Moody’s Corporation — Q1 2014 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three months ended March 31, 2014, compared with Q1 2013. Moody’s provides credit ratings and related research, data, analytics, software, risk-management, and professional services through Moody’s Investors Service (MIS) and Moody’s Analytics (MA).
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $767.2 million | $731.8 million | +5% |
| Operating income | $333.0 million | $280.4 million | +19% |
| Operating margin | 43.4% | 38.3% | +5.1 percentage points |
| Adjusted operating income | $356.1 million | $304.0 million | +17% |
| Adjusted operating margin | 46.4% | 41.5% | +4.9 percentage points |
| Net income attributable to Moody’s | $218.0 million | $188.4 million | +16% |
| Diluted EPS | $1.00 | $0.83 | +20% |
| Operating cash flow | $177.2 million | $202.6 million | -$25.4 million |
| Free cash flow | $158.1 million | $194.0 million | -$35.9 million |
All dollar amounts are U.S. dollars. Adjusted operating income, adjusted operating margin, and free cash flow are non-GAAP measures.
- Segments: MIS revenue was $525.8 million, up 1%; MA external revenue was $241.4 million, up 15%. MA growth included approximately $11 million of Amba revenue and growth across RD&A, ERS, and Professional Services. MIS benefited from pricing and fee initiatives, investment-grade issuance and bank-loan activity, partly offset by weaker high-yield issuance and lower U.S. public-finance revenue.
- Cash and liquidity: At March 31, cash and cash equivalents were $1.792 billion, short-term investments $177.3 million, and restricted cash $75.4 million. Restricted cash was escrowed for the proposed ICRA share tender offer. The company had a $1.0 billion undrawn revolving facility. Operating cash flow fell despite higher earnings; management cited working-capital movements, stock-compensation tax benefits, and the prior-year litigation-settlement timing. Capital additions were $19.1 million, versus $8.6 million.
- Debt and balance sheet: Long-term debt was $2.098 billion, compared with $2.102 billion at year-end 2013. Moody’s reported compliance with debt covenants and no cross-defaults. The $1.0 billion revolving credit facility expires in April 2017 and includes a maximum debt-to-EBITDA covenant of 4:1. Total assets were $4.353 billion; total shareholders’ equity was $393.3 million.
Material changes and notable items
- Revenue increased $35.4 million, while total expenses declined $17.2 million. The year-over-year expense comparison benefited from a Q1 2013 charge for settlements of the Abu Dhabi and Rhinebridge litigation matters; Moody’s said that charge reduced prior-year diluted EPS by $0.14. Excluding it, Q1 2014 diluted EPS of $1.00 was 3 cents above prior-year non-GAAP EPS of $0.97.
- Higher compensation costs, headcount growth, Amba-related expenses, and occupancy and technology spending partly offset the litigation-related comparison benefit. Amba was acquired in December 2013 and integrated with Copal in MA’s Professional Services business.
- Cash used in financing rose to $222.1 million, including $201.6 million of share repurchases and $59.9 million of dividends. Moody’s expected approximately $1 billion of 2014 repurchases. The board declared a quarterly dividend of $0.28 per share, payable June 10, 2014.
- Moody’s placed $75.4 million in escrow for a conditional offer to buy additional shares of ICRA Limited. Completion was subject to regulatory review and minimum acceptance conditions; the stated potential cash cost was approximately $69–$85 million.
Outlook, risks, and contingencies
- 2014 guidance: Full-year diluted EPS of $3.90–$4.00; revenue growth in the high-single-digit range; operating-expense growth in the mid-single-digit range; operating margin of 42%–43%; adjusted operating margin of 45%–46%; effective tax rate of approximately 33%; capital expenditures of approximately $90 million; depreciation and amortization of approximately $100 million; and free cash flow of approximately $900 million. Management expected full-year repurchases of approximately $1 billion, subject to cash, markets, and capital-allocation decisions.
- MIS revenue was forecast to grow in the mid-single digits; MA revenue, including Amba, in the low teens. Management noted that results depend on uncertain macroeconomic and capital-market conditions, including interest rates, debt issuance, M&A activity, and business investment.
- Material risks include increased regulation and scrutiny of credit-rating agencies, litigation relating to ratings, competitive and pricing pressure, capital-market volatility, foreign-exchange movements, cybersecurity and operational risks, and the integration and performance of acquisitions.
- The Cheyne Finance matter remained subject to an appeal by two plaintiffs seeking approximately $76 million in compensatory damages. Rhinebridge claims against Moody’s were dismissed with prejudice following settlement. Moody’s stated that it could not estimate a range of possible losses for certain pending legal, regulatory, and governmental matters.
- Recorded Legacy Tax Matter liabilities were $17.7 million. The filing also reports $206.3 million of net long-term tax liabilities related to uncertain tax positions and Legacy Tax Matters, excluded from contractual-obligation timing estimates because expected payment timing could not be reasonably estimated. Tax audits remained open in the U.S., New York State, and the U.K.
- Management expected positive operating cash flow over the next 12 months and said it believed available financial resources were sufficient for expected needs. Approximately $1.3 billion of cash, restricted cash, and short-term investments was held outside the U.S.; about 95% of non-U.S. balances were at entities with earnings treated as indefinitely reinvested.
Important facts for investors to verify
- Whether 2014 guidance was subsequently achieved, particularly revenue growth, margins, EPS, and free cash flow.
- How much MA growth was organic versus attributable to Amba, and whether segment margins and recurring revenue trends were sustained.
- Whether operating cash flow recovered and how working capital, capital spending, buybacks, and dividends affected liquidity.
- The outcome and funding of the ICRA tender offer, including any change in Moody’s ownership or consolidation treatment.
- Developments in the Cheyne appeal, other ratings-related litigation and investigations, and tax matters that could affect results or cash flows.
- Debt maturities, covenant headroom, and the effect of planned repurchases and the Copal put/call arrangement on leverage and liquidity.