Moody’s Corporation — 2013 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2013; quarterly figures are unaudited. Moody’s provides credit ratings and related research, data, analytics, software, risk-management, training, and outsourced research services. Its reportable segments are Moody’s Investors Service (MIS), the ratings business, and Moody’s Analytics (MA), its non-ratings businesses.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $2,972.5 million | $2,730.3 million |
| Operating income / margin | $1,234.6 million / 41.5% | $1,077.4 million / 39.5% |
| Adjusted operating income / margin (non-GAAP) | $1,328.0 million / 44.7% | $1,183.1 million / 43.3% |
| Net income attributable to Moody’s | $804.5 million | $690.0 million |
| Diluted EPS | $3.60 | $3.05 |
| Operating cash flow / free cash flow (non-GAAP) | $926.8 million / $884.5 million | $823.1 million / $778.1 million |
| Cash and short-term investments | $2,106.3 million | $1,773.3 million |
| Total debt | $2,101.8 million | $1,671.2 million |
- Revenue rose 9%; operating income increased 15%, with margin up 2.0 percentage points. Diluted EPS increased 18%.
- MIS external revenue increased 9% to $2,059.4 million; operating income was $1,068.8 million and operating margin was 50.0%. MA external revenue increased 8% to $913.1 million; operating income was $165.8 million and operating margin was 17.9%.
- Growth reflected higher high-yield corporate debt and bank-loan issuance, pricing and fee initiatives, and growth across MA lines of business. MIS structured-finance revenue was broadly flat, as U.S. growth was offset by EMEA declines.
- Cash and short-term investments included approximately $1.2 billion held outside the U.S. The company had an undrawn $1.0 billion revolving credit facility maturing in 2017 and reported compliance with debt covenants.
- Debt increased with the issuance of $500 million of 4.875% senior notes due 2024; the $63.8 million term-loan balance was repaid. The company repurchased $893.1 million of shares and paid $197.3 million in dividends during 2013.
Material changes and unusual items
- 2013 diluted EPS included a $0.14-per-share charge for litigation settlements and a $0.09-per-share benefit from a Legacy Tax Matter. The company reported non-GAAP diluted EPS of $3.65, excluding the specified litigation and tax items.
- Abu Dhabi and Rhinebridge litigation matters were settled in 2013. The separate securities class action against the company was concluded through a confidential settlement after plaintiffs dismissed their appeal with prejudice.
- MA acquired Amba Investment Services in December for stated consideration of $71.6 million, including contingent consideration. Amba was combined with Copal; the company reported 971 acquired staff, principally in lower-cost jurisdictions.
- No goodwill impairment was recorded in 2013; a $12.2 million impairment had been recorded in 2012 for the Financial Services Training and Certifications reporting unit. Management identified that unit, and to a lesser extent Enterprise Risk Solutions, as areas to monitor for possible future impairment.
- Fourth-quarter 2013 revenue was $779.2 million, operating income $311.9 million, net income attributable to Moody’s $206.7 million, and diluted EPS $0.94.
Outlook, risks, and contingencies
- For 2014, management expected revenue growth in the high-single-digit range, operating expense growth in the mid-single-digit range, operating margin of 42%–43%, adjusted operating margin of 45%–46%, and diluted EPS of $3.90–$4.00. The effective tax rate was projected at approximately 33%.
- Management expected approximately $900 million of free cash flow, $90 million of capital expenditures, and $1.0 billion of share repurchases in 2014. The repurchase outlook was subject to cash availability, market conditions, and capital-allocation decisions.
- 2014 segment revenue outlook: MIS mid-single-digit growth; MA low-teens growth, including Amba. Management’s assumptions depend on capital-market issuance, interest rates, corporate profitability, business investment, and other macroeconomic factors; actual results could differ materially.
- Key risks include evolving U.S. and foreign regulation of credit rating agencies, potential changes to rating demand and pricing, litigation and investigations, debt-issuance volatility, competition and pricing pressure, reputational risk, cybersecurity or operational disruption, foreign exchange exposure, and acquisition integration.
- The company disclosed ongoing governmental inquiries and litigation involving ratings. Two Cheyne-related plaintiffs appealed dismissal of their claims and sought approximately $76 million in compensatory damages. Moody’s stated it could not estimate a range of possible losses for certain pending matters.
- Legacy Tax Matter liabilities recorded at year-end were $17.6 million; additional liability could exceed recorded amounts. Total unrecognized tax benefits were $195.6 million. More than 95% of cash and short-term investments held by non-U.S. operations were considered indefinitely reinvested; potential tax on future distributions was not practicably estimable.
Important facts for investors to verify
- Review the filing’s reconciliations and definitions for non-GAAP adjusted income, margins, EPS, and free cash flow.
- Track MIS issuance volumes, especially corporate finance and structured finance by region, and assess how much growth reflects market activity versus pricing and fee initiatives.
- Compare 2014 guidance with subsequent results, particularly MA organic growth, the contribution from Amba, margins, and the projected tax rate.
- Assess capital allocation and leverage: planned buybacks and dividends relative to cash generation, debt maturities, and substantial lease commitments.
- Monitor the Cheyne appeal, other regulatory and legal matters, tax audits, and impairment sensitivity in MA reporting units.
The filing reports an unqualified audit opinion and effective internal control over financial reporting as of December 31, 2013.