MOODYS CORP /DE/, 10-Q filed on 8/3/2011
Quarterly Report
Document and Entity Information
In Millions
6 Months Ended
Jun. 30, 2011
Document and Entity Information
 
Document Type
10-Q 
Amendment Flag
FALSE 
Document Period End Date
Jun. 30, 2011 
Document Fiscal Year Focus
2011 
Document Fiscal Period Focus
Q2 
Trading Symbol
MCO 
Entity Registrant Name
MOODYS CORP /DE/ 
Entity Central Index Key
0001059556 
Current Fiscal Year End Date
--12-31 
Entity Filer Category
Large Accelerated Filer 
Entity Common Stock, Shares Outstanding
228.7 
Consolidated Statements of Operations (USD $)
In Millions, except Per Share data
3 Months Ended
Jun. 30,
6 Months Ended
Jun. 30,
2011
2010
2011
2010
Consolidated Statements of Operations
 
 
 
 
Revenue
$ 605.2 
$ 477.8 
$ 1,182.3 
$ 954.4 
Expenses
 
 
 
 
Operating
170.5 
134.3 
331.3 
270.2 
Selling, general and administrative
142.9 
137.5 
291.4 
266.3 
Restructuring
(0.1)
0.3 
(0.1)
(0.4)
Depreciation and amortization
21.8 
15.2 
39.5 
31.0 
Total Expenses
335.1 
287.3 
662.1 
567.1 
Operating Income
270.1 
190.5 
520.2 
387.3 
Non-operating (expense) income, net
 
 
 
 
Interest (expense) income, net
(14.1)
(9.0)
(32.3)
(22.3)
Other non-operating (expense) income, net
8.2 
(3.6)
11.5 
(4.6)
Total non-operating (expense) income, net
(5.9)
(12.6)
(20.8)
(26.9)
Income before provisions for income taxes
264.2 
177.9 
499.4 
360.4 
Provision for income taxes
73.5 
55.3 
151.6 
123.1 
Net income
190.7 
122.6 
347.8 
237.3 
Less: Net income attributable to noncontrolling interests
1.7 
1.6 
3.3 
2.9 
Net income attributable to Moody's
$ 189.0 
$ 121.0 
$ 344.5 
$ 234.4 
Earnings per share attributable to Moody's common shareholders
 
 
 
 
Basic
$ 0.83 
$ 0.51 
$ 1.51 
$ 0.99 
Diluted
$ 0.82 
$ 0.51 
$ 1.49 
$ 0.99 
Weighted average number of shares outstanding
 
 
 
 
Basic
228.2 
235.3 
228.6 
236.1 
Diluted
231.5 
236.5 
231.4 
237.8 
Dividends declared per share attributable to Moody's common shareholders
$ 0.14 
$ 0.105 
$ 0.14 
$ 0.105 
Consolidated Balance Sheets (USD $)
In Millions
Jun. 30, 2011
Dec. 31, 2010
Current assets:
 
 
Cash and cash equivalents
$ 938.5 
$ 659.6 
Short-term investments
11.0 
12.7 
Accounts receivable, net of allowances of $30.5 in 2011 and $33.0 in 2010
492.6 
497.5 
Deferred tax assets, net
44.3 
45.3 
Other current assets
56.7 
127.9 
Total current assets
1,543.1 
1,343.0 
Property and equipment, net of accumulated depreciation of $232.7 in 2011 and $200.8 in 2010
325.2 
319.3 
Goodwill
470.4 
465.5 
Intangible assets, net
166.8 
168.8 
Deferred tax assets, net
181.1 
187.9 
Other assets
58.0 
55.8 
Total assets
2,744.6 
2,540.3 
Current liabilities:
 
 
Accounts payable and accrued liabilities
302.1 
414.4 
Current portion of long-term debt
15.0 
11.3 
Deferred revenue
534.9 
508.1 
Total current liabilities
852.0 
933.8 
Non-current portion of deferred revenue
96.0 
96.6 
Long-term debt
1,228.0 
1,228.3 
Deferred tax liabilities, net
35.0 
36.9 
Unrecognized tax benefits
187.2 
180.8 
Other liabilities
363.0 
362.3 
Total liabilities
2,761.2 
2,838.7 
Contingencies (Note 12)
 
 
Shareholders' deficit:
 
 
Preferred stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding
 
 
Capital surplus
369.1 
391.5 
Retained earnings
4,048.8 
3,736.2 
Treasury stock, at cost; 114,210,759 and 112,116,581 shares of common stock at June 30, 2011 and December 31, 2010, respectively
(4,448.9)
(4,407.3)
Accumulated other comprehensive income (loss)
1.5 
(33.4)
Total Moody's shareholders' deficit
(26.1)
(309.6)
Noncontrolling interests
9.5 
11.2 
Total shareholders' deficit
(16.6)
(298.4)
Total liabilities and shareholders' deficit
2,744.6 
2,540.3 
Series Common Stock [Member]
 
 
Shareholders' deficit:
 
 
Common stock
 
 
Common Stock [Member]
 
 
Shareholders' deficit:
 
 
Common stock
$ 3.4 
$ 3.4 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data
Jun. 30, 2011
Dec. 31, 2010
Accounts receivable, allowances
$ 30.5 
$ 33.0 
Accumulated depreciation
$ 232.7 
$ 200.8 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Treasury stock, shares
114,210,759 
112,116,581 
Series Common Stock [Member]
 
 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
10,000,000 
10,000,000 
Common stock, shares issued
Common stock, shares outstanding
Common Stock [Member]
 
 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
1,000,000,000 
1,000,000,000 
Common stock, shares issued
342,902,272 
342,902,272 
Condensed Consolidated Statements of Cash Flows (USD $)
In Millions
6 Months Ended
Jun. 30,
2011
2010
Cash flows from operating activities
 
 
Net income
$ 347.8 
$ 237.3 
Reconciliation of net income to net cash provided by operating activities:
 
 
Depreciation and amortization
39.5 
31.0 
Stock-based compensation expense
30.3 
27.7 
Excess tax benefits from stock-based compensation plans
(5.9)
(3.3)
Legacy Tax Matters
(6.4)
 
Changes in assets and liabilities:
 
 
Accounts receivable
11.2 
45.8 
Other current assets
72.6 
6.0 
Other assets
5.5 
(23.2)
Accounts payable and accrued liabilities
(78.0)
(55.0)
Restructuring
(0.2)
(4.3)
Deferred revenue
20.5 
12.1 
Unrecognized tax benefits
6.4 
6.9 
Other liabilities
2.6 
23.0 
Net cash provided by operating activities
445.9 
304.0 
Cash flows from investing activities
 
 
Capital additions
(35.6)
(35.3)
Purchases of short-term investments
(16.6)
(14.3)
Sales and maturities of short-term investments
18.9 
16.3 
Cash paid for acquisitions
(7.1)
 
Net cash used in investing activities
(40.4)
(33.3)
Cash flows from financing activities
 
 
Issuance of commercial paper
 
1,909.9 
Repayments of commercial paper
 
(1,997.1)
Repayments of notes
(3.8)
 
Net proceeds from stock-based compensation plans
35.1 
14.3 
Cost of treasury shares repurchased
(127.6)
(99.9)
Excess tax benefits from stock-based compensation plans
5.9 
3.3 
Payment of dividends
(58.2)
(49.5)
Payment of dividends to noncontrolling interests
(4.5)
(4.1)
Payments under capital lease obligations
 
(0.7)
Net cash used in financing activities
(153.1)
(223.8)
Effect of exchange rate changes on cash and cash equivalents
26.5 
(34.9)
Net increase in cash and cash equivalents
278.9 
12.0 
Cash and cash equivalents, beginning of the period
659.6 
473.9 
Cash and cash equivalents, end of the period
$ 938.5 
$ 485.9 
Glossary of Terms and Abbreviations
Glossary of Terms and Abbreviations

GLOSSARY OF TERMS AND ABBREVIATIONS

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

 

TERM

  

DEFINITION

ACNielsen

   ACNielsen Corporation – a former affiliate of Old D&B

Analytics

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

AOCI

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

ASC

   The FASB Accounting Standards Codification; the sole source of authoritative GAAP as of July 1, 2009 except for rules and interpretive releases of the SEC, which are also sources of authoritative GAAP for SEC registrants

ASU

   The FASB Accounting Standards Update to the ASC. It also provides background information for accounting guidance and the bases for conclusions on the changes in the ASC. ASUs are not considered authoritative until codified into the ASC

Basel II

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

Basel III

   A new global regulatory standard on bank capital adequacy and liquidity agreed by the members of the Basel Committee on Banking Supervision. Basel III was developed in a response to the deficiencies in financial regulation revealed by the global financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage.

Board

   The board of directors of the Company

Bps

   Basis points

Canary Wharf Lease

   Operating lease agreement entered into on February 6, 2008 for office space in London, England, occupied by the Company in the second half of 2009

CDOs

   Collateralized debt obligations

CFG

   Corporate finance group; an LOB of MIS

CMBS

   Commercial mortgage-backed securities; part of CREF

Cognizant

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

Commission

   European Commission

Company

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

Corporate Family Ratings

   Rating opinion of a corporate family's ability to honor all of its financial obligations which is assigned to the corporate family as if it had a single class of debt and a single consolidated legal entity structure. This rating is often issued in connection with ratings of leveraged finance transactions

COSO

   Committee of Sponsoring Organizations of the Treadway Commission

CP

   Commercial paper

CP Notes

   Unsecured commercial paper notes

CP Program

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

CRAs

   Credit rating agencies

 

TERM

  

DEFINITION

CREF

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

CSI

   CSI Global Education, Inc.; an acquisition completed in November 2010; part of the MA segment; a provider of financial learning, credentials, and certification in Canada

D&B Business

   Old D&B's Dun & Bradstreet operating company

DBPP

   Defined benefit pension plans

Debt/EBITDA

   Ratio of Total Debt to EBITDA

EBITDA

   Earnings before interest, taxes, depreciation and amortization

ECAIs

   External Credit Assessment Institutions

ECB

   European Central Bank

EMEA

   Represents countries within Europe, the Middle East and Africa

EPS

   Earnings per share

ESMA

   European Securities and Market Authority

ESPP

   The 1999 Moody's Corporation Employee Stock Purchase Plan

ETR

   Effective tax rate

EU

   European Union

EUR

   Euros

Eurosystem

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

Excess Tax Benefits

   The difference between the tax benefit realized at exercise of an option or delivery of a restricted share and the tax benefit recorded at the time the option or restricted share is expensed under GAAP

Exchange Act

   The Securities Exchange Act of 1934, as amended

FASB

   Financial Accounting Standards Board

FCIC

   Financial Crisis Inquiry Commission; commission appointed by the United States government with the goal of investigating the causes of the financial crisis of 2007–2010

FIG

   Financial institutions group; an LOB of MIS

Financial Reform Act

   Dodd-Frank Wall Street Reform and Consumer Protection Act

FX

   Foreign exchange

GAAP

   U.S. Generally Accepted Accounting Principles

GBP

   British pounds

G-8

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

 

TERM

  

DEFINITION

G-20

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

IMS Health

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

Indenture

   Indenture and supplemental indenture dated August 19, 2010, relating to the 2010 Senior Notes

Indicative Ratings

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

IOSCO

   International Organization of Securities Commissions

IOSCO Code

   Code of Conduct Fundamentals for Credit Rating Agencies

IRS

   Internal Revenue Service

KIS

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

Legacy Tax Matter(s)

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

LIBOR

   London Interbank Offered Rate

LOB

   Line of business

MA

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

Make Whole Amount

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

MCO

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

MD&A

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

MIS

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

MIS Code

   Moody's Investors Service Code of Professional Conduct

Moody's

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

Net Income

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

New D&B

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

NM

   Percentage change is not meaningful

NMR

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

NRSRO

   Nationally Recognized Statistical Rating Organization

 

TERM

  

DEFINITION

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

Post-Retirement Plans

   Moody's funded and unfunded pension plans, the post-retirement healthcare plans and post-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

PSI

   The U.S. Senate's Permanent Subcommittee on Investigations

RD&A

   Research, Data and Analytics; an LOB within MA that produces, sells and distributes research, data and related content. Includes products generated by MIS, such as analyses on major debt issuers, industry studies, and commentary on topical credit events, as well as economic research, data, quantitative risk scores, and other analytical tools that are produced within MA

Reform Act

   Credit Rating Agency Reform Act of 2006

REITs

   Real estate investment trusts

RMBS

   Residential mortgage-backed security; part of SFG

RMS

   The Risk Management Software LOB within MA which provides both economic and regulatory capital risk management software and implementation services

S&P

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

SEC

   U.S. Securities and Exchange Commission

Securities Act

   Securities Act of 1933

Series 2005-1 Notes

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

Series 2007-1 Notes

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

SFG

   Structured finance group; an LOB of MIS

SG&A

   Selling, general and administrative expenses

T&E

   Travel and entertainment expenses

Total Debt

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

U.K.

   United Kingdom

U.S.

   United States

USD

   U.S. dollar

UTBs

   Unrecognized tax benefits

UTPs

   Uncertain tax positions

 

TERM

  

DEFINITION

2000 Distribution

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

2000 Distribution

Agreement

   Agreement governing certain ongoing relationships between the Company and New D&B after the 2000 Distribution including the sharing of any liabilities for the payment of taxes, penalties and interest resulting from unfavorable IRS rulings on certain tax matters and certain other potential tax liabilities

2005 Agreement

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

2007 Agreement

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

2007 Facility

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

2008 Term Loan

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

2010 Senior Notes

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

7WTC

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

7WTC Lease

   Operating lease agreement entered into on October 20, 2006
Description of Business and Basis of Presentation
Description of Business and Basis of Presentation

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Moody's is a provider of (i) credit ratings, (ii) credit and economic related research, data and analytical tools, (iii) risk management software and (iv) quantitative credit risk measures, credit portfolio management solutions, training, and financial credentialing and certification services. The Company has two reportable segments: MIS and MA. The MIS segment 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's ratings to support the distribution of their debt issues to investors. The MA segment, which contains all non-rating commercial activities of the Company, develops a wide range of products and services that support the credit risk management activities of institutional participants in global financial markets. These offerings include quantitative credit risk scores, credit processing software, economic research, analytical models, financial data, specialized advisory and training services and financial credentialing and certification services. MA also distributes investor-oriented research and data developed by MIS as part of its rating process, including in-depth research on major debt issuers, industry studies and commentary on topical events.

The Company operated as part of Old D&B until September 30, 2000, when Old D&B separated into two publicly traded companies – Moody's Corporation and New D&B. At that time, Old D&B distributed to its shareholders shares of New D&B stock. New D&B comprised the business of Old D&B's Dun & Bradstreet operating company. The remaining business of Old D&B consisted solely of the business of providing ratings and related research and credit risk management services and was renamed Moody's Corporation. For purposes of governing certain ongoing relationships between the Company and New D&B after the 2000 Distribution and to provide for an orderly transition, the Company and New D&B entered into various agreements including a distribution agreement, tax allocation agreement and employee benefits agreement.

These interim financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the Company's consolidated financial statements and related notes in the Company's 2010 annual report on Form 10-K filed with the SEC on February 28, 2011. The results of interim periods are not necessarily indicative of results for the full year or any subsequent period. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Certain prior year amounts have been reclassified to conform to the current year presentation.

Stock-Based Compensation
Stock-Based Compensation

NOTE 2. STOCK-BASED COMPENSATION

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

 

                                     
     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2011      2010      2011      2010  

Stock compensation cost

   $ 14.3       $ 12.9       $ 30.3            $ 27.7   

Tax benefit

   $ 5.6       $ 4.7       $ 11.2            $ 10.6   

 

During the first half of 2011, the Company granted 0.6 million employee stock options, which had a weighted average grant date fair value of $12.45 per share based on the Black-Scholes option-pricing model. The Company also granted 1.5 million shares of restricted stock in the first half of 2011, which had a weighted average grant date fair value of $30.05 per share and generally vest ratably over a four-year period. Additionally, the Company granted approximately 0.4 million shares of restricted stock that contain a condition whereby the number of shares that ultimately vest are based on the achievement of certain non-market based performance metrics of the Company over a three-year period. The weighted average grant date fair value of these awards was $28.67 per share.

The following weighted average assumptions were used in determining the fair value for options granted in 2011:

 

         

Expected dividend yield

     1.53

Expected stock volatility

     41

Risk-free interest rate

     3.34

Expected holding period

     7.6 yrs   

Grant date fair value

   $ 12.45   

Unrecognized compensation expense at June 30, 2011 was $28.5 million and $58.1 million for stock options and nonvested restricted stock, respectively, which is expected to be recognized over a weighted average period of 1.5 years and 1.8 years, respectively. Additionally, there was $15.6 million of unrecognized compensation expense relating to the aforementioned non-market based performance awards which is expected to be recognized over a weighted average period of 1.1 years.

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

 

                 
     Six Months Ended  
     June 30,  
     2011      2010  

Stock option exercises:

                 

Proceeds from stock option exercises

   $ 39.6       $ 17.5   

Aggregate intrinsic value

   $ 19.3       $ 9.1   

Tax benefit realized upon exercise

   $ 7.7       $ 3.7   
   
     Six Months Ended  
     June 30,  
     2011      2010  

Restricted stock vesting:

                 

Fair value of shares vested

   $ 18.8       $ 12.4   

Tax benefit realized upon vesting

   $ 7.0       $ 4.6   
Income Taxes
Income Taxes

NOTE 3. INCOME TAXES

Moody's effective tax rate was 27.8% and 31.1% for the three months ended June 30, 2011 and 2010, respectively and 30.4% and 34.2% for the six months ended June 30, 2011 and 2010, respectively. The decrease was primarily due to a higher proportion of taxable income generated internationally in lower tax jurisdictions, lower U.S. state income taxes and  a beneficial adjustment in UTBs in 2011 resulting from a foreign tax ruling, partially offset by a smaller benefit in 2011 for Legacy Tax Matters..

The Company classifies interest related to UTBs in interest (expense) income, net in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating expenses. The Company had an overall decrease in its UTBs of $5.8 million ($7.7 million net of federal tax benefit) during the second quarter of 2011 and an overall increase in its UTBs during the first six months of 2011 of $6.4 million ($1.7 million, net of federal tax benefit).

Prepaid taxes of $17.9 million and $82.3 million at June 30, 2011 and December 31, 2010, respectively, are included in other current assets in the consolidated balance sheets.

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. Moody's U.S. federal tax returns filed for the years 2007 through 2009 remain subject to examination by the IRS. The Company's tax filings in New York State for the years 2004 through 2007 are currently under examination. The income tax returns for 2008 and 2009 remain open to examination for both New York State and New York City. Tax filings in the U.K. for 2006 are currently under examination by the U.K. taxing authorities and for 2007 through 2009 remain open to examination.

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

Weighted Average Shares Outstanding
Weighted Average Shares Outstanding

NOTE 4. WEIGHTED AVERAGE SHARES OUTSTANDING

Below is a reconciliation of basic to diluted shares outstanding:

 

                                 
     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2011      2010      2011      2010  

Basic

     228.2         235.3         228.6         236.1   

Dilutive effect of shares issuable under stock-based compensation plans

     3.3         1.2         2.8         1.7   
                                     

Diluted

     231.5         236.5         231.4         237.8   
                                     

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

     9.4         16.6         11.6         16.5   
                                     

The calculation of diluted EPS requires certain assumptions regarding the use of both cash proceeds and assumed proceeds that would be received upon the exercise of stock options and vesting of restricted stock outstanding as of June 30, 2011 and 2010. These assumed proceeds include Excess Tax Benefits and any unrecognized compensation of the awards.

Short-Term Investments
Short-Term Investments

NOTE 5. SHORT-TERM INVESTMENTS

Short-term investments are securities with maturities greater than 90 days at the time of purchase that are available for operations in the next twelve months. The short-term investments, primarily consisting of certificates of deposit, are classified as held-to-maturity and therefore are carried at cost. The remaining contractual maturities of the short-term investments were one month to six months as of both June 30, 2011 and December 31, 2010. Interest and dividends are recorded into income when earned.

Derivative Instruments and Hedging Activities
Derivative Instruments and Hedging Activities

NOTE 6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to global market risks, including risks from changes in FX rates and changes in interest rates. Accordingly, the Company uses derivatives in certain instances to manage the aforementioned financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for speculative purposes.

Interest Rate Swaps

In the fourth quarter of 2010, the Company entered into interest rate swaps with a total notional amount of $300 million to convert the fixed interest rate on the Series 2005-1 Notes to a floating interest rate based on the 3-month LIBOR. The purpose of this hedge was to mitigate the risk associated with changes in the fair value of the Series 2005-1 Notes, thus the Company has designated these swaps as fair value hedges. The fair value of the swaps is reported in other assets at June 30, 2011 and in other liabilities at December 31, 2010 in the Company's consolidated balance sheets with a corresponding adjustment to the carrying value of the Series 2005-1 Notes. The changes in the fair value of the hedges and the underlying hedged item generally offset and the net cash settlements on the swaps are recorded each period within interest income (expense), net in the Company's consolidated statement of operations. The net interest income recognized in interest income (expense), net within the Company's consolidated statement of operations on these swaps was ($1.0) million and $2.1 million in the three months and six months ended June 30, 2011, respectively.

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 11. These interest rate swaps are designated as cash flow hedges. Accordingly, changes in the fair value of these swaps are recorded to other comprehensive income or loss, to the extent that the hedge is effective, and such amounts are reclassified to earnings in the same period during which the hedged transaction affects income. The fair value of the swaps is reported in other liabilities in the Company's consolidated balance sheets at June 30, 2011 and December 31, 2010.

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 June 30, 2011 and December 31, 2010, 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 entity's functional currency. These forward contracts are not designated as hedging instruments under the applicable sections of Topic 815 of the ASC. Accordingly, changes in the fair value of these contracts are recognized immediately in other non-operating (expense) income, net in the Company's consolidated statements of operations along with the FX gain or loss recognized on the assets and liabilities denominated in a currency other than the entity's functional currency. These contracts have expiration dates at various times through November 2011. The following table summarizes the notional amounts of the Company's outstanding foreign exchange forwards:

 

                 
     June 30,
2011
     December 31,
2010
 

Notional amount of Currency Pair:

                 

Contracts to purchase USD with euros

   $ 10.8       $ 11.7   

Contracts to sell USD for euros

   $ 52.8       $ 55.5   

Contracts to purchase USD with GBP

   $ 1.6       $ —     

Contracts to sell USD for GBP

   $ 17.5       $ 20.7   

Contracts to purchase USD with other foreign currencies

   $ 5.2       $ 5.4   

Contracts to sell USD for other foreign currencies

   $ 8.1       $ 19.5   

Contracts to purchase euros with other foreign currencies

   10.6       10.5   

Contracts to purchase euros with GBP

   1.1       —     

Contracts to sell euros for GBP

   19.3       14.0   

The net gains (losses) on these instruments recognized in other non-operating income (expense), net in the Company's consolidated statements of operations was ($0.7) million and ($5.1) million in the three months ended June 30, 2011 and 2010, respectively, and $2.5 million and ($10.0) million in the six months ended June 30, 2011 and 2010, respectively.

The tables below show the classification between assets and liabilities on the Company's consolidated balance sheets of the fair value of derivative instruments as well as information on the gains/(losses) on those instruments:

 

                                 
     Fair Value of Derivative Instruments  
     Asset      Liability  
     June 30,
2011
     December 31,
2010
     June 30,
2011
     December 31,
2010
 

Derivatives designated as accounting hedges:

                                   

Interest rate swaps

   $ 3.4       $ —         $ 7.0       $ 12.2   
                                     

Total derivatives designated as accounting hedges

     3.4         —           7.0         12.2   

Derivatives not designated as accounting hedges:

                                   

FX forwards on certain assets and liabilities

     1.4         2.0         0.9         0.7   
                                     

Total

   $ 4.8       $ 2.0       $ 7.9       $ 12.9   
                                     

The fair value for the interest rate swaps is included in other assets and other liabilities in the consolidated balance sheets at June 30, 2011 and in other liabilities at December 31, 2010. The fair value of the FX forwards is included in other current assets and account payable and accrued liabilities as of June 30, 2011 and December 31, 2010. All of the above derivative instruments are valued using Level 2 inputs as defined in Topic 820 of the ASC. A Level 2 input is an input other than a quoted market price that is 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. In determining the fair value of the derivative contracts in the table above, the Company utilizes industry standard valuation models when active market quotes are not available. Where applicable, these models project future cash flows and discount the future amounts to a present value using spot rates, forward points, currency volatilities, interest rates as well as the risk of non-performance of the Company and the counterparties with whom it has derivative contracts. The Company has 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.

 

                                                         

Derivatives in

Cash Flow

Hedging

Relationships

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

Location of

Gain/(Loss)

Reclassified from

AOCI into Income

(Effective Portion)

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

Location of Gain/(Loss)

Recognized in Income

on Derivative

(Ineffective Portion and

Amount Excluded from

Effectiveness Testing)

   Gain/(Loss) Recognized  in
Income on Derivative
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)
 
    Three Months Ended
June  30,
         Three Months Ended
June  30,
         Three Months Ended
June  30,
 
    2011      2010          2011     2010          2011      2010  

FX options

  $ —         $ 0.4      Revenue    $ —        $ (0.3   Revenue    $ —         $ (0.2

Interest rate swaps

    (0.4 )         (1.3   Interest Expense      (0.6     (0.8   N/A      —           —     
                                                             

Total

  $ (0.4 )    $ (0.9        $ (0.6   $ (1.1        $ —         $ (0.2
                                                             
           
    Six Months Ended
June 30,
         Six Months Ended
June 30,
         Six Months Ended
June 30,
 
    2011      2010          2011     2010          2011      2010  

FX options

  $ —         $ 0.5      Revenue    $ (0.2   $ (0.5   Revenue    $ —         $ (0.2

Interest rate swaps

    (0.4 )         (2.5   Interest Expense      (1.3     (1.6   N/A      —           —     
                                                             

Total

  $ (0.4 )       $ (2.0        $ (1.5   $ (2.1        $ —         $ (0.2
                                                             

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

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

 

                 
     Unrecognized Losses, net of tax  
     June 30,
2011
    December 31,
2010
 

FX options

   $ —        $ (0.2

Interest rate swaps

     (4.5     (5.4
                  

Total

   $ (4.5   $ (5.6
                  
Acquisitions
Acquisitions

NOTE 7. ACQUISITIONS

CSI Global Education, Inc.

On November 18, 2010, a subsidiary of the Company acquired CSI Global Education, Inc., a leading provider of financial learning, credentials, and certification in Canada. CSI will operate 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.

 

 

This acquisition was 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.

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. The Company has recognized the fair value of the contingent payment of $2.0 million as a long-term liability at the acquisition date using a discounted cash flow methodology which assumes that the entire 2.5 million Canadian dollar payment will be made by January 2016. This methodology is based on significant inputs that are not observable in the market, which ASC 820 refers to as Level 3 inputs. Subsequent fair value changes, which will be measured quarterly, up to the ultimate amount paid, will be recognized in earnings. The change in fair value of the contingent payment in the first six months of 2011 was de minimis. The purchase price was funded with cash on hand.

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

Korea Investors Service Pricing

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

Goodwill and Other Acquired Intangible Assets
Goodwill and Other Acquired Intangible Assets

NOTE 8. GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS

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

 

                                                 
     Six Months Ended
June 30, 2011
     Year ended
December 31, 2010
 
     MIS      MA      Consolidated      MIS      MA      Consolidated  

Beginning Balance

   $ 11.4       $ 454.1       $ 465.5       $ 11.1       $ 338.1       $ 349.2   

Additions/adjustments

     —           2.7         2.7         —           104.6         104.6   

FX translation

     0.6         1.6         2.2         0.3         11.4         11.7   
                                                       

Ending balance

   $ 12.0       $ 458.4       $ 470.4       $ 11.4       $ 454.1       $ 465.5   
                                                       

The 2011 additions/adjustments for the MA segment in the table above relate to an immaterial acquisition by a subsidiary of the Company. The 2010 additions/adjustments for the MA segment in the table above relate to the acquisition of CSI in November 2010, more fully discussed in Note 7, above.

 

Acquired intangible assets and related amortization consisted of:

 

                 
     June 30,
2011
    December 31,
2010
 

Customer relationships

   $ 148.9      $ 145.1   

Accumulated amortization

     (54.0     (49.2
                  

Net customer relationships

     94.9        95.9   
                  

Trade secrets

     31.6        31.4   

Accumulated amortization

     (12.2     (10.9
                  

Net trade secrets

     19.4        20.5   
                  

Software

     58.8        54.8   

Accumulated amortization

     (24.2     (20.3
                  

Net software

     34.6        34.5   
                  

Other

     39.0        37.5   

Accumulated amortization

     (21.1     (19.6
                  

Net other

     17.9        17.9   
                  

Total acquired intangible assets, net

   $ 166.8      $ 168.8   
                  

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

Amortization expense relating to acquired intangible assets is as follows:

 

                                 
     Three Months Ended
June 30,
     Six Months Ended
June  30,
 
     2011      2010      2011      2010  

Amortization Expense

   $ 4.8       $ 3.9       $ 9.6       $ 7.9   

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

 

         

Year Ending December 31,

      

2011 (after June 30,)

   $ 9.7   

2012

     18.9   

2013

     18.8   

2014

     15.3   

2015

     14.2   

Thereafter

     89.9   

Intangible assets are reviewed for impairment whenever circumstances indicate that the carrying amount may not be recoverable. If the estimated undiscounted future cash flows are lower than the carrying amount of the related asset, a loss is recognized for the difference between the carrying amount and the estimated fair value of the asset. Goodwill is tested for impairment annually as of November 30th, or more frequently if circumstances indicate the assets may be impaired. For the three and six months ended June 30, 2011 and 2010, there were no impairments to goodwill or intangible assets.

Details of Certain Balance Sheet Captions
Detail of Certain Balance Sheet Captions

NOTE 9. DETAIL OF CERTAIN BALANCE SHEET CAPTIONS

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

 

                 
     June 30,
2011
     December 31,
2010
 

Other current assets:

                 

Prepaid taxes

   $ 17.9       $ 82.3   

Prepaid expenses

     33.0         39.8   

Other

     5.8         5.8   
                   

Total other current assets

   $ 56.7       $ 127.9   
                   
     
     June 30,
2011
     December 31,
2010
 

Other assets:

                 

Investments in joint ventures

   $ 34.7       $ 30.8   

Deposits for real-estate leases

     11.8         11.4   

Other

     11.5         13.6   
                   

Total other assets

   $ 58.0       $ 55.8   
                   

Accounts payable and accrued liabilities:

                 

Salaries and benefits

   $ 59.0       $ 69.6   

Incentive compensation

     67.8         116.8   

Profit sharing contribution

     1.6         12.6   

Customer credits, advanced payments and advanced billings

     19.8         15.3   

Dividends

     1.9         27.9   

Professional service fees

     51.9         50.6   

Interest accrued on debt

     14.9         17.6   

Accounts payable

     8.6         14.3   

Income taxes

     12.3         26.9   

Restructuring

     0.5         0.7   

Pension and other post retirement employee benefits

     9.5         9.5   

Other

     54.3         52.6   
                   

Total accounts payable and accrued liabilities

   $ 302.1       $ 414.4   
                   
     
     June 30,
2011
     December 31,
2010
 

Other liabilities:

                 

Pension and other post retirement employee benefits

   $ 132.2       $ 132.8   

Deferred rent-non-current portion

     107.1         100.4   

Interest accrued on UTPs

     39.8         33.7   

Legacy and other tax matters

     50.4         57.3   

Other

     33.5         38.1   
                   

Total other liabilities

   $ 363.0       $ 362.3   
                   
Pension and Other Post-Retirement Benefits
Pension and Other Post-Retirement Benefits

NOTE 10. PENSION AND OTHER POST-RETIRMENT BENEFITS

Moody's maintains funded and unfunded noncontributory Defined Benefit Pension Plans. The U.S. DBPPs provide defined benefits using a cash balance formula based on years of service and career average salary for its employees or final average pay for selected executives. The Company also provides certain healthcare and life insurance benefits for retired U.S. employees. The post-retirement healthcare plans are contributory with participants' contributions adjusted annually; the life insurance plans are noncontributory. Moody's funded and unfunded U.S. pension plans, the U.S. post-retirement healthcare plans and the U.S. post-retirement life insurance plans are collectively referred to herein as the Post-Retirement Plans.

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

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

 

                                 
     Three Months Ended June 30,  
     Pension Plans     Other Post-Retirement Plans  
     2011     2010     2011      2010  

Components of net periodic expense

                                 

Service cost

   $ 3.9      $ 3.3      $ 0.3       $ 0.2   

Interest cost

     3.4        2.9        0.2         0.2   

Expected return on plan assets

     (3.0     (2.6     —           —     

Amortization of net actuarial loss from earlier periods

     1.4        0.6        0.1         —     

Amortization of net prior service costs from earlier periods

     0.1        0.1        —           —     
                                   

Net periodic expense

   $ 5.8      $ 4.3      $ 0.6       $ 0.4   
                                   
   
     Six Months Ended June 30,  
     Pension Plans     Other Post-Retirement Plans  
     2011     2010     2011      2010  

Components of net periodic expense

                                 

Service cost

   $ 7.6      $ 6.8      $ 0.6       $ 0.4   

Interest cost

     6.6        6.0        0.4         0.4   

Expected return on plan assets

     (6.0     (5.3     —           —     

Amortization of net actuarial loss from earlier periods

     2.5        1.4        0.1           —     

Amortization of net prior service costs from earlier periods

     0.3        0.3                —     
                                   

Net periodic expense

   $ 11.0      $ 9.2      $ 1.1       $ 0.8   
                                   

In March 2010, the Patient Protection and Affordable Care Act (the "Act") and the related reconciliation measure, which modifies certain provisions of the Act, were signed into law. The Act repeals the current rule permitting deduction of the portion of the drug coverage expense that is offset by the Medicare Part D subsidy. This provision of the Act is effective for taxable years beginning after December 31, 2010 and the reconciliation measure delays the aforementioned repeal of the drug coverage expense reduction by two years to December 31, 2012. The Company has accounted for the enactment of the two laws in the first quarter of 2010, for which the impact to the Company's income tax expense and net income was immaterial.

The Company contributed $13.6 million to its U.S. funded pension plan and made payments of $2.5 million related to its unfunded U.S. DBPPs and $0.3 million to its U.S. other post-retirement plans, respectively during the six months ended June 30, 2011. The Company presently anticipates making additional payments of $8.9 million related to its unfunded U.S. DBPPs and $0.4 million to its U.S. other post-retirement plans during the remainder of 2011.

Indebtedness
Indebtedness

NOTE 11. INDEBTEDNESS

The following table summarizes total indebtedness:

 

                 
     June 30,
2011
    December 31,
2010
 

2007 Facility

   $ —        $ —     

Commercial paper

     —          —     

Notes Payable:

                

Series 2005-1 Notes, due 2015, including fair value of interest rate swap of $3.4 million at 2011 and $(3.7) million at 2010

     303.4        296.3   

Series 2007-1 Notes due 2017

     300.0        300.0   

2010 Senior Notes, due 2020, net of unamortized discount of $2.9 million and $3.0 million in 2011 and 2010, respectively

     497.1        497.0   

2008 Term Loan, various payments through 2013

     142.5        146.3   
                  

Total debt

     1,243.0        1,239.6   

Current portion

     (15.0     (11.3
                  

Total long-term debt

   $ 1,228.0      $ 1,228.3   
                  

2007 Facility

On September 28, 2007, the Company entered into a $1.0 billion five-year senior, unsecured revolving credit facility, expiring in September 2012. The 2007 Facility will serve, in part, to support the Company's CP Program described below. Interest on borrowings is payable at rates that are based on LIBOR plus a premium that can range from 16.0 to 40.0 basis points of the outstanding borrowing amount depending on the Debt/EBITDA ratio. The Company also pays quarterly facility fees, regardless of borrowing activity under the 2007 Facility. The quarterly fees for the 2007 Facility can range 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 pays 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 contains 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 agreement. The 2007 Facility also contains financial covenants that, among other things, require the Company to maintain a Debt/EBITDA ratio of not more than 4.0 to 1.0 at the end of any fiscal quarter.

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

Notes Payable

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

 

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 beginning in 2010 in accordance with the schedule of payments set forth in the 2008 Term Loan outlined in the table below.

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

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

 

                         

Year Ended December 31,

   2008 Term Loan      Series 2005-1 Notes      Total  

2011 (after June 30,)

   $ 7.5       $ —         $ 7.5   

2012

     71.2         —           71.2   

2013

     63.8         —           63.8   

2014

     —           —           —     

2015

     —           300.0         300.0   
                            

Total

   $ 142.5       $ 300.0       $ 442.5   
                            

In the fourth quarter of 2010, the Company entered into interest rate swaps with a total notional amount of $300 million which converted the fixed rate of interest on the Series 2005-1 Notes to a floating LIBOR-based interest rate. Also, on May 7, 2008, the Company entered into interest rate swaps with a total notional amount of $150 million to protect against fluctuations in the LIBOR-based variable interest rate on the 2008 Term Loan. Both of these interest rate swaps are more fully discussed in Note 6 above.

At June 30, 2011, the Company was in compliance with all covenants contained within all of the debt agreements. In addition to the covenants described above, the 2007 Facility, the 2005 Agreement, the 2007 Agreement, the 2010 Senior Notes and the 2008 Term Loan contain cross default provisions. These provisions state that default under one of the aforementioned debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under those instruments to be immediately due and payable. As of June 30, 2011, there were no such cross defaults.

 

Interest (expense) income, net

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

 

The Company's long-term debt, including the current portion, is recorded at cost except for the Series 2005-1 Notes which are carried at cost adjusted for the fair value of an interest rate swap used to hedge the fair value of the note. The fair value and carrying value of the Company's long-term debt as of June 30, 2011 and December 31, 2010 is as follows:

 

                                 
     June 30, 2011      December 31, 2010  
     Carrying
Amount
     Estimated Fair
Value
     Carrying
Amount
     Estimated Fair
Value
 

Series 2005-1 Notes

   $ 303.4       $ 323.6       $ 296.3       $ 310.6   

Series 2007-1 Notes

     300.0         338.6         300.0         321.3   

2010 Senior Notes

     497.1         530.9         497.0         492.1   

2008 Term Loan

     142.5         142.5         146.3         146.3   
                                     

Total

   $ 1,243.0       $ 1,335.6       $ 1,239.6       $ 1,270.3   
                                     

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

Contingencies
Contingencies

NOTE 12 CONTINGENCIES

From time to time, Moody's is involved in legal and tax proceedings, governmental investigations, claims and litigation that are incidental to the Company's business, including claims based on ratings assigned by MIS. Moody's is also subject to ongoing tax audits in the normal course of business. Management periodically assesses the Company's liabilities and contingencies in connection with these matters based upon the latest information available. Moody's discloses material pending legal proceedings pursuant to SEC rules and other pending matters as it may determine to be appropriate.

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

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

On June 27, 2008, the Brockton Contributory Retirement System, a purported shareholder of the Company's securities, filed a purported shareholder derivative complaint on behalf of the Company against its directors and certain senior officers, and the Company as nominal defendant, in the Supreme Court of the State of New York, County of New York. The plaintiff asserts various causes of action relating to the named defendants' oversight of MIS's ratings of RMBS and constant-proportion debt obligations, and their participation in the alleged public dissemination of false and misleading information about MIS's ratings practices and/or a failure to implement internal procedures and controls to prevent the alleged wrongdoing. The plaintiff seeks compensatory damages, restitution, disgorgement of profits and other equitable relief. On July 2, 2008, Thomas R. Flynn, a purported shareholder of the Company's securities, filed a similar purported shareholder derivative complaint on behalf of the Company against its directors and certain senior officers, and the Company as nominal defendant, in the Supreme Court of the State of New York, County of New York, asserting similar claims and seeking the same relief. The cases have been consolidated and plaintiffs filed an amended consolidated complaint in November 2008. The Company removed the consolidated action to the United States District Court for the Southern District of New York in December 2008. In January 2009, the plaintiffs moved to remand the case to the Supreme Court of the State of New York, which the Company opposed. On February 23, 2010, the court issued an opinion remanding the case to the Supreme Court of New York. On October 30, 2008, the Louisiana Municipal Police Employees Retirement System, a purported shareholder of the Company's securities, also filed a shareholder derivative complaint on behalf of the Company against its directors and certain officers, and the Company as a nominal defendant, in the U.S. District Court for the Southern District of New York. This complaint also asserts various causes of action relating to the Company's ratings of RMBS, CDO and constant-proportion debt obligations, and named defendants' participation in the alleged public dissemination of false and misleading information about MIS's ratings practices and/or a failure to implement internal procedures and controls to prevent the alleged wrongdoing. On December 9, 2008, Rena Nadoff, a purported shareholder of the Company, filed a shareholder derivative complaint on behalf of the Company against its directors and its CEO, and the Company as a nominal defendant, in the Supreme Court of the State of New York. The complaint asserts a claim for breach of fiduciary duty in connection with alleged overrating of asset-backed securities and underrating of municipal securities. On October 20, 2009, the Company moved to dismiss or stay the action in favor of related federal litigation. On January 26, 2010, the court entered a stipulation and order, submitted jointly by the parties, staying the Nadoff litigation pending coordination and prosecution of similar claims in the above and below described federal derivative actions. On July 6, 2009, W. A. Sokolowski, a purported shareholder of the Company, filed a purported shareholder derivative complaint on behalf of the Company against its directors and current and former officers, and the Company as a nominal defendant, in the United States District Court for the Southern District of New York. The complaint asserts claims relating to alleged mismanagement of the Company's processes for rating structured finance transactions, alleged insider trading and causing the Company to buy back its own stock at artificially inflated prices.

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 U.S. 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.

For claims, litigation and proceedings not related to income taxes, where it is both probable that a liability is expected to be incurred and the amount of loss can be reasonably estimated, the Company records liabilities in the consolidated financial statements and periodically adjusts these as appropriate. In other instances, because of uncertainties related to the probable outcome and/or the amount or range of loss, management does not record a liability but discloses the contingency if significant. As additional information becomes available, the Company adjusts its assessments and estimates of such matters accordingly. In view of the inherent difficulty of predicting the outcome of litigation, regulatory, enforcement and similar matters and contingencies, particularly where the claimants seek large or indeterminate damages or where the parties assert novel legal theories or the matters involve a large number of parties, the Company cannot predict what the eventual outcome of the pending matters will be or the timing of any resolution of such matters. The Company also cannot predict the impact (if any) that any such matters may have on how its business is conducted, on its competitive position or on its financial position, results of operations or cash flows. As the process to resolve the pending matters referred to above progresses, management will continue to review the latest information available and assess its ability to predict the outcome of such matters and the effects, if any, on its operations and financial condition. However, in light of the inherent uncertainties involved in these matters, the large or indeterminate damages sought in some of them and the novel theories of law asserted, an estimate of the range of possible losses cannot be made at this time. For income tax matters, the Company employs the prescribed methodology of Topic 740 of the ASC which requires a company to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.

Legacy Tax Matters

Moody's continues to have exposure to potential liabilities arising from Legacy Tax Matters. As of June 30, 2011, Moody's has recorded liabilities for Legacy Tax Matters totaling $52.4 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. As of June 30, 2011, Moody's liability with respect to this matter totaled $50.4 million.

Additionally, in April 2011, Moody's received a refund of $0.9 million ($0.6 million, net of tax) for interest assessed relating to pre-spin tax years. Coupled with the $6.4 million noted above (and related interest of $1.7 million), net legacy tax benefits were $8.7 million in the three and six months ended June 30, 2011, of which $7 million was deemed unusual in nature.

In 2005, settlement agreements were executed with the IRS with respect to certain Legacy Tax Matters related to the years 1989-1990 and 1993-1996. With respect to these settlements, Moody's and New D&B believed that IMS Health and NMR did not pay their full share of the liability to the IRS under the terms of the applicable separation agreements between the parties. Moody's and New D&B subsequently paid these amounts to the IRS and commenced arbitration proceedings against IMS Health and NMR to resolve this dispute. Pursuant to these arbitration proceedings, the Company received $10.8 million ($6.5 million as a reduction of interest expense and $4.3 million as a reduction of tax expense) in 2009. The aforementioned settlement payment resulted in net income benefits of $8.2 million in 2009. The Company continues to carry a $2 million liability for this matter.

In 2006, New D&B and Moody's each deposited $39.8 million with the IRS in order to stop the accrual of statutory interest on potential tax deficiencies with respect to the 1997 through 2002 tax years. In 2007, New D&B and Moody's requested a return of that deposit. The IRS applied a portion of the deposit in satisfaction of an assessed deficiency and returned the balance to the Company. Moody's subsequently pursued a refund for a portion of the outstanding amount. In May 2010, the IRS refunded $5.2 million to the Company for the 1997 tax year, which included interest of approximately $2.5 million resulting in an after-tax benefit of $4.6 million

Comprehensive Income and Noncontrolling Interests
Comprehensive Income and Noncontrolling Interests

NOTE 13. COMPREHENSIVE INCOME AND NONCONTROLLING INTERESTS

The components of total comprehensive income, net of tax, are as follows:

 

                                                 
     Three Months Ended June 30,  
     2011     2010  
     Shareholders'
of Moody's
Corporation
    Noncontrolling
Interests
     Total     Shareholders'
of Moody's
Corporation
    Noncontrolling
Interests
    Total  

Net income

   $ 189.0      $ 1.7       $ 190.7      $ 121.0      $ 1.6      $ 122.6   

Net realized and unrealized gain/(loss) on cash flow hedges (net of tax of $0.3 million and $0.1 million in 2011 and 2010, respectively)

     0.4        —           0.4        0.3        —          0.3   

FX translation (net of tax of nil and $11.8 million in 2011 and 2010, respectively)

     12.9        0.4         13.3        (2.5     (0.7     (3.2

Net actuarial gains and prior service costs (net of tax of 2.4 and $2.9 million in 2011 and 2010, respectively)

     (3.3   )       —           (3.3   )       4.1        —          4.1   

Amortization and recognition of actuarial losses and prior service costs (net of tax of $1.7 million and $0.3 million in 2011 and 2010, respectively)

     0.9       —           0.9     0.5        —          0.5   
                                                   

Total comprehensive income

   $ 199.9      $ 2.1       $ 202.0      $ 123.4      $ 0.9      $ 124.3   
                                                   
   
 

 
    Six Months Ended June 30,
2011     2010  

 

Shareholders'
of Moody's
Corporation

 

Noncontrolling
Interests

Total

 

Shareholders'
of Moody's
Corporation

 

Noncontrolling
Interests

 

Total

Net income

   $ 344.5      $ 3.3       $ 347.8      $ 234.4      $ 2.9      $ 237.3   

Net realized and unrealized gain/(loss) on cash flow hedges (net of tax of $0.7 million and $0.2 million in 2011 and 2010, respectively)

     1.1        —           1.1        0.3        —          0.3   

FX translation (net of tax of nil and $8.6 million in 2011 and 2010, respectively)

     35.4        0.8         36.2        (47.3     (0.4     (47.7

Net actuarial gains and prior service costs (net of tax of $2.4 and $2.9 million in 2011 and 2010, respectively)

     (3.3   )       —           (3.3   )       4.1        —          4.1   

Amortization and recognition of actuarial losses and prior service costs (net of tax of $1.2 million and $1.0 million in 2011 and 2010, respectively)

     (1.7     —           (1.7     0.8        —          0.8   
                                                   

Total comprehensive income

   $ 379.4      $ 4.1       $ 383.5      $ 192.3      $ 2.5      $ 194.8   
                                                   

 

The following table summarizes the activity in the Company's noncontrolling interests:

 

                 
     Six Months Ended
June 30,
 
     2011     2010  

Beginning Balance

   $ 11.2      $ 10.1   

Net income attributable to noncontrolling interest

     3.3        2.9   

Dividends declared to noncontrolling interest

     (4.8     (4.4

Purchase of KIS Pricing shares from noncontrolling interest

     (1.0     —     

FX translation

     0.8        (0.4
                  

Ending Balance

   $ 9.5      $ 8.2   
                  
Segment Information
Segment Information

NOTE 14. SEGMENT INFORMATION

The Company operates in two reportable segments: MIS and MA.

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 license fee charged to MIS from MA for certain MA products and services utilized in MIS's ratings process. Overhead charges and corporate expenses which exclusively benefit only one segment, are fully charged to that segment. Additionally, 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 resource, information technology and legal. Beginning on January 1, 2011, the Company refined its methodology for allocating the aforementioned overhead and corporate costs to its segments. The refined methodology is reflected in the segment results for the three and six months ended June 30, 2011 and accordingly, the segment results for the three and six months ended June 30, 2010 have been reclassified to conform to the new presentation. "Eliminations" in the table below represent intersegment royalty/license revenue/expense.

 

Below is financial information by segment, MIS and MA revenue by line of business and consolidated revenue information by geographic area, each of which is for the three and six month periods ended June 30, 2011 and 2010, and total assets by segment as of June 30, 2011 and December 31, 2010.

Financial Information by Segment

 

                                                                 
     Three Months Ended June 30,  
     2011     2010  
     MIS     MA      Eliminations     Consolidated     MIS     MA     Eliminations     Consolidated  

Revenue

   $ 454.2      $ 169.8       $ (18.8   $ 605.2      $ 344.1      $ 151.6      $ (17.9   $ 477.8   

Expenses:

                                                                 

Operating, SG&A

     204.1        128.1         (18.8     313.4        180.3        109.4        (17.9     271.8   

Restructuring

     (0.1     —           —          (0.1     0.2        0.1        —          0.3   
                 

Depreciation and amortization

     12.3        9.5         —          21.8        7.8        7.4        —          15.2   
                                                                   

Total

     216.3        137.6         (18.8     335.1        188.3        116.9        (17.9     287.3   
                                                                   

Operating income

   $ 237.9      $ 32.2       $ —        $ 270.1      $ 155.8      $ 34.7      $ —        $ 190.5   
                                                                   
   
     Six Months Ended June 30,  
     2011     2010  
     MIS     MA      Eliminations     Consolidated     MIS     MA     Eliminations     Consolidated  

Revenue

   $ 882.8      $ 336.9       $ (37.4   $ 1,182.3      $ 694.9      $ 295.0      $ (35.5   $ 954.4   

Expenses:

                                                                 

Operating, SG&A

     404.2        255.9         (37.4     622.7        357.7        214.3        (35.5     536.5   

Restructuring

     (0.1     —           —          (0.1     (0.3     (0.1     —          (0.4

Depreciation and amortization

     21.0        18.5         —          39.5        16.0        15.0        —          31.0   
                                                                   

Total

     425.1        274.4         (37.4     662.1        373.4        229.2        (35.5     567.1   
                                                                   

Operating income

   $ 457.7      $ 62.5       $ —        $ 520.2      $ 321.5      $ 65.8      $ —        $ 387.3   
                                                                   

 

MIS and MA Revenue by Line of Business

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

 

                                 
     Three Months Ended June 30,     Six Months Ended June 30,  
     2011     2010     2011     2010  

MIS:

                                

Corporate finance (CFG)

   $ 200.1      $ 127.9      $ 381.9      $ 254.3   

Structured finance (SFG)

     86.3        73.1        175.7        144.6   

Financial institutions (FIG)

     79.1        63.2        156.0        139.4   

Public, project and infrastructure finance (PPIF)

     72.5        64.4        137.0        125.8   
                                  

Total external revenue

     438.0        328.6        850.6        664.1   

Intersegment royalty

     16.2        15.5        32.2        30.8   
                                  

Total

     454.2        344.1        882.8        694.9   
                                  

MA:

                                

Research, data and analytics (RD&A)

     111.0        105.2        220.6        209.8   

Risk management software (RMS)

     40.0        39.2        79.6        72.5   

Professional services

     16.2        4.8        31.5        8.0   
                                  

Total external revenue

     167.2        149.2        331.7        290.3   

Intersegment license fee

     2.6        2.4        5.2        4.7   
                                  

Total

     169.8        151.6        336.9        295.0   
                                  

Eliminations

     (18.8     (17.9     (37.4     (35.5
                                  

Total MCO

   $ 605.2      $ 477.8      $ 1,182.3      $ 954.4   
                                  

Consolidated Revenue Information by Geographic Area:

 

                                 
     Three Months Ended June 30,      Six Months Ended June 30,  
     2011      2010      2011      2010  

United States

   $ 315.0       $ 261.5       $ 616.4       $ 516.1   
                                     

International:

                                   

EMEA

     185.7         144.9         369.0         298.4   
         

Other

     104.5         71.4         196.9         139.9   
                                     

Total International

     290.2         216.3         565.9         438.3   
                                     

Total

   $ 605.2       $ 477.8       $ 1,182.3       $ 954.4   
                                     

Total Assets by Segment:

Recently Issued Accounting Standards
Recently Issued Accounting Standards

NOTE 15. RECENTLY ISSUED ACCOUNTING STANDARDS

In January 2010, the FASB issued ASU No. 2010-06, "Improving Disclosures about Fair Value Measurements". The new standard requires disclosure regarding transfers in and out of Level 1 and Level 2 classifications within the fair value hierarchy as well as requiring further detail of activity within the Level 3 category of the fair value hierarchy. The new standard also requires disclosures regarding the fair value for each class of assets and liabilities, which is a subset of assets or liabilities within a line item in a company's balance sheet. Additionally, the standard will require further disclosures surrounding inputs and valuation techniques used in fair value measurements. The new disclosures and clarifications of existing disclosures set forth in this ASU are effective for interim and annual reporting periods beginning after December 15, 2009, except for the additional disclosures regarding Level 3 fair value measurements, for which the effective date is for fiscal years and interim periods within those years beginning after December 15, 2010. The Company has fully adopted all provisions of this ASU as of January 1, 2011 and the implementation did not have a material impact on the Company's consolidated financial statements.

In December 2010, the FASB issued ASU No. 2010-29, "Disclosure of Supplementary Pro Forma Information for Business Combinations". The objective of this ASU is to address diversity in practice regarding proforma disclosures for revenue and earnings of the acquired entity. The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this ASU also expand the supplemental pro forma disclosures under ASC Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this ASU are effective for fiscal years beginning on or after December 15, 2010. The Company will conform to the disclosure requirements set forth in this ASU for any future material business combinations.

In May 2011, the FASB issued ASU No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs". The objective of this ASU is to achieve common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. The amendments in this ASU change the wording used to describe current requirements in U.S. GAAP for measuring fair value and for financial statement disclosure about fair value measurements. Some of the amendments in the ASU clarify the FASB's intent or change a particular principle or requirement pertaining to the application of existing fair value measurement requirements or for disclosing information about fair value measurements. The amendments in this ASU are required to be applied prospectively and are effective for fiscal years beginning after December 15, 2011 and early adoption is not permitted. The Company is currently evaluating the potential impact, if any, of the implementation of this ASU on its consolidated financial statements.

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 present total comprehensive income and 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. The Company intends to conform to the new presentation required in this ASU beginning with its Form 10Q for the three months ended March 31, 2012.

Subsequent Event
Subsequent Event

NOTE 16. SUBSEQUENT EVENT

On July 11, 2011, the Board approved the declaration of a quarterly dividend of $0.14 per share of Moody's common stock, payable on September 10, 2011 to shareholders of record at the close of business on August 20, 2011.

Stock-Based Compensation (Tables)
                                     
     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2011      2010      2011      2010  

Stock compensation cost

   $ 14.3       $ 12.9       $ 30.3            $ 27.7   

Tax benefit

   $ 5.6       $ 4.7       $ 11.2            $ 10.6   
         

Expected dividend yield

     1.53

Expected stock volatility

     41

Risk-free interest rate

     3.34

Expected holding period

     7.6 yrs   

Grant date fair value

   $ 12.45   
                 
     Six Months Ended  
     June 30,  
     2011      2010  

Stock option exercises:

                 

Proceeds from stock option exercises

   $ 39.6       $ 17.5   

Aggregate intrinsic value

   $ 19.3       $ 9.1   

Tax benefit realized upon exercise

   $ 7.7       $ 3.7   
   
     Six Months Ended  
     June 30,  
     2011      2010  

Restricted stock vesting:

                 

Fair value of shares vested

   $ 18.8       $ 12.4   

Tax benefit realized upon vesting

   $ 7.0       $ 4.6   
Weighted Average Shares Outstanding (Tables)
Reconciliation of Basic to Diluted Shares Outstanding
                                 
     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2011      2010      2011      2010  

Basic

     228.2         235.3         228.6         236.1   

Dilutive effect of shares issuable under stock-based compensation plans

     3.3         1.2         2.8         1.7   
                                     

Diluted

     231.5         236.5         231.4         237.8   
                                     

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

     9.4         16.6         11.6         16.5   
                                     
Derivative Instruments and Hedging Activities (Tables)
                 
     June 30,
2011
     December 31,
2010
 

Notional amount of Currency Pair:

                 

Contracts to purchase USD with euros

   $ 10.8       $ 11.7   

Contracts to sell USD for euros

   $ 52.8       $ 55.5   

Contracts to purchase USD with GBP

   $ 1.6       $ —     

Contracts to sell USD for GBP

   $ 17.5       $ 20.7   

Contracts to purchase USD with other foreign currencies

   $ 5.2       $ 5.4   

Contracts to sell USD for other foreign currencies

   $ 8.1       $ 19.5   

Contracts to purchase euros with other foreign currencies

   10.6       10.5   

Contracts to purchase euros with GBP

   1.1       —     

Contracts to sell euros for GBP

   19.3       14.0   
                                 
     Fair Value of Derivative Instruments  
     Asset      Liability  
     June 30,
2011
     December 31,
2010
     June 30,
2011
     December 31,
2010
 

Derivatives designated as accounting hedges:

                                   

Interest rate swaps

   $ 3.4       $ —         $ 7.0       $ 12.2   
                                     

Total derivatives designated as accounting hedges

     3.4         —           7.0         12.2   

Derivatives not designated as accounting hedges:

                                   

FX forwards on certain assets and liabilities

     1.4         2.0         0.9         0.7   
                                     

Total

   $ 4.8       $ 2.0       $ 7.9       $ 12.9   
                                     
                                                         

Derivatives in

Cash Flow

Hedging

Relationships

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

Location of

Gain/(Loss)

Reclassified from

AOCI into Income

(Effective Portion)

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

Location of Gain/(Loss)

Recognized in Income

on Derivative

(Ineffective Portion and

Amount Excluded from

Effectiveness Testing)

   Gain/(Loss) Recognized  in
Income on Derivative
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)
 
    Three Months Ended
June  30,
         Three Months Ended
June  30,
         Three Months Ended
June  30,
 
    2011      2010          2011     2010          2011      2010  

FX options

  $ —         $ 0.4      Revenue    $ —        $ (0.3   Revenue    $ —         $ (0.2

Interest rate swaps

    (0.4 )         (1.3   Interest Expense      (0.6     (0.8   N/A      —           —     
                                                             

Total

  $ (0.4 )    $ (0.9        $ (0.6   $ (1.1        $ —         $ (0.2
                                                             
           
    Six Months Ended
June 30,
         Six Months Ended
June 30,
         Six Months Ended
June 30,
 
    2011      2010          2011     2010          2011      2010  

FX options

  $ —         $ 0.5      Revenue    $ (0.2   $ (0.5   Revenue    $ —         $ (0.2

Interest rate swaps

    (0.4 )         (2.5   Interest Expense      (1.3     (1.6   N/A      —           —     
                                                             

Total

  $ (0.4 )       $ (2.0        $ (1.5   $ (2.1        $ —         $ (0.2
                                                             
                 
     Unrecognized Losses, net of tax  
     June 30,
2011
    December 31,
2010
 

FX options

   $ —        $ (0.2

Interest rate swaps

     (4.5     (5.4
                  

Total

   $ (4.5   $ (5.6
                  
Goodwill and Other Acquired Intangible Assets (Tables)
                                                 
     Six Months Ended
June 30, 2011
     Year ended
December 31, 2010
 
     MIS      MA      Consolidated      MIS      MA      Consolidated  

Beginning Balance

   $ 11.4       $ 454.1       $ 465.5       $ 11.1       $ 338.1       $ 349.2   

Additions/adjustments

     —           2.7         2.7         —           104.6         104.6   

FX translation

     0.6         1.6         2.2         0.3         11.4         11.7   
                                                       

Ending balance

   $ 12.0       $ 458.4       $ 470.4       $ 11.4       $ 454.1       $ 465.5   
                                                       
                 
     June 30,
2011
    December 31,
2010
 

Customer relationships

   $ 148.9      $ 145.1   

Accumulated amortization

     (54.0     (49.2
                  

Net customer relationships

     94.9        95.9   
                  

Trade secrets

     31.6        31.4   

Accumulated amortization

     (12.2     (10.9
                  

Net trade secrets

     19.4        20.5   
                  

Software

     58.8        54.8   

Accumulated amortization

     (24.2     (20.3
                  

Net software

     34.6        34.5   
                  

Other

     39.0        37.5   

Accumulated amortization

     (21.1     (19.6
                  

Net other

     17.9        17.9   
                  

Total acquired intangible assets, net

   $ 166.8      $ 168.8   
                  
                                 
     Three Months Ended
June 30,
     Six Months Ended
June  30,
 
     2011      2010      2011      2010  

Amortization Expense

   $ 4.8       $ 3.9       $ 9.6       $ 7.9   
         

Year Ending December 31,

      

2011 (after June 30,)

   $ 9.7   

2012

     18.9   

2013

     18.8   

2014

     15.3   

2015

     14.2   

Thereafter

     89.9   
Detail of Certain Balance Sheet Captions (Tables)
Additional Detail Related to Certain Balance Sheet Captions
                 
     June 30,
2011
     December 31,
2010
 

Other current assets:

                 

Prepaid taxes

   $ 17.9       $ 82.3   

Prepaid expenses

     33.0         39.8   

Other

     5.8         5.8   
                   

Total other current assets

   $ 56.7       $ 127.9   
                   
     
     June 30,
2011
     December 31,
2010
 

Other assets:

                 

Investments in joint ventures

   $ 34.7       $ 30.8   

Deposits for real-estate leases

     11.8         11.4   

Other

     11.5         13.6   
                   

Total other assets

   $ 58.0       $ 55.8   
                   

Accounts payable and accrued liabilities:

                 

Salaries and benefits

   $ 59.0       $ 69.6   

Incentive compensation

     67.8         116.8   

Profit sharing contribution

     1.6         12.6   

Customer credits, advanced payments and advanced billings

     19.8         15.3   

Dividends

     1.9         27.9   

Professional service fees

     51.9         50.6   

Interest accrued on debt

     14.9         17.6   

Accounts payable

     8.6         14.3   

Income taxes

     12.3         26.9   

Restructuring

     0.5         0.7   

Pension and other post retirement employee benefits

     9.5         9.5   

Other

     54.3         52.6   
                   

Total accounts payable and accrued liabilities

   $ 302.1       $ 414.4   
                   
     
     June 30,
2011
     December 31,
2010
 

Other liabilities:

                 

Pension and other post retirement employee benefits

   $ 132.2       $ 132.8   

Deferred rent-non-current portion

     107.1         100.4   

Interest accrued on UTPs

     39.8         33.7   

Legacy and other tax matters

     50.4         57.3   

Other

     33.5         38.1   
                   

Total other liabilities

   $ 363.0       $ 362.3   
                   
Pension and Other Post-Retirement Benefits (Tables)
Net Periodic Benefit Expense Related to Post-Retirement Plans
                                 
     Three Months Ended June 30,  
     Pension Plans     Other Post-Retirement Plans  
     2011     2010     2011      2010  

Components of net periodic expense

                                 

Service cost

   $ 3.9      $ 3.3      $ 0.3       $ 0.2   

Interest cost

     3.4        2.9        0.2         0.2   

Expected return on plan assets

     (3.0     (2.6     —           —     

Amortization of net actuarial loss from earlier periods

     1.4        0.6        0.1         —     

Amortization of net prior service costs from earlier periods

     0.1        0.1        —           —     
                                   

Net periodic expense

   $ 5.8      $ 4.3      $ 0.6       $ 0.4   
                                   
   
     Six Months Ended June 30,  
     Pension Plans     Other Post-Retirement Plans  
     2011     2010     2011      2010  

Components of net periodic expense

                                 

Service cost

   $ 7.6      $ 6.8      $ 0.6       $ 0.4   

Interest cost

     6.6        6.0        0.4         0.4   

Expected return on plan assets

     (6.0     (5.3     —           —     

Amortization of net actuarial loss from earlier periods

     2.5        1.4        0.1           —     

Amortization of net prior service costs from earlier periods

     0.3        0.3                —     
                                   

Net periodic expense

   $ 11.0      $ 9.2      $ 1.1       $ 0.8   
                                   
Indebtedness (Tables)
                 
     June 30,
2011
    December 31,
2010
 

2007 Facility

   $ —        $ —     

Commercial paper

     —          —     

Notes Payable:

                

Series 2005-1 Notes, due 2015, including fair value of interest rate swap of $3.4 million at 2011 and $(3.7) million at 2010

     303.4        296.3   

Series 2007-1 Notes due 2017

     300.0        300.0   

2010 Senior Notes, due 2020, net of unamortized discount of $2.9 million and $3.0 million in 2011 and 2010, respectively

     497.1        497.0   

2008 Term Loan, various payments through 2013

     142.5        146.3   
                  

Total debt

     1,243.0        1,239.6   

Current portion

     (15.0     (11.3
                  

Total long-term debt

   $ 1,228.0      $ 1,228.3   
                  
                         

Year Ended December 31,

   2008 Term Loan      Series 2005-1 Notes      Total  

2011 (after June 30,)

   $ 7.5       $ —         $ 7.5   

2012

     71.2         —           71.2   

2013

     63.8         —           63.8   

2014

     —           —           —     

2015

     —           300.0         300.0   
                            

Total

   $ 142.5       $ 300.0       $ 442.5