S&P Global Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 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. Interim financial statements were reviewed by the independent accountant, not audited.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $1.704B | $1.609B | $3.275B | $3.176B |
| Operating profit | $813M | $672M | $1.518B | $1.383B |
| Operating margin | 48% | 42% | 46% | 44% |
| Net income attributable to S&P Global | $555M | $461M | $965M | $951M |
| Diluted EPS | $2.24 | $1.82 | $3.89 | $3.75 |
| Cash from operating activities | — | $1.010B | $903M | |
| Free cash flow (non-GAAP) | — | $905M | $765M |
Revenue rose 6% in Q2 and 3% for the first half. Operating profit increased 21% and 10%, respectively; reported comparisons benefited from higher prior-year legal settlement expenses. First-half attributable net income rose 1%, while diluted EPS rose 4%, supported in part by fewer weighted-average shares.
Q2 revenue grew across all four segments. First-half revenue increased at Market Intelligence (9%), Indices (8%) and Platts (5%), but fell 2% at Ratings. Q2 segment revenue was Ratings $801M, Market Intelligence $487M, Platts $213M and Indices $235M. Management cited subscription and contract-value growth, Platts market-data demand, and higher Indices asset-linked fees; Ratings was affected by weaker bank-loan and some structured-finance issuance. Indices growth also reflected partner-rights buyout benefits, contract renegotiation and a retrospective usage fee.
First-half effective tax rate was 21.7%, versus 22.7% in 2018, primarily reflecting excess tax benefits from share-based payments. Interest expense rose to $73M from $61M for the first half.
Financial position and liquidity
- At June 30, cash and cash equivalents were $1.881B, restricted cash was $39M, and total current assets were $3.694B versus current liabilities of $2.699B.
- Long-term debt was $3.664B, compared with $3.662B at year-end 2018. No commercial paper borrowings were outstanding; a $1.2B revolving credit facility, expiring in 2022, was available. The facility’s debt-to-cash-flow covenant limit is 4:1; the company said it had never exceeded the limit.
- First-half operating cash flow was $1.010B; investing activities used $53M and financing activities used $1.008B. Cash, cash equivalents and restricted cash declined $38M to $1.920B.
- First-half capital returns included $644M of share repurchases and $281M of dividends paid. The quarterly dividend was increased from $0.50 to $0.57 per share in January. Management said cash, operating cash flow and credit availability should meet operating and recurring needs for the foreseeable future.
Material changes, outlook and notable items
- A $113M non-cash pre-tax pension settlement charge was recorded in the first quarter after a group annuity contract transferred obligations for about 4,600 retirees and beneficiaries to an insurer. The transaction reduced qualified pension obligations by approximately $370M, or 24%; it was funded from pension plan assets.
- Operating profit comparisons were affected by $73M of legal settlement expenses in Q2 2018; 2019 included $20M of restructuring charges and a $5M lease impairment for the first half. The filing also identifies Kensho retention expenses.
- Adoption of the lease accounting standard on January 1, 2019 added $669M of right-of-use assets and $730M of lease liabilities at June 30. The company said adoption materially affected the balance sheet but not income or cash flows.
- Remaining performance obligations were $1.5B at June 30; the company expected to recognize about half within 12 months and three-quarters within 24 months. These figures exclude certain short-term and usage-based royalty contracts.
- No numerical full-year earnings or revenue guidance is provided in the supplied filing text. Management described strategic priorities including core-business growth, digital platforms, technology and data investment, and disciplined capital returns; it cautioned results depend on market, regulatory and execution factors.
- Key stated risks include credit and capital-market conditions, regulatory changes, litigation and investigations, cybersecurity and business continuity, foreign exchange, competition, and successful integration of Kensho. The company said there were no material changes to previously disclosed risk factors. Legal and regulatory outcomes could include damages, fines, penalties or activity restrictions; the company said outcomes generally cannot be predicted or reasonably estimated.
- After quarter-end, the company completed the sale of SPIAS on July 1 and RigData on July 31, and acquired the Orion technology center in July; Orion was described as immaterial. The 2019 $500M accelerated share repurchase was completed July 31, with an additional 0.1M shares expected in August.
- The filing disclosed approximately $1.4M of Q2 revenue from Platts information sales to subscribers owned or apparently controlled by the Government of Iran; net profit was described as a fraction of revenue.
Important facts for investors to verify
- How much reported profit growth reflects recurring operations versus prior-year legal costs, pension settlement accounting, restructuring and other unusual items.
- Whether Ratings issuance trends, particularly bank loans, CLOs and European markets, recover or continue to pressure segment revenue.
- The sustainability of Indices revenue growth given asset-linked fee exposure, market levels, derivative volumes and one-time contractual or retrospective benefits.
- Cash-flow conversion and capital returns alongside debt, lease obligations, pension funding and the redeemable S&P Dow Jones Indices noncontrolling interest, which rose to $1.890B.
- Developments in regulatory and legal matters, cybersecurity and compliance risks, and the post-quarter divestitures and share-repurchase settlement.