Moody’s Corporation — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 25, 2015. Moody’s operates through Moody’s Investors Service (MIS), its ratings business, and Moody’s Analytics (MA), its research, data, software, risk-management and professional-services business.
Financial performance
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $3,334.3 million | $2,972.5 million | +12% |
| Operating income | $1,439.1 million | $1,234.6 million | +17% |
| Operating margin | 43.2% | 41.5% | +1.7 percentage points |
| Adjusted operating income / margin | $1,534.7 million / 46.0% | $1,328.0 million / 44.7% | +16% / +1.3 points |
| Net income attributable to Moody’s | $988.7 million | $804.5 million | +23% |
| Diluted EPS | $4.61 | $3.60 | +28% |
| Non-GAAP diluted EPS | $4.21 | $3.65 | +15% |
| Cash from operating activities | $1,018.6 million | $926.8 million | +$91.8 million |
| Free cash flow | $944.0 million | $884.5 million | +$59.5 million |
All figures are in U.S. dollars. Non-GAAP measures are management-defined and should be considered alongside, not instead of, GAAP results.
Segments and drivers
- MIS: External revenue was $2,265.8 million, up 9%; operating income was $1,227.8 million. Ratings revenue grew on higher investment-grade corporate and CLO issuance, monitoring fees, pricing initiatives and fee mix. High-yield issuance and U.S. banking-related revenue were offsets.
- MA: External revenue was $1,068.5 million, up 19%; operating income was $211.3 million. RD&A revenue rose 10%, ERS 25% and Professional Services 42%. Acquisitions contributed to growth, notably Amba to Professional Services, WebEquity to ERS and Lewtan to RD&A. Recurring revenue was 73% of MA revenue, versus 77% in 2013.
For the fourth quarter, revenue was $877.5 million versus $779.2 million a year earlier; operating income was $344.7 million versus $311.9 million; net income attributable to Moody’s was $236.3 million versus $206.7 million; and diluted EPS was $1.12 versus $0.94.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $1,219.5 million and short-term investments $458.1 million at year-end, totaling $1,677.6 million. About $1,250.6 million of that total was outside the U.S.
- Long-term debt was $2,547.3 million, up from $2,101.8 million. The company had $1.0 billion of available capacity under its revolving credit facility and reported compliance with debt covenants.
- Operating cash flow was $1,018.6 million; capital additions were $74.6 million. Investing cash outflow was $564.9 million, including acquisitions and investment purchases. Financing cash outflow was $1,064.5 million, principally reflecting $1,220.5 million of share repurchases, dividends and the $183.8 million purchase of Copal Amba’s remaining interest.
- Moody’s repurchased 13.8 million shares in 2014. The board authorized an additional $1.0 billion repurchase program in December; management expected approximately $1.0 billion of repurchases in 2015, subject to cash, markets and capital-allocation decisions. Dividends declared were $1.18 per share in 2014.
Material changes and unusual items
- 2014 GAAP EPS included a $0.37-per-share benefit from the $102.8 million pre-tax ICRA step-acquisition gain ($78.5 million after tax). Excluding that gain and specified legacy-tax and litigation items, non-GAAP EPS was $4.21.
- Moody’s acquired control of ICRA in June, increasing its ownership from 28.5% to 50.06%; it acquired WebEquity in July and Lewtan in October, and purchased the remaining Copal Amba interest in December.
- Expenses rose primarily due to compensation, headcount growth and acquisitions. The 2013 comparison included a litigation settlement charge; the 2014 operating-margin improvement therefore partly reflects the absence of that prior-year charge.
- Shareholders’ equity fell to $42.9 million from $347.9 million. The filing attributes substantial capital use to repurchases and reports a $187.8 million deficit in Moody’s parent-company shareholders’ equity, partly offset in total equity by noncontrolling interests.
Outlook, risks and contingencies
For 2015, management guided to mid-single-digit revenue and operating-expense growth; operating margin of about 43% and adjusted operating margin of about 46%; GAAP EPS of $4.55–$4.65; effective tax rate of 32%–33%; free cash flow of about $1 billion; and capital expenditures of $110–$115 million. Segment guidance included mid-single-digit growth for MIS and MA overall, high-single-digit growth for PPIF and RD&A, approximately 10% U.S. MA growth, and roughly flat Professional Services revenue. Guidance assumes specified foreign-exchange rates and depends on uncertain market and economic conditions.
- Key business risks include volatility in debt issuance, interest-rate and economic changes, competition and pricing pressure, regulatory changes affecting rating agencies, and reputational or credibility damage.
- The filing identifies cybersecurity, operational disruption, third-party technology dependence, foreign exchange, acquisition integration, employee retention, and goodwill impairment as additional risks.
- Moody’s disclosed ongoing litigation and government inquiries relating to ratings and business practices. In the Cheyne SIV matter, an appeal concerning Commerzbank remained pending; CalPERS litigation had returned to state court; and the Pursuit Partners case remained active. The company stated it could not estimate a range of possible losses for certain matters.
- Legacy tax liabilities were recorded at $10.9 million; the company noted ultimate exposure could be higher. Unrecognized tax benefits were $220.3 million, and potential tax on approximately $2.032 billion of indefinitely reinvested foreign earnings had not been provided.
Investor verification priorities
- Assess earnings quality and year-over-year comparability after separating the ICRA gain, legacy-tax benefits and prior-year litigation settlement.
- Verify the sustainability of MIS growth given transaction-based ratings revenue and issuance-market sensitivity, and monitor MA recurring revenue and acquisition contributions.
- Review debt, interest expense, overseas cash availability and the pace of buybacks against the company’s 2015 cash-flow outlook.
- Track the litigation and regulatory matters, potential tax exposures, and any changes to the company’s estimate that certain legal loss ranges cannot be determined.
- Test 2015 guidance against actual issuance volumes, foreign-exchange movements, margins and integration results from recent acquisitions.