S&P Global Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; comparisons are to the corresponding 2015 periods. The company changed its name from McGraw Hill Financial, Inc. to S&P Global Inc. on April 27, 2016. The interim financial statements were reviewed, not audited.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $1.482bn | $1.342bn | $2.823bn | $2.615bn |
| Operating profit | $651m | $582m | $1.163bn | $1.083bn |
| Operating margin | 44% | 43% | 41% | 41% |
| Net income attributable to S&P Global | $383m | $353m | $677m | $656m |
| Diluted EPS | $1.44 | $1.28 | $2.54 | $2.38 |
- Revenue increased 10% in Q2 and 8% for the first half. The SNL acquisition contributed about 6 percentage points to overall revenue growth; foreign exchange reduced growth by 1 point in Q2 and less than 1 point for the half.
- Q2 growth reached all four segments. For the first half, Ratings revenue declined 2%, while Market Intelligence grew 28%, Platts 11% and Indices 4%. Market Intelligence growth principally reflected the SNL acquisition.
- Operating profit rose 12% in Q2 and 7% for the first half. Reported results included legal-settlement insurance recoveries, legal charges, acquisition amortization and disposition-related costs; first-half 2016 also included a $24m technology impairment. Management’s adjusted comparisons indicated stronger underlying operating-profit growth, but those comparisons exclude selected items.
- Net interest expense increased to $42m in Q2 and $83m for the first half, mainly reflecting senior notes issued in 2015. Effective tax rates were 32.3% for Q2 and 31.9% for the first half, slightly below 2015.
Cash flow, liquidity and capital
- Cash from continuing operations was $571m in the first half, versus cash used of $897m in 2015. The comparison chiefly reflects the prior-year payment of legal and regulatory settlements. Capital expenditures were $36m; cash used in investing was $88m.
- Company-defined free cash flow, a non-GAAP measure, was $478m versus negative $988m. Excluding specified legal settlement payments, insurance recoveries and tax effects, it was $513m versus $298m.
- Cash and equivalents were $1.567bn at June 30, up from $1.481bn at year-end; approximately 95% was held abroad. Current assets were $3.459bn and current liabilities $2.845bn.
- Total debt was $3.779bn, including $309m of commercial paper; long-term debt was $3.470bn. The company reported approximately $891m of additional borrowing availability under its $1.2bn credit facility and stated that it had not exceeded its 4-to-1 leverage covenant.
- First-half dividends paid were $191m and share repurchases used $373m of cash. The quarterly dividend was raised from $0.33 to $0.36 per share. The company repurchased 3.5m shares in the first half (cash settlements included a prior-period purchase); 31.9m shares remained authorized for repurchase.
Outlook, material developments and risks
- No numeric full-year earnings or revenue guidance is provided. Management said cash on hand, operating cash flow and credit-facility availability should meet operating and recurring cash needs into the foreseeable future.
- The company agreed to sell J.D. Power for $1.1bn; regulatory approval had been received and closing was expected in Q3 2016. Sale of SPSE and CMA to ICE remained subject to extended antitrust review. Both transactions and their timing remained uncertain.
- Market issuance was weaker in the first half, weighing on Ratings transaction revenue; management cited volatility and political and economic uncertainty in Europe. Brexit was identified as a potential source of regulatory, economic and operating uncertainty.
- Significant ongoing exposures include ratings-related litigation and regulatory proceedings. The company said outcomes and potential additional amounts generally could not be estimated; it reported settling the City of Swan Australian case for AUD $144m, paid in 2016.
- Other disclosed risks include credit-market conditions, commodities-market volatility, regulation, cybersecurity and business continuity, foreign exchange and acquisition integration. Unrecognized tax benefits were $122m; the company expected they could decrease significantly within 12 months, but resolution could materially affect results or cash flows.
- Q2 revenue of approximately $211,000 from information sales to 14 subscribers owned or apparently controlled by the Government of Iran was disclosed; the company said it believed the sales qualified for applicable information exemptions and would continue monitoring compliance.
Important facts for investors to verify
- Whether the J.D. Power sale closed on the expected terms and when proceeds were received; status and impact of the SPSE/CMA sale.
- Organic growth, excluding acquisitions and currency effects, particularly in Ratings and Market Intelligence, and the durability of subscription and contract-value growth.
- Legal and regulatory developments, settlement cash payments and insurance recoveries, including whether future liabilities can be estimated.
- Cash generation excluding unusually large prior-year settlement payments, cash held overseas and the effect of repurchases, dividends and debt on liquidity.
- Ratings issuance trends, Brexit-related developments, and the company’s compliance and potential exposure regarding sanctions, regulation and tax audits.