S&P Global Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. S&P Global provides ratings, benchmarks, analytics and data through Ratings, Market Intelligence, Platts and Indices. Financial statements are unaudited; the independent accountant conducted an interim review, not an audit.
Financial performance
Amounts are in millions of dollars except per-share amounts and percentages.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1,689 | $1,546 | $4,964 | $4,721 |
| Operating profit | $891 | $704 | $2,408 | $2,086 |
| Operating margin | 53% | 46% | 49% | 44% |
| Net income attributable to S&P Global | $617 | $495 | $1,582 | $1,447 |
| Diluted EPS | $2.50 | $1.95 | $6.40 | $5.70 |
| Cash from operations | — | — | $1,772 | $1,401 |
| Free cash flow (non-GAAP) | — | — | $1,595 | $1,197 |
- Q3 revenue increased 9%, operating profit 27%, attributable net income 25% and diluted EPS 28%. Nine-month revenue increased 5%, operating profit 15%, attributable net income 9% and diluted EPS 12%.
- Operating profit includes $49 million of gains on the SPIAS and RigData sales. Management reported operating profit growth excluding specified unusual items of 14% for Q3 and 9% for the nine-month period.
- Nine-month operating cash flow rose $371 million. Management attributed the increase mainly to higher operating results, lower legal settlement payments and lower incentive compensation payments. Free cash flow, as defined by the company, deducts capital expenditures and distributions to noncontrolling holders.
Segments
| Segment | Q3 revenue / change | Q3 operating profit / change | Nine-month revenue / change | Nine-month operating profit / change |
|---|---|---|---|---|
| Ratings | $789 / 13% | $472 / 19% | $2,286 / 3% | $1,290 / 10% |
| Market Intelligence | $488 / 5% | $171 / 17% | $1,457 / 8% | $462 / 20% |
| Platts | $212 / 4% | $132 / 35% | $632 / 5% | $333 / 17% |
| Indices | $232 / 14% | $161 / 19% | $684 / 10% | $473 / 13% |
Segment operating-profit comparisons include the disposition gains where applicable. Ratings’ nine-month revenue growth was moderated by lower bank-loan ratings activity; Indices benefited from higher ETF and mutual-fund assets and certain licensing and contract effects. Market Intelligence growth reflected subscription and annualized contract-value gains. Platts cited continued demand for market data and price assessments.
Balance sheet, liquidity and capital returns
- At September 30, 2019, cash and cash equivalents were $1,996 million; current assets were $3,722 million and current liabilities $3,373 million.
- Total debt was $3,665 million, including $699 million classified as short-term, principally 3.3% senior notes due 2020; long-term debt was $2,966 million. Cash less total debt was approximately negative $1,669 million, before considering other obligations. The company had no commercial-paper borrowings and a $1.2 billion revolving credit facility available through June 2022.
- Operating lease right-of-use assets were $660 million; lease liabilities totaled $727 million ($112 million current and $615 million non-current). The new lease standard materially increased balance-sheet assets and liabilities but did not materially affect income or cash flow statements.
- Nine-month financing cash use was $1,684 million, including $1,144 million for share repurchases and $421 million in dividends. The quarterly dividend was increased from $0.50 to $0.57 per share in January 2019. The company stated that cash, operating cash flow and credit availability should be sufficient for foreseeable operating and recurring cash needs.
Material changes, unusual items and management commentary
- Q3 growth reflected increases across all four segments. Ratings benefited from stronger U.S. corporate bond and bank-loan issuance. Management noted that structured-credit issuance, particularly CLOs, was substantially lower year over year. European corporate issuance faced Brexit-related uncertainty.
- The company recorded a $113 million pre-tax noncash pension settlement charge in the first quarter after purchasing a group annuity contract funded with pension assets. The transaction transferred obligations for approximately 4,600 retirees and beneficiaries and reduced qualified pension obligations by about $370 million, or 24%.
- SPIAS and RigData were sold in 2019, generating respective pre-tax gains of $22 million and $27 million. Small Platts acquisitions of Enerdata and Live Rice Index and the Orion technology-center acquisition were described as immaterial.
- Nine-month results also included $20 million of restructuring charges, a $5 million lease impairment, and $17 million of Kensho retention expense. Prior-year comparisons included $73 million of Ratings legal-settlement expense. The 2019 tax rate was 21.9% for the nine-month period, unchanged year over year.
- Management provided no explicit numerical earnings or revenue guidance in this filing. It described priorities including digital and product investment, expansion in China, technology modernization, cost efficiency and disciplined capital allocation. Results are not necessarily indicative of full-year performance.
- Risks include changing regulation and compliance obligations, litigation and investigations, credit and equity-market conditions affecting ratings and index-related activity, competition, customer cost pressure, cyber and business-continuity threats, foreign exchange exposure, and acquisition integration and retention. The company said no material changes had occurred to previously disclosed risk factors.
- Legal and regulatory outcomes are uncertain; the company said it cannot generally predict their timing or reasonably estimate potential effects. The filing also disclosed approximately $781,058 of Q3 revenue from Platts informational materials sold to subscribers owned or controlled, or appearing to be owned or controlled, by the Iranian government; net profit was described as a fraction of revenue. Market Intelligence terminated a commercial relationship with an entity designated under an executive order.
- Redeemable noncontrolling interest rose from $1,620 million to $2,025 million, including a $356 million redemption-value adjustment. The S&P Dow Jones Indices joint-venture agreement gives minority holders redemption rights, and valuation uses significant unobservable assumptions.
Important facts for investors to verify
- How much of reported profit growth is sustainable after excluding the $49 million disposition gains and comparing with prior-year legal, restructuring and impairment charges.
- Whether Ratings revenue and profitability remain resilient if corporate issuance stays strong but structured-credit issuance remains weak.
- The refinancing or repayment plan for the $699 million of notes due in 2020, and the implications of total debt, lease liabilities and ongoing shareholder distributions.
- Whether Market Intelligence subscription growth and Indices asset-linked fees persist, particularly given market-sensitive assets under management and transaction volumes.
- The assumptions driving the $2.025 billion redeemable noncontrolling-interest valuation, along with potential exposure from legal, regulatory, tax and sanctions-related matters.