Moody’s Corporation — Q1 2021 Form 10-Q
Business context and period. Moody’s is a global risk-assessment company with two reporting segments: Moody’s Investors Service (MIS), which provides credit ratings and related services, and Moody’s Analytics (MA), which provides data, analytics and risk-management solutions. This unaudited filing covers the three months ended March 31, 2021, compared with Q1 2020. Amounts below are in millions of dollars unless stated otherwise.
Financial results and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $1,600 | $1,290 | +24% |
| Operating income | $853 | $592 | +44% |
| Operating margin | 53.3% | 45.9% | +740 bps |
| Adjusted operating income (non-GAAP) | $914 | $649 | +41% |
| Adjusted operating margin (non-GAAP) | 57.1% | 50.3% | +680 bps |
| Net income attributable to Moody’s | $736 | $488 | +51% |
| Diluted EPS | $3.90 | $2.57 | +52% |
| Adjusted diluted EPS (non-GAAP) | $4.06 | $2.73 | +49% |
| Operating cash flow | $676 | $345 | +$331 |
| Free cash flow (non-GAAP) | $662 | $324 | +$338 |
Revenue by segment: MIS external revenue was $1,036, up 30%; MA external revenue was $564, up 14%. MIS ratings revenue grew 31%, led by corporate finance, including stronger leveraged-loan and high-yield issuance. MA organic revenue growth was 10% (RD&A 12%; ERS 4%); reported growth also included acquisitions. Foreign-exchange translation benefited consolidated revenue by 3%.
Cash, debt and liquidity: At March 31, cash and cash equivalents were $2,769 and short-term investments were $96; long-term debt carried at $6,340. Current assets were $4,695 and current liabilities $2,154. The company reported approximately $1 billion of additional commercial-paper capacity, backed by its revolving credit facility, and said it was in compliance with debt covenants. It reported no cross-defaults or material off-balance-sheet arrangements.
Material changes and notable items
- Revenue growth substantially exceeded expense growth, expanding both GAAP and adjusted operating margins. Operating and SG&A costs rose overall, reflecting compensation, hiring, acquisitions and strategic technology investment; lower travel and credit-loss costs partly offset increases.
- Q1 2021 net income and EPS included tax-related benefits: $61 million from resolution of uncertain tax positions and a $40 million reversal of accrued tax-related interest. Management attributed much of the improvement in net interest expense to that interest reversal. The effective tax rate was 14.6%, versus 13.7%.
- Operating cash flow increased partly because a $99 million contribution to the funded pension plan in Q1 2020 did not recur. Investing cash outflow fell year over year, primarily because acquisition spending was lower; Q1 2021 included $138 million cash paid for Cortera.
- Moody’s acquired Cortera, a North American credit-data and workflow provider, on March 19, 2021, for total consideration of approximately $139 million. The preliminary allocation included $95 million of goodwill, assigned to MA.
- Debt carrying value declined from $6,422 at December 31, 2020. The company repurchased $132 million of treasury shares and paid $116 million in dividends during the quarter. The Board authorized an additional $1 billion of repurchases in February; approximately $1.7 billion of authorization remained at quarter-end.
Outlook, risks and contingencies
- Management said COVID-19 had not materially adversely affected reported results and was not expected to materially affect the near-term outlook, but longer-term effects remained uncertain. The filing does not provide a clear numerical full-year revenue or earnings forecast.
- Management expected positive operating cash flow over the next 12 months and said it believed available financial resources were sufficient for cash requirements. It remained focused on organic investment and targeted acquisitions, with excess capital returned through dividends and repurchases.
- A MA strategic reorganization was expected to generate annualized savings of $25–$30 million, with total pre-tax charges of approximately $20–$30 million. It was expected to be substantially complete in the first half of 2021; related cash outlays were expected through 2022.
- Key disclosed risks include credit-market and economic volatility affecting debt issuance, regulatory changes and oversight of credit-rating agencies, rating-related litigation, competition and pricing pressure, acquisition integration, cybersecurity and infrastructure failures, data-privacy compliance, foreign-exchange movements, and uncertainty around COVID-19. The filing reported no material change in previously disclosed risk factors.
- The company described legal, regulatory and tax proceedings but did not provide a clear aggregate estimate of potential losses. It said outcomes and timing can be difficult to predict. Tax audits may result in changes to uncertain tax positions; the timing and amount of potential changes were not estimable.
Most important facts for investors to verify
- How much of the quarter’s earnings and EPS growth is sustainable after excluding the $61 million tax-position benefit and $40 million tax-interest reversal.
- Whether strong MIS transaction revenue, particularly leveraged-finance issuance, persists as market conditions and issuance volumes change.
- MA’s organic growth and margins, distinguished from contributions by recent acquisitions, and Cortera’s integration and returns.
- Progress and realized savings from the MA restructuring, alongside its remaining charges and cash costs.
- Debt, capital returns and liquidity needs, including planned repurchases, dividend decisions and upcoming debt maturities.
- Developments in tax audits, ICRA-related regulatory matters, and any material rating-related legal or regulatory proceedings.