Moody’s Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing; quarterly figures are included for context. Moody’s operates through Moody’s Investors Service (MIS), its ratings business, and Moody’s Analytics (MA), its data, analytics, software and services business.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $4,442.7 million | $4,204.1 million |
| Operating income / margin | $1,868.2 million / 42.1% | $1,820.8 million / 43.3% |
| Adjusted operating income / margin (non-GAAP) | $2,117.1 million / 47.7% | $2,001.6 million / 47.6% |
| Net income attributable to Moody’s | $1,309.6 million | $1,000.6 million |
| Diluted EPS / adjusted diluted EPS (non-GAAP) | $6.74 / $7.39 | $5.15 / $6.07 |
| Operating cash flow / free cash flow (non-GAAP) | $1,461.1 million / $1,370.7 million | $754.6 million / $664.0 million |
| Cash and short-term investments at year-end | $1,817.5 million | $1,183.3 million |
| Total debt principal at year-end | $5,721.6 million | $5,710.4 million |
Revenue rose 6%. MA external revenue increased 21% to $1,730.3 million, while MIS external revenue declined 2% to $2,712.4 million. MA growth included about $202 million from Bureau van Dijk, Reis and Omega Performance acquisitions. MIS faced weaker corporate and infrastructure issuance, and lower U.S. public finance issuance; pricing, product mix, new mandates and CLO activity partly offset those declines.
Net income and diluted EPS increased 31%, with the lower effective tax rate a major contributor: the rate was 21.0% versus 43.6% in 2017. Management said the U.S. tax-rate reduction and lower non-U.S. rates helped; 2017 included a net tax-reform charge of about $246 million. Adjusted diluted EPS rose 22%; management attributed roughly 10 percentage points of growth to the tax-rate benefit. GAAP operating margin fell 1.2 percentage points, while adjusted margin was nearly flat.
Operating cash flow increased $706.5 million, principally because 2017 included an approximately $864 million cash payment for the 2016 settlement. Free cash flow was $1,370.7 million after $90.4 million of capital additions. Current assets were $3,386.9 million and current liabilities were $2,098.5 million at year-end. The company had no commercial paper outstanding and no borrowings under its $1 billion revolving facility; it reported compliance with debt covenants. Debt carrying value was $5,676.0 million. Moody’s repaid the $450 million 2014 five-year notes in January 2019.
Material changes and unusual items
- 2018 acquisitions included Reis, a commercial real estate data provider, for $278 million, and Omega Performance; MA results include their post-acquisition contributions. Bureau van Dijk, acquired in 2017, contributed to year-over-year growth.
- A fourth-quarter restructuring charge of $48.7 million was recorded. The program is expected to cost $70–$80 million in total, generate annualized savings of approximately $40–$50 million, and be substantially completed by June 30, 2019.
- Adoption of the new revenue standard increased 2018 revenue by $13.4 million, operating income by $23.7 million and net income attributable to Moody’s by $18.8 million versus the prior accounting method. Prior-year results were not restated.
- Goodwill was $3,781.3 million and acquired intangible assets were $1,566.1 million at year-end; approximately 94% of goodwill and intangible assets were in MA. No impairment was recorded in the 2018 annual test.
Outlook, risks and contingencies
Management expected positive operating cash flow in 2019 and said it believed available financial resources were sufficient for cash requirements. The filing does not provide a clear 2019 revenue or EPS forecast. The company expected approximately $1 billion of 2019 share repurchases, including a $500 million accelerated repurchase agreement entered in February 2019, subject to cash, market conditions and capital-allocation decisions. The board approved a quarterly dividend of $0.50 per share in February 2019, subject to board discretion.
Key business risks include sensitivity of ratings revenue to global debt issuance and market volatility; competitive and pricing pressure; changing U.S. and international regulation of rating agencies; litigation and reputational exposure; cybersecurity, data privacy and operational disruption; foreign exchange and geopolitical risks; and execution or impairment risks related to acquisitions. A New York False Claims Act case alleges more than $120 million of underpaid state and city taxes and seeks statutory damages, including treble damages. Moody’s disputes the claims, says they are meritless, and cannot estimate a loss range; discovery was ongoing and trial was not expected before late 2019. The filing also reports $494.6 million of uncertain tax positions and approximately $198 million of remaining unpaid transition-tax liability.
Other notable exposures include $715.7 million of operating lease payments under existing commitments and the scheduled adoption of lease accounting in 2019. The company estimated adoption would recognize about $520 million of right-of-use assets and $625 million of lease liabilities.
Important facts for investors to verify
- How much MA’s growth and recurring-revenue mix persist after separating acquisition contributions from organic performance; MA recurring revenue was 84% of revenue versus 78% in 2017.
- Whether MIS issuance conditions recover, particularly in corporate finance and public, project and infrastructure finance, and how the late-2018 market weakness affects results.
- Whether restructuring savings meet the $40–$50 million annual target and whether total charges remain within the $70–$80 million estimate.
- Progress and potential financial impact of the New York tax litigation, other proceedings and the $494.6 million uncertain-tax-position balance; the filing does not provide a loss estimate for the New York case.
- Debt, liquidity and capital returns following the January 2019 note repayment, planned repurchases and dividend; verify subsequent cash generation and covenant headroom.
- Impairment sensitivity and performance of acquisition-related goodwill and intangibles, particularly Bureau van Dijk and the newer Reis business.