Moody’s Corporation — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. This is an annual report, not a standalone fourth-quarter filing; unaudited fourth-quarter results are also summarized below. Moody’s operates Moody’s Investors Service (MIS), its credit-rating business, and Moody’s Analytics (MA), which sells research, data, risk-management software and professional services.
Financial performance and liquidity
| Metric | FY 2009 | FY 2008 | Change |
|---|---|---|---|
| Revenue | $1,797.2 million | $1,755.4 million | +2.4% |
| Operating income | $687.5 million | $748.2 million | -8.1% |
| Operating margin | 38.3% | 42.6% | -4.3 percentage points |
| Net income attributable to Moody’s | $402.0 million | $457.6 million | -12.2% |
| Diluted EPS | $1.69 | $1.87 | -9.6% |
| Cash provided by operating activities | $643.8 million | $539.7 million | +$104.1 million |
- Revenue rose modestly as improved corporate debt issuance and MA growth more than offset continuing weakness in structured finance. Excluding unfavorable currency translation, revenue increased $76.6 million.
- MIS revenue was $1,217.7 million, up 1.1%; structured finance fell 24.7% to $304.9 million, while corporate finance rose 33.0% to $408.2 million. MA revenue increased 5.2% to $579.5 million, led by Risk Management Software (RMS), up 33.4% to $145.1 million, substantially reflecting the Fermat acquisition.
- Total expenses increased 10.2% to $1,109.7 million. Higher compensation, acquisition-related costs, Canary Wharf occupancy, professional services and restructuring outweighed lower depreciation and favorable currency effects. Restructuring expense was $17.5 million.
- Cash and cash equivalents were $473.9 million at year-end, versus $245.9 million a year earlier; short-term investments were $10.0 million. Capital additions were $90.7 million.
- Total debt was $1,193.7 million, down from $1,467.7 million; $447.5 million was classified as current and $746.2 million as long-term. Net debt, calculated as total debt less cash and short-term investments, was approximately $709.8 million. Commercial paper outstanding was $443.7 million; the company reported approximately $556 million of additional borrowing capacity and compliance with debt covenants.
- Current assets were $1,012.9 million and current liabilities $1,236.0 million. Current liabilities include $471.3 million of deferred revenue, an important component of the business model.
Fourth-quarter context: Unaudited Q4 2009 revenue was $485.8 million, operating income $178.9 million, net income attributable to Moody’s $101.9 million, and diluted EPS $0.43. In Q4 2008, the corresponding figures were $403.7 million, $125.4 million, $88.7 million and $0.37.
Changes, outlook and key risks
- FY 2009’s revenue increase followed the sharp 22.3% revenue decline in 2008. Recovery in investment-grade and high-yield corporate issuance supported MIS, while structured finance issuance continued to contract. Expenses rose despite continued cost actions, reducing operating margin.
- Management’s 2010 outlook: revenue and expenses each expected to increase in the high-single-digit percentage range; operating margin in the high-thirties; effective tax rate of 37%–38%; and diluted EPS of $1.75–$1.85. Management expected modest share repurchases to resume, subject to cash flow and capital allocation. Forecasts assume foreign exchange rates remain at year-end 2009 levels.
- For 2010, MIS revenue was expected to rise in the high-single- to low-double-digit range; MA revenue in the mid-single digits. Management anticipated modest structured finance growth, continued corporate-finance growth, and mid-teens growth in RMS.
- Principal uncertainties include debt issuance and market conditions, the pace and durability of recovery, lower structured-finance activity, regulatory changes affecting credit rating agencies and demand for ratings, competition and pricing pressure, and reputational and litigation exposure.
- Moody’s reported responding to government inquiries and cooperating with an SEC review of errors in a model used to rate certain constant-proportion debt obligations. Securities and shareholder derivative litigation related to ratings and disclosures remained pending. Management said pending matters, excluding Legacy Tax Matters, were not likely to materially affect consolidated financial position, but could materially affect results in an individual period.
- Recorded Legacy Tax Matter liabilities were $55.8 million; management cautioned that ultimate exposure could be higher and materially affect future results, financial position or cash flows. Unrecognized tax benefits were $164.2 million.
- Notable items include a $17.5 million restructuring charge and a $4.3 million tax benefit from resolution of a Legacy Tax Matter. Goodwill was $349.2 million and amortizable intangible assets $104.9 million; no goodwill or intangible impairment was recorded in 2009. Management reported that all reporting units passed the annual goodwill impairment test.
- The company reported effective internal control over financial reporting, and the auditor gave unqualified opinions on the financial statements and internal controls.
Investor verification priorities
- Verify whether the projected 2010 issuance recovery and revenue growth materialized, particularly in structured finance and corporate finance.
- Track operating costs and margins against revenue growth, including restructuring, acquisition-related spending and the Canary Wharf lease commitments.
- Review commercial-paper refinancing, debt maturities, borrowing capacity and covenant headroom alongside operating cash flow.
- Monitor the outcomes and potential costs of rating-related litigation, regulatory actions, SEC inquiries and Legacy Tax Matters.
- Assess whether MA growth—especially RMS—can persist beyond the contribution from Fermat, and whether weaker RD&A and training demand improves.