S&P Global Inc. quarterly report, Q1 FY2023

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Business context and reporting period

S&P Global Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2023. Its six segments are Market Intelligence, Ratings, Commodity Insights, Mobility, Indices and Engineering Solutions. The 2022 comparison is not fully comparable: IHS Markit was acquired on February 28, 2022, so its results were included for only part of that prior-year quarter.

Financial performance and condition

  • Revenue: $3.160 billion, up 32% year over year. Management cited the IHS Markit merger as a primary growth driver; foreign exchange reduced growth by 2 percentage points. Subscription revenue was $1.740 billion, up 55%.
  • Profit and margins: Operating profit was $1.144 billion, down 40%, and operating margin was 36% versus 79%. Net income attributable to S&P Global was $795 million, down 36%; diluted EPS was $2.47 versus $4.47, down 45%. The prior-year quarter included a $1.344 billion pre-tax gain from the sale of CUSIP Global Services. Excluding specified unusual items and other comparability effects, management said operating profit increased 22%.
  • Segments: Revenue grew in Market Intelligence (+47%), Commodity Insights (+40%), Indices (+6%), Mobility and Engineering Solutions, with the latter two increases substantially reflecting the acquisition. Ratings revenue fell 5%, primarily amid lower bank-loan ratings revenue and weaker issuance and M&A-related activity.
  • Cash flow: Operating cash flow was $594 million, compared with $222 million. Capital expenditures were $28 million; free cash flow, a non-GAAP measure, was $488 million versus $151 million. Investing cash use was $253 million. Financing cash use was $230 million, including $500 million of share repurchases and $290 million of dividends paid.
  • Liquidity and debt: Cash and cash equivalents were $1.402 billion at quarter-end. Total debt was $11.663 billion, including $898 million of commercial paper; short-term debt was $936 million and long-term debt $10.727 billion. The company had a $2.0 billion commercial-paper program supported by a $2.0 billion credit facility, with $898 million of commercial paper outstanding. Management said cash, operating cash flows and facility availability should meet operating and recurring cash needs for the foreseeable future. The credit agreement’s maximum indebtedness-to-cash-flow covenant is 4:1; the company reported it had never exceeded that threshold.
  • Other metrics: Effective tax rate was 17.9%, versus 30.4% in the prior-year quarter. Unearned revenue was $3.175 billion. Remaining performance obligations were $4.5 billion; the company expects to recognize about half within 12 months and three-quarters within 24 months.

Material changes versus the prior comparable period

Revenue and operating cash flow increased, principally reflecting the IHS Markit acquisition and growth in several businesses. Reported operating profit and EPS declined sharply, chiefly because the prior-year quarter included the large CUSIP sale gain. Amortization of acquired intangibles rose to $262 million from $111 million, while net interest expense rose to $85 million from $57 million. The effective tax rate fell, in part because the prior-year rate included tax charges related to merger divestitures and nondeductible deal costs. The company repurchased $500 million of shares in Q1 2023, compared with $7.0 billion in Q1 2022.

Outlook, commentary, risks and unusual items

  • Outlook: The filing provides no quantified company-wide revenue, earnings or margin guidance. Management’s stated priorities include organic growth, EBITA margin targets, merger synergies, innovation and shareholder returns. Management cautions that quarterly results are not necessarily indicative of full-year results.
  • Portfolio actions: The company agreed to sell Engineering Solutions to a KKR-controlled buyer for $975 million in cash, subject to customary adjustments and closing conditions. It expected the sale to close in Q2 2023 and estimated after-tax proceeds of approximately $750 million, intended for share repurchases. The business was classified as held for sale at quarter-end.
  • Costs and commitments: A new AWS strategic collaboration carries a $1.0 billion purchase obligation over five years, before incremental credits. The company recorded $12 million of restructuring charges in Q1. A $50 million pre-tax contingent payment from prior LCD and leveraged-index divestitures contributed to 2023 reported profit.
  • Tax and legal risks: The company said the tax-law requirement to capitalize and amortize certain R&D costs could increase cash taxes in 2023 if not deferred, repealed or modified. Australian litigation concerns ratings of collateralized debt obligations before the financial crisis; the company cannot assure that resolution will not require significant payments. Regulatory inquiries and investigations could result in penalties, damages or activity restrictions; outcomes and potential losses generally could not be estimated.
  • Market and operating risks: Management identified credit-market conditions and issuance, demand for ratings and investment products, foreign exchange and interest rates, cybersecurity and business continuity, regulation, competition, and realizing merger synergies among factors that could affect results. The company also disclosed limited Iran-related information transactions or dealings; it reported no revenue or net profit attributable to the Commodity Insights activity and de minimis amounts related to data sourced by Market Intelligence.

Important facts for investors to verify

  1. Separate underlying operating trends from acquisition effects, the prior-year CUSIP gain, 2023 divestiture-related gains, and higher acquired-intangible amortization.
  2. Track Ratings issuance conditions and revenue, and whether growth in subscription businesses and merger synergies support margins.
  3. Monitor Engineering Solutions sale approval, closing, proceeds and planned use of cash for repurchases.
  4. Assess liquidity and refinancing exposure, including commercial-paper utilization, debt maturities and the AWS purchase commitment.
  5. Follow the impact of R&D tax capitalization rules and developments in the Australian litigation and regulatory matters.

The independent accountant performed a review of the interim financial statements, not a full audit, and reported no material modifications considered necessary for U.S. GAAP conformity.