Moody’s Corporation — Q2 2020 Form 10-Q
Business and period: The filing covers the quarter and six months ended June 30, 2020. Moody’s operates Moody’s Investors Service (MIS), its credit ratings business, and Moody’s Analytics (MA), its data, research, analytics and risk-solutions business. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1,435 (+18%) | $1,214 | $2,725 (+16%) | $2,356 |
| Operating income | $710 (+47%) | $483 | $1,302 (+38%) | $945 |
| Operating margin | 49.5% | 39.8% | 47.8% | 40.1% |
| Adjusted operating margin | 53.4% | 49.3% | 51.9% | 47.5% |
| Net income attributable to Moody’s | $509 (+64%) | $310 | $997 (+46%) | $683 |
| Diluted EPS | $2.69 | $1.62 | $5.27 | $3.56 |
| Adjusted diluted EPS | $2.81 | $2.07 | $5.55 | $4.14 |
| Effective tax rate | 23.6% | 28.0% | 19.0% | 18.8% |
Adjusted figures are non-GAAP measures. Adjusted operating income excludes restructuring, depreciation and amortization, specified acquisition-related expenses and the MAKS divestiture loss; adjusted EPS also excludes acquired-intangible amortization and specified tax and divestiture items.
- Segments: Q2 MIS external revenue rose 27% to $938; MA external revenue rose 5% to $497. MIS growth reflected strong corporate debt issuance, particularly investment-grade and high-yield bonds. MA growth included KYC/compliance, research and data feeds, and acquisitions. For the first half, MIS external revenue rose 23% to $1,732 and MA rose 5% to $993.
- Mix and pressure points: Q2 MIS corporate finance revenue increased 47%, while structured finance fell 28%, reflecting weaker CLO and CMBS activity. MA organic revenue grew 6% in Q2 and 8% in the first half; acquisitions and the prior-year MAKS divestiture affected reported comparisons.
- Cash flow: First-half operating cash flow was $977 versus $755; capital additions were $62, producing reported free cash flow of $915 versus $716. Investing cash outflow was $823, primarily reflecting the RDC acquisition. Financing cash flow was $123, compared with a $1,186 outflow in the prior-year period.
- Liquidity and debt: Cash and cash equivalents were $2,099 at June 30, compared with $1,832 at year-end; short-term investments were $100. Long-term debt was $6,333, up from $5,581. Moody’s issued $700 of 5-year notes and $300 of 30-year notes, and repaid $300 of notes. Commercial paper outstanding at quarter-end was zero; the company said approximately $1 billion of CP capacity was available. It reported compliance with debt covenants.
- Other financial items: The accounts-receivable allowance was $41 at June 30 versus $20 at year-end; the first-half provision for expected credit losses was $28, primarily reflecting estimated COVID-19 effects. The company contributed $99 to its funded pension plan in Q1.
Changes, outlook and risks
- Comparisons benefited from strong Q2 corporate bond issuance as issuers raised liquidity amid pandemic uncertainty. Management cautioned that issuance could remain volatile; investment-grade issuance might moderate in the second half, and lower leveraged-loan issuance could further weigh on CLO activity.
- For MA, management cited possible reduced customer discretionary spending, longer sales cycles, delayed compliance-driven purchases, higher contract attrition or lower renewal yields. Moody’s said it could not predict the pandemic’s near- or long-term financial impact, and that 2020 revenue, cash flow, receivables, asset values and pension funding could be materially affected.
- Management said near-term liquidity was adequate, expected positive operating cash flow over the next 12 months, and expected to maintain covenant compliance. No numerical full-year revenue or earnings guidance is provided in the filing.
- To preserve liquidity, Moody’s suspended share repurchases late in Q1 and continued the suspension through the filing date, while reducing discretionary spending. The board declared a $0.56-per-share quarterly dividend after quarter-end, payable September 10, 2020.
- Subsequent to quarter-end, management approved a real-estate restructuring expected to produce $5–$6 annualized savings, with $25–$35 in pretax charges; approximately $20–$30 was expected in the second half of 2020, primarily as a non-cash lease-asset charge.
- Goodwill assessments found no impairment for ICRA or Reis at June 30, but further declines in ICRA’s market capitalization or Reis’s projections could trigger future impairment. ICRA also faced regulatory inquiries and related matters whose financial impact Moody’s could not estimate.
- Other significant uncertainties include credit-rating litigation and regulation, tax examinations and uncertain tax positions, cybersecurity and operational risks, and integration of acquisitions. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- Whether exceptional corporate issuance levels persist, and how any second-half slowdown affects MIS, especially investment-grade, leveraged-loan, CLO and CMBS activity.
- Whether COVID-19 drives further receivables provisions, customer churn, delayed MA sales, impairments or pension-funding changes.
- RDC integration and acquired goodwill/intangible valuations, including the remaining purchase-price allocation and ICRA/Reis impairment headroom.
- Debt maturities, ongoing interest costs, liquidity and covenant compliance, alongside the duration of the buyback suspension and dividend policy.
- The timing and actual charges and savings from the post-quarter real-estate restructuring, as well as outcomes of ICRA, regulatory, legal and tax matters.