10-KPeriod: FY2002

MOODYS CORP /DE/ Annual Report, Year Ended Dec 31, 2002

Filed March 21, 2003For Securities:MCO

Summary

Moody's Corporation (MCO) reported a strong financial performance for the fiscal year ended December 31, 2002, with total revenue reaching $1,023.3 million, a significant increase of 28.4% over the prior year. This growth was driven by robust performance in both its Moody's Investors Service (MIS) and the recently acquired Moody's KMV segments, with structured finance being a primary catalyst. The company demonstrated impressive operational leverage, with operating income growing by 35.0% to $538.1 million, resulting in an expanded operating margin of 52.6%. Net income increased to $288.9 million, translating to diluted earnings per share of $1.83. Moody's continues to focus on expanding its global reach and product offerings, particularly in structured finance and quantitative credit assessment services, positioning itself for continued growth in the evolving capital markets. Key financial strengths include solid operating cash flow and a significant share repurchase program. However, investors should be aware of the ongoing regulatory scrutiny faced by credit rating agencies and potential litigation risks, which are noted as contingent liabilities. The company's outlook for 2003 anticipates continued revenue growth in the mid-to-high single digits, with diluted EPS growth in the low double digits, before accounting for new stock-based compensation expense and insurance recoveries.

Key Highlights

  • 1Revenue increased by 28.4% to $1,023.3 million in 2002, driven by strong growth in structured finance and research.
  • 2Operating income grew by 35.0% to $538.1 million, with an improved operating margin of 52.6%.
  • 3Net income rose to $288.9 million, and diluted EPS reached $1.83, up from $1.32 in 2001.
  • 4The acquisition of KMV in April 2002 expanded Moody's into quantitative credit assessment services, contributing significantly to revenue and segment diversification.
  • 5Moody's maintained strong operating cash flow, generating $334.8 million in 2002.
  • 6The company continued its share repurchase program, authorizing an additional $450 million in October 2002.
  • 7Significant legal and tax contingencies were disclosed, with management expressing confidence they would not materially affect financial position, though potential cash outlays could be substantial.

Frequently Asked Questions

The primary drivers of Moody's revenue growth in 2002 were strong performance in global structured finance, growth in financial institutions and sovereign risk ratings, increased issuance in U.S. public finance, and a significant expansion in the global research business. The acquisition of KMV also contributed to overall revenue growth, particularly in the newly formed Moody's KMV segment.

The acquisition of KMV in April 2002 expanded Moody's operations into quantitative credit assessment services. For the portion of 2002 after the acquisition, KMV contributed $42.1 million in revenue. The integration of KMV created the Moody's KMV segment, which, while reporting an operating loss of $5.3 million in 2002 (largely due to acquisition-related charges and amortization), is expected to be a key growth area for the company, with a target of $200 million in revenue by 2005.

Moody's faces several risks and contingencies, including potential loss of market share due to competition from other rating agencies like S&P and Fitch, and the possibility of evolving regulatory landscapes for credit rating agencies in the US and Europe. The company also disclosed significant legacy tax matters related to its spin-off from Dun & Bradstreet, with potential liabilities estimated up to $202 million. Additionally, a lawsuit from AFPER in France seeking damages of approximately $2.9 billion related to Russian debt ratings is ongoing, though Moody's believes the claims lack merit.

Moody's strategy for future growth includes expanding its global presence in financial centers, developing new rating products beyond traditional fixed-income securities (e.g., bank loans, project finance, insurance financial strength), capitalizing on the growth in securitization markets, enhancing its internet-based products and services, expanding credit research and analytical tools, and growing its quantitative credit assessment services, particularly with the integration of KMV.