Moody’s Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons are primarily with FY2019. The filing is an annual report, not a standalone fourth-quarter results release. Amounts are in U.S. dollars unless noted.
Business context and performance
Moody’s operates two segments: Moody’s Investors Service (MIS), which provides credit ratings and related services, and Moody’s Analytics (MA), which sells data, analytics, software and risk solutions. MIS revenue is sensitive to debt issuance; MA’s subscription-based business provides a more recurring revenue base.
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $5.371 billion | $4.829 billion | +11% |
| Operating income | $2.388 billion | $1.998 billion | +20% |
| Net income attributable to Moody’s | $1.778 billion | $1.422 billion | +25% |
| Diluted EPS | $9.39 | $7.42 | +27% |
| Adjusted diluted EPS (non-GAAP) | $10.15 | $8.29 | +22% |
| Operating margin | 44.5% | 41.4% | +310 bps |
| Adjusted operating margin (non-GAAP) | 49.7% | 47.4% | +230 bps |
| Effective tax rate | 20.3% | 21.0% | Down 70 bps |
Segments and material changes
- MIS: External revenue rose 15% to $3.292 billion; operating income increased 20% to $1.964 billion. Corporate finance revenue grew 24%, supported by strong investment-grade and high-yield issuance, refinancing and pricing/mix. Structured finance revenue fell 15%, including weaker CLO and U.S. commercial mortgage-backed securities activity.
- MA: External revenue increased 6% to $2.079 billion; operating income rose 16% to $424 million. RD&A revenue grew 19% and ERS grew 8%; organic MA revenue growth was 8%. Acquisition contributions supported results, while the 2019 MAKS divestiture reduced comparability. MA relationship revenue was 91% of segment revenue, compared with 85% in 2019.
- Growth in corporate bond issuance was unusually strong as issuers raised liquidity and refinanced amid COVID-19 uncertainty. Management cautioned that some 2020 issuance reflected temporary balance-sheet needs and may not persist.
Cash flow, liquidity and debt
- Operating cash flow was $2.146 billion, up from $1.675 billion. Free cash flow, a non-GAAP measure, was $2.043 billion versus $1.606 billion; capital additions were $103 million.
- Cash and cash equivalents were $2.597 billion and short-term investments were $99 million at year-end, totaling approximately $2.7 billion. About $1.5 billion was held outside the U.S.
- Long-term debt carrying value was $6.422 billion, up from $5.581 billion. Moody’s issued $1.5 billion of notes and repaid $800 million of notes during 2020; it also repaid two notes ahead of maturity. The company reported covenant compliance and no commercial paper outstanding.
- The $1 billion revolving facility was undrawn, and the commercial paper program had up to approximately $1 billion of capacity backed by that facility. Contractual obligations totaled $10.119 billion, including scheduled debt principal, interest and fees, operating leases, purchase obligations and pension obligations.
- Investing cash outflow was $1.077 billion, mainly reflecting $897 million of acquisition spending. Financing cash outflow was $351 million; share repurchases were paused from late Q1 through Q3 and resumed in Q4.
Outlook, risks and unusual items
- Management expects positive operating cash flow in 2021 and believes liquidity is adequate, but provided no specific revenue or earnings guidance in the supplied filing text. The company expects continued long-term demand for ratings, research, data and analytics, with growth opportunities in ESG, KYC/compliance, commercial real estate and geographic expansion.
- Key near-term uncertainties include whether debt issuance moderates from 2020 levels, market volatility and credit-spread movements, potential weakness in leveraged loans and CLO activity, and slower MA sales cycles, customer spending or renewals. COVID-19 could also affect receivables, cash flows, pension funding and asset values.
- 2020 restructuring expense was $50 million. Programs included real-estate rationalization and a strategic MA reorganization. The latter is expected to generate $25–$30 million in annualized savings and incur approximately $20–$30 million of total pretax charges; substantial completion was expected in the first half of 2021. The real-estate program was expected to save approximately $5–$6 million annually.
- Goodwill was $4.556 billion and acquired intangible assets were $1.824 billion, predominantly associated with MA. The company reported no goodwill impairment in its 2020 assessments, but identified sensitivity to weaker performance, particularly in certain reporting units.
- Uncertain tax positions were $483 million at year-end, with $113 million of accrued interest. Subsequent to year-end, the company reported a Q1 2021 settlement and statute lapse expected to release $61 million of tax positions and $40 million of accrued interest.
- Other significant risks include extensive and evolving CRA and data-privacy regulation, litigation and regulatory inquiries, cybersecurity and third-party technology exposure, foreign exchange, competition, and the integration and performance of acquisitions. The company noted it could not estimate the potential financial impact of certain ICRA matters. The filing also describes $33 million of remaining MAKS divestiture indemnification provisions.
- The board declared a quarterly dividend of $0.62 per share in February 2021 and authorized an additional $1 billion of share repurchases. Robert Fauber became CEO in January 2021.
Important facts for investors to verify
- Whether 2020’s elevated corporate issuance and MIS transaction revenue are sustainable, especially as pandemic support and issuer liquidity-building fade.
- How much MA’s reported growth reflects organic demand versus acquisitions and the MAKS divestiture, and whether recurring subscription renewals remain strong.
- Debt repayment, refinancing and capital-return plans relative to operating cash generation and the $2.7 billion cash-and-investment balance.
- Potential impairment exposure in MA and ICRA, given goodwill concentration, valuation assumptions and the ICRA-related matters disclosed.
- Resolution and cash consequences of tax audits, uncertain tax positions, litigation and other contingencies; also track the Q1 2021 tax release noted in the filing.
- Auditor KPMG issued unqualified opinions on the financial statements and internal control over financial reporting as of December 31, 2020.