S&P Global Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone fourth-quarter filing; fourth-quarter figures are included below where disclosed. Amounts are U.S. dollars.
Business context
S&P Global provides ratings, benchmarks, analytics and data to capital and commodity markets. Its four reportable segments are Ratings, Market Intelligence, Platts and S&P Dow Jones Indices. In April 2018, the company acquired Kensho for approximately $550 million, net of cash acquired, in a mix of cash and stock; Kensho results are reported in Corporate.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $6.258 billion | $6.063 billion | +3% |
| Operating profit | $2.790 billion | $2.583 billion | +8% |
| Operating margin | 45% | 43% | +2 percentage points |
| Net income attributable to S&P Global | $1.958 billion | $1.496 billion | +31% |
| Diluted EPS | $7.73 | $5.78 | +34% |
| Cash provided by operating activities | $2.064 billion | $2.016 billion | +2% |
| Free cash flow (non-GAAP) | $1.797 billion | $1.782 billion | +1% |
Fourth-quarter 2018 revenue was $1.536 billion versus $1.589 billion in Q4 2017; operating profit was $704 million versus $627 million; net income attributable to S&P Global shareholders was $512 million versus $263 million; diluted EPS was $2.03 versus $1.02.
2018 revenue growth was led by Market Intelligence (+9%), Indices (+15%) and Platts (+5%); Ratings revenue declined 4%. Subscription revenue rose 9% to $2.682 billion. Ratings transaction revenue fell 11%, largely reflecting lower corporate bond issuance, while Ratings non-transaction revenue increased 4%.
At December 31, 2018, cash, cash equivalents and restricted cash totaled $1.958 billion, down $821 million from year-end 2017. Total debt was $3.662 billion, compared with $3.569 billion; working capital was $975 million versus $1.110 billion. The company reported total assets of $9.458 billion and equity of $684 million. Operating cash flow exceeded capital expenditures and distributions to noncontrolling interests, producing reported free cash flow of $1.797 billion.
Material changes versus the prior period
- Revenue growth was modest overall, with foreign exchange contributing one percentage point. Lower Ratings revenue was offset by growth in the other three reportable segments.
- Operating profit increased as segment growth and lower compensation costs at Ratings outweighed higher costs in Market Intelligence and Indices, increased legal settlement expense and Kensho-related costs.
- Net income benefited from a lower effective tax rate: 20.9% in 2018 versus 33.4% in 2017. The 2017 rate included a $149 million net tax charge associated with U.S. tax reform.
- 2018 cash used in investing activities was $513 million, primarily reflecting the Kensho acquisition and intellectual property purchases. Cash used in financing activities rose to $2.288 billion, principally due to increased share repurchases.
- Segment reporting changed in 2018: Market Intelligence and Platts are presented separately, with historical segment information revised. Trucost was moved from Indices to Market Intelligence.
Outlook, risks and unusual items
- Management said available cash, operating cash flow and the $1.2 billion revolving credit facility were expected to cover 2019 operating and recurring cash needs. The filing describes strategic priorities for 2019 but does not provide a clear consolidated earnings or revenue forecast.
- The board approved an increase in the quarterly dividend from $0.50 to $0.57 per share in January 2019. The company repurchased 8.4 million shares for $1.7 billion during 2018 and announced a further $500 million accelerated share repurchase in February 2019.
- Market conditions were a notable headwind for Ratings: global corporate issuance fell 10% in 2018, including a 40% decline in global high-yield issuance. Management cited market volatility, slower global growth and higher U.S. interest rates. Indices revenue also faces exposure to market levels, fund assets and derivatives trading volumes; Platts is exposed to commodity-market conditions.
- Key risks include litigation and regulatory actions, cybersecurity and data privacy, evolving regulation of ratings and benchmarks, competition, acquisition integration and economic or market volatility. The filing highlights uncertainty around Brexit and the costs and requirements of new benchmark and privacy rules.
- The company recorded $74 million of Ratings legal settlement expense in 2018 and paid $180 million in legal settlements, as reflected in its free-cash-flow reconciliation. It settled certain Australian civil cases relating to rated collateralized debt obligations; the filing excerpt does not state the settlement amount. The company says it cannot predict the outcome or reasonably estimate potential losses for many legal and regulatory matters.
- Other items include $31 million of Kensho retention expense, $11 million of lease impairments, and a $25 million restructuring charge. The 2018 effective tax rate fell following U.S. tax reform. The company also disclosed approximately $5.77 million of 2018 revenue from Platts information subscriptions to 13 customers owned or apparently controlled by Iran’s government; it stated it believed the sales qualified for sanctions exemptions and stopped service to one customer after its designation by OFAC.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and no identified material weaknesses.
Important facts for investors to verify
- Whether Ratings transaction revenue and issuance volumes recover, particularly corporate and high-yield debt issuance.
- Whether Market Intelligence, Platts and Indices sustain growth, and how market declines or reduced trading and fund assets could affect those businesses.
- The cash and earnings effects of litigation, regulatory proceedings and the Australian settlement, including any future charges or payments.
- Kensho integration and returns on the acquisition, alongside the effect of ongoing acquisition and technology investment.
- Debt maturities, leverage covenant headroom, the $1.620 billion redeemable noncontrolling interest in the Indices joint venture, and the effect of repurchases and dividends on liquidity.
- Implementation costs and business effects of benchmark, privacy and Brexit-related regulatory changes.