Moody’s Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019. Amounts are in U.S. dollars unless noted. Moody’s operates Moody’s Investors Service (MIS), its ratings business, and Moody’s Analytics (MA), its data, analytics, and risk-solutions business.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $1.290 billion | $1.142 billion | +13% |
| Operating income | $592 million | $462 million | +28% |
| Operating margin | 45.9% | 40.5% | +540 bps |
| Adjusted operating income (non-GAAP) | $649 million | $519 million | +25% |
| Adjusted operating margin (non-GAAP) | 50.3% | 45.4% | +490 bps |
| Net income attributable to Moody’s | $488 million | $373 million | +31% |
| Diluted EPS | $2.57 | $1.93 | +33% |
| Adjusted diluted EPS (non-GAAP) | $2.73 | $2.07 | +32% |
| Operating cash flow | $345 million | $367 million | Down $22 million |
| Free cash flow (non-GAAP) | $324 million | $347 million | Down $23 million |
Revenue increased in both segments. MIS external revenue was $794 million, up 19%; MA external revenue was $496 million, up 5% (9% organic growth, a non-GAAP measure). MIS operating income was $488 million versus $366 million; MA operating income was $104 million versus $96 million. MA results include a $9 million loss related to post-closing adjustments on the MAKS divestiture.
Revenue growth was strongest in MIS Corporate Finance, up 28%, while Structured Finance declined 5%. MA Research, Data & Analytics grew 16% and Enterprise Risk Solutions grew 13%; acquisitions contributed to reported MA growth. Prior-period MA line-of-business comparisons are affected by the divestiture of MAKS and the reassignment of MALS revenue.
Liquidity, debt, and other financial metrics
- At March 31, cash and cash equivalents were $2.141 billion and short-term investments were $90 million, versus cash of $1.832 billion and short-term investments of $98 million at year-end 2019.
- Total debt carrying value was approximately $6.8 billion, including $485 million of commercial paper. Moody’s issued $700 million of five-year notes at 3.75% in March and reported compliance with all debt covenants.
- Operating cash flow decreased year over year, principally reflecting a $99 million pension contribution and higher incentive-compensation payments, partly offset by improved operating income. Investing cash outflow was $772 million, including approximately $700 million paid for RDC.
- Accounts receivable allowances were $42 million at quarter-end, compared with $20 million at year-end 2019. The company recorded a $24 million provision for expected credit losses during the quarter, primarily reflecting its assessment of COVID-19 effects.
- The effective tax rate was 13.7%, versus 9.2%; management attributed the increase mainly to favorable IRS regulations that benefited Q1 2019 but did not recur.
Material changes, outlook, and risks
- COVID-19: Moody’s reported late-quarter disruption, including reduced leveraged-finance issuance, widening credit spreads, and a decline in CLO activity. It said the pandemic could materially affect 2020 revenue and cash flows but could not estimate the extent or duration. Potential MA impacts include lower discretionary spending, longer sales cycles, delayed compliance-related sales, and weaker renewals.
- Management said near-term liquidity was adequate and debt covenants remained manageable. To preserve liquidity, Moody’s issued the 2020 notes, drew on its commercial-paper program, reduced discretionary spending, and suspended share repurchases. It provided no numerical earnings or revenue guidance in this filing.
- The $702 million RDC acquisition added $494 million of preliminary goodwill, assigned to MA. The purchase-price allocation remains preliminary. The company also acquired RBA; its purchase price and expected near-term impact were not material.
- ICRA’s market-capitalization decline reduced goodwill headroom. No impairment was recorded at March 31, but further declines or adverse outcomes from investigations could lead to future impairment. The filing does not quantify any potential loss from the ICRA matters.
- A $300 million Treasury-rate lock had a cumulative $68 million loss when it matured on April 30, 2020. The loss remains in accumulated other comprehensive income unless the anticipated hedged transaction is deemed not probable, and is expected to be recognized with the related interest payments.
- The company reported $448 million of uncertain tax positions; timing of any related cash outflow could not be reasonably estimated. It also disclosed ongoing legal, regulatory, and tax matters without a clear quantified potential loss.
- The Board declared a $0.56-per-share quarterly dividend in April, payable June 10, 2020. Continued dividends remain subject to Board discretion.
Important facts for investors to verify
- How subsequent COVID-19 market conditions affected ratings issuance, especially leveraged finance and structured finance, and the related revenue and cash-flow outlook.
- Whether MA subscription renewals, sales cycles, customer spending, and credit losses developed in line with management’s risk assessment.
- RDC integration and final purchase-price allocation, including the assumptions supporting acquired goodwill and intangible assets.
- ICRA investigation developments and changes in ICRA’s market capitalization, goodwill headroom, or impairment risk.
- Debt, commercial-paper usage, covenant compliance, and the effect of the Treasury-lock loss on future interest expense and cash flows.
- Resolution of tax audits and other contingencies, including any material change in potential exposure or cash-payment timing.