S&P Global Inc. — 2017 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2017, filed February 9, 2018. S&P Global provides credit ratings, benchmarks, analytics and data to capital and commodity markets. Its 2017 reportable segments were Ratings, Market and Commodities Intelligence, and S&P Dow Jones Indices (Indices). Platts was to become a separate reportable segment beginning in 2018.
Financial performance and key metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $6.063 billion | $5.661 billion |
| Operating profit | $2.610 billion | $3.369 billion |
| Operating margin | 43% | 60% |
| Net income attributable to S&P Global | $1.496 billion | $2.106 billion |
| Diluted EPS | $5.78 | $7.94 |
| Cash from operating activities | $2.016 billion | $1.560 billion |
| Free cash flow (non-GAAP) | $1.782 billion | $1.329 billion |
- Revenue rose 7%; subscription/non-transaction revenue grew 5%, asset-linked fees 21%, and transaction revenue 9%.
- Operating profit and earnings fell against 2016, which included $1.101 billion of gains on divestitures. Excluding specified unusual items, management reported operating profit growth of 18%.
- Segment revenue and operating profit: Ratings $2.988 billion and $1.524 billion, up 18% and 21%; Market and Commodities Intelligence $2.452 billion and $793 million, down 5% and 56% (the prior-year profit included divestiture gains); Indices $733 million and $471 million, up 15% and 14%.
- Fourth-quarter 2017 revenue was $1.589 billion, operating profit $628 million, net income attributable to shareholders $263 million, and diluted EPS $1.02. Fourth-quarter 2016 included a $379 million pre-tax divestiture gain.
- Year-end cash and cash equivalents were $2.779 billion, up from $2.392 billion; working capital was $1.110 billion. About 80% of cash was held abroad.
- Total debt was $3.569 billion, including $399 million classified as short-term and due in 2018. The $1.2 billion revolving credit facility had no outstanding borrowings; commercial paper borrowings were also zero.
- Dividends were $1.64 per share for 2017. The board subsequently raised the quarterly dividend from $0.41 to $0.50 per share. The company repurchased $1.001 billion of shares in 2017.
Material changes versus the prior period
Revenue growth was led by Ratings, supported by bank-loan and corporate-bond ratings, and by Indices, reflecting higher ETF and mutual-fund assets. Market and Commodities Intelligence revenue declined mainly because businesses were sold in 2016; management cited continued organic growth in desktop, risk-services and Platts products. The company sold QuantHouse in January 2017. The 2016 comparison also includes major gains from the J.D. Power, SPSE/CMA and Equity Research dispositions. Cash from operations increased, chiefly due to improved operating results; free cash flow increased to $1.782 billion.
Outlook, risks, contingencies and unusual items
- Management said cash, operating cash flow and the credit facility were expected to meet 2018 operating and recurring needs. Its stated 2018 priorities included organic growth, margin expansion, product investment, operational efficiency and cybersecurity; the filing provides no consolidated numerical earnings guidance.
- The 2017 tax provision included a provisional $149 million net charge related to the Tax Cuts and Jobs Act, including tax on deemed repatriation of foreign earnings. The company anticipated an ongoing benefit from the lower U.S. corporate tax rate, while noting that tax estimates could change as guidance became available.
- The IRS proposed increasing 2015 federal income tax by approximately $242 million, primarily concerning deductions for lawsuit-settlement payments. S&P Global disputed the proposal and filed a protest.
- Recorded redeemable noncontrolling interest in the Indices joint venture was $1.350 billion. CME Group and its affiliate could require the company to buy at least 20% of their interest after December 31, 2017; the timing and ultimate payment amount were uncertain.
- The company faces ratings-related litigation and regulatory inquiries, including Australian civil cases tied to rated CDOs and shareholder derivative-action appeals. It said outcomes and potential losses generally could not be reliably predicted. The Trani, Italy criminal proceeding ended in acquittals that became final.
- Principal disclosed risks include regulatory change, market and issuance volatility, litigation, cyber and data-security incidents, competition, customer cost-cutting, Brexit, privacy requirements including GDPR, and acquisition integration. The company also disclosed approximately $545,000 of 2017 revenue from information-material sales to Iranian government-owned or controlled subscribers, which it believed were permissible under applicable exemptions.
Most important facts for investors to verify
- How much of underlying growth and margin performance persists after separating 2016 divestiture gains and other unusual items.
- Ratings revenue sensitivity to debt issuance, refinancing and market conditions, and Indices revenue sensitivity to ETF assets and related fees.
- Cash availability and repatriation costs, the 2018 debt maturity, and the potential funding needs from the Indices minority-interest put rights.
- Developments in the IRS dispute, ratings litigation and regulatory matters, and the eventual impact of tax-law and European benchmark regulations.
- Progress on Platts’ separate-segment reporting and the company’s implementation of the new revenue-recognition standard.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2017.