Moody’s Corporation — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing; fourth-quarter figures are included below where useful.
Business context
Moody’s operates two segments: Moody’s Investors Service (MIS), its credit ratings business, and Moody’s Analytics (MA), which sells research, data, risk-management software, training and professional services. Results remain sensitive to debt issuance and capital-market conditions. In 2011, the company acquired Barrie & Hibbert and a majority interest in Copal Partners, expanding MA.
Financial results and key metrics
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $2,280.7 million | $2,032.0 million |
| Operating income | $888.4 million | $772.8 million |
| Operating margin | 39.0% | 38.0% |
| Net income attributable to Moody’s | $571.4 million | $507.8 million |
| Diluted EPS | $2.49 | $2.15 |
| Cash provided by operating activities | $803.3 million | $653.3 million |
| Cash and cash equivalents at year-end | $760.0 million | $659.6 million |
| Total debt at year-end | $1,243.8 million | $1,239.6 million |
- Revenue increased 12%; operating income rose 15%. International revenue grew 17% to $1,103.7 million, while U.S. revenue increased 8% to $1,177.0 million.
- MIS external revenue increased 12% to $1,568.9 million; segment operating income rose 17% to $762.7 million. MA external revenue increased 14% to $711.8 million, while segment operating income increased 2% to $125.7 million.
- MA’s professional services revenue rose sharply, primarily reflecting the acquisitions of CSI and Copal. Recurring revenue represented 80% of MA revenue, down from 85% in 2010.
- Operating cash flow rose $150.0 million, aided by lower prepaid taxes and stronger collections. Investing used $267.6 million, including acquisition spending; financing used $417.7 million, including $333.8 million of share repurchases and $121.0 million of dividends paid.
- Year-end shareholders’ deficit attributable to Moody’s was $169.0 million. The balance sheet reported $1,424.4 million of current assets and $1,134.0 million of current liabilities.
- Fourth-quarter 2011 revenue was $567.1 million, operating income $172.1 million, net income attributable to Moody’s $96.2 million and diluted EPS $0.43. In fourth-quarter 2010, the corresponding figures were $564.3 million, $196.6 million, $137.4 million and $0.58.
Material changes and unusual items
- Growth reflected higher issuance and pricing initiatives, particularly in corporate finance and structured finance, as well as MA acquisitions. In contrast, high-yield issuance weakened in the second half amid widening spreads and market uncertainty; U.S. public-finance issuance also declined.
- Reported 2011 diluted EPS included a $0.03 benefit from Legacy Tax Matters and other tax benefits of approximately $0.09. Excluding the Legacy Tax benefit, diluted EPS was $2.46, up 15% from adjusted 2010 EPS of $2.13.
- The effective tax rate increased to 31.2% from 28.1%, principally because 2010 included benefits from foreign tax credits, lower state taxes and indefinitely reinvested foreign earnings.
- Goodwill increased to $642.9 million, principally following acquisitions. The company reported no material goodwill or intangible-asset impairment in 2011.
Liquidity, debt and commitments
Moody’s said operating cash flow and available financial resources should meet expected cash requirements, and it expected positive operating cash flow over the next 12 months. Year-end cash included approximately $550 million held outside the U.S.; about $438 million of that amount was in entities whose earnings were treated as indefinitely reinvested. The company had no commercial-paper or revolving-facility borrowings outstanding at year-end and reported compliance with debt covenants. It had $1.0 billion of additional borrowing capacity under its facilities, subject to their terms.
Near-term obligations include $71.3 million of scheduled 2012 term-loan principal payments. The company also disclosed substantial operating-lease commitments and $119.9 million of projected near-term payments for uncertain tax positions in its contractual-obligations table. Approximately $89 million was paid to New York State in January 2012 for tax assessments accrued at year-end; further 2012 tax-audit payments of $30–$40 million were anticipated.
Outlook, commentary and principal risks
- For 2012, management forecast revenue growth in the high-single- to low-double-digit range, expenses growing at a similar rate, an operating margin of approximately 39%, an effective tax rate near 33%, and diluted EPS of $2.62–$2.72.
- MIS revenue was expected to grow in the mid-single digits; MA revenue was projected to grow in the high teens, including acquisition contributions. These projections depend on uncertain economic, issuance, interest-rate and foreign-exchange assumptions.
- Key risks include evolving U.S. and international regulation of rating agencies, potential changes to rating-agency liability and business models, litigation and investigations tied to ratings, and the effects of sovereign-debt and broader market volatility on issuance.
- Other material risks include competition and pricing pressure, reputational damage, foreign-exchange and international operating risks, cybersecurity or operational disruption, acquisition integration, and potential impairment of MA goodwill and intangible assets.
- Management stated that it could not estimate a range of possible losses for certain pending legal and regulatory matters. Recorded Legacy Tax Matter liabilities were $54.6 million at year-end; ultimate exposure could be higher.
Most important facts for investors to verify
- Whether MIS issuance volumes, especially speculative-grade, structured-finance and public-finance activity, support the 2012 outlook.
- How much of MA’s forecast growth comes from acquired businesses versus organic growth, and whether acquisition-related costs and integration affect margins.
- Cash conversion and capital allocation, including buybacks, dividends, scheduled debt repayment and the company’s offshore cash and tax position.
- Developments in rating-agency regulation, litigation and investigations, including potential outcomes that the company says cannot currently be estimated.
- Whether Copal’s put/call arrangement, contingent consideration, tax exposures and goodwill assumptions create material future cash requirements or accounting charges.