MOODYS CORP /DE/, 10-Q filed on 11/6/2012
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2012
Document Information [Line Items]
 
Document Type
10-Q 
Amendment Flag
false 
Document Period End Date
Sep. 30, 2012 
Document Fiscal Year Focus
2012 
Document Fiscal Period Focus
Q3 
Trading Symbol
MCO 
Entity Registrant Name
MOODYS CORP /DE/ 
Entity Central Index Key
0001059556 
Current Fiscal Year End Date
--12-31 
Entity Filer Category
Large Accelerated Filer 
Entity Common Stock, Shares Outstanding
222,900,000 
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Revenue
$ 688.5 
$ 531.3 
$ 1,976.1 
$ 1,713.6 
Expenses
 
 
 
 
Operating
207.3 
171.0 
573.4 
502.3 
Selling, general and administrative
187.4 
145.0 
515.8 
436.4 
Depreciation and amortization
24.1 
19.0 
69.7 
58.5 
Restructuring
 
0.2 
 
0.1 
Total expenses
418.8 
335.2 
1,158.9 
997.3 
Operating income
269.7 
196.1 
817.2 
716.3 
Non-operating (expense) income, net
 
 
 
 
Interest expense, net
(15.3)
(12.9)
(42.2)
(45.2)
Other non-operating income (expense), net
10.0 
1.6 
12.6 
13.1 
Total non-operating (expense) income, net
(5.3)
(11.3)
(29.6)
(32.1)
Income before provisions for income taxes
264.4 
184.8 
787.6 
684.2 
Provision for income taxes
77.9 
52.7 
249.9 
204.3 
Net income
186.5 
132.1 
537.7 
479.9 
Less: Net income attributable to noncontrolling interests
2.6 
1.4 
7.8 
4.7 
Net income attributable to Moody's
$ 183.9 
$ 130.7 
$ 529.9 
$ 475.2 
Earnings per share attributable to Moody's common shareholders
 
 
 
 
Basic
$ 0.83 
$ 0.58 
$ 2.37 
$ 2.09 
Diluted
$ 0.81 
$ 0.57 
$ 2.34 
$ 2.06 
Weighted average number of shares outstanding
 
 
 
 
Basic
222.5 
226.0 
223.3 
227.7 
Diluted
226.1 
229.0 
226.7 
230.7 
Dividends declared per share attributable to Moody's common shareholders
$ 0.16 
$ 0.14 
$ 0.32 
$ 0.28 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Net income
$ 186.5 
$ 132.1 
$ 537.7 
$ 479.9 
Foreign currency translation adjustments
32.8 
(74.4)
23.5 
(38.2)
Cash flow and net investment hedges, net of tax:
 
 
 
 
Net unrealized losses on cash flow and net investment hedges
0.1 1
(0.1)1
(1.5)1
(0.5)1
Reclassification of losses included in net income
0.6 2
0.8 2
1.9 2
2.3 2
Cash flow and net investment hedges, net of tax
0.7 
0.7 
0.4 
1.8 
Pension and Other Post-Retirement Benefits, net of tax:
 
 
 
 
Amortization of actuarial losses and prior service costs included in net income
1.5 3
0.6 3
4.5 3
2.3 3
Net actuarial losses and prior service costs
 
 
(5.6)4
(3.3)4
Pension and Other Post-Retirement Benefits, net of tax
1.5 
0.6 
(1.1)
(1.0)
Comprehensive income
221.5 
59.0 
560.5 
442.5 
Less: comprehensive income attributable to noncontrolling interests
2.5 
0.3 
8.8 
4.4 
Comprehensive income attributable to Moody's
$ 219.0 
$ 58.7 
$ 551.7 
$ 438.1 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Parenthetical) (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Tax on unrealized losses on cash flow and investment hedges
$ 0.1 
$ 0.1 
$ 1.0 
$ 0.2 
Tax on reclassification losses included in net income
0.4 
0.6 
1.3 
1.6 
Tax on amortization of actuarial losses and prior service costs included in net income
1.1 
0.5 
3.1 
1.7 
Tax on actuarial losses and prior service costs
 
 
$ 3.9 
$ 2.4 
CONSOLIDATED BALANCE SHEETS (USD $)
In Millions, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Current assets:
 
 
Cash and cash equivalents
$ 1,518.5 
$ 760.0 
Short-term investments
22.7 
14.8 
Accounts receivable, net of allowances of $30.0 in 2012 and $28.0 in 2011
549.6 
489.8 
Deferred tax assets, net
46.1 
82.2 
Other current assets
68.9 
77.6 
Total current assets
2,205.8 
1,424.4 
Property and equipment, net of accumulated depreciation of $297.9 in 2012 and $258.2 in 2011
315.6 
326.8 
Goodwill
646.3 
642.9 
Intangible assets, net
233.3 
253.6 
Deferred tax assets, net
156.8 
146.4 
Other assets
104.5 
82.0 
Total assets
3,662.3 
2,876.1 
Current liabilities:
 
 
Accounts payable and accrued liabilities
362.8 
452.3 
Unrecognized tax benefits
 
90.0 
Current portion of long-term debt
95.6 
71.3 
Deferred revenue
524.5 
520.4 
Total current liabilities
982.9 
1,134.0 
Non-current portion of deferred revenue
92.9 
97.7 
Long-term debt
1,611.9 
1,172.5 
Deferred tax liabilities, net
52.5 
49.6 
Unrecognized tax benefits
144.6 
115.4 
Other liabilities
386.2 
404.8 
Total liabilities
3,271.0 
2,974.0 
Contingencies (Note 14)
   
   
Redeemable noncontrolling interest
69.2 
60.5 
Shareholders' equity (deficit):
 
 
Preferred stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding
   
   
Capital surplus
375.5 
394.5 
Retained earnings
4,634.1 
4,176.1 
Treasury stock, at cost; 120,028,264 and 120,462,232 shares of common stock at September 30, 2012 and December 31, 2011, respectively
(4,615.6)
(4,635.5)
Accumulated other comprehensive loss
(85.8)
(107.5)
Total Moody's shareholders' equity (deficit)
311.6 
(169.0)
Noncontrolling interests
10.5 
10.6 
Total shareholders' equity (deficit)
322.1 
(158.4)
Total liabilities, redeemable noncontrolling interest and shareholders' equity (deficit)
3,662.3 
2,876.1 
Series common stock
 
 
Shareholders' equity (deficit):
 
 
Common stock
   
   
Common Stock
 
 
Shareholders' equity (deficit):
 
 
Common stock
$ 3.4 
$ 3.4 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Accounts receivable, allowances
$ 30.0 
$ 28.0 
Property and equipment, accumulated depreciation
$ 297.9 
$ 258.2 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Preferred stock, shares issued
   
   
Preferred stock, shares outstanding
   
   
Treasury stock, shares
120,028,264 
120,462,232 
Series common stock
 
 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
10,000,000 
10,000,000 
Common stock, shares issued
   
   
Common stock, shares outstanding
   
   
Common Stock
 
 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
1,000,000,000 
1,000,000,000 
Common stock, shares issued
342,902,272 
342,902,272 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Cash flows from operating activities
 
 
Net income
$ 537.7 
$ 479.9 
Reconciliation of net income to net cash provided by operating activities:
 
 
Depreciation and amortization
69.7 
58.5 
Stock-based compensation expense
46.3 
43.2 
Deferred income taxes
29.8 
12.8 
Excess tax benefits from stock-based compensation plans
(11.8)
(6.0)
Legacy Tax Matters
(12.8)1
(6.4)1
Changes in assets and liabilities:
 
 
Accounts receivable
(57.0)
97.5 
Other current assets
8.9 
77.5 
Other assets
2.5 
8.7 
Accounts payable and accrued liabilities
(48.5)
(71.0)
Restructuring
(0.1)
(0.1)
Deferred revenue
(2.7)
(26.3)
Unrecognized tax benefits
(61.5)
(0.1)
Other liabilities
(4.5)
(1.9)
Net cash provided by operating activities
496.0 
666.3 
Cash flows from investing activities
 
 
Capital additions
(35.2)
(53.6)
Purchases of short-term investments
(47.8)
(28.9)
Sales and maturities of short-term investments
40.4 
27.3 
Acquisitions
(3.5)
(10.1)
Net cash used in investing activities
(46.1)
(65.3)
Cash flows from financing activities
 
 
Issuance of notes
496.1 
 
Repayments of notes
(39.4)
(7.5)
Net proceeds from stock-based compensation plans
71.9 
37.6 
Cost of treasury shares repurchased
(125.1)
(333.8)
Excess tax benefits from stock-based compensation plans
11.8 
6.0 
Payment of dividends
(107.3)
(89.9)
Payment of dividends to noncontrolling interests
(6.8)
(4.8)
Contingent consideration paid
(0.5)
 
Debt issuance costs and related fees
(6.3)
 
Net cash provided by (used in) financing activities
294.4 
(392.4)
Effect of exchange rate changes on cash and cash equivalents
14.2 
(14.0)
Net increase in cash and cash equivalents
758.5 
194.6 
Cash and cash equivalents, beginning of the period
760.0 
659.6 
Cash and cash equivalents, end of the period
$ 1,518.5 
$ 854.2 
GLOSSARY OF TERMS AND ABBREVIATIONS
GLOSSARY OF TERMS AND ABBREVIATIONS

GLOSSARY OF TERMS AND ABBREVIATIONS

The following terms, abbreviations and acronyms are used to identify frequently used terms in this report:

 

TERM

  

DEFINITION

ACNielsen

   ACNielsen Corporation – a former affiliate of Old D&B

Adjusted Operating Income

   Operating income excluding restructuring and depreciation and amortization expense

Adjusted Operating Margin

  

Adjusted operating income divided by revenue

Analytics

   Moody’s Analytics – a reportable segment of MCO formed in January 2008, which includes the non-rating commercial activities of MCO

AOCI

   Accumulated other comprehensive income (loss); a separate component of shareholders’ equity (deficit)

ASC

   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

ASU

   The FASB Accounting Standards Update 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

B&H

   Barrie & Hibbert Limited, an acquisition completed in December 2011; part of the MA segment, a leading provider of risk management modeling tools for insurance companies worldwide

Basel II

   Capital adequacy framework published in June 2004 by the Basel Committee on Banking Supervision

Basel III

   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.

Board

   The board of directors of the Company

Bps

   Basis points

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

CDOs

   Collateralized debt obligations

CFG

   Corporate finance group; an LOB of MIS

CMBS

   Commercial mortgage-backed securities; part of CREF

Cognizant

   Cognizant Corporation – a former affiliate of Old D&B; comprised the IMS Health and NMR businesses

Commission

   European Commission

Company

   Moody’s Corporation and its subsidiaries; MCO; Moody’s

Copal

   Copal Partners; an acquisition completed in November 2011; part of the MA segment; leading provider of outsourced research and analytical services to institutional investors

CP

   Commercial paper

CP Notes

   Unsecured commercial paper notes

CP Program

   The Company’s commercial paper program entered into on October 3, 2007

CRAs

   Credit rating agencies

CREF

   Commercial real estate finance which includes REITs, commercial real estate CDOs and mortgage-backed securities; part of SFG

CSI

   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

D&B Business

   Old D&B’s Dun & Bradstreet operating company

DBPP

   Defined benefit pension plans

Debt/EBITDA

   Ratio of Total Debt to EBITDA

EBITDA

   Earnings before interest, taxes, depreciation and amortization

ECAIs

   External Credit Assessment Institutions

ECB

   European Central Bank

EMEA

   Represents countries within Europe, the Middle East and Africa

EPS

   Earnings per share

ERS

   The enterprise risk solutions LOB within MA (formerly RMS); which offers risk management software products as well as software implementation services and related risk management advisory engagements

ESMA

   European Securities and Market Authority

ESPP

   The 1999 Moody’s Corporation Employee Stock Purchase Plan

ETR

   Effective tax rate

EU

   European Union

EUR

   Euros

Eurosystem

   The monetary authority of the Eurozone, the collective of European Union member states that have adopted the euro as their sole official currency. The Eurosystem consists of the European Central Bank and the central banks of the member states that belong to the Eurozone

Excess Tax Benefits

   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 the option or restricted share is expensed under GAAP

Exchange Act

   The Securities Exchange Act of 1934, as amended

FASB

   Financial Accounting Standards Board

FIG

   Financial institutions group; an LOB of MIS

Financial Reform Act

   Dodd-Frank Wall Street Reform and Consumer Protection Act

Free Cash Flow

   Net cash provided by operating activities less cash paid for capital additions

FSTC

   Financial Services Training and Certifications; a reporting unit within the MA segment that includes classroom-based training services and CSI

FX

   Foreign exchange

GAAP

   U.S. Generally Accepted Accounting Principles

GBP

   British pounds

G-8

   The finance minister and central bank governors of the group of eight countries consisting of Canada, France, Germany, Italy, Japan, Russia, U.S. and U.K., that meet annually

G-20

   The G-20 is an informal forum of industrial and emerging-market countries on key issues related to global economic stability. The G-20 is comprised of: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the U.K. and the U.S. and The EU who is represented by the rotating Council presidency and ECB

IMS Health

   A spin-off of Cognizant; provides services to the pharmaceutical and healthcare industries

Indicative Ratings

   These are ratings which are provided as of a point in time, and not published or monitored. They are primarily provided to potential or current issuers to indicate what a rating may be based on business fundamentals and financial conditions as well as based on proposed financings

IOSCO

   International Organization of Securities Commissions

IOSCO Code

   Code of Conduct Fundamentals for Credit Rating Agencies

IRS

   Internal Revenue Service

KIS

   Korea Investors Service, Inc.; a leading Korean rating agency and consolidated subsidiary of the Company

KIS Pricing

   Korea Investors Service Pricing, Inc.; a Korean provider of fixed income securities pricing and consolidated subsidiary of the Company

Legacy Tax Matter(s)

   Exposures to certain potential tax liabilities assumed in connection with the 2000 Distribution

LIBOR

   London Interbank Offered Rate

LOB

   Line of business

MA

   Moody’s Analytics – a reportable segment of MCO formed in January 2008, which includes the non-rating commercial activities of MCO

Make Whole Amount

   The prepayment penalty amount relating to the Series 2005-1 Notes, Series 2007-1 Notes, 2010 Senior Notes and 2012 Senior Notes which is a premium based on the excess, if any, of the discounted value of the remaining scheduled payments over the prepaid principal

MCO

   Moody’s Corporation and its subsidiaries; the Company; Moody’s

MD&A

   Management’s Discussion and Analysis of Financial Condition and Results of Operations

MIS

   Moody’s Investors Service – a reportable segment of MCO; consists of four LOBs – SFG, CFG, FIG and PPIF

MIS Code

   Moody’s Investors Service Code of Professional Conduct

Moody’s

   Moody’s Corporation and its subsidiaries; MCO; the Company

Net Income

   Net income attributable to Moody’s Corporation, which excludes net income from consolidated noncontrolling interests belonging to the minority interest holder

New D&B

   The New D&B Corporation – which comprises the D&B business

NM

   Percentage change is not meaningful

NMR

   Nielsen Media Research, Inc.; a spin-off of Cognizant; a leading source of television audience measurement services

NRSRO

   Nationally Recognized Statistical Rating Organization

Old D&B

   The former Dun and Bradstreet Company which distributed New D&B shares on September 30, 2000, and was renamed Moody’s Corporation

PPIF

   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

PS

   Professional Services, an LOB within MA that provides outsourced research and analytical services as well as financial training and certification programs

RD&A

   Research, Data and Analytics; an LOB within MA that produces, sells and distributes research, data and related content. Includes products generated by MIS, such as analyses on major debt issuers, industry studies, and commentary on topical credit events, as well as economic research, data, 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 in the control of the minority shareholders

Reform Act

   Credit Rating Agency Reform Act of 2006

REITs

   Real estate investment trusts

RMBS

   Residential mortgage-backed security; part of SFG

RMS

   The Risk Management Software LOB within MA, which provides both economic and regulatory capital risk management software and implementation services. Now referred to as “ERS”

Retirement Plans

   Moody’s funded and unfunded pension plans, the retirement healthcare plans and retirement life insurance plans

S&P

   Standard & Poor’s Ratings Services; a division of The McGraw-Hill Companies, Inc.

SEC

   U.S. Securities and Exchange Commission

Securities Act

   Securities Act of 1933

Series 2005-1 Notes

   Principal amount of $300 million, 4.98% senior unsecured notes due in September 2015 pursuant to the 2005 Agreement

Series 2007-1 Notes

   Principal amount of $300 million, 6.06% senior unsecured notes due in September 2017 pursuant to the 2007 Agreement

SFG

   Structured finance group; an LOB of MIS

SG&A

   Selling, general and administrative expenses

T&E

   Travel and entertainment expenses

Total Debt

   All indebtedness of the Company as reflected on the consolidated balance sheets, excluding current accounts payable and deferred revenue incurred in the ordinary course of business

U.K.

   United Kingdom

U.S.

   United States

USD

   U.S. dollar

UTBs

   Unrecognized tax benefits

UTPs

   Uncertain tax positions

2000 Distribution

   The distribution by Old D&B to its shareholders of all the outstanding shares of New D&B common stock on September 30, 2000

2000 Distribution Agreement

   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 rulings on certain tax matters and certain other potential tax liabilities

2005 Agreement

   Note purchase agreement dated September 30, 2005, relating to the Series 2005-1 Notes

2007 Agreement

   Note purchase agreement dated September 7, 2007, relating to the Series 2007-1 Notes

2007 Facility

   Revolving credit facility of $1 billion entered into on September 28, 2007, expiring in 2012

2008 Term Loan

   Five-year $150 million senior unsecured term loan entered into by the Company on May 7, 2008

2012 Indenture

   Agreements dated August 18, 2012, relating to the 2012 Senior Notes

2010 Senior Notes

   Principal amount of $500 million, 5.50% senior unsecured notes due in September 2020 pursuant to the 2010 Indenture

2010 Indenture

   Agreements dated August 19, 2010, relating to the 2010 Senior Notes

2012 Senior Notes

   Principal amount of $500 million, 4.50% senior unsecured notes due in September 2022 pursuant to the 2012 Indenture

2012 Facility

   Revolving credit facility of $1 billion entered into on April 18, 2012, expiring in 2017

7WTC

   The Company’s corporate headquarters located at 7 World Trade Center in New York, NY

7WTC Lease

   Operating lease agreement entered into on October 20, 2006
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

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 derived from the originators and issuers of such transactions who use MIS ratings in the distribution of their debt issues to investors.

The MA segment, which includes all of the Company’s non-rating commercial activities, 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 (formerly referred to as RMS), 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.

These interim financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the Company’s consolidated financial statements and related notes in the Company’s 2011 annual report on Form 10-K filed with the SEC on February 27, 2012. The results of interim periods are not necessarily indicative of results for the full year or any subsequent period. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Certain prior year amounts have been reclassified to conform to the current year presentation.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following outlines changes to the Company’s accounting policy regarding long-lived assets, including goodwill and other acquired intangible assets since the Company’s last Form 10K filed with the SEC for the year ended December 31, 2011. All other provisions as outlined in the summary of significant accounting policies for this policy and all other significant accounting policies described in the Form 10-K for the year ended December 31, 2011 remain unchanged.

Long-Lived Assets, Including Goodwill and Other Acquired Intangible Assets

Moody’s evaluated its goodwill for impairment at the reporting unit level, defined as an operating segment or one level below an operating segment, annually as of November 30 or more frequently if impairment indicators arose in accordance with ASC Topic 350. In the second quarter of 2012, the Company changed the date of its annual assessment of goodwill impairment to July 31 of each year. This is a change in method of applying an accounting principle which management believes is a preferable alternative as the new date of the assessment is more closely aligned with the Company’s strategic planning process. The change in the assessment date does not delay, accelerate or avoid a potential impairment charge. The Company has determined that it is impracticable to objectively determine projected cash flows and related valuation estimates that would have been used as of each July 31 of prior reporting periods without the use of hindsight. As such, the Company has prospectively applied the change in annual goodwill impairment testing date beginning in the second quarter of 2012.

At July 31, 2012, the Company had five primary reporting units: one in MIS that encompasses all of Moody’s ratings operations and four reporting units within MA: RD&A, ERS, Financial Services Training and Certifications and Copal Partners. 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. In the first quarter of 2012, a division formerly in the RD&A reporting unit which provided various financial modeling services was transferred to the ERS reporting unit. Additionally, in the second quarter of 2012, the CSI reporting unit, which consisted of all operations relating to CSI which was acquired in November 2010, was integrated into MA’s training reporting unit to form the FSTC reporting unit. The new 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. In the fourth quarter of 2011, the Company acquired Copal which is deemed to be separate reporting unit at September 30, 2012. Also, in December 2011, the Company acquired B&H which is part of the ERS reporting unit.

STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION

NOTE 3. STOCK-BASED COMPENSATION

Presented below is a summary of the stock-based compensation cost and associated tax benefit included in the accompanying consolidated statements of operations:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2012      2011      2012      2011  

Stock-based compensation cost

   $ 16.4      $ 12.9      $ 46.3      $ 43.2  

Tax benefit

   $ 5.9      $ 5.0      $ 16.7      $ 16.2  

During the first nine months of 2012, the Company granted 0.5 million employee stock options, which had a weighted average grant date fair value of $15.19 per share based on the Black-Scholes option-pricing model. The Company also granted 1.3 million shares of restricted stock in the first nine months of 2012, which had a weighted average grant date fair value of $38.61 per share and generally vest ratably over a four-year period. Additionally, the Company granted approximately 0.3 million shares of restricted stock that contain a condition whereby the number of shares that ultimately vest are based on the achievement of certain non-market based performance metrics of the Company over a three-year period. The weighted average grant date fair value of these awards was $36.78 per share.

The following weighted average assumptions were used in determining the fair value for options granted in 2012:

 

Expected dividend yield

     1.66

Expected stock volatility

     44

Risk-free interest rate

     1.55

Expected holding period

     7.4 yrs   

Grant date fair value

   $ 15.19   

 

Unrecognized compensation expense at September 30, 2012 was $15.6 million and $66.2 million for stock options and nonvested restricted stock, respectively, which is expected to be recognized over a weighted average period of 1.3 years and 1.7 years, respectively. Additionally, there was $16.2 million of unrecognized compensation expense relating to the aforementioned non-market based performance awards which is expected to be recognized over a weighted average period of 0.9 years.

The following tables summarize information relating to stock option exercises and restricted stock vesting:

 

     Nine Months Ended  
     September 30,  
Stock option exercises:    2012      2011  

Proceeds from stock option exercises

   $ 83.2      $ 41.5  

Aggregate intrinsic value

   $ 41.4      $ 20.4  

Tax benefit realized upon exercise

   $ 15.7      $ 8.0  

 

     Nine Months Ended  
     September 30,  
Restricted stock vesting:    2012      2011  

Fair value of shares vested

   $ 37.7      $ 18.8  

Tax benefit realized upon vesting

   $ 13.3      $ 7.0  
INCOME TAXES
INCOME TAXES

NOTE 4. INCOME TAXES

Moody’s effective tax rate was 29.5% and 28.5% for the three months ended September 30, 2012 and 2011, respectively and 31.7% and 29.9% for the nine months ended September 30, 2012 and 2011, respectively. The increase in the ETR compared to the third quarter of 2011 was primarily due to tax benefits from the settlement of state tax audits in the prior period, partially offset by the favorable impact of foreign tax planning initiatives in 2012. The increase in the ETR compared to the nine months ended September 30, 2011 was primarily due to a reversal of UTPs in 2011 resulting from a foreign tax ruling and tax benefits from the settlement of state tax audits in 2011 partially offset by the aforementioned foreign tax planning.

The Company classifies interest related to UTPs in interest expense, net in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating (expense) income, net. The Company had an overall increase in its UTPs of $14.6 million ($12.1 million net of federal tax benefit) during the third quarter of 2012 and an overall decrease in its UTPs during the first nine months of 2012 of $60.8 million ($33.5 million net of federal benefits). The decrease in UTPs from December 31, 2011 is due to the settlement of income tax audits in the period.

Moody’s Corporation and subsidiaries are subject to U.S. federal income tax as well as income tax in various state, local and foreign jurisdictions. The Company’s U.S. federal income tax returns for the years 2008 through 2010 are under examination and its 2011 return remains open to examination. Tax filings in the U.K. remain open to examination for tax years 2007 through 2010.

For ongoing audits, it is possible the balance of UTBs could decrease in the next twelve months as a result of the settlement of these audits, which might involve the payment of additional taxes, the adjustment of certain deferred taxes and/or the recognition of tax benefits. It is also possible that new issues might be raised by tax authorities which could necessitate increases to the balance of UTBs. As the Company is unable to predict the timing or outcome of these audits, it is therefore unable to estimate the amount of changes to the balance of UTBs at this time. However, the Company believes that it has adequately provided for its financial exposure relating to all open tax years by tax jurisdiction in accordance with the applicable provisions of Topic 740 of the ASC regarding UTBs.

 

The following table shows the amount the Company paid for income taxes:

 

     Nine Months Ended  
     September 30,  
     2012      2011  

Income Taxes Paid*

   $ 271.9      $ 166.9  

 

* Includes approximately $92 million in payments for tax audit settlements in the first quarter of 2012.
WEIGHTED AVERAGE SHARES OUTSTANDING
WEIGHTED AVERAGE SHARES OUTSTANDING

NOTE 5. WEIGHTED AVERAGE SHARES OUTSTANDING

Below is a reconciliation of basic to diluted shares outstanding:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2012      2011      2012      2011  

Basic

     222.5        226.0        223.3        227.7  

Dilutive effect of shares issuable under stock-based compensation plans

     3.6        3.0        3.4        3.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     226.1        229.0        226.7        230.7  
  

 

 

    

 

 

    

 

 

    

 

 

 

Anti-dilutive options to purchase common shares and restricted stock excluded from the table above

     6.6        10.7        6.6        10.8  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2012 and 2011. These assumed proceeds include Excess Tax Benefits and any unrecognized compensation of the awards.

SHORT-TERM INVESTMENTS
SHORT-TERM INVESTMENTS

NOTE 6. SHORT-TERM INVESTMENTS

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 short-term investments, primarily consisting of certificates of deposit, are classified as held-to-maturity and therefore are carried at cost. The remaining contractual maturities of the short-term investments were one month to six months and one month to seven months as of September 30, 2012 and December 31, 2011, respectively. Interest and dividends are recorded into income when earned.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

NOTE 7. 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 has designated these swaps as fair value hedges. The fair value of the swaps is reported in other assets at September 30, 2012 and December 31, 2011 in the Company’s consolidated balance sheets 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 are recorded each period within interest expense, net, in the Company’s consolidated statement of operations.

In May 2008, the Company entered into interest rate swaps with a total notional amount of $150 million to protect against fluctuations in the LIBOR-based variable interest rate on the 2008 Term Loan, further described in Note 13. These interest rate swaps are designated as cash flow hedges. Accordingly, changes in the fair value of these swaps are recorded to other comprehensive income or loss, to the extent that the hedge is effective, and such amounts are reclassified to earnings in the same period during which the hedged transaction affects income. The fair value of the swaps is reported in other liabilities in the Company’s consolidated balance sheets at September 30, 2012 and December 31, 2011.

Foreign Exchange Forwards and Options

The Company engaged in hedging activities to protect against FX risks from forecasted billings and related revenue denominated in the euro and the GBP. FX options and forward exchange contracts were utilized to hedge exposures related to changes in FX rates. As of December 31, 2011, these FX options and forward exchange contracts have matured and all realized gains and losses have been reclassified from AOCI into earnings. FX options and forward exchange contracts were designated as cash flow hedges.

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 entity’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 (expense) income, 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 entity’s functional currency. These contracts have expiration dates at various times through December 2012.

The following table summarizes the notional amounts of the Company’s outstanding foreign exchange forwards:

 

     September 30,      December 31,  
     2012      2011  

Notional amount of Currency Pair:

     

Contracts to purchase USD with euros

   $ 34.6      $ 27.5  

Contracts to sell USD for euros

   $ 47.1      $ 47.7  

Contracts to purchase USD with GBP

   $ 4.2      $ 2.4  

Contracts to sell USD for GBP

   $ 4.2      $ 17.6  

Contracts to purchase USD with other foreign currencies

   $ 8.7      $ 3.2  

Contracts to sell USD for other foreign currencies

   $ 6.5      $ 7.6  

Contracts to purchase euros with other foreign currencies

   20.7      13.6  

Contracts to purchase euros with GBP

   8.7      1.6  

Contracts to sell euros for GBP

   9.9      7.2  

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. 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 statement of operations. As of September 30, 2012 the Company does not expect to incur any ineffectiveness. Accordingly, all gains and losses on these derivatives designated as net investment hedges are recognized in the currency translation adjustment component of AOCI. These outstanding contracts expire on December 3, 2012.

The following table summarizes the notional amounts of the Company’s outstanding foreign exchange forward contracts that are designated as net investment hedges:

 

     September 30,      December 31,  
     2012      2011  

Notional amount of Currency Pair:

     

Contracts to sell euros for USD

   50.0        N/A   

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

   September 30,
2012
     December 31,
2011
 

Assets:

        

Derivatives designated as accounting hedges:

        

Interest rate swaps

  

Other assets

   $ 18.4      $ 11.5  
     

 

 

    

 

 

 

Total derivatives designated as accounting hedges

        18.4        11.5  

Derivatives not designated as accounting hedges:

        

FX forwards on certain assets and liabilities

  

Other current assets

     2.0        1.1  
     

 

 

    

 

 

 

Total

      $ 20.4      $ 12.6  
     

 

 

    

 

 

 

Liabilities:

        

Derivatives designated as accounting hedges:

        

Interest rate swaps

  

Accounts payable and accrued liabilities

   $ 1.5      $ 4.5  

FX forwards on net investment in certain foreign subsidiaries

  

Accounts payable and accrued liabilities

     1.8        —     
     

 

 

    

 

 

 

Total derivatives designated as accounting hedges

        3.3        4.5  

Derivatives not designated as accounting hedges:

        

FX forwards on certain assets and liabilities

  

Accounts payable and accrued liabilities

     0.6        2.3  
     

 

 

    

 

 

 

Total

      $ 3.9      $ 6.8  
     

 

 

    

 

 

 

 

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 hedge:

 

          Amount of Gain (Loss) Recognized in
consolidated statements of operations
 
          Three Months Ended     Nine Months Ended  
          September 30,     September 30,  

Derivatives designated as accounting hedges

  

Location on Income Statement

   2012      2011     2012      2011  

Interest rate swaps

  

Interest expense, net

   $ 0.9      $ 1.0     $ 2.6      $ 3.1  
     

 

 

    

 

 

   

 

 

    

 

 

 

Derivatives not designated as accounting hedges

                               

Foreign exchange forwards

  

Other non-operating (expense) income

   $ 0.4      $ (3.1   $ —         $ (0.6
     

 

 

    

 

 

   

 

 

    

 

 

 

The following table provides information on gains/(losses) on the Company’s cash flow hedges:

 

Derivatives in

Cash Flow

Hedging

Relationships

   Amount of
Gain/(Loss)
Recognized in
AOCI on Derivative
(Effective Portion)
   

Location of

Gain/(Loss)
Reclassified from

AOCI into Income

(Effective Portion)

   Amount of
Gain/(Loss)
Reclassified from
AOCI into Income
(Effective Portion)
   

Location of

Gain/(Loss)

Recognized in

Income on Derivative

(Ineffective Portion

and Amount

Excluded from

Effectiveness Testing)

   Gain/(Loss)
Recognized in
Income on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
 
     Three Months Ended          Three Months Ended          Three Months Ended  
     September 30,          September 30,          September 30,  
     2012     2011          2012     2011          2012      2011  

FX options

   $ —        $ —       

Revenue

   $ —        $ —       

Revenue

   $ —         $ —     

Interest rate swaps

     —          (0.1  

Interest Expense

     (0.6     (0.9  

N/A

     —           —     
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

    

 

 

 

Total

   $ —        $ (0.1      $ (0.6   $ (0.9      $ —         $ —     
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

    

 

 

 
     Nine Months Ended          Nine Months Ended          Nine Months Ended  
     September 30,          September 30,          September 30,  
     2012     2011          2012     2011          2012      2011  

FX options

   $ —        $ —       

Revenue

   $ —        $ (0.2  

Revenue

   $ —         $ —     

Interest rate swaps

     (0.1     (0.5  

Interest Expense

     (1.9     (2.2  

N/A

     —           —     
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

    

 

 

 

Total

   $ (0.1   $ (0.5      $ (1.9   $ (2.4      $ —         $ —     
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

    

 

 

 

All gains and losses on derivatives designated as cash flow hedges are initially recognized through AOCI. Realized gains and losses reported in AOCI are reclassified into earnings (into revenue for FX options and into interest expense, net for the interest rate swaps) as the underlying transaction is recognized.

The following table provides information on gains/(losses) on the Company’s net investment hedges:

 

Derivatives in

Net Investment

Hedging

Relationships

   Amount  of
Gain/(Loss)
Recognized in
AOCI  on Derivative
(Effective Portion)
    

Location of

Gain/(Loss)

Reclassified from

AOCI into Income

(Effective Portion)

   Amount  of
Gain/(Loss)
Reclassified  from
AOCI into Income
(Effective Portion)
    

Location of

Gain/(Loss)

Recognized in

Income on Derivative

(Ineffective Portion

and Amount

Excluded from

Effectiveness Testing)

   Gain/(Loss)
Recognized in
Income on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
 
     Three Months Ended           Three Months Ended           Three Months Ended  
     September 30,           September 30,           September 30,  
     2012     2011           2012      2011           2012      2011  

FX forwards

   $ 0.1     $ —        

N/A

   $ —         $ —        

N/A

   $ —         $ —     
  

 

 

   

 

 

       

 

 

    

 

 

       

 

 

    

 

 

 

Total

   $ 0.1     $ —            $ —         $ —            $ —         $ —     
  

 

 

   

 

 

       

 

 

    

 

 

       

 

 

    

 

 

 
     Nine Months Ended           Nine Months Ended           Nine Months Ended  
     September 30,           September 30,           September 30,  
     2012     2011           2012      2011           2012      2011  

FX forwards

   $ (1.4   $ —        

N/A

   $ —         $ —        

N/A

   $ —         $ —     
  

 

 

   

 

 

       

 

 

    

 

 

       

 

 

    

 

 

 

Total

   $ (1.4   $ —            $ —         $ —            $ —         $ —     
  

 

 

   

 

 

       

 

 

    

 

 

       

 

 

    

 

 

 

All gains and losses on derivatives designated as net investment hedges are recognized in the currency translation adjustment component of AOCI.

The cumulative amount of unrecognized hedge losses recorded in AOCI is as follows:

 

     Unrecognized Losses, net of tax  
     September 30,     December 31,  
     2012     2011  

FX forwards on net investment hedges

   $ (1.4   $ —     

Interest rate swaps (1)

     (1.2     (3.0
  

 

 

   

 

 

 

Total

   $ (2.6   $ (3.0
  

 

 

   

 

 

 

 

(1) 

The unrecognized hedge losses relating to the cash flow hedges on the 2008 Term Loan are expected to be reclassified into earnings within the next twelve months as the underlying hedge ends with the full repayment of the Term Loan in the first half of 2013.

ACQUISITIONS
ACQUISITIONS

NOTE 8. ACQUISITIONS

All of the acquisitions described below were accounted for under the purchase method of accounting whereby the purchase price is allocated first to the net assets of the acquired entity based on the fair value of its net assets. Any excess of the purchase price over the fair value of the net assets acquired is recorded to goodwill. These acquisitions are discussed below in more detail.

Barrie & Hibbert, Limited

On December 16, 2011, a subsidiary of the Company acquired Barrie & Hibbert Limited, a provider of risk management modeling tools for insurance companies worldwide. B&H operates within the ERS LOB of MA, broadening MA’s suite of software solutions for the insurance and pension sectors.

 

The aggregate purchase price was $79.5 million in cash payments to the sellers and was funded by using Moody’s non-U.S. cash on hand.

Shown below is the purchase price allocation, which summarizes the fair values of the assets acquired, and liabilities assumed:

 

Current assets

      $ 15.2  

Property and equipment, net

        0.7  

Intangible assets:

     

Trade name (5 year weighted average life)

   $ 1.9     

Client relationships (18 year weighted average life)

     8.3     

Software (7 year weighted average life)

     16.8     

Other intangibles (2 year weighted average life)

     0.1     
  

 

 

    

Total intangible assets (12 year weighted average life)

        27.1  

Goodwill

        54.6  

Liabilities assumed

        (18.1
     

 

 

 

Net assets acquired

      $ 79.5  
     

 

 

 

Current assets include acquired cash of approximately $10 million. Goodwill will not be deductible for tax. B&H operates within the ERS reporting unit and goodwill associated with the acquisition was part of the ERS reporting unit within the MA segment as of the acquisition date.

The near term impact to operations and cash flow from this acquisition is not expected to be material to the Company’s consolidated financial statements.

Copal Partners

On November 4, 2011, subsidiaries of the Company acquired a 67% interest in Copal Partners Limited and a 100% interest in two related entities that were wholly-owned by Copal Partners Limited (together herein referred to as “Copal”). These acquisitions resulted in the Company obtaining an approximate 75% economic ownership interest in the Copal group of companies. Copal is a provider of outsourced research and consulting services to the financial services industry. Copal operates within the PS LOB of MA and complements the other products and services offered by MA. The table below details the total consideration transferred to the sellers of Copal:

 

Cash paid

   $ 125.0  

Put/call option for non-controlling interest

     68.0  

Contingent consideration liability assumed

     6.8  
  

 

 

 

Total fair value of consideration transferred

   $ 199.8  
  

 

 

 

In conjunction with the purchase, the Company and the non-controlling shareholders entered into a put/call option agreement whereby the Company has the option to purchase from the non-controlling shareholders and the non-controlling shareholders have the option to sell to the Company the remaining 33% ownership interest of Copal Partners Limited based on a strike price to be calculated on pre-determined formulas using a combination of revenue and EBITDA multiples when exercised. The value of the estimated put/call option strike price on the date of acquisition was based on a Monte Carlo simulation model. This model contemplated multiple scenarios which simulated certain of Copal’s revenue, EBITDA margins and equity values to estimate the present value of the expected strike price of the option. The option is subject to a minimum exercise price of $46 million. There is no limit as to the maximum amount of the strike price on the put/call option.

 

Additionally, as part of the consideration transferred, the Company issued a note payable of $14.2 million to the sellers which is more fully discussed in Note 13. The Company has a right to reduce the amount payable under this note with payments that it may be required to make relating to certain UTPs associated with the acquisition. Accordingly, this note payable is not carried on the consolidated balance sheet as of September 30, 2012 and December 31, 2011 in accordance with certain indemnification arrangements relating to these UTPs which are more fully discussed below.

Also, the purchase agreement contains several different provisions for contingent cash payments to the sellers valued at $6.8 million at the acquisition date. A portion of the contingent cash payments are based on revenue and EBITDA growth for certain of the acquired Copal entities. This growth is calculated by comparing revenue and EBITDA in the year immediately prior to the exercise of the aforementioned put/call option to revenue and EBITDA in the year ended December 31, 2011. There are no limitations set forth in the acquisition agreement relating to the amount payable under this contingent payment arrangement. Payments under this arrangement, if any, would be made upon the exercise of the put/call option. Other contingent cash payments are based on the achievement of revenue targets for 2012 and 2013, with certain limits on the amount of revenue that can be applied to the calculation of the contingent payment. Each of these contingent payments has a maximum payout of $2.5 million. Further information on the inputs and methodologies utilized to derive the fair value of these contingent consideration liabilities are discussed in Note 10.

Shown below is the purchase price allocation, which summarizes the fair values of the assets acquired, and liabilities assumed:

 

Current assets

      $ 15.5  

Property and equipment, net

        0.5  

Intangible assets:

     

Trade name (15 year weighted average life)

   $ 8.6     

Client relationships (16 year weighted average life)

     66.2     

Other (2 year weighted average life)

     4.4     
  

 

 

    

Total intangible assets (15 year weighted average life)

        79.2  

Goodwill

        136.9  

Indemnification asset

        18.8  

Other assets

        6.6  

Liabilities assumed

        (57.7
     

 

 

 

Net assets acquired

      $ 199.8  
     

 

 

 

Current assets include acquired cash of approximately $7 million. 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 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. Under the terms of the acquisition agreement, a portion of the purchase price was remitted to an escrow agent for various uncertainties associated with the transaction of which a portion relates to these UTPs. Additionally, the Company is contractually indemnified for payments in excess of the amount paid into escrow via a reduction to the amount payable under the aforementioned note payable issued to the sellers. Accordingly, the Company carries an indemnification asset on its consolidated balance sheet at September 30, 2012 and December 31, 2011 for which a portion has been offset by the note payable in the amount of $14.2 million.

 

As of September 30, 2012, Copal operates as its own reporting unit. Accordingly, goodwill associated with the acquisition is part of the Copal reporting unit within the MA segment. Copal will remain a separate reporting unit until MA management completes its evaluation of options for integrating the entity into the other MA reporting units.

The near term impact to operations and cash flow from this acquisition is not expected to be material to the Company’s consolidated financial statements.

KIS Pricing, Inc.

On May 6, 2011, a subsidiary of the Company acquired a 16% additional direct equity investment in KIS Pricing, which is a consolidated subsidiary of the Company, from a shareholder with a non-controlling interest in the entity. The additional interest adds to the Company’s existing indirect ownership of KIS Pricing through its controlling equity stake in Korea Investors Service (KIS). The aggregate purchase price was not material and the near term impact to operations and cash flow is not expected to be material. KIS Pricing is part of the MA segment.

GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS
GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS

NOTE 9. GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS

The following table summarizes the activity in goodwill for the periods indicated:

 

     Nine Months Ended     Year ended  
     September 30, 2012     December 31, 2011  
     MIS      MA     Consolidated     MIS     MA     Consolidated  

Beginning Balance

   $ 11.0      $ 631.9     $ 642.9     $ 11.4     $ 454.1     $ 465.5  

Additions/adjustments

     —           (4.4     (4.4     —          198.5       198.5  

FX translation

     0.2        7.6       7.8       (0.4     (20.7     (21.1
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 11.2      $ 635.1     $ 646.3     $ 11.0     $ 631.9     $ 642.9  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The 2012 and 2011 additions/adjustments for the MA segment relate to the acquisitions of Copal and B&H in the fourth quarter of 2011, more fully discussed in Note 8.

Acquired intangible assets and related amortization consisted of:

 

     September 30,
2012
    December 31,
2011
 

Customer relationships

   $ 218.2     $ 217.9  

Accumulated amortization

     (69.1     (58.6
  

 

 

   

 

 

 

Net customer relationships

     149.1       159.3  
  

 

 

   

 

 

 

Trade secrets

     31.4       31.3  

Accumulated amortization

     (15.4     (13.4
  

 

 

   

 

 

 

Net trade secrets

     16.0       17.9  
  

 

 

   

 

 

 

Software

     72.3       70.9  

Accumulated amortization

     (31.3     (25.1
  

 

 

   

 

 

 

Net software

     41.0       45.8  
  

 

 

   

 

 

 

Trade names

     28.3       28.1  

Accumulated amortization

     (10.0     (9.0
  

 

 

   

 

 

 

Net trade names

     18.3       19.1  
  

 

 

   

 

 

 

Other

     24.9       24.6  

Accumulated amortization

     (16.0     (13.1
  

 

 

   

 

 

 

Net other

     8.9       11.5  
  

 

 

   

 

 

 

Total acquired intangible assets, net

   $ 233.3     $ 253.6  
  

 

 

   

 

 

 

Other intangible assets primarily consist of databases and covenants not to compete.

Amortization expense relating to acquired intangible assets is as follows:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2012      2011      2012      2011  

Amortization expense

   $ 8.1      $ 5.0      $ 22.5      $ 14.6  

Estimated future amortization expense for acquired intangible assets subject to amortization is as follows:

 

Year Ending December 31,

      

2012 (after September 30,)

   $ 7.0  

2013

     27.5  

2014

     22.3  

2015

     20.9  

2016

     19.7  

Thereafter

     135.9  

 

 

Intangible assets are reviewed for recoverability whenever circumstances indicate that the carrying amount may not be recoverable. If the estimated undiscounted future cash flows are lower than the carrying amount of the related asset, a loss is recognized for the difference between the carrying amount and the estimated fair value of the asset. In conjunction with the Company’s annual goodwill impairment assessment, the Company reviewed the recoverability of certain customer lists within its FSTC reporting unit as actual and projected results for this reporting unit were less than anticipated earlier in 2012. This review resulted in an impairment of approximately $1 million in the three and nine months ended September 30, 2012. There were no impairments to intangible assets in the three and nine months ended September 30, 2011.

Goodwill is analyzed for impairment annually or more frequently if circumstances indicate the assets may be impaired. For the three and nine months ended September 30, 2012 and 2011, there were no impairments to goodwill.

FAIR VALUE
FAIR VALUE

NOTE 10. FAIR VALUE

The table below presents information about items, which are carried at fair value on a recurring basis at September 30, 2012 and December 31, 2011:

 

         Fair Value Measurement as of September 30, 2012  
   

Description

   Balance      Level 1      Level 2      Level 3  

Assets:

             
 

Derivatives (a)

   $ 20.4      $ —         $ 20.4      $ —     
    

 

 

    

 

 

    

 

 

    

 

 

 
 

Total

   $ 20.4      $ —         $ 20.4      $ —     
    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

             
 

Derivatives (a)

   $ 3.9      $ —         $ 3.9      $ —     
 

Contingent consideration arising from acquisitions (b)

     6.8        —           —           6.8  
    

 

 

    

 

 

    

 

 

    

 

 

 
 

Total

   $ 10.7      $ —         $ 3.9      $ 6.8  
    

 

 

    

 

 

    

 

 

    

 

 

 
         Fair Value Measurement as of December 31, 2011  
   

Description

   Balance      Level 1      Level 2      Level 3  

Assets:

             
 

Derivatives (a)

   $ 12.6      $ —         $ 12.6      $ —     
    

 

 

    

 

 

    

 

 

    

 

 

 
 

Total

   $ 12.6      $ —         $ 12.6      $ —     
    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

             
 

Derivatives (a)

   $ 6.8      $ —         $ 6.8      $ —     
 

Contingent consideration arising from acquisitions (b)

     9.1        —           —           9.1  
    

 

 

    

 

 

    

 

 

    

 

 

 
 

Total

   $ 15.9      $ —         $ 6.8      $ 9.1  
    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 as more fully described in Note 7 to the financial statements

(b)

Represents contingent consideration liabilities pursuant to the agreements for certain MA acquisitions which are more fully discussed in Note 8 to the consolidated financial statements

 

 

The following table summarizes the changes in the fair value of the Company’s Level 3 liabilities:

 

     Contingent Consideration  
     Nine Months Ended September 30,  
     2012     2011  

Balance as of January 1

   $ 9.1     $ 2.1  

Purchases

     —          —     

Issuances

     —          —     

Settlements

     (0.5     —     

Total gains (realized and unrealized):

    

Included in earnings

     (2.2     —     

Included in other comprehensive income

     —          —     

Transfer in and/or out of Level 3

     —          —     

Foreign currency translation adjustments

     0.4       (0.1
  

 

 

   

 

 

 

Balance as of September 30

   $ 6.8     $ 2.0  
  

 

 

   

 

 

 

The gains included in earnings in the table above are recorded within SG&A expenses in the Company’s consolidated statement of operations. These gains relate to contingent consideration obligations outstanding at September 30, 2012.

Of the $6.8 million in contingent consideration obligations as of September 30, 2012, $1.4 million is classified within accounts payable and accrued liabilities with the remaining $5.4 million classified in other liabilities within the Company’s consolidated balance sheet.

The following are descriptions of the methodologies utilized by the Company to estimate the fair value of its derivative contracts and contingent consideration obligations:

Derivatives:

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 established 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.

Contingent consideration:

At September 30, 2012, the Company has contingent consideration obligations related to the acquisitions of CSI and Copal which are based on certain financial and non-financial metrics set forth in the acquisition agreements. These obligations are measured using Level 3 inputs as defined in the ASC. The Company recorded the obligations for these contingent consideration arrangements on the date of each respective acquisition based on management’s best estimates of the achievement of the metrics and the value of the obligations are 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 September 30, 2012, the Company expects that this milestone will be reached by the aforementioned date.

There are several contingent consideration obligations relating to the acquisition of Copal which are more fully discussed in Note 8. The Company utilizes discounted cash flow methodologies to value these obligations. The expected future cash flows for these obligations are 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. The most significant unobservable input involved in the measurement of these obligations is the projected future financial results of the applicable Copal entities. Also, for the portion of the obligations which are dependent upon the exercise of the call/put option, the Company has utilized a Monte Carlo simulation model to estimate when the option will be exercised, thus triggering the payment of contingent consideration.

A significant increase or decrease in any of the aforementioned significant unobservable inputs related to the fair value measurement of the Company’s contingent consideration obligations would result in a significantly higher or lower reported fair value for these obligations.

OTHER BALANCE SHEET INFORMATION
OTHER BALANCE SHEET INFORMATION

NOTE 11. OTHER BALANCE SHEET INFORMATION

The following tables contain additional detail related to certain balance sheet captions:

 

     September 30,      December 31,  
     2012      2011  

Other current assets:

     

Prepaid taxes

   $ 22.2      $ 27.6  

Prepaid expenses

     36.3        44.6  

Other

     10.4        5.4  
  

 

 

    

 

 

 

Total other current assets

   $ 68.9      $ 77.6  
  

 

 

    

 

 

 
     September 30,      December 31,  
     2012      2011  

Other assets:

     

Investments in joint ventures

   $ 40.9      $ 37.2  

Deposits for real-estate leases

     10.0        12.2  

Other

     53.6        32.6  
  

 

 

    

 

 

 

Total other assets

   $ 104.5      $ 82.0  
  

 

 

    

 

 

 

Accounts payable and accrued liabilities:

     

Salaries and benefits

   $ 66.5      $ 73.8  

Incentive compensation

     113.1        114.1  

Profit sharing contribution

     8.3        7.1  

Customer credits, advanced payments and advanced billings

     22.6        17.6  

Dividends

     2.8        38.2  

Professional service fees

     57.1        50.5  

Interest accrued on debt

     6.7        15.1  

Accounts payable

     14.6        16.4  

Income taxes

     22.9        23.4  

Restructuring

     0.1        0.2  

Deferred rent-current portion

     1.2        1.7  

Pension and other post retirement employee benefits

     3.8        3.8  

Interest accrued on UTPs

     —           29.7  

Other

     43.1        60.7  
  

 

 

    

 

 

 

Total accounts payable and accrued liabilities

   $ 362.8      $ 452.3  
  

 

 

    

 

 

 

 

     September 30,      December 31,  
     2012      2011  

Other liabilities:

     

Pension and other post retirement employee benefits

   $ 194.5      $ 187.5  

Deferred rent-non-current portion

     110.8        108.8  

Interest accrued on UTPs

     9.5        11.8  

Legacy and other tax matters

     36.8        52.6  

Other

     34.6        44.1  
  

 

 

    

 

 

 

Total other liabilities

   $ 386.2      $ 404.8  
  

 

 

    

 

 

 

Redeemable Noncontrolling Interest:

The following table shows changes in the redeemable noncontrolling interest related to the acquisition of Copal:

 

     Nine Months Ended
September 30, 2012
    Year Ended
December 31, 2011
 
(in millions)    Redeemable Noncontrolling Interest  

Balance January 1,

   $ 60.5     $ —     

Fair value at date of acquisition

     —          68.0  

Adjustment due to right of offset for UTPs*

     6.8       (6.8

Net earnings

     2.6       1.0  

Distributions

     (2.3     —     

FX translation

     1.6       (1.7
  

 

 

   

 

 

 

Balance

   $ 69.2     $ 60.5  
  

 

 

   

 

 

 

 

* Relates 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 is reduced by the amount of UTPs that the Company may be required to pay. See Note 8 for further detail on this arrangement.

 

Noncontrolling Interests:

The following table summarizes the changes in the Company’s noncontrolling interests:

 

     Nine Months
Ended
September 30,
2012
    Year Ended
December 31,
2011
 
(in millions)    Non-Redeemable Noncontrolling Interest  

Balance January 1,

   $ 10.6     $ 11.2  

Net Income

     5.2       5.6  

Dividends

     (4.7     (5.1

Purchase of KIS Pricing shares from noncontrolling interest

     —          (1.0

Currency translation adjustment

     (0.6     (0.1
  

 

 

   

 

 

 

Balance

   $ 10.5     $ 10.6  
  

 

 

   

 

 

 

AOCI:

The following table summarizes the components of the Company’s AOCI:

 

(in millions)    September 30,
2012
    December 31,
2011
 

Currency translation adjustments, net of tax

   $ (0.8   $ (23.3

Net actuarial losses and net prior service cost related to Post-retirement plans, net of tax

     (82.4     (81.2

Unrealized losses on cash flow and net investment hedges, net of tax

     (2.6     (3.0
  

 

 

   

 

 

 

Total accumulated other comprehensive loss

   $ (85.8   $ (107.5
  

 

 

   

 

 

 

Other Non-Operating (Expense) Income:

The following table summarizes the components of other non-operating (expense) income:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  

FX gain/(loss)

   $ (4.8   $ 0.5     $ (6.0   $ 3.3  

Legacy Tax(a)

     12.8       —          12.8       6.4  

Joint venture income

     2.3       1.4       6.9       5.3  

Other

     (0.3     (0.3     (1.1     (1.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 10.0     $ 1.6     $ 12.6     $ 13.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) The 2012 amount represents a reversal of a liability of $12.8 million relating to the favorable resolution of a Legacy Tax Matter for the 2005 and 2006 tax years. The 2011 amounts represent a reversal of a liability relating to the lapse of the statute of limitations for a Legacy Tax Matter.
PENSION AND OTHER RETIREMENT BENEFITS
PENSION AND OTHER RETIREMENT BENEFITS

NOTE 12. PENSION AND OTHER RETIREMENT BENEFITS

Moody’s maintains funded and unfunded noncontributory Defined Benefit Pension Plans. The U.S. DBPPs provide defined benefits using a cash balance formula based on years of service and career average salary for its employees 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 with participants’ contributions adjusted annually; 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.

Effective January 1, 2008, the Company no longer offers DBPPs to U.S. employees hired or rehired on or after January 1, 2008. New U.S. employees will instead receive a retirement contribution of similar benefit value under the Company’s Profit Participation Plan. Current participants of the Company’s DBPPs continue to accrue benefits based on existing plan formulas.

The components of net periodic benefit expense related to the Retirement Plans are as follows:

 

     Three Months Ended September 30,  
     Pension Plans     Other Retirement Plans  
     2012     2011     2012      2011  

Components of net periodic expense

         

Service cost

   $ 4.7     $ 3.7     $ 0.4      $ 0.3  

Interest cost

     3.3       3.3       0.1        0.2  

Expected return on plan assets

     (3.1     (3.0     —           —     

Amortization of net actuarial loss from earlier periods

     2.2       1.2       —           —     

Amortization of net prior service costs from earlier periods

     0.2       0.2       0.1        0.1  

Settlement loss

     —          1.6       —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Net periodic expense

   $ 7.3     $ 7.0     $ 0.6      $ 0.6  
  

 

 

   

 

 

   

 

 

    

 

 

 
     Nine Months Ended September 30,  
     Pension Plans     Other Retirement Plans  
     2012     2011     2012      2011  

Components of net periodic expense

         

Service cost

   $ 14.2     $ 11.3     $ 1.1      $ 0.9  

Interest cost

     9.8       9.9       0.5        0.6  

Expected return on plan assets

     (9.3     (9.0     —           —     

Amortization of net actuarial loss from earlier periods

     6.8       3.7       —           —     

Amortization of net prior service costs from earlier periods

     0.5       0.5       0.2        0.2  

Settlement loss

     —          1.6       —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Net periodic expense

   $ 22.0     $ 18.0     $ 1.8      $ 1.7  
  

 

 

   

 

 

   

 

 

    

 

 

 

The Company contributed $17.8 million to its U.S. funded pension plan and made payments of $1.9 million related to its unfunded U.S. DBPPs and $0.4 million to its U.S. other retirement plans, respectively during the nine months ended September 30, 2012. The Company presently anticipates making additional payments of $1.4 million related to its unfunded U.S. DBPPs and $0.2 million to its U.S. other retirement plans during the remainder of 2012.

INDEBTEDNESS
INDEBTEDNESS

NOTE 13. INDEBTEDNESS

The following table summarizes total indebtedness:

 

     September 30,     December 31,  
     2012     2011  

2012 Facility

   $ —        $ —     

Commercial paper

     —          —     

Notes Payable:

    

Series 2005-1 Notes, due 2015; which includes the fair value of interest rate swap of $18.4 million at 2012 and $11.5 million at 2011

     318.4       311.5  

Series 2007-1 Notes due 2017

     300.0       300.0  

2010 Senior Notes, due 2020, net of unamortized discount of $2.6 million in 2012 and $2.7 million in 2011

     497.4       497.3  

2012 Senior Notes, due 2022, net of unamortized discount of $3.9 million in 2012

     496.1       —     

2008 Term Loan, various payments through 2013

     95.6       135.0  
  

 

 

   

 

 

 

Total debt

     1,707.5       1,243.8  

Current portion

     (95.6     (71.3
  

 

 

   

 

 

 

Total long-term debt

   $ 1,611.9     $ 1,172.5  
  

 

 

   

 

 

 

2012 Facility

On April 18, 2012, the Company and certain of its subsidiaries entered into a $1 billion five-year senior, unsecured revolving credit facility in an aggregate principal amount of $1 billion that expires in April 2017. The 2012 Facility replaces the $1 billion 2007 Facility that was scheduled to expire in September 2012. The proceeds from the 2012 Facility will be used for general corporate purposes, including, without limitation, support for the Company’s $1 billion commercial paper program, share repurchases and acquisition financings. Interest on borrowings under the facility is payable at rates that are based on LIBOR plus a premium that can range from 77.5 basis points to 120 basis points per annum of the outstanding amount, depending on the Company’s Debt/EBITDA ratio. The Company also pays quarterly facility fees, regardless of borrowing activity under the 2012 Facility. These quarterly fees can range from 10 basis points of the facility amount to 17.5 basis points, depending on the Company’s Debt/ EBITDA Ratio.

The 2012 Facility contains covenants that, among other things, restrict the ability of the Company and its subsidiaries, without the approval of the lenders, to engage in mergers, consolidations, asset sales, transactions with affiliates and sale-leaseback transactions or to incur liens, as set forth in the facility agreement. The 2012 Facility also contains a financial covenant that requires the Company to maintain a Debt to EBITDA Ratio of not more than 4 to 1 at the end of any fiscal quarter. Upon the occurrence of certain financial or economic events, significant corporate events or certain other events constituting an event of default under the 2012 Facility, all loans outstanding under the facility (including accrued interest and fees payable thereunder) may be declared immediately due and payable and all commitments under the facility may be terminated.

2007 Facility

On September 28, 2007, the Company entered into a $1.0 billion five-year senior, unsecured revolving credit facility, expiring in September 2012. The 2007 Facility served, in part, to support the Company’s CP Program described below. Interest on borrowings was payable at rates that were based on LIBOR plus a premium that could range from 16.0 to 40.0 basis points of the outstanding borrowing amount depending on the Debt/EBITDA ratio. The Company also paid quarterly facility fees, regardless of borrowing activity under the 2007 Facility. The quarterly fees for the 2007 Facility ranged from 4.0 to 10.0 basis points per annum of the facility amount, depending on the Company’s Debt/EBITDA ratio. The Company also paid a utilization fee of 5.0 basis points on borrowings outstanding when the aggregate amount outstanding exceeded 50% of the total facility. The 2007 Facility contained certain covenants that, among other things, restricted the ability of the Company and certain of its subsidiaries, without the approval of the lenders, to engage in mergers, consolidations, asset sales, transactions with affiliates and sale-leaseback transactions or to incur liens, as defined in the related agreement. The 2007 Facility also contained financial covenants that, among other things, required the Company to maintain a Debt/EBITDA ratio of not more than 4.0 to 1.0 at the end of any fiscal quarter. On April 18, 2012, the 2007 Facility was replaced by the 2012 Facility described above.

Commercial Paper

On October 3, 2007, the Company entered into a private placement commercial paper program under which the Company may issue CP notes up to a maximum amount of $1.0 billion. Amounts available under the CP Program may be re-borrowed. The CP Program is supported by the Company’s 2012 Facility. The maturities of the CP Notes will vary, but may not exceed 397 days from the date of issue. The CP Notes are sold at a discount from par or, alternatively, sold at par and bear interest at rates that will vary based upon market conditions at the time of issuance. The rates of interest will depend on whether the CP Notes will be a fixed or floating rate. The interest on a floating rate may be based on the following: (a) certificate of deposit rate; (b) commercial paper rate; (c) federal funds rate; (d) LIBOR; (e) prime rate; (f) Treasury rate; or (g) such other base rate as may be specified in a supplement to the private placement agreement. The CP Program contains certain events of default including, among other things: non-payment of principal, interest or fees; entrance into any form of moratorium; and bankruptcy and insolvency events, subject in certain instances to cure periods.

Notes Payable

On September 30, 2005, the Company issued and sold through a private placement transaction, $300.0 million aggregate principal amount of its Series 2005-1 Senior Unsecured Notes due 2015 pursuant to the 2005 Agreement. The Series 2005-1 Notes have a ten-year term and bear interest at an annual rate of 4.98%, payable semi-annually on March 30 and September 30. Proceeds from the sale of the Series 2005-1 Notes were used to refinance $300.0 million aggregate principal amount of the Company’s outstanding 7.61% senior notes which matured on September 30, 2005. In the event that Moody’s pays all, or part, of the Series 2005-1 Notes in advance of their maturity, such prepayment will be subject to a Make Whole Amount. The Series 2005-1 Notes are subject to certain covenants that, among other things, restrict the ability of the Company and certain of its subsidiaries, without the approval of the lenders, to engage in mergers, consolidations, asset sales, transactions with affiliates and sale-leaseback transactions or to incur liens, as defined in the related agreements.

On September 7, 2007, the Company issued and sold through a private placement transaction, $300.0 million aggregate principal amount of its 6.06% Series 2007-1 Senior Unsecured Notes due 2017 pursuant to the 2007 Agreement. The Series 2007-1 Notes have a ten-year term and bear interest at an annual rate of 6.06%, payable semi-annually on March 7 and September 7. Under the terms of the 2007 Agreement, the Company may, from time to time within five years, in its sole discretion, issue additional series of senior notes in an aggregate principal amount of up to $500.0 million pursuant to one or more supplements to the 2007 Agreement. The Company may prepay the Series 2007-1 Notes, in whole or in part, at any time at a price equal to 100% of the principal amount being prepaid, plus accrued and unpaid interest and a Make Whole Amount. The 2007 Agreement contains covenants that limit the ability of the Company, and certain of its subsidiaries to, among other things: enter into transactions with affiliates, dispose of assets, incur or create liens, enter into any sale-leaseback transactions, or merge with any other corporation or convey, transfer or lease substantially all of its assets. The Company must also not permit its Debt/EBITDA ratio to exceed 4.0 to 1.0 at the end of any fiscal quarter.

On August 19, 2010, the Company issued $500 million aggregate principal amount of unsecured notes in a public offering. The 2010 Senior Notes bear interest at a fixed rate of 5.50% and mature on September 1, 2020. Interest on the 2010 Senior Notes will be due semi-annually on September 1 and March 1 of each year, commencing March 1, 2011. The Company may prepay the 2010 Senior Notes, in whole or in part, at any time at a price equal to 100% of the principal amount being prepaid, plus accrued and unpaid interest and a Make-Whole Amount. Additionally, at the option of the holders of the notes, the Company may be required to purchase all or a portion of the notes upon occurrence of a “Change of Control Triggering Event,” as defined in the 2010 Indenture, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The 2010 Indenture contains covenants that limit the ability of the Company and certain of its subsidiaries to, among other things, incur or create liens and enter into sale and leaseback transactions. In addition, the Indenture contains a covenant that limits the ability of the Company to consolidate or merge with another entity or to sell all or substantially all of its assets to another entity. The 2010 Indenture contains customary default provisions. In addition, an event of default will occur if the Company or certain of its subsidiaries fail to pay the principal of any indebtedness (as defined in the 2010 Indenture) when due at maturity in an aggregate amount of $50 million or more, or a default occurs that results in the acceleration of the maturity of the Company’s or certain of its subsidiaries’ indebtedness in an aggregate amount of $50 million or more. Upon the occurrence and during the continuation of an event of default under the 2010 Indenture, the notes may become immediately due and payable either automatically or by the vote of the holders of more than 25% of the aggregate principal amount of all of the notes then outstanding.

On November 4, 2011, in connection with the acquisition of Copal, a subsidiary of the Company issued a $14.2 million non-interest bearing note to the sellers which represented a portion of the consideration transferred to acquire the Copal entities. If a seller subsequently transfers to the Company all of its shares, the Company must repay the seller its proportion of the principal on the later of (i) the fourth anniversary date of the note or (ii) within a time frame set forth in the acquisition agreement relating to the resolution of certain income tax uncertainties pertaining to the transaction. Otherwise, the Company must repay any amount outstanding on the earlier of (i) two business days subsequent to the exercise of the put/call option to acquire the remaining shares of Copal or (ii) the tenth anniversary date of the issuance of the note. The Company has the right to offset payment of the note against certain indemnification assets associated with UTPs related to the acquisition, which are more fully discussed in Note 7. Accordingly, the Company has offset the liability for this note against the indemnification asset, thus no balance for this note is carried on the Company’s consolidated balance sheet at September 30, 2012 and December 31, 2011. In the event that the Company would not be required to settle amounts related to the UTPs, the Company would be required to pay the sellers the principal in accordance with the note agreement. The Company may prepay the note in accordance with certain terms set forth in the acquisition agreement.

On August 20, 2012, the Company issued $500 million aggregate principal amount of unsecured notes in a public offering. The 2012 Senior Notes bear interest at a fixed rate of 4.50% and mature on September 1, 2022. Interest on the 2012 Senior Notes will be due semi-annually on September 1 and March 1 of each year, commencing March 1, 2013. The Company may prepay the 2012 Senior Notes, in whole or in part, at any time at a price equal to 100% of the principal amount being prepaid, plus accrued and unpaid interest and a Make-Whole Amount. Additionally, at the option of the holders of the notes, the Company may be required to purchase all or a portion of the notes upon occurrence of a “Change of Control Triggering Event,” as defined in the 2012 Indenture, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The 2012 Indenture contains covenants that limit the ability of the Company and certain of its subsidiaries to, among other things, incur or create liens and enter into sale and leaseback transactions. In addition, the 2012 Indenture contains a covenant that limits the ability of the Company to consolidate or merge with another entity or to sell all or substantially all of its assets to another entity. The 2012 Indenture contains customary default provisions. In addition, an event of default will occur if the Company or certain of its subsidiaries fail to pay the principal of any indebtedness (as defined in the 2012 Indenture) when due at maturity in an aggregate amount of $50 million or more, or a default occurs that results in the acceleration of the maturity of the Company’s or certain of its subsidiaries’ indebtedness in an aggregate amount of $50 million or more. Upon the occurrence and during the continuation of an event of default under the Indenture, the 2012 Senior notes may become immediately due and payable either automatically or by the vote of the holders of more than 25% of the aggregate principal amount of all of the notes then outstanding.

 

2008 Term Loan

On May 7, 2008, Moody’s entered into a five-year, $150.0 million senior unsecured term loan with several lenders due at various times through May 7, 2013. Proceeds from the loan were used to pay off a portion of the CP outstanding. Interest on borrowings under the 2008 Term Loan is payable quarterly at rates that are based on LIBOR plus a margin that can range from 125 basis points to 175 basis points depending on the Company’s Debt/EBITDA ratio. The outstanding borrowings shall amortize in accordance with the schedule of payments set forth in the 2008 Term Loan outlined in the table below.

The 2008 Term Loan contains restrictive covenants that, among other things, restrict the ability of the Company to engage or to permit its subsidiaries to engage in mergers, consolidations, asset sales, transactions with affiliates and sale-leaseback transactions or to incur, or permit its subsidiaries to incur, liens, in each case, subject to certain exceptions and limitations. The 2008 Term Loan also limits the amount of debt that subsidiaries of the Company may incur. In addition, the 2008 Term Loan contains a financial covenant that requires the Company to maintain a Debt/EBITDA ratio of not more than 4.0 to 1.0 at the end of any fiscal quarter.

The principal payments due on the Company’s long-term borrowings for each of the next five years are presented in the table below:

 

Year Ended December 31,

   2008 Term
Loan
     Series 2005-1
Notes
     Series 2007-1
Notes
     2010 Senior
Notes
     2012 Senior
Notes
     Total  

2012 (after September 30,)

   $ 31.8      $ —         $ —         $ —         $ —         $ 31.8  

2013

     63.8        —           —           —           —           63.8  

2014

     —           —           —           —           —           —     

2015

     —           300.0        —           —           —           300.0  

2016

     —           —           —           —           —           —     

Thereafter

     —           —           300.0        500.0        500.0        1,300.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 95.6      $ 300.0      $ 300.0      $ 500.0      $ 500.0      $ 1,695.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In the fourth quarter of 2010, the Company entered into interest rate swaps with a total notional amount of $300 million which converted the fixed rate of interest on the Series 2005-1 Notes to a floating LIBOR-based interest rate. Also, on May 7, 2008, the Company entered into interest rate swaps with a total notional amount of $150 million to protect against fluctuations in the LIBOR-based variable interest rate on the 2008 Term Loan. Both of these interest rate swaps are more fully discussed in Note 7 above.

At September 30, 2012, the Company was in compliance with all covenants contained within all of the debt agreements. In addition to the covenants described above, the 2012 Facility, the 2007 Facility, the 2005 Agreement, the 2007 Agreement, the 2012 Senior Notes, the 2010 Senior Notes and the 2008 Term Loan contain cross default provisions. These provisions state that default under one of the aforementioned debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under those instruments to be immediately due and payable. As of September 30, 2012, there were no such cross defaults.

 

Interest expense, net

The following table summarizes the components of interest as presented in the consolidated statements of operations:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  

Income

   $ 1.2     $ 1.6     $ 3.7     $ 3.9  

Expense on borrowings

     (19.3     (16.2     (52.1     (48.9

Income (expense) on UTPs and other tax related liabilities (a)

     (1.7     0.9       1.8       (6.1

Legacy Tax (b)

     4.4       —          4.4       3.7  

Capitalized

     0.1       0.8       —          2.2  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (15.3   $ (12.9   $ (42.2   $ (45.2
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) The nine months ended September 30, 2012 amount contains a benefit of approximately $7 million related to the settlement of state and local income tax audits.
(b) The 2012 amounts represent a reversal of $4.4 million of accrued interest relating to the favorable resolution of a Legacy Tax Matter for the 2005 and 2006 tax years. The 2011 amounts represent a reversal of $2.8 million of accrued interest expense relating to the favorable resolution of a Legacy Tax Matter and $0.9 million of interest income related to a pre-spinoff tax year.

The following tables shows the cash paid for interest:

 

     Nine Months Ended  
     September 30,  
     2012      2011  

Interest paid*

   $ 97.1      $ 63.6  

 

* Interest paid includes payments of interest relating to the settlement of income tax audits in the first quarter of 2012 as well as net settlements on interest rate swaps more fully discussed in Note 7.

The Company’s long-term debt, including the current portion, is recorded at cost except for the Series 2005-1 Notes which are carried at cost adjusted for the fair value of an interest rate swap used to hedge the fair value of the note. The fair value and carrying value of the Company’s long-term debt as of September 30, 2012 and December 31, 2011 are as follows:

 

     September 30, 2012      December 31, 2011  
     Carrying
Amount
     Estimated Fair
Value
     Carrying
Amount
     Estimated Fair
Value
 

Series 2005-1 Notes*

   $ 318.4      $ 315.5      $ 311.5      $ 316.5  

Series 2007-1 Notes

     300.0        335.9        300.0        332.7  

2010 Senior Notes

     497.4        554.6        497.3        525.6  

2012 Senior Notes

     496.1        530.4        —           —     

2008 Term Loan

     95.6        95.6        135.0        135.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,707.5      $ 1,832.0      $ 1,243.8      $ 1,309.8  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* The carrying amount includes an $18.4 million and $11.5 million fair value adjustment on an interest rate hedge at September 30, 2012 and December 31, 2011, respectively.

 

The fair values of the Company’s 2012 Senior Notes and 2010 Senior Notes are based on quoted market prices. The fair value of the remaining long-term debt, which is not publicly traded, is estimated using discounted cash flows with inputs based on prevailing interest rates available to the Company for borrowings with similar maturities.

CONTINGENCIES
CONTINGENCIES

NOTE 14. CONTINGENCIES

From time to time, Moody’s is involved in legal and tax proceedings, governmental investigations, 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.

Following the events in the U.S. subprime residential mortgage sector and the credit markets more broadly over the last several years, MIS and other credit rating agencies are the subject of intense scrutiny, increased regulation, ongoing investigation, and civil litigation. Legislative, regulatory and enforcement entities around the world are considering additional legislation, regulation and enforcement actions, including with respect to MIS’s compliance with newly imposed regulatory standards. Moody’s has received subpoenas and inquiries from states attorneys general and other governmental authorities and is responding to such investigations and inquiries.

In addition, the Company is facing litigation from market participants relating to the performance of MIS rated securities. Although Moody’s in the normal course experiences such litigation, the volume and cost of defending such litigation has significantly increased following the events in the U.S. subprime residential mortgage sector and the credit markets more broadly over the last several years.

On June 27, 2008, the Brockton Contributory Retirement System, a purported shareholder of the Company’s securities, filed a purported shareholder derivative complaint on behalf of the Company against its directors and certain senior officers, and the Company as nominal defendant, in the Supreme Court of the State of New York, County of New York. The plaintiff asserted various causes of action relating to the named defendants’ oversight of MIS’s ratings of RMBS and constant-proportion debt obligations, and their participation in the alleged public dissemination of false and misleading information about MIS’s ratings practices and/or a failure to implement internal procedures and controls to prevent the alleged wrongdoing. The plaintiff sought compensatory damages, restitution, disgorgement of profits and other equitable relief. On July 2, 2008, Thomas R. Flynn, a purported shareholder of the Company’s securities, filed a similar purported shareholder derivative complaint in the Supreme Court of the State of New York, County of New York, asserting similar claims and seeking the same relief. The Flynn and Brockton cases were consolidated and plaintiffs filed an amended consolidated complaint in November 2008. Similar claims were subsequently filed on October 30, 2008 by the Louisiana Municipal Police Employees Retirement System in the United States District Court for the Southern District of New York, on December 9, 2008 by Rena Nadoff in the Supreme Court of the State of New York and on July 6, 2009 by W. A. Sokolowski in the United States District Court for the Southern District of New York. On July 19, 2012, plaintiffs in the above shareholder derivative actions filed in the United States District Court for the Southern District of New York a motion for preliminary approval of a proposed settlement that would resolve all pending shareholder derivative cases. The settlement calls for Moody’s to adopt and maintain certain corporate governance changes for a period of two years. In connection with the settlement, the Company agreed not to oppose an application for attorney’s fees and costs in an amount not to exceed $4.95 million. On July 20, 2012, the District Court granted preliminary approval of the settlement. On September 6, 2012, the District Court held a final settlement hearing and, on September 7, 2012, entered a Final Order and Judgment. No shareholder has appealed the Final Order and Judgment, and the time for an appeal to be filed expired on October 9, 2012.

 

Two purported class action complaints have been filed by purported purchasers of the Company’s securities against the Company and certain of its senior officers, asserting claims under the federal securities laws. The first was filed by Raphael Nach in the U.S. District Court for the Northern District of Illinois on July 19, 2007. The second was filed by Teamsters Local 282 Pension Trust Fund in the United States District Court for the Southern District of New York on September 26, 2007. Both actions have been consolidated into a single proceeding entitled In re Moody’s Corporation Securities Litigation in the U.S. District Court for the Southern District of New York. On June 27, 2008, a consolidated amended complaint was filed, purportedly on behalf of all purchasers of the Company’s securities during the period February 3, 2006 through October 24, 2007. Plaintiffs allege that the defendants issued false and/or misleading statements concerning the Company’s business conduct, business prospects, business conditions and financial results relating primarily to MIS’s ratings of structured finance products including RMBS, CDO and constant-proportion debt obligations. The plaintiffs seek an unspecified amount of compensatory damages and their reasonable costs and expenses incurred in connection with the case. The Company moved for dismissal of the consolidated amended complaint in September 2008. On February 23, 2009, the court issued an opinion dismissing certain claims and sustaining others. On January 22, 2010, plaintiffs moved to certify a class of individuals who purchased Moody’s Corporation common stock between February 3, 2006 and October 24, 2007, which the Company opposed. On March 31, 2011, the court issued an opinion denying plaintiffs’ motion to certify the proposed class. On April 14, 2011, plaintiffs filed a petition in the United States Court of Appeals for the Second Circuit seeking discretionary permission to appeal the decision. The Company filed its response to the petition on April 25, 2011. On July 20, 2011, the Second Circuit issued an order denying plaintiffs’ petition for leave to appeal.

On August 25, 2008, Abu Dhabi Commercial Bank filed a purported class action in the United States District Court for the Southern District of New York asserting numerous common-law causes of action against two subsidiaries of the Company, another rating agency, and Morgan Stanley & Co. The action relates to securities issued by a structured investment vehicle called Cheyne Finance (the “Cheyne SIV”) and seeks, among other things, compensatory and punitive damages. The central allegation against the rating agency defendants is that the credit ratings assigned to the securities issued by the Cheyne SIV were false and misleading. In early proceedings, the court dismissed all claims against the rating agency defendants except those for fraud and aiding and abetting fraud. In June 2010, the court denied plaintiff’s motion for class certification, and additional plaintiffs were subsequently added to the complaint. In January 2012, the rating agency defendants moved for summary judgment with respect to the fraud and aiding and abetting fraud claims. Also in January 2012, in light of new New York state case law, the court permitted the plaintiffs to file an amended complaint that reasserted previously dismissed claims against all defendants for breach of fiduciary duty, negligence, negligent misrepresentation, and related aiding and abetting claims. In May 2012, the court, ruling on the rating agency defendants’ motion to dismiss, dismissed all of the reasserted claims except for the negligent misrepresentation claim, and on September 19, 2012, after further proceedings, the court also dismissed the negligent misrepresentation claim. On August 17, 2012, the court ruled on the rating agencies’ motion for summary judgment on the plaintiffs’ remaining claims for fraud and aiding and abetting fraud. The court dismissed, in whole or in part, the fraud claims of four plaintiffs as against Moody’s but allowed the fraud claims to proceed with respect to certain claims of one of those plaintiffs and the claims of the remaining 11 plaintiffs. The court also dismissed all claims against Moody’s for aiding and abetting fraud. Trial on the remaining fraud claims against the rating agencies, and on claims against Morgan Stanley for aiding and abetting fraud and for negligent misrepresentation, is scheduled for May 2013. According to plaintiffs’ most recent litigation disclosures, plaintiffs have asserted that their total alleged compensatory damages against all defendants, consisting of alleged lost principal and lost interest, plus statutory interest, are approximately $713 million. However, this figure includes approximately $303 million dollars of damages asserted in connection with claims that have been dismissed against Moody’s via the court’s August 17, 2012 ruling, noted above. Three of the four plaintiffs whose claims were dismissed against Moody’s, with claims aggregating approximately $288 million, have filed motions for reconsideration.

 

In October 2009, plaintiffs King County, Washington and Iowa Student Loan Liquidity Corporation each filed substantially identical putative class actions in the Southern District of New York against two subsidiaries of the Company and several other defendants, including two other rating agencies and IKB Deutsche Industriebank AG. These actions arise out of investments in securities issued by a structured investment vehicle called Rhinebridge plc (the “Rhinebridge SIV”) and seek, among other things, compensatory and punitive damages. Each complaint asserted a claim for common law fraud against the rating agency defendants, alleging, among other things, that the credit ratings assigned to the securities issued by the Rhinebridge SIV were false and misleading. The case is pending before the same judge presiding over the litigation concerning the Cheyne SIV, described above. In April 2010, the court denied the rating agency defendants’ motion to dismiss. In June 2010, the court consolidated the two cases and the plaintiffs filed an amended complaint that, among other things, added Morgan Stanley & Co. as a defendant. In January 2012, in light of new New York state case law, the court permitted the plaintiffs to file an amended complaint that asserted claims against the rating agency defendants for breach of fiduciary duty, negligence, negligent misrepresentation, and aiding and abetting claims. In May 2012, the court, ruling on the rating agency defendants’ motion to dismiss, dismissed all of the new claims except for the negligent misrepresentation claim and a claim for aiding and abetting fraud; on September 28, 2012, after further proceedings, the court also dismissed the negligent misrepresentation claim. Plaintiffs have thus far not sought class certification. On September 7, 2012 the rating agencies filed a motion for summary judgment dismissing the remaining claims against them. In the course of the proceedings, the two plaintiffs have asserted that their total compensatory damages, consisting of alleged lost principal and lost interest, plus statutory interest, equal approximately $70 million. In June 2012, defendants IKB Deutsche Industriebank AG and IKB Credit Asset Management GmbH informed the court that they had executed a confidential settlement agreement with the plaintiffs.

For claims, litigation and proceedings not related to income taxes, where it is both probable that a liability is expected to be 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. 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, enforcement and similar matters and contingencies, 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 the pending matters referred to above 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. 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.

Legacy Tax Matters

Moody’s continues to have exposure to potential liabilities arising from Legacy Tax Matters. As of September 30, 2012, Moody’s has recorded liabilities for Legacy Tax Matters totaling $38.9 million. This includes liabilities and accrued interest due to New D&B arising from the 2000 Distribution Agreement. It is possible that the ultimate liability for Legacy Tax Matters could be greater than the liabilities recorded by the Company, which could result in additional charges that may be material to Moody’s future reported results, financial position and cash flows.

 

The following summary of the relationships among Moody’s, New D&B and their predecessor entities is important in understanding the Company’s exposure to the Legacy Tax Matters.

In November 1996, The Dun & Bradstreet Corporation separated into three separate public companies: The Dun & Bradstreet Corporation, ACNielsen Corporation and Cognizant Corporation. In June 1998, The Dun & Bradstreet Corporation separated into two separate public companies: Old D&B and R.H. Donnelley Corporation. During 1998, Cognizant separated into two separate public companies: IMS Health Incorporated and Nielsen Media Research, Inc. In September 2000, Old D&B separated into two separate public companies: New D&B and Moody’s.

Old D&B and its predecessors entered into global tax planning initiatives in the normal course of business. These initiatives are subject to normal review by tax authorities. Old D&B and its predecessors also entered into a series of agreements covering the sharing of any liabilities for payment of taxes, penalties and interest resulting from unfavorable IRS determinations on certain tax matters, and certain other potential tax liabilities, all as described in such agreements. Further, in connection with the 2000 Distribution and pursuant to the terms of the 2000 Distribution Agreement, New D&B and Moody’s have agreed on the financial responsibility for any potential liabilities related to these Legacy Tax Matters.

At the time of the 2000 Distribution, New D&B paid Moody’s $55.0 million for 50% of certain anticipated future tax benefits through 2012. In the event that these tax benefits are not claimed or otherwise not realized by New D&B, or there is an IRS audit of New D&B impacting these tax benefits, Moody’s would be required to repay to New D&B an amount equal to the discounted value of its share of the related future tax benefits as well as its share of any tax liability incurred by New D&B. In September 2012, New D&B effectively settled IRS examinations for its 2005 and 2006 tax years. As a result, in the third quarter of 2012, Moody’s recorded a reduction of accrued interest expense of $4.4 million ($2.6 million, net of tax) and a reduction of other liabilities of $12.8 million, which was recorded as other non-operating income, relating to amounts due to New D&B. In June 2011, the statute of limitations for New D&B relating to its 2004 tax year expired. As a result, in the second quarter of 2011, Moody’s recorded a reduction of accrued interest expense of $2.8 million ($1.7 million, net of tax) and a reduction of other liabilities of $6.4 million, which was recorded as other non-operating income, relating to amounts due to New D&B. As of September 30, 2012, Moody’s liability with respect to this matter totaled $36.8 million.

Additionally, in April 2011, Moody’s received a refund of $0.9 million ($0.6 million, net of tax) for interest assessed related to pre-spinoff tax years.

In 2005, settlement agreements were executed with the IRS with respect to certain Legacy Tax Matters related to the years 1989-1990 and 1993-1996. With respect to these settlements, Moody’s and New D&B believed that IMS Health and NMR did not pay their full share of the liability to the IRS under the terms of the applicable separation agreements between the parties. Moody’s and New D&B subsequently paid these amounts to the IRS and commenced arbitration proceedings against IMS Health and NMR to resolve this dispute. Pursuant to these arbitration proceedings, the Company received $10.8 million ($6.5 million as a reduction of interest expense and $4.3 million as a reduction of tax expense) in 2009. The aforementioned settlement payment resulted in net income benefits of $8.2 million in 2009. The Company continues to carry a $2.1 million liability for this matter.

SEGMENT INFORMATION
SEGMENT INFORMATION

NOTE 15. SEGMENT INFORMATION

The Company is organized into three operating segments: (i) MIS, (ii) MA and (iii) an immaterial operating segment that provides fixed income pricing services in the Asia Pacific region. This aforementioned immaterial operating segment has been aggregated with the MA operating segment based on the fact that it has similar economic characteristics to MA. Accordingly, the Company reports in two reportable segments: MIS and MA. The MIS segment is comprised of all of the Company’s ratings activities. All of Moody’s other non-rating commercial activities are included in the MA segment.

The MIS segment consists of four lines of business—corporate finance, structured finance, financial institutions and public, project and infrastructure finance—that generate revenue principally from fees for the assignment and ongoing monitoring of credit ratings on debt obligations and the entities that issue such obligations in markets worldwide.

The MA segment, which includes all of the Company’s non-rating commercial activities, develops a wide range of products and services that support the risk management activities of institutional participants in global financial markets. The MA segment consists of three lines of business – RD&A, enterprise risk solutions (formerly named risk management software) and professional services. Additionally, in the first quarter of 2012, a division within the PS LOB which provided various financial modeling services was transferred to the ERS LOB. Accordingly, the prior year revenue by LOB for MA has been reclassified to reflect the transfer of this division.

In the fourth quarter of 2011, subsidiaries of the Company acquired Copal and B&H. Copal is an outsourced research and consulting business. B&H is a provider of insurance risk management tools. B&H and Copal are part of the MA segment and their revenue is included in the ERS and PS LOB’s within MA, respectively.

Revenue for MIS and expenses for MA include an intersegment royalty charged to MA for the rights to use and distribute content, data and products developed by MIS. Also, revenue for MA and expenses for MIS include an intersegment fee charged to MIS from MA for certain MA products and services utilized in MIS’s ratings process. Additionally, overhead costs and corporate expenses of the Company which exclusively benefit only one segment, are fully charged to that segment. Overhead costs and corporate expenses of the Company which benefit both segments are allocated to each segment based on a revenue-split methodology. Overhead expenses include costs such as rent and occupancy, information technology and support staff such as finance, human resources and information technology. Beginning on January 1, 2012, the Company refined its methodology for allocating certain overhead departments to its segments to better align the costs allocated based on each segment’s usage of the overhead service. The refined methodology is reflected in the segment results for the three and nine months ended September 30, 2012 and accordingly, the segment results for the three and nine months ended September 30, 2011 have been reclassified to conform to the new presentation. “Eliminations” in the table below represent intersegment revenue/expense.

 

Financial Information by Segment

The table below shows revenue, Adjusted Operating Income and operating income by reportable segment. Adjusted Operating Income is a financial metric utilized by the Company’s chief operating decision maker to assess the profitability of each reportable segment.

 

     Three Months Ended September 30,  
     2012      2011  
     MIS      MA      Eliminations     Consolidated      MIS      MA      Eliminations     Consolidated  

Revenue

   $ 491.3      $ 218.1      $ (20.9   $ 688.5      $ 368.2      $ 182.5      $ (19.4   $ 531.3  

Operating, SG&A

     252.4        163.2        (20.9     394.7        200.5        134.9        (19.4     316.0  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Adjusted Operating Income

     238.9        54.9        —          293.8        167.7        47.6        —          215.3  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Depreciation and amortization

     11.0        13.1        —          24.1        9.9        9.1        —          19.0  

Restructuring

     —           —           —          —           0.2        —           —          0.2  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 227.9      $ 41.8      $ —        $ 269.7      $ 157.6      $ 38.5      $ —        $ 196.1  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     Nine Months Ended September 30,  
     2012      2011  
     MIS      MA      Eliminations     Consolidated      MIS      MA      Eliminations     Consolidated  

Revenue

   $ 1,419.8      $ 617.7      $ (61.4   $ 1,976.1      $ 1,251.0      $ 519.4      $ (56.8   $ 1,713.6  

Operating, SG&A

     684.0        466.6        (61.4     1,089.2        606.1        389.4        (56.8     938.7  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Adjusted Operating Income

     735.8        151.1        —          886.9        644.9        130.0        —          774.9  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Depreciation and amortization

     32.9        36.8        —          69.7        31.0        27.5        —          58.5  

Restructuring

     —           —           —          —           0.1        —           —          0.1  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 702.9      $ 114.3      $ —        $ 817.2      $ 613.8      $ 102.5      $ —        $ 716.3  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

MIS and MA Revenue by Line of Business

The table below presents revenue by LOB within each reportable segment:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2012     2011     2012     2011  

MIS:

        

Corporate finance (CFG)

   $ 220.7     $ 129.0     $ 612.7     $ 510.9  

Structured finance (SFG)

     93.1       82.0       278.1       257.7  

Financial institutions (FIG)

     82.7       72.1       239.3       228.1  

Public, project and infrastructure finance (PPIF)

     77.0       68.3       237.3       205.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total external revenue

     473.5       351.4       1,367.4       1,202.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Intersegment royalty

     17.8       16.8       52.4       49.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     491.3       368.2       1,419.8       1,251.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

MA:

        

Research, data and analytics (RD&A)

     123.8       115.3       364.7       335.9  

Enterprise risk solutions (ERS)

     64.0       50.8       163.6       135.7  

Professional services (PS)

     27.2       13.8       80.4       40.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total external revenue

     215.0       179.9       608.7       511.6  
  

 

 

   

 

 

   

 

 

   

 

 

 

Intersegment revenue

     3.1       2.6       9.0       7.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     218.1       182.5       617.7       519.4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Eliminations

     (20.9     (19.4     (61.4     (56.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Total MCO

   $ 688.5     $ 531.3     $ 1,976.1     $ 1,713.6  
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated Revenue Information by Geographic Area:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2012      2011      2012      2011  

United States

   $ 375.4      $ 274.3      $ 1,063.2      $ 890.7  

International:

           

EMEA

     203.3        163.1        590.4        532.1  

Other

     109.8        93.9        322.5        290.8  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total International

     313.1        257.0        912.9        822.9  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 688.5      $ 531.3      $ 1,976.1      $ 1,713.6  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets by Segment:

 

     September 30, 2012      December 31, 2011  
     MIS      MA      Corporate
Assets (a)
     Consolidated      MIS      MA      Corporate
Assets (a)
     Consolidated  

Total Assets

   $ 912.6        1,262.2        1,487.5      $ 3,662.3      $ 725.9        1,289.7        860.5      $ 2,876.1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Represents common assets that are shared between each segment or utilized by the corporate entity. Such assets primarily include cash and cash equivalents, short-term investments, unallocated property and equipment and deferred taxes.
RECENTLY ISSUED ACCOUNTING STANDARDS
RECENTLY ISSUED ACCOUNTING STANDARDS

NOTE 16. RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS”. The objective of this ASU is to achieve common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. The amendments in this ASU change the wording used to describe current requirements in U.S. GAAP for measuring fair value and for financial statement disclosure about fair value measurements. Some of the amendments in the ASU clarify the FASB’s intent or change a particular principle or requirement pertaining to the application of existing fair value measurement requirements or for disclosing information about fair value measurements. The amendments in this ASU are required to be applied prospectively and are effective for fiscal years beginning after December 15, 2011. The Company has conformed to the new disclosures required in this ASU in this Form 10Q for the three months ended March 31, 2012.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”. Under the amendments in this ASU, an entity has two options for presenting its total comprehensive income: to show its components along with the components of net income in a single continuous statement, or in two separate but consecutive statements. The amendments in this ASU are required to be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. In December 2011, the FASB issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income”, which indefinitely defers the requirement in ASU No. 2011-05 to present on the face of the financial statements reclassification adjustments for items that are reclassified from OCI to net income in the statement(s) where the components of net income and the components of OCI are presented. All other provisions of this ASU, which are to be applied retrospectively, are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted all provisions that were not deferred as of March 31, 2012. The adoption of this ASU will not have any impact on the Company’s consolidated financial statements other than revising the presentation of the components of comprehensive income.

SUBSEQUENT EVENTS
SUBSEQUENT EVENTS

NOTE 17. SUBSEQUENT EVENTS

On October 23, 2012, the Board approved the declaration of a quarterly dividend of $0.16 per share of Moody’s common stock, payable on December 10, 2012 to shareholders of record at the close of business on November 20, 2012.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
Long-Lived Assets, Including Goodwill and Other Acquired Intangible Assets

Long-Lived Assets, Including Goodwill and Other Acquired Intangible Assets

Moody’s evaluated its goodwill for impairment at the reporting unit level, defined as an operating segment or one level below an operating segment, annually as of November 30 or more frequently if impairment indicators arose in accordance with ASC Topic 350. In the second quarter of 2012, the Company changed the date of its annual assessment of goodwill impairment to July 31 of each year. This is a change in method of applying an accounting principle which management believes is a preferable alternative as the new date of the assessment is more closely aligned with the Company’s strategic planning process. The change in the assessment date does not delay, accelerate or avoid a potential impairment charge. The Company has determined that it is impracticable to objectively determine projected cash flows and related valuation estimates that would have been used as of each July 31 of prior reporting periods without the use of hindsight. As such, the Company has prospectively applied the change in annual goodwill impairment testing date beginning in the second quarter of 2012.

At July 31, 2012, the Company had five primary reporting units: one in MIS that encompasses all of Moody’s ratings operations and four reporting units within MA: RD&A, ERS, Financial Services Training and Certifications and Copal Partners. 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. In the first quarter of 2012, a division formerly in the RD&A reporting unit which provided various financial modeling services was transferred to the ERS reporting unit. Additionally, in the second quarter of 2012, the CSI reporting unit, which consisted of all operations relating to CSI which was acquired in November 2010, was integrated into MA’s training reporting unit to form the FSTC reporting unit. The new 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. In the fourth quarter of 2011, the Company acquired Copal which is deemed to be separate reporting unit at September 30, 2012. Also, in December 2011, the Company acquired B&H which is part of the ERS reporting unit.

STOCK-BASED COMPENSATION (Tables)

Presented below is a summary of the stock-based compensation cost and associated tax benefit included in the accompanying consolidated statements of operations:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2012      2011      2012      2011  

Stock-based compensation cost

   $ 16.4      $ 12.9      $ 46.3      $ 43.2  

Tax benefit

   $ 5.9      $ 5.0      $ 16.7      $ 16.2  

The following weighted average assumptions were used in determining the fair value for options granted in 2012:

 

Expected dividend yield

     1.66

Expected stock volatility

     44

Risk-free interest rate

     1.55

Expected holding period

     7.4 yrs   

Grant date fair value

   $ 15.19   

The following tables summarize information relating to stock option exercises and restricted stock vesting:

 

     Nine Months Ended  
     September 30,  
Stock option exercises:    2012      2011  

Proceeds from stock option exercises

   $ 83.2      $ 41.5  

Aggregate intrinsic value

   $ 41.4      $ 20.4  

Tax benefit realized upon exercise

   $ 15.7      $ 8.0  

 

     Nine Months Ended  
     September 30,  
Restricted stock vesting:    2012      2011  

Fair value of shares vested

   $ 37.7      $ 18.8  

Tax benefit realized upon vesting

   $ 13.3      $ 7.0  
INCOME TAXES (Tables)
Income Taxes Paid

The following table shows the amount the Company paid for income taxes:

 

     Nine Months Ended  
     September 30,  
     2012      2011  

Income Taxes Paid*

   $ 271.9      $ 166.9  

 

* Includes approximately $92 million in payments for tax audit settlements in the first quarter of 2012.
WEIGHTED AVERAGE SHARES OUTSTANDING (Tables)
Reconciliation of Basic to Diluted Shares Outstanding

Below is a reconciliation of basic to diluted shares outstanding:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2012      2011      2012      2011  

Basic

     222.5        226.0        223.3        227.7  

Dilutive effect of shares issuable under stock-based compensation plans

     3.6        3.0        3.4        3.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     226.1        229.0        226.7        230.7  
  

 

 

    

 

 

    

 

 

    

 

 

 

Anti-dilutive options to purchase common shares and restricted stock excluded from the table above

     6.6        10.7        6.6        10.8  
  

 

 

    

 

 

    

 

 

    

 

 

 
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Tables)

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

   September 30,
2012
     December 31,
2011
 

Assets:

        

Derivatives designated as accounting hedges:

        

Interest rate swaps

  

Other assets

   $ 18.4      $ 11.5  
     

 

 

    

 

 

 

Total derivatives designated as accounting hedges

        18.4        11.5  

Derivatives not designated as accounting hedges:

        

FX forwards on certain assets and liabilities

  

Other current assets

     2.0        1.1  
     

 

 

    

 

 

 

Total

      $ 20.4      $ 12.6  
     

 

 

    

 

 

 

Liabilities:

        

Derivatives designated as accounting hedges:

        

Interest rate swaps

  

Accounts payable and accrued liabilities

   $ 1.5      $ 4.5  

FX forwards on net investment in certain foreign subsidiaries

  

Accounts payable and accrued liabilities

     1.8        —     
     

 

 

    

 

 

 

Total derivatives designated as accounting hedges

        3.3        4.5  

Derivatives not designated as accounting hedges:

        

FX forwards on certain assets and liabilities

  

Accounts payable and accrued liabilities

     0.6        2.3  
     

 

 

    

 

 

 

Total

      $ 3.9      $ 6.8  
     

 

 

    

 

 

 

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 hedge:

 

          Amount of Gain (Loss) Recognized in
consolidated statements of operations
 
          Three Months Ended     Nine Months Ended  
          September 30,     September 30,  

Derivatives designated as accounting hedges

  

Location on Income Statement

   2012      2011     2012      2011  

Interest rate swaps

  

Interest expense, net

   $ 0.9      $ 1.0     $ 2.6      $ 3.1  
     

 

 

    

 

 

   

 

 

    

 

 

 

Derivatives not designated as accounting hedges

                               

Foreign exchange forwards

  

Other non-operating (expense) income

   $ 0.4      $ (3.1   $ —         $ (0.6
     

 

 

    

 

 

   

 

 

    

 

 

 

The cumulative amount of unrecognized hedge losses recorded in AOCI is as follows:

 

     Unrecognized Losses, net of tax  
     September 30,     December 31,  
     2012     2011  

FX forwards on net investment hedges

   $ (1.4   $ —     

Interest rate swaps (1)

     (1.2     (3.0
  

 

 

   

 

 

 

Total

   $ (2.6   $ (3.0
  

 

 

   

 

 

 

 

(1) 

The unrecognized hedge losses relating to the cash flow hedges on the 2008 Term Loan are expected to be reclassified into earnings within the next twelve months as the underlying hedge ends with the full repayment of the Term Loan in the first half of 2013.

The following table summarizes the notional amounts of the Company’s outstanding foreign exchange forwards:

 

     September 30,      December 31,  
     2012      2011  

Notional amount of Currency Pair:

     

Contracts to purchase USD with euros

   $ 34.6      $ 27.5  

Contracts to sell USD for euros

   $ 47.1      $ 47.7  

Contracts to purchase USD with GBP

   $ 4.2      $ 2.4  

Contracts to sell USD for GBP

   $ 4.2      $ 17.6  

Contracts to purchase USD with other foreign currencies

   $ 8.7      $ 3.2  

Contracts to sell USD for other foreign currencies

   $ 6.5      $ 7.6  

Contracts to purchase euros with other foreign currencies

   20.7      13.6  

Contracts to purchase euros with GBP

   8.7      1.6  

Contracts to sell euros for GBP

   9.9      7.2  

The following table provides information on gains/(losses) on the Company’s cash flow hedges:

 

Derivatives in

Cash Flow

Hedging

Relationships

   Amount of
Gain/(Loss)
Recognized in
AOCI on Derivative
(Effective Portion)
   

Location of

Gain/(Loss)
Reclassified from

AOCI into Income

(Effective Portion)

   Amount of
Gain/(Loss)
Reclassified from
AOCI into Income
(Effective Portion)
   

Location of

Gain/(Loss)

Recognized in

Income on Derivative

(Ineffective Portion

and Amount

Excluded from

Effectiveness Testing)

   Gain/(Loss)
Recognized in
Income on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
 
     Three Months Ended          Three Months Ended          Three Months Ended  
     September 30,          September 30,          September 30,  
     2012     2011          2012     2011          2012      2011  

FX options

   $ —        $ —       

Revenue

   $ —        $ —       

Revenue

   $ —         $ —     

Interest rate swaps

     —          (0.1  

Interest Expense

     (0.6     (0.9  

N/A