Item 1. Financial Statements
MOODY’S CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in millions, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended
June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Revenue | $ | 1,381 | | | $ | 1,553 | | | $ | 2,903 | | | $ | 3,153 | |
| Expenses | | | | | | | |
| Operating | 393 | | | 365 | | | 810 | | | 758 | |
| Selling, general and administrative | 368 | | | 327 | | | 739 | | | 620 | |
| Depreciation and amortization | 81 | | | 60 | | | 159 | | | 119 | |
| Restructuring | 31 | | | — | | | 31 | | | 2 | |
| | | | | | | |
| | | | | | | |
| Total expenses | 873 | | | 752 | | | 1,739 | | | 1,499 | |
| Operating income | 508 | | | 801 | | | 1,164 | | | 1,654 | |
| Non-operating (expense) income, net | | | | | | | |
| Interest expense, net | (55) | | | (49) | | | (108) | | | (56) | |
| Other non-operating (expense) income, net | (10) | | | 6 | | | (4) | | | 22 | |
| Total non-operating (expense) income, net | (65) | | | (43) | | | (112) | | | (34) | |
| Income before provision for income taxes | 443 | | | 758 | | | 1,052 | | | 1,620 | |
| Provision for income taxes | 116 | | | 181 | | | 227 | | | 307 | |
| | | | | | | |
| | | | | | | |
| Net income attributable to Moody's | $ | 327 | | | $ | 577 | | | $ | 825 | | | $ | 1,313 | |
| Earnings per share attributable to Moody's common shareholders | | | | | | | |
| Basic | $ | 1.78 | | | $ | 3.09 | | | $ | 4.47 | | | $ | 7.02 | |
| Diluted | $ | 1.77 | | | $ | 3.07 | | | $ | 4.45 | | | $ | 6.98 | |
| Weighted average number of shares outstanding | | | | | | | |
| Basic | 184.1 | | | 186.7 | |
| 184.6 | | | 187.0 | |
| Diluted | 184.9 | | | 187.9 | |
| 185.4 | | | 188.2 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
MOODY’S CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Amounts in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 | | Three Months Ended June 30, 2021 |
| |
| Pre-tax
amounts | | Tax
amounts | | After-tax
amounts | | Pre-tax
amounts | | Tax
amounts | | After-tax
amounts |
| Net Income | | | | | $ | 327 | | | | | | | $ | 577 | |
| Other Comprehensive Income (Loss): | | | | | | | | | | | |
| Foreign Currency Adjustments: | | | | | | | | | | | |
| Foreign currency translation adjustments, net | $ | (340) | | | $ | 3 | | | (337) | | | $ | 37 | | | $ | (2) | | | 35 | |
| Foreign currency translation adjustments - reclassification of losses included in net income | 20 | | | — | | | 20 | | | — | | | — | | | — | |
| Net gains (losses) on net investment hedges | 241 | | | (60) | | | 181 | | | (41) | | | 12 | | | (29) | |
| Net investment hedges - reclassification of gains included in net income | — | | | — | | | — | | | (1) | | | 1 | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Pension and Other Retirement Benefits: | | | | | | | | | | | |
| Amortization of actuarial losses/prior service costs and settlement charge included in net income | 1 | | | — | | | 1 | | | 10 | | | (2) | | | 8 | |
| Net actuarial gains and prior service costs | 6 | | | (2) | | | 4 | | | — | | | — | | | — | |
| Total other comprehensive (loss) income | $ | (72) | | | $ | (59) | | | $ | (131) | | | $ | 5 | | | $ | 9 | | | $ | 14 | |
| Comprehensive income | | | | | 196 | | | | | | | 591 | |
| Less: comprehensive (loss) income attributable to noncontrolling interests | | | | | (3) | | | | | | | (1) | |
| Comprehensive Income Attributable to Moody's | | | | | $ | 199 | | | | | | | $ | 592 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended
June 30, 2022 | | Six Months Ended
June 30, 2021 |
| |
| Pre-tax
amounts | | Tax
amounts | | After-tax
amounts | | Pre-tax
amounts | | Tax
amounts | | After-tax
amounts |
| Net Income | | | | | $ | 825 | | | | | | | $ | 1,313 | |
| Other Comprehensive Income (Loss): | | | | | | | | | | | |
| Foreign Currency Adjustments: | | | | | | | | | | | |
| Foreign currency translation adjustments, net | $ | (448) | | | $ | 4 | | | (444) | | | $ | (110) | | | $ | 4 | | | (106) | |
| Foreign currency translation adjustments - reclassification of losses included in net income | 20 | | | — | | | 20 | | | — | | | — | | | — | |
| Net gains on net investment hedges | 305 | | | (77) | | | 228 | | | 134 | | | (30) | | | 104 | |
| Net investment hedges - reclassification of gains included in net income | — | | | — | | | — | | | (2) | | | 1 | | | (1) | |
| Cash Flow Hedges: | | | | | | | | | | | |
| | | | | | | | | | | |
| Reclassification of losses included in net income | 1 | | | — | | | 1 | | | 1 | | | — | | | 1 | |
| Pension and Other Retirement Benefits: | | | | | | | | | | | |
| Amortization of actuarial losses/prior service costs and settlement charge included in net income | 1 | | | — | | | 1 | | | 13 | | | (3) | | | 10 | |
| Net actuarial gains and prior service costs | 3 | | | (1) | | | 2 | | | — | | | — | | | — | |
| Total other comprehensive (loss) income | $ | (118) | | | $ | (74) | | | $ | (192) | | | $ | 36 | | | $ | (28) | | | $ | 8 | |
| Comprehensive income | | | | | 633 | | | | | | | 1,321 | |
| Less: comprehensive (loss) income attributable to noncontrolling interests | | | | | (3) | | | | | | | 1 | |
| Comprehensive Income Attributable to Moody's | | | | | $ | 636 | | | | | | | $ | 1,320 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
MOODY’S CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in millions, except share and per share data) | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,617 | | | $ | 1,811 | |
| Short-term investments | 86 | | | 91 | |
Accounts receivable, net of allowance for credit losses of $46 in 2022 and $32 in 2021 | 1,602 | | | 1,720 | |
| Other current assets | 515 | | | 389 | |
| | | |
| Total current assets | 3,820 | | | 4,011 | |
Property and equipment, net of accumulated depreciation of $1,058 in 2022 and $1,010 in 2021 | 433 | | | 347 | |
| Operating lease right-of-use assets | 413 | | | 438 | |
| Goodwill | 5,841 | | | 5,999 | |
| Intangible assets, net | 2,300 | | | 2,467 | |
| Deferred tax assets, net | 341 | | | 384 | |
| Other assets | 1,167 | | | 1,034 | |
| Total assets | $ | 14,315 | | | $ | 14,680 | |
| LIABILITIES AND SHAREHOLDERS' EQUITY |
| Current liabilities: | | | |
| Accounts payable and accrued liabilities | $ | 866 | | | $ | 1,142 | |
| Current portion of operating lease liabilities | 105 | | | 105 | |
| | | |
| Current portion of long-term debt | 499 | | | — | |
| Deferred revenue | 1,285 | | | 1,249 | |
| | | |
| Total current liabilities | 2,755 | | | 2,496 | |
| Non-current portion of deferred revenue | 81 | | | 86 | |
| Long-term debt | 7,158 | | | 7,413 | |
| Deferred tax liabilities, net | 572 | | | 488 | |
| Uncertain tax positions | 336 | | | 388 | |
| Operating lease liabilities | 421 | | | 455 | |
| Other liabilities | 513 | | | 438 | |
| Total liabilities | 11,836 | | | 11,764 | |
Contingencies (Note 17) | | | |
| Shareholders' equity: | | | |
Preferred stock, par value $0.01 per share; 10,000,000 shares authorized; no shares issued and outstanding | — | | | — | |
Series common stock, par value $0.01 per share; 10,000,000 shares authorized; no shares issued and outstanding | — | | | — | |
Common stock, par value $0.01 per share; 1,000,000,000 shares authorized; 342,902,272 shares issued at June 30, 2022 and December 31, 2021, respectively. | 3 | | | 3 | |
| Capital surplus | 965 | | | 885 | |
| Retained earnings | 13,328 | | | 12,762 | |
Treasury stock, at cost; 159,355,829 and 157,262,484 shares of common stock at June 30, 2022 and December 31, 2021 | (11,403) | | | (10,513) | |
| Accumulated other comprehensive loss | (599) | | | (410) | |
| Total Moody's shareholders' equity | 2,294 | | | 2,727 | |
| Noncontrolling interests | 185 | | | 189 | |
| Total shareholders' equity | 2,479 | | | 2,916 | |
| Total liabilities, noncontrolling interests and shareholders' equity | $ | 14,315 | | | $ | 14,680 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
MOODY’S CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in millions) | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
| Cash flows from operating activities | |
| Net income | $ | 825 | | | $ | 1,313 | |
| Reconciliation of net income to net cash provided by operating activities: | | | |
| Depreciation and amortization | 159 | | | 119 | |
| Stock-based compensation | 84 | | | 86 | |
| Deferred income taxes | 65 | | | 59 | |
| | | |
| | | |
| | | |
| FX translation losses reclassified to net income | 20 | | | — | |
| Changes in assets and liabilities: | | | |
| Accounts receivable | 63 | | | (29) | |
| Other current assets | (172) | | | 17 | |
| | | |
| Other assets | (12) | | | (23) | |
| Lease obligations | (7) | | | (7) | |
| | | |
| Accounts payable and accrued liabilities | (276) | | | (175) | |
| Deferred revenue | 92 | | | 49 | |
| Unrecognized tax benefits and other non-current tax liabilities | (44) | | | (75) | |
| Other liabilities | (36) | | | (64) | |
| Net cash provided by operating activities | 761 | | | 1,270 | |
| Cash flows from investing activities |
| Capital additions | (133) | | | (44) | |
| Purchases of investments | (182) | | | (109) | |
| Sales and maturities of investments | 99 | | | 85 | |
| Cash paid for acquisitions, net of cash acquired | (92) | | | (138) | |
| Receipts from settlements of net investment hedges | 136 | | | 2 | |
| Payments for settlements of net investment hedges | — | | | (47) | |
| Net cash used in investing activities | (172) | | | (251) | |
| Cash flows from financing activities | | | |
| Issuance of notes | 491 | | | — | |
| | | |
| | | |
| | | |
| Proceeds from stock-based compensation plans | 16 | | | 23 | |
| Repurchase of shares related to stock-based compensation | (83) | | | (79) | |
| Treasury shares | (871) | | | (503) | |
| | | |
| Dividends | (259) | | | (232) | |
| Debt issuance costs and related fees | (5) | | | — | |
| Dividends to noncontrolling interest | (1) | | | (1) | |
| | | |
| | | |
| Net cash used in financing activities | (712) | | | (792) | |
| | | |
| Effect of exchange rate changes on cash and cash equivalents | (71) | | | (15) | |
| (Decrease) increase in cash and cash equivalents | (194) | | | 212 | |
| Cash and cash equivalents, beginning of period | 1,811 | | | 2,597 | |
| Cash and cash equivalents, end of period | $ | 1,617 | | | $ | 2,809 | |
| | | |
| | | |
| | | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
MOODY’S CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(Amounts in millions, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shareholders of Moody's Corporation | | | |
| Common Stock | | Capital Surplus | | Retained Earnings | | Treasury Stock | | Accumulated
Other
Comprehensive
Loss | | Total Moody's
Shareholders'
Equity | | Non- Controlling
Interests | | Total
Shareholders'
Equity |
| Shares | | Amount | | | Shares | | Amount | |
Balance at March 31, 2021 | 342.9 | | | $ | 3 | | | $ | 739 | | | $ | 11,632 | | | (155.7) | | | $ | (9,904) | | | $ | (440) | | | $ | 2,030 | | | $ | 195 | | | $ | 2,225 | |
| Net income | | | | | | | 577 | | | | | | | | | 577 | | | — | | | 577 | |
Dividends ($0.62 per share) | | | | | | | (115) | | | | | | | | | (115) | | | — | | | (115) | |
| Stock-based compensation | | | | | 41 | | | | | | | | | | | 41 | | | | | 41 | |
| Shares issued for stock-based compensation plans at average cost, net | | | | | 4 | | | | | 0.1 | | | 5 | | | | | 9 | | | | | 9 | |
| | | | | | | | | | | | | | | | | | | |
| Treasury shares repurchased | | | | | | | | | (1.1) | | | (371) | | | | | (371) | | | | | (371) | |
Currency translation adjustment, net of net investment hedge activity (net of tax of $11 million) | | | | | | | | | | | | | 7 | | | 7 | | | (1) | | | 6 | |
| | | | | | | | | | | | | | | | | | | |
Amortization of prior service costs/actuarial losses and settlement charge (net of tax of $2 million) | | | | | | | | | | | | | 8 | | | 8 | | | | | 8 | |
| | | | | | | | | | | | | | | | | | | |
Balance at June 30, 2021 | 342.9 | | | $ | 3 | | | $ | 784 | | | $ | 12,094 | | | (156.7) | | | $ | (10,270) | | | $ | (425) | | | $ | 2,186 | | | $ | 194 | | | $ | 2,380 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
MOODY'S CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(Amounts in millions, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shareholders of Moody's Corporation | | | | | | |
| Common Stock | | Capital
Surplus | | Retained
Earnings | | Treasury Stock | | Accumulated
Other
Comprehensive
Loss | | Total Moody's
Shareholders'
Equity | | Non- Controlling
Interests | | Total
Shareholders'
Equity | | | |
| Shares | | Amount | | | Shares | | Amount | | | | |
Balance at December 31, 2020 | 342.9 | | | $ | 3 | | | $ | 735 | | | $ | 11,011 | | | (155.8) | | | $ | (9,748) | | | $ | (432) | | | $ | 1,569 | | | $ | 194 | | | $ | 1,763 | | | | |
| Net income | | | | | | | 1,313 | | | | | | | | | 1,313 | | | — | | | 1,313 | | | | |
Dividends ($1.24 per share) | | | | | | | (230) | | | | | | | | | (230) | | | (1) | | | (231) | | | | |
| Stock-based compensation | | | | | 86 | | | | | | | | | | | 86 | | | | | 86 | | | | |
| Shares issued for stock-based compensation plans at average cost, net | | | | | (37) | | | | | 0.7 | | | (19) | | | | | (56) | | | | | (56) | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Treasury shares repurchased | | | | | | | | | (1.6) | | | (503) | | | | | (503) | | | | | (503) | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Currency translation adjustment, net of net investment hedge activity (net of tax of $25 million) | | | | | | | | | | | | | (4) | | | (4) | | | 1 | | | (3) | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Amortization of prior service costs/actuarial losses and settlement charge (net of tax of $3 million) | | | | | | | | | | | | | 10 | | | 10 | | | | | 10 | | | | |
| Net realized and unrealized gain on cash flow hedges | | | | | | | | | | | | | 1 | | | 1 | | | | | 1 | | | | |
| Balance at June 30, 2021 | 342.9 | | | $ | 3 | | | $ | 784 | | | $ | 12,094 | | | (156.7) | | | $ | (10,270) | | | $ | (425) | | | $ | 2,186 | | | $ | 194 | | | $ | 2,380 | | | | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
MOODY'S CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(Amounts in millions, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shareholders of Moody's Corporation | | | |
| Common Stock | | Capital
Surplus | | Retained
Earnings | | Treasury Stock | | Accumulated
Other
Comprehensive
Loss | | Total Moody's
Shareholders'
Equity | | Non- Controlling
Interests | | Total
Shareholders'
Equity |
| Shares | | Amount | | | Shares | | Amount | |
Balance at March 31, 2022 | 342.9 | | | $ | 3 | | | $ | 826 | | | $ | 13,132 | | | (158.4) | | | $ | (11,096) | | | $ | (471) | | | $ | 2,394 | | | $ | 188 | | | $ | 2,582 | |
| Net income | | | | | | | 327 | | | | | | | | | 327 | | | — | | | 327 | |
Dividends ($0.70 per share) | | | | | | | (131) | | | | | | | | | (131) | | | — | | | (131) | |
| Stock-based compensation | | | | | 38 | | | | | | | | | | | 38 | | | | | 38 | |
| Shares issued for stock-based compensation plans at average cost, net | | | | | 6 | | | | | — | | | 1 | | | | | 7 | | | | | 7 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Treasury shares repurchased | | | | | 95 | | | | | (1.0) | | | (308) | | | | | (213) | | | | | (213) | |
Currency translation adjustment, net of net investment hedge activity (net of tax of $57 million) | | | | | | | | | | | | | (133) | | | (133) | | | (3) | | | (136) | |
Net actuarial gains and prior service costs (net of tax of $2 million) | | | | | | | | | | | | | 4 | | | 4 | | | | | 4 | |
| Amortization of prior service costs and actuarial losses | | | | | | | | | | | | | 1 | | | 1 | | | | | 1 | |
| | | | | | | | | | | | | | | | | | | |
Balance at June 30, 2022 | 342.9 | | | $ | 3 | | | $ | 965 | | | $ | 13,328 | | | (159.4) | | | $ | (11,403) | | | $ | (599) | | | $ | 2,294 | | | $ | 185 | | | $ | 2,479 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
MOODY'S CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(Amounts in millions, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shareholders of Moody's Corporation | | | |
| Common Stock | | Capital
Surplus | | Retained
Earnings | | Treasury Stock | | Accumulated
Other
Comprehensive
Loss | | Total Moody's
Shareholders'
Equity | | Non- Controlling
Interests | | Total
Shareholders'
Equity |
| Shares | | Amount | | | Shares | | Amount | |
| Balance at December 31, 2021 | 342.9 | | | $ | 3 | | | $ | 885 | | | $ | 12,762 | | | (157.3) | | | $ | (10,513) | | | $ | (410) | | | $ | 2,727 | | | $ | 189 | | | $ | 2,916 | |
| Net income | | | | | | | 825 | | | | | | | | | 825 | | | — | | | 825 | |
Dividends ($1.40 per share) | | | | | | | (259) | | | | | | | | | (259) | | | (1) | | | (260) | |
| | | | | | | | | | | | | | | | | | | |
| Stock-based compensation | | | | | 84 | | | | | | | | | | | 84 | | | | | 84 | |
| Shares issued for stock-based compensation plans at average cost, net | | | | | (36) | | | | | 0.5 | | | (31) | | | | | (67) | | | | | (67) | |
Shares issued as consideration to acquire kompany(1) | | | | | 35 | | | | | 0.1 | | | 9 | | | | | 44 | | | | | 44 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Treasury shares repurchased | | | | | (3) | | | | | (2.7) | | | (868) | | | | | (871) | | | | | (871) | |
| | | | | | | | | | | | | | | | | | | |
Currency translation adjustment, net of net investment hedge activity (net of tax of $73 million) | | | | | | | | | | | | | (193) | | | (193) | | | (3) | | | (196) | |
Net actuarial gains and prior service costs (net of tax of $1 million) | | | | | | | | | | | | | 2 | | | 2 | | | | | 2 | |
| Amortization of prior service costs and actuarial losses | | | | | | | | | | | | | 1 | | | 1 | | | | | 1 | |
| Net realized and unrealized gain on cash flow hedges | | | | | | | | | | | | | 1 | | | 1 | | | | | 1 | |
| Balance at June 30, 2022 | 342.9 | | | $ | 3 | | | $ | 965 | | | $ | 13,328 | | | (159.4) | | | $ | (11,403) | | | $ | (599) | | | $ | 2,294 | | | $ | 185 | | | $ | 2,479 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
(1) Represents a non-cash investing activity relating to the issuance of common stock to fund a portion of the purchase price for kompany.
MOODY’S CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(tabular dollar and share amounts in millions, except per share data)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Moody’s is a global integrated risk assessment firm that empowers organizations and investors to make better decisions. Moody’s reports in two reportable segments: MIS and MA.
MIS publishes credit ratings and provides assessment services on a wide range of debt obligations, programs and facilities, and the entities that issue such obligations in markets worldwide, including various corporate, financial institution and governmental obligations, and structured finance securities.
MA is a global provider of: i) data and information; ii) research and insights; and iii) decision solutions, which help companies make better and faster decisions. MA leverages its industry expertise across multiple risks such as credit, market, financial crime, supply chain, catastrophe and climate to deliver integrated risk assessment solutions that enable business leaders to identify, measure and manage the implications of interrelated risks and opportunities.
These interim financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the Company’s consolidated financial statements and related notes in the Company’s 2021 annual report on Form 10-K filed with the SEC on February 22, 2022. The results of interim periods are not necessarily indicative of results for the full year or any subsequent period. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
Certain reclassifications have been made to prior period amounts to conform to the current presentation.
Adoption of New Accounting Standards
On January 1, 2022, the Company adopted ASU 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers" ("ASU No. 2021-08"). This ASU requires companies to apply the definition of a performance obligation under ASC Topic 606 to recognize and measure contract assets and contract liabilities (i.e., deferred revenue) relating to contracts with customers that are acquired in a business combination. The adoption of this ASU will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. Accordingly, upon adoption, the Company will no longer be required to adjust acquired deferred revenue to fair value in business combination transactions. The amendments in ASU No. 2021-08 are applied prospectively and has been applied to all business combination transactions completed subsequent to January 1, 2022.
COVID-19
The COVID-19 pandemic has not had a material adverse impact on the Company's reported results to date and is currently not expected to have a material adverse impact on its near-term outlook. However, Moody's is unable to predict the longer-term impact that the pandemic may have on its business, future results of operations, financial position or cash flows due to numerous uncertainties.
Russia/Ukraine Conflict
The Company is closely monitoring the impact of the ongoing Russia/Ukraine conflict on all aspects of its business. In response to the conflict, the Company is no longer conducting commercial operations in Russia for both MIS and MA and is complying with all applicable regulatory restrictions set forth by the jurisdictions in which Moody's operates. Furthermore, the Company also has withdrawn MIS credit ratings on Russian entities.
While Moody's Russian operations and net assets are not material, broader global market volatility relating to uncertainties surrounding the conflict has contributed to an adverse impact on rated issuance volumes in 2022. The Company is unable to predict either the near-term or longer-term impact that the conflict may have on its financial position and operating results due to numerous uncertainties regarding the severity and duration of the conflict and its broader potential macroeconomic impact.
Reclassification of Previously Reported Revenue by LOB
In the first quarter of 2022, the Company realigned its revenue by LOB reporting structure for the MA operating segment to enhance insight and transparency into this business. As of January 1, 2022, the MA LOBs have been realigned from RD&A and ERS to:
–Decision Solutions (DS) - provides software and workflow tools for specific use cases (banking, insurance, KYC/KYS, CRE and structured finance solutions). This LOB utilizes components from the Data & Information and Research & Insights LOBs to provide integrated risk solutions;
–Research & Insights (R&I) - provides models, scores, expert insights and commentary. This LOB includes: credit research; credit models and analytics; and economics data and models; and
–Data & Information (D&I) - provides vast data sets on companies and securities via data feeds and data applications products.
Prior year revenue by LOB disclosures have been reclassified to conform to the new LOB reporting structure, which is presented in Note 2.
NOTE 2. REVENUES
Revenue by Category
The following table presents the Company’s revenues disaggregated by LOB: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended
June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| MIS: | | | | | | | |
| Corporate Finance (CFG) | | | | | | | |
| Investment-grade | $ | 68 | | | $ | 102 | | | $ | 182 | | | $ | 236 | |
| High-yield | 31 | | | 124 | | | 70 | | | 265 | |
| Bank loans | 72 | | | 157 | | | 185 | | | 337 | |
Other accounts (1) | 151 | | | 167 | | | 302 | | | 317 | |
| Total CFG | 322 | | | 550 | | | 739 | | | 1,155 | |
| Structured Finance (SFG) | | | | | | | |
| Asset-backed securities | 31 | | | 33 | | | 63 | | | 59 | |
| RMBS | 28 | | | 31 | | | 63 | | | 58 | |
| CMBS | 27 | | | 23 | | | 65 | | | 47 | |
| Structured credit | 36 | | | 53 | | | 75 | | | 91 | |
| Other accounts | 1 | | | — | | | 1 | | | 1 | |
| Total SFG | 123 | | | 140 | | | 267 | | | 256 | |
| Financial Institutions (FIG) | | | | | | | |
| Banking | 93 | | | 101 | | | 182 | | | 210 | |
| Insurance | 24 | | | 33 | | | 58 | | | 76 | |
| Managed investments | 8 | | | 13 | | | 13 | | | 21 | |
| Other accounts | 3 | | | 3 | | | 6 | | | 5 | |
| Total FIG | 128 | | | 150 | | | 259 | | | 312 | |
| Public, Project and Infrastructure Finance (PPIF) |
| Public finance / sovereign | 55 | | | 63 | | | 113 | | | 130 | |
| Project and infrastructure | 67 | | | 67 | | | 132 | | | 143 | |
| Total PPIF | 122 | | | 130 | | | 245 | | | 273 | |
| Total ratings revenue | 695 | | | 970 | | | 1,510 | | | 1,996 | |
| MIS Other | 11 | | | 10 | | | 23 | | | 20 | |
| Total external revenue | 706 | | | 980 | | | 1,533 | | | 2,016 | |
| Intersegment revenue | 43 | | | 42 | | | 86 | | | 82 | |
| Total MIS | 749 | | | 1,022 | | | 1,619 | | | 2,098 | |
| MA: | | | | | | | |
| Decision Solutions | 312 | | | 222 | | | 646 | | | 447 | |
| Research and Insights | 185 | | | 175 | | | 368 | | | 346 | |
| Data and Information | 178 | | | 176 | | | 356 | | | 344 | |
| Total external revenue | 675 | | | 573 | | | 1,370 | | | 1,137 | |
| Intersegment revenue | 1 | | | 2 | | | 3 | | | 4 | |
| Total MA | 676 | | | 575 | | | 1,373 | | | 1,141 | |
| Eliminations | (44) | | | (44) | | | (89) | | | (86) | |
| Total MCO | $ | 1,381 | | | $ | 1,553 | | | $ | 2,903 | | | $ | 3,153 | |
(1) Other includes: recurring monitoring fees of a rated debt obligation and/or entities that issue such obligations as well as fees from programs such as commercial paper, medium term notes, and ICRA corporate finance revenue.
The following table presents the Company’s revenues disaggregated by LOB and geographic area:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 | | Three Months Ended June 30, 2021 |
| U.S. | | Non-U.S | | Total | | U.S. | | Non-U.S | | Total |
| MIS: |
| Corporate Finance | $ | 210 | | | $ | 112 | | | $ | 322 | | | $ | 345 | | | $ | 205 | | | $ | 550 | |
| Structured Finance | 83 | | | 40 | | | 123 | | | 88 | | | 52 | | | 140 | |
| Financial Institutions | 53 | | | 75 | | | 128 | | | 69 | | | 81 | | | 150 | |
| Public, Project and Infrastructure Finance | 78 | | | 44 | | | 122 | | | 79 | | | 51 | | | 130 | |
| Total ratings revenue | 424 | | | 271 | | | 695 | | | 581 | | | 389 | | | 970 | |
| MIS Other | 2 | | | 9 | | | 11 | | | 1 | | | 9 | | | 10 | |
| Total MIS | 426 | | | 280 | | | 706 | | | 582 | | | 398 | | | 980 | |
| MA: |
| Decision Solutions | 133 | | | 179 | | | 312 | | | 96 | | | 126 | | | 222 | |
| Research and Insights | 102 | | | 83 | | | 185 | | | 96 | | | 79 | | | 175 | |
| Data and Information | 62 | | | 116 | | | 178 | | | 57 | | | 119 | | | 176 | |
| Total MA | 297 | | | 378 | | | 675 | | | 249 | | | 324 | | | 573 | |
| Total MCO | $ | 723 | | | $ | 658 | | | $ | 1,381 | | | $ | 831 | | | $ | 722 | | | $ | 1,553 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Six Months Ended June 30, 2022 | | Six Months Ended June 30, 2021 |
| U.S. | | Non-U.S | | Total | | U.S. | | Non-U.S | | Total |
| MIS: |
| Corporate Finance | $ | 485 | | | $ | 254 | | | $ | 739 | | | $ | 759 | | | $ | 396 | | | $ | 1,155 | |
| Structured Finance | 180 | | | 87 | | | 267 | | | 156 | | | 100 | | | 256 | |
| Financial Institutions | 118 | | | 141 | | | 259 | | | 155 | | | 157 | | | 312 | |
| Public, Project and Infrastructure Finance | 153 | | | 92 | | | 245 | | | 157 | | | 116 | | | 273 | |
| Total ratings revenue | 936 | | | 574 | | | 1,510 | | | 1,227 | | | 769 | | | 1,996 | |
| MIS Other | 3 | | | 20 | | | 23 | | | 2 | | | 18 | | | 20 | |
| Total MIS | 939 | | | 594 | | | 1,533 | | | 1,229 | | | 787 | | | 2,016 | |
| MA: |
| Decision Solutions | 282 | | | 364 | | | 646 | | | 187 | | | 260 | | | 447 | |
| Research and Insights | 203 | | | 165 | | | 368 | | | 188 | | | 158 | | | 346 | |
| Data and Information | 122 | | | 234 | | | 356 | | | 112 | | | 232 | | | 344 | |
| Total MA | 607 | | | 763 | | | 1,370 | | | 487 | | | 650 | | | 1,137 | |
| Total MCO | $ | 1,546 | | | $ | 1,357 | | | $ | 2,903 | | | $ | 1,716 | | | $ | 1,437 | | | $ | 3,153 | |
The following table presents the Company’s reportable segment revenues disaggregated by segment and geographic region:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended
June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| MIS: | |
| U.S. | $ | 426 | | | $ | 582 | | | $ | 939 | | | $ | 1,229 | |
| Non-U.S.: | | | | | | | |
| EMEA | 165 | | | 248 | | | 358 | | | 496 | |
| Asia-Pacific | 80 | | | 100 | | | 154 | | | 197 | |
| Americas | 35 | | | 50 | | | 82 | | | 94 | |
| Total Non-U.S. | 280 | | | 398 | | | 594 | | | 787 | |
| Total MIS | 706 | | | 980 | | | 1,533 | | | 2,016 | |
| MA: | | | | | | | |
| U.S. | 297 | | | 249 | | | 607 | | | 487 | |
| Non-U.S.: | | | | | | | |
| EMEA | 257 | | | 233 | | | 520 | | | 463 | |
| Asia-Pacific | 71 | | | 55 | | | 139 | | | 114 | |
| Americas | 50 | | | 36 | | | 104 | | | 73 | |
| Total Non-U.S. | 378 | | | 324 | | | 763 | | | 650 | |
| Total MA | 675 | | | 573 | | | 1,370 | | | 1,137 | |
| Total MCO | $ | 1,381 | | | $ | 1,553 | | | $ | 2,903 | | | $ | 3,153 | |
The following tables summarize the split between transaction and recurring revenue. In the MIS segment, excluding MIS Other, transaction revenue represents the initial rating of a new debt issuance as well as other one-time fees while recurring revenue represents the recurring monitoring fees of a rated debt obligation and/or entities that issue such obligations, as well as revenue from programs such as commercial paper, medium-term notes and shelf registrations. In MIS Other, transaction revenue represents revenue from professional services and recurring revenue represents subscription-based revenues. In the MA segment, recurring revenue represents subscription-based revenues and software maintenance revenue. Transaction revenue in MA represents perpetual software license fees and revenue from software implementation services, risk management advisory projects, and training and certification services.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2022 | | 2021 |
| Transaction | | Recurring | | Total | | Transaction | | Recurring | | Total |
| Corporate Finance | $ | 199 | | | $ | 123 | | | $ | 322 | | | $ | 427 | | | $ | 123 | | | $ | 550 | |
| 62 | % | | 38 | % | | 100 | % | | 78 | % | | 22 | % | | 100 | % |
| Structured Finance | $ | 73 | | | $ | 50 | | | $ | 123 | | | $ | 92 | | | $ | 48 | | | $ | 140 | |
| 59 | % | | 41 | % | | 100 | % | | 66 | % | | 34 | % | | 100 | % |
| Financial Institutions | $ | 57 | | | $ | 71 | | | $ | 128 | | | $ | 79 | | | $ | 71 | | | $ | 150 | |
| 45 | % | | 55 | % | | 100 | % | | 53 | % | | 47 | % | | 100 | % |
| Public, Project and Infrastructure Finance | $ | 82 | | | $ | 40 | | | $ | 122 | | | $ | 88 | | | $ | 42 | | | $ | 130 | |
| 67 | % | | 33 | % | | 100 | % | | 68 | % | | 32 | % | | 100 | % |
| MIS Other | $ | 1 | | | $ | 10 | | | $ | 11 | | | $ | — | | | $ | 10 | | | $ | 10 | |
| 9 | % | | 91 | % | | 100 | % | | — | % | | 100 | % | | 100 | % |
| Total MIS | $ | 412 | | | $ | 294 | | | $ | 706 | | | $ | 686 | | | $ | 294 | | | $ | 980 | |
| 58 | % | | 42 | % | | 100 | % | | 70 | % | | 30 | % | | 100 | % |
| Decision Solutions | $ | 40 | | | $ | 272 | | | $ | 312 | | | $ | 36 | | | $ | 186 | | | $ | 222 | |
| 13 | % | | 87 | % | | 100 | % | | 16 | % | | 84 | % | | 100 | % |
| Research and Insights | $ | 2 | | | $ | 183 | | | $ | 185 | | | $ | 3 | | | $ | 172 | | | $ | 175 | |
| 1 | % | | 99 | % | | 100 | % | | 2 | % | | 98 | % | | 100 | % |
| Data and Information | $ | — | | | $ | 178 | | | $ | 178 | | | $ | 1 | | | $ | 175 | | | $ | 176 | |
| — | % | | 100 | % | | 100 | % | | 1 | % | | 99 | % | | 100 | % |
| Total MA | $ | 42 | | (1) | $ | 633 | | | $ | 675 | | | $ | 40 | | | $ | 533 | | | $ | 573 | |
| 6 | % | | 94 | % | | 100 | % | | 7 | % | | 93 | % | | 100 | % |
| Total Moody's Corporation | $ | 454 | | | $ | 927 | | | $ | 1,381 | | | $ | 726 | | | $ | 827 | | | $ | 1,553 | |
| 33 | % | | 67 | % | | 100 | % | | 47 | % | | 53 | % | | 100 | % |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
| Transaction | | Recurring | | Total | | Transaction | | Recurring | | Total |
| Corporate Finance | $ | 492 | | | $ | 247 | | | $ | 739 | | | $ | 914 | | | $ | 241 | | | $ | 1,155 | |
| 67 | % | | 33 | % | | 100 | % | | 79 | % | | 21 | % | | 100 | % |
| Structured Finance | $ | 166 | | | $ | 101 | | | $ | 267 | | | $ | 158 | | | $ | 98 | | | $ | 256 | |
| 62 | % | | 38 | % | | 100 | % | | 62 | % | | 38 | % | | 100 | % |
| Financial Institutions | $ | 118 | | | $ | 141 | | | $ | 259 | | | $ | 169 | | | $ | 143 | | | $ | 312 | |
| 46 | % | | 54 | % | | 100 | % | | 54 | % | | 46 | % | | 100 | % |
| Public, Project and Infrastructure Finance | $ | 161 | | | $ | 84 | | | $ | 245 | | | $ | 188 | | | $ | 85 | | | $ | 273 | |
| 66 | % | | 34 | % | | 100 | % | | 69 | % | | 31 | % | | 100 | % |
| MIS Other | $ | 2 | | | $ | 21 | | | $ | 23 | | | $ | 2 | | | $ | 18 | | | $ | 20 | |
| 9 | % | | 91 | % | | 100 | % | | 10 | % | | 90 | % | | 100 | % |
| Total MIS | $ | 939 | | | $ | 594 | | | $ | 1,533 | | | $ | 1,431 | | | $ | 585 | | | $ | 2,016 | |
| 61 | % | | 39 | % | | 100 | % | | 71 | % | | 29 | % | | 100 | % |
| Decision Solutions | $ | 83 | | | $ | 563 | | | $ | 646 | | | $ | 77 | | | $ | 370 | | | $ | 447 | |
| 13 | % | | 87 | % | | 100 | % | | 17 | % | | 83 | % | | 100 | % |
| Research and Insights | $ | 3 | | | $ | 365 | | | $ | 368 | | | $ | 4 | | | $ | 342 | | | $ | 346 | |
| 1 | % | | 99 | % | | 100 | % | | 1 | % | | 99 | % | | 100 | % |
| Data and Information | $ | — | | | $ | 356 | | | $ | 356 | | | $ | 2 | | | $ | 342 | | | $ | 344 | |
| — | % | | 100 | % | | 100 | % | | 1 | % | | 99 | % | | 100 | % |
| Total MA | $ | 86 | | (1) | $ | 1,284 | | | $ | 1,370 | | | $ | 83 | | | $ | 1,054 | | | $ | 1,137 | |
| 6 | % | | 94 | % | | 100 | % | | 7 | % | | 93 | % | | 100 | % |
| Total Moody's Corporation | $ | 1,025 | | | $ | 1,878 | | | $ | 2,903 | | | $ | 1,514 | | | $ | 1,639 | | | $ | 3,153 | |
| 35 | % | | 65 | % | | 100 | % | | 48 | % | | 52 | % | | 100 | % |
(1) Revenue from software implementation services and risk management advisory projects, while classified by management as transactional revenue, is recognized over time under the Revenue Accounting Standard (please also refer to the following table).
The following table presents the timing of revenue recognition:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 | | Six Months Ended June 30, 2022 | | |
| MIS | | MA | | Total | | MIS | | MA | | Total | | | | | | |
| Revenue recognized at a point in time | $ | 412 | | | $ | 16 | | | $ | 428 | | | $ | 939 | | | $ | 57 | | | $ | 996 | | | | | | | |
| Revenue recognized over time | 294 | | | 659 | | | 953 | | | 594 | | | 1,313 | | | 1,907 | | | | | | | |
| Total | $ | 706 | | | $ | 675 | | | $ | 1,381 | | | $ | 1,533 | | | $ | 1,370 | | | $ | 2,903 | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Three Months Ended June 30, 2021 | | Six Months Ended June 30, 2021 |
| MIS | | MA | | Total | | MIS | | MA | | Total |
| Revenue recognized at a point in time | $ | 686 | | | $ | 20 | | | $ | 706 | | | $ | 1,431 | | | $ | 49 | | | $ | 1,480 | |
| Revenue recognized over time | 294 | | | 553 | | | 847 | | | 585 | | | 1,088 | | | 1,673 | |
| Total | $ | 980 | | | $ | 573 | | | $ | 1,553 | | | $ | 2,016 | | | $ | 1,137 | | | $ | 3,153 | |
Unbilled receivables, deferred revenue and remaining performance obligations
Unbilled receivables
Certain MIS arrangements contain contractual terms whereby the customers are billed in arrears for annual monitoring services, requiring revenue to be accrued as an unbilled receivable as such services are provided. In addition, for certain MA arrangements, the timing of when the Company has the unconditional right to consideration and recognizes revenue occurs prior to invoicing the customer.
The following table presents the Company's unbilled receivables, which are included within accounts receivable, net, at June 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| As at June 30, 2022 | | As at December 31, 2021 |
| MIS | | MA | | MIS | | MA |
| Unbilled Receivables | $ | 397 | | | $ | 167 | | | $ | 386 | | | $ | 152 | |
Deferred revenue
The Company recognizes deferred revenue when a contract requires a customer to pay consideration to the Company in advance of when revenue related to that contract is recognized. This deferred revenue is relieved when the Company satisfies the related performance obligation and revenue is recognized.
Significant changes in the deferred revenue balances during the three and six months ended June 30, 2022 and 2021 are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 | | Three Months Ended June 30, 2021 |
| MIS | | MA | | Total | | MIS | | MA | | Total |
Balance at March 31, | $ | 377 | | | $ | 1,234 | | | $ | 1,611 | | | $ | 388 | | | $ | 940 | | | $ | 1,328 | |
| Changes in deferred revenue | | | | | | | | | | | |
| Revenue recognized that was included in the deferred revenue balance at the beginning of the period | (117) | | | (391) | | | (508) | | | (119) | | | (338) | | | (457) | |
| Increases due to amounts billable excluding amounts recognized as revenue during the period | 94 | | | 213 | | | 307 | | | 98 | | | 262 | | | 360 | |
| | | | | | | | | | | |
| Effect of exchange rate changes | (7) | | | (37) | | | (44) | | | 1 | | | 3 | | | 4 | |
| Total changes in deferred revenue | (30) | | | (215) | | | (245) | | | (20) | | | (73) | | | (93) | |
Balance at June 30, | $ | 347 | | | $ | 1,019 | | | $ | 1,366 | | | $ | 368 | | | $ | 867 | | | $ | 1,235 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 | | Six Months Ended June 30, 2021 |
| MIS | | MA | | Total | | MIS | | MA | | Total |
| Balance at December 31, | $ | 296 | | | $ | 1,039 | | | $ | 1,335 | | | $ | 313 | | | $ | 874 | | | $ | 1,187 | |
| Changes in deferred revenue | | | | | | | | | | | |
| Revenue recognized that was included in the deferred revenue balance at the beginning of the period | (155) | | | (654) | | | (809) | | | (162) | | | (565) | | | (727) | |
| Increases due to amounts billable excluding amounts recognized as revenue during the period | 215 | | | 680 | | | 895 | | | 219 | | | 555 | | | 774 | |
| Increases due to acquisitions during the period | — | | | 1 | | | 1 | | | — | | | 4 | | | 4 | |
| Effect of exchange rate changes | (9) | | | (47) | | | (56) | | | (2) | | | (1) | | | (3) | |
| Total changes in deferred revenue | 51 | | | (20) | | | 31 | | | 55 | | | (7) | | | 48 | |
Balance at June 30, | $ | 347 | | | $ | 1,019 | | | $ | 1,366 | | | $ | 368 | | | $ | 867 | | | $ | 1,235 | |
| Deferred revenue - current | $ | 268 | | | $ | 1,017 | | | $ | 1,285 | | | $ | 279 | | | $ | 863 | | | $ | 1,142 | |
| Deferred revenue - non-current | $ | 79 | | | $ | 2 | | | $ | 81 | | | $ | 89 | | | $ | 4 | | | $ | 93 | |
For the MIS segment, the changes in the deferred revenue balance during the three and six months ended June 30, 2022 were primarily related to the significant portion of contract renewals that occurred during the first quarter of 2022 and are generally recognized over a one year period.
For the MA segment, the decrease in deferred revenue for the three months ended June 30, 2022 was primarily due to the recognition of annual subscription and maintenance billings from December 2021 and January 2022. For the six months ended June 30, 2022, the slight decrease in the deferred revenue balance is attributable to recognition of revenues related to the aforementioned December 2021 billings and unfavorable changes in FX translation rates being mostly offset by the impact of the high concentration of billings in the first quarter of 2022.
Remaining performance obligations
Remaining performance obligations in the MIS segment largely reflect deferred revenue related to monitoring fees for certain structured finance products, primarily CMBS, where the issuers can elect to pay the monitoring fees for the life of the security in advance. As of June 30, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $105 million. The Company expects to recognize into revenue approximately 20% of this balance within one year, approximately 50% of this balance between one to five years and the remaining amount thereafter. With respect to the remaining performance obligations for the MIS segment, the Company has applied a practical expedient set forth in ASC Topic 606 permitting the omission from the amounts stated above relating to unsatisfied performance obligations for contracts with an original expected length of one year or less.
Remaining performance obligations in the MA segment include both amounts recorded as deferred revenue on the balance sheet as of June 30, 2022 as well as amounts not yet invoiced to customers as of June 30, 2022, largely reflecting future revenue related to signed multi-year arrangements for hosted and installed subscription-based products. As of June 30, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $3.0 billion. The Company expects to recognize into revenue approximately 60% of this balance within one year, approximately 25% of this balance between one to two years and the remaining amount thereafter.
NOTE 3. STOCK-BASED COMPENSATION
Presented below is a summary of the stock-based compensation cost and associated tax benefit included in the accompanying consolidated statements of operations:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Stock-based compensation cost | $ | 38 | | | $ | 41 | | | $ | 84 | | | $ | 86 | |
| Tax benefit | $ | 9 | | | $ | 10 | | | $ | 20 | | | $ | 21 | |
During the first six months of 2022, the Company granted 0.1 million employee stock options, which had a weighted average grant date fair value of $84.15 per share. The Company also granted 0.5 million shares of restricted stock in the first six months of 2022, which had a weighted average grant date fair value of $326.32 per share. Both the employee stock options and restricted stock generally vest ratably over four years. Additionally, the Company granted 0.1 million shares of performance-based awards whereby the number of shares that ultimately vest are based on the achievement of certain non-market-based performance metrics of the Company over three years. The weighted average grant date fair value of these awards was $317.21 per share.
The following weighted average assumptions were used in determining the fair value using the Black-Scholes option-pricing model for options granted in 2022:
| | | | | |
| Expected dividend yield | 0.86 | % |
| Expected stock volatility | 27 | % |
| Risk-free interest rate | 1.88 | % |
| Expected holding period | 5.6 years |
Unrecognized stock-based compensation expense at June 30, 2022 was $22 million and $293 million for stock options and unvested restricted stock, respectively, which is expected to be recognized over a weighted average period of 2.2 years and 2.7 years, respectively. Additionally, there was $41 million of unrecognized stock-based compensation expense relating to the aforementioned non-market-based performance-based awards, which is expected to be recognized over a weighted average period of 1.9 years.
The following table summarizes information relating to stock option exercises and restricted stock vesting:
| | | | | | | | | | | |
| Six Months Ended
June 30, |
| 2022 | | 2021 |
| Exercise of stock options: | | | |
| Proceeds from stock option exercises | $ | 4 | | | $ | 16 | |
| Aggregate intrinsic value | $ | 5 | | | $ | 35 | |
| Tax benefit realized upon exercise | $ | 1 | | | $ | 8 | |
Number of shares exercised (1) | — | | | 0.2 | |
| Vesting of restricted stock: | | | |
| Fair value of shares vested | $ | 170 | | | $ | 187 | |
| Tax benefit realized upon vesting | $ | 40 | | | $ | 43 | |
| Number of shares vested | 0.5 | | | 0.7 | |
| Vesting of performance-based restricted stock: | | | |
| Fair value of shares vested | $ | 50 | | | $ | 28 | |
| Tax benefit realized upon vesting | $ | 12 | | | $ | 7 | |
| Number of shares vested | 0.2 | | | 0.1 | |
(1) The number of options exercised in 2022 was approximately 27 thousand.
NOTE 4. INCOME TAXES
Moody’s effective tax rate was 26.2% and 23.9% for the three months ended June 30, 2022 and 2021, and 21.6% and 19% for the six months periods ended June 30, 2022 and 2021, respectively. The 2.3% and 2.6% increase in the ETR for the three and six months ended June 30, 2022 and 2021, respectively, was primarily due to non-recurring tax benefits including the resolution of uncertain tax positions in the first half of 2021, along with a non-deductible foreign currency translation loss recognized resulting from the Company no longer conducting commercial operations in Russia. The Company’s year-to-date 2022 income tax expense differs from the tax computed by applying its estimated annual effective tax rate to the pre-tax earnings primarily due to the following items recognized in 2022: i) Excess Tax Benefits from stock-based compensation of $19 million; and ii) net reductions in UTPs of $20 million related to the resolution of uncertain tax positions.
The Company classifies interest related to UTPs in interest expense, net in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating (expense) income, net. The Company had a decrease in its UTPs of $32 million ($26 million, net of federal tax) during the second quarter of 2022 and a decrease in its UTPs of $52 million ($47 million net of federal tax) during the first six months of 2022, which primarily related to the aforementioned resolution of uncertain tax positions.
Moody’s Corporation and subsidiaries are subject to U.S. federal income tax as well as income tax in various state, local and foreign jurisdictions. The Company’s U.S. federal income tax returns for 2017 through 2019 are currently under examination and 2020 remains open to examination. The Company’s New York State tax returns for 2017 through 2018 and New York City tax returns for 2015 through 2018 are currently under examination. The Company’s U.K. tax returns for 2012 through 2020 remain open to examination.
For ongoing audits, it is possible the balance of UTPs could decrease in the next twelve months as a result of the settlement of these audits, which might involve the payment of additional taxes, the adjustment of certain deferred taxes and/or the recognition of tax benefits. It is also possible that new issues might be raised by tax authorities which could necessitate increases to the balance of UTPs. As the Company is unable to predict the timing or outcome of these audits, it is therefore unable to estimate the amount of changes to the balance of UTPs at this time. However, the Company believes that it has adequately provided for its financial exposure relating to all open tax years by tax jurisdiction in accordance with the applicable provisions of Topic 740 of the ASC regarding UTPs.
The following table shows the amount the Company paid for income taxes: | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
| Income taxes paid | $ | 326 | | | $ | 327 | |
NOTE 5. RECONCILIATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
Below is a reconciliation of basic to diluted shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| |
| 2022 | | 2021 | | 2022 | | 2021 |
| Basic | 184.1 | | | 186.7 | | | 184.6 | | | 187.0 | |
| Dilutive effect of shares issuable under stock-based compensation plans | 0.8 | | | 1.2 | | | 0.8 | | | 1.2 | |
| Diluted | 184.9 | | | 187.9 | | | 185.4 | | | 188.2 | |
| Anti-dilutive options to purchase common shares and restricted stock as well as contingently issuable restricted stock which are excluded from the table above | 0.8 | | | 0.2 | | | 0.4 | | | 0.3 | |
The calculation of diluted EPS requires certain assumptions regarding the use of both cash proceeds and assumed proceeds that would be received upon the exercise of stock options and vesting of restricted stock outstanding as of June 30, 2022 and 2021.
NOTE 6. ACCELERATED SHARE REPURCHASE PROGRAM
On March 1, 2022, the Company entered into an ASR agreement with a financial institution counterparty to repurchase $500 million of its outstanding common stock. The Company paid $500 million to the counterparty and received an initial delivery of 1.2 million shares of its common stock. Final settlement of the ASR agreement was completed in April 2022 and the Company received delivery of an additional 0.3 million shares of the Company’s common stock.
In total, the Company repurchased 1.5 million shares of the Company’s common stock during the term of the ASR Agreement, based on the volume-weighted average price (net of discount) of $324.20 per share over the duration of the program. The initial share repurchase and final share settlement were recorded as a reduction to shareholders’ equity.
NOTE 7. CASH EQUIVALENTS AND INVESTMENTS
The table below provides additional information on the Company’s cash equivalents and investments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2022 |
| | | | | | | Balance sheet location |
| Cost | | Gains/(Losses) | | Fair Value | | Cash and cash equivalents | | Short-term
investments | | Other
assets |
Certificates of deposit and money market deposit accounts (1) | $ | 777 | | | $ | — | | | $ | 777 | | | $ | 669 | | | $ | 86 | | | $ | 22 | |
| Mutual funds | $ | 59 | | | $ | — | | | $ | 59 | | | $ | — | | | $ | — | | | $ | 59 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| | | | | | | Balance sheet location |
|
Cost | | Gains/(Losses) | |
Fair Value | | Cash and cash
equivalents | | Short-term
investments | | Other
assets |
| | | | | | | | | | | |
Certificates of deposit and money market deposit accounts (1) | $ | 691 | | | $ | — | | | $ | 691 | | | $ | 584 | | | $ | 91 | | | $ | 16 | |
| Mutual funds | $ | 65 | | | $ | 8 | | | $ | 73 | | | $ | — | | | $ | — | | | $ | 73 | |
(1) Consists of time deposits and money market deposit accounts. The remaining contractual maturities for the certificates of deposits classified as short-term investments were one month to 12 months at both June 30, 2022 and December 31, 2021. The remaining contractual maturities for the certificates of deposits classified in other assets are 13 months to 35 months at June 30, 2022 and 13 months to 29 months at December 31, 2021. Time deposits with a maturity of less than 90 days at time of purchase are classified as cash and cash equivalents.
In addition, the Company invests in Corporate-Owned Life Insurance (COLI). As of June 30, 2022 and December 31, 2021, the contract value of the COLI was $40 million and $37 million, respectively.
NOTE 8. ACQUISITIONS
The material business combination described below is accounted for using the acquisition method of accounting whereby assets acquired and liabilities assumed were recognized at fair value or other values set forth in U.S. GAAP on the date of the transaction. Any excess of the purchase price over the fair value of the assets acquired and liabilities assumed was recorded to goodwill. Goodwill typically results through expected synergies from combining operations of an acquiree and an acquirer, anticipated new customer acquisition and products, as well as from intangible assets that do not qualify for separate recognition.
RMS
On September 15, 2021, the Company acquired 100% of RMS, a global provider of climate and natural disaster risk modeling and analytics. The cash payment was funded with new debt financing and a combination of U.S. and offshore cash on hand. The acquisition will expand Moody’s insurance data and analytics business and accelerate the development of the Company’s global integrated risk capabilities to address the next generation of risk assessment.
The table below details the total consideration relating to the acquisition: | | | | | |
| Cash paid at closing | $ | 1,922 | |
| |
| |
| |
| |
Replacement equity compensation awards | 5 | |
| Total consideration | $ | 1,927 | |
Shown below is the preliminary purchase price allocation, which summarizes the fair value of the assets and liabilities assumed, at the date of acquisition: | | | | | | | | | | | |
| Cash | | | $ | 60 | |
| Accounts receivable | | | 38 | |
| Other current assets | | | 11 | |
| Property and equipment, net | | | 13 | |
| Operating lease right-of-use assets | | | 64 | |
| Intangible assets: | | | |
Customer relationships (23 year useful life) | $ | 518 | | | |
Product technology (7 year useful life) | 212 | | | |
Trade name (9 year useful life) | 49 | | | |
Total intangible assets (18 year weighted average useful life) | | | 779 | |
| Goodwill | | | 1,376 | |
| Deferred tax assets, net | | | 48 | |
| Other assets | | | 99 | |
| Liabilities: | | | |
| Accounts payable and accrued liabilities | $ | (92) | | | |
| Deferred revenue | (89) | | | |
| Operating lease liabilities | (68) | | | |
| Deferred tax liabilities, net | (214) | | | |
| Uncertain tax positions | (96) | | | |
| Other liabilities | (2) | | | |
| Total liabilities | | | (561) | |
| Net assets acquired | | | $ | 1,927 | |
The Company has performed a preliminary valuation analysis of the fair market value of assets and liabilities of the RMS business. The final purchase price allocation will be determined when the Company has completed and fully reviewed all information necessary to finalize the fair value of the acquired assets and liabilities, including deferred revenue. The final allocation could differ materially from the preliminary allocation. The final allocation may include changes in allocations to acquired intangible assets (including estimated useful lives of these assets) as well as goodwill and other changes to assets and liabilities including reserves for UTPs and deferred tax liabilities.
Goodwill
The goodwill recognized as a result of this acquisition includes, among other things, the value of combining the complementary product portfolios of Moody's and RMS, which is expected to extend the Company's reach into new market segments. The goodwill also includes the combined company's ability to accelerate technology innovations into new product adjacencies (leveraging RMS's team of data scientists, modelers and software engineers) as well as combining RMS's products with Moody’s core data and analytics offerings to provide holistic integrated risk solutions.
Goodwill, of which $1,286 million and $90 million has been assigned to the MA and MIS segments, respectively, is not deductible for tax purposes. The amount of goodwill allocated to the MIS segment relates to the integration of certain of RMS's models/processes into the Company's ESG solutions offerings.
Other assets in the table above includes an indemnification asset of $95 million related to uncertain tax positions assumed in the transaction, for which the Company expects to be indemnified by the sellers in the event of an unfavorable outcome.
Transaction costs
Transaction costs incurred in the year ended December 31, 2021 directly related to the RMS acquisition were $22 million and were recorded in SG&A expenses in the statement of operations.
Supplementary Unaudited Pro Forma Information
Supplemental information on an unaudited pro forma basis is presented below for the three and six months ended June 30, 2021 as if the acquisition of RMS occurred on January 1, 2020. The pro forma financial information is presented for comparative purposes only and is based on certain estimates and assumptions, which the Company believes to be reasonable but not necessarily indicative of future results of operations or the results that would have been reported if the acquisition had been completed at January 1, 2020. The unaudited pro forma information includes amortization of acquired intangible assets, based on the preliminary purchase price allocation and an estimate of useful lives reflected above, and incremental financing costs resulting from the acquisition, net of income tax, which was estimated using the weighted average statutory tax rates in effect in the jurisdiction for which the pro forma adjustment relates.
| | | | | | | | |
| Three Months Ended June 30, 2021 | Six Months Ended
June 30, 2021 |
| Pro forma Revenue | $ | 1,633 | | $ | 3,313 | |
| Pro forma Net Income attributable to Moody's | $ | 572 | | $ | 1,301 | |
The unaudited pro forma results do not include any anticipated cost savings or other effects of the planned integration of RMS. Accordingly, the pro forma results above are not necessarily indicative of the results that would have been reported if the acquisition had occurred on the dates indicated, nor are the pro forma results indicative of results which may occur in the future. The RMS results included in the above have been converted to U.S. GAAP from IFRS as issued by the IASB and have been translated to USD at rates in effect for the periods presented.
NOTE 9. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to global market risks, including risks from changes in FX rates and changes in interest rates. Accordingly, the Company uses derivatives in certain instances to manage the aforementioned financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for speculative purposes.
Derivatives and non-derivative instruments designated as accounting hedges:
Fair Value Hedges
Interest Rate Swaps
The Company has entered into interest rate swaps to convert the fixed interest rate on certain of its long-term debt to a floating interest rate based on the 3-month LIBOR, 6-month LIBOR, and SOFR. The purpose of these hedges is to mitigate the risk associated with changes in the fair value of the long-term debt, thus the Company has designated these swaps as fair value hedges. The fair value of the swaps is adjusted quarterly with a corresponding adjustment to the carrying value of the debt. The changes in the fair value of the swaps and the underlying hedged item generally offset and the net cash settlements on the swaps are recorded each period within interest expense, net in the Company’s consolidated statements of operations.
The following table summarizes the Company’s interest rate swaps designated as fair value hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Notional Amount | | |
| Hedged Item | | Nature of Swap | | As of June 30, 2022 | | As of December 31, 2021 | | Floating Interest Rate |
| 2017 Senior Notes due 2023 | | Pay Floating/Receive Fixed | | $ | — | | | $ | 250 | | | 3-month USD LIBOR |
| 2017 Senior Notes due 2028 | | Pay Floating/Receive Fixed | | $ | 500 | | | $ | 500 | | | 3-month USD LIBOR |
| 2020 Senior Notes due 2025 | | Pay Floating/Receive Fixed | | $ | 300 | | | $ | 300 | | | 6-month USD LIBOR |
| 2014 Senior Notes due 2044 | | Pay Floating/Receive Fixed | | $ | 300 | | | $ | 300 | | | 3-month USD LIBOR |
| 2018 Senior Notes due 2048 | | Pay Floating/Receive Fixed | | $ | 300 | | | $ | 300 | | | 3-month USD LIBOR |
2018 Senior Notes due 2029 (1) | | Pay Floating/Receive Fixed | | $ | 400 | | | $ | — | | | SOFR |
2022 Senior Notes due 2052 (2) | | Pay Floating/Receive Fixed | | $ | 500 | | | $ | — | | | SOFR |
| Total | | | | $ | 2,300 | | | $ | 1,650 | | | |
(1) Executed in the first quarter of 2022.
(2) Executed in the second quarter of 2022.
Refer to Note 15 for information on the cumulative amount of fair value hedging adjustments included in the carrying amount of the above hedged items.
The following table summarizes the impact to the statements of operations of the Company’s interest rate swaps designated as fair value hedges:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total amounts of financial statement line item presented in the statements of operations in which the effects of fair value hedges are recorded | | Amount of income/(loss) recognized in the consolidated statements of operations |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Interest expense, net | | $ | (55) | | | $ | (49) | | | $ | (108) | | | $ | (56) | |
| | | | | | | | | | |
Descriptions | | Location on Consolidated Statements of Operations | | | | | | | | |
| Net interest settlements and accruals on interest rate swaps | | Interest expense, net | | $ | 3 | | | $ | 6 | | | $ | 9 | | | $ | 11 | |
| Fair value changes on interest rate swaps | | Interest expense, net | | $ | (47) | | | $ | — | | | $ | (132) | | | $ | (24) | |
| Fair value changes on hedged debt | | Interest expense, net | | $ | 47 | | | $ | — | | | $ | 132 | | | $ | 24 | |
Net investment hedges
Debt designated as net investment hedges
The Company has designated €500 million of the 2015 Senior Notes Due 2027 and €750 million of the 2019 Senior Notes due 2030 as net investment hedges to mitigate FX exposure related to a portion of the Company’s euro net investment in certain foreign subsidiaries against changes in euro/USD exchange rates. These hedges are designated as accounting hedges under the applicable sections of ASC Topic 815 and will end upon the repayment of the notes in 2027 and 2030, respectively, unless terminated early at the discretion of the Company.
Cross currency swaps designated as net investment hedges
The Company enters into cross-currency swaps to mitigate FX exposure related to a portion of the Company’s euro net investment in certain foreign subsidiaries against changes in euro/USD exchange rates. The following table provides information on the cross-currency swaps designated as net investment hedges under ASC Topic 815: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| | Pay | | Receive |
| Nature of Swap | | Notional Amount | | Weighted Average Interest Rate | | Notional Amount | | Weighted Average Interest Rate |
| Pay Fixed/Receive Fixed | | € | 765 | | | 3.67% | | $ | 800 | | | 5.25% |
| Pay Floating/Receive Floating | | 958 | | | Based on 3-month EURIBOR | | 1,100 | | | Based on 3-month USD LIBOR |
| Pay Floating/Receive Floating | | 854 | | | Based on ESTR | | 900 | | | Based on SOFR |
| Total | | € | 2,577 | | | | | $ | 2,800 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| | Pay | | Receive |
| Nature of Swap | | Notional Amount | | Weighted Average Interest Rate | | Notional Amount | | Weighted Average Interest Rate |
| Pay Fixed/Receive Fixed | | € | 909 | | | 2.16% | | $ | 1,050 | | | 4.45% |
| Pay Floating/Receive Floating | | 1,179 | | | Based on 3-month EURIBOR | | 1,350 | | | Based on 3-month USD LIBOR |
| Total | | € | 2,088 | | | | | $ | 2,400 | | | |
As of June 30, 2022 these hedges will expire and the notional amounts will be settled as follows unless terminated early at the discretion of the Company: | | | | | | | | |
| Years Ending December 31, | | |
| | |
| 2026 | | € | 450 | |
| 2027 | | € | 285 | |
| 2028 | | € | 507 | |
| 2029 | | € | 373 | |
| 2031 | | € | 481 | |
| 2032 | | € | 481 | |
| Total | | € | 2,577 | |
Cash Flow Hedges
Interest Rate Forward Contracts
In January 2020, the Company entered into $300 million notional amount treasury rate locks with an average locked-in U.S. 30-year Treasury rate of 2.0103%, which were designated as cash flow hedges and used to manage the Company’s interest rate risk during the period prior to an anticipated issuance of 30-year debt. The treasury lock interest rate forward contracts matured on April 30, 2020, resulting in a cumulative loss of $68 million, which was recognized in AOCL. The loss on the Treasury rate lock will be reclassified from AOCL to earnings in the same period that the hedged transaction (i.e. interest payments on the 3.25% 2020 Senior Notes, due 2050) impacts earnings.
The following tables provide information on the gains/(losses) on the Company’s net investment and cash flow hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative and Non-Derivative Instruments in Net Investment Hedging Relationships | | Amount of Gain/(Loss) Recognized in AOCL on Derivative, net of Tax | | Amount of Gain/(Loss) Reclassified from AOCL into Income, net of Tax | | Gain/(Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing) |
| Three Months Ended June 30, | | Three Months Ended June 30, | | Three Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | | | | | |
| Cross currency swaps | | $ | 118 | | | $ | (18) | | | $ | — | | | $ | — | | | $ | 11 | | | $ | 9 | |
| Long-term debt | | 63 | | | (10) | | | — | | | — | | | — | | | — | |
| Total net investment hedges | | $ | 181 | | | $ | (28) | | | $ | — | | | $ | — | | | $ | 11 | | | $ | 9 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative and Non-Derivative Instruments in Net Investment Hedging Relationships | | Amount of Gain/(Loss) Recognized in AOCL on Derivative, net of Tax | | Amount of Gain/(Loss) Reclassified from AOCL into Income, net of Tax | | Gain/(Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing) |
| Six Months Ended
June 30, | | Six Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| FX forward contracts | | $ | — | | | $ | 16 | | | $ | — | | | $ | 1 | | | $ | — | | | $ | — | |
| Cross currency swaps | | 142 | | | 54 | | | — | | | — | | | 21 | | | 19 | |
| Long-term debt | | 86 | | | 35 | | | — | | | — | | | — | | | — | |
| Total net investment hedges | | $ | 228 | | | $ | 105 | | | $ | — | | | $ | 1 | | | $ | 21 | | | $ | 19 | |
| Derivatives in Cash Flow Hedging Relationships | | | | | | | | | | | | |
| | | | | | | | | | | | |
| Interest rate contracts | | $ | — | | | $ | — | | | $ | (1) | | | $ | (1) | | | $ | — | | | $ | — | |
| | | | | | | | | | | | |
| Total cash flow hedges | | $ | — | | | $ | — | | | $ | (1) | | | $ | (1) | | | $ | — | | | $ | — | |
| Total | | $ | 228 | | | $ | 105 | | | $ | (1) | | | $ | — | | | $ | 21 | | | $ | 19 | |
The cumulative amount of net investment hedge and cash flow hedge gains (losses) remaining in AOCL is as follows:
| | | | | | | | | | | |
| Cumulative Gains/(Losses), net of tax |
| June 30, 2022 | | December 31, 2021 |
Net investment hedges | | | |
| Cross currency swaps | $ | 161 | | | $ | 19 | |
| FX forwards | 29 | | | 29 | |
| Long-term debt | 59 | | | (27) | |
| Total net investment hedges | $ | 249 | | | $ | 21 | |
| Cash flow hedges | | | |
| Interest rate contracts | $ | (48) | | | $ | (49) | |
| Cross currency swaps | 2 | | | 2 | |
| Total cash flow hedges | (46) | | | (47) | |
| Total net gain (loss) in AOCL | $ | 203 | | | $ | (26) | |
Derivatives not designated as accounting hedges:
Foreign exchange forwards
The Company also enters into foreign exchange forward contracts to mitigate the change in fair value on certain assets and liabilities denominated in currencies other than a subsidiary’s functional currency. These forward contracts are not designated as accounting hedges under the applicable sections of Topic 815 of the ASC. Accordingly, changes in the fair value of these contracts are recognized immediately in other non-operating income, net in the Company’s consolidated statements of operations along with the FX gain or loss recognized on the assets and liabilities denominated in a currency other than the subsidiary’s functional currency. These contracts have expiration dates at various times through August 2022.
The following table summarizes the notional amounts of the Company’s outstanding foreign exchange forwards: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Notional amount of currency pair: | Sell | | Buy | | Sell | | Buy |
| Contracts to sell USD for GBP | $ | 135 | | | £ | 104 | | | $ | 126 | | | £ | 92 | |
| Contracts to sell USD for Japanese yen | $ | 20 | | | ¥ | 2,500 | | | $ | 22 | | | ¥ | 2,500 | |
| Contracts to sell USD for Canadian dollars | $ | 134 | | | C$ | 171 | | | $ | 120 | | | C$ | 150 | |
| Contracts to sell USD for Singapore dollars | $ | 73 | | | S$ | 100 | | | $ | 67 | | | S$ | 90 | |
| Contracts to sell USD for euros | $ | 365 | | | € | 338 | | | $ | 364 | | | € | 315 | |
| Contracts to sell USD for Russian ruble | $ | — | | | ₽ | — | | | $ | 16 | | | ₽ | 1,200 | |
| Contracts to sell USD for Indian rupee | $ | 23 | | | ₹ | 1,800 | | | $ | 7 | | | ₹ | 500 | |
| Contracts to sell GBP for USD | £ | — | | | $ | — | | | £ | 172 | | | $ | 231 | |
NOTE: € = euro, £ = British pound, $ = U.S. dollar, ¥ = Japanese yen, C$ = Canadian dollar, S$= Singapore dollars, ₽= Russian ruble, ₹= Indian rupee
The following table summarizes the impact to the consolidated statements of operations relating to the net losses on the Company’s derivatives which are not designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivatives not designated as accounting hedges | | Location on Consolidated Statements of Operations | | | Three Months Ended June 30, | | | Six Months Ended
June 30, |
| | | 2022 | | 2021 | | | 2022 | | 2021 |
| FX forwards | | Other non-operating income, net | | | $ | (38) | | | $ | (1) | | | | $ | (57) | | | $ | (7) | |
The table below shows the classification between assets and liabilities on the Company’s consolidated balance sheets for the fair value of the derivative instrument as well as the carrying value of its non-derivative debt instruments designated and qualifying as net investment hedges:
| | | | | | | | | | | | | | | | | | | | |
| | Derivative and Non-Derivative Instruments |
| | Balance Sheet Location | | June 30, 2022 | | December 31, 2021 |
| Assets: | | | | | | |
| Derivatives designated as accounting hedges: | | | | | | |
| | | | | | |
| Cross-currency swaps designated as net investment hedges | | Other assets | | $ | 112 | | | $ | 53 | |
| | | | | | |
| Interest rate swaps designated as fair value hedges | | Other assets | | — | | | 13 | |
| Total derivatives designated as accounting hedges | | | | 112 | | | 66 | |
| | | | | | |
| Derivatives not designated as accounting hedges: | | | | | | |
| FX forwards on certain assets and liabilities | | Other current assets | | — | | | 1 | |
| Total assets | | | | $ | 112 | | | $ | 67 | |
| Liabilities: | | | | | | |
| Derivatives designated as accounting hedges: | | | | | | |
| | | | | | |
| | | | | | |
| Cross-currency swaps designated as net investment hedges | | Other liabilities | | $ | 22 | | | $ | 17 | |
| Interest rate swaps designated as fair value hedges | | Other liabilities | | 142 | | | 23 | |
| Total derivatives designated as accounting hedges | | | | 164 | | | 40 | |
| Non-derivatives designated as accounting hedges: | | | | | | |
| Long-term debt designated as net investment hedge | | Long-term debt | | 1,307 | | | 1,421 | |
| Derivatives not designated as accounting hedges: | | | | | | |
| FX forwards on certain assets and liabilities | | Accounts payable and accrued liabilities | | 25 | | | 12 | |
| Total liabilities | | | | $ | 1,496 | | | $ | 1,473 | |
NOTE 10. GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS
The following table summarizes the activity in goodwill for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| MIS | | MA | | Consolidated |
| Gross goodwill | | Accumulated impairment
charge | | Net
goodwill | | Gross goodwill | | Accumulated
impairment
charge | | Net
goodwill | | Gross goodwill | | Accumulated
impairment
charge | | Net
goodwill |
Balance at beginning
of year | $ | 396 | | | $ | — | | | $ | 396 | | | $ | 5,615 | | | $ | (12) | | | $ | 5,603 | | | $ | 6,011 | | | $ | (12) | | | $ | 5,999 | |
Additions/ adjustments (1) | 3 | | | — | | | 3 | | | 107 | | | — | | | 107 | | | 110 | | | — | | | 110 | |
| Foreign currency translation adjustments | (9) | | | — | | | (9) | | | (259) | | | — | | | (259) | | | (268) | | | — | | | (268) | |
| | | | | | | | | | | | | | | | | |
| Ending balance | $ | 390 | | | $ | — | | | $ | 390 | | | $ | 5,463 | | | $ | (12) | | | $ | 5,451 | | | $ | 5,853 | | | $ | (12) | | | $ | 5,841 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| MIS | | MA | | Consolidated |
| Gross goodwill | | Accumulated impairment charge | | Net goodwill | | Gross goodwill | | Accumulated impairment charge | | Net goodwill | | Gross goodwill | | Accumulated impairment charge | | Net goodwill |
Balance at beginning
of year | $ | 311 | | | $ | — | | | $ | 311 | | | $ | 4,257 | | | $ | (12) | | | $ | 4,245 | | | $ | 4,568 | | | $ | (12) | | | $ | 4,556 | |
Additions/ adjustments (2) | 90 | | | — | | | 90 | | | 1,525 | | | — | | | 1,525 | | | 1,615 | | | — | | | 1,615 | |
Foreign currency translation
adjustments | (5) | | | — | | | (5) | | | (167) | | | — | | | (167) | | | (172) | | | — | | | (172) | |
| | | | | | | | | | | | | | | | | |
| Ending balance | $ | 396 | | | $ | — | | | $ | 396 | | | $ | 5,615 | | | $ | (12) | | | $ | 5,603 | | | $ | 6,011 | | | $ | (12) | | | $ | 5,999 | |
(1) The 2022 additions/adjustments for the MA segment in the table above primarily relate to the acquisition of kompany in the first quarter of 2022.
(2) The 2021 additions/adjustments for the MA segment in the table above relate to the acquisitions of Cortera, RMS, RealXData, Bogard, and PassFort. The 2021 additions/adjustments for the MIS segment relate to certain revenue synergies from the RMS acquisition that are expected to benefit the ESG solutions group within the MIS Other LOB.
Acquired intangible assets and related amortization consisted of: | | | | | | | | | | | |
| June 30,
2022 | | December 31,
2021 |
| Customer relationships | $ | 2,016 | | | $ | 2,101 | |
| Accumulated amortization | (407) | | | (381) | |
| Net customer relationships | 1,609 | | | 1,720 | |
| Software/product technology | 656 | | | 663 | |
| Accumulated amortization | (243) | | | (219) | |
| Net software/product technology | 413 | | | 444 | |
| Database | 177 | | | 179 | |
| Accumulated amortization | (54) | | | (46) | |
| Net database | 123 | | | 133 | |
| Trade names | 199 | | | 207 | |
| Accumulated amortization | (53) | | | (47) | |
| Net trade names | 146 | | | 160 | |
Other (1) | 53 | | | 54 | |
| Accumulated amortization | (44) | | | (44) | |
| Net other | 9 | | | 10 | |
| Total acquired intangible assets, net | $ | 2,300 | | | $ | 2,467 | |
(1) Other intangible assets primarily consist of trade secrets, covenants not to compete, and acquired ratings methodologies and models.
Amortization expense relating to acquired intangible assets is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended
June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Amortization expense | $ | 51 | | | $ | 36 | | | $ | 102 | | | $ | 71 | |
Estimated future amortization expense for acquired intangible assets subject to amortization is as follows:
| | | | | | | | |
| Year Ending December 31, | | |
2022 (After June 30,) | | $ | 100 | |
| 2023 | | 190 | |
| 2024 | | 185 | |
| 2025 | | 181 | |
| 2026 | | 176 | |
| Thereafter | | 1,468 | |
| Total estimated future amortization | | $ | 2,300 | |
NOTE 11. RESTRUCTURING
On June 30, 2022, the chief executive officer of Moody’s approved a restructuring program (the “2022 - 2023 Geolocation Restructuring Program”) that the Company estimates will result in annualized savings of $40 million to $60 million per year. This program relates to the Company's post-COVID-19 geolocation strategy and includes the rationalization and exit of certain real estate leases and a reduction in staff, including the relocation of certain job functions from their current locations. The exit from certain leased office spaces is expected to begin late in 2022 or early 2023 and is expected to result in $25 million to $35 million of pre-tax charges to either terminate or sublease the affected real estate leases. The program also includes $30 million to $40 million of pre-tax personnel-related restructuring charges, an amount that includes severance and related costs primarily determined under the Company’s existing severance plans. The savings generated from the 2022 - 2023 Geolocation Restructuring Program will primarily be redeployed towards strategic investments including the Company's Workplace of the Future program and employee retention initiatives. The 2022 - 2023 Geolocation Restructuring Program is expected to be substantially complete in the first half of 2023. Cash outlays associated with this program are expected to be $30 million to $40 million, which are expected to be paid through 2024.
On December 22, 2020, the chief executive officer of Moody’s approved a restructuring program (the “2020 MA Strategic Reorganization Restructuring Program”) that the Company estimates will result in annualized savings of $20 million per year. This program relates to a strategic reorganization in the MA reportable segment consisting of severance and related costs primarily determined under the Company’s existing severance plans. The 2020 MA Strategic Reorganization Restructuring Program resulted in a total of $19 million in pre-tax charges and was substantially completed in the first half of 2021. Cash outlays associated with this program are expected to be $20 million, which will be paid through 2022.
Total expense included in the accompanying consolidated statements of operations relating to the aforementioned restructuring program is below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended
June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| | | | | | | |
| 2020 MA Strategic Reorganization Restructuring Program | $ | (1) | | | $ | — | | | $ | (1) | | | $ | 2 | |
| 2022 - 2023 Geolocation Restructuring Program | 32 | | | — | | | 32 | | | — | |
| Total Restructuring | $ | 31 | | | $ | — | | | $ | 31 | | | $ | 2 | |
Changes to the restructuring liability for the aforementioned restructuring programs during the first six months of 2022 were as follows: | | | | | | | | | |
| Employee Termination Costs | | | | |
Balance as of December 31, 2021 | $ | 4 | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| 2020 MA Strategic Reorganization Restructuring Program: | | | | | |
| Cost incurred and adjustments | (1) | | | | | |
| Cash payments and adjustments | (2) | | | | | |
| 2022 - 2023 Geolocation Restructuring Program: | | | | | |
| Cost incurred and adjustments | 32 | | | | | |
| Cash payments and adjustments | (1) | | | | | |
Balance as of June 30, 2022 | $ | 32 | | | | | |
| | | | | |
| Cumulative expense incurred to date | | | | | |
| | | | | |
| | | | | |
| 2020 MA Strategic Reorganization Restructuring Program | $ | 19 | | | | | |
| 2022 - 2023 Geolocation Restructuring Program | $ | 32 | | | | | |
NOTE 12. FAIR VALUE
The table below presents information about items that are carried at fair value at June 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | |
| Fair value Measurement as of June 30, 2022 |
| Description | Balance | | Level 1 | | Level 2 |
Assets: | | | | | |
Derivatives (1) | $ | 112 | | | $ | — | | | $ | 112 | |
| Mutual funds | 59 | | | 59 | | | — | |
| Total | $ | 171 | | | $ | 59 | | | $ | 112 | |
| Liabilities: | | | | | |
Derivatives (1) | $ | 189 | | | $ | — | | | $ | 189 | |
| Total | $ | 189 | | | $ | — | | | $ | 189 | |
| | | | | | | | | | | | | | | | | |
| Fair value Measurement as of December 31, 2021 |
| Description | Balance | | Level 1 | | Level 2 |
| Assets: | | | | | |
Derivatives (1) | $ | 67 | | | $ | — | | | $ | 67 | |
| | | | | |
| Mutual funds | 73 | | | 73 | | | — | |
| Total | $ | 140 | | | $ | 73 | | | $ | 67 | |
| Liabilities: | | | | | |
Derivatives (1) | $ | 52 | | | $ | — | | | $ | 52 | |
| Total | $ | 52 | | | $ | — | | | $ | 52 | |
(1) Represents FX forward contracts, interest rate swaps and cross-currency swaps as more fully described in Note 9 to the condensed consolidated financial statements.
The following are descriptions of the methodologies utilized by the Company to estimate the fair value of its derivative contracts, mutual funds and money market mutual funds:
Derivatives:
In determining the fair value of the derivative contracts in the table above, the Company utilizes industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using spot rates, forward points, currency volatilities, interest rates as well as the risk of non-performance of the Company and the counterparties with whom it has derivative contracts. The Company established strict counterparty credit guidelines and only enters into transactions with financial institutions that adhere to these guidelines. Accordingly, the risk of counterparty default is deemed to be minimal.
Mutual funds:
The mutual funds in the table above are deemed to be equity securities with readily determinable fair values with changes in the fair value recognized through net income under ASC Topic 321. The fair value of these instruments is determined using Level 1 inputs as defined in the ASC Topic 820.
NOTE 13. OTHER BALANCE SHEET AND STATEMENTS OF OPERATIONS INFORMATION
The following tables contain additional detail related to certain balance sheet captions:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Other current assets: | | | |
| Prepaid taxes | $ | 258 | | | $ | 112 | |
| Prepaid expenses | 98 | | | 99 | |
| Capitalized costs to obtain and fulfill sales contracts | 91 | | | 103 | |
| | | |
| | | |
| Other | 68 | | | 75 | |
| Total other current assets | $ | 515 | | | $ | 389 | |
| | | |
| Other assets: | | | |
| Investments in non-consolidated affiliates | $ | 514 | | | $ | 443 | |
| Deposits for real-estate leases | 14 | | | 14 | |
| Indemnification assets related to acquisitions | 108 | | | 106 | |
| Mutual funds and fixed deposits | 81 | | | 89 | |
| Company owned life insurance (at contract value) | 40 | | | 37 | |
| Costs to obtain sales contracts | 145 | | | 138 | |
| Derivative instruments designated as accounting hedges | 112 | | | 66 | |
| Pension and other retirement employee benefits | 73 | | | 77 | |
| Other | 80 | | | 64 | |
| Total other assets | $ | 1,167 | | | $ | 1,034 | |
| | | |
| Accounts payable and accrued liabilities: | | | |
| Salaries and benefits | $ | 156 | | | $ | 211 | |
| Incentive compensation | 110 | | | 324 | |
| Customer credits, advanced payments and advanced billings | 102 | | | 100 | |
| | | |
| Dividends | 5 | | | 6 | |
| Professional service fees | 68 | | | 75 | |
| Interest accrued on debt | 82 | | | 85 | |
| Accounts payable | 31 | | | 47 | |
| Income taxes | 130 | | | 115 | |
| Pension and other retirement employee benefits | 7 | | | 7 | |
| Accrued royalties | 17 | | | 36 | |
| Foreign exchange forwards on certain assets and liabilities | 25 | | | 12 | |
| Restructuring liability | 28 | | | 4 | |
| | | |
| | | |
| Other | 105 | | | 120 | |
| Total accounts payable and accrued liabilities | $ | 866 | | | $ | 1,142 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | | | | | | | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Other liabilities: | | | |
| Pension and other retirement employee benefits | $ | 213 | | | $ | 235 | |
| | | |
| Interest accrued on UTPs | 40 | | | 59 | |
| MAKS indemnification provisions | 22 | | | 33 | |
| Income tax liability - non-current portion | 23 | | | 23 | |
| Derivative instruments designated as accounting hedges | 164 | | | 40 | |
| Restructuring liability | 4 | | | — | |
| Other | 47 | | | 48 | |
| Total other liabilities | $ | 513 | | | $ | 438 | |
Allowance for credit losses:
During the six months ended June 30, 2022, the Company increased its allowance for credit losses by $14 million. This increase was primarily due to reserves recorded for the Company's Russian-domiciled customers pursuant to the impacts of the Russia/Ukraine conflict, which is more fully described in Note 1.
Investments in non-consolidated affiliates:
The following table provides additional detail regarding Moody's investments in non-consolidated affiliates, as included in other assets in the consolidated balance sheets:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Equity method investments(1) | $ | 189 | | | $ | 121 | |
Investments measured using the measurement alternative(2) | 320 | | | 318 | |
| Other | 5 | | | 4 | |
| Total investments in non-consolidated affiliates | $ | 514 | | | $ | 443 | |
(1) Equity securities in which the Company has significant influence over the investee but does not have a controlling financial interest in accordance with ASC Topic 323 |
(2) Equity securities without readily determinable fair value for which the Company has elected to apply the measurement alternative in accordance with ASC Topic 321 |
Moody's holds various investments accounted for under the equity method, the most significant of which is the Company's minority investment in CCXI. Moody's also holds various investments measured using the measurement alternative, the most significant of which is the Company's minority interest in BitSight.
Earnings from non-consolidated affiliates, which are included within other non-operating income, net, are disclosed within the table below.
Other non-operating (expense) Income:
The following table summarizes the components of other non-operating (expense) income:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
FX (loss)/gain (1) | $ | (22) | | | $ | 2 | | | $ | (22) | | | $ | — | |
| Net periodic pension costs - other components | 6 | | | (3) | | | 12 | | | 1 | |
| Income from investments in non-consolidated affiliates | 2 | | | 1 | | | 4 | | | 9 | |
| Other | 4 | | | 6 | | | 2 | | | 12 | |
| Total | $ | (10) | | | $ | 6 | | | $ | (4) | | | $ | 22 | |
(1) FX loss for the three and six months ended June 30, 2022 includes FX translation losses of $20 million reclassified to earnings resulting from the Company no longer conducting commercial operations in Russia. |
NOTE 14. COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table provides details about the reclassifications out of AOCL:
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Location in the consolidated statements of operations |
| Losses on currency translation adjustments | 2022 | | 2021 | |
| Foreign currency translation adjustments - reclassification of losses included in net income | $ | (20) | | | $ | — | | | Other non-operating income, net |
| Total losses on currency translation adjustments | (20) | | | — | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Gains (losses) on net investment hedges | | | | | |
| FX forwards | — | | | 1 | | | Other non-operating income, net |
| Income tax effect of item above | — | | | (1) | | | Provision for income taxes |
| Total net gains on net investment hedges | — | | | — | | | |
| Pension and other retirement benefits | | | | | |
| Amortization of actuarial losses and prior service costs included in net income | (1) | | | (3) | | | Other non-operating income, net |
| Settlement charge | — | | | (7) | | | Other non-operating income, net |
| Total before income taxes | (1) | | | (10) | | | |
| Income tax effect of items above | — | | | 2 | | | Provision for income taxes |
| Total pension and other retirement benefits | (1) | | | (8) | | | |
| Total net losses included in Net Income attributable to reclassifications out of AOCL | $ | (21) | | | $ | (8) | | | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | Location in the consolidated statements of operations |
| Losses on currency translation adjustments | 2022 | | 2021 | |
| Foreign currency translation adjustments - reclassification of losses included in net income | $ | (20) | | | $ | — | | | Other non-operating income, net |
| Total losses on currency translation adjustments | (20) | | | — | | | |
| Losses on cash flow hedges | | | | | |
| | | | | |
| Interest rate contract | (1) | | | (1) | | | Other non-operating income, net |
| Income tax effect of item above | — | | | — | | | Provision for income taxes |
| Total net losses on cash flow hedges | (1) | | | (1) | | | |
| Gains (losses) on net investment hedges | | | | | |
| FX forwards | — | | | 2 | | | Other non-operating income, net |
| Income tax effect of item above | — | | | (1) | | | Provision for income taxes |
| Total net gains on net investment hedges | — | | | 1 | | | |
| Pension and other retirement benefits | | | | | |
| Amortization of actuarial losses and prior service costs included in net income | (1) | | | (6) | | | Other non-operating income, net |
| Settlement charge | — | | | (7) | | | Other non-operating income, net |
| Total before income taxes | (1) | | | (13) | | | |
| Income tax effect of item above | — | | | 3 | | | Provision for income taxes |
| Total pension and other retirement benefits | (1) | | | (10) | | | |
| Total net losses included in Net Income attributable to reclassifications out of AOCL | $ | (22) | | | $ | (10) | | | |
The following tables show changes in AOCL by component (net of tax):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Three Months Ended June 30, |
| 2022 | | 2021 |
| Gains/(Losses) | Pension and Other Retirement Benefits | Cash Flow Hedges | Foreign Currency Translation Adjustments | Net Investment Hedges | Total | | Pension and Other Retirement Benefits | Cash Flow Hedges | Foreign Currency Translation Adjustments | Net Investment Hedges | Total |
Balance at March 31, | $ | (51) | | $ | (46) | | $ | (442) | | $ | 68 | | $ | (471) | | | $ | (116) | | $ | (48) | | $ | (188) | | $ | (88) | | $ | (440) | |
| Other comprehensive income/(loss) before reclassifications | 4 | | — | | (334) | | 181 | | (149) | | | — | | — | | 36 | | (29) | | 7 | |
| Amounts reclassified from AOCL | 1 | | — | | 20 | | — | | 21 | | | 8 | | — | | — | | — | | 8 | |
| Other comprehensive income/(loss) | 5 | | — | | (314) | | 181 | | (128) | | | 8 | | — | | 36 | | (29) | | 15 | |
Balance at June 30, | $ | (46) | | $ | (46) | | $ | (756) | | $ | 249 | | $ | (599) | | | $ | (108) | | $ | (48) | | $ | (152) | | $ | (117) | | $ | (425) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
| Gains/(Losses) | Pension and Other Retirement Benefits | Cash Flow Hedges | Foreign Currency Translation Adjustments | Net Investment Hedges | Total | | Pension and Other Retirement Benefits | Cash Flow Hedges | Foreign Currency Translation Adjustments | Net Investment Hedges | Total |
Balance at December 31, | $ | (49) | | $ | (47) | | $ | (335) | | $ | 21 | | $ | (410) | | | $ | (118) | | $ | (49) | | $ | (45) | | $ | (220) | | $ | (432) | |
| Other comprehensive income/(loss) before reclassifications | 2 | | — | | (441) | | 228 | | (211) | | | — | | — | | (107) | | 104 | | (3) | |
| Amounts reclassified from AOCL | 1 | | 1 | | 20 | | — | | 22 | | | 10 | | 1 | | — | | (1) | | 10 | |
| | | | | | | | | | | |
| Other comprehensive income/(loss) | 3 | | 1 | | (421) | | 228 | | (189) | | | 10 | | 1 | | (107) | | 103 | | 7 | |
Balance at June 30, | $ | (46) | | $ | (46) | | $ | (756) | | $ | 249 | | $ | (599) | | | $ | (108) | | $ | (48) | | $ | (152) | | $ | (117) | | $ | (425) | |
NOTE 15. INDEBTEDNESS
The Company’s debt is recorded at its carrying amount, which represents the issuance amount plus or minus any issuance premium or discount, except for certain debt as depicted in the table below, which is recorded at the carrying amount adjusted for the fair value of an interest rate swap used to hedge the fair value of the note.
The following table summarizes total indebtedness:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| Notes Payable: | Principal Amount | | Fair Value of Interest Rate Swaps (1) | | Unamortized (Discount) Premium | | Unamortized Debt Issuance Costs | | Carrying Value |
4.875% 2013 Senior Notes, due 2024 | $ | 500 | | | $ | — | | | $ | (1) | | | $ | (1) | | | $ | 498 | |
5.25% 2014 Senior Notes, due 2044 | 600 | | | (32) | | | 3 | | | (5) | | | 566 | |
1.75% 2015 Senior Notes, due 2027 | 523 | | | — | | | — | | | (2) | | | 521 | |
2.625% 2017 Senior Notes, due 2023 | 500 | | | — | | | — | | | (1) | | | 499 | |
3.25% 2017 Senior Notes, due 2028 | 500 | | | (24) | | | (3) | | | (2) | | | 471 | |
4.25% 2018 Senior Notes, due 2029 | 400 | | | (25) | | | (2) | | | (2) | | | 371 | |
4.875% 2018 Senior Notes, due 2048 | 400 | | | (34) | | | (6) | | | (4) | | | 356 | |
0.950% 2019 Senior Notes, due 2030 | 784 | | | — | | | (2) | | | (4) | | | 778 | |
3.75% 2020 Senior Notes, due 2025 | 700 | | | (22) | | | (1) | | | (3) | | | 674 | |
3.25% 2020 Senior Notes, due 2050 | 300 | | | — | | | (4) | | | (3) | | | 293 | |
2.55% 2020 Senior Notes, due 2060 | 500 | | | — | | | (4) | | | (5) | | | 491 | |
2.00% 2021 Senior Notes, due 2031 | 600 | | | — | | | (7) | | | (5) | | | 588 | |
2.75% 2021 Senior Notes, due 2041 | 600 | | | — | | | (13) | | | (5) | | | 582 | |
3.10% 2021 Senior Notes, due 2061 | 500 | | | — | | | (7) | | | (5) | | | 488 | |
3.75% 2022 Senior Notes, due 2052 | 500 | | | (5) | | | (9) | | | (5) | | | 481 | |
| | | | | | | | | |
| Total debt | $ | 7,907 | | | $ | (142) | | | $ | (56) | | | $ | (52) | | | $ | 7,657 | |
| Current portion | | | | | | | | | (499) | |
| Total long-term debt | | | | | | | | | $ | 7,158 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Notes Payable: | Principal Amount | | Fair Value of Interest Rate Swaps (1) | | Unamortized (Discount) Premium | | Unamortized Debt Issuance Costs | | Carrying Value |
4.875% 2013 Senior Notes, due 2024 | $ | 500 | | | $ | — | | | $ | (1) | | | $ | (1) | | | $ | 498 | |
5.25% 2014 Senior Notes, due 2044 | 600 | | | (7) | | | 3 | | | (5) | | | 591 | |
1.75% 2015 Senior Notes, due 2027 | 568 | | | — | | | — | | | (2) | | | 566 | |
2.625% 2017 Senior Notes, due 2023 | 500 | | | 5 | | | — | | | (1) | | | 504 | |
3.25% 2017 Senior Notes, due 2028 | 500 | | | 8 | | | (3) | | | (2) | | | 503 | |
4.25% 2018 Senior Notes, due 2029 | 400 | | | — | | | (2) | | | (2) | | | 396 | |
4.875% 2018 Senior Notes, due 2048 | 400 | | | (7) | | | (6) | | | (4) | | | 383 | |
0.950% 2019 Senior Notes, due 2030 | 853 | | | — | | | (2) | | | (5) | | | 846 | |
3.75% 2020 Senior Notes, due 2025 | 700 | | | (9) | | | (1) | | | (4) | | | 686 | |
3.25% 2020 Senior Notes, due 2050 | 300 | | | — | | | (4) | | | (3) | | | 293 | |
2.55% 2020 Senior Notes, due 2060 | 500 | | | — | | | (4) | | | (5) | | | 491 | |
2.00% 2021 Senior Notes, due 2031 | 600 | | | — | | | (8) | | | (5) | | | 587 | |
2.75% 2021 Senior Notes, due 2041 | 600 | | | — | | | (13) | | | (6) | | | 581 | |
3.10% 2021 Senior Notes, due 2061 | 500 | | | — | | | (7) | | | (5) | | | 488 | |
| Total long-term debt | $ | 7,521 | | | $ | (10) | | | $ | (48) | | | $ | (50) | | | $ | 7,413 | |
(1) The fair value of interest rate swaps in the table above represents the cumulative amount of fair value hedging adjustments included in the carrying amount of the hedged debt.
Notes Payable
In the first quarter of 2022, the Company issued the 2022 Senior Notes, due 2052. The key terms of this debt issuance are set forth in the table above.
At June 30, 2022, the Company was in compliance with all covenants contained within all of the debt agreements. All the debt agreements contain cross default provisions which state that default under one of the aforementioned debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under those instruments to be immediately due and payable. As of June 30, 2022, there were no such cross defaults.
The repayment schedule for the Company’s borrowings is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ending December 31, | 2013 Senior Notes due 2024 | | 2014 Senior Notes due 2044 | | 2015 Senior Notes due 2027 | | 2017 Senior Notes due 2023 | | 2017 Senior Notes due 2028 | | 2018 Senior Notes due 2029 | | 2018 Senior Notes due 2048 | | 2019 Senior Notes due 2030 | | 2020 Senior Notes due 2025 | | 2020 Senior Notes due 2050 | | 2020 Senior Notes due 2060 | | | | 2021 Senior Notes due 2031 | | 2021 Senior Notes due 2041 | | 2021 Senior Notes due 2061 | | 2022 Senior Notes due 2052 | | Total |
2022 (After June 30,) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| 2023 | — | | | — | | | — | | | 500 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | | | — | | | — | | | — | | | 500 | |
| 2024 | 500 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | | | — | | | — | | | — | | | 500 | |
| 2025 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 700 | | | — | | | — | | | | | — | | | — | | | — | | | — | | | 700 | |
| 2026 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | | | — | | | — | | | — | | | — | |
| Thereafter | — | | | 600 | | | 523 | | | — | | | 500 | | | 400 | | | 400 | | | 784 | | | — | | | 300 | | | 500 | | | | | 600 | | | 600 | | | 500 | | | 500 | | | 6,207 | |
| Total | $ | 500 | | | $ | 600 | | | $ | 523 | | | $ | 500 | | | $ | 500 | | | $ | 400 | | | $ | 400 | | | $ | 784 | | | $ | 700 | | | $ | 300 | | | $ | 500 | | | | | $ | 600 | | | $ | 600 | | | $ | 500 | | | $ | 500 | | | $ | 7,907 | |
Interest expense, net
The following table summarizes the components of interest as presented in the consolidated statements of operations and the cash paid for interest:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Income | $ | 2 | | | $ | 1 | | | $ | 4 | | | $ | 4 | |
| Expense on borrowings | (50) | | | (41) | | | (98) | | | (82) | |
Income (expense) on UTPs and other tax related liabilities(2) | (3) | | | (5) | | | (6) | | | 30 | |
| Net periodic pension costs - interest component | (4) | | | (4) | | | (8) | | | (8) | |
| Interest expense, net | $ | (55) | | | $ | (49) | | | $ | (108) | | | $ | (56) | |
Interest paid(1) | $ | 12 | | | $ | 13 | | | $ | 90 | | | $ | 86 | |
(1) Interest paid includes net settlements on interest rate swaps more fully discussed in Note 9.
(2) Income (expense) on UTPs and other tax related liabilities for the six months ended June 30, 2021 includes a $40 million benefit relating to the reversal of tax-related interest accruals pursuant to the resolution of tax matters.
The fair value and carrying value of the Company’s debt as of June 30, 2022 and December 31, 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
4.875% 2013 Senior Notes, due 2024 | $ | 498 | | | $ | 510 | | | $ | 498 | | | $ | 538 | |
5.25% 2014 Senior Notes, due 2044 | 566 | | | 607 | | | 591 | | | 805 | |
1.75% 2015 Senior Notes, due 2027 | 521 | | | 503 | | | 566 | | | 607 | |
2.625% 2017 Senior Notes, due 2023 | 499 | | | 499 | | | 504 | | | 509 | |
3.25% 2017 Senior Notes, due 2028 | 471 | | | 499 | | | 503 | | | 539 | |
4.25% 2018 Senior Notes, due 2029 | 371 | | | 398 | | | 396 | | | 451 | |
4.875% 2018 Senior Notes, due 2048 | 356 | | | 395 | | | 383 | | | 526 | |
0.950% 2019 Senior Notes, due 2030 | 778 | | | 678 | | | 846 | | | 866 | |
3.75% 2020 Senior Notes, due 2025 | 674 | | | 699 | | | 686 | | | 750 | |
3.25% 2020 Senior Notes, due 2050 | 293 | | | 223 | | | 293 | | | 311 | |
2.55% 2020 Senior Notes, due 2060 | 491 | | | 311 | | | 491 | | | 432 | |
2.00% 2021 Senior Notes, due 2031 | 588 | | | 491 | | | 587 | | | 581 | |
2.75% 2021 Senior Notes, due 2041 | 582 | | | 442 | | | 581 | | | 579 | |
3.10% 2021 Senior Notes, due 2061 | 488 | | | 347 | | | 488 | | | 488 | |
3.75% 2022 Senior Notes, due 2052 | 481 | | | 409 | | | — | | | — | |
| Total | $ | 7,657 | | | $ | 7,011 | | | $ | 7,413 | | | $ | 7,982 | |
The fair value of the Company’s long-term debt is estimated based on quoted market prices for similar instruments. Accordingly, the inputs used to estimate the fair value of the Company’s long-term debt are classified as Level 2 inputs within the fair value hierarchy.
NOTE 16. LEASE COMMITMENTS
The Company has operating leases, substantially all of which relate to the lease of office space. The Company’s leases which are classified as finance leases are not material to the consolidated financial statements. Certain of the Company’s leases include options to renew, with renewal terms that can extend the lease term from one year to 20 years at the Company’s discretion.
The following table presents the components of the Company’s lease cost:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| Operating lease cost | $ | 25 | | | $ | 23 | | | $ | 52 | | | $ | 47 | |
| Sublease income | (2) | | | (1) | | | (4) | | | (2) | |
| Variable lease cost | 5 | | | 5 | | | 10 | | | 10 | |
| Total lease cost | $ | 28 | | | $ | 27 | | | $ | 58 | | | $ | 55 | |
The following tables present other information related to the Company’s operating leases:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | 29 | | | $ | 28 | | | $ | 60 | | | $ | 56 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 15 | | | $ | 2 | | | $ | 30 | | | $ | 6 | |
| | | | | | | | | | | | |
| June 30, 2022 | | June 30, 2021 | |
Weighted-average remaining lease term | 5.3 years | | 5.6 years | |
Weighted-average discount rate applied to operating leases | 3.1 | % | | 3.6 | % | |
The following table presents a maturity analysis of the future minimum lease payments included within the Company’s operating lease liabilities at June 30, 2022:
| | | | | | | | |
| Year Ending December 31, | | Operating Leases |
2022 (After June 30,) | | $ | 60 | |
| 2023 | | 119 | |
| 2024 | | 112 | |
| 2025 | | 97 | |
| 2026 | | 79 | |
| After 2026 | | 103 | |
| Total lease payments (undiscounted) | | 570 | |
| Less: Interest | | 44 | |
| Present value of lease liabilities: | | $ | 526 | |
| Lease liabilities - current | | $ | 105 | |
| Lease liabilities - noncurrent | | $ | 421 | |
NOTE 17. CONTINGENCIES
Given the nature of the Company's activities, Moody’s and its subsidiaries are subject to legal and tax proceedings, governmental, regulatory and legislative investigations, subpoenas and other inquiries, and claims and litigation by governmental and private parties that are based on ratings assigned by MIS or that are otherwise incidental to the Company’s business. Moody’s and MIS also are subject to periodic reviews, inspections, examinations and investigations by regulators in the U.S. and other jurisdictions, any of which may result in claims, legal proceedings, assessments, fines, penalties or restrictions on business activities. Moody’s also is subject to ongoing tax audits as addressed in Note 4 to the condensed consolidated financial statements.
Management periodically assesses the Company’s liabilities and contingencies in connection with these matters based upon the latest information available. For claims, litigation and proceedings and governmental investigations and inquiries not related to income taxes, the Company records liabilities in the consolidated financial statements when it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated and periodically adjusts these as appropriate. When the reasonable estimate of the loss is within a range of amounts, the minimum amount of the range is accrued unless some higher amount within the range is a better estimate than another amount within the range. In instances when a loss is reasonably possible but uncertainties exist related to the probable outcome and/or the amount or range of loss, management does not record a liability but discloses the contingency if material. As additional information becomes available, the Company adjusts its assessments and estimates of such matters accordingly. Moody’s also discloses material pending legal proceedings pursuant to SEC rules and other pending matters as it may determine to be appropriate.
In view of the inherent difficulty of assessing the potential outcome of legal proceedings, governmental, regulatory and legislative investigations and inquiries, claims and litigation and similar matters and contingencies, particularly when the claimants seek large or indeterminate damages or assert novel legal theories or the matters involve a large number of parties, the Company often cannot predict what the eventual outcome of the pending matters will be or the timing of any resolution of such matters. The Company also may be unable to predict the impact (if any) that any such matters may have on how its business is conducted, on its competitive position or on its financial position, results of operations or cash flows. As the process to resolve any pending matters progresses, management will continue to review the latest information available and assess its ability to predict the outcome of such matters and the effects, if any, on its operations and financial condition and to accrue for and disclose such matters as and when required. However, because such matters are inherently unpredictable and unfavorable developments or resolutions can occur, the ultimate outcome of such matters, including the amount of any loss, may differ from those estimates.
NOTE 18. SEGMENT INFORMATION
The Company is organized into two operating segments: MIS and MA and accordingly, the Company reports in two reportable segments: MIS and MA.
The MIS segment consists of five LOBs. The CFG, FIG, PPIF and SFG LOBs generate revenue principally from fees for the assignment and ongoing monitoring of credit ratings on debt obligations and the entities that issue such obligations in markets worldwide. The MIS Other LOB primarily consists of financial instruments pricing services in the Asia-Pacific region, ICRA non-ratings revenue and revenue from providing ESG research, data and assessments.
The MA segment develops a wide range of products and services that support the risk management activities of institutional participants in global financial markets. The MA segment consists of three LOBs - Decision Solutions, Research and Insights, and Data and Information.
Revenue for MIS and expenses for MA include intersegment fees charged to MA for the rights to use and distribute content, data and products developed by MIS. Additionally, revenue for MA and expenses for MIS include an intersegment fee charged to MIS from MA for certain MA products and services utilized in MIS’s ratings process. These intersegment fees are generally based on the market value of the products and services being transferred between the segments.
Overhead expenses include costs such as rent and occupancy, information technology and support staff such as finance, human resources and legal. Such costs and corporate expenses that exclusively benefit one segment are fully charged to that segment.
For overhead costs and corporate expenses that benefit both segments, costs are allocated to each segment based on the segment’s share of full-year 2019 actual revenue which comprises a “Baseline Pool” that will remain fixed over time. In subsequent periods, incremental overhead costs (or reductions thereof) will be allocated to each segment based on the prevailing shares of total revenue represented by each segment.
“Eliminations” in the following table represent intersegment revenue/expense. Moody’s does not report the Company’s assets by reportable segment, as this metric is not used by the chief operating decision maker to allocate resources to the segments. Consequently, it is not practical to show assets by reportable segment.
Financial Information by Segment
The table below shows revenue and Adjusted Operating Income by reportable segment. Adjusted Operating Income is a financial metric utilized by the Company’s chief operating decision maker to assess the profitability of each reportable segment. Refer to Note 2 for further details on the components of the Company’s revenue.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2022 | | 2021 |
| MIS | | MA | | Eliminations | | Consolidated | | MIS | | MA | | Eliminations | | Consolidated |
| Total external revenue | $ | 706 | | | $ | 675 | | | $ | — | | | $ | 1,381 | | | $ | 980 | | | $ | 573 | | | $ | — | | | $ | 1,553 | |
| Intersegment revenue | 43 | | | 1 | | | (44) | | | — | | | 42 | | | 2 | | | (44) | | | — | |
| Revenue | 749 | | | 676 | | | (44) | | | 1,381 | | | 1,022 | | | 575 | | | (44) | | | 1,553 | |
| Operating, SG&A | 334 | | | 471 | | | (44) | | | 761 | | | 344 | | | 392 | | | (44) | | | 692 | |
| Adjusted Operating Income | 415 | | | 205 | | | — | | | 620 | | | 678 | | | 183 | | | — | | | 861 | |
| Add: | | | | | | |
| | | | | | | | |
Depreciation and
amortization | 21 | | | 60 | | | — | | | 81 | | | 18 | | | 42 | | | — | | | 60 | |
| | | | | | | | | | | | | | | |
| Restructuring | 15 | | | 16 | | | — | | | 31 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Operating Income | | | | | | | $ | 508 | | | | | | | | | $ | 801 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | |
| 2022 | | 2021 | |
| MIS | | MA | | Eliminations | | Consolidated | | MIS | | MA | | Eliminations | | Consolidated | |
| Total external revenue | $ | 1,533 | | | $ | 1,370 | | | $ | — | | | $ | 2,903 | | | $ | 2,016 | | | $ | 1,137 | | | $ | — | | | $ | 3,153 | | |
| Intersegment revenue | 86 | | | 3 | | | (89) | | | — | | | 82 | | | 4 | | | (86) | | | — | | |
| Revenue | $ | 1,619 | | | $ | 1,373 | | | $ | (89) | | | $ | 2,903 | | | $ | 2,098 | | | $ | 1,141 | | | $ | (86) | | | $ | 3,153 | | |
| Operating, SG&A | 694 | | | 944 | | | (89) | | | 1,549 | | | 692 | | | 772 | | | (86) | | | 1,378 | | |
| Adjusted Operating Income | $ | 925 | | | $ | 429 | | | $ | — | | | $ | 1,354 | | | $ | 1,406 | | | $ | 369 | | | $ | — | | | $ | 1,775 | | |
| Add: | | | | | | | | | | | | | | | | |
| Depreciation and amortization | 39 | | | 120 | | | — | | | 159 | | | 36 | | | 83 | | | — | | | 119 | | |
| Restructuring | 15 | | | 16 | | | — | | | 31 | | | — | | | 2 | | | — | | | 2 | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Operating Income | | | | | | | $ | 1,164 | | | | | | | | | $ | 1,654 | | |
The cumulative restructuring charge for the MA reportable segment related to the 2020 MA Strategic Reorganization Restructuring Program is $19 million. The cumulative restructuring charge for the MIS and MA reportable segments related to the 2022 - 2023 Geolocation Restructuring Program is $15 million and $17 million, respectively. The restructuring programs are more fully discussed in Note 11.
Consolidated Revenue Information by Geographic Area
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| United States | $ | 723 | | | $ | 831 | | | $ | 1,546 | | | $ | 1,716 | |
| Non-U.S.: | | | | | | | |
| EMEA | 422 | | | 481 | | | 878 | | | 959 | |
| Asia-Pacific | 151 | | | 155 | | | 293 | | | 311 | |
| Americas | 85 | | | 86 | | | 186 | | | 167 | |
| Total Non-U.S. | 658 | | | 722 | | | 1,357 | | | 1,437 | |
| Total | $ | 1,381 | | | $ | 1,553 | | | $ | 2,903 | | | $ | 3,153 | |
NOTE 19. SUBSEQUENT EVENT
On July 25, 2022, the Board approved the declaration of a quarterly dividend of $0.70 per share of Moody’s common stock, payable on September 9, 2022 to shareholders of record at the close of business on August 19, 2022.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis of financial condition and results of operations should be read in conjunction with the Moody’s Corporation condensed consolidated financial statements and notes thereto included elsewhere in this quarterly report on Form 10–Q.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains Forward-Looking Statements. See “Forward-Looking Statements” commencing on page 84 for a discussion of uncertainties, risks and other factors associated with these statements. THE COMPANY
Moody’s is a global integrated risk assessment firm that empowers organizations and investors to make better decisions. Moody’s reports in two segments: MIS and MA.
MIS publishes credit ratings and provides assessment services on a wide range of debt obligations, programs and facilities, and the entities that issue such obligations in markets worldwide, including various corporate, financial institution and governmental obligations, and structured finance securities.
MA is a global provider of: i) data and information; ii) research and insights; and iii) decision solutions, which help companies make better and faster decisions. MA leverages its industry expertise across multiple risks such as credit, market, financial crime, supply chain, catastrophe and climate to deliver integrated risk assessment solutions that enable business leaders to identify, measure and manage the implications of interrelated risks and opportunities.
Sustainability
Moody’s manages its business with the goal of delivering value to all of its stakeholders, including its customers, employees, business partners, local communities and stockholders. As part of this effort, Moody’s advances sustainability by considering environmental, social, and governance (“ESG”) factors throughout its operations and products and services. The Company uses its expertise and assets to make a positive difference through technology tools, research and analytical services that help other organizations and the investor community better understand the links between sustainability considerations and the global markets. Moody’s efforts to promote sustainability-related thought leadership, assessments and data to market participants include adhering to the policies of recognized sustainability organizations that develop standards or frameworks and/or evaluate and assess performance, including: the Global Reporting Initiative (GRI); Sustainability Accounting Standards Board (SASB); and the World Economic Forum (WEF)’s Stakeholder Capitalism metrics. Moody's also issues an annual report on Stakeholder Sustainability and on how the Company has implemented the Task Force on Climate-related Financial Disclosures (“TCFD”) recommendations. Moody’s sustainability-related achievements during the first half of 2022 included the following:
–Validated Moody’s long-term net-zero targets with SBTi;
–Rolled out an all-employee training on Sustainability and ESG;
–Named 2021 CDP Supplier Engagement Leader on Climate Action for second consecutive year;
–Awarded Best ESG Reporting (large-cap) from IR Magazine;
–Published Moody’s 2021 Stakeholder Sustainability report and 2021 TCFD report;
–Issued an inaugural global tax policy and a political engagement & public policy statement; and
–Updated Moody’s decarbonization plan
The Board oversees sustainability matters, with assistance from the Audit, Governance & Nominating and Compensation & Human Resources Committees, as part of its oversight of management and the Company’s overall strategy. The Board also oversees Moody’s policies for assessing and managing our exposure to risk, including climate-related risks such as business continuity disruption or reputational and credibility concerns stemming from incorporation of climate-related risks into the credit methodologies and credit ratings of MIS.
Russia/Ukraine Conflict
The Company is closely monitoring the impact of the ongoing Russia/Ukraine conflict on all aspects of its business. In response to the conflict, the Company is no longer conducting commercial operations in Russia for both MIS and MA and is complying with all applicable regulatory restrictions set forth by the jurisdictions in which Moody's operates. Furthermore, the Company also has withdrawn MIS credit ratings on Russian entities.
While Moody's Russian operations and net assets are not material, broader global market volatility relating to uncertainties surrounding the conflict has contributed to an adverse impact on rated issuance volumes in 2022, which are more fully discussed in the "Results of Operations" section of this MD&A. The Company is unable to predict either the near-term or longer-term impact that the conflict may have on its financial position and operating results due to numerous uncertainties regarding the severity and duration of the conflict and its broader potential macroeconomic impact.
COVID-19
The Company continues to closely monitor the impact of the COVID-19 pandemic on all aspects of its business. The Company continues to monitor regional developments relating to the COVID-19 pandemic to inform decisions regarding its offices and its business travel policies. As of the date of the filing of this quarterly report on Form 10-Q, the Company has reopened all of its offices for employees to access on a voluntary basis.
The COVID-19 pandemic has not had a material adverse impact on the Company's reported results to date and is currently not expected to have a material adverse impact on its near-term outlook. However, Moody's is unable to predict the longer-term impact that the pandemic may have on its business, future results of operations, financial position or cash flows due to numerous uncertainties. Refer to Item 1A. “Risk Factors”, contained in the Company’s annual report on Form 10-K for the year ended December 31, 2021 for further disclosure relating to the risks of the COVID-19 pandemic on the Company's business.
Reportable Segments
The Company is organized into two reportable segments at June 30, 2022: MIS and MA, which are more fully described in the section entitled “The Company” above and in Note 18 to the condensed consolidated financial statements.
Reclassification of Previously Reported Revenue by LOB
In the first quarter of 2022, the Company realigned its revenue by LOB reporting structure for the MA operating segment to enhance insight and transparency into this business. As of January 1, 2022, the MA LOBs have been realigned from RD&A and ERS to:
–Decision Solutions (DS) - provides software and workflow tools for specific use cases (banking, insurance, KYC/KYS, CRE and structured finance solutions). This LOB utilizes components from the Data & Information and Research & Insights LOBs to provide integrated risk solutions;
–Research & Insights (R&I) - provides models, scores, expert insights and commentary. This LOB includes: credit research; credit models and analytics; and economics data and models; and
–Data & Information (D&I) - provides vast data sets on companies and securities via data feeds and data applications products.
Prior year revenue by LOB amounts have been reclassified to conform to the new LOB reporting structure, which is presented below in the section entitled "Results of Operations."
RESULTS OF OPERATIONS
Impact of acquisitions on comparative results
–Moody’s completed the following acquisitions, which impact the Company's year-over-year comparative results:
–Cortera on March 19, 2021;
–RMS on September 15, 2021;
–RealXData on September 17, 2021;
–PassFort on November 30, 2021; and
–kompany on February 28, 2022.
Refer to the section entitled "Non-GAAP Financial Measures" of this MD&A for the definitions of how the Company determines certain organic growth measures used in this MD&A that exclude the impact of acquisition activity.
Three months ended June 30, 2022 compared with three months ended June 30, 2021
Executive Summary
The following table provides an executive summary of key operating results for the quarter ended June 30, 2022. Following this executive summary is a more detailed discussion of the Company’s operating results as well as a discussion of the operating results of the Company’s reportable segments.
| | | | | | | | | | | | | | |
| Three Months Ended June 30, | |
| Financial measure: | 2022 | 2021 | % Change Favorable
(Unfavorable) | Insight and Key Drivers of Change Compared to Prior Year |
| Moody's total revenue | $ | 1,381 | | $ | 1,553 | | (11 | %) | — reflects lower MIS revenue partially offset by growth in MA |
| MIS External Revenue | $ | 706 | | $ | 980 | | (28 | %) | — mainly reflects declines in leveraged finance (high-yield corporate debt and bank loans) issuance resulting from market volatility relating to macroeconomic uncertainties, rising borrowing costs and the Russia/Ukraine conflict |
| MA External Revenue | $ | 675 | | $ | 573 | | 18 | % | — inorganic growth from acquisitions; and — strong organic growth across all LOBs, most notably for KYC and compliance solutions coupled with continued strong retention and demand for credit research, analytics and models |
| Total operating and SG&A expenses | $ | 761 | | $ | 692 | | (10 | %) | — operational and integration costs associated with recent acquisitions contributed approximately 10 percentage points of growth; and — hiring and salary increases contributed approximately five percentage points of the growth; partially offset by: — lower incentive compensation accruals and performance-based equity compensation |
| Restructuring | $ | 31 | | $ | — | | NM | — the 2022 charge is pursuant to the Company's 2022 - 2023 Geolocation Restructuring Program, more fully discussed in Note 11 to the condensed consolidated financial statements |
| Total non-operating (expense) income, net | $ | (65) | | $ | (43) | | (51 %) | — primarily reflects FX translation losses of $20 million reclassified to earnings resulting from the Company no longer conducting commercial operations in Russia |
| Operating Margin | 36.8 | % | 51.6 | % | (1,480 | BPS) | — margin declines primarily due to the aforementioned decrease in MIS revenue coupled with the aforementioned increase in expenses |
| Adjusted Operating Margin | 44.9 | % | 55.4 | % | (1,050 | BPS) |
| ETR | 26.2 | % | 23.9 | % | (230 | BPS) | — primarily reflects the non-deductible nature of the aforementioned FX translation losses resulting from the Company no longer conducting commercial operations in Russia coupled with lower excess tax benefits in 2022 |
| Diluted EPS | $ | 1.77 | | $ | 3.07 | | (42 | %) | — mainly due to declines in MIS revenue coupled with the aforementioned increase in expenses |
| Adjusted Diluted EPS | $ | 2.22 | | $ | 3.22 | | (31 | %) |
Moody's Corporation | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | % Change Favorable (Unfavorable) |
| 2022 | | 2021 | |
| Revenue: | | | | | |
| United States | $ | 723 | | | $ | 831 | | | (13 | %) |
| Non-U.S.: | | | | | |
| EMEA | 422 | | | 481 | | | (12 | %) |
| Asia-Pacific | 151 | | | 155 | | | (3 | %) |
| Americas | 85 | | | 86 | | | (1 | %) |
| Total Non-U.S. | 658 | | | 722 | | | (9 | %) |
| Total | 1,381 | | | 1,553 | | | (11 | %) |
| Expenses: | | | | | |
| Operating | 393 | | | 365 | | | (8 | %) |
| SG&A | 368 | | | 327 | | | (13 | %) |
| Depreciation and amortization | 81 | | | 60 | | | (35 | %) |
| Restructuring | 31 | | | — | | | NM |
| | | | | |
| | | | | |
| | | | | |
| Total | 873 | | | 752 | | | (16 | %) |
| Operating income | $ | 508 | | | $ | 801 | | | (37 | %) |
Adjusted Operating Income (1) | $ | 620 | | | $ | 861 | | | (28 | %) |
| Interest expense, net | $ | (55) | | | $ | (49) | | | (12 | %) |
| Other non-operating income, net | (10) | | | 6 | | | (267 | %) |
| Non-operating (expense) income, net | $ | (65) | | | $ | (43) | | | (51 | %) |
| | | | | |
| Net income attributable to Moody's | $ | 327 | | | $ | 577 | | | (43 | %) |
| Diluted weighted average shares outstanding | 184.9 | | | 187.9 | | | 2 | % |
| Diluted EPS attributable to Moody's common shareholders | $ | 1.77 | | | $ | 3.07 | | | (42 | %) |
Adjusted Diluted EPS (1) | $ | 2.22 | | | $ | 3.22 | | | (31 | %) |
| Operating margin | 36.8 | % | | 51.6 | % | | |
Adjusted Operating Margin(1) | 44.9 | % | | 55.4 | % | | |
| Effective tax rate | 26.2 | % | | 23.9 | % | | |
(1) Adjusted Operating Income, Adjusted Operating Margin and Adjusted Diluted EPS are non-GAAP financial measures. Refer to the section entitled "Non-GAAP Financial Measures" of this Management Discussion and Analysis for further information regarding these measures.
The table below shows Moody’s global staffing by geographic area:
| | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | June 30, | | | | Change |
| | | 2022 | | 2021 | | | | % |
| MIS | | | | | | | | |
| U.S. | | 1,450 | | | 1,429 | | | | | 1 | % |
| Non-U.S. | | 3,582 | | | 3,280 | | | | | 9 | % |
| Total | | 5,032 | | | 4,709 | | | | | 7 | % |
| | | | | | | | | |
| MA | | | | | | | | |
| U.S. | | 2,788 | | | 2,072 | | | | | 35 | % |
| Non-U.S. | | 4,304 | | | 3,070 | | | | | 40 | % |
| Total | | 7,092 | | | 5,142 | | | | | 38 | % |
| MSS |
| U.S. | | 794 | | | 676 | | | | | 17 | % |
| Non-U.S. | | 1,288 | | | 1,079 | | | | | 19 | % |
| Total | | 2,082 | | | 1,755 | | | | | 19 | % |
| Total MCO | | | | | | | | |
| U.S. | | 5,032 | | | 4,177 | | | | | 20 | % |
| Non-U.S. | | 9,174 | | | 7,429 | | | | | 23 | % |
| Total | | 14,206 | | | 11,606 | | | | | 22 | % |
The increase in Moody’s global staffing included approximately 1,400 employees from acquisitions completed subsequent to June 30, 2021.
GLOBAL REVENUE
| | | | | | | | | | | | | | |
Three months ended June 30, |
2022-----------------------------------------------------------------------------------2021
_______________________________________________________________________________________________________
| | | | | | | | | | | | | | | | | |
Global revenue ⇓ $172 million | U.S. Revenue ⇓ $108 million | Non-U.S. Revenue ⇓ $64 million |
The decrease in global revenue reflected declines in MIS, mainly in the U.S. and EMEA, partially offset by growth in MA in all regions. Refer to the section entitled “Segment Results” of this MD&A for a more fulsome discussion of the Company’s segment revenue.
–Foreign currency translation unfavorably impacted global revenue by 3% percent.
–Organic constant currency revenue(1) decreased 13%.
(1) Refer to the section entitled "Non-GAAP Financial Measures" of this MD&A for the definition and methodology that the Company utilizes to calculate this metric.
| | | | | | | | | | | | | |
| | Q2 Operating Expense ⇑ $28 million | | | | Q2 SG&A Expense ⇑ $41 million | |
---------- ---------
| | | | | | | | | | | | | | |
Compensation expenses decreased $15 million reflecting: | | | | Compensation expenses increased $19 million reflecting: | |
— lower incentive compensation accruals and performance-based equity compensation of $28 million, which aligns with actual/projected financial and operating performance; and | | | | — inorganic growth from acquisitions of $13 million; | |
| | | — higher salaries and benefits costs primarily due to hiring and salary increases; partially offset by: | |
— approximately $25 million in higher compensation costs eligible for capitalization in 2022 reflecting certain product development in the MA operating segment; partially offset by | | | | — lower incentive compensation accruals and performance-based equity compensation of $20 million, which aligns with actual/projected financial and operating performance. | |
| — inorganic growth from acquisitions of $33 million | | | | | | |
| | | | | |
Non-compensation expenses increased $43 million reflecting: | | | | Non-compensation expenses increased $22 million reflecting: | |
— higher costs of $27 million primarily relating to strategic initiatives to support business growth coupled with enhancements to technology infrastructure to enable automation, innovation and efficiency; and | | | | — inorganic growth from acquisitions of $12 million; and | |
| | | — higher travel costs of $6 million resulting from minimal travel in the prior year in light of COVID-19 | |
— inorganic growth from acquisitions of $10 million. | | | | | | |
| | | | | | |
The restructuring charge in the second quarter of 2022 relates to the Company's 2022 - 2023 Geolocation Restructuring Program as more fully discussed in Note 11 to the condensed consolidated financial statements.
| | | | | | | | | |
| | Operating margin 36.8%, down 1,480 BPS | | | Adjusted Operating Margin 44.9%, down 1,050 BPS |
Overall, margin declines resulted from the aforementioned decrease in MIS revenue coupled with operating expense growth (mainly from inorganic expense growth from acquisitions).
| | | | | | | | | | |
| | | Interest Expense, net ⇑ $6 million | | | Other non-operating income ⇓ $16 million |
| | | | | | | | | | | | | | |
| Increase in expense is primarily due to: | | Decrease in income is primarily due to: |
— higher interest on borrowings resulting from the issuance of new long-term debt in 2022 (refer to the "Material Cash Requirements" section of this MD&A for further information on the Company's indebtedness) | | — FX translation losses of $20 million reclassified to earnings resulting from the Company no longer conducting commercial operations in Russia (refer to the section above entitled "Russia/Ukraine Conflict" for further information); and |
| | | — higher gains of $15 million in the prior year on certain of the Company's investments in equity securities; partially offset by: |
| | | — an $11 million benefit relating to statute of limitations lapses on certain indemnification obligations relating to the MAKS divestiture; and |
| | — a $7 million loss on the settlement of pension obligations in 2021 resulting from lump sum distributions from the Company's defined benefit pension plans. |
| | | |
| | |
| | | |
The increase in ETR primarily reflects the non-deductible nature of the aforementioned FX translation losses resulting from the Company no longer conducting commercial operations in Russia coupled with lower Excess Tax Benefits in the second quarter of 2022. | | | | | | | | | | |
| | Diluted EPS ⇓ $1.30 | | | | Adjusted Diluted EPS ⇓ $1.00 |
Diluted EPS and Adjusted Diluted EPS declined mainly due to lower operating income and Adjusted Operating Income, respectively, the components of which are more fully described above. Refer to the section entitled “Non-GAAP Financial Measures” of this MD&A for items excluded in the derivation of Adjusted Diluted EPS.
Segment Results
Moody’s Investors Service
The table below provides a summary of revenue and operating results, followed by further insight and commentary: | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | % Change Favorable (Unfavorable) |
| 2022 | | 2021 | |
| Revenue: | | | | | |
| Corporate finance (CFG) | $ | 322 | | | $ | 550 | | | (41 | %) |
| Structured finance (SFG) | 123 | | | 140 | | | (12 | %) |
| Financial institutions (FIG) | 128 | | | 150 | | | (15 | %) |
| Public, project and infrastructure finance (PPIF) | 122 | | | 130 | | | (6 | %) |
| Total ratings revenue | 695 | | | 970 | | | (28 | %) |
| MIS Other | 11 | | | 10 | | | 10 | % |
| Total external revenue | 706 | | | 980 | | | (28 | %) |
| Intersegment revenue | 43 | | | 42 | | | 2 | % |
| Total MIS revenue | $ | 749 | | | $ | 1,022 | | | (27 | %) |
| Expenses: | |
| Operating and SG&A (external) | $ | 333 | | | $ | 342 | | | 3 | % |
| Operating and SG&A (intersegment) | 1 | | | 2 | | | 50 | % |
| Total operating and SG&A | $ | 334 | | | $ | 344 | | | 3 | % |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Adjusted Operating Income | $ | 415 | | | $ | 678 | | | (39 | %) |
| | | | | |
| | | | | |
| Adjusted Operating Margin | 55.4 | % | | 66.3 | % | | |
| | | | | |
| Depreciation and amortization | 21 | | | 18 | | | (17 | %) |
| Restructuring | 15 | | | — | | | NM |
The following chart presents changes in rated issuance volumes compared to the second quarter of 2021. To the extent that changes in rated issuance volumes had a material impact to MIS's revenue compared to the prior year, those impacts are discussed below.
MOODY'S INVESTORS SERVICE REVENUE
| | | | | | | | | | | | | | |
Three months ended June 30, |
2022-----------------------------------------------------------------------------------2021
_______________________________________________________________________________________________________
| | | | | | | | |
MIS: Global revenue ⇓ $274 million | U.S. Revenue ⇓ $156 million | Non-U.S. Revenue ⇓ $118 million |
–The decrease in global MIS revenue primarily resulted from a 32% decrease in rated issuance volumes, which resulted in transaction revenue declining $274 million compared to the same period in the prior year. The decline in rated issuance volumes compared to the second quarter of 2021 resulted from market volatility relating to macroeconomic uncertainties, rising borrowing costs and the Russia/Ukraine conflict.
–Foreign currency translation unfavorably impacted MIS revenue by two percentage points.
CFG REVENUE
| | | | | | | | | | | | | | |
Three months ended June 30, |
2022-----------------------------------------------------------------------------------2021
_______________________________________________________________________________________________________
| | | | | | | | |
CFG: Global revenue ⇓ $228 million | U.S. Revenue ⇓ $135 million | Non-U.S. Revenue ⇓ $93 million |
Global CFG revenue for the three months ended June 30, 2022 and 2021 was comprised as follows:
(1) Other includes: recurring monitoring fees of a rated debt obligation and/or entities that issue such obligations as well as fees from programs such as commercial paper, medium term notes, and ICRA corporate finance revenue.
The decrease in CFG revenue of 41% reflected declines in both U.S. (39%) and internationally (45%).
Transaction revenue decreased $228 million compared to the same period in the prior year.
The decrease compared to a strong period of issuance in the second quarter of 2021 reflected declines in leveraged finance and investment-grade issuance activity in all regions resulting from market volatility relating to macroeconomic uncertainties, rising borrowing costs and the Russia/Ukraine conflict.
SFG REVENUE
| | | | | | | | | | | | | | |
Three months ended June 30, |
2022---------------------------------------------------------------------------2021
_______________________________________________________________________________________________________
| | | | | | | | |
SFG: Global revenue ⇓ $17 million | U.S. Revenue ⇓ $5 million | Non-U.S. Revenue ⇓ $12 million |
Global SFG revenue for the three months ended June 30, 2022 and 2021 was comprised as follows:
The 12% decrease in SFG revenue was substantially all in the U.S. and EMEA.
Transaction revenue decreased $19 million compared to the second quarter of 2021.
The most notable drivers of the decline in SFG revenue included:
–lower CLO refinancing activity in the U.S. and EMEA reflecting higher credit spreads resulting from market volatility relating to macroeconomic uncertainties, rising borrowing costs and the Russia/Ukraine conflict; and
–changes in foreign currency translation rates which unfavorably impacted SFG revenue by three percentage points.
FIG REVENUE
| | | | | | | | | | | | | | |
Three months ended June 30, |
2022-----------------------------------------------------------------------------------2021
_______________________________________________________________________________________________________
| | | | | | | | |
FIG: Global revenue ⇓ $22 million | U.S. Revenue ⇓ $16 million | Non-U.S. Revenue ⇓ $6 million |
Global FIG revenue for the three months ended June 30, 2022 and 2021 was comprised as follows:
The decrease in FIG revenue of 15% reflected revenue declines in both U.S. (23%) and internationally (7%).
Transaction revenue decreased $22 million compared to the second quarter of 2021.
The most notable drivers of the decline reflected lower revenue from U.S. insurance, banking and asset management issuers, mainly due to:
–a decline in opportunistic issuance as issuers were well capitalized following funding activity in the prior year period ahead of anticipated interest rate increases;
–an unfavorable product mix;
–lower issuer and investor demand resulting from market volatility and macroeconomic uncertainties; and
–changes in foreign currency translation rates which unfavorably impacted FIG revenue by two percentage points.
PPIF REVENUE
| | | | | | | | | | | | | | |
Three months ended June 30, |
2022-----------------------------------------------------------------------------------2021
_______________________________________________________________________________________________________
| | | | | | | | |
PPIF: Global revenue ⇓ $8 million | U.S. Revenue ⇓ $1 million | Non-U.S. Revenue ⇓ $7 million |
Global PPIF revenue for the three months ended June 30, 2022 and 2021 was comprised as follows:
Transaction revenue decreased $6 million compared to the second quarter of 2021.
The decrease in PPIF revenue of 6% reflected declines in the U.S. (1%) and internationally (14%).
The main drivers of the decrease were:
–declines in U.S. public finance and project/infrastructure finance in the Americas resulting from market volatility, which increased funding costs, coupled with issuers in these sectors being currently well capitalized;
–changes in foreign currency translation rates which unfavorably impacted PPIF revenue by two percentage points;
partially offset by:
–an increase in U.S. project finance revenue primarily due to a large jumbo issuance during the second quarter of 2022.
| | | | |
| | MIS: Q2 Operating and SG&A Expense ⇓ $9 million |
The decline is due to lower compensation costs of $34 million, partially offset by higher non-compensation costs of $25 million, with the most notable drivers reflecting:
| | | | | | | | |
| Compensation costs | | Non-compensation costs |
| The decrease is primarily due to: | | The increase is primarily due to: |
— lower incentive compensation accruals and performance-based equity compensation, which aligns with actual/projected financial and operating performance | | — higher costs relating to strategic initiatives to support business growth coupled with enhancements to technology infrastructure to enable automation, innovation and efficiency; and |
| | — higher travel costs compared to minimal travel in the prior year in light of COVID-19 |
The restructuring charge in the second quarter of 2022 relates to the Company's 2022 - 2023 Geolocation Restructuring Program as more fully discussed in Note 11 to the condensed consolidated financial statements.
| | | | | | |
| | | | MIS: Adjusted Operating Margin 55.4% ⇓ 1,090 BPS |
The MIS Adjusted Operating Margin decline primarily reflected the aforementioned 28% decrease in revenue.
Moody’s Analytics
The table below provides a summary of revenue and operating results, followed by further insight and commentary:
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | % Change Favorable (Unfavorable) |
| 2022 | | 2021 | |
| Revenue: | | | | | |
| Decision Solutions (DS) | $ | 312 | | | $ | 222 | | | 41 | % |
| Research and Insights (R&I) | 185 | | | 175 | | | 6 | % |
| Data and Information (D&I) | 178 | | | 176 | | | 1 | % |
| Total external revenue | 675 | | | 573 | | | 18 | % |
| Intersegment revenue | 1 | | | 2 | | | (50 | %) |
| Total MA revenue | 676 | | | 575 | | | 18 | % |
| Expenses: | | | | | |
| Operating and SG&A (external) | 428 | | | 350 | | | (22 | %) |
| Operating and SG&A (intersegment) | 43 | | | 42 | | | (2 | %) |
| Total operating and SG&A | 471 | | | 392 | | | (20 | %) |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Adjusted Operating Income | $ | 205 | | | $ | 183 | | | 12 | % |
| | | | | |
| | | | | |
| Adjusted Operating Margin | 30.3 | % | | 31.8 | % | | |
| | | | | |
| Depreciation and amortization | 60 | | | 42 | | | (43 | %) |
| Restructuring | 16 | | | — | | | NM |
MOODY'S ANALYTICS REVENUE
| | | | | | | | | | | | | | |
Three months ended June 30, |
2022-----------------------------------------------------------------------------------2021
_______________________________________________________________________________________________________
| | | | | | | | |
MA: Global revenue ⇑ $102 million | U.S. Revenue ⇑ $48 million | Non-U.S. Revenue ⇑ $54 million |
The 18% increase in global MA revenue reflects growth both in the U.S. (19%) and internationally (17%) in all LOBs and includes revenue from the acquisitions of RMS, RealXData, PassFort and kompany. Foreign currency translation unfavorably impacted MA revenue by five percentage points.
–Organic constant currency revenue growth(1) was 8% reflecting increases across all LOBs.
–ARR(2) grew 25% mainly due to acquisitions completed in the previous twelve months. Organic ARR(2) grew 9% representing increased demand for KYC and banking products within the Decision Solutions LOB coupled with growth for company data and ratings feeds products in the Data & Information LOB.
DECISION SOLUTIONS REVENUE
| | | | | | | | | | | | | | |
Three months ended June 30, |
2022-----------------------------------------------------------------------------------2021
_______________________________________________________________________________________________________
| | | | | | | | |
DS: Global revenue ⇑ $90 million | U.S. Revenue ⇑ $37 million | Non-U.S. Revenue ⇑ $53 million |
Global DS revenue grew 41% compared to the second quarter of 2021 and reflects growth in both the U.S. (39%) and internationally (42%) with the most notable drivers of the increase reflecting:
–inorganic revenue growth from the acquisitions of RMS, PassFort, RealXData, and kompany; and
–continued demand for KYC and compliance solutions reflecting increased customer and supplier risk data usage;
partially offset by:
–changes in foreign currency translation rates which unfavorably impacted DS revenue by five percentage points.
Organic constant currency revenue(1) growth for DS was 8%.
_____________________
(1) Refer to the section entitled "Non-GAAP Financial Measures" of this MD&A for the definition and methodology that the Company utilizes to calculate this metric.
(2) Refer to the section entitled "Key Performance Metrics" of this MD&A for the definition and methodology that the Company utilizes to calculate this metric.
RESEARCH AND INSIGHTS REVENUE
| | | | | | | | | | | | | | |
Three months ended June 30, |
2022-----------------------------------------------------------------------------------2021
_____________________________________________________________________________________________________________________
| | | | | | | | |
R&I: Global revenue ⇑ $10 million | U.S. Revenue ⇑ $6 million | Non-U.S. Revenue ⇑ $4 million |
Global R&I revenue increased 6% compared to the second quarter of 2021 and reflects growth in both the U.S. (6%) and internationally (5%) mainly driven by:
–growth in constant currency recurring revenue of 6%, primarily due to continued strong retention and demand for credit research, analytics and models;
partially offset by:
–changes in foreign currency translation rates which unfavorably impacted R&I revenue by two percentage points.
Constant currency revenue(1) growth for R&I was 8%.
(1) Refer to the section entitled "Non-GAAP Financial Measures" of this MD&A for the definition and methodology that the Company utilizes to calculate this metric.
DATA AND INFORMATION REVENUE
| | | | | | | | | | | | | | |
Three months ended June 30, |
2022-----------------------------------------------------------------------------------2021
_____________________________________________________________________________________________________________________
| | | | | | | | |
D&I: Global revenue ⇑ $2 million | U.S. Revenue ⇑ $5 million | Non-U.S. Revenue ⇓ $3 million |
Global D&I revenue increased 1% compared to the second quarter of 2021 and reflects growth in the U.S. (9%) partially offset by decreases internationally (3%) mainly driven by:
–strong retention and new sales for ratings feeds coupled with pricing increases; and
–continued demand for company data;
partially offset by:
–unfavorable changes in foreign currency translation rates, which unfavorably impacted D&I revenue by seven percentage points.
Organic constant currency revenue(1) growth for D&I was 8%.
(1) Refer to the section entitled "Non-GAAP Financial Measures" of this MD&A for the definition and methodology that the Company utilizes to calculate this metric.
| | | | |
| | MA: Q2 Operating and SG&A Expense ⇑ $78 million |
The increase in operating and SG&A expenses compared to the second quarter of 2021 reflected growth in compensation and non-compensation costs of $58 million and $20 million, respectively. The most notable drivers of these increases were:
| | | | | | | | |
| Compensation costs | | Non-compensation costs |
| The increase is primarily due to: | | The increase is primarily due to: |
| — inorganic expense growth from acquisitions; and | | — operating and integration-related costs associated with recent acquisitions. |
| — higher salaries and benefits related to headcount growth. | |
|
| | |
The restructuring charge in the second quarter of 2022 relates to the Company's 2022 - 2023 Geolocation Restructuring Program as more fully discussed in Note 11 to the condensed consolidated financial statements.
| | | | | | |
| | | | MA: Adjusted Operating Margin 30.3% ⇓ 150 BPS |
The Adjusted Operating Margin contraction for MA is primarily due to operational and integration-related costs associated with recent acquisitions.
Six months ended June 30, 2022 compared with six months ended June 30, 2021
Executive Summary
–The following table provides an executive summary of key operating results for the six months ended June 30, 2022. Following this executive summary is a more detailed discussion of the Company’s operating results as well as a discussion of the operating results of the Company’s reportable segments.
| | | | | | | | | | | | | | |
| Six Months Ended June 30, | |
| Financial measure: | 2022 | 2021 | % Change | Insight and Key Drivers of Change Compared to Prior Year |
| Moody's total revenue | $ | 2,903 | | $ | 3,153 | | (8 | %) | — reflects lower MIS revenue partially offset by growth in MA |
| MIS External Revenue | $ | 1,533 | | $ | 2,016 | | (24 | %) | — mainly reflects declines in leveraged finance (high-yield corporate debt and bank loans) issuance resulting from market volatility relating to macroeconomic uncertainties, rising borrowing costs and the Russia/Ukraine conflict. |
| MA External Revenue | $ | 1,370 | | $ | 1,137 | | 20 | % | — inorganic growth from acquisitions; and — strong organic growth across all LOBs, most notably for KYC and compliance solutions coupled with continued strong retention and demand for credit research, analytics and models. |
| Total operating and SG&A expenses | $ | 1,549 | | $ | 1,378 | | (12 | %) | — operational and integration costs associated with recent acquisitions contributed approximately 11 percentage points of growth; and — increases in hiring and salary growth contributed approximately five percentage points of growth; partially offset by: — lower incentive compensation accruals and performance-based equity compensation.
|
| Restructuring | $ | 31 | | $ | 2 | | NM | — the 2022 charge is pursuant to the Company's 2022 - 2023 Geolocation Restructuring Program, more fully discussed in Note 11 to the condensed consolidated financial statements |
| Total non-operating (expense) income, net | $ | (112) | | $ | (34) | | (229 | %) | — reflects a $40 million benefit in the prior period related to the reversal of tax-related interest accruals pursuant to the resolution of tax matters; and — the 2022 amount includes FX translation losses of $20 million reclassified to earnings resulting from the Company no longer conducting commercial operations in Russia |
| Operating Margin | 40.1 | % | 52.5 | % | (1240 BPS) | — margin declines primarily due to the aforementioned decrease in MIS revenue |
| Adjusted Operating Margin | 46.6 | % | 56.3 | % | (970 BPS) |
| ETR | 21.6 | % | 19.0 | % | (260BPS) | — primarily reflects the non-deductible nature of the aforementioned FX translation losses resulting from the Company no longer conducting commercial operations in Russia; and — the resolution of uncertain tax positions in the first half of 2021 that did not recur to the same extent in the first half of 2022 |
| Diluted EPS | $ | 4.45 | | $ | 6.98 | | (36 | %) | — mainly due to declines in MIS revenue coupled with the aforementioned increase in expenses |
| Adjusted Diluted EPS | $ | 5.11 | | $ | 7.28 | | (30 | %) |
Moody’s Corporation | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | % Change Favorable
(Unfavorable) |
| 2022 | | 2021 | |
| Revenue: | | | | | |
| United States | $ | 1,546 | | | $ | 1,716 | | | (10 | %) |
| Non-U.S.: | | | | | |
| EMEA | 878 | | | 959 | | | (8 | %) |
| Asia-Pacific | 293 | | | 311 | | | (6 | %) |
| Americas | 186 | | | 167 | | | 11 | % |
| Total Non-U.S. | 1,357 | | | 1,437 | | | (6 | %) |
| Total | 2,903 | | | 3,153 | | | (8 | %) |
| Expenses: | | | | | |
| Operating | 810 | | | 758 | | | (7 | %) |
| SG&A | 739 | | | 620 | | | (19 | %) |
| Depreciation and amortization | 159 | | | 119 | | | (34 | %) |
| Restructuring | 31 | | | 2 | | | NM |
| | | | | |
| | | | | |
| Total | 1,739 | | | 1,499 | | | (16 | %) |
| Operating income | 1,164 | | | 1,654 | | | (30 | %) |
Adjusted Operating Income (1) | 1,354 | | | 1,775 | | | (24 | %) |
| Interest expense, net | (108) | | | (56) | | | (93 | %) |
| Other non-operating income, net | (4) | | | 22 | | | (118 | %) |
| Non-operating (expense) income, net | (112) | | | (34) | | | (229 | %) |
| | | | | |
| Net income attributable to Moody’s | $ | 825 | | | $ | 1,313 | | | (37 | %) |
| Diluted weighted average shares outstanding | 185.4 | | | 188.2 | | | 1 | % |
| Diluted EPS attributable to Moody’s common shareholders | $ | 4.45 | | | $ | 6.98 | | | (36 | %) |
Adjusted Diluted EPS (1) | $ | 5.11 | | | $ | 7.28 | | | (30 | %) |
| Operating margin | 40.1 | % | | 52.5 | % | | |
Adjusted Operating Margin (1) | 46.6 | % | | 56.3 | % | | |
| Effective tax rate | 21.6 | % | | 19.0 | % | | |
(1)Adjusted Operating Income, Adjusted Operating Margin and Adjusted Diluted EPS attributable to Moody’s common shareholders are non-GAAP financial measures. Refer to the section entitled “Non-GAAP Financial Measures” of this Management Discussion and Analysis for further information regarding these measures.
GLOBAL REVENUE
| | | | | | | | | | | | | | |
Six months ended June 30, |
2022-----------------------------------------------------------------------------------2021
_______________________________________________________________________________________________________
| | | | | | | | | | | | | | | | | |
Global revenue ⇓ $250 million | U.S. Revenue ⇓ $170 million | Non-U.S. Revenue ⇓ $80 million |
The decrease in global revenue reflected declines in MIS in all regions, partially offset by growth in MA in all regions. Refer to the section entitled “Segment Results” of this MD&A for a more fulsome discussion of the Company’s segment revenue.
–Foreign currency translation unfavorably impacted global revenue by two percent.
–Organic constant currency revenue(1) for MCO decreased 11%.
(1) Refer to the section entitled "Non-GAAP Financial Measures" of this MD&A for the definition and methodology that the Company utilizes to calculate this metric.
| | | | | | | | | | | | |
| | YTD Operating Expense ⇑ $52 million | | | | YTD SG&A Expense ⇑ $119 million |
-------------------------------------
| | | | | | | | | | | | |
| | Compensation expenses decreased $3 million and reflected: | | | Compensation expenses increased $60 million reflecting: |
| | — lower incentive compensation accruals and performance-based equity compensation of $34 million, which aligns with actual/projected financial and operating performance; | | | — inorganic growth from acquisitions of $29 million; and |
| | | | — higher salaries and benefits costs primarily due to hiring and salary increases; partially offset by: |
| | — approximately $40 million in higher compensation costs eligible for capitalization in 2022 reflecting certain product development in the MA operating segment; partially offset by | | | — lower incentive compensation accruals and performance-based equity compensation of $14 million, which aligns with actual/projected financial and operating performance. |
| | — inorganic growth from acquisitions of $68 million. | | | |
| | | | | |
| | | | | | |
| | Non-compensation expenses increased $55 million reflecting: | | | Non-compensation expenses increased $59 million reflecting: |
| | — inorganic growth from acquisitions of $20 million; and | | | — inorganic growth from acquisitions of $21 million; |
| | — higher costs of $30 million relating to strategic initiatives to support business growth coupled with enhancements to technology infrastructure to enable automation, innovation and efficiency. | | — higher estimates for bad debt reserves of $11 million for the Company's Russian-domiciled customers resulting from the impact of the Russia/Ukraine conflict; and |
| | | | | — higher costs of $12 million relating to strategic initiatives to support business growth coupled with enhancements to technology infrastructure to enable automation, innovation and efficiency. |
| | | | | | |
| | | | | |
The restructuring charge in the first half of 2022 relates to the Company's 2022 - 2023 Geolocation Restructuring Program as more fully discussed in Note 11 to the condensed consolidated financial statements.
| | | | | | | | | |
| | | | | |
| | Operating margin 40.1%, down 1,240 BPS | | | Adjusted Operating Margin 46.6%, down 970 BPS |
Overall, margin declines resulted from the aforementioned decrease in MIS revenue coupled with operating expense growth (mainly from inorganic expense growth from acquisitions).
| | | | | | | | | |
| | Interest Expense, net ⇑ $52 million | | | Other non-operating income ⇓ $26 million |
| | | | | | | | |
| Increase in expense is primarily due to: | | Decrease in income is primarily due to: |
— a $40 million benefit in the prior year related to the reversal of tax-related interest accruals pursuant to the resolution of uncertain tax positions; and | | — FX translation losses of $20 million reclassified to earnings resulting from the Company no longer conducting commercial operations in Russia (refer to the section above entitled "Russia/Ukraine Conflict" for further information); and |
— higher interest on borrowings resulting from the issuance of new long-term debt in 2022 (refer to the "Material Cash Requirements" section of this MD&A for further information on the Company's indebtedness) | | — higher gains of $23 million in the prior year on certain of the Company's investments in equity securities; partially offset by: |
| — an $11 million benefit relating to statute of limitations lapses on certain indemnification obligations relating to the MAKS divestiture; and |
| | — a $7 million loss on the settlement of pension obligations in 2021 resulting from lump sum distributions from the Company's defined benefit pension plans. |
The drivers for the increase in the ETR include:
–approximately $40 million in higher tax benefits from the resolution of uncertain tax positions in the first half of 2021 compared to the first half of 2022; and
–the non-deductible nature of the aforementioned FX translation losses resulting from the Company no longer conducting commercial operations in Russia.
| | | | | | | | | |
| | Diluted EPS ⇓ $2.53 | | | Adjusted Diluted EPS ⇓ $2.17 |
Diluted EPS and Adjusted Diluted EPS declined mainly due to lower operating income and Adjusted Operating Income, respectively. Refer to the section entitled “Non-GAAP Financial Measures” of this MD&A for items excluded in the derivation of Adjusted Diluted EPS.
Segment Results
Moody’s Investors Service
The table below provides a summary of revenue and operating results, followed by further insight and commentary: | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | % Change Favorable
(Unfavorable) |
| 2022 | | 2021 | |
| Revenue: | | | | | |
| Corporate finance (CFG) | $ | 739 | | | $ | 1,155 | | | (36 | %) |
| Structured finance (SFG) | $ | 267 | | | $ | 256 | | | 4 | % |
| Financial institutions (FIG) | 259 | | | 312 | | | (17 | %) |
| Public, project and infrastructure finance (PPIF) | 245 | | | 273 | | | (10 | %) |
| Total ratings revenue | 1,510 | | | 1,996 | | | (24 | %) |
| MIS Other | 23 | | | 20 | | | 15 | % |
| Total external revenue | 1,533 | | | 2,016 | | | (24 | %) |
| Intersegment royalty | 86 | | | 82 | | | 5 | % |
| Total | 1,619 | | | 2,098 | | | (23 | %) |
| Expenses: | | | | | |
| Operating and SG&A (external) | 691 | | | 688 | | | — | % |
| Operating and SG&A (intersegment) | 3 | | | 4 | | | 25 | % |
| Total operating and SG&A expense | 694 | | | 692 | | | — | % |
| | | | | |
| Adjusted Operating Income | $ | 925 | | | $ | 1,406 | | | (34 | %) |
| | | | | |
| Adjusted Operating Margin | 57.1 | % | | 67.0 | % | | |
| | | | | |
| Depreciation and amortization | 39 | | | 36 | | | (8 | %) |
| Restructuring | 15 | | | — | | | NM |
The following chart presents changes in rated issuance volumes compared to the first half of 2021. To the extent that changes in rated issuance volumes had a material impact to MIS's revenue compared to the prior year, those impacts are discussed below.
MOODY'S INVESTORS SERVICE REVENUE
| | | | | | | | | | | | | | |
Six months ended June 30, |
2022-----------------------------------------------------------------------------------2021
_______________________________________________________________________________________________________
| | | | | | | | |
MIS: Global revenue ⇓ $483 million | U.S. Revenue ⇓ $290 million | Non-U.S. Revenue ⇓ $193 million |
–The decrease in global MIS revenue primarily resulted from a 27% decrease in rated issuance volumes, which resulted in transaction revenue declining $492 million compared to the same period in the prior year. The decline in rated issuance volumes compared to the first half of 2021 resulted from market volatility relating to macroeconomic uncertainties, rising borrowing costs and the Russia/Ukraine conflict.
–Foreign currency translation unfavorably impacted MIS revenue by two percentage points.
CFG REVENUE
| | | | | | | | | | | | | | |
Six months ended June 30, |
2022-----------------------------------------------------------------------------------2021
_______________________________________________________________________________________________________
| | | | | | | | |
CFG: Global revenue ⇓ $416 million | U.S. Revenue ⇓ $274 million | Non-U.S. Revenue ⇓ $142 million |
Global CFG revenue for the six months ended June 30, 2022 and 2021 was comprised as follows:
(1) Other includes: recurring monitoring fees of a rated debt obligation and/or entities that issue such obligations as well as fees from programs such as commercial paper, medium term notes, and ICRA corporate finance revenue.
The decrease in CFG revenue of 36% reflected declines both in the U.S. and internationally of 36% each, which resulted in a $422 million decrease in transaction revenue.
The most notable drivers of the decrease compared to the first half of 2021 reflected declines in leveraged finance and investment-grade issuance activity compared to a strong prior year period resulting from market volatility relating to macroeconomic uncertainties, rising borrowing costs and the Russia/Ukraine conflict.
SFG REVENUE
| | | | | | | | | | | | | | |
Six months ended June 30, |
2022-----------------------------------------------------------------------------------2021
_______________________________________________________________________________________________________
| | | | | | | | |
SFG: Global revenue ⇑ $11 million | U.S. Revenue ⇑ $24 million | Non-U.S. Revenue ⇓ $13 million |
Global SFG revenue for the six months ended June 30, 2022 and 2021 was comprised as follows:
The increase in SFG revenue of 4% reflected growth in the U.S. (15%) partially offset by declines internationally (13%). Transaction revenue increased $8 million compared to the first half of 2021.
The most notable drivers of the increase in SFG revenue were:
–strong growth in U.S. CMBS securitization activity before a widening of credit spreads late in the first quarter of 2022; and
–growth in U.S. ABS issuance activity which reflected larger-sized deals in the first quarter of 2022;
partially offset by:
–a decrease in CLO refinancing activity in EMEA resulting from the widening of credit spreads for this asset class; and
–unfavorable changes in foreign currency translation rates which unfavorably impacted SFG revenue by three percentage points.
FIG REVENUE
| | | | | | | | | | | | | | |
Six months ended June 30, |
2022-----------------------------------------------------------------------------------2021
_______________________________________________________________________________________________________
| | | | | | | | |
FIG: Global revenue ⇓ $53 million | U.S. Revenue ⇓ $37 million | Non-U.S. Revenue ⇓ $16 million |
Global FIG revenue for the six months ended June 30, 2022 and 2021 was comprised as follows:
The decrease in FIG revenue of 17% reflected declines in both the U.S. (24%) and internationally (10%) which resulted in a $51 million decrease in transaction revenue compared to the same period in the prior year.
The most notable drivers of the decline reflected lower revenue from banking, insurance and asset management issuers, mainly due to:
–an unfavorable product mix;
–a decline in opportunistic issuance, as banks, insurers and asset management issuers were well capitalized following financing activity in the prior year period ahead of anticipated interest rate increases; and
–changes in foreign currency translation rates which unfavorably impacted FIG revenue by two percentage points.
PPIF REVENUE
| | | | | | | | | | | | | | |
Six months ended June 30, |
2022-----------------------------------------------------------------------------------2021
_______________________________________________________________________________________________________
| | | | | | | | |
PPIF: Global revenue ⇓ $28 million | U.S. Revenue ⇓ $4 million | Non-U.S. Revenue ⇓ $24 million |
Global PPIF revenue for the six months ended June 30, 2022 and 2021 was comprised as follows:
Transaction revenue decreased $27 million compared to the same period in the prior year.
The 10% decrease in PPIF revenue reflected declines in both the U.S. (3%) and internationally (21%). The decrease in revenue was mainly due to:
–declines in sovereign, project finance and infrastructure finance rated issuance volumes in EMEA resulting from market volatility and rising funding costs;
–declines in U.S. public finance revenue resulting from market volatility, which increased funding costs, coupled with issuers in these sectors being currently well capitalized; and
–changes in foreign currency translation rates which unfavorably impacted PPIF revenue by two percentage points.
| | | | |
| | MIS: YTD Operating and SG&A Expense ⇑ $3 million |
The modest increase in operating and SG&A expense reflects a $42 million increase in non-compensation expenses partially offset by a $39 million decrease in compensation costs. The most notable drivers of these changes are as follows: | | | | | | | | |
| Compensation costs | | Non-compensation costs |
| The decrease is primarily due to: | | The increase is primarily due to: |
— lower incentive compensation accruals and performance-based equity compensation, which aligns with actual/projected financial and operating performance. | | — higher estimates for bad debt reserves for the Company's Russian-domiciled customers resulting from the impact of the Russia/Ukraine conflict, which represented approximately 35% of the increase; |
| | — higher costs relating to strategic initiatives to support business growth coupled with enhancements to technology infrastructure to enable automation, innovation and efficiency, which represented approximately 15% of the increase; and |
| | — higher travel costs resulting from minimal travel in the prior year in light of COVID-19, which represented approximately 10% of the increase. |
The restructuring charge in the first half of 2022 relates to the Company's 2022 - 2023 Geolocation Restructuring Program as more fully discussed in Note 11 to the condensed consolidated financial statements.
| | | | | | | |
| | | | | Adjusted Operating Margin of 57.1% ⇓ 990 BPS |
The MIS Adjusted Operating Margin decline primarily reflected the aforementioned 24% decrease in revenue.
Moody’s Analytics
The table below provides a summary of revenue and operating results, followed by further insight and commentary:
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | % Change Favorable
(Unfavorable) |
| 2022 | | 2021 | |
| Revenue: | | | | | |
| Decision Solutions (DS) | $ | 646 | | | $ | 447 | | | 45 | % |
| Research and Insights (R&I) | 368 | | | 346 | | | 6 | % |
| Data and Information (D&I) | 356 | | | 344 | | | 3 | % |
| Total external revenue | 1,370 | | | 1,137 | | | 20 | % |
| Intersegment revenue | 3 | | | 4 | | | (25 | %) |
| Total MA Revenue | 1,373 | | | 1,141 | | | 20 | % |
| Expenses: | | | | | |
| Operating and SG&A (external) | 858 | | | 690 | | | (24 | %) |
| Operating and SG&A (intersegment) | 86 | | | 82 | | | (5 | %) |
| | | | | |
| | | | | |
| Total operating and SG&A expense | 944 | | | 772 | | | (22 | %) |
| | | | | |
| | | | | |
| Adjusted Operating Income | $ | 429 | | | $ | 369 | | | 16 | % |
| | | | | |
| Adjusted Operating Margin | 31.2 | % | | 32.3 | % | | |
| | | | | |
| Depreciation and amortization | 120 | | | 83 | | | (45 | %) |
| Restructuring | 16 | | | 2 | | | NM |
MOODY'S ANALYTICS REVENUE
| | | | | | | | | | | | | | |
Six months ended June 30, |
2022-----------------------------------------------------------------------------------2021
_______________________________________________________________________________________________________
| | | | | | | | |
MA: Global revenue ⇑ $233 million | U.S. Revenue ⇑ $120 million | Non-U.S. Revenue ⇑ $113 million |
The 20% increase in global MA revenue reflects growth both in the U.S. and internationally in all LOBs and includes revenue from the acquisitions of Cortera, RMS, RealXData, PassFort and kompany. Foreign currency translation unfavorably impacted MA revenue by four percentage points.
–Organic constant currency revenue(1) growth was 10%.
–ARR(2) grew 25% mainly due to acquisitions completed in the previous twelve months. Organic ARR(2) grew 9% reflecting increased demand for KYC and banking products within the Decision Solutions LOB coupled with growth for company data and ratings feeds products in the Data & Information LOB.
DECISION SOLUTIONS REVENUE
| | | | | | | | | | | | | | |
Six months ended June 30, |
2022-----------------------------------------------------------------------------------2021
_______________________________________________________________________________________________________
| | | | | | | | |
DS: Global revenue ⇑ $199 million | U.S. Revenue ⇑ $95 million | Non-U.S. Revenue ⇑ $104 million |
Global DS revenue grew 45% compared to the first half of 2021 with the most notable drivers of the increase reflecting:
–inorganic revenue growth from the acquisitions of RMS, PassFort, RealXData and kompany;
–continued demand for KYC and compliance solutions reflecting increased customer and supplier risk data usage;
–growth in recurring revenue for banking solutions reflecting strong renewals of multi-year commitments; and
–growth in subscription-based revenue for pension and actuarial modeling tools in support of certain international accounting standards relating to insurance contracts;
partially offset by:
–unfavorable changes in foreign currency translation rates which unfavorably impacted DS revenue by three percentage points.
Organic constant currency revenue(1) growth for DS was 12%.
______________________________________
(1) Refer to the section entitled "Non-GAAP Financial Measures" of this MD&A for the definition and methodology that the Company utilizes to calculate this metric.
(2) Refer to the section entitled "Key Performance Metrics" of this MD&A for the definition and methodology that the Company utilizes to calculate this metric.
RESEARCH AND INSIGHTS REVENUE
| | | | | | | | | | | | | | |
Six months ended June 30, |
2022-----------------------------------------------------------------------------------2021
_______________________________________________________________________________________________________
| | | | | | | | |
R&I: Global revenue ⇑ $22 million | U.S. Revenue ⇑ $15 million | Non-U.S. Revenue ⇑ $7 million |
Global R&I revenue increased 6% compared to the first half of 2021 mainly driven by:
–growth in recurring revenue of 7%, primarily due to continued strong retention and demand for credit research, analytics and models.
partially offset by:
–unfavorable changes in foreign currency translation rates which unfavorably impacted R&I revenue by two percentage points.
Constant currency revenue(1) growth for R&I was 8%.
DATA AND INFORMATION REVENUE
| | | | | | | | | | | | | | |
Six months ended June 30, |
2022-----------------------------------------------------------------------------------2021
_______________________________________________________________________________________________________
______________________________________
(1) Refer to the section entitled "Non-GAAP Financial Measures" of this MD&A for the definition and methodology that the Company utilizes to calculate this metric.
| | | | | | | | |
D&I: Global revenue ⇑ $12 million | U.S. Revenue ⇑ $10 million | Non-U.S. Revenue ⇑ $2 million |
Global D&I revenue increased 3% compared to the first half of 2021 and includes inorganic revenue growth from the acquisition of Cortera. The main drivers of the increase were:
–continued strong retention and new sales for ratings feeds coupled with pricing increases; and
–increased demand for company data;
partially offset by:
–unfavorable changes in foreign currency translation, which unfavorably impacted D&I revenue by six percentage points.
Organic constant currency revenue(1) growth for D&I was 8%.
(1) Refer to the section entitled "Non-GAAP Financial Measures" of this MD&A for the definition and methodology that the Company utilizes to calculate this metric.
| | | | |
| | MA: YTD Operating and SG&A Expense ⇑ $168 million |
The increase in operating and SG&A expenses compared to the first six months of 2021 is primarily due to growth in both compensation and non-compensation costs of $114 million and $54 million, respectively, reflecting:
| | | | | | | | |
| Compensation costs | | Non-compensation costs |
| — inorganic expense growth from acquisitions, which represented approximately 90% of the growth | | — operating and integration-related costs associated with recent acquisitions, which contributed approximately 85% of the growth. |
| |
The restructuring charge in the first half of 2022 relates to the Company's 2022 - 2023 Geolocation Restructuring Program as more fully discussed in Note 11 to the condensed consolidated financial statements.
| | | | | | | |
| | | | | MA: Adjusted Operating Margin 31.2% ⇓ 110BPS |
The Adjusted Operating Margin contraction for MA is primarily due to operational and integration-related costs associated with recent acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Moody's remains committed to using its strong cash flow to create value for shareholders by both investing in the Company's employees and growing the business through targeted organic initiatives and inorganic acquisitions aligned with strategic priorities. Additional excess capital is returned to the Company’s shareholders via a combination of dividends and share repurchases.
Cash Flow
The Company is currently financing its operations, capital expenditures, acquisitions and share repurchases from operating and financing cash flows.
The following is a summary of the changes in the Company’s cash flows followed by a brief discussion of these changes:
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | $ Change
Favorable (Unfavorable) |
| 2022 | | 2021 | |
| Net cash provided by operating activities | $ | 761 | | | $ | 1,270 | | | $ | (509) | |
| Net cash used in investing activities | $ | (172) | | | $ | (251) | | | $ | 79 | |
| Net cash used in financing activities | $ | (712) | | | $ | (792) | | | $ | 80 | |
Free Cash Flow (1) | $ | 628 | | | $ | 1,226 | | | $ | (598) | |
(1) Free Cash Flow is a non-GAAP measure and is defined by the Company as net cash provided by operating activities minus cash paid for capital expenditures. Refer to “Non-GAAP Financial Measures” of this MD&A for further information on this financial measure.
Net cash provided by operating activities
Net cash flows from operating activities in the six months ended June 30, 2022 decreased $509 million compared to the same period in 2021 primarily reflecting a decrease in net income (see section entitled “Results of Operations” of this MD&A for further discussion).
Net cash used in investing activities
The $79 million decrease in cash used in investing activities in the six months ended June 30, 2022 compared to the same period in 2021 primarily reflects:
–higher cash paid of $46 million in the prior year for acquisitions; and
–higher net cash receipts of $181 million in the current period relating to the settlement of net investment hedges;
partially offset by:
–an increase in cash paid for capital additions of $89 million reflecting product development and investments relating to strategic initiatives to support business growth and to enhance technology infrastructure to enable automation, innovation and efficiency; and
–$59 million in higher net purchases of investments in 2022 compared to the same period in the prior year (refer to Note 7 and Note 13 to the condensed consolidated financial statements for further information on the Company's investments).
Net cash used in financing activities
The $80 million decrease in cash used in financing activities in the six months ended June 30, 2022 compared to the same period in the prior year was primarily attributed to:
–the issuance of $500 million in long-term debt in 2022;
partially offset by:
–higher cash paid for treasury share repurchases in 2022 of $368 million, which includes payment for shares made under an ASR agreement executed in the first quarter of 2022.
Cash and cash equivalents and short-term investments
The Company’s aggregate cash and cash equivalents and short-term investments of $1.7 billion at June 30, 2022 included approximately $1.5 billion located outside of the U.S. Approximately 24% of the Company’s aggregate cash and cash equivalents and short-term investments is denominated in euros and British pounds. The Company manages both its U.S. and non-U.S. cash flow to maintain sufficient liquidity in all regions to effectively meet its operating needs.
As a result of the Tax Act, all previously net undistributed foreign earnings have now been subject to U.S. tax. The Company continues to evaluate which entities it will indefinitely reinvest earnings outside the U.S. The Company has provided deferred taxes for those entities whose earnings are not considered indefinitely reinvested. Accordingly, the Company has commenced repatriating a portion of its non-U.S. cash in these subsidiaries and will continue to repatriate certain of its offshore cash in a manner that addresses compliance with local statutory requirements, sufficient offshore working capital and any other factors that may be relevant in certain jurisdictions. Notwithstanding the Tax Act, which generally eliminated federal income tax on future cash repatriation to the U.S., cash repatriation may be subject to state and local taxes or withholding or similar taxes.
Material Cash Requirements
The Company's material cash requirements consist of the following contractual and other obligations:
Financing Arrangements
Indebtedness
At June 30, 2022, Moody’s had $7.7 billion of outstanding debt and approximately $1 billion of additional capacity available under the Company’s CP Program, which is backstopped by the $1.25 billion 2021 Facility.
The repayment schedule for the Company’s borrowings outstanding at June 30, 2022 is as follows:
For additional information on the Company's outstanding debt, refer to Note 15 to the condensed consolidated financial statements.
Future interest payments and fees associated with the Company's debt and credit facility are expected to be $4.0 billion, of which approximately $239 million is expected to be paid over the next twelve months.
Management may consider pursuing additional long-term financing when it is appropriate in light of cash requirements for operations, share repurchases and other strategic opportunities, which would result in higher financing costs.
Purchase Obligations
Purchase obligations generally include multi-year agreements with vendors to purchase goods or services and mainly include data center/cloud hosting fees and fees for information technology licensing and maintenance. As of June 30, 2022, these purchase obligations totaled $232 million, of which $157 million is expected to be paid in the next twelve months.
Leases
The Company has operating lease obligations of $526 million at June 30, 2022, primarily related to real estate leases, of which $105 million in payments are expected over the next twelve months. For more information on the Company's operating leases, refer to Note 16 to the condensed consolidated financial statements.
Pension and Other Retirement Plan Obligations
The Company does not anticipate making significant contributions to its funded pension plan in the next twelve months. This plan is overfunded at June 30, 2022, and accordingly holds sufficient investments to fund future benefit obligations. Payments for the Company's unfunded plans are not expected to be material in either the short or long-term.
Dividends and share repurchases
On July 25, 2022, the Board approved the declaration of a quarterly dividend of $0.70 per share for Moody’s common stock, payable September 9, 2022 to shareholders of record at the close of business on August 19, 2022. The continued payment of dividends at this rate, or at all, is subject to the discretion of the Board.
On February 9, 2021, the Board approved $1 billion in share repurchase authority, and on February 7, 2022, the Board approved an additional $750 million of share repurchase authority. At June 30, 2022, the Company had approximately $960 million of remaining authority. There is no established expiration date for the remaining authorizations.
Restructuring
As more fully discussed in Note 11 to the condensed consolidated financial statements, on June 30, 2022, the Company approved the 2022 - 2023 Geolocation Restructuring Program. This program relates to the Company's post-COVID-19 geolocation strategy and includes the rationalization and exit of certain real estate leases and a reduction in staff, including the relocation of certain job functions from their current locations. Cash outlays associated with this program are expected to be $30 million to $40 million, which are expected to be paid through 2024.
Sources of Funding to Satisfy Material Cash Requirements
The Company believes that it has the financial resources needed to meet its cash requirements and expects to have positive operating cash flow over the next twelve months. Cash requirements for periods beyond the next twelve months will depend, among other things, on the Company’s profitability and its ability to manage working capital requirements. The Company may also borrow from various sources as described above.
Non-GAAP Financial Measures:
In addition to its reported results, Moody’s has included in this MD&A certain adjusted results that the SEC defines as “non-GAAP financial measures.” Management believes that such adjusted financial measures, when read in conjunction with the Company’s reported results, can provide useful supplemental information for investors analyzing period-to-period comparisons of the Company’s performance, facilitate comparisons to competitors’ operating results and can provide greater transparency to investors of supplemental information used by management in its financial and operational decision-making. These adjusted measures, as defined by the Company, are not necessarily comparable to similarly defined measures of other companies. Furthermore, these adjusted measures should not be viewed in isolation or used as a substitute for other GAAP measures in assessing the operating performance or cash flows of the Company. Below are brief descriptions of the Company’s adjusted financial measures accompanied by a reconciliation of the adjusted measure to its most directly comparable GAAP measure:
Adjusted Operating Income and Adjusted Operating Margin:
The Company presents Adjusted Operating Income and Adjusted Operating Margin because management deems these metrics to be useful measures to provide additional perspective on Moody's operating performance. Adjusted Operating Income excludes the impact of: i) depreciation and amortization; and ii) restructuring charges/adjustments. Depreciation and amortization are excluded because companies utilize productive assets of different ages and use different methods of acquiring and depreciating productive assets. Restructuring charges are excluded as the frequency and magnitude of these charges may vary widely across periods and companies.
Management believes that the exclusion of the aforementioned items, as detailed in the reconciliation below, allows for an additional perspective on the Company’s operating results from period to period and across companies. The Company defines Adjusted Operating Margin as Adjusted Operating Income divided by revenue.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Operating income | $ | 508 | | | $ | 801 | | | $ | 1,164 | | | $ | 1,654 | |
| Adjustments: | | | | | | | |
| Depreciation and amortization | 81 | | | 60 | | | 159 | | | 119 | |
| Restructuring | 31 | | | — | | | 31 | | | 2 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Adjusted Operating Income | $ | 620 | | | $ | 861 | | | $ | 1,354 | | | $ | 1,775 | |
| Operating margin | 36.8 | % | | 51.6 | % | | 40.1 | % | | 52.5 | % |
| Adjusted Operating Margin | 44.9 | % | | 55.4 | % | | 46.6 | % | | 56.3 | % |
Adjusted Net Income and Adjusted Diluted EPS attributable to Moody's common shareholders:
The Company presents Adjusted Net Income and Adjusted Diluted EPS because management deems these metrics to be useful measures to provide additional perspective on Moody’s operating performance. Adjusted Net Income and Adjusted Diluted EPS exclude the impact of: i) amortization of acquired intangible assets; ii) restructuring charges; and iii) FX translation losses reclassified to earnings resulting from the Company no longer conducting commercial operations in Russia.
The Company excludes the impact of amortization of acquired intangible assets as companies utilize intangible assets with different estimated useful lives and have different methods of acquiring and amortizing intangible assets. These intangible assets were recorded as part of acquisition accounting and contribute to revenue generation. The amortization of intangible assets related to acquisitions will recur in future periods until such intangible assets have been fully amortized. Furthermore, the timing and magnitude of business combination transactions are not predictable and the purchase price allocated to amortizable intangible assets and the related amortization period are unique to each acquisition and can vary significantly from period to period and across companies. Restructuring charges and FX translation losses resulting from the Company no longer conducting commercial operations in Russia are excluded as the frequency and magnitude of these items may vary widely across periods and companies.
The Company excludes the aforementioned items to provide additional perspective when comparing net income and diluted EPS from period to period and across companies as the frequency and magnitude of similar transactions may vary widely across periods.
Below is a reconciliation of this measure to its most directly comparable U.S. GAAP amount:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
Amounts in millions | 2022 | | 2021 | | 2022 | | 2021 |
| Net income attributable to Moody's common shareholders | | $ | 327 | | | | $ | 577 | | | | $ | 825 | | | | $ | 1,313 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Pre-Tax Acquisition-Related Intangible Amortization Expenses | $ | 51 | | | | $ | 36 | | | | $ | 102 | | | | $ | 71 | | |
| Tax on Acquisition-Related Intangible Amortization Expenses | (12) | | | | (8) | | | | (24) | | | | (16) | | |
| Net Acquisition-Related Intangible Amortization Expenses |
| 39 | | |
| 28 | | |
| 78 | | |
| 55 | |
| | | | | | | | | | | |
| Pre-Tax Restructuring | $ | 31 | | | | $ | — | | | | $ | 31 | | | | $ | 2 | | |
| Tax on Restructuring | (7) | | | | — | | | | (7) | | | | — | | |
| Net Restructuring | | 24 | | | | — | | | | 24 | | | | 2 | |
FX losses resulting from the Company no longer conducting commercial operations in Russia | | 20 | | | | — | | | | 20 | | | | — | |
| Adjusted Net Income |
| $ | 410 | | |
| $ | 605 | | |
| $ | 947 | | |
| $ | 1,370 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Diluted earnings per share attributable to Moody's common shareholders | | $ | 1.77 | | | | $ | 3.07 | | | | $ | 4.45 | | | | $ | 6.98 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Pre-Tax Acquisition-Related Intangible Amortization Expenses | $ | 0.28 | | | | $ | 0.19 | | | | $ | 0.55 | | | | $ | 0.38 | | |
| Tax on Acquisition-Related Intangible Amortization Expenses | (0.07) | | | | (0.04) | | | | (0.13) | | | | (0.09) | | |
| Net Acquisition-Related Intangible Amortization Expenses | | 0.21 | | | | 0.15 | | | | 0.42 | | | | 0.29 | |
| | | | | | | | | | | |
| Pre-Tax Restructuring | $ | 0.17 | | | | $ | — | | | | $ | 0.17 | | | | $ | 0.01 | | |
| Tax on Restructuring | (0.04) | | | | — | | | | (0.04) | | | | — | | |
| Net Restructuring | | 0.13 | | | | — | | | | 0.13 | | | | 0.01 | |
| FX losses resulting from the Company no longer conducting commercial operations in Russia | | 0.11 | | | | — | | | | 0.11 | | | | — | |
| Adjusted Diluted EPS | | $ | 2.22 | | | | $ | 3.22 | | | | $ | 5.11 | | | | $ | 7.28 | |
Note: the tax impacts in the table above were calculated using tax rates in effect in the jurisdiction for which the item relates.
Free Cash Flow:
The Company defines Free Cash Flow as net cash provided by operating activities minus payments for capital additions. Management believes that Free Cash Flow is a useful metric in assessing the Company’s cash flows to service debt, pay dividends and to fund acquisitions and share repurchases. Management deems capital expenditures essential to the Company’s product and service innovations and maintenance of Moody’s operational capabilities. Accordingly, capital expenditures are deemed to be a recurring use of Moody’s cash flow. Below is a reconciliation of the Company’s net cash flows from operating activities to Free Cash Flow: | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
| Net cash flows provided by operating activities | $ | 761 | | | $ | 1,270 | |
| Capital additions | (133) | | | (44) | |
| Free Cash Flow | $ | 628 | | | $ | 1,226 | |
| Net cash flows used in investing activities | $ | (172) | | | $ | (251) | |
| Net cash flows used in financing activities | $ | (712) | | | $ | (792) | |
Organic Constant Currency Revenue Growth (Decline)/Constant Currency Revenue Growth (Decline):
Beginning in the second quarter of 2022, the Company began presenting organic constant currency revenue growth (decline) and constant currency revenue growth (decline) as its non-GAAP measure of revenue growth (decline). Previously, the Company presented organic revenue growth (decline), which excluded only the impact of certain acquisition activity. Management deems this revised measure to be useful in providing additional perspective in assessing the Company's revenue growth (decline) excluding both the inorganic revenue impacts from certain acquisition activity and the impacts of changes in foreign exchange rates. The Company calculates the dollar impact of foreign exchange as the difference between the translation of its current period non-USD functional currency results using prior comparative period weighted average foreign exchange translation rates and current year as reported results.
Below is a reconciliation of the Company's reported revenue and growth rates to its organic constant currency revenue growth (decline) and constant currency revenue growth (decline) measures:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| Amounts in millions | | 2022 | | 2021 | | Change | | Growth | | 2022 | | 2021 | | Change | | Growth |
| MA revenue | | $ | 675 | | | $ | 573 | | | $ | 102 | | | 18% | | $ | 1,370 | | | $ | 1,137 | | | $ | 233 | | | 20% |
| FX impact | | 27 | | | — | | | 27 | | | | | 40 | | | — | | | 40 | | | |
| Inorganic revenue from acquisitions | | (83) | | | — | | | (83) | | | | | (162) | | | — | | | (162) | | | |
| Organic constant currency MA revenue | | $ | 619 | | | $ | 573 | | | $ | 46 | | | 8% | | $ | 1,248 | | | $ | 1,137 | | | $ | 111 | | | 10% |
| | | | | | | | | | | | | | | | |
| | | | |
| | | | | | | | | | | | | | | | |
| Decision Solutions revenue | | $ | 312 | | | $ | 222 | | | $ | 90 | | | 41% | | $ | 646 | | | $ | 447 | | | $ | 199 | | | 45% |
| FX impact | | 11 | | | — | | | 11 | | | | | 16 | | | — | | | 16 | | | |
| Inorganic revenue from acquisitions | | (83) | | | — | | | (83) | | | | | (160) | | | — | | | (160) | | | |
| Organic constant currency Decision Solutions revenue | | $ | 240 | | | $ | 222 | | | $ | 18 | | | 8% | | $ | 502 | | | $ | 447 | | | $ | 55 | | | 12% |
| | | | | | | | | | | | | | | | |
| Research and Insights revenue | | $ | 185 | | | $ | 175 | | | $ | 10 | | | 6% | | $ | 368 | | | $ | 346 | | | $ | 22 | | | 6% |
| FX impact | | 4 | | | — | | | 4 | | | | | 5 | | | — | | | 5 | | | |
| Constant currency Research and Insights revenue | | $ | 189 | | | $ | 175 | | | $ | 14 | | | 8% | | $ | 373 | | | $ | 346 | | | $ | 27 | | | 8% |
| | | | | | | | | | | | | | | | |
| | | | |
| | | | | | | | | | | | | | | | |
| Data and Information revenue | | $ | 178 | | | $ | 176 | | | $ | 2 | | | 1% | | $ | 356 | | | $ | 344 | | | $ | 12 | | | 3% |
| FX impact | | 12 | | | — | | | 12 | | | | | 19 | | | — | | | 19 | | | |
| Inorganic revenue from acquisitions | | — | | | — | | | — | | | | | (2) | | | — | | | (2) | | | |
| Organic constant currency Data and Information revenue | | $ | 190 | | | $ | 176 | | | $ | 14 | | | 8% | | $ | 373 | | | $ | 344 | | | $ | 29 | | | 8% |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| Amounts in millions | | 2022 | | 2021 | | Change | | Growth | | 2022 | | 2021 | | Change | | Growth |
| MCO revenue | | $ | 1,381 | | | $ | 1,553 | | | $ | (172) | | | (11)% | | $ | 2,903 | | | $ | 3,153 | | | $ | (250) | | | (8)% |
| FX impact | | 47 | | | — | | | 47 | | | | | 75 | | | — | | | 75 | | | |
| Inorganic recurring revenue from acquisitions | | (83) | | | — | | | (83) | | | | | (162) | | | — | | | (162) | | | |
| Organic constant currency MCO revenue | | $ | 1,345 | | | $ | 1,553 | | | $ | (208) | | | (13)% | | $ | 2,816 | | | $ | 3,153 | | | $ | (337) | | | (11)% |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Key Performance Metrics:
The Company presents Annualized Recurring Revenue (“ARR”) and Organic ARR on a constant currency basis for its MA business as supplemental performance metrics to provide additional insight on the estimated value of MA's recurring revenue contracts at a given point in time. The Company uses these metrics to manage and monitor performance of its MA operating segment and believes that ARR is a key indicator of the trajectory of MA's recurring revenue base.
The Company calculates ARR and Organic ARR by taking the total recurring contract value for each active renewable contract as of the reporting date, divided by the number of days in the contract and multiplied by 365 days to create an annualized value. The Company defines renewable contracts as subscriptions, term licenses, maintenance and renewable services. ARR excludes transaction sales including training, one-time services and perpetual licenses. In order to compare period-over-period ARR and Organic ARR excluding the effects of foreign currency translation, the Company bases the calculation on currency rates utilized in its current year operating budget and holds these FX rates constant for the duration of all current and prior periods being reported. Additionally, Organic ARR excludes contracts related to acquisitions to provide additional perspective in assessing ARR growth excluding the impacts from certain acquisition activity.
The Company’s definition of ARR may differ from definitions utilized by other companies reporting similarly named measures, and this metric should be viewed in addition to, and not as a substitute for, financial measures presented in accordance with U.S. GAAP.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amounts in millions | | June 30, 2022 | | June 30, 2021 | | Change | | Growth | | | | | | | | |
| MA ARR | | $ | 2,608 | | | $ | 2,084 | | | $ | 524 | | | 25% | | | | | | | | |
| Organic MA ARR | | $ | 2,276 | | | $ | 2,084 | | | $ | 192 | | | 9% | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Recently Issued Accounting Standards
Refer to Note 1 to the condensed consolidated financial statements located in Part I of this Form 10-Q for a discussion on the impact to the Company relating to recently issued accounting pronouncements.
Contingencies
Legal proceedings in which the Company is involved also may impact Moody’s liquidity or operating results. No assurance can be provided as to the outcome of such proceedings. In addition, litigation inherently involves significant costs. For information regarding legal proceedings, see Item 1 - "Financial Statements", Note 17 "Contingencies” in this Form 10-Q.
Regulation
MIS, certain of the Company's credit rating affiliates and many of the issuers and/or securities that MIS and the affiliates rate, are subject to extensive regulation in the U.S., EU and in other countries (including by state and local authorities). In addition, some of the services offered by MA and its affiliates are subject to regulation in a number of countries. MA also derives a significant amount of its sales from banks and other financial services providers who are subject to regulatory oversight and who are required to pass through certain regulatory requirements to key suppliers such as MA. Existing and proposed laws and regulations can impact the Company’s operations, products and the markets in which the Company operates. Additional laws and regulations have been proposed or are being considered. Each of the existing, adopted, proposed and potential laws and regulations can increase the costs and legal risk associated with the Company’s operations, including the issuance of credit ratings, and may negatively impact the Company’s profitability and ability to compete, or result in changes in the demand for the Company’s products and services, in the manner in which the Company’s products and services are utilized and in the manner in which the Company operates.
The regulatory landscape continues to evolve. In the U.S., CRAs are subject to extensive regulation primarily pursuant to the Reform Act and the Dodd-Frank Act. The Reform Act added Section 15E to the Exchange Act and provided the SEC with the authority to establish a registration and oversight program for CRAs registered as NRSROs. The Dodd-Frank Act added additional provisions to Section 15E. Government transition, can bring potential changes in the laws affecting CRAs and/or the enforcement of any new or existing legislation, regulation or directives by government authorities.
In the EU, the CRA industry is registered and supervised through a pan-EU regulatory framework. ESMA has direct supervisory responsibility for registered CRAs throughout the EU. MIS’s EU CRA subsidiaries are registered and are subject to formal regulation and periodic inspection. From time to time, ESMA publishes interpretive guidance, or thematic reports regarding various aspects of the CRA regulation and, annually, sets out its work program for the forthcoming year. The Commission is moving forward with their sustainable finance strategy released in July 2021. This includes further assessments in respect of both CRAs and sustainability ratings and research, which might lead to legislative action.
On December 31, 2020, the MIS U.K. registered CRA ceased to be registered with and regulated by ESMA and became subject to regulation by the U.K. Financial Conduct Authority (FCA). Regulatory arrangements also came into effect in both the U.K. and the EU to allow credit ratings to be available for regulatory use in both the EU and the U.K. MIS has put arrangements in place to endorse its U.K. credit ratings into the EU and its EU credit ratings into the U.K. The U.K. Government is considering bringing ESG data and ratings firms within the scope of FCA authorization and regulation. The FCA has said that it sees a clear rationale for regulating them.
In light of the regulations that have gone into effect in both the EU and the U.S. (as well as many other countries), periodically and as a matter of course pursuant to their enabling legislation, regulatory authorities have, and will continue to, publish reports that describe their oversight activities. In addition, other legislation, regulation and/or interpretation of existing regulation relating to the Company’s operations, including credit rating, ancillary and research services has been or is being considered by local, national and multinational bodies and this type of activity is likely to continue in the future. Finally, in certain countries, governments may provide financial or other support to locally-based CRAs. If enacted, any such legislation and regulation could change the competitive landscape in which the Company operates. The legal status of CRAs has been addressed by courts in various jurisdictions and is likely to be considered and addressed in legal proceedings from time to time in the future. Management of the Company cannot predict whether these or any other proposals will be enacted, the outcome of any pending or possible future legal proceedings, or regulatory or legislative actions, or the ultimate impact of any such matters on the competitive position, financial position or results of operations of the Company.
Forward-Looking Statements
Certain statements contained in this quarterly report on Form 10-Q are forward-looking statements and are based on future expectations, plans and prospects for the Company's business and operations that involve a number of risks and uncertainties. Such statements involve estimates, projections, goals, forecasts, assumptions and uncertainties that could cause actual results or outcomes to differ materially from those contemplated, expressed, projected, anticipated or implied in the forward-looking statements. Those statements appear at various places throughout this quarterly report on Form 10-Q, including in the sections entitled “Contingencies” under Item 2, “MD&A”, commencing on page 45 of this quarterly report on Form 10-Q, under “Legal Proceedings” in Part II, Item 1, of this Form 10-Q, and elsewhere in the context of statements containing the words “believe”, “expect”, “anticipate”, “intend”, “plan”, “will”, “predict”, “potential”, “continue”, “strategy”, “aspire”, “target”, “forecast”, “project”, “estimate”, “should”, “could”, “may” and similar expressions or words and variations thereof relating to the Company’s views on future events, trends and contingencies or otherwise convey the prospective nature of events or outcomes generally indicative of forward-looking statements. Stockholders and investors are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements and other information are made as of the date of this quarterly report on Form 10-Q, and the Company undertakes no obligation (nor does it intend) to publicly supplement, update or revise such statements on a going-forward basis, whether as a result of subsequent developments, changed expectations or otherwise, except as required by applicable law or regulation. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company is identifying certain factors that could cause actual results to differ, perhaps materially, from those indicated by these forward-looking statements. Those factors, risks and uncertainties include, but are not limited to:
•the impact of general economic conditions, including inflation, on worldwide credit markets and economic activity and its effect on the volume of debt and other securities issued in domestic and/or global capital markets;
•the global impacts of each of the crisis in Ukraine and COVID-19 on volatility in the U.S. and world financial markets, on general economic conditions and GDP in the U.S. and worldwide, on global relations and on the Company's own operations and personnel;
•other matters that could affect the volume of debt and other securities issued in domestic and/or global capital markets, including regulation, credit quality concerns, changes in interest rates, inflation and other volatility in the financial markets;
•the level of merger and acquisition activity in the U.S. and abroad;
•the uncertain effectiveness and possible collateral consequences of U.S. and foreign government actions affecting credit markets, international trade and economic policy, including those related to tariffs, tax agreements and trade barriers;
•the impact of MIS’s withdrawal of its credit ratings on Russian entities and of Moody’s suspension of commercial operations in Russia;
•concerns in the marketplace affecting our credibility or otherwise affecting market perceptions of the integrity or utility of independent credit agency ratings;
•the introduction of competing products or technologies by other companies;
•pricing pressure from competitors and/or customers; the level of success of new product development and global expansion;
•the impact of regulation as an NRSRO, the potential for new U.S., state and local legislation and regulations;
•the potential for increased competition and regulation in the EU and other foreign jurisdictions;
•exposure to litigation related to our rating opinions, as well as any other litigation, government and regulatory proceedings, investigations and inquiries to which Moody’s may be subject from time to time;
•provisions in U.S. legislation modifying the pleading standards and EU regulations modifying the liability standards, applicable to credit rating agencies in a manner adverse to credit rating agencies;
•provisions of EU regulations imposing additional procedural and substantive requirements on the pricing of services and the expansion of supervisory remit to include non-EU ratings used for regulatory purposes;
•uncertainty regarding the future relationship between the U.S. and China;
•the possible loss of key employees;
•failures or malfunctions of our operations and infrastructure;
•any vulnerabilities to cyber threats or other cybersecurity concerns;
•the outcome of any review by controlling tax authorities of Moody’s global tax planning initiatives;
•exposure to potential criminal sanctions or civil remedies if Moody’s fails to comply with foreign and U.S. laws and regulations that are applicable in the jurisdictions in which Moody’s operates, including data protection and privacy laws, sanctions laws, anti-corruption laws, and local laws prohibiting corrupt payments to government officials;
•the impact of mergers, acquisitions, such as our acquisition of RMS, or other business combinations and the ability of Moody’s to successfully integrate acquired businesses;
•currency and foreign exchange volatility;
•the level of future cash flows;
•the levels of capital investments; and
•a decline in the demand for credit risk management tools by financial institutions.
These factors, risks and uncertainties as well as other risks and uncertainties that could cause Moody’s actual results to differ materially from those contemplated, expressed, projected, anticipated or implied in the forward-looking statements are described in greater detail under “Risk Factors” in Part I, Item 1A of Moody’s annual report on Form 10-K for the year ended December 31, 2021, and in other filings made by the Company from time to time with the SEC or in materials incorporated herein or therein. Stockholders and investors are cautioned that the occurrence of any of these factors, risks and uncertainties may cause the Company’s actual results to differ materially from those contemplated, expressed, projected, anticipated or implied in the forward-looking statements, which could have a material and adverse effect on the Company’s business, results of operations and financial condition. New factors may emerge from time to time, and it is not possible for the Company to predict new factors, nor can the Company assess the potential effect of any new factors on it. Forward-looking and other statements in this document may also address our corporate responsibility progress, plans, and goals (including sustainability and environmental matters), and the inclusion of such statements is not an indication that these contents are necessarily material to investors or required to be disclosed in the Company’s filings with the Securities and Exchange Commission. In addition, historical, current, and forward-looking sustainability-related statements may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future.