Moody’s Corporation — Q1 2012 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2012, compared with the same period in 2011. Moody’s operates Moody’s Investors Service (MIS), its credit-ratings business, and Moody’s Analytics (MA), its non-ratings research, data, software and services business. Amounts below are in millions of U.S. dollars, except per-share data.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $646.8 | $577.1 | +12% |
| Operating income | $269.0 | $250.1 | +8% |
| Operating margin | 41.6% | 43.3% | Down 1.7 percentage points |
| Net income attributable to Moody’s | $173.5 | $155.5 | +12% |
| Diluted EPS | $0.76 | $0.67 | +$0.09 |
| Operating cash flow | $62.0 | $200.9 | Down $138.9 |
- Revenue and segments: MIS external revenue rose 10% to $452.7; MA external revenue rose 18% to $194.1. MIS operating income increased to $237.7, while MA operating income was $31.3, little changed. MA growth included acquired Copal in professional services and Barrie & Hibbert (B&H) in enterprise risk solutions.
- Costs and earnings: Total expenses increased 16% to $377.8, faster than revenue, including higher staffing, technology investment, acquisition-related costs and amortization. The effective tax rate declined to 32.1% from 33.2%. The filing attributes part of the lower net interest expense to an approximately $7 benefit from state and local tax audit settlements.
- Cash flow: Operating cash flow fell primarily because of an approximately $121 tax-audit settlement payment and a $94 unfavorable change in receivables, partly offset by higher deferred revenue. Capital additions were $15.3. Cash and cash equivalents ended the quarter at $814.7, versus $760.0 at year-end.
- Balance sheet and debt: Total assets were $2,994.4 and total liabilities were $2,833.8 at March 31. Total debt was $1,236.8, including $99.4 current and $1,137.4 long-term. Moody’s reported no borrowings under its revolving facility or commercial paper program and said it complied with debt covenants. Current assets were $1,526.6 and current liabilities $1,011.5; current liabilities include substantial deferred revenue.
- Capital allocation: No shares were repurchased in Q1; 334,965 shares reported as purchased in March were surrendered to satisfy employee tax withholding. Dividends paid were $35.7. The board subsequently declared a $0.16-per-share quarterly dividend, and $873.8 of repurchase authorization remained at quarter-end.
Material changes versus the prior period
- Revenue growth was broad-based across MIS and MA. Within MIS, public, project and infrastructure finance grew 23%, while corporate finance grew 10%; MA professional services more than doubled, substantially reflecting Copal.
- Expense growth outpaced revenue, reducing the operating margin despite higher operating income.
- Operating cash flow was materially lower, mainly because of tax settlement cash payments and higher receivables; reported net income increased.
- Quarter-end shareholders’ equity shifted from a deficit of $158.4 at December 31, 2011 to positive equity of $91.2, reflecting earnings and other equity movements.
Outlook, risks and unusual items
- 2012 guidance reaffirmed or updated: Full-year diluted EPS of $2.62–$2.72, now expected toward the upper end; revenue growth in the low-double-digit percentage range; expense growth also in the low-double-digit range; operating margin approximately 39%; and effective tax rate approximately 33%.
- Segment outlook: MIS revenue growth expected in the mid- to high-single-digit range; MA growth expected in the high-teens. Management projected professional services growth of approximately 80%, including Copal, and ERS growth in the low 20s, including B&H. Guidance depends on uncertain macroeconomic and capital-market assumptions and assumes quarter-end foreign-exchange rates.
- Financing: On April 18, 2012, after quarter-end, Moody’s entered a new $1 billion, five-year unsecured revolving credit facility, replacing the facility scheduled to expire in September 2012. The new facility includes a maximum debt-to-EBITDA covenant of 4:1.
- Legal and regulatory exposure: Moody’s described ongoing litigation and government inquiries relating to ratings, including securities and shareholder derivative cases. It said it could not estimate a range of possible losses for the described matters. EU oversight and proposed CRA regulation could increase compliance costs, legal exposure or operating constraints.
- Tax contingencies: Recorded Legacy Tax Matter liabilities were $55.5; the filing cautions that ultimate exposure could be higher. Net long-term tax liabilities of $177.9 relating to uncertain tax positions and legacy matters were excluded from contractual-obligation timing because expected payment dates could not be reasonably estimated.
- Other exposures: Approximately $522 of cash was held in foreign entities with earnings treated as indefinitely reinvested; a future distribution could create additional tax. Moody’s also noted substantial long-term lease commitments and a Copal put/call arrangement whose exercise price has a floor and no stated maximum.
Investor verification priorities
- Check whether subsequent quarters convert the higher deferred revenue and receivables into cash, and whether the Q1 operating-cash-flow decline was temporary.
- Track MIS issuance volumes, fee mix and pricing, particularly in corporate finance and public finance, and assess the durability of acquisition-driven MA growth.
- Verify delivery against full-year EPS, revenue, expense and segment guidance, including the effects of foreign exchange and market conditions.
- Monitor developments in ratings-related litigation, regulatory inquiries and proposed EU rules; the filing provides no clear estimate of potential litigation losses.
- Review tax-audit settlements, uncertain tax positions, Legacy Tax Matter exposure and potential tax on foreign earnings, as well as Copal’s put/call and contingent payment obligations.