S&P Global Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Amounts are in U.S. dollars; financial statements are unaudited and were reviewed by Ernst & Young.
Business context
S&P Global provides ratings, benchmarks, analytics and data through Ratings, Market Intelligence, Platts and Indices. Kensho, acquired in April for approximately $550 million net of cash acquired in a cash-and-stock transaction, is reported in Corporate. Market Intelligence and Platts became separate reportable segments in 2018; prior segment information was recast.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1.546 billion | $1.513 billion | $4.721 billion | $4.475 billion |
| Operating profit | $704 million | $649 million | $2.086 billion | $1.956 billion |
| Operating margin | 45.5% | 42.9% | 44.2% | 43.7% |
| Net income attributable to S&P Global | $495 million | $414 million | $1.447 billion | $1.234 billion |
| Diluted EPS | $1.95 | $1.61 | $5.70 | $4.75 |
| Cash from operations | — | $1.401 billion | $1.203 billion |
- Revenue rose 2% in Q3 and 6% year to date; operating profit rose 8% and 7%, respectively. Diluted EPS increased 21% and 20% (rounded filing percentages: 22% and 20%).
- Nine-month free cash flow, a non-GAAP measure, was $1.197 billion versus $1.057 billion. The company reported $1.404 billion excluding specified settlement, tax and other items; review the filing’s reconciliation and definitions.
- Cash and cash equivalents were $2.158 billion, plus $45 million restricted cash, at September 30, versus $2.777 billion and $2 million, respectively, at year-end 2017. Total debt was $3.661 billion, up from $3.569 billion; there was no short-term debt outstanding. The $1.2 billion revolving credit facility was undrawn.
- Current assets were $3.628 billion and current liabilities $2.517 billion. Management said cash, operating cash flow and credit availability should meet operating and recurring cash needs into the foreseeable future.
- The company generated $1.401 billion of operating cash flow, used $346 million in investing activities and $1.579 billion in financing activities. Financing included $1.108 billion of share repurchases and $379 million of shareholder dividends. The quarterly dividend was increased from $0.41 to $0.50 per share.
Segments and material changes
- Ratings: Q3 revenue fell 5% to $700 million as corporate bond and bank loan ratings activity declined; nine-month revenue edged up 1% to $2.223 billion. Nine-month operating profit included $73 million of legal settlement expense.
- Market Intelligence: Revenue grew 10% in Q3 and 9% year to date, to $464 million and $1.349 billion. Growth was led by subscription and annualized contract value gains; acquisitions also contributed.
- Platts: Revenue grew 5% in both periods, reaching $204 million in Q3 and $604 million year to date. Subscription demand increased, while usage-based royalties were pressured by lower oil trading volumes.
- Indices: Revenue grew 10% in Q3 and 16% year to date, to $205 million and $627 million, reflecting higher ETF and mutual fund assets under management and stronger exchange-traded derivatives activity. Q3 ending ETF assets were $1.505 trillion, up 24% year over year.
- Q3 revenue growth reflected strength in Market Intelligence, Indices and Platts, partly offset by weaker Ratings transaction revenue. Year-to-date growth came from all four segments. Foreign exchange helped revenue by 1 percentage point year to date but reduced Q3 revenue by 1 point.
Outlook, commentary, risks and unusual items
- The filing does not provide specific numeric earnings or revenue guidance. Management emphasized organic growth, margin expansion, operational efficiency, product development and customer experience; it cautioned that results depend on market, regulatory and other factors.
- Management attributed operating improvement to segment growth and lower Ratings compensation costs, partly offset by higher Market Intelligence data, royalty and compensation costs. Q3 included $11 million of Kensho retention costs and $11 million of lease impairments; nine-month results included $23 million of Kensho retention costs, $11 million of lease impairments, $7 million of severance and the $73 million Ratings legal settlement expense.
- The company settled certain Australian civil cases related to alleged losses on rated collateralized debt obligations; the settlement was court-approved in August 2018. Legal and regulatory proceedings, investigations and inquiries could result in damages, penalties or operating restrictions.
- The effective tax rate fell to 20.4% for Q3 and 21.9% year to date, from 27.3% and 28.5%, mainly reflecting the U.S. tax law changes. The IRS and company agreed to a $14 million settlement of a 2015 tax dispute, fully reserved previously. Management expected unrecognized tax benefits to decrease by about $40 million over the next 12 months, subject to audit resolution.
- Adoption of ASC 606 increased opening retained earnings by $35 million; the company recognized $5 million of incremental revenue through September. Prior-year revenue was not restated. The company expected the lease accounting standard, effective January 1, 2019, to materially affect the balance sheet but not materially affect income or cash flows.
- Other stated risks include credit-market and issuance conditions, regulation of ratings and data businesses, acquisition integration and retention (including Kensho), cybersecurity and business continuity, foreign exchange, competition, and geopolitical and Brexit-related uncertainty. The company disclosed approximately $1.15 million of Q3 revenue from Platts information sales to 12 Iranian government-owned or controlled subscribers; it believed the activity was permitted under applicable exemptions and said it would continue monitoring it.
Key facts for investors to verify
- How much of revenue and profit growth was organic versus currency effects, acquisitions and accounting changes, particularly the modified retrospective adoption of ASC 606.
- Ratings issuance trends and whether weaker corporate bond and bank loan ratings activity persists; also review the effect and cash timing of the Australian settlement.
- Kensho integration, retention costs and expected contribution, alongside the impact of the 2018 acquisitions on goodwill and intangible assets.
- Capital allocation and leverage: continued buybacks and dividends, debt maturities and the redeemable 27% Indices noncontrolling interest, carried at $1.485 billion and subject to contractual redemption provisions.
- Progress and final quantified impact of the new lease standard, tax examinations and other legal or regulatory matters.