S&P Global Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; comparisons are with the same periods in 2019. Financial statements are unaudited and were subject to an independent accountant’s interim review, not a full audit.
Business context
S&P Global provides ratings, benchmarks, analytics and data through Ratings, Market Intelligence, Platts and Indices. The company reported broad-based revenue growth, while Q3 net income was reduced by a substantial debt-extinguishment charge.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1.846 billion | $1.689 billion | $5.575 billion | $4.964 billion |
| Operating profit | $944 million | $891 million | $2.960 billion | $2.408 billion |
| Operating margin | 51% | 53% | 53% | 49% |
| Net income attributable to S&P Global | $455 million | $617 million | $1.885 billion | $1.582 billion |
| Diluted EPS | $1.88 | $2.50 | $7.78 | $6.40 |
Q3 revenue grew 9% and operating profit 6%; attributable net income fell 26% and diluted EPS fell 25%. The quarter included a $279 million pretax loss on extinguishment of debt. For the first nine months, revenue increased 12%, operating profit 23%, attributable net income 19% and diluted EPS 22%.
Q3 segment revenue and operating profit: Ratings $894 million and $544 million; Market Intelligence $530 million and $164 million; Platts $222 million and $121 million; Indices $234 million and $151 million. Ratings led growth, supported by higher corporate bond issuance. Platts operating profit was down year over year partly because 2019 included a RigData-sale gain; Indices profit was lower amid higher legal and compensation costs.
Cash flow and liquidity: Nine-month operating cash flow was $2.426 billion, up from $1.772 billion. Capital expenditures were $43 million; free cash flow, a non-GAAP measure, was $2.240 billion, versus $1.595 billion. September 30 cash and cash equivalents were $3.148 billion (plus $20 million restricted cash), compared with $2.866 billion at year-end 2019. Current assets were $4.841 billion and current liabilities $2.815 billion.
Debt and capital returns: Long-term debt was $4.110 billion, versus $3.948 billion at December 31, 2019. The company issued $1.3 billion of notes in August and used proceeds to retire $900 million of 2026 notes and portions of longer-dated notes; the refinancing generated the $279 million extinguishment loss. A $1.2 billion revolving credit facility and commercial-paper program were undrawn, with no commercial paper outstanding. Nine-month cash uses included $1.164 billion for share repurchases and $484 million for shareholder dividends. The quarterly dividend was increased to $0.67 per share in January.
Material changes and management commentary
- Revenue increased across all four segments. Ratings transaction revenue benefited from corporate bond issuance; Market Intelligence cited growth in desktop, credit-risk and data-management products; Platts cited continued demand for market data; Indices benefited from higher ETF assets and, year to date, derivatives volumes.
- Operating results benefited from lower travel and entertainment costs during COVID-19 restrictions, partly offset by higher incentive and compensation costs. Q3 operating margin declined year over year.
- Management said COVID-19 had not materially adversely affected reported results through September 30, but its future effects were uncertain. The company incorporated a modeled three-month recovery scenario into its 2020 guidance expectations; the filing text does not provide a clear numerical guidance range.
- Management described liquidity as sufficient for foreseeable operating and recurring cash needs. The Board said it was prudent not to initiate a new share repurchase plan at that time; it made no changes to dividend guidance. The existing 2020 repurchase authorization remained available, but no shares were repurchased under it in Q3.
Risks, contingencies and unusual items
- Indices received an SEC Wells Notice concerning alleged disclosure deficiencies about a quality-assurance mechanism affecting certain volatility index values on one business day in 2018. The notice is not a formal allegation or finding; potential remedies could include penalties or restrictions.
- The company disclosed a potential Australian class action concerning alleged investment losses in pre-financial-crisis collateralized debt obligations rated by Ratings. The company and subsidiary had not been served; outcomes and potential costs were uncertain.
- COVID-19 risks include recession, market volatility, weaker issuance or trading activity, subscription pricing and renewal pressure, lower energy-related demand, remote-work productivity and cybersecurity risks. Management cautioned that favorable corporate bond issuance conditions might not continue.
- The redeemable 27% noncontrolling interest in S&P Dow Jones Indices was $2.511 billion, up from $2.268 billion at year-end. Its redemption value depends in part on valuation assumptions, including expected cash flows and discount rates.
- Other notable items included $16 million of nine-month disposition gains and a $5 million technology-related impairment charge. The company stated that it could not reliably predict outcomes or estimate potential losses for certain legal and regulatory matters.
Important facts for investors to verify
- Whether elevated Ratings transaction revenue and corporate bond issuance persist, and how lower structured-finance issuance affects the segment.
- The full-year outlook and COVID-19 impacts: the filing discusses a recovery scenario but gives no clear numerical guidance range in the supplied text.
- The debt-refinancing economics, including the $279 million extinguishment charge and the resulting debt and interest-cost profile.
- Developments in the SEC matter and Australian complaint, including any change in the company’s ability to estimate exposure.
- Capital-allocation policy, including the status of repurchases and the Board’s statement that dividend guidance was unchanged.