Moody's Corporation (MCO) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome's to the Moody's Corporation First Quarter 2013 Earnings Call. [Operator Instructions] It is now my pleasure to turn the call over to Ms. Salli Schwartz, Global Head of Investor Relations. Please go ahead, ma'am.

Thank you. Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's' first quarter results for 2013. I'm Salli Schwartz, Global Head of Investor Relations. This morning, Moody's released its results for the first quarter of 2013. The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moodys.com. Ray McDaniel, President and Chief Executive Officer of Moody's Corporation, will lead this morning's conference call. Also making prepared remarks on the call this morning is Linda Huber, Chief Financial Officer of Moody's Corporation. Before we begin, I call your attention to the Safe Harbor language, which can be found towards the end of our earnings release. Today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In accordance with the act, I also direct your attention to the Management's Discussion and Analysis section and the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2012, and in other SEC filings made by the company, which are available on our website and on the Securities and Exchange Commission's website. These, together with the Safe Harbor statements, set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements. I would also like to point out that members of the media may be on the call this morning in a listen-only mode. I'll now turn the call over to Ray McDaniel.

Thank you, Salli. Good morning, and thank you to everyone for joining today's call. I'll begin by summarizing Moody's' first quarter 2013 results. Linda will follow with additional financial detail and operating highlights, and I will then speak to recent regulatory and legal developments and finish with comments on our outlook for 2013. After our prepared remarks, we will be happy to respond to your questions. First quarter revenue of $732 million increased 13% over the first quarter of 2012, reflecting strong operating performance for both Moody's Investors Service and Moody's Analytics. Operating expenses for the first quarter, which include a litigation settlement charge related to the resolution of our Abu Dhabi and Rhinebridge cases, were $451 million, a 19% increase from the first quarter of 2012. Excluding the litigation settlement charge, operating expenses increased 4% year-over-year. Operating income for the first quarter was $280 million, a 4% increase from the prior year period. Adjusted operating income, defined as operating income less depreciation and amortization, was $304 million, also up 4% from the same period last year. Excluding the litigation settlement charge, first quarter operating income and adjusted operating income increased 25% and 23%, respectively, year-over-year. Diluted earnings per share for the first quarter increased 9% from the prior year period to $0.83, which includes the litigation settlement charge of $0.14. Excluding the litigation settlement charge, diluted earnings per share of $0.97 increased 28% year-over-year. Our full year 2013 non-GAAP EPS guidance range is now $3.49 to $3.59, which reflects our continued focus on cost control and also excludes the impact of the litigation settlement charge. I'll now turn the call over to Linda to provide further commentary on our financial results and other updates.

Thanks, Ray. I'll begin with revenue at the company level. As Ray mentioned, Moody's' total revenue for the quarter increased 13% to $732 million. Foreign currency translation for the quarter was negligible. U.S. first quarter revenue increased 18% to $406 million, while revenue outside of U.S. grew 8% to $326 million and represented 45% of Moody's' total revenue, down slightly from the 47% in the year ago period. Recurring revenue grew 6% to $350 million and represented 48% of total revenue, down from 51% in the prior year period. Looking now at each of our businesses. Moody's Investors Service revenue for the quarter was $521 million, up 15% from the prior year period. The impact of foreign currency translation on MIS revenue was negligible. U.S. revenue for MIS increased 21% over the prior year period to $313 million. Revenue outside of the U.S. of $208 million increased 8% and represented 40% of total ratings revenue. Turning now to the MIS business lines. First, global corporate finance revenue in the first quarter increased 29% from the year ago period to $258 million, primarily driven by strong speculative-grade bank loan and bond issuance as corporations continued to take advantage of historically low interest rates. Revenue was up 25% year-over-year in the U.S. and up 36% outside of the U.S. Secondly, global structured finance revenue for the first quarter was $93 million, down 1% from the prior year period. In the U.S., revenue increased 26% year-over-year due to strong issuance of collateralized loan obligations and commercial mortgage-backed securities. Non-U.S. structured finance revenue was down 29% against the prior year period, primarily reflecting weaker issuance of residential mortgage-backed securities in Europe. Thirdly, global financial institutions revenue of $87 million increased 10% from the same quarter of 2011. U.S. revenue was up 14%, primarily reflecting increased bond issuance by insurance companies, while non-U.S. revenue was up 7% as compared to the first quarter of 2012, driven by stronger banking activity from issuers taking advantage of generally favorable market conditions. Finally for MIS, global revenue for the public project and infrastructure finance business rose 5% year-over-year to $83 million. Revenue was up 10% in the U.S. due to gains in both public and infrastructure finance, while non-U.S. revenue declined 3%. And turning now to Moody's Analytics. Global revenue for Moody's Analytics of $211 million was up 9% from the first quarter of 2012. Excluding the impact of foreign currency translation, revenue grew 10%. As you know, we have not made any organic acquisitions during the past year. We are very pleased with our organic revenue growth this quarter, which demonstrates the inherent strength of our underlying businesses and is among the strongest in our industry. U.S. revenue grew by 10% year-over-year to $93 million. Non-U.S. revenue increased 8% to $118 million and represented 56% of the total Moody's Analytics revenue. Looking now at each of the MA business lines. Revenue from research, data and analytics of $130 million increased 8% from the prior year period and represented 62% of total MA revenue. Our customer retention rate remains strong in the mid-90s percent range, and we continue to see solid demand for credit research via our CreditView offering. U.S. revenue was up 8% and non-U.S. revenue was up 9% as compared to the first quarter of 2012. Second, revenue from enterprise risk solutions of $53 million grew 10% from last year, reflecting strong growth of products and services that support bank regulatory and compliance activities. Revenue was up 12% in the U.S., and non-U.S. revenue was up 9% against the prior year period. Due to the variable nature of product timing, enterprise risk solutions' revenue remains subject to quarterly volatility. Third, professional services revenue grew 7% to $28 million, reflecting strong growth in revenue from Copal Partners, partially offset by softness in the training and certification business. U.S. revenue increased 32%, while non-U.S. revenue increased 3% year-over-year. Finally, we note that subscription revenue, which includes MA's research, data and analytics segment, of certain products within the MA's enterprise risk solution segment was up 9% for the first quarter of 2013. Turning now to expenses. Moody's' first quarter expenses were $451 million, an increase of 19% compared to the first quarter of 2012. However, excluding the litigation settlement related to the resolution of our Abu Dhabi and Rhinebridge cases, expenses were up 4% year-over-year. More specifically, this year's P&L will be impacted only in the first quarter by expenses associated with the litigation settlement charge, which is tax-deductible. The impact of foreign currency translation on operating expenses for the quarter was negligible. Moody's reported operating margin for the quarter was 38.3%, down from 41.6% in the first quarter of 2012. Adjusted operating margin was 41.5% for the quarter, down from 45.2% for the same period last year. Again, excluding the litigation settlement charge, first quarter reported operating margin and adjusted operating margin were 46.1% and 49.3%, respectively. Moody's effective tax rate for the quarter was 28.5% compared with 32.1% for the prior year period. Now I'll provide an update on capital allocation. During the first quarter of 2013, Moody's repurchased 1.9 million shares at a total cost of $91 million or an average price of $48.48 per share and issued 2.2 million shares under employee stock-based compensation plans, which are substantially issued in the first quarter of each year. Outstanding shares of March 30 -- as of March 31, 2013, totaled 222.9 million, reflecting a 1% decline from a year earlier. As of March 31, 2013, Moody's had $1.6 billion of share repurchase authority remaining under its current program, reflecting the additional $1.0 billion of share repurchase authority approved on February 12, 2013. As of March 31, 2013, Moody's had $1.6 billion of outstanding debt and $1 billion of additional debt capacity available under our revolving credit facility. Cash and cash equivalents were $1.8 billion as of March 31, 2013, an increase of $943 million from a year earlier. As of March 31, 2013, approximately 50% of our cash holdings were maintained outside the U.S. Free cash flow of $194 million increased $147 million from a year ago, due in part to first quarter 2012 payments related to the settlement of state and local matters. While -- we remain committed to using our strong cash flow to create value for shareholders while maintaining sufficient liquidity. And with that, I'll turn the call back over to Ray.

Thanks, Linda. I'll continue with a brief update on regulatory and legal developments. First, in the U.S. In December 2012, the SEC published its report under Dodd-Frank on matters related to assigning credit ratings for structured finance products, commonly referred to as Franken amendment study. On May 14, the commission will host a roundtable to which Moody's has been invited and in which we will participate. Turning to Europe. As discussed on previous calls, few additional steps remain in the legislative process for a third round of legislation related to credit rating agencies, known as CRA3, is finalized. We expect that CRA3 will come into effect sometime in the second half of 2013, and we are currently preparing for its implementation. Finally, as you are aware, last week, we settled 2 litigation matters known as the Abu Dhabi and Rhinebridge cases. These settlements allow us put the distraction of these very protracted legal matters behind us. I'll conclude this morning's prepared comments by discussing our full year guidance for 2013. Moody's' outlook for 2013 is based on assumptions about many macroeconomic and capital market factors, including interest rates, corporate profitability, business investment spending, merger and acquisition activity, consumer borrowing and securitization and the amount of debt issued. There's an important degree of uncertainty surrounding these assumptions, and if actual conditions differ, Moody's' results for the year may differ materially from the current outlook. Our guidance assumes foreign currency translation at end-of-quarter exchange rates. As I mentioned earlier, our full year 2013 non-GAAP EPS guidance range is now $3.49 to $3.59, which reflects our continued focus on cost control and also excludes the impact of the litigation settlement charge. For Moody's overall, the company still expects full year 2013 revenue to grow in the high single-digit percent range. Full year 2013 operating expenses are now projected to increase in the mid-single-digit percent range. Full year 2013 operating margin is now projected to be 41% to 42%, and adjusted operating margin for the year is now expected to be 44% to 45%. Guidance ranges for operating expenses, operating margin and adjusted operating margin all include the litigation settlement charge. The effective tax rate is still expected to be approximately 32%. We still expect full year 2013 share repurchases of approximately $500 million, subject to available cash, market conditions and other ongoing capital allocation decisions. Capital expenditures are still projected to be approximately $50 million. We still expect approximately $100 million in depreciation and amortization expense. Incremental compliance and regulatory expense is still projected to be $10 million to $15 million. Free cash flow is expected to be approximately $850 million. Certain components of our 2013 guidance have also been modified to reflect the company's currently view of business conditions. For the Global MIS business, revenue for full year 2013 is still expected to increase in the high single-digit percent range. Within the U.S., MIS revenue is now expected to increase in the low double-digit percent range, while non-U.S. revenue is now expected to increase in the low single-digit percent range, reflecting anticipated ongoing weakness in the European structured finance markets. Corporate finance revenue is now projected to grow in the low double-digit percent range. Revenue from structured finance is now expected to be about flat, while revenue from financial institutions is still expected to grow in the low single-digit percent range. Public project and infrastructure finance revenue is still expected to increase in the low double-digit percent range. For Moody's Analytics, full year 2013 revenue is still expected to increase in the high single-digit percent range. Within the U.S., Moody's Analytics revenue is also expected to increase in the high single-digit percent range. Non-U.S. revenue is now also expected to increase in the high single-digit percent range. Revenue from research, data and analytics is still projected to grow in the high single-digit percent range, while revenue for enterprise risk resolutions is still expected to grow in the low double-digit percent range. Professional services revenue is now projected to grow in the high single-digit percent range, reflecting softness in the training and certification business. This concludes our prepared remarks. And joining us for the question-and-answer session is Mark Almeida, President of Moody's Analytics. Michel Madelain, the President of Moody's Investor Service is traveling and unable to join us today. We'd be pleased to take any questions that you have.

[Operator Instructions] And we'll hear first from Manav Patnaik with Barclays.

The first question, just on the litigation settlement. I mean, I guess you've given us many different ways to back into it, which is helpful. Can you just maybe help clarify how that works with like, I guess, what the accounting is with the 20 million reserves you took last quarter, like does that have any adjustments in this quarter? And also what the tax rate for the tax-deductibility of that settlement is?

Well, with respect to the reserves, any remaining amounts that we had accrued for defense costs relating to Abu Dhabi or Rhinebridge are no longer necessary, and those have been reversed.

And Manav, it's Linda. We're not going to attempt to go through how the accounting works step by step on the call. However, we would note that our 10-Q is coming out later today. You may want to take a look at that. And as I said earlier in the script, the settlement charge is tax-deductible. We're not going to go into information on the specific rate, though.

Okay. Can I ask -- in terms of the guidance, which on the expense and margin side you obviously lowered because of the settlement charge, if we would exclude that, did the sort of ranges and commentary you provided us last quarter change one way or the other materially?

We had been at $3.45 to $3.55, which was a GAAP number. We've had the settlement charge, which is $0.14. Our new EPS guidance, which is non-GAAP, we would note, is $3.49 to $3.59. That centers on $3.54, which shows an increase of $0.04 as a result of, as Ray said, increased focus on cost control. Now we'll see where we go as we go through the year. Ray may want to comment a little bit further. We're only through 1 quarter of the year. In recent years, we've been surprised by things like interesting activities in Europe during the summer. So for this point in the year, we think that $3.49 to $3.59 feels about right.

Yes, I'd just emphasize Linda's point. On Europe, we have taken a cautious approach in our outlook. Hopefully, it's a conservative approach. But for each of the last few years, we have had periods of market interruption or dislocation really centered on some of the stresses and recessionary pressures in Europe.

Our next question today comes from Peter Appert with Piper Jaffray.

So Ray, you've enjoyed very impressive growth in the Moody's Investors Services business for the last several years. We're seeing some signs of life domestically in the structured finance markets. So I'm wondering how your thinking has changed, if at all, in terms of sustainable revenue growth outlook for the ratings side of the business now that structured finance seems to be coming back. Are you feeling any more optimistic about what the revenue numbers could look like over the next few years?

Well, as you note, Peter, I think I've been feeling pretty optimistic about the outlook for the last few years. We have said that we think we can, on average, grow at a low double-digit percent rate. Obviously, that will be subject to cyclical factors. But the underlying drivers for the business, I think, are as strong, if not stronger, today than they have been in recent years. As economic activity regains some momentum in the U.S., as Europe works through the stresses that it has to work through and the consequences of that in terms of changes in the banking system and growth in the bond markets, capital markets and the further maturation of the emerging capital markets, all of these are powerful. I'd also just note that the recent comments, very recent comments, coming out of the European Central Bank looking for resumption of asset-backed securitization activity in Europe are also encouraging, if a longer-term driver.

And Linda, on the tax rate, specifically for the first quarter, beyond litigation, there was something else going on, I assume. Can you help us understand that?

Sure, Peter. That was primarily due to the domestic tax benefit associated with the litigation settlement, but again, we'd ask you to take a look at the Q and see what you think, and then maybe we can help you a little bit further.

Okay, got it. And then, Linda, can you give me any guidance on the cost of implementation of CRA3? Is that going to be a big item?

What we've said in terms of the incremental regulatory and compliance expense, Peter, we've mentioned, and Ray just confirmed, $10 million to $15 million this year. We think we've got a good start on much of that, but again, those rules are not totally finalized. So we're going to have to wait and see what comes of that. Peter, I wanted to take just a moment to kind of go through market conditions, which Ray had touched on sort of in the macro. And if it's okay with you, we've got some commentaries around what we're hearing from the banks in terms of investment-grade and high-yield issuance, if that's okay with you?

Please.

Okay. So investment-grade issuance to date 2013, we've heard, has surprised to the upside. We've seen $325 billion of year-to-date issuance versus $319 billion in 2012, which is an increase of 2%. $50 billion had been expected in April, and the total came in at $106 billion. Now $17 billion of that was Apple, so you can do what you want with that information. One bank is reviewing its 2013 volume predictions of $800 billion and may move that up by $50 billion to $100 billion. Another is keeping its original forecast of $750 billion, as it expects issuance to flow in the second half of the year. So you can kind of look at some different views there on issuance. Apple had the largest U.S. dollar offering at $17 billion and generated demand of $50 billion, had the largest single tranche ever of $55 billion. Expected high-grade volumes in May are $80 billion to $100 billion, and expected high-grade second quarter volumes are $200 billion to $250 billion in issuance. The key things we're seeing: continuing drop in U.S. Treasury rates, which were 2.05% in March, 1.64% currently; and continued tightening in spreads. Investment-grade spreads are at record lows, 20 basis points tighter year-to-date, and that is very helpful for borrowers. We're seeing new and infrequent issuers playing a larger role this year. We've seen borrowers who haven't tapped the markets since before 2009 comprise 25% of corporate issuance. So that's a different borrower group than we've seen before. We're seeing dropped new issue concessions and preference for shorter-dated paper as investors are concerned about what will happen with the eventual Fed exit. Use of proceeds is mostly refinancing with some M&A and recent uptick in return of capital, such as Apple, and fund flows have been positive: $29 billion flowing into investment-grade funds versus $23 billion in 2012. If we turn to high yields, similarly to the high-grade market, high yield has outpaced expectations. Demand for loans, though, continues to outpace bonds. Bond, $130 billion year-to-date versus $127 billion last year. Loans at about double that pace, $286 billion in high-yield, high-leverage loans versus $108 billion last year. That's up 65%. We expect those volumes to be about -- bond volumes to be the same as 2012, and loans expected to be higher. We are seeing still a lot of CLO issuance, running 3x ahead of 2012. Use of proceeds for high yield is about 2/3 refinancing, and the balance, M&A and general corporate purposes. Funds flow is about $1.7 billion into bonds year-to-date, and significantly higher funds flows into leveraged loans, about 4x that of funds. $9.3 billion fund flows into leveraged loans. So we're continuing to see good fundamentals, good levels, and that's helpful to us. So sorry for the long explanation, but hope that's helpful.

That's great. That's very helpful. And can I just ask one other thing?

Sure.

With regard to the Abu Dhabi settlement, should we perhaps interpret that as an indication of greater willingness to consider settlement of other cases?

No. We haven't changed our view on how we handle litigation. As a general matter, our approach is unchanged. There were circumstances in this case that made us feel that the ongoing legal cost of 2 federal trials and the distraction of those cases made it in the best interest of shareholders that we go ahead and complete the settlement.

Our next question today comes from William Bird with Lazard.

I was wondering if you could talk about just your point of view on the durability of the strength you've seen in leveraged loans. And Linda, can you discuss, I guess, how you see your expense profile unfolding in coming quarters?

Sure. On leveraged loans, Bill, it seems to be the place where investors want to be in the high-yield sector right now. As I just said, fund flow is running 4x stronger into those leveraged loans, and it seems to be that, given the questions about the interest rate outlook, variable-rate paper seems to be more attractive to investors than fixed-rate paper. So we would expect that, that trend would probably continue. Now, of course, issuance in the high yield area, whether bonds or loans, is very specifically tied to that all-in funding cost. And if that moves, which it sometimes does, we can see periods where windows close pretty quickly. But for right now, things look relatively good.

Yes, I'd just add that some of this is -- I think we've characterized as opportunistic, given the rate environment that Linda referenced and the relatively narrow spreads that we're seeing. And some of it is, I think, again, more structural in terms of a shift in the mix of debt and the rating of bank loans that are then available to go into other vehicles such as collateralized loan obligations, and there's been a lot of demand for those vehicles. So I would expect that, outside of the opportunistic nature of this, we would also continue to see the diversification of the debt mix available in the market.

And Bill, on your second question regarding the expense outlook, we want to be very clear in explaining to everyone that first quarter includes all the charges related to the litigation settlements. That's it. So you won't see those in the future quarters. If you remove those settlement costs, we still expect expenses to ramp about $50 million over the balance of the year from Q1 sort of normalized expenses through to Q4. About half of that will be growth in compensation, and the other half will be various non-comp costs. So that's what the outlook is for right now.

And what was your incentive comp accrual in the quarter?

Sure. Hang on just one second. We'll get that for you. Okay, incentive comp for the quarter was about $30 million, which was about flat to last year's first quarter incentive compensation accrual.

And we'll take our next question from Alex Kramm with UBS.

Just staying on the, I guess, on the MIS business and the outlook there. It looks like this quarter, you had tremendous operating leverage if I back out the settlement charge. I mean, really, really high, like 90%-plus or so. So just maybe you can give us a little bit more color on what drove that. Obviously, you just talked about high yield being strong in bank loans, but maybe just talk about the different areas and how they changed your margin profile as we think about the outlook here.

Well, the strength in corporate finance in terms of issuance volumes was complemented by the mix because it was the speculative-grade part of that market that was so active. And that is, as we've discussed previously, a beneficial area for us financially when that is active. Linda may have some more specifics on this, but I don't think we had 90% leverage. But it was a good quarter, obviously.

Sure, Alex. Generally, I count on Craig to ask this question, but I'll go ahead anyway. For the first quarter of 2013, looking at the corporate line as compared to first quarter last year, investment grade was about flat at $44 million, but that was only 17% of the total corporate line of $258 million. Last year, it was higher at 22%. So high yield was considerably higher, $75.6 million versus $51.6 million last year, and it's 29% of the total corporate line. So you're correct. We've seen much greater revenue from this spec-grade line. Bank loans also considerably higher, $55.8 million this year versus $34.7 million last year. That's up 22%. And other accounts also up nicely to $82.4 million from $70 million last year. That's 32%. So the total for corporate is $258.3 million, and that represents 50% of the whole MIS business. So I hope that helps you.

Yes, I didn't mean to steal anybody's question. But real quick, just to stay on the same topic. When you compare bank loans and high yields, how do those margin profiles compare? I know you can't really compare because it's probably the same people, but how does that usually compare?

Yes, it is the same people, and it's really driven as much as anything by whether we are seeing relatively more refinancing or new money financing from new mandates. And this past quarter, we happened to have both a lot of new mandates, which, because they are more time consuming than companies that we already follow, are initially a lower-margin business, but we also had very high levels of refinancing. So it was just a strong quarter for spec-grade corporate book bonds and loans.

And Alex, as we put out the new investor deck here in a couple of days, we'll have more detail on the new mandates. But new mandates are running strong, and you can see that when we put out that new investor presentation pretty soon.

Great. Just moving on to the capital return real quick. I think you gave the number of 500 million for buybacks. Just backward looking a little bit here, I mean, you bought back a, I would say, small amount of stock in the first quarter. So any more color you can give us? I mean, the stock obviously got crushed, if I may used that word, in early February, and you obviously bought back at a good price. But it seems like you could have been a little bit more aggressive, in particular as you were working towards the settlement. So maybe a little bit more color here.

Alex, we'd point out a year is a long time, and we've only been through 1 quarter. We've done about $91 million worth, which is about 20% of the $500 million that we said we would do. So give us a little bit of time. Things have changed quite a bit here in the last week, so we're now focused on our forward-looking capital allocation program, which we will be discussing, and we'll take a look at our share repurchase. We'll take a look at our dividend levels. The stock price is higher. Dividend yields could use a little bit of work. We'll see where we go with that, but we were -- are well aware of the $500 million commitment, and we've got 3 quarters to go here.

And I'd just add that, again, our ability to conduct opportunistic share repurchase as opposed to programmatic share repurchase is constrained when we have information that the market doesn't, and these litigation settlements were something that we were obviously aware of in the weeks before it was announced.

Yes, that's what I figured. I just wanted to make sure. And then just last one for me. You gave a little bit of color on the outlook here for the second quarter. I think one area you didn't touch upon was the RMBS or -- particularly the private market there. It seems like we're seeing a few green shoots here with a little bit of issuance in the U.S. here, a couple of things coming to market. So any other color you could provide when you talk to the banks and issuers and so forth?

Yes, I would agree with you. We are seeing some green shoots. That market is coming back slowly as issuers and investors look at the appropriate terms, conditions for a resumption of the RMBS market. So the absolute volume levels are still quite light, even though we can see some progress. Unfortunately, it's being more than offset on a cyclical basis from the European side, where the RMBS market, as well as the covered bond market, have been very weak in the first quarter. But again, the good news there is we can see that, that is a cyclical downturn as opposed to something longer-term.

[Operator Instructions] We'll move next to Doug Arthur with Evercore.

Just -- I guess, one change in guidance in structured. You previously saw overall as up mid-single, now you're saying flat. And obviously, U.S. looks quite strong. So I'm wondering if you can elaborate on the weakness you're seeing in structured in Europe. And then, in terms of your guidance for the year, obviously, the comps in the second half, investment grade and high yield, are more difficult. Can you comment on that?

Yes. As you've, I think, correctly identified, there's a bit of a tug-of-war going on in structured finance, where we're seeing good growth in the U.S. and offsetting declines outside the U.S., particularly centered in Europe, as I said, and particularly centered in the mortgage-backed securities in Europe. Although, really, most asset categories in Europe were down in the first quarter. So we don't expect it to be down as much in the succeeding quarters as it was in the first quarter, but again, we are cautious about the pace of recovery in the European market. As I said earlier in our comments, hopefully, we are being overly conservative on that. But right now, we're just not seeing a lot in the pipeline there.

And Doug, it's Linda. In terms of MIS as a whole, MIS, as we said, did $521 million in the first quarter. The second quarter is about the same, and the third quarter would be the one where we'd ask everybody to focus a little bit and look at expectations for the third quarter in terms of the MIS revenue line. You're right that comps get tougher as we go through the year. But traditionally, third quarter has been a little bit softer. Again, as Ray had said, we continue to be on the watch for any unusual activity in terms of the European situation in the third quarter. And then the fourth quarter, as you pointed out, in 2012 was tremendously strong. And that, as we said on the previous call, may be the only one that isn't absolutely up from last year. So I hope that helps you in terms of how we're thinking about it, which, of course, may or may not be a correct and accurate forecast. We're going to have to see.

So let me just clarify. In the third quarter, you're saying traditionally -- obviously, it's a summer quarter. It's traditional weaker. So I mean, is your implication that, between that and the comps, it will not be up much at this -- obviously, it's very early to have a crystal ball.

No, that's -- we had an unusually strong third quarter last year. Just the market pattern didn't follow what we normally see, and we're assuming that the third quarter is going to go back to being a relatively light quarter.

Our next question comes from Craig Huber with Huber Research Partners.

I did want to just finish up that one question from before, Linda, if you could just break down within structured finance, financial institutions and PPIF, the revenue categories on a percentage basis and/or dollar?

Sure, Craig. So we did CFG, and we'll move on to structured. So for the first quarter 2013, global structured revenue was $93 million. And asset-backed securities of that is $23 million. It's about 25% of the total. RMBS, about $17 million, 18% of the total. Commercial real estate, $25 million, which is 28% of the total. And derivatives, $26.8 million, specifically, which is 29% of the total. So again, very good strength in derivatives, and that has been helpful to us. Moving on to the FIG line. We don't usually have a lot of exciting movement here. $86.5 million for the quarter. We're looking at $60 million for banking. It's about 70% of the total, which is about where we were last year. Insurance is $22 million, 26% of the total, marginally up from last year. Managed investments, $3.9 million, almost $4 million. That's 5%. So those percentages are relatively as they were last year, with maybe a bit more strength in insurance. Going on to public project and infrastructure. Total for the quarter is $83 million. Public finance and sovereigns, $42 million, which is 51% of the total, about flat from last year. Munis, about $4 million, again, flat from last year. Project and infrastructure, $37 million, 44%, about the same as last year. And again, the total for PPIF is $83 million. And I think that's it.

And then also just a couple of quick housekeeping questions, and I think I might have a follow-on. I think the last 2 quarters, your cash on your balance sheet, 50% to 52% of that was tied up overseas. What's the update on that number, please?

Sure. As we said on the script, that continues to be about 50-50. We've got about 8 50 [ph] in the U.S. and about 9 10 [ph] internationally, Craig.

Yes, so it's 48%, 52% right now.

Yes.

And is the plans of that, given just how expensive it is to take it, bring it back home here, given the tax situation, is just to keep it overseas and use it opportunistically for acquisitions?

Yes, that's correct.

And obviously, if there are opportunities to bring it back under some sort of tax holiday, we, like everyone else in corporate America, would look at that.

How much is your head count change here in the first 3 months this year, please?

Sure, hang on just a second. Let me see. Since the end of 2012, not too much. Let me see here. We are up, let me see, we're up only 73 people since the end of last year, which is about 1%. So we haven't grown too much. Over the course of the year, Craig, year-over-year comparisons were up 7%. And most of that, again, has been in the business lines, particularly Moody's Analytics, and particularly overseas. Those numbers do exclude -- include Copal Partners. So that can be a big addition, big line of addition for us.

And then my last question, please. Just speak a little about -- a little further about what happened over in Asia in the quarter on your ratings business.

Sure. The Corporate Finance business in Asia was strong, just as it was in Europe and the U.S. Structured finance, similar to Europe, was somewhat soft, although not nearly to the degree that Europe was. And financial institutions, we had growth that broadly reflected what we saw in the U.S. So low double-digit growth outside of Europe internationally. And public project and infrastructure finance, which is relatively small, but was down a bit in Asia.

If I could just sneak one more in here. This upcoming roundtable discussion, as you think about that, are you expecting much -- anything material to come out of that?

Well, we will be participating in it. There are a couple of different panels. I think, as you would expect, the roundtables are an opportunity for people with very diverse points of view to share their views and for the staff at the SEC to collect this wide range of viewpoints. I expect that's what's we're going to hear, given the roles and responsibilities of the different participants who are joining the roundtable.

[Operator Instructions] We'll move next to Patrick O'Shaughnessy with Raymond James. Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division: So my first question is with the Abu Dhabi and the King County cases resolved, I think that knocks out 2 of the 3 legal proceedings that you had discussed in your SEC filings. So maybe now is a good time to take a step back and kind of talk about where you see yourself in the overall process of dealing with these issues? And then, I guess, on a similar vein, when you are through dealing with all these issues, how do you view your professional expenses and the impact on your expense base when you no longer have to deal with all this stuff?

Yes. Just to answer the second question first, yes, we would expect to see a reduction in our ongoing legal defense costs from what they are today. The trials that -- or the lawsuits that we are continuing to deal with are -- many of them are in discovery, and the discovery process is a relatively expensive process. That being said, of the U.S. lawsuits that were filed since the financial crisis, we had about a little more than 4 dozen cases against us, and a little more than 3 dozen of those cases are -- have been disposed of in one way or another. Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division: Okay. So you have about a dozen outstanding cases that you're currently working your way through?

Yes, approximately.

[Operator Instructions] It appears there are no further questions or comments at this time.

Okay. I just want to thank everyone for joining the call today, and we look forward to speaking with you again in July. Thanks.

Thank you, ladies and gentlemen. This does conclude Moody's' First Quarter Earnings Call. And as a reminder, a replay of this call will be available after 3:30 p.m. Eastern time on Moody's' website, which is ir.moody's.com. Thank you.