Moody’s Corporation — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; comparisons are with the three months ended March 31, 2009 unless noted. Amounts are in U.S. dollars, millions except per-share data. Moody’s operates Moody’s Investors Service (MIS), its ratings business, and Moody’s Analytics (MA), its research, data, software and services business.
Financial performance
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Revenue | $476.6 | $408.9 | Up 17% |
| Operating income | $196.8 | $148.9 | Up 32% |
| Operating margin | 41.3% | 36.4% | Calculated from reported figures |
| Net income attributable to Moody’s | $113.4 | $90.2 | Up 26% |
| Diluted EPS | $0.47 | $0.38 | Up $0.09 |
| Cash from operations | $164.1 | $195.0 | Down $30.9 |
Revenue increased $67.7 million, or $57.7 million excluding favorable foreign-exchange translation. Growth was led by ratings, especially speculative-grade corporate debt and bank-loan issuance, and banking-related issuance. Transaction revenue was 41% of consolidated revenue, versus 33% a year earlier. The 2010 restructuring line was a $0.7 million credit, compared with an $11.8 million charge in 2009; excluding restructuring effects, operating income was $196.1 million, up $35.4 million.
Operating expenses rose 8% to $279.8 million. Higher incentive compensation, salaries, technology investment and legal costs contributed to the increase. Net interest expense was $13.3 million versus $3.3 million; the prior-year figure included an approximately $12 million benefit related to uncertain tax positions and other tax liabilities. The effective tax rate increased to 37.2% from 35.7%.
Segments
- MIS: Revenue including intersegment royalties was $350.8 million, up 23%; external revenue was $335.5 million, up 24%. Operating income was $165.7 million, up 42%. Corporate finance revenue rose 50% and financial institutions revenue rose 35%; structured finance revenue declined 1%.
- MA: Revenue was $141.1 million, up 2%, while operating income declined to $31.1 million from $31.9 million. RD&A revenue rose 3%, risk-management software rose 4%, and professional services declined 30%. Recurring revenue comprised 92% of MA revenue.
Balance sheet, debt and liquidity
At March 31, 2010, cash and cash equivalents were $496.4 million, short-term investments were $7.5 million, and total assets were $2,003.3 million. Total debt was $1,121.9 million, including $371.9 million of commercial paper; long-term debt was $744.4 million. Moody’s reported a shareholders’ deficit of $534.0 million. The company said it had approximately $628 million of additional borrowing capacity and was in compliance with its debt covenants, including the 4.0-to-1.0 maximum Debt/EBITDA covenant.
Operating cash flow fell despite higher net income, reflecting working-capital movements, including incentive-compensation payments and tax-payment timing. Investing cash outflow was $13.6 million; financing cash outflow was $111.9 million, including $29.9 million of share repurchases and $24.9 million of dividends. Cash increased $22.5 million to $496.4 million. Management expected positive operating cash flow over the next 12 months and said modest share repurchases would depend on liquidity and market conditions. The filing also reports substantial lease commitments, including $884.2 million of operating lease obligations.
Outlook and material developments
- Management reaffirmed 2010 diluted EPS guidance of $1.75–$1.85, high-single-digit growth in revenue and expenses, an operating margin in the high-thirties percent range, and an effective tax rate of 37%–38%.
- Full-year MIS revenue was expected to grow in the high-single- to low-double-digit range. Corporate finance growth was forecast in the low-twenties range; structured finance was expected to decline in the low-single digits, partly reflecting weaker European issuance. Public, project and infrastructure finance was expected to grow in the low-double digits.
- MA revenue was expected to grow in the mid-single digits. Management forecast low-single-digit growth in RD&A, high-single- to low-double-digit growth in risk-management software, and mid- to high-single-digit growth in professional services. The outlook depended on uncertain economic, issuance and capital-market assumptions.
- The company early-adopted new multiple-deliverable revenue guidance prospectively from January 1, 2010; it reported no material impact on revenue or consolidated financial statements.
- After quarter-end, the board declared a quarterly dividend of $0.105 per share, payable June 10, 2010.
Risks, contingencies and unusual items
MIS received an SEC Wells Notice in March 2010. SEC staff was considering recommending administrative and cease-and-desist proceedings related to MIS’s 2007 NRSRO registration application and a previously identified rating-committee policy violation. MIS disputed the staff’s position and submitted a response. Moody’s also described government inquiries, an SEC and Department of Justice investigation involving its Wall Street Analytics unit, and shareholder and securities litigation concerning ratings practices. Management said the pending matters, other than legacy tax matters, were not likely to materially affect consolidated financial position, but could materially affect an individual reporting period.
Recorded liabilities for legacy tax matters were $56.9 million. The company cautioned that ultimate exposure could be higher and potentially material to future results, financial position and cash flows. The filing also describes increasing regulation of credit-rating agencies in the U.S. and internationally, with potential effects on compliance costs, competition, demand and legal exposure. Management noted no material change in market-risk exposure from year-end 2009.
Investor facts to verify
- Whether issuance conditions, especially speculative-grade corporate and bank-loan issuance, support the MIS growth outlook and the full-year EPS range.
- How the SEC Wells Notice, other investigations and ratings-related litigation develop, including any effects on expenses, business practices or liability.
- Whether legacy tax exposures exceed the $56.9 million recorded liability and the timing or amount of related cash payments.
- Commercial-paper refinancing, available borrowing capacity, covenant compliance and the company’s ability to balance debt, leases, dividends and repurchases.
- Whether MA’s modest revenue growth and declining operating income improve, particularly in professional services and risk-management software.