Adjusted Operating Income
Operating income excluding restructuring, depreciation and amortization and a goodwill impairment charge
Adjusted Operating Margin
Adjusted Operating Income divided by revenue
Amba Investment Services; a provider of investment research and quantitative analytics for global financial institutions; a subsidiary of the Company acquired 100% of Amba in December 2013.
Represents countries within North and South America, excluding the U.S.
Accumulated other comprehensive income (loss); a separate component of shareholders’ equity (deficit); includes accumulated gains & losses on cash flow and net investment hedges, certain gains and losses relating to pension and other retirement benefits obligations and foreign currency translation adjustments.
The FASB Accounting Standards Codification; the sole source of authoritative
GAAP as of July 1, 2009 except for rules and interpretive releases of the SEC, which are also sources of authoritative GAAP for SEC registrants
Represents countries in Asia also including but not limited to: Australia and its proximate islands, China, India, Indonesia, Japan, Korea, Malaysia, Singapore and Thailand
The FASB Accounting Standards Updates to the ASC. It also provides background information for accounting guidance and the bases for conclusions on the changes in the ASC. ASUs are not considered authoritative until codified into the ASC
Capital adequacy framework published in June 2004 by the Basel Committee on Banking Supervision
A new global regulatory standard on bank capital adequacy and liquidity agreed by the members of the Basel Committee on Banking Supervision. Basel III was developed in a response to the deficiencies in financial regulation revealed by the global financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage.
The board of directors of the Company
Canary Wharf Lease
Operating lease agreement entered into on February 6, 2008 for office space in London, England, occupied by the Company in the second half of 2009
Corporate finance group; an LOB of MIS
Collateralized loan obligation
Commercial mortgage-backed securities; part of CREF
The Company’s common stock
Moody’s Corporation and its subsidiaries; MCO; Moody’s
Copal Partners; an acquisition completed in November 2011; part of the MA segment; leading provider of outsourced research and analytical services to institutional investors
Operating segment created in January 2014 that consists of all operations from Copal as well as the operations of Amba. The Copal Amba operating segment provides outsourced research and analytical services to the global financial and corporate sectors
Council of the European Union
Committee of Sponsoring Organizations of the Treadway Commission
Credit rating agencies
Regulation (EC) No 1060/2009 of the European Parliament and of the Council, establishing an oversight regime for the CRA industry in the EU
Regulation (EC) No 513/2011 of the European Parliament and of the Council, which transferred direct supervisory responsibility of the registered CRA industry in the EU to ESMA
Regulation (EC) No 462/2013 of the European Parliament and of the Council, which updated the regulatory regimes imposing additional procedural requirements on CRAs
Commercial real estate finance which includes REITs, commercial real estate collateralized debt obligations and CMBS; part of SFG
Research product offered by MA that provides credit professionals a comprehensive, consolidated and streamlined view of credit information
CSI Global Education, Inc.; an acquisition completed in November 2010; part of the MA segment; a provider of financial learning, credentials, and certification in Canada
Old D&B’s Dun & Bradstreet operating company
Defined benefit pension plans
Discounted cash flow; a fair value calculation methodology whereby future projected cash flows are discounted back to their present value
Ratio of Total Debt to EBITDA
The 1998 Moody’s Corporation Non-Employee Directors’ Stock Incentive Plan
September 30, 2000; the date which Old D&B separated into two publicly traded companies – Moody’s Corporation and New D&B
Earnings before interest, taxes, depreciation and amortization
European Central Bank
Represents countries within Europe, the Middle East and Africa
Earnings per share
The enterprise risk solutions LOB within MA; offers risk management software products as well as software implementation services and related risk management advisory engagements
European Securities and Market Authority
Estimated Selling Price; estimate of selling price, as defined in the ASC, at which the vendor would transact if the deliverable were sold by the vendor regularly on a stand-alone basis
The 1999 Moody’s Corporation Employee Stock Purchase Plan
Effective tax rate
European Ratings Platform
Central credit ratings website administered by ESMA
Excess Tax Benefit
The difference between the tax benefit realized at exercise of an option or delivery of a restricted share and the tax benefit recorded at the time that the option or restricted share is expensed under GAAP
The Securities Exchange Act of 1934, as amended
Financial Accounting Standards Board
Financial institutions group; an LOB of MIS
Fitch Ratings, a part of the Fitch Group
Financial Reform Act
Free Cash Flow
Dodd-Frank Wall Street Reform and Consumer Protection Act
Net cash provided by operating activities less cash paid for capital additions
Financial Services Training and Certifications; a reporting unit within the MA segment that includes on-line and classroom-based training services and CSI
U.S. Generally Accepted Accounting Principles
Gross domestic product
ICRA Limited; a leading provider of credit ratings and research in India. The Company previously held 28.5% equity ownership and in June 2014, increased that ownership stake to 50.06% through the acquisition of additional shares
Gain relating to the step-acquisition of ICRA; U.S. GAAP requires the remeasurement to fair value of the previously held non-controlling shares upon obtaining a controlling interest in a step-acquisition. This remeasurement of the Company’s equity investment in ICRA to fair value resulted in a pre-tax gain of $102.8 million ($78.5 million after tax) in the second quarter of 2014
The Company’s intellectual property, including but not limited to proprietary information, trademarks, research, software tools and applications, models and methodologies, databases, domain names, and other proprietary materials
Internal Revenue Service
Korea Investors Service, Inc.; a leading Korean rating agency and consolidated subsidiary of the Company
Korea Investors Service Pricing, Inc.; a Korean provider of fixed income securities pricing and consolidated subsidiary of the Company
Republic of South Korea
Legacy Tax Matter(s)
Exposures to certain potential tax liabilities assumed in connection with the 2000 Distribution
Lewtan Technologies; a leading provider of analytical tools and data for the global structured finance market; an acquisition completed in October 2014
London Interbank Offered Rate
Line of Business
Moody’s Analytics – a reportable segment of MCO formed in January 2008 which provides a wide range of products and services that support financial analysis and risk management activities of institutional participants in global financial markets.
Mergers and acquisitions
Make Whole Amount
The prepayment penalty relating to the Series 2005-1 Notes and Series 2007-1 Notes; a premium based on the excess, if any, of the discounted value of the remaining scheduled payments over the prepaid principal
Moody’s Corporation and its subsidiaries; the Company; Moody’s
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Moody’s Investors Service – a reportable segment of MCO
Consists of non-ratings revenue from ICRA, KIS Pricing and KIS Research. These businesses are managed by MIS; an LOB of MIS
Moody’s Corporation and its subsidiaries; MCO; the Company
Earnings attributable to Moody’s Corporation, which excludes the portion of net income from consolidated entities attributable to non-controlling shareholders
The New D&B Corporation – which comprises the D&B business after September 30, 2000
Not-meaningful percentage change (over 400%)
Nationally Recognized Statistical Rating Organization
Other comprehensive income (loss); includes gains and losses on cash flow and net investment hedges, certain gains and losses relating to pension and other retirement benefit obligations and foreign currency translation adjustments.
The former Dun and Bradstreet Company which distributed New D&B shares on September 30, 2000, and was renamed Moody’s Corporation
Other Retirement Plans
The U.S. retirement healthcare and U.S. retirement life insurance plans
Public, project and infrastructure finance; an LOB of MIS
Profit Participation Plan
Defined contribution profit participation plan that covers substantially all U.S. employees of the Company
Profit Participation Plan
Professional Services; an LOB of MA
Research, Data and Analytics; an LOB within MA that distributes investor-oriented research and data, including in-depth research on major debt issuers, industry studies, commentary on topical credit events, economic research and analytical tools such as quantitative risk scores, and other analytical tools that are produced within MA
Redeemable Noncontrolling Interest
Represents minority shareholders’ interest in entities which are controlled but not wholly-owned by Moody’s and for which Moody’s obligation to redeem the minority shareholders’ interest is represented by a put/call relationship
Credit Rating Agency Reform Act of 2006
Real estate investment trusts
In MIS, excluding MIS Other, relationship revenue represents the recurring monitoring of a rated debt obligation and/or entities that issue such obligations, as well as revenue from programs such as commercial paper, medium-term notes and shelf registrations. In MIS Other, relationship revenue represents subscription-based revenue. For MA, relationship revenue represents subscription-based revenue and maintenance revenue.
The Company’s business reorganization announced in August 2007 which resulted in two new reportable segments (MIS and MA) beginning in January 2008
Moody’s funded and unfunded U.S. pension plans, the U.S. post-retirement healthcare plans and the U.S. post-retirement life insurance plans
Residential mortgage-backed securities; part of SFG
Standard & Poor’s, a division of McGraw-Hill Financial, Inc.
Securities and Exchange Commission
Securities Act of 1933
Series 2005-1 Notes
Principal amount of $300 million, 4.98% senior unsecured notes; notes were paid in 2014
Series 2007-1 Notes
Principal amount of $300 million, 6.06% senior unsecured notes due in September 2017 pursuant to the 2007 Agreement
Structured finance group; an LOB of MIS
Selling, general and administrative expenses
Structured Investment Vehicle
The Old D&B’s 1998 Key Employees’ Stock Incentive Plan and the Restated 2001 Moody’s Corporation Key Employees’ Stock Incentive Plan
Current and long-term portion of debt as reflected on the consolidated balance sheets, excluding current accounts payable and accrued liabilities incurred in the ordinary course of business
Third party evidence, as defined in the ASC, used to determine selling price based on a vendor’s or any competitor’s largely interchangeable products or services in standalone sales transactions to similarly situated customers
For MIS, excluding MIS Other, revenue representing the initial rating of a new debt issuance as well as other one-time fees. In MIS Other, transaction revenue represents revenue from professional services and outsourcing engagements. For MA, transaction revenue represents software license fees and revenue from risk management advisory projects, training and certification services, and knowledge outsourcing engagements
Unrecognized tax benefits
Uncertain tax positions
Vendor specific objective evidence; evidence, as defined in the ASC, of selling price limited to either of the following: the price charged for a deliverable when it is sold separately, or for a deliverable not yet being sold separately, the price established by management having the relevant authority
Weighted average cost of capital
WebEquity Solutions LLC; a leading provider of cloud-based loan origination solutions for financial institutions. The Company acquired WebEquity on July 17, 2014
Old D&B’s 1998 Key Employees’ Stock Incentive Plan
The distribution by Old D&B to its shareholders of all of the outstanding shares of New D&B common stock on September 30, 2000
Agreement governing certain ongoing relationships between the Company and New D&B after the 2000 Distribution including the sharing of any liabilities for the payment of taxes, penalties and interest resulting from unfavorable IRS determinations on certain tax matters and certain other potential tax liabilities
The Amended and Restated 2001 Moody’s Corporation Key Employees’ Stock Incentive Plan
Note purchase agreement dated September 30, 2005 relating to the Series 2005-1 Notes
Note purchase agreement dated September 7, 2007 relating to the Series 2007-1 Notes
Revolving credit facility of $1 billion entered into on September 28, 2007, expiring in 2012
2008 Term Loan
Five-year $150.0 million senior unsecured term loan entered into by the Company on May 7, 2008
Supplemental indenture and related agreements dated August 19, 2010, relating to the 2010 Senior Notes
2010 Senior Notes
Principal amount of $500.0 million, 5.50% senior unsecured notes due in September 2020 pursuant to the 2010 Indenture
Revolving credit facility of $1 billion entered into on April 18, 2012, maturing in 2017
Supplemental indenture and related agreements dated August 18, 2012, relating to the 2012 Senior Notes
2012 Senior Notes
Principal amount of $500 million, 4.50% senior unsecured notes due in September 2022 pursuant to the 2012 Indenture
2013 Senior Notes
2014 Senior Notes (5- Year)
2014 Senior Notes (30-Year)
Supplemental indenture and related agreements dated August 12, 2013, relating to the 2013 Senior Notes
Principal amount of $500 million, 4.875% senior unsecured notes due in February 2024 pursuant to the 2013 Indenture
Supplemental indenture and related agreements dated July 16, 2014, relating to the 2014 Senior Notes
Principal amount of $450 million, 2.75% senior unsecured notes due in July 2019
Principal amount of $300 million, 5.25% senior unsecured notes due in July 2044
The Company’s corporate headquarters located at 7 World Trade Center
Operating lease agreement entered into on October 20, 2006
GLOSSARY OF TERMS AND ABBREVIATIONS
The following terms, abbreviations and acronyms are used to identify frequently used terms in this report:
NOTE 1 DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Moody’s is a provider of (i) credit ratings, (ii) credit, capital markets and economic research, data and analytical tools, (iii) software solutions and related risk management services, (iv) quantitative credit risk measures, financial services training and certification services and (v) outsourced research and analytical services to institutional customers. Moody’s has two reportable segments: MIS and MA.
MIS, the credit rating agency, publishes credit ratings on a wide range of debt obligations and the entities that issue such obligations in markets worldwide. Revenue is primarily derived from the originators and issuers of such transactions who use MIS ratings in the distribution of their debt issues to investors. Additionally, MIS earns revenue from certain non-ratings-related operations which consist primarily of the distribution of research and fixed income pricing services in the Asia-Pacific region and outsourced services. The revenue from these operations is included in the MIS Other LOB and is not material to the results of the MIS segment.
The MA segment develops a wide range of products and services that support financial analysis and risk management activities of institutional participants in global financial markets. Within its Research, Data and Analytics business, MA distributes research and data developed by MIS as part of its ratings process, including in-depth research on major debt issuers, industry studies and commentary on topical credit-related events. The RD&A business also produces economic research as well as data and analytical tools such as quantitative credit risk scores. Within its Enterprise Risk Solutions business, MA provides software solutions as well as related risk management services. The Professional Services business provides outsourced research and analytical services along with financial training and certification programs.
Recently Issued Accounting Pronouncements
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include those of Moody’s Corporation and its majority- and wholly-owned subsidiaries. The effects of all intercompany transactions have been eliminated. Investments in companies for which the Company has significant influence over operating and financial policies but not a controlling interest are accounted for on an equity basis whereby the Company records its proportional share of the investment’s net income or loss as part of other non-operating income (expense), net and any dividends received reduce the carrying amount of the investment. The Company applies the guidelines set forth in Topic 810 of the ASC in assessing its interests in variable interest entities to decide whether to consolidate that entity. The Company has reviewed the potential variable interest entities and determined that there are no consolidation requirements under Topic 810 of the ASC. The Company consolidates its ICRA subsidiaries on a three month lag.
Cash and Cash Equivalents
Cash equivalents principally consist of investments in money market mutual funds and money market deposit accounts as well as high-grade commercial paper and certificates of deposit with maturities of three months or less when purchased.
Short-term investments are securities with maturities greater than 90 days at the time of purchase that are available for operations in the next twelve months. The Company’s short-term investments primarily consist of certificates of deposit and their cost approximates fair value due to the short-term nature of the instruments. Interest and dividends on these investments are recorded into income when earned.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives. Expenditures for maintenance and repairs that do not extend the economic useful life of the related assets are charged to expense as incurred.
Research and Development Costs
All research and development costs are expensed as incurred. These costs primarily reflect the development of credit processing software and quantitative credit risk assessment products sold by the MA segment.
Research and development costs were $37.9 million, $22.8 million, and $16.1 million for the years ended December 31, 2014, 2013 and 2012, respectively, and are included in operating expenses within the Company’s consolidated statements of operations. These costs generally consist of professional services provided by third parties and compensation costs of employees.
Costs for internally developed computer software that will be sold, leased or otherwise marketed are capitalized when technological feasibility has been established. These costs primarily relate to the development or enhancement of products in the ERS business and generally consist of professional services provided by third parties and compensation costs of employees that develop the software. Judgment is required in determining when technological feasibility of a product is established and the Company believes that technological feasibility for its software products is reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to customers. Accordingly, costs for internally developed computer software that will be sold, leased or otherwise marketed that were eligible for capitalization under Topic 985 of the ASC as well as the related amortization expense related to such costs were immaterial for the years ended December 31, 2014, 2013 and 2012.
Computer Software Developed or Obtained for Internal Use
The Company capitalizes costs related to software developed or obtained for internal use. These assets, included in property and equipment in the consolidated balance sheets, relate to the Company’s accounting, product delivery and other systems. Such costs generally consist of direct costs for third-party license fees, professional services provided by third parties and employee compensation, in each case incurred either during the application development stage or in connection with upgrades and enhancements that increase functionality. Such costs are depreciated over their estimated useful lives on a straight-line basis. Costs incurred during the preliminary project stage of development as well as maintenance costs are expensed as incurred.
Long-Lived Assets, Including Goodwill and Other Acquired Intangible Assets
Moody’s evaluates its goodwill for impairment at the reporting unit level, defined as an operating segment or one level below an operating segment, annually as of July 31 or more frequently if impairment indicators arise in accordance with ASC Topic 350.
The Company evaluates the recoverability of goodwill using a three-step impairment test approach at the reporting unit level. In the first step, the Company assesses various qualitative factors to determine whether the fair value of a reporting unit may be less than its carrying amount. If a determination is made that, based on the qualitative factors, an impairment does not exist, the Company is not required to perform further testing. If the aforementioned qualitative assessment results in the Company concluding that it is more likely than not that the fair value of a reporting unit may be less than its carrying amount, the fair value of the reporting unit will be determined and compared to its carrying value including goodwill. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and the Company is not required to perform further testing. If the fair value of the reporting unit is less than the carrying value, the Company must perform a third step of the impairment test to determine the implied fair value of the reporting unit’s goodwill. The implied fair value of the goodwill is determined based on the difference between the fair value of the reporting unit and the net fair value of the identifiable assets and liabilities of the reporting unit. If the implied fair value of the goodwill is less than its carrying value, the difference is recognized as an impairment charge. For the reporting units where the Company is consistently able to conclude that an impairment does not exist using only a qualitative approach, the Company’s accounting policy is to perform the second step of the aforementioned goodwill impairment assessment at least once every three years. Goodwill is assigned to a reporting unit at the date when an acquisition is integrated into one of the established reporting units, and is based on which reporting unit is expected to benefit from the synergies of the acquisition.
For purposes of assessing the recoverability of goodwill, the Company has six reporting units at December 31, 2014: two within the Company’s ratings business (one for the newly acquired ICRA business and one that encompasses all of Moody’s other ratings operations) and four reporting units within MA: RD&A, ERS, Financial Services Training and Certifications and Copal Amba. The RD&A reporting unit encompasses the distribution of investor-oriented research and data developed by MIS as part of its ratings process, in-depth research on major debt issuers, industry studies, economic research and commentary on topical events and credit analytic tools. The ERS reporting unit consists of credit risk management and compliance software that is sold on a license or subscription basis as well as related advisory services for implementation and maintenance. The FSTC reporting unit consists of the portion of the MA business that offers both credit training as well as other professional development training and certification services. The Copal Amba reporting unit consists of outsourced research and analytical services.
Amortizable intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
The Company records rent expense on a straight-line basis over the life of the lease. In cases where there is a free rent period or future fixed rent escalations the Company will record a deferred rent liability. Additionally, the receipt of any lease incentives will be recorded as a deferred rent liability which will be amortized over the lease term as a reduction of rent expense.
The Company records compensation expense for all share-based payment award transactions granted to employees based on the fair value of the equity instrument at the time of grant. This includes shares issued under stock option and restricted stock plans. The Company has also established a pool of additional paid-in capital related to the tax effects of employee share-based compensation, which is available to absorb any recognized tax shortfalls.
Derivative Instruments and Hedging Activities
Based on the Company’s risk management policy, from time to time the Company may use derivative financial instruments to reduce exposure to changes in foreign exchange rates and interest rates. The Company does not enter into derivative financial instruments for speculative purposes. All derivative financial instruments are recorded on the balance sheet at their respective fair values. The changes in the value of derivatives that qualify as fair value hedges are recorded with a corresponding adjustment to the carrying value of the item being hedged. Changes in the derivative’s fair value that qualify as cash flow hedges are recorded to other comprehensive income or loss, to the extent the hedge is effective, and such amounts are reclassified from accumulated other comprehensive income or loss to earnings in the same period or periods during which the hedged transaction affects income. Changes in the derivative’s fair value that qualify as net investment hedges are recorded to other comprehensive income or loss, to the extent the hedge is effective. Any changes in the fair value of derivatives that the Company does not designate as hedging instruments under Topic 815 of the ASC are recorded in the consolidated statements of operations in the period in which they occur.
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or the services have been provided and accepted by the customer when applicable, fees are determinable and the collection of resulting receivables is considered probable.
Pursuant to ASC Topic 605, when a sales arrangement contains multiple deliverables, the Company allocates revenue to each deliverable based on its relative selling price which is determined based on its vendor specific objective evidence if available, third party evidence if VSOE is not available, or estimated selling price if neither VSOE nor TPE is available.
The Company’s products and services will generally qualify as separate units of accounting under ASC Topic 605. The Company evaluates each deliverable in an arrangement to determine whether it represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting when it has stand-alone value to the customers and if the arrangement includes a customer refund or return right relative to the delivered item and the delivery and performance of the undelivered item is considered probable and substantially in the Company’s control. In instances where the aforementioned criteria are not met, the deliverable is combined with the undelivered items and revenue recognition is determined as one single unit.
The Company determines whether its selling price in a multi-element transaction meets the VSOE criteria by using the price charged for a deliverable when sold separately. In instances where the Company is not able to establish VSOE for all deliverables in a multiple element arrangement, which may be due to the Company infrequently selling each element separately, not selling products within a reasonably narrow price range, or only having a limited sales history, the Company attempts to establish TPE for deliverables. The Company determines whether TPE exists by evaluating largely similar and interchangeable competitor products or services in standalone sales to similarly situated customers. However, due to the difficulty in obtaining third party pricing, possible differences in its market strategy from that of its peers and the potential that products and services offered by the Company may contain a significant level of differentiation and/or customization such that the comparable pricing of products with similar functionality cannot be obtained, the Company generally is unable to reliably determine TPE. Based on the selling price hierarchy established by ASC Topic 605, when the Company is unable to establish selling price using VSOE or TPE, the Company will establish an ESP. ESP is the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company establishes its best estimate of ESP considering internal factors relevant to is pricing practices such as costs and margin objectives, standalone sales prices of similar products, percentage of the fee charged for a primary product or service relative to a related product or service, and customer segment and geography. Additional consideration is also given to market conditions such as competitor pricing strategies and market trend. The Company reviews its determination of VSOE, TPE and ESP on an annual basis or more frequently as needed.
In the MIS segment, revenue attributed to initial ratings of issued securities is recognized when the rating is issued. Revenue attributed to monitoring of issuers or issued securities is recognized ratably over the period in which the monitoring is performed, generally one year. In the case of commercial mortgage-backed securities, structured credit, international residential mortgage-backed and asset-backed securities, issuers can elect to pay the monitoring fees upfront. These fees are deferred and recognized over the future monitoring periods based on the expected lives of the rated securities, which was approximately 28 years on a weighted average basis at December 31, 2014. At December 31, 2014, 2013 and 2012, deferred revenue related to these securities was approximately $107 million, $97 million, and $82 million.
Multiple element revenue arrangements in the MIS segment are generally comprised of an initial rating and the related monitoring service. In instances where monitoring fees are not charged for the first year monitoring effort, fees are allocated to the initial rating and monitoring services based on the relative selling price of each service to the total arrangement fees. The Company generally uses ESP in determining the selling price for its initial ratings as the Company rarely sells initial ratings separately without providing related monitoring services and thus is unable to establish VSOE or TPE for initial ratings.
MIS estimates revenue for ratings of commercial paper for which, in addition to a fixed annual monitoring fee, issuers are billed quarterly based on amounts outstanding. Revenue is accrued each quarter based on estimated amounts outstanding and is billed when actual data is available. The estimate is determined based on the issuers’ most recent reported quarterly data. At December 31, 2014, 2013 and 2012, accounts receivable included approximately $22 million, $21 million, and $22 million, respectively, related to accrued commercial paper revenue. Historically, MIS has not had material differences between the estimated revenue and the actual billings. Furthermore, for certain annual monitoring services, fees are not invoiced until the end of the annual monitoring period and revenue is accrued ratably over the monitoring period.
In the MA segment, products and services offered by the Company include software licenses and related maintenance, subscriptions, and professional services. Revenue from subscription based products, such as research and data subscriptions and certain software-based credit risk management subscription products, is recognized ratably over the related subscription period, which is principally one year. Revenue from sale of perpetual licenses of credit processing software is generally recognized at the time the product master or first copy is delivered or transferred to and accepted by the customer. If uncertainty exists regarding customer acceptance of the product or service, revenue is not recognized until acceptance occurs. Software maintenance revenue is recognized ratably over the annual maintenance period. Revenue from professional services rendered is generally recognized as the services are performed. A large portion of annual research and data subscriptions and annual software maintenance are invoiced in the months of November, December and January.
Products and services offered within the MA segment are sold either stand-alone or together in various combinations. In instances where a multiple element arrangement includes software and non-software deliverables, revenue is allocated to the non-software deliverables and to the software deliverables, as a group, using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. Revenue is recognized for each element based upon the conditions for revenue recognition noted above.
If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is allocated to each software deliverable using VSOE. In the instances where the Company is not able to determine VSOE for all of the deliverables of an arrangement, the Company allocates the revenue to the undelivered elements equal to its VSOE and the residual revenue to the delivered elements. If the Company is unable to determine VSOE for an undelivered element, the Company defers all revenue allocated to the software deliverables until the Company has delivered all of the elements or when VSOE has been determined for the undelivered elements. In cases where software implementation services are considered essential and VSOE of fair value exists for post-contract customer support (“PCS”), once the delivery criteria has been met on the standard software, license and service revenue is recognized on a percentage-of-completion basis as implementation services are performed, while PCS is recognized over the coverage period. If VSOE of fair value does not exist for PCS, once the delivery criteria has been met on the standard software, service revenue is recognized on a zero profit margin basis until essential services are complete, at which point total remaining arrangement revenue is then spread ratably over the remaining PCS coverage period.
Accounts Receivable Allowances
Moody’s records an allowance for estimated future adjustments to customer billings as a reduction of revenue, based on historical experience and current conditions. Such amounts are reflected as additions to the accounts receivable allowance. Additionally, estimates of uncollectible accounts are recorded as bad debt expense and are reflected as additions to the accounts receivable allowance. Actual billing adjustments and uncollectible account write-offs are recorded against the allowance. Moody’s evaluates its accounts receivable allowance by reviewing and assessing historical collection and adjustment experience and the current status of customer accounts. Moody’s also considers the economic environment of the customers, both from an industry and geographic perspective, in evaluating the need for allowances. Based on its analysis, Moody’s adjusts its allowance as considered appropriate in the circumstances.
Moody’s is involved in legal and tax proceedings, governmental investigations and inquiries, claims and litigation that are incidental to the Company’s business, including claims based on ratings assigned by MIS. Moody’s is also subject to ongoing tax audits in the normal course of business. Management periodically assesses the Company’s liabilities and contingencies in connection with these matters based upon the latest information available. Moody’s discloses material pending legal proceedings pursuant to SEC rules and other pending matters as it may determine to be appropriate.
For claims, litigation and proceedings and governmental investigations and inquires not related to income taxes, where it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated, the Company records liabilities in the consolidated financial statements and periodically adjusts these as appropriate. When the reasonable estimate of the loss is within a range of amounts, the minimum amount of the range is accrued unless some higher amount within the range is a better estimate than another amount within the range. In other instances, because of uncertainties related to the probable outcome and/or the amount or range of loss, management does not record a liability but discloses the contingency if significant. As additional information becomes available, the Company adjusts its assessments and estimates of such matters accordingly. In view of the inherent difficulty of predicting the outcome of litigation, regulatory, governmental investigations and inquiries, enforcement and similar matters , particularly where the claimants seek large or indeterminate damages or where the parties assert novel legal theories or the matters involve a large number of parties, the Company cannot predict what the eventual outcome of the pending matters will be or the timing of any resolution of such matters. The Company also cannot predict the impact (if any) that any such matters may have on how its business is conducted, on its competitive position or on its financial position, results of operations or cash flows. As the process to resolve any pending matters progresses, management will continue to review the latest information available and assess its ability to predict the outcome of such matters and the effects, if any, on its operations and financial condition. However, in light of the large or indeterminate damages sought in some of them, the absence of similar court rulings on the theories of law asserted and uncertainties regarding apportionment of any potential damages, an estimate of the range of possible losses cannot be made at this time.
The Company’s wholly-owned insurance subsidiary insures the Company against certain risks including but not limited to deductibles for worker’s compensation, employment practices litigation and employee medical claims and terrorism, for which the claims are not material to the Company. In addition, for claim years 2008 and 2009, the insurance subsidiary insured the Company for defense costs related to professional liability claims. For matters insured by the Company’s insurance subsidiary, Moody’s records liabilities based on the estimated total claims expected to be paid and total projected costs to defend a claim through its anticipated conclusion. The Company determines liabilities based on an assessment of management’s best estimate of claims to be paid and legal defense costs as well as actuarially determined estimates. The Cheyne SIV and Rhinebridge SIV matters more fully discussed in Note 18 are both cases from the 2008/2009 claims period, and accordingly defense costs for these matters are covered by the Company’s insurance subsidiary. Defense costs for matters not self-insured by the Company’s wholly-owned insurance subsidiary are expensed as services are provided.
For income tax matters, the Company employs the prescribed methodology of Topic 740 of the ASC which requires a company to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.
Operating expenses include costs associated with the development and production of the Company’s products and services and their delivery to customers. These expenses principally include employee compensation and benefits and travel costs that are incurred in connection with these activities. Operating expenses are charged to income as incurred, except for certain costs related to software implementation services which are deferred until related revenue is recognized. Additionally, certain costs incurred to develop internal use software are capitalized and depreciated over their estimated useful life.
Selling, General and Administrative Expenses
SG&A expenses include such items as compensation and benefits for corporate officers and staff and compensation and other expenses related to sales of products. They also include items such as office rent, business insurance, professional fees and gains and losses from sales and disposals of assets. SG&A expenses are charged to income as incurred, except for certain expenses incurred to develop internal use software are capitalized and depreciated over their estimated useful life.
Redeemable Noncontrolling Interest
The Company records its redeemable noncontrolling interest at fair value on the date of the related business combination transaction. The redeemable noncontrolling interest represents noncontrolling shareholders’ interest in entities which are controlled but not wholly-owned by Moody’s and for which Moody’s obligation to redeem the minority shareholders’ interest is governed by a put/call relationship. Subsequent to the initial measurement, the redeemable noncontrolling interest is recorded at the greater of its redemption value or its carrying value at the end of each reporting period. If the redeemable noncontrolling interest is carried at its redemption value, the difference between the redemption value and the carrying value would be adjusted through capital surplus at the end of each reporting period. The Company also performs a quarterly assessment to determine if the aforementioned redemption value exceeds the fair value of the redeemable noncontrolling interest. If the redemption value of the redeemable noncontrolling interest were to exceed its fair value, the excess would reduce the net income attributable to Moody’s shareholders. The Company settled its redeemable noncontrolling interest in the fourth quarter of 2014 by exercising its call option to acquire the remaining share of Copal Amba that it did not previously own.
Foreign Currency Translation
For all operations outside the U.S. where the Company has designated the local currency as the functional currency, assets and liabilities are translated into U.S. dollars using end of year exchange rates, and revenue and expenses are translated using average exchange rates for the year. For these foreign operations, currency translation adjustments are accumulated in a separate component of shareholders’ equity.
Comprehensive income represents the change in net assets of a business enterprise during a period due to transactions and other events and circumstances from non-owner sources including foreign currency translation impacts, net actuarial losses and net prior service costs related to pension and other retirement plans, gains and losses on derivative instruments and unrealized gains and losses on securities designated as ‘available-for-sale’ under Topic 320 of the ASC.
The Company accounts for income taxes under the asset and liability method in accordance with ASC Topic 740. Therefore, income tax expense is based on reported income before income taxes and deferred income taxes reflect the effect of temporary differences between the amounts of assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes.
The Company classifies interest related to unrecognized tax benefits as a component of interest expense in its consolidated statements of operations. Penalties are recognized in other non-operating expenses. For UTPs, the Company first determines whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.
For certain of its non-U.S. subsidiaries, the Company has deemed the undistributed earnings relating to these subsidiaries to be indefinitely reinvested within its foreign operations. Accordingly, the Company has not provided deferred income taxes on these indefinitely reinvested earnings. It is not practicable to determine the amount of deferred taxes that might be required to be provided if such earnings were distributed in the future due to complexities in the tax laws and in the hypothetical calculations that would have to be made.
Fair Value of Financial Instruments
The Company’s financial instruments include cash, cash equivalents, trade receivables and payables, all of which are short-term in nature and, accordingly, approximate fair value. Additionally, the Company invests in certain short-term investments consisting primarily of certificates of deposit that are carried at cost, which approximates fair value due to their short-term maturities.
The Company also has certain investments in closed-ended and open-ended mutual funds in India which are designated as ‘available for sale’ under Topic 320 of the ASC. Accordingly, unrealized gains and losses on these investments are recorded to other comprehensive income and are reclassified out of accumulated other comprehensive income to the statement of operations when the investment matures or is sold using a specific identification method.
Also, the Company uses derivative instruments, as further described in Note 5, to manage certain financial exposures that occur in the normal course of business. These derivative instruments are carried at fair value on the Company’s consolidated balance sheets.
The Company also is subject to contingent consideration obligations related to certain of its acquisitions as more fully discussed in Note 9. These obligations are carried at their estimated fair value within the Company’s consolidated balance sheets.
Fair value is defined by the ASC as the price that would be received from selling an asset or paid to transfer a liability (i.e., an exit price) in an orderly transaction between market participants at the measurement date. The determination of this fair value is based on the principal or most advantageous market in which the Company could commence transactions and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance. Also, determination of fair value assumes that market participants will consider the highest and best use of the asset.
The ASC establishes a fair value hierarchy whereby the inputs contained in valuation techniques used to measure fair value are categorized into three broad levels as follows:
Level 1 : quoted market prices in active markets that the reporting entity has the ability to access at the date of the fair value measurement;
Level 2 : inputs other than quoted market prices described in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities;
Level 3 : unobservable inputs that are supported by little or no market activity and that are significant to the fair value measurement of the assets or liabilities.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk principally consist of cash and cash equivalents, short-term investments, trade receivables and derivatives.
The Company manages its credit risk exposure by allocating its cash equivalents among various money market mutual funds, money market deposit accounts, certificates of deposits and high- grade commercial paper. Short-term investments primarily consist of certificates of deposit as of December 31, 2014 and 2013. The Company manages its credit risk exposure on cash equivalents and short-term investments by limiting the amount it can invest with any single entity. No customer accounted for 10% or more of accounts receivable at December 31, 2014 or 2013.
Earnings per Share of Common Stock
Basic shares outstanding is calculated based on the weighted average number of shares of common stock outstanding during the reporting period. Diluted shares outstanding is calculated giving effect to all potentially dilutive common shares, assuming that such shares were outstanding during the reporting period.
Pension and Other Retirement Benefits
Moody’s maintains various noncontributory DBPPs as well as other contributory and noncontributory retirement plans. The expense and assets/liabilities that the Company reports for its pension and other retirement benefits are dependent on many assumptions concerning the outcome of future events and circumstances. These assumptions represent the Company’s best estimates and may vary by plan. The differences between the assumptions for the expected long-term rate of return on plan assets and actual experience is spread over a five-year period to the market related value of plan assets which is used in determining the expected return on assets component of annual pension expense. All other actuarial gains and losses are generally deferred and amortized over the estimated average future working life of active plan participants.
The Company recognizes as an asset or liability in its consolidated balance sheet the funded status of its defined benefit retirement plans, measured on a plan-by-plan basis. Changes in the funded status due to actuarial gains/losses are recorded as part of other comprehensive income during the period the changes occur.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Estimates are used for, but not limited to, revenue recognition, accounts receivable allowances, income taxes, contingencies, valuation of long-lived and intangible assets, goodwill, pension and other retirement benefits, stock-based compensation, and depreciable lives for property and equipment and computer software.
NOTE 3 RECONCILIATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
Below is a reconciliation of basic to diluted shares outstanding:
|Dilutive effect of shares issuable under stock-based compensation plans||4.0||4.1||3.4|
|Antidilutive options to purchase common shares and restricted stock as well as contingently issuable restricted stock which are excluded from the table above||0.7||4.0||7.5|
The calculation of diluted EPS requires certain assumptions regarding the use of both cash proceeds and assumed proceeds that would be received upon the exercise of stock options and vesting of restricted stock outstanding as of December 31, 2014, 2013 and 2012. These assumed proceeds include Excess Tax Benefits and any unrecognized compensation on the awards.
|As of December 31, 2014|
|Balance sheet location|
|Cost||Gross Unrealized Gains||Fair Value||Cash and cash equivalents||Short-term investments||Other assets|
|Money market mutual funds||$||149.7||$||-||$||149.7||$||149.7||$||-||$||-|
|Certificates of deposit and money market deposit accounts (1)||$||842.5||$||-||$||842.5||$||380.1||$||458.1||$||4.3|
|Fixed maturity and open ended mutual funds (2)||$||47.1||$||0.9||$||48.0||$||-||$||-||$||48.0|
|As of December 31, 2013|
|Balance sheet location|
|Cost||Gross Unrealized Gains||Fair Value||Cash and cash equivalents||Short-term investments||Other assets|
|Money market mutual funds||$||212.3||$||-||$||212.3||$||212.3||$||-||$||-|
|Certificates of deposit and money market deposit accounts (1)||$||911.8||$||-||$||911.8||$||725.0||$||186.8||$||-|
|(1) Consists of time deposits and money market deposit accounts. The remaining contractual maturities for the certificates of deposits classified as short-term investments were one month to ten months at December 31, 2014 and one month to nine months at December 31, 2013. Time deposits with a maturity of less than 90 days at time of purchase are classified as cash and cash equivalents.|
|(2) Consists of investments in fixed maturity mutual funds and open-ended mutual funds held by ICRA. The remaining contractual maturities for the fixed maturity instruments range from two months to 23 months at December 31, 2014.|
The money market mutual funds as well as the fixed maturity and open ended mutual funds in the table above are deemed to be ‘available for sale’ under ASC Topic 320 and the fair value of these instruments is determined using Level 1 inputs which are more fully described in Note 2.
The total proceeds received in the year ended December 31, 2014 for maturities of fixed maturity mutual funds was $10.7 million. The gross realized gains on these maturities were immaterial.
NOTE 5 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to global market risks, including risks from changes in FX rates and changes in interest rates. Accordingly, the Company uses derivatives in certain instances to manage the aforementioned financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for speculative purposes.
Interest Rate Swaps
In the fourth quarter of 2010, the Company entered into interest rate swaps with a total notional amount of $300 million to convert the fixed interest rate on the Series 2005-1 Notes to a floating interest rate based on the 3-month LIBOR. The purpose of this hedge was to mitigate the risk associated with changes in the fair value of the Series 2005-1 Notes, thus the Company designated these swaps as fair value hedges. The fair value of the swaps was adjusted quarterly with a corresponding adjustment to the carrying value of the Series 2005-1 Notes. The changes in the fair value of the hedges and the underlying hedged item generally offset and the net cash settlements on the swaps were recorded each period within interest income (expense), net, in the Company’s consolidated statement of operations. In August of 2014, the Company terminated the swaps on the Series 2005-1 Notes concurrent with the early retirement of those notes as further described in Note 15. The termination of these swaps resulted in a gain of approximately $4 million in 2014 which is recorded in interest income (expense), net in the Company’s consolidated statement of operations.
In the second quarter of 2014, the Company entered into interest rate swaps with a total notional amount of $250 million to convert the fixed interest rate on the 2010 Senior Notes to a floating interest rate based on the 3-month LIBOR. In the third quarter of 2014, the Company entered into interest rate swaps with a total notional amount of $250 million to convert the fixed interest rate on the remaining balance of the 2010 Senior Notes to a floating interest rate based on the 3-month LIBOR. The purpose of these hedges is to mitigate the risk associated with changes in the fair value of the 2010 Senior Notes, thus the Company has designated these swaps as fair value hedges. The fair value of the swaps is adjusted quarterly with a corresponding adjustment to the carrying value of the 2010 Senior Notes. The changes in the fair value of the hedges and the underlying hedged item generally offset and the net cash settlements on the swaps are recorded each period within interest income (expense), net, in the Company’s consolidated statement of operations.
In the third quarter of 2014, the Company entered into interest rate swaps with a total notional amount of $250 million to convert the fixed interest rate on a portion of the 2014 Senior Notes (5-year) to a floating interest rate based on the 3-month LIBOR. The purpose of this hedge was to mitigate the risk associated with changes in the fair value of a portion of the 2014 Senior Notes (5-year), thus the Company has designated these swaps as fair value hedges. The fair value of the swaps is adjusted quarterly with a corresponding adjustment to the carrying value of the 2014 Senior Notes (5-year). The changes in the fair value of the hedges and the underlying hedged item generally offset and the net cash settlements on the swaps are recorded each period within interest income (expense), net, in the Company’s consolidated statement of operations.
Foreign Exchange Forwards
The Company also enters into foreign exchange forwards to mitigate the change in fair value on certain assets and liabilities denominated in currencies other than the subsidiary’s functional currency. These forward contracts are not designated as hedging instruments under the applicable sections of Topic 815 of the ASC. Accordingly, changes in the fair value of these contracts are recognized immediately in other non-operating income (expense), net in the Company’s consolidated statements of operations along with the FX gain or loss recognized on the assets and liabilities denominated in a currency other than the subsidiary’s functional currency. These contracts have expiration dates at various times through March 2015.
The following table summarizes the notional amounts of the Company’s outstanding foreign exchange forwards:
|December 31,||December 31,|
|Notional amount of Currency Pair:|
|Contracts to purchase USD with euros||$||38.5||$||14.2|
|Contracts to sell USD for euros||$||51.1||$||53.2|
|Contracts to purchase USD with GBP||$||0.2||$||-|
|Contracts to purchase USD with other foreign currencies||$||1.2||$||-|
|Contracts to purchase euros with other foreign currencies||€||34.0||€||13.1|
|Contracts to purchase euros with GBP||€||25.0||€||22.1|
|Contracts to sell euros for GBP||€||38.2||€||-|
Net Investment Hedges
The Company enters into foreign currency forward contracts to hedge the exposure related to non-U.S. dollar net investments in certain foreign subsidiaries against adverse changes in foreign exchange rates. These forward contracts are designated as hedging instruments under the applicable sections of Topic 815 of the ASC. Hedge effectiveness is assessed based on the overall changes in the fair value of the forward contracts on a pre-tax basis. For hedges that meet the effectiveness requirements, any change in fair value for the hedge is recorded in OCI. Any change in the fair value of these hedges that is the result of ineffectiveness would be recognized immediately in other non-operating (expense) income in the Company’s consolidated statements of operations. These outstanding contracts expire in March 2015 for contracts to sell euros for USD and in November 2015 for contracts to sell Japanese yen for USD.
The following table summarizes the notional amounts of the Company’s outstanding foreign exchange forward contracts that are designated as net investment hedges:
|December 31,||December 31,|
|Notional amount of Currency Pair:|
|Contracts to sell euros for USD||€||50.0||€||50.0|
|Contracts to sell Japanese yen for USD||¥||19,400||¥||19,700|
The table below shows the classification between assets and liabilities on the Company’s consolidated balance sheets for the fair value of the derivative instruments:
|Fair Value of Derivative Instruments|
|Balance Sheet Location||December 31, 2014||December 31, 2013|
|Derivatives designated as accounting hedges:|
|Interest rate swaps||Other assets||$||17.4||$||10.3|
|FX forwards on net investment in certain foreign subsidiaries||Other current assets||18.8||9.3|
|Total derivatives designated as accounting hedges||36.2||19.6|
|Derivatives not designated as accounting hedges:|
|FX forwards on certain assets and liabilities||Other current assets||5.6||0.9|
|Derivatives designated as accounting hedges:|
|FX forwards on net investment in certain foreign subsidiaries||Accounts payable and accrued liabilities||$||-||$||1.0|
|Total derivatives designated as accounting hedges||-||1.0|
|Derivatives not designated as accounting hedges:|
|FX forwards on certain assets and liabilities||Accounts payable and accrued liabilities||2.1||0.7|
The following table summarizes the net gain (loss) on the Company’s foreign exchange forwards which are not designated as hedging instruments as well as the gain (loss) on the interest rate swaps designated as fair value hedges:
|Amount of Gain (Loss) Recognized in consolidated statement of operations|
|Year Ended December 31,|
|Derivatives designated as accounting hedges||Location on Consolidated Statements of Operations||2014||2013||2012|
|Interest rate swaps||Interest income (expense), net||$||11.7||$||4.2||$||3.6|
|Derivatives not designated as accounting hedges|
|Foreign exchange forwards||Other non-operating (expense) income||$||(2.0)||$||2.1||$||0.9|
The following table provides information on annual gains (losses) on the Company’s net investment hedges:
|Derivatives in Net Investment Hedging Relationships||Amount of Gain/(Loss), net of tax, Recognized in AOCI on Derivative (Effective Portion)|
|Year Ended December 31,|
All gains and losses on derivatives designated as net investment hedges are recognized through OCI.
There were no gains or losses reclassified from AOCI to the statement of operations or any hedge ineffectiveness in the years ended December 31, 2014, 2013 and 2012.
The cumulative amount of hedge gain (losses) recorded in AOCI relating to derivative instruments is as follows:
|Gains (Losses), net of tax|
|December 31, 2014||December 31, 2013|
|FX forwards on net investment hedges||$||20.9||$||1.5|
NOTE 6 PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of:
|Office and computer equipment (3 - 10 year estimated useful life)||$||152.5||$||129.7|
|Office furniture and fixtures (3 - 10 year estimated useful life)||43.8||40.6|
|Internal-use computer software (3 - 10 year estimated useful life)||336.8||284.9|
|Leasehold improvements and building (3 - 20 year estimated useful life)||220.7||199.2|
|Total property and equipment, at cost||753.8||654.4|
|Less: accumulated depreciation and amortization||(451.5)||(375.7)|
|Total property and equipment, net||$||302.3||$||278.7|
Depreciation and amortization expense related to the above assets was 67.2 million, $65.4 million, and $63.4 million for the years ended December 31, 2014, 2013 and 2012, respectively.
NOTE 7 ACQUISITIONS
All of the acquisitions described below were accounted for using the acquisition method of accounting whereby assets acquired and liabilities assumed were recognized at their acquisition date fair value. Any excess of the purchase price over the fair value of the assets acquired and liabilities assumed was recorded to goodwill. For all of the acquisitions described below, the Company has not presented proforma combined results for the acquisitions because the impact on previously reported statements of operations would not have been material. Furthermore, for all acquisitions described below, the amount of revenue and expenses in the year of acquisition from the acquisition date through the end of the year was not material. These acquisitions are discussed below in more detail.
On October 27, 2014, a subsidiary of the Company acquired 100% of Lewtan Technologies, a leading provider of analytical tools and data for the global structured finance market. The acquisition of Lewtan will bolster MA’s Structured Analytics and Valuations (SAV) business within its RD&A LOB, which provides an extensive data and analytics library for securitized assets. The aggregate purchase price was not material and the near term impact to the Company’s operations and cash flows is not expected to be material. Lewtan will operate in the RD&A LOB of MA and goodwill related to this acquisition was allocated to the RD&A reporting unit.
WebEquity Solutions, LLC
On July 17, 2014, a subsidiary of the Company acquired 100% of WebEquity Solutions, LLC, a leading provider of cloud-based loan origination solutions for financial institutions. The cash payment to the sellers of $130.5 million was funded using Moody’s U.S. cash. This acquisition will enhance MA’s risk management product portfolio.
The Company incurred approximately $2 million of costs directly related to this acquisition in 2014, which are recorded within selling, general and administrative expenses in the Company’s consolidated statements of operations.
Shown below is the purchase price allocation, which summarizes the fair value of the assets and liabilities assumed, at the date of the acquisition:
|Property and equipment, net||2.3|
|Client relationships (18 year weighted average life)||$||42.8|
|Software (15 year weighted average life)||11.5|
|Trade name (4 year weighted average life)||0.5|
|Total intangible assets (17 year weighted average life)||54.8|
|Net assets acquired||$||130.5|
Current assets include acquired cash of $0.6 million. Additionally, current assets includes gross accounts receivable of $0.7 million, of which an immaterial amount is not expected to be collectible. The acquired goodwill, which has been assigned to the MA segment, will be deductible for tax.
As of the date of the acquisition, WebEquity is part of the ERS reporting unit.
On June 26, 2014, a subsidiary of the Company acquired 2,154,722 additional shares of ICRA Limited, a publicly traded company in India, pursuant to a conditional open tender offer which was initiated in February 2014. ICRA is a leading provider of credit ratings and research in India and will extend MIS’s reach in the growing domestic debt market in India as well as other emerging markets in the region. The acquisition of the additional shares increased Moody’s ownership stake in ICRA from 28.5% to 50.06%, resulting in a controlling interest in ICRA. Accordingly, the Company consolidates ICRA’s financial statements on a three month lag which resulted in only one quarter of ICRA’s operating results included in the Company’s statement of operations in 2014.
Prior to the acquisition of the additional shares, Moody’s accounted for its investment in ICRA on an equity basis whereby the Company recorded its proportional share of the investment’s net income or loss as part of other non-operating income (expense), net. The acquisition of the additional shares has resulted in the Company consolidating ICRA into its financial statements. As a result of this consolidation and in accordance with ASC 805, the carrying value of the Company’s equity investment in ICRA was remeasured to fair value as of the acquisition date resulting in a pre-tax gain of $102.8 million ($78.5 million after-tax) in 2014. The fair value of the Company’s equity investment was based on ICRA’s quoted market price on the date of acquisition.
The Company incurred approximately $2 million of costs directly related to the acquisition of ICRA during 2014 which are recorded within selling, general and administrative expenses in the Company’s consolidated statements of operations.
The table below details the total consideration relating to the ICRA step-acquisition:
|Fair value of equity interest in ICRA prior to obtaining a controlling interest||124.9|
|The cash paid in the table above was funded by using Moody's non-U.S. cash on hand.|
Shown below is the purchase price allocation, which summarizes the fair value of the assets and liabilities assumed, at the date of acquisition:
|Property and equipment, net||15.1|
|Trade name (36 year weighted average life)||$||46.8|
|Client relationships (19 year weighted average life)||33.8|
|Other (17 year weighted average life)*||18.3|
|Total intangible assets (26 year weighted average life)||98.9|
|Fair value of non-controlling interest assumed||(218.8)|
|Net assets acquired||$||210.9|
|* Primarily consists of acquired technical know-how and ratings methodologies|
Current assets include acquired cash of approximately $5 million. Additionally, current assets includes gross accounts receivable of approximately $14 million, of which an immaterial amount is not expected to be collectible. Goodwill, which has been assigned to the MIS segment, is not deductible for tax.
The fair value of the non-controlling interest was determined based on the quoted market price per share of ICRA on the date that the Company acquired the controlling stake.
ICRA will operate as its own reporting unit for purposes of the Company’s annual goodwill impairment assessment.
Amba Investment Services
On December 10, 2013, Copal Partners Limited, a majority-owned subsidiary of the Company, acquired 100% of Amba Investment Services, a provider of investment research and quantitative analytics for global financial institutions. Amba currently operates within the PS LOB of MA and will bolster the research and analytical capabilities offered by MA through Copal, a majority of which was acquired in December 2011.
The table below details the total consideration transferred to the sellers of Amba:
|Contingent consideration liability assumed||4.3|
|Total fair value of consideration transferred||$||71.6|
The cash payment to the sellers was funded by using Moody’s non-U.S. cash on hand.
The purchase agreement contained a provision for a contingent cash payment to the sellers valued at $4.3 million at the acquisition date which was dependent on Amba achieving certain revenue targets for the period from the acquisition date through March 31, 2014. The target was met and a $4.3 million payment was made to the sellers in the third quarter of 2014.
The Company incurred approximately $1 million of costs directly related to the acquisition of Amba during the year ended December 31, 2013. These costs, which primarily consist of consulting and legal fees, are recorded within selling, general and administrative expenses in the Company’s consolidated statements of operations.
Shown below is the purchase price allocation, which summarizes the fair value of the assets acquired and the liabilities assumed, at the date of acquisition:
|Property and equipment, net||0.4|
|Trade name (7 year weighted average life)||$||3.3|
|Client relationships (12 year weighted average life)||26.7|
|Other (3 year weighted average life)||1.6|
|Total intangible assets (11 year weighted average life)||31.6|
|Net assets acquired||$||71.6|
Current assets include acquired cash of approximately $16 million. Additionally, current assets includes gross accounts receivable of approximately $6 million, of which an immaterial amount is not expected to be collectible. The acquired goodwill, which has been assigned to the MA segment, will not be deductible for tax.
In connection with the acquisition, the Company assumed liabilities relating to certain UTPs. These UTPs are included in the liabilities assumed in the table above. The sellers have contractually indemnified the Company against any potential payments that may have to be made regarding these UTPs. Accordingly, the Company carries an indemnification asset on its consolidated balance sheet at December 31, 2014.
As of the date of the acquisition, Amba was integrated with Copal to form the Copal Amba reporting unit.
NOTE 8 GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS
The following table summarizes the activity in goodwill:
|Year Ended December 31,2014|
|Gross goodwill||Accumulated Impairment charge||Net goodwill||Gross goodwill||Accumulated Impairment charge||Net goodwill||Gross goodwill||Accumulated Impairment charge||Net goodwill|
|Balance at beginning of year||$||11.4||$||-||$||11.4||$||666.0||$||(12.2)||$||653.8||$||677.4||$||(12.2)||$||665.2|
|Foreign currency translation adjustments||(9.4)||-||(9.4)||(32.5)||-||(32.5)||(41.9)||-||(41.9)|
|Year Ended December 31,2013|
|Gross goodwill||Accumulated Impairment charge||Net goodwill||Gross goodwill||Accumulated Impairment charge||Net goodwill||Gross goodwill||Accumulated Impairment charge||Net goodwill|
|Balance at beginning of year||$||11.5||$||-||$||11.5||$||637.8||$||(12.2)||$||625.6||$||649.3||$||(12.2)||$||637.1|
|Foreign currency translation adjustments||(0.1)||-||(0.1)||(6.3)||-||(6.3)||(6.4)||-||(6.4)|
The 2014 additions/adjustments for the MIS segment in the table above relate to the ICRA acquisition in the second quarter of 2014. The 2014 additions/adjustments for the MA segment relate to the acquisition WebEquity in the third quarter of 2014 and Lewtan in the fourth quarter of 2014 as well as adjustments for Amba which was acquired in the fourth quarter of 2013. The 2013 additions/adjustments for the MA segment relate to the acquisition of Amba.
The accumulated impairment charge in the table above reflects an impairment charge recognized in 2012 relating to the FSTC reporting unit within MA. This impairment charge reflected a contraction in spending for training and certification services for many individuals and global financial institutions in 2012 due to macroeconomic uncertainties at the time. The fair value of the FSTC reporting unit utilized in this impairment assessment was estimated using a discounted cash flow methodology and comparable public company and precedent transaction multiples.
Acquired intangible assets consisted of:
|Net customer relationships||212.3||150.8|
|Net trade secrets||9.7||-||12.6|
|Net trade names||63.2||-||19.6|
Other intangible assets primarily consist of databases, covenants not to compete and acquired ratings methodologies and models. Amortization expense relating to intangible assets is as follows:
|Year Ended December 31,|
Estimated future annual amortization expense for intangible assets subject to amortization is as follows:
|Year Ended December 31,|
Amortizable intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In conjunction with the assessment of goodwill impairment at July 31, 2012, the Company reviewed the recoverability of certain customer lists within its FSTC reporting unit. This review resulted in an impairment of approximately $1 million in the third quarter of 2012 which is recorded in depreciation and amortization expense in the consolidated statement of operations. The fair value of these customer lists was determined using a discounted cash flow analysis. The Company again reviewed the recoverability of these customer lists in the fourth quarter of 2012 in conjunction with the quantitative goodwill impairment test performed at December 31, 2012 for the FSTC reporting unit. Based on this assessment, there was no further impairment of the customer lists in the fourth quarter of 2012. For all intangible assets, there were no such events or changes during 2014 or 2013 that would indicate that the carrying amount of amortizable intangible assets in any of the Company’s reporting units may not be recoverable. Additionally, there were no events or circumstances during 2014 or 2013 that would indicate the need for an adjustment of the remaining useful lives of these amortizable intangible assets.
NOTE 9 FAIR VALUE
The table below presents information about items, which are carried at fair value on a recurring basis at December 31, 2014 and 2013:
|Fair Value Measurement as of December 31, 2014|
|Description||Balance||Level 1||Level 2||Level 3|
|Money market mutual funds||149.7||149.7||-||-|
|Fixed maturity and open ended mutual funds (b)||48.0||48.0||-||-|
|Contingent consideration arising from acquisitions (c)||2.1||-||-||2.1|
|Fair Value Measurement as of December 31, 2013|
|Description||Balance||Level 1||Level 2||Level 3|
|Money market mutual funds||212.3||212.3||-||-|
|Contingent consideration arising from acquisitions (c)||17.5||-||-||17.5|
|(a) Represents interest rate swaps and FX forwards on certain assets and liabilities as well as on certain non-U.S. dollar net investments in certain foreign subsidiaries more fully discussed in Note 5 to the financial statements|
|(b) Represents investments in fixed maturity mutual funds and open ended mutual funds held by ICRA. The remaining contractual maturities for the fixed maturity instruments range from two months to 23 months|
|(c) Represents contingent consideration liabilities pursuant to the agreements for certain acquisitions|
The following table summarizes the changes in the fair value of the Company’s Level 3 liabilities:
|Changes in Contingent Consideration for Years Ended December 31,|
|Balance as of January 1||$||17.5||$||9.0||$||9.1|
|Contingent consideration assumed in acquisition of Amba||-||4.3||-|
|Contingent consideration payments||(16.5)||(2.5)||(0.5)|
|Losses included in earnings||1.3||6.9||0.1|
|Foreign currency translation adjustments||(0.2)||(0.2)||0.3|
|Balance as of December 31||$||2.1||$||17.5||$||9.0|
The losses included in earnings in the table above are recorded within SG&A expenses in the Company’s consolidated statements of operations and relate to contingent consideration obligations related to the Copal Amba acquisition which were settled in 2014.
The $ 2.1 million of contingent consideration obligations as of December 31, 2014 is classified in other liabilities within the Company’s consolidated balance sheet.
The following are descriptions of the methodologies utilized by the Company for determining the fair value of its derivative contracts, fixed maturity and open-ended mutual funds, money market mutual funds and contingent consideration obligations:
In determining the fair value of the derivative contracts in the table above, the Company utilizes industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using spot rates, forward points, currency volatilities, interest rates as well as the risk of non-performance of the Company and the counterparties with whom it has derivative contracts. The Company has strict counterparty credit guidelines and only enters into transactions with financial institutions that adhere to these guidelines. Accordingly, the risk of counterparty default is deemed to be minimal.
Fixed maturity and open ended mutual funds:
The fixed maturity mutual funds and open ended mutual funds primarily represent exchange traded funds in India held by ICRA and are classified as securities available-for-sale. Accordingly, any unrealized gains and losses are recognized through OCI until the instruments mature or are sold.
Money market mutual funds:
The money market mutual funds represent publicly traded funds with a stable $1 net asset value.
At December 31, 2014, the Company has a contingent consideration obligation related to the acquisition of CSI which is carried at estimated fair value, and is based on certain financial and non-financial metrics set forth in the acquisition agreements. This obligation is measured using Level 3 inputs as defined in the ASC. The Company has recorded the obligation for this contingent consideration arrangement on the date of acquisition based on management’s best estimates of the achievement of the metrics and the value of the obligation is adjusted quarterly.
The contingent consideration obligation for CSI is based on the achievement of a certain contractual milestone by January 2016. The Company utilizes a discounted cash flow methodology to value this obligation. The future expected cash flow for this obligation is discounted using an interest rate available to borrowers with similar credit risk profiles to that of the Company. The most significant unobservable input involved in the measurement of this obligation is the probability that the milestone will be reached by January 2016. At December 31, 2014, the Company expects that this milestone will be reached by the aforementioned date.
For certain of the contingent consideration obligations relating to the acquisition of Copal, a portion of the contingent cash payments were based on revenue and EBITDA growth for certain of the Copal entities. This growth was calculated by comparing revenue and EBITDA in the year immediately prior to the exercise of the put/call option to acquire the remaining 33% ownership interest of Copal Partners Limited, to revenue and EBITDA in Copal’s fiscal year ended March 31, 2011. Payments of $12.2 million under this arrangement were made in the fourth quarter of 2014 pursuant to the Company exercising its call option to acquire the remaining shares of Copal Amba. The Company had utilized discounted cash flow methodologies to value these obligations prior to their settlement in 2014. The expected future cash flows for these obligations were discounted using a risk-free interest rate plus a credit spread based on the option adjusted spread of the Company’s publicly traded debt as of the valuation date plus sovereign and size risk premiums. The most significant unobservable input involved in the measurement of these obligations were the projected future financial results of the applicable Copal Amba entities. Other contingent cash payments were based on the achievement of revenue targets for Copal’s fiscal year ended March 31, 2013 and a $2.5 million payment was made in 2013.
For the contingent consideration obligations relating to the acquisition of Amba, the payment was based on the acquired entity achieving a revenue target for its fiscal year ended March 31, 2014 which was met resulting in a $4.3 million payment in 2014.
NOTE 10 DETAIL OF CERTAIN BALANCE SHEET INFORMATION
The following tables contain additional detail related to certain balance sheet captions:
|Other current assets:|
|Total other current assets||$||172.5||$||114.4|
|Investments in joint ventures||$||21.6||$||37.5|
|Deposits for real-estate leases||11.3||10.3|
|Indemnification assets related to acquisitions||23.5||27.0|
|Fixed maturity and open-ended mutual funds||48.0||-|
|Total other assets||$||145.9||$||112.1|
|Accounts payable and accrued liabilities:|
|Salaries and benefits||$||86.5||$||77.1|
|Profit sharing contribution||9.3||-|
|Customer credits, advanced payments and advanced billings||17.0||21.7|
|Professional service fees||47.0||32.9|
|Interest accrued on debt||45.0||36.3|
|Income taxes (see Note 14)||16.1||47.5|
|Pension and other retirement employee benefits (see Note 12)||5.1||7.0|
|Total accounts payable and accrued liabilities||$||557.6||$||538.9|
|Pension and other retirement employee benefits (see Note 12)||$||244.8||$||164.0|
|Deferred rent-non-current portion||104.2||106.3|
|Interest accrued on UTPs||20.8||18.0|
|Legacy and other tax matters||8.6||15.4|
|Total other liabilities||$||430.9||$||360.2|
|Year Ended December 31,|
|Balance January 1,||$||27.6||$||55.8||$||27.1|
|Accruals (reversals), net||5.8||(0.9)||38.1|
|Balance December 31,||$||21.5||$||27.6||$||55.8|
Redeemable Noncontrolling Interest:
|Year Ended December 31,|
|Redeemable Noncontrolling Interest|
|Balance January 1,||$||80.0||$||72.3||$||60.5|
|Adjustment due to right of offset for UTPs (1)||-||-||6.8|
|Redemption of noncontrolling interest||(183.8)||-||-|
|Adjustment to redemption value (2)||99.4||7.9||3.4|
|Balance December 31,||$||-||$||80.0||$||72.3|
|(1) Related to an adjustment for the right of offset pursuant to the Copal acquisition agreement whereby the amount due to the sellers under the put/call arrangement was reduced by the amount of UTPs that the Company may be required to pay(2) The adjustment to the redemption value in the year ended December 31, 2014 reflects the aforementioned revisions to the revenue and EBITDA multiples pursuant to the amendment of the put/call agreement which occurred contemporaneously with the acquisition of Amba coupled with growth in the Copal Amba reporting unit. These adjustments are recorded with a corresponding reduction to capital surplus.|
NOTE 12 PENSION AND OTHER RETIREMENT BENEFITS
Moody’s maintains funded and unfunded noncontributory Defined Benefit Pension Plans. The U.S. plans provide defined benefits using a cash balance formula based on years of service and career average salary or final average pay for selected executives. The Company also provides certain healthcare and life insurance benefits for retired U.S. employees. The retirement healthcare plans are contributory; the life insurance plans are noncontributory. Moody’s funded and unfunded U.S. pension plans, the U.S. retirement healthcare plans and the U.S. retirement life insurance plans are collectively referred to herein as the “Retirement Plans”. The U.S. retirement healthcare plans and the U.S. retirement life insurance plans are collectively referred to herein as the “Other Retirement Plans”. Effective at the Distribution Date, Moody’s assumed responsibility for the pension and other retirement benefits relating to its active employees. New D&B has assumed responsibility for the Company’s retirees and vested terminated employees as of the Distribution Date.
Through 2007, substantially all U.S. employees were eligible to participate in the Company’s DBPPs. Effective January 1, 2008, the Company no longer offers DBPPs to U.S. employees hired or rehired on or after January 1, 2008 and new hires in the U.S. instead will receive a retirement contribution in similar benefit value under the Company’s Profit Participation Plan. Current participants of the Company’s Retirement Plans and Other Retirement Plans continue to accrue benefits based on existing plan benefit formulas.
Following is a summary of changes in benefit obligations and fair value of plan assets for the Retirement Plans for the years ended December 31:
|Pension Plans||Other Retirement Plans|
|Change in benefit obligation:|
|Benefit obligation, beginning of the period||$||(347.1)||$||(356.3)||$||(20.7)||$||(21.8)|
|Plan participants’ contributions||-||-||(0.4)||(0.3)|
|Actuarial gain (loss)||(8.3)||(0.7)||(0.1)||1.0|
|Benefit obligation, end of the period||(461.8)||(347.1)||(26.7)||(20.7)|
|Change in plan assets:|
|Fair value of plan assets, beginning of the period||204.6||167.6||-||-|
|Actual return on plan assets||12.9||23.0||-||-|
|Plan participants' contributions||-||-||0.4||0.3|
|Fair value of plan assets, end of the period||248.4||204.6||-||-|
|Funded Status of the plans||(213.4)||(142.5)||(26.7)||(20.7)|