Moody's Corp (NYSE:MCO) Q2 2021 Earnings Conference Call July 28, 2021 11:30 AM ET Company Participants Shivani Kak - Head, IR Robert Fauber - President, CEO & Director Mark Kaye - SVP & CFO Conference Call Participants Manav Patnaik - Barclays Bank Kevin McVeigh - Crédit Suisse George Tong - Goldman Sachs Group Toni Kaplan - Morgan Stanley Alexander Kramm - UBS Owen Lau - Oppenheimer Jeffrey Silber - BMO Capital Markets Craig Huber - Huber Research Partners Andrew Nicholas - William Blair & Company Ashish ...

Financial Data and Key Metrics Changes - Moody's reported a revenue growth of 24% in Q1 2021, with adjusted diluted EPS increasing by 49% to $4.06 [8][9] - Adjusted operating income rose 41% to $914 million, and the adjusted operating margin expanded by 680 basis points to 57.1% [9][20] - The company updated its full-year 2021 guidance, projecting revenue to increase in the high single-digit percent range and adjusted diluted EPS to be in the range of $11 to $11.30 [8][24] Business Line Data and Key Metrics Changes - Moody's Investor Service (MIS) generated over $1 billion in revenue, up 30% year-over-year, marking the first time MIS revenue exceeded $1 billion in a single quarter [8][19] - Moody's Analytics (MA) revenue grew by 14%, with subscription-based products driving this growth [8][20] - MIS's adjusted operating margin expanded to 67.7%, while MA's adjusted operating margin increased to 32.9% [20][24] Market Data and Key Metrics Changes - Issuance volumes reached their highest level in over a decade, with leveraged loans and high-yield bond issuance increasing by 94% and 85%, respectively [10][11] - The global speculative-grade default rate is expected to decline to approximately 3% to 4% by year-end, improving the outlook for corporate defaults [11][23] - Investment-grade issuance is expected to decline by approximately 30% for the full year, while high-yield bonds and leveraged loans are projected to be flat and up 55%, respectively [25][26] Company Strategy and Development Direction - The company is focused on innovation and integrating new features into its products to meet evolving customer needs, particularly in areas like ESG and climate [13][15] - Moody's is making strategic investments in KYC, commercial real estate, and ESG, aiming to enhance its risk assessment capabilities [44][45] - The company is also integrating recent acquisitions to improve its offerings and customer solutions [17][18] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the economic backdrop, which supports business growth and capital investment, while acknowledging potential challenges such as a third wave of infections [11][68] - The company anticipates a modest decline in issuance in the second half of 2021, as many issuers are expected to fulfill their funding needs earlier in the year [25][49] - Management highlighted the importance of economic growth as a key driver for the business over the medium and long term [78] Other Important Information - The company is maintaining its expense growth expectations in the mid-single-digit percent range while focusing on cost efficiency initiatives [24][29] - Moody's free cash flow forecast is expected to be between $2.1 billion and $2.2 billion, with share repurchases anticipated at approximately $1.5 billion [25] Q&A Session Summary Question: Insights on the full-year guidance raise - Management noted that the full-year adjusted EPS guidance was increased to approximately $11.15, reflecting strong operating performance from MIS [34] Question: Clarification on MIS margins - Management explained that the guidance for MIS margins is approximately 61%, with expectations for lower margins in the latter part of the year due to tough comparables and issuance activity [36] Question: Opportunities in insurance and commercial real estate - Management discussed the growth in the insurance business driven by IFRS 17 compliance and the integration of data analytics in commercial real estate solutions [40][41] Question: Update on M&A opportunities - Management emphasized a focus on acquiring assets that enhance risk assessment capabilities and meet evolving customer needs [44][45] Question: Clarification on issuance outlook - Management acknowledged that Q2 2020 had a surge in issuance, making it a tough comparable, and expects a modest decline in issuance in Q2 and Q3 [49][50] Question: Discussion on refinancing pull-forward activity - Management indicated that many borrowers pulled forward their 2021 funding plans to take advantage of favorable rates, impacting the issuance outlook [75]

[Glossary of Terms and Abbreviations](index=4&type=section&id=Glossary%20of%20Terms%20and%20Abbreviations) [Glossary of Terms and Abbreviations](index=4&type=section&id=Glossary%20of%20Terms%20and%20Abbreviations) This section defines key terms, abbreviations, and acronyms used throughout the report - The glossary defines key operational and financial terms used in the report, including the two main reportable segments: **Moody's Investors Service (MIS)** and **Moody's Analytics (MA)**[8](index=8&type=chunk) - Several recent acquisitions are defined, highlighting the company's strategic focus areas, such as **Regulatory Data Corporation (RDC)** for KYC services, **Vigeo Eiris (VE)** for ESG research, and **ZM Financial Systems (ZMFS)** for risk management software[10](index=10&type=chunk)[11](index=11&type=chunk) - The glossary includes definitions for various restructuring programs, such as the **2020 Real Estate Rationalization** and the **2020 MA Strategic Reorganization**, indicating recent operational adjustments[11](index=11&type=chunk) Part I [Item 1. Business](index=10&type=section&id=Item%201.%20Business) Moody's operates as a global integrated risk assessment firm with two main segments, MIS for credit ratings and MA for data solutions [The Company](index=10&type=section&id=The%20Company) The company operates as a global risk assessment firm with two segments, MIS and MA, generating $5.4 billion in 2020 revenue 2020 Financial Highlights by Segment | Segment | 2020 Revenue Contribution | 2020 Operating Margin | 2020 Adjusted Operating Margin | | :--- | :--- | :--- | :--- | | **Moody's Corporation Total** | **$5.4 billion** | **44.5%** | **49.7%** | | Moody's Investors Service (MIS) | 61% (approx. $3.3B) | 57.1% | 59.7% | | Moody's Analytics (MA) | 39% (approx. $2.1B) | 20.3% | 29.4% | - The company's strategic evolution focuses on expanding beyond its traditional ratings agency role by building out data and analytics capabilities, particularly through acquisitions like **Bureau van Dijk (BvD)** for private company information[15](index=15&type=chunk) - Moody's is positioned to serve high-growth risk assessment use cases, such as **Know-Your-Customer (KYC)** and compliance, by integrating its data and analytics with technology and expertise[15](index=15&type=chunk) [Human Capital](index=16&type=section&id=Human%20Capital) The company employed 11,490 people in 2020, a 4% increase, with a focus on diversity, equity, and inclusion initiatives Employee Headcount by Segment (as of Dec 31) | Segment | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | MIS | 5,076 | 4,811 | 6% | | MA | 4,967 | 4,833 | 3% | | MSS | 1,447 | 1,437 | 1% | | **Total MCO** | **11,490** | **11,081** | **4%** | - The company is focused on diversity, equity, and inclusion, with objectives to increase diverse representation; as of December 31, 2020, women comprised **38% of the total workforce** and **35% of officers and managers**[27](index=27&type=chunk)[28](index=28&type=chunk)[29](index=29&type=chunk) - **Voluntary employee turnover decreased in 2020** compared to 2019, a trend attributed to the labor market effects of the COVID-19 pandemic[36](index=36&type=chunk) [Moody's Strategy](index=20&type=section&id=Moody's%20Strategy) The company's growth strategy combines organic development with targeted acquisitions to enhance its core businesses and expand into new markets Key 2020 Acquisitions and Strategic Investments | Date | Business Area | Company Acquired/Invested In | Stake | Strategic Rationale | | :--- | :--- | :--- | :--- | :--- | | Dec 2020 | Commercial Real Estate | Catylist, Inc | 100% | Enhance MA's CRE platform with property-level data for the broker market | | Dec 2020 | Risk Solutions | ZM Financial Systems | 100% | Broaden MA's suite of enterprise risk solutions for the U.S. banking sector | | Nov 2020 | ESG & KYC | MioTech | Minority | Provide technology-enabled ESG and KYC solutions for China's financial markets | | Oct 2020 | Data | Acquire Media | 100% | Strengthen MA's ability to provide real-time insights and early warning signals | | Feb 2020 | KYC | Regulatory DataCorp (RDC) | 100% | Complement the 2017 acquisition of Bureau van Dijk (BvD) to create a global leader in compliance solutions | - Future strategic priorities include sharpening customer focus, investing with intent to grow and scale, and collaborating to modernize and innovate, particularly in technology interoperability and data access[43](index=43&type=chunk) [Prospects for Growth](index=22&type=section&id=Prospects%20for%20Growth) Long-term growth is anticipated from the expansion of global fixed-income and financial information markets, including ESG and KYC - The company identifies strong secular trends providing long-term growth opportunities for MIS, including debt market issuance driven by global GDP and the disintermediation of fixed-income markets[48](index=48&type=chunk) - Growth drivers for MA include expansion into adjacent data and analytics markets such as **ESG, KYC, and CRE**, as well as the continued shift to SaaS-based solutions for credit decisioning[51](index=51&type=chunk)[53](index=53&type=chunk) - **ESG data and solutions** are expected to be an increasingly important growth driver across both the MIS and MA segments as market participants seek trusted insights for decision-making[44](index=44&type=chunk) [Regulation](index=24&type=section&id=Regulation) The company operates in a highly regulated industry with significant oversight from the SEC in the U.S. and ESMA in the EU - In the U.S., Credit Rating Agencies (CRAs) are regulated by the SEC pursuant to the **Reform Act** and the **Dodd-Frank Act**, which enhanced oversight and changed liability standards[57](index=57&type=chunk) - In the EU, the industry is supervised by the **European Securities and Markets Authority (ESMA)**, which sets rules on methodologies, conflicts of interest, and sovereign ratings[57](index=57&type=chunk) - Following Brexit, the MIS U.K. registered CRA is now regulated by the U.K. Financial Conduct Authority, with arrangements in place to endorse ratings between the U.K. and EU[57](index=57&type=chunk) [Item 1A. Risk Factors](index=29&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks across legal, regulatory, business, and technology domains, including the impact of COVID-19 - Legal and regulatory risks are prominent, stemming from complex and evolving laws in the U.S. (**Dodd-Frank Act**) and abroad (**EU regulations via ESMA**) that could increase costs and heighten litigation exposure[73](index=73&type=chunk)[78](index=78&type=chunk) - Business results are highly sensitive to the volume of debt securities issued in capital markets, which is influenced by economic conditions, interest rates, and market volatility[104](index=104&type=chunk)[105](index=105&type=chunk)[119](index=119&type=chunk) - The company is exposed to significant technology risks, including **cybersecurity threats** targeting its systems and confidential data, the need to comply with various data privacy laws like **GDPR**, and reliance on third-party infrastructure[125](index=125&type=chunk)[129](index=129&type=chunk)[130](index=130&type=chunk) - The global **COVID-19 pandemic** is highlighted as a material risk factor that could adversely impact operations, financial performance, and the achievement of strategic objectives[117](index=117&type=chunk)[118](index=118&type=chunk) [Item 2. Properties](index=40&type=section&id=Item%202.%20Properties) The company's operations are conducted from 124 leased offices worldwide, with its headquarters in New York City - The company's principal executive offices are at **7 World Trade Center, New York, NY**[133](index=133&type=chunk) - As of year-end 2020, Moody's conducted its business from a total of **124 leased office locations worldwide** (26 in the U.S. and 98 non-U.S.)[133](index=133&type=chunk) Part II [Item 5. Market for the Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities](index=41&type=section&id=Item%205.%20Market%20for%20the%20Registrant's%20Common%20Equity,%20Related%20Shareholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) This section details information about Moody's common stock, shareholder matters, and share repurchase activities Share Repurchases (Q4 2020) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 1-31 | — | — | | Nov 1-30 | 395,735 | $277.73 | | Dec 1-31 | 502,196 | $278.92 | | **Total Q4** | **897,931** | **$278.40 (weighted avg.)** | - As of December 31, 2020, Moody's had approximately **$831 million remaining** under its share repurchase authority, with an additional **$1.0 billion approved** in February 2021[136](index=136&type=chunk) - The company's **5-year cumulative total shareholder return was 206%**, significantly outperforming the S&P 500 (103%) and Russell 3000 Financial Services (84%) indices[140](index=140&type=chunk)[142](index=142&type=chunk) [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=43&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In 2020, revenue grew 11% to $5.37 billion and Diluted EPS rose 27% to $9.39, driven by strong performance in both MIS and MA segments [Results of Operations](index=50&type=section&id=Results%20of%20Operations) Total revenue increased 11% to $5.37 billion in 2020, driven by strong corporate debt issuance in MIS and acquisition-led growth in MA Moody's Corporation Full Year 2020 vs. 2019 Financial Summary | Financial Metric | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $5,371 M | $4,829 M | 11% | | Operating Income | $2,388 M | $1,998 M | 20% | | Adjusted Operating Income | $2,667 M | $2,291 M | 16% | | Operating Margin | 44.5% | 41.4% | +310 bps | | Adjusted Operating Margin | 49.7% | 47.4% | +230 bps | | Diluted EPS | $9.39 | $7.42 | 27% | | Adjusted Diluted EPS | $10.15 | $8.29 | 22% | - **MIS revenue grew 15% to $3.29 billion**, primarily driven by a 24% increase in Corporate Finance Group (CFG) revenue from higher debt issuance as companies bolstered liquidity amid COVID-19 uncertainty[179](index=179&type=chunk)[192](index=192&type=chunk)[198](index=198&type=chunk) - **MA revenue grew 6% to $2.08 billion** (8% on an organic basis), led by a 19% increase in Research, Data, and Analytics (RD&A) revenue from strong demand for KYC solutions and acquisitions[179](index=179&type=chunk)[212](index=212&type=chunk)[217](index=217&type=chunk) [Liquidity and Capital Resources](index=65&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintained a strong liquidity position, generating $2.04 billion in free cash flow and increasing long-term debt by a net $691 million Summary of Cash Flows (in millions) | Cash Flow Activity | 2020 | 2019 | $ Change | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $2,146 | $1,675 | $471 | | Net cash (used in) provided by investing activities | $(1,077) | $36 | $(1,113) | | Net cash used in financing activities | $(351) | $(1,563) | $1,212 | | **Free Cash Flow** | **$2,043** | **$1,606** | **$437** | - In 2020, the company increased its long-term debt position by a **net $691 million** to enhance liquidity in response to COVID-19 uncertainties[231](index=231&type=chunk)[237](index=237&type=chunk) - As of December 31, 2020, the company had **$2.7 billion in cash, cash equivalents, and short-term investments**, of which approximately $1.5 billion was located outside the U.S[231](index=231&type=chunk) [Item 8. Financial Statements](index=73&type=section&id=Item%208.%20Financial%20Statements) This section contains the audited consolidated financial statements for the fiscal year ended December 31, 2020 [Consolidated Statements of Operations](index=77&type=section&id=Consolidated%20Statements%20of%20Operations) For 2020, total revenues were $5.371 billion, operating income was $2.388 billion, and diluted EPS was $9.39 Consolidated Statement of Operations Highlights (in millions, except EPS) | Line Item | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Revenue | $5,371 | $4,829 | $4,443 | | Operating income | $2,388 | $1,998 | $1,868 | | Net income attributable to Moody's | $1,778 | $1,422 | $1,310 | | Diluted EPS | $9.39 | $7.42 | $6.74 | [Consolidated Balance Sheets](index=79&type=section&id=Consolidated%20Balance%20Sheets) As of December 31, 2020, total assets were $12.41 billion and total liabilities were $10.65 billion Consolidated Balance Sheet Highlights (in millions) | Line Item | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $2,597 | $1,832 | | Goodwill | $4,556 | $3,722 | | **Total Assets** | **$12,409** | **$10,265** | | **Liabilities & Equity** | | | | Long-term debt | $6,422 | $5,581 | | **Total Liabilities** | **$10,646** | **$9,428** | | **Total Moody's Shareholders' Equity** | **$1,569** | **$612** | [Consolidated Statements of Cash Flows](index=80&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) For 2020, net cash from operations was $2.15 billion, with $897 million used for acquisitions and $923 million for share repurchases and dividends Consolidated Statement of Cash Flows Highlights (in millions) | Line Item | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $2,146 | $1,675 | $1,461 | | Net cash (used in) provided by investing activities | $(1,077) | $36 | $(406) | | Net cash used in financing activities | $(351) | $(1,563) | $(412) | | **Increase in cash and cash equivalents** | **$765** | **$147** | **$613** | Part III [Items 10-14](index=132&type=section&id=Items%2010-14) This section incorporates information by reference from the company's 2021 definitive proxy statement - Information required for Items 10 through 14 is incorporated by reference from the Registrant's definitive proxy statement for its annual meeting of stockholders scheduled for April 20, 2021[497](index=497&type=chunk) Part IV [Item 15. Exhibits and Financial Statement Schedules](index=133&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists the documents filed as part of the Form 10-K report, including an index of all exhibits - This section provides a comprehensive list of all exhibits filed with the Form 10-K, including corporate governance documents, debt indentures, and management compensation plans[502](index=502&type=chunk)[503](index=503&type=chunk)

Financial Data and Key Metrics Changes - Moody's achieved record financial results in 2020, with revenue growth of 11% and an increase in adjusted diluted EPS of 22% [9] - Adjusted operating income rose 16% to $2.7 billion, and adjusted operating margin expanded by 230 basis points to 49.7% [11] - For 2021, Moody's projects revenue to increase in the mid-single digit percent range, with adjusted diluted EPS forecasted to be between $10.30 and $10.70 [10][32] Business Line Data and Key Metrics Changes - Moody's Investors Service (MIS) generated $3.3 billion in revenue, up 15% from the prior year, while Moody's Analytics (MA) revenue totaled $2.1 billion, up 6% [9] - MA's recurring revenue now comprises over 90% of its total, driven by a strategic focus on subscription-based business [15] - In Q4 2020, MIS revenue increased by 2%, while MA revenue grew by 8% [24] Market Data and Key Metrics Changes - Credit market activity reached record levels in 2020, particularly for non-financial corporate issuance, which grew over 16% from its previous high in 2017 [14] - Investment grade issuance is projected to decline approximately 30% in 2021, while leveraged loan issuance is expected to grow by about 10% [33] - The global high-yield default rate is expected to decline below 5% by year-end 2021 [30] Company Strategy and Development Direction - Moody's aims to integrate and leverage data and analytic capabilities while investing in innovation to meet evolving customer needs [10] - The company is focused on expanding its presence in risk assessment markets, particularly in KYC and compliance solutions [19] - Recent acquisitions, including Cortera, are expected to enhance Moody's data offerings and support growth in various markets [22] Management's Comments on Operating Environment and Future Outlook - Management highlighted the importance of resilience in scenario planning and the need for a holistic view of risk management in a complex environment [17] - The outlook for 2021 reflects assumptions regarding economic conditions, including a projected U.S. GDP increase of approximately 4% to 5% [30] - Management expressed confidence in the long-term growth opportunities driven by high demand for data analytics and insights [36] Other Important Information - Moody's plans to return approximately $2 billion to stockholders in 2021 through dividends and share repurchases [10] - The company made significant contributions to diversity and inclusion initiatives, as well as environmental sustainability efforts [12] Q&A Session All Questions and Answers Question: Margin outlook for 2021 - Management is focused on balancing margin expansion with necessary investments, projecting margins to remain around 49% to 50% for the year [38][40] Question: Issuance forecasts and flat revenue forecasts - Management expects issuance to be down modestly year-over-year, with a high single-digit percent decline, while recurring revenue growth is projected in the low to mid-single digits [44][50] Question: Thoughts on M&A strategy - Management remains open to both large and small acquisitions, focusing on opportunities that advance their strategic goals [56][58] Question: ESG revenue growth - ESG revenue is projected to grow by around 25% in 2021, with additional revenue expected from integrating ESG data into existing products [60] Question: Growth opportunities beyond KYC and compliance - Management sees strong demand for data and analytics on private companies, as well as growth in commercial real estate content and economic data [66]

Moody's Overview - Moody's has a revenue of $5.3 billion and an adjusted operating income of $2.7 billion [6] - Moody's Investors Service (MIS) accounts for 62% of revenue, while Moody's Analytics (MA) accounts for 38% [6] - MIS has an adjusted operating margin of 61.6%, while MA has an adjusted operating margin of 28.8% [6] Financial Performance and Outlook - Moody's projects revenue between $9.95 billion and $10.15 billion for 2020 [32] - Moody's anticipates adjusted diluted EPS to be in the range of $9.95 to $10.15 for 2020 [32] - The company aims for a high single-digit percentage growth range in revenue and a high-40s percentage range in adjusted operating margin in the long term [35] - Moody's expects approximately $1.8 billion in free cash flow [34] Market and Credit Environment - The U.S high-yield spreads of ~500 bps [27] - The U.S. unemployment rate of ~8% by year-end [27] - The global trailing twelve month speculative-grade default rate at 6.4% as of September 30, 2020; expected to increase to 7.2% by December 2020 and peak at 8.1% by March 2021, before declining to 6.3% by September 2021 [75] Moody's Investors Service (MIS) - MIS has $3.3 billion in trailing twelve months (TTM) revenue [85] - MIS expects issuance to grow in the high-teens percent range from $4.6 trillion in 2019 [88] Moody's Analytics (MA) - MA has $2.0 billion in TTM revenue [120] - Bureau van Dijk (BvD) TTM 2020 Q3 revenue is approximately $400 million, representing ~33% growth [153]

[Glossary of Terms and Abbreviations](index=3&type=section&id=Glossary%20of%20Terms%20and%20Abbreviations) [PART I. FINANCIAL INFORMATION](index=8&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=8&type=section&id=Item%201.%20Financial%20Statements) This section presents Moody's unaudited consolidated financial statements, showing significant growth in net income and diluted EPS for the first nine months of 2020 [Consolidated Statements of Operations (Unaudited)](index=8&type=section&id=Consolidated%20Statements%20of%20Operations%20(Unaudited)) Key Metrics (USD in millions) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Revenue | 1,356 | 1,240 | 4,081 | 3,596 | | Operating Income | 642 | 549 | 1,944 | 1,494 | | Net Income Attributable to Moody's | 467 | 380 | 1,464 | 1,062 | | Diluted EPS | 2.47 | 1.99 | 7.73 | 5.54 | - For the three months ended September 30, 2020, revenue grew **9.35%**, operating income grew **16.94%**, net income attributable to Moody's grew **22.89%**, and diluted EPS grew **24.12%** year-over-year[15](index=15&type=chunk) - For the nine months ended September 30, 2020, revenue grew **13.49%**, operating income grew **30.12%**, net income attributable to Moody's grew **37.85%**, and diluted EPS grew **39.53%** year-over-year[15](index=15&type=chunk) [Consolidated Statements of Comprehensive Income (Unaudited)](index=9&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20(Unaudited)) Key Metrics (USD in millions) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Income | 467 | 383 | 1,463 | 1,067 | | Other Comprehensive Income (Loss) | 39 | (92) | (77) | (82) | | Comprehensive Income Attributable to Moody's | 505 | 288 | 1,398 | 970 | - For the three months ended September 30, 2020, other comprehensive income shifted from a **$92 million loss** in 2019 to a **$39 million gain**, primarily due to positive foreign currency adjustments[18](index=18&type=chunk) - For the nine months ended September 30, 2020, net foreign currency translation adjustments shifted from a **$179 million loss** in 2019 to a **$96 million gain**[19](index=19&type=chunk) [Consolidated Balance Sheets (Unaudited)](index=10&type=section&id=Consolidated%20Balance%20Sheets%20(Unaudited)) Key Metrics (USD in millions) | Metric | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | 2,492 | 1,832 | | Total assets | 11,672 | 10,265 | | Long-term debt | 6,363 | 5,581 | | Total Moody's shareholders' equity | 1,497 | 612 | - As of September 30, 2020, cash and cash equivalents increased by **$660 million** and total assets increased by **$1,407 million** compared to December 31, 2019[20](index=20&type=chunk) - As of September 30, 2020, long-term debt increased by **$782 million** and total Moody's shareholders' equity increased by **$885 million**[20](index=20&type=chunk) [Consolidated Statements of Cash Flows (Unaudited)](index=11&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows%20(Unaudited)) Key Metrics (USD in millions) | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | 1,488 | 1,196 | | Net cash used in investing activities | (853) | (150) | | Net cash provided by (used in) financing activities | 3 | (1,517) | | Cash and cash equivalents at end of period | 2,492 | 1,178 | - For the nine months ended September 30, 2020, net cash from operating activities increased by **24.41%** year-over-year, driven by higher net income[23](index=23&type=chunk) - Net cash outflow from investing activities significantly increased from **$150 million** in 2019 to **$853 million** in 2020, mainly due to increased cash paid for acquisitions[23](index=23&type=chunk) - Net cash from financing activities shifted from a **$1,517 million outflow** in 2019 to a **$3 million inflow** in 2020, influenced by note issuances and share repurchase activities[23](index=23&type=chunk) [Consolidated Statements of Shareholders' Equity (Unaudited)](index=12&type=section&id=Consolidated%20Statements%20of%20Shareholders'%20Equity%20(Unaudited)) Key Metrics (USD in millions) | Metric | Sep 30, 2020 | Sep 30, 2019 | | :--- | :--- | :--- | | Total Moody's shareholders' equity | 1,497 | 472 | | Retained earnings | 10,804 | 9,391 | | Treasury stock | (9,505) | (8,993) | - As of September 30, 2020, total Moody's shareholders' equity grew substantially compared to the prior year, driven by higher net income and reduced treasury stock repurchases[32](index=32&type=chunk)[35](index=35&type=chunk) - In the first nine months of 2020, retained earnings increased by **$1,464 million**, reflecting the contribution from net income for the period[34](index=34&type=chunk) [Notes to Condensed Consolidated Financial Statements (Unaudited)](index=25&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements%20(Unaudited)) [NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION](index=25&type=section&id=NOTE%201.%20DESCRIPTION%20OF%20BUSINESS%20AND%20BASIS%20OF%20PRESENTATION) Moody's operates through MIS and MA segments, offering credit ratings, research, risk management software, and business intelligence products - The company operates through two reportable segments: Moody's Investors Service (MIS) for credit ratings and Moody's Analytics (MA) for financial intelligence and analytical tools[36](index=36&type=chunk)[37](index=37&type=chunk)[38](index=38&type=chunk) - MIS revenue is primarily from debt issuers, while MA's solutions include research, data, software, and professional services[37](index=37&type=chunk)[38](index=38&type=chunk) - The company adopted ASU No 2016-13 (Credit Losses) and ASU No 2018-15 (Implementation Costs for Internal-Use Software) on January 1, 2020, with no material impact on financial statements[41](index=41&type=chunk)[42](index=42&type=chunk) [NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=26&type=section&id=NOTE%202.%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This note outlines key accounting policies, focusing on new standards for credit losses and internal-use software adopted in 2020 - The company adopted the new credit loss standard (ASU No 2016-13) on January 1, 2020, revising its allowance for accounts receivable policy with no material impact on the bad debt allowance[48](index=48&type=chunk)[49](index=49&type=chunk) - The allowance for accounts receivable is determined based on segmentation, historical loss patterns, aging analysis, and adjustments for current and future macroeconomic conditions[50](index=50&type=chunk) - In the first nine months of 2020, the company recorded a **$31 million** net provision for expected credit losses, primarily attributed to the estimated impact of the COVID-19 pandemic[52](index=52&type=chunk) - The company capitalizes costs for developing or obtaining internal-use software and, under the new standard (ASU No 2018-15), capitalizes and amortizes implementation costs for cloud computing arrangements[53](index=53&type=chunk)[54](index=54&type=chunk) [NOTE 3. REVENUES](index=28&type=section&id=NOTE%203.%20REVENUES) Moody's revenue grew across both MIS and MA segments, with detailed disclosures on unbilled receivables, deferred revenue, and remaining performance obligations Revenue by Segment (USD in millions) | Revenue Category | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | MIS Total Revenue | 863 | 781 | 2,667 | 2,255 | | MA Total Revenue | 532 | 496 | 1,529 | 1,448 | | MCO Total Revenue | 1,356 | 1,240 | 4,081 | 3,596 | - In Q3 2020, MIS total revenue grew **10.5%** and MA total revenue grew **7.3%** year-over-year[57](index=57&type=chunk) - For the first nine months of 2020, MIS total revenue grew **18.3%** and MA total revenue grew **5.6%** year-over-year[57](index=57&type=chunk) Revenue by Source (USD in millions) | Revenue Source | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Transaction Revenue | 599 | 556 | 1,874 | 1,585 | | Relationship Revenue | 757 | 684 | 2,207 | 2,011 | - As of September 30, 2020, the MA segment had approximately **$1.8 billion** in remaining performance obligations, with about 60% expected to be recognized as revenue within one year[77](index=77&type=chunk) [NOTE 4. STOCK-BASED COMPENSATION](index=36&type=section&id=NOTE%204.%20STOCK-BASED%20COMPENSATION) The company's equity incentive plans include stock options, restricted stock, and performance-based awards, with unrecognized expenses totaling $284 million Stock-Based Compensation Costs (USD in millions) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Stock-based compensation cost | 38 | 33 | 110 | 103 | | Tax benefit | 8 | 7 | 22 | 22 | - In the first nine months of 2020, the company granted **0.1 million** employee stock options and **0.5 million** shares of restricted stock[78](index=78&type=chunk) - As of September 30, 2020, total unrecognized stock-based compensation expense was **$284 million**, expected to be recognized over 2.0 to 2.5 years[79](index=79&type=chunk) Stock-Based Compensation Activity (USD in millions) | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Proceeds from stock option exercises | 32 | 29 | | Fair value of shares vested | 195 | 153 | | Fair value of performance restricted shares vested | 70 | 48 | [NOTE 5. INCOME TAXES](index=37&type=section&id=NOTE%205.%20INCOME%20TAXES) Moody's effective tax rate decreased in Q3 and the first nine months of 2020, primarily due to deferred tax benefits from a non-U.S. corporate restructuring Tax Rate and Payments | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Effective Tax Rate | 22.0% | 25.3% | 20.0% | 21.4% | | Income Taxes Paid | - | - | $374 million | $303 million | - The Q3 2020 effective tax rate decreased by **3.3 percentage points**, mainly due to tax benefits from a non-U.S. corporate restructuring[81](index=81&type=chunk) - In the first nine months of 2020, unrecognized tax benefits (UTPs) decreased by a net **$6 million**[81](index=81&type=chunk) - The company is under tax audit in the U.S., New York State, New York City, and the U.K., but believes it is adequately accrued for related financial risks[81](index=81&type=chunk) [NOTE 6. WEIGHTED AVERAGE SHARES OUTSTANDING](index=38&type=section&id=NOTE%206.%20WEIGHTED%20AVERAGE%20SHARES%20OUTSTANDING) This note provides a reconciliation of basic and diluted weighted average shares outstanding used in the calculation of earnings per share Weighted Average Shares (in millions) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Basic | 187.8 | 189.0 | 187.6 | 189.6 | | Diluted | 189.3 | 191.1 | 189.3 | 191.8 | - The dilutive effect primarily comes from shares issuable under stock-based compensation plans, amounting to **1.5 million** shares in Q3 2020 and **1.7 million** shares in the first nine months of 2020[82](index=82&type=chunk) [NOTE 7. ACCELERATED SHARE REPURCHASE PROGRAM](index=39&type=section&id=NOTE%207.%20ACCELERATED%20SHARE%20REPURCHASE%20PROGRAM) Moody's completed a $500 million accelerated share repurchase agreement in 2019, buying back 2.8 million shares at an average price of $180.33 per share - On February 20, 2019, the company entered into a **$500 million** accelerated share repurchase agreement[84](index=84&type=chunk) - The program was completed on April 26, 2019, with a total of **2.8 million** common shares repurchased at an average price of **$180.33** per share[85](index=85&type=chunk) [NOTE 8. CASH EQUIVALENTS AND INVESTMENTS](index=39&type=section&id=NOTE%208.%20CASH%20EQUIVALENTS%20AND%20INVESTMENTS) The company's cash equivalents and investments primarily consist of certificates of deposit, money market accounts, and mutual funds Fair Value of Investments (USD in millions) | Category | Fair Value at Sep 30, 2020 | Fair Value at Dec 31, 2019 | | :--- | :--- | :--- | | Certificates of deposit and money market deposit accounts | 1,387 | 971 | | Mutual funds | 50 | 3 | - In Q1 2020, the company invested **$14 million** in company-owned life insurance (COLI)[87](index=87&type=chunk) [NOTE 9. ACQUISITIONS AND OTHER STRATEGIC INITIATIVES](index=39&type=section&id=NOTE%209.%20ACQUISITIONS%20AND%20OTHER%20STRATEGIC%20INITIATIVES) Moody's acquired RDC, an anti-money laundering service provider, in February 2020 and increased its stake in Vigeo Eiris during the second quarter - On February 13, 2020, the company acquired 100% of RDC, a global leader in anti-money laundering and customer due diligence data and services[89](index=89&type=chunk) RDC Acquisition Preliminary Purchase Price Allocation (USD in millions) | | Amount | | :--- | :--- | | Current assets | 24 | | Total intangible assets | 280 | | Goodwill | 494 | | Total liabilities | (98) | | Net assets | 702 | - The RDC acquisition resulted in **$494 million** of goodwill, which is not tax-deductible and was allocated to the MA segment[91](index=91&type=chunk)[93](index=93&type=chunk) - In Q2 2020, the company increased its ownership stake in Vigeo Eiris from **69.2% to 99.8%**[95](index=95&type=chunk) [NOTE 10. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES](index=41&type=section&id=NOTE%2010.%20DERIVATIVE%20INSTRUMENTS%20AND%20HEDGING%20ACTIVITIES) Moody's uses derivative instruments, including interest rate swaps and forward contracts, to manage foreign exchange and interest rate risks - The company uses interest rate swaps to convert a portion of its fixed-rate long-term debt to floating-rate debt to hedge fair value risk[97](index=97&type=chunk) Hedged Items (USD in millions) | | Notional Amount at Sep 30, 2020 | | :--- | :--- | | 2012 Senior Notes | 330 | | 2017 Senior Notes | 250 | | 2017 Senior Notes | 500 | | 2020 Senior Notes | 300 | | Total | 1,380 | - The company designated its 2015 and 2019 Senior Notes as net investment hedges to mitigate foreign exchange risk on its net investment in euro-denominated operations[101](index=101&type=chunk) - In January 2020, the company entered into Treasury rate lock contracts with a notional amount of **$300 million** as a cash flow hedge, resulting in an accumulated loss of **$68 million**[106](index=106&type=chunk) [NOTE 11. GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS](index=48&type=section&id=NOTE%2011.%20GOODWILL%20AND%20OTHER%20ACQUIRED%20INTANGIBLE%20ASSETS) This note details changes in goodwill and acquired intangible assets, with goodwill increasing due to the RDC and RBA acquisitions Goodwill (USD in millions) | | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | MIS | 302 | 315 | | MA | 3,980 | 3,407 | | Consolidated Total | 4,282 | 3,722 | - In the first nine months of 2020, goodwill in the MA segment increased by **$497 million**, primarily from the acquisitions of RDC and RBA[118](index=118&type=chunk)[119](index=119&type=chunk) Net Acquired Intangible Assets (USD in millions) | | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Customer relationships | 1,237 | 1,090 | | Software/product technology | 226 | 241 | | Trade names | 117 | 120 | | Other | 136 | 46 | | Total | 1,717 | 1,498 | Amortization Expense (USD in millions) | | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Amortization expense | 31 | 24 | 90 | 77 | - Estimated future amortization expenses are **$121 million** for 2021, **$120 million** for 2022, **$116 million** for 2023, **$108 million** for 2024, and **$1,221 million** thereafter[122](index=122&type=chunk) [NOTE 12. RESTRUCTURING](index=50&type=section&id=NOTE%2012.%20RESTRUCTURING) Moody's approved a new restructuring plan in 2020 to rationalize real estate leases in response to COVID-19, expecting $25 to $35 million in pre-tax charges - On July 29, 2020, the company approved the 2020 Restructuring Plan, primarily targeting real estate lease rationalization and exits, with expected pre-tax charges of **$25 to $35 million**[124](index=124&type=chunk) - The 2020 Restructuring Plan is expected to generate annual savings of approximately **$5 to $6 million**[124](index=124&type=chunk) - The 2018 Restructuring Plan is expected to generate annual savings of approximately **$60 million**, with total estimated pre-tax charges of **$105 to $110 million**[125](index=125&type=chunk) Restructuring Plans (USD in millions) | | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | 2018 Restructuring Plan | — | (1) | (3) | 58 | | 2020 Restructuring Plan | 23 | — | 23 | — | | Total restructuring charges | 23 | (1) | 20 | 58 | [NOTE 13. FAIR VALUE](index=51&type=section&id=NOTE%2013.%20FAIR%20VALUE) Moody's discloses fair value information for its derivative instruments and mutual funds, determined using valuation models and observable market prices Fair Value of Financial Instruments (USD in millions) | Category | Fair Value at Sep 30, 2020 | Fair Value at Dec 31, 2019 | | :--- | :--- | :--- | | Derivative assets | 79 | 92 | | Mutual fund assets | 50 | 3 | | Derivative liabilities | 69 | — | - The fair value of derivative instruments is determined by forecasting future cash flows and discounting them using spot rates, forward points, currency volatility, and interest rates[128](index=128&type=chunk) - The fair value of mutual funds is determined using Level 1 inputs as defined in ASC Topic 820, which are quoted prices in active markets[129](index=129&type=chunk) [NOTE 14. OTHER BALANCE SHEET AND STATEMENT OF OPERATIONS INFORMATION](index=52&type=section&id=NOTE%2014.%20OTHER%20BALANCE%20SHEET%20AND%20STATEMENT%20OF%20OPERATIONS%20INFORMATION) This note provides a detailed breakdown of other assets and liabilities, with an increased allowance for doubtful accounts in 2020 reflecting COVID-19 impacts Other Balance Sheet Items (USD in millions) | Category | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Other current assets | 333 | 330 | | Other assets | 468 | 389 | | Accounts payable and accrued liabilities | 712 | 773 | | Other liabilities | 498 | 504 | - As of September 30, 2020, prepaid taxes increased to **$121 million** from **$79 million** at December 31, 2019[132](index=132&type=chunk) - The loss on divestiture of MAKS was **$9 million** for the first nine months of 2020, compared to **$11 million** for the same period in 2019[135](index=135&type=chunk) Other non-operating income (expense), net (USD in millions) | | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Foreign exchange gains (losses) | 2 | 1 | 7 | (15) | | Net periodic pension cost - other components | 3 | 4 | 10 | 13 | | Earnings from investments in non-consolidated affiliates | 4 | 4 | 4 | 11 | | Total | 10 | 10 | 38 | 12 | [NOTE 15. COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE LOSS](index=53&type=section&id=NOTE%2015.%20COMPREHENSIVE%20INCOME%20AND%20ACCUMULATED%20OTHER%20COMPREHENSIVE%20LOSS) This note details the components and changes in Accumulated Other Comprehensive Loss (AOCL), including adjustments for hedges and pension benefits Components of AOCL (USD in millions) | AOCL Component | Sep 30, 2020 | Sep 30, 2019 | | :--- | :--- | :--- | | Pension and other retirement benefits | (89) | (69) | | Cash flow hedges | (49) | — | | Foreign currency translation adjustments | (293) | (594) | | Net investment hedges | (73) | 126 | | Total | (504) | (537) | - In Q3 2020, other comprehensive income (loss) before reclassifications was **$186 million** for foreign currency translation adjustments and **($143) million** for net investment hedges[140](index=140&type=chunk) - For the first nine months of 2020, losses on cash flow hedges were **($50) million**, and foreign currency translation adjustments were **$108 million**[141](index=141&type=chunk) [NOTE 16. PENSION AND OTHER RETIREMENT BENEFITS](index=55&type=section&id=NOTE%2016.%20PENSION%20AND%20OTHER%20RETIREMENT%20BENEFITS) Moody's maintains funded and unfunded non-contributory defined benefit pension plans and contributed $108 million to its plans in the first nine months of 2020 - Moody's maintains funded and unfunded non-contributory defined benefit pension plans and provides medical and life insurance benefits for retired U.S. employees[142](index=142&type=chunk) Net Periodic Benefit Expense (USD in millions) | | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Service cost | 5 | 4 | 13 | 12 | | Interest cost | 4 | 5 | 13 | 15 | | Expected return on plan assets | (5) | (5) | (15) | (15) | | Amortization of net actuarial loss | 2 | 1 | 5 | 3 | | Net periodic expense | 6 | 5 | 16 | 15 | - In the first nine months of 2020, the company contributed **$99 million** to its funded pension plans, **$8 million** to its unfunded U.S. defined benefit pension plans, and **$1 million** to its U.S. other postretirement plans[146](index=146&type=chunk) [NOTE 17. INDEBTEDNESS](index=57&type=section&id=NOTE%2017.%20INDEBTEDNESS) Moody's issued new senior notes to enhance liquidity in 2020, while also prepaying some existing debt and remaining in compliance with all covenants Carrying Value of Notes (USD in millions) | Note Category | Carrying Value at Sep 30, 2020 | Carrying Value at Dec 31, 2019 | | :--- | :--- | :--- | | 2012 Senior Notes | 514 | 507 | | 2013 Senior Notes | 498 | 497 | | 2014 Senior Notes | 599 | 599 | | 2015 Senior Notes | 584 | 558 | | 2017 Senior Notes | 510 | 504 | | 2017 Senior Notes | 527 | 493 | | 2018 Senior Notes | 395 | 394 | | 2018 Senior Notes | 389 | 389 | | 2019 Senior Notes | 870 | 833 | | 2020 Senior Notes | 693 | — | | 2020 Senior Notes | 293 | — | | 2020 Senior Notes | 491 | — | | Total long-term debt | 6,363 | 5,581 | - In the first nine months of 2020, the company issued 2020 Senior Notes and prepaid its 2018 and 2017 Senior Notes, incurring a total of **$24 million** in make-whole premiums[152](index=152&type=chunk)[153](index=153&type=chunk) Net Interest Expense (USD in millions) | | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Borrowing costs | (42) | (37) | (121) | (125) | | Total | (53) | (46) | (153) | (149) | - As of September 30, 2020, the company was in compliance with all covenants in its debt agreements, with no cross-default situations[154](index=154&type=chunk) [NOTE 18. LEASES](index=59&type=section&id=NOTE%2018.%20LEASES) Moody's primarily leases office space under operating leases and recorded an $11 million impairment charge on right-of-use assets in Q3 2020 Lease Costs (USD in millions) | | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Operating lease cost | 24 | 24 | 72 | 73 | | Sublease income | (1) | — | (3) | — | | Variable lease cost | 4 | 5 | 14 | 13 | | Total lease cost | 27 | 29 | 83 | 86 | - In Q3 2020, the company recorded an **$11 million** impairment charge on right-of-use assets related to the 2020 Restructuring Plan[160](index=160&type=chunk) Future Minimum Lease Payments (USD in millions) | | Amount | | :--- | :--- | | 2020 (after Sep 30) | 27 | | 2021 | 107 | | 2022 | 96 | | 2023 | 90 | | 2024 | 81 | | Thereafter | 191 | | Total lease payments (undiscounted) | 592 | | Present value of lease liabilities | 530 | [NOTE 19. CONTINGENCIES](index=60&type=section&id=NOTE%2019.%20CONTINGENCIES) Moody's faces various legal proceedings and investigations related to its business activities, with outcomes and financial impacts that are inherently uncertain - Moody's and its subsidiaries are subject to legal and tax proceedings related to credit ratings, government investigations, tax audits, and business activities[164](index=164&type=chunk) - The company records liabilities when they are probable and reasonably estimable, but cannot predict the ultimate outcome or financial impact of all matters[165](index=165&type=chunk)[167](index=167&type=chunk) [NOTE 20. SEGMENT INFORMATION](index=61&type=section&id=NOTE%2020.%20SEGMENT%20INFORMATION) Moody's operates through two reportable segments, MIS and MA, with profitability assessed based on adjusted operating income - Moody's is organized into two reportable segments: Moody's Investors Service (MIS) and Moody's Analytics (MA)[168](index=168&type=chunk) - MIS primarily generates revenue from debt ratings and monitoring, while MA provides financial analysis and risk management tools[169](index=169&type=chunk)[170](index=170&type=chunk) Segment Financial Information (USD in millions) | | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | MIS Total Revenue | 863 | 781 | 2,667 | 2,255 | | MA Total Revenue | 532 | 496 | 1,529 | 1,448 | | MIS Operating Income | 524 | 441 | 1,616 | 1,227 | | MA Operating Income | 118 | 108 | 328 | 267 | | MIS Adjusted Operating Income | 554 | 469 | 1,680 | 1,319 | | MA Adjusted Operating Income | 167 | 145 | 456 | 413 | - For the first nine months of 2020, restructuring charges for the MIS and MA segments were **$12 million** and **$8 million**, respectively[178](index=178&type=chunk)[179](index=179&type=chunk) [NOTE 21. RECENTLY ISSUED ACCOUNTING STANDARDS](index=63&type=section&id=NOTE%2021.%20RECENTLY%20ISSUED%20ACCOUNTING%20STANDARDS) This note lists recently issued accounting standards updates, which are not expected to have a material impact on the company's consolidated financial statements - ASU No 2018-14 (Pension Benefit Disclosures) will be effective for fiscal years beginning after December 15, 2020, and the company will adhere to the new disclosure requirements[181](index=181&type=chunk) - ASU No 2019-04 (Improvements to Credit Losses, Derivatives, and Hedging) and ASU No 2019-12 (Simplifying Income Taxes) are not expected to have a material impact on the company's consolidated financial statements[182](index=182&type=chunk)[183](index=183&type=chunk) [NOTE 22. SUBSEQUENT EVENTS](index=63&type=section&id=NOTE%2022.%20SUBSEQUENT%20EVENTS) This note discloses significant events after the reporting period, including the acquisition of Acquire Media and the declaration of a quarterly dividend - On October 21, 2020, the company completed the acquisition of Acquire Media (AM), with an immaterial purchase price and no expected near-term material impact on financial statements[184](index=184&type=chunk) - On October 27, 2020, the Board of Directors declared a quarterly dividend of **$0.56 per share**, payable on December 14, 2020[185](index=185&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=64&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section analyzes Moody's financial condition and results of operations, highlighting the impact of COVID-19, key estimates, and segment performance [The Company](index=64&type=section&id=The%20Company) - Moody's Corporation provides credit ratings, capital markets research, risk management software, credit scoring, learning solutions, and business intelligence products[189](index=189&type=chunk) - The company is organized into two reportable segments: Moody's Investors Service (MIS) and Moody's Analytics (MA)[189](index=189&type=chunk) - MIS primarily generates revenue through credit rating services, while MA provides financial intelligence and analytical tools[190](index=190&type=chunk)[191](index=191&type=chunk) [Corporate Social Responsibility and Sustainability](index=64&type=section&id=Corporate%20Social%20Responsibility%20and%20Sustainability) - Moody's is committed to helping market participants understand the links between sustainability factors and global markets through its tools, research, and analytical services[193](index=193&type=chunk) - The company follows policies from the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB) and is a signatory to the Principles for Responsible Investment and the UN Global Compact[193](index=193&type=chunk) - The Board of Directors oversees sustainability matters through its Governance and Nominating Committee, with progress assessed by a CSR committee led by the CEO[194](index=194&type=chunk) [Critical Accounting Estimates](index=65&type=section&id=Critical%20Accounting%20Estimates) Moody's critical accounting estimates include revenue recognition, goodwill, pension benefits, and income taxes, with updates in 2020 reflecting COVID-19 impacts [Goodwill](index=65&type=section&id=Goodwill) - Moody's conducts its annual goodwill impairment assessment on July 31 at the reporting unit level, which is either the MIS and MA segments or components thereof[200](index=200&type=chunk) - The company has seven primary reporting units, including ICRA and other rating businesses in MIS, and Content, ERS, MALS, Bureau van Dijk, and Reis in MA[201](index=201&type=chunk)[202](index=202&type=chunk) - In the first half of 2020, goodwill impairment assessments for the ICRA and Reis reporting units found no impairment, though future market conditions could pose risks[204](index=204&type=chunk)[206](index=206&type=chunk) - The annual goodwill impairment assessment on July 31, 2020, concluded through a qualitative assessment that the fair value of all reporting units was not less than their carrying value[207](index=207&type=chunk) Goodwill Sensitivity Analysis (USD in millions) | Reporting Unit | Goodwill (Sep 30, 2020) | Deficit from 10% Fair Value Decline | Deficit from 20% Fair Value Decline | Deficit from 30% Fair Value Decline | Deficit from 40% Fair Value Decline | | :--- | :--- | :--- | :--- | :--- | :--- | | 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) | | Total | 4,282 | — | (24) | (104) | (462) | [Accounts Receivable Allowances](index=69&type=section&id=Accounts%20Receivable%20Allowances) - The company adopted ASU No 2016-13 on January 1, 2020, revising its allowance for accounts receivable policy with no material impact on the bad debt allowance[217](index=217&type=chunk) - The allowance for accounts receivable is determined based on segmentation, historical loss patterns, and aging analysis, adjusted for current and future macroeconomic conditions[218](index=218&type=chunk) - In 2020, Moody's assessment considered the estimated impact of the COVID-19 pandemic, involving significant judgment about the severity and duration of market disruptions[219](index=219&type=chunk) [Reportable Segments](index=69&type=section&id=Reportable%20Segments) - Moody's Corporation is organized into two reportable segments: Moody's Investors Service (MIS) and Moody's Analytics (MA)[220](index=220&type=chunk) [Results of Operations](index=70&type=section&id=Results%20of%20Operations) Moody's achieved strong revenue and earnings growth in Q3 and the first nine months of 2020, driven by MIS and MA performance despite COVID-19 uncertainty [Potential Impact of COVID-19 on the Company's future operating results](index=70&type=section&id=Potential%20Impact%20of%20COVID-19%20on%20the%20Company's%20future%20operating%20results) - The COVID-19 pandemic may lead to continued volatility in MIS bond issuance, a potential slowdown in corporate debt issuance, and a further decline in CLO activity[222](index=222&type=chunk) - The MA segment may face reduced discretionary spending by clients, longer sales cycles, delayed compliance deadlines, and higher contract attrition rates[222](index=222&type=chunk) [Impact of acquisitions/divestitures on comparative results](index=70&type=section&id=Impact%20of%20acquisitions/divestitures%20on%20comparative%20results) - Moody's completed several acquisitions in 2019 and 2020, including Vigeo Eiris, Four Twenty Seven, RiskFirst, ABS Suite, and Regulatory DataCorp, which impacted year-over-year results[223](index=223&type=chunk) - In Q4 2019, the company divested its MAKS business, and starting in 2020, revenue from the MALS business was reclassified from the PS to the RD&A line of business[223](index=223&type=chunk) [Three months ended September 30, 2020 compared with three months ended September 30, 2019](index=71&type=section&id=Three%20months%20ended%20September%2030%2C%202020%20compared%20with%20three%20months%20ended%20September%2030%2C%202019) [Executive Summary](index=71&type=section&id=Executive%20Summary) Financial Highlights (USD in millions) | Financial Metric | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Moody's Total Revenue | 1,356 | 1,240 | 9% | | MIS External Revenue | 825 | 746 | 11% | | MA External Revenue | 531 | 494 | 7% | | Diluted EPS | 2.47 | 1.99 | 24% | | Adjusted Diluted EPS | 2.69 | 2.15 | 25% | - In Q3 2020, Moody's total revenue grew **9%**, driven by increased MIS corporate bond issuance and strong demand for MA KYC and compliance solutions[225](index=225&type=chunk)[232](index=232&type=chunk) - Operating margin and adjusted operating margin increased by **300 bps** and **370 bps**, respectively, reflecting strong revenue growth and flat operating expenses[228](index=228&type=chunk)[240](index=240&type=chunk) - The effective tax rate decreased by **330 bps**, primarily due to deferred tax benefits from a non-U.S. corporate restructuring[229](index=229&type=chunk)[241](index=241&type=chunk) [Global Revenue](index=74&type=section&id=Global%20Revenue) - Global revenue increased by **$116 million**, with U.S. revenue up **$69 million** and non-U.S. revenue up **$47 million**[236](index=236&type=chunk) - Non-U.S. revenue benefited from a **2%** favorable foreign currency translation impact[236](index=236&type=chunk) [Operating Expense & SG&A Expense](index=74&type=section&id=Operating%20Expense%20%26%20SG&A%20Expense) - Operating expense increased by **$14 million**, while SG&A expense decreased by **$21 million**[239](index=239&type=chunk) - Compensation expense increased by **$29 million**, reflecting hiring activity, merit increases, and higher incentive compensation[237](index=237&type=chunk) - Non-compensation expense decreased by **$15 million**, mainly due to lower travel costs from COVID-19, disciplined cost management, and reduced legal accruals[238](index=238&type=chunk) [Other Expenses](index=74&type=section&id=Other%20Expenses) - The **$23 million** restructuring charge was primarily related to lease asset impairments from real estate rationalization due to COVID-19[239](index=239&type=chunk) [Interest Expense, net](index=76&type=section&id=Interest%20Expense%2C%20net) - Net interest expense increased by **$7 million**, mainly due to a **$16 million** make-whole premium on the early redemption of 2017 Senior Notes and **$700 million** in new long-term borrowings in 2020[240](index=240&type=chunk) - This was partially offset by a **$17 million** gain on fair value hedges related to the early redemption of the 2017 Senior Notes[240](index=240&type=chunk) [ETR](index=76&type=section&id=ETR) - The effective tax rate decreased by **330 bps**, primarily due to deferred tax benefits from a non-U.S. corporate restructuring[241](index=241&type=chunk) [Diluted EPS & Adjusted Diluted EPS](index=76&type=section&id=Diluted%20EPS%20%26%20Adjusted%20Diluted%20EPS) - Diluted EPS grew by **$0.48** to **$2.47**, and Adjusted Diluted EPS grew by **$0.54** to **$2.69**, driven by higher operating and adjusted operating income[242](index=242&type=chunk) [Segment Results](index=77&type=section&id=Segment%20Results) [Moody's Investors Service](index=77&type=section&id=Moody's%20Investors%20Service) [MIS: Global revenue](index=78&type=section&id=MIS:%20Global%20revenue) - MIS global revenue increased by **$79 million**, with U.S. revenue up **$52 million** and non-U.S. revenue up **$27 million**[246](index=246&type=chunk) - The growth reflected increases across all rating lines of business except SFG[246](index=246&type=chunk) - Non-U.S. MIS revenue benefited from a **2%** favorable foreign currency translation impact[246](index=246&type=chunk) [CFG REVENUE](index=78&type=section&id=CFG%20REVENUE) - CFG global revenue increased by **$69 million**, with U.S. revenue up **$52 million** and non-U.S. revenue up **$17 million**[249](index=249&type=chunk) - CFG revenue grew **18%**, driven by higher investment-grade and high-yield bond issuance, as well as favorable product mix and pricing[250](index=250&type=chunk) - The growth was partially offset by a decline in U.S. bank loan rating issuance[250](index=250&type=chunk) [SFG REVENUE](index=79&type=section&id=SFG%20REVENUE) - SFG global revenue decreased by **$17 million**, with U.S. revenue down **$14 million** and non-U.S. revenue down **$3 million**[251](index=251&type=chunk) - SFG revenue declined **16%**, primarily due to reduced U.S. CLO securitization activity, reflecting wider credit spreads, less collateral, and increased competition[252](index=252&type=chunk) [FIG REVENUE](index=80&type=section&id=FIG%20REVENUE) - FIG global revenue increased by **$14 million**, with U.S. revenue up **$5 million** and non-U.S. revenue up **$9 million**[253](index=253&type=chunk) - FIG revenue grew **12%**, mainly due to higher U.S. and international banking revenue, reflecting a favorable issuance mix[254](index=254&type=chunk) [PPIF REVENUE](index=82&type=section&id=PPIF%20REVENUE) - PPIF global revenue increased by **$13 million**, with U.S. revenue up **$9 million** and non-U.S. revenue up **$4 million**[256](index=256&type=chunk) - PPIF revenue grew **11%**, primarily due to higher U.S. public finance issuance, reflecting favorable market conditions including refinancing of taxable transactions[257](index=257&type=chunk) [MIS: Operating and SG&A Expense](index=82&type=section&id=MIS:%20Operating%20and%20SG&A%20Expense) - MIS operating and SG&A expenses decreased by **$12 million**, mainly due to a **$37 million** decline in non-compensation costs, partially offset by a **$25 million** increase in compensation costs[258](index=258&type=chunk)[259](index=259&type=chunk) - The decrease in non-compensation costs was primarily due to reduced legal accruals and lower travel costs, partially offset by costs for technology infrastructure enhancements[260](index=260&type=chunk) [Other Expenses](index=84&type=section&id=Other%20Expenses) - The **$13 million** restructuring charge in Q3 2020 was primarily related to real estate lease asset impairments due to COVID-19[261](index=261&type=chunk) [MIS: Operating Margin & Adjusted Operating Margin](index=84&type=section&id=MIS:%20Operating%20Margin%20%26%20Adjusted%20Operating%20Margin) - MIS operating margin increased **420 bps** to **60.7%**, and adjusted operating margin increased **410 bps** to **64.2%**, reflecting strong revenue growth and lower operating and SG&A expenses[261](index=261&type=chunk) [Moody's Analytics](index=85&type=section&id=Moody's%20Analytics) [MA: Global revenue](index=86&type=section&id=MA:%20Global%20revenue) - MA global revenue increased by **$37 million**, with U.S. revenue up **$17 million** and non-U.S. revenue up **$20 million**[266](index=266&type=chunk) - The growth reflected strong performance in RD&A and ERS, including revenue from the RDC, RiskFirst, and ABS Suite acquisitions, partially offset by the MAKS divestiture[266](index=266&type=chunk) - Organic revenue growth was **9%**, and non-U.S. MA revenue benefited from a **3%** favorable foreign currency translation impact[266](index=266&type=chunk)[267](index=267&type=chunk) [RD&A REVENUE](index=86&type=section&id=RD&A%20REVENUE) - RD&A global revenue increased by **$69 million**, with U.S. revenue up **$28 million** and non-U.S. revenue up **$41 million**[269](index=269&type=chunk) - RD&A revenue grew **22%**, primarily due to inorganic growth from the RDC and ABS Suite acquisitions, and strong demand for credit research, data subscriptions, and KYC solutions[269](index=269&type=chunk) - Organic revenue growth was **12%**[270](index=270&type=chunk) [ERS REVENUE](index=87&type=section&id=ERS%20REVENUE) - ERS global revenue increased by **$11 million**, with U.S. revenue up **$7 million** and non-U.S. revenue up **$4 million**[271](index=271&type=chunk) - ERS revenue grew **8%**, mainly due to continued strong demand for credit assessment and loan origination solutions, and inorganic growth from the RiskFirst acquisition[271](index=271&type=chunk) - Organic revenue growth was **7%**[272](index=272&type=chunk) [MA: Operating and SG&A Expense](index=87&type=section&id=MA:%20Operating%20and%20SG&A%20Expense) - MA operating and SG&A expenses increased by **$5 million**, mainly due to a **$15 million** increase in compensation costs, partially offset by a **$10 million** decrease in non-compensation costs[272](index=272&type=chunk) - The increase in compensation costs reflected hiring activity, merit increases, and inorganic expense growth from acquisitions[272](index=272&type=chunk) - The decrease in non-compensation costs was primarily due to lower travel costs and disciplined expense management, partially offset by costs for technology infrastructure enhancements[272](index=272&type=chunk) [Other Expenses](index=88&type=section&id=Other%20Expenses) - The **$10 million** restructuring charge in Q3 2020 was primarily related to real estate lease asset impairments due to COVID-19[273](index=273&type=chunk) [MA: Operating Margin & Adjusted Operating Margin](index=88&type=section&id=MA:%20Operating%20Margin%20%26%20Adjusted%20Operating%20Margin) - MA operating margin increased **40 bps** to **22.2%**, and adjusted operating margin increased **220 bps** to **31.4%**, reflecting revenue growth outpacing expense growth[274](index=274&type=chunk) [Nine months ended September 30, 2020 compared with nine months ended September 30, 2019](index=89&type=section&id=Nine%20months%20ended%20September%2030%2C%202020%20compared%20with%20nine%20months%20ended%20September%2030%2C%202019) [Executive Summary](index=89&type=section&id=Executive%20Summary) Financial Highlights (USD in millions) | Financial Metric | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Moody's Total Revenue | 4,081 | 3,596 | 13% | | MIS External Revenue | 2,557 | 2,155 | 19% | | MA External Revenue | 1,524 | 1,441 | 6% | | Diluted EPS | 7.73 | 5.54 | 40% | | Adjusted Diluted EPS | 8.24 | 6.29 | 31% | - For the first nine months of 2020, Moody's total revenue grew **13%**, driven by increased MIS corporate bond issuance and strong demand for MA KYC and compliance solutions[278](index=278&type=chunk)[276](index=276&type=chunk) - Operating margin and adjusted operating margin increased by **610 bps** and **410 bps**, respectively, reflecting strong revenue growth and modest expense increases[276](index=276&type=chunk)[289](index=289&type=chunk) - The effective tax rate decreased by **140 bps**, primarily due to deferred tax benefits from a non-U.S. corporate restructuring[276](index=276&type=chunk)[291](index=291&type=chunk) [Global Revenue](index=92&type=section&id=Global%20Revenue) - Global revenue increased by **$485 million**, with U.S. revenue up **$370 million** and non-U.S. revenue up **$115 million**[282](index=282&type=chunk) - The growth reflected increases in both reportable segments across U.S. and international markets[282](index=282&type=chunk) [Operating Expense & SG&A Expense](index=92&type=section&id=Operating%20Expense%20%26%20SG&A%20Expense) - Operating expense increased by **$34 million**, and SG&A expense increased by **$31 million**[283](index=283&type=chunk) - Compensation expense increased by **$31 million**, reflecting hiring, merit increases, and higher incentive compensation, partially offset by benefits from the 2018 Restructuring Plan[283](index=283&type=chunk) - Non-compensation expense increased by **$14 million**, mainly due to a **$20 million** increase in bad debt provisions (impacted by COVID-19) and higher costs for technology infrastructure, partially offset by lower travel costs[285](index=285&type=chunk) [Other Expenses](index=94&type=section&id=Other%20Expenses) - The **$20 million** restructuring charge in 2020 was mainly for lease asset impairments due to COVID-19, while the **$58 million** charge in 2019 related to the 2018 Restructuring Plan[287](index=287&type=chunk) - A loss on the divestiture of MAKS was recorded in both 2020 and 2019[288](index=288&type=chunk) [Interest Expense, net](index=94&type=section&id=Interest%20Expense%2C%20net) - Net interest expense increased by **$4 million**, mainly due to **$24 million** in make-whole premiums on early debt redemptions, partially offset by a **$17 million** gain on fair value hedges[289](index=289&type=chunk) [Other non-operating income](index=94&type=section&id=Other%20non-operating%20income) - Other non-operating income increased by **$26 million**, primarily due to a **$7 million** foreign exchange gain in the first nine months of 2020, compared to a **$15 million** loss in the same period of 2019[290](index=290&type=chunk) [ETR](index=94&type=section&id=ETR) - The effective tax rate decreased by **140 bps**, primarily due to deferred tax benefits from a non-U.S. corporate restructuring[291](index=291&type=chunk) [Diluted EPS & Adjusted Diluted EPS](index=94&type=section&id=Diluted%20EPS%20%26%20Adjusted%20Diluted%20EPS) - Diluted EPS grew by **$2.19** to **$7.73**, and Adjusted Diluted EPS grew by **$1.95** to **$8.24**, driven by higher operating and adjusted operating income[291](index=291&type=chunk)[292](index=292&type=chunk) [Segment Results](index=95&type=section&id=Segment%20Results) [Moody's Investors Service](index=95&type=section&id=Moody's%20Investors%20Service) [MIS: Global revenue](index=97&type=section&id=MIS:%20Global%20revenue) - MIS global revenue increased by **$402 million**, with U.S. revenue up **$324 million** and non-U.S. revenue up **$78 million**[295](index=295&type=chunk) - The growth reflected increases across all lines of business except SFG[295](index=295&type=chunk) [CFG REVENUE](index=97&type=section&id=CFG%20REVENUE) - CFG global revenue increased by **$351 million**, with U.S. revenue up **$294 million** and non-U.S. revenue up **$57 million**[296](index=296&type=chunk) - CFG revenue grew **31%**, primarily due to strong growth in investment-grade and high-yield rated issuance, as well as favorable product mix and pricing[299](index=299&type=chunk) - The growth was partially offset by a decline in U.S. bank loan revenue[299](index=299&type=chunk) [SFG REVENUE](index=99&type=section&id=SFG%20REVENUE) - SFG global revenue decreased by **$53 million**, with U.S. revenue down **$42 million** and non-U.S. revenue down **$11 million**[300](index=300&type=chunk) - SFG revenue declined **17%**, primarily due to reduced activity in the CLO asset class and lower U.S. CMBS securitization activity[300](index=300&type=chunk)[301](index=301&type=chunk) [FIG REVENUE](index=100&type=section&id=FIG%20REVENUE) - FIG global revenue increased by **$40 million**, with U.S. revenue up **$37 million** and non-U.S. revenue up **$3 million**[302](index=302&type=chunk) - FIG revenue grew **11%**, mainly due to higher rated issuance in the U.S. banking and insurance sectors, as well as favorable product mix and pricing[303](index=303&type=chunk) [PPIF REVENUE](index=102&type=section&id=PPIF%20REVENUE) - PPIF global revenue increased by **$54 million**, with U.S. revenue up **$35 million** and non-U.S. revenue up **$19 million**[305](index=305&type=chunk) - PPIF revenue grew **17%**, primarily due to higher U.S. public finance refinancing volume and growth in infrastructure finance revenue[306](index=306&type=chunk) [MIS: Operating and SG&A Expense](index=102&type=section&id=MIS:%20Operating%20and%20SG&A%20Expense) - MIS operating and SG&A expenses increased by **$43 million**, with compensation expense up **$36 million** and non-compensation expense up **$7 million**[308](index=308&type=chunk) - The increase in non-compensation costs was mainly due to higher costs for technology infrastructure and a **$12 million** increase in bad debt provisions (impacted by COVID-19), partially offset by lower travel costs[308](index=308&type=chunk) [Other Expenses](index=104&type=section&id=Other%20Expenses) - Restructuring charges were related to both the 2020 Restructuring Plan and the 2018 Restructuring Plan[308](index=308&type=chunk) [MIS: Operating Margin & Adjusted Operating Margin](index=104&type=section&id=MIS:%20Operating%20Margin%20%26%20Adjusted%20Operating%20Margin) - MIS operating margin increased **620 bps** to **60.6%**, and adjusted operating margin increased **450 bps** to **63.0%**, reflecting strong revenue growth outpacing expense growth[308](index=308&type=chunk) [Moody's Analytics](index=105&type=section&id=Moody's%20Analytics) [MA: Global revenue](index=107&type=section&id=MA:%20Global%20revenue) - MA global revenue increased by **$83 million**, with U.S. revenue up **$46 million** and non-U.S. revenue up **$37 million**[311](index=311&type=chunk) - The growth reflected strong performance in RD&A and ERS, partially offset by the negative impact of the MAKS divestiture[311](index=311&type=chunk) - Organic revenue growth was **8%**[311](index=311&type=chunk) [RD&A REVENUE](index=107&type=section&id=RD&A%20REVENUE) - RD&A global revenue increased by **$170 million**, with U.S. revenue up **$80 million** and non-U.S. revenue up **$90 million**[312](index=312&type=chunk) - RD&A revenue grew **18%**, primarily due to strong demand for credit research, data subscriptions, and KYC solutions, as well as inorganic growth from the RDC and ABS Suite acquisitions[312](index=312&type=chunk) - Organic revenue growth was **9%**[312](index=312&type=chunk) [ERS REVENUE](index=108&type=section&id=ERS%20REVENUE) - ERS global revenue increased by **$41 million**, with U.S. revenue up **$20 million** and non-U.S. revenue up **$21 million**[314](index=314&type=chunk) - ERS revenue grew **11%**, mainly due to continued strong demand for credit assessment and loan origination solutions, and inorganic growth from the RiskFirst acquisition[314](index=314&type=chunk) - Organic revenue growth was **8%**[314](index=314&type=chunk) [MA: Operating and SG&A Expense](index=108&type=section&id=MA:%20Operating%20and%20SG&A%20Expense) - MA operating and SG&A expenses increased by **$22 million**, with compensation costs up **$13 million** and non-compensation costs up **$9 million**[315](index=315&type=chunk)[316](index=316&type=chunk) - The increase in non-compensation costs was mainly due to a **$44 million** increase in technology infrastructure costs and an **$8 million** increase in bad debt provisions (impacted by COVID-19), partially offset by a **$26 million** reduction in travel costs[317](index=317&type=chunk) [Other Expenses](index=109&type=section&id=Other%20Expenses) - Restructuring charges were related to both the 2020 Restructuring Plan and the 2018 Restructuring Plan[318](index=318&type=chunk) - The loss on the divestiture of MAKS was **$9 million** in 2020 and **$11 million** in 2019[318](index=318&type=chunk) [MA: Operating Margin & Adjusted Operating Margin](index=109&type=section&id=MA:%20Operating%20Margin%20%26%20Adjusted%20Operating%20Margin) - MA operating margin increased **310 bps** to **21.5%**, and adjusted operating margin increased **130 bps** to **29.8%**, reflecting RD&A and ERS revenue growth partially offset by modest expense increases and higher bad debt provisions[319](index=319&type=chunk) [Liquidity and Capital Resources](index=109&type=section&id=Liquidity%20and%20Capital%20Resources) Moody's funds operations through operating and financing cash flows, with increased operating cash flow in 2020 offset by higher acquisition-related outflows [Cash Flow](index=109&type=section&id=Cash%20Flow) Cash Flow Summary (USD in millions) | Cash Flow | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Change | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | 1,488 | 1,196 | 292 | | Net cash used in investing activities | (853) | (150) | (703) | | Net cash provided by (used in) financing activities | 3 | (1,517) | 1,520 | | Free Cash Flow | 1,405 | 1,135 | 270 | [Net cash provided by operating activities](index=110&type=section&id=Net%20cash%20provided%20by%20operating%20activities) - For the first nine months of 2020, net cash from operating activities increased by **$292 million**, primarily due to higher net income, partially offset by a **$99 million** pension plan contribution and a **$68 million** payment to settle Treasury rate lock contracts[321](index=321&type=chunk) [Net cash used in investing activities](index=110&type=section&id=Net%20cash%20used%20in%20investing%20activities) - For the first nine months of 2020, cash used in investing activities increased by **$703 million**, mainly due to a **$578 million** increase in cash paid for acquisitions and a **$101 million** increase in net purchases of investments[322](index=322&type=chunk) [Net cash provided by (used in) financing activities](index=110&type=section&id=Net%20cash%20provided%20by%20(used%20in)%20financing%20activities) - For the first nine months of 2020, cash flow from financing activities increased by **$1,520 million**, primarily due to **$691 million** in net long-term debt issuances (compared to a **$450 million** repayment in 2019) and a **$475 million** reduction in cash paid for treasury stock repurchases[323](index=323&type=chunk) [Cash and short-term investments held in non-U.S. jurisdictions](index=110&type=section&id=Cash%20and%20short-term%20investments%20held%20in%20non-U.S.%20jurisdictions) - As of September 30, 2020, approximately **$1.5 billion** of the company's **$2.6 billion** in cash and short-term investments was held outside the U.S., with about 10% denominated in euros and British pounds[324](index=324&type=chunk) - The company is evaluating and has begun repatriating cash from certain non-U.S. subsidiaries to comply with local regulations and meet operational needs[325](index=325&type=chunk) [Other Material Future Cash Requirements](index=110&type=section&id=Other%20Material%20Future%20Cash%20Requirements) - The company expects positive operating cash flow over the next twelve months and is committed to creating shareholder value through investments, acquisitions, share repurchases, and dividends[326](index=326&type=chunk)[327](index=327&type=chunk) [Dividends and share repurchases](index=112&type=section&id=Dividends%20and%20share%20repurchases) - On October 27, 2020, the Board of Directors declared a quarterly dividend of **$0.56 per share**[329](index=329&type=chunk) - As of September 30, 2020, approximately **$81 million** remained authorized under the 2018 $1 billion share repurchase program, with an additional **$1 billion** program approved in December 2019[330](index=330&type=chunk) - The company suspended share repurchase activity from late Q1 through Q3 2020 to preserve liquidity, with plans to resume in Q4[331](index=331&type=chunk) [Indebtedness](index=112&type=section&id=Indebtedness) - In the first nine months of 2020, the company increased long-term debt by **$700 million** through public offerings to enhance liquidity[333](index=333&type=chunk) - As of September 30, 2020, Moody's had **$6.4 billion** of outstanding debt and was in compliance with all covenants in its debt agreements[334](index=334&type=chunk) [Off-Balance Sheet Arrangements](index=113&type=section&id=Off-Balance%20Sheet%20Arrangements) - As of September 30, 2020, Moody's had no relationships with unconsolidated entities or financial partnerships that would expose it to financing, liquidity, market, or credit risks[337](index=337&type=chunk) [Contractual Obligations](index=113&type=section&id=Contractual%20Obligations) Contractual Obligations Summary (USD in millions) | Contractual Obligation | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Debt | 9,127 | 197 | 1,382 | 1,497 | 6,051 | | Operating lease obligations | 592 | 27 | 203 | 171 | 191 | | Purchase obligations | 208 | 91 | 106 | 11 | — | | Pension obligations | 151 | 2 | 45 | 28 | 76 | | Total | 10,078 | 317 | 1,736 | 1,707 | 6,318 | - The table excludes **$471 million** in long-term tax liabilities for uncertain tax positions, a **$33 million** MAKS divestiture indemnification liability, and a **$51 million** unpaid deemed repatriation liability[338](index=338&type=chunk) [Non-GAAP Financial Measures](index=113&type=section&id=Non-GAAP%20Financial%20Measures) [Adjusted Operating Income and Adjusted Operating Margin](index=113&type=section&id=Adjusted%20Operating%20Income%20and%20Adjusted%20Operating%20Margin) - Adjusted Operating Income and Adjusted Operating Margin are non-GAAP measures used by management to evaluate the company's operating performance[340](index=340&type=chunk) - These measures exclude restructuring charges, depreciation and amortization, acquisition-related expenses, the MAKS divestiture loss, and the captive insurance company settlement[340](index=340&type=chunk) Reconciliation of Operating Income to Adjusted Operating Income (USD in millions) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Operating Income | 642 | 549 | 1,944 | 1,494 | | 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](index=114&type=section&id=Adjusted%20Net%20Income%20and%20Adjusted%20Diluted%20EPS%20attributable%20to%20Moody's%20common%20shareholders) - Adjusted Net Income and Adjusted Diluted EPS exclude acquisition-related expenses, amortization of acquired intangible assets, restructuring charges, the MAKS divestiture loss, and the captive insurance company settlement[343](index=343&type=chunk)[344](index=344&type=chunk) Reconciliation of Net Income to Adjusted Net Income (USD in millions) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net income attributable to Moody's common shareholders | 467 | 380 | 1,464 | 1,062 | | Adjusted Net Income | 509 | 411 | 1,559 | 1,206 | | Diluted EPS | 2.47 | 1.99 | 7.73 | 5.54 | | Adjusted Diluted EPS | 2.69 | 2.15 | 8.24 | 6.29 | [Free Cash Flow](index=116&type=section&id=Free%20Cash%20Flow) - Free Cash Flow, defined as net cash from operating activities minus capital expenditures, is a useful measure of the company's ability to service debt, pay dividends, and fund acquisitions and share repurchases[349](index=349&type=chunk) Reconciliation of Net Cash from Operating Activities to Free Cash Flow (USD in millions) | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | 1,488 | 1,196 | | Capital expenditures | (83) | (61) | | Free Cash Flow | 1,405 | 1,135 | [Organic Revenue](index=117&type=section&id=Organic%20Revenue) - Organic revenue excludes the inorganic revenue impact from certain acquisitions and divestitures to provide a clearer view of revenue growth[352](index=352&type=chunk) Organic Revenue Growth - Three Months Ended Sep 30 (USD in millions) | Metric | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | MA Revenue | 531 | 494 | 7% | | Organic MA Revenue | 510 | 466 | 9% | | RD&A Revenue | 386 | 317 | 22% | | Organic RD&A Revenue | 354 | 317 | 12% | | ERS Revenue | 145 | 134 | 8% | | Organic ERS Revenue | 143 | 134 | 7% | Organic Revenue Growth - Nine Months Ended Sep 30 (USD in millions) | Metric | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | MA Revenue | 1,524 | 1,441 | 6% | | Organic MA Revenue | 1,469 | 1,358 | 8% | | RD&A Revenue | 1,110 | 940 | 18% | | Organic RD&A Revenue | 1,027 | 940 | 9% | | ERS Revenue | 414 | 373 | 11% | | Organic ERS Revenue | 402 | 373 | 8% | [Recently Issued Accounting Standards](index=118&type=section&id=Recently%20Issued%20Accounting%20Standards) - The company refers to Note 21 for a discussion of the impact of recently issued accounting standards[355](index=355&type=chunk) [Contingencies](index=118&type=section&id=Contingencies) - Legal proceedings in which the company is involved could impact Moody's liquidity or operating results, but the outcome of such proceedings cannot be guaranteed[356](index=356&type=chunk) - For information on legal proceedings, refer to Note 19, "Contingencies," in Item 1, "Financial Statements" of this Form 10-Q[356](index=356&type=chunk) [Regulation](index=118&type=section&id=Regulation) - MIS and its rated securities are subject to extensive regulation in the U.S. and other countries, with existing and proposed laws potentially increasing operating costs and legal risks[357](index=357&type=chunk) - In the U.S., credit rating agencies (CRAs) are primarily regulated under the Reform Act and the Dodd-Frank Act[358](index=358&type=chunk) - In the EU, the European Securities and Markets Authority (ESMA) directly supervises registered CRAs and monitors new risks from COVID-19 and ESG products[359](index=359&type=chunk)[360](index=360&type=chunk) - Post-Brexit, the EU CRA regulatory framework will apply during a transition period, with the U.K. Financial Conduct Authority expected to implement related legislation from early 2021[361](index=361&type=chunk)[362](index=362&type=chunk) [Forward-Looking Statements](index=120&type=section&id=Forward-Looking%20Statements) - This report contains forward-looking statements based on future expectations, plans, and prospects that involve risks and uncertainties which could cause actual results to differ materially[365](index=365&type=chunk) - These risks and uncertainties include the impact of COVID-19, credit market disruptions, competitive pressures, regulatory changes, litigation risk, cyber threats, and M&A integration[366](index=366&type=chunk) - The company undertakes no obligation to publicly supplement, update, or revise these statements unless required by applicable law or regulation[365](index=365&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=121&typ