Moody’s(MCO) - 2020 Q3 - Quarterly Report

Glossary of Terms and Abbreviations PART I. FINANCIAL INFORMATION Item 1. Financial Statements 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) 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] - 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] Consolidated Statements of Comprehensive Income (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] - 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] Consolidated Balance Sheets (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] - As of September 30, 2020, long-term debt increased by $782 million and total Moody's shareholders' equity increased by $885 million[20] Consolidated Statements of Cash Flows (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] - 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] - 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] Consolidated Statements of Shareholders' Equity (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][35] - In the first nine months of 2020, retained earnings increased by $1,464 million, reflecting the contribution from net income for the period[34] Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION 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][37][38] - MIS revenue is primarily from debt issuers, while MA's solutions include research, data, software, and professional services[37][38] - 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][42] NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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][49] - The allowance for accounts receivable is determined based on segmentation, historical loss patterns, aging analysis, and adjustments for current and future macroeconomic conditions[50] - 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] - 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][54] NOTE 3. REVENUES 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] - For the first nine months of 2020, MIS total revenue grew 18.3% and MA total revenue grew 5.6% year-over-year[57] 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] NOTE 4. STOCK-BASED COMPENSATION 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] - 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] 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 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] - In the first nine months of 2020, unrecognized tax benefits (UTPs) decreased by a net $6 million[81] - 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] NOTE 6. WEIGHTED AVERAGE SHARES OUTSTANDING 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] NOTE 7. ACCELERATED SHARE REPURCHASE PROGRAM 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] - 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] NOTE 8. CASH EQUIVALENTS AND INVESTMENTS 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] NOTE 9. ACQUISITIONS AND OTHER STRATEGIC INITIATIVES 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] 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][93] - In Q2 2020, the company increased its ownership stake in Vigeo Eiris from 69.2% to 99.8%[95] NOTE 10. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES 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] 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] - 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] NOTE 11. GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS 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][119] 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] NOTE 12. RESTRUCTURING 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] - The 2020 Restructuring Plan is expected to generate annual savings of approximately $5 to $6 million[124] - 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] 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 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] - 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] NOTE 14. OTHER BALANCE SHEET AND STATEMENT OF OPERATIONS INFORMATION 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] - 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] 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 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] - For the first nine months of 2020, losses on cash flow hedges were ($50) million, and foreign currency translation adjustments were $108 million[141] NOTE 16. PENSION AND OTHER RETIREMENT BENEFITS 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] 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] NOTE 17. INDEBTEDNESS 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][153] 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] NOTE 18. LEASES 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] 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 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] - The company records liabilities when they are probable and reasonably estimable, but cannot predict the ultimate outcome or financial impact of all matters[165][167] NOTE 20. SEGMENT INFORMATION 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] - MIS primarily generates revenue from debt ratings and monitoring, while MA provides financial analysis and risk management tools[169][170] 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][179] NOTE 21. RECENTLY ISSUED ACCOUNTING STANDARDS 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] - 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][183] NOTE 22. SUBSEQUENT EVENTS 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] - On October 27, 2020, the Board of Directors declared a quarterly dividend of $0.56 per share, payable on December 14, 2020[185] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Moody's financial condition and results of operations, highlighting the impact of COVID-19, key estimates, and segment performance The Company - Moody's Corporation provides credit ratings, capital markets research, risk management software, credit scoring, learning solutions, and business intelligence products[189] - The company is organized into two reportable segments: Moody's Investors Service (MIS) and Moody's Analytics (MA)[189] - MIS primarily generates revenue through credit rating services, while MA provides financial intelligence and analytical tools[190][191] Corporate Social Responsibility and Sustainability - 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] - 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] - 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] Critical Accounting Estimates Moody's critical accounting estimates include revenue recognition, goodwill, pension benefits, and income taxes, with updates in 2020 reflecting COVID-19 impacts 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] - 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][202] - 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][206] - 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] 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 - 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] - The allowance for accounts receivable is determined based on segmentation, historical loss patterns, and aging analysis, adjusted for current and future macroeconomic conditions[218] - 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] Reportable Segments - Moody's Corporation is organized into two reportable segments: Moody's Investors Service (MIS) and Moody's Analytics (MA)[220] Results of Operations 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 - 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] - The MA segment may face reduced discretionary spending by clients, longer sales cycles, delayed compliance deadlines, and higher contract attrition rates[222] Impact of acquisitions/divestitures on comparative results - 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] - 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] Three months ended September 30, 2020 compared with three months ended September 30, 2019 Executive Summary 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][232] - Operating margin and adjusted operating margin increased by 300 bps and 370 bps, respectively, reflecting strong revenue growth and flat operating expenses[228][240] - The effective tax rate decreased by 330 bps, primarily due to deferred tax benefits from a non-U.S. corporate restructuring[229][241] Global Revenue - Global revenue increased by $116 million, with U.S. revenue up $69 million and non-U.S. revenue up $47 million[236] - Non-U.S. revenue benefited from a 2% favorable foreign currency translation impact[236] Operating Expense & SG&A Expense - Operating expense increased by $14 million, while SG&A expense decreased by $21 million[239] - Compensation expense increased by $29 million, reflecting hiring activity, merit increases, and higher incentive compensation[237] - Non-compensation expense decreased by $15 million, mainly due to lower travel costs from COVID-19, disciplined cost management, and reduced legal accruals[238] Other Expenses - The $23 million restructuring charge was primarily related to lease asset impairments from real estate rationalization due to COVID-19[239] Interest Expense, net - 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] - This was partially offset by a $17 million gain on fair value hedges related to the early redemption of the 2017 Senior Notes[240] ETR - The effective tax rate decreased by 330 bps, primarily due to deferred tax benefits from a non-U.S. corporate restructuring[241] Diluted EPS & Adjusted Diluted EPS - 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] Segment Results Moody's Investors Service MIS: Global revenue - MIS global revenue increased by $79 million, with U.S. revenue up $52 million and non-U.S. revenue up $27 million[246] - The growth reflected increases across all rating lines of business except SFG[246] - Non-U.S. MIS revenue benefited from a 2% favorable foreign currency translation impact[246] CFG REVENUE - CFG global revenue increased by $69 million, with U.S. revenue up $52 million and non-U.S. revenue up $17 million[249] - CFG revenue grew 18%, driven by higher investment-grade and high-yield bond issuance, as well as favorable product mix and pricing[250] - The growth was partially offset by a decline in U.S. bank loan rating issuance[250] SFG REVENUE - SFG global revenue decreased by $17 million, with U.S. revenue down $14 million and non-U.S. revenue down $3 million[251] - SFG revenue declined 16%, primarily due to reduced U.S. CLO securitization activity, reflecting wider credit spreads, less collateral, and increased competition[252] FIG REVENUE - FIG global revenue increased by $14 million, with U.S. revenue up $5 million and non-U.S. revenue up $9 million[253] - FIG revenue grew 12%, mainly due to higher U.S. and international banking revenue, reflecting a favorable issuance mix[254] PPIF REVENUE - PPIF global revenue increased by $13 million, with U.S. revenue up $9 million and non-U.S. revenue up $4 million[256] - PPIF revenue grew 11%, primarily due to higher U.S. public finance issuance, reflecting favorable market conditions including refinancing of taxable transactions[257] MIS: Operating and SG&A Expense - 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][259] - 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] Other Expenses - The $13 million restructuring charge in Q3 2020 was primarily related to real estate lease asset impairments due to COVID-19[261] MIS: Operating Margin & Adjusted Operating Margin - 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] Moody's Analytics MA: Global revenue - MA global revenue increased by $37 million, with U.S. revenue up $17 million and non-U.S. revenue up $20 million[266] - 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] - Organic revenue growth was 9%, and non-U.S. MA revenue benefited from a 3% favorable foreign currency translation impact[266][267] RD&A REVENUE - RD&A global revenue increased by $69 million, with U.S. revenue up $28 million and non-U.S. revenue up $41 million[269] - 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] - Organic revenue growth was 12%[270] ERS REVENUE - ERS global revenue increased by $11 million, with U.S. revenue up $7 million and non-U.S. revenue up $4 million[271] - 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] - Organic revenue growth was 7%[272] MA: Operating and SG&A Expense - 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] - The increase in compensation costs reflected hiring activity, merit increases, and inorganic expense growth from acquisitions[272] - 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] Other Expenses - The $10 million restructuring charge in Q3 2020 was primarily related to real estate lease asset impairments due to COVID-19[273] MA: Operating Margin & Adjusted Operating Margin - 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] Nine months ended September 30, 2020 compared with nine months ended September 30, 2019 Executive Summary 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][276] - Operating margin and adjusted operating margin increased by 610 bps and 410 bps, respectively, reflecting strong revenue growth and modest expense increases[276][289] - The effective tax rate decreased by 140 bps, primarily due to deferred tax benefits from a non-U.S. corporate restructuring[276][291] Global Revenue - Global revenue increased by $485 million, with U.S. revenue up $370 million and non-U.S. revenue up $115 million[282] - The growth reflected increases in both reportable segments across U.S. and international markets[282] Operating Expense & SG&A Expense - Operating expense increased by $34 million, and SG&A expense increased by $31 million[283] - Compensation expense increased by $31 million, reflecting hiring, merit increases, and higher incentive compensation, partially offset by benefits from the 2018 Restructuring Plan[283] - 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] Other Expenses - 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] - A loss on the divestiture of MAKS was recorded in both 2020 and 2019[288] Interest Expense, net - 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] Other non-operating income - 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] ETR - The effective tax rate decreased by 140 bps, primarily due to deferred tax benefits from a non-U.S. corporate restructuring[291] Diluted EPS & Adjusted Diluted EPS - 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][292] Segment Results Moody's Investors Service MIS: Global revenue - MIS global revenue increased by $402 million, with U.S. revenue up $324 million and non-U.S. revenue up $78 million[295] - The growth reflected increases across all lines of business except SFG[295] CFG REVENUE - CFG global revenue increased by $351 million, with U.S. revenue up $294 million and non-U.S. revenue up $57 million[296] - 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] - The growth was partially offset by a decline in U.S. bank loan revenue[299] SFG REVENUE - SFG global revenue decreased by $53 million, with U.S. revenue down $42 million and non-U.S. revenue down $11 million[300] - SFG revenue declined 17%, primarily due to reduced activity in the CLO asset class and lower U.S. CMBS securitization activity[300][301] FIG REVENUE - FIG global revenue increased by $40 million, with U.S. revenue up $37 million and non-U.S. revenue up $3 million[302] - 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] PPIF REVENUE - PPIF global revenue increased by $54 million, with U.S. revenue up $35 million and non-U.S. revenue up $19 million[305] - PPIF revenue grew 17%, primarily due to higher U.S. public finance refinancing volume and growth in infrastructure finance revenue[306] MIS: Operating and SG&A Expense - MIS operating and SG&A expenses increased by $43 million, with compensation expense up $36 million and non-compensation expense up $7 million[308] - 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] Other Expenses - Restructuring charges were related to both the 2020 Restructuring Plan and the 2018 Restructuring Plan[308] MIS: Operating Margin & Adjusted Operating Margin - 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] Moody's Analytics MA: Global revenue - MA global revenue increased by $83 million, with U.S. revenue up $46 million and non-U.S. revenue up $37 million[311] - The growth reflected strong performance in RD&A and ERS, partially offset by the negative impact of the MAKS divestiture[311] - Organic revenue growth was 8%[311] RD&A REVENUE - RD&A global revenue increased by $170 million, with U.S. revenue up $80 million and non-U.S. revenue up $90 million[312] - 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] - Organic revenue growth was 9%[312] ERS REVENUE - ERS global revenue increased by $41 million, with U.S. revenue up $20 million and non-U.S. revenue up $21 million[314] - 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] - Organic revenue growth was 8%[314] MA: Operating and SG&A Expense - MA operating and SG&A expenses increased by $22 million, with compensation costs up $13 million and non-compensation costs up $9 million[315][316] - 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] Other Expenses - Restructuring charges were related to both the 2020 Restructuring Plan and the 2018 Restructuring Plan[318] - The loss on the divestiture of MAKS was $9 million in 2020 and $11 million in 2019[318] MA: Operating Margin & Adjusted Operating Margin - 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] Liquidity and Capital Resources 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 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 - 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] Net cash used in investing activities - 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] Net cash provided by (used in) financing activities - 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] Cash and short-term investments held in non-U.S. jurisdictions - 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] - 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] Other Material Future Cash Requirements - 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][327] Dividends and share repurchases - On October 27, 2020, the Board of Directors declared a quarterly dividend of $0.56 per share[329] - 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] - The company suspended share repurchase activity from late Q1 through Q3 2020 to preserve liquidity, with plans to resume in Q4[331] Indebtedness - In the first nine months of 2020, the company increased long-term debt by $700 million through public offerings to enhance liquidity[333] - 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] Off-Balance Sheet Arrangements - 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] Contractual Obligations 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] Non-GAAP Financial Measures Adjusted Operating Income and Adjusted Operating Margin - Adjusted Operating Income and Adjusted Operating Margin are non-GAAP measures used by management to evaluate the company's operating performance[340] - These measures exclude restructuring charges, depreciation and amortization, acquisition-related expenses, the MAKS divestiture loss, and the captive insurance company settlement[340] 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 - 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][344] 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 - 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] 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 - Organic revenue excludes the inorganic revenue impact from certain acquisitions and divestitures to provide a clearer view of revenue growth[352] 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 - The company refers to Note 21 for a discussion of the impact of recently issued accounting standards[355] 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] - For information on legal proceedings, refer to Note 19, "Contingencies," in Item 1, "Financial Statements" of this Form 10-Q[356] 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] - In the U.S., credit rating agencies (CRAs) are primarily regulated under the Reform Act and the Dodd-Frank Act[358] - 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][360] - 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][362] Forward-Looking Statements - 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] - 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] - The company undertakes no obligation to publicly supplement, update, or revise these statements unless required by applicable law or regulation[365] [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=121&typ