Moody’s Corporation (MCO) — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; comparisons are with the same 2010 periods. Moody’s operates Moody’s Investors Service (MIS), its credit-ratings business, and Moody’s Analytics (MA), its non-rating research, data, software and services business. Dollar amounts are in millions unless noted.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $605.2 | $477.8 | $1,182.3 | $954.4 |
| Operating income | $270.1 | $190.5 | $520.2 | $387.3 |
| Operating margin | 44.6% | 39.9% | 44.0% | 40.6% |
| Net income attributable to Moody’s | $189.0 | $121.0 | $344.5 | $234.4 |
| Diluted EPS | $0.82 | $0.51 | $1.49 | $0.99 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $445.9 | $304.0 |
- Q2 revenue rose 27%; first-half revenue rose 24%. MIS external revenue increased 33% in Q2 and 28% in the first half; MA external revenue increased 12% and 14%, respectively.
- Growth was strongest in corporate finance ratings, supported by higher high-yield, bank-loan and investment-grade issuance. MA growth included the CSI acquisition completed in late 2010. First-half transaction revenue was 49% of consolidated revenue, versus 41% a year earlier.
- Operating expenses increased 17% in both Q2 and the first half, below revenue growth. Higher compensation, staffing, technology investment and acquisition-related amortization were partly offset by lower legal and litigation costs.
- Q2 net income included a $14.7 million benefit from a foreign tax ruling (about $0.06 per diluted share) and favorable Legacy Tax Matter resolutions. Management’s adjusted diluted EPS, excluding Legacy Tax Matter benefits and minor restructuring adjustments, was $0.79 for Q2 and $1.46 for the first half.
Balance sheet, liquidity and capital
- At June 30, cash and cash equivalents were $938.5, short-term investments $11.0, and total current assets $1,543.1; current liabilities were $852.0.
- Total debt was $1,243.0, including $15.0 current and $1,228.0 long-term; there were no commercial-paper or revolving-facility borrowings. Moody’s reported compliance with debt covenants. Its $1.0 billion revolving facility expires in September 2012 and includes a maximum Debt/EBITDA covenant of 4.0x.
- First-half cash flow from operations of $445.9 funded $40.4 of net investing outflows and $153.1 of net financing outflows. Financing included $127.6 of share repurchases and $58.2 of dividends paid.
- Shareholders’ deficit was $16.6. Cash included approximately $631 held outside the U.S.; about $519 of foreign earnings were treated as indefinitely reinvested, and a future distribution could create additional tax liability.
Outlook, risks and unusual items
- Management revised 2011 guidance: revenue growth in the low-teens percentage range; expenses up in the low-double-digit range; operating margin of 38%–40%; effective tax rate about 33%; and diluted EPS of $2.38–$2.48. Share repurchases were expected to resume in the second half, subject to cash flow and other capital-allocation decisions.
- Management cited stronger-than-expected Q2 performance but expected more challenging debt-issuance conditions in the U.S. and Europe in the second half. The outlook assumes quarter-end foreign exchange rates.
- Legal and regulatory exposure remains significant. Moody’s described investigations and litigation related to ratings, including shareholder derivative actions and securities litigation. A proposed class was denied certification and the Second Circuit denied leave to appeal; Moody’s said it could not estimate a possible loss range for pending matters.
- Legacy tax liabilities were recorded at $52.4, including $50.4 related to amounts due to New D&B. The filing warns ultimate liability could exceed recorded amounts and materially affect future results, financial position or cash flows.
- Regulatory changes, including implementation of the Dodd-Frank Act and evolving U.S. and European rules, could increase compliance costs and legal exposure, change rating-agency operations or affect revenue. Debt issuance, market conditions, competition, litigation, tax audits and acquisition integration are also identified risks.
Most important facts for investors to verify
- Whether second-half issuance and market conditions support the full-year revenue and EPS guidance.
- How much reported earnings growth reflects core operations versus the foreign tax ruling and Legacy Tax Matter benefits.
- Whether MA can convert revenue growth into improved operating income after acquisition and staffing costs.
- Developments in ratings-related litigation, regulatory rulemaking and the potential financial effects of Legacy Tax Matters.
- Cash deployment, including the timing and scale of planned share repurchases, dividends and debt repayments.