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 91 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). 50
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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 the reopening of its offices. 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 the near term, Moody's believes that it has adequate liquidity to maintain its operations with minimal disruption and to maintain compliance with its debt covenants. In the first nine months 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 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 has reduced discretionary spending, including temporarily suspending its share repurchase program beginning late in the first quarter of 2020 and spanning through the third quarter. The Company anticipates resuming its share repurchase program in the fourth quarter of 2020. The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted onMarch 27, 2020 inthe United States . The Company is 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 certain updates relating to i) the critical accounting estimate disclosures relating to goodwill to update the Company's goodwill impairment assessments in 2020 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 As ofJuly 31st of each year, Moody's evaluates its goodwill for impairment at the reporting unit level, defined as an operating segment (i.e., MIS and MA), or one level below an operating segment (i.e., a component of an operating segment). The Company has seven primary reporting units: two within the Company's ratings business (one for the ICRA business and one that encompasses all of Moody's other ratings operations) and five reporting units within MA: Content, ERS, MALS, Bureauvan Dijk and Reis. The Content reporting unit offers subscription-based research, data and analytical products, including credit ratings produced by MIS, credit research, quantitative credit scores and other analytical tools, economic research and forecasts, business intelligence and company information products. The ERS reporting unit provides products and services that support the credit risk management and regulatory compliance activities of financial institutions and also provides advanced actuarial software for the life insurance industry. These products and services are primarily sold on a subscription basis or delivered via software that is licensed on a perpetual basis. The MALS reporting unit consists of the portion of the MA business that offers both credit training as well as other professional development training. The Bureauvan Dijk reporting unit primarily 51
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Table of Contents consists of the Bureauvan Dijk business and the newly acquired RDC business, and provides business intelligence, company information products and risk and compliance intelligence. The Reis reporting unit, which consists of the Reis business, provides commercial real estate market information and analytical tools. The Company evaluates the recoverability of goodwill using a two-step impairment test approach at the reporting unit level. In the first step, the Company assesses various qualitative factors to determine whether the fair value of a reporting unit may be less than its carrying amount. If a determination is made based on the qualitative factors that an impairment does not exist, the Company is not required to perform further testing. If the aforementioned qualitative assessment results in the Company concluding that it is more likely than not that the fair value of a reporting unit may be less than its carrying amount, the fair value of the reporting unit will be quantitatively determined and compared to its carrying value including goodwill. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired. If the fair value of the reporting unit is less than the carrying value, the Company will record a goodwill impairment charge for the amount by which the carrying value exceeds the reporting unit's fair value. The Company evaluates its reporting units on an annual basis, or more frequently if there are changes in the reporting structure of the Company due to acquisitions, realignments or if there are indicators of potential impairment. For the reporting units where the Company is consistently able to conclude that no impairment exists using only a qualitative approach, the Company's accounting policy is to perform the second step of the aforementioned goodwill impairment assessment at least once every three years. Interim goodwill impairment assessments performed in advance of the Company's annual assessment During the first half of 2020, the observable 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 . 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. While the estimate of the fair value of the ICRA reporting unit resulted in no impairment of goodwill in the first half of 2020, further declines in ICRA's average market capitalization could result in impairment in future quarters. 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. 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 exceeded its carrying value, further declines in its financial projections could result in impairment in future quarters. Annual goodwill impairment assessment performed atJuly 31, 2020 AtJuly 31, 2020 , the Company performed a qualitative assessment for each of the reporting units. The qualitative analyses resulted in the Company determining that it was not more likely than not that the fair value of any reporting unit was less than its carrying amount. Determining the fair value of a reporting unit or an indefinite-lived acquired intangible asset involves the use of significant estimates and assumptions, which are more fully described below. In addition, the Company also makes certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of its reporting units. Other assets and liabilities, including applicable corporate assets, are allocated to the extent they are related to the operation of respective reporting units. 52
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Table of Contents 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 ofSeptember 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 371 - - - -
ERS 745 - - - -
MALS 123 - - (12) (37)
ICRA 207 - (2) (44) (85)
Bureau van Dijk 2,594 - - - (266)
Reis 147 - (22) (48) (74)
Totals $ 4,282 $ - $ (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 as of the date of each
reporting unit's last quantitative assessment (June 30, 2020 for Reis and ICRA;
and July 31, 2019 for the remaining reporting units). 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.
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 require 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. 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 applied
in each reporting unit's last quantitative test ranged from 8.5% to 9.0%.
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
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Table of Contents 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 atSeptember 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. 54
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RESULTS OF OPERATIONS Potential 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 and third quarters of 2020. Future market volatility and widening of credit spreads could have a material impact on MIS's near-term operating results; -corporate debt issuance (both investment-grade and speculative-grade) may moderate compared to issuance levels observed in the first nine months of 2020. While issuance has been strong in the first nine months 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 fewer new sales opportunities being identified and an extension of sales cycles on existing opportunities, particularly related to software sales; -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. 55
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Three months endedSeptember 30, 2020 compared with three months endedSeptember 30, 2019 Executive Summary -The following table provides an executive summary of key operating results for the quarter endedSeptember 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 Ended September
30,
Insight and Key Drivers of Change Compared to
Financial measure: 2020 2019 % Change Prior Year
Moody's total revenue $ 1,356 $ 1,240 9 % - reflects strong growth in both segments
- growth driven by higher corporate debt
issuance (both investment-grade and
MIS External Revenue $ 825 $ 746 11 % speculative-grade) as issuers took advantage
of low borrowing costs for refinancing
purposes and M&A activity
- growth in know-your-customer (KYC) and
compliance solutions, as well as research and
data feeds;
MA External Revenue $ 531 $ 494 7 % - demand for insurance compliance products
along with credit assessment and loan
origination solutions in ERS; and
- inorganic growth from acquisitions.
In line with prior year with key offsetting
drivers being:
- additional compensation expense resulting
from hiring activity and merit increases
coupled with higher incentive compensation
aligned with financial and operating
Total operating and SG&A performance;
expenses $ 635 $ 642 (1) % - higher costs to support the Company's
initiative to enhance technology
infrastructure to enable automation,
innovation and efficiency as well as to
support business growth; offset by
- lower travel costs and disciplined cost
management in light of the COVID-19 crisis;
- lower legal accruals
- charge in 2020 is pursuant to the Company's
restructuring program revolving around the
Restructuring $ 23 $ (1) NM rationalization and exit of certain real
estate leases in response to the COVID-19
pandemic
Operating Margin 47.3 % 44.3 % 300BPS - margin expansion reflects strong revenue
growth coupled with operating expenses in
Adjusted Operating Margin 53.2 % 49.5 % 370BPS line with prior year
- decrease primarily due to a deferred tax
ETR 22.0 % 25.3 % (330BPS) benefit in 2020 resulting from a non-U.S.
corporate reorganization
Diluted EPS $ 2.47 $ 1.99 24 % - increase reflects strong operating
income/Adjusted Operating Income growth as
Adjusted Diluted EPS $ 2.69 $ 2.15 25 % described above
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Moody's Corporation Three Months Ended September 30, % Change Favorable 2020 2019 (Unfavorable) Revenue: United States $ 729$ 660 10 % Non-U.S.: EMEA 401 362 11 % Asia-Pacific 156 142 10 % Americas 70 76 (8 %) Total Non-U.S. 627 580 8 % Total 1,356 1,240 9 % Expenses: Operating 364 350 (4 %) SG&A 271 292 7 % Restructuring 23 (1) NM Depreciation and amortization 56 48 (17 %) Loss pursuant to the divestiture of MAKS - 2 100 % Total 714 691 (3 %) Operating income $ 642$ 549 17 % Adjusted Operating Income (1) $ 721$ 614 17 % Interest expense, net $ (53)$ (46) (15 %) Other non-operating income, net 10 10 - % Non-operating (expense) income, net $ (43)$ (36) (19 %) Net income attributable to Moody's $ 467$ 380 23 % Diluted weighted average shares outstanding 189.3 191.1 1 % Diluted EPS attributable to Moody's common shareholders $ 2.47$ 1.99 24 % Adjusted Diluted EPS (1) $ 2.69$ 2.15 25 % Operating margin 47.3 % 44.3 % Adjusted Operating Margin(1) 53.2 % 49.5 % Effective tax rate 22.0 % 25.3 % (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: September 30, 2020 2019 % Change United States 4,087 3,875 5 % Non-U.S. 7,310 9,850 (26 %) Total 11,397 (1) 13,725 (17 %) (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 150 employees relating to acquisitions completed subsequent toSeptember 30, 2019 . 57
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GLOBAL REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________
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Global revenue ?$116 million U.S. Revenue ?$69 million Non-U.S. Revenue ?$47 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 in bothU.S. and non-U.S. revenue reflects strong growth in both reportable segments -Foreign currency translation favorably impacted non-U.S. revenue by two percent. Operating Expense ?$14 million SG&A Expense ?$21 million
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Compensation expenses increased $29 million Compensation expenses increased
reflecting: reflecting:
- hiring activity and salary increases coupled with - hiring activity and salary increases coupled with
net inorganic growth from acquisitions/divestiture net inorganic growth from acquisitions/divestiture
activity; and activity; and
- higher incentive compensation accruals - higher incentive compensation accruals.
Non-compensation expenses decreased $15 million Non-compensation expenses decreased
reflecting: reflecting:
- lower travel costs and disciplined cost management -
lower legal accruals, which includes a
in light of the COVID-19 crisis. captive insurance company settlement in 2019; and
- lower travel costs and disciplined cost management
in light of the COVID-19 crisis; partially offset by:
- higher costs to support the Company's initiative to
enhance technology infrastructure to enable
automation, innovation and efficiency as well as to
support business growth.
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Other Expenses
The restructuring charge of$23 million primarily relates to the non-cash impairment of certain leased real estate assets (ROU Assets and leasehold improvements) pursuant to the rationalization and exit of certain real estate leases in response to the COVID-19 pandemic. This restructuring program is more fully discussed in Note 12 to the condensed consolidated financial statements. Operating margin 47.3%, up 300 BPS Adjusted
Operating Margin 53.2%, up 370 BPS
- Operating margin and Adjusted Operating Margin expansion reflects strong revenue growth coupled with operating expenses generally in line with the prior year
Other non-operating income was in line with prior
Interest Expense, net ? $7 million year
Increase is primarily due to: Overall, in line with the prior year
- a $16 million prepayment penalty on the
early redemption of the 2017 Senior Notes due
2021
- higher interest expense reflecting an
additional $700 million of long-term
borrowings in 2020 (further discussion in
"Liquidity and Capital Resources" below);
partially offset by:
- a $17 million benefit from a fair value
hedge settled in connection with the early
redemption of the 2017 Senior Notes
ETR ? 330 BPS
The decrease in the ETR is primarily due to a deferred tax benefit resulting
from a non-
Diluted EPS ? $0.48 Adjusted Diluted EPS ? $0.54
Diluted EPS in the third quarter of 2020 of Adjusted Diluted EPS of $2.69 in the third
$2.47 increased $0.48 compared to the same quarter of 2020 increased $0.54 compared to the
period in 2019 mainly due to higher same period in 2019, mainly due to higher
operating income. Adjusted Operating Income (refer to the section
entitled "Non-GAAP Financial Measures" of this
MD&A for items excluded in the derivation of
Adjusted Diluted EPS).
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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 September 30, % Change Favorable 2020 2019 (Unfavorable) Revenue: Corporate finance (CFG) $ 461$ 392 18 % Structured finance (SFG) 88 105 (16 %) Financial institutions (FIG) 134 120 12 % Public, project and infrastructure finance (PPIF) 133 120 11 % Total ratings revenue 816 737 11 % MIS Other 9 9 - % Total external revenue 825 746 11 % Intersegment royalty 38 35 9 % Total MIS revenue 863 781 10 % Expenses: Operating and SG&A (external) 308 320 4 % Operating and SG&A (intersegment) 1 2 50 % Restructuring 13 - NM Depreciation and amortization 17 18 6 % Total expense 339 340 - % Operating Income $ 524$ 441 19 % Restructuring 13 - NM Depreciation and amortization 17 18 6 % Captive insurance company settlement - 10 100 % Adjusted Operating Income $ 554$ 469 18 % Operating margin 60.7 % 56.5 % Adjusted Operating Margin 64.2 % 60.1 % 60
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MOODY'S INVESTORS SERVICE REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________
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MIS: Global revenue ?
-The increase in global MIS revenue reflected growth across all ratings 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 primarily reflected growth in CFG and FIG. -Foreign currency translation favorably impacted non-U.S. MIS revenue by two percentage points. -Transaction revenue grew$70 million compared to the same period in the prior year. CFG REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________ [[Image Removed: mco-20200930_g10.jpg]] [[Image Removed: mco-20200930_g11.jpg]] [[Image Removed: mco-20200930_g12.jpg]] [[Image Removed: mco-20200930_g13.jpg]]
CFG: Global revenue ?
Global CFG revenue for the three months ended
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(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 18% reflected growth both in theU.S. (20%) and internationally (13%). Transaction revenue grew$65 million compared to the same period in the prior year. The most notable drivers of the CFG growth consisted of: -growth in both high-yield and investment-grade bond issuance as credit spreads declined for much of the third quarter of 2020 which resulted in: -opportunistic refinancing in advance of potential volatility in the fourth quarter surrounding theU.S. presidential election; -issuance to support M&A activity. -benefits from favorable changes in product mix and pricing increases; partially offset by: -a decline in rated issuance volumes inU.S. bank loans reflecting issuer and investor preference for corporate bonds, which provided more favorable borrowing rates.
SFG REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________ [[Image Removed: mco-20200930_g15.jpg]] [[Image Removed: mco-20200930_g16.jpg]]
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SFG: Global revenue ?
Global SFG revenue for the three months ended
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The decrease in SFG revenue of 16% primarily reflected declines in theU.S. (21%). Transaction revenue declined$17 million compared to the third quarter of 2019. The most notable drivers of the decline in SFG revenue were: -a reduction in CLO securitization activity (both new formation and refinancing activity) in theU.S. reflecting: -elevated credit spreads and macroeconomic uncertainties relating to the COVID-19 pandemic; -a decline in available collateral (see discussion on bank loan issuance in CFG section above); -an increasingly competitive landscape in this asset class. FIG REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________ [[Image Removed: mco-20200930_g20.jpg]] [[Image Removed: mco-20200930_g21.jpg]] [[Image Removed: mco-20200930_g22.jpg]] [[Image Removed: mco-20200930_g23.jpg]]
FIG: Global revenue ?
Global FIG revenue for the three months ended
[[Image Removed: mco-20200930_g24.jpg]]
Transaction revenue increased $11 million compared to the third quarter of 2019.
The 12% increase in FIG revenue was mainly due to higher banking revenue both in
the U.S. and internationally reflecting a favorable issuance mix.
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PPIF REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________ [[Image Removed: mco-20200930_g25.jpg]] [[Image Removed: mco-20200930_g26.jpg]] [[Image Removed: mco-20200930_g27.jpg]] [[Image Removed: mco-20200930_g28.jpg]]
PPIF: Global revenue ?
Global PPIF revenue for the three months ended
[[Image Removed: mco-20200930_g29.jpg]]
Transaction revenue increased $10 million compared to the third quarter of 2020.
The 11% increase in PPIF revenue primarily consisted of growth in U.S. public
finance issuance volumes reflecting favorable market conditions, including
refinancing by way of taxable transactions.
MIS: Operating and SG&A Expense ? $12 million
[[Image Removed: mco-20200930_g30.jpg]]
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The decline is primarily due to lower non-compensation costs of
Non-compensation costs Compensation costs
- lower legal accruals in 2020, which includes a $10 - higher costs reflecting hiring activity and
million captive insurance company settlement in 2019 salary increases coupled with higher
incentive compensation accruals; partially
offset by:
- lower travel costs and disciplined expense - benefits from the 2018 Restructuring management in light of the COVID-19 crisis; partially Program. offset by
- higher costs to support the Company's initiative to enhance technology infrastructure to enable automation, innovation and efficiency as well as to support business growth.
Other Expenses The restructuring charge of$13 million in the third quarter of 2020 primarily relates to the non-cash impairment of certain leased real estate assets (ROU Assets and leasehold improvements) pursuant to the rationalization and exit of certain real estate leases in response to the COVID-19 pandemic. This restructuring program is more fully discussed in Note 12 to the condensed consolidated financial statements. MIS: Operating Margin 60.7% ? 420 BPS Adjusted
Operating Margin 64.2% ? 410 BPS
MIS operating margin and Adjusted Operating Margin both increased reflecting strong revenue coupled with declines in operating and SG&A expenses.
65
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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 September 30, % Change Favorable 2020 2019 (Unfavorable) Revenue: Research, data and analytics (RD&A) $ 386$ 317 22 % Enterprise risk solutions (ERS) 145 134 8 % Professional services (PS) - 43 (100 %) Total external revenue 531 494 7 % Intersegment revenue 1 2 (50 %) Total MA revenue 532 496 7 % Expenses: Operating and SG&A (external) 327 322 (2 %) Operating and SG&A (intersegment) 38 35 (9 %) Restructuring 10 (1) NM Depreciation and amortization 39 30 (30 %) Loss pursuant to the divestiture of MAKS - 2 100 % Total expense 414 388 (7 %) Operating income $ 118$ 108 9 % Restructuring 10 (1) NM Depreciation and amortization 39 30 (30 %) Loss pursuant to the divestiture of MAKS - 2 100 % Captive insurance company settlement - 6 100 % Adjusted Operating Income $ 167$ 145 15 % Operating margin 22.2 % 21.8 % Adjusted Operating Margin 31.4 % 29.2 % MOODY'S ANALYTICS REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________ [[Image Removed: mco-20200930_g31.jpg]] [[Image Removed: mco-20200930_g32.jpg]] [[Image Removed: mco-20200930_g33.jpg]] [[Image Removed: mco-20200930_g34.jpg]] 66
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MA: Global revenue ?
The 7% 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 9%. -Foreign currency translation favorably impacted MA revenue by two percent. -The increase inU.S. and nonU.S. revenue reflected growth in both RD&A and ERS. -The growth in non-U.S. revenue was partially offset by the negative impact of the divestiture of the MAKS business in the fourth quarter of 2019. -Foreign currency translation favorably impacted non-U.S. MA revenue by three percent. -The increase in relationship revenue as a percentage of total revenue from 84% in the third quarter of 2019 to 90% 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-20200930_g35.jpg]]
[[Image Removed: mco-20200930_g36.jpg]][[Image Removed: mco-20200930_g37.jpg]]
[[Image Removed: mco-20200930_g38.jpg]]
RD&A: Global revenue ?
Global RD&A revenue grew 22% compared to the third 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 favorably impacted RD&A revenue by two percent.
Organic revenue growth for RD&A was 12%.
67
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ERS REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________ [[Image Removed: mco-20200930_g39.jpg]][[Image Removed: mco-20200930_g40.jpg]][[Image Removed: mco-20200930_g41.jpg]]
[[Image Removed: mco-20200930_g42.jpg]]
ERS: Global revenue ?
Global ERS revenue increased 8% compared to the third 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. Organic revenue growth for ERS was 7%.
MA: Operating and SG&A Expense ?
[[Image Removed: mco-20200930_g43.jpg]]
The increase in operating and SG&A expenses compared to the third quarter of
2019 reflected growth in compensation costs of $15 million partially offset by a
decrease in non-compensation costs of $10 million . The most notable drivers of
these changes were:
Compensation costs Non-compensation costs
- higher costs reflecting hiring activity, - lower travel costs and disciplined expense
salary increases and inorganic expense growth management in light of the COVID-19 crisis;
from acquisitions;
- higher incentive compensation accruals aligned - a $6 million captive insurance company settlement
with business performance; partially offset by, in the prior year; partially offset by,
- lower expenses resulting from the divestiture - higher costs to support the Company's initiative
of MAKS in the fourth quarter of 2019 and to enhance technology infrastructure to enable
benefits from the 2018 Restructuring Program automation, innovation and efficiency as well as to
support business growth
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Other Expenses
The restructuring charge of$10 million in the third quarter of 2020 primarily relates to the non-cash impairment of certain leased real estate assets (ROU Assets and leasehold improvements) pursuant to the rationalization and exit of certain real estate leases in response to the COVID-19 pandemic. This restructuring program is more fully discussed in Note 12 to the condensed consolidated financial statements.
MA: Operating Margin 22.2% ? 40 BPS Adjusted Operating Margin 31.4% ? 220 BPS
MA operating margin expansion was suppressed by the aforementioned restructuring
charge in the third quarter of 2020. The operating margin and Adjusted Operating
Margin expansion for MA both reflect revenue growth outpacing expense growth.
69
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Table of Contents Nine months endedSeptember 30, 2020 compared with nine months endedSeptember 30, 2019 Executive Summary -The following table provides an executive summary of key operating results for the nine months endedSeptember 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. Nine Months Ended September 30, Financial measure: 2020 2019 %
Change Insight and
13 % - reflects strong growth in both segments
- higher corporate debt rated issuance volumes (both
investment-grade and speculative-grade) as corporate
issuers bolstered liquidity positions in response to
MIS External Revenue
19 % COVID-19 uncertainties and issued opportunistically for
refinancing and M&A needs; partially offset by
- declines in
key asset classes in SFG
- strong renewals and new sales of credit research and
data feeds, as well as demand for know-your-customer
(KYC) and compliance solutions; and
MA External Revenue $ 1,524 $ 1,441 6 % - strong demand for credit assessment and loan
origination solutions along with insurance compliance
products in ERS;
- inorganic growth from acquisitions
- higher costs to enhance technology infrastructure to
enable automation, innovation and efficiency as well as
to support business growth;
- additional compensation expense resulting from hiring
Total operating and SG&A
(3 %) activity and merit increases;
expenses - higher estimates for bad debt reserves resulting from
the COVID-19 crisis; partially offset by
- lower travel costs and disciplined expense management
in light of the COVID-19 crisis coupled with benefits
from the 2018 Restructuring Program
- charges pursuant to the Company's 2020 Restructuring Restructuring
$ 20 $ 58 66 % Program and 2018 Restructuring Program, more fully
discussed in Note 12 to the condensed consolidated
financial statements
Operating Margin 47.6 % 41.5 % 610 BPS - margin expansion reflects strong revenue growth
partially offset by modest increases in operating Adjusted Operating
52.3 % 48.2 % 410 BPS expenses
Margin
ETR 20.0 % 21.4 % (140BPS) - decrease primarily due to a deferred tax benefit in
2020 resulting from a non-
$ 7.73 $ 5.54 40 % - growth reflects higher operating income/Adjusted Adjusted Diluted EPS$ 8.24 $ 6.29 31 % Operating Income 70
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Table of ContentsMoody's Corporation Nine Months Ended September 30, % Change Favorable 2020 2019 (Unfavorable) Revenue: United States$ 2,280 $ 1,910 19 % Non-U.S.: EMEA 1,137 1,057 8 % Asia-Pacific 436 415 5 % Americas 228 214 7 % Total Non-U.S. 1,801 1,686 7 % Total 4,081 3,596 13 % Expenses: Operating 1,066 1,032 (3 %) SG&A 879 848 (4 %) Restructuring 20 58 66 % Depreciation and amortization 163 150 (9 %) Acquisition-Related Expenses - 3 100 % Loss pursuant to the divestiture of MAKS 9 11 18 % Total 2,137 2,102 (2 %) Operating income 1,944 1,494 30 % Adjusted Operating Income (1) 2,136 1,732 23 % Interest expense, net (153) (149) (3 %) Other non-operating income, net 38 12 217 % Non-operating (expense) income, net (115) (137) 16 % Net income attributable to Moody's$ 1,464 $ 1,062 38 % Diluted weighted average shares outstanding 189.3 191.8 1 %
Diluted EPS attributable to Moody's common shareholders $ 7.73
$ 5.54 40 % Adjusted Diluted EPS (1) $ 8.24$ 6.29 31 % Operating margin 47.6 % 41.5 % Adjusted Operating Margin (1) 52.3 % 48.2 % Effective tax rate 20.0 % 21.4 % (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. 71
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Table of Contents GLOBAL REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________ [[Image Removed: mco-20200930_g44.jpg]] [[Image Removed: mco-20200930_g45.jpg]]
[[Image Removed: mco-20200930_g3.jpg]] [[Image Removed: mco-20200930_g2.jpg]]
Global revenue ?$485 million U.S. Revenue ?$370 million Non-U.S. Revenue ?$115 million The increase in global revenue reflected growth in both reportable segments in both theU.S. and internationally. Refer to the section entitled "Segment Results" of this MD&A for a more fulsome discussion of the Company's segment revenue. Operating Expense ?$34 million SG&A Expense ?$31 million
[[Image Removed: mco-20200930_g46.jpg]]-------------------------------------[[Image Removed: mco-20200930_g47.jpg]]
Compensation expenses increased $31 million and
Compensation expenses increased
reflected: reflecting:
- hiring activity and salary increases coupled with - hiring activity and salary increases partially
higher incentive compensation accruals, partially offset by benefits from the 2018 Restructuring
offset by benefits from the 2018 Restructuring Program.
Program.
Non-compensation expenses increased $3 million Non-compensation expenses increased
reflecting: reflecting:
- higher costs to support the Company's initiative to - higher estimates for bad debt reserves of
enhance technology infrastructure to enable
approximately
automation, innovation and efficiency as well as to anticipated impact of the COVID-19 crisis on the
support business growth; partially offset by: 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;
- a $16 million captive insurance company settlement
in 2019.
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Table of Contents Other Expenses The restructuring charge of$20 million in 2020 primarily relates to the non-cash impairment of certain leased real estate assets (ROU Assets and leasehold improvements) pursuant to the rationalization and exit of certain real estate leases in response to the COVID-19 pandemic. The$58 million restructuring charge in 2019 relates to actions pursuant to the Company's 2018 Restructuring Program. Both of these programs are more fully discussed in Note 12 to the condensed consolidated financial statements. The loss pursuant to the divestiture of MAKS in both years relates to the Company's strategic divestiture of this business. Operating margin 47.6%, up 610 BPS Adjusted
Operating Margin 52.3%, up 410 BPS
Operating margin and Adjusted Operating Margin expansion reflects strong revenue growth partially offset by modest growth in expenses.
Interest Expense, net ? $4 million Other non-operating income ? $26 million
Primarily reflects: The increase is primarily due to:
- a combined $24 million prepayment penalty in - FX gains of $7 million in the first nine
the first nine months of 2020 on the early months of 2020 compared to $15 million in FX
redemption of the 2018 Senior Notes and 2017 losses in the same period of the prior year.
Senior Notes; partially offset by
- a $17 million benefit from a fair value hedge
settled in connection with the early redemption
of the 2017 Senior Notes
ETR ? 140 BPS
The decrease in the ETR is primarily due to a deferred tax benefit resulting
from a non-
Diluted EPS ? $2.19 Adjusted Diluted EPS ? $1.95 Diluted EPS in the first nine months of 2020 of Adjusted Diluted EPS of
$1.95 compared to the first nine months of 2019 period in 2019, with both periods including the (refer to the section entitled "Non-GAAP aforementioned restructuring charges. The growth Financial Measures" of this MD&A for items in EPS is mainly due to the aforementioned excluded in the derivation of Adjusted Diluted growth in operating income. EPS). The growth in Adjusted Diluted EPS is primarily due to the aforementioned growth in Adjusted Operating Income. 73
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Table of Contents Segment ResultsMoody's Investors Service The table below provides a summary of revenue and operating results, followed by further insight and commentary: Nine Months Ended September 30, % Change Favorable 2020 2019 (Unfavorable) Revenue: Corporate finance (CFG)$ 1,486 $ 1,135 31 % Structured finance (SFG) 265 318 (17 %) Financial institutions (FIG) 401 361 11 % Public, project and infrastructure finance (PPIF) 375 321 17 % Total ratings revenue 2,527 2,135 18 % MIS Other 30 20 50 % Total external revenue 2,557 2,155 19 % Intersegment royalty 110 100 10 % Total 2,667 2,255 18 % Expenses: Operating and SG&A (external) 982 939 (5 %) Operating and SG&A (intersegment) 5 7 29 % Restructuring 12 29 59 % Depreciation and amortization 52 53 2 % Total expense 1,051 1,028 (2 %) Operating income$ 1,616 $ 1,227 32 % Restructuring 12 29 59 % Depreciation and amortization 52 53 2 % Captive insurance company settlement - 10 100 % Adjusted Operating Income$ 1,680 $ 1,319 27 % Operating margin 60.6 % 54.4 % Adjusted Operating Margin 63.0 % 58.5 % 74
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Table of Contents MOODY'S INVESTORS SERVICE REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________ [[Image Removed: mco-20200930_g48.jpg]] [[Image Removed: mco-20200930_g49.jpg]] [[Image Removed: mco-20200930_g50.jpg]] [[Image Removed: mco-20200930_g51.jpg]]
MIS: Global revenue ?
-The increase in global MIS revenue (and in both
CFG REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________ [[Image Removed: mco-20200930_g52.jpg]] [[Image Removed: mco-20200930_g53.jpg]] [[Image Removed: mco-20200930_g54.jpg]] [[Image Removed: mco-20200930_g55.jpg]]
CFG: Global revenue ?
Global CFG revenue for the nine months ended
[[Image Removed: mco-20200930_g56.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.
75
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Table of Contents The increase in CFG revenue of 31% reflected growth both in theU.S. (40%) and internationally (15%) which resulted in a$334 million increase in transaction revenue. The most notable drivers of the CFG revenue growth were: -strong growth in investment-grade rated issuance volumes reflecting: -corporate issuers bolstering their liquidity positions in light of uncertainties regarding the duration and severity of the COVID-19 crisis; -opportunistic issuance for both refinancing and M&A activity in light of current favorable market conditions. -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 and third quarters of 2020, high-yield market sentiment improved and credit spreads tightened resulting in strong growth in rated issuance volumes; 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 and issuer/investor preference for fixed-rate bonds.
SFG REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________ [[Image Removed: mco-20200930_g57.jpg]] [[Image Removed: mco-20200930_g58.jpg]]
[[Image Removed: mco-20200930_g59.jpg]][[Image Removed: mco-20200930_g60.jpg]]
SFG: Global revenue ?
Global SFG revenue for the nine months ended
[[Image Removed: mco-20200930_g61.jpg]]
The decrease in SFG revenue of 17% reflected declines both in the U.S. (21%) and
internationally (10%). Transaction revenue declined $58 million . The most
notable factors contributing to the decline in SFG revenue were:
-reduced activity in the CLO asset class resulting from:
-challenges in the leveraged loan market (refer to CFG discussion above);
-widening credit spreads in response to uncertainties relating to the COVID-19
crisis; and
-an increasingly competitive landscape.
76
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Table of Contents -declines inU.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-20200930_g62.jpg]] [[Image Removed: mco-20200930_g63.jpg]] [[Image Removed: mco-20200930_g64.jpg]] [[Image Removed: mco-20200930_g65.jpg]]
FIG: Global revenue ?
Global FIG revenue for the nine months ended
[[Image Removed: mco-20200930_g66.jpg]]
Transaction revenue grew by
The 11% increase in FIG revenue was mainly due to: -growth inU.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 favorable market conditions; -issuance in advance of anticipated volatility around theU.S. presidential election in the fourth quarter of 2020; and -benefits from favorable changes in product mix and pricing increases. 77
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Table of Contents PPIF REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________ [[Image Removed: mco-20200930_g67.jpg]] [[Image Removed: mco-20200930_g26.jpg]] [[Image Removed: mco-20200930_g68.jpg]] [[Image Removed: mco-20200930_g69.jpg]]
PPIF: Global revenue ?
Global PPIF revenue for the nine months ended
[[Image Removed: mco-20200930_g70.jpg]]
Transaction revenue increased $49 million compared to the same period in the
prior year.
The 17% increase in PPIF revenue resulted primarily from:
-higher U.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 ? $43 million
[[Image Removed: mco-20200930_g71.jpg]]
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Table of Contents The growth reflects a$36 million and$7 million increase in compensation and non-compensation expenses, respectively. The most notable drivers of these increases are as follows: Compensation costs Non-compensation costs The increase is primarily due to: The increase is primarily due to: - annual salary increases and hiring; partially - approximately$15 million in higher costs to offset by: support the
Company's initiative to enhance
technology infrastructure to enable automation,
innovation and efficiency as well as to support
business growth;
- benefits from the 2018 Restructuring Program - higher estimates for bad debt reserves of
million primarily resulting from the anticipated
impact of the COVID-19 crisis on the Company's
customers; partially offset by:
- lower travel costs
of
expense management in light of the COVID-19 crisis;
and
- a $10 million charge in the prior year for a
captive insurance company settlement
Other Expenses
The restructuring charges in both years relate to the Company's 2020 Restructuring
Program and 2018 Restructuring Program as more fully discussed in Note 12 to the
condensed consolidated financial statements.
MIS: Operating Margin of 60.6% ? 620 BPS Adjusted Operating Margin of 63.0% ? 450 BPS
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: Nine Months Ended September 30, % Change Favorable 2020 2019 (Unfavorable) Revenue: Research, data and analytics (RD&A) (1) $ 1,110$ 940 18 % Enterprise risk solutions (ERS) 414 373 11 % Professional services (PS) (1) - 128 (100 %) Total external revenue 1,524 1,441 6 % Intersegment revenue 5 7 (29 %) Total MA Revenue 1,529 1,448 6 % Expenses: Operating and SG&A (external) 963 941 (2 %) Operating and SG&A (intersegment) 110 100 (10 %) Restructuring 8 29 72 % Depreciation and amortization 111 97 (14 %) Acquisition-Related Expenses - 3 100 % Loss pursuant to the divestiture of MAKS 9 11 18 % Total expense 1,201 1,181 (2 %) Operating income $ 328$ 267 23 % Restructuring 8 29 72 % Depreciation and amortization 111 97 (14 %) Acquisition-Related Expenses - 3 100 % Loss pursuant to the divestiture of MAKS 9 11 18 Captive insurance company settlement - 6 100 Adjusted Operating Income $ 456$ 413 10 % Operating margin 21.5 % 18.4 % Adjusted Operating Margin 29.8 % 28.5 % (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. 80
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Table of Contents MOODY'S ANALYTICS REVENUE 2020----------------------------------------------------------------------------------------------------------------------2019 __________________________________________________________________________________________________________________________________________________________ [[Image Removed: mco-20200930_g72.jpg]] [[Image Removed: mco-20200930_g73.jpg]] [[Image Removed: mco-20200930_g33.jpg]] [[Image Removed: mco-20200930_g74.jpg]]
MA: Global revenue ?
The 6% 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. -The increase in relationship revenue as a percentage of total revenue from 85% in the first nine 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-20200930_g75.jpg]]
[[Image Removed: mco-20200930_g36.jpg]][[Image Removed: mco-20200930_g37.jpg]]
[[Image Removed: mco-20200930_g38.jpg]]
RD&A: Global revenue ?
Global RD&A revenue grew 18% compared to the first nine months 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 9%.
81
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Table of Contents
ERS REVENUE
2020----------------------------------------------------------------------------------------------------------------------2019
__________________________________________________________________________________________________________________________________________________________
[[Image Removed: mco-20200930_g76.jpg]][[Image Removed: mco-20200930_g40.jpg]][[Image Removed: mco-20200930_g77.jpg]]
[[Image Removed: mco-20200930_g78.jpg]]
ERS: Global revenue ?
Global ERS revenue increased 11% compared to the first nine months 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 ? $22 million
[[Image Removed: mco-20200930_g79.jpg]]
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Table of Contents The increase in operating and SG&A expenses compared to the first nine months of 2019 is primarily due to growth in both compensation non-compensation costs of$13 million and$9 million , respectively, reflecting: Compensation costs Non-compensation costs The increase is primarily due to: The increase is primarily due to: - annual salary increases and hiring; - approximately$44
million in higher costs to
support the Company's initiative to enhance
technology infrastructure to enable automation,
innovation and efficiency as well as to support
business growth;
- higher incentive compensation accruals aligned - higher estimates for bad debt reserves of
million primarily resulting from the anticipated
impact of the COVID-19 crisis on the Company's
customers;
partially offset by:
- benefits from the 2018 Restructuring Program - lower travel costs of
disciplined expense management across other
expense categories in light of the COVID-19
crisis; and
- a $6 million charge in the prior year for a
captive insurance company settlement
Other Expenses
The restructuring charges in both years relate to the Company's 2020
Restructuring Program and 2018 Restructuring Program as more fully discussed in
Note 12 to the condensed consolidated financial statements.
The $9 million and $11 million losses pursuant to the divestiture of MAKS in
both 2020 and 2019 relate to the Company's strategic divestiture of this
business.
MA: Operating Margin 21.5% ? 310BPS Adjusted Operating Margin 29.8% ? 130BPS
The operating margin and Adjusted Operating Margin expansion for MA both reflect
RD&A and ERS revenue growth partially offset by modest expense growth. Operating
margin expansion also benefitted from a lower restructuring charge in the first
nine months of 2020 compared to the same period in the prior year. Both the
operating margin and Adjusted Operating Margin were suppressed by higher bad
debt reserves in the first nine months of 2020.
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:
Nine Months Ended September 30, $ Change
Favorable
2020 2019 (Unfavorable)
Net cash provided by operating activities
292
Net cash used in investing activities $ (853) $ (150) $ (703)
Net cash provided by (used in) financing $ 3 $ (1,517) $ 1,520
activities
Free Cash Flow (1) $ 1,405 $ 1,135 $ 270
(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.
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Net cash provided by operating activities Net cash flows from operating activities in the nine months endedSeptember 30, 2020 increased$292 million compared to same period in 2019 with the most significant drivers reflecting: -an increase in net income compared to the same period in the prior year (see section entitled "Results of Operations" for further discussion); partially offset by: -a$99 million contribution to the Company's funded pension plan in the first quarter of 2020; and -a$68 million payment made in conjunction with the settlement of treasury lock interest rate forward contracts as more fully described in Note 10 to the condensed consolidated financial statements. Net cash used in investing activities The$703 million increase in cash used in investing activities in the nine months endedSeptember 30, 2020 compared to the same period in 2019 primarily reflects: -an increase in cash paid for acquisitions of$578 million (refer to Note 9 to the condensed consolidated financial statements for further discussion on the Company's M&A activity); -$101 million in higher net purchases of investments in the first nine months of 2020 compared to the same period in the prior year. Net cash provided by (used in) financing activities The$1,520 million increase in cash flows provided by financing activities in the nine months endedSeptember 30, 2020 compared to the same period in the prior year was primarily attributed to: -the net issuance of$691 million in long-term debt during the first nine months 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$475 million compared to the first nine months of 2019. Cash and short-term investments held in non-U.S. jurisdictions The Company's aggregate cash and cash equivalents and short-term investments of$2.6 billion atSeptember 30, 2020 consisted of approximately$1.5 billion located outside of theU.S. Approximately 10% 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 84
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Table of Contents 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 OnOctober 27, 2020 , the Board of Directors of the Company declared a quarterly dividend of$0.56 per share of Moody's common stock, payableDecember 14, 2020 to shareholders of record at the close of business onNovember 23, 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 atSeptember 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. Beginning late in the first quarter of 2020 and through the third 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 Company anticipates resuming its share repurchase program in the fourth quarter of 2020. 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 nine months of 2020, in response to uncertainties relating to the severity and duration of the COVID-19 crisis, the Company increased its long-term debt position by$700 million via public offerings to bolster liquidity. The key terms of these transactions are presented in Note 17 to the condensed consolidated financial statements. AtSeptember 30, 2020 , Moody's had$6.4 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. AtSeptember 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. AtSeptember 30, 2020 , there were no such cross defaults. The repayment schedule for the Company's borrowings outstanding atSeptember 30, 2020 is as follows: [[Image Removed: mco-20200930_g80.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. 85
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Table of Contents Off-Balance Sheet Arrangements AtSeptember 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 ofSeptember 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)$ 9,127 $ 197
592 27 203 171 191
Purchase obligations 208 91 106 11 -
Pension obligations (2) 151 2 45 28 76
Total (3) $ 10,078 $ 317 $ 1,736 $ 1,707 $ 6,318
(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
$471 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 $33 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 .
Non-GAAP Financial Measures:
In addition to its reported results, Moody's has included in this MD&A certain
adjusted results that the SEC 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; iv) loss pursuant to the
divestiture of MAKS; and v) a captive insurance company settlement.
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 Bureau van 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. The captive insurance
company settlement relates to the resolution of a matter that is not expected to
recur in the future at this magnitude.
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Management believes that the exclusion of the aforementioned items, as detailed
in the reconciliation below, allows for an additional perspective on the
Company's operating results from period to period and across companies. The
Company defines Adjusted Operating Margin as Adjusted Operating Income divided
by revenue.
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Operating income $ 642 $ 549 $ 1,944 $ 1,494
Adjustments:
Restructuring 23 (1) 20 58
Depreciation and amortization 56 48 163 150
Acquisition-Related Expenses - - - 3
Loss pursuant to the divestiture of MAKS - 2 9 11
Captive insurance company settlement - 16 - 16
Adjusted Operating Income $ 721 $ 614 $ 2,136 $ 1,732
Operating margin 47.3 % 44.3 % 47.6 % 41.5 %
Adjusted Operating Margin 53.2 % 49.5 % 52.3 % 48.2 %
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; iv) loss and a tax charge pursuant to the divestiture of
MAKS; and v) a captive insurance company settlement.
Acquisition-Related Expenses consist of expenses incurred to complete and
integrate the acquisition of Bureau van 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. These intangible assets were recorded as part of acquisition accounting
and contribute to revenue generation. The amortization of intangible assets
related to acquisitions will recur in future periods until such intangible
assets have been fully amortized. Furthermore, the timing and magnitude of
business combination transactions are not predictable and the purchase price
allocated to amortizable intangible assets and the related amortization period
are unique to each acquisition and can vary significantly from period to period
and across companies. Restructuring charges 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 captive insurance company settlement relates to
the resolution of a matter that is not expected to recur in the future at this
magnitude.
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.
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Table of Contents Below is a reconciliation of this measure to its most directly comparableU.S. GAAP amount: Three Months Ended September 30, Nine Months Ended September 30, Amounts in millions 2020 2019 2020 2019 Net income attributable to Moody's common shareholders$ 467 $ 380 $ 1,464 $ 1,062 Pre-Tax Acquisition-Related Expenses $ - $ - $ -$ 3 Tax on Acquisition-Related Expenses - - - - Net Acquisition-Related Expenses - - - 3 Pre-Tax Acquisition-Related Intangible Amortization Expenses$ 31 $ 24 $ 90 $ 77 Tax on Acquisition-Related Intangible Amortization Expenses (7) (6) (20) (18) Net Acquisition-Related Intangible Amortization Expenses 24 18 70 59 Pre-Tax Restructuring$ 23 $ (1) $ 20 $ 58 Tax on Restructuring (5) - (4) (14) Net Restructuring 18 (1) 16 44 Pre-Tax captive insurance company settlement $ -$ 16 $ -$ 16 Tax on captive insurance company settlement - (4) - (4) Net captive insurance company settlement - 12 - 12 Tax charge pursuant to the divestiture of MAKS - - - 15 Loss pursuant to the divestiture of MAKS - 2 9 11 Adjusted Net Income$ 509 $ 411 $ 1,559 $ 1,206 88
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Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Diluted earnings per share attributable
to Moody's common shareholders $ 2.47 $ 1.99 $ 7.73 $ 5.54
Pre-Tax Acquisition-Related Expenses $ - $ - $ - $ 0.02
Tax on Acquisition-Related Expenses - - - (0.01)
Net Acquisition-Related Expenses - - - 0.01
Pre-Tax Acquisition-Related Intangible
Amortization Expenses $ 0.16 $ 0.13 $ 0.47 $ 0.40
Tax on Acquisition-Related Intangible
Amortization Expenses (0.04) (0.04) (0.09) (0.09)
Net Acquisition-Related Intangible
Amortization Expenses 0.12 0.09 0.38 0.31
Pre-Tax Restructuring $ 0.12 $ (0.01) $ 0.10 $ 0.30
Tax on Restructuring (0.02) 0.01 (0.02) (0.07)
Net Restructuring 0.10 - 0.08 0.23
Pre-Tax captive insurance company
settlement $ - $ 0.08 $ - $ 0.08
Tax on captive insurance company
settlement - (0.02) - (0.02)
Net captive insurance company settlement - 0.06 - 0.06
Tax charge pursuant to the divestiture of
MAKS - - - 0.08
Loss pursuant to the divestiture of MAKS - 0.01 0.05 0.06
Adjusted Diluted EPS $ 2.69 $ 2.15 $ 8.24 $ 6.29
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:
Nine Months Ended September 30,
2020 2019
Net cash flows provided by operating activities $ 1,488 $ 1,196
Capital additions (83) (61)
Free Cash Flow $ 1,405 $ 1,135
Net cash flows used in investing activities $ (853) $ (150)
Net cash flows provided by (used in) financing activities $ 3
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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 September 30 Nine Months Ended September 30
RiskFirst July 25, 2019 July 1, 2020 - July 24, 2020 January 1, 2020 - July 24, 2020
ABS Suite October 1, 2019 July 1, 2020 - September 30, 2020 January 1, 2020 -
2020
Regulatory DataCorp February 13, 2020 July 1, 2020 - September 30, 2020 February 13, 2020 - September 30,
2020
Divestiture Divestiture Date
MAKS November 7, 2019 July 1, 2019 - September 30, 2019 January 1, 2019 - September 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 September 30, Nine Months Ended September 30,
Amounts in millions 2020 2019 Change Growth 2020 2019 Change Growth
MA revenue $ 531 $ 494 $ 37 7% $ 1,524 $ 1,441 $ 83 6%
RiskFirst (2) - (2) (12) - (12)
ABS Suite (3) - (3) (6) - (6)
Regulatory DataCorp (16) - (16) (37) - (37)
MAKS - (28) 28 - (83) 83
Organic MA revenue $ 510 $ 466 $ 44 9% $ 1,469 $ 1,358 $ 111 8%
Three Months Ended September 30, Nine Months Ended September 30,
Amounts in millions 2020 2019 Change Growth 2020 2019 Change Growth
RD&A revenue $ 386 $ 317 $ 69 22% $ 1,110 $ 940 $ 170 18%
ABS Suite (3) - (3) (6) - (6)
Regulatory DataCorp (16) - (16) (37) - (37)
MALS (13) - (13) (40) - (40)
Organic RD&A revenue $ 354 $ 317 $ 37 12% $ 1,027 $ 940 $ 87 9%
Three Months Ended September 30, Nine Months Ended September 30,
Amounts in millions 2020 2019 Change Growth 2020 2019 Change Growth
ERS revenue $ 145 $ 134 $ 11 8% $ 414 $ 373 $ 41 11%
RiskFirst (2) - (2) (12) - (12)
Organic ERS revenue $ 143 $ 134 $ 9 7% $ 402 $ 373 $ 29 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-EU 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, methodologies, models and key rating assumptions, CRA rotation and 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 2021 work program includes, amongst others, monitoring, identifying and assessing new risks such as those emanating from COVID-19 and Environmental, Social and Governance (ESG) products, assessing the drivers behind changes to credit rating methodologies, engaging with CRAs on IT and information security controls and ensuring that credit ratings are accessible and usable by investors. 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 the 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 ratings and 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 91
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Table of Contents expected that from the start of 2021, relevant legislation for CRAs under the supervision of theFinancial Conduct Authority will come into force in theU.K. 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. 92
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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 50 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 Brexit and uncertainty as companies transition away from LIBOR; 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. 93
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