Business context and reporting period
Moody’s Corporation filed this unaudited Form 10-Q for the three months ended March 31, 2017. Its two reportable segments are Moody’s Investors Service (MIS), which provides credit ratings and related services, and Moody’s Analytics (MA), which provides research, data, software, risk-management, and professional services.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $975.2 million | $816.1 million | +19% |
| Operating income | $443.4 million | $304.1 million | +46% |
| Operating margin | 45.5% | 37.3% | +8.2 percentage points |
| Adjusted operating income | $475.9 million | $334.0 million | +42% |
| Adjusted operating margin | 48.8% | 40.9% | +7.9 percentage points |
| Net income attributable to Moody’s | $345.6 million | $184.4 million | +87% |
| Diluted EPS | $1.78 | $0.93 | +91% |
| Adjusted diluted EPS | $1.47 | $0.93 | +58% |
| Operating cash flow | $(512.4) million | $253.6 million | $(766.0) million |
| Free cash flow | $(531.1) million | $227.3 million | $(758.4) million |
Revenue growth was concentrated in MIS: external revenue rose 27% to $668.2 million, including strong corporate finance issuance activity. MA external revenue increased 5% to $307.0 million; growth in research/data and enterprise risk solutions was partly offset by weaker professional services revenue. Total company revenue benefited from both segments and pricing initiatives.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $2.130 billion at March 31, 2017; short-term investments were $132.8 million. The company reported approximately $2.3 billion in combined cash and short-term investments, of which about $1.9 billion was held outside the U.S.
- Total debt was approximately $4.1 billion, including $214.0 million of commercial paper. Long-term debt carrying value was $3.862 billion. The company had approximately $800 million of additional commercial-paper capacity, backstopped by its $1 billion revolving facility.
- Q1 financing included $500 million of 2.75% notes due 2021 and $300 million of floating-rate notes due 2018. Moody’s repaid $300 million of Series 2007-1 notes, including an approximately $7 million prepayment amount. Management reported compliance with debt covenants and no cross-defaults.
- Operating cash flow was negative primarily because the company paid an $863.8 million settlement charge accrued at year-end 2016. Cash at quarter-end increased $78.1 million, supported by net financing cash inflows of $553.7 million.
- Total shareholders’ deficit was $724.2 million. Accounts payable and accrued liabilities declined from $1.444 billion at year-end to $392.6 million, largely reflecting settlement, dividend, and interest payments.
Material changes, outlook, and notable items
- Q1 earnings included a $59.7 million non-cash, non-taxable gain from CCXI’s strategic realignment, which diluted Moody’s ownership interest to 30%. Management’s adjusted diluted EPS excludes this gain.
- The effective tax rate fell to 23.4% from 32.3%, primarily due to the non-taxable CCXI gain and a $19 million tax benefit from adopting new stock-based compensation accounting. Moody’s expected that accounting change to benefit full-year 2017 taxes by about $30 million, or $0.15 per diluted share.
- Management expected positive operating cash flow for full-year 2017 and anticipated approximately $500 million of 2017 share repurchases, subject to cash availability, market conditions, and capital-allocation decisions. The board declared a quarterly dividend of $0.38 per share, payable June 12, 2017.
- The company cited favorable Q1 debt issuance conditions, especially bank loans and high-yield corporate debt, but results remain exposed to market volatility and issuance cycles. Management also noted quarterly volatility in MA’s enterprise risk solutions business due to the timing and concentration of implementation and license projects.
- Moody’s was assessing the impact of the revenue-recognition standard it planned to adopt January 1, 2018; the quantitative effect was not yet reasonably estimable. It identified possible timing changes for certain software and ERS revenue and contract-cost accounting.
- A Q1 goodwill review found no impairment at MAKS, but the excess of estimated fair value over carrying value had declined. The filing’s sensitivity analysis showed potential impairment under hypothetical fair-value reductions of 30% or more for MAKS and FSTC.
- Risk factors include litigation and regulatory proceedings, changing credit-rating regulation, competition, capital-market conditions, foreign-exchange movements, cybersecurity and operational risks, and tax audits. Management said there had been no material change in the company’s previously disclosed risk factors.
Most important facts for investors to verify
- The nature and remaining implications of the $863.8 million settlement payment; the supplied filing text does not clearly identify the underlying matter.
- How much of reported EPS growth reflects ongoing operations versus the CCXI gain and the stock-compensation tax benefit.
- Whether strong MIS issuance volumes and the resulting transaction-revenue mix are sustainable as market conditions change.
- Cash generation after the settlement payment, and the company’s capacity to fund debt maturities, repurchases, dividends, and other commitments.
- Progress on the 2018 revenue-standard transition and changes in the MAKS goodwill valuation headroom.