S&P Global Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; comparisons are with the same 2016 periods. Amounts are in U.S. dollars; financial statement figures are in millions except per-share data. The interim financial statements were reviewed, not audited.
Business context and performance
S&P Global provides ratings, benchmarks, analytics and data through Ratings, Market and Commodities Intelligence (MCI), and S&P Dow Jones Indices (Indices).
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $1,509; +2% | $1,482 | $2,962; +5% | $2,823 |
| Operating profit | $677; +4% | $651 | $1,324; +14% | $1,163 |
| Operating margin | 45% | 44% | 45% | 41% |
| Net income attributable to S&P Global | $421; +10% | $383 | $820; +21% | $677 |
| Diluted EPS | $1.62; +13% | $1.44 | $3.15; +24% | $2.54 |
| Net interest expense | $37 | $42 | $74 | $83 |
Quarterly revenue growth reflected Ratings and Indices gains, partly offset by lower MCI revenue. Ratings revenue rose 10% in Q2, led by corporate bond and bank-loan ratings; Indices revenue rose 20%, largely from higher ETF and mutual-fund assets under management. MCI revenue fell 10%, mainly due to prior-period and 2017 business disposals; management cited growth in existing desktop, risk-services and Platts offerings. For the first half, Ratings revenue rose 18%, Indices 17%, and MCI fell 10%.
Q2 operating profit growth was partly offset by higher compensation and incentive costs. First-half reported results also reflect differing unusual items between years, including prior-year legal settlement insurance recoveries and impairment charges, and 2017 facility-exit, severance, asset-write-off, and acquisition/disposition-related charges.
Cash flow, liquidity and capital
- Cash and cash equivalents were $2,384 at June 30, 2017, approximately 20% domestic and 80% held abroad. Total debt was $3,566, primarily long-term senior notes; net debt was approximately $1,182.
- First-half operating cash flow was $674, versus $640 in 2016. Investing cash outflow was $124, including $56 of capital expenditures and $70 for acquisitions. Financing cash outflow was $618.
- Company-defined free cash flow was $564 versus $547 in the prior-year period. It excludes the effects of specified items and is a non-GAAP measure.
- Current assets were $3,723 and current liabilities $2,362 at June 30. Unearned revenue was $1,502. The company said cash, operating cash flow and credit availability should meet operating and recurring cash needs for the foreseeable future.
- A new $1.2 billion revolving credit facility runs to June 30, 2022, replacing a facility previously due in 2020. No commercial paper or facility borrowings were outstanding. Its financial covenant caps the defined indebtedness-to-cash-flow ratio at 4:1; the company reported it had never exceeded the limit.
- First-half shareholder distributions included $212 of dividends and $346 of share repurchases. The quarterly dividend was increased from $0.36 to $0.41 per share; 23.2 million shares remained authorized for repurchase. The 27% Indices joint-venture minority interest is reported separately as $1,107 of redeemable noncontrolling interest.
Outlook, risks and unusual items
The filing provides strategic priorities—growth, operational excellence, digital transformation, international expansion and talent accountability—but no quantified earnings or revenue guidance. Management stated that cash and available credit are expected to support foreseeable operating and recurring needs, while cautioning that strategy execution and results are subject to market and regulatory conditions.
- Tax dispute: The IRS proposed increasing federal income tax for 2015 by approximately $242 million, primarily concerning deductions for litigation settlements. The company filed a formal protest, disagrees with the proposed adjustment and said it did not materially change its assessment. The filing does not establish the ultimate outcome or a clear expected payment.
- Legal and regulatory exposure: The company described ongoing financial-crisis-related ratings litigation, regulatory inquiries, and other proceedings. It said outcomes and potential losses generally cannot be predicted or reasonably estimated. In the Trani proceeding, defendants were acquitted in March 2017; the prosecutor may appeal.
- Potential liquidity obligation: After December 31, 2017, CME Group and its affiliate may put at least 20% of their S&P Dow Jones Indices interests to the company, which would generally be required to buy at fair value. A change of control also triggers a put right. The filing does not provide a clear purchase amount.
- Other risks: Management cited changing regulation, credit and capital-market conditions, litigation, acquisitions and dispositions, competition, commodities-market volatility, foreign exchange, cybersecurity, and employee retention. The filing reported no material changes to previously disclosed risk factors.
- Iran disclosure: A division sold informational materials to 15 subscribers owned or apparently controlled by the Iranian government. Q2 revenue was approximately $110,000, with net profit described as a fraction of revenue; the company stated it believed the transactions were permitted under applicable information exemptions and would continue monitoring them.
- Tax-rate benefit: The first-half effective tax rate was 29.1%, versus 31.9% in 2016, reflecting share-based-payment tax benefits, tax-audit resolutions and an acquisition-related benefit. The filing identifies $17 of excess tax benefits from share-based payments in the first half.
Important facts for investors to verify
- Whether Ratings issuance levels and Indices-linked asset levels sustain growth, and how MCI’s continuing-business growth compares with the reported decline driven by disposals.
- The status and potential financial effects of the IRS proposal, ratings litigation, regulatory matters and any related reserves or developments.
- The timing, valuation and funding implications of the S&P Dow Jones Indices minority-interest put rights after December 31, 2017.
- Cash availability and repatriation considerations, given that about 80% of cash was held abroad, alongside planned dividends and repurchases.
- How the company’s non-GAAP free cash flow measure reconciles to operating cash flow and whether unusual items materially affect comparisons.