10-QPeriod: Q3 FY2006

S&P Global Inc. Quarterly Report for Q3 Ended Sep 30, 2006

Filed October 27, 2006For Securities:SPGI

Summary

S&P Global Inc. (SPGI), formerly The McGraw-Hill Companies, reported its third-quarter 2006 results, showcasing steady revenue growth and a notable increase in operating profit. The company's Financial Services segment, operating under the Standard & Poor's brand, was a key driver of this growth, with strong performance in structured finance and corporate ratings contributing significantly. While the McGraw-Hill Education segment experienced a revenue decline primarily due to shifts in state adoption markets, the overall company demonstrated resilience. Investors will note the company's ongoing commitment to shareholder returns through significant share repurchase activity, which was a major factor in the reduced cash balance. The adoption of new accounting standards for stock-based compensation (SFAS 123(R)) is also a key event, leading to increased expense recognition in this area, though the company is actively managing its long-term incentive programs. Furthermore, S&P Global continues to navigate regulatory scrutiny within its Financial Services segment, particularly concerning credit rating agency oversight, with management expressing confidence in its ability to manage these developments.

Key Highlights

  • 1Total revenue increased slightly to $1.99 billion for the third quarter of 2006 compared to $1.98 billion in the same period of 2005, driven by growth in the Financial Services segment.
  • 2Operating profit saw a healthy increase of 2.8% to $663.4 million in Q3 2006, improving the operating margin to 33.3% from 32.6% in Q3 2005.
  • 3The Financial Services segment demonstrated robust growth, with revenue up 11.4% and operating profit up 17.3% year-over-year, benefiting from strong performance in structured finance and corporate ratings.
  • 4The McGraw-Hill Education segment experienced a 6.3% revenue decline due to a less favorable state adoption market compared to the prior year, impacting overall segment operating profit.
  • 5Significant share repurchase activity continued, with the company utilizing $1.4 billion for repurchases in the first nine months of 2006, leading to a decrease in cash and cash equivalents.
  • 6Stock-based compensation expense increased significantly due to the adoption of SFAS 123(R), impacting reported expenses across segments.
  • 7The company is actively managing ongoing legal proceedings, particularly related to Standard & Poor's ratings of Parmalat, with management expressing confidence in the lack of merit in the claims.

Frequently Asked Questions

Revenue growth in the third quarter of 2006 was primarily driven by the Financial Services segment, which experienced an 11.4% increase in revenue. This growth was largely fueled by strong performance in structured finance ratings and corporate and government ratings.

The McGraw-Hill Education segment saw a 6.3% decrease in revenue and a 7.0% decrease in operating profit for the third quarter of 2006 compared to the prior year. This decline was primarily attributed to a weaker state adoption market for educational materials in 2006 compared to the significant adoption opportunities in 2005.

The company engaged in substantial share repurchase activities, utilizing $1.4 billion in the first nine months of 2006. This significant outflow of cash led to a decrease in the company's cash and cash equivalents balance to $309.7 million as of September 30, 2006, from $748.8 million at the end of 2005. The company also increased its commercial paper borrowings to support these activities.

The company is involved in a notable legal proceeding in Italy related to Standard & Poor's ratings of Parmalat. The lawsuit claims that S&P breached its duty by issuing inflated ratings. The company believes these allegations lack legal or factual merit and intends to vigorously contest the action. Management does not believe that any pending legal proceedings will result in a material adverse effect on the company's financial condition or results of operations.