S&P Global Inc. — 2016 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2016; figures below are full-year unless identified as fourth-quarter. S&P Global provides ratings, benchmarks, analytics and data to capital and commodity markets. Its reportable segments are Ratings, Market and Commodities Intelligence, and S&P Dow Jones Indices. The company changed its name from McGraw Hill Financial on April 27, 2016, and realigned segment reporting in the fourth quarter, retrospectively revising prior segment comparisons.
Financial results and liquidity
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $5.661 billion | $5.313 billion | +7% |
| Operating profit | $3.369 billion | $1.917 billion | +76% |
| Operating margin | 60% | 36% | Reported |
| Net income attributable to S&P Global | $2.106 billion | $1.156 billion | +82% |
| Diluted EPS from continuing operations | $7.94 | $4.21 | +89% |
| Cash from operating activities | $1.464 billion | $195 million | Up $1.269 billion |
| Free cash flow | $1.233 billion | $(48) million | Non-GAAP |
- Operating profit included a $1.1 billion pretax gain on business disposals. Excluding specified unusual items, management said operating profit increased 15% and segment operating profit increased 13%.
- Revenue mix shifted toward recurring income: subscription/non-transaction revenue rose 11% to $3.623 billion and represented 64% of revenue; transaction revenue fell 2% to $1.657 billion. Asset-linked fees were $381 million, up 3%.
- Segment revenue/profit: Ratings $2.535 billion/$1.262 billion; Market and Commodities Intelligence $2.585 billion/$1.822 billion; Indices $639 million/$412 million. Market and Commodities Intelligence profit included the bulk of the disposal gain.
- Cash and equivalents were $2.392 billion at year-end, including about 70% held abroad; working capital was $1.060 billion. Total debt was $3.564 billion, implying net debt of approximately $1.172 billion. No commercial paper was outstanding; the company had a $1.2 billion revolving credit facility, with a 4-to-1 debt-to-cash-flow covenant that it said had never been exceeded.
- Net interest expense rose 77% to $181 million, principally reflecting debt issued in 2015 and 2016 and a fee on early repayment of notes. Effective tax rate was 30.1%, unchanged from 2015.
- Fourth-quarter revenue was $1.399 billion versus $1.374 billion a year earlier; operating profit was $857 million versus $424 million, and net income attributable to S&P Global was $537 million versus $248 million. Fourth-quarter 2016 included a $379 million pretax disposal gain.
Material changes versus the prior period
- Disposals generated $1.1 billion of pretax gains: J.D. Power was sold for $1.1 billion, SPSE and CMA for $425 million, and Equity Research was also sold. The J.D. Power sale contributed a $728 million gain and SPSE/CMA a $364 million gain.
- Acquisitions included PIRA Energy Group, RigData, Commodity Flow and Trucost; the 2015 SNL acquisition continued to drive revenue growth and higher amortization and operating costs.
- Revenue grew across all segments. Ratings benefited from U.S. bank-loan and corporate-bond ratings and surveillance fees; Market and Commodities Intelligence from subscription growth and Platts content demand; Indices from higher average ETF and mutual-fund assets and derivatives volumes.
- Cash from operations rebounded mainly because 2015 included payment of $1.6 billion in legal and regulatory settlements. The company repurchased about 9.7 million shares for $1.097 billion in 2016.
Outlook, risks and unusual items
- Management described priorities of growth, operational excellence, digital transformation, innovation and international expansion. It expected cash on hand, operating cash flow and credit-facility availability to meet operating and recurring needs in 2017. No consolidated earnings or revenue guidance is stated in the provided filing text.
- Management planned continued Market and Commodities Intelligence product development, international expansion and integration of recent acquisitions. Indices planned organic product growth, geographic expansion and selective acquisitions or partnerships.
- The board approved increasing the quarterly dividend from $0.36 to $0.41 per share beginning in 2017. Future dividends remain dependent on earnings, capital needs and financial condition.
- Key exposures include ratings-related litigation and regulatory investigations, changing regulation of ratings and benchmarks, capital-market issuance and ETF asset levels, commodity-market weakness, competition, cybersecurity and business-continuity events, foreign exchange, and uncertainty around Brexit and potential U.S. policy or tax changes.
- Specific unresolved matters include financial-crisis ratings litigation, SEC compliance oversight and Italian Trani criminal proceedings; the company said outcomes and potential losses generally could not be predicted or reasonably estimated. Two shareholder derivative actions were dismissed in December 2016, with plaintiffs appealing in January 2017.
- After year-end, the company completed the QuantHouse sale; the 2016 statements included a $31 million loss related to assets held for sale. A $24 million technology impairment was also recorded. The company disclosed approximately $790,900 of 2016 revenue from sales of information materials to 15 Iran-related subscribers, which it believed were permitted under applicable sanctions exemptions.
- Auditor Ernst & Young issued an unqualified opinion on the financial statements and internal controls; management reported effective disclosure controls and no material weaknesses.
Important facts for investors to verify
- How much of reported earnings growth is recurring: reconcile the $1.1 billion disposal gain and other adjustments with underlying operating-profit growth.
- Whether subscription and contract-value growth persists after portfolio disposals, and how acquisition integration affects margins and cash generation.
- Debt maturities, interest costs, and the timing and potential amount of the S&P Dow Jones Indices partner put; the balance-sheet redeemable noncontrolling interest was $1.080 billion, with put rights exercisable after December 31, 2017.
- Developments and potential financial effects of ratings litigation, regulatory matters, benchmark rules, and the disclosed Iran-related activity.
- Cash availability and repatriation needs: most year-end cash was held abroad, and repatriating foreign earnings could trigger U.S. taxes.