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 87 for a discussion of uncertainties, risks and other factors associated with these statements. THE COMPANY Moody's is a provider of (i) credit ratings and assessment services; (ii) credit, capital markets and economic research, data and analytical tools; (iii) software solutions that support financial risk management activities; (iv) quantitatively derived credit scores; (v) learning solutions and certification services; and (vi) company information and business intelligence products. Moody's reports in two reportable segments: MIS and MA. MIS, the credit rating agency, publishes credit ratings and provides assessment services on a wide range of debt obligations and the entities that issue such obligations in markets worldwide. Revenue is primarily derived from the originators and issuers of such transactions who use MIS ratings in the distribution of their debt issues to investors. Additionally, MIS earns revenue from certain non-ratings-related operations, which consist primarily of financial instrument pricing services in theAsia-Pacific region , revenue from ICRA's non-ratings operations and revenue from providing ESG research, data and assessments. The revenue from these operations is included in the MIS Other LOB and is not material to the results of the MIS segment. MA provides financial intelligence and analytical tools to assist businesses in making decisions. MA's portfolio of solutions consists of specialized research, data, software, and professional services, which are assembled to support the financial analysis and risk management activities of institutional customers worldwide. Corporate Social Responsibility Moody's believes that knowledge fuels opportunity. The core of Moody's business is to provide credit ratings, research, tools and analysis that help to equip participants in the global financial markets to understand risks and make important investment decisions with critical insight. Moody's global corporate social responsibility (CSR) efforts are rooted in that same approach. Moody's is committed to working to empower people with the knowledge, resources and confidence they need to create a better future - for themselves, their communities and the environment.The CSR Council , chaired by President and CEORaymond W. McDaniel , Jr. and comprised of members of the management team, evaluates the Company's CSR progress and generates recommendations on its CSR strategy.The CSR Working Group , comprised of senior executives, is then charged with implementing the Company's CSR strategy. In addition, the Company's Board of Directors oversees sustainability matters, with assistance from theGovernance & Nominating Committee , as part of its oversight of management and the Company's overall strategy. For more information on Moody's approach to CSR, see moodys.com/csr. The content of this website is not incorporated by reference herein. Sustainability Moody's advances sustainability by considering Environmental, Social, and Governance (ESG) factors throughout its operations and two business segments. It 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 following the policies of recognized sustainability and corporate social responsibility parties that develop standards or frameworks and/or evaluate and assess performance, includingGlobal Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB). Moody's sustainability-related achievements have included the following: (i) reporting using recommendations from SASB; (ii) becoming a signatory to the Principles forResponsible Investment ; (iii) joining the United Nations Global Compact; and (iv) issuing annual reports on how the Company has implemented the recommendations of theTask Force on Climate-related Financial Disclosures (TCFD). 48
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Table of Contents COVID-19 The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business. While the Company has selectively reopened certain of its offices, Moody's continues to require remote work for most employees globally and has operated effectively to date. The Company continues to monitor regional developments relating to the COVID-19 pandemic to inform decisions on office re-openings. The Company experienced disruption in certain sectors of its business beginning late in the first quarter of 2020 resulting from market volatility associated with the COVID-19 crisis. However, at the date of the filing of this quarterly report on Form 10-Q, the Company is unable to predict either the potential near-term or longer-term impact that the COVID-19 crisis may have on its financial position and operating results due to numerous uncertainties regarding the duration and severity of the crisis. As a result, it is reasonably possible that the Company could experience material impacts including, but not limited to: reductions in revenue and cash flows; additional credit losses related to accounts receivables; asset impairment charges; and changes in the funded status of defined benefit pension plans. While it is reasonably possible that the COVID-19 crisis will have a material impact on the results of operations and cash flows of the Company in 2020, Moody's believes that it has adequate liquidity to maintain its operations with minimal disruption in the near term and to maintain compliance with its debt covenants. In the first half of 2020, in order to maximize liquidity and to increase available cash on hand through this period of uncertainty, the Company added$700 million in additional long-term borrowings and began borrowing under its CP Program as more fully discussed in the section entitled "Liquidity and Capital Resources" below and in Note 17 to the condensed consolidated financial statements. In addition, the Company is reducing discretionary spending, including suspending its share repurchase program until further notice. The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted onMarch 27, 2020 inthe United States . The Company intends on utilizing certain provisions in the CARES Act and otherIRS guidance which permit the deferral of certain income and payroll tax remittances. Critical Accounting Estimates Moody's discussion and analysis of its financial condition and results of operations are based on the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these financial statements requires Moody's to make estimates and judgments that affect reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the dates of the financial statements and revenue and expenses during the reporting periods. These estimates are based on historical experience and on other assumptions that are believed to be reasonable under the circumstances. On an ongoing basis, Moody's evaluates its estimates, including those related to revenue recognition, accounts receivable allowances, contingencies, restructuring, goodwill and acquired intangible assets, pension and other retirement benefits, stock-based compensation, and income taxes. Actual results may differ from these estimates under different assumptions or conditions. Item 7, MD&A, in the Company's annual report on Form 10-K for the year endedDecember 31, 2019 , includes descriptions of some of the judgments that Moody's makes in applying its accounting estimates in these areas. Since the date of the annual report on Form 10-K, there have been no material changes to the Company's critical accounting estimates other than: i) the critical accounting estimate disclosures relating to goodwill to update the Company's impairment sensitivity analysis in light of a further decline in the market capitalization of ICRA and interim impairment assessment of Reis; and ii) to update the critical accounting estimate disclosures for the Company's accounts receivable allowances to align with the adoption of ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments".Goodwill This update should be read in conjunction with the critical accounting estimate disclosures made in the Company's Form 10-K for the year endedDecember 31, 2019 , and relates to the Company's ICRA and Reis reporting units. ICRA is a publicly traded company inIndia , and accordingly the Company is able to derive its fair value based on its observable average market capitalization (plus a control premium) over a relatively short duration of time. During the first half of 2020, the average market capitalization of ICRA declined to a level that resulted in a significant decline in headroom (the amount by which the fair value of a reporting unit exceeds its carrying value) from amounts reported in the Company's Form 10-K for the year endedDecember 31, 2019 . While the current estimate of the fair value of the ICRA reporting unit results in no impairment of goodwill atJune 30, 2020 , further declines in ICRA's average market capitalization could result in impairment in future quarters. 49
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Table of Contents Additionally, as discussed in further detail in Note 11 to the Company's condensed consolidated financial statements, ICRA has reported that it has completed its internal examinations into anonymous allegations that were forwarded to ICRA by SEBI and certain additional allegations made during the course of that examination while an examination into a separate anonymous complaint is ongoing. ICRA reported that its Board of Directors is in the process of taking appropriate actions based on the findings of the completed examinations. As of the date of this quarterly report on Form 10-Q, the Company is unable to estimate the financial impact, if any, that may result from a potential unfavorable conclusion of these matters or any other ICRA inquiry. An unfavorable resolution of such matters may negatively impact ICRA's future operating results, which could result in an impairment of goodwill and amortizable intangible assets in future quarters. AtJune 30, 2020 , the Company performed an interim quantitative goodwill impairment assessment on the Reis reporting unit (acquired inOctober 2018 ), which resulted in no impairment of goodwill. The Company performed this quantitative assessment in response to a decline in projected cash flows relative to Reis' acquisition case projections and included the estimated impact of the COVID-19 crisis on the business. While the fair value atJune 30, 2020 of the Reis reporting unit exceeds carrying value, further declines in its financial projections could result in impairment in future quarters. Sensitivity Analysis and Key Assumptions for Deriving the Fair Value of a Reporting Unit The following table identifies the amount of goodwill allocated to each reporting unit as ofJune 30, 2020 and the amount by which the net assets of each reporting unit would exceed the fair value under Step 2 of the goodwill impairment test as prescribed in ASC Topic 350, assuming hypothetical reductions in their fair values as of the date of the last quantitative goodwill impairment assessment for each reporting unit (June 30, 2020 for ICRA and Reis;July 31, 2019 for all remaining reporting units).
Sensitivity Analysis
Deficit Caused by a Hypothetical Reduction to Fair Value
Goodwill 10% 20% 30% 40%
MIS $ 95 $ - $ - $ - $ -
Content 363 - - - -
ERS 726 - - - -
MALS 121 - - (12) (37)
ICRA 206 - (2) (44) (85)
Bureau van Dijk 2,504 - - - (266)
Reis 147 - (22) (48) (74)
Totals $ 4,162 $ - $ (24) $ (104) $ (462)
Methodologies and significant estimates utilized in determining the fair value
of reporting units:
The following is a discussion regarding the Company's methodology for
determining the fair value of its reporting units, excluding ICRA, as of the
date of each reporting unit's last quantitative assessment (June 30, 2020 for
Reis and July 31, 2019 for the remaining reporting units). Reis was not
quantitatively assessed as of July 31, 2019 due to the close proximity of its
acquisition date to the assessment date. As ICRA is a publicly traded company in
India , the Company estimates its fair value using its observable market
capitalization.
The fair value of each reporting unit, excluding ICRA, was estimated using a
discounted cash flow methodology and comparable public company and precedent
transaction multiples. The discounted cash flow analysis requires significant
estimates, including projections of future operating results and cash flows of
each reporting unit that are based on internal budgets and strategic plans,
expected long-term growth rates, terminal values, weighted average cost of
capital and the effects of external factors and market conditions. Changes in
these estimates and assumptions could materially affect the estimated fair value
of each reporting unit that could result in an impairment charge to reduce the
carrying value of goodwill, which could be material to the Company's financial
position and results of operations. Moody's allocates newly acquired goodwill to
reporting units based on the reporting unit expected to benefit from the
acquisition.
50
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Table of Contents The sensitivity analysis on the future cash flows and WACC assumptions described below are as of each reporting unit's last quantitative goodwill impairment assessment. The following discusses the key assumptions utilized in the discounted cash flow valuation methodology that requires significant management judgment: -Future cash flow assumptions - The projections for future cash flows utilized in the models are derived from historical experience and assumptions regarding future growth and profitability of each reporting unit. These projections are consistent with the Company's operating budget and strategic plan. Cash flows for the five to six years subsequent to the date of the quantitative goodwill impairment analysis were utilized in the determination of the fair value of each reporting unit. Beyond the forecasted period, a terminal value was determined using a perpetuity growth rate based on inflation and real GDP growth rates. A sensitivity analysis of the revenue growth rates was performed on all reporting units. For each reporting unit analyzed, a 10% reduction in the revenue growth rates used would not have resulted in its carrying value exceeding its estimated fair value. -WACC - The WACC is the rate used to discount each reporting unit's estimated future cash flows. The WACC is calculated based on the proportionate weighting of the cost of debt and equity. The cost of equity is based on a risk-free interest rate and an equity risk factor, which is derived from public companies similar to the reporting unit and which captures the perceived risks and uncertainties associated with the reporting unit's cash flows. The cost of debt component is calculated as the weighted average cost associated with all of the Company's outstanding borrowings as of the date of the impairment test and was immaterial to the computation of the WACC. The cost of debt and equity is weighted based on the debt to market capitalization ratio of publicly traded companies with similarities to the reporting unit being tested. The WACC for all reporting units ranged from 8.5% to 9.0% as ofJune 30, 2020 . Differences in the WACC used between reporting units is primarily due to distinct risks and uncertainties regarding the cash flows of the different reporting units. A sensitivity analysis of the WACC was performed on all reporting units. For each reporting unit analyzed, an increase in the WACC of one percentage point would not result in the carrying value of the reporting unit exceeding its fair value. Accounts Receivable Allowances OnJanuary 1, 2020 , the Company adopted ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" as more fully described in Note 1 to the condensed consolidated financial statements. As the Company's accounts receivable are short-term in nature, the adoption of this ASU did not have a material impact to the Company's allowance for bad debts or its policies and procedures for determining the allowance. In order to determine an estimate of expected credit losses, receivables are segmented based on similar risk characteristics including historical credit loss patterns and industry or class of customers to calculate reserve rates. The Company uses an aging method for developing its allowance for credit losses by which receivable balances are grouped based on aging category. A reserve rate is calculated for each aging category which is generally based on historical information. The reserve rate is adjusted, when necessary, for current conditions (e.g., macroeconomic or industry related) and reasonable and supportable forecasts about the future. The Company also considers customer specific information (e.g., bankruptcy or financial difficulty) when estimating its expected credit losses, as well as the economic environment of the customers, both from an industry and geographic perspective, in evaluating the need for allowances. Expected credit losses are reflected as additions to the accounts receivable allowance. Actual uncollectible account write-offs are recorded against the allowance. In 2020, Moody's assessment included consideration of the current COVID-19 pandemic and its estimated impact on the Company's accounts receivable allowances. This assessment involved the utilization of significant judgment regarding the severity and duration of the market disruption caused by the pandemic, as well as judgment regarding which industries, classes of customers and geographies would be most significantly impacted. Reportable Segments The Company is organized into two reportable segments atJune 30, 2020 : MIS and MA, which are more fully described in the section entitled "The Company" above and in Note 20 to the condensed consolidated financial statements. 51
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Table of Contents RESULTS OF OPERATIONS Expected Impact of COVID-19 on the Company's future operating results -The Company is closely monitoring the impact of COVID-19 on all aspects of its business (refer to the section above entitled "COVID-19" for further detail). The operating results discussed below may not be indicative of future quarterly results of the Company due to uncertainties relating to the duration and severity of the pandemic and its potential impact on Moody's. The Company remains committed to disciplined cost management through this period of uncertainty. -As of the date of the filing of this quarterly report on Form 10-Q, the Company believes the most significant near-term impacts to Moody's business may be: -MIS: within the MIS segment, the most notable near-term impacts are likely to be: -the potential for continued volatility in issuance. The Company observed significant market disruption and a widening of credit spreads late in the first quarter of 2020, followed by strong corporate bond issuance activity in the second quarter of 2020. Future market volatility and widening of credit spreads could have a material impact on MIS's operating results in the second half of 2020; -investment-grade issuance in the second half of 2020 may moderate compared to issuance levels observed in the first half of 2020. While investment-grade issuance has been strong in the first half of 2020, a portion of this activity has resulted from corporate issuers bolstering their balance sheets in light of uncertainties regarding the COVID-19 pandemic; -potential full-year 2020 declines in leveraged loan issuance could result in a decrease in availability of collateral for securitization activity, which could then result in further declines in CLO activity. -MA: within the MA segment, the most notable near-term impacts are likely to be: -reductions in discretionary spending by MA's customer base and social distancing measures could result in reduced sales opportunities and extension of sales cycles on existing opportunities; -postponement of certain compliance deadlines (e.g., CECL for financial institutions and IFRS 17 for insurers) may delay sales for MA solutions that address these requirements; -higher attrition rates and/or lower yields on renewable contracts. Impact of acquisitions/divestitures on comparative results -Moody's completed the following acquisitions, which impact the Company's year-over-year comparative results: -Vigeo Eiris onApril 12, 2019 ; -Four Twenty Seven onJuly 22, 2019 ; -RiskFirst onJuly 25, 2019 ; -ABS Suite onOctober 1, 2019 ; -Regulatory DataCorp onFebruary 13, 2020 . -OnNovember 8, 2019 , the Company sold its MAKS business toEquistone Partners Europe Limited , a European private equity firm. The operating results of MAKS are reported within the MA segment (and PS LOB) through theNovember 8, 2019 closing of the transaction. Beginning in 2020, revenue from the Moody's Analytics Learning Solutions ("MALS") unit, which previous to 2020 was reported in the PS LOB, is now reported as part of the RD&A LOB. Prior periods have not been reclassified as the amounts were not material. -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/divestiture activity. 52
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Table of Contents Three months endedJune 30, 2020 compared with three months endedJune 30, 2019 Executive Summary -The following table provides an executive summary of key operating results for the quarter endedJune 30, 2020 . 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 ,
Insight and
2020 2019 % Change Prior Year
Moody's total revenue $ 1,435 $ 1,214 18 % - reflects strong growth in both segments
- growth driven by higher corporate debt
issuance (both investment-grade and
MIS External Revenue $ 938 $ 739 27 % speculative-grade) as issuers took advantage of
low borrowing costs and bolstered their balance
sheets in light of uncertainties relating to
the COVID-19 crisis
- growth in know-your-customer (KYC) and
compliance solutions, as well as research and
data feeds;
MA External Revenue $ 497 $ 475 5 % - demand for insurance compliance products
along with credit assessment and loan
origination solutions in ERS; and
- inorganic growth from acquisitions.
- higher legal accruals;
- higher costs to support the Company's
initiative to enhance technology infrastructure
to enable automation, innovation and efficiency Total operating and SG&A
$ 669 $ 615 9 % as well as to support business growth; expenses - additional compensation expense resulting from hiring activity and merit increases; partially offset by - lower travel costs and disciplined cost
management in light of the COVID-19 crisis Restructuring
$ (2) $ 53 (104 %) - charges/adjustments pursuant to the 2018 Restructuring Program
- margin expansion reflects strong revenue Operating Margin
49.5 % 39.8 % 970BPS growth (most notably in MIS) outpacing expense
growth
- second quarter 2019 operating margin was Adjusted Operating Margin
53.4 % 49.3 % 410BPS suppressed by the aforementioned restructuring
charge
ETR 23.6 % 28.0 %
(440BPS) - decrease primarily due to a tax charge in
2019 pursuant to the divestiture of MAKS
Diluted EPS $ 2.69 $ 1.62 66 % - increase reflects strong operating
income/Adjusted Operating Income growth as
$ 2.81 $ 2.07 36 % described above
Adjusted Diluted EPS
53
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Table of ContentsMoody's Corporation Three Months Ended June 30, % Change Favorable 2020 2019 (Unfavorable) Revenue: United States$ 837 $ 638 31 % Non-U.S.: EMEA 373 362 3 % Asia-Pacific 144 141 2 % Americas 81 73 11 % Total Non-U.S. 598 576 4 % Total 1,435 1,214 18 % Expenses: Operating 362 340 (6 %) SG&A 307 275 (12 %) Restructuring (2) 53 104 % Depreciation and amortization 58 52 (12 %) Acquisition-Related Expenses - 2 100 % Loss pursuant to the divestiture of MAKS - 9 100 % Total 725 731 1 % Operating income$ 710 $ 483 47 % Adjusted Operating Income (1)$ 766 $ 599 28 % Interest expense, net$ (60) $ (51) (18 %) Other non-operating income, net 16 - NM Non-operating (expense) income, net$ (44) $ (51) 14 % Net income attributable to Moody's$ 509 $ 310 64 % Diluted weighted average shares outstanding 189.0 191.3 1 % Diluted EPS attributable to Moody's common shareholders$ 2.69 $ 1.62 66 % Adjusted Diluted EPS (1)$ 2.81 $ 2.07 36 % Operating margin 49.5 % 39.8 % Adjusted Operating Margin(1) 53.4 % 49.3 % Effective tax rate 23.6 % 28.0 % (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. The table below shows Moody's global staffing by geographic area: June 30, 2020 2019 % Change United States 4,052 3,903 4 % Non-U.S. 7,227 9,319 (22 %) Total 11,279 (1) 13,222 (15 %) (1)The divestiture of the MAKS business resulted in a reduction of approximately 2,700 employees, most of which were in low-cost jurisdictions. Additionally, Moody's global staffing increased by approximately 500 employees relating to acquisitions completed subsequent toJune 30, 2019 . 54
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Table of Contents GLOBAL REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________
[[Image Removed: mco-20200630_g1.jpg]] [[Image Removed: mco-20200630_g2.jpg]]
[[Image Removed: mco-20200630_g3.jpg]] [[Image Removed: mco-20200630_g4.jpg]] Global revenue ? 221 million U.S. Revenue ? 199 million Non-U.S. Revenue ? 22 million The increase in global revenue reflected growth in both reportable segments. Refer to the section entitled "Segment Results" of this MD&A for a more fulsome discussion of the Company's segment revenue. -The increase inU.S. revenue reflects strong growth in MIS (most notably in CFG revenue) coupled with strong growth in MA (most notably in RD&A). -The increase in non-U.S. revenue primarily reflects strong growth in MIS (most notably in CFG revenue) -Foreign currency translation unfavorably impacted non-U.S. revenue by two percent.
Operating Expense ? 22 million SG&A Expense ?
[[Image Removed: mco-20200630_g5.jpg]]-------------------------------------[[Image Removed: mco-20200630_g6.jpg]]
Compensation expenses increased $20 million Compensation expenses increased
reflecting:
- hiring activity, salary increases and higher - hiring activity, salary increases and higher incentive
incentive compensation accruals, partially offset compensation accruals, partially offset by benefits from
by benefits from the 2018 Restructuring Program. the 2018 Restructuring Program.
Non-compensation expenses increased $2 million Non-compensation expenses increased
reflecting: reflecting:
- higher costs to support the Company's initiative - higher legal accruals; and
to enhance technology infrastructure to enable
automation, innovation and efficiency as well as to - higher costs to
support business growth; mostly offset by: support the
Company's initiative
to enhance
technology
infrastructure to
enable automation,
innovation and
- lower travel costs and disciplined cost efficiency as well
management in light of the COVID-19 crisis. as to support
business growth;
partially offset by:
-lower travel costs and disciplined cost
management in light of the COVID-19 crisis.
55
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Table of Contents Other Expenses The restructuring charge of$53 million in the second quarter of 2019 relates to actions pursuant to the Company's 2018 Restructuring Program, which is more fully discussed in Note 12 to the condensed consolidated financial statements. The$9 million loss pursuant to the divestiture of MAKS relates to the Company's strategic divestiture of this business. Operating margin 49.5%, up 970 BPS Adjusted
Operating Margin 53.4%, up 410 BPS
- Operating margin expansion reflects strong - Adjusted Operating Margin expansion reflects
revenue growth partially offset by modest strong revenue growth partially offset by
increases in operating expense. Operating margin modest increases in operating expenses.
in the second quarter of 2019 was suppressed by
the aforementioned restructuring charge and loss
pursuant to the divestiture of MAKS.
Interest Expense, net ?$9 million Other non-operating income ?$16 million
Increase is primarily due to: The increase is primarily due to:
- an $8 million prepayment penalty on the - a $9 million benefit relating to statute of
early redemption of the 2018 Senior Notes. limitations lapses on certain indemnification
obligations relating to the MAKS divestiture; and
- $7 million in gains on mutual funds held by the
Company.
ETR ?440 BPS
The decrease in the ETR is primarily due to an approximate $15 million charge in
the second quarter of 2019 relating to the pre-sale reorganization pursuant to
the divestiture of MAKS.
Diluted EPS ?$1.07 Adjusted Diluted EPS ?$0.74
Diluted EPS in the second quarter of 2020 of Adjusted Diluted EPS of $2.81 in the second
$2.69 increased $1.07 compared to the same quarter of 2020 increased $0.74 compared to the
period in 2019, which included the same period in 2019 (refer to the section
aforementioned restructuring charge as well as entitled "Non-GAAP Financial Measures" of this
the loss and tax-related charge pursuant to the MD&A for items excluded in the derivation of
divestiture of MAKS. Adjusted Diluted EPS).
56--------------------------------------------------------------------------------
Table of Contents Segment ResultsMoody's Investors Service The table below provides a summary of revenue and operating results, followed by further insight and commentary: Three Months Ended June 30, % Change Favorable 2020 2019 (Unfavorable) Revenue: Corporate finance (CFG)$ 572 $ 388 47 % Structured finance (SFG) 81 112 (28 %) Financial institutions (FIG) 142 125 14 % Public, project and infrastructure finance (PPIF) 133 108 23 % Total ratings revenue 928 733 27 % MIS Other 10 6 67 % Total external revenue 938 739 27 % Intersegment royalty 35 33 6 % Total MIS revenue 973 772 26 % Expenses: Operating and SG&A (external) 348 305 (14 %) Operating and SG&A (intersegment) 2 3 33 % Restructuring - 26 (100 %) Depreciation and amortization 19 18 (6 %) Total expense 369 352 (5 %) Operating Income$ 604 $ 420 44 % Restructuring - 26 (100 %) Depreciation and amortization 19 18 (6 %) Adjusted Operating Income$ 623 $ 464 34 % Operating margin 62.1 % 54.4 % Adjusted Operating Margin 64.0 % 60.1 % 57
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Table of Contents MOODY'S INVESTORS SERVICE REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________
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[[Image Removed: mco-20200630_g9.jpg]] [[Image Removed: mco-20200630_g10.jpg]]
MIS: Global revenue ?
-The increase in global MIS revenue reflected growth across all LOBs excluding SFG. -The growth inU.S. revenue mainly reflected higher CFG revenue being partially offset by declines in SFG. -The increase in non-U.S. revenue reflected growth in CFG and PPIF being partially offset by declines in SFG. -Foreign currency translation unfavorably impacted non-U.S. MIS revenue by two percentage points. CFG REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________ [[Image Removed: mco-20200630_g11.jpg]] [[Image Removed: mco-20200630_g12.jpg]] [[Image Removed: mco-20200630_g13.jpg]] [[Image Removed: mco-20200630_g14.jpg]]
CFG: Global revenue ?
Global CFG revenue for the three months ended
[[Image Removed: mco-20200630_g15.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.
58
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Table of Contents The increase in CFG revenue of 47% reflected growth both in theU.S. (71%) and internationally (9%) with the most notable drivers consisting of: -strong growth in investment-grade rated issuance volumes as large corporate issuers opportunistically bolstered their liquidity positions in light of both uncertainties regarding the duration and severity of the COVID-19 crisis and current favorable market conditions; -growth in speculative-grade bond issuance as credit spreads tightened following severe disruption in the high-yield markets late in the first quarter of 2020; and -benefits from favorable changes in product mix and pricing increases; partially offset by: -a decline in rated issuance volumes inU.S. bank loans reflecting rising defaults on leveraged loans resulting in issuers utilizing the bond markets which provided more favorable borrowing rates.
SFG REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________ [[Image Removed: mco-20200630_g16.jpg]] [[Image Removed: mco-20200630_g17.jpg]]
[[Image Removed: mco-20200630_g18.jpg]][[Image Removed: mco-20200630_g19.jpg]]
SFG: Global revenue ?
Global SFG revenue for the three months ended
[[Image Removed: mco-20200630_g20.jpg]]
The decrease in SFG revenue of 28% reflected declines both in the U.S. (38%) and
internationally (10%) and primarily reflected:
-lower revenue from the CLO asset class in the U.S. and internationally, as
rising leveraged loan downgrades and defaults resulted in reduced securitization
activity. Additionally, an increasingly competitive landscape in this asset
class has resulted in reduced activity; and
-declines in U.S. CMBS securitization activity as retail and hotel properties
have been significantly impacted by the COVID-19 crisis.
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Table of Contents FIG REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________ [[Image Removed: mco-20200630_g21.jpg]] [[Image Removed: mco-20200630_g22.jpg]]
[[Image Removed: mco-20200630_g23.jpg]] [[Image Removed: mco-20200630_g2.jpg]]
FIG: Global revenue ?
Global FIG revenue for the three months ended
[[Image Removed: mco-20200630_g24.jpg]]
The 14% increase in FIG revenue was mainly due to
PPIF REVENUE
2020----------------------------------------------------------------------------------------------------------------------2019
__________________________________________________________________________________________________________________________________________________________
[[Image Removed: mco-20200630_g25.jpg]] [[Image Removed: mco-20200630_g26.jpg]]
[[Image Removed: mco-20200630_g27.jpg]] [[Image Removed: mco-20200630_g28.jpg]]
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Table of Contents
PPIF: Global revenue ?
Global PPIF revenue for the three months ended
[[Image Removed: mco-20200630_g29.jpg]]
The 23% increase in PPIF revenue consisted mainly of growth in the U.S.
reflecting:
-higher infrastructure finance rated issuance volumes as investment-grade
issuers bolstered liquidity positions in light of the COVID-19 crisis; and
-higher rated issuance volumes in public finance reflecting favorable market
conditions, including refinancing by way of taxable transactions.
MIS: Operating and SG&A Expense ?
[[Image Removed: mco-20200630_g30.jpg]]
The increase is primarily due to growth in compensation and non-compensation
expenses of $20 million and $23 million , respectively, with the most notable
drivers reflecting:
Compensation costs Non-compensation costs
- higher costs reflecting hiring activity - higher legal accruals;
and salary increases partially offset by
savings from the 2018 Restructuring - higher costs to
Program; and support the
Company's
initiative to
enhance
technology
infrastructure to
enable
automation,
innovation and
efficiency as
- inorganic expense growth relating to the well as to
acquisitions of Vigeo Eiris and Four support business
Twenty Seven. growth; partially
offset by
- lower travel
costs and
disciplined
expense
management in
light of the
COVID-19 crisis.
Other Expenses
The restructuring charge of $26 million in the second quarter of 2019 relates to
actions pursuant to the Company's 2018 Restructuring Program, which are more
fully discussed in Note 12 to the condensed consolidated financial statements.
MIS: Operating Margin 62.1% ?770BPS Adjusted Operating Income 64.0% ?390BPS
MIS operating margin and Adjusted Operating Margin both increased reflecting
strong revenue growth partially offset by expense growth. The second quarter
2019 operating margin was suppressed by the aforementioned restructuring charge.
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Moody's Analytics The table below provides a summary of revenue and operating results, followed by further insight and commentary: Three Months Ended June 30, % Change Favorable 2020 2019 (Unfavorable) Revenue: Research, data and analytics (RD&A)$ 366 $ 315 16 % Enterprise risk solutions (ERS) 131 117 12 % Professional services (PS) - 43 (100 %) Total external revenue 497 475 5 % Intersegment revenue 2 3 (33 %) Total MA revenue 499 478 4 % Expenses: Operating and SG&A (external) 321 310 (4 %) Operating and SG&A (intersegment) 35 33 (6 %) Restructuring (2) 27 107 % Depreciation and amortization 39 34 (15 %) Acquisition-Related Expenses - 2 100 % Loss pursuant to the divestiture of MAKS - 9 100 % Total expense 393 415 5 % Operating income$ 106 $ 63 68 % Restructuring (2) 27 (107 %) Depreciation and amortization 39 34 (15 %) Acquisition-Related Expenses - 2 100 % Loss pursuant to the divestiture of MAKS - 9 100 % Adjusted Operating Income$ 143 $ 135 6 % Operating margin 21.2 % 13.2 % Adjusted Operating Margin 28.7 % 28.2 % MOODY'S ANALYTICS REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________ [[Image Removed: mco-20200630_g31.jpg]] [[Image Removed: mco-20200630_g32.jpg]] [[Image Removed: mco-20200630_g33.jpg]] [[Image Removed: mco-20200630_g34.jpg]] 62
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MA: Global revenue ?
The 5% increase in global MA revenue reflects strong growth in RD&A and ERS, which includes revenue from the acquisitions of RDC, RiskFirst and ABS Suite. These increases were partially offset by a decline in revenue resulting from the divestiture of the MAKS business in the fourth quarter of 2019. -Organic revenue growth (1) was 6%. -Foreign currency translation unfavorably impacted MA revenue by two percent. -The increase inU.S. revenue reflected growth in both RD&A and ERS. -Non-U.S. revenue was flat compared to the same period in the prior year and was negatively impacted by the divestiture of the MAKS business in the fourth quarter of 2019. -Foreign currency translation unfavorably impacted non-U.S. MA revenue by three percent. -The increase in relationship revenue as a percentage of total revenue from 85% in the second quarter of 2019 to 92% in the same period of 2020 reflects the divestiture of the transaction revenue-based MAKS business in 2019. (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 RD&A REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________ [[Image Removed: mco-20200630_g35.jpg]]
[[Image Removed: mco-20200630_g36.jpg]][[Image Removed: mco-20200630_g37.jpg]]
[[Image Removed: mco-20200630_g38.jpg]]
RD&A: Global revenue ?
Global RD&A revenue grew 16% compared to the second quarter of 2019 with the
most notable drivers of the change reflecting:
-inorganic revenue growth from the acquisitions of RDC and ABS Suite;
-strong renewals and new sales of credit research and data feeds in the trailing
twelve month period; and
-strong demand for solutions that address customer identity requirements, such
as know-your-customer, anti-money laundering, anti-bribery and sanctions
compliance over the trailing twelve month period.
Foreign currency translation unfavorably impacted RD&A revenue by two percent.
Organic revenue growth for RD&A was 7%.
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ERS REVENUE
2020----------------------------------------------------------------------------------------------------------------------2019
__________________________________________________________________________________________________________________________________________________________
[[Image Removed: mco-20200630_g39.jpg]][[Image Removed: mco-20200630_g40.jpg]][[Image Removed: mco-20200630_g41.jpg]]
[[Image Removed: mco-20200630_g40.jpg]]
ERS: Global revenue ?
Global ERS revenue increased 12% compared to the second quarter of 2019 with the most notable drivers of the growth reflecting: -continued strong demand for credit assessment and loan origination solutions; -increased demand for actuarial modeling tools in support of certain international accounting standards relating to insurance contracts; and -inorganic revenue growth from the acquisition of RiskFirst. Foreign currency translation unfavorably impacted ERS revenue by two percent. Organic revenue growth for ERS was 7%.
MA: Operating and SG&A Expense ?
[[Image Removed: mco-20200630_g42.jpg]]
The increase in operating and SG&A expenses compared to the second quarter of
2019 reflected modest growth in both compensation and non-compensation costs of
approximately $9 million and $2 million , respectively. The most notable drivers
of this growth were:
Compensation costs Non-compensation costs
- higher costs reflecting hiring activity, - higher costs to support the Company's initiative
salary increases, higher incentive compensation to enhance technology infrastructure to enable
accruals and inorganic expense growth from automation, innovation and efficiency as well as to
acquisitions; partially offset by, support business growth; partially offset by,
- lower expenses resulting from the divestiture - lower travel costs and disciplined expense
of MAKS in the fourth quarter of 2019 and management in light of the COVID-19 crisis
benefits from the 2018 Restructuring Program
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Table of Contents Other Expenses The restructuring charge of$27 million in the second quarter of 2019 relates to actions pursuant to the Company's 2018 Restructuring Plan, which are more fully discussed in Note 12 to the consolidated financial statements. The$9 million loss pursuant to the divestiture of MAKS in the second quarter of 2019 relates to the Company's strategic divestiture of this business. MA: Operating Margin 21.2% ?800BPS Adjusted Operating
Margin 28.7% ?50BPS
The operating margin and Adjusted Operating Margin expansion for MA both reflect
revenue growth outpacing expense growth. Operating margin in 2019 was suppressed
by the aforementioned restructuring charge and the loss pursuant to the
divestiture of MAKS.
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Six months ended
-The following table provides an executive summary of key operating results for the six months endedJune 30, 2020 . 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 EndedJune 30 ,
Insight and
2019 % Change Year
Moody's total revenue $ 2,725 $ 2,356 16 % - reflects strong growth in both segments
- higher investment-grade rated issuance volumes as
corporate issuers bolstered liquidity positions in
MIS External Revenue
23 % response to COVID-19 uncertainties coupled with
strong speculative-grade issuance despite a severe
market disruption late in the first quarter
- strong renewals and new sales of credit research
and data feeds, as well as demand for
know-your-customer (KYC) and compliance solutions;
- strong demand
for insurance
compliance
MA External Revenue $ 993 $ 947 5 % products along
with credit
assessment and
loan origination
solutions in ERS;
and
- inorganic growth
from acquisitions
-costs to enhance technology infrastructure to
enable automation, innovation and efficiency as well
as to support business growth;
- higher estimates
for bad debt
reserves resulting
from the COVID-19
crisis; partially
Total operating and offset by
SG&A expenses $ 1,310 $ 1,238 (6 %) - lower travel
costs and
disciplined
expense management
in light of the
COVID-19 crisis
coupled with
benefits from the
2018 Restructuring
Program
Restructuring $ (3) $ 59 105 % -charges/adjustments pursuant to the 2018
Restructuring Program
Operating Margin 47.8 % 40.1 % 770 BPS - margin expansion reflects strong revenue growth
Adjusted Operating 51.9 % 47.5 % 440 BPS partially offset by increases in operating expenses Margin ETR
19.0 % 18.8 % 20BPS - generally in line with prior year
Diluted EPS $ 5.27 $ 3.56 48 % - growth reflects higher operating income/Adjusted
Adjusted Diluted EPS $ 5.55 $ 4.14 34 % Operating Income
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Table of ContentsMoody's Corporation Six Months Ended June 30, % Change Favorable 2020 2019 (Unfavorable) Revenue: United States$ 1,551 $ 1,250 24 % Non-U.S.: EMEA 736 695 6 % Asia-Pacific 280 273 3 % Americas 158 138 14 % Total Non-U.S. 1,174 1,106 6 % Total 2,725 2,356 16 % Expenses: Operating 702 682 (3 %) SG&A 608 556 (9 %) Restructuring (3) 59 105 % Depreciation and amortization 107 102 (5 %) Acquisition-Related Expenses - 3 100 % Loss pursuant to the divestiture of MAKS 9 9 - % Total 1,423 1,411 (1 %) Operating income 1,302 945 38 % Adjusted Operating Income (1) 1,415 1,118 27 % Interest expense, net (100) (103) 3 % Other non-operating income, net 28 2 NM Non-operating (expense) income, net (72) (101) 29 % Net income attributable to Moody's$ 997 $ 683 46 % Diluted weighted average shares outstanding 189.3 192.1 1 % Diluted EPS attributable to Moody's common shareholders$ 5.27 $ 3.56 48 % Adjusted Diluted EPS (1)$ 5.55 $ 4.14 34 % Operating margin 47.8 % 40.1 % Adjusted Operating Margin (1) 51.9 % 47.5 % Effective tax rate 19.0 % 18.8 % (1)Adjusted Operating Income, Adjusted Operating Margin and Adjusted Diluted EPS attributable to Moody'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. 67
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Table of Contents GLOBAL REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________ [[Image Removed: mco-20200630_g43.jpg]] [[Image Removed: mco-20200630_g44.jpg]]
[[Image Removed: mco-20200630_g3.jpg]] [[Image Removed: mco-20200630_g45.jpg]]
Global revenue ?$369 million U.S. Revenue ?$301 million Non-U.S. Revenue ?$68
million
The increase in global revenue reflected growth in both reportable segments. Refer to the section entitled "Segment Results" of this MD&A for a more fulsome discussion of the Company's segment revenue. -The increase inU.S. revenue reflects strong growth in MIS (most notably in CFG) coupled with good growth in MA. -The increase in non-U.S. revenue reflects strong growth in both segments. -Foreign currency translation unfavorably impacted non-U.S. revenue by two percent. Operating Expense ?$20 million SG&A Expense ?$52 million
[[Image Removed: mco-20200630_g46.jpg]]-------------------------------------[[Image Removed: mco-20200630_g47.jpg]]
Compensation expenses increased modestly and
Compensation expenses increased
reflected:
- hiring activity and salary increases mostly offset - hiring activity and salary increases partially offset
by benefits from the 2018 Restructuring Program. by benefits from the 2018 Restructuring Program.
Non-compensation expenses increased $18 million Non-compensation expenses increased
reflecting: reflecting:
- higher costs to support the Company's initiative - higher legal accruals;
to enhance technology infrastructure to enable
automation, innovation and efficiency as well as to - higher estimates
support business growth; partially offset by: for bad debt
reserves of
approximately $20
million primarily
resulting from the
anticipated impact
of the COVID-19
crisis on the
Company's customers;
and
- lower travel costs and disciplined expense -higher costs to support the Company's initiative to
management in light of the COVID-19 crisis. enhance technology infrastructure to enable automation,
innovation and efficiency as well as to support business
growth; partially offset by
- lower travel costs and disciplined expense management
in light of the COVID-19 crisis.
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Table of Contents Other Expenses The restructuring charge of$59 million in the first six months of 2019 relates to actions pursuant to the Company's 2018 Restructuring Program, which are more fully discussed in Note 12 to the condensed consolidated financial statements. Operating margin 47.8%, up 770 BPS Adjusted
Operating Margin 51.9%, up 440 BPS
Operating margin and Adjusted Operating Margin expansion reflects strong revenue
growth partially offset by growth in expenses. Operating margin in the first six
months of 2019 was suppressed by the aforementioned restructuring charge.
Interest Expense, net ?$3 million Other non-operating income ?$26 million
Decrease is primarily due to: The increase is primarily due to:
- a $16 million higher combined benefit from the - FX gains of $5 million in the first six
interest element of cross-currency swaps and months of 2020 compared to $16 million in FX
fixed-to-floating interest rate swaps (more fully losses in the same period of the prior year. discussed in Note 10 to the condensed consolidated financial statements); partially offset by
- an
ETR ? 20 BPS
The ETR is generally in line with the prior year.
Diluted EPS ?
Diluted EPS in the first six months of 2020 of Adjusted Diluted EPS of
$1.41 compared to the first six months of 2019 period in 2019, which included the (refer to the section entitled "Non-GAAP aforementioned restructuring charge. The growth Financial Measures" of this MD&A for items in EPS is mainly due to the aforementioned excluded in the derivation of Adjusted Diluted growth in operating income. EPS). The growth in Adjusted Diluted EPS is primarily due to the aforementioned growth in Adjusted Operating Income. 69
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Table of Contents Segment ResultsMoody's Investors Service The table below provides a summary of revenue and operating results, followed by further insight and commentary: Six Months Ended June 30, % Change Favorable 2020 2019 (Unfavorable) Revenue: Corporate finance (CFG)$ 1,025 $ 743 38 % Structured finance (SFG) 177 213 (17 %) Financial institutions (FIG) 267 241 11 % Public, project and infrastructure finance (PPIF) 242 201 20 % Total ratings revenue 1,711 1,398 22 % MIS Other 21 11 91 % Total external revenue 1,732 1,409 23 % Intersegment royalty 72 65 11 % Total 1,804 1,474 22 % Expenses: Operating and SG&A (external) 674 619 (9 %) Operating and SG&A (intersegment) 4 5 20 % Restructuring (1) 29 103 % Depreciation and amortization 35 35 - % Total expense 712 688 (3 %) Operating income$ 1,092 $ 786 39 % Restructuring (1) 29 103 % Depreciation and amortization 35 35 - % Adjusted Operating Income$ 1,126 $ 850 32 % Operating margin 60.5 % 53.3 % Adjusted Operating Margin 62.4 % 57.7 % MOODY'S INVESTORS SERVICE REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________ [[Image Removed: mco-20200630_g48.jpg]] [[Image Removed: mco-20200630_g49.jpg]] [[Image Removed: mco-20200630_g50.jpg]] [[Image Removed: mco-20200630_g51.jpg]] 70
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MIS: Global revenue ?
-The increase in global MIS revenue reflected growth across all LOBs excluding SFG. -The growth inU.S. revenue reflected increases in all ratings LOBs excluding SFG. -The increase in non-U.S. revenue primarily reflected growth in CFG and PPIF being partially offset by declines in SFG and FIG. -Foreign currency translation unfavorably impacted non-U.S. MIS revenue by two percentage points. CFG REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________ [[Image Removed: mco-20200630_g52.jpg]] [[Image Removed: mco-20200630_g53.jpg]] [[Image Removed: mco-20200630_g54.jpg]] [[Image Removed: mco-20200630_g14.jpg]]
CFG: Global revenue ?
Global CFG revenue for the six months ended
[[Image Removed: mco-20200630_g55.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 increase in CFG revenue of 38% reflected growth both in theU.S. (50%) and internationally (16%) with the most notable drivers consisting of: -strong growth in investment-grade rated issuance volumes as large corporate issuers bolstered their liquidity positions in light of uncertainties regarding the duration and severity of the COVID-19 crisis; -strong growth in speculative-grade rated issuance volumes despite severe market disruption in this sector in March relating to the COVID-19 crisis. In the second quarter of 2020, high-yield market sentiment improved and credit spreads tightened resulting in strong growth in rated issuance volumes compared to the first six months of 2019; and -benefits from favorable changes in product mix and pricing increases; partially offset by: -a decline inU.S. bank loan revenue primarily reflecting rising defaults on leveraged loans which resulted in issuers utilizing the bond markets which provided more favorable borrowing rates. 71
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Table of Contents SFG REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________ [[Image Removed: mco-20200630_g56.jpg]] [[Image Removed: mco-20200630_g57.jpg]]
[[Image Removed: mco-20200630_g58.jpg]][[Image Removed: mco-20200630_g59.jpg]]
SFG: Global revenue ?
Global SFG revenue for the six months ended
[[Image Removed: mco-20200630_g60.jpg]]
The decrease in SFG revenue of 17% reflected declines both in the U.S. (21%) and
internationally (10%), mainly due to:
-reduced activity in the CLO asset class in the U.S. and EMEA resulting from
challenges in the leveraged loan market (refer to CFG discussion above) and
widening credit spreads in response to uncertainties relating to the COVID-19
crisis as well as an increasingly competitive landscape; and
-declines in U.S. CMBS securitization activity as retail and hotel properties
have been significantly impacted by the COVID-19 crisis.
FIG REVENUE
2020----------------------------------------------------------------------------------------------------------------------2019
__________________________________________________________________________________________________________________________________________________________
[[Image Removed: mco-20200630_g61.jpg]] [[Image Removed: mco-20200630_g62.jpg]]
[[Image Removed: mco-20200630_g63.jpg]] [[Image Removed: mco-20200630_g64.jpg]]
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FIG: Global revenue ?
Global FIG revenue for the six months ended
[[Image Removed: mco-20200630_g65.jpg]]
The 11% increase in FIG revenue was mainly due to:
-growth in U.S. banking and insurance rated issuance volumes as large financial
institutions and insurers fortified their balance sheets in light of
uncertainties relating to the COVID-19 crisis and anticipated volatility around
the U.S. presidential election later in the year; and
-benefits from favorable changes in product mix and pricing increases;
partially offset by:
-lower rated issuance volumes in the banking sector in EMEA reflecting financial
institutions in the region being currently well funded after raising capital in
the prior year to meet certain regulatory capitalization requirements.
PPIF REVENUE
2020----------------------------------------------------------------------------------------------------------------------2019
__________________________________________________________________________________________________________________________________________________________
[[Image Removed: mco-20200630_g18.jpg]] [[Image Removed: mco-20200630_g66.jpg]]
[[Image Removed: mco-20200630_g27.jpg]] [[Image Removed: mco-20200630_g67.jpg]]
PPIF: Global revenue ?
Global PPIF revenue for the six months ended
[[Image Removed: mco-20200630_g68.jpg]]
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Table of Contents The 20% increase in PPIF revenue resulted primarily from: -higherU.S. public finance refunding volumes resulting from continued low benchmark interest rates, including refinancing by way of taxable transactions; -higher infrastructure finance revenue resulting from investment-grade issuers bolstering their balance sheets in light of uncertainties regarding the duration and severity of the COVID-19 crisis; and -benefits from favorable changes in product mix and pricing increases.
MIS: Operating and SG&A Expense ?
[[Image Removed: mco-20200630_g69.jpg]]
The growth reflects a
Non-compensation costs Compensation costs
The increase is primarily due to: The increase is primarily due to:
- higher legal accruals; - annual salary increases and hiring;
partially offset by;
- higher estimates for bad debt reserves of $14 - lower incentive compensation accruals
million primarily resulting from the anticipated reflecting lower projected achievement against
impact of the COVID-19 crisis on the Company's full-year 2020 targeted results compared to
customers; partially offset by: the prior year.
- lower travel costs and disciplined expense
management in light of the COVID-19 crisis
MIS: Operating Margin of 60.5% ? 720BPS Adjusted Operating Income of 62.4% ? 470BPS
MIS operating margin and Adjusted Operating Margin both increased reflecting strong revenue growth outpacing expense growth.
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Table of ContentsMoody's Analytics The table below provides a summary of revenue and operating results, followed by further insight and commentary: Six Months Ended June 30, % Change Favorable 2020 2019 (Unfavorable) Revenue: Research, data and analytics (RD&A) (1)$ 724 $ 623 16 % Enterprise risk solutions (ERS) 269 239 13 % Professional services (PS) (1) - 85 (100 %) Total external revenue 993 947 5 % Intersegment revenue 4 5 (20 %) Total MA Revenue 997 952 5 % Expenses: Operating and SG&A (external) 636 619 (3 %) Operating and SG&A (intersegment) 72 65 (11 %) Restructuring (2) 30 107 % Depreciation and amortization 72 67 (7 %) Acquisition-Related Expenses - 3 100 % Loss pursuant to the divestiture of MAKS 9 9 - % Total expense 787 793 1 % Operating income$ 210 $ 159 32 % Restructuring (2) 30 107 % Depreciation and amortization 72 67 (7 %) Acquisition-Related Expenses - 3 100 % Loss pursuant to the divestiture of MAKS 9 9 - Adjusted Operating Income$ 289 $ 268 8 % Operating margin 21.1 % 16.7 % Adjusted Operating Margin 29.0 % 28.2 % (1) Subsequent to the divestiture of MAKS in 2019, revenue from the Moody's Analytics Learning Solutions ("MALS") unit, which previous to 2020 was reported in the Professional Services line of business ("LOB"), is now reported as part of the RD&A LOB. Prior periods have not been reclassified as the amounts were not material. MOODY'S ANALYTICS REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________ [[Image Removed: mco-20200630_g31.jpg]] [[Image Removed: mco-20200630_g70.jpg]] [[Image Removed: mco-20200630_g33.jpg]] [[Image Removed: mco-20200630_g34.jpg]] 75
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MA: Global revenue ?
The 5% increase in global MA revenue reflects strong growth in RD&A and ERS partially offset by a decline in revenue resulting from the divestiture of the MAKS business in the fourth quarter of 2019. -Organic revenue growth was 8%. -The increase inU.S. revenue reflected growth in both RD&A and ERS. -The increase in non-U.S. revenue reflected growth in RD&A and ERS, partially offset by a decline in revenue resulting from the divestiture of MAKS in the fourth quarter of 2019. -Foreign currency translation unfavorably impacted non-U.S. MA revenue by two percent. -The increase in relationship revenue as a percentage of total revenue from 85% in the first six months of 2019 to 91% in the same period of 2020 reflects the divestiture of the transaction revenue-based MAKS business in 2019. RD&A REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________ [[Image Removed: mco-20200630_g71.jpg]]
[[Image Removed: mco-20200630_g72.jpg]][[Image Removed: mco-20200630_g37.jpg]]
[[Image Removed: mco-20200630_g38.jpg]]
RD&A: Global revenue ?
Global RD&A revenue grew 16% compared to the first half of 2019 with the most notable drivers of the increase reflecting: - strong renewals and new sales of credit research and data feeds; - inorganic revenue growth from the acquisitions of RDC and ABS Suite; and - strong demand for solutions that address customer identity requirements, such as know-your-customer, anti-money laundering, anti-bribery and sanctions compliance. Organic revenue growth for RD&A was 8%.
ERS REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________ [[Image Removed: mco-20200630_g73.jpg]][[Image Removed: mco-20200630_g74.jpg]][[Image Removed: mco-20200630_g41.jpg]]
[[Image Removed: mco-20200630_g40.jpg]]
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ERS: Global revenue ?
Global ERS revenue increased 13% compared to the first half of 2019 with the most notable drivers of the growth reflecting: -continued strong demand for credit assessment and loan origination solutions; -increased demand for actuarial modeling tools in support of certain international accounting standards relating to insurance contracts; and -inorganic revenue growth from the acquisition of RiskFirst. Organic revenue growth for ERS was 8%.
MA: Operating and SG&A Expense ?
[[Image Removed: mco-20200630_g75.jpg]]
The increase in operating and SG&A expenses compared to the first half of 2019
is primarily due to growth in non-compensation costs reflecting:
- higher costs of approximately $30 million to support the Company's initiative
to enhance technology infrastructure to enable automation, innovation and
efficiency as well as to support business growth;
-higher estimates for bad debt reserves of $9 million which included the
anticipated impact of the COVID-19 crisis on the Company's customers;
partially offset by:
-lower travel costs of $15 million in light of the COVID-19 crisis; and
-continued disciplined expense management.
Other Expenses
The restructuring charge of$30 million in the first half of 2019 relates to actions pursuant to the Company's 2018 Restructuring Plan, which are more fully discussed in Note 12 to the condensed consolidated financial statements. The$9 million loss in both the first half of 2020 and 2019 is pursuant to the divestiture of MAKS.
MA: Operating Margin 21.1% ? 440BPS Adjusted Operating Margin 29.0% ? 80BPS
The operating margin and Adjusted Operating Margin expansion for MA both reflect
RD&A and ERS revenue growth partially offset by modest expense growth. Both the
operating margin and Adjusted Operating Margin were suppressed by higher bad
debt reserves in the first half of 2020. Operating margin in the first half of
2019 was suppressed by the aforementioned restructuring charge.
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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.
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
2020 2019 Favorable (Unfavorable)
Net cash provided by operating activities $ 977 $ 755 $ 222
Net cash used in investing activities $ (823) $ (53) $ (770)
Net cash provided by (used in) financing $ 123 $ (1,186) $ 1,309
activities
Free Cash Flow (1) $ 915 $ 716 $ 199
(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 ended June 30, 2020
increased $222 million compared to same period in 2019 primarily due to:
-the increase in Adjusted Operating Income compared to the same period in the
prior year (see section entitled "Results of Operations" for further
discussion); and
-the extension of payment terms for approximately $115 million in estimated
federal tax payments as a result of relief provided by the IRS in response to
the COVID-19 crisis;
partially offset by:
-a $99 million contribution to the Company's funded pension plan in the first
quarter of 2020; and
-approximately $70 million in higher incentive compensation payments (based on
full-year 2019 financial results) compared to the prior year.
Net cash used in investing activities
The $770 million increase in cash used in investing activities in the six months
ended June 30, 2020 compared to the same period in 2019 primarily reflects:
-the acquisition of RDC in the first quarter of 2020 for approximately $700
million ; and
- $86 million in higher net purchases of investments in the first half of 2020
compared to the same period in the prior year.
Net cash provided by (used in) financing activities
The $1,309 million increase in cash flows provided by financing activities in
the six months ended June 30, 2020 compared to the same period in the prior year
was primarily attributed to:
-the net issuance of $700 million in long-term debt during the first half of
2020 compared to repayment of long-term debt of $450 million in the same period
of the prior year; and
-lower cash paid for treasury share repurchases of $362 million compared to the
first half of 2019.
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Table of Contents Cash and short-term investments held in non-U.S. jurisdictions The Company's aggregate cash and cash equivalents and short-term investments of$2.2 billion atJune 30, 2020 consisted of approximately$1 billion located outside of theU.S. Approximately 15% 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. Other Material Future 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 for 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. The Company remains committed to using its strong cash flow to create value for shareholders by investing in growing areas of the business, reinvesting in ratings quality initiatives, making selective acquisitions, repurchasing stock and paying dividends, all in a manner consistent with maintaining sufficient liquidity after giving effect to any additional indebtedness that may be incurred. Dividends and share repurchases OnJuly 28, 2020 , the Board of Directors of the Company declared a quarterly dividend of$0.56 per share of Moody's common stock, payableSeptember 10, 2020 to shareholders of record at the close of business onAugust 20, 2020 . The continued payment of dividends at this rate, or at all, is subject to the discretion of the Board. InOctober 2018 , the Board authorized a$1.0 billion share repurchase program, which atJune 30, 2020 had a remaining authority of approximately$81 million . Additionally, inDecember 2019 , the Board authorized an additional$1.0 billion share repurchase program, which may commence following the completion of the existing program. Late in the first quarter of 2020, the Company suspended its share repurchase activity to preserve liquidity in light of uncertainties regarding the severity and duration of the COVID-19 crisis. The consideration of the resumption of share repurchase activity in the future will be dependent on close monitoring of the COVID-19 pandemic and its effect on both the Company's business and the broader economic environment. Moody's will also closely review market indicators and volatility, along with the prospects for, and certainty surrounding, the Company's free cash flow generation. Other cash requirements The Company has future cash requirements, including operating leases and debt service and payments as noted in the tables that follow as well as future payments related to the transition tax under the Tax Act. Indebtedness During the first half of 2020, in response to uncertainties relating to the severity and duration of the COVID-19 crisis, the Company issued$700 million in 5-year unsecured senior notes and$300 million in 30-year unsecured senior notes via public offerings to bolster liquidity. The terms of these transactions are more fully discussed in Note 17 to the condensed consolidated financial statements. AtJune 30, 2020 , Moody's had$6.3 billion of outstanding debt. and approximately$1 billion of additional capacity available under the Company's CP program, which is backstopped by the 2018 Facility. AtJune 30, 2020 , the Company was in compliance with all covenants contained within all of the debt agreements. All of the Company's long-term debt agreements contain cross default provisions which state that default under one of the aforementioned debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under those instruments to be immediately due and payable. AtJune 30, 2020 , there were no such cross defaults. 79
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Table of Contents The repayment schedule for the Company's borrowings outstanding atJune 30, 2020 is as follows: [[Image Removed: mco-20200630_g76.jpg]] For additional information on the Company's outstanding debt, refer to Note 17 to the condensed consolidated financial statements. Management may consider pursuing additional long-term financing when it is appropriate in light of cash requirements for operations, share repurchases and other strategic opportunities, which would result in higher financing costs. Off-Balance Sheet Arrangements AtJune 30, 2020 , Moody's did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as special purpose or variable interest entities where Moody's is the primary beneficiary, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, Moody's is not exposed to any financing, liquidity market or credit risk that could arise if it had engaged in such relationships. Contractual Obligations The following table presents payments due under the Company's contractual obligations as ofJune 30, 2020 : Payments Due by Period Payments Due by Period (in millions) Total Less Than 1 Year 1 - 3 Years 3 - 5 Years Over 5 Years Indebtedness (1)$ 8,968 $ 204
607 107 190 161 149
Purchase obligations 128 80 32 16 0
Pension obligations (2) 147 3 45 27 72
Total (3) $ 9,850 $ 394 $ 2,448 $ 1,703 $ 5,305
(1)Reflects principal payments, related interest and applicable fees due on all
indebtedness outstanding as described in Note 17 to the condensed consolidated
financial statements.
(2)Reflects projected benefit payments relating to the Company's U.S. unfunded
DBPPs and Retirement and Other Plans described in Note 16 to the condensed
consolidated financial statements.
(3)The table above does not include the Company's long-term tax liabilities of
$455 million relating to UTPs, since the expected cash outflow of such amounts
by period cannot be reasonably estimated. Additionally, the table above does not
include approximately $32 million relating to indemnification liability
resulting from the divestiture of MAKS and approximately $51 million relating to
the remaining unpaid deemed repatriation liability resulting from the Tax Act
enacted into law in the U.S. in December 2017 .
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Table of Contents 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 on the operating performance of Moody's. Adjusted Operating Income excludes the impact of: i) restructuring; ii) depreciation and amortization; iii) Acquisition-Related Expenses; and iv) loss pursuant to the divestiture of MAKS. Restructuring charges are excluded as the frequency and magnitude of these charges may vary widely across periods and companies. Depreciation and amortization are excluded because companies utilize productive assets of different ages and use different methods of acquiring and depreciating productive assets. Acquisition-Related Expenses consist of expenses incurred to complete and integrate the acquisition of Bureauvan Dijk . These expenses were excluded in the prior years due to the material nature of the cumulative costs incurred over the multi-year integration effort. Acquisition-related expenses from other acquisitions were not material. The loss pursuant to the divestiture of MAKS is excluded as the frequency and magnitude of divestiture activity may vary widely from period to period and across 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. Six Months Ended June Three Months Ended June 30, 30, 2020 2019 2020 2019 Operating income$ 710 $ 483 $ 1,302 $ 945 Adjustments: Restructuring (2) 53 (3) 59 Depreciation and amortization 58 52 107 102 Acquisition-Related Expenses - 2 - 3 Loss pursuant to the divestiture of MAKS - 9 9 9 Adjusted Operating Income$ 766 $ 599 $ 1,415 $ 1,118 Operating margin 49.5 % 39.8 % 47.8 % 40.1 % Adjusted Operating Margin 53.4 % 49.3 % 51.9 % 47.5 % 81
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Table of Contents Adjusted Net Income and Adjusted Diluted EPS attributable to Moody's common shareholders: The Company presents Adjusted Net Income and Adjusted Diluted EPS because management deems these metrics to be useful measures to provide additional perspective on the operating performance of Moody's. Adjusted Net Income and Adjusted Diluted EPS exclude the impact of: i) Acquisition-Related Expenses; ii) amortization of acquired intangible assets; iii) restructuring charges/adjustments; and iv) loss and a tax charge pursuant to the divestiture of MAKS. Acquisition-Related Expenses consist of expenses incurred to complete and integrate the acquisition of Bureauvan Dijk . These expenses were excluded in prior years due to the material nature of the cumulative costs incurred over the multi-year integration effort. Acquisition-related expenses from other acquisitions were not material. The Company excludes the impact of amortization of acquired intangible assets as companies utilize intangible assets with different ages and have different methods of acquiring and amortizing intangible assets. 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 are excluded as the frequency and magnitude of these charges may vary widely across periods and companies. The loss and tax charge pursuant to the divestiture of MAKS are excluded as the frequency and magnitude of divestiture activity may vary widely from period to period and across 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. 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 2020 2019 2020 2019 Net income attributable to Moody's common shareholders$ 509 $ 310 $ 997 $ 683 Pre-Tax Acquisition-Related Expenses $ -$ 2 $ -$ 3 Tax on Acquisition-Related Expenses - - - - Net Acquisition-Related Expenses - 2 - 3 Pre-Tax Acquisition-Related Intangible Amortization Expenses$ 31 $ 27 $ 59 $ 53 Tax on Acquisition-Related Intangible Amortization Expenses (7) (8) (13) (13) Net Acquisition-Related Intangible Amortization Expenses 24 19 46 40 Pre-Tax Restructuring$ (2) $ 53 $ (3) $ 59 Tax on Restructuring 1 (12) 1 (14) Net Restructuring (1) 41 (2) 45 Tax charge pursuant to the divestiture of MAKS - 15 - 15 Loss pursuant to the divestiture of MAKS - 9 9 9 Adjusted Net Income$ 532 $ 396 $ 1,050 $ 795 82
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Table of Contents
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Diluted earnings per share attributable to
Moody's common shareholders $ 2.69 $ 1.62 $ 5.27 $ 3.56
Pre-Tax Acquisition-Related Expenses $ - $ 0.01 $ - $ 0.02
Tax on Acquisition-Related Expenses - - - (0.01)
Net Acquisition-Related Expenses - 0.01 - 0.01
Pre-Tax Acquisition-Related Intangible
Amortization Expenses $ 0.16 $ 0.14 $ 0.31 $ 0.27
Tax on Acquisition-Related Intangible
Amortization Expenses (0.03) (0.04) (0.07) (0.06)
Net Acquisition-Related Intangible
Amortization Expenses 0.13 0.10 0.24 0.21
Pre-Tax Restructuring $ (0.01) $ 0.28 $ (0.02) $ 0.31
Tax on Restructuring - (0.07) 0.01 (0.08)
Net Restructuring (0.01) 0.21 (0.01) 0.23
Tax charge pursuant to the divestiture of
MAKS - 0.08 - 0.08
Loss pursuant to the divestiture of MAKS - 0.05 0.05 0.05
Adjusted Diluted EPS $ 2.81 $ 2.07 $ 5.55 $ 4.14
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 of Moody's operational capabilities. Accordingly, capital
expenditures are deemed to be a recurring use of Moody'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,
2020 2019
Net cash flows provided by operating activities $ 977 $ 755
Capital additions (62) (39)
Free Cash Flow $ 915 $ 716
Net cash flows used in investing activities $ (823) $ (53)
Net cash flows provided by (used in) financing activities $ 123
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Table of Contents
Organic Revenue:
The Company presents the organic revenue and growth because management deems
this metric to be a useful measure which provides additional perspective in
assessing the revenue growth excluding the inorganic revenue impacts from
certain acquisitions and divestiture activity. The following table details the
periods excluded from each acquisition/divestiture to determine organic revenue.
Period excluded to determine organic revenue growth
Acquisition Acquisition Date Three Months Ended June 30 Six Months Ended June 30
RiskFirst July 25, 2019 April 1, 2020 - June 30, 2020 January 1, 2020 - June 30, 2020
ABS Suite October 1, 2019 April 1, 2020 - June 30, 2020 January 1, 2020 - June 30, 2020
Regulatory DataCorp February 13, 2020 April 1, 2020 - June 30, 2020
Divestiture Divestiture Date
MAKS November 7, 2019 April 1, 2019 - June 30, 2019
Additionally, subsequent to the divestiture of MAKS in 2019, revenue from the
Moody's Analytics Learning Solutions ("MALS") unit, which previous to 2020 was
reported in the Professional Services LOB, is now reported as part of the RD&A
LOB. Prior periods have not been reclassified as the amounts were not material.
For purposes of determining organic RD&A revenue growth, MALS revenue has been
excluded from 2020 RD&A revenue. Below is a reconciliation of MA's reported
revenue and growth rates to its organic revenue and organic growth rates:
Three Months Ended June 30, Six Months Ended June 30,
Amounts in millions 2020 2019 Change Growth 2020 2019 Change Growth
MA revenue $ 497 $ 475 $ 22 5% $ 993 $ 947 $ 46 5%
RiskFirst (6) - (6) (10) - (10)
ABS Suite (2) - (2) (3) - (3)
Regulatory DataCorp (14) - (14) (21) - (21)
MAKS - (28) 28 - (55) 55
Organic MA revenue $ 475 $ 447 $ 28 6% $ 959 $ 892 $ 67 8%
Three Months Ended June 30, Six Months Ended June 30,
Amounts in millions 2020 2019 Change Growth 2020 2019 Change Growth
RD&A revenue $ 366 $ 315 $ 51 16% $ 724 $ 623 $ 101 16%
ABS Suite (2) - (2) (3) - (3)
Regulatory DataCorp (14) - (14) (21) - (21)
MALS (12) - (12) (27) - (27)
Organic RD&A revenue $ 338 $ 315 $ 23 7% $ 673 $ 623 $ 50 8%
Three Months Ended June 30, Six Months Ended June 30,
Amounts in millions 2020 2019 Change Growth 2020 2019 Change Growth
ERS revenue $ 131 $ 117 $ 14 12% $ 269 $ 239 $ 30 13%
RiskFirst (6) - (6) (10) - (10)
Organic ERS revenue $ 125 $ 117 $ 8 7% $ 259 $ 239 $ 20 8%
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Table of Contents Recently Issued Accounting Standards Refer to Note 21 to the condensed consolidated financial statements located in Part I on 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 impact Moody'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 19 "Contingencies" in this Form 10-Q. Regulation MIS and many of the securities that it rates are subject to extensive regulation in both theU.S. and in other countries (including by state and local authorities). Existing and proposed laws and regulations can impact the Company's operations and the markets for securities that it rates. 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 credit ratings, in the manner in which credit ratings 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 credit rating agencies registered as NRSROs. Among other things, the Reform Act requires theSEC to submit an annual report toCongress providing an overview ofSEC activities with respect to NRSROs, and detailing theSEC's views on the state of competition, transparency and conflicts of interests among NRSROs. The Dodd-Frank Act enhanced theSEC's oversight of the regulation of NRSROs, and includes a requirement that theSEC publish an annual report summarizing the results of its annual examinations of NRSROs. To date, through a series of rulemakings, theSEC has implemented several Exchange Act provisions related to NRSROs. These include, for example, provisions addressing disclosure of data and assumptions underlying credit ratings, conflicts of interest with respect to sales and marketing practices, disclosure of performance statistics, application and disclosure of credit rating methodologies, analyst training and testing and consistent application of rating symbols and definitions. The Company has made and continues to make substantial IT and other investments, and has implemented the relevant compliance obligations. In the EU, the CRA industry is registered and supervised through a pan-European regulatory framework.The European Securities and Markets Authority (ESMA) has direct supervisory responsibility for the registered CRA industry throughout the EU. MIS' EU CRA subsidiaries are registered and are subject to formal regulation and periodic inspection. Applicable rules include procedural requirements with respect to use of credit ratings, independence and avoidance of conflicts of interest, conflicts of interest concerning investments in CRAs, CRA rotation, methodologies, models and key rating assumptions, use of multiple CRAs, outsourcing, disclosures, credit ratings of sovereign issuers, liability for intentional or grossly negligent failure to abide by applicable regulations, reporting requirements to ESMA regarding fees, and additional procedural and substantive requirements on the pricing of services. From time to time, ESMA publishes interpretive guidance, or thematic reports regarding various aspects of the regulation and, annually, sets out its work program for the forthcoming year. ESMA's 2020 work program includes supervisory work on the credit rating process, methodology development and validation, governance, and internal controls. In 2016, theEuropean Commission published a report concluding that no new EU legislation was necessary at that time, but that it would continue to monitor the credit rating industry and analyze approaches that may strengthen existing regulation. InApril 2020 , the Commission published a consultation on a Sustainable Finance strategy for the EU. The new strategy is expected to be published in either the fourth quarter of 2020 or first quarter of 2021 and could include proposals on the integration of Environmental, Social, and Governance criteria in the credit rating process. The Commission is also expected to publish a report in 2021 on CRAs and the integration of sustainability factors into their credit rating opinions and in the fourth quarter of 2020 onSustainability Research and Ratings. Separately, onJune 23, 2016 , theU.K. voted to exit the E.U. and onJanuary 31, 2020 formally left the E.U. There is now a transition period of 11 months untilDecember 31, 2020 when most EU law will remain applicable in theU.K. . The longer-term impact of the decision to leave the E.U. on the overall regulatory framework for theU.K. will depend, in part, on the relationship that theU.K. negotiates with the E.U. During the transition period, the E.U. CRA regulatory framework will remain in place in theU.K. and firms must continue to abide by their existing obligations with ESMA as the regulator of EU-registered CRAs. It is expected that from the start of 2021, legislation for CRAs under the supervision of theFinancial Conduct Authority will come into force in theU.K. 85
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Table of Contents In light of the regulations that have gone into effect in both the E.U. 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 over the industry. In addition, other legislation and/or interpretation of existing regulation relating to the Company's operations, including credit rating, ancillary and research services 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. For example, governments may from time to time establish official CRAs or credit ratings criteria or procedures for evaluating local issuers. If enacted, any such legislation and regulation could change the competitive landscape in which MIS operates. The legal status of CRAs has been addressed by courts in various decisions 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. 86
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Table of Contents 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 business and operations of the Company 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 48 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 examples of factors, risks and uncertainties 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 COVID-19 on volatility in theU.S. and world financial markets, on general economic conditions and GDP growth in theU.S. and worldwide, and on the Company's own operations and personnel. Many other factors could cause actual results to differ from Moody's outlook, including credit market disruptions or economic slowdowns, which could affect the volume of debt and other securities issued in domestic and/or global capital markets; 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 and other volatility in the financial markets such as that due to uncertainty as companies transition away from LIBOR and Brexit; the level of merger and acquisition activity in theU.S. and abroad; 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 and trade barriers; 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 newU.S. , state and local legislation and regulations, including provisions in the Dodd-Frank Act and regulations resulting from that Act; the potential for increased competition and regulation in the EU and other foreign jurisdictions; exposure to litigation related toMoody's Investors Service's rating opinions, as well as any other litigation, government and regulatory proceedings, investigations and inquiries to which the Company may be subject from time to time; provisions in the Dodd-Frank Act legislation modifying the pleading standards, and EU regulations modifying the liability standards, applicable to credit rating agencies in a manner adverse to credit rating agencies; 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; the possible loss of key employees; failures or malfunctions of our operations and infrastructure; any vulnerabilities to cyber threats or other cybersecurity concerns; the outcome of any review by controlling tax authorities of the Company's global tax planning initiatives; exposure to potential criminal sanctions or civil remedies if the Company fails to comply with foreign andU.S. laws and regulations that are applicable in the jurisdictions in which the Company 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 or other business combinations and the ability of the Company to successfully integrate such acquired businesses; 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 cause Moody's actual results to differ materially from those contemplated, expressed, projected, anticipated or implied in the forward-looking statements are currently, or in the future could be, amplified by the COVID-19 outbreak, and are described in greater detail under "Risk Factors" in Part I, Item 1A of the Company's annual report on Form 10-K for the year endedDecember 31, 2019 , its quarterly report on Form 10-Q for the quarter endedMarch 31, 2020 , 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. 87
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