Moody's Corporation Reports Results for Third Quarter 2019

Moody's Corporation (NYSE: MCO) today announced results for the third quarter of 2019, as well as updated its current outlook for full year 2019.

"Moody's revenue increased 15% in the third quarter as Moody's Investors Service benefited from strong corporate and public finance sector bond issuance amid favorable market conditions. Furthermore, Moody's Analytics continued to deliver robust performance across all business lines, particularly in ERS, driven by solid demand for its analytical solutions," said Raymond McDaniel, President and Chief Executive Officer of Moody's. "In light of stronger than anticipated top-line growth and disciplined expense management, we are raising our full year 2019 adjusted diluted EPS guidance range to $8.05 to $8.20."

THIRD QUARTER REVENUE UP 15%

Moody's Corporation reported record revenue of $1.2 billion for the three months ended September 30, 2019, up 15% from the prior-year period.

U.S. revenue was $660 million, up 18% from the prior-year period. Non-U.S. revenue was $581 million, up 11%, and represented 47% of total revenue, compared to 48% in the third quarter of 2018. Foreign currency translation unfavorably impacted Moody's revenue by 2%.

Moody's Investors Service (MIS) Third Quarter Revenue Up 16%

Revenue for MIS for the third quarter of 2019 was $747 million, up 16% from the prior-year period and above the 10% increase in overall debt issuance² due to a favorable mix of debt issuers. U.S. revenue was $453 million, up 18% from the prior-year period. Non-U.S. revenue was $293 million, up 13%, and represented 39% of MIS revenue, compared to 40% in the third quarter of 2018. Foreign currency translation unfavorably impacted MIS revenue by 1%. The MIS adjusted operating margin was 60.0%.

Corporate finance revenue was $392 million, up 28% from the prior-year period. This result reflected robust global fixed-rate bond issuance, driven by opportunistic and M&A-related financing. U.S. and non-U.S. corporate finance revenues were up 33% and 18%, respectively.

Structured finance revenue was $105 million, down 8% from the prior-year period. This result was driven by a decline in global collateralized loan obligation (CLO) activity due to wider spreads. U.S. and non-U.S. structured finance revenues were down 4% and 14%, respectively.

Financial institutions revenue was $121 million, up 1% from the prior-year period. This result reflected activity from international infrequent bank issuers, partially offset by a decline in the U.S. insurance sector as compared to an elevated prior-year period. U.S. financial institutions revenue was down 10%, while non-U.S. revenue was up 12%.

Public, project and infrastructure finance revenue was $120 million, up 21% from the prior-year period. This result reflected strong U.S. public finance issuance, including surges in refunding supply and taxable transactions, as well as opportunistic infrastructure finance issuance in Latin America and Canada. U.S. and non-U.S. public, project and infrastructure finance revenues were up 23% and 19%, respectively.

Moody's Analytics (MA) Third Quarter Revenue Up 13%

Revenue for MA for the third quarter of 2019 was $494 million, up 13% from the prior-year period. U.S. revenue was $206 million, up 18% from the prior-year period. Non-U.S. revenue was $288 million, up 10%, and represented 58% of MA revenue, compared to 60% in the third quarter of 2018. Foreign currency translation unfavorably impacted MA revenue by 2%. Organic MA revenue for the third quarter of 2019, which excluded revenue from the acquisitions of Reis and RiskFirst, as well as partial quarter revenue for Omega Performance, was $481 million, up 10% from the prior-year period. The MA adjusted operating margin was 29.4%.

Research, data and analytics (RD&A) revenue was $318 million, up 13% from the prior-year period. U.S. and non-U.S. RD&A revenues were up 20% and 9%, respectively. Organic RD&A revenue, which excluded revenue from Reis, was $309 million, up 10%, with strength in new business areas and more established product lines. Revenue growth was driven by strong demand for Bureau van Dijk solutions that address customer identity requirements, such as know-your-customer, anti-money laundering, anti-bribery and sanctions compliance. The credit research and ratings data feeds product areas also generated strong results.

Enterprise risk solutions (ERS) revenue was $133 million, up 16% from the prior-year period. U.S. and non-U.S. ERS revenues were up 12% and 18%, respectively. Organic ERS revenue, which excluded partial quarter revenue from RiskFirst, was $131 million, up 13%, driven by strong demand for credit assessment and loan origination solutions, along with products to meet new accounting standards.

Professional services revenue was $43 million, up 7% from the prior-year period. U.S. professional services revenue was up 20%, while non-U.S. revenue was down 1%. Organic professional services revenue, which excluded revenue from Omega Performance, was $42 million, up 4% from the prior-year period.

THIRD QUARTER OPERATING EXPENSES AND OPERATING INCOME

Third quarter 2019 operating expenses for Moody's Corporation totaled $692 million, up 13% from the prior-year period. The increase was primarily driven by higher accruals for incentive compensation, operating expenses attributable to acquisitions completed within the last year, a captive insurance company settlement, as well as additional compensation expense for merit increases and new hires. This growth was partially offset by the beneficial impacts of the restructuring plan and cost control initiatives. Foreign currency translation favorably impacted operating expenses by 2%.

Operating income of $549 million was up 18% from the third quarter of 2018. Adjusted operating income of $614 million was up 19% from the prior-year period, and excluded depreciation and amortization, a captive insurance company settlement and a non-tax-deductible impairment charge related to the planned divestiture of Moody's Analytics Knowledge Services ("MAKS Impairment Charge"). Foreign currency translation unfavorably impacted operating income and adjusted operating income by 2% each. Moody's operating margin was 44.2%, up 100 basis points from the prior-year period, and the adjusted operating margin was 49.5%, up 190 basis points.

Moody's effective tax rate for the third quarter of 2019 was 25.4%, up 100 basis points from the prior-year period, primarily due to non-U.S. tax rate changes.

YEAR-TO-DATE REVENUE UP 6%

Moody's Corporation reported revenue of $3.6 billion for the first nine months of 2019, up 6% from the prior-year period. U.S. revenue was $1.9 billion, up 7% from the prior-year period. Non-U.S. revenue was $1.7 billion, up 5%, and represented 47% of total revenue, consistent with the first nine months of 2018. Foreign currency translation unfavorably impacted Moody's revenue by 2%.

MIS revenue totaled $2.2 billion for the first nine months of 2019, up 2% from the prior-year period, despite a 5% decline in issuance activity³. U.S. revenue was $1.3 billion, up 2%. Non-U.S. revenue was $854 million, up 1%, and represented 40% of MIS revenue, consistent with the first nine months of 2018. Foreign currency translation unfavorably impacted MIS revenue by 1%. The MIS adjusted operating margin was 58.5%.

MA revenue totaled $1.4 billion for the first nine months of 2019, up 14% from the prior-year period. U.S. revenue of $609 million was up 19%. Non-U.S. revenue was $832 million, up 11%, and represented 58% of MA revenue, compared to 59% in the first nine months of 2018. Foreign currency translation unfavorably impacted MA revenue by 3%. Organic MA revenue for the first nine months of 2019, which excluded revenue from the acquisitions of Reis, Omega Performance and RiskFirst, was $1.4 billion, up 11% from the prior-year period. The MA adjusted operating margin was 28.6%.

YEAR-TO-DATE OPERATING EXPENSES UP 11%

Operating expenses for Moody's Corporation in the first nine months of 2019 totaled $2.1 billion, up 11% from the prior-year period. Four percentage points of this increase were attributable to a restructuring charge of $58 million and the MAKS Impairment Charge of $11 million. Other drivers of expense growth primarily reflected additional compensation expense for new hires and merit increases, operating expenses attributable to acquisitions completed within the last year, higher accruals for incentive compensation, as well as a captive insurance company settlement. This growth was partially offset by the beneficial impacts of the restructuring plan and cost control initiatives. Foreign currency translation favorably impacted operating expenses by 2%.

Operating income of $1.5 billion was approximately flat as compared to the first nine months of 2018. Adjusted operating income of $1.7 billion was up 6% from the prior-year period. Foreign currency translation unfavorably impacted operating income and adjusted operating income by 2% each. Moody's operating margin was 41.5% and the adjusted operating margin was 48.2%.

The effective tax rate for the first nine months of 2019 was 21.3%, up from 21.0% in the prior-year period. This increase was primarily due to taxes related to the planned divestiture of MAKS and non-U.S. tax rate changes, partially offset by benefits related to regulations issued in the first quarter of 2019 associated with the U.S. Tax Cuts and Jobs Act.

Diluted EPS of $5.54 was up 2% from the first nine months of 2018. Adjusted diluted EPS of $6.29 was up 9%. Both year-to-date diluted EPS and adjusted diluted EPS included a $0.22 per share tax benefit related to employee share-based compensation, compared to a $0.19 per share tax benefit in the first nine months of 2018.

CAPITAL ALLOCATION AND LIQUIDITY

Capital Returned to Shareholders

During the third quarter of 2019, Moody's repurchased 0.5 million shares at a total cost of $113 million, or an average cost of $211.15 per share, and issued 0.2 million shares as part of its employee stock-based compensation plans. Moody's returned $95 million to its shareholders via dividend payments during the third quarter of 2019.

Over the first nine months of 2019, Moody's repurchased 4.0 million shares at a total cost of $728 million, or an average cost of $181.49 per share, and issued a net 1.5 million shares as part of its employee stock-based compensation plans. The net amount includes shares withheld for employee payroll taxes.

Moody's returned $284 million to its shareholders via dividend payments during the first nine months of 2019 and on October 21^st, the Board of Directors declared a regular quarterly dividend of $0.50 per share of Moody's common stock. This dividend will be payable on December 12, 2019 to stockholders of record at the close of business on November 21, 2019.

Outstanding shares as of September 30, 2019 totaled 189 million, down 1% from September 30, 2018. As of September 30, 2019, Moody's had approximately $597 million of share repurchase authority remaining.

Sources of Capital and Cash Flow Generation

At quarter-end, Moody's had $5.2 billion of outstanding debt and approximately $1.0 billion of additional borrowing capacity under its revolving credit facility. Total cash, cash equivalents and short-term investments at quarter-end were $1.3 billion, down from $1.8 billion on December 31, 2018.

Cash flow from operations for the first nine months of 2019 was $1.2 billion and free cash flow was $1.1 billion.

ASSUMPTIONS AND OUTLOOK FOR FULL YEAR 2019

Moody's outlook for 2019 is based on assumptions about many geopolitical conditions and macroeconomic and capital market factors, including interest rates, foreign currency exchange rates, corporate profitability and business investment spending, mergers and acquisitions, consumer borrowing and securitization, and the amount of debt issued. These assumptions are subject to uncertainty, and results for the year could differ materially from our current outlook. Our guidance assumes foreign currency translation at end-of-quarter exchange rates. Specifically, our forecast for the remainder of 2019 reflects exchange rates for the British pound (£) of $1.23 to £1 and for the euro (€) of $1.09 to €1.

A full summary of Moody's guidance as of October 30, 2019, is included in Table 12 - 2019 Outlook table at the end of this press release.

CONFERENCE CALL

Moody's will hold a conference call to discuss third quarter 2019 results as well as its 2019 outlook on October 30, 2019, at 11:30 a.m. Eastern Time ("ET"). Individuals within the U.S. and Canada can access the call by dialing +1-877-400-0505. Other callers should dial +1-720-452-9084. Please dial into the call by 11:20 a.m. ET. The passcode for the call is 2733003.

The teleconference will also be webcast with an accompanying slide presentation which can be accessed through Moody's Investor Relations website, http://ir.moodys.com under "Featured and Upcoming Events & Presentations". The webcast will be available until 3:30 p.m. ET on November 28, 2019.

A replay of the teleconference will be available from 3:30 p.m. ET, October 30, 2019 until 3:30 p.m. ET, November 28, 2019. The replay can be accessed from within the United States and Canada by dialing +1-888-203-1112. Other callers can access the replay at +1-719-457-0820. The replay confirmation code is 2733003.

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ABOUT MOODY'S CORPORATION

Moody's is an essential component of the global capital markets, providing credit ratings, research, tools and analysis that contribute to transparent and integrated financial markets. Moody's Corporation (NYSE: MCO) is the parent company of Moody's Investors Service, which provides credit ratings and research covering debt instruments and securities, and Moody's Analytics, which offers leading-edge software, advisory services and research for credit and economic analysis and financial risk management. The corporation, which reported revenue of $4.4 billion in 2018, employs approximately 13,700 people worldwide and maintains a presence in 44 countries. Further information is available at www.moodys.com.

Moody’s published its inaugural Sustainability Accounting Standards Board, or SASB, index on moodys.com/csr.

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995

Certain statements contained in this release are forward-looking statements and are based on future expectations, plans and prospects for the Company’s business and operations that involve a number of risks and uncertainties. Such statements may include, among other words, “believe”, “expect”, “anticipate”, “intend”, “plan”, “will”, “predict”, “potential”, “continue”, “strategy”, “aspire”, “target”, “forecast”, “project”, “estimate”, “should”, “could”, “may” and similar expressions or words and variations thereof that convey the prospective nature of events or outcomes generally indicative of forward-looking statements. The forward-looking statements and other information in this release are made as of the date hereof (except where noted otherwise), and the Company undertakes no obligation (nor does it intend) to publicly supplement, update or revise such statements on a going-forward basis, whether as a result of subsequent developments, changed expectations or otherwise, except as required by applicable law or regulation. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company is identifying examples of factors, risks and uncertainties that could cause actual results to differ, perhaps materially, from those indicated by these forward-looking statements. Those factors, risks and uncertainties include, but are not limited to, credit market disruptions or economic slowdowns, which could affect the volume of debt and other securities issued in domestic and/or global capital markets; other matters that could affect the volume of debt and other securities issued in domestic and/or global capital markets, including regulation, credit quality concerns, changes in interest rates and other volatility in the financial markets such as that due to uncertainty as companies transition away from LIBOR and the U.K.’s pending withdrawal from the EU; the level of merger and acquisition activity in the U.S. and abroad; the uncertain effectiveness and possible collateral consequences of U.S. and foreign government actions affecting credit markets, international trade and economic policy, including those related to tariffs and trade barriers; concerns in the marketplace affecting our credibility or otherwise affecting market perceptions of the integrity or utility of independent credit agency ratings; the introduction of competing products or technologies by other companies; pricing pressure from competitors and/or customers; the level of success of new product development and global expansion; the impact of regulation as an NRSRO, the potential for new U.S., state and local legislation and regulations, including provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) and regulations resulting from Dodd-Frank; the potential for increased competition and regulation in the EU and other foreign jurisdictions; exposure to litigation related to our rating opinions, as well as any other litigation, government and regulatory proceedings, investigations and inquires to which the Company may be subject from time to time; provisions in the Dodd-Frank legislation modifying the pleading standards, and EU regulations modifying the liability standards, applicable to credit rating agencies in a manner adverse to credit rating agencies; provisions of EU regulations imposing additional procedural and substantive requirements on the pricing of services and the expansion of supervisory remit to include non-EU ratings used for regulatory purposes; the possible loss of key employees; failures or malfunctions of our operations and infrastructure; any vulnerabilities to cyber threats or other cybersecurity concerns; the outcome of any review by controlling tax authorities of the Company’s global tax planning initiatives; exposure to potential criminal sanctions or civil remedies if the Company fails to comply with foreign and U.S. laws and regulations that are applicable in the jurisdictions in which the Company operates, including data protection and privacy laws, sanctions laws, anti-corruption laws, and local laws prohibiting corrupt payments to government officials; the impact of mergers, acquisitions or other business combinations and the ability of the Company to successfully integrate such acquired businesses; currency and foreign exchange volatility; the level of future cash flows; the levels of capital investments; and a decline in the demand for credit risk management tools by financial institutions. These factors, risks and uncertainties as well as other risks and uncertainties that could cause Moody’s actual results to differ materially from those contemplated, expressed, projected, anticipated or implied in the forward-looking statements are described in greater detail under “Risk Factors” in Part I, Item 1A of the Company’s annual report on Form 10-K for the year ended December 31, 2018, and in other filings made by the Company from time to time with the SEC or in materials incorporated herein or therein. Stockholders and investors are cautioned that the occurrence of any of these factors, risks and uncertainties may cause the Company’s actual results to differ materially from those contemplated, expressed, projected, anticipated or implied in the forward-looking statements, which could have a material and adverse effect on the Company’s business, results of operations and financial condition. New factors may emerge from time to time, and it is not possible for the Company to predict new factors, nor can the Company assess the potential effect of any new factors on it.

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Table 6 - Financial Information by Segment (Unaudited)

The table below presents revenue, operating income and adjusted operating income by reportable segment. The Company defines adjusted operating income as operating income excluding: i) depreciation and amortization; ii) restructuring; iii) Acquisition-Related Expenses; iv) a non-recurring impairment charge pursuant to the planned divestiture of MAKS; and v) a captive insurance company settlement.

Table 7 - Transaction and Relationship Revenue (Unaudited)

The tables below summarize the split between transaction and relationship 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 relationship revenue represents the recurring monitoring 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 outsourcing engagements and relationship revenue represents subscription-based revenues. In the MA segment, transaction revenue represents perpetual software license fees and revenue from software implementation services, risk management advisory projects, training and certification services, and research and analytical engagements. Relationship revenue in MA represents subscription-based revenues and software maintenance revenue.

Table 8 - Adjusted Operating Income and Adjusted Operating Margin (Unaudited)

The Company presents Adjusted Operating Income and Adjusted Operating Margin because management deems these metrics to be useful measures to provide additional perspective on the operating performance of Moody’s. Adjusted Operating Income excludes the impact of: i) amortization of acquired intangible assets; ii) Acquisition-Related Expenses; iii) restructuring charges; iv) an impairment and tax charge pursuant to the planned divestiture of MAKS; and v) a captive insurance company settlement. Depreciation and amortization are excluded because companies utilize productive assets of different ages and use different methods of acquiring and depreciating productive assets. Restructuring charges are excluded as the frequency and magnitude of these charges may vary widely across periods and companies. Acquisition-Related Expenses consist of expenses incurred to complete and integrate the acquisition of Bureau van Dijk and are excluded due to the material nature of these expenses on an annual basis in both the current and prior years, which are not expected to recur at this dollar magnitude subsequent to the completion of the multi-year integration effort. Acquisition-related expenses from other acquisitions were not material. The impairment charge pursuant to the planned divestiture of MAKS is excluded as the frequency and magnitude of divestiture activity may vary widely from period to period and across companies. The captive insurance company settlement relates to the resolution of a matter that is not expected to recur in the future at this magnitude. Management believes that the exclusion of the aforementioned items, as detailed in the reconciliation below, allows for an additional perspective on the Company’s operating results from period to period and across companies. The Company defines Adjusted Operating Margin as Adjusted Operating Income divided by revenue.

Table 9 - Free Cash Flow (Unaudited)

The table below reflects a reconciliation of the Company's net cash flows from operating activities to free cash flow. The Company defines free cash flow as net cash provided by operating activities minus payments for capital additions. Management deems capital expenditures essential to the Company's product and service innovations and maintenance of Moody's operational capabilities. Accordingly, capital expenditures are deemed to be a recurring use of Moody's cash flow. Management believes that free cash flow is a useful metric in assessing the Company's cash flows to service debt, pay dividends and to fund acquisitions and share repurchases.

Table 10 - Organic Revenue and Growth Measures (Unaudited)

The Company presents the organic revenue and growth for the MA segment, the RD&A LOB, the ERS LOB and the PS LOB because management deems this metric to be a useful measure which provides additional perspective in assessing the revenue growth excluding the inorganic revenue impacts from the August 2018 acquisition of Omega Performance, the October 2018 acquisition of Reis Inc., and the July 2019 acquisition of RiskFirst. Inorganic revenue for Omega Performance includes revenue from the start of the period until August 16, 2019. Below is a reconciliation of the Company's organic dollar revenue and growth rates: