Moody’s Corporation — FY2010 Form 10-K
Business context and period: Annual report for the fiscal year ended December 31, 2010, filed February 25, 2011. Moody’s operates two segments: Moody’s Investors Service (MIS), its credit-rating business, and Moody’s Analytics (MA), which provides research, data, software, advisory, training and credentialing services. The filing includes fourth-quarter results, but is not a quarterly filing.
Financial performance
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Revenue | $2,032.0 million | $1,797.2 million | +13% |
| Operating income | $772.8 million | $687.5 million | +12% |
| Operating margin | 38.0% | 38.3% | Down about 0.3 percentage points |
| Net income attributable to Moody’s | $507.8 million | $402.0 million | +26% |
| Diluted EPS | $2.15 | $1.69 | +27% |
| Operating cash flow | $653.3 million | $643.8 million | +$9.5 million |
| Cash and cash equivalents at year-end | $659.6 million | $473.9 million | +$185.7 million |
| Total debt at year-end | $1,239.6 million | $1,193.7 million | +$45.9 million |
- Net income increased partly because the effective tax rate fell to 28.1% from 37.0%. Management cites foreign earnings treated as indefinitely reinvested, foreign tax credits, lower state taxes and tax-audit resolution. Reported 2010 diluted EPS included approximately $0.15 per share of tax benefits and $0.02 related to Legacy Tax Matters; excluding specified restructuring and Legacy Tax items, diluted EPS was $2.13 versus $1.70.
- FY2010 operating cash flow was nearly flat year over year. Investing activities used $228.8 million, including $148.6 million net cash paid for CSI. Financing activities used $241.3 million; Moody’s issued $496.9 million of notes, repurchased $223.6 million of shares and paid $98.6 million in dividends.
- Year-end current assets were $1,343.0 million and current liabilities $933.8 million, implying a current ratio of about 1.44. Cash less total debt was approximately negative $580 million. Shareholders’ deficit improved to $309.6 million from $606.2 million.
Material changes and segment performance
- MIS: Revenue was $1,405.0 million externally, up 15%. Corporate finance rose 38% to $563.9 million, financial institutions rose 8% to $278.7 million, and public, project and infrastructure finance rose 10% to $271.6 million. Structured finance declined 5% to $290.8 million. Segment operating income increased 17% to $649.4 million.
- MA: Revenue rose 8% to $627.0 million, but operating income fell 5% to $123.4 million as expenses grew faster than revenue. Research, data and analytics rose 3% to $425.0 million; risk management software rose 19% to $173.2 million; professional services rose 38% to $28.8 million. Recurring revenue represented 85% of MA revenue, down from 89%.
- Consolidated revenue growth reflected stronger issuance of corporate, financial institution and public finance debt, plus growth across MA lines. Transaction revenue increased to 44% of consolidated revenue from 37%; MIS transaction revenue rose to 57% from 50%. Structured-finance issuance remained weak, especially in several non-U.S. asset classes.
- Expenses increased 13% to $1,259.2 million, driven by higher compensation, headcount, technology investment and legal costs. The 2009 comparison included $17.5 million of restructuring charges, versus $0.1 million in 2010.
Outlook, risks and unusual items
- 2011 guidance: Revenue growth in the high-single-digit percent range; expenses up mid- to high-single digits; operating margin of 38%–40%; effective tax rate of approximately 36%; and diluted EPS of $2.12–$2.22. Management expected modest share repurchases, subject to cash flow and capital allocation. Guidance depends on uncertain macroeconomic and capital-market assumptions.
- MIS revenue was particularly exposed to new debt issuance: transaction-based revenue was 57% of MIS revenue in 2010. A slowdown in issuance, renewed market disruption, higher interest rates or spreads, or reduced reliance on ratings could adversely affect results. Structured finance markets remained well below prior peak activity.
- Regulatory changes, including the Dodd-Frank Act and evolving U.S. and European CRA oversight, could increase compliance expense, competition and legal exposure, or alter rating demand and business models. The filing states that effects were not yet reliably quantifiable.
- Moody’s disclosed ongoing government inquiries, litigation related to ratings and securities, shareholder derivative suits and an SEC investigation concerning certain MA valuation services. Management could not estimate a range of possible losses for the described legal matters. The company recorded $59.3 million of Legacy Tax Matter liabilities; ultimate exposure could be higher. Total net long-term tax liabilities of $238.8 million were excluded from the contractual-obligations schedule because payment timing could not be reasonably estimated.
- Other notable items: Moody’s acquired CSI Global Education for $151.4 million net cash, with an additional contingent payment; issued $500 million of 5.50% senior notes due 2020; and had no commercial paper outstanding at year-end. It reported compliance with debt covenants. KPMG gave unqualified opinions on the financial statements and internal control; management also concluded internal control was effective.
Important facts for investors to verify
- Whether 2011 revenue and EPS guidance was achieved, and how much results depended on issuance volumes and tax benefits.
- Whether MIS transaction-based revenue and structured-finance activity recovered sustainably, and how recurring MIS and MA revenue performed.
- Progress and financial returns from the CSI acquisition, including integration, professional-services growth and goodwill or intangible-asset impairment indicators.
- Developments in CRA regulation, rating-related litigation and the SEC inquiry, including any new estimates, reserves or potential effects on operating costs and demand.
- Cash conversion, capital spending, share repurchases, dividends, debt maturities and liquidity after the new notes issuance; also monitor the company’s substantial lease commitments.