Moody’s Corporation (MCO) — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Moody’s operates Moody’s Analytics (MA), which sells data, research and risk solutions, and Moody’s Investors Service (MIS), which provides credit ratings and related services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $1,494 | $1,381 | $2,964 | $2,903 |
| Operating income | $550 | $508 | $1,104 | $1,164 |
| Net income attributable to Moody’s | $377 | $327 | $878 | $825 |
| Diluted EPS | $2.05 | $1.77 | $4.77 | $4.45 |
| Adjusted diluted EPS (non-GAAP) | $2.30 | $2.22 | $5.29 | $5.11 |
| Operating margin | 36.8% | 36.8% | 37.2% | 40.1% |
| Adjusted operating margin (non-GAAP) | 43.7% | 44.9% | 44.2% | 46.6% |
| Effective tax rate | 23.4% | 26.2% | 12.0% | 21.6% |
Q2 revenue rose 8%, operating income rose 8% and net income rose 15%. For the first half, revenue increased 2%, but operating income declined 5%; diluted EPS nevertheless grew 7%, partly reflecting tax benefits. Q2 operating margin was flat, while adjusted operating margin fell 120 basis points. First-half operating and adjusted margins contracted 290 and 240 basis points, respectively, as expenses grew faster than revenue.
Segments: Q2 external revenue was $747 million each for MA and MIS. MA grew 11%, led by Decision Solutions (+14%), while MIS grew 6% as stronger corporate finance and financial institution revenue more than offset weaker structured finance. For the first half, MA revenue increased 8% to $1.484 billion, while MIS declined 3% to $1.480 billion. MIS transaction revenue fell $64 million year over year, amid a 5% decrease in rated issuance volumes. MA annualized recurring revenue (ARR), a company-defined operating metric, increased 10% to $2.781 billion.
Cash flow: First-half operating cash flow was $1.212 billion, versus $761 million; free cash flow, a non-GAAP measure, was $1.085 billion versus $628 million. Capital additions were $127 million. The cash-flow improvement primarily reflected lower prior-year tax and incentive-compensation payments.
Balance sheet at June 30, 2023: Cash and cash equivalents were $2.278 billion and short-term investments $57 million. Total debt carrying value was $7.223 billion, including $300 million current debt; principal debt outstanding was $7.564 billion. Current assets were $4.390 billion and current liabilities $2.667 billion. Cash and short-term investments totaled approximately $2.3 billion, including approximately $1.6 billion outside the U.S. The company reported $1.25 billion of revolving credit-facility capacity backing its commercial paper program.
Material changes, outlook and risks
- Market and issuance conditions: Management cited inflation, higher interest rates, capital-market volatility, geopolitical uncertainty and failures of certain banks as factors affecting rated issuance. It said declines in some issuance sectors were believed to be predominantly transitory, but the severity, duration and future impact were not predictable.
- Tax and unusual items: First-half results benefited from resolutions of uncertain tax positions in U.S. and non-U.S. jurisdictions; management attributed a $0.75 per-share benefit to these tax resolutions. The first-half tax rate was 12.0%, and management noted a $113 million reduction in the tax provision from the resolutions. The filing also reports a $23 million foreign-exchange loss in first-half other non-operating income related to an immaterial out-of-period adjustment for fiscal 2022.
- Restructuring: The 2022–2023 geolocation program is expected to generate annualized savings of $120–$140 million, with completion substantially expected by year-end 2023. Cumulative charges were $137 million through June 30; remaining cash outlays were estimated at $30–$40 million through 2024. Some savings are intended to support strategic investment and employee initiatives.
- Capital allocation and liquidity outlook: Management expects positive operating cash flow over the next 12 months and believes available resources can meet cash requirements. The Board declared a quarterly dividend of $0.77 per share after quarter-end. Approximately $740 million of share-repurchase authorization remained at June 30.
- Other risks and contingencies: The company faces legal, regulatory and tax proceedings related to its business, ratings and operations; outcomes and potential effects may be difficult to predict, and the filing does not provide a clear quantified exposure for these matters. Moody’s reported no material changes to previously disclosed risk factors or market-risk disclosures. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether credit-market issuance and MIS revenue recover, especially in structured finance and bank loans, and how persistent macroeconomic volatility proves to be.
- How much of first-half EPS growth reflects the tax-resolution benefit, and the outcome of ongoing tax audits and uncertain tax positions.
- Whether MA’s recurring-revenue and ARR growth can continue while investment, compensation and technology costs moderate enough to stabilize margins.
- Debt maturities, refinancing needs, interest-rate swap costs and the company’s capacity to sustain dividends and repurchases alongside its investment and restructuring commitments.
- Actual restructuring savings, costs and timing compared with management’s estimates, as well as developments in legal and regulatory contingencies.