10-K 1 mhfi-20151231x10k.htm 10-K 10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 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
Title of each class
 
Name of exchange on which registered
Common Stock — $1 par value
 
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES ¨   NO þ

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES ¨    NO þ

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 Web site, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ






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 the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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

The aggregate market value of voting stock held by non-affiliates of the Registrant as of the last business day of the second fiscal quarter ended June 30, 2015, was $27.4 billion, based on the closing price of the common stock as reported on the New York Stock Exchange of $100.45 per common share. For purposes of this calculation, it is assumed that directors, executive officers and beneficial owners of more than 10% of the registrant outstanding stock are affiliates. The number of shares of common stock of the Registrant outstanding as of January 22, 2016 was 265.3 million shares.

Part III incorporates information by reference from the definitive proxy statement for the 2016 annual meeting of shareholders.



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TABLE OF CONTENTS
 
 
PART I
 
Item
 
Page
1
1a.
1b.
2
3
4
 
 
 
 
 
PART II
 
 
 
 
5
6
7
7a.
8.
9.
9a.
9b.
 
 
 
 
PART III
 
 
 
 
10
11
12
13
14
 
 
 
 
PART IV
 
 
 
 
15
 
 
 


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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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 Company’s ability to make acquisitions and dispositions and to integrate, and realize expected synergies, savings or benefits from the businesses it acquires, including the impact of the acquisition of SNL 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 the combined company’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, Europe and elsewhere, 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 domestic and global 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;


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•
the health of the commodities markets;

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

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the level of the Company’s future cash flows;

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the level of the Company’s capital investments;

•
the level of restructuring charges the Company incurs;

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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 trade sanctions laws, anti-corruption laws such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act 2010, anti-bribery laws, anti-money laundering laws, and other financial crimes laws.

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 Item 1a, Risk Factors, in this Annual Report on Form 10-K.

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PART I

Item 1. Business

Overview

McGraw Hill Financial, Inc. (together with its consolidated subsidiaries, the “Company,” the “Registrant,” “we,” “us” or “our”) is a leading benchmarks and ratings, analytics, data and research provider serving the global capital, commodities and commercial markets. The capital markets include asset managers, investment banks, commercial banks, insurance companies, exchanges, and issuers; the commodities markets include producers, traders and intermediaries within energy, metals, petrochemicals and agriculture; and the commercial markets include professionals and corporate executives within automotive, financial services, insurance and marketing / research information services. We serve our global customers through a broad range of products and services available through both third-party and proprietary distribution channels. We were incorporated in December of 1925 under the laws of the state of New York.

In the fourth quarter of 2015, we began exploring strategic alternatives for J.D. Power, included in our Commodities & Commercial segment. We committed to and initiated an active program to sell J.D. Power in its current state that we believe is probable in the next year. As a result, we have classified the assets and liabilities of J.D. Power as held for sale in our consolidated balance sheet as of December 31, 2015. The anticipated disposal does not represent a strategic shift that will have a major effect on operations and financial results, therefore, it is not classified as a discontinued operation.

On November 3, 2014, we completed the sale of McGraw Hill Construction, which has historically been part of our Commodities & Commercial segment, to Symphony Technology Group for $320 million in cash. We recorded an after-tax gain on the sale of $160 million, which is included in discontinued operations, net in the consolidated statement of income for the year ended December 31, 2014. We used the after-tax proceeds from the sale to make selective acquisitions, investments, share repurchases and for general corporate purposes.

On March 22, 2013, we completed the sale of McGraw-Hill Education ("MHE") to investment funds affiliated with Apollo Global Management, LLC for a purchase price of $2.4 billion in cash. We recorded an after-tax gain on the sale of $589 million, which is included in discontinued operations, net in the consolidated statement of income for the year ended December 31, 2013. We used the after-tax proceeds from the sale to pay down short-term debt for the special dividend paid in 2012, to make selective acquisitions, investments, share repurchases and for general corporate purposes.

In 2015, we continued to focus on investments in targeted financial assets, divesting selected non-core assets, reducing our real estate portfolio and increasing shareholder return.

In 2016, pending shareholder approval, the Company will be re-branded S&P Global. This name better leverages the Company's rich heritage as a financial data and analytics brand while signaling that we have a strong global footprint and broad portfolio.

Investments in Targeted Financial Assets / Divest Selected Non-Core Assets

During 2015, we continued to create a portfolio focused on scalable, industry leading, interrelated businesses in the capital and commodity markets.
•
S&P Capital IQ and SNL — we acquired SNL Financial LC ("SNL"), a leading provider of news, data, and analytics to five sectors in the global economy: financial institutions, real estate, energy, media & communications, and metals & mining;
•
Commodities & Commercial:
◦
we acquired the entire issued share capital of Petromedia Ltd and its operating subsidiaries, an independent provider of data, intelligence, news and tools to the global fuels market that offers a suite of products providing clients with actionable data and intelligence that enables informed decisions, minimizes risk and increases efficiency;
◦
we acquired National Automobile Dealers Association's Used Car Guide, a leading provider of U.S. retail, trade-in and auction used-vehicle valuation products, services and information.
In 2015, we further reduced our real estate footprint by completing the consolidation of our corporate headquarters with our operations in New York City.


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During 2014, we continued to execute our strategy of investing for growth in markets that have size and scale while exiting non-core assets.
•
Commodities & Commercial — we acquired Eclipse Energy Group AS which complements our North American natural gas capabilities, which we obtained from our Bentek Energy LLC acquisition in 2011;
•
S&P Ratings — we acquired BRC Investor Services S.A., a Colombia-based ratings firm providing risk classifications of banks, financial services providers, insurance companies, corporate bonds and structured issues that will expand our presence in the Latin American credit markets.
In 2014, in addition to the divestiture of McGraw Hill Construction discussed above, we streamlined our infrastructure by reducing our real estate footprint through selling our data facility, initiating the consolidation of our corporate headquarters with our operations in New York City, as well as disposing of our corporate aircraft.
During 2013, we acquired an incremental 11 million equity shares representing 15.07% of CRISIL's total outstanding equity shares for $214 million, concurrently increasing our ownership percentage in CRISIL to 67.84% from 52.77%.

In 2013, we also completed certain dispositions of our non-core assets that allow us to apply greater focus on our high-growth, high-margin benchmark businesses.
•
Commodities & Commercial — we completed the sale of Aviation Week to Penton, a privately held business information company;
•
S&P Capital IQ and SNL — we completed the sale of Financial Communications as well as the closure of several non-core businesses.

Increased Shareholder Return
During the three years ended December 31, 2015, we have returned $3.3 billion to our shareholders through a combination of share repurchases and our quarterly dividends: we completed share repurchases of $2.3 billion and distributed regular quarterly dividends totaling approximately $997 million. Also, on January 27, 2016, the Board of Directors approved an increase in the quarterly common stock dividend from $0.33 per share to $0.36 per share.

Our Businesses

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 (“C&C”). For a discussion on the competitive conditions in our businesses, see “MD&A – Segment Review” contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Annual Report on Form 10-K.

S&P Ratings
S&P Ratings is an independent provider of credit ratings, research and analytics to investors, issuers and market participants. 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.

With offices in over 25 countries around the world, S&P Ratings is an important part of the world's financial infrastructure and has played a leading role for over 150 years in providing investors with information and independent benchmarks for their investment and financial decisions as well as access to the capital markets. The key constituents S&P Ratings serves are investors, corporations, governments, municipalities, commercial and investment banks, insurance companies, asset managers, and other debt issuers.

As the capital markets continue to evolve, S&P Ratings is well-positioned to capitalize on opportunities, driven by continuing regulatory changes, through its global network, well-established position in corporate markets and strong investor reputation.

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;
•
bank loan ratings; and

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•
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.

S&P Capital IQ and SNL
S&P Capital IQ and SNL is a global provider of digital and traditional financial research and analytical tools for capital market participants. It deploys the latest technology-driven strategies to deliver to customers an integrated portfolio of cross-asset analytics, desktop services, and investment information in the rapidly growing financial information, data and analytics market. The key constituents S&P Capital IQ and SNL serves are asset managers; investment banks; investors; brokers; financial advisors; insurance companies; investment sponsors; and companies’ back-office functions, including compliance, operations, risk, clearance, and settlement.

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;
•
Global Risk Services — 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®;
•
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; and
•
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.
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 primarily generates revenue from non-subscription products based on the S&P and Dow Jones Indices, and also generates subscription revenue. Specifically, S&P DJ Indices generate revenue from the following sources:
•
Investment vehicles — such as exchange traded funds (“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.

Commodities & Commercial
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 benchmarks. C&C includes the following brands:
•
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.


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In the fourth quarter of 2015, we began exploring strategic alternatives for J.D. Power, included in our C&C segment. We committed to and initiated an active program to sell J.D. Power in its current state that we believe is probable in the next year. As a result, we have classified the assets and liabilities of J.D. Power as held for sale in our consolidated balance sheet as of December 31, 2015. The anticipated disposal does not represent a strategic shift that will have a major effect on operations and financial results, therefore, it is not classified as a discontinued operation.

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. Our commodities business serves producers, traders, and intermediaries within energy, metals and agriculture markets. Our commercial business serves professionals and executives within automotive, financial services, insurance and marketing / research services markets.

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, commercial-oriented data and analytics, conference sponsorship, consulting engagements and events.

Our Strategy

Our vision is to be the leading provider of transparent and independent benchmarks and ratings, analytics, data and research in the global capital, commodities and corporate markets. Our mission is to promote sustainable growth in these markets by providing customers with essential intelligence and superior service. We seek to accomplish our mission and vision within the framework of our core values of fairness, integrity and transparency. We intend to deliver our products and services through customer-centric distribution channels that enable mission-critical decisions in our core customer sets of investment management, investment banking, commercial banking, insurance, specialty financial institutions 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 executing our strategic initiatives, strengthening core capabilities and collaborating across businesses.

Driving Performance

•
We will strive to deliver operational excellence, manage and mitigate risk and enhance leadership and accountability.

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. See Item 1a, Risk Factors, in this Annual Report on Form 10-K.

Further projections and discussion on our 2016 outlook for our segments can be found within “MD&A – Results of Operations”.

Segment and Geographic Data

The relative contribution of our operating segments to operating revenue, operating profit, long-lived assets and geographic area for the three years ended December 31, 2015 are included in Note 11 – Segment and Geographic Information to the consolidated financial statements under Item 8, Consolidated Financial Statements and Supplementary Data, in this Form 10-K.

Our Personnel

As of December 31, 2015, we had approximately 20,400 employees located worldwide, of which approximately 5,700 were employed in the U.S.


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Available Information

The Company's investor kit includes Annual Reports on Form 10-K, Proxy Statements, Quarterly Reports on Form 10-Q, current reports on Form 8-K, the current earnings release and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. For online access to the Digital Investor Kit, go to http://investor.mhfi.com. Requests for printed copies, free of charge, can be e-mailed to investor.relations@mhfi.com or mailed to Investor Relations, McGraw Hill Financial, Inc., 55 Water Street, New York, NY 10041-0001. Interested parties can also call Investor Relations toll-free at 866-436-8502 (domestic callers) or 212-438-2192 (international callers). The information on our website is not, and shall not be deemed to be part hereof or incorporated into this or any of our filings with the SEC.

Access to more than 10 years of the Company's filings made with the Securities and Exchange Commission is available through the Company's Investor Relations Web site. Go to http://investor.mhfi.com and click on the SEC Filings link. In addition, these filings are available to the public on the Commission's Web site through their EDGAR filing system at www.sec.gov. Interested parties may also read and copy materials that the Company has filed with the Securities and Exchange Commission (“SEC”) at the SEC's public reference room located at 100 F Street, NE, Washington, D.C. 20549 on official business days between the hours of 10AM and 3PM. Please call the Commission at 1-800-SEC-0330 for further information on the public reference room.


Item 1a. Risk Factors

We are providing the following cautionary statements which identify all known material risks, uncertainties and other factors that could cause our actual results to differ materially from historical and expected results.
We operate in the capital, commodities and commercial markets. The capital markets include asset managers, investment banks, commercial banks, insurance companies, exchanges, and issuers; the commodities markets include producers, traders and intermediaries within energy, metals, petrochemicals and agriculture; and the commercial markets include professionals and corporate executives within automotive, financial services, insurance and marketing / research information services. Certain risk factors are applicable to certain of our individual segments while other risk factors are applicable company-wide.
Exposure to litigation and government and regulatory proceedings, investigations and inquiries could have a material adverse effect on our business, financial condition or results of operations.
•
In the normal course of business, both in the United States and abroad, we and our subsidiaries are defendants in numerous legal proceedings and are often the subject of government and regulatory proceedings, investigations and inquiries, as discussed under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Annual Report on Form 10-K and in Note 12 - Commitments and Contingencies to the consolidated financial statements under Item 8, Consolidated Financial Statements and Supplementary Data, in this Annual Report on Form 10-K, and we face the risk that additional proceedings, investigations and inquiries will arise in the future.
•
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 have a material adverse effect on our business, financial condition or results of operations.
•
In view of the uncertainty inherent in litigation and government and regulatory enforcement matters, we cannot predict the eventual outcome of the matters we are currently facing 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 we are currently facing or that we may face in the future will not have a material adverse effect on our business, financial condition or results of operations.
•
As litigation or the process to resolve pending matters progresses, as the case may be, we continuously 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.

10

•
Legal proceedings impose additional expenses on the Company and require the attention of senior management to an extent that may significantly reduce their ability to devote time addressing other business issues.
•
Risks relating to legal proceedings may be heightened in foreign jurisdictions that lack the legal protections or liability standards comparable to those that exist in the United States. In addition, new laws and regulations have been and may continue to be enacted that establish lower liability standards, shift the burden of proof or relax pleading requirements, thereby increasing the risk of successful litigations against the Company in the United States and in foreign jurisdictions. These litigation risks are often difficult to assess or quantify and could have a material adverse effect on our business, financial condition or results of operations.
•
We may not have adequate insurance or reserves to cover these risks, and the existence and magnitude of these risks often remains unknown for substantial periods of time and could have a material adverse effect on our business, financial condition or results of operations.
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 $100 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.
Changes in the volume of securities issued and traded in domestic and/or global capital markets and changes in interest rates and volatility in the financial markets could have a material adverse effect on our business, financial condition or results of operations.
•
Our business is impacted by general economic conditions and volatility in the United States and world financial markets. Therefore, since a significant component of our credit-rating based revenue is transaction-based, and is essentially dependent on the number and dollar volume of debt securities issued in the capital markets, unfavorable financial or economic conditions that either reduce investor demand for debt securities or reduce issuers’ willingness or ability to issue such securities could reduce the number and dollar volume of debt issuances for which S&P Ratings provides credit ratings.
•
Increases in interest rates or credit spreads, volatility in financial markets or the interest rate environment, significant political or economic events, defaults of significant issuers and other market and economic factors may negatively impact the general level of debt issuance, the debt issuance plans of certain categories of borrowers, the level of derivatives trading and/or the types of credit-sensitive products being offered, any of which could have a material adverse effect on our business, financial condition or results of operations.
•
Any weakness in the macroeconomic environment could constrain customer budgets across the markets we serve, potentially leading to a reduction in their employee headcount and a decrease in demand for our subscription-based

11

products.
Increasing regulation of our S&P Ratings business in the United States, Europe and elsewhere can increase our costs of doing business and therefore could have a material adverse effect on our business, financial condition or results of operations.
•
The financial services industry is highly regulated, rapidly evolving and subject to the potential for increasing regulation in the United States, Europe and elsewhere. The businesses conducted by S&P Ratings are in certain cases regulated under the Credit Rating Agency Reform Act of 2006 (the “Reform Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the U.S. Securities Exchange Act of 1934 (the “Exchange Act”), and/or the laws of the states or other jurisdictions in which they conduct business.
•
In the past several years, the U.S. Congress, the International Organization of Securities Commissions ("IOSCO"), the SEC and the European Commission, including through the European Securities Market Authority ("ESMA"), as well as regulators in other countries in which S&P Ratings operates, have been reviewing the role of rating agencies and their processes and the need for greater oversight or regulations concerning the issuance of credit ratings or the activities of credit rating agencies. Other laws, regulations and rules relating to credit rating agencies are being considered by local, national and multinational bodies and are likely to continue to be considered in the future, including provisions seeking to reduce regulatory and investor reliance on credit ratings, rotation of credit rating agencies and liability standards applicable to credit rating agencies.
•
These laws and regulations, and any future rulemaking, could result in reduced demand for credit ratings and increased costs, which we may be unable to pass through to customers. In addition, there may be uncertainty over the scope, interpretation and administration of such laws and regulations. We may be required to incur significant expenses in order to comply with such laws and regulations and to mitigate the risk of fines, penalties or other sanctions. Legal proceedings could become increasingly lengthy and there may be uncertainty over and exposure to liability. It is difficult to accurately assess the future impact of legislative and regulatory requirements on our business and our customers’ businesses, and they may affect S&P Ratings’ communications with issuers as part of the rating assignment process, alter the manner in which S&P Ratings’ ratings are developed, affect the manner in which S&P Ratings or its customers or users of credit ratings operate, impact the demand for ratings and alter the economics of the credit ratings business. Each of these developments increase the costs and legal risk associated with the issuance of credit ratings and may have a material adverse effect on our operations, profitability and competitiveness, the demand for credit ratings and the manner in which such ratings are utilized.
•
Additional information regarding rating agencies is provided under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Annual Report on Form 10-K.
Our S&P DJ Indices and C&C businesses are subject to the potential for increasing regulatory review in the United States, Europe and elsewhere, which can increase our costs of doing business and therefore could have a material adverse effect on our business, financial condition or results of operations.
•
In addition to the extensive and evolving U.S. laws and regulations, foreign jurisdictions, principally in Europe, have taken measures to increase regulation of the financial services and commodities industries.
•
In October of 2012, IOSCO issued its Principles for Oil Price Reporting Agencies ("PRA Principles"), which IOSCO states are intended to enhance the reliability of oil price assessments that are referenced in derivative contracts subject to regulation by IOSCO members. Platts has taken steps to align its operations with the PRA Principles and, as recommended by IOSCO in its final report on the PRA Principles, has aligned to the PRA Principles for other commodities for which it publishes benchmarks.
•
In July of 2013, IOSCO issued its Principles for Financial Benchmarks ("Financial Benchmark Principles"), which are intended to promote the reliability of benchmark determinations, and address governance, benchmark quality and accountability mechanisms, including with regard to the indices published by S&P DJ Indices. S&P DJ Indices has taken steps to align its governance regime and operations with the Financial Benchmark Principles and engaged an independent auditor to perform a reasonable assurance review of such alignment.
•
The financial benchmarks industry is subject to the new pending benchmark regulation in the European Union (the “E.U. Benchmark Regulation”) as well as potential increased regulation in other jurisdictions. The proposed E.U. Benchmark Regulation has been released for final approval and is expected to be published later this year. The E.U. Benchmark

12

Regulation will likely require S&P DJ Indices and Platts in due course to obtain registration or authorization in connection with its benchmark activities in Europe. This legislation will likely cause additional operating obligations but they are not expected to be material at this time and until the regulation is finalized the exact impact is not certain.
•
The European Union has recently finalized a package of legislative measures known as MiFID II ("MiFID II"), which revise and update the existing E.U. Markets in Financial Instruments Directive framework. MiFID II will apply in full in all E.U. Member States from January 3, 2017. MiFID II includes provisions that, among other things: (i) impose new conditions and requirements on the licensing of benchmarks and provide for non-discriminatory access to exchanges and clearing houses; (ii) modify the categorization and treatment of certain classes of derivatives; (iii) expand the categories of trading venue that are subject to regulation; and (iv) provide for the mandatory trading of certain derivatives on exchanges (complementing the mandatory derivative clearing requirements in the E.U. Market Infrastructure Regulation of 2011). Although the MiFID II package is “framework” legislation (meaning that much of the detail of the rules will be set out in subordinate measures to be agreed upon in the period before 2017), it is possible that the introduction of these laws and rules could affect S&P DJ Indices’ and Platts’ abilities both to administer and license their indices and price assessments, respectively.
Changes to regulations in the United States, Europe and elsewhere may impact our S&P Capital IQ and SNL business by increasing the costs of doing business globally, which could have a material adverse effect on our business, financial condition or results of operations.
•
S&P Capital IQ and SNL operates regulated investment advisory businesses in the United States, the European Union and certain other countries. These and other S&P Capital IQ and SNL businesses may increasingly become subject to new or more stringent regulations that will increase the cost of doing business, which could have a material adverse effect on our business, financial condition or results of operations.
•
MiFID II and the Market Abuse Regulation (“MAR”) may impose additional regulatory burdens on S&P Capital IQ and SNL's activities in the European Union, although the exact severity and cost are not yet known.
We may become subject to liability based on the use of our products by our clients.
•
Some of our products support the investment processes of our clients, which, in the aggregate, manage trillions of dollars of assets. Use of our products as part of the investment process creates the risk that clients, or the parties whose assets are managed by our clients, may pursue claims against us for very significant dollar amounts, which could have a material adverse effect on our business, financial condition or results of operations.
•
Any such claim, even if the outcome were to be ultimately favorable to us, would involve a significant commitment of our management, personnel, financial and other resources and could have a negative impact on our reputation. In addition, such claims and lawsuits could have a material adverse effect on our business, financial condition or results of operations.
Increased competition could result in a loss of market share or revenue.
•
The markets for credit ratings, financial research, investment and advisory services, index-based products, and commodities price assessments and related news and information about the commodities markets are intensely competitive. S&P Ratings, S&P Capital IQ and SNL, S&P DJ Indices and C&C compete domestically and internationally on the basis of a number of factors, including the quality of its ratings, research and advisory services, client service, reputation, price, geographic scope, range of products and technological innovation.
•
While our businesses face competition from traditional content and analytics providers, we also face competition from non-traditional providers such as exchanges, asset managers, investment banks and technology-led companies that are adding content and analytics capabilities to their core businesses.
•
In addition, in some of the countries in which S&P Ratings competes, governments may provide financial or other support to locally-based rating agencies and may from time to time establish official credit rating agencies, credit ratings criteria or procedures for evaluating local issuers.
•
Sustained downward pressure on oil and other commodities prices and trading activity in those markets could have a material adverse effect on the rate of growth of Platts’ revenue, including subscription and licensing fees.

13

Introduction of new products, services or technologies could impact our profitability.
•
We operate in highly competitive markets that continue to change to adapt to customer needs. In order to maintain a competitive position, we must continue to invest in new offerings and new ways to deliver our products and services. These investments may not be profitable or may be less profitable than what we have experienced historically.
•
We could experience threats to our existing businesses from the rise of new competitors due to the rapidly changing environment in which we operate.
•
We rely on our information technology environment and certain critical databases, systems and applications to support key product and service offerings. We believe we have appropriate policies, processes and internal controls to ensure the stability of our information technology, provide security from unauthorized access to our systems and maintain business continuity, but our business could be subject to significant disruption and our business, financial condition or results of operations could be materially and adversely affected by unanticipated system failures, data corruption or unauthorized access to our systems.
A significant increase in operating costs and expenses could have a material adverse effect on our profitability.
•
Our major expenditures include employee compensation and capital investments.
•
We offer competitive salary and benefit packages in order to attract and retain the quality employees required to grow and expand our businesses. Compensation costs are influenced by general economic factors, including those affecting the cost of health insurance and postretirement benefits, and any trends specific to the employee skill sets we require.
•
We make significant investments in information technology data centers and other technology initiatives and we cannot provide assurances that such investments will result in increased revenues.
•
Although we believe we are prudent in our investment strategies and execution of our implementation plans, there is no assurance as to the ultimate recoverability of these investments.
Consolidation of customers as well as staffing levels across our customer base could impact our available markets and revenue growth.
•
Our businesses have a customer base which is largely comprised of members from the financial services and commodities industries. The current challenging business environment and the consolidation of customers resulting from mergers and acquisitions in the financial services and commodities industries can result in reductions in the number of firms and workforce which can impact the size of our customer base.
•
Customers within the financial services and commodities industries that strive to reduce their operating costs may seek to reduce their spending on our products and services. If a large number of smaller customers or a critical number of larger customers reduce their spending with us, our business, financial condition or results of operations could be materially and adversely affected.
•
Alternatively, customers may use other strategies to reduce their overall spending on financial and commodity market products and services by consolidating their spending with fewer vendors, including by selecting other vendors with lower-cost offerings, or by self-sourcing their need for financial and commodity market products and services. If customers elect to consolidate their spending on financial and commodity market products and services with other vendors and not us, if we lose business to lower priced competitors, or if customers elect to self-source their product and service needs, our business, financial condition or results of operations could be materially and adversely affected.
•
A material portion of our revenues in our S&P DJ Indices business is concentrated in some of our largest customers, who have significant assets under management in index funds and exchange-traded funds. A loss of a substantial portion of revenue from our largest customers could have a material and adverse effect on our business, financial condition or results of operations.

14

If we lose key outside suppliers of data and products or if the data or products of these suppliers have errors or are delayed, we may not be able to provide our clients with the information and products they desire.
•
Our ability to produce our products and develop new products is dependent upon the products of other suppliers, including certain data, software and service suppliers. Some of our products are dependent upon (and of little value without) updates from our data suppliers and most of our information and data products are dependent upon (and of little value without) continuing access to historical and current data.
•
We utilize certain data provided by third-party data sources in a variety of ways, including large volumes of data from certain stock exchanges around the world.
•
If the data from our suppliers has errors, is delayed, has design defects, is unavailable on acceptable terms or is not available at all, it could have a material adverse effect on our business, financial condition or results of operations.
•
Some of our agreements with data suppliers allow them to cancel on short notice. Termination of one or more of our significant data agreements or exclusion from, or restricted use of, or litigation in connection with, a data provider’s information could decrease the available information for us to use (and offer our clients) and could have a material adverse effect on our business, financial condition or results of operations.
Changes in the legislative, regulatory, and commercial environments in which we operate may materially and adversely impact our ability to collect, compile, use, and publish data and may impact our financial results.
•
Certain types of information we collect, compile, use, and publish, including offerings in our C&C business, are subject to regulation by governmental authorities in jurisdictions in which we operate. In addition, there is increasing concern among certain privacy advocates and government regulators regarding marketing and privacy matters, particularly as they relate to individual privacy interests.
•
These concerns may result in new or amended laws and regulations. Future laws and regulations with respect to the collection, compilation, use, and publication of information and consumer privacy could result in limitations on our operations, increased compliance or litigation expense, adverse publicity, or loss of revenue, which could have a material adverse effect on our business, financial condition, and results of operations. It is also possible that we could be prohibited from collecting or disseminating certain types of data, which could affect our ability to meet our customers’ needs.
Our ability to protect our intellectual property rights could impact our competitive position.
•
Our products contain intellectual property delivered through a variety of digital and other media. Our ability to achieve anticipated results depends in part on our ability to defend our intellectual property against infringement. Our business, financial condition or results of operations could be materially and adversely affected by inadequate or changing legal and technological protections for intellectual property and proprietary rights in some jurisdictions and markets.
We are exposed to multiple risks associated with the global nature of our operations.
•
The geographic breadth of our activities subjects us to significant legal, economic, operational, market, compliance and reputational risks. These include, among others, risks relating to:
•
economic and political conditions in foreign countries,
•
inflation,
•
fluctuation in interest rates and currency exchange rates,
•
limitations that foreign governments may impose on the conversion of currency or the payment of dividends or other remittances to us from our non-U.S. subsidiaries,
•
differing accounting principles and standards,
•
unexpected increases in taxes or changes in U.S. or foreign tax laws,
•
the costs of repatriating cash held by entities outside the United States, including withholding or other taxes that

15

foreign governments may impose on the payment of dividends or other remittances to us from our non-U.S. subsidiaries,
•
potential costs and difficulties in complying with a wide variety of foreign laws and regulations (including tax systems) administered by foreign government agencies, some of which may conflict with U.S. or other sources of law,
•
changes in applicable laws and regulatory requirements,
•
the possibility of nationalization, expropriation, price controls and other restrictive governmental actions,
•
competition with local rating agencies that have greater familiarity, longer operating histories and/or support from local governments or other institutions,
•
civil unrest, terrorism, unstable governments and legal systems, and other factors.
Adverse developments in any of these areas could have a material adverse effect on our business, financial condition or results of operations.
•
Additionally, we are subject to complex U.S., European and other local laws and regulations that are applicable to our operations abroad, including trade sanctions laws, anti-corruption laws such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act 2010, anti-bribery laws, anti-money laundering laws, and other financial crimes laws. Although we have implemented internal controls, policies and procedures and employee training and compliance programs to deter prohibited practices, such measures may not be effective in preventing employees, contractors or agents from violating or circumventing such internal policies and violating applicable laws and regulations. Any determination that we have violated trade sanctions, anti-bribery or anti-corruption laws could have a material adverse effect on our business, financial condition or results of operations.
•
Compliance with international and U.S. laws and regulations that apply to our international operations increases the cost of doing business in foreign jurisdictions. Violations of such laws and regulations may result in fines and penalties, criminal sanctions, administrative remedies, restrictions on business conduct and could have a material adverse effect on our reputation, our ability to attract and retain employees, our business, financial condition or results of operations.
Our inability to successfully recover should we experience a disaster or other business continuity problem could cause material financial loss, loss of human capital, regulatory actions, reputational harm or legal liability.
•
Should we experience a local or regional disaster or other business continuity problem, such as an earthquake, hurricane, flood, terrorist attack, pandemic, security breach, cyber attack, power loss, telecommunications failure or other natural or man-made disaster, our ability to continue to operate will depend, in part, on the availability of our personnel, our office facilities and the proper functioning of our computer, telecommunication and other related systems and operations. In such an event, we could experience operational challenges with regard to particular areas of our operations, such as key executive officers or personnel, that could have a material adverse effect on our business.
•
We regularly assess and take steps to improve our existing business continuity plans and key management succession. However, a disaster on a significant scale or affecting certain of our key operating areas within or across regions, or our inability to successfully recover should we experience a disaster or other business continuity problem, could materially interrupt our business operations and result in material financial loss, loss of human capital, regulatory actions, reputational harm, damaged client relationships or legal liability.
Outsourcing certain aspects of our business could result in disruption and increased costs.
•
We have outsourced certain support functions to third-party service providers to leverage leading specialized capabilities and achieve cost efficiencies. If the service providers to which we have outsourced these functions to do not perform effectively, we may not be able to achieve the expected cost savings and, depending on the function involved, we may experience business disruption, processing inefficiencies, or harm employee morale.

16

We rely heavily on network systems and the Internet and any failures or disruptions may adversely affect our ability to serve our customers.
•
Many of our products and services are delivered electronically, and our customers rely on our ability to process transactions rapidly and deliver substantial quantities of data on computer-based networks. Our customers also depend on the continued capacity, reliability and security of our electronic delivery systems, our websites and the Internet.
•
Our ability to deliver our products and services electronically may be impaired due to infrastructure or network failures, malicious or defective software, human error, natural disasters, service outages at third-party Internet providers or increased government regulation.
•
Delays in our ability to deliver our products and services electronically may harm our reputation and result in the loss of customers. In addition, a number of our customers entrust us with storing and securing their data and information on our servers.
•
Although we have disaster recovery plans that include backup facilities for our primary data centers, our systems are not always fully redundant, and our disaster planning may not always be sufficient or effective. As such, these disruptions may affect our ability to store, handle and secure such data and information.
Our operations and infrastructure may malfunction or fail, which could have a material adverse effect on our business, financial condition or results of operations.
•
Our ability to conduct business may be materially and adversely impacted by a disruption in the infrastructure that supports our businesses and the communities in which we are located, including New York City, the location of our headquarters, and major cities worldwide in which we have offices.
•
This may include a disruption involving physical or technological infrastructure used by us or third parties with or through whom we conduct business, whether due to human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, intentional acts of vandalism, acts of terrorism, political unrest, war or otherwise. Our efforts to secure and plan for potential disruptions of our major operating systems may not be successful.
•
We rely on third-party providers to provide certain essential services. While we believe that such providers are reliable, we have limited control over the performance of such providers. To the extent any of our third-party providers ceases to provide these services in an efficient, cost-effective manner or fail to adequately expand its services to meet our needs and the needs of our customers, we could experience lower revenues and higher costs.
•
We also do not have fully redundant systems for most of our smaller office locations and low-risk systems, and our disaster recovery plan does not include restoration of non-essential services. If a disruption occurs in one of our locations or systems and our personnel in those locations or those who rely on such systems are unable to utilize other systems or communicate with or travel to other locations, such persons’ ability to service and interact with our clients and customers may suffer.
•
We cannot predict with certainty all of the adverse effects that could result from our failure, or the failure of a third party, to efficiently address and resolve these delays and interruptions. A disruption to our operations or infrastructure could have a material adverse effect on our business, financial condition or results of operations.
We are exposed to risks related to cybersecurity and protection of confidential information.
•
Our operations rely on the secure processing, storage and transmission of confidential, sensitive and other types of information in our computer systems and networks and those of our third party vendors.
•
The cyber risks we face range from cyber-attacks common to most industries, to more advanced threats that target us because of our prominence in the global marketplace, or due to our ratings of sovereign debt. Breaches of our or our vendors’ technology and systems, whether from circumvention of security systems, denial-of-service attacks or other cyber-attacks, hacking, computer viruses or malware, employee error, malfeasance, physical breaches or other actions, may cause material interruptions or malfunctions in our or such vendors’ web sites, applications or data processing, or may compromise the confidentiality and integrity of material information regarding us or our business or customers.

17

•
Measures that we take to avoid or mitigate material incidents can be expensive, and may be insufficient, circumvented, or may become obsolete. Any material incidents could cause us to experience reputational harm, loss of customers, regulatory actions, sanctions or other statutory penalties, litigation or financial losses that are either not insured against or not fully covered through any insurance maintained by us.
•
Any of the foregoing could have a material adverse effect on our business, financial condition or results of operations.


18

Item 1b. Unresolved Staff Comments

None.


Item 2. Properties

Our corporate headquarters are located in leased premises located at 55 Water Street, New York, NY 10041. We lease office facilities at 120 locations; 41 are in the U.S. In addition, we own real property at 7 locations, of which 2 are in the U.S. Our properties consist primarily of office space used by each of our segments. We believe that all of our facilities are well maintained and are suitable and adequate for our current needs.


Item 3. Legal Proceedings

For information on our legal proceedings, see Note 12 – Commitments and Contingencies under Item 8, Consolidated Financial Statements and Supplementary Data, in this Form 10-K.


Item 4. Mine Safety Disclosures

Not applicable.


19

Executive Officers of the Registrant

The following individuals are the executive officers of the Company:
Name
 
Age
 
Position
John L. Berisford
 
52
 
President, Standard & Poor's Ratings Services
Jack F. Callahan, Jr.
 
57
 
Executive Vice President and Chief Financial Officer
Martina L. Cheung
 
40
 
Executive Managing Director, Global Risk Services, S&P Capital IQ and SNL
Michael Chinn
 
43
 
President, S&P Capital IQ and SNL
Imogen Dillon Hatcher
 
53
 
President, Platts
Courtney Geduldig
 
40
 
Executive Vice President, Public Affairs
France M. Gingras
 
51
 
Executive Vice President, Human Resources
David Goldenberg
 
49
 
Acting General Counsel
Donald Howard
 
56
 
Chief of Risk and Compliance
Alex J. Matturri, Jr.
 
57
 
Chief Executive Officer, S&P Dow Jones Indices
Douglas L. Peterson
 
57
 
President and Chief Executive Officer
Paul Sheard
 
61
 
Executive Vice President and Chief Economist
Ashu Suyash
 
49
 
Managing Director and Chief Executive Officer, CRISIL

Mr. Berisford, prior to becoming President of Standard and Poor’s Ratings Services on November 3, 2015, was Executive Vice President, Human Resources since 2011. Prior to that, he held senior management positions at PepsiCo, including Senior Vice President, Human Resources for Pepsi Beverages Company.
Mr. Callahan, prior to becoming Executive Vice President and Chief Financial Officer on December 6, 2010, was Chief Financial Officer of Dean Foods. Prior to that, Mr. Callahan held senior management positions at PepsiCo, including Chief Financial Officer of Frito-Lay International.
Ms. Cheung, prior to becoming Executive Managing Director, Global Risk Services, S&P Capital IQ and SNL on November 3, 2015, held management positions at Standard and Poor’s Ratings Services and was most recently MHFI’s Chief Strategy Officer. Prior to joining Standard & Poor’s, she worked in the consulting industry, first in Accenture’s Financial Services Strategy group and later as a Partner at Mitchell Madison Consulting.
Mr. Chinn, prior to becoming President of S&P Capital IQ and SNL on September 8, 2015, was Chief Executive Officer of SNL since 2010 and President of SNL since 2000.
Ms. Dillon Hatcher, prior to becoming President of Platts on September 8, 2015, was President of S&P Capital IQ since 2014. Prior to that, she was FTSE Group Executive Director Global Sales and FTSE Group Managing Director, EMEA.
Ms. Geduldig, prior to becoming Executive Vice President, Public Affairs on May 1, 2015, was Managing Director, Global Government and Public Policy since 2013, and Vice President of Global Regulatory Affairs at Standard & Poor’s. Prior to that, she was Managing Director and Head of Federal Government Relations at the Financial Services Forum.
Ms. Gingras, prior to becoming Executive Vice President, Human Resources on November 3, 2015, was Senior Vice President, Total Rewards since 2012. Prior to that, she was Head of Compensation and Benefits at Time, Inc.
Mr. Goldenberg, prior to becoming Acting General Counsel on October 14, 2015, was Chief Legal Officer for S&P Capital IQ and SNL since January, 2015. His prior roles include General Counsel of Mercer and General Counsel at Lazard Asset Management.
Mr. Howard, prior to becoming Chief of Risk and Compliance on November 3, 2015 was Head of Enterprise Risk Management and Chief Risk and Compliance Officer since November, 2013. Prior to that, Mr. Howard held senior management positions at Standard & Poor’s Ratings Services and Promontory Financial Group, LLC.
Mr. Matturri, prior to becoming Chief Executive Officer at S&P Dow Jones Indices on July 2, 2012, served as an Executive Managing Director of S&P Indices. Prior to joining S&P Indices, Mr. Matturri served as Senior Vice President and Director of

20

Global Equity Index Management at Northern Trust Global Investments (NTGI). He previously held management positions with Deutsche Asset Management’s Index and Quantitative Investment business and The Bank of New York.
Mr. Peterson, prior to becoming President and Chief Executive Officer on November 1, 2013, was President of Standard & Poor's Ratings Services since 2011. Prior to that, he was Chief Operating Officer of Citibank, NA.
Mr. Sheard, prior to becoming Executive Vice President and Chief Economist on November 3, 2015, was Chief Global Economics and Head of Global Economics and Research of Standard & Poor’s Ratings Services. Prior to that, he held economist positions at Nomura Securities and at Lehman Brothers.
Ms. Suyash, prior to becoming an officer on June 1, 2015, was Chief Executive Officer of L&T Investment Management.

21

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Common Stock

On January 22, 2016, the closing price of our common stock was $85.50 per share as reported on the New York Stock Exchange (“NYSE”) under the ticker symbol “MHFI”. The approximate number of record holders of our common stock as of January 22, 2016 was 3,350. The high and low sales prices of McGraw Hill Financials’ common stock on the NYSE for the past two fiscal years are as follows: 
 
2015
 
2014
First Quarter
$109.13 - $85.06
 
$72.83 - $82.39
Second Quarter
108.14 - 100.44
 
71.93 - 84.81
Third Quarter
107.50 - 84.64
 
77.70 - 87.28
Fourth Quarter
101.27 - 86.10
 
73.96 - 93.94
Year
109.13 - 84.64
 
71.93 - 93.94

The performance graph below compares our cumulative total shareholder return during the previous five years with a performance indicator of the overall market (i.e., S&P 500), and our peer group. The current peer group consists of the following companies: Thomson Reuters Corporation, Moody’s Corporation, CME Group Inc., MSCI Inc., FactSet Research Systems Inc. and IHS Inc. Beginning in fiscal 2014, the Company selected a new peer group to more accurately reflect the Company's peers in terms of industry after the portfolio rationalization of certain businesses. The previous peer group consisted of the following companies: Thomson Reuters Corporation, Thomson Reuters PLC (through September of 2009), Reed Elsevier NV, Reed Elsevier PLC, Pearson PLC, Moody’s Corporation and Wolters Kluwer. Returns assume $100 invested on December 31, 2010 and total return includes reinvestment of dividends through December 31, 2015.


22



Dividends

We expect to continue our policy of paying regular cash dividends, although there is no assurance as to future dividend payments because they depend on future earnings, capital requirements and our financial condition. Regular quarterly dividends per share of our common stock for 2015 and 2014 were as follows:
 
2015
 
2014
$0.33 per quarter in 2015
$
1.32

 
 
$0.30 per quarter in 2014
 
 
$
1.20


On January 27, 2016, the Board of Directors approved an increase in the quarterly common stock dividend from $0.33 per share to $0.36 per share.

Transfer Agent and Registrar for Common Stock

Computershare is the transfer agent for McGraw Hill Financial. Computershare maintains the records for the Company's registered shareholders and can assist with a variety of shareholder related services.

Shareholder correspondence should be mailed to:
Computershare
P.O. Box 30170
College Station, TX 77842-3170

Overnight correspondence should be mailed to:
Computershare
211 Quality Circle, Suite 210
College Station, TX 77845

Visit the Investor Center™ website to view and manage shareholder account online: www.computershare.com/investor

For shareholder assistance:
In the U.S. and Canada:
888-201-5538
Outside the U.S. and Canada:
201-680-6578
TDD for the hearing impaired:
800-231-5469
TDD outside the U.S. and Canada:
201-680-6610
E-mail address:
shareholder@computershare.com
Shareholder online inquiries
https://www-us.computershare.com/investor/Contact

Repurchase of Equity Securities

On December 4, 2013, the Board of Directors approved a stock repurchase program authorizing the purchase of up to 50 million shares (the "2013 Repurchase Program"), which was approximately 18% of the Company's outstanding shares at that time. During the fourth quarter of 2015, we repurchased 5.1 million shares under the 2013 Repurchase Program and, as of December 31, 2015, 35.5 million shares remained under the 2013 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. The 2013 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 fourth 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

23

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.

(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
Oct. 1 - Oct. 31, 2015
 
—

 
$
89.31

 
—

 
40.6

Nov. 1 - Nov. 30, 2015
 
2.5

 
96.40

 
2.5

 
38.1

Dec. 1 - Dec. 31, 2015
 
2.7

 
95.96

 
2.6

 
35.5

Total — Qtr
 
5.2

 
$
96.14

 
5.1

 
35.5



Equity Compensation Plan
For information on securities authorized under our equity compensation plans, see Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

24

Item 6. Selected Financial Data
(in millions, except per share data)
2015
 
2014
 
2013
 
2012
 
2011
 
Income statement data:
 
 
 
 
 
 
 
 
 
 
Revenue
$
5,313

  
$
5,051

  
$
4,702

  
$
4,270

  
$
3,762

  
Operating profit
1,917

  
113

  
1,358

  
1,170

 
1,052

  
Income from continuing operations before taxes on income
1,815

1 
54

2 
1,299

3 
1,089

4 
975

5 
Provision for taxes on income
547

   
245

  
425

  
388

  
364

  
Net income (loss) from continuing operations attributable to McGraw Hill Financial, Inc.
1,156

 
(293
)
 
783

  
651

  
592

  
Earnings (loss) per share from continuing operations attributable to the McGraw Hill Financial, Inc. common shareholders:
 
 
 
 
 
 
 
 
 
 
Basic
4.26

 
(1.08
)
 
2.85

  
2.33

 
1.98

  
Diluted
4.21

 
(1.08
)
 
2.80

  
2.29

 
1.95

  
Dividends per share
1.32

  
1.20

  
1.12

  
1.02

  
1.00

  
Special dividend declared per common share
—

 
—

 
—

 
2.50

 
—

 
Operating statistics:
 
 
 
 
 
 
 
 
 
 
Return on average equity 6
324.3
%
 
(1.4
)%
 
134.2
%
 
40.5
%
 
48.2
%
 
Income from continuing operations before taxes on income as a percent of revenue from continuing operations
34.2
%
 
1.1
 %
 
27.6
%
 
25.5
%
 
25.9
%
 
Net income (loss) from continuing operations as a percent of revenue from continuing operations
23.9
%
 
(3.8
)%
 
18.6
%
 
16.4
%
 
16.2
%
 
Balance sheet data: 7
 
 
 
 
 
 
 
 
 
 
Working capital
$
388

 
$
42

 
$
612

 
$
(1,018
)
 
$
(812
)
 
Total assets
8,183

 
6,773

 
6,060

 
5,081

 
4,061

  
Total debt
3,611

 
795

 
794

 
1,251

 
1,193

  
Redeemable noncontrolling interest
920

 
810

 
810

 
810

 
—

 
Equity
243

 
539

 
1,344

 
840

 
1,584

  
Number of employees 7
20,400

 
17,000

 
16,400

 
15,900

 
15,600

  
1
Includes the impact of the following items: costs related to identified operating efficiencies primarily related to restructuring of $56 million, legal settlement charges partially offset by insurance recoveries of $54 million, acquisition-related costs of $37 million, and a gain of $11 million on the sale of our interest in a legacy McGraw Hill Construction investment.
2 
Includes the impact of the following items: $1.6 billion of legal and regulatory settlements, restructuring charges of $86 million, and $4 million of professional fees largely related to corporate development activities.
3 
Includes the impact of the following items: $77 million of legal settlements, $64 million charge for costs necessary to enable the separation of MHE and reduce our cost structure, a $36 million non-cash impairment charge related to the sale of our data center, a $28 million restructuring charge in the fourth quarter primarily related to severance, $13 million related to terminating various leases as we reduce our real estate portfolio and a $24 million net gain from our dispositions.
4 
Includes the impact of the following items: $135 million charge for costs necessary to enable the separation of MHE and reduce our cost structure, a $65 million restructuring charge, transaction costs of $15 million for our S&P Dow Jones Indices LLC joint venture, an $8 million charge related to a reduction in our lease commitments, partially offset by a vacation accrual reversal of $52 million.
5 
Includes the impact of a $31 million restructuring charge and a $10 million charge for costs necessary to enable the separation of MHE and reduce our cost structure.
6 
Includes the impact of the gain on sale of McGraw Hill Construction in 2014, the gain on sale of McGraw-Hill Education in 2013 and the gain on sale of the Broadcasting Group in 2011.
7 
Excludes discontinued operations.

25

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management 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, the “Company,” “we,” “us” or “our”) for the years ended December 31, 2015 and 2014, respectively. The MD&A should be read in conjunction with the consolidated financial statements and accompanying notes included in this Form 10-K for the year ended December 31, 2015, which have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”).
The MD&A includes the following sections:
•
Overview
•
Results of Operations
•
Liquidity and Capital Resources
•
Reconciliation of Non-GAAP Financial Information
•
Critical Accounting Estimates
•
Recently Issued or Adopted Accounting Standards

Certain of the statements below are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, any projections of future results of operations and cash flows are subject to substantial uncertainty. See Forward-Looking Statements on page 4 of this report.

OVERVIEW

We are a leading benchmarks and ratings, analytics, data and research provider serving the global capital, commodities and commercial markets. The capital markets include asset managers, investment banks, commercial banks, insurance companies, exchanges, and issuers; the commodities markets include producers, traders and intermediaries within energy, metals, petrochemicals and agriculture; and the commercial markets include professionals and corporate executives within automotive, financial services, insurance 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 (“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. As of August 1, 2013, we completed the sale of Aviation Week and the results have been included in C&C's results through that date.

In the fourth quarter of 2015, we began exploring strategic alternatives for J.D. Power, included in our C&C segment. We committed to and initiated an active program to sell J.D. Power in its current state that we believe is probable in the next year. As a result, we have classified the assets and liabilities of J.D. Power as held for sale in our consolidated balance sheet as of December 31, 2015. The anticipated disposal does not represent a strategic shift that will have a major effect on operations and financial results, therefore, it is not classified as a discontinued operation.

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. We recorded an after-tax gain on the sale of $160 million, which is included in discontinued operations, net in the consolidated statement of income for the year ended December 31, 2014. We used the after-tax proceeds from the sale to make selective acquisitions, investments, share repurchases and for general corporate purposes.

On March 22, 2013, we completed the sale of McGraw-Hill Education ("MHE") to investment funds affiliated with Apollo Global Management, LLC for a purchase price of $2.4 billion in cash. We recorded an after-tax gain on the sale of $589 million, which

26

is included in discontinued operations, net in the consolidated statement of income for the year ended December 31, 2013. We used the after-tax proceeds from the sale to pay down short-term debt for the special dividend paid in 2012, to make selective acquisitions, investments, share repurchases and for general corporate purposes.

In 2015, we continued to focus on investments in targeted financial assets, divesting selected non-core assets, reducing in our real estate portfolio and increasing shareholder return.

Investments in Targeted Financial Assets / Divest Selected Non-Core Assets

During 2015, we continued to create a portfolio focused on scalable, industry leading, interrelated businesses in the capital and commodity markets.
•
S&P Capital IQ and SNL — we acquired SNL Financial LC ("SNL"), a leading provider of news, data, and analytics to five sectors in the global economy: financial institutions, real estate, energy, media & communications, and metals & mining;
•
Commodities & Commercial:
◦
we acquired the entire issued share capital of Petromedia Ltd and its operating subsidiaries, an independent provider of data, intelligence, news and tools to the global fuels market that offers a suite of products providing clients with actionable data and intelligence that enables informed decisions, minimizes risk and increases efficiency;
◦
we acquired National Automobile Dealers Association's Used Car Guide, a leading provider of U.S. retail, trade-in and auction used-vehicle valuation products, services and information.
In 2015, we further reduced our real estate footprint by completing the consolidation of our corporate headquarters with our operations in New York City.

During 2014, we continued to execute our strategy of investing for growth in markets that have size and scale while exiting non-core assets.
•
Commodities & Commercial — we acquired Eclipse Energy Group AS which complements our North American natural gas capabilities, which we obtained from our Bentek Energy LLC acquisition in 2011;
•
S&P Ratings — we acquired BRC Investor Services S.A., a Colombia-based ratings firm providing risk classifications of banks, financial services providers, insurance companies, corporate bonds and structured issues that will expand our presence in the Latin American credit markets.
In 2014, in addition to the divestiture of McGraw Hill Construction discussed above, we streamlined our infrastructure by reducing our real estate footprint through selling our data facility, initiating the consolidation of our corporate headquarters with our operations in New York City, as well as disposing of our corporate aircraft.
During 2013, we acquired an incremental 11 million equity shares representing 15.07% of CRISIL's total outstanding equity shares for $214 million, concurrently increasing our ownership percentage in CRISIL to 67.84% from 52.77%.

In 2013, we also completed certain dispositions of our non-core assets that allow us to apply greater focus on our high-growth, high-margin benchmark businesses.
•
Commodities & Commercial — we completed the sale of Aviation Week to Penton, a privately held business information company;
•
S&P Capital IQ and SNL — we completed the sale of Financial Communications as well as the closure of several non-core businesses.

Increased Shareholder Return
During the three years ended December 31, 2015, we have returned $3.3 billion to our shareholders through a combination of share repurchases and our quarterly dividends: we completed share repurchases of $2.3 billion and distributed regular quarterly dividends totaling approximately $997 million. Also, on January 27, 2016, the Board of Directors approved an increase in the quarterly common stock dividend from $0.33 per share to $0.36 per share.



27

Key Results
(in millions)
Years ended December 31,
 
% Change 1
 
2015
 
2014
 
2013
 
’15 vs ’14
 
’14 vs ’13
Revenue
$
5,313

 
$
5,051

 
$
4,702

 
5%
 
7%
Operating profit 2
$
1,917

 
$
113

 
$
1,358

 
N/M
 
(92)%
% Operating margin
36
%
 
2
%
 
29
%
 
 
 
 
Diluted earnings (loss) per share from continuing operations
$
4.21

 
$
(1.08
)
 
$
2.80

 
N/M
 
N/M
N/M - not meaningful
 1 
% changes in the tables throughout the MD&A are calculated off of the actual number, not the rounded number presented.
 2 
2015 includes legal settlements, partially offset by a benefit related to insurance recoveries of $54 million. 2014 includes legal and regulatory settlements of $1.6 billion and 2013 include legal settlements of $77 million.

2015

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. Revenue growth at S&P Capital IQ and SNL was due to the acquisition of SNL in September of 2015 and growth of the legacy S&P Capital IQ products driven by increases in average contract values for each product. The revenue increase at C&C was primarily driven by continued demand for Platts’ proprietary content as annualized contract values increased. Increases at J.D Power primarily due to an increase in auto consulting engagements in the U.S. and the acquisition of National Automobile Dealers Association's Used Car Guide (“UCG”) in July of 2015 driving the data and analytics revenue growth at C&C. Revenue growth at S&P DJ Indices was due to higher average levels of assets under management for ETFs and mutual funds and higher volumes for exchange-traded derivatives. The revenue decrease at S&P Ratings was driven by the unfavorable impact of foreign exchange rates. The unfavorable impact of foreign exchange rates reduced revenue by 2 percentage points which was offset by the favorable impact from acquisitions of 2 percentage points.

The increase in operating profit was primarily due to the impact of $1.6 billion in legal and regulatory settlements in 2014 compared
to net legal settlement expenses of $54 million in 2015. In addition, 2015 includes costs related to identified operating efficiencies primarily related to restructuring of $56 million in 2015 compared to $86 million in 2014. 2015 also includes acquisition-related costs related to the acquisition of SNL of $37 million and an $11 million gain on the sale of our interest in a legacy McGraw Hill Construction investment. 2014 includes $4 million of professional fees largely related to corporate development activities. Excluding these items, operating profit increased 13%. This increase was 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 during 2015.

2014

Revenue increased 7% driven by increases at all of our segments. The increase at S&P Ratings was primarily driven by growth in both corporate and financial services bond ratings revenue, increases in bank loan ratings and higher annual fees. Revenue growth at S&P Capital IQ and SNL was driven by increases in average contract values for each product driven by new customer relationships and increases in existing accounts. Revenue growth at S&P DJ Indices was due to higher levels of assets under management for ETFs and mutual funds and higher volumes for exchange-traded derivatives. The revenue increase at C&C was primarily driven by continued demand for Platts' proprietary content as annualized contract values increased and increases at J.D. Power driven by strong demand for auto consulting engagements in the U.S. and Singapore. The unfavorable impact of foreign exchange rates reduced revenue by less than 1 percentage point.

Operating profit decreased 92% driven by the unfavorable impact of $1.6 billion of legal and regulatory settlement charges in 2014 compared to legal settlement charges of $77 million in 2013 and higher costs recorded in 2014 related to identified operating efficiencies primarily related to restructuring, partially offset by revenue growth at all of our segments. Excluding the unfavorable impact of legal and regulatory settlement charges of 111 percentage points, higher costs recorded in 2014 related to identified operating efficiencies primarily related to restructuring of 3 percentage points, partially offset by the favorable impact of costs necessary to enable the separation of MHE and reduce our cost structure recorded in 2013 of 5 percentage points and a net loss related to the sale of a data center, an equity investment at CRISIL, Aviation Week and Financial Communications in 2013 of 1 percentage point, operating profit increased 17%.
 

28

Outlook

Our vision is to be the leading provider of transparent and independent benchmarks and ratings, analytics, data and research in the global capital, commodities and corporate markets. Our mission is to promote sustainable growth in these markets by providing customers with essential intelligence and superior service. We seek to accomplish our mission and vision within the framework of our core values of fairness, integrity and transparency. We intend to deliver our products and services through customer-centric distribution channels that enable mission-critical decisions in our core customer sets of investment management, investment banking, commercial banking, insurance, specialty financial institutions 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 executing our strategic initiatives, strengthening core capabilities and collaborating across businesses.

Driving Performance

•
We will strive to deliver operational excellence, manage and mitigate risk and enhance leadership and accountability.

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. See Item 1a, Risk Factors, in this Annual Report on Form 10-K.

Further projections and discussion on our 2016 outlook for our segments can be found within “ – Results of Operations”.

RESULTS OF OPERATIONS

Consolidated Review
 
(in millions)
Years ended December 31,
 
% Change
 
2015
 
2014
 
2013
 
'15 vs '14
 
'14 vs '13
Revenue
$
5,313

 
$
5,051

 
$
4,702

 
5%
 
7%
Expenses:
 
 
 
 
 
 
 
 
 
     Operating-related expenses
1,672

 
1,627

 
1,564

 
3%
 
4%
     Selling and general expenses
1,578

 
3,168

 
1,631

 
(50)%
 
94%
     Depreciation and amortization
157

 
134

 
137

 
17%
 
(2)%
          Total expenses
3,407

 
4,929

 
3,332

 
(31)%
 
48%
     Other (income) loss
(11
)
 
9

 
12

 
N/M
 
(25)%
Operating profit
1,917

 
113

 
1,358

 
N/M
 
(92)%
     Interest expense, net
102

 
59

 
59

 
73%
 
(1)%
     Provision for taxes on income
547

 
245

 
425

 
N/M
 
(42)%
Income (loss) from continuing operations
1,268

 
(191
)
 
874

 
N/M
 
N/M
Discontinued operations, net
—

 
178

 
592

 
N/M
 
(70)%
Less: net income from continuing operations attributable to noncontrolling interests
(112
)
 
(102
)
 
(91
)
 
9%
 
12%
Less: net loss from discontinuing operations attributable to noncontrolling interests
—

 
—

 
1

 
N/M
 
N/M
Net income (loss) attributable to McGraw Hill Financial, Inc.
$
1,156

 
$
(115
)
 
$
1,376

 
N/M
 
N/M
N/M - not meaningful


29

Revenue

(in millions)
Years ended December 31,
 
% Change
 
2015
 
2014
 
2013
 
’15 vs ’14
 
’14 vs ’13
Subscription / Non-transaction revenue
$
3,264

 
$
3,045

 
$
2,849

 
7%
 
7%
Non-subscription / Transaction revenue
$
2,049

 
$
2,006

 
$
1,853

 
2%
 
8%
 
 
 
 
 
 
 
 
 
 
Domestic revenue
$
3,202

 
$
2,911

 
$
2,723

 
10%
 
7%
International revenue
$
2,111

 
$
2,140

 
$
1,979

 
(1)%
 
8%
 
 
 
 
 
 
 
 
 
 
% of total revenue:
 
 
 
 
 
 
 
 
 
     Subscription / Non-transaction revenue
61
%
 
60
%
 
61
%
 

 

     Non-subscription / Transaction revenue
39
%
 
40
%
 
39
%
 

 

 
 
 
 
 
 
 
 
 
 
     Domestic revenue
60
%
 
58
%
 
58
%
 

 

     International revenue
40
%
 
42
%
 
42
%
 

 


2015
Revenue increased 5% as compared to 2014. Subscription / non-transaction revenue increased primarily due to 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 primarily due to growth at S&P DJ Indices due to higher assets under management for ETFs and mutual funds and higher volumes for exchange-traded derivatives, partially offset by a decrease at S&P Ratings which includes the unfavorable impact of foreign exchange rates. 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.

2014
Revenue increased 7% as compared to 2013. Subscription / non-transaction revenue increased primarily due to growth at S&P Capital IQ and SNL due to an increase in the average contract values, growth in non-issuance related revenue for corporate ratings primarily related to higher annual fees, and continued demand for Platts’ proprietary content. Non-subscription / transaction revenue increased primarily due to strong growth in corporate bond ratings revenue, an increase in bank loan ratings and higher assets under management for ETFs and mutual funds at S&P DJ Indices, partially offset by lower structured finance revenues. See " – Segment Review" below for further information.

The unfavorable impact of foreign exchange rates reduced revenue by less than 1 percentage point.


30

Total Expenses

The following tables provide an analysis by segment of our operating-related expenses and selling and general expenses for the years ended December 31, 2015 and 2014:
(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 1
$
725

 
$
583

 
$
777

 
$
2,219

 
(7)%
 
(74)%
S&P Capital IQ and SNL 2
614

 
495

 
549

 
411

 
12%
 
20%
S&P DJ Indices 3
105

 
92

 
97

 
101

 
8%
 
(8)%
C&C 4
316

 
269

 
289

 
289

 
9%
 
(7)%
Intersegment eliminations 5
(88
)
 
—

 
(86
)
 
—

 
(3)%
 
N/M
Total segments
1,672

 
1,439

 
1,626

 
3,020

 
3%
 
(52)%
Corporate 6
—

 
139

 
1

 
148

 
(100)%
 
(6)%
 
$
1,672

 
$
1,578

 
$
1,627

 
$
3,168

 
3%
 
(50)%
N/M - not meaningful
1 
In 2015, selling and general expenses include legal settlements partially offset by a benefit related to legal insurance recoveries of $54 million and restructuring costs of $13 million. In 2014, selling and general expenses include $1.6 billion for legal and regulatory settlements and restructuring charges of $45 million.
2 
In 2015, selling and general expenses include acquisition-related costs related to the acquisition of SNL of $37 million and costs identified operating efficiencies primarily related to restructuring of $32 million. In 2014, selling and general expenses include $9 million of restructuring charges.
3 
In 2014, selling and general expenses include the impact of professional fees largely related to corporate development activities of $4 million.
4 
In 2015 and 2014, selling and general expenses include restructuring charges of $1 million and $16 million, respectively.
5 
Intersegment eliminations relates to a royalty charged to S&P Capital IQ and SNL for the rights to use and distribute content and data developed by S&P Ratings.
6 
In 2015 and 2014, selling and general expenses include costs related to identified operating efficiencies primarily related to restructuring of $10 million and $16 million, respectively.
Operating-Related Expenses
Operating-related expenses increased $44 million or 3% as compared to 2014. 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.

Selling and General Expenses
Selling and general expenses decreased 50%. Excluding the favorable net impact of legal settlement and regulatory settlement charges and insurance recoveries of 48 percentage points, higher costs recorded in 2014 related to identified operating efficiencies primarily related to restructuring of 1 percentage point, partially offset by the unfavorable impact of acquisition-related costs related to the acquisition of SNL of 1 percentage point, selling and general expenses decreased 2%. The decline was due to a decrease 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 and an increase at S&P Capital IQ and SNL driven by the acquisition of SNL in September of 2015.

Depreciation and Amortization
Depreciation and amortization increased $23 million or 17% as compared to 2014 primarily due to higher intangible asset amortization in 2015 due to the acquisition of SNL in September of 2015 and the acquisition of UCG in July of 2015.


31

The following tables provide an analysis by segment of our operating-related expenses and selling and general expenses for the years ended December 31, 2014 and 2013:
(in millions)
2014
 
2013
 
% 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 1
$
777

 
$
2,219

 
$
741

 
$
624

 
5%
 
N/M
S&P Capital IQ and SNL 2
549

 
411

 
538

 
390

 
2%
 
5%
S&P DJ Indices 3
97

 
101

 
92

 
126

 
5%
 
(20)%
C&C 4
289

 
289

 
271

 
278

 
7%
 
4%
Intersegment eliminations 5
(86
)
 
—

 
(76
)
 
—

 
(13)%
 
N/M
Total segments
1,626

 
3,020

 
1,566

 
1,418

 
4%
 
N/M
Corporate 6
1

 
148

 
(2
)
 
213

 
N/M
 
(30)%
 
$
1,627

 
$
3,168

 
$
1,564

 
$
1,631

 
4%
 
94%
N/M - not meaningful
1 
In 2014, selling and general expenses include $1.6 billion for legal and regulatory settlements and restructuring charges of $45 million. In 2013, selling and general expenses include $77 million for legal settlements, restructuring charges of $10 million, and the gain on sale of an equity investment held at CRISIL of $16 million.
2 
In 2014, selling and general expenses include $9 million of restructuring charges. In 2013, selling and general expenses include restructuring charges of $9 million and a loss related to the sale of Financial Communications of $3 million.
3 
In 2014, selling and general expenses include the impact of professional fees largely related to corporate development activities of $4 million.
4 
In 2014, selling and general expenses include restructuring charges of $16 million. In 2013, selling and general expenses include a pre-tax gain on the sale of Aviation Week of $11 million and restructuring charges of $9 million.
5 
Intersegment eliminations relates to a royalty charged to S&P Capital IQ and SNL for the rights to use and distribute content and data developed by S&P Ratings.
6 
In 2014, selling and general expenses include restructuring charges of $16 million. In 2013, selling and general expenses primarily include $64 million necessary to enable the separation of MHE and reduce our cost structure, restructuring charges and charges related to our reduction in our real estate portfolio.
Operating-Related Expenses
Operating-related expenses increased $64 million or 4% as compared to 2013, primarily driven by increased costs at S&P Ratings, C&C and S&P Capital IQ and SNL. These increases were primarily attributable to an increase in compensation costs and higher technology costs.

Selling and General Expenses
Selling and general expenses increased 94%. Excluding the unfavorable impact of legal settlement charges of 94 percentage points and higher costs recorded in 2014 related to identified operating efficiencies primarily related to restructuring of 3 percentage points, partially offset by the favorable impact of costs necessary to enable the separation of MHE and reduce our cost structure recorded in 2013 of 4 percentage points, selling and general expenses increased 1%. The increase was primarily driven by increased legal costs at S&P Ratings, increased commissions and incentives at S&P Capital IQ and SNL, partially offset by a decrease at S&P DJ Indices primarily related to a $26 million non-cash impairment charge recorded in 2013 associated with an intangible asset acquired with the formation of the S&P Dow Jones Indices LLC joint venture.

Depreciation and Amortization
Depreciation and amortization decreased $3 million or 2% as compared to 2013, primarily due an intangible asset that became fully amortized in 2013.


32

Other (Income) Loss

During 2015, we completed the sale of our interest in a legacy McGraw Hill Construction investment that resulted in a pre-tax gain of $11 million within other (income) loss in the consolidated statement of income.
During 2014, we completed the following transactions that resulted in a pre-tax loss of $9 million within other (income) loss in the consolidated statement of income:
•
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. 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 to our consolidated financial statements for further discussion.
•
On June 30, 2014, we completed the sale of our data center to Quality Technology Services, LLC (“QTS”) 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.
During 2013, we recorded a net pre-tax loss of $12 million within other (income) loss in the consolidated statement of income:
•
During the fourth quarter of 2013, we recognized a non-cash impairment charge of $36 million related to the pending sale of our data center.
•
On September 30, 2013, we completed the sale of Financial Communications, which was part of our S&P Capital IQ and SNL segment.
•
On August 27, 2013, CRISIL sold its 49% equity interest in India Index Services & Products Ltd. This investment was held within our S&P Ratings segment.
•
On August 1, 2013, we completed the sale of Aviation Week within our C&C segment to Penton, a privately held business information company.

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 table below reconciles segment operating profit to total operating profit:
(in millions)
Years ended December 31,
% Change
 
2015
 
2014
 
2013
 
'15 vs '14
 
'14 vs '13
S&P Ratings 1
$
1,078

 
$
(583
)
 
$
882

 
N/M
 
N/M
S&P Capital IQ and SNL 2
228

 
228

 
189

 
—%
 
21%
S&P DJ Indices 3
392

 
347

 
266

 
13%
 
30%
C&C 4
357

 
290

 
280

 
23%
 
3%
Total segment operating profit
2,055

 
282

 
1,617

 
N/M
 
(83)%
Unallocated expense 5
(138
)
 
(169
)
 
(259
)
 
(18)%
 
(35)%
Total operating profit
$
1,917

 
$
113

 
$
1,358

 
N/M
 
(92)%
N/M - not meaningful

33

1 
2015 includes legal settlements, partially offset by a benefit related to insurance recoveries of $54 million, and restructuring charges of $13 million. 2014 includes legal and regulatory settlements of $1.6 billion and restructuring charges of $45 million. 2013 includes legal settlements of $77 million, restructuring charges of $10 million, and the gain on sale of an equity investment held at CRISIL of $16 million.
2 
2015 includes acquisition-related costs related to the acquisition of SNL of $37 million and costs identified operating efficiencies primarily related to restructuring of $32 million. 2014 includes $9 million of restructuring charges. 2013 includes restructuring charges of $9 million and a loss related to the sale of Financial Communications of $3 million.
3 
2014 includes the impact of professional fees largely related to corporate development activities of $4 million.
4 
2015 and 2014 include restructuring charges of $1 million and $16 million, respectively. 2013 includes a pre-tax gain on the sale of Aviation Week of $11 million and restructuring charges of $9 million.
5 
2015 and 2014 include costs related to identified operating efficiencies primarily related to restructuring of $10 million and $16 million, respectively. 2013 includes depreciation expense and costs necessary to enable the separation of MHE and reduce our cost structure, including restructuring costs and other related non-recurring costs. 2013 also includes a non-cash impairment charge related to the pending sale of our data center and charges related to a reduction in our real estate portfolio.

2015

Segment Operating Profit — Increased $1.8 billion, or 629% as compared to 2014. 2015 includes legal settlement charges partially offset by a benefit related to insurance recoveries of $54 million compared to legal and regulatory settlement charges of $1.6 billion in 2014. Excluding the favorable net impact of lower legal and regulatory settlement charges and insurance recoveries of 621 percentage points, higher costs recorded in 2014 related to identified operating efficiencies primarily related to restructuring of 9 percentage points and the impact of professional fees largely related to corporate development activities recorded in 2014 of 2 percentage points, partially offset by the unfavorable impact of acquisition-related costs related to the acquisition of SNL of 15 percentage points, segment operating profit increased 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 2015 were the primary drivers for the increase. See “ – Segment Review” below for further information.

Unallocated Expense — Decreased by $31 million or 18% as compared to 2014. 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 favorable impact of the sale of our interest in a legacy McGraw Hill Construction investment of 6 percentage points and higher costs recorded in 2014 related to identified operating efficiencies primarily related to restructuring of 4 percentage points, unallocated expense decreased by 9 percentage points as compared to 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 and the sale of our data center.

Foreign currency exchange rates had a negligible impact on operating profit. The foreign exchange rate impact refers to constant currency comparisons and the remeasurement of monetary assets and liabilities. Constant currency impacts are estimated by recalculating 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 monetary assets and liabilities denominated in currencies other than the individual business' functional currency.

2014

Segment Operating Profit — Decreased $1.3 billion, or 83% as compared to 2013. Excluding the unfavorable impact of legal and regulatory settlement charges of 94 percentage points, higher restructuring charges recorded in 2014 of 3 percentage points, and a net gain related to the sale of an equity investment at CRISIL, Aviation Week and Financial Communications in 2013 of 2 percentage points, operating profit increased 16%. This increase was primarily due to strong revenue growth at S&P Ratings, S&P Capital IQ and SNL, S&P DJ Indices and C&C. See “ – Segment Review” below for further information.
 
Unallocated Expense — Decreased by $90 million or 35% as compared to 2013. Excluding the favorable impact of costs necessary to enable the separation of MHE and reduce our cost structure recorded in 2013 of 27 percentage points, a loss related to the sale of a data center in 2013 of 15 percentage points, and charges related to a reduction in our real estate portfolio in 2013 of 5 percentage points, partially offset by the unfavorable impact of higher restructuring charges recorded in 2014 of 5 percentage points, unallocated expense increased 7%. This increase 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 and the sale of our data center, and an increase in unoccupied office space.


34

Foreign exchange rates had a favorable impact on operating profit of 2 percentage points. The favorable impact on 2014 was driven by the devaluation of the Argentinian peso as well as early strength of the British pound.

Interest Expense, net

Net interest expense for 2015 increased 73% as compared to 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. Net interest expense for 2014 remained relatively flat as compared to 2013, decreasing 1%.

Provision for Income Taxes

Our effective tax rate from continuing operations was 30.1%, 453.7% and 32.7% for 2015, 2014 and 2013, respectively. The decrease in the 2015 effective tax rate was primarily due to the reduction in charges for legal settlements, improved profitability in several lower tax jurisdictions outside of the United States, and continuing resolution of prior year tax audits. The increase in the 2014 effective tax rate from the prior year period was primarily due to the expected tax treatment of charges for legal settlements in 2014.

Discontinued Operations, net

Income from discontinued operations was $178 million in 2014 as compared to $592 million in 2013, primarily as a result of the after-tax gains of $160 million and $589 million recorded on the sale of McGraw Hill Construction in 2014 and the sale of MHE in 2013, respectively.

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;
•
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, fees for entity credit ratings and global research and analytics. Non-transaction revenue also includes 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. Royalty revenue for 2015, 2014 and 2013 was $83 million, $77 million and $72 million, respectively.


35

(in millions)
 
Years ended December 31,
 
% Change
 
 
2015
 
2014
 
2013
 
’15 vs ’14
 
’14 vs ’13
Revenue:
 
 
 
 
 
 
 
 
 
 
Transaction
 
$
1,109

 
$
1,129

 
$
1,035

 
(2
)%
 
9
%
Non-transaction
 
1,319

 
1,326

 
1,239

 
—
 %
 
7
%
Total revenue
 
$
2,428

 
$
2,455

 
$
2,274

 
(1
)%
 
8
%
% of total revenue:
 
 
 
 
 
 
 
 
 
 
Transaction
 
46
%
 
46
 %
 
46
%
 
 
 
 
Non-transaction
 
54
%
 
54
 %
 
54
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic revenue
 
$
1,390

 
$
1,305

 
$
1,214

 
7
 %
 
8
%
International revenue
 
$
1,038

 
$
1,150

 
$
1,060

 
(10
)%
 
8
%
% of total revenue:
 
 
 
 
 
 
 
 
 
 
     Domestic revenue
 
57
%
 
53
 %
 
53
%
 

 

     International revenue
 
43
%
 
47
 %
 
47
%
 

 

 
 
 
 
 
 
 
 
 
 
 
Operating profit (loss) 1
 
$
1,078

 
$
(583
)
 
$
882

 
N/M

 
N/M

% Operating margin
 
44
%
 
(24
)%
 
39
%
 
 
 
 
 
N/M - not meaningful
1 
2015 includes legal settlements, partially offset by a benefit related to insurance recoveries of $54 million and restructuring charges of approximately $13 million. 2014 includes $1.6 billion of legal and regulatory settlements and restructuring charges of approximately $45 million. 2013 includes $77 million of legal settlements, restructuring charges of approximately $10 million, and a $16 million gain on the sale of an equity investment held by CRISIL.

2015

Revenue decreased 1%, which includes the unfavorable impact of foreign exchange rates that reduced revenue by 4 percentage points. Excluding the unfavorable impact of foreign exchange rates, transaction revenue increased primarily due to an increase in U.S. Public Finance issuance, partially offset by a decline in structured finance revenue driven by reduced global market issuance. Excluding the unfavorable impact of foreign exchange rates, non-transaction revenue also increased due to growth in surveillance revenues and additional Ratings Evaluation Service activity, partially offset by lower revenue associated with new client relationships.

Operating profit increased 285%. Excluding the favorable net impact of legal and regulatory settlement charges and insurance recoveries of 273 percentage points and net higher restructuring costs recorded in 2014 of 6 percentage points, operating profit increased 7%. Foreign currency exchange rates had an unfavorable impact of 1 percentage point on the operating profit growth of 7%. This increase was driven by 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 decrease in revenue discussed above.

2014

Revenue increased 8% driven by growth in both transaction and non-transaction revenue. Transaction revenue increased in 2014 primarily driven by growth in both corporate and financial services bond ratings revenue with strong growth in all regions and an increase in bank loan ratings revenue, partially offset by a decline in structured finance revenues. Non-transaction revenue increased primarily due to an increase in annual fees, increases in global research and analytics services and increased RES activity.

Operating profit decreased 166%. Excluding the unfavorable impact of legal and regulatory settlements of 173 percentage points, the unfavorable impact of higher restructuring charges recorded in 2014 of 4 percentage points, and the unfavorable impact of the gain on sale of an equity investment held at CRISIL in 2013 of 2 percentage points, operating profit increased 13%. This increase was driven by the increase in revenue and the favorable impact of foreign exchange rates of 2 percentage points, partially offset by higher legal defense costs primarily driven by increased litigation activity including the Department of Justice case.

36


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 Rating’s internal estimates.
 
 
2015 Compared to 2014
Corporate Bond Issuance
 
U.S.
 
Europe
High-Yield Issuance
 
(13
)%
 
(30
)%
Investment Grade
 
20
 %
 
(21
)%
Total New Issue Dollars—Corporate Issuance
 
12
 %
 
(22
)%
•
Although the number of issuances were down, par value of corporate issuance in the U.S. was up in 2015 driven by an increase in investment-grade debt issuance reflecting high par value deals, as the number of deals was lower in the first nine months of the year. Strong M&A activity was a major driver of large financing transactions that resulted in increased issuance in the first nine months of the year. Investment-grade debt issuance was negatively impacted in the fourth quarter of 2015 as market volatility increased. The increase in U.S. investment-grade debt issuance was partially offset by weakness in U.S. high-yield debt issuance.
•
Corporate issuance in Europe for both investment-grade and high-yield decreased in 2015 as a result of economic and political uncertainty in the European markets.
 
 
2015 Compared to 2014
Structured Finance
 
U.S.
 
Europe
Asset-Backed Securities (“ABS”)
 
(10
)%
 
(22
)%
Collateralized Debt Obligations (“CDO”)
 
(22
)%
 
(15
)%
Commercial Mortgage-Backed Securities (“CMBS”)
 
7
 %
 
14
 %
Residential Mortgage-Backed Securities (“RMBS”)
 
45
 %
 
25
 %
Covered Bonds
 
*

 
28
 %
Total New Issue Dollars—Structured Finance
 
(6
)%
 
13
 %
* Represents no activity in 2015 and 2014.

•
ABS issuance in the U.S. was down, primarily driven by a decline in credit cards as banks continued to use deposit funding rather than securitization for alternative funding. ABS issuance in Europe was also down, driven by declines across several sub-asset classes.
•
Issuance was down in the U.S. and European Structured Credit markets driven by lower availability of leveraged loans and overall market volatility.
•
CMBS issuance in the U.S. was up reflecting favorable market conditions and investor demand during the first half of the year, partially offset by a decline in the second half of the year with the mix reflecting a lower proportion of single borrower transactions. European CMBS issuance was also up, although from a low 2014 base.
•
RMBS volume in the U.S. was up driven by a mix of deal types, including servicing advance transactions. The increase in European RMBS volume was predominantly driven by an increase in the average issuance size.
•
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 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.


37

Industry Highlights and Outlook

Revenue declined in 2015 primarily due to the unfavorable impact of foreign exchange rates of 4 percentage points and reduced market issuance internationally primarily impacting corporate bond ratings revenue and structured finance revenues. These decreases were partially offset by an increase in U.S. Public Finance issuance in the first nine months of the year as issuers took advantage of the low interest rate environment. However, issuance slowed in the fourth quarter of 2015 due to market volatility. Corporate bond ratings revenue in the U.S. was favorably impacted by the low interest rate environment and M&A activity throughout the first nine months of the year. However, issuance declined in the fourth quarter of 2015 as market volatility increased and M&A activity slowed. Debt issuance is expected to continue to be volatile in 2016. M&A activity is expected to continue across the ratings spectrum. International economic and political uncertainties are likely to continue to cause market volatility in 2016.

Legal and Regulatory Environment

Legal and Regulatory Environment
General
S&P Ratings and many of the securities that it rates are subject to extensive regulation in both the U.S. and in other countries, and therefore existing and proposed laws and regulations can impact the Company’s operations and the markets in which it operates. Additional laws and regulations have been adopted but not yet implemented or have been proposed or are being considered. In addition, in certain countries, governments may provide financial or other support to locally-based rating agencies. For example, governments may from time to time establish official rating agencies or credit ratings criteria or procedures for evaluating local issuers. We have reviewed the new laws, regulations and rules which have been adopted and we have implemented, or are planning to implement, changes as required. We do not believe that such new laws, regulations or rules will have a material adverse effect on our financial condition or results of operations. Other laws, regulations and rules relating to credit rating agencies are being considered by local, national, foreign and multinational bodies and are likely to continue to be considered in the future, including provisions seeking to reduce regulatory and investor reliance on credit ratings, rotation of credit rating agencies and liability standards applicable to credit rating agencies. The impact on us of the adoption of any such laws, regulations or rules remains uncertain, but could increase the costs and legal risks relating to S&P Ratings’ rating activities, or adversely affect our ability to compete, or result in changes in the demand for credit ratings.
In the normal course of business both in the U.S. and abroad, S&P Ratings (or the legal entities comprising S&P Ratings) 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 purchasers of rated securities. In addition, various government and self-regulatory agencies frequently make inquiries and conduct investigations into S&P Ratings’ compliance with applicable laws and regulations. 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.

U.S.
The businesses conducted by our S&P Ratings segment are, in certain cases, regulated under the Credit Rating Agency Reform Act of 2006 (the “Reform Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd Frank Act”), the Securities Exchange Act of 1934 (the “Exchange Act”) and/or the laws of the states or other jurisdictions in which they conduct business. The financial services industry is subject to the potential for increased regulation in the U.S.
S&P Ratings is a credit rating agency that is registered with the SEC as a Nationally Recognized Statistical Rating Organization (“NRSRO”). The SEC first began informally designating NRSROs in 1975 for use of their credit ratings in the determination of capital charges for registered brokers and dealers under the SEC’s Net Capital Rule. The Reform Act created a new SEC registration system for rating agencies that choose to register as NRSROs. Under the Reform Act, the SEC is given authority and oversight of NRSROs and can censure NRSROs, revoke their registration or limit or suspend their registration in certain cases. The rules implemented by the SEC pursuant to the Reform Act, the Dodd Frank Act and the Exchange Act address, among other things, prevention or misuse of material non-public information, conflicts of interest, documentation and assessment of internal controls, and improving transparency of ratings performance and methodologies. The public portions of the current version of S&P Ratings’ Form NRSRO are available on S&P Ratings’ Web site.


38

European Union
In the European Union, the credit rating industry is registered and supervised through a pan-European regulatory framework which is a compilation of three sets of legislative actions. In 2009, the European Parliament passed a regulation (“CRA1”) that established an oversight regime for the credit rating industry in the European Union, which became effective in 2010. CRA1 requires the registration, formal regulation and periodic inspection of credit rating agencies operating in the European Union. S&P Ratings was granted registration in October of 2011. In January of 2011, the European Union established the European Securities and Markets Authority (“ESMA”), which, among other things, has direct supervisory responsibility for the registered credit rating industry throughout the European Union.
Additional rules augmenting the supervisory framework for credit rating agencies went into effect in 2013. Commonly referred to as CRA3, these rules, among other things:
•
impose various additional procedural requirements with respect to ratings of sovereign issuers;
•
require member states to adopt laws imposing liability on credit rating agencies for an intentional or grossly negligent failure to abide by the applicable regulations;
•
impose mandatory rotation requirements on credit rating agencies hired by issuers of securities for ratings of resecuritizations, which may limit the number of years a credit rating agency can issue ratings for such securities of a particular issuer;
•
impose restrictions on credit rating agencies or their shareholders if certain ownership thresholds are crossed; and
•
impose additional procedural and substantive requirements on the pricing of services.

The financial services industry is subject to the potential for increased regulation in the European Union.
Other Jurisdictions
Outside of the U.S. and the European Union, regulators and government officials have also been implementing formal oversight of credit rating agencies. S&P Ratings is subject to regulations in several foreign jurisdictions in which it operates and continues to work closely with regulators globally to promote the global consistency of regulatory requirements. S&P Ratings expects regulators in additional countries to introduce new regulations in the future.
For a further discussion of competitive and other risks inherent in our S&P Ratings business, see Item 1a, Risk Factors, in this Annual Report on Form 10-K. For a further discussion of the legal and regulatory environment in our S&P Ratings business, see Note 12 - Commitments and Contingencies to the consolidated financial statements under Item 8, Consolidated Financial Statements and Supplementary Data, in this Annual Report on Form 10-K.

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;
•
Global Risk Services — 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®;
•
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; and
•
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.

39

(in millions)
 
Years ended December 31,
 
% Change
 
 
2015
 
2014
 
2013
 
’15 vs ’14
 
’14 vs ’13
Revenue
 
$
1,405

 
$
1,237

 
$
1,170

 
14
%
 
6
%
 
 
 
 
 
 
 
 
 
 
 
Subscription revenue
 
$
1,270

 
$
1,118

 
$
1,056

 
14
%
 
6
%
Non-subscription revenue
 
$
135

 
$
119

 
$
114

 
13
%
 
4
%
% of total revenue:
 
 
 
 
 
 
 
 
 
 
     Subscription revenue
 
90
%
 
90
%
 
90
%
 
 
 
 
     Non-subscription revenue
 
10
%
 
10
%
 
10
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic revenue
 
$
933

 
$
809

 
$
767

 
15
%
 
5
%
International revenue
 
$
472

 
$
428

 
$
403

 
10
%
 
6
%
% of total revenue:
 
 
 
 
 
 
 
 
 
 
     Domestic revenue
 
66
%
 
65
%
 
66
%
 
 
 
 
     International revenue
 
34
%
 
35
%
 
34
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit 1
 
$
228

 
$
228

 
$
189

 
—
%
 
21
%
% Operating margin
 
16
%
 
18
%
 
16
%
 
 
 
 
1 
2015 includes acquisition costs of $37 million related to the acquisition of SNL and costs of $32 million related to identified operating efficiencies primarily related to restructuring. 2014 includes restructuring charges of $9 million. 2013 includes restructuring charges of approximately $9 million and a loss related to the sale of Financial Communications of $3 million.

2015

Revenue increased 14% primarily due to 7 percentage points of 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 new customer relationships and increases from existing accounts. 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 number of users on the S&P Capital IQ Desktop and the number of customers at RatingsXpress® continued to grow in 2015. RatingsXpress® continued to benefit from increased compliance requirements which have created a greater need for alternative risk tools. International revenue grew 10% over 2014, primarily driven by sales growth of the S&P Capital IQ Desktop and RatingsXpress® in Europe and Asia.

Operating profit remained flat. Excluding the unfavorable impact of acquisition-related costs related to the acquisition of SNL of 16 percentage points and higher costs recorded in 2015 related to identified operating efficiencies primarily related to restructuring of 10 percentage points, operating profit increased 25%. This increase is due to revenue growth and the favorable impact of foreign exchange rates of 7 percentage points, partially offset by higher technology costs, increased compensation costs and higher intangible asset amortization in 2015 related to the acquisition of SNL.

2014

Revenue increased 6% 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 new customer relationships and increases from existing accounts. This was partially offset by an unfavorable impact related to the closure of several non-core businesses. The number of users on the S&P Capital IQ Desktop and the number of customers at RatingsXpress® increased in 2014 as compared to 2013. Increases for existing accounts were driven by bundled solution offerings integrated within the S&P Capital IQ Desktop, new datasets and expanded coverage of existing datasets combined with improved functionality of the S&P Capital IQ Desktop. RatingsXpress® benefited from improvements made to the speed and timeliness through delivery on the Xpressfeed platform. Additionally, RatingsXpress® benefited from increased compliance requirements which have created a greater need for alternative risk tools. RatingsDirect® also had revenue growth in 2014 as increased contract values were driven by the sale of bundled packages including the S&P Capital IQ Desktop. Additionally, S&P Capital IQ Desktop, RatingsXpress® and RatingsDirect® benefited in 2014 from a higher customer retention rate compared to 2013. International revenue grew 6% over 2013, primarily driven by sales growth of the S&P Capital IQ Desktop in Europe, Asia and Canada.

40


Operating profit increased 21%. Excluding the favorable impact of a loss related to the sale of Financial Communications of 3 percentage points, operating profit increased 18%. This increase is due to revenue growth, expense savings from the closure of several non-core businesses and a favorable impact from foreign exchange rates of 4 percentage points. Partially offsetting the increases to operating profit were increased compensation costs, primarily due to improved sales performance and additional headcount in developing regions, and higher technology costs.

Industry Highlights and Outlook

In 2015, S&P Capital IQ and SNL added scale to data, technology and commercial capabilities and created synergies with the existing legacy S&P Capital IQ portfolio through the acquisition of SNL.

In 2016, S&P Capital IQ and SNL will continue to focus on meeting or exceeding targeted revenue and costs synergies as a result of the acquisition of SNL. The segment will seek to develop new products, further penetrate core customer segments and geographies, as well as enhance core capabilities in data, technology and market approach.

Legal and Regulatory Environment

The financial services industry is subject to the potential for increased regulation in the U.S. and abroad. The businesses conducted by S&P Capital IQ and SNL are in certain cases regulated under the U.S. Investment Advisers Act of 1940 (the “Investment Advisers Act”) and/or the laws of the states or other jurisdictions in which they conduct business.
Certain businesses of S&P Capital IQ and SNL are authorized and regulated in the United Kingdom by the Financial Conduct Authority (the “FCA”). As such, these businesses are authorized to arrange and advise on investments, and are entitled to exercise a passport right to provide specified cross border services into other European Economic Area (“EEA”) States, under and subject to the conditions in the E.U. Markets in Financial Instruments Directive (“MiFID”).
The markets for financial research, investment and advisory services are very competitive. S&P Capital IQ and SNL competes domestically and internationally on the basis of a number of factors, including the quality of its research and advisory services, client service, reputation, price, geographic scope, range of products and services, and technological innovation. For a further discussion of competitive and other risks inherent in our S&P Capital IQ and SNL business, see Item 1a, Risk Factors, in this Annual Report on Form 10-K.

S&P DJ 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 and Dow Jones Indices. Specifically, S&P DJ Indices generate 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

(in millions)
 
Years ended December 31,
 
% Change
 
 
2015
 
2014
 
2013
 
’15 vs ’14
 
’14 vs ’13
Revenue
 
$
597

 
$
552

 
$
493

 
8%
 
12%
 
 
 
 
 
 
 
 
 
 
 
Subscription revenue
 
$
122

 
$
111

 
$
103

 
10%
 
8%
Non-subscription revenue
 
$
475

 
$
441

 
$
390

 
8%
 
13%
% of total revenue:
 
 
 
 
 
 
 
 
 
 
     Subscription revenue
 
21
%
 
20
%
 
21
%
 
 
 
 
     Non-subscription revenue
 
79
%
 
80
%
 
79
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic revenue
 
$
488

 
$
440

 
$
385

 
11%
 
14%
International revenue
 
$
109

 
$
112

 
$
108

 
(2)%
 
4%
% of total revenue:
 
 
 
 
 
 
 
 
 
 
     Domestic revenue
 
82
%
 
80
%
 
78
%
 
 
 
 
     International revenue
 
18
%
 
20
%
 
22
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit 1
 
$
392

 
$
347

 
$
266

 
13%
 
30%
Less: net income attributable to noncontrolling interests
 
$
101

 
$
92

 
$
73

 
10%
 
25%
Net operating profit
 
$
291

 
$
255

 
$
193

 
14%
 
32%
% Operating margin
 
66
%
 
63
%
 
54
%
 
 
 
 
% Net operating margin
 
49
%
 
46
%
 
39
%
 
 
 
 
1 
2014 includes $4 million of professional fees largely related to corporate development activities.

2015

Revenue at S&P DJ Indices increased 8%, primarily driven by higher average levels of assets under management ("AUM") for ETFs and mutual funds. Volumes for exchange-traded derivatives continued to increase for certain products which also contributed to revenue growth. Additionally, the year-over-year revenue increase was slightly unfavorably impacted by the refinement of our process for estimating revenue for certain products that favorably impacted 2014 which caused a one-time revenue increase in the prior-year period. Ending AUM for ETFs decreased 2% to $815 billion in 2015 from $832 billion in 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 13%. Excluding the favorable impact of professional fees largely related to corporate development activities recorded in 2014 of 1 percentage point, operating profit increased 12%. This increase was primarily due to revenue growth as expenses remained relatively flat as a result of cost containment measures.

2014

Revenue at S&P DJ Indices increased 12%, primarily driven by higher average levels of AUM for ETFs and mutual funds. Higher volumes for exchange-traded derivatives also contributed to revenue growth. These increases were partially offset by the unfavorable impact of lower over-the-counter derivative trading volumes in 2014 driven by the expiration of a licensing arrangement for commodities indices in June of 2014. AUM for ETFs rose 25% to $832 billion in 2014 from $668 billion in 2013. The unfavorable impact of foreign exchange rates reduced revenue by less than 1 percentage point.


42

Operating profit grew 30%. Excluding the impact of professional fees largely related to corporate development activities recorded in 2014 of 2 percentage points, operating profit increased 32%. This increase was primarily due revenue growth and the favorable impact of a $26 million non-cash impairment charge recorded in 2013 associated with an intangible asset acquired with the formation of the S&P Dow Jones Indices LLC joint venture and a reduction of royalty expenses. The reduction of royalty expenses was the result of purchases of intellectual property rights to certain commodities indices developed by Goldman Sachs, and Broad Market Indices (“BMI”) from Citigroup Global Markets Inc. as well as the expiration of a licensing arrangement for commodities indices in June of 2014. These expense reductions were partially offset by an increase in compensation costs related to additional headcount and higher incentive costs. The unfavorable impact of foreign exchange rates reduced operating profit by 1 percentage point.

Industry Highlights and Outlook

S&P DJ Indices continues to be the leading index provider for the ETF market space. In 2015, higher average levels of AUM for ETFs contributed to revenue growth, however, ending AUM for ETFs decreased 2% to $815 billion in 2015 from $832 billion in 2014. S&P DJ Indices will also seek to diversify their portfolio of index offerings through asset class expansion, new geographies, and investment strategies. This group will seek to expand its fixed income offering and grow its local presence in emerging markets.

Legal and Regulatory Environment

The financial benchmarks industry is subject to the new pending benchmark regulation in the European Union (the “E.U. Benchmark Regulation”) as well as potential increased regulation in other jurisdictions.
The proposed E.U. Benchmark Regulation has been released for final approval and is expected to be published later this year. The E.U. Benchmark Regulation will likely require S&P DJ Indices in due course to obtain registration or authorization in connection with its benchmark activities in Europe. This legislation will likely cause additional operating obligations but they are not expected to be material at this time and until the regulation is finalized the exact impact is not certain.
In addition, the European Union has recently finalized a package of legislative measures known as MiFID II, which revise and update the existing E.U. Markets in Financial Instruments Directive framework. MiFID II will apply in full in all E.U. Member States from January 3, 2017. MiFID II includes provisions that, among other things: (i) impose new conditions and requirements on the licensing of benchmarks and provide for non-discriminatory access to exchanges and clearing houses; (ii) modify the categorization and treatment of certain classes of derivatives; (iii) expand the categories of trading venue that are subject to regulation; and (iv) provide for the mandatory trading of certain derivatives on exchanges (complementing the mandatory derivative clearing requirements in the E.U. Market Infrastructure Regulation of 2011). Although the MiFID II package is “framework” legislation (meaning that much of the detail of the rules will be set out in subordinate measures to be agreed upon in the period before 2017), it is possible that the introduction of these laws and rules could affect S&P DJ Indices’ ability both to administer and license its indices.
In July of 2013, the International Organization of Securities Commissions (“IOSCO”) issued Financial Benchmark Principles, which are intended to promote the reliability of benchmark determinations, and address governance, benchmark quality and accountability mechanisms, including with regard to the indices published by S&P DJ Indices. Even though the Financial Benchmark Principles are not binding law, S&P DJ Indices has taken steps to align its governance regime and operations with the Financial Benchmark Principles and engaged an independent auditor to perform a reasonable assurance review of such alignment.
The markets for index providers are very competitive. S&P DJ Indices competes domestically and internationally on the basis of a number of factors, including the quality of its benchmark indices, client service, reputation, price, range of products and services (including geographic coverage) and technological innovation. For a further discussion of competitive and other risks inherent in our S&P DJ Indices business, see Item 1a, Risk Factors, in this Annual Report on Form 10-K.

Commodities & Commercial

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:
•
Platts — provides essential price data, analytics, and industry insight that enable commodities markets to perform with greater transparency and efficiency; and

43

•
J.D. Power — provides essential consumer intelligence to help businesses measure, understand, and improve the key performance metrics that drive growth and profitability.
In the fourth quarter of 2015, we began exploring strategic alternatives for J.D. Power, included in our C&C segment. We committed to and initiated an active program to sell J.D. Power in its current state that we believe is probable in the next year. As a result, we have classified the assets and liabilities of J.D. Power as held for sale in our consolidated balance sheet as of December 31, 2015. The anticipated disposal does not represent a strategic shift that will have a major effect on operations and financial results, therefore, it is not classified as a discontinued operation.
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 year ended December 31, 2014 and all prior periods presented have been reclassified to reflect the business as a discontinued operation. See Note 2 — Acquisitions and Divestitures for further discussion.
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 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, commercial-oriented data and analytics, conference sponsorship, consulting engagements, and events.

As of August 1, 2013, we completed the sale of Aviation Week and results have been included in C&C's results through that date. See Note 2 – Acquisitions and Divestitures to our consolidated financial statements for further discussion.

(in millions)
 
Years ended December 31,
 
% Change
 
 
2015
 
2014
 
2013
 
’15 vs ’14
 
’14 vs ’13
Total revenue
 
$
971

 
$
893

 
$
841

 
9
%
 
6
%
 
 
 
 
 
 
 
 
 
 
 
Subscription revenue
 
$
641

 
$
576

 
$
527

 
11
%
 
9
%
Non-subscription revenue
 
$
330

 
$
317

 
$
314

 
4
%
 
1
%
% of total revenue:
 
 
 
 
 
 
 
 
 
 
     Subscription revenue
 
66
%
 
64
%
 
63
%
 
 
 
 
     Non-subscription revenue
 
34
%
 
36
%
 
37
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic revenue
 
$
435

 
$
401

 
$
394

 
9
%
 
2
%
International revenue
 
$
536

 
$
492

 
$
447

 
9
%
 
10
%
% of total revenue:
 
 
 
 
 
 
 
 
 
 
     Domestic revenue
 
45
%
 
45
%
 
47
%
 
 
 
 
     International revenue
 
55
%
 
55
%
 
53
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit 1
 
$
357

 
$
290

 
$
280

 
23
%
 
3
%
% Operating margin
 
37
%
 
32
%
 
33
%
 
 
 
 
1 
2015 includes $1 million of restructuring charges. 2014 includes $16 million of restructuring charges. 2013 includes $9 million of restructuring charges and a pre-tax gain of $11 million on the sale of Aviation Week.

44

2015

Revenue grew 9% driven by strength in Platts' proprietary content as Platts' revenue grew across all regions. This growth was mainly due to continued demand for Platts’ market data and price assessment products across all commodity sectors, led by petroleum. 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 natural gas, petrochemicals, metals and agriculture. Additionally, growth has been driven by the continued licensing of our proprietary market price data and price assessments to various commodity exchanges. Platts' revenue for 2015 was also favorably impacted by the acquisitions of Eclipse Energy Group AS and its operating subsidiaries (“Eclipse”) in July of 2014 and Petromedia Ltd and its operating subsidiaries (“Petromedia”) in July of 2015. J.D. Power also contributed to the revenue increase driven by an increase in auto consulting engagements in the U.S., growth in the U.S. Power Information Network® ("PIN") business and the acquisition of National Automobile Dealers Association's Used Car Guide ("UCG") in July of 2015. The acquisitions of Eclipse, Petromedia and UCG had a favorable impact on revenue of 3 percentage points. See Note 2 — Acquisitions and Divestitures for further discussion. The unfavorable impact of foreign exchange rates reduced revenue by 1 percentage point.

Operating profit increased 23%. Excluding the favorable impact of higher restructuring charges recorded in 2014 of 6 percentage points, operating profit increased 17%. This increase is due to the increase in revenue and the favorable impact of foreign exchange rates of 4 percentage points, partially offset by higher incentive costs and outside consulting fees at Platts and higher compensation costs related to additional headcount at J.D. Power due to the acquisition of UCG.

2014

Revenue increased 6% due to continued demand for Platts’ proprietary content as Platts’ revenue grew across all regions. This growth was mainly driven by strength in Platts’ market data and price assessment products across all commodity sectors, led by petroleum. While petroleum is still the biggest driver, the revenue mix continues to become more diversified as other sectors continued to show positive annualized contract value growth including petrochemicals, natural gas, coal, metals and agriculture. Platts' revenue in 2014 was also favorably impacted by the acquisition of Eclipse in July of 2014. The acquisition of Eclipse had a favorable impact on revenue of less than 1 percentage point. See Note 2 — Acquisitions and Divestitures for further discussion. Additionally, growth at J.D. Power also contributed to the revenue increase driven by strong demand for auto consulting engagements in the U.S. and Singapore and growth in the U.S. PIN business. The increases in revenue were partially offset by the unfavorable impact of 3 percentage points related to the sale of Aviation Week on August 1, 2013 as the results have been included in C&C's results through that date.

Operating profit increased 3%. Excluding the unfavorable impact of the pre-tax gain on the sale of Aviation Week recorded in 2013 of 4 percentage points and higher restructuring charges recorded in 2014 as compared to 2013 of 3 percentage points, operating profit increased 10%. This increase is due to the increase in revenue, partially offset by the unfavorable impact of foreign exchange rates of 1 percentage point, increased costs at Platts and J.D. Power related to additional headcount, merit increases, and other operating costs to support business growth.

Industry Highlights and Outlook
C&C expects to continue to invest in digital capabilities that will enable our brands to become more integrated in our customers' workflows, compete more effectively in the marketplace, and create a foundation for the development of new products and revenue streams. The segment expects to further expand its presence in selected markets and geographies to help drive growth.

High growth in supply and an uncertain pace of demand growth causes volatility in energy prices, which will drive market participant demand for Platts' proprietary content, including news, price assessments and analytics. However, if commodity prices remain at levels that are lower than in recent years, this is likely to have an adverse impact on the rate of growth for subscription and conference revenue in some of Platts’ customer segments. The International Energy Agency ("IEA"), in its first monthly forecast of 2016, predicted that world oil consumption will rise to 95.7 million barrels per day in 2016, a gain of 1.2 million barrels per day compared to 2015. The IEA expected non-OPEC total liquids supply to contract by nearly 600,000 barrels per day in 2016, following growth of 1.4 million barrels per day in 2015. In 2016, Platts will continue to invest in technology and customer engagement activities to seek to drive additional revenue growth across all commodity sectors. They will also seek to continue to leverage the capabilities and content from recent acquisitions and expand into adjacent markets. Similar to 2015, they expect to continue to introduce a number of new products and price assessments within all commodity sectors. Platts completed its first annual assurance review confirming adherence to the IOSCO Principles for Oil Price Reporting Agencies (PRAs) for its oil benchmarks in 2013 and, as of December 2015, had completed its fourth assurance review confirming its alignment with the PRA Principles for both its oil and non-oil commodity benchmarks. On September 17, 2015, IOSCO announced that the PRAs have made the IOSCO PRA Principles an "integral part" of their price assessment practices and that IOSCO saw no need to continue its annual review of the Principles’ implementation. Platts remains committed to ensuring its price assessment processes continue

45

to fully align with the PRA Principles across all commodities and will continue to retain an independent accountancy firm to conduct voluntary reasonable assurance reviews of its alignment to the PRA Principles.

Demand for our automotive studies is driven by the performance of the automotive industry. In 2015, global and U.S. light vehicle sales increased approximately 1% and 6%, respectively, compared to 2014, with growth across most primary markets partially offset by decreases from Russia, Brazil and Japan. For 2016, J.D. Power projects growth for global and U.S. light vehicles sales of 4% and 2%, respectively. In 2016, J.D. Power will strive to grow the core business by strengthening their benchmark studies, leveraging new initiatives to drive operational efficiencies and enhance customer delivery and increasing the distribution of their syndicated studies. International growth will continue to be a key focus in 2016 as they will look to extend product offerings to increase penetration in the Asia-Pacific region and exploring growth opportunities in target growth markets (China, Brazil and Mexico).

Legal and Regulatory Environment
Platts’ commodities price assessment and information business is subject to increasing regulatory scrutiny in the U.S. and abroad. As discussed above under the heading “S&P DJ Indices-Legal and Regulatory Environment”, the financial benchmarks industry is subject to the new pending benchmark regulation in the European Union (the “E.U. Benchmark Regulation”) as well as potential increased regulation in other jurisdictions. As a result of these measures, as well as measures that could be taken in other jurisdictions outside of Europe, Platts will likely be required in due course to obtain registration or authorization in connection with its benchmark and price assessment activities in Europe and potentially elsewhere.
Also as discussed above under the heading “S&P DJ Indices-Legal and Regulatory Environment”, the European Union has recently finalized a package of legislative measures known as MiFID II, which may also impact Platts’ business. Although the MiFID II package is “framework” legislation, it is possible that the introduction of these laws and rules could affect Platts’ ability both to administer and license its price assessments.
In October of 2012, IOSCO issued its PRA Principles which set out principles, which are intended to enhance the reliability of oil price assessments referenced in derivative contracts subject to regulation by IOSCO members. Platts has taken steps to align its operations with the PRA Principles and as recommended by IOSCO in its final report on the PRA Principles, has aligned to the PRA Principles for other commodities for which it publishes benchmarks.
The markets for commodities price assessments and information are very competitive. Platts competes domestically and internationally on the basis of a number of factors, including the quality of its assessments and other information it provides to the commodities and related markets, client service, reputation, price, range of products and services (including geographic coverage) and technological innovation. Furthermore, sustained downward pressure on oil and other commodities prices and trading activity in those markets could have a material adverse impact on the rate of growth of Platts’ revenue. For a further discussion of competitive and other risks inherent in our Platts business, see Item 1a, Risk Factors, in this Annual Report on Form 10-K.

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. In 2016, 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 foreseeable 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 $1.5 billion as of December 31, 2015, a decrease of $1.0 billion as compared to 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.

46

(in millions)
 
Years ended December 31,
 
 
2015
 
2014
 
2013
Net cash provided by (used for):
 
 
 
 
 
 
Operating activities from continuing operations
 
$
195

 
$
1,209

 
$
782

Investing activities from continuing operations
 
(2,525
)
 
(65
)
 
(130
)
Financing activities from continuing operations
 
1,510

 
(462
)
 
(1,743
)

In 2015, free cash flow decreased to $(48.0) million compared to $1.0 billion in 2014. The decrease is primarily due to the decrease in cash provided from operating activities as discussed below. 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. See “MDA – 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.

Operating activities
Cash provided by operating activities decreased $1.0 billion to $195 million in 2015. The decrease is mainly due to the payment of legal and regulatory settlements in 2015 of $1.6 billion.

Cash provided by operating activities increased $427 million to $1.2 billion in 2014. The increase is mainly due to a tax refund received in the first quarter of 2014 related to an overpayment in 2013 and the timing of our estimated tax payment which was made in the first quarter of 2013 as compared to the fourth quarter of 2012. Additionally, improved collections in 2014 impacting accounts receivable also contributed to the increase. These increases were partially offset by higher incentive payments in 2014 compared to 2013.
 
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 $2.5 billion for 2015 from $65 million in 2014, primarily due to the acquisition of SNL in September of 2015.

Cash used for investing activities decreased to $65 million for 2014 from $130 million in 2013. This was primarily due to higher proceeds from dispositions in 2014 related to the sale of our data center to QTS and proceeds from the sale of the Company's aircraft. Additionally, lower capital expenditures in 2014 compared to 2013 contributed to the decrease. These decreases were partially offset by a higher amount of cash paid for acquisitions in 2014 compared to 2013.

Refer to Note 2 – Acquisitions and Divestitures to our consolidated financial statements for further information.

Financing activities
Our cash outflows from financing activities consist primarily of share repurchases, dividends and repayment of debt, while cash inflows are primarily inflows from long-term and short-term debt borrowings and proceeds from the exercise of stock options.

Cash provided by financing activities was $1.5 billion in 2015 compared to cash used for financing activities of $462 million in 2014, driven by proceeds from the issuance of senior notes in 2015, partially offset by an increase in cash used for the repurchase of treasury shares.

Cash used for financing activities decreased $1.3 billion to $462 million in 2014. This decrease is primarily attributable to a decrease in cash used for share repurchases and the repayment of short-term debt that occurred in the first quarter of 2013.

During 2015, we used cash to repurchase 9.8 million shares for $974 million at an average price paid per share of $98.98, excluding commissions. An additional 0.3 million shares were repurchased in the fourth quarter of 2015 for approximately $26 million, which settled in January of 2016. Including these additional shares, we utilized cash to repurchase shares at an average price of $99.00, excluding commissions.

During 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. Included in the repurchase were 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 ("Mr.

47

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 and Corporate Governance Committee of the Company's Board of Directors after consultation with members of the Financial Policy Committee.

During 2013, we used cash to repurchase 16.8 million shares for $978 million, including commissions. The average price per share, excluding commissions, was $58.36. An additional 0.1 million shares were repurchased in the fourth quarter of 2013 for approximately $10 million, which settled in January of 2014. Including these additional shares, we utilized cash to repurchase shares at an average price of $58.52, excluding commissions.

On December 4, 2013, the Board of Directors approved a new stock repurchase program authorizing the purchase of up to 50 million shares (the “2013 Repurchase Program”), which was approximately 18% of the total shares of our outstanding common stock at that time. The 2013 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. As of December 31, 2015, 35.5 million shares remained available under the 2013 Repurchase Program.

Discontinued Operations
Cash flows from discontinued operations reflects the classification of McGraw Hill Construction and MHE as discontinued operations.

Cash used for operating activities from discontinued operations of $129 million in 2015 relates to the tax payment on the gain on sale of McGraw Hill Construction. Cash provided by operating activities from discontinued operations of $18 million in 2014 relates to McGraw Hill Construction and cash used for operating activities of $231 million in 2013 relates both to MHE and McGraw Hill Construction.

Cash provided by investing activities from discontinued operations decreased to $320 million in 2014 compared to $2.1 billion in 2013 due to lower proceeds received from the sale of McGraw Hill Construction compared to the proceeds received from MHE.

Cash used for financing activities decreased $25 million in 2014 as there was no impact related to McGraw Hill Construction.

Additional Financing

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. Commercial paper borrowings outstanding as of December 31, 2015 totaled $143 million with an average interest rate and term of 0.95% and 17 days. As of December 31, 2015, we can borrow approximately $1.1 billion in additional funds through the commercial paper program. There were no commercial paper borrowings outstanding under our credit facility as of December 31, 2014.

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 15 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 Offered 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 5 — Debt for further information.

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 debt rating. On August 7, 2015, Moody's Investor Service assigned a Baa1 long-term debt rating and P-2 commercial paper rating.

48


Dividends

On January 27, 2016, the Board of Directors approved an increase in the quarterly common stock dividend from $0.33 per share to $0.36 per share.

Contractual Obligations

We typically have various contractual obligations, which are recorded as liabilities in our consolidated balance sheets, while other items, such as certain purchase commitments and other executory contracts, are not recognized, but are disclosed herein. For example, we are contractually committed to contracts for information-technology outsourcing, certain enterprise-wide information-technology software licensing and maintenance and make certain minimum lease payments for the use of property under operating lease agreements.

We believe that the amount of cash and cash equivalents on hand, cash flow expected from operations and availability under our credit facility will be adequate for us to execute our business strategy and meet anticipated requirements for lease obligations, capital expenditures, working capital and debt service for 2016.

The following table summarizes our significant contractual obligations and commercial commitments as of December 31, 2015, over the next several years that relate to our continuing operations. Additional details regarding these obligations are provided in the notes to our consolidated financial statements, as referenced in the footnotes to the table: 
(in millions)
Less than 1
Year
 
1-3 Years
 
3-5 Years
 
More than 5
Years
 
Total
Debt: 1
 
 
 
 
 
 
 
 


Principal payments
143

 
797

 
695

 
1,976

 
3,611

Interest payments
150

 
274

 
225

 
771

 
1,420

Operating leases 2
136

 
229

 
150

 
162

 
677

Purchase obligations and other 3
83

 
90

 
6

 
—

 
179

Total contractual cash obligations
$
512

 
$
1,390

 
$
1,076

 
$
2,909

 
$
5,887

1 
Our debt obligations are described in Note 5 – Debt to our consolidated financial statements.
2 
Amounts shown include taxes and escalation payments, see Note 12 – Commitments and Contingencies to our consolidated financial statements for further discussion on our operating lease obligations.
3 
Other consists primarily of commitments for unconditional purchase obligations in contracts for information-technology outsourcing and certain enterprise-wide information-technology software licensing and maintenance.

As of December 31, 2015, we had $120 million of liabilities for unrecognized tax benefits. We have excluded the liabilities for unrecognized tax benefits from our contractual obligations table because reasonable estimates of the timing of cash settlements with the respective taxing authorities are not practicable.

As of December 31, 2015, we have recorded $920 million for our redeemable noncontrolling interest in our S&P Dow Jones Indices LLC partnership discussed in Note 8 – Equity to our consolidated financial statements.  Specifically, this amount relates to the put option under the terms of the operating agreement of S&P Dow Jones Indices LLC, whereby, after December 31, 2017, 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. We have excluded this amount from our contractual obligations table because we are uncertain as to the timing and the ultimate amount of the potential payment we may be required to make.

We make contributions to our pension and postretirement plans in order to satisfy minimum funding requirements as well as additional contributions that we consider appropriate to improve the funded status of our plans. During 2015, we contributed $15 million and $8 million to our domestic and international retirement and postretirement plans, respectively. Expected employer contributions in 2016 are $7 million and $9 million for our domestic and international retirement and postretirement plans, respectively. In 2016, we may elect to make additional non-required contributions depending on investment performance and the pension plan status. See Note 6 – Employee Benefits to our consolidated financial statements for further discussion.


49

Off-Balance Sheet Arrangements

As of December 31, 2015 and 2014, we did not have any relationships with unconsolidated entities, such as entities often referred to as specific purpose or variable interest entities where we are the primary beneficiary, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such we are not exposed to any financial liquidity, market or credit risk that could arise if we had engaged in such relationships.

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 operation 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:
(in millions)
 
Years ended December 31,
 
% Change
 
 
2015
 
2014
 
2013
 
2015
 
2014
Cash provided by operating activities
 
$
195

 
$
1,209

 
$
782

 
(84)%

55%
Capital expenditures
 
(139
)
 
(92
)
 
(117
)
 

 

Dividends and other payments paid to noncontrolling interests
 
(104
)
 
(84
)
 
(75
)
 

 

Free cash flow
 
$
(48
)

$
1,033

 
$
590

 
N/M
 
75%
Payment of legal and regulatory settlements
 
1,624

 
35

 
—

 

 

Legal settlement insurance recoveries
 
(101
)
 
—

 
—

 

 

Tax benefit from legal settlements
 
(250
)
 
—

 
—

 

 

Free cash flow excluding above items
 
$
1,225

 
$
1,068

 
$
590

 
15%
 
81%

CRITICAL ACCOUNTING ESTIMATES

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Unless otherwise indicated, all discussion and analysis of our financial condition and results of operations relate to our continuing operations.

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. 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.

Management considers 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.

50

Management has discussed the development and selection of our critical accounting estimates with the Audit Committee of our Board of Directors. The Audit Committee has reviewed our disclosure relating to them in this MD&A.

We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements:

Revenue recognition
Revenue is recognized as it is earned when services are rendered. We consider amounts to be earned once evidence of an arrangement has been obtained, services are performed, fees are fixed or determinable and collectability is reasonably assured. Revenue relating to products that provide for more than one deliverable is recognized based upon the relative fair value to the customer of each deliverable as each deliverable is provided. Revenue relating to agreements that provide for more than one service is recognized based upon the relative fair value to the customer of each service component as each component is earned. If the fair value to the customer for each service is not objectively determinable, we make our best estimate of the services’ stand alone selling price and recognize revenue as earned as the services are delivered. The allocation of consideration received from multiple element arrangements that involve initial assignment of ratings and the future surveillance of ratings is determined through an analysis that considers cash consideration that would be received for instances when the service components are sold separately. In such cases, we defer portions of rating fees that we estimate will be attributed to future surveillance and recognize the deferred revenue ratably over the estimated surveillance periods. Advertising revenue is recognized when the page is run. Subscription income is recognized over the related subscription period.

For the years ended December 31, 2015, 2014 and 2013, no significant changes have been made to the underlying assumptions related to estimates of revenue or the methodologies applied. Based on our current outlook these assumptions are not expected to significantly change in 2016.

Allowance for doubtful accounts
The allowance for doubtful accounts reserve methodology is based on historical analysis, a review of outstanding balances and current conditions. In determining these reserves, we consider, amongst other factors, the financial condition and risk profile of our customers, areas of specific or concentrated risk as well as applicable industry trends or market indicators. The impact on operating profit for a one percentage point change in the allowance for doubtful accounts is approximately $10 million.

For the years ended December 31, 2015, 2014 and 2013, we made no material changes in our assumptions regarding the determination of the allowance for doubtful accounts. Based on our current outlook these assumptions are not expected to significantly change in 2016.

Accounting for the impairment of long-lived assets (including other intangible assets)
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Upon such an occurrence, recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to current forecasts of undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized equal to the amount by which the carrying amount of the asset exceeds the fair value of the asset. For long-lived assets held for sale, assets are written down to fair value, less cost to sell. Fair value is determined based on market evidence, discounted cash flows, appraised values or management’s estimates, depending upon the nature of the assets.

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 to our consolidated financial statements for further information.

On June 30, 2014, we completed the sale of our data center to Quality Technology Services, LLC (“QTS”) 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 of $36 million we recorded in the fourth quarter of 2013 to adjust the value facilities and associated infrastructure classified as held for sale to their fair value.

During the fourth quarter of 2013, we also incurred a $26 million non-cash impairment charge associated with an intangible asset acquired through the formation of our S&P Dow Jones Indices LLC joint venture.


51

Goodwill and indefinite-lived intangible assets
Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. As of December 31, 2015 and 2014, the carrying value of goodwill and other indefinite-lived intangible assets was $3.6 billion and $2.1 billion, respectively. The increase was primarily due to the acquisition of SNL in September of 2015. See Note 2 – Acquisitions and Divestitures to our consolidated financial statements for further information.
Goodwill and other intangible assets with indefinite lives are not amortized, but instead are tested for impairment annually during the fourth quarter each year or more frequently if events or changes in circumstances indicate that the asset might be impaired.

Goodwill
As part of our annual impairment test of our four reporting units, we initially perform a qualitative analysis evaluating whether any events and circumstances occurred that provide evidence that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount. Our qualitative assessment included, but was not limited to, consideration of macroeconomic conditions, industry and market conditions, cost factors, cash flows, changes in key Company personnel and our share price. If, based on our evaluation of the events and circumstances that occurred during the year we do not believe that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount, no quantitative impairment test is performed. Conversely, if the results of our qualitative assessment determine that it is more likely than not that the fair value of any of our reporting units is less than its respective carrying amount we perform a two-step quantitative impairment test. For 2015, based on our qualitative assessments, we determined that it is more likely than not that our reporting units’ fair value was greater than their respective carrying amounts.

If the fair value of the reporting unit is less than the carrying value, a second step is performed which compares the implied fair value of the reporting unit's goodwill to the carrying value of the goodwill. The implied fair value of the goodwill is determined based on the difference between the fair value of the reporting unit and the net fair value of the identifiable assets and liabilities of the reporting unit. If the implied fair value of the goodwill is less than the carrying value, the difference is recognized as an impairment charge.

Indefinite-Lived Intangible Assets
We evaluate the recoverability of indefinite-lived intangible assets by first performing a qualitative analysis evaluating whether any events and circumstances occurred that provide evidence that it is more likely than not that the indefinite-lived asset is impaired. If, based on our evaluation of the events and circumstances that occurred during the year we do not believe that it is more likely than not that the indefinite-lived asset is impaired, no quantitative impairment test is performed. Conversely, if the results of our qualitative assessment determine that it is more likely than not that the indefinite-lived asset is impaired a quantitative impairment test is performed. If necessary, the impairment test is performed by comparing the estimated fair value of the intangible asset to its carrying value. If the indefinite-lived intangible asset carrying value exceeds its fair value, an impairment analysis is performed using the income approach. The fair value of loss is recognized in an amount equal to that excess. Significant judgments inherent in these analyses include estimating the amount and timing of future cash flows and the selection of appropriate discount rates, royalty rates and long-term growth rate assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for this indefinite-lived intangible asset and could result in an impairment charge, which could be material to our financial position and results of operations.

We performed our impairment assessment of goodwill and indefinite-lived intangible assets at our S&P Ratings, S&P Capital IQ and SNL, S&P DJ Indices and C&C operating segments and concluded that no impairment existed for the years ended December 31, 2015, 2014, and 2013.

Retirement plans and postretirement healthcare and other benefits
Our employee pension and other postretirement benefit costs and obligations are dependent on assumptions concerning the outcome of future events and circumstances, including compensation increases, long-term return on pension plan assets, healthcare cost trends, discount rates and other factors. In determining such assumptions, we consult with outside actuaries and other advisors where deemed appropriate. In accordance with relevant accounting standards, if actual results differ from our assumptions, such differences are deferred and amortized over the estimated remaining lifetime of the plan participants. While we believe that the assumptions used in these calculations are reasonable, differences in actual experience or changes in assumptions could affect the expense and liabilities related to our pension and other postretirement benefits.

The following is a discussion of some significant assumptions that we make in determining costs and obligations for pension and other postretirement benefits:
•
Discount rate assumptions are based on current yields on high-grade corporate long-term bonds.
•
Healthcare cost trend assumptions are based on historical market data, the near-term outlook and an assessment of likely long-term trends.

52

•
The expected return on assets assumption is calculated based on the plan’s asset allocation strategy and projected market returns over the long-term.

Our discount rate and return on asset assumptions used to determine the net periodic pension and postretirement benefit cost on our U.S. retirement plans are as follows:
 
 
Retirement Plans
 
Postretirement Plans
January 1
 
2016
 
2015
 
2014
 
2016
 
2015
 
2014
Discount rate 1
 
4.47
%
 
4.15
%
 
5.00
%
 
3.90
%
 
3.60
%
 
4.20
%
Return on assets
 
6.25
%
 
6.25
%
 
7.125
%
 
 
 
 
 
 
Weighted-average healthcare cost rate
 
 
 
 
 
 
 
7.00
%
 
7.00
%
 
7.00
%
1 
At the end of 2015, we changed our approach used to measure service and interest costs on all of our retirement plans. For 2015 and prior periods presented, we measured service and interest costs utilizing the single weighted-average discount rate derived from the yield curve used to measure the benefit obligation. For 2016, we elected to measure service and interest costs by applying the specific spot rates along that yield curve to the plans' liability cash flows. We believe this new approach provides a more precise measurement of service and interest costs by aligning the timing of the plans' liability cash flows to the corresponding spot rates on the yield curve. This change does not affect the measurement of our benefit obligation. We have accounted for this change as a change in accounting estimate that is inseparable from a change in accounting principle and, accordingly, have accounted for it on a prospective basis. We expect pension and postretirement medical costs to decrease by approximately $13 million in 2016 as a result of this change.

In addition to the assumptions in the above table, assumed mortality is also a key assumption in determining benefit obligations. Effective December 31, 2014, the Company updated the assumed mortality rates to reflect life expectancy improvements.

Stock-based compensation
Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized over the requisite service period, which typically is the vesting period. Stock-based compensation is classified as both operating-related expense and selling and general expense in our consolidated statements of income.

We use a lattice-based option-pricing model to estimate the fair value of options granted. The following assumptions were used in valuing the options granted:
 
 
Years ended December 31,
 
 
2015
 
2014
 
2013
Risk-free average interest rate
 
0.2 - 1.9%

 
0.1 - 2.9%

 
0.1 - 2.9%

Dividend yield
 
1.4%

 
1.4 - 1.8%

 
2.07 - 2.09%

Volatility
 
21 - 39%

 
18 - 41%

 
29 - 45%

Expected life (years)
 
6.3

 
6.21 - 6.25

 
6.1 - 6.2

Weighted-average grant-date fair value per option
 
$
27.57

 
$
23.41

 
$
14.46


Because lattice-based option-pricing models incorporate ranges of assumptions, those ranges are disclosed. These assumptions are based on multiple factors, including historical exercise patterns, post-vesting termination rates, expected future exercise patterns and the expected volatility of our stock price. The risk-free interest rate is the imputed forward rate based on the U.S. Treasury yield at the date of grant. We use the historical volatility of our stock price over the expected term of the options to estimate the expected volatility. The expected term of options granted is derived from the output of the lattice model and represents the period of time that options granted are expected to be outstanding.

Income taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize liabilities for uncertain tax positions taken or expected to be taken in income tax returns. Accrued interest and penalties related to unrecognized tax benefits are recognized in interest expense and operating expense, respectively.


53

Judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and unrecognized tax benefits. In determining the need for a valuation allowance, the historical and projected financial performance of the operation that is recording a net deferred tax asset is considered along with any other pertinent information.

We file income tax returns in the U.S. federal jurisdiction, various states, and foreign jurisdictions, and we are routinely under audit by many different tax authorities. We believe that our accrual for tax liabilities is adequate for all open audit years based on our assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. It is possible that examinations will be settled prior to December 31, 2016. If any of these tax audit settlements do occur within that period we would make any necessary adjustments to the accrual for unrecognized tax benefits. Until formal resolutions are reached between us and the tax authorities, the determination of a possible audit settlement range with respect to the impact on unrecognized tax benefits is not practicable. On the basis of present information, it is our opinion that any assessments resulting from the current audits will not have a material effect on our consolidated financial statements.

We have determined that the undistributed earnings of our foreign subsidiaries are permanently reinvested within those foreign operations. Accordingly, we have not provided deferred income taxes on these indefinitely reinvested earnings. A future distribution by the foreign subsidiaries of these earnings could result in additional tax liability, which may be material to our future reported results, financial position and cash flows.

For the years ended December 31, 2015, 2014 and 2013, we made no material changes in our assumptions regarding the determination of the provision for income taxes. However, certain events could occur that would materially affect our estimates and assumptions regarding deferred taxes. Changes in current tax laws and applicable enacted tax rates could affect the valuation of deferred tax assets and liabilities, thereby impacting our income tax provision.

Contingencies
We are subject to a number of lawsuits and claims that arise in the ordinary course of business. We recognize a liability for such contingencies when both (a) information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements and (b) the amount of loss can reasonably be estimated. We continually assess the likelihood of any adverse judgments or outcomes to our contingencies, as well as potential amounts or ranges of probable losses, and recognize a liability, if any, for these contingencies based on an analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Because many of these matters are resolved over long periods of time, our estimate of liabilities may change due to new developments, changes in assumptions or changes in our strategy related to the matter. When we accrue for loss contingencies and the reasonable estimate of the loss is within a range, we record its best estimate within the range. We disclose an estimated possible loss or a range of loss when it is at least reasonably possible that a loss may have been incurred.

Redeemable Noncontrolling Interest
The fair value component of the redeemable noncontrolling interest in S&P DJ Indices business is based on a combination of an income and market valuation approach. Our income and market valuation approaches may incorporate Level 3 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.

RECENT ACCOUNTING STANDARDS

See Note 1 – Accounting Policies, to the consolidated financial statements for a detailed description of recent accounting standards. We do not expect these recent accounting standards to have a material impact on our results of operations, financial condition, or liquidity in future periods.


Item 7a. Quantitative and Qualitative Disclosures about Market Risk

There have been no significant changes in our exposure to market risk during the year ended December 31, 2015. Our exposure to market risk includes changes in foreign exchange rates. We have operations in various foreign countries where the functional currency is primarily the local currency. For international operations that are determined to be extensions of the parent company, the U.S. dollar is the functional currency. We typically have naturally hedged positions in most countries from a local currency perspective with offsetting assets and liabilities. As of December 31, 2015, we have entered into an immaterial amount of foreign exchange forwards to hedge the effect of adverse fluctuations in foreign currency exchange rates. We have not entered into any derivative financial instruments for speculative purposes.

54

Item 8. Consolidated Financial Statements and Supplementary Data
TABLE OF CONTENTS
 

55

Report of Independent Registered Public Accounting Firm

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

We have audited the accompanying consolidated balance sheets of McGraw Hill Financial, Inc. (the "Company") as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, cash flows and equity for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedule listed in Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of McGraw Hill Financial, Inc. at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), McGraw Hill Financial, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 11, 2016 expressed an unqualified opinion thereon.


/s/ ERNST & YOUNG LLP

New York, New York
February 11, 2016

56

Report of Independent Registered Public Accounting Firm

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

We have audited McGraw Hill Financial, Inc.’s (the "Company") internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). McGraw Hill Financial, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As indicated in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of SNL Financial LC, which is included in the 2015 consolidated financial statements of McGraw Hill Financial, Inc. and constituted $2.5 billion and $2.3 billion of total and net assets, respectively, as of December 31, 2015 and $85 million and $9 million of revenues and net loss attributable to McGraw Hill Financial, Inc., respectively, for the year then ended. Our audit of internal control over financial reporting of McGraw Hill Financial, Inc. also did not include an evaluation of the internal control over financial reporting of SNL Financial LC.

In our opinion, McGraw Hill Financial, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of McGraw Hill Financial, Inc. as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, cash flows and equity for each of the three years in the period ended December 31, 2015 and our report dated February 11, 2016 expressed an unqualified opinion thereon.


/s/ ERNST & YOUNG LLP

New York, New York
February 11, 2016

57

Consolidated Statements of Income
 
(in millions, except per share data)
Year Ended December 31,
 
2015
 
2014
 
2013
Revenue
$
5,313

 
$
5,051

 
$
4,702

Expenses:
 
 
 
 
 
Operating-related expenses
1,672

 
1,627

 
1,564

Selling and general expenses
1,578

 
3,168

 
1,631

Depreciation
90

 
86

 
86

Amortization of intangibles
67

 
48

 
51

Total expenses
3,407

 
4,929

 
3,332

Other (income) loss
(11
)
 
9

 
12

Operating profit
1,917

 
113

 
1,358

Interest expense, net
102

 
59

 
59

Income from continuing operations before taxes on income
1,815

 
54

 
1,299

Provision for taxes on income
547

 
245

 
425

Income (loss) from continuing operations
1,268

 
(191
)
 
874

Discontinued operations, net of tax:
 
 
 
 
 
Income from discontinued operations
—

 
18

 
3

Gain on sale of discontinued operations (includes $(75) accumulated other comprehensive income reclassifications in 2013 for foreign currency translation adjustment)
—

 
160

 
589

Discontinued operations, net
—

 
178

 
592

Net income (loss)
1,268

 
(13
)
 
1,466

Less: net income from continuing operations attributable to noncontrolling interests
(112
)
 
(102
)
 
(91
)
Less: net loss from discontinued operations attributable to noncontrolling interests
—

 
—

 
1

Net income (loss) attributable to McGraw Hill Financial, Inc.
$
1,156

 
$
(115
)
 
$
1,376

 
 
 
 
 
 
Amounts attributable to McGraw Hill Financial, Inc. common shareholders:
 
 
 
 
 
Income (loss) from continuing operations
$
1,156

 
$
(293
)
 
$
783

Income from discontinued operations
—

 
178

 
593

Net income (loss)
$
1,156

 
$
(115
)
 
$
1,376

 
 
 
 
 
 
Earnings (loss) per share attributable to McGraw Hill Financial, Inc. common shareholders:
 
 
 
 
 
Income (loss) from continuing operations:
 
 
 
 
 
Basic
$
4.26

 
$
(1.08
)
 
$
2.85

Diluted
$
4.21

 
$
(1.08
)
 
$
2.80

Income from discontinued operations:
 
 
 
 
 
Basic
$
—

 
$
0.66

 
$
2.16

Diluted
$
—

 
$
0.66

 
$
2.12

Net income (loss):
 
 
 
 
 
Basic
$
4.26

 
$
(0.42
)
 
$
5.01

Diluted
$
4.21

 
$
(0.42
)
 
$
4.91

Weighted-average number of common shares outstanding:
 
 
 
 
 
Basic
271.6

 
271.5

 
274.5

Diluted
274.6

 
271.5

 
279.8

 
 
 
 
 
 
Actual shares outstanding at year end
265.2

 
272.0

 
270.4

 
 
 
 
 
 
Dividend declared per common share
$
1.32

 
$
1.20

 
$
1.12

See accompanying notes to the consolidated financial statements.

58

Consolidated Statements of Comprehensive Income

(in millions)
Year Ended December 31,
 
2015
 
2014
 
2013
Net income (loss)
$
1,268

 
$
(13
)
 
$
1,466

Other comprehensive income (loss):
 
 
 
 
 
Foreign currency translation adjustment
(111
)
 
(108
)
 
93

Income tax effect
1

 
2

 
(2
)
 
(110
)
 
(106
)
 
91

 
 
 
 
 
 
Pension and other postretirement benefit plans
34

 
(357
)
 
385

Income tax effect
(9
)
 
142

 
(154
)
 
25

 
(215
)
 
231

 
 
 
 
 
 
Unrealized (loss) gain on investment and forward exchange contract
(1
)
 
4

 
2

Income tax effect
—

 
(1
)
 
(2
)
 
(1
)
 
3

 
—

 
 
 
 
 
 
Comprehensive income (loss)
1,182

 
(331
)
 
1,788

Less: comprehensive income attributable to nonredeemable noncontrolling interests
(11
)
 
(10
)
 
(18
)
Less: comprehensive income attributable to redeemable noncontrolling interests
(101
)
 
(92
)
 
(73
)
Comprehensive income (loss) attributable to McGraw Hill Financial, Inc.
$
1,070

 
$
(433
)
 
$
1,697


See accompanying notes to the consolidated financial statements.


59

Consolidated Balance Sheets
 
(in millions)
December 31,
 
2015
 
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,481

 
$
2,497

Short-term investments
6

 
3

Accounts receivable, net of allowance for doubtful accounts: 2015 - $37; 2014 - $38
991

 
932

Deferred income taxes
109

 
360

Prepaid and other current assets
206

 
170

Assets of a business held for sale
503

 
—

Total current assets
3,296

 
3,962

Property and equipment:
 
 
 
Buildings and leasehold improvements
352

 
287

Equipment and furniture
503

 
482

Total property and equipment
855

 
769

Less: accumulated depreciation
(585
)
 
(563
)
Property and equipment, net
270

 
206

Goodwill
2,882

 
1,387

Other intangible assets, net
1,522

 
1,004

Asset for pension benefits
36

 
28

Other non-current assets
177

 
186

Total assets
$
8,183

 
$
6,773

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
206

 
$
191

Accrued compensation and contributions to retirement plans
383

 
410

Short-term debt
143

 
—

Income taxes currently payable
56

 
54

Unearned revenue
1,421

 
1,254

Accrued legal and regulatory settlements
121

 
1,609

Other current liabilities
372

 
402

Liabilities of a business held for sale
206

 
—

Total current liabilities
2,908

 
3,920

Long-term debt
3,468

 
795

Pension and other postretirement benefits
276

 
333

Deferred income taxes
23

 
40

Other non-current liabilities
345

 
336

Total liabilities
7,020

 
5,424

Redeemable noncontrolling interest
920

 
810

Commitments and contingencies (Note 12)

 

Equity:
 
 
 
Common stock, $1 par value: authorized - 600 million shares; issued - 412 million shares in 2015 and 2014
412

 
412

Additional paid-in capital
475

 
493

Retained income
7,636

 
6,946

Accumulated other comprehensive loss
(600
)
 
(514
)
Less: common stock in treasury - at cost: 2015 - 146 million shares; 2014 - 140 million shares
(7,729
)
 
(6,849
)
Total equity – controlling interests
194

 
488

Total equity – noncontrolling interests
49

 
51

Total equity
243

 
539

Total liabilities and equity
$
8,183

 
$
6,773


See accompanying notes to the consolidated financial statements.

60

Consolidated Statements of Cash Flows
(in millions)
Year Ended December 31,
 
2015
 
2014
 
2013
Operating Activities:
 
 
 
 
 
Net income (loss)
$
1,268

 
$
(13
)
 
$
1,466

Less: income from discontinued operations
—

 
178

 
592

Net income (loss) from continuing operations
1,268

 
(191
)
 
874

Adjustments to reconcile income (loss) from continuing operations to cash provided by operating activities from continuing operations:
 
 
 
 
 
Depreciation
90

 
86

 
86

Amortization of intangibles
67

 
48

 
51

Provision for losses on accounts receivable
8

 
11

 
22

Deferred income taxes
280

 
(245
)
 
43

Stock-based compensation
78

 
100

 
96

Accrued legal and regulatory settlements
119

 
1,587

 
—

Other
46

 
80

 
96

Changes in operating assets and liabilities, net of effect of acquisitions and dispositions:
 
 
 
 
 
Accounts receivable
(118
)
 
(9
)
 
(35
)
Prepaid and other current assets
(4
)
 
(7
)
 
(29
)
Accounts payable and accrued expenses
(92
)
 
(130
)
 
(94
)
Unearned revenue
129

 
78

 
109

Accrued legal and regulatory settlement
(1,624
)
 
(35
)
 
—

Other current liabilities
(78
)
 
(16
)
 
(89
)
Net change in prepaid / accrued income taxes
61

 
(93
)
 
(238
)
Net change in other assets and liabilities
(35
)
 
(55
)
 
(110
)
Cash provided by operating activities from continuing operations
195

 
1,209

 
782

Investing Activities:
 
 
 
 
 
Capital expenditures
(139
)
 
(92
)
 
(117
)
Acquisitions, including contingent payments, net of cash acquired
(2,396
)
 
(71
)
 
(47
)
Proceeds from dispositions
14

 
83

 
51

Changes in short-term investments
(4
)
 
15

 
(17
)
Cash used for investing activities from continuing operations
(2,525
)
 
(65
)
 
(130
)
Financing Activities:
 
 
 
 
 
Additions to / (payments on) short-term debt, net
143

 
—

 
(457
)
Proceeds from issuance of senior notes, net
2,674

 
—

 
—

Dividends paid to shareholders
(363
)
 
(326
)
 
(308
)
Dividends and other payments paid to noncontrolling interests
(104
)
 
(84
)
 
(75
)
Repurchase of treasury shares
(974
)
 
(362
)
 
(978
)
Exercise of stock options
86

 
193

 
258

Contingent consideration payment
(5
)
 
(11
)
 
(12
)
Purchase of additional CRISIL shares
(16
)
 
—

 
(214
)
Excess tax benefits from share-based payments
69

 
128

 
43

Cash provided by (used for) financing activities from continuing operations
1,510

 
(462
)
 
(1,743
)
Effect of exchange rate changes on cash from continuing operations
(67
)
 
(65
)
 
(1
)
Cash (used for) provided by continuing operations
(887
)
 
617

 
(1,092
)
Discontinued Operations:
 
 
 
 
 
Cash (used for) provided by operating activities
(129
)
 
18

 
(231
)
Cash provided by investing activities
—

 
320

 
2,129

Cash used for financing activities
—

 
—

 
(25
)
Effect of exchange rate changes on cash
—

 
—

 
1

Cash (used for) provided by discontinued operations
(129
)
 
338

 
1,874

Net change in cash and cash equivalents
(1,016
)
 
955

 
782

Cash and cash equivalents at beginning of year
2,497

 
1,542

 
760

Cash and cash equivalents at end of year
$
1,481

 
$
2,497

 
$
1,542

Cash paid during the year for:
 
 
 
 
 
Interest (including discontinued operations)
$
65

 
$
50

 
$
50

Income taxes (including discontinued operations)
$
260

 
$
419

 
$
787

See accompanying notes to the consolidated financial statements.

61

Consolidated Statements of Equity
 (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, 2012
$
412

 
$
492

 
$
6,525

 
$
(517
)
 
$
6,145

 
$
767

 
$
73

 
$
840

Comprehensive income 1
 
 
 
 
1,376

 
321

 
 
 
1,697

 
18

 
1,715

Dividends
 
 
 
 
(315
)
 
 
 
 
 
(315
)
 
(10
)
 
(325
)
Noncontrolling interest adjustments related to discontinued operations
 
 


 

 
 
 
 
 
—

 
(22
)
 
(22
)
Share repurchases
 
 


 
 
 
 
 
989

 
(989
)
 

 
(989
)
Employee stock plans, net of tax benefit
 
 
(45
)
 
 
 
 
 
(388
)
 
343

 
 
 
343

Change in redemption value of redeemable noncontrolling interest
 
 
 
 
11

 
 
 
 
 
11

 
 
 
11

Increase in CRISIL ownership
 
 
 
 
(216
)
 
 
 
 
 
(216
)
 
$
(17
)
 
(233
)
Other
 
 
 
 
3

 
 
 
 
 
3

 
1

 
4

Balance as of December 31, 2013
$
412

 
$
447

 
$
7,384

 
$
(196
)
 
$
6,746

 
$
1,301

 
$
43

 
$
1,344

Comprehensive loss 1
 
 
 
 
(115
)
 
(318
)
 
 
 
(433
)
 
10

 
(423
)
Dividends
 
 
 
 
(324
)
 
 
 
 
 
(324
)
 
(8
)
 
(332
)
Share repurchases
 
 

 
 
 
 
 
352

 
(352
)
 
6

 
(346
)
Employee stock plans, net of tax benefit
 
 
46

 
 
 
 
 
(249
)
 
295

 
 
 
295

Change in redemption value of redeemable noncontrolling interest
 
 
 
 
(1
)
 
 
 
 
 
(1
)
 
 
 
(1
)
Other
 
 
 
 
2

 
 
 
 
 
2

 

 
2

Balance as of December 31, 2014
$
412

 
$
493

 
$
6,946

 
$
(514
)
 
$
6,849

 
$
488

 
$
51

 
$
539

Comprehensive income 1
 
 
 
 
1,156

 
(86
)
 
 
 
1,070

 
11

 
1,081

Dividends
 
 
 
 
(359
)
 
 
 
 
 
(359
)
 
(9
)
 
(368
)
Share repurchases
 
 


 
 
 
 
 
1,000

 
(1,000
)
 
(2
)
 
(1,002
)
Employee stock plans, net of tax benefit
 
 
(18
)
 
 
 
 
 
(120
)
 
102

 
 
 
102

Change in redemption value of redeemable noncontrolling interest
 
 
 
 
(107
)
 
 
 
 
 
(107
)
 
 
 
(107
)
Other
 
 
 
 

 
 
 
 
 
—

 
(2
)
 
(2
)
Balance as of December 31, 2015
$
412

 
$
475

 
$
7,636

 
$
(600
)
 
$
7,729

 
$
194

 
$
49

 
$
243

1
Excludes $101 million, $92 million and $73 million in 2015, 2014 and 2013, respectively, attributable to redeemable noncontrolling interest.
See accompanying notes to the consolidated financial statements.

62

Notes to the Consolidated Financial Statements

1. Accounting Policies

Nature of operations
McGraw Hill Financial, Inc. (together with its consolidated subsidiaries, the “Company,” the “Registrant,” “we,” “us” or “our”) is a leading benchmarks and ratings, analytics, data and research provider serving the global capital, commodities and commercial markets. The capital markets include asset managers, investment banks, commercial banks, insurance companies, exchanges, and issuers; the commodities markets include producers, traders and intermediaries within energy, metals, petrochemicals and agriculture; and the commercial markets include professionals and corporate executives within automotive, financial services, insurance 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 (“C&C”).
•
S&P Ratings is an independent provider of credit ratings, research and analytics to investors, issuers and market participants.
•
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 leading 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. As of August 1, 2013, we completed the sale of Aviation Week and the results have been included in C&C's results through that date.

See Note 11 – Segment and Geographic Information for further discussion on our operating segments, which are also our reportable segments.

In the fourth quarter of 2015, we began exploring strategic alternatives for J.D. Power, included in our C&C segment. We committed to and initiated an active program to sell J.D. Power in its current state that we believe is probable in the next year. As a result, we have classified the assets and liabilities of J.D. Power as held for sale in our consolidated balance sheet as of December 31, 2015. The anticipated disposal does not represent a strategic shift that will have a major effect on operations and financial results, therefore, it is not classified as a discontinued operation.

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 years ended December 31, 2014 and December 31, 2013 have been reclassified to reflect the business as a discontinued operation.

We completed the sale of our McGraw-Hill Education business ("MHE") on March 22, 2013 and, accordingly, the results of operations of MHE have been reclassified to reflect the business as a discontinued operation for the year ended December 31, 2013.

See Note 2 — Acquisitions and Divestitures for further discussion on discontinued operations.

Assets and Liabilities Held for Sale and Discontinued Operations
Assets and Liabilities Held for Sale
We classify a disposal group to be sold as held for sale in the period in which all of the following criteria are met: management, having the authority to approve the action, commits to a plan to sell the disposal group; the disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such disposal group; an active program to locate a buyer and other actions required to complete the plan to sell the disposal group have been initiated; the sale of the disposal group is probable, and transfer of the disposal group is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the disposal group beyond one year; the disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.


63

An entity that is classified as held for sale is initially measured at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a disposal group until the date of sale.

The fair value of a disposal group less any costs to sell is assessed each reporting period it remains classified as held for sale and any subsequent changes are reported as an adjustment to the carrying value of the disposal group, as long as the new carrying value does not exceed the carrying value of the disposal group at the time it was initially classified as held for sale. Upon determining that a disposal group meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group as held for sale in the current period in our consolidated balance sheets.

Discontinued Operations
Beginning on January 1, 2015, we adopted revised guidance for discontinued operations that raises the threshold for a disposal to qualify as a discontinued operation. In determining whether a disposal of a component of an entity or a group of components of an entity is required to be presented as a discontinued operation, we make a determination whether the disposal represents a strategic shift that had, or will have, a major effect on our operations and financial results. A component of an entity comprises operations and cash flows that can be clearly distinguished both operationally and for financial reporting purposes. If we conclude that the disposal represents a strategic shift, then the results of operations of the group of assets being disposed of (as well as any gain or loss on the disposal transaction) are aggregated for separate presentation apart from our continuing operating results in the consolidated financial statements.

For the years ended December 31, 2014 and 2013, we applied the previous guidance for discontinued operations in determining whether a group of assets disposed or to be disposed of should be presented as a discontinued operation. We determined whether the group of assets being disposed of comprised a component of the entity. We also determined whether the cash flows associated with the group of assets had been or would have been eliminated from our ongoing operations as a result of the disposal transaction and whether we would have had significant continuing involvement in the operations of the group of assets after the disposal transaction. If we concluded that the cash flows had been eliminated and we had no significant continuing involvement, then the results of operations of the group of assets being disposed of (as well as any gain or loss on the disposal transaction) were aggregated for separate presentation for separate presentation apart from our continuing operating results in the consolidated financial statements.

See Note 2 – Acquisitions and Divestitures for a summary of discontinued operations. Unless otherwise indicated, all disclosures and amounts in the notes to our consolidated financial statements relate to our continuing operations.

Principles of consolidation
The consolidated financial statements include the accounts of all subsidiaries and our share of earnings or losses of joint ventures and affiliated companies under the equity method of accounting. All significant intercompany accounts and transactions have been eliminated.

Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and cash equivalents
Cash and cash equivalents include ordinary bank deposits and highly liquid investments with original maturities of three months or less that consist primarily of money market funds with unrestricted daily liquidity and fixed term time deposits. Such investments and bank deposits are stated at cost, which approximates market value, and were $1.5 billion and $2.5 billion as of December 31, 2015 and 2014, respectively. These investments are not subject to significant market risk.

Short-term investments
Short-term investments are securities with original maturities greater than 90 days that are available for use in our operations in the next twelve months. The short-term investments, primarily consisting of certificates of deposit, are classified as held-to-maturity and therefore are carried at cost. Interest and dividends are recorded into income when earned.

Accounts receivable
Credit is extended to customers based upon an evaluation of the customer’s financial condition. Accounts receivable, which include billings consistent with terms of contractual arrangements, are recorded at net realizable value.


64

Allowance for doubtful accounts
The allowance for doubtful accounts reserve methodology is based on historical analysis, a review of outstanding balances and current conditions. In determining these reserves, we consider, amongst other factors, the financial condition and risk profile of our customers, areas of specific or concentrated risk as well as applicable industry trends or market indicators.

Deferred technology costs
We capitalize certain software development and website implementation costs. Capitalized costs only include incremental, direct costs of materials and services incurred to develop the software after the preliminary project stage is completed, funding has been committed and it is probable that the project will be completed and used to perform the function intended. Incremental costs are expenditures that are out-of-pocket to us and are not part of an allocation or existing expense base. Software development and website implementation costs are expensed as incurred during the preliminary project stage. Capitalized costs are amortized from the year the software is ready for its intended use over its estimated useful life, three to seven years, using the straight-line method. Periodically, we evaluate the amortization methods, remaining lives and recoverability of such costs. Capitalized software development and website implementation costs are included in other non-current assets and are presented net of accumulated amortization. Gross deferred technology costs were $128 million and $123 million as of December 31, 2015 and 2014, respectively. Accumulated amortization of deferred technology costs was $72 million and $55 million as of December 31, 2015 and 2014, respectively.

Fair Value
Certain assets and liabilities are required to be recorded at fair value and classified within a fair value hierarchy based on inputs used when measuring fair value. We have an immaterial amount of forward exchange contracts that are adjusted to fair value on a recurring basis.

Other financial instruments, including cash and cash equivalents and short-term investments, are recorded at cost, which approximates fair value because of the short-term maturity and highly liquid nature of these instruments. The fair value of our long-term debt borrowings were $3.6 billion and $0.9 billion as of December 31, 2015 and 2014, respectively, and was estimated based on quoted market prices.

Accounting for the impairment of long-lived assets (including other intangible assets)
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Upon such an occurrence, recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to current forecasts of undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized equal to the amount by which the carrying amount of the asset exceeds the fair value of the asset. For long-lived assets held for sale, assets are written down to fair value, less cost to sell. Fair value is determined based on market evidence, discounted cash flows, appraised values or management’s estimates, depending upon the nature of the assets.

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 discussion.

On June 30, 2014, we completed the sale of our data center to Quality Technology Services, LLC (“QTS”) 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 loss (income) in our consolidated statement of income, which is in addition to the non-cash impairment charge of $36 million we recorded in the fourth quarter of 2013 to adjust the value facilities and associated infrastructure classified as held for sale to their fair value.

During the fourth quarter of 2013, we also incurred a $26 million non-cash impairment charge associated with an intangible asset acquired through the formation of our S&P Dow Jones Indices LLC joint venture.

Goodwill and other indefinite-lived intangible assets
Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill and other intangible assets with indefinite lives are not amortized, but instead are tested for impairment annually during the fourth quarter each year, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We have four reporting units with goodwill that are evaluated for impairment.


65

We initially perform a qualitative analysis evaluating whether any events and circumstances occurred or exist that provide evidence that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount. If, based on our evaluation we do not believe that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount, no quantitative impairment test is performed. Conversely, if the results of our qualitative assessment determine that it is more likely than not that the fair value of any of our reporting units is less than their respective carrying amounts we perform a two-step quantitative impairment test.

When conducting the first step of our two step impairment test to evaluate the recoverability of goodwill at the reporting unit level, the estimated fair value of the reporting unit is compared to its carrying value including goodwill. Fair value of the reporting units are estimated using the income approach, which incorporates the use of a discounted free cash flow (“DCF”) analyses and are corroborated using the market approach, which incorporates the use of revenue and earnings multiples based on market data. The DCF analyses are based on the current operating budgets and estimated long-term growth projections for each reporting unit. Future cash flows are discounted based on a market comparable weighted average cost of capital rate for each reporting unit, adjusted for market and other risks where appropriate. In addition, we analyze any difference between the sum of the fair values of the reporting units and our total market capitalization for reasonableness, taking into account certain factors including control premiums.

If the fair value of the reporting unit is less than the carrying value, a second step is performed which compares the implied fair value of the reporting unit’s goodwill to the carrying value of the goodwill. The fair value of the goodwill is determined based on the difference between the fair value of the reporting unit and the net fair value of the identifiable assets and liabilities of the reporting unit. If the implied fair value of the goodwill is less than the carrying value, the difference is recognized as an impairment charge.

We evaluate the recoverability of indefinite-lived intangible assets by first performing a qualitative analysis evaluating whether any events and circumstances occurred that provide evidence that it is more likely than not that the indefinite-lived asset is impaired. If, based on our evaluation of the events and circumstances that occurred during the year we do not believe that it is more likely than not that the indefinite-lived asset is impaired, no quantitative impairment test is performed. Conversely, if the results of our qualitative assessment determine that it is more likely than not that the indefinite-lived asset is impaired a quantitative impairment test is performed. If necessary, the impairment test is performed by comparing the estimated fair value of the intangible asset to its carrying value. If the indefinite-lived intangible asset carrying value exceeds its fair value, an impairment analysis is performed using the income approach. The fair value of loss is recognized in an amount equal to that excess.

Significant judgments inherent in these analyses include estimating the amount and timing of future cash flows and the selection of appropriate discount rates, royalty rates and long-term growth rate assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit and indefinite-lived intangible asset and could result in an impairment charge, which could be material to our financial position and results of operations.

We performed our impairment assessment of goodwill and indefinite-lived intangible assets and concluded that no impairment existed for the years ended December 31, 2015, 2014 and 2013.

Foreign currency translation
We have operations in many foreign countries. For most international operations, the local currency is the functional currency. For international operations that are determined to be extensions of the parent company, the United States ("U.S.") dollar is the functional currency. For local currency operations, assets and liabilities are translated into U.S. dollars using end of period exchange rates, and revenue and expenses are translated into U.S. dollars using weighted-average exchange rates. Foreign currency translation adjustments are accumulated in a separate component of equity.

Revenue recognition
Revenue is recognized as it is earned when services are rendered. We consider amounts to be earned once evidence of an arrangement has been obtained, services are performed, fees are fixed or determinable and collectability is reasonably assured. Revenue relating to products that provide for more than one deliverable is recognized based upon the relative fair value to the customer of each deliverable as each deliverable is provided. Revenue relating to agreements that provide for more than one service is recognized based upon the relative fair value to the customer of each service component as each component is earned. If the fair value to the customer for each service is not objectively determinable, management makes its best estimate of the services’ stand-alone selling price and records revenue as it is earned over the service period. For arrangements that include multiple services, fair value of the service components are determined using an analysis that considers cash consideration that would be received for instances when the service components are sold separately. Advertising revenue is recognized when the page is run. Subscription income is recognized over the related subscription period.


66

Depreciation
The costs of property and equipment are depreciated using the straight-line method based upon the following estimated useful lives: buildings and improvements from 15 to 40 years and equipment and furniture from 2 to 10 years. The costs of leasehold improvements are amortized over the lesser of the useful lives or the terms of the respective leases.

Advertising expense
The cost of advertising is expensed as incurred. We incurred $33 million, $35 million and $41 million in advertising costs for the years ended December 31, 2015, 2014 and 2013, respectively.

Stock-based compensation
Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized over the requisite service period, which typically is the vesting period. Stock-based compensation is classified as both operating-related expense and selling and general expense in the consolidated statements of income.

Income taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize liabilities for uncertain tax positions taken or expected to be taken in income tax returns. Accrued interest and penalties related to unrecognized tax benefits are recognized in interest expense and operating expense, respectively.

Judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and unrecognized tax benefits. In determining the need for a valuation allowance, the historical and projected financial performance of the operation that is recording a net deferred tax asset is considered along with any other pertinent information.

We file income tax returns in the U.S. federal jurisdiction, various states, and foreign jurisdictions, and we are routinely under audit by many different tax authorities. We believe that our accrual for tax liabilities is adequate for all open audit years based on our assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. It is possible that examinations will be settled prior to December 31, 2016. If any of these tax audit settlements do occur within that period we would make any necessary adjustments to the accrual for unrecognized tax benefits. Until formal resolutions are reached between us and the tax authorities, the determination of a possible audit settlement range with respect to the impact on unrecognized tax benefits is not practicable. On the basis of present information, our opinion is that any assessments resulting from the current audits will not have a material effect on our consolidated financial statements.

Redeemable Noncontrolling Interest
The agreement with the minority partners of our S&P Dow Jones Indices LLC joint venture established in June of 2012 contains redemption features whereby interests held by our 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. Since redemption of the noncontrolling interest is outside of our control, this interest is presented on our consolidated balance sheets under the caption “Redeemable noncontrolling interest.” If the interest were to be redeemed, we would be required to purchase all of such interest at fair value on the date of redemption. We adjust the redeemable noncontrolling interest each reporting period to its estimated redemption value, but never less than its initial fair value, using a combination of an income and market valuation approach. Our income and market valuation approaches may incorporate Level 3 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. See Note 8 – Equity, for further detail.

Contingencies
We accrue for loss contingencies when both (a) information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements and (b) the amount of loss can reasonably be estimated. We continually assess the likelihood of any adverse judgments or outcomes to our contingencies, as well as potential amounts or ranges of probable losses, and recognize a liability, if any, for these contingencies based on an analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Because many of these matters are resolved over long periods of time, our estimate of liabilities may change due to new developments, changes in assumptions or changes in our strategy related to the matter. When we accrue for loss contingencies and the reasonable estimate of the loss is within a range, we record its best estimate within the range. We disclose an estimated possible loss or a range of loss when it is at least reasonably possible that a loss may have been incurred.


67

Recent Accounting Standards
In November of 2015, the Financial Accounting Standards Board ("FASB") issued guidance to simplify the presentation of deferred income taxes. The guidance requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. 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 September of 2015, the 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 adopted this guidance upon issuance and prior year amounts have been reclassified to conform with current year presentation. As of December 31, 2014, $4 million of debt issuance costs were reclassified from other non-current assets to long-term debt, less current portion. The adoption of this guidance did not 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. 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. While we will continue with our evaluation process, initially, we believe this guidance may have an impact on the accounting for certain proprietary consulting arrangements in our C&C segment as well as the accounting for certain integrated desktop service revenue arrangements offered in our S&P Capital IQ and SNL segment.

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. We adopted the amendments to this guidance on January 1, 2015.


68

Reclassification
Certain prior year amounts have been reclassified for comparability purposes.

2. Acquisitions and Divestitures

2015
For the year ended December 31, 2015, we paid cash for acquisitions, net of cash acquired, totaling $2.4 billion. We used the net proceeds of our $2.0 billion of senior notes issued in August of 2015 and cash on hand to finance the acquisition of SNL. All other acquisitions were funded with cash flows from operations. Acquisitions completed during the year ended December 31, 2015 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.

Acquisition-Related Expenses

During the year ended December 31, 2015, the Company incurred approximately $37 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 preliminary allocation of purchase price to the assets and liabilities of SNL as a result of the acquisition.

(in millions)
 
Current assets
$
23

Property, plant and equipment
19

Goodwill
1,563

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
1

Total assets acquired
2,378

Current liabilities
(23
)
Unearned revenue
(117
)
Other non-current liabilities
(4
)
Total liabilities acquired
(144
)
Net assets acquired
$
2,234



69

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.

Supplemental Pro Forma Information

Supplemental information on an unaudited pro forma basis is presented below for the years ended December 31, 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 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.

(in millions)
Year Ended December 31,
 
2015
2014
Pro forma revenue
$
5,477

$
5,275

Pro forma net income (loss) from continuing operations
$
1,258

$
(251
)

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 is 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 is not material to our consolidated financial statements.

Following our acquisition of UCG, we made a contingent purchase price payment in 2015 for $5 million that has been reflected in the consolidated statement of cash flows as a financing activity.

For acquisitions during 2015 that were accounted for using 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. Intangible assets recorded for all transactions are amortized using the straight-line method for periods not exceeding 18 years.

2014
For the year ended December 31, 2014, we paid cash for acquisitions, net of cash acquired, totaling $82 million. None of our acquisitions were material either individually or in the aggregate, including the pro forma impact on earnings. All acquisitions were funded with cash flows from operations. Acquisitions completed during the year ended December 31, 2014 by segment included:

S&P Ratings
•
In October of 2014, we acquired BRC Investor Services S.A. (“BRC”), a Colombia-based ratings firm providing risk classifications of banks, financial services providers, insurance companies, corporate bonds and structured issues that will expand our presence in the Latin American credit markets.  We accounted for the acquisition of BRC using the purchase method of accounting.  The acquisition is 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 2014 for $11 million that has been reflected in the consolidated statement of cash flows as a financing activity.

70


C&C
•
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 is 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.

For acquisitions during 2014 that were accounted for using 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. Intangible assets recorded for all transactions are amortized using the straight-line method for periods not exceeding 7 years. None of the goodwill acquired from our acquisitions during 2014 will be deductible for tax purposes.

2013
For the year ended December 31, 2013, we paid cash for acquisitions, net of cash acquired, totaling $273 million. None of our acquisitions were material either individually or in the aggregate, including the pro forma impact on earnings. All acquisitions were funded with cash flows from operations. Acquisitions completed during the year ended December 31, 2013 by segment included:

S&P DJ Indices
•
In December of 2013, we purchased the intellectual property rights to a range of commodities indices developed by Goldman Sachs as well as a limited-use license to promote the commodities indices using the Goldman Sachs Commodity Index trademarks. The commodities indices provide us with a leading benchmark that measures general price movements and inflation in the world economy. We accounted for the acquisition of the intellectual property on a cost basis.

S&P Ratings
•
In June of 2013, we made a voluntary open offer to purchase up to an additional 22.23% of the total equity shares outstanding in CRISIL Limited ("CRISIL"), our majority owned Indian credit rating agency within our S&P Ratings segment. In August of 2013, at the conclusion of the tender offer period, we acquired approximately 11 million equity shares representing 15.07% of CRISIL's total outstanding equity shares for $214 million, increasing our ownership percentage in CRISIL to 67.84% from 52.77%.

Following CRISIL's acquisition of Coalition that occurred in July of 2012, we made a contingent purchase price payment in 2013 for $12 million that has been reflected in the consolidated statement of cash flows as a financing activity.

Intangible assets recorded for all transactions during 2013 are considered intangible assets with indefinite lives which are not amortized, but instead are tested for impairment annually during the fourth quarter each year or more frequently if events or changes in circumstances indicate that the asset might be impaired.

Goodwill consists primarily of intangible assets that do not qualify for separate recognition, including assembled workforce, noncontractual relationships and agreements. The goodwill is not expected to be deductible for tax purposes.


71

Non-cash investing activities
Liabilities assumed in conjunction with the acquisition of businesses are as follows:
(in millions)
Years ended December 31,
 
2015
 
2014
 
2013
Fair value of assets acquired
$
2,576

 
$
67

 
$
—

Cash paid (net of cash acquired)
2,401

 
52

 
—

Liabilities assumed 1
$
175

 
$
15

 
$
—

1 2013 acquisitions did not result in any liabilities assumed.

Divestitures - Continuing Operations

During the year ended December 31, 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.

In the fourth quarter of 2015, we began exploring strategic alternatives for J.D. Power, included in our C&C segment. We committed to and initiated an active program to sell J.D. Power in its current state that we believe is probable in the next year. As a result, we have classified the assets and liabilities of J.D. Power as held for sale in our consolidated balance sheet as of December 31, 2015. The anticipated disposal does not represent a strategic shift that will have a major effect on operations and financial results, therefore, it is not classified as a discontinued operation.

The components of assets and liabilities held for sale related to J.D. Power in the consolidated balance sheet consist of the following:
(in millions)
December 31,
 
2015
Accounts receivable, net
$
58

Goodwill
75

Other intangible assets, net
335

Other assets
35

Assets of a business held for sale
$
503

 
 
Accounts payable and accrued expenses
$
42

Unearned revenue
64

Other liabilities
100

Liabilities of a business held for sale
$
206


The operating profit of J.D. Power for the years ending December 31, 2015, 2014 and 2013 is as follows:
(in millions)
Years ended December 31,
 
2015
 
2014
 
2013
J.D. Power operating profit
$
53

 
$
44

 
$
35


During the year ended December 31, 2014, we completed the following dispositions that resulted in a net pre-tax loss of $9 million, which was included in other (income) loss in the consolidated statement of income:
•
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 included all of the facilities and equipment on the south campus of our East Windsor, New Jersey location, inclusive of the rights

72

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.
During the year ended December 31, 2013, we completed the following dispositions that resulted in a net pre-tax gain of $24 million, which was included in other (income) loss in the consolidated statement of income:
•
On September 30, 2013, we completed the sale of Financial Communications, which was part of our S&P Capital IQ segment.
•
On August 27, 2013, CRISIL sold its 49% equity interest in India Index Services & Products Ltd. This investment was held within our S&P Ratings segment.
•
On August 1, 2013, we completed the sale Aviation Week within our C&C segment to Penton, a privately held business information company.

Additionally, S&P Capital IQ closed several of their non-core businesses during 2013.

Discontinued Operations

On November 3, 2014, we completed the sale of McGraw Hill Construction, which has historically been part of the C&C segment, to Symphony Technology Group for $320 million in cash. We recorded an after-tax gain on the sale of $160 million, which is included in discontinued operations, net in the consolidated statement of income for the year ended December 31, 2014. We used the after-tax proceeds from the sale to make selective acquisitions, investments, share repurchases and for general corporate purposes.

On March 22, 2013, we completed the sale of MHE to investment funds affiliated with Apollo Global Management, LLC for a purchase price of $2.4 billion in cash. We recorded an after-tax gain on the sale of $589 million, which is included in discontinued operations, net in the consolidated statement of income for the year ended December 31, 2013. We used the after-tax proceeds from the sale to pay down short-term debt for the special dividend paid in 2012, to make selective acquisitions, investments, share repurchases and for general corporate purposes.

The key components of income from discontinued operations for the years ended December 31, 2014 and 2013 consist of the following:
(in millions)
Years ended December 31,

2014

2013
Revenue
$
139


$
441

Expenses
110


436

Operating income
29


5

Interest expense, net
—


2

Income before taxes on income
29


3

Provision for taxes on income
11


—

Income from discontinued operations, net of tax
18


3

Pre-tax gain on sale from discontinued operations
289


888

Provision for taxes on gain on sale
129


299

Gain on sale of discontinued operations, net of tax
160


589

Discontinued operations, net
178


592

Less: net loss attributable to noncontrolling interests
—


(1
)
Income from discontinued operations attributable to McGraw Hill Financial, Inc. common shareholders
$
178


$
593


Results from discontinued operations for the year ended December 31, 2014 included the after-tax gain on sale of McGraw Hill Construction of $160 million.
Results from discontinued operations for the year ended December 31, 2013 included the after-tax gain on sale of MHE of $589 million.


73

3. Goodwill and Other Intangible Assets

Goodwill

Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired.

The change in the carrying amount of goodwill by segment is shown below:
(in millions)
S&P Ratings
 
S&P Capital IQ and SNL
 
S&P DJ Indices
 
C&C
 
Total
Balance as of December 31, 2013
$
125

 
$
469

 
$
376

 
$
439

 
$
1,409

Acquisitions
4

—

—

 
—

 
38

 
42

Dispositions
—

 
—

 
—

 
(32
)
 
(32
)
Other (primarily Fx)
(7
)
 
(17
)
 
—

 
(8
)
 
(32
)
Balance as of December 31, 2014
122

 
452

 
376

 
437

 
1,387

Acquisitions
—

 
1,563

 
—

 
39

 
1,602

  Reclassifications 1
—

 
—

 
—

 
(75
)
 
(75
)
Other (primarily Fx)
(8
)
 
(17
)
 
—

 
(7
)
 
(32
)
Balance as of December 31, 2015
$
114

 
$
1,998

 
$
376

 
$
394

 
$
2,882

1 
Relates to J.D. Power, which is classified as assets held for sale in our consolidated balance sheet as of December 31, 2015.

Goodwill additions and dispositions in the table above relate to transactions discussed in Note 2 – Acquisitions and Divestitures.

Other Intangible Assets

Other intangible assets include both indefinite-lived assets not subject to amortization and definite-lived assets subject to amortization. We have indefinite-lived assets with a carrying value of $713 million and $693 million as of December 31, 2015 and 2014, respectively.
•
2015 and 2014 both include $380 million and $90 million, for Dow Jones Indices intellectual property and the Dow Jones tradename, respectively, that we recorded as part of the transaction to form S&P Dow Jones Indices LLC in 2012.
•
2015 includes $184 million within our S&P Capital IQ and SNL segment for the SNL tradename.
•
2014 includes $164 million within our C&C segment for the J.D. Power and Associates tradename.
•
2015 and 2014 include $59 million within our S&P Dow Jones Indices segment for the Goldman Sachs Commodity Index intellectual property and the Broad Market Indices intellectual property.



74

The following table summarizes our definite-lived intangible assets:
(in millions)
 
 
 
 
 
 
 
 
 
 
 
Cost
Databases and software
 
Content
 
Customer relationships
 
Tradenames
 
Other intangibles
 
Total
Balance as of December 31, 2013
$
115

 
$
139

 
$
225

 
$
45

 
$
158

 
$
682

   Acquisitions
—

 
—

 
—

 
—

 
13

 
13

     Transfers
—

 
—

 
—

 
—

 
(44
)
 
(44
)
     Other (primarily Fx)
(2
)
 
—

 
3

 
1

 
(16
)
 
(14
)
Balance as of December 31, 2014
113

 
139

 
228

 
46

 
111

 
637

   Acquisitions
421

 
—

 
—

 
—

 
177

 
598

     Reclassifications 1
(19
)
 
—

 
(62
)
 
(2
)
 
(8
)
 
(91
)
     Other (primarily Fx)
(5
)
 
—

 
2

 
3

 
(11
)
 
(11
)
Balance as of December 31, 2015
$
510

 
$
139

 
$
168

 
$
47

 
$
269

 
$
1,133

 
 
 
 
 
 
 
 
 
 
 
 
Accumulated amortization
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2013
$
83

 
$
45

 
$
67

 
$
32

 
$
56

 
$
283

Current year amortization
6

 
14

 
13

 
3

 
12

 
48

     Other (primarily Fx)
(1
)
 
—

 
—

 
—

 
(4
)
 
(5
)
Balance as of December 31, 2014
88

 
59

 
80

 
35

 
64

 
326

Current year amortization
20

 
14

 
9

 
2

 
22

 
67

     Reclassifications 1
(18
)
 
—

 
(30
)
 
(2
)
 
(14
)
 
(64
)
     Other (primarily Fx)
(2
)
 
—

 
1

 
1

 
(5
)
 
(5
)
Balance as of December 31, 2015
$
88

 
$
73

 
$
60

 
$
36

 
$
67

 
$
324

 
 
 
 
 
 
 
 
 
 
 
 
Net definite-lived intangibles:
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
$
25

 
$
80

 
$
148

 
$
11

 
$
47

 
$
311

December 31, 2015
$
422

 
$
66

 
$
108

 
$
11

 
$
202

 
$
809

1 
Relates to J.D. Power, which is classified as assets held for sale in our consolidated balance sheet as of December 31, 2015.

Definite-lived intangible assets are being amortized on a straight-line basis over periods of up to 20 years. The weighted-average life of the intangible assets as of December 31, 2015 is approximately 10 years.

Amortization expense for the years ended December 31, 2015, 2014 and 2013 was $67 million, $48 million, and $51 million, respectively. Expected amortization expense for intangible assets over the next five years for the years ended December 31, assuming no further acquisitions or dispositions, is as follows:
(in millions)
2016
 
2017
 
2018
 
2019
 
2020
Amortization expense 1
$
98

 
$
93

 
$
86

 
$
81

 
$
74

1 
Amortization expense excludes J.D. Power, which is expected to be sold in the next year.
 
4. Taxes on Income

Income before taxes on income resulted from domestic and foreign operations is as follows:
(in millions)
Year Ended December 31,
 
2015
 
2014
 
2013
Domestic operations
$
1,266

 
$
(423
)
 
$
821

Foreign operations
549

 
477

 
478

Total continuing income before taxes
$
1,815

 
$
54

 
$
1,299



75

The provision for taxes on income consists of the following:
(in millions)
Year Ended December 31,
 
2015
 
2014
 
2013
Federal:
 
 
 
 
 
Current
$
90

 
$
285

 
$
194

Deferred
276

 
(213
)
 
51

Total federal
366

 
72

 
245

Foreign:
 
 
 
 
 
Current
111

 
135

 
152

Deferred
(1
)
 
1

 
(19
)
Total foreign
110

 
136

 
133

State and local:
 
 
 
 
 
Current
34

 
62

 
37

Deferred
37

 
(25
)
 
10

Total state and local
71

 
37

 
47

Total provision for taxes for continuing operations
547

 
245

 
425

Provision for discontinued operations
—

 
140

 
299

Total provision for taxes
$
547

 
$
385

 
$
724


A reconciliation of the U.S. federal statutory income tax rate to our effective income tax rate for financial reporting purposes is as follows: 
 
Year Ended December 31,
 
2015
 
2014
 
2013
U.S. federal statutory income tax rate
35.0
 %
 
35.0
 %
 
35.0
 %
Legal and regulatory settlements
—

 
524.1

 
—

State and local income taxes
2.6

 
64.2

 
2.8

Foreign operations
(3.2
)
 
(79.6
)
 
(3.9
)
S&P Dow Jones Indices LLC joint venture
(2.0
)
 
(60.2
)
 
(2.0
)
Tax credits and incentives
(2.9
)
 
(91.5
)
 
(2.1
)
Other, net
0.6

 
61.7

 
2.9

Effective income tax rate for continuing operations
30.1
 %
 
453.7
 %
 
32.7
 %


76

The principal temporary differences between the accounting for income and expenses for financial reporting and income tax purposes are as follows: 
(in millions)
December 31,
 
2015
 
2014
Deferred tax assets:
 
 
 
Legal and regulatory settlements
$
45

 
$
305

Employee compensation
91

 
99

Accrued expenses
72

 
94

Postretirement benefits
126

 
146

Unearned revenue
39

 
27

Allowance for doubtful accounts
12

 
13

Loss carryforwards
114

 
37

Other
18

 
14

Total deferred tax assets
517

 
735

Deferred tax liabilities:
 
 
 
Goodwill and intangible assets
(299
)
 
(362
)
Fixed assets
(9
)
 
(8
)
Other
—

 
—

Total deferred tax liabilities
(308
)
 
(370
)
Net deferred income tax asset (liability) before valuation allowance
209

 
365

Valuation allowance
(98
)
 
(16
)
Net deferred income tax asset (liability)
$
111

 
$
349

Reported as:
 
 
 
Current deferred tax assets
$
109

 
$
360

Current deferred tax liabilities
(8
)
 
(2
)
Non-current deferred tax assets
33

 
31

Non-current deferred tax liabilities
(23
)
 
(40
)
Net deferred income tax asset (liability)
$
111

 
$
349


We record valuation allowances against deferred income tax assets when we determine that it is more likely than not based upon all the available evidence that such deferred income tax assets will not be realized. The valuation allowance is primarily related to operating losses.

We have not recorded deferred income taxes applicable to undistributed earnings of foreign subsidiaries that are indefinitely reinvested in foreign operations. Undistributed earnings that are indefinitely reinvested in foreign operations amounted to $1,573 million at December 31, 2015. Quantification of the deferred tax liability, if any, associated with indefinitely reinvested earnings is not practicable.

We made net income tax payments for continuing and discontinued operations totaling $260 million in 2015, $419 million in 2014, and $787 million in 2013. As of December 31, 2015, we had net operating loss carryforwards of $440 million, which will expire over various periods.

77


A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(in millions)
Years ended December 31,
 
2015
 
2014
 
2013
Balance at beginning of year
$
118

 
$
82

 
$
74

Additions based on tax positions related to the current year
22

 
30

 
27

Additions for tax positions of prior years
12

 
33

 
10

Reduction for tax positions of prior years
(14
)
 
(11
)
 
(9
)
Reduction for settlements
(18
)
 
(16
)
 
(20
)
Balance at end of year
$
120

 
$
118

 
$
82


The total amount of federal, state and local, and foreign unrecognized tax benefits as of December 31, 2015, 2014 and 2013 was $120 million, $118 million and $82 million, respectively, exclusive of interest and penalties. The increase of $20 million in 2015 (excluding settlements) is the amount of unrecognized tax benefits that unfavorably impacted tax expense. The unfavorable impact to the tax provision was partially offset by the resolution of tax audits in multiple jurisdictions.

We recognize accrued interest and penalties related to unrecognized tax benefits in interest expense and operating-related expense, respectively. In addition to the unrecognized tax benefits, as of December 31, 2015 and 2014, we had $31 million and $23 million, respectively, of accrued interest and penalties associated with uncertain tax positions.

During 2015, we completed the federal income tax audit for 2013. The U.S. federal income tax audits for 2014 and 2015 are in process. During 2015, we completed various state and foreign tax audits and, with few exceptions, we are no longer subject to federal, state and local, or non-U.S. income tax examinations by tax authorities for the years before 2007. The impact to tax expense in 2015, 2014 and 2013 was not material.

We file income tax returns in the U.S. federal jurisdiction, various states, and foreign jurisdictions, and we are routinely under audit by many different tax authorities. We believe that our accrual for tax liabilities is adequate for all open audit years based on an assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. It is possible that tax examinations will be settled prior to December 31, 2016. If any of these tax audit settlements do occur within that period, we would make any necessary adjustments to the accrual for unrecognized tax benefits. Until formal resolutions are reached between us and the tax authorities, the determination of a possible audit settlement range with respect to the impact on unrecognized tax benefits is not practicable.

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.

5. Debt

A summary of short-term and long-term debt outstanding is as follows:
(in millions)
December 31,
 
2015
 
2014
5.9% Senior Notes, due 2017 1
$
399

 
$
399

2.5% Senior Notes, due 2018 2
398

 
—

3.3% Senior Notes, due 2020 3
695

 
—

4.0% Senior Notes, due 2025 4
690

 
—

4.4% Senior Notes, due 2026 5
890

 
—

6.55% Senior Notes, due 2037 6
396

 
396

Commercial paper
143

 
—

Total debt
3,611

 
795

Less: short-term debt including current maturities
143

 
—

Long-term debt
$
3,468

 
$
795


78

1 
Interest payments are due semiannually on April 15 and October 15, and as of December 31, 2015, the unamortized debt discount and issuance costs total $1 million.
2 
Interest payments are due semiannually on February 15 and August 15, beginning on February 15, 2016, and as of December 31, 2015, the unamortized debt discount and issuance costs total $2 million.
3 
Interest payments are due semiannually on February 14 and August 14, beginning on February 14, 2016, and as of December 31, 2015, the unamortized debt discount and issuance costs total $5 million.
4 
Interest payments are due semiannually on June 15 and December 15, and as of December 31, 2015, the unamortized debt discount and issuance costs total $10 million.
5 
Interest payments are due semiannually on February 15 and August 15, beginning on February 15, 2016, and as of December 31, 2015, the unamortized debt discount and issuance costs total $10 million.
6 
Interest payments are due semiannually on May 15 and November 15, and as of December 31, 2015, the unamortized debt discount and issuance costs total $4 million.

Annual long-term debt maturities are scheduled as follows based on book values as of December 31, 2015: no amounts due in 2016, $399 million due in 2017, $398 million due in 2018, no amounts due in 2019, $695 million due in 2020, and $2.0 billion due thereafter.

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.

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. Commercial paper borrowings outstanding as of December 31, 2015 totaled $143 million with an average interest rate and term of 0.95% and 17 days. As of December 31, 2015, we can borrow approximately $1.1 billion in additional funds through the commercial paper program. There were no commercial paper borrowings outstanding under our credit facility as of December 31, 2014.

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 15 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 Offered 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.

6. 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 also 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.


79

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 retirement and postretirement plans in the consolidated balance sheets, with a corresponding adjustment to accumulated other comprehensive income, net of taxes. The amounts in accumulated other comprehensive income represent net 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 part of the sale of McGraw Hill Construction and MHE, described further in Note 2 – Acquisitions and Divestitures, we retained the benefit obligations and plan assets related to McGraw Hill Construction and MHE; however, the benefit cost for periods presented is bifurcated between continuing and discontinued operations.


80

Benefit Obligation

A summary of the benefit obligation and the fair value of plan assets, as well as the funded status for the retirement and postretirement plans as of December 31, is as follows (benefits paid in the table below include only those amounts contributed directly to or paid directly from plan assets): 
(in millions)
Retirement Plans
 
Postretirement Plans
 
2015
 
2014
 
2015
 
2014
Net benefit obligation at beginning of year
$
2,462

 
$
2,004

 
$
96

 
$
103

Service cost
6

 
5

 
—

 
1

Interest cost
96

 
99

 
3

 
4

Plan participants’ contributions
—

 
—

 
4

 
4

Actuarial (gain) loss
(189
)
 
504

 
(12
)
 
5

Gross benefits paid
(150
)
 
(125
)
 
(12
)
 
(13
)
Foreign currency effect
(26
)
 
(25
)
 
—

 
—

Other adjustments
—

 
—

 
1

 
(8
)
Net benefit obligation at end of year
2,199

 
2,462

 
80

 
96

Fair value of plan assets at beginning of year
2,236

 
2,088

 
—

 
—

Actual return on plan assets
(57
)
 
270

 
—

 
—

Employer contributions
15

 
22

 
8

 
9

Plan participants’ contributions
—

 
—

 
4

 
4

Gross benefits paid
(150
)
 
(125
)
 
(12
)
 
(13
)
Foreign currency effect
(21
)
 
(19
)
 
—

 
—

Fair value of plan assets at end of year
2,023

 
2,236

 
—

 
—

Funded status
$
(176
)
 
$
(226
)
 
$
(80
)
 
$
(96
)
Amounts recognized in consolidated balance sheets:
 
 
 
 
 
 
 
Non-current assets
$
36

 
$
28

 
$
—

 
$
—

Current liabilities
(8
)
 
(8
)
 
(8
)
 
(9
)
Non-current liabilities
(204
)
 
(246
)
 
(72
)
 
(87
)

$
(176
)
 
$
(226
)
 
$
(80
)
 
$
(96
)
Accumulated benefit obligation
$
2,190

 
$
2,440

 
 
 
 
Plans with accumulated benefit obligation in excess of the fair value of plan assets:
 
 
 
 
 
 
 
Projected benefit obligation
$
1,810

 
$
2,046

 
 
 
 
Accumulated benefit obligation
$
1,801

 
$
2,024

 
 
 
 
Fair value of plan assets
$
1,598

 
$
1,792

 
 
 
 
Amounts recognized in accumulated other comprehensive loss, net of tax:
 
 
 
 
 
 
 
Net actuarial loss (gain)
$
433

 
$
452

 
$
(24
)
 
$
(8
)
Prior service credit
1

 
1

 
(5
)
 
(5
)
Total recognized
$
434

 
$
453

 
$
(29
)
 
$
(13
)

The actuarial loss included in accumulated other comprehensive loss for our retirement plans and expected to be recognized in net periodic pension cost during the year ending December 31, 2016 is $16 million. There is no prior service credit included in accumulated other comprehensive loss for our retirement plans expected to be recognized in net periodic benefit cost during the year ending December 31, 2016.

There is an immaterial amount of actuarial loss and prior service credit included in accumulated other comprehensive loss for our postretirement plans expected to be recognized in net periodic benefit cost during the year ending December 31, 2016.



81

Net Periodic Cost

For purposes of determining annual pension cost, prior service costs are being amortized straight-line over the average expected remaining lifetime of plan participants expected to receive benefits.

A summary of net periodic benefit cost for our retirement and postretirement plans for the years ended December 31, is as follows: 
(in millions)
Retirement Plans
 
Postretirement Plans
 
2015
 
2014
 
2013
 
2015
 
2014
 
2013
Service cost
$
6

 
$
5

 
$
10

 
$
—

 
$
1

 
$
2

Interest cost
96

 
99

 
91

 
3

 
4

 
5

Expected return on assets
(127
)
 
(138
)
 
(129
)
 


 
—

 
—

Amortization of:

 

 

 

 

 

Actuarial loss (gain)
20

 
11

 
26

 
—

 
(1
)
 
—

Prior service cost (credit)
—

 
—

 
5

 
(1
)
 
—

 
(1
)
Curtailment 1
—

 
—

 
(8
)
 
—

 
(1
)
 
(12
)
Net periodic benefit cost
$
(5
)
 
$
(23
)
 
$
(5
)
 
$
2

 
$
3

 
$
(6
)
1 
The curtailment gain for our retirement plans in 2013 relates to a freeze of pension accruals for MHE employees as well as all remaining active employees in the United Kingdom ("U.K."). The curtailment gain for our postretirement plans in 2014 is a result of plan changes effective October 31, 2014 eliminating retiree medical and life insurance benefits for active employees not retiring by July 1, 2016. The curtailment gain for our postretirement plans in 2013 relates to the sale of MHE on March 22, 2013.

Our U.K. retirement plan accounted for a benefit of $10 million in 2015, $8 million in 2014, and $10 million in 2013, including the $8 million curtailment gain discussed above, of the net periodic benefit cost attributable to the funded plans.

Other changes in plan assets and benefit obligations recognized in other comprehensive income, net of tax for the years ended December 31, are as follows: 
(in millions)
Retirement Plans
 
Postretirement Plans
 
2015
 
2014
 
2013
 
2015
 
2014
 
2013
Net actuarial (gain) loss
$
(6
)
 
$
232

 
$
(213
)
 
$
(17
)
 
$
3

 
$
(8
)
Recognized actuarial (gain) loss
(13
)
 
(7
)
 
(15
)
 
—

 
1

 
—

Prior service cost (credit)
—

 
—

 
5

 
1

 
(5
)
 
—

Total recognized
$
(19
)
 
$
225

 
$
(223
)
 
$
(16
)
 
$
(1
)
 
$
(8
)

The total cost for our retirement plans was $91 million for 2015, $81 million for 2014 and $96 million for 2013. Included in the total retirement plans cost are defined contribution plans cost of $67 million for 2015, $74 million for 2014 and $75 million for 2013.


82

Assumptions
 
Retirement Plans
 
Postretirement Plans
 
2015
 
2014
 
2013
 
2015
 
2014
 
2013
Benefit obligation:
 
 
 
 
 
 
 
 
 
 
 
Discount rate
4.47
%
 
4.15
%
 
5.00
%
 
3.90
%
 
3.60
%
 
4.20
%
Net periodic cost:
 
 
 
 
 
 
 
 
 
 
 
Weighted-average healthcare cost rate 1
 
 
 
 
 
 
7.0
%
 
7.0
%
 
7.0
%
Discount rate - U.S. plan 2
4.15
%
 
5.0
%
 
4.1
%
 
3.60
%
 
4.125
%
 
3.45
%
Discount rate - U.K. plan 2
3.8
%
 
4.5
%
 
4.8
%
 
 
 
 
 
 
Compensation increase factor - U.S. plan
N/A

 
N/A

 
N/A

 
 
 
 
 
 
Compensation increase factor - U.K. plan
N/A

 
N/A

 
5.75
%
 
 
 
 
 
 
Return on assets 3
6.25
%
 
7.125
%
 
7.25
%
 
 
 
 
 
 
1 
The assumed weighted-average healthcare cost trend rate will decrease ratably from 7% in 2015 to 5% in 2024 and remain at that level thereafter. Assumed healthcare cost trends have an effect on the amounts reported for the healthcare plans. A one percentage point change in assumed healthcare cost trend creates the following effects:
(in millions)
1% point
increase
 
1% point
decrease
Effect on postretirement obligation
$
4

 
$
(3
)
2 
Effective January 1, 2016, we changed our discount rate assumption on our U.S. retirement plans to 4.47% from 4.15% in 2015 and changed our discount rate assumption on our U.K. plan to 3.84% from 3.8% in 2015. At the end of 2015, we changed our approach used to measure service and interest costs on all of our retirement plans. For 2015 and prior periods presented, we measured service and interest costs utilizing and single weighted-average discount rate derived from the yield curve used to measure the benefit obligation. For 2016, we elected to measure service and interest costs by applying the specific spot rates along that yield curve to the plans' liability cash flows. We believe this new approach provides a more precise measurement of service and interest costs by aligning the timing of the plans' liability cash flows to the corresponding spot rates on the yield curve. This change does not affect the measurement of our benefit obligation. We have accounted for this change as a change in accounting estimate that is inseparable from a change in accounting principle and, accordingly, have accounted for it on a prospective basis. We expect pension and postretirement medical costs to decrease by approximately $13 million in 2016 as a result of this change.
3 
The expected return on assets assumption is calculated based on the plan’s asset allocation strategy and projected market returns over the long-term. Effective January 1, 2016, our return on assets assumption for the U.S. plan and U.K. plan remained unchanged to 6.25%.

In addition to the assumptions in the above table, assumed mortality is also a key assumption in determining benefit obligations. Effective December 31, 2014, the Company updated the assumed mortality rates to reflect life expectancy improvements.

Cash Flows

In December of 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was enacted. The Act established a prescription drug benefit under Medicare, known as “Medicare Part D”, and a federal subsidy to sponsors of retiree healthcare benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Our benefits provided to certain participants are at least actuarially equivalent to Medicare Part D, and, accordingly, we are entitled to a subsidy.

Expected employer contributions in 2016 are $7 million for our retirement plans and $9 million for our postretirement plans. In 2016, we may elect to make additional non-required contributions depending on investment performance and the pension plan status. Information about the expected cash flows for our retirement and postretirement plans and the impact of the Medicare subsidy is as follows: 

83

(in millions)
 
 
Postretirement Plans 2
 
Retirement 1
Plans
 
Gross
payments
 
Retiree
contributions
 
Medicare
subsidy
 
Net
payments
2016
$
91

 
$
13

 
$
(4
)
 
$
(1
)
 
$
8

2017
90

 
13

 
(4
)
 
(1
)
 
8

2018
93

 
12

 
(4
)
 
(1
)
 
7

2019
96

 
12

 
(4
)
 
(1
)
 
7

2020
99

 
11

 
(4
)
 
(1
)
 
6

2021-2025
539

 
43

 
(12
)
 
(3
)
 
28

1 
Reflects the total benefits expected to be paid from the plans or from our assets including both our share of the benefit cost and the participants’ share of the cost.
2 
Reflects the total benefits expected to be paid from our assets.

Fair Value of Plan Assets

In accordance with authoritative guidance for fair value measurements certain assets and liabilities are required to be recorded at fair value. Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value hierarchy has been established which requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs used to measure fair value are as follows:
•
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities.
•
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.


84

The fair value of our defined benefit plans assets as of December 31, 2015 and 2014, by asset class is as follows:
(in millions)
December 31, 2015
 
Total
 
Level 1
 
Level 2
 
Level 3
Cash and short-term investments
$
188

 
$
8

 
$
180

 
$
—

Equities:

 

 

 

U.S. indexes 1
312

 
63

 
249

 
—

U.S. growth and value
132

 
92

 
40

 
—

U.K.
47

 
34

 
13

 
—

International, excluding U.K.
124

 
40

 
84

 
—

Fixed income:

 

 

 

Long duration strategy 2
1,072

 
—

 
1,072

 
—

Intermediate duration securities
33

 
—

 
33

 
—

Agency mortgage backed securities
6

 
—

 
6

 
—

Asset backed securities
17

 
—

 
17

 
—

Non-agency mortgage backed securities 3
23

 
—

 
23

 
—

U.K. 4
6

 
—

 
6

 
—

International, excluding U.K.
48

 
—

 
48

 
—

Other
15

 
—

 
15

 
—

Total
$
2,023

 
$
237

 
$
1,786

 
$
—

(in millions)
December 31, 2014
 
Total
 
Level 1
 
Level 2
 
Level 3
Cash, short-term investments, and other
$
176

 
$
17

 
$
159

 
$
—

Equities:

 

 

 

U.S. indexes 1
293

 
88

 
205

 
—

U.S. growth and value
204

 
147

 
57

 
—

U.K.
67

 
56

 
11

 
—

International, excluding U.K.
139

 
42

 
97

 
—

Fixed income:

 

 

 

Long duration strategy 2
1,165

 
—

 
1,165

 
—

Intermediate duration securities
25

 
—

 
25

 
—

Agency mortgage backed securities
6

 
—

 
6

 
—

Asset backed securities
18

 
—

 
18

 
—

Non-agency mortgage backed securities 3
37

 
—

 
37

 
—

U.K. 4
7

 
—

 
7

 
—

International, excluding U.K.
85

 
—

 
85

 
—

Other
14

 
—

 
14

 
—

Total
$
2,236

 
$
350

 
$
1,886

 
$
—

1 
Includes securities that are tracked in the following indexes: S&P 500, S&P MidCap 400, S&P MidCap 400 Growth and S&P Smallcap 600.
2 
Includes securities that are investment grade obligations of issuers in the U.S.
3 
Includes U.S. mortgage-backed securities that are not backed by the U.S. government.
4 
Includes securities originated by the government of and other issuers from the U.K.

For securities that are quoted in active markets, the trustee/custodian determines fair value by applying securities’ prices obtained from its pricing vendors. For commingled funds that are not actively traded, the trustee applies pricing information provided by investment management firms to the unit quantities of such funds. Investment management firms employ their own pricing vendors

85

to value the securities underlying each commingled fund. Underlying securities that are not actively traded derive their prices from investment managers, which in turn, employ vendors that use pricing models (e.g., discounted cash flow, comparables). The domestic defined benefit plans have no investment in our stock, except through the S&P 500 commingled trust index fund.

Pension Trusts’ Asset Allocations

There are two pension trusts, one in the U.S. and one in the U.K.
•
The U.S. pension trust had assets of $1.6 billion and $1.8 billion as of December 31, 2015 and 2014, respectively, and the target allocations in 2015 include 26% domestic equities, 6% international equities, and 68% debt securities and short-term investments.
•
The U.K. pension trust had assets of $425 million and $443 million as of December 31, 2015 and 2014, respectively, and the target allocations in 2015 include 20% equities, 40% diversified growth funds and 40% fixed income.

The pension assets are invested with the goal of producing a combination of capital growth, income and a liability hedge. The mix of assets is established after consideration of the long-term performance and risk characteristics of asset classes. Investments are selected based on their potential to enhance returns, preserve capital and reduce overall volatility. Holdings are diversified within each asset class. The portfolios employ a mix of index and actively managed equity strategies by market capitalization, style, geographic regions and economic sectors. The fixed income strategies include U.S. long duration securities, opportunistic fixed income securities and U.K. debt instruments. The short-term portfolio, whose primary goal is capital preservation for liquidity purposes, is composed of government and government-agency securities, uninvested cash, receivables and payables. The portfolios do not employ any financial leverage.

U.S. Defined Contribution Plans

Assets of the defined contribution plans in the U.S. consist primarily of investment options which include actively managed equity, indexed equity, actively managed equity/bond funds, target date funds, McGraw Hill Financial common stock, stable value and money market strategies. There is also a self-directed mutual fund investment option. The plans purchased 223,656 shares and sold 247,984 shares of McGraw Hill Financial common stock in 2015 and purchased 301,924 shares and sold 629,086 shares of McGraw Hill Financial common stock in 2014. The plans held approximately 1.8 million shares of McGraw Hill Financial common stock as of December 31, 2015 and 1.9 million shares as of December 31, 2014, with market values of $179 million and $165 million, respectively. The plans received dividends on McGraw Hill Financial common stock of $2 million during the year ended December 31, 2015 and $3 million during the year ended December 31, 2014.

7. 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.
•
2002 Employee Stock Incentive Plan (the “2002 Plan”) – The 2002 Plan permits the granting of nonqualified stock options, stock appreciation rights, performance stock, restricted stock and other stock-based awards.
•
Director Deferred Stock Ownership Plan – Under this plan, common stock reserved may be credited to deferred stock accounts for eligible Directors. In general, the plan requires that 50% of eligible Directors’ annual compensation plus dividend equivalents be credited to deferred stock accounts. Each Director may also elect to defer all or a portion of the remaining compensation and have an equivalent number of shares credited to the deferred stock account. Recipients under this plan are not required to provide consideration to us other than rendering service. Shares will be delivered as of the date a recipient ceases to be a member of the Board of Directors or within five years thereafter, if so elected. The plan will remain in effect until terminated by the Board of Directors or until no shares of stock remain available under the plan.

The number of common shares reserved for issuance are as follows: 
(in millions)
December 31,
 
2015
 
2014
Shares available for granting under the 2002 Plan
32.8
 
31.4
Options outstanding
5.8
 
8.1
Total shares reserved for issuance 1
38.6
 
39.5
1
Shares reserved for issuance under the Director Deferred Stock Ownership Plan are not included in the total, but are approximately 0.1 million.

86


We issue treasury shares upon exercise of stock options and the issuance of restricted stock and unit awards. To offset the dilutive effect of the exercise of employee stock options, we periodically repurchase shares. See Note 8 – Equity for further discussion.

Stock-based compensation expense and the corresponding tax benefit are as follows: 
(in millions)
Year Ended December 31,
 
2015
 
2014
 
2013
Stock option expense
$
14

 
$
21

 
$
13

Restricted stock and unit awards expense
64

 
79

 
83

Total stock-based compensation expense
$
78

 
$
100

 
$
96

 
 
 
 
 
 
Tax benefit
$
29

 
$
38

 
$
37


Stock-based compensation of $2 million and $10 million is recorded in discontinued operations for the years ended December 31, 2014 and 2013, respectively, as a result of the sale of MHE and McGraw Hill Construction described further in Note 2 – Acquisitions and Divestitures.

Stock Options

Stock options may not be granted at a price less than the fair market value of our common stock on the date of grant. Stock options granted vest over a three year service period in equal annual installments and have a maximum term of 10 years. Stock option compensation costs are recognized from the date of grant, utilizing a three-year graded vesting method. Under this method, one-third of the costs are ratably recognized over the first twelve months, one-third of the costs are ratably recognized over a twenty-four month period starting from the date of grant with the remaining costs ratably recognized over a thirty-six month period starting from the date of grant.

Stock options granted in 2011 and prior years vest over a two year service period in equal annual installments and have a maximum term of 10 years. Stock option compensation costs for 2011 and prior year grants are recognized from the date of grant, utilizing a two-year graded vesting method. Under this method, fifty percent of the costs are ratably recognized over the first twelve months with the remaining costs ratably recognized over a twenty-four month period starting from the date of grant.

We use a lattice-based option-pricing model to estimate the fair value of options granted. The following assumptions were used in valuing the options granted: 
 
Year Ended December 31,
 
2015
 
2014
 
2013
Risk-free average interest rate
0.2 - 1.9%

 
0.1 - 2.9%

 
0.1 - 2.9%

Dividend yield
1.4%

 
1.4 - 1.8%

 
2.07 - 2.09%

Volatility
21 - 39%

 
18 - 41%

 
29 - 45%

Expected life (years)
6.3

 
6.21 - 6.25

 
6.1 - 6.2

Weighted-average grant-date fair value per option
$
27.57

 
$
23.41

 
$
14.46


Because lattice-based option-pricing models incorporate ranges of assumptions, those ranges are disclosed. These assumptions are based on multiple factors, including historical exercise patterns, post-vesting termination rates, expected future exercise patterns and the expected volatility of our stock price. The risk-free interest rate is the imputed forward rate based on the U.S. Treasury yield at the date of grant. We use the historical volatility of our stock price over the expected term of the options to estimate the expected volatility. The expected term of options granted is derived from the output of the lattice model and represents the period of time that options granted are expected to be outstanding.


87

Stock option activity is as follows: 
(in millions, except per award amounts)
Shares

Weighted average exercise price

Weighted-average remaining years of contractual term

Aggregate intrinsic value
Options outstanding as of December 31, 2014
8.1

 
$
45.18

 
 
 
 
Granted 1
—

 
$
90.30

 
 
 
 
Exercised
(2.2
)
 
$
76.08

 
 
 
 
Canceled, forfeited and expired
(0.1
)
 
$
53.28

 
 
 
 
Options outstanding as of December 31, 2015
5.8

 
$
45.61

 
4.5
 
$
308

Options exercisable as of December 31, 2015
5.0

 
$
42.10

 
4.0
 
$
283

(in millions, except per award amounts)
Shares

Weighted-average grant-date fair value
Nonvested options outstanding as of December 31, 2014
1.6

 
$
19.00

Granted 1
—

 
$
27.57

Vested
(0.7
)
 
$
18.24

Forfeited
(0.1
)
 
$
17.44

Nonvested options outstanding as of December 31, 2015
0.8

 
$
19.82

Total unrecognized compensation expense related to nonvested options
$
3

 
 
Weighted-average years to be recognized over
1.2

 
 
1 There were a minimal amount of stock options granted in 2015. During 2015, the Company stopped granting stock options.

The total fair value of our stock options that vested during the years ended December 31, 2015, 2014 and 2013 was $11 million, $6 million and $12 million, respectively.

We receive a tax deduction for certain stock option exercises during the period in which the options are exercised, generally for the excess of the quoted market value of the stock at the time of the exercise of the options over the exercise price of the options (“intrinsic value”). For the years ended December 31, 2015, 2014 and 2013, $69 million, $128 million and $43 million, respectively, of excess tax benefits from stock options exercised are reported in our cash flows used for financing activities.

Information regarding our stock option exercises is as follows: 
(in millions)
Year Ended December 31,
 
2015
 
2014
 
2013
Net cash proceeds from the exercise of stock options
$
86

 
$
193

 
$
258

Total intrinsic value of stock option exercises
$
94

 
$
168

 
$
158

Income tax benefit realized from stock option exercises
$
49

 
$
73

 
$
61


Restricted Stock and Unit Awards

Restricted stock and unit awards (performance and non-performance) have been granted under the 2002 Plan. Restricted stock and unit performance awards will vest only if we achieve certain financial goals over the performance period. Restricted stock non-performance awards have various vesting periods (generally three years), with vesting beginning on the first anniversary of the awards. Recipients of restricted stock and unit awards are not required to provide consideration to us other than rendering service.

The stock-based compensation expense for restricted stock and unit awards is determined based on the market price of our stock at the grant date of the award applied to the total number of awards that are anticipated to fully vest. For restricted stock and unit performance awards, adjustments are made to expense dependent upon financial goals achieved.


88

Restricted stock and unit activity for performance and non-performance awards is as follows: 
(in millions, except per award amounts)
Shares
 
Weighted-average grant-date fair value
Nonvested shares as of December 31, 2014
1.7

 
$
61.56

Granted
1.3

 
$
77.06

Vested
(1.6
)
 
$
96.00

Forfeited
(0.2
)
 
$
81.70

Nonvested shares as of December 31, 2015
1.2

 
$
92.39

Total unrecognized compensation expense related to nonvested awards
$
60

 
 
Weighted-average years to be recognized over
1.6

 
 

 
Year Ended December 31,
 
2015
 
2014
 
2013
Weighted-average grant-date fair value per award
$
77.06

 
$
77.74

 
$
44.22

Total fair value of restricted stock and unit awards vested
$
155

 
$
88

 
$
119

Tax benefit relating to restricted stock activity
$
24

 
$
30

 
$
33


8. Equity

Capital Stock

Two million shares of preferred stock, par value $1 per share, are authorized; none have been issued.

On January 27, 2016, the Board of Directors approved an increase in the dividends for 2016 to a quarterly rate of $0.36 per common share. 
 
Year Ended December 31,
 
2015
 
2014
 
2013
Quarterly dividend rate
$
0.33

 
$
0.30

 
$
0.28

Annualized dividend rate
$
1.32

 
$
1.20

 
$
1.12

Dividends paid (in millions)
$
363

 
$
326

 
$
308


Stock Repurchases

On December 4, 2013, the Board of Directors approved a stock repurchase program authorizing the purchase of 50 million shares (the "2013 Repurchase Program"), which was approximately 18% of the total shares of our outstanding common stock at that time. In 2011, the Board of Directors approved a stock repurchase program authorizing the purchase of up to 50 million shares (the “2011 Repurchase Program”), which was approximately 17% of the total shares of our outstanding common stock at that time.

Share repurchases were as follows: 
(in millions, except average price)
Year Ended December 31,
 
2015
 
2014
 
2013
Total number of shares purchased - 2013 Repurchase Program
10.1

 
4.4

 
—

Total number of shares purchased - 2011 Repurchase Program 1
—

 
—

 
16.9

Average price paid per share 2, 3
$
99.00

 
$
79.06

 
$
58.52

Total cash utilized 2
$
1,000

 
$
352

 
$
989

1 
2013 includes shares received as part of our accelerated share repurchase agreements as described in more detail below.
2 
In December of 2015, 0.3 million shares were repurchased for approximately $26 million, which settled in January of 2016. Excluding these 0.3 million shares, the average price paid per share was $98.98. In December of 2013, 0.1 million shares were repurchased for

89

approximately $10 million, which settled in January of 2014. Excluding these 0.1 million shares, the average price paid per share was $58.36. Cash used for financing activities only reflects those shares which settled during the year ended December 31, 2015 and 2014 resulting in $974 million and $362 million of cash used to repurchase shares, respectively.
3 
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.
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 December 31, 2015, 35.5 million shares remained available under the 2013 Repurchase Program. As of December 31, 2015, there were no remaining shares available under the 2011 Repurchase Program. The 2013 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.

Accelerated Share Repurchase Program

We entered into an accelerated share repurchase (“ASR”) agreement with a financial institution on March 25, 2013 to initiate share repurchases aggregating $500 million. The ASR agreement was structured as a capped ASR agreement in which we paid $500 million and received an initial delivery of approximately 7.2 million shares during the three months ended March 31, 2013, with an additional 1.4 million shares received on April 1, 2013, in the aggregate, representing the minimum number of shares of our common stock to be repurchased based on a calculation using a specific capped price per share. The total number of shares ultimately purchased was determined based on the volume weighted-average share price (“VWAP”), minus a discount, of our common stock from March 25, 2013 through July 22, 2013. On July 25, 2013 we received a final incremental delivery of 0.7 million shares determined using a VWAP of $53.7995 bringing the total amount of shares received to 9.3 million.
Redeemable Noncontrolling Interests

The agreement with the minority partners of our S&P Dow Jones Indices LLC partnership 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 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.

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

Net income attributable to noncontrolling interest
101

Distributions to noncontrolling interest
(98
)
Redemption value adjustment
107

Balance as of December 31, 2015
$
920



90

Accumulated Other Comprehensive Loss

The following table summarizes the changes in the components of accumulated other comprehensive loss for the year ended December 31, 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
(110
)
 
13

 
(1
)
 
(98
)
Reclassifications from accumulated other comprehensive loss to net earnings

 
12

1 


 
12

Net other comprehensive income
(110
)
 
25

 
(1
)
 
(86
)
Balance as of December 31, 2015
$
(193
)
 
$
(406
)
 
$
(1
)
 
$
(600
)
1 
See Note 6 — 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 $7 million for the year ended December 31, 2015.

9. Earnings (Loss) per Share

Basic earnings (loss) per common share is computed by dividing net income (loss) attributable to the common shareholders of the Company by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed in the same manner as basic earnings (loss) per share, 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, restricted stock and restricted stock units calculated using the treasury stock method.

The calculation for basic and diluted earnings (loss) per share is as follows:
(in millions, except per share data)
Year Ended December 31,
 
2015
 
2014
 
2013
Amount attributable to McGraw Hill Financial, Inc. common shareholders:
 
 
 
 
 
Income (loss) from continuing operations
$
1,156

 
$
(293
)
 
$
783

Income from discontinued operations
—

 
178

 
593

Net income (loss) attributable to the Company
$
1,156

 
$
(115
)
 
$
1,376

 
 
 
 
 
 
Basic weighted-average number of common shares outstanding
271.6

 
271.5

 
274.5

Effect of stock options and other dilutive securities
3.0

 
—

 
5.3

Diluted weighted-average number of common shares outstanding
274.6

 
271.5

 
279.8

 
 
 
 
 
 
Income (loss) from continuing operations:
 
 
 
 
 
Basic
$
4.26

 
$
(1.08
)
 
$
2.85

Diluted
$
4.21

 
$
(1.08
)
 
$
2.80

Income from discontinued operations:
 
 
 
 
 
Basic
$
—

 
$
0.66

 
$
2.16

Diluted
$
—

 
$
0.66

 
$
2.12

Net income (loss):
 
 
 
 
 
Basic
$
4.26

 
$
(0.42
)
 
$
5.01

Diluted
$
4.21

 
$
(0.42
)
 
$
4.91



91

Each period we have certain stock options and restricted performance shares that are excluded from the computation of diluted earnings (loss) per share. 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 or when a loss from continuing operations exists because the effect would have been antidilutive. Additionally, restricted performance shares are excluded because the necessary vesting conditions had not been met or when a loss from continuing operations exists. As of December 31, 2015, there were no stock options excluded as compared to 2.9 million and 1.2 million stock options excluded for the years ended December 31, 2014 and 2013, respectively. Additionally, restricted performance shares outstanding of 0.9 million, 3.2 million and 0.9 million as of December 31, 2015, 2014 and 2013, respectively, were excluded.

10. Restructuring

During 2015 and 2014, we continued to evaluate our cost structure and further identified cost savings associated with streamlining our management structure and our decision to exit non-strategic businesses. Our 2015 and 2014 restructuring plans consisted of a company-wide workforce reduction of approximately 550 positions 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. There was approximately $7 million of reserves from the 2014 restructuring plan that we have reversed in 2015, which offset the initial charge of $86 million recorded for the 2014 restructuring plan.

The initial restructuring charge recorded and the ending reserve balance as of December 31, 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
$
18

 
$
15

 
$
45

 
6

S&P Capital IQ and SNL
31

 
23

 
9

 
1

C&C 1
3

 
2

 
16

 
1

Corporate
11

 
10

 
16

 
5

Total
$
63

 
$
50

 
$
86

 
$
13

1 
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 retained McGraw Hill Construction's restructuring liabilities and the initial charge associated with the reserve has been bifurcated between continuing and discontinued operations. The 2014 restructuring plan includes an initial charge of $3 million.

For the year ended December 31, 2015, we have reduced the reserve for the 2015 restructuring plan by $13 million and for the years ended December 31, 2015 and 2014, we have reduced the reserve for the 2014 restructuring plan by $64 million and $9 million, respectively. The reductions primarily related to cash payments for employee severance costs.

11. Segment and Geographic Information

As discussed in Note 1 – Accounting Policies, 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. We use the same accounting policies for our segments as those described in Note 1 – Accounting Policies.


92

Segment information for the years ended December 31 is as follows:
 
(in millions)
Revenue
 
Operating Profit (Loss)
 
2015
2014
2013
 
2015
2014
2013
S&P Ratings
$
2,428

 
$
2,455

 
$
2,274

 
$
1,078

 
$
(583
)
 
$
882

S&P Capital IQ and SNL
1,405

 
1,237

 
1,170

 
228

 
228

 
189

S&P DJ Indices
597

 
552

 
493

 
392

 
347

 
266

C&C
971

 
893

 
841

 
357

 
290

 
280

Intersegment elimination 1
(88
)
 
(86
)
 
(76
)
 
—

 
—

 
—

Total operating segments
5,313

 
5,051

 
4,702

 
2,055

 
282

 
1,617

Unallocated expense 2
—

 
—

 
—

 
(138
)
 
(169
)
 
(259
)
Total
$
5,313

 
$
5,051

 
$
4,702

 
$
1,917

 
$
113

 
$
1,358

1 
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.
2 
The year ended December 31, 2015 includes a gain of $11 million related to the sale of our interest in a legacy McGraw Hill Construction investment and costs related to identified operating efficiencies primarily related to restructuring of $10 million. The year ended December 31, 2014 includes restructuring charges of $16 million. The year ended December 31, 2013 includes costs necessary to enable the separation of MHE and reduce our cost structure of $64 million, a $36 million non-cash impairment charge related to the sale of a data center and $13 million related to terminating various leases as we reduce our real estate portfolio.
(in millions)
Depreciation & Amortization
 
Capital Expenditures
 
2015
2014
2013
 
2015
2014
2013
S&P Ratings
$
43

 
$
43

 
$
45

 
$
48

 
$
33

 
$
40

S&P Capital IQ and SNL
70

 
50

 
49

 
60

 
38

 
39

S&P DJ Indices
8

 
7

 
10

 
4

 
2

 
4

C&C
29

 
24

 
22

 
18

 
11

 
17

Total operating segments
150

 
124

 
126

 
130

 
84

 
100

Corporate
7

 
10

 
11

 
9

 
8

 
17

Total
$
157

 
$
134

 
$
137

 
$
139

 
$
92

 
$
117


Segment information as of December 31 is as follows:
(in millions)
Total Assets
 
2015
 
2014
S&P Ratings
$
620

 
$
624

S&P Capital IQ and SNL
3,405

 
1,011

S&P DJ Indices
1,181

 
1,166

C&C
606

 
918

Total operating segments
5,812

 
3,719

Corporate 1
1,868

 
3,054

Assets of a business held for sale 2
503

 
—

Total
$
8,183

 
$
6,773

1 
Corporate assets consist principally of cash and cash equivalents, assets for pension benefits, deferred income taxes and leasehold improvements related to subleased areas.
2 
Includes J.D. Power as of December 31, 2015.

We have operations with foreign revenue and long-lived assets in approximately 90 countries. We do not have operations in any foreign country that represent more than 8% of our consolidated revenue. Transfers between geographic areas are recorded at agreed upon prices and intercompany revenue and profit are eliminated. No single customer accounted for more than 10% of our consolidated revenue.


93

The following provides revenue and long-lived assets by geographic region:
(in millions)
Revenue
 
Long-lived Assets
 
Years ended December 31,
 
December 31,
 
2015
 
2014
 
2013
 
2015
 
2014
U.S.
$
3,202

 
$
2,911

 
$
2,723

 
$
4,198

 
$
2,117

European region
1,265

 
1,316

 
1,226

 
419

 
430

Asia
566

 
528

 
483

 
63

 
54

Rest of the world
280

 
296

 
270

 
50

 
64

Total
$
5,313

 
$
5,051

 
$
4,702

 
$
4,730

 
$
2,665


 
Revenue
 
Long-lived Assets
 
Years ended December 31,
 
December 31,
 
2015
 
2014
 
2013
 
2015
 
2014
U.S.
60
%
 
58
%
 
58
%
 
89
%
 
80
%
European region
24

 
26

 
26

 
9

 
16

Asia
11

 
10

 
10

 
1

 
2

Rest of the world
5

 
6

 
6

 
1

 
2

Total
100
%
 
100
%
 
100
%
 
100
%
 
100
%

See Note 2 – Acquisitions and Divestitures and Note 10 – Restructuring, for actions that impacted the segment operating results.

12. Commitments and Contingencies

Rental Expense and Lease Obligations

We are committed under lease arrangements covering property, computer systems and office equipment. Leasehold improvements are amortized on a straight-line basis over the shorter of their economic lives or their lease term. Certain lease arrangements contain escalation clauses covering increased costs for various defined real estate taxes and operating services and the associated fees are recognized on a straight-line basis over the minimum lease period.

Rental expense for property and equipment under all operating lease agreements is as follows:
(in millions)
Years ended December 31,
 
2015
 
2014
 
2013
Gross rental expense
$
182

 
$
199

 
$
202

Less: sublease revenue
(14
)
 
(16
)
 
(29
)
Less: Rock-McGraw rent credit
(4
)
 
(23
)
 
(20
)
Net rental expense
$
164

 
$
160

 
$
153


In December of 2003, we sold our 45% equity investment in Rock-McGraw, Inc., which owned our then headquarters building in New York City, and remained an anchor tenant by concurrently leasing back space from the buyer through 2020. Proceeds from the disposition were $382 million and the sale resulted in a pre-tax gain, net of transaction costs, of $131 million ($58 million after-tax) upon disposition. As a result of the amount of building space we retained through our leaseback, a pre-tax gain of $212 million ($126 million after-tax) was deferred upon the disposition in 2003. In December of 2013, we entered into an arrangement with the buyer to shorten the lease to December of 2015 in exchange for approximately $60 million which was recorded as a reduction to the unrecognized deferred gain from the sale. The remaining gain was amortized over the remaining lease term as a reduction in rent expense. The amount of gain recognized for the years ended December 31, 2015, 2014 and 2013 was $4 million, $21 million and $15 million, respectively. The lease terminated in December of 2015.

Cash amounts for future minimum rental commitments, including rent payments on the sale-leaseback, under existing non-cancelable leases with a remaining term of more than one year, along with minimum sublease rental income to be received under non-cancelable subleases are shown in the following table.

94

(in millions)
Rent
commitment
 
Sublease
income
 
Net rent
2016
$
136

 
$
(14
)
 
$
122

2017
120

 
(13
)
 
107

2018
109

 
(13
)
 
96

2019
101

 
(13
)
 
88

2020
49

 
(2
)
 
47

2021 and beyond
162

 
—

 
162

Total
$
677

 
$
(55
)
 
$
622


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.
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.
Trani Prosecutorial Proceeding
The prosecutor in the Italian city of Trani has obtained 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. Trial commenced 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.

95

Shareholder Derivative Actions
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. Plaintiffs filed an opposition on December 8, 2015, and the Company and the individual defendants filed their reply on January 8, 2016. The court has scheduled oral argument on the motions to dismiss for April 22, 2016.
On January 28, 2016, a different purported shareholder commenced a separate putative derivative action on behalf of the Company in New York State Supreme Court titled L.A. Grika v. Harold McGraw III, et al.  The allegations in the complaint are substantially similar to those in the North Miami Beach matter described above.  The complaint asserts claims for, inter alia, breach of fiduciary duty, aiding and abetting breaches of fiduciary duty, unjust enrichment, contribution and indemnification against Harold McGraw III, Douglas L. Peterson, and nine former S&P Ratings employees.  The Company is reviewing the plaintiff’s complaint and intends to vigorously defend this matter.
The City of Swan
Australian government municipal councils filed suit against the Company and S&P International LLC in a representative action in April of 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 of 2015 to August of 2016. The Company and the plaintiffs are currently engaged in settlement discussions. The Company has established a reserve for potential settlement in an amount deemed adequate by management based on the facts and circumstances of the case. We can provide no assurance that the Company will not incur 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.
Commodities & Commercial Markets
McGraw Hill Construction
Under the terms of an asset purchase agreement with Skyline HoldCo LLC (“Skyline”) related to Skyline’s purchase of the McGraw Hill Construction business from the Company in November 2014, the Company agreed to retain liability with respect to the litigation captioned, Reed Construction Data Inc. v. The McGraw-Hill Companies, Inc. et al., 09 Civ. 8578 (JPO), in the United States District Court for the Southern District of New York, and any action instituted at any time by the parties thereto arising from substantially the same set of facts and circumstances.
Reed Construction Data filed this action in the U.S. District Court for the Southern District of New York in October of 2009, asserting 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. On January 7, 2016, the Second Circuit Court of Appeals affirmed the District Court’s grant of summary judgment.

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

96

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 and 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 years ended December 31, 2015, 2014 and 2013, S&P Dow Jones Indices LLC earned $63 million, $52 million and $46 million of revenue under the terms of the License Agreement, respectively. 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.


97

14. Quarterly Financial Information (Unaudited)
 
(in millions, except per share data)
First
quarter
 
Second
quarter
 
Third
quarter
 
Fourth
quarter
 
Total
year
2015
 
 
 
 
 
 
 
 
 
Revenue
$
1,273


$
1,342


$
1,324

  
$
1,374


$
5,313

Operating profit
$
501

 
$
582

 
$
410

 
$
424

 
$
1,917

Income from continuing operations
$
329


$
381


$
281

  
$
276


$
1,268

Net income
$
329


$
381


$
281

  
$
276


$
1,268

Net income attributable to McGraw Hill Financial common shareholders:
 
 
 
 
 
 
 
 
 
Income from continuing operations
$
303


$
353


$
252

  
$
248


$
1,156

Net income
$
303


$
353


$
252


$
248


$
1,156

 
 
 
 
 
 
 
 
 
 
Earnings per share attributable to McGraw Hill Financial, Inc. common shareholders:
 
 
 
 
 
 
 
 
 
Income from continuing operations:
 
 
 
 
 
 
 
 
 
Basic
$
1.11


$
1.29


$
0.93


$
0.92


$
4.26

Diluted
$
1.10


$
1.28


$
0.92


$
0.91


$
4.21

Net income:
 
 
 
 
 
 
 
 
 
Basic
$
1.11


$
1.29


$
0.93


$
0.92


$
4.26

Diluted
$
1.10


$
1.28


$
0.92


$
0.91


$
4.21

 
 
 
 
 
 
 
 
 
 
2014
 
 
 
 
 
 
 
 
 
Revenue
$
1,196


$
1,302


$
1,263

  
$
1,290


$
5,051

Operating profit (loss)
$
420

 
$
476

 
$
366

 
$
(1,148
)
 
$
113

Income (loss) from continuing operations
$
268


$
310


$
215


$
(984
)

$
(191
)
Income from discontinued operations
$
7


$
6


$
2


$
163


$
178

Net income (loss)
$
275


$
316


$
217


$
(821
)

$
(13
)
Net income attributable to McGraw Hill Financial common shareholders:
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
241


$
286


$
188

  
$
(1,009
)
  
$
(293
)
Income from discontinued operations
7


6


2

  
163

  
178

Net income (loss)
$
248


$
292


$
190


$
(846
)

$
(115
)
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per share attributable to McGraw Hill Financial, Inc. common shareholders:
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations:
 
 
 
 
 
 
 
 
 
Basic
$
0.89


$
1.05


$
0.69


$
(3.71
)

$
(1.08
)
Diluted
$
0.87


$
1.04


$
0.68


$
(3.71
)

$
(1.08
)
Income from discontinued operations:
 
 
 
 
 
 
 
 
 
Basic
$
0.02


$
0.02


$
0.01


$
0.60


$
0.66

Diluted
$
0.02


$
0.02


$
0.01


$
0.60


$
0.66

Net income (loss):
 
 
 
 
 
 
 
 
 
Basic
$
0.91


$
1.08


$
0.70


$
(3.11
)

$
(0.42
)
Diluted
$
0.89


$
1.06


$
0.69


$
(3.11
)

$
(0.42
)
Note - Totals presented may not sum due to rounding.

98

15. 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.

 
Statement of Income
 
Year Ended December 31, 2015
(in millions)
McGraw Hill Financial, Inc.
 
Standard & Poor's Financial Services LLC
 
Non-Guarantor Subsidiaries
 
Eliminations
 
McGraw Hill Financial Inc. Consolidated
Revenue
$
624

 
$
2,141

 
$
2,663

 
$
(115
)
 
$
5,313

Expenses:
 
 
 
 
 
 
 
 
 
Operating-related expenses
73

 
522

 
1,192

 
(115
)
 
1,672

Selling and general expenses
248

 
469

 
861

 
—

 
1,578

Depreciation
40

 
18

 
32

 
—

 
90

Amortization of intangibles
—

 
—

 
67

 
—

 
67

Total expenses
361

 
1,009

 
2,152

 
(115
)
 
3,407

Other income
—

 
—

 
(11
)
 
—

 
(11
)
Operating profit
263

 
1,132

 
522

 
—

 
1,917

Interest expense (income), net
112

 
—

 
(10
)
 
—

 
102

Non-operating intercompany transactions
282

 
222

 
(504
)
 
—

 
—

(Loss) income from continuing operations before taxes on income
(131
)
 
910

 
1,036

 
—

 
1,815

(Benefit) provision for taxes on income
(107
)
 
358

 
296

 
—

 
547

Equity in net income of subsidiaries
1,473

 
272

 
—

 
(1,745
)
 
—

Net income
1,449

 
824

 
740

 
(1,745
)
 
1,268

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

 
—

 
—

 
(112
)
 
(112
)
Net income attributable to McGraw Hill Financial, Inc.
$
1,449

 
$
824

 
$
740

 
$
(1,857
)
 
$
1,156

Comprehensive income
$
1,446

 
$
822

 
$
655

 
$
(1,741
)
 
$
1,182




99

 
Statement of Income
 
Year Ended December 31, 2014
(in millions)
McGraw Hill Financial, Inc.
 
Standard & Poor's Financial Services LLC
 
Non-Guarantor Subsidiaries
 
Eliminations
 
McGraw Hill Financial Inc. Consolidated
Revenue
$
598

 
$
2,043

 
$
2,525

 
$
(115
)
 
$
5,051

Expenses:
 
 
 
 
 
 
 
 
 
Operating-related expenses
78

 
389

 
1,275

 
(115
)
 
1,627

Selling and general expenses
296

 
2,350

 
522

 
—

 
3,168

Depreciation
41

 
17

 
28

 
—

 
86

Amortization of intangibles
4

 
—

 
44

 
—

 
48

Total expenses
419

 
2,756

 
1,869

 
(115
)
 
4,929

Other loss
3

 
—

 
6

 
—

 
9

Operating profit (loss)
176

 
(713
)
 
650

 
—

 
113

Interest expense (income), net
66

 
—

 
(7
)
 
—

 
59

Non-operating intercompany transactions
193

 
38

 
(231
)
 
—

 
—

(Loss) income from continuing operations before taxes on income
(83
)
 
(751
)
 
888

 
—

 
54

(Benefit) provision for taxes on income
(22
)
 
16

 
251

 
—

 
245

Equity in net (loss) income of subsidiaries
(443
)
 
248

 
—

 
195

 
—

(Loss) income from continuing operations
(504
)
 
(519
)
 
637

 
195

 
(191
)
Discontinued operations, net of tax:
 
 
 
 
 
 
 
 
 
Income from discontinued operations
18

 
—

 
—

 
—

 
18

Gain on sale of discontinued operations
160

 
—

 
—

 
—

 
160

Discontinued operations, net
178

 
—

 
—

 
—

 
178

Net (loss) income
$
(326
)
 
$
(519
)
 
$
637

 
$
195

 
(13
)
Less: net income from continuing operations attributable to noncontrolling interests
—

 
—

 
—

 
(102
)
 
(102
)
Net (loss) income attributable to McGraw Hill Financial, Inc.
$
(326
)
 
$
(519
)
 
$
637

 
$
93

 
$
(115
)
Comprehensive (loss) income
$
(495
)
 
$
(544
)
 
$
513

 
$
195

 
$
(331
)

100

 
Statement of Income
 
Year Ended December 31, 2013
(in millions)
McGraw Hill Financial, Inc.
 
Standard & Poor's Financial Services LLC
 
Non-Guarantor Subsidiaries
 
Eliminations
 
McGraw Hill Financial Inc. Consolidated
Revenue
$
570

 
$
1,931

 
$
2,306

 
$
(105
)
 
$
4,702

Expenses:
 
 
 
 
 
 
 
 
 
Operating-related expenses
128

 
556

 
985

 
(105
)
 
1,564

Selling and general expenses
338

 
532

 
761

 
—

 
1,631

Depreciation
40

 
19

 
27

 
—

 
86

Amortization of intangibles
5

 
—

 
46

 
—

 
51

Total expenses
511

 
1,107

 
1,819

 
(105
)
 
3,332

Other loss (income)
25

 
3

 
(16
)
 
—

 
12

Operating profit
34

 
821

 
503

 
—

 
1,358

Interest expense (income), net
65

 
—

 
(6
)
 
—

 
59

Non-operating intercompany transactions
245

 
66

 
(311
)
 
—

 
—

Income from continuing operations before taxes on income
(276
)
 
755

 
820

 
—

 
1,299

(Benefit) provision for taxes on income
(121
)
 
283

 
263

 
—

 
425

Equity in net income of subsidiaries
1,937

 
197

 
—

 
(2,134
)
 
—

Income from continuing operations
1,782

 
669

 
557

 
(2,134
)
 
874

Discontinued operations, net of tax:
 
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations
82

 
—

 
(79
)
 
—

 
3

Gain (loss) on sale of discontinued operations
644

 
—

 
(55
)
 
—

 
589

Discontinued operations, net
726

 
—

 
(134
)
 
—

 
592

Net income
$
2,508

 
$
669

 
$
423

 
$
(2,134
)
 
$
1,466

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

 
—

 
—

 
(91
)
 
(91
)
Less: net loss from discontinued operations attributable to noncontrolling interests

—

 
—

 
—

 
1

 
1

Net income attributable to McGraw Hill Financial, Inc.
$
2,508

 
$
669

 
$
423

 
$
(2,224
)
 
$
1,376

Comprehensive income
$
2,773

 
$
669

 
$
452

 
$
(2,106
)
 
$
1,788


101

 
Balance Sheet
 
December 31, 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
$
167

 
$
—

 
$
1,314

 
$
—

 
$
1,481

Accounts receivable, net of allowance for doubtful accounts
116

 
319

 
556

 
—

 
991

Intercompany receivable
208

 
1,872

 
1,273

 
(3,353
)
 
—

Deferred income taxes
75

 
10

 
24

 
—

 
109

Prepaid and other current assets
120

 
13

 
80

 
(1
)
 
212

Assets of a business held for sale
4

 
—

 
499

 
—

 
503

Total current assets
690

 
2,214

 
3,746

 
(3,354
)
 
3,296

Property and equipment, net of accumulated depreciation
141

 
3

 
126

 
—

 
270

Goodwill
17

 
40

 
2,816

 
9

 
2,882

Other intangible assets, net
—

 
—

 
1,522

 
—

 
1,522

Asset for pension benefits
—

 
—

 
36

 
—

 
36

Investments in subsidiaries
4,651

 
659

 
7,316

 
(12,626
)
 
—

Intercompany loans receivable
16

 
368

 
1,733

 
(2,117
)
 
—

Other non-current assets
67

 
19

 
91

 
—

 
177

Total assets
$
5,582

 
$
3,303

 
$
17,386

 
$
(18,088
)
 
$
8,183

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
71

 
$
54

 
$
81

 
$
—

 
$
206

Intercompany payable
2,144

 
675

 
535

 
(3,354
)
 
—

Accrued compensation and contributions to retirement plans
127

 
89

 
167

 
—

 
383

Short-term debt
143

 
—

 
—

 
—

 
143

Income taxes currently payable
1

 
—

 
55

 
—

 
56

Unearned revenue
254

 
586

 
582

 
(1
)
 
1,421

Accrued legal and regulatory settlements
—

 
115

 
6

 
—

 
121

Other current liabilities
190

 
(50
)
 
232

 
—

 
372

Liabilities of a business held for sale
80

 
—

 
126

 
—

 
206

Total current liabilities
3,010

 
1,469

 
1,784

 
(3,355
)
 
2,908

Long-term debt
3,468

 
—

 
—

 
—

 
3,468

Intercompany loans payable
21

 
—

 
2,096

 
(2,117
)
 
—

Pension and other postretirement benefits
230

 
—

 
46

 
—

 
276

Deferred income taxes
(246
)
 
17

 
252

 
—

 
23

Other non-current liabilities
221

 
81

 
43

 
—

 
345

Total liabilities
6,704

 
1,567

 
4,221

 
(5,472
)
 
7,020

Redeemable noncontrolling interest
—

 
—

 
—

 
920

 
920

Equity:
 
 
 
 
 
 
 
 
 
Common stock
412

 
—

 
2,337

 
(2,337
)
 
412

Additional paid-in capital
(184
)
 
1,179

 
10,174

 
(10,694
)
 
475

Retained income
6,701

 
557

 
987

 
(609
)
 
7,636

Accumulated other comprehensive loss
(322
)
 
—

 
(322
)
 
44

 
(600
)
Less: common stock in treasury
(7,729
)
 
—

 
(12
)
 
12

 
(7,729
)
Total equity - controlling interests
(1,122
)
 
1,736

 
13,164

 
(13,584
)
 
194

Total equity - noncontrolling interests
—

 
—

 
1

 
48

 
49

Total equity
(1,122
)
 
1,736

 
13,165

 
(13,536
)
 
243

Total liabilities and equity
$
5,582

 
$
3,303

 
$
17,386

 
$
(18,088
)
 
$
8,183


102

 
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
60

 
334

 
(34
)
 
—

 
360

Prepaid and other current assets
79

 
27

 
67

 
—

 
173

Total current assets
2,186

 
2,779

 
3,645

 
(4,648
)
 
3,962

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
20

 
358

 
1,594

 
(1,972
)
 
—

Other non-current assets
71

 
25

 
90

 
—

 
186

Total assets
$
3,768

 
$
3,861

 
$
14,791

 
$
(15,647
)
 
$
6,773

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
19

 
1

 
34

 
—

 
54

Unearned revenue
259

 
520

 
475

 
—

 
1,254

Accrued legal and regulatory settlements
—

 
1,609

 
—

 
—

 
1,609

Other current liabilities
194

 
—

 
208

 
—

 
402

Total current liabilities
3,230

 
2,913

 
2,336

 
(4,559
)
 
3,920

Long-term debt
795

 
—

 
—

 
—

 
795

Intercompany loans payable
109

 
—

 
1,952

 
(2,061
)
 
—

Pension and other postretirement benefits
272

 
—

 
61

 
—

 
333

Deferred income taxes
(260
)
 
51

 
249

 
—

 
40

Other non-current liabilities
219

 
73

 
44

 
—

 
336

Total liabilities
4,365

 
3,037

 
4,642

 
(6,620
)
 
5,424

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
6,275

 
(329
)
 
1,060

 
(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
(597
)
 
824

 
10,149

 
(9,888
)
 
488

Total equity - noncontrolling interests
—

 
—

 
—

 
51

 
51

Total equity
(597
)
 
824

 
10,149

 
(9,837
)
 
539

Total liabilities and equity
$
3,768

 
$
3,861

 
$
14,791

 
$
(15,647
)
 
$
6,773


103

 
Statement of Cash Flows
 
Year Ended December 31, 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
$
1,449

 
$
824

 
$
740

 
$
(1,745
)
 
$
1,268

Adjustments to reconcile income from continuing operations to cash provided by (used for) operating activities from continuing operations:
 
 
 
 
 
 
 
 
 
     Depreciation
40

 
18

 
32

 
—

 
90

     Amortization of intangibles
—

 
—

 
67

 
—

 
67

     Provision for losses on accounts receivable
1

 
1

 
6

 
—

 
8

     Deferred income taxes
33

 
290

 
(43
)
 
—

 
280

     Stock-based compensation
23

 
24

 
31

 
—

 
78

     Accrued legal and regulatory settlements
—

 
110

 
9

 
—

 
119

     Other
23

 
16

 
7

 
—

 
46

Changes in operating assets and liabilities, net of effect of acquisitions and dispositions:
 
 
 
 
 
 
 
 
 
     Accounts receivable
3

 
(27
)
 
(94
)
 
—

 
(118
)
     Prepaid and current assets
(13
)
 
14

 
(5
)
 
—

 
(4
)
     Accounts payable and accrued expenses
(75
)
 
(34
)
 
17

 
—

 
(92
)
     Unearned revenue
(5
)
 
66

 
68

 
—

 
129

     Accrued legal and regulatory settlement
—

 
(1,624
)
 
—

 
—

 
(1,624
)
     Other current liabilities
(32
)
 
(35
)
 
(11
)
 
—

 
(78
)
     Net change in prepaid/accrued income taxes
(54
)
 
—

 
115

 
—

 
61

     Net change in other assets and liabilities
78

 
8

 
(121
)
 
—

 
(35
)
Cash provided by (used for) operating activities from continuing operations
1,471

 
(349
)
 
818

 
(1,745
)
 
195

Investing Activities:
 
 
 
 
 
 
 
 
 
     Capital expenditures
(67
)
 
(10
)
 
(62
)
 
—

 
(139
)
     Acquisitions, net of cash acquired
(2,243
)
 
—

 
(153
)
 
—

 
(2,396
)
     Proceeds from dispositions
—

 
—

 
14

 
—

 
14

     Changes in short-term investments
—

 
—

 
(4
)
 
—

 
(4
)
Cash used for investing activities from continuing operations
(2,310
)
 
(10
)
 
(205
)
 
—

 
(2,525
)
Financing Activities:
 
 
 
 
 
 
 
 
 
     Additions to short-term debt, net
143

 
—

 
—

 
—

 
143

     Proceeds from issuance of senior notes, net
2,674

 
—

 
—

 
—

 
2,674

     Dividends paid to shareholders
(363
)
 
—

 
—

 
—

 
(363
)
     Dividends and other payments paid to noncontrolling interests
—

 
—

 
(104
)
 
—

 
(104
)
     Repurchase of treasury shares
(974
)
 
—

 
—

 
—

 
(974
)
     Exercise of stock options
80

 
—

 
6

 
—

 
86

     Contingent payments
(5
)
 
—

 
—

 
—

 
(5
)
     Purchase of additional CRISIL shares
—

 
—

 
(16
)
 
—

 
(16
)
     Excess tax benefits from share-based payments
69

 
—

 
—

 
—

 
69

     Intercompany financing activities
(2,020
)
 
359

 
(84
)
 
1,745

 
—

Cash (used for) provided by financing activities from continuing operations
(396
)
 
359

 
(198
)
 
1,745

 
1,510

Effect of exchange rate changes on cash from continuing operations
—

 
—

 
(67
)
 
—

 
(67
)
Cash (used for) provided by continuing operations
(1,235
)
 
—

 
348

 
—

 
(887
)
Discontinued Operations:
 
 
 
 
 
 
 
 
 
     Cash used for operating activities
—

 
—

 
(129
)
 
—

 
(129
)
Cash used for discontinued operations
—

 
—

 
(129
)
 
—

 
(129
)
Net change in cash and cash equivalents
(1,235
)
 
—

 
219

 
—

 
(1,016
)
Cash and cash equivalents at beginning of year
1,402

 
—

 
1,095

 
—

 
2,497

Cash and cash equivalents at end of year
$
167

 
$
—

 
$
1,314

 
$
—

 
$
1,481


104

 
Statement of Cash Flows
 
Year Ended December 31, 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 (loss) income
$
(326
)
 
$
(519
)
 
$
637

 
$
195

 
$
(13
)
Less: discontinued operations, net
178

 
—

 
—

 
—

 
178

(Loss) income from continuing operations
(504
)
 
(519
)
 
637

 
195

 
(191
)
Adjustments to reconcile (loss) income from continuing operations to cash (used for) provided by operating activities from continuing operations:
 
 
 
 
 
 
 
 
 
     Depreciation
41

 
17

 
28

 
—

 
86

     Amortization of intangibles
4

 
—

 
44

 
—

 
48

     Provision for losses on accounts receivable
—

 
5

 
6

 
—

 
11

     Deferred income taxes
42

 
(272
)
 
(15
)
 
—

 
(245
)
     Stock-based compensation
31

 
34

 
35

 
—

 
100

     Accrued legal and regulatory settlements
—

 
1,587

 
—

 
—

 
1,587

     Other
21

 
39

 
20

 
—

 
80

Changes in operating assets and liabilities, net of effect of acquisitions and dispositions:
 
 
 
 
 
 
 
 
 
     Accounts receivable
(11
)
 
47

 
(45
)
 
—

 
(9
)
     Prepaid and current assets
(42
)
 
(17
)
 
52

 
—

 
(7
)
     Accounts payable and accrued expenses
(83
)
 
(47
)
 
—

 
—

 
(130
)
     Unearned revenue
8

 
26

 
44

 
—

 
78

     Accrued legal and regulatory settlement
—

 
(35
)
 
—

 
—

 
(35
)
     Other current liabilities
(51
)
 
45

 
(10
)
 
—

 
(16
)
     Net change in prepaid/accrued income taxes
13

 
3

 
(109
)
 
—

 
(93
)
     Net change in other assets and liabilities
(131
)
 
5

 
71

 
—

 
(55
)
Cash (used for) provided by operating activities from continuing operations
(662
)
 
918

 
758

 
195

 
1,209

Investing Activities:
 
 
 
 
 
 
 
 
 
     Capital expenditures
(26
)
 
(14
)
 
(52
)
 
—

 
(92
)
     Acquisitions, net of cash acquired
—

 
—

 
(71
)
 
—

 
(71
)
     Proceeds from dispositions
63

 
—

 
20

 
—

 
83

     Changes in short-term investments
—

 
—

 
15

 
—

 
15

Cash provided by (used for) investing activities from continuing operations
37

 
(14
)
 
(88
)
 
—

 
(65
)
Financing Activities:
 
 
 
 
 
 
 
 
 
    Dividends paid to shareholders
(326
)
 
—

 
—

 
—

 
(326
)
Dividends and other payments paid to noncontrolling interests
—

 
—

 
(84
)
 
—

 
(84
)
     Repurchase of treasury shares
(362
)
 
—

 
—

 
—

 
(362
)
     Exercise of stock options
184

 
—

 
9

 
—

 
193

     Contingent payments
—

 
—

 
(11
)
 
—

 
(11
)
     Excess tax benefits from share-based payments
128

 
—

 
—

 
—

 
128

     Intercompany financing activities
1,377

 
(904
)
 
(278
)
 
(195
)
 
—

Cash provided by (used for) financing activities from continuing operations
1,001

 
(904
)
 
(364
)
 
(195
)
 
(462
)
Effect of exchange rate changes on cash from continuing operations
3

 
—

 
(68
)
 
—

 
(65
)
Cash provided by continuing operations
379

 
—

 
238

 
—

 
617

Discontinued Operations:
 
 
 
 
 
 
 
 
 
     Cash provided by operating activities
18

 
—

 
—

 
—

 
18

     Cash provided by investing activities
320

 
—

 
—

 
—

 
320

Cash provided by discontinued operations
338

 
—

 
—

 
—

 
338

Net change in cash and cash equivalents
717

 
—

 
238

 
—

 
955

Cash and cash equivalents at beginning of year
685

 
—

 
857

 
—

 
1,542

Cash and cash equivalents at end of year
$
1,402

 
$
—

 
$
1,095

 
$
—

 
$
2,497


105

 
Statement of Cash Flows
 
Year Ended December 31, 2013
(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
$
2,508

 
$
669

 
$
423

 
$
(2,134
)
 
$
1,466

Less: discontinued operations, net
726

 
—

 
(134
)
 
—

 
592

Income from continuing operations
1,782

 
669

 
557

 
(2,134
)
 
874

Adjustments to reconcile income from continuing operations to cash provided by (used for) operating activities from continuing operations:
 
 
 
 
 
 
 
 
 
     Depreciation
40

 
19

 
27

 
—

 
86

     Amortization of intangibles
5

 
—

 
46

 
—

 
51

     Provision for losses on accounts receivable
1

 
7

 
14

 
—

 
22

     Deferred income taxes
39

 
—

 
4

 
—

 
43

     Stock-based compensation
35

 
33

 
28

 
—

 
96

     Accrued legal and regulatory settlements
—

 
—

 
—

 
—

 
—

     Other
68

 
10

 
18

 
—

 
96

Changes in operating assets and liabilities, net of effect of acquisitions and dispositions:
 
 
 
 
 
 
 
 
 
     Accounts receivable
(2
)
 
(4
)
 
(29
)
 
—

 
(35
)
     Prepaid and current assets
(14
)
 
(7
)
 
(8
)
 
—

 
(29
)
     Accounts payable and accrued expenses
(120
)
 
18

 
8

 
—

 
(94
)
     Unearned revenue
17

 
43

 
49

 
—

 
109

     Other current liabilities
(43
)
 
(24
)
 
(22
)
 
—

 
(89
)
     Net change in prepaid/accrued income taxes
(265
)
 
(3
)
 
30

 
—

 
(238
)
     Net change in other assets and liabilities
(190
)
 
84

 
(4
)
 
—

 
(110
)
Cash provided by operating activities from continuing operations
1,353

 
845

 
718

 
(2,134
)
 
782

Investing Activities:
 
 
 
 
 
 
 
 
 
     Capital expenditures
(61
)
 
(19
)
 
(37
)
 
—

 
(117
)
     Acquisitions, net of cash acquired
—

 
—

 
(47
)
 
—

 
(47
)
     Proceeds from dispositions
35

 
—

 
16

 
—

 
51

     Changes in short-term investments
—

 
—

 
(17
)
 
—

 
(17
)
Cash used for investing activities from continuing operations
(26
)
 
(19
)
 
(85
)
 
—

 
(130
)
Financing Activities:
 
 
 
 
 
 
 
 
 
     Payments on short-term debt
(457
)
 
—

 
—

 
—

 
(457
)
     Dividends paid to shareholders
(308
)
 
—

 
—

 
—

 
(308
)
 Dividends and other payments paid to noncontrolling interests
—

 
—

 
(75
)
 
—

 
(75
)
     Repurchase of treasury shares
(978
)
 
—

 
—

 
—

 
(978
)
     Exercise of stock options
254

 
—

 
4

 
—

 
258

     Contingent payments
—

 
—

 
(12
)
 
—

 
(12
)
     Purchase of additional CRISIL shares
—

 
—

 
(214
)
 
—

 
(214
)
     Excess tax benefits from share-based payments
43

 
—

 
—

 
—

 
43

     Intercompany financing activities
(43
)
 
(826
)
 
(1,265
)
 
2,134

 
—

Cash used for financing activities from continuing operations
(1,489
)
 
(826
)
 
(1,562
)
 
2,134

 
(1,743
)
Effect of exchange rate changes on cash from continuing operations
8

 
—

 
(9
)
 
—

 
(1
)
Cash used for continuing operations
(154
)
 
—

 
(938
)
 
—

 
(1,092
)
Discontinued Operations:
 
 
 
 
 
 
 
 
 
     Cash provided by (used for) operating activities
720

 
—

 
(951
)
 
—

 
(231
)
     Cash provided by investing activities
—

 
—

 
2,129

 
—

 
2,129

     Cash used for financing activities
—

 
—

 
(25
)
 
—

 
(25
)
     Effect of exchange rate changes on cash
—

 
—

 
1

 
—

 
1

Cash provided by discontinued operations
720

 
—

 
1,154

 
—

 
1,874

Net change in cash and cash equivalents
566

 
—

 
216

 
—

 
782

Cash and cash equivalents at beginning of year
119

 
—

 
641

 
—

 
760

Cash and cash equivalents at end of year
$
685

 
$
—

 
$
857

 
$
—

 
$
1,542



106

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.


Item 9a. Controls and Procedures

We have filed the required certifications under Section 302 of the Sarbanes-Oxley Act of 2002 incorporated herein by reference from Exhibits (31.1) and (31.2) to this Form 10-K. In addition we have filed the required certifications under Section 906 of the Sarbanes-Oxley Act of 2002 incorporated herein by reference from Exhibit (32) to this Form 10-K.

This Item 9a. includes information concerning the controls and control evaluations referred to in the required certifications.

Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed so that information required to be disclosed in our reports filed with 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 December 31, 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 U.S. 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 December 31, 2015.

Management’s Annual Report on Internal Control Over Financial Reporting

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, management is required to provide the following report on our internal control over financial reporting:
1.
Management is responsible for establishing and maintaining adequate internal control over financial reporting.
2.
Management has evaluated the system of internal control using the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework (“COSO 2013 framework”). Management has selected the COSO 2013 framework for its evaluation as it is a control framework recognized by the SEC and the Public Company Accounting Oversight Board that is free from bias, permits reasonably consistent qualitative and quantitative measurement of our internal controls, is sufficiently complete so that relevant controls are not omitted and is relevant to an evaluation of internal controls over financial reporting.
3.
Based on management’s evaluation under this framework, management has concluded that our internal controls over financial reporting were effective as of December 31, 2015. There are no material weaknesses in our internal control over financial reporting that have been identified by management.
4.
Management has excluded SNL Financial LC ("SNL") from its assessment of internal control over financial reporting as of December 31, 2015, since it was acquired on September 1, 2015. SNL has $2.5 billion and $2.3 billion of total and net assets, respectively, as of December 31, 2015 and $85 million and $9 million of revenues and net loss attributable to McGraw Hill Financial, Inc., respectively, for the year then ended.
5.
Our independent registered public accounting firm, Ernst & Young LLP, has audited our consolidated financial statements for the year ended December 31, 2015, and has issued their reports on the financial statements and the effectiveness of our internal control over financial reporting. These reports are located on pages 56 and 57 of this Form 10-K.

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.



107

Item 9b. 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 2015 attributable to the transactions or dealings by the Company described below was approximately $702,700, with net profit from such sales being a fraction of the revenues.

During 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 fifteen 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 fifteen Iran-linked customers was, at the time of the relevant transactions, designated by OFAC pursuant to Executive Order 13382, and appears, based on publicly available information, to be owned or controlled by GOI entities; one was, at the time of the relevant transactions, designated by OFAC pursuant to Executive Order 13382, and is designated by OFAC as a GOI entity; eight 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 so that such activity continues to be permissible under U.S. sanctions.






108

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Information about our directors is contained under the caption “Board of Directors and Corporate Governance-Director Biographies” in our Proxy Statement for our 2016 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2015 (the “2016 Proxy Statement”) and is incorporated herein by reference.
The information under the heading “Executive Officers of the Registrant” in Part I of this Form 10-K is also incorporated herein by reference.
Code of Ethics

We have adopted a Code of Ethics that applies to our CEO, CFO, chief accounting officer and senior financial officers. To access such code, go to the Corporate Governance section of our Investor Relations Web site at http://investor.mhfi.com. Any waivers that may in the future be granted from such Code will be posted at such Web site address. In addition to our Code of Ethics for the CEO and senior financial officers noted above, the following documents may be found on our Web site at the above Web site address:
•
Code of Business Ethics for all employees;
•
Code of Business Conduct and Ethics for Directors;
•
Employee Complaint Procedures;
•
Certificate of Incorporation;
•
By-Laws;
•
Corporate Governance Guidelines;
•
Audit Committee Charter;
•
Compensation and Leadership Development Committee Charter;
•
Nominating and Corporate Governance Committee Charter;
•
Financial Policy Committee Charter; and
•
Executive Committee Charter.

The foregoing documents are also available in print, free of charge, to any shareholder who requests them. Requests for printed copies may be e-mailed to corporate.secretary@mhfi.com or mailed to the Corporate Secretary, McGraw Hill Financial, Inc., 55 Water Street, New York, NY 10041-0001.

Information about the procedures by which security holders may recommend nominees to our Board of Directors can be found in our 2016 Proxy Statement under the caption “Board of Directors and Corporate Governance-Committees of the Board of Directors-Nominating and Corporate Governance Committee” and is incorporated herein by reference.
Information concerning the composition of the Audit Committee and our Audit Committee financial experts is contained in our 2016 Proxy Statement under the caption “Board of Directors and Corporate Governance-Committees of the Board of Directors-Audit Committee” and is incorporated herein by reference.
New York Stock Exchange Certification

Promptly following the 2016 annual meeting of shareholders, we intend to file with the NYSE the CEO certification regarding our compliance with the NYSE’s corporate governance listing standards as required by NYSE Rule 303A.12. Last year, we filed this CEO certification with the NYSE on May 1, 2015.


Item 11. Executive Compensation

Information about director and executive officer compensation, Compensation Committee interlocks and the Compensation Committee Report is contained in our 2016 Proxy Statement under the captions “2015 Director Compensation,” “Board of

109

Directors and Corporate Governance-Compensation Committee Interlocks and Insider Participation,” and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Set forth below is information with respect to securities authorized for issuance under equity compensation plans:
The following table details our equity compensation plans as of December 31, 2015:
 
Equity Compensation Plans’ Information
 
 
(a)
 
(b)
 
(c)
 
Plan category
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
 
Weighted-average
exercise price of
outstanding options,
warrants and rights
 
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
 
Equity compensation plans approved by security holders
5,814,328

  
$
45.61

 
32,921,637

  
Equity compensation plans not approved by security holders
—

  
—

 
—

  
Total
5,814,328

1 
$
45.61

 
32,921,637

2,3 
1 
Shares to be issued upon exercise of outstanding options under our Stock Incentive Plans.
2 
Included in this number are 92,649 shares reserved for issuance under the Director Deferred Stock Ownership Plan. The remaining 32,828,988 shares are reserved for issuance under the 2002 Stock Incentive Plan (the “2002 Plan”) for Performance Stock, Restricted Stock, Other Stock-Based Awards, Stock Options and Stock Appreciation Rights.
3 
Under the terms of the 2002 Plan, shares subject to an award or shares paid in settlement of a dividend equivalent reduce the number of shares available under the 2002 Plan by one share for each such share granted or paid.

The 2002 Plan is also governed by certain share recapture provisions. The aggregate number of shares of stock available under the 2002 Plan for issuance are increased by the number of shares of stock granted as an award under the 2002 Plan that are:
•
forfeited, cancelled, settled in cash or property other than stock, or otherwise not distributable under the 2002 Plan;
•
tendered or withheld to pay the exercise or purchase price of an award under the 2002 Plan or to satisfy applicable wage or other required tax withholding in connection with the exercise, vesting or payment of, or other event related to, an award under the 2002 Plan; or
•
repurchased by us with the option proceeds in respect of the exercise of a stock option under the 2002 Plan.

Information on the number of shares our common stock beneficially owned by each director and named executive officer, by all directors and executive officers as a group and on each beneficial owner of more than 5% of our common stock is contained under the caption “Ownership of Company Stock” in our 2016 Proxy Statement and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information with respect to certain relationships and related transactions and director independence is contained under the captions “Board of Directors and Corporate Governance-Transactions with Related Persons” in our 2016 Proxy Statement and is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

During the year ended December 31, 2015, Ernst & Young LLP audited the consolidated financial statements of the Registrant and its subsidiaries.


110

Information on our Audit Committee’s pre-approval policy for audit services and information on our principal accountant fees and services is contained in our 2016 Proxy Statement under the caption “Independent Registered Public Accounting Firm’s Fees and Services” and is incorporated herein by reference.



111

PART IV

Item 15. Exhibits, Financial Statement Schedules

(a) Documents filed as part of this Form 10-K:

1.
Financial Statements
•
Reports of Independent Registered Public Accounting Firm
•
Consolidated Statements of Income for the three years ended December 31, 2015
•
Consolidated Statements of Comprehensive Income for the three years ended December 31, 2015
•
Consolidated Balance Sheets as of December 31, 2015 and 2014
•
Consolidated Statements of Cash Flows for the three years ended December 31, 2015
•
Consolidated Statements of Equity for the three years ended December 31, 2015
•
Notes to the Consolidated Financial Statements

2.
Financial Schedule
•
Schedule II—Valuation and Qualifying Accounts

All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto.

3.
Exhibits – The exhibits filed as part of this Form 10-K are listed in the Exhibit Index immediately preceding such Exhibits, and such Exhibit Index is incorporated herein by reference.

112

McGraw Hill Financial
Schedule II – Valuation and Qualifying Accounts
(in millions)
 
Additions/(deductions)
Balance at
beginning of
year
 
Net charges
to income
 
Deductions and other 1
 
Balance at end
of year
Year ended December 31, 2015
 
 
 
 
 
 
 
Allowance for doubtful accounts
$
38

 
$
12

 
$
(13
)
 
$
37

 
 
 
 
 
 
 
 
Year ended December 31, 2014
 
 
 
 
 
 
 
Allowance for doubtful accounts
$
50

 
$
2

 
$
(14
)
 
$
38

 
 
 
 
 
 
 
 
Year ended December 31, 2013
 
 
 
 
 
 
 
Allowance for doubtful accounts
$
51

 
$
20

 
$
(21
)
 
$
50

1 
Primarily includes uncollectible accounts written off, net of recoveries, impact of acquisitions and divestitures and adjustments for foreign currency translation.


113

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
McGraw Hill Financial, Inc.
Registrant
 
By:
 
/s/ Douglas L. Peterson
Douglas L. Peterson
President and Chief Executive Officer

February 11, 2016

Each individual whose signature appears below constitutes and appoints Douglas L. Peterson and Jack F. Callahan, Jr., and each of them singly, his or her true and lawful attorneys-in-fact and agents with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Form 10-K filed with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all the said attorneys-in-fact and agents or any of them or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on February 11, 2016 on behalf of the Registrant by the following persons who signed in the capacities as set forth below under their respective names.
 
 
/s/ Douglas L. Peterson
Douglas L. Peterson
President and Chief Executive Officer and Director
 
/s/ Jack F. Callahan, Jr.
Jack F. Callahan, Jr.
Executive Vice President and Chief Financial Officer
 
/s/ Robert J. MacKay
Robert J. MacKay
Senior Vice President and Corporate Controller
 
/s/ Charles E. Haldeman, Jr.
Charles E. Haldeman, Jr.
Chairman of the Board and Director
 
/s/ Sir Winfried F.W. Bischoff
Sir Winfried F.W. Bischoff
Director
 
 
/s/ William D. Green
William D. Green
Director
 
/s/ Rebecca Jacoby
Rebecca Jacoby
Director
 
/s/ Robert P. McGraw
Robert P. McGraw
Director
 
/s/ Hilda Ochoa-Brillembourg
Hilda Ochoa-Brillembourg
Director
 
/s/ Sir Michael Rake
Sir Michael Rake
Director
 
/s/ Edward B. Rust, Jr.
Edward B. Rust, Jr.
Director
 
/s/ Kurt L. Schmoke
Kurt L. Schmoke
Director
 
/s/ Sidney Taurel
Sidney Taurel
Director
 
/s/ Richard E. Thornburgh
Richard E. Thornburgh
Director

114

Exhibit
Number
Exhibit Index
 
 
(2.1
)
Purchase and Sale Agreement between the Registrant, McGraw-Hill Education LLC, various sellers named therein and MHE Acquisition, LLC, dated November 26, 2012 (“Sale Agreement”), incorporated by reference from Registrant's Form 8-K filed November 26, 2012.
 
 
(2.2
)
Amendment No. 1 to Sale Agreement, dated March 4, 2013, incorporated by reference from Registrant’s Form 8-K filed March 5, 2013.
 
 
(2.3
)
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.
 
 
(3.1
)
Restated Certificate of Incorporation of Registrant, incorporated by reference from Registrant’s Form 8-K filed April 28, 2011.
 
 
(3.2
)
Certificate of Amendment of the Certificate of Incorporation of Registrant, dated May 1, 2013, incorporated by reference from Registrant’s Form 8-K filed May 1, 2013.
 
 
(3.3
)
By-Laws of Registrant, dated February 26, 2014, incorporated by reference from the Registrant’s Form 8-K filed February 26, 2014.
 
 
(3.4
)
Certificate of Change of the Certificate of Incorporation of the Company, as incorporated by reference from the Registrant’s Form 8-K filed on July 1, 2015.
 
 
(4.1
)
Indenture dated as of November 2, 2007 between the Registrant, as issuer, and The Bank of New York, as trustee, incorporated by reference from Registrant’s Form 8-K filed November 2, 2007.
 
 
(4.2
)
First Supplemental Indenture, dated January 1, 2009, between the Company and The Bank of New York Mellon, as trustee, incorporated by reference from Registrant’s Form 8-K filed January 2, 2009.
 
 
(4.3
)
Indenture dated as of May 26, 2015, among the Company, Standard & Poor's Financial Services LLC and U.S. Bank National Association, as trustee, as incorporated by reference from the Registrant’s Form 8-K filed on May 26, 2015.
 
 
(4.4
)
First Supplemental Indenture dated as of May 26, 2015, among the Company, Standard & Poor's Financial Services LLC and U.S. Bank National Association, as trustee, as incorporated by reference from the Registrant’s Form 8-K filed on May 26, 2015.
 
 
(4.5
)
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 by reference from the Registrant’s Form 8-K filed on August 18, 2015.
 
 
(4.6
)
Form of 2.500% Senior Note due 2018.
 
 
(4.7
)
Form of 3.300% Senior Note due 2020.
 
 
(4.8
)
Form of 4.000% Senior Note due 2025.
 
 
(4.9
)
Form of 4.400% Senior Note due 2026.
 
 
(10.1
)
Form of Indemnification Agreement between Registrant and each of its directors and certain of its executive officers, incorporated by reference from Registrant’s Form 10-K for the fiscal year ended December 31, 2004.
 
 
(10.2)*

Registrant’s 2002 Stock Incentive Plan, as amended and restated as of February 26, 2014, incorporated by reference from the Registrant’s Form 10-Q filed April 29, 2014.
 
 
(10.3)*

Form of Performance Share Unit Terms and Conditions, incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 2014.
 
 

115

(10.4)*

Form of Performance Share Unit Terms and Conditions, as incorporated by reference from the Registrant’s Form 10-Q filed on April 28, 2015.
 
 
(10.5)*

Form of Restricted Stock Unit Award Terms and Conditions, as incorporated by reference from the Registrant’s Form 10-Q filed on April 28, 2015.
 
 
(10.6)*

Form of Stock Option Award, incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 2013.
 
 
(10.7)*

Registrant’s Key Executive Short Term Incentive Compensation Plan, as amended effective January 1, 2014, incorporated by reference from Registrant’s Form 10-Q filed April 29, 2014.
 
 
(10.8)*

Registrant’s Key Executive Short-Term Incentive Deferred Compensation Plan, as amended and restated as of January 1, 2008, incorporated by reference from Registrant’s Form 10-K for the fiscal year ended December 31, 2007.
 
 
(10.9)*

Resolutions terminating deferrals under the Key Executive Short-Term Deferred Compensation Plan, dated October 23, 2014, incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 2014.
 
 
(10.10)*

Registrant's Senior Executive Severance Plan, amended and restated as of January 1, 2015, incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 2014.
 
 
(10.11
)
$1,000,000,000 Four-Year Credit Agreement dated as of June 19, 2013 among the Registrant, Standard & Poor’s Financial Services LLC, as guarantor, the lenders listed therein, JP Morgan Chase Bank, N.A., as administrative agent, and Bank of America, N.A., as syndication agent, incorporated by reference from the Registrant’s Form 8-K filed June 20, 2013.
 
 
(10.12
)
Revolving Five-Year Credit Agreement, dated as of June 30, 2015, among the Company, Standard & Poor's Financial Services LLC, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, as incorporated by reference from the Registrant’s Form 8-K filed on July 1, 2015.
 
 
(10.13)*

Registrant’s Employee Retirement Plan Supplement, as amended and restated as of January 1, 2008, incorporated by reference from Registrant’s Form 10-K for the fiscal year ended December 31, 2007.
 
 
(10.14)*

First Amendment to Registrant’s Employee Retirement Plan Supplement, effective as of January 1, 2009, incorporated by reference from the Registrant’s Form 10-K for the fiscal year ended December 31, 2009.
 
 
(10.15)*

Second Amendment to Registrant’s Employee Retirement Plan Supplement, effective generally as of January 1, 2010, incorporated by reference from the Registrant’s Form 10-K for the fiscal year ended December 31, 2009.
 
 
(10.16)*

Third Amendment to Registrant’s Employee Retirement Plan Supplement, effective generally as of January 1, 2012, incorporated from the Registrant's Form 10-K for the fiscal year ended December 31, 2011.
 
 
(10.17)*

Fourth Amendment to Registrant’s Employee Retirement Plan Supplement, effective generally as of May 1, 2013, incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 2013.
 
 
(10.18)*

Standard & Poor’s Employee Retirement Plan Supplement, as amended and restated as of January 1, 2008, incorporated by reference from the Registrant’s Form 10-K for the fiscal year ended December 31, 2009.
 
 
(10.19)*

First Amendment to Standard & Poor’s Employee Retirement Plan Supplement, effective as of December 2, 2009, incorporated by reference from the Registrant’s Form 10-K for the fiscal year ended December 31, 2009.
 
 
(10.20)*

Second Amendment to Standard & Poor’s Employee Retirement Plan Supplement, effective as of January 1, 2010, incorporated by reference from the Registrant’s Form 10-K for the fiscal year ended December 31, 2009.
 
 
(10.21)*

Third Amendment to Standard & Poor’s Employee Retirement Plan Supplement, effective as of January 1, 2012, incorporated from the Registrant's Form 10-K for the fiscal year ended December 31, 2011.
 
 

116

(10.22)*

Fourth Amendment to Standard & Poor’s Employee Retirement Plan Supplement, effective generally as of January 1, 2014, incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 2013.
 
 
(10.23)*

Fifth Amendment to Standard & Poor’s Employee Retirement Plan Supplement, dated December 23, 2014, incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 2014.
 
 
(10.24)*

Registrant’s 401(k) Savings and Profit Sharing Supplement, as amended and restated as of January 1, 2015, incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 2014.
 
 
(10.25)*

Registrant’s Management Supplemental Death and Disability Benefits Plan, as amended and restated effective as of September 23, 2014, incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 2014.
 
 
(10.26)*

Registrant’s Senior Executive Supplemental Death, Disability & Retirement Benefits Plan, as amended and restated as of January 1, 2008, incorporated by reference from Registrant's Form 10-K for the fiscal year ended December 31, 2007.
 
 
(10.27)*

Amendment to Registrant’s Senior Executive Supplemental Death, Disability & Retirement Benefits Plan, effective as of January 1, 2010, incorporated by reference from the Registrant’s Form 10-K for the fiscal year ended December 31, 2009.
 
 
(10.28)*

Registrant's Director Retirement Plan, incorporated by reference from Registrant’s Form SE filed March 29, 1990 in connection with Registrant’s Form 10-K for the fiscal year ended December 31, 1989.
 
 
(10.29)*

Resolutions Freezing Existing Benefits and Terminating Additional Benefits under Registrant’s Directors Retirement Plan, as adopted on January 31, 1996, incorporated by reference from Registrant’s Form 10-K for the fiscal year ended December 31, 1996.
 
 
(10.30)*

Registrant’s Director Deferred Compensation Plan, as amended and restated as of January 1, 2008, incorporated by reference from Registrant’s Form 10-K for the fiscal year ended December 31, 2007.
 
 
(10.31)*

Registrant’s Director Deferred Stock Ownership Plan, incorporated by reference from Registrant’s Form 10-K for the fiscal year ended December 31, 2010.
 
 
(10.32)*

Amendment dated December 9, 2011 to offer letter dated November 2, 2010 to Jack F. Callahan, Jr., Executive Vice President and Chief Financial Officer, incorporated from the Registrant's Form 10-K for the fiscal year ended December 31, 2011.
 
 
(10.33)*

Amendment dated December 9, 2011 to offer letter dated October 27, 2010 to John L. Berisford, Executive Vice President, Human Resources, incorporated from the Registrant's Form 10-K for the fiscal year ended December 31, 2011.
 
 
(10.34)*

Letter Agreement, dated July 11, 2013, with Harold McGraw III regarding his compensation arrangement for serving as Non-Executive Chairman of the Board, incorporated by reference from Registrant’s Form 8-K filed July 11, 2013.
 
 
(10.35)*

Separation Agreement dated September 24, 2015 between the Company and Neeraj Sahai, as incorporated by reference from the Registrant’s Registration Statement on Form S-4 filed on October 30, 2015.
 
 
(10.36)*

Registrant’s Pay Recovery Policy, restated effective as of January 1, 2015, incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 2014.
 
 
(10.37)*

S&P Ratings Services Pay Recovery Policy, effective as of October 1, 2014, incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 2014.
 
 
(10.38)

Settlement Agreement dated February 2, 2015 among the Company, Standard & Poor's Financial Services LLC, the United States, acting through the Department of Justice, and various States and the District of Columbia, acting through their respective Attorneys General, incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 2014.
 
 
(12)

Computation of Ratio of Earnings to Fixed Charges.

117

 
 
(21)

Subsidiaries of the Registrant.
 
 
(23)

Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
 
 
(31.1)

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
 
 
(31.2)

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
 
 
(32)

Certification of the Chief Executive Officer and the 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
 
 
(101.LAB)

XBRL Taxonomy Extension Label Linkbase
 
 
(101.PRE)

XBRL Taxonomy Extension Presentation Linkbase
 
 
(101.DEF)

XBRL Taxonomy Extension Definition Linkbase

 * These exhibits relate to management contracts or compensatory plan arrangements.

118