Business context and reporting period
Moody’s Corporation filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. Its two reportable segments are Moody’s Investors Service (MIS), principally credit ratings, and Moody’s Analytics (MA), providing research, data, analytics, software and related services.
On August 10, 2017, Moody’s acquired Bureau van Dijk (BvD), a business-intelligence and company-information provider, for $3.542 billion. BvD is included in MA from the acquisition date.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $1,062.9 million | $917.1 million | $3,038.6 million | $2,662.1 million |
| Operating income | $445.4 million | $397.5 million | $1,346.3 million | $1,111.8 million |
| Net income attributable to Moody’s | $317.3 million | $255.3 million | $975.1 million | $695.2 million |
| Diluted EPS | $1.63 | $1.31 | $5.02 | $3.55 |
- Revenue increased 16% in Q3 and 14% year to date. MIS external revenue rose 13% in Q3 and 16% year to date; MA external revenue rose 21% and 10%, respectively.
- GAAP operating margin was 41.9% in Q3 (43.3% prior year) and 44.3% year to date (41.8% prior year). Adjusted operating margin, a non-GAAP measure, was 46.9% and 48.4%, respectively. Adjusted diluted EPS was $1.52 in Q3 and $4.57 year to date.
- Operating cash flow was $342.7 million and free cash flow was $273.3 million for the nine months, versus $889.0 million and $804.2 million, respectively, in 2016. The decline primarily reflected payment of the $863.8 million 2016 settlement charge.
- At September 30, cash and cash equivalents were $962.8 million and short-term investments $108.3 million. Total debt had a $5.721 billion carrying value ($5.756 billion principal); shareholders’ deficit was $156.8 million.
- Debt increased substantially to finance BvD and other obligations. Moody’s reported covenant compliance and approximately $685 million of additional commercial-paper capacity; $315 million of commercial paper was outstanding.
- Quarterly dividends declared were $0.38 per share. The company had about $563 million of remaining share-repurchase authorization and expected approximately $200 million of repurchases for full-year 2017, subject to cash availability, market conditions and capital-allocation decisions.
Material changes and unusual items
- Q3 growth reflected strong U.S. investment-grade corporate issuance and CLO activity, alongside rating-fee initiatives and pricing. U.S. public-finance refunding weakness partly offset MIS growth. MA growth included about $30 million of BvD revenue, with an approximately $14 million acquisition-accounting deferred-revenue reduction.
- BvD contributed $30.3 million of revenue and a $2.0 million net loss from acquisition through September 30. Its purchase-price allocation was preliminary and included $2.636 billion of goodwill and $1.352 billion of acquired intangible assets. Integration, amortization and acquisition expenses affect reported results.
- Q3 included a $69.9 million BvD purchase-price hedge gain; nine-month results also included a $59.7 million non-cash, non-taxable gain from Moody’s dilution of its CCXI interest to 30%. These items boosted reported earnings and are excluded from adjusted measures.
- Interest expense rose $12.7 million in Q3 and $31.7 million year to date, reflecting new acquisition and other financing. Nine-month effective tax rate fell to 29.0% from 31.5%, partly due to the CCXI gain and $35.6 million of stock-compensation tax benefits.
Outlook, risks and contingencies
- Management expected positive operating cash flow for the next 12 months and believed available financial resources were sufficient for anticipated requirements. It also cited investment, selective acquisitions, repurchases and dividends as capital-allocation priorities; continued dividends remain at the Board’s discretion.
- Moody’s planned to adopt the new revenue-recognition standard on January 1, 2018. It estimated a $74–$104 million post-tax increase to opening retained earnings; management said the standard changes timing, not expected cash receipts or business economics, and did not anticipate a material effect on 2018 net income overall, though quarterly fluctuations were possible.
- Key exposures include capital-market issuance volumes and economic conditions, regulation of rating agencies, litigation and investigations, competition, cybersecurity and operational failures, foreign-exchange volatility, and execution and integration risks related to BvD. Management cautioned that BvD synergies may not be achieved as expected.
- The filing describes ongoing tax audits and legal and regulatory matters but does not provide a clear estimate of potential losses or timing for unresolved contingencies. Unrecognized tax benefits were $336.3 million; the company said audit outcomes could change reserves, but could not estimate the amount.
Important facts for investors to verify
- Whether MIS issuance-driven growth and elevated transaction revenue persist, particularly if capital-market conditions or public-finance refunding activity change.
- BvD integration progress, realized synergies, revenue performance and the final purchase-price allocation, including goodwill and intangible-asset assumptions.
- Underlying earnings and margins excluding the hedge gain, CCXI gain, acquisition costs and acquisition-related amortization; assess the company’s non-GAAP reconciliations.
- Debt repayment and refinancing needs, leverage covenant headroom, liquidity and cash-flow recovery after the settlement payment and acquisition spending.
- Effects of the 2018 revenue-standard adoption, unresolved tax audits, and any material developments in legal, regulatory or rating-agency oversight matters.