Business context and reporting period
Moody’s Corporation filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. Its two reportable segments are Moody’s Investors Service (MIS), principally credit ratings, and Moody’s Analytics (MA), offering research, data, analytics, software and related services. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1,080.8 | $1,062.9 | $3,382.6 | $3,038.6 |
| Operating income | $466.8 | $448.5 | $1,491.6 | $1,355.3 |
| Net income attributable to Moody’s | $310.2 | $317.3 | $1,059.3 | $975.1 |
| Diluted EPS | $1.59 | $1.63 | $5.45 | $5.02 |
| Operating margin | 43.2% | 42.2% | 44.1% | 44.6% |
| Adjusted operating margin (non-GAAP) | 47.6% | 47.2% | 48.5% | 48.7% |
| Effective tax rate | 24.4% | 31.4% | 21.0% | 29.0% |
For the first nine months, operating cash flow was $1,084.6 versus $349.8 in 2017; free cash flow, a non-GAAP measure, was $1,021.7 versus $280.4. Capital additions were $62.9. The cash-flow improvement mainly reflects the approximately $864 million settlement payment made in 2017 and higher operating income, partly offset by compensation payouts and tax-payment timing.
At September 30, cash and cash equivalents were $1,034.8 and short-term investments were $110.7. Current assets were $2,516.2 and current liabilities $1,823.6. Debt principal was approximately $5.0 billion (carrying value $4,954.5, including commercial paper); the company reported approximately $975 million of additional commercial-paper borrowing capacity. Moody’s repaid $450 million of its term loan and $300 million of floating-rate notes, and issued $300 million of 3.25% notes due 2021 during 2018. It reported compliance with debt covenants.
Material changes versus the prior comparable period
- Q3 revenue rose 2%, as MA growth more than offset lower MIS revenue. MIS external revenue fell 7%; MA external revenue grew 18%, including about $37 million of Bureau van Dijk revenue.
- For the nine months, revenue increased 11%. MIS external revenue rose 3%, while MA external revenue rose 28%, including about $190 million of Bureau van Dijk revenue. International revenue grew 23%, compared with 3% U.S. growth.
- Q3 net income attributable to Moody’s declined 2% and diluted EPS declined 2%; the prior-year quarter included a $69.9 million Bureau van Dijk purchase-price hedge gain. Nine-month net income rose 9% and diluted EPS rose 9%, despite prior-year gains of $111.1 million from that hedge and $59.7 million from the CCXI transaction.
- Q3 operating margin expanded by 1.0 percentage point; nine-month operating margin declined by 0.5 point. Nine-month costs increased, including Bureau van Dijk-related expenses and higher compensation and amortization.
- Moody’s adopted the new revenue accounting standard on January 1, 2018 using a modified retrospective approach; 2017 comparatives were not restated. Adoption increased reported Q3 diluted EPS by $0.04 and nine-month diluted EPS by $0.08 versus the prior accounting guidance. Management did not expect a material full-year 2018 net-income impact, but noted potential quarterly fluctuations.
Outlook, commentary, risks and unusual items
- Management expected positive operating cash flow over the next 12 months and said it believed available financial resources would meet cash requirements. The filing gives no clear full-year revenue or EPS guidance. Full-year 2018 share repurchases were expected to be approximately $200 million, subject to cash availability, market conditions and capital-allocation decisions.
- After quarter-end, Moody’s completed the approximately $278 million acquisition of Reis, Inc. on October 15, 2018. On October 26, it approved a restructuring program expected to generate $30–$40 million in annualized savings beginning in 2019, with $45–$60 million of pretax charges and $25–$35 million of cash outlays; most cash outlays were expected in 2019.
- The Tax Act lowered the U.S. corporate tax rate and contributed to lower effective tax rates. Moody’s revised its provisional transition-tax estimate to $237 million; approximately $213 million remained unpaid, with payment scheduled over eight years. The company also reported increases in uncertain tax positions, primarily for non-U.S. matters, and ongoing tax audits.
- A New York False Claims Act case alleges more than $120 million in unpaid state and city taxes and seeks treble damages and other relief. The company contests the claims, says it cannot estimate a loss range, and expected trial no earlier than late 2019 absent earlier resolution.
- Management cited risks including credit-market and economic conditions, issuance volumes, interest rates and spreads, regulation, litigation, competition, foreign exchange, cybersecurity, and the integration and performance of acquisitions. MIS remains subject to extensive U.S. and international oversight.
- Other accounting and balance-sheet items to note: adoption of lease accounting was expected to add approximately $500 million of right-of-use assets and lease liabilities in January 2019; foreign-currency translation reduced nine-month comprehensive income; and goodwill was $3.66 billion, largely reflecting acquisitions.
Most important facts for investors to verify
- How much of MA’s growth is recurring and organic after separating Bureau van Dijk contributions, currency effects and revenue-standard timing impacts.
- Whether MIS issuance trends recover or remain pressured by interest rates, credit spreads, seasonal patterns and corporate liquidity.
- Cash generation and debt reduction, including the 2019 maturity of $450 million of notes and the planned use of cash for acquisitions, dividends and repurchases.
- The final tax-reform accounting, uncertain tax-position developments and cash payments under the transition tax; also monitor the New York tax litigation, for which no loss range is estimable.
- Actual restructuring charges, savings and cash outlays, and Reis integration and purchase-accounting effects; assess goodwill sensitivity, particularly for ERS and other reporting units identified in the filing.