S&P Global Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; comparisons are with the same periods in 2016. Amounts are in millions except per-share data. The interim financial statements were reviewed by the independent accountant, not audited.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $1,513 | $1,439 | $4,475 | $4,262 |
| Operating profit | $658 | $1,348 | $1,982 | $2,512 |
| Operating margin | 43% | 94% | 44% | 59% |
| Net income attributable to S&P Global | $414 | $892 | $1,234 | $1,569 |
| Diluted EPS | $1.61 | $3.36 | $4.75 | $5.89 |
| Cash from operating activities | — | — | $1,203 | $1,257 |
Revenue grew 5% in both comparison periods. Reported operating profit and earnings fell mainly because 2016 included a $722 million pretax gain on the J.D. Power sale. Excluding specified comparison-period items, management reported operating-profit growth of 10% for Q3 and 14% for the first nine months.
Revenue drivers included stronger Ratings and Indices results, partly offset by Market and Commodities Intelligence dispositions. Ratings revenue increased 15% in Q3 and 17% year to date; Indices revenue rose 14% and 16%, respectively. Market and Commodities Intelligence revenue declined 6% and 9%, respectively, reflecting divestitures, while existing subscription products and Platts content showed growth.
Nine-month free cash flow, a non-GAAP measure defined by the company as operating cash flow less capital expenditures and distributions to noncontrolling holders, was $1,057 million versus $1,131 million. The company cited tax-payment timing and working-capital changes as factors in lower operating cash flow.
Balance sheet, liquidity, and capital allocation
- At September 30, 2017, cash and cash equivalents were $2,312 million, current assets $3,653 million, and current liabilities $2,408 million. Cash declined $80 million from year-end 2016; approximately 90% was held abroad.
- Long-term debt was $3,568 million, compared with $3,564 million at December 31, 2016. The company had no commercial-paper borrowings outstanding.
- A $1.2 billion revolving credit facility runs to June 2022 and supports the commercial-paper program. The financial covenant caps indebtedness to cash flow at 4:1; the company reported it had never exceeded the limit.
- Nine-month financing uses included $846 million for share repurchases and $316 million for shareholder dividends. A $500 million accelerated repurchase initiated in August was expected to settle by October 31, 2017. The quarterly dividend was increased to $0.41 per share from $0.36.
Outlook, commentary, and material risks
- No numerical earnings or revenue guidance is provided. Management said cash on hand, operating cash flow, and available credit were expected to cover operating and recurring cash needs into the foreseeable future. Its stated priorities are growth, operational excellence, digital transformation, and talent.
- Current-period unusual expenses included $24 million of restructuring severance charges, a $6 million facility-exit charge, a $2 million asset write-off, $15 million of noncash acquisition/disposition adjustments, and $2 million of legal-settlement expense for the first nine months.
- The IRS proposed increasing federal income tax for 2015 by approximately $242 million, principally over deductions for certain litigation settlements. The company disputes the proposed adjustment and filed a formal protest. Unrecognized tax benefits were $138 million at September 30; the company said up to approximately $32 million might be resolved in the following 12 months.
- Legal and regulatory exposure includes financial-crisis-era ratings litigation and continuing regulatory inquiries. The Trani court acquitted the company and individuals in March 2017; an appeal could create renewed criminal, civil, or regulatory exposure. The filing says outcomes and potential losses in many matters cannot be predicted or reasonably estimated.
- After December 31, 2017, minority partners in S&P Dow Jones Indices may put at least 20% of their interests to the company, which would generally be required to purchase them at fair value. The related redeemable noncontrolling interest was $1,161 million at quarter-end.
- Other stated risk factors include credit-market and issuance conditions, regulation, litigation and tax examinations, competition, commodity-market volatility, cybersecurity and business continuity, foreign exchange, and the company’s ability to retain key employees. Platts reported approximately $136,500 of Q3 revenue from information sales to Iran-linked subscribers, which the company said it believed were permitted under applicable exemptions.
Most important facts for investors to verify
- Underlying segment growth and margins, especially whether Ratings and Indices momentum offsets Market and Commodities Intelligence divestiture impacts.
- Cash-flow conversion and working-capital trends, including the effect of tax-payment timing and the high proportion of cash held abroad.
- Potential outcomes and cash exposure from the IRS proposal, ratings litigation, regulatory matters, and the S&P Dow Jones Indices put rights.
- Final settlement of the $500 million accelerated repurchase and the company’s future repurchase, dividend, and debt priorities.
- Implementation effects of the forthcoming revenue-recognition standard; the company anticipated changes to certain Ratings revenue, jointly owned product presentation, and contract-cost accounting, but did not expect a significant overall financial-statement impact.