Moody’s Corporation — Q1 2018 Form 10-Q
Business context and period: Quarterly results for the three months ended March 31, 2018, compared with Q1 2017. Moody’s operates Moody’s Investors Service (MIS), its credit ratings business, and Moody’s Analytics (MA), which provides data, analytics, software, and professional services. Results include Bureau van Dijk (BvD), acquired in August 2017, for the full quarter; the prior-year comparison does not.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $1,126.7 million | $975.2 million | +16% |
| Operating income | $490.8 million | $446.7 million | +10% |
| Operating margin | 43.6% | 45.8% | Down 2.2 percentage points |
| Adjusted operating income | $540.7 million | $479.2 million | +13% |
| Adjusted operating margin | 48.0% | 49.1% | Down 1.1 percentage points |
| Net income attributable to Moody’s | $372.9 million | $345.6 million | +8% |
| Diluted EPS | $1.92 | $1.78 | +8% |
| Adjusted diluted EPS | $2.02 | $1.50 | +35% |
| Operating cash flow | $391.5 million | $(512.4) million | Improved $903.9 million |
| Free cash flow | $376.5 million | $(531.1) million | Improved $907.6 million |
Adjusted measures are non-GAAP; adjusted operating income excludes depreciation and amortization and acquisition-related expenses. Adjusted EPS also excludes acquisition-related intangible amortization and, for 2017, the CCXI gain.
Segments and revenue drivers
- MIS: Segment revenue was $749.7 million, up 8%; adjusted operating income was $439.3 million, up 8%. Structured finance revenue rose 29%, led by CLO and CMBS activity; corporate finance rose 7%. Public, project and infrastructure finance revenue declined 5%, partly reflecting lower U.S. advance-refunding issuance after the Tax Act.
- MA: Segment revenue was $411.8 million, up 33%; adjusted operating income was $101.4 million, up 42%. External revenue growth was led by RD&A, up 53%, including approximately $74 million from BvD net of an acquisition-accounting deferred-revenue reduction. MA operating margin fell to 16.6% from 18.5%, mainly due to higher acquired-intangible amortization; adjusted margin increased to 24.6% from 22.9%.
- International revenue increased 33% to $529.0 million, while U.S. revenue increased 3% to $597.7 million. Favorable foreign exchange contributed to growth in both segments.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $1,277.3 million and short-term investments were $100.5 million at March 31, 2018. Approximately $1.1 billion of combined cash and short-term investments was held outside the U.S.
- Total debt was approximately $5.5 billion. Commercial paper outstanding was $90 million; a $300 million floating-rate note was due in 2018. The company reported compliance with debt covenants and no cross-defaults. Approximately $910 million of additional commercial-paper capacity was available, backed by a $1 billion revolving facility.
- Q1 operating cash flow and free cash flow benefited from comparison with the approximately $864 million settlement payment made in Q1 2017. Q1 2018 operating cash flow also reflected working-capital movements.
- The company declared a $0.44-per-share quarterly dividend in April, payable June 11, 2018. Management expected approximately $200 million of 2018 share repurchases, subject to cash availability, market conditions, and capital-allocation decisions; about $484 million remained under the authorization at quarter-end.
Material changes, outlook and risks
- The effective tax rate declined to 14.6% from 23.4%, reflecting the lower U.S. corporate tax rate under the Tax Act, about $31 million of excess tax benefits on stock compensation, and uncertain-tax-position benefits. The company recorded a provisional $247.3 million transition-tax estimate at year-end 2017 and said the estimate could change as its analysis and related guidance develop.
- Q1 2017 included a $59.7 million non-taxable CCXI gain ($0.31 per diluted share); Q1 2018 did not. Thus, reported EPS growth understates the increase in the company’s adjusted comparison.
- Moody’s adopted the new revenue standard on January 1, 2018 using the modified retrospective method. Adoption increased opening retained earnings by about $156 million after tax; the filing says it had no material expected impact on 2018 full-year net income, though quarterly revenue and expense timing may fluctuate. Reported Q1 net income was $0.5 million higher than under prior guidance.
- Management said it expects positive operating cash flow over the next 12 months and believes available financial resources are sufficient for cash requirements. The filing provides no specific full-year revenue or EPS guidance.
- Key exposures include credit-market and issuance-volume changes, competition, foreign exchange, regulatory changes affecting rating agencies, litigation and investigations, cybersecurity and operational risks, tax audits, and BvD integration and synergy execution. The company said no material risk-factor changes had occurred since year-end 2017; management also noted uncertainty in predicting outcomes of legal and regulatory matters.
- Disclosure controls were assessed as effective. The company was integrating BvD into financial reporting controls and had implemented controls for the new revenue standard. It expects lease accounting adoption to create a material right-of-use asset and lease liability.
Investor verification priorities
- Separate organic MA growth from BvD’s contribution and assess the acquisition’s integration, synergies, and amortization burden.
- Track MIS issuance-sensitive revenue, particularly CLO/CMBS strength and the effect of reduced U.S. advance refundings.
- Reconcile reported and adjusted earnings, including the prior-year CCXI gain, acquired-intangible amortization, and the unusually low current-period tax rate.
- Monitor cash conversion beyond the settlement-payment comparison, working capital, and the 2018 floating-rate note maturity.
- Follow changes to the Tax Act transition-tax estimate, uncertain tax positions, and ongoing tax examinations, as well as material legal or regulatory developments.