Moody's Corporation Reports Results for Fourth Quarter and Full Year 2006
Moody's Corporation (NYSE: MCO) today announced results for the
fourth quarter and full year 2006.
Summary of Results for Fourth Quarter 2006
Moody's reported revenue of $590.0 million for the three months
ended December 31, 2006, an increase of 25% from $473.2 million for
the same quarter of 2005. Operating income for the fourth quarter was
$463.3 million, which included a one-time gain on the sale of Moody's
99 Church Street building in New York. Excluding the gain, operating
income of $302.7 million rose 25% from $242.4 million in the year-ago
period. Net income was $278.6 million and diluted earnings per share
were $0.97, including $0.33 per diluted share related to the one-time
gain on the building sale. Excluding the gain, diluted earnings per
share of $0.64 grew 28% from $0.50 per share in the prior year period.
Earnings for the quarter also included $22.5 million of expense
related to stock options and other stock-based compensation plans,
equivalent to $0.05 per diluted share, compared with $12.3 million of
expense, or $0.02 per diluted share, for the prior year period.
Raymond McDaniel, Chairman and Chief Executive Officer of Moody's,
commented, "I am pleased to announce that Moody's delivered strong
financial performance for both the fourth quarter and full year 2006.
We generated strong revenue growth across most business lines,
including structured finance and corporate finance ratings as well as
in global credit research. While we anticipate that cyclical
conditions in some market segments will become less favorable, overall
market conditions combined with Moody's revenue diversity should
support low-double-digit percent growth in 2007."
In addition to its reported results, Moody's has included in this
earnings release certain adjusted results that the Securities and
Exchange Commission defines as "non-GAAP financial measures."
Management believes that such non-GAAP financial measures, when read
in conjunction with the company's reported results, can provide useful
supplemental information for investors analyzing period to period
comparisons of the company's growth. These non-GAAP financial
measures, as described more specifically in the text, include: (1)
presenting fourth quarter and full year 2006 and fourth quarter and
full year 2005 before the impact of expensing stock-based
compensation, (2) presenting fourth quarter 2006 and full year 2006
excluding the gain on sale of Moody's 99 Church Street building, and
(3) presenting full year 2006 and full year 2005 excluding adjustments
for legacy income tax exposures. Beginning in 2007, stock-based
compensation expense will no longer be excluded from non-GAAP results
or outlooks as the impact of stock-based compensation expense has been
fully phased in as of 2006. Attached to this earnings release are
tables showing adjustments to Moody's fourth quarter and full year
results for 2006 and 2005 to explain non-GAAP financial measures
excluding the impacts noted above.
Fourth Quarter Revenue
Revenue at Moody's Investors Service for the fourth quarter of
2006 was $550.3 million, an increase of 26% from the prior year
period. Ratings revenue totaled $480.9 million in the quarter, rising
26% from a year ago. Research revenue of $69.4 million was 22% higher
than in the fourth quarter of 2005.
Within the ratings business, global structured finance revenue
totaled $275.7 million for the fourth quarter of 2006, an increase of
31% from a year earlier. U.S. structured finance revenue rose 27%,
driven by strong growth in credit derivatives and commercial
mortgage-backed securities ratings, tempered by a modest decline in
asset backed securities revenue. International structured finance
revenue rose 40%, reflecting strong growth across all asset classes.
Global corporate finance revenue of $111.1 million in the fourth
quarter of 2006 rose 31% from the same quarter of 2005. Revenue in the
U.S. rose 22% from the prior year period, reflecting sharply higher
levels of rated loan and bond issuance for both investment grade and
speculative grade securities. Outside the U.S., corporate finance
revenue increased 45% due largely to bond issuance volume in Europe
and Canada.
Global financial institutions and sovereigns revenue totaled $69.9
million for the fourth quarter of 2006, increasing 8% from the prior
year period. Revenue in the U.S. was flat to the prior year quarter,
following three consecutive quarters of moderate growth. Favorable
results in insurance and real estate finance ratings in the U.S. were
offset by declines in the banking and the finance and securities
sectors. Outside the U.S., revenue rose 13% reflecting strong
performance in the banking sectors in both Europe and Asia.
U.S. public finance revenue was $24.2 million for the fourth
quarter of 2006, 18% higher than in the fourth quarter of 2005. This
reflected an increase in refunding issuance in the quarter as
long-term interest rates remained at low levels.
Moody's global research revenue rose to $69.4 million, up 22% from
the same quarter of 2005. This growth reflected good increases in each
of Moody's research product segments, including core research
services, licensing of Moody's data to third parties, and sales of
data and analytic tools.
Foreign currency translation positively impacted revenue and
operating income growth for Moody's Investors Service by approximately
190 basis points and 110 basis points, respectively.
Revenue at Moody's KMV ("MKMV") for the fourth quarter of 2006 was
$39.7 million, 11% higher than in the fourth quarter of 2005. Strong
revenue growth from professional services and an increase in revenue
from sales of risk product subscriptions were partially offset by
declines in revenue from the licensing of credit processing software.
Moody's U.S. revenue of $360.5 million for the fourth quarter of
2006 was up 22% from the fourth quarter of 2005. International revenue
of $229.5 million was 28% higher than in the prior year period and
reflected approximately 450 basis points of positive impact from
currency translation. International revenue accounted for 39% of
Moody's total revenue in the quarter compared with 38% in the year-ago
period.
Fourth Quarter Expenses
Operating expenses for the fourth quarter of 2006 were $126.7
million which included the gain on the sale of the 99 Church Street
building. Excluding the gain, Moody's operating expenses were $287.3
million in the fourth quarter, 24% higher than in the prior year
period. The higher fourth quarter expense was primarily related to
higher personnel costs, including performance-based compensation
expense and the final phasing-in of expense related to annual
stock-based compensation awards, which commenced in January 2003 and
generally vests over a four-year period. The quarter's stock-based
compensation expense was $22.5 million compared with $12.3 million in
the 2005 period. Excluding the gain on sale, Moody's operating margin
for the fourth quarter of 2006 was 51%, equal to the margin for the
same period in 2005.
Fourth Quarter Effective Tax Rate
Moody's effective tax rate for the fourth quarter of 2006 was
39.9% as compared with 38.5% for the prior year period. The tax rate
for the fourth quarter of 2006 benefited from the recognition of
additional foreign tax credits. The tax rate for the fourth quarter of
2005 benefited from the impact of the American Jobs Creation Act of
2004, which permitted Moody's a one-time opportunity to repatriate
funds at a lower tax rate in 2005 than previously.
Full Year 2006 Results
Revenue for the full year 2006 totaled $2,037.1 million, an
increase of 18% from $1,731.6 million for the same period of 2005.
Operating income for the full year 2006 was $1,259.5 million and net
income was $753.9 million. Excluding the gain on sale of the 99 Church
Street building, operating income for 2006 grew 17% from $939.6
million and net income grew 18% from $560.8 million in 2005. Diluted
earnings per share of $2.58 for the full year 2006 included $0.32 per
diluted share related to the gain on sale. Excluding the gain, full
year diluted earnings per share were $2.26, 23% higher than $1.84 for
2005.
Diluted earnings per share for the full year 2006 also included a
benefit of $2.4 million, equivalent to $0.01 per diluted share,
related to a reduction in reserves for legacy income tax exposures.
Results for the full year 2005 included a charge of $9.4 million,
equivalent to $0.02 per diluted share, for the settlement of sales tax
matters related to Moody's operations in Japan from 2000 through June
30, 2005, and an $8.8 million net reduction in income tax reserves,
equivalent to $0.03 per diluted share, primarily related to legacy
income tax exposures. Moody's results for the full year 2006 also
included $77.1 million of expense related to stock options and other
stock-based compensation plans, or $0.17 per diluted share, compared
with $54.8 million of similar expense, or $0.10 per diluted share, in
the full year 2005.
Ratings and research revenue at Moody's Investors Service totaled
$1,894.3 million for the full year 2006, an increase of 18% from the
prior year period. The impact of currency translation on full year
2006 revenue was not material. Global ratings revenue was $1,635.6
million for the full year 2006, up 18% from $1,385.0 million in the
same period of 2005. Each of the global ratings business lines
achieved year-over-year growth with the exception of U.S. public
finance. Research revenue rose to $258.7 million for the full year
2006, up 20% from the full year 2005. Finally, revenue at MKMV for the
full year 2006 totaled $142.8 million, 9% higher than in the prior
year period.
Share Repurchases
During the fourth quarter of 2006, Moody's repurchased 2.3 million
shares at a total cost of $149.6 million and issued 1.1 million shares
of stock under stock-based compensation plans. For the full year 2006,
Moody's repurchased 18.0 million shares at a total cost of $1.1
billion and issued 6.5 million shares under stock-based compensation
plans. Since becoming a public company in October 2000 and through
December 31, 2006, Moody's has repurchased 84.4 million shares at a
total cost of $2.9 billion, including 38.6 million shares to offset
shares issued under stock-based compensation plans. At year-end,
Moody's had $1.8 billion of share repurchase authority remaining under
the current $2 billion program.
Outlook for Full Year 2007
Moody's outlook for 2007 is based on assumptions about many
macroeconomic and capital market factors, including interest rates,
corporate profitability and business investment spending, merger and
acquisition activity, consumer spending, residential mortgage
borrowing and refinancing activity, securitization levels and capital
markets issuance. There is an important degree of uncertainty
surrounding these assumptions and, if actual conditions differ from
these assumptions, Moody's results for the year may differ from our
current outlook.
For Moody's overall, we project low double-digit percent revenue
growth for the full year 2007. This growth assumes foreign currency
translation in 2007 at current exchange rates, which would result in
no material full year impact from currency translation. We expect the
operating margin to decline by approximately 150 basis points in 2007,
due to investments we are continuing to make to sustain business
growth, including international expansion, improving our analytical
processes, pursuing ratings transparency and compliance initiatives,
introducing new products, improving our technology infrastructure and
relocating Moody's headquarters in New York City. On a GAAP basis,
diluted earnings per share in 2007 are projected to be modestly lower
compared to 2006. However, excluding the one-time gain on the sale of
Moody's 99 Church Street building from 2006 results, we project
low-double-digit percent growth in 2007 non-GAAP diluted earnings per
share. This expected growth includes stock-based compensation expense
in 2006 and 2007.
In the U.S., we project low-double-digit percent revenue growth
for the Moody's Investors Service ratings and research business for
the full year 2007. In the U.S. structured finance business, we expect
revenue for the year to rise in the high-single to double-digit
percent range, including strong double-digit year-over-year percent
growth in revenue from credit derivatives and commercial
mortgage-backed securities ratings, partially offset by an expected
decline in revenue from residential mortgage-backed securities
ratings, including home equity securitization.
In the U.S. corporate finance business, we expect revenue growth
in the low double-digit percent range for the year, including good
growth from rated bonds, bank loans and new products. We anticipate a
stronger first half of 2007 followed by a weaker second half, due in
part to an expected moderation in the pace of leveraged buyout
transactions.
In the U.S. financial institutions sector, we project revenue in
2007 to grow in the low teens percent range for the year. For the U.S.
public finance sector, we expect revenue for 2007 to grow modestly. We
forecast growth in the U.S. research business to be about 20%.
Outside the U.S. we expect ratings revenue to grow in the
high-teens percent range with mid- to high-teens percent growth in all
major business lines, led by corporate finance revenue growth in
Europe and Asia, financial institutions growth in Europe, and growth
in international structured finance. We also project about twenty
percent growth in international research revenue.
For Moody's KMV globally, we expect growth in sales and revenue
from credit risk assessment subscription products, credit decision
processing software, and professional services. This should result in
low-double-digit percent growth in revenue with greater growth in
profitability.
Moody's Corporation (NYSE: MCO) is the parent company of Moody's
Investors Service, a leading provider of credit ratings, research and
analysis covering debt instruments and securities in the global
capital markets, Moody's KMV, a leading provider of credit risk
processing and credit risk management products for banks and investors
in credit-sensitive assets serving the world's largest financial
institutions, Moody's Economy.com, a provider of economic research and
data services, and Moody's Wall Street Analytics, a provider of
software tools and analysis for the structured finance industry. The
corporation, which reported revenue of $2.0 billion in 2006, employs
approximately 3,400 people worldwide and maintains offices in 24
countries. Further information is available at www.moodys.com.
"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 Moody's business and operations that involve a number of risks and
uncertainties. The forward-looking statements and other information
are made as of February 7, 2007, and the Company disclaims any duty to
supplement, update or revise such statements on a going-forward basis,
whether as a result of subsequent developments, changed expectations
or otherwise. In connection with the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, the Company is
identifying certain factors that could cause actual results to differ,
perhaps materially, from those indicated by these forward-looking
statements. Those factors include, but are not limited to, changes in
the volume of debt securities issued in domestic and/or global capital
markets; changes in interest rates and other volatility in the
financial markets; possible loss of market share through competition;
introduction of competing products or technologies by other companies;
pricing pressures from competitors and/or customers; the potential
emergence of government-sponsored credit rating agencies; proposed
U.S., foreign, state and local legislation and regulations, including
those relating to Nationally Recognized Statistical Rating
Organizations; possible judicial decisions in various jurisdictions
regarding the status of and potential liabilities of rating agencies;
the possible loss of key employees to investment or commercial banks
or elsewhere and related compensation cost pressures; the outcome of
any review by controlling tax authorities of the Company's global tax
planning initiatives; the outcome of those tax and legal contingencies
that relate to Old D&B, its predecessors and their affiliated
companies for which the Company has assumed portions of the financial
responsibility; the outcome of other legal actions to which the
Company, from time to time, may be named as a party; the ability of
the Company to successfully integrate acquired businesses; a decline
in the demand for credit risk management tools by financial
institutions; and other risk factors as discussed in the Company's
Annual Report on Form 10-K for the year ended December 31, 2005 and in
other filings made by the Company from time to time with the
Securities and Exchange Commission.
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Moody's Corporation
Consolidated Statements of Operations (Unaudited)
Three Months Ended Year Ended
December 31, December 31,
------------------- -------------------
2006 2005 2006 2005
Amounts in millions, except per
share amounts
-------------------------------------------------- -------------------
Revenue $ 590.0 $ 473.2 $2,037.1 $1,731.6
-------------------------------------------------- -------------------
Expenses
Operating, selling, general
and administrative
expenses 276.3 221.7 898.7 756.8
Gain on sale of building (160.6) - (160.6) -
Depreciation and
amortization 11.0 9.1 39.5 35.2
------------------- -------------------
Total expenses 126.7 230.8 777.6 792.0
-------------------------------------------------- -------------------
Operating income 463.3 242.4 1,259.5 939.6
-------------------------------------------------- -------------------
Interest and other non-
operating income
(expense), net - 1.5 1.0 (4.9)
Income before provision
for income taxes 463.3 243.9 1,260.5 934.7
Provision for income taxes 184.7 93.8 506.6 373.9
-------------------------------------------------- -------------------
Net income $ 278.6 $ 150.1 $ 753.9 $ 560.8
-------------------------------------------------- -------------------
-------------------------------------------------- -------------------
Earnings per share
Basic $ 1.00 $ 0.51 $ 2.65 $ 1.88
Diluted $ 0.97 $ 0.50 $ 2.58 $ 1.84
-------------------------------------------------- -------------------
Weighted average shares
outstanding
Basic 279.1 292.0 284.2 297.7
Diluted 286.7 300.9 291.9 305.6
-------------------------------------------------- -------------------
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Moody's Corporation
Supplemental Revenue Information (Unaudited)
Three Months Ended Year Ended
December 31, December 31,
------------------ -------------------
Amounts in millions 2006 2005 2006 2005
-------------------------------------------------- -------------------
Moody's Investors Service (a)
Structured finance $ 275.7 $ 209.8 $ 886.7 $ 715.4
Corporate finance 111.1 85.1 396.2 323.2
Financial institutions and
sovereign risk 69.9 64.9 266.8 254.6
Public finance 24.2 20.5 85.9 91.8
--------- -------- --------- ---------
Total ratings revenue 480.9 380.3 1,635.6 1,385.0
Research 69.4 57.1 258.7 215.3
--------- -------- --------- ---------
Total Moody's
Investors Service 550.3 437.4 1,894.3 1,600.3
Moody's KMV (a) 39.7 35.8 142.8 131.3
--------- -------- --------- ---------
Total revenue $ 590.0 $ 473.2 $2,037.1 $1,731.6
-------------------------------------------------- -------------------
Revenue by geographic area
United States $ 360.5 $ 294.5 $1,277.8 $1,085.4
International 229.5 178.7 759.3 646.2
--------- -------- --------- ---------
Total revenue $ 590.0 $ 473.2 $2,037.1 $1,731.6
-------------------------------------------------- -------------------
(a) Certain prior year amounts have been reclassified to conform to
the current year presentation.
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Moody's Corporation
Selected Consolidated Balance Sheet Data (Unaudited)
December 31, December 31,
2006 2005
------------- -------------
Amounts in millions
Cash and cash equivalents $ 469.9 $ 486.0
Short-term investments 13.6 94.5
Total current assets 1,001.9 1,051.8
Non-current assets 495.8 405.4
Total assets 1,497.7 1,457.2
Total current liabilities 700.0 578.9
Notes payable 300.0 300.0
Other long-term liabilities 330.3 268.9
Shareholders' equity 167.4 309.4
Total liabilities and shareholders' equity $ 1,497.7 $ 1,457.2
Shares outstanding 278.6 290.3
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Moody's Corporation
Reconciliation to Non-GAAP Financial Measures (Unaudited)
Three Months Ended
December 31, 2006
---------------------------------
Amounts in millions, except per
share amounts
Non-GAAP
As Financial
Reported Adjustments Measures*
-------- ----------- ---------
Revenue $ 590.0 $ 590.0
Expenses 126.7 138.1 (a) 264.8
-------- ----------- ---------
Operating income 463.3 (138.1) 325.2
Interest and other non-operating
income, net - - -
-------- ----------- ---------
Income before provision for income
taxes 463.3 (138.1) 325.2
Provision for income taxes 184.7 (57.8)(b) 126.9
-------- ----------- ---------
Net income $ 278.6 $ (80.3) $ 198.3
-------- ----------- ---------
Basic earnings per share $ 1.00 $ 0.71
-------- ---------
Diluted earnings per share $ 0.97 $ 0.69
-------- ---------
----------------------------------------------------------------------
Three Months Ended
December 31, 2005
---------------------------------
Amounts in millions, except per
share amounts
Non-GAAP
As Financial
Reported Adjustments Measures*
-------- ----------- ---------
Revenue $ 473.2 $ 473.2
Expenses 230.8 (12.3)(a) 218.5
-------- ----------- ---------
Operating income 242.4 12.3 254.7
Interest and other non-operating
income, net 1.5 - 1.5
-------- ----------- ---------
Income before provision for income
taxes 243.9 12.3 256.2
Provision for income taxes 93.8 4.8 (b) 98.6
-------- ----------- ---------
Net income $ 150.1 $ 7.5 $ 157.6
-------- ----------- ---------
Basic earnings per share $ 0.51 $ 0.54
-------- ---------
Diluted earnings per share $ 0.50 $ 0.52
-------- ---------
----------------------------------------------------------------------
In addition to its reported results, Moody's has included in the table
above adjusted results that the Securities and Exchange Commission
defines as "non-GAAP financial measures." Management believes that
such non-GAAP financial measures, when read in conjunction with the
company's reported results, can provide useful supplemental
information for investors analyzing period to period comparisons of
the company's growth. The table above shows Moody's results for the
three months ended December 31, 2006 and 2005, adjusted to reflect
the following:
(a)To exclude the gain on sale of 99 Church Street of $160.6 million
for the three months ended December 31, 2006 and to exclude operating
expenses of $22.5 million for the three months ended December 31,
2006 relating to the expensing of stock-based compensation based on
the implementation of SFAS No. 123R on January 1, 2006 and $12.3
million of stock-based compensation expense for the three months
ended December 31, 2005 as determined on a prospective basis for
stock awards granted on or after January 1, 2003.
(b)To reflect the income tax impacts related to the adjustments
described in note (a).
*May not add due to rounding.
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Moody's Corporation
Reconciliation to Non-GAAP Financial Measures (Unaudited)
Twelve Months Ended
December 31, 2006
---------------------------------
Amounts in millions, except per share
amounts
Non-GAAP
As Financial
Reported Adjustments Measures*
--------- ----------- ---------
Revenue $2,037.1 $2,037.1
Expenses 777.6 83.5 (a) 861.1
--------- ----------- ---------
Operating income 1,259.5 (83.5) 1,176.0
Interest and other non-operating
income (expense), net 1.0 - 1.0
--------- ----------- ---------
Income before provision for income
taxes 1,260.5 (83.5) 1,177.0
Provision for income taxes 506.6 (34.4)(b) 472.2
--------- ----------- ---------
Net income $753.9 $(49.1) $704.8
--------- ----------- ---------
Basic earnings per share $2.65 $2.48
--------- ---------
Diluted earnings per share $2.58 $2.41
--------- ---------
----------------------------------------------------------------------
Twelve Months Ended
December 31, 2005
----------------------------------
Amounts in millions, except per
share amounts
Non-GAAP
As Financial
Reported Adjustments Measures*
--------------------- ---------
Revenue $1,731.6 $1,731.6
Expenses 792.0 (54.8)(a) 737.2
--------- ----------- ---------
Operating income 939.6 54.8 994.4
Interest and other non-operating
income (expense), net (4.9) - (4.9)
--------- ----------- ---------
Income before provision for income
taxes 934.7 54.8 989.5
Provision for income taxes 373.9 30.3 (b) 404.2
--------- ----------- ---------
Net income $560.8 $24.5 $585.3
--------- ----------- ---------
Basic earnings per share $1.88 $1.97
--------- ---------
Diluted earnings per share $1.84 $1.92
--------- ---------
----------------------------------------------------------------------
In addition to its reported results, Moody's has included in the table
above adjusted results that the Securities and Exchange Commission
defines as "non-GAAP financial measures." Management believes that
such non-GAAP financial measures, when read in conjunction with the
company's reported results, can provide useful supplemental
information for investors analyzing period to period comparisons of
the company's growth. The table above shows Moody's results for the
years ended December 31, 2006 and 2005, adjusted to reflect the
following:
(a) To exclude the gain on sale of 99 Church Street of $160.6 million
for the year ended December 31, 2006 and to exclude operating
expenses of $77.1 million for the year ended December 31, 2006
relating to the expensing of stock-based compensation based on the
implementation of SFAS No. 123R on January 1, 2006 and $54.8 million
of stock-based compensation expense for the year ended December 31,
2005 as determined on a prospective basis for stock awards granted on
or after January 1, 2003.
(b) To reflect the income tax impacts related to the adjustments
described in note (a) and to exclude income tax benefits of $2.4
million and $8.8 million for the years ended December 31, 2006 and
2005, respectively, related to legacy tax exposures.
*May not add due to rounding.
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