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S&P Global Inc. - Quarter Report: 2015 September (Form 10-Q)



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 1-1023
 
McGraw Hill Financial, Inc.
(Exact name of registrant as specified in its charter)
New York
13-1026995
(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

55 Water Street, New York, New York
10041
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: 212-438-1000
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES þ NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.
þ Large accelerated filer
o Accelerated filer
o Non-accelerated filer
o Smaller reporting company
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ NO þ
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
Class
Shares Outstanding
Date
Common stock (par value $1.00 per share)
270.3 million
October 16, 2015

1

McGraw Hill Financial, Inc.
INDEX
 
 
Page Number
 
 
 


2

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of McGraw Hill Financial, Inc.

We have reviewed the consolidated balance sheet of McGraw Hill Financial, Inc. (and subsidiaries) (the "Company") as of September 30, 2015, the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2015 and 2014, the related consolidated statements of cash flows for the nine-month periods ended September 30, 2015 and 2014, and the related consolidated statement of equity for the nine-month period ended September 30, 2015. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of McGraw Hill Financial, Inc. (and subsidiaries) as of December 31, 2014, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated February 13, 2015, except for Note 15, as to which the date is October 29, 2015.


/s/ ERNST & YOUNG LLP

New York, New York
November 3, 2015

3

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements

McGraw Hill Financial, Inc.
Consolidated Statements of Income
(Unaudited)
(in millions, except per share amounts)
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
1,324

 
$
1,263

 
$
3,938

 
$
3,761

Expenses:
 
 
 
 
 
 
 
Operating-related expenses
407

 
402

 
1,218

 
1,205

Selling and general expenses
470

 
462

 
1,134

 
1,186

Depreciation
20

 
21

 
64

 
64

Amortization of intangibles
17

 
12

 
40

 
36

Total expenses
914

 
897

 
2,456

 
2,491

Other (income) loss
—

 
—

 
(11
)
 
9

Operating profit
410

 
366

 
1,493

 
1,261

Interest expense, net
30

 
12

 
62

 
40

Income from continuing operations before taxes on income
380

 
354

 
1,431

 
1,221

Provision for taxes on income
99

 
139

 
439

 
428

Income from continuing operations
281

 
215

 
992

 
793

Income from discontinued operations, net of tax
—

 
2

 
—

 
15

Net income
281

 
217

 
992

 
808

Less: net income from continuing operations attributable to noncontrolling interests
(29
)
 
(27
)
 
(83
)
 
(77
)
Net income attributable to McGraw Hill Financial, Inc.
$
252

 
$
190

 
$
909

 
$
731

 
 
 
 
 
 
 
 
Amounts attributable to McGraw Hill Financial, Inc. common shareholders:
 
 
 
 
 
 
 
Income from continuing operations
$
252

 
$
188

 
$
909

 
$
716

Income from discontinued operations
—

 
2

 
—

 
15

Net income
$
252

 
$
190

 
$
909

 
$
731

 
 
 
 
 
 
 
 
Earnings per share attributable to McGraw Hill Financial, Inc. common shareholders:
 
 
 
 
 
 
 
Income from continuing operations:
 
 
 
 
 
 
 
Basic
$
0.93

 
$
0.69

 
$
3.33

 
$
2.64

Diluted
$
0.92

 
$
0.68

 
$
3.30

 
$
2.59

Income from discontinued operations:
 
 
 
 
 
 
 
Basic
$
—

 
$
0.01

 
$
—

 
$
0.05

Diluted
$
—

 
$
0.01

 
$
—

 
$
0.05

Net income:
 
 
 
 
 
 
 
Basic
$
0.93

 
$
0.70

 
$
3.33

 
$
2.69

Diluted
$
0.92

 
$
0.69

 
$
3.30

 
$
2.64

Weighted-average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
271.3

 
270.9

 
272.6

 
271.4

Diluted
274.4

 
275.4

 
275.4

 
276.2

 
 
 
 
 
 
 
 
Actual shares outstanding at period end
 
 
 
 
270.3

 
271.4

 
 
 
 
 
 
 
 
Dividend declared per common share
$
0.33

 
$
0.30

 
$
0.99

 
$
0.90

 
See accompanying notes to the unaudited consolidated financial statements.

4

McGraw Hill Financial, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
 
(in millions)
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
281

 
$
217

 
$
992

 
$
808

 
 
 
 
 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(45
)
 
(68
)
 
(78
)
 
(56
)
Income tax effect
1

 
1

 
—

 
1

 
(44
)
 
(67
)
 
(78
)
 
(55
)
 
 
 
 
 
 
 
 
Pension and other postretirement benefit plans
5

 
—

 
59

 
(54
)
Income tax effect
(1
)
 
—

 
(19
)
 
21

 
4

 
—

 
40

 
(33
)
 
 
 
 
 
 
 
 
Unrealized gain on forward exchange contracts
(1
)
 
—

 
(1
)
 
4

Income tax effect
—

 
—

 
—

 
(1
)
 
(1
)
 
—

 
(1
)
 
3

 
 
 
 
 
 
 
 
Comprehensive income
240

 
150

 
953

 
723

Less: comprehensive income attributable to nonredeemable noncontrolling interests
(3
)
 
(4
)
 
(7
)
 
(8
)
Less: comprehensive income attributable to redeemable noncontrolling interests
(26
)
 
(23
)
 
(76
)
 
(69
)
Comprehensive income attributable to McGraw Hill Financial, Inc.
$
211

 
$
123

 
$
870

 
$
646



See accompanying notes to the unaudited consolidated financial statements.

5

McGraw Hill Financial, Inc.
Consolidated Balance Sheets
 
(in millions)
September 30,
2015
 
December 31,
2014
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,441

 
$
2,497

Accounts receivable, net of allowance for doubtful accounts: 2015 - $35; 2014 - $38
986

 
932

Deferred income taxes
203

 
363

Prepaid and other current assets
206

 
174

Total current assets
2,836

 
3,966

Property and equipment, net of accumulated depreciation: 2015 - $600; 2014 - $563
237

 
206

Goodwill
2,968

 
1,387

Other intangible assets, net
1,881

 
1,004

Other non-current assets
241

 
208

Total assets
$
8,163

 
$
6,771

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
211

 
$
191

Accrued compensation and contributions to retirement plans
320

 
410

Unearned revenue
1,453

 
1,323

Accrued legal and regulatory settlements (Note 11)
104

 
1,609

Other current liabilities
417

 
434

Total current liabilities
2,505


3,967

Long-term debt
3,489

 
799

Pension and other postretirement benefits
278

 
333

Other non-current liabilities
377

 
323

Total liabilities
6,649

 
5,422

Redeemable noncontrolling interest (Note 7)
810

 
810

Commitments and contingencies (Note 11)

 

Equity:
 
 
 
Common stock
412

 
412

Additional paid-in capital
441

 
493

Retained income
7,592

 
6,946

Accumulated other comprehensive loss
(553
)
 
(514
)
Less: common stock in treasury
(7,234
)
 
(6,849
)
Total equity — controlling interests
658

 
488

Total equity — noncontrolling interests
46

 
51

Total equity
704

 
539

Total liabilities and equity
$
8,163

 
$
6,771


See accompanying notes to the unaudited consolidated financial statements.

6

McGraw Hill Financial, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 
(in millions)
Nine Months Ended
 
September 30,
 
2015
 
2014
Operating Activities:
 
 
 
Net income
$
992

 
$
808

Less: discontinued operations, net
—

 
15

Income from continuing operations
992

 
793

Adjustments to reconcile income from continuing operations to cash (used for) provided by operating activities from continuing operations:
 
 
 
Depreciation
64

 
64

Amortization of intangibles
40

 
36

Provision for losses on accounts receivable
3

 
5

Deferred income taxes
166

 
(33
)
Stock-based compensation
55

 
72

Other
139

 
106

Changes in operating assets and liabilities, net of effect of acquisitions and dispositions:
 
 
 
Accounts receivable
(44
)
 
12

Prepaid and other current assets
(6
)
 
(8
)
Accounts payable and accrued expenses
(186
)
 
(211
)
Unearned revenue
18

 
7

Accrued legal and regulatory settlements
(1,624
)
 
—

Other current liabilities
(53
)
 
(65
)
Net change in prepaid/accrued income taxes
140

 
93

Net change in other assets and liabilities
(60
)
 
(51
)
Cash (used for) provided by operating activities from continuing operations
(356
)
 
820

Investing Activities:
 
 
 
Capital expenditures
(74
)
 
(52
)
Acquisitions, net of cash acquired
(2,393
)
 
(65
)
Proceeds from dispositions
14

 
83

Changes in short-term investments
(3
)
 
(1
)
Cash used for investing activities from continuing operations
(2,456
)
 
(35
)
Financing Activities:
 
 
 
Proceeds from issuance of senior notes, net
2,674

 
—

Dividends paid to shareholders
(274
)
 
(245
)
Dividends and other payments paid to noncontrolling interests
(67
)
 
(31
)
Contingent consideration payment
(5
)
 
(11
)
Purchase of CRISIL shares
(16
)
 
—

Repurchase of treasury shares
(501
)
 
(362
)
Exercise of stock options
77

 
159

Excess tax benefits from share-based payments
39

 
89

Cash provided by (used for) financing activities from continuing operations
1,927

 
(401
)
Effect of exchange rate changes on cash from continuing operations
(42
)
 
(24
)
Cash (used for) provided by continuing operations
(927
)
 
360

Discontinued Operations:
 
 
 
Cash (used for) provided by operating activities
(129
)
 
16

Cash provided by (used for) investing activities
—

 
—

Cash provided by (used for) financing activities
—

 
—

Cash (used for) provided by discontinued operations
(129
)
 
16

Net change in cash and cash equivalents
(1,056
)
 
376

Cash and cash equivalents at beginning of period
2,497

 
1,542

Cash and cash equivalents at end of period
$
1,441

 
$
1,918


See accompanying notes to the unaudited consolidated financial statements.

7

McGraw Hill Financial, Inc.
Consolidated Statement of Equity
(Unaudited)

 (in millions)
Common Stock $1 par
 
Additional Paid-in Capital
 
Retained Income
 
Accumulated Other Comprehensive Loss
 
Less: Treasury Stock
 
Total MHFI Equity
 
Noncontrolling Interests
 
Total Equity
Balance as of December 31, 2014
$
412

 
$
493

 
$
6,946

 
$
(514
)
 
$
6,849

 
$
488

 
$
51

 
$
539

Comprehensive income 1
 
 
 
 
909

 
(39
)
 
 
 
870

 
7

 
877

Dividends
 
 
 
 
(270
)
 
 
 
 
 
(270
)
 
(8
)
 
(278
)
Share repurchases
 
 


 
 
 
 
 
501

 
(501
)
 
(4
)
 
(505
)
Employee stock plans, net of tax benefit
 
 
(52
)
 
 
 
 
 
(116
)
 
64

 
1

 
65

Change in redemption value of redeemable noncontrolling interest
 
 
 
 
7

 
 
 
 
 
7

 
 
 
7

Other
 
 

 

 
 
 

 
—

 
(1
)
 
(1
)
Balance as of September 30, 2015
$
412

 
$
441

 
$
7,592

 
$
(553
)
 
$
7,234

 
$
658

 
$
46

 
$
704

1
Excludes $76 million attributable to our redeemable noncontrolling interest.

See accompanying notes to the unaudited consolidated financial statements.



8

McGraw Hill Financial, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
 
1.
Nature of Operations and Basis of Presentation

McGraw Hill Financial, Inc. (together with its consolidated subsidiaries, "McGraw Hill Financial," the “Company,” “we,” “us” or “our”) is a leading benchmarks & ratings, analytics, data and research provider serving the global capital, commodities and commercial markets. The capital markets include asset managers, investment banks, commercial banks, exchanges, and issuers; the commodities markets include producers, traders and intermediaries within energy, metals, and agriculture; and the commercial markets include professionals and corporate executives within automotive and marketing / research information services.

Our operations consist of four reportable segments: Standard & Poor’s Ratings Services (“S&P Ratings”), S&P Capital IQ and SNL, S&P Dow Jones Indices ("S&P DJ Indices") and Commodities & Commercial Markets (“C&C”).
•
S&P Ratings is an independent provider of credit ratings, research and analytics, offering investors and market participants information, ratings and benchmarks.
•
S&P Capital IQ and SNL is a global provider of multi-asset-class data, research and analytical capabilities, which integrate cross-asset analytics and desktop services.
•
S&P DJ Indices is a global index provider that maintains a wide variety of valuation and index benchmarks for investment advisors, wealth managers and institutional investors.
•
C&C consists of business-to-business companies specializing in commercial and commodities markets that deliver their customers access to high-value information, data, analytic services and pricing and quality benchmarks.

The accompanying unaudited financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Therefore, the financial statements included herein should be read in conjunction with the financial statements and notes included in our Form 10-K for the year ended December 31, 2014 (our “Form 10-K”). Certain prior-year amounts have been reclassified to conform with current presentation.

In the opinion of management all normal recurring adjustments considered necessary for a fair statement of the results of the interim periods have been included. The operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the full year.

Our critical accounting estimates are disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Form 10-K. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowance for doubtful accounts, valuation of long-lived assets, goodwill and other intangible assets, pension plans, incentive compensation and stock-based compensation, income taxes, contingencies and redeemable noncontrolling interests. Since the date of our Form 10-K, there have been no material changes to our critical accounting policies and estimates.
 
2.
Acquisitions and Divestitures

Acquisitions

Acquisitions by segment included:

S&P Capital IQ and SNL

•
On September 1, 2015 (the "Acquisition Date"), we acquired SNL Financial LC ("SNL") for $2.225 billion in cash, subject to working capital adjustments. SNL's results of operations have been included in our consolidated statements of income subsequent to the Acquisition Date. SNL is a global provider of news, data, and analytical tools to five sectors in the global economy: financial services, real estate, energy, media & communications, and metals & mining. SNL delivers information through its suite of web, mobile and direct data feed platforms that helps clients, including investment and commercial banks, investors, corporations, and regulators make decisions, improve efficiency, and manage risk.


9

Acquisition-Related Expenses

During the three and nine months ended September 30, 2015, the Company incurred approximately $32 million of acquisition-related costs related to the acquisition of SNL. These expenses are included in selling and general expenses in our consolidated statements of income.

Preliminary Allocation of Purchase Price

Our acquisition of SNL was accounted for using the purchase method. Under the purchase method, the excess of the purchase price over the fair value of the net assets acquired is allocated to goodwill and other intangibles. The goodwill recognized is largely attributable to anticipated operational synergies and growth opportunities as a result of the acquisition. The intangible assets, excluding goodwill and indefinite-lived intangibles, will be amortized over their anticipated useful lives between 10 and 18 years which will be determined when we finalize our purchase price allocation. The goodwill is expected to be deductible for tax purposes.

The following table presents the the preliminary allocation of purchase price to the assets and liabilities of SNL as a result of the acquisition.

(in millions)
 
Current assets
$
22

Property, plant and equipment
19

Goodwill
1,558

Other intangible assets, net:

Databases and software
421

Customer relationships
162

Tradenames
185

Other intangibles
4

Other intangible assets, net
772

Other non-current assets
3

Total assets acquired
2,374

Current liabilities
(19
)
Unearned revenue
(118
)
Other non-current liabilities
(6
)
Total liabilities acquired
(143
)
Net assets acquired
$
2,231


The Company has performed a preliminary valuation analysis of the fair market value of assets and liabilities of the SNL Financial business.  The final purchase price allocation will be determined when the Company has completed the detailed valuations and necessary calculations. The final allocation could differ materially from the preliminary allocation. The final allocation may include (1) changes in fair values of property, plant and equipment, (2) changes in allocations to intangible assets as well as goodwill and (3) other changes to assets and liabilities.

The projected incremental amortization expense for intangible assets beginning in 2016 related to SNL over each of the next five years ended December 31, 2020 is approximately $53 million. Amortization expense related to SNL for the three and nine months ended September 30, 2015 was approximately $4 million.

Supplemental Pro Forma Information

Supplemental information on an unaudited pro forma basis is presented below for the nine months ended September 30, 2015 and 2014 as if the acquisition of SNL occurred on January 1, 2014. The pro forma financial information is presented for comparative purposes only, based on estimates and assumptions, which the Company believes to be reasonable but not necessarily indicative of the consolidated financial position or results of operations in future periods or the results that actually would have been realized had this acquisition been completed at the beginning of 2015. The unaudited pro forma information includes non-recurring transaction related costs, intangible asset charges and incremental borrowing costs as a result of the acquisition, net of related tax, estimated using the Company's effective tax rate for continuing operations for the periods presented.

10


(in millions)
Nine Months Ended September 30,
 
2015
2014
Pro forma revenue
$
4,124

$
3,927

Pro forma net income from continuing operations
$
954

$
746


C&C

•
In July of 2015, we acquired the entire issued share capital of Petromedia Ltd and its operating subsidiaries (“Petromedia”), an independent provider of data, intelligence, news and tools to the global fuels market that offers a suite of products that provides clients with actionable data and intelligence that enable informed decisions, minimize risk and increase efficiency. We accounted for the acquisition of Petromedia using the purchase method of accounting. The acquisition of Petromedia was not material to our consolidated financial statements.

•
In July of 2015, we acquired National Automobile Dealers Association's Used Car Guide (“UCG”), a leading provider of U.S. retail, trade-in and auction used-vehicle values. The acquisition of UCG expanded our analytical and modeling capabilities while deepening our presence in auto finance and auto insurance, and enriching retail solutions. We accounted for the acquisition of UCG using the purchase method of accounting. The acquisition of UCG was not material to our consolidated financial statements.

•
In July of 2014, we acquired Eclipse Energy Group AS and its operating subsidiaries (“Eclipse”), which provides a comprehensive suite of data and analytics products on the European natural gas and liquefied natural gas markets as well as a range of advisory services leveraging Eclipse’s knowledge base, data capabilities, and modeling suite of products. This transaction complements our North American natural gas capabilities, which we obtained from our Bentek Energy LLC acquisition in 2011. We accounted for the acquisition of Eclipse using the purchase method of accounting. The acquisition of Eclipse was not material to our consolidated financial statements.

S&P DJ Indices

•
In March of 2014, we acquired the intellectual property of a family of Broad Market Indices (“BMI”) from Citigroup Global Markets Inc. The BMI provides a broad measure of the global equities markets which includes approximately 11,000 companies in more than 52 countries covering both developed and emerging markets. We accounted for the acquisition of the intellectual property on a cost basis and it was not material to our consolidated financial statements.

Following CRISIL's acquisition of Coalition Development Ltd. ("Coalition") that occurred in July of 2012, we made a contingent purchase price payment in the first nine months of 2014 for $11 million that has been reflected in the consolidated statement of cash flows as a financing activity.

Divestitures - Continuing Operations

During the nine months ended September 30, 2015, we recorded a pre-tax gain of $11 million within other (income) loss in the consolidated statement of income related to the sale of our interest in a legacy McGraw Hill Construction investment.

On July 31, 2014, we completed the sale of the Company's aircraft to Harold W. McGraw III, then Chairman of the Company's Board of Directors and former President and CEO of the Company for a purchase price of $20 million. During the second quarter of 2014, we recorded a non-cash impairment charge of $6 million within other (income) loss in our consolidated statement of income as a result of the pending sale. See Note 13 — Related Party Transactions for further information.

On June 30, 2014, we completed the sale of our data center to Quality Technology Services, LLC which owns, operates and manages data centers. Net proceeds from the sale of $58 million were received in July of 2014. The sale includes all of the facilities and equipment on the south campus of our East Windsor, New Jersey location, inclusive of the rights and obligations associated with an adjoining solar power field. The sale resulted in an expense of $3 million recorded within other (income) loss in our consolidated statement of income, which is in addition to the non-cash impairment charge we recorded in the fourth quarter of 2013.


11

Divestitures - Discontinued Operations

On November 3, 2014, we completed the sale of McGraw Hill Construction, which has historically been part of our C&C segment, to Symphony Technology Group for $320 million in cash. Accordingly, the results of operations for the three and nine months ended September 30, 2014, have been reclassified to reflect the business as a discontinued operation.

The key components of income from discontinued operations for the periods ended September 30, 2014 consist of the following:

(in millions)
Three Months
 
Nine Months
Revenue
$
40

 
$
124

Expenses
37

 
100

Operating income
3

 
24

Provision for taxes on income
1

 
9

Income from discontinued operations, net of tax
$
2

 
$
15


3.
Income Taxes

The effective income tax rate for continuing operations was 25.9% and 30.7% for the three and nine months ended September 30, 2015, respectively, and 39.2% and 35.1% for the three and nine months ended September 30, 2014, respectively. Our effective income tax rate from continuing operations was lower than the prior periods as the result of the resolution of tax audits, increased income in lower tax rate jurisdictions, and the non-deductible tax treatment of certain regulatory charges incurred during 2014.

At the end of each interim period, we estimate the annual effective tax rate and apply that rate to our ordinary quarterly earnings. The tax expense or benefit related to significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect, and are individually computed, is recognized in the interim period in which those items occur. In addition, the effect of changes in enacted tax laws or rates or tax status is recognized in the interim period in which the change occurs.

As of September 30, 2015 and December 31, 2014, the total amount of federal, state and local, and foreign unrecognized tax benefits was $122 million and $118 million, respectively, exclusive of interest and penalties. The increase in unrecognized tax benefits relates primarily to tax positions of prior years. We recognize accrued interest and penalties related to unrecognized tax benefits in interest expense and operating-related expense, respectively. In addition, as of September 30, 2015 and December 31, 2014, we had $30 million and $23 million, respectively, of accrued interest and penalties associated with unrecognized tax benefits.

Based on the current status of income tax audits, we believe that the total amount of unrecognized tax benefits may significantly decrease in the next twelve months. Although the ultimate resolution of our tax audits is unpredictable, the resulting change in our unrecognized tax benefits could have a material impact on our results of operations and/or cash flows.


12

4.
Debt 
(in millions)
September 30,
2015
 
December 31,
2014
5.9% Senior Notes, due 2017 1
$
400

 
400

2.5% Senior Notes, due 2018 2
399

 
—

3.3% Senior Notes, due 2020 3
699

 
—

4.0% Senior Notes, due 2025 4
695

 
—

4.4% Senior Notes, due 2026 5
897

 
—

6.55% Senior Notes, due 2037 6
399

 
399

Long-term debt
$
3,489

 
$
799

1
Interest payments are due semiannually on April 15 and October 15, and, as of September 30, 2015, the unamortized debt discount is less than $1 million.
2
Interest payments are due semiannually on February 15 and August 15, beginning on February15, 2016, and, as of September 30, 2015, the unamortized debt discount is less than $1 million.
3
Interest payments are due semiannually on February 14 and August 14, beginning on February14, 2016, and, as of September 30, 2015, the unamortized debt discount is approximately $1 million.
4
Interest payments are due semiannually on June 15 and December 15, beginning on December15, 2015, and, as of September 30, 2015, the unamortized debt discount is approximately $5 million.
5
Interest payments are due semiannually on February 15 and August 15, beginning on February15, 2016, and, as of September 30, 2015, the unamortized debt discount is approximately $3 million.
6
Interest payments are due semiannually on May 15 and November 15, and, as of September 30, 2015, the unamortized debt discount is approximately $1 million.

The fair value of our long-term debt borrowings was $3.6 billion and $0.9 billion as of September 30, 2015 and December 31, 2014, respectively, and was estimated based on quoted market prices.

On August 18, 2015, we issued $2.0 billion of senior notes (the "Notes"), consisting of $400 million of 2.5% senior notes due in 2018, $700 million of 3.3% senior notes due in 2020 and $900 million of 4.4% senior notes due in 2026. The Notes are fully and unconditionally guaranteed by our wholly-owned subsidiary, Standard & Poor's Financial Services LLC. We used the net proceeds to finance the acquisition of SNL.

On May 26, 2015, we issued $700 million of 4.0% senior notes due in 2025 and used a portion of the net proceeds for the repayment of short-term debt, including commercial paper. The 4.0% senior notes will mature on June 15, 2025 and are fully and unconditionally guaranteed by our wholly-owned subsidiary, Standard & Poor's Financial Services LLC.

Currently, we have the ability to borrow a total of $1.2 billion through our commercial paper program, which is supported by our credit facility described below. As of September 30, 2015 and December 31, 2014, we had no commercial paper outstanding or borrowings outstanding under our credit facility. In connection with the payment of legal and regulatory settlements recorded in 2014 and paid largely in 2015, we utilized our commercial paper program and borrowed from our credit facility during the nine months ended September 30, 2015.

On June 30, 2015, we entered into a revolving $1.2 billion five-year credit agreement (our “credit facility”) that will terminate on June 30, 2020. This credit facility replaced our $1.0 billion four-year credit facility that was scheduled to terminate on June 19, 2017. The previous credit facility was canceled immediately after the new credit facility became effective. There were no outstanding borrowings under the previous credit facility when it was replaced.

We pay a commitment fee of 10 to 20 basis points for our credit facility, depending on our indebtedness to cash flow ratio, whether or not amounts have been borrowed and currently pay a commitment fee of 12.5 basis points. The interest rate on borrowings under our credit facility is, at our option, calculated using rates that are primarily based on either the prevailing London Inter-Bank Offer Rate, the prime rate determined by the administrative agent or the Federal Funds Rate. For certain borrowings under this credit facility, there is also a spread based on our indebtedness to cash flow ratio added to the applicable rate.

Our credit facility contains certain covenants. The only financial covenant requires that our indebtedness to cash flow ratio, as defined in our credit facility, is not greater than 4 to 1, and this covenant level has never been exceeded. 


13

5.
Employee Benefits

We maintain a number of active defined contribution retirement plans for our employees. The majority of our defined benefit plans are frozen. As a result, no new employees will be permitted to enter these plans and no additional benefits for current participants in the frozen plans will be accrued.

We have supplemental benefit plans that provide senior management with supplemental retirement, disability and death benefits. Certain supplemental retirement benefits are based on final monthly earnings. In addition, we sponsor voluntary 401(k) plans under which we may match employee contributions up to certain levels of compensation as well as profit-sharing plans under which we contribute a percentage of eligible employees' compensation to the employees' accounts.

We also provide certain medical, dental and life insurance benefits for active and retired employees and eligible dependents. The medical and dental plans and supplemental life insurance plan are contributory, while the basic life insurance plan is noncontributory. We currently do not prefund any of these plans.

We recognize the funded status of our defined benefit retirement and postretirement plans in the consolidated balance sheets, with a corresponding adjustment to accumulated other comprehensive loss, net of taxes. The amounts in accumulated other comprehensive loss represent unrecognized actuarial losses and unrecognized prior service costs. These amounts will be subsequently recognized as net periodic pension cost pursuant to our accounting policy for amortizing such amounts.

As discussed in our Form 10-K, we changed certain discount rate assumptions and our expected return on assets assumption for our retirement plans, which became effective on January 1, 2015. In addition, we updated the assumed mortality rates to reflect life expectancy improvements. The effect of the assumption changes for the three and nine months ended September 30, 2015 resulted in an increase in pre-tax retirement expense of approximately $8 million and $25 million, respectively.

In the first nine months of 2015, we contributed $14 million to our retirement plans and expect to make additional required contributions of approximately $1 million to our retirement plans during the remainder of the year. We may elect to make additional non-required contributions depending on investment performance and the pension plan status in the fourth quarter of 2015.

6.
Stock-Based Compensation

We issue stock-based incentive awards to our eligible employees and Directors under the 2002 Employee Stock Incentive Plan and a Director Deferred Stock Ownership Plan. The 2002 Employee Stock Incentive Plan permits the granting of nonqualified stock options, stock appreciation rights, performance stock, restricted stock and other stock-based awards.

Stock-based compensation for the periods ended September 30 is as follows:
(in millions)
Three Months
 
Nine Months
 
2015
 
2014
 
2015
 
2014
Stock option expense
$
2

 
$
6

 
$
11

 
$
15

Restricted stock and unit awards expense
16

 
20

 
44

 
57

Total stock-based compensation expense 
$
18

 
$
26

 
$
55

 
$
72


During the nine months ended September 30, 2015, the Company granted 0.6 million shares of restricted stock and unit awards, which had a weighted average grant date fair value of $104.31 per share, and a minimal amount of employee stock options.

Total unrecognized compensation expense related to unvested stock option awards and unvested restricted stock unit awards as of September 30, 2015 was $4 million and $75 million, respectively, which is expected to be recognized over a weighted average period of 1.4 years and 1.8 years, respectively.


14

7.
Equity

Stock Repurchases

On December 4, 2013, the Board of Directors approved a share repurchase program authorizing the purchase of 50 million shares, which was approximately 18% of the total shares of our outstanding common stock at that time.

In any period, share repurchase transactions could result in timing differences between the recognition of those repurchases and their settlement for cash. This could result in a difference between the cash used for financing activities related to common stock repurchased and the comparable change in equity.

Share repurchases for the periods ended September 30 were as follows: 
(in millions, except average price)
Three Months
 
Nine Months
 
2015
 
2014
 
2015
 
2014
Total number of shares purchased 1
2.3

 
—

 
4.9

 
4.4

Average price paid per share 1
$
99.01

 
$
—

 
$
102.01

 
$
79.06

Total cash utilized 2
$
227

 
$
—

 
$
501

 
$
352

1
On June 25, 2014, we repurchased 0.5 million shares of the Company's common stock from the personal holdings of Harold W. McGraw III, then Chairman of the Company's Board of Directors and former President and CEO of the Company, at a discount of 0.35% from the June 24, 2014 New York Stock Exchange closing price. We repurchased these shares with cash for $41 million at an average price of $82.66 per share. See Note 13 — Related Party Transactions for further information.
2
In December of 2013, 0.1 million shares were repurchased for approximately $10 million, which settled in January of 2014. Cash used for financing activities only reflects those shares which settled during the nine months ended September 30, 2014 resulting in $362 million of cash used to repurchase shares.

Our purchased shares may be used for general corporate purposes, including the issuance of shares for stock compensation plans and to offset the dilutive effect of the exercise of employee stock options. As of September 30, 2015, approximately 40.6 million shares remained available under the current share repurchase program which has no expiration date and purchases under this program may be made from time to time on the open market and in private transactions, depending on market conditions.

Redeemable Noncontrolling Interests

The agreement with the minority partners of our S&P Dow Jones Indices LLC established in June of 2012 contains redemption features whereby interests held by minority partners are redeemable either (i) at the option of the holder or (ii) upon the occurrence of an event that is not solely within our control. Specifically, under the terms of the operating agreement of S&P Dow Jones Indices LLC, after December 31, 2017, CME Group, Inc. ("CME Group") and CME Group Index Services LLC ("CGIS") will have the right at any time to sell, and we are obligated to buy, at least 20% of their share in S&P Dow Jones Indices LLC. In addition, in the event there is a change of control of the Company, for the 15 days following a change in control, CME Group and CGIS will have the right to put their interest to us at the then fair value of CME Group's and CGIS' minority interest.

If interests were to be redeemed under this agreement, we would generally be required to purchase the interest at fair value on the date of redemption. This interest is presented on the consolidated balance sheets outside of equity under the caption “Redeemable noncontrolling interest” with an initial value based on fair value for the portion attributable to the net assets we acquired, and based on our historical cost for the portion attributable to our S&P Index business. We adjust the redeemable noncontrolling interest each reporting period to its estimated redemption value, but never less than its initial fair value, considering a combination of an income and market valuation approach. Our income and market valuation approaches may incorporate Level 3 fair value measures for instances when observable inputs are not available, including assumptions related to expected future net cash flows, long-term growth rates, the timing and nature of tax attributes, and the redemption features. Any adjustments to the redemption value will impact retained income.

Noncontrolling interests that do not contain such redemption features are presented in equity.


15

Changes to redeemable noncontrolling interest during the nine months ended September 30, 2015 were as follows:
(in millions)
 
Balance as of December 31, 2014
$
810

Net income attributable to noncontrolling interest
76

Distributions payable to noncontrolling interest
(69
)
Redemption value adjustment
(7
)
Balance as of September 30, 2015
$
810


Accumulated Other Comprehensive Loss

The following table summarizes the changes in the components of accumulated other comprehensive loss for the nine months ended September 30, 2015:
(in millions)
Foreign Currency Translation Adjustment
 
Pension and Postretirement Benefit Plans
 
Unrealized Gain (Loss) on Forward Exchange Contracts
 
Accumulated Other Comprehensive Loss
Balance as of December 31, 2014
$
(83
)
 
$
(431
)
 
$
—

 
$
(514
)
Other comprehensive income before reclassifications
(78
)
 
31

 
(1
)
 
(48
)
Reclassifications from accumulated other comprehensive loss to net earnings
—

 
9

1 

—

 
9

Net other comprehensive income
(78
)
 
40

 
(1
)
 
(39
)
Balance as of September 30, 2015
$
(161
)
 
$
(391
)
 
$
(1
)
 
$
(553
)

1 
See Note 5 — Employee Benefits for additional details of items reclassed from accumulated other comprehensive loss to net earnings.

The net actuarial loss and prior service cost related to pension and other postretirement benefit plans included in other comprehensive income is net of a tax provision of $5 million for the nine months ended September 30, 2015.

8.
Earnings Per Share

Basic earnings per common share (“EPS”) is computed by dividing net income attributable to the common shareholders of the Company by the weighted-average number of common shares outstanding. Diluted EPS is computed in the same manner as basic EPS, except the number of shares is increased to include additional common shares that would have been outstanding if potential common shares with a dilutive effect had been issued. Potential common shares consist primarily of stock options and restricted performance shares calculated using the treasury stock method.


16

The calculation for basic and diluted EPS for the periods ended September 30 is as follows: 
(in millions, except per share amounts)
Three Months
 
Nine Months
 
2015
 
2014
 
2015
 
2014
Amounts attributable to McGraw Hill Financial, Inc. common shareholders:
 
 
 
 
 
 
 
Income from continuing operations
$
252

 
$
188

 
$
909

 
$
716

Income from discontinued operations
—

 
2

 
—

 
15

Net income
$
252

 
$
190

 
$
909

 
$
731

 
 
 
 
 
 
 
 
Basic weighted-average number of common shares outstanding
271.3

 
270.9

 
272.6

 
271.4

Effect of stock options and other dilutive securities
3.1

 
4.5

 
2.8

 
4.8

Diluted weighted-average number of common shares outstanding
274.4

 
275.4

 
275.4

 
276.2

 
 
 
 
 
 
 
 
Earnings per share attributable to McGraw Hill Financial, Inc. common shareholders:
 
 
 
 
 
 
 
Income from continuing operations:
 
 
 
 
 
 
 
Basic
$
0.93

 
$
0.69

 
$
3.33

 
$
2.64

Diluted
$
0.92

 
$
0.68

 
$
3.30

 
$
2.59

Income from discontinued operations:
 
 
 
 
 
 
 
Basic
$
—

 
$
0.01

 
$
—

 
$
0.05

Diluted
$
—

 
$
0.01

 
$
—

 
$
0.05

Net income:
 
 
 
 
 
 
 
Basic
$
0.93

 
$
0.70

 
$
3.33

 
$
2.69

Diluted
$
0.92

 
$
0.69

 
$
3.30

 
$
2.64


We have certain stock options and restricted performance shares that are potentially excluded from the computation of diluted EPS. The effect of the potential exercise of stock options is excluded when the average market price of our common stock is lower than the exercise price of the related option during the period because the effect would have been antidilutive. Additionally, restricted performance shares are excluded because the necessary vesting conditions had not been met. For the three and nine months ended September 30, 2015, there were no stock options excluded, and for the three and nine months ended September 30, 2014, there were a minimal amount of stock options excluded. Restricted performance shares outstanding of 0.9 million and 1.4 million as of September 30, 2015 and 2014, respectively, were excluded.

9.
Restructuring

During 2015 and 2014, we continued to evaluate our cost structure and further identified cost savings associated with streamlining our management structure and additionally, in 2014, our decision to exit non-strategic businesses. Our 2015 and 2014 restructuring plans consisted of a company-wide workforce reduction of approximately 260 and 590 positions, respectively, and are further detailed below. The charges for each restructuring plan are classified as selling and general expenses within the consolidated statements of income and the reserves are included in other current liabilities in the consolidated balance sheets.

In certain circumstances, reserves are no longer needed because of efficiencies in carrying out the plans or because employees previously identified for separation resigned from the Company and did not receive severance or were reassigned due to circumstances not foreseen when the original plans were initiated. In these cases, we reverse reserves through the consolidated statements of income during the period when it is determined they are no longer needed.

As part of the sale of McGraw Hill Construction, which has historically been part of our C&C segment, to Symphony Technology Group, described further in Note 2 — Acquisitions and Divestitures, we have retained McGraw Hill Construction's restructuring liabilities. Therefore, the remaining reserves described below for the 2014 restructuring plan include McGraw Hill Construction's restructuring liability; however, the initial charge associated with the reserve has been bifurcated between continuing and discontinued operations.


17

The initial restructuring charge recorded and the ending reserve balance as of September 30, 2015 by segment is as follows:
 
2015 Restructuring Plan
2014 Restructuring Plan
(in millions)
Initial Charge Recorded
 
Ending Reserve Balance
Initial Charge Recorded
 
Ending Reserve Balance
S&P Ratings
$
11

 
$
10

$
45

 
$
15

S&P Capital IQ and SNL
13

 
9

9

 
2

C&C 1
3

 
2

16

 
4

Corporate
3

 
3

16

 
9

Total
$
30

 
$
24

$
86

 
$
30


1 
The 2014 restructuring plan included an initial charge of $3 million and an ending reserve balance of less than a $1 million for McGraw Hill Construction.

We recorded a pre-tax restructuring charge of $30 million for the 2015 restructuring plan during the nine months ended September 30, 2015 and have reduced the reserve for the 2015 restructuring plan by $6 million.

The ending reserve balance for the 2014 restructuring plan was $78 million as of December 31, 2014. For the nine months ended September 30, 2015, we have reduced the reserve for the 2014 restructuring plan by $48 million.

10.
Segment and Related Information

We have four reportable segments: S&P Ratings, S&P Capital IQ and SNL, S&P DJ Indices and C&C. Our Chief Executive Officer is our chief operating decision-maker and evaluates performance of our segments and allocates resources based primarily on operating profit. Segment operating profit does not include unallocated expense or interest expense as these are costs that do not affect the operating results of our segments.

A summary of operating results by segment for the periods ended September 30 is as follows: 
Three Months
2015
 
2014
(in millions)
Revenue
 
Operating Profit
 
Revenue
 
Operating Profit
S&P Ratings 1
$
587

 
$
194

 
$
604

 
$
183

S&P Capital IQ and SNL
356

 
53

 
311

 
64

S&P DJ Indices
156

 
106

 
143

 
86

C&C
248

 
93

 
227

 
71

Intersegment elimination 2
(23
)
 
—

 
(22
)
 
—

Total operating segments
1,324

 
446

 
1,263

 
404

Unallocated expense 3
—

 
(36
)
 
—

 
(38
)
Total
$
1,324

 
$
410

 
$
1,263

 
$
366



18

Nine Months
2015
 
2014
(in millions)
Revenue
 
Operating Profit
 
Revenue
 
Operating Profit
S&P Ratings 1
$
1,851

 
$
846

 
$
1,837

 
$
730

S&P Capital IQ and SNL
1,000

 
178

 
919

 
172

S&P DJ Indices
446

 
297

 
412

 
260

C&C
707

 
265

 
657

 
217

Intersegment elimination 2
(66
)
 
—

 
(64
)
 
—

Total operating segments
3,938

 
1,586

 
3,761

 
1,379

Unallocated expense 3
—

 
(93
)
 
—

 
(118
)
Total
$
3,938

 
$
1,493

 
$
3,761

 
$
1,261


1 
Operating profit for the three and nine months ended September 30, 2015 includes legal settlement charges partially offset by a benefit related to legal settlement insurance recoveries of $86 million and $40 million, respectively. Operating profit for the three and nine months ended September 30, 2014 includes legal settlement charges of $60 million.
2 
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 distribute content and data developed by S&P Ratings.
3 
The nine months ended September 30, 2015 include a gain of $11 million related to the sale of our interest in a legacy McGraw Hill Construction investment. See Note 2 — Acquisitions and Divestitures for additional information.

See Note 2 — Acquisitions and Divestitures and Note 9 — Restructuring for additional actions that impacted the segment operating results.

11.
Commitments and Contingencies

Legal & Regulatory Matters

In the normal course of business both in the United States and abroad, the Company, its subsidiary Standard & Poor’s Financial Services LLC (“S&P LLC”) and some of its other subsidiaries are defendants in numerous legal proceedings and are often the subject of government and regulatory proceedings, investigations and inquiries. Many of these proceedings, investigations and inquiries relate to the ratings activity of S&P Ratings brought by issuers and alleged purchasers of rated securities. In addition, various government and self-regulatory agencies frequently make inquiries and conduct investigations into our compliance with applicable laws and regulations, including those related to ratings activities and antitrust matters. Any of these proceedings, investigations or inquiries could ultimately result in adverse judgments, damages, fines, penalties or activity restrictions, which could adversely impact our consolidated financial condition, cash flows, business or competitive position.

The Company believes that it has meritorious defenses to the pending claims and potential claims in the matters described below and is diligently pursuing these defenses, and in some cases working to reach an acceptable negotiated resolution. However, in view of the uncertainty inherent in litigation and government and regulatory enforcement matters, we cannot predict the eventual outcome of these matters or the timing of their resolution, or in most cases reasonably estimate what the eventual judgments, damages, fines, penalties or impact of activity restrictions may be. As a result, we cannot provide assurance that the outcome of the matters described below will not have a material adverse effect on our consolidated financial condition, cash flows, business or competitive position. As litigation or the process to resolve pending matters progresses, as the case may be, we will continue to review the latest information available and assess our ability to predict the outcome of such matters and the effects, if any, on our consolidated financial condition, cash flows, business and competitive position, which may require that we record liabilities in the consolidated financial statements in future periods.

S&P Ratings

Financial Crisis Litigation
The Company and its subsidiaries continue to defend civil cases brought by private and public plaintiffs arising out of ratings activities prior to and during the global financial crisis of 2008-2009. Discovery in these cases is ongoing. We can provide no assurance that we will not be obligated to pay significant amounts in order to resolve these matters on terms deemed acceptable. At this time, however, we are unable to reasonably estimate the range of such additional amounts, if any.


19

U.S. Securities and Exchange Commission
As a nationally recognized statistical rating organization registered with the SEC under Section 15E of the Securities Exchange Act of 1934, S&P Ratings is in ongoing communication with the staff of the SEC regarding compliance with its extensive obligations under the federal securities laws. Although S&P Ratings seeks to promptly address any compliance issues that it detects or that the staff of the SEC raises, there can be no assurance that the SEC will not seek remedies against S&P Ratings for one or more compliance deficiencies.

Parmalat Litigation
In September and October of 2005, writs of summons were served on The McGraw-Hill Companies, SRL and The McGraw-Hill Companies, SA in an action brought in the Tribunal of Milan, Italy by the Extraordinary Commissioner of Parmalat Finanziaria S.p.A. and Parmalat S.p.A. (collectively, “Parmalat”), claiming damages of €4.1 billion, representing the value of bonds issued by Parmalat which were rated investment grade by S&P Ratings, plus damages for S&P Ratings’ alleged complicity in aggravating Parmalat’s financial difficulties, among other claims. In June of 2011, the Court dismissed Parmalat’s main damages claim based on the value of the bonds, and ordered the defendants to pay Parmalat approximately €0.8 million, representing ratings fees paid by Parmalat, plus interest and expenses. In September of 2012, Parmalat appealed the judgment and, in November of 2012, requested payment of the judgment in the amount of €1.1 million, which was paid in December of 2012. In July of 2014, the Court of Appeals of Milan issued an order reopening the proceedings to allow the parties to submit additional pleadings. A hearing was held on February 25, 2015. On July 29, 2015, the Company reached a settlement with Parmalat to resolve the claims in this action. Under the settlement, the Company paid Parmalat €14.5 million.

Trani Prosecutorial Proceeding
The prosecutor in the Italian city of Trani is seeking criminal indictments against several current and former S&P Ratings managers and ratings analysts for alleged market manipulation, and against Standard & Poor’s Credit Market Services Europe under Italy’s vicarious liability statute, for having allegedly failed to properly supervise the ratings analysts and prevent them from committing market manipulation. The prosecutor’s theories are based on various actions by S&P Ratings taken with respect to Italian sovereign debt between May of 2011 and January of 2012. In October of 2014, the court granted the prosecutor’s request and issued indictments against the current and former S&P Ratings managers and ratings analysts, as well as Standard & Poor’s Credit Market Services Europe. The trial commenced with a hearing on February 4, 2015 and is ongoing. Apart from criminal penalties that might be imposed following a conviction, such conviction could also lead to civil damages claims and other sanctions against Standard & Poor's Credit Market Services Europe or the Company. Such claims and sanctions cannot be quantified at this stage.

Shareholder Derivative Action
On August 3, 2015, two purported shareholders commenced a putative derivative action on behalf of the Company in New York State Supreme Court titled Retirement Plan for General Employees of the City of North Miami Beach and Robin Stein v. Harold McGraw III, et al. The complaint asserts claims for, inter alia, breach of fiduciary duty, waste of corporate assets, and mismanagement against the board of directors, certain former directors of the Company, and three former S&P Ratings employees. Plaintiffs seek recovery from the defendants based on allegations that S&P Ratings’ credit ratings practices for certain residential mortgage-backed securities and collateralized debt obligations misrepresented the credit risks of those securities, allegedly resulting in losses to the Company. The Company and the individual defendants filed motions to dismiss the complaint on October 9, 2015.

The City of Swan

Australian government municipal councils filed suit against the Company and S&P International LLC in a representative action in April 2013 in connection with alleged investment losses in eight synthetic collateralized debt obligations (CDOs) rated by S&P Ratings. These same CDOs were at issue in an earlier lawsuit brought by the plaintiffs against its investment advisor, Lehman Brothers Australia (LBA), in which the plaintiffs secured a judgment against LBA, which is now in liquidation.  The plaintiffs claim total losses of AUD$327 million from these investments and are seeking recovery from both LBA and the Company.  The trial in the matter has been re-scheduled from October 2015 to August 2016. The Company has offered to settle this matter, although the plaintiffs have not accepted our offer. We can provide no assurance that the Company will not incur additional amounts in excess of amounts accrued to settle this matter on terms deemed acceptable. At this point, however, we are unable to reasonably estimate the range of such additional amounts, if any.



20

Commodities & Commercial Markets

Platts
In May of 2013, representatives from the European Commission (DG Competition, the EC’s antitrust office) commenced an unannounced inspection of Platts’ London offices in conjunction with potential anticompetitive conduct (in particular, in the crude oil, refined oil products and biofuels markets) relating to Platts’ Market On Close price assessment process. No allegations have been made against Platts at this time. There have also been several civil actions filed in the United States relating to potential anticompetitive behavior by market participants relating to Platts’ price assessment process, none of which have named Platts as a defendant.

McGraw Hill Construction
In October of 2009, an action was filed in the U.S. District Court for the Southern District of New York in which Reed Construction Data asserted a number of claims under various state and federal laws against the Company relating to alleged misappropriation and unfair competition by McGraw Hill Construction and seeking an unspecified amount of damages. In September of 2010, the Court granted the Company’s motion to dismiss some of the claims. In September of 2014, the Court granted summary judgment to the Company on all of Reed’s remaining claims with the exception of the unfair competition claim. In October of 2014, the parties submitted a joint stipulation to the Court agreeing to dismiss both Reed’s unfair competition claim and the Company’s counterclaims without prejudice to reinstatement in the event of a successful appeal of Reed’s dismissed claims.

12.
Recent Accounting Standards

In September of 2015, the Financial Accounting Standards Board ("FASB") issued guidance intended to simplify the accounting for measurement-period adjustments made to provisional amounts recognized in a business combination. The guidance eliminates the requirement to retrospectively account for those adjustments. This guidance is effective for reporting periods beginning after December 15, 2015. We do not expect the adoption of this guidance to have a significant impact on our consolidated financial statements.

In April of 2015, the FASB issued new accounting guidance intended to simplify the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with the presentation for debt discounts. This guidance is effective for reporting periods beginning after December 15, 2015 and must be applied on a retrospective basis with early adoption permitted. We do not expect the adoption of this guidance to have a significant impact on our consolidated financial statements.

In February of 2015, the FASB issued guidance that requires management to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. This guidance is effective for reporting periods beginning after December 15, 2015; however, early adoption is permitted. We do not expect the adoption of this guidance to have a significant impact on our consolidated financial statements.

In January of 2015, the FASB issued guidance that eliminates the concept of reporting extraordinary items, but retains current presentation and disclosure requirements for an event or transaction that is of an unusual nature or of a type that indicates infrequency of occurrence. Transactions that meet both criteria would now also follow such presentation and disclosure requirements. This guidance is effective for reporting periods beginning after December 15, 2015; however, early adoption is permitted. We do not expect the adoption of this guidance to have a significant impact on our consolidated financial statements.

In August of 2014, the FASB issued guidance that requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. This guidance is effective for reporting periods beginning after December 15, 2016; however, early adoption is permitted. We do not expect the adoption of this guidance to have a significant impact on our consolidated financial statements.

In May of 2014, the FASB and the International Accounting Standards Board (“IASB”) issued jointly a converged standard on the recognition of revenue from contracts with customers which is intended to improve the financial reporting of revenue and comparability of the top line in financial statements globally. The core principle of the new standard is for the recognition of revenue to depict the transfer of goods or services to customers in amounts that reflect the payment to which the company expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced revenue disclosures, provide guidance for transactions that were not previously addressed comprehensively and improve guidance for multiple-element arrangements. In August of 2015, the FASB issued guidance deferring the effective date of the new revenue standard by one year.

21

The new guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We are currently in the process of assessing the impact the adoption of this guidance will have on our consolidated financial statements.

In April of 2014, the FASB issued final guidance that raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The guidance is intended to reduce the frequency of disposals reported as discontinued operations by focusing on strategic shifts that have or will have a major effect on an entity’s operations and financial results. In addition, the guidance permits companies to have continuing cash flows and significant continuing involvement with the disposed component. The amendments were effective on January 1, 2015, and the adoption of the guidance did not have a significant impact on our consolidated financial statements.

13.
Related Party Transactions

On July 31, 2014, we completed the sale of the Company's aircraft to Harold W. McGraw III, then Chairman of the Company's Board of Directors and former President and CEO of the Company ("Mr. McGraw") for a purchase price of $20 million, which is modestly higher than the independent appraisal obtained. This transaction was approved by the Nominating and Corporate Governance Committee of the Company's Board of Directors after consultation with members of the Financial Policy Committee. During the second quarter of 2014, we recorded a non-cash impairment charge of $6 million within other (income) loss in our consolidated statement of income as a result of the pending sale.

On June 25, 2014, we repurchased 0.5 million shares of the Company's common stock from the personal holdings of Mr. McGraw. The shares were purchased at a discount of 0.35% from the June 24, 2014 New York Stock Exchange closing price pursuant to a private transaction with Mr. McGraw. We repurchased these shares with cash for $41 million at an average price of $82.66 per share. This transaction was approved by the Nominating & Corporate Governance Committee of the Company's Board of Directors after consultation with members of the Financial Policy Committee.

In June of 2012, we entered into a new license agreement (the "License Agreement") with the holder of S&P Dow Jones Indices LLC noncontrolling interest, CME Group, which replaced the 2005 license agreement between S&P DJ Indices and CME Group. Under the terms of the License Agreement, S&P Dow Jones Indices LLC receives a share of the profits from the trading and clearing of CME Group's equity index products. During the three and nine months ended September 30, 2015, S&P Dow Jones Indices LLC earned $19 million and $47 million, respectively, of revenue under the terms of the License Agreement. The entire amount of this revenue is included in our consolidated statement of income and the portion related to the 27% noncontrolling interest is removed in net income attributable to noncontrolling interests.

14.
Condensed Consolidating Financial Statements

On 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 notes, consisting of $400 million of 2.5% senior notes due in 2018, $700 million of 3.3% senior notes due in 2020 and $900 million of 4.4% senior notes due in 2026.

The senior notes described above are fully and unconditionally guaranteed by Standard & Poor's Financial Services LLC, a 100% owned subsidiary of the Company. The following condensed consolidating financial statements present the results of operations, financial position and cash flows of McGraw Hill Financial, Inc., Standard & Poor's Financial Services LLC, and the Non-Guarantor Subsidiaries of McGraw Hill Financial, Inc. and Standard & Poor's Financial Services LLC, and the eliminations necessary to arrive at the information for the Company on a consolidated basis.



22

 
Statement of Income
 
Three Months Ended September 30, 2015
 
(Unaudited)
(in millions)
McGraw Hill Financial, Inc.
 
Standard & Poor's Financial Services LLC
 
Non-Guarantor Subsidiaries
 
Eliminations
 
McGraw Hill Financial Inc. Consolidated
Revenue
$
165

 
$
523

 
$
665

 
$
(29
)
 
$
1,324

Expenses:
 
 
 
 
 
 
 
 
 
Operating-related expenses
20

 
99

 
317

 
(29
)
 
407

Selling and general expenses
206

 
69

 
195

 
—

 
470

Depreciation
9

 
4

 
7

 
—

 
20

Amortization of intangibles
—

 
—

 
17

 
—

 
17

Total expenses
235

 
172

 
536

 
(29
)
 
914

Operating (loss) profit
(70
)
 
351

 
129

 
—

 
410

Interest expense (income), net
32

 
—

 
(2
)
 
—

 
30

Non-operating intercompany transactions
51

 
48

 
(99
)
 
—

 
—

(Loss) income from continuing operations before taxes on income
(153
)
 
303

 
230

 
—

 
380

(Benefit) provision for taxes on income
(74
)
 
100

 
73

 
—

 
99

Equity in net income of subsidiaries
1,180

 
206

 
—

 
(1,386
)
 
—

Net income
$
1,101

 
$
409

 
$
157

 
$
(1,386
)
 
$
281

Less: net income from continuing operations attributable to noncontrolling interests
—

 
—

 
—

 
(29
)
 
(29
)
Net income attributable to McGraw Hill Financial, Inc.
$
1,101

 
$
409

 
$
157

 
$
(1,415
)
 
$
252

Comprehensive income
$
1,095

 
$
408

 
$
123

 
$
(1,386
)
 
$
240


23

 
Statement of Income
 
Nine Months Ended September 30, 2015
 
(Unaudited)
(in millions)
McGraw Hill Financial, Inc.
 
Standard & Poor's Financial Services LLC
 
Non-Guarantor Subsidiaries
 
Eliminations
 
McGraw Hill Financial Inc. Consolidated
Revenue
$
481

 
$
1,640

 
$
1,902

 
$
(85
)
 
$
3,938

Expenses:
 
 
 
 
 
 
 
 
 
Operating-related expenses
64

 
396

 
843

 
(85
)
 
1,218

Selling and general expenses
282

 
243

 
609

 
—

 
1,134

Depreciation
29

 
14

 
21

 
—

 
64

Amortization of intangibles
—

 
—

 
40

 
—

 
40

Total expenses
375

 
653

 
1,513

 
(85
)
 
2,456

Other income
—

 
—

 
(11
)
 
—

 
(11
)
Operating profit
106

 
987

 
400

 
—

 
1,493

Interest expense (income), net
69

 
—

 
(7
)
 
—

 
62

Non-operating intercompany transactions
180

 
139

 
(319
)
 
—

 
—

(Loss) income from continuing operations before taxes on income
(143
)
 
848

 
726

 
—

 
1,431

(Benefit) provision for taxes on income
(57
)
 
291

 
205

 
—

 
439

Equity in net income of subsidiaries
1,180

 
205

 
—

 
(1,385
)
 
—

Net income
$
1,094

 
$
762

 
$
521

 
$
(1,385
)
 
$
992

Less: net income from continuing operations attributable to noncontrolling interests
—

 
—

 
—

 
(83
)
 
(83
)
Net income attributable to McGraw Hill Financial, Inc.
$
1,094

 
$
762

 
$
521

 
$
(1,468
)
 
$
909

Comprehensive income
$
1,102

 
$
761

 
$
480

 
$
(1,390
)
 
$
953





24

 
Statement of Income
 
Three Months Ended September 30, 2014
 
(Unaudited)
(in millions)
McGraw Hill Financial, Inc.
 
Standard & Poor's Financial Services LLC
 
Non-Guarantor Subsidiaries
 
Eliminations
 
McGraw Hill Financial Inc. Consolidated
Revenue
$
149

 
$
507

 
$
635

 
$
(28
)
 
$
1,263

Expenses:
 
 
 
 
 
 
 
 
 
Operating-related expenses
19

 
142

 
269

 
(28
)
 
402

Selling and general expenses
147

 
150

 
165

 
—

 
462

Depreciation
10

 
4

 
7

 
—

 
21

Amortization of intangibles
1

 
—

 
11

 
—

 
12

Total expenses
177

 
296

 
452

 
(28
)
 
897

Operating (loss) profit
(28
)
 
211

 
183

 
—

 
366

Interest expense (income), net
15

 
—

 
(3
)
 
—

 
12

Non-operating intercompany transactions
56

 
13

 
(69
)
 
—

 
—

(Loss) income from continuing operations before taxes on income
(99
)
 
198

 
255

 
—

 
354

(Benefit) provision for taxes on income
(5
)
 
53

 
91

 
—

 
139

Equity in net income of subsidiaries
286

 
63

 
—

 
(349
)
 
—

Income from continuing operations
192

 
208

 
164

 
(349
)
 
215

Income from discontinued operations, net of tax
2

 
—

 
—

 
—

 
2

Net income
$
194

 
$
208

 
$
164

 
$
(349
)
 
$
217

Less: net income from continuing operations attributable to noncontrolling interests
—

 
—

 
—

 
(27
)
 
(27
)
Net income attributable to McGraw Hill Financial, Inc.
$
194

 
$
208

 
$
164

 
$
(376
)
 
$
190

Comprehensive income
$
186

 
$
208

 
$
109

 
$
(353
)
 
$
150


25

 
Statement of Income
 
Nine Months Ended September 30, 2014
 
(Unaudited)
(in millions)
McGraw Hill Financial, Inc.
 
Standard & Poor's Financial Services LLC
 
Non-Guarantor Subsidiaries
 
Eliminations
 
McGraw Hill Financial Inc. Consolidated
Revenue
$
443

 
$
1,535

 
$
1,869

 
$
(86
)
 
$
3,761

Expenses:
 
 
 
 
 
 
 
 
 
Operating-related expenses
59

 
450

 
782

 
(86
)
 
1,205

Selling and general expenses
241

 
394

 
551

 
—

 
1,186

Depreciation
30

 
13

 
21

 
—

 
64

Amortization of intangibles
2

 
—

 
34

 
—

 
36

Total expenses
332

 
857

 
1,388

 
(86
)
 
2,491

Other loss
3

 
—

 
6

 
—

 
9

Operating profit
108

 
678

 
475

 
—

 
1,261

Interest expense (income), net
46

 
—

 
(6
)
 
—

 
40

Non-operating intercompany transactions
130

 
27

 
(157
)
 
—

 
—

(Loss) income from continuing operations before taxes on income
(68
)
 
651

 
638

 
—

 
1,221

Provision for taxes on income
8

 
225

 
195

 
—

 
428

Equity in net income of subsidiaries
786

 
186

 
—

 
(972
)
 
—

Income from continuing operations
710

 
612

 
443

 
(972
)
 
793

Income from discontinued operations, net of tax
15

 
—

 
—

 
—

 
15

Net income
$
725

 
$
612

 
$
443

 
$
(972
)
 
$
808

Less: net income from continuing operations attributable to noncontrolling interests
—

 
—

 
—

 
(77
)
 
(77
)
Net income attributable to McGraw Hill Financial, Inc.
$
725

 
$
612

 
$
443

 
$
(1,049
)
 
$
731

Comprehensive income
$
701

 
$
588

 
$
415

 
$
(981
)
 
$
723























26

 
Balance Sheet
 
September 30, 2015
(in millions)
McGraw Hill Financial, Inc.
 
Standard & Poor's Financial Services LLC
 
Non-Guarantor Subsidiaries
 
Eliminations
 
McGraw Hill Financial Inc. Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
161

 
$
1

 
$
1,279

 
$
—

 
$
1,441

Accounts receivable, net of allowance for doubtful accounts
109

 
282

 
595

 
—

 
986

Intercompany receivable
313

 
1,480

 
1,124

 
(2,917
)
 
—

Deferred income taxes
72

 
172

 
(41
)
 
—

 
203

Prepaid and other current assets
93

 
4

 
109

 
—

 
206

Total current assets
748

 
1,939

 
3,066

 
(2,917
)
 
2,836

Property and equipment, net of accumulated depreciation
124

 
3

 
110

 
—

 
237

Goodwill
15

 
41

 
2,903

 
9

 
2,968

Other intangible assets, net
—

 
—

 
1,887

 
(6
)
 
1,881

Asset for pension benefits
—

 
—

 
61

 
—

 
61

Investments in subsidiaries

4,547

 
671

 
7,280

 
(12,498
)
 
—

Intercompany loans receivable
17

 
361

 
1,817

 
(2,195
)
 
—

Other non-current assets
69

 
19

 
92

 
—

 
180

Total assets
$
5,520

 
$
3,034

 
$
17,216

 
$
(17,607
)
 
$
8,163

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
69

 
$
42

 
$
100

 
$
—

 
$
211

Intercompany Payable
1,671

 
593

 
568

 
(2,832
)
 
—

Accrued compensation and contributions to retirement plans
108

 
73

 
139

 
—

 
320

Income taxes currently payable
16

 
—

 
43

 
—

 
59

Unearned revenue
269

 
565

 
619

 
—

 
1,453

Accrued legal and regulatory settlements
—

 
104

 
—

 
—

 
104

Other current liabilities
267

 
(134
)
 
225

 
—

 
358

Total current liabilities
2,400

 
1,243

 
1,694

 
(2,832
)
 
2,505

Long-term debt
3,489

 
—

 
—

 
—

 
3,489

Intercompany loans payable
108

 
(3
)
 
2,178

 
(2,283
)
 
—

Pension and postretirement benefits
218

 
—

 
60

 
—

 
278

Deferred income taxes
(224
)
 
51

 
263

 
—

 
90

Other non-current liabilities
217

 
12

 
59

 
(1
)
 
287

Total liabilities
6,208

 
1,303

 
4,254

 
(5,116
)
 
6,649

Redeemable noncontrolling interest
—

 
—

 
—

 
810

 
810

Equity:
 
 
 
 
 
 
 
 
 
Common stock
412

 
—

 
2,321

 
(2,321
)
 
412

Additional paid-in capital
(197
)
 
1,171

 
10,156

 
(10,689
)
 
441

Retained income
6,641

 
560

 
784

 
(393
)
 
7,592

Accumulated other comprehensive loss
(310
)
 
—

 
(279
)
 
36

 
(553
)
Less: common stock in treasury
(7,234
)
 
—

 
(20
)
 
20

 
(7,234
)
Total equity - controlling interests
(688
)
 
1,731

 
12,962

 
(13,347
)
 
658

Total equity - noncontrolling interests
—

 
—

 
—

 
46

 
46

Total equity
(688
)
 
1,731

 
12,962

 
(13,301
)
 
704

Total liabilities and equity
$
5,520

 
$
3,034

 
$
17,216

 
$
(17,607
)
 
$
8,163


27

 
Balance Sheet
 
December 31, 2014
(in millions)
McGraw Hill Financial, Inc.
 
Standard & Poor's Financial Services LLC
 
Non-Guarantor Subsidiaries
 
Eliminations
 
McGraw Hill Financial Inc. Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,402

 
$
—

 
$
1,095

 
$
—

 
$
2,497

Accounts receivable, net of allowance for doubtful accounts
120

 
293

 
519

 
—

 
932

Intercompany receivable
525

 
2,125

 
1,998

 
(4,648
)
 
—

Deferred income taxes
72

 
334

 
(43
)
 
—

 
363

Prepaid and other current assets
80

 
27

 
67

 
—

 
174

Total current assets
2,199

 
2,779

 
3,636

 
(4,648
)
 
3,966

Property and equipment, net of accumulated depreciation
111

 
5

 
90

 
—

 
206

Goodwill
109

 
41

 
1,228

 
9

 
1,387

Other intangible assets, net
13

 
—

 
991

 
—

 
1,004

Asset for pension benefits
—

 
—

 
28

 
—

 
28

Investments in subsidiaries
1,258

 
653

 
7,125

 
(9,036
)
 
—

Intercompany loans receivable
19

 
358

 
1,595

 
(1,972
)
 
—

Other non-current assets
81

 
25

 
74

 
—

 
180

Total assets
$
3,790

 
$
3,861

 
$
14,767

 
$
(15,647
)
 
$
6,771

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
59

 
$
45

 
$
87

 
$
—

 
$
191

Intercompany payable
2,566

 
617

 
1,376

 
(4,559
)
 
—

Accrued compensation and contributions to retirement plans
133

 
121

 
156

 
—

 
410

Income taxes currently payable
15

 
1

 
16

 
—

 
32

Unearned revenue
259

 
585

 
479

 
—

 
1,323

Accrued legal and regulatory settlements
—

 
1,609

 
—

 
—

 
1,609

Other current liabilities
194

 
—

 
208

 
—

 
402

Total current liabilities
3,226

 
2,978

 
2,322

 
(4,559
)
 
3,967

Long-term debt
799

 
—

 
—

 
—

 
799

Intercompany loans payable
109

 
—

 
1,952

 
(2,061
)
 
—

Pension and postretirement benefits
272

 
—

 
61

 
—

 
333

Deferred income taxes
(245
)
 
51

 
250

 
—

 
56

Other non-current liabilities
219

 
8

 
40

 
—

 
267

Total liabilities
4,380

 
3,037

 
4,625

 
(6,620
)
 
5,422

Redeemable noncontrolling interest
—

 
—

 
—

 
810

 
810

Equity:
 
 
 
 
 
 
 
 
 
Common stock
412

 
—

 
2,316

 
(2,316
)
 
412

Additional paid-in capital
(116
)
 
1,153

 
7,016

 
(7,560
)
 
493

Retained income
6,282

 
(329
)
 
1,053

 
(60
)
 
6,946

Accumulated other comprehensive loss
(319
)
 
—

 
(236
)
 
41

 
(514
)
Less: common stock in treasury
(6,849
)
 
—

 
(7
)
 
7

 
(6,849
)
Total equity - controlling interests
(590
)
 
824

 
10,142

 
(9,888
)
 
488

Total equity - noncontrolling interests
—

 
—

 
—

 
51

 
51

Total equity
(590
)
 
824

 
10,142

 
(9,837
)
 
539

Total liabilities and equity
$
3,790

 
$
3,861

 
$
14,767

 
$
(15,647
)
 
$
6,771



28

 
Statement of Cash Flows
 
Nine Months Ended September 30, 2015
(in millions)
McGraw Hill Financial, Inc.
 
Standard & Poor's Financial Services LLC
 
Non-Guarantor Subsidiaries
 
Eliminations
 
McGraw Hill Financial Inc. Consolidated
Operating Activities:
 
 
 
 
 
 
 
 
 
Net income
$
1,094

 
$
762

 
$
521

 
$
(1,385
)
 
$
992

Adjustments to reconcile income from continuing operations to cash provided by (used for) operating activities from continuing operations:
 
 
 
 
 
 
 
 
 
     Depreciation
29

 
14

 
21

 
—

 
64

     Amortization of intangibles
—

 
—

 
40

 
—

 
40

     Provision for losses on accounts receivable
—

 
(4
)
 
7

 
—

 
3

     Deferred income taxes
(139
)
 
161

 
144

 
—

 
166

     Stock-based compensation
16

 
16

 
23

 
—

 
55

     Other
107

 
22

 
10

 
—

 
139

Changes in operating assets and liabilities, net of effect of acquisitions and dispositions:
 
 
 
 
 
 
 
 
 
     Accounts receivable
10

 
16

 
(70
)
 
—

 
(44
)
     Prepaid and current assets
(35
)
 
22

 
7

 
—

 
(6
)
     Accounts payable and accrued expenses
(100
)
 
(76
)
 
(10
)
 
—

 
(186
)
     Unearned revenue
10

 
(20
)
 
28

 
—

 
18

     Accrued legal and regulatory settlements
—

 
(1,624
)
 
—

 
—

 
(1,624
)
     Other current liabilities
(19
)
 
(12
)
 
(22
)
 
—

 
(53
)
     Net change in prepaid/accrued income taxes
166

 
—

 
(26
)
 
—

 
140

     Net change in other assets and liabilities
91

 
4

 
(155
)
 
—

 
(60
)
Cash provided by (used for) operating activities from continuing operations
1,230

 
(719
)
 
518

 
(1,385
)
 
(356
)
Investing Activities:
 
 
 
 
 
 
 
 
 
     Capital expenditures
(38
)
 
(7
)
 
(29
)
 
—

 
(74
)
     Acquisitions, net of cash acquired
(2,241
)
 
—

 
(152
)
 
—

 
(2,393
)
     Proceeds from dispositions
—

 
—

 
14

 
—

 
14

     Changes in short-term investments
—

 
—

 
(3
)
 
—

 
(3
)
Cash used for investing activities from continuing operations
(2,279
)
 
(7
)
 
(170
)
 
—

 
(2,456
)
Financing Activities:
 
 
 
 
 
 
 
 
 
     Proceeds from issuance of senior notes, net
2,674

 
—

 
—

 
—

 
2,674

     Dividends paid to shareholders
(274
)
 
—

 
—

 
—

 
(274
)
 Dividends and other payments paid to noncontrolling interests
—

 
—

 
(67
)
 
—

 
(67
)
     Contingent consideration payment
(5
)
 
—

 
—

 
—

 
(5
)
     Purchase of CRISIL shares
—

 
—

 
(16
)
 
—

 
(16
)
     Repurchase of treasury shares
(501
)
 
—

 
—

 
—

 
(501
)
     Exercise of stock options
76

 
—

 
1

 
—

 
77

     Excess tax benefits from share-based payments
39

 
—

 
—

 
—

 
39

     Intercompany financing activities
(2,192
)
 
727

 
80

 
1,385

 
—

Cash (used for) provided by financing activities from continuing operations
(183
)
 
727

 
(2
)
 
1,385

 
1,927

Effect of exchange rate changes on cash from continuing operations
(9
)
 
—

 
(33
)
 
—

 
(42
)
Cash (used for) provided by continuing operations
(1,241
)
 
1

 
313

 
—

 
(927
)
Discontinued Operations:
 
 
 
 
 
 
 
 
 
     Cash used for operating activities
—

 
—

 
(129
)
 
—

 
(129
)
Cash used for discontinued operations
—

 
—

 
(129
)
 
—

 
(129
)
Net change in cash and cash equivalents
(1,241
)
 
1

 
184

 
—

 
(1,056
)
Cash and cash equivalents at beginning of period
1,402

 
—

 
1,095

 
—

 
2,497

Cash and cash equivalents at end of period
$
161

 
$
1

 
$
1,279

 
$
—

 
$
1,441



29

 
Statement of Cash Flows
 
Nine Months Ended September 30, 2014
(in millions)
McGraw Hill Financial, Inc.
 
Standard & Poor's Financial Services LLC
 
Non-Guarantor Subsidiaries
 
Eliminations
 
McGraw Hill Financial Inc. Consolidated
Operating Activities:
 
 
 
 
 
 
 
 
 
Net income
$
725

 
$
612

 
$
443

 
$
(972
)
 
$
808

Less: discontinued operations, net
15

 
—

 
—

 
—

 
15

Income from continuing operations
710

 
612

 
443

 
(972
)
 
793

Adjustments to reconcile income from continuing operations to cash provided by (used for) operating activities from continuing operations:
 
 
 
 
 
 
 
 
 
     Depreciation
30

 
13

 
21

 
—

 
64

     Amortization of intangibles
2

 
—

 
34

 
—

 
36

     Provision for losses on accounts receivable
—

 
(3
)
 
8

 
—

 
5

     Deferred income taxes
(18
)
 
—

 
(15
)
 
—

 
(33
)
     Stock-based compensation
23

 
23

 
26

 
—

 
72

     Other
—

 
85

 
21

 
—

 
106

Changes in operating assets and liabilities, net of effect of acquisitions and dispositions:
 
 
 
 
 
 
 
 
 
     Accounts receivable
2

 
67

 
(57
)
 
—

 
12

     Prepaid and current assets
(30
)
 
4

 
18

 
—

 
(8
)
     Accounts payable and accrued expenses
(153
)
 
(141
)
 
83

 
—

 
(211
)
     Unearned revenue
(10
)
 
(14
)
 
31

 
—

 
7

     Other current liabilities
22

 
(67
)
 
(20
)
 
—

 
(65
)
     Net change in prepaid/accrued income taxes
99

 
3

 
(9
)
 
—

 
93

     Net change in other assets and liabilities
14

 
2

 
(67
)
 
—

 
(51
)
Cash provided by operating activities from continuing operations
691

 
584

 
517

 
(972
)
 
820

Investing Activities:
 
 
 
 
 
 
 
 
 
     Capital expenditures
(12
)
 
(11
)
 
(29
)
 
—

 
(52
)
     Acquisitions, net of cash acquired
—

 
—

 
(65
)
 
—

 
(65
)
     Proceeds from dispositions
44

 
—

 
39

 
—

 
83

     Changes in short-term investments
—

 
—

 
(1
)
 
—

 
(1
)
Cash provided by (used for) investing activities from continuing operations
32

 
(11
)
 
(56
)
 
—

 
(35
)
Financing Activities:
 
 
 
 
 
 
 
 
 
     Dividends paid to shareholders
(245
)
 
—

 
—

 
—

 
(245
)
     Dividends and other payments paid to noncontrolling interests
—

 
—

 
(31
)
 
—

 
(31
)
     Contingent consideration payment
—

 
—

 
(11
)
 
—

 
(11
)
     Repurchase of treasury shares
(362
)
 
—

 
—

 
—

 
(362
)
     Exercise of stock options
156

 
—

 
3

 
—

 
159

     Excess tax benefits from share-based payments
89

 
—

 
—

 
—

 
89

     Intercompany financing activities
(108
)
 
(573
)
 
(291
)
 
972

 
—

Cash used for financing activities from continuing operations
(470
)
 
(573
)
 
(330
)
 
972

 
(401
)
Effect of exchange rate changes on cash from continuing operations
(8
)
 
—

 
(16
)
 
—

 
(24
)
Cash provided by continuing operations
245

 
—

 
115

 
—

 
360

Discontinued Operations:
 
 
 
 
 
 
 
 
 
     Cash provided by operating activities
16

 
—

 
—

 
—

 
16

Cash provided by discontinued operations
16

 
—

 
—

 
—

 
16

Net change in cash and cash equivalents
261

 
—

 
115

 
—

 
376

Cash and cash equivalents at beginning of period
685

 
—

 
857

 
—

 
1,542

Cash and cash equivalents at end of period
$
946

 
$
—

 
$
972

 
$
—

 
$
1,918


15.
Subsequent Event

We are in the preliminary stages of evaluating a range of strategic options for J.D. Power included in our Commodities & Commercial segment that best positions J.D. Power for future growth.


30

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Unaudited)

The following Management's Discussion and Analysis (“MD&A”) provides a narrative of the results of operations and financial condition of McGraw Hill Financial, Inc. (together with its consolidated subsidiaries, "McGraw Hill Financial," the “Company,” “we,” “us” or “our”) for the three and nine months ended September 30, 2015. The MD&A should be read in conjunction with the consolidated financial statements, accompanying notes and MD&A included in our Form 10-K for the year ended December 31, 2014 (our “Form 10-K”), which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The MD&A includes the following sections:
•
Overview
•
Results of Operations — Comparing the Three and Nine Months Ended September 30, 2015 and 2014
•
Liquidity and Capital Resources
•
Reconciliation of Non-GAAP Financial Information
•
Critical Accounting Estimates
•
Recently Adopted Accounting Standards
•
Forward-Looking Statements

OVERVIEW

We are a leading ratings, benchmarks, analytics, data and research provider serving the global capital, commodities and commercial markets. The capital markets include asset managers, investment banks, commercial banks, exchanges and issuers; the commodities markets include producers, traders and intermediaries within energy, metals, and agriculture; and the commercial markets include professionals and corporate executives within automotive and marketing / research information services.

Our operations consist of four reportable segments: Standard & Poor’s Ratings Services (“S&P Ratings”), S&P Capital IQ and SNL, S&P Dow Jones Indices ("S&P DJ Indices") and Commodities & Commercial Markets (“C&C”).
•
S&P Ratings is an independent provider of credit ratings, research and analytics, offering investors and market participants information, ratings and benchmarks.
•
S&P Capital IQ and SNL is a global provider of multi-asset-class data, research and analytical capabilities, which integrate cross-asset analytics and desktop services.
•
S&P DJ Indices is a global index provider that maintains a wide variety of valuation and index benchmarks for investment advisors, wealth managers and institutional investors.
•
C&C consists of business-to-business companies specializing in commercial and commodities markets that deliver their customers access to high-value information, data, analytic services and pricing and quality benchmarks.

Key results for the periods ended September 30 are as follows: 
(in millions, except per share amounts)
Three Months

Nine Months

2015

2014

% Change 1

2015

2014

% Change 1
Revenue
$
1,324


$
1,263


5%

$
3,938


$
3,761


5%
Operating profit
$
410


$
366


12%

$
1,493


$
1,261


18%
Operating margin %
31
%
 
29
%
 

 
38
%
 
34
%
 

Diluted earnings per share from continuing operations
$
0.92

 
$
0.68

 
35%
 
$
3.30

 
$
2.59

 
27%
1
% changes in the tables throughout the MD&A are calculated off of the actual number, not the rounded number presented.

Three Months

Revenue increased 5% driven by increases at S&P Capital IQ and SNL, C&C and S&P DJ Indices, partially offset by a decrease at S&P Ratings. Excluding revenue from acquisitions of 3 percentage points, revenue increased 2%. Revenue growth at S&P Capital IQ and SNL was favorably impacted by growth of the legacy S&P Capital IQ products driven by increases in average contract values for each product and the acquisition of SNL Financial ("SNL"). The revenue increase at C&C was primarily driven by continued demand for Platts’ proprietary content as annualized contract values increased, and the acquisition of Used Car Guide

31

at J.D. Power in July of 2015. Revenue growth at S&P DJ Indices is primarily due to higher volumes for exchange-traded derivatives and higher average levels of assets under management for ETFs and mutual funds. These revenue increases were partially offset by a decrease at S&P Ratings driven by reduced market issuance internationally and lower bank loan ratings revenue, and the unfavorable impact of foreign exchange rates by 2 percentage points.

Operating profit increased 12% in the quarter driven by revenue growth at S&P Capital IQ and SNL, C&C and S&P DJ Indices and cost containment efforts at S&P Ratings, offset by the impact of SNL operating costs. Excluding the net unfavorable impact of legal settlement charges and insurance recoveries of 5 percentage points and impact of acquisition-related costs related to the acquisition of SNL of 7 percentage points, partially offset by the favorable impact of higher restructuring charges recorded in the third quarter of 2014 of 12 percentage points and corporate development activities recorded in the third quarter of 2014 of 1 percentage point, operating profit increased 11%.

Nine Months

Revenue increased 5% driven by increases at all of our segments. Revenue growth at S&P Capital IQ and SNL was due to growth of the legacy S&P Capital IQ products driven by increases in average contract values for each product and the acquisition of SNL. The revenue increase at C&C was primarily driven by continued demand for Platts’ proprietary content as annualized contract values increased and the acquisition of Used Car Guide at J.D. Power in July of 2015. Revenue growth at S&P DJ Indices primarily due to higher volumes for exchange-traded derivatives and higher average levels of assets under management for ETFs and mutual funds. The increase at S&P Ratings was driven by growth in corporate bond ratings revenue in the U.S. and increases in U.S. Public Finance issuance, partially offset by the unfavorable impact of foreign exchange rates and a decline in bank loan ratings revenue.

Operating profit increased 18% in the first nine months of 2015 driven by revenue growth at S&P Capital IQ and SNL, C&C, S&P DJ Indices and S&P Ratings, and cost containment efforts at S&P Ratings, and a net reduction in legal settlement-related expenses. Excluding the favorable impact of higher restructuring charges recorded in the third quarter of 2014 of 2 percentage points, the net impact of legal settlement charges and insurance recoveries of 2 percentage points, and the gain on the sale of our interest in a legacy McGraw Hill Construction investment of 1 percentage point, partially offset by the unfavorable impact of acquisition-related costs related to the acquisition of SNL of 2 percentage points, operating profit increased 15%.

Our Strategy

We strive to be the leading provider of transparent and independent benchmarks & ratings, analytics, data and research in the global capital, commodities and commercial markets. We seek to promote sustainable growth in the global capital, commodities and commercial markets by providing customers with essential intelligence and superior service. We intend to provide essential intelligence through benchmarks and ratings, analytics, data, and research that enables mission-critical decisions in investment management, investment banking, CBIS (commercial banking, insurance and specialty), and corporates.

We are aligning our efforts against two key strategic priorities: creating growth and driving performance.

Creating Growth

•
We will strive to drive global growth by focusing on customers and innovation.

Driving Performance

•
We will strive to boost operational excellence, productivity, risk management, and compliance; and to attract and develop the finest talent.

There can be no assurance that we will achieve success in implementing any one or more of these strategies as a variety of factors could unfavorably impact operating results, including prolonged difficulties in the global credit markets and a change in the regulatory environment affecting our businesses.


32

RESULTS OF OPERATIONS — COMPARING THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

Consolidated Review 
(in millions)
Three Months
 
Nine Months
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
$
1,324

 
$
1,263

 
5%
 
$
3,938

 
$
3,761

 
5%
Total Expenses:
 
 
 
 
 
 
 
 
 
 
 
Operating-related expenses
407

 
402

 
1%
 
1,218

 
1,205

 
1%
Selling and general expenses
470

 
462

 
2%
 
1,134

 
1,186

 
(4)%
Depreciation and amortization
37

 
33

 
13%
 
104

 
100

 
4%
Total expenses
914

 
897

 
2%
 
2,456

 
2,491

 
(1)%
Other (income) loss
—

 
—

 
N/M
 
(11
)
 
9

 
N/M
Operating profit
410

 
366

 
12%
 
1,493

 
1,261

 
18%
Interest expense, net
30

 
12

 
N/M
 
62

 
40

 
55%
Provision for taxes on income
99

 
139

 
(29)%
 
439

 
428

 
2%
Income from continuing operations
281

 
215

 
30%
 
992

 
793

 
25%
Discontinued operations, net
—

 
2

 
N/M
 
—

 
15

 
N/M
Less: net income from continuing operations attributable to noncontrolling interests
(29
)
 
(27
)
 
11%
 
(83
)
 
(77
)
 
9%
Net income attributable to McGraw Hill Financial, Inc.
$
252

 
$
190

 
33%
 
$
909

 
$
731

 
24%
N/M - not meaningful

Revenue

The following table provides consolidated revenue information for the periods ended September 30:
(in millions)
Three Months
 
Nine Months
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
Subscription / Non-transaction revenue
$
839

 
$
770

 
9%
 
$
2,384

 
$
2,273

 
5%
Non-subscription / Transaction revenue
$
485

 
$
493

 
(2)%
 
$
1,554

 
$
1,488

 
4%
 
 
 
 
 
 
 
 
 
 
 
 
Domestic revenue
$
810

 
$
724

 
12%
 
$
2,385

 
$
2,170

 
10%
International revenue
$
515

 
$
539

 
(5)%
 
$
1,553

 
$
1,591

 
(2)%

Three Months

Subscription / non-transaction revenue increased 9% primarily from growth at S&P Capital IQ and SNL due to an increase in the average contract values driven by increases in existing accounts as well as continued demand for Platts’ proprietary content. Non-subscription / transaction revenue decreased 2% primarily due to a decline at S&P Ratings driven by reduced market issuance internationally and a decrease in bank loan ratings revenue, partially offset by higher assets under management for ETFs and mutual funds and higher volumes for exchange-traded derivatives at S&P DJ Indices. See “Segment Review” below for further information.

The unfavorable impact of foreign exchange rates reduced revenue by 2 percentage points. This impact refers to constant currency comparisons estimated by recalculating current year results of foreign operations using the average exchange rate from the prior year. The unfavorable impact of foreign exchange rates on revenue primarily related to S&P Ratings and was driven by the weakening of the Euro to the U.S. dollar.


33

Nine Months

Subscription / non-transaction revenue increased 5% primarily from growth at S&P Capital IQ and SNL due to an increase in the average contract values as well as continued demand for Platts’ proprietary content. Non-subscription / transaction revenue increased 4% primarily due to growth at S&P Ratings due to increases in U.S. corporate bond ratings revenue and U.S. public finance revenues, partially offset by a decline in the bank loan ratings revenue and growth at S&P DJ Indices due to higher assets under management for ETFs and mutual funds and higher volumes for exchange-traded derivatives. See “Segment Review” below for further information.

The unfavorable impact of foreign exchange rates reduced revenue by 2 percentage points.

Total Expenses

The following tables provide an analysis by segment of our operating-related expenses and selling and general expenses for the periods ended September 30:

Three Months
(in millions)
2015
 
2014
 
% Change
 
Operating-
related expenses
 
Selling and
general expenses
 
Operating-
related expenses
 
Selling and
general expenses
 
Operating-
related expenses
 
Selling and
general expenses
S&P Ratings
$
174

 
$
209

 
$
188

 
$
223

 
(7)%
 
(6)%
S&P Capital IQ and SNL
150

 
138

 
136

 
99

 
10%
 
40%
S&P DJ Indices
26

 
22

 
25

 
29

 
3%
 
(27)%
C&C
79

 
68

 
74

 
75

 
7%
 
(9)%
Intersegment eliminations
(22
)
 
—

 
(21
)
 
—

 
(6)%
 
N/M
Total segments
407

 
437

 
402

 
426

 
1%
 
2%
Unallocated expense
—

 
33

 
—

 
36

 
N/M
 
(10)%
Total
$
407

 
$
470

 
$
402

 
$
462

 
1%
 
2%
N/M - not meaningful

Operating-Related Expenses

Operating-related expenses increased 1%. Increases at S&P Capital IQ and SNL primarily driven by the acquisition of SNL in September of 2015 and increases at C&C due to higher incentive costs were partially offset by a decrease at S&P Ratings driven by our compensation cost containment efforts resulting from 2014 restructuring actions.

Intersegment eliminations primarily relate 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.

Selling and General Expenses

Selling and general expenses increased 2%. Excluding the unfavorable impact of legal settlement charges of 10 percentage points and impact of acquisition-related costs related to the acquisition of SNL of 9 percentage points, partially offset by the favorable impact of restructuring charges recorded in the third quarter of 2014 of 13 percentage points and a benefit related to legal insurance recoveries of 3 percentage points, selling and general expenses remained flat. Increases at S&P Capital IQ and SNL primarily driven by the acquisition of SNL in September 2015, increases at C&C due to higher incentive costs, as well as increased implementation costs of the Dodd-Frank Wall Street Reform and Consumer Protection Act were offset by declines at S&P Ratings primarily driven by lower incentive costs.

Depreciation and Amortization

Depreciation and amortization increased compared to the third quarter of 2014 due to higher intangible asset amortization in 2015 due to the acquisition of SNL in September of 2015 and the acquisition of Used Car Guide in July of 2015.


34

Nine Months
(in millions)
2015
 
2014
 
% Change
 
Operating-
related expenses
 
Selling and
general expenses
 
Operating-
related expenses
 
Selling and
general expenses
 
Operating-
related expenses
 
Selling and
general expenses
S&P Ratings
$
541

 
$
432

 
$
576

 
$
499

 
(6)%
 
(14)%
S&P Capital IQ and SNL
437

 
346

 
411

 
300

 
6%
 
15%
S&P DJ Indices
78

 
65

 
69

 
76

 
12%
 
(14)%
C&C
227

 
193

 
211

 
210

 
8%
 
(8)%
Intersegment eliminations
(65
)
 
—

 
(64
)
 
—

 
(2)%
 
N/M
Total segments
1,218

 
1,036

 
1,203

 
1,085

 
1%
 
(4)%
Unallocated expense
—

 
98

 
2

 
100

 
(100)%
 
(2)%
Total
$
1,218

 
$
1,134

 
$
1,205

 
$
1,185

 
1%
 
(4)%
N/M - not meaningful

Operating-Related Expenses

Operating-related expenses increased 1%. Increases at S&P Capital IQ and SNL primarily driven by higher data processing costs and the acquisition of SNL in September of 2015 and increases at C&C due to higher incentive costs were partially offset by declines at S&P Ratings driven by our compensation cost containment efforts resulting from 2014 restructuring actions.

Intersegment eliminations primarily relate 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.

Selling and General Expenses

Selling and general expenses decreased 4%. Excluding the unfavorable impact of legal settlement charges of 6 percentage points and impact of acquisition-related costs related to the acquisition of SNL of 3 percentage points, partially offset by a benefit related to legal insurance recoveries of 8 percentage points and the favorable impact of higher restructuring charges recorded in the third quarter of 2014 of 2 percentage points, selling and general expenses decreased 2%. The decline was due to decreases at S&P Ratings driven by lower incentive and legal costs, partially offset by increased costs related to the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Depreciation and Amortization

Depreciation and amortization increased compared to the first nine months of 2014 due to higher intangible asset amortization in 2015 due to the acquisition of SNL in September of 2015 and the acquisition of Used Car Guide in July of 2015.

Other (Income) Loss
During the nine months ended September 30, 2015, we completed the sale of our interest in a legacy McGraw Hill Construction investment that resulted in a gain of $11 million.
During the nine months ended September 30, 2014, we completed the following transactions that resulted in a pre-tax loss of $9 million:
•
On July 31, 2014, we completed the sale of the Company's aircraft to Harold W. McGraw III, then Chairman of the Company's Board of Directors and former President and CEO of the Company for a purchase price of $20 million. During the second quarter of 2014, we recorded a non-cash impairment charge of $6 million within other (income) loss in our consolidated statement of income as a result of the pending sale. See Note 13 — Related Party Transactions for further information.
•
On June 30, 2014, we completed the sale of our data center to Quality Technology Services, LLC which owns, operates and manages data centers. Net proceeds from the sale of $58 million were received in July of 2014. The sale includes all of the facilities and equipment on the south campus of our East Windsor, New Jersey location, inclusive of the rights and obligations associated with an adjoining solar power field. The sale resulted in an expense of $3 million recorded within

35

other loss (income) in our consolidated statement of income, which is in addition to the non-cash impairment charge we recorded in the fourth quarter of 2013.
Operating Profit
We consider operating profit to be an important measure for evaluating our operating performance and we evaluate operating profit for each of the reportable business segments in which we operate.
We internally manage our operations by reference to “segment operating profit” with economic resources allocated primarily based on segment operating profit. Segment operating profit is defined as operating profit before unallocated expense. Segment operating profit is one of the key metrics we use to evaluate operating performance. Segment operating profit is not, however, a measure of financial performance under U.S. GAAP, and may not be defined and calculated by other companies in the same manner.
The tables below reconcile segment operating profit to total operating profit for the periods ended September 30:

Three Months
(in millions)
2015
 
2014
 
% Change
S&P Ratings
$
194

 
$
183

 
6%
S&P Capital IQ and SNL 
53

 
64

 
(18)%
S&P DJ Indices
106

 
86

 
23%
C&C
93

 
71

 
30%
Total segment operating profit
446

 
404

 
10%
Unallocated expense
(36
)
 
(38
)
 
(8)%
Total operating profit
$
410

 
$
366

 
12%

Segment Operating Profit — Increased 10% in the quarter as compared to the third quarter of 2014. Excluding the impact of legal settlement charges of 7 percentage points and the impact of acquisition-related costs related to the acquisition of SNL of 6 percentage points, partially offset by the favorable impact of higher restructuring charges recorded in the third quarter of 2014 of 8 percentage points, the benefit of insurance recoveries of 2 percentage points and the favorable impact of corporate development activities recorded in the third quarter of 2014 of 1 percentage point, segment operating profit increased by 11%. Revenue growth at S&P Capital IQ and SNL, C&C and S&P DJ Indices and cost containment efforts at S&P Ratings during the quarter were the primary drivers for the increase. See “Segment Review” below for further information.

Unallocated Expense — These expenses, included in selling and general expenses, mainly include costs for corporate center functions, select initiatives, unoccupied office space and corporate overhead costs allocable to discontinued operations. Excluding the impact of restructuring charges, unallocated expense increased by $4 million or 11% as compared to the third quarter of 2014, primarily driven by an increase in professional fees.

Foreign exchange rates had a favorable impact on operating profit of 1 percentage point. This impact refers to constant currency comparisons and the remeasurement of monetary assets and liabilities. Constant currency impacts are estimated by re-calculating current year results of foreign operations using the average exchange rate from the prior year. Remeasurement impacts are based on the variance between current-year and prior-year foreign exchange rate fluctuations on assets and liabilities denominated in currencies other than the individual businesses functional currency.

36


Nine Months
(in millions)
2015
 
2014
 
% Change
S&P Ratings
$
846

 
$
730

 
16%
S&P Capital IQ and SNL 
178

 
172

 
4%
S&P DJ Indices
297

 
260

 
14%
C&C
265

 
217

 
22%
Total segment operating profit
1,586

 
1,379

 
15%
Unallocated expense
(93
)
 
(118
)
 
(21)%
Total operating profit
$
1,493

 
$
1,261

 
18%

Segment Operating Profit — Increased 15% in the first nine months of 2015 as compared to the first nine months of 2014. Excluding the impact of legal settlement charges of 5 percentage points and the impact of acquisition-related costs related to the acquisition of SNL of 2 percentage points, partially offset by the benefit of insurance recoveries of 6 percentage points and the favorable impact of higher restructuring charges recorded in the third quarter of 2014 of 2 percentage points, segment operating profit increased by 13%. Excluding the impact of the insurance recoveries, acquisition-related costs related to the acquisition of SNL, restructuring charges and legal settlement charges, segment operating margins were 43% and 39% for the first nine months of 2015 and 2014, respectively. Revenue growth at S&P Capital IQ and SNL, C&C, S&P DJ Indices and S&P Ratings, and cost containment efforts at S&P Ratings during the first nine months of 2015 were the primary drivers for the increase. See “Segment Review” below for further information.

Unallocated Expense — These expenses, included in selling and general expenses, mainly include costs for corporate center functions, select initiatives, unoccupied office space and corporate overhead costs allocable to discontinued operations. Excluding the sale of our interest in a legacy McGraw Hill Construction investment and the impact of restructuring charges, unallocated expense decreased by $8 million or 7% as compared to the first nine months of 2014. This decrease was primarily driven by the impact of a $9 million loss recorded in the second quarter of 2014 related to the sale of the Company's aircraft.

Foreign exchange rates had a favorable impact on operating profit of less than 1 percentage point.

Interest Expense, net

Net interest expense increased compared to the third quarter and first nine months of 2014 primarily as a result of higher interest expense related to the $700 million of senior notes issued in the second quarter of 2015 and the $2.0 billion of senior notes issued in the third quarter of 2015.

Provision for Income Taxes

The effective income tax rate for continuing operations was 25.9% and 30.7% for the three and nine months ended September 30, 2015, respectively, and 39.2% and 35.1% for the three and nine months ended September 30, 2014, respectively. The decrease in the effective income tax rate was primarily due to the combined impact of the resolutions of tax audits, increased income in lower tax rate jurisdictions, and the non-deductible tax treatment of certain regulatory charges incurred during 2014.

Segment Review

Standard & Poor's Ratings Services

Credit ratings are one of several tools that investors can use when making decisions about purchasing bonds and other fixed income investments. They are opinions about credit risk and our ratings express our opinion about the ability and willingness of an issuer, such as a corporation or state or city government, to meet its financial obligations in full and on time. Our credit ratings can also relate to the credit quality of an individual debt issue, such as a corporate or municipal bond, and the relative likelihood that the issuer may default.

S&P Ratings differentiates its revenue between transaction and non-transaction. Transaction revenue primarily includes fees associated with:
•
ratings related to new issuance of corporate and government debt instruments, and structured finance debt instruments;

37

•
bank loan ratings; and
•
corporate credit estimates, which are intended, based on an abbreviated analysis, to provide an indication of our opinion regarding creditworthiness of a company which does not currently have an S&P Ratings credit rating.

Non-transaction revenue primarily includes fees for surveillance of a credit rating, annual fees for customer relationship-based pricing programs and fees for entity credit ratings.

The following table provides revenue and segment operating profit information for the periods ended September 30: 
(in millions)
Three Months
 
Nine Months
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Transaction
$
244

 
$
269

 
(9)%
 
$
862

 
$
841

 
3%
Non-transaction
343

 
335

 
3%
 
989

 
996

 
(1)%
Total revenue
$
587

 
$
604

 
(3)%
 
$
1,851

 
$
1,837

 
1%
% of total revenue:
 
 
 
 
 
 
 
 
 
 
 
Transaction
42
%
 
45
%
 
 
 
47
%
 
46
%
 
 
Non-transaction
58
%
 
55
%
 
 
 
53
%
 
54
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic revenue
$
340

 
$
316

 
8%
 
$
1,078

 
$
977

 
10%
International revenue
$
247

 
$
288

 
(14)%
 
$
773

 
$
860

 
(10)%
 


 


 

 


 


 

Operating profit 1
$
194

 
$
183

 
6%
 
$
846

 
$
730

 
16%
Operating margin %
33
%
 
30
%
 
 
 
46
%
 
40
%
 
 

1 
Operating profit for the three and nine months ended September 30, 2015 includes legal settlement charges partially offset by a benefit related to legal settlement insurance recoveries of $86 million and $40 million, respectively. Additionally, operating profit for the nine months ended September 30, 2015 includes restructuring charges of $8 million. Operating profit for the three and nine months ended September 30, 2014 includes legal settlement charges of $60 million and restructuring charges of $23 million.

Three Months

Revenue decreased 3%, reflecting the unfavorable impact of foreign exchange rates which reduced revenue by 4 percentage points. Transaction revenue decreased in the quarter driven by reduced market issuance internationally across all regions, primarily impacting corporate bond ratings revenue and structured finance. Bank loan ratings revenue also contributed to the decline primarily driven by Europe as well as bank loan ratings revenue from infrastructure ratings. These decreases were partially offset by growth in U.S. investment-grade issuance reflecting an increase in large issuance deals driven by merger and acquisitions (M&A) activity and increases in U.S. Public Finance issuance. Non-transaction revenue grew primarily due to RES activity and increases at CRISIL in their Global Research & Analytics business as sales to new clients, mainly within the risk and analytics sector, increased, partially offset by lower entity credit ratings activity driven by a decline in new issuers.

Operating profit increased 6%. Excluding the unfavorable impact of legal settlement charges of 14 percentage points, partially offset by the favorable impact of restructuring charges recorded in the third quarter of 2014 of 10 percentage points and a benefit related to legal insurance recoveries of 4 percentage points, operating profit increased 5%. This increase was driven by reduced legal fees following the resolution of a number of significant legal matters, and decreased compensation costs primarily driven by lower incentive costs and cost containment resulting from 2014 restructuring actions, partially offset by increased costs resulting from the implementation of the Dodd-Frank Wall Street Reform of the Consumer Protection Act and the unfavorable impact of foreign exchange rates of 2 percentage points.


38

Nine Months

Revenue increased 1% driven by growth in corporate bond ratings revenue in the U.S. and increases in U.S. Public Finance issuance, partially offset by the unfavorable impact of foreign exchange rates which reduced revenue by 4 percentage points and a decline in bank loan ratings revenue. Excluding the unfavorable impact of foreign exchange rates, non-transaction revenue increased primarily due to an increase in annual fees and increased RES activity, partially offset by lower entity credit ratings activity.

Operating profit increased 16%. Excluding the benefit of legal insurance recoveries that favorably impacted operating profit by 11 percentage points and the favorable impact of higher restructuring charges recorded in 2014 of 2 percentage points, partially offset by the unfavorable impact of legal settlement charges of 9 percentage points, operating profit increased 10%. This increase was driven by the increase in revenue, decreased compensation costs primarily driven by lower incentive costs and cost containment resulting from 2014 restructuring actions and reduced legal fees following the resolution of a number of significant legal matters, partially offset by increased costs related to the implementation of the Dodd-Frank Wall Street Reform of the Consumer Protection Act and the unfavorable impact of foreign exchange rates of 2 percentage points.

Issuance Volumes

We monitor issuance volumes as an indicator of trends in transaction revenue streams within S&P Ratings. Issuance volumes noted within the discussion that follows are based on the domicile of the issuer. Issuance volumes can be reported in two ways: by “domicile” which is based on where an issuer is located or where the assets associated with an issue are located, or based on “marketplace” which is where the bonds are sold. The following tables depict changes in issuance levels as compared to the prior year, based on Thomson Financial, Harrison Scott Publications, Dealogic and S&P Ratings' internal estimates.
 
Third Quarter
Compared to Prior Year
 
Year-to-Date
Compared to Prior Year
Corporate Issuance
U.S.
 
Europe
 
U.S.
 
Europe
High-yield issuance
(43)%
 
(14)%
 
(5)%
 
(31)%
Investment-grade
33%
 
(31)%
 
33%
 
(22)%
Total new issue dollars — corporate issuance
14%
 
(29)%
 
24%
 
(24)%
•
Corporate issuance in the U.S. was up in the quarter and first nine months of 2015 driven by a strong double-digit increase in investment-grade debt issuance. The trend of high par value deals, but lower volumes continued this quarter. Strong M&A activity was a major driver of large financing transactions that resulted in increased issuance. Strong U.S. investment-grade debt issuance was partially offset by weakness in U.S. high-yield debt issuance in both the quarter and year-to-date periods.
•
Corporate issuance in Europe for both investment-grade and high-yield decreased in the quarter and first nine months of 2015 as a result of economic and political uncertainty in the European markets.
 
Third Quarter Compared to Prior Year
 
Year-to-Date Compared to Prior Year
Structured Finance
U.S.
 
Europe
 
U.S.
 
Europe
Asset-backed securities (“ABS”)
(24)%
 
39%
 
(2)%
 
15%
Structured Credit
(38)%
 
(55)%
 
(16)%
 
(10)%
Commercial mortgage-backed securities (“CMBS”)
(25)%
 
33%
 
12%
 
224%
Residential mortgage-backed securities (“RMBS”)
9%
 
483%
 
32%
 
199%
Covered bonds
*
 
82%
 
*
 
20%
Total new issue dollars — structured finance
(27)%
 
98%
 
(1)%
 
38%
*
Represents no activity in 2015 and 2014.

•
ABS issuance in the U.S. was down for the quarter driven by a decline in credit card and student loan transactions. ABS issuance in Europe was up for the quarter and year-to date periods as a result of favorable spreads and investors looking for diversification.
•
Issuance was down in the U.S. and European Structured Credit markets for the quarter and year-to-date periods driven by lower availability of leveraged loans and overall market volatility.

39

•
CMBS issuance in the U.S. was down in the quarter with the mix reflecting a lower proportion of single borrower transactions compared to the prior-year period. Year-to-date issuance was up in the U.S. reflecting favorable market conditions and investor demand during the first half of the year. European CMBS issuance was up for both the quarter and year-to-date, although from a low 2014 base.
•
RMBS volume in the U.S. was up in the quarter and year-to-date driven by a mix of deal types. The significant increase in the European RMBS volume was predominantly driven by the issuance of one large transaction; excluding this transaction volume was up 15%.
•
Covered bond issuance (which are debt securities backed by mortgages or other high-quality assets that remain on the issuer's balance sheet) in Europe was up in both the quarter and year-to-date periods due to historically low yields. The European Central Bank's purchase program is also adding to the demand side, with banks and financial institutions taking advantage of attractive lower rates.
For a further discussion of the legal and regulatory environment see Note 11 – Commitments and Contingencies to the consolidated financial statements of this Form 10-Q.

S&P Capital IQ and SNL

S&P Capital IQ and SNL's portfolio of capabilities are designed to help the financial community track performance, generate better investment returns (alpha), identify new trading and investment ideas, perform risk analysis, and develop mitigation strategies.

S&P Capital IQ and SNL includes the following business lines:
•
S&P Capital IQ Desktop & Enterprise Solutions — a product suite that provides data, analytics and third-party research for global finance professionals, which includes the S&P Capital IQ Desktop and integrated bulk data feeds that can be customized, which include QuantHouse, S&P Securities Evaluations, CUSIP and Compustat;
•
S&P Credit Solutions — commercial arm that sells Standard & Poor's Ratings Services' credit ratings and related data, analytics and research, which includes subscription-based offerings, RatingsDirect® and RatingsXpress® and
•
S&P Capital IQ Markets Intelligence — a comprehensive source of market research for financial professionals, which includes Global Markets Intelligence, Leveraged Commentary & Data and Equity Research Services.
•
SNL — a product suite that includes standardized and as-reported financials, sector-specific templates, asset-level data, mapping and regulatory data accessible through SNL Unlimited that provides in-depth coverage of industry-specific financial market data from over 6,500 public companies and over 50,000 private companies across the globe, comprehensive market data on a variety of assets, and M&A and Capital Market activities.

The following table provides revenue and segment operating profit information for the periods ended September 30: 
(in millions)
Three Months
 
Nine Months
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Subscription revenue
$
322

 
$
283

 
14%
 
$
900

 
$
832

 
8%
Non-subscription revenue
34

 
28

 
18%
 
100

 
87

 
14%
Total revenue
$
356

 
$
311

 
14%
 
$
1,000

 
$
919

 
9%
 
 
 
 
 
 
 
 
 
 
 
 
Domestic revenue
$
236

 
$
203

 
16%
 
$
660

 
$
603

 
9%
International revenue
$
120

 
$
108

 
12%
 
$
340

 
$
316

 
8%
 


 


 

 


 


 

Operating profit 1
$
53

 
$
64

 
(18)%
 
$
178

 
$
172

 
4%
Operating margin %
15
%
 
21
%
 
 
 
18
%
 
19
%
 
 

1 
Operating profit for the three and nine months ended September 30, 2015 includes acquisition costs of $32 million related to the acquisition of SNL. Additionally, operating profit for the nine months ended September 30, 2015 includes restructuring charges of $12 million. Operating profit for the three and nine months ended September 30, 2014 includes restructuring charges of $4 million.

40


Three Months

Revenue increased 14% with revenue favorably impacted by 7 percentage points from growth in the S&P Capital IQ Desktop, RatingsXpress® and RatingsDirect®, and 7 percentage points from the acquisition of SNL. Revenue growth of the legacy S&P Capital IQ products was primarily driven by increases in average contract values for each product from existing customers. These increases were partially offset by declines in the equity research business and the unfavorable impact of foreign exchange rates which reduced revenue by 1 percentage point. The number of users on the S&P Capital IQ Desktop and the number of customers at RatingsXpress® continued to grow in the quarter. Both domestic and international revenue increased, and international revenue represented approximately 35% of S&P Capital IQ and SNL's total revenue. International revenue growth in the quarter was primarily driven by sales growth of the S&P Capital IQ Desktop in Europe and Asia. Sales growth of RatingsXpress® in Asia also contributed to the increase in international revenue.

Operating profit decreased 18%. Excluding the impact of acquisition-related costs related to the acquisition of SNL of 47 percentage points, partially offset by the favorable impact of restructuring charges recorded in the third quarter of 2014 of 5 percentage points, operating profit increased 25%. This increase is due to revenue growth and the favorable impact of foreign exchange rates of 8 percentage points, partially offset by higher incentive costs and technology costs.
 
Nine Months

Revenue increased 9% primarily due to growth from the S&P Capital IQ Desktop, RatingsXpress® and RatingsDirect®, driven by increases in average contract values for each product from the comparable prior year period. These increases were partially offset by declines in the equity research business, the unfavorable impact of foreign exchange rates which reduced revenue by 1 percentage point and the unfavorable impact related to the closure of a non-core business. The acquisition of SNL in September of 2015 favorably impacted revenue in the first nine months of 2015 by 2 percentage points.

Operating profit increased 4%. Excluding the impact of acquisition-related costs related to the acquisition of SNL of 18 percentage points and the unfavorable impact of higher restructuring charges recorded in 2015 of 5 percentage points, operating profit increased 26%. This increase is due to revenue growth, the favorable impact of foreign exchange rates of 8 percentage points and lower incentive costs, partially offset by higher technology costs.

S&P Dow Jones Indices

S&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’ mission is to provide transparent benchmarks to help with decision making, collaborate with the financial community to create innovative products and provide investors with tools to monitor world markets.
S&P DJ Indices generates subscription revenue but primarily derives revenue from non-subscription products based on the S&P DJ Indices. Specifically, S&P DJ Indices generates revenue from the following sources:
•
Investment vehicles — such as ETFs, which are based on the S&P Dow Jones Indices' benchmarks and generate revenue through fees based on assets and underlying funds;
•
Exchange traded derivatives — which generate royalties based on trading volumes of derivatives contracts listed on various exchanges;
•
Index-related licensing fees — which are either fixed or variable annual and per-issue fees for over-the-counter derivatives and retail-structured products; and
•
Data and customized index subscription fees — which support index fund management, portfolio analytics and research.


41

The following table provides revenue and segment operating profit information for the periods ended September 30: 
(in millions)
Three Months
 
Nine Months
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Non-subscription revenue
$
124

 
$
114

 
8%
 
$
355

 
$
330

 
8%
Subscription revenue
32

 
29

 
12%
 
91

 
82

 
11%
Total revenue
$
156

 
$
143

 
9%
 
$
446

 
$
412

 
8%
 
 
 
 
 
 
 
 
 
 
 
 
Domestic revenue
$
129

 
$
114

 
13%
 
$
363

 
$
327

 
11%
International revenue
$
27

 
$
29

 
(5)%
 
$
83

 
$
85

 
(2)%
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit 1
$
106

 
$
86

 
23%
 
$
297

 
$
260

 
14%
Less: net operating profit attributable to noncontrolling interests
26

 
23

 

 
76

 
69

 

Net operating profit
$
80

 
$
63

 
25%
 
$
221

 
$
191

 
16%
Operating margin %
68
%
 
61
%
 
 
 
67
%
 
63
%
 
 
Net operating margin %
51
%
 
44
%
 
 
 
50
%
 
46
%
 
 

1 
Operating profit for the three and nine months ended September 30, 2014 includes $4 million of professional fees largely related to corporate development activities.

Three Months

Revenue at S&P DJ Indices increased 9%, primarily driven by higher volumes for exchange-traded derivatives and higher average levels of assets under management ("AUM") for ETFs and mutual funds, partially offset by lower over-the-counter derivative revenue. AUM for ETFs rose 2% to $749 billion in the third quarter of 2015 from $733 billion in the third quarter of 2014. However, AUM for the third quarter of 2015 were lower than the amount in the second quarter of 2015 of $792 billion and $832 billion in the fourth quarter of 2014, primarily due to the flow of investment funds to the developed international equity markets and the impact of lower equity prices. The unfavorable impact of foreign exchange rates reduced revenue by 1 percentage point.

Operating profit grew 23%. Excluding the impact of professional fees largely related to corporate development activities recorded in the third quarter of 2014 of 5 percentage points, operating profit increased 18%. This increase was primarily due to revenue growth, a decrease in operating costs primarily resulting from cost containment and lower incentive costs, partially offset by increased compensation costs. The unfavorable impact of foreign exchange rates reduced operating profit by 1 percentage point.

Nine Months

Revenue at S&P DJ Indices increased 8%, primarily driven by higher volumes for exchange-traded derivatives and higher average levels of AUM for ETFs and mutual funds, partially offset by lower over-the-counter derivative revenue. Additionally, the year-over-year revenue increase was unfavorably impacted by the refinement of our process for estimating revenue for certain products that favorably impacted the first nine months of 2014 which caused a one-time revenue increase in the prior-year period. The unfavorable impact of foreign exchange rates reduced revenue by 1 percentage point.

Operating profit grew 14%. Excluding the impact of professional fees largely related to corporate development activities recorded in the third quarter of 2014 of 2 percentage points, operating profit increased 12%. This increase was primarily due revenue growth and a decrease in operating costs primarily resulting from cost containment, partially offset by higher compensation costs. The unfavorable impact of foreign exchange rates reduced operating profit by less than 1 percentage point.

Commodities & Commercial Markets

C&C consists of business-to-business companies specializing in the commodities and commercial markets that deliver their customers access to high-value information, data, analytic services and pricing and quality benchmarks. C&C includes the following brands:

42

•
Platts — provides essential price data, analytics, and industry insight that enable commodities markets to perform with greater transparency and efficiency; and
•
J.D. Power — provides essential consumer intelligence to help businesses measure, understand, and improve the key performance metrics that drive growth and profitability in automotive and other industries.
The C&C business is driven by the need for high-value information and transparency in a variety of industries. C&C seeks to deliver premier content that is deeply embedded in customer workflows and decision making processes.

C&C's revenue is generated primarily through the following sources:
•
Subscription revenue — subscriptions to our real-time news, market data and price assessments, along with other information products, primarily serving the energy and the automotive industry; and
•
Non-subscription revenue — primarily from licensing of our proprietary market price data and price assessments to commodity exchanges, syndicated and proprietary research studies, conference sponsorship, consulting engagements, and events. 

The following table provides revenue and segment operating profit information for the periods ended September 30: 
(in millions)
Three Months
 
Nine Months
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
Total revenue
$
248

 
$
227

 
9%
 
$
707

 
$
657

 
8%
 
 
 
 
 
 
 
 
 
 
 
 
Subscription revenue
$
165

 
$
145

 
14%
 
$
470

 
$
427

 
10%
Non-subscription revenue
$
83

 
$
82

 
1%
 
$
237

 
$
230

 
3%
 
 
 
 
 
 
 
 
 
 
 
 
Domestic revenue
$
116

 
$
102

 
15%
 
$
317

 
$
296

 
7%
International revenue
$
132

 
$
125

 
5%
 
$
390

 
$
361

 
8%
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit 1
$
93

 
$
71

 
30%
 
$
265

 
$
217

 
22%
Operating margin %
37
%
 
31
%
 
 
 
38
%
 
33
%
 
 

1 
Operating profit for the nine months ended September 30, 2015 includes $1 million of restructuring charges. Operating profit for the three and nine months ended September 30, 2014 includes $12 million of restructuring charges.

Three Months

Revenue grew 9% primarily due to continued demand for Platts’ proprietary content. This growth was mainly continued demand for Platts’ market data and price assessment products across all commodity sectors, led by petroleum. Additionally, revenue benefited from a retroactive revision to annual pricing terms on an existing licensing agreement that occurred in third quarter of 2015. While petroleum is still the biggest driver, the revenue mix continues to become more diversified as other sectors showed positive annualized contract value growth including coal, natural gas, petrochemicals, metals and agriculture. J.D. Power also contributed to the revenue increase due to the acquisition of Used Car Guide (“UCG”) in July of 2015. Excluding the acquisition of UCG, revenue at J.D. Power decreased due to declines in auto consulting and proprietary engagement in China and Japan. The unfavorable impact of foreign exchange rates reduced revenue by 1 percentage point.

Operating profit increased 30%. Excluding the favorable impact of restructuring charges recorded in the third quarter of 2014 of 19 percentage points, operating profit increased 11%. This increase is primarily due to the increase in revenue, the favorable impact of foreign exchange rates of 3 percentage points, partially offset by higher incentive costs at Platts.

Nine Months

Revenue grew 8% primarily due to continued demand for Platts' proprietary content. Platts revenue for the nine months of 2015 was also favorably impacted by the acquisition of Eclipse Energy Group AS and its operating subsidiaries (“Eclipse”) in July of 2014. J.D. Power also contributed to the revenue increase primarily due to the acquisition of UCG in July of 2015. The unfavorable impact of foreign exchange rates reduced revenue by 1 percentage point.

Operating profit increased 22%. Excluding the favorable impact of higher restructuring charges recorded in the third quarter of

43

2014 of 6 percentage points, operating profit increased 16%. This increase is due to the increase in revenue and the favorable impact of foreign exchange rates of 4 percentage points. These increases were partially offset by higher incentive costs at Platts.

For a further discussion of the legal and regulatory environment see Note 11 – Commitments and Contingencies to the consolidated financial statements of this Form 10-Q.

LIQUIDITY AND CAPITAL RESOURCES

We continue to maintain a strong financial position. Our primary source of funds for operations is cash from our businesses and our core businesses have been strong cash generators. Cash on hand, cash flows from operations and availability under our existing credit facility are expected to be sufficient to meet any additional operating and recurring cash needs into the forseeable future. We use our cash for a variety of needs, including among others: ongoing investments in our businesses, strategic acquisitions, share repurchases, dividends, repayment of debt, capital expenditures and investment in our infrastructure.

Cash Flow Overview

Cash and cash equivalents were $1,441 million as of September 30, 2015, a decrease of $1,056 million from December 31, 2014, and consisted of approximately 10% of domestic cash and 90% of cash held abroad. Typically, cash held outside the U.S. is anticipated to be utilized to fund international operations or to be reinvested outside of the U.S., as a significant portion of our opportunities for growth in the coming years is expected to be abroad. In the event funds from international operations are needed to fund operations in the U.S., we would be required to accrue for and pay taxes in the U.S. to repatriate these funds.

The following table provides cash flow information for the nine months ended September 30: 
(in millions)
2015
 
2014
 
% Change
Net cash (used for) provided by:
 
 
 
 
 
Operating activities from continuing operations
$
(356
)
 
$
820

 
N/M
Investing activities from continuing operations
$
(2,456
)
 
$
(35
)
 
N/M
Financing activities from continuing operations
$
1,927

 
$
(401
)
 
N/M
N/M - not meaningful

In the first nine months of 2015, free cash flow decreased to $(497) million compared to $737 million in the first nine months of 2014. The decrease is primarily due to the decrease in cash (used for) provided by operating activities as discussed below. Free cash flow is a non-GAAP financial measure and reflects our cash flow (used for) provided by operating activities less capital expenditures and dividends and other payments paid to noncontrolling interests. Capital expenditures include purchases of property and equipment and additions to technology projects. See “Reconciliation of Non-GAAP Financial Information” below for a reconciliation of cash flow provided by operating activities, the most directly comparable U.S. GAAP financial measure, to free cash flow and free cash flow excluding certain items.

Operating activities

Cash used for operating activities was $356 million for the first nine months of 2015 compared to cash provided by operating activities of $820 million for the first nine months of 2014. The decrease is mainly due to the payment of legal and regulatory settlements in 2015.

Investing activities

Our cash outflows from investing activities are primarily for acquisitions and capital expenditures, while cash inflows are primarily proceeds from dispositions.

Cash used for investing activities increased to $2,456 million for the first nine months of 2015, primarily due to the acquisition of SNL in September of 2015. Refer to Note 2 — Acquisitions and Divestitures to our unaudited consolidated financial statements for further information.


44

Financing activities

Our cash outflows from financing activities consist primarily of share repurchases, dividends to shareholders and repayments of short-term and long-term debt, while cash inflows are primarily attributable to the borrowing of short-term and long-term debt and proceeds from the exercise of stock options.

Cash provided by financing activities was $1,927 million in the first nine months of 2015 as compared to cash used for financing activities of $401 million in the first nine months of 2014 driven by the issuance of senior notes in the first nine months of 2015, partially offset by an increase in cash used for the repurchase of treasury shares.

On August 18, 2015, we issued $2.0 billion of senior notes (the "Notes"), consisting of $400 million of 2.5% senior notes due in 2018, $700 million of 3.3% senior notes due in 2020 and $900 million of 4.4% senior notes due in 2026. The Notes are fully and unconditionally guaranteed by our wholly-owned subsidiary, Standard & Poor's Financial Services LLC. We used the net proceeds to finance the acquisition.

On May 26, 2015, we issued $700 million of 4.0% senior notes due in 2025 and used a portion of the net proceeds for the repayment of short-term debt, including commercial paper. The 4.0% senior notes will mature on June 15, 2025 and are fully and unconditionally guaranteed by our wholly-owned subsidiary, Standard & Poor's Financial Services LLC.

During the first nine months of 2015, we used cash to repurchase 4.9 million shares for $501 million at an average price paid per share of $102.01, excluding commissions. During the first nine months of 2014, we used cash to repurchase 4.6 million shares for $362 million at an average price paid per share of $79.02, excluding commissions. On June 25, 2014, we repurchased 0.5 million shares of the Company's common stock from the personal holdings of Harold W. McGraw III, then Chairman of the Company's Board of Directors and former President and CEO of the Company, at a discount of 0.35% from the June 24, 2014 New York Stock Exchange closing price. We repurchased these shares with cash for $41 million at an average price of $82.66 per share. This transaction was approved by the Nominating & Corporate Governance Committee of the Company's Board of Directors after consultation with members of the Financial Policy Committee.

Discontinued Operations

Cash used for operating activities from discontinued operations of $129 million in the first nine months of 2015 relates to the tax payment on the gain on sale of McGraw Hill Construction which was sold in the fourth quarter of 2014.

Additional Financing

Currently, we have the ability to borrow a total of $1.2 billion through our commercial paper program, which is supported by our credit facility described below. As of September 30, 2015 and December 31, 2014, we had no commercial paper outstanding or borrowings outstanding under our credit facility. In connection with the payment of legal and regulatory settlements recorded in 2014 and paid largely in 2015, we utilized our commercial paper program and borrowed from our credit facility during the nine months ended September 30, 2015.

On June 30, 2015, we entered into a revolving $1.2 billion five-year credit agreement (our “credit facility”) that will terminate on June 30, 2020. This credit facility replaced our $1.0 billion four-year credit facility that was scheduled to terminate on June 19, 2017. The previous credit facility was canceled immediately after the new credit facility became effective. There were no outstanding borrowings under the previous credit facility when it was replaced.

We pay a commitment fee of 10 to 20 basis points for our credit facility, depending on our indebtedness to cash flow ratio, whether or not amounts have been borrowed and currently pay a commitment fee of 12.5 basis points. The interest rate on borrowings under our credit facility is, at our option, calculated using rates that are primarily based on either the prevailing London Inter-Bank Offer Rate, the prime rate determined by the administrative agent or the Federal Funds Rate. For certain borrowings under this credit facility, there is also a spread based on our indebtedness to cash flow ratio added to the applicable rate.

Our credit facility contains certain covenants. The only financial covenant requires that our indebtedness to cash flow ratio, as defined in our credit facility, is not greater than 4 to 1, and this covenant level has never been exceeded. 

On July 24, 2015, in connection with the acquisition of SNL, we entered into a commitment letter. Upon receipt of the proceeds from the issuance of $2.0 billion of senior notes on August 18, 2015, we terminated this commitment letter. See Note 4 — Debt for further information.


45

On January 22, 2015, Fitch Ratings revised its ratings outlook from negative to stable and affirmed our BBB+ long-term debt rating and F2 short-term/commercial paper rating. On August 7, 2015, Moody's Investor Service assigned a Baa1 long-term debt rating and P-2 commercial paper rating.
 
Dividends

On February 12, 2015, the Board of Directors approved an increase in the quarterly common stock dividend from $0.30 per share to $0.33 per share.

RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION

Free cash flow is a non-GAAP financial measure and reflects our cash flow provided by operating activities less capital expenditures and dividends and other payments paid to noncontrolling interests. Capital expenditures include purchases of property and equipment and additions to technology projects. Our cash flow provided by operating activities is the most directly comparable U.S. GAAP financial measure to free cash flow. Additionally, we have considered certain items in evaluating free cash flow, which are included in the table below.

We believe the presentation of free cash flow and free cash flow excluding certain items allows our investors to evaluate the cash generated from our underlying operations in a manner similar to the method used by management. We use free cash flow to conduct and evaluate our business because we believe it typically presents a more conservative measure of cash flows since capital expenditures and dividends and other payments paid to noncontrolling interests are considered a necessary component of ongoing operations. Free cash flow is useful for management and investors because it allows management and investors to evaluate the cash available to us to service debt, make strategic acquisitions and investments, repurchase stock and fund ongoing operational and working capital needs.

The presentation of free cash flow and free cash flow excluding certain items are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP. Free cash flow, as we calculate it, may not be comparable to similarly titled measures employed by other companies. The following table presents a reconciliation of our cash flow provided by operating activities to free cash flow excluding the impact of the items below for the nine months ended September 30: 
(in millions)
2015
 
2014
Cash (used for) provided by operating activities from continuing operations
$
(356
)
 
$
820

Capital expenditures
(74
)
 
(52
)
Dividends and other payments paid to noncontrolling interests
(67
)
 
(31
)
Free cash flow
(497
)
 
737

Payment of legal and regulatory settlements
1,624

 
—

Legal settlement insurance recoveries
(101
)
 
—

Tax benefit from legal settlements
(250
)

—

Free cash flow excluding above items
$
776

 
$
737


CRITICAL ACCOUNTING ESTIMATES

Our accounting policies are described in Note 1 — Accounting Policies to the consolidated financial statements in our Form 10-K. As discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Form 10-K, we consider an accounting estimate to be critical if it required assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate or different estimates could have a material effect on our results of operations. These critical estimates include those related to revenue recognition, allowance for doubtful accounts, valuation of long-lived assets, goodwill and other intangible assets, pension plans, incentive compensation and stock-based compensation, income taxes, contingencies and redeemable non-controlling interests. We base our estimates on historical experience, current developments and on various other assumptions that we believe to be reasonable under these circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that cannot readily be determined from other sources. There can be no assurance that actual results will not differ from those estimates. Since the date of our Form 10-K, there have been no changes to our critical accounting estimates.


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RECENT ACCOUNTING STANDARDS

See Note 12 – Recent Accounting Standards to the consolidated financial statements of this Form 10-Q for further information.


47

FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements,” as defined in the Private Securities Litigation Reform Act of 1995. These statements, which express management’s current views concerning future events, trends, contingencies or results, appear at various places in this report and use words like “anticipate,” “assume,” “believe,” “continue,” “estimate,” “expect,” “forecast,” “future,” “intend,” “plan,” “potential,” “predict,” “project,” “strategy,” “target” and similar terms, and future or conditional tense verbs like “could,” “may,” “might,” “should,” “will” and “would.” For example, management may use forward-looking statements when addressing topics such as: the outcome of contingencies; future actions by regulators; changes in the Company’s business strategies and methods of generating revenue; the development and performance of the Company’s services and products; the expected impact of acquisitions and dispositions; the Company’s effective tax rates; and the Company’s cost structure, dividend policy, cash flows or liquidity.
Forward-looking statements are subject to inherent risks and uncertainties. Factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements include, among other things:
•
the impact of the acquisition of SNL, including the impact on the Company’s results of operations; any failure to successfully integrate SNL into the Company’s operations and generate anticipated synergies and other cost savings; any failure to attract and retain key employees to execute SNL’s growth strategy; any failure to realize the intended tax benefits of the acquisition; and the risk of litigation, competitive responses, or unexpected costs, charges or expenses resulting from or relating to the SNL acquisition;

•
the rapidly evolving regulatory environment, in the United States and abroad, affecting Standard & Poor’s Ratings Services, Platts, S&P Dow Jones Indices, S&P Capital IQ and SNL and the Company’s other businesses, including new and amended regulations and the Company’s compliance therewith;

•
the outcome of litigation, government and regulatory proceedings, investigations and inquiries;

•
worldwide economic, financial, political and regulatory conditions;

•
the health of debt and equity markets, including credit quality and spreads, the level of liquidity and future debt issuances;

•
the level of interest rates and the strength of the credit and capital markets in the United States and abroad;

•
the demand and market for credit ratings in and across the sectors and geographies where the Company operates;

•
concerns in the marketplace affecting the Company’s credibility or otherwise affecting market perceptions of the integrity or utility of independent credit ratings;

•
the Company’s ability to maintain adequate physical, technical and administrative safeguards to protect the security of confidential information and data, and the potential of a system or network disruption that results in regulatory penalties, remedial costs or improper disclosure of confidential information or data;

•
the effect of competitive products and pricing;

•
consolidation in the Company’s end-customer markets;

•
the impact of cost-cutting pressures across the financial services industry;

•
a decline in the demand for credit risk management tools by financial institutions;

•
the level of success of new product developments and global expansion;

•
the level of merger and acquisition activity in the United States and abroad;

•
the volatility of the energy marketplace;

•
the health of the commodities markets;


48

•
the impact of cost-cutting pressures and reduced trading in oil and other commodities markets;

•
the level of the Company’s future cash flows;

•
the Company’s ability to make acquisitions and dispositions and to integrate, and realize expected synergies, savings or benefits from the businesses it acquires;

•
the level of the Company’s capital investments;

•
the level of restructuring charges the Company incurs;

•
the strength and performance of the domestic and international automotive markets;

•
the Company’s ability to successfully recover should it experience a disaster or other business continuity problem from a hurricane, flood, earthquake, terrorist attack, pandemic, security breach, cyber-attack, power loss, telecommunications failure or other natural or man-made event;

•
changes in applicable tax or accounting requirements;

•
the impact on the Company’s net income caused by fluctuations in foreign currency exchange rates; and

•
the Company’s exposure to potential criminal sanctions or civil penalties if it fails to comply with foreign and U.S. laws and regulations that are applicable in the domestic and international jurisdictions in which it operates, including sanctions laws relating to countries such as Iran, Russia, Sudan and Syria, anti-corruption laws such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010, and local laws prohibiting corrupt payments to government officials, as well as import and export restrictions.

The factors noted above are not exhaustive. The Company and its subsidiaries operate in a dynamic business environment in which new risks emerge frequently. Accordingly, the Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the dates on which they are made. The Company undertakes no obligation to update or revise any forward-looking statement to reflect events or circumstances arising after the date on which it is made, except as required by applicable law. Further information about the Company’s businesses, including information about factors that could materially affect its results of operations and financial condition, is contained in the Company’s filings with the SEC, including the “Risk Factors” section in the Company’s most recently filed Annual Report on Form 10-K and any subsequently filed Quarterly Report on Form 10-Q.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no significant changes in our exposure to market risk during the nine months ended September 30, 2015 from those disclosed in our Form 10-K for the year ended December 31, 2014.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed with the U.S. Securities and Exchange Commission (the “SEC”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.

As of September 30, 2015, an evaluation was performed under the supervision and with the participation of management, including the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of September 30, 2015.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the most recent quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




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PART II – OTHER INFORMATION
Item 1. Legal Proceedings

See Note 11 – Commitments and Contingencies - Legal & Regulatory Matters to the consolidated financial statements of this Form 10-Q for information on our legal proceedings.

Item 1a. Risk Factors

Our Form 10-K contains detailed cautionary statements which identify all known material risks, uncertainties and other factors that could cause our actual results to differ materially from historical or expected results. Except as noted below, there have been no material changes to the risk factors we have previously disclosed in Item 1a, Risk Factors, in our Form 10-K.
Our acquisitions and other strategic transactions may not produce anticipated results.
•
We have made and expect to continue to make acquisitions or enter into other strategic transactions to strengthen our business and grow our Company.

•
Such transactions, including our recent acquisition of SNL Financial LC, present significant challenges and risks.

•
The market for acquisition targets and other strategic transactions is highly competitive, especially in light of industry consolidation, which may affect our ability to complete such transactions.

•
If we are unsuccessful in completing such transactions or if such opportunities for expansion do not arise, our business, financial condition or results of operations could be materially adversely affected.

•
If such transactions are completed, the anticipated growth and other strategic objectives of such transactions may not be fully realized, and a variety of factors may adversely affect any anticipated benefits from such transactions. For instance, the process of integration may require more resources than anticipated, we may assume unintended liabilities, there may be unexpected regulatory and operating difficulties and expenditures, we may fail to retain key personnel of the acquired business and such transactions may divert management’s focus from other business operations.

•
The anticipated benefits from an acquisition or other strategic transaction may not be realized fully, or may take longer to realize than expected. For instance, although we have identified approximately $70 million in synergies expected to be realized by 2019 largely from operational efficiencies and our ability to accelerate SNL Financial’s international growth through its global footprint, there is no guarantee that we will be able to achieve any or all of these synergies. As a result, the failure of acquisitions and other strategic transactions to perform as expected could have a material adverse effect on our business, financial condition or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On December 4, 2013, the Board of Directors approved a share repurchase program authorizing the purchase of up to 50 million shares, which was approximately 18% of the Company's outstanding shares at that time. During the third quarter of 2015, we repurchased 2.3 million shares and, as of September 30, 2015, 40.6 million shares remained under our current share repurchase program.

Repurchased shares may be used for general corporate purposes, including the issuance of shares for stock compensation plans and to offset the dilutive effect of the exercise of employee stock options. Our current repurchase program has no expiration date and purchases under this program may be made from time to time on the open market and in private transactions, depending on market conditions.

The following table provides information on our purchases of our outstanding common stock during the third quarter of 2015 pursuant to our current share repurchase program (column c). In addition to these purchases, the number of shares in column (a) include: 1) shares of common stock that are tendered to us to satisfy our employees’ tax withholding obligations in connection with the vesting of awards of restricted shares (we repurchase such shares based on their fair market value on the vesting date), and 2) our shares deemed surrendered to us to pay the exercise price and to satisfy our employees’ tax withholding obligations in connection with the exercise of employee stock options. There were no other share repurchases during the quarter outside the repurchases noted below.

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(amounts in millions, except per share price) 
Period
 
(a) Total Number of Shares Purchased
 
(b) Average Price Paid per Share
 
(c) Total Number of Shares Purchased as
Part of Publicly Announced Programs
 
(d) Maximum Number of Shares that may yet be Purchased Under the Programs
Jul. 1 — Jul. 31, 2015
 
0.1

 
$
102.58

 
0.1

 
42.8

Aug. 1 — Aug. 31, 2015
 
2.2

 
98.88

 
2.2

 
40.6

Sept. 1 — Sept. 30, 2015
 
—

 
93.22

 
—

 
40.6

Total — Qtr
 
2.3

 
$
99.01

 
2.3

 
40.6


Item 5. Other Information

IRAN THREAT REDUCTION AND SYRIA HUMAN RIGHTS ACT DISCLOSURE

Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which amended the Securities Exchange Act of 1934, an issuer is required to disclose in its annual or quarterly reports, as applicable, whether, during the reporting period, it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable laws and regulations.

Revenue during the third quarter of 2015 attributable to the transactions or dealings by the Company described below was approximately $176,000, with net profit from such sales being a fraction of the revenues.

During the third quarter of 2015, one of the Company’s divisions, a provider of energy-related information in over 150 countries, sold information and informational materials, which are generally exempt from U.S. economic sanctions, to fourteen Iran-linked subscribers that are designated by the Treasury Department’s Office of Foreign Assets Control (“OFAC”) pursuant to Executive Order 13382 and/or are owned or controlled, or appear to be owned or controlled, by the Government of Iran (the “GOI”). The Company, among other things, offers customers that subscribe to its publications access to proprietary data, analytics, and industry information that enable commodities markets to perform with greater transparency and efficiency. This division provided such data related to the energy and petrochemicals markets to the Iran-linked subscribers referenced above, generating revenue that was a de minimis portion of both the division's and the Company’s revenue. One of the twelve Iran-linked customers is designated by OFAC pursuant to Executive Order 13382; one is designated by OFAC both pursuant to Executive Order 13382 and as a GOI entity; seven are designated by OFAC as GOI entities; and five appear, based on publicly available information, to be owned or controlled by GOI entities. We believe that these transactions were permissible under U.S. sanctions pursuant to certain statutory and regulatory exemptions for the exportation of information and informational materials. The Company will continue to monitor its provision of products and services to these Iranian customers to ensure that such activity continues to be permissible under U.S. sanctions.
  





52

Item 6. Exhibits

(2.1)
Agreement and Plan of Merger, dated as of July 24, 2015, among the Company, Venus Sub LLC, SNL Financial LC and New Mountain Partners III (AIV-C), L.P., as incorporated by reference from the Registrant's Form 8-K filed on July 29, 2015.
(4.1)
Second Supplemental Indenture dated as of August 18, 2015, among the Company, Standard & Poor’s Financial Services LLC and U.S. Bank National Association, as trustee, as incorporated from Registrant’s Form 8-K filed on August 18, 2015.
 
 
(10.1)
Separation Agreement dated September 24, 2015 between the Company and Neeraj Sahai, as incorporated from Registrant’s Registration Statement on Form S-4 filed on October 30, 2015.
 
 
(12)
Computation of Ratio of Earnings to Fixed Charges
 
 
(15)
Letter on Unaudited Interim Financials
 
 
(31.1)
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
 
 
(31.2)
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
 
 
(32)
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
(101.INS)
XBRL Instance Document
 
 
(101.SCH)
XBRL Taxonomy Extension Schema
 
 
(101.CAL)
XBRL Taxonomy Extension Calculation Linkbase
 
 
(101.LAB)
XBRL Taxonomy Extension Label Linkbase
 
 
(101.PRE)
XBRL Taxonomy Extension Presentation Linkbase
 
 
(101.DEF)
XBRL Taxonomy Extension Definition Linkbase


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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
McGraw Hill Financial, Inc.
 
 
 
Registrant

 
 
 
 
Date:
November 3, 2015
By:
/s/ Jack F. Callahan, Jr.
 
 
 
Jack F. Callahan, Jr.
 
 
 
Executive Vice President and Chief Financial Officer

 
 
 
 
Date:
November 3, 2015
By:
/s/ Robert J. MacKay
 
 
 
Robert J. MacKay
 
 
 
Senior Vice President and Corporate Controller

54