S&P Global Inc. — First-Quarter 2018 Form 10-Q
Business context and reporting period. The filing covers the unaudited three months ended March 31, 2018, compared with the first quarter of 2017. S&P Global provides ratings, benchmarks, analytics and data through Ratings, Market Intelligence, Platts and Indices. Market Intelligence and Platts were reported as separate segments beginning in 2018; historical segment results were recast. The independent accountant performed an interim review, not an audit, and reported no material modifications needed for GAAP conformity.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $1.567 billion | $1.453 billion | +8% |
| Operating profit | $711 million | $639 million | +11% |
| Operating margin | 45% | 44% | +1 percentage point |
| Net income attributable to S&P Global | $491 million | $399 million | +23% |
| Diluted EPS | $1.93 | $1.53 | +26% |
| Effective tax rate | 21.6% | 29.5% | Down 7.9 percentage points |
| Cash provided by operating activities | $360 million | $353 million | +2% |
| Free cash flow (non-GAAP) | $277 million | $306 million | −10% |
Revenue growth reflected increases across all segments and a favorable 2-percentage-point foreign-exchange effect. Indices revenue rose 25%, Ratings 5%, Market Intelligence 9% and Platts 3%. Ratings growth came chiefly from surveillance and other non-transaction fees; Indices benefited from higher ETF assets under management and derivatives volumes. U.S. corporate bond issuance declined, weighing on Ratings transaction revenue.
Operating profit growth benefited from revenue gains, foreign exchange and lower Ratings incentive costs. Compensation and technology costs increased. Comparisons also benefited from non-cash acquisition and disposition-related charges in 2017; the company said operating-profit growth excluding those prior-year adjustments was 8%.
Cash, debt and liquidity
- Cash and cash equivalents were $1.756 billion at March 31, down $1.023 billion from year-end. Total debt was $3.570 billion, including $400 million short-term and $3.170 billion long-term; net debt was approximately $1.8 billion.
- Operating cash flow was $360 million; investing cash outflow was $87 million, including $57 million for acquisitions. Financing cash outflow was $1.316 billion, primarily reflecting $1.100 billion in share repurchases and $127 million in dividends.
- Free cash flow, defined by the company as operating cash flow less capital expenditures and distributions to noncontrolling holders, was $277 million versus $306 million. Excluding specified legal-settlement payments and related tax effects, it was $299 million versus $307 million.
- The company reported a $1.2 billion revolving credit facility and commercial-paper capacity, with no commercial-paper borrowings outstanding. Management stated that cash, operating cash flows and facility availability should meet operating and recurring cash needs for the foreseeable future. The debt covenant caps indebtedness to cash flow at 4:1; the company said it had never exceeded the limit.
Material changes, outlook and notable items
- The Tax Cuts and Jobs Act reduced the effective tax rate and contributed to higher earnings. Tax amounts remain provisional and may be adjusted as guidance or the company’s interpretation changes.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. Adoption increased opening retained earnings by $35 million and added $3 million to Q1 revenue; prior-year results were not restated.
- The board raised the quarterly dividend from $0.41 to $0.50 per share. The company repurchased 5.0 million shares for $1.1 billion, including an uncapped $1 billion accelerated share repurchase; final settlement was expected by Q3 2018. About 14.0 million authorized shares remained available at quarter-end.
- After quarter-end, the company acquired Kensho in April for approximately $550 million, net of cash acquired, in cash and stock. It also acquired Panjiva in February and Pragmatix in January; each was described as not material to consolidated financial statements.
- No numerical full-year earnings or revenue guidance is provided in the supplied filing text. Management highlighted organic growth, margin expansion, efficiency, customer experience, innovation and technology investment as strategic priorities, while cautioning that execution and market conditions could affect results.
Risks and contingencies
- Pending ratings-related civil litigation and regulatory matters could result in judgments, damages, fines, penalties or operating restrictions; the company generally could not predict outcomes or reasonably estimate potential losses. It recorded $82 million in accrued legal and regulatory settlements at quarter-end.
- The IRS proposed approximately $242 million of additional federal tax for 2015, mainly challenging deductions for state litigation settlements. The company is contesting the proposal. Unrecognized tax benefits were $210 million, and management expected approximately $90 million could be resolved in the next 12 months.
- Key risks include debt- and equity-market conditions, ratings demand and credibility, regulation, litigation, competition, acquisitions and integration, cybersecurity and business continuity, foreign exchange, commodities-market volatility, and tax or accounting changes.
- Platts reported approximately $94,000 of Q1 revenue from information sales to subscribers owned or apparently controlled by the Iranian government; the company said it believed the transactions qualified for sanctions exemptions and would continue monitoring compliance.
Important facts for investors to verify
- Whether revenue and margin momentum continues, especially at Indices and Ratings, and how much growth depends on foreign exchange or market volumes.
- Completion and final share count of the $1 billion accelerated repurchase, alongside the effect of buybacks and the higher dividend on cash and equity.
- Integration, spending and performance of Kensho, Panjiva and Pragmatix, and the funding impact of the post-quarter Kensho acquisition.
- Resolution of the IRS dispute, provisional tax accounting and pending litigation or regulatory matters, including any changes to recorded reserves.
- Cash generation relative to capital returns and debt obligations, particularly the $400 million notes due in 2018; confirm refinancing or repayment plans and ongoing covenant headroom.