Moody’s Corporation (MCO) — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; unaudited. Moody’s operates through Moody’s Investors Service (MIS), its ratings business, and Moody’s Analytics (MA), which provides data, analytics, software, risk-management and professional services.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $834.9 million | $816.1 million | $2,618.6 million | $2,456.8 million |
| Operating income | $349.7 million | $349.7 million | $1,140.3 million | $1,094.4 million |
| Operating margin | 41.9% | 42.9% | 43.5% | 44.5% |
| Net income attributable to Moody’s | $231.6 million | $215.2 million | $723.4 million | $752.4 million |
| Diluted EPS | $1.14 | $1.00 | $3.54 | $3.48 |
| Adjusted operating income (non-GAAP) | $378.0 million | $372.9 million | $1,225.1 million | $1,163.0 million |
- Q3 revenue rose 2% reported and 7% excluding unfavorable foreign-exchange (FX) translation. Nine-month revenue rose 7% reported and 11% constant currency.
- Q3 operating margin fell 100 basis points; nine-month margin fell 100 basis points. Management attributed pressure to continued investment, acquired businesses with lower margins and FX.
- Q3 diluted EPS increased 14%. Nine-month GAAP net income fell 4% despite higher EPS, principally because 2014 included the $102.8 million pre-tax ICRA step-acquisition gain. Excluding that gain and Legacy Tax benefits, non-GAAP diluted EPS was $3.51 versus $3.09.
- Q3 effective tax rate was 32.0%, down from 33.5%; the nine-month rate was 31.7% versus 32.0%.
Segment and revenue trends
- MIS: Q3 external revenue was $548.1 million, essentially flat reported and up 5% constant currency. Nine-month external revenue increased 5% reported and 10% constant currency. U.S. investment-grade issuance, structured finance, pricing and fee initiatives supported growth; FX, weaker high-yield issuance and bank-loan activity were offsets.
- MA: Q3 external revenue rose 6% reported and 11% constant currency to $286.8 million. Nine-month revenue rose 10% reported and 15% constant currency to $829.0 million. ERS and RD&A grew, helped by regulatory and loan-origination demand and the Lewtan and WebEquity acquisitions; Professional Services declined.
- Q3 global transaction revenue was 46% of total, versus 49% a year earlier. MA recurring revenue was 75%, versus 72%.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $893.5 million, versus $709.8 million. Free cash flow, a non-GAAP measure, was $827.6 million versus $653.0 million, after $65.9 million of capital additions.
- Cash and cash equivalents were $1,471.1 million and short-term investments were $470.2 million at September 30. About $1.5 billion of the combined $1.9 billion was held outside the U.S.; approximately 95% of non-U.S. cash and investments were in entities with indefinitely reinvested earnings.
- Long-term debt was $3,124.5 million, up from $2,547.3 million at year-end 2014. The company issued €500 million of 1.75% notes due 2027. It had no borrowings under its new $1 billion five-year revolving facility and reported covenant compliance.
- Financing used $512.5 million in the first nine months, including $905.6 million of share repurchases and $205.0 million of dividends. Shareholders’ equity attributable to Moody’s was a deficit of $469.9 million, compared with a deficit of $187.8 million at year-end 2014.
Outlook, risks and unusual items
- Full-year 2015 guidance: revenue growth in the mid-single digits; GAAP EPS of $4.55–$4.65; operating margin about 43%; adjusted operating margin about 46%; tax rate about 31%–32%; capital expenditures about $90 million; and free cash flow about $1 billion. Share repurchases were expected to be about $1 billion, subject to cash availability, markets and capital-allocation decisions.
- Guidance changes from the September 30 public outlook included lower expectations for MIS CFG (approximately flat versus mid-single-digit growth), MIS non-U.S. (mid-single-digit decline versus low-single-digit decline), MIS PPIF (high-single-digit versus low-double-digit growth), MA non-U.S. (approximately flat versus low-single-digit growth), and capital expenditures ($90 million versus $100–$110 million).
- Management cited uncertainty in debt issuance, interest rates, FX, corporate activity and capital markets. Risks also include regulatory change, ratings-related litigation and investigations, competition, cyber and infrastructure risks, tax audits, and integration of acquisitions.
- Legal matters include ratings-related litigation and government inquiries. Moody’s said it could not estimate a range of possible losses for certain pending matters. CalPERS litigation remained active; the Pursuit claims against Moody’s were dismissed with prejudice pursuant to a confidential settlement in August 2015. The company stated that it believes tax exposures are adequately provided for, but ongoing audits could change unrecognized tax benefits.
- Foreign currency translation reduced Q3 revenue by about $37 million and nine-month revenue by about $120 million. Q3 included a $6.4 million Legacy Tax benefit; the nine-month 2014 comparison included the ICRA gain. The Board declared a subsequent quarterly dividend of $0.34 per share, payable December 10, 2015.
Key facts for investors to verify
- Whether debt issuance, segment growth and FX assumptions support full-year guidance, especially the revised MIS and MA regional outlook.
- Whether expense growth and ongoing investment continue to pressure operating margins, and how acquisitions contribute to revenue and profitability.
- Cash-flow quality: the contribution of tax-payment timing and working-capital changes to the increase in operating cash flow.
- Debt maturity and covenant profile, alongside continued buybacks, dividends and the company’s substantial foreign-held cash balance.
- Developments in ratings-related litigation, regulatory inquiries and tax audits; the filing does not provide a clear loss estimate for certain legal matters.