Moody’s Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Moody’s operates Moody’s Investors Service (MIS), a credit ratings and assessment business, and Moody’s Analytics (MA), a data, analytics and risk-management business. Unless otherwise stated, amounts are in U.S. dollars.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1.526 billion | $1.356 billion | $4.679 billion | $4.081 billion |
| Operating income | $676 million | $642 million | $2.330 billion | $1.944 billion |
| Net income attributable to Moody’s | $474 million | $467 million | $1.787 billion | $1.464 billion |
| Diluted EPS | $2.53 | $2.47 | $9.51 | $7.73 |
| Adjusted diluted EPS (non-GAAP) | $2.69 | $2.69 | $9.96 | $8.24 |
| Operating margin | 44.3% | 47.3% | 49.8% | 47.6% |
| Adjusted operating margin (non-GAAP) | 48.3% | 53.2% | 53.7% | 52.3% |
Q3 revenue increased 13% year over year; nine-month revenue increased 15%. Q3 operating income rose 5%, while diluted EPS rose 2%. For the first nine months, operating income rose 20% and diluted EPS rose 23%. Adjusted measures exclude specified items, including acquired-intangible amortization and, where applicable, restructuring and the MAKS divestiture loss.
- Segments, Q3: MIS external revenue was $925 million, up 12%; MA external revenue was $601 million, up 13%. MIS adjusted operating income was $580 million, up 5%; MA adjusted operating income was $157 million, down 6%.
- Segments, nine months: MIS external revenue was $2.941 billion, up 15%; MA external revenue was $1.738 billion, up 14%. Adjusted operating income increased 18% for MIS to $1.986 billion and 15% for MA to $526 million.
- Cash flow, nine months: Operating cash flow was $1.706 billion, versus $1.488 billion. Free cash flow, a company-defined non-GAAP measure, was $1.629 billion, versus $1.405 billion. Investing cash outflow was $2.161 billion, primarily reflecting acquisitions; financing cash inflow was $135 million.
- Liquidity and debt: At September 30, cash and cash equivalents were $2.239 billion and short-term investments were $104 million. Debt carrying value was $7.476 billion, including $507 million current; principal debt was $7.548 billion. Moody’s issued $1.2 billion of senior notes in 2021 and reported compliance with debt covenants and no cross-defaults. Approximately $1 billion of capacity remained under its commercial paper program.
- Other balance-sheet items: Total assets were $14.414 billion and shareholders’ equity, including noncontrolling interests, was $2.619 billion. Goodwill was $5.898 billion and net acquired intangible assets were $2.510 billion.
Material changes and notable items
- Revenue growth reflected strength in both segments. MIS benefited from bank-loan issuance, CLO refinancing and securitization activity; this was partly offset by lower investment-grade and high-yield issuance versus strong prior-year comparisons. MA growth included acquisitions, demand for KYC/compliance and research/data products, and recurring subscription growth.
- Q3 operating and SG&A expenses increased substantially, including $22 million of RMS acquisition-related costs and higher incentive compensation, acquisition-related expenses, and technology and strategic investment costs. These factors contributed to lower Q3 operating margins; management said strong underlying performance was offset by these costs.
- On September 15, Moody’s acquired Risk Management Solutions (RMS) for total consideration of $1.936 billion, funded with new debt and cash. The preliminary allocation included $1.389 billion of goodwill and $784 million of intangible assets; the purchase-price allocation remained subject to finalization. Cortera was acquired in March 2021 for $139 million.
- For the nine-month period, MIS ratings revenue increased 15%, with structured finance up 51%. MA organic revenue growth was 10% for the period, compared with reported growth of 14%; acquisitions contributed to the difference.
- Income-tax benefits from the resolution of uncertain tax positions benefited nine-month results; management reported $62 million of tax benefits from such resolutions in 2021. A $40 million reversal of tax-related interest accruals also reduced interest expense. Q3 included a $13 million loss on a forward contract hedging part of the RMS purchase price.
Outlook, risks and contingencies
The filing provides no new quantified full-year revenue or EPS guidance in the supplied text. Management stated it expected positive operating cash flow over the next 12 months and believed available financial resources were sufficient for cash requirements. Moody’s said COVID-19 had not materially adversely affected results to date and was not then expected to materially affect the near-term outlook, but longer-term effects remained uncertain.
- Management identified exposure to capital-market issuance volumes, economic and credit-market conditions, interest rates, M&A activity, competition, regulation, litigation, cybersecurity, foreign exchange, taxes, and the successful integration and realization of benefits from acquisitions, particularly RMS.
- ICRA matters include appealed SEBI fines and related inquiries. The company could not estimate any financial impact; an unfavorable outcome could affect future results and potentially lead to impairment of goodwill or intangible assets.
- The company is subject to ongoing legal, regulatory and tax proceedings. The filing does not predict their outcomes; tax audits could change uncertain tax positions, and potential future cash outflows for certain tax liabilities could not be reasonably estimated.
- In October 2021, Moody’s completed a $250 million cash minority investment in BitSight and contributed its VisibleRisk interest. It expected a non-cash gain of approximately $30–$40 million in Q4 2021.
- The board declared a quarterly dividend of $0.62 per share, payable in December 2021. Approximately $1.203 billion remained under share-repurchase authorizations at September 30, 2021.
Most important facts for investors to verify
- How much future growth is organic versus acquisition-driven, especially in MA, and whether recurring subscription growth continues.
- Whether MIS issuance-related revenue remains strong given the prior-year comparison and sensitivity to credit-market and financing activity.
- RMS integration progress, final purchase-price allocation, acquisition costs, debt impact, and realization of anticipated strategic benefits.
- Whether Q3 margin pressure from acquisition costs, compensation and investment spending eases, and how non-GAAP adjustments compare with GAAP results.
- Cash generation and capital allocation against debt maturities, share repurchases, dividends and the completed BitSight investment.
- Developments in ICRA regulatory matters, tax audits and other litigation or regulatory proceedings, together with any resulting financial exposure.