filings.toolsItem 1. Financial Statements
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Item 1. Financial Statements
MOODY’S CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in millions, except per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue | $ | 1,275 | $ | 1,526 | $ | 4,178 | $ | 4,679 | |||||||||||||||
| Expenses | |||||||||||||||||||||||
| Operating | 393 | 394 | 1,203 | 1,152 | |||||||||||||||||||
| Selling, general and administrative | 385 | 395 | 1,124 | 1,015 | |||||||||||||||||||
| Depreciation and amortization | 83 | 61 | 242 | 180 | |||||||||||||||||||
| Restructuring | 1 | — | 32 | 2 | |||||||||||||||||||
| Total expenses | 862 | 850 | 2,601 | 2,349 | |||||||||||||||||||
| Operating income | 413 | 676 | 1,577 | 2,330 | |||||||||||||||||||
| Non-operating (expense) income, net | |||||||||||||||||||||||
| Interest expense, net | (58) | (53) | (166) | (109) | |||||||||||||||||||
| Other non-operating income (expense), net | 26 | (4) | 22 | 18 | |||||||||||||||||||
| Total non-operating (expense) income, net | (32) | (57) | (144) | (91) | |||||||||||||||||||
| Income before provision for income taxes | 381 | 619 | 1,433 | 2,239 | |||||||||||||||||||
| Provision for income taxes | 78 | 145 | 305 | 452 | |||||||||||||||||||
| Net income attributable to Moody's | $ | 303 | $ | 474 | $ | 1,128 | $ | 1,787 | |||||||||||||||
| Earnings per share attributable to Moody's common shareholders | |||||||||||||||||||||||
| Basic | $ | 1.65 | $ | 2.55 | $ | 6.13 | $ | 9.58 | |||||||||||||||
| Diluted | $ | 1.65 | $ | 2.53 | $ | 6.10 | $ | 9.51 | |||||||||||||||
| Weighted average number of shares outstanding | |||||||||||||||||||||||
| Basic | 183.2 | 186.0 | 184.1 | 186.6 | |||||||||||||||||||
| Diluted | 183.9 | 187.3 | 184.9 | 188.0 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
MOODY’S CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Amounts in millions)
| Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||||
| Pre-tax amounts | Tax amounts | After-tax amounts | Pre-tax amounts | Tax amounts | After-tax amounts | ||||||||||||||||||||||||||||||
| Net Income | $ | 303 | $ | 474 | |||||||||||||||||||||||||||||||
| Other Comprehensive Income (Loss): | |||||||||||||||||||||||||||||||||||
| Foreign Currency Adjustments: | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments, net | $ | (358) | $ | 6 | (352) | $ | (124) | $ | 5 | (119) | |||||||||||||||||||||||||
| Net gains on net investment hedges | 256 | (63) | 193 | 99 | (26) | 73 | |||||||||||||||||||||||||||||
| Cash Flow Hedges: | |||||||||||||||||||||||||||||||||||
| Reclassification of losses included in net income | 1 | (1) | — | 1 | — | 1 | |||||||||||||||||||||||||||||
| Pension and Other Retirement Benefits: | |||||||||||||||||||||||||||||||||||
| Amortization of actuarial losses/prior service costs and settlement charge included in net income | 1 | — | 1 | 3 | (1) | 2 | |||||||||||||||||||||||||||||
| Net actuarial gains and prior service costs | — | — | — | 4 | (1) | 3 | |||||||||||||||||||||||||||||
| Total other comprehensive (loss) income | $ | (100) | $ | (58) | $ | (158) | $ | (17) | $ | (23) | $ | (40) | |||||||||||||||||||||||
| Comprehensive income | 145 | 434 | |||||||||||||||||||||||||||||||||
| Less: comprehensive (loss) income attributable to noncontrolling interests | (9) | (3) | |||||||||||||||||||||||||||||||||
| Comprehensive Income Attributable to Moody's | $ | 154 | $ | 437 |
| Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||||
| Pre-tax amounts | Tax amounts | After-tax amounts | Pre-tax amounts | Tax amounts | After-tax amounts | ||||||||||||||||||||||||||||||
| Net Income | $ | 1,128 | $ | 1,787 | |||||||||||||||||||||||||||||||
| Other Comprehensive Income (Loss): | |||||||||||||||||||||||||||||||||||
| Foreign Currency Adjustments: | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments, net | $ | (806) | $ | 10 | (796) | $ | (234) | $ | 9 | (225) | |||||||||||||||||||||||||
| Foreign currency translation adjustments - reclassification of losses included in net income | 20 | — | 20 | — | — | — | |||||||||||||||||||||||||||||
| Net gains on net investment hedges | 561 | (140) | 421 | 233 | (56) | 177 | |||||||||||||||||||||||||||||
| Net investment hedges - reclassification of gains included in net income | — | — | — | (2) | 1 | (1) | |||||||||||||||||||||||||||||
| Cash Flow Hedges: | |||||||||||||||||||||||||||||||||||
| Reclassification of losses included in net income | 2 | (1) | 1 | 2 | — | 2 | |||||||||||||||||||||||||||||
| Pension and Other Retirement Benefits: | |||||||||||||||||||||||||||||||||||
| Amortization of actuarial losses/prior service costs and settlement charge included in net income | 2 | — | 2 | 16 | (4) | 12 | |||||||||||||||||||||||||||||
| Net actuarial gains and prior service costs | 3 | (1) | 2 | 4 | (1) | 3 | |||||||||||||||||||||||||||||
| Total other comprehensive (loss) income | $ | (218) | $ | (132) | $ | (350) | $ | 19 | $ | (51) | $ | (32) | |||||||||||||||||||||||
| Comprehensive income | 778 | 1,755 | |||||||||||||||||||||||||||||||||
| Less: comprehensive (loss) income attributable to noncontrolling interests | (12) | (2) | |||||||||||||||||||||||||||||||||
| Comprehensive Income Attributable to Moody's | $ | 790 | $ | 1,757 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
MOODY’S CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in millions, except share and per share data)
| September 30, 2022 | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 1,656 | $ | 1,811 | |||||||
| Short-term investments | 89 | 91 | |||||||||
| Accounts receivable, net of allowance for credit losses of $42 in 2022 and $32 in 2021 | 1,518 | 1,720 | |||||||||
| Other current assets | 463 | 389 | |||||||||
| Total current assets | 3,726 | 4,011 | |||||||||
| Property and equipment, net of accumulated depreciation of $1,078 in 2022 and $1,010 in 2021 | 472 | 347 | |||||||||
| Operating lease right-of-use assets | 387 | 438 | |||||||||
| Goodwill | 5,617 | 5,999 | |||||||||
| Intangible assets, net | 2,182 | 2,467 | |||||||||
| Deferred tax assets, net | 336 | 384 | |||||||||
| Other assets | 1,219 | 1,034 | |||||||||
| Total assets | $ | 13,939 | $ | 14,680 | |||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued liabilities | $ | 807 | $ | 1,142 | |||||||
| Current portion of operating lease liabilities | 104 | 105 | |||||||||
| Deferred revenue | 1,155 | 1,249 | |||||||||
| Total current liabilities | 2,066 | 2,496 | |||||||||
| Non-current portion of deferred revenue | 78 | 86 | |||||||||
| Long-term debt | 7,476 | 7,413 | |||||||||
| Deferred tax liabilities, net | 604 | 488 | |||||||||
| Uncertain tax positions | 308 | 388 | |||||||||
| Operating lease liabilities | 389 | 455 | |||||||||
| Other liabilities | 588 | 438 | |||||||||
| Total liabilities | 11,509 | 11,764 | |||||||||
| Contingencies (Note 17) | |||||||||||
| Shareholders' equity: | |||||||||||
| Preferred stock, par value $0.01 per share; 10,000,000 shares authorized; no shares issued and outstanding | — | — | |||||||||
| Series common stock, par value $0.01 per share; 10,000,000 shares authorized; no shares issued and outstanding | — | — | |||||||||
| Common stock, par value $0.01 per share; 1,000,000,000 shares authorized; 342,902,272 shares issued at September 30, 2022 and December 31, 2021, respectively. | 3 | 3 | |||||||||
| Capital surplus | 1,013 | 885 | |||||||||
| Retained earnings | 13,501 | 12,762 | |||||||||
| Treasury stock, at cost; 159,739,888 and 157,262,484 shares of common stock at September 30, 2022 and December 31, 2021 | (11,514) | (10,513) | |||||||||
| Accumulated other comprehensive loss | (748) | (410) | |||||||||
| Total Moody's shareholders' equity | 2,255 | 2,727 | |||||||||
| Noncontrolling interests | 175 | 189 | |||||||||
| Total shareholders' equity | 2,430 | 2,916 | |||||||||
| Total liabilities, noncontrolling interests and shareholders' equity | $ | 13,939 | $ | 14,680 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
MOODY’S CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in millions)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net income | $ | 1,128 | $ | 1,787 | |||||||
| Reconciliation of net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 242 | 180 | |||||||||
| Stock-based compensation | 130 | 127 | |||||||||
| Deferred income taxes | 58 | (79) | |||||||||
| FX translation losses reclassified to net income | 20 | — | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | 123 | (137) | |||||||||
| Other current assets | (140) | 64 | |||||||||
| Other assets | 10 | (7) | |||||||||
| Lease obligations | (14) | (10) | |||||||||
| Accounts payable and accrued liabilities | (358) | (10) | |||||||||
| Deferred revenue | (20) | (75) | |||||||||
| Uncertain tax positions | (41) | (79) | |||||||||
| Other liabilities | (41) | (55) | |||||||||
| Net cash provided by operating activities | 1,097 | 1,706 | |||||||||
| Cash flows from investing activities | |||||||||||
| Capital additions | (204) | (77) | |||||||||
| Purchases of investments | (244) | (137) | |||||||||
| Sales and maturities of investments | 153 | 102 | |||||||||
| Cash paid for acquisitions, net of cash acquired | (97) | (2,026) | |||||||||
| Receipts from settlements of net investment hedges | 220 | 26 | |||||||||
| Payments for settlements of net investment hedges | — | (49) | |||||||||
| Net cash used in investing activities | (172) | (2,161) | |||||||||
| Cash flows from financing activities | |||||||||||
| Issuance of notes | 988 | 1,178 | |||||||||
| Repayment of notes | (500) | — | |||||||||
| Proceeds from stock-based compensation plans | 21 | 30 | |||||||||
| Repurchase of shares related to stock-based compensation | (85) | (82) | |||||||||
| Treasury shares | (983) | (628) | |||||||||
| Dividends | (387) | (347) | |||||||||
| Debt issuance costs and related fees | (10) | (13) | |||||||||
| Dividends to noncontrolling interest | (1) | (3) | |||||||||
| Net cash (used in) provided by financing activities | (957) | 135 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (123) | (38) | |||||||||
| Decrease in cash and cash equivalents | (155) | (358) | |||||||||
| Cash and cash equivalents, beginning of period | 1,811 | 2,597 | |||||||||
| Cash and cash equivalents, end of period | $ | 1,656 | $ | 2,239 | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
MOODY’S CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(Amounts in millions, except per share data)
| Shareholders of Moody's Corporation | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Capital Surplus | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total Moody's Shareholders' Equity | Non- Controlling Interests | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | 342.9 | $ | 3 | $ | 784 | $ | 12,094 | (156.7) | $ | (10,270) | $ | (425) | $ | 2,186 | $ | 194 | $ | 2,380 | |||||||||||||||||||||||||||||||||||||||||
| Net income | 474 | 474 | — | 474 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends ($0.62 per share) | (117) | (117) | (2) | (119) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 41 | 41 | 41 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for stock-based compensation plans at average cost, net | 7 | — | 1 | 8 | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury shares repurchased | (0.3) | (125) | (125) | (125) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustment, net of net investment hedge activity (net of tax of $21 million) | (43) | (43) | (3) | (46) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net actuarial gains and prior service costs (net of tax of $1 million) | 3 | 3 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of prior service costs/actuarial losses and settlement charge (net of tax of $1 million) | 2 | 2 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net realized gain on cash flow hedges | 1 | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | 342.9 | $ | 3 | $ | 832 | $ | 12,451 | (157.0) | $ | (10,394) | $ | (462) | $ | 2,430 | $ | 189 | $ | 2,619 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
MOODY'S CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(Amounts in millions, except per share data)
| Shareholders of Moody's Corporation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Capital Surplus | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total Moody's Shareholders' Equity | Non- Controlling Interests | Total Shareholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 342.9 | $ | 3 | $ | 735 | $ | 11,011 | (155.8) | $ | (9,748) | $ | (432) | $ | 1,569 | $ | 194 | $ | 1,763 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 1,787 | 1,787 | — | 1,787 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends ($1.86 per share) | (347) | (347) | (3) | (350) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 127 | 127 | 127 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for stock-based compensation plans at average cost, net | (30) | 0.7 | (18) | (48) | (48) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury shares repurchased | (1.9) | (628) | (628) | (628) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustment, net of net investment hedge activity (net of tax of $46 million) | (47) | (47) | (2) | (49) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net actuarial losses and prior service costs (net of tax of $1 million) | 3 | 3 | 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of prior service costs/actuarial losses and settlement charge (net of tax of $4 million) | 12 | 12 | 12 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net realized and unrealized gain on cash flow hedges | 2 | 2 | 2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | 342.9 | $ | 3 | $ | 832 | $ | 12,451 | (157.0) | $ | (10,394) | $ | (462) | $ | 2,430 | $ | 189 | $ | 2,619 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
MOODY'S CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(Amounts in millions, except per share data)
| Shareholders of Moody's Corporation | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Capital Surplus | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total Moody's Shareholders' Equity | Non- Controlling Interests | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | 342.9 | $ | 3 | $ | 965 | $ | 13,328 | (159.4) | $ | (11,403) | $ | (599) | $ | 2,294 | $ | 185 | $ | 2,479 | |||||||||||||||||||||||||||||||||||||||||
| Net income | 303 | 303 | — | 303 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends ($0.70 per share) | (130) | (130) | (1) | (131) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 46 | 46 | 46 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for stock-based compensation plans at average cost, net | 2 | 0.1 | 1 | 3 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury shares repurchased | (0.4) | (112) | (112) | (112) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustment, net of net investment hedge activity (net of tax of $57 million) | (150) | (150) | (9) | (159) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of prior service costs and actuarial losses | 1 | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | 342.9 | $ | 3 | $ | 1,013 | $ | 13,501 | (159.7) | $ | (11,514) | $ | (748) | $ | 2,255 | $ | 175 | $ | 2,430 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
MOODY'S CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(Amounts in millions, except per share data)
| Shareholders of Moody's Corporation | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Capital Surplus | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total Moody's Shareholders' Equity | Non- Controlling Interests | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | 342.9 | $ | 3 | $ | 885 | $ | 12,762 | (157.3) | $ | (10,513) | $ | (410) | $ | 2,727 | $ | 189 | $ | 2,916 | |||||||||||||||||||||||||||||||||||||||||
| Net income | 1,128 | 1,128 | — | 1,128 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends ($2.10 per share) | (389) | (389) | (2) | (391) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 130 | 130 | 130 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for stock-based compensation plans at average cost, net | (34) | 0.6 | (30) | (64) | (64) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued as consideration to acquire kompany(1) | 35 | 0.1 | 9 | 44 | 44 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury shares repurchased | (3) | (3.1) | (980) | (983) | (983) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustment, net of net investment hedge activity (net of tax of $130 million) | (343) | (343) | (12) | (355) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net actuarial gains and prior service costs (net of tax of $1 million) | 2 | 2 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of prior service costs and actuarial losses | 2 | 2 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net realized and unrealized gain on cash flow hedges | 1 | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | 342.9 | $ | 3 | $ | 1,013 | $ | 13,501 | (159.7) | $ | (11,514) | $ | (748) | $ | 2,255 | $ | 175 | $ | 2,430 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
(1) Represents a non-cash investing activity relating to the issuance of common stock to fund a portion of the purchase price for kompany.
MOODY’S CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(tabular dollar and share amounts in millions, except per share data)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Moody’s is a global integrated risk assessment firm that empowers organizations and investors to make better decisions. Moody’s reports in two reportable segments: MIS and MA.
MIS publishes credit ratings and provides assessment services on a wide range of debt obligations, programs and facilities, and the entities that issue such obligations in markets worldwide, including various corporate, financial institution and governmental obligations, and structured finance securities.
MA is a global provider of: i) data and information; ii) research and insights; and iii) decision solutions, which help companies make better and faster decisions. MA leverages its industry expertise across multiple risks such as credit, market, financial crime, supply chain, catastrophe and climate to deliver integrated risk assessment solutions that enable business leaders to identify, measure and manage the implications of interrelated risks and opportunities.
These interim financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the Company’s consolidated financial statements and related notes in the Company’s 2021 annual report on Form 10-K filed with the SEC on February 22, 2022. The results of interim periods are not necessarily indicative of results for the full year or any subsequent period. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
Certain reclassifications have been made to prior period amounts to conform to the current presentation.
Adoption of New Accounting Standards
On January 1, 2022, the Company adopted ASU 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers" ("ASU No. 2021-08"). This ASU requires companies to apply the definition of a performance obligation under ASC Topic 606 to recognize and measure contract assets and contract liabilities (i.e., deferred revenue) relating to contracts with customers that are acquired in a business combination. The adoption of this ASU will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. Accordingly, upon adoption, the Company will no longer be required to adjust acquired deferred revenue to fair value in business combination transactions. The amendments in ASU No. 2021-08 are applied prospectively and have been applied to business combination transactions completed subsequent to January 1, 2022.
COVID-19
The COVID-19 pandemic has not had a material adverse impact on the Company's reported results to date and is currently not expected to have a material adverse impact on its near-term outlook. However, Moody's is unable to predict the longer-term impact that the pandemic may have on its business, future results of operations, financial position or cash flows due to numerous uncertainties.
Russia/Ukraine Conflict
The Company is closely monitoring the impact of the ongoing Russia/Ukraine conflict on all aspects of its business. In response to the conflict, the Company is no longer conducting commercial operations in Russia for both MIS and MA and is complying with all applicable regulatory restrictions set forth by the jurisdictions in which Moody's operates. Furthermore, the Company also has withdrawn MIS credit ratings on Russian entities.
While Moody's Russian operations and net assets are not material, broader global market volatility, which partially relates to uncertainties surrounding the conflict, has contributed to an adverse impact on rated issuance volumes in 2022. The Company is unable to predict either the near-term or longer-term impact that the conflict may have on its financial position and operating results due to numerous uncertainties regarding the severity and duration of the conflict and its broader potential macroeconomic impact.
Reclassification of Previously Reported Revenue by LOB
In the first quarter of 2022, the Company realigned its revenue by LOB reporting structure for the MA operating segment to enhance insight and transparency into this business. As of January 1, 2022, the MA LOBs have been realigned from RD&A and ERS to:
–Decision Solutions (DS) - provides software and workflow tools for specific use cases (banking, insurance, KYC/KYS, CRE and structured finance solutions). This LOB utilizes components from the Data & Information and Research & Insights LOBs to provide integrated risk solutions;
–Research & Insights (R&I) - provides models, scores, expert insights and commentary. This LOB includes: credit research; credit models and analytics; and economics data and models; and
–Data & Information (D&I) - provides vast data sets on companies and securities via data feeds and data applications products.
Prior year revenue by LOB disclosures have been reclassified to conform to the new LOB reporting structure, which is presented in Note 2.
NOTE 2. REVENUES
Revenue by Category
The following table presents the Company’s revenues disaggregated by LOB:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| MIS: | |||||||||||||||||||||||
| Corporate Finance (CFG) | |||||||||||||||||||||||
| Investment-grade | $ | 67 | $ | 105 | $ | 249 | $ | 341 | |||||||||||||||
| High-yield | 21 | 82 | 91 | 347 | |||||||||||||||||||
| Bank loans | 47 | 145 | 232 | 482 | |||||||||||||||||||
| Other accounts (1) | 142 | 156 | 444 | 473 | |||||||||||||||||||
| Total CFG | 277 | 488 | 1,016 | 1,643 | |||||||||||||||||||
| Structured Finance (SFG) | |||||||||||||||||||||||
| Asset-backed securities | 26 | 29 | 89 | 88 | |||||||||||||||||||
| RMBS | 22 | 31 | 85 | 89 | |||||||||||||||||||
| CMBS | 19 | 26 | 84 | 73 | |||||||||||||||||||
| Structured credit | 34 | 57 | 109 | 148 | |||||||||||||||||||
| Other accounts | — | — | 1 | 1 | |||||||||||||||||||
| Total SFG | 101 | 143 | 368 | 399 | |||||||||||||||||||
| Financial Institutions (FIG) | |||||||||||||||||||||||
| Banking | 76 | 105 | 258 | 315 | |||||||||||||||||||
| Insurance | 24 | 38 | 82 | 114 | |||||||||||||||||||
| Managed investments | 6 | 8 | 19 | 29 | |||||||||||||||||||
| Other accounts | 3 | 2 | 9 | 7 | |||||||||||||||||||
| Total FIG | 109 | 153 | 368 | 465 | |||||||||||||||||||
| Public, Project and Infrastructure Finance (PPIF) | |||||||||||||||||||||||
| Public finance / sovereign | 44 | 61 | 157 | 191 | |||||||||||||||||||
| Project and infrastructure | 48 | 69 | 180 | 212 | |||||||||||||||||||
| Total PPIF | 92 | 130 | 337 | 403 | |||||||||||||||||||
| Total ratings revenue | 579 | 914 | 2,089 | 2,910 | |||||||||||||||||||
| MIS Other | 11 | 11 | 34 | 31 | |||||||||||||||||||
| Total external revenue | 590 | 925 | 2,123 | 2,941 | |||||||||||||||||||
| Intersegment revenue | 43 | 42 | 129 | 124 | |||||||||||||||||||
| Total MIS | 633 | 967 | 2,252 | 3,065 | |||||||||||||||||||
| MA: | |||||||||||||||||||||||
| Decision Solutions | 325 | 250 | 971 | 697 | |||||||||||||||||||
| Research and Insights | 184 | 177 | 552 | 523 | |||||||||||||||||||
| Data and Information | 176 | 174 | 532 | 518 | |||||||||||||||||||
| Total external revenue | 685 | 601 | 2,055 | 1,738 | |||||||||||||||||||
| Intersegment revenue | 2 | 2 | 5 | 6 | |||||||||||||||||||
| Total MA | 687 | 603 | 2,060 | 1,744 | |||||||||||||||||||
| Eliminations | (45) | (44) | (134) | (130) | |||||||||||||||||||
| Total MCO | $ | 1,275 | $ | 1,526 | $ | 4,178 | $ | 4,679 |
(1) Other includes: recurring monitoring fees of a rated debt obligation and/or entities that issue such obligations as well as fees from programs such as commercial paper, medium term notes, and ICRA corporate finance revenue.
The following table presents the Company’s revenues disaggregated by LOB and geographic area:
| Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||||
| U.S. | Non-U.S | Total | U.S. | Non-U.S | Total | ||||||||||||||||||||||||||||||
| MIS: | |||||||||||||||||||||||||||||||||||
| Corporate Finance | $ | 188 | $ | 89 | $ | 277 | $ | 334 | $ | 154 | $ | 488 | |||||||||||||||||||||||
| Structured Finance | 69 | 32 | 101 | 98 | 45 | 143 | |||||||||||||||||||||||||||||
| Financial Institutions | 47 | 62 | 109 | 71 | 82 | 153 | |||||||||||||||||||||||||||||
| Public, Project and Infrastructure Finance | 57 | 35 | 92 | 76 | 54 | 130 | |||||||||||||||||||||||||||||
| Total ratings revenue | 361 | 218 | 579 | 579 | 335 | 914 | |||||||||||||||||||||||||||||
| MIS Other | 1 | 10 | 11 | 1 | 10 | 11 | |||||||||||||||||||||||||||||
| Total MIS | 362 | 228 | 590 | 580 | 345 | 925 | |||||||||||||||||||||||||||||
| MA: | |||||||||||||||||||||||||||||||||||
| Decision Solutions | 143 | 182 | 325 | 107 | 143 | 250 | |||||||||||||||||||||||||||||
| Research and Insights | 100 | 84 | 184 | 96 | 81 | 177 | |||||||||||||||||||||||||||||
| Data and Information | 63 | 113 | 176 | 58 | 116 | 174 | |||||||||||||||||||||||||||||
| Total MA | 306 | 379 | 685 | 261 | 340 | 601 | |||||||||||||||||||||||||||||
| Total MCO | $ | 668 | $ | 607 | $ | 1,275 | $ | 841 | $ | 685 | $ | 1,526 | |||||||||||||||||||||||
| Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||||
| U.S. | Non-U.S | Total | U.S. | Non-U.S | Total | ||||||||||||||||||||||||||||||
| MIS: | |||||||||||||||||||||||||||||||||||
| Corporate Finance | $ | 673 | $ | 343 | $ | 1,016 | $ | 1,093 | $ | 550 | $ | 1,643 | |||||||||||||||||||||||
| Structured Finance | 249 | 119 | 368 | 254 | 145 | 399 | |||||||||||||||||||||||||||||
| Financial Institutions | 165 | 203 | 368 | 226 | 239 | 465 | |||||||||||||||||||||||||||||
| Public, Project and Infrastructure Finance | 210 | 127 | 337 | 233 | 170 | 403 | |||||||||||||||||||||||||||||
| Total ratings revenue | 1,297 | 792 | 2,089 | 1,806 | 1,104 | 2,910 | |||||||||||||||||||||||||||||
| MIS Other | 4 | 30 | 34 | 3 | 28 | 31 | |||||||||||||||||||||||||||||
| Total MIS | 1,301 | 822 | 2,123 | 1,809 | 1,132 | 2,941 | |||||||||||||||||||||||||||||
| MA: | |||||||||||||||||||||||||||||||||||
| Decision Solutions | 425 | 546 | 971 | 294 | 403 | 697 | |||||||||||||||||||||||||||||
| Research and Insights | 303 | 249 | 552 | 284 | 239 | 523 | |||||||||||||||||||||||||||||
| Data and Information | 185 | 347 | 532 | 170 | 348 | 518 | |||||||||||||||||||||||||||||
| Total MA | 913 | 1,142 | 2,055 | 748 | 990 | 1,738 | |||||||||||||||||||||||||||||
| Total MCO | $ | 2,214 | $ | 1,964 | $ | 4,178 | $ | 2,557 | $ | 2,122 | $ | 4,679 |
The following table presents the Company’s reportable segment revenues disaggregated by segment and geographic region:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| MIS: | |||||||||||||||||||||||
| U.S. | $ | 362 | $ | 580 | $ | 1,301 | $ | 1,809 | |||||||||||||||
| Non-U.S.: | |||||||||||||||||||||||
| EMEA | 139 | 211 | 497 | 707 | |||||||||||||||||||
| Asia-Pacific | 57 | 90 | 211 | 287 | |||||||||||||||||||
| Americas | 32 | 44 | 114 | 138 | |||||||||||||||||||
| Total Non-U.S. | 228 | 345 | 822 | 1,132 | |||||||||||||||||||
| Total MIS | 590 | 925 | 2,123 | 2,941 | |||||||||||||||||||
| MA: | |||||||||||||||||||||||
| U.S. | 306 | 261 | 913 | 748 | |||||||||||||||||||
| Non-U.S.: | |||||||||||||||||||||||
| EMEA | 254 | 232 | 774 | 695 | |||||||||||||||||||
| Asia-Pacific | 72 | 59 | 211 | 173 | |||||||||||||||||||
| Americas | 53 | 49 | 157 | 122 | |||||||||||||||||||
| Total Non-U.S. | 379 | 340 | 1,142 | 990 | |||||||||||||||||||
| Total MA | 685 | 601 | 2,055 | 1,738 | |||||||||||||||||||
| Total MCO | $ | 1,275 | $ | 1,526 | $ | 4,178 | $ | 4,679 |
The following tables summarize the split between transaction and recurring revenue. In the MIS segment, excluding MIS Other, transaction revenue represents the initial rating of a new debt issuance as well as other one-time fees while recurring revenue represents the recurring monitoring fees of a rated debt obligation and/or entities that issue such obligations, as well as revenue from programs such as commercial paper, medium-term notes and shelf registrations. In MIS Other, transaction revenue represents revenue from professional services and recurring revenue represents subscription-based revenues. In the MA segment, recurring revenue represents subscription-based revenues and software maintenance revenue. Transaction revenue in MA represents perpetual software license fees and revenue from software implementation services, risk management advisory projects, and training and certification services.
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| Transaction | Recurring | Total | Transaction | Recurring | Total | ||||||||||||||||||||||||||||||
| Corporate Finance | $ | 153 | $ | 124 | $ | 277 | $ | 366 | $ | 122 | $ | 488 | |||||||||||||||||||||||
| 55 | % | 45 | % | 100 | % | 75 | % | 25 | % | 100 | % | ||||||||||||||||||||||||
| Structured Finance | $ | 51 | $ | 50 | $ | 101 | $ | 93 | $ | 50 | $ | 143 | |||||||||||||||||||||||
| 50 | % | 50 | % | 100 | % | 65 | % | 35 | % | 100 | % | ||||||||||||||||||||||||
| Financial Institutions | $ | 41 | $ | 68 | $ | 109 | $ | 83 | $ | 70 | $ | 153 | |||||||||||||||||||||||
| 38 | % | 62 | % | 100 | % | 54 | % | 46 | % | 100 | % | ||||||||||||||||||||||||
| Public, Project and Infrastructure Finance | $ | 50 | $ | 42 | $ | 92 | $ | 88 | $ | 42 | $ | 130 | |||||||||||||||||||||||
| 54 | % | 46 | % | 100 | % | 68 | % | 32 | % | 100 | % | ||||||||||||||||||||||||
| MIS Other | $ | 1 | $ | 10 | $ | 11 | $ | 1 | $ | 10 | $ | 11 | |||||||||||||||||||||||
| 9 | % | 91 | % | 100 | % | 9 | % | 91 | % | 100 | % | ||||||||||||||||||||||||
| Total MIS | $ | 296 | $ | 294 | $ | 590 | $ | 631 | $ | 294 | $ | 925 | |||||||||||||||||||||||
| 50 | % | 50 | % | 100 | % | 68 | % | 32 | % | 100 | % | ||||||||||||||||||||||||
| Decision Solutions | $ | 37 | $ | 288 | $ | 325 | $ | 34 | $ | 216 | $ | 250 | |||||||||||||||||||||||
| 11 | % | 89 | % | 100 | % | 14 | % | 86 | % | 100 | % | ||||||||||||||||||||||||
| Research and Insights | $ | 1 | $ | 183 | $ | 184 | $ | 2 | $ | 175 | $ | 177 | |||||||||||||||||||||||
| 1 | % | 99 | % | 100 | % | 1 | % | 99 | % | 100 | % | ||||||||||||||||||||||||
| Data and Information | $ | — | $ | 176 | $ | 176 | $ | 1 | $ | 173 | $ | 174 | |||||||||||||||||||||||
| — | % | 100 | % | 100 | % | 1 | % | 99 | % | 100 | % | ||||||||||||||||||||||||
| Total MA | $ | 38 | (1) | $ | 647 | $ | 685 | $ | 37 | $ | 564 | $ | 601 | ||||||||||||||||||||||
| 6 | % | 94 | % | 100 | % | 6 | % | 94 | % | 100 | % | ||||||||||||||||||||||||
| Total Moody's Corporation | $ | 334 | $ | 941 | $ | 1,275 | $ | 668 | $ | 858 | $ | 1,526 | |||||||||||||||||||||||
| 26 | % | 74 | % | 100 | % | 44 | % | 56 | % | 100 | % | ||||||||||||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| Transaction | Recurring | Total | Transaction | Recurring | Total | ||||||||||||||||||||||||||||||
| Corporate Finance | $ | 645 | $ | 371 | $ | 1,016 | $ | 1,280 | $ | 363 | $ | 1,643 | |||||||||||||||||||||||
| 63 | % | 37 | % | 100 | % | 78 | % | 22 | % | 100 | % | ||||||||||||||||||||||||
| Structured Finance | $ | 217 | $ | 151 | $ | 368 | $ | 251 | $ | 148 | $ | 399 | |||||||||||||||||||||||
| 59 | % | 41 | % | 100 | % | 63 | % | 37 | % | 100 | % | ||||||||||||||||||||||||
| Financial Institutions | $ | 159 | $ | 209 | $ | 368 | $ | 252 | $ | 213 | $ | 465 | |||||||||||||||||||||||
| 43 | % | 57 | % | 100 | % | 54 | % | 46 | % | 100 | % | ||||||||||||||||||||||||
| Public, Project and Infrastructure Finance | $ | 211 | $ | 126 | $ | 337 | $ | 276 | $ | 127 | $ | 403 | |||||||||||||||||||||||
| 63 | % | 37 | % | 100 | % | 68 | % | 32 | % | 100 | % | ||||||||||||||||||||||||
| MIS Other | $ | 3 | $ | 31 | $ | 34 | $ | 3 | $ | 28 | $ | 31 | |||||||||||||||||||||||
| 9 | % | 91 | % | 100 | % | 10 | % | 90 | % | 100 | % | ||||||||||||||||||||||||
| Total MIS | $ | 1,235 | $ | 888 | $ | 2,123 | $ | 2,062 | $ | 879 | $ | 2,941 | |||||||||||||||||||||||
| 58 | % | 42 | % | 100 | % | 70 | % | 30 | % | 100 | % | ||||||||||||||||||||||||
| Decision Solutions | $ | 120 | $ | 851 | $ | 971 | $ | 111 | $ | 586 | $ | 697 | |||||||||||||||||||||||
| 12 | % | 88 | % | 100 | % | 16 | % | 84 | % | 100 | % | ||||||||||||||||||||||||
| Research and Insights | $ | 4 | $ | 548 | $ | 552 | $ | 6 | $ | 517 | $ | 523 | |||||||||||||||||||||||
| 1 | % | 99 | % | 100 | % | 1 | % | 99 | % | 100 | % | ||||||||||||||||||||||||
| Data and Information | $ | — | $ | 532 | $ | 532 | $ | 3 | $ | 515 | $ | 518 | |||||||||||||||||||||||
| — | % | 100 | % | 100 | % | 1 | % | 99 | % | 100 | % | ||||||||||||||||||||||||
| Total MA | $ | 124 | (1) | $ | 1,931 | $ | 2,055 | $ | 120 | $ | 1,618 | $ | 1,738 | ||||||||||||||||||||||
| 6 | % | 94 | % | 100 | % | 7 | % | 93 | % | 100 | % | ||||||||||||||||||||||||
| Total Moody's Corporation | $ | 1,359 | $ | 2,819 | $ | 4,178 | $ | 2,182 | $ | 2,497 | $ | 4,679 | |||||||||||||||||||||||
| 33 | % | 67 | % | 100 | % | 47 | % | 53 | % | 100 | % |
(1) Revenue from software implementation services and risk management advisory projects, while classified by management as transactional revenue, is recognized over time under the Revenue Accounting Standard (please also refer to the following table).
The following table presents the timing of revenue recognition:
| Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| MIS | MA | Total | MIS | MA | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
| Revenue recognized at a point in time | $ | 296 | $ | 20 | $ | 316 | $ | 1,235 | $ | 77 | $ | 1,312 | |||||||||||||||||||||||||||||||||||||||||
| Revenue recognized over time | 294 | 665 | 959 | 888 | 1,978 | 2,866 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 590 | $ | 685 | $ | 1,275 | $ | 2,123 | $ | 2,055 | $ | 4,178 | |||||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||||
| MIS | MA | Total | MIS | MA | Total | ||||||||||||||||||||||||||||||
| Revenue recognized at a point in time | $ | 631 | $ | 29 | $ | 660 | $ | 2,062 | $ | 78 | $ | 2,140 | |||||||||||||||||||||||
| Revenue recognized over time | 294 | 572 | 866 | 879 | 1,660 | 2,539 | |||||||||||||||||||||||||||||
| Total | $ | 925 | $ | 601 | $ | 1,526 | $ | 2,941 | $ | 1,738 | $ | 4,679 |
Unbilled receivables, deferred revenue and remaining performance obligations
Unbilled receivables
Certain MIS arrangements contain contractual terms whereby the customers are billed in arrears for annual monitoring services, requiring revenue to be accrued as an unbilled receivable as such services are provided. In addition, for certain MA arrangements, the timing of when the Company has the unconditional right to consideration and recognizes revenue occurs prior to invoicing the customer.
The following table presents the Company's unbilled receivables, which are included within accounts receivable, net, at September 30, 2022 and December 31, 2021:
| As of September 30, 2022 | As of December 31, 2021 | ||||||||||||||||||||||
| MIS | MA | MIS | MA | ||||||||||||||||||||
| Unbilled Receivables | $ | 381 | $ | 147 | $ | 386 | $ | 152 |
Deferred revenue
The Company recognizes deferred revenue when a contract requires a customer to pay consideration to the Company in advance of when revenue related to that contract is recognized. This deferred revenue is relieved when the Company satisfies the related performance obligation and revenue is recognized.
Significant changes in the deferred revenue balances during the three and nine months ended September 30, 2022 and 2021 are as follows:
| Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||||
| MIS | MA | Total | MIS | MA | Total | ||||||||||||||||||||||||||||||
| Balance at June 30, | $ | 347 | $ | 1,019 | $ | 1,366 | $ | 368 | $ | 867 | $ | 1,235 | |||||||||||||||||||||||
| Changes in deferred revenue | |||||||||||||||||||||||||||||||||||
| Revenue recognized that was included in the deferred revenue balance at the beginning of the period | (110) | (480) | (590) | (118) | (484) | (602) | |||||||||||||||||||||||||||||
| Increases due to amounts billable excluding amounts recognized as revenue during the period | 82 | 389 | 471 | 85 | 393 | 478 | |||||||||||||||||||||||||||||
| Increases due to acquisitions during the period | — | — | — | — | 89 | 89 | |||||||||||||||||||||||||||||
| Effect of exchange rate changes | (5) | (9) | (14) | (2) | (12) | (14) | |||||||||||||||||||||||||||||
| Total changes in deferred revenue | (33) | (100) | (133) | (35) | (14) | (49) | |||||||||||||||||||||||||||||
| Balance at September 30, | $ | 314 | $ | 919 | $ | 1,233 | $ | 333 | $ | 853 | $ | 1,186 | |||||||||||||||||||||||
| Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||||
| MIS | MA | Total | MIS | MA | Total | ||||||||||||||||||||||||||||||
| Balance at December 31, | $ | 296 | $ | 1,039 | $ | 1,335 | $ | 313 | $ | 874 | $ | 1,187 | |||||||||||||||||||||||
| Changes in deferred revenue | |||||||||||||||||||||||||||||||||||
| Revenue recognized that was included in the deferred revenue balance at the beginning of the period | (186) | (883) | (1,069) | (200) | (814) | (1,014) | |||||||||||||||||||||||||||||
| Increases due to amounts billable excluding amounts recognized as revenue during the period | 218 | 819 | 1,037 | 224 | 713 | 937 | |||||||||||||||||||||||||||||
| Increases due to acquisitions during the period | — | 1 | 1 | — | 93 | 93 | |||||||||||||||||||||||||||||
| Effect of exchange rate changes | (14) | (57) | (71) | (4) | (13) | (17) | |||||||||||||||||||||||||||||
| Total changes in deferred revenue | 18 | (120) | (102) | 20 | (21) | (1) | |||||||||||||||||||||||||||||
| Balance at September 30, | $ | 314 | $ | 919 | $ | 1,233 | $ | 333 | $ | 853 | $ | 1,186 | |||||||||||||||||||||||
| Deferred revenue - current | $ | 238 | $ | 917 | $ | 1,155 | $ | 247 | $ | 852 | $ | 1,099 | |||||||||||||||||||||||
| Deferred revenue - non-current | $ | 76 | $ | 2 | $ | 78 | $ | 86 | $ | 1 | $ | 87 |
For the MIS segment, the changes in the deferred revenue balance during the three and nine months ended September 30, 2022 were primarily related to the significant portion of contract renewals that occurred during the first quarter of 2022 and are generally recognized over a one year period.
For the MA segment, the decrease in deferred revenue for the three months ended September 30, 2022 was primarily due to the recognition of annual subscription and maintenance billings from December 2021 and January 2022. For the nine months ended September 30, 2022, the decrease in the deferred revenue balance is attributable to recognition of revenues related to the aforementioned December 2021 billings and unfavorable changes in FX translation rates being mostly offset by the impact of the high concentration of billings in the first quarter of 2022.
Remaining performance obligations
Remaining performance obligations in the MIS segment largely reflect deferred revenue related to monitoring fees for certain structured finance products, primarily CMBS, where the issuers can elect to pay the monitoring fees for the life of the security in advance. As of September 30, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $103 million. The Company expects to recognize into revenue approximately 20% of this balance within one year, approximately 50% of this balance between one to five years and the remaining amount thereafter. With respect to the remaining performance obligations for the MIS segment, the Company has applied a practical expedient set forth in ASC Topic 606 permitting the omission from the amounts stated above relating to unsatisfied performance obligations for contracts with an original expected length of one year or less.
Remaining performance obligations in the MA segment include both amounts recorded as deferred revenue on the balance sheet as of September 30, 2022 as well as amounts not yet invoiced to customers as of September 30, 2022, largely reflecting future revenue related to signed multi-year arrangements for hosted and installed subscription-based products. As of September 30, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $3.1 billion. The Company expects to recognize into revenue approximately 60% of this balance within one year, approximately 30% of this balance between one to two years and the remaining amount thereafter.
NOTE 3. STOCK-BASED COMPENSATION
Presented below is a summary of the stock-based compensation cost and associated tax benefit included in the accompanying consolidated statements of operations:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Stock-based compensation cost | $ | 46 | $ | 41 | $ | 130 | $ | 127 | |||||||||||||||
| Tax benefit | $ | 10 | $ | 8 | $ | 30 | $ | 29 |
During the first nine months of 2022, the Company granted 0.1 million employee stock options, which had a weighted average grant date fair value of $84.00 per share. The Company also granted 0.6 million shares of restricted stock in the first nine months of 2022, which had a weighted average grant date fair value of $321.70 per share. Both the employee stock options and restricted stock generally vest ratably over four years. Additionally, the Company granted 0.1 million shares of performance-based awards whereby the number of shares that ultimately vest are based on the achievement of certain non-market-based performance metrics of the Company over three years. The weighted average grant date fair value of these awards was $310.62 per share.
The following weighted average assumptions were used in determining the fair value using the Black-Scholes option-pricing model for options granted in 2022:
| Expected dividend yield | 0.86 | % | |||
| Expected stock volatility | 27 | % | |||
| Risk-free interest rate | 1.91 | % | |||
| Expected holding period | 5.6 years |
Unrecognized stock-based compensation expense at September 30, 2022 was $18 million and $260 million for stock options and unvested restricted stock, respectively, which is expected to be recognized over a weighted average period of 2.1 years and 2.6 years, respectively. Additionally, there was $34 million of unrecognized stock-based compensation expense relating to the aforementioned non-market-based performance-based awards, which is expected to be recognized over a weighted average period of 1.6 years.
The following table summarizes information relating to stock option exercises and restricted stock vesting:
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Exercise of stock options: | |||||||||||
| Proceeds from stock option exercises | $ | 6 | $ | 20 | |||||||
| Aggregate intrinsic value | $ | 7 | $ | 44 | |||||||
| Tax benefit realized upon exercise | $ | 2 | $ | 10 | |||||||
| Number of shares exercised (1) | — | 0.2 | |||||||||
| Vesting of restricted stock: | |||||||||||
| Fair value of shares vested | $ | 174 | $ | 193 | |||||||
| Tax benefit realized upon vesting | $ | 41 | $ | 43 | |||||||
| Number of shares vested | 0.5 | 0.7 | |||||||||
| Vesting of performance-based restricted stock: | |||||||||||
| Fair value of shares vested | $ | 50 | $ | 28 | |||||||
| Tax benefit realized upon vesting | $ | 7 | $ | 4 | |||||||
| Number of shares vested | 0.2 | 0.1 |
(1) The number of options exercised in 2022 was approximately 41 thousand.
NOTE 4. INCOME TAXES
Moody’s effective tax rate (ETR) was 20.5% and 23.4% for the three months ended September 30, 2022 and 2021, respectively, and 21.3% and 20.2% for the nine months ended September 30, 2022 and 2021, respectively. The 2.9% decrease in the ETR for the three months ended September 30, 2022 compared to the same period in the prior year was primarily due to lower pre-tax income, which increases the percentage impact of net beneficial discrete items, as well as a favorable mix of earnings in the jurisdictions in which Moody’s operates. The 1.1% increase in the ETR for the nine months ended September 30, 2022 compared to the same period in the prior year was primarily due to tax benefits realized upon resolution of UTPs during 2021 that did not recur to the same extent in 2022 and a non-deductible loss associated with the Company no longer conducting commercial operations in Russia. The Company’s year-to-date 2022 income tax expense differs from the tax computed by applying its estimated annual effective tax rate to the pre-tax earnings primarily due to the following items recognized in 2022: i) Excess Tax Benefits from stock-based compensation of $19 million; and ii) net reductions in UTPs of $20 million related to the resolution of UTPs.
The Company classifies interest related to UTPs in interest expense, net in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating (expense) income, net. The Company had a decrease in its UTPs of $28 million (net of federal tax) during the third quarter of 2022 and a decrease in its UTPs of $80 million ($75 million net of federal tax) during the nine months of 2022, which primarily related to the aforementioned resolution of UTPs.
Moody’s Corporation and subsidiaries are subject to U.S. federal income tax as well as income tax in various state, local and foreign jurisdictions. The Company’s U.S. federal income tax returns for 2017 through 2020 are currently under examination and 2021 remains open to examination. The Company’s New York State tax returns for 2017 through 2018 and New York City tax returns for 2015 through 2018 are currently under examination. The Company’s U.K. tax returns for 2012 through 2020 remain open to examination.
For ongoing audits, it is possible the balance of UTPs could decrease in the next twelve months as a result of the settlement of such audits, which might involve the payment of additional taxes, the adjustment of certain deferred taxes and/or the recognition of tax benefits. It is also possible that new issues will be raised by tax authorities which could necessitate increases to the balance of UTPs. As the Company is unable to predict the timing or outcome of these audits, it is unable to estimate the amount of changes to the balance of UTPs at this time. However, the Company believes that it has adequately provided for its financial exposure relating to all open tax years, by tax jurisdiction, in accordance with the applicable provisions of Topic 740 of the ASC regarding UTPs.
The following table shows the amount the Company paid for income taxes:
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Income taxes paid | $ | 394 | $ | 501 |
In August 2022, the U.S. Congress passed the Inflation Reduction Act, which included a corporate minimum tax on book earnings of 15%, an excise tax on corporate share repurchases of 1%, and certain climate change and energy tax credit incentives. The adoption of a corporate minimum tax of 15% is not expected to impact Moody’s ETR. The excise tax of 1% on corporate share buybacks will not have an impact on the Company’s ETR for the years 2022 or 2023.
NOTE 5. RECONCILIATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
Below is a reconciliation of basic to diluted shares outstanding:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Basic | 183.2 | 186.0 | 184.1 | 186.6 | |||||||||||||||||||
| Dilutive effect of shares issuable under stock-based compensation plans | 0.7 | 1.3 | 0.8 | 1.4 | |||||||||||||||||||
| Diluted | 183.9 | 187.3 | 184.9 | 188.0 | |||||||||||||||||||
| Anti-dilutive options to purchase common shares and restricted stock as well as contingently issuable restricted stock which are excluded from the table above | 0.5 | 0.1 | 0.4 | 0.2 |
The calculation of diluted EPS requires certain assumptions regarding the use of both cash proceeds and assumed proceeds that would be received upon the exercise of stock options and vesting of restricted stock outstanding as of September 30, 2022 and 2021.
NOTE 6. ACCELERATED SHARE REPURCHASE PROGRAM
On March 1, 2022, the Company entered into an ASR agreement with a financial institution counterparty to repurchase $500 million of its outstanding common stock. The Company paid $500 million to the counterparty and received an initial delivery of 1.2 million shares of its common stock. Final settlement of the ASR agreement was completed in April 2022 and the Company received delivery of an additional 0.3 million shares of the Company’s common stock.
In total, the Company repurchased 1.5 million shares of the Company’s common stock during the term of the ASR Agreement, based on the volume-weighted average price (net of discount) of $324.20 per share over the duration of the program. The initial share repurchase and final share settlement were recorded as a reduction to shareholders’ equity.
NOTE 7. CASH EQUIVALENTS AND INVESTMENTS
The table below provides additional information on the Company’s cash equivalents and investments:
| As of September 30, 2022 | |||||||||||||||||||||||||||||||||||
| Balance sheet location | |||||||||||||||||||||||||||||||||||
| Cost | Gains/(Losses) | Fair Value | Cash and cash equivalents | Short-term investments | Other assets | ||||||||||||||||||||||||||||||
| Certificates of deposit and money market deposit accounts (1) | $ | 739 | $ | — | $ | 739 | $ | 640 | $ | 89 | $ | 10 | |||||||||||||||||||||||
| Mutual funds | $ | 72 | $ | (2) | $ | 70 | $ | — | $ | — | $ | 70 | |||||||||||||||||||||||
| As of December 31, 2021 | |||||||||||||||||||||||||||||||||||
| Balance sheet location | |||||||||||||||||||||||||||||||||||
| Cost | Gains/(Losses) | Fair Value | Cash and cash equivalents | Short-term investments | Other assets | ||||||||||||||||||||||||||||||
| Certificates of deposit and money market deposit accounts (1) | $ | 691 | $ | — | $ | 691 | $ | 584 | $ | 91 | $ | 16 | |||||||||||||||||||||||
| Mutual funds | $ | 65 | $ | 8 | $ | 73 | $ | — | $ | — | $ | 73 |
(1) Consists of time deposits and money market deposit accounts. The remaining contractual maturities for the certificates of deposits classified as short-term investments are one month to 12 months at both September 30, 2022 and December 31, 2021. The remaining contractual maturities for the certificates of deposits classified in other assets are 13 months to 27 months at September 30, 2022 and 13 months to 29 months at December 31, 2021. Time deposits with a maturity of less than 90 days at time of purchase are classified as cash and cash equivalents.
In addition, the Company invests in Corporate-Owned Life Insurance (COLI). As of September 30, 2022 and December 31, 2021, the contract value of the COLI was $38 million and $37 million, respectively.
NOTE 8. ACQUISITIONS
The material business combination described below is accounted for using the acquisition method of accounting whereby assets acquired and liabilities assumed were recognized at fair value or other values set forth in U.S. GAAP on the date of the transaction. Any excess of the purchase price over the fair value of the assets acquired and liabilities assumed was recorded to goodwill. Goodwill typically results through expected synergies from combining operations of an acquiree and an acquirer, anticipated new customer acquisition and products, as well as from intangible assets that do not qualify for separate recognition.
RMS
On September 15, 2021, the Company acquired 100% of RMS, a global provider of climate and natural disaster risk modeling and analytics. The cash payment was funded with new debt financing and a combination of U.S. and offshore cash on hand. The acquisition will expand Moody’s insurance data and analytics business and accelerate the development of the Company’s global integrated risk capabilities to address the next generation of risk assessment.
The table below details the total consideration relating to the acquisition:
| Cash paid at closing | $ | 1,922 | |||
| Replacement equity compensation awards | 5 | ||||
| Total consideration | $ | 1,927 |
Shown below is the purchase price allocation, which summarizes the fair value of the assets and liabilities assumed, at the date of acquisition:
| Cash (1) | $ | 55 | |||||||||
| Accounts receivable | 38 | ||||||||||
| Other current assets (1) | 12 | ||||||||||
| Property and equipment, net | 13 | ||||||||||
| Operating lease right-of-use assets | 64 | ||||||||||
| Intangible assets: | |||||||||||
| Customer relationships (23 year useful life) | $ | 518 | |||||||||
| Product technology (7 year useful life) | 212 | ||||||||||
| Trade name (9 year useful life) | 49 | ||||||||||
| Total intangible assets (18 year weighted average useful life) | 779 | ||||||||||
| Goodwill (1) | 1,357 | ||||||||||
| Deferred tax assets, net | 50 | ||||||||||
| Other assets | 99 | ||||||||||
| Liabilities: | |||||||||||
| Accounts payable and accrued liabilities (1) | $ | (96) | |||||||||
| Deferred revenue | (89) | ||||||||||
| Operating lease liabilities | (68) | ||||||||||
| Deferred tax liabilities, net | (214) | ||||||||||
| Uncertain tax positions (1) | (71) | ||||||||||
| Other liabilities | (2) | ||||||||||
| Total liabilities | (540) | ||||||||||
| Net assets acquired | $ | 1,927 |
(1) During the third quarter of 2022, the Company adjusted the purchase price allocation pursuant to the receipt of additional information from the sellers relating to RMS's pre-acquisition income taxes. These adjustments included a decrease to UTPs of $25 million along with other immaterial adjustments. These adjustments resulted in a corresponding decrease in goodwill of $19 million.
Goodwill
The goodwill recognized as a result of this acquisition includes, among other things, the value of combining the complementary product portfolios of Moody's and RMS, which is expected to extend the Company's reach into new market segments. The goodwill also includes the combined company's ability to accelerate technology innovations into new product adjacencies (leveraging RMS's team of data scientists, modelers and software engineers) as well as combining RMS's products with Moody’s core data and analytics offerings to provide holistic integrated risk solutions.
Goodwill, of which $1,267 million and $90 million has been assigned to the MA and MIS segments, respectively, is not deductible for tax purposes. The amount of goodwill allocated to the MIS segment relates to the integration of certain of RMS's models/processes into the Company's ESG solutions offerings.
Other assets in the table above includes an indemnification asset of $95 million related to UTPs assumed in the transaction, for which the Company expects to be indemnified by the sellers in the event of an unfavorable outcome.
Transaction costs
Transaction costs incurred in the year ended December 31, 2021 directly related to the RMS acquisition were $22 million and were recorded in SG&A expenses in the statement of operations.
Supplementary Unaudited Pro Forma Information
Supplemental information on an unaudited pro forma basis is presented below for the three and nine months ended September 30, 2021 as if the acquisition of RMS occurred on January 1, 2020. The pro forma financial information is presented for comparative purposes only and is based on certain estimates and assumptions, which the Company believes to be reasonable but not necessarily indicative of future results of operations or the results that would have been reported if the acquisition had been completed at January 1, 2020. The unaudited pro forma information includes amortization of acquired intangible assets, based on the purchase price allocation and an estimate of useful lives reflected above, and incremental financing costs resulting from the acquisition, net of income tax, which was estimated using the weighted average statutory tax rates in effect in the jurisdiction for which the pro forma adjustment relates.
| Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2021 | |||||||
| Pro forma Revenue | $ | 1,597 | $ | 4,910 | ||||
| Pro forma Net Income attributable to Moody's | $ | 506 | $ | 1,807 |
The unaudited pro forma results do not include any anticipated cost savings or other effects of the planned integration of RMS. Accordingly, the pro forma results above are not necessarily indicative of the results that would have been reported if the acquisition had occurred on the dates indicated, nor are the pro forma results indicative of results which may occur in the future. The RMS results included in the above have been converted to U.S. GAAP from IFRS as issued by the IASB and have been translated to USD at rates in effect for the periods presented.
NOTE 9. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to global market risks, including risks from changes in FX rates and changes in interest rates. Accordingly, the Company uses derivatives in certain instances to manage the aforementioned financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for speculative purposes.
Derivatives and non-derivative instruments designated as accounting hedges:
Fair Value Hedges
Interest Rate Swaps
The Company has entered into interest rate swaps to convert the fixed interest rate on certain of its long-term debt to a floating interest rate based on the 3-month LIBOR, 6-month LIBOR, and SOFR. The purpose of these hedges is to mitigate the risk associated with changes in the fair value of the long-term debt, thus the Company has designated these swaps as fair value hedges. The fair value of the swaps is adjusted quarterly with a corresponding adjustment to the carrying value of the debt. The changes in the fair value of the swaps and the underlying hedged item generally offset and the net cash settlements on the swaps are recorded each period within interest expense, net in the Company’s consolidated statements of operations.
The following table summarizes the Company’s interest rate swaps designated as fair value hedges:
| Notional Amount | ||||||||||||||||||||||||||
| Hedged Item | Nature of Swap | As of September 30, 2022 | As of December 31, 2021 | Floating Interest Rate | ||||||||||||||||||||||
| 2017 Senior Notes due 2023 | Pay Floating/Receive Fixed | $ | — | $ | 250 | 3-month USD LIBOR | ||||||||||||||||||||
| 2017 Senior Notes due 2028 | Pay Floating/Receive Fixed | $ | 500 | $ | 500 | 3-month USD LIBOR | ||||||||||||||||||||
| 2020 Senior Notes due 2025 | Pay Floating/Receive Fixed | $ | 300 | $ | 300 | 6-month USD LIBOR | ||||||||||||||||||||
| 2014 Senior Notes due 2044 | Pay Floating/Receive Fixed | $ | 300 | $ | 300 | 3-month USD LIBOR | ||||||||||||||||||||
| 2018 Senior Notes due 2048 | Pay Floating/Receive Fixed | $ | 300 | $ | 300 | 3-month USD LIBOR | ||||||||||||||||||||
| 2018 Senior Notes due 2029 (1) | Pay Floating/Receive Fixed | $ | 400 | $ | — | SOFR | ||||||||||||||||||||
| 2022 Senior Notes due 2052 (2) | Pay Floating/Receive Fixed | $ | 500 | $ | — | SOFR | ||||||||||||||||||||
| 2022 Senior Notes due 2032 (3) | Pay Floating/Receive Fixed | $ | 250 | $ | — | SOFR | ||||||||||||||||||||
| Total | $ | 2,550 | $ | 1,650 |
(1) Executed in the first quarter of 2022.
(2) Executed in the second quarter of 2022.
(3) Executed in the third quarter of 2022.
Refer to Note 15 for information on the cumulative amount of fair value hedging adjustments included in the carrying amount of the above hedged items.
The following table summarizes the impact to the statements of operations of the Company’s interest rate swaps designated as fair value hedges:
| Total amounts of financial statement line item presented in the statements of operations in which the effects of fair value hedges are recorded | Amount of income/(loss) recognized in the consolidated statements of operations | |||||||||||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
| Interest expense, net | $ | (58) | $ | (53) | $ | (166) | $ | (109) | ||||||||||||||||||||||||
| Descriptions | Location on Consolidated Statements of Operations | |||||||||||||||||||||||||||||||
| Net interest settlements and accruals on interest rate swaps | Interest expense, net | $ | (4) | $ | 6 | $ | 5 | $ | 17 | |||||||||||||||||||||||
| Fair value changes on interest rate swaps | Interest expense, net | $ | (95) | $ | (16) | $ | (227) | $ | (40) | |||||||||||||||||||||||
| Fair value changes on hedged debt | Interest expense, net | $ | 95 | $ | 16 | $ | 227 | $ | 40 |
Net investment hedges
Debt designated as net investment hedges
The Company has designated €500 million of the 2015 Senior Notes Due 2027 and €750 million of the 2019 Senior Notes due 2030 as net investment hedges to mitigate FX exposure related to a portion of the Company’s euro net investment in certain foreign subsidiaries against changes in euro/USD exchange rates. These hedges are designated as accounting hedges under the applicable sections of ASC Topic 815 and will end upon the repayment of the notes in 2027 and 2030, respectively, unless terminated early at the discretion of the Company.
Cross currency swaps designated as net investment hedges
The Company enters into cross-currency swaps to mitigate FX exposure related to a portion of the Company’s euro net investment in certain foreign subsidiaries against changes in euro/USD exchange rates. The following table provides information on the cross-currency swaps designated as net investment hedges under ASC Topic 815:
| September 30, 2022 | ||||||||||||||||||||||||||
| Pay | Receive | |||||||||||||||||||||||||
| Nature of Swap | Notional Amount | Weighted Average Interest Rate | Notional Amount | Weighted Average Interest Rate | ||||||||||||||||||||||
| Pay Fixed/Receive Fixed | € | 765 | 3.67% | $ | 800 | 5.25% | ||||||||||||||||||||
| Pay Floating/Receive Floating | 450 | Based on 3-month EURIBOR | 500 | Based on 3-month USD LIBOR | ||||||||||||||||||||||
| Pay Floating/Receive Floating | 1,688 | Based on ESTR | 1,750 | Based on SOFR | ||||||||||||||||||||||
| Total | € | 2,903 | $ | 3,050 |
| December 31, 2021 | ||||||||||||||||||||||||||
| Pay | Receive | |||||||||||||||||||||||||
| Nature of Swap | Notional Amount | Weighted Average Interest Rate | Notional Amount | Weighted Average Interest Rate | ||||||||||||||||||||||
| Pay Fixed/Receive Fixed | € | 909 | 2.16% | $ | 1,050 | 4.45% | ||||||||||||||||||||
| Pay Floating/Receive Floating | 1,179 | Based on 3-month EURIBOR | 1,350 | Based on 3-month USD LIBOR | ||||||||||||||||||||||
| Total | € | 2,088 | $ | 2,400 |
As of September 30, 2022 these hedges will expire and the notional amounts will be settled as follows unless terminated early at the discretion of the Company:
| Years Ending December 31, | ||||||||
| 2026 | € | 450 | ||||||
| 2027 | € | 531 | ||||||
| 2028 | € | 588 | ||||||
| 2029 | € | 373 | ||||||
| 2031 | € | 481 | ||||||
| 2032 | € | 480 | ||||||
| Total | € | 2,903 |
The following tables provide information on the gains/(losses) on the Company’s net investment and cash flow hedges:
| Derivative and Non-Derivative Instruments in Net Investment Hedging Relationships | Amount of Gain/(Loss) Recognized in AOCL on Derivative, net of Tax | Amount of Gain/(Loss) Reclassified from AOCL into Income, net of Tax | Gain/(Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing) | |||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, | Three Months Ended September 30, | Three Months Ended September 30, | ||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||
| FX forward contracts | $ | — | $ | 2 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||
| Cross currency swaps | 131 | 44 | — | — | 17 | 8 | ||||||||||||||||||||||||||||||||
| Long-term debt | 62 | 26 | — | — | — | — | ||||||||||||||||||||||||||||||||
| Total net investment hedges | $ | 193 | $ | 72 | $ | — | $ | — | $ | 17 | $ | 8 | ||||||||||||||||||||||||||
| Derivatives in Cash Flow Hedging Relationships | ||||||||||||||||||||||||||||||||||||||
| Interest rate contracts | $ | — | $ | 1 | $ | — | $ | (1) | $ | — | $ | — | ||||||||||||||||||||||||||
| Total cash flow hedges | $ | — | $ | 1 | $ | — | $ | (1) | $ | — | $ | — | ||||||||||||||||||||||||||
| Total | $ | 193 | $ | 73 | $ | — | $ | (1) | $ | 17 | $ | 8 | ||||||||||||||||||||||||||
| Derivative and Non-Derivative Instruments in Net Investment Hedging Relationships | Amount of Gain/(Loss) Recognized in AOCL on Derivative, net of Tax | Amount of Gain/(Loss) Reclassified from AOCL into Income, net of Tax | Gain/(Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing) | |||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, | Nine Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||
| FX forward contracts | $ | — | $ | 18 | $ | — | $ | 1 | $ | — | $ | — | ||||||||||||||||||||||||||
| Cross currency swaps | 273 | 98 | — | — | 38 | 27 | ||||||||||||||||||||||||||||||||
| Long-term debt | 148 | 61 | — | — | — | — | ||||||||||||||||||||||||||||||||
| Total net investment hedges | $ | 421 | $ | 177 | $ | — | $ | 1 | $ | 38 | $ | 27 | ||||||||||||||||||||||||||
| Derivatives in Cash Flow Hedging Relationships | ||||||||||||||||||||||||||||||||||||||
| Interest rate contracts | $ | — | $ | — | $ | (1) | $ | (2) | $ | — | $ | — | ||||||||||||||||||||||||||
| Total cash flow hedges | $ | — | $ | — | $ | (1) | $ | (2) | $ | — | $ | — | ||||||||||||||||||||||||||
| Total | $ | 421 | $ | 177 | $ | (1) | $ | (1) | $ | 38 | $ | 27 |
The cumulative amount of net investment hedge and cash flow hedge gains (losses) remaining in AOCL is as follows:
| Cumulative Gains/(Losses), net of tax | |||||||||||
| September 30, 2022 | December 31, 2021 | ||||||||||
| Net investment hedges | |||||||||||
| Cross currency swaps | $ | 292 | $ | 19 | |||||||
| FX forwards | 29 | 29 | |||||||||
| Long-term debt | 121 | (27) | |||||||||
| Total net investment hedges | $ | 442 | $ | 21 | |||||||
| Cash flow hedges | |||||||||||
| Interest rate contracts | $ | (48) | $ | (49) | |||||||
| Cross currency swaps | 2 | 2 | |||||||||
| Total cash flow hedges | (46) | (47) | |||||||||
| Total net gain (loss) in AOCL | $ | 396 | $ | (26) |
Derivatives not designated as accounting hedges:
Foreign exchange forwards
The Company also enters into foreign exchange forward contracts to mitigate the change in fair value on certain assets and liabilities denominated in currencies other than a subsidiary’s functional currency. These forward contracts are not designated as accounting hedges under the applicable sections of Topic 815 of the ASC. Accordingly, changes in the fair value of these contracts are recognized immediately in other non-operating income, net in the Company’s consolidated statements of operations along with the FX gain or loss recognized on the assets and liabilities denominated in a currency other than the subsidiary’s functional currency. These contracts have expiration dates at various times through January 2023.
The following table summarizes the notional amounts of the Company’s outstanding foreign exchange forwards:
| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||
| Notional amount of currency pair: | Sell | Buy | Sell | Buy | |||||||||||||||||||||||||
| Contracts to sell USD for GBP | $ | 138 | £ | 115 | $ | 126 | £ | 92 | |||||||||||||||||||||
| Contracts to sell USD for Japanese yen | $ | 18 | ¥ | 2,500 | $ | 22 | ¥ | 2,500 | |||||||||||||||||||||
| Contracts to sell USD for Canadian dollars | $ | 141 | C$ | 183 | $ | 120 | C$ | 150 | |||||||||||||||||||||
| Contracts to sell USD for Singapore dollars | $ | 58 | S$ | 80 | $ | 67 | S$ | 90 | |||||||||||||||||||||
| Contracts to sell USD for euros | $ | 332 | € | 325 | $ | 364 | € | 315 | |||||||||||||||||||||
| Contracts to sell USD for Russian ruble | $ | — | ₽ | — | $ | 16 | ₽ | 1,200 | |||||||||||||||||||||
| Contracts to sell USD for Indian rupee | $ | 20 | ₹ | 1,600 | $ | 7 | ₹ | 500 | |||||||||||||||||||||
| Contracts to sell GBP for USD | £ | — | $ | — | £ | 172 | $ | 231 | |||||||||||||||||||||
| Contracts to sell euros for USD | € | 135 | $ | 134 | € | — | $ | — |
NOTE: € = euro, £ = British pound, $ = U.S. dollar, ¥ = Japanese yen, C$ = Canadian dollar, S$= Singapore dollars, ₽= Russian ruble, ₹= Indian rupee
The following table summarizes the impact to the consolidated statements of operations relating to the net losses on the Company’s derivatives which are not designated as hedging instruments:
| Derivatives not designated as accounting hedges | Location on Consolidated Statements of Operations | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||
| FX forwards | Other non-operating income, net | $ | (46) | $ | (18) | $ | (103) | $ | (25) | |||||||||||||||||||||||||||||
| Foreign exchange forwards relating to RMS acquisition(1) | Other non-operating (expense) income, net | $ | — | $ | (13) | $ | — | $ | (13) |
(1) The Company entered into forward contracts to sell $1,675 million for £1,200 to hedge a portion of the GBP denominated RMS purchase price. The contract was terminated on September 14, 2021 and resulted in a $13 million loss.
The table below shows the classification between assets and liabilities on the Company’s consolidated balance sheets for the fair value of the derivative instrument as well as the carrying value of its non-derivative debt instruments designated and qualifying as net investment hedges:
| Derivative and Non-Derivative Instruments | ||||||||||||||||||||
| Balance Sheet Location | September 30, 2022 | December 31, 2021 | ||||||||||||||||||
| Assets: | ||||||||||||||||||||
| Derivatives designated as accounting hedges: | ||||||||||||||||||||
| Cross-currency swaps designated as net investment hedges | Other assets | $ | 181 | $ | 53 | |||||||||||||||
| Interest rate swaps designated as fair value hedges | Other assets | — | 13 | |||||||||||||||||
| Total derivatives designated as accounting hedges | 181 | 66 | ||||||||||||||||||
| Derivatives not designated as accounting hedges: | ||||||||||||||||||||
| FX forwards on certain assets and liabilities | Other current assets | — | 1 | |||||||||||||||||
| Total assets | $ | 181 | $ | 67 | ||||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Derivatives designated as accounting hedges: | ||||||||||||||||||||
| Cross-currency swaps designated as net investment hedges | Other liabilities | $ | — | $ | 17 | |||||||||||||||
| Interest rate swaps designated as fair value hedges | Other liabilities | 237 | 23 | |||||||||||||||||
| Total derivatives designated as accounting hedges | 237 | 40 | ||||||||||||||||||
| Non-derivatives designated as accounting hedges: | ||||||||||||||||||||
| Long-term debt designated as net investment hedge | Long-term debt | 1,225 | 1,421 | |||||||||||||||||
| Derivatives not designated as accounting hedges: | ||||||||||||||||||||
| FX forwards on certain assets and liabilities | Accounts payable and accrued liabilities | 28 | 12 | |||||||||||||||||
| Total liabilities | $ | 1,490 | $ | 1,473 |
NOTE 10. GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS
The following table summarizes the activity in goodwill for the periods indicated:
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| MIS | MA | Consolidated | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at beginning of year | $ | 396 | $ | — | $ | 396 | $ | 5,615 | $ | (12) | $ | 5,603 | $ | 6,011 | $ | (12) | $ | 5,999 | |||||||||||||||||||||||||||||||||||
| Additions/ adjustments (1) | 3 | — | 3 | 87 | — | 87 | 90 | — | 90 | ||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (21) | — | (21) | (451) | — | (451) | (472) | — | (472) | ||||||||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 378 | $ | — | $ | 378 | $ | 5,251 | $ | (12) | $ | 5,239 | $ | 5,629 | $ | (12) | $ | 5,617 |
| Year Ended December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| MIS | MA | Consolidated | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at beginning of year | $ | 311 | $ | — | $ | 311 | $ | 4,257 | $ | (12) | $ | 4,245 | $ | 4,568 | $ | (12) | $ | 4,556 | |||||||||||||||||||||||||||||||||||
| Additions/ adjustments (2) | 90 | — | 90 | 1,525 | — | 1,525 | 1,615 | — | 1,615 | ||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (5) | — | (5) | (167) | — | (167) | (172) | — | (172) | ||||||||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 396 | $ | — | $ | 396 | $ | 5,615 | $ | (12) | $ | 5,603 | $ | 6,011 | $ | (12) | $ | 5,999 |
(1) The 2022 additions/adjustments for the MA segment in the table above primarily relate to the acquisition of kompany in the first quarter of 2022, partially offset by RMS measurement period adjustments in the third quarter of 2022, which are more fully discussed in Note 8.
(2) The 2021 additions/adjustments for the MA segment in the table above relate to the acquisitions of Cortera, RMS, RealXData, Bogard, and PassFort. The 2021 additions/adjustments for the MIS segment relate to certain revenue synergies from the RMS acquisition that are expected to benefit the ESG solutions group within the MIS Other LOB.
Acquired intangible assets and related amortization consisted of:
| September 30, 2022 | December 31, 2021 | ||||||||||
| Customer relationships | $ | 1,947 | $ | 2,101 | |||||||
| Accumulated amortization | (412) | (381) | |||||||||
| Net customer relationships | 1,535 | 1,720 | |||||||||
| Software/product technology | 633 | 663 | |||||||||
| Accumulated amortization | (251) | (219) | |||||||||
| Net software/product technology | 382 | 444 | |||||||||
| Database | 176 | 179 | |||||||||
| Accumulated amortization | (58) | (46) | |||||||||
| Net database | 118 | 133 | |||||||||
| Trade names | 192 | 207 | |||||||||
| Accumulated amortization | (53) | (47) | |||||||||
| Net trade names | 139 | 160 | |||||||||
| Other (1) | 52 | 54 | |||||||||
| Accumulated amortization | (44) | (44) | |||||||||
| Net other | 8 | 10 | |||||||||
| Total acquired intangible assets, net | $ | 2,182 | $ | 2,467 |
(1) Other intangible assets primarily consist of trade secrets, covenants not to compete, and acquired ratings methodologies and models.
Amortization expense relating to acquired intangible assets is as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Amortization expense | $ | 48 | $ | 37 | $ | 150 | $ | 108 |
NOTE 11. RESTRUCTURING
On June 30, 2022, the chief executive officer of Moody’s approved a restructuring program (the “2022 - 2023 Geolocation Restructuring Program”) for which the scope was expanded in October 2022, prior to the filing of this quarterly report on Form 10-Q. The Company estimates that the program will result in annualized savings of $100 million to $135 million per year. This program relates to the Company's post-COVID-19 geolocation strategy and includes the rationalization and exit of certain real estate leases and a reduction in staff, including the relocation of certain job functions from their current locations. The exit from certain leased office spaces is expected to begin late in 2022 or early 2023 and is expected to result in $50 million to $70 million of pre-tax charges to either terminate or sublease the affected real estate leases. The program also includes $75 million to $100 million of pre-tax personnel-related restructuring charges, an amount that includes severance and related costs primarily determined under the Company’s existing severance plans. The savings generated from the 2022 - 2023 Geolocation Restructuring Program are expected to strengthen the Company's operating margin, with a portion being deployed to support strategic investments, including the Company's Workplace of the Future program and employee retention initiatives. The 2022 - 2023 Geolocation Restructuring Program is expected to be substantially complete by the end of 2023. Cash outlays associated with this program are expected to be $75 million to $100 million, which are expected to be paid through 2024.
On December 22, 2020, the chief executive officer of Moody’s approved a restructuring program (the “2020 MA Strategic Reorganization Restructuring Program”) that the Company estimates will result in annualized savings of $20 million per year. This program relates to a strategic reorganization in the MA reportable segment consisting of severance and related costs primarily determined under the Company’s existing severance plans. The 2020 MA Strategic Reorganization Restructuring Program resulted in a total of $19 million in pre-tax charges and was substantially completed in the first half of 2021. Cash outlays associated with this program are expected to be $20 million, which will be paid through 2022.
Total expense included in the accompanying consolidated statements of operations relating to the aforementioned restructuring program is below:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| 2020 MA Strategic Reorganization Restructuring Program | $ | — | $ | — | $ | (1) | $ | 2 | |||||||||||||||
| 2022 - 2023 Geolocation Restructuring Program | 1 | — | 33 | — | |||||||||||||||||||
| Total Restructuring | $ | 1 | $ | — | $ | 32 | $ | 2 |
Changes to the restructuring liability for the aforementioned restructuring programs during the first nine months of 2022 were as follows:
| Employee Termination Costs | |||||||||||||||||
| Balance as of December 31, 2021 | $ | 4 | |||||||||||||||
| 2020 MA Strategic Reorganization Restructuring Program: | |||||||||||||||||
| Cost incurred and adjustments | (1) | ||||||||||||||||
| Cash payments and adjustments | (2) | ||||||||||||||||
| 2022 - 2023 Geolocation Restructuring Program: | |||||||||||||||||
| Cost incurred and adjustments | 33 | ||||||||||||||||
| Cash payments and adjustments | (6) | ||||||||||||||||
| Balance as of September 30, 2022 | $ | 28 | |||||||||||||||
| Cumulative expense incurred to date | |||||||||||||||||
| 2020 MA Strategic Reorganization Restructuring Program | $ | 19 | |||||||||||||||
| 2022 - 2023 Geolocation Restructuring Program | $ | 33 |
NOTE 12. FAIR VALUE
The table below presents information about items that are carried at fair value at September 30, 2022 and December 31, 2021:
| Fair Value Measurement as of September 30, 2022 | |||||||||||||||||
| Description | Balance | Level 1 | Level 2 | ||||||||||||||
| Assets: | |||||||||||||||||
| Derivatives (1) | $ | 181 | $ | — | $ | 181 | |||||||||||
| Mutual funds | 70 | 70 | — | ||||||||||||||
| Total | $ | 251 | $ | 70 | $ | 181 | |||||||||||
| Liabilities: | |||||||||||||||||
| Derivatives (1) | $ | 265 | $ | — | $ | 265 | |||||||||||
| Total | $ | 265 | $ | — | $ | 265 |
| Fair Value Measurement as of December 31, 2021 | |||||||||||||||||
| Description | Balance | Level 1 | Level 2 | ||||||||||||||
| Assets: | |||||||||||||||||
| Derivatives (1) | $ | 67 | $ | — | $ | 67 | |||||||||||
| Mutual funds | 73 | 73 | — | ||||||||||||||
| Total | $ | 140 | $ | 73 | $ | 67 | |||||||||||
| Liabilities: | |||||||||||||||||
| Derivatives (1) | $ | 52 | $ | — | $ | 52 | |||||||||||
| Total | $ | 52 | $ | — | $ | 52 |
(1) Represents FX forward contracts, interest rate swaps and cross-currency swaps as more fully described in Note 9 to the condensed consolidated financial statements.
The following are descriptions of the methodologies utilized by the Company to estimate the fair value of its derivative contracts, mutual funds and money market mutual funds:
Derivatives:
In determining the fair value of the derivative contracts in the table above, the Company utilizes industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using spot rates, forward points, currency volatilities, interest rates as well as the risk of non-performance of the Company and the counterparties with whom it has derivative contracts. The Company established strict counterparty credit guidelines and only enters into transactions with financial institutions that adhere to these guidelines. Accordingly, the risk of counterparty default is deemed to be minimal.
Mutual funds:
The mutual funds in the table above are deemed to be equity securities with readily determinable fair values with changes in the fair value recognized through net income under ASC Topic 321. The fair value of these instruments is determined using Level 1 inputs as defined in the ASC Topic 820.
NOTE 13. OTHER BALANCE SHEET AND STATEMENTS OF OPERATIONS INFORMATION
The following tables contain additional detail related to certain balance sheet captions:
| September 30, 2022 | December 31, 2021 | ||||||||||
| Other current assets: | |||||||||||
| Prepaid taxes | $ | 203 | $ | 112 | |||||||
| Prepaid expenses | 105 | 99 | |||||||||
| Capitalized costs to obtain and fulfill sales contracts | 90 | 103 | |||||||||
| Other | 65 | 75 | |||||||||
| Total other current assets | $ | 463 | $ | 389 | |||||||
| Other assets: | |||||||||||
| Investments in non-consolidated affiliates | $ | 504 | $ | 443 | |||||||
| Deposits for real-estate leases | 14 | 14 | |||||||||
| Indemnification assets related to acquisitions | 109 | 106 | |||||||||
| Mutual funds and fixed deposits | 80 | 89 | |||||||||
| Company owned life insurance (at contract value) | 38 | 37 | |||||||||
| Costs to obtain sales contracts | 143 | 138 | |||||||||
| Derivative instruments designated as accounting hedges | 181 | 66 | |||||||||
| Pension and other retirement employee benefits | 73 | 77 | |||||||||
| Other | 77 | 64 | |||||||||
| Total other assets | $ | 1,219 | $ | 1,034 | |||||||
| Accounts payable and accrued liabilities: | |||||||||||
| Salaries and benefits | $ | 154 | $ | 211 | |||||||
| Incentive compensation | 155 | 324 | |||||||||
| Customer credits, advanced payments and advanced billings | 83 | 100 | |||||||||
| Dividends | 9 | 6 | |||||||||
| Professional service fees | 63 | 75 | |||||||||
| Interest accrued on debt | 51 | 85 | |||||||||
| Accounts payable | 34 | 47 | |||||||||
| Income taxes | 79 | 115 | |||||||||
| Pension and other retirement employee benefits | 7 | 7 | |||||||||
| Accrued royalties | 18 | 36 | |||||||||
| Foreign exchange forwards on certain assets and liabilities | 28 | 12 | |||||||||
| Restructuring liability | 24 | 4 | |||||||||
| Other | 102 | 120 | |||||||||
| Total accounts payable and accrued liabilities | $ | 807 | $ | 1,142 | |||||||
| Other liabilities: | |||||||||||
| Pension and other retirement employee benefits | $ | 212 | $ | 235 | |||||||
| Interest accrued on UTPs | 44 | 59 | |||||||||
| MAKS indemnification provisions | 22 | 33 | |||||||||
| Income tax liability - non-current portion | 23 | 23 | |||||||||
| Derivative instruments designated as accounting hedges | 237 | 40 | |||||||||
| Restructuring liability - non-current portion | 4 | — | |||||||||
| Other | 46 | 48 | |||||||||
| Total other liabilities | $ | 588 | $ | 438 |
Allowance for credit losses:
During the nine months ended September 30, 2022, the Company increased its allowance for credit losses by $10 million. This increase was primarily due to reserves recorded for the Company's Russian-domiciled customers pursuant to the impacts of the Russia/Ukraine conflict, which is more fully described in Note 1.
Investments in non-consolidated affiliates:
The following table provides additional detail regarding Moody's investments in non-consolidated affiliates, as included in other assets in the consolidated balance sheets:
| September 30, 2022 | December 31, 2021 | ||||||||||
| Equity method investments (1) | $ | 178 | $ | 121 | |||||||
| Investments measured using the measurement alternative (2) | 321 | 318 | |||||||||
| Other | 5 | 4 | |||||||||
| Total investments in non-consolidated affiliates | $ | 504 | $ | 443 | |||||||
| (1) Equity securities in which the Company has significant influence over the investee but does not have a controlling financial interest in accordance with ASC Topic 323. | |||||||||||
| (2) Equity securities without readily determinable fair value for which the Company has elected to apply the measurement alternative in accordance with ASC Topic 321. |
Moody's holds various investments accounted for under the equity method, the most significant of which is the Company's minority investment in CCXI. Moody's also holds various investments measured using the measurement alternative, the most significant of which is the Company's minority interest in BitSight.
Earnings from non-consolidated affiliates, which are included within other non-operating income, net, are disclosed within the table below.
Other non-operating income (expense), net:
The following table summarizes the components of other non-operating income (expense), net:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| FX gain/(loss) (1) | $ | 13 | $ | (2) | $ | (9) | $ | (2) | |||||||||||||||
| Purchase price hedge loss (2) | — | (13) | — | (13) | |||||||||||||||||||
| Net periodic pension costs - other components | 6 | 4 | 18 | 5 | |||||||||||||||||||
| Income from investments in non-consolidated affiliates | 10 | 6 | 14 | 15 | |||||||||||||||||||
| Other | (3) | 1 | (1) | 13 | |||||||||||||||||||
| Total | $ | 26 | $ | (4) | $ | 22 | $ | 18 | |||||||||||||||
| (1) FX loss for the nine months ended September 30, 2022 includes FX translation losses of $20 million reclassified to earnings resulting from the Company no longer conducting commercial operations in Russia. | |||||||||||||||||||||||
| (2) The amounts for the three and nine months ended September 30, 2021 represent a loss in the prior year on a forward contract used to hedge a portion of the GBP denominated RMS purchase price. |
NOTE 14. COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table provides details about the reclassifications out of AOCL:
| Three Months Ended September 30, | Location in the consolidated statements of operations | ||||||||||||||||
| Losses on cash flow hedges | 2022 | 2021 | |||||||||||||||
| Interest rate contract | $ | (1) | $ | (1) | Other non-operating income, net | ||||||||||||
| Income tax effect of item above | 1 | — | Provision for income taxes | ||||||||||||||
| Total net gains (losses) on cash flow hedges | — | (1) | |||||||||||||||
| Pension and other retirement benefits | |||||||||||||||||
| Amortization of actuarial losses and prior service costs included in net income | (1) | (2) | Other non-operating income, net | ||||||||||||||
| Settlement charge | — | (1) | Other non-operating income, net | ||||||||||||||
| Total before income taxes | (1) | (3) | |||||||||||||||
| Income tax effect of items above | — | 1 | Provision for income taxes | ||||||||||||||
| Total pension and other retirement benefits | (1) | (2) | |||||||||||||||
| Total net losses included in Net Income attributable to reclassifications out of AOCL | $ | (1) | $ | (3) | |||||||||||||
| Nine Months Ended September 30, | Location in the consolidated statements of operations | ||||||||||||||||
| Losses on currency translation adjustments | 2022 | 2021 | |||||||||||||||
| Foreign currency translation adjustments - reclassification of losses included in net income | $ | (20) | $ | — | Other non-operating income, net | ||||||||||||
| Total losses on currency translation adjustments | (20) | — | |||||||||||||||
| Losses on cash flow hedges | |||||||||||||||||
| Interest rate contract | (2) | (2) | Other non-operating income, net | ||||||||||||||
| Income tax effect of item above | 1 | — | Provision for income taxes | ||||||||||||||
| Total net losses on cash flow hedges | (1) | (2) | |||||||||||||||
| Gains (losses) on net investment hedges | |||||||||||||||||
| FX forwards | — | 2 | Other non-operating income, net | ||||||||||||||
| Income tax effect of item above | — | (1) | Provision for income taxes | ||||||||||||||
| Total net gains on net investment hedges | — | 1 | |||||||||||||||
| Pension and other retirement benefits | |||||||||||||||||
| Amortization of actuarial losses and prior service costs included in net income | (2) | (8) | Other non-operating income, net | ||||||||||||||
| Settlement charge | — | (8) | Other non-operating income, net | ||||||||||||||
| Total before income taxes | (2) | (16) | |||||||||||||||
| Income tax effect of item above | — | 4 | Provision for income taxes | ||||||||||||||
| Total pension and other retirement benefits | (2) | (12) | |||||||||||||||
| Total net losses included in Net Income attributable to reclassifications out of AOCL | $ | (23) | $ | (13) |
The following tables show changes in AOCL by component (net of tax):
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| Gains/(Losses) | Pension and Other Retirement Benefits | Cash Flow Hedges | Foreign Currency Translation Adjustments | Net Investment Hedges | Total | Pension and Other Retirement Benefits | Cash Flow Hedges | Foreign Currency Translation Adjustments | Net Investment Hedges | Total | |||||||||||||||||||||||||
| Balance at June 30, | $ | (46) | $ | (46) | $ | (756) | $ | 249 | $ | (599) | $ | (108) | $ | (48) | $ | (152) | $ | (117) | $ | (425) | |||||||||||||||
| Other comprehensive income/(loss) before reclassifications | — | — | (343) | 193 | (150) | 3 | — | (116) | 73 | (40) | |||||||||||||||||||||||||
| Amounts reclassified from AOCL | 1 | — | — | — | 1 | 2 | 1 | — | — | 3 | |||||||||||||||||||||||||
| Other comprehensive income/(loss) | 1 | — | (343) | 193 | (149) | 5 | 1 | (116) | 73 | (37) | |||||||||||||||||||||||||
| Balance at September 30, | $ | (45) | $ | (46) | $ | (1,099) | $ | 442 | $ | (748) | $ | (103) | $ | (47) | $ | (268) | $ | (44) | $ | (462) |
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| Gains/(Losses) | Pension and Other Retirement Benefits | Cash Flow Hedges | Foreign Currency Translation Adjustments | Net Investment Hedges | Total | Pension and Other Retirement Benefits | Cash Flow Hedges | Foreign Currency Translation Adjustments | Net Investment Hedges | Total | |||||||||||||||||||||||||
| Balance at December 31, | $ | (49) | $ | (47) | $ | (335) | $ | 21 | $ | (410) | $ | (118) | $ | (49) | $ | (45) | $ | (220) | $ | (432) | |||||||||||||||
| Other comprehensive income/(loss) before reclassifications | 2 | — | (784) | 421 | (361) | 3 | — | (223) | 177 | (43) | |||||||||||||||||||||||||
| Amounts reclassified from AOCL | 2 | 1 | 20 | — | 23 | 12 | 2 | — | (1) | 13 | |||||||||||||||||||||||||
| Other comprehensive income/(loss) | 4 | 1 | (764) | 421 | (338) | 15 | 2 | (223) | 176 | (30) | |||||||||||||||||||||||||
| Balance at September 30, | $ | (45) | $ | (46) | $ | (1,099) | $ | 442 | $ | (748) | $ | (103) | $ | (47) | $ | (268) | $ | (44) | $ | (462) | |||||||||||||||
NOTE 15. INDEBTEDNESS
The Company’s debt is recorded at its carrying amount, which represents the issuance amount plus or minus any issuance premium or discount, except for certain debt as depicted in the table below, which is recorded at the carrying amount adjusted for the fair value of an interest rate swap used to hedge the fair value of the note.
The following table summarizes total indebtedness:
| September 30, 2022 | |||||||||||||||||||||||||||||
| Notes Payable: | Principal Amount | Fair Value of Interest Rate Swaps (1) | Unamortized (Discount) Premium | Unamortized Debt Issuance Costs | Carrying Value | ||||||||||||||||||||||||
| 4.875% 2013 Senior Notes, due 2024 | $ | 500 | $ | — | $ | (1) | $ | (1) | $ | 498 | |||||||||||||||||||
| 5.25% 2014 Senior Notes, due 2044 | 600 | (42) | 3 | (5) | 556 | ||||||||||||||||||||||||
| 1.75% 2015 Senior Notes, due 2027 | 490 | — | — | (2) | 488 | ||||||||||||||||||||||||
| 3.25% 2017 Senior Notes, due 2028 | 500 | (38) | (3) | (2) | 457 | ||||||||||||||||||||||||
| 4.25% 2018 Senior Notes, due 2029 | 400 | (41) | (2) | (2) | 355 | ||||||||||||||||||||||||
| 4.875% 2018 Senior Notes, due 2048 | 400 | (44) | (6) | (4) | 346 | ||||||||||||||||||||||||
| 0.950% 2019 Senior Notes, due 2030 | 735 | — | (2) | (4) | 729 | ||||||||||||||||||||||||
| 3.75% 2020 Senior Notes, due 2025 | 700 | (28) | (1) | (3) | 668 | ||||||||||||||||||||||||
| 3.25% 2020 Senior Notes, due 2050 | 300 | — | (4) | (3) | 293 | ||||||||||||||||||||||||
| 2.55% 2020 Senior Notes, due 2060 | 500 | — | (4) | (5) | 491 | ||||||||||||||||||||||||
| 2.00% 2021 Senior Notes, due 2031 | 600 | — | (7) | (4) | 589 | ||||||||||||||||||||||||
| 2.75% 2021 Senior Notes, due 2041 | 600 | — | (13) | (5) | 582 | ||||||||||||||||||||||||
| 3.10% 2021 Senior Notes, due 2061 | 500 | — | (7) | (5) | 488 | ||||||||||||||||||||||||
| 3.75% 2022 Senior Notes, due 2052 | 500 | (32) | (9) | (5) | 454 | ||||||||||||||||||||||||
| 4.25% 2022 Senior Notes, due 2032 | 500 | (12) | (2) | (4) | 482 | ||||||||||||||||||||||||
| Total long-term debt | $ | 7,825 | $ | (237) | $ | (58) | $ | (54) | $ | 7,476 | |||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||
| Notes Payable: | Principal Amount | Fair Value of Interest Rate Swaps (1) | Unamortized (Discount) Premium | Unamortized Debt Issuance Costs | Carrying Value | ||||||||||||||||||||||||
| 4.875% 2013 Senior Notes, due 2024 | $ | 500 | $ | — | $ | (1) | $ | (1) | $ | 498 | |||||||||||||||||||
| 5.25% 2014 Senior Notes, due 2044 | 600 | (7) | 3 | (5) | 591 | ||||||||||||||||||||||||
| 1.75% 2015 Senior Notes, due 2027 | 568 | — | — | (2) | 566 | ||||||||||||||||||||||||
| 2.625% 2017 Senior Notes, due 2023 | 500 | 5 | — | (1) | 504 | ||||||||||||||||||||||||
| 3.25% 2017 Senior Notes, due 2028 | 500 | 8 | (3) | (2) | 503 | ||||||||||||||||||||||||
| 4.25% 2018 Senior Notes, due 2029 | 400 | — | (2) | (2) | 396 | ||||||||||||||||||||||||
| 4.875% 2018 Senior Notes, due 2048 | 400 | (7) | (6) | (4) | 383 | ||||||||||||||||||||||||
| 0.950% 2019 Senior Notes, due 2030 | 853 | — | (2) | (5) | 846 | ||||||||||||||||||||||||
| 3.75% 2020 Senior Notes, due 2025 | 700 | (9) | (1) | (4) | 686 | ||||||||||||||||||||||||
| 3.25% 2020 Senior Notes, due 2050 | 300 | — | (4) | (3) | 293 | ||||||||||||||||||||||||
| 2.55% 2020 Senior Notes, due 2060 | 500 | — | (4) | (5) | 491 | ||||||||||||||||||||||||
| 2.00% 2021 Senior Notes, due 2031 | 600 | — | (8) | (5) | 587 | ||||||||||||||||||||||||
| 2.75% 2021 Senior Notes, due 2041 | 600 | — | (13) | (6) | 581 | ||||||||||||||||||||||||
| 3.10% 2021 Senior Notes, due 2061 | 500 | — | (7) | (5) | 488 | ||||||||||||||||||||||||
| Total long-term debt | $ | 7,521 | $ | (10) | $ | (48) | $ | (50) | $ | 7,413 |
(1) The fair value of interest rate swaps in the table above represents the cumulative amount of fair value hedging adjustments included in the carrying amount of the hedged debt.
Notes Payable
In the first nine months of 2022, the Company issued the 2022 Senior Notes due 2052 and the 2022 Senior Notes due 2032. The key terms of this debt issuance are set forth in the table above.
Additionally, in the first nine months of 2022, the Company fully repaid $500 million of the 2017 Senior Notes due 2023.
At September 30, 2022, the Company was in compliance with all covenants contained within all of the debt agreements. All the debt agreements contain cross default provisions which state that default under one of the aforementioned debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under those instruments to be immediately due and payable. As of September 30, 2022, there were no such cross defaults.
The repayment schedule for the Company’s borrowings is as follows:
| Year Ending December 31, | Year Ending Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 (After September 30,) | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 500 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2025 | 700 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2026 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Thereafter | 6,625 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 7,825 |
Interest expense, net
The following table summarizes the components of interest as presented in the consolidated statements of operations and the cash paid for interest:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Income | $ | 5 | $ | 3 | $ | 9 | $ | 7 | |||||||||||||||
| Expense on borrowings | (54) | (47) | (152) | (129) | |||||||||||||||||||
| Income (expense) on UTPs and other tax related liabilities(2) | (5) | (5) | (11) | 25 | |||||||||||||||||||
| Net periodic pension costs - interest component | (4) | (4) | (12) | (12) | |||||||||||||||||||
| Interest expense, net | $ | (58) | $ | (53) | $ | (166) | $ | (109) | |||||||||||||||
| Interest paid(1) | $ | 77 | $ | 53 | $ | 167 | $ | 139 |
(1) Interest paid includes net settlements on interest rate swaps more fully discussed in Note 9.
(2) Income (expense) on UTPs and other tax related liabilities for the nine months ended September 30, 2021 includes a $40 million benefit relating to the reversal of tax-related interest accruals pursuant to the resolution of tax matters.
The fair value and carrying value of the Company’s debt as of September 30, 2022 and December 31, 2021 are as follows:
| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||||||||||||||
| Long-term debt | $ | 7,476 | $ | 6,426 | $ | 7,413 | $ | 7,982 |
The fair value of the Company’s long-term debt is estimated based on quoted market prices for similar instruments. Accordingly, the inputs used to estimate the fair value of the Company’s long-term debt are classified as Level 2 inputs within the fair value hierarchy.
NOTE 16. LEASE COMMITMENTS
The Company has operating leases, substantially all of which relate to the lease of office space. The Company’s leases which are classified as finance leases are not material to the consolidated financial statements. Certain of the Company’s leases include options to renew, with renewal terms that can extend the lease term from one year to 20 years at the Company’s discretion.
The following table presents the components of the Company’s lease cost:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Operating lease cost | $ | 25 | $ | 24 | $ | 77 | $ | 71 | |||||||||||||||
| Sublease income | (2) | (2) | (6) | (4) | |||||||||||||||||||
| Variable lease cost | 5 | 5 | 15 | 15 | |||||||||||||||||||
| Total lease cost | $ | 28 | $ | 27 | $ | 86 | $ | 82 |
The following tables present other information related to the Company’s operating leases:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | 29 | $ | 27 | $ | 89 | $ | 83 | |||||||||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 1 | $ | 117 | $ | 31 | $ | 123 |
| September 30, 2022 | September 30, 2021 | |||||||||||||
| Weighted-average remaining lease term | 5.1 years | 5.9 years | ||||||||||||
| Weighted-average discount rate applied to operating leases | 3.1 | % | 3.1 | % |
The following table presents a maturity analysis of the future minimum lease payments included within the Company’s operating lease liabilities at September 30, 2022:
| Year Ending December 31, | Operating Leases | |||||||
| 2022 (After September 30,) | $ | 29 | ||||||
| 2023 | 117 | |||||||
| 2024 | 111 | |||||||
| 2025 | 96 | |||||||
| 2026 | 78 | |||||||
| After 2026 | 102 | |||||||
| Total lease payments (undiscounted) | 533 | |||||||
| Less: Interest | 40 | |||||||
| Present value of lease liabilities: | $ | 493 | ||||||
| Lease liabilities - current | $ | 104 | ||||||
| Lease liabilities - noncurrent | $ | 389 |
NOTE 17. CONTINGENCIES
Given the nature of the Company's activities, Moody’s and its subsidiaries are subject to legal and tax proceedings, governmental, regulatory and legislative investigations, subpoenas and other inquiries, and claims and litigation by governmental and private parties that are based on ratings assigned by MIS or that are otherwise incidental to the Company’s business. Moody’s and MIS also are subject to periodic reviews, inspections, examinations and investigations by regulators in the U.S. and other jurisdictions, any of which may result in claims, legal proceedings, assessments, fines, penalties or restrictions on business activities. Moody’s also is subject to ongoing tax audits as addressed in Note 4 to the condensed consolidated financial statements.
Management periodically assesses the Company’s liabilities and contingencies in connection with these matters based upon the latest information available. For claims, litigation and proceedings and governmental investigations and inquiries not related to income taxes, the Company records liabilities in the consolidated financial statements when it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated and periodically adjusts these as appropriate. When the reasonable estimate of the loss is within a range of amounts, the minimum amount of the range is accrued unless some higher amount within the range is a better estimate than another amount within the range. In instances when a loss is reasonably possible but uncertainties exist related to the probable outcome and/or the amount or range of loss, management does not record a liability but discloses the contingency if material. As additional information becomes available, the Company adjusts its assessments and estimates of such matters accordingly. Moody’s also discloses material pending legal proceedings pursuant to SEC rules and other pending matters as it may determine to be appropriate.
In view of the inherent difficulty of assessing the potential outcome of legal proceedings, governmental, regulatory and legislative investigations and inquiries, claims and litigation and similar matters and contingencies, particularly when the claimants seek large or indeterminate damages or assert novel legal theories or the matters involve a large number of parties, the Company often cannot predict what the eventual outcome of the pending matters will be or the timing of any resolution of such matters. The Company also may be unable to predict the impact (if any) that any such matters may have on how its business is conducted, on its competitive position or on its financial position, results of operations or cash flows. As the process to resolve any pending matters progresses, management will continue to review the latest information available and assess its ability to predict the outcome of such matters and the effects, if any, on its operations and financial condition and to accrue for and disclose such matters as and when required. However, because such matters are inherently unpredictable and unfavorable developments or resolutions can occur, the ultimate outcome of such matters, including the amount of any loss, may differ from those estimates.
NOTE 18. SEGMENT INFORMATION
The Company is organized into two operating segments: MIS and MA and accordingly, the Company reports in two reportable segments: MIS and MA.
The MIS segment consists of five LOBs. The CFG, FIG, PPIF and SFG LOBs generate revenue principally from fees for the assignment and ongoing monitoring of credit ratings on debt obligations and the entities that issue such obligations in markets worldwide. The MIS Other LOB primarily consists of financial instruments pricing services in the Asia-Pacific region, ICRA non-ratings revenue and revenue from providing ESG research, data and assessments.
The MA segment develops a wide range of products and services that support the risk management activities of institutional participants in global financial markets. The MA segment consists of three LOBs - Decision Solutions, Research and Insights, and Data and Information.
Revenue for MIS and expenses for MA include intersegment fees charged to MA for the rights to use and distribute content, data and products developed by MIS. Additionally, revenue for MA and expenses for MIS include an intersegment fee charged to MIS from MA for certain MA products and services utilized in MIS’s ratings process. These intersegment fees are generally based on the market value of the products and services being transferred between the segments.
Overhead expenses include costs such as rent and occupancy, information technology and support staff such as finance, human resources and legal. Such costs and corporate expenses that exclusively benefit one segment are fully charged to that segment.
For overhead costs and corporate expenses that benefit both segments, costs are allocated to each segment based on the segment’s share of full-year 2018 actual revenue which comprises a “Baseline Pool” established in 2019, which will remain fixed over time. In subsequent periods, incremental overhead costs (or reductions thereof) will be allocated to each segment based on the prevailing shares of total revenue represented by each segment.
“Eliminations” in the following table represent intersegment revenue/expense. Moody’s does not report the Company’s assets by reportable segment, as this metric is not used by the chief operating decision maker to allocate resources to the segments. Consequently, it is not practical to show assets by reportable segment.
Financial Information by Segment
The table below shows revenue and Adjusted Operating Income by reportable segment. Adjusted Operating Income is a financial metric utilized by the Company’s chief operating decision maker to assess the profitability of each reportable segment. Refer to Note 2 for further details on the components of the Company’s revenue.
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| MIS | MA | Eliminations | Consolidated | MIS | MA | Eliminations | Consolidated | ||||||||||||||||||||||||||||||||||||||||
| Total external revenue | $ | 590 | $ | 685 | $ | — | $ | 1,275 | $ | 925 | $ | 601 | $ | — | $ | 1,526 | |||||||||||||||||||||||||||||||
| Intersegment revenue | 43 | 2 | (45) | — | 42 | 2 | (44) | — | |||||||||||||||||||||||||||||||||||||||
| Revenue | 633 | 687 | (45) | 1,275 | 967 | 603 | (44) | 1,526 | |||||||||||||||||||||||||||||||||||||||
| Operating, SG&A | 344 | 479 | (45) | 778 | 387 | 446 | (44) | 789 | |||||||||||||||||||||||||||||||||||||||
| Adjusted Operating Income | $ | 289 | $ | 208 | $ | — | $ | 497 | $ | 580 | $ | 157 | $ | — | $ | 737 | |||||||||||||||||||||||||||||||
| Add: | |||||||||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 21 | 62 | — | 83 | 17 | 44 | — | 61 | |||||||||||||||||||||||||||||||||||||||
| Restructuring | — | 1 | — | 1 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Operating Income | $ | 413 | $ | 676 | |||||||||||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| MIS | MA | Eliminations | Consolidated | MIS | MA | Eliminations | Consolidated | ||||||||||||||||||||||||||||||||||||||||
| Total external revenue | $ | 2,123 | $ | 2,055 | $ | — | $ | 4,178 | $ | 2,941 | $ | 1,738 | $ | — | $ | 4,679 | |||||||||||||||||||||||||||||||
| Intersegment revenue | 129 | 5 | (134) | — | 124 | 6 | (130) | — | |||||||||||||||||||||||||||||||||||||||
| Revenue | 2,252 | 2,060 | (134) | 4,178 | 3,065 | 1,744 | (130) | 4,679 | |||||||||||||||||||||||||||||||||||||||
| Operating, SG&A | 1,038 | 1,423 | (134) | 2,327 | 1,079 | 1,218 | (130) | 2,167 | |||||||||||||||||||||||||||||||||||||||
| Adjusted Operating Income | $ | 1,214 | $ | 637 | $ | — | $ | 1,851 | $ | 1,986 | $ | 526 | $ | — | $ | 2,512 | |||||||||||||||||||||||||||||||
| Add: | |||||||||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 60 | 182 | — | 242 | 53 | 127 | — | 180 | |||||||||||||||||||||||||||||||||||||||
| Restructuring | 15 | 17 | — | 32 | — | 2 | — | 2 | |||||||||||||||||||||||||||||||||||||||
| Operating Income | $ | 1,577 | $ | 2,330 |
The cumulative restructuring charge for the MA reportable segment related to the 2020 MA Strategic Reorganization Restructuring Program is $19 million. The cumulative restructuring charge for the MIS and MA reportable segments related to the 2022 - 2023 Geolocation Restructuring Program is $15 million and $18 million, respectively. The restructuring programs are more fully discussed in Note 11.
Consolidated Revenue Information by Geographic Area
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| United States | $ | 668 | $ | 841 | $ | 2,214 | $ | 2,557 | |||||||||||||||
| Non-U.S.: | |||||||||||||||||||||||
| EMEA | 393 | 443 | 1,271 | 1,402 | |||||||||||||||||||
| Asia-Pacific | 129 | 149 | 422 | 460 | |||||||||||||||||||
| Americas | 85 | 93 | 271 | 260 | |||||||||||||||||||
| Total Non-U.S. | 607 | 685 | 1,964 | 2,122 | |||||||||||||||||||
| Total | $ | 1,275 | $ | 1,526 | $ | 4,178 | $ | 4,679 |
NOTE 19. SUBSEQUENT EVENT
On October 24, 2022, the Board approved the declaration of a quarterly dividend of $0.70 per share of Moody’s common stock, payable on December 14, 2022 to shareholders of record at the close of business on November 23, 2022.
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