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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, depreciation and amortization and a goodwill impairment charge | |
Adjusted
Operating Margin |
Adjusted Operating Income divided by revenue | |
Analytics | Moody’s Analytics – 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 Updates to the ASC. It also provides background information for accounting guidance and the bases for conclusions on the changes in the ASC. ASUs are not considered authoritative until codified into the ASC | |
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, which comprised the IMS Health and NMR businesses | |
Commission | European Commission | |
Common Stock | The Company’s common stock | |
Company | Moody’s Corporation and its subsidiaries; MCO; Moody’s | |
Copal | Copal Partners; an acquisition completed in November 2011; leading provider of outsourced research and analytical services to institutional investors. | |
COSO | Committee of Sponsoring Organizations of the Treadway Commission | |
CP | Commercial paper | |
CP Notes | Unsecured CP notes | |
CP Program | The Company’s CP program entered into on October 3, 2007 | |
CRAs | Credit rating agencies | |
CREF | Commercial real estate finance which includes REITs, commercial real estate collateralized debt obligations and CMBS; 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 | |
DBPPs | Defined benefit pension plans | |
DCF | Discounted cash flow; a fair value calculation methodology whereby future projected cash flows are discounted back to their present value using a discount rate | |
Debt/EBITDA | Ratio of Total Debt to EBITDA | |
Directors’ Plan | The 1998 Moody’s Corporation Non-Employee Directors’ Stock Incentive Plan | |
Distribution Date | September 30, 2000; the date which Old D&B separated into two publicly traded companies – Moody’s Corporation and New D&B | |
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 Eurozon | |
Excess Tax Benefit | The difference between the tax benefit realized at exercise of an option or delivery of a restricted share and the tax benefit recorded at the time that the option or restricted share is expensed under GAAP | |
Exchange Act | The Securities Exchange Act of 1934, as amended | |
FASB | Financial Accounting Standards Board | |
FIG | Financial institutions group; an LOB of MIS | |
Fitch | Fitch Ratings, a part of the Fitch Group | |
Financial Reform Act |
Dodd-Frank Wall Street Reform and Consumer Protection Act | |
FX | Foreign exchange | |
FSTC | Financial Services Training and Certifications; a reporting unit within the MA Segment that includes classroom-based training services and CSI. | |
GAAP | U.S. Generally Accepted Accounting Principles | |
GBP | British pounds | |
G-8 | The finance ministers and central bank governors of the group of eight countries consisting of Canada, France, Germany, Italy, Japan, Russia, U.S. and U.K. | |
G-20 | The G-20 is an informal forum that promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. By contributing to the strengthening of the international financial architecture and providing opportunities for dialogue on national policies, international co-operation, and international financial institutions, the G-20 helps to support growth and development across the globe. 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, U.K., U.S. and the EU, which is represented by the rotating Council presidency and the ECB | |
IMS Health | A spin-off of Cognizant, which 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 | |
Intellectual Property | The Company’s intellectual property, including but not limited to proprietary information, trademarks, research, software tools and applications, models and methodologies, databases, domain names, and other proprietary materials | |
IOSCO | International Organization of Securities Commissions | |
IOSCO Code | Code of Conduct Fundamentals for CRAs issued by IOSCO | |
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 | |
Korea | Republic of South Korea | |
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 relating to the Series 2005-1 Notes, Series 2007-1 Notes, 2010 Senior Notes and 2012 Senior Notes; 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 | |
MIS Code | Moody’s Investors Service Code of Professional Conduct | |
Moody’s | Moody’s Corporation and its subsidiaries; MCO; the Company | |
Net Income | Earnings attributable to Moody’s Corporation, which excludes the portion of net income from consolidated entities attributable to non-controlling shareholders | |
New D&B | The New D&B Corporation – which comprises the D&B business after September 30, 2000 | |
NM | Not-meaningful percentage change (over 400%) | |
NMR | Nielsen Media Research, Inc.; a spin-off of Cognizant; a leading source of television audience measurement services | |
NRSRO | Nationally Recognized Statistical Rating Organization | |
OCI | Other comprehensive income (loss) | |
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 | |
Other
Retirement Plans |
The U.S. retirement healthcare and U.S. retirement life insurance plans | |
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 | |
PPP | Profit Participation Plan | |
PS | Professional Services; an LOB of MA | |
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 the 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 | |
Reorganization | The Company’s business reorganization announced in August 2007 which resulted in two new reportable segments (MIS and MA) beginning in January 2008 | |
Retirement Plans | Moody’s funded and unfunded U.S. pension plans, the U.S. post-retirement healthcare plans and the U.S. post-retirement life insurance plans | |
RMBS | Residential mortgage-backed securities; 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” | |
S&P | Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. | |
SEC | 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 | |
SIV | Structured Investment Vehicle | |
Stock Plans | The Old D&B’s 1998 Key Employees’ Stock Incentive Plan and the Restated 2001 Moody’s Corporation Key Employees’ Stock Incentive Plan | |
T&E | Travel and entertainment expenses | |
TPE | Third party evidence, as defined in the ASC, used to determine selling price based on a vendor’s or any competitor’s largely interchangeable products or services in standalone sales transactions to similarly situated customers | |
Total Debt | Current and long-term portion of debt as reflected on the consolidated balance sheets, excluding current accounts payable and accrued liabilities incurred in the ordinary course of business | |
U.K. | United Kingdom | |
U.S. | United States | |
USD | U.S. dollar | |
UTBs | Unrecognized tax benefits | |
UTPs | Uncertain tax positions | |
VSOE | Vendor specific objective evidence; evidence, as defined in the ASC, of selling price limited to either of the following: the price charged for a deliverable when it is sold separately, or for a deliverable not yet being sold separately, the price established by management having the relevant authority | |
WACC | Weighted average cost of capital | |
1998 Plan | Old D&B’s 1998 Key Employees’ Stock Incentive Plan | |
2000 Distribution | The distribution by Old D&B to its shareholders of all of the outstanding shares of New D&B common stock on September 30, 2000 | |
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 determinations on certain tax matters and certain other potential tax liabilities | |
2001 Plan | The Amended and Restated 2001 Moody’s Corporation Key Employees’ Stock Incentive Plan | |
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 | |
2007 Restructuring Plan |
The Company’s 2007 restructuring plan approved December 31, 2007 | |
2008 Term Loan | Five-year $150.0 million senior unsecured term loan entered into by the Company on May 7, 2008 | |
2009 Restructuring Plan |
The Company’s 2009 restructuring plan approved March 27, 2009 | |
2010 Indenture | Supplemental indenture and related agreements dated August 19, 2010, relating to the 2010 Senior Notes | |
2010 Senior Notes | Principal amount of $500.0 million, 5.50% senior unsecured notes due in September 2020 pursuant to the 2010 Indenture | |
2012 Facility | Revolving credit facility of $1 billion entered into on April 18, 2012, expiring in 2017 | |
2012 Indenture | Supplemental indenture and related agreements dated August 18, 2012, relating to the 2012 Senior Notes | |
2012 Senior Notes | Principal amount of $500 million, 4.50% senior unsecured notes due in September 2022 pursuant to the 2012 Indenture | |
7WTC | The Company’s corporate headquarters located at 7 World Trade Center | |
7WTC Lease | Operating lease agreement entered into on October 20, 2006 |
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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.
MA, 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 Risk Management Software), 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.
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NOTE 2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Consolidation
The consolidated financial statements include those of Moody’s Corporation and its majority- and wholly-owned subsidiaries. The effects of all intercompany transactions have been eliminated. Investments in companies for which the Company has significant influence over operating and financial policies but not a controlling interest are accounted for on an equity basis.
The Company applies the guidelines set forth in Topic 810 of the ASC in assessing its interests in variable interest entities to decide whether to consolidate that entity. The Company has reviewed the potential variable interest entities and determined that there are no consolidation requirements under Topic 810 of the ASC.
Cash and Cash Equivalents
Cash equivalents principally consist of investments in money market mutual funds and high-grade commercial paper with maturities of three months or less when purchased.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives. Expenditures for maintenance and repairs that do not extend the economic useful life of the related assets are charged to expense as incurred.
Research and Development Costs
All research and development costs are expensed as incurred. These costs primarily reflect the development of credit processing software and quantitative credit risk assessment products sold by the MA segment. These costs also reflect expenses for new quantitative research and business ideas that potentially warrant near-term investment within MIS or MA which could potentially result in commercial opportunities for the Company.
Research and development costs were $16.1 million, $29.8 million, and $20.3 million for the years ended December 31, 2012, 2011 and 2010, respectively, and are included in operating expenses within the Company’s consolidated statements of operations. These costs generally consist of professional services provided by third parties and compensation costs of employees.
Costs for internally developed computer software that will be sold, leased or otherwise marketed are capitalized when technological feasibility has been established. These costs primarily relate to the development or enhancement of credit processing software and quantitative credit risk assessment products sold by the MA segment, to be licensed to customers and generally consist of professional services provided by third parties and compensation costs of employees that develop the software. Judgment is required in determining when technological feasibility of a product is established and the Company believes that technological feasibility for its software products is reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to customers. Accordingly, costs for internally developed computer software that will be sold, leased or otherwise marketed that were eligible for capitalization under Topic 985 of the ASC as well as the related amortization expense related to such costs were immaterial for the years ended December 31, 2012, 2011 and 2010.
Computer Software Developed or Obtained for Internal Use
The Company capitalizes costs related to software developed or obtained for internal use. These assets, included in property and equipment in the consolidated balance sheets, relate to the Company’s accounting, product delivery and other systems. Such costs generally consist of direct costs for third-party license fees, professional services provided by third parties and employee compensation, in each case incurred either during the application development stage or in connection with upgrades and enhancements that increase functionality. Such costs are depreciated over their estimated useful lives on a straight-line basis. Costs incurred during the preliminary project stage of development as well as maintenance costs are expensed as incurred.
Long-Lived Assets, Including Goodwill and Other Acquired Intangible Assets
Moody’s 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.
The Company has five 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 December 31, 2012. Also, in December 2011, the Company acquired B&H which is part of the ERS reporting unit.
Rent Expense
The Company records rent expense on a straight-line basis over the life of the lease. In cases where there is a free rent period or future fixed rent escalations the Company will record a deferred rent liability. Additionally, the receipt of any lease incentives will be recorded as a deferred rent liability which will be amortized over the lease term as a reduction of rent expense.
Stock-Based Compensation
The Company records compensation expense for all share-based payment award transactions granted to employees based on the fair value of the equity instrument at the time of grant. This includes shares issued under employee stock purchase plans, stock options and restricted stock. The Company has also established a pool of additional paid-in capital related to the tax effects of employee share-based compensation, which is available to absorb any recognized tax deficiencies.
Derivative Instruments and Hedging Activities
Based on the Company’s risk management policy, from time to time the Company may use derivative financial instruments to reduce exposure to changes in foreign exchange rates and interest rates. The Company does not enter into derivative financial instruments for speculative purposes. All derivative financial instruments are recorded on the balance sheet at their respective fair values. The changes in the value of derivatives that qualify as fair value hedges are recorded currently into earnings. Changes in the derivative’s fair value that qualify as cash flow hedges are recorded to accumulated other comprehensive income or loss, to the extent the hedge is effective, and such amounts are reclassified to earnings in the same period or periods during which the hedged transaction affects income. Changes in the derivative’s fair value that qualify as net investment hedges are recorded to accumulated other comprehensive income or loss, to the extent the hedge is effective.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or the services have been provided and accepted by the customer when applicable, fees are determinable and the collection of resulting receivables is considered probable.
In October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”). The standard changed the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration based on the relative selling price of each deliverable. The Company adopted ASU 2009-13 on a prospective basis for applicable transactions originating or materially modified on or after January 1, 2010. If applied in the same manner to the year ended December 31, 2009, ASU 2009-13 would not have had a material impact on net revenue reported for both its MIS and MA segments in terms of the timing and pattern of revenue recognition. The adoption of ASU 2009-13 did not have a significant effect on the Company’s net revenue in the period of adoption and also did not have a significant effect on the Company’s net revenue in periods after the initial adoption when applied to multiple element arrangements based on the currently anticipated business volume and pricing.
For 2010 and future periods, pursuant to the guidance of ASU 2009-13, when a sales arrangement contains multiple deliverables, the Company allocates revenue to each deliverable based on its relative selling price which is determined based on its vendor specific objective evidence (“VSOE”) if available, third party evidence (“TPE”) if VSOE is not available, or estimated selling price (“ESP”) if neither VSOE nor TPE is available.
The Company’s products and services will generally continue to qualify as separate units of accounting under ASU 2009-13. The Company evaluates each deliverable in an arrangement to determine whether it represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting when it has stand-alone value to the customers and if the arrangement includes a customer refund or return right relative to the delivered item and the delivery and performance of the undelivered item is considered probable and substantially in the Company’s control. In instances where the aforementioned criteria are not met, the deliverable is combined with the undelivered items and revenue recognition is determined as one single unit.
The Company determines whether its selling price in a multi-element transaction meets the VSOE criteria by using the price charged for a deliverable when sold separately. In instances where the Company is not able to establish VSOE for all deliverables in a multiple element arrangement, which may be due to the Company infrequently selling each element separately, not selling products within a reasonably narrow price range, or only having a limited sales history, the Company attempts to establish TPE for deliverables. The Company determines whether TPE exists by evaluating largely similar and interchangeable competitor products or services in standalone sales to similarly situated customers. However, due to the difficulty in obtaining third party pricing, possible differences in its market strategy from that of its peers and the potential that products and services offered by the Company may contain a significant level of differentiation and/or customization such that the comparable pricing of products with similar functionality cannot be obtained, the Company generally is unable to reliably determine TPE. Based on the selling price hierarchy established by ASU 2009-13, when the Company is unable to establish selling price using VSOE or TPE, the Company will establish an ESP. ESP is the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company establishes its best estimate of ESP considering internal factors relevant to is pricing practices such as costs and margin objectives, standalone sales prices of similar products, percentage of the fee charged for a primary product or service relative to a related product or service, and customer segment and geography. Additional consideration is also given to market conditions such as competitor pricing strategies and market trend. The Company reviews its determination of VSOE, TPE and ESP on an annual basis or more frequently as needed.
In the MIS segment, revenue attributed to initial ratings of issued securities is recognized when the rating is issued. Revenue attributed to monitoring of issuers or issued securities is recognized ratably over the period in which the monitoring is performed, generally one year. In the case of commercial mortgage-backed securities, derivatives, international residential mortgage-backed and asset-backed securities, issuers can elect to pay the monitoring fees upfront. These fees are deferred and recognized over the future monitoring periods based on the expected lives of the rated securities, which ranged from two to 52 years at December 31, 2012. At December 31, 2012, 2011 and 2010, deferred revenue related to these securities was approximately $82 million, $79 million, and $76 million.
Multiple element revenue arrangements in the MIS segment are generally comprised of an initial rating and the related monitoring service. Beginning January 1, 2010, in instances where monitoring fees are not charged for the first year monitoring effort, fees are allocated to the initial rating and monitoring services based on the relative selling price of each service to the total arrangement fees. The Company generally uses ESP in determining the selling price for its initial ratings as the Company rarely sells initial ratings separately without providing related monitoring services and thus is unable to establish VSOE or TPE for initial ratings. Prior to January 1, 2010 and pursuant to the previous accounting standards, for these types of arrangements the initial rating fee was first allocated to the monitoring service determined based on the estimated fair market value of monitoring services, with the residual amount allocated to the initial rating. Under ASU 2009-13 this practice can no longer be used for non-software deliverables upon the adoption of ASU 2009-13.
MIS estimates revenue for ratings of commercial paper for which, in addition to a fixed annual monitoring fee, issuers are billed quarterly based on amounts outstanding. Revenue is accrued each quarter based on estimated amounts outstanding and is billed when actual data is available. The estimate is determined based on the issuers’ most recent reported quarterly data. At December 31, 2012, 2011 and 2010, accounts receivable included approximately $22 million, $24 million, and $25 million, respectively, related to accrued commercial paper revenue. Historically, MIS has not had material differences between the estimated revenue and the actual billings. Furthermore, for certain annual monitoring services, fees are not invoiced until the end of the annual monitoring period. Revenue is accrued ratably over the monitoring period.
In the MA segment, products and services offered by the Company include software licenses and related maintenance, subscriptions, and professional services. Revenue from subscription based products, such as research and data subscriptions and certain software-based credit risk management subscription products, is recognized ratably over the related subscription period, which is principally one year. Revenue from sale of perpetual licenses of credit processing software is generally recognized at the time the product master or first copy is delivered or transferred to and accepted by the customer. Software maintenance revenue is recognized ratably over the annual maintenance period. Revenue from services rendered within the professional services line of business is generally recognized as the services are performed. If uncertainty exists regarding customer acceptance of the product or service, revenue is not recognized until acceptance occurs. A large portion of annual research and data subscriptions and annual software maintenance are invoiced in the months of November, December and January.
Products and services offered within the MA segment are sold either stand-alone or together in various combinations. In instances where a multiple element arrangement includes software and non-software deliverables, revenue is allocated to the non-software deliverables and to the software deliverables, as a group, using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. Revenue is recognized for each element based upon the conditions for revenue recognition noted above.
If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is allocated to each software deliverable using VSOE. In the instances where the Company is not able to determine VSOE for all of the deliverables of an arrangement, the Company allocates the revenue to the undelivered elements equal to its VSOE and the residual revenue to the delivered elements. If the Company is unable to determine VSOE for an undelivered element, the Company defers all revenue allocated to the software deliverables until the Company has delivered all of the elements or when VSOE has been determined for the undelivered elements.
Accounts Receivable Allowances
Moody’s records an allowance for estimated future adjustments to customer billings as a reduction of revenue, based on historical experience and current conditions. Such amounts are reflected as additions to the accounts receivable allowance. Additionally, estimates of uncollectible accounts are recorded as bad debt expense and are reflected as additions to the accounts receivable allowance. Billing adjustments and uncollectible account write-offs are recorded against the allowance. Moody’s evaluates its accounts receivable allowance by reviewing and assessing historical collection and adjustment experience and the current status of customer accounts. Moody’s also considers the economic environment of the customers, both from an industry and geographic perspective, in evaluating the need for allowances. Based on its analysis, Moody’s adjusts its allowance as considered appropriate in the circumstances.
Contingencies
From time to time, Moody’s is involved in legal and tax proceedings, governmental investigations and inquiries, claims and litigation that are incidental to the Company’s business, including claims based on ratings assigned by MIS. Moody’s is also subject to ongoing tax audits in the normal course of business. Management periodically assesses the Company’s liabilities and contingencies in connection with these matters based upon the latest information available. Moody’s discloses material pending legal proceedings pursuant to SEC rules and other pending matters as it may determine to be appropriate.
For claims, litigation and proceedings and governmental investigations and inquires not related to income taxes, where it is both probable that a liability 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. When the reasonable estimate of the loss is within a range of amounts, the minimum amount of the range is accrued unless some higher amount within the range is a better estimate than another amount within the range. In other instances, because of uncertainties related to the probable outcome and/or the amount or range of loss, management does not record a liability but discloses the contingency if significant. As additional information becomes available, the Company adjusts its assessments and estimates of such matters accordingly. In view of the inherent difficulty of predicting the outcome of litigation, regulatory, governmental investigations and inquiries, enforcement and similar matters 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 any pending matters progresses, management will continue to review the latest information available and assess its ability to predict the outcome of such matters and the effects, if any, on its operations and financial condition. However, in light of the large or indeterminate damages sought in some of them, the absence of similar court rulings on the theories of law asserted and uncertainties regarding apportionment of any potential damages, an estimate of the range of possible losses cannot be made at this time.
The Company’s wholly-owned insurance subsidiary insures the Company against certain risks including but not limited to deductibles for worker’s compensation, employment practices litigation, employee medical claims and terrorism, for which the claims are not material to the Company. In addition, for claim years 2008 and 2009, the insurance subsidiary insured the Company for defense costs related to professional liability claims. For matters insured by the Company’s insurance subsidiary, Moody’s records liabilities based on the estimated total claims expected to be paid and total projected costs to defend a claim through its anticipated conclusion. The Company determines liabilities based on an assessment of management’s best estimate of claims to be paid and legal defense costs as well as actuarially determined estimates. The Cheyne SIV and Rhinebridge SIV matters more fully discussed in Note 17 are both cases from the 2008/2009 claims period, and accordingly these matters are covered by the Company’s insurance subsidiary. Defense costs for matters not self-insured by the Company’s wholly-owned insurance subsidiary are expensed as services are provided.
For income tax matters, the Company employs the prescribed methodology of Topic 740 of the ASC which requires a company to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.
Operating Expenses
Operating expenses are charged to income as incurred. These expenses include costs associated with the development and production of the Company’s products and services and their delivery to customers. These expenses principally include employee compensation and benefits and travel costs that are incurred in connection with these activities.
Selling, General and Administrative Expenses
SG&A expenses are charged to income as incurred. These expenses include such items as compensation and benefits for corporate officers and staff and compensation and other expenses related to sales of products. They also include items such as office rent, business insurance, professional fees and gains and losses from sales and disposals of assets.
Redeemable Noncontrolling Interest
The Company records its redeemable noncontrolling interest at fair value on the date of the related business combination transaction. The redeemable noncontrolling interest represents noncontrolling shareholders’ interest in entities which are controlled but not wholly-owned by Moody’s and for which Moody’s obligation to redeem the minority shareholders’ interest is in the control of the minority shareholders. Subsequent to the initial measurement, the redeemable noncontrolling interest is recorded at the greater of its redemption value or its carrying value at the end of each reporting period. If the redeemable noncontrolling interest is carried at its redemption value, the difference between the redemption value and the carrying value would be adjusted through capital surplus at the end of each reporting period. The Company also performs a quarterly assessment to determine if the aforementioned redemption value exceeds the fair value of the redeemable noncontrolling interest. If the redemption value of the redeemable noncontrolling interest were to exceed its fair value, the excess would reduce the net income attributable to Moody’s shareholders.
Foreign Currency Translation
For all operations outside the U.S. where the Company has designated the local currency as the functional currency, assets and liabilities are translated into U.S. dollars using end of year exchange rates, and revenue and expenses are translated using average exchange rates for the year. For these foreign operations, currency translation adjustments are accumulated in a separate component of shareholders’ equity.
Comprehensive Income
Comprehensive income represents the change in net assets of a business enterprise during a period due to transactions and other events and circumstances from non-owner sources including foreign currency translation impacts, net actuarial losses and net prior service costs related to pension and other post-retirement plans and derivative instruments.
Income Taxes
The Company accounts for income taxes under the asset and liability method in accordance with ASC Topic 740. Therefore, income tax expense is based on reported income before income taxes and deferred income taxes reflect the effect of temporary differences between the amounts of assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes.
The Company classifies interest related to unrecognized tax benefits as a component of interest expense in its consolidated statements of operations. Penalties are recognized in other non-operating expenses. For UTPs, the Company first determines whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.
For certain of its non-U.S. subsidiaries, the Company has deemed the undistributed earnings relating to these subsidiaries to be indefinitely reinvested within its foreign operations. Accordingly, the Company has not provided deferred income taxes on these indefinitely reinvested earnings. It is not practicable to determine the amount of deferred taxes that might be required to be provided if such earnings were distributed in the future due to complexities in the tax laws and in the hypothetical calculations that would have to be made.
Fair Value of Financial Instruments
The Company’s financial instruments include cash, cash equivalents, trade receivables and payables, all of which are short-term in nature and, accordingly, approximate fair value. Additionally, the Company invests in short-term investments that are carried at cost, which approximates fair value due to their short-term maturities. Also, the Company uses derivative instruments, as further described in Note 5, to manage certain financial exposures that occur in the normal course of business. These derivative instruments are carried at fair value on the Company’s consolidated balance sheets. The Company also is subject to contingent consideration obligations related to certain of its acquisitions as more fully discussed in Note 7. These obligations are carried at their estimated fair value within the Company’s consolidated balance sheets.
Fair value is defined by the ASC as the price that would be received from selling an asset or paid to transfer a liability (i.e., an exit price) in an orderly transaction between market participants at the measurement date. The determination of this fair value is based on the principal or most advantageous market in which the Company could commence transactions and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance. Also, determination of fair value assumes that market participants will consider the highest and best use of the asset.
The ASC establishes a fair value hierarchy whereby the inputs contained in valuation techniques used to measure fair value are categorized into three broad levels as follows:
Level 1 : quoted market prices in active markets that the reporting entity has the ability to access at the date of the fair value measurement;
Level 2 : inputs other than quoted market prices described in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities;
Level 3 : unobservable inputs that are supported by little or no market activity and that are significant to the fair value measurement of the assets or liabilities.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk principally consist of cash and cash equivalents, short-term investments, trade receivables and derivatives.
Cash equivalents consist of investments in high quality investment-grade securities within and outside the U.S. The Company manages its credit risk exposure by allocating its cash equivalents among various money market mutual funds and issuers of high- grade commercial paper. Short-term investments primarily consist of certificates of deposit and high-grade corporate bonds in Korea as of December 31, 2012 and 2011. The Company manages its credit risk exposure on cash equivalents and short-term investments by limiting the amount it can invest with any single issuer. No customer accounted for 10% or more of accounts receivable at December 31, 2012 or 2011.
Earnings per Share of Common Stock
Basic shares outstanding is calculated based on the weighted average number of shares of common stock outstanding during the reporting period. Diluted shares outstanding is calculated giving effect to all potentially dilutive common shares, assuming that such shares were outstanding during the reporting period.
Pension and Other Retirement Benefits
Moody’s maintains various noncontributory DBPPs as well as other contributory and noncontributory retirement plans. The expense and assets/liabilities that the Company reports for its pension and other retirement benefits are dependent on many assumptions concerning the outcome of future events and circumstances. These assumptions represent the Company’s best estimates and may vary by plan. The differences between the assumptions for the expected long-term rate of return on plan assets and actual experience is spread over a five-year period to the market related value of plan assets which is used in determining the expected return on assets component of annual pension expense. All other actuarial gains and losses are generally deferred and amortized over the estimated average future working life of active plan participants.
The Company recognizes as an asset or liability in its statement of financial position the funded status of its defined benefit post-retirement plans, measured on a plan-by-plan basis. Changes in the funded status are recorded as part of other comprehensive income during the period the changes occur.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Estimates are used for, but not limited to, revenue recognition, accounts receivable allowances, income taxes, contingencies, valuation of long-lived and intangible assets, goodwill, pension and other retirement benefits, stock-based compensation, and depreciation and amortization rates for property and equipment and computer software.
The financial market volatility and poor economic conditions beginning in the third quarter of 2007 and continuing into 2012, both in the U.S. and in many other countries where the Company operates, have impacted and will continue to impact Moody’s business. If such conditions were to continue they could have a material impact to the Company’s significant accounting estimates discussed above, in particular those around accounts receivable allowances, valuations of investments in affiliates, goodwill and other acquired intangible assets, and pension and other retirement benefits.
Recently Issued Accounting Pronouncements
In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. The objective of this ASU is to improve reporting by requiring entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in the statement of operations. The amendments in this ASU are required to be applied retrospectively and are effective for reporting periods beginning after December 15, 2012. The adoption of this ASU will not have any impact on the Company’s consolidated financial statements other than revising the presentation relating to items reclassified from accumulated other comprehensive income to the statement of operations.
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 deferred 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 in 2012. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements other than revising the presentation of the components of comprehensive income.
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NOTE 3 | RECONCILIATION OF WEIGHTED AVERAGE SHARES OUTSTANDING |
Below is a reconciliation of basic to diluted shares outstanding:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Basic | 223.2 | 226.3 | 235.0 | |||||||||
Dilutive effect of shares issuable under stock-based compensation plans | 3.4 | 3.1 | 1.6 | |||||||||
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Diluted | 226.6 | 229.4 | 236.6 | |||||||||
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Antidilutive options to purchase common shares and restricted stock as well as contingently issuable restricted stock which are excluded from the table above |
7.5 | 10.6 | 15.5 | |||||||||
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The calculation of diluted EPS requires certain assumptions regarding the use of both cash proceeds and assumed proceeds that would be received upon the exercise of stock options and vesting of restricted stock outstanding as of December 31, 2012, 2011 and 2010. These assumed proceeds include Excess Tax Benefits and any unrecognized compensation on the awards.
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NOTE 4 | SHORT-TERM INVESTMENTS |
Short-term investments are securities with maturities greater than 90 days at the time of purchase that are available for use in the Company’s 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 to 11 months and one to seven months as of December 31, 2012 and 2011, respectively. Interest and dividends are recorded into income when earned.
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NOTE 5 | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
The Company is exposed to global market risks, including risks from changes in FX rates and changes in interest rates. Accordingly, the Company uses derivatives in certain instances to manage the aforementioned financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for speculative purposes.
Interest Rate Swaps
In the fourth quarter of 2010, the Company entered into interest rate swaps with a total notional amount of $300 million to convert the fixed interest rate on the Series 2005-1 Notes to a floating interest rate based on the 3-month LIBOR. The purpose of this hedge was to mitigate the risk associated with changes in the fair value of the Series 2005-1 Notes, thus the Company has designated these swaps as fair value hedges. The fair value of the swaps is adjusted quarterly with a corresponding adjustment to the carrying value of the 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 income (expense), net in the Company’s consolidated statements 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 14. 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.
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. These 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 subsidiary’s functional currency. These forward contracts are not designated as hedging instruments under the applicable sections of Topic 815 of the ASC. Accordingly, changes in the fair value of these contracts are recognized immediately in other non-operating income (expense), net in the Company’s consolidated statements of operations along with the FX gain or loss recognized on the assets and liabilities denominated in a currency other than the subsidiary’s functional currency. These contracts have expiration dates at various times through March 2013.
The following table summarizes the notional amounts of the Company’s outstanding foreign exchange forwards:
December 31, 2012 |
December 31, 2011 |
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Notional amount of Currency Pair: | ||||||||
Contracts to purchase USD with euros | $ | 34.3 | $ | 27.5 | ||||
Contracts to sell USD for euros | $ | 48.4 | $ | 47.7 | ||||
Contracts to purchase USD with GBP | $ | 2.1 | $ | 2.4 | ||||
Contracts to sell USD for GBP | $ | 1.7 | $ | 17.6 | ||||
Contracts to purchase USD with other foreign currencies | $ | 6.7 | $ | 3.2 | ||||
Contracts to sell USD for other foreign currencies | $ | 5.1 | $ | 7.6 | ||||
Contracts to purchase euros with other foreign currencies | € | 14.4 | € | 13.6 | ||||
Contracts to purchase euros with GBP | € | — | € | 1.6 | ||||
Contracts to sell euros for GBP | € | 8.9 | € | 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. For hedges that meet the effectiveness requirements, any change in fair value for the hedge is recorded in the currency translation adjustment component of AOCI. Any change in the fair value of these hedges that is the result of ineffectiveness would be recognized immediately in other non-operating (expense) income in the Company’s consolidated statements of operations. These outstanding contracts expire in March 2013.
The following table summarizes the notional amounts of the Company’s outstanding foreign exchange forward contracts that are designated as net investment hedges:
December 31, 2012 |
December 31, 2011 |
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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 |
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Balance Sheet Location |
December 31, 2012 |
December 31, 2011 |
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Assets: | ||||||||||
Derivatives designated as accounting hedges: | ||||||||||
Interest rate swaps | Other assets | $ | 13.8 | $ | 11.5 | |||||
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Total derivatives designated as accounting hedges | 13.8 | 11.5 | ||||||||
Derivatives not designated as accounting hedges: | ||||||||||
FX forwards on certain assets and liabilities | Other current assets | 1.4 | 1.1 | |||||||
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Total | $ | 15.2 | $ | 12.6 | ||||||
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Liabilities: | ||||||||||
Derivatives designated as accounting hedges: | ||||||||||
Interest rate swaps | Accounts payable and accrued liabilities | $ | 0.7 | $ | 4.5 | |||||
FX forwards on net investment in certain foreign subsidiaries | Accounts payable and accrued liabilities | 1.0 | — | |||||||
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Total derivatives designated as accounting hedges | 1.7 | 4.5 | ||||||||
Derivatives not designated as accounting hedges: | ||||||||||
FX forwards on certain assets and liabilities | Accounts payable and accrued liabilities | 0.7 | 2.3 | |||||||
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Total | $ | 2.4 | $ | 6.8 | ||||||
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The following table summarizes the net gain (loss) on the Company’s foreign exchange forwards which are not designated as hedging instruments as well as the gain (loss) on the interest rate swaps designated as fair value hedges:
Amount of Gain (Loss) Recognized in consolidated statement of operations |
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Year Ended December 31, | ||||||||||||||
2012 | 2011 | 2010 | ||||||||||||
Derivatives designated as accounting hedges | Location on Consolidated Statements of Operations | |||||||||||||
Interest rate swaps | Interest Expense, net | $ | 3.6 | $ | 4.1 | — | ||||||||
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Derivatives not designated as accounting hedges | ||||||||||||||
Foreign exchange forwards | Other non-operating (expense) income | $ | 0.9 | $ | (1.4 | ) | (2.2 | ) | ||||||
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The following table provides information on gains (losses) on the company’s cash flow hedges:
Derivatives in Cash Flow |
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) |
Amount of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
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Year Ended December 31, |
Year Ended December 31, |
Year Ended December 31, |
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2012 | 2011 | 2010 | 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | ||||||||||||||||||||||||||||||||
FX options | $ | — | $ | — | $ | — | Revenue | $ | — | $ | (0.2) | $ | (1.0) | Revenue | $ | — | $ | — | $ | — | ||||||||||||||||||||
Interest rate swaps | (0.1) | (0.6) | (3.1) | Interest income (expense), net |
(2.4) | (3.0) | (2.8) | N/A | — | — | — | |||||||||||||||||||||||||||||
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Total | $ | (0.1) | $ | (0.6) | $ | (3.1) | $ | (2.4) | $ | (3.2) | $ | (3.8) | $ | — | $ | — | $ | — | ||||||||||||||||||||||
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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 income (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) |
Amount of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
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Year Ended December 31, |
Year Ended December 31, |
Year Ended December 31, |
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2012 | 2011 | 2012 | 2011 | 2012 | 2011 | |||||||||||||||||||||||
FX forwards | $ | (2.2 | ) | $ | — | N/A | $ | — | $ | — | N/A | $ | — | $ | — | |||||||||||||
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Total | $ | (2.2 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
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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 |
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December 31, 2012 |
December 31, 2011 |
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FX forwards on net investment hedges | $ | (2.2 | ) | $ | — | |||
Interest rate swaps (1) | (0.7 | ) | (3.0 | ) | ||||
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Total |
$ | (2.9 | ) | $ | (3.0 | ) | ||
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(1) |
The unrecognized hedge losses relating to the cash flow hedge on the 2008 Term Loan are expected to be reclassified into earnings within the next five months as the underlying hedge ends with the full repayment of the 2008 Term Loan in the first half of 2013. |
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NOTE 6 | PROPERTY AND EQUIPMENT, NET |
Property and equipment, net consisted of:
December 31, | ||||||||
2012 | 2011 | |||||||
Office and computer equipment (3 – 20 year estimated useful life) | $ | 119.7 | $ | 106.8 | ||||
Office furniture and fixtures (5 – 10 year estimated useful life) | 40.3 | 40.6 | ||||||
Internal-use computer software (3 – 5 year estimated useful life) | 263.9 | 241.8 | ||||||
Leasehold improvements (3 – 20 year estimated useful life) | 197.5 | 195.8 | ||||||
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Total property and equipment, at cost |
621.4 | 585.0 | ||||||
Less: accumulated depreciation and amortization | (314.3 | ) | (258.2 | ) | ||||
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Total property and equipment, net | $ | 307.1 | $ | 326.8 | ||||
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Depreciation and amortization expense related to the above assets was $63.4 million, $58.7 million, and $49.9 million for the years ended December 31, 2012, 2011 and 2010, respectively.
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NOTE 7 | ACQUISITIONS |
All of the acquisitions described below were accounted for using 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, at the date of acquisition:
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 | |||||||
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Total intangible assets (12 year weighted average life) |
27.1 | |||||||
Goodwill | 54.6 | |||||||
Liabilities assumed | (18.1 | ) | ||||||
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Net assets acquired | $ | 79.5 | ||||||
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Current assets include acquired cash of approximately $10 million. The acquired 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 Company incurred approximately $1 million of costs directly related to the acquisition of B&H during the year ended December 31, 2011. These costs, which primarily consisted of consulting and legal fees, are recorded within selling, general and administrative expenses in the Company’s consolidated statements of operations.
The amount of revenue and expenses included in the Company’s consolidated statement of operations for B&H from the acquisition date through December 31, 2011 was not material. The near term impact to operations and cash flow from this acquisition was not 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 product 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 | |||
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Total fair value of consideration transferred | $ | 199.8 | ||
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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 14. 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 December 31, 2012 and 2011 in accordance with certain indemnification arrangements relating to these UTP’s 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 9.
The Company incurred approximately $7 million of costs directly related to the acquisition of Copal during the year ended December 31, 2011. These costs, which primarily consist of consulting and legal fees, are recorded within selling, general and administrative expenses in the Company’s consolidated statements of operations.
Shown below is the purchase price allocation, which summarizes the fair values of the assets acquired and liabilities assumed, at the date of acquisition:
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 | |||||||
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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 | ) | ||||||
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Net assets acquired | $ | 199.8 | ||||||
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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 December 31, 2012 and 2011 for which a portion has been offset by the note payable in the amount of $14.2 million.
As of December 31, 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 evaluation of options for integrating the entity into the other MA reporting units.
The amount of revenue and expenses for Copal from the acquisition date through December 31, 2011 was not material. The near term impact to operations and cash flow from this acquisition was not 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.
CSI Global Education, Inc.
On November 18, 2010, a subsidiary of the Company acquired CSI Global Education, Inc., Canada’s leading provider of financial learning, credentials, and certification. CSI operates within MA, strengthening the Company’s capabilities for delivering credit and other financial training programs to financial institutions worldwide and bolsters Moody’s efforts to serve as an essential resource to financial market participants. The purchase price was funded with cash on hand.
The aggregate purchase price was $151.4 million in net cash payments to the sellers. There is a 2.5 million Canadian dollar contingent cash payment which is dependent upon the achievement of a certain contractual milestone by January 2016 which is more fully discussed in Note 9.
Shown below is the purchase price allocation, which summarizes the fair values of the assets acquired and liabilities assumed, at the date of acquisition:
Current assets | $ | 5.1 | ||||||
Property and equipment, net | 0.8 | |||||||
Intangible assets: | ||||||||
Trade name (30 year weighted average life) |
$ | 9.0 | ||||||
Client relationships (21 year weighted average life) |
63.1 | |||||||
Trade secret (13 year weighted average life) |
5.8 | |||||||
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Total intangible assets (21 year weighted average life) |
77.9 | |||||||
Goodwill | 104.6 | |||||||
Liabilities assumed | (37.0 | ) | ||||||
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Net assets acquired | $ | 151.4 | ||||||
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Current assets include acquired cash of approximately $2.8 million. The acquired goodwill, which has been assigned to the MA segment, will not be deductible for tax. In 2012 CSI was integrated into MA’s training reporting unit to form the FSTC reporting unit.
The near term impact to operations and cash flow from this acquisition was not material to the Company’s consolidated financial statements.
For all of the acquisitions described above, the Company has not presented proforma combined results for these acquisitions because the impact on the previously reported statements of operations would not have been material.
|
NOTE 8 | GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS |
The following table summarizes the activity in goodwill:
Year Ended December 31, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
MIS | MA | Consolidated | MIS | MA | Consolidated | |||||||||||||||||||
Beginning balance: | ||||||||||||||||||||||||
Goodwill |
$ | 11.0 | $ | 631.9 | $ | 642.9 | $ | 11.4 | $ | 454.1 | $ | 465.5 | ||||||||||||
Accumulated impairment charge |
— | — | — | — | — | — | ||||||||||||||||||
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Total | 11.0 | 631.9 | 642.9 | 11.4 | 454.1 | 465.5 | ||||||||||||||||||
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Additions/adjustments | — | (4.4 | ) | (4.4 | ) | — | 198.5 | 198.5 | ||||||||||||||||
Impairment charge | — | (12.2 | ) | (12.2 | ) | — | — | — | ||||||||||||||||
Foreign currency translation adjustments | 0.5 | 10.3 | 10.8 | (0.4 | ) | (20.7 | ) | (21.1 | ) | |||||||||||||||
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Ending balance: | ||||||||||||||||||||||||
Goodwill |
11.5 | 637.8 | 649.3 | 11.0 | 631.9 | 642.9 | ||||||||||||||||||
Accumulated impairment charge |
— | (12.2 | ) | (12.2 | ) | — | — | — | ||||||||||||||||
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Total | $ | 11.5 | $ | 625.6 | $ | 637.1 | $ | 11.0 | $ | 631.9 | $ | 642.9 | ||||||||||||
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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 7.
The impairment charge above relates to goodwill in the FSTC reporting unit within MA. The Company evaluates its goodwill for potential impairment annually on July 31 or more frequently if impairment indicators arise throughout the year. Projected operating results for the FSTC reporting unit at December 31, 2012 were lower than projections utilized for the annual impairment analysis performed at July 31, 2012 reflecting a contraction in spending for training and certification services for many individuals and global financial institutions amidst current macroeconomic uncertainties. Based on this trend and overall macroeconomic uncertainties, the Company lowered its cash flow forecasts for this reporting unit in the fourth quarter of 2012. Accordingly, the Company performed another goodwill impairment assessment as of December 31, 2012 which resulted in an impairment charge of $12.2 million. The fair value of the FSTC reporting unit utilized in the impairment assessment was estimated using a discounted cash flow methodology and comparable public company and precedent transaction multiples.
Acquired intangible assets consisted of:
December 31, | ||||||||
2012 | 2011 | |||||||
Customer relationships | $ | 219.6 | $ | 217.9 | ||||
Accumulated amortization | (74.0 | ) | (58.6 | ) | ||||
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Net customer relationships |
145.6 | 159.3 | ||||||
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Trade secrets | 31.4 | 31.3 | ||||||
Accumulated amortization | (16.0 | ) | (13.4 | ) | ||||
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Net trade secrets |
15.4 | 17.9 | ||||||
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Software | 73.2 | 70.9 | ||||||
Accumulated amortization | (33.7 | ) | (25.1 | ) | ||||
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Net software |
39.5 | 45.8 | ||||||
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Trade names | 28.3 | 28.1 | ||||||
Accumulated amortization | (10.3 | ) | (9.0 | ) | ||||
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Net trade names |
18.0 | 19.1 | ||||||
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Other | 24.9 | 24.6 | ||||||
Accumulated amortization | (16.9 | ) | (13.1 | ) | ||||
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Net other |
8.0 | 11.5 | ||||||
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Total |
$ | 226.5 | $ | 253.6 | ||||
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Other intangible assets primarily consist of databases and covenants not to compete. Amortization expense relating to intangible assets is as follows:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Amortization expense | $ | 30.1 | $ | 20.5 | $ | 16.4 |
Estimated future annual amortization expense for intangible assets subject to amortization is as follows:
Year Ended December 31, |
||||
2013 | $ | 28.2 | ||
2014 | 22.9 | |||
2015 | 21.6 | |||
2016 | 20.4 | |||
2017 | 15.5 | |||
Thereafter | 117.9 |
Amortizable intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In conjunction with the assessment of goodwill impairment at July 31, 2012, the Company reviewed the recoverability of certain customer lists within its FSTC reporting unit. This review resulted in an impairment of approximately $1 million in the third quarter of 2012 which is recorded in depreciation and amortization expense in the consolidated statement of operations. The fair value of these customer lists was determined using a discounted cash flow analysis. The Company again reviewed the recoverability of these customer lists in the fourth quarter of 2012 in conjunction with the quantitative goodwill impairment test performed at December 31, 2012. Based on this assessment, there was no further impairment of the customer lists in the fourth quarter of 2012. For all other intangible assets, there were no such events or changes during 2012 that would indicate that the carrying amount of amortizable intangible assets in any of the Company’s reporting units may not be recoverable. This determination was made based on improving market conditions for the reporting unit where the intangible asset resides and an assessment of projected cash flows for all reporting units. Additionally, there were no events or circumstances during 2012 that would indicate the need for an adjustment of the remaining useful lives of these amortizable intangible assets.
|
NOTE 9 | FAIR VALUE |
The table below presents information about items, which are carried at fair value on a recurring basis at December 31, 2012 and 2011:
Fair Value Measurement as of December 31, 2012 | ||||||||||||||||
Description |
Balance | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: | ||||||||||||||||
Derivatives (a) |
$ | 15.2 | $ | — | $ | 15.2 | $ | — | ||||||||
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Total |
$ | 15.2 | $ | — | $ | 15.2 | $ | — | ||||||||
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Liabilities: | ||||||||||||||||
Derivatives (a) |
$ | 2.4 | $ | — | $ | 2.4 | $ | — | ||||||||
Contingent consideration arising from acquisitions (b) |
9.0 | — | — | 9.0 | ||||||||||||
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Total |
$ | 11.4 | $ | — | $ | 2.4 | $ | 9.0 | ||||||||
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Fair Value Measurement as of December 31, 2011 | ||||||||||||||||
Description |
Balance | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: | ||||||||||||||||
Derivatives (a) |
$ | 12.6 | $ | — | $ | 12.6 | $ | — | ||||||||
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Total |
$ | 12.6 | $ | — | $ | 12.6 | $ | — | ||||||||
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Liabilities: | ||||||||||||||||
Derivatives (a) |
$ | 6.8 | $ | — | $ | 6.8 | $ | — | ||||||||
Contingent consideration arising from acquisitions (b) |
9.1 | — | — | 9.1 | ||||||||||||
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Total |
$ | 15.9 | $ | — | $ | 6.8 | $ | 9.1 | ||||||||
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(a) | Represents interest rate swaps and FX forwards on certain assets and liabilities as well as on certain non U.S. dollar net investments in certain foreign subsidiaries more fully discussed in Note 5. |
(b) | Represents contingent consideration liabilities pursuant to the agreements for certain MA acquisitions which are more fully discussed in Note 7. |
The following table summarizes the changes in the fair value of the Company’s Level 3 liabilities:
Contingent Consideration Year Ended December 31, |
||||||||
2012 | 2011 | |||||||
Balance as of January 1 | $ | 9.1 | $ | 2.1 | ||||
Issuances | — | 7.4 | ||||||
Settlements | (0.5 | ) | (0.3 | ) | ||||
Losses included in earnings | 0.1 | 0.3 | ||||||
Foreign currency translation adjustments | 0.3 | (0.4 | ) | |||||
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Balance as of December 31 | $ | 9.0 | $ | 9.1 | ||||
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The losses included in earnings in the table above are recorded within SG&A expenses in the Company’s consolidated statements of operations. During the year ended December 31, 2012, there were immaterial gains relating to contingent consideration obligations that were settled during the year. The remaining losses of $0.1 million relate to contingent consideration obligations outstanding at December 31, 2012.
Of the $9.0 million in contingent consideration obligations as of December 31, 2012, $2.5 million is classified within accounts payable and accrued liabilities with the remaining $6.5 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 December 31, 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 has 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 December 31, 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 7. 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.
|
NOTE 10 | DETAIL OF CERTAIN BALANCE SHEET INFORMATION |
The following tables contain additional detail related to certain balance sheet captions:
December 31, | ||||||||
2012 | 2011 | |||||||
Other current assets: | ||||||||
Prepaid taxes |
$ | 31.8 | $ | 27.6 | ||||
Prepaid expenses |
47.3 | 44.6 | ||||||
Other |
12.8 | 5.4 | ||||||
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Total other current assets |
$ | 91.9 | $ | 77.6 | ||||
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December 31, | ||||||||
2012 | 2011 | |||||||
Other assets: | ||||||||
Investments in joint ventures |
$ | 38.3 | $ | 37.2 | ||||
Deposits for real-estate leases |
10.0 | 12.2 | ||||||
Other |
47.7 | 32.6 | ||||||
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Total other assets |
$ | 96.0 | $ | 82.0 | ||||
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December 31, | ||||||||
2012 | 2011 | |||||||
Accounts payable and accrued liabilities: | ||||||||
Salaries and benefits |
$ | 79.2 | $ | 67.5 | ||||
Incentive compensation |
162.6 | 114.1 | ||||||
Profit sharing contribution |
12.6 | 7.1 | ||||||
Customer credits, advanced payments and advanced billings |
21.5 | 17.6 | ||||||
Self-insurance reserves |
55.8 | 27.1 | ||||||
Dividends |
47.7 | 38.2 | ||||||
Professional service fees |
30.2 | 29.7 | ||||||
Interest accrued on debt |
23.4 | 15.1 | ||||||
Accounts payable |
14.3 | 16.4 | ||||||
Income taxes (see Note 13) |
56.1 | 23.4 | ||||||
Deferred rent-current portion |
1.1 | 1.7 | ||||||
Pension and other retirement employee benefits (see Note 11) |
4.4 | 3.8 | ||||||
Interest accrued on UTPs |
— | 29.7 | ||||||
Other |
46.4 | 60.9 | ||||||
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Total accounts payable and accrued liabilities |
$ | 555.3 | $ | 452.3 | ||||
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December 31, | ||||||||
2012 | 2011 | |||||||
Other liabilities: | ||||||||
Pension and other retirement employee benefits (see Note 11) |
$ | 213.3 | $ | 187.5 | ||||
Deferred rent-non-current portion |
110.2 | 108.8 | ||||||
Interest accrued on UTPs |
10.6 | 11.8 | ||||||
Legacy and other tax matters |
37.1 | 52.6 | ||||||
Other |
38.9 | 44.1 | ||||||
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Total other liabilities |
$ | 410.1 | $ | 404.8 | ||||
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Redeemable Noncontrolling Interest:
The following table shows changes in the redeemable noncontrolling interest related to the acquisition of Copal:
Year Ended December 31, | ||||||||
2012 | 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 |
3.6 | 1.0 | ||||||
Distributions |
(3.6 | ) | — | |||||
FX translation |
1.6 | (1.7 | ) | |||||
Adjustment to redemption value |
3.4 | — | ||||||
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Balance December 31, | $ | 72.3 | $ | 60.5 | ||||
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* | 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 7 for further detail on this arrangement. |
AOCI:
The following table summarizes the components of the Company’s AOCI:
(in millions) | December 31, | |||||||
2012 | 2011 | |||||||
Currency translation adjustments, net of tax |
$ | 10.9 | $ | (23.3 | ) | |||
Net actuarial losses and net prior service cost related to pension and other retirement employee benefits, net of tax |
(90.1 | ) | (81.2 | ) | ||||
Unrealized losses on cash flow and net investment hedges, net of tax |
(2.9 | ) | (3.0 | ) | ||||
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Total accumulated other comprehensive loss |
$ | (82.1 | ) | $ | (107.5 | ) | ||
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Changes in the Company’s self-insurance reserves are as follows:
Year Ended December 31, | ||||||||||||
(in millions) | 2012 | 2011 | 2010 | |||||||||
Balance January 1, | $ | 27.1 | $ | 30.0 | $ | 19.9 | ||||||
Charged to costs and expenses |
38.1 | 10.9 | 29.1 | |||||||||
Payments |
(9.4 | ) | (13.8 | ) | (19.0 | ) | ||||||
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Balance December 31,* | $ | 55.8 | $ | 27.1 | $ | 30.0 | ||||||
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* | Refer to Note 2, “Contingencies” for further information on the Company’s self-insurance reserves. These reserves primarily relate to legal defense costs for claims from 2008 and 2009. |
|
NOTE 11 | PENSION AND OTHER RETIREMENT BENEFITS |
U.S. Plans
Moody’s maintains funded and unfunded noncontributory Defined Benefit Pension Plans. The U.S. plans provide defined benefits using a cash balance formula based on years of service and career average salary or final average pay for selected executives. The Company also provides certain healthcare and life insurance benefits for retired U.S. employees. The retirement healthcare plans are contributory; the life insurance plans are noncontributory. Moody’s funded and unfunded U.S. pension plans, the U.S. retirement healthcare plans and the U.S. retirement life insurance plans are collectively referred to herein as the “Retirement Plans”. The U.S. retirement healthcare plans and the U.S. retirement life insurance plans are collectively referred to herein as the “Other Retirement Plans”. Effective at the Distribution Date, Moody’s assumed responsibility for the pension and other retirement benefits relating to its active employees. New D&B has assumed responsibility for the Company’s retirees and vested terminated employees as of the Distribution Date.
Through 2007, substantially all U.S. employees were eligible to participate in the Company’s DBPPs. Effective January 1, 2008, the Company no longer offers DBPPs to employees hired or rehired on or after January 1, 2008 and new hires instead will receive a retirement contribution in 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 benefit formulas.
Following is a summary of changes in benefit obligations and fair value of plan assets for the Retirement Plans for the years ended December 31:
Pension Plans | Other Retirement Plans | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Change in benefit obligation: | ||||||||||||||||
Benefit obligation, beginning of the period |
$ | (298.8 | ) | (242.5 | ) | $ | (20.2 | ) | (15.6 | ) | ||||||
Service cost |
(18.9 | ) | (15.1 | ) | (1.5 | ) | (1.1 | ) | ||||||||
Interest cost |
(13.1 | ) | (13.1 | ) | (0.7 | ) | (0.8 | ) | ||||||||
Plan participants’ contributions |
— | — | (0.3 | ) | (0.2 | ) | ||||||||||
Benefits paid |
5.7 | 13.6 | 1.0 | 0.8 | ||||||||||||
Actuarial gain (loss) |
(11.0 | ) | (4.9 | ) | 1.1 | (0.9 | ) | |||||||||
Assumption changes |
(20.2 | ) | (36.8 | ) | (1.2 | ) | (2.4 | ) | ||||||||
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Benefit obligation, end of the period | (356.3 | ) | (298.8 | ) | (21.8 | ) | (20.2 | ) | ||||||||
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Change in plan assets: | ||||||||||||||||
Fair value of plan assets, beginning of the period |
133.0 | 120.4 | — | — | ||||||||||||
Actual return on plan assets |
19.0 | 0.8 | — | — | ||||||||||||
Benefits paid |
(5.7 | ) | (13.6 | ) | (1.0 | ) | (0.8 | ) | ||||||||
Employer contributions |
21.3 | 25.4 | 0.7 | 0.6 | ||||||||||||
Plan participants’ contributions |
— | — | 0.3 | 0.2 | ||||||||||||
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Fair value of plan assets, end of period |
167.6 | 133.0 | — | — | ||||||||||||
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Funded status of the plans | (188.7 | ) | (165.8 | ) | (21.8 | ) | (20.2 | ) | ||||||||
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Amounts recorded on the consolidated balance sheets: | ||||||||||||||||
Pension and retirement benefits liability-current |
(3.6 | ) | (3.0 | ) | (0.8 | ) | (0.8 | ) | ||||||||
Pension and retirement benefits liability-non current |
(185.1 | ) | (162.8 | ) | (21.0 | ) | (19.4 | ) | ||||||||
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Net amount recognized | $ | (188.7 | ) | (165.8 | ) | $ | (21.8 | ) | (20.2 | ) | ||||||
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Accumulated benefit obligation, end of the period | $ | (298.4 | ) | (256.1 | ) | |||||||||||
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The following information is for those pension plans with an accumulated benefit obligation in excess of plan assets:
December 31, | ||||||||
2012 | 2011 | |||||||
Aggregate projected benefit obligation | $ | 356.3 | $ | 298.8 | ||||
Aggregate accumulated benefit obligation | $ | 298.4 | $ | 256.1 | ||||
Aggregate fair value of plan assets | $ | 167.6 | $ | 133.0 |
The following table summarizes the pre-tax net actuarial losses and prior service cost recognized in AOCI for the Company’s Retirement Plans as of December 31:
Pension Plans | Other Retirement Plans | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Net actuarial losses | $ | (142.7 | ) | $ | (127.1 | ) | $ | (6.0 | ) | $ | (6.1 | ) | ||||
Net prior service costs | (4.0 | ) | (4.7 | ) | — | — | ||||||||||
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Total recognized in AOCI- pretax |
$ | (146.7 | ) | $ | (131.8 | ) | $ | (6.0 | ) | $ | (6.1 | ) | ||||
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The following table summarizes the estimated pre-tax net actuarial losses and prior service cost for the Company’s Retirement Plans that will be amortized from AOCI and recognized as components of net periodic expense during the next fiscal year:
Pension Plans | Other Retirement Plans | |||||||
Net actuarial losses | $ | 11.1 | $ | 0.4 | ||||
Net prior service costs | 0.6 | — | ||||||
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Total to be recognized as components of net periodic expense |
$ | 11.7 | $ | 0.4 | ||||
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Net periodic benefit expenses recognized for the Retirement Plans for years ended December 31:
Pension Plans | Other Retirement Plans | |||||||||||||||||||||||
2012 | 2011 | 2010 | 2012 | 2011 | 2010 | |||||||||||||||||||
Components of net periodic expense | ||||||||||||||||||||||||
Service cost | $ | 18.9 | $ | 15.1 | $ | 13.5 | $ | 1.5 | $ | 1.1 | $ | 0.9 | ||||||||||||
Interest cost | 13.1 | 13.1 | 12.0 | 0.7 | 0.8 | 0.8 | ||||||||||||||||||
Expected return on plan assets | (12.5 | ) | (11.9 | ) | (10.5 | ) | — | — | — | |||||||||||||||
Amortization of net actuarial loss from earlier periods | 9.1 | 5.0 | 2.8 | 0.3 | 0.3 | 0.1 | ||||||||||||||||||
Amortization of net prior service costs from earlier periods | 0.7 | 0.6 | 0.7 | — | — | — | ||||||||||||||||||
Settlement charges | — | 1.6 | 1.3 | — | — | — | ||||||||||||||||||
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Net periodic expense | $ | 29.3 | $ | 23.5 | $ | 19.8 | $ | 2.5 | $ | 2.2 | $ | 1.8 | ||||||||||||
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The following table summarizes the pre-tax amounts recorded in OCI related to the Company’s Retirement Plans for the years ended December 31:
Pension Plans | Other Retirement Plans | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Amortization of net actuarial losses | $ | 9.1 | $ | 5.0 | $ | 0.3 | $ | 0.3 | ||||||||
Amortization of prior service costs | 0.7 | 0.6 | — | — | ||||||||||||
Accelerated recognition of actuarial loss due to settlement | — | 1.6 | — | — | ||||||||||||
Net actuarial loss arising during the period | (24.7 | ) | (52.8 | ) | (0.2 | ) | (3.3 | ) | ||||||||
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Total recognized in OCI – pre-tax |
$ | (14.9 | ) | $ | (45.6 | ) | $ | 0.1 | $ | (3.0 | ) | |||||
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ADDITIONAL INFORMATION:
Assumptions – Retirement Plans
Weighted-average assumptions used to determine benefit obligations at December 31:
Pension Plans | Other Retirement Plans | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Discount rate | 3.82 | % | 4.25 | % | 3.55 | % | 4.05 | % | ||||||||
Rate of compensation increase | 4.00 | % | 4.00 | % | — | — |
Weighted-average assumptions used to determine net periodic benefit expense for years ended December 31:
Pension Plans | Other Retirement Plans | |||||||||||||||||||||||
2012 | 2011 | 2010 | 2012 | 2011 | 2010 | |||||||||||||||||||
Discount rate | 4.25 | % | 5.39 | % | 5.95 | % | 4.05 | % | 5.15 | % | 5.75 | % | ||||||||||||
Expected return on plan assets | 7.85 | % | 8.35 | % | 8.35 | % | — | — | — | |||||||||||||||
Rate of compensation increase | 4.00 | % | 4.00 | % | 4.00 | % | — | — | — |
The expected rate of return on plan assets represents the Company’s best estimate of the long-term return on plan assets and is determined by using a building block approach, which generally weighs the underlying long-term expected rate of return for each major asset class based on their respective allocation target within the plan portfolio, net of plan paid expenses. As the assumption reflects a long-term time horizon, the plan performance in any one particular year does not, by itself, significantly influence the Company’s evaluation. For 2012, the expected rate of return used in calculating the net periodic benefit costs was 7.85%. For 2013, the Company reduced the expected rate of return assumption to 7.30% to reflect the Company’s current view of long-term capital market outlook and is commensurate with the returns expected to be generated by the plan assets under Company’s current investment strategy.
Assumed Healthcare Cost Trend Rates at December 31:
2012 | 2011 | 2010 | ||||||||||||||||||||||
Pre-age 65 | Post-age 65 | Pre-age 65 | Post-age 65 | Pre-age 65 | Post-age 65 | |||||||||||||||||||
Healthcare cost trend rate assumed for the following year |
6.9 | % | 7.9 | % | 7.4 | % | 8.4 | % | 7.9 | % | 8.9 | % | ||||||||||||
Ultimate rate to which the cost trend rate is assumed to decline (ultimate trend rate) |
5.0% |
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5.0% |
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5.0% | |||||||||||||||||||
Year that the rate reaches the ultimate trend rate | 2020 |
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2020 |
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2020 |
The assumed health cost trend rate reflects different expectations for the medical and prescribed medication components of health care costs for pre and post-65 retirees. As the Company subsidies for retiree healthcare coverage are capped at the 2005 level, for the majority of the retirement health plan participants, retiree contributions are assumed to increase at the same rate as the healthcare cost trend rates.
In 2012, the Company amended its retiree medical plan to modify its current design. Effective January 1, 2013, the newly implemented plan design will provide current retirees age 65 and older with the option over the next three years to either enroll in a new Health Reimbursement Account (HRA) Program and receive a fixed amount annual subsidy or continue to stay in the current retiree medical plan. All future retirees age 65 and older will have to participate in the new HRA Program. There will be no change to pre-65 coverage. As the new plan is designed to be cost neutral to the Company, the amendment of the plan has no significant impact to the plan and a one percentage-point increase or decrease in assumed healthcare cost trend rates would not have affected total service and interest cost and would have a minimal impact on the retiree medical benefit obligation.
Plan Assets
Moody’s investment objective for the assets in the funded pension plan is to earn total returns that will minimize future contribution requirements over the long-term within a prudent level of risk. The Company works with its independent investment consultants to determine asset allocation targets for its pension plan investment portfolio based on its assessment of business and financial conditions, demographic and actuarial data, funding characteristics, and related risk factors. Other relevant factors, including historical and forward looking views of inflation and capital market returns, are also considered. Risk management practices include monitoring of the plan, diversification across asset classes and investment styles, and periodic rebalancing toward asset allocation targets. The Company’s monitoring of the plan includes ongoing reviews of investment performance, annual liability measurements, periodic asset/liability studies, and investment portfolio reviews.
The Company’s current target asset allocation is approximately 60% (range of 50% to 70%) in equity securities, 30% (range of 25% to 35%) in fixed income securities and 10% (range of 7% to 13%) in other investments and the plan will use a combination of active and passive investment strategies and different investment styles for its investment portfolios within each asset class. The plan’s equity investments are diversified across U.S. and non-U.S. stocks of small, medium and large capitalization. The plan’s fixed income investments are diversified principally across U.S. and non-U.S. government and corporate bonds which are expected to help reduce plan exposure to interest rate variation and to better align assets with obligations. Approximately 3% of total plan assets may be invested in funds which invest in debts rated below investment grade and 3% may be invested in emerging market debt. The plan’s other investments are made through private real estate and convertible securities funds and these investments are expected to provide additional diversification benefits and absolute return enhancement to the plan assets. The Company does not use derivatives to leverage the portfolio. The overall allocation is expected to help protect the plan’s funded status while generating sufficiently stable returns over the long-term.
Fair value of the assets in the Company’s funded pension plan by asset category at December 31, 2012 and 2011 is determined based on the hierarchy of fair value measurements as defined in Note 2 to these financial statements and is as follows:
Fair Value Measurement as of December 31, 2012 | ||||||||||||||||||||
Asset Category |
Balance | Level 1 | Level 2 | Level 3 | % of total assets |
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Cash and cash equivalent | $ | 0.2 | $ | — | $ | 0.2 | $ | — | — | % | ||||||||||
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Emerging markets equity fund | 13.3 | $ | 13.3 | $ | — | — | 8 | % | ||||||||||||
Common/collective trust funds – equity securities | ||||||||||||||||||||
U.S. large-cap |
32.0 | — | 32.0 | — | 19 | % | ||||||||||||||
U.S. small and mid-cap |
10.7 | — | 10.7 | — | 6 | % | ||||||||||||||
International |
44.1 | — | 44.1 | — | 27 | % | ||||||||||||||
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Total equity investments | 100.1 | 13.3 | 86.8 | — | 60 | % | ||||||||||||||
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Common/collective trust funds – fixed income securities | ||||||||||||||||||||
Long-term government/treasury bonds |
13.8 | — | 13.8 | — | 8 | % | ||||||||||||||
Long-term investment grade corporate bonds |
17.5 | — | 17.5 | — | 11 | % | ||||||||||||||
U.S. Treasury Inflation-Protected Securities (TIPs) |
8.5 | — | 8.5 | — | 5 | % | ||||||||||||||
Emerging markets bonds |
5.4 | — | 5.4 | — | 3 | % | ||||||||||||||
High yield bonds |
5.2 | — | 5.2 | — | 3 | % | ||||||||||||||
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Total fixed-income investments | 50.4 | — | 50.4 | — | 30 | % | ||||||||||||||
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Common/collective trust funds – convertible securities | 4.8 | — | 4.8 | — | 3 | % | ||||||||||||||
Private real estate fund | 12.1 | — | — | 12.1 | 7 | % | ||||||||||||||
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Total other investment | 16.9 | — | 4.8 | 12.1 | 10 | % | ||||||||||||||
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Total Assets | $ | 167.6 | $ | 13.3 | $ | 142.2 | $ | 12.1 | 100 | % | ||||||||||
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Fair Value Measurement as of December 31, 2011 | ||||||||||||||||||||
Asset Category |
Balance | Level 1 | Level 2 | Level 3 | % of total assets |
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Cash and cash equivalent | $ | 0.2 | $ | — | $ | 0.2 | $ | — | — | % | ||||||||||
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Emerging markets equity fund | 7.7 | $ | 7.7 | $ | — | — | 6 | % | ||||||||||||
Common/collective trust funds – equity securities | ||||||||||||||||||||
U.S. large-cap |
26.4 | — | 26.4 | — | 20 | % | ||||||||||||||
U.S. small and mid-cap |
9.3 | — | 9.3 | — | 7 | % | ||||||||||||||
International |
30.4 | — | 30.4 | — | 23 | % | ||||||||||||||
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Total equity investments | 73.8 | 7.7 | 66.1 | — | 56 | % | ||||||||||||||
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Common/collective trust funds – fixed income securities | ||||||||||||||||||||
Long-term government/treasury bonds |
13.9 | — | 13.9 | — | 10 | % | ||||||||||||||
Long-term investment grade corporate bonds |
14.9 | — | 14.9 | — | 11 | % | ||||||||||||||
U.S. Treasury Inflation-Protected Securities (TIPs) |
7.6 | — | 7.6 | — | 6 | % | ||||||||||||||
Emerging markets bonds |
4.5 | — | 4.5 | — | 3 | % | ||||||||||||||
High yield bonds |
3.6 | — | 3.6 | — | 3 | % | ||||||||||||||
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Total fixed-income investments | 44.5 | — | 44.5 | — | 33 | % | ||||||||||||||
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Common/collective trust funds – convertible securities | 4.8 | — | 4.8 | — | 4 | % | ||||||||||||||
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Private real estate fund | 9.7 | — | — | 9.7 | 7 | % | ||||||||||||||
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Total other investment | 14.5 | — | 4.8 | 9.7 | 11 | % | ||||||||||||||
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Total Assets | $ | 133.0 | $ | 7.7 | $ | 115.6 | $ | 9.7 | 100 | % | ||||||||||
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Cash and cash equivalent is primarily comprised of investment in money market mutual funds. In determining fair value, Level 1 investments are valued based on quoted market prices in active markets. Investments in common/collective trust funds are valued using the net asset value (NAV) per unit in each fund. The NAV is based on the value of the underlying investments owned by each trust, minus its liabilities, and then divided by the number of shares outstanding. Common/collective trust funds are categorized in Level 2 to the extent that they are readily redeemable at their NAV or else they are categorized in Level 3 of the fair value hierarchy. The Company’s investment in a private real estate fund is valued using the NAV per unit of funds that are invested in real property, and the real property is valued using independent market appraisals. Since appraisals involve utilization of significant unobservable inputs and the private real estate fund is not readily redeemable for cash, the Company’s investment in the private real estate fund is categorized in Level 3.
The table below is a summary of changes in the fair value of the Plan’s Level 3 assets:
Real estate investment fund: | ||||
Balance as of December 31, 2011 | $ | 9.7 | ||
Return on plan assets related to assets held as of December 31, 2012 | 0.8 | |||
Return on plan assets related to assets sold during the period | — | |||
Purchases (sales), net | 1.6 | |||
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Balance as of December 31, 2012 | $ | 12.1 | ||
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Except for the Company’s U.S. funded pension plan, all of Moody’s Retirement Plans are unfunded and therefore have no plan assets.
Cash Flows
The Company contributed $17.8 million and $13.6 million to its U.S. funded pension plan during the years ended December 31, 2012 and 2011, respectively. The Company made payments of $3.5 million and $11.8 million related to its U.S. unfunded pension plan obligations during the years ended December 31, 2012 and 2011, respectively, which included lump sum settlement payments of $6.9 million in 2011. The Company made payments of $0.7 million and $0.6 million to its Other Retirement Plans during the years ended December 31, 2012 and 2011, respectively. The Company presently anticipates making contributions of $15.5 million to its funded pension plan and anticipates making payments of $3.6 million related to its unfunded U.S. pension plans and $0.8 million related to its Other Retirement Plans during the year ended December 31, 2013.
Estimated Future Benefits Payable
Estimated future benefits payments for the Retirement Plans are as follows at ended December 31, 2012:
Year Ending December 31, |
Pension Plans | Other Retirement Plans | ||||||
2013 | $ | 6.4 | $ | 0.8 | ||||
2014 | 7.5 | 0.9 | ||||||
2015 | 7.9 | 1.0 | ||||||
2016 | 10.5 | 1.2 | ||||||
2017 | 11.0 | 1.3 | ||||||
2018 – 2022 | $ | 108.5 | $ | 8.3 |
Defined Contribution Plans
Moody’s has a Profit Participation Plan covering substantially all U.S. employees. The Profit Participation Plan provides for an employee salary deferral and the Company matches employee contributions with cash contributions equal to 50% of employee contribution up to a maximum of 3% of the employee’s pay. Moody’s also makes additional contributions to the Profit Participation Plan based on year-to-year growth in the Company’s EPS. Effective January 1, 2008, all new hires are automatically enrolled in the Profit Participation Plan when they meet eligibility requirements unless they decline participation. As the Company’s U.S. DBPPs are closed to new entrants effective January 1, 2008, all eligible new hires will instead receive a retirement contribution into the Profit Participation Plan in value similar to the pension benefits. Additionally, effective January 1, 2008, the Company implemented a deferred compensation plan in the U.S., which is unfunded and provides for employee deferral of compensation and Company matching contributions related to compensation in excess of the IRS limitations on benefits and contributions under qualified retirement plans. Total expenses associated with U.S. defined contribution plans were $24.5 million, $14.9 million and $19.4 million in 2012, 2011, and 2010, respectively.
Effective January 1, 2008, Moody’s has designated the Moody’s Stock Fund, an investment option under the Profit Participation Plan, as an Employee Stock Ownership Plan and, as a result, participants in the Moody’s Stock Fund may receive dividends in cash or may reinvest such dividends into the Moody’s Stock Fund. Moody’s paid approximately $0.4 million and $0.3 million in dividends during the years ended December 31, 2012 and 2011, respectively, for the Company’s common shares held by the Moody’s Stock Fund. The Company records the dividends as a reduction of retained earnings in the Consolidated Statements of Shareholders’ Equity (Deficit). The Moody’s Stock Fund held approximately 580,000 and 610,000 shares of Moody’s common stock at December 31, 2012 and 2011, respectively.
International Plans
Certain of the Company’s international operations provide pension benefits to their employees. For defined contribution plans, company contributions are primarily determined as a percentage of employees’ eligible compensation. Moody’s also makes contributions to non-U.S. employees under a profit sharing plan which is based on year-to-year growth in the Company’s diluted EPS. Expenses related to these defined contribution plans for the years ended December 31, 2012, 2011 and 2010 were $18.8 million, $16.3 million and $11.8 million, respectively.
For defined benefit plans, the Company maintains various unfunded DBPPs and retirement health benefit plan for certain of its non-U.S. subsidiaries located in Germany, France and Canada. These unfunded DBPPs are generally based on each eligible employee’s years of credited service and on compensation levels as specified in the plans. The DBPP in Germany was closed to new entrants in 2002. Total defined benefit pension liabilities recorded related to non-U.S. pension plans was $7.2 million, $5.3 million and $4.6 million based on a weighted average discount rate of 3.53%, 4.79% and 5.28% at December 31, 2012, 2011 and 2010, respectively. The pension liabilities recorded as of December 31, 2012 represent the unfunded status of these pension plans and were recognized in the consolidated balance sheet as non-current liabilities. Total pension expense recorded for the years ended December 31, 2012, 2011 and 2010 was approximately $0.6 million, $0.6 million and $0.5 million, respectively. These amounts are not included in the tables above. As of December 31, 2012, the Company has included in AOCI net actuarial losses of $0.5 million ($0.3 million net of tax) related to non-U.S. pension plans that have yet to be recognized as increases to net periodic pension expense and the Company expects its 2013 amortization of the net actuarial losses to be immaterial. The Company’s non-U.S. other retirement benefit obligation is not material as of December 31, 2012.
|
NOTE 12 | STOCK - BASED COMPENSATION PLANS |
Under the 1998 Plan, 33.0 million shares of the Company’s common stock have been reserved for issuance. The 2001 Plan, which is shareholder approved, permits the granting of up to 35.6 million shares, of which not more than 15.0 million shares are available for grants of awards other than stock options. The Stock Plans also provide for the granting of restricted stock. The Stock Plans provide that options are exercisable not later than ten years from the grant date. The vesting period for awards under the Stock Plans is generally determined by the Board at the date of the grant and has been four years except for employees who are at or near retirement eligibility, as defined, for which vesting is between one and four years. Additionally, the vesting period is three years for certain performance-based 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. Options may not be granted at less than the fair market value of the Company’s common stock at the date of grant.
The Company maintains the Directors’ Plan for its Board, which permits the granting of awards in the form of non-qualified stock options, restricted stock or performance shares. The Directors’ Plan provides that options are exercisable not later than ten years from the grant date. The vesting period is determined by the Board at the date of the grant and is generally one year for both options and restricted stock. Under the Directors’ Plan, 0.8 million shares of common stock were reserved for issuance. Any director of the Company who is not an employee of the Company or any of its subsidiaries as of the date that an award is granted is eligible to participate in the Directors’ Plan.
Presented below is a summary of the stock-based compensation expense and associated tax benefit in the accompanying Consolidated Statements of Operations:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Stock-based compensation expense | $ | 64.5 | $ | 56.7 | $ | 56.6 | ||||||
Tax benefit | $ | 23.3 | $ | 18.1 | $ | 23.9 |
The fair value of each employee stock option award is estimated on the date of grant using the Black-Scholes option-pricing model that uses the assumptions noted below. The expected dividend yield is derived from the annual dividend rate on the date of grant. The expected stock volatility is based on an assessment of historical weekly stock prices of the Company as well as implied volatility from Moody’s traded options. The risk-free interest rate is based on U.S. government zero coupon bonds with maturities similar to the expected holding period. The expected holding period was determined by examining historical and projected post-vesting exercise behavior activity.
The following weighted average assumptions were used for options granted:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Expected dividend yield | 1.66 | % | 1.53 | % | 1.58 | % | ||||||
Expected stock volatility | 44 | % | 41 | % | 44 | % | ||||||
Risk-free interest rate | 1.55 | % | 3.33 | % | 2.73 | % | ||||||
Expected holding period | 7.4 years | 7.6 years | 5.9 years | |||||||||
Grant date fair value | $ | 15.19 | $ | 12.49 | $ | 10.38 |
A summary of option activity as of December 31, 2012 and changes during the year then ended is presented below:
Options |
Shares | Weighted Average Exercise Price Per Share |
Weighted Average Remaining Contractual Term |
Aggregate Intrinsic Value |
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Outstanding, December 31, 2011 | 17.4 | $ | 39.60 | |||||||||||||
Granted | 0.5 | 38.68 | ||||||||||||||
Exercised | (4.4 | ) | 28.77 | |||||||||||||
Forfeited | (0.1 | ) | 27.66 | |||||||||||||
Expired | (0.4 | ) | 57.28 | |||||||||||||
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Outstanding, December 31, 2012 | 13.0 | $ | 42.82 | 4.6 yrs | $ | 163.9 | ||||||||||
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Vested and expected to vest, December 31, 2012 | 12.8 | $ | 43.05 | 4.5 yrs | $ | 159.2 | ||||||||||
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Exercisable, December 31, 2012 | 10.4 | $ | 46.14 | 3.9 yrs | $ | 109.9 | ||||||||||
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The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between Moody’s closing stock price on the last trading day of the year ended December 31, 2012 and the exercise prices, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options as of December 31, 2012. This amount varies based on the fair value of Moody’s stock. As of December 31, 2012 there was $11.9 million of total unrecognized compensation expense related to options. The expense is expected to be recognized over a weighted average period of 1.3 years.
The following table summarizes information relating to stock option exercises:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Proceeds from stock option exercises | $ | 127.4 | $ | 50.3 | $ | 36.4 | ||||||
Aggregate intrinsic value | $ | 61.3 | $ | 25.3 | $ | 19.7 | ||||||
Tax benefit realized upon exercise | $ | 23.4 | $ | 9.6 | $ | 7.8 |
A summary of the status of the Company’s nonvested restricted stock as of December 31, 2012 and changes during the year then ended is presented below:
Nonvested Restricted Stock |
Shares | Weighted Average Grant Date Fair Value Per Share |
||||||
Balance, December 31, 2011 | 2.8 | $ | 30.65 | |||||
Granted |
1.3 | 38.62 | ||||||
Vested |
(1.0 | ) | 33.82 | |||||
Forfeited |
(0.1 | ) | 32.07 | |||||
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Balance, December 31, 2012 | 3.0 | $ | 33.08 | |||||
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As of December 31, 2012, there was $56.5 million of total unrecognized compensation expense related to nonvested restricted stock. The expense is expected to be recognized over a weighted average period of 1.7 years.
The following table summarizes information relating to the vesting of restricted stock awards:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Fair value of vested shares | $ | 37.8 | $ | 18.9 | $ | 12.4 | ||||||
Tax benefit realized upon vesting | $ | 13.4 | $ | 6.9 | $ | 4.7 |
A summary of the status of the Company’s performance-based restricted stock as of December 31, 2012 and changes during the year then ended is presented below:
Performance-based restricted stock |
Shares | Weighted Average Grant Date Fair Value Per Share |
||||||
Balance, December 31, 2011 | 1.0 | $ | 26.92 | |||||
Granted |
0.3 | 36.78 | ||||||
Vested |
(0.5 | ) | 25.27 | |||||
Adjustment to shares expected to vest* |
0.2 | 33.67 | ||||||
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Balance, December 31, 2012 | 1.0 | $ | 30.06 | |||||
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* | The adjustment reflects additional shares expected to vest based on the Company’s projected achievement of certain non-market based performance metrics as of December 31, 2012. |
As of December 31, 2012, there was $15.5 million of total unrecognized compensation expense related to this plan. The expense is expected to be recognized over a weighted average period of 0.9 years.
The Company has a policy of issuing treasury stock to satisfy shares issued under stock-based compensation plans.
In addition, the Company also sponsors the ESPP. Under the ESPP, 6.0 million shares of common stock were reserved for issuance. The ESPP allows eligible employees to purchase common stock of the Company on a monthly basis at a discount to the average of the high and the low trading prices on the New York Stock Exchange on the last trading day of each month. This discount was 5% in 2012, 2011 and 2010 resulting in the ESPP qualifying for non-compensatory status under Topic 718 of the ASC. Accordingly, no compensation expense was recognized for the ESPP in 2012 , 2011, and 2010. The employee purchases are funded through after-tax payroll deductions, which plan participants can elect from one percent to ten percent of compensation, subject to the annual federal limit.
|
NOTE 13 | INCOME TAXES |
Components of the Company’s provision for income taxes are as follows:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Current: | ||||||||||||
Federal |
$ | 168.1 | $ | 133.6 | $ | 106.6 | ||||||
State and Local |
33.7 | 28.1 | 22.1 | |||||||||
Non-U.S. |
86.4 | 89.8 | 82.9 | |||||||||
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Total current |
288.2 | 251.5 | 211.6 | |||||||||
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Deferred: | ||||||||||||
Federal |
35.7 | 9.3 | (14.7 | ) | ||||||||
State and Local |
4.5 | 7.0 | 10.6 | |||||||||
Non-U.S. |
(4.1 | ) | (6.0 | ) | (6.5 | ) | ||||||
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Total deferred |
36.1 | 10.3 | (10.6 | ) | ||||||||
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Total provision for income taxes | $ | 324.3 | $ | 261.8 | $ | 201.0 | ||||||
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A reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate on income before provision for income taxes is as follows:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
U.S. statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
State and local taxes, net of federal tax benefit | 2.4 | 2.7 | 2.9 | |||||||||
Benefit of foreign operations | (6.1 | ) | (6.3 | ) | (9.7 | ) | ||||||
Legacy tax items | (0.4 | ) | (0.2 | ) | (0.4 | ) | ||||||
Other | 0.8 | — | 0.3 | |||||||||
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Effective tax rate | 31.7 | % | 31.2 | % | 28.1 | % | ||||||
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Income tax paid | $ | 293.3 | * | $ | 191.4 | $ | 247.9 | |||||
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* | Includes approximately $92 million in payments for tax audit settlements in the first quarter of 2012. |
The source of income before provision for income taxes is as follows:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
United States | $ | 694.2 | $ | 469.1 | $ | 390.6 | ||||||
International | 329.8 | 370.7 | 323.8 | |||||||||
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Income before provision for income taxes | $ | 1,024.0 | $ | 839.8 | $ | 714.4 | ||||||
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The components of deferred tax assets and liabilities are as follows:
Year Ended December 31, | ||||||||
2012 | 2011 | |||||||
Deferred tax assets: | ||||||||
Current: |
||||||||
Account receivable allowances |
$ | 8.2 | $ | 8.0 | ||||
Accrued compensation and benefits |
13.3 | 12.3 | ||||||
Deferred revenue |
6.1 | 5.8 | ||||||
Legal and professional fees |
8.4 | 9.8 | ||||||
Restructuring |
1.5 | 1.4 | ||||||
Uncertain tax positions |
— | 43.6 | ||||||
Other |
3.1 | 3.4 | ||||||
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Total current |
40.6 | 84.3 | ||||||
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Non-current: |
||||||||
Accumulated depreciation and amortization |
0.4 | 1.3 | ||||||
Stock-based compensation |
86.9 | 89.6 | ||||||
Benefit plans |
96.6 | 82.7 | ||||||
Deferred rent and construction allowance |
31.3 | 30.5 | ||||||
Deferred revenue |
34.3 | 36.4 | ||||||
Foreign net operating loss (1) |
13.0 | 9.7 | ||||||
Uncertain tax positions |
25.9 | 21.2 | ||||||
Self-insured related reserves |
33.8 | 23.0 | ||||||
Other |
4.5 | 7.2 | ||||||
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|
|||||
Total non-current |
326.7 | 301.6 | ||||||
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|
|||||
Total deferred tax assets | 367.3 | 385.9 | ||||||
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|
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Deferred tax liabilities: | ||||||||
Current: |
||||||||
Other |
(0.2 | ) | — | |||||
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|||||
Total Current |
(0.2 | ) | — | |||||
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|
|||||
Non-current: |
||||||||
Accumulated depreciation and amortization of intangible assets and capitalized software |
(154.7 | ) | (161.3 | ) | ||||
Foreign earnings to be repatriated |
(4.7 | ) | (2.6 | ) | ||||
Self-insured related income |
(39.7 | ) | (26.8 | ) | ||||
Other liabilities |
(3.9 | ) | (2.4 | ) | ||||
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|
|
|||||
Total non-current |
(203.0 | ) | (193.1 | ) | ||||
|
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|
|
|||||
Total deferred tax liabilities | (203.2 | ) | (193.1 | ) | ||||
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|
|||||
Net deferred tax asset | 164.1 | 192.8 | ||||||
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|
|||||
Valuation allowance | (15.2 | ) | (13.9 | ) | ||||
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|
|||||
Total net deferred tax assets | $ | 148.9 | $ | 178.9 | ||||
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(1) | Amounts are primarily set to expire beginning in 2017, if unused. |
As of December 31, 2012, the Company had approximately $1,225.2 million of undistributed earnings of foreign subsidiaries that it intends to indefinitely reinvest in foreign operations. The Company has not provided deferred income taxes on these indefinitely reinvested earnings. It is not practicable to determine the amount of deferred taxes that might be required to be provided if such earnings were distributed in the future, due to complexities in the tax laws and in the hypothetical calculations that would have to be made.
The Company had valuation allowances of $15.2 million and $13.9 million at December 31, 2012 and 2011, respectively, related to foreign net operating losses for which realization is uncertain. The change in the valuation allowances for 2012 and 2011 results primarily from the increase in valuation allowances in certain jurisdictions based on the Company’s evaluation of the expected realization of these future benefits.
As of December 31, 2012 the Company had $156.6 million of UTPs of which $105.8 million represents the amount that, if recognized, would impact the effective tax rate in future periods.
A reconciliation of the beginning and ending amount of UTPs is as follows:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Balance as of January 1 | $ | 205.4 | $ | 180.8 | $ | 164.2 | ||||||
Additions for tax positions related to the current year | 49.1 | 48.9 | 31.1 | |||||||||
Additions for tax positions of prior years | 18.9 | 15.3 | 16.2 | |||||||||
Reductions for tax positions of prior years | (20.6 | ) | (27.3 | ) | (9.9 | ) | ||||||
Settlements with taxing authorities | (91.5 | ) | (2.1 | ) | — | |||||||
Lapse of statute of limitations | (4.7 | ) | (10.2 | ) | (20.8 | ) | ||||||
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|||||||
Balance as of December 31 | $ | 156.6 | $ | 205.4 | $ | 180.8 | ||||||
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The Company classifies interest related to UTPs in interest expense in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating expenses. During 2012, the Company realized a net interest benefit of $1.6 million related to UTPs. As of December 31, 2012 and 2011, the amount of accrued interest recorded in the Company’s consolidated balance sheets related to UTPs was $10.6 million and $41.5 million, respectively.
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. The Company’s New York State and New York City income tax returns for 2011 remain open to examination. Tax filings in the U.K. remain open to examination for tax years 2007 through 2011.
For current ongoing audits related to open tax years, the Company estimates that it is possible that the balance of UTPs could decrease in the next twelve months as a result of the effective 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 might necessitate increases to the balance of UTPs. As the Company is unable to predict the timing of conclusion of these audits, the Company is unable to estimate the amount of changes to the balance of UTPs at this time.
|
NOTE 14 | INDEBTEDNESS |
The following table summarizes total indebtedness:
December 31, | ||||||||
2012 | 2011 | |||||||
2012 Facility | $ | — | $ | — | ||||
Commercial paper | — | — | ||||||
Notes payable: | ||||||||
Series 2005-1 Notes due 2015, including fair value of interest rate swap of $13.8 million at 2012 and $11.5 million at 2011 |
313.8 | 311.5 | ||||||
Series 2007-1 Notes due in 2017 |
300.0 | 300.0 | ||||||
2010 Senior Notes, due 2020, net of unamortized discount of $2.6 million and $2.7 million in 2012 and 2011, respectively |
497.4 | 497.3 | ||||||
2012 Senior Notes, due 2022, net of unamortized discount of $3.8 million in 2012 |
496.2 | — | ||||||
2008 Term Loan, various payments through 2013 | 63.8 | 135.0 | ||||||
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|
|||||
Total debt | 1,671.2 | 1,243.8 | ||||||
Current portion | (63.8 | ) | (71.3 | ) | ||||
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|||||
Total long-term debt | $ | 1,607.4 | $ | 1,172.5 | ||||
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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 replaced 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, which expired 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 ranged 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 exceeds 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) the federal funds rate; (d) the 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 senior 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 2010 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 of (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 December 31, 2012 and 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 2012 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. 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 Ending December 31, | 2008 Term Loan | Series 2005-1 Notes |
Series 2007-1 Notes |
2010 Senior Notes |
2012 Senior Notes |
Total | ||||||||||||||||||
2013 | $ | 63.8 | $ | — | $ | — | $ | — | $ | — | $ | 63.8 | ||||||||||||
2014 | — | — | — | — | — | — | ||||||||||||||||||
2015 | — | 300.0 | — | — | — | 300.0 | ||||||||||||||||||
2016 | — | — | — | — | — | — | ||||||||||||||||||
2017 | — | — | 300.0 | — | — | 300.0 | ||||||||||||||||||
Thereafter | — | — | 500.0 | 500.0 | 1,000.0 | |||||||||||||||||||
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Total | $ | 63.8 | $ | 300.0 | $ | 300.0 | $ | 500.0 | $ | 500.0 | $ | 1,663.8 | ||||||||||||
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In the fourth quarter of 2010, the Company entered into interest rate swaps with a total notional amount of $300 million which will convert 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 5 above.
INTEREST EXPENSE, NET
The following table summarizes the components of interest as presented in the consolidated statements of operations:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Income | $ | 5.2 | $ | 5.3 | $ | 3.1 | ||||||
Expense on borrowings | (73.8 | ) | (65.5 | ) | (52.2 | ) | ||||||
UTBs and other tax related interest | 0.4 | (8.7 | ) | (7.7 | ) | |||||||
Legacy Tax (a) | 4.4 | 3.7 | 2.5 | |||||||||
Interest capitalized | — | 3.1 | 1.8 | |||||||||
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Total | $ | (63.8 | ) | $ | (62.1 | ) | $ | (52.5 | ) | |||
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Interest paid (b) | $94.4 | $ | 67.2 | $ | 44.0 | |||||||
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(a) | Represents a reduction of accrued interest related to the favorable resolution of Legacy Tax Matters, further discussed in Note 17 to the consolidated financial statements. |
(b) | 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 5. |
At December 31, 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 Indenture, the 2010 Indenture 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 December 31, 2012, there are no such cross defaults.
The Company’s long-term debt, including the current portion, is recorded at cost except for the Series 2005-1 Notes which is 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 December 31, 2012 and 2011 is as follows:
December 31, 2012 | December 31, 2011 | |||||||||||||||
Carrying Amount |
Estimated Fair Value |
Carrying Amount |
Estimated Fair Value |
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Series 2005-1 Notes* | $ | 313.8 | $ | 326.1 | $ | 311.5 | $ | 316.5 | ||||||||
Series 2007-1 Notes | 300.0 | 348.3 | 300.0 | 332.7 | ||||||||||||
2010 Senior Notes | 497.4 | 562.8 | 497.3 | 534.1 | ||||||||||||
2012 Senior Notes | 496.2 | 528.8 | — | — | ||||||||||||
2008 Term Loan | 63.8 | 63.8 | 135.0 | 135.0 | ||||||||||||
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Total | $ | 1,671.2 | $ | 1,829.8 | $ | 1,243.8 | $ | 1,318.3 | ||||||||
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* | The carrying amount includes a $13.8 million and $11.5 million fair value adjustment on an interest rate hedge at December 31, 2012 and 2011, respectively. |
The fair value of the Company’s long-term debt is estimated using discounted cash flows based on prevailing interest rates available to the Company for borrowings with similar maturities.
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NOTE 15 | CAPITAL STOCK |
Authorized Capital Stock
The total number of shares of all classes of stock that the Company has authority to issue under its Restated Certificate of Incorporation is 1.02 billion shares with a par value of $0.01, of which 1.0 billion are shares of common stock, 10.0 million are shares of preferred stock and 10.0 million are shares of series common stock. The preferred stock and series common stock can be issued with varying terms, as determined by the Board.
Share Repurchase Program
The Company implemented a systematic share repurchase program in the third quarter of 2005 through an SEC Rule 10b5-1 program. Moody’s may also purchase opportunistically when conditions warrant. On July 30, 2007, the Board of the Company authorized a $2.0 billion share repurchase program, which the Company began utilizing in January 2008. There is no established expiration date for the remaining authorization. On February 12, 2013, the Board authorized a new $1 billion share repurchase program which will commence following the completion of the existing program. The Company’s intent is to return capital to shareholders in a way that serves their long-term interests. As a result, Moody’s share repurchase activity will continue to vary from quarter to quarter.
During 2012, Moody’s repurchased 4.8 million shares of its common stock under the aforementioned July 30, 2007 authorization, and issued 6.0 million shares under employee stock-based compensation plans.
Dividends
During the years ended December 31, 2012, 2011 and 2010, the Company paid dividends of:
Dividends Paid Per Share | ||||||||||||
Year ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
First quarter | $ | 0.16 | $ | 0.115 | $ | 0.105 | ||||||
Second quarter | 0.16 | 0.14 | 0.105 | |||||||||
Third quarter | 0.16 | 0.14 | 0.105 | |||||||||
Fourth quarter | 0.16 | 0.14 | 0.105 | |||||||||
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Total |
$ | 0.64 | $ | 0.535 | $ | 0.42 | ||||||
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On December 11, 2012, the Board of the Company approved the declaration of a quarterly dividend of $0.20 per share of Moody’s common stock, payable on March 11, 2013 to shareholders of record at the close of business on February 20, 2013. The continued payment of dividends at the rate noted above, or at all, is subject to the discretion of the Board.
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NOTE 16 | LEASE COMMITMENTS |
Moody’s operates its business from various leased facilities, which are under operating leases that expire over the next 15 years. Moody’s also leases certain computer and other equipment under operating leases that expire over the next six years. Rent expense, including lease incentives, is amortized on a straight-line basis over the related lease term. Rent expense under operating leases for the years ended December 31, 2012, 2011 and 2010 was $75.8 million, $73.1 million and $70.9 million, respectively.
The minimum rent for operating leases that have remaining or original non-cancelable lease terms in excess of one year at December 31, 2012 is as follows:
Year Ending December 31, |
Operating Leases | |||
2013 | $ | 80.7 | ||
2014 | 69.9 | |||
2015 | 62.3 | |||
2016 | 55.0 | |||
2017 | 52.7 | |||
Thereafter | 494.8 | |||
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Total minimum lease payments | $ | 815.4 | ||
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On October 20, 2006, the Company entered into a 21-year operating lease agreement to occupy 15 floors of an office building at 7WTC which includes a total of 20 years of renewal options. On March 28, 2007 the 7WTC lease agreement was amended for the Company to lease an additional two floors for a term of 20 years. The total base rent for the entire lease term, including rent credits, for the 7WTC lease is approximately $642 million. As of December 31, 2012, the company has a remaining obligation of $509.2 million.
On February 6, 2008, the Company entered into a 17.5 year operating lease agreement to occupy six floors of an office tower located in the Canary Wharf district of London, England. The total base rent of the Canary Wharf Lease over its 17.5-year term is approximately 134 million GBP, and the Company began making base rent payments in 2011. As of December 31, 2012, the Company has a remaining obligation of $201.0 million. In addition to the base rent payments the Company is obligated to pay certain customary amounts for its share of operating expenses and tax obligation.
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NOTE 17 | CONTINGENCIES |
From time to time, Moody’s is involved in legal and tax proceedings, governmental investigations and inquiries, claims and litigation that are incidental to the Company’s business, including claims based on ratings assigned by MIS. Moody’s is also subject to ongoing tax audits in the normal course of business. Management periodically assesses the Company’s liabilities and contingencies in connection with these matters based upon the latest information available. Moody’s discloses material pending legal proceedings pursuant to SEC rules and other pending matters as it may determine to be appropriate.
Following events in the global credit markets over the last several years, including in the U.S. subprime residential mortgage sector, MIS and other credit rating agencies are the subject of intense scrutiny, increased regulation, ongoing inquiry and governmental investigations, 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 domestic and foreign 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 global credit markets more broadly over the last several years.
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 September 14, 2012, the Company filed a motion for summary judgment, which was fully briefed on December 21, 2012. Oral argument on the motion for summary judgment is scheduled for April 2013.
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. Three of the plaintiffs whose claims were dismissed filed motions for reconsideration, and on November 7, 2012, the court granted two of these motions, reinstating the claims of two plaintiffs that were previously dismissed. On February 1, 2013, the court dismissed the claims of one additional plaintiff on jurisdictional grounds. 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. Based on plaintiffs’ most recent litigation disclosures, the August 2012 dismissal of certain claims noted above, the reinstatement of certain of those claims in November 2012, and the dismissal of an additional plaintiff’s claims in February 2013, the total alleged compensatory damages against all defendants are approximately $638 million, consisting of alleged lost principal and lost interest, plus statutory interest, except that approximately $14.5 million of those claimed damages are not being sought from Moody’s.
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 not sought class certification. On September 7, 2012 the rating agencies filed a motion for summary judgment dismissing the remaining claims against them. On January 3, 2013, the Court issued an order dismissing the claim for aiding and abetting fraud against the rating agencies but allowing the claim for fraud to proceed to trial. It is expected that a trial date will be set with respect to the fraud claim against the rating agencies and a claim for aiding and abetting fraud against Morgan Stanley. In the course of the proceedings, the two plaintiffs have asserted that their total compensatory damages against all defendants, 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.
Legacy Tax Matters
Moody’s continues to have exposure to potential liabilities arising from Legacy Tax Matters. As of December 31, 2012, Moody’s has recorded liabilities for Legacy Tax Matters totaling $39.2 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 June 2011, the statute of limitations for New D&B relating to the 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 an increase in other non-operating income of $6.4 million, relating to amounts due to New D&B. In August 2012, New D&B effectively settled examinations for the 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 an increase in other non-operating income of $12.8 million, relating to amounts due to New D&B. As of December 31, 2012, Moody’s liability with respect to this matter totaled $37.1 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 carries a $2.1 million liability for this matter.
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NOTE 18 | 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, ERS (formerly named RMS) and PS. 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 revenue for prior years 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 LOBs 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. These fees charged by MA are generally equal to the costs incurred by MA to produce these products and services. 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 year ended December 31, 2012 and accordingly, the segment results for the years ended December 31, 2011 and 2010 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.
Year Ended December 31, | ||||||||||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||||||||||
MIS | MA | Eliminations | Consolidated | MIS | MA | Eliminations | Consolidated | |||||||||||||||||||||||||
Revenue | $ | 1,958.3 | $ | 855.3 | $ | (83.3 | ) | $ | 2,730.3 | $ | 1,634.7 | $ | 722.4 | $ | (76.4 | ) | $ | 2,280.7 | ||||||||||||||
Operating, SG&A | 967.1 | 663.4 | (83.3 | ) | 1,547.2 | 833.6 | 555.9 | (76.4 | ) | 1,313.1 | ||||||||||||||||||||||
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Adjusted Operating Income |
991.2 | 191.9 | — | 1,183.1 | 801.1 | 166.5 | — | 967.6 | ||||||||||||||||||||||||
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Depreciation and amortization |
44.3 | 49.2 | — | 93.5 | 41.3 | 37.9 | — | 79.2 | ||||||||||||||||||||||||
Goodwill impairment charge |
— | 12.2 | 12.2 | — | — | — | — | |||||||||||||||||||||||||
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Operating income | $ | 946.9 | $ | 130.5 | $ | — | $ | 1,077.4 | $ | 759.8 | $ | 128.6 | $ | — | $ | 888.4 | ||||||||||||||||
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Year Ended December 31, | ||||||||||||||||
2010 | ||||||||||||||||
MIS | MA | Eliminations | Consolidated | |||||||||||||
Revenue | $ | 1,466.3 | $ | 636.3 | $ | (70.6 | ) | $ | 2,032.0 | |||||||
Operating, SG&A | 783.9 | 479.5 | (70.6 | ) | 1,192.8 | |||||||||||
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Adjusted Operating Income |
682.4 | 156.8 | - | 839.2 | ||||||||||||
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Depreciation and amortization |
35.2 | 31.1 | - | 66.3 | ||||||||||||
Restructuring |
— | 0.1 | - | 0.1 | ||||||||||||
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Operating income | $ | 647.2 | $ | 125.6 | $ | - | $ | 772.8 | ||||||||
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MIS AND MA REVENUE BY LINE OF BUSINESS
The tables below present revenue by LOB:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
MIS: | ||||||||||||
Corporate finance (CFG) | $ | 857.6 | $ | 652.1 | $ | 563.9 | ||||||
Structured finance (SFG) | 381.0 | 344.6 | 290.8 | |||||||||
Financial institutions (FIG) | 325.5 | 294.9 | 278.7 | |||||||||
Public, project and infrastructure finance (PPIF) | 322.7 | 277.3 | 271.6 | |||||||||
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Total external revenue |
1,886.8 | 1,568.9 | 1,405.0 | |||||||||
Intersegment royalty | 71.5 | 65.8 | 61.3 | |||||||||
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Total | 1,958.3 | 1,634.7 | 1,466.3 | |||||||||
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MA: | ||||||||||||
Research, data and analytics (RD&A) | 491.0 | 451.3 | 425.0 | |||||||||
Enterprise Risk Solutions (ERS) | 242.6 | 196.1 | 180.7 | |||||||||
Professional services (PS) | 109.9 | 64.4 | 21.3 | |||||||||
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Total external revenue |
843.5 | 711.8 | 627.0 | |||||||||
Intersegment revenue | 11.8 | 10.6 | 9.3 | |||||||||
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Total | 855.3 | 722.4 | 636.3 | |||||||||
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Eliminations | (83.3 | ) | (76.4 | ) | (70.6 | ) | ||||||
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Total MCO | $ | 2,730.3 | $ | 2,280.7 | $ | 2,032.0 | ||||||
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CONSOLIDATED REVENUE INFORMATION BY GEOGRAPHIC AREA
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Revenue: | ||||||||||||
U.S. | $ | 1,464.1 | $ | 1,177.0 | $ | 1,089.5 | ||||||
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International: | ||||||||||||
EMEA |
820.7 | 708.4 | 627.4 | |||||||||
Other |
445.5 | 395.3 | 315.1 | |||||||||
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Total International |
1,266.2 | 1,103.7 | 942.5 | |||||||||
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Total | $ | 2,730.3 | $ | 2,280.7 | $ | 2,032.0 | ||||||
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Long-lived assets at December 31: | ||||||||||||
United States | $ | 498.4 | $ | 495.8 | $ | 476.5 | ||||||
International | 672.3 | 727.5 | 477.1 | |||||||||
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Total | $ | 1,170.7 | $ | 1,223.3 | $ | 953.6 | ||||||
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TOTAL ASSETS BY SEGMENT
December 31, 2012 | December 31, 2011 | |||||||||||||||||||||||||||||||
MIS | MA | Corporate Assets (a) |
Consolidated | MIS | MA | Corporate Assets (a) |
Consolidated | |||||||||||||||||||||||||
Total Assets | $ | 884.9 | $ | 1,386.7 | $ | 1,689.3 | $ | 3,960.9 | $ | 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 tax assets. |
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NOTE 19 | VALUATION AND QUALIFYING ACCOUNTS |
Accounts receivable allowances primarily represent adjustments to customer billings that are estimated when the related revenue is recognized and also represents an estimate for uncollectible accounts. The valuation allowance on deferred tax assets relates to foreign net operating losses for which realization is uncertain. Below is a summary of activity for both allowances:
Year Ended December 31, |
Balance at Beginning of the Year |
Additions | Write-offs and Adjustments |
Balance at End of the Year |
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2012 | ||||||||||||||||
Accounts receivable allowance |
$ | (28.0 | ) | $ | (44.3 | ) | $ | 43.2 | $ | (29.1 | ) | |||||
Deferred tax assets – valuation allowance |
$ | (13.9 | ) | $ | (3.1 | ) | $ | 1.8 | $ | (15.2 | ) | |||||
2011 | ||||||||||||||||
Accounts receivable allowance |
$ | (33.0 | ) | $ | (40.6 | ) | $ | 45.6 | $ | (28.0 | ) | |||||
Deferred tax assets – valuation allowance |
$ | (12.8 | ) | $ | (4.0 | ) | $ | 2.9 | $ | (13.9 | ) | |||||
2010 | ||||||||||||||||
Accounts receivable allowance |
$ | (24.6 | ) | $ | (46.5 | ) | $ | 38.1 | $ | (33.0 | ) | |||||
Deferred tax assets – valuation allowance |
$ | (4.5 | ) | $ | (8.8 | ) | $ | 0.5 | $ | (12.8 | ) |
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NOTE 20 | OTHER NON-OPERATING INCOME (EXPENSE), NET |
The following table summarizes the components of other non-operating income (expense), net as presented in the consolidated statements of operations:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
FX gain (loss) | $ | (5.9 | ) | $ | 2.6 | $ | (5.1 | ) | ||||
Legacy Tax (a) | 12.8 | 6.4 | — | |||||||||
Joint venture income | 4.8 | 6.8 | 2.8 | |||||||||
Other | (1.3 | ) | (2.3 | ) | (3.6 | ) | ||||||
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Total |
$ | 10.4 | $ | 13.5 | $ | (5.9 | ) | |||||
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(a) | The 2012 amount represents a reversal of a liability 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 2004 Legacy Tax Matter. |
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NOTE 21 | RELATED PARTY TRANSACTIONS |
Moody’s Corporation made grants of $10 million to The Moody’s Foundation during the year ended December 31, 2012. Grants of $5 million and $4.4 million were made during the years ended December 31, 2011 and 2010, respectively. The Foundation carries out philanthropic activities primarily in the areas of education and health and human services. Certain members of Moody’s senior management are on the board of the Foundation.
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NOTE 22 | QUARTERLY FINANCIAL DATA (UNAUDITED) |
Three Months Ended | ||||||||||||||||
(amounts in millions, except EPS) |
March 31 | June 30 | September 30 | December 31 | ||||||||||||
2012 | ||||||||||||||||
Revenue | $ | 646.8 | $ | 640.8 | $ | 688.5 | $ | 754.2 | ||||||||
Operating Income | $ | 269.0 | $ | 278.5 | $ | 269.7 | $ | 260.2 | ||||||||
Net income attributable to Moody’s | $ | 173.5 | $ | 172.5 | $ | 183.9 | $ | 160.1 | ||||||||
EPS: | ||||||||||||||||
Basic |
$ | 0.78 | $ | 0.77 | $ | 0.83 | $ | 0.72 | ||||||||
Diluted |
$ | 0.76 | $ | 0.76 | $ | 0.81 | $ | 0.70 | ||||||||
2011 | ||||||||||||||||
Revenue | $ | 577.1 | $ | 605.2 | $ | 531.3 | $ | 567.1 | ||||||||
Operating income | $ | 250.1 | $ | 270.1 | $ | 196.1 | $ | 172.1 | ||||||||
Net income attributable to Moody’s | $ | 155.5 | $ | 189.0 | $ | 130.7 | $ | 96.2 | ||||||||
EPS: | ||||||||||||||||
Basic |
$ | 0.68 | $ | 0.83 | $ | 0.58 | $ | 0.43 | ||||||||
Diluted |
$ | 0.67 | $ | 0.82 | $ | 0.57 | $ | 0.43 |
Basic and diluted EPS are computed for each of the periods presented. The number of weighted average shares outstanding changes as common shares are issued pursuant to employee stock plans and for other purposes or as shares are repurchased. Therefore, the sum of basic and diluted EPS for each of the four quarters may not equal the full year basic and diluted EPS.
There was a $12.2 million non-tax deductible goodwill impairment charge in the fourth quarter of 2012 relating to the Company’s FTSC reporting unit. Additionally, the quarterly financial data includes a $12.8 million and $7.0 million benefit to net income related to the resolution of Legacy Tax Matters for the three months ended September 30, 2012 and June 30, 2011, respectively. Also, there was a tax benefit of approximately $14 million during the three months ended June 30, 2011 resulting from a foreign tax ruling and a tax benefit of approximately $7 million in the three months ended September 30, 2011 resulting from the settlement of state tax audits.
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NOTE 23 | SUBSEQUENT EVENT |
On February 12, 2013, the Board authorized a new $1 billion share repurchase program. The Company expects to commence repurchases under the new program following the completion of its existing share repurchase program.
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Basis of Consolidation
The consolidated financial statements include those of Moody’s Corporation and its majority- and wholly-owned subsidiaries. The effects of all intercompany transactions have been eliminated. Investments in companies for which the Company has significant influence over operating and financial policies but not a controlling interest are accounted for on an equity basis.
The Company applies the guidelines set forth in Topic 810 of the ASC in assessing its interests in variable interest entities to decide whether to consolidate that entity. The Company has reviewed the potential variable interest entities and determined that there are no consolidation requirements under Topic 810 of the ASC.
Cash and Cash Equivalents
Cash equivalents principally consist of investments in money market mutual funds and high-grade commercial paper with maturities of three months or less when purchased.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives. Expenditures for maintenance and repairs that do not extend the economic useful life of the related assets are charged to expense as incurred.
Research and Development Costs
All research and development costs are expensed as incurred. These costs primarily reflect the development of credit processing software and quantitative credit risk assessment products sold by the MA segment. These costs also reflect expenses for new quantitative research and business ideas that potentially warrant near-term investment within MIS or MA which could potentially result in commercial opportunities for the Company.
Research and development costs were $16.1 million, $29.8 million, and $20.3 million for the years ended December 31, 2012, 2011 and 2010, respectively, and are included in operating expenses within the Company’s consolidated statements of operations. These costs generally consist of professional services provided by third parties and compensation costs of employees.
Costs for internally developed computer software that will be sold, leased or otherwise marketed are capitalized when technological feasibility has been established. These costs primarily relate to the development or enhancement of credit processing software and quantitative credit risk assessment products sold by the MA segment, to be licensed to customers and generally consist of professional services provided by third parties and compensation costs of employees that develop the software. Judgment is required in determining when technological feasibility of a product is established and the Company believes that technological feasibility for its software products is reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to customers. Accordingly, costs for internally developed computer software that will be sold, leased or otherwise marketed that were eligible for capitalization under Topic 985 of the ASC as well as the related amortization expense related to such costs were immaterial for the years ended December 31, 2012, 2011 and 2010.
Computer Software Developed or Obtained for Internal Use
The Company capitalizes costs related to software developed or obtained for internal use. These assets, included in property and equipment in the consolidated balance sheets, relate to the Company’s accounting, product delivery and other systems. Such costs generally consist of direct costs for third-party license fees, professional services provided by third parties and employee compensation, in each case incurred either during the application development stage or in connection with upgrades and enhancements that increase functionality. Such costs are depreciated over their estimated useful lives on a straight-line basis. Costs incurred during the preliminary project stage of development as well as maintenance costs are expensed as incurred.
Long-Lived Assets, Including Goodwill and Other Acquired Intangible Assets
Moody’s 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.
The Company has five 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 December 31, 2012. Also, in December 2011, the Company acquired B&H which is part of the ERS reporting unit.
Rent Expense
The Company records rent expense on a straight-line basis over the life of the lease. In cases where there is a free rent period or future fixed rent escalations the Company will record a deferred rent liability. Additionally, the receipt of any lease incentives will be recorded as a deferred rent liability which will be amortized over the lease term as a reduction of rent expense.
Stock-Based Compensation
The Company records compensation expense for all share-based payment award transactions granted to employees based on the fair value of the equity instrument at the time of grant. This includes shares issued under employee stock purchase plans, stock options and restricted stock. The Company has also established a pool of additional paid-in capital related to the tax effects of employee share-based compensation, which is available to absorb any recognized tax deficiencies.
Derivative Instruments and Hedging Activities
Based on the Company’s risk management policy, from time to time the Company may use derivative financial instruments to reduce exposure to changes in foreign exchange rates and interest rates. The Company does not enter into derivative financial instruments for speculative purposes. All derivative financial instruments are recorded on the balance sheet at their respective fair values. The changes in the value of derivatives that qualify as fair value hedges are recorded currently into earnings. Changes in the derivative’s fair value that qualify as cash flow hedges are recorded to accumulated other comprehensive income or loss, to the extent the hedge is effective, and such amounts are reclassified to earnings in the same period or periods during which the hedged transaction affects income. Changes in the derivative’s fair value that qualify as net investment hedges are recorded to accumulated other comprehensive income or loss, to the extent the hedge is effective.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or the services have been provided and accepted by the customer when applicable, fees are determinable and the collection of resulting receivables is considered probable.
In October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”). The standard changed the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration based on the relative selling price of each deliverable. The Company adopted ASU 2009-13 on a prospective basis for applicable transactions originating or materially modified on or after January 1, 2010. If applied in the same manner to the year ended December 31, 2009, ASU 2009-13 would not have had a material impact on net revenue reported for both its MIS and MA segments in terms of the timing and pattern of revenue recognition. The adoption of ASU 2009-13 did not have a significant effect on the Company’s net revenue in the period of adoption and also did not have a significant effect on the Company’s net revenue in periods after the initial adoption when applied to multiple element arrangements based on the currently anticipated business volume and pricing.
For 2010 and future periods, pursuant to the guidance of ASU 2009-13, when a sales arrangement contains multiple deliverables, the Company allocates revenue to each deliverable based on its relative selling price which is determined based on its vendor specific objective evidence (“VSOE”) if available, third party evidence (“TPE”) if VSOE is not available, or estimated selling price (“ESP”) if neither VSOE nor TPE is available.
The Company’s products and services will generally continue to qualify as separate units of accounting under ASU 2009-13. The Company evaluates each deliverable in an arrangement to determine whether it represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting when it has stand-alone value to the customers and if the arrangement includes a customer refund or return right relative to the delivered item and the delivery and performance of the undelivered item is considered probable and substantially in the Company’s control. In instances where the aforementioned criteria are not met, the deliverable is combined with the undelivered items and revenue recognition is determined as one single unit.
The Company determines whether its selling price in a multi-element transaction meets the VSOE criteria by using the price charged for a deliverable when sold separately. In instances where the Company is not able to establish VSOE for all deliverables in a multiple element arrangement, which may be due to the Company infrequently selling each element separately, not selling products within a reasonably narrow price range, or only having a limited sales history, the Company attempts to establish TPE for deliverables. The Company determines whether TPE exists by evaluating largely similar and interchangeable competitor products or services in standalone sales to similarly situated customers. However, due to the difficulty in obtaining third party pricing, possible differences in its market strategy from that of its peers and the potential that products and services offered by the Company may contain a significant level of differentiation and/or customization such that the comparable pricing of products with similar functionality cannot be obtained, the Company generally is unable to reliably determine TPE. Based on the selling price hierarchy established by ASU 2009-13, when the Company is unable to establish selling price using VSOE or TPE, the Company will establish an ESP. ESP is the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company establishes its best estimate of ESP considering internal factors relevant to is pricing practices such as costs and margin objectives, standalone sales prices of similar products, percentage of the fee charged for a primary product or service relative to a related product or service, and customer segment and geography. Additional consideration is also given to market conditions such as competitor pricing strategies and market trend. The Company reviews its determination of VSOE, TPE and ESP on an annual basis or more frequently as needed.
In the MIS segment, revenue attributed to initial ratings of issued securities is recognized when the rating is issued. Revenue attributed to monitoring of issuers or issued securities is recognized ratably over the period in which the monitoring is performed, generally one year. In the case of commercial mortgage-backed securities, derivatives, international residential mortgage-backed and asset-backed securities, issuers can elect to pay the monitoring fees upfront. These fees are deferred and recognized over the future monitoring periods based on the expected lives of the rated securities, which ranged from two to 52 years at December 31, 2012. At December 31, 2012, 2011 and 2010, deferred revenue related to these securities was approximately $82 million, $79 million, and $76 million.
Multiple element revenue arrangements in the MIS segment are generally comprised of an initial rating and the related monitoring service. Beginning January 1, 2010, in instances where monitoring fees are not charged for the first year monitoring effort, fees are allocated to the initial rating and monitoring services based on the relative selling price of each service to the total arrangement fees. The Company generally uses ESP in determining the selling price for its initial ratings as the Company rarely sells initial ratings separately without providing related monitoring services and thus is unable to establish VSOE or TPE for initial ratings. Prior to January 1, 2010 and pursuant to the previous accounting standards, for these types of arrangements the initial rating fee was first allocated to the monitoring service determined based on the estimated fair market value of monitoring services, with the residual amount allocated to the initial rating. Under ASU 2009-13 this practice can no longer be used for non-software deliverables upon the adoption of ASU 2009-13.
MIS estimates revenue for ratings of commercial paper for which, in addition to a fixed annual monitoring fee, issuers are billed quarterly based on amounts outstanding. Revenue is accrued each quarter based on estimated amounts outstanding and is billed when actual data is available. The estimate is determined based on the issuers’ most recent reported quarterly data. At December 31, 2012, 2011 and 2010, accounts receivable included approximately $22 million, $24 million, and $25 million, respectively, related to accrued commercial paper revenue. Historically, MIS has not had material differences between the estimated revenue and the actual billings. Furthermore, for certain annual monitoring services, fees are not invoiced until the end of the annual monitoring period. Revenue is accrued ratably over the monitoring period.
In the MA segment, products and services offered by the Company include software licenses and related maintenance, subscriptions, and professional services. Revenue from subscription based products, such as research and data subscriptions and certain software-based credit risk management subscription products, is recognized ratably over the related subscription period, which is principally one year. Revenue from sale of perpetual licenses of credit processing software is generally recognized at the time the product master or first copy is delivered or transferred to and accepted by the customer. Software maintenance revenue is recognized ratably over the annual maintenance period. Revenue from services rendered within the professional services line of business is generally recognized as the services are performed. If uncertainty exists regarding customer acceptance of the product or service, revenue is not recognized until acceptance occurs. A large portion of annual research and data subscriptions and annual software maintenance are invoiced in the months of November, December and January.
Products and services offered within the MA segment are sold either stand-alone or together in various combinations. In instances where a multiple element arrangement includes software and non-software deliverables, revenue is allocated to the non-software deliverables and to the software deliverables, as a group, using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. Revenue is recognized for each element based upon the conditions for revenue recognition noted above.
If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is allocated to each software deliverable using VSOE. In the instances where the Company is not able to determine VSOE for all of the deliverables of an arrangement, the Company allocates the revenue to the undelivered elements equal to its VSOE and the residual revenue to the delivered elements. If the Company is unable to determine VSOE for an undelivered element, the Company defers all revenue allocated to the software deliverables until the Company has delivered all of the elements or when VSOE has been determined for the undelivered elements.
Accounts Receivable Allowances
Moody’s records an allowance for estimated future adjustments to customer billings as a reduction of revenue, based on historical experience and current conditions. Such amounts are reflected as additions to the accounts receivable allowance. Additionally, estimates of uncollectible accounts are recorded as bad debt expense and are reflected as additions to the accounts receivable allowance. Billing adjustments and uncollectible account write-offs are recorded against the allowance. Moody’s evaluates its accounts receivable allowance by reviewing and assessing historical collection and adjustment experience and the current status of customer accounts. Moody’s also considers the economic environment of the customers, both from an industry and geographic perspective, in evaluating the need for allowances. Based on its analysis, Moody’s adjusts its allowance as considered appropriate in the circumstances.
Contingencies
From time to time, Moody’s is involved in legal and tax proceedings, governmental investigations and inquiries, claims and litigation that are incidental to the Company’s business, including claims based on ratings assigned by MIS. Moody’s is also subject to ongoing tax audits in the normal course of business. Management periodically assesses the Company’s liabilities and contingencies in connection with these matters based upon the latest information available. Moody’s discloses material pending legal proceedings pursuant to SEC rules and other pending matters as it may determine to be appropriate.
For claims, litigation and proceedings and governmental investigations and inquires not related to income taxes, where it is both probable that a liability 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. When the reasonable estimate of the loss is within a range of amounts, the minimum amount of the range is accrued unless some higher amount within the range is a better estimate than another amount within the range. In other instances, because of uncertainties related to the probable outcome and/or the amount or range of loss, management does not record a liability but discloses the contingency if significant. As additional information becomes available, the Company adjusts its assessments and estimates of such matters accordingly. In view of the inherent difficulty of predicting the outcome of litigation, regulatory, governmental investigations and inquiries, enforcement and similar matters 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 any pending matters progresses, management will continue to review the latest information available and assess its ability to predict the outcome of such matters and the effects, if any, on its operations and financial condition. However, in light of the large or indeterminate damages sought in some of them, the absence of similar court rulings on the theories of law asserted and uncertainties regarding apportionment of any potential damages, an estimate of the range of possible losses cannot be made at this time.
The Company’s wholly-owned insurance subsidiary insures the Company against certain risks including but not limited to deductibles for worker’s compensation, employment practices litigation, employee medical claims and terrorism, for which the claims are not material to the Company. In addition, for claim years 2008 and 2009, the insurance subsidiary insured the Company for defense costs related to professional liability claims. For matters insured by the Company’s insurance subsidiary, Moody’s records liabilities based on the estimated total claims expected to be paid and total projected costs to defend a claim through its anticipated conclusion. The Company determines liabilities based on an assessment of management’s best estimate of claims to be paid and legal defense costs as well as actuarially determined estimates. The Cheyne SIV and Rhinebridge SIV matters more fully discussed in Note 17 are both cases from the 2008/2009 claims period, and accordingly these matters are covered by the Company’s insurance subsidiary. Defense costs for matters not self-insured by the Company’s wholly-owned insurance subsidiary are expensed as services are provided.
For income tax matters, the Company employs the prescribed methodology of Topic 740 of the ASC which requires a company to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.
Operating Expenses
Operating expenses are charged to income as incurred. These expenses include costs associated with the development and production of the Company’s products and services and their delivery to customers. These expenses principally include employee compensation and benefits and travel costs that are incurred in connection with these activities.
Selling, General and Administrative Expenses
SG&A expenses are charged to income as incurred. These expenses include such items as compensation and benefits for corporate officers and staff and compensation and other expenses related to sales of products. They also include items such as office rent, business insurance, professional fees and gains and losses from sales and disposals of assets.
Redeemable Noncontrolling Interest
The Company records its redeemable noncontrolling interest at fair value on the date of the related business combination transaction. The redeemable noncontrolling interest represents noncontrolling shareholders’ interest in entities which are controlled but not wholly-owned by Moody’s and for which Moody’s obligation to redeem the minority shareholders’ interest is in the control of the minority shareholders. Subsequent to the initial measurement, the redeemable noncontrolling interest is recorded at the greater of its redemption value or its carrying value at the end of each reporting period. If the redeemable noncontrolling interest is carried at its redemption value, the difference between the redemption value and the carrying value would be adjusted through capital surplus at the end of each reporting period. The Company also performs a quarterly assessment to determine if the aforementioned redemption value exceeds the fair value of the redeemable noncontrolling interest. If the redemption value of the redeemable noncontrolling interest were to exceed its fair value, the excess would reduce the net income attributable to Moody’s shareholders.
Foreign Currency Translation
For all operations outside the U.S. where the Company has designated the local currency as the functional currency, assets and liabilities are translated into U.S. dollars using end of year exchange rates, and revenue and expenses are translated using average exchange rates for the year. For these foreign operations, currency translation adjustments are accumulated in a separate component of shareholders’ equity.
Comprehensive Income
Comprehensive income represents the change in net assets of a business enterprise during a period due to transactions and other events and circumstances from non-owner sources including foreign currency translation impacts, net actuarial losses and net prior service costs related to pension and other post-retirement plans and derivative instruments.
Income Taxes
The Company accounts for income taxes under the asset and liability method in accordance with ASC Topic 740. Therefore, income tax expense is based on reported income before income taxes and deferred income taxes reflect the effect of temporary differences between the amounts of assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes.
The Company classifies interest related to unrecognized tax benefits as a component of interest expense in its consolidated statements of operations. Penalties are recognized in other non-operating expenses. For UTPs, the Company first determines whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.
For certain of its non-U.S. subsidiaries, the Company has deemed the undistributed earnings relating to these subsidiaries to be indefinitely reinvested within its foreign operations. Accordingly, the Company has not provided deferred income taxes on these indefinitely reinvested earnings. It is not practicable to determine the amount of deferred taxes that might be required to be provided if such earnings were distributed in the future due to complexities in the tax laws and in the hypothetical calculations that would have to be made.
Fair Value of Financial Instruments
The Company’s financial instruments include cash, cash equivalents, trade receivables and payables, all of which are short-term in nature and, accordingly, approximate fair value. Additionally, the Company invests in short-term investments that are carried at cost, which approximates fair value due to their short-term maturities. Also, the Company uses derivative instruments, as further described in Note 5, to manage certain financial exposures that occur in the normal course of business. These derivative instruments are carried at fair value on the Company’s consolidated balance sheets. The Company also is subject to contingent consideration obligations related to certain of its acquisitions as more fully discussed in Note 7. These obligations are carried at their estimated fair value within the Company’s consolidated balance sheets.
Fair value is defined by the ASC as the price that would be received from selling an asset or paid to transfer a liability (i.e., an exit price) in an orderly transaction between market participants at the measurement date. The determination of this fair value is based on the principal or most advantageous market in which the Company could commence transactions and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance. Also, determination of fair value assumes that market participants will consider the highest and best use of the asset.
The ASC establishes a fair value hierarchy whereby the inputs contained in valuation techniques used to measure fair value are categorized into three broad levels as follows:
Level 1 : quoted market prices in active markets that the reporting entity has the ability to access at the date of the fair value measurement;
Level 2 : inputs other than quoted market prices described in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities;
Level 3 : unobservable inputs that are supported by little or no market activity and that are significant to the fair value measurement of the assets or liabilities.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk principally consist of cash and cash equivalents, short-term investments, trade receivables and derivatives.
Cash equivalents consist of investments in high quality investment-grade securities within and outside the U.S. The Company manages its credit risk exposure by allocating its cash equivalents among various money market mutual funds and issuers of high- grade commercial paper. Short-term investments primarily consist of certificates of deposit and high-grade corporate bonds in Korea as of December 31, 2012 and 2011. The Company manages its credit risk exposure on cash equivalents and short-term investments by limiting the amount it can invest with any single issuer. No customer accounted for 10% or more of accounts receivable at December 31, 2012 or 2011.
Earnings per Share of Common Stock
Basic shares outstanding is calculated based on the weighted average number of shares of common stock outstanding during the reporting period. Diluted shares outstanding is calculated giving effect to all potentially dilutive common shares, assuming that such shares were outstanding during the reporting period.
Pension and Other Retirement Benefits
Moody’s maintains various noncontributory DBPPs as well as other contributory and noncontributory retirement plans. The expense and assets/liabilities that the Company reports for its pension and other retirement benefits are dependent on many assumptions concerning the outcome of future events and circumstances. These assumptions represent the Company’s best estimates and may vary by plan. The differences between the assumptions for the expected long-term rate of return on plan assets and actual experience is spread over a five-year period to the market related value of plan assets which is used in determining the expected return on assets component of annual pension expense. All other actuarial gains and losses are generally deferred and amortized over the estimated average future working life of active plan participants.
The Company recognizes as an asset or liability in its statement of financial position the funded status of its defined benefit post-retirement plans, measured on a plan-by-plan basis. Changes in the funded status are recorded as part of other comprehensive income during the period the changes occur.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Estimates are used for, but not limited to, revenue recognition, accounts receivable allowances, income taxes, contingencies, valuation of long-lived and intangible assets, goodwill, pension and other retirement benefits, stock-based compensation, and depreciation and amortization rates for property and equipment and computer software.
The financial market volatility and poor economic conditions beginning in the third quarter of 2007 and continuing into 2012, both in the U.S. and in many other countries where the Company operates, have impacted and will continue to impact Moody’s business. If such conditions were to continue they could have a material impact to the Company’s significant accounting estimates discussed above, in particular those around accounts receivable allowances, valuations of investments in affiliates, goodwill and other acquired intangible assets, and pension and other retirement benefits.
Recently Issued Accounting Pronouncements
In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. The objective of this ASU is to improve reporting by requiring entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in the statement of operations. The amendments in this ASU are required to be applied retrospectively and are effective for reporting periods beginning after December 15, 2012. The adoption of this ASU will not have any impact on the Company’s consolidated financial statements other than revising the presentation relating to items reclassified from accumulated other comprehensive income to the statement of operations.
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 deferred 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 in 2012. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements other than revising the presentation of the components of comprehensive income.
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Below is a reconciliation of basic to diluted shares outstanding:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Basic | 223.2 | 226.3 | 235.0 | |||||||||
Dilutive effect of shares issuable under stock-based compensation plans | 3.4 | 3.1 | 1.6 | |||||||||
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Diluted | 226.6 | 229.4 | 236.6 | |||||||||
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Antidilutive options to purchase common shares and restricted stock as well as contingently issuable restricted stock which are excluded from the table above |
7.5 | 10.6 | 15.5 | |||||||||
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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 |
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Balance Sheet Location |
December 31, 2012 |
December 31, 2011 |
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Assets: | ||||||||||
Derivatives designated as accounting hedges: | ||||||||||
Interest rate swaps | Other assets | $ | 13.8 | $ | 11.5 | |||||
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Total derivatives designated as accounting hedges | 13.8 | 11.5 | ||||||||
Derivatives not designated as accounting hedges: | ||||||||||
FX forwards on certain assets and liabilities | Other current assets | 1.4 | 1.1 | |||||||
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Total | $ | 15.2 | $ | 12.6 | ||||||
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Liabilities: | ||||||||||
Derivatives designated as accounting hedges: | ||||||||||
Interest rate swaps | Accounts payable and accrued liabilities | $ | 0.7 | $ | 4.5 | |||||
FX forwards on net investment in certain foreign subsidiaries | Accounts payable and accrued liabilities | 1.0 | — | |||||||
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Total derivatives designated as accounting hedges | 1.7 | 4.5 | ||||||||
Derivatives not designated as accounting hedges: | ||||||||||
FX forwards on certain assets and liabilities | Accounts payable and accrued liabilities | 0.7 | 2.3 | |||||||
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Total | $ | 2.4 | $ | 6.8 | ||||||
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The following table summarizes the net gain (loss) on the Company’s foreign exchange forwards which are not designated as hedging instruments as well as the gain (loss) on the interest rate swaps designated as fair value hedges:
Amount of Gain (Loss) Recognized in consolidated statement of operations |
||||||||||||||
Year Ended December 31, | ||||||||||||||
2012 | 2011 | 2010 | ||||||||||||
Derivatives designated as accounting hedges | Location on Consolidated Statements of Operations | |||||||||||||
Interest rate swaps | Interest Expense, net | $ | 3.6 | $ | 4.1 | — | ||||||||
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Derivatives not designated as accounting hedges | ||||||||||||||
Foreign exchange forwards | Other non-operating (expense) income | $ | 0.9 | $ | (1.4 | ) | (2.2 | ) | ||||||
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The cumulative amount of unrecognized hedge losses recorded in AOCI is as follows:
Unrecognized Losses, net of tax |
||||||||
December 31, 2012 |
December 31, 2011 |
|||||||
FX forwards on net investment hedges | $ | (2.2 | ) | $ | — | |||
Interest rate swaps (1) | (0.7 | ) | (3.0 | ) | ||||
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Total |
$ | (2.9 | ) | $ | (3.0 | ) | ||
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(1) |
The unrecognized hedge losses relating to the cash flow hedge on the 2008 Term Loan are expected to be reclassified into earnings within the next five months as the underlying hedge ends with the full repayment of the 2008 Term Loan in the first half of 2013. |
The following table summarizes the notional amounts of the Company’s outstanding foreign exchange forwards:
December 31, 2012 |
December 31, 2011 |
|||||||
Notional amount of Currency Pair: | ||||||||
Contracts to purchase USD with euros | $ | 34.3 | $ | 27.5 | ||||
Contracts to sell USD for euros | $ | 48.4 | $ | 47.7 | ||||
Contracts to purchase USD with GBP | $ | 2.1 | $ | 2.4 | ||||
Contracts to sell USD for GBP | $ | 1.7 | $ | 17.6 | ||||
Contracts to purchase USD with other foreign currencies | $ | 6.7 | $ | 3.2 | ||||
Contracts to sell USD for other foreign currencies | $ | 5.1 | $ | 7.6 | ||||
Contracts to purchase euros with other foreign currencies | € | 14.4 | € | 13.6 | ||||
Contracts to purchase euros with GBP | € | — | € | 1.6 | ||||
Contracts to sell euros for GBP | € | 8.9 | € | 7.2 |
The following table provides information on gains (losses) on the company’s cash flow hedges:
Derivatives in Cash Flow |
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) |
Amount of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
|||||||||||||||||||||||||||||||||||
Year Ended December 31, |
Year Ended December 31, |
Year Ended December 31, |
||||||||||||||||||||||||||||||||||||||
2012 | 2011 | 2010 | 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | ||||||||||||||||||||||||||||||||
FX options | $ | — | $ | — | $ | — | Revenue | $ | — | $ | (0.2) | $ | (1.0) | Revenue | $ | — | $ | — | $ | — | ||||||||||||||||||||
Interest rate swaps | (0.1) | (0.6) | (3.1) | Interest income (expense), net |
(2.4) | (3.0) | (2.8) | N/A | — | — | — | |||||||||||||||||||||||||||||
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|||||||||||||||||||||||
Total | $ | (0.1) | $ | (0.6) | $ | (3.1) | $ | (2.4) | $ | (3.2) | $ | (3.8) | $ | — | $ | — | $ | — | ||||||||||||||||||||||
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The following table summarizes the notional amounts of the Company’s outstanding foreign exchange forward contracts that are designated as net investment hedges:
December 31, 2012 |
December 31, 2011 |
|||||||
Notional amount of Currency Pair: | ||||||||
Contracts to sell euros for USD | € | 50.0 | N/A |
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) |
Amount of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
|||||||||||||||||||||||
Year Ended December 31, |
Year Ended December 31, |
Year Ended December 31, |
||||||||||||||||||||||||||
2012 | 2011 | 2012 | 2011 | 2012 | 2011 | |||||||||||||||||||||||
FX forwards | $ | (2.2 | ) | $ | — | N/A | $ | — | $ | — | N/A | $ | — | $ | — | |||||||||||||
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|||||||||||||||||
Total | $ | (2.2 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
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Property and equipment, net consisted of:
December 31, | ||||||||
2012 | 2011 | |||||||
Office and computer equipment (3 – 20 year estimated useful life) | $ | 119.7 | $ | 106.8 | ||||
Office furniture and fixtures (5 – 10 year estimated useful life) | 40.3 | 40.6 | ||||||
Internal-use computer software (3 – 5 year estimated useful life) | 263.9 | 241.8 | ||||||
Leasehold improvements (3 – 20 year estimated useful life) | 197.5 | 195.8 | ||||||
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|
|||||
Total property and equipment, at cost |
621.4 | 585.0 | ||||||
Less: accumulated depreciation and amortization | (314.3 | ) | (258.2 | ) | ||||
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|
|||||
Total property and equipment, net | $ | 307.1 | $ | 326.8 | ||||
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Shown below is the purchase price allocation, which summarizes the fair values of the assets acquired, and liabilities assumed, at the date of acquisition:
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 | |||||||
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|||||||
Total intangible assets (12 year weighted average life) |
27.1 | |||||||
Goodwill | 54.6 | |||||||
Liabilities assumed | (18.1 | ) | ||||||
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|||||||
Net assets acquired | $ | 79.5 | ||||||
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Shown below is the purchase price allocation, which summarizes the fair values of the assets acquired and liabilities assumed, at the date of acquisition:
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 | |||||||
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|||||||
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 | ) | ||||||
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|||||||
Net assets acquired | $ | 199.8 | ||||||
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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 | |||
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Total fair value of consideration transferred | $ | 199.8 | ||
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Shown below is the purchase price allocation, which summarizes the fair values of the assets acquired and liabilities assumed, at the date of acquisition:
Current assets | $ | 5.1 | ||||||
Property and equipment, net | 0.8 | |||||||
Intangible assets: | ||||||||
Trade name (30 year weighted average life) |
$ | 9.0 | ||||||
Client relationships (21 year weighted average life) |
63.1 | |||||||
Trade secret (13 year weighted average life) |
5.8 | |||||||
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|||||||
Total intangible assets (21 year weighted average life) |
77.9 | |||||||
Goodwill | 104.6 | |||||||
Liabilities assumed | (37.0 | ) | ||||||
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|||||||
Net assets acquired | $ | 151.4 | ||||||
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The following table summarizes the activity in goodwill:
Year Ended December 31, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
MIS | MA | Consolidated | MIS | MA | Consolidated | |||||||||||||||||||
Beginning balance: | ||||||||||||||||||||||||
Goodwill |
$ | 11.0 | $ | 631.9 | $ | 642.9 | $ | 11.4 | $ | 454.1 | $ | 465.5 | ||||||||||||
Accumulated impairment charge |
— | — | — | — | — | — | ||||||||||||||||||
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Total | 11.0 | 631.9 | 642.9 | 11.4 | 454.1 | 465.5 | ||||||||||||||||||
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Additions/adjustments | — | (4.4 | ) | (4.4 | ) | — | 198.5 | 198.5 | ||||||||||||||||
Impairment charge | — | (12.2 | ) | (12.2 | ) | — | — | — | ||||||||||||||||
Foreign currency translation adjustments | 0.5 | 10.3 | 10.8 | (0.4 | ) | (20.7 | ) | (21.1 | ) | |||||||||||||||
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Ending balance: | ||||||||||||||||||||||||
Goodwill |
11.5 | 637.8 | 649.3 | 11.0 | 631.9 | 642.9 | ||||||||||||||||||
Accumulated impairment charge |
— | (12.2 | ) | (12.2 | ) | — | — | — | ||||||||||||||||
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Total | $ | 11.5 | $ | 625.6 | $ | 637.1 | $ | 11.0 | $ | 631.9 | $ | 642.9 | ||||||||||||
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Acquired intangible assets consisted of:
December 31, | ||||||||
2012 | 2011 | |||||||
Customer relationships | $ | 219.6 | $ | 217.9 | ||||
Accumulated amortization | (74.0 | ) | (58.6 | ) | ||||
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Net customer relationships |
145.6 | 159.3 | ||||||
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Trade secrets | 31.4 | 31.3 | ||||||
Accumulated amortization | (16.0 | ) | (13.4 | ) | ||||
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Net trade secrets |
15.4 | 17.9 | ||||||
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Software | 73.2 | 70.9 | ||||||
Accumulated amortization | (33.7 | ) | (25.1 | ) | ||||
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Net software |
39.5 | 45.8 | ||||||
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Trade names | 28.3 | 28.1 | ||||||
Accumulated amortization | (10.3 | ) | (9.0 | ) | ||||
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Net trade names |
18.0 | 19.1 | ||||||
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Other | 24.9 | 24.6 | ||||||
Accumulated amortization | (16.9 | ) | (13.1 | ) | ||||
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Net other |
8.0 | 11.5 | ||||||
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Total |
$ | 226.5 | $ | 253.6 | ||||
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Other intangible assets primarily consist of databases and covenants not to compete. Amortization expense relating to intangible assets is as follows:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Amortization expense | $ | 30.1 | $ | 20.5 | $ | 16.4 |
Estimated future annual amortization expense for intangible assets subject to amortization is as follows:
Year Ended December 31, |
||||
2013 | $ | 28.2 | ||
2014 | 22.9 | |||
2015 | 21.6 | |||
2016 | 20.4 | |||
2017 | 15.5 | |||
Thereafter | 117.9 |
|
The table below presents information about items, which are carried at fair value on a recurring basis at December 31, 2012 and 2011:
Fair Value Measurement as of December 31, 2012 | ||||||||||||||||
Description |
Balance | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: | ||||||||||||||||
Derivatives (a) |
$ | 15.2 | $ | — | $ | 15.2 | $ | — | ||||||||
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Total |
$ | 15.2 | $ | — | $ | 15.2 | $ | — | ||||||||
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Liabilities: | ||||||||||||||||
Derivatives (a) |
$ | 2.4 | $ | — | $ | 2.4 | $ | — | ||||||||
Contingent consideration arising from acquisitions (b) |
9.0 | — | — | 9.0 | ||||||||||||
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Total |
$ | 11.4 | $ | — | $ | 2.4 | $ | 9.0 | ||||||||
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Fair Value Measurement as of December 31, 2011 | ||||||||||||||||
Description |
Balance | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: | ||||||||||||||||
Derivatives (a) |
$ | 12.6 | $ | — | $ | 12.6 | $ | — | ||||||||
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Total |
$ | 12.6 | $ | — | $ | 12.6 | $ | — | ||||||||
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Liabilities: | ||||||||||||||||
Derivatives (a) |
$ | 6.8 | $ | — | $ | 6.8 | $ | — | ||||||||
Contingent consideration arising from acquisitions (b) |
9.1 | — | — | 9.1 | ||||||||||||
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Total |
$ | 15.9 | $ | — | $ | 6.8 | $ | 9.1 | ||||||||
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(a) | Represents interest rate swaps and FX forwards on certain assets and liabilities as well as on certain non U.S. dollar net investments in certain foreign subsidiaries more fully discussed in Note 5. |
(b) | Represents contingent consideration liabilities pursuant to the agreements for certain MA acquisitions which are more fully discussed in Note 7. |
The following table summarizes the changes in the fair value of the Company’s Level 3 liabilities:
Contingent Consideration Year Ended December 31, |
||||||||
2012 | 2011 | |||||||
Balance as of January 1 | $ | 9.1 | $ | 2.1 | ||||
Issuances | — | 7.4 | ||||||
Settlements | (0.5 | ) | (0.3 | ) | ||||
Losses included in earnings | 0.1 | 0.3 | ||||||
Foreign currency translation adjustments | 0.3 | (0.4 | ) | |||||
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|||||
Balance as of December 31 | $ | 9.0 | $ | 9.1 | ||||
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The following tables contain additional detail related to certain balance sheet captions:
December 31, | ||||||||
2012 | 2011 | |||||||
Other current assets: | ||||||||
Prepaid taxes |
$ | 31.8 | $ | 27.6 | ||||
Prepaid expenses |
47.3 | 44.6 | ||||||
Other |
12.8 | 5.4 | ||||||
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|
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Total other current assets |
$ | 91.9 | $ | 77.6 | ||||
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|||||
December 31, | ||||||||
2012 | 2011 | |||||||
Other assets: | ||||||||
Investments in joint ventures |
$ | 38.3 | $ | 37.2 | ||||
Deposits for real-estate leases |
10.0 | 12.2 | ||||||
Other |
47.7 | 32.6 | ||||||
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|
|||||
Total other assets |
$ | 96.0 | $ | 82.0 | ||||
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|
|||||
December 31, | ||||||||
2012 | 2011 | |||||||
Accounts payable and accrued liabilities: | ||||||||
Salaries and benefits |
$ | 79.2 | $ | 67.5 | ||||
Incentive compensation |
162.6 | 114.1 | ||||||
Profit sharing contribution |
12.6 | 7.1 | ||||||
Customer credits, advanced payments and advanced billings |
21.5 | 17.6 | ||||||
Self-insurance reserves |
55.8 | 27.1 | ||||||
Dividends |
47.7 | 38.2 | ||||||
Professional service fees |
30.2 | 29.7 | ||||||
Interest accrued on debt |
23.4 | 15.1 | ||||||
Accounts payable |
14.3 | 16.4 | ||||||
Income taxes (see Note 13) |
56.1 | 23.4 | ||||||
Deferred rent-current portion |
1.1 | 1.7 | ||||||
Pension and other retirement employee benefits (see Note 11) |
4.4 | 3.8 | ||||||
Interest accrued on UTPs |
— | 29.7 | ||||||
Other |
46.4 | 60.9 | ||||||
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|
|||||
Total accounts payable and accrued liabilities |
$ | 555.3 | $ | 452.3 | ||||
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|||||
December 31, | ||||||||
2012 | 2011 | |||||||
Other liabilities: | ||||||||
Pension and other retirement employee benefits (see Note 11) |
$ | 213.3 | $ | 187.5 | ||||
Deferred rent-non-current portion |
110.2 | 108.8 | ||||||
Interest accrued on UTPs |
10.6 | 11.8 | ||||||
Legacy and other tax matters |
37.1 | 52.6 | ||||||
Other |
38.9 | 44.1 | ||||||
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|
|||||
Total other liabilities |
$ | 410.1 | $ | 404.8 | ||||
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The following table shows changes in the redeemable noncontrolling interest related to the acquisition of Copal:
Year Ended December 31, | ||||||||
2012 | 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 |
3.6 | 1.0 | ||||||
Distributions |
(3.6 | ) | — | |||||
FX translation |
1.6 | (1.7 | ) | |||||
Adjustment to redemption value |
3.4 | — | ||||||
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|
|||||
Balance December 31, | $ | 72.3 | $ | 60.5 | ||||
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* | 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 7 for further detail on this arrangement. |
The following table summarizes the components of the Company’s AOCI:
(in millions) | December 31, | |||||||
2012 | 2011 | |||||||
Currency translation adjustments, net of tax |
$ | 10.9 | $ | (23.3 | ) | |||
Net actuarial losses and net prior service cost related to pension and other retirement employee benefits, net of tax |
(90.1 | ) | (81.2 | ) | ||||
Unrealized losses on cash flow and net investment hedges, net of tax |
(2.9 | ) | (3.0 | ) | ||||
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|
|||||
Total accumulated other comprehensive loss |
$ | (82.1 | ) | $ | (107.5 | ) | ||
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Changes in the Company’s self-insurance reserves are as follows:
Year Ended December 31, | ||||||||||||
(in millions) | 2012 | 2011 | 2010 | |||||||||
Balance January 1, | $ | 27.1 | $ | 30.0 | $ | 19.9 | ||||||
Charged to costs and expenses |
38.1 | 10.9 | 29.1 | |||||||||
Payments |
(9.4 | ) | (13.8 | ) | (19.0 | ) | ||||||
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|||||||
Balance December 31,* | $ | 55.8 | $ | 27.1 | $ | 30.0 | ||||||
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* | Refer to Note 2, “Contingencies” for further information on the Company’s self-insurance reserves. These reserves primarily relate to legal defense costs for claims from 2008 and 2009. |
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Following is a summary of changes in benefit obligations and fair value of plan assets for the Retirement Plans for the years ended December 31:
Pension Plans | Other Retirement Plans | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Change in benefit obligation: | ||||||||||||||||
Benefit obligation, beginning of the period |
$ | (298.8 | ) | (242.5 | ) | $ | (20.2 | ) | (15.6 | ) | ||||||
Service cost |
(18.9 | ) | (15.1 | ) | (1.5 | ) | (1.1 | ) | ||||||||
Interest cost |
(13.1 | ) | (13.1 | ) | (0.7 | ) | (0.8 | ) | ||||||||
Plan participants’ contributions |
— | — | (0.3 | ) | (0.2 | ) | ||||||||||
Benefits paid |
5.7 | 13.6 | 1.0 | 0.8 | ||||||||||||
Actuarial gain (loss) |
(11.0 | ) | (4.9 | ) | 1.1 | (0.9 | ) | |||||||||
Assumption changes |
(20.2 | ) | (36.8 | ) | (1.2 | ) | (2.4 | ) | ||||||||
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Benefit obligation, end of the period | (356.3 | ) | (298.8 | ) | (21.8 | ) | (20.2 | ) | ||||||||
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Change in plan assets: | ||||||||||||||||
Fair value of plan assets, beginning of the period |
133.0 | 120.4 | — | — | ||||||||||||
Actual return on plan assets |
19.0 | 0.8 | — | — | ||||||||||||
Benefits paid |
(5.7 | ) | (13.6 | ) | (1.0 | ) | (0.8 | ) | ||||||||
Employer contributions |
21.3 | 25.4 | 0.7 | 0.6 | ||||||||||||
Plan participants’ contributions |
— | — | 0.3 | 0.2 | ||||||||||||
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Fair value of plan assets, end of period |
167.6 | 133.0 | — | — | ||||||||||||
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|||||||||
Funded status of the plans | (188.7 | ) | (165.8 | ) | (21.8 | ) | (20.2 | ) | ||||||||
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Amounts recorded on the consolidated balance sheets: | ||||||||||||||||
Pension and retirement benefits liability-current |
(3.6 | ) | (3.0 | ) | (0.8 | ) | (0.8 | ) | ||||||||
Pension and retirement benefits liability-non current |
(185.1 | ) | (162.8 | ) | (21.0 | ) | (19.4 | ) | ||||||||
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|||||||||
Net amount recognized | $ | (188.7 | ) | (165.8 | ) | $ | (21.8 | ) | (20.2 | ) | ||||||
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Accumulated benefit obligation, end of the period | $ | (298.4 | ) | (256.1 | ) | |||||||||||
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The following information is for those pension plans with an accumulated benefit obligation in excess of plan assets:
December 31, | ||||||||
2012 | 2011 | |||||||
Aggregate projected benefit obligation | $ | 356.3 | $ | 298.8 | ||||
Aggregate accumulated benefit obligation | $ | 298.4 | $ | 256.1 | ||||
Aggregate fair value of plan assets | $ | 167.6 | $ | 133.0 |
The following table summarizes the pre-tax net actuarial losses and prior service cost recognized in AOCI for the Company’s Retirement Plans as of December 31:
Pension Plans | Other Retirement Plans | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Net actuarial losses | $ | (142.7 | ) | $ | (127.1 | ) | $ | (6.0 | ) | $ | (6.1 | ) | ||||
Net prior service costs | (4.0 | ) | (4.7 | ) | — | — | ||||||||||
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Total recognized in AOCI- pretax |
$ | (146.7 | ) | $ | (131.8 | ) | $ | (6.0 | ) | $ | (6.1 | ) | ||||
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The following table summarizes the estimated pre-tax net actuarial losses and prior service cost for the Company’s Retirement Plans that will be amortized from AOCI and recognized as components of net periodic expense during the next fiscal year:
Pension Plans | Other Retirement Plans | |||||||
Net actuarial losses | $ | 11.1 | $ | 0.4 | ||||
Net prior service costs | 0.6 | — | ||||||
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|||||
Total to be recognized as components of net periodic expense |
$ | 11.7 | $ | 0.4 | ||||
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Net periodic benefit expenses recognized for the Retirement Plans for years ended December 31:
Pension Plans | Other Retirement Plans | |||||||||||||||||||||||
2012 | 2011 | 2010 | 2012 | 2011 | 2010 | |||||||||||||||||||
Components of net periodic expense | ||||||||||||||||||||||||
Service cost | $ | 18.9 | $ | 15.1 | $ | 13.5 | $ | 1.5 | $ | 1.1 | $ | 0.9 | ||||||||||||
Interest cost | 13.1 | 13.1 | 12.0 | 0.7 | 0.8 | 0.8 | ||||||||||||||||||
Expected return on plan assets | (12.5 | ) | (11.9 | ) | (10.5 | ) | — | — | — | |||||||||||||||
Amortization of net actuarial loss from earlier periods | 9.1 | 5.0 | 2.8 | 0.3 | 0.3 | 0.1 | ||||||||||||||||||
Amortization of net prior service costs from earlier periods | 0.7 | 0.6 | 0.7 | — | — | — | ||||||||||||||||||
Settlement charges | — | 1.6 | 1.3 | — | — | — | ||||||||||||||||||
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Net periodic expense | $ | 29.3 | $ | 23.5 | $ | 19.8 | $ | 2.5 | $ | 2.2 | $ | 1.8 | ||||||||||||
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The following table summarizes the pre-tax amounts recorded in OCI related to the Company’s Retirement Plans for the years ended December 31:
Pension Plans | Other Retirement Plans | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Amortization of net actuarial losses | $ | 9.1 | $ | 5.0 | $ | 0.3 | $ | 0.3 | ||||||||
Amortization of prior service costs | 0.7 | 0.6 | — | — | ||||||||||||
Accelerated recognition of actuarial loss due to settlement | — | 1.6 | — | — | ||||||||||||
Net actuarial loss arising during the period | (24.7 | ) | (52.8 | ) | (0.2 | ) | (3.3 | ) | ||||||||
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|||||||||
Total recognized in OCI – pre-tax |
$ | (14.9 | ) | $ | (45.6 | ) | $ | 0.1 | $ | (3.0 | ) | |||||
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Weighted-average assumptions used to determine benefit obligations at December 31:
Pension Plans | Other Retirement Plans | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Discount rate | 3.82 | % | 4.25 | % | 3.55 | % | 4.05 | % | ||||||||
Rate of compensation increase | 4.00 | % | 4.00 | % | — | — |
Weighted-average assumptions used to determine net periodic benefit expense for years ended December 31:
Pension Plans | Other Retirement Plans | |||||||||||||||||||||||
2012 | 2011 | 2010 | 2012 | 2011 | 2010 | |||||||||||||||||||
Discount rate | 4.25 | % | 5.39 | % | 5.95 | % | 4.05 | % | 5.15 | % | 5.75 | % | ||||||||||||
Expected return on plan assets | 7.85 | % | 8.35 | % | 8.35 | % | — | — | — | |||||||||||||||
Rate of compensation increase | 4.00 | % | 4.00 | % | 4.00 | % | — | — | — |
Assumed Healthcare Cost Trend Rates at December 31:
2012 | 2011 | 2010 | ||||||||||||||||||||||
Pre-age 65 | Post-age 65 | Pre-age 65 | Post-age 65 | Pre-age 65 | Post-age 65 | |||||||||||||||||||
Healthcare cost trend rate assumed for the following year |
6.9 | % | 7.9 | % | 7.4 | % | 8.4 | % | 7.9 | % | 8.9 | % | ||||||||||||
Ultimate rate to which the cost trend rate is assumed to decline (ultimate trend rate) |
5.0% |
|
5.0% |
|
5.0% | |||||||||||||||||||
Year that the rate reaches the ultimate trend rate | 2020 |
|
2020 |
|
2020 |
Fair value of the assets in the Company’s funded pension plan by asset category at December 31, 2012 and 2011 is determined based on the hierarchy of fair value measurements as defined in Note 2 to these financial statements and is as follows:
Fair Value Measurement as of December 31, 2012 | ||||||||||||||||||||
Asset Category |
Balance | Level 1 | Level 2 | Level 3 | % of total assets |
|||||||||||||||
Cash and cash equivalent | $ | 0.2 | $ | — | $ | 0.2 | $ | — | — | % | ||||||||||
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|||||||||||
Emerging markets equity fund | 13.3 | $ | 13.3 | $ | — | — | 8 | % | ||||||||||||
Common/collective trust funds – equity securities | ||||||||||||||||||||
U.S. large-cap |
32.0 | — | 32.0 | — | 19 | % | ||||||||||||||
U.S. small and mid-cap |
10.7 | — | 10.7 | — | 6 | % | ||||||||||||||
International |
44.1 | — | 44.1 | — | 27 | % | ||||||||||||||
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|||||||||||
Total equity investments | 100.1 | 13.3 | 86.8 | — | 60 | % | ||||||||||||||
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|||||||||||
Common/collective trust funds – fixed income securities | ||||||||||||||||||||
Long-term government/treasury bonds |
13.8 | — | 13.8 | — | 8 | % | ||||||||||||||
Long-term investment grade corporate bonds |
17.5 | — | 17.5 | — | 11 | % | ||||||||||||||
U.S. Treasury Inflation-Protected Securities (TIPs) |
8.5 | — | 8.5 | — | 5 | % | ||||||||||||||
Emerging markets bonds |
5.4 | — | 5.4 | — | 3 | % | ||||||||||||||
High yield bonds |
5.2 | — | 5.2 | — | 3 | % | ||||||||||||||
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|||||||||||
Total fixed-income investments | 50.4 | — | 50.4 | — | 30 | % | ||||||||||||||
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|||||||||||
Common/collective trust funds – convertible securities | 4.8 | — | 4.8 | — | 3 | % | ||||||||||||||
Private real estate fund | 12.1 | — | — | 12.1 | 7 | % | ||||||||||||||
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Total other investment | 16.9 | — | 4.8 | 12.1 | 10 | % | ||||||||||||||
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|||||||||||
Total Assets | $ | 167.6 | $ | 13.3 | $ | 142.2 | $ | 12.1 | 100 | % | ||||||||||
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Fair Value Measurement as of December 31, 2011 | ||||||||||||||||||||
Asset Category |
Balance | Level 1 | Level 2 | Level 3 | % of total assets |
|||||||||||||||
Cash and cash equivalent | $ | 0.2 | $ | — | $ | 0.2 | $ | — | — | % | ||||||||||
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|||||||||||
Emerging markets equity fund | 7.7 | $ | 7.7 | $ | — | — | 6 | % | ||||||||||||
Common/collective trust funds – equity securities | ||||||||||||||||||||
U.S. large-cap |
26.4 | — | 26.4 | — | 20 | % | ||||||||||||||
U.S. small and mid-cap |
9.3 | — | 9.3 | — | 7 | % | ||||||||||||||
International |
30.4 | — | 30.4 | — | 23 | % | ||||||||||||||
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|||||||||||
Total equity investments | 73.8 | 7.7 | 66.1 | — | 56 | % | ||||||||||||||
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Common/collective trust funds – fixed income securities | ||||||||||||||||||||
Long-term government/treasury bonds |
13.9 | — | 13.9 | — | 10 | % | ||||||||||||||
Long-term investment grade corporate bonds |
14.9 | — | 14.9 | — | 11 | % | ||||||||||||||
U.S. Treasury Inflation-Protected Securities (TIPs) |
7.6 | — | 7.6 | — | 6 | % | ||||||||||||||
Emerging markets bonds |
4.5 | — | 4.5 | — | 3 | % | ||||||||||||||
High yield bonds |
3.6 | — | 3.6 | — | 3 | % | ||||||||||||||
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|||||||||||
Total fixed-income investments | 44.5 | — | 44.5 | — | 33 | % | ||||||||||||||
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Common/collective trust funds – convertible securities | 4.8 | — | 4.8 | — | 4 | % | ||||||||||||||
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Private real estate fund | 9.7 | — | — | 9.7 | 7 | % | ||||||||||||||
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Total other investment | 14.5 | — | 4.8 | 9.7 | 11 | % | ||||||||||||||
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|||||||||||
Total Assets | $ | 133.0 | $ | 7.7 | $ | 115.6 | $ | 9.7 | 100 | % | ||||||||||
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The table below is a summary of changes in the fair value of the Plan’s Level 3 assets:
Real estate investment fund: | ||||
Balance as of December 31, 2011 | $ | 9.7 | ||
Return on plan assets related to assets held as of December 31, 2012 | 0.8 | |||
Return on plan assets related to assets sold during the period | — | |||
Purchases (sales), net | 1.6 | |||
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|
|||
Balance as of December 31, 2012 | $ | 12.1 | ||
|
|
Estimated future benefits payments for the Retirement Plans are as follows at ended December 31, 2012:
Year Ending December 31, |
Pension Plans | Other Retirement Plans | ||||||
2013 | $ | 6.4 | $ | 0.8 | ||||
2014 | 7.5 | 0.9 | ||||||
2015 | 7.9 | 1.0 | ||||||
2016 | 10.5 | 1.2 | ||||||
2017 | 11.0 | 1.3 | ||||||
2018 – 2022 | $ | 108.5 | $ | 8.3 |
|
Presented below is a summary of the stock-based compensation expense and associated tax benefit in the accompanying Consolidated Statements of Operations:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Stock-based compensation expense | $ | 64.5 | $ | 56.7 | $ | 56.6 | ||||||
Tax benefit | $ | 23.3 | $ | 18.1 | $ | 23.9 |
The following weighted average assumptions were used for options granted:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Expected dividend yield | 1.66 | % | 1.53 | % | 1.58 | % | ||||||
Expected stock volatility | 44 | % | 41 | % | 44 | % | ||||||
Risk-free interest rate | 1.55 | % | 3.33 | % | 2.73 | % | ||||||
Expected holding period | 7.4 years | 7.6 years | 5.9 years | |||||||||
Grant date fair value | $ | 15.19 | $ | 12.49 | $ | 10.38 |
A summary of option activity as of December 31, 2012 and changes during the year then ended is presented below:
Options |
Shares | Weighted Average Exercise Price Per Share |
Weighted Average Remaining Contractual Term |
Aggregate Intrinsic Value |
||||||||||||
Outstanding, December 31, 2011 | 17.4 | $ | 39.60 | |||||||||||||
Granted | 0.5 | 38.68 | ||||||||||||||
Exercised | (4.4 | ) | 28.77 | |||||||||||||
Forfeited | (0.1 | ) | 27.66 | |||||||||||||
Expired | (0.4 | ) | 57.28 | |||||||||||||
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Outstanding, December 31, 2012 | 13.0 | $ | 42.82 | 4.6 yrs | $ | 163.9 | ||||||||||
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|
|||||||||||||||
Vested and expected to vest, December 31, 2012 | 12.8 | $ | 43.05 | 4.5 yrs | $ | 159.2 | ||||||||||
|
|
|||||||||||||||
Exercisable, December 31, 2012 | 10.4 | $ | 46.14 | 3.9 yrs | $ | 109.9 | ||||||||||
|
|
The following table summarizes information relating to stock option exercises:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Proceeds from stock option exercises | $ | 127.4 | $ | 50.3 | $ | 36.4 | ||||||
Aggregate intrinsic value | $ | 61.3 | $ | 25.3 | $ | 19.7 | ||||||
Tax benefit realized upon exercise | $ | 23.4 | $ | 9.6 | $ | 7.8 |
A summary of the status of the Company’s nonvested restricted stock as of December 31, 2012 and changes during the year then ended is presented below:
Nonvested Restricted Stock |
Shares | Weighted Average Grant Date Fair Value Per Share |
||||||
Balance, December 31, 2011 | 2.8 | $ | 30.65 | |||||
Granted |
1.3 | 38.62 | ||||||
Vested |
(1.0 | ) | 33.82 | |||||
Forfeited |
(0.1 | ) | 32.07 | |||||
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|
|||||||
Balance, December 31, 2012 | 3.0 | $ | 33.08 | |||||
|
|
The following table summarizes information relating to the vesting of restricted stock awards:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Fair value of vested shares | $ | 37.8 | $ | 18.9 | $ | 12.4 | ||||||
Tax benefit realized upon vesting | $ | 13.4 | $ | 6.9 | $ | 4.7 |
A summary of the status of the Company’s performance-based restricted stock as of December 31, 2012 and changes during the year then ended is presented below:
Performance-based restricted stock |
Shares | Weighted Average Grant Date Fair Value Per Share |
||||||
Balance, December 31, 2011 | 1.0 | $ | 26.92 | |||||
Granted |
0.3 | 36.78 | ||||||
Vested |
(0.5 | ) | 25.27 | |||||
Adjustment to shares expected to vest* |
0.2 | 33.67 | ||||||
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|
|||||||
Balance, December 31, 2012 | 1.0 | $ | 30.06 | |||||
|
|
* | The adjustment reflects additional shares expected to vest based on the Company’s projected achievement of certain non-market based performance metrics as of December 31, 2012. |
|
Components of the Company’s provision for income taxes are as follows:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Current: | ||||||||||||
Federal |
$ | 168.1 | $ | 133.6 | $ | 106.6 | ||||||
State and Local |
33.7 | 28.1 | 22.1 | |||||||||
Non-U.S. |
86.4 | 89.8 | 82.9 | |||||||||
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|
|
|
|
|||||||
Total current |
288.2 | 251.5 | 211.6 | |||||||||
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|
|||||||
Deferred: | ||||||||||||
Federal |
35.7 | 9.3 | (14.7 | ) | ||||||||
State and Local |
4.5 | 7.0 | 10.6 | |||||||||
Non-U.S. |
(4.1 | ) | (6.0 | ) | (6.5 | ) | ||||||
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|
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|
|||||||
Total deferred |
36.1 | 10.3 | (10.6 | ) | ||||||||
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|
|
|
|||||||
Total provision for income taxes | $ | 324.3 | $ | 261.8 | $ | 201.0 | ||||||
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|
|
A reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate on income before provision for income taxes is as follows:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
U.S. statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
State and local taxes, net of federal tax benefit | 2.4 | 2.7 | 2.9 | |||||||||
Benefit of foreign operations | (6.1 | ) | (6.3 | ) | (9.7 | ) | ||||||
Legacy tax items | (0.4 | ) | (0.2 | ) | (0.4 | ) | ||||||
Other | 0.8 | — | 0.3 | |||||||||
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|
|||||||
Effective tax rate | 31.7 | % | 31.2 | % | 28.1 | % | ||||||
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|
|||||||
Income tax paid | $ | 293.3 | * | $ | 191.4 | $ | 247.9 | |||||
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|
|
* | Includes approximately $92 million in payments for tax audit settlements in the first quarter of 2012. |
The source of income before provision for income taxes is as follows:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
United States | $ | 694.2 | $ | 469.1 | $ | 390.6 | ||||||
International | 329.8 | 370.7 | 323.8 | |||||||||
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|||||||
Income before provision for income taxes | $ | 1,024.0 | $ | 839.8 | $ | 714.4 | ||||||
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|
The components of deferred tax assets and liabilities are as follows:
Year Ended December 31, | ||||||||
2012 | 2011 | |||||||
Deferred tax assets: | ||||||||
Current: |
||||||||
Account receivable allowances |
$ | 8.2 | $ | 8.0 | ||||
Accrued compensation and benefits |
13.3 | 12.3 | ||||||
Deferred revenue |
6.1 | 5.8 | ||||||
Legal and professional fees |
8.4 | 9.8 | ||||||
Restructuring |
1.5 | 1.4 | ||||||
Uncertain tax positions |
— | 43.6 | ||||||
Other |
3.1 | 3.4 | ||||||
|
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|
|
|||||
Total current |
40.6 | 84.3 | ||||||
|
|
|
|
|||||
Non-current: |
||||||||
Accumulated depreciation and amortization |
0.4 | 1.3 | ||||||
Stock-based compensation |
86.9 | 89.6 | ||||||
Benefit plans |
96.6 | 82.7 | ||||||
Deferred rent and construction allowance |
31.3 | 30.5 | ||||||
Deferred revenue |
34.3 | 36.4 | ||||||
Foreign net operating loss (1) |
13.0 | 9.7 | ||||||
Uncertain tax positions |
25.9 | 21.2 | ||||||
Self-insured related reserves |
33.8 | 23.0 | ||||||
Other |
4.5 | 7.2 | ||||||
|
|
|
|
|||||
Total non-current |
326.7 | 301.6 | ||||||
|
|
|
|
|||||
Total deferred tax assets | 367.3 | 385.9 | ||||||
|
|
|
|
|||||
Deferred tax liabilities: | ||||||||
Current: |
||||||||
Other |
(0.2 | ) | — | |||||
|
|
|
|
|||||
Total Current |
(0.2 | ) | — | |||||
|
|
|
|
|||||
Non-current: |
||||||||
Accumulated depreciation and amortization of intangible assets and capitalized software |
(154.7 | ) | (161.3 | ) | ||||
Foreign earnings to be repatriated |
(4.7 | ) | (2.6 | ) | ||||
Self-insured related income |
(39.7 | ) | (26.8 | ) | ||||
Other liabilities |
(3.9 | ) | (2.4 | ) | ||||
|
|
|
|
|||||
Total non-current |
(203.0 | ) | (193.1 | ) | ||||
|
|
|
|
|||||
Total deferred tax liabilities | (203.2 | ) | (193.1 | ) | ||||
|
|
|
|
|||||
Net deferred tax asset | 164.1 | 192.8 | ||||||
|
|
|
|
|||||
Valuation allowance | (15.2 | ) | (13.9 | ) | ||||
|
|
|
|
|||||
Total net deferred tax assets | $ | 148.9 | $ | 178.9 | ||||
|
|
|
|
(1) | Amounts are primarily set to expire beginning in 2017, if unused. |
A reconciliation of the beginning and ending amount of UTPs is as follows:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Balance as of January 1 | $ | 205.4 | $ | 180.8 | $ | 164.2 | ||||||
Additions for tax positions related to the current year | 49.1 | 48.9 | 31.1 | |||||||||
Additions for tax positions of prior years | 18.9 | 15.3 | 16.2 | |||||||||
Reductions for tax positions of prior years | (20.6 | ) | (27.3 | ) | (9.9 | ) | ||||||
Settlements with taxing authorities | (91.5 | ) | (2.1 | ) | — | |||||||
Lapse of statute of limitations | (4.7 | ) | (10.2 | ) | (20.8 | ) | ||||||
|
|
|
|
|
|
|||||||
Balance as of December 31 | $ | 156.6 | $ | 205.4 | $ | 180.8 | ||||||
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|
The following table summarizes total indebtedness:
December 31, | ||||||||
2012 | 2011 | |||||||
2012 Facility | $ | — | $ | — | ||||
Commercial paper | — | — | ||||||
Notes payable: | ||||||||
Series 2005-1 Notes due 2015, including fair value of interest rate swap of $13.8 million at 2012 and $11.5 million at 2011 |
313.8 | 311.5 | ||||||
Series 2007-1 Notes due in 2017 |
300.0 | 300.0 | ||||||
2010 Senior Notes, due 2020, net of unamortized discount of $2.6 million and $2.7 million in 2012 and 2011, respectively |
497.4 | 497.3 | ||||||
2012 Senior Notes, due 2022, net of unamortized discount of $3.8 million in 2012 |
496.2 | — | ||||||
2008 Term Loan, various payments through 2013 | 63.8 | 135.0 | ||||||
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Total debt | 1,671.2 | 1,243.8 | ||||||
Current portion | (63.8 | ) | (71.3 | ) | ||||
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Total long-term debt | $ | 1,607.4 | $ | 1,172.5 | ||||
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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 Ending December 31, | 2008 Term Loan | Series 2005-1 Notes |
Series 2007-1 Notes |
2010 Senior Notes |
2012 Senior Notes |
Total | ||||||||||||||||||
2013 | $ | 63.8 | $ | — | $ | — | $ | — | $ | — | $ | 63.8 | ||||||||||||
2014 | — | — | — | — | — | — | ||||||||||||||||||
2015 | — | 300.0 | — | — | — | 300.0 | ||||||||||||||||||
2016 | — | — | — | — | — | — | ||||||||||||||||||
2017 | — | — | 300.0 | — | — | 300.0 | ||||||||||||||||||
Thereafter | — | — | 500.0 | 500.0 | 1,000.0 | |||||||||||||||||||
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Total | $ | 63.8 | $ | 300.0 | $ | 300.0 | $ | 500.0 | $ | 500.0 | $ | 1,663.8 | ||||||||||||
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The following table summarizes the components of interest as presented in the consolidated statements of operations:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Income | $ | 5.2 | $ | 5.3 | $ | 3.1 | ||||||
Expense on borrowings | (73.8 | ) | (65.5 | ) | (52.2 | ) | ||||||
UTBs and other tax related interest | 0.4 | (8.7 | ) | (7.7 | ) | |||||||
Legacy Tax (a) | 4.4 | 3.7 | 2.5 | |||||||||
Interest capitalized | — | 3.1 | 1.8 | |||||||||
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Total | $ | (63.8 | ) | $ | (62.1 | ) | $ | (52.5 | ) | |||
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Interest paid (b) | $94.4 | $ | 67.2 | $ | 44.0 | |||||||
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(a) | Represents a reduction of accrued interest related to the favorable resolution of Legacy Tax Matters, further discussed in Note 17 to the consolidated financial statements. |
(b) | 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 5. |
The fair value and carrying value of the Company’s long-term debt as of December 31, 2012 and 2011 is as follows:
December 31, 2012 | December 31, 2011 | |||||||||||||||
Carrying Amount |
Estimated Fair Value |
Carrying Amount |
Estimated Fair Value |
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Series 2005-1 Notes* | $ | 313.8 | $ | 326.1 | $ | 311.5 | $ | 316.5 | ||||||||
Series 2007-1 Notes | 300.0 | 348.3 | 300.0 | 332.7 | ||||||||||||
2010 Senior Notes | 497.4 | 562.8 | 497.3 | 534.1 | ||||||||||||
2012 Senior Notes | 496.2 | 528.8 | — | — | ||||||||||||
2008 Term Loan | 63.8 | 63.8 | 135.0 | 135.0 | ||||||||||||
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Total | $ | 1,671.2 | $ | 1,829.8 | $ | 1,243.8 | $ | 1,318.3 | ||||||||
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* | The carrying amount includes a $13.8 million and $11.5 million fair value adjustment on an interest rate hedge at December 31, 2012 and 2011, respectively. |
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During the years ended December 31, 2012, 2011 and 2010, the Company paid dividends of:
Dividends Paid Per Share | ||||||||||||
Year ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
First quarter | $ | 0.16 | $ | 0.115 | $ | 0.105 | ||||||
Second quarter | 0.16 | 0.14 | 0.105 | |||||||||
Third quarter | 0.16 | 0.14 | 0.105 | |||||||||
Fourth quarter | 0.16 | 0.14 | 0.105 | |||||||||
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Total |
$ | 0.64 | $ | 0.535 | $ | 0.42 | ||||||
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The minimum rent for operating leases that have remaining or original non-cancelable lease terms in excess of one year at December 31, 2012 is as follows:
Year Ending December 31, |
Operating Leases | |||
2013 | $ | 80.7 | ||
2014 | 69.9 | |||
2015 | 62.3 | |||
2016 | 55.0 | |||
2017 | 52.7 | |||
Thereafter | 494.8 | |||
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Total minimum lease payments | $ | 815.4 | ||
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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.
Year Ended December 31, | ||||||||||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||||||||||
MIS | MA | Eliminations | Consolidated | MIS | MA | Eliminations | Consolidated | |||||||||||||||||||||||||
Revenue | $ | 1,958.3 | $ | 855.3 | $ | (83.3 | ) | $ | 2,730.3 | $ | 1,634.7 | $ | 722.4 | $ | (76.4 | ) | $ | 2,280.7 | ||||||||||||||
Operating, SG&A | 967.1 | 663.4 | (83.3 | ) | 1,547.2 | 833.6 | 555.9 | (76.4 | ) | 1,313.1 | ||||||||||||||||||||||
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Adjusted Operating Income |
991.2 | 191.9 | — | 1,183.1 | 801.1 | 166.5 | — | 967.6 | ||||||||||||||||||||||||
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Depreciation and amortization |
44.3 | 49.2 | — | 93.5 | 41.3 | 37.9 | — | 79.2 | ||||||||||||||||||||||||
Goodwill impairment charge |
— | 12.2 | 12.2 | — | — | — | — | |||||||||||||||||||||||||
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Operating income | $ | 946.9 | $ | 130.5 | $ | — | $ | 1,077.4 | $ | 759.8 | $ | 128.6 | $ | — | $ | 888.4 | ||||||||||||||||
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Year Ended December 31, | ||||||||||||||||
2010 | ||||||||||||||||
MIS | MA | Eliminations | Consolidated | |||||||||||||
Revenue | $ | 1,466.3 | $ | 636.3 | $ | (70.6 | ) | $ | 2,032.0 | |||||||
Operating, SG&A | 783.9 | 479.5 | (70.6 | ) | 1,192.8 | |||||||||||
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Adjusted Operating Income |
682.4 | 156.8 | - | 839.2 | ||||||||||||
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Depreciation and amortization |
35.2 | 31.1 | - | 66.3 | ||||||||||||
Restructuring |
— | 0.1 | - | 0.1 | ||||||||||||
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Operating income | $ | 647.2 | $ | 125.6 | $ | - | $ | 772.8 | ||||||||
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The tables below present revenue by LOB:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
MIS: | ||||||||||||
Corporate finance (CFG) | $ | 857.6 | $ | 652.1 | $ | 563.9 | ||||||
Structured finance (SFG) | 381.0 | 344.6 | 290.8 | |||||||||
Financial institutions (FIG) | 325.5 | 294.9 | 278.7 | |||||||||
Public, project and infrastructure finance (PPIF) | 322.7 | 277.3 | 271.6 | |||||||||
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Total external revenue |
1,886.8 | 1,568.9 | 1,405.0 | |||||||||
Intersegment royalty | 71.5 | 65.8 | 61.3 | |||||||||
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Total | 1,958.3 | 1,634.7 | 1,466.3 | |||||||||
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MA: | ||||||||||||
Research, data and analytics (RD&A) | 491.0 | 451.3 | 425.0 | |||||||||
Enterprise Risk Solutions (ERS) | 242.6 | 196.1 | 180.7 | |||||||||
Professional services (PS) | 109.9 | 64.4 | 21.3 | |||||||||
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Total external revenue |
843.5 | 711.8 | 627.0 | |||||||||
Intersegment revenue | 11.8 | 10.6 | 9.3 | |||||||||
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Total | 855.3 | 722.4 | 636.3 | |||||||||
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Eliminations | (83.3 | ) | (76.4 | ) | (70.6 | ) | ||||||
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Total MCO | $ | 2,730.3 | $ | 2,280.7 | $ | 2,032.0 | ||||||
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CONSOLIDATED REVENUE INFORMATION BY GEOGRAPHIC AREA
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Revenue: | ||||||||||||
U.S. | $ | 1,464.1 | $ | 1,177.0 | $ | 1,089.5 | ||||||
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International: | ||||||||||||
EMEA |
820.7 | 708.4 | 627.4 | |||||||||
Other |
445.5 | 395.3 | 315.1 | |||||||||
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Total International |
1,266.2 | 1,103.7 | 942.5 | |||||||||
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Total | $ | 2,730.3 | $ | 2,280.7 | $ | 2,032.0 | ||||||
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Long-lived assets at December 31: | ||||||||||||
United States | $ | 498.4 | $ | 495.8 | $ | 476.5 | ||||||
International | 672.3 | 727.5 | 477.1 | |||||||||
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Total | $ | 1,170.7 | $ | 1,223.3 | $ | 953.6 | ||||||
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TOTAL ASSETS BY SEGMENT
December 31, 2012 | December 31, 2011 | |||||||||||||||||||||||||||||||
MIS | MA | Corporate Assets (a) |
Consolidated | MIS | MA | Corporate Assets (a) |
Consolidated | |||||||||||||||||||||||||
Total Assets | $ | 884.9 | $ | 1,386.7 | $ | 1,689.3 | $ | 3,960.9 | $ | 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 tax assets. |
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Below is a summary of activity for both allowances:
Year Ended December 31, |
Balance at Beginning of the Year |
Additions | Write-offs and Adjustments |
Balance at End of the Year |
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2012 | ||||||||||||||||
Accounts receivable allowance |
$ | (28.0 | ) | $ | (44.3 | ) | $ | 43.2 | $ | (29.1 | ) | |||||
Deferred tax assets – valuation allowance |
$ | (13.9 | ) | $ | (3.1 | ) | $ | 1.8 | $ | (15.2 | ) | |||||
2011 | ||||||||||||||||
Accounts receivable allowance |
$ | (33.0 | ) | $ | (40.6 | ) | $ | 45.6 | $ | (28.0 | ) | |||||
Deferred tax assets – valuation allowance |
$ | (12.8 | ) | $ | (4.0 | ) | $ | 2.9 | $ | (13.9 | ) | |||||
2010 | ||||||||||||||||
Accounts receivable allowance |
$ | (24.6 | ) | $ | (46.5 | ) | $ | 38.1 | $ | (33.0 | ) | |||||
Deferred tax assets – valuation allowance |
$ | (4.5 | ) | $ | (8.8 | ) | $ | 0.5 | $ | (12.8 | ) |
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The following table summarizes the components of other non-operating income (expense), net as presented in the consolidated statements of operations:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
FX gain (loss) | $ | (5.9 | ) | $ | 2.6 | $ | (5.1 | ) | ||||
Legacy Tax (a) | 12.8 | 6.4 | — | |||||||||
Joint venture income | 4.8 | 6.8 | 2.8 | |||||||||
Other | (1.3 | ) | (2.3 | ) | (3.6 | ) | ||||||
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Total |
$ | 10.4 | $ | 13.5 | $ | (5.9 | ) | |||||
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(a) | The 2012 amount represents a reversal of a liability 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 2004 Legacy Tax Matter. |
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Three Months Ended | ||||||||||||||||
(amounts in millions, except EPS) |
March 31 | June 30 | September 30 | December 31 | ||||||||||||
2012 | ||||||||||||||||
Revenue | $ | 646.8 | $ | 640.8 | $ | 688.5 | $ | 754.2 | ||||||||
Operating Income | $ | 269.0 | $ | 278.5 | $ | 269.7 | $ | 260.2 | ||||||||
Net income attributable to Moody’s | $ | 173.5 | $ | 172.5 | $ | 183.9 | $ | 160.1 | ||||||||
EPS: | ||||||||||||||||
Basic |
$ | 0.78 | $ | 0.77 | $ | 0.83 | $ | 0.72 | ||||||||
Diluted |
$ | 0.76 | $ | 0.76 | $ | 0.81 | $ | 0.70 | ||||||||
2011 | ||||||||||||||||
Revenue | $ | 577.1 | $ | 605.2 | $ | 531.3 | $ | 567.1 | ||||||||
Operating income | $ | 250.1 | $ | 270.1 | $ | 196.1 | $ | 172.1 | ||||||||
Net income attributable to Moody’s | $ | 155.5 | $ | 189.0 | $ | 130.7 | $ | 96.2 | ||||||||
EPS: | ||||||||||||||||
Basic |
$ | 0.68 | $ | 0.83 | $ | 0.58 | $ | 0.43 | ||||||||
Diluted |
$ | 0.67 | $ | 0.82 | $ | 0.57 | $ | 0.43 |
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