Business context and reporting period
Moody’s Corporation’s 10-K reports the fiscal year ended December 31, 2015; the filing also provides unaudited fourth-quarter results. Moody’s operates two reportable segments: Moody’s Investors Service (MIS), its ratings business, and Moody’s Analytics (MA), which sells research, data, software, risk-management, training, and professional services.
Financial performance and position
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $3,484.5 million | $3,334.3 million | +5%; +9% excluding foreign-exchange translation |
| Operating income / margin | $1,473.4 million / 42.3% | $1,439.1 million / 43.2% | Income +2%; margin down 0.9 percentage points |
| Net income attributable to Moody’s | $941.3 million | $988.7 million | -5% |
| Diluted EPS | $4.63 | $4.61 | Nearly flat; non-GAAP diluted EPS was $4.60 vs. $4.21 |
| Operating cash flow / free cash flow | $1,153.6 million / $1,064.6 million | $1,018.6 million / $944.0 million | Free cash flow +13% |
| Cash and short-term investments | $2,232.2 million | $1,677.6 million | Up; about $1.5 billion was held outside the U.S. |
| Long-term debt | $3,401.0 million | $2,547.3 million | Up $853.7 million |
At year-end, Moody’s had $1.0 billion of additional capacity under its revolving credit facility, with no borrowings outstanding, and reported compliance with debt covenants. Total shareholders’ equity was a deficit of $333.0 million, versus positive equity of $42.9 million in 2014.
Fourth-quarter 2015 revenue was $865.9 million, operating income $333.1 million, net income attributable to Moody’s $217.9 million, and diluted EPS $1.09. The comparable 2014 quarter reported $877.5 million, $344.7 million, $236.3 million, and $1.12, respectively.
Material changes versus 2014
- MIS external revenue rose 3% as reported and 8% excluding FX effects; growth included pricing and fee initiatives, investment-grade corporate issuance, U.S. public-finance refundings, structured finance, and ICRA. MIS operating margin declined to 51.1% from 52.2%.
- MA external revenue rose 8% as reported and 12% excluding FX effects. RD&A revenue increased 10% and ERS 14%; Professional Services revenue fell 11%, partly reflecting exited Copal Amba product lines and attrition outpacing sales growth. MA operating margin improved to 19.9% from 19.5%.
- Foreign-exchange translation reduced reported revenue growth; management estimated an approximately $149.5 million adverse revenue impact and approximately $76 million adverse operating-income impact.
- GAAP net income declined despite higher revenue and operating income, largely because 2014 included a $102.8 million pre-tax ICRA remeasurement gain. Share repurchases reduced diluted weighted-average shares by 5.3%, supporting EPS.
Outlook, commentary, risks and contingencies
Management described long-term demand prospects for fixed-income-market information and risk-management products as favorable, while noting that ratings revenue depends substantially on debt issuance and market conditions. The filing does not provide formal 2016 revenue or earnings guidance. Moody’s expected positive operating cash flow over the next 12 months and anticipated approximately $1 billion of 2016 share repurchases, subject to cash availability, market conditions, and capital-allocation decisions. The Board declared a quarterly dividend of $0.37 per share, subject to Board discretion.
- Key business risks include changes in debt issuance and market volatility, pricing and competitive pressure, evolving U.S. and foreign CRA regulation, litigation and investigations, reputation risk, foreign-exchange exposure, cyber and operational disruptions, and acquisition integration.
- Legal matters include litigation relating to ratings and ongoing governmental inquiries. Management said that, for certain matters involving large or indeterminate damages and uncertain legal theories, it could not estimate a range of possible losses. A CalPERS matter remained pending, with trial scheduled for May 2016 if summary judgment was denied. The filing reports that the Second Circuit affirmed dismissal of Commerzbank’s claim on February 23, 2016.
- Tax exposures include $203.4 million of unrecognized tax benefits and $205.1 million of net long-term tax liabilities related to uncertain tax positions and legacy tax matters. Approximately $1.5 billion of cash and short-term investments was held outside the U.S.; repatriation could create additional U.S. tax.
- Management identified continued investment, acquisition-related costs, and FX translation as pressures on margins. It also highlighted variability in ERS quarterly revenue due to project timing and large engagements.
Important facts for investors to verify
- Whether ratings issuance and monitoring trends support MIS growth, and how much of growth reflects pricing, acquisitions, or transaction volumes.
- Whether MA’s recurring-revenue growth continues and whether Professional Services stabilizes after the Copal Amba declines.
- How FX movements affect reported results and whether operating margins recover as investments and acquisitions are absorbed.
- Debt levels, share repurchases, the planned 2016 buyback, and the sustainability of dividends alongside the reported shareholders’ deficit.
- Developments in ratings-related litigation, regulatory requirements, tax audits, and other contingencies whose potential losses were not clearly quantifiable.