S&P Global (NYSE: SPGI) reported third quarter 2020 results with revenue of $1,846 million, an increase of 9% compared to the same period last year. Net income decreased 26% to $455 million and diluted earnings per share decreased 25% to $1.88 primarily due to the debt tender premium and fees associated with the recent senior notes tender offer.
Adjusted net income increased 14% to $689 million and adjusted diluted earnings per share increased 16% to $2.85 primarily due to revenue growth, productivity programs, and reduced expenses across the Company from COVID-19 related management actions. The largest adjustment in the third quarter of 2020 was associated with the debt tender premium and fees. In addition, there were adjustments for deal-related amortization and Kensho retention-related expenses. The third quarter of 2019 included adjustments for the gains on the divestitures of SPIAS and RigData as well as deal-related amortization and Kensho retention-related expenses.
“S&P Global has a collection of strong and resilient businesses that continued to perform well in the current environment. The demand for our ratings, benchmarks, research, data, and analytics is greater than ever during uncertain and volatile markets,” said Douglas L. Peterson, President and Chief Executive Officer of S&P Global. “Two years ago, we established a number of growth initiatives. It is very encouraging to see so many of these investments result in new products that we have launched this year. This is particularly true with our ESG investments and the traction that our new ESG products are gaining in the marketplace.”
Profit Margin: The Company’s operating profit margin decreased 160 basis points to 51.1% primarily due to the prior period benefiting from the dispositions of the SPIAS and RigData businesses. The adjusted operating profit margin increased 100 basis points to 52.9% primarily due to revenue growth, productivity programs, and reduced expenses across the Company from COVID-19 related management actions.
Ratings: Revenue increased 13% to $894 million in the third quarter of 2020 due primarily to strong bond issuance partially offset by lower bank loan rating activity. Transaction revenue increased 22% to $490 million due primarily to strong bond issuance among U.S. corporates, global sovereigns, and U.S. public finance. Non-transaction revenue increased 4% to $404 million.
Operating profit increased 14% to $544 million and the operating profit margin improved 50 basis points to 60.9% compared to the third quarter of 2019. Adjusted operating profit increased 16% to $552 million and the adjusted operating profit margin improved 130 basis points to 61.8%.
S&P Dow Jones Indices: S&P Dow Jones Indices LLC is a majority-owned subsidiary. The consolidated results are included in S&P Global’s income statement and the portion related to the 27% noncontrolling interest is removed in net income attributable to noncontrolling interests.
Revenue increased 1% to $234 million in the third quarter of 2020 as modest gains in asset-linked fees and data and custom subscriptions were partially offset by reduced exchange-traded derivative fees.
Asset-linked fees include fees associated with ETFs, mutual funds, and certain over-the-counter derivatives. Revenue from ETFs is the largest component of asset-linked fees, and average ETF AUM associated with the Company’s indices increased 12% year-over-year. Quarter-ending ETF AUM associated with our indices was $1,727 billion, an 11% increase from 3Q 2019.
Operating profit decreased 7% to $151 million and the operating profit margin declined 510 basis points to 64.6% primarily due to increased legal related costs, higher compensation from increased headcount and incentives, as well as professional fees. Adjusted operating profit decreased 7% to $153 million and the adjusted operating profit margin declined 510 basis points to 65.2%. Operating profit attributable to the Company decreased 7% to $110 million. Adjusted operating profit attributable to the Company decreased 7% to $112 million.
Market Intelligence: Revenue increased 9% to $530 million in the third quarter of 2020 with growth in Data Management Solutions, Credit Risk Solutions, and Desktop as well as the addition of 451 Research. Operating profit increased 2% to $164 million and the operating profit margin declined 210 basis points to 30.8%. These comparisons were impacted by a gain on the divestiture of the SPIAS business in the prior period. Adjusted operating profit increased 14% to $179 million and adjusted operating profit margin improved 160 basis points to 33.8%.
Platts: Revenue increased 5% to $222 million in the third quarter of 2020 with growth in the core subscription business partially offset by lower Global Trading Services activity. Operating profit decreased 11% to $121 million and the operating profit margin decreased 980 basis points to 54.7% due to a gain on the divestiture of RigData in the prior period partially offset by revenue growth and reduced expenses in the current period. Adjusted operating profit increased 10% to $124 million and adjusted operating profit margin increased 280 basis points to 55.7% due to revenue growth and reduced expenses in the current period.
Corporate Unallocated Expense: This expense decreased from $45 million in the prior period to $36 million in the third quarter of 2020 due primarily to lower Kensho retention-related expenses, lower rental expense from reduction in the Company’s real estate footprint, reduced T&E, and Company-owned life insurance proceeds. Adjusted Corporate Unallocated expense declined from $33 million in the prior period to $32 million due primarily to lower rental expense, reduced T&E, and Company-owned life insurance proceeds, partially offset by a $4 million contribution to the S&P Global Foundation made in the third quarter.
Provision for Income Taxes: The Company’s effective tax rate decreased to 21.7% in the third quarter of 2020 compared to 22.2% in the same period last year and the Company’s adjusted effective tax rate increased to 22.6% in the third quarter of 2020 compared to 22.2% in the same period last year. The Company’s effective tax rate may fluctuate from quarter to quarter due to the timing of discrete tax adjustments.
Balance Sheet and Cash Flow: During the quarter the Company refinanced approximately $1.1 billion of its outstanding debt and replaced it with new debt at lower interest rates. The net result was approximately $200 million of additional debt, a $26 million per year reduction in bond interest expense, and an extension of the weighted average tenor of the Company’s outstanding debt by approximately 5 years.
Cash, cash equivalents, and restricted cash at the end of the third quarter were $3.2 billion. In the first nine months of 2020, cash provided by operating activities was $2,426 million, cash used for investing activities was $204 million, and cash used for financing activities was $1,950 million. Free cash flow in the first nine months of 2020 was $2,240 million, an increase of $645 million from the same period in 2019, primarily due to increased net income.
Productivity Program: The Company is establishing a new productivity program targeting savings in real estate, procurement, T&E, and IT infrastructure. This program will be completed in two to three years with estimated annual savings of $120 million.
Outlook: Due to the debt tender premium and fees incurred in the third quarter, GAAP diluted EPS guidance is decreased from a range of $10.25 to $10.45 to a new range of $10.00 to $10.15. This guidance does not reflect potential future impairment charges relating to the new productivity program that are not quantifiable at this time. Based on the Company’s strong year-to-date financial performance and its expectation for the remainder of the year, adjusted diluted EPS guidance is increased from a range of $10.75 to $10.95 to a new range of $11.30 to $11.45.
Source: S&P Global Earnings Release