Moody’s Corporation — Q1 2019 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2019, compared with Q1 2018. Moody’s operates Moody’s Investors Service (MIS), its credit-rating business, and Moody’s Analytics (MA), which provides financial data, software, research and risk-management solutions. Amounts are in U.S. dollars.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $1,142.1 million | $1,126.7 million | +1% |
| Operating income / margin | $461.7 million / 40.4% | $490.8 million / 43.6% | -6%; margin -320 bps |
| Adjusted operating income / margin (non-GAAP) | $518.9 million / 45.4% | $540.7 million / 48.0% | -4%; margin -260 bps |
| Net income attributable to Moody’s | $372.9 million | $372.9 million | Flat |
| Diluted EPS | $1.93 | $1.92 | +1% |
| Adjusted diluted EPS (non-GAAP) | $2.07 | $2.02 | +2% |
| Operating cash flow / free cash flow (non-GAAP) | $367.1 million / $347.1 million | $391.5 million / $376.5 million | Down $24.4 million / $29.4 million |
Segment performance: MIS external revenue declined 7% to $670.1 million, with ratings revenue down 7%. Management cited weaker bank-loan and CLO refinancing activity, higher borrowing costs, and postponed EMEA securitizations amid Brexit and regulatory uncertainty. MA external revenue rose 16% to $472.0 million, supported by research and ratings data, SaaS-based risk solutions, and acquisitions. Reis and Omega Performance contributed about $11 million of MA revenue growth.
Liquidity and debt: At March 31, cash and cash equivalents were $1,196.6 million and short-term investments were $114.0 million. Total debt carrying value was $5,547.4 million, including $318.8 million of commercial paper; long-term debt on the balance sheet was $5,228.6 million. Moody’s repaid $450 million of notes in January and reported compliance with debt covenants. The company said it had approximately $680 million of additional borrowing capacity under its commercial-paper program and expected positive operating cash flow over the next 12 months.
Total assets were $9,518.1 million and total shareholders’ equity, including noncontrolling interests, was $325.0 million at quarter-end. The adoption of lease accounting added $508.1 million of operating lease right-of-use assets and $610.9 million of lease liabilities on the March 31 balance sheet.
Material changes and notable items
- Revenue growth was modest because MA’s expansion was largely offset by lower MIS revenue. MIS operating income declined 13%; MA operating income increased 40%.
- Operating and SG&A expenses rose 6% combined, reflecting compensation, hiring and acquired-business costs. A $5.5 million restructuring charge was recorded in Q1.
- The effective tax rate fell to 9.2% from 14.6%, primarily due to favorable IRS regulations and lower non-U.S. taxes on certain software development. Management also cited excess tax benefits and reductions in uncertain tax positions.
- Moody’s paid $500 million under an accelerated share repurchase agreement, received 2.2 million shares initially, and received a further 0.6 million shares at final settlement on April 26, 2019. Q1 share repurchases and dividends contributed to cash used in financing activities of $848.8 million.
- Moody’s adopted the new lease accounting standard on January 1, 2019; prior-year comparative periods were not restated. It also reclassified approximately $20 million of stranded tax effects from accumulated other comprehensive loss to retained earnings.
- After quarter-end, Moody’s acquired a majority stake in ESG research provider Vigeo Eiris; the purchase price and expected near-term operating and cash-flow impact were described as immaterial.
Outlook, risks and contingencies
- Management estimated the 2018 restructuring program would produce annualized savings of approximately $40–$50 million, with total pretax charges of $70–$80 million, and expected substantial completion by June 30, 2019.
- Full-year 2019 share repurchases, including the ASR, were expected to be approximately $1 billion, subject to available cash, market conditions and capital-allocation decisions. The board declared a $0.50-per-share dividend payable June 10, 2019; future dividends remain at the board’s discretion.
- A New York False Claims Act case alleges more than $120 million of state and city tax underpayments and seeks treble damages and other relief. Moody’s disputes the claims, says they are unsupported, and cannot estimate a loss range; trial was expected no earlier than late 2019 absent earlier disposition.
- Management highlighted risks including debt issuance and credit-market conditions, interest rates, Brexit, regulation and litigation, competition, cybersecurity and operational failures, foreign-exchange movements, tax audits, and acquisition integration. The company said there had been no material change in its reported risk factors since year-end 2018.
Important facts for investors to verify
- Whether MIS issuance and refinancing activity recovered, particularly in bank loans, CLOs and EMEA structured finance, and whether MIS revenue and margins stabilized.
- How much of MA’s growth is organic and recurring versus acquisition-related, and whether its operating-margin improvement persists.
- The sustainability of the unusually low 9.2% quarterly effective tax rate and the outcome of open tax audits and uncertain tax positions.
- Cash generation and liquidity after the $500 million ASR, debt repayment, planned repurchases and dividends; also monitor commercial-paper usage and upcoming maturities.
- Actual restructuring charges, cash costs, completion timing and realized annual savings compared with management’s estimates.
- Developments in the New York False Claims Act litigation, for which the filing provides no estimable loss range.