Moody’s Corporation (MCO) — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Dollar amounts are in millions unless otherwise stated. Moody’s operates Moody’s Investors Service (MIS), its credit ratings business, and Moody’s Analytics (MA), its data, research and decision-solutions business.
Financial performance
| Metric | Q3 2022 | Q3 2021 | First nine months 2022 | First nine months 2021 |
|---|---|---|---|---|
| Revenue | $1,275 | $1,526 | $4,178 | $4,679 |
| Operating income | $413 | $676 | $1,577 | $2,330 |
| Net income attributable to Moody’s | $303 | $474 | $1,128 | $1,787 |
| Diluted EPS | $1.65 | $2.53 | $6.10 | $9.51 |
| Adjusted diluted EPS | $1.85 | $2.69 | $6.96 | $9.96 |
| Operating margin | 32.4% | 44.3% | 37.7% | 49.8% |
| Adjusted operating margin | 39.0% | 48.3% | 44.3% | 53.7% |
Revenue mix and segment results: Q3 revenue fell 16%; MIS external revenue fell 36% to $590, while MA external revenue rose 14% to $685. MIS adjusted operating income was $289, down 50%, and MA adjusted operating income was $208, up 32%. For the first nine months, MIS external revenue declined 28% to $2,123, while MA external revenue increased 18% to $2,055. MA’s nine-month organic constant-currency revenue grew 10%; MA annualized recurring revenue (ARR) grew 9% to $2.662 billion.
Cash flow and liquidity: Nine-month operating cash flow was $1,097, down from $1,706; free cash flow was $893, versus $1,629. Capital additions were $204. Cash and cash equivalents were $1,656 and short-term investments $89 at September 30, compared with $1,811 and $91 at year-end 2021. Management said it expects positive operating cash flow over the next 12 months and believes available resources are sufficient for cash requirements.
Debt and capital returns: Long-term debt had a $7,476 carrying value and $7,825 principal amount, versus $7,413 carrying value at year-end 2021. Moody’s issued $1 billion of 2022 senior notes and repaid $500 million of notes during the first nine months. The company reported compliance with debt covenants. It repurchased $983 of treasury shares and paid $387 in dividends during the nine-month period. Remaining share-repurchase authorization was approximately $848 at September 30.
Material changes and drivers
- MIS revenue pressure reflected a 41% year-over-year decline in Q3 rated issuance volumes and a 30% decline for the first nine months. Management attributed weak issuance to market volatility, central-bank actions, high corporate cash balances, and inflation and recession concerns.
- MA growth reflected acquisitions and ongoing demand for KYC and compliance products, credit research and analytics, and data feeds. Acquisitions contributed $70 of Q3 revenue and $232 for the first nine months; foreign exchange reduced reported growth.
- Q3 operating margin declined mainly because of lower MIS revenue. YTD margins also reflected higher acquisition-related operating costs and increased depreciation and amortization, including acquired-intangible and internally developed software amortization.
- Foreign currency translation unfavorably affected Q3 total revenue by 4% and nine-month revenue by 3%. Nine-month results also included a $20 FX translation loss reclassified to earnings after Moody’s ceased commercial operations in Russia.
Outlook, risks and unusual items
- The filing provides no specific consolidated revenue or EPS guidance. Management described issuance declines as predominantly transitory but said the severity and duration of macroeconomic and geopolitical uncertainty—and the resulting impact on future issuance—cannot be predicted.
- A geolocation restructuring program, approved in June and expanded in October 2022, is expected to produce annualized savings of $100–$135, with $125–$170 of estimated pretax real-estate and personnel charges. Expected cash outlays are $75–$100 through 2024; the program is expected to be substantially complete by year-end 2023. Management expects savings to support margins, with some reinvested in workplace and employee initiatives.
- Moody’s ceased commercial operations in Russia, withdrew ratings on Russian entities and recorded additional credit-loss reserves related to Russian-domiciled customers. The conflict’s broader effects remain uncertain.
- Q3 ETR was 20.5%, down from 23.4%; the nine-month rate was 21.3%, up from 20.2%. The YTD increase included the non-deductible Russia-related FX loss and tax benefits from prior-year tax-position resolutions that did not recur to the same extent.
- Legal, regulatory and tax matters may affect results, but the filing does not provide a clear quantified estimate of potential losses for these contingencies. Management said there were no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Investor verification priorities
- Track rated issuance volumes, transaction revenue and whether management’s view that issuance weakness is transitory proves accurate.
- Separate MA organic constant-currency growth from acquisition contributions and currency effects; assess recurring-revenue and ARR trends.
- Review restructuring charges, cash spending, timing and realization of the stated $100–$135 annualized savings.
- Monitor debt maturities, interest costs, liquidity and shareholder returns against lower year-to-date operating and free cash flow.
- Follow FX, Russia-related exposures, tax audits and legal or regulatory developments, including any quantified changes in contingencies.