Moody’s Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited results compared with Q1 2012. Moody’s operates Moody’s Investors Service (MIS), its credit ratings business, and Moody’s Analytics (MA), its non-rating research, data, software, risk-management and professional-services businesses. Dollar amounts are in millions unless otherwise stated.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $731.8 | $646.8 | +13% |
| Operating income | $280.4 | $269.0 | +4% |
| Operating margin | 38.3% | 41.6% | Down 3.3 percentage points |
| Adjusted operating income | $304.0 | $292.5 | +4% |
| Adjusted operating margin | 41.5% | 45.2% | Down 3.7 percentage points |
| Net income attributable to Moody’s | $188.4 | $173.5 | +9% |
| Diluted EPS | $0.83 | $0.76 | +9% |
| Net cash from operating activities | $202.6 | $62.0 | +$140.6 |
| Free cash flow | $194.0 | $46.7 | +$147.3 |
Revenue growth reflected strength in both segments, particularly MIS corporate finance, driven by higher high-yield corporate debt and bank-loan issuance. MIS external revenue rose 15% to $521.2; MA external revenue rose 9% to $210.6. Within MIS, corporate finance revenue increased 29%, while structured finance revenue declined 1%. All MA lines of business grew, led by research, data and analytics and enterprise risk solutions.
Total expenses increased 19% to $451.4. Selling, general and administrative expense rose $58.2, primarily due to the Abu Dhabi and Rhinebridge litigation settlements; higher compensation and headcount also contributed to expense growth. The settlements reduced diluted EPS by $0.14. Interest expense, net increased to $22.0 from $10.3, reflecting higher borrowing costs and a prior-year tax-audit-related interest benefit. The effective tax rate declined to 28.5% from 32.1%, partly due to tax benefits associated with the litigation charge and tax legislation retroactively extending certain benefits.
Cash, liquidity and debt
- Cash and cash equivalents were $1,758.0 at March 31, 2013, versus $1,755.4 at year-end 2012. Current assets were $2,520.3 and current liabilities $1,013.4.
- Total debt was $1,642.1, down from $1,671.2 at year-end; $31.9 was current debt, representing the remaining 2008 term-loan balance. Moody’s reported no commercial paper or revolving-facility borrowings and had $1.0 billion available under its revolving facility.
- Operating cash flow and free cash flow improved substantially year over year. The prior-year comparison included significant state and local tax-audit payments and a larger accounts-receivable increase.
- Financing cash outflow was $156.0, including $91.3 of treasury-share repurchases, $44.5 of dividends and $31.9 of term-loan repayments. The company had $1.6 billion of share-repurchase authority remaining.
- Approximately $910 of cash was held outside the U.S.; about $844 was in foreign entities whose undistributed earnings were indefinitely reinvested. A future distribution or change in that assertion could create additional tax liability.
Outlook and management commentary
For full-year 2013, management forecast GAAP diluted EPS of $3.35–$3.45, including the $0.14 litigation-settlement impact; non-GAAP EPS excluding that impact was projected at $3.49–$3.59. Revenue was expected to grow in the high-single-digit range. Operating expenses were projected to increase in the mid-single-digit range; operating margin was expected at 41%–42% and adjusted operating margin at 44%–45%, both including the settlement charge. Management expected an approximately 32% effective tax rate, $500 of share repurchases, $50 of capital expenditures, $100 of depreciation and amortization, and approximately $850 of free cash flow.
MIS revenue was expected to grow in the high-single-digit range; management anticipated low-double-digit U.S. growth and low-single-digit non-U.S. growth, citing continued weakness in European structured finance. MA revenue was also expected to grow in the high-single-digit range, with softness in training and certification affecting professional services. Management noted that actual results could differ materially if macroeconomic and capital-market assumptions—including debt issuance, interest rates and business investment—change.
Risks, contingencies and unusual items
- Abu Dhabi and Rhinebridge litigation matters were settled in April 2013, after quarter-end; the settlement charge was reflected in Q1 results and the payment was described as not material to financial position. The filing does not state the settlement amount.
- Other litigation, governmental inquiries and regulatory investigations remain. Moody’s said outcomes and possible loss ranges could not be estimated for certain matters. A separate securities-litigation motion for summary judgment had been argued in April 2013.
- Recorded liabilities for legacy tax matters totaled $39.5. Moody’s also disclosed $204.6 of net long-term tax liabilities relating to uncertain tax positions and legacy tax matters, excluded from contractual-obligation timing because cash outflows could not be reasonably estimated; additional exposure could be material.
- Proposed European CRA3 requirements could add procedural, liability, rotation, ownership and pricing restrictions. The timing and effects of further U.S. and international regulation were uncertain.
- Q1 other comprehensive loss was $56.7, largely reflecting $59.8 of foreign-currency translation loss. Management reported no material change in market-risk exposure, and disclosure controls were assessed as effective.
- MA’s FSTC training and certification unit remained exposed to weaker demand; failure to meet its financial projections could lead to further goodwill impairment. Project timing also makes revenue in some MA businesses variable.
Important facts for investors to verify
- How much of Q1 revenue and future growth depends on transaction-based ratings activity, high-yield issuance and favorable capital-market conditions.
- The underlying operating cost and margin trend excluding the litigation-settlement charge, and whether the stated 2013 margin and EPS guidance is achieved.
- The resolution, cash cost and remaining exposure from litigation, regulatory inquiries and legacy or uncertain tax matters.
- The sustainability and repatriation implications of the substantial cash held abroad, alongside debt maturities and planned repurchases and dividends.
- Progress at FSTC and the risk of additional goodwill impairment, as well as the effects of European and other credit-rating regulation.