Moody’s Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Moody’s provides credit ratings and related research, data, analytics, risk solutions and professional services through Moody’s Investors Service (MIS) and Moody’s Analytics (MA). Amounts are in U.S. dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1,240.5M | $1,080.8M | $3,596.2M | $3,382.6M |
| Operating income | $548.8M | $466.8M | $1,494.0M | $1,491.6M |
| Net income attributable to Moody’s | $379.4M | $310.2M | $1,062.6M | $1,059.3M |
| Diluted EPS | $1.99 | $1.59 | $5.54 | $5.45 |
| Adjusted diluted EPS (non-GAAP) | $2.15 | $1.69 | $6.29 | $5.76 |
| Operating margin | 44.2% | 43.2% | 41.5% | 44.1% |
| Adjusted operating margin (non-GAAP) | 49.5% | 47.6% | 48.2% | 48.5% |
| Net cash from operations | Not separately stated for the quarter | Not separately stated for the quarter | $1,195.5M | $1,084.6M |
| Free cash flow (non-GAAP) | Not separately stated for the quarter | Not separately stated for the quarter | $1,134.6M | $1,021.7M |
- Q3 growth: Revenue increased 15%; MIS external revenue rose 16% and MA external revenue rose 13%. Q3 revenue growth was broad, though Structured Finance (SFG) declined 8%.
- Year-to-date: Revenue increased 6%, driven mainly by MA growth of 14%; MIS external revenue grew 2%. GAAP operating income and net income were nearly flat year over year, while adjusted diluted EPS increased 9%.
- Balance sheet at September 30: Cash and cash equivalents were $1,178.0M and short-term investments were $95.8M. Debt carrying value was $5,238.0M, including $501.5M current debt. Total current assets were $3,042.3M and current liabilities $2,138.0M. The filing reports approximately $1.3B of cash and short-term investments, about $1.1B held outside the U.S.
- Capital allocation: Nine-month cash used in financing was $1,517.0M, including $728.0M for treasury shares and $283.6M in dividends. The company completed a $500M accelerated share repurchase and expected full-year 2019 share repurchases of approximately $1.0B, subject to cash availability, market conditions and capital allocation decisions.
Material changes versus the prior comparable period
- Q3 MIS corporate finance revenue rose 28%, reflecting strong investment-grade and speculative-grade issuance amid low borrowing costs; public, project and infrastructure finance revenue rose 21%. SFG fell 8%, including weaker CLO activity and postponed EMEA securitizations amid Brexit uncertainty.
- MA revenue growth reflected demand for credit research and ratings data feeds, Bureau van Dijk offerings, and risk solutions, including SaaS products supporting CECL and insurance accounting standards. Acquisitions contributed to MA growth; Reis, RiskFirst and Omega Performance added approximately $13M of Q3 revenue and $34M for the nine-month period.
- Q3 operating income increased 18%, with margin up 100 basis points. Nine-month GAAP operating margin fell 260 basis points, primarily due to restructuring and MAKS impairment charges; adjusted margin was down 30 basis points as expenses grew faster than revenue.
- Foreign currency translation reduced revenue growth by approximately 2% in Q3 and for the nine-month period. Diluted weighted-average shares declined, benefiting EPS, partly following the 2019 share repurchase.
Outlook, commentary, risks and unusual items
- Management said it expects positive operating cash flow over the next 12 months and believes available financial resources are sufficient for expected cash requirements. The filing does not provide a full-year revenue or EPS forecast.
- Management expected the sale of MAKS to Equistone to close in Q4 2019. At September 30, MAKS was classified as held for sale; the company recorded $10.7M of impairment for the nine months and estimated fair value less costs to sell at $202.5M. The carrying amount included an approximately $43M reduction for indemnification provisions.
- The 2018 restructuring program was estimated to generate approximately $60M in annualized savings and to incur total pre-tax charges of $105M–$110M. Nine-month 2019 restructuring charges were $58.3M; remaining liability was $31.3M, expected to be paid through 2021.
- In October 2019, the company reached an agreement to settle New York State and City tax-related claims and the former employee’s claims for $15.5M. The complaint alleged tax underpayment exceeding $120M, which Moody’s said it believed was unsupported. The Q3 segment reconciliation identifies a $15.5M captive insurance company settlement adjustment; verify the timing and accounting treatment of the settlement.
- ICRA was addressing regulatory proceedings and allegations relating to ratings and other matters. Moody’s said it could not estimate any financial impact; an unfavorable outcome could affect ICRA results and potentially lead to impairment of goodwill or intangible assets.
- Key risks include credit-market or economic slowdowns affecting issuance, competition and pricing pressure, rating-agency regulation and litigation, Brexit and regulatory uncertainty, cybersecurity and operational failures, acquisition integration, foreign exchange volatility, and tax audits. Management reported compliance with debt covenants and no cross-defaults at September 30.
- Moody’s reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It adopted the new lease standard in 2019, recognizing operating lease assets and liabilities; the filing reports $584.5M of lease liabilities at September 30.
Important facts for investors to verify
- How much of Q3 and year-to-date revenue growth was organic versus acquisition-related, and whether MA growth and recurring subscription revenue remain durable.
- The pace of corporate debt issuance and refinancing, and continued weakness or recovery in CLO, structured finance and EMEA issuance.
- Cash conversion, deferred revenue trends, offshore cash availability, and the funding of the announced share repurchases and dividends.
- The actual proceeds, closing date, indemnification terms and any further accounting effects of the MAKS divestiture.
- The recognition and cash-payment timing of the $15.5M settlement, and developments in ICRA proceedings and open tax audits.
- Performance against restructuring savings and charges, and whether acquisition integration and technology investment affect margins.
- Debt refinancing needs, particularly $500M of notes due in 2020 and $800M due in 2021, alongside the company’s commercial-paper capacity.