Moody’s Corporation — Q3 2009 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2009. Moody’s operates Moody’s Investors Service (MIS), a credit-rating business, and Moody’s Analytics (MA), which sells subscriptions, software and professional services. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $451.8 | $433.4 | $1,311.4 | $1,351.7 |
| Operating income | $172.5 | $189.8 | $508.6 | $622.8 |
| Operating margin | 38.2% | 43.8% | 38.8% | 46.1% |
| Net income attributable to Moody’s | $100.6 | $113.0 | $300.1 | $368.9 |
| Diluted EPS | $0.42 | $0.46 | $1.26 | $1.49 |
| Operating cash flow | — | $456.6 | $405.4 |
- Q3 comparison: Revenue rose 4.2%, but expenses increased 14.7%; operating income fell 9.1% and attributable net income fell 11.0%. Management cited a $10 million adverse foreign-exchange effect on revenue, partly offset by stronger corporate bond issuance and acquisitions.
- Nine-month comparison: Revenue declined 3.0%, operating income 18.3%, attributable net income 18.7%, and diluted EPS from $1.49 to $1.26. Excluding FX translation, revenue increased $6.6 million. Management attributed earnings pressure to weaker MIS results, higher expenses, restructuring and acquisition-related costs.
- Q3 segments: MIS external revenue was $305.3 million, up 2.9%, while operating income was $122.7 million, down 7.4%. MA revenue was $146.5 million, up 7.2%, while operating income was $49.8 million, down 13.1%. MIS structured-finance revenue fell 17.2%; corporate-finance revenue grew 31.7%. MA software revenue grew 82.0%, largely reflecting acquisitions.
- Cash, debt and liquidity: Cash and cash equivalents were $422.7 million at September 30, versus $245.9 million at year-end 2008. Total debt was $1,281.0 million, down from $1,467.7 million; this included $531.0 million of commercial paper. Moody’s reported about $470 million of additional borrowing capacity and compliance with debt covenants. Current assets of $896.5 million were below current liabilities of $1,202.3 million.
- Other metrics: The nine-month effective tax rate was 36.6%, versus 38.4%. Declared dividends were $0.10 per share for Q3; the board subsequently approved another $0.10 quarterly dividend. Moody’s had not repurchased shares during the first nine months of 2009.
Outlook and management commentary
Moody’s revised its 2009 outlook, citing continued strength in corporate debt issuance. It expected full-year revenue to be approximately flat versus 2008, expenses to increase in the high-single-digit percentage range, operating margin in the high-thirties, an effective tax rate of 37%–38%, and diluted EPS of $1.60–$1.68.
Management expected full-year MIS revenue to decline in the low-single-digit range: corporate finance was projected to grow in the low-thirties, while structured finance was expected to decline in the mid-twenties. MA revenue growth was projected in the low-single-digit range, supported by software and the Fermat acquisition. The company expected positive operating cash flow over the next 12 months, intended to maintain its dividend, and planned to curtail systematic share repurchases while retaining the option for opportunistic purchases.
Material items, risks and contingencies
- The 2009 restructuring plan, approved in response to weak economic and market conditions, targeted approximately 150 positions and included office closures, contract terminations and asset divestitures. Cumulative expense was $17.0 million and the plan was substantially complete; most remaining cash costs were expected within 12 months.
- A settlement of a legacy tax matter generated $10.8 million in cash proceeds and increased nine-month net income by $8.2 million. Recorded liabilities for legacy tax matters totaled $55.3 million; Moody’s said the ultimate amount could be higher and potentially material. Separately, the balance sheet reported $158.3 million of unrecognized tax benefits.
- MIS faced heightened regulatory scrutiny, governmental inquiries, an SEC review concerning errors in a model used to rate certain constant-proportion debt obligations, and litigation related to ratings and alleged disclosure or oversight failures. Management considered pending non-tax matters unlikely to materially affect consolidated financial position, but said they could materially affect results in an individual period.
- Regulatory proposals in the U.S. and internationally could increase compliance costs, legal exposure and competition or change the role of ratings. Management said their eventual effects were uncertain.
- Other financial commitments included substantial office leases, approximately $14 million of expected Canary Wharf build-out costs over the next 12 months, and a possible $5 million–$10 million 2010 contribution to the qualified pension plan. A $5 million charge relating to an international non-income-tax matter affected Q3 non-operating results.
Key facts for investors to verify
- Whether the improving corporate issuance environment persisted, and whether MIS structured-finance weakness continued.
- Progress against the full-year EPS, revenue, expense and margin outlook, including the sensitivity to foreign exchange and issuance volumes.
- Commercial-paper refinancing needs, available credit capacity, covenant headroom and the company’s ability to maintain liquidity despite negative working capital.
- Developments in the SEC model review, ratings-related litigation and proposed CRA regulation, including any changes to potential costs or liabilities.
- Resolution and potential cash impact of the $55.3 million legacy-tax liability and other open tax audits; also monitor restructuring cash payments and lease commitments.