UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20152018
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-1023
McGraw Hill Financial,S&P Global Inc.
(Exact name of registrant as specified in its charter)
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| New York | | 13-1026995 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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| 55 Water Street, New York, New York | | 10041 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: 212-438-1000
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| Title of each class | | Name of exchange on which registered |
| Common Stock — $1 par value | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES ¨þ NO þ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES ¨ NO þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
YES þ NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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þ Large accelerated filer | | o Accelerated filer | | o Non-accelerated filer | | o Smaller reporting company |
| | (Do not check if a smaller reporting company)o Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ NO þ
The aggregate market value of voting stock held by non-affiliates of the Registrant as of the last business day of the second fiscal quarter ended June 30, 2015,2018, was $27.4$51.3 billion, based on the closing price of the common stock as reported on the New York Stock Exchange of $100.45$203.89 per common share. For purposes of this calculation, it is assumed that directors, executive officers and beneficial owners of more than 10% of the registrant outstanding stock are affiliates. The number of shares of common stock of the Registrant outstanding as of January 22, 201625, 2019 was 265.3248.6 million shares.
Part III incorporates information by reference from the definitive proxy statement for the 20162019 annual meeting of shareholders.
TABLE OF CONTENTS
| | | | PART I | | PART I | |
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| | PART II | | PART II | |
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| 9b. | | | | |
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| | PART III | | PART III | |
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| | PART IV | | PART IV | |
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains “forward-looking statements,” as defined in the Private Securities Litigation Reform Act of 1995. These statements, which express management’s current views concerning future events, trends, contingencies or results, appear at various places in this report and use words like “anticipate,” “assume,” “believe,” “continue,” “estimate,” “expect,” “forecast,” “future,” “intend,” “plan,” “potential,” “predict,” “project,” “strategy,” “target” and similar terms, and future or conditional tense verbs like “could,” “may,” “might,” “should,” “will” and “would.” For example, management may use forward-looking statements when addressing topics such as: the outcome of contingencies; future actions by regulators; changes in the Company’s business strategies and methods of generating revenue; the development and performance of the Company’s services and products; the expected impact of acquisitions and dispositions; the Company’s effective tax rates; and the Company’s cost structure, dividend policy, cash flows or liquidity.
Forward-looking statements are subject to inherent risks and uncertainties. Factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements include, among other things:
worldwide economic, financial, political and regulatory conditions, including geopolitical uncertainty and conditions that may result from legislative, regulatory, trade and policy changes associated with the Company’s ability to make acquisitions and dispositions and to integrate, and realize expected synergies, savingscurrent U.S. administration or benefitsthe United Kingdom’s withdrawal from the businesses it acquires, including the impact of the acquisition of SNL on the Company’s results of operations, any failure to successfully integrate SNL into the Company’s operations and generate anticipated synergies and other cost savings, any failure to attract and retain key employees to execute the combined company’s growth strategy, any failure to realize the intended tax benefits of the acquisition, and the risk of litigation, competitive responses, or unexpected costs, charges or expenses resulting from or relating to the SNL acquisition;
European Union;
the rapidly evolving regulatory environment, in Europe, the United States Europe and elsewhere, affecting Standard & Poor’sS&P Global Ratings, Services,S&P Global Platts, S&P Dow JonesGlobal Indices, and S&P Capital IQ and SNL and the Company’s other businesses,Global Market Intelligence, including new and amended regulations and the Company’s compliance therewith;
the outcomeimpact of the recent acquisition of Kensho, including the impact on the Company’s results of operations; any failure to successfully integrate Kensho into the Company’s operations; any failure to attract and retain key employees; and the risk of litigation, government and regulatory proceedings, investigations and inquiries;
worldwide economic, financial, political and regulatory conditions;
unexpected costs, charges or expenses relating to the health of debt and equity markets, including credit quality and spreads, the level of liquidity and future debt issuances;
the level of interest rates and the strength of the domestic and global credit and capital markets in the United States and abroad;
the demand and market for credit ratings in and across the sectors and geographies where the Company operates;
concerns in the marketplace affecting the Company’s credibility or otherwise affecting market perceptions of the integrity or utility of independent credit ratings;
acquisition;
the Company’s ability to maintain adequate physical, technical and administrative safeguards to protect the security of confidential information and data, and the potential offor unauthorized access to our systems or a system or network disruption that results in regulatory penalties, remedial costs or improper disclosure of confidential information or data;data, regulatory penalties and remedial costs;
our ability to make acquisitions and dispositions and successfully integrate the businesses we acquire;
the outcome of litigation, government and regulatory proceedings, investigations and inquiries;
the health of debt and equity markets, including credit quality and spreads, the level of liquidity and future debt issuances and the potentially adverse impact of increased access to cash resulting from the Tax Cuts and Jobs Act;
the demand and market for credit ratings in and across the sectors and geographies where the Company operates;
concerns in the marketplace affecting the Company’s credibility or otherwise affecting market perceptions of the integrity or utility of independent credit ratings, benchmarks and indices;
the effect of competitive products and pricing;
pricing, including the level of success of new product developments and global expansion;
consolidation in the Company’s end-customer markets;
the introduction of competing products or technologies by other companies;
the impact of customer cost-cutting pressures, acrossincluding in the financial services industry;
industry and commodities markets;
a decline in the demand for credit risk management tools by financial institutions;
the level of success of new product developments and global expansion;
the level of merger and acquisition activity in the United States and abroad;
the volatility of the energy marketplace;
the health of the commodities markets;
our ability to attract, incentivize and retain key employees;
our ability to adjust to changes in European and United Kingdom markets as the United Kingdom leaves the European Union, and the impact of cost-cutting pressuresthe United Kingdom’s departure on our offerings in the European Union and reduced tradingUnited Kingdom, particularly in oil and other commodities markets;
the levelevent of the Company’s future cash flows;
United Kingdom's departure without an agreement on terms with the level of the Company’s capital investments;
the level of restructuring charges the Company incurs;
the strength and performance of the domestic and international automotive markets;
European Union;
the Company’s ability to successfully recover should it experience a disaster or other business continuity problem from a hurricane, flood, earthquake, terrorist attack, pandemic, security breach, cyber-attack, power loss, telecommunications failure or other natural or man-made event;
changes in applicable tax or accounting requirements;requirements, including the impact of the Tax Cuts and Jobs Act in the U.S.;
the level of the Company’s future cash flows and capital investments;
the impact on the Company’s revenue and net income caused by fluctuations in foreign currency exchange rates; and
the Company’s exposure to potential criminal sanctions or civil penalties if it fails to comply with foreign and U.S. laws and regulations that are applicable in the domestic and international jurisdictions in which it operates, including trade sanctions laws relating to countries such as Iran, Russia, Sudan and Syria, anti-corruption laws such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010, anti-briberyand local laws anti-money laundering laws,prohibiting corrupt payments to government officials, as well as import and other financial crimes laws.export restrictions.
The factors noted above are not exhaustive. The Company and its subsidiaries operate in a dynamic business environment in which new risks emerge frequently. Accordingly, the Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the dates on which they are made. The Company undertakes no obligation to update or revise any forward-looking statement to reflect events or circumstances arising after the date on which it is made, except as required by applicable law. Further information about the Company’s businesses, including information about factors that could materially affect its results of operations and financial condition, is contained in the Company’s filings with the SEC, including Item 1a, Risk Factors, in this Annual Report on Form 10-K.
PART I
Item 1. Business
Overview
McGraw Hill Financial,S&P Global Inc. (together with its consolidated subsidiaries, the “Company,” the “Registrant,” “we,” “us” or “our”) is a leading provider of transparent and independent ratings, benchmarks, analytics and ratings, analytics, data to the capital and research provider serving the global capital, commodities and commercial markets.commodity markets worldwide. The capital markets include asset managers, investment banks, commercial banks, insurance companies, exchanges, trading firms and issuers; and the commoditiescommodity markets include producers, traders and intermediaries within energy, metals, petrochemicals and agriculture; and the commercial markets include professionals and corporate executives within automotive, financial services, insurance and marketing / research information services.agriculture. We serve our global customers through a broad range of products and services available through both third-party and proprietary distribution channels. We were incorporated in December of 1925 under the laws of the state of New York.
In the fourth quarter of 2015, we began exploring strategic alternatives for J.D. Power, included in our Commodities & Commercial segment. We committed to and initiated an active program to sell J.D. Power in its current state that we believe is probable in the next year. As a result, we have classified the assets and liabilities of J.D. Power as held for sale in our consolidated balance sheet as of December 31, 2015. The anticipated disposal does not represent a strategic shift that will have a major effect on operations and financial results, therefore, it is not classified as a discontinued operation.
On November 3, 2014, we completed the sale of McGraw Hill Construction, which has historically been part of our Commodities & Commercial segment, to Symphony Technology Group for $320 million in cash. We recorded an after-tax gain on the sale of $160 million, which is included in discontinued operations, net in the consolidated statement of income for the year ended December 31, 2014. We used the after-tax proceeds from the sale to make selective acquisitions, investments, share repurchases and for general corporate purposes.
On March 22, 2013, we completed the sale of McGraw-Hill Education ("MHE") to investment funds affiliated with Apollo Global Management, LLC for a purchase price of $2.4 billion in cash. We recorded an after-tax gain on the sale of $589 million, which is included in discontinued operations, net in the consolidated statement of income for the year ended December 31, 2013. We used the after-tax proceeds from the sale to pay down short-term debt for the special dividend paid in 2012, to make selective acquisitions, investments, share repurchases and for general corporate purposes.
In 2015, we continued to focus on investments in targeted financial assets, divesting selected non-core assets, reducing our real estate portfolio and increasing shareholder return.
In 2016, pending shareholder approval, the Company will be re-branded S&P Global. This name better leverages the Company's rich heritage as a financial data and analytics brand while signaling that we have a strong global footprint and broad portfolio.
Investments in Targeted Financial Assets / Divest Selected Non-Core Assets
During 2015, we continued to create a portfolio focused on scalable, industry leading, interrelated businesses in the capital and commodity markets.
S&P Capital IQ and SNL— we acquired SNL Financial LC ("SNL"), a leading provider of news, data, and analytics to five sectors in the global economy: financial institutions, real estate, energy, media & communications, and metals & mining;
Commodities & Commercial:
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◦ | we acquired the entire issued share capital of Petromedia Ltd and its operating subsidiaries, an independent provider of data, intelligence, news and tools to the global fuels market that offers a suite of products providing clients with actionable data and intelligence that enables informed decisions, minimizes risk and increases efficiency; |
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◦ | we acquired National Automobile Dealers Association's Used Car Guide, a leading provider of U.S. retail, trade-in and auction used-vehicle valuation products, services and information. |
In 2015, we further reduced our real estate footprint by completing the consolidation of our corporate headquarters with our operations in New York City.
During 2014, we continued to execute our strategy of investing for growth in markets that have size and scale while exiting non-core assets.
Commodities & Commercial— we acquired Eclipse Energy Group AS which complements our North American natural gas capabilities, which we obtained from our Bentek Energy LLC acquisition in 2011;
S&P Ratings— we acquired BRC Investor Services S.A., a Colombia-based ratings firm providing risk classifications of banks, financial services providers, insurance companies, corporate bonds and structured issues that will expand our presence in the Latin American credit markets.
In 2014, in addition to the divestiture of McGraw Hill Construction discussed above, we streamlined our infrastructure by reducing our real estate footprint through selling our data facility, initiating the consolidation of our corporate headquarters with our operations in New York City, as well as disposing of our corporate aircraft.
During 2013, we acquired an incremental 11 million equity shares representing 15.07% of CRISIL's total outstanding equity shares for $214 million, concurrently increasing our ownership percentage in CRISIL to 67.84% from 52.77%.
In 2013, we also completed certain dispositions of our non-core assets that allow us to apply greater focus on our high-growth, high-margin benchmark businesses.
Commodities & Commercial— we completed the sale of Aviation Week to Penton, a privately held business information company;
S&P Capital IQ and SNL— we completed the sale of Financial Communications as well as the closure of several non-core businesses.
Increased Shareholder Return
During the three years ended December 31, 2015, we have returned $3.3 billion to our shareholders through a combination of share repurchases and our quarterly dividends: we completed share repurchases of $2.3 billion and distributed regular quarterly dividends totaling approximately $997 million. Also, on January 27, 2016, the Board of Directors approved an increase in the quarterly common stock dividend from $0.33 per share to $0.36 per share.
Our Businesses
Our operations consist of four reportable segments: Standard & Poor’sS&P Global Ratings Services (“S&P Ratings”("Ratings"), S&P Capital IQGlobal Market Intelligence ("Market Intelligence"), S&P Global Platts ("Platts") and SNL, S&P Dow Jones Indices ("S&P DJ Indices") and Commodities & Commercial (“C&C”). For a discussion on the competitive conditions in our businesses, see “MD&A – Segment Review” contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Annual Report on Form 10-K.
S&P In April of 2018, we acquired Kensho Technologies Inc. ("Kensho") for approximately $550 million, net of cash acquired, in a mix of cash and stock. Kensho is a leading-edge provider of next-generation analytics, artificial intelligence, machine learning, and data visualization systems to Wall Street's premier global banks and investment institutions, as well as the National Security community. The results of Kensho, an operating segment of the Company, are included in Corporate revenue and Corporate Unallocated for financial reporting purposes.
Effective beginning with the first quarter of 2018, we began reporting the financial results of Market Intelligence and Platts as separate reportable segments consistent with the changes to our organizational structure and how our Chief Executive Officer evaluates the performance of these segments. Our historical segment reporting has been retroactively revised to reflect the current organizational structure.
Ratings
S&P Ratings is an independent provider of credit ratings, research, and analytics, tooffering investors issuers and other market participants.participants information, ratings and benchmarks. Credit ratings are one of several tools that investors can use when making decisions about purchasing bonds and other fixed income investments. They are opinions about credit risk and our ratings express our opinion about the ability and willingness of an issuer, such as a corporation or state or city government, to meet its financial obligations in full and on time. Our credit ratings can also relate to the credit quality of an individual debt issue, such as a corporate or municipal bond, and the relative likelihood that the issuerdebt issue may default.
With offices in over 25 countries around the world, S&P Ratings is an important part of the world's financial infrastructure and has played a leading role for over 150 years in providing investors with information and independent benchmarks for their investment and financial decisions as well as access to the capital markets. The key constituents S&P Ratings serves are investors, corporations, governments, municipalities, commercial and investment banks, insurance companies, asset managers, and other debt issuers.
As the capital markets continue to evolve, S&P Ratings is well-positioned to capitalize on opportunities, driven by continuing regulatory changes, through its global network, well-established position in corporate markets and strong investor reputation.
S&P Ratings differentiates its revenue between transaction and non-transaction. Transaction revenue primarily includes fees associated with:
ratings related to new issuance of corporate and government debt instruments, and structured finance debt instruments;
bank loan ratings; and
corporate credit estimates, which are intended, based on an abbreviated analysis, to provide an indication of our opinion regarding creditworthiness of a company which does not currently have an S&Pa Ratings credit rating.
Non-transaction revenue primarily includes fees for surveillance of a credit rating, annual fees for customer relationship-based pricing programs, and fees for entity credit ratings.ratings and global research and analytics.
S&P Capital IQ and SNL
S&P Capital IQ and SNL'sMarket Intelligence
Market Intelligence's portfolio of capabilities are designed to help the financial communityinvestment professionals, government agencies, corporations and universities track performance, generate better investment returns (alpha),alpha, identify new trading and investment ideas, understand competitive and industry dynamics, perform risk analysis,evaluations and develop mitigation strategies.assess credit risk. Key customers served by Market Intelligence include investment managers, investment banks, private equity firms, insurance companies, commercial banks, corporations, professional services firms, government agencies and regulators.
S&P Capital IQ and SNLMarket Intelligence includes the following business lines:
S&P Capital IQ Desktop & Enterprise Solutions —a product suite that provides data, analytics and third-party research for global finance professionals, which includes the Market Intelligence Desktop (which are inclusive of the S&P Capital IQ and SNL Desktop andproducts);
Data Management Solutions — integrated bulk data feeds and application programming interfaces that can be customized, which include QuantHouse, S&P Securities Evaluations, CUSIPincludes Compustat, GICS, Point In Time Financials and Compustat;CUSIP; and
Global Risk Services —commercial arm that sells Standard & Poor's Ratings Services'Ratings' credit ratings and related data, analytics and research, which includes subscription-based offerings, RatingsDirect® and RatingsXpress®; and Credit Analytics.
Subscription revenue at Market Intelligence is primarily derived from distribution of data, analytics, third-party research, and credit ratings-related information primarily through web-based channels, including Market Intelligence Desktop, RatingsDirect®, RatingsXpress®, and Credit Analytics. Non-subscription revenue at Market Intelligence is primarily related to certain advisory, pricing and analytical services.
Platts
Platts is the leading independent provider of information and benchmark prices for the commodity and energy markets. Platts provides essential price data, analytics, and industry insight enabling the commodity and energy markets to perform with greater transparency and efficiency. Key customers served by Platts include producers, traders and intermediaries within the energy, petrochemicals, metals and agriculture markets.
Platts' revenue is generated primarily through the following sources:
Subscription revenue — primarily from subscriptions to our real-time news, market data and price assessments, along with other information products;
S&P Capital IQ Markets IntelligenceSales usage-based royalties — a comprehensive sourceprimarily from licensing of our proprietary market research for financial professionals, which includes Global Markets Intelligence, Leveraged Commentary & Dataprice data and Equity Research Services;price assessments to commodity exchanges; and
SNLNon-subscription revenue — a product suite that includes standardizedconference sponsorship, consulting engagements, and as-reported financials, sector-specific templates, asset-level data, mapping and regulatory data accessible through SNL Unlimited that provides in-depth coverage of industry-specific financial market data from over 6,500 public companies and over 50,000 private companies across the globe, comprehensive market data on a variety of assets, and M&A and Capital Market activities.events.
S&P Dow Jones
We completed the sale of J.D. Power on September 7, 2016, with the results included in Platts results through that date.
Indices
S&P DJ Indices is a global index provider that maintainsmaintaining a wide variety of indices to meet an array of investor needs. S&P DJ Indices’ mission is to provide transparent benchmarks to help with decision making, collaborate with the financial community to create innovative products and provide investors with tools to monitor world markets.
S&P DJ Indices primarily generatesderives revenue from non-subscription productsasset-linked fees based on the S&P and Dow Jones Indices,indices and alsoto a lesser extent generates subscription revenue and transaction revenue. Specifically, S&P DJ Indices generategenerates revenue from the following sources:
Investment vehicles — asset-linked fees such as exchange traded funds (“ETFs”), which and mutual funds, that are based on the S&P Dow Jones Indices' benchmarks andthat generate revenue through fees based on assets and underlying funds;
Exchange traded derivatives — which generate sales usage-based royalties based on trading volumes of derivatives contracts listed on various exchanges;
Index-related licensing fees — which are either fixed or variable annual and per-issue asset-linked fees for over-the-counter derivatives and retail-structured products; and
Data and customized index subscription fees — which supportfees from supporting index fund management, portfolio analytics and research.
Commodities & Commercial
C&C consists of business-to-business companies specializing in the commodities and commercial markets that deliver their customers access to high-value information, data, analytic services and pricing benchmarks. C&C includes the following brands:
Platts — provides essential price data, analytics, and industry insight that enable commodities markets to perform with greater transparency and efficiency; and
J.D. Power — provides essential consumer intelligence to help businesses measure, understand, and improve the key performance metrics that drive growth and profitability.
InSegment and Geographic Data
The relative contribution of our reportable segments to operating revenue, operating profit, long-lived assets and geographic area for the fourth quarter of 2015, we began exploring strategic alternatives for J.D. Power,three years ended December 31, 2018 are included in our C&C segment. We committedNote 12 – Segment and Geographic Information to the consolidated financial statements under Item 8, Consolidated Financial Statements and initiated an active program to sell J.D. PowerSupplementary Data, in its current state that we believe is probable in the next year. this Annual Report on Form 10-K.
Our Personnel
As a result, we have classified the assets and liabilities of J.D. Power as held for sale in our consolidated balance sheet as of December 31, 2015. The anticipated disposal does not represent a strategic shift that will have a major effect on operations and financial results, therefore, it is not classified as a discontinued operation.2018, we had approximately 21,200 employees located worldwide, of which approximately 5,400 were employed in the U.S.
Available Information
The C&CCompany's investor kit includes Annual Reports on Form 10-K, Proxy Statements, Quarterly Reports on Form 10-Q, current reports on Form 8-K, the current earnings release and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. For online access, go to http://investor.spglobal.com. Requests for printed copies, free of charge, can be e-mailed to investor.relations@spglobal.com or mailed to Investor Relations, S&P Global Inc., 55 Water Street, New York, NY 10041-0001. Interested parties can also call Investor Relations toll-free at 866-436-8502 (domestic callers) or 212-438-2192 (international callers). The information on our website is not, and shall not be deemed to be part hereof or incorporated into this or any of our filings with the Securities and Exchange Commission (“SEC”).
Access to more than 10 years of the Company's filings made with the SEC is available through the Company's Investor Relations website. Go to http://investor.spglobal.com and click on the SEC Filings link. In addition, these filings are available to the public on the Commission's website through their EDGAR filing system at www.sec.gov. Interested parties may also read and copy materials that the Company has filed with the SEC at the SEC's public reference room located at 100 F Street, NE, Washington, D.C. 20549 on official business is driven bydays between the needhours of 10AM and 3PM. Please call the Commission at 1-800-SEC-0330 for high-valuefurther information on the public reference room.
Item 1a. Risk Factors
The following risk factors and transparencyother information included in a varietythis annual report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. These risks could materially and adversely affect our business, financial condition and results of industries. C&C seeksoperations. Additional risks and uncertainties not presently known to deliver premier content that is deeply embeddedus or which we currently believe to be immaterial may also impair our business operations.
We operate in customer workflowsthe capital and decision making processes. Our commodities business servesmarkets. The capital markets include asset managers, investment banks, commercial banks, insurance companies, exchanges, trading firms, and issuers; the commodities markets include producers, traders and intermediaries within energy, metals, petrochemicals and agricultureagriculture. Certain risk factors are applicable to certain of our individual segments while other risk factors are applicable company-wide.
Exposure to litigation and government and regulatory proceedings, investigations and inquiries could have a material adverse effect on our business, financial condition or results of operations.
In the normal course of business, both in the United States and abroad, we and our subsidiaries are defendants in numerous legal proceedings and are often the subject of government and regulatory proceedings, investigations and inquiries, as discussed under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Annual Report on Form 10-K and in Note 13 - Commitments and Contingencies to the consolidated financial statements under Item 8, Consolidated Financial Statements and Supplementary Data, in this Annual Report on Form 10-K, and we face the risk that additional proceedings, investigations and inquiries will arise in the future.
Many of these proceedings, investigations and inquiries relate to the ratings activity of S&P Global Ratings brought by issuers and alleged purchasers of rated securities. In addition, various government and self-regulatory agencies frequently make inquiries and conduct investigations into our compliance with applicable laws and regulations, including those related to ratings activities and antitrust matters.
Any of these proceedings, investigations or inquiries could ultimately result in adverse judgments, damages, fines, penalties or activity restrictions, which could have a material adverse effect on our business, financial condition or results of operations.
In view of the uncertainty inherent in litigation and government and regulatory enforcement matters, we cannot predict the eventual outcome of the matters we are currently facing or the timing of their resolution, or in most cases reasonably
estimate what the eventual judgments, damages, fines, penalties or impact of activity restrictions may be. As a result, we cannot provide assurance that the outcome of the matters we are currently facing or that we may face in the future will not have a material adverse effect on our business, financial condition or results of operations.
As litigation or the process to resolve pending matters progresses, as the case may be, we continuously review the latest information available and assess our ability to predict the outcome of such matters and the effects, if any, on our consolidated financial condition, cash flows, business and competitive position, which may require that we record liabilities in the consolidated financial statements in future periods.
Legal proceedings impose additional expenses on the Company and require the attention of senior management to an extent that may significantly reduce their ability to devote time addressing other business issues.
Risks relating to legal proceedings may be heightened in foreign jurisdictions that lack the legal protections or liability standards comparable to those that exist in the United States. In addition, new laws and regulations have been and may continue to be enacted that establish lower liability standards, shift the burden of proof or relax pleading requirements, thereby increasing the risk of successful litigations against the Company in the United States and in foreign jurisdictions. These litigation risks are often difficult to assess or quantify and could have a material adverse effect on our business, financial condition or results of operations.
We may not have adequate insurance or reserves to cover these risks, and the existence and magnitude of these risks often remains unknown for substantial periods of time and could have a material adverse effect on our business, financial condition or results of operations.
Our acquisitions and other strategic transactions may not produce anticipated results.
We have made and expect to continue to make acquisitions or enter into other strategic transactions to strengthen our business and grow our Company. Such transactions present significant challenges and risks.
The market for acquisition targets and other strategic transactions is highly competitive, especially in light of industry consolidation, which may affect our ability to complete such transactions.
If we are unsuccessful in completing such transactions or if such opportunities for expansion do not arise, our business, financial condition or results of operations could be materially adversely affected.
If such transactions are completed, the anticipated growth and other strategic objectives of such transactions may not be fully realized, and a variety of factors may adversely affect any anticipated benefits from such transactions. For instance, the process of integration may require more resources than anticipated, we may assume unintended liabilities, there may be unexpected regulatory and operating difficulties and expenditures, we may fail to retain key personnel of the acquired business and such transactions may divert management’s focus from other business operations.
The anticipated benefits from an acquisition or other strategic transaction may not be realized fully, or may take longer to realize than expected. As a result, the failure of acquisitions and other strategic transactions to perform as expected could have a material adverse effect on our business, financial condition or results of operations.
We are exposed to risks related to cybersecurity and protection of confidential information.
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| ◦ | Our operations rely on the secure processing, storage and transmission of confidential, sensitive and other types of data and information in our computer systems and networks and those of our third-party vendors. |
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| ◦ | All of our businesses have access to material non-public information concerning the Company’s customers, including sovereigns, corporate issuers and other third parties around the world, the unauthorized disclosure of which could affect the trading markets for such customers’ securities and could damage such customers’ competitive positions. The cyber risks the Company faces range from cyber attacks common to most industries, to more sophisticated and targeted attacks intended to obtain unauthorized access to certain information or systems due in part to our prominence in the global marketplace, such as our ratings on debt issued by sovereigns and corporate issuers, or the composition of our indices. Unauthorized disclosure of this information could cause our customers to lose faith in our ability to protect their confidential information and therefore cause customers to cease doing business with us. |
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| ◦ | We experience cyber attacks of varying degrees on a regular basis. Although there has not been a cyber attack that has had a material adverse effect on the Company to date, there can be no assurance that there will not be a material adverse effect in the future. |
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| ◦ | Breaches of our or our vendors’ systems and networks, whether from circumvention of security systems, denial-of-service attacks or other cyber attacks, hacking, computer viruses or malware, employee error, malfeasance, physical breaches or other actions, may cause material interruptions or malfunctions in our or such vendors’ websites, applications or data processing, or may compromise the confidentiality and integrity of material information regarding us, our business or our customers. |
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| ◦ | Misappropriation, improper modification, destruction, corruption or unavailability of our data and information due to cyber incidents, attacks or other security breaches could damage our brand and reputation, result in litigation and regulatory |
actions, and lead to loss of customer confidence in our security measures and reliability, which would harm our ability to retain customers and gain new ones.
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| ◦ | Although we devote significant resources to maintain and regularly update our systems and processes that are designed to protect the security of our computer systems, software, networks and other technology assets and the confidentiality, integrity and availability of information belonging to the enterprise and our customers, clients and employees, there is no assurance that all of our security measures will provide absolute security. |
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| ◦ | Measures that we take to avoid or mitigate material incidents can be expensive, and may be insufficient, circumvented, or become obsolete. Any material incidents could cause us to experience reputational harm, loss of customers, regulatory actions, sanctions or other statutory penalties, litigation or financial losses that are either not insured against or not fully covered through any insurance maintained by us, and increased expenses related to addressing or mitigating the risks associated with any such material incidents. |
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| ◦ | Cyber threats are rapidly evolving and are becoming increasingly sophisticated. Despite our efforts to ensure the integrity of our systems, as cyber threats evolve and become more difficult to detect and successfully defend against, one or more cyber threats might defeat the measures that we or our vendors take to anticipate, detect, avoid or mitigate such threats. Certain techniques used to obtain unauthorized access, introduce malicious software, disable or degrade service, or sabotage systems may be designed to remain dormant until a triggering event and we may be unable to anticipate these techniques or implement adequate preventative measures since techniques change frequently or are not recognized until launched, and because cyber attacks can originate from a wide variety of sources. |
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| ◦ | If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and could result in damage to our reputation and a loss of confidence in the security of our products and services. |
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| ◦ | The theft, loss, or misuse of personal data collected, used, stored, or transferred by us to run our business could result in significantly increased security costs or costs related to defending legal claims. Global privacy legislation, enforcement, and policy activity in this area are rapidly expanding and creating a complex regulatory compliance environment. Costs to comply with and implement these privacy-related and data protection measures could be significant. In addition, if despite our best efforts an inadvertent failure to comply with federal, state, or international privacy-related or data protection laws and regulations should occur, this could result in proceedings against us by governmental entities or others. |
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| ◦ | Given the extent to which our businesses are privy to material non-public information concerning the Company’s customers, our data could be improperly used, including for insider trading by our employees and third party vendors with access to key systems. It is not always possible to deter misconduct by employees or third party vendors. The precautions we take to detect and prevent such activity, including implementing and training on insider trading policies for our employees and contractual obligations for our third party vendors, may not be effective in all cases. Any breach of our clients’ confidences as a result of employee or third party vendor misconduct could harm our reputation. |
Any of the foregoing could have a material adverse effect on our business, financial condition or results of operations.
Changes in the volume of securities issued and traded in domestic and/or global capital markets, asset levels and flows into investment products, changes in interest rates and volatility in the financial markets, and volatility in the commodities markets could have a material adverse effect on our business, financial condition or results of operations.
Our business is impacted by general economic conditions and volatility in the United States and world financial markets.
Therefore, since a significant component of our credit-rating based revenue is transaction-based, and is essentially dependent on the number and dollar volume of debt securities issued in the capital markets, unfavorable financial or economic conditions that either reduce investor demand for debt securities or reduce issuers’ willingness or ability to issue such securities could reduce the number and dollar volume of debt issuances for which Ratings provides credit ratings.
Our commercialIndices business serves professionalsis impacted by market volatility, asset levels of investment products tracking indices, and executives within automotive,trading volumes of certain exchange traded derivatives. A decrease in our revenues attributable to these products could have a material adverse effect on our business, financial condition or results of operations. Volatile capital markets, as well as changing investment styles, among other factors, may influence an investor’s decision to invest in and maintain an investment in an index-linked investment product.
Increases in interest rates or credit spreads, volatility in financial markets or the interest rate environment, significant political or economic events, defaults of significant issuers and other market and economic factors may negatively impact the general level of debt issuance, the debt issuance plans of certain categories of borrowers, the level of derivatives trading and/or the types of credit-sensitive products being offered, any of which could have a material adverse effect on our business, financial condition or results of operations.
Our Platts business is impacted by volatility in the commodities markets. Weak economic conditions, especially in our key markets, including the energy industry, could reduce demand for our products, impacting our revenues and margins.
As a result of volatility in commodity prices and trading activity in physical commodities and commodities derivatives, we may encounter difficulty in achieving sustained market acceptance of past or future contract terms, which could have a material adverse effect on our financial position, results of operations and cash flows.
Any weakness in the macroeconomic environment could constrain customer budgets across the markets we serve, potentially leading to a reduction in their employee headcount and a decrease in demand for our subscription-based products.
Increasing regulation of our Ratings business in the United States, Europe and elsewhere can increase our costs of doing business and therefore could have a material adverse effect on our business, financial condition or results of operations.
The financial services industry is highly regulated, rapidly evolving and subject to the potential for increasing regulation in the United States, Europe and elsewhere. The businesses conducted by Ratings are in certain cases regulated under the Credit Rating Agency Reform Act of 2006 (the “Reform Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the U.S. Securities Exchange Act of 1934 (the “Exchange Act”), and/or the laws of the states or other jurisdictions in which they conduct business.
In the past several years, the U.S. Congress, the International Organization of Securities Commissions ("IOSCO"), the SEC and the European Commission, including through the European Securities Market Authority ("ESMA"), as well as regulators in other countries in which Ratings operates, have been reviewing the role of rating agencies and their processes and the need for greater oversight or regulations concerning the issuance of credit ratings or the activities of credit rating agencies. Other laws, regulations and rules relating to credit rating agencies are being considered by local, national and multinational bodies and are likely to continue to be considered in the future, including provisions seeking to reduce regulatory and investor reliance on credit ratings, and liability standards applicable to credit rating agencies.
These laws and regulations, and any future rulemaking, could result in reduced demand for credit ratings and increased costs, which we may be unable to pass through to customers. In addition, there may be uncertainty over the scope, interpretation and administration of such laws and regulations. We may be required to incur significant expenses in order to comply with such laws and regulations and to mitigate the risk of fines, penalties or other sanctions. Legal proceedings could become increasingly lengthy and there may be uncertainty over and exposure to liability. It is difficult to accurately assess the future impact of legislative and regulatory requirements on our business and our customers’ businesses, and they may affect Ratings’ communications with issuers as part of the rating assignment process, alter the manner in which Ratings’ ratings are developed, affect the manner in which Ratings or its customers or users of credit ratings operate, impact the demand for ratings and alter the economics of the credit ratings business. Each of these developments increases the costs and legal risk associated with the issuance of credit ratings and may have a material adverse effect on our operations, profitability and competitiveness, the demand for credit ratings and the manner in which such ratings are utilized.
Additional information regarding rating agencies is provided under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Annual Report on Form 10-K.
Our Indices and Platts businesses are subject to a new and evolving regulatory regimes in Europe and the potential for increased or changing regulations in the United States and elsewhere. Our Indices business is subject to a new regulatory regime in Australia. Our Indices, Market Intelligence and Platts businesses are subject to additional regulation in Europe and our Market Intelligence business is subject to investment advisory regulation in the United States and Europe. This changing regulatory landscape can increase our exposure, compliance risk and costs of doing business globally and therefore could have a material adverse effect on our business, financial condition or results of operations.
In addition to the extensive and evolving U.S. laws and regulations, foreign jurisdictions have taken measures to increase regulation of the financial services and commodities industries.
In October of 2012, IOSCO issued its Principles for Oil Price Reporting Agencies ("PRA Principles"), which IOSCO states are intended to enhance the reliability of oil price assessments that are referenced in derivative contracts subject to regulation by IOSCO members. Platts has taken steps to align its operations with the PRA Principles and, as recommended by IOSCO in its final report on the PRA Principles, has aligned to the PRA Principles for other commodities for which it publishes benchmarks.
In July of 2013, IOSCO issued its Principles for Financial Benchmarks ("Financial Benchmark Principles"), which are intended to promote the reliability of the benchmark determination process by setting standards related to benchmark governance, benchmark quality, transparency and accountability mechanisms, including with regard to the indices and benchmarks published by Indices. Indices has taken steps to align its governance regime, control framework and operations with the Financial Benchmark Principles and engages an independent auditor to perform an annual reasonable assurance review of its adherence to the Financial Benchmark Principles.
The benchmark industry is subject to the new regulation in the European Union (the “EU Benchmark Regulation”) as well as potential increased regulation of financial benchmarks in other jurisdictions. The EU Benchmark Regulation was published on June 30, 2016, with provisions applicable to Indices and Platts, effective from January 1, 2018. ESMA has published additional guidance clarifying that existing benchmark administrators such as Indices and Platts may utilize the transitional provisions contained in the EU Benchmark Regulation, which provides them two (2) years to implement and seek authorization by an EU National Competent Authority by January 1, 2020, with their respective benchmark activities in Europe. This legislation will likely cause additional operating obligations, greater compliance risk and costs for Indices but they are not expected to be material at this time, although the exact impact remains unclear.
Indices is subject to the new benchmark regulation in Australia under which it is required to obtain a license from and be subject to the supervision of the Australian Securities and Investment Commission regarding its administration of the S&P ASX 200 index. This legislation will likely cause additional operating obligations, greater compliance risk and costs for Indices but they are not expected to be material at this time, although the exact impact remains unclear.
The EU's package of legislative measures called the Markets in Financial Instruments Directive and Regulation (collectively "MiFID II") entered into force on July 2, 2014, revising and updating the prior Markets in Financial Instruments Directive (2004) and its associated secondary legislation. The substantive provisions of MiFID II apply in all EU Member States since January 3, 2018. MiFID II includes provisions that, among other things: (i) mandate conditions and requirements on the licensing of benchmarks for the purposes of clearing related securities and provide for non-discriminatory access to exchanges and clearing houses for this purpose; (ii) modify the categorization and treatment of certain classes of derivatives; (iii) expand the categories of trading venues that are subject to regulation; (iv) require the unbundling of investment research from other services, including execution services, and direct that investment firms must pay for research either out of a dedicated research payment account which is paid for by clients or from the investment firm’s profits; and (v) provide for the mandatory trading of certain derivatives on exchanges (complementing the mandatory derivative clearing requirements in the EU Market Infrastructure Regulation of 2011, or EMIR). The MiFID II package may result in changes to the manner in which S&P Dow Jones Indices and Platts license their indices and price assessments, respectively, and could also have an indirect impact on the credit ratings and third-party research products offered by other divisions of the Company for use within the EU. MiFID II and the Market Abuse Regulation (“MAR”) may impose additional regulatory burdens on the activities of S&P Dow Jones Indices and Platts in the EU, although the exact impact and costs are not yet known.
Market Intelligence operates regulated investment advisory businesses in the United States and the European Union. This business and other Market Intelligence businesses may increasingly become subject to new or more stringent regulations that will increase the cost of doing business, which could have a material adverse effect on our business, financial condition or results of operations.
Recent and future legislation, regulatory reform or policy changes under the current U.S. administration could have a material effect on our business and results of operations.
The Tax Cuts and Jobs Act enacted in 2017 in the United States significantly changes the tax rules applicable to U.S. domiciled corporations. Changes such as lower corporate tax rates, full expensing for qualified property, taxation of offshore earnings, limitations on interest expense deductions, and changes to the municipal bond tax exemption may impact demand for our products and services. While lower than usual issuance in 2018 impacted our business in 2018, at this time, we cannot assess what the overall effect of such legislation could be on our results of operations or cash flows over the longer term.
Other legislation, regulatory reform or policy changes under the current U.S. administration, such as financial services regulatory reform, U.S. oil deregulation, government-sponsored enterprise reform and increased infrastructure spending and significant changes in trade policy (including sanctions), could impact our business. Any of the forgoing changes could impact our results of operations and cash flows directly; such changes may also impact our business by creating increased volatility and uncertainty in the financial and commodities markets. At this time, we cannot predict the scope or nature of these changes or assess what the overall effect of such potential changes could be on our results of operations or cash flows.
Regulatory changes and economic conditions leading up to and following the United Kingdom’s withdrawal from the European Union could have a material adverse effect on our business and results of operations.
Voters in the United Kingdom ("UK") approved an exit from the European Union ("EU") via a referendum on June 23, 2016. On March 29, 2017, the UK invoked Article 50 of the Treaty on the EU, commencing the process to leave the EU (“Brexit”). Negotiations on the terms of the UK’s future relationship with the EU are ongoing, with the UK due to exit the EU on March 29, 2019. In December 2018, the European Court of Justice ruled that, subject to certain conditions, a member state could revoke notification of its intention to withdraw from the EU. Any withdrawal agreement must be approved by the UK Parliament as well as by the European Council and European Parliament before becoming effective.
Although the British government and the EU negotiated a withdrawal agreement that was approved by the leaders of EU member states, the agreement failed on January 16, 2019 to receive UK parliamentary approval. While negotiations are continuing, there remains considerable uncertainty around the withdrawal. Failure to obtain parliamentary approval of an agreed withdrawal agreement would, absent a revocation of the UK’s notification to withdraw or some other delay, mean that the UK would leave the EU on March 29, 2019, likely with no agreement (a so-called “hard Brexit”). Current discussions between the UK and the EU may result in any number of outcomes including an extension or delay of the UK's withdrawal from the EU. The consequences for the economies of the EU member states as a result of the UK's withdrawal from the EU are unknown and unpredictable, especially in the case of a hard Brexit.
Any impact from Brexit on the Company will depend, in part, on the outcome of tariff, trade and other negotiations. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations between the UK and the EU as the UK determines which EU laws to replace or replicate and the EU determines how to treat regulated activities (e.g., the activities of credit rating agencies) originating in the UK. Our businesses are subject to increasing regulation of the financial services and commodities industries in Europe. Potential changes in EU regulation and/or additional regulation in the UK could cause additional operating obligations and increased costs for our businesses.
Changes to UK immigration policy as a result of Brexit could adversely affect our ability to retain talent for our European operations.
Any of these effects of Brexit, and others we cannot anticipate, could adversely affect our business, business opportunities, results of operations, financial condition and cash flows. Such effects may be heightened in the event of a hard Brexit. The lack of certainty given the various possible outcomes creates the risk that notwithstanding that we have devoted valuable resources to a thorough preparation for the impact of Brexit on our European operations, we may not be adequately prepared for an unforeseen outcome.
Changes in the legislative, regulatory, and commercial environments in which we operate may materially and adversely impact our ability to collect, compile, use, and publish data and may impact our financial results.
Certain types of information we collect, compile, use, and publish, including offerings in all our businesses, and particularly our Market Intelligence business, are subject to regulation by governmental authorities in jurisdictions in which we operate. In addition, there is increasing concern among certain privacy advocates and government regulators regarding marketing and privacy matters, particularly as they relate to individual privacy interests.
There has been increased public attention regarding the use of personal information and data transfer, accompanied by legislation and regulations intended to strengthen data protection, information security and consumer and personal privacy. The law in these areas continues to develop and the changing nature of privacy laws in the U.S., the European Union and elsewhere could impact our processing of personal and sensitive information of our employees, vendors and customers.
The European Union's comprehensive General Data Privacy Regulation (the “GDPR”) became fully effective in May 2018. GDPR requires companies to satisfy new requirements regarding the handling of personal and sensitive data, including its use, protection and the ability of persons whose data is stored to correct or delete such data about themselves.
Failure to comply with GDPR requirements could result in penalties of up to 4% of worldwide revenue. GDPR and other similar laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including fines or demands or orders that we modify or cease existing business practices.
California recently enacted legislation, the California Consumer Privacy Act (“CCPA”), that will, among other things, require covered companies to provide new disclosures to California consumers, and afford such consumers new abilities to opt-out of certain sales of personal information, when it goes into effect on January 1, 2020. Legislators have stated that they intend to propose amendments to the CCPA before it goes into effect, and it remains unclear what, if any, modifications will be made to this legislation or how it will be interpreted. The effects of the CCPA potentially are significant, however, and may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply. We may also from time to time be subject to, or face assertions that we are subject to, additional obligations relating to personal data by contract or due to assertions that self-regulatory obligations or industry standards apply to our practices.
In addition, other jurisdictions, including China, are considering imposing or have already imposed additional restrictions. These laws and regulations are increasing in complexity and number, change frequently and increasingly conflict among the various countries in which we operate, which could result in greater compliance risk and cost for us.
Continued privacy concerns may result in new or amended laws and regulations. Future laws and regulations with respect to the collection, compilation, use, and publication of information and consumer privacy could result in limitations on our operations, increased compliance or litigation expense, adverse publicity, or loss of revenue, which could have a material adverse effect on our business, financial condition, and results of operations. It is also possible that we could be prohibited from collecting or disseminating certain types of data, which could affect our ability to meet our customers’ needs.
We may become subject to liability based on the use of our products by our clients.
Some of our products support the investment processes and other activities of our clients, which, in the aggregate, manage trillions of dollars of assets. Use of our products as part of such activities, including the investment process creates the risk that clients, or the parties whose assets are managed by our clients, may pursue claims against us for very significant dollar amounts, which could have a material adverse effect on our business, financial condition or results of operations.
The products we develop or license may contain undetected errors or defects, despite testing and/or other quality assurance practices. Such errors may exist during any part of a product’s life cycle and may persist notwithstanding testing and/or other quality assurance practices. Deploying products containing such errors may damage our reputation and the costs associated with remediating such errors may have an impact on our profitability.
Further, certain of our products rely on proprietary methodologies, models and processes that are subject to various internal governance and control frameworks. Despite ongoing review and quality assurance processes, these methodologies, models and processes as well as their respective inputs may also contain undetected errors or defects that may damage our reputation and the costs associated with remediating such errors may have an impact on our profitability.
Any claim relating to our products, even if the outcome were to be ultimately favorable to us, would involve a significant commitment of our management, personnel, financial and other resources and could have a negative impact on our reputation. In addition, such claims and lawsuits could have a material adverse effect on our business, financial condition or results of operations.
Increased competition could result in a loss of market share or revenue.
The markets for credit ratings, financial research, investment advisory services, market data, index-based products, and commodities price assessments and related news and information about these markets are intensely competitive. Ratings, Market Intelligence, Platts and Indices compete domestically and internationally on the basis of a number of factors, including the quality of their offerings, client service, reputation, price, geographic scope, range of products and technological innovation.
While our businesses face competition from traditional content and analytics providers (including exchanges), we also face competition from non-traditional providers, such as asset managers, investment banks and technology-led companies that are adding content and analytics capabilities to their core businesses.
In addition, in some of the countries in which Ratings competes, governments may provide financial or other support to locally-based rating agencies and may from time to time establish official credit rating agencies, credit ratings criteria or procedures for evaluating local issuers.
Sustained downward pressure on oil and other commodities prices and trading activity in those markets could have a material adverse effect on the rate of growth of Platts’ revenue, including subscription and licensing fees.
Introduction of new or enhanced products and services could impact our profitability.
We operate in highly competitive markets that continue to change to adapt to customer needs.
In order to maintain a competitive position, we must continue to invest in new offerings and enhancements, including new ways to deliver our products and services.
These new or enhanced offerings resulting form our investments may not achieve market acceptance, may not be profitable or may be less profitable than what we have experienced historically.
We could experience threats to our existing businesses from the rise of new competitors due to the rapidly changing environment in which we operate.
Our ability to develop, adapt, or implement new and improved processes and technology may adversely impact our business, financial condition or results of operations.
The rapid change of technology is a key feature of all of the markets in which we operate. To succeed in the future, we will need to deploy improved processes and technology to innovate, design, develop, assemble, test, market, and support new products and enhancements to our existing products in a timely and cost-effective manner.
Innovation and constant development in support of new products and enhancements to existing products calls for the implementation of new and improved processes and technologies that require related change management efforts.
While we employ a certain level of internal and external resources to mitigate the risks associated with implementing process and technology improvements, we may face unexpected challenges in execution that may require more management attention than expected, thus diverting management time and energy from other businesses. The foregoing and other unforeseen factors could also result in business being disrupted for a period of time as well as additional commitments of financial resources.
A significant increase in operating costs and expenses could have a material adverse effect on our profitability.
Our major expenditures include employee compensation and capital investments.
We offer competitive salary and benefit packages in order to attract and retain the quality employees required to grow and expand our businesses. Compensation costs are influenced by general economic factors, including those affecting the cost of health insurance and marketing postretirement benefits, and any trends specific to the employee skill sets we require.
We make significant investments in information technology data centers and other technology initiatives and we cannot provide assurances that such investments will result in increased revenues.
Although we believe we are prudent in our investment strategies and execution of our implementation plans, there is no assurance as to the ultimate recoverability of these investments.
Increased availability of free or relatively inexpensive information sources may reduce demand for our products and could have a material adverse effect on our business, financial condition or results of operations.
In recent years, more public sources of free or relatively inexpensive information have become available, particularly through the Internet, and advances in public cloud computing and open source software may continue.
Public sources of free or relatively inexpensive information may reduce demand for our products and services. Demand could also be reduced as a result of cost-cutting initiatives at certain companies and organizations. Although we believe our products are enhanced by our analysis, tools and applications, our financial results may be adversely affected if our customers choose to use these public sources as a substitute for our products or services.
Consolidation of customers as well as staffing levels across our customer base could impact our available markets and revenue growth.
Our businesses have a customer base which is largely comprised of members from the corporate, financial services and commodities industries. The consolidation of customers resulting from mergers and acquisitions across these industries can result in reductions in the number of firms and workforce which can impact the size of our customer base.
Our customers that strive to reduce their operating costs may seek to reduce their spending on our products and services. If a large number of smaller customers or a critical number of larger customers reduce their spending with us, our business, financial condition or results of operations could be materially and adversely affected.
Alternatively, customers may use other strategies to reduce their overall spending on financial and commodity market products and services by consolidating their spending with fewer vendors, including by selecting other vendors with lower-cost offerings, or by self-sourcing their need for financial and commodity market products and services. If customers elect to consolidate their spending on financial and commodity market products and services with other vendors and not us, if we lose business to lower priced competitors, or if customers elect to self-source their product and service needs, our business, financial condition or results of operations could be materially and adversely affected.
A material portion of our revenues in our Indices business is concentrated in some of our largest customers, who have significant assets under management in index funds and exchange-traded funds. A loss of a substantial portion of revenue from our largest customers could have a material and adverse effect on our business, financial condition or results of operations.
If we lose key outside suppliers of data and products or if the data or products of these suppliers have errors or are delayed, we may not be able to provide our clients with the information and products they desire.
Our ability to produce our products and develop new products is dependent upon the products of other suppliers, including certain data, software and service suppliers. Some of our products and their related value are dependent upon updates from our data suppliers and most of our information and data products are dependent upon continuing access to historical and current data.
We utilize certain data provided by third-party data sources in a variety of ways, including large volumes of data from certain stock exchanges around the world.
If the data from our suppliers has errors, is delayed, has design defects, is unavailable on acceptable terms or is not available at all, it could have a material adverse effect on our business, financial condition or results of operations.
Some of our agreements with data suppliers allow them to cancel on short notice. Termination of one or more of our significant data agreements or exclusion from, or restricted use of, or litigation in connection with, a data provider’s information could decrease the available information for us to use (and offer our clients) and could have a material adverse effect on our business, financial condition or results of operations.
Our ability to protect our intellectual property rights could impact our competitive position.
We consider many of our products and services to be proprietary. Failure to protect our intellectual property adequately could harm the value of and revenue generated by such assets as well as our reputation and affect our ability to compete effectively. Businesses we acquire may also have intellectual property portfolios which increase the complexity of managing our intellectual property portfolio and protecting our competitive position.
Our products contain intellectual property delivered through a variety of digital and other media. Our ability to achieve anticipated results depends in part on our ability to defend our intellectual property rights against infringement and misappropriation. Our business, financial condition or results of operations could be materially and adversely affected by inadequate or changing legal and technological protections for intellectual property and proprietary rights in some jurisdictions and markets.
Our products also contain intellectual property of third party sources. Any violation by us of the intellectual property rights of such third parties could result in termination of the relevant source agreement, litigation and reputational damage which could materially and adversely affects our business, financial condition or results of operations.
We are exposed to multiple risks associated with the global nature of our operations.
The geographic breadth of our activities subjects us to significant legal, economic, operational, market, compliance and reputational risks. These include, among others, risks relating to:
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| ▪ | economic and political conditions around the world, |
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| ▪ | fluctuation in interest rates and currency exchange rates, |
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| ▪ | limitations that foreign governments may impose on the conversion of currency or the payment of dividends or other remittances to us from our non-U.S. subsidiaries, |
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| ▪ | differing accounting principles and standards, |
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| ▪ | unexpected increases in taxes or changes in U.S. or foreign tax laws, |
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| ▪ | potential costs and difficulties in complying with a wide variety of foreign laws and regulations (including tax systems) administered by foreign government agencies, some of which may conflict with U.S. or other sources of law, |
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| ▪ | changes in applicable laws and regulatory requirements, |
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| ▪ | the possibility of nationalization, expropriation, price controls and other restrictive governmental actions, |
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| ▪ | competition with local rating agencies that have greater familiarity, longer operating histories and/or support from local governments or other institutions, |
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| ▪ | civil unrest, terrorism, unstable governments and legal systems, and other factors. |
Adverse developments in any of these areas could have a material adverse effect on our business, financial condition or results of operations.
Additionally, we are subject to complex U.S., European and other local laws and regulations that are applicable to our operations abroad, including trade sanctions laws, anti-corruption and anti-bribery laws such as the U.S. Foreign Corrupt Practices Act and the UK Bribery Act 2010, anti-money laundering laws, and other financial crimes laws. Although we have implemented internal controls, policies and procedures and employee training and compliance programs to deter prohibited practices, such measures may not be effective in preventing employees, contractors or agents from violating or circumventing such internal policies and violating applicable laws and regulations. Any determination that we have violated trade sanctions, anti-bribery or anti-corruption laws could have a material adverse effect on our business, financial condition or results of operations.
Compliance with international and U.S. laws and regulations that apply to our international operations increases the cost of doing business in foreign jurisdictions. Violations of such laws and regulations may result in fines and penalties, criminal sanctions, administrative remedies, or restrictions on business conduct and could have a material adverse effect on our reputation, our ability to attract and retain employees, our business, financial condition or results of operations.
Embargoes and sanctions laws are changing rapidly for certain geographies, including with respect to Russia, Iran, and Venezuela. These embargoes and sanctions laws may affect our ability to continue to market and/or sell our products and services into these geographies. In addition, while we have a compliance program in place designed to reduce the likelihood of potential violations of import and export laws and sanctions, violations of these laws or sanctions could have an adverse effect on our reputation, business, financial condition and results of operations.
Our inability to successfully recover should we experience a disaster or other business continuity problem could cause material financial loss, loss of human capital, regulatory actions, reputational harm or legal liability.
Should we experience a local or regional disaster or other business continuity problem, such as an earthquake, hurricane, flood, terrorist attack, pandemic, security breach, cyber attack, power loss, telecommunications failure or other natural or man-made disaster, our ability to continue to operate will depend, in part, on the availability of our personnel, our office facilities and the proper functioning of our computer, telecommunication and other related systems and operations. In such an event, we could experience operational challenges with regard to particular areas of our operations, such as key executive officers or personnel, that could have a material adverse effect on our business.
We regularly assess and take steps to improve our existing business continuity plans and key management succession. However, a disaster on a significant scale or affecting certain of our key operating areas within or across regions, or our inability to successfully recover should we experience a disaster or other business continuity problem, could materially interrupt our business operations and result in material financial loss, loss of human capital, regulatory actions, reputational harm, damaged client relationships or legal liability.
Outsourcing certain aspects of our business could result in disruption and increased costs.
We have outsourced certain functions to third-party service providers to leverage leading specialized capabilities and achieve cost efficiencies. Outsourcing these functions involves the risk that the third-party service providers may not perform to our standards or legal requirements, may not produce reliable results, may not perform in a timely manner, may not maintain the confidentiality of our proprietary information, or may fail to perform at all. Failure of these third parties to meet their contractual, regulatory, confidentiality, or other obligations to us could result in material financial loss, higher costs, regulatory actions and reputational harm.
Outsourcing these functions also involves the risk that the third-party service providers may not maintain adequate physical, technical and administrative safeguards to protect the security of our confidential information and data. Failure of these third parties to maintain these safeguards could result in unauthorized access to our systems or a system or network disruption that could lead to improper disclosure of confidential information or data, regulatory penalties and remedial costs.
We also rely on the business infrastructure and systems of third parties with whom we do business and to whom we outsource the maintenance and development of operational and technological functionality, including third-party cloud infrastructure. Our cloud infrastructure providers, or other service providers, could experience system breakdowns or failures, outages, downtime, cyber attacks, adverse changes to financial condition, bankruptcy or other adverse conditions, which could have a material adverse effect on our business and reputation. Thus, our plans to increase the amount of our infrastructure that we outsource to “the cloud” or to other third parties may increase our risk exposure.
We rely heavily on network systems and the Internet and any failures or disruptions may adversely affect our ability to serve our customers.
Many of our products and services are delivered electronically, and our customers rely on our ability to process transactions rapidly and deliver substantial quantities of data on computer-based networks. Our customers also depend on the continued capacity, reliability and security of our electronic delivery systems, our websites and the Internet.
Our ability to deliver our products and services electronically may be impaired due to infrastructure or network failures, malicious or defective software, human error, natural disasters, service outages at third-party Internet providers or increased government regulation.
Delays in our ability to deliver our products and services electronically may harm our reputation and result in the loss of customers. In addition, a number of our customers entrust us with storing and securing their data and information on our servers.
Although we have disaster recovery plans that include backup facilities for our primary data centers, our systems are not always fully redundant, and our disaster planning may not always be sufficient or effective. As such, these disruptions may affect our ability to store, handle and secure such data and information.
Our operations and infrastructure may malfunction or fail, which could have a material adverse effect on our business, financial condition or results of operations.
Our ability to conduct business may be materially and adversely impacted by a disruption in the infrastructure that supports our businesses and the communities in which we are located, including New York City, the location of our headquarters, and major cities worldwide in which we have offices.
This may include a disruption involving physical or technological infrastructure used by us or third parties with or through whom we conduct business, whether due to human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, intentional acts of vandalism, acts of terrorism, political unrest, war or otherwise. Our efforts to secure and plan for potential disruptions of our major operating systems may not be successful.
We rely on our information technology environment and certain critical databases, systems and applications to support key product and service offerings. We believe we have appropriate policies, processes and internal controls to ensure the stability of our information technology, provide security from unauthorized access to our systems and maintain business continuity, but our business could be subject to significant disruption and our business, financial condition or results of operations could be materially and adversely affected by unanticipated system failures, data corruption or unauthorized access to our systems.
We also do not have fully redundant systems for most of our smaller office locations and low-risk systems, and our disaster recovery plan does not include restoration of non-essential services. If a disruption occurs in one of our locations or systems and our personnel in those locations or those who rely on such systems are unable to utilize other systems or communicate with or travel to other locations, such persons’ ability to service and interact with our clients and customers may suffer.
We cannot predict with certainty all of the adverse effects that could result from our failure, or the failure of a third party, to efficiently address and resolve these delays and interruptions. A disruption to our operations or infrastructure could have a material adverse effect on our business, financial condition or results of operations.
Inability to attract and retain key qualified personnel could have a material adverse effect on our business and results of operations.
The development, maintenance and support of our products and services are dependent upon the knowledge, experience and ability of our highly skilled, educated and trained employees. Accordingly, our business is dependent on successfully attracting and retaining talented employees. If the Company is less successful in its recruiting efforts, or if it is unable to retain key employees, its ability to develop and deliver successful products and services or achieve strategic goals may be adversely affected.
Our brand and reputation are key assets and competitive advantages of our Company and our business may be affected by how we are perceived in the marketplace.
Our ability to attract and retain customers is affected by external perceptions of our brand and reputation. Negative perceptions or publicity could damage our reputation with customers, prospects and the public generally, which could negatively impact, among other things, our ability to attract and retain customers, employees and suppliers, as well as suitable candidates for acquisition or other combinations.
Our expansion into and investments in new markets may not be successful.
We believe there remains significant opportunity to expand our business into major markets, including China, and we are in the process of such expansion efforts. Expansion into new markets requires significant levels of investment and attention from management. There can be no assurance that these markets will develop as anticipated or that we will have success in these markets, and if we do not, we may be unable to recover our investment spent to expand our business into these markets and may forgo opportunities in more lucrative markets, which could adversely impact our business, financial condition and results of operations.
Item 1b. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters are located in leased premises located at 55 Water Street, New York, NY 10041. We lease office facilities at 99 locations; 34 are in the U.S. In addition, we own real property at 7 locations, of which 2 are in the U.S. Our properties consist primarily of office space used by each of our segments. We believe that all of our facilities are well maintained and are suitable and adequate for our current needs.
Item 3. Legal Proceedings
For information on our legal proceedings, see Note 13 – Commitments and Contingencies under Item 8, Consolidated Financial Statements and Supplementary Data, in this Annual Report on Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
Executive Officers of the Registrant
The following individuals are the executive officers of the Company:
|
| | | | |
| Name | | Age | | Position |
| Douglas L. Peterson | | 60 | | President and Chief Executive Officer |
| Ewout L. Steenbergen | | 49 | | Executive Vice President, Chief Financial Officer |
| Ratings |
| John L. Berisford | | 55 | | President, S&P Global Ratings |
| Market Intelligence |
| Martina L. Cheung | | 43 | | President, S&P Global Market Intelligence |
| Platts |
| Martin E. Fraenkel | | 58 | | President, S&P Global Platts |
| Indices | | | | |
| Alexander J. Matturri, Jr. | | 60 | | Chief Executive Officer, S&P Dow Jones Indices |
| S&P Global Functions |
| Nicholas D. Cafferillo | | 47 | | Chief Data and Technology Officer |
| Courtney C. Geduldig | | 43 | | Executive Vice President, Public Affairs |
| S. Swamy Kocherlakota | | 52 | | Chief Information Officer |
| Steven J. Kemps | | 53 | | Executive Vice President, General Counsel |
| Nancy J. Luquette | | 53 | | Senior Vice President, Chief Risk & Audit Executive |
| Dimitra Manis | | 53 | | Executive Vice President, Chief People Officer |
Mr. Berisford, prior to becoming President of S&P Global Ratings on November 3, 2015, was Executive Vice President, Human Resources since 2011. Prior to that, he held senior management positions at PepsiCo, including Senior Vice President, Human Resources for Pepsi Beverages Company.
Mr. Cafferillo, prior to becoming Chief Data and Technology Officer on January 2, 2019, was Chief Technology Officer as well as Chief Operating Officer, S&P Global Market Intelligence. Prior to joining S&P Global, Mr. Cafferillo was Chief Operating Officer of SNL Financial LC.
Ms. Cheung, prior to becoming President, S&P Global Market Intelligence on January 2, 2019, was Head of Global Risk Services, S&P Global’s Chief Strategy Officer, and previously held management positions at S&P Global Ratings. Prior to joining S&P Global, she worked in the consulting industry, first in Accenture’s Financial Services Strategy group and later as a Partner at Mitchell Madison Consulting.
Mr. Fraenkel, prior to becoming President of S&P Global Platts in September 2016, was Global Head of Content, responsible for leading Platts’ 450-member global editorial and analytics team, as well as being a member of the Platts Executive Committee regarding the division’s strategy and offerings in data, pricing, news and analysis. Mr. Fraenkel joined S&P Global Platts in June 2015 from CME Group, where he was Managing Director and Global Head of Energy.
Ms. Geduldig, prior to becoming Executive Vice President, Public Affairs on May 1, 2015, was Managing Director, Global Government and Public Policy since 2013, and Vice President of Global Regulatory Affairs at S&P Global Ratings. Prior to that, she was Managing Director and Head of Federal Government Relations at the Financial Services Forum.
Mr. Kocherlakota, prior to becoming Chief Information Officer on January, 1, 2018, was Global Head of Infrastructure & Cloud and Enterprise Services since July, 2017. Prior to that, he was Senior Vice President, Global Head of Technology Operations & Infrastructure at Visa, Inc.
Mr. Kemps, prior to becoming Executive Vice President, General Counsel at S&P Global in August 2016, served as Executive Vice President and General Counsel at Quanta Services, where he oversaw all legal affairs and advised the business on regulatory,
ethical and compliance matters. Prior to joining Quanta, he served as General Counsel of Hess Retail Corporation and Dean Foods Company.
Ms. Luquette, prior to becoming Senior Vice President, Chief Risk & Audit Executive for S&P Global in June 2016, was the Chief Audit Executive for the Company, in which capacity she led the S&P Global Internal Audit function and the Ratings Risk Review function for S&P Global Ratings. Before joining the Company, Ms. Luquette was Vice President and General Auditor for Avaya, and prior to that was a Partner in PwC’s Internal Audit and Global Risk Management Services practices.
Ms. Manis, prior to becoming Executive Vice President, Chief People Officer on May 15, 2018, was the Chief Human Resources Officer for Revlon Inc. Prior to joining Revlon, she served as Senior Vice President for Global Talent at Estée Lauder Companies. She previously worked at OpenLink and Thomson Reuters.
Mr. Matturri, prior to becoming Chief Executive Officer at S&P Dow Jones Indices on July 2, 2012, served as an Executive Managing Director of S&P Indices. Prior to joining S&P Indices, Mr. Matturri served as Senior Vice President and Director of Global Equity Index Management at Northern Trust Global Investments (NTGI). He previously held management positions with Deutsche Asset Management’s Index and Quantitative Investment business and The Bank of New York.
Mr. Peterson, prior to becoming President and Chief Executive Officer on November 1, 2013, was President of S&P Global Ratings (then known as Standard & Poor's Ratings Services) since 2011. Prior to that, he was Chief Operating Officer of Citibank, NA.
Mr. Steenbergen, prior to becoming Executive Vice President and Chief Financial Officer at S&P Global in November 2016, was Executive Vice President and Chief Financial Officer of Voya Financial, Inc. Prior to his role as Voya's Chief Financial Officer, Mr. Steenbergen was Chief Financial Officer and Chief Risk Officer for ING Asia-Pacific and held a number of management roles for ING Group, including serving as regional general manager in Hong Kong and as a Chief Executive Officer of RVS, an ING Group company based in the Netherlands.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
S&P Global Inc. began trading under its new ticker symbol "SPGI" on April 28, 2016. Previously, the Company's common stock traded on the New York Stock Exchange ("NYSE") under the ticker symbol "MHFI". The approximate number of record holders of our common stock as of January 25, 2019 was 3,007.
The performance graph below compares our cumulative total shareholder return during the previous five years with a performance indicator of the overall market (i.e., S&P 500), and our peer group. The peer group consists of the following companies: Thomson Reuters Corporation, Moody’s Corporation, CME Group Inc., MSCI Inc., FactSet Research Systems Inc. and IHS Markit Ltd. Returns assume $100 invested on December 31, 2013 and total return includes reinvestment of dividends through December 31, 2018.
Dividends
We expect to continue our policy of paying regular cash dividends, although there is no assurance as to future dividend payments because they depend on future earnings, capital requirements and our financial condition. Regular quarterly dividends per share of our common stock for 2018 and 2017 were as follows:
|
| | | | | | | |
| | 2018 | | 2017 |
| $0.50 per quarter in 2018 | $ | 2.00 |
| | |
| $0.41 per quarter in 2017 | | | $ | 1.64 |
|
On January 30, 2019, the Board of Directors approved an increase in the quarterly common stock dividend from $0.50 per share to $0.57 per share.
Transfer Agent and Registrar for Common Stock
Computershare is the transfer agent for S&P Global. Computershare maintains the records for the Company's registered shareholders and can assist with a variety of shareholder related services.
Shareholder correspondence should be mailed to:
Computershare
P.O. Box 505000
Louisville, KY 40233-5000
Overnight correspondence should be mailed to:
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
Visit the Investor Center™ website to view and manage shareholder account online: www.computershare.com/investor
For shareholder assistance:
|
| |
| In the U.S. and Canada: | 888-201-5538 |
| Outside the U.S. and Canada: | 201-680-6578 |
| TDD for the hearing impaired: | 800-231-5469 |
| TDD outside the U.S. and Canada: | 781-575-4592 |
| E-mail address: | web.queries@computershare.com |
| Shareholder online inquiries | https://www-us.computershare.com/investor/Contact |
Repurchase of Equity Securities
On December 4, 2013, the Board of Directors approved a share repurchase program authorizing the purchase of up to 50 million shares, which was approximately 18% of the Company's outstanding shares at that time. During the fourth quarter of 2018, we repurchased 2.7 million shares, which included 2.5 million shares received from the initiation of our accelerated share repurchase ("ASR") agreement that we entered into on October 29, 2018. Further discussion relating to our ASR agreement can be found in Note 9 - Equity to the Consolidated Financial Statements and Supplementary Data, in the Annual Report on Form 10-K. As of December 31, 2018, 10.6 million shares remained under our current repurchase program.
Repurchased shares may be used for general corporate purposes, including the issuance of shares for stock compensation plans and to offset the dilutive effect of the exercise of employee stock options. Our current repurchase program has no expiration date and purchases under this program may be made from time to time on the open market and in private transactions, depending on market conditions.
The following table provides information on our purchases of our outstanding common stock during the fourth quarter of 2018 pursuant to our current share repurchase program (column c). In addition to these purchases, the number of shares in column (a) include shares of common stock that are tendered to us to satisfy our employees’ tax withholding obligations in connection with the vesting of awards of restricted shares (we repurchase such shares based on their fair market value on the vesting date). There were no other share repurchases during the quarter outside the repurchases noted below.
|
| | | | | | | | | | | | | |
| Period | | (a) Total Number of Shares Purchased | | (b) Average Price Paid per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Programs | | (d) Maximum Number of Shares that may yet be Purchased Under the Programs |
Oct. 1 - Oct. 31, 2018 1, 2 | | 2,730,625 |
| | $ | 187.96 |
| | 2,728,342 |
| | 10.6 | million |
| Nov. 1 - Nov. 30, 2018 | | 13,333 |
| | 183.06 |
| | — |
| | 10.6 | million |
| Dec. 1 - Dec. 31, 2018 | | 6,818 |
| | 182.79 |
| | — |
| | 10.6 | million |
Total — Qtr 2 | | 2,750,776 |
| | $ | 187.59 |
| | 2,728,342 |
| | 10.6 | million |
1 Includes 2.5 million shares received from the initial delivery of our ASR agreement that we entered into on October 29, 2018.
2 Average price paid per share does not include the accelerated share repurchase transaction as discussed in more detail above.
Equity Compensation Plan
For information on securities authorized under our equity compensation plans, see Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 6. Selected Financial Data |
| | | | | | | | | | | | | | | | | | | | |
| (in millions, except per share data) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 | |
| Income statement data: | | | | | | | | | | |
| Revenue | $ | 6,258 |
| | $ | 6,063 |
| | $ | 5,661 |
| | $ | 5,313 |
| | $ | 5,051 |
| |
| Operating profit | 2,790 |
| | 2,583 |
| | 3,341 |
| | 1,908 |
| | 88 |
| |
| Income before taxes on income | 2,681 |
| 1 | 2,461 |
| 2 | 3,188 |
| 3 | 1,815 |
| 4 | 54 |
| 5 |
| Provision for taxes on income | 560 |
| | 823 |
| 6 | 960 |
| | 547 |
| | 245 |
| |
| Net income (loss) from continuing operations attributable to S&P Global Inc. | 1,958 |
| | 1,496 |
| | 2,106 |
| | 1,156 |
| | (293 | ) | |
| Earnings (loss) per share from continuing operations attributable to the S&P Global Inc. common shareholders: | | | | | | | | | | |
| Basic | 7.80 |
| | 5.84 |
| | 8.02 |
| | 4.26 |
| | (1.08 | ) | |
| Diluted | 7.73 |
| | 5.78 |
| | 7.94 |
| | 4.21 |
| | (1.08 | ) | |
| Dividends per share | 2.00 |
| | 1.64 |
| | 1.44 |
| | 1.32 |
| | 1.20 |
| |
| Operating statistics: | | | | | | | | | | |
Return on average equity 7 | 292.6 | % | | 222.3 | % | | 472.0 | % | | 324.3 | % | | (1.4 | )% | |
| Income from continuing operations before taxes on income as a percent of revenue from continuing operations | 42.8 | % | | 40.6 | % | | 56.3 | % | | 34.2 | % | | 1.1 | % | |
| Net income (loss) from continuing operations as a percent of revenue from continuing operations | 33.9 | % | | 27.0 | % | | 39.4 | % | | 23.9 | % | | (3.8 | )% | |
Balance sheet data: 7 | | | | | | | | | | |
| Working capital | $ | 975 |
| | $ | 1,110 |
| | $ | 1,060 |
| | $ | 388 |
| | $ | 42 |
| |
| Total assets | 9,458 |
| | 9,425 |
| | 8,669 |
| | 8,183 |
| | 6,773 |
| |
| Total debt | 3,662 |
| | 3,569 |
| | 3,564 |
| | 3,611 |
| | 795 |
| |
| Redeemable noncontrolling interest | 1,620 |
| | 1,352 |
| | 1,080 |
| | 920 |
| | 810 |
| |
| Equity | 684 |
| | 766 |
| | 701 |
| | 243 |
| | 539 |
| |
Number of employees 8 | 21,200 |
| | 20,400 |
| | 20,000 |
| | 20,400 |
| | 17,000 |
| |
| |
1 | Includes the impact of the following items: legal settlement expenses of $74 million, Kensho retention related expense of $31 million, restructuring charges related to a business disposition and employee severance charges of $25 million, lease impairments of $11 million, a pension related charge of $5 million and amortization of intangibles from acquisitions of $122 million. |
| |
2 | Includes the impact of the following items: legal settlement expenses of $55 million, employee severance charges of $44 million, a charge to exit leased facilities of $25 million, non-cash acquisition and disposition-related adjustments of $15 million, a pension related charge of $8 million, an asset write-off of $2 million and amortization of intangibles from acquisitions of $98 million. |
| |
3 | Includes the impact of the following items: a $1.1 billion gain from our dispositions, a benefit related to net legal settlement insurance recoveries of $10 million, disposition-related costs of $48 million, a technology-related impairment charge of $24 million, employee severance charges of $6 million, a $3 million disposition-related reserve release, an acquisition-related cost of $1 million and amortization of intangibles from acquisitions of $96 million. |
| |
4 | Includes the impact of the following items: costs related to identified operating efficiencies primarily related to employee severance charges of $56 million, net legal settlement expenses of $54 million, acquisition-related costs of $37 million, an $11 million gain on dispositions and amortization of intangibles from acquisitions of $67 million. |
| |
5 | Includes the impact of the following items: $1.6 billion of legal and regulatory settlements, employee severance charges of $86 million, $4 million of professional fees largely related to corporate development activities and amortization of intangibles from acquisitions of $48 million. |
| |
6 | Includes $149 million of tax expense due to U.S. tax reform, primarily associated with the deemed repatriation of foreign earnings, which was partially offset by a $21 million tax benefit related to prior year divestitures. |
| |
7 | Includes the impact of the $1.1 billion gain on dispositions in 2016 and the gain on sale of McGraw Hill Construction in 2014. |
| |
8 | Excludes discontinued operations. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis (“MD&A”) provides a narrative of the results of operations and financial condition of S&P Global Inc. (together with its consolidated subsidiaries, the “Company,” “we,” “us” or “our”) for the years ended December 31, 2018 and 2017, respectively. The MD&A should be read in conjunction with the consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K for the year ended December 31, 2018, which have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”).
The MD&A includes the following sections:
Overview
Results of Operations
Liquidity and Capital Resources
Reconciliation of Non-GAAP Financial Information
Critical Accounting Estimates
Recent Accounting Standards
Certain of the statements below are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, any projections of future results of operations and cash flows are subject to substantial uncertainty. See Forward-Looking Statements on page 4 of this report.
OVERVIEW
We are a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide. The capital markets include asset managers, investment banks, commercial banks, insurance companies, exchanges, trading firms and issuers; and the commodity markets include producers, traders and intermediaries within energy, petrochemicals, metals and agriculture.
Our operations consist of four reportable segments: S&P Global Ratings ("Ratings"), S&P Global Market Intelligence ("Market Intelligence"), S&P Global Platts ("Platts") and S&P Dow Jones Indices ("Indices").
Ratings is an independent provider of credit ratings, research servicesand analytics, offering investors and other market participants information, ratings and benchmarks.
Market Intelligence is a global provider of multi-asset-class data, research and analytical capabilities, which integrate cross-asset analytics and desktop services.
Platts is the leading independent provider of information and benchmark prices for the commodity and energy markets.We completed the sale of J.D. Power on September 7, 2016, with the results included in Platts results through that date.
Indices is a global index provider maintaining a wide variety of valuation and index benchmarks for investment advisors, wealth managers and institutional investors.
Effective beginning with the first quarter of 2018, we began reporting the financial results of Market Intelligence and Platts as separate reportable segments consistent with the changes to our organizational structure and how our Chief Executive Officer evaluates the performance of these segments. Our historical segment reporting has been retroactively revised to reflect the current organizational structure.
Major Portfolio Changes
The following significant changes were made to our portfolio during the three years ended December 31, 2018:
2018
In April of 2018, we acquired Kensho Technologies Inc. ("Kensho") for approximately $550 million, net of cash acquired, in a mix of cash and stock. Kensho is a leading-edge provider of next-generation analytics, artificial intelligence, machine learning, and data visualization systems to Wall Street's premier global banks and investment institutions, as well as the National Security community. The results of Kensho, an operating segment of the Company, are included in Corporate revenue and Corporate Unallocated for financial reporting purposes.
2016
Market Intelligence
In October of 2016, we completed the sale of Standard & Poor's Securities Evaluations, Inc. ("SPSE") and Credit Market Analysis ("CMA") for $425 million in cash to Intercontinental Exchange, an operator of global exchanges, clearing houses and data services. During year ended December 31, 2016, we recorded a pre-tax gain of $364 million ($297 million after-tax) in gain on dispositions in the consolidated statement of income related to the sale of SPSE and CMA.
Platts
In September of 2016, we completed the sale of J.D. Power for $1.1 billion to XIO Group, a global alternative investments firm headquartered in London. During the year ended December 31, 2016, we recorded a pre-tax gain of $728 million ($516 million after-tax) in gain on dispositions in the consolidated statement of income related to the sale of J.D. Power.
In September of 2016, we acquired PIRA Energy Group ("PIRA"), a global provider of energy research and forecasting products and services. The purchase enhances Platts energy analytical capabilities by expanding its oil offering and strengthening its position in the natural gas and power markets.
C&C's revenue is generated primarily throughIn June of 2016, we acquired RigData, a provider of daily information on rig activity for the following sources:natural gas and oil markets across North America. The purchase enhances Platts energy analytical capabilities by strengthening its position in natural gas and enhancing its oil offering.
Subscription revenue — subscriptionsIncreased Shareholder Return
During the three years ended December 31, 2018, we have returned approximately $5.1 billion to our real-time news,shareholders through a combination of share repurchases and our quarterly dividends: we completed share repurchases of approximately $3.8 billion and distributed regular quarterly dividends totaling approximately $1.3 billion. Also, on January 30, 2019, the Board of Directors approved an increase in the quarterly common stock dividend from $0.50 per share to $0.57 per share.
Key Results
|
| | | | | | | | | | | | | | | |
| (in millions) | Year ended December 31, | | % Change 1 |
| | 2018 | | 2017 | | 2016 | | ’18 vs ’17 | | ’17 vs ’16 |
| Revenue | $ | 6,258 |
| | $ | 6,063 |
| | $ | 5,661 |
| | 3% | | 7% |
Operating profit 2 | $ | 2,790 |
| | $ | 2,583 |
| | $ | 3,341 |
| | 8% | | (23)% |
| % Operating margin | 45 | % | | 43 | % | | 59 | % | | | | |
| Diluted earnings per share from net income | $ | 7.73 |
| | $ | 5.78 |
| | $ | 7.94 |
| | 34% | | (27)% |
| |
1 | % changes in the tables throughout the MD&A are calculated off of the actual number, not the rounded number presented. |
| |
2 | 2018 includes legal settlement expenses of $74 million, Kensho retention related expense of $31 million, restructuring charges related to a business disposition and employee severance charges of $25 million and lease impairments of $11 million. 2017 includes legal settlement expenses of $55 million, employee severance charges of $44 million, a charge to exit leased facilities of $25 million, non-cash acquisition and disposition-related adjustments of $15 million and an asset write-off of $2 million. 2016 includes a $1.1 billion gain from our dispositions, a benefit related to net legal settlement insurance recoveries of $10 million, disposition-related costs of $48 million, a technology-related impairment charge of $24 million, employee severance charges of $6 million, a $3 million disposition-related reserve release and acquisition-related costs of $1 million. 2018, 2017 and 2016 also includes amortization of intangibles from acquisitions of $122 million, $98 million, and $96 million, respectively. |
2018
Revenue increased 3% with a 1 percentage point favorable impact from foreign exchange rates. Revenue growth was driven by increases at Market Intelligence, Indices and Platts, partially offset by a decrease at Ratings. The increase at Market Intelligence was driven by annualized contract value growth in the Market Intelligence Desktop and Global Risk Services products. Revenue growth at Indices was driven by higher levels of assets under management for exchange traded funds ("ETFs") and mutual funds, and higher exchange-traded derivative volumes. The increase at Platts was due to continued demand for market data and price assessments, alongassessment products. These increases were partially offset by a decrease at Ratings driven by lower corporate bond ratings revenue.
Operating profit increased 8% with other informationa 2 percentage point favorable impact from foreign exchange rates. Excluding the unfavorable impact of higher legal settlement expenses in 2018 of less than 1 percentage point, Kensho retention related expense in 2018 of less than 1 percentage point, and higher deal-related amortization in 2018 of less than 1 percentage point, partially offset by the favorable impact of higher employee severance charges in 2017 of less than1 percentage point, the favorable impact of non-cash acquisition and disposition-related adjustments in 2017 of less than 1 percentage point, operating profit increased 8%. The increase was primarily due to revenue growth at Market Intelligence, Indices and Platts and decreased compensation costs at Ratings and Corporate primarily driven by reduced incentive costs as well as the decreased headcount from attrition and prior year restructuring actions. These increases were partially offset by a decrease in revenue at Ratings, increased expenses at Market Intelligence due to an increase in cost of sales as a result of royalties tied to annualized contract value growth and increased data costs, and higher compensation costs at Market Intelligence and Indices primarily driven by additional headcount.
2017
Revenue increased 7% and was unfavorably impacted by 6 percentage points from the net impact of acquisitions and dispositions. Revenue growth was driven by increases at Ratings, Indices and Market Intelligence, partially offset by a decrease at Platts. The increase at Ratings was primarily due to growth in bank loan ratings revenue and corporate bond ratings revenue. Revenue growth at Indices was primarily due to higher levels of assets under management for ETFs and mutual funds. The increase at Market Intelligence was driven by annualized contract value growth in the Market Intelligence Desktop and Global Risk Services products, primarily servingpartially offset by the energy andunfavorable impact of the automotive industry; and
Non-subscription revenue — primarily from licensingdisposition of our proprietarynon-core businesses in 2016. The decrease at Platts was driven by the unfavorable impact of the disposition of J.D. Power in 2016, partially offset by an increase due to continued demand for market price data and price assessments to commodity exchanges, syndicated and proprietary research studies, commercial-oriented data and analytics, conference sponsorship, consulting engagements and events.
assessment products.
Operating profit decreased 23%. Excluding the unfavorable impact of the gain on dispositions in 2016 of 38 percentage points, higher net legal settlement expenses in 2017 of 2 percentage points, higher employee severance charges in 2017 of 1 percentage point, a charge to exit leased facilities of 1 percentage point and non-cash acquisition and disposition-related adjustments in 2017 of 1 percentage point, partially offset by the favorable impact of a technology-related impairment charge in 2016 of 1 percentage point and higher disposition-related costs in 2016 of 1 percentage point, operating profit increased 17%. This increase was primarily due to revenue growth at Ratings, Indices and Market Intelligence as discussed above, partially offset by higher compensation costs due to increased incentive costs and additional headcount.
Our StrategyExecutive Officers of the Registrant
The following individuals are the executive officers of the Company:
|
| | | | |
| Name | | Age | | Position |
| Douglas L. Peterson | | 60 | | President and Chief Executive Officer |
| Ewout L. Steenbergen | | 49 | | Executive Vice President, Chief Financial Officer |
| Ratings |
| John L. Berisford | | 55 | | President, S&P Global Ratings |
| Market Intelligence |
| Martina L. Cheung | | 43 | | President, S&P Global Market Intelligence |
| Platts |
| Martin E. Fraenkel | | 58 | | President, S&P Global Platts |
| Indices | | | | |
| Alexander J. Matturri, Jr. | | 60 | | Chief Executive Officer, S&P Dow Jones Indices |
| S&P Global Functions |
| Nicholas D. Cafferillo | | 47 | | Chief Data and Technology Officer |
| Courtney C. Geduldig | | 43 | | Executive Vice President, Public Affairs |
| S. Swamy Kocherlakota | | 52 | | Chief Information Officer |
| Steven J. Kemps | | 53 | | Executive Vice President, General Counsel |
| Nancy J. Luquette | | 53 | | Senior Vice President, Chief Risk & Audit Executive |
| Dimitra Manis | | 53 | | Executive Vice President, Chief People Officer |
Mr. Berisford, prior to becoming President of S&P Global Ratings on November 3, 2015, was Executive Vice President, Human Resources since 2011. Prior to that, he held senior management positions at PepsiCo, including Senior Vice President, Human Resources for Pepsi Beverages Company.
Mr. Cafferillo, prior to becoming Chief Data and Technology Officer on January 2, 2019, was Chief Technology Officer as well as Chief Operating Officer, S&P Global Market Intelligence. Prior to joining S&P Global, Mr. Cafferillo was Chief Operating Officer of SNL Financial LC.
Ms. Cheung, prior to becoming President, S&P Global Market Intelligence on January 2, 2019, was Head of Global Risk Services, S&P Global’s Chief Strategy Officer, and previously held management positions at S&P Global Ratings. Prior to joining S&P Global, she worked in the consulting industry, first in Accenture’s Financial Services Strategy group and later as a Partner at Mitchell Madison Consulting.
Mr. Fraenkel, prior to becoming President of S&P Global Platts in September 2016, was Global Head of Content, responsible for leading Platts’ 450-member global editorial and analytics team, as well as being a member of the Platts Executive Committee regarding the division’s strategy and offerings in data, pricing, news and analysis. Mr. Fraenkel joined S&P Global Platts in June 2015 from CME Group, where he was Managing Director and Global Head of Energy.
Ms. Geduldig, prior to becoming Executive Vice President, Public Affairs on May 1, 2015, was Managing Director, Global Government and Public Policy since 2013, and Vice President of Global Regulatory Affairs at S&P Global Ratings. Prior to that, she was Managing Director and Head of Federal Government Relations at the Financial Services Forum.
Mr. Kocherlakota, prior to becoming Chief Information Officer on January, 1, 2018, was Global Head of Infrastructure & Cloud and Enterprise Services since July, 2017. Prior to that, he was Senior Vice President, Global Head of Technology Operations & Infrastructure at Visa, Inc.
Mr. Kemps, prior to becoming Executive Vice President, General Counsel at S&P Global in August 2016, served as Executive Vice President and General Counsel at Quanta Services, where he oversaw all legal affairs and advised the business on regulatory,
ethical and compliance matters. Prior to joining Quanta, he served as General Counsel of Hess Retail Corporation and Dean Foods Company.
Ms. Luquette, prior to becoming Senior Vice President, Chief Risk & Audit Executive for S&P Global in June 2016, was the Chief Audit Executive for the Company, in which capacity she led the S&P Global Internal Audit function and the Ratings Risk Review function for S&P Global Ratings. Before joining the Company, Ms. Luquette was Vice President and General Auditor for Avaya, and prior to that was a Partner in PwC’s Internal Audit and Global Risk Management Services practices.
Ms. Manis, prior to becoming Executive Vice President, Chief People Officer on May 15, 2018, was the Chief Human Resources Officer for Revlon Inc. Prior to joining Revlon, she served as Senior Vice President for Global Talent at Estée Lauder Companies. She previously worked at OpenLink and Thomson Reuters.
Mr. Matturri, prior to becoming Chief Executive Officer at S&P Dow Jones Indices on July 2, 2012, served as an Executive Managing Director of S&P Indices. Prior to joining S&P Indices, Mr. Matturri served as Senior Vice President and Director of Global Equity Index Management at Northern Trust Global Investments (NTGI). He previously held management positions with Deutsche Asset Management’s Index and Quantitative Investment business and The Bank of New York.
Mr. Peterson, prior to becoming President and Chief Executive Officer on November 1, 2013, was President of S&P Global Ratings (then known as Standard & Poor's Ratings Services) since 2011. Prior to that, he was Chief Operating Officer of Citibank, NA.
Mr. Steenbergen, prior to becoming Executive Vice President and Chief Financial Officer at S&P Global in November 2016, was Executive Vice President and Chief Financial Officer of Voya Financial, Inc. Prior to his role as Voya's Chief Financial Officer, Mr. Steenbergen was Chief Financial Officer and Chief Risk Officer for ING Asia-Pacific and held a number of management roles for ING Group, including serving as regional general manager in Hong Kong and as a Chief Executive Officer of RVS, an ING Group company based in the Netherlands.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
S&P Global Inc. began trading under its new ticker symbol "SPGI" on April 28, 2016. Previously, the Company's common stock traded on the New York Stock Exchange ("NYSE") under the ticker symbol "MHFI". The approximate number of record holders of our common stock as of January 25, 2019 was 3,007.
The performance graph below compares our cumulative total shareholder return during the previous five years with a performance indicator of the overall market (i.e., S&P 500), and our peer group. The peer group consists of the following companies: Thomson Reuters Corporation, Moody’s Corporation, CME Group Inc., MSCI Inc., FactSet Research Systems Inc. and IHS Markit Ltd. Returns assume $100 invested on December 31, 2013 and total return includes reinvestment of dividends through December 31, 2018.
Dividends
We expect to continue our policy of paying regular cash dividends, although there is no assurance as to future dividend payments because they depend on future earnings, capital requirements and our financial condition. Regular quarterly dividends per share of our common stock for 2018 and 2017 were as follows:
|
| | | | | | | |
| | 2018 | | 2017 |
| $0.50 per quarter in 2018 | $ | 2.00 |
| | |
| $0.41 per quarter in 2017 | | | $ | 1.64 |
|
On January 30, 2019, the Board of Directors approved an increase in the quarterly common stock dividend from $0.50 per share to $0.57 per share.
Transfer Agent and Registrar for Common Stock
Computershare is the transfer agent for S&P Global. Computershare maintains the records for the Company's registered shareholders and can assist with a variety of shareholder related services.
Shareholder correspondence should be mailed to:
Computershare
P.O. Box 505000
Louisville, KY 40233-5000
Overnight correspondence should be mailed to:
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
Visit the Investor Center™ website to view and manage shareholder account online: www.computershare.com/investor
For shareholder assistance:
|
| |
| In the U.S. and Canada: | 888-201-5538 |
| Outside the U.S. and Canada: | 201-680-6578 |
| TDD for the hearing impaired: | 800-231-5469 |
| TDD outside the U.S. and Canada: | 781-575-4592 |
| E-mail address: | web.queries@computershare.com |
| Shareholder online inquiries | https://www-us.computershare.com/investor/Contact |
Repurchase of Equity Securities
On December 4, 2013, the Board of Directors approved a share repurchase program authorizing the purchase of up to 50 million shares, which was approximately 18% of the Company's outstanding shares at that time. During the fourth quarter of 2018, we repurchased 2.7 million shares, which included 2.5 million shares received from the initiation of our accelerated share repurchase ("ASR") agreement that we entered into on October 29, 2018. Further discussion relating to our ASR agreement can be found in Note 9 - Equity to the Consolidated Financial Statements and Supplementary Data, in the Annual Report on Form 10-K. As of December 31, 2018, 10.6 million shares remained under our current repurchase program.
Repurchased shares may be used for general corporate purposes, including the issuance of shares for stock compensation plans and to offset the dilutive effect of the exercise of employee stock options. Our vision iscurrent repurchase program has no expiration date and purchases under this program may be made from time to time on the open market and in private transactions, depending on market conditions.
The following table provides information on our purchases of our outstanding common stock during the fourth quarter of 2018 pursuant to our current share repurchase program (column c). In addition to these purchases, the number of shares in column (a) include shares of common stock that are tendered to us to satisfy our employees’ tax withholding obligations in connection with the vesting of awards of restricted shares (we repurchase such shares based on their fair market value on the vesting date). There were no other share repurchases during the quarter outside the repurchases noted below.
|
| | | | | | | | | | | | | |
| Period | | (a) Total Number of Shares Purchased | | (b) Average Price Paid per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Programs | | (d) Maximum Number of Shares that may yet be Purchased Under the Programs |
Oct. 1 - Oct. 31, 2018 1, 2 | | 2,730,625 |
| | $ | 187.96 |
| | 2,728,342 |
| | 10.6 | million |
| Nov. 1 - Nov. 30, 2018 | | 13,333 |
| | 183.06 |
| | — |
| | 10.6 | million |
| Dec. 1 - Dec. 31, 2018 | | 6,818 |
| | 182.79 |
| | — |
| | 10.6 | million |
Total — Qtr 2 | | 2,750,776 |
| | $ | 187.59 |
| | 2,728,342 |
| | 10.6 | million |
1 Includes 2.5 million shares received from the initial delivery of our ASR agreement that we entered into on October 29, 2018.
2 Average price paid per share does not include the accelerated share repurchase transaction as discussed in more detail above.
Equity Compensation Plan
For information on securities authorized under our equity compensation plans, see Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 6. Selected Financial Data |
| | | | | | | | | | | | | | | | | | | | |
| (in millions, except per share data) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 | |
| Income statement data: | | | | | | | | | | |
| Revenue | $ | 6,258 |
| | $ | 6,063 |
| | $ | 5,661 |
| | $ | 5,313 |
| | $ | 5,051 |
| |
| Operating profit | 2,790 |
| | 2,583 |
| | 3,341 |
| | 1,908 |
| | 88 |
| |
| Income before taxes on income | 2,681 |
| 1 | 2,461 |
| 2 | 3,188 |
| 3 | 1,815 |
| 4 | 54 |
| 5 |
| Provision for taxes on income | 560 |
| | 823 |
| 6 | 960 |
| | 547 |
| | 245 |
| |
| Net income (loss) from continuing operations attributable to S&P Global Inc. | 1,958 |
| | 1,496 |
| | 2,106 |
| | 1,156 |
| | (293 | ) | |
| Earnings (loss) per share from continuing operations attributable to the S&P Global Inc. common shareholders: | | | | | | | | | | |
| Basic | 7.80 |
| | 5.84 |
| | 8.02 |
| | 4.26 |
| | (1.08 | ) | |
| Diluted | 7.73 |
| | 5.78 |
| | 7.94 |
| | 4.21 |
| | (1.08 | ) | |
| Dividends per share | 2.00 |
| | 1.64 |
| | 1.44 |
| | 1.32 |
| | 1.20 |
| |
| Operating statistics: | | | | | | | | | | |
Return on average equity 7 | 292.6 | % | | 222.3 | % | | 472.0 | % | | 324.3 | % | | (1.4 | )% | |
| Income from continuing operations before taxes on income as a percent of revenue from continuing operations | 42.8 | % | | 40.6 | % | | 56.3 | % | | 34.2 | % | | 1.1 | % | |
| Net income (loss) from continuing operations as a percent of revenue from continuing operations | 33.9 | % | | 27.0 | % | | 39.4 | % | | 23.9 | % | | (3.8 | )% | |
Balance sheet data: 7 | | | | | | | | | | |
| Working capital | $ | 975 |
| | $ | 1,110 |
| | $ | 1,060 |
| | $ | 388 |
| | $ | 42 |
| |
| Total assets | 9,458 |
| | 9,425 |
| | 8,669 |
| | 8,183 |
| | 6,773 |
| |
| Total debt | 3,662 |
| | 3,569 |
| | 3,564 |
| | 3,611 |
| | 795 |
| |
| Redeemable noncontrolling interest | 1,620 |
| | 1,352 |
| | 1,080 |
| | 920 |
| | 810 |
| |
| Equity | 684 |
| | 766 |
| | 701 |
| | 243 |
| | 539 |
| |
Number of employees 8 | 21,200 |
| | 20,400 |
| | 20,000 |
| | 20,400 |
| | 17,000 |
| |
| |
1 | Includes the impact of the following items: legal settlement expenses of $74 million, Kensho retention related expense of $31 million, restructuring charges related to a business disposition and employee severance charges of $25 million, lease impairments of $11 million, a pension related charge of $5 million and amortization of intangibles from acquisitions of $122 million. |
| |
2 | Includes the impact of the following items: legal settlement expenses of $55 million, employee severance charges of $44 million, a charge to exit leased facilities of $25 million, non-cash acquisition and disposition-related adjustments of $15 million, a pension related charge of $8 million, an asset write-off of $2 million and amortization of intangibles from acquisitions of $98 million. |
| |
3 | Includes the impact of the following items: a $1.1 billion gain from our dispositions, a benefit related to net legal settlement insurance recoveries of $10 million, disposition-related costs of $48 million, a technology-related impairment charge of $24 million, employee severance charges of $6 million, a $3 million disposition-related reserve release, an acquisition-related cost of $1 million and amortization of intangibles from acquisitions of $96 million. |
| |
4 | Includes the impact of the following items: costs related to identified operating efficiencies primarily related to employee severance charges of $56 million, net legal settlement expenses of $54 million, acquisition-related costs of $37 million, an $11 million gain on dispositions and amortization of intangibles from acquisitions of $67 million. |
| |
5 | Includes the impact of the following items: $1.6 billion of legal and regulatory settlements, employee severance charges of $86 million, $4 million of professional fees largely related to corporate development activities and amortization of intangibles from acquisitions of $48 million. |
| |
6 | Includes $149 million of tax expense due to U.S. tax reform, primarily associated with the deemed repatriation of foreign earnings, which was partially offset by a $21 million tax benefit related to prior year divestitures. |
| |
7 | Includes the impact of the $1.1 billion gain on dispositions in 2016 and the gain on sale of McGraw Hill Construction in 2014. |
| |
8 | Excludes discontinued operations. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis (“MD&A”) provides a narrative of the results of operations and financial condition of S&P Global Inc. (together with its consolidated subsidiaries, the “Company,” “we,” “us” or “our”) for the years ended December 31, 2018 and 2017, respectively. The MD&A should be read in conjunction with the consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K for the year ended December 31, 2018, which have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”).
The MD&A includes the following sections:
Overview
Results of Operations
Liquidity and Capital Resources
Reconciliation of Non-GAAP Financial Information
Critical Accounting Estimates
Recent Accounting Standards
Certain of the statements below are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, any projections of future results of operations and cash flows are subject to substantial uncertainty. See Forward-Looking Statements on page 4 of this report.
OVERVIEW
We are a leading provider of transparent and independent ratings, benchmarks, analytics and ratings, analytics, data and research in the global capital, commodities and corporate markets. Our mission is to promote sustainable growth in these markets by providing customers with essential intelligence and superior service. We seek to accomplish our mission and vision within the framework of our core values of fairness, integrity and transparency. We intend to deliver our products and services through customer-centric distribution channels that enable mission-critical decisions in our core customer sets of investment management, investment banking, commercial banking, insurance, specialty financial institutions and corporates.
We are aligning our efforts against two key strategic priorities: creating growth and driving performance.
Creating Growth
We will strive to drive global growth by focusing on executing our strategic initiatives, strengthening core capabilities and collaborating across businesses.
Driving Performance
We will strive to deliver operational excellence, manage and mitigate risk and enhance leadership and accountability.
There can be no assurance that we will achieve success in implementing any one or more of these strategies as a variety of factors could unfavorably impact operating results, including prolonged difficulties in the global credit markets and a change in the regulatory environment affecting our businesses. See Item 1a, Risk Factors, in this Annual Report on Form 10-K.
Further projections and discussion on our 2016 outlook for our segments can be found within “MD&A – Results of Operations”.
Segment and Geographic Data
The relative contribution of our operating segments to operating revenue, operating profit, long-lived assets and geographic area for the three years ended December 31, 2015 are included in Note 11 – Segment and Geographic Information to the consolidated financial statements under Item 8, Consolidated Financial Statementscapital and Supplementary Data, in this Form 10-K.
Our Personnel
As of December 31, 2015, we had approximately 20,400 employees located worldwide, of which approximately 5,700 were employed in the U.S.
Available Information
The Company's investor kit includes Annual Reports on Form 10-K, Proxy Statements, Quarterly Reports on Form 10-Q, current reports on Form 8-K, the current earnings release and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. For online access to the Digital Investor Kit, go to http://investor.mhfi.com. Requests for printed copies, free of charge, can be e-mailed to investor.relations@mhfi.com or mailed to Investor Relations, McGraw Hill Financial, Inc., 55 Water Street, New York, NY 10041-0001. Interested parties can also call Investor Relations toll-free at 866-436-8502 (domestic callers) or 212-438-2192 (international callers). The information on our website is not, and shall not be deemed to be part hereof or incorporated into this or any of our filings with the SEC.
Access to more than 10 years of the Company's filings made with the Securities and Exchange Commission is available through the Company's Investor Relations Web site. Go to http://investor.mhfi.com and click on the SEC Filings link. In addition, these filings are available to the public on the Commission's Web site through their EDGAR filing system at www.sec.gov. Interested parties may also read and copy materials that the Company has filed with the Securities and Exchange Commission (“SEC”) at the SEC's public reference room located at 100 F Street, NE, Washington, D.C. 20549 on official business days between the hours of 10AM and 3PM. Please call the Commission at 1-800-SEC-0330 for further information on the public reference room.
Item 1a. Risk Factors
We are providing the following cautionary statements which identify all known material risks, uncertainties and other factors that could cause our actual results to differ materially from historical and expected results.
We operate in the capital, commodities and commercial markets.commodity markets worldwide. The capital markets include asset managers, investment banks, commercial banks, insurance companies, exchanges, trading firms and issuers; and the commoditiescommodity markets include producers, traders and intermediaries within energy, petrochemicals, metals petrochemicals and agriculture;agriculture.
Our operations consist of four reportable segments: S&P Global Ratings ("Ratings"), S&P Global Market Intelligence ("Market Intelligence"), S&P Global Platts ("Platts") and S&P Dow Jones Indices ("Indices").
Ratings is an independent provider of credit ratings, research and analytics, offering investors and other market participants information, ratings and benchmarks.
Market Intelligence is a global provider of multi-asset-class data, research and analytical capabilities, which integrate cross-asset analytics and desktop services.
Platts is the commercial markets include professionalsleading independent provider of information and corporate executives within automotive,benchmark prices for the commodity and energy markets.We completed the sale of J.D. Power on September 7, 2016, with the results included in Platts results through that date.
Indices is a global index provider maintaining a wide variety of valuation and index benchmarks for investment advisors, wealth managers and institutional investors.
Effective beginning with the first quarter of 2018, we began reporting the financial services, insurance and marketing / research information services. Certain risk factors are applicable to certain of our individual segments while other risk factors are applicable company-wide.
Exposure to litigation and government and regulatory proceedings, investigations and inquiries could have a material adverse effect on our business, financial condition or results of operations.
InMarket Intelligence and Platts as separate reportable segments consistent with the normal course of business, both inchanges to our organizational structure and how our Chief Executive Officer evaluates the United States and abroad, we and our subsidiaries are defendants in numerous legal proceedings and are often the subject of government and regulatory proceedings, investigations and inquiries, as discussed under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Annual Report on Form 10-K and in Note 12 - Commitments and Contingencies to the consolidated financial statements under Item 8, Consolidated Financial Statements and Supplementary Data, in this Annual Report on Form 10-K, and we face the risk that additional proceedings, investigations and inquiries will arise in the future.
Manyperformance of these proceedings, investigationssegments. Our historical segment reporting has been retroactively revised to reflect the current organizational structure.
Major Portfolio Changes
The following significant changes were made to our portfolio during the three years ended December 31, 2018:
2018
In April of 2018, we acquired Kensho Technologies Inc. ("Kensho") for approximately $550 million, net of cash acquired, in a mix of cash and inquiries relatestock. Kensho is a leading-edge provider of next-generation analytics, artificial intelligence, machine learning, and data visualization systems to Wall Street's premier global banks and investment institutions, as well as the ratings activity of S&P Ratings brought by issuers and alleged purchasers of rated securities. In addition, various government and self-regulatory agencies frequently make inquiries and conduct investigations into our compliance with applicable laws and regulations, including those related to ratings activities and antitrust matters.
Any of these proceedings, investigations or inquiries could ultimately result in adverse judgments, damages, fines, penalties or activity restrictions, which could have a material adverse effect on our business, financial condition orNational Security community. The results of operations.
In viewKensho, an operating segment of the uncertainty inherentCompany, are included in litigationCorporate revenue and government and regulatory enforcement matters, we cannot predict the eventual outcome of the matters we are currently facing or the timing of their resolution, or in most cases reasonably estimate what the eventual judgments, damages, fines, penalties or impact of activity restrictions may be. As a result, we cannot provide assurance that the outcome of the matters we are currently facing or that we may face in the future will not have a material adverse effect on our business,Corporate Unallocated for financial condition or results of operations.reporting purposes.
As litigation or the process to resolve pending matters progresses, as the case may be, we continuously review the latest information available and assess our ability to predict the outcome of such matters and the effects, if any, on our consolidated financial condition, cash flows, business and competitive position, which may require that we record liabilities in the consolidated financial statements in future periods.
Legal proceedings impose additional expenses
2016
Market Intelligence
In October of 2016, we completed the sale of Standard & Poor's Securities Evaluations, Inc. ("SPSE") and Credit Market Analysis ("CMA") for $425 million in cash to Intercontinental Exchange, an operator of global exchanges, clearing houses and data services. During year ended December 31, 2016, we recorded a pre-tax gain of $364 million ($297 million after-tax) in gain on the Company and require the attention of senior management to an extent that may significantly reduce their ability to devote time addressing other business issues.
Risks relating to legal proceedings may be heightened in foreign jurisdictions that lack the legal protections or liability standards comparable to those that existdispositions in the United States. consolidated statement of income related to the sale of SPSE and CMA.
Platts
In addition, new laws and regulations have been and may continueSeptember of 2016, we completed the sale of J.D. Power for $1.1 billion to be enacted that establish lower liability standards, shiftXIO Group, a global alternative investments firm headquartered in London. During the burdenyear ended December 31, 2016, we recorded a pre-tax gain of proof or relax pleading requirements, thereby increasing the risk of successful litigations against the Company$728 million ($516 million after-tax) in gain on dispositions in the United Statesconsolidated statement of income related to the sale of J.D. Power.
In September of 2016, we acquired PIRA Energy Group ("PIRA"), a global provider of energy research and forecasting products and services. The purchase enhances Platts energy analytical capabilities by expanding its oil offering and strengthening its position in foreign jurisdictions. These litigation risks are often difficult to assess or quantifythe natural gas and could havepower markets.
In June of 2016, we acquired RigData, a material adverse effectprovider of daily information on our business, financial condition or results of operations.rig activity for the natural gas and oil markets across North America. The purchase enhances Platts energy analytical capabilities by strengthening its position in natural gas and enhancing its oil offering.
We may not have adequate insurance or reserves to cover these risks, and
Increased Shareholder Return
During the existence and magnitude of these risks often remains unknown for substantial periods of time and could have a material adverse effect on our business, financial condition or results of operations.
Our acquisitions and other strategic transactions may not produce anticipated results.
We have made and expect to continue to make acquisitions or enter into other strategic transactions to strengthen our business and grow our Company.
Such transactions, including our recent acquisition of SNL Financial LC, present significant challenges and risks.
The market for acquisition targets and other strategic transactions is highly competitive, especially in light of industry consolidation, which may affect our ability to complete such transactions.
If we are unsuccessful in completing such transactions or if such opportunities for expansion do not arise, our business, financial condition or results of operations could be materially adversely affected.
If such transactions are completed, the anticipated growth and other strategic objectives of such transactions may not be fully realized, and a variety of factors may adversely affect any anticipated benefits from such transactions. For instance, the process of integration may require more resources than anticipated, we may assume unintended liabilities, there may be unexpected regulatory and operating difficulties and expenditures, we may fail to retain key personnel of the acquired business and such transactions may divert management’s focus from other business operations.
The anticipated benefits from an acquisition or other strategic transaction may not be realized fully, or may take longer to realize than expected. For instance, althoughthree years ended December 31, 2018, we have identifiedreturned approximately $100 million in synergies expected$5.1 billion to be realized by 2019 largely from operational efficienciesour shareholders through a combination of share repurchases and our ability to accelerate SNL Financial’s international growth through its global footprint, there is no guarantee thatquarterly dividends: we will be able to achieve any or allcompleted share repurchases of these synergies. As a result,approximately $3.8 billion and distributed regular quarterly dividends totaling approximately $1.3 billion. Also, on January 30, 2019, the failureBoard of acquisitions and other strategic transactions to perform as expected could have a material adverse effect on our business, financial condition or results of operations.
ChangesDirectors approved an increase in the volume of securities issuedquarterly common stock dividend from $0.50 per share to $0.57 per share.
Key Results
|
| | | | | | | | | | | | | | | |
| (in millions) | Year ended December 31, | | % Change 1 |
| | 2018 | | 2017 | | 2016 | | ’18 vs ’17 | | ’17 vs ’16 |
| Revenue | $ | 6,258 |
| | $ | 6,063 |
| | $ | 5,661 |
| | 3% | | 7% |
Operating profit 2 | $ | 2,790 |
| | $ | 2,583 |
| | $ | 3,341 |
| | 8% | | (23)% |
| % Operating margin | 45 | % | | 43 | % | | 59 | % | | | | |
| Diluted earnings per share from net income | $ | 7.73 |
| | $ | 5.78 |
| | $ | 7.94 |
| | 34% | | (27)% |
| |
1 | % changes in the tables throughout the MD&A are calculated off of the actual number, not the rounded number presented. |
| |
2 | 2018 includes legal settlement expenses of $74 million, Kensho retention related expense of $31 million, restructuring charges related to a business disposition and employee severance charges of $25 million and lease impairments of $11 million. 2017 includes legal settlement expenses of $55 million, employee severance charges of $44 million, a charge to exit leased facilities of $25 million, non-cash acquisition and disposition-related adjustments of $15 million and an asset write-off of $2 million. 2016 includes a $1.1 billion gain from our dispositions, a benefit related to net legal settlement insurance recoveries of $10 million, disposition-related costs of $48 million, a technology-related impairment charge of $24 million, employee severance charges of $6 million, a $3 million disposition-related reserve release and acquisition-related costs of $1 million. 2018, 2017 and 2016 also includes amortization of intangibles from acquisitions of $122 million, $98 million, and $96 million, respectively. |
2018
Revenue increased 3% with a 1 percentage point favorable impact from foreign exchange rates. Revenue growth was driven by increases at Market Intelligence, Indices and traded in domestic and/or global capital markets and changes in interest rates and volatilityPlatts, partially offset by a decrease at Ratings. The increase at Market Intelligence was driven by annualized contract value growth in the financial markets could have a material adverse effect on our business, financial condition or resultsMarket Intelligence Desktop and Global Risk Services products. Revenue growth at Indices was driven by higher levels of operations.
Our business is impacted by general economic conditionsassets under management for exchange traded funds ("ETFs") and volatility in the United Statesmutual funds, and world financial markets. Therefore, since a significant component of our credit-rating based revenue is transaction-based, and is essentially dependent on the number and dollar volume of debt securities issued in the capital markets, unfavorable financial or economic conditions that either reduce investorhigher exchange-traded derivative volumes. The increase at Platts was due to continued demand for debt securities or reduce issuers’ willingness or ability to issue such securities could reduce the numbermarket data and dollar volume of debt issuances for which S&P Ratings provides credit ratings.
Increases in interest rates or credit spreads, volatility in financial markets or the interest rate environment, significant political or economic events, defaults of significant issuers and other market and economic factors may negatively impact the general level of debt issuance, the debt issuance plans of certain categories of borrowers, the level of derivatives trading and/or the types of credit-sensitive products being offered, any of which could have a material adverse effect on our business, financial condition or results of operations.
Any weakness in the macroeconomic environment could constrain customer budgets across the markets we serve, potentially leading to a reduction in their employee headcount andprice assessment products. These increases were partially offset by a decrease in demand for our subscription-basedat Ratings driven by lower corporate bond ratings revenue.
products.
Increasing regulation
Operating profit increased 8% with a 2 percentage point favorable impact from foreign exchange rates. Excluding the unfavorable impact of our S&Phigher legal settlement expenses in 2018 of less than 1 percentage point, Kensho retention related expense in 2018 of less than 1 percentage point, and higher deal-related amortization in 2018 of less than 1 percentage point, partially offset by the favorable impact of higher employee severance charges in 2017 of less than1 percentage point, the favorable impact of non-cash acquisition and disposition-related adjustments in 2017 of less than 1 percentage point, operating profit increased 8%. The increase was primarily due to revenue growth at Market Intelligence, Indices and Platts and decreased compensation costs at Ratings business in the United States, Europe and elsewhere can increase ourCorporate primarily driven by reduced incentive costs of doing business and therefore could have a material adverse effect on our business, financial condition or results of operations.
The financial services industry is highly regulated, rapidly evolving and subject to the potential for increasing regulation in the United States, Europe and elsewhere. The businesses conducted by S&P Ratings are in certain cases regulated under the Credit Rating Agency Reform Act of 2006 (the “Reform Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the U.S. Securities Exchange Act of 1934 (the “Exchange Act”), and/or the laws of the states or other jurisdictions in which they conduct business.
In the past several years, the U.S. Congress, the International Organization of Securities Commissions ("IOSCO"), the SEC and the European Commission, including through the European Securities Market Authority ("ESMA"), as well as regulatorsthe decreased headcount from attrition and prior year restructuring actions. These increases were partially offset by a decrease in other countriesrevenue at Ratings, increased expenses at Market Intelligence due to an increase in which S&P Ratings operates, have been reviewing the rolecost of rating agencies and their processes and the need for greater oversight or regulations concerning the issuancesales as a result of credit ratings or the activities of credit rating agencies. Other laws, regulations and rules relatingroyalties tied to credit rating agencies are being considered by local, national and multinational bodies and are likely to continue to be considered in the future, including provisions seeking to reduce regulatory and investor reliance on credit ratings, rotation of credit rating agencies and liability standards applicable to credit rating agencies.
These laws and regulations, and any future rulemaking, could result in reduced demand for credit ratingsannualized contract value growth and increased data costs, which we may be unable to pass through to customers. In addition, there may be uncertainty overand higher compensation costs at Market Intelligence and Indices primarily driven by additional headcount.
2017
Revenue increased 7% and was unfavorably impacted by 6 percentage points from the scope, interpretation and administration of such laws and regulations. We may be required to incur significant expenses in order to comply with such laws and regulations and to mitigate the risk of fines, penalties or other sanctions. Legal proceedings could become increasingly lengthy and there may be uncertainty over and exposure to liability. It is difficult to accurately assess the futurenet impact of legislativeacquisitions and regulatory requirements on our business and our customers’ businesses, and they may affect S&P Ratings’ communications with issuers as part of the rating assignment process, alter the manner in which S&P Ratings’ ratings are developed, affect the manner in which S&Pdispositions. Revenue growth was driven by increases at Ratings, or its customers or users of credit ratings operate, impact the demand for ratings and alter the economics of the credit ratings business. Each of these developments increase the costs and legal risk associated with the issuance of credit ratings and may have a material adverse effect on our operations, profitability and competitiveness, the demand for credit ratings and the manner in which such ratings are utilized.
Additional information regarding rating agencies is provided under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Annual Report on Form 10-K.
Our S&P DJ Indices and C&C businesses are subject to the potential for increasing regulatory review in the United States, Europe and elsewhere, which canMarket Intelligence, partially offset by a decrease at Platts. The increase our costs of doing business and therefore could have a material adverse effect on our business, financial condition or results of operations.
In addition to the extensive and evolving U.S. laws and regulations, foreign jurisdictions, principally in Europe, have taken measures to increase regulation of the financial services and commodities industries.
In October of 2012, IOSCO issued its Principles for Oil Price Reporting Agencies ("PRA Principles"), which IOSCO states are intended to enhance the reliability of oil price assessments that are referenced in derivative contracts subject to regulation by IOSCO members. Platts has taken steps to align its operations with the PRA Principles and, as recommended by IOSCO in its final report on the PRA Principles, has aligned to the PRA Principles for other commodities for which it publishes benchmarks.
In July of 2013, IOSCO issued its Principles for Financial Benchmarks ("Financial Benchmark Principles"), which are intended to promote the reliability of benchmark determinations, and address governance, benchmark quality and accountability mechanisms, including with regard to the indices published by S&P DJ Indices. S&P DJ Indices has taken steps to align its governance regime and operations with the Financial Benchmark Principles and engaged an independent auditor to perform a reasonable assurance review of such alignment.
The financial benchmarks industry is subject to the new pending benchmark regulation in the European Union (the “E.U. Benchmark Regulation”) as well as potential increased regulation in other jurisdictions. The proposed E.U. Benchmark Regulation has been released for final approval and is expected to be published later this year. The E.U. Benchmark
Regulation will likely require S&P DJ Indices and Platts in due course to obtain registration or authorization in connection with its benchmark activities in Europe. This legislation will likely cause additional operating obligations but they are not expected to be material at this time and until the regulation is finalized the exact impact is not certain.
The European Union has recently finalized a package of legislative measures known as MiFID II ("MiFID II"), which revise and update the existing E.U. Markets in Financial Instruments Directive framework. MiFID II will apply in full in all E.U. Member States from January 3, 2017. MiFID II includes provisions that, among other things: (i) impose new conditions and requirements on the licensing of benchmarks and provide for non-discriminatory access to exchanges and clearing houses; (ii) modify the categorization and treatment of certain classes of derivatives; (iii) expand the categories of trading venue that are subject to regulation; and (iv) provide for the mandatory trading of certain derivatives on exchanges (complementing the mandatory derivative clearing requirements in the E.U. Market Infrastructure Regulation of 2011). Although the MiFID II package is “framework” legislation (meaning that much of the detail of the rules will be set out in subordinate measures to be agreed upon in the period before 2017), it is possible that the introduction of these laws and rules could affect S&P DJ Indices’ and Platts’ abilities both to administer and license their indices and price assessments, respectively.
Changes to regulations in the United States, Europe and elsewhere may impact our S&P Capital IQ and SNL business by increasing the costs of doing business globally, which could have a material adverse effect on our business, financial condition or results of operations.
S&P Capital IQ and SNL operates regulated investment advisory businesses in the United States, the European Union and certain other countries. These and other S&P Capital IQ and SNL businesses may increasingly become subject to new or more stringent regulations that will increase the cost of doing business, which could have a material adverse effect on our business, financial condition or results of operations.
MiFID II and the Market Abuse Regulation (“MAR”) may impose additional regulatory burdens on S&P Capital IQ and SNL's activities in the European Union, although the exact severity and cost are not yet known.
We may become subject to liability based on the use of our products by our clients.
Some of our products support the investment processes of our clients, which, in the aggregate, manage trillions of dollars of assets. Use of our products as part of the investment process creates the risk that clients, or the parties whose assets are managed by our clients, may pursue claims against us for very significant dollar amounts, which could have a material adverse effect on our business, financial condition or results of operations.
Any such claim, even if the outcome were to be ultimately favorable to us, would involve a significant commitment of our management, personnel, financial and other resources and could have a negative impact on our reputation. In addition, such claims and lawsuits could have a material adverse effect on our business, financial condition or results of operations.
Increased competition could result in a loss of market share or revenue.
The markets for credit ratings, financial research, investment and advisory services, index-based products, and commodities price assessments and related news and information about the commodities markets are intensely competitive. S&P Ratings S&P Capital IQ and SNL, S&P DJ Indices and C&C compete domestically and internationally on the basis of a number of factors, including the quality of its ratings, research and advisory services, client service, reputation, price, geographic scope, range of products and technological innovation.
While our businesses face competition from traditional content and analytics providers, we also face competition from non-traditional providers such as exchanges, asset managers, investment banks and technology-led companies that are adding content and analytics capabilities to their core businesses.
In addition, in some of the countries in which S&P Ratings competes, governments may provide financial or other support to locally-based rating agencies and may from time to time establish official credit rating agencies, credit ratings criteria or procedures for evaluating local issuers.
Sustained downward pressure on oil and other commodities prices and trading activity in those markets could have a material adverse effect on the rate of growth of Platts’ revenue, including subscription and licensing fees.
Introduction of new products, services or technologies could impact our profitability.
We operate in highly competitive markets that continue to change to adapt to customer needs. In order to maintain a competitive position, we must continue to invest in new offerings and new ways to deliver our products and services. These investments may not be profitable or may be less profitable than what we have experienced historically.
We could experience threats to our existing businesses from the rise of new competitorswas primarily due to the rapidly changing environmentgrowth in which we operate.
We rely on our information technology environmentbank loan ratings revenue and certain critical databases, systems and applicationscorporate bond ratings revenue. Revenue growth at Indices was primarily due to support key product and service offerings. We believe we have appropriate policies, processes and internal controls to ensure the stabilityhigher levels of our information technology, provide security from unauthorized access to our systems and maintain business continuity, but our business could be subject to significant disruption and our business, financial condition or results of operations could be materially and adversely affected by unanticipated system failures, data corruption or unauthorized access to our systems.
A significant increase in operating costs and expenses could have a material adverse effect on our profitability.
Our major expenditures include employee compensation and capital investments.
We offer competitive salary and benefit packages in order to attract and retain the quality employees required to grow and expand our businesses. Compensation costs are influenced by general economic factors, including those affecting the cost of health insurance and postretirement benefits, and any trends specific to the employee skill sets we require.
We make significant investments in information technology data centers and other technology initiatives and we cannot provide assurances that such investments will result in increased revenues.
Although we believe we are prudent in our investment strategies and execution of our implementation plans, there is no assurance as to the ultimate recoverability of these investments.
Consolidation of customers as well as staffing levels across our customer base could impact our available markets and revenue growth.
Our businesses have a customer base which is largely comprised of members from the financial services and commodities industries. The current challenging business environment and the consolidation of customers resulting from mergers and acquisitions in the financial services and commodities industries can result in reductions in the number of firms and workforce which can impact the size of our customer base.
Customers within the financial services and commodities industries that strive to reduce their operating costs may seek to reduce their spending on our products and services. If a large number of smaller customers or a critical number of larger customers reduce their spending with us, our business, financial condition or results of operations could be materially and adversely affected.
Alternatively, customers may use other strategies to reduce their overall spending on financial and commodity market products and services by consolidating their spending with fewer vendors, including by selecting other vendors with lower-cost offerings, or by self-sourcing their need for financial and commodity market products and services. If customers elect to consolidate their spending on financial and commodity market products and services with other vendors and not us, if we lose business to lower priced competitors, or if customers elect to self-source their product and service needs, our business, financial condition or results of operations could be materially and adversely affected.
A material portion of our revenues in our S&P DJ Indices business is concentrated in some of our largest customers, who have significant assets under management for ETFs and mutual funds. The increase at Market Intelligence was driven by annualized contract value growth in index fundsthe Market Intelligence Desktop and exchange-traded funds. A lossGlobal Risk Services products, partially offset by the unfavorable impact of the disposition of non-core businesses in 2016. The decrease at Platts was driven by the unfavorable impact of the disposition of J.D. Power in 2016, partially offset by an increase due to continued demand for market data and price assessment products.
Operating profit decreased 23%. Excluding the unfavorable impact of the gain on dispositions in 2016 of 38 percentage points, higher net legal settlement expenses in 2017 of 2 percentage points, higher employee severance charges in 2017 of 1 percentage point, a charge to exit leased facilities of 1 percentage point and non-cash acquisition and disposition-related adjustments in 2017 of 1 percentage point, partially offset by the favorable impact of a substantial portiontechnology-related impairment charge in 2016 of 1 percentage point and higher disposition-related costs in 2016 of 1 percentage point, operating profit increased 17%. This increase was primarily due to revenue from our largest customers could have a materialgrowth at Ratings, Indices and adverse effect on our business, financial condition or results of operations.
If we lose key outside suppliers of data and products or if the data or products of these suppliers have errors or are delayed, we may not be ableMarket Intelligence as discussed above, partially offset by higher compensation costs due to provide our clients with the information and products they desire.
Our ability to produce our products and develop new products is dependent upon the products of other suppliers, including certain data, software and service suppliers. Some of our products are dependent upon (and of little value without) updates from our data suppliers and most of our information and data products are dependent upon (and of little value without) continuing access to historical and current data.
We utilize certain data provided by third-party data sources in a variety of ways, including large volumes of data from certain stock exchanges around the world.
If the data from our suppliers has errors, is delayed, has design defects, is unavailable on acceptable terms or is not available at all, it could have a material adverse effect on our business, financial condition or results of operations.
Some of our agreements with data suppliers allow them to cancel on short notice. Termination of one or more of our significant data agreements or exclusion from, or restricted use of, or litigation in connection with, a data provider’s information could decrease the available information for us to use (and offer our clients) and could have a material adverse effect on our business, financial condition or results of operations.
Changes in the legislative, regulatory, and commercial environments in which we operate may materially and adversely impact our ability to collect, compile, use, and publish data and may impact our financial results.
Certain types of information we collect, compile, use, and publish, including offerings in our C&C business, are subject to regulation by governmental authorities in jurisdictions in which we operate. In addition, there is increasing concern among certain privacy advocates and government regulators regarding marketing and privacy matters, particularly as they relate to individual privacy interests.
These concerns may result in new or amended laws and regulations. Future laws and regulations with respect to the collection, compilation, use, and publication of information and consumer privacy could result in limitations on our operations, increased compliance or litigation expense, adverse publicity, or loss of revenue, which could have a material adverse effect on our business, financial condition, and results of operations. It is also possible that we could be prohibited from collecting or disseminating certain types of data, which could affect our ability to meet our customers’ needs.
Our ability to protect our intellectual property rights could impact our competitive position.
Our products contain intellectual property delivered through a variety of digital and other media. Our ability to achieve anticipated results depends in part on our ability to defend our intellectual property against infringement. Our business, financial condition or results of operations could be materially and adversely affected by inadequate or changing legal and technological protections for intellectual property and proprietary rights in some jurisdictions and markets.
We are exposed to multiple risks associated with the global nature of our operations.
The geographic breadth of our activities subjects us to significant legal, economic, operational, market, compliance and reputational risks. These include, among others, risks relating to:
economic and political conditions in foreign countries,
inflation,
fluctuation in interest rates and currency exchange rates,
limitations that foreign governments may impose on the conversion of currency or the payment of dividends or other remittances to us from our non-U.S. subsidiaries,
differing accounting principles and standards,
unexpected increases in taxes or changes in U.S. or foreign tax laws,
the costs of repatriating cash held by entities outside the United States, including withholding or other taxes that
foreign governments may impose on the payment of dividends or other remittances to us from our non-U.S. subsidiaries,
potentialincentive costs and difficulties in complying with a wide variety of foreign laws and regulations (including tax systems) administered by foreign government agencies, some of which may conflict with U.S. or other sources of law,
changes in applicable laws and regulatory requirements,
the possibility of nationalization, expropriation, price controls and other restrictive governmental actions,
competition with local rating agencies that have greater familiarity, longer operating histories and/or support from local governments or other institutions,
civil unrest, terrorism, unstable governments and legal systems, and other factors.
Adverse developments in any of these areas could have a material adverse effect on our business, financial condition or results of operations.
Additionally, we are subject to complex U.S., European and other local laws and regulations that are applicable to our operations abroad, including trade sanctions laws, anti-corruption laws such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act 2010, anti-bribery laws, anti-money laundering laws, and other financial crimes laws. Although we have implemented internal controls, policies and procedures and employee training and compliance programs to deter prohibited practices, such measures may not be effective in preventing employees, contractors or agents from violating or circumventing such internal policies and violating applicable laws and regulations. Any determination that we have violated trade sanctions, anti-bribery or anti-corruption laws could have a material adverse effect on our business, financial condition or results of operations.
Compliance with international and U.S. laws and regulations that apply to our international operations increases the cost of doing business in foreign jurisdictions. Violations of such laws and regulations may result in fines and penalties, criminal sanctions, administrative remedies, restrictions on business conduct and could have a material adverse effect on our reputation, our ability to attract and retain employees, our business, financial condition or results of operations.
Our inability to successfully recover should we experience a disaster or other business continuity problem could cause material financial loss, loss of human capital, regulatory actions, reputational harm or legal liability.
Should we experience a local or regional disaster or other business continuity problem, such as an earthquake, hurricane, flood, terrorist attack, pandemic, security breach, cyber attack, power loss, telecommunications failure or other natural or man-made disaster, our ability to continue to operate will depend, in part, on the availability of our personnel, our office facilities and the proper functioning of our computer, telecommunication and other related systems and operations. In such an event, we could experience operational challenges with regard to particular areas of our operations, such as key executive officers or personnel, that could have a material adverse effect on our business.
We regularly assess and take steps to improve our existing business continuity plans and key management succession. However, a disaster on a significant scale or affecting certain of our key operating areas within or across regions, or our inability to successfully recover should we experience a disaster or other business continuity problem, could materially interrupt our business operations and result in material financial loss, loss of human capital, regulatory actions, reputational harm, damaged client relationships or legal liability.
Outsourcing certain aspects of our business could result in disruption and increased costs.
We have outsourced certain support functions to third-party service providers to leverage leading specialized capabilities and achieve cost efficiencies. If the service providers to which we have outsourced these functions to do not perform effectively, we may not be able to achieve the expected cost savings and, depending on the function involved, we may experience business disruption, processing inefficiencies, or harm employee morale.
We rely heavily on network systems and the Internet and any failures or disruptions may adversely affect our ability to serve our customers.
Many of our products and services are delivered electronically, and our customers rely on our ability to process transactions rapidly and deliver substantial quantities of data on computer-based networks. Our customers also depend on the continued capacity, reliability and security of our electronic delivery systems, our websites and the Internet.
Our ability to deliver our products and services electronically may be impaired due to infrastructure or network failures, malicious or defective software, human error, natural disasters, service outages at third-party Internet providers or increased government regulation.
Delays in our ability to deliver our products and services electronically may harm our reputation and result in the loss of customers. In addition, a number of our customers entrust us with storing and securing their data and information on our servers.
Although we have disaster recovery plans that include backup facilities for our primary data centers, our systems are not always fully redundant, and our disaster planning may not always be sufficient or effective. As such, these disruptions may affect our ability to store, handle and secure such data and information.
Our operations and infrastructure may malfunction or fail, which could have a material adverse effect on our business, financial condition or results of operations.
Our ability to conduct business may be materially and adversely impacted by a disruption in the infrastructure that supports our businesses and the communities in which we are located, including New York City, the location of our headquarters, and major cities worldwide in which we have offices.
This may include a disruption involving physical or technological infrastructure used by us or third parties with or through whom we conduct business, whether due to human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, intentional acts of vandalism, acts of terrorism, political unrest, war or otherwise. Our efforts to secure and plan for potential disruptions of our major operating systems may not be successful.
We rely on third-party providers to provide certain essential services. While we believe that such providers are reliable, we have limited control over the performance of such providers. To the extent any of our third-party providers ceases to provide these services in an efficient, cost-effective manner or fail to adequately expand its services to meet our needs and the needs of our customers, we could experience lower revenues and higher costs.
We also do not have fully redundant systems for most of our smaller office locations and low-risk systems, and our disaster recovery plan does not include restoration of non-essential services. If a disruption occurs in one of our locations or systems and our personnel in those locations or those who rely on such systems are unable to utilize other systems or communicate with or travel to other locations, such persons’ ability to service and interact with our clients and customers may suffer.
We cannot predict with certainty all of the adverse effects that could result from our failure, or the failure of a third party, to efficiently address and resolve these delays and interruptions. A disruption to our operations or infrastructure could have a material adverse effect on our business, financial condition or results of operations.
We are exposed to risks related to cybersecurity and protection of confidential information.
Our operations rely on the secure processing, storage and transmission of confidential, sensitive and other types of information in our computer systems and networks and those of our third party vendors.
The cyber risks we face range from cyber-attacks common to most industries, to more advanced threats that target us because of our prominence in the global marketplace, or due to our ratings of sovereign debt. Breaches of our or our vendors’ technology and systems, whether from circumvention of security systems, denial-of-service attacks or other cyber-attacks, hacking, computer viruses or malware, employee error, malfeasance, physical breaches or other actions, may cause material interruptions or malfunctions in our or such vendors’ web sites, applications or data processing, or may compromise the confidentiality and integrity of material information regarding us or our business or customers.
Measures that we take to avoid or mitigate material incidents can be expensive, and may be insufficient, circumvented, or may become obsolete. Any material incidents could cause us to experience reputational harm, loss of customers, regulatory actions, sanctions or other statutory penalties, litigation or financial losses that are either not insured against or not fully covered through any insurance maintained by us.
Any of the foregoing could have a material adverse effect on our business, financial condition or results of operations.additional headcount.
Item 1b. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters are located in leased premises located at 55 Water Street, New York, NY 10041. We lease office facilities at 120 locations; 41 are in the U.S. In addition, we own real property at 7 locations, of which 2 are in the U.S. Our properties consist primarily of office space used by each of our segments. We believe that all of our facilities are well maintained and are suitable and adequate for our current needs.
Item 3. Legal Proceedings
For information on our legal proceedings, see Note 12 – Commitments and Contingencies under Item 8, Consolidated Financial Statements and Supplementary Data, in this Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
Executive Officers of the Registrant
The following individuals are the executive officers of the Company:
|
| | | | |
| Name | | Age | | Position |
JohnDouglas L. BerisfordPeterson | | 5260 | | President Standard & Poor's Ratings Servicesand Chief Executive Officer |
Jack F. Callahan, Jr.Ewout L. Steenbergen | | 5749 | | Executive Vice President, and Chief Financial Officer |
| Ratings |
| John L. Berisford | | 55 | | President, S&P Global Ratings |
| Market Intelligence |
| Martina L. Cheung | | 40 | | Executive Managing Director, Global Risk Services, S&P Capital IQ and SNL |
Michael Chinn | | 43 | | President, S&P Capital IQ and SNLGlobal Market Intelligence |
Imogen Dillon HatcherPlatts |
| Martin E. Fraenkel | | 5358 | | President, S&P Global Platts |
Courtney GeduldigIndices | | 40 | | Executive Vice President, Public Affairs |
France M. Gingras | | 51 | | Executive Vice President, Human Resources |
David Goldenberg | | 49 | | Acting General Counsel |
Donald Howard | | 56 | | Chief of Risk and Compliance |
AlexAlexander J. Matturri, Jr. | | 5760 | | Chief Executive Officer, S&P Dow Jones Indices |
Douglas L. PetersonS&P Global Functions |
| Nicholas D. Cafferillo | | 5747 | | PresidentChief Data and Chief ExecutiveTechnology Officer |
Paul SheardCourtney C. Geduldig | | 6143 | | Executive Vice President, and Chief EconomistPublic Affairs |
Ashu SuyashS. Swamy Kocherlakota | | 4952 | | Managing Director and Chief Information Officer |
| Steven J. Kemps | | 53 | | Executive Vice President, General Counsel |
| Nancy J. Luquette | | 53 | | Senior Vice President, Chief Risk & Audit Executive |
| Dimitra Manis | | 53 | | Executive Vice President, Chief People Officer CRISIL |
Mr. Berisford, prior to becoming President of Standard and Poor’sS&P Global Ratings Services on November 3, 2015, was Executive Vice President, Human Resources since 2011. Prior to that, he held senior management positions at PepsiCo, including Senior Vice President, Human Resources for Pepsi Beverages Company.
Mr. CallahanCafferillo, prior to becoming Executive Vice PresidentChief Data and Chief FinancialTechnology Officer on December 6, 2010,January 2, 2019, was Chief FinancialTechnology Officer as well as Chief Operating Officer, S&P Global Market Intelligence. Prior to joining S&P Global, Mr. Cafferillo was Chief Operating Officer of Dean Foods. Prior to that, Mr. Callahan held senior management positions at PepsiCo, including ChiefSNL Financial Officer of Frito-Lay International.LC.
Ms. Cheung, prior to becoming Executive Managing Director,President, S&P Global Market Intelligence on January 2, 2019, was Head of Global Risk Services, S&P Capital IQGlobal’s Chief Strategy Officer, and SNL on November 3, 2015,previously held management positions at Standard and Poor’s Ratings Services and was most recently MHFI’s Chief Strategy Officer.S&P Global Ratings. Prior to joining Standard & Poor’s,S&P Global, she worked in the consulting industry, first in Accenture’s Financial Services Strategy group and later as a Partner at Mitchell Madison Consulting.
Mr. ChinnFraenkel, prior to becoming President of S&P Capital IQGlobal Platts in September 2016, was Global Head of Content, responsible for leading Platts’ 450-member global editorial and SNL on September 8,analytics team, as well as being a member of the Platts Executive Committee regarding the division’s strategy and offerings in data, pricing, news and analysis. Mr. Fraenkel joined S&P Global Platts in June 2015 was Chief Executive Officer of SNL since 2010 and President of SNL since 2000.
Ms. Dillon Hatcher, prior to becoming President of Platts on September 8, 2015, was President of S&P Capital IQ since 2014. Prior to that, she was FTSEfrom CME Group, Executive Director Global Sales and FTSE Groupwhere he was Managing Director EMEA.and Global Head of Energy.
Ms. Geduldig, prior to becoming Executive Vice President, Public Affairs on May 1, 2015, was Managing Director, Global Government and Public Policy since 2013, and Vice President of Global Regulatory Affairs at Standard & Poor’s.S&P Global Ratings. Prior to that, she was Managing Director and Head of Federal Government Relations at the Financial Services Forum.
Ms. GingrasMr. Kocherlakota, prior to becoming Chief Information Officer on January, 1, 2018, was Global Head of Infrastructure & Cloud and Enterprise Services since July, 2017. Prior to that, he was Senior Vice President, Global Head of Technology Operations & Infrastructure at Visa, Inc.
Mr. Kemps, prior to becoming Executive Vice President, Human Resources on November 3, 2015, was SeniorGeneral Counsel at S&P Global in August 2016, served as Executive Vice President Total Rewards since 2012.and General Counsel at Quanta Services, where he oversaw all legal affairs and advised the business on regulatory,
ethical and compliance matters. Prior to that, she was Headjoining Quanta, he served as General Counsel of CompensationHess Retail Corporation and Benefits at Time, Inc.Dean Foods Company.
Mr. GoldenbergMs. Luquette, prior to becoming Acting General Counsel on October 14, 2015, wasSenior Vice President, Chief Legal OfficerRisk & Audit Executive for S&P Capital IQGlobal in June 2016, was the Chief Audit Executive for the Company, in which capacity she led the S&P Global Internal Audit function and SNL since January, 2015. His prior roles include General Counsel of Mercerthe Ratings Risk Review function for S&P Global Ratings. Before joining the Company, Ms. Luquette was Vice President and General Counsel at Lazard Asset Management.Auditor for Avaya, and prior to that was a Partner in PwC’s Internal Audit and Global Risk Management Services practices.
Mr. HowardMs. Manis, prior to becoming Executive Vice President, Chief of Risk and CompliancePeople Officer on November 3, 2015May 15, 2018, was Head of Enterprise Risk Management andthe Chief Risk and ComplianceHuman Resources Officer since November, 2013.for Revlon Inc. Prior to that, Mr. Howard held senior management positionsjoining Revlon, she served as Senior Vice President for Global Talent at Standard & Poor’s Ratings ServicesEstée Lauder Companies. She previously worked at OpenLink and Promontory Financial Group, LLC.Thomson Reuters.
Mr. Matturri, prior to becoming Chief Executive Officer at S&P Dow Jones Indices on July 2, 2012, served as an Executive Managing Director of S&P Indices. Prior to joining S&P Indices, Mr. Matturri served as Senior Vice President and Director of
Global Equity Index Management at Northern Trust Global Investments (NTGI). He previously held management positions with Deutsche Asset Management’s Index and Quantitative Investment business and The Bank of New York.
Mr. Peterson, prior to becoming President and Chief Executive Officer on November 1, 2013, was President of S&P Global Ratings (then known as Standard & Poor's Ratings ServicesServices) since 2011. Prior to that, he was Chief Operating Officer of Citibank, NA.
Mr. SheardSteenbergen, prior to becoming Executive Vice President and Chief Economist onFinancial Officer at S&P Global in November 3, 2015,2016, was Executive Vice President and Chief Financial Officer of Voya Financial, Inc. Prior to his role as Voya's Chief Financial Officer, Mr. Steenbergen was Chief Global EconomicsFinancial Officer and HeadChief Risk Officer for ING Asia-Pacific and held a number of Global Economicsmanagement roles for ING Group, including serving as regional general manager in Hong Kong and Research of Standard & Poor’s Ratings Services. Prior to that, he held economist positions at Nomura Securities and at Lehman Brothers.
Ms. Suyash, prior to becoming an officer on June 1, 2015, wasas a Chief Executive Officer of L&T Investment Management.RVS, an ING Group company based in the Netherlands.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Price Range of Common Stock
On January 22, 2016,S&P Global Inc. began trading under its new ticker symbol "SPGI" on April 28, 2016. Previously, the closing price of ourCompany's common stock was $85.50 per share as reportedtraded on the New York Stock Exchange (“NYSE”("NYSE") under the ticker symbol “MHFI”"MHFI". The approximate number of record holders of our common stock as of January 22, 201625, 2019 was 3,350. The high and low sales prices of McGraw Hill Financials’ common stock on the NYSE for the past two fiscal years are as follows:
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| | | |
| | 2015 | | 2014 |
| First Quarter | $109.13 - $85.06 | | $72.83 - $82.39 |
| Second Quarter | 108.14 - 100.44 | | 71.93 - 84.81 |
| Third Quarter | 107.50 - 84.64 | | 77.70 - 87.28 |
| Fourth Quarter | 101.27 - 86.10 | | 73.96 - 93.94 |
| Year | 109.13 - 84.64 | | 71.93 - 93.94 |
The performance graph below compares our cumulative total shareholder return during the previous five years with a performance indicator of the overall market (i.e., S&P 500), and our peer group. The current peer group consists of the following companies: Thomson Reuters Corporation, Moody’s Corporation, CME Group Inc., MSCI Inc., FactSet Research Systems Inc. and IHS Inc. Beginning in fiscal 2014, the Company selected a new peer group to more accurately reflect the Company's peers in terms of industry after the portfolio rationalization of certain businesses. The previous peer group consisted of the following companies: Thomson Reuters Corporation, Thomson Reuters PLC (through September of 2009), Reed Elsevier NV, Reed Elsevier PLC, Pearson PLC, Moody’s Corporation and Wolters Kluwer.Markit Ltd. Returns assume $100 invested on December 31, 20102013 and total return includes reinvestment of dividends through December 31, 2015.
22
Dividends
We expect to continue our policy of paying regular cash dividends, although there is no assurance as to future dividend payments because they depend on future earnings, capital requirements and our financial condition. Regular quarterly dividends per share of our common stock for 20152018 and 20142017 were as follows:
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| | | | | | | |
| | 2015 | | 2014 |
| $0.33 per quarter in 2015 | $ | 1.32 |
| | |
| $0.30 per quarter in 2014 | | | $ | 1.20 |
|
|
| | | | | | | |
| | 2018 | | 2017 |
| $0.50 per quarter in 2018 | $ | 2.00 |
| | |
| $0.41 per quarter in 2017 | | | $ | 1.64 |
|
On January 27, 2016,30, 2019, the Board of Directors approved an increase in the quarterly common stock dividend from $0.33$0.50 per share to $0.36$0.57 per share.
Transfer Agent and Registrar for Common Stock
Computershare is the transfer agent for McGraw Hill Financial.S&P Global. Computershare maintains the records for the Company's registered shareholders and can assist with a variety of shareholder related services.
Shareholder correspondence should be mailed to:
Computershare
P.O. Box 30170505000
College Station, TX 77842-3170Louisville, KY 40233-5000
Overnight correspondence should be mailed to:
Computershare
211 Quality Circle,462 South 4th Street, Suite 2101600
College Station, TX 77845Louisville, KY 40202
Visit the Investor Center™ website to view and manage shareholder account online: www.computershare.com/investor
For shareholder assistance:
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| |
| In the U.S. and Canada: | 888-201-5538 |
| Outside the U.S. and Canada: | 201-680-6578 |
| TDD for the hearing impaired: | 800-231-5469 |
| TDD outside the U.S. and Canada: | 201-680-6610781-575-4592 |
| E-mail address: | shareholder@computershare.comweb.queries@computershare.com |
| Shareholder online inquiries | https://www-us.computershare.com/investor/Contact |
Repurchase of Equity Securities
On December 4, 2013, the Board of Directors approved a stockshare repurchase program authorizing the purchase of up to 50 million shares, (the "2013 Repurchase Program"), which was approximately 18% of the Company's outstanding shares at that time. During the fourth quarter of 2015,2018, we repurchased 5.12.7 million shares, underwhich included 2.5 million shares received from the 2013 Repurchase Programinitiation of our accelerated share repurchase ("ASR") agreement that we entered into on October 29, 2018. Further discussion relating to our ASR agreement can be found in Note 9 - Equity to the Consolidated Financial Statements and asSupplementary Data, in the Annual Report on Form 10-K. As of December 31, 2015, 35.52018, 10.6 million shares remained under the 2013 Repurchase Program.our current repurchase program.
Repurchased shares may be used for general corporate purposes, including the issuance of shares for stock compensation plans and to offset the dilutive effect of the exercise of employee stock options. The 2013 Repurchase ProgramOur current repurchase program has no expiration date and purchases under this program may be made from time to time on the open market and in private transactions, depending on market conditions.
The following table provides information on our purchases of our outstanding common stock during the fourth quarter of 20152018 pursuant to our current share repurchase program (column c). In addition to these purchases, the number of shares in column (a) include: 1)include shares of common stock that are tendered to us to satisfy our employees’ tax withholding obligations in connection
with the vesting of awards of restricted shares (we repurchase such shares based on their fair market value on the vesting date), and 2) our shares deemed surrendered to us to pay the exercise price and to satisfy our employees’ tax withholding obligations in connection with the exercise of employee stock options.. There were no other share repurchases during the quarter outside the repurchases noted below.
(amounts in millions, except per share price)
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| | | | | | | | | | | | | |
| Period | | (a) Total Number of Shares Purchased | | (b) Average Price Paid per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Programs | | (d) Maximum Number of Shares that may yet be Purchased Under the Programs |
| Oct. 1 - Oct. 31, 2015 | | — |
| | $ | 89.31 |
| | — |
| | 40.6 |
|
| Nov. 1 - Nov. 30, 2015 | | 2.5 |
| | 96.40 |
| | 2.5 |
| | 38.1 |
|
| Dec. 1 - Dec. 31, 2015 | | 2.7 |
| | 95.96 |
| | 2.6 |
| | 35.5 |
|
| Total — Qtr | | 5.2 |
| | $ | 96.14 |
| | 5.1 |
| | 35.5 |
|
|
| | | | | | | | | | | | | |
| Period | | (a) Total Number of Shares Purchased | | (b) Average Price Paid per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Programs | | (d) Maximum Number of Shares that may yet be Purchased Under the Programs |
Oct. 1 - Oct. 31, 2018 1, 2 | | 2,730,625 |
| | $ | 187.96 |
| | 2,728,342 |
| | 10.6 | million |
| Nov. 1 - Nov. 30, 2018 | | 13,333 |
| | 183.06 |
| | — |
| | 10.6 | million |
| Dec. 1 - Dec. 31, 2018 | | 6,818 |
| | 182.79 |
| | — |
| | 10.6 | million |
Total — Qtr 2 | | 2,750,776 |
| | $ | 187.59 |
| | 2,728,342 |
| | 10.6 | million |
1 Includes 2.5 million shares received from the initial delivery of our ASR agreement that we entered into on October 29, 2018.
2 Average price paid per share does not include the accelerated share repurchase transaction as discussed in more detail above.
Equity Compensation Plan
For information on securities authorized under our equity compensation plans, see Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 6. Selected Financial Data | | | (in millions, except per share data) | 2015 | | 2014 | | 2013 | | 2012 | | 2011 | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 | |
| Income statement data: | | | | | | | | | | | | | | | | | | | | |
| Revenue | $ | 5,313 |
| | $ | 5,051 |
| | $ | 4,702 |
| | $ | 4,270 |
| | $ | 3,762 |
| | $ | 6,258 |
| | $ | 6,063 |
| | $ | 5,661 |
| | $ | 5,313 |
| | $ | 5,051 |
| |
| Operating profit | 1,917 |
| | 113 |
| | 1,358 |
| | 1,170 |
| | 1,052 |
| | 2,790 |
| | 2,583 |
| | 3,341 |
| | 1,908 |
| | 88 |
| |
| Income from continuing operations before taxes on income | 1,815 |
| 1 | 54 |
| 2 | 1,299 |
| 3 | 1,089 |
| 4 | 975 |
| 5 | |
| Income before taxes on income | | 2,681 |
| 1 | 2,461 |
| 2 | 3,188 |
| 3 | 1,815 |
| 4 | 54 |
| 5 |
| Provision for taxes on income | 547 |
| | 245 |
| | 425 |
| | 388 |
| | 364 |
| | 560 |
| | 823 |
| 6 | 960 |
| | 547 |
| | 245 |
| |
| Net income (loss) from continuing operations attributable to McGraw Hill Financial, Inc. | 1,156 |
| | (293 | ) | | 783 |
| | 651 |
| | 592 |
| | |
| Earnings (loss) per share from continuing operations attributable to the McGraw Hill Financial, Inc. common shareholders: | | | | | | | | | | | |
| Net income (loss) from continuing operations attributable to S&P Global Inc. | | 1,958 |
| | 1,496 |
| | 2,106 |
| | 1,156 |
| | (293 | ) | |
| Earnings (loss) per share from continuing operations attributable to the S&P Global Inc. common shareholders: | | | | | | | | | | | |
| Basic | 4.26 |
| | (1.08 | ) | | 2.85 |
| | 2.33 |
| | 1.98 |
| | 7.80 |
| | 5.84 |
| | 8.02 |
| | 4.26 |
| | (1.08 | ) | |
| Diluted | 4.21 |
| | (1.08 | ) | | 2.80 |
| | 2.29 |
| | 1.95 |
| | 7.73 |
| | 5.78 |
| | 7.94 |
| | 4.21 |
| | (1.08 | ) | |
| Dividends per share | 1.32 |
| | 1.20 |
| | 1.12 |
| | 1.02 |
| | 1.00 |
| | 2.00 |
| | 1.64 |
| | 1.44 |
| | 1.32 |
| | 1.20 |
| |
| Special dividend declared per common share | — |
| | — |
| | — |
| | 2.50 |
| | — |
| | |
| Operating statistics: | | | | | | | | | | | | | | | | | | | | |
Return on average equity 6 | 324.3 | % | | (1.4 | )% | | 134.2 | % | | 40.5 | % | | 48.2 | % | | |
Return on average equity 7 | | 292.6 | % | | 222.3 | % | | 472.0 | % | | 324.3 | % | | (1.4 | )% | |
| Income from continuing operations before taxes on income as a percent of revenue from continuing operations | 34.2 | % | | 1.1 | % | | 27.6 | % | | 25.5 | % | | 25.9 | % | | 42.8 | % | | 40.6 | % | | 56.3 | % | | 34.2 | % | | 1.1 | % | |
| Net income (loss) from continuing operations as a percent of revenue from continuing operations | 23.9 | % | | (3.8 | )% | | 18.6 | % | | 16.4 | % | | 16.2 | % | | 33.9 | % | | 27.0 | % | | 39.4 | % | | 23.9 | % | | (3.8 | )% | |
Balance sheet data: 7 | | | | | | | | | | | | | | | | | | | | |
| Working capital | $ | 388 |
| | $ | 42 |
| | $ | 612 |
| | $ | (1,018 | ) | | $ | (812 | ) | | $ | 975 |
| | $ | 1,110 |
| | $ | 1,060 |
| | $ | 388 |
| | $ | 42 |
| |
| Total assets | 8,183 |
| | 6,773 |
| | 6,060 |
| | 5,081 |
| | 4,061 |
| | 9,458 |
| | 9,425 |
| | 8,669 |
| | 8,183 |
| | 6,773 |
| |
| Total debt | 3,611 |
| | 795 |
| | 794 |
| | 1,251 |
| | 1,193 |
| | 3,662 |
| | 3,569 |
| | 3,564 |
| | 3,611 |
| | 795 |
| |
| Redeemable noncontrolling interest | 920 |
| | 810 |
| | 810 |
| | 810 |
| | — |
| | 1,620 |
| | 1,352 |
| | 1,080 |
| | 920 |
| | 810 |
| |
| Equity | 243 |
| | 539 |
| | 1,344 |
| | 840 |
| | 1,584 |
| | 684 |
| | 766 |
| | 701 |
| | 243 |
| | 539 |
| |
Number of employees 7 | 20,400 |
| | 17,000 |
| | 16,400 |
| | 15,900 |
| | 15,600 |
| | |
Number of employees 8 | | 21,200 |
| | 20,400 |
| | 20,000 |
| | 20,400 |
| | 17,000 |
| |
| |
1 | Includes the impact of the following items: legal settlement expenses of $74 million, Kensho retention related expense of $31 million, restructuring charges related to a business disposition and employee severance charges of $25 million, lease impairments of $11 million, a pension related charge of $5 million and amortization of intangibles from acquisitions of $122 million. |
| |
2 | Includes the impact of the following items: legal settlement expenses of $55 million, employee severance charges of $44 million, a charge to exit leased facilities of $25 million, non-cash acquisition and disposition-related adjustments of $15 million, a pension related charge of $8 million, an asset write-off of $2 million and amortization of intangibles from acquisitions of $98 million. |
| |
3 | Includes the impact of the following items: a $1.1 billion gain from our dispositions, a benefit related to net legal settlement insurance recoveries of $10 million, disposition-related costs of $48 million, a technology-related impairment charge of $24 million, employee severance charges of $6 million, a $3 million disposition-related reserve release, an acquisition-related cost of $1 million and amortization of intangibles from acquisitions of $96 million. |
| |
4 | Includes the impact of the following items: costs related to identified operating efficiencies primarily related to restructuringemployee severance charges of $56 million, net legal settlement charges partially offset by insurance recoveriesexpenses of $54 million, acquisition-related costs of $37 million, and a gain ofan $11 million gain on the saledispositions and amortization of our interest in a legacy McGraw Hill Construction investment.intangibles from acquisitions of $67 million. |
| |
25
| Includes the impact of the following items: $1.6 billion of legal and regulatory settlements, restructuringemployee severance charges of $86 million, and $4 million of professional fees largely related to corporate development activities. |
| |
3
| Includes the impactactivities and amortization of the following items: $77 millionintangibles from acquisitions of legal settlements, $64 million charge for costs necessary to enable the separation of MHE and reduce our cost structure, a $36 million non-cash impairment charge related to the sale of our data center, a $28 million restructuring charge in the fourth quarter primarily related to severance, $13 million related to terminating various leases as we reduce our real estate portfolio and a $24 million net gain from our dispositions. |
| |
4
| Includes the impact of the following items: $135 million charge for costs necessary to enable the separation of MHE and reduce our cost structure, a $65 million restructuring charge, transaction costs of $15 million for our S&P Dow Jones Indices LLC joint venture, an $8 million charge related to a reduction in our lease commitments, partially offset by a vacation accrual reversal of $52$48 million. |
| |
5
| Includes the impact of a $31 million restructuring charge and a $10 million charge for costs necessary to enable the separation of MHE and reduce our cost structure. |
| |
6 | Includes $149 million of tax expense due to U.S. tax reform, primarily associated with the impactdeemed repatriation of the gain on sale of McGraw Hill Construction in 2014, the gain on sale of McGraw-Hill Education in 2013 and the gain on sale of the Broadcasting Group in 2011.foreign earnings, which was partially offset by a $21 million tax benefit related to prior year divestitures. |
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7 | Includes the impact of the $1.1 billion gain on dispositions in 2016 and the gain on sale of McGraw Hill Construction in 2014. |
| |
8 | Excludes discontinued operations. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following ManagementManagement's Discussion and Analysis (“MD&A”) provides a narrative of the results of operations and financial condition of McGraw Hill Financial,S&P Global Inc. (together with its consolidated subsidiaries, the “Company,” “we,” “us” or “our”) for the years ended December 31, 20152018 and 2014,2017, respectively. The MD&A should be read in conjunction with the consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K for the year ended December 31, 2015,2018, which have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”).
The MD&A includes the following sections:
Overview
Results of Operations
Liquidity and Capital Resources
Reconciliation of Non-GAAP Financial Information
Critical Accounting Estimates
Recently Issued or AdoptedRecent Accounting Standards
Certain of the statements below are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, any projections of future results of operations and cash flows are subject to substantial uncertainty. See Forward-Looking Statements on page 4 of this report.
OVERVIEW
We are a leading provider of transparent and independent ratings, benchmarks, analytics and ratings, analytics, data to the capital and research provider serving the global capital, commodities and commercial markets.commodity markets worldwide. The capital markets include asset managers, investment banks, commercial banks, insurance companies, exchanges, trading firms and issuers; and the commoditiescommodity markets include producers, traders and intermediaries within energy, petrochemicals, metals petrochemicals and agriculture; and the commercial markets include professionals and corporate executives within automotive, financial services, insurance and marketing / research information services.agriculture.
Our operations consist of four reportable segments: Standard & Poor’sS&P Global Ratings Services (“S&P Ratings”("Ratings"), S&P Capital IQGlobal Market Intelligence ("Market Intelligence"), S&P Global Platts ("Platts") and SNL, S&P Dow Jones Indices ("S&P DJ Indices") and Commodities & Commercial (“C&C”).
S&P Ratings is an independent provider of credit ratings, research and analytics, offering investors and other market participants information, ratings and benchmarks.
S&P Capital IQ and SNLMarket Intelligence is a global provider of multi-asset-class data, research and analytical capabilities, which integrate cross-asset analytics and desktop services.
S&P DJ Platts is the leading independent provider of information and benchmark prices for the commodity and energy markets.We completed the sale of J.D. Power on September 7, 2016, with the results included in Platts results through that date.
Indices is a global index provider that maintainsmaintaining a wide variety of valuation and index benchmarks for investment advisors, wealth managers and institutional investors.
C&C consists
Effective beginning with the first quarter of business-to-business companies specializing2018, we began reporting the financial results of Market Intelligence and Platts as separate reportable segments consistent with the changes to our organizational structure and how our Chief Executive Officer evaluates the performance of these segments. Our historical segment reporting has been retroactively revised to reflect the current organizational structure.
Major Portfolio Changes
The following significant changes were made to our portfolio during the three years ended December 31, 2018:
2018
In April of 2018, we acquired Kensho Technologies Inc. ("Kensho") for approximately $550 million, net of cash acquired, in commerciala mix of cash and commodities markets that deliver their customers accessstock. Kensho is a leading-edge provider of next-generation analytics, artificial intelligence, machine learning, and data visualization systems to high-value information, data, analytic servicesWall Street's premier global banks and pricinginvestment institutions, as well as the National Security community. The results of Kensho, an operating segment of the Company, are included in Corporate revenue and quality benchmarks. AsCorporate Unallocated for financial reporting purposes.
2016
Market Intelligence
In October of 2016, we completed the sale of Aviation WeekStandard & Poor's Securities Evaluations, Inc. ("SPSE") and the results have been includedCredit Market Analysis ("CMA") for $425 million in C&C's results through that date.
In the fourth quartercash to Intercontinental Exchange, an operator of 2015, we began exploring strategic alternatives for J.D. Power, included in our C&C segment. We committed toglobal exchanges, clearing houses and initiated an active program to sell J.D. Power in its current state that we believe is probable in the next year. As a result, we have classified the assets and liabilities of J.D. Power as held for sale in our consolidated balance sheet as ofdata services. During year ended December 31, 2015. The anticipated disposal does not represent2016, we recorded a strategic shift that will have a major effect on operations and financial results, therefore, it is not classified as a discontinued operation.
On November 3, 2014, we completed the salepre-tax gain of McGraw Hill Construction, which has historically been part of our C&C segment, to Symphony Technology Group for $320$364 million ($297 million after-tax) in cash. We recorded an after-tax gain on the sale of $160 million, which is included in discontinued operations, netdispositions in the consolidated statement of income related to the sale of SPSE and CMA.
Platts
In September of 2016, we completed the sale of J.D. Power for $1.1 billion to XIO Group, a global alternative investments firm headquartered in London. During the year ended December 31, 2014. We used the after-tax proceeds from the sale to make selective acquisitions, investments, share repurchases and for general corporate purposes.
On March 22, 2013,2016, we completed the salerecorded a pre-tax gain of McGraw-Hill Education ("MHE") to investment funds affiliated with Apollo Global Management, LLC for a purchase price of $2.4 billion$728 million ($516 million after-tax) in cash. We recorded an after-tax gain on the sale of $589 million, which
is included in discontinued operations, netdispositions in the consolidated statement of income for the year ended December 31, 2013. We used the after-tax proceeds fromrelated to the sale to pay down short-term debt for the special dividend paid in 2012, to make selective acquisitions, investments, share repurchases and for general corporate purposes.of J.D. Power.
In 2015,September of 2016, we continued to focus on investments in targeted financial assets, divesting selected non-core assets, reducing in our real estate portfolioacquired PIRA Energy Group ("PIRA"), a global provider of energy research and increasing shareholder return.
Investments in Targeted Financial Assets / Divest Selected Non-Core Assets
During 2015, we continued to create a portfolio focused on scalable, industry leading, interrelated businessesforecasting products and services. The purchase enhances Platts energy analytical capabilities by expanding its oil offering and strengthening its position in the capital and commodity markets.
S&P Capital IQ and SNL— we acquired SNL Financial LC ("SNL"), a leading provider of news, data, and analytics to five sectors in the global economy: financial institutions, real estate, energy, media & communications, and metals & mining;
Commodities & Commercial:
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◦ | we acquired the entire issued share capital of Petromedia Ltd and its operating subsidiaries, an independent provider of data, intelligence, news and tools to the global fuels market that offers a suite of products providing clients with actionable data and intelligence that enables informed decisions, minimizes risk and increases efficiency; |
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◦ | we acquired National Automobile Dealers Association's Used Car Guide, a leading provider of U.S. retail, trade-in and auction used-vehicle valuation products, services and information. |
In 2015, we further reduced our real estate footprint by completing the consolidation of our corporate headquarters with our operations in New York City.
During 2014, we continued to execute our strategy of investing for growth in markets that have size and scale while exiting non-core assets.
Commodities & Commercial— we acquired Eclipse Energy Group AS which complements our North American natural gas capabilities, which we obtained from our Bentek Energy LLC acquisition in 2011;
S&P Ratings— we acquired BRC Investor Services S.A., a Colombia-based ratings firm providing risk classifications of banks, financial services providers, insurance companies, corporate bonds and structured issues that will expand our presence in the Latin American creditpower markets.
In 2014, in addition to the divestiture of McGraw Hill Construction discussed above, we streamlined our infrastructure by reducing our real estate footprint through selling our data facility, initiating the consolidation of our corporate headquarters with our operations in New York City, as well as disposing of our corporate aircraft.
During 2013, we acquired an incremental 11 million equity shares representing 15.07% of CRISIL's total outstanding equity shares for $214 million, concurrently increasing our ownership percentage in CRISIL to 67.84% from 52.77%.
In 2013,June of 2016, we also completed certain dispositionsacquired RigData, a provider of our non-core assets that allow us to apply greater focusdaily information on our high-growth, high-margin benchmark businesses.
Commodities & Commercial— we completedrig activity for the sale of Aviation Week to Penton, a privately held business information company;
S&P Capital IQnatural gas and SNL— we completed the sale of Financial Communications as well as the closure of several non-core businesses.
oil markets across North America. The purchase enhances Platts energy analytical capabilities by strengthening its position in natural gas and enhancing its oil offering.
Increased Shareholder Return
During the three years ended December 31, 2015,2018, we have returned $3.3approximately $5.1 billion to our shareholders through a combination of share repurchases and our quarterly dividends: we completed share repurchases of $2.3approximately $3.8 billion and distributed regular quarterly dividends totaling approximately $997 million.$1.3 billion. Also, on January 27, 2016,30, 2019, the Board of Directors approved an increase in the quarterly common stock dividend from $0.33$0.50 per share to $0.36$0.57 per share.
Key Results
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| | | | | | | | | | | | | | | |
| (in millions) | Years ended December 31, | | % Change 1 |
| | 2015 | | 2014 | | 2013 | | ’15 vs ’14 | | ’14 vs ’13 |
| Revenue | $ | 5,313 |
| | $ | 5,051 |
| | $ | 4,702 |
| | 5% | | 7% |
Operating profit 2 | $ | 1,917 |
| | $ | 113 |
| | $ | 1,358 |
| | N/M | | (92)% |
| % Operating margin | 36 | % | | 2 | % | | 29 | % | | | | |
| Diluted earnings (loss) per share from continuing operations | $ | 4.21 |
| | $ | (1.08 | ) | | $ | 2.80 |
| | N/M | | N/M |
N/M - not meaningful |
| | | | | | | | | | | | | | | |
| (in millions) | Year ended December 31, | | % Change 1 |
| | 2018 | | 2017 | | 2016 | | ’18 vs ’17 | | ’17 vs ’16 |
| Revenue | $ | 6,258 |
| | $ | 6,063 |
| | $ | 5,661 |
| | 3% | | 7% |
Operating profit 2 | $ | 2,790 |
| | $ | 2,583 |
| | $ | 3,341 |
| | 8% | | (23)% |
| % Operating margin | 45 | % | | 43 | % | | 59 | % | | | | |
| Diluted earnings per share from net income | $ | 7.73 |
| | $ | 5.78 |
| | $ | 7.94 |
| | 34% | | (27)% |
| |
1 | % changes in the tables throughout the MD&A are calculated off of the actual number, not the rounded number presented. |
| |
2 | 20152018 includes legal settlements, partially offset bysettlement expenses of $74 million, Kensho retention related expense of $31 million, restructuring charges related to a business disposition and employee severance charges of $25 million and lease impairments of $11 million. 2017 includes legal settlement expenses of $55 million, employee severance charges of $44 million, a charge to exit leased facilities of $25 million, non-cash acquisition and disposition-related adjustments of $15 million and an asset write-off of $2 million. 2016 includes a $1.1 billion gain from our dispositions, a benefit related to net legal settlement insurance recoveries of $54$10 million, disposition-related costs of $48 million, a technology-related impairment charge of $24 million, employee severance charges of $6 million, a $3 million disposition-related reserve release and acquisition-related costs of $1 million. 20142018, 2017 and 2016 also includes legalamortization of intangibles from acquisitions of $122 million, $98 million, and regulatory settlements of $1.6 billion and 2013 include legal settlements of $77 million.$96 million, respectively. |
20152018
Revenue increased 5%3% with a 1 percentage point favorable impact from foreign exchange rates. Revenue growth was driven by increases at S&P Capital IQMarket Intelligence, Indices and SNL, C&C and S&P DJ Indices,Platts, partially offset by a decrease at S&P Ratings. The increase at Market Intelligence was driven by annualized contract value growth in the Market Intelligence Desktop and Global Risk Services products. Revenue growth at S&P Capital IQ and SNLIndices was due to the acquisition of SNL in September of 2015 and growth of the legacy S&P Capital IQ products driven by increases in average contract values for each product. The revenue increase at C&C was primarily driven by continued demand for Platts’ proprietary content as annualized contract values increased. Increases at J.D Power primarily due to an increase in auto consulting engagements in the U.S. and the acquisition of National Automobile Dealers Association's Used Car Guide (“UCG”) in July of 2015 driving the data and analytics revenue growth at C&C. Revenue growth at S&P DJ Indices was due to higher average levels of assets under management for ETFsexchange traded funds ("ETFs") and mutual funds, and higher volumesexchange-traded derivative volumes. The increase at Platts was due to continued demand for exchange-traded derivatives. The revenuemarket data and price assessment products. These increases were partially offset by a decrease at S&P Ratings was driven by lower corporate bond ratings revenue.
Operating profit increased 8% with a 2 percentage point favorable impact from foreign exchange rates. Excluding the unfavorable impact of foreign exchange rates. The unfavorable impacthigher legal settlement expenses in 2018 of foreign exchange rates reduced revenue by 2less than 1 percentage points which waspoint, Kensho retention related expense in 2018 of less than 1 percentage point, and higher deal-related amortization in 2018 of less than 1 percentage point, partially offset by the favorable impact from acquisitions of 2higher employee severance charges in 2017 of less than1 percentage points.
point, the favorable impact of non-cash acquisition and disposition-related adjustments in 2017 of less than 1 percentage point, operating profit increased 8%. The increase in operating profit was primarily due to the impact of $1.6 billion in legal and regulatory settlements in 2014 compared
to net legal settlement expenses of $54 million in 2015. In addition, 2015 includes costs related to identified operating efficiencies primarily related to restructuring of $56 million in 2015 compared to $86 million in 2014. 2015 also includes acquisition-related costs related to the acquisition of SNL of $37 million and an $11 million gain on the sale of our interest in a legacy McGraw Hill Construction investment. 2014 includes $4 million of professional fees largely related to corporate development activities. Excluding these items, operating profit increased 13%. This increase was driven by revenue growth at S&P Capital IQ and SNL, C&C, and S&P DJMarket Intelligence, Indices and Platts and decreased compensation costs at Ratings and Corporate primarily driven by reduced incentive costs as well as the decreased headcount from attrition and prior year restructuring actions. These increases were partially offset by a decrease in revenue at Ratings, increased expenses at Market Intelligence due to an increase in cost containment effortsof sales as a result of royalties tied to annualized contract value growth and increased data costs, and higher compensation costs at S&P Ratings during 2015.Market Intelligence and Indices primarily driven by additional headcount.
20142017
Revenue increased 7% and was unfavorably impacted by 6 percentage points from the net impact of acquisitions and dispositions. Revenue growth was driven by increases at all of our segments.Ratings, Indices and Market Intelligence, partially offset by a decrease at Platts. The increase at S&P Ratings was primarily driven bydue to growth in both corporate and financial services bond ratings revenue, increases in bank loan ratings revenue and higher annual fees.corporate bond ratings revenue. Revenue growth at S&P Capital IQ and SNLIndices was driven by increases in average contract values for each product driven by new customer relationships and increases in existing accounts. Revenue growth at S&P DJ Indices wasprimarily due to higher levels of assets under management for ETFs and mutual funds and higher volumes for exchange-traded derivatives.funds. The revenue increase at C&CMarket Intelligence was primarily driven by continued demand for Platts' proprietary content as annualized contract values increased and increases at J.D. Power driven by strong demand for auto consulting engagementsvalue growth in the U.S.Market Intelligence Desktop and Singapore. TheGlobal Risk Services products, partially offset by the unfavorable impact of foreign exchange rates reduced revenue by less than 1 percentage point.
Operating profit decreased 92%the disposition of non-core businesses in 2016. The decrease at Platts was driven by the unfavorable impact of $1.6 billionthe disposition of legal and regulatory settlement chargesJ.D. Power in 2014 compared to legal settlement charges of $77 million in 2013 and higher costs recorded in 2014 related to identified operating efficiencies primarily related to restructuring,2016, partially offset by revenue growth at all of our segments.an increase due to continued demand for market data and price assessment products.
Operating profit decreased 23%. Excluding the unfavorable impact of legal and regulatory settlement chargesthe gain on dispositions in 2016 of 11138 percentage points, higher costs recordednet legal settlement expenses in 2014 related2017 of 2 percentage points, higher employee severance charges in 2017 of 1 percentage point, a charge to identified operating efficiencies primarily related to restructuringexit leased facilities of 31 percentage points,point and non-cash acquisition and disposition-related adjustments in 2017 of 1 percentage point, partially offset by the favorable impact of a technology-related impairment charge in 2016 of 1 percentage point and higher disposition-related costs necessary to enable the separation of MHE and reduce our cost structure recorded in 2013 of 5 percentage points and a net loss related to the sale of a data center, an equity investment at CRISIL, Aviation Week and Financial Communications in 20132016 of 1 percentage point, operating profit increased 17%.
Outlook This increase was primarily due to revenue growth at Ratings, Indices and Market Intelligence as discussed above, partially offset by higher compensation costs due to increased incentive costs and additional headcount.
Our vision is to be theStrategy
We are a leading provider of transparent and independent ratings, benchmarks, analytics and ratings, analytics, data to the capital and research in the global capital, commodities and corporate markets.commodity markets worldwide. Our missionpurpose is to promote sustainable growth in these markets by providing customersprovide the intelligence that is essential for companies, governments and individuals to make decisions with essential intelligence and superior service.conviction. We seek to accomplish our mission and visiondeliver on this purpose within the framework of our core values of fairness, integrity, excellence and transparency. We intend to deliver our products and services through customer-centric distribution channels that enable mission-critical decisions in our core customer sets of investment management, investment banking, commercial banking, insurance, specialty financial institutions and corporates.relevance.
We are aligningseek to deliver an exceptional, differentiated customer experience across the globe. We strive for operational excellence, continuous innovation, and a high performance culture driven by our efforts against two key strategic priorities: creating growth and driving performance.
Creating Growth
We will strive to drive global growth by focusing on executing our strategic initiatives, strengthening core capabilities and collaborating across businesses.
Driving Performance
Webest-in-class talent. In 2019, we will strive to deliver operational excellence, manageon our strategic priorities in the following four categories by:
Finance
Delivering revenue growth and EBITA margin targets and delivering on commitments to return capital to shareholders and create capacity to invest;
Investing for mid- to long-term revenue growth that meets or exceeds market growth rates; and
Pursuing a disciplined acquisition, investment and partnership strategy.
Customer
Strengthening and growing the core businesses;
Delivering a modern, digital, integrated platform and user experience that enhances customer value, accompanied by thoughtful user migration plans;
Expanding our presence in China to capture market opportunities;
Building and promoting new products to solve customer pain points and deliver new commercial propositions in ESG, data marketplace, and small and medium-sized enterprises; and
Enhancing teamwork and adopting commercial tools and processes to improve the clarity and quality of insights we gather from customers, and improve revenue capture.
Operations
Transforming technology infrastructure to support growth, improve cost efficiency and mitigate cyber risk;
Adopting core management systems, tools and processes across the Company to improve priortization and agility, drive execution, and reduce complexity;
Developing an enterprise-wide data strategy and execution plan, leveraging machine learning and data science; and
Further enhancing our commitment to our robust risk, internal control and enhance leadershipcompliance culture.
People
Creating an inclusive performance-driven culture that drives employee engagement;
Promoting internal mobility and accountability.attracting and retaining the best people; and
Improving diversity in overall representation through talent acquisition and retention.
There can be no assurance that we will achieve success in implementing any one or more of these strategies as a variety of factors could unfavorably impact operating results, including prolonged difficulties in the global credit markets and a change in the regulatory environment affecting our businesses. See Item 1a, Risk Factors, in this Annual Report on Form 10-K.
Further projections and discussion on our 20162019 outlook for our segments can be found within “ – Results of Operations”.
RESULTS OF OPERATIONS
Consolidated Review
| | | (in millions) | Years ended December 31, | | % Change | Year ended December 31, | | % Change |
| | 2015 | | 2014 | | 2013 | | '15 vs '14 | | '14 vs '13 | 2018 | | 2017 | | 2016 | | ’18 vs ’17 | | ’17 vs ’16 |
| Revenue | $ | 5,313 |
| | $ | 5,051 |
| | $ | 4,702 |
| | 5% | | 7% | $ | 6,258 |
| | $ | 6,063 |
| | $ | 5,661 |
| | 3% | | 7% |
| Expenses: | | | | | | | | | | | | |
| Operating-related expenses | 1,672 |
| | 1,627 |
| | 1,564 |
| | 3% | | 4% | 1,701 |
| | 1,695 |
| | 1,773 |
| | —% | | (4)% |
| Selling and general expenses | 1,578 |
| | 3,168 |
| | 1,631 |
| | (50)% | | 94% | 1,561 |
| | 1,605 |
| | 1,467 |
| | (3)% | | 9% |
| Depreciation and amortization | 157 |
| | 134 |
| | 137 |
| | 17% | | (2)% | 206 |
| | 180 |
| | 181 |
| | 14% | | (1)% |
| Total expenses | 3,407 |
| | 4,929 |
| | 3,332 |
| | (31)% | | 48% | 3,468 |
| | 3,480 |
| | 3,421 |
| | —% | | 2% |
| Other (income) loss | (11 | ) | | 9 |
| | 12 |
| | N/M | | (25)% | |
| Gain on dispositions | | — |
| | — |
| | (1,101 | ) | | N/M | | N/M |
| Operating profit | 1,917 |
| | 113 |
| | 1,358 |
| | N/M | | (92)% | 2,790 |
| | 2,583 |
| | 3,341 |
| | 8% | | (23)% |
| Other income, net | | (25 | ) | | (27 | ) | | (28 | ) | | 8% | | 5% |
| Interest expense, net | 102 |
| | 59 |
| | 59 |
| | 73% | | (1)% | 134 |
| | 149 |
| | 181 |
| | (10)% | | (18)% |
| Provision for taxes on income | 547 |
| | 245 |
| | 425 |
| | N/M | | (42)% | 560 |
| | 823 |
| | 960 |
| | (32)% | | (14)% |
| Income (loss) from continuing operations | 1,268 |
| | (191 | ) | | 874 |
| | N/M | | N/M | |
| Discontinued operations, net | — |
| | 178 |
| | 592 |
| | N/M | | (70)% | |
| Less: net income from continuing operations attributable to noncontrolling interests | (112 | ) | | (102 | ) | | (91 | ) | | 9% | | 12% | |
| Less: net loss from discontinuing operations attributable to noncontrolling interests | — |
| | — |
| | 1 |
| | N/M | | N/M | |
| Net income (loss) attributable to McGraw Hill Financial, Inc. | $ | 1,156 |
| | $ | (115 | ) | | $ | 1,376 |
| | N/M | | N/M | |
| Net income | | 2,121 |
| | 1,638 |
| | 2,228 |
| | 30% | | (27)% |
| Less: net income attributable to noncontrolling interests | | (163 | ) | | (142 | ) | | (122 | ) | | 15% | | 16% |
| Net income attributable to S&P Global Inc. | | $ | 1,958 |
| | $ | 1,496 |
| | $ | 2,106 |
| | 31% | | (29)% |
N/M - not meaningful
Revenue
|
| | | | | | | | | | | | | | | |
| (in millions) | Year ended December 31, | | % Change |
| | 2018 | | 2017 | | 2016 | | ’18 vs ’17 | | ’17 vs ’16 |
| Subscription revenue | $ | 2,682 |
| | $ | 2,454 |
| | $ | 2,364 |
| | 9% | | 4% |
| Non-subscription / transaction revenue | 1,428 |
| | 1,599 |
| | 1,460 |
| | (11)% | | 9% |
| Non-transaction revenue | 1,381 |
| | 1,338 |
| | 1,259 |
| | 3% | | 6% |
| Asset-linked fees | 542 |
| | 484 |
| | 400 |
| | 12% | | 21% |
| Sales usage-based royalties | 225 |
| | 188 |
| | 178 |
| | 19% | | 6% |
| % of total revenue: | | | | | | | | | |
| Subscription revenue | 43 | % | | 41 | % | | 42 | % | | | | |
| Non-subscription / transaction revenue | 23 | % | | 26 | % | | 26 | % | | | | |
| Non-transaction revenue | 22 | % | | 22 | % | | 22 | % | | | | |
| Asset-linked fees | 9 | % | | 8 | % | | 7 | % | | | | |
| Sales usage-based royalties | 3 | % | | 3 | % | | 3 | % | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| U.S. revenue | $ | 3,750 |
| | $ | 3,658 |
| | $ | 3,461 |
| | 3% | | 6% |
| International revenue: | | | | | | | | | |
| European region | 1,543 |
| | 1,473 |
| | 1,330 |
| | 5% | | 11% |
| Asia | 647 |
| | 594 |
| | 575 |
| | 9% | | 3% |
| Rest of the world | 318 |
| | 338 |
| | 295 |
| | (6)% | | 14% |
| Total international revenue | $ | 2,508 |
| | $ | 2,405 |
| | $ | 2,200 |
| | 4% | | 9% |
| % of total revenue: | | | | | | | | | |
| U.S. revenue | 60 | % | | 60 | % | | 61 | % | |
| |
|
| International revenue | 40 | % | | 40 | % | | 39 | % | |
| |
|
Revenue
|
| | | | | | | | | | | | | | | |
| (in millions) | Years ended December 31, | | % Change |
| | 2015 | | 2014 | | 2013 | | ’15 vs ’14 | | ’14 vs ’13 |
| Subscription / Non-transaction revenue | $ | 3,264 |
| | $ | 3,045 |
| | $ | 2,849 |
| | 7% | | 7% |
| Non-subscription / Transaction revenue | $ | 2,049 |
| | $ | 2,006 |
| | $ | 1,853 |
| | 2% | | 8% |
| | | | | | | | | | |
| Domestic revenue | $ | 3,202 |
| | $ | 2,911 |
| | $ | 2,723 |
| | 10% | | 7% |
| International revenue | $ | 2,111 |
| | $ | 2,140 |
| | $ | 1,979 |
| | (1)% | | 8% |
| | | | | | | | | | |
| % of total revenue: | | | | | | | | | |
| Subscription / Non-transaction revenue | 61 | % | | 60 | % | | 61 | % | |
| |
|
| Non-subscription / Transaction revenue | 39 | % | | 40 | % | | 39 | % | |
| |
|
| | | | | | | | | | |
| Domestic revenue | 60 | % | | 58 | % | | 58 | % | |
| |
|
| International revenue | 40 | % | | 42 | % | | 42 | % | |
| |
|
2015
Revenue increased 5%3% as compared to 2014.2017. Subscription / non-transaction revenue increased primarily due tofrom growth in Market Intelligence's average contract values and continued demand for Platt's proprietary content. Non-transaction revenue grew at S&P Capital IQ and SNLRatings primarily due to an increase in the average contract values as well as continued demand for Platts’ proprietary content.surveillance fees, higher entity credit ratings revenue and an increase in royalty revenue. Non-subscription / transaction revenue decreased as a decline in corporate bond ratings revenue was partially offset by an increase in structured finance revenue and bank loan ratings revenue at Ratings. Asset-linked fees increased primarily due to growth at S&P DJ Indices due tothe impact of higher levels of assets under management for ETFs and mutual funds andat Indices. Sales usage-based royalties increased primarily driven by higher volumes for exchange-traded derivatives partially offset by a decrease at S&P Ratings which includes the unfavorable impact of foreign exchange rates.Indices. See " – Segment Review"“Segment Review” below for further information.
The unfavorable impact of foreignForeign exchange rates reduced revenue by 2had a one percentage points.point favorable impact on revenue. This impact refers to constant currency comparisons estimated by recalculating current year results of foreign operations using the average exchange rate from the prior year. The unfavorable impact of foreign exchange rates on revenue primarily related to S&P Ratings and was driven by the weakening of the Euro to the U.S. dollar.
20142017
Revenue increased 7% as compared to 2013.2016. Subscription / non-transaction revenue increased primarily due tofrom growth at S&P Capital IQ and SNL due to an increase in theMarket Intelligence's average contract values growth in non-issuance related revenue for corporate ratings primarily related to higher annual fees, and continued demand for Platts’ proprietary content.content, partially offset by the unfavorable impact of the disposition of non-core businesses in 2016. Non-transaction revenue grew at Ratings primarily due to an increase in surveillance fees. Non-subscription / transaction revenue increased primarily due to strong growth in corporate bond ratings revenue, an increase in bank loan ratings revenue and corporate bond ratings revenue at Ratings, partially offset by the unfavorable impact of the disposition of non-core businesses in 2016. Asset-linked fees increased due to the impact of higher levels of assets under management for ETFs and mutual funds at S&P DJ Indices, partially offset by lower structured finance revenues.funds. See " – Segment Review"“Segment Review” below for further information.
The unfavorableForeign exchange rates had a negligible impact on revenue. This impact refers to constant currency comparisons estimated by recalculating current year results of foreign operations using the average exchange rates reduced revenue by less than 1 percentage point.rate from the prior year.
Total Expenses
The following tables provide an analysis by segment of our operating-related expenses and selling and general expenses for the years ended December 31, 20152018 and 20142017:
|
| | | | | | | | | | | | | | | | | | | |
| (in millions) | 2015 | | 2014 | | % Change |
| | Operating- related expenses | | Selling and general expenses | | Operating- related expenses | | Selling and general expenses | | Operating- related expenses | | Selling and general expenses |
S&P Ratings 1 | $ | 725 |
| | $ | 583 |
| | $ | 777 |
| | $ | 2,219 |
| | (7)% | | (74)% |
S&P Capital IQ and SNL 2 | 614 |
| | 495 |
| | 549 |
| | 411 |
| | 12% | | 20% |
S&P DJ Indices 3 | 105 |
| | 92 |
| | 97 |
| | 101 |
| | 8% | | (8)% |
C&C 4 | 316 |
| | 269 |
| | 289 |
| | 289 |
| | 9% | | (7)% |
Intersegment eliminations 5 | (88 | ) | | — |
| | (86 | ) | | — |
| | (3)% | | N/M |
| Total segments | 1,672 |
| | 1,439 |
| | 1,626 |
| | 3,020 |
| | 3% | | (52)% |
Corporate 6 | — |
| | 139 |
| | 1 |
| | 148 |
| | (100)% | | (6)% |
| | $ | 1,672 |
| | $ | 1,578 |
| | $ | 1,627 |
| | $ | 3,168 |
| | 3% | | (50)% |
|
| | | | | | | | | | | | | | | | | | | |
| (in millions) | 2018 | | 2017 | | % Change |
| | Operating- related expenses | | Selling and general expenses | | Operating- related expenses | | Selling and general expenses | | Operating- related expenses | | Selling and general expenses |
Ratings 1 | $ | 813 |
| | $ | 509 |
| | $ | 864 |
| | $ | 574 |
| | (6)% | | (11)% |
Market Intelligence 2 | 663 |
| | 525 |
| | 624 |
| | 497 |
| | 6% | | 6% |
Platts 3 | 226 |
| | 181 |
| | 222 |
| | 203 |
| | 2% | | (11)% |
| Indices | 101 |
| | 162 |
| | 95 |
| | 145 |
| | 6% | | 11% |
Intersegment eliminations 4 | (125 | ) | | — |
| | (110 | ) | | — |
| | (14)% | | N/M |
| Total segments | 1,678 |
| | 1,377 |
| | 1,695 |
| | 1,419 |
| | (1)% | | (3)% |
Corporate Unallocated expense 5 | 23 |
| | 184 |
| | — |
| | 186 |
| | N/M | | (1)% |
| | $ | 1,701 |
| | $ | 1,561 |
| | $ | 1,695 |
| | $ | 1,605 |
| | —% | | (3)% |
N/M - not meaningful
| |
1 | In 2015,2018, selling and general expenses include legal settlements partially offset by a benefit related to legal insurance recoveriessettlement expenses of $54$74 million and restructuring costsemployee severance charges of $13$8 million. In 2014,2017, selling and general expenses include $1.6 billion for legal settlement expenses of $55 million and regulatory settlements and restructuringemployee severance charges of $45$25 million. |
| |
2 | In 2015,2018, selling and general expenses include acquisition-related costsrestructuring charges related to the acquisitiona business disposition and employee severance charges of SNL of $37 million and costs identified operating efficiencies primarily related to restructuring of $32$7 million. In 2014,2017, selling and general expenses include $9employee severance charges of $7 million of restructuring charges. |
| |
3
| In 2014, selling and general expenses include the impact of professional fees largely related to corporate development activitiesa non-cash disposition-related adjustment of $4 million. |
3 In 2017, selling and general expenses include a non-cash acquisition-related adjustment of $11 million, a charge to exit a leased facility of $6 million, an asset write-off of $2 million and employee severance charges of $2 million.
| |
4 | In 2015 and 2014, selling and general expenses include restructuring charges of $1 million and $16 million, respectively. |
| |
5
| Intersegment eliminations relatesprimarily relate to a royalty charged to S&P Capital IQ and SNLMarket Intelligence for the rights to use and distribute content and data developed by S&P Ratings. |
| |
65
| In 2015 and 2014,2018, selling and general expenses include costsKensho retention related to identified operating efficiencies primarily related to restructuringexpense of $31 million, lease impairments of $11 million and employee severance charges of $10 million. In 2017, selling and general expenses include a charge to exit leased facilities of $19 million and $16 million, respectively.employee severance charges of $10 million. |
Operating-Related Expenses
Operating-related expenses increased $44 million or 3%remained relatively unchanged as compared to 20142017, increasing $6 million or less than 1%. Increases at S&P Capital IQMarket Intelligence increased due to an increase in cost of sales as a result of royalties tied to annualized contract value growth and SNL primarily driven by higherincreased data processing costs, and higher compensation costs related to additional headcount. Additionally, operating-related expenses increased due to the acquisition of SNLKensho in SeptemberApril of 2015 and2018. These increases at C&C due to higher incentive costs were partially offset by declinesdecreased compensation costs at S&P Ratings primarily driven by our compensation cost containment efforts resultingreduced incentive costs as well as the decreased headcount from 2014attrition and prior year restructuring actions.
Selling and General Expenses
Selling and general expenses decreased 50%3%. Excluding the favorable net impact of legal settlementhigher employee severance charges in 2017 of 59 percentage points, non-cash acquisition and regulatory settlement charges and insurance recoveriesdisposition-related adjustments in 2017 of 48 percentage points, higher costs recordedlease impairment charges in 2014 related to identified operating efficiencies primarily related to restructuring2017 of 143 percentage point,points and an asset write-off in 2017 of 7 percentage points, partially offset by the unfavorable impact of acquisition-related costsKensho retention related to the acquisitionexpense in 2018 of SNL98 percentage points and higher legal settlement expenses in 2018 of 159 percentage point,points, selling and general expenses decreased 2%3%. The decline wasdecrease is due to decreased compensation costs at Ratings primarily driven by reduced incentive costs, as well as the decreased headcount from attrition and prior year restructuring actions, and a reduction in Corporate Unallocated expense due to a decrease at S&P Ratings driven by lower incentivereduction in vacant space, technology spend and legal costs,professional fees. These decreases were partially offset by higher compensation costs at Market Intelligence and Indices, and increased costs relatedexpenses due to the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act and an increase at S&P Capital IQ and SNL driven by the acquisition of SNLKensho in SeptemberApril of 2015.2018.
Depreciation and Amortization
Depreciation and amortization increased $23$26 million, or 17% as14%, compared to 2014 primarily2017 due to higher intangible assetan increase in amortization in 2015 dueexpense primarily related to the acquisition of SNLKensho in SeptemberApril of 2015 and the acquisition of UCG in July of 2015.2018.
The following tables provide an analysis by segment of our operating-related expenses and selling and general expenses for the years ended December 31, 20142017 and 2013:2016:
|
| | | | | | | | | | | | | | | | | | | |
| (in millions) | 2014 | | 2013 | | % Change |
| | Operating- related expenses | | Selling and general expenses | | Operating- related expenses | | Selling and general expenses | | Operating- related expenses | | Selling and general expenses |
S&P Ratings 1 | $ | 777 |
| | $ | 2,219 |
| | $ | 741 |
| | $ | 624 |
| | 5% | | N/M |
S&P Capital IQ and SNL 2 | 549 |
| | 411 |
| | 538 |
| | 390 |
| | 2% | | 5% |
S&P DJ Indices 3 | 97 |
| | 101 |
| | 92 |
| | 126 |
| | 5% | | (20)% |
C&C 4 | 289 |
| | 289 |
| | 271 |
| | 278 |
| | 7% | | 4% |
Intersegment eliminations 5 | (86 | ) | | — |
| | (76 | ) | | — |
| | (13)% | | N/M |
| Total segments | 1,626 |
| | 3,020 |
| | 1,566 |
| | 1,418 |
| | 4% | | N/M |
Corporate 6 | 1 |
| | 148 |
| | (2 | ) | | 213 |
| | N/M | | (30)% |
| | $ | 1,627 |
| | $ | 3,168 |
| | $ | 1,564 |
| | $ | 1,631 |
| | 4% | | 94% |
|
| | | | | | | | | | | | | | | | | | | |
| (in millions) | 2017 | | 2016 | | % Change |
| | Operating- related expenses | | Selling and general expenses | | Operating- related expenses | | Selling and general expenses | | Operating- related expenses | | Selling and general expenses |
Ratings 1 | $ | 864 |
| | $ | 574 |
| | $ | 797 |
| | $ | 447 |
| | 8% | | 28% |
Market Intelligence 2 | 624 |
| | 497 |
| | 667 |
| | 532 |
| | (7)% | | (7)% |
Platts 3 | 222 |
| | 203 |
| | 292 |
| | 246 |
| | (24)% | | (17)% |
| Indices | 95 |
| | 145 |
| | 115 |
| | 103 |
| | (17)% | | 41% |
Intersegment eliminations 4 | (110 | ) | | — |
| | (98 | ) | | — |
| | (12)% | | N/M |
| Total segments | 1,695 |
| | 1,419 |
| | 1,773 |
| | 1,328 |
| | (4)% | | 7% |
Corporate Unallocated expense5 | — |
| | 186 |
| | — |
| | 139 |
| | N/M | | 34% |
| | $ | 1,695 |
| | $ | 1,605 |
| | $ | 1,773 |
| | $ | 1,467 |
| | (4)% | | 9% |
N/M - not meaningful
| |
1 | In 2014,2017, selling and general expenses include $1.6 billion for legal settlement expenses of $55 million and regulatory settlements and restructuringemployee severance charges of $45$25 million. In 2013,2016, selling and general expenses include $77 million fora benefit related to net legal settlements, restructuring chargessettlement insurance recoveries of $10 million and the gain on saleemployee severance charges of an equity investment held at CRISIL of $16$6 million. |
| |
2 | In 2014,2017, selling and general expenses include $9 million of restructuring charges. In 2013, selling and general expenses include restructuringemployee severance charges of $9$7 million and a loss related to the salenon-cash disposition-related adjustment of Financial Communications$4 million. 2016 includes disposition-related costs of $3$43 million, a technology-related impairment charge of $24 million and an acquisition-related cost of $1 million. |
| |
3 | In 2014,2017, selling and general expenses include the impacta non-cash acquisition-related adjustment of professional fees largely related$11 million, a charge to corporate development activitiesexit a leased facility of $4$6 million, an asset write-off of $2 million and employee severance charges of $2 million. In 2016, selling and general expenses include disposition-related costs of $5 million. |
| |
4 | In 2014, selling and general expenses include restructuring charges of $16 million. In 2013, selling and general expenses include a pre-tax gain on the sale of Aviation Week of $11 million and restructuring charges of $9 million. |
| |
5
| Intersegment eliminations relatesprimarily relate to a royalty charged to S&P Capital IQ and SNLMarket Intelligence for the rights to use and distribute content and data developed by S&P Ratings. |
| |
65
| In 2014,2017, selling and general expenses include restructuringa charge to exit leased facilities of $19 million and employee severance charges of $16$10 million. In 2013,2016, selling and general expenses primarily include $64$3 million necessary to enable the separation of MHE and reduce our cost structure, restructuring charges and charges related to our reduction in our real estate portfolio.from a disposition-related reserve release. |
Operating-Related Expenses
Operating-related expenses increased $64decreased $78 million, or 4%, as compared to 2013, primarily driven2016. The decrease was due to the disposition of non-core businesses at Market Intelligence and Platts in 2016. This decrease was partially offset by increased costs at S&P Ratings, C&C and S&P Capital IQ and SNL. These increases were primarily attributable to an increase inat Ratings due to higher compensation costs related to increased incentive costs and higher technology costs.additional headcount.
Selling and General Expenses
Selling and general expenses increased 94%9%. Excluding the unfavorable impact of higher net legal settlement expenses in 2017 of 4 percentage points, higher employee severance charges in 2017 of 942 percentage points, a charge to exit leased facilities in 2017 of 2 percentage points and highernon-cash acquisition and disposition related costs recorded in 2014 related to identified operating efficiencies primarily related to restructuring2017 of 31 percentage points,point, partially offset by the favorable impact of higher disposition-related costs necessary to enable the separationin 2016 of MHE3 percentage points and reduce our cost structure recordeda technology-related impairment charge in 20132016 of 42 percentage points, selling and general expenses increased 1%5%. The increase wasis due to higher compensation costs related to incentives and additional headcount at Ratings and Indices and an increase at Corporate primarily driven by increased legal costs at S&P Ratings, increased commissionsdue to performance related incentive compensation and incentives at S&P Capital IQ and SNL,Company-wide technology projects. This increase was partially offset by a decrease at S&P DJ Indices primarily related toPlatts as a $26 million non-cash impairment charge recorded in 2013 associated with an intangible asset acquired with the formationresult of the S&P Dow Jones Indices LLC joint venture.sale of J.D. Power in 2016.
Depreciation and Amortization
Depreciation and amortization decreased $3 million or 2%remained relatively unchanged as compared to 2013, primarily due an intangible asset that became fully amortized in 2013.2016, decreasing $1 million or 1%.
Other (Income) LossGain on Dispositions
During 2015, we completed the sale of our interest in a legacy McGraw Hill Construction investment that resulted in a pre-tax gain of $11 million within other (income) loss in the consolidated statement of income.
During 2014,2016, we completed the following transactions that resulted in a pre-tax lossgain of $9 million within other (income) loss$1.1 billion in gain on dispositions in the consolidated statement of income:
On July 31, 2014,In October of 2016, we completed the sale of the Company's aircraftSPSE and CMA for $425 million in cash to Harold W. McGraw III, then ChairmanIntercontinental Exchange, an operator of the Company's Board of Directorsglobal exchanges, clearing houses and former President and CEO of the Company ("Mr. McGraw") for a purchase price of $20 million, which is modestly higher than the independent appraisal obtained. During the second quarter of 2014, wedata services. We recorded a non-cash impairment chargepre-tax gain of $6$364 million within other (income) loss in ourgain on dispositions in the consolidated statement of income as a resultrelated to the sale of the pending sale. See Note 13 – Related Party Transactions to our consolidated financial statements for further discussion.
On June 30, 2014,SPSE and CMA. Additionally, in October of 2016, we completed the sale of our data centerEquity and Fund Research ("Equity Research") to Quality Technology Services, LLC (“QTS”) which owns, operates,CFRA, a leading independent provider of forensic accounting research, analytics and manages data centers. Net proceeds fromadvisory services. During the sale of $58 million were received in July of 2014. The sale includes all of the facilities and equipment on the south campus of our East Windsor, New Jersey location, inclusive of the rights and obligations associated with an adjoining solar power field. The sale resulted in an expense of $3 million recorded within other (income) loss in our consolidated statement of income, which is in addition to the non-cash impairment charge we recorded in the fourth quarter of 2013.
During 2013,year ended December 31, 2016, we recorded a net pre-tax lossgain of $12$9 million within other (income) lossin gain on dispositions in the consolidated statement of income:
During the fourth quarter of 2013, we recognized a non-cash impairment charge of $36 millionincome related to the pending sale of our data center.Equity Research.
OnIn September 30, 2013,of 2016, we completed the sale of Financial Communications, which was partJ.D. Power for $1.1 billion to XIO Group, a global alternative investments firm headquartered in London. We recorded a pre-tax gain of our S&P Capital IQ and SNL segment.
On August 27, 2013, CRISIL sold its 49% equity interest$728 million in India Index Services & Products Ltd. This investment was held within our S&P Ratings segment.
On August 1, 2013, we completedgain on dispositions in the consolidated statement of income related to the sale of Aviation Week within our C&C segment to Penton, a privately held business information company.J.D. Power.
Operating Profit
We consider operating profit to be an important measure for evaluating our operating performance and we evaluate operating profit for each of the reportable business segments in which we operate.
We internally manage our operations by reference to “segment operating profit”profit with economic resources allocated primarily based on segmenteach segment's contribution to operating profit. Segment operating profit is defined as operating profit before unallocated expense. Segment operating profit is one of the key metrics we use to evaluate operating performance.Corporate Unallocated. Segment operating profit is not, however, a measure of financial performance under U.S. GAAP, and may not be defined and calculated by other companies in the same manner.
The table below reconciles segment operating profit to total operating profit:
|
| | | | | | | | | | | | | | | |
| (in millions) | Years ended December 31, | % Change |
| | 2015 | | 2014 | | 2013 | | '15 vs '14 | | '14 vs '13 |
S&P Ratings 1 | $ | 1,078 |
| | $ | (583 | ) | | $ | 882 |
| | N/M | | N/M |
S&P Capital IQ and SNL 2 | 228 |
| | 228 |
| | 189 |
| | —% | | 21% |
S&P DJ Indices 3 | 392 |
| | 347 |
| | 266 |
| | 13% | | 30% |
C&C 4 | 357 |
| | 290 |
| | 280 |
| | 23% | | 3% |
| Total segment operating profit | 2,055 |
| | 282 |
| | 1,617 |
| | N/M | | (83)% |
Unallocated expense 5 | (138 | ) | | (169 | ) | | (259 | ) | | (18)% | | (35)% |
| Total operating profit | $ | 1,917 |
| | $ | 113 |
| | $ | 1,358 |
| | N/M | | (92)% |
|
| | | | | | | | | | | | | | | |
| (in millions) | Year ended December 31, | % Change |
| | 2018 | | 2017 | | 2016 | | ’18 vs ’17 | | ’17 vs ’16 |
Ratings 1 | $ | 1,530 |
| | $ | 1,517 |
| | $ | 1,256 |
| | 1% | | 21% |
Market Intelligence 2 | 545 |
| | 457 |
| | 729 |
| | 19% | | (37)% |
Platts 3 | 383 |
| | 326 |
| | 1,090 |
| | 18% | | (70)% |
Indices 4 | 563 |
| | 478 |
| | 413 |
| | 18% | | 16% |
| Total segment operating profit | 3,021 |
| | 2,778 |
| | 3,488 |
| | 9% | | (20)% |
Corporate Unallocated 5 | (231 | ) | | (195 | ) | | (147 | ) | | (19)% | | (33)% |
| Total operating profit | $ | 2,790 |
| | $ | 2,583 |
| | $ | 3,341 |
| | 8% | | (23)% |
N/M - not meaningful
| |
1 | 20152018 includes legal settlements, partially offset bysettlement expenses of $74 million and employee severance charges of $8 million. 2017 includes legal settlement expenses of $55 million and employee severance charges of $25 million. 2016 includes a benefit related to net legal settlement insurance recoveries of $54 million, and restructuring charges of $13 million. 2014 includes legal and regulatory settlements of $1.6 billion and restructuring charges of $45 million. 2013 includes legal settlements of $77 million, restructuring charges of $10 million and the gain on saleemployee severance charges of an equity investment held at CRISIL$6 million. 2018, 2017 and 2016 also includes amortization of $16 million.intangibles from acquisitions of $2 million, $4 million and $5 million, respectively. |
| |
2 | 2015 includes acquisition-related costs related to the acquisition of SNL of $37 million and costs identified operating efficiencies primarily related to restructuring of $32 million. 2014 includes $9 million of restructuring charges. 20132018 includes restructuring charges related to a business disposition and employee severance charges of $9$7 million. 2017 includes employee severance charges of $7 million and a loss related to the salenon-cash disposition-related adjustment of Financial Communications$4 million. 2016 includes a $373 million gain from our dispositions, disposition-related costs of $3$43 million, a technology-related impairment charge of $24 million and an acquisition-related cost of $1 million. 2018, 2017 and 2016 includes amortization of intangibles from acquisitions of $73 million, $71 million and $72 million, respectively. |
| |
3 | 20142017 includes the impacta non-cash acquisition-related adjustment of professional fees largely related$11 million, a charge to corporate development activitiesexit a leased facility of $4$6 million, an asset write-off of $2 million and employee severance charges of $2 million. 2016 includes a $728 million gain from our disposition of J.D. Power and disposition-related costs of $5 million. 2018, 2017 and 2016 includes amortization of intangibles from acquisitions of $18 million, $18 million and $14 million, respectively. |
| |
4 | 20152018, 2017 and 2014 include restructuring charges2016 includes amortization of $1 million and $16 million, respectively. 2013 includes a pre-tax gain on the saleintangibles from acquisitions of Aviation Week of $11 million and restructuring charges of $9$6 million. |
| |
5 | 20152018 includes Kensho retention related expense of $31 million, lease impairments of $11 million and 2014 include costs related to identified operating efficiencies primarily related to restructuringemployee severance charges of $10 million. In 2017, selling and general expenses include a charge to exit leased facilities of $19 million and $16employee severance charges of $10 million. In 2016, selling and general expenses include $3 million respectively. 2013 includes depreciation expense and costs necessary to enable the separation of MHE and reduce our cost structure, including restructuring costs and other related non-recurring costs. 2013from a disposition-related reserve release. 2018 also includes a non-cash impairment charge related to the pending saleamortization of our data center and charges related to a reduction in our real estate portfolio.intangibles from acquisitions of $23 million. |
20152018
Segment Operating Profit — Increased $1.8 billion,$243 million, or 629%9% as compared to 2014. 2015 includes legal settlement charges partially offset by a benefit related to insurance recoveries of $54 million compared to legal and regulatory settlement charges of $1.6 billion in 2014.2017. Excluding the favorable net impact of lower legalhigher employee severance charges in 2017 of 1 percentage point and regulatory settlement chargesnon-cash acquisition and insurance recoveriesdisposition related adjustments of 6211 percentage points, higher costs recorded in 2014 related to identified operating efficiencies primarily related to restructuring of 9 percentage points and the impact of professional fees largely related to corporate development activities recorded in 2014 of 2 percentage points,point, partially offset by the unfavorable impact of acquisition-related costs related to the acquisitionhigher legal settlement charges in 2018 of SNL of 151 percentage points,point, segment operating profit increased 11%7%. RevenueThis increase was primarily due to revenue growth at S&P Capital IQ and SNL, C&C and S&P DJMarket Intelligence, Indices and Platts as discussed above and decreased compensation costs at Ratings primarily driven by reduced incentive costs as well as the decreased headcount from attrition and prior year restructuring actions. These increases were partially offset by a decrease in revenue at Ratings, increased expenses at Market Intelligence due to an increase in cost containment effortsof sales as a result of royalties tied to annualized contract value growth and increased data costs, and higher compensation costs at S&P Ratings during 2015 were the primary drivers for the increase.Market Intelligence and Indices primarily driven by additional headcount. See “ – Segment Review” below for further information.
Corporate Unallocated Expense — Decreased by $31 million or 18% as compared to 2014. These expenses, included in selling and general expenses, mainly includeCorporate Unallocated includes costs for corporate center functions, select initiatives and unoccupied office space, included in selling and corporate overhead costs allocablegeneral expenses, and the results for Kensho. Corporate Unallocated operating loss increased by $36 million or 19% as compared to discontinued operations.2017. Excluding the favorableunfavorable impact of the saleKensho retention related expense in 2018 of our interest in a legacy McGraw Hill Construction investment of 617 percentage points, and higher costs recordeddeal-related amortization of 12 percentage points, partially offset by higher lease impairment charges in 2014 related to identified operating efficiencies primarily related to restructuring2017 of 4 percentage points, unallocated expenseCorporate Unallocated loss decreased by 9 percentage points as compared6% due to 2014. This decrease was primarily driven by the impact of a $9 million loss recordedreduction in the second quarter of 2014vacant space, performance related to the sale of the Company's aircraftincentive compensation and the sale of our data center.professional fees.
Foreign currency exchange rates had a negligiblefavorable impact on operating profit.profit of 2 percentage points. The foreign exchange rate impact refers to constant currency comparisons and the remeasurement of monetary assets and liabilities. Constant currency impacts are estimated by recalculating current year results of foreign operations using the average exchange rate from the prior year. Remeasurement impacts are based on the variance between current-year and prior-year foreign exchange rate fluctuations on monetary assets and liabilities denominated in currencies other than the individual business' functional currency.
20142017
Segment Operating Profit — Decreased $1.3 billion,$710 million, or 83%20% as compared to 2013.2016. Excluding the unfavorable impact of legal and regulatory settlement chargesthe gain on dispositions in 2016 of 9436 percentage points, higher restructuringnet legal settlement expenses in 2017 of 2 percentage points, higher employee severance charges recorded in 20142017 of 31 percentage point and non-cash acquisition and disposition-related adjustments in 2017 of 1 percentage point, partially offset by the favorable impact of higher disposition-related costs in 2016 of 2 percentage points and a net gain related to the saletechnology-related impairment charge in 2016 of an equity investment at CRISIL, Aviation Week and Financial Communications in 2013 of 21 percentage points,point, segment operating profit increased 16%17%. This increase was primarily due to strong revenue growth at S&P Ratings, S&P Capital IQ and SNL, S&P DJ Indices and C&C.Market Intelligence as discussed above, partially offset by higher compensation costs due to additional increased incentive costs and additional headcount. See “ – Segment Review” below for further information.
Corporate Unallocated Expense — DecreasedCorporate Unallocated includes costs for corporate center functions, select initiatives and unoccupied office space, included in selling and general expenses. Corporate Unallocated operating loss increased by $90$48 million or 35%33% as compared to 2013. Excluding the favorable impact of costs necessary to enable the separation of MHE and reduce our cost structure recorded in 2013 of 27 percentage points, a loss related to the sale of a data center in 2013 of 15 percentage points, and charges related to a reduction in our real estate portfolio in 2013 of 5 percentage points, partially offset by the unfavorable impact of higher restructuring charges recorded in 2014 of 5 percentage points, unallocated expense increased 7%. This increase was primarily driven by the impact of a $9 million loss recorded in the second quarter of 2014 related to the sale of the Company's aircraft and the sale of our data center, and an increase in unoccupied office space.
compared to 2016. Excluding the unfavorable impact of a charge to exit leased facilities in 2017 of 13 percentage points, employee severance charges in 2017 of 7 percentage points and a disposition-related reserve release in 2016 of 2 percentage points, Corporate Unallocated operating loss increased 11%. This increase was primarily due to performance related incentive compensation and Company-wide technology projects.
Foreign exchange rates had a favorable impact on operating profit of 21 percentage points.point. The favorableforeign exchange rate impact refers to constant currency comparisons and the remeasurement of monetary assets and liabilities. Constant currency impacts are estimated by recalculating current year results of foreign operations using the average exchange rate from the prior year. Remeasurement impacts are based on 2014the variance between current-year and prior-year foreign exchange rate fluctuations on monetary assets and liabilities denominated in currencies other than the individual business' functional currency.
Other Income, net
Other income, net for 2018, 2017 and 2016 was driven by$25 million, $27 million and $28 million, respectively, and primarily includes the devaluation of the Argentinian peso as well as early strength of the British pound. net periodic benefit cost for our retirement and postretirement.
Interest Expense, net
Net interest expense for 2015 increased 73%2018 decreased $16 million or 10% as compared to 2014,2017, driven by the release of reserves for accrued interest related to the resolution of various tax audits in 2018.
Net interest expense for 2017 decreased $32 million or 18% as compared to 2016, primarily as a result of higherthe favorable impact of lower interest expense related torates on the $700$500 million of senior notes issued in 2016 compared to the second quarter of 2015 and the $2.0 billion of$400 million senior notes issuedthat were repaid in the third quarter of 2015. Net interest expense for 2014 remained relatively flat as compared to 2013, decreasing 1%.2016.
Provision for Income Taxes
Our effective tax rate from continuing operations was 30.1%20.9%, 453.7%33.4% and 32.7%30.1% for 2015, 20142018, 2017 and 2013,2016, respectively. The decrease in the 2015 effective tax rate2018 was primarily due to the reduction in charges for legal settlements, improved profitability in several lower tax jurisdictions outside of the United States, and continuing resolution of prior yearU.S. federal corporate tax audits. The increase in the 2014 effective tax rate from the prior year period was primarily due to the expected tax treatment of charges for legal settlements in 2014.
Discontinued Operations, net
Income from discontinued operations was $178 million in 2014 as compared to $592 million in 2013, primarily as a result of the after-tax gainsenactment of $160the Tax Cuts and Jobs Act ("TCJA"). Additionally, a one-time net tax charge of $149 million and $589due to the TCJA was recorded in 2017, which included tax expense of approximately $173 million recorded on the saledeemed repatriation of McGraw Hill Constructionforeign earnings and a tax benefit of approximately $24 million in 2014respect of the re-valuation of the net U.S. deferred tax liabilities at the reduced corporate income tax rate.
The Company is continuously subject to tax examinations in various jurisdictions. In May 2017, the IRS issued a 30-Day Letter proposing to increase the Company’s federal income tax for the 2015 tax year by approximately $242 million. This increase related primarily to the IRS’s proposed disallowance of claimed tax deductions for certain amounts paid in 2015 to settle lawsuits by nineteen states and the saleDistrict of MHEColumbia. In April 2018, the Company and the IRS formally agreed to a settlement for $14 million that had been fully reserved in 2013, respectively.prior periods.
Segment Review
Standard & Poor's Ratings Services
Ratings is an independent provider of credit ratings, research and analytics to investors, issuers and other market participants. Credit ratings are one of several tools that investors can use when making decisions about purchasing bonds and other fixed income investments. They are opinions about credit risk and our ratings express our opinion about the ability and willingness of an issuer, such as a corporation or state or city government, to meet its financial obligations in full and on time. Our credit ratings can also relate to the credit quality of an individual debt issue, such as a corporate or municipal bond, and the relative likelihood that the issuerissue may default.
S&P Ratings differentiates its revenue between transaction and non-transaction. Transaction revenue primarily includes fees associated with:
ratings related to new issuance of corporate and government debt instruments, and structured finance debt instruments;
bank loan ratings; and
corporate credit estimates, which are intended, based on an abbreviated analysis, to provide an indication of our opinion regarding creditworthiness of a company which does not currently have an S&Pa Ratings credit rating.
Non-transaction revenue primarily includes fees for surveillance of a credit rating, annual fees for customer relationship-based pricing programs, fees for entity credit ratings and global research and analytics. Non-transaction revenue also includes an intersegment royalty charged to S&P Capital IQ and SNLMarket Intelligence for the rights to use and distribute content and data developed by S&P Ratings. Royalty revenue for 2015, 2014was 2018, 2017 and 20132016 was $83$109 million, $77$100 million and $72$92 million, respectively.
The following table provides revenue and segment operating profit information for the years ended December 31:
|
| | | | | | | | | | | | | | | | | | |
| (in millions) | | Years ended December 31, | | % Change |
| | | 2015 | | 2014 | | 2013 | | ’15 vs ’14 | | ’14 vs ’13 |
| Revenue: | | | | | | | | | | |
| Transaction | | $ | 1,109 |
| | $ | 1,129 |
| | $ | 1,035 |
| | (2 | )% | | 9 | % |
| Non-transaction | | 1,319 |
| | 1,326 |
| | 1,239 |
| | — | % | | 7 | % |
| Total revenue | | $ | 2,428 |
| | $ | 2,455 |
| | $ | 2,274 |
| | (1 | )% | | 8 | % |
| % of total revenue: | | | | | | | | | | |
| Transaction | | 46 | % | | 46 | % | | 46 | % | | | | |
| Non-transaction | | 54 | % | | 54 | % | | 54 | % | | | | |
| | | | | | | | | | | |
| Domestic revenue | | $ | 1,390 |
| | $ | 1,305 |
| | $ | 1,214 |
| | 7 | % | | 8 | % |
| International revenue | | $ | 1,038 |
| | $ | 1,150 |
| | $ | 1,060 |
| | (10 | )% | | 8 | % |
| % of total revenue: | | | | | | | | | | |
| Domestic revenue | | 57 | % | | 53 | % | | 53 | % | |
| |
|
| International revenue | | 43 | % | | 47 | % | | 47 | % | |
| |
|
| | | | | | | | | | | |
Operating profit (loss) 1 | | $ | 1,078 |
| | $ | (583 | ) | | $ | 882 |
| | N/M |
| | N/M |
|
| % Operating margin | | 44 | % | | (24 | )% | | 39 | % | | | | |
|
| | | | | | | | | | | | | | | | | | |
| (in millions) | | Year ended December 31, | | % Change |
| | | 2018 | | 2017 | | 2016 | | ’18 vs ’17 | | ’17 vs ’16 |
| Revenue | | $ | 2,883 |
| | $ | 2,988 |
| | $ | 2,535 |
| | (4 | )% | | 18 | % |
| | | | | | | | | | | |
| Non-transaction revenue | | $ | 1,506 |
| | $ | 1,448 |
| | $ | 1,357 |
| | 4 | % | | 7 | % |
| Transaction revenue | | $ | 1,377 |
| | $ | 1,540 |
| | $ | 1,178 |
| | (11 | )% | | 31 | % |
| % of total revenue: | | | | | | | | | | |
| Non-transaction revenue | | 52 | % | | 48 | % | | 54 | % | | | | |
| Transaction revenue | | 48 | % | | 52 | % | | 46 | % | | | | |
| | | | | | | | | | | |
| U.S. revenue | | $ | 1,619 |
| | $ | 1,716 |
| | $ | 1,462 |
| | (6 | )% | | 17 | % |
| International revenue | | $ | 1,264 |
| | $ | 1,272 |
| | $ | 1,073 |
| | (1 | )% | | 19 | % |
| % of total revenue: | | | | | | | | | | |
| U.S. revenue | | 56 | % | | 57 | % | | 58 | % | |
| |
|
| International revenue | | 44 | % | | 43 | % | | 42 | % | |
| |
|
| | | | | | | | | | | |
Operating profit 1 | | $ | 1,530 |
| | $ | 1,517 |
| | $ | 1,256 |
| | 1 | % | | 21 | % |
| % Operating margin | | 53 | % | | 51 | % | | 50 | % | | | | |
N/M - not meaningful
| |
1 | 20152018 includes legal settlements, partially offset bysettlement expenses of $74 million and employee severance charges of $8 million. 2017 includes legal settlement expenses of $55 million and employee severance charges of $25 million. 2016 includes a benefit related to net legal settlement insurance recoveries of $54 million and restructuring charges of approximately $13 million. 2014 includes $1.6 billion of legal and regulatory settlements and restructuring charges of approximately $45 million. 2013 includes $77 million of legal settlements, restructuring charges of approximately $10 million and a $16employee severance charges of $6 million. 2018, 2017 and 2016 also includes amortization of intangibles from acquisitions of $2 million, gain on the sale of an equity investment held by CRISIL.$4 million and $5 million, respectively. |
20152018
Revenue decreased 4% due to a decline in transaction revenue, partially offset by an increase in non-transaction revenue. Transaction revenue decreased due to a decline in corporate bond ratings revenue driven by lower corporate bond issuance in the U.S. and Europe, partially offset by an increase in structured finance revenue and bank loan ratings revenue. The increase in structured finance transaction revenue was driven by increased U.S. collateralized loan obligations ("CLO") issuance in the first half of the year. Non-transaction revenue grew due to an increase in surveillance fees, higher entity credit ratings revenue, an increase in royalty revenue, and an increase in Ratings Evaluation Service activity. Transaction and non-transaction revenue benefited from improved contract terms across product categories.
Operating profit increased 1%, which includes the unfavorablewith a 3 percentage point favorable impact offrom foreign exchange rates that reduced revenue by 4 percentage points.rates. Excluding the unfavorable impact of foreign exchange rates, transaction revenue increased primarily due to an increasehigher legal settlement expenses in U.S. Public Finance issuance, partially offset by a decline in structured finance revenue driven by reduced global market issuance. Excluding the unfavorable impact of foreign exchange rates, non-transaction revenue also increased due to growth in surveillance revenues and additional Ratings Evaluation Service activity, partially offset by lower revenue associated with new client relationships.
Operating profit increased 285%. Excluding the favorable net impact of legal and regulatory settlement charges and insurance recoveries of 273 percentage points and net higher restructuring costs recorded in 20142018 of 6 percentage points, operating profit increased 7%. Foreign currency exchange rates had an unfavorablepartially offset by the favorable impact of higher employee severance charges in 2017 of 5 percentage points and higher amortization of intangibles from acquisitions in 2017 of 1 percentage point, on the operating profit growth of 7%increased 1%. This increase was driven by decreased compensation costs primarily driven by lower incentive costs and cost containment resulting from 2014 restructuring actions and reduced legal fees following the resolution of a number of significant legal matters, partially offset by increased costs related to the implementation of the Dodd-Frank Wall Street Reform of the Consumer Protection Act and the decrease in revenue discussed above.
2014
Revenue increased 8% driven by growth in both transaction and non-transaction revenue. Transaction revenue increased in 2014 primarily driven by growth in both corporate and financial services bond ratings revenue with strong growth in all regions and an increase in bank loan ratings revenue, partially offset by a decline in structured finance revenues. Non-transaction revenue increased primarily due to an increase in annual fees, increases in global research and analytics services and increased RES activity.
Operating profit decreased 166%. Excluding the unfavorable impact of legal and regulatory settlements of 173 percentage points, the unfavorable impact of higher restructuring charges recorded in 2014 of 4 percentage points, and the unfavorable impact of the gain on sale of an equity investment held at CRISIL in 2013 of 2 percentage points, operating profit increased 13%. This increase was driven by the increase in revenue and the favorable impact of foreign exchange rates of 2 percentage points,and a decrease in compensation costs related to lower incentive costs as well as the decreased headcount from attrition and prior year restructuring actions, partially offset by higher legal defensethe decrease in revenue discussed above and an increase in costs related to the development of a global center for technology talent in India.
2017
Revenue increased 18%. Transaction revenue grew primarily due to growth in bank loan ratings revenue in the U.S. and Europe and an increase in corporate bond ratings revenue driven by an increase in corporate bond issuance. The increase in bank loan ratings revenue was driven by refinancing activity from the low interest rate environment. The increase in structured finance revenue driven by increased litigation activity including the Department of Justice case.U.S. collateralized loan obligations and U.S. commercial mortgage-backed securities issuance also
contributed to revenue growth. These increases were partially offset by a decline in public finance revenue driven by lower state and municipal bond issuance. Non-transaction revenue grew primarily due to an increase in surveillance fees and higher entity credit ratings revenue.
Operating profit increased 21%. Excluding the unfavorable impact of higher net legal settlement expenses in 2017 of 5 percentage points and higher employee severance charges in 2017 of 1 percentage point, operating profit increased 27%. This increase is primarily due to revenue growth, partially offset by higher compensation costs related to increased incentive costs and additional headcount. A reduction in legal fees and professional service fees also had a favorable impact on operating profit growth.
Market Issuance Volumes
We monitor market issuance volumes as an indicator of trends in transaction revenue streamsregularly within S&P Ratings. IssuanceMarket issuance volumes noted within the discussion that follows are based on the domicile of the issuer. Issuance volumes can be reported in two ways: by "domicile",“domicile” which is based on where an issuer is located or where the assets associated with an issue are located, or based on "marketplace",“marketplace” which is where the bonds are sold. The following tables depict changes in market issuance levels as compared to the prior year, based on a composite of Thomson Financial, Harrison Scott Publications and Dealogic and S&P Rating’s internal estimates.market issuance views.
|
| | | | | | |
| | | 2015 Compared to 2014 |
| Corporate Bond Issuance | | U.S. | | Europe |
| High-Yield Issuance | | (13 | )% | | (30 | )% |
| Investment Grade | | 20 | % | | (21 | )% |
| Total New Issue Dollars—Corporate Issuance | | 12 | % | | (22 | )% |
|
| | | | | | |
| | | 2018 Compared to 2017 |
| Corporate Bond Issuance * | | U.S. | | Europe | | Global |
| High-yield issuance | | (43)% | | (34)% | | (40)% |
| Investment grade | | (23)% | | 4% | | (5)% |
| Total new issue dollars — Corporate issuance | | (26)% | | (2)% | | (10)% |
| |
| * | Includes Industrials and Financial Services. |
Although the number of issuances were down, par value ofThe 2018 decrease in global corporate issuance, primarily driven by a decline in high-yield issuance, was mainly due to increased market volatility, slowing global economic growth and higher interest rates in the U.S. was upcompared to more favorable market conditions in 20152017. Market conditions in 2017 were favorable due to tightening credit spreads and some issuers going to market in advance of expected interest rate increases. Additionally, increased liquidity provided to U.S. companies driven by an increase in investment-grade debttax reform is unfavorably impacting issuance reflecting high par value deals, as the number of deals was lower in the first nine months of the year. Strong M&A activity was a major driver of large financing transactions that resulted in increased issuance in the first nine months of the year. Investment-grade debt issuance was negatively impacted in the fourth quarter of 2015 as market volatility increased. The increase in U.S. investment-grade debt issuance was partially offset by weakness in U.S. high-yield debt issuance.
Corporate issuance in Europe for both investment-grade and high-yield decreased in 2015 as a result of economic and political uncertainty in the European markets.growth.
|
| | | | | | |
| | | 2015 Compared to 2014 |
| Structured Finance | | U.S. | | Europe |
| Asset-Backed Securities (“ABS”) | | (10 | )% | | (22 | )% |
| Collateralized Debt Obligations (“CDO”) | | (22 | )% | | (15 | )% |
| Commercial Mortgage-Backed Securities (“CMBS”) | | 7 | % | | 14 | % |
| Residential Mortgage-Backed Securities (“RMBS”) | | 45 | % | | 25 | % |
| Covered Bonds | | * |
| | 28 | % |
| Total New Issue Dollars—Structured Finance | | (6 | )% | | 13 | % |
|
| | | | | | |
| | | 2018 Compared to 2017 |
| Structured Finance | | U.S. | | Europe | | Global |
| Asset-backed securities (“ABS”) | | 6% | | 16% | | 11% |
| Structured credit | | (2)% | | 21% | | 2% |
| Commercial mortgage-backed securities (“CMBS”) | | (18)% | | 54% | | (12)% |
| Residential mortgage-backed securities (“RMBS”) | | 32% | | 22% | | 28% |
| Covered bonds | | ** | | 54% | | 61% |
| Total new issue dollars — Structured finance | | 1% | | 38% | | 18% |
** Represents no activity in 20152018 and 2014.2017.
ABS issuance was up in the U.S. due to an increase in auto and non-traditional asset transactions and Europe reflecting an increase in auto transactions.
Issuance was down, primarilyup in the European structured credit markets mainly driven by a decline in credit cards as banks continued to use deposit funding rather than securitization for alternative funding. ABSnew CLO transactions.
CMBS issuance in Europe was also down, driven by declines across several sub-asset classes.
Issuance was down in the U.S. and European Structured Credit markets driven by lower availability of leveraged loans and overallreflecting decreased market volatility.
CMBS issuance in the U.S. was up reflecting favorable market conditions and investor demand during the first half of the year, partially offset by a decline in the second half of the year with the mix reflecting a lower proportion of single borrower transactions.volume. European CMBS issuance was also up, although from a low 20142017 base.
RMBS volumeissuance was up in the U.S. was up driven by a mix of deal types, including servicing advance transactions. The increaseand in European RMBS volume was predominantly driven by an increase in the average issuance size.Europe reflecting increased market volume.
Covered bond issuance (which are debt(debt securities backed by mortgages or other high-quality assets that remain on the issuer's balance sheet) issuance in Europe was up partially due to historically low yields. The European Central Bank's purchase program is also adding to the demand side, with banks and financial institutions taking advantageimpact of attractive lower rates.new regulations bringing consistency across countries within Europe.
Industry Highlights and Outlook
Revenue declineddecreased in 2015 primarily2018 due to the unfavorable impact of foreign exchange rates of 4 percentage points and reduced market issuance internationally primarily impactinga decrease in corporate bond ratings revenue and structured finance revenues. These decreases were partially offsetdriven by an increaselower corporate bond issuance. In 2018, Ratings focused on international expansion particularly in U.S. Public Finance issuance in the first nine months of the year as issuers took advantage of the low interest rate environment. However, issuance slowed in the fourth quarter of 2015 due to market volatility. Corporate bond ratings revenue in the U.S. was favorably impacted by the low interest rate environment and M&A activity throughout the first nine months of the year. However, issuance declined in the fourth quarter of 2015 as market volatility increased and M&A activity slowed. Debt issuance is expected toChina. In 2019, Ratings will continue to be volatile in 2016. M&A activity is expectedfocus on strengthening analytical excellence to continue across the ratings spectrum. International economicdrive market relevance, executing on foundational technology and political uncertainties are likely to continue to cause market volatility in 2016.data initiatives, and entering new high-potential geographies with innovative products.
Legal and Regulatory Environment
Legal and Regulatory Environment
General
S&P Ratings and many of the securities that it rates are subject to extensive regulation in both the U.S. and in other countries, and therefore existing and proposed laws and regulations can impact the Company’s operations and the markets in which it operates. Additional laws and regulations have been adopted but not yet implemented or have been proposed or are being considered. In addition, in certain countries, governments may provide financial or other support to locally-based rating agencies. For example, governments may from time to time establish official rating agencies or credit ratings criteria or procedures for evaluating local issuers. We have reviewed the new laws, regulations and rules which have been adopted and we have implemented, or are planning to implement, changes as required. We do not believe that such new laws, regulations or rules will have a material adverse effect on our financial condition or results of operations. Other laws, regulations and rules relating to credit rating agencies are being considered by local, national, foreign and multinational bodies and are likely to continue to be considered in the future, including provisions seeking to reduce regulatory and investor reliance on credit ratings, rotation of credit rating agencies and liability standards applicable to credit rating agencies. The impact on us of the adoption of any such laws, regulations or rules remains uncertain, but could increase the costs and legal risks relating to S&P Ratings’ rating activities, or adversely affect our ability to compete, or result in changes in the demand for credit ratings.
In the normal course of business both in the U.S. and abroad, S&P Ratings (or the legal entities comprising S&P Ratings) are defendants in numerous legal proceedings and are often the subject of government and regulatory proceedings, investigations and inquiries. Many of these proceedings, investigations and inquiries relate to the ratings activity of S&P Ratings and are or have been brought by purchasers of rated securities. In addition, various government and self-regulatory agencies frequently make inquiries and conduct investigations into S&P Ratings’ compliance with applicable laws and regulations. Any of these proceedings, investigations or inquiries could ultimately result in adverse judgments, damages, fines, penalties or activity restrictions, which could adversely impact our consolidated financial condition, cash flows, business or competitive position.
U.S.
The businesses conducted by our S&P Ratings segment are, in certain cases, regulated under the Credit Rating Agency Reform Act of 2006 (the “Reform Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd Frank Act”), the Securities Exchange Act of 1934 (the “Exchange Act”) and/or the laws of the states or other jurisdictions in which they conduct business. The financial services industry is subject to the potential for increased regulation in the U.S.
S&P Global Ratings is a credit rating agency that is registered with the SEC as a Nationally Recognized Statistical Rating Organization (“NRSRO”). The SEC first began informally designating NRSROs in 1975 for use of their credit ratings in the determination of capital charges for registered brokers and dealers under the SEC’s Net Capital Rule. The Reform Act created a new SEC registration system for rating agencies that choose to register as NRSROs. Under the Reform Act, the SEC is given authority and oversight of NRSROs and can censure NRSROs, revoke their registration or limit or suspend their registration in certain cases. The rules implemented by the SEC pursuant to the Reform Act, the Dodd Frank Act and the Exchange Act address, among other things, prevention or misuse of material non-public information, conflicts of interest, documentation and assessment of internal controls, and improving transparency of ratings performance and methodologies. The public portions of the current version of S&P Global Ratings’ Form NRSRO are available on S&P Global Ratings’ Web site.website.
European Union
In the European Union ("EU"), the credit rating industry is registered and supervised through a pan-European regulatory framework which is a compilation of three sets of legislative actions. In 2009, the European Parliament passed a regulation (“CRA1”) that established an oversight regime for the credit rating industry in the European Union,EU, which became effective in 2010. CRA1 requires the registration, formal regulation and periodic inspection of credit rating agencies operating in the European Union. S&PEU. Ratings was granted registration in October of 2011. In January of 2011, the European UnionEU established the European Securities and Markets Authority (“ESMA”), which, among other things, has direct supervisory responsibility for the registered credit rating industry throughout the European Union.EU.
Additional rules augmenting the supervisory framework for credit rating agencies went into effect in 2013. Commonly referred to as CRA3, these rules, among other things:
impose various additional procedural requirements with respect to ratings of sovereign issuers;
require member states to adopt laws imposing liability on credit rating agencies for an intentional or grossly negligent failure to abide by the applicable regulations;
impose mandatory rotation requirements on credit rating agencies hired by issuers of securities for ratings of resecuritizations, which may limit the number of years a credit rating agency can issue ratings for such securities of a particular issuer;
impose restrictions on credit rating agencies or their shareholders if certain ownership thresholds are crossed; and
impose additional procedural and substantive requirements on the pricing of services.
The financial services industry is subject to the potential for increased regulation in the European Union.EU.
Other Jurisdictions
Outside of the U.S. and the European Union,EU, regulators and government officials have also been implementing formal oversight of credit rating agencies. S&P Ratings is subject to regulations in severalmost of the foreign jurisdictions in which it operates and continues to work closely with regulators globally to promote the global consistency of regulatory requirements. S&P Ratings expects regulatorsRegulators in additional countries tomay introduce new regulations in the future. This includes the UK, which is in the process of establishing its own credit rating agencies oversight regime for its exit from the EU.
For a further discussion of competitive and other risks inherent in our S&P Ratings business, see Item 1a, Risk Factors,, in this Annual Report on Form 10-K. For a further discussion of the legal and regulatory environment in our S&P Ratings business, see Note 1213 - Commitments and Contingencies to the consolidated financial statements under Item 8, Consolidated Financial Statements and Supplementary Data,, in this Annual Report on Form 10-K.
S&P Capital IQ and SNL
Market Intelligence
Market Intelligence's portfolio of capabilities areis designed to help the financial communityinvestment professionals, government agencies, corporations and universities track performance, generate better investment returns (alpha),alpha, identify new trading and investment ideas, understand competitive and industry dynamics, perform risk analysis,valuations and develop mitigation strategies.assess credit risk.
S&P Capital IQIn January of 2017, we completed the sale of Quant House SAS ("QuantHouse"), included in our Market Intelligence segment, to QH Holdco, an independent third-party. In November of 2016, we entered into a put option agreement that gave the Company the right, but not the obligation, to put the entire share capital of QuantHouse to QH Holdco. As a result, we classified the assets and SNLliabilities of QuantHouse, net of our costs to sell, as held for sale, which is included in prepaid and other current assets and other current liabilities, respectively, in our consolidated balance sheet as of December 31, 2016 resulting in an aggregate loss of $31 million. On January 4, 2017, we exercised the put option, thereby entering into a definitive agreement to sell QuantHouse to QH Holdco. On January 9, 2017, we completed the sale of QuantHouse to QH Holdco.
In October of 2016, we completed the sale of SPSE and CMA for $425 million in cash to Intercontinental Exchange, an operator of global exchanges, clearing houses and data services. During the year ended December 31, 2016, we recorded a pre-tax gain of $364 million ($297 million after-tax) in gain on dispositions in the consolidated statement of income related to the sale of SPSE and CMA. Additionally, in October of 2016, we completed the sale of Equity Research, a business within our Market Intelligence segment to CFRA, a leading independent provider of forensic accounting research, analytics and advisory services. During the year ended December 31, 2016, we recorded a pre-tax gain of $9 million ($5 million after-tax) in gain on dispositions in the consolidated statement of income related to the sale of Equity Research.
Market Intelligence includes the following business lines:
S&P Capital IQ Desktop & Enterprise Solutions — a product suite that provides data, analytics and third-party research for global finance professionals, which includes the Market Intelligence Desktop (which are inclusive of the S&P Capital IQ and SNL Desktop andproducts);
Data Management Solutions — integrated bulk data feeds and application programming interfaces that can be customized, which include QuantHouse, S&P Securities Evaluations, CUSIPincludes Compustat, GICS, Point In Time Financials and Compustat;CUSIP; and
Global Risk Services — commercial arm that sells Standard & Poor's Ratings Services'Ratings' credit ratings and related data, analytics and research, which includes subscription-based offerings, RatingsDirect® and RatingsXpress®;, and Credit Analytics.
S&P Capital IQ MarketsSubscription revenue at Market Intelligence — a comprehensive sourceis primarily derived from distribution of marketdata, analytics, third-party research, for financial professionals, which includes Global Marketsand credit ratings-related information primarily through web-based channels, including Market Intelligence Leveraged Commentary & DataDesktop, RatingsDirect®, RatingsXpress®, and Equity Research Services;Credit Analytics. Non-subscription revenue at Market Intelligence is primarily related to certain advisory, pricing and
analytical services.SNL — a product suite that includes standardized and as-reported financials, sector-specific templates, asset-level data, mapping and regulatory data accessible through SNL Unlimited that provides in-depth coverage of industry-specific financial market data from over 6,500 public companies and over 50,000 private companies across the globe, comprehensive market data on a variety of assets, and M&A and Capital Market activities.
The following table provides revenue and segment operating profit information for the years ended December 31:
| | | (in millions) | | Years ended December 31, | | % Change | | Year ended December 31, | | % Change |
| | | 2015 | | 2014 | | 2013 | | ’15 vs ’14 | | ’14 vs ’13 | | 2018 | | 2017 | | 2016 | | ’18 vs ’17 | | ’17 vs ’16 |
| Revenue | | $ | 1,405 |
| | $ | 1,237 |
| | $ | 1,170 |
| | 14 | % | | 6 | % | | $ | 1,833 |
| | $ | 1,683 |
| | $ | 1,661 |
| | 9 | % | | 1 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Subscription revenue | | $ | 1,270 |
| | $ | 1,118 |
| | $ | 1,056 |
| | 14 | % | | 6 | % | | $ | 1,773 |
| | $ | 1,614 |
| | $ | 1,543 |
| | 10 | % | | 5 | % |
| Non-subscription revenue | | $ | 135 |
| | $ | 119 |
| | $ | 114 |
| | 13 | % | | 4 | % | | $ | 40 |
| | $ | 46 |
| | $ | 99 |
| | (13 | )% | | (54 | )% |
| Asset-linked fees | | | $ | 20 |
| | $ | 23 |
| | $ | 19 |
| | (14 | )% | | 19 | % |
| % of total revenue: | | | | | | | | | | | | | | | | | | | | |
| Subscription revenue | | 90 | % | | 90 | % | | 90 | % | | | | | | 97 | % | | 96 | % | | 93 | % | | | | |
| Non-subscription revenue | | 10 | % | | 10 | % | | 10 | % | | | | | | 2 | % | | 3 | % | | 6 | % | | | | |
| Asset-linked fees | | | 1 | % | | 1 | % | | 1 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Domestic revenue | | $ | 933 |
| | $ | 809 |
| | $ | 767 |
| | 15 | % | | 5 | % | |
| U.S. revenue | | | $ | 1,180 |
| | $ | 1,114 |
| | $ | 1,122 |
| | 6 | % | | (1 | )% |
| International revenue | | $ | 472 |
| | $ | 428 |
| | $ | 403 |
| | 10 | % | | 6 | % | | $ | 653 |
| | $ | 569 |
| | $ | 539 |
| | 14 | % | | 6 | % |
| % of total revenue: | | | | | | | | | | | | | | | | | | | | |
| Domestic revenue | | 66 | % | | 65 | % | | 66 | % | | | | | |
| U.S. revenue | | | 64 | % | | 66 | % | | 68 | % | | | | |
| International revenue | | 34 | % | | 35 | % | | 34 | % | | | | | | 36 | % | | 34 | % | | 32 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Operating profit 1 | | $ | 228 |
| | $ | 228 |
| | $ | 189 |
| | — | % | | 21 | % | | $ | 545 |
| | $ | 457 |
| | $ | 729 |
| | 19 | % | | (37 | )% |
| % Operating margin | | 16 | % | | 18 | % | | 16 | % | | | | | | 30 | % | | 27 | % | | 44 | % | | | | |
| |
1 | 2015 includes acquisition costs of $37 million related to the acquisition of SNL and costs of $32 million related to identified operating efficiencies primarily related to restructuring. 20142018 includes restructuring charges of $9 million. 2013 includes restructuringrelated to a business disposition and employee severance charges of approximately $9$7 million. 2017 includes employee severance charges of $7 million and a loss related to the salenon-cash disposition-related adjustment of Financial Communications$4 million. 2016 includes a $373 million gain from our dispositions, disposition-related costs of $3$43 million, a technology-related impairment charge of $24 million and an acquisition-related cost of $1 million. 2018, 2017 and 2016 includes amortization of intangibles from acquisitions of $73 million, $71 million and $72 million, respectively. |
Note - In 2018, Trucost plc ("Trucost") was integrated from Indices into Market Intelligence and historical reporting was retroactively revised to reflect the change.
20152018
Revenue increased 14% primarily due to 79% and was favorably impacted by 1 percentage pointspoint from the impact of recent acquisitions. Excluding acquisitions, the revenue increase was driven by growth in annualized contract values in the S&P Capital IQMarket Intelligence Desktop, RatingsXpress® and RatingsDirect® products from new and 7existing customers. The number of users and customers continued to grow for each of these products in 2018. Increases in annualized contract value for certain of our data feed products within Data Management Solutions also contributed to revenue growth. Both domestic and international revenue increased compared to 2017. In 2018, international revenue represented 36% of Market Intelligence's total revenue compared to 34% in 2017.
Operating profit increased 19%, with a 3 percentage point favorable impact from foreign exchange rates. Excluding the favorable impact of a non-cash disposition-related adjustment in 2017 of 8 percentage points from the acquisitionand higher employee severance charges in 2017 of SNL. Revenue growth of the legacy S&P Capital IQ products was primarily driven by increases in average contract values for each product from new customer relationships and increases from existing accounts. These increases were2 percentage points, partially offset by declines in the equity research business, the unfavorable impact of foreign exchange rates which reduced revenue by 1 percentage point and the unfavorable impact related to the closurehigher amortization in 2018 of a non-core business. The number of users on the S&P Capital IQ Desktop and the number of customers at RatingsXpress® continued to grow in 2015. RatingsXpress® continued to benefit from increased compliance requirements which have created a greater need for alternative risk tools. International revenue grew 10% over 2014, primarily driven by sales growth of the S&P Capital IQ Desktop and RatingsXpress® in Europe and Asia.
Operating profit remained flat. Excluding the unfavorable impact of acquisition-related costs related to the acquisition of SNL of 165 percentage points and higherdisposition-related costs recorded in 2015 related to identified operating efficiencies primarily related to restructuring2018 of 102 percentage points, operating profit increased 25%16%. ThisThe increase iswas primarily due to revenue growth, and the favorable impact of foreign exchange rates of 7 percentage points, partially offset by higher technology costs, increased compensation costs and higher intangible asset amortization in 2015 related to the acquisition of SNL.
2014
Revenue increased 6% primarily due to growth from the S&P Capital IQ Desktop, RatingsXpress® and RatingsDirect®, driven by increases in average contract values for each product from new customer relationships and increases from existing accounts. This was partially offset by an unfavorable impactincrease in cost of sales as a result of royalties tied to annualized contract value growth and increased data costs, and higher compensation costs driven by additional headcount partially related to the closureacquisitions of several non-core businesses. The numberPanjiva Inc. ("Panjiva") in February of users on the S&P Capital IQ Desktop2018 and the numberRateWatch business ("RateWatch") in June of customers at2018. See Note 2 - RatingsXpress® increased in 2014 as compared to 2013. Increases for existing accounts were driven by bundled solution offerings integrated within the S&P Capital IQ Desktop, new datasetsAcquisitions and expanded coverage of existing datasets combined with improved functionality of the S&P Capital IQ Desktop. RatingsXpress® benefited from improvements made Divestitures to the speedConsolidated Financial Statements and timeliness through deliverySupplementary Data, in the Annual Report on the Xpressfeed platform. Additionally, RatingsXpress® benefited from increased compliance requirements which have created a greater needForm 10-K for alternative risk tools. RatingsDirect® also had revenue growth in 2014 as increased contract values were driven by the sale of bundled packages including the S&P Capital IQ Desktop. Additionally, S&P Capital IQ Desktop, RatingsXpress® and RatingsDirect® benefited in 2014 from a higher customer retention rate compared to 2013. International revenue grew 6% over 2013, primarily driven by sales growth of the S&P Capital IQ Desktop in Europe, Asia and Canada.further discussion.
2017
Revenue increased 1% and was unfavorably impacted by 8 percentage points from the net impact of acquisitions and dispositions. Excluding these acquisitions and dispositions, the revenue increase was driven by growth in annualized contract values in the Market Intelligence Desktop, RatingsXpress® and RatingsDirect® products from new and existing customers. The number of users and customers continued to grow for each of these products in 2017. Increases in annualized contract value for certain of our data feed products within Data Management Solutions also contributed to revenue growth. International revenue increased and domestic revenue decreased slightly compared to 2016. In 2017, international revenue represented 34% of Market Intelligence's total revenue compared to 32% in 2016. Revenue growth was unfavorably impacted by the dispositions of SPSE and CMA in October of 2016, Equity Fund Research in October of 2016 and QuantHouse in January of 2017, and favorably impacted by the acquisition of Trucost in October of 2016. See Note 2 — Acquisitions and Divestitures to the Consolidated Financial Statements and Supplementary Data, in the Annual Report on Form 10-K for further discussion.
Operating profit increased 21%decreased 37%. Excluding the unfavorable impact of the gain on dispositions in 2016 of 55 percentage points, higher employee severance charges in 2017 of 1 percentage point and a non-cash acquisition adjustment in 2017 of 1 percentage point, partially offset by the favorable impact of disposition-related costs in 2016 of 6 percentage points and a loss related to the saletechnology-related impairment charge in 2016 of Financial Communications of 34 percentage points, operating profit increased 18%9%. ThisThe increase is due to revenue growth, expense savingsmargin improvement from existing businesses, partially offset by the closureunfavorable impact of several non-core businesses and a favorable impact from foreign exchange rates of 4 percentage points. Partially offsetting the increases to operating profit were increased compensation costs, primarily due to improved sales performance and additional headcount in developing regions, and higher technology costs.dispositions discussed above.
Industry Highlights and Outlook
In 2015, S&P Capital IQ2018, Market Intelligence continued to develop its desktop platform by enhancing its product offerings and SNL added scaledeveloping its analytical capabilities. Market Intelligence released the latest version of the desktop platform with significant content, feature, and performance enhancements and introduced the initial release of Kensho-driven topic search. Additionally, the segment integrated and leveraged recent acquisitions to data, technologydevelop and commercialexpand its analytical capabilities and created synergies with the existing legacy S&P Capital IQ portfolio through the acquisition of SNL.
offerings. In 2016, S&P Capital IQ and SNL2019, Market Intelligence will continue to focus on meeting or exceeding targeted revenueleveraging its strong content heritage to expand the core business, streamlining and costs synergies as a result ofenriching the acquisition of SNL. The segment will seekcustomer experience across all delivery platforms, and harnessing new data sources and technology to developextend into new products, further penetrate core customer segmentsgrowth areas and geographies, as well as enhance core capabilities in data, technology and market approach.geographies.
Legal and Regulatory Environment
The financial services industry is subject to the potential for increased regulation in the U.S. and abroad. TheMarket Intelligence operates investment advisory businesses conducted by S&P Capital IQ and SNLthat are regulated in certain cases regulatedthe U.S. under the U.S. Investment Advisers Act of 1940 (the “Investment Advisers Act”) and/or the laws of the states or other jurisdictions in which they conduct business.
Certain businesses of S&P Capital IQ and SNL are
Market Intelligence operates a business that is authorized and regulated in the United Kingdom by the Financial Conduct Authority (the “FCA”). As such, these businesses arethis business is authorized to arrange and advise on investments, and areis also entitled to exercise a passport right to provide specified cross border services into other European Economic Area (“EEA”) States, under and subjectis to the conditions inunder the E.U. Markets in Financial Instruments Directive (“MiFID”).
The markets for financial research and investment and advisory services are very competitive. S&P Capital IQ and SNLMarket Intelligence competes domestically and internationally on the basis of a number of factors, including the quality of its research and advisory services, client service, reputation, price, geographic scope, range of products and services, and technological innovation. For a further discussion of competitive and other risks inherent in our S&P Capital IQ and SNLMarket Intelligence business, see Item 1a, Risk Factors,, in this Annual Report on Form 10-K.
S&P DJ Indices
S&P DJ Indices is a global index provider that maintains a wide variety of indices to meet an array of investor needs. S&P DJ Indices’ mission is to provide transparent benchmarks to help with decision making, collaborate with the financial community to create innovative products and provide investors with tools to monitor world markets.
S&P DJ Indices generates subscription revenue but primarily derives revenue from non-subscription products based on the S&P and Dow Jones Indices. Specifically, S&P DJ Indices generate revenue from the following sources:
Investment vehicles — such as ETFs, which are based on the S&P Dow Jones Indices' benchmarks and generate revenue through fees based on assets and underlying funds;
Exchange traded derivatives — which generate royalties based on trading volumes of derivatives contracts listed on various exchanges;
Index-related licensing fees — which are either fixed or variable annual and per-issue fees for over-the-counter derivatives and retail-structured products; and
Data and customized index subscription fees — which support index fund management, portfolio analytics and research.
|
| | | | | | | | | | | | | | | | |
| (in millions) | | Years ended December 31, | | % Change |
| | | 2015 | | 2014 | | 2013 | | ’15 vs ’14 | | ’14 vs ’13 |
| Revenue | | $ | 597 |
| | $ | 552 |
| | $ | 493 |
| | 8% | | 12% |
| | | | | | | | | | | |
| Subscription revenue | | $ | 122 |
| | $ | 111 |
| | $ | 103 |
| | 10% | | 8% |
| Non-subscription revenue | | $ | 475 |
| | $ | 441 |
| | $ | 390 |
| | 8% | | 13% |
| % of total revenue: | | | | | | | | | | |
| Subscription revenue | | 21 | % | | 20 | % | | 21 | % | | | | |
| Non-subscription revenue | | 79 | % | | 80 | % | | 79 | % | | | | |
| | | | | | | | | | | |
| Domestic revenue | | $ | 488 |
| | $ | 440 |
| | $ | 385 |
| | 11% | | 14% |
| International revenue | | $ | 109 |
| | $ | 112 |
| | $ | 108 |
| | (2)% | | 4% |
| % of total revenue: | | | | | | | | | | |
| Domestic revenue | | 82 | % | | 80 | % | | 78 | % | | | | |
| International revenue | | 18 | % | | 20 | % | | 22 | % | | | | |
| | | | | | | | | | | |
Operating profit 1 | | $ | 392 |
| | $ | 347 |
| | $ | 266 |
| | 13% | | 30% |
| Less: net income attributable to noncontrolling interests | | $ | 101 |
| | $ | 92 |
| | $ | 73 |
| | 10% | | 25% |
| Net operating profit | | $ | 291 |
| | $ | 255 |
| | $ | 193 |
| | 14% | | 32% |
| % Operating margin | | 66 | % | | 63 | % | | 54 | % | | | | |
| % Net operating margin | | 49 | % | | 46 | % | | 39 | % | | | | |
| |
1
| 2014 includes $4 million of professional fees largely related to corporate development activities. |
2015
Revenue at S&P DJ Indices increased 8%, primarily driven by higher average levels of assets under management ("AUM") for ETFs and mutual funds. Volumes for exchange-traded derivatives continued to increase for certain products which also contributed to revenue growth. Additionally, the year-over-year revenue increase was slightly unfavorably impacted by the refinement of our process for estimating revenue for certain products that favorably impacted 2014 which caused a one-time revenue increase in the prior-year period. Ending AUM for ETFs decreased 2% to $815 billion in 2015 from $832 billion in 2014, primarily due to the flow of investment funds to the developed international equity markets and the impact of lower equity prices. The unfavorable impact of foreign exchange rates reduced revenue by 1 percentage point.
Operating profit grew 13%. Excluding the favorable impact of professional fees largely related to corporate development activities recorded in 2014 of 1 percentage point, operating profit increased 12%. This increase was primarily due to revenue growth as expenses remained relatively flat as a result of cost containment measures.
2014
Revenue at S&P DJ Indices increased 12%, primarily driven by higher average levels of AUM for ETFs and mutual funds. Higher volumes for exchange-traded derivatives also contributed to revenue growth. These increases were partially offset by the unfavorable impact of lower over-the-counter derivative trading volumes in 2014 driven by the expiration of a licensing arrangement for commodities indices in June of 2014. AUM for ETFs rose 25% to $832 billion in 2014 from $668 billion in 2013. The unfavorable impact of foreign exchange rates reduced revenue by less than 1 percentage point.
Operating profit grew 30%. Excluding the impact of professional fees largely related to corporate development activities recorded in 2014 of 2 percentage points, operating profit increased 32%. This increase was primarily due revenue growth and the favorable impact of a $26 million non-cash impairment charge recorded in 2013 associated with an intangible asset acquired with the formation of the S&P Dow Jones Indices LLC joint venture and a reduction of royalty expenses. The reduction of royalty expenses was the result of purchases of intellectual property rights to certain commodities indices developed by Goldman Sachs, and Broad Market Indices (“BMI”) from Citigroup Global Markets Inc. as well as the expiration of a licensing arrangement for commodities indices in June of 2014. These expense reductions were partially offset by an increase in compensation costs related to additional headcount and higher incentive costs. The unfavorable impact of foreign exchange rates reduced operating profit by 1 percentage point.
Industry Highlights and Outlook
S&P DJ Indices continues to be the leading index provider for the ETF market space. In 2015, higher average levels of AUM for ETFs contributed to revenue growth, however, ending AUM for ETFs decreased 2% to $815 billion in 2015 from $832 billion in 2014. S&P DJ Indices will also seek to diversify their portfolio of index offerings through asset class expansion, new geographies, and investment strategies. This group will seek to expand its fixed income offering and grow its local presence in emerging markets.
Legal and Regulatory Environment
European Union
The financial benchmarks industry is subject to the new pending benchmark regulation in the European Union (the “E.U. Benchmark Regulation”) as well as potential increased regulation in other jurisdictions.
The proposed E.U. Benchmark Regulation has been released for final approval and is expected to be published later this year. The E.U. Benchmark Regulation will likely require S&P DJ Indices in due course to obtain registration or authorization in connection with its benchmark activities in Europe. This legislation will likely cause additional operating obligations but they are not expected to be material at this time and until the regulation is finalized the exact impact is not certain.
In addition, the European Union has recently finalizedEU enacted a package of legislative measures known as MiFID II ("MiFID II"), which reviserevises and updateupdates the existing E.U.EU Markets in Financial Instruments Directive framework. MiFID II will apply in fullframework, and the substantive provisions became applicable in all E.U.EU Member States fromas of January 3, 2017.2018. MiFID II includes provisions that, among other things: (i) impose new conditions and requirements on the licensing of benchmarks and provide for non-discriminatory access to exchanges and clearing houses; (ii) modify the categorization and treatment of certain classes of derivatives; (iii) expand the categories of trading venue that are subject to regulation; (iv) require the unbundling of investment research and direct how asset managers pay for research either out of a research payment account or from a firm’s profits; and (v) provide for the mandatory trading of certain derivatives on exchanges (complementing the mandatory derivative clearing requirements in the EU Market Infrastructure Regulation of 2011). Although the MiFID II package is “framework” legislation (meaning that much of the detail of the rules will be set out in subordinate measures, including some technical standards yet to be adopted by the European Commission.
Platts
Platts is the leading independent provider of information and benchmark prices for the commodity and energy markets. Platts provides essential price data, analytics, and industry insight enabling the commodity and energy markets to perform with greater transparency and efficiency.
Platts' revenue is generated primarily through the following sources:
Subscription revenue — primarily from subscriptions to our real-time news, market data and price assessments, along with other information products;
Sales usage-based royalties — primarily from licensing of our proprietary market price data and price assessments to commodity exchanges, and
Non-subscription revenue — conference sponsorship, consulting engagements, and events.
We completed the sale of J.D. Power on September 7, 2016, with the results included in Platts results through that date. During the year ended December 31, 2016, we recorded a pre-tax gain of $728 million ($516 million after-tax) in gain on dispositions in the consolidated statement of income related to the sale of J.D. Power.
|
| | | | | | | | | | | | | | | | | | |
| (in millions) | | Year ended December 31, | | % Change |
| | | 2018 | | 2017 | | 2016 | | ’18 vs ’17 | | ’17 vs ’16 |
| Revenue | | $ | 815 |
| | $ | 774 |
| | $ | 925 |
| | 5 | % | | (16 | )% |
| | | | | | | | | | | |
| Subscription revenue | | $ | 750 |
| | $ | 704 |
| | $ | 689 |
| | 6 | % | | 2 | % |
| Sales usage-based royalties | | $ | 54 |
| | $ | 57 |
| | $ | 53 |
| | (5 | )% | | 7 | % |
Non-subscription revenue | | $ | 11 |
| | $ | 13 |
| | $ | 183 |
| | (12 | )% | | (93 | )% |
| % of total revenue: | | | | | | | | | | |
| Subscription revenue | | 92 | % | | 91 | % | | 74 | % | | | | |
| Sales usage-based royalties | | 7 | % | | 7 | % | | 6 | % | | | | |
| Non-subscription revenue | | 1 | % | | 2 | % | | 20 | % | | | | |
| | | | | | | | | | | |
| U.S. revenue | | $ | 283 |
| | $ | 284 |
| | $ | 400 |
| | — | % | | (29 | )% |
| International revenue | | $ | 532 |
| | $ | 490 |
| | $ | 525 |
| | 9 | % | | (7 | )% |
| % of total revenue: | | | | | | | | | | |
| U.S. revenue | | 35 | % | | 37 | % | | 43 | % | | | | |
| International revenue | | 65 | % | | 63 | % | | 57 | % | | | | |
| | | | | | | | | | | |
Operating profit 1 | | $ | 383 |
| | $ | 326 |
| | $ | 1,090 |
| | 18 | % | | (70 | )% |
| % Operating margin | | 47 | % | | 42 | % | | 118 | % | | | | |
| |
1 | 2017 includes a non-cash acquisition-related adjustment of $11 million, a charge to exit a leased facility of $6 million, an asset write-off of $2 million and employee severance charges of $2 million. 2016 includes a $728 million gain from our disposition of J.D. Power and disposition-related costs of $5 million. 2018, 2017 and 2016 includes amortization of intangibles from acquisitions of $18 million, $18 million and $14 million, respectively. |
2018
Revenue increased 5% due to continued demand for market data and price assessment products across all commodity sectors, led by petroleum, partially offset by a decrease in sales usage-based royalties from the licensing of our proprietary market price data and price assessments to commodity exchanges mainly due to a decline in oil trading volumes in the first nine months of 2018. Demand for market data and price assessment products was driven by international customers. While petroleum is still the biggest revenue driver, the proportional revenue mix continues to become more diversified as other sectors contributed to revenue growth including petrochemicals, metals and agriculture. International revenue increased and domestic revenue remained relatively
unchanged compared to 2017. In 2018, international revenue represented 65% of Platts total revenue compared to 63% in 2017.
Operating profit increased 18%. Excluding the favorable impact of a non-cash acquisition-related adjustment in 2017 of 4 percentage points, a charge to exit a leased facility in 2017 of 2 percentage points, an asset write-off in 2017 of 1 percentage point and employee severance charges in 2017 of 1 percentage point, operating profit increased 10%, with the increase largely driven by revenue growth.
2017
Revenue decreased 16% and was unfavorably impacted by 21 percentage points from the net impact of acquisitions and dispositions discussed below. Excluding these acquisitions and dispositions, revenue increased due to continued demand for market data and price assessment products across all commodity sectors, led by petroleum. Demand for market data and price assessment products was driven by international customers. While petroleum is still the biggest revenue driver, the proportional revenue mix continues to become more diversified as other sectors contributed to revenue growth including petrochemicals, metals and agriculture. Both domestic and international revenue decreased compared to 2016 due to the unfavorable impact from the disposition of J.D. Power. In 2017, international revenue represented 63% of Platts total revenue compared to 57% in 2016. Revenue was unfavorably impacted by the disposition of J.D. Power in September of 2016 and favorably impacted by the acquisitions of RigData and PIRA in June of 2016 and September of 2016, respectively. See Note 2 - Acquisitions and Divestitures to the Consolidated Financial Statements and Supplementary Data, in the Annual Report on Form 10-K for further discussion.
Operating profit decreased 70%. Excluding the unfavorable impact of the gain on dispositions in 2016 of 64 percentage points, a non-cash acquisition-related adjustment in 2017 of 1 percentage point and a charge to exit a leased facility of 1 percentage point, operating profit decreased 4% due to the unfavorable impact from the disposition of J.D. Power.
Industry Highlights and Outlook
In 2018, sustained demand for market data and price assessment products across all commodity sectors, led by petroleum, continued to drive revenue growth despite small declines in sales usage-based royalty revenue. In 2018, Platts set the groundwork for enhancing its commercial model and simplifying its customer facing and operating platforms for improved user experience. In 2019, Platts will continue to focus on extending the core business through innovation, simplifying its product and platform strategy, and driving commercial transformation.
Legal and Regulatory Environment
Platts’ commodities price assessment and information business is subject to increasing regulatory scrutiny in the U.S. and abroad. As discussed below under the heading “Indices-Legal and Regulatory Environment”, the financial benchmarks industry is subject to the new benchmark regulation in the EU (the “EU Benchmark Regulation”) as well as potential increased regulation in other jurisdictions. As a result of these measures, as well as measures that could be taken in other jurisdictions outside of Europe, Platts will be required in due course to obtain registration or authorization in connection with its benchmark and price assessment activities in Europe and potentially elsewhere.
European Union
The EU has enacted MiFID II, which revise and update the existing EU Markets in Financial Instruments Directive and the substantive provisions became applicable in all EU Member States as of January 3, 2018. MiFID II includes provisions that, among other things: (i) impose new conditions and requirements on the licensing of benchmarks and provide for non-discriminatory access to exchanges and clearing houses; (ii) modify the categorization and treatment of certain classes of derivatives; (iii) expand the categories of trading venue that are subject to regulation; (iv) require the unbundling of investment research and direct how asset managers pay for research either out of a research payment account or from a firm’s profits; and (v) provide for the mandatory trading of certain derivatives on exchanges (complementing the mandatory derivative clearing requirements in the E.U. Market Infrastructure Regulation of 2011). Although the MiFID II package is “framework” legislation (meaning that much of the detail of the rules will be set out in subordinate measures, including some technical standards yet to be agreed upon in the period before 2017), it is possible that the introduction of these laws and rules could affect S&P DJ Indices’ ability both to administer and license its indices.
In July of 2013, the International Organization of Securities Commissions (“IOSCO”) issued Financial Benchmark Principles, which are intended to promote the reliability of benchmark determinations, and address governance, benchmark quality and accountability mechanisms, including with regard to the indices published by S&P DJ Indices. Even though the Financial Benchmark Principles are not binding law, S&P DJ Indices has taken steps to align its governance regime and operations with the Financial Benchmark Principles and engaged an independent auditor to perform a reasonable assurance review of such alignment.
The markets for index providers are very competitive. S&P DJ Indices competes domestically and internationally on the basis of a number of factors, including the quality of its benchmark indices, client service, reputation, price, range of products and services (including geographic coverage) and technological innovation. For a further discussion of competitive and other risks inherent in our S&P DJ Indices business, see Item 1a, Risk Factors, in this Annual Report on Form 10-K.
Commodities & Commercial
C&C consists of business-to-business companies specializing in the commodities and commercial markets that deliver their customers access to high-value information, data, analytic services and pricing and quality benchmarks. C&C includes the following brands:
Platts — provides essential price data, analytics, and industry insight that enable commodities markets to perform with greater transparency and efficiency; and
J.D. Power — provides essential consumer intelligence to help businesses measure, understand, and improve the key performance metrics that drive growth and profitability.
In the fourth quarter of 2015, we began exploring strategic alternatives for J.D. Power, included in our C&C segment. We committed to and initiated an active program to sell J.D. Power in its current state that we believe is probable in the next year. As a result, we have classified the assets and liabilities of J.D. Power as held for sale in our consolidated balance sheet as of December 31, 2015. The anticipated disposal does not represent a strategic shift that will have a major effect on operations and financial results, therefore, it is not classified as a discontinued operation.
On November 3, 2014, we completed the sale of McGraw Hill Construction, which has historically been part of our C&C segment, to Symphony Technology Group for $320 million in cash. Accordingly, the results of operations for the year ended December 31, 2014 and all prior periods presented have been reclassified to reflect the business as a discontinued operation. See Note 2 — Acquisitions and Divestitures for further discussion.
The C&C business is drivenadopted by the need for high-value information and transparency in a varietyEuropean Commission. The introduction of industries. C&C seeks to deliver premier content that is deeply embedded in customer workflows and decision making processes.
C&C's revenue is generated primarily through the following sources:
Subscription revenue — subscriptions to our real-time news, market data and price assessments, along with other information products, primarily serving the energy and automotive industry; and
Non-subscription revenue — primarily from licensing of our proprietary market price data and price assessments to commodity exchanges, syndicated and proprietary research studies, commercial-oriented data and analytics, conference sponsorship, consulting engagements, and events.
As of August 1, 2013, we completed the sale of Aviation Week and results have been included in C&C's results through that date. See Note 2 – Acquisitions and Divestitures to our consolidated financial statements for further discussion.
|
| | | | | | | | | | | | | | | | | | |
| (in millions) | | Years ended December 31, | | % Change |
| | | 2015 | | 2014 | | 2013 | | ’15 vs ’14 | | ’14 vs ’13 |
| Total revenue | | $ | 971 |
| | $ | 893 |
| | $ | 841 |
| | 9 | % | | 6 | % |
| | | | | | | | | | | |
| Subscription revenue | | $ | 641 |
| | $ | 576 |
| | $ | 527 |
| | 11 | % | | 9 | % |
| Non-subscription revenue | | $ | 330 |
| | $ | 317 |
| | $ | 314 |
| | 4 | % | | 1 | % |
| % of total revenue: | | | | | | | | | | |
| Subscription revenue | | 66 | % | | 64 | % | | 63 | % | | | | |
| Non-subscription revenue | | 34 | % | | 36 | % | | 37 | % | | | | |
| | | | | | | | | | | |
| Domestic revenue | | $ | 435 |
| | $ | 401 |
| | $ | 394 |
| | 9 | % | | 2 | % |
| International revenue | | $ | 536 |
| | $ | 492 |
| | $ | 447 |
| | 9 | % | | 10 | % |
| % of total revenue: | | | | | | | | | | |
| Domestic revenue | | 45 | % | | 45 | % | | 47 | % | | | | |
| International revenue | | 55 | % | | 55 | % | | 53 | % | | | | |
| | | | | | | | | | | |
Operating profit 1 | | $ | 357 |
| | $ | 290 |
| | $ | 280 |
| | 23 | % | | 3 | % |
| % Operating margin | | 37 | % | | 32 | % | | 33 | % | | | | |
| |
1
| 2015 includes $1 million of restructuring charges. 2014 includes $16 million of restructuring charges. 2013 includes $9 million of restructuring charges and a pre-tax gain of $11 million on the sale of Aviation Week. |
2015
Revenue grew 9% driven by strength in Platts' proprietary content as Platts' revenue grew across all regions. This growth was mainly due to continued demand for Platts’ market data and price assessment products across all commodity sectors, led by petroleum. While petroleum is still the biggest driver, the revenue mix continues to become more diversified as other sectors showed positive annualized contract value growth including natural gas, petrochemicals, metals and agriculture. Additionally, growth has been driven by the continued licensing of our proprietary market price data and price assessments to various commodity exchanges. Platts' revenue for 2015 was also favorably impacted by the acquisitions of Eclipse Energy Group AS and its operating subsidiaries (“Eclipse”) in July of 2014 and Petromedia Ltd and its operating subsidiaries (“Petromedia”) in July of 2015. J.D. Power also contributed to the revenue increase driven by an increase in auto consulting engagements in the U.S., growth in the U.S. Power Information Network® ("PIN") business and the acquisition of National Automobile Dealers Association's Used Car Guide ("UCG") in July of 2015. The acquisitions of Eclipse, Petromedia and UCG had a favorable impact on revenue of 3 percentage points. See Note 2 — Acquisitions and Divestitures for further discussion. The unfavorable impact of foreign exchange rates reduced revenue by 1 percentage point.
Operating profit increased 23%. Excluding the favorable impact of higher restructuring charges recorded in 2014 of 6 percentage points, operating profit increased 17%. This increase is due to the increase in revenue and the favorable impact of foreign exchange rates of 4 percentage points, partially offset by higher incentive costs and outside consulting fees at Platts and higher compensation costs related to additional headcount at J.D. Power due to the acquisition of UCG.
2014
Revenue increased 6% due to continued demand for Platts’ proprietary content as Platts’ revenue grew across all regions. This growth was mainly driven by strength in Platts’ market data and price assessment products across all commodity sectors, led by petroleum. While petroleum is still the biggest driver, the revenue mix continues to become more diversified as other sectors continued to show positive annualized contract value growth including petrochemicals, natural gas, coal, metals and agriculture. Platts' revenue in 2014 was also favorably impacted by the acquisition of Eclipse in July of 2014. The acquisition of Eclipse had a favorable impact on revenue of less than 1 percentage point. See Note 2 — Acquisitions and Divestitures for further discussion. Additionally, growth at J.D. Power also contributed to the revenue increase driven by strong demand for auto consulting engagements in the U.S. and Singapore and growth in the U.S. PIN business. The increases in revenue were partially offset by the unfavorable impact of 3 percentage points related to the sale of Aviation Week on August 1, 2013 as the results have been included in C&C's results through that date.
Operating profit increased 3%. Excluding the unfavorable impact of the pre-tax gain on the sale of Aviation Week recorded in 2013 of 4 percentage points and higher restructuring charges recorded in 2014 as compared to 2013 of 3 percentage points, operating profit increased 10%. This increase is due to the increase in revenue, partially offset by the unfavorable impact of foreign exchange rates of 1 percentage point, increased costs at Platts and J.D. Power related to additional headcount, merit increases, and other operating costs to support business growth.
Industry Highlights and Outlook
C&C expects to continue to invest in digital capabilities that will enable our brands to become more integrated in our customers' workflows, compete more effectively in the marketplace, and create a foundation for the development of new products and revenue streams. The segment expects to further expand its presence in selected markets and geographies to help drive growth.
High growth in supply and an uncertain pace of demand growth causes volatility in energy prices, which will drive market participant demand for Platts' proprietary content, including news, price assessments and analytics. However, if commodity prices remain at levels that are lower than in recent years, this is likely to have an adverse impact on the rate of growth for subscription and conference revenue in some of Platts’ customer segments. The International Energy Agency ("IEA"), in its first monthly forecast of 2016, predicted that world oil consumption will rise to 95.7 million barrels per day in 2016, a gain of 1.2 million barrels per day compared to 2015. The IEA expected non-OPEC total liquids supply to contract by nearly 600,000 barrels per day in 2016, following growth of 1.4 million barrels per day in 2015. In 2016, Platts will continue to invest in technology and customer engagement activities to seek to drive additional revenue growth across all commodity sectors. They will also seek to continue to leverage the capabilities and content from recent acquisitions and expand into adjacent markets. Similar to 2015, they expect to continue to introduce a number of new products and price assessments within all commodity sectors. Platts completed its first annual assurance review confirming adherence to the IOSCO Principles for Oil Price Reporting Agencies (PRAs) for its oil benchmarks in 2013 and, as of December 2015, had completed its fourth assurance review confirming its alignment with the PRA Principles for both its oil and non-oil commodity benchmarks. On September 17, 2015, IOSCO announced that the PRAs have made the IOSCO PRA Principles an "integral part" of their price assessment practices and that IOSCO saw no need to continue its annual review of the Principles’ implementation. Platts remains committed to ensuring its price assessment processes continue
to fully align with the PRA Principles across all commodities and will continue to retain an independent accountancy firm to conduct voluntary reasonable assurance reviews of its alignment to the PRA Principles.
Demand for our automotive studies is driven by the performance of the automotive industry. In 2015, global and U.S. light vehicle sales increased approximately 1% and 6%, respectively, compared to 2014, with growth across most primary markets partially offset by decreases from Russia, Brazil and Japan. For 2016, J.D. Power projects growth for global and U.S. light vehicles sales of 4% and 2%, respectively. In 2016, J.D. Power will strive to grow the core business by strengthening their benchmark studies, leveraging new initiatives to drive operational efficiencies and enhance customer delivery and increasing the distribution of their syndicated studies. International growth will continue to be a key focus in 2016 as they will look to extend product offerings to increase penetration in the Asia-Pacific region and exploring growth opportunities in target growth markets (China, Brazil and Mexico).
Legal and Regulatory Environment
Platts’ commodities price assessment and information business is subject to increasing regulatory scrutiny in the U.S. and abroad. As discussed above under the heading “S&P DJ Indices-Legal and Regulatory Environment”, the financial benchmarks industry is subject to the new pending benchmark regulation in the European Union (the “E.U. Benchmark Regulation”) as well as potential increased regulation in other jurisdictions. As a result of these measures, as well as measures that could be taken in other jurisdictions outside of Europe, Platts will likely be required in due course to obtain registration or authorization in connection with its benchmark and price assessment activities in Europe and potentially elsewhere.
Also as discussed above under the heading “S&P DJ Indices-Legal and Regulatory Environment”, the European Union has recently finalized a package of legislative measures known as MiFID II, which may also impact Platts’ business. Although the MiFID II package is “framework” legislation, it is possible thatmay result in changes to the introduction of these laws and rules could affect Platts’ ability both to administer and licensemanner in which Platts licenses its price assessments. MiFID II and the MAR may impose additional regulatory burdens on Platts activities in the EU, although the exact impact and costs are not yet known.
In October of 2012, IOSCO issued its Principles for Oil Price Reporting Agencies ("PRA Principles which set out principles,Principles"), which are intended to enhance the reliability of oil price assessments referenced in derivative contracts subject to regulation by IOSCO members. Platts has taken steps to alignaligned its operations with the PRA Principles and, as recommended by IOSCO in its final report on the PRA Principles, has aligned to the PRA Principles for other commodities for which it publishes benchmarks.
The markets for commodities price assessments and information are very competitive.
Platts competes domestically and internationally on the basis of a number of factors, including the quality of its assessments and other information it provides to the commodities and related markets, client service, reputation, price, range of products and services (including geographic coverage) and technological innovation. Furthermore, sustained downward pressure on oil and other commodities prices and trading activity in those markets could have a material adverse impact on the rate of growth of Platts’ revenue. For a further discussion of competitive and other risks inherent in our Platts business, see Item 1a, Risk Factors,, in this Annual Report on Form 10-K.
Indices
Indices is a global index provider maintaining a wide variety of indices to meet an array of investor needs. Indices’ mission is to provide transparent benchmarks to help with decision making, collaborate with the financial community to create innovative products and provide investors with tools to monitor world markets.
Indices primarily derives revenue from asset-linked fees based on the S&P and Dow Jones indices and to a lesser extent generates subscription revenue and transaction revenue. Specifically, Indices generates revenue from the following sources:
Investment vehicles — asset-linked fees such as ETFs and mutual funds, that are based on the S&P Dow Jones Indices' benchmarks and generate revenue through fees based on assets and underlying funds;
Exchange traded derivatives — generate sales usage-based royalties based on trading volumes of derivatives contracts listed on various exchanges;
Index-related licensing fees — fixed or variable annual and per-issue asset-linked fees for over-the-counter derivatives and retail-structured products; and
Data and customized index subscription fees — fees from supporting index fund management, portfolio analytics and research.
The following table provides revenue and segment operating profit information for the years ended December 31:
|
| | | | | | | | | | | | | | | | |
| (in millions) | | Year ended December 31, | | % Change |
| | | 2018 | | 2017 | | 2016 | | ’18 vs ’17 | | ’17 vs ’16 |
| Revenue | | $ | 837 |
| | $ | 728 |
| | $ | 638 |
| | 15% | | 14% |
| | | | | | | | | | | |
| Asset-linked fees | | $ | 522 |
| | $ | 461 |
| | $ | 381 |
| | 13% | | 21% |
| Sales usage-based royalties | | $ | 171 |
| | $ | 131 |
| | $ | 125 |
| | 30% | | 5% |
| Subscription revenue | | $ | 144 |
| | $ | 136 |
| | $ | 132 |
| | 6% | | 4% |
| % of total revenue: | | | | | | | | | | |
| Asset-linked fees | | 62 | % | | 63 | % | | 60 | % | | | | |
| Sales usage-based royalties | | 21 | % | | 18 | % | | 20 | % | | | | |
| Subscription revenue | | 17 | % | | 19 | % | | 20 | % | | | | |
| | | | | | | | | | | |
| U.S. revenue | | $ | 719 |
| | $ | 601 |
| | $ | 525 |
| | 20% | | 15% |
| International revenue | | $ | 118 |
| | $ | 127 |
| | $ | 113 |
| | (7)% | | 12% |
| % of total revenue: | | | | | | | | | | |
| U.S. revenue | | 86 | % | | 83 | % | | 82 | % | | | | |
| International revenue | | 14 | % | | 17 | % | | 18 | % | | | | |
| | | | | | | | | | | |
Operating profit 1 | | $ | 563 |
| | $ | 478 |
| | $ | 413 |
| | 18% | | 16% |
| Less: net income attributable to noncontrolling interests | | $ | 151 |
| | $ | 129 |
| | $ | 109 |
| | 17% | | 18% |
| Net operating profit | | $ | 412 |
| | $ | 349 |
| | $ | 304 |
| | 18% | | 15% |
| % Operating margin | | 67 | % | | 66 | % | | 65 | % | | | | |
| % Net operating margin | | 49 | % | | 48 | % | | 48 | % | | | | |
| |
1 | 2018, 2017 and 2016 includes amortization of intangibles from acquisitions of $6 million. |
Note - In 2018, Trucost was integrated from Indices into Market Intelligence and historical reporting was retroactively revised to reflect the change.
2018
Revenue increased 15%, primarily driven by higher average levels of assets under management ("AUM") for ETFs and mutual funds, and higher exchange-traded derivative volumes due to market volatility. Average AUM for ETFs increased 20% to $1.399 trillion compared to 2017. Ending AUM for ETFs decreased 3% to $1.309 trillion compared to 2017 driven by the impact of market depreciation in the fourth quarter of 2018.
Operating profit grew 18%. The impact of revenue growth was partially offset by increased operating costs to support revenue growth and business initiatives at Indices and higher compensation costs from additional headcount.
2017
Revenue increased 14%, primarily driven by higher AUM for ETFs and mutual funds. Ending AUM for ETFs increased 31% to $1.343 trillion and average AUM for ETFs increased 34% to $1.167 trillion compared to 2016.
Operating profit grew 16%. The impact of revenue growth was partially offset by higher compensation costs and increased operating costs to support revenue growth and business initiatives at Indices. Higher compensation costs related to increased incentive costs and additional headcount.
Industry Highlights and Outlook
Indices continues to be the leading index provider for the ETF market space. In 2018, higher average levels of AUM for ETFs and higher volumes for exchange-traded derivatives contributed to revenue growth. In 2018, Indices continued to launch innovative indices, expand index product offerings and grow international partnerships. In 2019, Indices will continue to focus on growing the core business, expanding innovative offerings, and growing globally through collaborative client relationships.
Legal and Regulatory Environment
The financial benchmarks industry is subject to the new benchmark regulation in the European Union (the "EU Benchmark Regulation"), the new benchmark regulation in Australia (the "Australia Benchmark Regulation") and potential increased regulation in other jurisdictions.
The EU Benchmark Regulation was published June 30, 2016 and included provisions applicable to Indices and Platts, which became effective January 1, 2018. The EU Benchmark Regulation provides a two (2) year transitional period during which Indices and Platts are required to obtain registration or authorization in connection with their respective benchmark activities in Europe. This legislation will likely cause additional operating obligations but they are not expected to be material at this time, although the exact impact remains unclear.
As discussed above under the heading “Platts Legal and Regulatory Environment”, the EU has finalized a package of legislative measures known as MiFID II The introduction of the MiFID II package may result in changes to the manner in which S&P Dow Jones Indices licenses its indices. MiFID II and the MAR may impose additional regulatory burdens on Indices activities in the EU, although the exact impact and costs are not yet known.
The Australian Benchmark Regulation was enacted in June of 2018 and included provisions applicable to Indices, designating the S&P ASX 200 a significant financial benchmark and therefore requiring Indices to obtain a license from the Australian Investment and Securities Commission (“ASIC”) as its administrator. Although narrower in scope, the requirements of the Australian Benchmark Regulation are similar to those of the E.U. Benchmark Regulation. This legislation will likely cause additional operating obligations but they are not expected to be material at this time, although the exact impact remains unclear.
In July of 2013, the IOSCO issued Financial Benchmark Principles, intended to promote the reliability of benchmark determinations, and address governance, benchmark quality and accountability mechanisms, including with regard to the indices published by Indices. Even though the Financial Benchmark Principles are not binding law, Indices has taken steps to align its governance regime and operations with the Financial Benchmark Principles and engaged an independent auditor to perform a reasonable assurance review of such alignment.
The markets for index providers are very competitive. Indices competes domestically and internationally on the basis of a number of factors, including the quality of its benchmark indices, client service, reputation, price, range of products and services (including geographic coverage) and technological innovation. For a further discussion of competitive and other risks inherent in our Indices business, see Item 1a, Risk Factors, in this Annual Report on Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
We continue to maintain a strong financial position. Our primary source of funds for operations is cash from our businesses and our core businesses have been strong cash generators. In 2016,2019, cash on hand, cash flows from operations and availability under our existing credit facility are expected to be sufficient to meet any additional operating and recurring cash needs into the foreseeable future. We use our cash for a variety of needs, including among others:but not limited to: ongoing investments in our businesses, strategic acquisitions, share repurchases, dividends, repayment of debt, capital expenditures and investment in our infrastructure.
Cash Flow Overview
Cash, and cash equivalents, and restricted cash were $1.52.0 billion as of December 31, 2015,2018, a decrease of $1.00.8 billion as compared to December 31, 2014,2017, and consisted of approximately 10%40% of domestic cash and 90%60% of cash held abroad. Typically, cash held outside the U.S. is anticipated to be utilized to fund international operations or to be reinvested outside of the U.S., as a significant portion of our opportunities for growth in the coming years is expected to be abroad. In the event funds from international operations are needed to fund operations in the U.S., we would be required to accrue for and pay taxes in the U.S. to repatriate these funds.
|
| | | | | | | | | | | | |
| (in millions) | | Years ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| Net cash provided by (used for): | | | | | | |
| Operating activities from continuing operations | | $ | 195 |
| | $ | 1,209 |
| | $ | 782 |
|
| Investing activities from continuing operations | | (2,525 | ) | | (65 | ) | | (130 | ) |
| Financing activities from continuing operations | | 1,510 |
| | (462 | ) | | (1,743 | ) |
|
| | | | | | | | | | | | |
| (in millions) | | Year ended December 31, |
| | | 2018 | | 2017 | | 2016 |
| Net cash provided by (used for): | | | | | | |
| Operating activities | | $ | 2,064 |
| | $ | 2,016 |
| | $ | 1,560 |
|
| Investing activities | | (513 | ) | | (209 | ) | | 1,171 |
|
| Financing activities | | (2,288 | ) | | (1,507 | ) | | (1,662 | ) |
In 2015,2018, free cash flow decreased to $(48.0) millionremained relatively unchanged at $1.8 billion compared to $1.0 billion in 2014. The decrease is primarily due to the decrease in cash provided from operating activities as discussed below.2017. Free cash flow is a non-GAAP financial measure and reflects our cash flow provided by operating activities less capital expenditures and dividends and other payments paiddistributions to noncontrolling interests.interest holders. Capital expenditures include purchases of property and equipment and additions to technology projects. See “MDA – Reconciliation“Reconciliation of Non-GAAP Financial Information” below for a reconciliation of cash flow provided by operating activities, the most directly comparable U.S. GAAP financial measure, to free cash flow.flow and free cash flow excluding certain items.
Operating activities
Cash provided by operating activities decreased $1.0increased to $2.1 billion in 2018 as compared to $195 million$2.0 billion in 2015.2017. The decreaseincrease is mainly due to higher results from operations in 2018 and lower estimated income tax payments in 2018 due to the paymentreduction of the U.S. federal corporate tax rate as a result of the enactment of the TCJA, partially offset by legal settlement payments and regulatory settlements in 2015settlement payments following the resolution of $1.6 billion.tax audits.
Cash provided by operating activities increased $to $2.0 billion in 2017 as compared to $1.6 billion in 427 million2016. to $1.2 billion in 2014. The increase is mainly due to a tax refund received in the first quarter of 2014 related to an overpayment in 2013 andhigher results from operations, partially offset by the timing of our estimated tax payment which was made in the first quarter of 2013 as compared to the fourth quarter of 2012. Additionally, improved collections in 2014 impacting accounts receivable also contributed to the increase. These increases were partially offset by higher incentive payments in 2014 compared to 2013.payments.
Investing activities
Our cash outflows from investing activities are primarily for acquisitions and capital expenditures, while cash inflows are primarily proceeds from dispositions.
Cash used for investing activities increased to $2.5$0.5 billion for 2015 from $65 million2018 as compared to $0.2 billion in 2014,2017, primarily due to cash used for the acquisition of SNLKensho and the purchase of intellectual property in September of 2015.2018.
Cash used for investing activities decreased to $65 million$0.2 billion for 2014 from $130 million2017 as compared to cash provided by investing activities of $1.2 billion in 2013. This was2016. The decrease is primarily due to higher proceeds from dispositions in 2014 related to the sale of our data center to QTS and proceeds from the sale of the Company's aircraft. Additionally, lower capital expendituresJ.D. Power of $1.1 billion in 2014 compared to 2013 contributed to the decrease. These decreases were partially offset by a higher amount of cash paid for acquisitions in 2014 compared to 2013.2016.
Refer to Note 2 – Acquisitions and Divestitures to our consolidated financial statementsthe Consolidated Financial Statements and Supplementary Data, in the Annual Report on Form 10-K for further information.
Financing activities
Our cash outflows from financing activities consist primarily of share repurchases, dividends and repayment of short-term and long-term debt, while cash inflows are primarily inflows from long-term and short-term debt borrowings and proceeds from the exercise of stock options.
Cash provided by financing activities was $1.5 billion in 2015 compared to cash used for financing activities increased to $2.3 billion in 2018 from $1.5 billion in 2017. The increase is primarily attributable to higher cash paid for share repurchases in 2018.
Cash used for financing activities decreased to $1.5 billion in 2017 from $1.7 billion in 2016. The decrease is primarily attributable to higher repayments of $462 milliondebt and higher cash paid for share repurchases in 2014, driven2016, partially offset by proceeds from the issuance of senior notes in 2015, partially offset by an increase in cash used for the repurchase of treasury shares.
Cash used for financing activities decreased $1.3 billion to $462 million in 2014. This decrease is primarily attributable to a decrease in cash used for share repurchases and the repayment of short-term debt that occurred in the first quarter of 2013.2016.
During 2015,2018, we used cash to repurchase 9.88.4 million shares for $974$1.7 billion. We entered into an accelerated share repurchase ("ASR") agreement with a financial institution on October 29, 2018 to initiate share repurchases aggregating $500 million. We repurchased a total of 2.9 million atshares under the ASR agreement for an average purchase price paidof $173.80 per share. We entered into an ASR agreement with a financial institution on March 6, 2018 to initiate share repurchases aggregating $1 billion. We repurchased a total of $98.98, excluding commissions. An additional5.1 million shares under that ASR agreement for an average purchase price of $197.49 per share.
During 2017, we used cash to repurchase 6.8 million shares for $1.0 billion. We entered into an ASR agreement with a financial institution on August 1, 2017 to initiate share repurchases aggregating $500 million. We repurchased a total of 3.2 million shares under the ASR agreement for an average purchase price of $154.46 per share.
During 2016, we used cash to repurchase 10 million shares for $1.1 billion, which included 0.3 million shares were repurchased in the fourth quarter of 2015 for approximately $26 million whichthat settled in January of 2016. Including these additionalUsing a portion of the proceeds received from the sale of J.D. Power, we entered into an ASR agreement with a financial institution on September 7, 2016 to initiate share repurchases aggregating $750 million. We repurchased a total of 6.1 million shares we utilized cash to repurchase shares atunder the ASR agreement for an average purchase price of $99.00, excluding commissions.
During 2014, we used cash to repurchase 4.6 million shares for $362 million at an average price paid$122.18 per share of $79.02, excluding commissions. Included in the repurchase were 0.5 million shares of the Company's common stock from the personal holdings of Harold W. McGraw III, then Chairman of the Company's Board of Directors and former President and CEO of the Company ("Mr.
McGraw") The shares were purchased at a discount of 0.35% from the June 24, 2014 New York Stock Exchange closing price pursuant to a private transaction with Mr. McGraw. We repurchased these shares with cash for $41 million at an average price of $82.66 per share. This transaction was approved by the Nominating and Corporate Governance Committee of the Company's Board of Directors after consultation with members of the Financial Policy Committee.
During 2013, we used cash to repurchase 16.8 million shares for $978 million, including commissions. The average price per share, excluding commissions, was $58.36. An additional 0.1 million shares were repurchased in the fourth quarter of 2013 for approximately $10 million, which settled in January of 2014. Including these additional shares, we utilized cash to repurchase shares at an average price of $58.52, excluding commissions.
On December 4, 2013, the Board of Directors approved a new stockshare repurchase program authorizing the purchase of up to 50 million shares, (the “2013 Repurchase Program”), which was approximately 18% of the total shares of our outstanding common stock at that time. The 2013 Repurchase ProgramOur current repurchase program has no expiration date and purchases under this program may be made from time to time on the open market and in private transactions, depending on market conditions. As of December 31, 2015, 35.52018, 10.6 million shares remained available under the 2013 Repurchase Program.our current repurchase program.
We entered into an ASR agreement with a financial institution on February 11, 2019 to initiate share repurchases aggregating $500 million.
See Note 9 — Equity to the Consolidated Financial Statements and Supplementary Data, in the Annual Report on Form 10-K for further discussion related to our ASR agreements.
Additional Financing
We have the ability to borrow a total of $1.2 billion through our commercial paper program, which is supported by our revolving $1.2 billion five-year credit agreement (our "credit facility") that we entered into on June 30, 2017. This credit facility will terminate on June 30, 2022. There were no commercial paper borrowings outstanding as of December 31, 2018 and 2017.
Depending on our corporate credit rating, we pay a commitment fee of 8 to 17.5 basis points for our credit facility, whether or not amounts have been borrowed. We currently pay a commitment fee of 10 basis points. The interest rate on borrowings under our credit facility is, at our option, calculated using rates that are primarily based on either the prevailing London Inter-Bank Offer Rate, the prime rate determined by the administrative agent or the Federal Funds Rate. For certain borrowings under this credit facility, there is also a spread based on our corporate credit rating.
Our credit facility contains certain covenants. The only financial covenant requires that our indebtedness to cash flow ratio, as defined in our credit facility, is not greater than 4 to 1, and this covenant level has never been exceeded.
On August 8, 2018, Moody's Investors Service, Inc. upgraded our long-term debt ratings to A3 from Baa1, affirmed our P-2 short-term/commercial paper rating and the ratings outlook was maintained at stable. On October 12, 2018, Fitch Ratings upgraded our long-term debt rating to A- from BBB+, affirmed our F2 short-term/commercial paper rating and the ratings outlook was maintained at stable.
Dividends
On January 30, 2019, the Board of Directors approved an increase in the quarterly common stock dividend from $0.50 per share to $0.57 per share.
Contractual Obligations
We typically have various contractual obligations, which are recorded as liabilities in our consolidated balance sheets, while other items, such as certain purchase commitments and other executory contracts, are not recognized, but are disclosed herein. For example, we are contractually committed to contracts for information-technology outsourcing, certain enterprise-wide information-technology software licensing and maintenance and make certain minimum lease payments for the use of property under operating lease agreements.
We believe that the amount of cash and cash equivalents on hand, cash flow expected from operations and availability under our credit facility will be adequate for us to execute our business strategy and meet anticipated requirements for lease obligations, capital expenditures, working capital and debt service for 2019.
The following table summarizes our significant contractual obligations and commercial commitments as of December 31, 2018, over the next several years. Additional details regarding these obligations are provided in the notes to our consolidated financial statements, as referenced in the footnotes to the table:
|
| | | | | | | | | | | | | | | | | | | |
| (in millions) | Less than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 Years | | Total |
Debt: 1 | | | | | | | | |
|
|
| Principal payments | $ | — |
| | $ | 698 |
| | $ | — |
| | $ | 2,964 |
| | $ | 3,662 |
|
| Interest payments | 154 |
| | 277 |
| | 262 |
| | 1,096 |
| | 1,789 |
|
Operating leases 2 | 130 |
| | 187 |
| | 142 |
| | 400 |
| | 859 |
|
Purchase obligations and other 3 | 83 |
| | 57 |
| | 34 |
| | 49 |
| | 223 |
|
| Total contractual cash obligations | $ | 367 |
| | $ | 1,219 |
| | $ | 438 |
| | $ | 4,509 |
| | $ | 6,533 |
|
| |
1 | Our debt obligations are described in Note 5 – Debt to our consolidated financial statements. |
| |
2 | Amounts shown include taxes and escalation payments, see Note 13 – Commitments and Contingencies to our consolidated financial statements for further discussion on our operating lease obligations. |
| |
3 | Other consists primarily of commitments for unconditional purchase obligations in contracts for information-technology outsourcing and certain enterprise-wide information-technology software licensing and maintenance. |
As of December 31, 2018, we had $147 million of liabilities for unrecognized tax benefits. We have excluded the liabilities for unrecognized tax benefits from our contractual obligations table because, until formal resolutions are reached, reasonable estimates of the timing of cash settlements with the respective taxing authorities are not practicable.
As of December 31, 2018, we have recorded $1,620 million for our redeemable noncontrolling interest in our S&P Dow Jones Indices LLC partnership discussed in Note 9 – Equity to our consolidated financial statements. Specifically, this amount relates to the put option under the terms of the operating agreement of S&P Dow Jones Indices LLC, whereby, after December 31, 2017, CME Group and CME Group Index Services LLC ("CGIS") has the right at any time to sell, and we are obligated to buy, at least 20% of their share in S&P Dow Jones Indices LLC. We have excluded this amount from our contractual obligations table because we are uncertain as to the timing and the ultimate amount of the potential payment we may be required to make.
We make contributions to our pension and postretirement plans in order to satisfy minimum funding requirements as well as additional contributions that we consider appropriate to improve the funded status of our plans. During 2018, we contributed $9 million and $1 million to our retirement and postretirement plans, respectively. Expected employer contributions in 2019 are $46 million and $6 million for our retirement and postretirement plans, respectively. In 2019, we may elect to make additional non-required contributions depending on investment performance and the pension plan status. See Note 7 – Employee Benefits to our consolidated financial statements for further discussion.
Off-Balance Sheet Arrangements
As of December 31, 2018 and 2017, we did not have any material relationships with unconsolidated entities, such as entities often referred to as specific purpose or variable interest entities where we are the primary beneficiary, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such we are not exposed to any financial liquidity, market or credit risk that could arise if we had engaged in such relationships.
RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION
Free cash flow is a non-GAAP financial measure and reflects our cash flow provided by operating activities less capital expenditures and distributions to noncontrolling interest holders. Capital expenditures include purchases of property and equipment and additions to technology projects. Our cash flow provided by operating activities is the most directly comparable U.S. GAAP financial measure to free cash flow. Additionally, we have considered certain items in evaluating free cash flow, which are included in the table below.
We believe the presentation of free cash flow and free cash flow excluding certain items allows our investors to evaluate the cash generated from our underlying operations in a manner similar to the method used by management. We use free cash flow to conduct and evaluate our business because we believe it typically presents a more conservative measure of cash flows since capital expenditures and distributions to noncontrolling interest holders are considered a necessary component of ongoing operations. Free cash flow is useful for management and investors because it allows management and investors to evaluate the cash available to us to prepay debt, make strategic acquisitions and investments and repurchase stock.
The presentation of free cash flow and free cash flow excluding certain items are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP. Free cash flow, as we calculate it, may not be comparable to similarly titled measures employed by other companies. The following table presents a reconciliation of our cash flow provided by operating activities to free cash flow excluding the impact of the items below:
|
| | | | | | | | | | | | | | | | |
| (in millions) | | Year ended December 31, | | % Change |
| | | 2018 | | 2017 | | 2016 | | ’18 vs ’17 | | ’17 vs ’16 |
| Cash provided by operating activities | | $ | 2,064 |
| | $ | 2,016 |
| | $ | 1,560 |
| | 2% |
| 29% |
| Capital expenditures | | (113 | ) | | (123 | ) | | (115 | ) | |
| |
|
| Distributions to noncontrolling interest holders | | (154 | ) | | (111 | ) | | (116 | ) | |
| |
|
| Free cash flow | | $ | 1,797 |
|
| $ | 1,782 |
| | $ | 1,329 |
| | 1% | | 34% |
| Tax on gain from sale of J.D. Power | | — |
| | — |
| | 200 |
| | | | |
| Tax on gain from sale of SPSE and CMA | | — |
| | 67 |
| | — |
| | | | |
| Payment of legal settlements | | 180 |
| | 4 |
| | 150 |
| |
| |
|
| Legal settlement insurance recoveries | | — |
| | — |
| | (77 | ) | |
| |
|
| Settlement of prior-year tax audits | | 73 |
| | — |
| | — |
| | | | |
| Tax benefit from legal settlements | | (44 | ) | | (2 | ) | | (24 | ) | |
| |
|
| Free cash flow excluding above items | | $ | 2,006 |
| | $ | 1,851 |
| | $ | 1,578 |
| | 8% | | 17% |
|
| | | | | | | | | | | | | |
| (in millions) | 2018 | | 2017 | | 2016 | | ’18 vs ’17 | | ’17 vs ’16 |
| Cash (used for) provided by investing activities | (513 | ) | | (209 | ) | | 1,171 |
| | N/M |
| | N/M |
| Cash used for financing activities | (2,288 | ) | | (1,507 | ) | | (1,662 | ) | | 52 | % | | (9)% |
N/M - not meaningful
CRITICAL ACCOUNTING ESTIMATES
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.
On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowance for doubtful accounts, valuation of long-lived assets, goodwill and other intangible assets, pension plans, incentive compensation and stock-based compensation, income taxes, contingencies and redeemable noncontrolling interests. We base our estimates on historical experience, current developments and on various other assumptions that we believe to be reasonable under these circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that cannot readily be determined from other sources. There can be no assurance that actual results will not differ from those estimates.
Management considers an accounting estimate to be critical if it required assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate or different estimates could have a material effect on our results of operations. Management has discussed the development and selection of our critical accounting estimates with the Audit Committee of our Board of Directors. The Audit Committee has reviewed our disclosure relating to them in this MD&A.
We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements:
Revenue recognition
We adopted Financial Accounting Standards Board Accounting Standards Codification ("ASC") 606 "Revenue from Contracts with Customers" using the modified retrospective transition method applied to our revenue contracts with customers as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior year amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605 "Revenue Recognition". We recorded a net increase to opening retained earnings of $35 million as of January 1, 2018 due to the cumulative effect of adopting ASC 606, with the impact primarily related to our treatment of costs to obtain a contract and to a lesser extent, changes to the timing of the recognition of our subscription and non-transaction revenues. We recognized incremental revenue of $6 million for the year ended December 31, 2018 as a result of the adoption of this standard.
Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. Under ASC 605, revenue was recognized as it was earned and when services were rendered. See Note 1 - Accounting Policies to our consolidated financial statements for further information.
Allowance for doubtful accounts
The allowance for doubtful accounts reserve methodology is based on historical analysis, a review of outstanding balances and current conditions. In determining these reserves, we consider, amongst other factors, the financial condition and risk profile of our customers, areas of specific or concentrated risk as well as applicable industry trends or market indicators. The impact on operating profit for a one percentage point change in the allowance for doubtful accounts is approximately $15 million.
For the years ended December 31, 2018, 2017 and 2016, there were no material changes in our assumptions regarding the determination of the allowance for doubtful accounts. Based on our current outlook these assumptions are not expected to significantly change in 2019.
Accounting for the impairment of long-lived assets (including other intangible assets)
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Upon such an occurrence, recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to current forecasts of undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized equal to the amount by which the carrying amount of the asset exceeds the fair value of the asset. For long-lived assets held for sale, assets are written down to fair value, less cost to sell. Fair value is determined based on market evidence, discounted cash flows, appraised values or management’s estimates, depending upon the nature of the assets.
For the year ended December 31, 2016, we recorded a non-cash impairment charge of $24 million related to a technology project at our Market Intelligence segment in selling and general expenses in our consolidated statement of income.
Goodwill and indefinite-lived intangible assets
Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. As of December 31, 2018 and 2017, the carrying value of goodwill and other indefinite-lived intangible assets was $4.4 billion and $3.7 billion, respectively. Goodwill and other intangible assets with indefinite lives are not amortized, but instead are tested for impairment annually during the fourth quarter each year or more frequently if events or changes in circumstances indicate that the asset might be impaired.
Goodwill
As part of our annual impairment test of our four reporting units, we initially perform a qualitative analysis evaluating whether any events and circumstances occurred that provide evidence that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount. Reporting units are generally an operating segment or one level below an operating segment. Our qualitative assessment included, but was not limited to, consideration of macroeconomic conditions, industry and market conditions, cost factors, cash flows, changes in key Company personnel and our share price. If, based on our evaluation of the events and circumstances that occurred during the year we do not believe that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount, no quantitative impairment test is performed. Conversely, if the results of our qualitative assessment determine that it is more likely than not that the fair value of any of our reporting units is less than its respective carrying amount we perform a two-step quantitative impairment test. For 2018, based on our qualitative assessments, we determined that it is more likely than not that our reporting units’ fair values were greater than their respective carrying amounts.
If the fair value of the reporting unit is less than the carrying value, a second step is performed which compares the implied fair value of the reporting unit's goodwill to the carrying value of the goodwill. The implied fair value of the goodwill is determined based on the difference between the fair value of the reporting unit and the net fair value of the identifiable assets and liabilities of the reporting unit. If the implied fair value of the goodwill is less than the carrying value, the difference is recognized as an impairment charge.
Indefinite-Lived Intangible Assets
We evaluate the recoverability of indefinite-lived intangible assets by first performing a qualitative analysis evaluating whether any events and circumstances occurred that provide evidence that it is more likely than not that the indefinite-lived asset is impaired. If, based on our evaluation of the events and circumstances that occurred during the year we do not believe that it is more likely than not that the indefinite-lived asset is impaired, no quantitative impairment test is performed. Conversely, if the results of our qualitative assessment determine that it is more likely than not that the indefinite-lived asset is impaired, a quantitative impairment test is performed. If necessary, the impairment test is performed by comparing the estimated fair value of the intangible asset to its carrying value. If the indefinite-lived intangible asset carrying value exceeds its fair value, an impairment analysis is performed using the income approach. The fair value of loss is recognized in an amount equal to that excess. Significant judgments inherent in these analyses include estimating the amount and timing of future cash flows and the selection of appropriate discount rates, royalty rates and long-term growth rate assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for this indefinite-lived intangible asset and could result in an impairment charge, which could be material to our financial position and results of operations.
We performed our impairment assessment of goodwill and indefinite-lived intangible assets and concluded that no impairment existed for the years ended December 31, 2018, 2017, and 2016.
Retirement plans and postretirement healthcare and other benefits
Our employee pension and other postretirement benefit costs and obligations are dependent on assumptions concerning the outcome of future events and circumstances, including compensation increases, long-term return on pension plan assets, healthcare cost trends, discount rates and other factors. In determining such assumptions, we consult with outside actuaries and other advisors where deemed appropriate. In accordance with relevant accounting standards, if actual results differ from our assumptions, such differences are deferred and amortized over the estimated remaining lifetime of the plan participants. While we believe that the assumptions used in these calculations are reasonable, differences in actual experience or changes in assumptions could affect the expense and liabilities related to our pension and other postretirement benefits.
The following is a discussion of some significant assumptions that we make in determining costs and obligations for pension and other postretirement benefits:
Discount rate assumptions are based on current yields on high-grade corporate long-term bonds.
Healthcare cost trend assumptions are based on historical market data, the near-term outlook and an assessment of likely long-term trends.
The expected return on assets assumption is calculated based on the plan’s asset allocation strategy and projected market returns over the long-term.
Our discount rate and return on asset assumptions used to determine the net periodic pension and postretirement benefit cost on our U.S. retirement plans are as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | Retirement Plans | | Postretirement Plans |
| January 1 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Discount rate | | 4.40 | % | | 3.68 | % | | 4.14 | % | | 4.15 | % | | 3.40 | % | | 3.69 | % |
| Return on assets | | 6.00 | % | | 6.00 | % | | 6.25 | % | | | | | | |
| Weighted-average healthcare cost rate | | | | | | | | 6.50 | % | | 6.50 | % | | 7.00 | % |
Stock-based compensation
Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized over the requisite service period, which typically is the vesting period. Stock-based compensation is classified as both operating-related expense and selling and general expense in our consolidated statements of income.
We use a lattice-based option-pricing model to estimate the fair value of options granted. The following assumptions were used in valuing the options granted:
|
| | | | |
| | | Year Ended |
| | | December 31, 2018 |
| Risk-free average interest rate | | 2.6 - 2.7% |
|
| Dividend yield | | 1.1 | % |
| Volatility | | 21.8 - 22.0% |
|
| Expected life (years) | | 5.67 - 6.07 |
|
| Weighted-average grant-date fair value per option | | $ | 112.98 |
|
Because lattice-based option-pricing models incorporate ranges of assumptions, those ranges are disclosed. These assumptions are based on multiple factors, including historical exercise patterns, post-vesting termination rates, expected future exercise patterns and the expected volatility of our stock price. The risk-free interest rate is the imputed forward rate based on the U.S. Treasury yield at the date of grant. We use the historical volatility of our stock price over the expected term of the options to estimate the expected volatility. The expected term of options granted is derived from the output of the lattice model and represents the period of time that options granted are expected to be outstanding.
In 2018, we made a one-time issuance of incentive stock options in connection with our acquisition of Kensho in April of 2018. There were no stock options granted in 2017 and 2016.
Income taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize liabilities for uncertain tax positions taken or expected to be taken in income tax returns. Accrued interest and penalties related to unrecognized tax benefits are recognized in interest expense and operating expense, respectively.
Judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and unrecognized tax benefits. In determining the need for a valuation allowance, the historical and projected financial performance of the operation that is recording a net deferred tax asset is considered along with any other pertinent information.
We file income tax returns in the U.S. federal jurisdiction, various states, and foreign jurisdictions, and we are routinely under audit by many different tax authorities. We believe that our accrual for tax liabilities is adequate for all open audit years based on our assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. It is possible that examinations will be settled prior to December 31, 2019. If any of these tax audit settlements do occur within that period we would make any necessary adjustments to the accrual for unrecognized tax benefits.
As of December 31, 2018, we have approximately $2.3 billion of undistributed earnings of our foreign subsidiaries, of which $784 million is reinvested indefinitely in our foreign operations.
Contingencies
We are subject to a number of lawsuits and claims that arise in the ordinary course of business. We recognize a liability for such contingencies when both (a) information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements and (b) the amount of loss can reasonably be estimated. We continually assess the likelihood of any adverse judgments or outcomes to our contingencies, as well as potential amounts or ranges of probable losses, and recognize a liability, if any, for these contingencies based on an analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Because many of these matters are resolved over long periods of time, our estimate of liabilities may change due to new developments, changes in assumptions or changes in our strategy related to the matter. When we accrue for loss contingencies and the reasonable estimate of the loss is within a range, we record its best estimate within the range. We disclose an estimated possible loss or a range of loss when it is at least reasonably possible that a loss may have been incurred.
Redeemable Noncontrolling Interest
The fair value component of the redeemable noncontrolling interest in Indices business is based on a combination of an income and market valuation approach. Our income and market valuation approaches may incorporate Level 3 measures for instances when observable inputs are not available, including assumptions related to expected future net cash flows, long-term growth rates, the timing and nature of tax attributes, and the redemption features.
RECENTACCOUNTING STANDARDS
See Note 1 – Accounting Policies to our consolidated financial statements for a detailed description of recent accounting standards. We expect the adoption of these recent accounting standards to have a material impact on our consolidated balance sheet; however, we do not expect that these standards will have a material impact on our consolidated statements of income or cash flows.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk includes changes in foreign exchange rates. We have operations in various foreign countries where the functional currency is primarily the local currency. For international operations that are determined to be extensions of the parent company, the U.S. dollar is the functional currency. We typically have naturally hedged positions in most countries from a local currency perspective with offsetting assets and liabilities. During the years ended December 31, 2018 and 2017, we entered into foreign exchange forward contracts in order to mitigate the change in fair value of specific assets and liabilities in the consolidated balance sheet. These forward contracts are not designated as hedges and do not qualify for hedge accounting. During the years ended December 31, 2018, 2017 and 2016, we entered into foreign exchange forward contracts to hedge the effect of adverse fluctuations in foreign currency exchange rates. We have not entered into any derivative financial instruments for speculative purposes. See Note 6 – Derivative Instruments to the Consolidated Financial Statements and Supplementary Data, in the Annual Report on Form 10-K for further discussion.
Item 8. Consolidated Financial Statements and Supplementary Data
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of S&P Global Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of S&P Global Inc. (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 12, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ ERNST & YOUNG LLP
We have served as the Company’s auditor since 1969.
New York, New York
February 12, 2019
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of S&P Global Inc.
Opinion on Internal Control over Financial Reporting
We have audited S&P Global Inc.’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, S&P Global Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of S&P Global Inc. as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in Item 15(a)(2) and our report dated February 12, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ ERNST & YOUNG LLP
New York, New York
February 12, 2019
Consolidated Statements of Income
|
| | | | | | | | | | | |
| (in millions, except per share data) | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Revenue | $ | 6,258 |
| | $ | 6,063 |
| | $ | 5,661 |
|
| Expenses: | | | | | |
| Operating-related expenses | 1,701 |
| | 1,695 |
| | 1,773 |
|
| Selling and general expenses | 1,561 |
| | 1,605 |
| | 1,467 |
|
| Depreciation | 84 |
| | 82 |
| | 85 |
|
| Amortization of intangibles | 122 |
| | 98 |
| | 96 |
|
| Total expenses | 3,468 |
| | 3,480 |
| | 3,421 |
|
| Gain on dispositions | — |
| | — |
| | (1,101 | ) |
| Operating profit | 2,790 |
| | 2,583 |
| | 3,341 |
|
| Other income, net | (25 | ) | | (27 | ) | | (28 | ) |
| Interest expense, net | 134 |
| | 149 |
| | 181 |
|
| Income before taxes on income | 2,681 |
| | 2,461 |
| | 3,188 |
|
| Provision for taxes on income | 560 |
| | 823 |
| | 960 |
|
| Net income | 2,121 |
| | 1,638 |
| | 2,228 |
|
| Less: net income attributable to noncontrolling interests | (163 | ) | | (142 | ) | | (122 | ) |
| Net income attributable to S&P Global Inc. | $ | 1,958 |
| | $ | 1,496 |
| | $ | 2,106 |
|
| | | | | | |
| Earnings per share attributable to S&P Global Inc. common shareholders: | | | | | |
| Net income: | | | | | |
| Basic | $ | 7.80 |
| | $ | 5.84 |
| | $ | 8.02 |
|
| Diluted | $ | 7.73 |
| | $ | 5.78 |
| | $ | 7.94 |
|
| Weighted-average number of common shares outstanding: | | | | | |
| Basic | 250.9 |
| | 256.3 |
| | 262.8 |
|
| Diluted | 253.2 |
| | 258.9 |
| | 265.2 |
|
| | | | | | |
| Actual shares outstanding at year end | 248.4 |
| | 253.7 |
| | 258.3 |
|
| | | | | | |
| Dividend declared per common share | $ | 2.00 |
| | $ | 1.64 |
| | $ | 1.44 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Comprehensive Income
|
| | | | | | | | | | | |
| (in millions) | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Net income | $ | 2,121 |
| | $ | 1,638 |
| | $ | 2,228 |
|
| Other comprehensive income: | | | | | |
| Foreign currency translation adjustment | (96 | ) | | 93 |
| | (132 | ) |
| Income tax effect | (4 | ) | | — |
| | (7 | ) |
| | (100 | ) | | 93 |
| | (139 | ) |
| | | | | | |
| Pension and other postretirement benefit plans | (14 | ) | | 52 |
| | (27 | ) |
| Income tax effect | 9 |
| | (11 | ) | | (10 | ) |
| | (5 | ) | | 41 |
| | (37 | ) |
| | | | | | |
| Unrealized gain (loss) on investment and forward exchange contracts | 2 |
| | (10 | ) | | 4 |
|
| Income tax effect | — |
| | — |
| | (1 | ) |
| | 2 |
| | (10 | ) | | 3 |
|
| | | | | | |
| Comprehensive income | 2,018 |
| | 1,762 |
| | 2,055 |
|
| Less: comprehensive income attributable to nonredeemable noncontrolling interests | (12 | ) | | (13 | ) | | (13 | ) |
| Less: comprehensive income attributable to redeemable noncontrolling interests | (151 | ) | | (129 | ) | | (109 | ) |
| Comprehensive income attributable to S&P Global Inc. | $ | 1,855 |
| | $ | 1,620 |
| | $ | 1,933 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Balance Sheets
|
| | | | | | | |
| (in millions) | December 31, |
| | 2018 | | 2017 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,917 |
| | $ | 2,777 |
|
| Restricted cash | 41 |
| | 2 |
|
| Short-term investments | 18 |
| | 12 |
|
| Accounts receivable, net of allowance for doubtful accounts: 2018- $34 ; 2017 - $33 | 1,449 |
| | 1,319 |
|
| Prepaid and other current assets | 179 |
| | 214 |
|
| Total current assets | 3,604 |
| | 4,324 |
|
| Property and equipment: | | | |
| Buildings and leasehold improvements | 372 |
| | 354 |
|
| Equipment and furniture | 494 |
| | 475 |
|
| Total property and equipment | 866 |
| | 829 |
|
| Less: accumulated depreciation | (596 | ) | | (554 | ) |
| Property and equipment, net | 270 |
| | 275 |
|
| Goodwill | 3,535 |
| | 2,989 |
|
| Other intangible assets, net | 1,524 |
| | 1,388 |
|
| Other non-current assets | 525 |
| | 449 |
|
| Total assets | $ | 9,458 |
| | $ | 9,425 |
|
| LIABILITIES AND EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 211 |
| | $ | 195 |
|
| Accrued compensation and contributions to retirement plans | 354 |
| | 472 |
|
| Short-term debt | — |
| | 399 |
|
| Income taxes currently payable | 72 |
| | 77 |
|
| Unearned revenue | 1,641 |
| | 1,613 |
|
| Accrued legal and regulatory settlements | 1 |
| | 107 |
|
| Other current liabilities | 350 |
| | 351 |
|
| Total current liabilities | 2,629 |
| | 3,214 |
|
| Long-term debt | 3,662 |
| | 3,170 |
|
| Pension and other postretirement benefits | 229 |
| | 244 |
|
| Other non-current liabilities | 634 |
| | 679 |
|
| Total liabilities | 7,154 |
| | 7,307 |
|
| Redeemable noncontrolling interest | 1,620 |
| | 1,352 |
|
| Commitments and contingencies (Note 13) |
| |
|
| Equity: | | | |
| Common stock, $1 par value: authorized - 600 million shares; issued: 2018 - 294 million shares; 2017 - 412 million shares | 294 |
| | 412 |
|
| Additional paid-in capital | 833 |
| | 525 |
|
| Retained income | 11,284 |
| | 10,023 |
|
| Accumulated other comprehensive loss | (742 | ) | | (649 | ) |
| Less: common stock in treasury - at cost: 2018 - 45 million shares; 2017 - 158 million shares | (11,041 | ) | | (9,602 | ) |
| Total equity – controlling interests | 628 |
| | 709 |
|
| Total equity – noncontrolling interests | 56 |
| | 57 |
|
| Total equity | 684 |
| | 766 |
|
| Total liabilities and equity | $ | 9,458 |
| | $ | 9,425 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Cash Flows
|
| | | | | | | | | | | |
| (in millions) | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Operating Activities: | | | | | |
| Net income | $ | 2,121 |
| | $ | 1,638 |
| | $ | 2,228 |
|
| Adjustments to reconcile net income to cash provided by operating activities: | | | | | |
| Depreciation | 84 |
| | 82 |
| | 85 |
|
| Amortization of intangibles | 122 |
| | 98 |
| | 96 |
|
| Provision for losses on accounts receivable | 21 |
| | 16 |
| | 9 |
|
| Deferred income taxes | 81 |
| | — |
| | 79 |
|
| Stock-based compensation | 94 |
| | 99 |
| | 76 |
|
| Gain on dispositions | — |
| | — |
| | (1,101 | ) |
| Accrued legal settlements | 1 |
| | 55 |
| | 54 |
|
| Other | 52 |
| | 96 |
| | 30 |
|
| Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: | | | | | |
| Accounts receivable | (164 | ) | | (196 | ) | | (177 | ) |
| Prepaid and other current assets | (1 | ) | | 10 |
| | 5 |
|
| Accounts payable and accrued expenses | (106 | ) | | 75 |
| | 19 |
|
| Unearned revenue | 70 |
| | 85 |
| | 107 |
|
| Accrued legal settlements | (108 | ) | | (4 | ) | | (150 | ) |
| Other current liabilities | (67 | ) | | (85 | ) | | (19 | ) |
| Net change in prepaid/accrued income taxes | (7 | ) | | 32 |
| | 174 |
|
| Net change in other assets and liabilities | (129 | ) | | 15 |
| | 45 |
|
| Cash provided by operating activities | 2,064 |
| | 2,016 |
| | 1,560 |
|
| Investing Activities: | | | | | |
| Capital expenditures | (113 | ) | | (123 | ) | | (115 | ) |
| Acquisitions, net of cash acquired | (401 | ) | | (83 | ) | | (177 | ) |
| Contingent consideration payment | — |
| | — |
| | (34 | ) |
| Proceeds from dispositions | 6 |
| | 2 |
| | 1,498 |
|
| Changes in short-term investments | (5 | ) | | (5 | ) | | (1 | ) |
| Cash (used for) provided by investing activities | (513 | ) | | (209 | ) | | 1,171 |
|
| Financing Activities: | | | | | |
| Payments on short-term debt, net | — |
| | — |
| | (143 | ) |
| Proceeds from issuance of senior notes, net | 489 |
| | — |
| | 493 |
|
| Payments on senior notes | (403 | ) | | — |
| | (421 | ) |
| Dividends paid to shareholders | (503 | ) | | (421 | ) | | (380 | ) |
| Distributions to noncontrolling interest holders | (154 | ) | | (111 | ) | | (116 | ) |
| Repurchase of treasury shares | (1,660 | ) | | (1,001 | ) | | (1,123 | ) |
| Exercise of stock options | 34 |
| | 75 |
| | 88 |
|
| Contingent consideration payment | — |
| | — |
| | (5 | ) |
| Purchase of additional CRISIL shares | (25 | ) | | — |
| | — |
|
| Employee withholding tax on share-based payments | (66 | ) | | (49 | ) | | (55 | ) |
| Cash used for financing activities | (2,288 | ) | | (1,507 | ) | | (1,662 | ) |
| Effect of exchange rate changes on cash | (84 | ) | | 87 |
| | (158 | ) |
| Net change in cash, cash equivalents, and restricted cash | (821 | ) | | 387 |
| | 911 |
|
| Cash, cash equivalents, and restricted cash at beginning of year | 2,779 |
| | 2,392 |
| | 1,481 |
|
| Cash, cash equivalents, and restricted cash at end of year | $ | 1,958 |
| | $ | 2,779 |
| | $ | 2,392 |
|
| Cash paid during the year for: | | | | | |
| Interest | $ | 151 |
| | $ | 139 |
| | $ | 150 |
|
| Income taxes | $ | 558 |
| | $ | 709 |
| | $ | 683 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Equity
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Common Stock $1 par | | Additional Paid-in Capital | | Retained Income | | Accumulated
Other Comprehensive Loss | | Less: Treasury Stock | | Total SPGI Equity | | Noncontrolling Interests | | Total Equity |
| Balance as of December 31, 2015 | $ | 412 |
| | $ | 475 |
| | $ | 7,636 |
| | $ | (600 | ) | | $ | 7,729 |
| | $ | 194 |
| | $ | 49 |
| | $ | 243 |
|
Comprehensive income 1 | | | | | 2,106 |
| | (173 | ) | | | | 1,933 |
| | 13 |
| | 1,946 |
|
| Dividends | | | | | (380 | ) | | | | | | (380 | ) | | (10 | ) | | (390 | ) |
| Share repurchases | | |
|
| | | | | | 1,097 |
| | (1,097 | ) | |
| | (1,097 | ) |
| Employee stock plans, net of tax benefit | | | 27 |
| | | | | | (125 | ) | | 152 |
| | | | 152 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | (153 | ) | | | | | | (153 | ) | | | | (153 | ) |
| Other | | | | | 1 |
| | | | | | 1 |
| | (1 | ) | | — |
|
| Balance as of December 31, 2016 | $ | 412 |
| | $ | 502 |
| | $ | 9,210 |
| | $ | (773 | ) | | $ | 8,701 |
| | $ | 650 |
| | $ | 51 |
| | $ | 701 |
|
Comprehensive income 1 | | | | | 1,496 |
| | 124 |
| | | | 1,620 |
| | 15 |
| | 1,635 |
|
| Dividends | | | | | (421 | ) | | | | | | (421 | ) | | (10 | ) | | (431 | ) |
| Share repurchases | | |
| | | | | | 1,001 |
| | (1,001 | ) | | (5 | ) | | (1,006 | ) |
| Employee stock plans | | | 23 |
| | | | | | (100 | ) | | 123 |
| | 8 |
| | 131 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | (260 | ) | | | | | | (260 | ) | | | | (260 | ) |
| Other | | | | | (2 | ) | | | | | | (2 | ) | | (2 | ) | | (4 | ) |
| Balance as of December 31, 2017 | $ | 412 |
| | $ | 525 |
| | $ | 10,023 |
| | $ | (649 | ) | | $ | 9,602 |
| | $ | 709 |
| | $ | 57 |
| | $ | 766 |
|
Comprehensive income 1 | | | | | 1,958 |
| | (103 | ) | | | | 1,855 |
| | 12 |
| | 1,867 |
|
| Dividends | | | | | (503 | ) | | | | | | (503 | ) | | (11 | ) | | (514 | ) |
| Share repurchases | | | (75 | ) | | | | | | 1,585 |
| | (1,660 | ) | |
| | (1,660 | ) |
| Retirement of common stock | (118 | ) | | | | | | | | (118 | ) | | — |
| | | | — |
|
| Employee stock plans | | | 56 |
| | | | | | (28 | ) | | 84 |
| |
| | 84 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | (228 | ) | | | | | | (228 | ) | | | | (228 | ) |
| Increase in CRISIL ownership | | | (25 | ) | | | | | | | | (25 | ) | | 2 |
| | (23 | ) |
| Stock consideration for Kensho | | | 352 | | | | | | | | 352 |
| | | | 352 |
|
| Other | | | | | 34 |
| 2 |
| 10 |
| 2 |
| | | 44 |
| | (4 | ) | | 40 |
|
| Balance as of December 31, 2018 | $ | 294 |
| | $ | 833 |
| | $ | 11,284 |
| | $ | (742 | ) | | $ | 11,041 |
| | $ | 628 |
| | $ | 56 |
| | $ | 684 |
|
| |
1 | Excludes $151 million, $129 million and $109 million in 2018, 2017 and 2016, respectively, attributable to redeemable noncontrolling interest. |
| |
2 | Includes opening balance sheet adjustments related to the adoption of the new revenue recognition standard and the reclassification of the unrealized loss on investments from Accumulated other comprehensive loss to Retained income. See Note 1 —Accounting Policies for additional details. |
See accompanying notes to the consolidated financial statements.
Notes to the Consolidated Financial Statements
1. Accounting Policies
Nature of operations
S&P Global Inc. (together with its consolidated subsidiaries, the “Company,” the “Registrant,” “we,” “us” or “our”) is a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide. The capital markets include asset managers, investment banks, commercial banks, insurance companies, exchanges, trading firms and issuers; and the commodity markets include producers, traders and intermediaries within energy, metals, petrochemicals and agriculture.
Our operations consist of four reportable segments: S&P Global Ratings ("Ratings"), S&P Global Market Intelligence ("Market Intelligence"), S&P Global Platts ("Platts") and S&P Dow Jones Indices ("Indices").
Ratings is an independent provider of credit ratings, research and analytics, offering investors and other market participants information, ratings and benchmarks.
Market Intelligence is a global provider of multi-asset-class data, research and analytical capabilities, which integrate cross-asset analytics and desktop services.
Platts is the leading independent provider of information and benchmark prices for the commodity and energy markets. We completed the sale of J.D. Power on September 7, 2016, with the results included in Platts results through that date.
Indices is a global index provider that maintains a wide variety of valuation and index benchmarks for investment advisors, wealth managers and institutional investors.
In April of 2018, we acquired Kensho Technologies Inc. ("Kensho") for approximately $550 million, net of cash acquired, in a mix of cash and stock. The results of Kensho, an operating segment of the Company, are included in Corporate revenue and Corporate Unallocated for financial reporting purposes. Restricted cash of $32 million included in our consolidated balance sheet as of December 31, 2018 includes amounts held in escrow accounts in connection with our acquisition of Kensho. See Note 2 —Acquisitions and Divestitures for additional information and Note 12 – Segment and Geographic Information for further discussion on our reportable segments.
In January of 2018, we adopted Financial Accounting Standards Board Accounting Standards Codification ("ASC") 606 as discussed below.
Adoption of ASC 606, “Revenue from Contracts with Customers”
We adopted ASC 606 "Revenue from Contracts with Customers" using the modified retrospective transition method applied to our revenue contracts with customers as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior year amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605 "Revenue Recognition". We recorded a net increase to opening retained earnings of $35 million as of January 1, 2018 due to the cumulative effect of adopting ASC 606, with the impact primarily related to our treatment of costs to obtain a contract and to a lesser extent, changes to the timing of the recognition of our subscription and non-transaction revenues. We recognized incremental revenue of $6 million for the year ended December 31, 2018 as a result of the adoption of this standard.
Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. Under ASC 605, revenue was recognized as it was earned and when services were rendered.
The following table presents our revenue disaggregated by revenue type for the years ended December 31:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Ratings | | Market Intelligence | | Platts | | Indices | | Corporate | | Intersegment Elimination 1 | | Total |
| | | | | | | | | | | | | | |
| | 2018 |
| Subscription | $ | — |
| | $ | 1,773 |
| | $ | 750 |
| | $ | 144 |
| | $ | 15 |
| | $ | — |
| | $ | 2,682 |
|
| Non-transaction | 1,506 |
| | — |
| | — |
| | — |
| | — |
| | (125 | ) | | 1,381 |
|
| Non-subscription / Transaction | 1,377 |
| | 40 |
| | 11 |
| | — |
| | — |
| | — |
| | 1,428 |
|
| Asset-linked fees | — |
| | 20 |
| | — |
| | 522 |
| | — |
| | — |
| | 542 |
|
| Sales usage-based royalties | — |
| | — |
| | 54 |
| | 171 |
| | — |
| | — |
| | 225 |
|
| Total revenue | $ | 2,883 |
| | $ | 1,833 |
| | $ | 815 |
| | $ | 837 |
| | $ | 15 |
| | $ | (125 | ) | | $ | 6,258 |
|
| | | | | | | | | | | | | | |
| Timing of revenue recognition | | | | | | | | | | | | | |
| Services transferred at a point in time | $ | 1,377 |
| | $ | 40 |
| | $ | 11 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,428 |
|
| Services transferred over time | 1,506 |
| | 1,793 |
| | 804 |
| | 837 |
| | 15 |
| | (125 | ) | | 4,830 |
|
| Total revenue | $ | 2,883 |
| | $ | 1,833 |
| | $ | 815 |
| | $ | 837 |
| | $ | 15 |
| | $ | (125 | ) | | $ | 6,258 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Ratings | | Market Intelligence | | Platts | | Indices | | Corporate | | Intersegment Elimination 1 | | Total |
| | | | | | | | | | | | | | |
| | 2017 2 |
| Subscription | $ | — |
| | $ | 1,614 |
| | $ | 704 |
| | $ | 136 |
| | $ | — |
| | $ | — |
| | $ | 2,454 |
|
| Non-transaction | 1,448 |
| | — |
| | — |
| | — |
| | — |
| | (110 | ) | | 1,338 |
|
| Non-subscription / Transaction | 1,540 |
| | 46 |
| | $ | 13 |
| | — |
| | — |
| | — |
| | 1,599 |
|
| Asset-linked fees | — |
| | 23 |
| | — |
| | 461 |
| | — |
| | — |
| | 484 |
|
| Sales usage-based royalties | — |
| | — |
| | 57 |
| | 131 |
| | — |
| | — |
| | 188 |
|
| Total revenue | $ | 2,988 |
| | $ | 1,683 |
| | $ | 774 |
| | $ | 728 |
| | $ | — |
| | $ | (110 | ) | | $ | 6,063 |
|
| | | | | | | | | | | | | | |
| Timing of revenue recognition | | | | | | | | | | | | | |
| Services transferred at a point in time | $ | 1,540 |
| | $ | 46 |
| | $ | 13 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,599 |
|
| Services transferred over time | 1,448 |
| | 1,637 |
| | 761 |
| | 728 |
| | — |
| | (110 | ) | | 4,464 |
|
| Total revenue | $ | 2,988 |
| | $ | 1,683 |
| | $ | 774 |
| | $ | 728 |
| | $ | — |
| | $ | (110 | ) | | $ | 6,063 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Ratings | | Market Intelligence | | Platts | | Indices | | Corporate | | Intersegment Elimination 1 | | Total |
| | | | | | | | | | | | | | |
| | 2016 2 |
| Subscription | $ | — |
| | $ | 1,543 |
| | $ | 689 |
| | $ | 132 |
| | $ | — |
| | $ | — |
| | $ | 2,364 |
|
| Non-transaction | 1,357 |
| | — |
| | — |
| | — |
| | — |
| | (98 | ) | | 1,259 |
|
| Non-subscription / Transaction | 1,178 |
| | 99 |
| | 183 |
| | — |
| | — |
| | — |
| | 1,460 |
|
| Asset-linked fees | — |
| | 19 |
| | — |
| | 381 |
| | — |
| | — |
| | 400 |
|
| Sales usage-based royalties | — |
| | — |
| | 53 |
| | 125 |
| | — |
| | — |
| | 178 |
|
| Total revenue | $ | 2,535 |
| | $ | 1,661 |
| | $ | 925 |
| | $ | 638 |
| | $ | — |
| | $ | (98 | ) | | $ | 5,661 |
|
| | | | | | | | | | | | | | |
| Timing of revenue recognition | | | | | | | | | | | | | |
| Services transferred at a point in time | $ | 1,178 |
| | $ | 99 |
| | $ | 183 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,460 |
|
| Services transferred over time | 1,357 |
| | 1,562 |
| | 742 |
| | 638 |
| | — |
| | (98 | ) | | 4,201 |
|
| Total revenue | $ | 2,535 |
| | $ | 1,661 |
| | $ | 925 |
| | $ | 638 |
| | $ | — |
| | $ | (98 | ) | | $ | 5,661 |
|
| |
1 | Intersegment eliminations mainly consists of a royalty charged to Market Intelligence for the rights to use and distribute content and data developed by Ratings. |
| |
2 | As noted above, amounts for the years ended December 31, 2017 and 2016 were not adjusted under the modified retrospective transition method applied to our revenue contracts with customers as of January 1, 2018. |
Subscription revenue
Subscription revenue at Market Intelligence is primarily derived from distribution of data, analytics, third party research, and credit ratings-related information primarily through web-based channels including Market Intelligence Desktop, RatingsDirect®, RatingsXpress®, and Credit Analytics. Subscription revenue at Platts is generated by providing customers access to commodity and energy-related price assessments, market data, and real-time news, along with other information services. Subscription revenue at Indices is derived from the contracts for underlying data of our indexes to support our customers' management of index funds, portfolio analytics, and research.
For subscription products and services, we generally provide continuous access to dynamic data sets and analytics for a defined period, with revenue recognized ratably as our performance obligation to provide access to our data and analytics is progressively fulfilled over the stated term of the contract.
Non-transaction revenue
Non-transaction revenue at Ratings is primarily related to surveillance of a credit rating, annual fees for customer relationship-based pricing programs, fees for entity credit ratings and global research and analytics. Non-transaction revenue also includes an intersegment revenue elimination of $125 million, $110 million and $98 million for the years ended December 31, 2018, 2017, and 2016 respectively, mainly consisting of the royalty charged to Market Intelligence for the rights to use and distribute content and data developed by Ratings.
For non-transaction revenue related to Rating’s surveillance services, we continuously monitor factors that impact the creditworthiness of an issuer over the contractual term with revenue recognized to the extent that our performance obligation is progressively fulfilled over the term contract. Because surveillance services are continuously provided throughout the term of the contract, our measure of progress towards fulfillment of our obligation to monitor a rating is a time-based output measure with revenue recognized ratably over the term of the contract.
Non-subscription / Transaction revenue
Transaction revenue at our Ratings segment primarily includes fees associated with:
ratings related to new issuance of corporate and government debt instruments; and structured finance instruments;
bank loan ratings; and
corporate credit estimates, which are intended, based on an abbreviated analysis, to provide an indication of our opinion regarding creditworthiness of a company which does not currently have a Ratings credit rating.
Transaction revenue is recognized at the point in time when our performance obligation is satisfied by issuing a rating on our customer's instruments, our customer's creditworthiness, or a counter-party's creditworthiness and when we have a right to payment and the customer can benefit from the significant risks and rewards of ownership.
Non-subscription revenue at Market Intelligence is primarily related to certain advisory, pricing and analytical services. Non-subscription revenue at Platts is primarily related to conference sponsorship, consulting engagements and events.
Asset-linked fees
Asset-linked fees at Indices and Market Intelligence are primarily related to royalties payments based on the value of assets under management in our customers exchange-traded funds and mutual funds.
For asset-linked products and services, we provide licenses conveying continuous access to our index and benchmark-related intellectual property during a specified contract term. Revenue is recognized when the extent that our customers have used our licensed intellectual property can be quantified. Recognition of revenue for our asset-linked fee arrangements is subject to the "recognition constraint" for usage-based royalty payments because we cannot reasonably predict the value of the assets that will be invested in index funds structured using our intellectual property until it is either publicly available or when we are notified by
our customers. Revenue derived from an asset-linked fee arrangement is measured and recognized when the certainty of the extent of its utilization of our index products by our customers is known.
Sales usage-based royalties
Sales usage-based royalty revenue at our Indices segment is primarily related to trading based fees from exchange-traded derivatives. Sales and usage-based royalty revenue at our Platts segment is primarily related to licensing of its proprietary market price data and price assessments to commodity exchanges.
For sales usage-based royalty products and services, we provide licenses conveying the right to continuous access to our intellectual property over the contract term, with revenue recognized when the extent of our license’s utilization can be quantified, or more specifically, when trading volumes are known and publicly available to us or when we are notified by our customers. Recognition of revenue of fees tied to trading volumes is subject to the recognition constraint for a usage-based royalty promised by our customers in exchange for the license of our intellectual property, with revenue recognized when trading volumes are known.
Arrangements with Multiple Performance Obligations
Our contracts with customers may include multiple performance obligations. Revenue relating to agreements that provide for more than one performance obligation is recognized based upon the relative fair value to the customer of each service component as each component is earned. The fair value of the service components are determined using an analysis that considers cash consideration that would be received for instances when the service components are sold separately. If the fair value to the customer for each service is not objectively determinable, we make our best estimate of the services’ stand-alone selling price and record revenue as it is earned over the service period.
Receivables
We record a receivable when a customer is billed or when revenue is recognized prior to billing a customer. For multi-year agreements, we generally invoice customers annually at the beginning of each annual period. The opening balance of accounts receivable, net of allowance for doubtful accounts, was $1,319 million as of January 1, 2018.
Contract Assets
Contract assets include unbilled amounts from when the Company transfers service to a customer before a customer pays consideration or before payment is due. As of December 31, 2018 and 2017, contract assets were $26 million and $17 million, respectively, and are included in accounts receivable in our consolidated balance sheets.
Unearned Revenue
We record unearned revenue when cash payments are received or due in advance of our performance. The increase in the unearned revenue balance for the year ended December 31, 2018 is primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by $1.5 billion of revenues recognized that were included in the unearned revenue balance at the beginning of the period.
Remaining Performance Obligations
Remaining performance obligations represent the transaction price of contracts for work that has not yet been performed. As of December 31, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was $1.4 billion. We expect to recognize revenue on approximately half and three-quarters of the remaining performance obligations over the next 12 and 24 months, respectively, with the remainder recognized thereafter.
We do not disclose the value of unfulfilled performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts where revenue is a usage-based royalty promised in exchange for a license of intellectual property.
Costs to Obtain a Contract
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales commission programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were $101 million as of December 31, 2018, and are included in prepaid and other current assets and other non-current assets on our consolidated balance sheets. The asset will be amortized over a period consistent with the transfer to the customer of the goods or services to which the asset relates, calculated based on the customer term and the average life of the products and services underlying the contracts. The expense is recorded within selling and general expenses.
We expense sales commissions when incurred if the amortization period would have been one year or less. These costs are recorded within selling and general expenses.
Presentation of net periodic pension cost and net periodic postretirement benefit cost
During the first quarter of 2018, we adopted new accounting guidance requiring that net periodic benefit cost for our retirement and postretirement plans other than the service cost component be included outside of operating profit; these costs are included in other income, net in our consolidated statements of income.
The components of other income, net for the year ended December 31 are as follows:
|
| | | | | | | | | | | |
| (in millions) | 2018 | | 2017 | | 2016 |
| Other components of net periodic benefit cost | $ | (30 | ) | | $ | (27 | ) | | $ | (28 | ) |
| Net loss from investments | 5 |
| | — |
| | — |
|
| Other income, net | $ | (25 | ) | | $ | (27 | ) | | $ | (28 | ) |
Assets and Liabilities Held for Sale and Discontinued Operations
Assets and Liabilities Held for Sale
We classify a disposal group to be sold as held for sale in the period in which all of the following criteria are met: management, having the authority to approve the action, commits to a plan to sell the disposal group; the disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such disposal group; an active program to locate a buyer and other actions required to complete the plan to sell the disposal group have been initiated; the sale of the disposal group is probable, and transfer of the disposal group is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the disposal group beyond one year; the disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
A disposal group that is classified as held for sale is initially measured at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a disposal group until the date of sale.
The fair value of a disposal group less any costs to sell is assessed each reporting period it remains classified as held for sale and any subsequent changes are reported as an adjustment to the carrying value of the disposal group, as long as the new carrying value does not exceed the carrying value of the disposal group at the time it was initially classified as held for sale. Upon determining that a disposal group meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group as held for sale in the current period in our consolidated balance sheets.
Discontinued Operations
Cash flows from discontinued operations reflects the classification of McGraw Hill Construction and MHE as discontinued operations.Off-Balance Sheet Arrangements
Cash usedAs of December 31, 2018 and 2017, we did not have any material relationships with unconsolidated entities, such as entities often referred to as specific purpose or variable interest entities where we are the primary beneficiary, which would have been established for operating activities from discontinued operationsthe purpose of $129 millionfacilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such we are not exposed to any financial liquidity, market or credit risk that could arise if we had engaged in 2015 relates to the tax payment on the gain on salesuch relationships.
RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION
Free cash flow is a non-GAAP financial measure and reflects our cash flow provided by operating activities from discontinued operationsless capital expenditures and distributions to noncontrolling interest holders. Capital expenditures include purchases of $18 million in 2014 relatesproperty and equipment and additions to McGraw Hill Construction andtechnology projects. Our cash used forflow provided by operating activities of $231 millionis the most directly comparable U.S. GAAP financial measure to free cash flow. Additionally, we have considered certain items in 2013 relates both to MHE and McGraw Hill Construction.
Cash provided by investing activities from discontinued operations decreased to $320 millionevaluating free cash flow, which are included in 2014 compared to $2.1 billion in 2013 due to lower proceeds received from the sale of McGraw Hill Construction compared to the proceeds received from MHE.
Cash used for financing activities decreased $25 million in 2014 as there was no impact related to McGraw Hill Construction.
Additional Financingtable below.
We believe the presentation of free cash flow and free cash flow excluding certain items allows our investors to evaluate the cash generated from our underlying operations in a manner similar to the method used by management. We use free cash flow to conduct and evaluate our business because we believe it typically presents a more conservative measure of cash flows since capital expenditures and distributions to noncontrolling interest holders are considered a necessary component of ongoing operations. Free cash flow is useful for management and investors because it allows management and investors to evaluate the cash available to us to prepay debt, make strategic acquisitions and investments and repurchase stock.
The presentation of free cash flow and free cash flow excluding certain items are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP. Free cash flow, as we calculate it, may not be comparable to similarly titled measures employed by other companies. The following table presents a reconciliation of our cash flow provided by operating activities to free cash flow excluding the impact of the items below:
|
| | | | | | | | | | | | | | | | |
| (in millions) | | Year ended December 31, | | % Change |
| | | 2018 | | 2017 | | 2016 | | ’18 vs ’17 | | ’17 vs ’16 |
| Cash provided by operating activities | | $ | 2,064 |
| | $ | 2,016 |
| | $ | 1,560 |
| | 2% |
| 29% |
| Capital expenditures | | (113 | ) | | (123 | ) | | (115 | ) | |
| |
|
| Distributions to noncontrolling interest holders | | (154 | ) | | (111 | ) | | (116 | ) | |
| |
|
| Free cash flow | | $ | 1,797 |
|
| $ | 1,782 |
| | $ | 1,329 |
| | 1% | | 34% |
| Tax on gain from sale of J.D. Power | | — |
| | — |
| | 200 |
| | | | |
| Tax on gain from sale of SPSE and CMA | | — |
| | 67 |
| | — |
| | | | |
| Payment of legal settlements | | 180 |
| | 4 |
| | 150 |
| |
| |
|
| Legal settlement insurance recoveries | | — |
| | — |
| | (77 | ) | |
| |
|
| Settlement of prior-year tax audits | | 73 |
| | — |
| | — |
| | | | |
| Tax benefit from legal settlements | | (44 | ) | | (2 | ) | | (24 | ) | |
| |
|
| Free cash flow excluding above items | | $ | 2,006 |
| | $ | 1,851 |
| | $ | 1,578 |
| | 8% | | 17% |
|
| | | | | | | | | | | | | |
| (in millions) | 2018 | | 2017 | | 2016 | | ’18 vs ’17 | | ’17 vs ’16 |
| Cash (used for) provided by investing activities | (513 | ) | | (209 | ) | | 1,171 |
| | N/M |
| | N/M |
| Cash used for financing activities | (2,288 | ) | | (1,507 | ) | | (1,662 | ) | | 52 | % | | (9)% |
N/M - not meaningful
CRITICAL ACCOUNTING ESTIMATES
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the ability to borrow a totalreported amounts of $1.2 billion through our commercial paper program, which is supported by our credit facility described below. Commercial paper borrowings outstanding asassets, liabilities, revenues and expenses and related disclosure of December 31, 2015 totaled $143 million with an average interest ratecontingent assets and term of 0.95% and 17 days. As of December 31, 2015, we can borrow approximately $1.1 billion in additional funds through the commercial paper program. There were no commercial paper borrowings outstanding under our credit facility as of December 31, 2014.liabilities.
On June 30, 2015,an ongoing basis, we entered intoevaluate our estimates and assumptions, including those related to revenue recognition, allowance for doubtful accounts, valuation of long-lived assets, goodwill and other intangible assets, pension plans, incentive compensation and stock-based compensation, income taxes, contingencies and redeemable noncontrolling interests. We base our estimates on historical experience, current developments and on various other assumptions that we believe to be reasonable under these circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that cannot readily be determined from other sources. There can be no assurance that actual results will not differ from those estimates.
Management considers an accounting estimate to be critical if it required assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate or different estimates could have a revolving $1.2 billion five-year credit agreement (our "credit facility") that will terminatematerial effect on June 30, 2020. This credit facility replaced our $1.0 billion four-year credit facility that was scheduledresults of operations. Management has discussed the development and selection of our critical accounting estimates with the Audit Committee of our Board of Directors. The Audit Committee has reviewed our disclosure relating to terminate on June 19, 2017. The previous credit facility was canceled immediately after the new credit facility became effective. There were no outstanding borrowings under the previous credit facility when it was replaced.them in this MD&A.
We paybelieve the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements:
Revenue recognition
We adopted Financial Accounting Standards Board Accounting Standards Codification ("ASC") 606 "Revenue from Contracts with Customers" using the modified retrospective transition method applied to our revenue contracts with customers as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior year amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605 "Revenue Recognition". We recorded a commitment feenet increase to opening retained earnings of 10 to 20 basis points for our credit facility, depending on our indebtedness to cash flow ratio, whether or not amounts have been borrowed and currently pay a commitment fee$35 million as of 15 basis points. The interest rate on borrowings under our credit facility is, at our option, calculated using rates that are primarily based on either the prevailing London Inter-Bank Offered Rate, the prime rate determined by the administrative agent or the Federal Funds Rate. For certain borrowings under this credit facility, there is also a spread based on our indebtedness to cash flow ratio addedJanuary 1, 2018 due to the applicable rate.
Our credit facility contains certain covenants. The only financial covenant requires thatcumulative effect of adopting ASC 606, with the impact primarily related to our indebtednesstreatment of costs to cash flow ratio,obtain a contract and to a lesser extent, changes to the timing of the recognition of our subscription and non-transaction revenues. We recognized incremental revenue of $6 million for the year ended December 31, 2018 as defined in our credit facility, is not greater than 4 to 1, anda result of the adoption of this covenant level has never been exceeded.standard.
On July 24, 2015,Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services in connection withan amount that reflects the acquisition of SNL, we entered into a commitment letter. Upon receipt ofconsideration the proceeds from the issuance of $2.0 billion of senior notes on August 18, 2015, we terminated this commitment letter.entity expects to receive in exchange for those goods or services. Under ASC 605, revenue was recognized as it was earned and when services were rendered. See Note 51 - —DebtAccounting Policies to our consolidated financial statements for further information.
On January 22, 2015, Fitch Ratings revisedAllowance for doubtful accounts
The allowance for doubtful accounts reserve methodology is based on historical analysis, a review of outstanding balances and current conditions. In determining these reserves, we consider, amongst other factors, the financial condition and risk profile of our customers, areas of specific or concentrated risk as well as applicable industry trends or market indicators. The impact on operating profit for a one percentage point change in the allowance for doubtful accounts is approximately $15 million.
For the years ended December 31, 2018, 2017 and 2016, there were no material changes in our assumptions regarding the determination of the allowance for doubtful accounts. Based on our current outlook these assumptions are not expected to significantly change in 2019.
Accounting for the impairment of long-lived assets (including other intangible assets)
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Upon such an occurrence, recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to current forecasts of undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its ratings outlook from negativeestimated future cash flows, an impairment charge is recognized equal to stablethe amount by which the carrying amount of the asset exceeds the fair value of the asset. For long-lived assets held for sale, assets are written down to fair value, less cost to sell. Fair value is determined based on market evidence, discounted cash flows, appraised values or management’s estimates, depending upon the nature of the assets.
For the year ended December 31, 2016, we recorded a non-cash impairment charge of $24 million related to a technology project at our Market Intelligence segment in selling and affirmedgeneral expenses in our BBB+ long-term debt ratingconsolidated statement of income.
Goodwill and F2 short-term/commercial debt rating. On August 7, 2015, Moody's Investor Serviceindefinite-lived intangible assets
Goodwill represents the excess of purchase price and related costs over the value assigned a Baa1 long-term debt ratingto the net tangible and P-2 commercial paper rating.identifiable intangible assets of businesses acquired. As of December 31, 2018 and 2017, the carrying value of goodwill and other indefinite-lived intangible assets was $4.4 billion and $3.7 billion, respectively. Goodwill and other intangible assets with indefinite lives are not amortized, but instead are tested for impairment annually during the fourth quarter each year or more frequently if events or changes in circumstances indicate that the asset might be impaired.
DividendsGoodwill
As part of our annual impairment test of our four reporting units, we initially perform a qualitative analysis evaluating whether any events and circumstances occurred that provide evidence that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount. Reporting units are generally an operating segment or one level below an operating segment. Our qualitative assessment included, but was not limited to, consideration of macroeconomic conditions, industry and market conditions, cost factors, cash flows, changes in key Company personnel and our share price. If, based on our evaluation of the events and circumstances that occurred during the year we do not believe that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount, no quantitative impairment test is performed. Conversely, if the results of our qualitative assessment determine that it is more likely than not that the fair value of any of our reporting units is less than its respective carrying amount we perform a two-step quantitative impairment test. For 2018, based on our qualitative assessments, we determined that it is more likely than not that our reporting units’ fair values were greater than their respective carrying amounts.
On January 27, 2016,If the Boardfair value of Directors approvedthe reporting unit is less than the carrying value, a second step is performed which compares the implied fair value of the reporting unit's goodwill to the carrying value of the goodwill. The implied fair value of the goodwill is determined based on the difference between the fair value of the reporting unit and the net fair value of the identifiable assets and liabilities of the reporting unit. If the implied fair value of the goodwill is less than the carrying value, the difference is recognized as an increase in the quarterly common stock dividend from $0.33 per share to $0.36 per share.impairment charge.
Contractual ObligationsIndefinite-Lived Intangible Assets
We evaluate the recoverability of indefinite-lived intangible assets by first performing a qualitative analysis evaluating whether any events and circumstances occurred that provide evidence that it is more likely than not that the indefinite-lived asset is impaired. If, based on our evaluation of the events and circumstances that occurred during the year we do not believe that it is more likely than not that the indefinite-lived asset is impaired, no quantitative impairment test is performed. Conversely, if the results of our qualitative assessment determine that it is more likely than not that the indefinite-lived asset is impaired, a quantitative impairment test is performed. If necessary, the impairment test is performed by comparing the estimated fair value of the intangible asset to its carrying value. If the indefinite-lived intangible asset carrying value exceeds its fair value, an impairment analysis is performed using the income approach. The fair value of loss is recognized in an amount equal to that excess. Significant judgments inherent in these analyses include estimating the amount and timing of future cash flows and the selection of appropriate discount rates, royalty rates and long-term growth rate assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for this indefinite-lived intangible asset and could result in an impairment charge, which could be material to our financial position and results of operations.
We performed our impairment assessment of goodwill and indefinite-lived intangible assets and concluded that no impairment existed for the years ended December 31, 2018, 2017, and 2016.
Retirement plans and postretirement healthcare and other benefits
Our employee pension and other postretirement benefit costs and obligations are dependent on assumptions concerning the outcome of future events and circumstances, including compensation increases, long-term return on pension plan assets, healthcare cost trends, discount rates and other factors. In determining such assumptions, we consult with outside actuaries and other advisors where deemed appropriate. In accordance with relevant accounting standards, if actual results differ from our assumptions, such differences are deferred and amortized over the estimated remaining lifetime of the plan participants. While we believe that the assumptions used in these calculations are reasonable, differences in actual experience or changes in assumptions could affect the expense and liabilities related to our pension and other postretirement benefits.
The following is a discussion of some significant assumptions that we make in determining costs and obligations for pension and other postretirement benefits:
Discount rate assumptions are based on current yields on high-grade corporate long-term bonds.
Healthcare cost trend assumptions are based on historical market data, the near-term outlook and an assessment of likely long-term trends.
The expected return on assets assumption is calculated based on the plan’s asset allocation strategy and projected market returns over the long-term.
Our discount rate and return on asset assumptions used to determine the net periodic pension and postretirement benefit cost on our U.S. retirement plans are as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | Retirement Plans | | Postretirement Plans |
| January 1 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Discount rate | | 4.40 | % | | 3.68 | % | | 4.14 | % | | 4.15 | % | | 3.40 | % | | 3.69 | % |
| Return on assets | | 6.00 | % | | 6.00 | % | | 6.25 | % | | | | | | |
| Weighted-average healthcare cost rate | | | | | | | | 6.50 | % | | 6.50 | % | | 7.00 | % |
Stock-based compensation
Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized over the requisite service period, which typically have various contractual obligations, which are recordedis the vesting period. Stock-based compensation is classified as liabilitiesboth operating-related expense and selling and general expense in our consolidated balance sheets, while other items, such as certain purchase commitments and other executory contracts, are not recognized, but are disclosed herein. For example, we are contractually committed to contracts for information-technology outsourcing, certain enterprise-wide information-technology software licensing and maintenance and make certain minimum lease payments for the usestatements of property under operating lease agreements.income.
We use a lattice-based option-pricing model to estimate the fair value of options granted. The following assumptions were used in valuing the options granted:
|
| | | | |
| | | Year Ended |
| | | December 31, 2018 |
| Risk-free average interest rate | | 2.6 - 2.7% |
|
| Dividend yield | | 1.1 | % |
| Volatility | | 21.8 - 22.0% |
|
| Expected life (years) | | 5.67 - 6.07 |
|
| Weighted-average grant-date fair value per option | | $ | 112.98 |
|
Because lattice-based option-pricing models incorporate ranges of assumptions, those ranges are disclosed. These assumptions are based on multiple factors, including historical exercise patterns, post-vesting termination rates, expected future exercise patterns and the expected volatility of our stock price. The risk-free interest rate is the imputed forward rate based on the U.S. Treasury yield at the date of grant. We use the historical volatility of our stock price over the expected term of the options to estimate the expected volatility. The expected term of options granted is derived from the output of the lattice model and represents the period of time that options granted are expected to be outstanding.
In 2018, we made a one-time issuance of incentive stock options in connection with our acquisition of Kensho in April of 2018. There were no stock options granted in 2017 and 2016.
Income taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize liabilities for uncertain tax positions taken or expected to be taken in income tax returns. Accrued interest and penalties related to unrecognized tax benefits are recognized in interest expense and operating expense, respectively.
Judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and unrecognized tax benefits. In determining the need for a valuation allowance, the historical and projected financial performance of the operation that is recording a net deferred tax asset is considered along with any other pertinent information.
We file income tax returns in the U.S. federal jurisdiction, various states, and foreign jurisdictions, and we are routinely under audit by many different tax authorities. We believe that our accrual for tax liabilities is adequate for all open audit years based on our assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. It is possible that examinations will be settled prior to December 31, 2019. If any of these tax audit settlements do occur within that period we would make any necessary adjustments to the accrual for unrecognized tax benefits.
As of December 31, 2018, we have approximately $2.3 billion of undistributed earnings of our foreign subsidiaries, of which $784 million is reinvested indefinitely in our foreign operations.
Contingencies
We are subject to a number of lawsuits and claims that arise in the ordinary course of business. We recognize a liability for such contingencies when both (a) information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements and (b) the amount of loss can reasonably be estimated. We continually assess the likelihood of any adverse judgments or outcomes to our contingencies, as well as potential amounts or ranges of probable losses, and recognize a liability, if any, for these contingencies based on an analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Because many of these matters are resolved over long periods of time, our estimate of liabilities may change due to new developments, changes in assumptions or changes in our strategy related to the matter. When we accrue for loss contingencies and the reasonable estimate of the loss is within a range, we record its best estimate within the range. We disclose an estimated possible loss or a range of loss when it is at least reasonably possible that a loss may have been incurred.
Redeemable Noncontrolling Interest
The fair value component of the redeemable noncontrolling interest in Indices business is based on a combination of an income and market valuation approach. Our income and market valuation approaches may incorporate Level 3 measures for instances when observable inputs are not available, including assumptions related to expected future net cash flows, long-term growth rates, the timing and cash equivalents on hand, cash flow expected from operationsnature of tax attributes, and availability under our credit facility will be adequate for us to execute our business strategy and meet anticipated requirements for lease obligations, capital expenditures, working capital and debt service for 2016.the redemption features.
RECENTACCOUNTING STANDARDS
The following table summarizes our significant contractual obligations and commercial commitments as of December 31, 2015, over the next several years that relate to our continuing operations. Additional details regarding these obligations are provided in the notes See Note 1 – Accounting Policies to our consolidated financial statements as referencedfor a detailed description of recent accounting standards. We expect the adoption of these recent accounting standards to have a material impact on our consolidated balance sheet; however, we do not expect that these standards will have a material impact on our consolidated statements of income or cash flows.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk includes changes in foreign exchange rates. We have operations in various foreign countries where the functional currency is primarily the local currency. For international operations that are determined to be extensions of the parent company, the U.S. dollar is the functional currency. We typically have naturally hedged positions in most countries from a local currency perspective with offsetting assets and liabilities. During the years ended December 31, 2018 and 2017, we entered into foreign exchange forward contracts in order to mitigate the change in fair value of specific assets and liabilities in the footnotes consolidated balance sheet. These forward contracts are not designated as hedges and do not qualify for hedge accounting. During the years ended December 31, 2018, 2017 and 2016, we entered into foreign exchange forward contracts to hedge the effect of adverse fluctuations in foreign currency exchange rates. We have not entered into any derivative financial instruments for speculative purposes. See Note 6 – Derivative Instruments to the table:Consolidated Financial Statements and Supplementary Data, in the Annual Report on Form 10-K for further discussion.
Item 8. Consolidated Financial Statements and Supplementary Data
TABLE OF CONTENTS
|
| | | | | | | | | | | | | | | | | | | |
| (in millions) | Less than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 Years | | Total |
Debt: 1 | | | | | | | | |
|
|
| Principal payments | 143 |
| | 797 |
| | 695 |
| | 1,976 |
| | 3,611 |
|
| Interest payments | 150 |
| | 274 |
| | 225 |
| | 771 |
| | 1,420 |
|
Operating leases 2 | 136 |
| | 229 |
| | 150 |
| | 162 |
| | 677 |
|
Purchase obligations and other 3 | 83 |
| | 90 |
| | 6 |
| | — |
| | 179 |
|
| Total contractual cash obligations | $ | 512 |
| | $ | 1,390 |
| | $ | 1,076 |
| | $ | 2,909 |
| | $ | 5,887 |
|
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of S&P Global Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of S&P Global Inc. (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 12, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ ERNST & YOUNG LLP
We have served as the Company’s auditor since 1969.
New York, New York
February 12, 2019
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of S&P Global Inc.
Opinion on Internal Control over Financial Reporting
We have audited S&P Global Inc.’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, S&P Global Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of S&P Global Inc. as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in Item 15(a)(2) and our report dated February 12, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ ERNST & YOUNG LLP
New York, New York
February 12, 2019
Consolidated Statements of Income
|
| | | | | | | | | | | |
| (in millions, except per share data) | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Revenue | $ | 6,258 |
| | $ | 6,063 |
| | $ | 5,661 |
|
| Expenses: | | | | | |
| Operating-related expenses | 1,701 |
| | 1,695 |
| | 1,773 |
|
| Selling and general expenses | 1,561 |
| | 1,605 |
| | 1,467 |
|
| Depreciation | 84 |
| | 82 |
| | 85 |
|
| Amortization of intangibles | 122 |
| | 98 |
| | 96 |
|
| Total expenses | 3,468 |
| | 3,480 |
| | 3,421 |
|
| Gain on dispositions | — |
| | — |
| | (1,101 | ) |
| Operating profit | 2,790 |
| | 2,583 |
| | 3,341 |
|
| Other income, net | (25 | ) | | (27 | ) | | (28 | ) |
| Interest expense, net | 134 |
| | 149 |
| | 181 |
|
| Income before taxes on income | 2,681 |
| | 2,461 |
| | 3,188 |
|
| Provision for taxes on income | 560 |
| | 823 |
| | 960 |
|
| Net income | 2,121 |
| | 1,638 |
| | 2,228 |
|
| Less: net income attributable to noncontrolling interests | (163 | ) | | (142 | ) | | (122 | ) |
| Net income attributable to S&P Global Inc. | $ | 1,958 |
| | $ | 1,496 |
| | $ | 2,106 |
|
| | | | | | |
| Earnings per share attributable to S&P Global Inc. common shareholders: | | | | | |
| Net income: | | | | | |
| Basic | $ | 7.80 |
| | $ | 5.84 |
| | $ | 8.02 |
|
| Diluted | $ | 7.73 |
| | $ | 5.78 |
| | $ | 7.94 |
|
| Weighted-average number of common shares outstanding: | | | | | |
| Basic | 250.9 |
| | 256.3 |
| | 262.8 |
|
| Diluted | 253.2 |
| | 258.9 |
| | 265.2 |
|
| | | | | | |
| Actual shares outstanding at year end | 248.4 |
| | 253.7 |
| | 258.3 |
|
| | | | | | |
| Dividend declared per common share | $ | 2.00 |
| | $ | 1.64 |
| | $ | 1.44 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Comprehensive Income
|
| | | | | | | | | | | |
| (in millions) | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Net income | $ | 2,121 |
| | $ | 1,638 |
| | $ | 2,228 |
|
| Other comprehensive income: | | | | | |
| Foreign currency translation adjustment | (96 | ) | | 93 |
| | (132 | ) |
| Income tax effect | (4 | ) | | — |
| | (7 | ) |
| | (100 | ) | | 93 |
| | (139 | ) |
| | | | | | |
| Pension and other postretirement benefit plans | (14 | ) | | 52 |
| | (27 | ) |
| Income tax effect | 9 |
| | (11 | ) | | (10 | ) |
| | (5 | ) | | 41 |
| | (37 | ) |
| | | | | | |
| Unrealized gain (loss) on investment and forward exchange contracts | 2 |
| | (10 | ) | | 4 |
|
| Income tax effect | — |
| | — |
| | (1 | ) |
| | 2 |
| | (10 | ) | | 3 |
|
| | | | | | |
| Comprehensive income | 2,018 |
| | 1,762 |
| | 2,055 |
|
| Less: comprehensive income attributable to nonredeemable noncontrolling interests | (12 | ) | | (13 | ) | | (13 | ) |
| Less: comprehensive income attributable to redeemable noncontrolling interests | (151 | ) | | (129 | ) | | (109 | ) |
| Comprehensive income attributable to S&P Global Inc. | $ | 1,855 |
| | $ | 1,620 |
| | $ | 1,933 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Balance Sheets
|
| | | | | | | |
| (in millions) | December 31, |
| | 2018 | | 2017 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,917 |
| | $ | 2,777 |
|
| Restricted cash | 41 |
| | 2 |
|
| Short-term investments | 18 |
| | 12 |
|
| Accounts receivable, net of allowance for doubtful accounts: 2018- $34 ; 2017 - $33 | 1,449 |
| | 1,319 |
|
| Prepaid and other current assets | 179 |
| | 214 |
|
| Total current assets | 3,604 |
| | 4,324 |
|
| Property and equipment: | | | |
| Buildings and leasehold improvements | 372 |
| | 354 |
|
| Equipment and furniture | 494 |
| | 475 |
|
| Total property and equipment | 866 |
| | 829 |
|
| Less: accumulated depreciation | (596 | ) | | (554 | ) |
| Property and equipment, net | 270 |
| | 275 |
|
| Goodwill | 3,535 |
| | 2,989 |
|
| Other intangible assets, net | 1,524 |
| | 1,388 |
|
| Other non-current assets | 525 |
| | 449 |
|
| Total assets | $ | 9,458 |
| | $ | 9,425 |
|
| LIABILITIES AND EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 211 |
| | $ | 195 |
|
| Accrued compensation and contributions to retirement plans | 354 |
| | 472 |
|
| Short-term debt | — |
| | 399 |
|
| Income taxes currently payable | 72 |
| | 77 |
|
| Unearned revenue | 1,641 |
| | 1,613 |
|
| Accrued legal and regulatory settlements | 1 |
| | 107 |
|
| Other current liabilities | 350 |
| | 351 |
|
| Total current liabilities | 2,629 |
| | 3,214 |
|
| Long-term debt | 3,662 |
| | 3,170 |
|
| Pension and other postretirement benefits | 229 |
| | 244 |
|
| Other non-current liabilities | 634 |
| | 679 |
|
| Total liabilities | 7,154 |
| | 7,307 |
|
| Redeemable noncontrolling interest | 1,620 |
| | 1,352 |
|
| Commitments and contingencies (Note 13) |
| |
|
| Equity: | | | |
| Common stock, $1 par value: authorized - 600 million shares; issued: 2018 - 294 million shares; 2017 - 412 million shares | 294 |
| | 412 |
|
| Additional paid-in capital | 833 |
| | 525 |
|
| Retained income | 11,284 |
| | 10,023 |
|
| Accumulated other comprehensive loss | (742 | ) | | (649 | ) |
| Less: common stock in treasury - at cost: 2018 - 45 million shares; 2017 - 158 million shares | (11,041 | ) | | (9,602 | ) |
| Total equity – controlling interests | 628 |
| | 709 |
|
| Total equity – noncontrolling interests | 56 |
| | 57 |
|
| Total equity | 684 |
| | 766 |
|
| Total liabilities and equity | $ | 9,458 |
| | $ | 9,425 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Cash Flows
|
| | | | | | | | | | | |
| (in millions) | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Operating Activities: | | | | | |
| Net income | $ | 2,121 |
| | $ | 1,638 |
| | $ | 2,228 |
|
| Adjustments to reconcile net income to cash provided by operating activities: | | | | | |
| Depreciation | 84 |
| | 82 |
| | 85 |
|
| Amortization of intangibles | 122 |
| | 98 |
| | 96 |
|
| Provision for losses on accounts receivable | 21 |
| | 16 |
| | 9 |
|
| Deferred income taxes | 81 |
| | — |
| | 79 |
|
| Stock-based compensation | 94 |
| | 99 |
| | 76 |
|
| Gain on dispositions | — |
| | — |
| | (1,101 | ) |
| Accrued legal settlements | 1 |
| | 55 |
| | 54 |
|
| Other | 52 |
| | 96 |
| | 30 |
|
| Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: | | | | | |
| Accounts receivable | (164 | ) | | (196 | ) | | (177 | ) |
| Prepaid and other current assets | (1 | ) | | 10 |
| | 5 |
|
| Accounts payable and accrued expenses | (106 | ) | | 75 |
| | 19 |
|
| Unearned revenue | 70 |
| | 85 |
| | 107 |
|
| Accrued legal settlements | (108 | ) | | (4 | ) | | (150 | ) |
| Other current liabilities | (67 | ) | | (85 | ) | | (19 | ) |
| Net change in prepaid/accrued income taxes | (7 | ) | | 32 |
| | 174 |
|
| Net change in other assets and liabilities | (129 | ) | | 15 |
| | 45 |
|
| Cash provided by operating activities | 2,064 |
| | 2,016 |
| | 1,560 |
|
| Investing Activities: | | | | | |
| Capital expenditures | (113 | ) | | (123 | ) | | (115 | ) |
| Acquisitions, net of cash acquired | (401 | ) | | (83 | ) | | (177 | ) |
| Contingent consideration payment | — |
| | — |
| | (34 | ) |
| Proceeds from dispositions | 6 |
| | 2 |
| | 1,498 |
|
| Changes in short-term investments | (5 | ) | | (5 | ) | | (1 | ) |
| Cash (used for) provided by investing activities | (513 | ) | | (209 | ) | | 1,171 |
|
| Financing Activities: | | | | | |
| Payments on short-term debt, net | — |
| | — |
| | (143 | ) |
| Proceeds from issuance of senior notes, net | 489 |
| | — |
| | 493 |
|
| Payments on senior notes | (403 | ) | | — |
| | (421 | ) |
| Dividends paid to shareholders | (503 | ) | | (421 | ) | | (380 | ) |
| Distributions to noncontrolling interest holders | (154 | ) | | (111 | ) | | (116 | ) |
| Repurchase of treasury shares | (1,660 | ) | | (1,001 | ) | | (1,123 | ) |
| Exercise of stock options | 34 |
| | 75 |
| | 88 |
|
| Contingent consideration payment | — |
| | — |
| | (5 | ) |
| Purchase of additional CRISIL shares | (25 | ) | | — |
| | — |
|
| Employee withholding tax on share-based payments | (66 | ) | | (49 | ) | | (55 | ) |
| Cash used for financing activities | (2,288 | ) | | (1,507 | ) | | (1,662 | ) |
| Effect of exchange rate changes on cash | (84 | ) | | 87 |
| | (158 | ) |
| Net change in cash, cash equivalents, and restricted cash | (821 | ) | | 387 |
| | 911 |
|
| Cash, cash equivalents, and restricted cash at beginning of year | 2,779 |
| | 2,392 |
| | 1,481 |
|
| Cash, cash equivalents, and restricted cash at end of year | $ | 1,958 |
| | $ | 2,779 |
| | $ | 2,392 |
|
| Cash paid during the year for: | | | | | |
| Interest | $ | 151 |
| | $ | 139 |
| | $ | 150 |
|
| Income taxes | $ | 558 |
| | $ | 709 |
| | $ | 683 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Equity
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Common Stock $1 par | | Additional Paid-in Capital | | Retained Income | | Accumulated
Other Comprehensive Loss | | Less: Treasury Stock | | Total SPGI Equity | | Noncontrolling Interests | | Total Equity |
| Balance as of December 31, 2015 | $ | 412 |
| | $ | 475 |
| | $ | 7,636 |
| | $ | (600 | ) | | $ | 7,729 |
| | $ | 194 |
| | $ | 49 |
| | $ | 243 |
|
Comprehensive income 1 | | | | | 2,106 |
| | (173 | ) | | | | 1,933 |
| | 13 |
| | 1,946 |
|
| Dividends | | | | | (380 | ) | | | | | | (380 | ) | | (10 | ) | | (390 | ) |
| Share repurchases | | |
|
| | | | | | 1,097 |
| | (1,097 | ) | |
| | (1,097 | ) |
| Employee stock plans, net of tax benefit | | | 27 |
| | | | | | (125 | ) | | 152 |
| | | | 152 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | (153 | ) | | | | | | (153 | ) | | | | (153 | ) |
| Other | | | | | 1 |
| | | | | | 1 |
| | (1 | ) | | — |
|
| Balance as of December 31, 2016 | $ | 412 |
| | $ | 502 |
| | $ | 9,210 |
| | $ | (773 | ) | | $ | 8,701 |
| | $ | 650 |
| | $ | 51 |
| | $ | 701 |
|
Comprehensive income 1 | | | | | 1,496 |
| | 124 |
| | | | 1,620 |
| | 15 |
| | 1,635 |
|
| Dividends | | | | | (421 | ) | | | | | | (421 | ) | | (10 | ) | | (431 | ) |
| Share repurchases | | |
| | | | | | 1,001 |
| | (1,001 | ) | | (5 | ) | | (1,006 | ) |
| Employee stock plans | | | 23 |
| | | | | | (100 | ) | | 123 |
| | 8 |
| | 131 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | (260 | ) | | | | | | (260 | ) | | | | (260 | ) |
| Other | | | | | (2 | ) | | | | | | (2 | ) | | (2 | ) | | (4 | ) |
| Balance as of December 31, 2017 | $ | 412 |
| | $ | 525 |
| | $ | 10,023 |
| | $ | (649 | ) | | $ | 9,602 |
| | $ | 709 |
| | $ | 57 |
| | $ | 766 |
|
Comprehensive income 1 | | | | | 1,958 |
| | (103 | ) | | | | 1,855 |
| | 12 |
| | 1,867 |
|
| Dividends | | | | | (503 | ) | | | | | | (503 | ) | | (11 | ) | | (514 | ) |
| Share repurchases | | | (75 | ) | | | | | | 1,585 |
| | (1,660 | ) | |
| | (1,660 | ) |
| Retirement of common stock | (118 | ) | | | | | | | | (118 | ) | | — |
| | | | — |
|
| Employee stock plans | | | 56 |
| | | | | | (28 | ) | | 84 |
| |
| | 84 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | (228 | ) | | | | | | (228 | ) | | | | (228 | ) |
| Increase in CRISIL ownership | | | (25 | ) | | | | | | | | (25 | ) | | 2 |
| | (23 | ) |
| Stock consideration for Kensho | | | 352 | | | | | | | | 352 |
| | | | 352 |
|
| Other | | | | | 34 |
| 2 |
| 10 |
| 2 |
| | | 44 |
| | (4 | ) | | 40 |
|
| Balance as of December 31, 2018 | $ | 294 |
| | $ | 833 |
| | $ | 11,284 |
| | $ | (742 | ) | | $ | 11,041 |
| | $ | 628 |
| | $ | 56 |
| | $ | 684 |
|
| |
1 | Excludes $151 million, $129 million and $109 million in 2018, 2017 and 2016, respectively, attributable to redeemable noncontrolling interest. |
| |
2 | Includes opening balance sheet adjustments related to the adoption of the new revenue recognition standard and the reclassification of the unrealized loss on investments from Accumulated other comprehensive loss to Retained income. See Note 1 —Accounting Policies for additional details. |
See accompanying notes to the consolidated financial statements.
Notes to the Consolidated Financial Statements
1. Accounting Policies
Nature of operations
S&P Global Inc. (together with its consolidated subsidiaries, the “Company,” the “Registrant,” “we,” “us” or “our”) is a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide. The capital markets include asset managers, investment banks, commercial banks, insurance companies, exchanges, trading firms and issuers; and the commodity markets include producers, traders and intermediaries within energy, metals, petrochemicals and agriculture.
Our operations consist of four reportable segments: S&P Global Ratings ("Ratings"), S&P Global Market Intelligence ("Market Intelligence"), S&P Global Platts ("Platts") and S&P Dow Jones Indices ("Indices").
Ratings is an independent provider of credit ratings, research and analytics, offering investors and other market participants information, ratings and benchmarks.
Market Intelligence is a global provider of multi-asset-class data, research and analytical capabilities, which integrate cross-asset analytics and desktop services.
Platts is the leading independent provider of information and benchmark prices for the commodity and energy markets. We completed the sale of J.D. Power on September 7, 2016, with the results included in Platts results through that date.
Indices is a global index provider that maintains a wide variety of valuation and index benchmarks for investment advisors, wealth managers and institutional investors.
In April of 2018, we acquired Kensho Technologies Inc. ("Kensho") for approximately $550 million, net of cash acquired, in a mix of cash and stock. The results of Kensho, an operating segment of the Company, are included in Corporate revenue and Corporate Unallocated for financial reporting purposes. Restricted cash of $32 million included in our consolidated balance sheet as of December 31, 2018 includes amounts held in escrow accounts in connection with our acquisition of Kensho. See Note 2 —Acquisitions and Divestitures for additional information and Note 12 – Segment and Geographic Information for further discussion on our reportable segments.
In January of 2018, we adopted Financial Accounting Standards Board Accounting Standards Codification ("ASC") 606 as discussed below.
Adoption of ASC 606, “Revenue from Contracts with Customers”
We adopted ASC 606 "Revenue from Contracts with Customers" using the modified retrospective transition method applied to our revenue contracts with customers as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior year amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605 "Revenue Recognition". We recorded a net increase to opening retained earnings of $35 million as of January 1, 2018 due to the cumulative effect of adopting ASC 606, with the impact primarily related to our treatment of costs to obtain a contract and to a lesser extent, changes to the timing of the recognition of our subscription and non-transaction revenues. We recognized incremental revenue of $6 million for the year ended December 31, 2018 as a result of the adoption of this standard.
Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. Under ASC 605, revenue was recognized as it was earned and when services were rendered.
The following table presents our revenue disaggregated by revenue type for the years ended December 31:
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Ratings | | Market Intelligence | | Platts | | Indices | | Corporate | | Intersegment Elimination 1 | | Total |
| | | | | | | | | | | | | | |
| | 2018 |
| Subscription | $ | — |
| | $ | 1,773 |
| | $ | 750 |
| | $ | 144 |
| | $ | 15 |
| | $ | — |
| | $ | 2,682 |
|
| Non-transaction | 1,506 |
| | — |
| | — |
| | — |
| | — |
| | (125 | ) | | 1,381 |
|
| Non-subscription / Transaction | 1,377 |
| | 40 |
| | 11 |
| | — |
| | — |
| | — |
| | 1,428 |
|
| Asset-linked fees | — |
| | 20 |
| | — |
| | 522 |
| | — |
| | — |
| | 542 |
|
| Sales usage-based royalties | — |
| | — |
| | 54 |
| | 171 |
| | — |
| | — |
| | 225 |
|
| Total revenue | $ | 2,883 |
| | $ | 1,833 |
| | $ | 815 |
| | $ | 837 |
| | $ | 15 |
| | $ | (125 | ) | | $ | 6,258 |
|
| | | | | | | | | | | | | | |
| Timing of revenue recognition | | | | | | | | | | | | | |
| Services transferred at a point in time | $ | 1,377 |
| | $ | 40 |
| | $ | 11 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,428 |
|
| Services transferred over time | 1,506 |
| | 1,793 |
| | 804 |
| | 837 |
| | 15 |
| | (125 | ) | | 4,830 |
|
| Total revenue | $ | 2,883 |
| | $ | 1,833 |
| | $ | 815 |
| | $ | 837 |
| | $ | 15 |
| | $ | (125 | ) | | $ | 6,258 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Ratings | | Market Intelligence | | Platts | | Indices | | Corporate | | Intersegment Elimination 1 | | Total |
| | | | | | | | | | | | | | |
| | 2017 2 |
| Subscription | $ | — |
| | $ | 1,614 |
| | $ | 704 |
| | $ | 136 |
| | $ | — |
| | $ | — |
| | $ | 2,454 |
|
| Non-transaction | 1,448 |
| | — |
| | — |
| | — |
| | — |
| | (110 | ) | | 1,338 |
|
| Non-subscription / Transaction | 1,540 |
| | 46 |
| | $ | 13 |
| | — |
| | — |
| | — |
| | 1,599 |
|
| Asset-linked fees | — |
| | 23 |
| | — |
| | 461 |
| | — |
| | — |
| | 484 |
|
| Sales usage-based royalties | — |
| | — |
| | 57 |
| | 131 |
| | — |
| | — |
| | 188 |
|
| Total revenue | $ | 2,988 |
| | $ | 1,683 |
| | $ | 774 |
| | $ | 728 |
| | $ | — |
| | $ | (110 | ) | | $ | 6,063 |
|
| | | | | | | | | | | | | | |
| Timing of revenue recognition | | | | | | | | | | | | | |
| Services transferred at a point in time | $ | 1,540 |
| | $ | 46 |
| | $ | 13 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,599 |
|
| Services transferred over time | 1,448 |
| | 1,637 |
| | 761 |
| | 728 |
| | — |
| | (110 | ) | | 4,464 |
|
| Total revenue | $ | 2,988 |
| | $ | 1,683 |
| | $ | 774 |
| | $ | 728 |
| | $ | — |
| | $ | (110 | ) | | $ | 6,063 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Ratings | | Market Intelligence | | Platts | | Indices | | Corporate | | Intersegment Elimination 1 | | Total |
| | | | | | | | | | | | | | |
| | 2016 2 |
| Subscription | $ | — |
| | $ | 1,543 |
| | $ | 689 |
| | $ | 132 |
| | $ | — |
| | $ | — |
| | $ | 2,364 |
|
| Non-transaction | 1,357 |
| | — |
| | — |
| | — |
| | — |
| | (98 | ) | | 1,259 |
|
| Non-subscription / Transaction | 1,178 |
| | 99 |
| | 183 |
| | — |
| | — |
| | — |
| | 1,460 |
|
| Asset-linked fees | — |
| | 19 |
| | — |
| | 381 |
| | — |
| | — |
| | 400 |
|
| Sales usage-based royalties | — |
| | — |
| | 53 |
| | 125 |
| | — |
| | — |
| | 178 |
|
| Total revenue | $ | 2,535 |
| | $ | 1,661 |
| | $ | 925 |
| | $ | 638 |
| | $ | — |
| | $ | (98 | ) | | $ | 5,661 |
|
| | | | | | | | | | | | | | |
| Timing of revenue recognition | | | | | | | | | | | | | |
| Services transferred at a point in time | $ | 1,178 |
| | $ | 99 |
| | $ | 183 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,460 |
|
| Services transferred over time | 1,357 |
| | 1,562 |
| | 742 |
| | 638 |
| | — |
| | (98 | ) | | 4,201 |
|
| Total revenue | $ | 2,535 |
| | $ | 1,661 |
| | $ | 925 |
| | $ | 638 |
| | $ | — |
| | $ | (98 | ) | | $ | 5,661 |
|
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1 | Our debt obligations are described in Note 5 – DebtIntersegment eliminations mainly consists of a royalty charged to our consolidated financial statements.
Market Intelligence for the rights to use and distribute content and data developed by Ratings. |
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2 | Amounts shown include taxesAs noted above, amounts for the years ended December 31, 2017 and escalation payments, see Note 12 – Commitments and Contingencies2016 were not adjusted under the modified retrospective transition method applied to our consolidated financial statements for further discussion on our operating lease obligations.
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3
| Other consists primarilyrevenue contracts with customers as of commitments for unconditional purchase obligations in contracts for information-technology outsourcing and certain enterprise-wide information-technology software licensing and maintenance.January 1, 2018. |
AsSubscription revenue
Subscription revenue at Market Intelligence is primarily derived from distribution of data, analytics, third party research, and credit ratings-related information primarily through web-based channels including Market Intelligence Desktop, RatingsDirect®, RatingsXpress®, and Credit Analytics. Subscription revenue at Platts is generated by providing customers access to commodity and energy-related price assessments, market data, and real-time news, along with other information services. Subscription revenue at Indices is derived from the contracts for underlying data of our indexes to support our customers' management of index funds, portfolio analytics, and research.
For subscription products and services, we generally provide continuous access to dynamic data sets and analytics for a defined period, with revenue recognized ratably as our performance obligation to provide access to our data and analytics is progressively fulfilled over the stated term of the contract.
Non-transaction revenue
Non-transaction revenue at Ratings is primarily related to surveillance of a credit rating, annual fees for customer relationship-based pricing programs, fees for entity credit ratings and global research and analytics. Non-transaction revenue also includes an intersegment revenue elimination of $125 million, $110 million and $98 million for the years ended December 31, 2015, we had $120 million of liabilities for unrecognized tax benefits. We have excluded the liabilities for unrecognized tax benefits from our contractual obligations table because reasonable estimates2018, 2017, and 2016 respectively, mainly consisting of the timing of cash settlements withroyalty charged to Market Intelligence for the respective taxing authorities are not practicable.rights to use and distribute content and data developed by Ratings.
AsFor non-transaction revenue related to Rating’s surveillance services, we continuously monitor factors that impact the creditworthiness of December 31, 2015,an issuer over the contractual term with revenue recognized to the extent that our performance obligation is progressively fulfilled over the term contract. Because surveillance services are continuously provided throughout the term of the contract, our measure of progress towards fulfillment of our obligation to monitor a rating is a time-based output measure with revenue recognized ratably over the term of the contract.
Non-subscription / Transaction revenue
Transaction revenue at our Ratings segment primarily includes fees associated with:
ratings related to new issuance of corporate and government debt instruments; and structured finance instruments;
bank loan ratings; and
corporate credit estimates, which are intended, based on an abbreviated analysis, to provide an indication of our opinion regarding creditworthiness of a company which does not currently have a Ratings credit rating.
Transaction revenue is recognized at the point in time when our performance obligation is satisfied by issuing a rating on our customer's instruments, our customer's creditworthiness, or a counter-party's creditworthiness and when we have recorded $920 milliona right to payment and the customer can benefit from the significant risks and rewards of ownership.
Non-subscription revenue at Market Intelligence is primarily related to certain advisory, pricing and analytical services. Non-subscription revenue at Platts is primarily related to conference sponsorship, consulting engagements and events.
Asset-linked fees
Asset-linked fees at Indices and Market Intelligence are primarily related to royalties payments based on the value of assets under management in our customers exchange-traded funds and mutual funds.
For asset-linked products and services, we provide licenses conveying continuous access to our index and benchmark-related intellectual property during a specified contract term. Revenue is recognized when the extent that our customers have used our licensed intellectual property can be quantified. Recognition of revenue for our redeemable noncontrolling interest in our S&P Dow Jones Indices LLC partnership discussed in Note 8 – Equity to our consolidated financial statements. Specifically, this amount relatesasset-linked fee arrangements is subject to the put option under"recognition constraint" for usage-based royalty payments because we cannot reasonably predict the termsvalue of the operating agreement of S&P Dow Jones Indices LLC, whereby, after December 31, 2017, CME Group and CME Group Index Services LLC ("CGIS")assets that will have the right at any time to sell, andbe invested in index funds structured using our intellectual property until it is either publicly available or when we are obligated to buy, at least 20% of their share in S&P Dow Jones Indices LLC. We have excluded this amount from our contractual obligations table because we are uncertain as to the timing and the ultimate amount of the potential payment we may be required to make.notified by
We make contributions to our pension and postretirement plans in order to satisfy minimum funding requirements as well as additional contributions that we consider appropriate to improve the funded status of our plans. During 2015, we contributed $15 million and $8 million to our domestic and international retirement and postretirement plans, respectively. Expected employer contributions in 2016 are $7 million and $9 million for our domestic and international retirement and postretirement plans, respectively. In 2016, we may elect to make additional non-required contributions depending on investment performance and the pension plan status. See Note 6 – Employee Benefits to our consolidated financial statements for further discussion.
our customers. Revenue derived from an asset-linked fee arrangement is measured and recognized when the certainty of the extent of its utilization of our index products by our customers is known.
Sales usage-based royalties
Sales usage-based royalty revenue at our Indices segment is primarily related to trading based fees from exchange-traded derivatives. Sales and usage-based royalty revenue at our Platts segment is primarily related to licensing of its proprietary market price data and price assessments to commodity exchanges.
For sales usage-based royalty products and services, we provide licenses conveying the right to continuous access to our intellectual property over the contract term, with revenue recognized when the extent of our license’s utilization can be quantified, or more specifically, when trading volumes are known and publicly available to us or when we are notified by our customers. Recognition of revenue of fees tied to trading volumes is subject to the recognition constraint for a usage-based royalty promised by our customers in exchange for the license of our intellectual property, with revenue recognized when trading volumes are known.
Arrangements with Multiple Performance Obligations
Our contracts with customers may include multiple performance obligations. Revenue relating to agreements that provide for more than one performance obligation is recognized based upon the relative fair value to the customer of each service component as each component is earned. The fair value of the service components are determined using an analysis that considers cash consideration that would be received for instances when the service components are sold separately. If the fair value to the customer for each service is not objectively determinable, we make our best estimate of the services’ stand-alone selling price and record revenue as it is earned over the service period.
Receivables
We record a receivable when a customer is billed or when revenue is recognized prior to billing a customer. For multi-year agreements, we generally invoice customers annually at the beginning of each annual period. The opening balance of accounts receivable, net of allowance for doubtful accounts, was $1,319 million as of January 1, 2018.
Contract Assets
Contract assets include unbilled amounts from when the Company transfers service to a customer before a customer pays consideration or before payment is due. As of December 31, 2018 and 2017, contract assets were $26 million and $17 million, respectively, and are included in accounts receivable in our consolidated balance sheets.
Unearned Revenue
We record unearned revenue when cash payments are received or due in advance of our performance. The increase in the unearned revenue balance for the year ended December 31, 2018 is primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by $1.5 billion of revenues recognized that were included in the unearned revenue balance at the beginning of the period.
Remaining Performance Obligations
Remaining performance obligations represent the transaction price of contracts for work that has not yet been performed. As of December 31, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was $1.4 billion. We expect to recognize revenue on approximately half and three-quarters of the remaining performance obligations over the next 12 and 24 months, respectively, with the remainder recognized thereafter.
We do not disclose the value of unfulfilled performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts where revenue is a usage-based royalty promised in exchange for a license of intellectual property.
Costs to Obtain a Contract
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales commission programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were $101 million as of December 31, 2018, and are included in prepaid and other current assets and other non-current assets on our consolidated balance sheets. The asset will be amortized over a period consistent with the transfer to the customer of the goods or services to which the asset relates, calculated based on the customer term and the average life of the products and services underlying the contracts. The expense is recorded within selling and general expenses.
We expense sales commissions when incurred if the amortization period would have been one year or less. These costs are recorded within selling and general expenses.
Presentation of net periodic pension cost and net periodic postretirement benefit cost
During the first quarter of 2018, we adopted new accounting guidance requiring that net periodic benefit cost for our retirement and postretirement plans other than the service cost component be included outside of operating profit; these costs are included in other income, net in our consolidated statements of income.
The components of other income, net for the year ended December 31 are as follows:
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| (in millions) | 2018 | | 2017 | | 2016 |
| Other components of net periodic benefit cost | $ | (30 | ) | | $ | (27 | ) | | $ | (28 | ) |
| Net loss from investments | 5 |
| | — |
| | — |
|
| Other income, net | $ | (25 | ) | | $ | (27 | ) | | $ | (28 | ) |
Assets and Liabilities Held for Sale and Discontinued Operations
Assets and Liabilities Held for Sale
We classify a disposal group to be sold as held for sale in the period in which all of the following criteria are met: management, having the authority to approve the action, commits to a plan to sell the disposal group; the disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such disposal group; an active program to locate a buyer and other actions required to complete the plan to sell the disposal group have been initiated; the sale of the disposal group is probable, and transfer of the disposal group is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the disposal group beyond one year; the disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
A disposal group that is classified as held for sale is initially measured at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a disposal group until the date of sale.
The fair value of a disposal group less any costs to sell is assessed each reporting period it remains classified as held for sale and any subsequent changes are reported as an adjustment to the carrying value of the disposal group, as long as the new carrying value does not exceed the carrying value of the disposal group at the time it was initially classified as held for sale. Upon determining that a disposal group meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group as held for sale in the current period in our consolidated balance sheets.
Off-Balance Sheet Arrangements
As of December 31, 20152018 and 2014,2017, we did not have any material relationships with unconsolidated entities, such as entities often referred to as specific purpose or variable interest entities where we are the primary beneficiary, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such we are not exposed to any financial liquidity, market or credit risk that could arise if we had engaged in such relationships.
RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION
Free cash flow is a non-GAAP financial measure and reflects our cash flow provided by operating activities less capital expenditures and dividends and other payments paiddistributions to noncontrolling interests.interest holders. Capital expenditures include purchases of property and equipment and additions to technology projects. Our cash flow provided by operating activities is the most directly comparable U.S. GAAP financial measure to free cash flow. Additionally, we have considered certain items in evaluating free cash flow, which are included in the table below.
We believe the presentation of free cash flow and free cash flow excluding certain items allows our investors to evaluate the cash generated from our underlying operations in a manner similar to the method used by management. We use free cash flow to conduct and evaluate our business because we believe it typically presents a more conservative measure of cash flows since capital expenditures and dividends and other payments paiddistributions to noncontrolling interestsinterest holders are considered a necessary component of ongoing operations. Free cash flow is useful for management and investors because it allows management and investors to evaluate the cash available to us to serviceprepay debt, make strategic acquisitions and investments and repurchase stock and fund ongoing operation and working capital needs.stock.
The presentation of free cash flow and free cash flow excluding certain items are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP. Free cash flow, as we calculate it, may not be comparable to similarly titled measures employed by other companies. The following table presents a reconciliation of our cash flow provided by operating activities to free cash flow excluding the impact of the items below:
| | | (in millions) | | Years ended December 31, | | % Change | | Year ended December 31, | | % Change |
| | | 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 | | ’18 vs ’17 | | ’17 vs ’16 |
| Cash provided by operating activities | | $ | 195 |
| | $ | 1,209 |
| | $ | 782 |
| | (84)% |
| 55% | | $ | 2,064 |
| | $ | 2,016 |
| | $ | 1,560 |
| | 2% |
| 29% |
| Capital expenditures | | (139 | ) | | (92 | ) | | (117 | ) | |
| |
| | (113 | ) | | (123 | ) | | (115 | ) | |
| |
|
| Dividends and other payments paid to noncontrolling interests | | (104 | ) | | (84 | ) | | (75 | ) | |
| |
| |
| Distributions to noncontrolling interest holders | | | (154 | ) | | (111 | ) | | (116 | ) | |
| |
|
| Free cash flow | | $ | (48 | ) |
| $ | 1,033 |
| | $ | 590 |
| | N/M | | 75% | | $ | 1,797 |
|
| $ | 1,782 |
| | $ | 1,329 |
| | 1% | | 34% |
| Payment of legal and regulatory settlements | | 1,624 |
| | 35 |
| | — |
| |
| |
| |
| Tax on gain from sale of J.D. Power | | | — |
| | — |
| | 200 |
| |
| Tax on gain from sale of SPSE and CMA | | | — |
| | 67 |
| | — |
| |
| Payment of legal settlements | | | 180 |
| | 4 |
| | 150 |
| |
| |
|
| Legal settlement insurance recoveries | | (101 | ) | | — |
| | — |
| |
| |
| | — |
| | — |
| | (77 | ) | |
| |
|
| Settlement of prior-year tax audits | | | 73 |
| | — |
| | — |
| |
| Tax benefit from legal settlements | | (250 | ) | | — |
| | — |
| |
| |
| | (44 | ) | | (2 | ) | | (24 | ) | |
| |
|
| Free cash flow excluding above items | | $ | 1,225 |
| | $ | 1,068 |
| | $ | 590 |
| | 15% | | 81% | | $ | 2,006 |
| | $ | 1,851 |
| | $ | 1,578 |
| | 8% | | 17% |
|
| | | | | | | | | | | | | |
| (in millions) | 2018 | | 2017 | | 2016 | | ’18 vs ’17 | | ’17 vs ’16 |
| Cash (used for) provided by investing activities | (513 | ) | | (209 | ) | | 1,171 |
| | N/M |
| | N/M |
| Cash used for financing activities | (2,288 | ) | | (1,507 | ) | | (1,662 | ) | | 52 | % | | (9)% |
N/M - not meaningful
CRITICAL ACCOUNTING ESTIMATES
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Unless otherwise indicated, all discussion and analysis of our financial condition and results of operations relate to our continuing operations.
On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowance for doubtful accounts, valuation of long-lived assets, goodwill and other intangible assets, pension plans, incentive compensation and stock-based compensation, income taxes, contingencies and redeemable noncontrolling interests. We base our estimates on historical experience, current developments and on various other assumptions that we believe to be reasonable under these circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that cannot readily be determined from other sources. There can be no assurance that actual results will not differ from those estimates.
Management considers an accounting estimate to be critical if it required assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate or different estimates could have a material effect on our results of operations.
Management has discussed the development and selection of our critical accounting estimates with the Audit Committee of our Board of Directors. The Audit Committee has reviewed our disclosure relating to them in this MD&A.
We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements:
Revenue recognition
Revenue is recognizedWe adopted Financial Accounting Standards Board Accounting Standards Codification ("ASC") 606 "Revenue from Contracts with Customers" using the modified retrospective transition method applied to our revenue contracts with customers as it is earned when servicesof January 1, 2018. Results for reporting periods beginning after January 1, 2018 are rendered. We considerpresented under ASC 606, while prior year amounts are not adjusted and continue to be earned once evidencereported in accordance with our historic accounting under ASC 605 "Revenue Recognition". We recorded a net increase to opening retained earnings of an arrangement has been obtained, services are performed, fees are fixed or determinable and collectability is reasonably assured. Revenue relating to products that provide for more than one deliverable is recognized based upon the relative fair value$35 million as of January 1, 2018 due to the customercumulative effect of each deliverable as each deliverable is provided. Revenue relatingadopting ASC 606, with the impact primarily related to agreements that provide for more than one service is recognized based upon the relative fair valueour treatment of costs to obtain a contract and to a lesser extent, changes to the customer of each service component as each component is earned. If the fair value to the customer for each service is not objectively determinable, we make our best estimatetiming of the services’ stand alone selling pricerecognition of our subscription and recognizenon-transaction revenues. We recognized incremental revenue of $6 million for the year ended December 31, 2018 as earned asa result of the services are delivered. The allocationadoption of consideration received from multiple element arrangements that involve initial assignment of ratings and the future surveillance of ratings is determined through an analysis that considers cash consideration that would be received for instances when the service components are sold separately. In such cases, we defer portions of rating fees that we estimate will be attributed to future surveillance and recognize the deferred revenue ratably over the estimated surveillance periods. Advertisingthis standard.
Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the page is run. Subscription income isconsideration the entity expects to receive in exchange for those goods or services. Under ASC 605, revenue was recognized over the related subscription period.
For the years ended December 31, 2015, 2014as it was earned and 2013, no significant changes have been madewhen services were rendered. See Note 1 - Accounting Policies to the underlying assumptions related to estimates of revenue or the methodologies applied. Based on our current outlook these assumptions are not expected to significantly change in 2016.consolidated financial statements for further information.
Allowance for doubtful accounts
The allowance for doubtful accounts reserve methodology is based on historical analysis, a review of outstanding balances and current conditions. In determining these reserves, we consider, amongst other factors, the financial condition and risk profile of our customers, areas of specific or concentrated risk as well as applicable industry trends or market indicators. The impact on operating profit for a one percentage point change in the allowance for doubtful accounts is approximately $10$15 million.
For the years ended December 31, 2015, 20142018, 2017 and 2013, we made2016, there were no material changes in our assumptions regarding the determination of the allowance for doubtful accounts. Based on our current outlook these assumptions are not expected to significantly change in 2016.2019.
Accounting for the impairment of long-lived assets (including other intangible assets)
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Upon such an occurrence, recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to current forecasts of undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized equal to the amount by which the carrying amount of the asset exceeds the fair value of the asset. For long-lived assets held for sale, assets are written down to fair value, less cost to sell. Fair value is determined based on market evidence, discounted cash flows, appraised values or management’s estimates, depending upon the nature of the assets.
On JulyFor the year ended December 31, 2014, we completed the sale of the Company's aircraft to Harold W. McGraw III, then Chairman of the Company's Board of Directors and former President and CEO of the Company for a purchase price of $20 million. During the second quarter of 2014,2016, we recorded a non-cash impairment charge of $6$24 million within other (income) lossrelated to a technology project at our Market Intelligence segment in selling and general expenses in our consolidated statement of income as a result of the pending sale. See Note 13 – Related Party Transactions to our consolidated financial statements for further information.income.
On June 30, 2014, we completed the sale of our data center to Quality Technology Services, LLC (“QTS”) which owns, operates, and manages data centers. Net proceeds from the sale of $58 million were received in July of 2014. The sale includes all of the facilities and equipment on the south campus of our East Windsor, New Jersey location, inclusive of the rights and obligations associated with an adjoining solar power field. The sale resulted in an expense of $3 million recorded within other (income) loss in our consolidated statement of income, which is in addition to the non-cash impairment charge of $36 million we recorded in the fourth quarter of 2013 to adjust the value facilities and associated infrastructure classified as held for sale to their fair value.
During the fourth quarter of 2013, we also incurred a $26 million non-cash impairment charge associated with an intangible asset acquired through the formation of our S&P Dow Jones Indices LLC joint venture.
Goodwill and indefinite-lived intangible assets
Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. As of December 31, 20152018 and 2014,2017, the carrying value of goodwill and other indefinite-lived intangible assets was $3.6$4.4 billion and $2.1$3.7 billion, respectively. The increase was primarily due to the acquisition of SNL in September of 2015. See Note 2 – Acquisitions and Divestitures to our consolidated financial statements for further information.
Goodwill and other intangible assets with indefinite lives are not amortized, but instead are tested for impairment annually during the fourth quarter each year or more frequently if events or changes in circumstances indicate that the asset might be impaired.
Goodwill
As part of our annual impairment test of our four reporting units, we initially perform a qualitative analysis evaluating whether any events and circumstances occurred that provide evidence that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount. Reporting units are generally an operating segment or one level below an operating segment. Our qualitative assessment included, but was not limited to, consideration of macroeconomic conditions, industry and market conditions, cost factors, cash flows, changes in key Company personnel and our share price. If, based on our evaluation of the events and circumstances that occurred during the year we do not believe that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount, no quantitative impairment test is performed. Conversely, if the results of our qualitative assessment determine that it is more likely than not that the fair value of any of our reporting units is less than its respective carrying amount we perform a two-step quantitative impairment test. For 2015,2018, based on our qualitative assessments, we determined that it is more likely than not that our reporting units’ fair value wasvalues were greater than their respective carrying amounts.
If the fair value of the reporting unit is less than the carrying value, a second step is performed which compares the implied fair value of the reporting unit's goodwill to the carrying value of the goodwill. The implied fair value of the goodwill is determined based on the difference between the fair value of the reporting unit and the net fair value of the identifiable assets and liabilities of the reporting unit. If the implied fair value of the goodwill is less than the carrying value, the difference is recognized as an impairment charge.
Indefinite-Lived Intangible Assets
We evaluate the recoverability of indefinite-lived intangible assets by first performing a qualitative analysis evaluating whether any events and circumstances occurred that provide evidence that it is more likely than not that the indefinite-lived asset is impaired. If, based on our evaluation of the events and circumstances that occurred during the year we do not believe that it is more likely than not that the indefinite-lived asset is impaired, no quantitative impairment test is performed. Conversely, if the results of our qualitative assessment determine that it is more likely than not that the indefinite-lived asset is impaired, a quantitative impairment test is performed. If necessary, the impairment test is performed by comparing the estimated fair value of the intangible asset to its carrying value. If the indefinite-lived intangible asset carrying value exceeds its fair value, an impairment analysis is performed using the income approach. The fair value of loss is recognized in an amount equal to that excess. Significant judgments inherent in these analyses include estimating the amount and timing of future cash flows and the selection of appropriate discount rates, royalty rates and long-term growth rate assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for this indefinite-lived intangible asset and could result in an impairment charge, which could be material to our financial position and results of operations.
We performed our impairment assessment of goodwill and indefinite-lived intangible assets at our S&P Ratings, S&P Capital IQ and SNL, S&P DJ Indices and C&C operating segments and concluded that no impairment existed for the years ended December 31, 2015, 2014,2018, 2017, and 2013.2016.
Retirement plans and postretirement healthcare and other benefits
Our employee pension and other postretirement benefit costs and obligations are dependent on assumptions concerning the outcome of future events and circumstances, including compensation increases, long-term return on pension plan assets, healthcare cost trends, discount rates and other factors. In determining such assumptions, we consult with outside actuaries and other advisors where deemed appropriate. In accordance with relevant accounting standards, if actual results differ from our assumptions, such differences are deferred and amortized over the estimated remaining lifetime of the plan participants. While we believe that the assumptions used in these calculations are reasonable, differences in actual experience or changes in assumptions could affect the expense and liabilities related to our pension and other postretirement benefits.
The following is a discussion of some significant assumptions that we make in determining costs and obligations for pension and other postretirement benefits:
Discount rate assumptions are based on current yields on high-grade corporate long-term bonds.
Healthcare cost trend assumptions are based on historical market data, the near-term outlook and an assessment of likely long-term trends.
The expected return on assets assumption is calculated based on the plan’s asset allocation strategy and projected market returns over the long-term.
Our discount rate and return on asset assumptions used to determine the net periodic pension and postretirement benefit cost on our U.S. retirement plans are as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | Retirement Plans | | Postretirement Plans |
| January 1 | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
Discount rate 1 | | 4.47 | % | | 4.15 | % | | 5.00 | % | | 3.90 | % | | 3.60 | % | | 4.20 | % |
| Return on assets | | 6.25 | % | | 6.25 | % | | 7.125 | % | | | | | | |
| Weighted-average healthcare cost rate | | | | | | | | 7.00 | % | | 7.00 | % | | 7.00 | % |
| |
1
| At the end of 2015, we changed our approach used to measure service and interest costs on all of our retirement plans. For 2015 and prior periods presented, we measured service and interest costs utilizing the single weighted-average discount rate derived from the yield curve used to measure the benefit obligation. For 2016, we elected to measure service and interest costs by applying the specific spot rates along that yield curve to the plans' liability cash flows. We believe this new approach provides a more precise measurement of service and interest costs by aligning the timing of the plans' liability cash flows to the corresponding spot rates on the yield curve. This change does not affect the measurement of our benefit obligation. We have accounted for this change as a change in accounting estimate that is inseparable from a change in accounting principle and, accordingly, have accounted for it on a prospective basis. We expect pension and postretirement medical costs to decrease by approximately $13 million in 2016 as a result of this change. |
In addition to the assumptions in the above table, assumed mortality is also a key assumption in determining benefit obligations. Effective December 31, 2014, the Company updated the assumed mortality rates to reflect life expectancy improvements. |
| | | | | | | | | | | | | | | | | | |
| | | Retirement Plans | | Postretirement Plans |
| January 1 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Discount rate | | 4.40 | % | | 3.68 | % | | 4.14 | % | | 4.15 | % | | 3.40 | % | | 3.69 | % |
| Return on assets | | 6.00 | % | | 6.00 | % | | 6.25 | % | | | | | | |
| Weighted-average healthcare cost rate | | | | | | | | 6.50 | % | | 6.50 | % | | 7.00 | % |
Stock-based compensation
Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized over the requisite service period, which typically is the vesting period. Stock-based compensation is classified as both operating-related expense and selling and general expense in our consolidated statements of income.
We use a lattice-based option-pricing model to estimate the fair value of options granted. The following assumptions were used in valuing the options granted:
| | | | | Years ended December 31, | | Year Ended |
| | | 2015 | | 2014 | | 2013 | | December 31, 2018 |
| Risk-free average interest rate | | 0.2 - 1.9% |
| | 0.1 - 2.9% |
| | 0.1 - 2.9% |
| | 2.6 - 2.7% |
|
| Dividend yield | | 1.4% |
| | 1.4 - 1.8% |
| | 2.07 - 2.09% |
| | 1.1 | % |
| Volatility | | 21 - 39% |
| | 18 - 41% |
| | 29 - 45% |
| | 21.8 - 22.0% |
|
| Expected life (years) | | 6.3 |
| | 6.21 - 6.25 |
| | 6.1 - 6.2 |
| | 5.67 - 6.07 |
|
| Weighted-average grant-date fair value per option | | $ | 27.57 |
| | $ | 23.41 |
| | $ | 14.46 |
| | $ | 112.98 |
|
Because lattice-based option-pricing models incorporate ranges of assumptions, those ranges are disclosed. These assumptions are based on multiple factors, including historical exercise patterns, post-vesting termination rates, expected future exercise patterns and the expected volatility of our stock price. The risk-free interest rate is the imputed forward rate based on the U.S. Treasury yield at the date of grant. We use the historical volatility of our stock price over the expected term of the options to estimate the expected volatility. The expected term of options granted is derived from the output of the lattice model and represents the period of time that options granted are expected to be outstanding.
In 2018, we made a one-time issuance of incentive stock options in connection with our acquisition of Kensho in April of 2018. There were no stock options granted in 2017 and 2016.
Income taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize liabilities for uncertain tax positions taken or expected to be taken in income tax returns. Accrued interest and penalties related to unrecognized tax benefits are recognized in interest expense and operating expense, respectively.
Judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and unrecognized tax benefits. In determining the need for a valuation allowance, the historical and projected financial performance of the operation that is recording a net deferred tax asset is considered along with any other pertinent information.
We file income tax returns in the U.S. federal jurisdiction, various states, and foreign jurisdictions, and we are routinely under audit by many different tax authorities. We believe that our accrual for tax liabilities is adequate for all open audit years based on our assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. It is possible that examinations will be settled prior to December 31, 2016.2019. If any of these tax audit settlements do occur within that period we would make any necessary adjustments to the accrual for unrecognized tax benefits. Until formal resolutions are reached between us and the tax authorities, the determination of a possible audit settlement range with respect to the impact on unrecognized tax benefits is not practicable. On the basis of present information, it is our opinion that any assessments resulting from the current audits will not have a material effect on our consolidated financial statements.
WeAs of December 31, 2018, we have determined that theapproximately $2.3 billion of undistributed earnings of our foreign subsidiaries, are permanentlyof which $784 million is reinvested within thoseindefinitely in our foreign operations. Accordingly, we have not provided deferred income taxes on these indefinitely reinvested earnings. A future distribution by the foreign subsidiaries of these earnings could result in additional tax liability, which may be material to our future reported results, financial position and cash flows.
For the years ended December 31, 2015, 2014 and 2013, we made no material changes in our assumptions regarding the determination
Contingencies
We are subject to a number of lawsuits and claims that arise in the ordinary course of business. We recognize a liability for such contingencies when both (a) information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements and (b) the amount of loss can reasonably be estimated. We continually assess the likelihood of any adverse judgments or outcomes to our contingencies, as well as potential amounts or ranges of probable losses, and recognize a liability, if any, for these contingencies based on an analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Because many of these matters are resolved over long periods of time, our estimate of liabilities may change due to new developments, changes in assumptions or changes in our strategy related to the matter. When we accrue for loss contingencies and the reasonable estimate of the loss is within a range, we record its best estimate within the range. We disclose an estimated possible loss or a range of loss when it is at least reasonably possible that a loss may have been incurred.
Redeemable Noncontrolling Interest
The fair value component of the redeemable noncontrolling interest in S&P DJ Indices business is based on a combination of an income and market valuation approach. Our income and market valuation approaches may incorporate Level 3 measures for instances when observable inputs are not available, including assumptions related to expected future net cash flows, long-term growth rates, the timing and nature of tax attributes, and the redemption features.
RECENT ACCOUNTING STANDARDS
See Note 1 – Accounting Policies, to theour consolidated financial statements for a detailed description of recent accounting standards. We do not expect the adoption of these recent accounting standards to have a material impact on our resultsconsolidated balance sheet; however, we do not expect that these standards will have a material impact on our consolidated statements of operations, financial condition,income or liquidity in future periods.cash flows.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
There have been no significant changes in our exposure to market risk during the year ended December 31, 2015. Our exposure to market risk includes changes in foreign exchange rates. We have operations in various foreign countries where the functional currency is primarily the local currency. For international operations that are determined to be extensions of the parent company, the U.S. dollar is the functional currency. We typically have naturally hedged positions in most countries from a local currency perspective with offsetting assets and liabilities. As ofDuring the years ended December 31, 2015,2018 and 2017, we have entered into an immaterial amount of foreign exchange forwardsforward contracts in order to mitigate the change in fair value of specific assets and liabilities in the consolidated balance sheet. These forward contracts are not designated as hedges and do not qualify for hedge accounting. During the years ended December 31, 2018, 2017 and 2016, we entered into foreign exchange forward contracts to hedge the effect of adverse fluctuations in foreign currency exchange rates. We have not entered into any derivative financial instruments for speculative purposes. See Note 6 – Derivative Instruments to the Consolidated Financial Statements and Supplementary Data, in the Annual Report on Form 10-K for further discussion.
Item 8. Consolidated Financial Statements and Supplementary Data
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
TheTo the Shareholders and the Board of Directors and Shareholders of McGraw Hill Financial,S&P Global Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of McGraw Hill Financial,S&P Global Inc. (the "Company")Company) as of December 31, 20152018 and 2014, and2017, the related consolidated statements of income, comprehensive income, equity and cash flows and equity for each of the three years in the period ended December 31, 2015. Our audits also included2018, and the related notes and financial statement schedule listed in Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 12, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements and schedule are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on thesethe Company’s financial statements and schedule based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ ERNST & YOUNG LLP
We have served as the Company’s auditor since 1969.
New York, New York
February 12, 2019
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of S&P Global Inc.
Opinion on Internal Control over Financial Reporting
We have audited S&P Global Inc.’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the financial statements referred to above present fairly,S&P Global Inc. (the Company) maintained, in all material respects, the consolidatedeffective internal control over financial positionreporting as of McGraw Hill Financial, Inc. at December 31, 2015 and 2014, and2018, based on the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), McGraw Hill Financial,the consolidated balance sheets of S&P Global Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework issued by2018 and 2017, the Committeerelated consolidated statements of Sponsoring Organizationsincome, comprehensive income, equity and cash flows for each of the Treadway Commission (2013 framework),three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in Item 15(a)(2) and our report dated February 11, 201612, 2019 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
New York, New York
February 11, 2016
Report of Independent Registered Public Accounting Firm
Basis for Opinion
The Board of Directors and Shareholders of McGraw Hill Financial, Inc.
We have audited McGraw Hill Financial, Inc.’s (the "Company") internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). McGraw Hill Financial, Inc.’sCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of SNL Financial LC, which is included in the 2015 consolidated financial statements of McGraw Hill Financial, Inc. and constituted $2.5 billion and $2.3 billion of total and net assets, respectively, as of December 31, 2015 and $85 million and $9 million of revenues and net loss attributable to McGraw Hill Financial, Inc., respectively, for the year then ended. Our audit of internal control over financial reporting of McGraw Hill Financial, Inc. also did not include an evaluation of the internal control over financial reporting of SNL Financial LC.
In our opinion, McGraw Hill Financial, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of McGraw Hill Financial, Inc. as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, cash flows and equity for each of the three years in the period ended December 31, 2015 and our report dated February 11, 2016 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
New York, New York
February 11, 201612, 2019
Consolidated Statements of Income
| | | (in millions, except per share data) | Year Ended December 31, | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| Revenue | $ | 5,313 |
| | $ | 5,051 |
| | $ | 4,702 |
| $ | 6,258 |
| | $ | 6,063 |
| | $ | 5,661 |
|
| Expenses: | | | | | | | | | | |
| Operating-related expenses | 1,672 |
| | 1,627 |
| | 1,564 |
| 1,701 |
| | 1,695 |
| | 1,773 |
|
| Selling and general expenses | 1,578 |
| | 3,168 |
| | 1,631 |
| 1,561 |
| | 1,605 |
| | 1,467 |
|
| Depreciation | 90 |
| | 86 |
| | 86 |
| 84 |
| | 82 |
| | 85 |
|
| Amortization of intangibles | 67 |
| | 48 |
| | 51 |
| 122 |
| | 98 |
| | 96 |
|
| Total expenses | 3,407 |
| | 4,929 |
| | 3,332 |
| 3,468 |
| | 3,480 |
| | 3,421 |
|
| Other (income) loss | (11 | ) | | 9 |
| | 12 |
| |
| Gain on dispositions | | — |
| | — |
| | (1,101 | ) |
| Operating profit | 1,917 |
| | 113 |
| | 1,358 |
| 2,790 |
| | 2,583 |
| | 3,341 |
|
| Other income, net | | (25 | ) | | (27 | ) | | (28 | ) |
| Interest expense, net | 102 |
| | 59 |
| | 59 |
| 134 |
| | 149 |
| | 181 |
|
| Income from continuing operations before taxes on income | 1,815 |
| | 54 |
| | 1,299 |
| |
| Income before taxes on income | | 2,681 |
| | 2,461 |
| | 3,188 |
|
| Provision for taxes on income | 547 |
| | 245 |
| | 425 |
| 560 |
| | 823 |
| | 960 |
|
| Income (loss) from continuing operations | 1,268 |
| | (191 | ) | | 874 |
| |
| Discontinued operations, net of tax: | | | | | | |
| Income from discontinued operations | — |
| | 18 |
| | 3 |
| |
| Gain on sale of discontinued operations (includes $(75) accumulated other comprehensive income reclassifications in 2013 for foreign currency translation adjustment) | — |
| | 160 |
| | 589 |
| |
| Discontinued operations, net | — |
| | 178 |
| | 592 |
| |
| Net income (loss) | 1,268 |
| | (13 | ) | | 1,466 |
| |
| Less: net income from continuing operations attributable to noncontrolling interests | (112 | ) | | (102 | ) | | (91 | ) | |
| Less: net loss from discontinued operations attributable to noncontrolling interests | — |
| | — |
| | 1 |
| |
| Net income (loss) attributable to McGraw Hill Financial, Inc. | $ | 1,156 |
| | $ | (115 | ) | | $ | 1,376 |
| |
| Net income | | 2,121 |
| | 1,638 |
| | 2,228 |
|
| Less: net income attributable to noncontrolling interests | | (163 | ) | | (142 | ) | | (122 | ) |
| Net income attributable to S&P Global Inc. | | $ | 1,958 |
| | $ | 1,496 |
| | $ | 2,106 |
|
| | | | | | | | | | | |
| Amounts attributable to McGraw Hill Financial, Inc. common shareholders: | | | | | | |
| Income (loss) from continuing operations | $ | 1,156 |
| | $ | (293 | ) | | $ | 783 |
| |
| Income from discontinued operations | — |
| | 178 |
| | 593 |
| |
| Net income (loss) | $ | 1,156 |
| | $ | (115 | ) | | $ | 1,376 |
| |
| | | | | | | |
| Earnings (loss) per share attributable to McGraw Hill Financial, Inc. common shareholders: | | | | | | |
| Income (loss) from continuing operations: | | | | | | |
| Basic | $ | 4.26 |
| | $ | (1.08 | ) | | $ | 2.85 |
| |
| Diluted | $ | 4.21 |
| | $ | (1.08 | ) | | $ | 2.80 |
| |
| Income from discontinued operations: | | | | | | |
| Basic | $ | — |
| | $ | 0.66 |
| | $ | 2.16 |
| |
| Diluted | $ | — |
| | $ | 0.66 |
| | $ | 2.12 |
| |
| Net income (loss): | | | | | | |
| Earnings per share attributable to S&P Global Inc. common shareholders: | | | | | | |
| Net income: | | | | | | |
| Basic | $ | 4.26 |
| | $ | (0.42 | ) | | $ | 5.01 |
| $ | 7.80 |
| | $ | 5.84 |
| | $ | 8.02 |
|
| Diluted | $ | 4.21 |
| | $ | (0.42 | ) | | $ | 4.91 |
| $ | 7.73 |
| | $ | 5.78 |
| | $ | 7.94 |
|
| Weighted-average number of common shares outstanding: | | | | | | | | | | |
| Basic | 271.6 |
| | 271.5 |
| | 274.5 |
| 250.9 |
| | 256.3 |
| | 262.8 |
|
| Diluted | 274.6 |
| | 271.5 |
| | 279.8 |
| 253.2 |
| | 258.9 |
| | 265.2 |
|
| | | | | | | | | | | |
| Actual shares outstanding at year end | 265.2 |
| | 272.0 |
| | 270.4 |
| 248.4 |
| | 253.7 |
| | 258.3 |
|
| | | | | | | | | | | |
| Dividend declared per common share | $ | 1.32 |
| | $ | 1.20 |
| | $ | 1.12 |
| $ | 2.00 |
| | $ | 1.64 |
| | $ | 1.44 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Comprehensive Income
| | | (in millions) | Year Ended December 31, | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| Net income (loss) | $ | 1,268 |
| | $ | (13 | ) | | $ | 1,466 |
| |
| Other comprehensive income (loss): | | | | | | |
| Net income | | $ | 2,121 |
| | $ | 1,638 |
| | $ | 2,228 |
|
| Other comprehensive income: | | | | | | |
| Foreign currency translation adjustment | (111 | ) | | (108 | ) | | 93 |
| (96 | ) | | 93 |
| | (132 | ) |
| Income tax effect | 1 |
| | 2 |
| | (2 | ) | (4 | ) | | — |
| | (7 | ) |
| | (110 | ) | | (106 | ) | | 91 |
| (100 | ) | | 93 |
| | (139 | ) |
| | | | | | | | | | | |
| Pension and other postretirement benefit plans | 34 |
| | (357 | ) | | 385 |
| (14 | ) | | 52 |
| | (27 | ) |
| Income tax effect | (9 | ) | | 142 |
| | (154 | ) | 9 |
| | (11 | ) | | (10 | ) |
| | 25 |
| | (215 | ) | | 231 |
| (5 | ) | | 41 |
| | (37 | ) |
| | | | | | | | | | | |
| Unrealized (loss) gain on investment and forward exchange contract | (1 | ) | | 4 |
| | 2 |
| |
| Unrealized gain (loss) on investment and forward exchange contracts | | 2 |
| | (10 | ) | | 4 |
|
| Income tax effect | — |
| | (1 | ) | | (2 | ) | — |
| | — |
| | (1 | ) |
| | (1 | ) | | 3 |
| | — |
| 2 |
| | (10 | ) | | 3 |
|
| | | | | | | | | | | |
| Comprehensive income (loss) | 1,182 |
| | (331 | ) | | 1,788 |
| |
| Comprehensive income | | 2,018 |
| | 1,762 |
| | 2,055 |
|
| Less: comprehensive income attributable to nonredeemable noncontrolling interests | (11 | ) | | (10 | ) | | (18 | ) | (12 | ) | | (13 | ) | | (13 | ) |
| Less: comprehensive income attributable to redeemable noncontrolling interests | (101 | ) | | (92 | ) | | (73 | ) | (151 | ) | | (129 | ) | | (109 | ) |
| Comprehensive income (loss) attributable to McGraw Hill Financial, Inc. | $ | 1,070 |
| | $ | (433 | ) | | $ | 1,697 |
| |
| Comprehensive income attributable to S&P Global Inc. | | $ | 1,855 |
| | $ | 1,620 |
| | $ | 1,933 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Balance Sheets
|
| | | | | | | |
| (in millions) | December 31, |
| | 2018 | | 2017 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,917 |
| | $ | 2,777 |
|
| Restricted cash | 41 |
| | 2 |
|
| Short-term investments | 18 |
| | 12 |
|
| Accounts receivable, net of allowance for doubtful accounts: 2018- $34 ; 2017 - $33 | 1,449 |
| | 1,319 |
|
| Prepaid and other current assets | 179 |
| | 214 |
|
| Total current assets | 3,604 |
| | 4,324 |
|
| Property and equipment: | | | |
| Buildings and leasehold improvements | 372 |
| | 354 |
|
| Equipment and furniture | 494 |
| | 475 |
|
| Total property and equipment | 866 |
| | 829 |
|
| Less: accumulated depreciation | (596 | ) | | (554 | ) |
| Property and equipment, net | 270 |
| | 275 |
|
| Goodwill | 3,535 |
| | 2,989 |
|
| Other intangible assets, net | 1,524 |
| | 1,388 |
|
| Other non-current assets | 525 |
| | 449 |
|
| Total assets | $ | 9,458 |
| | $ | 9,425 |
|
| LIABILITIES AND EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 211 |
| | $ | 195 |
|
| Accrued compensation and contributions to retirement plans | 354 |
| | 472 |
|
| Short-term debt | — |
| | 399 |
|
| Income taxes currently payable | 72 |
| | 77 |
|
| Unearned revenue | 1,641 |
| | 1,613 |
|
| Accrued legal and regulatory settlements | 1 |
| | 107 |
|
| Other current liabilities | 350 |
| | 351 |
|
| Total current liabilities | 2,629 |
| | 3,214 |
|
| Long-term debt | 3,662 |
| | 3,170 |
|
| Pension and other postretirement benefits | 229 |
| | 244 |
|
| Other non-current liabilities | 634 |
| | 679 |
|
| Total liabilities | 7,154 |
| | 7,307 |
|
| Redeemable noncontrolling interest | 1,620 |
| | 1,352 |
|
| Commitments and contingencies (Note 13) |
| |
|
| Equity: | | | |
| Common stock, $1 par value: authorized - 600 million shares; issued: 2018 - 294 million shares; 2017 - 412 million shares | 294 |
| | 412 |
|
| Additional paid-in capital | 833 |
| | 525 |
|
| Retained income | 11,284 |
| | 10,023 |
|
| Accumulated other comprehensive loss | (742 | ) | | (649 | ) |
| Less: common stock in treasury - at cost: 2018 - 45 million shares; 2017 - 158 million shares | (11,041 | ) | | (9,602 | ) |
| Total equity – controlling interests | 628 |
| | 709 |
|
| Total equity – noncontrolling interests | 56 |
| | 57 |
|
| Total equity | 684 |
| | 766 |
|
| Total liabilities and equity | $ | 9,458 |
| | $ | 9,425 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Cash Flows
|
| | | | | | | | | | | |
| (in millions) | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Operating Activities: | | | | | |
| Net income | $ | 2,121 |
| | $ | 1,638 |
| | $ | 2,228 |
|
| Adjustments to reconcile net income to cash provided by operating activities: | | | | | |
| Depreciation | 84 |
| | 82 |
| | 85 |
|
| Amortization of intangibles | 122 |
| | 98 |
| | 96 |
|
| Provision for losses on accounts receivable | 21 |
| | 16 |
| | 9 |
|
| Deferred income taxes | 81 |
| | — |
| | 79 |
|
| Stock-based compensation | 94 |
| | 99 |
| | 76 |
|
| Gain on dispositions | — |
| | — |
| | (1,101 | ) |
| Accrued legal settlements | 1 |
| | 55 |
| | 54 |
|
| Other | 52 |
| | 96 |
| | 30 |
|
| Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: | | | | | |
| Accounts receivable | (164 | ) | | (196 | ) | | (177 | ) |
| Prepaid and other current assets | (1 | ) | | 10 |
| | 5 |
|
| Accounts payable and accrued expenses | (106 | ) | | 75 |
| | 19 |
|
| Unearned revenue | 70 |
| | 85 |
| | 107 |
|
| Accrued legal settlements | (108 | ) | | (4 | ) | | (150 | ) |
| Other current liabilities | (67 | ) | | (85 | ) | | (19 | ) |
| Net change in prepaid/accrued income taxes | (7 | ) | | 32 |
| | 174 |
|
| Net change in other assets and liabilities | (129 | ) | | 15 |
| | 45 |
|
| Cash provided by operating activities | 2,064 |
| | 2,016 |
| | 1,560 |
|
| Investing Activities: | | | | | |
| Capital expenditures | (113 | ) | | (123 | ) | | (115 | ) |
| Acquisitions, net of cash acquired | (401 | ) | | (83 | ) | | (177 | ) |
| Contingent consideration payment | — |
| | — |
| | (34 | ) |
| Proceeds from dispositions | 6 |
| | 2 |
| | 1,498 |
|
| Changes in short-term investments | (5 | ) | | (5 | ) | | (1 | ) |
| Cash (used for) provided by investing activities | (513 | ) | | (209 | ) | | 1,171 |
|
| Financing Activities: | | | | | |
| Payments on short-term debt, net | — |
| | — |
| | (143 | ) |
| Proceeds from issuance of senior notes, net | 489 |
| | — |
| | 493 |
|
| Payments on senior notes | (403 | ) | | — |
| | (421 | ) |
| Dividends paid to shareholders | (503 | ) | | (421 | ) | | (380 | ) |
| Distributions to noncontrolling interest holders | (154 | ) | | (111 | ) | | (116 | ) |
| Repurchase of treasury shares | (1,660 | ) | | (1,001 | ) | | (1,123 | ) |
| Exercise of stock options | 34 |
| | 75 |
| | 88 |
|
| Contingent consideration payment | — |
| | — |
| | (5 | ) |
| Purchase of additional CRISIL shares | (25 | ) | | — |
| | — |
|
| Employee withholding tax on share-based payments | (66 | ) | | (49 | ) | | (55 | ) |
| Cash used for financing activities | (2,288 | ) | | (1,507 | ) | | (1,662 | ) |
| Effect of exchange rate changes on cash | (84 | ) | | 87 |
| | (158 | ) |
| Net change in cash, cash equivalents, and restricted cash | (821 | ) | | 387 |
| | 911 |
|
| Cash, cash equivalents, and restricted cash at beginning of year | 2,779 |
| | 2,392 |
| | 1,481 |
|
| Cash, cash equivalents, and restricted cash at end of year | $ | 1,958 |
| | $ | 2,779 |
| | $ | 2,392 |
|
| Cash paid during the year for: | | | | | |
| Interest | $ | 151 |
| | $ | 139 |
| | $ | 150 |
|
| Income taxes | $ | 558 |
| | $ | 709 |
| | $ | 683 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Equity
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Common Stock $1 par | | Additional Paid-in Capital | | Retained Income | | Accumulated
Other Comprehensive Loss | | Less: Treasury Stock | | Total SPGI Equity | | Noncontrolling Interests | | Total Equity |
| Balance as of December 31, 2015 | $ | 412 |
| | $ | 475 |
| | $ | 7,636 |
| | $ | (600 | ) | | $ | 7,729 |
| | $ | 194 |
| | $ | 49 |
| | $ | 243 |
|
Comprehensive income 1 | | | | | 2,106 |
| | (173 | ) | | | | 1,933 |
| | 13 |
| | 1,946 |
|
| Dividends | | | | | (380 | ) | | | | | | (380 | ) | | (10 | ) | | (390 | ) |
| Share repurchases | | |
|
| | | | | | 1,097 |
| | (1,097 | ) | |
| | (1,097 | ) |
| Employee stock plans, net of tax benefit | | | 27 |
| | | | | | (125 | ) | | 152 |
| | | | 152 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | (153 | ) | | | | | | (153 | ) | | | | (153 | ) |
| Other | | | | | 1 |
| | | | | | 1 |
| | (1 | ) | | — |
|
| Balance as of December 31, 2016 | $ | 412 |
| | $ | 502 |
| | $ | 9,210 |
| | $ | (773 | ) | | $ | 8,701 |
| | $ | 650 |
| | $ | 51 |
| | $ | 701 |
|
Comprehensive income 1 | | | | | 1,496 |
| | 124 |
| | | | 1,620 |
| | 15 |
| | 1,635 |
|
| Dividends | | | | | (421 | ) | | | | | | (421 | ) | | (10 | ) | | (431 | ) |
| Share repurchases | | |
| | | | | | 1,001 |
| | (1,001 | ) | | (5 | ) | | (1,006 | ) |
| Employee stock plans | | | 23 |
| | | | | | (100 | ) | | 123 |
| | 8 |
| | 131 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | (260 | ) | | | | | | (260 | ) | | | | (260 | ) |
| Other | | | | | (2 | ) | | | | | | (2 | ) | | (2 | ) | | (4 | ) |
| Balance as of December 31, 2017 | $ | 412 |
| | $ | 525 |
| | $ | 10,023 |
| | $ | (649 | ) | | $ | 9,602 |
| | $ | 709 |
| | $ | 57 |
| | $ | 766 |
|
Comprehensive income 1 | | | | | 1,958 |
| | (103 | ) | | | | 1,855 |
| | 12 |
| | 1,867 |
|
| Dividends | | | | | (503 | ) | | | | | | (503 | ) | | (11 | ) | | (514 | ) |
| Share repurchases | | | (75 | ) | | | | | | 1,585 |
| | (1,660 | ) | |
| | (1,660 | ) |
| Retirement of common stock | (118 | ) | | | | | | | | (118 | ) | | — |
| | | | — |
|
| Employee stock plans | | | 56 |
| | | | | | (28 | ) | | 84 |
| |
| | 84 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | (228 | ) | | | | | | (228 | ) | | | | (228 | ) |
| Increase in CRISIL ownership | | | (25 | ) | | | | | | | | (25 | ) | | 2 |
| | (23 | ) |
| Stock consideration for Kensho | | | 352 | | | | | | | | 352 |
| | | | 352 |
|
| Other | | | | | 34 |
| 2 |
| 10 |
| 2 |
| | | 44 |
| | (4 | ) | | 40 |
|
| Balance as of December 31, 2018 | $ | 294 |
| | $ | 833 |
| | $ | 11,284 |
| | $ | (742 | ) | | $ | 11,041 |
| | $ | 628 |
| | $ | 56 |
| | $ | 684 |
|
| |
1 | Excludes $151 million, $129 million and $109 million in 2018, 2017 and 2016, respectively, attributable to redeemable noncontrolling interest. |
| |
2 | Includes opening balance sheet adjustments related to the adoption of the new revenue recognition standard and the reclassification of the unrealized loss on investments from Accumulated other comprehensive loss to Retained income. See Note 1 —Accounting Policies for additional details. |
See accompanying notes to the consolidated financial statements.
Consolidated Balance Sheets
|
| | | | | | | |
| (in millions) | December 31, |
| | 2015 | | 2014 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,481 |
| | $ | 2,497 |
|
| Short-term investments | 6 |
| | 3 |
|
| Accounts receivable, net of allowance for doubtful accounts: 2015 - $37; 2014 - $38 | 991 |
| | 932 |
|
| Deferred income taxes | 109 |
| | 360 |
|
| Prepaid and other current assets | 206 |
| | 170 |
|
| Assets of a business held for sale | 503 |
| | — |
|
| Total current assets | 3,296 |
| | 3,962 |
|
| Property and equipment: | | | |
| Buildings and leasehold improvements | 352 |
| | 287 |
|
| Equipment and furniture | 503 |
| | 482 |
|
| Total property and equipment | 855 |
| | 769 |
|
| Less: accumulated depreciation | (585 | ) | | (563 | ) |
| Property and equipment, net | 270 |
| | 206 |
|
| Goodwill | 2,882 |
| | 1,387 |
|
| Other intangible assets, net | 1,522 |
| | 1,004 |
|
| Asset for pension benefits | 36 |
| | 28 |
|
| Other non-current assets | 177 |
| | 186 |
|
| Total assets | $ | 8,183 |
| | $ | 6,773 |
|
| LIABILITIES AND EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 206 |
| | $ | 191 |
|
| Accrued compensation and contributions to retirement plans | 383 |
| | 410 |
|
| Short-term debt | 143 |
| | — |
|
| Income taxes currently payable | 56 |
| | 54 |
|
| Unearned revenue | 1,421 |
| | 1,254 |
|
| Accrued legal and regulatory settlements | 121 |
| | 1,609 |
|
| Other current liabilities | 372 |
| | 402 |
|
| Liabilities of a business held for sale | 206 |
| | — |
|
| Total current liabilities | 2,908 |
| | 3,920 |
|
| Long-term debt | 3,468 |
| | 795 |
|
| Pension and other postretirement benefits | 276 |
| | 333 |
|
| Deferred income taxes | 23 |
| | 40 |
|
| Other non-current liabilities | 345 |
| | 336 |
|
| Total liabilities | 7,020 |
| | 5,424 |
|
| Redeemable noncontrolling interest | 920 |
| | 810 |
|
| Commitments and contingencies (Note 12) |
| |
|
| Equity: | | | |
| Common stock, $1 par value: authorized - 600 million shares; issued - 412 million shares in 2015 and 2014 | 412 |
| | 412 |
|
| Additional paid-in capital | 475 |
| | 493 |
|
| Retained income | 7,636 |
| | 6,946 |
|
| Accumulated other comprehensive loss | (600 | ) | | (514 | ) |
| Less: common stock in treasury - at cost: 2015 - 146 million shares; 2014 - 140 million shares | (7,729 | ) | | (6,849 | ) |
| Total equity – controlling interests | 194 |
| | 488 |
|
| Total equity – noncontrolling interests | 49 |
| | 51 |
|
| Total equity | 243 |
| | 539 |
|
| Total liabilities and equity | $ | 8,183 |
| | $ | 6,773 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Cash Flows
|
| | | | | | | | | | | |
| (in millions) | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Operating Activities: | | | | | |
| Net income (loss) | $ | 1,268 |
| | $ | (13 | ) | | $ | 1,466 |
|
| Less: income from discontinued operations | — |
| | 178 |
| | 592 |
|
| Net income (loss) from continuing operations | 1,268 |
| | (191 | ) | | 874 |
|
| Adjustments to reconcile income (loss) from continuing operations to cash provided by operating activities from continuing operations: | | | | | |
| Depreciation | 90 |
| | 86 |
| | 86 |
|
| Amortization of intangibles | 67 |
| | 48 |
| | 51 |
|
| Provision for losses on accounts receivable | 8 |
| | 11 |
| | 22 |
|
| Deferred income taxes | 280 |
| | (245 | ) | | 43 |
|
| Stock-based compensation | 78 |
| | 100 |
| | 96 |
|
| Accrued legal and regulatory settlements | 119 |
| | 1,587 |
| | — |
|
| Other | 46 |
| | 80 |
| | 96 |
|
| Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: | | | | | |
| Accounts receivable | (118 | ) | | (9 | ) | | (35 | ) |
| Prepaid and other current assets | (4 | ) | | (7 | ) | | (29 | ) |
| Accounts payable and accrued expenses | (92 | ) | | (130 | ) | | (94 | ) |
| Unearned revenue | 129 |
| | 78 |
| | 109 |
|
| Accrued legal and regulatory settlement | (1,624 | ) | | (35 | ) | | — |
|
| Other current liabilities | (78 | ) | | (16 | ) | | (89 | ) |
| Net change in prepaid / accrued income taxes | 61 |
| | (93 | ) | | (238 | ) |
| Net change in other assets and liabilities | (35 | ) | | (55 | ) | | (110 | ) |
| Cash provided by operating activities from continuing operations | 195 |
| | 1,209 |
| | 782 |
|
| Investing Activities: | | | | | |
| Capital expenditures | (139 | ) | | (92 | ) | | (117 | ) |
| Acquisitions, including contingent payments, net of cash acquired | (2,396 | ) | | (71 | ) | | (47 | ) |
| Proceeds from dispositions | 14 |
| | 83 |
| | 51 |
|
| Changes in short-term investments | (4 | ) | | 15 |
| | (17 | ) |
| Cash used for investing activities from continuing operations | (2,525 | ) | | (65 | ) | | (130 | ) |
| Financing Activities: | | | | | |
| Additions to / (payments on) short-term debt, net | 143 |
| | — |
| | (457 | ) |
| Proceeds from issuance of senior notes, net | 2,674 |
| | — |
| | — |
|
| Dividends paid to shareholders | (363 | ) | | (326 | ) | | (308 | ) |
| Dividends and other payments paid to noncontrolling interests | (104 | ) | | (84 | ) | | (75 | ) |
| Repurchase of treasury shares | (974 | ) | | (362 | ) | | (978 | ) |
| Exercise of stock options | 86 |
| | 193 |
| | 258 |
|
| Contingent consideration payment | (5 | ) | | (11 | ) | | (12 | ) |
| Purchase of additional CRISIL shares | (16 | ) | | — |
| | (214 | ) |
| Excess tax benefits from share-based payments | 69 |
| | 128 |
| | 43 |
|
| Cash provided by (used for) financing activities from continuing operations | 1,510 |
| | (462 | ) | | (1,743 | ) |
| Effect of exchange rate changes on cash from continuing operations | (67 | ) | | (65 | ) | | (1 | ) |
| Cash (used for) provided by continuing operations | (887 | ) | | 617 |
| | (1,092 | ) |
| Discontinued Operations: | | | | | |
| Cash (used for) provided by operating activities | (129 | ) | | 18 |
| | (231 | ) |
| Cash provided by investing activities | — |
| | 320 |
| | 2,129 |
|
| Cash used for financing activities | — |
| | — |
| | (25 | ) |
| Effect of exchange rate changes on cash | — |
| | — |
| | 1 |
|
| Cash (used for) provided by discontinued operations | (129 | ) | | 338 |
| | 1,874 |
|
| Net change in cash and cash equivalents | (1,016 | ) | | 955 |
| | 782 |
|
| Cash and cash equivalents at beginning of year | 2,497 |
| | 1,542 |
| | 760 |
|
| Cash and cash equivalents at end of year | $ | 1,481 |
| | $ | 2,497 |
| | $ | 1,542 |
|
| Cash paid during the year for: | | | | | |
| Interest (including discontinued operations) | $ | 65 |
| | $ | 50 |
| | $ | 50 |
|
| Income taxes (including discontinued operations) | $ | 260 |
| | $ | 419 |
| | $ | 787 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Equity
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Common Stock $1 par | | Additional Paid-in Capital | | Retained Income | | Accumulated
Other Comprehensive Loss | | Less: Treasury Stock | | Total MHFI Equity | | Noncontrolling Interests | | Total Equity |
| Balance as of December 31, 2012 | $ | 412 |
| | $ | 492 |
| | $ | 6,525 |
| | $ | (517 | ) | | $ | 6,145 |
| | $ | 767 |
| | $ | 73 |
| | $ | 840 |
|
Comprehensive income 1 | | | | | 1,376 |
| | 321 |
| | | | 1,697 |
| | 18 |
| | 1,715 |
|
| Dividends | | | | | (315 | ) | | | | | | (315 | ) | | (10 | ) | | (325 | ) |
| Noncontrolling interest adjustments related to discontinued operations | | |
|
| |
| | | | | | — |
| | (22 | ) | | (22 | ) |
| Share repurchases | | |
|
| | | | | | 989 |
| | (989 | ) | |
| | (989 | ) |
| Employee stock plans, net of tax benefit | | | (45 | ) | | | | | | (388 | ) | | 343 |
| | | | 343 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | 11 |
| | | | | | 11 |
| | | | 11 |
|
| Increase in CRISIL ownership | | | | | (216 | ) | | | | | | (216 | ) | | $ | (17 | ) | | (233 | ) |
| Other | | | | | 3 |
| | | | | | 3 |
| | 1 |
| | 4 |
|
| Balance as of December 31, 2013 | $ | 412 |
| | $ | 447 |
| | $ | 7,384 |
| | $ | (196 | ) | | $ | 6,746 |
| | $ | 1,301 |
| | $ | 43 |
| | $ | 1,344 |
|
Comprehensive loss 1 | | | | | (115 | ) | | (318 | ) | | | | (433 | ) | | 10 |
| | (423 | ) |
| Dividends | | | | | (324 | ) | | | | | | (324 | ) | | (8 | ) | | (332 | ) |
| Share repurchases | | |
| | | | | | 352 |
| | (352 | ) | | 6 |
| | (346 | ) |
| Employee stock plans, net of tax benefit | | | 46 |
| | | | | | (249 | ) | | 295 |
| | | | 295 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | (1 | ) | | | | | | (1 | ) | | | | (1 | ) |
| Other | | | | | 2 |
| | | | | | 2 |
| |
| | 2 |
|
| Balance as of December 31, 2014 | $ | 412 |
| | $ | 493 |
| | $ | 6,946 |
| | $ | (514 | ) | | $ | 6,849 |
| | $ | 488 |
| | $ | 51 |
| | $ | 539 |
|
Comprehensive income 1 | | | | | 1,156 |
| | (86 | ) | | | | 1,070 |
| | 11 |
| | 1,081 |
|
| Dividends | | | | | (359 | ) | | | | | | (359 | ) | | (9 | ) | | (368 | ) |
| Share repurchases | | |
|
| | | | | | 1,000 |
| | (1,000 | ) | | (2 | ) | | (1,002 | ) |
| Employee stock plans, net of tax benefit | | | (18 | ) | | | | | | (120 | ) | | 102 |
| | | | 102 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | (107 | ) | | | | | | (107 | ) | | | | (107 | ) |
| Other | | | | |
| | | | | | — |
| | (2 | ) | | (2 | ) |
| Balance as of December 31, 2015 | $ | 412 |
| | $ | 475 |
| | $ | 7,636 |
| | $ | (600 | ) | | $ | 7,729 |
| | $ | 194 |
| | $ | 49 |
| | $ | 243 |
|
| |
1
| Excludes $101 million, $92 million and $73 million in 2015, 2014 and 2013, respectively, attributable to redeemable noncontrolling interest. |
See accompanying notes to the consolidated financial statements.
Notes to the Consolidated Financial Statements
1. Accounting Policies
Nature of operations
McGraw Hill Financial,S&P Global Inc. (together with its consolidated subsidiaries, the “Company,” the “Registrant,” “we,” “us” or “our”) is a leading provider of transparent and independent ratings, benchmarks, analytics and ratings, analytics, data to the capital and research provider serving the global capital, commodities and commercial markets.commodity markets worldwide. The capital markets include asset managers, investment banks, commercial banks, insurance companies, exchanges, trading firms and issuers; and the commoditiescommodity markets include producers, traders and intermediaries within energy, metals, petrochemicals and agriculture; and the commercial markets include professionals and corporate executives within automotive, financial services, insurance and marketing / research information services.agriculture.
Our operations consist of four reportable segments: Standard & Poor’sS&P Global Ratings Services (“S&P Ratings”("Ratings"), S&P Capital IQGlobal Market Intelligence ("Market Intelligence"), S&P Global Platts ("Platts") and SNL, S&P Dow Jones Indices ("S&P DJ Indices") and Commodities & Commercial (“C&C”).
S&P Ratings is an independent provider of credit ratings, research and analytics, tooffering investors issuers and other market participants.participants information, ratings and benchmarks.
S&P Capital IQ and SNLMarket Intelligence is a global provider of multi-asset-class data, research and analytical capabilities, which integrate cross-asset analytics and desktop services.
S&P DJ Platts is the leading independent provider of information and benchmark prices for the commodity and energy markets. We completed the sale of J.D. Power on September 7, 2016, with the results included in Platts results through that date.
Indices is a global leading index provider that maintains a wide variety of valuation and index benchmarks for investment advisors, wealth managers and institutional investors.
C&C consistsIn April of business-to-business companies specializing2018, we acquired Kensho Technologies Inc. ("Kensho") for approximately $550 million, net of cash acquired, in commerciala mix of cash and commodities markets that deliver their customers access to high-value information, data, analytic services and pricing and quality benchmarks. Asstock. The results of August 1, 2013, we completedKensho, an operating segment of the sale of Aviation Week and the results have beenCompany, are included in C&C's results through that date.
Corporate revenue and Corporate Unallocated for financial reporting purposes. Restricted cash of $32 million included in our consolidated balance sheet as of December 31, 2018 includes amounts held in escrow accounts in connection with our acquisition of Kensho. See Note 112 —Acquisitions and Divestitures for additional information and Note 12 – Segment and Geographic Information for further discussion on our operating segments, which are also our reportable segments.
In January of 2018, we adopted Financial Accounting Standards Board Accounting Standards Codification ("ASC") 606 as discussed below.
Adoption of ASC 606, “Revenue from Contracts with Customers”
We adopted ASC 606 "Revenue from Contracts with Customers" using the fourth quartermodified retrospective transition method applied to our revenue contracts with customers as of 2015, we began exploring strategic alternativesJanuary 1, 2018. Results for J.D. Power, includedreporting periods beginning after January 1, 2018 are presented under ASC 606, while prior year amounts are not adjusted and continue to be reported in accordance with our C&C segment.historic accounting under ASC 605 "Revenue Recognition". We committedrecorded a net increase to opening retained earnings of $35 million as of January 1, 2018 due to the cumulative effect of adopting ASC 606, with the impact primarily related to our treatment of costs to obtain a contract and initiated an active program to sell J.D. Power in its current state that we believe is probable ina lesser extent, changes to the next year. Astiming of the recognition of our subscription and non-transaction revenues. We recognized incremental revenue of $6 million for the year ended December 31, 2018 as a result we have classifiedof the assets and liabilitiesadoption of J.D. Power as held for sale in our consolidated balance sheet as of December 31, 2015. The anticipated disposal does not represent a strategic shift that will have a major effect on operations and financial results, therefore, it is not classified as a discontinued operation.this standard.
On November 3, 2014, we completedUnder ASC 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the saleconsideration the entity expects to receive in exchange for those goods or services. Under ASC 605, revenue was recognized as it was earned and when services were rendered.
The following table presents our revenue disaggregated by revenue type for the years ended December 31:
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Ratings | | Market Intelligence | | Platts | | Indices | | Corporate | | Intersegment Elimination 1 | | Total |
| | | | | | | | | | | | | | |
| | 2018 |
| Subscription | $ | — |
| | $ | 1,773 |
| | $ | 750 |
| | $ | 144 |
| | $ | 15 |
| | $ | — |
| | $ | 2,682 |
|
| Non-transaction | 1,506 |
| | — |
| | — |
| | — |
| | — |
| | (125 | ) | | 1,381 |
|
| Non-subscription / Transaction | 1,377 |
| | 40 |
| | 11 |
| | — |
| | — |
| | — |
| | 1,428 |
|
| Asset-linked fees | — |
| | 20 |
| | — |
| | 522 |
| | — |
| | — |
| | 542 |
|
| Sales usage-based royalties | — |
| | — |
| | 54 |
| | 171 |
| | — |
| | — |
| | 225 |
|
| Total revenue | $ | 2,883 |
| | $ | 1,833 |
| | $ | 815 |
| | $ | 837 |
| | $ | 15 |
| | $ | (125 | ) | | $ | 6,258 |
|
| | | | | | | | | | | | | | |
| Timing of revenue recognition | | | | | | | | | | | | | |
| Services transferred at a point in time | $ | 1,377 |
| | $ | 40 |
| | $ | 11 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,428 |
|
| Services transferred over time | 1,506 |
| | 1,793 |
| | 804 |
| | 837 |
| | 15 |
| | (125 | ) | | 4,830 |
|
| Total revenue | $ | 2,883 |
| | $ | 1,833 |
| | $ | 815 |
| | $ | 837 |
| | $ | 15 |
| | $ | (125 | ) | | $ | 6,258 |
|
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Ratings | | Market Intelligence | | Platts | | Indices | | Corporate | | Intersegment Elimination 1 | | Total |
| | | | | | | | | | | | | | |
| | 2017 2 |
| Subscription | $ | — |
| | $ | 1,614 |
| | $ | 704 |
| | $ | 136 |
| | $ | — |
| | $ | — |
| | $ | 2,454 |
|
| Non-transaction | 1,448 |
| | — |
| | — |
| | — |
| | — |
| | (110 | ) | | 1,338 |
|
| Non-subscription / Transaction | 1,540 |
| | 46 |
| | $ | 13 |
| | — |
| | — |
| | — |
| | 1,599 |
|
| Asset-linked fees | — |
| | 23 |
| | — |
| | 461 |
| | — |
| | — |
| | 484 |
|
| Sales usage-based royalties | — |
| | — |
| | 57 |
| | 131 |
| | — |
| | — |
| | 188 |
|
| Total revenue | $ | 2,988 |
| | $ | 1,683 |
| | $ | 774 |
| | $ | 728 |
| | $ | — |
| | $ | (110 | ) | | $ | 6,063 |
|
| | | | | | | | | | | | | | |
| Timing of revenue recognition | | | | | | | | | | | | | |
| Services transferred at a point in time | $ | 1,540 |
| | $ | 46 |
| | $ | 13 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,599 |
|
| Services transferred over time | 1,448 |
| | 1,637 |
| | 761 |
| | 728 |
| | — |
| | (110 | ) | | 4,464 |
|
| Total revenue | $ | 2,988 |
| | $ | 1,683 |
| | $ | 774 |
| | $ | 728 |
| | $ | — |
| | $ | (110 | ) | | $ | 6,063 |
|
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Ratings | | Market Intelligence | | Platts | | Indices | | Corporate | | Intersegment Elimination 1 | | Total |
| | | | | | | | | | | | | | |
| | 2016 2 |
| Subscription | $ | — |
| | $ | 1,543 |
| | $ | 689 |
| | $ | 132 |
| | $ | — |
| | $ | — |
| | $ | 2,364 |
|
| Non-transaction | 1,357 |
| | — |
| | — |
| | — |
| | — |
| | (98 | ) | | 1,259 |
|
| Non-subscription / Transaction | 1,178 |
| | 99 |
| | 183 |
| | — |
| | — |
| | — |
| | 1,460 |
|
| Asset-linked fees | — |
| | 19 |
| | — |
| | 381 |
| | — |
| | — |
| | 400 |
|
| Sales usage-based royalties | — |
| | — |
| | 53 |
| | 125 |
| | — |
| | — |
| | 178 |
|
| Total revenue | $ | 2,535 |
| | $ | 1,661 |
| | $ | 925 |
| | $ | 638 |
| | $ | — |
| | $ | (98 | ) | | $ | 5,661 |
|
| | | | | | | | | | | | | | |
| Timing of revenue recognition | | | | | | | | | | | | | |
| Services transferred at a point in time | $ | 1,178 |
| | $ | 99 |
| | $ | 183 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,460 |
|
| Services transferred over time | 1,357 |
| | 1,562 |
| | 742 |
| | 638 |
| | — |
| | (98 | ) | | 4,201 |
|
| Total revenue | $ | 2,535 |
| | $ | 1,661 |
| | $ | 925 |
| | $ | 638 |
| | $ | — |
| | $ | (98 | ) | | $ | 5,661 |
|
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1 | Intersegment eliminations mainly consists of a royalty charged to Market Intelligence for the rights to use and distribute content and data developed by Ratings. |
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2 | As noted above, amounts for the years ended December 31, 2017 and 2016 were not adjusted under the modified retrospective transition method applied to our revenue contracts with customers as of January 1, 2018. |
Subscription revenue
Subscription revenue at Market Intelligence is primarily derived from distribution of data, analytics, third party research, and credit ratings-related information primarily through web-based channels including Market Intelligence Desktop, RatingsDirect®, RatingsXpress®, and Credit Analytics. Subscription revenue at Platts is generated by providing customers access to commodity and energy-related price assessments, market data, and real-time news, along with other information services. Subscription revenue at Indices is derived from the contracts for underlying data of our C&C segment,indexes to Symphony Technology Groupsupport our customers' management of index funds, portfolio analytics, and research.
For subscription products and services, we generally provide continuous access to dynamic data sets and analytics for $320a defined period, with revenue recognized ratably as our performance obligation to provide access to our data and analytics is progressively fulfilled over the stated term of the contract.
Non-transaction revenue
Non-transaction revenue at Ratings is primarily related to surveillance of a credit rating, annual fees for customer relationship-based pricing programs, fees for entity credit ratings and global research and analytics. Non-transaction revenue also includes an intersegment revenue elimination of $125 million, in cash. Accordingly, the results of operations$110 million and $98 million for the years ended December 31, 20142018, 2017, and December 31, 20132016 respectively, mainly consisting of the royalty charged to Market Intelligence for the rights to use and distribute content and data developed by Ratings.
For non-transaction revenue related to Rating’s surveillance services, we continuously monitor factors that impact the creditworthiness of an issuer over the contractual term with revenue recognized to the extent that our performance obligation is progressively fulfilled over the term contract. Because surveillance services are continuously provided throughout the term of the contract, our measure of progress towards fulfillment of our obligation to monitor a rating is a time-based output measure with revenue recognized ratably over the term of the contract.
Non-subscription / Transaction revenue
Transaction revenue at our Ratings segment primarily includes fees associated with:
ratings related to new issuance of corporate and government debt instruments; and structured finance instruments;
bank loan ratings; and
corporate credit estimates, which are intended, based on an abbreviated analysis, to provide an indication of our opinion regarding creditworthiness of a company which does not currently have been reclassifieda Ratings credit rating.
Transaction revenue is recognized at the point in time when our performance obligation is satisfied by issuing a rating on our customer's instruments, our customer's creditworthiness, or a counter-party's creditworthiness and when we have a right to reflectpayment and the businesscustomer can benefit from the significant risks and rewards of ownership.
Non-subscription revenue at Market Intelligence is primarily related to certain advisory, pricing and analytical services. Non-subscription revenue at Platts is primarily related to conference sponsorship, consulting engagements and events.
Asset-linked fees
Asset-linked fees at Indices and Market Intelligence are primarily related to royalties payments based on the value of assets under management in our customers exchange-traded funds and mutual funds.
For asset-linked products and services, we provide licenses conveying continuous access to our index and benchmark-related intellectual property during a specified contract term. Revenue is recognized when the extent that our customers have used our licensed intellectual property can be quantified. Recognition of revenue for our asset-linked fee arrangements is subject to the "recognition constraint" for usage-based royalty payments because we cannot reasonably predict the value of the assets that will be invested in index funds structured using our intellectual property until it is either publicly available or when we are notified by
our customers. Revenue derived from an asset-linked fee arrangement is measured and recognized when the certainty of the extent of its utilization of our index products by our customers is known.
Sales usage-based royalties
Sales usage-based royalty revenue at our Indices segment is primarily related to trading based fees from exchange-traded derivatives. Sales and usage-based royalty revenue at our Platts segment is primarily related to licensing of its proprietary market price data and price assessments to commodity exchanges.
For sales usage-based royalty products and services, we provide licenses conveying the right to continuous access to our intellectual property over the contract term, with revenue recognized when the extent of our license’s utilization can be quantified, or more specifically, when trading volumes are known and publicly available to us or when we are notified by our customers. Recognition of revenue of fees tied to trading volumes is subject to the recognition constraint for a usage-based royalty promised by our customers in exchange for the license of our intellectual property, with revenue recognized when trading volumes are known.
Arrangements with Multiple Performance Obligations
Our contracts with customers may include multiple performance obligations. Revenue relating to agreements that provide for more than one performance obligation is recognized based upon the relative fair value to the customer of each service component as a discontinued operation.each component is earned. The fair value of the service components are determined using an analysis that considers cash consideration that would be received for instances when the service components are sold separately. If the fair value to the customer for each service is not objectively determinable, we make our best estimate of the services’ stand-alone selling price and record revenue as it is earned over the service period.
Receivables
We completedrecord a receivable when a customer is billed or when revenue is recognized prior to billing a customer. For multi-year agreements, we generally invoice customers annually at the salebeginning of each annual period. The opening balance of accounts receivable, net of allowance for doubtful accounts, was $1,319 million as of January 1, 2018.
Contract Assets
Contract assets include unbilled amounts from when the Company transfers service to a customer before a customer pays consideration or before payment is due. As of December 31, 2018 and 2017, contract assets were $26 million and $17 million, respectively, and are included in accounts receivable in our consolidated balance sheets.
Unearned Revenue
We record unearned revenue when cash payments are received or due in advance of our McGraw-Hill Education business ("MHE") on March 22, 2013 and, accordingly,performance. The increase in the results of operations of MHE have been reclassified to reflect the business as a discontinued operationunearned revenue balance for the year ended December 31, 2013.2018 is primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by $1.5 billion of revenues recognized that were included in the unearned revenue balance at the beginning of the period.
Remaining Performance Obligations
Remaining performance obligations represent the transaction price of contracts for work that has not yet been performed. As of December 31, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was $1.4 billion. We expect to recognize revenue on approximately half and three-quarters of the remaining performance obligations over the next 12 and 24 months, respectively, with the remainder recognized thereafter.
We do not disclose the value of unfulfilled performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts where revenue is a usage-based royalty promised in exchange for a license of intellectual property.
Costs to Obtain a Contract
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales commission programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were $101 million as of December 31, 2018, and are included in prepaid and other current assets and other non-current assets on our consolidated balance sheets. The asset will be amortized over a period consistent with the transfer to the customer of the goods or services to which the asset relates, calculated based on the customer term and the average life of the products and services underlying the contracts. The expense is recorded within selling and general expenses.
We expense sales commissions when incurred if the amortization period would have been one year or less. These costs are recorded within selling and general expenses.
Presentation of net periodic pension cost and net periodic postretirement benefit cost
During the first quarter of 2018, we adopted new accounting guidance requiring that net periodic benefit cost for our retirement and postretirement plans other than the service cost component be included outside of operating profit; these costs are included in other income, net in our consolidated statements of income.
See Note 2 —The components of other income, net for the year ended December 31 are as follows: Acquisitions and Divestitures for further discussion on discontinued operations.
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| | | | | | | | | | | |
| (in millions) | 2018 | | 2017 | | 2016 |
| Other components of net periodic benefit cost | $ | (30 | ) | | $ | (27 | ) | | $ | (28 | ) |
| Net loss from investments | 5 |
| | — |
| | — |
|
| Other income, net | $ | (25 | ) | | $ | (27 | ) | | $ | (28 | ) |
Assets and Liabilities Held for Sale and Discontinued Operations
Assets and Liabilities Held for Sale
We classify a disposal group to be sold as held for sale in the period in which all of the following criteria are met: management, having the authority to approve the action, commits to a plan to sell the disposal group; the disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such disposal group; an active program to locate a buyer and other actions required to complete the plan to sell the disposal group have been initiated; the sale of the disposal group is probable, and transfer of the disposal group is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the disposal group beyond one year; the disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
An entity that is classified as held for sale is initially measured at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a disposal group until the date of sale.
Redeemable Noncontrolling Interest
The fair value of a disposal group less any costs to sell is assessed each reporting period it remains classified as held for sale and any subsequent changes are reported as an adjustment to the carrying value of the disposal group, as long as the new carrying value does not exceed the carrying value of the disposal group at the time it was initially classified as held for sale. Upon determining that a disposal group meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group as held for sale in the current period in our consolidated balance sheets.
Discontinued Operations
Beginning on January 1, 2015, we adopted revised guidance for discontinued operations that raises the threshold for a disposal to qualify as a discontinued operation. In determining whether a disposal of a component of an entity or a group of components of an entity is required to be presented as a discontinued operation, we make a determination whether the disposal represents a strategic shift that had, or will have, a major effect on our operations and financial results. A component of an entity comprises operations and cash flows that can be clearly distinguished both operationally and for financial reporting purposes. If we conclude that the disposal represents a strategic shift, then the results of operations of the group of assets being disposed of (as well as any gain or loss on the disposal transaction) are aggregated for separate presentation apart from our continuing operating results in the consolidated financial statements.
For the years ended December 31, 2014 and 2013, we applied the previous guidance for discontinued operations in determining whether a group of assets disposed or to be disposed of should be presented as a discontinued operation. We determined whether the group of assets being disposed of comprised a component of the entity. We also determined whether theredeemable noncontrolling interest in Indices business is based on a combination of an income and market valuation approach. Our income and market valuation approaches may incorporate Level 3 measures for instances when observable inputs are not available, including assumptions related to expected future net cash flows, associated withlong-term growth rates, the grouptiming and nature of assets had been or would have been eliminated from our ongoing operations as a result oftax attributes, and the disposal transaction and whether we would have had significant continuing involvement in the operations of the group of assets after the disposal transaction. If we concluded that the cash flows had been eliminated and we had no significant continuing involvement, then the results of operations of the group of assets being disposed of (as well as any gain or loss on the disposal transaction) were aggregated for separate presentation for separate presentation apart from our continuing operating results in the consolidated financial statements.redemption features.
RECENTACCOUNTING STANDARDS
See Note 21 – Acquisitions and DivestituresAccounting Policies for a summary of discontinued operations. Unless otherwise indicated, all disclosures and amounts in the notes to our consolidated financial statements relatefor a detailed description of recent accounting standards. We expect the adoption of these recent accounting standards to have a material impact on our continuing operations.consolidated balance sheet; however, we do not expect that these standards will have a material impact on our consolidated statements of income or cash flows.
Principles of consolidation
The consolidated financial statements include the accounts of all subsidiaries and our share of earnings or losses of joint ventures and affiliated companies under the equity method of accounting. All significant intercompany accounts and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents include ordinary bank deposits and highly liquid investments with original maturities of three months or less that consist primarily of money market funds with unrestricted daily liquidity and fixed term time deposits. Such investments and bank deposits are stated at cost, which approximates market value, and were $1.5 billion and $2.5 billion as of December 31, 2015 and 2014, respectively. These investments are not subject to significant market risk.
Short-term investments are securities with original maturities greater than Item 7a90 days that are available for use in our operations in the next twelve months. The short-term investments, primarily consisting of certificates of deposit, are classified as held-to-maturity. Quantitative and therefore are carried at cost. Interest and dividends are recorded into income when earned.Qualitative Disclosures about Market Risk
Accounts receivable
Credit is extendedOur exposure to customers based upon an evaluation of the customer’s financial condition. Accounts receivable, which include billings consistent with terms of contractual arrangements, are recorded at net realizable value.
Allowance for doubtful accounts
The allowance for doubtful accounts reserve methodology is based on historical analysis, a review of outstanding balances and current conditions. In determining these reserves, we consider, amongst other factors, the financial condition andmarket risk profile of our customers, areas of specific or concentrated risk as well as applicable industry trends or market indicators.
Deferred technology costs
We capitalize certain software development and website implementation costs. Capitalized costs only include incremental, direct costs of materials and services incurred to develop the software after the preliminary project stage is completed, funding has been committed and it is probable that the project will be completed and used to perform the function intended. Incremental costs are expenditures that are out-of-pocket to us and are not part of an allocation or existing expense base. Software development and website implementation costs are expensed as incurred during the preliminary project stage. Capitalized costs are amortized from the year the software is ready for its intended use over its estimated useful life, three to seven years, using the straight-line method. Periodically, we evaluate the amortization methods, remaining lives and recoverability of such costs. Capitalized software development and website implementation costs are included in other non-current assets and are presented net of accumulated amortization. Gross deferred technology costs were $128 million and $123 million as of December 31, 2015 and 2014, respectively. Accumulated amortization of deferred technology costs was $72 million and $55 million as of December 31, 2015 and 2014, respectively.
Fair Value
Certain assets and liabilities are required to be recorded at fair value and classified within a fair value hierarchy based on inputs used when measuring fair value. We have an immaterial amount of forward exchange contracts that are adjusted to fair value on a recurring basis.
Other financial instruments, including cash and cash equivalents and short-term investments, are recorded at cost, which approximates fair value because of the short-term maturity and highly liquid nature of these instruments. The fair value of our long-term debt borrowings were $3.6 billion and $0.9 billion as of December 31, 2015 and 2014, respectively, and was estimated based on quoted market prices.
Accounting for the impairment of long-lived assets (including other intangible assets)
We evaluate long-lived assets for impairment whenever events orincludes changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Upon such an occurrence, recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to current forecasts of undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized equal to the amount by which the carrying amount of the asset exceeds the fair value of the asset. For long-lived assets held for sale, assets are written down to fair value, less cost to sell. Fair value is determined based on market evidence, discounted cash flows, appraised values or management’s estimates, depending upon the nature of the assets.
On July 31, 2014, we completed the sale of the Company's aircraft to Harold W. McGraw III, then Chairman of the Company's Board of Directors and former President and CEO of the Company for a purchase price of $20 million. During the second quarter of 2014, we recorded a non-cash impairment charge of $6 million within other (income) loss in our consolidated statement of income as a result of the pending sale. See Note 13 – Related Party Transactions for further discussion.
On June 30, 2014, we completed the sale of our data center to Quality Technology Services, LLC (“QTS”) which owns, operates, and manages data centers. Net proceeds from the sale of $58 million were received in July of 2014. The sale includes all of the facilities and equipment on the south campus of our East Windsor, New Jersey location, inclusive of the rights and obligations associated with an adjoining solar power field. The sale resulted in an expense of $3 million recorded within other loss (income) in our consolidated statement of income, which is in addition to the non-cash impairment charge of $36 million we recorded in the fourth quarter of 2013 to adjust the value facilities and associated infrastructure classified as held for sale to their fair value.
During the fourth quarter of 2013, we also incurred a $26 million non-cash impairment charge associated with an intangible asset acquired through the formation of our S&P Dow Jones Indices LLC joint venture.
Goodwill and other indefinite-lived intangible assets
Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill and other intangible assets with indefinite lives are not amortized, but instead are tested for impairment annually during the fourth quarter each year, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We have four reporting units with goodwill that are evaluated for impairment.
We initially perform a qualitative analysis evaluating whether any events and circumstances occurred or exist that provide evidence that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount. If, based on our evaluation we do not believe that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount, no quantitative impairment test is performed. Conversely, if the results of our qualitative assessment determine that it is more likely than not that the fair value of any of our reporting units is less than their respective carrying amounts we perform a two-step quantitative impairment test.
When conducting the first step of our two step impairment test to evaluate the recoverability of goodwill at the reporting unit level, the estimated fair value of the reporting unit is compared to its carrying value including goodwill. Fair value of the reporting units are estimated using the income approach, which incorporates the use of a discounted free cash flow (“DCF”) analyses and are corroborated using the market approach, which incorporates the use of revenue and earnings multiples based on market data. The DCF analyses are based on the current operating budgets and estimated long-term growth projections for each reporting unit. Future cash flows are discounted based on a market comparable weighted average cost of capital rate for each reporting unit, adjusted for market and other risks where appropriate. In addition, we analyze any difference between the sum of the fair values of the reporting units and our total market capitalization for reasonableness, taking into account certain factors including control premiums.
If the fair value of the reporting unit is less than the carrying value, a second step is performed which compares the implied fair value of the reporting unit’s goodwill to the carrying value of the goodwill. The fair value of the goodwill is determined based on the difference between the fair value of the reporting unit and the net fair value of the identifiable assets and liabilities of the reporting unit. If the implied fair value of the goodwill is less than the carrying value, the difference is recognized as an impairment charge.
We evaluate the recoverability of indefinite-lived intangible assets by first performing a qualitative analysis evaluating whether any events and circumstances occurred that provide evidence that it is more likely than not that the indefinite-lived asset is impaired. If, based on our evaluation of the events and circumstances that occurred during the year we do not believe that it is more likely than not that the indefinite-lived asset is impaired, no quantitative impairment test is performed. Conversely, if the results of our qualitative assessment determine that it is more likely than not that the indefinite-lived asset is impaired a quantitative impairment test is performed. If necessary, the impairment test is performed by comparing the estimated fair value of the intangible asset to its carrying value. If the indefinite-lived intangible asset carrying value exceeds its fair value, an impairment analysis is performed using the income approach. The fair value of loss is recognized in an amount equal to that excess.
Significant judgments inherent in these analyses include estimating the amount and timing of future cash flows and the selection of appropriate discount rates, royalty rates and long-term growth rate assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit and indefinite-lived intangible asset and could result in an impairment charge, which could be material to our financial position and results of operations.
We performed our impairment assessment of goodwill and indefinite-lived intangible assets and concluded that no impairment existed for the years ended December 31, 2015, 2014 and 2013.
Foreign currency translation
foreign exchange rates. We have operations in manyvarious foreign countries. For most international operations,countries where the localfunctional currency is primarily the functionallocal currency. For international operations that are determined to be extensions of the parent company, the United States ("U.S.") dollar is the functional currency. ForWe typically have naturally hedged positions in most countries from a local currency operations,perspective with offsetting assets and liabilities. During the years ended December 31, 2018 and 2017, we entered into foreign exchange forward contracts in order to mitigate the change in fair value of specific assets and liabilities in the consolidated balance sheet. These forward contracts are translatednot designated as hedges and do not qualify for hedge accounting. During the years ended December 31, 2018, 2017 and 2016, we entered into foreign exchange forward contracts to hedge the effect of adverse fluctuations in foreign currency exchange rates. We have not entered into any derivative financial instruments for speculative purposes. See Note 6 – Derivative Instruments to the Consolidated Financial Statements and Supplementary Data, in the Annual Report on Form 10-K for further discussion.
Item 8. Consolidated Financial Statements and Supplementary Data
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of S&P Global Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of S&P Global Inc. (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. dollars using endgenerally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 12, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ ERNST & YOUNG LLP
We have served as the Company’s auditor since 1969.
New York, New York
February 12, 2019
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of S&P Global Inc.
Opinion on Internal Control over Financial Reporting
We have audited S&P Global Inc.’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, S&P Global Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of S&P Global Inc. as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period exchange rates,ended December 31, 2018, and the related notes and financial statement schedule listed in Item 15(a)(2) and our report dated February 12, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ ERNST & YOUNG LLP
New York, New York
February 12, 2019
Consolidated Statements of Income
|
| | | | | | | | | | | |
| (in millions, except per share data) | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Revenue | $ | 6,258 |
| | $ | 6,063 |
| | $ | 5,661 |
|
| Expenses: | | | | | |
| Operating-related expenses | 1,701 |
| | 1,695 |
| | 1,773 |
|
| Selling and general expenses | 1,561 |
| | 1,605 |
| | 1,467 |
|
| Depreciation | 84 |
| | 82 |
| | 85 |
|
| Amortization of intangibles | 122 |
| | 98 |
| | 96 |
|
| Total expenses | 3,468 |
| | 3,480 |
| | 3,421 |
|
| Gain on dispositions | — |
| | — |
| | (1,101 | ) |
| Operating profit | 2,790 |
| | 2,583 |
| | 3,341 |
|
| Other income, net | (25 | ) | | (27 | ) | | (28 | ) |
| Interest expense, net | 134 |
| | 149 |
| | 181 |
|
| Income before taxes on income | 2,681 |
| | 2,461 |
| | 3,188 |
|
| Provision for taxes on income | 560 |
| | 823 |
| | 960 |
|
| Net income | 2,121 |
| | 1,638 |
| | 2,228 |
|
| Less: net income attributable to noncontrolling interests | (163 | ) | | (142 | ) | | (122 | ) |
| Net income attributable to S&P Global Inc. | $ | 1,958 |
| | $ | 1,496 |
| | $ | 2,106 |
|
| | | | | | |
| Earnings per share attributable to S&P Global Inc. common shareholders: | | | | | |
| Net income: | | | | | |
| Basic | $ | 7.80 |
| | $ | 5.84 |
| | $ | 8.02 |
|
| Diluted | $ | 7.73 |
| | $ | 5.78 |
| | $ | 7.94 |
|
| Weighted-average number of common shares outstanding: | | | | | |
| Basic | 250.9 |
| | 256.3 |
| | 262.8 |
|
| Diluted | 253.2 |
| | 258.9 |
| | 265.2 |
|
| | | | | | |
| Actual shares outstanding at year end | 248.4 |
| | 253.7 |
| | 258.3 |
|
| | | | | | |
| Dividend declared per common share | $ | 2.00 |
| | $ | 1.64 |
| | $ | 1.44 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Comprehensive Income
|
| | | | | | | | | | | |
| (in millions) | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Net income | $ | 2,121 |
| | $ | 1,638 |
| | $ | 2,228 |
|
| Other comprehensive income: | | | | | |
| Foreign currency translation adjustment | (96 | ) | | 93 |
| | (132 | ) |
| Income tax effect | (4 | ) | | — |
| | (7 | ) |
| | (100 | ) | | 93 |
| | (139 | ) |
| | | | | | |
| Pension and other postretirement benefit plans | (14 | ) | | 52 |
| | (27 | ) |
| Income tax effect | 9 |
| | (11 | ) | | (10 | ) |
| | (5 | ) | | 41 |
| | (37 | ) |
| | | | | | |
| Unrealized gain (loss) on investment and forward exchange contracts | 2 |
| | (10 | ) | | 4 |
|
| Income tax effect | — |
| | — |
| | (1 | ) |
| | 2 |
| | (10 | ) | | 3 |
|
| | | | | | |
| Comprehensive income | 2,018 |
| | 1,762 |
| | 2,055 |
|
| Less: comprehensive income attributable to nonredeemable noncontrolling interests | (12 | ) | | (13 | ) | | (13 | ) |
| Less: comprehensive income attributable to redeemable noncontrolling interests | (151 | ) | | (129 | ) | | (109 | ) |
| Comprehensive income attributable to S&P Global Inc. | $ | 1,855 |
| | $ | 1,620 |
| | $ | 1,933 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Balance Sheets
|
| | | | | | | |
| (in millions) | December 31, |
| | 2018 | | 2017 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,917 |
| | $ | 2,777 |
|
| Restricted cash | 41 |
| | 2 |
|
| Short-term investments | 18 |
| | 12 |
|
| Accounts receivable, net of allowance for doubtful accounts: 2018- $34 ; 2017 - $33 | 1,449 |
| | 1,319 |
|
| Prepaid and other current assets | 179 |
| | 214 |
|
| Total current assets | 3,604 |
| | 4,324 |
|
| Property and equipment: | | | |
| Buildings and leasehold improvements | 372 |
| | 354 |
|
| Equipment and furniture | 494 |
| | 475 |
|
| Total property and equipment | 866 |
| | 829 |
|
| Less: accumulated depreciation | (596 | ) | | (554 | ) |
| Property and equipment, net | 270 |
| | 275 |
|
| Goodwill | 3,535 |
| | 2,989 |
|
| Other intangible assets, net | 1,524 |
| | 1,388 |
|
| Other non-current assets | 525 |
| | 449 |
|
| Total assets | $ | 9,458 |
| | $ | 9,425 |
|
| LIABILITIES AND EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 211 |
| | $ | 195 |
|
| Accrued compensation and contributions to retirement plans | 354 |
| | 472 |
|
| Short-term debt | — |
| | 399 |
|
| Income taxes currently payable | 72 |
| | 77 |
|
| Unearned revenue | 1,641 |
| | 1,613 |
|
| Accrued legal and regulatory settlements | 1 |
| | 107 |
|
| Other current liabilities | 350 |
| | 351 |
|
| Total current liabilities | 2,629 |
| | 3,214 |
|
| Long-term debt | 3,662 |
| | 3,170 |
|
| Pension and other postretirement benefits | 229 |
| | 244 |
|
| Other non-current liabilities | 634 |
| | 679 |
|
| Total liabilities | 7,154 |
| | 7,307 |
|
| Redeemable noncontrolling interest | 1,620 |
| | 1,352 |
|
| Commitments and contingencies (Note 13) |
| |
|
| Equity: | | | |
| Common stock, $1 par value: authorized - 600 million shares; issued: 2018 - 294 million shares; 2017 - 412 million shares | 294 |
| | 412 |
|
| Additional paid-in capital | 833 |
| | 525 |
|
| Retained income | 11,284 |
| | 10,023 |
|
| Accumulated other comprehensive loss | (742 | ) | | (649 | ) |
| Less: common stock in treasury - at cost: 2018 - 45 million shares; 2017 - 158 million shares | (11,041 | ) | | (9,602 | ) |
| Total equity – controlling interests | 628 |
| | 709 |
|
| Total equity – noncontrolling interests | 56 |
| | 57 |
|
| Total equity | 684 |
| | 766 |
|
| Total liabilities and equity | $ | 9,458 |
| | $ | 9,425 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Cash Flows
|
| | | | | | | | | | | |
| (in millions) | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Operating Activities: | | | | | |
| Net income | $ | 2,121 |
| | $ | 1,638 |
| | $ | 2,228 |
|
| Adjustments to reconcile net income to cash provided by operating activities: | | | | | |
| Depreciation | 84 |
| | 82 |
| | 85 |
|
| Amortization of intangibles | 122 |
| | 98 |
| | 96 |
|
| Provision for losses on accounts receivable | 21 |
| | 16 |
| | 9 |
|
| Deferred income taxes | 81 |
| | — |
| | 79 |
|
| Stock-based compensation | 94 |
| | 99 |
| | 76 |
|
| Gain on dispositions | — |
| | — |
| | (1,101 | ) |
| Accrued legal settlements | 1 |
| | 55 |
| | 54 |
|
| Other | 52 |
| | 96 |
| | 30 |
|
| Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: | | | | | |
| Accounts receivable | (164 | ) | | (196 | ) | | (177 | ) |
| Prepaid and other current assets | (1 | ) | | 10 |
| | 5 |
|
| Accounts payable and accrued expenses | (106 | ) | | 75 |
| | 19 |
|
| Unearned revenue | 70 |
| | 85 |
| | 107 |
|
| Accrued legal settlements | (108 | ) | | (4 | ) | | (150 | ) |
| Other current liabilities | (67 | ) | | (85 | ) | | (19 | ) |
| Net change in prepaid/accrued income taxes | (7 | ) | | 32 |
| | 174 |
|
| Net change in other assets and liabilities | (129 | ) | | 15 |
| | 45 |
|
| Cash provided by operating activities | 2,064 |
| | 2,016 |
| | 1,560 |
|
| Investing Activities: | | | | | |
| Capital expenditures | (113 | ) | | (123 | ) | | (115 | ) |
| Acquisitions, net of cash acquired | (401 | ) | | (83 | ) | | (177 | ) |
| Contingent consideration payment | — |
| | — |
| | (34 | ) |
| Proceeds from dispositions | 6 |
| | 2 |
| | 1,498 |
|
| Changes in short-term investments | (5 | ) | | (5 | ) | | (1 | ) |
| Cash (used for) provided by investing activities | (513 | ) | | (209 | ) | | 1,171 |
|
| Financing Activities: | | | | | |
| Payments on short-term debt, net | — |
| | — |
| | (143 | ) |
| Proceeds from issuance of senior notes, net | 489 |
| | — |
| | 493 |
|
| Payments on senior notes | (403 | ) | | — |
| | (421 | ) |
| Dividends paid to shareholders | (503 | ) | | (421 | ) | | (380 | ) |
| Distributions to noncontrolling interest holders | (154 | ) | | (111 | ) | | (116 | ) |
| Repurchase of treasury shares | (1,660 | ) | | (1,001 | ) | | (1,123 | ) |
| Exercise of stock options | 34 |
| | 75 |
| | 88 |
|
| Contingent consideration payment | — |
| | — |
| | (5 | ) |
| Purchase of additional CRISIL shares | (25 | ) | | — |
| | — |
|
| Employee withholding tax on share-based payments | (66 | ) | | (49 | ) | | (55 | ) |
| Cash used for financing activities | (2,288 | ) | | (1,507 | ) | | (1,662 | ) |
| Effect of exchange rate changes on cash | (84 | ) | | 87 |
| | (158 | ) |
| Net change in cash, cash equivalents, and restricted cash | (821 | ) | | 387 |
| | 911 |
|
| Cash, cash equivalents, and restricted cash at beginning of year | 2,779 |
| | 2,392 |
| | 1,481 |
|
| Cash, cash equivalents, and restricted cash at end of year | $ | 1,958 |
| | $ | 2,779 |
| | $ | 2,392 |
|
| Cash paid during the year for: | | | | | |
| Interest | $ | 151 |
| | $ | 139 |
| | $ | 150 |
|
| Income taxes | $ | 558 |
| | $ | 709 |
| | $ | 683 |
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Equity
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Common Stock $1 par | | Additional Paid-in Capital | | Retained Income | | Accumulated
Other Comprehensive Loss | | Less: Treasury Stock | | Total SPGI Equity | | Noncontrolling Interests | | Total Equity |
| Balance as of December 31, 2015 | $ | 412 |
| | $ | 475 |
| | $ | 7,636 |
| | $ | (600 | ) | | $ | 7,729 |
| | $ | 194 |
| | $ | 49 |
| | $ | 243 |
|
Comprehensive income 1 | | | | | 2,106 |
| | (173 | ) | | | | 1,933 |
| | 13 |
| | 1,946 |
|
| Dividends | | | | | (380 | ) | | | | | | (380 | ) | | (10 | ) | | (390 | ) |
| Share repurchases | | |
|
| | | | | | 1,097 |
| | (1,097 | ) | |
| | (1,097 | ) |
| Employee stock plans, net of tax benefit | | | 27 |
| | | | | | (125 | ) | | 152 |
| | | | 152 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | (153 | ) | | | | | | (153 | ) | | | | (153 | ) |
| Other | | | | | 1 |
| | | | | | 1 |
| | (1 | ) | | — |
|
| Balance as of December 31, 2016 | $ | 412 |
| | $ | 502 |
| | $ | 9,210 |
| | $ | (773 | ) | | $ | 8,701 |
| | $ | 650 |
| | $ | 51 |
| | $ | 701 |
|
Comprehensive income 1 | | | | | 1,496 |
| | 124 |
| | | | 1,620 |
| | 15 |
| | 1,635 |
|
| Dividends | | | | | (421 | ) | | | | | | (421 | ) | | (10 | ) | | (431 | ) |
| Share repurchases | | |
| | | | | | 1,001 |
| | (1,001 | ) | | (5 | ) | | (1,006 | ) |
| Employee stock plans | | | 23 |
| | | | | | (100 | ) | | 123 |
| | 8 |
| | 131 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | (260 | ) | | | | | | (260 | ) | | | | (260 | ) |
| Other | | | | | (2 | ) | | | | | | (2 | ) | | (2 | ) | | (4 | ) |
| Balance as of December 31, 2017 | $ | 412 |
| | $ | 525 |
| | $ | 10,023 |
| | $ | (649 | ) | | $ | 9,602 |
| | $ | 709 |
| | $ | 57 |
| | $ | 766 |
|
Comprehensive income 1 | | | | | 1,958 |
| | (103 | ) | | | | 1,855 |
| | 12 |
| | 1,867 |
|
| Dividends | | | | | (503 | ) | | | | | | (503 | ) | | (11 | ) | | (514 | ) |
| Share repurchases | | | (75 | ) | | | | | | 1,585 |
| | (1,660 | ) | |
| | (1,660 | ) |
| Retirement of common stock | (118 | ) | | | | | | | | (118 | ) | | — |
| | | | — |
|
| Employee stock plans | | | 56 |
| | | | | | (28 | ) | | 84 |
| |
| | 84 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | (228 | ) | | | | | | (228 | ) | | | | (228 | ) |
| Increase in CRISIL ownership | | | (25 | ) | | | | | | | | (25 | ) | | 2 |
| | (23 | ) |
| Stock consideration for Kensho | | | 352 | | | | | | | | 352 |
| | | | 352 |
|
| Other | | | | | 34 |
| 2 |
| 10 |
| 2 |
| | | 44 |
| | (4 | ) | | 40 |
|
| Balance as of December 31, 2018 | $ | 294 |
| | $ | 833 |
| | $ | 11,284 |
| | $ | (742 | ) | | $ | 11,041 |
| | $ | 628 |
| | $ | 56 |
| | $ | 684 |
|
| |
1 | Excludes $151 million, $129 million and $109 million in 2018, 2017 and 2016, respectively, attributable to redeemable noncontrolling interest. |
| |
2 | Includes opening balance sheet adjustments related to the adoption of the new revenue recognition standard and the reclassification of the unrealized loss on investments from Accumulated other comprehensive loss to Retained income. See Note 1 —Accounting Policies for additional details. |
See accompanying notes to the consolidated financial statements.
Notes to the Consolidated Financial Statements
1. Accounting Policies
Nature of operations
S&P Global Inc. (together with its consolidated subsidiaries, the “Company,” the “Registrant,” “we,” “us” or “our”) is a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide. The capital markets include asset managers, investment banks, commercial banks, insurance companies, exchanges, trading firms and issuers; and the commodity markets include producers, traders and intermediaries within energy, metals, petrochemicals and agriculture.
Our operations consist of four reportable segments: S&P Global Ratings ("Ratings"), S&P Global Market Intelligence ("Market Intelligence"), S&P Global Platts ("Platts") and S&P Dow Jones Indices ("Indices").
Ratings is an independent provider of credit ratings, research and analytics, offering investors and other market participants information, ratings and benchmarks.
Market Intelligence is a global provider of multi-asset-class data, research and analytical capabilities, which integrate cross-asset analytics and desktop services.
Platts is the leading independent provider of information and benchmark prices for the commodity and energy markets. We completed the sale of J.D. Power on September 7, 2016, with the results included in Platts results through that date.
Indices is a global index provider that maintains a wide variety of valuation and index benchmarks for investment advisors, wealth managers and institutional investors.
In April of 2018, we acquired Kensho Technologies Inc. ("Kensho") for approximately $550 million, net of cash acquired, in a mix of cash and stock. The results of Kensho, an operating segment of the Company, are included in Corporate revenue and expenses are translated into U.S. dollars using weighted-average exchange rates. Foreign currency translation adjustments are accumulatedCorporate Unallocated for financial reporting purposes. Restricted cash of $32 million included in a separate componentour consolidated balance sheet as of equity.December 31, 2018 includes amounts held in escrow accounts in connection with our acquisition of Kensho. See Note 2 —Acquisitions and Divestitures for additional information and Note 12 – Segment and Geographic Information for further discussion on our reportable segments.
RevenueIn January of 2018, we adopted Financial Accounting Standards Board Accounting Standards Codification ("ASC") 606 as discussed below.
Adoption of ASC 606, “Revenue from Contracts with Customers”
We adopted ASC 606 "Revenue from Contracts with Customers" using the modified retrospective transition method applied to our revenue contracts with customers as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior year amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605 "Revenue Recognition". We recorded a net increase to opening retained earnings of $35 million as of January 1, 2018 due to the cumulative effect of adopting ASC 606, with the impact primarily related to our treatment of costs to obtain a contract and to a lesser extent, changes to the timing of the recognition of our subscription and non-transaction revenues. We recognized incremental revenue of $6 million for the year ended December 31, 2018 as a result of the adoption of this standard.
Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. Under ASC 605, revenue was recognized as it was earned and when services were rendered.
The following table presents our revenue disaggregated by revenue type for the years ended December 31:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Ratings | | Market Intelligence | | Platts | | Indices | | Corporate | | Intersegment Elimination 1 | | Total |
| | | | | | | | | | | | | | |
| | 2018 |
| Subscription | $ | — |
| | $ | 1,773 |
| | $ | 750 |
| | $ | 144 |
| | $ | 15 |
| | $ | — |
| | $ | 2,682 |
|
| Non-transaction | 1,506 |
| | — |
| | — |
| | — |
| | — |
| | (125 | ) | | 1,381 |
|
| Non-subscription / Transaction | 1,377 |
| | 40 |
| | 11 |
| | — |
| | — |
| | — |
| | 1,428 |
|
| Asset-linked fees | — |
| | 20 |
| | — |
| | 522 |
| | — |
| | — |
| | 542 |
|
| Sales usage-based royalties | — |
| | — |
| | 54 |
| | 171 |
| | — |
| | — |
| | 225 |
|
| Total revenue | $ | 2,883 |
| | $ | 1,833 |
| | $ | 815 |
| | $ | 837 |
| | $ | 15 |
| | $ | (125 | ) | | $ | 6,258 |
|
| | | | | | | | | | | | | | |
| Timing of revenue recognition | | | | | | | | | | | | | |
| Services transferred at a point in time | $ | 1,377 |
| | $ | 40 |
| | $ | 11 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,428 |
|
| Services transferred over time | 1,506 |
| | 1,793 |
| | 804 |
| | 837 |
| | 15 |
| | (125 | ) | | 4,830 |
|
| Total revenue | $ | 2,883 |
| | $ | 1,833 |
| | $ | 815 |
| | $ | 837 |
| | $ | 15 |
| | $ | (125 | ) | | $ | 6,258 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Ratings | | Market Intelligence | | Platts | | Indices | | Corporate | | Intersegment Elimination 1 | | Total |
| | | | | | | | | | | | | | |
| | 2017 2 |
| Subscription | $ | — |
| | $ | 1,614 |
| | $ | 704 |
| | $ | 136 |
| | $ | — |
| | $ | — |
| | $ | 2,454 |
|
| Non-transaction | 1,448 |
| | — |
| | — |
| | — |
| | — |
| | (110 | ) | | 1,338 |
|
| Non-subscription / Transaction | 1,540 |
| | 46 |
| | $ | 13 |
| | — |
| | — |
| | — |
| | 1,599 |
|
| Asset-linked fees | — |
| | 23 |
| | — |
| | 461 |
| | — |
| | — |
| | 484 |
|
| Sales usage-based royalties | — |
| | — |
| | 57 |
| | 131 |
| | — |
| | — |
| | 188 |
|
| Total revenue | $ | 2,988 |
| | $ | 1,683 |
| | $ | 774 |
| | $ | 728 |
| | $ | — |
| | $ | (110 | ) | | $ | 6,063 |
|
| | | | | | | | | | | | | | |
| Timing of revenue recognition | | | | | | | | | | | | | |
| Services transferred at a point in time | $ | 1,540 |
| | $ | 46 |
| | $ | 13 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,599 |
|
| Services transferred over time | 1,448 |
| | 1,637 |
| | 761 |
| | 728 |
| | — |
| | (110 | ) | | 4,464 |
|
| Total revenue | $ | 2,988 |
| | $ | 1,683 |
| | $ | 774 |
| | $ | 728 |
| | $ | — |
| | $ | (110 | ) | | $ | 6,063 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Ratings | | Market Intelligence | | Platts | | Indices | | Corporate | | Intersegment Elimination 1 | | Total |
| | | | | | | | | | | | | | |
| | 2016 2 |
| Subscription | $ | — |
| | $ | 1,543 |
| | $ | 689 |
| | $ | 132 |
| | $ | — |
| | $ | — |
| | $ | 2,364 |
|
| Non-transaction | 1,357 |
| | — |
| | — |
| | — |
| | — |
| | (98 | ) | | 1,259 |
|
| Non-subscription / Transaction | 1,178 |
| | 99 |
| | 183 |
| | — |
| | — |
| | — |
| | 1,460 |
|
| Asset-linked fees | — |
| | 19 |
| | — |
| | 381 |
| | — |
| | — |
| | 400 |
|
| Sales usage-based royalties | — |
| | — |
| | 53 |
| | 125 |
| | — |
| | — |
| | 178 |
|
| Total revenue | $ | 2,535 |
| | $ | 1,661 |
| | $ | 925 |
| | $ | 638 |
| | $ | — |
| | $ | (98 | ) | | $ | 5,661 |
|
| | | | | | | | | | | | | | |
| Timing of revenue recognition | | | | | | | | | | | | | |
| Services transferred at a point in time | $ | 1,178 |
| | $ | 99 |
| | $ | 183 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,460 |
|
| Services transferred over time | 1,357 |
| | 1,562 |
| | 742 |
| | 638 |
| | — |
| | (98 | ) | | 4,201 |
|
| Total revenue | $ | 2,535 |
| | $ | 1,661 |
| | $ | 925 |
| | $ | 638 |
| | $ | — |
| | $ | (98 | ) | | $ | 5,661 |
|
| |
1 | Intersegment eliminations mainly consists of a royalty charged to Market Intelligence for the rights to use and distribute content and data developed by Ratings. |
| |
2 | As noted above, amounts for the years ended December 31, 2017 and 2016 were not adjusted under the modified retrospective transition method applied to our revenue contracts with customers as of January 1, 2018. |
Subscription revenue
Subscription revenue at Market Intelligence is primarily derived from distribution of data, analytics, third party research, and credit ratings-related information primarily through web-based channels including Market Intelligence Desktop, RatingsDirect®, RatingsXpress®, and Credit Analytics. Subscription revenue at Platts is generated by providing customers access to commodity and energy-related price assessments, market data, and real-time news, along with other information services. Subscription revenue at Indices is derived from the contracts for underlying data of our indexes to support our customers' management of index funds, portfolio analytics, and research.
For subscription products and services, we generally provide continuous access to dynamic data sets and analytics for a defined period, with revenue recognized ratably as our performance obligation to provide access to our data and analytics is progressively fulfilled over the stated term of the contract.
Non-transaction revenue
Non-transaction revenue at Ratings is primarily related to surveillance of a credit rating, annual fees for customer relationship-based pricing programs, fees for entity credit ratings and global research and analytics. Non-transaction revenue also includes an intersegment revenue elimination of $125 million, $110 million and $98 million for the years ended December 31, 2018, 2017, and 2016 respectively, mainly consisting of the royalty charged to Market Intelligence for the rights to use and distribute content and data developed by Ratings.
For non-transaction revenue related to Rating’s surveillance services, we continuously monitor factors that impact the creditworthiness of an issuer over the contractual term with revenue recognized to the extent that our performance obligation is progressively fulfilled over the term contract. Because surveillance services are continuously provided throughout the term of the contract, our measure of progress towards fulfillment of our obligation to monitor a rating is a time-based output measure with revenue recognized ratably over the term of the contract.
Non-subscription / Transaction revenue
Transaction revenue at our Ratings segment primarily includes fees associated with:
ratings related to new issuance of corporate and government debt instruments; and structured finance instruments;
bank loan ratings; and
corporate credit estimates, which are intended, based on an abbreviated analysis, to provide an indication of our opinion regarding creditworthiness of a company which does not currently have a Ratings credit rating.
Transaction revenue is recognized at the point in time when our performance obligation is satisfied by issuing a rating on our customer's instruments, our customer's creditworthiness, or a counter-party's creditworthiness and when we have a right to payment and the customer can benefit from the significant risks and rewards of ownership.
Non-subscription revenue at Market Intelligence is primarily related to certain advisory, pricing and analytical services. Non-subscription revenue at Platts is primarily related to conference sponsorship, consulting engagements and events.
Asset-linked fees
Asset-linked fees at Indices and Market Intelligence are primarily related to royalties payments based on the value of assets under management in our customers exchange-traded funds and mutual funds.
For asset-linked products and services, we provide licenses conveying continuous access to our index and benchmark-related intellectual property during a specified contract term. Revenue is recognized aswhen the extent that our customers have used our licensed intellectual property can be quantified. Recognition of revenue for our asset-linked fee arrangements is subject to the "recognition constraint" for usage-based royalty payments because we cannot reasonably predict the value of the assets that will be invested in index funds structured using our intellectual property until it is earnedeither publicly available or when we are notified by
our customers. Revenue derived from an asset-linked fee arrangement is measured and recognized when the certainty of the extent of its utilization of our index products by our customers is known.
Sales usage-based royalties
Sales usage-based royalty revenue at our Indices segment is primarily related to trading based fees from exchange-traded derivatives. Sales and usage-based royalty revenue at our Platts segment is primarily related to licensing of its proprietary market price data and price assessments to commodity exchanges.
For sales usage-based royalty products and services, we provide licenses conveying the right to continuous access to our intellectual property over the contract term, with revenue recognized when the extent of our license’s utilization can be quantified, or more specifically, when trading volumes are rendered. We consider amountsknown and publicly available to be earned once evidenceus or when we are notified by our customers. Recognition of an arrangement has been obtained, services are performed,revenue of fees are fixed or determinable and collectabilitytied to trading volumes is reasonably assured. Revenue relating to products that provide for more than one deliverable is recognized based upon the relative fair valuesubject to the customerrecognition constraint for a usage-based royalty promised by our customers in exchange for the license of each deliverable as each deliverable is provided.our intellectual property, with revenue recognized when trading volumes are known.
Arrangements with Multiple Performance Obligations
Our contracts with customers may include multiple performance obligations. Revenue relating to agreements that provide for more than one serviceperformance obligation is recognized based upon the relative fair value to the customer of each service component as each component is earned. If the fair value to the customer for each service is not objectively determinable, management makes its best estimate of the services’ stand-alone selling price and records revenue as it is earned over the service period. For arrangements that include multiple services,The fair value of the service components are determined using an analysis that considers cash consideration that would be received for instances when the service components are sold separately. AdvertisingIf the fair value to the customer for each service is not objectively determinable, we make our best estimate of the services’ stand-alone selling price and record revenue as it is earned over the service period.
Receivables
We record a receivable when a customer is billed or when revenue is recognized prior to billing a customer. For multi-year agreements, we generally invoice customers annually at the beginning of each annual period. The opening balance of accounts receivable, net of allowance for doubtful accounts, was $1,319 million as of January 1, 2018.
Contract Assets
Contract assets include unbilled amounts from when the pageCompany transfers service to a customer before a customer pays consideration or before payment is run. Subscription incomedue. As of December 31, 2018 and 2017, contract assets were $26 million and $17 million, respectively, and are included in accounts receivable in our consolidated balance sheets.
Unearned Revenue
We record unearned revenue when cash payments are received or due in advance of our performance. The increase in the unearned revenue balance for the year ended December 31, 2018 is primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by $1.5 billion of revenues recognized overthat were included in the related subscriptionunearned revenue balance at the beginning of the period.
Remaining Performance Obligations
Remaining performance obligations represent the transaction price of contracts for work that has not yet been performed. As of December 31, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was $1.4 billion. We expect to recognize revenue on approximately half and three-quarters of the remaining performance obligations over the next 12 and 24 months, respectively, with the remainder recognized thereafter.
66
We do not disclose the value of unfulfilled performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts where revenue is a usage-based royalty promised in exchange for a license of intellectual property.
Depreciation
TheCosts to Obtain a Contract
We recognize an asset for the incremental costs of propertyobtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales commission programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were $101 million as of December 31, 2018, and equipment are depreciated using the straight-line method based upon the following estimated useful lives: buildingsincluded in prepaid and improvements from 15 to 40 yearsother current assets and equipment and furniture from 2 to 10 years.other non-current assets on our consolidated balance sheets. The costs of leasehold improvements areasset will be amortized over a period consistent with the lessertransfer to the customer of the useful livesgoods or services to which the terms of the respective leases.
Advertising expense
The cost of advertising is expensed as incurred. We incurred $33 million, $35 million and $41 million in advertising costs for the years ended December 31, 2015, 2014 and 2013, respectively.
Stock-based compensation
Stock-based compensation expense is measured at the grant dateasset relates, calculated based on the fair valuecustomer term and the average life of the awardproducts and services underlying the contracts. The expense is recognized over the requisite service period, which typically is the vesting period. Stock-based compensation is classified as both operating-related expense andrecorded within selling and general expenses.
We expense sales commissions when incurred if the amortization period would have been one year or less. These costs are recorded within selling and general expenses.
Presentation of net periodic pension cost and net periodic postretirement benefit cost
During the first quarter of 2018, we adopted new accounting guidance requiring that net periodic benefit cost for our retirement and postretirement plans other than the service cost component be included outside of operating profit; these costs are included in theother income, net in our consolidated statements of income.
Income taxes
Deferred tax assets and liabilities are recognizedThe components of other income, net for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilitiesyear ended December 31 are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize liabilities for uncertain tax positions taken or expected to be taken in income tax returns. Accrued interest and penalties related to unrecognized tax benefits are recognized in interest expense and operating expense, respectively.as follows:
|
| | | | | | | | | | | |
| (in millions) | 2018 | | 2017 | | 2016 |
| Other components of net periodic benefit cost | $ | (30 | ) | | $ | (27 | ) | | $ | (28 | ) |
| Net loss from investments | 5 |
| | — |
| | — |
|
| Other income, net | $ | (25 | ) | | $ | (27 | ) | | $ | (28 | ) |
Judgment is required in determining our provisionAssets and Liabilities Held for income taxes, deferred tax assetsSale and liabilities and unrecognized tax benefits. In determining the need for a valuation allowance, the historical and projected financial performance of the operation that is recording a net deferred tax asset is considered along with any other pertinent information.Discontinued Operations
We file income tax returns in the U.S. federal jurisdiction, various states, and foreign jurisdictions, and we are routinely under audit by many different tax authorities. We believe that our accrual for tax liabilities is adequate for all open audit years based on our assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. It is possible that examinations will be settled prior to December 31, 2016. If any of these tax audit settlements do occur within that period we would make any necessary adjustments to the accrual for unrecognized tax benefits. Until formal resolutions are reached between us and the tax authorities, the determination of a possible audit settlement range with respect to the impact on unrecognized tax benefits is not practicable. On the basis of present information, our opinion is that any assessments resulting from the current audits will not have a material effect on our consolidated financial statements.
Redeemable Noncontrolling Interest
The agreement with the minority partners of our S&P Dow Jones Indices LLC joint venture established in June of 2012 contains redemption features whereby interests held by our minority partners are redeemable either (i) at the option of the holder or (ii) upon the occurrence of an event that is not solely within our control. Since redemption of the noncontrolling interest is outside of our control, this interest is presented on our consolidated balance sheets under the caption “Redeemable noncontrolling interest.” If the interest were to be redeemed, we would be required to purchase all of such interest at fair value on the datecomponent of redemption. We adjust the redeemable noncontrolling interest each reporting period to its estimated redemption value, but never less than its initial fair value, usingin Indices business is based on a combination of an income and market valuation approach. Our income and market valuation approaches may incorporate Level 3 measures for instances when observable inputs are not available, including assumptions related to expected future net cash flows, long-term growth rates, the timing and nature of tax attributes, and the redemption features. Any adjustments to the redemption value will impact retained income. See Note 8 –
RECENTEquity, for further detail.ACCOUNTING STANDARDS
ContingenciesSee Note 1 – Accounting Policies to our consolidated financial statements for a detailed description of recent accounting standards. We expect the adoption of these recent accounting standards to have a material impact on our consolidated balance sheet; however, we do not expect that these standards will have a material impact on our consolidated statements of income or cash flows.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk includes changes in foreign exchange rates. We accrue for loss contingencies when both (a) information available priorhave operations in various foreign countries where the functional currency is primarily the local currency. For international operations that are determined to issuancebe extensions of the parent company, the U.S. dollar is the functional currency. We typically have naturally hedged positions in most countries from a local currency perspective with offsetting assets and liabilities. During the years ended December 31, 2018 and 2017, we entered into foreign exchange forward contracts in order to mitigate the change in fair value of specific assets and liabilities in the consolidated balance sheet. These forward contracts are not designated as hedges and do not qualify for hedge accounting. During the years ended December 31, 2018, 2017 and 2016, we entered into foreign exchange forward contracts to hedge the effect of adverse fluctuations in foreign currency exchange rates. We have not entered into any derivative financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements and (b) the amount of loss can reasonably be estimated. We continually assess the likelihood of any adverse judgments or outcomes to our contingencies, as well as potential amounts or ranges of probable losses, and recognize a liability, if any,instruments for these contingencies based on an analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Because many of these matters are resolved over long periods of time, our estimate of liabilities may change due to new developments, changes in assumptions or changes in our strategy related speculative purposes. See Note 6 – Derivative Instruments to the matter. When we accrueConsolidated Financial Statements and Supplementary Data, in the Annual Report on Form 10-K for loss contingencies and the reasonable estimate of the loss is within a range, we record its best estimate within the range. We disclose an estimated possible loss or a range of loss when it is at least reasonably possible that a loss may have been incurred.further discussion.
Recent Accounting Standards
In November of 2015, the Financial Accounting Standards Board ("FASB") issued guidance to simplify the presentation of deferred income taxes. The guidance requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This guidance is effective for reporting periods beginning after December 15, 2016; however, early adoption is permitted. We do not expect the adoption of this guidance to have a significant impact on our consolidated financial statements.
In September of 2015, the FASB issued guidance intended to simplify the accounting for measurement-period adjustments made to provisional amounts recognized in a business combination. The guidance eliminates the requirement to retrospectively account for those adjustments. This guidance is effective for reporting periods beginning after December 15, 2015. We do not expect the adoption of this guidance to have a significant impact on our consolidated financial statements.Item 8. Consolidated Financial Statements and Supplementary Data
TABLE OF CONTENTS
In April of 2015, the FASB issued new accounting guidance intended to simplify the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with the presentation for debt discounts. This guidance is effective for reporting periods beginning after December 15, 2015 and must be applied on a retrospective basis with early adoption permitted. We adopted this guidance upon issuance and prior year amounts have been reclassified to conform with current year presentation. As of December 31, 2014, $4 million of debt issuance costs were reclassified from other non-current assets to long-term debt, less current portion. The adoption of this guidance did not have a significant impact on our consolidated financial statements.
In February of 2015, the FASB issued guidance that requires management to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. This guidance is effective for reporting periods beginning after December 15, 2015; however, early adoption is permitted. We do not expect the adoption of this guidance to have a significant impact on our consolidated financial statements.
In January of 2015, the FASB issued guidance that eliminates the concept of reporting extraordinary items, but retains current presentation and disclosure requirements for an event or transaction that is of an unusual nature or of a type that indicates infrequency of occurrence. Transactions that meet both criteria would now also follow such presentation and disclosure requirements. This guidance is effective for reporting periods beginning after December 15, 2015; however, early adoption is permitted. We do not expect the adoption of this guidance to have a significant impact on our consolidated financial statements.
In August of 2014, the FASB issued guidance that requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. This guidance is effective for reporting periods beginning after December 15, 2016; however, early adoption is permitted. We do not expect the adoption of this guidance to have a significant impact on our consolidated financial statements.
In May of 2014, the FASB and the International Accounting Standards Board (“IASB”) issued jointly a converged standard on the recognition of revenue from contracts with customers which is intended to improve the financial reporting of revenue and comparability of the top line in financial statements globally. The core principle of the new standard is for the recognition of revenue to depict the transfer of goods or services to customers in amounts that reflect the payment to which the company expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced revenue disclosures, provide guidance for transactions that were not previously addressed comprehensively and improve guidance for multiple-element arrangements. In August of 2015, the FASB issued guidance deferring the effective date of the new revenue standard by one year. The new guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. While we will continue with our evaluation process, initially, we believe this guidance may have an impact on the accounting for certain proprietary consulting arrangements in our C&C segment as well as the accounting for certain integrated desktop service revenue arrangements offered in our S&P Capital IQ and SNL segment.
In April of 2014, the FASB issued final guidance that raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The guidance is intended to reduce the frequency of disposals reported as discontinued operations by focusing on strategic shifts that have or will have a major effect on an entity’s operations and financial results. In addition, the guidance permits companies to have continuing cash flows and significant continuing involvement with the disposed component. We adopted the amendments to this guidance on January 1, 2015.
Reclassification
Certain prior year amounts have been reclassified for comparability purposes.
2. Acquisitions and DivestituresReport of Independent Registered Public Accounting Firm
2015To the Shareholders and the Board of Directors of S&P Global Inc.
For
Opinion on the year endedFinancial Statements
We have audited the accompanying consolidated balance sheets of S&P Global Inc. (the Company) as of December 31, 2015, we paid cash for acquisitions, net of cash acquired, totaling $2.4 billion. We used2018 and 2017, the net proceeds of our $2.0 billion of senior notes issued in August of 2015 and cash on hand to finance the acquisition of SNL. All other acquisitions were funded with cash flows from operations. Acquisitions completed during the year ended December 31, 2015 by segment included:
S&P Capital IQ and SNL
On September 1, 2015 (the "Acquisition Date"), we acquired SNL Financial LC ("SNL") for $2.225 billion in cash, subject to working capital adjustments. SNL's results of operations have been included in ourrelated consolidated statements of income, subsequent tocomprehensive income, equity and cash flows for each of the Acquisition Date. SNL is a global provider of news, data, and analytical tools to five sectorsthree years in the global economy: financial services, real estate, energy, media & communications, and metals & mining. SNL delivers information through its suite of web, mobile and direct data feed platforms that helps clients, including investment and commercial banks, investors, corporations, and regulators make decisions, improve efficiency, and manage risk.
Acquisition-Related Expenses
During the yearperiod ended December 31, 2015,2018, and the related notes and financial statement schedule listed in Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company incurred approximately $37 millionat December 31, 2018 and 2017, and the results of acquisition-related costs relatedits operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 12, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the acquisitionCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of SNL. These expenses are included in sellingthe Securities and general expenses in our consolidated statements of income.Exchange Commission and the PCAOB.
Preliminary AllocationWe conducted our audits in accordance with the standards of Purchase Pricethe PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Our acquisition of SNL was accounted for using the purchase method. Under the purchase method, the excess of the purchase price over the fair value of the net assets acquired is allocated to goodwill and other intangibles. The goodwill recognized is largely attributable to anticipated operational synergies and growth opportunities as a result of the acquisition. The intangible assets, excluding goodwill and indefinite-lived intangibles, will be amortized over their anticipated useful lives between 10 and 18 years which will be determined when we finalize our purchase price allocation. The goodwill is expected to be deductible for tax purposes./s/ ERNST & YOUNG LLP
The following table presentsWe have served as the preliminary allocation of purchase price to the assets and liabilities of SNL as a result of the acquisition.Company’s auditor since 1969.
|
| | | |
| (in millions) | |
| Current assets | $ | 23 |
|
| Property, plant and equipment | 19 |
|
| Goodwill | 1,563 |
|
| Other intangible assets, net: | |
| Databases and software | 421 |
|
| Customer relationships | 162 |
|
| Tradenames | 185 |
|
| Other intangibles | 4 |
|
| Other intangible assets, net | 772 |
|
| Other non-current assets | 1 |
|
| Total assets acquired | 2,378 |
|
| Current liabilities | (23 | ) |
| Unearned revenue | (117 | ) |
| Other non-current liabilities | (4 | ) |
| Total liabilities acquired | (144 | ) |
| Net assets acquired | $ | 2,234 |
|
69
The Company has performed a preliminary valuation analysisReport of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of S&P Global Inc.
Opinion on Internal Control over Financial Reporting
We have audited S&P Global Inc.’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the fair market valueTreadway Commission (2013 framework) (the COSO criteria). In our opinion, S&P Global Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of assets and liabilitiesDecember 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the SNL Financial business. The final purchase price allocation will be determined whenPublic Company Accounting Oversight Board (United States) (PCAOB), the Company has completedconsolidated balance sheets of S&P Global Inc. as of December 31, 2018 and 2017, the detailed valuationsrelated consolidated statements of income, comprehensive income, equity and necessary calculations. The final allocation could differ materially fromcash flows for each of the preliminary allocation. The final allocation may include (1) changesthree years in fair values of property, plant and equipment, (2) changes in allocations to intangible assets as well as goodwill and (3) other changes to assets and liabilities.
Supplemental Pro Forma Information
Supplemental information on an unaudited pro forma basis is presented below for the yearsperiod ended December 31, 20152018, and 2014 as if the acquisitionrelated notes and financial statement schedule listed in Item 15(a)(2) and our report dated February 12, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of SNL occurredthe effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on January 1, 2014. The pro formaInternal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial information is presented for comparative purposes only,reporting based on estimatesour audit. We are a public accounting firm registered with the PCAOB and assumptions, whichare required to be independent with respect to the Company believes to be reasonable but not necessarily indicativein accordance with the U.S. federal securities laws and the applicable rules and regulations of the consolidated financial position or results of operationsSecurities and Exchange Commission and the PCAOB.
We conducted our audit in future periods oraccordance with the results that actually would have been realized had this acquisition been completed at the beginning of 2015. The unaudited pro forma information includes intangible asset charges and incremental borrowing costs as a resultstandards of the acquisition, net of related tax, estimated usingPCAOB. Those standards require that we plan and perform the Company'saudit to obtain reasonable assurance about whether effective tax rate for continuing operations for the periods presented.internal control over financial reporting was maintained in all material respects.
|
| | | | | | |
| (in millions) | Year Ended December 31, |
| | 2015 | 2014 |
| Pro forma revenue | $ | 5,477 |
| $ | 5,275 |
|
| Pro forma net income (loss) from continuing operations | $ | 1,258 |
| $ | (251 | ) |
C&CDefinition and Limitations of Internal Control Over Financial Reporting
In JulyA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of 2015, we acquiredfinancial reporting and the entire issued share capitalpreparation of Petromedia Ltdfinancial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and its operating subsidiaries (“Petromedia”), an independent provider of data, intelligence, news and toolsprocedures that (1) pertain to the global fuels marketmaintenance of records that, offersin reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a suite of products that provides clients with actionable data and intelligence that enable informed decisions, minimize risk and increase efficiency. We accounted formaterial effect on the acquisition of Petromedia using the purchase method of accounting. The acquisition of Petromedia is not material to our consolidated financial statements.
In JulyBecause of 2015, we acquired National Automobile Dealers Association's Used Car Guide (“UCG”), a leading providerits inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of U.S. retail, trade-in and auction used-vehicle values. The acquisitionany evaluation of UCG expanded our analytical and modeling capabilities while deepening our presenceeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in auto finance and auto insurance, and enriching retail solutions. We accounted forconditions, or that the acquisitiondegree of UCG usingcompliance with the purchase method of accounting. The acquisition of UCG is not material to our consolidated financial statements.
Following our acquisition of UCG, we made a contingent purchase price payment in 2015 for $5 million that has been reflected in the consolidated statement of cash flows as a financing activity.
For acquisitions during 2015 that were accounted for using the purchase method, the excess of the purchase price over the fair value of the net assets acquired is allocated to goodwill and other intangibles. Intangible assets recorded for all transactions are amortized using the straight-line method for periods not exceeding 18 years.
2014
For the year ended December 31, 2014, we paid cash for acquisitions, net of cash acquired, totaling $82 million. None of our acquisitions were material either individuallypolicies or in the aggregate, including the pro forma impact on earnings. All acquisitions were funded with cash flows from operations. Acquisitions completed during the year ended December 31, 2014 by segment included:procedures may deteriorate.
S&P Ratings/s/ ERNST & YOUNG LLP
In October of 2014, we acquired BRC Investor Services S.A. (“BRC”), a Colombia-based ratings firm providing risk classifications of banks, financial services providers, insurance companies, corporate bonds and structured issues that will expand our presence in the Latin American credit markets. We accounted for the acquisition of BRC using the purchase method of accounting. The acquisition is not material to our consolidated financial statements.
Following CRISIL's acquisition of Coalition Development Ltd. ("Coalition") that occurred in July of 2012, we made a contingent purchase price payment in 2014 for $11 million that has been reflected in the consolidated statement of cash flows as a financing activity.New York, New York
C&CConsolidated Statements of Income
In July of 2014, we acquired Eclipse Energy Group AS and its operating subsidiaries (“Eclipse”), which provides a comprehensive suite of data and analytics products on |
| | | | | | | | | | | |
| (in millions, except per share data) | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Revenue | $ | 6,258 |
| | $ | 6,063 |
| | $ | 5,661 |
|
| Expenses: | | | | | |
| Operating-related expenses | 1,701 |
| | 1,695 |
| | 1,773 |
|
| Selling and general expenses | 1,561 |
| | 1,605 |
| | 1,467 |
|
| Depreciation | 84 |
| | 82 |
| | 85 |
|
| Amortization of intangibles | 122 |
| | 98 |
| | 96 |
|
| Total expenses | 3,468 |
| | 3,480 |
| | 3,421 |
|
| Gain on dispositions | — |
| | — |
| | (1,101 | ) |
| Operating profit | 2,790 |
| | 2,583 |
| | 3,341 |
|
| Other income, net | (25 | ) | | (27 | ) | | (28 | ) |
| Interest expense, net | 134 |
| | 149 |
| | 181 |
|
| Income before taxes on income | 2,681 |
| | 2,461 |
| | 3,188 |
|
| Provision for taxes on income | 560 |
| | 823 |
| | 960 |
|
| Net income | 2,121 |
| | 1,638 |
| | 2,228 |
|
| Less: net income attributable to noncontrolling interests | (163 | ) | | (142 | ) | | (122 | ) |
| Net income attributable to S&P Global Inc. | $ | 1,958 |
| | $ | 1,496 |
| | $ | 2,106 |
|
| | | | | | |
| Earnings per share attributable to S&P Global Inc. common shareholders: | | | | | |
| Net income: | | | | | |
| Basic | $ | 7.80 |
| | $ | 5.84 |
| | $ | 8.02 |
|
| Diluted | $ | 7.73 |
| | $ | 5.78 |
| | $ | 7.94 |
|
| Weighted-average number of common shares outstanding: | | | | | |
| Basic | 250.9 |
| | 256.3 |
| | 262.8 |
|
| Diluted | 253.2 |
| | 258.9 |
| | 265.2 |
|
| | | | | | |
| Actual shares outstanding at year end | 248.4 |
| | 253.7 |
| | 258.3 |
|
| | | | | | |
| Dividend declared per common share | $ | 2.00 |
| | $ | 1.64 |
| | $ | 1.44 |
|
See accompanying notes to the European natural gas and liquefied natural gas markets as well as a range of advisory services leveraging Eclipse’s knowledge base, data capabilities, and modeling suite of products. This transaction complements our North American natural gas capabilities, which we obtained from our Bentek Energy LLC acquisition in 2011. We accounted for the acquisition of Eclipse using the purchase method of accounting. The acquisition of Eclipse is not material to our consolidated financial statements.
S&P DJ Indices
In March of 2014, we acquired the intellectual property of a family of Broad Market Indices (“BMI”) from Citigroup Global Markets Inc. The BMI provides a broad measure of the global equities markets which includes approximately 11,000 companies in more than 52 countries covering both developed and emerging markets. We accounted for the acquisition of the intellectual property on a cost basis and it was not material to our consolidated financial statements.
For acquisitions during 2014 that were accounted for using the purchase method, the excess of the purchase price over the fair value of the net assets acquired is allocated to goodwill and other intangibles. Intangible assets recorded for all transactions are amortized using the straight-line method for periods not exceeding 7 years. None of the goodwill acquired from our acquisitions during 2014 will be deductible for tax purposes.
2013
For the year ended December 31, 2013, we paid cash for acquisitions, net of cash acquired, totaling $273 million. None of our acquisitions were material either individually or in the aggregate, including the pro forma impact on earnings. All acquisitions were funded with cash flows from operations. Acquisitions completed during the year ended December 31, 2013 by segment included:
S&P DJ Indices
In December of 2013, we purchased the intellectual property rights to a range of commodities indices developed by Goldman Sachs as well as a limited-use license to promote the commodities indices using the Goldman Sachs Commodity Index trademarks. The commodities indices provide us with a leading benchmark that measures general price movements and inflation in the world economy. We accounted for the acquisition of the intellectual property on a cost basis.
S&P Ratings
In June of 2013, we made a voluntary open offer to purchase up to an additional 22.23% of the total equity shares outstanding in CRISIL Limited ("CRISIL"), our majority owned Indian credit rating agency within our S&P Ratings segment. In August of 2013, at the conclusion of the tender offer period, we acquired approximately 11 million equity shares representing 15.07% of CRISIL's total outstanding equity shares for $214 million, increasing our ownership percentage in CRISIL to 67.84% from 52.77%.
Following CRISIL's acquisition of Coalition that occurred in July of 2012, we made a contingent purchase price payment in 2013 for $12 million that has been reflected in the consolidated statement of cash flows as a financing activity.
Intangible assets recorded for all transactions during 2013 are considered intangible assets with indefinite lives which are not amortized, but instead are tested for impairment annually during the fourth quarter each year or more frequently if events or changes in circumstances indicate that the asset might be impaired.
Goodwill consists primarily of intangible assets that do not qualify for separate recognition, including assembled workforce, noncontractual relationships and agreements. The goodwill is not expected to be deductible for tax purposes.
Non-cash investing activities
Liabilities assumed in conjunction with the acquisitionConsolidated Statements of businesses are as follows:Comprehensive Income
|
| | | | | | | | | | | |
| (in millions) | Years ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Fair value of assets acquired | $ | 2,576 |
| | $ | 67 |
| | $ | — |
|
| Cash paid (net of cash acquired) | 2,401 |
| | 52 |
| | — |
|
Liabilities assumed 1 | $ | 175 |
| | $ | 15 |
| | $ | — |
|
|
| | | | | | | | | | | |
| (in millions) | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Net income | $ | 2,121 |
| | $ | 1,638 |
| | $ | 2,228 |
|
| Other comprehensive income: | | | | | |
| Foreign currency translation adjustment | (96 | ) | | 93 |
| | (132 | ) |
| Income tax effect | (4 | ) | | — |
| | (7 | ) |
| | (100 | ) | | 93 |
| | (139 | ) |
| | | | | | |
| Pension and other postretirement benefit plans | (14 | ) | | 52 |
| | (27 | ) |
| Income tax effect | 9 |
| | (11 | ) | | (10 | ) |
| | (5 | ) | | 41 |
| | (37 | ) |
| | | | | | |
| Unrealized gain (loss) on investment and forward exchange contracts | 2 |
| | (10 | ) | | 4 |
|
| Income tax effect | — |
| | — |
| | (1 | ) |
| | 2 |
| | (10 | ) | | 3 |
|
| | | | | | |
| Comprehensive income | 2,018 |
| | 1,762 |
| | 2,055 |
|
| Less: comprehensive income attributable to nonredeemable noncontrolling interests | (12 | ) | | (13 | ) | | (13 | ) |
| Less: comprehensive income attributable to redeemable noncontrolling interests | (151 | ) | | (129 | ) | | (109 | ) |
| Comprehensive income attributable to S&P Global Inc. | $ | 1,855 |
| | $ | 1,620 |
| | $ | 1,933 |
|
1 2013 acquisitions did not result in any liabilities assumed.See accompanying notes to the consolidated financial statements.
Divestitures - Continuing OperationsConsolidated Balance Sheets
|
| | | | | | | |
| (in millions) | December 31, |
| | 2018 | | 2017 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,917 |
| | $ | 2,777 |
|
| Restricted cash | 41 |
| | 2 |
|
| Short-term investments | 18 |
| | 12 |
|
| Accounts receivable, net of allowance for doubtful accounts: 2018- $34 ; 2017 - $33 | 1,449 |
| | 1,319 |
|
| Prepaid and other current assets | 179 |
| | 214 |
|
| Total current assets | 3,604 |
| | 4,324 |
|
| Property and equipment: | | | |
| Buildings and leasehold improvements | 372 |
| | 354 |
|
| Equipment and furniture | 494 |
| | 475 |
|
| Total property and equipment | 866 |
| | 829 |
|
| Less: accumulated depreciation | (596 | ) | | (554 | ) |
| Property and equipment, net | 270 |
| | 275 |
|
| Goodwill | 3,535 |
| | 2,989 |
|
| Other intangible assets, net | 1,524 |
| | 1,388 |
|
| Other non-current assets | 525 |
| | 449 |
|
| Total assets | $ | 9,458 |
| | $ | 9,425 |
|
| LIABILITIES AND EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 211 |
| | $ | 195 |
|
| Accrued compensation and contributions to retirement plans | 354 |
| | 472 |
|
| Short-term debt | — |
| | 399 |
|
| Income taxes currently payable | 72 |
| | 77 |
|
| Unearned revenue | 1,641 |
| | 1,613 |
|
| Accrued legal and regulatory settlements | 1 |
| | 107 |
|
| Other current liabilities | 350 |
| | 351 |
|
| Total current liabilities | 2,629 |
| | 3,214 |
|
| Long-term debt | 3,662 |
| | 3,170 |
|
| Pension and other postretirement benefits | 229 |
| | 244 |
|
| Other non-current liabilities | 634 |
| | 679 |
|
| Total liabilities | 7,154 |
| | 7,307 |
|
| Redeemable noncontrolling interest | 1,620 |
| | 1,352 |
|
| Commitments and contingencies (Note 13) |
| |
|
| Equity: | | | |
| Common stock, $1 par value: authorized - 600 million shares; issued: 2018 - 294 million shares; 2017 - 412 million shares | 294 |
| | 412 |
|
| Additional paid-in capital | 833 |
| | 525 |
|
| Retained income | 11,284 |
| | 10,023 |
|
| Accumulated other comprehensive loss | (742 | ) | | (649 | ) |
| Less: common stock in treasury - at cost: 2018 - 45 million shares; 2017 - 158 million shares | (11,041 | ) | | (9,602 | ) |
| Total equity – controlling interests | 628 |
| | 709 |
|
| Total equity – noncontrolling interests | 56 |
| | 57 |
|
| Total equity | 684 |
| | 766 |
|
| Total liabilities and equity | $ | 9,458 |
| | $ | 9,425 |
|
See accompanying notes to the consolidated financial statements.
During the year ended December 31, 2015, we recorded a pre-tax gainConsolidated Statements of $11 million within other (income) loss inCash Flows
|
| | | | | | | | | | | |
| (in millions) | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Operating Activities: | | | | | |
| Net income | $ | 2,121 |
| | $ | 1,638 |
| | $ | 2,228 |
|
| Adjustments to reconcile net income to cash provided by operating activities: | | | | | |
| Depreciation | 84 |
| | 82 |
| | 85 |
|
| Amortization of intangibles | 122 |
| | 98 |
| | 96 |
|
| Provision for losses on accounts receivable | 21 |
| | 16 |
| | 9 |
|
| Deferred income taxes | 81 |
| | — |
| | 79 |
|
| Stock-based compensation | 94 |
| | 99 |
| | 76 |
|
| Gain on dispositions | — |
| | — |
| | (1,101 | ) |
| Accrued legal settlements | 1 |
| | 55 |
| | 54 |
|
| Other | 52 |
| | 96 |
| | 30 |
|
| Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: | | | | | |
| Accounts receivable | (164 | ) | | (196 | ) | | (177 | ) |
| Prepaid and other current assets | (1 | ) | | 10 |
| | 5 |
|
| Accounts payable and accrued expenses | (106 | ) | | 75 |
| | 19 |
|
| Unearned revenue | 70 |
| | 85 |
| | 107 |
|
| Accrued legal settlements | (108 | ) | | (4 | ) | | (150 | ) |
| Other current liabilities | (67 | ) | | (85 | ) | | (19 | ) |
| Net change in prepaid/accrued income taxes | (7 | ) | | 32 |
| | 174 |
|
| Net change in other assets and liabilities | (129 | ) | | 15 |
| | 45 |
|
| Cash provided by operating activities | 2,064 |
| | 2,016 |
| | 1,560 |
|
| Investing Activities: | | | | | |
| Capital expenditures | (113 | ) | | (123 | ) | | (115 | ) |
| Acquisitions, net of cash acquired | (401 | ) | | (83 | ) | | (177 | ) |
| Contingent consideration payment | — |
| | — |
| | (34 | ) |
| Proceeds from dispositions | 6 |
| | 2 |
| | 1,498 |
|
| Changes in short-term investments | (5 | ) | | (5 | ) | | (1 | ) |
| Cash (used for) provided by investing activities | (513 | ) | | (209 | ) | | 1,171 |
|
| Financing Activities: | | | | | |
| Payments on short-term debt, net | — |
| | — |
| | (143 | ) |
| Proceeds from issuance of senior notes, net | 489 |
| | — |
| | 493 |
|
| Payments on senior notes | (403 | ) | | — |
| | (421 | ) |
| Dividends paid to shareholders | (503 | ) | | (421 | ) | | (380 | ) |
| Distributions to noncontrolling interest holders | (154 | ) | | (111 | ) | | (116 | ) |
| Repurchase of treasury shares | (1,660 | ) | | (1,001 | ) | | (1,123 | ) |
| Exercise of stock options | 34 |
| | 75 |
| | 88 |
|
| Contingent consideration payment | — |
| | — |
| | (5 | ) |
| Purchase of additional CRISIL shares | (25 | ) | | — |
| | — |
|
| Employee withholding tax on share-based payments | (66 | ) | | (49 | ) | | (55 | ) |
| Cash used for financing activities | (2,288 | ) | | (1,507 | ) | | (1,662 | ) |
| Effect of exchange rate changes on cash | (84 | ) | | 87 |
| | (158 | ) |
| Net change in cash, cash equivalents, and restricted cash | (821 | ) | | 387 |
| | 911 |
|
| Cash, cash equivalents, and restricted cash at beginning of year | 2,779 |
| | 2,392 |
| | 1,481 |
|
| Cash, cash equivalents, and restricted cash at end of year | $ | 1,958 |
| | $ | 2,779 |
| | $ | 2,392 |
|
| Cash paid during the year for: | | | | | |
| Interest | $ | 151 |
| | $ | 139 |
| | $ | 150 |
|
| Income taxes | $ | 558 |
| | $ | 709 |
| | $ | 683 |
|
See accompanying notes to the consolidated statementfinancial statements.
Consolidated Statements of Equity
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Common Stock $1 par | | Additional Paid-in Capital | | Retained Income | | Accumulated
Other Comprehensive Loss | | Less: Treasury Stock | | Total SPGI Equity | | Noncontrolling Interests | | Total Equity |
| Balance as of December 31, 2015 | $ | 412 |
| | $ | 475 |
| | $ | 7,636 |
| | $ | (600 | ) | | $ | 7,729 |
| | $ | 194 |
| | $ | 49 |
| | $ | 243 |
|
Comprehensive income 1 | | | | | 2,106 |
| | (173 | ) | | | | 1,933 |
| | 13 |
| | 1,946 |
|
| Dividends | | | | | (380 | ) | | | | | | (380 | ) | | (10 | ) | | (390 | ) |
| Share repurchases | | |
|
| | | | | | 1,097 |
| | (1,097 | ) | |
| | (1,097 | ) |
| Employee stock plans, net of tax benefit | | | 27 |
| | | | | | (125 | ) | | 152 |
| | | | 152 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | (153 | ) | | | | | | (153 | ) | | | | (153 | ) |
| Other | | | | | 1 |
| | | | | | 1 |
| | (1 | ) | | — |
|
| Balance as of December 31, 2016 | $ | 412 |
| | $ | 502 |
| | $ | 9,210 |
| | $ | (773 | ) | | $ | 8,701 |
| | $ | 650 |
| | $ | 51 |
| | $ | 701 |
|
Comprehensive income 1 | | | | | 1,496 |
| | 124 |
| | | | 1,620 |
| | 15 |
| | 1,635 |
|
| Dividends | | | | | (421 | ) | | | | | | (421 | ) | | (10 | ) | | (431 | ) |
| Share repurchases | | |
| | | | | | 1,001 |
| | (1,001 | ) | | (5 | ) | | (1,006 | ) |
| Employee stock plans | | | 23 |
| | | | | | (100 | ) | | 123 |
| | 8 |
| | 131 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | (260 | ) | | | | | | (260 | ) | | | | (260 | ) |
| Other | | | | | (2 | ) | | | | | | (2 | ) | | (2 | ) | | (4 | ) |
| Balance as of December 31, 2017 | $ | 412 |
| | $ | 525 |
| | $ | 10,023 |
| | $ | (649 | ) | | $ | 9,602 |
| | $ | 709 |
| | $ | 57 |
| | $ | 766 |
|
Comprehensive income 1 | | | | | 1,958 |
| | (103 | ) | | | | 1,855 |
| | 12 |
| | 1,867 |
|
| Dividends | | | | | (503 | ) | | | | | | (503 | ) | | (11 | ) | | (514 | ) |
| Share repurchases | | | (75 | ) | | | | | | 1,585 |
| | (1,660 | ) | |
| | (1,660 | ) |
| Retirement of common stock | (118 | ) | | | | | | | | (118 | ) | | — |
| | | | — |
|
| Employee stock plans | | | 56 |
| | | | | | (28 | ) | | 84 |
| |
| | 84 |
|
| Change in redemption value of redeemable noncontrolling interest | | | | | (228 | ) | | | | | | (228 | ) | | | | (228 | ) |
| Increase in CRISIL ownership | | | (25 | ) | | | | | | | | (25 | ) | | 2 |
| | (23 | ) |
| Stock consideration for Kensho | | | 352 | | | | | | | | 352 |
| | | | 352 |
|
| Other | | | | | 34 |
| 2 |
| 10 |
| 2 |
| | | 44 |
| | (4 | ) | | 40 |
|
| Balance as of December 31, 2018 | $ | 294 |
| | $ | 833 |
| | $ | 11,284 |
| | $ | (742 | ) | | $ | 11,041 |
| | $ | 628 |
| | $ | 56 |
| | $ | 684 |
|
| |
1 | Excludes $151 million, $129 million and $109 million in 2018, 2017 and 2016, respectively, attributable to redeemable noncontrolling interest. |
| |
2 | Includes opening balance sheet adjustments related to the adoption of the new revenue recognition standard and the reclassification of the unrealized loss on investments from Accumulated other comprehensive loss to Retained income. See Note 1 —Accounting Policies for additional details. |
See accompanying notes to the consolidated financial statements.
Notes to the Consolidated Financial Statements
1. Accounting Policies
Nature of operations
S&P Global Inc. (together with its consolidated subsidiaries, the “Company,” the “Registrant,” “we,” “us” or “our”) is a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide. The capital markets include asset managers, investment banks, commercial banks, insurance companies, exchanges, trading firms and issuers; and the commodity markets include producers, traders and intermediaries within energy, metals, petrochemicals and agriculture.
Our operations consist of four reportable segments: S&P Global Ratings ("Ratings"), S&P Global Market Intelligence ("Market Intelligence"), S&P Global Platts ("Platts") and S&P Dow Jones Indices ("Indices").
Ratings is an independent provider of credit ratings, research and analytics, offering investors and other market participants information, ratings and benchmarks.
Market Intelligence is a global provider of multi-asset-class data, research and analytical capabilities, which integrate cross-asset analytics and desktop services.
Platts is the leading independent provider of information and benchmark prices for the commodity and energy markets. We completed the sale of our interestJ.D. Power on September 7, 2016, with the results included in Platts results through that date.
Indices is a global index provider that maintains a wide variety of valuation and index benchmarks for investment advisors, wealth managers and institutional investors.
In April of 2018, we acquired Kensho Technologies Inc. ("Kensho") for approximately $550 million, net of cash acquired, in a legacy McGraw Hill Construction investment.
Inmix of cash and stock. The results of Kensho, an operating segment of the fourth quarter of 2015, we began exploring strategic alternatives for J.D. Power,Company, are included in our C&C segment. We committed toCorporate revenue and initiated an active program to sell J.D. Power in its current state that we believe is probable in the next year. As a result, we have classified the assets and liabilitiesCorporate Unallocated for financial reporting purposes. Restricted cash of J.D. Power as held for sale$32 million included in our consolidated balance sheet as of December 31, 2015. The anticipated disposal does not represent a strategic shift that will have a major effect2018 includes amounts held in escrow accounts in connection with our acquisition of Kensho. See Note 2 —Acquisitions and Divestitures for additional information and Note 12 – Segment and Geographic Information for further discussion on operations and financial results, therefore, it is not classified as a discontinued operation.our reportable segments.
The componentsIn January of assets2018, we adopted Financial Accounting Standards Board Accounting Standards Codification ("ASC") 606 as discussed below.
Adoption of ASC 606, “Revenue from Contracts with Customers”
We adopted ASC 606 "Revenue from Contracts with Customers" using the modified retrospective transition method applied to our revenue contracts with customers as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior year amounts are not adjusted and liabilities held for salecontinue to be reported in accordance with our historic accounting under ASC 605 "Revenue Recognition". We recorded a net increase to opening retained earnings of $35 million as of January 1, 2018 due to the cumulative effect of adopting ASC 606, with the impact primarily related to J.D. Power inour treatment of costs to obtain a contract and to a lesser extent, changes to the consolidated balance sheet consisttiming of the following:
|
| | | |
| (in millions) | December 31, |
| | 2015 |
| Accounts receivable, net | $ | 58 |
|
| Goodwill | 75 |
|
| Other intangible assets, net | 335 |
|
| Other assets | 35 |
|
| Assets of a business held for sale | $ | 503 |
|
| | |
| Accounts payable and accrued expenses | $ | 42 |
|
| Unearned revenue | 64 |
|
| Other liabilities | 100 |
|
| Liabilities of a business held for sale | $ | 206 |
|
The operating profitrecognition of J.D. Powerour subscription and non-transaction revenues. We recognized incremental revenue of $6 million for the years ending December 31, 2015, 2014 and 2013 is as follows:
|
| | | | | | | | | | | |
| (in millions) | Years ended December 31, |
| | 2015 | | 2014 | | 2013 |
| J.D. Power operating profit | $ | 53 |
| | $ | 44 |
| | $ | 35 |
|
During the year ended December 31, 2014, we completed the following dispositions that resulted in a net pre-tax loss of $9 million, which was included in other (income) loss in the consolidated statement of income:
On July 31, 2014, we completed the sale of the Company's aircraft to Harold W. McGraw III, then Chairman of the Company's Board of Directors and former President and CEO of the Company for a purchase price of $20 million. During the second quarter of 2014, we recorded a non-cash impairment charge of $6 million within other (income) loss in our consolidated statement of income2018 as a result of the pending sale. See Note 13 — Related Party Transactionsadoption of this standard.
Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for further information.
those goods or services. Under ASC 605, revenue was recognized as it was earned and when services were rendered.On June 30, 2014, we completed the sale of our data center to Quality Technology Services, LLC which owns, operates and manages data centers. Net proceeds from the sale of $58 million were received in July of 2014. The sale included all of the facilities and equipment on the south campus of our East Windsor, New Jersey location, inclusive of the rights
The following table presents our revenue disaggregated by revenue type for the years ended December 31:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Ratings | | Market Intelligence | | Platts | | Indices | | Corporate | | Intersegment Elimination 1 | | Total |
| | | | | | | | | | | | | | |
| | 2018 |
| Subscription | $ | — |
| | $ | 1,773 |
| | $ | 750 |
| | $ | 144 |
| | $ | 15 |
| | $ | — |
| | $ | 2,682 |
|
| Non-transaction | 1,506 |
| | — |
| | — |
| | — |
| | — |
| | (125 | ) | | 1,381 |
|
| Non-subscription / Transaction | 1,377 |
| | 40 |
| | 11 |
| | — |
| | — |
| | — |
| | 1,428 |
|
| Asset-linked fees | — |
| | 20 |
| | — |
| | 522 |
| | — |
| | — |
| | 542 |
|
| Sales usage-based royalties | — |
| | — |
| | 54 |
| | 171 |
| | — |
| | — |
| | 225 |
|
| Total revenue | $ | 2,883 |
| | $ | 1,833 |
| | $ | 815 |
| | $ | 837 |
| | $ | 15 |
| | $ | (125 | ) | | $ | 6,258 |
|
| | | | | | | | | | | | | | |
| Timing of revenue recognition | | | | | | | | | | | | | |
| Services transferred at a point in time | $ | 1,377 |
| | $ | 40 |
| | $ | 11 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,428 |
|
| Services transferred over time | 1,506 |
| | 1,793 |
| | 804 |
| | 837 |
| | 15 |
| | (125 | ) | | 4,830 |
|
| Total revenue | $ | 2,883 |
| | $ | 1,833 |
| | $ | 815 |
| | $ | 837 |
| | $ | 15 |
| | $ | (125 | ) | | $ | 6,258 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Ratings | | Market Intelligence | | Platts | | Indices | | Corporate | | Intersegment Elimination 1 | | Total |
| | | | | | | | | | | | | | |
| | 2017 2 |
| Subscription | $ | — |
| | $ | 1,614 |
| | $ | 704 |
| | $ | 136 |
| | $ | — |
| | $ | — |
| | $ | 2,454 |
|
| Non-transaction | 1,448 |
| | — |
| | — |
| | — |
| | — |
| | (110 | ) | | 1,338 |
|
| Non-subscription / Transaction | 1,540 |
| | 46 |
| | $ | 13 |
| | — |
| | — |
| | — |
| | 1,599 |
|
| Asset-linked fees | — |
| | 23 |
| | — |
| | 461 |
| | — |
| | — |
| | 484 |
|
| Sales usage-based royalties | — |
| | — |
| | 57 |
| | 131 |
| | — |
| | — |
| | 188 |
|
| Total revenue | $ | 2,988 |
| | $ | 1,683 |
| | $ | 774 |
| | $ | 728 |
| | $ | — |
| | $ | (110 | ) | | $ | 6,063 |
|
| | | | | | | | | | | | | | |
| Timing of revenue recognition | | | | | | | | | | | | | |
| Services transferred at a point in time | $ | 1,540 |
| | $ | 46 |
| | $ | 13 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,599 |
|
| Services transferred over time | 1,448 |
| | 1,637 |
| | 761 |
| | 728 |
| | — |
| | (110 | ) | | 4,464 |
|
| Total revenue | $ | 2,988 |
| | $ | 1,683 |
| | $ | 774 |
| | $ | 728 |
| | $ | — |
| | $ | (110 | ) | | $ | 6,063 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Ratings | | Market Intelligence | | Platts | | Indices | | Corporate | | Intersegment Elimination 1 | | Total |
| | | | | | | | | | | | | | |
| | 2016 2 |
| Subscription | $ | — |
| | $ | 1,543 |
| | $ | 689 |
| | $ | 132 |
| | $ | — |
| | $ | — |
| | $ | 2,364 |
|
| Non-transaction | 1,357 |
| | — |
| | — |
| | — |
| | — |
| | (98 | ) | | 1,259 |
|
| Non-subscription / Transaction | 1,178 |
| | 99 |
| | 183 |
| | — |
| | — |
| | — |
| | 1,460 |
|
| Asset-linked fees | — |
| | 19 |
| | — |
| | 381 |
| | — |
| | — |
| | 400 |
|
| Sales usage-based royalties | — |
| | — |
| | 53 |
| | 125 |
| | — |
| | — |
| | 178 |
|
| Total revenue | $ | 2,535 |
| | $ | 1,661 |
| | $ | 925 |
| | $ | 638 |
| | $ | — |
| | $ | (98 | ) | | $ | 5,661 |
|
| | | | | | | | | | | | | | |
| Timing of revenue recognition | | | | | | | | | | | | | |
| Services transferred at a point in time | $ | 1,178 |
| | $ | 99 |
| | $ | 183 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,460 |
|
| Services transferred over time | 1,357 |
| | 1,562 |
| | 742 |
| | 638 |
| | — |
| | (98 | ) | | 4,201 |
|
| Total revenue | $ | 2,535 |
| | $ | 1,661 |
| | $ | 925 |
| | $ | 638 |
| | $ | — |
| | $ | (98 | ) | | $ | 5,661 |
|
| |
1 | Intersegment eliminations mainly consists of a royalty charged to Market Intelligence for the rights to use and distribute content and data developed by Ratings. |
| |
2 | As noted above, amounts for the years ended December 31, 2017 and 2016 were not adjusted under the modified retrospective transition method applied to our revenue contracts with customers as of January 1, 2018. |
Subscription revenue
Subscription revenue at Market Intelligence is primarily derived from distribution of data, analytics, third party research, and obligationscredit ratings-related information primarily through web-based channels including Market Intelligence Desktop, RatingsDirect®, RatingsXpress®, and Credit Analytics. Subscription revenue at Platts is generated by providing customers access to commodity and energy-related price assessments, market data, and real-time news, along with other information services. Subscription revenue at Indices is derived from the contracts for underlying data of our indexes to support our customers' management of index funds, portfolio analytics, and research.
For subscription products and services, we generally provide continuous access to dynamic data sets and analytics for a defined period, with revenue recognized ratably as our performance obligation to provide access to our data and analytics is progressively fulfilled over the stated term of the contract.
Non-transaction revenue
Non-transaction revenue at Ratings is primarily related to surveillance of a credit rating, annual fees for customer relationship-based pricing programs, fees for entity credit ratings and global research and analytics. Non-transaction revenue also includes an intersegment revenue elimination of $125 million, $110 million and $98 million for the years ended December 31, 2018, 2017, and 2016 respectively, mainly consisting of the royalty charged to Market Intelligence for the rights to use and distribute content and data developed by Ratings.
For non-transaction revenue related to Rating’s surveillance services, we continuously monitor factors that impact the creditworthiness of an issuer over the contractual term with revenue recognized to the extent that our performance obligation is progressively fulfilled over the term contract. Because surveillance services are continuously provided throughout the term of the contract, our measure of progress towards fulfillment of our obligation to monitor a rating is a time-based output measure with revenue recognized ratably over the term of the contract.
Non-subscription / Transaction revenue
Transaction revenue at our Ratings segment primarily includes fees associated with:
ratings related to new issuance of corporate and government debt instruments; and structured finance instruments;
bank loan ratings; and
corporate credit estimates, which are intended, based on an abbreviated analysis, to provide an indication of our opinion regarding creditworthiness of a company which does not currently have a Ratings credit rating.
Transaction revenue is recognized at the point in time when our performance obligation is satisfied by issuing a rating on our customer's instruments, our customer's creditworthiness, or a counter-party's creditworthiness and when we have a right to payment and the customer can benefit from the significant risks and rewards of ownership.
Non-subscription revenue at Market Intelligence is primarily related to certain advisory, pricing and analytical services. Non-subscription revenue at Platts is primarily related to conference sponsorship, consulting engagements and events.
Asset-linked fees
Asset-linked fees at Indices and Market Intelligence are primarily related to royalties payments based on the value of assets under management in our customers exchange-traded funds and mutual funds.
For asset-linked products and services, we provide licenses conveying continuous access to our index and benchmark-related intellectual property during a specified contract term. Revenue is recognized when the extent that our customers have used our licensed intellectual property can be quantified. Recognition of revenue for our asset-linked fee arrangements is subject to the "recognition constraint" for usage-based royalty payments because we cannot reasonably predict the value of the assets that will be invested in index funds structured using our intellectual property until it is either publicly available or when we are notified by
our customers. Revenue derived from an asset-linked fee arrangement is measured and recognized when the certainty of the extent of its utilization of our index products by our customers is known.
Sales usage-based royalties
Sales usage-based royalty revenue at our Indices segment is primarily related to trading based fees from exchange-traded derivatives. Sales and usage-based royalty revenue at our Platts segment is primarily related to licensing of its proprietary market price data and price assessments to commodity exchanges.
For sales usage-based royalty products and services, we provide licenses conveying the right to continuous access to our intellectual property over the contract term, with revenue recognized when the extent of our license’s utilization can be quantified, or more specifically, when trading volumes are known and publicly available to us or when we are notified by our customers. Recognition of revenue of fees tied to trading volumes is subject to the recognition constraint for a usage-based royalty promised by our customers in exchange for the license of our intellectual property, with revenue recognized when trading volumes are known.
Arrangements with Multiple Performance Obligations
Our contracts with customers may include multiple performance obligations. Revenue relating to agreements that provide for more than one performance obligation is recognized based upon the relative fair value to the customer of each service component as each component is earned. The fair value of the service components are determined using an adjoining solar power field.analysis that considers cash consideration that would be received for instances when the service components are sold separately. If the fair value to the customer for each service is not objectively determinable, we make our best estimate of the services’ stand-alone selling price and record revenue as it is earned over the service period.
Receivables
We record a receivable when a customer is billed or when revenue is recognized prior to billing a customer. For multi-year agreements, we generally invoice customers annually at the beginning of each annual period. The sale resultedopening balance of accounts receivable, net of allowance for doubtful accounts, was $1,319 million as of January 1, 2018.
Contract Assets
Contract assets include unbilled amounts from when the Company transfers service to a customer before a customer pays consideration or before payment is due. As of December 31, 2018 and 2017, contract assets were $26 million and $17 million, respectively, and are included in an expense of $3 million recorded within other (income) lossaccounts receivable in our consolidated statementbalance sheets.
Unearned Revenue
We record unearned revenue when cash payments are received or due in advance of income, which is in addition to the non-cash impairment charge we recordedour performance. The increase in the fourth quarter of 2013.
Duringunearned revenue balance for the year ended December 31, 2013,2018 is primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by $1.5 billion of revenues recognized that were included in the unearned revenue balance at the beginning of the period.
Remaining Performance Obligations
Remaining performance obligations represent the transaction price of contracts for work that has not yet been performed. As of December 31, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was $1.4 billion. We expect to recognize revenue on approximately half and three-quarters of the remaining performance obligations over the next 12 and 24 months, respectively, with the remainder recognized thereafter.
We do not disclose the value of unfulfilled performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts where revenue is a usage-based royalty promised in exchange for a license of intellectual property.
Costs to Obtain a Contract
We recognize an asset for the incremental costs of obtaining a contract with a customer if we completedexpect the following dispositionsbenefit of those costs to be longer than one year. We have determined that resultedcertain sales commission programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were $101 million as of December 31, 2018, and are included in prepaid and other current assets and other non-current assets on our consolidated balance sheets. The asset will be amortized over a period consistent with the transfer to the customer of the goods or services to which the asset relates, calculated based on the customer term and the average life of the products and services underlying the contracts. The expense is recorded within selling and general expenses.
We expense sales commissions when incurred if the amortization period would have been one year or less. These costs are recorded within selling and general expenses.
Presentation of net pre-tax gainperiodic pension cost and net periodic postretirement benefit cost
During the first quarter of $24 million, which was2018, we adopted new accounting guidance requiring that net periodic benefit cost for our retirement and postretirement plans other than the service cost component be included outside of operating profit; these costs are included in other (income) lossincome, net in our consolidated statements of income.
The components of other income, net for the year ended December 31 are as follows:
|
| | | | | | | | | | | |
| (in millions) | 2018 | | 2017 | | 2016 |
| Other components of net periodic benefit cost | $ | (30 | ) | | $ | (27 | ) | | $ | (28 | ) |
| Net loss from investments | 5 |
| | — |
| | — |
|
| Other income, net | $ | (25 | ) | | $ | (27 | ) | | $ | (28 | ) |
Assets and Liabilities Held for Sale and Discontinued Operations
Assets and Liabilities Held for Sale
We classify a disposal group to be sold as held for sale in the consolidated statementperiod in which all of income:
On September 30, 2013, we completedthe following criteria are met: management, having the authority to approve the action, commits to a plan to sell the disposal group; the disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such disposal group; an active program to locate a buyer and other actions required to complete the plan to sell the disposal group have been initiated; the sale of Financial Communications,the disposal group is probable, and transfer of the disposal group is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the disposal group beyond one year; the disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
A disposal group that is classified as held for sale is initially measured at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which was part of our S&P Capital IQ segment.
On August 27, 2013, CRISIL sold its 49% equity interest in India Index Services & Products Ltd. This investment wasthe held within our S&P Ratings segment.
On August 1, 2013, we completedfor sale criteria are met. Conversely, gains are not recognized on the sale Aviation Week within our C&C segment to Penton,of a privately held business information company.disposal group until the date of sale.
Additionally, S&P Capital IQ closed severalThe fair value of their non-core businesses during 2013.a disposal group less any costs to sell is assessed each reporting period it remains classified as held for sale and any subsequent changes are reported as an adjustment to the carrying value of the disposal group, as long as the new carrying value does not exceed the carrying value of the disposal group at the time it was initially classified as held for sale. Upon determining that a disposal group meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group as held for sale in the current period in our consolidated balance sheets.
Discontinued Operations
In determining whether a disposal of a component of an entity or a group of components of an entity is required to be presented as a discontinued operation, we make a determination whether the disposal represents a strategic shift that had, or will have, a major effect on our operations and financial results. A component of an entity comprises operations and cash flows that can be clearly distinguished both operationally and for financial reporting purposes. If we conclude that the disposal represents a strategic shift, then the results of operations of the group of assets being disposed of (as well as any gain or loss on the disposal transaction) are aggregated for separate presentation apart from our continuing operating results in the consolidated financial statements.
Principles of consolidation
The consolidated financial statements include the accounts of all subsidiaries and our share of earnings or losses of joint ventures and affiliated companies under the equity method of accounting. All significant intercompany accounts and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents include ordinary bank deposits and highly liquid investments with original maturities of three months or less that consist primarily of money market funds with unrestricted daily liquidity and fixed term time deposits. Such investments and bank deposits are stated at cost, which approximates market value, and were $1.9 billion and $2.8 billion as of December 31, 2018 and 2017, respectively. These investments are not subject to significant market risk.
Restricted cash
Cash that is subject to legal restrictions or is unavailable for general operating purposes is classified as restricted cash.
Short-term investments
Short-term investments are securities with original maturities greater than 90 days that are available for use in our operations in the next twelve months. The short-term investments, primarily consisting of certificates of deposit and mutual funds, are classified as held-to-maturity and therefore are carried at cost. Interest and dividends are recorded in income when earned.
Accounts receivable
Credit is extended to customers based upon an evaluation of the customer’s financial condition. Accounts receivable, which include billings consistent with terms of contractual arrangements, are recorded at net realizable value.
Allowance for doubtful accounts
The allowance for doubtful accounts reserve methodology is based on historical analysis, a review of outstanding balances and current conditions. In determining these reserves, we consider, amongst other factors, the financial condition and risk profile of our customers, areas of specific or concentrated risk as well as applicable industry trends or market indicators.
Capitalized technology costs
We capitalize certain software development and website implementation costs. Capitalized costs only include incremental, direct costs of materials and services incurred to develop the software after the preliminary project stage is completed, funding has been committed and it is probable that the project will be completed and used to perform the function intended. Incremental costs are expenditures that are out-of-pocket to us and are not part of an allocation or existing expense base. Software development and website implementation costs are expensed as incurred during the preliminary project stage. Capitalized costs are amortized from the year the software is ready for its intended use over its estimated useful life, three to seven years, using the straight-line method. Periodically, we evaluate the amortization methods, remaining lives and recoverability of such costs. Capitalized software development and website implementation costs are included in other non-current assets and are presented net of accumulated amortization. Gross capitalized technology costs were $205 million and $186 million as of December 31, 2018 and 2017, respectively. Accumulated amortization of capitalized technology costs was $105 million and $104 million as of December 31, 2018 and 2017, respectively.
Fair Value
Certain assets and liabilities are required to be recorded at fair value and classified within a fair value hierarchy based on inputs used when measuring fair value. We have forward exchange contracts that are adjusted to fair value on a recurring basis.
Other financial instruments, including cash and cash equivalents and short-term investments, are recorded at cost, which approximates fair value because of the short-term maturity and highly liquid nature of these instruments. The fair value of our total debt borrowings were $3.8 billion as of December 31, 2018 and 2017, respectively, and was estimated based on quoted market prices.
Accounting for the impairment of long-lived assets (including other intangible assets)
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Upon such an occurrence, recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to current forecasts of undiscounted future net cash flows expected to be generated by the asset.
If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized equal to the amount by which the carrying amount of the asset exceeds the fair value of the asset. For long-lived assets held for sale, assets are written down to fair value, less cost to sell. Fair value is determined based on market evidence, discounted cash flows, appraised values or management’s estimates, depending upon the nature of the assets.
For the year ended December 31, 2016, we recorded a non-cash impairment charge of $24 million related to a technology project at our Market Intelligence segment in selling and general expenses in our consolidated statement of income.
Goodwill and other indefinite-lived intangible assets
Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill and other intangible assets with indefinite lives are not amortized, but instead are tested for impairment annually during the fourth quarter each year, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We have four reporting units with goodwill that are evaluated for impairment.
We initially perform a qualitative analysis evaluating whether any events and circumstances occurred or exist that provide evidence that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount. If, based on our evaluation we do not believe that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount, no quantitative impairment test is performed. Conversely, if the results of our qualitative assessment determine that it is more likely than not that the fair value of any of our reporting units is less than their respective carrying amounts we perform a two-step quantitative impairment test.
When conducting the first step of our two step impairment test to evaluate the recoverability of goodwill at the reporting unit level, the estimated fair value of the reporting unit is compared to its carrying value including goodwill. Fair value of the reporting units are estimated using the income approach, which incorporates the use of the discounted free cash flow (“DCF”) analyses and are corroborated using the market approach, which incorporates the use of revenue and earnings multiples based on market data. The DCF analyses are based on the current operating budgets and estimated long-term growth projections for each reporting unit. Future cash flows are discounted based on a market comparable weighted average cost of capital rate for each reporting unit, adjusted for market and other risks where appropriate. In addition, we analyze any difference between the sum of the fair values of the reporting units and our total market capitalization for reasonableness, taking into account certain factors including control premiums.
If the fair value of the reporting unit is less than the carrying value, a second step is performed which compares the implied fair value of the reporting unit’s goodwill to the carrying value of the goodwill. The fair value of the goodwill is determined based on the difference between the fair value of the reporting unit and the net fair value of the identifiable assets and liabilities of the reporting unit. If the implied fair value of the goodwill is less than the carrying value, the difference is recognized as an impairment charge.
We evaluate the recoverability of indefinite-lived intangible assets by first performing a qualitative analysis evaluating whether any events and circumstances occurred that provide evidence that it is more likely than not that the indefinite-lived asset is impaired. If, based on our evaluation of the events and circumstances that occurred during the year we do not believe that it is more likely than not that the indefinite-lived asset is impaired, no quantitative impairment test is performed. Conversely, if the results of our qualitative assessment determine that it is more likely than not that the indefinite-lived asset is impaired, a quantitative impairment test is performed. If necessary, the impairment test is performed by comparing the estimated fair value of the intangible asset to its carrying value. If the indefinite-lived intangible asset carrying value exceeds its fair value, an impairment analysis is performed using the income approach. An impairment charge is recognized in an amount equal to that excess.
Significant judgments inherent in these analyses include estimating the amount and timing of future cash flows and the selection of appropriate discount rates, royalty rates and long-term growth rate assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit and indefinite-lived intangible asset and could result in an impairment charge, which could be material to our financial position and results of operations.
We performed our impairment assessment of goodwill and indefinite-lived intangible assets and concluded that no impairment existed for the years ended December 31, 2018, 2017 and 2016.
Foreign currency translation
We have operations in many foreign countries. For most international operations, the local currency is the functional currency. For international operations that are determined to be extensions of the parent company, the United States ("U.S.") dollar is the functional currency. For local currency operations, assets and liabilities are translated into U.S. dollars using end of period exchange
rates, and revenue and expenses are translated into U.S. dollars using weighted-average exchange rates. Foreign currency translation adjustments are accumulated in a separate component of equity.
Depreciation
The costs of property and equipment are depreciated using the straight-line method based upon the following estimated useful lives: buildings and improvements from 15 to 40 years and equipment and furniture from 2 to 10 years. The costs of leasehold improvements are amortized over the lesser of the useful lives or the terms of the respective leases.
Advertising expense
The cost of advertising is expensed as incurred. We incurred $33 million, $33 million and $35 million in advertising costs for the years ended December 31, 2018, 2017 and 2016, respectively.
Stock-based compensation
Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized over the requisite service period, which typically is the vesting period. Stock-based compensation is classified as both operating-related expense and selling and general expense in the consolidated statements of income.
We use a lattice-based option-pricing model to estimate the fair value of options granted. The following assumptions were used in valuing the options granted:
|
| | | | |
| | | Year Ended |
| | | December 31, 2018 |
| Risk-free average interest rate | | 2.6 - 2.7% |
|
| Dividend yield | | 1.1 | % |
| Volatility | | 21.8 - 22.0% |
|
| Expected life (years) | | 5.67 - 6.07 |
|
| Weighted-average grant-date fair value per option | | $ | 112.98 |
|
Because lattice-based option-pricing models incorporate ranges of assumptions, those ranges are disclosed. These assumptions are based on multiple factors, including historical exercise patterns, post-vesting termination rates, expected future exercise patterns and the expected volatility of our stock price. The risk-free interest rate is the imputed forward rate based on the U.S. Treasury yield at the date of grant. We use the historical volatility of our stock price over the expected term of the options to estimate the expected volatility. The expected term of options granted is derived from the output of the lattice model and represents the period of time that options granted are expected to be outstanding.
In 2018, we made a one-time issuance of incentive stock options in connection with our acquisition of Kensho in April of 2018. There were no stock options granted in 2017 and 2016.
Income taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize liabilities for uncertain tax positions taken or expected to be taken in income tax returns. Accrued interest and penalties related to unrecognized tax benefits are recognized in interest expense and operating expense, respectively.
Judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and unrecognized tax benefits. In determining the need for a valuation allowance, the historical and projected financial performance of the operation that is recording a net deferred tax asset is considered along with any other pertinent information.
We file income tax returns in the U.S. federal jurisdiction, various states, and foreign jurisdictions, and we are routinely under audit by many different tax authorities. We believe that our accrual for tax liabilities is adequate for all open audit years based on our assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. It is possible that examinations will be settled prior to December 31, 2019. If any of these tax audit settlements do occur within that period we would make any necessary adjustments to the accrual for unrecognized tax benefits.
As of December 31, 2018, we have approximately $2.3 billion of undistributed earnings of our foreign subsidiaries, of which $784 million is reinvested indefinitely in our foreign operations.
Redeemable Noncontrolling Interest
The agreement with the minority partners of our S&P Dow Jones Indices LLC joint venture established in June of 2012 contains redemption features whereby interests held by our minority partners are redeemable either (i) at the option of the holder or (ii) upon the occurrence of an event that is not solely within our control. Since redemption of the noncontrolling interest is outside of our control, this interest is presented on our consolidated balance sheets under the caption “Redeemable noncontrolling interest.” If the interest were to be redeemed, we would be required to purchase all of such interest at fair value on the date of redemption. We adjust the redeemable noncontrolling interest each reporting period to its estimated redemption value, but never less than its initial fair value, using a combination of an income and market valuation approach. Our income and market valuation approaches may incorporate Level 3 measures for instances when observable inputs are not available, including assumptions related to expected future net cash flows, long-term growth rates, the timing and nature of tax attributes, and the redemption features. Any adjustments to the redemption value will impact retained income. See Note 9 – Equity for further detail.
Contingencies
We accrue for loss contingencies when both (a) information available prior to issuance of the consolidated financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements and (b) the amount of loss can reasonably be estimated. We continually assess the likelihood of any adverse judgments or outcomes to our contingencies, as well as potential amounts or ranges of probable losses, and recognize a liability, if any, for these contingencies based on an analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Because many of these matters are resolved over long periods of time, our estimate of liabilities may change due to new developments, changes in assumptions or changes in our strategy related to the matter. When we accrue for loss contingencies and the reasonable estimate of the loss is within a range, we record our best estimate within the range. We disclose an estimated possible loss or a range of loss when it is at least reasonably possible that a loss may be incurred.
Recent Accounting Standards
In November of 2018, the Financial Accounting Standards Board ("FASB") issued guidance that provides clarification on whether certain transactions between collaborative arrangement participants should be accounted for revenue with ASC 606. The guidance is effective for reporting periods after December 15, 2019; however early adoption is permitted. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.
In August of 2018, the FASB issued guidance to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance is effective for reporting periods beginning after December 15, 2019; however, early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.
In February of 2018, the FASB issued guidance which allows companies to reclassify certain stranded income tax effects resulting from the enactment of the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. The guidance is effective for reporting periods after December 15, 2018; however early adoption is permitted. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.
In August of 2017, the FASB issued guidance to enhance the hedge accounting model for both nonfinancial and financial risk components, which includes amendments to address certain aspects of recognition and presentation disclosure. In October of 2018, the FASB issued a subsequent update that permits the inclusion of the Secured Overnight Financing Rate Overnight Index Swap rate as a benchmark interest rate for hedge accounting purposes. The guidance is effective for reporting periods beginning after December 15, 2018. We do not expect this guidance to have a significant impact on our consolidated financial statements.
In May of 2017, the FASB issued guidance that provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This guidance does not change the accounting for modifications but
clarifies when modification accounting guidance should be applied. Under the new guidance, an entity should apply modification accounting in response to a change in the terms and conditions of an entity's share-based payment awards unless three newly specified criteria are met. The guidance was effective on January 1, 2018, and the adoption of this guidance did not have a significant impact on our consolidated financial statements.
In March of 2017, the FASB issued guidance to enhance the presentation of net periodic pension cost and net periodic postretirement benefit cost. The guidance requires employers to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period, and requires the other components of net periodic pension cost and net periodic postretirement benefit cost to be presented in the income statement separately from
the service cost component outside a subtotal of income from operations. Additionally, only the service cost component is eligible for capitalization. We adopted the guidance on January 1, 2018. The change in capitalization requirement did not have a material impact on our consolidated financial statements. As a result of the adoption of the guidance, net periodic benefit cost for our retirement and post retirement plans other than the service cost component are included in other income, net in our consolidated statements of income. See Note 7 – Employee Benefits for additional information related to our retirement and postretirement plans.
In January of 2017, the FASB issued guidance that simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. Under the new guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The guidance is effective for reporting periods beginning after December 15, 2019; however, early adoption is permitted. We do not expect this guidance to have a significant impact on our consolidated financial statements.
In January of 2017, the FASB issued guidance that clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance was effective on January 1, 2018, and the adoption of this guidance did not have a significant impact on our consolidated financial statements.
In November of 2016, the FASB issued guidance requiring that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. We adopted this guidance on January 1, 2018. The adoption of this guidance did not have a significant impact on our consolidated financial statements.
In August of 2016, the FASB issued guidance providing amendments to eight specific statement of cash flows classification issues. The guidance was effective on January 1, 2018, and the adoption of this guidance did not have a significant impact on our consolidated financial statements.
In February of 2016, the FASB issued guidance that amends accounting for leases. Under the new guidance, a lessee will recognize a "right of use" asset with an offsetting lease liability, with expenses recognized similar to current lease accounting. The guidance is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. In July of 2018, the FASB issued a subsequent update providing entities an additional transition method to adopt the new lease standard, allowing entities to adopt the standard prospectively without restating prior period's financial statements. We have elected this transition method upon adoption on January 1, 2019. We have also elected to apply the "package" of practical expedients permitting entities to forgo reassessment of (1) the lease classification of expired or existing leases, (2) whether any expired or existing contracts contain leases, and (3) the accounting for initial direct costs of existing leases.
Based on our preliminary analysis, we anticipate that following the adoption of the new standard, the Company will recognize a lease liability of approximately $700 million with an offsetting right of use asset with no impact on our consolidated statements of income or cash flows. As part of our implementation process, we have refined our processes, procedures, and controls to capture the complete population of our leases that incorporates a third party software solution that will report both the initial and ongoing financial statement impact of the new standard.
In January of 2016, the FASB issued guidance to enhance the reporting model for financial instruments, which includes amendments to address certain aspects of recognition, measurement, presentation and disclosure. We adopted this guidance on January 1, 2018. We recorded a reduction to opening retained earnings and an increase to accumulated other comprehensive income of $10 million as of January 1, 2018 due to the adoption of this guidance. The adoption of this guidance did not have a significant impact on our consolidated financial statements.
In May of 2014, the FASB and the International Accounting Standards Board (“IASB”) issued jointly a converged standard on the recognition of revenue from contracts with customers, which is intended to improve the financial reporting of revenue and comparability of the top line in financial statements globally. The core principle of the new standard is for the recognition of revenue to depict the transfer of goods or services to customers in amounts that reflect the payment to which the company expects to be entitled in exchange for those goods or services. The new standard also results in enhanced revenue disclosures, provides guidance for transactions that were not previously addressed comprehensively and improve guidance for multiple-element arrangements. We adopted the new revenue standard effective January 1, 2018 using the modified retrospective transition method. See Adoption of ASC 606, “Revenue from Contracts with Customers” above for further details.
Reclassification
Certain prior year amounts have been reclassified for comparability purposes.
2. Acquisitions and Divestitures
Acquisitions
2018
For the year ended December 31, 2018, we paid for acquisitions in a mix of cash and stock. We paid cash for acquisitions of $401 million, net of cash acquired, funded with cash flows from operations. Additionally, stock consideration was given for our acquisition of Kensho. None of our acquisitions were material either individually or in the aggregate, including the pro forma impact on earnings. Acquisitions completed during the year ended December 31, 2018 included:
In December of 2018, Indices purchased the balance of the intellectual property ("IP") rights in a family of indices derived from the S&P 500, solidifying its IP in and to the S&P 500 index family. We accounted for the acquisition on a cost basis. The transaction is not material to our consolidated financial statements.
In August of 2018, we acquired a 5.03% investment in FiscalNote, a technology innovator at the intersection of global business and government that provides advanced, data-driven Issues Management solutions. We measured the investment in FiscalNote at cost, less any impairment, and changes resulting from observable price changes will be recorded in the consolidated statements of income. The investment in FiscalNote is not material to our consolidated financial statements.
In June of 2018, Market Intelligence acquired the RateWatch business ("RateWatch") from TheStreet, Inc., a B2B data business that offers subscription and custom reports on bank deposits, loans, fees and other product data to the financial services industry. The acquisition will complement and strengthen Market Intelligence's core capabilities of providing differentiated data and analytics solutions for the banking sector. We accounted for the acquisition of RateWatch using the purchase method of accounting. The acquisition of RateWatch is not material to our consolidated financial statements.
In April of 2018, we acquired Kensho for approximately $550 million, net of cash acquired, in a mix of cash and stock. Kensho is a leading-edge provider of next-generation analytics, artificial intelligence, machine learning, and data visualization systems to Wall Street's premier global banks and investment institutions, as well as the National Security community. The acquisition will strengthen S&P Global's emerging technology capabilities, enhance our ability to deliver essential, actionable insights that will transform the user experience for our clients, and accelerate efforts to improve efficiency and effectiveness of our core internal operations. We accounted for the acquisition of Kensho using the purchase method of accounting. The acquisition of Kensho is not material to our consolidated financial statements.
In February of 2018, Market Intelligence acquired Panjiva, Inc. ("Panjiva"), a privately-held company that provides deep, differentiated, sector-relevant insights on global supply chains, leveraging data science and technology to make sense of large, unstructured datasets. The acquisition will help strengthen the insights, products and data that we provide to our clients throughout the world. We accounted for the acquisition of Panjiva using the purchase method of accounting. The acquisition of Panjiva is not material to our consolidated financial statements.
In January of 2018, CRISIL, included within our Ratings segment, acquired a 100% stake in Pragmatix Services Private Limited ("Pragmatix"), a data analytics company focused on delivering cutting edge solutions in the "data to intelligence" life cycle to the Banking, Financial Services and Insurance vertical. The acquisition will strengthen CRISIL's position as an agile, innovative and global analytics company. We accounted for the acquisition of Pragmatix using the purchase method of accounting. The acquisition of Pragmatix is not material to our consolidated financial statements.
For acquisitions during 2018 that were accounted for using the purchase method, the excess of the purchase price over the fair value of the net assets acquired is allocated to goodwill and other intangibles. The goodwill recognized on our acquisitions is largely attributable to anticipated operational synergies and growth opportunities as a result of the acquisition. The intangible assets, excluding goodwill and indefinite-lived intangibles, will be amortized over their anticipated useful lives between 1 and 10 years which will be determined when we finalize our purchase price allocations. The goodwill for RateWatch is expected to be deductible for tax purposes.
2017
For the year ended December 31, 2017, we paid cash for acquisitions, net of cash acquired, totaling $83 million. None of our acquisitions were material either individually or in the aggregate, including the pro forma impact on earnings. All acquisitions were funded with cash flows from operations. Acquisitions completed during the year ended December 31, 2017 included:
In August of 2017, we acquired a 6.02% investment in Algomi Limited ("Algomi"), an innovative fintech company focused on providing software-enabled liquidity solutions to both buy-side and sell-side firms within the credit markets. Our investment in Algomi will help facilitate product collaboration and enable future business expansion. We accounted for the investment in Algomi using the cost method of accounting. The investment with Algomi is not material to our consolidated financial statements.
In June of 2017, CRISIL, included within our Ratings segment, acquired 8.9% of the outstanding shares of CARE Ratings Limited ("CARE") from Canara Bank. CARE is a Securities and Exchange Board of India registered credit rating agency providing various rating and grading services in India whose shares are publicly traded on both the Bombay Stock Exchange and the National Stock Exchange of India. We accounted for the investment in CARE as available-for-sale using the fair value method of accounting. The investment in CARE is not material to our consolidated financial statements.
2016
For the year ended December 31, 2016, we paid cash for acquisitions, net of cash acquired, totaling $177 million. None of our acquisitions were material either individually or in the aggregate, including the pro forma impact on earnings. All acquisitions were funded with cash flows from operations. Acquisitions completed during the year ended December 31, 2016 included:
In December of 2016, Market Intelligence acquired a 2.54% equity investment in Kensho, a financial technology startup in market data analytics. We accounted for the acquisition of Kensho on a cost basis. Our investment in Kensho is not material to our consolidated financial statements.
In October of 2016, Indices acquired Trucost plc, a leader in carbon and environmental data and risk analysis through its subsidiary S&P Global Indices UK Limited. The purchase will build on Indices' current portfolio of Environmental, Social and Governance solutions. The acquisition of Trucost plc is not material to our consolidated financial statements. In 2018, Trucost was integrated from Indices into Market Intelligence and historical reporting was retroactively revised to reflect the change.
In September of 2016, Platts acquired PIRA Energy Group ("PIRA"), a global provider of energy research and forecasting products and services. The purchase enhances Platts' energy analytical capabilities by expanding its oil offering and strengthening its position in the natural gas and power markets. We accounted for the acquisition of PIRA using the purchase method of accounting. The acquisition of PIRA is not material to our consolidated financial statements.
In June of 2016, Platts acquired RigData, a provider of daily information on rig activity for the natural gas and oil markets across North America. The purchase enhances Platts' energy analytical capabilities by strengthening its position in natural gas and enhancing its oil offering. We accounted for the acquisition of RigData using the purchase method of accounting. The acquisition of RigData is not material to our consolidated financial statements.
In June of 2016, Ratings acquired a 49% equity investment in Thailand's TRIS Rating Company Limited from its parent company, TRIS Corporation Limited. The transaction extends an existing association between Ratings and TRIS Rating and deepens their commitment to capital markets in Thailand. We accounted for the acquisition of TRIS Rating Company using the equity method of accounting. The equity investment in TRIS Rating is not material to our consolidated financial statements.
In March of 2016, Platts acquired Commodity Flow, a specialist technology and business intelligence service for the global waterborne commodity and energy markets. The purchase helps extend Platts' trade flow analytical capabilities and complements its existing shipping services. We accounted for the acquisition of Commodity Flow using the purchase method of accounting. The acquisition of Commodity Flow is not material to our consolidated financial statements.
Following our acquisition of PIRA, we made a contingent purchase price payment in 2016 for $34 million that has been reflected in the consolidated statement of cash flows as an investing activity.
Following our acquisition of National Automobile Dealers Association's Used Car Guide ("UCG") at J.D. Power in July of 2015, we made a contingent purchase price payment in 2016 for $5 million that has been reflected in the consolidated statement of cash flows as a financing activity.
For acquisitions during 2016 that were accounted for using the purchase method, the excess of the purchase price over the fair value of the net assets acquired is allocated to goodwill and other intangibles. The goodwill recognized on our acquisitions is largely attributable to anticipated operational synergies and growth opportunities as a result of the acquisition. The intangible assets, excluding goodwill and indefinite-lived intangibles, will be amortized over their anticipated useful lives between 3 2014,and 10 years which will be determined when we finalize our purchase price allocations. The goodwill for PIRA and RigData is expected to be deductible for tax purposes.
Non-cash investing activities
Liabilities assumed in conjunction with our acquisitions are as follows:
|
| | | | | | | | | | | |
| (in millions) | Year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Fair value of assets acquired | $ | 857 |
| | $ | 83 |
| | $ | 253 |
|
| Cash and stock consideration (net of cash acquired) | 803 |
| | 83 |
| | 211 |
|
| Liabilities assumed | $ | 54 |
| | $ | — |
| | $ | 42 |
|
Divestitures
2018
During the year ended December 31, 2018, we did not complete any material dispositions.
2017
In April of 2017, we signed a letter of intent to sell our facility at East Windsor, New Jersey. The fixed assets of the facility of $5 million have been classified as held for sale, which is included in prepaid and other current assets in our consolidated balance sheet as of December 31, 2018 and 2017.
In January of 2017, we completed the sale of McGraw Hill Construction, which has historically been part of the C&CQuant House SAS ("QuantHouse"), included in our Market Intelligence segment, to Symphony Technology GroupQH Holdco, an independent third party. In November of 2016, we entered into a put option agreement that gave the Company the right, but not the obligation, to put the entire share capital of QuantHouse to QH Holdco. As a result, we classified the assets and liabilities of QuantHouse, net of our costs to sell, as held for $320 millionsale, which were included in cash. We recordedprepaid and other current assets and other current liabilities, respectively, in our consolidated balance sheet as of December 31, 2016 resulting in an after-tax gain onaggregate loss of $31 million. On January 4, 2017, we exercised the put option, thereby entering into a definitive agreement to sell QuantHouse to QH Holdco. On January 9, 2017, we completed the sale of $160 million,QuantHouse to QH Holdco.
2016
During the year ended December 31, 2016, we completed the following dispositions that resulted in a net pre-tax gain of $1.1 billion, which iswas included in discontinued operations, netgain on dispositions in the consolidated statement of income:
In October of 2016, we completed the sale of Standard & Poor's Securities Evaluations, Inc. ("SPSE") and Credit Market Analysis ("CMA"), two businesses within our Market Intelligence segment, for $425 million in cash to Intercontinental Exchange, an operator of global exchanges, clearing houses and data services. During the year ended December 31, 2016, we recorded a pre-tax gain of $364 million ($297 million after-tax) in gain on dispositions in the consolidated statement of income forrelated to the sale of SPSE and CMA. Additionally, in October of 2016, we completed the sale of Equity and Fund Research ("Equity Research") to CFRA, a leading independent provider of forensic accounting research, analytics and advisory services. During the year ended December 31, 2014. We used the after-tax proceeds from the sale to make selective acquisitions, investments, share repurchases and for general corporate purposes.
On March 22, 2013,2016, we completed the salerecorded a pre-tax gain of MHE to investment funds affiliated with Apollo Global Management, LLC for a purchase price of $2.4 billion$9 million ($5 million after-tax) in cash. We recorded an after-tax gain on the sale of $589 million, which is included in discontinued operations, netdispositions in the consolidated statement of income for the year ended December 31, 2013. We used the after-tax proceeds fromrelated to the sale to pay down short-term debt for the special dividend paid in 2012, to make selective acquisitions, investments, share repurchases and for general corporate purposes.of Equity Research.
The key components of income from discontinued operations for the years ended December 31, 2014 and 2013 consist of the following:
|
| | | | | | | |
| (in millions) | Years ended December 31, |
| 2014 |
| 2013 |
| Revenue | $ | 139 |
|
| $ | 441 |
|
| Expenses | 110 |
|
| 436 |
|
| Operating income | 29 |
|
| 5 |
|
| Interest expense, net | — |
|
| 2 |
|
| Income before taxes on income | 29 |
|
| 3 |
|
| Provision for taxes on income | 11 |
|
| — |
|
| Income from discontinued operations, net of tax | 18 |
|
| 3 |
|
| Pre-tax gain on sale from discontinued operations | 289 |
|
| 888 |
|
| Provision for taxes on gain on sale | 129 |
|
| 299 |
|
| Gain on sale of discontinued operations, net of tax | 160 |
|
| 589 |
|
| Discontinued operations, net | 178 |
|
| 592 |
|
| Less: net loss attributable to noncontrolling interests | — |
|
| (1 | ) |
| Income from discontinued operations attributable to McGraw Hill Financial, Inc. common shareholders | $ | 178 |
|
| $ | 593 |
|
Results from discontinued operations for the year ended December 31, 2014 included the after-tax gain on sale of McGraw Hill Construction of $160 million.
Results from discontinued operations for the year ended December 31, 2013 included the after-tax gain on sale of MHE of $589 million.
In September of 2016, we completed the sale of J.D. Power, included within our Platts segment, for $1.1 billion to XIO Group, a global alternative investments firm headquartered in London. During the year ended December 31, 2016, we recorded a pre-tax gain of $728 million ($516 million after-tax) in gain on dispositions in the consolidated statement of income related to the sale of J.D. Power.
The operating profit of our businesses that were disposed of or held for sale for the years ending December 31, 2018, 2017, and 2016 is as follows:
|
| | | | | | | | | | | |
| (in millions) | Year ended December 31, |
| | 2018 | | 2017 | | 2016 |
Operating profit 1 | $ | — |
| | $ | — |
| | $ | 62 |
|
1 The year ended December 31, 2016 excludes a pre-tax gain of $1.1 billion on our dispositions.
3. Goodwill and Other Intangible Assets
Goodwill
Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired.
The change in the carrying amount of goodwill by segment is shown below:
|
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | S&P Ratings | | S&P Capital IQ and SNL | | S&P DJ Indices | | C&C | | Total |
| Balance as of December 31, 2013 | $ | 125 |
| | $ | 469 |
| | $ | 376 |
| | $ | 439 |
| | $ | 1,409 |
|
| Acquisitions | 4 |
| — |
| — |
| | — |
| | 38 |
| | 42 |
|
| Dispositions | — |
| | — |
| | — |
| | (32 | ) | | (32 | ) |
| Other (primarily Fx) | (7 | ) | | (17 | ) | | — |
| | (8 | ) | | (32 | ) |
| Balance as of December 31, 2014 | 122 |
| | 452 |
| | 376 |
| | 437 |
| | 1,387 |
|
| Acquisitions | — |
| | 1,563 |
| | — |
| | 39 |
| | 1,602 |
|
Reclassifications 1 | — |
| | — |
| | — |
| | (75 | ) | | (75 | ) |
| Other (primarily Fx) | (8 | ) | | (17 | ) | | — |
| | (7 | ) | | (32 | ) |
| Balance as of December 31, 2015 | $ | 114 |
| | $ | 1,998 |
| | $ | 376 |
| | $ | 394 |
| | $ | 2,882 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Ratings | | Market Intelligence | | Platts | | Indices | | Corporate | | Total |
| Balance as of December 31, 2016 | $ | 109 |
| | $ | 1,960 |
| | $ | 497 |
| | $ | 383 |
| | $ | — |
| | $ | 2,949 |
|
Other 1 | 5 |
| | 1 |
| | 26 |
| | 8 |
| | — |
| | 40 |
|
| Balance as of December 31, 2017 | 114 |
| | 1,961 |
| | 523 |
| | 391 |
| | — |
| | 2,989 |
|
| Acquisitions | 5 |
| | 62 |
| | — |
| | — |
| | 498 |
| | 565 |
|
Other 1 | (6 | ) | | 6 |
| | (7 | ) | | (12 | ) | | — |
| | (19 | ) |
| Balance as of December 31, 2018 | $ | 113 |
| | $ | 2,029 |
| | $ | 516 |
| | $ | 379 |
| | $ | 498 |
| | $ | 3,535 |
|
| |
1 | RelatesPrimarily relates to J.D. Power, which is classified as assets heldthe impact of foreign exchange and valuation adjustments for sale in our consolidated balance sheet as of December 31, 2015.prior period acquisitions. 2017 includes adjustments related to PIRA, Trucost, RigData and Commodity Flow. 2018 includes adjustments related to Trucost. |
Goodwill additions and dispositions in the table above relate to transactions discussed in Note 2 – Acquisitions and Divestitures.
Other Intangible Assets
Other intangible assets include both indefinite-lived assets not subject to amortization and definite-lived assets subject to amortization. We have indefinite-lived assets with a carrying value of $713$846 million and $693$714 million as of December 31, 20152018 and 2014,2017, respectively.
20152018 and 20142017 both include $380 million and $90 million for Dow Jones Indices intellectual property and the Dow Jones tradename, respectively, that we recorded as part of the transaction to form S&P Dow Jones Indices LLC in 2012.
2015 includes $1842018 and 2017 both include $185 million within our S&P Capital IQ and SNLMarket Intelligence segment for the SNL tradename.
20142018 includes $164$132 million within our C&CIndices segment for the J.D. Powerbalance of the IP rights in a family of indices derived from the S&P 500, solidifying Indices IP in and Associates tradename.to the S&P 500 index family.
20152018 and 20142017 both include $59 million within our S&P Dow Jones Indices segment for the Goldman Sachs Commodity Index intellectual property and the Broad Market Indices intellectual property.
The following table summarizes our definite-lived intangible assets:
| | | (in millions) | | | | | | | | | | | | | | | | | | | | | | |
| Cost | Databases and software | | Content | | Customer relationships | | Tradenames | | Other intangibles | | Total | Databases and software | | Content | | Customer relationships | | Tradenames | | Other intangibles | | Total |
| Balance as of December 31, 2013 | $ | 115 |
| | $ | 139 |
| | $ | 225 |
| | $ | 45 |
| | $ | 158 |
| | $ | 682 |
| |
| Balance as of December 31, 2016 | | $ | 506 |
| | $ | 139 |
| | $ | 330 |
| | $ | 45 |
| | $ | 163 |
| | $ | 1,183 |
|
| Dispositions | | (4 | ) | | — |
| | (2 | ) | | — |
| | — |
| | (6 | ) |
Other 1 | | 52 |
| | — |
| | 19 |
| | 5 |
| | (86 | ) | | (10 | ) |
| Balance as of December 31, 2017 | | 554 |
| | 139 |
| | 347 |
| | 50 |
| | 77 |
| | 1,167 |
|
| Acquisitions | — |
| | — |
| | — |
| | — |
| | 13 |
| | 13 |
| 3 |
| | — |
| | — |
| | — |
| | 123 |
| | 126 |
|
| Transfers | — |
| | — |
| | — |
| | — |
| | (44 | ) | | (44 | ) | |
| Other (primarily Fx) | (2 | ) | | — |
| | 3 |
| | 1 |
| | (16 | ) | | (14 | ) | 4 |
| | — |
| | (1 | ) | | — |
| | (6 | ) | | (3 | ) |
| Balance as of December 31, 2014 | 113 |
| | 139 |
| | 228 |
| | 46 |
| | 111 |
| | 637 |
| |
| Acquisitions | 421 |
| | — |
| | — |
| | — |
| | 177 |
| | 598 |
| |
Reclassifications 1 | (19 | ) | | — |
| | (62 | ) | | (2 | ) | | (8 | ) | | (91 | ) | |
| Other (primarily Fx) | (5 | ) | | — |
| | 2 |
| | 3 |
| | (11 | ) | | (11 | ) | |
| Balance as of December 31, 2015 | $ | 510 |
| | $ | 139 |
| | $ | 168 |
| | $ | 47 |
| | $ | 269 |
| | $ | 1,133 |
| |
| Balance as of December 31, 2018 | | $ | 561 |
| | $ | 139 |
| | $ | 346 |
| | $ | 50 |
| | $ | 194 |
| | $ | 1,290 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Accumulated amortization | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of December 31, 2013 | $ | 83 |
| | $ | 45 |
| | $ | 67 |
| | $ | 32 |
| | $ | 56 |
| | $ | 283 |
| |
| Balance as of December 31, 2016 | | $ | 132 |
| | $ | 87 |
| | $ | 84 |
| | $ | 36 |
| | $ | 52 |
| | $ | 391 |
|
| Current year amortization | 6 |
| | 14 |
| | 13 |
| | 3 |
| | 12 |
| | 48 |
| 52 |
| | 14 |
| | 22 |
| | 4 |
| | 6 |
| | 98 |
|
| Dispositions | | (3 | ) | | — |
| | (2 | ) | | — |
| | (1 | ) | | (6 | ) |
| Reclassifications | | 2 |
| | — |
| | 1 |
| | 1 |
| | (4 | ) | | — |
|
| Other (primarily Fx) | (1 | ) | | — |
| | — |
| | — |
| | (4 | ) | | (5 | ) | 4 |
| | — |
| | 1 |
| | 1 |
| | 4 |
| | 10 |
|
| Balance as of December 31, 2014 | 88 |
| | 59 |
| | 80 |
| | 35 |
| | 64 |
| | 326 |
| |
| Balance as of December 31, 2017 | | 187 |
| | 101 |
| | 106 |
| | 42 |
| | 57 |
| | 493 |
|
| Current year amortization | 20 |
| | 14 |
| | 9 |
| | 2 |
| | 22 |
| | 67 |
| 52 |
| | 14 |
| | 21 |
| | 3 |
| | 32 |
| | 122 |
|
Reclassifications 1 | (18 | ) | | — |
| | (30 | ) | | (2 | ) | | (14 | ) | | (64 | ) | |
| Reclassifications | | 1 |
| | — |
| |
|
| | — |
| | (1 | ) | | — |
|
| Other (primarily Fx) | (2 | ) | | — |
| | 1 |
| | 1 |
| | (5 | ) | | (5 | ) | — |
| | — |
| | (1 | ) | | — |
| | (2 | ) | | (3 | ) |
| Balance as of December 31, 2015 | $ | 88 |
| | $ | 73 |
| | $ | 60 |
| | $ | 36 |
| | $ | 67 |
| | $ | 324 |
| |
| Balance as of December 31, 2018 | | $ | 240 |
| | $ | 115 |
| | $ | 126 |
| | $ | 45 |
| | $ | 86 |
| | $ | 612 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Net definite-lived intangibles: | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2014 | $ | 25 |
| | $ | 80 |
| | $ | 148 |
| | $ | 11 |
| | $ | 47 |
| | $ | 311 |
| |
| December 31, 2015 | $ | 422 |
| | $ | 66 |
| | $ | 108 |
| | $ | 11 |
| | $ | 202 |
| | $ | 809 |
| |
| December 31, 2017 | | $ | 367 |
| | $ | 38 |
| | $ | 241 |
| | $ | 8 |
| | $ | 20 |
| | $ | 674 |
|
| December 31, 2018 | | $ | 321 |
| | $ | 24 |
| | $ | 220 |
| | $ | 5 |
| | $ | 108 |
| | $ | 678 |
|
| |
1 | RelatesPrimarily relates to J.D. Power, which is classified as assets heldthe impact of foreign exchange and valuation adjustments for sale in our consolidated balance sheet as of December 31, 2015.prior period acquisitions. 2017 includes adjustments related to PIRA, Trucost, RigData and Commodity Flow. |
Definite-lived intangible assets are being amortized on a straight-line basis over periods of up to 20 years. The weighted-average life of the intangible assets as of December 31, 20152018 is approximately 1011 years.
Amortization expense for the years ended December 31, 2015, 20142018, 2017 and 20132016 was $67$122 million, $48$98 million, and $51$96 million, respectively. Expected amortization expense for intangible assets over the next five years for the years ended December 31, assuming no further acquisitions or dispositions, is as follows:
| | | (in millions) | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | 2019 | | 2020 | | 2021 | | 2022 | | 2023 |
Amortization expense 1 | $ | 98 |
| | $ | 93 |
| | $ | 86 |
| | $ | 81 |
| | $ | 74 |
| |
| Amortization expense | | $ | 122 |
| | $ | 114 |
| | $ | 83 |
| | $ | 74 |
| | $ | 70 |
|
| |
1
| Amortization expense excludes J.D. Power, which is expected to be sold in the next year. |
4. Taxes on Income
Income before taxes on income resultedresulting from domestic and foreign operations is as follows:
| | | (in millions) | Year Ended December 31, | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| Domestic operations | $ | 1,266 |
| | $ | (423 | ) | | $ | 821 |
| $ | 1,857 |
| | $ | 1,723 |
| | $ | 2,585 |
|
| Foreign operations | 549 |
| | 477 |
| | 478 |
| 824 |
| | 738 |
| | 603 |
|
| Total continuing income before taxes | $ | 1,815 |
| | $ | 54 |
| | $ | 1,299 |
| |
| Total income before taxes | | $ | 2,681 |
| | $ | 2,461 |
| | $ | 3,188 |
|
The provision for taxes on income consists of the following:
| | | (in millions) | Year Ended December 31, | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| Federal: | | | | | | | | | | |
| Current | $ | 90 |
| | $ | 285 |
| | $ | 194 |
| $ | 183 |
| | $ | 489 |
| | $ | 641 |
|
| Deferred | 276 |
| | (213 | ) | | 51 |
| 68 |
| | 63 |
| | 79 |
|
| Total federal | 366 |
| | 72 |
| | 245 |
| 251 |
| | 552 |
| | 720 |
|
| Foreign: | | | | | | | | | | |
| Current | 111 |
| | 135 |
| | 152 |
| 214 |
| | 194 |
| | 133 |
|
| Deferred | (1 | ) | | 1 |
| | (19 | ) | (2 | ) | | (3 | ) | | (4 | ) |
| Total foreign | 110 |
| | 136 |
| | 133 |
| 212 |
| | 191 |
| | 129 |
|
| State and local: | | | | | | | | | | |
| Current | 34 |
| | 62 |
| | 37 |
| 81 |
| | 73 |
| | 99 |
|
| Deferred | 37 |
| | (25 | ) | | 10 |
| 16 |
| | 7 |
| | 12 |
|
| Total state and local | 71 |
| | 37 |
| | 47 |
| 97 |
| | 80 |
| | 111 |
|
| Total provision for taxes for continuing operations | 547 |
| | 245 |
| | 425 |
| |
| Provision for discontinued operations | — |
| | 140 |
| | 299 |
| |
| Total provision for taxes | $ | 547 |
| | $ | 385 |
| | $ | 724 |
| $ | 560 |
| | $ | 823 |
| | $ | 960 |
|
A reconciliation of the U.S. federal statutory income tax rate to our effective income tax rate for financial reporting purposes is as follows:
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| U.S. federal statutory income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % | 21.0 | % | | 35.0 | % | | 35.0 | % |
| Legal and regulatory settlements | — |
| | 524.1 |
| | — |
| |
| State and local income taxes | 2.6 |
| | 64.2 |
| | 2.8 |
| 2.8 |
| | 2.5 |
| | 2.7 |
|
| Divestitures | | — |
| | — |
| | (4.3 | ) |
| Foreign operations | (3.2 | ) | | (79.6 | ) | | (3.9 | ) | 0.2 |
| | (3.9 | ) | | (2.0 | ) |
| TCJA Transition Tax | | (0.3 | ) | | 6.0 |
| | — |
|
| Stock-based compensation | | (1.2 | ) | | (2.7 | ) | | — |
|
| S&P Dow Jones Indices LLC joint venture | (2.0 | ) | | (60.2 | ) | | (2.0 | ) | (1.2 | ) | | (1.8 | ) | | (1.2 | ) |
| Tax credits and incentives | (2.9 | ) | | (91.5 | ) | | (2.1 | ) | (1.7 | ) | | (2.1 | ) | | (1.6 | ) |
| Other, net | 0.6 |
| | 61.7 |
| | 2.9 |
| 1.3 |
| | 0.4 |
| | 1.5 |
|
| Effective income tax rate for continuing operations | 30.1 | % | | 453.7 | % | | 32.7 | % | |
| Effective income tax rate | | 20.9 | % | | 33.4 | % | | 30.1 | % |
The decrease in the effective income tax rate in 2018 was primarily due to the reduction of the U.S. federal corporate tax rate as a result of the enactment of the Tax Cuts and Jobs Act (“TCJA”). Additionally, a one-time transition tax charge of $149 million due to the TCJA was recorded in 2017, which included tax expense of approximately $173 million on the deemed repatriation of foreign earnings and a tax benefit of approximately $24 million in respect of the re-valuation of the net U.S. deferred tax liabilities at the reduced corporate income tax rate.
We have elected to recognize the tax on Global Intangible Low Taxed Income (“GILTI”) as a period expense in the year the tax is incurred. GILTI expense is included in Other, net above.
76
The principal temporary differences between the accounting for income and expenses for financial reporting and income tax purposes are as follows:
| | | (in millions) | December 31, | December 31, |
| | 2015 | | 2014 | 2018 | | 2017 |
| Deferred tax assets: | | | | | | |
| Legal and regulatory settlements | $ | 45 |
| | $ | 305 |
| $ | 2 |
| | $ | 27 |
|
| Employee compensation | 91 |
| | 99 |
| 57 |
| | 50 |
|
| Accrued expenses | 72 |
| | 94 |
| 36 |
| | 47 |
|
| Postretirement benefits | 126 |
| | 146 |
| 48 |
| | 34 |
|
| Unearned revenue | 39 |
| | 27 |
| 11 |
| | 26 |
|
| Allowance for doubtful accounts | 12 |
| | 13 |
| 8 |
| | 8 |
|
| Loss carryforwards | 114 |
| | 37 |
| 155 |
| | 135 |
|
| Other | 18 |
| | 14 |
| 24 |
| | 45 |
|
| Total deferred tax assets | 517 |
| | 735 |
| 341 |
| | 372 |
|
| Deferred tax liabilities: | | | | | | |
| Goodwill and intangible assets | (299 | ) | | (362 | ) | (295 | ) | | (249 | ) |
| Fixed assets | (9 | ) | | (8 | ) | — |
| | (4 | ) |
| Other | — |
| | — |
| |
| Total deferred tax liabilities | (308 | ) | | (370 | ) | (295 | ) | | (253 | ) |
| Net deferred income tax asset (liability) before valuation allowance | 209 |
| | 365 |
| |
| Net deferred income tax asset before valuation allowance | | 46 |
| | 119 |
|
| Valuation allowance | (98 | ) | | (16 | ) | (156 | ) | | (127 | ) |
| Net deferred income tax asset (liability) | $ | 111 |
| | $ | 349 |
| |
| Net deferred income tax (liability) asset | | $ | (110 | ) | | $ | (8 | ) |
| Reported as: | | | | | | |
| Current deferred tax assets | $ | 109 |
| | $ | 360 |
| |
| Current deferred tax liabilities | (8 | ) | | (2 | ) | |
| Non-current deferred tax assets | 33 |
| | 31 |
| $ | 52 |
| | $ | 59 |
|
| Non-current deferred tax liabilities | (23 | ) | | (40 | ) | (162 | ) | | (67 | ) |
| Net deferred income tax asset (liability) | $ | 111 |
| | $ | 349 |
| |
| Net deferred income tax (liability) asset | | $ | (110 | ) | | $ | (8 | ) |
We record valuation allowances against deferred income tax assets when we determine that it is more likely than not based upon all the available evidence that such deferred income tax assets will not be realized.realized based upon all the available evidence. The valuation allowance is primarily related to operating losses.
As of December 31, 2018, we have approximately $2.3 billion of undistributed earnings of our foreign subsidiaries, of which $784 million is reinvested indefinitely in our foreign operations. We have not recorded deferred income taxes applicable to undistributed earnings of foreign subsidiaries that are indefinitely reinvested in foreign operations. Undistributed earnings that are indefinitely reinvested in foreign operations amounted to $1,573 million at December 31, 2015. Quantification of the deferred tax liability, if any, associated with indefinitely reinvested earnings is not practicable.
We made net income tax payments for continuing and discontinued operations totaling $260$558 million in 2015, $4192018, $709 million in 2014,2017, and $787$683 million in 2013.2016. As of December 31, 2015,2018, we had net operating loss carryforwards of $440$691 million, of which will expire over various periods.a significant portion has an unlimited carryover period under current law.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | (in millions) | Years ended December 31, | Year ended December 31, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| Balance at beginning of year | $ | 118 |
| | $ | 82 |
| | $ | 74 |
| $ | 212 |
| | $ | 221 |
| | $ | 162 |
|
| Additions based on tax positions related to the current year | 22 |
| | 30 |
| | 27 |
| 19 |
| | 23 |
| | 48 |
|
| Additions for tax positions of prior years | 12 |
| | 33 |
| | 10 |
| 2 |
| | 17 |
| | 20 |
|
| Reduction for tax positions of prior years | (14 | ) | | (11 | ) | | (9 | ) | (21 | ) | | (32 | ) | | (3 | ) |
| Reduction for settlements | (18 | ) | | (16 | ) | | (20 | ) | (65 | ) | | (5 | ) | | (6 | ) |
| Expiration of applicable statutes of limitations | | — |
| | (12 | ) | | — |
|
| Balance at end of year | $ | 120 |
| | $ | 118 |
| | $ | 82 |
| $ | 147 |
| | $ | 212 |
| | $ | 221 |
|
The total amount of federal, state and local, and foreign unrecognized tax benefits as of December 31, 2015, 20142018, 2017 and 20132016 was $120$147 million, $118$212 million and $82$221 million, respectively, exclusive of interest and penalties. The increase of $20 millionDuring the period ending December 31, 2018, there was no net tax impact to tax expense from the change in 2015 (excluding settlements) is the amount of unrecognized tax benefits that unfavorably impacted tax expense. The unfavorable impact to the tax provision was partially offset by the resolution of tax audits in multiple jurisdictions.benefits.
We recognize accrued interest and penalties related to unrecognized tax benefits in interest expense and operating-related expense, respectively. Based on the current status of income tax audits, we believe that the total amount of unrecognized tax benefits on the balance sheet may be reduced by up to approximately $40 million in the next twelve months as a result of the resolution of local tax examinations. In addition to the unrecognized tax benefits, as of December 31, 20152018 and 2014,2017, we had $31$35 million and $23$59 million, respectively, of accrued interest and penalties associated with uncertainunrecognized tax positions.benefits.
During 2015, we completed theThe U.S. federal income tax audit for 2013. The U.S. federal income tax audits for 2014 and 2015 are2017 is in process. During 2015,2018, we completed variousfederal, state and foreign tax audits and, with few exceptions, we are no longer subject to federal, state, and local, or non-U.S.foreign income tax examinations by tax authorities for the years before 2007.2011. The impact to tax expense in 2015, 20142018, 2017 and 20132016 was not material.
We file income tax returns in the U.S. federal jurisdiction and various states,state and foreign jurisdictions, and we are routinely under audit by many different tax authorities. We believe that our accrual for tax liabilities is adequate for all open audit years based on an assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. It is possible that tax examinations will be settled prior to December 31, 2016.2019. If any of these tax audit settlements do occur within that period, we would make any necessary adjustments to the accrual for unrecognized tax benefits. Until formal resolutions are reached between us and the tax authorities, the determination of a possible audit settlement range with respect to the impact on unrecognized tax benefits is not practicable.
Based on the current status of income tax audits, we believe that the total amount of unrecognized tax benefits may significantly decrease in the next twelve months. Although the ultimate resolution of our tax audits is unpredictable, the resulting change in our unrecognized tax benefits could have a material impact on our results of operations and/or cash flows.
5. Debt
A summary of short-term and long-term debt outstanding is as follows:
|
| | | | | | | |
| (in millions) | December 31, |
| | 2015 | | 2014 |
5.9% Senior Notes, due 2017 1 | $ | 399 |
| | $ | 399 |
|
2.5% Senior Notes, due 2018 2 | 398 |
| | — |
|
3.3% Senior Notes, due 2020 3 | 695 |
| | — |
|
4.0% Senior Notes, due 2025 4 | 690 |
| | — |
|
4.4% Senior Notes, due 2026 5 | 890 |
| | — |
|
6.55% Senior Notes, due 2037 6 | 396 |
| | 396 |
|
| Commercial paper | 143 |
| | — |
|
| Total debt | 3,611 |
| | 795 |
|
| Less: short-term debt including current maturities | 143 |
| | — |
|
| Long-term debt | $ | 3,468 |
| | $ | 795 |
|
|
| | | | | | | |
| (in millions) | December 31, |
| | 2018 | | 2017 |
2.5% Senior Notes, due 2018 1 | $ | — |
| | $ | 399 |
|
3.3% Senior Notes, due 2020 2 | 698 |
| | 697 |
|
4.0% Senior Notes, due 2025 3 | 693 |
| | 692 |
|
4.4% Senior Notes, due 2026 4 | 892 |
| | 892 |
|
2.95% Senior Notes, due 2027 5 | 493 |
| | 493 |
|
6.55% Senior Notes, due 2037 6 | 396 |
| | 396 |
|
4.5% Senior Notes, due 2048 7 | 490 |
| | — |
|
| Total debt | 3,662 |
| | 3,569 |
|
| Less: short-term debt including current maturities | — |
| | 399 |
|
| Long-term debt | $ | 3,662 |
| | $ | 3,170 |
|
| |
1 | Interest payments are due semiannually on April 15 and October 15, and asWe made a $400 million early repayment of December 31, 2015, the unamortized debt discount and issuance costs total $1 million.our 2.5% senior note in June of 2018. |
| |
2 | Interest payments are due semiannually on February 1514 and August 15, beginning on February 15, 2016,14, and as of December 31, 2015,2018, the unamortized debt discount and issuance costs total $2 million. |
| |
3 | Interest payments are due semiannually on February 14June 15 and August 14, beginning on February 14, 2016,December 15, and as of December 31, 2015,2018, the unamortized debt discount and issuance costs total $5$7 million. |
| |
4 | Interest payments are due semiannually on JuneFebruary 15 and DecemberAugust 15, and as of December 31, 2015,2018, the unamortized debt discount and issuance costs total $10$8 million. |
| |
5 | Interest payments are due semiannually on February 15January 22 and August 15, beginning on February 15, 2016,July 22, and as of December 31, 2015,2018, the unamortized debt discount and issuance costs total $10 million.$7 million. |
| |
6 | Interest payments are due semiannually on May 15 and November 15, and as of December 31, 2015,2018, the unamortized debt discount and issuance costs total $4 million. |
| |
7 | Interest payments are due semiannually on May 15 and November 15, and as of December 31, 2018, the unamortized debt discount and issuance costs total $10 million. |
Annual long-term debt maturities are scheduled as follows based on book values as of December 31, 2015: no amounts due in 2016, $399 million due in 2017, $398 million due in 2018,2018: no amounts due in 2019, $695$698 million due in 2020, no amounts due in 2021, 2022, and $2.02023 and $3.0 billion due thereafter.
On August 18, 2015,May 17, 2018, we issued $2.0 billion$500 million of senior4.5% notes (the "Notes"), consistingdue in 2048. The notes are fully and unconditionally guaranteed by our wholly-owned subsidiary, Standard & Poor's Financial Services LLC. In June of 2018, we used the net proceeds to fund the redemption price of the $400 million outstanding principal amount of our 2.5% senior notes due in August of 2018, $700and the balance for general corporate purposes.
On September 22, 2016, we issued $500 million of 3.3%2.95% senior notes due in 2020 and $900 million of 4.4% senior2027. The notes due in 2026. The Notes are fully and unconditionally guaranteed by our wholly-owned subsidiary, Standard & Poor's Financial Services LLC. We used the net proceeds to financefund the acquisition$400 million early repayment of SNL.
On May 26, 2015, we issued $700 million of 4.0%our 5.9% senior notes due in 20252017 on October 20, 2016, and used a portion of the net proceedsbalance for the repayment of short-term debt, including commercial paper. The 4.0% senior notes will mature on June 15, 2025 and are fully and unconditionally guaranteed by our wholly-owned subsidiary, Standard & Poor's Financial Services LLC.general corporate purposes.
We have the ability to borrow a total of $1.2$1.2 billion through our commercial paper program, which is supported by our credit facility described below. Commercial paper borrowings outstanding as of December 31, 2015 totaled $143 million with an average interest rate and term of 0.95% and 17 days. As of December 31, 2015, we can borrow approximately $1.1 billion in additional funds through the commercial paper program. There were no commercial paper borrowings outstanding under our credit facility as of December 31, 2014.
On June 30, 2015, we entered into a revolving $1.2 billion five-year credit agreement (our "credit facility") that we entered into on June 30, 2017. This credit facility will terminate on June 30, 2020. This credit facility replaced our $1.0 billion four-year credit facility that was scheduled to terminate on June 19, 2017. The previous credit facility was canceled immediately after the new credit facility became effective.2022. There were no commercial paper borrowings outstanding borrowings under the previous credit facility when it was replaced.as of December 31, 2018 and 2017.
WeDepending on our corporate credit rating, we pay a commitment fee of 108 to 2017.5 basis points for our credit facility, depending on our indebtedness to cash flow ratio, whether or not amounts have been borrowed andborrowed. We currently pay a commitment fee of 1510 basis points. The interest rate on borrowings under our credit facility is, at our option, calculated using rates that are primarily based on either the prevailing London Inter-Bank OfferedOffer Rate, the prime rate determined by the administrative agent or the Federal Funds Rate. For certain borrowings under this credit facility, there is also a spread based on our indebtedness to cash flow ratio added to the applicable rate.corporate credit rating.
Our credit facility contains certain covenants. The only financial covenant requires that our indebtedness to cash flow ratio, as defined in our credit facility, is not greater than 4 to 1,, and this covenant level has never been exceeded.
Our exposure to market risk includes changes in foreign exchange rates. We have operations in foreign countries where the functional currency is primarily the local currency. For international operations that are determined to be extensions of the parent company, the U.S. dollar is the functional currency. We typically have naturally hedged positions in most countries from a local currency perspective with offsetting assets and liabilities. As of December 31, 2018 and December 31, 2017, we have entered into foreign exchange forward contracts to mitigate or hedge the effect of adverse fluctuations in foreign currency exchange rates. Foreign exchange forward contracts are recorded at fair value that is based on foreign currency exchange rates in active markets; therefore, we classify these derivative contracts within Level 2 of the fair value hierarchy.We do not enter into any derivative financial instruments for speculative purposes.
Undesignated Derivative Instruments
During the twelve months ended December 31, 2018 and 2017, we entered into foreign exchange forward contracts in order to mitigate the change in fair value of specific assets and liabilities in the consolidated balance sheet. These forward contracts do not qualify for hedge accounting. As of December 31, 2018 and 2017, the aggregate notional value of these outstanding forward contracts was $98 million and $130 million, respectively. The changes in fair value of these forward contracts are recorded in prepaid and other assets in the consolidated balance sheet with their corresponding change in fair value recognized into selling and general expenses in the consolidated statement of income. The amount recorded in selling and general expense for the twelve months ended December 31, 2018 and 2017 related to these contracts was a net loss of $12 million and a net gain of $3 million, respectively.
Cash Flow Hedges
During the twelve months ended December 31, 2018 and 2017, we entered into a series of foreign exchange forward contracts to hedge a portion of the Indian rupee, British pound, and Euro exposures through the fourth quarter of 2019 and 2018, respectively. During the twelve months ended December 31, 2016, we entered into a series of foreign exchange forward contracts to hedge a portion of the Indian Rupee exposure through the fourth quarter of 2016. These contracts are intended to offset the impact of movement of exchange rates on future revenue and operating costs and are scheduled to mature within twelve months. The changes in the fair value of these contracts are initially reported in accumulated other comprehensive loss in our consolidated balance sheet and are subsequently reclassified into revenue and selling and general expenses in the same period that the hedged transaction affects earnings.
As of December 31, 2018, we estimate that $4 million of the net gains related to derivatives designated as cash flow hedges recorded in other comprehensive income is expected to be reclassified into earnings within the next twelve months. There was no material hedge ineffectiveness for the year ended December 31, 2018.
As of December 31, 2018 and December 31, 2017, the aggregate notional value of our outstanding foreign exchange forward contracts designated as cash flow hedges was $289 million and $307 million, respectively.
The following table provides information on the location and fair value amounts of our cash flow hedges as of December 31, 2018 and December 31, 2017:
|
| | | | | | | | |
| (in millions) | | December 31, | | December 31, |
| Balance Sheet Location | | 2018 | | 2017 |
| Derivatives designated as cash flow hedges: | | | | |
| Prepaid and other current assets | Foreign exchange forward contracts | $ | 3 |
| | $ | 3 |
|
The following table provides information on the location and amounts of pre-tax gains (losses) on our cash flow hedges for the years ended December 31:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Gain (Loss) Recognized in Accumulated Other Comprehensive Loss (effective portion) | | Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (effective portion) | | Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (effective portion) |
| Cash flow hedges - designated as hedging instruments | 2018 | | 2017 | | 2016 | | | | 2018 | | 2017 | | 2016 |
| Foreign exchange forward contracts | $ | 2 |
| | $ | — |
| | $ | 3 |
| | Revenue, Selling and general expenses | | $ | (4 | ) | | $ | 9 |
| | $ | 4 |
|
The activity related to the change in unrealized gains (losses) in accumulated other comprehensive loss was as follows for the years ended December 31:
|
| | | | | | | | | | | |
| (in millions) | Year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Net unrealized gains (losses) on cash flow hedges, net of taxes, beginning of year | $ | 2 |
| | $ | 2 |
| | $ | (1 | ) |
| Change in fair value, net of tax | (2 | ) | | 9 |
| | 7 |
|
| Reclassification into earnings, net of tax | 4 |
| | (9 | ) | | (4 | ) |
| Net unrealized gains on cash flow hedges, net of taxes, end of year | $ | 4 |
| | $ | 2 |
| | $ | 2 |
|
6.7. Employee Benefits
We maintain a number of active defined contribution retirement plans for our employees. The majority of our defined benefit plans are frozen. As a result, no new employees will be permitted to enter these plans and no additional benefits for current participants in the frozen plans will be accrued.
We also have supplemental benefit plans that provide senior management with supplemental retirement, disability and death benefits. Certain supplemental retirement benefits are based on final monthly earnings. In addition, we sponsor a voluntary 401(k) plansplan under which we may match employee contributions up to certain levels of compensation as well as profit-sharing plans under which we contribute a percentage of eligible employees' compensation to the employees' accounts.
We also provide certain medical, dental and life insurance benefits for active and retired employees and eligible dependents. The medical and dental plans and supplemental life insurance plan are contributory, while the basic life insurance plan is noncontributory. We currently do not prefund any of these plans.
We recognize the funded status of our retirement and postretirement plans in the consolidated balance sheets, with a corresponding adjustment to accumulated other comprehensive income,loss, net of taxes. The amounts in accumulated other comprehensive incomeloss represent
net unrecognized actuarial losses and unrecognized prior service costs. These amounts will be subsequently recognized as net periodic pension cost pursuant to our accounting policy for amortizing such amounts.
As part of the sale of McGraw Hill Construction and MHE, described further in Note 2 – Acquisitions and Divestitures, we retained the benefit obligations and plan assets related to McGraw Hill Construction and MHE; however, the benefit cost for periods presented is bifurcated between continuing and discontinued operations.
Benefit Obligation
A summary of the benefit obligation and the fair value of plan assets, as well as the funded status for the retirement and postretirement plans as of December 31, 2018 and 2017, is as follows (benefits paid in the table below include only those amounts contributed directly to or paid directly from plan assets):
| | | (in millions) | Retirement Plans | | Postretirement Plans | Retirement Plans | | Postretirement Plans |
| | 2015 | | 2014 | | 2015 | | 2014 | 2018 | | 2017 | | 2018 | | 2017 |
| Net benefit obligation at beginning of year | $ | 2,462 |
| | $ | 2,004 |
| | $ | 96 |
| | $ | 103 |
| $ | 2,329 |
| | $ | 2,260 |
| | $ | 49 |
| | $ | 57 |
|
| Service cost | 6 |
| | 5 |
| | — |
| | 1 |
| 3 |
| | 3 |
| | — |
| | — |
|
| Interest cost | 96 |
| | 99 |
| | 3 |
| | 4 |
| 71 |
| | 74 |
| | 1 |
| | 2 |
|
| Plan participants’ contributions | — |
| | — |
| | 4 |
| | 4 |
| — |
| | — |
| | 3 |
| | 3 |
|
| Actuarial (gain) loss | (189 | ) | | 504 |
| | (12 | ) | | 5 |
| |
| Actuarial loss (gain) | | (199 | ) | | 107 |
| | (4 | ) | | (5 | ) |
| Gross benefits paid | (150 | ) | | (125 | ) | | (12 | ) | | (13 | ) | (103 | ) | | (110 | ) | | (8 | ) | | (8 | ) |
| Foreign currency effect | (26 | ) | | (25 | ) | | — |
| | — |
| (26 | ) | | 38 |
| | — |
| | — |
|
| Other adjustments | — |
| | — |
| | 1 |
| | (8 | ) | |
Other adjustments 1 | | 1 |
| | (43 | ) | | (1 | ) | | — |
|
| Net benefit obligation at end of year | 2,199 |
| | 2,462 |
| | 80 |
| | 96 |
| 2,076 |
| | 2,329 |
| | 40 |
| | 49 |
|
| Fair value of plan assets at beginning of year | 2,236 |
| | 2,088 |
| | — |
| | — |
| 2,219 |
| | 2,073 |
| | 20 |
| | — |
|
| Actual return on plan assets | (57 | ) | | 270 |
| | — |
| | — |
| (113 | ) | | 263 |
| | — |
| | — |
|
| Employer contributions | 15 |
| | 22 |
| | 8 |
| | 9 |
| 9 |
| | 8 |
| | 1 |
| | 25 |
|
| Plan participants’ contributions | — |
| | — |
| | 4 |
| | 4 |
| — |
| | — |
| | 3 |
| | 3 |
|
| Gross benefits paid | (150 | ) | | (125 | ) | | (12 | ) | | (13 | ) | (103 | ) | | (110 | ) | | (8 | ) | | (8 | ) |
| Foreign currency effect | (21 | ) | | (19 | ) | | — |
| | — |
| (25 | ) | | 31 |
| | — |
| | — |
|
Other adjustments 1 | | — |
| | (46 | ) | | — |
| | — |
|
| Fair value of plan assets at end of year | 2,023 |
| | 2,236 |
| | — |
| | — |
| 1,987 |
| | 2,219 |
| | 16 |
| | 20 |
|
| Funded status | $ | (176 | ) | | $ | (226 | ) | | $ | (80 | ) | | $ | (96 | ) | $ | (89 | ) | | $ | (110 | ) | | $ | (24 | ) | | $ | (29 | ) |
| Amounts recognized in consolidated balance sheets: | | | | | | | | | | | | | | |
| Non-current assets | $ | 36 |
| | $ | 28 |
| | $ | — |
| | $ | — |
| $ | 125 |
| | $ | 114 |
| | $ | — |
| | $ | — |
|
| Current liabilities | (8 | ) | | (8 | ) | | (8 | ) | | (9 | ) | (9 | ) | | (9 | ) | | — |
| | — |
|
| Non-current liabilities | (204 | ) | | (246 | ) | | (72 | ) | | (87 | ) | (205 | ) | | (215 | ) | | (24 | ) | | (29 | ) |
| $ | (176 | ) | | $ | (226 | ) | | $ | (80 | ) | | $ | (96 | ) | $ | (89 | ) | | $ | (110 | ) | | $ | (24 | ) | | $ | (29 | ) |
| Accumulated benefit obligation | $ | 2,190 |
| | $ | 2,440 |
| | | | | $ | 2,066 |
| | $ | 2,319 |
| | | | |
| Plans with accumulated benefit obligation in excess of the fair value of plan assets: | | | | | | | | | | | | | | |
| Projected benefit obligation | $ | 1,810 |
| | $ | 2,046 |
| | | | | $ | 214 |
| | $ | 224 |
| | | | |
| Accumulated benefit obligation | $ | 1,801 |
| | $ | 2,024 |
| | | | | $ | 204 |
| | $ | 214 |
| | | | |
| Fair value of plan assets | $ | 1,598 |
| | $ | 1,792 |
| | | | | $ | — |
| | $ | — |
| | | | |
| Amounts recognized in accumulated other comprehensive loss, net of tax: | | | | | | | | | | | | | | |
| Net actuarial loss (gain) | $ | 433 |
| | $ | 452 |
| | $ | (24 | ) | | $ | (8 | ) | $ | 460 |
| | $ | 451 |
| | $ | (41 | ) | | $ | (37 | ) |
| Prior service credit | 1 |
| | 1 |
| | (5 | ) | | (5 | ) | 2 |
| | 1 |
| | (14 | ) | | (12 | ) |
| Total recognized | $ | 434 |
| | $ | 453 |
| | $ | (29 | ) | | $ | (13 | ) | $ | 462 |
| | $ | 452 |
| | $ | (55 | ) | | $ | (49 | ) |
| |
1 | Relates to the impact of retiree annuity purchases in 2017. |
The actuarial loss included in accumulated other comprehensive loss for our retirement plans and expected to be recognized in net periodic pensionbenefit cost during the year ending December 31, 20162019 is $16$13 million. There is noan immaterial amount of prior service credit included in accumulated other comprehensive loss for our retirement plans expected to be recognized in net periodic benefit cost during the year ending December 31, 2016.2019.
There is an immaterial amount of
The actuarial loss and prior service creditgain included in accumulated other comprehensive loss for our postretirement plans and expected to be recognized in net periodic benefit cost during the year ending December 31, 2016.2019 is $2 million. The prior year service credit included in accumulated other comprehensive loss for our postretirement plans and expected to be recognized in net periodic benefit cost during the year ending December 31, 2019 is $1 million.
Net Periodic Benefit Cost
For purposes of determining annual pension cost, prior service costs are being amortized straight-line over the average expected remaining lifetime of plan participants expected to receive benefits.
A summary of net periodic benefit cost for our retirement and postretirement plans for the years ended December 31, is as follows:
| | | (in millions) | Retirement Plans | | Postretirement Plans | Retirement Plans | | Postretirement Plans |
| | 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| Service cost | $ | 6 |
| | $ | 5 |
| | $ | 10 |
| | $ | — |
| | $ | 1 |
| | $ | 2 |
| $ | 3 |
| | $ | 3 |
| | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Interest cost | 96 |
| | 99 |
| | 91 |
| | 3 |
| | 4 |
| | 5 |
| 71 |
| | 74 |
| | 78 |
| | 1 |
| | 2 |
| | 2 |
|
| Expected return on assets | (127 | ) | | (138 | ) | | (129 | ) | |
|
| | — |
| | — |
| (124 | ) | | (126 | ) | | (122 | ) | | — |
| | — |
| | — |
|
| Amortization of: |
| |
| |
| |
| |
| |
| | | | | | | | | | | |
| Actuarial loss (gain) | 20 |
| | 11 |
| | 26 |
| | — |
| | (1 | ) | | — |
| 20 |
| | 18 |
| | 16 |
| | (2 | ) | | (2 | ) | | (1 | ) |
| Prior service cost (credit) | — |
| | — |
| | 5 |
| | (1 | ) | | — |
| | (1 | ) | |
Curtailment 1 | — |
| | — |
| | (8 | ) | | — |
| | (1 | ) | | (12 | ) | |
| Prior service credit | | — |
| | — |
| | — |
| | (1 | ) | | (2 | ) | | — |
|
Other 1 | | 4 |
| | 8 |
| | — |
| |
|
| | — |
| | — |
|
| Net periodic benefit cost | $ | (5 | ) | | $ | (23 | ) | | $ | (5 | ) | | $ | 2 |
| | $ | 3 |
| | $ | (6 | ) | $ | (26 | ) | | $ | (23 | ) | | $ | (25 | ) | | $ | (2 | ) | | $ | (2 | ) | | $ | 1 |
|
| |
1 | The curtailment gain forRepresents a charge related to our U.K retirement plans in 2013 relates to a freeze of pension accruals for MHE employees as well as all remaining active employees in the United Kingdom ("U.K."). The curtailment gain for our postretirement plans in 2014 is a result of plan changes effective October 31, 2014 eliminating retiree medical and life insurance benefits for active employees not retiring by July 1, 2016. The curtailment gain for our postretirement plans in 2013 relates to the sale of MHE on March 22, 2013.
plan. |
Our U.K. retirement plan accounted for a benefit of $10 million in 2015, $82018, $6 million in 2014,2017, and $10 million in 2013, including the $8 million curtailment gain discussed above,2016 of the net periodic benefit cost attributable to the funded plans.
Other changes in plan assets and benefit obligations recognized in other comprehensive income, net of tax for the years ended December 31, are as follows:
| | | (in millions) | Retirement Plans | | Postretirement Plans | Retirement Plans | | Postretirement Plans |
| | 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| Net actuarial (gain) loss | $ | (6 | ) | | $ | 232 |
| | $ | (213 | ) | | $ | (17 | ) | | $ | 3 |
| | $ | (8 | ) | $ | 28 |
| | $ | (20 | ) | | $ | 60 |
| | $ | (7 | ) | | $ | (3 | ) | | $ | (12 | ) |
| Recognized actuarial (gain) loss | (13 | ) | | (7 | ) | | (15 | ) | | — |
| | 1 |
| | — |
| (15 | ) | | (12 | ) | | (10 | ) | | 1 |
| | 1 |
| | 1 |
|
| Prior service cost (credit) | — |
| | — |
| | 5 |
| | 1 |
| | (5 | ) | | — |
| |
| Prior service (credit) cost | | 1 |
| | — |
| | — |
| | 1 |
| | 1 |
| | (8 | ) |
Other 1
| | (4 | ) | | (7 | ) | | — |
| | — |
| | — |
| | — |
|
| Total recognized | $ | (19 | ) | | $ | 225 |
| | $ | (223 | ) | | $ | (16 | ) | | $ | (1 | ) | | $ | (8 | ) | $ | 10 |
| | $ | (39 | ) | | $ | 50 |
| | $ | (5 | ) | | $ | (1 | ) | | $ | (19 | ) |
| |
1 | Represents a charge related to our U.K retirement plan. |
The total cost for our retirement plans was $91$80 million for 2015, $812018, $70 million for 20142017 and $96$69 million for 2013.2016. Included in the total retirement plans cost are defined contribution plans cost of $67$79 million for 2015, $742018, $70 million for 20142017 and $75$65 million for 2013.2016.
Assumptions
| | | | Retirement Plans | | Postretirement Plans | Retirement Plans | | Postretirement Plans |
| | 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| Benefit obligation: | | | | | | | | | | | | | | | | | | | | | | |
| Discount rate | 4.47 | % | | 4.15 | % | | 5.00 | % | | 3.90 | % | | 3.60 | % | | 4.20 | % | |
Discount rate 2 | | 4.40 | % | | 3.68 | % | | 4.14 | % | | 4.15 | % | | 3.40 | % | | 3.69 | % |
| Net periodic cost: | | | | | | | | | | | | | | | | | | | | | | |
Weighted-average healthcare cost rate 1 | | | | | | | 7.0 | % | | 7.0 | % | | 7.0 | % | | | | | | | 6.50 | % | | 7.00 | % | | 7.00 | % |
Discount rate - U.S. plan 2 | 4.15 | % | | 5.0 | % | | 4.1 | % | | 3.60 | % | | 4.125 | % | | 3.45 | % | 3.68 | % | | 4.13 | % | | 4.47 | % | | 3.40 | % | | 3.69 | % | | 3.94 | % |
Discount rate - U.K. plan 2 | 3.8 | % | | 4.5 | % | | 4.8 | % | | | | | | | 2.41 | % | | 2.58 | % | | 3.84 | % | | | | | | |
| Compensation increase factor - U.S. plan | N/A |
| | N/A |
| | N/A |
| | | | | | | |
| Compensation increase factor - U.K. plan | N/A |
| | N/A |
| | 5.75 | % | | | | | | | |
Return on assets 3 | 6.25 | % | | 7.125 | % | | 7.25 | % | | | | | | | 6.00 | % | | 6.25 | % | | 6.25 | % | | | | | | |
| |
1 | The assumed weighted-average healthcare cost trend rate will decrease ratably from 7%6.5% in 20152018 to 5% in 2024 and remain at that level thereafter. Assumed healthcare cost trends have an effect on the amounts reported for the healthcare plans. A one percentage point change in assumed healthcare cost trend creates the following effects: |
|
| | | | | | | |
| (in millions) | 1% point increase | | 1% point decrease |
| Effect on postretirement obligation | $ | 4 |
| | $ | (3 | ) |
|
| | | | | | | |
| (in millions) | 1% point increase | | 1% point decrease |
| Effect on postretirement obligation | $ | — |
| | $ | — |
|
| |
2 | Effective January 1, 2016,2018, we changed our discount rate assumption on our U.S. retirement plans to 4.47%3.68% from 4.15%4.13% in 20152017 and changed our discount rate assumption on our U.K. plan to 3.84%2.41% from 3.8%2.58% in 2015. At the end of 2015, we changed our approach used to measure service and interest costs on all of our retirement plans. For 2015 and prior periods presented, we measured service and interest costs utilizing and single weighted-average discount rate derived from the yield curve used to measure the benefit obligation. For 2016, we elected to measure service and interest costs by applying the specific spot rates along that yield curve to the plans' liability cash flows. We believe this new approach provides a more precise measurement of service and interest costs by aligning the timing of the plans' liability cash flows to the corresponding spot rates on the yield curve. This change does not affect the measurement of our benefit obligation. We have accounted for this change as a change in accounting estimate that is inseparable from a change in accounting principle and, accordingly, have accounted for it on a prospective basis. We expect pension and postretirement medical costs to decrease by approximately $13 million in 2016 as a result of this change.2017 . |
| |
3 | The expected return on assets assumption is calculated based on the plan’s asset allocation strategy and projected market returns over the long-term. Effective January 1, 2016,2019, our return on assets assumption for the U.S. plan and U.K. plan remained unchanged to 6.25%at 6.00%. |
In addition to the assumptions in the above table, assumed mortality is also a key assumption in determining benefit obligations. Effective December 31, 2014, the Company updated the assumed mortality rates to reflect life expectancy improvements.
Cash Flows
In December of 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was enacted. The Act established a prescription drug benefit under Medicare, known as “Medicare Part D”, and a federal subsidy to sponsors of retiree healthcare benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Our benefits provided to certain participants are at least actuarially equivalent to Medicare Part D, and, accordingly, we are entitled to a subsidy.
Expected employer contributions in 20162019 are $7$46 million and $6 million for our retirement and postretirement plans and $9 million for our postretirement plans.respectively. In 2016,2019, we may elect to make additional non-required contributions depending on investment performance and the pension plan status. Information about the expected cash flows for our retirement and postretirement plans and the impact of the Medicare subsidy is as follows:
|
| | | | | | | | | | | | | | | | | | | |
| (in millions) | | | Postretirement Plans 2 |
| | Retirement 1 Plans | | Gross payments | | Retiree contributions | | Medicare subsidy | | Net payments |
| 2016 | $ | 91 |
| | $ | 13 |
| | $ | (4 | ) | | $ | (1 | ) | | $ | 8 |
|
| 2017 | 90 |
| | 13 |
| | (4 | ) | | (1 | ) | | 8 |
|
| 2018 | 93 |
| | 12 |
| | (4 | ) | | (1 | ) | | 7 |
|
| 2019 | 96 |
| | 12 |
| | (4 | ) | | (1 | ) | | 7 |
|
| 2020 | 99 |
| | 11 |
| | (4 | ) | | (1 | ) | | 6 |
|
| 2021-2025 | 539 |
| | 43 |
| | (12 | ) | | (3 | ) | | 28 |
|
|
| | | | | | | | | | | | | | | | | | | |
| (in millions) | | | Postretirement Plans 2 |
| | Retirement 1 Plans | | Gross payments | | Retiree contributions | | Medicare subsidy 3 | | Net payments |
| 2019 | $ | 91 |
| | $ | 8 |
| | $ | (2 | ) | | $ | — |
| | $ | 6 |
|
| 2020 | 94 |
| | 7 |
| | (2 | ) | | — |
| | 5 |
|
| 2021 | 96 |
| | 6 |
| | (2 | ) | | — |
| | 4 |
|
| 2022 | 99 |
| | 6 |
| | (2 | ) | | — |
| | 4 |
|
| 2023 | 101 |
| | 5 |
| | 1 |
| | — |
| | 6 |
|
| 2024-2028 | 534 |
| | 19 |
| | (7 | ) | | — |
| | 12 |
|
| |
1 | Reflects the total benefits expected to be paid from the plans or from our assets including both our share of the benefit cost and the participants’ share of the cost. |
| |
2 | Reflects the total benefits expected to be paid from our assets. |
| |
3 | Expected medicare subsidy amounts, for the years presented, are less than $1 million. |
Fair Value of Plan Assets
In accordance with authoritative guidance for fair value measurements certain assets and liabilities are required to be recorded at fair value. Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value hierarchy has been established which requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs used to measure fair value are as follows:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The fair value of our defined benefit plans assets as of December 31, 20152018 and 2014,2017, by asset class is as follows: |
| | | | | | | | | | | | | | | |
| (in millions) | December 31, 2018 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| Cash and short-term investments | $ | 4 |
| | $ | 4 |
| | $ | — |
| | $ | — |
|
| Equities: | | | | | | | |
U.S. indexes 1 | 21 |
| | 21 |
| | — |
| | — |
|
| U.S. growth and value | 69 |
| | 69 |
| | — |
| | — |
|
| Fixed income: | | | | | | | |
Long duration strategy 2 | 1,070 |
| | — |
| | 1,070 |
| | — |
|
| Intermediate duration securities | 35 |
| | — |
| | 35 |
| | — |
|
| Agency mortgage backed securities | 4 |
| | — |
| | 4 |
| | — |
|
| Asset backed securities | 18 |
| | — |
| | 18 |
| | — |
|
Non-agency mortgage backed securities 3 | 13 |
| | — |
| | 13 |
| | — |
|
| International, excluding U.K. | 18 |
| | — |
| | 18 |
| | — |
|
| Real Estate: | | | | | | | |
U.K. 4 | 39 |
| | — |
| | — |
| | 39 |
|
| Total | $ | 1,291 |
| | $ | 94 |
| | $ | 1,158 |
| | $ | 39 |
|
Collective investment funds 5 | $ | 696 |
| | | | | | |
| Total | $ | 1,987 |
| | | | | | |
|
| | | | | | | | | | | | | | | |
| (in millions) | December 31, 2015 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| Cash and short-term investments | $ | 188 |
| | $ | 8 |
| | $ | 180 |
| | $ | — |
|
| Equities: |
| |
| |
| |
|
U.S. indexes 1 | 312 |
| | 63 |
| | 249 |
| | — |
|
| U.S. growth and value | 132 |
| | 92 |
| | 40 |
| | — |
|
| U.K. | 47 |
| | 34 |
| | 13 |
| | — |
|
| International, excluding U.K. | 124 |
| | 40 |
| | 84 |
| | — |
|
| Fixed income: |
| |
| |
| |
|
Long duration strategy 2 | 1,072 |
| | — |
| | 1,072 |
| | — |
|
| Intermediate duration securities | 33 |
| | — |
| | 33 |
| | — |
|
| Agency mortgage backed securities | 6 |
| | — |
| | 6 |
| | — |
|
| Asset backed securities | 17 |
| | — |
| | 17 |
| | — |
|
Non-agency mortgage backed securities 3 | 23 |
| | — |
| | 23 |
| | — |
|
U.K. 4 | 6 |
| | — |
| | 6 |
| | — |
|
| International, excluding U.K. | 48 |
| | — |
| | 48 |
| | — |
|
| Other | 15 |
| | — |
| | 15 |
| | — |
|
| Total | $ | 2,023 |
| | $ | 237 |
| | $ | 1,786 |
| | $ | — |
|
| | | (in millions) | December 31, 2014 | December 31, 2017 |
| | Total | | Level 1 | | Level 2 | | Level 3 | Total | | Level 1 | | Level 2 | | Level 3 |
| Cash, short-term investments, and other | $ | 176 |
| | $ | 17 |
| | $ | 159 |
| | $ | — |
| $ | 10 |
| | $ | 10 |
| | $ | — |
| | $ | — |
|
| Equities: |
| |
| |
| |
| | | | | | | |
U.S. indexes 1 | 293 |
| | 88 |
| | 205 |
| | — |
| 50 |
| | 50 |
| | — |
| | — |
|
| U.S. growth and value | 204 |
| | 147 |
| | 57 |
| | — |
| 109 |
| | 109 |
| | — |
| | — |
|
| U.K. | 67 |
| | 56 |
| | 11 |
| | — |
| 5 |
| | 5 |
| | — |
| | — |
|
| International, excluding U.K. | 139 |
| | 42 |
| | 97 |
| | — |
| 45 |
| | 45 |
| | — |
| | — |
|
| Fixed income: |
| |
| |
| |
| | | | | | | |
Long duration strategy 2 | 1,165 |
| | — |
| | 1,165 |
| | — |
| 1,076 |
| | — |
| | 1,076 |
| | — |
|
| Intermediate duration securities | 25 |
| | — |
| | 25 |
| | — |
| 35 |
| | — |
| | 35 |
| | — |
|
| Agency mortgage backed securities | 6 |
| | — |
| | 6 |
| | — |
| 5 |
| | — |
| | 5 |
| | — |
|
| Asset backed securities | 18 |
| | — |
| | 18 |
| | — |
| 19 |
| | — |
| | 19 |
| | — |
|
Non-agency mortgage backed securities 3 | 37 |
| | — |
| | 37 |
| | — |
| 15 |
| | — |
| | 15 |
| | — |
|
| International, excluding U.K. | | 18 |
| | — |
| | 18 |
| | — |
|
| Real Estate: | | | | | | | | |
U.K. 4 | 7 |
| | — |
| | 7 |
| | — |
| 39 |
| | — |
| | — |
| | 39 |
|
| International, excluding U.K. | 85 |
| | — |
| | 85 |
| | — |
| |
| Other | 14 |
| | — |
| | 14 |
| | — |
| |
| Total | $ | 2,236 |
| | $ | 350 |
| | $ | 1,886 |
| | $ | — |
| $ | 1,426 |
| | $ | 219 |
| | $ | 1,168 |
| | $ | 39 |
|
Collective investment funds 5 | | $ | 793 |
| | | | | | |
| Total | | $ | 2,219 |
| | | | | | |
| |
1 | Includes securities that are tracked in the following indexes: S&P 500, S&P MidCap 400, S&P MidCap 400 Growth and S&P Smallcap 600.600 index. |
| |
2 | Includes securities that are mainly investment grade obligations of issuers in the U.S. |
| |
3 | Includes U.S. mortgage-backed securities that are not backed by the U.S. government. |
| |
4 | Includes securities originated by the government of and other issuers froma fund which holds real estate properties in the U.K. |
| |
5 | Includes the Standard & Poor's 500 Composite Stock Index, the Standard & Poor's MidCap 400 Composite Stock Index, a short-term investment fund which is a common collective trust vehicle, and other various asset classes. |
For securities that are quoted in active markets, the trustee/custodian determines fair value by applying securities’ prices obtained from its pricing vendors. For commingled funds that are not actively traded, the trustee applies pricing information provided by investment management firms to the unit quantities of such funds. Investment management firms employ their own pricing vendors
to value the securities underlying each commingled fund. Underlying securities that are not actively traded derive their prices from investment managers, which in turn, employ vendors that use pricing models (e.g., discounted cash flow, comparables). The domestic defined benefit plans have no investment in our stock, except through the S&P 500 commingled trust index fund.
The trustee obtains estimated prices from vendors for securities that are not easily quotable and they are categorized accordingly as Level 3. The following table details further information on our plan assets where we have used significant unobservable inputs (Level 3):
|
| | | |
| (in millions) | Level 3 |
| Balance as of December 31, 2017 | $ | 39 |
|
Purchases
| — |
|
| Distributions | (2 | ) |
| Gain (loss) | 2 |
|
| Balance as of December 31, 2018 | $ | 39 |
|
Pension Trusts’ Asset Allocations
There are two pension trusts, one in the U.S. and one in the U.K.
The U.S. pension trust had assets of $1.6 billion$1,572 million and $1.8 billion$1,739 million as of December 31, 20152018 and 2014,2017 respectively, and the target allocations in 20152018 include 26%75% fixed income, 16% domestic equities 6%and 9% international equities, and 68% debt securities and short-term investments.equities.
The U.K. pension trust had assets of $425$415 million and $443$480 million as of December 31, 20152018 and 2014,2017, respectively, and the target allocations in 20152018 include 20% equities, 40% fixed income, 30% diversified growth funds, 20% equities and 40% fixed income.
10% real estate.
The pension assets are invested with the goal of producing a combination of capital growth, income and a liability hedge. The mix of assets is established after consideration of the long-term performance and risk characteristics of asset classes. Investments are selected based on their potential to enhance returns, preserve capital and reduce overall volatility. Holdings are diversified within each asset class. The portfolios employ a mix of index and actively managed equity strategies by market capitalization, style, geographic regions and economic sectors. The fixed income strategies include U.S. long duration securities, opportunistic fixed income securities and U.K. debt instruments. The short-term portfolio, whose primary goal is capital preservation for liquidity purposes, is composed of government and government-agency securities, uninvested cash, receivables and payables. The portfolios do not employ any financial leverage.
U.S. Defined Contribution PlansPlan
Assets of the defined contribution plansplan in the U.S. consist primarily of investment options, which include actively managed equity, indexed equity, actively managed equity/bond funds, target date funds, McGraw Hill FinancialS&P Global Inc. common stock, stable value and money market strategies. There is also a self-directed mutual fund investment option. The plansplan purchased 223,656193,051 shares and sold 247,984205,798 shares of McGraw Hill FinancialS&P Global Inc. common stock in 20152018 and purchased 301,924228,248 shares and sold 629,086297,750 shares of McGraw Hill FinancialS&P Global Inc. common stock in 2014.2017. The plansplan held approximately 1.81.5 million shares of McGraw Hill FinancialS&P Global Inc. common stock as of December 31, 20152018 and 1.9 million shares as of December 31, 2014,2017, with market values of $179$251 million and $165$255 million, respectively. The plansplan received dividends on McGraw Hill FinancialS&P Global Inc. common stock of $2$3 million during both the yearyears ended December 31, 20152018 and $3 million during the year ended December 31, 2014.2017.
7.8. Stock-Based Compensation
We issue stock-based incentive awards to our eligible employees and Directors under the 2002 Employee Stock Incentive Plan and a Director Deferred Stock Ownership Plan.
2002 Employee Stock Incentive Plan (the “2002 Plan”) – The 2002 Plan permits the granting of nonqualified stock options, stock appreciation rights, performance stock, restricted stock and other stock-based awards. In 2018, we made a one-time issuance of incentive stock options under the 2002 Plan to replace Kensho employees' stock options that were assumed in connection with our acquisition of Kensho in April of 2018.
Director Deferred Stock Ownership Plan – Under this plan, common stock reserved may be credited to deferred stock accounts for eligible Directors. In general, the plan requires that 50% of eligible Directors’ annual compensation plus dividend equivalents be credited to deferred stock accounts. Each Director may also elect to defer all or a portion of the remaining compensation and have an equivalent number of shares credited to the deferred stock account. Recipients under this plan are not required to provide consideration to us other than rendering service. Shares will be delivered as of the date a recipient ceases to be a member of the Board of Directors or within five years thereafter, if so elected. The plan will remain in effect until terminated by the Board of Directors or until no shares of stock remain available under the plan.
The number of common shares reserved for issuance are as follows:
| | | (in millions) | December 31, | December 31, |
| | 2015 | | 2014 | 2018 | | 2017 |
| Shares available for granting under the 2002 Plan | 32.8 | | 31.4 | 33.3 | | 33.8 |
| Options outstanding | 5.8 | | 8.1 | 1.7 | | 2.1 |
Total shares reserved for issuance 1 | 38.6 | | 39.5 | 35.0 | | 35.9 |
| |
1 | Shares reserved for issuance under the Director Deferred Stock Ownership Plan are not included in the total, but are approximatelyless than 0.1 million. |
We issue treasury shares upon exercise of stock options and the issuance of restricted stock and unit awards. To offset the dilutive effect of the exercise of employee stock options, we periodically repurchase shares. See Note 89 – Equity for further discussion.
Stock-based compensation expense and the corresponding tax benefit are as follows:
|
| | | | | | | | | | | |
| (in millions) | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Stock option expense | $ | 14 |
| | $ | 21 |
| | $ | 13 |
|
| Restricted stock and unit awards expense | 64 |
| | 79 |
| | 83 |
|
| Total stock-based compensation expense | $ | 78 |
| | $ | 100 |
| | $ | 96 |
|
| | | | | | |
| Tax benefit | $ | 29 |
| | $ | 38 |
| | $ | 37 |
|
Stock-based compensation of $2 million and $10 million is recorded in discontinued operations for the years ended December 31, 2014 and 2013, respectively, as a result of the sale of MHE and McGraw Hill Construction described further in Note 2 – Acquisitions and Divestitures. |
| | | | | | | | | | | |
| (in millions) | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Stock option expense | $ | 5 |
| | $ | 3 |
| | $ | 7 |
|
| Restricted stock and unit awards expense | 89 |
| | 96 |
| | 69 |
|
| Total stock-based compensation expense | $ | 94 |
| | $ | 99 |
| | $ | 76 |
|
| | | | | | |
| Tax benefit | $ | 19 |
| | $ | 38 |
| | $ | 29 |
|
Stock Options
Stock options may not be granted at a price less than the fair market value of our common stock on the date of grant. Stock options granted vest over a threefour year service period in equal annual installments and have a maximum term of 10 years. Stock option compensation costs are recognized from the date of grant, utilizing a three-yearfour-year graded vesting method. Under this method, one-thirdmore than half of the costs are ratably recognized over the first twelve months, one-thirdapproximately one-quarter of the costs are ratably recognized over a twenty-four month period starting from the date of grant, withapproximately one-tenth of the remaining costs ratablyare recognized over a thirty-six month period starting from the date of grant.
Stock options granted in 2011grant, and prior years vest over a two year service period in equal annual installments and have a maximum term of 10 years. Stock option compensation costs for 2011 and prior year grants are recognized from the date of grant, utilizing a two-year graded vesting method. Under this method, fifty percent of the costs are ratably recognized over the first twelve months with the remaining costs ratably recognized over a twenty-fourforty-eight month period starting from the date of grant.
We use a lattice-based option-pricing model to estimate the fair value of options granted. The following assumptions were used in valuing the options granted:
| | | | Year Ended December 31, | Year Ended |
| | 2015 | | 2014 | | 2013 | December 31, 2018 |
| Risk-free average interest rate | 0.2 - 1.9% |
| | 0.1 - 2.9% |
| | 0.1 - 2.9% |
| 2.6 - 2.7% |
|
| Dividend yield | 1.4% |
| | 1.4 - 1.8% |
| | 2.07 - 2.09% |
| 1.1 | % |
| Volatility | 21 - 39% |
| | 18 - 41% |
| | 29 - 45% |
| 21.8 - 22.0% |
|
| Expected life (years) | 6.3 |
| | 6.21 - 6.25 |
| | 6.1 - 6.2 |
| 5.67 - 6.07 |
|
| Weighted-average grant-date fair value per option | $ | 27.57 |
| | $ | 23.41 |
| | $ | 14.46 |
| $ | 112.98 |
|
Because lattice-based option-pricing models incorporate ranges of assumptions, those ranges are disclosed. These assumptions are based on multiple factors, including historical exercise patterns, post-vesting termination rates, expected future exercise patterns and the expected volatility of our stock price. The risk-free interest rate is the imputed forward rate based on the U.S. Treasury yield at the date of grant. We use the historical volatility of our stock price over the expected term of the options to estimate the expected volatility. The expected term of options granted is derived from the output of the lattice model and represents the period of time that options granted are expected to be outstanding.
TableIn 2018, we made a one-time issuance of Contentsincentive stock options under the 2002 Plan to replace Kensho employees' stock options that were assumed in connection with our acquisition of Kensho in April of 2018. There were no stock options granted in 2017 and 2016.
Stock option activity is as follows:
|
| | | | | | | | | | | | |
| (in millions, except per award amounts) | Shares |
| Weighted average exercise price |
| Weighted-average remaining years of contractual term |
| Aggregate intrinsic value |
| Options outstanding as of December 31, 2014 | 8.1 |
| | $ | 45.18 |
| | | | |
Granted 1 | — |
| | $ | 90.30 |
| | | | |
| Exercised | (2.2 | ) | | $ | 76.08 |
| | | | |
| Canceled, forfeited and expired | (0.1 | ) | | $ | 53.28 |
| | | | |
| Options outstanding as of December 31, 2015 | 5.8 |
| | $ | 45.61 |
| | 4.5 | | $ | 308 |
|
| Options exercisable as of December 31, 2015 | 5.0 |
| | $ | 42.10 |
| | 4.0 | | $ | 283 |
|
|
| | | | | | | |
| (in millions, except per award amounts) | Shares |
| Weighted-average grant-date fair value |
| Nonvested options outstanding as of December 31, 2014 | 1.6 |
| | $ | 19.00 |
|
Granted 1 | — |
| | $ | 27.57 |
|
| Vested | (0.7 | ) | | $ | 18.24 |
|
| Forfeited | (0.1 | ) | | $ | 17.44 |
|
| Nonvested options outstanding as of December 31, 2015 | 0.8 |
| | $ | 19.82 |
|
| Total unrecognized compensation expense related to nonvested options | $ | 3 |
| | |
| Weighted-average years to be recognized over | 1.2 |
| | |
|
| | | | | | | | | | | | |
| (in millions, except per award amounts) | Shares |
| Weighted average exercise price |
| Weighted-average remaining years of contractual term |
| Aggregate intrinsic value |
| Options outstanding as of December 31, 2017 | 2.1 |
| | $ | 44.09 |
| | | | |
| Granted | 0.2 |
| | $ | 74.11 |
| | | | |
| Exercised | (0.6 | ) | | $ | 161.14 |
| | | | |
Forfeited and expired 1 | — |
| | $ | 71.68 |
| | | | |
| Options outstanding as of December 31, 2018 | 1.7 |
| | $ | 47.92 |
| | 3.3 | | $ | 202 |
|
| Options exercisable as of December 31, 2018 | 1.6 |
| | $ | 46.69 |
| | 3.1 | | $ | 195 |
|
1 There were a minimal amountare less 0.1 million shares forfeited and expired.
|
| | | | | | | |
| (in millions, except per award amounts) | Shares |
| Weighted-average grant-date fair value |
| Nonvested options outstanding as of December 31, 2017 | — |
| | $ | 27.52 |
|
| Granted | 0.2 |
| | $ | 112.98 |
|
| Vested | (0.1 | ) | | $ | 112.36 |
|
Forfeited 1 | — |
| | $ | 112.14 |
|
| Nonvested options outstanding as of December 31, 2018 | 0.1 |
| | $ | 113.02 |
|
| Total unrecognized compensation expense related to nonvested options | $ | 2 |
| | |
| Weighted-average years to be recognized over | 2.0 |
| | |
| |
1 | There are less than 0.1 million shares forfeited. |
The total fair value of our stock options that vested during the years ended December 31, 2015, 20142018, 2017 and 20132016 was $11$5 million, $6$4 million and $12$7 million, respectively.
We receive a tax deduction for certain stock option exercises during the period in which the options are exercised, generally for the excess of the quoted market value of the stock at the time of the exercise of the options over the exercise price of the options (“intrinsic value”). For the years ended December 31, 2015, 2014 and 2013, $69 million, $128 million and $43 million, respectively, of excess tax benefits from stock options exercised are reported in our cash flows used for financing activities.
Information regarding our stock option exercises is as follows:
| | | (in millions) | Year Ended December 31, | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| Net cash proceeds from the exercise of stock options | $ | 86 |
| | $ | 193 |
| | $ | 258 |
| $ | 34 |
| | $ | 75 |
| | $ | 88 |
|
| Total intrinsic value of stock option exercises | $ | 94 |
| | $ | 168 |
| | $ | 158 |
| $ | 77 |
| | $ | 118 |
| | $ | 95 |
|
| Income tax benefit realized from stock option exercises | $ | 49 |
| | $ | 73 |
| | $ | 61 |
| $ | 27 |
| | $ | 64 |
| | $ | 41 |
|
Restricted Stock and Unit Awards
Restricted stock and unit awards (performance and non-performance) have been granted under the 2002 Plan. Restricted stock andPerformance unit performance awards will vest only if we achieve certain financial goals over the performance period. Restricted stock non-performance awards have various vesting periods (generally three years), with vesting beginning on the first anniversary of the awards. Recipients of restricted stock and unit awards are not required to provide consideration to us other than rendering service.
The stock-based compensation expense for restricted stock and unit awards is determined based on the market price of our stock at the grant date of the award applied to the total number of awards that are anticipated to fully vest. For restricted stock andperformance unit performance awards, adjustments are made to expense dependent upon financial goals achieved.
Restricted stock and unit activity for performance and non-performance awards is as follows:
| | | (in millions, except per award amounts) | Shares | | Weighted-average grant-date fair value | Shares | | Weighted-average grant-date fair value |
| Nonvested shares as of December 31, 2014 | 1.7 |
| | $ | 61.56 |
| |
| Nonvested shares as of December 31, 2017 | | 0.8 |
| | $ | 124.91 |
|
| Granted | 1.3 |
| | $ | 77.06 |
| 1.0 |
| | $ | 182.75 |
|
| Vested | (1.6 | ) | | $ | 96.00 |
| (0.9 | ) | | $ | 167.13 |
|
| Forfeited | (0.2 | ) | | $ | 81.70 |
| (0.1 | ) | | $ | 149.03 |
|
| Nonvested shares as of December 31, 2015 | 1.2 |
| | $ | 92.39 |
| |
| Nonvested shares as of December 31, 2018 | | 0.8 |
| | $ | 172.24 |
|
| Total unrecognized compensation expense related to nonvested awards | $ | 60 |
| | | $ | 76 |
| | |
| Weighted-average years to be recognized over | 1.6 |
| | | 1.9 |
| | |
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| Weighted-average grant-date fair value per award | $ | 77.06 |
| | $ | 77.74 |
| | $ | 44.22 |
| $ | 182.75 |
| | $ | 147.12 |
| | $ | 93.01 |
|
| Total fair value of restricted stock and unit awards vested | $ | 155 |
| | $ | 88 |
| | $ | 119 |
| $ | 154 |
| | $ | 147 |
| | $ | 99 |
|
| Tax benefit relating to restricted stock activity | $ | 24 |
| | $ | 30 |
| | $ | 33 |
| $ | 32 |
| | $ | 36 |
| | $ | 26 |
|
9. Equity
Capital Stock
Two million shares of preferred stock, par value $1$1 per share, are authorized; none have been issued.
On January 27, 2016,30, 2019, the Board of Directors approved an increase in the dividends for 20162019 to a quarterly rate of $0.36$0.57 per common share.
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| Quarterly dividend rate | $ | 0.33 |
| | $ | 0.30 |
| | $ | 0.28 |
| $ | 0.50 |
| | $ | 0.41 |
| | $ | 0.36 |
|
| Annualized dividend rate | $ | 1.32 |
| | $ | 1.20 |
| | $ | 1.12 |
| $ | 2.00 |
| | $ | 1.64 |
| | $ | 1.44 |
|
| Dividends paid (in millions) | $ | 363 |
| | $ | 326 |
| | $ | 308 |
| $ | 503 |
| | $ | 421 |
| | $ | 380 |
|
Stock Repurchases
On December 4, 2013, the Board of Directors approved a stockshare repurchase program authorizing the purchase of 50 million shares, (the "2013 Repurchase Program"), which was approximately 18% of the total shares of our outstanding common stock at that time. In 2011, the Board of Directors approved a stock repurchase program authorizing the purchase of up to 50 million shares (the “2011 Repurchase Program”), which was approximately 17% of the total shares of our outstanding common stock at that time.
Share repurchases were as follows:
|
| | | | | | | | | | | |
| (in millions, except average price) | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Total number of shares purchased - 2013 Repurchase Program | 10.1 |
| | 4.4 |
| | — |
|
Total number of shares purchased - 2011 Repurchase Program 1 | — |
| | — |
| | 16.9 |
|
Average price paid per share 2, 3 | $ | 99.00 |
| | $ | 79.06 |
| | $ | 58.52 |
|
Total cash utilized 2 | $ | 1,000 |
| | $ | 352 |
| | $ | 989 |
|
|
| | | | | | | | | | | |
| (in millions, except average price) | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
Total number of shares purchased 1 | $ | 8.4 |
| | $ | 6.8 |
| | $ | 9.7 |
|
Average price paid per share 2 | $ | 197.21 |
| | $ | 147.74 |
| | $ | 113.36 |
|
Total cash utilized 2 | $ | 1,660 |
| | $ | 1,001 |
| | $ | 1,097 |
|
| |
1 | 20132018, 2017 and 2016 includes shares received as part of our accelerated share repurchase agreements as described in more detail below. |
| |
2 | In December of 2015, 0.3 million shares were repurchased for approximately $26 million, which settled in January of 2016. Excluding these 0.3Cash used for financing activities only reflects those shares which settled during the year ended December 31, 2018, 2017 and 2016 resulting in $1,660 million shares, the average price paid per share was $98.98. In December of 2013, 0.1, $1,001 million shares were repurchased for |
approximately $10 million, which settled in January of 2014. Excluding these 0.1 million shares, the average price paid per share was $58.36. Cash used for financing activities only reflects those shares which settled during the year ended December 31, 2015 and 2014 resulting in $974 million and $362and $1,123 million of cash used to repurchase shares, respectively.
| |
3
| On June 25, 2014, we repurchased 0.5 million shares of the Company's common stock from the personal holdings of Harold W. McGraw III, then Chairman of the Company's Board of Directors and former President and CEO of the Company, at a discount of 0.35% from the June 24, 2014 New York Stock Exchange closing price. We repurchased these shares with cash for $41 million at an average price of $82.66 per share. See Note 13 —Related Party Transactions for further information.
|
Our purchased shares may be used for general corporate purposes, including the issuance of shares for stock compensation plans and to offset the dilutive effect of the exercise of employee stock options. As of December 31, 2015,2018, 35.510.6 million shares remained available under the 2013 Repurchase Program. As of December 31, 2015, there were no remaining shares available under the 2011 Repurchase Program. The 2013 Repurchase Programour current share repurchase program. Our current share repurchase program has no expiration date and purchases under this program may be made from time to time on the open market and in private transactions, depending on market conditions.
Accelerated Share Repurchase ProgramAgreements
2018
We entered into an accelerated share repurchase (“ASR”("ASR") agreement with a financial institution on March 25, 2013October 29, 2018 to initiate share repurchases aggregating $500 million. The ASR agreement was structured as an uncapped ASR agreement in which we paid $500 million and received an initial delivery of approximately 2.5 million shares, representing 85% of the $500 million at a price equal to the then market price of the Company. We completed the ASR agreement on January 2, 2019 and received an additional 0.4 million shares. We repurchased a total of 2.9 million shares under the ASR agreement for an average purchase price of $173.80 per share. The total number of shares repurchased under the ASR agreement is equal to $500 million divided by the volume weighted-average share price, less a discount. The repurchased shares are held in Treasury. The ASR agreement was executed under the current share repurchase program, approved on December 4, 2013.
We entered into an ASR agreement with a financial institution on March 6, 2018 to initiate share repurchases aggregating $1 billion. The ASR agreement was structured as an uncapped ASR agreement in which we paid $1 billion and received an initial delivery of approximately 4.5 million shares, representing 85% of the $1 billion at a price equal to the then market price of the Company. We completed the ASR agreement on September 25, 2018, and received an additional 0.6 million shares. We repurchased a total of 5.1 million shares under the ASR agreement for an average purchase price of $197.49 per share. The total number of shares repurchased under the ASR agreement is equal to $1 billion divided by the volume weighted-average share price, less a discount. The repurchased shares are held in Treasury. The ASR agreement was executed under the current share repurchase program, approved on December 4, 2013.
2017
We entered into an ASR agreement with a financial institution on August 1, 2017 to initiate share repurchases aggregating $500 million. The ASR agreement was structured as an uncapped ASR agreement in which we paid $500 million and received an initial delivery of approximately 2.8 million shares, representing 85% of the $500 million at a price equal to the then market price of the Company. We completed the ASR agreement on October 31, 2017 and received an additional 0.5 million shares. We repurchased a total of 3.2 million shares under the ASR agreement for an average purchase price of $154.46 per share. The total number of shares repurchased under the ASR agreement is equal to $500 million divided by the volume weighted-average share price, less a discount. The repurchased shares are held in Treasury. The ASR agreement was executed under the current share repurchase program, approved on December 4, 2013.
2016
Using a portion of the proceeds received from the sale of J.D. Power, we entered into an ASR agreement with a financial institution on September 7, 2016 to initiate share repurchases aggregating $750 million. The ASR agreement was structured as a capped ASR agreement in which we paid $500$750 million and received an initial delivery of approximately 7.24.4 million shares and an additional amount of 0.9 million shares during the three months ended March 31, 2013, with an additional 1.4 million shares received on April 1, 2013, in the aggregate,month of September 2016, representing the minimum number of shares of our common stock to be repurchased based on a calculation using a specificspecified capped price per share. We completed the ASR agreement on December 7, 2016 and received an additional 0.9 million shares, which settled on December 12, 2016. We repurchased a total of 6.1 million shares under the ASR agreement for an average purchase price of $122.18 per share. The total number of shares ultimately purchasedrepurchased under the ASR agreement was determined based on the volume weighted-average share price, (“VWAP”), minus a discount, of our common stock from March 25, 2013 through July 22,over the term of the ASR agreement. The repurchased shares are held in Treasury. The ASR agreement was executed under the current share repurchase program, approved on December 4, 2013. On July 25, 2013 we received
The ASR agreements discussed above were each accounted for as two transactions: a final incremental deliverystock purchase transaction and a forward stock purchase contract. The shares delivered under the ASR agreement resulted in a reduction of 0.7 millionour outstanding shares determined usingused to determine our weighted average common shares outstanding for purposes of calculating basic and diluted earnings per share. The forward stock purchase contract was classified as an equity instrument.
We entered into an ASR agreement with a VWAPfinancial institution on February 11, 2019 to initiate share repurchases aggregating $500 million.
Redeemable Noncontrolling Interests
The agreement with the minority partners that own 27% of our S&P Dow Jones Indices LLC partnershipjoint venture contains redemption features whereby interests held by minority partners are redeemable either (i) at the option of the holder or (ii) upon the occurrence of an event that is not solely within our control. Specifically, under the terms of the operating agreement of S&P Dow Jones Indices LLC, after December 31, 2017, CME Group and CME Group Index Services LLC ("CGIS") will havehas the right at any time to sell, and we are obligated to buy, at least 20% of their share in S&P Dow Jones Indices LLC. In addition, in the event there is a change of control of the Company, for the 15 days following a change in control, CME Group and CGIS will have the right to put their interest to us at the then fair value of CME Group's and CGIS' minority interest.
If interests were to be redeemed under this agreement, we would generally be required to purchase the interest at fair value on the date of redemption. This interest is presented on the consolidated balance sheets outside of equity under the caption “Redeemable noncontrolling interest” with an initial value based on fair value for the portion attributable to the net assets we acquired, and based on our historical cost for the portion attributable to our S&P Index business. We adjust the redeemable noncontrolling interest each reporting period to its estimated redemption value, but never less than its initial fair value, considering a combination of an income and market valuation approach. Our income and market valuation approaches may incorporate Level 3 fair value measures for instances when observable inputs are not available, including assumptions related to expected future net cash flows, long-term growth rates, the timing and nature of tax attributes, and the redemption features. Any adjustments to the redemption value will impact retained income.
Noncontrolling interests that do not contain such redemption features are presented in equity.
Changes to redeemable noncontrolling interest during the year ended December 31, 20152018 were as follows:
| | | (in millions) | | |
| Balance as of December 31, 2014 | $ | 810 |
| |
| Balance as of December 31, 2017 | | $ | 1,352 |
|
| Net income attributable to noncontrolling interest | 101 |
| 151 |
|
| Distributions to noncontrolling interest | (98 | ) | (111 | ) |
| Redemption value adjustment | 107 |
| 228 |
|
| Balance as of December 31, 2015 | $ | 920 |
| |
| Balance as of December 31, 2018 | | $ | 1,620 |
|
Accumulated Other Comprehensive Loss
The following table summarizes the changes in the components of accumulated other comprehensive loss for the year ended December 31, 2015:2018:
|
| | | | | | | | | | | | | | | | |
| (in millions) | Foreign Currency Translation Adjustment | | Pension and Postretirement Benefit Plans | | Unrealized Gain (Loss) on Forward Exchange Contracts | | Accumulated Other Comprehensive Loss |
| Balance as of December 31, 2014 | $ | (83 | ) | | $ | (431 | ) | | $ | — |
| | $ | (514 | ) |
| Other comprehensive income before reclassifications | (110 | ) | | 13 |
| | (1 | ) | | (98 | ) |
| Reclassifications from accumulated other comprehensive loss to net earnings |
| | 12 |
| 1 |
|
| | 12 |
|
| Net other comprehensive income | (110 | ) | | 25 |
| | (1 | ) | | (86 | ) |
| Balance as of December 31, 2015 | $ | (193 | ) | | $ | (406 | ) | | $ | (1 | ) | | $ | (600 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| (in millions) | Foreign Currency Translation Adjustment | | Pension and Postretirement Benefit Plans 1 | | Unrealized Gain (Loss) on Forward Exchange Contracts 2 | | Unrealized Loss on Investment 3 | | Accumulated Other Comprehensive Loss |
| Balance as of December 31, 2017 | $ | (239 | ) | | $ | (402 | ) | | $ | 2 |
| | (10 | ) | | $ | (649 | ) |
| Other comprehensive loss before reclassifications | (100 | ) | | (19 | ) | | (2 | ) | | — |
| | (121 | ) |
| Reclassifications from accumulated other comprehensive loss to net earnings | — |
| | 14 |
| | 4 |
| | — |
| | 18 |
|
| Net other comprehensive (loss) income | (100 | ) | | (5 | ) | | 2 |
| | — |
| | (103 | ) |
| Amounts reclassified to retained income | — |
| | — |
| | — |
| | 10 |
| | 10 |
|
| Balance as of December 31, 2018 | $ | (339 | ) | | $ | (407 | ) | | $ | 4 |
| | $ | — |
| | $ | (742 | ) |
| |
1 | See Note 67 — Employee Benefits for additional details of items reclassed from accumulated other comprehensive loss to net earnings. |
| |
2 | See Note 6 —Derivative Instruments for additional details of items reclassed from accumulated other comprehensive loss to net earnings. |
| |
3 | On January 1, 2018, the unrealized loss on investments was reclassified to retained income. See Note 1 - Accounting Policies for additional details. |
The net actuarial loss and prior service cost related to pension and other postretirement benefit plans included in other comprehensive income is net of a tax provision of $7$9 million for the year ended December 31, 2015.2018.
9.10. Earnings (Loss) per Share
Basic earnings (loss) per common share ("EPS") is computed by dividing net income (loss) attributable to the common shareholders of the Company by the weighted-average number of common shares outstanding. Diluted earnings (loss) per shareEPS is computed in the same manner as basic earnings (loss) per share,EPS, except the number of shares is increased to include additional common shares that would have been outstanding if potential common shares with a dilutive effect had been issued. Potential common shares consist primarily of stock options restricted stock and restricted stock unitsperformance shares calculated using the treasury stock method.
The calculation for basic and diluted earnings (loss) per shareEPS is as follows:
| | | (in millions, except per share data) | Year Ended December 31, | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| Amount attributable to McGraw Hill Financial, Inc. common shareholders: | | | | | | |
| Income (loss) from continuing operations | $ | 1,156 |
| | $ | (293 | ) | | $ | 783 |
| |
| Income from discontinued operations | — |
| | 178 |
| | 593 |
| |
| Net income (loss) attributable to the Company | $ | 1,156 |
| | $ | (115 | ) | | $ | 1,376 |
| |
| Amount attributable to S&P Global Inc. common shareholders: | | | | | | |
| Net income | | $ | 1,958 |
| | $ | 1,496 |
| | $ | 2,106 |
|
| | | | | | | | | | | |
| Basic weighted-average number of common shares outstanding | 271.6 |
| | 271.5 |
| | 274.5 |
| 250.9 |
| | 256.3 |
| | 262.8 |
|
| Effect of stock options and other dilutive securities | 3.0 |
| | — |
| | 5.3 |
| 2.3 |
| | 2.6 |
| | 2.4 |
|
| Diluted weighted-average number of common shares outstanding | 274.6 |
| | 271.5 |
| | 279.8 |
| 253.2 |
| | 258.9 |
| | 265.2 |
|
| | | | | | | | | | | |
| Income (loss) from continuing operations: | | | | | | |
| Earnings per share attributable to S&P Global Inc. common shareholders: | | | | | | |
| Net income: | | | | | | |
| Basic | $ | 4.26 |
| | $ | (1.08 | ) | | $ | 2.85 |
| $ | 7.80 |
| | $ | 5.84 |
| | $ | 8.02 |
|
| Diluted | $ | 4.21 |
| | $ | (1.08 | ) | | $ | 2.80 |
| $ | 7.73 |
| | $ | 5.78 |
| | $ | 7.94 |
|
| Income from discontinued operations: | | | | | | |
| Basic | $ | — |
| | $ | 0.66 |
| | $ | 2.16 |
| |
| Diluted | $ | — |
| | $ | 0.66 |
| | $ | 2.12 |
| |
| Net income (loss): | | | | | | |
| Basic | $ | 4.26 |
| | $ | (0.42 | ) | | $ | 5.01 |
| |
| Diluted | $ | 4.21 |
| | $ | (0.42 | ) | | $ | 4.91 |
| |
Each period we have certain stock options and restricted performance shares that are potentially excluded from the computation of diluted earnings (loss) per share.EPS. The effect of the potential exercise of stock options is excluded when the average market price of our common stock is lower than the exercise price of the related option during the period or when a net loss from continuing operations exists because the effect would have been antidilutive. Additionally, restricted performance shares are excluded because the necessary vesting conditions had not been met or when a net loss from continuing operations exists. As of December 31, 2015,2018, 2017 and 2016, there were no stock options excluded as compared to 2.9 million and 1.2 million stock options excluded for the years ended December 31, 2014 and 2013, respectively. Additionally, restrictedexcluded. Restricted performance shares outstanding of 0.90.5 million, 3.20.6 million and 0.90.7 million as of December 31, 2015, 20142018, 2017 and 2013,2016, respectively, were excluded.
10.11. Restructuring
During 20152018 and 2014,2017, we continued to evaluate our cost structure and further identified cost savings associated with streamlining our management structure and our decision to exit non-strategic businesses. Our 20152018 and 20142017 restructuring plans consisted of a company-wide workforce reduction of approximately 550 positions160 and 590520 positions, respectively, and are further detailed below. The charges for each restructuring plan are classified as selling and general expenses within the consolidated statements of income and the reserves are included in other current liabilities in the consolidated balance sheets.
In certain circumstances, reserves are no longer needed because of efficiencies in carrying out the plans or because employees previously identified for separation resigned from the Company and did not receive severance or were reassigned due to circumstances not foreseen when the original plans were initiated. In these cases, we reverse reserves through the consolidated statements of income during the period when it is determined they are no longer needed. There waswere approximately $6 million of reserves from the 2017 restructuring plan that we have reversed in 2018, which offset the initial charge of $44 million recorded for the 2017 restructuring plan. There were approximately $7 million of reserves from the 20142016 restructuring plan that we have reversed in 2015,2017, which offset the initial charge of $86$30 million recorded for the 20142016 restructuring plan.
The initial restructuring charge recorded and the ending reserve balance as of December 31, 20152018 by segment is as follows:
| | | | 2015 Restructuring Plan | | 2014 Restructuring Plan | 2018 Restructuring Plan | | 2017 Restructuring Plan |
| (in millions) | Initial Charge Recorded | | Ending Reserve Balance | | Initial Charge Recorded | | Ending Reserve Balance | Initial Charge Recorded | | Ending Reserve Balance | | Initial Charge Recorded | | Ending Reserve Balance |
| S&P Ratings | $ | 18 |
| | $ | 15 |
| | $ | 45 |
| | 6 |
| |
| S&P Capital IQ and SNL | 31 |
| | 23 |
| | 9 |
| | 1 |
| |
C&C 1 | 3 |
| | 2 |
| | 16 |
| | 1 |
| |
| Ratings | | $ | 8 |
| | $ | 8 |
| | $ | 25 |
| | $ | 7 |
|
| Market Intelligence | | 7 |
| | 7 |
| | 8 |
| | 1 |
|
| Platts | | — |
| | — |
| | 1 |
| | — |
|
| Indices | | — |
| | — |
| | — |
| | — |
|
| Corporate | 11 |
| | 10 |
| | 16 |
| | 5 |
| 10 |
| | 9 |
| | 10 |
| | 2 |
|
| Total | $ | 63 |
| | $ | 50 |
| | $ | 86 |
| | $ | 13 |
| $ | 25 |
| | $ | 24 |
| | $ | 44 |
| | $ | 10 |
|
| |
1
| As part of the sale of McGraw Hill Construction, which has historically been part of our C&C segment, to Symphony Technology Group, described further in Note 2 —Acquisitions and Divestitures, we retained McGraw Hill Construction's restructuring liabilities and the initial charge associated with the reserve has been bifurcated between continuing and discontinued operations. The 2014 restructuring plan includes an initial charge of $3 million.
|
For the year ended December 31, 2015,2018, we have reduced the reserve for the 20152018 restructuring plan by $13$1 million and for the years ended December 31, 20152018 and 2014,2017, we have reduced the reserve for the 20142017 restructuring plan by $64$29 million and $9$5 million, respectively. The reductions primarily related to cash payments for employee severance costs.charges.
11.12. Segment and Geographic Information
As discussed in Note 1 – Accounting Policies, we have four reportable segments: S&P Ratings, S&P Capital IQMarket Intelligence, Platts and SNL, S&P DJ Indices and C&C.Indices.
Our Chief Executive Officer is our chief operating decision-maker and evaluates performance of our segments and allocates resources based primarily on operating profit. Segment operating profit does not include unallocated expenseCorporate Unallocated, other income, net, or interest expense, net, as these are costs that do not affect the operating results of our reportable segments. We use the same accounting policies for our segments as those described in Note 1 – Accounting PoliciePoliciess..
In April of 2018, we acquired Kensho for approximately $550 million, net of cash acquired, in a mix of cash and stock. The results of Kensho, an operating segment of the Company, are included in Corporate revenue and Corporate Unallocated for financial reporting purposes. See Note 2 — Acquisitions and Divestitures for additional information.
Effective beginning with the first quarter of 2018, we began reporting the financial results of Market Intelligence and Platts as separate reportable segments consistent with the changes to our organizational structure and how our Chief Executive Officer evaluates the performance of these segments. Our historical segment reporting has been retroactively revised to reflect the current organizational structure.
92
Segment informationA summary of operating results for the years ended December 31 is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Revenue | | Operating Profit (Loss) |
| | 2015 | 2014 | 2013 | | 2015 | 2014 | 2013 |
| S&P Ratings | $ | 2,428 |
| | $ | 2,455 |
| | $ | 2,274 |
| | $ | 1,078 |
| | $ | (583 | ) | | $ | 882 |
|
| S&P Capital IQ and SNL | 1,405 |
| | 1,237 |
| | 1,170 |
| | 228 |
| | 228 |
| | 189 |
|
| S&P DJ Indices | 597 |
| | 552 |
| | 493 |
| | 392 |
| | 347 |
| | 266 |
|
| C&C | 971 |
| | 893 |
| | 841 |
| | 357 |
| | 290 |
| | 280 |
|
Intersegment elimination 1 | (88 | ) | | (86 | ) | | (76 | ) | | — |
| | — |
| | — |
|
| Total operating segments | 5,313 |
| | 5,051 |
| | 4,702 |
| | 2,055 |
| | 282 |
| | 1,617 |
|
Unallocated expense 2 | — |
| | — |
| | — |
| | (138 | ) | | (169 | ) | | (259 | ) |
| Total | $ | 5,313 |
| | $ | 5,051 |
| | $ | 4,702 |
| | $ | 1,917 |
| | $ | 113 |
| | $ | 1,358 |
|
|
| | | | | | | | | | | |
| Revenue | |
| (in millions) | 2018 | 2017 | 2016 |
Ratings | $ | 2,883 |
| | $ | 2,988 |
| | $ | 2,535 |
|
Market Intelligence | 1,833 |
| | 1,683 |
| | 1,661 |
|
| Platts | 815 |
| | 774 |
| | 925 |
|
| Indices | 837 |
| | 728 |
| | 638 |
|
| Corporate | 15 |
| | — |
| | — |
|
Intersegment elimination 1 | (125 | ) | | (110 | ) | | (98 | ) |
| Total revenue | $ | 6,258 |
| | $ | 6,063 |
| | $ | 5,661 |
|
| | | | | | |
| Operating Profit | |
| (in millions) | 2018 | 2017 | 2016 |
Ratings 2 | $ | 1,530 |
| | $ | 1,517 |
| | $ | 1,256 |
|
Market Intelligence 3 | 545 |
| | 457 |
| | 729 |
|
Platts 4 | 383 |
| | 326 |
| | 1,090 |
|
Indices 5 | 563 |
| | 478 |
| | 413 |
|
| Total reportable segments | 3,021 |
| | 2,778 |
| | 3,488 |
|
Corporate Unallocated 6 | (231 | ) | | (195 | ) | | (147 | ) |
| Total operating profit | $ | 2,790 |
| | $ | 2,583 |
| | $ | 3,341 |
|
| |
1 | Revenue for S&P Ratings and expenses for S&P Capital IQ and SNLMarket Intelligence include an intersegment royalty charged to S&P Capital IQ and SNLMarket Intelligence for the rights to use and distribute content and data developed by S&P Ratings. |
| |
2 | TheOperating profit for the year ended December 31, 20152018 includes legal settlement expenses of $74 million and employee severance charges of $8 million. Operating profit for the year ended December 31, 2017 includes legal settlement expenses of $55 million and employee severance charges of $25 million. Operating profit for the year ended December 31, 2016 primarily includes a benefit related to net legal settlement insurance recoveries of $10 million and employee severance charges of $6 million. Additionally, operating profit includes amortization of intangibles from acquisitions of $2 million, $4 million $5 million for the years ended December 31, 2018, 2017 and 2016, respectively. |
| |
3 | Operating profit for the year ended December 31, 2018 includes restructuring charges related to a business disposition and employee severance charges of $7 million. Operating profit for the year ended December 31, 2017 includes employee severance charges of $7 million, and non-cash disposition-related adjustments of $4 million. Operating profit for the year ended December 31, 2016 includes a $373 million gain from our dispositions, disposition-related costs of $43 million, a technology-related impairment charge of $24 million and an acquisition-related cost of $1 million. Additionally, operating profit includes amortization of intangibles from acquisitions of $73 million, $71 million and $72 million for the years ended December 31, 2018, 2017 and 2016, respectively. |
| |
4 | Operating profit for the year ended December 31, 2017 includes non-cash acquisition-related adjustment of $11 million, a charge to exit a leased facility of $6 million, an asset write-off of $2 million, and employee severance charges of $2 million. Operating profit for the year ended December 31, 2016 includes a $728 million gain from our dispositions and disposition-related costs of $5 million. Additionally, Operating profit includes amortization of intangibles from acquisitions of $18 million for the years ended December 31, 2018 and 2017 and $14 million for the year ended December 31, 2016. |
| |
5 | Operating profit includes amortization of intangibles from acquisitions of $6 million for the years ended December 31, 2018, 2017 and 2016, respectively. |
| |
6 | Corporate Unallocated operating loss for the year ended December 31, 2018 includes Kensho retention related expense of $31 million, lease impairments of $11 million and employee severance charges of $10 million. Corporate Unallocated operating loss for the year ended December 31, 2017 includes a charge to the saleexit leased facilities of our interest in a legacy McGraw Hill Construction investment$19 million and costs related to identified operating efficiencies primarily related to restructuringemployee severance charges of $10 million. The year ended December 31, 20142016 includes restructuring charges$3 million from a disposition-related reserve release. Additionally, Corporate Unallocated operating loss includes amortization of $16 million. Theintangibles from acquisitions of $23 million for the year ended December 31, 2013 includes costs necessary to enable the separation of MHE and reduce our cost structure of $64 million, a $36 million non-cash impairment charge related to the sale of a data center and $13 million related to terminating various leases as we reduce our real estate portfolio.2018. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Depreciation & Amortization | | Capital Expenditures |
| | 2015 | 2014 | 2013 | | 2015 | 2014 | 2013 |
| S&P Ratings | $ | 43 |
| | $ | 43 |
| | $ | 45 |
| | $ | 48 |
| | $ | 33 |
| | $ | 40 |
|
| S&P Capital IQ and SNL | 70 |
| | 50 |
| | 49 |
| | 60 |
| | 38 |
| | 39 |
|
| S&P DJ Indices | 8 |
| | 7 |
| | 10 |
| | 4 |
| | 2 |
| | 4 |
|
| C&C | 29 |
| | 24 |
| | 22 |
| | 18 |
| | 11 |
| | 17 |
|
| Total operating segments | 150 |
| | 124 |
| | 126 |
| | 130 |
| | 84 |
| | 100 |
|
| Corporate | 7 |
| | 10 |
| | 11 |
| | 9 |
| | 8 |
| | 17 |
|
| Total | $ | 157 |
| | $ | 134 |
| | $ | 137 |
| | $ | 139 |
| | $ | 92 |
| | $ | 117 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Depreciation & Amortization | | Capital Expenditures |
| | 2018 | 2017 | 2016 | | 2018 | 2017 | 2016 |
| Ratings | $ | 32 |
| | $ | 34 |
| | $ | 34 |
| | $ | 42 |
| | $ | 45 |
| | $ | 42 |
|
| Market Intelligence | 99 |
| | 104 |
| | 105 |
| | 30 |
| | 37 |
| | 40 |
|
| Platts | 27 |
| | 25 |
| | 26 |
| | 9 |
| | 15 |
| | 17 |
|
| Indices | 9 |
| | 8 |
| | 8 |
| | 3 |
| | 3 |
| | 3 |
|
| Total reportable segments | 167 |
| | 171 |
| | 173 |
| | 84 |
| | 100 |
| | 102 |
|
| Corporate | 39 |
| | 9 |
| | 8 |
| | 29 |
| | 23 |
| | 13 |
|
| Total | $ | 206 |
| | $ | 180 |
| | $ | 181 |
| | $ | 113 |
| | $ | 123 |
| | $ | 115 |
|
Segment information as of December 31 is as follows:
|
| | | | | | | |
| (in millions) | Total Assets |
| | 2015 | | 2014 |
| S&P Ratings | $ | 620 |
| | $ | 624 |
|
| S&P Capital IQ and SNL | 3,405 |
| | 1,011 |
|
| S&P DJ Indices | 1,181 |
| | 1,166 |
|
| C&C | 606 |
| | 918 |
|
| Total operating segments | 5,812 |
| | 3,719 |
|
Corporate 1 | 1,868 |
| | 3,054 |
|
Assets of a business held for sale 2 | 503 |
| | — |
|
| Total | $ | 8,183 |
| | $ | 6,773 |
|
|
| | | | | | | |
| (in millions) | Total Assets |
| | 2018 | | 2017 |
| Ratings | $ | 680 |
| | $ | 788 |
|
| Market Intelligence | 3,606 |
| | 3,381 |
|
| Platts | 787 |
| | 791 |
|
| Indices | 1,443 |
| | 1,270 |
|
| Total reportable segments | 6,516 |
| | 6,230 |
|
Corporate 1 | 2,928 |
| | 3,190 |
|
Assets held for sale 2 | 14 |
| | 5 |
|
| Total | $ | 9,458 |
| | $ | 9,425 |
|
| |
1 | Corporate assets consist principally of cash and cash equivalents, goodwill and other intangible assets, assets for pension benefits, deferred income taxes and leasehold improvements related to subleased areas. |
| |
2 | Includes J.D. PowerEast Windsor and New Jersey facility as of December 31, 2015.2018 and 2017, respectively. |
We have operations with foreign revenue and long-lived assets in approximately 90 countries. We do not have operations in any foreign country that represent more than 8% of our consolidated revenue. Transfers between geographic areas are recorded at agreed upon prices and intercompany revenue and profit are eliminated. No single customer accounted for more than 10% of our consolidated revenue.
The following provides revenue and long-lived assets by geographic region:
| | | (in millions) | Revenue | | Long-lived Assets | Revenue | | Long-lived Assets |
| | Years ended December 31, | | December 31, | Year ended December 31, | | December 31, |
| | 2015 | | 2014 | | 2013 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | 2018 | | 2017 |
| U.S. | $ | 3,202 |
| | $ | 2,911 |
| | $ | 2,723 |
| | $ | 4,198 |
| | $ | 2,117 |
| $ | 3,750 |
| | $ | 3,658 |
| | $ | 3,461 |
| | $ | 5,019 |
| | $ | 4,285 |
|
| European region | 1,265 |
| | 1,316 |
| | 1,226 |
| | 419 |
| | 430 |
| 1,543 |
| | 1,473 |
| | 1,330 |
| | 317 |
| | 346 |
|
| Asia | 566 |
| | 528 |
| | 483 |
| | 63 |
| | 54 |
| 647 |
| | 594 |
| | 575 |
| | 51 |
| | 54 |
|
| Rest of the world | 280 |
| | 296 |
| | 270 |
| | 50 |
| | 64 |
| 318 |
| | 338 |
| | 295 |
| | 42 |
| | 49 |
|
| Total | $ | 5,313 |
| | $ | 5,051 |
| | $ | 4,702 |
| | $ | 4,730 |
| | $ | 2,665 |
| $ | 6,258 |
| | $ | 6,063 |
| | $ | 5,661 |
| | $ | 5,429 |
| | $ | 4,734 |
|
| | | | Revenue | | Long-lived Assets | Revenue | | Long-lived Assets |
| | Years ended December 31, | | December 31, | Year ended December 31, | | December 31, |
| | 2015 | | 2014 | | 2013 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | 2018 | | 2017 |
| U.S. | 60 | % | | 58 | % | | 58 | % | | 89 | % | | 80 | % | 60 | % | | 60 | % | | 61 | % | | 92 | % | | 91 | % |
| European region | 24 |
| | 26 |
| | 26 |
| | 9 |
| | 16 |
| 25 |
| | 24 |
| | 24 |
| | 6 |
| | 7 |
|
| Asia | 11 |
| | 10 |
| | 10 |
| | 1 |
| | 2 |
| 10 |
| | 10 |
| | 10 |
| | 1 |
| | 1 |
|
| Rest of the world | 5 |
| | 6 |
| | 6 |
| | 1 |
| | 2 |
| 5 |
| | 6 |
| | 5 |
| | 1 |
| | 1 |
|
| Total | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
See Note 2 – Acquisitions and Divestitures and Note 1011 – Restructuring, for actions that impacted the segment operating results.
12.13. Commitments and Contingencies
Related Party Agreement
In March of 2018, the Company made a $20 million contribution to the S&P Global Foundation.
In June of 2012, we entered into a license agreement (the "License Agreement") with the holder of S&P Dow Jones Indices LLC noncontrolling interest, CME Group, which replaced the 2005 license agreement between Indices and CME Group. Under the terms of the License Agreement, S&P Dow Jones Indices LLC receives a share of the profits from the trading and clearing of CME Group's equity index products. During the years ended December 31, 2018, 2017 and 2016, S&P Dow Jones Indices LLC earned $121 million, $74 million and $76 million of revenue under the terms of the License Agreement, respectively. The entire amount of this revenue is included in our consolidated statement of income and the portion related to the 27% noncontrolling interest is removed in net income attributable to noncontrolling interests.
Rental Expense and Lease Obligations
We are committed under lease arrangements covering property, computer systems and office equipment. Leasehold improvements are amortized on a straight-line basis over the shorter of their economic lives or their lease term. Certain lease arrangements contain escalation clauses covering increased costs for various defined real estate taxes and operating services and the associated fees are recognized on a straight-line basis over the minimum lease period.
Rental expense for property and equipment under all operating lease agreements is as follows:
|
| | | | | | | | | | | |
| (in millions) | Years ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Gross rental expense | $ | 182 |
| | $ | 199 |
| | $ | 202 |
|
| Less: sublease revenue | (14 | ) | | (16 | ) | | (29 | ) |
| Less: Rock-McGraw rent credit | (4 | ) | | (23 | ) | | (20 | ) |
| Net rental expense | $ | 164 |
| | $ | 160 |
| | $ | 153 |
|
In December of 2003, we sold our 45% equity investment in Rock-McGraw, Inc., which owned our then headquarters building in New York City, and remained an anchor tenant by concurrently leasing back space from the buyer through 2020. Proceeds from the disposition were $382 million and the sale resulted in a pre-tax gain, net of transaction costs, of $131 million ($58 million after-tax) upon disposition. As a result of the amount of building space we retained through our leaseback, a pre-tax gain of $212 million ($126 million after-tax) was deferred upon the disposition in 2003. In December of 2013, we entered into an arrangement with the buyer to shorten the lease to December of 2015 in exchange for approximately $60 million which was recorded as a reduction to the unrecognized deferred gain from the sale. The remaining gain was amortized over the remaining lease term as a reduction in rent expense. The amount of gain recognized for the years ended December 31, 2015, 2014 and 2013 was $4 million, $21 million and $15 million, respectively. The lease terminated in December of 2015. |
| | | | | | | | | | | |
| (in millions) | Year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Gross rental expense | $ | 172 |
| | $ | 177 |
| | $ | 179 |
|
| Less: sublease revenue | (17 | ) | | (17 | ) | | (16 | ) |
| Net rental expense | $ | 155 |
| | $ | 160 |
| | $ | 163 |
|
Cash amounts for future minimum rental commitments including rent payments on the sale-leaseback, under existing non-cancelable leases with a remaining term of more than one year, along with minimum sublease rental income to be received under non-cancelable subleases are shown in the following table.
| | | (in millions) | Rent commitment | | Sublease income | | Net rent | Rent commitment | | Sublease income | | Net rent |
| 2016 | $ | 136 |
| | $ | (14 | ) | | $ | 122 |
| |
| 2017 | 120 |
| | (13 | ) | | 107 |
| |
| 2018 | 109 |
| | (13 | ) | | 96 |
| |
| 2019 | 101 |
| | (13 | ) | | 88 |
| $ | 130 |
| | $ | (17 | ) | | $ | 113 |
|
| 2020 | 49 |
| | (2 | ) | | 47 |
| 102 |
| | (3 | ) | | 99 |
|
| 2021 and beyond | 162 |
| | — |
| | 162 |
| |
| 2021 | | 85 |
| | — |
| | 85 |
|
| 2022 | | 75 |
| | — |
| | 75 |
|
| 2023 | | 67 |
| | — |
| | 67 |
|
| 2024 and beyond | | 400 |
| | — |
| | 400 |
|
| Total | $ | 677 |
| | $ | (55 | ) | | $ | 622 |
| $ | 859 |
| | $ | (20 | ) | | $ | 839 |
|
Legal & Regulatory Matters
In the normal course of business both in the United States and abroad, the Company its subsidiary Standard & Poor’s Financial Services LLC (“S&P LLC”) and some of its other subsidiaries are defendants in numerousa number of legal proceedings and are often the subject of government and regulatory proceedings, investigations and inquiries. Many of these proceedings, investigations and inquiries relate to the ratings activity of S&P Global Ratings brought by issuers and alleged purchasers of rated securities. In addition, various government and self-regulatory agencies frequently make inquiries and conduct investigations into our compliance with applicable laws and regulations, including those related to ratings activities and antitrust matters. For example, as a nationally recognized statistical rating organization registered with the SEC under Section 15E of the Securities Exchange Act of 1934, S&P Global Ratings is in ongoing communication with the staff of the SEC regarding compliance with its extensive obligations under the federal securities laws. Although S&P Global Ratings seeks to promptly address any compliance issues that it detects or that the staff of the SEC raises, there can be no assurance that the SEC will not seek remedies
against S&P Global Ratings for one or more compliance deficiencies. Any of these proceedings, investigations or inquiries could ultimately result in adverse judgments, damages, fines, penalties or activity restrictions, which could adversely impact our consolidated financial condition, cash flows, business or competitive position.
The Company believes that it has meritorious defenses to the pending claims and potential claims in the matters described below and is diligently pursuing these defenses, and in some cases working to reach an acceptable negotiated resolution. However, in
In view of the uncertainty inherent in litigation and government and regulatory enforcement matters, we cannot predict the eventual outcome of thesesuch matters or the timing of their resolution, or in most cases reasonably estimate what the eventual judgments, damages, fines, penalties or impact of activity (if any) restrictions may be. As a result, we cannot provide assurance that the outcome of the matters described belowsuch outcomes will not have a material adverse effect on our consolidated financial condition, cash flows, business or competitive position. As litigation or the process to resolve pending matters progresses, as the case may be, we will continue to review the latest information available and assess our ability to predict the outcome of such matters and the effects, if any, on our consolidated financial condition, cash flows, business andor competitive position, which may require that we record liabilities in the consolidated financial statements in future periods.
S&P Global Ratings
Financial Crisis Litigation
TheIn the second quarter the Company and its subsidiaries continueentered into an agreement to defendsettle certain civil cases brought by private and public plaintiffs arising out of ratings activities prior to and during the global financial crisis of 2008-2009. Discovery in these cases is ongoing. We can provide no assurance that we will not be obligated to pay significant amounts in order to resolve these matters on terms deemed acceptable. At this time, however, we are unable to reasonably estimate the range of such additional amounts, if any.
U.S. Securities and Exchange Commission
As a nationally recognized statistical rating organization registered with the SEC under Section 15E of the Securities Exchange Act of 1934, S&P Ratings is in ongoing communication with the staff of the SEC regarding compliance with its extensive obligations under the federal securities laws. Although S&P Ratings seeks to promptly address any compliance issues that it detects or that the staff of the SEC raises, there can be no assurance that the SEC will not seek remedies against S&P Ratings for one or more compliance deficiencies.
Trani Prosecutorial Proceeding
The prosecutor in the Italian city of Trani has obtained criminal indictments against several current and former S&P Ratings managers and ratings analysts for alleged market manipulation, and against Standard & Poor’s Credit Market Services Europe under Italy’s vicarious liability statute, for having allegedly failed to properly supervise the ratings analysts and prevent them from committing market manipulation. The prosecutor’s theories are based on various actions by S&P Ratings taken with respect to Italian sovereign debt between May of 2011 and January of 2012. Trial commenced on February 4, 2015 and is ongoing. Apart from criminal penalties that might be imposed following a conviction, such conviction could also lead to civil damages claims and other sanctions against Standard & Poor's Credit Market Services Europe or the Company. Such claims and sanctions cannot be quantified at this stage.
Shareholder Derivative Actions
On August 3, 2015, two purported shareholders commenced a putative derivative action on behalf of the Company in New York State Supreme Court titled Retirement Plan for General Employees of the City of North Miami Beach and Robin Stein v. Harold McGraw III, et al. The complaint asserts claims for, inter alia, breach of fiduciary duty, waste of corporate assets, and mismanagement against the board of directors, certain former directors of the Company, and three former S&P Ratings employees. Plaintiffs seek recovery from the defendants based on allegations that S&P Ratings’ credit ratings practices for certain residential mortgage-backed securities and collateralized debt obligations misrepresented the credit risks of those securities, allegedly resulting in losses to the Company. The Company and the individual defendants filed motions to dismiss the complaint on October 9, 2015. Plaintiffs filed an opposition on December 8, 2015, and the Company and the individual defendants filed their reply on January 8, 2016. The court has scheduled oral argument on the motions to dismiss for April 22, 2016.
On January 28, 2016, a different purported shareholder commenced a separate putative derivative action on behalf of the Company in New York State Supreme Court titled L.A. Grika v. Harold McGraw III, et al. The allegations in the complaint are substantially similar to those in the North Miami Beach matter described above. The complaint asserts claims for, inter alia, breach of fiduciary duty, aiding and abetting breaches of fiduciary duty, unjust enrichment, contribution and indemnification against Harold McGraw III, Douglas L. Peterson, and nine former S&P Ratings employees. The Company is reviewing the plaintiff’s complaint and intends to vigorously defend this matter.
The City of Swan
Australian government municipal councils filed suitAustralia against the Company and S&P International LLC in a representative action in Aprilcertain of 2013 in connection withits subsidiaries relating to alleged investment losses in eight synthetic collateralized debt obligations (“CDOs”) rated by S&P Global Ratings. These same CDOs were at issue in an earlier lawsuit brought by the plaintiffs against its investment advisor, Lehman Brothers Australia (“LBA”), in which the plaintiffs secured a judgment against LBA, which is now in liquidation. The plaintiffs claim total losses of AUD$327 million from these investments and are seeking recovery from both LBA and the Company. The trial in the matter has been re-scheduled from October of 2015 to August of 2016. The Company and the plaintiffs are currently engaged in settlement discussions. The Company has established a reserve for potential settlement in an amount deemed adequate by management based on the facts and circumstances of the case. We can provide no assurance that the Company will not incur amounts in excess of amounts accrued to settle this matter on terms deemed acceptable. At this point, however, we are unable to reasonably estimate the range of such additional amounts, if any.
Commodities & Commercial Markets
McGraw Hill Construction
Under the terms of an asset purchase agreement with Skyline HoldCo LLC (“Skyline”) related to Skyline’s purchase of the McGraw Hill Construction business from the Company in November 2014, the Company agreed to retain liability with respect to the litigation captioned, Reed Construction Data Inc. v. The McGraw-Hill Companies, Inc. et al., 09 Civ. 8578 (JPO), in the United States District Court for the Southern District of New York, and any action instituted at any time by the parties thereto arising from substantially the same set of facts and circumstances.
Reed Construction Data filed this action in the U.S. District Court for the Southern District of New York in October of 2009, asserting a number of claims under various state and federal laws against the Company relating to alleged misappropriation and unfair competition by McGraw Hill Construction and seeking an unspecified amount of damages. In September of 2010, the Court granted the Company’s motion to dismiss some of the claims. In September of 2014, the Court granted summary judgment to the Company on all of Reed’s remaining claims with the exception of the unfair competition claim. In October of 2014, the parties submitted a joint stipulation to the Court agreeing to dismiss both Reed’s unfair competition claim and the Company’s counterclaims without prejudice to reinstatement in the event of a successful appeal of Reed’s dismissed claims. On January 7, 2016, the Second Circuit Court of Appeals affirmed the District Court’s grant of summary judgment.
| |
13. | Related Party Transactions |
On July 31, 2014, we completed the sale of the Company's aircraft to Harold W. McGraw III, then Chairman of the Company's Board of Directors and former President and CEO of the Company ("Mr. McGraw") for a purchase price of $20 million, which is modestly higher than the independent appraisal obtained. This transaction was approved by the Nominating and Corporate Governance Committee of the Company's Board of Directors after consultation with members of the Financial Policy Committee. During the second quarter of 2014, we recorded a non-cash impairment charge of $6 million within other (income) losscourt in our consolidated statement of income as a result of the pending sale.August 2018.
On June 25, 2014, we repurchased 0.5 million shares of the Company's common stock from the personal holdings of Mr. McGraw. The shares were purchased at a discount of 0.35% from the June 24, 2014 New York Stock Exchange closing price pursuant to a
private transaction with Mr. McGraw. We repurchased these shares with cash for $41 million at an average price of $82.66 per share. This transaction was approved by the Nominating and Corporate Governance Committee of the Company's Board of Directors after consultation with members of the Financial Policy Committee.
In June of 2012, we entered into a new license agreement (the "License Agreement") with the holder of S&P Dow Jones Indices LLC noncontrolling interest, CME Group, which replaced the 2005 license agreement between S&P DJ Indices and CME Group. Under the terms of the License Agreement, S&P Dow Jones Indices LLC receives a share of the profits from the trading and clearing of CME Group's equity index products. During the years ended December 31, 2015, 2014 and 2013, S&P Dow Jones Indices LLC earned $63 million, $52 million and $46 million of revenue under the terms of the License Agreement, respectively. The entire amount of this revenue is included in our consolidated statement of income and the portion related to the 27% noncontrolling interest is removed in net income attributable to noncontrolling interests.
14. Quarterly Financial Information (Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| (in millions, except per share data) | First quarter | | Second quarter | | Third quarter | | Fourth quarter | | Total year |
| 2015 | | | | | | | | | |
| Revenue | $ | 1,273 |
|
| $ | 1,342 |
|
| $ | 1,324 |
| | $ | 1,374 |
|
| $ | 5,313 |
|
| Operating profit | $ | 501 |
| | $ | 582 |
| | $ | 410 |
| | $ | 424 |
| | $ | 1,917 |
|
| Income from continuing operations | $ | 329 |
|
| $ | 381 |
|
| $ | 281 |
| | $ | 276 |
|
| $ | 1,268 |
|
| Net income | $ | 329 |
|
| $ | 381 |
|
| $ | 281 |
| | $ | 276 |
|
| $ | 1,268 |
|
| Net income attributable to McGraw Hill Financial common shareholders: | | | | | | | | | |
| Income from continuing operations | $ | 303 |
|
| $ | 353 |
|
| $ | 252 |
| | $ | 248 |
|
| $ | 1,156 |
|
| Net income | $ | 303 |
|
| $ | 353 |
|
| $ | 252 |
|
| $ | 248 |
|
| $ | 1,156 |
|
| | | | | | | | | | |
| Earnings per share attributable to McGraw Hill Financial, Inc. common shareholders: | | | | | | | | | |
| Income from continuing operations: | | | | | | | | | |
| Basic | $ | 1.11 |
|
| $ | 1.29 |
|
| $ | 0.93 |
|
| $ | 0.92 |
|
| $ | 4.26 |
|
| Diluted | $ | 1.10 |
|
| $ | 1.28 |
|
| $ | 0.92 |
|
| $ | 0.91 |
|
| $ | 4.21 |
|
| Net income: | | | | | | | | | |
| Basic | $ | 1.11 |
|
| $ | 1.29 |
|
| $ | 0.93 |
|
| $ | 0.92 |
|
| $ | 4.26 |
|
| Diluted | $ | 1.10 |
|
| $ | 1.28 |
|
| $ | 0.92 |
|
| $ | 0.91 |
|
| $ | 4.21 |
|
| | | | | | | | | | |
| 2014 | | | | | | | | | |
| Revenue | $ | 1,196 |
|
| $ | 1,302 |
|
| $ | 1,263 |
| | $ | 1,290 |
|
| $ | 5,051 |
|
| Operating profit (loss) | $ | 420 |
| | $ | 476 |
| | $ | 366 |
| | $ | (1,148 | ) | | $ | 113 |
|
| Income (loss) from continuing operations | $ | 268 |
|
| $ | 310 |
|
| $ | 215 |
|
| $ | (984 | ) |
| $ | (191 | ) |
| Income from discontinued operations | $ | 7 |
|
| $ | 6 |
|
| $ | 2 |
|
| $ | 163 |
|
| $ | 178 |
|
| Net income (loss) | $ | 275 |
|
| $ | 316 |
|
| $ | 217 |
|
| $ | (821 | ) |
| $ | (13 | ) |
| Net income attributable to McGraw Hill Financial common shareholders: | | | | | | | | | |
| Income (loss) from continuing operations | $ | 241 |
|
| $ | 286 |
|
| $ | 188 |
| | $ | (1,009 | ) | | $ | (293 | ) |
| Income from discontinued operations | 7 |
|
| 6 |
|
| 2 |
| | 163 |
| | 178 |
|
| Net income (loss) | $ | 248 |
|
| $ | 292 |
|
| $ | 190 |
|
| $ | (846 | ) |
| $ | (115 | ) |
| | | | | | | | | | |
| Earnings (loss) per share attributable to McGraw Hill Financial, Inc. common shareholders: | | | | | | | | | |
| Income (loss) from continuing operations: | | | | | | | | | |
| Basic | $ | 0.89 |
|
| $ | 1.05 |
|
| $ | 0.69 |
|
| $ | (3.71 | ) |
| $ | (1.08 | ) |
| Diluted | $ | 0.87 |
|
| $ | 1.04 |
|
| $ | 0.68 |
|
| $ | (3.71 | ) |
| $ | (1.08 | ) |
| Income from discontinued operations: | | | | | | | | | |
| Basic | $ | 0.02 |
|
| $ | 0.02 |
|
| $ | 0.01 |
|
| $ | 0.60 |
|
| $ | 0.66 |
|
| Diluted | $ | 0.02 |
|
| $ | 0.02 |
|
| $ | 0.01 |
|
| $ | 0.60 |
|
| $ | 0.66 |
|
| Net income (loss): | | | | | | | | | |
| Basic | $ | 0.91 |
|
| $ | 1.08 |
|
| $ | 0.70 |
|
| $ | (3.11 | ) |
| $ | (0.42 | ) |
| Diluted | $ | 0.89 |
|
| $ | 1.06 |
|
| $ | 0.69 |
|
| $ | (3.11 | ) |
| $ | (0.42 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| (in millions, except per share data) | First quarter | | Second quarter | | Third quarter | | Fourth quarter | | Total year |
| 2018 | | | | | | | | | |
| Revenue | $ | 1,567 |
|
| $ | 1,609 |
|
| $ | 1,546 |
| | $ | 1,536 |
|
| $ | 6,258 |
|
| Operating profit | $ | 711 |
| | $ | 672 |
| | $ | 704 |
| | $ | 704 |
| | $ | 2,790 |
|
| Net income | $ | 534 |
|
| $ | 501 |
|
| $ | 535 |
| | $ | 551 |
|
| $ | 2,121 |
|
| Net income attributable to S&P Global common shareholders | $ | 491 |
|
| $ | 461 |
|
| $ | 495 |
|
| $ | 512 |
|
| $ | 1,958 |
|
| | | | | | | | | | |
| Earnings per share attributable to S&P Global Inc. common shareholders: | | | | | | | | | |
| Net income: | | | | | | | | | |
| Basic | $ | 1.94 |
|
| $ | 1.83 |
|
| $ | 1.97 |
|
| $ | 2.06 |
|
| $ | 7.80 |
|
| Diluted | $ | 1.93 |
|
| $ | 1.82 |
|
| $ | 1.95 |
|
| $ | 2.03 |
|
| $ | 7.73 |
|
| | | | | | | | | | |
| 2017 | | | | | | | | | |
| Revenue | $ | 1,453 |
|
| $ | 1,509 |
|
| $ | 1,513 |
| | $ | 1,589 |
|
| $ | 6,063 |
|
| Operating profit | $ | 639 |
| | $ | 668 |
| | $ | 649 |
| | $ | 627 |
| | $ | 2,583 |
|
| Net income | $ | 430 |
|
| $ | 457 |
|
| $ | 452 |
|
| $ | 299 |
|
| $ | 1,638 |
|
| Net income attributable to S&P Global common shareholders | $ | 399 |
|
| $ | 421 |
|
| $ | 414 |
|
| $ | 263 |
|
| $ | 1,496 |
|
| | | | | | | | | | |
| Earnings per share attributable to S&P Global Inc. common shareholders: | | | | | | | | | |
Net income:
| | | | | | | | | |
| Basic | $ | 1.54 |
| | $ | 1.63 |
| | $ | 1.62 |
| | 1.03 |
| | 5.84 |
|
| Diluted | $ | 1.53 |
| | $ | 1.62 |
| | $ | 1.61 |
| | 1.02 |
| | 5.78 |
|
Note - Totals presented may not sum due to rounding.
15. Condensed Consolidating Financial Statements
On May 17, 2018, we issued $500 million of 4.5% notes due in 2048. On September 22, 2016, we issued $500 million of 2.95% senior notes due in 2027. On May 26, 2015, we issued $700 million of 4.0% senior notes due in 2025. On August 18, 2015, we issued $2.0 billion of senior notes, consisting of $400 million of 2.5% senior notes due in 2018, $700 million of 3.3% senior notes due in 2020 and $900 million of 4.4% senior notes due in 2026. See Note 5 —Debt for additional information.
The senior notes described above are fully and unconditionally guaranteed by Standard & Poor's Financial Services LLC, a 100% owned subsidiary of the Company. The following condensed consolidating financial statements present the results of operations, financial position and cash flows of McGraw Hill Financial,S&P Global Inc., Standard & Poor's Financial Services LLC, and the Non-Guarantor Subsidiaries of McGraw Hill Financial,S&P Global Inc. and Standard & Poor's Financial Services LLC, and the eliminations necessary to arrive at the information for the Company on a consolidated basis.
| | | | Statement of Income | Statement of Income |
| | Year Ended December 31, 2015 | Year Ended December 31, 2018 |
| (in millions) | McGraw Hill Financial, Inc. | | Standard & Poor's Financial Services LLC | | Non-Guarantor Subsidiaries | | Eliminations | | McGraw Hill Financial Inc. Consolidated | S&P Global Inc. | | Standard & Poor's Financial Services LLC | | Non-Guarantor Subsidiaries | | Eliminations | | S&P Global Inc. Consolidated |
| Revenue | $ | 624 |
| | $ | 2,141 |
| | $ | 2,663 |
| | $ | (115 | ) | | $ | 5,313 |
| $ | 776 |
| | $ | 1,695 |
| | $ | 3,940 |
| | $ | (153 | ) | | $ | 6,258 |
|
| Expenses: | | | | | | | | | | | | | | | | | | |
| Operating-related expenses | 73 |
| | 522 |
| | 1,192 |
| | (115 | ) | | 1,672 |
| 127 |
| | 434 |
| | 1,293 |
| | (153 | ) | | 1,701 |
|
| Selling and general expenses | 248 |
| | 469 |
| | 861 |
| | — |
| | 1,578 |
| 183 |
| | 292 |
| | 1,086 |
| | — |
| | 1,561 |
|
| Depreciation | 40 |
| | 18 |
| | 32 |
| | — |
| | 90 |
| 37 |
| | 7 |
| | 40 |
| | — |
| | 84 |
|
| Amortization of intangibles | — |
| | — |
| | 67 |
| | — |
| | 67 |
| — |
| | — |
| | 122 |
| | — |
| | 122 |
|
| Total expenses | 361 |
| | 1,009 |
| | 2,152 |
| | (115 | ) | | 3,407 |
| 347 |
| | 733 |
| | 2,541 |
| | (153 | ) | | 3,468 |
|
| Other income | — |
| | — |
| | (11 | ) | | — |
| | (11 | ) | |
| Operating profit | 263 |
| | 1,132 |
| | 522 |
| | — |
| | 1,917 |
| 429 |
| | 962 |
| | 1,399 |
| | — |
| | 2,790 |
|
| Other income, net | | (27 | ) | | — |
| | 2 |
| | — |
| | (25 | ) |
| Interest expense (income), net | 112 |
| | — |
| | (10 | ) | | — |
| | 102 |
| 143 |
| | 2 |
| | (11 | ) | | — |
| | 134 |
|
| Non-operating intercompany transactions | 282 |
| | 222 |
| | (504 | ) | | — |
| | — |
| 363 |
| | (75 | ) | | (1,872 | ) | | 1,584 |
| | — |
|
| (Loss) income from continuing operations before taxes on income | (131 | ) | | 910 |
| | 1,036 |
| | — |
| | 1,815 |
| |
| (Benefit) provision for taxes on income | (107 | ) | | 358 |
| | 296 |
| | — |
| | 547 |
| |
| (Loss) income before taxes on income | | (50 | ) | | 1,035 |
| | 3,280 |
| | (1,584 | ) | | 2,681 |
|
| (Benefit) Provision for taxes on income | | (14 | ) | | 250 |
| | 324 |
| | — |
| | 560 |
|
| Equity in net income of subsidiaries | 1,473 |
| | 272 |
| | — |
| | (1,745 | ) | | — |
| 3,576 |
| | (1 | ) | | — |
| | (3,575 | ) | | — |
|
| Net income | 1,449 |
| | 824 |
| | 740 |
| | (1,745 | ) | | 1,268 |
| 3,540 |
| | 784 |
| | 2,956 |
| | (5,159 | ) | | 2,121 |
|
| Less: net income from continuing operations attributable to noncontrolling interests | — |
| | — |
| | — |
| | (112 | ) | | (112 | ) | |
| Net income attributable to McGraw Hill Financial, Inc. | $ | 1,449 |
| | $ | 824 |
| | $ | 740 |
| | $ | (1,857 | ) | | $ | 1,156 |
| |
| Less: net income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | (163 | ) | | (163 | ) |
| Net income attributable to S&P Global Inc. | | $ | 3,540 |
| | $ | 784 |
| | $ | 2,956 |
| | $ | (5,322 | ) | | $ | 1,958 |
|
| Comprehensive income | $ | 1,446 |
| | $ | 822 |
| | $ | 655 |
| | $ | (1,741 | ) | | $ | 1,182 |
| $ | 3,510 |
| | $ | 783 |
| | $ | 2,884 |
| | $ | (5,159 | ) | | $ | 2,018 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Statement of Income |
| | Year Ended December 31, 2017 |
| (in millions) | S&P Global Inc. | | Standard & Poor's Financial Services LLC | | Non-Guarantor Subsidiaries | | Eliminations | | S&P Global Inc. Consolidated |
| Revenue | $ | 717 |
| | $ | 1,780 |
| | $ | 3,704 |
| | $ | (138 | ) | | $ | 6,063 |
|
| Expenses: | | | | | | | | | |
| Operating-related expenses | 90 |
| | 482 |
| | 1,261 |
| | (138 | ) | | 1,695 |
|
| Selling and general expenses | 196 |
| | 345 |
| | 1,064 |
| | — |
| | 1,605 |
|
| Depreciation | 31 |
| | 11 |
| | 40 |
| | — |
| | 82 |
|
| Amortization of intangibles | — |
| | — |
| | 98 |
| | — |
| | 98 |
|
| Total expenses | 317 |
| | 838 |
| | 2,463 |
| | (138 | ) | | 3,480 |
|
| Operating profit | 400 |
| | 942 |
| | 1,241 |
| | — |
| | 2,583 |
|
| Other income, net | (16 | ) | | — |
| | (11 | ) | | — |
| | (27 | ) |
| Interest expense (income), net | 163 |
| | — |
| | (14 | ) | | — |
| | 149 |
|
| Non-operating intercompany transactions | 365 |
| | (77 | ) | | (2,463 | ) | | 2,175 |
| | — |
|
| (Loss) income before taxes on income | (112 | ) | | 1,019 |
| | 3,729 |
| | (2,175 | ) | | 2,461 |
|
| Provision for taxes on income | 26 |
| | 370 |
| | 427 |
| | — |
| | 823 |
|
| Equity in net income of subsidiaries | 3,808 |
| | — |
| | — |
| | (3,808 | ) | | — |
|
| Net income | 3,670 |
| | 649 |
| | 3,302 |
| | (5,983 | ) | | 1,638 |
|
| Less: net income attributable to noncontrolling interests | — |
| | — |
| | — |
| | (142 | ) | | (142 | ) |
| Net income attributable to S&P Global Inc. | $ | 3,670 |
| | $ | 649 |
| | $ | 3,302 |
| | $ | (6,125 | ) | | $ | 1,496 |
|
| Comprehensive income | $ | 3,694 |
| | $ | 649 |
| | $ | 3,401 |
| | $ | (5,982 | ) | | $ | 1,762 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Statement of Income |
| | Year Ended December 31, 2016 |
| (in millions) | S&P Global Inc. | | Standard & Poor's Financial Services LLC | | Non-Guarantor Subsidiaries | | Eliminations | | S&P Global Inc. Consolidated |
| Revenue | $ | 667 |
| | $ | 1,513 |
| | $ | 3,607 |
| | $ | (126 | ) | | $ | 5,661 |
|
| Expenses: | | | | | | | | | |
| Operating-related expenses | 114 |
| | 451 |
| | 1,334 |
| | (126 | ) | | 1,773 |
|
| Selling and general expenses | 128 |
| | 243 |
| | 1,096 |
| | — |
| | 1,467 |
|
| Depreciation | 38 |
| | 9 |
| | 38 |
| | — |
| | 85 |
|
| Amortization of intangibles | — |
| | — |
| | 96 |
| | — |
| | 96 |
|
| Total expenses | 280 |
| | 703 |
| | 2,564 |
| | (126 | ) | | 3,421 |
|
| Gain on disposition | (1,072 | ) | | — |
| | (29 | ) | | — |
| | (1,101 | ) |
| Operating profit | 1,459 |
| | 810 |
| | 1,072 |
| | — |
| | 3,341 |
|
| Other income, net | (20 | ) | | — |
| | (8 | ) | | — |
| | (28 | ) |
| Interest expense (income), net | 191 |
| | — |
| | (10 | ) | | — |
| | 181 |
|
| Non-operating intercompany transactions | 356 |
| | (83 | ) | | (941 | ) | | 668 |
| | — |
|
| Income before taxes on income | 932 |
| | 893 |
| | 2,031 |
| | (668 | ) | | 3,188 |
|
| Provision for taxes on income | 275 |
| | 420 |
| | 265 |
| | — |
| | 960 |
|
| Equity in net income of subsidiaries | 2,412 |
| | 294 |
| | — |
| | (2,706 | ) | | — |
|
| Net income | 3,069 |
| | 767 |
| | 1,766 |
| | (3,374 | ) | | 2,228 |
|
| Less: net income attributable to noncontrolling interests | — |
| | — |
| | — |
| | (122 | ) | | (122 | ) |
| Net income attributable to S&P Global Inc. | $ | 3,069 |
| | $ | 767 |
| | $ | 1,766 |
| | $ | (3,496 | ) | | $ | 2,106 |
|
| Comprehensive income | $ | 3,099 |
| | $ | 767 |
| | $ | 1,563 |
| | $ | (3,374 | ) | | $ | 2,055 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Balance Sheet |
| | December 31, 2018 |
| (in millions) | S&P Global Inc. | | Standard & Poor's Financial Services LLC | | Non-Guarantor Subsidiaries | | Eliminations | | S&P Global Inc. Consolidated |
| ASSETS | | | | | | | | | |
| Current assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 694 |
| | $ | — |
| | $ | 1,223 |
| | $ | — |
| | $ | 1,917 |
|
| Restricted cash | — |
| | — |
| | 41 |
| | — |
| | 41 |
|
| Accounts receivable, net of allowance for doubtful accounts | 163 |
| | 109 |
| | 1,177 |
| | — |
| | 1,449 |
|
| Intercompany receivable | 550 |
| | 2,138 |
| | 2,873 |
| | (5,561 | ) | | — |
|
| Prepaid and other current assets | 58 |
| | 3 |
| | 136 |
| | — |
| | 197 |
|
| Total current assets | 1,465 |
| | 2,250 |
| | 5,450 |
| | (5,561 | ) | | 3,604 |
|
| Property and equipment, net of accumulated depreciation | 192 |
| | — |
| | 78 |
| | — |
| | 270 |
|
| Goodwill | 261 |
| | — |
| | 3,265 |
| | 9 |
| | 3,535 |
|
| Other intangible assets, net | — |
| | — |
| | 1,524 |
| | — |
| | 1,524 |
|
| Investments in subsidiaries | 8,599 |
| | 6 |
| | 8,030 |
| | (16,635 | ) | | — |
|
| Intercompany loans receivable | 130 |
| | — |
| | 1,643 |
| | (1,773 | ) | | — |
|
| Other non-current assets | 194 |
| | 45 |
| | 286 |
| | — |
| | 525 |
|
| Total assets | $ | 10,841 |
| | $ | 2,301 |
| | $ | 20,276 |
| | $ | (23,960 | ) | | $ | 9,458 |
|
| LIABILITIES AND EQUITY | | | | | | | | | |
| Current liabilities: | | | | | | | | | |
| Accounts payable | $ | 89 |
| | $ | 15 |
| | $ | 107 |
| | $ | — |
| | $ | 211 |
|
| Intercompany payable | 4,453 |
| | 32 |
| | 1,076 |
| | (5,561 | ) | | — |
|
| Accrued compensation and contributions to retirement plans | 125 |
| | 33 |
| | 196 |
| | — |
| | 354 |
|
| Income taxes currently payable | 1 |
| | — |
| | 71 |
| | — |
| | 72 |
|
| Unearned revenue | 240 |
| | 235 |
| | 1,166 |
| | — |
| | 1,641 |
|
| Accrued legal settlements | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Other current liabilities | 180 |
| | 16 |
| | 154 |
| | — |
| | 350 |
|
| Total current liabilities | 5,088 |
| | 331 |
| | 2,771 |
| | (5,561 | ) | | 2,629 |
|
| Long-term debt | 3,662 |
| | — |
| | — |
| | — |
| | 3,662 |
|
| Intercompany loans payable | 114 |
| | — |
| | 1,659 |
| | (1,773 | ) | | — |
|
| Pension and other postretirement benefits | 162 |
| | — |
| | 67 |
| | — |
| | 229 |
|
| Other non-current liabilities | 166 |
| | 75 |
| | 393 |
| | — |
| | 634 |
|
| Total liabilities | 9,192 |
| | 406 |
| | 4,890 |
| | (7,334 | ) | | 7,154 |
|
| Redeemable noncontrolling interest | — |
| | — |
| | — |
| | 1,620 |
| | 1,620 |
|
| Equity: | | | | | | | | | |
| Common stock | 294 |
| | — |
| | 2,279 |
| | (2,279 | ) | | 294 |
|
| Additional paid-in capital | 72 |
| | 618 |
| | 9,784 |
| | (9,641 | ) | | 833 |
|
| Retained income | 12,622 |
| | 1,277 |
| | 3,824 |
| | (6,439 | ) | | 11,284 |
|
| Accumulated other comprehensive loss | (299 | ) | | — |
| | (489 | ) | | 46 |
| | (742 | ) |
| Less: common stock in treasury | (11,040 | ) | | — |
| | (13 | ) | | 12 |
| | (11,041 | ) |
| Total equity - controlling interests | 1,649 |
| | 1,895 |
| | 15,385 |
| | (18,301 | ) | | 628 |
|
| Total equity - noncontrolling interests | — |
| | — |
| | 1 |
| | 55 |
| | 56 |
|
| Total equity | 1,649 |
| | 1,895 |
| | 15,386 |
| | (18,246 | ) | | 684 |
|
| Total liabilities and equity | $ | 10,841 |
| | $ | 2,301 |
| | $ | 20,276 |
| | $ | (23,960 | ) | | $ | 9,458 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Balance Sheet |
| | December 31, 2017 |
| (in millions) | S&P Global Inc. | | Standard & Poor's Financial Services LLC | | Non-Guarantor Subsidiaries | | Eliminations | | S&P Global Inc. Consolidated |
| ASSETS | | | | | | | | | |
| Current assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 632 |
| | $ | — |
| | $ | 2,145 |
| | $ | — |
| | $ | 2,777 |
|
| Restricted cash | — |
| | — |
| | 2 |
| | — |
| | 2 |
|
| Accounts receivable, net of allowance for doubtful accounts | 138 |
| | 152 |
| | 1,029 |
| | — |
| | 1,319 |
|
| Intercompany receivable | 768 |
| | 1,784 |
| | 2,527 |
| | (5,079 | ) | | — |
|
| Prepaid and other current assets | 143 |
| | (3 | ) | | 86 |
| | — |
| | 226 |
|
| Total current assets | 1,681 |
| | 1,933 |
| | 5,789 |
| | (5,079 | ) | | 4,324 |
|
| Property and equipment, net of accumulated depreciation | 158 |
| | 10 |
| | 107 |
| | — |
| | 275 |
|
| Goodwill | 261 |
| | — |
| | 2,719 |
| | 9 |
| | 2,989 |
|
| Other intangible assets, net | — |
| | — |
| | 1,388 |
| | — |
| | 1,388 |
|
| Investments in subsidiaries | 8,364 |
| | 5 |
| | 8,028 |
| | (16,397 | ) | | — |
|
| Intercompany loans receivable | 116 |
| | — |
| | 1,699 |
| | (1,815 | ) | | — |
|
| Other non-current assets | 215 |
| | 61 |
| | 174 |
| | (1 | ) | | 449 |
|
| Total assets | $ | 10,795 |
| | $ | 2,009 |
| | $ | 19,904 |
| | $ | (23,283 | ) | | $ | 9,425 |
|
| LIABILITIES AND EQUITY | | | | | | | | | |
| Current liabilities: | | | | | | | | | |
| Accounts payable | $ | 79 |
| | $ | 23 |
| | $ | 93 |
| | $ | — |
| | $ | 195 |
|
| Intercompany payable | 3,433 |
| | 492 |
| | 1,154 |
| | (5,079 | ) | | — |
|
| Accrued compensation and contributions to retirement plans | 145 |
| | 86 |
| | 241 |
| | — |
| | 472 |
|
| Short-term debt | 399 |
| | — |
| | — |
| | — |
| | 399 |
|
| Income taxes currently payable | 2 |
| | — |
| | 75 |
| | — |
| | 77 |
|
| Unearned revenue | 293 |
| | 193 |
| | 1,127 |
| | — |
| | 1,613 |
|
| Accrued legal settlements | — |
| | 2 |
| | 105 |
| | — |
| | 107 |
|
| Other current liabilities | 136 |
| | 21 |
| | 194 |
| | — |
| | 351 |
|
| Total current liabilities | 4,487 |
| | 817 |
| | 2,989 |
| | (5,079 | ) | | 3,214 |
|
| Long-term debt | 3,170 |
| | — |
| | — |
| | — |
| | 3,170 |
|
| Intercompany loans payable | 101 |
| | — |
| | 1,715 |
| | (1,816 | ) | | — |
|
| Pension and other postretirement benefits | 180 |
| | — |
| | 64 |
| | — |
| | 244 |
|
| Other non-current liabilities | 376 |
| | 74 |
| | 229 |
| | — |
| | 679 |
|
| Total liabilities | 8,314 |
| | 891 |
| | 4,997 |
| | (6,895 | ) | | 7,307 |
|
| Redeemable noncontrolling interest | — |
| | — |
| | — |
| | 1,352 |
| | 1,352 |
|
| Equity: | | | | | | | | | |
| Common stock | 412 |
| | — |
| | 2,318 |
| | (2,318 | ) | | 412 |
|
| Additional paid-in capital | (216 | ) | | 602 |
| | 9,256 |
| | (9,117 | ) | | 525 |
|
| Retained income | 12,156 |
| | 516 |
| | 3,782 |
| | (6,431 | ) | | 10,023 |
|
| Accumulated other comprehensive loss | (269 | ) | | — |
| | (426 | ) | | 46 |
| | (649 | ) |
| Less: common stock in treasury | (9,602 | ) | | — |
| | (23 | ) | | 23 |
| | (9,602 | ) |
| Total equity - controlling interests | 2,481 |
| | 1,118 |
| | 14,907 |
| | (17,797 | ) | | 709 |
|
| Total equity - noncontrolling interests | — |
| | — |
| | — |
| | 57 |
| | 57 |
|
| Total equity | 2,481 |
| | 1,118 |
| | 14,907 |
| | (17,740 | ) | | 766 |
|
| Total liabilities and equity | $ | 10,795 |
| | $ | 2,009 |
| | $ | 19,904 |
| | $ | (23,283 | ) | | $ | 9,425 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Statement of Cash Flows |
| | Year Ended December 31, 2018 |
| (in millions) | S&P Global Inc. | | Standard & Poor's Financial Services LLC | | Non-Guarantor Subsidiaries | | Eliminations | | S&P Global Inc. Consolidated |
| Operating Activities: | | | | | | | | | |
| Net income | $ | 3,540 |
| | $ | 784 |
| | $ | 2,956 |
| | $ | (5,159 | ) | | $ | 2,121 |
|
| Adjustments to reconcile net income to cash provided by operating activities: | | | | | | | | | |
| Depreciation | 37 |
| | 7 |
| | 40 |
| | — |
| | 84 |
|
| Amortization of intangibles | — |
| | — |
| | 122 |
| | — |
| | 122 |
|
| Provision for losses on accounts receivable | 3 |
| | 4 |
| | 14 |
| | — |
| | 21 |
|
| Deferred income taxes | 33 |
| | 10 |
| | 38 |
| | — |
| | 81 |
|
| Stock-based compensation | 28 |
| | 16 |
| | 50 |
| | — |
| | 94 |
|
| Accrued legal settlements | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
| Other | 46 |
| | 5 |
| | 1 |
| | — |
| | 52 |
|
| Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: | | | | | | | | | |
| Accounts receivable | (27 | ) | | 39 |
| | (176 | ) | | — |
| | (164 | ) |
| Prepaid and other current assets | (2 | ) | | (4 | ) | | 5 |
| | — |
| | (1 | ) |
| Accounts payable and accrued expenses | (11 | ) | | (64 | ) | | (31 | ) | | — |
| | (106 | ) |
| Unearned revenue | (53 | ) | | 13 |
| | 110 |
| | — |
| | 70 |
|
| Accrued legal settlements | — |
| | — |
| | (108 | ) | | — |
| | (108 | ) |
| Other current liabilities | (22 | ) | | (11 | ) | | (34 | ) | | — |
| | (67 | ) |
| Net change in prepaid/accrued income taxes | 2 |
| | — |
| | (9 | ) | | — |
| | (7 | ) |
| Net change in other assets and liabilities | (128 | ) | | 32 |
| | (33 | ) | | — |
| | (129 | ) |
| Cash provided by operating activities | 3,446 |
| | 832 |
| | 2,945 |
| | (5,159 | ) | | 2,064 |
|
| Investing Activities: | | | | | | | | | |
| Capital expenditures | (81 | ) | | (16 | ) | | (16 | ) | | — |
| | (113 | ) |
| Acquisitions, net of cash acquired | — |
| | — |
| | (401 | ) | | — |
| | (401 | ) |
| Proceeds from dispositions | — |
| | — |
| | 6 |
| | — |
| | 6 |
|
| Changes in short-term investments | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
| Cash used for investing activities | (81 | ) | | (16 | ) | | (416 | ) | | — |
| | (513 | ) |
| Financing Activities: | | | | | | | | | |
| Proceeds from issuance of senior notes, net | 489 |
| | — |
| | — |
| | — |
| | 489 |
|
| Payments on senior notes | (403 | ) | | — |
| | — |
| | — |
| | (403 | ) |
| Dividends paid to shareholders | (503 | ) | | — |
| | — |
| | — |
| | (503 | ) |
| Distributions to noncontrolling interest holders | — |
| | — |
| | (154 | ) | | — |
| | (154 | ) |
| Repurchase of treasury shares | (1,660 | ) | | — |
| | — |
| | — |
| | (1,660 | ) |
| Exercise of stock options | 26 |
| | — |
| | 8 |
| | — |
| | 34 |
|
| Purchase of additional CRISIL shares |
| | — |
| | (25 | ) | | — |
| | (25 | ) |
| Employee withholding tax on share-based payments | (66 | ) | | — |
| | — |
| | — |
| | (66 | ) |
| Intercompany financing activities | (1,181 | ) | | (816 | ) | | (3,162 | ) | | 5,159 |
| | — |
|
| Cash used for financing activities | (3,298 | ) | | (816 | ) | | (3,333 | ) | | 5,159 |
| | (2,288 | ) |
| Effect of exchange rate changes on cash | (5 | ) | | — |
| | (79 | ) | | — |
| | (84 | ) |
| Net change in cash, cash equivalents, and restricted cash | 62 |
| | — |
| | (883 | ) | | — |
| | (821 | ) |
| Cash, cash equivalents, and restricted cash at beginning of year | 632 |
| | — |
| | 2,147 |
| | — |
| | 2,779 |
|
| Cash, cash equivalents, and restricted cash at end of year | $ | 694 |
| | $ | — |
| | $ | 1,264 |
| | $ | — |
| | $ | 1,958 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Statement of Cash Flows |
| | Year Ended December 31, 2017 |
| (in millions) | S&P Global Inc. | | Standard & Poor's Financial Services LLC | | Non-Guarantor Subsidiaries | | Eliminations | | S&P Global Inc. Consolidated |
| Operating Activities: | | | | | | | | | |
| Net income | $ | 3,670 |
| | $ | 649 |
| | $ | 3,302 |
| | $ | (5,983 | ) | | $ | 1,638 |
|
| Adjustments to reconcile net income to cash provided by operating activities: | | | | | | | | | |
| Depreciation | 31 |
| | 11 |
| | 40 |
| | — |
| | 82 |
|
| Amortization of intangibles | — |
| | — |
| | 98 |
| | — |
| | 98 |
|
| Provision for losses on accounts receivable | 2 |
| | 3 |
| | 11 |
| | — |
| | 16 |
|
| Deferred income taxes | 108 |
| | (10 | ) | | (98 | ) | | — |
| | — |
|
| Stock-based compensation | 35 |
| | 22 |
| | 42 |
| | — |
| | 99 |
|
| Accrued legal settlements | — |
| | — |
| | 55 |
| | — |
| | 55 |
|
| Other | 34 |
| | 19 |
| | 43 |
| | — |
| | 96 |
|
| Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: | | | | | | | | | |
| Accounts receivable | (2 | ) | | (23 | ) | | (171 | ) | | — |
| | (196 | ) |
| Prepaid and other current assets | (5 | ) | | 3 |
| | 12 |
| | — |
| | 10 |
|
| Accounts payable and accrued expenses | 22 |
| | 97 |
| | (44 | ) | | — |
| | 75 |
|
| Unearned revenue | 19 |
| | 2 |
| | 64 |
| | — |
| | 85 |
|
| Accrued legal settlements | — |
| | (1 | ) | | (3 | ) | | — |
| | (4 | ) |
| Other current liabilities | (42 | ) | | (12 | ) | | (31 | ) | | — |
| | (85 | ) |
| Net change in prepaid/accrued income taxes | 41 |
| | (18 | ) | | 9 |
| | — |
| | 32 |
|
| Net change in other assets and liabilities | 7 |
| | (6 | ) | | 14 |
| | — |
| | 15 |
|
| Cash provided by operating activities | 3,920 |
| | 736 |
| | 3,343 |
| | (5,983 | ) | | 2,016 |
|
| Investing Activities: | | | | | | | | | |
| Capital expenditures | (55 | ) | | (32 | ) | | (36 | ) | | — |
| | (123 | ) |
| Acquisitions, net of cash acquired | — |
| | — |
| | (83 | ) | | — |
| | (83 | ) |
| Proceeds from dispositions | — |
| | — |
| | 2 |
| | — |
| | 2 |
|
| Changes in short-term investments | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
| Cash used for investing activities | (55 | ) | | (32 | ) | | (122 | ) | | — |
| | (209 | ) |
| Financing Activities: | | | | | | | | | |
| Dividends paid to shareholders | (421 | ) | | — |
| | — |
| | — |
| | (421 | ) |
| Distributions to noncontrolling interest holders | — |
| | — |
| | (111 | ) | | — |
| | (111 | ) |
| Repurchase of treasury shares | (1,001 | ) | | — |
| | — |
| | — |
| | (1,001 | ) |
| Exercise of stock options | 68 |
| | — |
| | 7 |
| | — |
| | 75 |
|
| Employee withholding tax on share-based payments | (49 | ) | | — |
| | — |
| | — |
| | (49 | ) |
| Intercompany financing activities | (2,546 | ) | | (704 | ) | | (2,733 | ) | | 5,983 |
| | — |
|
| Cash used for financing activities | (3,949 | ) | | (704 | ) | | (2,837 | ) | | 5,983 |
| | (1,507 | ) |
| Effect of exchange rate changes on cash | 5 |
| | — |
| | 82 |
| | — |
| | 87 |
|
| Net change in cash, cash equivalents, and restricted cash | (79 | ) | | — |
| | 466 |
| | — |
| | 387 |
|
| Cash, cash equivalents, and restricted cash at beginning of year | 711 |
| | — |
| | 1,681 |
| | — |
| | 2,392 |
|
| Cash, cash equivalents, and restricted cash at end of year | $ | 632 |
| | $ | — |
| | $ | 2,147 |
| | $ | — |
| | $ | 2,779 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Statement of Cash Flows |
| | Year Ended December 31, 2016 |
| (in millions) | S&P Global Inc. | | Standard & Poor's Financial Services LLC | | Non-Guarantor Subsidiaries | | Eliminations | | S&P Global Inc. Consolidated |
| Operating Activities: | | | | | | | | | |
| Net income | $ | 3,069 |
| | $ | 767 |
| | $ | 1,766 |
| | $ | (3,374 | ) | | $ | 2,228 |
|
| Adjustments to reconcile net income to cash provided by operating activities | | | | | | | | | |
| Depreciation | 38 |
| | 9 |
| | 38 |
| | — |
| | 85 |
|
| Amortization of intangibles | — |
| | — |
| | 96 |
| | — |
| | 96 |
|
| Provision for losses on accounts receivable | 1 |
| | — |
| | 8 |
| | — |
| | 9 |
|
| Deferred income taxes | 16 |
| | (9 | ) | | 72 |
| | — |
| | 79 |
|
| Stock-based compensation | 22 |
| | 17 |
| | 37 |
| | — |
| | 76 |
|
| Gain on disposition | (1,072 | ) | | — |
| | (29 | ) | | — |
| | (1,101 | ) |
| Accrued legal settlements | 3 |
| | 1 |
| | 50 |
| | — |
| | 54 |
|
| Other | 48 |
| | 5 |
| | (23 | ) | | — |
| | 30 |
|
| Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: | | | | | | | | | |
| Accounts receivable | (24 | ) | | 187 |
| | (340 | ) | | — |
| | (177 | ) |
| Prepaid and other current assets | (2 | ) | | 10 |
| | (3 | ) | | — |
| | 5 |
|
| Accounts payable and accrued expenses | (8 | ) | | (39 | ) | | 66 |
| | — |
| | 19 |
|
| Unearned revenue | 19 |
| | (395 | ) | | 483 |
| | — |
| | 107 |
|
| Accrued legal settlements | — |
| | (108 | ) | | (42 | ) | | — |
| | (150 | ) |
| Other current liabilities | (27 | ) | | (27 | ) | | 35 |
| | — |
| | (19 | ) |
| Net change in prepaid/accrued income taxes | 141 |
| | — |
| | 33 |
| | — |
| | 174 |
|
| Net change in other assets and liabilities | (9 | ) | | 38 |
| | 16 |
| | — |
| | 45 |
|
| Cash provided by operating activities | 2,215 |
| | 456 |
| | 2,263 |
| | (3,374 | ) | | 1,560 |
|
| Investing Activities: | | | | | | | | | |
| Capital expenditures | (68 | ) | | (15 | ) | | (32 | ) | | — |
| | (115 | ) |
| Acquisitions, net of cash acquired | (144 | ) | | — |
| | (33 | ) | | — |
| | (177 | ) |
| Contingent consideration payment | — |
| | — |
| | (34 | ) | | — |
| | (34 | ) |
| Proceeds from dispositions | 1,422 |
| | — |
| | 76 |
| | — |
| | 1,498 |
|
| Changes in short-term investments | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Cash provided by (used for) investing activities | 1,210 |
| | (15 | ) | | (24 | ) | | — |
| | 1,171 |
|
| Financing Activities: | | | | | | | | | |
| Additions to short-term debt | (143 | ) | | — |
| | — |
| | — |
| | (143 | ) |
| Proceeds from issuance of senior notes, net | 493 |
| | — |
| | — |
| | — |
| | 493 |
|
| Payments on senior notes | (421 | ) | | — |
| | — |
| | — |
| | (421 | ) |
| Dividends paid to shareholders | (380 | ) | | — |
| | — |
| | — |
| | (380 | ) |
| Distributions to noncontrolling interest holders | — |
| | — |
| | (116 | ) | | — |
| | (116 | ) |
| Repurchase of treasury shares | (1,123 | ) | | — |
| | — |
| | — |
| | (1,123 | ) |
| Exercise of stock options | 86 |
| | — |
| | 2 |
| | — |
| | 88 |
|
| Contingent consideration payment | (5 | ) | | — |
| | — |
| | — |
| | (5 | ) |
| Employee withholding tax on share-based payments | (55 | ) | | — |
| | — |
| | — |
| | (55 | ) |
| Intercompany financing activities | (1,333 | ) | | (441 | ) | | (1,600 | ) | | 3,374 |
| | — |
|
| Cash used for financing activities | (2,881 | ) | | (441 | ) | | (1,714 | ) | | 3,374 |
| | (1,662 | ) |
| Effect of exchange rate changes on cash | — |
| | — |
| | (158 | ) | | — |
| | (158 | ) |
| Net change in cash, cash equivalents, and restricted cash | 544 |
| | — |
| | 367 |
| | — |
| | 911 |
|
| Cash, cash equivalents, and restricted cash at beginning of year | 167 |
| | — |
| | 1,314 |
| | — |
| | 1,481 |
|
| Cash, cash equivalents, and restricted cash at end of year | $ | 711 |
| | $ | — |
| | $ | 1,681 |
| | $ | — |
| | $ | 2,392 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Statement of Income |
| | Year Ended December 31, 2014 |
| (in millions) | McGraw Hill Financial, Inc. | | Standard & Poor's Financial Services LLC | | Non-Guarantor Subsidiaries | | Eliminations | | McGraw Hill Financial Inc. Consolidated |
| Revenue | $ | 598 |
| | $ | 2,043 |
| | $ | 2,525 |
| | $ | (115 | ) | | $ | 5,051 |
|
| Expenses: | | | | | | | | | |
| Operating-related expenses | 78 |
| | 389 |
| | 1,275 |
| | (115 | ) | | 1,627 |
|
| Selling and general expenses | 296 |
| | 2,350 |
| | 522 |
| | — |
| | 3,168 |
|
| Depreciation | 41 |
| | 17 |
| | 28 |
| | — |
| | 86 |
|
| Amortization of intangibles | 4 |
| | — |
| | 44 |
| | — |
| | 48 |
|
| Total expenses | 419 |
| | 2,756 |
| | 1,869 |
| | (115 | ) | | 4,929 |
|
| Other loss | 3 |
| | — |
| | 6 |
| | — |
| | 9 |
|
| Operating profit (loss) | 176 |
| | (713 | ) | | 650 |
| | — |
| | 113 |
|
| Interest expense (income), net | 66 |
| | — |
| | (7 | ) | | — |
| | 59 |
|
| Non-operating intercompany transactions | 193 |
| | 38 |
| | (231 | ) | | — |
| | — |
|
| (Loss) income from continuing operations before taxes on income | (83 | ) | | (751 | ) | | 888 |
| | — |
| | 54 |
|
| (Benefit) provision for taxes on income | (22 | ) | | 16 |
| | 251 |
| | — |
| | 245 |
|
| Equity in net (loss) income of subsidiaries | (443 | ) | | 248 |
| | — |
| | 195 |
| | — |
|
| (Loss) income from continuing operations | (504 | ) | | (519 | ) | | 637 |
| | 195 |
| | (191 | ) |
| Discontinued operations, net of tax: | | | | | | | | | |
| Income from discontinued operations | 18 |
| | — |
| | — |
| | — |
| | 18 |
|
| Gain on sale of discontinued operations | 160 |
| | — |
| | — |
| | — |
| | 160 |
|
| Discontinued operations, net | 178 |
| | — |
| | — |
| | — |
| | 178 |
|
| Net (loss) income | $ | (326 | ) | | $ | (519 | ) | | $ | 637 |
| | $ | 195 |
| | (13 | ) |
| Less: net income from continuing operations attributable to noncontrolling interests | — |
| | — |
| | — |
| | (102 | ) | | (102 | ) |
| Net (loss) income attributable to McGraw Hill Financial, Inc. | $ | (326 | ) | | $ | (519 | ) | | $ | 637 |
| | $ | 93 |
| | $ | (115 | ) |
| Comprehensive (loss) income | $ | (495 | ) | | $ | (544 | ) | | $ | 513 |
| | $ | 195 |
| | $ | (331 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Statement of Income |
| | Year Ended December 31, 2013 |
| (in millions) | McGraw Hill Financial, Inc. | | Standard & Poor's Financial Services LLC | | Non-Guarantor Subsidiaries | | Eliminations | | McGraw Hill Financial Inc. Consolidated |
| Revenue | $ | 570 |
| | $ | 1,931 |
| | $ | 2,306 |
| | $ | (105 | ) | | $ | 4,702 |
|
| Expenses: | | | | | | | | | |
| Operating-related expenses | 128 |
| | 556 |
| | 985 |
| | (105 | ) | | 1,564 |
|
| Selling and general expenses | 338 |
| | 532 |
| | 761 |
| | — |
| | 1,631 |
|
| Depreciation | 40 |
| | 19 |
| | 27 |
| | — |
| | 86 |
|
| Amortization of intangibles | 5 |
| | — |
| | 46 |
| | — |
| | 51 |
|
| Total expenses | 511 |
| | 1,107 |
| | 1,819 |
| | (105 | ) | | 3,332 |
|
| Other loss (income) | 25 |
| | 3 |
| | (16 | ) | | — |
| | 12 |
|
| Operating profit | 34 |
| | 821 |
| | 503 |
| | — |
| | 1,358 |
|
| Interest expense (income), net | 65 |
| | — |
| | (6 | ) | | — |
| | 59 |
|
| Non-operating intercompany transactions | 245 |
| | 66 |
| | (311 | ) | | — |
| | — |
|
| Income from continuing operations before taxes on income | (276 | ) | | 755 |
| | 820 |
| | — |
| | 1,299 |
|
| (Benefit) provision for taxes on income | (121 | ) | | 283 |
| | 263 |
| | — |
| | 425 |
|
| Equity in net income of subsidiaries | 1,937 |
| | 197 |
| | — |
| | (2,134 | ) | | — |
|
| Income from continuing operations | 1,782 |
| | 669 |
| | 557 |
| | (2,134 | ) | | 874 |
|
| Discontinued operations, net of tax: | | | | | | | | | |
| Income (loss) from discontinued operations | 82 |
| | — |
| | (79 | ) | | — |
| | 3 |
|
| Gain (loss) on sale of discontinued operations | 644 |
| | — |
| | (55 | ) | | — |
| | 589 |
|
| Discontinued operations, net | 726 |
| | — |
| | (134 | ) | | — |
| | 592 |
|
| Net income | $ | 2,508 |
| | $ | 669 |
| | $ | 423 |
| | $ | (2,134 | ) | | $ | 1,466 |
|
| Less: net income from continuing operations attributable to noncontrolling interests | — |
| | — |
| | — |
| | (91 | ) | | (91 | ) |
Less: net loss from discontinued operations attributable to noncontrolling interests
| — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Net income attributable to McGraw Hill Financial, Inc. | $ | 2,508 |
| | $ | 669 |
| | $ | 423 |
| | $ | (2,224 | ) | | $ | 1,376 |
|
| Comprehensive income | $ | 2,773 |
| | $ | 669 |
| | $ | 452 |
| | $ | (2,106 | ) | | $ | 1,788 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Balance Sheet |
| | December 31, 2015 |
| (in millions) | McGraw Hill Financial, Inc. | | Standard & Poor's Financial Services LLC | | Non-Guarantor Subsidiaries | | Eliminations | | McGraw Hill Financial Inc. Consolidated |
| ASSETS | | | | | | | | | |
| Current assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 167 |
| | $ | — |
| | $ | 1,314 |
| | $ | — |
| | $ | 1,481 |
|
| Accounts receivable, net of allowance for doubtful accounts | 116 |
| | 319 |
| | 556 |
| | — |
| | 991 |
|
| Intercompany receivable | 208 |
| | 1,872 |
| | 1,273 |
| | (3,353 | ) | | — |
|
| Deferred income taxes | 75 |
| | 10 |
| | 24 |
| | — |
| | 109 |
|
| Prepaid and other current assets | 120 |
| | 13 |
| | 80 |
| | (1 | ) | | 212 |
|
| Assets of a business held for sale | 4 |
| | — |
| | 499 |
| | — |
| | 503 |
|
| Total current assets | 690 |
| | 2,214 |
| | 3,746 |
| | (3,354 | ) | | 3,296 |
|
| Property and equipment, net of accumulated depreciation | 141 |
| | 3 |
| | 126 |
| | — |
| | 270 |
|
| Goodwill | 17 |
| | 40 |
| | 2,816 |
| | 9 |
| | 2,882 |
|
| Other intangible assets, net | — |
| | — |
| | 1,522 |
| | — |
| | 1,522 |
|
| Asset for pension benefits | — |
| | — |
| | 36 |
| | — |
| | 36 |
|
| Investments in subsidiaries | 4,651 |
| | 659 |
| | 7,316 |
| | (12,626 | ) | | — |
|
| Intercompany loans receivable | 16 |
| | 368 |
| | 1,733 |
| | (2,117 | ) | | — |
|
| Other non-current assets | 67 |
| | 19 |
| | 91 |
| | — |
| | 177 |
|
| Total assets | $ | 5,582 |
| | $ | 3,303 |
| | $ | 17,386 |
| | $ | (18,088 | ) | | $ | 8,183 |
|
| LIABILITIES AND EQUITY | | | | | | | | | |
| Current liabilities: | | | | | | | | | |
| Accounts payable | $ | 71 |
| | $ | 54 |
| | $ | 81 |
| | $ | — |
| | $ | 206 |
|
| Intercompany payable | 2,144 |
| | 675 |
| | 535 |
| | (3,354 | ) | | — |
|
| Accrued compensation and contributions to retirement plans | 127 |
| | 89 |
| | 167 |
| | — |
| | 383 |
|
| Short-term debt | 143 |
| | — |
| | — |
| | — |
| | 143 |
|
| Income taxes currently payable | 1 |
| | — |
| | 55 |
| | — |
| | 56 |
|
| Unearned revenue | 254 |
| | 586 |
| | 582 |
| | (1 | ) | | 1,421 |
|
| Accrued legal and regulatory settlements | — |
| | 115 |
| | 6 |
| | — |
| | 121 |
|
| Other current liabilities | 190 |
| | (50 | ) | | 232 |
| | — |
| | 372 |
|
| Liabilities of a business held for sale | 80 |
| | — |
| | 126 |
| | — |
| | 206 |
|
| Total current liabilities | 3,010 |
| | 1,469 |
| | 1,784 |
| | (3,355 | ) | | 2,908 |
|
| Long-term debt | 3,468 |
| | — |
| | — |
| | — |
| | 3,468 |
|
| Intercompany loans payable | 21 |
| | — |
| | 2,096 |
| | (2,117 | ) | | — |
|
| Pension and other postretirement benefits | 230 |
| | — |
| | 46 |
| | — |
| | 276 |
|
| Deferred income taxes | (246 | ) | | 17 |
| | 252 |
| | — |
| | 23 |
|
| Other non-current liabilities | 221 |
| | 81 |
| | 43 |
| | — |
| | 345 |
|
| Total liabilities | 6,704 |
| | 1,567 |
| | 4,221 |
| | (5,472 | ) | | 7,020 |
|
| Redeemable noncontrolling interest | — |
| | — |
| | — |
| | 920 |
| | 920 |
|
| Equity: | | | | | | | | | |
| Common stock | 412 |
| | — |
| | 2,337 |
| | (2,337 | ) | | 412 |
|
| Additional paid-in capital | (184 | ) | | 1,179 |
| | 10,174 |
| | (10,694 | ) | | 475 |
|
| Retained income | 6,701 |
| | 557 |
| | 987 |
| | (609 | ) | | 7,636 |
|
| Accumulated other comprehensive loss | (322 | ) | | — |
| | (322 | ) | | 44 |
| | (600 | ) |
| Less: common stock in treasury | (7,729 | ) | | — |
| | (12 | ) | | 12 |
| | (7,729 | ) |
| Total equity - controlling interests | (1,122 | ) | | 1,736 |
| | 13,164 |
| | (13,584 | ) | | 194 |
|
| Total equity - noncontrolling interests | — |
| | — |
| | 1 |
| | 48 |
| | 49 |
|
| Total equity | (1,122 | ) | | 1,736 |
| | 13,165 |
| | (13,536 | ) | | 243 |
|
| Total liabilities and equity | $ | 5,582 |
| | $ | 3,303 |
| | $ | 17,386 |
| | $ | (18,088 | ) | | $ | 8,183 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Balance Sheet |
| | December 31, 2014 |
| (in millions) | McGraw Hill Financial, Inc. | | Standard & Poor's Financial Services LLC | | Non-Guarantor Subsidiaries | | Eliminations | | McGraw Hill Financial Inc. Consolidated |
| ASSETS | | | | | | | | | |
| Current assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 1,402 |
| | $ | — |
| | $ | 1,095 |
| | $ | — |
| | $ | 2,497 |
|
| Accounts receivable, net of allowance for doubtful accounts | 120 |
| | 293 |
| | 519 |
| | — |
| | 932 |
|
| Intercompany receivable | 525 |
| | 2,125 |
| | 1,998 |
| | (4,648 | ) | | — |
|
| Deferred income taxes | 60 |
| | 334 |
| | (34 | ) | | — |
| | 360 |
|
| Prepaid and other current assets | 79 |
| | 27 |
| | 67 |
| | — |
| | 173 |
|
| Total current assets | 2,186 |
| | 2,779 |
| | 3,645 |
| | (4,648 | ) | | 3,962 |
|
| Property and equipment, net of accumulated depreciation | 111 |
| | 5 |
| | 90 |
| | — |
| | 206 |
|
| Goodwill | 109 |
| | 41 |
| | 1,228 |
| | 9 |
| | 1,387 |
|
| Other intangible assets, net | 13 |
| | — |
| | 991 |
| | — |
| | 1,004 |
|
| Asset for pension benefits | — |
| | — |
| | 28 |
| | — |
| | 28 |
|
| Investments in subsidiaries | 1,258 |
| | 653 |
| | 7,125 |
| | (9,036 | ) | | — |
|
| Intercompany loans receivable | 20 |
| | 358 |
| | 1,594 |
| | (1,972 | ) | | — |
|
| Other non-current assets | 71 |
| | 25 |
| | 90 |
| | — |
| | 186 |
|
| Total assets | $ | 3,768 |
| | $ | 3,861 |
| | $ | 14,791 |
| | $ | (15,647 | ) | | $ | 6,773 |
|
| LIABILITIES AND EQUITY | | | | | | | | | |
| Current liabilities: | | | | | | | | | |
| Accounts payable | $ | 59 |
| | $ | 45 |
| | $ | 87 |
| | $ | — |
| | $ | 191 |
|
| Intercompany payable | 2,566 |
| | 617 |
| | 1,376 |
| | (4,559 | ) | | — |
|
| Accrued compensation and contributions to retirement plans | 133 |
| | 121 |
| | 156 |
| | — |
| | 410 |
|
| Income taxes currently payable | 19 |
| | 1 |
| | 34 |
| | — |
| | 54 |
|
| Unearned revenue | 259 |
| | 520 |
| | 475 |
| | — |
| | 1,254 |
|
| Accrued legal and regulatory settlements | — |
| | 1,609 |
| | — |
| | — |
| | 1,609 |
|
| Other current liabilities | 194 |
| | — |
| | 208 |
| | — |
| | 402 |
|
| Total current liabilities | 3,230 |
| | 2,913 |
| | 2,336 |
| | (4,559 | ) | | 3,920 |
|
| Long-term debt | 795 |
| | — |
| | — |
| | — |
| | 795 |
|
| Intercompany loans payable | 109 |
| | — |
| | 1,952 |
| | (2,061 | ) | | — |
|
| Pension and other postretirement benefits | 272 |
| | — |
| | 61 |
| | — |
| | 333 |
|
| Deferred income taxes | (260 | ) | | 51 |
| | 249 |
| | — |
| | 40 |
|
| Other non-current liabilities | 219 |
| | 73 |
| | 44 |
| | — |
| | 336 |
|
| Total liabilities | 4,365 |
| | 3,037 |
| | 4,642 |
| | (6,620 | ) | | 5,424 |
|
| Redeemable noncontrolling interest | — |
| | — |
| | — |
| | 810 |
| | 810 |
|
| Equity: | | | | | | | | | |
| Common stock | 412 |
| | — |
| | 2,316 |
| | (2,316 | ) | | 412 |
|
| Additional paid-in capital | (116 | ) | | 1,153 |
| | 7,016 |
| | (7,560 | ) | | 493 |
|
| Retained income | 6,275 |
| | (329 | ) | | 1,060 |
| | (60 | ) | | 6,946 |
|
| Accumulated other comprehensive loss | (319 | ) | | — |
| | (236 | ) | | 41 |
| | (514 | ) |
| Less: common stock in treasury | (6,849 | ) | | — |
| | (7 | ) | | 7 |
| | (6,849 | ) |
| Total equity - controlling interests | (597 | ) | | 824 |
| | 10,149 |
| | (9,888 | ) | | 488 |
|
| Total equity - noncontrolling interests | — |
| | — |
| | — |
| | 51 |
| | 51 |
|
| Total equity | (597 | ) | | 824 |
| | 10,149 |
| | (9,837 | ) | | 539 |
|
| Total liabilities and equity | $ | 3,768 |
| | $ | 3,861 |
| | $ | 14,791 |
| | $ | (15,647 | ) | | $ | 6,773 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Statement of Cash Flows |
| | Year Ended December 31, 2015 |
| (in millions) | McGraw Hill Financial, Inc. | | Standard & Poor's Financial Services LLC | | Non-Guarantor Subsidiaries | | Eliminations | | McGraw Hill Financial Inc. Consolidated |
| Operating Activities: | | | | | | | | | |
| Net income | $ | 1,449 |
| | $ | 824 |
| | $ | 740 |
| | $ | (1,745 | ) | | $ | 1,268 |
|
| Adjustments to reconcile income from continuing operations to cash provided by (used for) operating activities from continuing operations: | | | | | | | | | |
| Depreciation | 40 |
| | 18 |
| | 32 |
| | — |
| | 90 |
|
| Amortization of intangibles | — |
| | — |
| | 67 |
| | — |
| | 67 |
|
| Provision for losses on accounts receivable | 1 |
| | 1 |
| | 6 |
| | — |
| | 8 |
|
| Deferred income taxes | 33 |
| | 290 |
| | (43 | ) | | — |
| | 280 |
|
| Stock-based compensation | 23 |
| | 24 |
| | 31 |
| | — |
| | 78 |
|
| Accrued legal and regulatory settlements | — |
| | 110 |
| | 9 |
| | — |
| | 119 |
|
| Other | 23 |
| | 16 |
| | 7 |
| | — |
| | 46 |
|
| Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: | | | | | | | | | |
| Accounts receivable | 3 |
| | (27 | ) | | (94 | ) | | — |
| | (118 | ) |
| Prepaid and current assets | (13 | ) | | 14 |
| | (5 | ) | | — |
| | (4 | ) |
| Accounts payable and accrued expenses | (75 | ) | | (34 | ) | | 17 |
| | — |
| | (92 | ) |
| Unearned revenue | (5 | ) | | 66 |
| | 68 |
| | — |
| | 129 |
|
| Accrued legal and regulatory settlement | — |
| | (1,624 | ) | | — |
| | — |
| | (1,624 | ) |
| Other current liabilities | (32 | ) | | (35 | ) | | (11 | ) | | — |
| | (78 | ) |
| Net change in prepaid/accrued income taxes | (54 | ) | | — |
| | 115 |
| | — |
| | 61 |
|
| Net change in other assets and liabilities | 78 |
| | 8 |
| | (121 | ) | | — |
| | (35 | ) |
| Cash provided by (used for) operating activities from continuing operations | 1,471 |
| | (349 | ) | | 818 |
| | (1,745 | ) | | 195 |
|
| Investing Activities: | | | | | | | | | |
| Capital expenditures | (67 | ) | | (10 | ) | | (62 | ) | | — |
| | (139 | ) |
| Acquisitions, net of cash acquired | (2,243 | ) | | — |
| | (153 | ) | | — |
| | (2,396 | ) |
| Proceeds from dispositions | — |
| | — |
| | 14 |
| | — |
| | 14 |
|
| Changes in short-term investments | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
| Cash used for investing activities from continuing operations | (2,310 | ) | | (10 | ) | | (205 | ) | | — |
| | (2,525 | ) |
| Financing Activities: | | | | | | | | | |
| Additions to short-term debt, net | 143 |
| | — |
| | — |
| | — |
| | 143 |
|
| Proceeds from issuance of senior notes, net | 2,674 |
| | — |
| | — |
| | — |
| | 2,674 |
|
| Dividends paid to shareholders | (363 | ) | | — |
| | — |
| | — |
| | (363 | ) |
| Dividends and other payments paid to noncontrolling interests | — |
| | — |
| | (104 | ) | | — |
| | (104 | ) |
| Repurchase of treasury shares | (974 | ) | | — |
| | — |
| | — |
| | (974 | ) |
| Exercise of stock options | 80 |
| | — |
| | 6 |
| | — |
| | 86 |
|
| Contingent payments | (5 | ) | | — |
| | — |
| | — |
| | (5 | ) |
| Purchase of additional CRISIL shares | — |
| | — |
| | (16 | ) | | — |
| | (16 | ) |
| Excess tax benefits from share-based payments | 69 |
| | — |
| | — |
| | — |
| | 69 |
|
| Intercompany financing activities | (2,020 | ) | | 359 |
| | (84 | ) | | 1,745 |
| | — |
|
| Cash (used for) provided by financing activities from continuing operations | (396 | ) | | 359 |
| | (198 | ) | | 1,745 |
| | 1,510 |
|
| Effect of exchange rate changes on cash from continuing operations | — |
| | — |
| | (67 | ) | | — |
| | (67 | ) |
| Cash (used for) provided by continuing operations | (1,235 | ) | | — |
| | 348 |
| | — |
| | (887 | ) |
| Discontinued Operations: | | | | | | | | | |
| Cash used for operating activities | — |
| | — |
| | (129 | ) | | — |
| | (129 | ) |
| Cash used for discontinued operations | — |
| | — |
| | (129 | ) | | — |
| | (129 | ) |
| Net change in cash and cash equivalents | (1,235 | ) | | — |
| | 219 |
| | — |
| | (1,016 | ) |
| Cash and cash equivalents at beginning of year | 1,402 |
| | — |
| | 1,095 |
| | — |
| | 2,497 |
|
| Cash and cash equivalents at end of year | $ | 167 |
| | $ | — |
| | $ | 1,314 |
| | $ | — |
| | $ | 1,481 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Statement of Cash Flows |
| | Year Ended December 31, 2014 |
| (in millions) | McGraw Hill Financial, Inc. | | Standard & Poor's Financial Services LLC | | Non-Guarantor Subsidiaries | | Eliminations | | McGraw Hill Financial Inc. Consolidated |
| Operating Activities: | | | | | | | | | |
| Net (loss) income | $ | (326 | ) | | $ | (519 | ) | | $ | 637 |
| | $ | 195 |
| | $ | (13 | ) |
| Less: discontinued operations, net | 178 |
| | — |
| | — |
| | — |
| | 178 |
|
| (Loss) income from continuing operations | (504 | ) | | (519 | ) | | 637 |
| | 195 |
| | (191 | ) |
| Adjustments to reconcile (loss) income from continuing operations to cash (used for) provided by operating activities from continuing operations: | | | | | | | | | |
| Depreciation | 41 |
| | 17 |
| | 28 |
| | — |
| | 86 |
|
| Amortization of intangibles | 4 |
| | — |
| | 44 |
| | — |
| | 48 |
|
| Provision for losses on accounts receivable | — |
| | 5 |
| | 6 |
| | — |
| | 11 |
|
| Deferred income taxes | 42 |
| | (272 | ) | | (15 | ) | | — |
| | (245 | ) |
| Stock-based compensation | 31 |
| | 34 |
| | 35 |
| | — |
| | 100 |
|
| Accrued legal and regulatory settlements | — |
| | 1,587 |
| | — |
| | — |
| | 1,587 |
|
| Other | 21 |
| | 39 |
| | 20 |
| | — |
| | 80 |
|
| Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: | | | | | | | | | |
| Accounts receivable | (11 | ) | | 47 |
| | (45 | ) | | — |
| | (9 | ) |
| Prepaid and current assets | (42 | ) | | (17 | ) | | 52 |
| | — |
| | (7 | ) |
| Accounts payable and accrued expenses | (83 | ) | | (47 | ) | | — |
| | — |
| | (130 | ) |
| Unearned revenue | 8 |
| | 26 |
| | 44 |
| | — |
| | 78 |
|
| Accrued legal and regulatory settlement | — |
| | (35 | ) | | — |
| | — |
| | (35 | ) |
| Other current liabilities | (51 | ) | | 45 |
| | (10 | ) | | — |
| | (16 | ) |
| Net change in prepaid/accrued income taxes | 13 |
| | 3 |
| | (109 | ) | | — |
| | (93 | ) |
| Net change in other assets and liabilities | (131 | ) | | 5 |
| | 71 |
| | — |
| | (55 | ) |
| Cash (used for) provided by operating activities from continuing operations | (662 | ) | | 918 |
| | 758 |
| | 195 |
| | 1,209 |
|
| Investing Activities: | | | | | | | | | |
| Capital expenditures | (26 | ) | | (14 | ) | | (52 | ) | | — |
| | (92 | ) |
| Acquisitions, net of cash acquired | — |
| | — |
| | (71 | ) | | — |
| | (71 | ) |
| Proceeds from dispositions | 63 |
| | — |
| | 20 |
| | — |
| | 83 |
|
| Changes in short-term investments | — |
| | — |
| | 15 |
| | — |
| | 15 |
|
| Cash provided by (used for) investing activities from continuing operations | 37 |
| | (14 | ) | | (88 | ) | | — |
| | (65 | ) |
| Financing Activities: | | | | | | | | | |
| Dividends paid to shareholders | (326 | ) | | — |
| | — |
| | — |
| | (326 | ) |
| Dividends and other payments paid to noncontrolling interests | — |
| | — |
| | (84 | ) | | — |
| | (84 | ) |
| Repurchase of treasury shares | (362 | ) | | — |
| | — |
| | — |
| | (362 | ) |
| Exercise of stock options | 184 |
| | — |
| | 9 |
| | — |
| | 193 |
|
| Contingent payments | — |
| | — |
| | (11 | ) | | — |
| | (11 | ) |
| Excess tax benefits from share-based payments | 128 |
| | — |
| | — |
| | — |
| | 128 |
|
| Intercompany financing activities | 1,377 |
| | (904 | ) | | (278 | ) | | (195 | ) | | — |
|
| Cash provided by (used for) financing activities from continuing operations | 1,001 |
| | (904 | ) | | (364 | ) | | (195 | ) | | (462 | ) |
| Effect of exchange rate changes on cash from continuing operations | 3 |
| | — |
| | (68 | ) | | — |
| | (65 | ) |
| Cash provided by continuing operations | 379 |
| | — |
| | 238 |
| | — |
| | 617 |
|
| Discontinued Operations: | | | | | | | | | |
| Cash provided by operating activities | 18 |
| | — |
| | — |
| | — |
| | 18 |
|
| Cash provided by investing activities | 320 |
| | — |
| | — |
| | — |
| | 320 |
|
| Cash provided by discontinued operations | 338 |
| | — |
| | — |
| | — |
| | 338 |
|
| Net change in cash and cash equivalents | 717 |
| | — |
| | 238 |
| | — |
| | 955 |
|
| Cash and cash equivalents at beginning of year | 685 |
| | — |
| | 857 |
| | — |
| | 1,542 |
|
| Cash and cash equivalents at end of year | $ | 1,402 |
| | $ | — |
| | $ | 1,095 |
| | $ | — |
| | $ | 2,497 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Statement of Cash Flows |
| | Year Ended December 31, 2013 |
| (in millions) | McGraw Hill Financial, Inc. | | Standard & Poor's Financial Services LLC | | Non-Guarantor Subsidiaries | | Eliminations | | McGraw Hill Financial Inc. Consolidated |
| Operating Activities: | | | | | | | | | |
| Net income | $ | 2,508 |
| | $ | 669 |
| | $ | 423 |
| | $ | (2,134 | ) | | $ | 1,466 |
|
| Less: discontinued operations, net | 726 |
| | — |
| | (134 | ) | | — |
| | 592 |
|
| Income from continuing operations | 1,782 |
| | 669 |
| | 557 |
| | (2,134 | ) | | 874 |
|
| Adjustments to reconcile income from continuing operations to cash provided by (used for) operating activities from continuing operations: | | | | | | | | | |
| Depreciation | 40 |
| | 19 |
| | 27 |
| | — |
| | 86 |
|
| Amortization of intangibles | 5 |
| | — |
| | 46 |
| | — |
| | 51 |
|
| Provision for losses on accounts receivable | 1 |
| | 7 |
| | 14 |
| | — |
| | 22 |
|
| Deferred income taxes | 39 |
| | — |
| | 4 |
| | — |
| | 43 |
|
| Stock-based compensation | 35 |
| | 33 |
| | 28 |
| | — |
| | 96 |
|
| Accrued legal and regulatory settlements | — |
| | — |
| | — |
| | — |
| | — |
|
| Other | 68 |
| | 10 |
| | 18 |
| | — |
| | 96 |
|
| Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: | | | | | | | | | |
| Accounts receivable | (2 | ) | | (4 | ) | | (29 | ) | | — |
| | (35 | ) |
| Prepaid and current assets | (14 | ) | | (7 | ) | | (8 | ) | | — |
| | (29 | ) |
| Accounts payable and accrued expenses | (120 | ) | | 18 |
| | 8 |
| | — |
| | (94 | ) |
| Unearned revenue | 17 |
| | 43 |
| | 49 |
| | — |
| | 109 |
|
| Other current liabilities | (43 | ) | | (24 | ) | | (22 | ) | | — |
| | (89 | ) |
| Net change in prepaid/accrued income taxes | (265 | ) | | (3 | ) | | 30 |
| | — |
| | (238 | ) |
| Net change in other assets and liabilities | (190 | ) | | 84 |
| | (4 | ) | | — |
| | (110 | ) |
| Cash provided by operating activities from continuing operations | 1,353 |
| | 845 |
| | 718 |
| | (2,134 | ) | | 782 |
|
| Investing Activities: | | | | | | | | | |
| Capital expenditures | (61 | ) | | (19 | ) | | (37 | ) | | — |
| | (117 | ) |
| Acquisitions, net of cash acquired | — |
| | — |
| | (47 | ) | | — |
| | (47 | ) |
| Proceeds from dispositions | 35 |
| | — |
| | 16 |
| | — |
| | 51 |
|
| Changes in short-term investments | — |
| | — |
| | (17 | ) | | — |
| | (17 | ) |
| Cash used for investing activities from continuing operations | (26 | ) | | (19 | ) | | (85 | ) | | — |
| | (130 | ) |
| Financing Activities: | | | | | | | | | |
| Payments on short-term debt | (457 | ) | | — |
| | — |
| | — |
| | (457 | ) |
| Dividends paid to shareholders | (308 | ) | | — |
| | — |
| | — |
| | (308 | ) |
| Dividends and other payments paid to noncontrolling interests | — |
| | — |
| | (75 | ) | | — |
| | (75 | ) |
| Repurchase of treasury shares | (978 | ) | | — |
| | — |
| | — |
| | (978 | ) |
| Exercise of stock options | 254 |
| | — |
| | 4 |
| | — |
| | 258 |
|
| Contingent payments | — |
| | — |
| | (12 | ) | | — |
| | (12 | ) |
| Purchase of additional CRISIL shares | — |
| | — |
| | (214 | ) | | — |
| | (214 | ) |
| Excess tax benefits from share-based payments | 43 |
| | — |
| | — |
| | — |
| | 43 |
|
| Intercompany financing activities | (43 | ) | | (826 | ) | | (1,265 | ) | | 2,134 |
| | — |
|
| Cash used for financing activities from continuing operations | (1,489 | ) | | (826 | ) | | (1,562 | ) | | 2,134 |
| | (1,743 | ) |
| Effect of exchange rate changes on cash from continuing operations | 8 |
| | — |
| | (9 | ) | | — |
| | (1 | ) |
| Cash used for continuing operations | (154 | ) | | — |
| | (938 | ) | | — |
| | (1,092 | ) |
| Discontinued Operations: | | | | | | | | | |
| Cash provided by (used for) operating activities | 720 |
| | — |
| | (951 | ) | | — |
| | (231 | ) |
| Cash provided by investing activities | — |
| | — |
| | 2,129 |
| | — |
| | 2,129 |
|
| Cash used for financing activities | — |
| | — |
| | (25 | ) | | — |
| | (25 | ) |
| Effect of exchange rate changes on cash | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Cash provided by discontinued operations | 720 |
| | — |
| | 1,154 |
| | — |
| | 1,874 |
|
| Net change in cash and cash equivalents | 566 |
| | — |
| | 216 |
| | — |
| | 782 |
|
| Cash and cash equivalents at beginning of year | 119 |
| | — |
| | 641 |
| | — |
| | 760 |
|
| Cash and cash equivalents at end of year | $ | 685 |
| | $ | — |
| | $ | 857 |
| | $ | — |
| | $ | 1,542 |
|
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9a. Controls and Procedures
We have filed the required certifications under Section 302 of the Sarbanes-Oxley Act of 2002 incorporated herein by reference from Exhibits (31.1) and (31.2) to this Annual Report on Form 10-K. In addition we have filed the required certifications under Section 906 of the Sarbanes-Oxley Act of 2002 incorporated herein by reference from Exhibit (32) to this Annual Report on Form 10-K.
This Item 9a. includes information concerning the controls and control evaluations referred to in the required certifications.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed so that information required to be disclosed in our reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.
As of December 31, 2015,2018, an evaluation was performed under the supervision and with the participation of management, including the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the U.S. Securities Exchange Act of 1934). Based on that evaluation, management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of December 31, 2015.2018.
Management’s Annual Report on Internal Control Over Financial Reporting
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, management is required to provide the following report on our internal control over financial reporting:
| |
| 1. | Management is responsible for establishing and maintaining adequate internal control over financial reporting. |
| |
| 2. | Management has evaluated the system of internal control using the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework (“COSO 2013 framework”). Management has selected the COSO 2013 framework for its evaluation as it is a control framework recognized by the SEC and the Public Company Accounting Oversight Board that is free from bias, permits reasonably consistent qualitative and quantitative measurement of our internal controls, is sufficiently complete so that relevant controls are not omitted and is relevant to an evaluation of internal controls over financial reporting. |
| |
| 3. | Based on management’s evaluation under this framework, management has concluded that our internal controls over financial reporting were effective as of December 31, 2015.2018. There are no material weaknesses in our internal control over financial reporting that have been identified by management. |
| |
| 4. | Management has excluded SNL Financial LC ("SNL") from its assessment of internal control over financial reporting as of December 31, 2015, since it was acquired on September 1, 2015. SNL has $2.5 billion and $2.3 billion of total and net assets, respectively, as of December 31, 2015 and $85 million and $9 million of revenues and net loss attributable to McGraw Hill Financial, Inc., respectively, for the year then ended. |
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5. | Our independent registered public accounting firm, Ernst & Young LLP, has audited our consolidated financial statements for the year ended December 31, 2015,2018, and has issued their reports on the financial statements and the effectiveness of our internal control over financial reporting. These reports are located on pages 5655 and 5756 of this Annual Report on Form 10-K. |
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the most recent quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9b. Other Information
IRAN THREAT REDUCTION AND SYRIA HUMAN RIGHTS ACT DISCLOSURE
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which amended the Securities Exchange Act of 1934, an issuer is required to disclose in its annual or quarterly reports, as applicable, whether, during the reporting period, it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or
entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable laws and regulations.
Revenue during 2015in 2018 attributable to the transactions or dealings by the Company described below was approximately $702,700,$5.77 million with net profit from such sales being a fraction of the revenues.
During 2015, one2018, Platts, a division of the Company’s divisions, a provider ofCompany that provides energy-related information in over 150 countries, sold information and informational materials, which are generally exempt from U.S. economic sanctions, to fifteen Iran-linked13 subscribers that are designated by the Treasury Department’s Office of Foreign Assets Control (“OFAC”) pursuant to Executive Order 13382 and/or are owned or controlled, or appear to be owned or controlled, by the Government of Iran (the “GOI”). The Company, among other things, offers customers that subscribe to its publications access to proprietary data, analytics, and industry information that enable commodities markets to perform with greater transparency and efficiency. This division provided such data related to the energy and petrochemicals markets to the Iran-linked subscribers referenced above, generating revenue that was a de minimis portion of both the division’sdivision's and the Company’s revenue. OneEight of the fifteen Iran-linked customers was, at the time of the relevant transactions, designated by OFAC pursuant to Executive Order 13382, and appears, based on publicly available information, to be owned or controlled by GOI entities; one was, at the time of the relevant transactions, designated by OFAC pursuant to Executive Order 13382, and is designated by OFAC as a GOI entity; eightsubscribers are designatedidentified by OFAC as GOI entities; and five appear, based on publicly available information, to be owned or controlled by GOI entities. We believe that these transactions were permissible under U.S. sanctions pursuant to certain statutory and regulatory exemptions for the exportation of information and informational materials. One of the subscribers that appears to be owned or controlled by GOI entities was designated in October 2018 by OFAC as a Specially Designated Global Terrorist; upon such designation, Platts ceased providing services to this entity in accordance with U.S. law. The Company will continue to monitor its provision of products and services to these Iranian customers so that such activity continues to be permissible under U.S. sanctions.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information about our directors is contained under the caption “Board of Directors and Corporate Governance-Director Biographies” in our Proxy Statement for our 20162019 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 20152018 (the “2016“2019 Proxy Statement”) and is incorporated herein by reference.
The information under the heading “Executive Officers of the Registrant” in Part I of this Annual Report on Form 10-K is also incorporated herein by reference.
Code of Ethics
We have adopted a Code of Ethics that applies to our CEO, CFO, chief accounting officer and senior financial officers. To access such code, go to the Corporate Governance section of our Investor Relations Web sitewebsite at http://investor.mhfi.com.investor.spglobal.com. Any waivers that may in the future be granted from such Code will be posted at such Web sitewebsite address. In addition to our Code of Ethics for the CEO and senior financial officers noted above, the following documents may be found on our Web sitewebsite at the above Web sitewebsite address:
Code of Business Ethics for all employees;
Code of Business Conduct and Ethics for Directors;
Employee Complaint Procedures;Procedures (Accounting and Auditing Matters);
Certificate of Incorporation;
By-Laws;
Corporate Governance Guidelines;
Audit Committee Charter;
Compensation and Leadership Development Committee Charter;
Nominating and Corporate Governance Committee Charter;
Financial Policy Committee Charter; and
Executive Committee Charter.
The foregoing documents are also available in print, free of charge, to any shareholder who requests them. Requests for printed copies may be e-mailed to corporate.secretary@mhfi.comcorporate.secretary@spglobal.com or mailed to the Corporate Secretary, McGraw Hill Financial,S&P Global Inc., 55 Water Street, New York, NY 10041-0001.
Information about the procedures by which security holders may recommend nominees to our Board of Directors can be found in our 20162019 Proxy Statement under the caption “Board of Directors and Corporate Governance-Committees of the Board of Directors-Nominating and Corporate Governance Committee” and is incorporated herein by reference.
Information concerning the composition of the Audit Committee and our Audit Committee financial experts is contained in our 20162019 Proxy Statement under the caption “Board of Directors and Corporate Governance-Committees of the Board of Directors-Audit Committee” and is incorporated herein by reference.
New York Stock Exchange Certification
Promptly following the 20162019 annual meeting of shareholders, we intend to file with the NYSE the CEO certification regarding our compliance with the NYSE’s corporate governance listing standards as required by NYSE Rule 303A.12. Last year, we filed this CEO certification with the NYSE on May 1, 2015.
29, 2018.
Item 11. Executive Compensation
Information about director and executive officer compensation, Compensation Committee interlocks and the Compensation Committee Report is contained in our 20162019 Proxy Statement under the captions “2015“2018 Director Compensation,” “Board of
Directors and Corporate Governance-Compensation Committee Interlocks and Insider Participation,” and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Set forth below is information with respect to securities authorized for issuance under equity compensation plans:
The following table details our equity compensation plans as of December 31, 2015:2018:
| | | | Equity Compensation Plans’ Information | | Equity Compensation Plans’ Information | |
| | (a) | | (b) | | (c) | | (a) | | (b) | | (c) | |
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
| Equity compensation plans approved by security holders | 5,814,328 |
| | $ | 45.61 |
| | 32,921,637 |
| | 1,652,682 |
| 1 | $ | 47.92 |
| | 33,293,160 |
| 2,3 |
| Equity compensation plans not approved by security holders | — |
| | — |
| | — |
| | |
| Total | 5,814,328 |
| 1 | $ | 45.61 |
| | 32,921,637 |
| 2,3 | |
| |
1 | Shares to be issued upon exercise of outstanding options under our Stock Incentive Plans. |
| |
2 | Included in this number are 92,64932,622 shares reserved for issuance under the Director Deferred Stock Ownership Plan. The remaining 32,828,98833,260,538 shares are reserved for issuance under the 2002 Stock Incentive Plan (the “2002 Plan”) for Performance Stock, Restricted Stock, Other Stock-Based Awards, Stock Options and Stock Appreciation Rights. |
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3 | Under the terms of the 2002 Plan, shares subject to an award or shares paid in settlement of a dividend equivalent reduce the number of shares available under the 2002 Plan by one share for each such share granted or paid. |
The 2002 Plan is also governed by certain share recapture provisions. The aggregate number of shares of stock available under the 2002 Plan for issuance are increased by the number of shares of stock granted as an award under the 2002 Plan that are:
forfeited, cancelled, settled in cash or property other than stock, or otherwise not distributable under the 2002 Plan;
tendered or withheld to pay the exercise or purchase price of an award under the 2002 Plan or to satisfy applicable wage or other required tax withholding in connection with the exercise, vesting or payment of, or other event related to, an award under the 2002 Plan; or
repurchased by us with the option proceeds in respect of the exercise of a stock option under the 2002 Plan.
Information on the number of shares our common stock beneficially owned by each director and named executive officer, by all directors and executive officers as a group and on each beneficial owner of more than 5% of our common stock is contained under the caption “Ownership of Company Stock” in our 20162019 Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information with respect to certain relationships and related transactions and director independence is contained under the captions “Board of Directors and Corporate Governance-Transactions with Related Persons” in our 20162019 Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
During the year ended December 31, 2015,2018, Ernst & Young LLP audited the consolidated financial statements of the Registrant and its subsidiaries.
Information on our Audit Committee’s pre-approval policy for audit services and information on our principal accountant fees and services is contained in our 20162019 Proxy Statement under the caption “Independent Registered Public Accounting Firm’s Fees and Services” and is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this Annual Report on Form 10-K:
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Income for the three years ended December 31, 20152018
Consolidated Statements of Comprehensive Income for the three years ended December 31, 20152018
Consolidated Balance Sheets as of December 31, 20152018 and 20142017
Consolidated Statements of Cash Flows for the three years ended December 31, 20152018
Consolidated Statements of Equity for the three years ended December 31, 20152018
Notes to the Consolidated Financial Statements
Schedule II—Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto.
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| 3. | Exhibits – The exhibits filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index immediately preceding such Exhibits, and such Exhibit Index is incorporated herein by reference. |
McGraw Hill FinancialS&P Global
Schedule II – Valuation and Qualifying Accounts
(in millions)
| | | Additions/(deductions) | Balance at beginning of year | | Net charges to income | | Deductions and other 1 | | Balance at end of year | Balance at beginning of year | | Net charges to income | | Deductions and other 1 | | Balance at end of year |
| Year ended December 31, 2015 | | | | | | | | |
| Year ended December 31, 2018 | | | | | | | | |
| Allowance for doubtful accounts | $ | 38 |
| | $ | 12 |
| | $ | (13 | ) | | $ | 37 |
| $ | 33 |
| | $ | 21 |
| | $ | (20 | ) | | $ | 34 |
|
| | | | | | | | | | | | | | | |
| Year ended December 31, 2014 | | | | | | | | |
| Year ended December 31, 2017 | | | | | | | | |
| Allowance for doubtful accounts | $ | 50 |
| | $ | 2 |
| | $ | (14 | ) | | $ | 38 |
| $ | 28 |
| | $ | 15 |
| | $ | (11 | ) | | $ | 33 |
|
| | | | | | | | | | | | | | | |
| Year ended December 31, 2013 | | | | | | | | |
| Year ended December 31, 2016 | | | | | | | | |
| Allowance for doubtful accounts | $ | 51 |
| | $ | 20 |
| | $ | (21 | ) | | $ | 50 |
| $ | 37 |
| | $ | 8 |
| | $ | (17 | ) | | $ | 28 |
|
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1 | Primarily includes uncollectible accounts written off, net of recoveries, impact of acquisitions and divestitures and adjustments for foreign currency translation. |
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
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McGraw Hill Financial,S&P Global Inc. |
| Registrant |
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| By: |
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| /s/ Douglas L. Peterson |
| Douglas L. Peterson |
| President and Chief Executive Officer |
February 11, 201612, 2019
Each individual whose signature appears below constitutes and appoints Douglas L. Peterson and Jack F. Callahan, Jr.,Ewout L. Steenbergen, and each of them singly, his or her true and lawful attorneys-in-fact and agents with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Form 10-K filed with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all the said attorneys-in-fact and agents or any of them or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on February 11, 201612, 2019 on behalf of the Registrant by the following persons who signed in the capacities as set forth below under their respective names.
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|
| |
| /s/ Douglas L. Peterson |
| Douglas L. Peterson |
| President and Chief Executive Officer and Director |
| |
/s/ Jack F. Callahan, Jr.Ewout L. Steenbergen |
Jack F. Callahan, Jr.Ewout L. Steenbergen |
| Executive Vice President and Chief Financial Officer |
| |
/s/ Robert J. MacKayChristopher F. Craig |
Robert J. MacKayChristopher F. Craig |
| Senior Vice President and Corporate Controller |
| |
| /s/ Charles E. Haldeman, Jr. |
| Charles E. Haldeman, Jr. |
| Chairman of the Board and Director |
| |
/s/ Sir Winfried F.W. BischoffMarco Alverà |
Sir Winfried F.W. BischoffMarco Alverà |
| Director |
|
|
|
| |
| /s/ William D. Green |
| William D. Green |
| Director |
|
| /s/ Stephanie C. Hill |
| Stephanie C. Hill |
| Director |
| |
/s/ Rebecca Jacoby |
| Rebecca Jacoby |
| Director |
| |
/s/ Robert P. McGrawMonique F. Leroux |
Robert P. McGrawMonique F. Leroux |
| Director |
| |
/s/ Hilda Ochoa-BrillembourgMaria R. Morris |
Hilda Ochoa-BrillembourgMaria R. Morris |
| Director |
| |
| /s/ Sir Michael Rake |
| Sir Michael Rake |
| Director |
| |
/s/ Edward B. Rust, Jr. |
| Edward B. Rust, Jr. |
| Director |
| |
/s/ Kurt L. Schmoke |
| Kurt L. Schmoke |
| Director |
| |
/s/ Sidney Taurel |
Sidney Taurel |
Director |
|
/s/ Richard E. Thornburgh |
| Richard E. Thornburgh |
| Director |
|
| | |
Exhibit Number | Exhibit Index |
| | |
| (2.1 | ) | |
| | |
| (2.2 | ) | |
| | |
| (2.3 | ) | |
| | |
(3.1(2.4) | )
|
|
| |
| (3.1) |
| |
| | |
(3.2(3.2) | )
| Certificate of Amendment of the Certificate of Incorporation of Registrant, dated May 1, 2013, incorporated by reference from Registrant’s Form 8-K filed May 1, 2013. |
| |
(3.3 | ) | |
| |
(3.4 | ) | Certificate of Change of the Certificate of Incorporation of the Company, as incorporated by reference from the Registrant’s Form 8-K filed on July 1, 2015.April 29, 2016. |
| | |
| (4.1 | ) | |
| | |
| (4.2 | ) | |
| | |
| (4.3 | ) | |
| | |
(4.4(4.4) | )
| |
| | |
(4.5(4.5) | )
| |
| | |
(4.6(4.6) | )
| |
| |
| (4.7) |
| |
| |
| (4.8) |
| |
| | |
(4.7(4.9) | )
| |
| | |
(4.8(4.10) | )
| |
| | |
(4.9(4.11) | )
| |
| |
|
| | |
| (4.12) |
| |
| |
| (4.13) |
| |
| | |
| (10.1 | ) | |
| | |
| (10.2)* |
| |
| | |
| (10.3)* |
| |
| | |
|
| | |
| (10.4)* |
| |
| | |
| (10.5)* |
|
|
| |
| (10.6)* |
|
|
| |
| (10.7)* |
|
|
| |
| (10.8)* |
| |
| | |
(10.6)(10.9)* |
| |
| |
| (10.10)* |
| |
| |
| (10.11)* |
| |
| |
| (10.12)* |
| |
| |
| (10.13)* |
| Form of Stock Option Award, incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 2013. |
| | |
(10.7)(10.14)* |
| Registrant’s Key Executive Short Term Incentive Compensation Plan, as amended effective January 1, 2014, incorporated by reference from Registrant’s Form 10-Q filed April 29, 2014. |
| |
(10.8)* |
| |
| | |
(10.9)(10.15)* |
| |
| | |
(10.10)(10.16)* |
| |
| |
| (10.17)* |
| |
| |
|
| | |
| (10.18)* |
| |
| | |
(10.11(10.19) | )
| $1,000,000,000 Four-Year Credit Agreement dated as of June 19, 2013 among the Registrant, Standard & Poor’s Financial Services LLC, as guarantor, the lenders listed therein, JP Morgan Chase Bank, N.A., as administrative agent, and Bank of America, N.A., as syndication agent, incorporated by reference from the Registrant’s Form 8-K filed June 20, 2013. |
| | |
(10.12(10.20) | )
| |
| | |
(10.13)(10.21)* |
| |
| | |
(10.14)(10.22)* |
| |
| | |
(10.15)(10.23)* |
| |
| | |
(10.16)(10.24)* |
| |
| | |
(10.17)(10.25)* |
| |
| | |
(10.18)(10.26)* |
| |
| | |
(10.19)(10.27)* |
| |
| | |
(10.20)(10.28)* |
| |
| | |
(10.21)(10.29)* |
| |
| | |
|
| | |
(10.22)(10.30)* |
| |
| | |
(10.23)(10.31)* |
| |
| | |
(10.24)(10.32)* |
| |
| | |
(10.25)(10.33)* |
| |
| | |
(10.26)(10.34)* |
| |
| | |
(10.27)(10.35)* |
| |
| | |
(10.28) |
| | |
| (10.36)* |
| Registrant's Director Retirement Plan, incorporated by reference from Registrant’s Form SE filed March 29, 1990 in connection with Registrant’s Form 10-K for the fiscal year ended December 31, 1989. |
| | |
(10.29)(10.37)* |
| Resolutions Freezing Existing Benefits and Terminating Additional Benefits under Registrant’s Directors Retirement Plan, as adopted on January 31, 1996, incorporated by reference from Registrant’s Form 10-K for the fiscal year ended December 31, 1996. |
| | |
(10.30)(10.38)* |
| |
| | |
(10.31)(10.39)* |
| |
| | |
(10.32)(10.40)* |
| |
| |
| (10.41)* |
| |
| | |
(10.33)(10.42)* |
| |
| | |
(10.34)(10.43)* |
| |
| | |
(10.35)(10.44)* |
| |
| | |
(10.36)(10.45)* |
| |
| |
| (10.46)* |
| |
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| (10.47)* |
| |
| | |
(10.37)(10.48)* |
| |
| | |
(10.38)(10.49) |
| |
| | |
(12)(10.50) |
| Computation of Ratio of Earnings to Fixed Charges. |
| |
| (10.51) |
| |
| |
| (10.52) |
| |
| |
| (10.53) |
| |
| |
|
| | |
| |
| (21) |
| |
| | |
| (23) |
| |
| | |
| (31.1) |
| |
| | |
| (31.2) |
| |
| | |
| (32) |
| |
| | |
| (101.INS) |
| XBRL Instance Document |
| | |
| (101.SCH) |
| XBRL Taxonomy Extension Schema |
| | |
| (101.CAL) |
| XBRL Taxonomy Extension Calculation Linkbase |
| | |
| (101.LAB) |
| XBRL Taxonomy Extension Label Linkbase |
| | |
| (101.PRE) |
| XBRL Taxonomy Extension Presentation Linkbase |
| | |
| (101.DEF) |
| XBRL Taxonomy Extension Definition Linkbase |
| | |
| (101.LAB) |
| XBRL Taxonomy Extension Label Linkbase |
| | |
| (101.PRE) |
| XBRL Taxonomy Extension Presentation Linkbase |
| | |
| (101.DEF) |
| XBRL Taxonomy Extension Definition Linkbase |
* These exhibits relate to management contracts or compensatory plan arrangements.
Item 16. Form 10-K Summary
None.
