The Daily Warren Buffett Stock is MCO. Berkshire Hathaway owns 48,000,000 shares. As of Dec 31,2007, this represents 2.49 percent of portfolio.
Moodyâ€™s is a provider of (i) credit ratings and related research, data and analytical tools, (ii) quantitative credit risk measures, risk scoring software and credit portfolio management solutions and (iii) beginning in January 2008, fixed income pricing data and valuation models. Founded in 1900, Moodyâ€™s employs approximately 3,600 people worldwide. Moodyâ€™s maintains offices in 27 countries and has expanded into developing markets through joint ventures or affiliation agreements with local rating agencies. Moodyâ€™s customers include a wide range of corporate and governmental issuers of securities as well as institutional investors, depositors, creditors, investment banks, commercial banks and other financial intermediaries. Moodyâ€™s is not dependent on a single customer or a few customers, such that a loss of any one would have a material adverse effect on its business.
Moodyâ€™s operates in two reportable segments: Moodyâ€™s Investors Service and Moodyâ€™s KMV (â€śMKMVâ€ť). For additional financial information on these segments, see Part II, Item 8. â€śFinancial Statements â€“ Note 18 â€“ Segment Information.â€ť Beginning in January 2008, Moodyâ€™s segments were changed to reflect the implementation of the business reorganization announced in August 2007. A discussion concerning Moodyâ€™s new operating segments, as if they were in place beginning January 1, 2005, is outlined in Item 7. â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operations.â€ť
Moodyâ€™s Investors Service publishes credit ratings and associated opinions on a broad range of obligors and obligations issued in domestic and international markets, including various corporate and governmental obligations, structured finance securities and commercial paper programs. It also publishes investor-oriented credit information, research and economic commentary, including in-depth research on major debt issuers, industry studies, special comments and credit opinion handbooks. Moodyâ€™s credit ratings and research help investors analyze the credit risks associated with fixed-income securities and other credit-sensitive instruments. Such independent credit ratings and research also contribute to efficiencies in markets for other obligations, such as insurance policies and derivative transactions, by providing credible and independent assessments of credit risk. Moodyâ€™s provides ratings and credit research on governmental and commercial entities in more than 100 countries. Moodyâ€™s global and increasingly diverse services are designed to increase market efficiency and may reduce transaction costs. As of December 31, 2007, Moodyâ€™s had ratings relationships with more than 11,000 corporate issuers and approximately 26,000 public finance issuers. Additionally, the Company has rated more than 110,000 structured finance obligations. Ratings are disseminated via press releases to the public through a variety of print and electronic media, including the Internet and real-time information systems widely used by securities traders and investors.
Moodyâ€™s research services, data and analytic tools are utilized by institutional investors and other credit and capital markets professionals. These services cover various segments of the loan and debt capital markets, and are sold to more than 8,700 customer accounts worldwide. Within these accounts, more than 30,000 unique users accessed Moodyâ€™s research website (www.moodys.com) during calendar year 2007. In addition to these clients, more than 167,000 other individuals visited Moodyâ€™s website to retrieve current ratings and other information made freely available to the public.
MKMV develops and distributes quantitative credit risk assessment products and services, including credit processing and analytical tools for credit portfolio management. With more than 1,800 clients operating in approximately 85 countries, MKMV serves banks, corporations and institutional investors, including most of the worldâ€™s largest financial institutions. MKMVâ€™s quantitative credit analysis tools include models that estimate the probability of default for approximately 29,000 publicly traded firms globally, updated daily. In addition, MKMVâ€™s RiskCalcâ„˘ models extend the availability of these probabilities to privately held firms in many of the worldâ€™s economies. MKMV also offers services to value and improve the performance of credit-sensitive portfolios.
Prospects for Growth
Over recent decades, global fixed-income markets have grown significantly in terms of outstanding principal amount and types of securities or other obligations. Despite the recent market disruption and decline in issuance activity for some important classes of securities in the U.S. and internationally, Moodyâ€™s believes that the overall long-term outlook remains favorable for continued secular growth of fixed-income markets worldwide. However, Moodyâ€™s expects that, in the near-term, growth drivers such as financial innovation and disintermediation will slow as capital market participants adjust to the recent poor performance of some structured finance asset classes, such as U.S. residential mortgage-backed securities and credit derivatives. Restoring investor confidence in structured products will require enhancements to Moodyâ€™s rating processes and probably greater transparency from issuers of structured (or securitized) debt. Moodyâ€™s is developing updated rating methodologies, volatility measures, and pricing and valuation services to aid the return of investor trust and, though it is likely to be a measured process, Moodyâ€™s expects that these initiatives will support continued long-term demand for high-quality, independent credit opinions.
Growth in global fixed-income markets is attributable to a number of forces and trends. Advances in information technology, such as the Internet, make information about investment alternatives widely available throughout the world. This technology facilitates issuersâ€™ ability to place securities outside their national markets and investorsâ€™ capacity to obtain information about securities issued outside their national markets. Issuers and investors are also more readily able to obtain information about new financing techniques and new types of securities that they may wish to purchase or sell, many of which may be unfamiliar to them. This availability of information promotes the ongoing integration and development of worldwide financial markets and a greater need for credible, globally comparable opinions about credit risk. As a result, existing capital markets have expanded and a number of new capital markets have emerged. In addition, more issuers and investors are accessing developed capital markets.
Another trend that is driving growth in the worldâ€™s capital markets is the disintermediation of financial systems. Issuers increasingly raise capital in the global public capital markets, in addition to, or in substitution for, traditional financial intermediaries. Moreover, financial intermediaries have sold assets in the global public capital markets, in addition to or instead of retaining those assets. Recent credit market disruptions have slowed the trend of disintermediation in important markets such as the U.S. and Europe, but Moodyâ€™s believes that debt capital markets offer advantages in capacity and efficiency compared to the traditional banking systems. Thus, disintermediation is expected to expand in the longer-term.
Growth in issuance of structured finance securities has generally been stronger than growth in straight corporate and financial institutions debt issuance, though with recent market turmoil this trend is expected to change at least over the near term, and possibly longer, with investors preferring simpler, more standardized and more transparent securities to more complex financial instruments. Compared with 2007, Moodyâ€™s expects a decline in structured finance revenue at least through 2008 and possibly into 2009 and beyond.
Rating fees paid by debt issuers account for most of the revenue of Moodyâ€™s Investors Service. Therefore, a substantial portion of Moodyâ€™s revenue is dependent upon the volume and number of debt securities issued in the global capital markets that Moodyâ€™s rates. Moodyâ€™s is therefore affected by, for example, the performance, and the prospects for growth, of the major world economies, the fiscal and monetary policies pursued by their governments, and the decisions of issuers to request Moodyâ€™s ratings to aid investors in their investment decision process. However, annual fee arrangements with frequent debt issuers, annual debt monitoring fees and annual fees from commercial paper and medium-term note programs, bank and insurance company financial strength ratings, mutual fund ratings, subscription-based research and other areas are less dependent on, or independent of, the volume or number of debt securities issued in the global capital markets.
Moodyâ€™s operations are also subject to various risks inherent in carrying on business internationally. Such risks include currency fluctuations and possible nationalization, expropriation, exchange and price controls, changes in the availability of data from public sector sources, limits on providing information across borders and other restrictive governmental actions. Management believes that the risks of nationalization or expropriation are reduced because the Companyâ€™s basic service is the creation and dissemination of information, rather than the production of products that require manufacturing facilities or the use of natural resources. However, the formation of, for example, a new government-sponsored regional or global rating agency would pose a risk to Moodyâ€™s growth prospects. Management believes that this risk, compared to other regulatory changes under consideration for the credit rating industry, is relatively low because of the likelihood that substantial investments over a sustained period would be required, with uncertainty about the likelihood of financial success.
Legislative bodies and regulators in both the United States, Europe and selective other jurisdictions continue to conduct regulatory reviews of credit rating agencies, which may result in, for example, an increased number of competitors, changes to the business model or restrictions on certain business activities of Moodyâ€™s Investors Service, or increased costs of doing business for Moodyâ€™s. Therefore, in order to broaden the potential for expansion of non-ratings services, beginning in January 2008, Moodyâ€™s has reorganized into two distinct businesses, Moodyâ€™s Investors Service, consisting solely of the ratings business, and Moodyâ€™s Analytics. Moodyâ€™s Analytics now conducts all non-ratings activities, and includes the MKMV business, the sale of credit research produced by Moodyâ€™s Investors Service and the production and sale of other credit related products and services. The reorganization is expected to broaden the opportunities for expansion by Moodyâ€™s Analytics into activities which were previously restricted, due to the potential for conflicts of interest with the ratings business. At present, Moodyâ€™s is unable to assess the nature and effect any regulatory changes may have on future growth opportunities. See â€śRegulationâ€ť below.
Moodyâ€™s Analytics expects to benefit from the growing demand among credit market participants for information that enables them to make sound investment and risk management decisions. These customers require advanced qualitative and quantitative tools to support their management of increasingly complex capital market instruments. Such complexity creates analytical challenges for market participants, including financial intermediaries, asset managers and other investors. In recent years, reliable third-party ratings and research served to supplement or substitute for traditional in-house research as the scale, geographic scope and complexity of financial markets grew. Recent disruptions in credit markets threaten to slow this trend, but Moodyâ€™s expects to sustain reliance on its offerings as enhancements to credit rating methodologies and other changes in securities origination processes restore investor confidence and more orderly market operations.
Growth in Moodyâ€™s Analytics is also expected as financial institutions adopt active credit portfolio management practices and implement internal credit assessment tools for compliance with Basel II regulations. Moodyâ€™s Analytics offers products that respond to these needs. This growth will be realized by, for example, the development of new private firm default probability models for specific countries and by expanding analysis capabilities of new asset classes.
The Moodyâ€™s Investors Service business competes with other credit rating agencies and with investment banks and brokerage firms that offer credit opinions and research. Many of our customers also have in-house credit research capabilities. Moodyâ€™s largest competitor in the global credit rating business is Standard & Poorâ€™s Ratings Services (â€śS&Pâ€ť), a division of The McGraw-Hill Companies, Inc. There are some rating markets, based on industry, geography and/or instrument type, in which Moodyâ€™s has made investments and obtained market positions superior to S&Pâ€™s. In other markets, the reverse is true.
In addition to S&P, Moodyâ€™s competitors include Fitch, a subsidiary of Fimalac S.A., Dominion Bond Rating Service, Ltd. of Canada (â€śDBRSâ€ť) and A.M. Best Company, Inc. In 2007, Japan Credit Rating Agency, Ltd., Rating and Investment Information, Inc, (R&I) and Egan-Jones also were designated as Nationally Recognized Statistical Rating Organizations (â€śNRSROâ€ť), and in February 2008, LACE Financial Corp. also was registered as an NRSRO. One or more additional rating agencies may emerge in the United States as the Securities and Exchange Commission (â€śSECâ€ť) continues to expand the number of NRSROs. Competition may also increase in developed or developing markets outside the United States over the next few years as the number of rating agencies increases.
Financial regulators are reviewing their approach to supervision and have sought or are seeking comments on changes to the global regulatory framework that could affect Moodyâ€™s. Bank regulators, under the oversight of the Basel Committee on Banking Supervision, have proposed using refined risk assessments as the basis for minimum capital requirements. The proposed Standardized Approach relies on rating agency opinions, while the proposed Internal Ratings Based Approach relies on systems and processes maintained by the regulated bank. The increased regulatory focus on credit risk presents both opportunities and challenges for Moodyâ€™s. Global demand for credit ratings and risk management services may rise, but regulatory actions may result in a greater number of rating agencies and/or additional regulation of Moodyâ€™s and its competitors. Alternatively, banking or securities market regulators could seek to reduce the use of ratings in regulations, thereby reducing certain elements of demand for ratings, or otherwise seek to control the analysis or business of rating agencies.
Credit rating agencies such as Moodyâ€™s also compete with other means of managing credit risk, such as credit insurance. Competitors that develop quantitative methodologies for assessing credit risk also may pose a competitive threat to Moodyâ€™s.
Moodyâ€™s Analyticsâ€™ main competitors for quantitative measures of default risk include the RiskMetrics Group, S&P, CreditSights, R&Iâ€™s Financial Technology Institute, Fitch Algorithmics, Dun and Bradstreet, and other smaller vendors, as well as models developed internally by customers. Other firms may compete in the future. Baker Hill, acquired by Experian, and Bureau van Dijk Electronic Publishing are Moodyâ€™s Analyticsâ€™ main competitors in the market for analytical software supporting commercial lending activities. Mercer Oliver Wyman competes with the professional services group at Moodyâ€™s Analytics for certain credit risk consulting services business. In economic analysis, data and modeling services, Moodyâ€™s Analytics faces competition from Global Insight, Haver Analytics and a number of smaller firms around the world.
Moodyâ€™s intends to focus on the following opportunities:
Expansion in Financial Centers
Moodyâ€™s serves its customers through its global network of offices and business affiliations. Moodyâ€™s currently maintains comprehensive rating and marketing operations in financial centers including Frankfurt, Hong Kong, London, Madrid, Milan, Moscow, New York, Paris, Singapore, Sydney and Tokyo. Moodyâ€™s expects that its global network will position it to benefit from the expansion of worldwide capital markets and thereby increase revenue. Moodyâ€™s also expects that the growth of its Moodyâ€™s Investors Service business as a consequence of financial market integration in Europe will continue. Additionally, Moodyâ€™s expects to continue its expansion into developing markets either directly or through joint ventures. This will allow Moodyâ€™s to extend its credit opinion franchise to local and regional obligors, through domestic currency ratings and national scale ratings.
New Rating Products
Moodyâ€™s is pursuing numerous initiatives to expand credit ratings, including from public fixed-income securities markets to other sectors with credit risk exposures. Within established capital markets, Moodyâ€™s continues to expand its rating coverage of bank loans and project finance loans and securities. In global and local counterparty markets, Moodyâ€™s offers distinct sets of rating products to address the creditworthiness of financial firms, including bank financial strength and deposit ratings, and insurance financial strength ratings. Moodyâ€™s has also introduced issuer ratings for corporations not active in the debt markets. In response to growing investor demand for expanded credit opinion in the high yield market, Moodyâ€™s has introduced a number of new products, including joint default analysis, corporate financial metrics, and both loss-given-default and probability-of-default ratings. The recent disruptions in the structured finance markets may provide opportunities to enhance structured finance offerings to meet investor demands for more information content. In order to capitalize on market developments and to enhance ratings surveillance efficiency, Moodyâ€™s has created a new products group within Moodyâ€™s Investors Service to focus on new ratings products, such as hedge fund operations quality ratings, and to identify, design, develop and maintain value-added research, analytics and data products serving the capital markets.
Internet-Enhanced Products and Services
Moodyâ€™s is expanding its use of the Internet and other electronic media to enhance client service. Moodyâ€™s website provides the public with instant access to ratings and provides the public and subscribers with credit research. Internet delivery also enables Moodyâ€™s to provide services to more individuals within a client organization than were available with paper-based products and to offer higher-value services because of more timely delivery. Moodyâ€™s expects that access to these applications will increase client use of Moodyâ€™s services. Moodyâ€™s expects to continue to invest in electronic media to capitalize on these and other opportunities.
Expansion of Credit Research Products and Investment Analytic Tools
Moodyâ€™s plans to expand its research and analytic services through internal development and through acquisitions. Most new product initiatives tend to be more analytical and data-intensive than traditional narrative research offerings. Such services address investor interest in replicating the monitoring activities conducted by, for example, Moodyâ€™s securitization analysts and provide the means for customers to gain access to raw data and adjusted financial statistics and ratios used by Moodyâ€™s analysts in the rating process for municipalities, companies and financial institutions. These products represent important sources of growth for the research business. Moodyâ€™s Analytics is developing products in the fixed-income valuations and pricing arena that facilitate price transparency in global fixed income markets, especially for complex structured securities and derivative instruments. Moreover, Moodyâ€™s continues to explore opportunities to extend its research relevance in new domestic or regional markets (e.g., China) as well as new functional markets (e.g., hedge funds).
New Quantitative Credit Risk Assessment Services
Moodyâ€™s will continue to provide banks and other institutions with quantitative credit risk assessment services. Moodyâ€™s believes that there will be increased demand for such services because they assist customers trading or holding credit-sensitive assets to better manage risk and deliver better performance. Also, international bank regulatory authorities are assessing the adequacy of banksâ€™ internal credit risk management systems for the purpose of determining regulatory capital. Such regulatory initiatives create demand for, and encourages adoption of, related services by banks from third-party providers.
In the United States, since 1975, Moodyâ€™s Investors Service (â€śMISâ€ť) has been designated as an NRSRO by the SEC. The SEC first applied the NRSRO designation in that year to companies whose credit ratings could be used by broker-dealers for purposes of determining their net capital requirements. Since that time, Congress, the SEC and other governmental and private bodies have used the ratings of NRSROs to distinguish between, among other things, â€śinvestment gradeâ€ť and â€śnon-investment gradeâ€ť securities.
In September 2006, the Credit Rating Agency Reform Act of 2006 (â€śReform Actâ€ť) was passed, which created a voluntary registration process for rating agencies wishing to be designated as NRSROs. The Reform Act provides the SEC with authority to oversee NRSROs, while prohibiting the SEC from regulating the substance of credit ratings or the procedures and methodologies by which any NRSRO determines credit ratings. In June 2007, the SEC published final rules to implement the Reform Act, which address the NRSRO application and registration process, as well as oversight rules related to recordkeeping, financial reporting, prevention of misuse of material non-public information, conflicts of interest, and prohibited acts and practices. In June 2007, MIS submitted to the SEC its application for registration as an NRSRO and in September 2007 the SEC registered MIS as an NRSRO under the Securities Exchange Act of 1934. Consequently, MIS is now subject to the SECâ€™s oversight rules described above and, as required by the rules, has made its Form NRSRO Initial Application publicly available by posting it on the Regulatory Affairs page of the Companyâ€™s website.
Internationally, several regulatory developments have occurred:
The Group of 7 Finance Minister and Central Bank Authorities (G-7 )â€”After their October 2007 meeting, the G-7 published a joint-statement outlining their intended approach to the recent financial turbulence. In this statement, the Finance Ministers formally asked the Financial Stability Forum (FSF) to analyze the underlying causes of the turbulence and to provide an update at the G-7â€™s meetings in late Spring 2008. The G-7 identified the following four areas on which it would like the FSF to offer proposals: liquidity and risk management; accounting and valuation of financial derivatives; role, methodologies and use of credit rating agencies in structured finance; and basic supervisory principles of prudential oversight, including the treatment of off-balance sheet vehicles. The FSF has been working on this request and is expected to provide its recommendations at the G-7â€™s Spring 2008 meeting.
IOSCO â€” In April 2007, the Technical Committee of the International Organization of Securities Commissions (â€śIOSCOâ€ť) announced that it would reconstitute the Task Force on rating agencies to undertake a new mandate on the role of credit rating agencies in relation to the development of structured finance products. This work is to be carried out in close cooperation with the Committee on the Global Financial System (CGFS). In November 2007, IOSCO announced the creation of a new and dedicated Task Force to review the issues facing securities regulators following the recent events in the global credit markets. The topics which will be covered by this Task Force include: risk management / prudential supervision; transparency / due diligence; valuation of assets / accounting issues; and, credit rating agencies. It is anticipated that the Task Force will present its final report to the Technical Committee in May 2008 during IOSCOâ€™s Annual Conference in Paris.
In December 2004, the Technical Committee of IOSCO published its Code of Conduct Fundamentals for Credit Rating Agencies (â€śIOSCO Codeâ€ť). MIS initially published its Code of Professional Conduct (â€śMIS Codeâ€ť) pursuant to the IOSCO Code in June 2005 and published an updated Moodyâ€™s Code in October 2007. In December 2007, MIS published its second, annual report on the implementation of the Moodyâ€™s Code. The two annual reports and the MIS Code can be found on the Regulatory Affairs page of the Companyâ€™s website.
European Union â€”The European Commission (â€śCommissionâ€ť) stated in January 2006 and again in January 2007 that recent European Union (â€śEUâ€ť) financial services legislative measures that are relevant to credit rating agencies, combined with a self-regulatory framework for rating agencies based on the IOSCO Code, provided a suitable framework for the oversight of rating agencies and that no legislative actions were required at the time. The Committee of European Securities Regulators (â€śCESRâ€ť) has been charged with monitoring rating agenciesâ€™ compliance with the IOSCO Code and reporting back to the Commission regularly. CESR conducted its first annual review to assess such compliance during 2006 and published its report in January 2007. CESR concluded that four internationally active rating agencies operating in the EU, including Moodyâ€™s, are largely compliant with the IOSCO Code, and it identified a few areas where it believed rating agencies could improve their processes and disclosures and where the IOSCO Code could be improved. CESR began its second annual review in 2007 and is evaluating the areas identified in its 2006 report, the impact of the Reform Act on the ratings business in the European Union, and the role of rating agencies in the structured finance process, including securitizations backed by subprime residential mortgages. As part of CESRâ€™s review process, CESR has on two occasions requested comments from rating agencies and other market participants. The written responses MIS submitted to the CESR questionnaires can be found on the Regulatory Affairs page of the Companyâ€™s website. CESR plans to publish its second annual report in mid-2008.
The Basel Committee â€”In June 2004, the Basel Committee on Banking Supervision published a new bank capital adequacy framework (â€śBasel IIâ€ť) to replace its initial 1988 framework. Under Basel II, ratings assigned by recognized credit rating agencies (called External Credit Assessment Institutions or â€śECAIsâ€ť) can be used by banks in determining credit risk weights for many of their institutional credit exposures. Recognized ECAIs could be subject to a broader range of oversight. National authorities have begun the ECAI recognition process. Moodyâ€™s has been recognized as an ECAI in several jurisdictions and the recognition process is ongoing in many others. Moodyâ€™s does not currently believe that Basel II will materially affect its financial position or results of operations.
In addition, as a result of the recent events in the U.S. subprime residential mortgage sector and the credit markets more broadly, various national and global regulatory and other authorities have initiated, or indicated that they are considering, reviews of the role of rating agencies in the U.S. subprime mortgage-backed securitization market and structured finance more generally. Moodyâ€™s is the subject of a number of such reviews and cannot predict the ultimate outcome of such current or potential future reviews, or their ultimate impact on the competitive position, financial position or results of operations of Moodyâ€™s.
Other legislation and regulation relating to credit rating and research services has been considered from time to time by local, national and multinational bodies and is likely to be considered in the future. In certain countries, governments may provide financial or other support to locally-based rating agencies. In addition, governments may from time to time establish official rating agencies or credit ratings criteria or procedures for evaluating local issuers. If enacted, any such legislation and regulation could change the competitive landscape in which Moodyâ€™s operates. In addition, the legal status of rating agencies has been addressed by courts in various decisions and is likely to be considered and addressed in legal proceedings from time to time in the future. Management of Moodyâ€™s cannot predict whether these or any other proposals will be enacted, the outcome of any pending or possible future legal proceedings, or regulatory or legislative actions, or the ultimate impact of any such matters on the competitive position, financial position or results of operations of Moodyâ€™s.
Moodyâ€™s and its affiliates own and control a variety of trade secrets, confidential information, trademarks, trade names, copyrights, patents, databases and other intellectual property rights that, in the aggregate, are of material importance to Moodyâ€™s business. Management of Moodyâ€™s believes that each of the trademarks and related corporate names, marks and logos containing the term â€śMoodyâ€™sâ€ť are of material importance to the Company. Moodyâ€™s is licensed to use certain technology and other intellectual property rights owned and controlled by others, and, similarly, other companies are licensed to use certain technology and other intellectual property rights owned and controlled by Moodyâ€™s. The Company considers its trademarks, service marks, databases, software and other intellectual property to be proprietary, and Moodyâ€™s relies on a combination of copyright, trademark, trade secret, patent, non-disclosure and contractual safeguards for protection.
The names of Moodyâ€™s products and services referred to herein are trademarks, service marks or registered trademarks or service marks owned by or licensed to Moodyâ€™s or one or more of its subsidiaries.
As of December 31, 2007, the number of full-time equivalent employees of Moodyâ€™s was approximately 3,600.
Mr. Clarkson has served as President and Chief Operating Officer of Moodyâ€™s Investors Service, Inc. since August 2007. Prior to assuming this position, Mr. Clarkson was Executive Vice President and Co-Chief Operating Officer of MIS, responsible for the Global Structured Finance and US Public Finance franchises from 2004 to 2007. He served as Senior Managing Director of the Asset Backed Finance Group from 2002 through 2003, and Group Managing Director of the Global Asset Finance Group from 1997 to 2001. From 1996 through 1997 he was Group Managing Director of the Mortgage Finance Group. He has also served as Managing Director of the Asset-Backed Securities Group from 1994 to 1996 and Associate Director in Moodyâ€™s Mortgage-Backed Finance Group from 1993 through 1994. He joined Moodyâ€™s Structured Finance Group as Senior Analyst in 1991. Mr. Clarkson is on the board of directors of the American Securitization Forum and Achievement First Endeavor.
Mr. Goggins has served as the Companyâ€™s Senior Vice President and General Counsel since October 1, 2000. Mr. Goggins joined Moodyâ€™s Investors Service, Inc. in February 1999 as Vice President and Associate General Counsel and became General Counsel in 2000.
Ms. Huber has served as the Companyâ€™s Executive Vice President and Chief Financial Officer since May 2005. Prior thereto, she served as Executive Vice President and Chief Financial Officer at U.S. Trust Company, a subsidiary of Charles Schwab & Company, Inc., from 2003 to 2005. Prior to U.S. Trust, she was Managing Director at Freeman & Co. from 1998 through 2002. She served PepsiCo as Vice President of Corporate Strategy and Development from 1997 until 1998 and as Vice President and Assistant Treasurer from 1994 until 1997. She served as Vice President in the Energy Investment Banking Group at Bankers Trust Company from 1991 until 1994 and as an Associate in the Energy Group at First Boston Corporation from 1986 through 1990. She also held the rank of Captain in the U.S. Army where she served from 1980 to 1984.
Mr. Kriegler has served as Senior Vice President and Chief Human Resources Officer of the Company since February 2007. He served as Canadian Country Managing Director from September 2000 to February 2007. Prior thereto, Mr. Kriegler served as a treasury executive for Canada Trust from 1997 to August 2000 and as an investment banker with the securitization and debt capital markets group at BMO Nesbitt Burns from 1993 to 1997. Prior thereto Mr. Kriegler was a securities trader at CIBC World Markets specializing in structured finance from 1990 to 1992 and an investment banker in 1993.
Mr. McCabe has served as the Companyâ€™s Senior Vice President and Corporate Controller since December 2005. Mr. McCabe joined Moodyâ€™s in July 2004 as Vice President and Corporate Controller. Before joining the Company, he served as Vice President â€” Corporate Controller at PPL Corporation, an energy and utility company, from 1994 to 2003. Prior to PPL Corporation, he served Deloitte & Touche as Partner from 1984 to 1993 and as a member of the firmâ€™s audit practice from 1973 to 1984.
Mr. McDaniel, Jr., has served as the Chairman and Chief Executive Officer of the Company since April 2005 and serves on the International Business Development Committee of the Board of Directors. Mr. McDaniel served as the Companyâ€™s President from October 2004 until April 2005 and the Companyâ€™s Chief Operating Officer from January 2004 until April 2005. He served as President of Moodyâ€™s Investors Service from November 2001 to August 2007. Mr. McDaniel served as the Companyâ€™s Executive Vice President from April 2003 to January 2004, and as Senior Vice President, Global Ratings and Research from November 2000 until April 2003. He served as Senior Managing Director, Global Ratings and Research, of Moodyâ€™s Investors Service, Inc. from November 2000 until November 2001 and as Managing Director, International from 1996 to November 2000. Mr. McDaniel is also a director of John Wiley & Sons, Inc.
Mr. Rotella has served as the Companyâ€™s Senior Vice President and Chief Information Officer since December 2006. Prior to joining the Company, he served as Chief Information Officer for American International Groupâ€™s (â€śAIGâ€ť) Domestic Brokerage group from 2003 to 2006, Operations and Systems Executive in 2006 and Global Chief Technology Officer from 2000 to 2003. Prior to AIG, from 1985 to 1999, Mr. Rotella was with American Management Systems (â€śAMSâ€ť), a technology consulting firm, where he held a variety of positions including Chief Technology Officer for AMSâ€™s Insurance Technology Group.
MANAGEMENT DISCUSSION FROM LATEST 10K
Except where otherwise indicated, the terms â€śMoodyâ€™sâ€ť and the â€śCompanyâ€ť refer to Moodyâ€™s Corporation and its subsidiaries. Moodyâ€™s is a provider of (i) credit ratings and related research, data and analytical tools, (ii) quantitative credit risk measures, risk scoring software, and credit portfolio management solutions and (iii) beginning in January 2008, fixed income pricing data and valuation models. In 2007 and prior years, Moodyâ€™s operated in two reportable segments: Moodyâ€™s Investors Service and Moodyâ€™s KMV (â€śMKMVâ€ť). Beginning in January 2008, Moodyâ€™s segments were changed to reflect the business reorganization announced in August 2007. As a result of the reorganization, the rating agency remains in the Moodyâ€™s Investors Service operating company and several ratings business lines have been realigned. All of Moodyâ€™s other commercial activities, including MKMV and sales of MIS research, are now combined under a new operating company known as Moodyâ€™s Analytics.
Moodyâ€™s Investors Service publishes rating opinions on a broad range of credit obligors and credit obligations issued in domestic and international markets, including various corporate and governmental obligations, structured finance securities and commercial paper programs. It also publishes investor-oriented credit information, research and economic commentary, including in-depth research on major debt issuers, industry studies, special comments and credit opinion handbooks.
The MKMV business develops and distributes quantitative credit risk assessment products and services including credit processing software and analytical tools for credit portfolio management.
Prior to September 30, 2000, the Company operated as part of The Dun & Bradstreet Corporation (â€śOld D&Bâ€ť). On September 8, 2000, the Board of Directors of Old D&B approved a plan to separate into two publicly traded companies â€“ the Company and The New D&B Corporation (â€śNew D&Bâ€ť). On September 30, 2000 (â€śthe Distribution Dateâ€ť), Old D&B distributed to its shareholders all of the outstanding shares of New D&B common stock (the â€ś2000 Distributionâ€ť). New D&B comprised the business of Old D&Bâ€™s Dun & Bradstreet operating company (the â€śD&B Businessâ€ť). The remaining business of Old D&B consisted solely of the business of providing ratings and related research and credit risk management services (the â€śMoodyâ€™s Businessâ€ť) and was renamed â€śMoodyâ€™s Corporationâ€ť.
New D&B is the accounting successor to Old D&B, which was incorporated under the laws of the State of Delaware on April 8, 1998. Old D&B began operating as an independent publicly-owned corporation on July 1, 1998 as a result of its June 30, 1998 spin-off (the â€ś1998 Distributionâ€ť) from the corporation now known as â€śR.H. Donnelley Corporationâ€ť and previously known as â€śThe Dun & Bradstreet Corporationâ€ť (â€śDonnelleyâ€ť). Old D&B became the accounting successor to Donnelley at the time of the 1998 Distribution.
Prior to the 1998 Distribution, Donnelley was the parent holding company for subsidiaries then engaged in the businesses currently conducted by New D&B, Moodyâ€™s and Donnelley. Prior to November 1, 1996, it also was the parent holding company of subsidiaries conducting business under the names Cognizant Corporation (â€śCognizantâ€ť) and ACNielsen Corporation (â€śACNielsenâ€ť). On that date Donnelley effected a spin-off of the capital stock of Cognizant and ACNielsen to its stockholders (the â€ś1996 Distributionâ€ť). Cognizant subsequently changed its name to Nielsen Media Research, Inc. in connection with its 1998 spin-off of the capital stock of IMS Health Incorporated (â€śIMS Healthâ€ť).
For purposes of governing certain ongoing relationships between the Company and New D&B after the 2000 Distribution and to provide for an orderly transition, the Company and New D&B entered into various agreements including a distribution agreement, tax allocation agreement, employee benefits agreement, shared transaction services agreement, insurance and risk management services agreement, data services agreement and transition services agreement.
Detailed descriptions of the 1996, 1998 and 2000 Distributions are contained in the Companyâ€™s 2000 annual report on Form 10-K, filed on March 15, 2001.
Critical Accounting Estimates
Moodyâ€™s discussion and analysis of its financial condition and results of operations are based on the Companyâ€™s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Moodyâ€™s to make estimates and judgments that affect reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the dates of the financial statements and revenue and expenses during the reporting periods. These estimates are based on historical experience and on other assumptions that are believed to be reasonable under the circumstances. On an ongoing basis, Moodyâ€™s evaluates its estimates, including those related to revenue recognition, accounts receivable allowances, contingencies, goodwill and intangible assets, pension and other post-retirement benefits and stock-based compensation. Actual results may differ from these estimates under different assumptions or conditions. The following accounting estimates are considered critical because they are particularly dependent on managementâ€™s judgment about matters that are uncertain at the time the accounting estimates are made and changes to those estimates could have a material impact on the Companyâ€™s consolidated results of operations or financial condition.
In recognizing revenue related to ratings, Moodyâ€™s uses judgments to allocate billed revenue between ratings and the future monitoring of ratings in cases where the Company does not charge ongoing monitoring fees for a particular issuer. These judgments are not dependent on the outcome of future uncertainties, but rather relate to allocating revenue across accounting periods. In such cases, the Company defers portions of rating fees that it estimates will be attributed to future monitoring activities and recognizes the deferred revenue ratably over the estimated monitoring periods.
The portion of the revenue to be deferred is based upon a number of factors, including the estimated fair market value of the monitoring services charged for similar securities or issuers. The monitoring period over which the deferred revenue will be recognized is determined based on factors such as the estimated lives of the rated securities. Currently, the estimated monitoring periods range from one to ten years. At December 31, 2007, 2006 and 2005, deferred revenue included approximately $54 million, $47 million and $36 million, respectively, related to such monitoring fees.
Additionally, in the case of commercial mortgage-backed securities, derivatives, international residential mortgage-backed and asset-backed securities, issuers can elect to pay the monitoring fees upfront. These fees are deferred and recognized over the future monitoring periods, ranging from nine to 46 years, which are based on the expected lives of the rated securities. At December 31, 2007, 2006 and 2005, deferred revenue related to these securities was approximately $86 million, $72 million and $57 million, respectively.
Moodyâ€™s estimates revenue for ratings of commercial paper for which, in addition to a fixed annual monitoring fee, issuers are billed quarterly based on amounts outstanding. Revenue is accrued each quarter based on estimated amounts outstanding and is billed when actual data is available. The estimate is determined based on the issuersâ€™ most recent reported quarterly data. At December 31, 2007, 2006 and 2005, accounts receivable included approximately $38 million, $34 million and $31 million, respectively, related to accrued commercial paper revenue. Historically, the Company has not had material differences between the estimated revenue and the actual billings.
Accounts Receivable Allowance
Moodyâ€™s records, as reductions of revenue, provisions for estimated future adjustments to customer billings based on historical experience and current conditions. Such provisions are reflected as additions to the accounts receivable allowance. Adjustments to and write-offs of accounts receivable are charged against the allowance. Moodyâ€™s evaluates its accounts receivable by reviewing and assessing historical collection and adjustment experience and the current status of customer accounts. Moodyâ€™s also considers the economic environment of the customers, both from an industry and geographic perspective, in evaluating the need for allowances. Based on its reviews, Moodyâ€™s establishes or adjusts allowances as considered appropriate in the circumstance. This process involves a high degree of judgment and estimation and could involve significant dollar amounts. Accordingly, Moodyâ€™s results of operations can be affected by adjustments to the allowance. Management believes that the allowance for uncollectible accounts is adequate to cover anticipated adjustments and write-offs under current conditions. However, significant changes in any of the above factors, or actual write-offs or adjustments that differ from the estimated amounts could result in revenue adjustments that are greater or less than Moodyâ€™s estimates. In each of 2007, 2006 and 2005, the Company adjusted its provision rates and its allowances to reflect its current estimate of the appropriate level of accounts receivable allowance.
Accounting for contingencies, including those matters described in the â€śContingenciesâ€ť section of this â€śManagementâ€™s Discussion and Analysis of Financial Conditions and Results of Operationsâ€ť, commencing on page 38 is highly subjective and requires the use of judgments and estimates in assessing their magnitude and likely outcome. In many cases, the outcomes of such matters will be determined by third parties, including governmental or judicial bodies. The provisions made in the consolidated financial statements, as well as the related disclosures, represent managementâ€™s best estimates of the then current status of such matters and their potential outcome based on a review of the facts and in consultation with outside legal counsel where deemed appropriate . The Company regularly reviews contingencies and as additional information becomes available may, in the future, adjust its associated liabilities. Based on its review of the latest information available, and subject to the contingencies described in Item 7. â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operations â€“ Contingenciesâ€ť, the ultimate liability of the Company in connection with pending legal and tax proceedings, claims and litigation is not likely to have a material adverse effect on Moodyâ€™s future reported results and financial position.
For the years ended December 31, 2007, 2006 and 2005, the provision for income taxes reflected credits of $27.3 million, $2.4 million and $8.8 million, respectively, due to changes in the Companyâ€™s liabilities for legacy income tax exposures that were assumed by Moodyâ€™s in connection with its separation from Old D&B in October 2000. These tax matters are more fully described under the caption â€śLegacy Contingenciesâ€ť within Item 7, â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operations.â€ť
Goodwill and Other Intangible Assets
Moodyâ€™s evaluates its goodwill for impairment annually or more frequently if impairment indicators arise in accordance with Statement of Financial Accounting Standards (â€śSFASâ€ť) No. 142, â€śGoodwill and Other Intangible Assetsâ€ť. The evaluation of the carrying value of goodwill requires that the Company make important assumptions and judgments about future operating results and cash flows as well as terminal values and discount rates. In estimating future operating results and cash flows, Moodyâ€™s considers internal budgets and strategic plans, expected long-term growth rates, and the effects of external factors and market conditions. If actual future operating results and cash flows or external conditions differ from the Companyâ€™s judgments, or if changes in assumed terminal values or discount rates are made, an impairment charge may be necessary to reduce the carrying value of goodwill, which charge could be material to the Companyâ€™s financial position and results of operations. Amortizable intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
The Company has engaged, and may continue to engage, in restructuring actions, which require management to utilize significant estimates related to expenses for severance and other employee benefit costs, contract termination costs and asset impairments. If the actual amounts differ from these estimates, the amount of the restructuring charge could be impacted. For a full description of Moodyâ€™s restructuring actions, refer to the â€śResults of Operationsâ€ť section below and Note 10 to the consolidated financial statements.
Pension and Other Post-Retirement Benefits
The expenses, assets, liabilities and obligations that Moodyâ€™s reports for pension and other post-retirement benefits are dependent on many assumptions concerning the outcome of future events and circumstances. These assumptions include the following:
future compensation increases, based on the Companyâ€™s long-term actual experience and future outlook
long-term return on pension plan assets, based on historical portfolio results and the expected future average annual return for each major asset class within the planâ€™s portfolio (which is principally comprised of equity and fixed-income investments)
future healthcare cost trends, based on historical market data, near-term outlooks and assessments of likely long-term trends
discount rates, based on current yields on high-grade corporate long-term bonds
The discount rate selected to measure the present value of the Companyâ€™s benefit obligations as of December 31, 2007 was derived using a cash flow matching method whereby the Company compares the plansâ€™ projected payment obligations by year with the corresponding yield on the Citibank pension discount curve. The cash flows are then discounted back to their present value and an overall discount rate is determined.
Moodyâ€™s major assumptions vary by plan and assumptions used are set forth in Note 11 to the consolidated financial statements. In determining these assumptions, the Company consults with outside actuaries and other advisors as deemed appropriate. While the Company believes that the assumptions used in its calculations are reasonable, differences in actual experience or changes in assumptions could have a significant effect on the expenses, assets and liabilities related to the Companyâ€™s pension and other post-retirement benefits.
When actual plan experience differs from the assumptions used, actuarial gains or losses arise. To the extent the total outstanding gain or loss exceeds a corridor threshold as defined in SFAS No. 87, â€śEmployersâ€™ Accounting for Pensionsâ€ť (â€śSFAS No. 87â€ť), the excess is subject to amortization in annual expense over the estimated average future working lifetime of active plan participants. For Moodyâ€™s pension and other post-retirement benefit plans, the total losses as of December 31, 2007 which have not been recognized in annual expense are $19.0 million and in 2008, Moodyâ€™s expects amortization of actuarial losses to be immaterial.
For Moodyâ€™s funded pension plan, the differences between the expected long-term rate of return assumption and actual experience could also affect the net periodic pension expense. As permitted under SFAS No. 87, the Company spreads the impact of asset experience over a five-year period for purposes of calculating the market related value of assets which is used in determining the expected return on assetsâ€™ component of annual expense and in calculating the total unrecognized gain or loss subject to amortization. As of December 31, 2007, the Company has an unrecognized asset gain of $4.1 million, of which $1.7 million will be recognized in the market related value of assets that is used to calculate the expected return on assetsâ€™ component of 2009 expense.
The table below shows the estimated effect that a one percentage-point decrease in each of these assumptions will have on Moodyâ€™s 2008 operating income (dollars in millions). These effects have been calculated using the Companyâ€™s current projections of 2008 assets, liabilities, obligations and expenses related to pension and other post-retirement plans, which could change as updated data becomes available.
Results of Operations
Year Ended December 31, 2007 compared with Year Ended December 31, 2006
Total Company Results
Moodyâ€™s revenue for 2007 totaled $2,259.0 million, an increase of $221.9 million, or 10.9%, from $2,037.1 million for the same period in 2006. The main contributors to this growth were the corporate finance and research lines of business, which increased $85.3 million, or 22.4%, and $69.8 million, or 27.4%, respectively. MKMV revenue contributed 5.4% of the Companyâ€™s year-over-year growth, driven by the software and risk subscriptions businesses.
Revenue in the United States was $1,361.8 million in 2007, an increase of $84.0 million, or 6.6%, from $1,277.8 million in 2006. Corporate finance and research revenue achieved strong growth of $51.7 million and $33.8 million, respectively, partially offset by a $29.4 million decline in structured finance, resulting from the significant slow down in the credit securitization markets.
International revenue was $897.2 million in 2007, an increase of $137.9 million, or 18.2%, from $759.3 million in 2006. Revenue from the structured finance, research and corporate finance lines of business contributed approximately $39 million, $36 million and $34 million, respectively, to the increase. Foreign currency translation accounted for approximately $39 million of international revenue growth.
During the fourth quarter of 2007, the Company committed to a restructuring plan (the â€śPlanâ€ť) in response to the Companyâ€™s reorganization and a decline in current and anticipated issuance of rated debt securities in some market sectors, as more fully described in Note 10 to the consolidated financial statements. A restructuring charge of $50.0 million was recorded in 2007, which consisted of $45.9 million of expenses relating to severance and other employee benefit costs, and $4.1 million for contract termination costs.
Moodyâ€™s operating and selling, general and administrative expenses (â€śSG&Aâ€ť) of $1,035.1 million in 2007 were $136.4 million, or 15.2%, more than $898.7 million in 2006. Compensation and benefits continue to be Moodyâ€™s largest expense, accounting for approximately 70% of total operating and SG&A expenses, representing approximately $77 million in growth from prior year. Moodyâ€™s average global staffing of approximately 3,500 employees during the year ended December 31, 2007 was approximately 13% higher than during 2006. This increase reflects the impact of hiring from late 2006 and the first half of 2007 to support business growth mainly in the U.S., Asian and European ratings businesses offset by a partial completion of the workforce reductions relating to the restructuring actions implemented in the fourth quarter of 2007. The table below shows Moodyâ€™s global staffing by operating segment and geographic area at December 31, 2007 and 2006.
Operating expenses were $584.0 million in 2007, an increase of $44.6 million, or 8.3%, from $539.4 million in 2006. Compensation and benefits expense comprised approximately 77% of the growth, reflecting normal salary increases coupled with higher staffing levels compared to prior year, partially offset by lower incentive compensation. The staffing level increase reflects hiring in the first half of 2007 to support business growth, primarily in the international ratings businesses where headcount increased by approximately 14% over 2006. Non-compensation expenses of $96.8 million increased $10.2 million primarily from professional service costs associated with technology investments.
Selling, general and administrative expenses were $451.1 million in 2007, an increase of $91.8 million, or 25.5%, from $359.3 million in 2006. Compensation expense of $238.8 million increased $46.5 million, or 24.2%, from 2006 reflecting increased staffing levels in the corporate compliance and technology support functions coupled with the increase in stock-based compensation. Non-compensation expense of $212.3 million was up $45.3 million, or 27.1%, over 2006 due to higher rent and occupancy costs of $39.3 million, or 88.2%, over 2006 primarily related to the Companyâ€™s relocation to its new corporate headquarters at 7 World Trade Center (â€ś7WTCâ€ť) and an increase in professional service costs of $21.6 million relating to technology investment spending and legal matters.
Operating income in 2007 includes a $50.0 million restructuring charge consisting of $45.9 million of expenses relating to severance and other employee benefit costs and $4.1 million for contract termination costs, as further discussed in Note 10 to the consolidated financial statements.
Operating income of $1,131.0 million decreased $128.5 million, or 10.2%, from $1,259.5 million in 2006, which reflects approximately $21 million of foreign currency translation gains. Moodyâ€™s operating margin for 2007 was 50.1% compared to 61.8% in 2006. The restructuring charge in 2007 decreased the 2007 margin by approximately 220 basis points while the gain on building sale increased the 2006 margin by approximately 790 basis points.
Interest and other non-operating (expense) income, net was $(14.3) million in 2007 compared with $1.0 million in 2006. Interest expense on borrowings was $40.7 million and $15.2 million for the years ended December 31, 2007 and 2006, respectively. The increase was due to borrowings under the Companyâ€™s credit facilities, the issuance of the $300.0 million Series 2007-1 Notes in September 2007, and issuance under the Companyâ€™s commercial paper program which was established in October 2007. Interest expense on FIN No. 48 tax liabilities was $21.5 million in 2007. In 2006, before Fin No. 48 became effective, interest on tax liabilities was reported as part of income tax expense, net of Federal tax benefit. There was also a $17.5 million reduction of accrued interest expense and a $14.4 million increase in other non-operating income both for amounts due to New D&B related to the â€śAmortization Expense Deductionsâ€ť legacy tax matter more fully described in Contingencies â€“ Legacy Contingencies, below. Interest income earned on short-term investments and invested cash balances was $19.3 million and $18.2 million for the years ended December 31, 2007 and 2006, respectively. Foreign exchange gains (losses) were immaterial in both 2007 and 2006.
Moodyâ€™s effective tax rate was 37.2% in 2007 compared to 40.2% in 2006. The 2007 and 2006 effective tax rates included benefits of $27.3 million and $2.4 million, respectively, related to legacy income tax matters, see â€śContingencies â€“ Legacy Tax Mattersâ€ť below for further information. Additionally in 2007, there was a $14.4 million increase in other non-operating income, which was not taxable, related to legacy tax matters. These matters favorably impacted the Companyâ€™s 2007 and 2006 effective tax rates by approximately 295 basis points and 30 basis points, respectively.
Net income was $701.5 million in 2007, a decrease of $52.4 million, or 7.0%, from $753.9 million in 2006. Basic and diluted earnings per share for 2007 were $2.63 and $2.58, respectively, compared to $2.65 and $2.58, respectively, for 2006. Excluding the restructuring charge in 2007, the gain on building sale in 2006 and legacy tax adjustments in both years, net income increased $21.8 million, or 3.3%, and earnings per share increased $0.25, or 11.1%, to $2.50 per share.
Moodyâ€™s Investors Service
Revenue at Moodyâ€™s Investors Service in 2007 was $2,104.2 million, up $209.9 million, or 11.1%, from $1,894.3 million in 2006. Ratings revenue accounted for $140.1 million of the increase, with growth largely driven by global corporate finance, and financial institutions. Foreign currency translation accounted for approximately $32 million of ratings revenue growth.
Global corporate finance revenue totaled $465.4 million in 2007, an increase of $85.3 million, or 22.4%, from $380.1 million in 2006. Revenue in the U.S. increased $51.7 million, or 21.0%, primarily due to exceptionally strong growth in speculative grade and bank loans in the first half of 2007 offset by revenue declines in the second half of 2007 compared to the second half of 2006. In the second half of 2007, U.S. investment grade revenue increased 57.0% compared to a 7.7% increase in the first half of 2007. International revenue of $167.1 million increased $33.6 million, or 25.2%, largely driven by growth in European investment grade and speculative grade bond issuance as well as a 71.2% increase in bank loan revenue.
Global financial institutions revenue was $303.1 million, up $36.3 million, or 13.6%, from $266.8 million in 2006. Revenue in the U.S. increased $15.1 million, principally due to strong performance within the banking and insurance sectors driven by debt refinancing and funding for share repurchases. International revenue of $165.3 million grew $21.2 million, or 14.7%, from prior year mainly due to increased corporate bond issuance activity and a significant number of new ratings mandates both within the European banking sector.
Global structured finance revenue was $890.6 million for 2007, an increase of 1.1%, or $10.0 million, from $880.6 million in 2006. Revenue in the U.S., decreased $29.4 million, or 5.0%, in a mixed year where strong growth in the first half, largely from the derivatives and commercial mortgage-backed securities sectors, was offset by significant revenue declines in the second half of 2007 principally in residential and commercial mortgage-backed securities as well as derivatives due to the credit market turmoil which began early in the third quarter of 2007. Outside the U.S., revenue of $328.5 million increased $39.4 million, or 13.6%, reflecting strong growth from derivatives and residential mortgage-backed securities of $19.7 million and $12.3 million, mostly in the European region. International growth was 40.4% in the first half of 2007 offset by a significant slowdown in the second half of 2007 due to the credit market turmoil. Foreign currency translation positively impacted international revenue growth by approximately $16 million.
Public finance revenue was $120.8 million, an increase of $8.5 million, or 7.6%, from $112.3 million in 2006. Revenue growth was driven by a $4.4 million, or 12.4% increase in the housing, health care, higher education, and infrastructure sectors as well as a $3.0 million, or 11.3%, increase in the municipal structured products sector.
Global research revenue of $324.3 million was $69.8 million, or 27.4%, higher than the $254.5 million in 2006, as a result of strong sales of core research products and analytic services to new and existing customers. U.S. revenue of $176.0 million increased $33.8 million, or 23.8%, and international revenue increased $36.0 million, or 32.1%, with 77.5% reflecting growth in Europe.
Moodyâ€™s Investors Service operating, and SG&A expenses, including corporate expenses, were $922.1 million, an increase of $133.0 million, or 16.9%, from $789.1 million in 2006. Compensation and benefits expense comprised the largest portion of the 2007 expense growth, accounting for 50.8% of the increase from 2006, reflecting normal salary increases, higher staffing primarily in the international ratings businesses where headcount grew approximately 16% from 2006, as well as in the corporate compliance and technology support functions. Stock-based compensation expense also contributed to the year-over-year increase primarily due to the higher Black-Scholes value of the 2007 equity grants compared to prior years. Non-compensation expenses in 2007 included increased rent and occupancy costs of $39.8 million related to the Companyâ€™s relocation to its new corporate headquarters at 7WTC and increases in professional service costs of approximately $25 million primarily due to information technology investment spending and legal expenses. Foreign currency translation contributed approximately $17 million to year-to-year growth in reported expenses.
Moodyâ€™s Investors Service operating income of $1,105.4 million in 2007 was down $137.5 million, or 11.1%, from $1,242.9 million in 2006. Operating income included a $45.6 million restructuring charge in 2007 and a $160.6 million gain on the sale of the former corporate headquarters building in 2006. Excluding the restructuring charge and gain on building sale, operating income increased $68.7 million, or 6.3%, with foreign currency translation contributing approximately $22 million of the growth.
Revenue at MKMV in 2007 was $154.8 million, up $12.0 million, or 8.4%, from $142.8 million in 2006. Global revenue was driven by growth in annualized risk subscriptions and software license fees of $8.8 million and $3.5 million, respectively. U.S. revenue of $66.8 million increased 6.9% from $62.5 million in 2006. Outside the U.S., revenue increased $7.7 million, or 9.6%, over prior year.
MKMVâ€™s operating and SG&A expenses in 2007 including the $4.4 million restructuring charge, were $117.4 million, an increase of $7.8 million, or 7.1%, from $109.6 million in 2006. Compensation and benefits expense increased $9.9 million primarily reflecting normal salary increases coupled with increased staffing as well as an approximate $2 million reduction of certain employee obligations reflected in 2006. MKMV operating income was $25.6 million for 2007, an increase of $9.0 million, or 54.2%, compared with $16.6 million in 2006. Excluding the restructuring charge, MKMVâ€™s 2007 operating income increased $13.4 million, or 80.7%, from 2006. Currency translation did not have a significant year-to-year impact on MKMV results.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Results of Operations
Three Months Ended September 30, 2007 Compared With Three Months Ended September 30, 2006
Consolidated Company Results
Moodyâ€™s revenue for the third quarter of 2007 was $525.0 million, an increase of $29.5 million, or 6.0%, from $495.5 million in 2006. Research and corporate finance were the main contributors to the growth, increasing 28.6% and 17.4%, respectively.
Revenue in the United States totaled $306.6 million, a slight decrease from $310.3 million in 2006. Ratings revenue growth in the corporate finance, financial institutions and public finance lines of business of 6.0%, 4.5%, and 11.5%, respectively were offset by a significant decline in U.S. residential mortgage backed securities (â€śRMBSâ€ť) within structured finance, while the research line of business exhibited strong growth.
Moodyâ€™s international revenue was $218.4 million, representing an increase of $33.2 million, or 17.9%, from $185.2 million in 2006. Corporate finance, structured finance and research lines of business contributed 36.1%, 21.4% and 29.8% to the year-over-year growth, respectively. Foreign currency translation accounted for $8.4 million of international revenue growth.
Operating, selling, general and administrative expenses were $262.9 million, an increase of $46.0 million, or 21.2%, from $216.9 million in 2006. The largest contributor to this increase was compensation and benefits expense of approximately $22 million, reflecting normal salary increases coupled with an approximate 17% increase in staffing levels offset by an approximate $7 million decrease in incentive compensation. The staffing increases included hiring in late 2006 and the first half of 2007 to support business growth primarily in the U.S. and European ratings businesses and the corporate compliance and technology support functions. Stock-based compensation expense increased $3.5 million year-over-year primarily due to the higher Black-Scholes value of the 2007 equity grants compared to prior years. Increases in non-compensation expenses were due to higher rent and occupancy costs of approximately $13 million primarily related to the Companyâ€™s relocation to its new corporate headquarters at 7 World Trade Center and an increase in outside service fees of approximately $5 million primarily due to information technology investment spending. Foreign currency translation accounted for approximately $5 million of the year-to-year expense growth.
Operating income of $250.5 million decreased $18.3 million, or 6.8%, from $268.8 million in 2006. Foreign currency translation increased operating income by approximately $4 million. Moodyâ€™s operating margin was 47.7% compared to 54.2% in 2006, a result of increased operating expenses and a slowdown in revenue growth.
Moodyâ€™s reported $9.0 million of interest and other non-operating expense, net compared with $3.1 million in 2006. Interest expense was $16.9 million and $3.8 million for the three months ended September 30, 2007 and 2006, respectively, with the increase related to interest on FIN No. 48 liabilities as well as interest expense on borrowings under the revolving credit facilities and the new Series 2007-1 Notes. Foreign exchange gains (losses) were $2.1 and ($1.0) million in 2007 and 2006, respectively.
Moodyâ€™s effective tax rate was 43.3% compared to 40.9% in 2006. The increase was due to the absence of the prior year favorable adjustment for certain tax credits, recognition in the current quarter the effects of the 2008 U.K. corporate tax rate change, and adjustments relating to the filing of the 2006 federal income tax return.
Net income was $136.9 million, compared to $157.0 million in 2006, a decrease of $20.1 million, or 12.8%. Basic and diluted earnings per share were $0.52 and $0.51, respectively, compared to $0.56 and $0.55, respectively, in 2006.
Moodyâ€™s Investors Service
Revenue at MIS was $487.9 million, up $28.3 million, or 6.2%, from $459.6 million in 2006. Ratings revenue accounted for $9.8 million of the increase, with growth largely from global corporate finance and financial institutions. Global research revenue contributed $18.5 million to the year over year growth. Foreign currency translation contributed $8.5 million to revenue growth.
Global structured finance revenue was $200.8 million, a decrease of $13.6 million, or 6.3%, from $214.4 million in 2006. U.S. revenue decreased $20.7 million, or 14.5%, over prior year led by a $23.2 million, or 52.4% decrease in revenue from rating RMBS, with offsetting growth from the commercial mortgage backed securities (â€śCMBSâ€ť) sector of $6.0 million, or 29.0%. International structured finance revenue increased $7.1 million, or 9.9%, to $78.6 million. This was driven by growth in credit derivative ratings of $9.5 million, or 40.1%, as well as strong growth in both RMBS and asset backed commercial paper of 31.6% and 34.8%, respectively. Offsetting these increases was a decline in revenue from rating CMBS and long-term asset backed securities of 33.1% and 23.4%, respectively. Favorable foreign currency translation also contributed to revenue growth.
Global corporate finance revenue was $105.1 million, up $15.6 million, or 17.4%, from $89.5 million in 2006. In the U.S., revenue increased 6.0% benefiting from a $5.6 million, or 67.5%, increase in investment grade corporate bonds, which was offset by a $4.0 million, or 42.6%, decline in revenue from rating high-yield securities. U.S bank loan ratings revenue increased $1.0 million or 5.5%. Outside the U.S., corporate finance revenue increased $12.0 million, or 40.3%, largely due to growth in European investment grade corporate bonds and bank loan issuance as well as favorable foreign currency translation.
Global financial institutions and sovereigns risk revenue was $68.8 million, an increase of $4.7 million, or 7.3%, from $64.1 million in 2006. In the U.S., revenue grew to $30.4 million, or 4.5% higher than 2006, reflecting growth in issuance related revenue in the banking sector as well as solid growth in the insurance sector. Internationally, revenue increased by $3.4 million, or 9.7%, compared to 2006 primarily due to issuance growth in the banking sector.
Public finance revenue increased $3.1 million, or 11.5%, to $30.0 million from $26.9 million in 2006, reflecting growth in the municipal and healthcare sectors of the business. In the municipal bond market, revenue was influenced by growth in combined issuance, which is comprised of new and refunding debt, as well as increases within new money issuance.
Global research revenue of $83.2 million was $18.5 million, or 28.6%, higher than the $64.7 million in 2006. Revenue grew by $8.6 million, or 23.6%, in the U.S., and $9.9 million, or 35.0%, internationally, with Europe accounting for approximately 76% of the international growth. Research and analytics services accounted for approximately 66% of global research revenue growth, reflecting strong sales of core research products to existing customers and growth in new customers, particularly in Europe.
Operating, selling, general and administrative expenses were $233.0 million, an increase of $42.5 million, or 22.3%, from $190.5 million in 2006. Compensation and benefits expense accounted for approximately $18 million, or 43%, of the growth, reflecting normal salary increases coupled with higher staffing levels compared to the prior year period offset by a decrease in incentive compensation. The staffing level was approximately 18% higher in the third quarter of 2007 versus the same period in 2006. The increases principally reflected hiring in late 2006 and the first half of 2007 to support business growth, primarily in the U.S. and European ratings businesses, as well as in the corporate compliance and technology support functions. Stock-based compensation expense increased $3.5 million year-over-year primarily due to the higher Black-Scholes value of the 2007 equity grants. Increases in non-compensation expenses were due to higher rent and occupancy costs of approximately $12 million primarily related to the Companyâ€™s relocation to its new corporate headquarters at 7 World Trade Center and an increase in outside service fees of approximately $5 million primarily due to information technology investment spending. Foreign currency translation accounted for approximately $4 million of the year-to-year expense growth.
Operating income of $245.8 million decreased $17.7 million, or 6.7%, from $263.5 million in 2006. Foreign currency translation increased operating income growth by approximately $4 million.
MKMV global revenue of $37.1 million was $1.2 million, or 3.3% more than in 2006, driven mostly by growth in risk subscriptions, which increased $1.9 million, or 7.7%, over prior year offset by a $0.8 million, or 10.8%, decline in software sales. Revenue earned outside the U.S accounted for $21.4 million, or 57.7% of global MKMV revenue.
Operating, selling, general and administrative expenses were $29.9, an increase of $3.5 million, or 13.3%, from $26.4 million in 2006. Compensation and benefits expense was the largest contributor to expense growth and increased approximately $4 million reflecting normal salary increases coupled with increased staffing in the first half of 2007. Operating income was $4.7 million compared with $5.3 million in 2006. Foreign currency translation did not have a significant year-to-year impact on MKMV results.
02-16-09 08:34 PM - Post#2008
In response to Stock_Man
In one of the interviews with CNBC, Buffett said Moody's intrinsic value has definitely been tarnished. Moody's played a huge role in this subprime mess.