated statement of income, which
4370is in addition to the non-cash impairment charge we recorded
4371in the fourth quarter of 2013.
4372During the year ended December 31, 2013, we completed the
4373following dispositions that resulted in a net pre-tax gain of $24
4374million, which was included in other (income) loss in the consolidated
4375statement of income:
4376 On September 30, 2013, we completed the sale of Financial
4377Communications, which was part of our S&P Capital IQ
4378segment.
4379 On August 27, 2013, CRISIL sold its 49% equity interest in
4380India Index Services & Products Ltd. This investment was held
4381within our S&P Ratings segment.
4382 On August 1, 2013, we completed the sale Aviation Week
4383within our C&C segment to Penton, a privately held business
4384information company.
4385Additionally, S&P Capital IQ closed several of their non-core
4386businesses during 2013.
4387DISCONTINUED OPERATIONS
4388On November 3, 2014, we completed the sale of McGraw Hill
4389Construction, which has historically been part of the C&C segment,
4390to Symphony Technology Group for $320 million in cash.
4391We recorded an after-tax gain on the sale of $160 million, which
4392is included in discontinued operations, net in the consolidated
4393statement of income for the year ended December 31, 2014. We
4394used the after-tax proceeds from the sale to make selective
4395acquisitions, investments, share repurchases and for general
4396corporate purposes.
4397On March 22, 2013, we completed the sale of MHE to investment
4398funds affiliated with Apollo Global Management, LLC for a purchase
4399price of $2.4 billion in cash. We recorded an after-tax gain
4400on the sale of $589 million, which is included in discontinued
4401operations, net in the consolidated statement of income for the
4402year ended December 31, 2013. We used the after-tax proceeds
4403from the sale to pay down short-term debt for the special dividend
4404paid in 2012, to make selective acquisitions, investments,
4405share repurchases and for general corporate purposes.
4406The key components of income from discontinued operations
4407for the years ended December 31, 2014 and 2013 consist of the
4408following:
4409Years ended
4410December 31,
4411(in millions) 2014 2013
4412Revenue $139 $441
4413Expenses 110 436
4414Operating income 29 5
4415Interest expense, net — 2
4416Income before taxes on income 29 3
4417Provision for taxes on income 11 —
4418Income from discontinued operations, net of tax 18 3
4419Pre-tax gain on sale from discontinued operations 289 888
4420Provision for taxes on gain on sale 129 299
4421Gain on sale of discontinued operations, net of tax 160 589
4422Discontinued operations, net 178 592
4423Less: net loss attributable to noncontrolling interests — (1)
4424Income from discontinued operations
4425 attributable to McGraw Hill Financial, Inc.
4426common shareholders $178 $593
442758 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
4428Results from discontinued operations for the year ended
4429December 31, 2014 included the after-tax gain on sale of
4430McGraw Hill Construction of $160 million.
4431Results from discontinued operations for the year ended
4432December 31, 2013 included the after-tax gain on sale of MHE
4433of $589 million.
44343. Goodwill and Other Intangible Assets
4435GOODWILL
4436Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable
4437intangible assets of businesses acquired.
4438The change in the carrying amount of goodwill by segment is shown below:
4439(in millions)
4440S&P
4441Ratings
4442S&P Capital
4443IQ and SNL
4444S&P DJ
4445Indices C&C Total
4446Balance as of December 31, 2013 $ 125 $ 469 $376 $439 $ 1,409
4447Acquisitions 4 — — 38 42
4448Dispositions — — — (32) (32)
4449Other (primarily Fx) (7) (17) — (8) (32)
4450Balance as of December 31, 2014 122 452 376 437 1,387
4451Acquisitions — 1,563 — 39 1,602
4452Reclassifications 1 — — — (75) (75)
4453Other (primarily Fx) (8) (17) — (7) (32)
4454Balance as of December 31, 2015 $114 $1,998 $376 $394 $2,882
44551 Relates to J.D. Power, which is classified as assets held for sale in our consolidated balance sheet as of December 31, 2015.
4456Goodwill additions and dispositions in the table above relate to
4457transactions discussed in Note 2 — Acquisitions and Divestitures.
4458OTHER INTANGIBLE ASSETS
4459Other intangible assets include both indefinite-lived assets not
4460subject to amortization and definite-lived assets subject to
4461amortization. We have indefinite-lived assets with a carrying
4462value of $713 million and $693 million as of December 31, 2015
4463and 2014, respectively.
4464 2015 and 2014 both include $380 million and $90 million, for
4465Dow Jones Indices intellectual property and the Dow Jones
4466tradename, respectively, that we recorded as part of the
4467transaction to form S&P Dow Jones Indices LLC in 2012.
4468 2015 includes $184 million within our S&P Capital IQ and SNL
4469segment for the SNL tradename.
4470 2014 includes $164 million within our C&C segment for the
4471J.D. Power and Associates tradename.
4472 2015 and 2014 include $59 million within our S&P Dow Jones
4473Indices segment for the Goldman Sachs Commodity Index
4474intellectual property and the Broad Market Indices intellectual
4475property.
4476McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 59
4477The following table summarizes our definite-lived intangible assets:
4478(in millions)
4479Cost
4480Databases
4481and software Content
4482Customer
4483relationships Tradenames
4484Other
4485intangibles Total
4486Balance as of December 31, 2013 $115 $139 $225 $45 $158 $ 682
4487Acquisitions — — — — 13 13
4488Transfers — — — — (44) (44)
4489Other (primarily Fx) (2) — 3 1 (16) (14)
4490Balance as of December 31, 2014 113 139 228 46 111 637
4491Acquisitions 421 — — — 177 598
4492Reclassifications 1 (19) — (62) (2) (8) (91)
4493Other (primarily Fx) (5) — 2 3 (11) (11)
4494Balance as of December 31, 2015 $510 $139 $168 $47 $269 $1,133
4495Accumulated amortization
4496Balance as of December 31, 2013 $ 83 $ 45 $ 67 $32 $ 56 $ 283
4497Current year amortization 6 14 13 3 12 48
4498Other (primarily Fx) (1) — — — (4) (5)
4499Balance as of December 31, 2014 88 59 80 35 64 326
4500Current year amortization 20 14 9 2 22 67
4501Reclassifications 1 (18) — (30) (2) (14) (64)
4502Other (primarily Fx) (2) — 1 1 (5) (5)
4503Balance as of December 31, 2015 $ 88 $ 73 $ 60 $36 $ 67 $ 324
4504Net definite-lived intangibles:
4505December 31, 2014 $ 25 $ 80 $148 $11 $ 47 $ 311
4506December 31, 2015 $422 $ 66 $108 $11 $202 $ 809
45071 Relates to J.D. Power, which is classified as assets held for sale in our consolidated balance sheet as of December 31, 2015.
4508Definite-lived intangible assets are being amortized on a
4509straight-line basis over periods of up to 20 years. The weightedaverage
4510life of the intangible assets as of December 31, 2015 is
4511approximately 10 years.
4512Amortization expense for the years ended December 31, 2015,
45132014 and 2013 was $67 million, $48 million, and $51 million,
4514respectively. Expected amortization expense for intangible assets
4515over the next five years for the years ended December 31,
4516assuming no further acquisitions or dispositions, is as follows:
4517(in millions) 2016 2017 2018 2019 2020
4518Amortization expense 1 $98 $93 $86 $81 $74
45191 Amortization expense excludes J.D. Power, which is expected to be sold in the
4520next year.
45214. Taxes on Income
4522Income before taxes on income resulted from domestic and
4523foreign operations is as follows:
4524Years ended December 31,
4525(in millions) 2015 2014 2013
4526Domestic operations $1,266 $(423) $ 821
4527Foreign operations 549 477 478
4528Total continuing income before taxes $1,815 $ 54 $1,299
452960 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
4530The provision for taxes on income consists of the following:
4531(in millions)
4532Years ended
4533December 31,
45342015 2014 2013
4535Federal:
4536Current $ 90 $ 285 $194
4537Deferred 276 (213) 51
4538 Total federal 366 72 245
4539Foreign:
4540Current 111 135 152
4541Deferred (1) 1 (19)
4542 Total foreign 110 136 133
4543State and local:
4544Current 34 62 37
4545Deferred 37 (25) 10
4546 Total state and local 71 37 47
4547Total provision for taxes for
4548continuing operations 547 245 425
4549Provision for discontinued operations — 140 299
4550Total provision for taxes $547 $ 385 $724
4551A reconciliation of the U.S. federal statutory income tax rate to
4552our effective income tax rate for financial reporting purposes is
4553as follows:
4554Years ended
4555December 31,
45562015 2014 2013
4557U.S. federal statutory income tax rate 35.0% 35.0% 35.0%
4558Legal and regulatory settlements — 524.1 —
4559State and local income taxes 2.6 64.2 2.8
4560Foreign operations (3.2) (79.6) (3.9)
4561S&P Dow Jones Indices LLC joint venture (2.0) (60.2) (2.0)
4562Tax credits and incentives (2.9) (91.5) (2.1)
4563Other, net 0.6 61.7 2.9
4564 Effective income tax rate for
4565continuing operations 30.1% 453.7% 32.7%
4566The principal temporary differences between the accounting for
4567income and expenses for financial reporting and income tax
4568purposes are as follows:
4569December 31,
4570(in millions) 2015 2014
4571Deferred tax assets:
4572Legal and regulatory settlements $ 45 $ 305
4573Employee compensation 91 99
4574Accrued expenses 72 94
4575Postretirement benefits 126 146
4576Unearned revenue 39 27
4577Allowance for doubtful accounts 12 13
4578Loss carryforwards 114 37
4579Other 18 14
4580 Total deferred tax assets 517 735
4581Deferred tax liabilities:
4582Goodwill and intangible assets (299) (362)
4583Fixed assets (9) (8)
4584Other — —
4585 Total deferred tax liabilities (308) (370)
4586 Net deferred income tax asset (liability)
4587before valuation allowance 209 365
4588Valuation allowance (98) (16)
4589Net deferred income tax asset (liability) $ 111 $ 349
4590Reported as:
4591Current deferred tax assets $ 109 $ 360
4592Current deferred tax liabilities (8) (2)
4593Non-current deferred tax assets 33 31
4594Non-current deferred tax liabilities (23) (40)
4595Net deferred income tax asset (liability) $ 111 $ 349
4596We record valuation allowances against deferred income tax
4597assets when we determine that it is more likely than not based
4598upon all the available evidence that such deferred income tax
4599assets will not be realized. The valuation allowance is primarily
4600related to operating losses.
4601We have not recorded deferred income taxes applicable to
4602undistributed earnings of foreign subsidiaries that are indefinitely
4603reinvested in foreign operations. Undistributed earnings
4604that are indefinitely reinvested in foreign operations amounted
4605to $1,573 million at December 31, 2015. Quantification of the
4606deferred tax liability, if any, associated with indefinitely reinvested
4607earnings is not practicable.
4608McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 61
4609We made net income tax payments for continuing and discontinued
4610operations totaling $260 million in 2015, $419 million in
46112014, and $787 million in 2013. As of December 31, 2015, we
4612had net operating loss carryforwards of $440 million, which will
4613expire over various periods.
4614A reconciliation of the beginning and ending amount of unrecognized
4615tax benefits is as follows:
4616Years ended
4617December 31,
4618(in millions) 2015 2014 2013
4619Balance at beginning of year $118 $ 82 $ 74
4620 Additions based on tax positions
4621related to the current year 22 30 27
4622Additions for tax positions of prior years 12 33 10
4623Reduction for tax positions of prior years (14) (11) (9)
4624Reduction for settlements (18) (16) (20)
4625Balance at end of year $120 $118 $ 82
4626The total amount of federal, state and local, and foreign unrecognized
4627tax benefits as of December 31, 2015, 2014 and 2013
4628was $120 million, $118 million and $82 million, respectively,
4629exclusive of interest and penalties. The increase of $20 million
4630in 2015 (excluding settlements) is the amount of unrecognized
4631tax benefits that unfavorably impacted tax expense. The unfavorable
4632impact to the tax provision was partially offset by the
4633resolution of tax audits in multiple jurisdictions.
4634We recognize accrued interest and penalties related to unrecognized
4635tax benefits in interest expense and operating-related
4636expense, respectively. In addition to the unrecognized tax benefits,
4637as of December 31, 2015 and 2014, we had $31 million and
4638$23 million, respectively, of accrued interest and penalties
4639associated with uncertain tax positions.
4640During 2015, we completed the federal income tax audit for
46412013. The U.S. federal income tax audits for 2014 and 2015 are
4642in process. During 2015, we completed various state and foreign
4643tax audits and, with few exceptions, we are no longer subject to
4644federal, state and local, or non-U.S. income tax examinations by
4645tax authorities for the years before 2007. The impact to tax
4646expense in 2015, 2014 and 2013 was not material.
4647We file income tax returns in the U.S. federal jurisdiction, various
4648states, and foreign jurisdictions, and we are routinely under
4649audit by many different tax authorities. We believe that our
4650accrual for tax liabilities is adequate for all open audit years
4651based on an assessment of many factors including past experience
4652and interpretations of tax law. This assessment relies on
4653estimates and assumptions and may involve a series of complex
4654judgments about future events. It is possible that tax examinations
4655will be settled prior to December 31, 2016. If any of these
4656tax audit settlements do occur within that period, we would
4657make any necessary adjustments to the accrual for unrecognized
4658tax benefits. Until formal resolutions are reached between
4659us and the tax authorities, the determination of a possible audit
4660settlement range with respect to the impact on unrecognized
4661tax benefits is not practicable.
4662Based on the current status of income tax audits, we believe
4663that the total amount of unrecognized tax benefits may significantly
4664decrease in the next twelve months. Although the ultimate
4665resolution of our tax audits is unpredictable, the resulting
4666change in our unrecognized tax benefits could have a material
4667impact on our results of operations and / or cash flows.
46685. Debt
4669A summary of short-term and long-term debt outstanding is
4670as follows:
4671December 31,
4672(in millions) 2015 2014
46735.9% Senior Notes, due 2017 1 $ 399 $399
46742.5% Senior Notes, due 2018 2 398 —
46753.3% Senior Notes, due 2020 3 695 —
46764.0% Senior Notes, due 2025 4 690 —
46774.4% Senior Notes, due 2026 5 890 —
46786.55% Senior Notes, due 2037 6 396 396
4679Commercial paper 143 —
4680Total debt 3,611 795
4681 Less: short-term debt including
4682current maturities 143 —
4683Long-term debt $3,468 $795
46841 Interest payments are due semiannually on April 15 and October 15, and as of
4685December 31, 2015, the unamortized debt discount and issuance costs total
4686$1 million.
46872 Interest payments are due semiannually on February 15 and August 15, beginning
4688on February 15, 2016, and as of December 31, 2015, the unamortized
4689debt discount and issuance costs total $2 million.
46903 Interest payments are due semiannually on February 14 and August 14, beginning
4691on February 14, 2016, and as of December 31, 2015, the unamortized
4692debt discount and issuance costs total $5 million.
46934 Interest payments are due semiannually on June 15 and December 15, and as
4694of December 31, 2015, the unamortized debt discount and issuance costs
4695total $10 million.
46965 Interest payments are due semiannually on February 15 and August 15, beginning
4697on February 15, 2016, and as of December 31, 2015, the unamortized
4698debt discount and issuance costs total $10 million.
46996 Interest payments are due semiannually on May 15 and November 15, and as of
4700December 31, 2015, the unamortized debt discount and issuance costs total
4701$4 million.
470262 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
4703Annual long-term debt maturities are scheduled as follows
4704based on book values as of December 31, 2015: no amounts due
4705in 2016, $399 million due in 2017, $398 million due in 2018, no
4706amounts due in 2019, $695 million due in 2020, and $2.0 billion
4707due thereafter.
4708On August 18, 2015, we issued $2.0 billion of senior notes (the
4709“Notes”), consisting of $400 million of 2.5% senior notes due in
47102018, $700 million of 3.3% senior notes due in 2020 and $900
4711million of 4.4% senior notes due in 2026. The Notes are fully and
4712unconditionally guaranteed by our wholly-owned subsidiary,
4713Standard & Poor’s Financial Services LLC. We used the net proceeds
4714to finance the acquisition of SNL.
4715On May 26, 2015, we issued $700 million of 4.0% senior notes
4716due in 2025 and used a portion of the net proceeds for the
4717repayment of short-term debt, including commercial paper. The
47184.0% senior notes will mature on June 15, 2025 and are fully and
4719unconditionally guaranteed by our wholly-owned subsidiary,
4720Standard & Poor’s Financial Services LLC.
4721We have the ability to borrow a total of $1.2 billion through our
4722commercial paper program, which is supported by our credit
4723facility described below. Commercial paper borrowings outstanding
4724as of December 31, 2015 totaled $143 million with an
4725average interest rate and term of 0.95% and 17 days. As of
4726December 31, 2015, we can borrow approximately $1.1 billion in
4727additional funds through the commercial paper program. There
4728were no commercial paper borrowings outstanding under our
4729credit facility as of December 31, 2014.
4730On June 30, 2015, we entered into a revolving $1.2 billion fiveyear
4731credit agreement (our “credit facility”) that will terminate
4732on June 30, 2020. This credit facility replaced our $1.0 billion
4733four-year credit facility that was scheduled to terminate on June
473419, 2017. The previous credit facility was canceled immediately
4735after the new credit facility became effective. There were no
4736outstanding borrowings under the previous credit facility when
4737it was replaced.
4738We pay a commitment fee of 10 to 20 basis points for our credit
4739facility, depending on our indebtedness to cash flow ratio,
4740whether or not amounts have been borrowed and currently pay
4741a commitment fee of 15 basis points. The interest rate on borrowings
4742under our credit facility is, at our option, calculated
4743using rates that are primarily based on either the prevailing
4744London Inter-Bank Offered Rate, the prime rate determined
4745by the administrative agent or the Federal Funds Rate. For
4746certain borrowings under this credit facility, there is also a
4747spread based on our indebtedness to cash flow ratio added to
4748the applicable rate.
4749Our credit facility contains certain covenants. The only financial
4750covenant requires that our indebtedness to cash flow ratio, as
4751defined in our credit facility, is not greater than 4 to 1, and this
4752covenant level has never been exceeded.
47536. Employee Benefits
4754We maintain a number of active defined contribution retirement
4755plans for our employees. The majority of our defined benefit
4756plans are frozen. As a result, no new employees will be permitted
4757to enter these plans and no additional benefits for current
4758participants in the frozen plans will be accrued.
4759We also have supplemental benefit plans that provide senior
4760management with supplemental retirement, disability and death
4761benefits. Certain supplemental retirement benefits are based
4762on final monthly earnings. In addition, we sponsor voluntary
4763401(k) plans under which we may match employee contributions
4764up to certain levels of compensation as well as profitsharing
4765plans under which we contribute a percentage of eligible
4766employees’ compensation to the employees’ accounts.
4767We also provide certain medical, dental and life insurance benefits
4768for active and retired employees and eligible dependents.
4769The medical and dental plans and supplemental life insurance
4770plan are contributory, while the basic life insurance plan is noncontributory.
4771We currently do not prefund any of these plans.
4772We recognize the funded status of our retirement and postretirement
4773plans in the consolidated balance sheets, with a corresponding
4774adjustment to accumulated other comprehensive
4775income, net of taxes. The amounts in accumulated other comprehensive
4776income represent net unrecognized actuarial losses
4777and unrecognized prior service costs. These amounts will be
4778subsequently recognized as net periodic pension cost pursuant
4779to our accounting policy for amortizing such amounts.
4780As part of the sale of McGraw Hill Construction and MHE,
4781described further in Note 2 — Acquisitions and Divestitures, we
4782retained the benefit obligations and plan assets related to
4783McGraw Hill Construction and MHE; however, the benefit cost for
4784periods presented is bifurcated between continuing and discontinued
4785operations.
4786McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 63
4787BENEFIT OBLIGATION
4788A summary of the benefit obligation and the fair value of plan assets, as well as the funded status for the retirement and postretirement
4789plans as of December 31, is as follows (benefits paid in the table below include only those amounts contributed directly to or
4790paid directly from plan assets):
4791Retirement
4792Plans
4793Postretirement
4794Plans
4795(in millions) 2015 2014 2015 2014
4796Net benefit obligation at beginning of year $2,462 $2,004 $ 96 $ 103
4797Service cost 6 5 — 1
4798Interest cost 96 99 3 4
4799Plan participants’ contributions — — 4 4
4800Actuarial (gain) loss (189) 504 (12) 5
4801Gross benefits paid (150) (125) (12) (13)
4802Foreign currency effect (26) (25) — —
4803Other adjustments — — 1 (8)
4804Net benefit obligation at end of year 2,199 2,462 80 96
4805Fair value of plan assets at beginning of year 2,236 2,088 — —
4806Actual return on plan assets (57) 270 — —
4807Employer contributions 15 22 8 9
4808Plan participants’ contributions — — 4 4
4809Gross benefits paid (150) (125) (12) (13)
4810Foreign currency effect (21) (19) — —
4811Fair value of plan assets at end of year 2,023 2,236 — —
4812Funded status $ (176) $ (226) $(80) $ (96)
4813Amounts recognized in consolidated balance sheets:
4814Non-current assets $ 36 $ 28 $ — $ —
4815Current liabilities (8) (8) (8) (9)
4816Non-current liabilities (204) (246) (72) (87)
4817$ (176) $ (226) $(80) $ (96)
4818Accumulated benefit obligation $2,190 $2,440
4819Plans with accumulated benefit obligation in excess of the fair value of plan assets:
4820Projected benefit obligation $1,810 $2,046
4821Accumulated benefit obligation $1,801 $2,024
4822Fair value of plan assets $1,598 $1,792
4823Amounts recognized in accumulated other comprehensive loss, net of tax:
4824Net actuarial loss (gain) $ 433 $ 452 $(24) $ (8)
4825Prior service credit 1 1 (5) (5)
4826Total recognized $ 434 $ 453 $(29) $ (13)
4827The actuarial loss included in accumulated other comprehensive loss for our retirement plans and expected to be recognized in
4828net periodic pension cost during the year ending December 31, 2016 is $16 million. There is no prior service credit included in
4829accumulated other comprehensive loss for our retirement plans expected to be recognized in net periodic benefit cost during the
4830year ending December 31, 2016.
4831There is an immaterial amount of actuarial loss and prior service credit included in accumulated other comprehensive loss for our
4832postretirement plans expected to be recognized in net periodic benefit cost during the year ending December 31, 2016.
483364 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
4834NET PERIODIC COST
4835For purposes of determining annual pension cost, prior service costs are being amortized straight-line over the average expected
4836remaining lifetime of plan participants expected to receive benefits.
4837A summary of net periodic benefit cost for our retirement and postretirement plans for the years ended December 31, is
4838as follows:
4839Retirement Plans Postretirement Plans
4840(in millions) 2015 2014 2013 2015 2014 2013
4841Service cost $ 6 $ 5 $ 10 $— $ 1 $ 2
4842Interest cost 96 99 91 3 4 5
4843Expected return on assets (127) (138) (129) — — —
4844Amortization of:
4845Actuarial loss (gain) 20 11 26 — (1) —
4846Prior service cost (credit) — — 5 (1) — (1)
4847Curtailment 1 — — (8) — (1) (12)
4848Net periodic benefit cost $ (5) $ (23) $ (5) $ 2 $ 3 $ (6)
48491 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
4850United 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
4851and 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
4852March 22, 2013.
4853Our U.K. retirement plan accounted for a benefit of $10 million in 2015, $8 million in 2014, and $10 million in 2013, including the
4854$8 million curtailment gain discussed above, of the net periodic benefit cost attributable to the funded plans.
4855Other changes in plan assets and benefit obligations recognized in other comprehensive income, net of tax for the years ended
4856December 31, are as follows:
4857Retirement Plans Postretirement Plans
4858(in millions) 2015 2014 2013 2015 2014 2013
4859Net actuarial (gain) loss $ (6) $232 $(213) $(17) $ 3 $(8)
4860Recognized actuarial (gain) loss (13) (7) (15) — 1 —
4861Prior service cost (credit) — — 5 1 (5) —
4862Total recognized $(19) $225 $(223) $(16) $(1) $(8)
4863The total cost for our retirement plans was $91 million for 2015, $81 million for 2014 and $96 million for 2013. Included in the total
4864retirement plans cost are defined contribution plans cost of $67 million for 2015, $74 million for 2014 and $75 million for 2013.
4865McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 65
4866ASSUMPTIONS
4867Retirement Plans Postretirement Plans
48682015 2014 2013 2015 2014 2013
4869Benefit obligation:
4870Discount rate 4.47% 4.15% 5.00% 3.90% 3.60% 4.20%
4871Net periodic cost:
4872Weighted-average healthcare cost rate 1 7.0% 7.0% 7.0%
4873Discount rate — U.S. plan 2 4.15% 5.0% 4.1% 3.60% 4.125% 3.45%
4874Discount rate — U.K. plan 2 3.8% 4.5% 4.8%
4875Compensation increase factor — U.S. plan N/A N/A N/A
4876Compensation increase factor — U.K. plan N/A N/A 5.75%
4877Return on assets 3 6.25% 7.125% 7.25%
48781 The assumed weighted-average healthcare cost trend rate will decrease ratably from 7% in 2015 to 5% in 2024 and remain at that level thereafter. Assumed
4879healthcare cost trends have an effect on the amounts reported for the healthcare plans. A one percentage point change in assumed healthcare cost trend creates
4880the following effects:
4881(in millions) 1% point increase 1% point decrease
4882Effect on postretirement obligation $4 $(3)
48832 Effective January 1, 2016, we changed our discount rate assumption on our U.S. retirement plans to 4.47% from 4.15% in 2015 and changed our discount rate
4884assumption on our U.K. plan to 3.84% from 3.8% in 2015. At the end of 2015, we changed our approach used to measure service and interest costs on all of our
4885retirement plans. For 2015 and prior periods presented, we measured service and interest costs utilizing and single weighted-average discount rate derived from
4886the 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
4887yield 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
4888of 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
4889accounted 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
4890prospective basis. We expect pension and postretirement medical costs to decrease by approximately $13 million in 2016 as a result of this change.
48913 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
4892January 1, 2016, our return on assets assumption for the U.S. plan and U.K. plan remained unchanged to 6.25%.
4893In addition to the assumptions in the above table, assumed mortality is also a key assumption in determining benefit obligations.
4894Effective December 31, 2014, the Company updated the assumed mortality rates to reflect life expectancy improvements.
4895CASH FLOWS
4896In December of 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was enacted. The Act
4897established a prescription drug benefit under Medicare, known as “Medicare Part D”, and a federal subsidy to sponsors of retiree
4898healthcare benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Our benefits provided
4899to certain participants are at least actuarially equivalent to Medicare Part D, and, accordingly, we are entitled to
4900a subsidy.
4901Expected employer contributions in 2016 are $7 million for our retirement plans and $9 million for our postretirement plans. In
49022016, we may elect to make additional non-required contributions depending on investment performance and the pension plan
4903status. Information about the expected cash flows for our retirement and postretirement plans and the impact of the Medicare
4904subsidy is as follows:
4905Postretirement Plans 2
4906(in millions)
4907Retirement
4908Plans
4909 1 Gross
4910payments
4911Retiree
4912contributions
4913Medicare
4914subsidy
4915Net
4916payments
49172016 $ 91 $13 $ (4) $(1) $ 8
49182017 90 13 (4) (1) 8
49192018 93 12 (4) (1) 7
49202019 96 12 (4) (1) 7
49212020 99 11 (4) (1) 6
49222021–2025 539 43 (12) (3) 28
49231 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.
49242 Reflects the total benefits expected to be paid from our assets.
492566 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
4926FAIR VALUE OF PLAN ASSETS
4927In accordance with authoritative guidance for fair value measurements certain assets and liabilities are required to be recorded at
4928fair 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
4929transaction between market participants. A fair value hierarchy has been established which requires us to maximize the use of
4930observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs used to
4931measure fair value are as follows:
4932 Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities.
4933 Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets
4934that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially
4935the full term of the assets or liabilities.
4936 Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
4937assets or liabilities.
4938The fair value of our defined benefit plans assets as of December 31, 2015 and 2014, by asset class is as follows:
4939December 31, 2015
4940(in millions) Total Level 1 Level 2 Level 3
4941Cash and short-term investments $ 188 $ 8 $ 180 $—
4942Equities:
4943U.S. indexes 1 312 63 249 —
4944U.S. growth and value 132 92 40 —
4945U.K. 47 34 13 —
4946International, excluding U.K. 124 40 84 —
4947Fixed income:
4948Long duration strategy 2 1,072 — 1,072 —
4949Intermediate duration securities 33 — 33 —
4950Agency mortgage backed securities 6 — 6 —
4951Asset backed securities 17 — 17 —
4952Non-agency mortgage backed securities 3 23 — 23 —
4953U.K. 4 6 — 6 —
4954International, excluding U.K. 48 — 48 —
4955Other 15 — 15 —
4956Total $2,023 $237 $1,786 $—
4957December 31, 2014
4958(in millions) Total Level 1 Level 2 Level 3
4959Cash, short-term investments, and other $ 176 $ 17 $ 159 $—
4960Equities:
4961U.S. indexes 1 293 88 205 —
4962U.S. growth and value 204 147 57 —
4963U.K. 67 56 11 —
4964International, excluding U.K. 139 42 97 —
4965Fixed income:
4966Long duration strategy 2 1,165 — 1,165 —
4967Intermediate duration securities 25 — 25 —
4968Agency mortgage backed securities 6 — 6 —
4969Asset backed securities 18 — 18 —
4970Non-agency mortgage backed securities 3 37 — 37 —
4971U.K. 4 7 — 7 —
4972International, excluding U.K. 85 — 85 —
4973Other 14 — 14 —
4974Total $2,236 $350 $1,886 $—
49751 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.
49762 Includes securities that are investment grade obligations of issuers in the U.S.
49773 Includes U.S. mortgage-backed securities that are not backed by the U.S. government.
49784 Includes securities originated by the government of and other issuers from the U.K.
4979McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 67
4980For securities that are quoted in active markets, the trustee /
4981custodian determines fair value by applying securities’ prices
4982obtained from its pricing vendors. For commingled funds that
4983are not actively traded, the trustee applies pricing information
4984provided by investment management firms to the unit quantities
4985of such funds. Investment management firms employ their
4986own pricing vendors to value the securities underlying each
4987commingled fund. Underlying securities that are not actively
4988traded derive their prices from investment managers, which in
4989turn, employ vendors that use pricing models (e.g., discounted
4990cash flow, comparables). The domestic defined benefit plans
4991have no investment in our stock, except through the S&P 500
4992commingled trust index fund.
4993PENSION TRUSTS’ ASSET ALLOCATIONS
4994There are two pension trusts, one in the U.S. and one in the U.K.
4995 The U.S. pension trust had assets of $1.6 billion and $1.8 billion
4996as of December 31, 2015 and 2014, respectively, and the
4997target allocations in 2015 include 26% domestic equities, 6%
4998international equities, and 68% debt securities and shortterm
4999investments.
5000 The U.K. pension trust had assets of $425 million and $443
5001million as of December 31, 2015 and 2014, respectively, and
5002the target allocations in 2015 include 20% equities, 40%
5003diversified growth funds and 40% fixed income.
5004The pension assets are invested with the goal of producing a
5005combination of capital growth, income and a liability hedge.
5006The mix of assets is established after consideration of the
5007long-term performance and risk characteristics of asset
5008classes. Investments are selected based on their potential to
5009enhance returns, preserve capital and reduce overall volatility.
5010Holdings are diversified within each asset class. The portfolios
5011employ a mix of index and actively managed equity strategies by
5012market capitalization, style, geographic regions and economic
5013sectors. The fixed income strategies include U.S. long duration
5014securities, opportunistic fixed income securities and U.K. debt
5015instruments. The short-term portfolio, whose primary goal is
5016capital preservation for liquidity purposes, is composed of government
5017and government-agency securities, uninvested cash,
5018receivables and payables. The portfolios do not employ any
5019financial leverage.
5020U.S. DEFINED CONTRIBUTION PLANS
5021Assets of the defined contribution plans in the U.S. consist primarily
5022of investment options which include actively managed
5023equity, indexed equity, actively managed equity / bond funds,
5024target date funds, McGraw Hill Financial common stock, stable
5025value and money market strategies. There is also a self-directed
5026mutual fund investment option. The plans purchased 223,656
5027shares and sold 247,984 shares of McGraw Hill Financial common
5028stock in 2015 and purchased 301,924 shares and sold
5029629,086 shares of McGraw Hill Financial common stock in 2014.
5030The plans held approximately 1.8 million shares of McGraw Hill
5031Financial common stock as of December 31, 2015 and 1.9
5032million shares as of December 31, 2014, with market values of
5033$179 million and $165 million, respectively. The plans received
5034dividends on McGraw Hill Financial common stock of $2 million
5035during the year ended December 31, 2015 and $3 million during
5036the year ended December 31, 2014.
50377. Stock-Based Compensation
5038We issue stock-based incentive awards to our eligible employees
5039and Directors under the 2002 Employee Stock Incentive
5040Plan and a Director Deferred Stock Ownership Plan.
5041 2002 EMPLOYEE STOCK INCENTIVE PLAN (THE “2002 PLAN”)
5042— The 2002 Plan permits the granting of nonqualified stock
5043options, stock appreciation rights, performance stock,
5044restricted stock and other stock-based awards.
5045 DIRECTOR DEFERRED STOCK OWNERSHIP PLAN — Under this
5046plan, common stock reserved may be credited to deferred
5047stock accounts for eligible Directors. In general, the plan
5048requires that 50% of eligible Directors’ annual compensation
5049plus dividend equivalents be credited to deferred stock
5050accounts. Each Director may also elect to defer all or a portion
5051of the remaining compensation and have an equivalent
5052number of shares credited to the deferred stock account.
5053Recipients under this plan are not required to provide consideration
5054to us other than rendering service. Shares will be
5055delivered as of the date a recipient ceases to be a member of
5056the Board of Directors or within five years thereafter, if so
5057elected. The plan will remain in effect until terminated by the
5058Board of Directors or until no shares of stock remain available
5059under the plan.
506068 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
5061The number of common shares reserved for issuance are
5062as follows:
5063December 31,
5064(in millions) 2015 2014
5065Shares available for granting under the 2002 Plan 32.8 31.4
5066Options outstanding 5.8 8.1
5067Total shares reserved for issuance 1 38.6 39.5
50681 Shares reserved for issuance under the Director Deferred Stock Ownership
5069Plan are not included in the total, but are approximately 0.1 million.
5070We issue treasury shares upon exercise of stock options and the
5071issuance of restricted stock and unit awards. To offset the
5072dilutive effect of the exercise of employee stock options, we
5073periodically repurchase shares. See Note 8 — Equity for further
5074discussion.
5075Stock-based compensation expense and the corresponding tax
5076benefit are as follows:
5077Years ended
5078December 31,
5079(in millions) 2015 2014 2013
5080Stock option expense $14 $ 21 $13
5081Restricted stock and unit awards expense 64 79 83
5082Total stock-based compensation expense $78 $100 $96
5083Tax benefit $29 $ 38 $37
5084Stock-based compensation of $2 million and $10 million is
5085recorded in discontinued operations for the years ended
5086December 31, 2014 and 2013, respectively, as a result of the
5087sale of MHE and McGraw Hill Construction described further in
5088Note 2 — Acquisitions and Divestitures.
5089STOCK OPTIONS
5090Stock options may not be granted at a price less than the fair
5091market value of our common stock on the date of grant. Stock
5092options granted vest over a three year service period in equal
5093annual installments and have a maximum term of 10 years.
5094Stock option compensation costs are recognized from the date
5095of grant, utilizing a three-year graded vesting method. Under
5096this method, one-third of the costs are ratably recognized over
5097the first twelve months, one-third of the costs are ratably
5098recognized over a twenty-four month period starting from the
5099date of grant with the remaining costs ratably recognized over a
5100thirty-six month period starting from the date of grant.
5101Stock options granted in 2011 and prior years vest over a two
5102year service period in equal annual installments and have a
5103maximum term of 10 years. Stock option compensation costs
5104for 2011 and prior year grants are recognized from the date of
5105grant, utilizing a two-year graded vesting method. Under this
5106method, fifty percent of the costs are ratably recognized over
5107the first twelve months with the remaining costs ratably recognized
5108over a twenty-four month period starting from the date
5109of grant.
5110We use a lattice-based option-pricing model to estimate the
5111fair value of options granted. The following assumptions were
5112used in valuing the options granted:
5113Years ended December 31,
51142015 2014 2013
5115Risk-free average interest rate 0.2–1.9% 0.1–2.9% 0.1–2.9%
5116Dividend yield 1.4% 1.4–1.8% 2.07–2.09%
5117Volatility 21–39% 18–41% 29–45%
5118Expected life (years) 6.3 6.21–6.25 6.1–6.2
5119Weighted-average grant-date
5120fair value per option $27.57 $23.41 $14.46
5121Because lattice-based option-pricing models incorporate
5122ranges of assumptions, those ranges are disclosed. These
5123assumptions are based on multiple factors, including historical
5124exercise patterns, post-vesting termination rates, expected
5125future exercise patterns and the expected volatility of our stock
5126price. The risk-free interest rate is the imputed forward rate
5127based on the U.S. Treasury yield at the date of grant. We use the
5128historical volatility of our stock price over the expected term of
5129the options to estimate the expected volatility. The expected
5130term of options granted is derived from the output of the lattice
5131model and represents the period of time that options granted
5132are expected to be outstanding.
5133McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 69
5134Stock option activity is as follows:
5135(in millions, except per award amounts) Shares
5136Weighted average
5137exercise price
5138Weighted average
5139remaining years of
5140contractual term
5141Aggregate
5142intrinsic value
5143Options outstanding as of December 31, 2014 8.1 $45.18
5144Granted 1 — $90.30
5145Exercised (2.2) $76.08
5146Canceled, forfeited and expired (0.1) $53.28
5147Options outstanding as of December 31, 2015 5.8 $45.61 4.5 $308
5148Options exercisable as of December 31, 2015 5.0 $42.10 4.0 $283
5149(in millions, except per award amounts) Shares
5150Weighted-average
5151grant-date fair
5152value
5153Nonvested options outstanding as of December 31, 2014 1.6 $19.00
5154Granted 1 — $27.57
5155Vested (0.7) $18.24
5156Forfeited (0.1) $17.44
5157Nonvested options outstanding as of December 31, 2015 0.8 $19.82
5158Total unrecognized compensation expense related to nonvested options $ 3
5159Weighted-average years to be recognized over 1.2
51601 There were a minimal amount of stock options granted in 2015. During 2015, the Company stopped granting stock options.
5161The total fair value of our stock options that vested during the
5162years ended December 31, 2015, 2014 and 2013 was $11 million,
5163$6 million and $12 million, respectively.
5164We receive a tax deduction for certain stock option exercises
5165during the period in which the options are exercised, generally
5166for the excess of the quoted market value of the stock at the
5167time of the exercise of the options over the exercise price of the
5168options (“intrinsic value”). For the years ended December 31,
51692015, 2014 and 2013, $69 million, $128 million and $43 million,
5170respectively, of excess tax benefits from stock options exercised
5171are reported in our cash flows used for financing activities.
5172Information regarding our stock option exercises is as follows:
5173Years ended
5174December 31,
5175(in millions) 2015 2014 2013
5176Net cash proceeds from the
5177exercise of stock options $86 $193 $258
5178Total intrinsic value of stock
5179option exercises $94 $168 $158
5180Income tax benefit realized from
5181stock option exercises $49 $ 73 $ 61
5182RESTRICTED STOCK AND UNIT AWARDS
5183Restricted stock and unit awards (performance and nonperformance)
5184have been granted under the 2002 Plan.
5185Restricted stock and unit performance awards will vest only if
5186we achieve certain financial goals over the performance period.
5187Restricted stock non-performance awards have various vesting
5188periods (generally three years), with vesting beginning on the
5189first anniversary of the awards. Recipients of restricted stock
5190and unit awards are not required to provide consideration to us
5191other than rendering service.
5192The stock-based compensation expense for restricted stock
5193and unit awards is determined based on the market price of our
5194stock at the grant date of the award applied to the total number
5195of awards that are anticipated to fully vest. For restricted stock
5196and unit performance awards, adjustments are made to expense
5197dependent upon financial goals achieved.
519870 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
5199Restricted stock and unit activity for performance and nonperformance
5200awards is as follows:
5201(in millions, except per award amounts) Shares
5202Weightedaverage
5203grantdate
5204fair value
5205Nonvested shares as of December 31, 2014 1.7 $61.56
5206Granted 1.3 $77.06
5207Vested (1.6) $96.00
5208Forfeited (0.2) $81.70
5209Nonvested shares as of December 31, 2015 1.2 $92.39
5210Total unrecognized compensation expense
5211related to nonvested awards $ 60
5212Weighted-average years to be
5213recognized over 1.6
5214Years ended December 31,
52152015 2014 2013
5216Weighted-average grant-date
5217fair value per award $77.06 $77.74 $44.22
5218Total fair value of restricted stock
5219and unit awards vested $ 155 $ 88 $ 119
5220Tax benefit relating to restricted
5221stock activity $ 24 $ 30 $ 33
52228. Equity
5223CAPITAL STOCK
5224Two million shares of preferred stock, par value $1 per share, are
5225authorized; none have been issued.
5226On January 27, 2016, the Board of Directors approved an
5227increase in the dividends for 2016 to a quarterly rate of $0.36
5228per common share.
5229Years ended
5230December 31,
52312015 2014 2013
5232Quarterly dividend rate $0.33 $0.30 $0.28
5233Annualized dividend rate $1.32 $1.20 $1.12
5234Dividends paid (in millions) $ 363 $ 326 $ 308
5235STOCK REPURCHASES
5236On December 4, 2013, the Board of Directors approved a stock
5237repurchase program authorizing the purchase of 50 million
5238shares (the “2013 Repurchase Program”), which was approximately
523918% of the total shares of our outstanding common
5240stock at that time. In 2011, the Board of Directors approved a
5241stock repurchase program authorizing the purchase of up to 50
5242million shares (the “2011 Repurchase Program”), which was
5243approximately 17% of the total shares of our outstanding common
5244stock at that time.
5245Share repurchases were as follows:
5246Years ended December 31,
5247(in millions, except average price) 2015 2014 2013
5248Total number of shares purchased —
52492013 Repurchase Program 10.1 4.4 —
5250Total number of shares purchased —
52512011 Repurchase Program 1 — — 16.9
5252Average price paid per share 2, 3 $99.00 $79.06 $58.52
5253Total cash utilized 2 $1,000 $ 352 $ 989
52541 2013 includes shares received as part of our accelerated share repurchase
5255agreements as described in more detail below.
52562 In December of 2015, 0.3 million shares were repurchased for approximately
5257$26 million, which settled in January of 2016. Excluding these 0.3 million
5258shares, the average price paid per share was $98.98. In December of 2013, 0.1
5259million shares were repurchased for approximately $10 million, which settled
5260in January of 2014. Excluding these 0.1 million shares, the average price paid
5261per share was $58.36. Cash used for financing activities only reflects those
5262shares which settled during the year ended December 31, 2015 and 2014
5263resulting in $974 million and $362 million of cash used to repurchase shares,
5264respectively.
52653 On June 25, 2014, we repurchased 0.5 million shares of the Company’s common
5266stock from the personal holdings of Harold W. McGraw III, then Chairman
5267of the Company’s Board of Directors and former President and CEO of the
5268Company, at a discount of 0.35% from the June 24, 2014 New York Stock
5269Exchange closing price. We repurchased these shares with cash for $41 million
5270at an average price of $82.66 per share. See Note 13 — Related Party
5271Transactions for further information.
5272Our purchased shares may be used for general corporate purposes,
5273including the issuance of shares for stock compensation
5274plans and to offset the dilutive effect of the exercise of employee
5275stock options. As of December 31, 2015, 35.5 million shares
5276remained available under the 2013 Repurchase Program. As of
5277December 31, 2015, there were no remaining shares available
5278under the 2011 Repurchase Program. The 2013 Repurchase
5279Program has no expiration date and purchases under this program
5280may be made from time to time on the open market and in
5281private transactions, depending on market conditions.
5282ACCELERATED SHARE REPURCHASE PROGRAM
5283We entered into an accelerated share repurchase (“ASR”)
5284agreement with a financial institution on March 25, 2013 to initiate
5285share repurchases aggregating $500 million. The ASR
5286agreement was structured as a capped ASR agreement in which
5287we paid $500 million and received an initial delivery of approximately
52887.2 million shares during the three months ended March
528931, 2013, with an additional 1.4 million shares received on April
52901, 2013, in the aggregate, representing the minimum number
5291of shares of our common stock to be repurchased based on a
5292calculation using a specific capped price per share. The total
5293McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 71
5294number of shares ultimately purchased was determined based
5295on the volume weighted-average share price (“VWAP”), minus
5296a discount, of our common stock from March 25, 2013 through
5297July 22, 2013. On July 25, 2013 we received a final incremental
5298delivery of 0.7 million shares determined using a VWAP of
5299$53.7995 bringing the total amount of shares received to
53009.3 million.
5301REDEEMABLE NONCONTROLLING INTERESTS
5302The agreement with the minority partners of our S&P Dow Jones
5303Indices LLC partnership contains redemption features whereby
5304interests held by minority partners are redeemable either (i) at
5305the option of the holder or (ii) upon the occurrence of an event
5306that is not solely within our control. Specifically, under the terms
5307of the operating agreement of S&P Dow Jones Indices LLC, after
5308December 31, 2017, CME Group and CME Group Index Services
5309LLC (“CGIS”) will have the right at any time to sell, and we are
5310obligated to buy, at least 20% of their share in S&P Dow Jones
5311Indices LLC. In addition, in the event there is a change of control
5312of the Company, for the 15 days following a change in control,
5313CME Group and CGIS will have the right to put their interest to us
5314at the then fair value of CME Group’s and CGIS’ minority interest.
5315If interests were to be redeemed under this agreement, we
5316would generally be required to purchase the interest at fair value
5317on the date of redemption. This interest is presented on the
5318consolidated balance sheets outside of equity under the caption
5319“Redeemable noncontrolling interest” with an initial value based
5320on fair value for the portion attributable to the net assets we
5321acquired, and based on our historical cost for the portion attributable
5322to our S&P Index business. We adjust the redeemable
5323noncontrolling interest each reporting period to its estimated
5324redemption value, but never less than its initial fair value, considering
5325a combination of an income and market valuation
5326approach. Our income and market valuation approaches may
5327incorporate Level 3 fair value measures for instances when
5328observable inputs are not available, including assumptions
5329related to expected future net cash flows, long-term growth
5330rates, the timing and nature of tax attributes, and the redemption
5331features. Any adjustments to the redemption value will
5332impact retained income.
5333Noncontrolling interests that do not contain such redemption
5334features are presented in equity.
5335Changes to redeemable noncontrolling interest during the year
5336ended December 31, 2015 were as follows:
5337(in millions)
5338Balance as of December 31, 2014 $810
5339Net income attributable to noncontrolling interest 101
5340Distributions to noncontrolling interest (98)
5341Redemption value adjustment 107
5342Balance as of December 31, 2015 $920
5343ACCUMULATED OTHER COMPREHENSIVE LOSS
5344The following table summarizes the changes in the components of accumulated other comprehensive loss for the year ended
5345December 31, 2015:
5346(in millions)
5347Foreign Currency
5348Translation
5349Adjustment
5350Pension and
5351Postretirement
5352Benefit Plans
5353Unrealized Gain
5354(Loss) on Forward
5355Exchange Contracts
5356Accumulated Other
5357Comprehensive
5358Loss
5359Balance as of December 31, 2014 $ (83) $(431) $ — $ (514)
5360Other comprehensive income before reclassifications (110) 13 (1) (98)
5361 Reclassifications from accumulated other
5362comprehensive loss to net earnings 12 1 12
5363Net other comprehensive income (110) 25 (1) (86)
5364Balance as of December 31, 2015 $(193) $(406) $(1) $(600)
53651 See Note 6 — Employee Benefits for additional details of items reclassed from accumulated other comprehensive loss to net earnings.
5366The net actuarial loss and prior service cost related to pension and other postretirement benefit plans included in other comprehensive
5367income is net of a tax provision of $7 million for the year ended December 31, 2015.
536872 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
53699. Earnings (Loss) per Share
5370Basic earnings (loss) per common share is computed by dividing
5371net income (loss) attributable to the common shareholders of
5372the Company by the weighted-average number of common
5373shares outstanding. Diluted earnings (loss) per share is computed
5374in the same manner as basic earnings (loss) per share,
5375except the number of shares is increased to include additional
5376common shares that would have been outstanding if potential
5377common shares with a dilutive effect had been issued.
5378Potential common shares consist primarily of stock options,
5379restricted stock and restricted stock units calculated using the
5380treasury stock method.
5381The calculation for basic and diluted earnings (loss) per share is
5382as follows:
5383Years ended December 31,
5384(in millions, except per share data) 2015 2014 2013
5385Amount attributable to McGraw Hill
5386Financial, Inc. common shareholders:
5387 Income (loss) from continuing
5388operations $1,156 $ (293) $ 783
5389 Income from discontinued operations — 178 593
5390 Net income (loss) attributable to
5391the Company $1,156 $ (115) $1,376
5392Basic weighted-average number of
5393common shares outstanding 271.6 271.5 274.5
5394Effect of stock options and other
5395dilutive securities 3.0 — 5.3
5396Diluted weighted-average number of
5397common shares outstanding 274.6 271.5 279.8
5398Income (loss) from continuing operations:
5399Basic $ 4.26 $(1.08) $ 2.85
5400Diluted $ 4.21 $(1.08) $ 2.80
5401Income from discontinued operations:
5402Basic $ — $ 0.66 $ 2.16
5403Diluted $ — $ 0.66 $ 2.12
5404Net income (loss):
5405Basic $ 4.26 $(0.42) $ 5.01
5406Diluted $ 4.21 $(0.42) $ 4.91
5407Each period we have certain stock options and restricted performance
5408shares that are excluded from the computation of
5409diluted earnings (loss) per share. The effect of the potential
5410exercise of stock options is excluded when the average market
5411price of our common stock is lower than the exercise price of
5412the related option during the period or when a loss from continuing
5413operations exists because the effect would have been
5414antidilutive. Additionally, restricted performance shares are
5415excluded because the necessary vesting conditions had not
5416been met or when a loss from continuing operations exists. As
5417of December 31, 2015, there were no stock options excluded as
5418compared to 2.9 million and 1.2 million stock options excluded
5419for the years ended December 31, 2014 and 2013, respectively.
5420Additionally, restricted performance shares outstanding of 0.9
5421million, 3.2 million and 0.9 million as of December 31, 2015,
54222014 and 2013, respectively, were excluded.
542310. Restructuring
5424During 2015 and 2014, we continued to evaluate our cost
5425structure and further identified cost savings associated with
5426streamlining our management structure and our decision to exit
5427non-strategic businesses. Our 2015 and 2014 restructuring
5428plans consisted of a company-wide workforce reduction of
5429approximately 550 positions and 590 positions, respectively,
5430and are further detailed below. The charges for each restructuring
5431plan are classified as selling and general expenses within the
5432consolidated statements of income and the reserves are included
5433in other current liabilities in the consolidated balance sheets.
5434In certain circumstances, reserves are no longer needed
5435because of efficiencies in carrying out the plans or because
5436employees previously identified for separation resigned from
5437the Company and did not receive severance or were reassigned
5438due to circumstances not foreseen when the original plans were
5439initiated. In these cases, we reverse reserves through the consolidated
5440statements of income during the period when it is
5441determined they are no longer needed. There was approximately
5442$7 million of reserves from the 2014 restructuring plan that we
5443have reversed in 2015, which offset the initial charge of $86
5444million recorded for the 2014 restructuring plan.
5445The initial restructuring charge recorded and the ending reserve
5446balance as of December 31, 2015 by segment is as follows:
54472015 Restructuring
5448Plan
54492014 Restructuring
5450Plan
5451(in millions)
5452Initial
5453Charge
5454Recorded
5455Ending
5456Reserve
5457Balance
5458Initial
5459Charge
5460Recorded
5461Ending
5462Reserve
5463Balance
5464S&P Ratings $18 $15 $45 $ 6
5465S&P Capital IQ
5466and SNL 31 23 9 1
5467C&C 1 3 2 16 1
5468Corporate 11 10 16 5
5469 Total $63 $50 $86 $13
54701 As part of the sale of McGraw Hill Construction, which has historically been
5471part of our C&C segment, to Symphony Technology Group, described further in
5472Note 2 — Acquisitions and Divestitures, we retained McGraw Hill Construction’s
5473restructuring liabilities and the initial charge associated with the reserve has
5474been bifurcated between continuing and discontinued operations. The 2014
5475restructuring plan includes an initial charge of $3 million.
5476McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 73
5477For the year ended December 31, 2015, we have reduced the reserve for the 2015 restructuring plan by $13 million and for the years
5478ended December 31, 2015 and 2014, we have reduced the reserve for the 2014 restructuring plan by $64 million and $9 million,
5479respectively. The reductions primarily related to cash payments for employee severance costs.
548011. Segment and Geographic Information
5481As discussed in Note 1 — Accounting Policies, we have four reportable segments: S&P Ratings, S&P Capital IQ and SNL, S&P DJ
5482Indices and C&C.
5483Our Chief Executive Officer is our chief operating decision-maker and evaluates performance of our segments and allocates
5484resources based primarily on operating profit. Segment operating profit does not include unallocated expense or interest expense,
5485as these are costs that do not affect the operating results of our segments. We use the same accounting policies for our segments
5486as those described in Note 1 — Accounting Policies.
5487Segment information for the years ended December 31 is as follows:
5488Revenue Operating Profit (Loss)
5489(in millions) 2015 2014 2013 2015 2014 2013
5490S&P Ratings $2,428 $2,455 $2,274 $1,078 $(583) $ 882
5491S&P Capital IQ and SNL 1,405 1,237 1,170 228 228 189
5492S&P DJ Indices 597 552 493 392 347 266
5493C&C 971 893 841 357 290 280
5494Intersegment elimination 1 (88) (86) (76) — — —
5495Total operating segments 5,313 5,051 4,702 2,055 282 1,617
5496Unallocated expense 2 — — — (138) (169) (259)
5497Total $5,313 $5,051 $4,702 $1,917 $ 113 $1,358
54981 Revenue 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
5499distribute content and data developed by S&P Ratings.
55002 The year ended December 31, 2015 includes a gain of $11 million related to the sale of our interest in a legacy McGraw Hill Construction investment and costs
5501related to identified operating efficiencies primarily related to restructuring of $10 million. The year ended December 31, 2014 includes restructuring charges of
5502$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
5503non-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.
5504Depreciation &
5505Amortization Capital Expenditures
5506(in millions) 2015 2014 2013 2015 2014 2013
5507S&P Ratings $ 43 $ 43 $ 45 $ 48 $ 33 $ 40
5508S&P Capital IQ and SNL 70 50 49 60 38 39
5509S&P DJ Indices 8 7 10 4 2 4
5510C&C 29 24 22 18 11 17
5511Total operating segments 150 124 126 130 84 100
5512Corporate 7 10 11 9 8 17
5513Total $ 157 $ 134 $ 137 $ 139 $ 92 $ 117
551474 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
5515Segment information as of December 31 is as follows:
5516Total Assets
5517(in millions) 2015 2014
5518S&P Ratings $ 620 $ 624
5519S&P Capital IQ and SNL 3,405 1,011
5520S&P DJ Indices 1,181 1,166
5521C&C 606 918
5522Total operating segments 5,812 3,719
5523Corporate 1 1,868 3,054
5524Assets of a business held for sale 2 503 —
5525Total $8,183 $6,773
55261 Corporate assets consist principally of cash and cash equivalents, assets for pension benefits, deferred income taxes and leasehold improvements related to
5527subleased areas.
55282 Includes J.D. Power as of December 31, 2015.
5529We have operations with foreign revenue and long-lived assets in approximately 90 countries. We do not have operations in any
5530foreign country that represent more than 8% of our consolidated revenue. Transfers between geographic areas are recorded at
5531agreed upon prices and intercompany revenue and profit are eliminated. No single customer accounted for more than 10% of our
5532consolidated revenue.
5533The following provides revenue and long-lived assets by geographic region:
5534Revenue Long-lived Assets
5535Years ended December 31, December 31,
5536(in millions) 2015 2014 2013 2015 2014
5537U.S. $3,202 $2,911 $2,723 $4,198 $2,117
5538European region 1,265 1,316 1,226 419 430
5539Asia 566 528 483 63 54
5540Rest of the world 280 296 270 50 64
5541Total $5,313 $5,051 $4,702 $4,730 $2,665
5542Revenue Long-lived Assets
5543Years ended December 31, December 31,
55442015 2014 2013 2015 2014
5545U.S. 60% 58% 58% 89% 80%
5546European region 24 26 26 9 16
5547Asia 11 10 10 1 2
5548Rest of the world 5 6 6 1 2
5549Total 100% 100% 100% 100% 100%
5550See Note 2 — Acquisitions and Divestitures and Note 10 — Restructuring, for actions that impacted the segment operating results.
5551McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 75
555212. Commitments and
5553Contingencies
5554RENTAL EXPENSE AND LEASE OBLIGATIONS
5555We are committed under lease arrangements covering property,
5556computer systems and office equipment. Leasehold improvements
5557are amortized on a straight-line basis over the shorter of
5558their economic lives or their lease term. Certain lease arrangements
5559contain escalation clauses covering increased costs for
5560various defined real estate taxes and operating services and the
5561associated fees are recognized on a straight-line basis over the
5562minimum lease period.
5563Rental expense for property and equipment under all operating
5564lease agreements is as follows:
5565Years ended
5566December 31,
5567(in millions) 2015 2014 2013
5568Gross rental expense $182 $199 $202
5569Less: sublease revenue (14) (16) (29)
5570Less: Rock-McGraw rent credit (4) (23) (20)
5571Net rental expense $164 $160 $153
5572In December of 2003, we sold our 45% equity investment in
5573Rock-McGraw, Inc., which owned our then headquarters building
5574in New York City, and remained an anchor tenant by concurrently
5575leasing back space from the buyer through 2020. Proceeds from
5576the disposition were $382 million and the sale resulted in a pretax
5577gain, net of transaction costs, of $131 million ($58 million
5578after-tax) upon disposition. As a result of the amount of building
5579space we retained through our leaseback, a pre-tax gain of
5580$212 million ($126 million after-tax) was deferred upon the
5581disposition in 2003. In December of 2013, we entered into an
5582arrangement with the buyer to shorten the lease to December of
55832015 in exchange for approximately $60 million which was
5584recorded as a reduction to the unrecognized deferred gain from
5585the sale. The remaining gain was amortized over the remaining
5586lease term as a reduction in rent expense. The amount of gain
5587recognized for the years ended December 31, 2015, 2014 and
55882013 was $4 million, $21 million and $15 million, respectively.
5589The lease terminated in December of 2015.
5590Cash amounts for future minimum rental commitments, including
5591rent payments on the sale-leaseback, under existing
5592non-cancelable leases with a remaining term of more than one
5593year, along with minimum sublease rental income to be received
5594under non-cancelable subleases are shown in the following table.
5595(in millions)
5596Rent
5597commitment
5598Sublease
5599income
5600Net
5601rent
56022016 $136 $(14) $122
56032017 120 (13) 107
56042018 109 (13) 96
56052019 101 (13) 88
56062020 49 (2) 47
56072021 and beyond 162 — 162
5608Total $677 $(55) $622
5609LEGAL & REGULATORY MATTERS
5610In the normal course of business both in the United States and
5611abroad, the Company, its subsidiary Standard & Poor’s Financial
5612Services LLC (“S&P LLC”) and some of its other subsidiaries are
5613defendants in numerous legal proceedings and are often the
5614subject of government and regulatory proceedings, investigations
5615and inquiries. Many of these proceedings, investigations
5616and inquiries relate to the ratings activity of S&P Ratings
5617brought by issuers and alleged purchasers of rated securities.
5618In addition, various government and self-regulatory agencies
5619frequently make inquiries and conduct investigations into our
5620compliance with applicable laws and regulations, including
5621those related to ratings activities and antitrust matters. Any
5622of these proceedings, investigations or inquiries could ultimately
5623result in adverse judgments, damages, fines, penalties
5624or activity restrictions, which could adversely impact our consolidated
5625financial condition, cash flows, business or competitive
5626position.
5627The Company believes that it has meritorious defenses to the
5628pending claims and potential claims in the matters described
5629below and is diligently pursuing these defenses, and in some
5630cases working to reach an acceptable negotiated resolution.
5631However, in view of the uncertainty inherent in litigation and
5632government and regulatory enforcement matters, we cannot
5633predict the eventual outcome of these matters or the timing of
5634their resolution, or in most cases reasonably estimate what the
563576 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
5636eventual judgments, damages, fines, penalties or impact of
5637activity restrictions may be. As a result, we cannot provide
5638assurance that the outcome of the matters described below will
5639not have a material adverse effect on our consolidated financial
5640condition, cash flows, business or competitive position. As litigation
5641or the process to resolve pending matters progresses, as
5642the case may be, we will continue to review the latest information
5643available and assess our ability to predict the outcome of
5644such matters and the effects, if any, on our consolidated financial
5645condition, cash flows, business and competitive position,
5646which may require that we record liabilities in the consolidated
5647financial statements in future periods.
5648S&P RATINGS
5649Financial Crisis Litigation
5650The Company and its subsidiaries continue to defend civil cases
5651brought by private and public plaintiffs arising out of ratings
5652activities prior to and during the global financial crisis of 2008–
56532009. Discovery in these cases is ongoing. We can provide no
5654assurance that we will not be obligated to pay significant
5655amounts in order to resolve these matters on terms deemed
5656acceptable. At this time, however, we are unable to reasonably
5657estimate the range of such additional amounts, if any.
5658U.S. Securities and Exchange Commission
5659As a nationally recognized statistical rating organization registered
5660with the SEC under Section 15E of the Securities Exchange
5661Act of 1934, S&P Ratings is in ongoing communication with the
5662staff of the SEC regarding compliance with its extensive obligations
5663under the federal securities laws. Although S&P Ratings
5664seeks to promptly address any compliance issues that it detects
5665or that the staff of the SEC raises, there can be no assurance
5666that the SEC will not seek remedies against S&P Ratings for one
5667or more compliance deficiencies.
5668Trani Prosecutorial Proceeding
5669The prosecutor in the Italian city of Trani has obtained criminal
5670indictments against several current and former S&P Ratings
5671managers and ratings analysts for alleged market manipulation,
5672and against Standard & Poor’s Credit Market Services Europe
5673under Italy’s vicarious liability statute, for having allegedly failed
5674to properly supervise the ratings analysts and prevent them
5675from committing market manipulation. The prosecutor’s theories
5676are based on various actions by S&P Ratings taken with
5677respect to Italian sovereign debt between May of 2011 and
5678January of 2012. Trial commenced on February 4, 2015 and is
5679ongoing. Apart from criminal penalties that might be imposed
5680following a conviction, such conviction could also lead to civil
5681damages claims and other sanctions against Standard & Poor’s
5682Credit Market Services Europe or the Company. Such claims and
5683sanctions cannot be quantified at this stage.
5684Shareholder Derivative Actions
5685On August 3, 2015, two purported shareholders commenced
5686a putative derivative action on behalf of the Company in New
5687York State Supreme Court titled Retirement Plan for General
5688Employees of the City of North Miami Beach and Robin Stein v.
5689Harold McGraw III, et al. The complaint asserts claims for, inter
5690alia, breach of fiduciary duty, waste of corporate assets, and
5691mismanagement against the board of directors, certain former
5692directors of the Company, and three former S&P Ratings
5693employees. Plaintiffs seek recovery from the defendants based
5694on allegations that S&P Ratings’ credit ratings practices for
5695certain residential mortgage-backed securities and collateralized
5696debt obligations misrepresented the credit risks of those
5697securities, allegedly resulting in losses to the Company. The
5698Company and the individual defendants filed motions to dismiss
5699the complaint on October 9, 2015. Plaintiffs filed an opposition
5700on December 8, 2015, and the Company and the individual
5701defendants filed their reply on January 8, 2016. The court has
5702scheduled oral argument on the motions to dismiss for April
570322, 2016.
5704On January 28, 2016, a different purported shareholder commenced
5705a separate putative derivative action on behalf of the
5706Company in New York State Supreme Court titled L.A. Grika v.
5707Harold McGraw III, et al. The allegations in the complaint are
5708substantially similar to those in the North Miami Beach matter
5709described above. The complaint asserts claims for, inter alia,
5710breach of fiduciary duty, aiding and abetting breaches of fiduciary
5711duty, unjust enrichment, contribution and indemnification
5712against Harold McGraw III, Douglas L. Peterson, and nine former
5713S&P Ratings employees. The Company is reviewing the plaintiff’s
5714complaint and intends to vigorously defend this matter.
5715The City of Swan
5716Australian government municipal councils filed suit against the
5717Company and S&P International LLC in a representative action
5718in April of 2013 in connection with alleged investment losses in
5719eight synthetic collateralized debt obligations (“CDOs”) rated by
5720S&P Ratings. These same CDOs were at issue in an earlier lawsuit
5721brought by the plaintiffs against its investment advisor,
5722Lehman Brothers Australia (“LBA”), in which the plaintiffs
5723secured a judgment against LBA, which is now in liquidation. The
5724plaintiffs claim total losses of AUD$327 million from these
5725investments and are seeking recovery from both LBA and the
5726McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 77
5727Company. The trial in the matter has been re-scheduled from
5728October of 2015 to August of 2016. The Company and the plaintiffs
5729are currently engaged in settlement discussions. The
5730Company has established a reserve for potential settlement in
5731an amount deemed adequate by management based on the
5732facts and circumstances of the case. We can provide no assurance
5733that the Company will not incur amounts in excess of
5734amounts accrued to settle this matter on terms deemed
5735acceptable. At this point, however, we are unable to reasonably
5736estimate the range of such additional amounts, if any.
5737Commodities & Commercial Markets
5738McGraw Hill Construction
5739Under the terms of an asset purchase agreement with Skyline
5740HoldCo LLC (“Skyline”) related to Skyline’s purchase of the
5741McGraw Hill Construction business from the Company in
5742November 2014, the Company agreed to retain liability with
5743respect to the litigation captioned, Reed Construction Data Inc.
5744v. The McGraw-Hill Companies, Inc. et al., 09 Civ. 8578 (JPO),
5745in the United States District Court for the Southern District of
5746New York, and any action instituted at any time by the parties
5747thereto arising from substantially the same set of facts and
5748circumstances.
5749Reed Construction Data filed this action in the U.S. District
5750Court for the Southern District of New York in October of 2009,
5751asserting a number of claims under various state and federal
5752laws against the Company relating to alleged misappropriation
5753and unfair competition by McGraw Hill Construction and seeking
5754an unspecified amount of damages. In September of 2010, the
5755Court granted the Company’s motion to dismiss some of the
5756claims. In September of 2014, the Court granted summary judgment
5757to the Company on all of Reed’s remaining claims with the
5758exception of the unfair competition claim. In October of 2014,
5759the parties submitted a joint stipulation to the Court agreeing to
5760dismiss both Reed’s unfair competition claim and the Company’s
5761counterclaims without prejudice to reinstatement in the event
5762of a successful appeal of Reed’s dismissed claims. On January 7,
57632016, the Second Circuit Court of Appeals affirmed the District
5764Court’s grant of summary judgment.
576513. Related Party Transactions
5766On July 31, 2014, we completed the sale of the Company’s aircraft
5767to Harold W. McGraw III, then Chairman of the Company’s
5768Board of Directors and former President and CEO of the
5769Company (“Mr. McGraw”) for a purchase price of $20 million,
5770which is modestly higher than the independent appraisal
5771obtained. This transaction was approved by the Nominating and
5772Corporate Governance Committee of the Company’s Board of
5773Directors after consultation with members of the Financial
5774Policy Committee. During the second quarter of 2014, we
5775recorded a non-cash impairment charge of $6 million within
5776other (income) loss in our consolidated statement of income as
5777a result of the pending sale.
5778On June 25, 2014, we repurchased 0.5 million shares of the
5779Company’s common stock from the personal holdings of Mr.
5780McGraw. The shares were purchased at a discount of 0.35%
5781from the June 24, 2014 New York Stock Exchange closing price
5782pursuant to a private transaction with Mr. McGraw. We repurchased
5783these shares with cash for $41 million at an average
5784price of $82.66 per share. This transaction was approved by the
5785Nominating and Corporate Governance Committee of the
5786Company’s Board of Directors after consultation with members
5787of the Financial Policy Committee.
5788In June of 2012, we entered into a new license agreement (the
5789“License Agreement”) with the holder of S&P Dow Jones Indices
5790LLC noncontrolling interest, CME Group, which replaced the
57912005 license agreement between S&P DJ Indices and CME
5792Group. Under the terms of the License Agreement, S&P Dow
5793Jones Indices LLC receives a share of the profits from the trading
5794and clearing of CME Group’s equity index products. During
5795the years ended December 31, 2015, 2014 and 2013, S&P Dow
5796Jones Indices LLC earned $63 million, $52 million and $46 million
5797of revenue under the terms of the License Agreement,
5798respectively. The entire amount of this revenue is included in our
5799consolidated statement of income and the portion related to
5800the 27% noncontrolling interest is removed in net income attributable
5801to noncontrolling interests.
580278 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
580314. Quarterly Financial Information (Unaudited)
5804(in millions, except per share data)
5805First
5806quarter
5807Second
5808quarter
5809Third
5810quarter
5811Fourth
5812quarter
5813Total
5814year
58152015
5816Revenue $1,273 $1,342 $1,324 $ 1,374 $5,313
5817Operating profit $ 501 $ 582 $ 410 $ 424 $1,917
5818Income from continuing operations $ 329 $ 381 $ 281 $ 276 $1,268
5819Net income $ 329 $ 381 $ 281 $ 276 $1,268
5820Net income attributable to McGraw Hill Financial common shareholders:
5821Income from continuing operations $ 303 $ 353 $ 252 $ 248 $1,156
5822Net income $ 303 $ 353 $ 252 $ 248 $1,156
5823Earnings per share attributable to McGraw Hill Financial, Inc. common shareholders:
5824Income from continuing operations:
5825Basic $ 1.11 $ 1.29 $ 0.93 $ 0.92 $ 4.26
5826Diluted $ 1.10 $ 1.28 $ 0.92 $ 0.91 $ 4.21
5827Net income:
5828Basic $ 1.11 $ 1.29 $ 0.93 $ 0.92 $ 4.26
5829Diluted $ 1.10 $ 1.28 $ 0.92 $ 0.91 $ 4.21
58302014
5831Revenue $ 1,196 $ 1,302 $ 1,263 $ 1,290 $5,051
5832Operating profit (loss) $ 420 $ 476 $ 366 $(1,148) $ 113
5833Income (loss) from continuing operations $ 268 $ 310 $ 215 $ (984) $ (191)
5834Income from discontinued operations $ 7 $ 6 $ 2 $ 163 $ 178
5835Net income (loss) $ 275 $ 316 $ 217 $ (821) $ (13)
5836Net income attributable to McGraw Hill Financial common shareholders:
5837Income (loss) from continuing operations $ 241 $ 286 $ 188 $(1,009) $ (293)
5838Income from discontinued operations 7 6 2 163 178
5839Net income (loss) $ 248 $ 292 $ 190 $ (846) $ (115)
5840Earnings (loss) per share attributable to McGraw Hill Financial, Inc. common shareholders:
5841Income (loss) from continuing operations:
5842Basic $ 0.89 $ 1.05 $ 0.69 $ (3.71) $ (1.08)
5843Diluted $ 0.87 $ 1.04 $ 0.68 $ (3.71) $ (1.08)
5844Income from discontinued operations:
5845Basic $ 0.02 $ 0.02 $ 0.01 $ 0.60 $ 0.66
5846Diluted $ 0.02 $ 0.02 $ 0.01 $ 0.60 $ 0.66
5847Net income (loss):
5848Basic $ 0.91 $ 1.08 $ 0.70 $ (3.11) $ (0.42)
5849Diluted $ 0.89 $ 1.06 $ 0.69 $ (3.11) $ (0.42)
5850Note — Totals presented may not sum due to rounding.
5851McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 79
585215. Condensed Consolidating Financial Statements
5853On 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
5854notes, 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
5855of 4.4% senior notes due in 2026.
5856The senior notes described above are fully and unconditionally guaranteed by Standard & Poor’s Financial Services LLC, a 100%
5857owned subsidiary of the Company. The following condensed consolidating financial statements present the results of operations,
5858financial position and cash flows of McGraw Hill Financial, Inc., Standard & Poor’s Financial Services LLC, and the Non-Guarantor
5859Subsidiaries of McGraw Hill Financial, Inc. and Standard & Poor’s Financial Services LLC, and the eliminations necessary to arrive at
5860the information for the Company on a consolidated basis.
5861Statement of Income
5862Year ended December 31, 2015
5863(in millions)
5864McGraw Hill
5865Financial, Inc.
5866Standard &
5867Poor’s Financial
5868Services LLC
5869NonGuarantor
5870
5871Subsidiaries Eliminations
5872McGraw Hill
5873Financial Inc.
5874Consolidated
5875Revenue $ 624 $2,141 $2,663 $ (115) $5,313
5876Expenses:
5877Operating-related expenses 73 522 1,192 (115) 1,672
5878Selling and general expenses 248 469 861 — 1,578
5879Depreciation 40 18 32 — 90
5880Amortization of intangibles — — 67 — 67
5881 Total expenses 361 1,009 2,152 (115) 3,407
5882Other income — — (11) — (11)
5883Operating profit 263 1,132 522 — 1,917
5884Interest expense (income), net 112 — (10) — 102
5885Non-operating intercompany transactions 282 222 (504) — —
5886(Loss) income from continuing operations before
5887taxes on income (131) 910 1,036 — 1,815
5888 (Benefit) provision for taxes on income (107) 358 296 — 547
5889 Equity in net income of subsidiaries 1,473 272 — (1,745) —
5890Net income $1,449 $ 824 $ 740 $(1,745) $1,268
5891 Less: net income from continuing operations
5892attributable to noncontrolling interests — — — (112) (112)
5893Net income attributable to McGraw Hill Financial, Inc. $1,449 $ 824 $ 740 $(1,857) $1,156
5894Comprehensive income $1,446 $ 822 $ 655 $(1,741) $1,182
589580 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
5896Statement of Income
5897Year ended December 31, 2014
5898(in millions)
5899McGraw Hill
5900Financial, Inc.
5901Standard &
5902Poor’s Financial
5903Services LLC
5904NonGuarantor
5905
5906Subsidiaries Eliminations
5907McGraw Hill
5908Financial Inc.
5909Consolidated
5910Revenue $ 598 $2,043 $2,525 $(115) $5,051
5911Expenses:
5912Operating-related expenses 78 389 1,275 (115) 1,627
5913Selling and general expenses 296 2,350 522 — 3,168
5914Depreciation 41 17 28 — 86
5915Amortization of intangibles 4 — 44 — 48
5916 Total expenses 419 2,756 1,869 (115) 4,929
5917Other loss 3 — 6 — 9
5918Operating profit (loss) 176 (713) 650 — 113
5919Interest expense (income), net 66 — (7) — 59
5920Non-operating intercompany transactions 193 38 (231) — —
5921(Loss) income from continuing operations before
5922taxes on income (83) (751) 888 — 54
5923 (Benefit) provision for taxes on income (22) 16 251 — 245
5924 Equity in net (loss) income of subsidiaries (443) 248 — 195 —
5925(Loss) income from continuing operations (504) (519) 637 195 (191)
5926Discontinued operations, net of tax:
5927Income from discontinued operations 18 — — — 18
5928Gain on sale of discontinued operations 160 — — — 160
5929 Discontinued operations, net 178 — — — 178
5930Net (loss) income $(326) $ (519) $ 637 $ 195 $ (13)
5931 Less: net income from continuing operations
5932attributable to noncontrolling interests — — — (102) (102)
5933Net (loss) income attributable to McGraw Hill Financial, Inc. $(326) $ (519) $ 637 $ 93 $ (115)
5934Comprehensive (loss) income $(495) $ (544) $ 513 $ 195 $ (331)
5935McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 81
5936Statement of Income
5937Year ended December 31, 2013
5938(in millions)
5939McGraw Hill
5940Financial, Inc.
5941Standard &
5942Poor’s Financial
5943Services LLC
5944NonGuarantor
5945
5946Subsidiaries Eliminations
5947McGraw Hill
5948Financial Inc.
5949Consolidated
5950Revenue $ 570 $1,931 $2,306 $ (105) $4,702
5951Expenses:
5952Operating-related expenses 128 556 985 (105) 1,564
5953Selling and general expenses 338 532 761 — 1,631
5954Depreciation 40 19 27 — 86
5955Amortization of intangibles 5 — 46 — 51
5956 Total expenses 511 1,107 1,819 (105) 3,332
5957Other loss (income) 25 3 (16) — 12
5958Operating profit 34 821 503 — 1,358
5959Interest expense (income), net 65 — (6) — 59
5960Non-operating intercompany transactions 245 66 (311) — —
5961Income from continuing operations before taxes on income (276) 755 820 — 1,299
5962(Benefit) provision for taxes on income (121) 283 263 — 425
5963Equity in net income of subsidiaries 1,937 197 — (2,134) —
5964Income from continuing operations 1,782 669 557 (2,134) 874
5965Discontinued operations, net of tax:
5966Income (loss) from discontinued operations 82 — (79) — 3
5967Gain (loss) on sale of discontinued operations 644 — (55) — 589
5968 Discontinued operations, net 726 — (134) — 592
5969Net income $2,508 $ 669 $ 423 $(2,134) $1,466
5970 Less: net income from continuing operations
5971attributable to noncontrolling interests — — — (91) (91)
5972 Less: net loss from discontinued operations
5973attributable to noncontrolling interests — — — 1 1
5974Net income attributable to McGraw Hill Financial, Inc. $2,508 $ 669 $ 423 $(2,224) $1,376
5975Comprehensive income $2,773 $ 669 $ 452 $(2,106) $1,788
597682 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
5977Balance Sheet
5978December 31, 2015
5979(in millions)
5980McGraw Hill
5981Financial, Inc.
5982Standard &
5983Poor’s Financial
5984Services LLC
5985NonGuarantor
5986
5987Subsidiaries Eliminations
5988McGraw Hill
5989Financial Inc.
5990Consolidated
5991ASSETS
5992Current assets:
5993Cash and cash equivalents $ 167 $ — $ 1,314 $ — $ 1,481
5994Accounts receivable, net of allowance for doubtful accounts 116 319 556 — 991
5995Intercompany receivable 208 1,872 1,273 (3,353) —
5996Deferred income taxes 75 10 24 — 109
5997Prepaid and other current assets 120 13 80 (1) 212
5998Assets of a business held for sale 4 — 499 — 503
5999 Total current assets 690 2,214 3,746 (3,354) 3,296
6000Property and equipment, net of accumulated depreciation 141 3 126 — 270
6001Goodwill 17 40 2,816 9 2,882
6002Other intangible assets, net — — 1,522 — 1,522
6003Asset for pension benefits — — 36 — 36
6004Investments in subsidiaries 4,651 659 7,316 (12,626) —
6005Intercompany loans receivable 16 368 1,733 (2,117) —
6006Other non-current assets 67 19 91 — 177
6007 Total assets $ 5,582 $3,303 $17,386 $(18,088) $ 8,183
6008LIABILITIES AND EQUITY
6009Current liabilities:
6010Accounts payable $ 71 $ 54 $ 81 $ — $ 206
6011Intercompany payable 2,144 675 535 (3,354) —
6012Accrued compensation and contributions to retirement plans 127 89 167 — 383
6013Short-term debt 143 — — — 143
6014Income taxes currently payable 1 — 55 — 56
6015Unearned revenue 254 586 582 (1) 1,421
6016Accrued legal and regulatory settlements — 115 6 — 121
6017Other current liabilities 190 (50) 232 — 372
6018Liabilities of a business held for sale 80 — 126 — 206
6019 Total current liabilities 3,010 1,469 1,784 (3,355) 2,908
6020Long-term debt 3,468 — — — 3,468
6021Intercompany loans payable 21 — 2,096 (2,117) —
6022Pension and other postretirement benefits 230 — 46 — 276
6023Deferred income taxes (246) 17 252 — 23
6024Other non-current liabilities 221 81 43 — 345
6025 Total liabilities 6,704 1,567 4,221 (5,472) 7,020
6026Redeemable noncontrolling interest — — — 920 920
6027Equity:
6028Common stock 412 — 2,337 (2,337) 412
6029Additional paid-in capital (184) 1,179 10,174 (10,694) 475
6030Retained income 6,701 557 987 (609) 7,636
6031Accumulated other comprehensive loss (322) — (322) 44 (600)
6032Less: common stock in treasury (7,729) — (12) 12 (7,729)
6033 Total equity — controlling interests (1,122) 1,736 13,164 (13,584) 194
6034 Total equity — noncontrolling interests — — 1 48 49
6035Total equity (1,122) 1,736 13,165 (13,536) 243
6036Total liabilities and equity $ 5,582 $3,303 $17,386 $(18,088) $ 8,183
6037McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 83
6038Balance Sheet
6039December 31, 2014
6040(in millions)
6041McGraw Hill
6042Financial, Inc.
6043Standard &
6044Poor’s Financial
6045Services LLC
6046NonGuarantor
6047
6048Subsidiaries Eliminations
6049McGraw Hill
6050Financial Inc.
6051Consolidated
6052ASSETS
6053Current assets:
6054Cash and cash equivalents $ 1,402 $ — $ 1,095 $ — $ 2,497
6055Accounts receivable, net of allowance for doubtful accounts 120 293 519 — 932
6056Intercompany receivable 525 2,125 1,998 (4,648) —
6057Deferred income taxes 60 334 (34) — 360
6058Prepaid and other current assets 79 27 67 — 173
6059 Total current assets 2,186 2,779 3,645 (4,648) 3,962
6060Property and equipment, net of accumulated depreciation 111 5 90 — 206
6061Goodwill 109 41 1,228 9 1,387
6062Other intangible assets, net 13 — 991 — 1,004
6063Asset for pension benefits — — 28 — 28
6064Investments in subsidiaries 1,258 653 7,125 (9,036) —
6065Intercompany loans receivable 20 358 1,594 (1,972) —
6066Other non-current assets 71 25 90 — 186
6067 Total assets $ 3,768 $3,861 $14,791 $(15,647) $ 6,773
6068LIABILITIES AND EQUITY
6069Current liabilities:
6070Accounts payable $ 59 $ 45 $ 87 $ — $ 191
6071Intercompany payable 2,566 617 1,376 (4,559) —
6072Accrued compensation and contributions to retirement plans 133 121 156 — 410
6073Income taxes currently payable 19 1 34 — 54
6074Unearned revenue 259 520 475 — 1,254
6075Accrued legal and regulatory settlements — 1,609 — — 1,609
6076Other current liabilities 194 — 208 — 402
6077 Total current liabilities 3,230 2,913 2,336 (4,559) 3,920
6078Long-term debt 795 — — — 795
6079Intercompany loans payable 109 — 1,952 (2,061) —
6080Pension and other postretirement benefits 272 — 61 — 333
6081Deferred income taxes (260) 51 249 — 40
6082Other non-current liabilities 219 73 44 — 336
6083 Total liabilities 4,365 3,037 4,642 (6,620) 5,424
6084Redeemable noncontrolling interest — — — 810 810
6085Equity:
6086Common stock 412 — 2,316 (2,316) 412
6087Additional paid-in capital (116) 1,153 7,016 (7,560) 493
6088Retained income 6,275 (329) 1,060 (60) 6,946
6089Accumulated other comprehensive loss (319) — (236) 41 (514)
6090Less: common stock in treasury (6,849) — (7) 7 (6,849)
6091 Total equity — controlling interests (597) 824 10,149 (9,888) 488
6092 Total equity — noncontrolling interests — — — 51 51
6093 Total equity (597) 824 10,149 (9,837) 539
6094 Total liabilities and equity $ 3,768 $3,861 $14,791 $(15,647) $ 6,773
609584 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
6096Statement of Cash Flows
6097Year ended December 31, 2015
6098(in millions)
6099McGraw Hill
6100Financial, Inc.
6101Standard &
6102Poor’s Financial
6103Services LLC
6104NonGuarantor
6105
6106Subsidiaries Eliminations
6107McGraw Hill
6108Financial Inc.
6109Consolidated
6110Operating Activities:
6111Net income $ 1,449 $ 824 $ 740 $(1,745) $ 1,268
6112Adjustments to reconcile income from continuing operations
6113 to cash provided by (used for) operating activities from
6114continuing operations:
6115 Depreciation 40 18 32 — 90
6116 Amortization of intangibles — — 67 — 67
6117 Provision for losses on accounts receivable 1 1 6 — 8
6118 Deferred income taxes 33 290 (43) — 280
6119 Stock-based compensation 23 24 31 — 78
6120 Accrued legal and regulatory settlements — 110 9 — 119
6121 Other 23 16 7 — 46
6122Changes in operating assets and liabilities, net of effect of
6123acquisitions and dispositions:
6124 Accounts receivable 3 (27) (94) — (118)
6125 Prepaid and current assets (13) 14 (5) — (4)
6126 Accounts payable and accrued expenses (75) (34) 17 — (92)
6127 Unearned revenue (5) 66 68 — 129
6128 Accrued legal and regulatory settlement — (1,624) — — (1,624)
6129 Other current liabilities (32) (35) (11) — (78)
6130 Net change in prepaid / accrued income taxes (54) — 115 — 61
6131 Net change in other assets and liabilities 78 8 (121) — (35)
6132Cash provided by (used for) operating activities from
6133continuing operations 1,471 (349) 818 (1,745) 195
6134Investing Activities:
6135Capital expenditures (67) (10) (62) — (139)
6136Acquisitions, net of cash acquired (2,243) — (153) — (2,396)
6137Proceeds from dispositions — — 14 — 14
6138Changes in short-term investments — — (4) — (4)
6139Cash used for investing activities from continuing operations (2,310) (10) (205) — (2,525)
6140Financing Activities:
6141Additions to short-term debt, net 143 — — — 143
6142Proceeds from issuance of senior notes, net 2,674 — — — 2,674
6143Dividends paid to shareholders (363) — — — (363)
6144Dividends and other payments paid to noncontrolling interests — — (104) — (104)
6145Repurchase of treasury shares (974) — — — (974)
6146Exercise of stock options 80 — 6 — 86
6147Contingent payments (5) — — — (5)
6148Purchase of additional CRISIL shares — — (16) — (16)
6149Excess tax benefits from share-based payments 69 — — — 69
6150Intercompany financing activities (2,020) 359 (84) 1,745 —
6151Cash (used for) provided by financing activities from
6152continuing operations (396) 359 (198) 1,745 1,510
6153Effect of exchange rate changes on cash from
6154continuing operations — — (67) — (67)
6155Cash (used for) provided by continuing operations (1,235) — 348 — (887)
6156Discontinued Operations:
6157Cash used for operating activities — — (129) — (129)
6158Cash used for discontinued operations — — (129) — (129)
6159Net change in cash and cash equivalents (1,235) — 219 — (1,016)
6160Cash and cash equivalents at beginning of year 1,402 — 1,095 — 2,497
6161Cash and cash equivalents at end of year $ 167 $ — $1,314 $ — $ 1,481
6162McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 85
6163Statement of Cash Flows
6164Year ended December 31, 2014
6165(in millions)
6166McGraw Hill
6167Financial, Inc.
6168Standard &
6169Poor’s Financial
6170Services LLC
6171NonGuarantor
6172
6173Subsidiaries Eliminations
6174McGraw Hill
6175Financial Inc.
6176Consolidated
6177Operating Activities:
6178Net (loss) income $ (326) $ (519) $ 637 $ 195 $ (13)
6179Less: discontinued operations, net 178 — — — 178
6180(Loss) income from continuing operations (504) (519) 637 195 (191)
6181Adjustments to reconcile (loss) income from continuing
6182 operations to cash (used for) provided by operating activities
6183from continuing operations:
6184 Depreciation 41 17 28 — 86
6185 Amortization of intangibles 4 — 44 — 48
6186 Provision for losses on accounts receivable — 5 6 — 11
6187 Deferred income taxes 42 (272) (15) — (245)
6188 Stock-based compensation 31 34 35 — 100
6189 Accrued legal and regulatory settlements — 1,587 — — 1,587
6190 Other 21 39 20 — 80
6191Changes in operating assets and liabilities, net of effect of
6192acquisitions and dispositions:
6193 Accounts receivable (11) 47 (45) — (9)
6194 Prepaid and current assets (42) (17) 52 — (7)
6195 Accounts payable and accrued expenses (83) (47) — — (130)
6196 Unearned revenue 8 26 44 — 78
6197 Accrued legal and regulatory settlement — (35) — — (35)
6198 Other current liabilities (51) 45 (10) — (16)
6199 Net change in prepaid / accrued income taxes 13 3 (109) — (93)
6200 Net change in other assets and liabilities (131) 5 71 — (55)
6201Cash (used for) provided by operating activities from
6202continuing operations (662) 918 758 195 1,209
6203Investing Activities:
6204 Capital expenditures (26) (14) (52) — (92)
6205 Acquisitions, net of cash acquired — — (71) — (71)
6206 Proceeds from dispositions 63 — 20 — 83
6207 Changes in short-term investments — — 15 — 15
6208Cash provided by (used for) investing activities from
6209continuing operations 37 (14) (88) — (65)
6210Financing Activities:
6211 Dividends paid to shareholders (326) — — — (326)
6212 Dividends and other payments paid to noncontrolling interests — — (84) — (84)
6213 Repurchase of treasury shares (362) — — — (362)
6214 Exercise of stock options 184 — 9 — 193
6215 Contingent payments — — (11) — (11)
6216 Excess tax benefits from share-based payments 128 — — — 128
6217 Intercompany financing activities 1,377 (904) (278) (195) —
6218Cash provided by (used for) financing activities from
6219continuing operations 1,001 (904) (364) (195) (462)
6220Effect of exchange rate changes on cash from
6221continuing operations 3 — (68) — (65)
6222Cash provided by continuing operations 379 — 238 — 617
6223Discontinued Operations:
6224Cash provided by operating activities 18 — — — 18
6225Cash provided by investing activities 320 — — — 320
6226Cash provided by discontinued operations 338 — — — 338
6227Net change in cash and cash equivalents 717 — 238 — 955
6228Cash and cash equivalents at beginning of year 685 — 857 — 1,542
6229Cash and cash equivalents at end of year $1,402 $ — $1,095 $ — $2,497
623086 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
6231Statement of Cash Flows
6232Year ended December 31, 2013
6233(in millions)
6234McGraw Hill
6235Financial, Inc.
6236Standard &
6237Poor’s Financial
6238Services LLC
6239NonGuarantor
6240
6241Subsidiaries Eliminations
6242McGraw Hill
6243Financial Inc.
6244Consolidated
6245Operating Activities:
6246Net income $ 2,508 $ 669 $ 423 $(2,134) $ 1,466
6247Less: discontinued operations, net 726 — (134) — 592
6248Income from continuing operations 1,782 669 557 (2,134) 874
6249Adjustments to reconcile income from continuing operations
6250 to cash provided by (used for) operating activities from
6251continuing operations:
6252 Depreciation 40 19 27 — 86
6253 Amortization of intangibles 5 — 46 — 51
6254 Provision for losses on accounts receivable 1 7 14 — 22
6255 Deferred income taxes 39 — 4 — 43
6256 Stock-based compensation 35 33 28 — 96
6257 Accrued legal and regulatory settlements — — — — —
6258 Other 68 10 18 — 96
6259Changes in operating assets and liabilities, net of effect of
6260acquisitions and dispositions:
6261 Accounts receivable (2) (4) (29) — (35)
6262 Prepaid and current assets (14) (7) (8) — (29)
6263 Accounts payable and accrued expenses (120) 18 8 — (94)
6264 Unearned revenue 17 43 49 — 109
6265 Other current liabilities (43) (24) (22) — (89)
6266 Net change in prepaid / accrued income taxes (265) (3) 30 — (238)
6267 Net change in other assets and liabilities (190) 84 (4) — (110)
6268Cash provided by operating activities from continuing operations 1,353 845 718 (2,134) 782
6269Investing Activities:
6270Capital expenditures (61) (19) (37) — (117)
6271Acquisitions, net of cash acquired — — (47) — (47)
6272Proceeds from dispositions 35 — 16 — 51
6273Changes in short-term investments — — (17) — (17)
6274Cash used for investing activities from continuing operations (26) (19) (85) — (130)
6275Financing Activities:
6276 Payments on short-term debt (457) — — — (457)
6277 Dividends paid to shareholders (308) — — — (308)
6278 Dividends and other payments paid to noncontrolling interests — — (75) — (75)
6279 Repurchase of treasury shares (978) — — — (978)
6280 Exercise of stock options 254 — 4 — 258
6281 Contingent payments — — (12) — (12)
6282 Purchase of additional CRISIL shares — — (214) — (214)
6283 Excess tax benefits from share-based payments 43 — — — 43
6284 Intercompany financing activities (43) (826) (1,265) 2,134 —
6285Cash used for financing activities from continuing operations (1,489) (826) (1,562) 2,134 (1,743)
6286Effect of exchange rate changes on cash from
6287continuing operations 8 — (9) — (1)
6288Cash used for continuing operations (154) — (938) — (1,092)
6289Discontinued Operations:
6290Cash provided by (used for) operating activities 720 — (951) — (231)
6291Cash provided by investing activities — — 2,129 — 2,129
6292Cash used for financing activities — — (25) — (25)
6293Effect of exchange rate changes on cash — — 1 — 1
6294Cash provided by discontinued operations 720 — 1,154 — 1,874
6295Net change in cash and cash equivalents 566 — 216 — 782
6296Cash and cash equivalents at beginning of year 119 — 641 — 760
6297Cash and cash equivalents at end of year $ 685 $ — $ 857 $ — $ 1,542
6298McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 87
6299Five Year Financial Review
6300(in millions, except per share data) 2015 2014 2013 2012 2011
6301Income statement data:
6302Revenue $5,313 $5,051 $4,702 $ 4,270 $3,762
6303Operating profit 1,917 113 1,358 1,170 1,052
6304Income from continuing operations before taxes on income 1,815 1 54 2 1,299 3 1,089 4 975 5
6305Provision for taxes on income 547 245 425 388 364
6306 Net income (loss) from continuing operations attributable to
6307McGraw Hill Financial, Inc. 1,156 (293) 783 651 592
6308 Earnings (loss) per share from continuing operations attributable
6309to the McGraw Hill Financial, Inc. common shareholders:
6310 Basic 4.26 (1.08) 2.85 2.33 1.98
6311 Diluted 4.21 (1.08) 2.80 2.29 1.95
6312Dividends per share 1.32 1.20 1.12 1.02 1.00
6313Special dividend declared per common share — — — 2.50 —
6314Operating statistics:
6315Return on average equity 6 324.3% (1.4)% 134.2% 40.5% 48.2%
6316 Income from continuing operations before taxes on income as a
6317percent of revenue from continuing operations 34.2% 1.1% 27.6% 25.5% 25.9%
6318 Net income (loss) from continuing operations as a percent of
6319revenue from continuing operations 23.9% (3.8)% 18.6% 16.4% 16.2%
6320Balance sheet data: 7
6321Working capital $ 388 $ 42 $ 612 $(1,018) $ (812)
6322Total assets 8,183 6,773 6,060 5,081 4,061
6323Total debt 3,611 795 794 1,251 1,193
6324Redeemable noncontrolling interest 920 810 810 810 —
6325Equity 243 539 1,344 840 1,584
6326Number of employees 7 20,400 17,000 16,400 15,900 15,600
63271 Includes the impact of the following items: costs related to identified operating efficiencies primarily related to restructuring of $56 million, legal
6328settlement charges partially offset by insurance recoveries of $54 million, acquisition-related costs of $37 million, and a gain of $11 million on
6329the sale of our interest in a legacy McGraw Hill Construction investment.
63302 Includes the impact of the following items: $1.6 billion of legal and regulatory settlements, restructuring charges of $86 million, and $4 million of
6331professional fees largely related to corporate development activities.
63323 Includes the impact of the following items: $77 million of legal settlements, $64 million charge for costs necessary to enable the separation of
6333MHE and reduce our cost structure, a $36 million non-cash impairment charge related to the sale of our data center, a $28 million restructuring
6334charge in the fourth quarter primarily related to severance, $13 million related to terminating various leases as we reduce our real estate
6335portfolio and a $24 million net gain from our dispositions.
63364 Includes the impact of the following items: $135 million charge for costs necessary to enable the separation of MHE and reduce our cost
6337structure, a $65 million restructuring charge, transaction costs of $15 million for our S&P Dow Jones Indices LLC joint venture, an $8 million
6338charge related to a reduction in our lease commitments, partially offset by a vacation accrual reversal of $52 million.
63395 Includes the impact of a $31 million restructuring charge and a $10 million charge for costs necessary to enable the separation of MHE and
6340reduce our cost structure.
63416 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
6342sale of the Broadcasting Group in 2011.
63437 Excludes discontinued operations.
634488 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
6345Report of Management
6346To the Shareholders of McGraw Hill Financial, Inc.
6347MANAGEMENT’S ANNUAL REPORT ON ITS
6348RESPONSIBILITY FOR THE COMPANY’S FINANCIAL
6349STATEMENTS AND INTERNAL CONTROL OVER
6350FINANCIAL REPORTING
6351The financial statements in this report were prepared by the
6352management of McGraw Hill Financial, Inc., which is responsible
6353for their integrity and objectivity.
6354These statements, prepared in conformity with accounting
6355principles generally accepted in the United States and including
6356amounts based on management’s best estimates and judgments,
6357present fairly McGraw Hill Financial Inc.’s financial
6358condition and the results of the Company’s operations. Other
6359financial information given in this report is consistent with
6360these statements.
6361The Company’s management is responsible for establishing and
6362maintaining adequate internal control over financial reporting
6363for the Company as defined under the U.S. Securities Exchange
6364Act of 1934. It further assures the quality of the financial
6365records in several ways: a program of internal audits, the careful
6366selection and training of management personnel, maintaining
6367an organizational structure that provides an appropriate division
6368of financial responsibilities, and communicating financial
6369and other relevant policies throughout the Company.
6370McGraw Hill Financial Inc.’s Board of Directors, through its Audit
6371Committee, composed entirely of outside directors, is responsible
6372for reviewing and monitoring the Company’s financial reporting
6373and accounting practices. The Audit Committee meets
6374periodically with management, the Company’s internal auditors
6375and the independent registered public accounting firm to ensure
6376that each group is carrying out its respective responsibilities. In
6377addition, the independent registered public accounting firm has
6378full and free access to the Audit Committee and meet with it
6379with no representatives from management present.
6380MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER
6381FINANCIAL REPORTING
6382As stated above, the Company’s management is responsible for
6383establishing and maintaining adequate internal control over
6384financial reporting. The Company’s management has evaluated
6385the system of internal control using the Committee of Sponsoring
6386Organizations of the Treadway Commission 2013 framework
6387(“COSO 2013 framework”). Management has selected the
6388COSO 2013 framework for its evaluation as it is a control framework
6389recognized by the Securities and Exchange Commission
6390and the Public Company Accounting Oversight Board that is
6391free from bias, permits reasonably consistent qualitative and
6392quantitative measurement of the Company’s internal controls,
6393is sufficiently complete so that relevant controls are not omitted
6394and is relevant to an evaluation of internal controls over
6395financial reporting.
6396Based on management’s evaluation under this framework, we
6397have concluded that the Company’s internal controls over financial
6398reporting were effective as of December 31, 2015. There are
6399no material weaknesses in the Company’s internal control over
6400financial reporting that have been identified by management.
6401Management has excluded SNL Financial LC (“SNL”) from its
6402assessment of internal control over financial reporting as of
6403December 31, 2015, since it was acquired on September 1,
64042015. SNL has $2.5 billion and $2.3 billion of total and net
6405assets, respectively, as of December 31, 2015 and $85 million
6406and $9 million of revenues and net loss attributable to McGraw
6407Hill Financial, Inc., respectively, for the year then ended.
6408The Company’s independent registered public accounting firm,
6409Ernst & Young LLP, has audited the consolidated financial statements
6410of the Company for the year ended December 31, 2015,
6411and has issued their reports on the financial statements and the
6412effectiveness of internal controls over financial reporting.
6413OTHER MATTERS
6414There have been no changes in the Company’s internal controls
6415over financial reporting during the most recent quarter that
6416have materially affected, or are reasonably likely to materially
6417affect, the Company’s internal control over financial reporting.
6418Douglas L. Peterson
6419President and Chief Executive Officer
6420Jack F. Callahan, Jr.
6421Executive Vice President and Chief Financial Officer
6422McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 89
6423THE BOARD OF DIRECTORS AND SHAREHOLDERS
6424OF McGRAW HILL FINANCIAL, INC.
6425We have audited the accompanying consolidated balance sheets
6426of McGraw Hill Financial, Inc. (the “Company”) as of December
642731, 2015 and 2014, and the related consolidated statements of
6428income, comprehensive income, cash flows and equity for each
6429of the three years in the period ended December 31, 2015. These
6430financial statements are the responsibility of the Company’s
6431management. Our responsibility is to express an opinion on these
6432financial statements based on our audits.
6433We conducted our audits in accordance with the standards of
6434the Public Company Accounting Oversight Board (United
6435States). Those standards require that we plan and perform the
6436audit to obtain reasonable assurance about whether the financial
6437statements are free of material misstatement. An audit
6438includes examining, on a test basis, evidence supporting the
6439amounts and disclosures in the financial statements. An audit
6440also includes assessing the accounting principles used and significant
6441estimates made by management, as well as evaluating
6442the overall financial statement presentation. We believe that our
6443audits provide a reasonable basis for our opinion.
6444In our opinion, the financial statements referred to above present
6445fairly, in all material respects, the consolidated financial
6446position of McGraw Hill Financial, Inc. at December 31, 2015 and
64472014, and the consolidated results of its operations and its cash
6448flows for each of the three years in the period ended December
644931, 2015, in conformity with U.S. generally accepted accounting
6450principles.
6451We also have audited, in accordance with the standards of the
6452Public Company Accounting Oversight Board (United States),
6453McGraw Hill Financial, Inc.’s internal control over financial
6454reporting as of December 31, 2015, based on criteria established
6455in Internal Control — Integrated Framework issued by the
6456Committee of Sponsoring Organizations of the Treadway
6457Commission (2013 framework), and our report dated February
645811, 2016 expressed an unqualified opinion thereon.
6459/s/ ERNST & YOUNG LLP
6460New York, New York
6461February 11, 2016
6462Report of Independent Registered Public Accounting Firm
646390 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
6464THE BOARD OF DIRECTORS AND SHAREHOLDERS
6465OF McGRAW HILL FINANCIAL, INC.
6466We have audited McGraw Hill Financial, Inc.’s (the “Company”)
6467internal control over financial reporting as of December 31,
64682015, based on criteria established in Internal Control —
6469Integrated Framework issued by the Committee of Sponsoring
6470Organizations of the Treadway Commission (2013 framework)
6471(the COSO criteria). McGraw Hill Financial, Inc.’s management is
6472responsible for maintaining effective internal control over
6473financial reporting, and for its assessment of the effectiveness
6474of internal control over financial reporting included in the
6475accompanying Management’s Annual Report on Internal Control
6476Over Financial Reporting. Our responsibility is to express an
6477opinion on the Company’s internal control over financial reporting
6478based on our audit.
6479We conducted our audit in accordance with the standards of the
6480Public Company Accounting Oversight Board (United States).
6481Those standards require that we plan and perform the audit to
6482obtain reasonable assurance about whether effective internal
6483control over financial reporting was maintained in all material
6484respects. Our audit included obtaining an understanding of
6485internal control over financial reporting, assessing the risk that
6486a material weakness exists, testing and evaluating the design
6487and operating effectiveness of internal control based on the
6488assessed risk, and performing such other procedures as we
6489considered necessary in the circumstances. We believe that our
6490audit provides a reasonable basis for our opinion.
6491A company’s internal control over financial reporting is a process
6492designed to provide reasonable assurance regarding the
6493reliability of financial reporting and the preparation of financial
6494statements for external purposes in accordance with generally
6495accepted accounting principles. A company’s internal control
6496over financial reporting includes those policies and procedures
6497that (1) pertain to the maintenance of records that, in reasonable
6498detail, accurately and fairly reflect the transactions and
6499dispositions of the assets of the company; (2) provide reasonable
6500assurance that transactions are recorded as necessary
6501to permit preparation of financial statements in accordance
6502with generally accepted accounting principles, and that receipts
6503and expenditures of the company are being made only in accordance
6504with authorizations of management and directors of the
6505company; and (3) provide reasonable assurance regarding prevention
6506or timely detection of unauthorized acquisition, use, or
6507disposition of the company’s assets that could have a material
6508effect on the financial statements.
6509Because of its inherent limitations, internal control over financial
6510reporting may not prevent or detect misstatements. Also,
6511projections of any evaluation of effectiveness to future periods
6512are subject to the risk that controls may become inadequate
6513because of changes in conditions, or that the degree of compliance
6514with the policies or procedures may deteriorate.
6515As indicated in the accompanying Management’s Annual Report
6516on Internal Control Over Financial Reporting, management’s
6517assessment of and conclusion on the effectiveness of internal
6518control over financial reporting did not include the internal controls
6519of SNL Financial LC, which is included in the 2015 consolidated
6520financial statements of McGraw Hill Financial, Inc. and
6521constituted $2.5 billion and $2.3 billion of total and net assets,
6522respectively, as of December 31, 2015 and $85 million and $9
6523million of revenues and net loss attributable to McGraw Hill
6524Financial, Inc., respectively, for the year then ended. Our audit of
6525internal control over financial reporting of McGraw Hill Financial,
6526Inc. also did not include an evaluation of the internal control over
6527financial reporting of SNL Financial LC.
6528In our opinion, McGraw Hill Financial, Inc. maintained, in all material
6529respects, effective internal control over financial reporting
6530as of December 31, 2015, based on the COSO criteria.
6531We also have audited, in accordance with the standards of the
6532Public Company Accounting Oversight Board (United States),
6533the consolidated balance sheets of McGraw Hill Financial, Inc. as
6534of December 31, 2015 and 2014, and the related consolidated
6535statements of income, comprehensive income, cash flows and
6536equity for each of the three years in the period ended December
653731, 2015 and our report dated February 11, 2016 expressed an
6538unqualified opinion thereon.
6539/s/ ERNST & YOUNG LLP
6540New York, New York
6541February 11, 2016
6542Report of Independent Registered Public Accounting Firm
6543McGRAW HILL FINANCIAL 2015 ANNUAL REPORT 91
6544ANNUAL MEETING
6545The 2016 annual meeting will be held at 11 a.m. EDT on
6546Wednesday, April 27th at 55 Water Street, New York,
6547New York, 10041.
6548The annual meeting will also be Webcast at:
6549www.mhfi.com
6550STOCK EXCHANGE LISTING
6551Shares of the Company’s common stock are traded primarily on
6552the New York Stock Exchange. MHFI is the ticker symbol for its
6553common stock.
6554INVESTOR RELATIONS WEB SITE
6555Go to http://investor.mhfi.com to find:
6556 Dividend and stock split history
6557 Stock quotes and charts
6558 Investor Fact Book
6559 Corporate Governance
6560 Financial reports, including the annual report,
6561proxy statement and SEC filings
6562 Financial news releases
6563 Management presentations
6564 Investor e-mail alerts
6565 RSS news feeds
6566INVESTOR KIT
6567The Company’s investor kit includes the current Annual Report,
6568Proxy Statement, Form 10-Qs, Form 10-K, and the current
6569earnings release.
6570For online access to the Digital Investor Kit, go to
6571http://investor.mhfi.com
6572Requests for printed copies, free of charge, can be e-mailed
6573to investor.relations@mhfi.com or mailed to Investor Relations,
6574McGraw Hill Financial, Inc., 55 Water Street, New York, NY 10041.
6575Interested parties can also call Investor Relations toll-free at
6576866-436-8502 (domestic callers) or 212-438-2192 (international
6577callers).
6578NEWS MEDIA INQUIRIES
6579Go to www.mhfi.com/news to view the latest Company news
6580and information or to submit an e-mail inquiry. You may also
6581call Corporate Affairs at 212-438-1247.
6582CERTIFICATIONS AND
6583McGRAW HILL FINANCIAL, INC. FORM 10-K
6584We have filed the required certifications under Sections 302 and
6585906 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1, 31.2
6586and 32 to our Form 10-K for the year ended December 31, 2015.
6587The financial information included in this report was excerpted
6588from the Company’s Form 10-K for the year ended December
658931, 2015, filed with the Securities and Exchange Commission
6590on February 12, 2016. Shareholders may access a complete
6591copy of the 10-K by following the instruction noted above under
6592the heading “Investor Kit”.
6593TRANSFER AGENT AND REGISTRAR FOR COMMON STOCK
6594Computershare is the transfer agent for McGraw Hill Financial.
6595Computershare maintains the records for the Company’s registered
6596shareholders and can assist with a variety of shareholder
6597related services.
6598Shareholder correspondence should be mailed to:
6599Computershare
6600P.O. Box 30170
6601College Station, TX 77842-3170
6602Overnight correspondence should be mailed to:
6603Computershare
6604211 Quality Circle, Suite 210
6605College Station, TX 77845
6606Investor Centerâ„¢ website to view and manage shareholder
6607account online: www.computershare.com/investor
6608For shareholder assistance:
6609In the U.S. and Canada: 888-201-5538
6610Outside the U.S. and Canada: 201-680-6578
6611TDD for the hearing impaired: 800-231-5469
6612TDD outside the U.S. and Canada: 201-680-6610
6613E-mail address:
6614shareholder@computershare.com
6615Shareholder online inquiries:
6616https://www-us.computershare.com/investor/Contact
6617DIRECT STOCK PURCHASE AND
6618DIVIDEND REINVESTMENT PLAN
6619This program offers a convenient, low-cost way to invest in
6620our common stock. Participants can purchase and sell shares
6621directly through the program, make optional cash investments
6622weekly, reinvest dividends, and send certificates to the transfer
6623agent for safekeeping.
6624Interested investors can view the prospectus and enroll online
6625at www.computershare.com/investor. To receive the materials
6626by mail, contact Computershare as noted above.
6627Shareholder Information
662892 McGRAW HILL FINANCIAL 2015 ANNUAL REPORT
6629Charles E. “Ed” Haldeman, Jr. (A,E,N)
6630Chairman
6631McGraw Hill Financial & KCG Holdings, Inc.
6632Douglas L. Peterson (E,F)
6633President and Chief Executive Officer
6634McGraw Hill Financial
6635Sir Winfried Bischoff (C,E,F)
6636Chairman
6637Financial Reporting Council &
6638J.P. Morgan Securities plc
6639William D. Green (C,N)
6640Former CEO & Chairman
6641Accenture
6642Rebecca Jacoby (F)
6643Senior Vice President, Operations
6644Cisco Systems, Inc.
6645Robert P. McGraw (F)
6646Chairman and Chief Executive Officer
6647Averdale Holdings, LLC
6648Hilda Ochoa-Brillembourg (A,F)
6649Founder and Chairman
6650Strategic Investment Group
6651Sir Michael Rake (A,E,F)
6652Chairman
6653BT Group plc & Worldpay
6654Edward B. Rust, Jr. (C,E,N)
6655Chairman of the Board
6656State Farm Insurance Companies
6657Kurt L. Schmoke (C,N)
6658President
6659University of Baltimore
6660Sidney Taurel (C,E,N)
6661Chairman Emeritus
6662Eli Lilly and Company
6663Richard E. Thornburgh (A,F)
6664Member of the Private Equity
6665Investment Committee
6666Corsair Capital, LLC
6667(A) Audit Committee
6668(C) Compensation & Leadership Development Committee
6669(E) Executive Committee
6670(F) Financial Policy Committee
6671(N) Nominating & Corporate Governance Committee
6672Board of Directors
6673Executive Committee
6674Douglas L. Peterson
6675President and Chief
6676Executive Officer
6677Courtney Geduldig
6678Executive Vice President
6679Public Affairs
6680Alexander J. Matturri
6681Chief Executive Officer
6682S&P Dow Jones Indices
6683Mike Chinn
6684President
6685S&P Global Market
6686Intelligence
6687Donald R. Howard
6688Chief of Risk and Compliance
6689Jack F. Callahan, Jr.
6690Executive Vice President
6691Chief Financial Officer
6692David Goldenberg
6693Acting General Counsel
6694Ashu Suyash
6695Managing Director and
6696Chief Executive Officer
6697CRISIL
6698John Berisford
6699President
6700Standard & Poor’s
6701Ratings Services
6702France M. Gingras
6703Executive Vice President
6704Human Resources
6705Paul Sheard
6706Executive Vice President and
6707Chief Economist
6708Martina L. Cheung
6709Executive Managing Director,
6710Global Risk Services
6711S&P Global Market
6712Intelligence
6713Imogen Dillon Hatcher
6714President
6715Platts
6716Annual Report Design by Curran & Connors, Inc. / www.curran-connors.com
6717McGraw Hill Financial
671855 Water Street
6719New York, NY 10041
6720212.438.1000
6721www.mhfi.com