Moody’s(MCO) - 2020 Q4 - Annual Report

Glossary of Terms and Abbreviations Glossary of Terms and Abbreviations 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] - 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][11] - 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] Part I Item 1. Business 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 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] - 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] Human Capital 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][28][29] - Voluntary employee turnover decreased in 2020 compared to 2019, a trend attributed to the labor market effects of the COVID-19 pandemic[36] Moody's Strategy 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] Prospects for Growth 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] - 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][53] - 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] 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] - 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] - 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] Item 1A. Risk Factors 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][78] - 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][105][119] - 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][129][130] - 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][118] Item 2. Properties 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] - 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] Part II Item 5. Market for the Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities 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] - 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][142] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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][192][198] - 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][212][217] Liquidity and Capital Resources 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][237] - 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] Item 8. Financial Statements This section contains the audited consolidated financial statements for the fiscal year ended December 31, 2020 Consolidated Statements of Operations 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 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 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 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] Part IV Item 15. Exhibits and Financial Statement Schedules 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][503]