MOODY'S CORPORATION This discussion and analysis of financial condition and results of operations should be read in conjunction with theMoody's Corporation condensed consolidated financial statements and notes thereto included elsewhere in this quarterly report on Form 10-Q. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains Forward-Looking Statements. See "Forward-Looking Statements" commencing on page 84 for a discussion of uncertainties, risks and other factors associated with these statements.
THE COMPANY
Moody's is a global integrated risk assessment firm that empowers organizations and investors to make better decisions.Moody's reports in two segments: MIS and MA.
MIS publishes credit ratings and provides assessment services on a wide range of debt obligations, programs and facilities, and the entities that issue such obligations in markets worldwide, including various corporate, financial institution and governmental obligations, and structured finance securities.
MA is a global provider of: i) data and information; ii) research and insights; and iii) decision solutions, which help companies make better and faster decisions. MA leverages its industry expertise across multiple risks such as credit, market, financial crime, supply chain, catastrophe and climate to deliver integrated risk assessment solutions that enable business leaders to identify, measure and manage the implications of interrelated risks and opportunities.
Sustainability
Moody's manages its business with the goal of delivering value to all of its stakeholders, including its customers, employees, business partners, local communities and stockholders. As part of this effort,Moody's advances sustainability by considering environmental, social, and governance ("ESG") factors throughout its operations and products and services. The Company uses its expertise and assets to make a positive difference through technology tools, research and analytical services that help other organizations and the investor community better understand the links between sustainability considerations and the global markets.Moody's efforts to promote sustainability-related thought leadership, assessments and data to market participants include adhering to the policies of recognized sustainability organizations that develop standards or frameworks and/or evaluate and assess performance, including: theGlobal Reporting Initiative (GRI);Sustainability Accounting Standards Board (SASB); and theWorld Economic Forum (WEF)'s Stakeholder Capitalism metrics.Moody's also issues an annual report on Stakeholder Sustainability and on how the Company has implemented theTask Force on Climate-related Financial Disclosures ("TCFD") recommendations.Moody's sustainability-related achievements during the first half of 2022 included the following:
-Validated
-Rolled out an all-employee training on Sustainability and ESG;
-Named 2021 CDP Supplier Engagement Leader on Climate Action for second consecutive year;
-Awarded Best ESG Reporting (large-cap) from
-Published
-Issued an inaugural global tax policy and a political engagement & public policy statement; and
-Updated
The Board oversees sustainability matters, with assistance from the Audit, Governance & Nominating and Compensation & Human Resources Committees, as part of its oversight of management and the Company's overall strategy. The Board also overseesMoody's policies for assessing and managing our exposure to risk, including climate-related risks such as business continuity disruption or reputational and credibility concerns stemming from incorporation of climate-related risks into the credit methodologies and credit ratings of MIS. 45
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The Company is closely monitoring the impact of the ongoingRussia /Ukraine conflict on all aspects of its business. In response to the conflict, the Company is no longer conducting commercial operations inRussia for both MIS and MA and is complying with all applicable regulatory restrictions set forth by the jurisdictions in whichMoody's operates. Furthermore, the Company also has withdrawn MIS credit ratings on Russian entities. WhileMoody's Russian operations and net assets are not material, broader global market volatility relating to uncertainties surrounding the conflict has contributed to an adverse impact on rated issuance volumes in 2022, which are more fully discussed in the "Results of Operations" section of this MD&A. The Company is unable to predict either the near-term or longer-term impact that the conflict may have on its financial position and operating results due to numerous uncertainties regarding the severity and duration of the conflict and its broader potential macroeconomic impact.
COVID-19
The Company continues to closely monitor the impact of the COVID-19 pandemic on all aspects of its business. The Company continues to monitor regional developments relating to the COVID-19 pandemic to inform decisions regarding its offices and its business travel policies. As of the date of the filing of this quarterly report on Form 10-Q, the Company has reopened all of its offices for employees to access on a voluntary basis. The COVID-19 pandemic has not had a material adverse impact on the Company's reported results to date and is currently not expected to have a material adverse impact on its near-term outlook. However,Moody's is unable to predict the longer-term impact that the pandemic may have on its business, future results of operations, financial position or cash flows due to numerous uncertainties. Refer to Item 1A. "Risk Factors", contained in the Company's annual report on Form 10-K for the year endedDecember 31, 2021 for further disclosure relating to the risks of the COVID-19 pandemic on the Company's business.
Reportable Segments
The Company is organized into two reportable segments atJune 30, 2022 : MIS and MA, which are more fully described in the section entitled "The Company" above and in Note 18 to the condensed consolidated financial statements.
Reclassification of Previously Reported Revenue by LOB
In the first quarter of 2022, the Company realigned its revenue by LOB reporting structure for the MA operating segment to enhance insight and transparency into this business. As ofJanuary 1, 2022 , the MA LOBs have been realigned from RD&A and ERS to: -Decision Solutions (DS) - provides software and workflow tools for specific use cases (banking, insurance, KYC/KYS, CRE and structured finance solutions). This LOB utilizes components from the Data & Information and Research & Insights LOBs to provide integrated risk solutions;
-Research & Insights (R&I) - provides models, scores, expert insights and commentary. This LOB includes: credit research; credit models and analytics; and economics data and models; and
-Data & Information (D&I) - provides vast data sets on companies and securities via data feeds and data applications products.
Prior year revenue by LOB amounts have been reclassified to conform to the new LOB reporting structure, which is presented below in the section entitled "Results of Operations."
RESULTS OF OPERATIONS
Impact of acquisitions on comparative results
-
-
-RMS on
-RealXData on
-PassFort on
-kompany on
Refer to the section entitled "Non-GAAP Financial Measures" of this MD&A for the
definitions of how the Company determines certain organic growth measures used
in this MD&A that exclude the impact of acquisition activity.
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Three months ended
Executive Summary
The following table provides an executive summary of key operating results for the quarter endedJune 30, 2022 . Following this executive summary is a more detailed discussion of the Company's operating results as well as a discussion of the operating results of the Company's reportable segments. Three Months EndedJune 30 , % Change
Favorable Insight and
2022 2021 (Unfavorable) Prior Year
Moody's total revenue $ 1,381 $ 1,553 (11 %) - reflects lower MIS revenue partially offset by
growth in MA
MIS External Revenue $ 706 $ 980 (28 %) - mainly reflects declines in leveraged finance
(high-yield corporate debt and bank loans)
issuance resulting from market volatility relating
to macroeconomic uncertainties, rising borrowing
costs and the Russia/Ukraine conflict
MA External Revenue $ 675 $ 573 18 % - inorganic growth from acquisitions; and
- strong organic growth across all LOBs, most
notably for KYC and compliance solutions coupled
with continued strong retention and demand for
credit research, analytics and models
Total operating and SG&A $ 761 $ 692 (10 %) - operational and integration costs associated
expenses with recent acquisitions contributed approximately
10 percentage points of growth; and
- hiring and salary increases contributed
approximately five percentage points of the
growth; partially offset by:
- lower incentive compensation accruals and
performance-based equity compensation
Restructuring $ 31 $ - NM - the 2022 charge is pursuant to the Company's
2022 - 2023 Geolocation Restructuring Program,
more fully discussed in Note 11 to the condensed
consolidated financial statements
Total non-operating $ (65) $ (43) (51 %) - primarily reflects FX translation losses of
million reclassified to earnings resulting from
the Company no longer conducting commercial
operations in Russia
Operating Margin 36.8 % 51.6 % (1,480 BPS) - margin declines primarily due to the
aforementioned decrease in MIS revenue coupled
Adjusted Operating Margin 44.9 % 55.4 % (1,050 BPS) with the aforementioned increase in expenses
ETR 26.2 % 23.9 % (230 BPS) - primarily reflects the non-deductible nature of
the aforementioned FX translation losses resulting
from the Company no longer conducting commercial
operations in Russia coupled with lower excess tax
benefits in 2022
Diluted EPS $ 1.77 $ 3.07 (42 %) - mainly due to declines in MIS revenue coupled
Adjusted Diluted EPS
(31 %) with the aforementioned increase in expenses
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Moody's Corporation Three Months Ended June 30, % Change Favorable 2022 2021 (Unfavorable) Revenue: United States$ 723 $ 831 (13 %) Non-U.S.: EMEA 422 481 (12 %) Asia-Pacific 151 155 (3 %) Americas 85 86 (1 %) Total Non-U.S. 658 722 (9 %) Total 1,381 1,553 (11 %) Expenses: Operating 393 365 (8 %) SG&A 368 327 (13 %) Depreciation and amortization 81 60 (35 %) Restructuring 31 - NM Total 873 752 (16 %) Operating income$ 508 $ 801 (37 %) Adjusted Operating Income (1)$ 620 $ 861 (28 %) Interest expense, net$ (55) $ (49) (12 %) Other non-operating income, net (10) 6 (267 %) Non-operating (expense) income, net$ (65) $ (43) (51 %) Net income attributable to Moody's$ 327 $ 577 (43 %) Diluted weighted average shares outstanding 184.9 187.9 2 % Diluted EPS attributable toMoody's common shareholders$ 1.77 $ 3.07 (42 %) Adjusted Diluted EPS (1)$ 2.22 $ 3.22 (31 %) Operating margin 36.8 % 51.6 % Adjusted Operating Margin(1) 44.9 % 55.4 % Effective tax rate 26.2 % 23.9 % (1) Adjusted Operating Income, Adjusted Operating Margin and Adjusted Diluted EPS are non-GAAP financial measures. Refer to the section entitled "Non-GAAP Financial Measures" of this Management Discussion and Analysis for further information regarding these measures. 48
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The table below shows
June 30, Change
2022 2021 %
MIS
U.S. 1,450 1,429 1 %
Non-U.S. 3,582 3,280 9 %
Total 5,032 4,709 7 %
MA
U.S. 2,788 2,072 35 %
Non-U.S. 4,304 3,070 40 %
Total 7,092 5,142 38 %
MSS
U.S. 794 676 17 %
Non-U.S. 1,288 1,079 19 %
Total 2,082 1,755 19 %
Total MCO
U.S. 5,032 4,177 20 %
Non-U.S. 9,174 7,429 23 %
Total 14,206 11,606 22 %
The increase in
GLOBAL REVENUE
Three months ended
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Global revenue ?$172 million U.S. Revenue ?$108 million Non-U.S. Revenue ?$64 million The decrease in global revenue reflected declines in MIS, mainly in theU.S. and EMEA, partially offset by growth in MA in all regions. Refer to the section entitled "Segment Results" of this MD&A for a more fulsome discussion of the Company's segment revenue.
-Foreign currency translation unfavorably impacted global revenue by 3% percent.
-Organic constant currency revenue(1) decreased 13%.
(1) Refer to the section entitled "Non-GAAP Financial Measures" of this MD&A for the definition and methodology that the Company utilizes to calculate this metric.
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Q2 Operating Expense ? $28 million Q2 SG&A Expense ? $41 million
[[Image Removed: mco-20220630_g5.jpg]]----------
---------[[Image Removed: mco-20220630_g6.jpg]]
Compensation expenses decreased $15 million Compensation expenses increased $19 million
reflecting: reflecting:
- lower incentive compensation accruals and - inorganic growth from acquisitions of $13 million ;
performance-based equity compensation of $28
million , which aligns with actual/projected - higher salaries and benefits costs primarily due
financial and operating performance; and to hiring and salary increases; partially offset by:
- approximately $25 million in higher compensation - lower incentive compensation accruals and
costs eligible for capitalization in 2022 performance-based equity compensation of $20
reflecting certain product development in the MA million, which aligns with actual/projected
operating segment; partially offset by financial and operating performance.
- inorganic growth from acquisitions of $33
million
Non-compensation expenses increased $43 million Non-compensation expenses increased $22 million
reflecting: reflecting:
- higher costs of $27 million primarily relating - inorganic growth from acquisitions of $12 million ;
to strategic initiatives to support business and
growth coupled with enhancements to technology
infrastructure to enable automation, innovation - higher travel costs of $6 million resulting from
and efficiency; and minimal travel in the prior year in light of
COVID-19
- inorganic growth from acquisitions of $10
million .
Other Expenses
The restructuring charge in the second quarter of 2022 relates to the Company's
2022 - 2023 Geolocation Restructuring Program as more fully discussed in Note 11
to the condensed consolidated financial statements.
Operating margin 36.8%, down 1,480 BPS Adjusted Operating Margin 44.9%, down 1,050
BPS
Overall, margin declines resulted from the aforementioned decrease in MIS revenue coupled with operating expense growth (mainly from inorganic expense growth from acquisitions).
Interest Expense, net ? $6 million Other non-operating
income ?
Increase in expense is primarily due to: Decrease in income is primarily due to: - higher interest on borrowings resulting from the - FX translation losses of$20 million reclassified issuance of new long-term debt in 2022 (refer to the to earnings resulting from the Company no longer "Material Cash Requirements" section of this MD&A conducting commercial operations inRussia (refer to for further information on the Company's the section above entitled "Russia /Ukraine Conflict" indebtedness) for further
information); and
- higher gains
of
certain of the Company's investments in equity
securities; partially offset by:
- an $11 million benefit relating to statute of
limitations lapses on certain indemnification
obligations relating to the MAKS divestiture; and
- a $7 million loss on the settlement of pension
obligations in 2021 resulting from lump sum
distributions from the Company's defined benefit
pension plans.
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ETR ? 230 BPS
The increase in ETR primarily reflects the non-deductible nature of the
aforementioned FX translation losses resulting from the Company no longer
conducting commercial operations in
Diluted EPS ? $1.30 Adjusted Diluted EPS ? $1.00
Diluted EPS and Adjusted Diluted EPS declined mainly due to lower operating
income and Adjusted Operating Income, respectively, the components of which are
more fully described above. Refer to the section entitled "Non-GAAP Financial
Measures" of this MD&A for items excluded in the derivation of Adjusted Diluted
EPS.
Segment Results
Moody's Investors Service
The table below provides a summary of revenue and operating results, followed by further insight and commentary:
Three Months Ended June 30, % Change Favorable
2022 2021 (Unfavorable)
Revenue:
Corporate finance (CFG) $ 322 $ 550 (41 %)
Structured finance (SFG) 123 140 (12 %)
Financial institutions (FIG) 128 150 (15 %)
Public, project and infrastructure finance (PPIF) 122 130 (6 %)
Total ratings revenue 695 970 (28 %)
MIS Other 11 10 10 %
Total external revenue 706 980 (28 %)
Intersegment revenue 43 42 2 %
Total MIS revenue $ 749 $ 1,022 (27 %)
Expenses:
Operating and SG&A (external) $ 333 $ 342 3 %
Operating and SG&A (intersegment) 1 2 50 %
Total operating and SG&A $ 334 $ 344 3 %
Adjusted Operating Income $ 415 $ 678 (39 %)
Adjusted Operating Margin 55.4 % 66.3 %
Depreciation and amortization 21 18 (17 %)
Restructuring 15 - NM
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The following chart presents changes in rated issuance volumes compared to the
second quarter of 2021. To the extent that changes in rated issuance volumes had
a material impact to MIS's revenue compared to the prior year, those impacts are
discussed below.
[[Image Removed: mco-20220630_g7.jpg]]
Three months ended
2022-----------------------------------------------------------------------------------2021
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MIS: Global revenue ?
-The decrease in global MIS revenue primarily resulted from a 32% decrease in rated issuance volumes, which resulted in transaction revenue declining$274 million compared to the same period in the prior year. The decline in rated issuance volumes compared to the second quarter of 2021 resulted from market volatility relating to macroeconomic uncertainties, rising borrowing costs and theRussia /Ukraine conflict.
-Foreign currency translation unfavorably impacted MIS revenue by two percentage points.
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CFG REVENUE
Three months ended
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CFG: Global revenue ?
Global CFG revenue for the three months ended
[[Image Removed: mco-20220630_g16.jpg]]
(1) Other includes: recurring monitoring fees of a rated debt obligation and/or entities that issue such obligations as well as fees from programs such as commercial paper, medium term notes, and ICRA corporate finance revenue.
The decrease in CFG revenue of 41% reflected declines in both
Transaction revenue decreased
The decrease compared to a strong period of issuance in the second quarter of
2021 reflected declines in leveraged finance and investment-grade issuance
activity in all regions resulting from market volatility relating to
macroeconomic uncertainties, rising borrowing costs and the
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SFG REVENUE
Three months ended
2022---------------------------------------------------------------------------2021
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SFG: Global revenue ?
Global SFG revenue for the three months ended
[[Image Removed: mco-20220630_g21.jpg]]
The 12% decrease in SFG revenue was substantially all in the
Transaction revenue decreased
The most notable drivers of the decline in SFG revenue included:
-lower CLO refinancing activity in the
-changes in foreign currency translation rates which unfavorably impacted SFG revenue by three percentage points.
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FIG REVENUE
Three months ended
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FIG: Global revenue ?
Global FIG revenue for the three months ended
[[Image Removed: mco-20220630_g26.jpg]]
The decrease in FIG revenue of 15% reflected revenue declines in both
Transaction revenue decreased
The most notable drivers of the decline reflected lower revenue from
-a decline in opportunistic issuance as issuers were well capitalized following funding activity in the prior year period ahead of anticipated interest rate increases;
-an unfavorable product mix;
-lower issuer and investor demand resulting from market volatility and macroeconomic uncertainties; and
-changes in foreign currency translation rates which unfavorably impacted FIG revenue by two percentage points.
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PPIF REVENUE
Three months ended
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PPIF: Global revenue ?
Global PPIF revenue for the three months ended
[[Image Removed: mco-20220630_g31.jpg]]
Transaction revenue decreased
The decrease in PPIF revenue of 6% reflected declines in the
The main drivers of the decrease were:
-declines in
-changes in foreign currency translation rates which unfavorably impacted PPIF revenue by two percentage points;
partially offset by:
-an increase in
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MIS: Q2 Operating and SG&A Expense ? $9 million
[[Image Removed: mco-20220630_g32.jpg]]
The decline is due to lower compensation costs of $34 million , partially offset
by higher non-compensation costs of $25 million , with the most notable drivers
reflecting:
Compensation costs Non-compensation costs
The decrease is primarily due to: The increase is primarily due to:
- lower incentive compensation accruals and - higher costs relating to strategic initiatives to
performance-based equity compensation, which support business growth coupled with enhancements to
aligns with actual/projected financial and technology infrastructure to enable automation,
operating performance innovation and efficiency; and
- higher travel costs compared to minimal travel in
the prior year in light of COVID-19
Other Expenses
The restructuring charge in the second quarter of 2022 relates to the Company's
2022 - 2023 Geolocation Restructuring Program as more fully discussed in Note 11
to the condensed consolidated financial statements.
MIS: Adjusted Operating Margin 55.4% ? 1,090 BPS
The MIS Adjusted Operating Margin decline primarily reflected the aforementioned 28% decrease in revenue.
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The table below provides a summary of revenue and operating results, followed by further insight and commentary:
Three Months Ended June 30, % Change Favorable
2022 2021 (Unfavorable)
Revenue:
Decision Solutions (DS) $ 312 $ 222 41 %
Research and Insights (R&I) 185 175 6 %
Data and Information (D&I) 178 176 1 %
Total external revenue 675 573 18 %
Intersegment revenue 1 2 (50 %)
Total MA revenue 676 575 18 %
Expenses:
Operating and SG&A (external) 428 350 (22 %)
Operating and SG&A (intersegment) 43 42 (2 %)
Total operating and SG&A 471 392 (20 %)
Adjusted Operating Income $ 205 $ 183 12 %
Adjusted Operating Margin 30.3 % 31.8 %
Depreciation and amortization 60 42 (43 %)
Restructuring 16 - NM
MOODY'S ANALYTICS REVENUE
Three months ended June 30 ,
2022-----------------------------------------------------------------------------------2021
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MA: Global revenue ?
The 18% increase in global MA revenue reflects growth both in theU.S. (19%) and internationally (17%) in all LOBs and includes revenue from the acquisitions of RMS, RealXData, PassFort and kompany. Foreign currency translation unfavorably impacted MA revenue by five percentage points.
-Organic constant currency revenue growth(1) was 8% reflecting increases across all LOBs.
-ARR(2) grew 25% mainly due to acquisitions completed in the previous twelve months. Organic ARR(2) grew 9% representing increased demand for KYC and banking products within the Decision Solutions LOB coupled with growth for company data and ratings feeds products in the Data & Information LOB.
DECISION SOLUTIONS REVENUE
Three months ended June 30 ,
2022-----------------------------------------------------------------------------------2021
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DS: Global revenue ?
Global DS revenue grew 41% compared to the second quarter of 2021 and reflects growth in both theU.S. (39%) and internationally (42%) with the most notable drivers of the increase reflecting:
-inorganic revenue growth from the acquisitions of RMS, PassFort, RealXData, and kompany; and
-continued demand for KYC and compliance solutions reflecting increased customer and supplier risk data usage;
partially offset by:
-changes in foreign currency translation rates which unfavorably impacted DS revenue by five percentage points.
Organic constant currency revenue(1) growth for DS was 8%.
_____________________
(1) Refer to the section entitled "Non-GAAP Financial Measures" of this MD&A for
the definition and methodology that the Company utilizes to calculate this
metric.
(2) Refer to the section entitled "Key Performance Metrics" of this MD&A for the
definition and methodology that the Company utilizes to calculate this metric.
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RESEARCH AND INSIGHTS REVENUE
Three months ended
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[[Image Removed: mco-20220630_g44.jpg]]
R&I: Global revenue ?
Global R&I revenue increased 6% compared to the second quarter of 2021 and
reflects growth in both the
-growth in constant currency recurring revenue of 6%, primarily due to continued strong retention and demand for credit research, analytics and models;
partially offset by:
-changes in foreign currency translation rates which unfavorably impacted R&I revenue by two percentage points.
Constant currency revenue(1) growth for R&I was 8%.
(1) Refer to the section entitled "Non-GAAP Financial Measures" of this MD&A for the definition and methodology that the Company utilizes to calculate this metric.
DATA AND INFORMATION REVENUE
Three months ended
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D&I: Global revenue ?
Global D&I revenue increased 1% compared to the second quarter of 2021 and
reflects growth in the
-strong retention and new sales for ratings feeds coupled with pricing increases; and
-continued demand for company data;
partially offset by:
-unfavorable changes in foreign currency translation rates, which unfavorably impacted D&I revenue by seven percentage points.
Organic constant currency revenue(1) growth for D&I was 8%.
(1) Refer to the section entitled "Non-GAAP Financial Measures" of this MD&A for the definition and methodology that the Company utilizes to calculate this metric.
MA: Q2 Operating and SG&A Expense ? $78 million
[[Image Removed: mco-20220630_g48.jpg]]
The increase in operating and SG&A expenses compared to the second quarter of
2021 reflected growth in compensation and non-compensation costs of $58 million
and $20 million , respectively. The most notable drivers of these increases were:
Compensation costs Non-compensation costs
The increase is primarily due to: The increase is primarily due to:
- inorganic expense growth from acquisitions; - operating and integration-related costs associated
and with recent acquisitions.
- higher salaries and benefits related to
headcount growth.
Other Expenses
The restructuring charge in the second quarter of 2022 relates to the Company's
2022 - 2023 Geolocation Restructuring Program as more fully discussed in Note 11
to the condensed consolidated financial statements.
MA: Adjusted Operating Margin 30.3% ? 150 BPS
The Adjusted Operating Margin contraction for MA is primarily due to operational and integration-related costs associated with recent acquisitions.
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Six months ended
Executive Summary
-The following table provides an executive summary of key operating results for the six months endedJune 30, 2022 . Following this executive summary is a more detailed discussion of the Company's operating results as well as a discussion of the operating results of the Company's reportable segments. Six Months Ended June 30, Insight and Key Drivers of Change Compared to Financial measure: 2022 2021 % Change Prior Year Moody's total revenue$ 2,903 $ 3,153 (8 %)
- reflects lower MIS revenue partially offset by
growth in MA
- mainly reflects declines in leveraged finance
(high-yield corporate debt and bank loans)
MIS External Revenue $ 1,533 $ 2,016 (24 %) issuance resulting from market volatility relating
to macroeconomic uncertainties, rising borrowing
costs and the
- inorganic growth from acquisitions; and
- strong organic growth across all LOBs, most
MA External Revenue $ 1,370 $ 1,137 20 % notably for KYC and compliance solutions coupled
with continued strong retention and demand for
credit research, analytics and models.
- operational and integration costs associated
with recent acquisitions contributed approximately
11 percentage points of growth; and
Total operating and SG&A - increases in hiring and salary growth
expenses $ 1,549 $ 1,378 (12 %) contributed approximately five percentage points
of growth;
partially offset by:
- lower incentive compensation accruals and
performance-based equity compensation.
Restructuring $ 31 $ 2 NM - the 2022 charge is pursuant to the Company's
2022 - 2023 Geolocation Restructuring Program,
more fully discussed in Note 11 to the condensed
consolidated financial statements
Total non-operating $ (112) $ (34) (229 %) - reflects a $40 million benefit in the prior
(expense) income, net period related to the reversal of tax-related
interest accruals pursuant to the resolution of
tax matters; and
- the 2022 amount includes FX translation losses
of
from the Company no longer conducting commercial
operations in Russia
Operating Margin 40.1 % 52.5 % (1240 BPS) - margin declines primarily due to the
Adjusted Operating 46.6 % 56.3 % (970 BPS) aforementioned decrease in MIS revenue
Margin
- primarily reflects the non-deductible nature of
the aforementioned FX translation losses resulting
from the Company no longer conducting commercial
ETR 21.6 % 19.0 % (260BPS)
operations in
- the resolution of uncertain tax positions in the
first half of 2021 that did not recur to the same
extent in the first half of 2022
Diluted EPS $ 4.45 $ 6.98 (36 %) - mainly due to declines in MIS revenue coupled
Adjusted Diluted EPS $ 5.11 $ 7.28 (30 %) with the aforementioned increase in expenses
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T able of ContentsMoody's Corporation Six Months Ended June 30, % Change Favorable 2022 2021 (Unfavorable) Revenue: United States$ 1,546 $ 1,716 (10 %) Non-U.S.: EMEA 878 959 (8 %) Asia-Pacific 293 311 (6 %) Americas 186 167 11 % Total Non-U.S. 1,357 1,437 (6 %) Total 2,903 3,153 (8 %) Expenses: Operating 810 758 (7 %) SG&A 739 620 (19 %) Depreciation and amortization 159 119 (34 %) Restructuring 31 2 NM Total 1,739 1,499 (16 %) Operating income 1,164 1,654 (30 %) Adjusted Operating Income (1) 1,354 1,775 (24 %) Interest expense, net (108) (56) (93 %) Other non-operating income, net (4) 22 (118 %) Non-operating (expense) income, net (112) (34) (229 %) Net income attributable to Moody's$ 825 $ 1,313 (37 %) Diluted weighted average shares outstanding 185.4 188.2 1 % Diluted EPS attributable toMoody's common shareholders$ 4.45 $ 6.98 (36 %) Adjusted Diluted EPS (1)$ 5.11 $ 7.28 (30 %) Operating margin 40.1 % 52.5 % Adjusted Operating Margin (1) 46.6 % 56.3 % Effective tax rate 21.6 % 19.0 % (1)Adjusted Operating Income, Adjusted Operating Margin and Adjusted Diluted EPS attributable toMoody's common shareholders are non-GAAP financial measures. Refer to the section entitled "Non-GAAP Financial Measures" of this Management Discussion and Analysis for further information regarding these measures.
GLOBAL REVENUE
Six months ended
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Global revenue ?$250 million U.S. Revenue ?$170 million Non-U.S. Revenue ?$80 million The decrease in global revenue reflected declines in MIS in all regions, partially offset by growth in MA in all regions. Refer to the section entitled "Segment Results" of this MD&A for a more fulsome discussion of the Company's segment revenue.
-Foreign currency translation unfavorably impacted global revenue by two percent.
-Organic constant currency revenue(1) for MCO decreased 11%.
(1) Refer to the section entitled "Non-GAAP Financial Measures" of this MD&A for the definition and methodology that the Company utilizes to calculate this metric.
YTD Operating Expense ? $52 million YTD SG&A Expense ? [[Image Removed: mco-20220630_g53.jpg]]-------------------------------------[[Image Removed: mco-20220630_g54.jpg]]
Compensation expenses decreased $3 million and
Compensation expenses increased
reflected: reflecting:
- lower incentive compensation accruals and -
inorganic growth from acquisitions of
performance-based equity compensation of $34 million; and
million, which aligns with actual/projected - higher salaries and benefits costs primarily due
financial and operating performance; to hiring and salary increases; partially offset
by:
- approximately $40 million in higher - lower incentive compensation accruals and
compensation costs eligible for capitalization
performance-based equity compensation of
in 2022 reflecting certain product development million, which aligns with actual/projected
in the MA operating segment; partially offset by financial and operating performance.
- inorganic growth from acquisitions of
million.
Non-compensation expenses increased $55 million Non-compensation expenses increased
reflecting: reflecting:
- inorganic growth from acquisitions of $20 -
inorganic growth from acquisitions of
million; and million;
- higher costs of $30 million relating to - higher estimates for bad debt
strategic initiatives to support business growth reserves of
coupled with enhancements to technology Company's Russian-domiciled
infrastructure to enable automation, innovation customers resulting from the impact
and efficiency. of the
-
higher costs of
strategic initiatives to support business growth
coupled with enhancements to technology
infrastructure to enable automation, innovation
and efficiency.
Other Expenses
The restructuring charge in the first half of 2022 relates to the Company's 2022
- 2023 Geolocation Restructuring Program as more fully discussed in Note 11 to
the condensed consolidated financial statements.
Operating margin 40.1%, down 1,240 BPS Adjusted Operating Margin 46.6%, down 970 BPS
Overall, margin declines resulted from the aforementioned decrease in MIS revenue coupled with operating expense growth (mainly from inorganic expense growth from acquisitions).
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Interest Expense, net ?
Increase in expense is primarily due to: Decrease in income is primarily due to: - a$40 million benefit in the prior year - FX translation losses of$20 million related to the reversal of tax-related interest reclassified to earnings resulting from the accruals pursuant to the resolution of Company no longer conducting commercial uncertain tax positions; and operations inRussia
(refer to the section above
entitled
"
information); and
- higher interest on borrowings resulting from - higher gains of
on certain of the Company's investments in equity
(refer to the "Material Cash Requirements" securities; partially offset by:
section of this MD&A for further information on - an $11 million benefit relating to statute of
the Company's indebtedness) limitations lapses on certain indemnification
obligations relating to the MAKS divestiture; and
- a $7 million loss on the settlement of pension
obligations in 2021 resulting from lump sum
distributions from the Company's defined benefit
pension plans.
ETR ? 260 BPS
The drivers for the increase in the ETR include:
-approximately
-the non-deductible nature of the aforementioned FX translation losses resulting
from the Company no longer conducting commercial operations in
Diluted EPS ? $2.53 Adjusted Diluted EPS ? $2.17 Diluted EPS and Adjusted Diluted EPS declined mainly due to lower operating income and Adjusted Operating Income, respectively. Refer to the section entitled "Non-GAAP Financial Measures" of this MD&A for items excluded in the derivation of Adjusted Diluted EPS.
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T able of Contents Segment ResultsMoody's Investors Service
The table below provides a summary of revenue and operating results, followed by further insight and commentary:
Six Months Ended June 30, % Change Favorable
2022 2021 (Unfavorable)
Revenue:
Corporate finance (CFG) $ 739 $ 1,155 (36 %)
Structured finance (SFG) $ 267 $ 256 4 %
Financial institutions (FIG) 259 312 (17 %)
Public, project and infrastructure finance
(PPIF) 245 273 (10 %)
Total ratings revenue 1,510 1,996 (24 %)
MIS Other 23 20 15 %
Total external revenue 1,533 2,016 (24 %)
Intersegment royalty 86 82 5 %
Total 1,619 2,098 (23 %)
Expenses:
Operating and SG&A (external) 691 688 - %
Operating and SG&A (intersegment) 3 4 25 %
Total operating and SG&A expense 694 692 - %
Adjusted Operating Income $ 925 $ 1,406 (34 %)
Adjusted Operating Margin 57.1 % 67.0 %
Depreciation and amortization 39 36 (8 %)
Restructuring 15 - NM
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The following chart presents changes in rated issuance volumes compared to the
first half of 2021. To the extent that changes in rated issuance volumes had a
material impact to MIS's revenue compared to the prior year, those impacts are
discussed below.
[[Image Removed: mco-20220630_g55.jpg]]
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MIS: Global revenue ?
-The decrease in global MIS revenue primarily resulted from a 27% decrease in rated issuance volumes, which resulted in transaction revenue declining$492 million compared to the same period in the prior year. The decline in rated issuance volumes compared to the first half of 2021 resulted from market volatility relating to macroeconomic uncertainties, rising borrowing costs and theRussia /Ukraine conflict.
-Foreign currency translation unfavorably impacted MIS revenue by two percentage points.
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T able of Contents CFG REVENUE
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CFG: Global revenue ?
Global CFG revenue for the six months ended
[[Image Removed: mco-20220630_g62.jpg]]
(1) Other includes: recurring monitoring fees of a rated debt obligation and/or entities that issue such obligations as well as fees from programs such as commercial paper, medium term notes, and ICRA corporate finance revenue.
The decrease in CFG revenue of 36% reflected declines both in the
The most notable drivers of the decrease compared to the first half of 2021 reflected declines in leveraged finance and investment-grade issuance activity compared to a strong prior year period resulting from market volatility relating to macroeconomic uncertainties, rising borrowing costs and theRussia /Ukraine conflict. 68
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SFG REVENUE
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SFG: Global revenue ?
Global SFG revenue for the six months ended
[[Image Removed: mco-20220630_g67.jpg]]
The increase in SFG revenue of 4% reflected growth in the
The most notable drivers of the increase in SFG revenue were:
-strong growth in
-growth in
partially offset by:
-a decrease in CLO refinancing activity in EMEA resulting from the widening of credit spreads for this asset class; and
-unfavorable changes in foreign currency translation rates which unfavorably impacted SFG revenue by three percentage points.
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FIG REVENUE
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FIG: Global revenue ?
Global FIG revenue for the six months ended
[[Image Removed: mco-20220630_g72.jpg]]
The decrease in FIG revenue of 17% reflected declines in both the U.S. (24%) and
internationally (10%) which resulted in a $51 million decrease in transaction
revenue compared to the same period in the prior year.
The most notable drivers of the decline reflected lower revenue from banking, insurance and asset management issuers, mainly due to:
-an unfavorable product mix;
-a decline in opportunistic issuance, as banks, insurers and asset management issuers were well capitalized following financing activity in the prior year period ahead of anticipated interest rate increases; and
-changes in foreign currency translation rates which unfavorably impacted FIG revenue by two percentage points.
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T able of Contents PPIF REVENUE
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PPIF: Global revenue ?
Global PPIF revenue for the six months ended
[[Image Removed: mco-20220630_g77.jpg]]
Transaction revenue decreased
The 10% decrease in PPIF revenue reflected declines in both the
-declines in sovereign, project finance and infrastructure finance rated issuance volumes in EMEA resulting from market volatility and rising funding costs;
-declines inU.S. public finance revenue resulting from market volatility, which increased funding costs, coupled with issuers in these sectors being currently well capitalized; and
-changes in foreign currency translation rates which unfavorably impacted PPIF revenue by two percentage points.
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MIS: YTD Operating and SG&A Expense ? $3 million
[[Image Removed: mco-20220630_g78.jpg]]
The modest increase in operating and SG&A expense reflects a
Compensation costs Non-compensation costs
The decrease is primarily due to: The increase is primarily due to:
- lower incentive compensation accruals and - higher estimates for bad debt reserves for the
performance-based equity compensation, which Company's Russian-domiciled customers resulting from
aligns with actual/projected financial and the impact of the Russia /Ukraine conflict, which
operating performance. represented approximately 35% of the increase;
- higher costs relating to strategic initiatives to
support business growth coupled with enhancements to
technology infrastructure to enable automation,
innovation and efficiency, which represented
approximately 15% of the increase; and
- higher travelcosts resulting from minimal travel
in the prior year in light of COVID-19, which
represented approximately 10% of the increase.
Other Expenses
The restructuring charge in the first half of 2022 relates to the Company's 2022
- 2023 Geolocation Restructuring Program as more fully discussed in Note 11 to
the condensed consolidated financial statements.
Adjusted Operating Margin of 57.1% ? 990 BPS
The MIS Adjusted Operating Margin decline primarily reflected the aforementioned 24% decrease in revenue.
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The table below provides a summary of revenue and operating results, followed by further insight and commentary:
Six Months Ended June 30, % Change Favorable
2022 2021 (Unfavorable)
Revenue:
Decision Solutions (DS) $ 646 $ 447 45 %
Research and Insights (R&I) 368 346 6 %
Data and Information (D&I) 356 344 3 %
Total external revenue 1,370 1,137 20 %
Intersegment revenue 3 4 (25 %)
Total MA Revenue 1,373 1,141 20 %
Expenses:
Operating and SG&A (external) 858 690 (24 %)
Operating and SG&A (intersegment) 86 82 (5 %)
Total operating and SG&A expense 944 772 (22 %)
Adjusted Operating Income $ 429 $ 369 16 %
Adjusted Operating Margin 31.2 % 32.3 %
Depreciation and amortization 120 83 (45 %)
Restructuring 16 2 NM
MOODY'S ANALYTICS REVENUE
Six months ended
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MA: Global revenue ?
The 20% increase in global MA revenue reflects growth both in the
-Organic constant currency revenue(1) growth was 10%.
-ARR(2) grew 25% mainly due to acquisitions completed in the previous twelve months. Organic ARR(2) grew 9% reflecting increased demand for KYC and banking products within the Decision Solutions LOB coupled with growth for company data and ratings feeds products in the Data & Information LOB.
DECISION SOLUTIONS REVENUE
Six months ended
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DS: Global revenue ?
Global DS revenue grew 45% compared to the first half of 2021 with the most notable drivers of the increase reflecting:
-inorganic revenue growth from the acquisitions of RMS, PassFort, RealXData and kompany;
-continued demand for KYC and compliance solutions reflecting increased customer and supplier risk data usage;
-growth in recurring revenue for banking solutions reflecting strong renewals of multi-year commitments; and
-growth in subscription-based revenue for pension and actuarial modeling tools in support of certain international accounting standards relating to insurance contracts; partially offset by:
-unfavorable changes in foreign currency translation rates which unfavorably impacted DS revenue by three percentage points.
Organic constant currency revenue(1) growth for DS was 12%.
______________________________________
(1) Refer to the section entitled "Non-GAAP Financial Measures" of this MD&A for
the definition and methodology that the Company utilizes to calculate this
metric.
(2) Refer to the section entitled "Key Performance Metrics" of this MD&A for the
definition and methodology that the Company utilizes to calculate this metric.
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RESEARCH AND INSIGHTS REVENUE
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R&I: Global revenue ?
Global R&I revenue increased 6% compared to the first half of 2021 mainly driven by:
-growth in recurring revenue of 7%, primarily due to continued strong retention and demand for credit research, analytics and models.
partially offset by:
-unfavorable changes in foreign currency translation rates which unfavorably impacted R&I revenue by two percentage points.
Constant currency revenue(1) growth for R&I was 8%.
DATA AND INFORMATION REVENUE
Six months ended
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(1) Refer to the section entitled "Non-GAAP Financial Measures" of this MD&A for the definition and methodology that the Company utilizes to calculate this metric.
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D&I: Global revenue ?
Global D&I revenue increased 3% compared to the first half of 2021 and includes inorganic revenue growth from the acquisition ofCortera . The main drivers of the increase were:
-continued strong retention and new sales for ratings feeds coupled with pricing increases; and
-increased demand for company data;
partially offset by:
-unfavorable changes in foreign currency translation, which unfavorably impacted D&I revenue by six percentage points.
Organic constant currency revenue(1) growth for D&I was 8%.
(1) Refer to the section entitled "Non-GAAP Financial Measures" of this MD&A for the definition and methodology that the Company utilizes to calculate this metric.
MA: YTD Operating and SG&A Expense ? $168 million
[[Image Removed: mco-20220630_g93.jpg]]
The increase in operating and SG&A expenses compared to the first six months of
2021 is primarily due to growth in both compensation and non-compensation costs
of $114 million and $54 million , respectively, reflecting:
Compensation costs Non-compensation costs
- inorganic expense growth from acquisitions, - operating and integration-related costs associated
which represented approximately 90% of the with recent acquisitions, which contributed
growth approximately 85% of the growth.
Other Expenses
The restructuring charge in the first half of 2022 relates to the Company's 2022
- 2023 Geolocation Restructuring Program as more fully discussed in Note 11 to
the condensed consolidated financial statements.
MA: Adjusted Operating Margin 31.2% ? 110BPS
The Adjusted Operating Margin contraction for MA is primarily due to operational and integration-related costs associated with recent acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
The Company is currently financing its operations, capital expenditures, acquisitions and share repurchases from operating and financing cash flows.
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The following is a summary of the changes in the Company's cash flows followed by a brief discussion of these changes:
Six Months Ended June 30, $ Change
2022 2021 Favorable (Unfavorable)
Net cash provided by operating activities $ 761 $ 1,270 $ (509)
Net cash used in investing activities
$ 79
Net cash used in financing activities
$ 80
Free Cash Flow (1) $ 628 $ 1,226 $ (598)
(1) Free Cash Flow is a non-GAAP measure and is defined by the Company as net
cash provided by operating activities minus cash paid for capital expenditures.
Refer to "Non-GAAP Financial Measures" of this MD&A for further information on
this financial measure.
Net cash provided by operating activities
Net cash flows from operating activities in the six months endedJune 30, 2022 decreased$509 million compared to the same period in 2021 primarily reflecting a decrease in net income (see section entitled "Results of Operations" of this MD&A for further discussion).
Net cash used in investing activities
The
-higher cash paid of
-higher net cash receipts of
partially offset by:
-an increase in cash paid for capital additions of$89 million reflecting product development and investments relating to strategic initiatives to support business growth and to enhance technology infrastructure to enable automation, innovation and efficiency; and
-
Net cash used in financing activities
The$80 million decrease in cash used in financing activities in the six months endedJune 30, 2022 compared to the same period in the prior year was primarily attributed to:
-the issuance of
partially offset by:
-higher cash paid for treasury share repurchases in 2022 of$368 million , which includes payment for shares made under an ASR agreement executed in the first quarter of 2022.
Cash and cash equivalents and short-term investments
The Company's aggregate cash and cash equivalents and short-term investments of$1.7 billion atJune 30, 2022 included approximately$1.5 billion located outside of theU.S. Approximately 24% of the Company's aggregate cash and cash equivalents and short-term investments is denominated in euros and British pounds. The Company manages both itsU.S. and non-U.S. cash flow to maintain sufficient liquidity in all regions to effectively meet its operating needs. As a result of the Tax Act, all previously net undistributed foreign earnings have now been subject toU.S. tax. The Company continues to evaluate which entities it will indefinitely reinvest earnings outside theU.S. The Company has provided deferred taxes for those entities whose earnings are not considered indefinitely reinvested. Accordingly, the Company has commenced repatriating a portion of its non-U.S. cash in these subsidiaries and will continue to repatriate certain of its offshore cash in a manner that addresses compliance with local statutory requirements, sufficient offshore working capital and any other factors that may be relevant in certain jurisdictions. Notwithstanding the Tax Act, which generally eliminated federal income tax on future cash repatriation to theU.S. , cash repatriation may be subject to state and local taxes or withholding or similar taxes. 77
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Material Cash Requirements
The Company's material cash requirements consist of the following contractual and other obligations:
Financing Arrangements Indebtedness
At
The repayment schedule for the Company's borrowings outstanding at
[[Image Removed: mco-20220630_g94.jpg]]
For additional information on the Company's outstanding debt, refer to Note 15 to the condensed consolidated financial statements.
Future interest payments and fees associated with the Company's debt and credit facility are expected to be$4.0 billion , of which approximately$239 million is expected to be paid over the next twelve months.
Management may consider pursuing additional long-term financing when it is appropriate in light of cash requirements for operations, share repurchases and other strategic opportunities, which would result in higher financing costs.
Purchase Obligations
Purchase obligations generally include multi-year agreements with vendors to purchase goods or services and mainly include data center/cloud hosting fees and fees for information technology licensing and maintenance. As ofJune 30, 2022 , these purchase obligations totaled$232 million , of which$157 million is expected to be paid in the next twelve months.
Leases
The Company has operating lease obligations of$526 million atJune 30, 2022 , primarily related to real estate leases, of which$105 million in payments are expected over the next twelve months. For more information on the Company's operating leases, refer to Note 16 to the condensed consolidated financial statements.
Pension and Other Retirement Plan Obligations
The Company does not anticipate making significant contributions to its funded pension plan in the next twelve months. This plan is overfunded atJune 30, 2022 , and accordingly holds sufficient investments to fund future benefit obligations. Payments for the Company's unfunded plans are not expected to be material in either the short or long-term.
Dividends and share repurchases
On
On
Restructuring
As more fully discussed in Note 11 to the condensed consolidated financial statements, onJune 30, 2022 , the Company approved the 2022 - 2023 Geolocation Restructuring Program. This program relates to the Company's post-COVID-19 geolocation strategy and includes the rationalization and exit of certain real estate leases and a reduction in staff, including the relocation of certain job functions from their current locations. Cash outlays associated with this program are expected to be$30 million to$40 million , which are expected to be paid through 2024.
Sources of Funding to Satisfy Material Cash Requirements
The Company believes that it has the financial resources needed to meet its cash
requirements and expects to have positive operating cash flow over the next
twelve months. Cash requirements for periods beyond the next twelve months will
depend, among other things, on the Company's profitability and its ability to
manage working capital requirements. The Company may also borrow from various
sources as described above.
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Non-GAAP Financial Measures:
In addition to its reported results,Moody's has included in this MD&A certain adjusted results that theSEC defines as "non-GAAP financial measures." Management believes that such adjusted financial measures, when read in conjunction with the Company's reported results, can provide useful supplemental information for investors analyzing period-to-period comparisons of the Company's performance, facilitate comparisons to competitors' operating results and can provide greater transparency to investors of supplemental information used by management in its financial and operational decision-making. These adjusted measures, as defined by the Company, are not necessarily comparable to similarly defined measures of other companies. Furthermore, these adjusted measures should not be viewed in isolation or used as a substitute for other GAAP measures in assessing the operating performance or cash flows of the Company. Below are brief descriptions of the Company's adjusted financial measures accompanied by a reconciliation of the adjusted measure to its most directly comparable GAAP measure:
Adjusted Operating Income and Adjusted Operating Margin:
The Company presents Adjusted Operating Income and Adjusted Operating Margin because management deems these metrics to be useful measures to provide additional perspective onMoody's operating performance. Adjusted Operating Income excludes the impact of: i) depreciation and amortization; and ii) restructuring charges/adjustments. Depreciation and amortization are excluded because companies utilize productive assets of different ages and use different methods of acquiring and depreciating productive assets. Restructuring charges are excluded as the frequency and magnitude of these charges may vary widely across periods and companies. Management believes that the exclusion of the aforementioned items, as detailed in the reconciliation below, allows for an additional perspective on the Company's operating results from period to period and across companies. The Company defines Adjusted Operating Margin as Adjusted Operating Income divided by revenue. Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Operating income$ 508 $ 801 $ 1,164 $ 1,654 Adjustments: Depreciation and amortization 81 60 159 119 Restructuring 31 - 31 2 Adjusted Operating Income$ 620 $ 861 $ 1,354 $ 1,775 Operating margin 36.8 % 51.6 % 40.1 % 52.5 % Adjusted Operating Margin 44.9 % 55.4 % 46.6 % 56.3 %
Adjusted Net Income and Adjusted Diluted EPS attributable to
The Company presents Adjusted Net Income and Adjusted Diluted EPS because management deems these metrics to be useful measures to provide additional perspective onMoody's operating performance. Adjusted Net Income and Adjusted Diluted EPS exclude the impact of: i) amortization of acquired intangible assets; ii) restructuring charges; and iii) FX translation losses reclassified to earnings resulting from the Company no longer conducting commercial operations inRussia . The Company excludes the impact of amortization of acquired intangible assets as companies utilize intangible assets with different estimated useful lives and have different methods of acquiring and amortizing intangible assets. These intangible assets were recorded as part of acquisition accounting and contribute to revenue generation. The amortization of intangible assets related to acquisitions will recur in future periods until such intangible assets have been fully amortized. Furthermore, the timing and magnitude of business combination transactions are not predictable and the purchase price allocated to amortizable intangible assets and the related amortization period are unique to each acquisition and can vary significantly from period to period and across companies. Restructuring charges and FX translation losses resulting from the Company no longer conducting commercial operations inRussia are excluded as the frequency and magnitude of these items may vary widely across periods and companies. The Company excludes the aforementioned items to provide additional perspective when comparing net income and diluted EPS from period to period and across companies as the frequency and magnitude of similar transactions may vary widely across periods. 79
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Below is a reconciliation of this measure to its most directly comparableU.S. GAAP amount: Three Months Ended June 30, Six Months Ended June 30, Amounts in millions 2022 2021 2022 2021 Net income attributable toMoody's common shareholders$ 327 $ 577 $ 825 $ 1,313 Pre-Tax Acquisition-Related Intangible Amortization Expenses$ 51 $ 36 $ 102 $ 71 Tax on Acquisition-Related Intangible Amortization Expenses (12) (8) (24) (16) Net Acquisition-Related Intangible Amortization Expenses 39 28 78 55 Pre-Tax Restructuring$ 31 $ -$ 31 $ 2 Tax on Restructuring (7) - (7) - Net Restructuring 24 - 24 2 FX losses resulting from the Company no longer conducting commercial operations in Russia 20 - 20 - Adjusted Net Income$ 410 $ 605 $ 947 $ 1,370 Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Diluted earnings per share attributable toMoody's common shareholders$ 1.77 $ 3.07 $ 4.45 $ 6.98 Pre-Tax Acquisition-Related Intangible Amortization Expenses$ 0.28 $ 0.19 $ 0.55 $ 0.38 Tax on Acquisition-Related Intangible Amortization Expenses (0.07) (0.04) (0.13) (0.09) Net Acquisition-Related Intangible Amortization Expenses 0.21 0.15 0.42 0.29 Pre-Tax Restructuring$ 0.17 $ -$ 0.17 $ 0.01 Tax on Restructuring (0.04) - (0.04) - Net Restructuring 0.13 - 0.13 0.01 FX losses resulting from the Company no longer conducting commercial operations in Russia 0.11 - 0.11 - Adjusted Diluted EPS$ 2.22 $ 3.22 $ 5.11 $ 7.28
Note: the tax impacts in the table above were calculated using tax rates in effect in the jurisdiction for which the item relates.
Free Cash Flow:
The Company defines Free Cash Flow as net cash provided by operating activities minus payments for capital additions. Management believes that Free Cash Flow is a useful metric in assessing the Company's cash flows to service debt, pay dividends and to fund acquisitions and share repurchases. Management deems capital expenditures essential to the Company's product and service innovations and maintenance ofMoody's operational capabilities. Accordingly, capital expenditures are deemed to be a recurring use ofMoody's cash flow. Below is a reconciliation of the Company's net cash flows from operating activities to Free Cash Flow: Six Months Ended June 30, 2022 2021 Net cash flows provided by operating activities$ 761 $ 1,270 Capital additions (133) (44) Free Cash Flow$ 628 $ 1,226 Net cash flows used in investing activities$ (172) $ (251) Net cash flows used in financing activities$ (712)
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Organic Constant Currency Revenue Growth (Decline)/Constant Currency Revenue Growth (Decline):
Beginning in the second quarter of 2022, the Company began presenting organic
constant currency revenue growth (decline) and constant currency revenue growth
(decline) as its non-GAAP measure of revenue growth (decline). Previously, the
Company presented organic revenue growth (decline), which excluded only the
impact of certain acquisition activity. Management deems this revised measure to
be useful in providing additional perspective in assessing the Company's revenue
growth (decline) excluding both the inorganic revenue impacts from certain
acquisition activity and the impacts of changes in foreign exchange rates. The
Company calculates the dollar impact of foreign exchange as the difference
between the translation of its current period non-USD functional currency
results using prior comparative period weighted average foreign exchange
translation rates and current year as reported results.
Below is a reconciliation of the Company's reported revenue and growth rates to
its organic constant currency revenue growth (decline) and constant currency
revenue growth (decline) measures:
Three Months Ended June 30, Six Months Ended June 30,
Amounts in millions 2022 2021 Change Growth 2022 2021 Change Growth
MA revenue $ 675 $ 573 $ 102 18% $ 1,370 $ 1,137 $ 233 20%
FX impact 27 - 27 40 - 40
Inorganic revenue from
acquisitions (83) - (83) (162) - (162)
Organic constant currency MA
revenue $ 619 $ 573 $ 46 8% $ 1,248 $ 1,137 $ 111 10%
Decision Solutions revenue $ 312 $ 222 $ 90 41% $ 646 $ 447 $ 199 45%
FX impact 11 - 11 16 - 16
Inorganic revenue from
acquisitions (83) - (83) (160) - (160)
Organic constant currency
Decision Solutions revenue $ 240 $ 222 $ 18 8% $ 502 $ 447 $ 55 12%
Research and Insights revenue
6%$ 368 $ 346 $ 22 6% FX impact 4 - 4 5 - 5 Constant currency Research and Insights revenue$ 189 $ 175 $ 14 8%$ 373 $ 346 $ 27 8%
Data and Information revenue
1%$ 356 $ 344 $ 12 3% FX impact 12 - 12 19 - 19 Inorganic revenue from acquisitions - - - (2) - (2) Organic constant currency Data and Information revenue$ 190 $ 176 $ 14 8%$ 373 $ 344 $ 29 8% Three Months Ended June 30, Six Months Ended June 30, Amounts in millions 2022 2021 Change Growth 2022 2021 Change Growth MCO revenue$ 1,381 $ 1,553 $ (172) (11)%$ 2,903 $ 3,153 $ (250) (8)% FX impact 47 - 47 75 - 75 Inorganic recurring revenue from acquisitions (83) - (83) (162) -
(162)
Organic constant currency MCO revenue$ 1,345 $ 1,553 $ (208) (13)%$ 2,816 $ 3,153 $ (337) (11)% 81
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Key Performance Metrics:
The Company presents Annualized Recurring Revenue ("ARR") and Organic ARR on a
constant currency basis for its MA business as supplemental performance metrics
to provide additional insight on the estimated value of MA's recurring revenue
contracts at a given point in time. The Company uses these metrics to manage and
monitor performance of its MA operating segment and believes that ARR is a key
indicator of the trajectory of MA's recurring revenue base.
The Company calculates ARR and Organic ARR by taking the total recurring
contract value for each active renewable contract as of the reporting date,
divided by the number of days in the contract and multiplied by 365 days to
create an annualized value. The Company defines renewable contracts as
subscriptions, term licenses, maintenance and renewable services. ARR excludes
transaction sales including training, one-time services and perpetual licenses.
In order to compare period-over-period ARR and Organic ARR excluding the effects
of foreign currency translation, the Company bases the calculation on currency
rates utilized in its current year operating budget and holds these FX rates
constant for the duration of all current and prior periods being reported.
Additionally, Organic ARR excludes contracts related to acquisitions to provide
additional perspective in assessing ARR growth excluding the impacts from
certain acquisition activity.
The Company's definition of ARR may differ from definitions utilized by other
companies reporting similarly named measures, and this metric should be viewed
in addition to, and not as a substitute for, financial measures presented in
accordance with U.S. GAAP.
Amounts in millions June 30, 2022 June 30, 2021 Change Growth
MA ARR $ 2,608 $ 2,084 $ 524 25%
Organic MA ARR $ 2,276 $ 2,084 $ 192 9%
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Recently Issued Accounting Standards
Refer to Note 1 to the condensed consolidated financial statements located in Part I of this Form 10-Q for a discussion on the impact to the Company relating to recently issued accounting pronouncements.
Contingencies
Legal proceedings in which the Company is involved also may impactMoody's liquidity or operating results. No assurance can be provided as to the outcome of such proceedings. In addition, litigation inherently involves significant costs. For information regarding legal proceedings, see Item 1 - "Financial Statements", Note 17 "Contingencies" in this Form 10-Q.
Regulation
MIS, certain of the Company's credit rating affiliates and many of the issuers and/or securities that MIS and the affiliates rate, are subject to extensive regulation in theU.S. , EU and in other countries (including by state and local authorities). In addition, some of the services offered by MA and its affiliates are subject to regulation in a number of countries. MA also derives a significant amount of its sales from banks and other financial services providers who are subject to regulatory oversight and who are required to pass through certain regulatory requirements to key suppliers such as MA. Existing and proposed laws and regulations can impact the Company's operations, products and the markets in which the Company operates. Additional laws and regulations have been proposed or are being considered. Each of the existing, adopted, proposed and potential laws and regulations can increase the costs and legal risk associated with the Company's operations, including the issuance of credit ratings, and may negatively impact the Company's profitability and ability to compete, or result in changes in the demand for the Company's products and services, in the manner in which the Company's products and services are utilized and in the manner in which the Company operates. The regulatory landscape continues to evolve. In theU.S. , CRAs are subject to extensive regulation primarily pursuant to the Reform Act and the Dodd-Frank Act. The Reform Act added Section 15E to the Exchange Act and provided theSEC with the authority to establish a registration and oversight program for CRAs registered as NRSROs. The Dodd-Frank Act added additional provisions to Section 15E. Government transition, can bring potential changes in the laws affecting CRAs and/or the enforcement of any new or existing legislation, regulation or directives by government authorities. In the EU, the CRA industry is registered and supervised through a pan-EU regulatory framework. ESMA has direct supervisory responsibility for registered CRAs throughout the EU. MIS's EU CRA subsidiaries are registered and are subject to formal regulation and periodic inspection. From time to time, ESMA publishes interpretive guidance, or thematic reports regarding various aspects of the CRA regulation and, annually, sets out its work program for the forthcoming year. The Commission is moving forward with their sustainable finance strategy released inJuly 2021 . This includes further assessments in respect of both CRAs and sustainability ratings and research, which might lead to legislative action. OnDecember 31, 2020 , the MISU.K. registered CRA ceased to be registered with and regulated by ESMA and became subject to regulation by theU.K. Financial Conduct Authority (FCA). Regulatory arrangements also came into effect in both theU.K. and the EU to allow credit ratings to be available for regulatory use in both the EU and the U.K. MIS has put arrangements in place to endorse itsU.K. credit ratings into the EU and its EU credit ratings into theU.K. TheU.K. Government is considering bringing ESG data and ratings firms within the scope ofFCA authorization and regulation. TheFCA has said that it sees a clear rationale for regulating them. In light of the regulations that have gone into effect in both the EU and theU.S. (as well as many other countries), periodically and as a matter of course pursuant to their enabling legislation, regulatory authorities have, and will continue to, publish reports that describe their oversight activities. In addition, other legislation, regulation and/or interpretation of existing regulation relating to the Company's operations, including credit rating, ancillary and research services has been or is being considered by local, national and multinational bodies and this type of activity is likely to continue in the future. Finally, in certain countries, governments may provide financial or other support to locally-based CRAs. If enacted, any such legislation and regulation could change the competitive landscape in which the Company operates. The legal status of CRAs has been addressed by courts in various jurisdictions and is likely to be considered and addressed in legal proceedings from time to time in the future. Management of the Company cannot predict whether these or any other proposals will be enacted, the outcome of any pending or possible future legal proceedings, or regulatory or legislative actions, or the ultimate impact of any such matters on the competitive position, financial position or results of operations of the Company. 83
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Forward-Looking Statements
Certain statements contained in this quarterly report on Form 10-Q are forward-looking statements and are based on future expectations, plans and prospects for the Company's business and operations that involve a number of risks and uncertainties. Such statements involve estimates, projections, goals, forecasts, assumptions and uncertainties that could cause actual results or outcomes to differ materially from those contemplated, expressed, projected, anticipated or implied in the forward-looking statements. Those statements appear at various places throughout this quarterly report on Form 10-Q, including in the sections entitled "Contingencies" under Item 2, "MD&A", commencing on page 45 of this quarterly report on Form 10-Q, under "Legal Proceedings" in Part II, Item 1, of this Form 10-Q, and elsewhere in the context of statements containing the words "believe", "expect", "anticipate", "intend", "plan", "will", "predict", "potential", "continue", "strategy", "aspire", "target", "forecast", "project", "estimate", "should", "could", "may" and similar expressions or words and variations thereof relating to the Company's views on future events, trends and contingencies or otherwise convey the prospective nature of events or outcomes generally indicative of forward-looking statements. Stockholders and investors are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements and other information are made as of the date of this quarterly report on Form 10-Q, and the Company undertakes no obligation (nor does it intend) to publicly supplement, update or revise such statements on a going-forward basis, whether as a result of subsequent developments, changed expectations or otherwise, except as required by applicable law or regulation. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is identifying certain factors that could cause actual results to differ, perhaps materially, from those indicated by these forward-looking statements.
Those factors, risks and uncertainties include, but are not limited to:
•the impact of general economic conditions, including inflation, on worldwide credit markets and economic activity and its effect on the volume of debt and other securities issued in domestic and/or global capital markets; •the global impacts of each of the crisis inUkraine and COVID-19 on volatility in theU.S. and world financial markets, on general economic conditions and GDP in theU.S. and worldwide, on global relations and on the Company's own operations and personnel; •other matters that could affect the volume of debt and other securities issued in domestic and/or global capital markets, including regulation, credit quality concerns, changes in interest rates, inflation and other volatility in the financial markets;
•the level of merger and acquisition activity in the
•the uncertain effectiveness and possible collateral consequences ofU.S. and foreign government actions affecting credit markets, international trade and economic policy, including those related to tariffs, tax agreements and trade barriers;
•the impact of MIS's withdrawal of its credit ratings on Russian entities and of
•concerns in the marketplace affecting our credibility or otherwise affecting market perceptions of the integrity or utility of independent credit agency ratings;
•the introduction of competing products or technologies by other companies;
•pricing pressure from competitors and/or customers; the level of success of new product development and global expansion;
•the impact of regulation as an NRSRO, the potential for new
•the potential for increased competition and regulation in the EU and other foreign jurisdictions;
•exposure to litigation related to our rating opinions, as well as any other litigation, government and regulatory proceedings, investigations and inquiries to whichMoody's may be subject from time to time;
•provisions in
•provisions of EU regulations imposing additional procedural and substantive requirements on the pricing of services and the expansion of supervisory remit to include non-EU ratings used for regulatory purposes;
•uncertainty regarding the future relationship between the
•the possible loss of key employees;
•failures or malfunctions of our operations and infrastructure;
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•any vulnerabilities to cyber threats or other cybersecurity concerns;
•the outcome of any review by controlling tax authorities of
•exposure to potential criminal sanctions or civil remedies ifMoody's fails to comply with foreign andU.S. laws and regulations that are applicable in the jurisdictions in whichMoody's operates, including data protection and privacy laws, sanctions laws, anti-corruption laws, and local laws prohibiting corrupt payments to government officials;
•the impact of mergers, acquisitions, such as our acquisition of RMS, or other
business combinations and the ability of
•currency and foreign exchange volatility;
•the level of future cash flows;
•the levels of capital investments; and
•a decline in the demand for credit risk management tools by financial institutions.
These factors, risks and uncertainties as well as other risks and uncertainties that could causeMoody's actual results to differ materially from those contemplated, expressed, projected, anticipated or implied in the forward-looking statements are described in greater detail under "Risk Factors" in Part I, Item 1A ofMoody's annual report on Form 10-K for the year endedDecember 31, 2021 , and in other filings made by the Company from time to time with theSEC or in materials incorporated herein or therein. Stockholders and investors are cautioned that the occurrence of any of these factors, risks and uncertainties may cause the Company's actual results to differ materially from those contemplated, expressed, projected, anticipated or implied in the forward-looking statements, which could have a material and adverse effect on the Company's business, results of operations and financial condition. New factors may emerge from time to time, and it is not possible for the Company to predict new factors, nor can the Company assess the potential effect of any new factors on it. Forward-looking and other statements in this document may also address our corporate responsibility progress, plans, and goals (including sustainability and environmental matters), and the inclusion of such statements is not an indication that these contents are necessarily material to investors or required to be disclosed in the Company's filings with theSecurities and Exchange Commission . In addition, historical, current, and forward-looking sustainability-related statements may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future. 85
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