S&P Global Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; comparison with the same 2015 periods. The filing was reviewed by the independent accountant, not audited. The company changed its name from McGraw Hill Financial, Inc. in April 2016.
Business context and material changes
S&P Global provides ratings, benchmarks, analytics and data through Ratings, Market Intelligence, Dow Jones Indices and Platts. Effective in Q4 2016, Market Intelligence and Platts were to be combined into a single reportable segment.
- Sold J.D. Power in September for $1.1 billion and recorded a $722 million pretax gain ($521 million after tax). Its results were included through September 7.
- Completed the sale of SPSE and CMA to Intercontinental Exchange in October 2016; they were classified as held for sale at September 30.
- Acquired PIRA Energy Group and RigData in 2016; these acquisitions were described as not material. SNL, acquired in September 2015, continued to contribute to Market Intelligence growth.
Financial performance
| Metric (USD millions, except per-share data) | Q3 2016 | Q3 2015 | First 9 months 2016 | First 9 months 2015 |
|---|---|---|---|---|
| Revenue | 1,439 | 1,324 | 4,262 | 3,938 |
| Operating profit | 1,348 | 410 | 2,512 | 1,493 |
| Net income attributable to S&P Global | 892 | 252 | 1,569 | 909 |
| Diluted EPS | $3.36 | $0.92 | $5.89 | $3.30 |
| Reported operating margin | 94% | 31% | 59% | 38% |
Revenue rose 9% in Q3 and 8% year to date. Reported profit comparisons were heavily affected by the J.D. Power gain. Management said operating profit, excluding the identified unusual and comparison-period items, increased 17% in Q3 and 14% year to date. The filing reports effective tax rates of 29.5% and 30.6% for Q3 and year-to-date 2016, respectively.
Segment revenue for Q3/year to date was: Ratings $642 million/$1.877 billion; Market Intelligence $429 million/$1.252 billion; Dow Jones Indices $164 million/$468 million; and Platts $229 million/$738 million. Q3 Market Intelligence revenue grew 21%, including a 14-percentage-point contribution from SNL; Platts revenue fell 8%, primarily reflecting the J.D. Power sale. Segment operating profit at Platts includes the $722 million disposal gain.
Cash flow, debt and liquidity
- Cash from continuing operations was $1.171 billion for the first nine months, versus cash used of $356 million in 2015. The comparison chiefly reflects legal and regulatory settlement payments made in 2015.
- Free cash flow, a non-GAAP measure defined by the company, was $1.045 billion versus negative $497 million; excluding specified legal settlement, insurance recovery and tax items, it was $1.081 billion versus $776 million.
- Cash and equivalents were $2.399 billion at September 30, up from $1.481 billion at year-end 2015. About 70% was held abroad; repatriating foreign cash for U.S. use could incur taxes.
- Total debt was $3.963 billion, including $400 million current maturities; long-term debt was $3.563 billion. The company issued $500 million of 2.95% notes due 2027 in September and repaid $400 million of 5.9% notes on October 20, 2016.
- No commercial paper was outstanding at quarter-end. The company had a $1.2 billion revolving credit facility, maturing in 2020, and reported that its 4-to-1 debt-to-cash-flow covenant had never been exceeded.
- Financing used $1.018 billion in the first nine months, including $1.123 billion of cash for share repurchases; dividends paid to shareholders were $286 million. The quarterly dividend increased from $0.33 to $0.36 per share.
Outlook, risks and unusual items
No specific earnings or revenue guidance is provided. Management said cash on hand, operating cash flow and available credit were expected to meet operating and recurring cash needs into the foreseeable future. Management cautioned that interim results are not necessarily indicative of full-year results.
- Material legal and regulatory matters include financial-crisis ratings litigation, an ongoing Italian criminal proceeding involving ratings personnel and the company’s European ratings subsidiary, and regulatory inquiries. The company said it could not reasonably estimate potential additional exposure in key matters.
- Management identified uncertainty related to the U.K.’s expected departure from the EU, including possible regulatory divergence and increased compliance costs. Other cited risks include credit-market conditions, ratings demand, commodity-market volatility, competition, cybersecurity and foreign exchange.
- Unrecognized tax benefits were $121 million at quarter-end; the company expected they might decrease significantly within 12 months, but audit outcomes could materially affect results or cash flows.
- The company disclosed approximately $211,000 of Q3 revenue from information sales to 14 subscribers owned or apparently controlled by the Iranian government. It said it believed the transactions were permitted under applicable information-materials exemptions and would continue monitoring them.
- Other notable items included a $24 million technology impairment in Market Intelligence year to date, legal settlement insurance recoveries, restructuring charges, and higher interest expense following prior-year debt issuance.
Key facts for investors to verify
- How much of reported and adjusted profit growth is sustainable after the J.D. Power gain and legal settlement recoveries?
- Whether organic subscription and contract-value growth continues, particularly in Market Intelligence and Platts after the divestitures.
- Cash availability and potential tax costs associated with the substantial share of cash held abroad, alongside debt repayment and repurchase plans.
- Developments and potential financial exposure from ratings-related litigation, regulatory matters and tax audits.
- How the Q4 segment combination affects comparability and the company’s subsequent reporting of segment performance.