Business context and reporting period
Moody’s Corporation’s Form 10-K covers the fiscal year ended December 31, 2017; the filing also reports quarterly results. Moody’s operates Moody’s Investors Service (MIS), its credit-rating business, and Moody’s Analytics (MA), which provides research, data, analytics, risk-management software and related services.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $4,204.1 million | $3,604.2 million |
| Operating income / margin | $1,809.1 million / 43.0% | $638.7 million / 17.7% |
| Adjusted operating income / margin (non-GAAP) | $1,989.9 million / 47.3% | $1,641.2 million / 45.5% |
| Net income attributable to Moody’s | $1,000.6 million | $266.6 million |
| Diluted EPS | $5.15 | $1.36 |
| Operating cash flow / free cash flow (non-GAAP) | $747.5 million / $656.9 million | $1,259.2 million / $1,144.0 million |
- Revenue rose 17%. MIS external revenue increased 17% to $2,773.8 million; MA external revenue increased 16% to $1,430.3 million. MIS growth reflected strong debt issuance, particularly leveraged finance; MA growth included Bureau van Dijk.
- MA recurring revenue was 78% of segment revenue, versus 75% in 2016. MIS transaction revenue was 65% of ratings revenue, versus 61%.
- At year-end, cash and cash equivalents plus short-term investments totaled $1,183.3 million. Total debt had a $5,540.5 million carrying value ($5,580.4 million principal); shareholders’ equity was negative $114.9 million. The filing reports $5,111.1 million of long-term debt, excluding current maturities.
- Operating cash flow and free cash flow declined, primarily because Moody’s paid approximately $701 million net for the 2016 settlement. Investing cash flow was negative $3,420.0 million, largely reflecting the Bureau van Dijk acquisition.
- Fourth-quarter 2017 revenue was $1,165.5 million and operating income was $462.8 million. Net income attributable to Moody’s was $25.5 million and diluted EPS was $0.13, principally reflecting a $245.6 million net tax charge related to U.S. tax reform and Belgium’s tax-rate change.
Material changes versus the prior comparable period
Reported operating income, net income and EPS increased sharply from 2016, when Moody’s recorded an $863.8 million settlement charge ($700.7 million after tax). Excluding specified items, 2017 adjusted diluted EPS was $6.07, up 23% from $4.94; adjusted measures are non-GAAP and are not directly comparable across companies.
Moody’s acquired Bureau van Dijk in August 2017 for $3,542.0 million. It contributed $92.4 million of revenue after acquisition, including a $36 million reduction from acquisition-accounting adjustments. The acquisition increased goodwill and intangible assets substantially; their year-end balances were $3,753.2 million and $1,631.6 million, respectively. The purchase-price allocation remained preliminary.
Outlook, commentary, risks and unusual items
- Management expected positive operating cash flow in 2018, an effective tax rate of 22%–23%, and approximately $200 million of 2018 share repurchases, subject to cash availability, market conditions and capital-allocation decisions. The Board declared a $0.44-per-share quarterly dividend in January 2018. The filing does not provide clear 2018 revenue or EPS guidance.
- The Tax Act generated provisional tax estimates, including a $247.3 million transition-tax liability payable over eight years and a $56.2 million reduction in deferred tax assets. Estimates could change as guidance and analysis develop.
- Effective January 1, 2018, the company planned to adopt the new revenue-recognition standard. It estimated an approximately $149 million post-tax increase to opening retained earnings; management said this affects recognition timing, not expected cash receipts or business economics, and did not expect a material impact on 2018 net income, though quarterly results could fluctuate.
- Material risks include dependence of MIS on debt issuance and market conditions; evolving U.S. and international regulation; competition, pricing pressure and reputational risk; litigation and investigations; cybersecurity and operational disruptions; foreign-exchange exposure; and integration, execution and impairment risks from acquisitions. Management could not estimate a range of possible losses for certain pending matters. Goodwill impairment remains a risk, particularly given the acquisition-related increase.
- Moody’s reported compliance with debt covenants and no cross-defaults at year-end. It had approximately $0.9 billion of additional commercial-paper capacity backed by its revolving credit facility. The company’s internal-control assessment excluded Bureau van Dijk, which was to be included in the following year’s assessment; the auditor issued unqualified opinions on the consolidated financial statements and internal controls.
Important facts for investors to verify
- Separate underlying operating growth from the 2016 settlement comparison and 2017 tax, CCXI and purchase-price hedge gains or charges; reconcile GAAP and non-GAAP results.
- Track debt repayment and refinancing needs, especially the $300 million floating-rate notes due in 2018, alongside cash, cash-flow generation and covenant headroom.
- Assess Bureau van Dijk’s contribution, integration progress, final purchase-price allocation, realized synergies and the recoverability of acquisition-related goodwill and intangibles.
- Monitor the final Tax Act accounting, the effective tax rate, the $389.1 million balance of unrecognized tax benefits and outcomes of tax examinations.
- Review developments in pending litigation and regulatory matters, and the effects of the 2018 revenue standard on reported segment and quarterly results.