Moody’s Corporation (MCO) — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Moody’s operates Moody’s Investors Service (MIS), which provides credit ratings and related services, and Moody’s Analytics (MA), which provides data, analytics and risk-management solutions. Amounts are in U.S. dollars.
Financial performance
- Q2 revenue: $1.553 billion, up 8% year over year. Operating income was $801 million, up 13%; net income attributable to Moody’s was $577 million, up 13%; diluted EPS was $3.07, up 14%. Adjusted diluted EPS, a non-GAAP measure, was $3.22, up 15%.
- Q2 margins: GAAP operating margin was 51.6%, up 2.1 percentage points; adjusted operating margin was 55.4%, up 2.0 points. The filing attributes expansion to revenue growth outpacing expense growth.
- Q2 segments: MIS external revenue increased 4% to $980 million; MA external revenue increased 15% to $573 million, including 13% organic growth. MIS adjusted operating margin was 66.3%; MA’s was 31.8%.
- First-half results: Revenue was $3.153 billion, up 16%; operating income was $1.654 billion, up 27%; net income attributable to Moody’s was $1.313 billion, up 32%; diluted EPS was $6.98, up 32%. Adjusted diluted EPS was $7.28, up 31%. GAAP operating margin was 52.5%, versus 47.8% a year earlier; adjusted margin was 56.3%, versus 51.9%.
- First-half segments: MIS external revenue increased 16% to $2.016 billion, and MA external revenue increased 15% to $1.137 billion, including 11% organic growth. MIS and MA adjusted operating margins were 67.0% and 32.3%, respectively.
- Cash flow: First-half operating cash flow was $1.270 billion, compared with $977 million; capital additions were $44 million; free cash flow, a non-GAAP measure, was $1.226 billion, compared with $915 million.
- Liquidity and debt: At June 30, cash and cash equivalents were $2.809 billion and short-term investments were $88 million. Long-term debt was $6.355 billion. The company reported approximately $1 billion of additional capacity under its commercial paper program, backed by a revolving facility, and was in compliance with debt covenants.
- Capital returns: First-half dividends were $232 million and treasury-share repurchases were $503 million. Approximately $1.327 billion remained under share repurchase authorizations. A $0.62-per-share quarterly dividend was declared after quarter-end.
Changes and drivers versus prior periods
- Q2 growth reflected strength in both segments. MIS benefited from leveraged-finance issuance and strong structured-finance activity, partly offset by lower U.S. investment-grade issuance compared with a particularly strong prior-year quarter.
- MA growth was led by demand for KYC and compliance solutions, research and data feeds, recurring ERS subscriptions, favorable currency translation and acquisitions. Acquisitions also contributed to expenses and reported growth.
- For the first half, revenue growth and operating leverage drove higher margins and earnings. Net income and EPS also benefited from a $61 million year-to-date net reduction in uncertain tax positions and a $40 million reversal of accrued tax-related interest. These tax items are not necessarily recurring.
- First-half cash from operations increased partly because a $99 million pension contribution and a $68 million treasury-lock settlement payment made in 2020 did not recur. Higher cash taxes in 2021 partly offset those benefits.
Outlook, commentary and risks
- The filing does not provide a numerical full-year revenue or EPS forecast. Management said it expects positive operating cash flow over the next 12 months and believes it has resources to meet cash requirements.
- Management reported that COVID-19 had not materially adversely affected results and was not expected to materially affect the near-term outlook, while noting that longer-term effects remain uncertain.
- Moody’s completed an MA strategic reorganization, changing MA’s goodwill reporting-unit structure from five units to two. Qualitative assessments found no impairment indicator; a quantitative assessment was planned for July 31, 2021. A separate restructuring program was substantially complete, with estimated annual savings of $20 million and $12 million of remaining liability expected to be paid through 2022.
- Notable exposures include credit-market and issuance volatility, regulation of credit rating agencies and analytics products, litigation and regulatory inquiries, cybersecurity and operational risks, foreign-exchange movements, acquisition integration, and tax audits. The company said it could not estimate the potential financial impact of certain ICRA regulatory matters; an unfavorable outcome could affect results and potentially lead to impairment.
- The company disclosed ongoing tax examinations in the U.S., New York City and U.K. It also identified $406 million of uncertain tax positions and stated that timing and outcomes of audits cannot be predicted. Contractual-obligation disclosures exclude this amount because expected payment timing could not be reasonably estimated.
Investor verification points
- Assess how much MIS revenue growth depends on transaction-driven debt issuance and whether unusually strong structured-finance activity persists.
- Separate MA organic growth from acquisition and foreign-exchange contributions; review acquisition integration and related costs.
- Evaluate earnings quality and comparability, including the tax-position and accrued-interest benefits, and reconcile non-GAAP measures to GAAP results.
- Review debt maturities, cash held outside the U.S., repurchase pace and dividend commitments alongside future cash needs.
- Monitor the planned MA goodwill assessment, ICRA matters, tax audits and regulatory or litigation developments.