Moody’s Corporation — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results. Moody’s operates two principal segments: Moody’s Investors Service (MIS), its credit ratings business, and Moody’s Analytics (MA), its non-ratings research, data, software, risk-management, and professional-services businesses.
Financial performance
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Revenue | $2,730.3 million | $2,280.7 million | +20% |
| Operating income | $1,077.4 million | $888.4 million | +21% |
| Operating margin | 39.5% | 39.0% | +0.5 percentage points |
| Adjusted operating income | $1,183.1 million | $967.6 million | +22% |
| Adjusted operating margin | 43.3% | 42.4% | +0.9 percentage points |
| Net income attributable to Moody’s | $690.0 million | $571.4 million | +21% |
| Diluted EPS | $3.05 | $2.49 | +22% |
| Operating cash flow | $823.1 million | $803.3 million | +$19.8 million |
| Free cash flow | $778.1 million | $735.6 million | +$42.5 million |
FY 2012 revenue growth reflected stronger activity across both segments, notably corporate debt issuance, higher MA revenue, and a full year of contributions from the 2011 Copal and Barrie & Hibbert acquisitions. Foreign-exchange translation reduced revenue by approximately $45 million and operating income by approximately $30 million.
Segments
- MIS: External revenue was $1,886.8 million, up 20%. Operating income was $946.9 million, up 25%, and operating margin rose to 48.4% from 46.5%. Revenue increased across all rating lines of business; corporate finance was the largest contributor, up 32%.
- MA: External revenue was $843.5 million, up 19%. Operating income was $130.5 million, up 1%; operating margin fell to 15.3% from 17.8%. Growth in research/data, risk solutions, and professional services was partly offset by higher costs, amortization, and a goodwill impairment.
Fourth quarter
Fourth-quarter 2012 revenue was $754.2 million, operating income $260.2 million, net income attributable to Moody’s $160.1 million, and diluted EPS $0.70. In fourth-quarter 2011, the corresponding amounts were $567.1 million, $172.1 million, $96.2 million, and $0.43. Fourth-quarter 2012 included a $12.2 million non-tax-deductible goodwill impairment charge.
Financial position and capital
- At December 31, 2012, cash and cash equivalents were $1,755.4 million, versus $760.0 million a year earlier. Approximately $874 million was held outside the U.S.; about $792 million was in entities whose earnings were designated indefinitely reinvested abroad.
- Total debt was $1,671.2 million, compared with $1,243.8 million in 2011; long-term debt was $1,607.4 million and the current portion $63.8 million. The increase primarily reflected issuance of $500 million of 4.50% senior notes due 2022, partly offset by term-loan repayments. Cash exceeded reported debt by approximately $84 million, before other obligations.
- The company had no commercial paper or revolving-facility borrowings at year-end and had a $1 billion revolving credit facility available through 2017. Moody’s reported compliance with debt covenants; the facility includes a maximum debt-to-EBITDA covenant of 4.0:1.
- Total shareholders’ equity was $396.6 million, compared with a deficit of $158.4 million in 2011. The company repurchased $196.5 million of shares and paid $143.0 million in dividends during 2012. The declared quarterly dividend increased to $0.20 per share for payment in March 2013.
Material changes and unusual items
- Transaction revenue increased to 50% of consolidated revenue from 46% in 2011, increasing sensitivity to debt issuance volumes.
- MA revenue included a full year of Copal and Barrie & Hibbert results. MA recurring revenue was 77% of segment revenue, down from 80% in 2011.
- A $12.2 million goodwill impairment was recorded in MA’s Financial Services Training and Certifications reporting unit after weaker projected training and certification spending. The company also recorded approximately $1 million of related customer-list impairment in the third quarter.
- 2012 net income included a $12.8 million benefit from resolution of a Legacy Tax Matter; 2011 included a $7.0 million Legacy Tax benefit and other tax benefits. The effective tax rate was 31.7%, versus 31.2%.
- Operating cash flow included approximately $121 million of state and local tax-audit settlement payments. Higher receivables also reduced cash conversion compared with the prior year.
Outlook, risks, and contingencies
Management forecast 2013 revenue growth in the high-single-digit percentage range, operating-expense growth in the low-single digits, operating margin of 42%–43%, adjusted operating margin of 46%–47%, an effective tax rate of approximately 32%, and diluted EPS of $3.45–$3.55. Planned capital expenditures were approximately $50 million and depreciation and amortization approximately $100 million. Share repurchases were expected to be about $500 million, subject to cash availability, market conditions, and capital-allocation decisions. Segment and business-line growth expectations were also provided; all guidance depends on uncertain economic, capital-market, issuance, and foreign-exchange assumptions.
- Regulatory and competitive exposure: U.S. and international reforms may increase compliance costs, liability, pricing constraints, rotation requirements, and competition. The EU’s CRA3 amendments were adopted by Parliament in January 2013 and were expected to take effect later in 2013.
- Litigation: Rating-related cases and government inquiries remain significant. In the Cheyne SIV litigation, plaintiffs alleged approximately $638 million in compensatory damages against all defendants, of which approximately $14.5 million was not sought from Moody’s; fraud claims against Moody’s remained. In Rhinebridge SIV litigation, plaintiffs alleged approximately $70 million against all defendants, and fraud claims against rating agencies were allowed to proceed. These alleged amounts are not established liabilities. The company said it could not estimate a possible loss range for certain matters.
- Tax matters: Recorded Legacy Tax liabilities were $39.2 million at year-end; management cautioned that ultimate exposure could be higher. Unrecognized tax benefits were $156.6 million, and the timing and amount of potential settlement cash flows were uncertain.
- Other risks: Results are exposed to debt-market issuance cycles, economic and interest-rate volatility, foreign exchange, reputational risk, cybersecurity and operational disruptions, talent retention, and execution of acquisitions. Further impairment of MA goodwill is possible if forecasts weaken; FSTC was identified as most sensitive.
Management and KPMG reported effective internal control over financial reporting as of December 31, 2012. The financial statements received an unqualified audit opinion.
Important facts for investors to verify
- How much of 2012 growth reflects underlying business and issuance activity versus acquired businesses, pricing initiatives, fee mix, and foreign exchange?
- Whether issuance-sensitive MIS revenue and transaction revenue remain strong, and whether MA recurring revenue stabilizes or declines further.
- Progress against 2013 revenue, margin, and EPS guidance, including the assumptions behind forecast issuance volumes and market conditions.
- Potential exposure and insurance coverage for the Cheyne and Rhinebridge litigation, other investigations, and Legacy Tax Matters; the filing does not provide a clear estimated loss range for certain legal matters.
- Cash availability and capital-allocation capacity after debt maturities, leases, pension contributions, planned repurchases, and foreign cash-repatriation tax considerations.
- Whether FSTC’s training demand and cash-flow forecasts recover, and whether any further goodwill or intangible-asset impairment is required.