Business context and reporting period
Moody’s Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2017, compared with the same periods in 2016. Moody’s operates Moody’s Investors Service (MIS), which provides credit ratings, and Moody’s Analytics (MA), which provides data, research, software, risk-management and professional services. Amounts below are in U.S. dollars unless noted.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $1,000.5m | $928.9m | $1,975.7m | $1,745.0m |
| Operating income | $457.5m | $410.2m | $900.9m | $714.3m |
| Operating margin | 45.7% | 44.2% | 45.6% | 40.9% |
| Net income attributable to Moody’s | $312.2m | $255.5m | $657.8m | $439.9m |
| Diluted EPS | $1.61 | $1.30 | $3.39 | $2.24 |
- Adjusted results (non-GAAP): Q2 adjusted operating income was $497.0m and adjusted margin 49.7%, versus $441.4m and 47.5%. First-half adjusted operating income was $972.9m and adjusted margin 49.2%, versus $775.4m and 44.4%. Adjusted diluted EPS was $1.51 for Q2 and $2.99 for the first half, compared with $1.30 and $2.24, respectively.
- Segment revenue: Q2 MIS revenue was $686.7m, up 10% year over year; MA external revenue was $313.8m, up 3.5%. First-half MIS external revenue rose 18% to $1,354.9m; MA external revenue rose 4% to $620.8m.
- Cash flow: First-half cash from operations was negative $47.7m, compared with positive $546.4m in 2016; free cash flow was negative $90.5m versus positive $492.1m. The main driver was $863.8m of settlement payments in Q1 2017, partly offset by related tax benefits. Capital additions were $42.8m.
- Liquidity and debt: At June 30, cash and cash equivalents were $3,280.9m and short-term investments $86.3m. Long-term debt was $4,887.1m; total liabilities were $7,003.8m and total shareholders’ deficit was $467.5m. The company reported about $1.5bn of additional capacity under its commercial-paper program and undrawn term-loan facility, and compliance with debt covenants.
- Other: Q2 net interest expense was $45.0m, up from $34.3m; first-half net interest expense was $87.4m, up from $68.4m. Dividends declared were $0.38 per share. First-half share repurchases were $134.5m, compared with $485.9m in 2016.
Material changes versus prior comparable periods
- Q2 revenue increased 8%, reflecting growth in both segments. MIS benefited particularly from leveraged-finance issuance, CLO activity and banking-related revenue; MA growth was led by research subscriptions and ratings-data licensing.
- First-half revenue increased 13%. MIS growth was especially strong against a weak first half of 2016, when market volatility suppressed issuance; MA increased 4%, principally on RD&A growth.
- Q2 operating margin improved 1.5 percentage points; first-half margin improved 4.7 points. Cost-management benefits and higher revenue contributed, although compensation costs increased.
- First-half GAAP results included a $59.7m non-cash, non-taxable CCXI gain and a $41.2m unrealized Bureau van Dijk purchase-price hedge gain. These, plus stock-compensation tax benefits, contributed to GAAP EPS growth; adjusted measures exclude specified gains and acquisition costs.
- Debt increased from $3,363.0m at year-end 2016 to $4,887.1m at June 30, 2017, following new note issuances and repayment of $300m of Series 2007-1 Notes. Issuances also financed the prior-year settlement payment and prepared for the planned acquisition.
Outlook, commentary, risks and unusual items
- Management expected positive operating cash flow for full-year 2017 and the following 12 months, and stated it believed available financial resources were sufficient for cash requirements.
- Moody’s agreed to acquire Bureau van Dijk for €3.0bn plus a working-capital amount, expected to close in Q3 2017 subject to EU regulatory approval. The company expected to fund it with offshore cash and debt. The €1.0bn private-placement notes include a special mandatory redemption provision if the acquisition does not close by January 29, 2018 or the agreement is terminated.
- Management expected approximately $200m of 2017 share repurchases, subject to cash availability, market conditions and capital-allocation decisions. The Board declared a $0.38 quarterly dividend payable September 12, 2017.
- The company identified risks from capital-markets issuance volumes, regulation and competition, litigation and investigations, foreign exchange, cybersecurity, talent retention, tax audits, and execution and integration of Bureau van Dijk. It reported no material changes to the risk factors disclosed in its 2016 Form 10-K.
- The filing describes ongoing legal, regulatory and tax matters and notes that outcomes and potential losses may be difficult to predict. It also identifies a potential material MAKS goodwill impairment sensitivity under hypothetical fair-value reductions, though no impairment was recorded in the reported assessment.
- New revenue-recognition guidance was scheduled for adoption January 1, 2018; the quantitative effect was not yet reasonably estimable. Management expected material lease assets and liabilities under the new lease standard when adopted.
Important facts for investors to verify
- Whether Bureau van Dijk received EU approval and closed as expected, and the final purchase funding, integration costs and benefits.
- Underlying operating trends excluding the CCXI gain, hedge gain, acquisition costs and stock-compensation tax benefits; review the company’s non-GAAP reconciliations.
- Whether operating cash flow normalizes after the settlement payment and how working capital, taxes and acquisition spending affect liquidity.
- Debt levels, upcoming maturities, borrowing costs and compliance with leverage covenants after the acquisition.
- Developments in litigation, regulatory oversight, tax examinations and goodwill headroom, particularly for MAKS.