Moody’s Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2013; filed October 31, 2013. Moody’s operates Moody’s Investors Service (MIS), its ratings business, and Moody’s Analytics (MA), its non-rating research, data, software, risk-management and professional-services business. Amounts below are in millions of dollars except per-share data.
Financial performance and condition
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $705.5 | $688.5 | $2,193.3 | $1,976.1 |
| Operating income | $291.5 | $269.7 | $922.7 | $817.2 |
| Operating margin | 41.3% | 39.2% | 42.1% | 41.4% |
| Net income attributable to Moody’s | $183.9 | $183.9 | $597.8 | $529.9 |
| Diluted EPS | $0.83 | $0.81 | $2.66 | $2.34 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $653.5 | $496.0 |
| Free cash flow | Not provided for quarter | Not provided for quarter | $622.5 | $460.8 |
- Q3 revenue rose 2%; operating income increased 8%, while net income was unchanged. Q3 diluted EPS increased 2%; excluding a $0.06 prior-year benefit from a Legacy Tax Matter, management said EPS increased $0.08.
- Nine-month revenue grew 11%, operating income 13%, net income attributable to Moody’s 13%, and diluted EPS 14%. Nine-month results include a first-quarter litigation-settlement charge of $0.14 per diluted share. On the company’s non-GAAP basis, nine-month diluted EPS was $2.80 versus $2.28.
- Nine-month adjusted operating income, a non-GAAP measure excluding depreciation and amortization, was $992.8 versus $886.9; adjusted operating margin was 45.3% versus 44.9%.
- At September 30, cash and cash equivalents were $1,835.1 and short-term investments $209.6, totaling $2,044.7. Current assets were $2,782.2 and current liabilities $897.2.
- Total debt was $2,098.6, all classified as long-term, compared with $1,671.2 total debt at year-end 2012. The increase principally reflects issuance of $500 million of 4.875% senior notes due 2024; the $63.8 million term loan was repaid in May. The company reported no commercial paper outstanding and $1 billion available under its revolving facility; it terminated its commercial-paper program in October.
- Nine-month capital additions were $31.0. Financing cash outflow was $343.2, including $747.6 of treasury-share repurchases and $143.7 of dividends paid.
Material changes and business drivers
- For Q3, MIS revenue increased 1% to $478.1, while MA external revenue increased 6% to $227.4. MIS benefited from pricing and fee initiatives and bank-loan issuance, partly offset by weakness in structured finance, financial institutions and some corporate-debt issuance. MA growth was led by research, data and analytics and professional services.
- For the first nine months, MIS external revenue increased 12% to $1,536.6, led by corporate finance; structured finance declined 2%. MA external revenue increased 8% to $656.7, with growth across its three lines of business.
- Nine-month expenses increased $111.7, including the litigation-settlement charge and higher compensation, headcount and IT-related costs. Q3 expenses declined $4.8, largely reflecting lower incentive compensation, partly offset by headcount, IT consulting and other costs.
- Interest expense, net rose to $68.1 for the nine months from $42.2, primarily due to the 2012 and 2013 note issuances and prior-year tax-related interest benefits. The nine-month effective tax rate decreased to 30.1% from 31.7%, reflecting tax-law benefits and the tax effect of the litigation settlement.
Outlook, risks and unusual items
- Management reaffirmed full-year 2013 revenue growth in the high-single-digit range; GAAP diluted EPS guidance of $3.37–$3.43, including the $0.14-per-share litigation charge; and non-GAAP diluted EPS guidance of $3.51–$3.57. The outlook assumes specified macroeconomic and capital-market conditions and end-of-quarter foreign-exchange rates.
- Other full-year expectations: operating expenses up mid-single digits; Q4 expenses about $45 million above Q3; operating margin 41%–42%; adjusted operating margin 44%–45%; effective tax rate about 31%; capital expenditures about $50 million; depreciation and amortization about $100 million; and free cash flow about $850 million.
- Management expected approximately $1 billion of 2013 share repurchases and about $250 million in Q4, subject to cash availability, market conditions and other capital-allocation decisions. The board declared a $0.25-per-share dividend payable in December 2013.
- Material contingencies include ongoing government inquiries and litigation concerning ratings. A securities class action received summary judgment in Moody’s favor, but plaintiffs appealed. Certain Cheyne-related claims were settled; two plaintiffs’ claims remained on appeal and pleadings cited approximately $76 million in compensatory damages sought. Management said it could not estimate a range of possible losses for certain pending matters.
- Recorded Legacy Tax Matter liabilities were $40.1. The company also reported $199.2 of unrecognized tax benefits on its balance sheet and ongoing tax examinations. Management stated the ultimate Legacy Tax liability could exceed the recorded amount.
- Goodwill was $630.8, with no impairment recorded in the first nine months. Management identified the FSTC reporting unit as most exposed to potential impairment if financial projections are missed; ERS also carried some impairment risk. The filing reported no material change in market-risk exposure and no material change in known risk factors since year-end 2012.
- Subsequent events included a 14-year lease for additional headquarters space with an approximately $101 million net commitment, subject to closing conditions, and the October declaration of the quarterly dividend.
Important facts for investors to verify
- Whether MIS issuance volumes, pricing and fee initiatives sustain growth, particularly given weakness in some structured-finance markets and the transaction-linked nature of ratings revenue.
- Progress against the 2013 EPS, margin, revenue, free-cash-flow and repurchase outlook, including the expected Q4 expense increase.
- Debt levels, interest costs, refinancing needs and compliance with the revolving-facility covenant; the company reported compliance at September 30.
- Developments in ratings-related litigation, regulatory changes and tax examinations, including potential outcomes not quantifiable in the filing.
- FSTC and ERS performance relative to projections, which could affect goodwill impairment risk.
- Use of non-GAAP measures: adjusted operating income, adjusted margin, non-GAAP EPS and free cash flow are company-defined measures and should be considered alongside GAAP results.