Moody's Corporation (NYSE: MCO) today announced results for the
third quarter of 2006.
Summary of Results for Third Quarter 2006
Moody's reported revenue of $495.5 million for the three months
ended September 30, 2006, an increase of 18% from $421.1 million for
the same quarter of 2005. Operating income for the quarter was $268.8
million and rose 16% from $231.9 million for the same period of last
year. Diluted earnings per share were $0.55, 15% higher than $0.48 in
the third quarter of 2005. Results for the quarter included $20.0
million of expense related to stock options and other stock-based
compensation plans, equivalent to $0.04 per diluted share, compared
with $13.3 million, or $0.02 per share, in the prior-year period.
Results for the third quarter of 2005 also included an $11.5 million
reduction to tax reserves, equivalent to $0.04 per diluted share,
related to legacy tax matters that Moody's assumed in connection with
its separation from The Dun & Bradstreet Corporation in 2000 and which
are described in Moody's annual and quarterly SEC filings.
Raymond McDaniel, Moody's Chairman and Chief Executive Officer,
commented, "Moody's reported strong results for the third quarter of
2006 due largely to better than expected performance from our U.S. and
European structured finance and corporate finance ratings businesses.
Based on Moody's strong results for the first nine months of 2006 we
now believe that results for the full year 2006 will exceed our prior
outlook."
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
relate to: (1) presenting results for the third quarter of 2005 and
the first nine months of both 2006 and 2005 before adjustments for
income tax exposures related to legacy income tax matters that Moody's
assumed in connection with its separation from The Dun & Bradstreet
Corporation in 2000 and which are described in Moody's annual and
quarterly SEC filings; and (2) presenting results for the third
quarter and first nine months of both 2006 and 2005 before the impact
of expensing stock-based compensation, which is being phased in over a
four year period for stock awards commencing in 2003. In addition, the
2006 outlook presented below includes a discussion of projected 2006
diluted earnings per share growth excluding the impact of: legacy
income tax adjustments, the expensing of stock-based compensation, and
any potential gain on the sale of Moody's headquarters building.
Attached to this earnings release are tables showing adjustments to
Moody's results for the third quarter and first nine months of 2006
and 2005 to arrive at non-GAAP financial measures excluding the
impacts noted above.
Third Quarter Revenue
Revenue at Moody's Investors Service for the third quarter of 2006
was $459.6 million, 19% greater than in the prior year period. Foreign
currency translation, mainly due to the weakness of the U.S. dollar
relative to the euro, increased revenue growth by approximately 50
basis points and had a minimal impact on operating income growth.
Ratings revenue totaled $394.0 million in the quarter, rising 19%
from a year ago. Within the ratings business, global structured
finance revenue totaled $217.7 million for the third quarter of 2006,
an increase of 25% from a year earlier. U.S. structured finance
revenue rose 18%, benefiting from very strong growth from rating
credit derivatives and higher revenue from rating residential
mortgage-backed securities, which more than offset a year-over-year
decline from the asset-backed securities business. International
structured finance revenue rose 41%, benefiting from broad-based
growth across the European business.
Global corporate finance revenue of $91.2 million in the third
quarter of 2006 rose 17% from the same quarter of 2005. Revenue in the
U.S. rose 20% from the prior year period as robust growth from rating
bank loans more than offset a year-over-year decline in revenue from
rating speculative grade bonds. Outside the U.S., corporate finance
revenue increased 13% driven by strong growth in revenue from European
investment grade ratings.
Global financial institutions and sovereigns revenue totaled $64.1
million for the third quarter of 2006, 10% higher than in the prior
year period. Revenue increased 9% in the U.S. driven in part by new
ratings mandates in the finance, real estate and insurance sectors.
Outside the U.S., revenue grew 10% based largely on growth in issuer
ratings for European banks.
U.S. public finance revenue was $21.0 million for the third
quarter of 2006, 4% lower than in the third quarter of 2005, with an
increase in new money issuance more than offset by a sharp decrease in
refundings.
Moody's global research revenue rose to $65.6 million, increasing
22% from the same quarter of 2005. The quarter's results reflect
higher revenue from selling Moody's credit research, licensing Moody's
data to third parties, selling analytic tools, and providing credit
training and economic research.
Revenue at Moody's KMV was $35.9 million for the quarter, up 3%
from the strong prior year period, which had benefited from several
large one time software and services sales.
Moody's U.S. revenue of $310.3 million for the third quarter of
2006 was up 16% from the third quarter of 2005. International revenue
of $185.2 million was 20% higher than in the prior year period and
included approximately 120 basis points of positive impact from
currency translation. International revenue accounted for 37% of
Moody's total in the quarter, unchanged from the year-ago period.
Third Quarter Expenses
Moody's operating expenses were $226.7 million in the third
quarter of 2006, 20% higher than in the prior year period. This
increase was driven primarily by higher personnel costs, various
technology investments, and the phase-in of equity-based compensation
begun in 2003. The quarter's stock-based compensation expense was
$20.0 million compared with $13.3 million in the 2005 period. Moody's
operating margin for the third quarter of 2006 was 54% compared with
55% in the prior year period.
Third Quarter Effective Tax Rate
Moody's effective tax rate was 40.9% for the third quarter of 2006
compared with 37.5% for the prior year. The increase in the effective
tax rate was largely due to a favorable IRS settlement of a legacy tax
matter in the prior year period.
Year-to-date Results
Revenue for the first nine months of 2006 totaled $1,447.1
million, an increase of 15% from $1,258.4 million for the same period
of 2005. Operating income of $796.2 million was up 14% from $697.2
million for the same period of 2005. Currency translation had a
negative impact on these results, reducing revenue growth by
approximately 50 basis points and operating income growth by
approximately 80 basis points. Diluted earnings per share for the
first nine months of 2006 were $1.61, 20% higher than the $1.34 for
the prior year period.
Earnings per share for the first nine months of 2006 included
$54.6 million of expense related to stock options and other
stock-based compensation plans, or $0.12 per share, compared with
$42.5 million of similar expense, or $0.08 per share, for the first
nine months of 2005. Results for the first nine months of 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 tax reserves, equivalent to $0.03 per diluted
share, primarily related to legacy income tax exposures.
Ratings and research revenue at Moody's Investors Service totaled
$1,344.0 million for the first nine months of 2006, an increase of 16%
from the prior year period. Global ratings revenue was $1,154.7
million for the first nine months of 2006, up 15% from $1,004.7
million in the same period of 2005. Research revenue rose to $189.3
million for the first nine months of 2006, up 20% from the prior year
period. Finally, revenue at Moody's KMV for the first nine months of
2006 totaled $103.1 million, 8% higher than in the prior year period.
Share Repurchases
During the third quarter of 2006, Moody's repurchased 2.9 million
shares at a total cost of $168 million, which more than offset less
than 1 million shares issued under employee stock compensation plans.
Since becoming a public company in October 2000 and through September
30, 2006, Moody's has repurchased 82.1 million shares at a total cost
of $2.7 billion, including 37.5 million shares to offset shares issued
under employee stock plans. At quarter-end, Moody's had approximately
$1.9 billion of share repurchase authority remaining.
Assumptions and Outlook for Full Year 2006
Moody's outlook for 2006 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, and securitization levels. 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.
Based on Moody's stronger than expected results for the first nine
months of 2006 we have made a number of revisions to our outlook for
the full year 2006. For Moody's overall, we now project revenue growth
in the low teens percent range for the full year 2006. This assumes
foreign currency translation for the remainder of the year at current
exchange rates, which would result in no material full year impact
from currency translation. We now expect the operating margin before
the impact of expensing stock-based compensation to be flat to up 50
basis points in 2006 compared with 2005. Among other things, this
reflects our increased outlook for revenue and excludes any potential
gain on the sale of Moody's headquarters building. The margin outlook
continues to reflect investments we are making to: expand
internationally; improve our analytical processes; pursue ratings
transparency and compliance initiatives; introduce new products; and
improve our technology infrastructure.
For 2006, we project year-over-year growth in non-GAAP diluted
earnings per share in the high teens to low twenties percent range.
This forecast excludes the impacts of adjustments related to legacy
tax matters in 2005 and 2006, the expensing of stock-based
compensation in 2005 and 2006, and any potential gain on the sale of
Moody's headquarters building. This year represents the final year of
"phasing in" of expense related to stock-based compensation, which we
began in 2003. The impact of expensing stock-based compensation is
expected to be in the range of $0.15 - $0.17 per diluted share in
2006, compared to $0.10 per diluted share in 2005.
In the U.S., we forecast low to mid-teens percent revenue growth
for the Moody's Investors Service ratings and research business for
the full year 2006. In the U.S. structured finance business, we expect
revenue for the year to rise in the mid-teens percent range from the
record level of 2005. We now expect revenue from rating residential
mortgage-backed securities (including home equity securitizations) to
be essentially flat compared with 2005. In addition, we are expecting
strong growth from rating credit derivatives and commercial
mortgage-backed securities.
In the U.S. corporate finance business, we expect revenue growth
of approximately twenty percent for the year including good growth
from rated bonds and bank loans.
In the U.S. financial institutions sector, we expect revenue to
grow in the low teens percent range for the year reflecting new
entrants to the debt capital markets and fee increases partly related
to the Enhanced Analysis Initiative.
For the U.S. public finance sector, we expect revenue for 2006 to
decline in the double-digit percent range as rising interest rates
should continue to slow refinancing activity. We continue to expect
strong growth in the U.S. research business at better than twenty
percent.
Outside the U.S. we still expect ratings revenue to grow in the
low teens percent range. This forecast assumes that foreign currency
translation will have no material impact on revenue growth for the
year. Our outlook assumes mid-teens to low twenties percent growth for
all major business lines except financial institutions, where we
expect international revenue to be essentially flat.
Our outlook for Moody's KMV globally anticipates growth in net
sales and revenue from credit risk assessment subscription products,
credit decision processing software, and professional services. We
continue to expect this will result in high single-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, and Moody's Economy.com, a provider of economic research
and data services. The corporation, which reported revenue of $1.7
billion in 2005, employs approximately 2,900 people worldwide and
maintains offices in 22 countries. Further information is available at
www.moodys.com.
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Moody's Corporation
Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -------------------
2006 2005 2006 2005
Amounts in millions, except per
share amounts
------------------------------- -------- -------- --------- ---------
Revenue $495.5 $421.1 $1,447.1 $1,258.4
------------------------------- -------- -------- --------- ---------
Expenses
Operating, selling, general and
administrative expenses 216.9 180.4 622.4 535.1
Depreciation and amortization 9.8 8.8 28.5 26.1
-------- -------- --------- ---------
Total expenses 226.7 189.2 650.9 561.2
------------------------------- -------- -------- --------- ---------
Operating income 268.8 231.9 796.2 697.2
------------------------------- -------- -------- --------- ---------
Interest and other non-
operating (expense) income,
net (3.1) 2.7 1.0 (6.4)
Income before provision for
income taxes 265.7 234.6 797.2 690.8
Provision for income taxes 108.7 88.0 321.9 280.1
------------------------------- -------- -------- --------- ---------
Net income $157.0 $146.6 $ 475.3 $ 410.7
------------------------------- -------- -------- --------- ---------
------------------------------- -------- -------- --------- ---------
Earnings per share
Basic $ 0.56 $ 0.49 $ 1.66 $ 1.37
Diluted $ 0.55 $ 0.48 $ 1.61 $ 1.34
------------------------------- -------- -------- --------- ---------
Weighted average shares
outstanding
Basic 280.7 299.6 287.1 299.3
Diluted 287.9 307.7 294.9 306.8
------------------------------- -------- -------- --------- ---------
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Moody's Corporation
Supplemental Revenue Information (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -------------------
Amounts in millions 2006 2005 2006 2005
------------------------------- --------- ------- --------- ---------
Moody's Investors Service (a)
Structured finance $217.7 $174.5 $ 611.0 $ 505.6
Corporate finance 91.2 77.7 285.1 238.1
Financial institutions and
sovereign risk 64.1 58.4 196.9 189.7
Public finance 21.0 21.9 61.7 71.3
--------- ------- --------- ---------
Total ratings revenue 394.0 332.5 1,154.7 1,004.7
Research 65.6 53.8 189.3 158.2
--------- ------- --------- ---------
Total Moody's Investors
Service 459.6 386.3 1,344.0 1,162.9
Moody's KMV (a) 35.9 34.8 103.1 95.5
--------- ------- --------- ---------
Total revenue $495.5 $421.1 $1,447.1 $1,258.4
------------------------------- --------- ------- --------- ---------
Revenue by geographic area
United States $310.3 $267.0 $ 917.3 $ 790.9
International 185.2 154.1 529.8 467.5
--------- ------- --------- ---------
Total revenue $495.5 $421.1 $1,447.1 $1,258.4
------------------------------- --------- ------- --------- ---------
(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)
September 30, December 31,
2006 2005
-------------- -------------
Amounts in millions
Cash and cash equivalents $ 281.6 $ 486.0
Short-term investments 13.0 94.5
Total current assets 680.2 1,051.8
Non-current assets 475.0 405.4
Total assets 1,155.2 1,457.2
Total current liabilities 525.3 578.9
Notes payable 300.0 300.0
Other long-term liabilities 291.2 268.9
Shareholders' equity 38.7 309.4
Total liabilities and shareholders' equity $1,155.2 $1,457.2
Shares outstanding 279.8 290.3
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Moody's Corporation
Reconciliation to Non-GAAP Financial Measures (Unaudited)
Three Months Ended
September 30, 2006
----------------------------------
Amounts in millions, except per
share amounts
Non-GAAP
As Financial
Reported Adjustments Measures*
--------- ----------- ------------
Revenue $495.5 $495.5
Expenses 226.7 (20.0) (a) 206.7
-------- ----------- ---------
Operating income 268.8 20.0 288.8
Interest and other non-operating
income (expense), net (3.1) (3.1)
-------- ----------- ---------
Income before provision for income
taxes 265.7 20.0 285.7
Provision for income taxes 108.7 7.7 (b) 116.4
-------- ----------- ---------
Net income $157.0 $12.3 $169.3
-------- ----------- ---------
Basic earnings per share $0.56 $0.60
-------- ---------
Diluted earnings per share $0.55 $0.59
-------- ---------
--------------------------------------------- ----------- ------------
Three Months Ended
September 30, 2005
----------------------------------
Amounts in millions, except per
share amounts
Non-GAAP
As Financial
Reported Adjustments Measures*
--------- ----------- ------------
Revenue $421.1 $421.1
Expenses 189.2 (13.3) (a) 175.9
-------- ----------- ---------
Operating income 231.9 13.3 245.2
Interest and other non-operating
income (expense), net 2.7 - 2.7
-------- ----------- ---------
Income before provision for income
taxes 234.6 13.3 247.9
Provision for income taxes 88.0 16.8 (b) 104.8
-------- ----------- ---------
Net income $146.6 $(3.5) $143.1
-------- ----------- ---------
Basic earnings per share $0.49 $0.48
-------- ---------
Diluted earnings per share $0.48 $0.47
-------- ---------
--------------------------------------------- ----------- ------------
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 September 30, 2006 and 2005, adjusted to reflect
the following:
(a)To exclude operating expenses of $20.0 million in the third quarter
of 2006 relating to the expensing of stock-based compensation
based on the implementation of SFAS No. 123R on January 1, 2006
and $13.3 million of stock-based compensation expense in the third
quarter of 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 an income tax benefit of
$11.5 million in the third quarter of 2005 related to legacy tax
exposures.
* May not add due to rounding.
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Moody's Corporation
Reconciliation to Non-GAAP Financial Measures (Unaudited)
Nine Months Ended
September 30, 2006
----------------------------------
Amounts in millions, except per
share amounts
Non-GAAP
As Financial
Reported Adjustments Measures*
--------- ----------- ------------
Revenue $1,447.1 $1,447.1
Expenses 650.9 (54.6) (a) 596.3
--------- ----------- ---------
Operating income 796.2 54.6 850.8
Interest and other non-operating
income (expense), net 1.0 1.0
--------- ----------- ---------
Income before provision for income
taxes 797.2 54.6 851.8
Provision for income taxes 321.9 23.3 (b) 345.2
--------- ----------- ---------
Net income $475.3 $31.3 $506.6
--------- ----------- ---------
Basic earnings per share $1.66 $1.76
--------- ---------
Diluted earnings per share $1.61 $1.72
--------- ---------
-------------------------------------------- ----------- ------------
Nine Months Ended
September 30, 2005
----------------------------------
Amounts in millions, except per
share amounts
Non-GAAP
As Financial
Reported Adjustments Measures*
--------- ----------- ------------
Revenue $1,258.4 $1,258.4
Expenses 561.2 (42.5) (a) 518.7
--------- ----------- ---------
Operating income 697.2 42.5 739.7
Interest and other non-operating
income (expense), net (6.4) - (6.4)
--------- ----------- ---------
Income before provision for income
taxes 690.8 42.5 733.3
Provision for income taxes 280.1 25.5 (b) 305.6
--------- ----------- ---------
Net income $410.7 $17.0 $427.7
--------- ----------- ---------
Basic earnings per share $1.37 $1.43
--------- ---------
Diluted earnings per share $1.34 $1.39
--------- ---------
-------------------------------------------- ----------- ------------
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 nine months ended September 30, 2006 and
2005, adjusted to reflect the following:
(a)To exclude operating expenses of $54.6 million in the first nine
months of 2006 relating to the expensing of stock-based
compensation based on the implementation of SFAS No. 123R on
January 1, 2006 and $42.5 million of stock-based compensation
expense in the first nine months of 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 $2.4 million and $8.8 million
of income tax benefits in the first nine months of 2006 and 2005,
respectively, related to legacy tax exposures.
*May not add due to rounding.
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"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 October 25, 2006, 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 the KMV and MRMS 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.
