S&P Global Inc. — Q1 2017 Form 10-Q
Business context and period. For the three months ended March 31, 2017, S&P Global provided ratings, market and commodities data and analytics, and indices. The three reportable segments are Ratings, Market and Commodities Intelligence, and Indices. Results are compared with Q1 2016. The interim financial statements were reviewed by the independent accountant, not audited.
Key financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $1.453 billion | $1.341 billion | +8% |
| Operating profit | $648 million | $512 million | +27% |
| Operating margin | 45% | 38% | +7 percentage points |
| Net income attributable to S&P Global | $399 million | $294 million | +35% |
| Diluted EPS | $1.53 | $1.10 | +39% |
| Cash provided by operating activities | $353 million | $185 million | +91% |
| Free cash flow | $306 million | $136 million | More than doubled |
Revenue mix shifted toward transaction revenue, up 23% to $458 million, and asset-linked fees, up 26% to $108 million. Subscription/non-transaction revenue increased 1% to $887 million. The effective tax rate was 29.5%, down from 31.5%; the 2017 rate benefited from share-based payment tax benefits and an acquisition-related adjustment. Interest expense, net, was $37 million versus $40 million.
Segment performance
| Segment | Revenue | Operating profit | Year-over-year revenue / profit |
|---|---|---|---|
| Ratings | $714 million | $376 million | +29% / +43% |
| Market and Commodities Intelligence | $593 million | $186 million | -10% / +2% |
| Indices | $171 million | $115 million | +14% / +14% |
Ratings growth reflected stronger corporate bond and U.S. bank-loan issuance and repricing activity. Indices benefited from higher ETF and mutual-fund assets under management; Q1 ending ETF AUM rose 35% to $1.116 trillion. Market and Commodities Intelligence revenue was affected by prior-period divestitures, including J.D. Power, and the January 2017 QuantHouse sale; management cited growth in existing desktop, risk-services, and Platts offerings.
Balance sheet, cash flow, and capital
- At March 31, 2017, cash and equivalents were $2.411 billion; current assets were $3.663 billion and current liabilities $2.469 billion.
- Long-term debt was $3.565 billion, with no commercial paper outstanding. The company had a $1.2 billion revolving credit facility, maturing in 2020; its stated financial covenant caps indebtedness to cash flow at 4:1, and the company reported it had never exceeded the limit.
- Cash increased by $19 million during the quarter. Operating cash flow increased partly because Q1 2016 included higher legal-settlement payments. Free cash flow, a company-defined non-GAAP measure, was operating cash flow less capital expenditures and distributions to noncontrolling interests.
- The company repurchased 1.5 million shares for $201 million and paid $106 million in shareholder dividends. The quarterly dividend was increased from $0.36 to $0.41 per share. Approximately 24.2 million shares remained authorized for repurchase.
- Approximately 70% of cash was held abroad. The company said repatriating foreign funds for U.S. use could require U.S. taxes.
Changes, outlook, risks, and unusual items
- Operating profit growth reflects both business performance and comparison effects. Q1 2016 included $12 million of net legal-settlement insurance recoveries; Q1 2017 included $15 million of noncash acquisition/disposition-related adjustments. Q1 2016 also included a $24 million technology impairment and $3 million of disposition costs.
- Management described strategic priorities focused on growth, operational excellence, digital transformation, international expansion, and talent. It gave no specific numerical full-year revenue, earnings, or cash-flow guidance in this filing and cautioned that results are not assured.
- Management said cash on hand, operating cash flow, and available credit were expected to cover operating and recurring cash needs into the foreseeable future. It expected approximately $6 million of additional required retirement-plan contributions during the rest of 2017.
- Material uncertainties include litigation and regulatory matters related to historical ratings activity, investigations and compliance obligations, market issuance and credit conditions, commodity-market volatility, competition, cybersecurity and business continuity, foreign exchange, and tax or regulatory changes.
- In March 2017, an Italian court orally acquitted the company’s European ratings subsidiary and individual defendants in the Trani proceeding; the prosecutor could appeal after the written opinion. Other financial-crisis-related cases remained pending, and the company said outcomes and potential losses generally could not be predicted or reasonably estimated.
- Q1 2017 revenue of approximately $123,900 came from energy-information sales to 15 subscribers owned or apparently controlled by the Iranian government. The company said it believed the information sales were permitted under applicable sanctions exemptions and would continue monitoring them.
- QuantHouse was sold in January 2017. In April, the company signed a letter of intent to sell its East Windsor, New Jersey facility; $5 million of related fixed assets was classified as held for sale at quarter-end.
Important facts for investors to verify
- Whether Ratings transaction growth and associated market issuance levels are sustainable, and how sensitive results are to debt-market conditions.
- Underlying Market and Commodities Intelligence performance excluding the effects of acquisitions and divestitures, and whether growth in existing products offsets the lost businesses.
- The contribution of prior-year comparison items and current-period noncash adjustments to reported operating-profit and margin growth.
- Cash-flow normalization, including legal-settlement timing, and the amount and location of cash available for U.S. uses.
- Developments in ratings litigation, regulatory matters, and the Iran-related customer activity, including any changes in estimated liabilities or compliance risk.