S&P Global Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. S&P Global provides ratings, benchmarks, analytics and data through Ratings, Market Intelligence, Platts and Indices. Interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $2.106B | $1.943B | $4.122B | $3.729B |
| Operating profit | $1.154B | $1.105B | $2.234B | $2.017B |
| Operating margin | 55% | 57% | 54% | 54% |
| Net income attributable to S&P Global | $798M | $792M | $1.553B | $1.431B |
| Diluted EPS | $3.30 | $3.28 | $6.42 | $5.90 |
- For Q2, revenue increased 8%, while operating profit rose 4% and diluted EPS rose 1%. For the first half, revenue and operating profit each increased 11%, and diluted EPS increased 9%.
- Q2 revenue grew across all four segments: Ratings +7%, Market Intelligence +8%, Platts +9% and Indices +16%. Indices growth reflected higher ETF and mutual-fund assets under management and data subscriptions, partly offset by lower exchange-traded derivatives revenue.
- Q2 operating margin declined to 55% from 57%; management cited merger costs, higher incentives and compensation. Excluding IHS Markit merger costs, Q2 operating profit increased 8%.
- Effective tax rate was 25.1% in Q2 and 24.3% for the first half, versus 21.7% and 21.6% in 2020. The increase reflected foreign taxes, a UK tax-rate-related deferred-tax revaluation, nondeductible merger costs and prior-year tax examination resolutions.
Cash flow, liquidity and capital
- First-half cash from operating activities was $1.691B, up from $1.617B. Capital expenditures were $25M; reported free cash flow, a non-GAAP measure after capital expenditures and distributions to noncontrolling interests, was $1.548B versus $1.507B. Free cash flow including an add-back for $77M of IHS Markit merger costs was $1.625B.
- Cash, cash equivalents and restricted cash totaled $5.221B at June 30, 2021, up $1.099B from year-end. Cash used in investing was $33M; cash used in financing was $526M. The lower financing outflow versus 2020 largely reflected no cash share repurchases in the first half of 2021.
- Long-term debt was $4.112B; cash and cash equivalents were $5.213B. The company reported no commercial paper or credit-facility borrowings. A new $1.5B revolving facility runs through April 2026; the disclosed leverage covenant limit is 4:1 and had not been exceeded.
- The quarterly dividend increased from $0.67 to $0.77 per share; first-half shareholder dividends paid were $371M. No shares were repurchased under the announced programs during Q2.
- Current assets were $6.932B and current liabilities $3.315B. Unearned revenue was $2.099B. Remaining performance obligations were $2.5B; management expected to recognize approximately half within 12 months and three-quarters within 24 months.
Material changes, outlook and notable items
- Growth was supported by subscription and non-transaction revenue, stronger structured-finance and bank-loan ratings activity for the first half, and increased Indices asset-linked fees. Q2 Ratings transaction revenue was down 1%, including lower corporate bond ratings revenue; management noted comparisons with unusually strong 2020 issuance.
- Corporate unallocated expense included $50M of Q2 and $99M of first-half IHS Markit merger costs. The merger had shareholder approval and was expected to close in Q4 2021, subject to closing conditions and regulatory approvals. The filing provides no specific financial guidance for the remainder of 2021.
- Management said COVID-19 had not materially adversely affected reported results in the periods presented, but the ultimate effect on future business and results remained uncertain. It cited lower travel and occupancy costs in the first half, alongside higher compensation and incentive costs.
- First-half cash-flow-hedge losses recognized in other comprehensive income included a $206M pretax loss on interest-rate swaps with $2.3B notional value, intended to hedge future debt refinancing. Comprehensive income attributable to S&P Global was $682M in Q2 versus $748M, despite higher net income.
- Redeemable noncontrolling interest increased to $3.105B from $2.781B, including a $312M redemption-value adjustment. The Indices joint-venture agreement gives minority holders specified redemption rights, including a right to sell at least 20% of their interest.
- Legal matters include a May 2021 SEC settlement concerning a VIX index quality-assurance mechanism: a $9M penalty, previously reserved, without admission or denial of the allegations. Australian lawsuits relate to alleged losses on pre-financial-crisis collateralized debt obligations; the company said significant payments could not be ruled out. It also cautioned that regulatory proceedings may result in fines, damages or business restrictions.
Important facts for investors to verify
- Progress, regulatory approvals, timing, costs, integration risks and expected synergies for the planned IHS Markit merger.
- Whether revenue growth and margins persist, particularly amid changing credit issuance volumes, derivative activity and market-linked Indices fees.
- Potential outcomes and financial exposure from the Australian litigation and other regulatory or legal matters.
- Cash generation, debt capacity and the potential liquidity consequences of redemption rights in the Indices joint venture.
- How merger costs, tax-rate changes, hedge valuations and other unusual items affect reported results and comparability.