Business context and reporting period
Moody’s Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. The company operates Moody’s Investors Service (MIS), which provides credit ratings and related services, and Moody’s Analytics (MA), which provides data, research and risk-management solutions. Amounts below are in U.S. dollars; financial-statement amounts are in millions unless noted.
Financial results and key metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $1,381 | $1,553 | $2,903 | $3,153 |
| Operating income | $508 | $801 | $1,164 | $1,654 |
| Net income attributable to Moody’s | $327 | $577 | $825 | $1,313 |
| Diluted EPS | $1.77 | $3.07 | $4.45 | $6.98 |
| Adjusted diluted EPS (non-GAAP) | $2.22 | $3.22 | $5.11 | $7.28 |
| Operating margin | 36.8% | 51.6% | 40.1% | 52.5% |
| Adjusted operating margin (non-GAAP) | 44.9% | 55.4% | 46.6% | 56.3% |
| Effective tax rate | 26.2% | 23.9% | 21.6% | 19.0% |
Q2 revenue declined 11% and first-half revenue declined 8%. MIS external revenue fell 28% in Q2 and 24% for the half, while MA external revenue grew 18% and 20%, respectively. Q2 MIS adjusted operating income was $415 million (down 39%); MA was $205 million (up 12%). MIS and MA adjusted operating margins were 55.4% and 30.3% in Q2, respectively.
For the first half, net cash provided by operations was $761 million, versus $1.270 billion; free cash flow, a non-GAAP measure, was $628 million versus $1.226 billion. Capital additions were $133 million. Cash and cash equivalents were $1.617 billion and short-term investments were $86 million at June 30. Total debt had a $7.657 billion carrying value ($7.907 billion principal); $499 million was current. The company reported $2.755 billion in current liabilities and $3.820 billion in current assets. It had approximately $1 billion of capacity under its commercial paper program, backed by a $1.25 billion revolving facility, and said it expected positive operating cash flow over the next 12 months.
Material changes versus the prior comparable period
- MIS revenue weakness reflected a 32% year-over-year decline in Q2 rated issuance volumes and a 27% decline for the first half. MIS transaction revenue fell $274 million in Q2 and $492 million for the half, amid market volatility, rising borrowing costs and the Russia/Ukraine conflict.
- Within MIS, Q2 corporate finance revenue fell 41%; structured finance fell 12%, financial institutions fell 15%, and public, project and infrastructure finance fell 6%. First-half corporate finance revenue fell 36%; structured finance grew 4%.
- MA growth included acquisitions and organic expansion. Q2 MA organic constant-currency revenue grew 8%; first-half growth was 10%. MA annualized recurring revenue (ARR) rose 25%, while organic ARR rose 9%.
- Company expenses rose as acquisition-related operating and integration costs, hiring and salaries increased; lower incentive compensation partly offset the increases. Depreciation and amortization also increased, reflecting acquired intangibles.
- Higher interest expense and weaker other non-operating results weighed on earnings. First-half comparisons also reflected a $40 million prior-year benefit from resolving tax-related interest accruals.
Outlook, commentary, risks and unusual items
- The filing text does not provide a clear full-year revenue or EPS guidance figure. Management said it expected positive operating cash flow over the next 12 months.
- A restructuring program approved June 30 is expected to generate $40–$60 million in annualized savings. Estimated pretax charges are $25–$35 million for lease exits and $30–$40 million for personnel; expected cash outlays are $30–$40 million through 2024. The program is expected to be substantially complete in the first half of 2023, and savings are primarily intended for strategic investments and employee initiatives.
- Moody’s ceased commercial operations in Russia and withdrew MIS ratings on Russian entities. Russian operations and net assets were described as not material, but broader market volatility adversely affected rated issuance. The company recorded $20 million of Russia-related FX translation losses in earnings and increased credit-loss allowances by $14 million during the first half, primarily for Russian-domiciled customers.
- Management said COVID-19 had not materially harmed reported results and was not expected to materially affect the near-term outlook, while noting longer-term uncertainty. Other stated risks include macroeconomic and credit-market conditions, interest rates and inflation, FX volatility, regulation, litigation, cybersecurity, and acquisition integration.
- Legal, tax and regulatory matters are described, but the filing does not provide a clear aggregate estimate of potential losses. Management stated that it could not predict outcomes or timing for many proceedings. The company reported compliance with debt covenants and no cross-defaults at June 30.
- Non-GAAP adjusted earnings exclude acquired-intangible amortization, restructuring and specified Russia-related FX losses; free cash flow and organic constant-currency growth also are non-GAAP measures. These should be considered alongside, not instead of, GAAP results.
Most important facts for investors to verify
- Whether MIS issuance volumes recover, particularly leveraged finance, and how rate, spread and geopolitical conditions affect ratings revenue.
- Whether MA’s organic growth and ARR trends persist after separating acquisition contributions and foreign-exchange effects.
- Whether acquisition integration costs, amortization and staffing growth moderate, and whether the announced restructuring delivers expected savings within the estimated cost and timing ranges.
- Cash generation and capital allocation against debt maturities, dividends, repurchases and the $960 million of remaining repurchase authorization reported at quarter-end.
- Developments in Russia-related credit reserves, tax audits, litigation and regulatory matters, as well as the company’s ability to manage currency and interest-rate exposures.