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The McGraw-Hill Companies Inc. posted fourth-quarter 2012 adjusted quarterly earnings of 72 cents per share that came in line with the Zacks Consensus Estimate but jumped 56% year over year. 

The company reclassified its Education segment as discontinued operations as it entered into an agreement with Apollo Global Management LLC (APO - Snapshot Report) to divest its education division for $2.5 billion. The company expects to close the deal during the first-quarter of 2013.

On a consolidated basis, including McGraw Hill Financial and McGraw-Hill Education, earnings came in at 75 cents a share.

Total revenue of this Zacks Rank #3 (Hold) stock escalated 22% year over year to $1,226 million, reflecting strong performance across all its divisions.

Following the healthy results, management now expects adjusted earnings to be in the range of $3.10 to $3.20 per share for 2013, reflecting a growth of 15% year over year.  

Segment Details

S&P Capital IQ segments revenues grew 8% to $290 million, driven by an increase of 9% in subscription revenues to $281. Non-subscription revenues remained flat at $30 million. Segment’s adjusted operating income inched down 1% to $53 million.

The company acquired Credit Market Analysis Limited (CMA) from CME Group Inc. (CME - Analyst Report). London-based Credit Market Analysis Limited is an independent data provider in the over-the-counter markets. The acquisition strengthens S&P Capital IQ’s position in the market, where it competes with Reuters, FactSet and Bloomberg.

With the growing need of investors to access readily available data, fierce competition has emerged among the companies offering financial information solutions to grab a wider market through superior functionality and investor oriented services.

To grab its share of the market, the company took a similar stance in the past and acquired QuantHouse, the provider of market statistics and trading solutions along with R2 Financial Technologies that offers risk and scenario-based analytics across different asset classes to investors, risk and portfolio managers for pricing, hedging and capital maintenance.

These moves enable McGraw-Hill to offer investors access to global exchange pricing, securities valuations and asset analytics, while facilitating S&P Capital IQ to create real-time platforms, data base and analytics.

Further, the acquisition of TheMarkets.com by Capital IQ strengthened its position in the highly competitive financial data provider sector. The acquisition facilitates Capital IQ to provide a comprehensive research package to its buy-side clients, which not only include fundamental and quantitative research as well as analysis solutions but cover equity and market research reports and earnings estimates with valuation models from leading brokers.

S&P Dow Jones Indices revenues soared 38% to $110 million during the fourth quarter.  However, excluding the revenues related to the Dow Jones Indexes, revenues marked an increase of 5% to $84 million.  Segment’s adjusted operating income jumped 16% to $50 million.

The company noted that assets under management in exchange-traded funds surged 28% to $402 billion on S&P's indices.  Moreover, assets under management came in at $466 billion, including the Dow Jones Indexes.

The company along with CME Group announced the commencement of their index business with the launch of S&P-Dow Jones Indices.

CME Group owned 90% of the joint venture (JV) between CME Group and News Corp.’s (NWSA - Analyst Report) Dow Jones, which also owns Dow Jones Indexes, before the JV between CME Group and McGraw-Hill was established in November last year. The JV aims to tap the rapidly growing index business.

The transaction is expected to be accretive to McGraw-Hill’s earnings and S&P-Dow Jones Indices is expected to drive profit growth through enhanced revenues, asset-class expansion, cost synergies, highly efficient infrastructure and reduced capital requirements, while generating free cash flow.

Standard & Poor’s Ratings segment revenues augmented 34% to $584 million, whereas adjusted operating income increased 63% to $254 million, benefiting largely from increased refinancing activities on account of low interest rates.

Transaction revenues, which include ratings of publicly issued debt and bank loan, and corporate credit estimates, surged 97% to $292 million. The increase reflected a sharp rise in U.S. and European corporate issuance.  

Non-transaction revenues, which include annual contracts, surveillance fees and subscriptions, elevated 2% to $292 million.   

Commodities & Commercial Markets segment revenues rose 9% to $260 million, driven by strong performance in Platts’ revenues. Adjusted operating income jumped 27% to $59 million.

Commodities marked growth of 15% to $129 million during the period. Revenues increased 4% in Commercial, reflecting strong performance of J.D. Power and Associates.

To further strengthen the Platts division, the company announced the acquisition of Switzerland-based Kingsman SA, provider of price information and analytics for the worldwide sugar and biofuels markets.

Lawsuit Bringing Trouble

The United States Department of Justice recently filed a civil lawsuit against the McGraw-Hill subsidiary, Standard & Poor's Rating Services (S&P) for deliberately providing high ratings in 2007 to U.S. collateralized debt obligations (CDOs) and residential mortgage backed securities (RMBS) that underperformed and fueled the collapse of the housing market.

The U.S. Government stated that S&P did not properly highlight the credit risks related to the mortgage securities issued by the investment banks in order to get more business from them.

However, S&P stated that the ratings were provided on the basis of subprime mortgage data that was accessible to others as well as government officials, who in 2007 claimed that subprime woes have limited impact.

(Read our full coverage on the story at: McGraw-Hill Hit by S&P Lawsuit)

Financial Aspects

McGraw-Hill ended the quarter with cash and cash equivalents of $761 million, long-term debt of $799 million, and shareholders’ equity of $840 million. The company incurred capital expenditures of $97 million and generated free cash flow from continuing operations of $626 million in 2012.

During 2012, the company repurchased $300 million shares and distributed $300 million in dividends. Moreover, the company paid a special dividend of $700 million in Dec 2012.

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