Moody’s Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing. Unless noted, amounts are U.S. dollars in millions.
Business context
Moody’s operates two segments: Moody’s Investors Service (MIS), which provides credit ratings and related services, and Moody’s Analytics (MA), which provides financial data, research, software and risk-management solutions. MIS revenue is exposed to debt issuance activity; MA has a larger subscription-based revenue mix.
Financial and operating results
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $4,829; up 9% | $4,443 |
| Operating income | $1,998; up 7% | $1,868 |
| Operating margin | 41.4% | 42.0% |
| Adjusted operating income (non-GAAP) | $2,291; up 8% | $2,117 |
| Adjusted operating margin (non-GAAP) | 47.4% | 47.6% |
| Net income attributable to Moody’s | $1,422; up 9% | $1,310 |
| Diluted EPS | $7.42; up 10% | $6.74 |
| Adjusted diluted EPS (non-GAAP) | $8.29; up 12% | $7.39 |
| Effective tax rate | 21.0% | 21.1% |
| Operating cash flow | $1,675 | $1,461 |
| Free cash flow (non-GAAP) | $1,606 | $1,370 |
| Cash and short-term investments at year-end | $1,930 | $1,818 |
| Long-term debt at year-end | $5,581 | $5,226 |
Segment performance: MIS external revenue was $2,875, up 6%; operating income was $1,633, up 5%. MA external revenue was $1,954, up 13%, including 11% organic growth; operating income was $365, up 19%. MA growth reflected RD&A and ERS, while MIS benefited from corporate debt and public finance activity.
Fourth-quarter figures: Revenue was $1,233, operating income $504, net income attributable to Moody’s $359, and diluted EPS $1.88. The comparable 2018 quarter reported revenue of $1,060, operating income of $376, net income of $251, and diluted EPS of $1.29.
Liquidity and capital allocation: Year-end cash and short-term investments totaled $1.9 billion, including approximately $1.2 billion outside the U.S. The company reported $5.6 billion of debt, no commercial-paper borrowings, and $1.0 billion of undrawn revolving-credit capacity; it was in compliance with debt covenants. Financing cash outflows rose to $1,563, primarily reflecting $991 of treasury-share repurchases and higher net debt repayments. Dividends paid were $378.
Material changes versus 2018
- Revenue increased in both segments. MIS growth was led by corporate finance and public, project and infrastructure finance; structured finance revenue declined 11%, mainly due to weaker CLO activity and lower activity in parts of EMEA.
- MA revenue grew 13%, with 11% organic growth. RD&A increased 14% and ERS 16%; professional services revenue was flat, partly reflecting the MAKS divestiture.
- GAAP operating margin declined 60 basis points, primarily due to higher restructuring charges and a $14 loss on the MAKS divestiture. Adjusted operating margin was down 20 basis points.
- Operating cash flow increased $214 and free cash flow increased $236. Cash used in investing improved by $442, including $226 in net cash proceeds from the MAKS sale and lower acquisition payments.
- Moody’s acquired Vigeo Eiris, Four Twenty Seven, RiskFirst and ABS Suite, among other investments, and sold MAKS in November for $226 net cash proceeds. The sale generated a $14 loss and a $43 indemnification liability.
Outlook, risks and unusual items
- Management expected positive operating cash flow in 2020 and estimated full-year 2020 share repurchases of approximately $1.3 billion, subject to available cash, market conditions and capital-allocation decisions. The board declared a $0.56 quarterly dividend in February 2020, subject to board discretion.
- The company anticipated approximately $100 million of contributions to its funded U.S. pension plan in 2020; the pension note specifies $99 million for the funded plan plus $6 million for unfunded U.S. pension obligations.
- After year-end, Moody’s completed the $700 million acquisition of Regulatory Data Corporation (RDC), a provider of AML and KYC data and due-diligence services. The filing did not provide a preliminary purchase-price allocation.
- Key risks include changes in global debt issuance and market conditions, heightened competition and pricing pressure, credit-rating regulation and litigation, cybersecurity and data-protection events, foreign-exchange movements, and acquisition integration and goodwill impairment risk.
- Goodwill was $3,722 and acquired intangible assets were $1,498 at year-end, with approximately 92% of these balances in MA. The filing identified MALS as comparatively more exposed to impairment under hypothetical valuation declines. ICRA was addressing regulatory inquiries and allegations; Moody’s could not estimate any resulting financial impact, and an unfavorable outcome could affect goodwill and intangible assets.
- Uncertain tax positions were $477 at year-end, of which $422 would affect the effective tax rate if recognized. The company also reported $43 of MAKS indemnification liability and $51 of remaining deemed-repatriation tax liability not included in its contractual-obligations table.
- A New York State and City tax-related lawsuit was settled for $15.5 in 2019. Separately, 2019 restructuring expense was $60; the program was estimated to entail total pre-tax charges of $105–$110 and annualized savings of about $60.
Investor verification priorities
- Review the reconciliation and exclusions underlying adjusted operating income, adjusted margin, adjusted EPS and free cash flow; these are non-GAAP measures.
- Assess the sustainability of MA’s organic subscription growth and MIS’s sensitivity to issuance volumes, especially the weakness in structured finance.
- Monitor goodwill headroom and results at MALS, Bureau van Dijk and Reis, as well as developments in the ICRA inquiries.
- Evaluate debt maturities, future financing needs, the $477 uncertain-tax-position balance and the $43 MAKS indemnification provision.
- Track the integration and returns of recent acquisitions, including RDC, and compare 2020 buyback and pension spending with management’s stated expectations.