Moody’s Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts are in millions of dollars, except per-share data. Moody’s operates Moody’s Investors Service (MIS), its credit-ratings business, and Moody’s Analytics (MA), its research, data, software and services business.
Financial performance
- Q2 revenue: $1,213.6, up 3% year over year. MIS external revenue declined 2% to $738.4; MA external revenue grew 12% to $475.2.
- Q2 earnings: Operating income was $483.5, down 9%; operating margin was 39.8%, versus 45.4%. Net income attributable to Moody’s was $310.3, down 18%, and diluted EPS was $1.62, down 16%. Adjusted diluted EPS, a non-GAAP measure, was $2.07, up 1%; adjusted operating margin was 49.4%, versus 49.7%.
- First-half revenue and earnings: Revenue was $2,355.7, up 2%. Operating income was $945.2, down 8%, and operating margin was 40.1%, versus 44.5%. Net income attributable to Moody’s was $683.2, down 9%; diluted EPS was $3.56, down 8%. Adjusted diluted EPS was $4.14, up 2%, and adjusted operating margin was 47.5%, versus 48.9%.
- Cash flow: First-half operating cash flow was $754.5, compared with $777.3. Free cash flow, a non-GAAP measure, was $715.8, compared with $739.4. Capital additions were $38.7.
- Liquidity and debt: Cash and cash equivalents were $1,195.9 and short-term investments were $119.5 at June 30. Debt was $5,387.9, including $129.9 of commercial paper; approximately $870 of additional commercial-paper borrowing capacity was available. The company reported compliance with debt covenants and no cross-defaults.
- Shareholder returns: First-half dividends were $189.0 and treasury-share purchases were $615.2. The company completed a $500 accelerated share repurchase, receiving 2.8 million shares. A $0.50-per-share quarterly dividend was declared for payment in September.
Changes and operating drivers
- MA growth was led by research, data and analytics, including credit research and ratings data feeds, and by demand for SaaS-based enterprise-risk solutions. Acquisitions of Reis and Omega Performance contributed about $10 of Q2 revenue and about $22 in the first half.
- MIS revenue weakened, especially in structured finance, where wider CLO spreads and Brexit- and regulatory-related uncertainty delayed some securitizations. Lower bank-loan refinancing also weighed on corporate finance. Favorable corporate-bond issuance, product mix and pricing partially offset these pressures.
- Foreign exchange translation reduced Q2 non-U.S. revenue growth; for the first half it unfavorably affected total revenue by about 2%.
- Higher compensation costs reflected hiring and merit increases, with additional expense from acquisitions. Moody’s also cited technology spending to support automation, innovation and efficiency.
Outlook, unusual items and risks
- Management expected positive operating cash flow over the next 12 months and estimated full-year 2019 share repurchases, including the completed ASR, of $1.0–$1.3 billion, subject to cash availability, market conditions and capital-allocation decisions. The filing does not provide a full-year revenue or EPS forecast.
- The company recorded $53.8 of Q2 restructuring expense and $59.3 for the first half. The expanded program is expected to generate about $60 of annualized savings and incur total pretax charges of $105–$110; employee-termination cash outlays of about $60 are expected through 2021.
- MAKS was classified as held for sale at June 30; Moody’s agreed in July to sell it to Equistone, with closing expected in the second half of 2019. The company recorded an $8.7 non-cash impairment and an approximately $15 tax charge related to the planned divestiture.
- A New York False Claims Act case alleges more than $120 of underpaid state and city taxes and seeks triple damages plus unspecified retaliation damages. Moody’s contests the claims and said it could not estimate a loss range; trial was not expected before 2020. The filing also describes ICRA regulatory matters whose potential financial impact could not be estimated and could affect future results or asset values.
- Other risks include credit-market and issuance volatility, regulation of rating agencies, litigation and investigations, Brexit, foreign exchange, cybersecurity and operational failures, competition, acquisitions and tax audits. Management reported no material change in risk factors since year-end 2018.
Investor verification priorities
- Check whether MA’s subscription-led growth and margins persist after acquisition contributions and the MAKS sale.
- Monitor MIS issuance trends, especially bank loans, CLOs and EMEA securitizations, and the effect of currency movements.
- Track restructuring charges, cash costs and realized savings against management’s estimates.
- Assess the MAKS sale proceeds and final accounting, including the currency-translation loss to be reclassified on sale.
- Follow developments in the New York tax case, ICRA matters and open tax audits; the filing does not quantify potential outcomes for the principal legal contingency.
- Review debt maturities, commercial-paper usage, cash deployment and the planned $1.0–$1.3 billion of 2019 repurchases.