S&P Global Inc. (then McGraw Hill Financial, Inc.) — 2015 Form 10-K
Business context and reporting period
The filing covers the fiscal year ended December 31, 2015; it is an annual report, not a standalone fourth-quarter filing. The company provides ratings, indices, data, analytics and research across capital, commodities and commercial markets through four segments: S&P Ratings, S&P Capital IQ and SNL, S&P Dow Jones Indices, and Commodities & Commercial. Management said a rebrand to S&P Global was planned for 2016, subject to shareholder approval.
Financial results and key metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $5.313 billion (+5%) | $5.051 billion |
| Operating profit | $1.917 billion | $113 million |
| Operating margin | 36% | 2% |
| Income (loss) from continuing operations attributable to shareholders | $1.156 billion | $(293) million |
| Diluted EPS from continuing operations | $4.21 | $(1.08) |
| Cash from continuing operating activities | $195 million | $1.209 billion |
| Free cash flow (non-GAAP) | $(48) million | $1.033 billion |
| Cash and cash equivalents at year-end | $1.481 billion | $2.497 billion |
| Total debt | $3.611 billion | $795 million |
| Working capital | $388 million | $42 million |
The 2014 comparison is heavily distorted by approximately $1.6 billion of legal and regulatory settlement charges. Management reported 2015 operating profit growth of 13% excluding specified items. Cash from operations was reduced by $1.6 billion of legal-settlement payments; free cash flow excluding specified settlement payments, insurance recoveries and tax benefits was $1.225 billion, versus $1.068 billion in 2014. About 90% of year-end cash was held abroad; repatriating foreign cash for U.S. use could trigger tax.
Segment revenue and operating profit for 2015 were: S&P Ratings, $2.428 billion and $1.078 billion; S&P Capital IQ and SNL, $1.405 billion and $228 million; S&P Dow Jones Indices, $597 million and $392 million; and Commodities & Commercial, $971 million and $357 million. Segment operating profit includes segment-specific items and excludes unallocated expenses.
Debt increased mainly to finance the SNL acquisition. The company issued $700 million of senior notes in May and $2.0 billion in August 2015. It reported $143 million of commercial paper outstanding and a $1.2 billion revolving credit facility maturing in 2020, with approximately $1.1 billion of additional commercial-paper capacity. The facility’s financial covenant caps the defined indebtedness-to-cash-flow ratio at 4-to-1; the company said it had never exceeded the limit. Total contractual cash obligations were $5.887 billion, including debt principal and interest, leases and purchase obligations.
Material changes versus the prior comparable period
- Revenue rose 5%; subscription/non-transaction revenue increased 7%, while transaction/non-subscription revenue increased 2%. Domestic revenue rose 10%, but international revenue declined 1%; foreign exchange reduced revenue growth by 2 percentage points.
- Operating profit rose from $113 million to $1.917 billion, principally because 2014 included $1.6 billion of legal and regulatory settlement charges, compared with net legal settlement expense of $54 million in 2015.
- Cash from continuing operating activities fell to $195 million from $1.209 billion, primarily because of legal-settlement payments. Investing cash outflow increased to $2.525 billion, mainly reflecting the SNL acquisition.
- Total debt rose to $3.611 billion from $795 million. Cash declined by about $1.0 billion, to $1.481 billion.
- S&P Capital IQ and SNL revenue grew 14%, including SNL acquired in September; S&P Dow Jones Indices revenue grew 8%; and Commodities & Commercial revenue grew 9%. S&P Ratings revenue declined 1%, including a 4-percentage-point adverse foreign-exchange effect.
Outlook, commentary, risks and unusual items
- Management said available cash, operating cash flow and credit-facility capacity should cover 2016 operating and recurring cash needs. The filing provides no consolidated numerical earnings or revenue guidance. Ratings issuance was expected to remain volatile in 2016 amid market and geopolitical uncertainty.
- The September 2015 SNL acquisition cost $2.225 billion in cash. The preliminary allocation included $1.563 billion of goodwill; the final allocation was pending. Management identified approximately $100 million of potential synergies by 2019, with no assurance they would be achieved.
- In the fourth quarter, the company classified J.D. Power as held for sale: assets of $503 million and liabilities of $206 million. Its 2015 operating profit was $53 million. The anticipated sale was not treated as a discontinued operation.
- Significant legal and regulatory exposures include ratings-related litigation and investigations, the ongoing Italian Trani criminal trial, and Australian litigation alleging losses of AUD $327 million. The company said it could not estimate possible additional exposure in several matters. Year-end accrued legal and regulatory settlements were $121 million, compared with $1.609 billion in 2014.
- Other risks include evolving regulation of ratings, benchmarks and commodities price assessments; capital-market issuance and energy-market volatility; competition; acquisition integration; cybersecurity, data and business-continuity risks; foreign exchange; and potential penalties or claims. A $920 million redeemable noncontrolling interest relates to S&P Dow Jones Indices partners’ put rights, including rights exercisable after December 31, 2017.
- The filing disclosed approximately $702,700 of 2015 revenue from information products sold to 15 Iran-linked subscribers; the company stated it believed the transactions were permitted under information-materials exemptions and would continue monitoring compliance.
- The financial-statement audit opinion was unqualified. Management and the auditor reported effective internal control over financial reporting for the company, but SNL—acquired in September—was excluded from the 2015 internal-control assessment.
Important facts for investors to verify
- Progress on integrating SNL, the final purchase-price allocation, and the timing and realization of the stated synergy target.
- Developments in ratings-related and other litigation, the adequacy of recorded reserves, and any resulting cash payments or restrictions.
- Whether J.D. Power is sold on expected terms and how the disposal affects reported segment results.
- The sustainability of operating cash generation after separating recurring performance from legal-settlement cash flows, and the availability of cash held overseas.
- Debt servicing and covenant headroom, alongside the $920 million redeemable-interest exposure and potential put timing.
- Completion of SNL’s integration into financial controls, and the implications of the Iran-related transactions and evolving benchmark regulation.