Moody’s Corporation — Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 30, 2011; comparative periods ended September 30, 2010. Amounts are in millions, except per-share data. Moody’s operates Moody’s Investors Service (MIS), its ratings business, and Moody’s Analytics (MA), its non-rating analytics and related businesses.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $531.3 | $513.3 | $1,713.6 | $1,467.7 |
| Operating income | $196.1 | $188.9 | $716.3 | $576.2 |
| Operating margin | 36.9% | 36.8% | 41.8% | 39.3% |
| Net income attributable to Moody’s | $130.7 | $136.0 | $475.2 | $370.4 |
| Diluted EPS | $0.57 | $0.58 | $2.06 | $1.56 |
| Operating cash flow | Not separately provided | Not separately provided | $666.3 | $474.7 |
- Q3 revenue rose about 4% year over year, while operating income increased about 4%. Q3 attributable net income fell about 4%; diluted EPS declined by $0.01.
- For the first nine months, revenue grew about 17%, operating income 24%, and attributable net income 28%. Diluted EPS rose about 32% on an adjusted comparison excluding specified tax and restructuring items, and was $2.06 as reported versus $1.56.
- Q3 results included an estimated $7 million, or $0.03 per diluted share, benefit from settling state tax matters. Q3 2010 included an approximately $18 million, or $0.07 per share, tax benefit related to indefinitely reinvested foreign earnings. Nine-month 2011 results included approximately $19 million of tax benefits, including legacy-tax-related benefits.
- Nine-month operating cash flow increased $191.6 million. Management attributed the increase principally to higher earnings, collections, and lower prepaid-tax balances, partly offset by compensation, pension, and tax-payment timing.
Segments and material changes
- Q3: MIS total revenue was $368.2 million, down about 1%; external MIS revenue was $351.4 million, down about 2%. Corporate finance revenue declined 11%, partly offset by 17% growth in structured finance. Management cited weaker corporate issuance amid wider credit spreads and uncertainty over European sovereign debt, while CMBS and other structured-finance activity improved.
- Q3: MA total revenue was $182.5 million, up 16%; external revenue rose 16% to $179.9 million. Growth spanned its businesses, with professional services benefiting substantially from the CSI acquisition completed in late 2010. MA operating income increased 26% to $37.8 million.
- Nine months: MIS external revenue increased 18% to $1,202.0 million, reflecting stronger issuance earlier in the year across ratings businesses. MA external revenue grew 15% to $511.6 million; CSI contributed to professional-services growth. MIS operating income rose 28% to $616.0 million, while MA operating income rose 5% to $100.3 million.
- International revenue grew 9% in Q3 and 22% for the nine-month period. Foreign-exchange translation added approximately $11 million to Q3 revenue and $27 million to nine-month revenue.
- Q3 transaction revenue was 41% of consolidated revenue versus 45% a year earlier; MIS transaction revenue was 52% of MIS revenue versus 58%. MA recurring revenue was 81% of MA revenue versus 86%.
Financial position, liquidity, and capital allocation
- At September 30, cash and cash equivalents were $854.2 million, short-term investments $13.3 million, and total current assets $1,360.0 million. Current liabilities were $834.9 million. Cash was approximately $681 million outside the U.S.; about $579 million was in foreign entities whose earnings Moody’s considered indefinitely reinvested.
- Total debt was $1,244.0 million, including $43.1 million current and $1,200.9 million long-term. Debt was $1,239.6 million at December 31, 2010. No commercial paper or revolving-facility borrowings were outstanding. Moody’s reported compliance with debt covenants, including a maximum Debt/EBITDA ratio of 4.0 to 1.0.
- Shareholders’ deficit was $174.2 million. The company repurchased $333.8 million of shares during the first nine months and had $0.9 billion of remaining repurchase authorization at September 30.
- Cash dividends paid in the first nine months were $89.9 million. The Board declared a $0.14-per-share quarterly dividend in October, payable December 10, 2011.
- Contractual obligations totaled $2,675.2 million, including $1,645.0 million of indebtedness and $843.7 million of operating lease obligations. The table excluded $226.1 million of net long-term tax liabilities because the timing of cash outflows could not reasonably be estimated.
Outlook, commentary, and risks
- Moody’s reaffirmed full-year 2011 diluted EPS guidance of $2.38–$2.48 and expected results at the upper end. It projected low-double-digit revenue growth, high-single-digit expense growth, an operating margin of approximately 39%, and an effective tax rate of approximately 31%.
- Full-year MIS revenue was forecast to grow in the high-single-digit range; MA revenue was expected to grow in the low-double-digit range. Management noted uncertainty in macroeconomic and capital-market assumptions and expected lower revenue in Q4 than previously anticipated.
- Management expected positive operating cash flow over the next 12 months and said it planned modest Q4 share repurchases, subject to cash flow, market conditions, and capital-allocation decisions.
- Material risks include litigation and investigations concerning ratings and structured-finance products, heightened regulatory scrutiny and potential new requirements, uncertainty in global debt issuance and credit markets, and possible additional liabilities from legacy tax matters. The company stated that it could not estimate a range of possible losses for the cited legal matters; it also warned legacy-tax liabilities could exceed amounts accrued.
- Moody’s recorded $53.6 million of liabilities for legacy tax matters. It stated that an eventual distribution of certain foreign earnings, or a change in its reinvestment position, could create additional tax liability; the amount was not practicable to determine.
- The filing reported effective disclosure controls and procedures, no material change in internal control over financial reporting during the quarter, and no material change in market-risk exposure since year-end 2010.
Key facts for investors to verify
- Whether full-year EPS guidance at the upper end of $2.38–$2.48 remained achievable given Q3 weakness in corporate issuance and the anticipated Q4 revenue decline.
- How issuance conditions, credit spreads, and European sovereign-debt uncertainty affected MIS revenue after the reporting date.
- How much MA growth was organic versus attributable to CSI, and whether professional-services and software revenue volatility persisted.
- The sustainability of operating cash flow and the effects of foreign-held cash, share repurchases, dividends, lease commitments, and upcoming debt maturities on liquidity.
- Developments in ratings-related litigation, regulatory proceedings, and legacy-tax audits or claims, including potential exposures beyond recorded accruals.