S&P Global Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparison is Q1 2018. S&P Global provides ratings, benchmarks, analytics and data through Ratings, Market Intelligence, Platts and Indices. Interim statements were reviewed by the independent auditor, not audited.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $1.571 billion | $1.567 billion | Less than 1% increase |
| Operating profit | $705 million | $711 million | 1% decrease |
| Operating margin | 45% | 45% | Reported as flat |
| Net income | $453 million | $534 million | 15% decrease |
| Net income attributable to S&P Global | $410 million | $491 million | 16% decrease |
| Diluted EPS | $1.65 | $1.93 | 14% decrease |
| Cash from operating activities | $293 million | $360 million | 19% decrease |
| Free cash flow | $255 million | $277 million | 8% decrease |
Revenue was essentially flat, including an estimated one-percentage-point adverse foreign-exchange effect. Growth at Market Intelligence, Platts and Indices was offset by lower Ratings revenue. Operating profit excluding higher acquired-intangible amortization and Kensho retention costs increased 1%, according to management.
- Segment revenue / operating profit: Ratings $696 million / $363 million (revenue down 7%; profit down 11%); Market Intelligence $482 million / $145 million (up 10% / 31%); Platts $207 million / $94 million (up 5% / 5%); Indices $217 million / $149 million (up 2% / approximately flat). Segment figures include intersegment eliminations in consolidated revenue.
- Taxes and unusual items: Effective tax rate was 19.9%, versus 21.6%, helped by excess tax benefits on share-based payments. Other expense, net, was $103 million, principally reflecting a $113 million pre-tax, non-cash pension settlement charge. The annuity transaction transferred obligations for about 4,600 retirees and beneficiaries, reduced qualified pension obligations by approximately $370 million, and eliminated future investment and mortality risk for those beneficiaries.
Cash, liquidity and capital
- Cash, cash equivalents and restricted cash totaled $1.436 billion at quarter-end, down $522 million from year-end 2018. Operating cash flow fell partly because of stronger receivable collections in the prior-year quarter and tax-audit settlement payments in 2019; lower incentive compensation payments partly offset the decline.
- Free cash flow excluding specified items was $306 million, up 3% from $299 million. The company identifies this as a non-GAAP measure; specified items included $50 million of prior-year tax-audit settlements in 2019 and legal-settlement-related items in 2018.
- Long-term debt was $3.663 billion; net interest expense was $36 million. No commercial paper borrowings were outstanding. A $1.2 billion revolving credit facility, expiring in 2022, was available; the company reported that its 4-to-1 indebtedness-to-cash-flow covenant had never been exceeded.
- Quarter-end total assets were $9.720 billion and total liabilities were $7.685 billion. Adoption of the lease accounting standard added $675 million of right-of-use assets and $727 million of current and non-current lease liabilities; the company said adoption materially affected the balance sheet, but not income or cash flows.
- Shareholders received $141 million in dividends; the declared quarterly dividend rose to $0.57 per share from $0.50. The company repurchased 3.4 million shares for $644 million, including a newly initiated $500 million accelerated repurchase; final settlement was expected by Q3 2019. About 7.2 million authorized shares remained available for repurchase.
Changes, outlook and risks
- Segment trends: Ratings weakened with lower bank-loan and corporate-bond ratings activity, including reduced issuance, and lower Ratings Evaluation Service activity. Market Intelligence benefited from higher annualized contract values and acquisitions; Platts cited demand for data and price assessments; Indices benefited from higher mutual-fund assets and licensing, partly offset by lower exchange-traded derivatives volumes.
- Kensho customer contracts moved from Corporate to Market Intelligence reporting beginning January 2019, affecting segment comparability. The company also agreed to sell Standard & Poor’s Investment Advisory Services, with closing expected in mid-2019.
- No full-year earnings or revenue guidance is provided in the supplied filing text. Management said cash on hand, operating cash flow and available credit were expected to meet operating and recurring cash needs into the foreseeable future. Remaining performance obligations were $1.6 billion; approximately half were expected to be recognized within 12 months and three-quarters within 24 months.
- Management cautioned that results depend on credit and capital-market conditions, issuance activity, regulation, competition, foreign exchange, cybersecurity and successful integration of acquisitions, among other factors. Ratings-related litigation, regulatory proceedings and investigations could result in damages, fines, penalties or activity restrictions; outcomes and amounts were generally not estimable.
- The filing disclosed approximately $1.03 million of Q1 revenue from Platts information sales to ten subscribers owned or apparently controlled by the Government of Iran. One subscriber designated by OFAC had continued access to part of its subscription until early January 2019, despite the company’s prior statement that it had ceased providing service; the company said it would continue monitoring Iranian customers.
Most important facts for investors to verify
- Whether Ratings issuance activity and revenue stabilize, and whether growth in Market Intelligence, Platts and Indices continues.
- The sustainability of earnings and cash generation after separating the pension settlement charge, working-capital movements and specified free-cash-flow adjustments.
- Progress on Kensho integration and retention, and the expected completion and financial effect of the SPIAS sale.
- Capital-return pace, including final settlement of the $500 million accelerated repurchase, alongside debt, lease obligations and pension funding.
- Developments in ratings-related legal and regulatory matters, and the company’s compliance and controls concerning sanctioned or government-linked customers.