Moody’s Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless stated otherwise. Moody’s operates Moody’s Investors Service (MIS), its credit-rating business, and Moody’s Analytics (MA), its non-rating products and services business. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $577.1 million | $476.6 million | +21% |
| Operating income | $250.1 million | $196.8 million | +27% |
| Operating margin | 43.3% | 41.3% | +2.0 percentage points |
| Net income attributable to Moody’s | $155.5 million | $113.4 million | +37% |
| Diluted EPS | $0.67 | $0.47 | +$0.20 |
| Operating cash flow | $200.9 million | $164.1 million | +$36.8 million |
Revenue growth reflected stronger issuance activity, especially in corporate finance, growth in international structured finance, some MIS pricing increases, and higher MA revenue, including CSI Global Education, acquired in November 2010. Transaction revenue represented 49% of consolidated revenue, versus 41% a year earlier. Expenses rose 17% to $327.0 million, driven largely by compensation, higher headcount, technology investment, and business-related travel. The effective tax rate declined to 33.2% from 37.2%, primarily due to a greater share of income in lower-tax international jurisdictions and lower U.S. state taxes.
Segments and material changes
- MIS: Revenue was $428.6 million, up 22%; operating income was $219.8 million, up 33%. Corporate finance revenue rose 44% and structured finance 25%; financial institutions was nearly flat, while public, project and infrastructure finance rose 5%. Higher corporate debt issuance and international structured-finance activity were important drivers.
- MA: Revenue was $167.1 million, up 17%; operating income was $30.3 million, down 3%, as expenses grew faster than revenue. Professional-services growth included CSI; RMS rose 19% and research, data and analytics rose 5%. Management noted that RMS and professional-services revenue can be volatile because of project timing and engagement concentration.
- Management refined its allocation method for corporate and overhead costs between segments; prior-period segment results were reclassified for comparability.
- Shares outstanding declined year over year. Moody’s repurchased 4.3 million shares for $127.6 million during the quarter.
Cash, debt and liquidity
Cash and cash equivalents were $719.5 million at March 31, 2011, including approximately $522 million held outside the U.S.; about $420 million of foreign cash was considered indefinitely reinvested. Cash increased $59.9 million during the quarter. Operating cash flow exceeded net income, while financing cash outflows included $127.6 million of share repurchases and $26.3 million of dividends.
Total debt was $1.234 billion, down from $1.240 billion at year-end 2010. There were no commercial-paper or revolving-facility borrowings; Moody’s reported $1.0 billion of additional borrowing capacity and compliance with debt covenants. Shareholders’ deficit was $223.2 million. The company stated it expected positive operating cash flow over the next 12 months and believed available financial resources were sufficient for its needs.
Outlook, risks and unusual items
- Following stronger-than-expected Q1 performance, Moody’s raised full-year 2011 guidance: revenue growth in the low-double-digit range, expenses up in the high-single-digit range, operating margin of 38%–40%, effective tax rate of approximately 36%, and diluted EPS of $2.22–$2.32.
- Full-year MIS revenue was expected to grow in the low-double-digit range. MA revenue was expected to grow in the high-single- to low-double-digit range; professional-services revenue was projected to more than double, largely reflecting CSI and strong risk-management advisory performance.
- Guidance depended on uncertain macroeconomic and capital-market conditions, including interest rates, corporate activity, securitization, and the withdrawal of government support measures. The company cautioned that actual results could differ materially.
- Legal and regulatory exposure remains significant. Moody’s described litigation and government inquiries related to ratings, including shareholder and securities cases; a proposed class was denied certification in one securities case, but plaintiffs sought permission to appeal. MA was cooperating with an SEC investigation concerning valuation-related services. The company could not estimate a range of possible losses for the described litigation and regulatory matters.
- Recorded liabilities for legacy tax matters were $59.7 million. Total net long-term tax liabilities for uncertain tax positions and legacy matters were $250.7 million; the filing said the timing of related cash outflows could not be reasonably estimated. Tax audits and potential additional tax liabilities remain uncertain.
- Regulatory changes, including implementation of the Dodd-Frank Act and evolving U.S. and European CRA rules, could raise compliance costs, increase legal exposure, or affect the ratings business. Moody’s also identified capital-market conditions, competition, reputation, litigation, and retention of key employees as risks.
- The board declared a quarterly dividend of $0.14 per share, payable June 10, 2011. Continued dividends and planned modest repurchases remained subject to board discretion, cash flow, and capital-allocation decisions.
Investor verification points
- Verify whether issuance conditions and transaction-heavy revenue levels sustained the unusually strong Q1 MIS growth.
- Track whether full-year revenue, margin, tax-rate, and EPS guidance was achieved, particularly given market and regulatory uncertainty.
- Assess MA’s organic growth and profitability separately from CSI’s contribution and project-driven revenue volatility.
- Review cash availability, debt maturities and covenant headroom alongside buybacks, dividends, lease commitments, and foreign-cash tax implications.
- Monitor developments in ratings-related litigation, the SEC inquiry, tax audits, and recorded legacy-tax exposures; outcomes and potential losses were not reliably estimable in the filing.