Business context and reporting period
Moody’s Corporation filed this Form 10-K for the fiscal year ended December 31, 2016; it also provides unaudited fourth-quarter results. The company operates Moody’s Investors Service (MIS), a credit-rating business, and Moody’s Analytics (MA), which provides research, data, software, risk-management and professional services.
Key financial metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $3,604.2 million | $3,484.5 million |
| Operating income | $638.7 million | $1,473.4 million |
| Operating margin | 17.7% | 42.3% |
| Net income attributable to Moody’s | $266.6 million | $941.3 million |
| Diluted EPS | $1.36 | $4.63 |
| Adjusted operating income (non-GAAP) | $1,641.2 million | $1,586.9 million |
| Adjusted operating margin (non-GAAP) | 45.5% | 45.5% |
| Adjusted diluted EPS (non-GAAP) | $4.81 | $4.60 |
| Operating cash flow | $1,226.1 million | $1,153.6 million |
| Free cash flow (non-GAAP) | $1,110.9 million | $1,064.6 million |
At year-end, cash and cash equivalents were $2,051.5 million and short-term investments were $173.4 million. Debt principal was $3,377.4 million, including $300 million due in 2017; the balance sheet reported $3,063.0 million of long-term debt. Total shareholders’ deficit was $1,027.3 million. Approximately $1.7 billion of cash and short-term investments was held outside the U.S.
Material changes versus the prior comparable period
- Revenue rose 3% year over year. MIS revenue increased 2%, with growth in public finance and high-yield corporate and bank-loan issuance in the second half partly offset by weaker first-half issuance and lower U.S. CLO and CMBS activity. MA revenue increased 7% as reported, or 10% excluding unfavorable foreign-exchange effects.
- MA growth was led by Enterprise Risk Solutions (ERS), up 12%, and Research, Data and Analytics (RD&A), up 7%; Professional Services revenue declined 2%. MIS public, project and infrastructure finance revenue rose 10%, while structured finance revenue fell 3%.
- Reported operating income, net income and EPS fell sharply because 2016 included an $863.8 million settlement charge ($700.7 million after tax, or $3.59 per diluted share). Excluding disclosed adjustments, adjusted operating income rose 3% and adjusted diluted EPS rose 5%.
- Operating cash flow increased $72.5 million, partly reflecting the accrued settlement charge; it should not be read as cash already received from operations independent of that accrual. Capital additions rose to $115.2 million from $89.0 million.
Outlook, management commentary, risks and unusual items
- Management expects positive operating cash flow in 2017. It anticipated approximately $500 million of 2017 share repurchases, subject to cash availability, market conditions and capital-allocation decisions. The filing does not provide formal revenue or EPS guidance.
- The January 2017 agreement with the U.S. Department of Justice and attorneys general of 21 states and the District of Columbia resolves pending and potential civil claims concerning certain crisis-era structured-finance ratings and related statements. Moody’s recorded the $863.8 million charge in 2016; most of the payment was expected in first-quarter 2017. The agreement includes compliance measures over five years and states no finding of a legal violation or admission of liability.
- After year-end, Moody’s began issuing commercial paper to manage liquidity around the settlement. As of February 22, 2017, CP borrowings were $566 million, with a 63-day weighted-average maturity and 1.18% weighted-average rate. The company also intended to prepay $300 million of 2007 notes on March 20, 2017, requiring approximately $316 million including accrued interest and prepayment penalties.
- Principal risks include debt-market and issuance volatility, regulatory changes and competition, litigation and reputational exposure, foreign-exchange and international risks, cybersecurity and technology disruptions, and tax uncertainty. The filing says potential losses in certain other proceedings cannot currently be estimated.
- Goodwill was $1,023.6 million; no goodwill impairment was recorded in 2016. Following a management change in MAKS, the company planned a quantitative impairment assessment in first-quarter 2017 after revised projections were completed. Results could differ from the prior assessment.
Important facts for investors to verify
- Confirm settlement payment timing and amount, related compliance obligations, and the effect on 2017 cash, CP usage and debt.
- Track the March 2017 note prepayment and subsequent debt balances, maturities and financing costs.
- Assess whether MIS issuance-dependent growth and MA subscription growth continue, including the impact of FX, pricing and market conditions.
- Review the 2017 MAKS goodwill assessment and any revised projections or impairment charge.
- Monitor outstanding litigation, tax audits and the $199.8 million of unrecognized tax benefits reported at year-end.
- Reported figures are GAAP unless identified as non-GAAP; adjusted measures exclude specified items and are not substitutes for GAAP results. KPMG reported that the financial statements were fairly presented and internal control over financial reporting was effective.