Moody’s Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. Moody’s operates through Moody’s Investors Service (MIS), its credit-rating business, and Moody’s Analytics (MA), which provides data, software, analytics and related services. Results include Bureau van Dijk (BvD) from its August 2017 acquisition date; prior periods are not acquisition-adjusted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $1,175.1 million | $1,000.5 million | $2,301.8 million | $1,975.7 million |
| Operating income | $534.0 million | $460.1 million | $1,024.8 million | $906.8 million |
| Net income attributable to Moody’s | $376.2 million | $312.2 million | $749.1 million | $657.8 million |
| Diluted EPS | $1.94 | $1.61 | $3.85 | $3.39 |
| Operating margin | 45.4% | 46.0% | 44.5% | 45.9% |
| Adjusted operating margin (non-GAAP) | 49.7% | 49.9% | 48.9% | 49.5% |
- Revenue growth: 17% in both Q2 and the first half. Q2 MIS revenue rose 10% to $752.3 million; MA external revenue rose 35% to $422.8 million. First-half MIS revenue increased 9% to $1,472.2 million and MA external revenue increased 34% to $829.6 million.
- Drivers and mix: MIS benefited from bank-loan issuance and CLO/structured-credit activity, with declines in some investment-grade and public-finance categories. MA growth was led by RD&A and included about $80 million of Q2 BvD revenue and $154 million for the first half, net of acquisition-accounting deferred-revenue reductions. MA recurring revenue was 84% of Q2 revenue and 85% for the first half.
- Profitability: GAAP operating income rose 16% in Q2 and 13% in the first half. Margins declined year over year, principally amid acquisition-related amortization and costs, while adjusted margins also edged lower. BvD contributed materially to MA revenue and expenses.
- Taxes and EPS: Effective tax rates were 23.7% for Q2 and 19.4% for the first half, down from 32.1% and 27.8%. The filing attributes the decrease primarily to the U.S. tax-rate reduction under the Tax Act; first-half 2018 also included about $36 million of excess stock-compensation tax benefits and uncertain-tax-position benefits. Adjusted diluted EPS was $2.04 in Q2 and $4.06 for the first half; these are non-GAAP measures.
- Cash flow: First-half operating cash flow was $777.3 million and free cash flow was $739.4 million, versus cash used in operations of $40.6 million and negative free cash flow of $83.4 million in the prior-year period. The comparison was heavily affected by the approximately $864 million settlement payment made in 2017. Capital additions were $37.9 million.
- Liquidity and debt: At June 30, cash and cash equivalents were $1,314.5 million and short-term investments were $101.2 million. Debt carrying value was $5,324.0 million, including $89.9 million of commercial paper; the company reported $910 million of additional commercial-paper borrowing capacity. Moody’s issued $300 million of 3.25% notes due 2021 and repaid $450 million of its term loan during Q2. It was in compliance with debt covenants.
- Capital returns: First-half dividends paid were $168.6 million. The board declared a $0.44-per-share quarterly dividend payable September 10, 2018. The company expected approximately $200 million of full-year 2018 share repurchases, subject to cash, markets and capital-allocation decisions.
Material changes, outlook and risks
- Moody’s adopted the new revenue-recognition standard on January 1, 2018 using the modified retrospective method. It increased opening retained earnings by approximately $156 million after tax. Reported first-half net income was about $6.3 million higher than it would have been under the prior guidance; operating cash flow was unchanged. Management did not expect a material full-year 2018 net-income impact, but noted possible quarterly fluctuations and expected higher cash taxes.
- Management said it expected positive operating cash flow over the next 12 months and believed available financial resources would meet cash requirements. It remained committed to deleveraging after BvD-related financing. No formal revenue or EPS forecast is stated in the supplied filing text.
- Near-term operating risks include debt-issuance and capital-market volumes, interest-rate and credit-spread movements, M&A activity, foreign exchange, competition, and quarterly volatility in MA project and software-license revenue. Management also highlighted regulation of rating agencies, litigation and investigations, cybersecurity and infrastructure risks, tax audits, and the challenge of integrating BvD and realizing expected synergies.
- Legal and regulatory matters are described as inherently difficult to predict; the filing does not provide a clear quantified aggregate exposure. The company also reported $398.3 million of unrecognized tax benefits and an estimated $237 million remaining unpaid transition-tax liability not included in its contractual-obligations schedule.
- Other notable items: 2017 comparisons included a $41.2 million BvD purchase-price hedge gain and a $59.7 million CCXI gain. First-half 2018 other comprehensive loss included $134.3 million after tax of foreign-currency translation adjustments. Management reported disclosure controls were effective and no material change in internal control, while noting continued BvD integration and implementation of revenue-standard controls.
Important facts for investors to verify
- How much of MA’s growth and future profitability is attributable to BvD, and whether expected integration benefits and synergies are being realized.
- Underlying MIS issuance trends, particularly bank loans, CLOs, investment-grade corporate debt and U.S. public finance, and the balance between transaction and recurring revenue.
- Cash generation excluding the unusually large 2017 settlement-payment comparison, and the pace of debt repayment and share repurchases.
- The effects of revenue-recognition changes, acquisition-related amortization, and the lower tax rate on reported versus adjusted earnings and cash taxes.
- Developments in legal, regulatory and tax matters, including the transition-tax estimate, unrecognized tax benefits and evolving U.S. and European rating-agency rules.