Moody’s(MCO) - 2020 Q2 - Quarterly Report

Glossary of Terms and Abbreviations This section provides definitions for key terms, abbreviations, and acronyms used throughout the report to ensure clarity and understanding - This section defines key terms, abbreviations, and acronyms, including the two main business segments, Moody's Investors Service (MIS) and Moody's Analytics (MA), along with various financial instruments and accounting standards[3][5][7] PART I. FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and internal controls Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for the three and six months ended June 30, 2020, and 2019, along with detailed explanatory notes Consolidated Financial Statements Consolidated Statements of Operations Highlights (in millions, except per share data) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $1,435 | $1,214 | $2,725 | $2,356 | | Operating Income | $710 | $483 | $1,302 | $945 | | Net Income Attributable to Moody's | $509 | $310 | $997 | $683 | | Diluted EPS | $2.69 | $1.62 | $5.27 | $3.56 | Consolidated Balance Sheet Highlights (in millions) | Metric | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $3,963 | $3,679 | | Total Assets | $11,298 | $10,265 | | Total Liabilities | $10,061 | $9,428 | | Total Shareholders' Equity | $1,232 | $831 | Consolidated Statements of Cash Flows Highlights (in millions) | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $977 | $755 | | Net Cash used in Investing Activities | ($823) | ($53) | | Net Cash from (used in) Financing Activities | $123 | ($1,186) | Notes to Condensed Consolidated Financial Statements - The company operates in two reportable segments: Moody's Investors Service (MIS) for credit ratings and assessments, and Moody's Analytics (MA) for financial intelligence and analytical tools[36][37] - On January 1, 2020, the company adopted new accounting standards for credit losses (ASU 2016-13) and internal-use software (ASU 2018-15), which did not have a material impact on the financial statements[38] Revenue by Segment (Six Months Ended June 30, in millions) | Segment | 2020 | 2019 | | :--- | :--- | :--- | | MIS External Revenue | $1,732 | $1,409 | | MA External Revenue | $993 | $947 | | Total MCO Revenue | $2,725 | $2,356 | - On February 13, 2020, the company acquired 100% of Regulatory DataCorp Inc. (RDC), a provider of anti-money laundering and know-your-customer data services, for a total consideration of $702 million[94][95] - The acquisition resulted in $494 million of goodwill assigned to the MA segment[96] - Total long-term debt increased to $6.33 billion as of June 30, 2020, from $5.58 billion at year-end 2019[148] - This was primarily due to the issuance of $700 million in 3.75% senior notes due 2025 and $300 million in 3.25% senior notes due 2050 during the first half of 2020[150] Management's Discussion and Analysis of Financial Condition and Results of Operations Management provides its perspective on the company's financial condition and operational results, covering COVID-19 impact, critical accounting estimates, segment performance, liquidity, and non-GAAP measures The Company and COVID-19 Impact - Moody's operates through two segments: MIS (credit ratings) and MA (financial intelligence)[183] - The company is actively monitoring the impact of the COVID-19 pandemic, noting that while it has operated effectively with a remote workforce, the crisis creates significant uncertainty for future financial results[185][189] - In response to COVID-19 uncertainty, the company took steps to maximize liquidity, including adding $700 million in long-term borrowings and suspending its share repurchase program[191] - It also plans to utilize tax deferrals permitted under the CARES Act[192] Results of Operations Q2 2020 vs. Q2 2019 Performance Summary (in millions, except per share data) | Metric | Q2 2020 | Q2 2019 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $1,435 | $1,214 | 18% | | Operating Income | $710 | $483 | 47% | | Diluted EPS | $2.69 | $1.62 | 66% | | Adjusted Diluted EPS | $2.81 | $2.07 | 36% | H1 2020 vs. H1 2019 Performance Summary (in millions, except per share data) | Metric | H1 2020 | H1 2019 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $2,725 | $2,356 | 16% | | Operating Income | $1,302 | $945 | 38% | | Diluted EPS | $5.27 | $3.56 | 48% | | Adjusted Diluted EPS | $5.55 | $4.14 | 34% | - MIS Segment: Q2 revenue grew 27% to $938 million, driven by a 47% increase in Corporate Finance (CFG) revenue from strong corporate debt issuance[235] - This was partially offset by a 28% decline in Structured Finance (SFG) revenue due to lower CLO and CMBS activity[241] - Q2 Adjusted Operating Margin expanded to 64.0% from 60.1%[242] - MA Segment: Q2 revenue grew 5% to $497 million (6% organic growth), led by 16% growth in Research, Data & Analytics (RD&A) and 12% in Enterprise Risk Solutions (ERS)[253][254] - Growth was driven by demand for KYC/compliance solutions and inorganic contributions from acquisitions[256] - Q2 Adjusted Operating Margin was 28.7%, slightly up from 28.2%[256] Liquidity and Capital Resources Cash Flow Summary (Six Months Ended June 30, in millions) | Metric | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Net Cash from Operating Activities | $977 | $755 | $222 | | Net Cash used in Investing Activities | ($823) | ($53) | ($770) | | Net Cash from (used in) Financing Activities | $123 | ($1,186) | $1,309 | | Free Cash Flow | $915 | $716 | $199 | - The increase in operating cash flow was driven by higher Adjusted Operating Income and deferred tax payments[310] - The increase in cash used for investing reflects the ~$700 million acquisition of RDC[311] - The shift in financing cash flow was due to $700 million in net debt issuance in H1 2020 versus a $450 million repayment in H1 2019, and $362 million lower share repurchases[312] - The company suspended its share repurchase program late in Q1 2020 to preserve liquidity amid COVID-19 uncertainty[318] - As of June 30, 2020, approximately $81 million remained under the October 2018 authorization, with an additional $1.0 billion program authorized for future use[319] Quantitative and Qualitative Disclosures about Market Risk This section details changes in the company's derivative portfolio since year-end 2019, including new interest rate and cross-currency swaps to manage financial risks - In Q1 2020, the company entered into interest rate swaps with a notional amount of $500 million to convert fixed-rate debt to a floating rate based on 3-month USD LIBOR[354] - The company also entered into new cross-currency swaps in Q1 2020 to exchange €450 million for $500 million, designated as net investment hedges to mitigate FX exposure on its euro-denominated net investments[355] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2020, with no material changes - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[357] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls, despite the workforce shifting to remote work[358] PART II. OTHER INFORMATION This part covers legal proceedings, risk factors, equity security sales, other significant information, and a list of exhibits filed with the report Legal Proceedings This section provides an update on legal matters, referring the reader to Note 19, "Contingencies," in the Notes to Condensed Consolidated Financial Statements - The company directs investors to Note 19 of the financial statements for information regarding ongoing legal proceedings and contingencies[360] Risk Factors The company states that there have been no material changes to the significant risk factors and uncertainties previously disclosed in its Annual Report on Form 10-K and Q1 2020 Form 10-Q - There have been no material changes from the significant risk factors previously disclosed in the 2019 Form 10-K and Q1 2020 Form 10-Q[361] Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's purchases of its own equity securities during Q2 2020, primarily shares surrendered by employees for tax obligations, and notes remaining share repurchase authorization - During Q2 2020, a total of 2,302 shares were purchased, all of which were surrendered by employees to satisfy tax withholding obligations related to vested restricted stock[362] - As of June 30, 2020, approximately $81 million remained under the October 2018 share repurchase program[362] - An additional $1 billion program was approved in December 2019 to commence after the current one is completed[362] Other Information The company discloses a new restructuring program approved on July 29, 2020, primarily in response to the COVID-19 pandemic, involving real estate lease rationalization and expected savings - On July 29, 2020, a new restructuring program was approved to rationalize real estate leases in response to the COVID-19 pandemic[364] - The program is expected to result in total pre-tax charges of $25 to $35 million, primarily non-cash, and generate annualized savings of approximately $5 to $6 million[364] Exhibits This section lists all the exhibits filed with the Form 10-Q, including CEO and CFO certifications and interactive data files in Inline XBRL format - The report includes certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[366] - Interactive data files (Inline XBRL) are also filed as exhibits with this report[366]