1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
1-14037
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Commission file number
MOODY'S CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-3998945
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(State of Incorporation) (I.R.S. Employer
Identification No.)
99 CHURCH STREET, NEW YORK N.Y. 10007
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 553-0300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Title of Class Shares Outstanding
at March 31, 2001
Common Stock,
Par value $0.01 per share 157.5 million
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MOODY'S CORPORATION
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) for the
Three Months Ended March 31, 2001 and 2000 ................................ 1
Condensed Consolidated Balance Sheets (Unaudited) at
March 31, 2001 and December 31, 2000 ...................................... 2
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Three Months Ended March 31, 2001 and 2000 ................................ 3
Notes to Condensed Consolidated Financial Statements (Unaudited) ......... 4 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .................. 9 - 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 15
Item 4. Submission of Matters to a Vote of Security Holders .............. 15
Item 6. Exhibits and Reports on Form 8-K ................................ 16
SIGNATURES ................................................................ 16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOODY'S CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
---- ----
REVENUE $ 180.2 $ 139.3
EXPENSES
OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 86.3 71.5
DEPRECIATION AND AMORTIZATION 4.1 4.0
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TOTAL EXPENSES 90.4 75.5
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OPERATING INCOME 89.8 63.8
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NON-OPERATING (EXPENSE) INCOME, NET (3.5) 0.5
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INCOME BEFORE PROVISION FOR INCOME TAXES 86.3 64.3
PROVISION FOR INCOME TAXES 38.3 28.4
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NET INCOME $ 48.0 $ 35.9
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EARNINGS PER SHARE
BASIC $ 0.30 $ 0.22
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DILUTED $ 0.30 $ 0.22
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WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 159.0 161.2
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DILUTED 161.1 162.5
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The accompanying notes are an integral part of the condensed
consolidated financial statements.
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MOODY'S CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
MARCH 31, 2001 DECEMBER 31, 2000
ASSETS
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 99.0 $ 119.1
ACCOUNTS RECEIVABLE, NET OF ALLOWANCES OF $28.1 IN 2001 AND $24.4 IN 2000 123.7 101.0
OTHER CURRENT ASSETS 57.1 57.5
-------------- --------------
TOTAL CURRENT ASSETS 279.8 277.6
PROPERTY AND EQUIPMENT, NET 42.3 43.4
PREPAID PENSION COSTS 54.4 53.8
INTANGIBLES ASSETS, NET 13.1 13.7
OTHER ASSETS 10.0 9.8
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TOTAL ASSETS $ 399.6 $ 398.3
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ 143.2 $ 135.4
DEFERRED REVENUE 150.4 117.7
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TOTAL CURRENT LIABILITIES 293.6 253.1
NOTES PAYABLE 300.0 300.0
OTHER LIABILITIES 129.9 127.7
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TOTAL LIABILITIES 723.5 680.8
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CONTINGENCIES (NOTE 4 )
SHAREHOLDERS' EQUITY
PREFERRED STOCK, PAR VALUE $ .01 PER SHARE; 10,000,000 SHARES AUTHORIZED;
NO SHARES ISSUED AND OUTSTANDING - -
SERIES COMMON STOCK, PAR VALUE $ .01 PER SHARE; 10,000,000 SHARES
AUTHORIZED; NO SHARES ISSUED AND OUTSTANDING - -
COMMON STOCK, PAR VALUE $ .01 PER SHARE; 400,000,000 SHARES AUTHORIZED;
171,451,136 SHARES ISSUED AND OUTSTANDING AT MARCH 31, 2001 AND 1.7 1.7
DECEMBER 31, 2000
CAPITAL SURPLUS 15.7 7.9
ACCUMULATED DEFICIT (182.3) (223.2)
TREASURY STOCK, AT COST; 13,989,634 AND 11,040,266 SHARES OF COMMON STOCK
AT MARCH 31, 2001 AND DECEMBER 31, 2000, RESPECTIVELY (155.7) (67.0)
CUMULATIVE TRANSLATION ADJUSTMENT (3.3) (1.9)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY (323.9) (282.5)
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 399.6 $ 398.3
-------------- --------------
The accompanying notes are an integral part of the
condensed consolidated financial statements.
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MOODY'S CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 48.0 $35.9
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 4.1 4.0
CHANGES IN ASSETS AND LIABILITIES:
INCREASE IN ACCOUNTS RECEIVABLE (22.8) (10.7)
DECREASE (INCREASE) IN OTHER CURRENT ASSETS 0.2 (0.3)
INCREASE IN PREPAID PENSION COSTS (0.6) (0.8)
INCREASE IN OTHER ASSETS (0.1) (0.3)
INCREASE (DECREASE) IN ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 8.1 (29.3)
INCREASE IN DEFERRED REVENUE 32.8 20.5
INCREASE (DECREASE) IN OTHER LIABILITIES 2.1 (1.3)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 71.8 17.7
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CASH FLOWS FROM INVESTING ACTIVITIES
NET CAPITAL ADDITIONS (3.0) (3.0)
ACQUISITION OF BUSINESS
-- (17.4)
OTHER 0.1 --
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NET CASH USED IN INVESTING ACTIVITIES (2.9) (20.4)
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CASH FLOWS FROM FINANCING ACTIVITIES
NET PROCEEDS FROM STOCK PLANS 15.6 --
COST OF TREASURY SHARES REPURCHASED (96.5) --
PAYMENT OF DIVIDENDS (7.1) --
NET DISTRIBUTIONS FROM OLD D&B -- 9.2
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NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (88.0) 9.2
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EFFECT OF EXCHANGE RATE CHANGES ON CASH (1.0) 0.4
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(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (20.1) 6.9
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 119.1 3.4
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CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 99.0 $10.3
====== =====
The accompanying notes are an integral part of the condensed
consolidated financial statements.
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MOODY'S CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BACKGROUND AND BASIS OF PRESENTATION
Moody's Corporation ("Moody's" or the "Company"), a global credit
rating, research and risk analysis firm, publishes credit opinions, research and
ratings on fixed-income securities, issuers of securities and other credit
obligations. The Company publishes rating opinions on a broad range of credit
obligations issued in domestic and international markets, including various
corporate and governmental obligations, structured finance securities and
commercial paper programs. The Company also publishes investor-oriented credit
research including in-depth research on major issuers, industry studies, special
comments and credit opinion handbooks. Moody's Risk Management Services develops
and distributes credit risk assessment software used by banks and other
financial institutions in their portfolio management, commercial lending and
other activities. It also provides modeling tools, analytics, credit education
materials, seminars, computer-based lending simulations and other products and
services.
The Company operated as part of The Dun & Bradstreet Corporation ("Old
D&B") until September 30, 2000 (the "Distribution Date"), when Old D&B separated
into two publicly traded companies - Moody's Corporation and The New D&B
Corporation ("New D&B"). At that time, Old D&B distributed to its shareholders
shares of New D&B stock. New D&B comprised the business of Old D&B's Dun &
Bradstreet operating company (the "D&B Business"). The remaining business of Old
D&B consisted solely of the business of providing ratings and related research
and risk management services (the "Moody's Business") and was renamed "Moody's
Corporation". The method by which Old D&B distributed its shares is hereinafter
referred to as the "Distribution".
For purposes of governing certain ongoing relationships between the
Company and New D&B after the 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.
Pursuant to the terms of the Distribution Agreement, the Company
retained all of the assets and liabilities related to the Moody's Business and
New D&B retained all of the assets and liabilities related to the D&B Business.
Prior to the Distribution Date, Old D&B provided certain centralized services to
the Company, the cost of which was allocated to the Company. Management believes
these allocations were reasonable; however, the costs of these services are not
necessarily indicative of the costs that would have been incurred if the Company
had performed or provided these services as a separate entity. The condensed
consolidated financial statements reflect the financial position, results of
operations and cash flows of the Company as if it were a separate entity for
all periods presented.
These interim financial statements have been prepared in accordance
with the instructions to Form 10-Q and should be read in conjunction with the
Company's consolidated financial statements and related notes in the Company's
2000 Annual Report on Form 10-K filed on March 15, 2001. The results of interim
periods are not necessarily indicative of results for the full year or any
subsequent period. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation of
financial position, results of operations and cash flows at the dates and for
the periods presented have been included.
2. RECONCILIATION OF SHARES USED IN COMPUTING EARNINGS PER SHARE
Below is a reconciliation of basic weighted average shares outstanding
to diluted weighted average shares outstanding:
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THREE
MONTHS ENDED
MARCH 31,
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(in millions)
2001 2000
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Weighted average number of shares - Basic 159.0 161.2
Dilutive effect of shares issuable under stock option,
restricted stock and performance share plans 2.1 1.3
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Weighted average number of shares - Diluted 161.1 162.5
====== =====
Options to purchase 4.9 million and 9.1 million shares of common stock
were outstanding at March 31, 2001 and 2000, respectively, but were not included
in the computation of diluted earnings per share for the respective three month
periods because the options' exercise prices were greater than the year-to-date
average market price of the Company's common stock (as adjusted for the
Distribution).
3. INDEBTEDNESS
Pursuant to the Distribution Agreement, Moody's was allocated $195.5
million of debt at September 30, 2000. Moody's funded this debt with borrowings
under a $160 million unsecured bank revolving credit facility and a bank bridge
line of credit.
On October 3, 2000 the Company issued $300 million of notes payable
(the "Notes") in a private placement. The Notes have a five-year term and bear
interest at an annual rate of 7.61%, payable semi-annually. The cash proceeds
from the Notes were used in part to repay the outstanding balance on the
revolving credit facility and to repay the bridge line of credit. In March 2001,
the Company paid $11.2 million in semi-annual interest.
The revolving credit facility (the "Facility"), which was undrawn as of
March 31, 2001, consists of an $80 million 5-year facility, which expires in
September 2005 and an $80 million 364-day facility, which expires in September
2001. Interest on outstanding borrowings is payable monthly at rates of interest
that are based on prevailing short-term interest rates at the time of such
borrowings.
The Notes and the Facility contain covenants that, among other things,
restrict the ability of the Company and its subsidiaries, without the approval
of the lenders, to engage in mergers, consolidations, asset sales and
sale-leaseback transactions or to incur liens, and require the Company to
maintain certain financial ratios.
4. CONTINGENCIES
Moody's is involved in legal proceedings, claims and litigation arising
in the ordinary course of business. Although the outcome of such matters cannot
be predicted with certainty, in the opinion of management, the ultimate
liability of Moody's in connection with such matters will not have a material
adverse effect on Moody's financial position, results of operations or cash
flows.
In addition, Moody's has certain other contingencies discussed below.
Information Resources, Inc.
On July 29, 1996, Information Resources, Inc. ("IRI") filed a complaint
in the United States District Court for the Southern District of New York,
naming as defendants the corporation then known as "The Dun & Bradstreet
Corporation" and, as
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discussed below, now known as "R.H. Donnelley Corporation"("Donnelley"), A.C.
Nielsen Company (a subsidiary of ACNielsen Corporation) and IMS International,
Inc. (a subsidiary of the company then known as Cognizant Corporation). At the
time of the filing of the complaint, each of the other defendants was a
subsidiary of Donnelley.
The complaint alleges various violations of United States antitrust
laws, including purported violations of Sections 1 and 2 of the Sherman Act. The
complaint also alleges a claim of tortious interference with a contract and a
claim of tortious interference with a prospective business relationship. These
claims relate to the acquisition by defendants of Survey Research Group Limited
("SRG"). IRI alleges SRG violated an alleged agreement with IRI when it agreed
to be acquired by the defendants and that the defendants induced SRG to breach
that agreement.
IRI's complaint alleges damages in excess of $350 million, which amount
IRI asked to be trebled under antitrust laws. IRI also seeks punitive damages of
an unspecified amount.
In November 1996, Donnelley completed a distribution to its
shareholders (the "1996 Distribution") of the capital stock of ACNielsen
Corporation ("ACNielsen") and Cognizant Corporation ("Cognizant"). On October
28, 1996, in connection with the 1996 Distribution, Cognizant, ACNielsen and
Donnelley entered into an Indemnity and Joint Defense Agreement (the "Indemnity
and Joint Defense Agreement") pursuant to which they have agreed (i) to certain
arrangements allocating potential liabilities ("IRI Liabilities") that may arise
out of or in connection with the IRI action and (ii) to conduct a joint defense
of such action. In particular, the Indemnity and Joint Defense Agreement
provides that ACNielsen will assume exclusive liability for IRI Liabilities up
to a maximum amount to be calculated at such time such liabilities, if any,
become payable (the "ACN Maximum Amount"), and that Donnelley and Cognizant will
share liability equally for any amounts in excess of the ACN Maximum Amount. The
ACN Maximum Amount will be determined by an investment banking firm as the
maximum amount that ACNielsen is able to pay after giving effect to (i) any plan
submitted by such investment bank that is designed to maximize the claims-paying
ability of ACNielsen without impairing the investment banking firm's ability to
deliver a viability opinion (but which will not require any action requiring
shareholder approval), and (ii) payment of related fees and expenses. For these
purposes, financial viability means the ability of ACNielsen, after giving
effect to such plan, the payment of related fees and expenses and the payment of
the ACN Maximum Amount, to pay its debts as they become due and to finance the
current and anticipated operating and capital requirements of its business, as
reconstituted by such plan, for two years from the date any such plan is
expected to be implemented. On February 19, 2001, ACNielsen announced that it
had merged with VNU N.V. Pursuant to the Indemnity and Joint Defense Agreement,
VNU is to be included with ACNielsen for purposes of determining the ACN Maximum
Amount, and VNU must assume ACNielsen's liabilities under that agreement.
In June 1998, Donnelley completed a distribution to its shareholders
(the "1998 Distribution") of the capital stock of Old D&B and changed its name
to R.H. Donnelley Corporation. In connection with the 1998 Distribution, Old D&B
and
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Donnelley entered into an agreement (the "1998 Distribution Agreement") whereby
Old D&B has assumed all potential liabilities of Donnelley arising from the IRI
action and agreed to indemnify Donnelley in connection with such potential
liabilities.
During 1998, Cognizant separated into two companies, IMS Health
Incorporated ("IMS Health") and Nielsen Media Research, Inc. ("NMR"). IMS Health
and NMR are each jointly and severally liable for all Cognizant liabilities
under the Indemnity and Joint Defense Agreement.
Under the terms of the 1998 Distribution Agreement, as a condition to
the Distribution, New D&B undertook to be jointly and severally liable with
Moody's for Old D&B's obligations to Donnelley under the 1998 Distribution
Agreement including any liabilities arising under the Indemnity and Joint
Defense Agreement. However, as between themselves, each of New D&B and Moody's
will be responsible for 50% of any payments to be made with respect to the IRI
action pursuant to the 1998 Distribution Agreement, including legal fees or
expenses related thereto.
Management is unable to predict at this time the final outcome of the
IRI action or whether the resolution of this matter could materially affect
Moody's results of operations, cash flows or financial position. As such, no
amount in respect of this matter has been accrued in the financial statements of
the Company.
Tax Matters
Pursuant to the Distribution Agreement, New D&B and Moody's have agreed
to each be financially responsible for 50% of any potential liabilities that may
arise with respect to the reviews described below, to the extent such potential
liabilities are not directly attributable to their respective business
operations.
Old D&B and its predecessors entered into global tax planning
initiatives in the normal course of business, principally through tax-free
restructurings of both their foreign and domestic operations. These initiatives
are subject to normal review by tax authorities. It is possible that additional
liabilities may be proposed by tax authorities as a result of these reviews and
that some of the reviews could be resolved unfavorably. At this time, Moody's
management is unable to predict the extent of such reviews, the outcome thereof
or whether the resolution of these matters could materially affect Moody's
results of operations, cash flows or financial position.
The IRS has completed its review of the utilization of certain capital
losses generated during 1989 and 1990. On June 26, 2000, the IRS, as part of its
audit process, issued a formal assessment with respect to the utilization of
these capital losses and Old D&B responded by filing a petition for a refund in
the U.S. District Court on September 21, 2000, after the payments described
below were made.
On May 12, 2000, an amended tax return was filed for the 1989 and 1990
tax periods, which reflected $561.6 million of tax and interest due. Old D&B
paid the IRS approximately $349.3 million of this amount on May 12, 2000. IMS
Health informed Old D&B that it paid to the IRS approximately $212.3 million on
May 17, 2000. The payments were made to the IRS to stop further interest from
accruing. Notwithstanding the filing and payment, New D&B is contesting the
IRS's formal assessment and would also contest the assessment of amounts, if
any, in excess of the amounts paid. Moody's had previously accrued its
anticipated share of the probable liability arising from the utilization of
these capital losses.
5. COMPREHENSIVE INCOME
Total comprehensive income was as follows:
THREE MONTHS
ENDED MARCH 31,
-------------------
(in millions)
2001 2000
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Net income.......................................... $ 48.0 $ 35.9
Other comprehensive (loss) income -
foreign currency translation adjustment (1.4) 0.8
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Total comprehensive income................. $ 46.6 $ 36.7
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6. SEGMENT INFORMATION
The Company reports segment information in accordance with SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information". In
accordance with SFAS No. 131, operating segments are defined as components of an
enterprise for which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The Company operates primarily
in one reportable business segment - ratings, which accounts for approximately
90% of the Company's total revenues. Revenue related to research products and
the risk management services business have been aggregated as "Other" for
reporting purposes. Given the dominance of the ratings segment to Moody's
overall results, the Company does not separately measure and report operating
income for the ratings business. Rather, revenue is the predominant measure
utilized by senior management for assessing performance and for the allocation
of resources, and operating income is evaluated for the Company as a whole. In
addition, assets are not allocated on a segment basis but are considered on a
total company basis only.
The ratings segment is comprised of four major rating groups, each of
which has similar economic and financial characteristics. They are corporate
finance ratings, structured finance ratings, financial institutions and
sovereign ratings and public finance ratings.
Revenue included in "Other" consists of research products revenue,
generated from the sale of investor-oriented credit research, and risk
management services revenue, generated from the sale of credit risk assessment
software and related products and services.
There are no intersegment sales and no single customer accounted for
10% or more of total revenue.
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
---- ----
(in millions)
Revenue:
Ratings:
Structured finance ratings..................... $ 59.1 $ 40.5
Corporate finance ratings...................... 54.5 44.6
Financial institutions and sovereign ratings... 31.4 27.4
Public finance ratings......................... 13.0 9.4
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Total ratings revenue.......................... 158.0 121.9
Other..................................................... 22.2 17.4
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Total revenue ................................. 180.2 139.3
Total expenses............................................ 90.4 75.5
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Operating Income.......................................... 89.8 63.8
Non-operating (expense) income, net....................... (3.5) 0.5
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Income before provision for income taxes.................. $ 86.3 $ 64.3
======= =======
Revenue by geographic area:
United States.......................................... $ 131.9 $ 99.8
International.......................................... 48.3 39.5
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Total revenue.......................................... $ 180.2 $139.3
======= =======
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7. SUBSEQUENT EVENTS
On April 10, 2001, Moody's Investors Service, Inc., a subsidiary of the
Company, agreed to a settlement with the Antitrust Division of the U.S.
Department of Justice arising from an isolated incident in 1996 involving the
destruction of documents. Under the terms of the settlement, Moody's Investors
Service, Inc. pleaded guilty to one count of obstruction of justice and agreed
to pay a fine of $195,000. A copy of the plea agreement embodying the settlement
is included as an exhibit to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on April 11, 2001. The impact of the plea
agreement, including the settlement, is not expected to have a material adverse
effect on the Company's results of operations, financial position or cash flows.
On April 23, 2001, the Board of Directors increased the authorization
under the existing $250 million share repurchase program by an additional $50
million.
On April 23, 2001, the Board of Directors also approved a quarterly
dividend of 4.5 cents per share of Moody's common stock, payable on June 10,
2001 to shareholders of record at the close of business on May 20, 2001.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE COMPANY
Except where otherwise indicated, the terms "Moody's" or "the Company"
refer to Moody's Corporation and its wholly owned subsidiaries. The Company is a
leading global credit rating, research and risk analysis firm in terms of market
position, revenue, income and a number of other relevant statistical standards.
The Company publishes rating opinions on a broad range of credit obligations.
These include various corporate and governmental obligations, structured finance
securities and commercial paper programs, issued in domestic and international
markets. Moody's also assigns ratings to issuers of securities, insurance
company obligations, bank loans, derivative products, bank deposits and other
bank debt and managed funds.
Closely integrated with its ratings services, Moody's provides research
services that are utilized by institutional investors and other credit
professionals. Organized according to industry and market segment, these
research services cover investment grade and speculative grade corporate bonds,
the global banking sector, municipal bonds, and mortgage- and asset-backed
securities, in cross-border and domestic markets worldwide.
Moody's Risk Management Services, Inc., a wholly owned subsidiary of
Moody's ("Moody's Risk Management Services"), develops and distributes credit
risk assessment software used by banks and other financial institutions in their
portfolio management, commercial lending and other activities. Moody's Risk
Management Services also provides modeling tools, analytics, credit education
materials, seminars, computer-based lending simulations and other products and
services.
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FACTORS AFFECTING COMPARABILITY
On September 30, 2000 (the "Distribution Date"), The Dun & Bradstreet
Corporation ("Old D&B") separated into two independent, publicly traded
companies - Moody's Corporation and The New D&B Corporation ("New D&B"). At that
time, Old D&B distributed to its shareholders shares of New D&B stock. New D&B
comprised the business of Old D&B's Dun & Bradstreet operating company ("the D&B
Business"). The remaining business of Old D&B consisted solely of the business
of providing ratings and related research and risk management services ("the
Moody's Business") and was renamed "Moody's Corporation". Old D&B's common stock
became Moody's common stock, and shares of common stock of Old D&B represent a
continuing interest in the Moody's Business. The financial statements of Moody's
have been restated to reflect the recapitalization described above.
For purposes of governing certain ongoing relationships between the
Company and New D&B after the 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.
Pursuant to the terms of the Distribution Agreement, the Company
retained all of the assets and liabilities related to the Moody's Business and
New D&B retained all of the assets and liabilities related to the D&B Business.
Prior to the Distribution Date, Old D&B provided certain centralized services to
the Company, the cost of which was allocated to the Company. Management believes
these allocations were reasonable; however, the costs of these services are not
necessarily indicative of the costs that would have been incurred if the Company
had performed or provided these services as a separate entity. The condensed
consolidated financial statements reflect the financial position, results of
operations, and cash flows of the Company as if it were a separate entity for
all periods presented.
OPERATING SEGMENTS
Moody's operates primarily in one reportable business segment: ratings,
which accounts for approximately 90% of the Company's total revenue. The ratings
segment is composed of four ratings groups: corporate finance, structured
finance, financial institutions and sovereigns, and public finance. Given the
dominance of the ratings segment to Moody's overall results, the Company does
not separately measure and report operating income for the ratings business.
Rather, revenue is the predominant measure utilized by senior management for
assessing performance and for the allocation of resources, and operating income
is evaluated for Moody's as a whole. Moody's also reports revenue separately for
two geographic areas: U.S. and international.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2000
Revenue for the first quarter of 2001 was $180.2 million, an increase
of $40.9 million or 29.4% from $139.3 million for the first quarter of the
previous year. The revenue growth reflected significant increase in ratings
revenue, primarily due to robust debt issuance in the U.S. capital markets
coupled with strong gains in European structured finance ratings. Double-digit
first quarter growth was achieved in research products revenue, due to strong
demand for products delivered via the Internet and increased international
sales.
Ratings revenue was $158.0 million in the first quarter of 2001, up
29.6% from $121.9 million in the first quarter of 2000. The increased revenue
was driven primarily by strong growth in U.S. corporate and public finance
issuance, principally as a result of declining interest rates, and significant
growth in structured finance issuance in the U.S. and Europe.
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Structured finance ratings revenue was $59.1 million for the first
quarter of 2001, an increase of $18.6 million or 45.9% from $40.5 million in the
first quarter of 2000. The increase was due to strong growth in the U.S. and
Europe across several market sectors including credit derivatives, asset backed
finance and residential mortgage-backed securities.
Revenue from corporate ratings was $54.5 million in the first quarter
of 2001, up $9.9 million or 22.2% from $44.6 million in the first quarter of
2000. Lower interest rates resulted in strong issuance growth in both investment
grade and high yield bonds in the U.S. In addition, revenue benefited from
Moody's new rating assessment service introduced in the second half of 2000.
Revenue from financial institutions and sovereign ratings was $31.4
million for the first three months of 2001, an increase of $4.0 million or 14.6%
from $27.4 million for the same period of 2000. Lower interest rates in the U.S.
drove increased investment grade issuance for banks and other financial
institutions.
Public finance ratings revenue increased 38.3% to $13.0 million for the
first quarter of 2001, from $9.4 million for the 2000 first quarter. This growth
was principally the result of a 43% increase in issuance in the U.S. municipal
bond market in the first three months of 2001, compared with the same period of
2000.
Other revenue increased 27.6% to $22.2 million for the first quarter of
2001, reflecting 20% growth in research products revenue, principally due to
strong demand for products delivered via the Internet. In addition, Moody's Risk
Management Services had 61% revenue growth over the first quarter of 2000,
reflecting a full quarter of revenue related to a January 2000 acquisition as
well as continued strong growth in credit risk management products.
Revenue in the United States was $131.9 million for the first quarter
of 2001, an increase of $32.1 million or 32.2% from $99.8 million in the first
quarter of 2000. This increase reflected strong growth in ratings revenue,
principally due to higher issuance volumes in several market sectors, including
corporate and municipal bonds, residential mortgage-backed securities and
collateralized bond obligations. The number of investment grade corporate issues
was up more than 50% for the first quarter, while the number of high yield
issues nearly doubled, compared to the same period in 2000. Issuance in the U.S.
asset-backed sector grew 45% during the first three months of 2001 versus the
first quarter of 2000.
Moody's international revenue was $48.3 million in the first quarter of
2001, an increase of 22.3% over $39.5 million in the same period of 2000. The
strong growth was principally driven by higher structured finance ratings
revenue in Europe. International research products revenue increased 25% over
the first quarter of 2000, reflecting strong demand for Moody's products
delivered via the Internet.
Operating, selling, general and administrative expenses were $86.3
million in the first quarter of 2001, an increase of $14.8 million, or 20.7%
over the first quarter of 2000. This increase was principally due to increased
compensation and related costs to support business expansion, higher incentive
compensation costs due to strong first quarter results, and increased corporate
overhead costs resulting from becoming a separate public company. Depreciation
and amortization was $4.1 million in the first quarter of 2001 versus $4.0
million in the first quarter of 2000.
Moody's operating income of $89.8 million for the first quarter of 2001
was up 40.8% from $63.8 million in the same period of 2000.
Non-operating expense was $3.5 million for the first quarter of 2001
compared with $0.5 million of non-operating income for the same period of 2000.
The 2001 expense principally reflected interest expense related to Moody's
private debt placement that was completed in the fourth quarter of 2000, offset
in part by interest income on invested cash. In the first quarter of 2000,
Moody's had a nominal amount of net interest expense.
Moody's effective tax rate was 44.4% in the first quarter of 2001
compared to 44.2% in the first quarter of 2000, reflecting a higher
international net effective tax rate.
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As a result of the foregoing, Moody's reported net income of $48.0
million for the first quarter of 2001, an increase of 33.7% over $35.9 million
for the same period of 2000. Basic and diluted earnings per share grew 36.4% to
$0.30 for the first quarter of 2001, compared with $0.22 for the first quarter
of 2000. On a pro forma basis, including interest expense on the private
placement debt (and excluding any interest income) for both periods, first
quarter diluted earnings per share would have been $0.29 for 2001 compared with
$0.20 for 2000, a gain of 45.0%.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $71.8 million and $17.7
million for the three months ended March 31, 2001 and 2000, respectively. The
significant increase in the first quarter of 2001 principally reflected the
growth in net income, as well as, timing of income tax payments, lower payments
of prior year bonuses in 2001 than in 2000 and increased cash collections in
2001 compared to 2000.
Net cash used in investing activities was $2.9 million for the three
months ended March 31, 2001 compared with $20.4 million for the same period of
2000. The first quarter 2000 amount included a $17.4 million expenditure for the
acquisition of a financial software products company.
Net cash used in financing activities was $88.0 million for the three
months ended March 31, 2001 and consisted primarily of $96.5 million for share
repurchases under the Company's share repurchase program and $7.1 million of
dividends paid, offset in part by proceeds and related tax benefits from
employee benefit arrangements. For the three months ended March 31, 2000, $9.2
million was provided by financing activities, representing distributions from
Old D&B.
Pursuant to the Distribution Agreement, Moody's was allocated $195.5
million of debt at September 30, 2000. Moody's funded this debt with borrowings
under a $160 million unsecured bank revolving credit facility and a bank bridge
line of credit. On October 3, 2000 the Company issued $300 million of notes in a
private placement. The private placement notes have a five-year term and bear
interest at an annual rate of 7.61%, payable semi-annually. The cash proceeds
from the private placement were used in part to repay the outstanding balance on
the revolving credit facility and to repay the bridge line of credit.
The revolving credit facility, which was undrawn as of March 31, 2001,
consists of an $80 million 5-year facility and an $80 million 364-day facility.
Interest on borrowings under the facility is payable monthly, at rates of
interest that are based on prevailing short-term interest rates at the time of
such borrowings.
A share repurchase program of up to $250 million was approved by the
Board of Directors in October 2000, which includes both special share
repurchases and systematic repurchases of common stock to offset the dilutive
effect of share issuances under Moody's employee benefit arrangements. On April
23, 2001, the Board of Directors increased the authorization under the existing
share repurchase program by an additional $50 million.
On April 23, 2001, the Board of Directors approved a quarterly dividend
of 4.5 cents per share of Moody's common stock, payable on June 10, 2001 to
shareholders of record at the close of business on May 20, 2001.
Moody's existing balances of cash, cash generated from operations and
debt capacity are expected to be sufficient to fund Moody's operating needs,
service debt and pay dividends, over the next year.
MARKET RISK
Moody's maintains operations in 14 countries outside of the United
States, and approximately 22% of its expenses are incurred in currencies other
than the U.S. dollar. Over 90% of Moody's revenues for the three months ended
March 31, 2001 were
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billed and collected in U.S. dollars. As such, the Company is exposed to market
risk from changes in foreign exchange rates.
As of March 31, 2001, approximately 11% of Moody's assets were located
outside the U.S. Of Moody's aggregate cash and cash equivalents of $99.0 million
at March 31, 2001, approximately $24.8 million was located outside the United
States (with $16.6 million in the United Kingdom), making the Company
susceptible to fluctuations in foreign exchange rates. Changes in the value of
these currencies relative to the U.S. dollar are charged or credited to the
cumulative translation adjustment in shareholders' equity.
The Company's policy permits investments in time deposits, commercial
paper and money market funds. Market risk associated with these investments is
considered insignificant.
The Company has not engaged in foreign currency hedging transactions
nor does the Company have any derivative financial instruments. However, going
forward, the Company will assess the need to enter into hedging transactions to
limit its risk due to fluctuations in exchange rates.
CONTINGENCIES
Moody's is involved in legal proceedings of a nature considered normal
to its business. In the opinion of management, although the outcome of such
legal proceedings cannot be predicted with certainty, the ultimate liability of
Moody's in connection with such legal proceedings will not have a material
effect on Moody's results of operations, cash flows or financial position.
In addition, Moody's has certain other contingencies discussed below.
Tax Matters
Pursuant to the Distribution Agreement, New D&B and Moody's have agreed
to each be financially responsible for 50% of any potential liabilities that may
arise with respect to the reviews described below, to the extent such potential
liabilities are not directly attributable to their respective business
operations.
Old D&B and its predecessors entered into global tax planning
initiatives in the normal course of business, principally through tax-free
restructurings of both their foreign and domestic operations. These initiatives
are subject to normal review by tax authorities. It is possible that additional
liabilities may be proposed by tax authorities as a result of these reviews and
that some of the reviews could be resolved unfavorably. At this time, Moody's
management is unable to predict the extent of such reviews, the outcome thereof
or whether the resolution of these matters could materially affect Moody's
results of operations, cash flows or financial position.
The IRS has completed its review of the utilization of certain capital
losses generated during 1989 and 1990. On June 26, 2000, the IRS, as part of its
audit process, issued a formal assessment with respect to the utilization of
these capital losses and Old D&B responded by filing a petition for a refund in
the U.S. District Court on September 21, 2000, after the payments described
below were made.
On May 12, 2000, an amended tax return was filed for the 1989 and 1990
tax periods, which reflects $561.6 million of tax and interest due. Old D&B paid
the IRS approximately $349.3 million of this amount on May 12, 2000. IMS Health
has informed Old D&B that it paid to the IRS approximately $212.3 million on May
17, 2000. The payments were made to the IRS to stop further interest from
accruing. Notwithstanding the filing and payment, New D&B is contesting the
IRS's formal assessment and would also contest the assessment of amounts, if
any, in excess of the amounts paid. Moody's had previously accrued its
anticipated share of the probable liability arising from the utilization of
these capital losses.
Information Resources, Inc.
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On July 29, 1996, IRI filed a complaint in the United States District
Court for the Southern District of New York, naming as defendants Donnelley,
ACNielsen and IMS Health. At the time of the filing of the complaint, each of
the other defendants was a subsidiary of Donnelley.
The complaint alleges various violations of United States antitrust
laws, including purported violations of Sections 1 and 2 of the Sherman Act.
The complaint also alleges a claim of tortious interference with a contract and
a claim of tortious interference with a prospective business relationship.
These claims relate to the acquisition by defendants of Survey Research Group
Limited ("SRG"). IRI alleges SRG violated an alleged agreement with IRI when it
agreed to be acquired by the defendants and that the defendants induced SRG to
breach that agreement.
IRI's complaint alleges damages in excess of $350 million, which amount
IRI has asked to be trebled under antitrust laws. IRI also seeks punitive
damages in an unspecified amount.
Under the terms of the 1998 Distribution Agreement, as a condition to
the Distribution, New D&B undertook to be jointly and severally liable with
Moody's for Old D&B's obligations to Donnelley under the 1998 Distribution
Agreement, including any liabilities relating to the IRI action. However, under
the Distribution Agreement, as between themselves, each of New D&B and Moody's
has agreed to be responsible for 50% of any payments to be made in respect of
the IRI action pursuant to the 1998 Distribution Agreement or otherwise,
including any legal fees or expenses related thereto.
Management is unable to predict at this time the final outcome of the
IRI action or whether the resolution of such matter could materially affect
Moody's results of operations, cash flows or financial position. See Note 4 to
the condensed consolidated financial statements, Contingencies, for additional
information.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains information about future expectations, plans
and prospects for the Company's business and operations that constitute
forward-looking statements. The forward-looking statements and other information
are made as of the date of this Form 10-Q, 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, customer reaction to, and the exercise by various governmental authorities
of their discretionary authority in respect of, the Company's guilty plea on
April 10, 2001, and the conduct underlying it; 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; 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 uncertainty
regarding market acceptance and revenue generating opportunities for web-based
research products; and other factors as discussed in The New D&B Corporation
Form 10 (Amendment No. 2) filed on September 11, 2000 with the Securities and
Exchange Commission and in other filings made by the Company from time to time
with the Securities and Exchange Commission.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information in response to this Item is set forth in Note 4 -
Contingencies in Part I, Item 1 of this Form 10-Q. For additional information
regarding the IRI matter, reference is made to Part I, Item 3 of Moody's Annual
Report on Form 10-K for the year ended December 31, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The shareholders of the Company voted on four items at the Annual
Meeting of Shareholders held on April 23, 2001:
1. the election of two directors, to terms ending in 2004;
2. a proposal to approve the 2001 Moody's Corporation Key Employees' Stock
Incentive Plan;
3. a proposal to approve the Amended and Restated 1998 Moody's Corporation
Non-Employee Directors' Stock Incentive Plan;
4. a proposal to ratify the appointment of PricewaterhouseCoopers LLP as
independent accountants for 2001.
The results of the votes were as follows:
1. Votes were cast for election of directors as follows:
Nominee Votes For Votes Withheld
-------- ---------- --------------
Hall Adams, Jr. 137,334,238 1,123,440
John Rutherfurd, Jr 122,193,378 16,264,300
There were no abstentions for this item.
2. The proposal of the 2001 Moody's Corporation Key Employees' Stock
Incentive Plan was approved as follows:
120,661,562 votes for approval;
16,955,831 votes against; and
840,285 abstentions
3. The proposal of the Amended and Restated 1998 Moody's Corporation
Non-Employee Directors' Stock Incentive Plan was approved as follows:
122,590,643 votes for approval;
14,981,600 votes against; and
885,435 abstentions
4. The appointment of PricewaterhouseCoopers LLP as independent
accountants for 2001 was approved as follows:
134,075,472 votes for approval;
3,873,496 votes against; and
508,710 abstentions
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
3. ARTICLES OF INCORPORATION AND BY-LAWS
.1 Restated Certificate of Incorporation of the Registrant dated
June 15, 1998, as amended effective June 30, 1998, and as
further amended effective October 1, 2000 (incorporated by
reference to Exhibit 3.1 to the Report on Form 8-K of the
Registrant, file number 1-14037, filed October 4, 2000).
.2 Amended and Restated By-laws of the Registrant (incorporated
by reference to Exhibit 3.2 of the Registrant's Registration
Statement on Form 10, file number 1-14037, filed June 18,
1998).
10. MATERIAL CONTRACTS
.1* Separation Agreement and General Release, dated as of April
10, 2001, between Moody's Investors Service, Inc. and Donald
Noe.
.2* Separation Agreement and General Release, dated as of April
10, 2001, between Moody's Investors Service, Inc. and
Kenneth J. H. Pinkes.
--------------
* Filed herewith
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K on April 11, 2001, on
which information was reported under Items 5 and 7.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 15, 2001:
MOODY'S CORPORATION
By: /s/ JEANNE M. DERING
-------------------------
Jeanne M. Dering
Senior Vice President and
Chief Financial Officer
Date: May 15, 2001:
By: /s/ CHARLES R. BRUSCHI
-------------------------
Charles R. Bruschi
Vice President and
Corporate Controller
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