S&P Global Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; filed July 26, 2018. S&P Global provides credit ratings, benchmarks, analytics and data through Ratings, Market Intelligence, Platts and Indices. Interim financial statements are unaudited; the independent accountant’s review found no material modifications necessary for U.S. GAAP conformity.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $1.609 billion | $1.509 billion | $3.176 billion | $2.962 billion |
| Operating profit | $672 million | $668 million | $1.383 billion | $1.306 billion |
| Operating margin | 42% | 44% | 44% | 44% |
| Net income attributable to S&P Global | $461 million | $421 million | $951 million | $820 million |
| Diluted EPS | $1.82 | $1.62 | $3.75 | $3.15 |
| Cash provided by operating activities | — | $903 million | $674 million |
Q2 revenue rose 7%, while operating profit increased 1%, net income attributable to the company rose 9%, and diluted EPS increased 12%. For the first half, revenue grew 7%, operating profit 6%, attributable net income 16% and diluted EPS 19%. Management reported first-half free cash flow of $765 million, up from $564 million; this is a non-GAAP measure.
Q2 segment revenue increased across all four reportable segments: Ratings 4% to $775 million; Market Intelligence 8% to $447 million; Platts 7% to $205 million; and Indices 13% to $209 million. First-half segment operating profit rose at Market Intelligence (11%), Platts (17%) and Indices (21%); Ratings rose 1%. Ratings’ reported Q2 operating profit fell 7%, principally reflecting a $73 million legal-settlement expense.
Cash, debt and liquidity
- Cash, cash equivalents and restricted cash totaled $1.935 billion at June 30, down $844 million from year-end. Cash and cash equivalents alone were $1.885 billion.
- Operating cash flow was $903 million; investing activities used $305 million, including $246 million for acquisitions; financing activities used $1.404 billion, including $1.1 billion for share repurchases and $253 million in shareholder dividends.
- Total debt was $3.660 billion, up from $3.569 billion at year-end. The company issued $500 million of 4.5% notes due 2048 and repaid $400 million of 2.5% notes due 2018. No commercial paper was outstanding; a $1.2 billion revolving credit facility was available through June 2022. The filing states its debt-to-cash-flow covenant limit is 4-to-1 and had not been exceeded.
- Current assets were $3.468 billion and current liabilities $2.724 billion. The company said cash, operating cash flow and credit availability were expected to cover operating and recurring cash needs into the foreseeable future.
Material changes, outlook and risks
- Drivers and costs: Management cited subscription growth, Ratings surveillance and entity-rating fees, higher ETF assets under management and derivatives volumes, and continued Platts data demand. Q2 revenue also benefited by about one percentage point from foreign exchange and one point from acquisitions. Higher data, royalty, compensation and technology costs weighed on results.
- Unusual items: Q2 operating profit included $73 million of legal-settlement expense and $12 million of Kensho retention expense. The company acquired Kensho for approximately $550 million net of cash acquired, funded with cash and stock, and also acquired Panjiva, RateWatch and Pragmatix. Management said these acquisitions were not individually material to the consolidated financial statements.
- Capital allocation: A $1 billion accelerated share repurchase began in March; final settlement was expected by Q3 2018. The quarterly dividend increased from $0.41 to $0.50 per share. About 14.0 million shares remained authorized for repurchase at June 30.
- Taxes and accounting: The first-half effective tax rate was 22.7%, versus 29.1%, primarily reflecting the lower U.S. federal corporate tax rate under the Tax Cuts and Jobs Act. The company adopted ASC 606 using the modified retrospective method, increasing opening retained earnings by $35 million; it recognized $6 million of incremental revenue in the first half. It expected the forthcoming lease standard to materially affect the balance sheet.
- Legal and regulatory exposure: The company agreed to settle remaining Australian financial-crisis civil cases, subject to court approval; it continued to defend other pre- and during-crisis ratings litigation. It described ongoing regulatory inquiries and investigations, including ratings and antitrust matters, and reported $149 million of accrued legal and regulatory settlements. The company also disclosed $3.37 million of Q2 revenue from Platts informational-material sales to 12 subscribers owned or apparently controlled by the Iranian government; it stated it believed the sales were permissible under applicable exemptions and would monitor compliance.
- Forward view: The filing provides no specific earnings or revenue guidance. Management emphasized organic growth, margin expansion, operating leverage, innovation and efficiency, while cautioning that credit-market conditions, regulation, litigation, acquisition integration, cybersecurity, foreign exchange and other risks could affect results. Corporate operating loss increased, partly due to Kensho; first-half Corporate Unallocated also included a $20 million Foundation contribution.
Important facts for investors to verify
- How the $73 million Ratings legal-settlement charge, Australian settlement approval and remaining litigation affect subsequent expenses, cash payments and contingencies.
- Whether organic revenue growth and segment margins persist after separating acquisition, foreign-exchange and unusual-item effects.
- Kensho integration, retention costs and contribution to revenue and operating results, alongside the integration of other recent acquisitions.
- Final share count and pricing from the accelerated repurchase, and the effect of buybacks and the higher dividend on liquidity and leverage.
- Cash conversion, restricted cash availability, debt maturities and any material balance-sheet changes from lease-standard adoption.
- Resolution of tax examinations and the company’s continuing compliance with ratings, sanctions, data-security and other regulatory requirements.