MOODYS CORP /DE/, 10-K filed on 2/28/2011
Annual Report
Document and Entity Information
In Billions, except Share data in Millions
Year Ended
Dec. 31, 2010
Jan. 31, 2011
Jun. 30, 2010
Document and Entity Information
 
 
 
Document Type
10-K 
 
 
Amendment Flag
FALSE 
 
 
Document Period End Date
2010-12-31 
 
 
Document Fiscal Year Focus
2010 
 
 
Document Fiscal Period Focus
FY 
 
 
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 Public Float
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Common Stock, Shares Outstanding
 
229 
 
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Millions, except Per Share data
Year Ended
Dec. 31,
2010
2009
2008
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
Revenue
$ 2,032 
$ 1,797 
$ 1,755 
Expenses
 
 
 
Operating
605 
532 
493 
Selling, general and administrative
588 
496 
441 
Restructuring
18 
(3)
Depreciation and amortization
66 
64 
75 
Total expenses
1,259 
1,110 
1,007 
Operating income
773 
688 
748 
Interest income (expense), net
(53)
(33)
(52)
Other non-operating income (expense), net
(6)
(8)
34 
Non-operating income (expense), net
(58)
(41)
(18)
Income before provision for income taxes
714 
646 
730 
Provision for income taxes
201 
239 
268 
Net Income
513 
407 
462 
Less: Net income attributable to noncontrolling interests
Net income attributable to Moody's
508 
402 
458 
Earnings per share
 
 
 
Basic
2.16 
1.7 
1.89 
Diluted
$ 2.15 
$ 1.69 
$ 1.87 
Weighted average shares outstanding
 
 
 
Basic
235 
236 
242 
Diluted
237 
238 
245 
CONSOLIDATED BALANCE SHEETS (USD $)
In Millions
Year Ended
Dec. 31,
2010
2009
Current assets:
 
 
Cash and cash equivalents
$ 660 
$ 474 
Short-term investments
13 
10 
Accounts receivable, net of allowances of $33.0 in 2010 and $24.6 in 2009
498 
445 
Deferred tax assets, net
45 
32 
Other current assets
128 
52 
Total current assets
1,343 
1,013 
Property and equipment, net
319 
293 
Goodwill
466 
349 
Intangible assets, net
169 
105 
Deferred tax assets, net
188 
193 
Other assets
56 
51 
Total assets
2,540 
2,003 
Current liabilities:
 
 
Accounts payable and accrued liabilities
414 
317 
Commercial paper
 
444 
Current portion of long-term debt
11 
Deferred revenue
508 
471 
Total current liabilities
934 
1,236 
Non-current portion of deferred revenue
97 
104 
Long-term debt
1,228 
746 
Deferred tax liabilities, net
37 
31 
Unrecognized tax benefits
181 
164 
Other liabilities
362 
318 
Total liabilities
2,839 
2,599 
Commitments and contingencies (Notes 16 and 17)
 
 
Shareholders' deficit:
 
 
Preferred stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding
 
 
Capital surplus
392 
391 
Retained earnings
3,736 
3,329 
Treasury stock, at cost; 112,116,581 and 106,044,833 shares of common stock at December 31, 2010 and 2009, respectively
(4,407)
(4,289)
Accumulated other comprehensive loss
(33)
(41)
Total Moody's shareholders' deficit
(310)
(606)
Noncontrolling interests
11 
10 
Total shareholders' deficit
(298)
(596)
Total liabilities and shareholders' deficit
2,540 
2,003 
Series Common Stock [Member]
 
 
Shareholders' deficit:
 
 
Common stock
 
 
Common Stock [Member]
 
 
Shareholders' deficit:
 
 
Common stock
$ 3 
$ 3 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Millions, except Share data
Dec. 31, 2010
Dec. 31, 2009
Accounts receivable, allowances
$ 33 
$ 25 
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
112,116,581 
106,044,833 
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
Year Ended
Dec. 31,
2010
2009
2008
Cash flows from operating activities
 
 
 
Net income
$ 513 
$ 407 
$ 462 
Reconciliation of net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
66 
64 
75 
Stock-based compensation cost
57 
57 
63 
Deferred income taxes
(11)
17 
(17)
Excess tax benefits from settlement of stock-based compensation awards
(7)
(5)
(8)
Legacy Tax Matters
 
 
(8)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(54)
(15)
26 
Other current assets
(74)
55 
(23)
Other assets
(7)
26 
Accounts payable and accrued liabilities
84 
50 
(118)
Restructuring liability
(5)
(30)
Deferred revenue
20 
18 
Unrecognized tax benefits and other non-current tax liabilities
31 
(21)
31 
Deferred rent
12 
21 
Other liabilities
18 
(0)
45 
Net cash provided by operating activities
653 
644 
540 
Cash flows from investing activities
 
 
 
Capital additions
(79)
(91)
(84)
Purchases of short-term investments
(26)
(18)
(10)
Sales and maturities of short-term investments
25 
15 
16 
Cash paid for acquisitions and investment in affiliates, net of cash acquired
(149)
(1)
(241)
Insurance recovery
 
 
Net cash used in investing activities
(229)
(94)
(319)
Cash flows from financing activities
 
 
 
Borrowings under revolving credit facilities
250 
2,412 
4,266 
Repayments of borrowings under revolving credit facilities
(250)
(3,025)
(3,653)
Issuance of commercial paper
2,233 
11,076 
11,523 
Repayment of commercial paper
(2,676)
(10,737)
(11,969)
Issuance of notes
497 
 
150 
Repayment of notes
(4)
 
 
Net proceeds from stock plans
35 
20 
24 
Excess tax benefits from settlement of stock-based compensation awards
Cost of treasury shares repurchased
(224)
 
(593)
Payment of dividends to MCO shareholders
(99)
(95)
(97)
Payment of dividends to noncontrolling interests
(5)
(4)
(5)
Payments under capital lease obligations
(1)
(1)
(2)
Debt issuance costs and related fees
(4)
 
(1)
Net cash used in financing activities
(241)
(349)
(350)
Effect of exchange rate changes on cash and cash equivalents
27 
(51)
Increase (decrease) in cash and cash equivalents
186 
228 
(180)
Cash and cash equivalents, beginning of the period
474 
246 
426 
Cash and cash equivalents, end of the period
$ 660 
$ 474 
$ 246 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (USD $)
In Millions
Common Stock [Member]
Capital Surplus [Member]
Retained Earnings [Member]
Treasury Stock [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Total Moody's Shareholders' Equity (Deficit) [Member]
Non-Controlling Interests [Member]
Total
Beginning balance, value at Dec. 31, 2007
$ 3 
$ 388 
$ 2,661 
$ (3,852)
$ 16 
$ (784)
$ 12 
$ (772)
Beginning balance, shares at Dec. 31, 2007
343 
 
 
(92)
 
 
 
 
Net Income
 
 
458 
 
 
458 
462 
Dividends
 
 
(96)
 
 
(96)
(5)
(101)
Stock-based compensation
 
64 
 
 
 
64 
 
64 
Shares issued for stock-based compensation plans, net, value
 
(59)
 
83 
 
24 
 
24 
Shares issued for stock-based compensation plans, net, shares
 
 
 
 
 
 
 
Treasury shares repurchased, value
 
 
 
(593)
 
(593)
 
(593)
Treasury shares repurchased, shares
 
 
 
(18)
 
 
 
 
Net tax (excess) shortfalls upon settlement of stock-based compensation awards
 
 
 
 
 
Currency translation adjustment (net of tax)
 
 
 
 
(38)
(38)
(2)
(40)
Net actuarial losses and prior service costs (net of tax)
 
 
 
 
(27)
(27)
 
(27)
Amortization and recognition of prior service cost and actuarial losses (net of tax)
 
 
 
 
 
Net unrealized loss on cash flow hedges (net of tax)
 
 
 
 
(4)
(4)
 
(4)
Comprehensive income (loss)
 
 
 
 
 
390 
392 
Ending Balance, value at Dec. 31, 2008
393 
3,023 
(4,362)
(52)
(994)
(986)
Ending balance, shares at Dec. 31, 2008
343 
 
 
(108)
 
 
 
 
Net Income
 
 
402 
 
 
402 
407 
Dividends
 
 
(96)
 
 
(96)
(4)
(100)
Stock-based compensation
 
58 
 
 
 
58 
 
58 
Shares issued for stock-based compensation plans, net, value
 
(53)
 
73 
 
20 
 
20 
Shares issued for stock-based compensation plans, net, shares
 
 
 
 
 
 
 
Net tax (excess) shortfalls upon settlement of stock-based compensation awards
 
(6)
 
 
 
(6)
 
(6)
Currency translation adjustment (net of tax)
 
 
 
 
22 
22 
23 
Net actuarial losses and prior service costs (net of tax)
 
 
 
 
(10)
(10)
 
(10)
Amortization and recognition of prior service cost and actuarial losses (net of tax)
 
 
 
 
 
Net unrealized loss on cash flow hedges (net of tax)
 
 
 
 
(2)
(2)
 
(2)
Comprehensive income (loss)
 
 
 
 
 
413 
418 
Ending Balance, value at Dec. 31, 2009
391 
3,329 
(4,289)
(41)
(606)
10 
(596)
Ending balance, shares at Dec. 31, 2009
343 
 
 
(106)
 
 
 
 
Net Income
 
 
508 
 
 
508 
513 
Dividends
 
 
(101)
 
 
(101)
(5)
(105)
Stock-based compensation
 
57 
 
 
 
57 
 
57 
Shares issued for stock-based compensation plans, net, value
 
(70)
 
105 
 
35 
 
35 
Shares issued for stock-based compensation plans, net, shares
 
 
 
 
 
 
 
Treasury shares repurchased, value
 
 
 
(224)
 
(224)
 
(224)
Treasury shares repurchased, shares
 
 
 
(9)
 
 
 
 
Net tax (excess) shortfalls upon settlement of stock-based compensation awards
 
14 
 
 
 
14 
 
14 
Currency translation adjustment (net of tax)
 
 
 
 
12 
12 
12 
Net actuarial losses and prior service costs (net of tax)
 
 
 
 
(7)
(7)
 
(7)
Amortization and recognition of prior service cost and actuarial losses (net of tax)
 
 
 
 
 
Net unrealized loss on cash flow hedges (net of tax)
 
 
 
 
 
Comprehensive income (loss)
 
 
 
 
 
516 
522 
Ending Balance, value at Dec. 31, 2010
$ 3 
$ 392 
$ 3,736 
$ (4,407)
$ (33)
$ (310)
$ 11 
$ (298)
Ending balance, shares at Dec. 31, 2010
343 
 
 
(112)
 
 
 
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (Parenthetical) (USD $)
In Millions
Year Ended
Dec. 31,
2010
2009
2008
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
 
 
 
Currency translation adjustment, tax
$ 12 
$ 19 
$ 12 
Net actuarial gains and prior service cost, tax
18 
Amortization and recognition of prior service cost and actuarial losses, tax
Net unrealized loss on cash flow hedges, tax
$ 0 
$ 2 
$ 2 
GLOSSARY OF TERMS AND ABBREVIATIONS
GLOSSARY OF TERMS AND ABBREVIATIONS

GLOSSARY OF TERMS AND ABBREVIATIONS

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

 

TERM

  

DEFINITION

ACNielsen    ACNielsen Corporation – a former affiliate of Old D&B
Analytics    Moody's Analytics – reportable segment of MCO formed in January 2008 which combines MKMV, the sales of MIS research and other MCO non-rating commercial activities
AOCI    Accumulated other comprehensive income (loss); a separate component of shareholders' equity (deficit)
ASC   

The FASB Accounting Standards Codification; the sole source of authoritative

GAAP as of July 1, 2009 except for rules and interpretive releases of the SEC, which are also sources of authoritative GAAP for SEC registrants

ASU    The FASB Accounting Standards Updates to the ASC. It also provides background information for accounting guidance and the bases for conclusions on the changes in the ASC. ASUs are not considered authoritative until codified into the ASC
Basel II    Capital adequacy framework published in June 2004 by the Basel Committee on Banking Supervision
Board    The board of directors of the Company
Bps    Basis points
Canary Wharf Lease    Operating lease agreement entered into on February 6, 2008 for office space in London, England, occupied by the Company in the second half of 2009
CDOs    Collateralized debt obligations
CFG    Corporate finance group; an LOB of MIS
CMBS    Commercial mortgage-backed securities; part of CREF
Cognizant    Cognizant Corporation – a former affiliate of Old D&B, which comprised the IMS Health and NMR businesses
Commission    European Commission
Common Stock    The Company's common stock
Company    Moody's Corporation and its subsidiaries; MCO; Moody's
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 CP notes
CP Program    The Company's CP program entered into on October 3, 2007
CRAs    Credit rating agencies
CREF    Commercial real estate finance which includes REITs, commercial real estate CDOs and CMBS; part of SFG
CSI    CSI Global Education, Inc.; an acquisition completed in November 2010; part of the MA segment; a provider of financial learning, credentials, and certification in Canada
D&B Business    Old D&B's Dun & Bradstreet operating company
DBPPs    Defined benefit pension plans
DCF    Discounted cash flow; a fair value calculation methodology whereby future projected cash flows are discounted back to their present value using a discount rate
Debt/EBITDA    Ratio of Total Debt to EBITDA
Directors' Plan    The 1998 Moody's Corporation Non-Employee Directors' Stock Incentive Plan
Distribution Date    September 30, 2000; the date which Old D&B separated into two publicly traded companies – Moody's Corporation and New D&B
EBITDA    Earnings before interest, taxes, depreciation, amortization and extraordinary items
ECAIs    External Credit Assessment Institutions
ECB    European Central Bank
EMEA    Represents countries within Europe, the Middle East and Africa
Enb    Enb Consulting; an acquisition completed in December 2008; part of the MA segment; a provider of credit and capital markets training services
EPS    Earnings per share
ESPP    The 1999 Moody's Corporation Employee Stock Purchase Plan
ETR    Effective Tax Rate
EU    European Union
EUR    Euros
Excess Tax Benefit    The difference between the tax benefit realized at exercise of an option or delivery of a restricted share and the tax benefit recorded at the time that the option or restricted share is expensed under GAAP
Exchange Act    The Securities Exchange Act of 1934, as amended
FASB    Financial Accounting Standards Board
Fermat    Fermat International; an acquisition completed in October 2008; part of the MA segment; a provider of risk and performance management software to the global banking industry
FIG    Financial institutions group; an LOB of MIS
Fitch    Fitch Ratings, a part of the Fitch Group which is a majority-owned subsidiary of Fimalac, S.A.
Financial Reform Act    Dodd-Frank Wall Street Reform and Consumer Protection Act
FSF    Financial Stability Forum
FX    Foreign exchange
GAAP    U.S. Generally Accepted Accounting Principles
GBP    British pounds
G-8    The finance ministers and central bank governors of the group of eight countries consisting of Canada, France, Germany, Italy, Japan, Russia, U.S. and U.K.
G-20    The G-20 is an informal forum that promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. By contributing to the strengthening of the international financial architecture and providing opportunities for dialogue on national policies, international co-operation, and international financial institutions, the G-20 helps to support growth and development across the globe. The G-20 is comprised of: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, U.K., U.S. and the EU, which is represented by the rotating Council presidency and the ECB
HFSC    House Financial Services Committee
IMS Health    A spin-off of Cognizant, which 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
Intellectual Property    The Company's intellectual property, including but not limited to proprietary information, trademarks, research, software tools and applications, models and methodologies, databases, domain names, and other proprietary materials
IOSCO    International Organization of Securities Commissions
IOSCO Code    Code of Conduct Fundamentals for CRAs issued by IOSCO
IRS    Internal Revenue Service
Legacy Tax Matter(s)    Exposures to certain tax matters in connection with the 2000 Distribution
LIBOR    London Interbank Offered Rate
LOB    Line of Business
MA    Moody's Analytics – a reportable segment of MCO formed in January 2008 which includes the non-rating commercial activities of MCO
Make Whole Amount    The prepayment penalty relating to the Series 2005-1 Notes and Series 2007-1 Notes; a premium based on the excess, if any, of the discounted value of the remaining scheduled payments over the prepaid principal
MCO    Moody's Corporation and its subsidiaries; the Company; Moody's
MD&A    Management's Discussion and Analysis of Financial Condition and Results of Operations
MIS    Moody's Investors Service – a reportable segment of MCO
MIS Code    Moody's Investors Service Code of Professional Conduct
MKMV    Moody's KMV – a reportable segment of MCO prior to January 2008
Moody's    Moody's Corporation and its subsidiaries; MCO; the Company
Net Income    Net income attributable to Moody's Corporation, which excludes the portion of net income from consolidated entities attributable to non-controlling shareholders
New D&B    The New D&B Corporation – which comprises the D&B business after September 30, 2000
NM    Not-meaningful percentage change (over 400%)
NMR    Nielsen Media Research, Inc.; a spin-off of Cognizant; a leading source of television audience measurement services
NRSRO    Nationally Recognized Statistical Rating Organization
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 U.S. pension plans, the U.S. post-retirement healthcare plans and the U.S. 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
PPP   

Profit Participation Plan

RD&A    Research, Data and Analytics; an LOB within MA that distributes investor-oriented research and data, including in-depth research on major debt issuers, industry studies, commentary on topical credit events, economic research and analytical tools such as quantitative risk scores
Reform Act    Credit Rating Agency Reform Act of 2006
REITs    Real estate investment trusts
Reorganization    The Company's business reorganization announced in August 2007 which resulted in two new reportable segments (MIS and MA) beginning in January 2008
RMBS    Residential mortgage-backed securities; part of SFG
RMS    The Risk Management Software LOB within MA which provides both economic and regulatory capital risk management software and implementation services
S&P    Standard & Poor's Financial Services, a division of The McGraw-Hill Companies, Inc.
SEC    Securities and Exchange Commission
Series 2005-1 Notes    Principal amount of $300.0 million, 4.98% senior unsecured notes due in September 2015 pursuant to the 2005 Agreement
Series 2007-1 Notes    Principal amount of $300.0 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
Stock Plans    The Old D&B's 1998 Key Employees' Stock Incentive Plan and the Restated 2001 Moody's Corporation Key Employees' Stock Incentive Plan
T&E    Travel and entertainment expenses
TPE    Third party evidence, as defined in the ASC, used to determine selling price based on a vendor's or any competitor's largely interchangeable products or services in standalone sales transactions to similarly situated customers
Total Debt    Current and long-term portion of debt as reflected on the consolidated balance sheets, excluding current accounts payable and accrued liabilities incurred in the ordinary course of business
U.K.    United Kingdom
U.S.    United States
USD    U.S. dollar
UTBs    Unrecognized tax benefits
UTPs    Uncertain tax positions
VAT    Value added tax
VSOE    Vendor specific objective evidence; evidence, as defined in the ASC, of selling price limited to either of the following: the price charged for a deliverable when it is sold separately, or for a deliverable not yet being sold separately, the price established by management having the relevant authority
WACC    Weighted average cost of capital
1998 Plan    Old D&B's 1998 Key Employees' Stock Incentive Plan
2000 Distribution    The distribution by Old D&B to its shareholders of all of the outstanding shares of New D&B common stock on September 30, 2000

2000 Distribution

Agreement

   Agreement governing certain ongoing relationships between the Company and New D&B after the 2000 Distribution including the sharing of any liabilities for the payment of taxes, penalties and interest resulting from unfavorable IRS determinations on certain tax matters and certain other potential tax liabilities
2001 Plan    The Amended and Restated 2001 Moody's Corporation Key Employees' Stock Incentive Plan
2005 Agreement    Note purchase agreement dated September 30, 2005 relating to the Series 2005-1 Notes
2007 Agreement    Note purchase agreement dated September 7, 2007 relating to the Series 2007-1 Notes
2007 Facility    Revolving credit facility of $1 billion entered into on September 28, 2007, expiring in 2012
2007 Restructuring Plan    The Company's 2007 restructuring plan approved December 31, 2007
2008 Term Loan    Five-year $150.0 million senior unsecured term loan entered into by the Company on May 7, 2008
2009 Restructuring Plan    The Company's 2009 restructuring plan approved March 27, 2009
2010 Senior Notes    Principal amount of $500.0 million, 5.50% senior unsecured notes due in September 2010 pursuant to the Indenture
7WTC    The Company's corporate headquarters located at 7 World Trade Center
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. In 2007 and prior years, Moody's operated in two reportable segments: Moody's Investors Service and Moody's KMV. Beginning in January 2008, Moody's segments were changed to reflect the Reorganization announced in August 2007 and Moody's now reports in two reportable segments: MIS and MA. As a result of the Reorganization, the rating agency remains in the MIS operating segment and several ratings business lines have been realigned. All of Moody's other non-rating commercial activities are included within the Moody's Analytics segment. 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 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, and specialized advisory, training, 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.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Recently Issued Accounting Pronouncements

Adopted:

In June 2009, the FASB issued a new accounting standard related to the consolidation of variable interest entities. This new standard eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. This new standard also requires enhanced disclosures regarding an enterprise's involvement in variable interest entities. The Company has adopted this new accounting standard as of January 1, 2010 and the implementation did not impact its consolidated financial statements.

In October 2009, the FASB issued ASU No. 2009-13, "Multiple-Deliverable Revenue Arrangements" ("ASU 2009-13"). The new standard changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable based on the relative selling price. The selling price for each deliverable is based on vendor-specific objective evidence of selling price if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE nor TPE is available. The Company has elected to early adopt ASU 2009-13 on a prospective basis for applicable transactions originating or materially modified on or after January 1, 2010. The early adoption of this ASU did not have a material impact on the Company's consolidated financial statements. Further information on the early adoption of this standard is set forth in this note above, under "Revenue Recognition".

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 adopted the provisions of this ASU as of January 1, 2010 for all new disclosure requirements except for the aforementioned requirements regarding Level 3 fair-value measurements, for which the Company will adopt that portion of the ASU on January 1, 2011. The portion of this ASU that was adopted on January 1, 2010 did not have a material impact on the Company's consolidated financial statements. The Company does not expect the implementation of the remaining portion of this ASU to have a material impact on its consolidated financial statements.

Not yet adopted

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.

Reclassifications

Certain reclassifications have been made to the prior year amounts to conform to the current year presentation.

RECONCILIATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
RECONCILIATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
NOTE 3 RECONCILIATION OF WEIGHTED AVERAGE SHARES OUTSTANDING

Below is a reconciliation of basic to diluted shares outstanding:

 

     Year Ended December 31,  
     2010      2009      2008  
Basic      235.0         236.1         242.4   
Dilutive effect of shares issuable under stock-based compensation plans      1.6         1.7         2.9   
                          
Diluted      236.6         237.8         245.3   
                          

Antidilutive options to purchase common shares and restricted stock excluded from the table above

     15.5         15.6         11.3   
                          

The calculation of diluted EPS requires certain assumptions regarding the use of both cash proceeds and assumed proceeds that would be received upon the exercise of stock options and vesting of restricted stock outstanding as of December 31, 2010, 2009 and 2008. These assumed proceeds include Excess Tax Benefits and any unrecognized compensation on the awards.

SHORT-TERM INVESTMENTS
SHORT-TERM INVESTMENTS
NOTE 4 SHORT-TERM INVESTMENTS

Short-term investments are securities with maturities greater than 90 days at the time of purchase that are available for use in the Company's operations in the next twelve months. The short-term investments, primarily consisting of certificates of deposit, are classified as held-to-maturity and therefore are carried at cost. The remaining contractual maturities of the short-term investments were one to six months and one to three months as of December 31, 2010 and 2009, respectively. Interest and dividends are recorded into income when earned.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
NOTE 5 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

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. As a result, the fair value of the swaps and changes in the fair value of the underlying debt are reported in other liabilities and as a reduction of the carrying amount of the Series 2005-1 Notes, respectively, at December 31, 2010. 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 on these swaps was immaterial in 2010.

In May 2008, the Company entered into interest rate swaps with a total notional amount of $150.0 million to protect against fluctuations in the LIBOR-based variable interest rate on the 2008 Term Loan, further described in Note 14. These interest rate swaps are designated as cash flow hedges.

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 an 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. The notional principal of foreign exchange forwards to purchase U.S. dollars with foreign currencies was approximately $17 million at December 31, 2010. The notional principal of foreign exchange forwards to sell U.S. dollars for foreign currencies was approximately $96 million at December 31, 2010 and approximately $66 million at December 31, 2009. The notional principal amounts of foreign exchange forwards to purchase euros with other foreign currencies was approximately 11 million euros at December 31, 2010 and approximately 10 million euros at December 31, 2009. The net gains (losses) on these instruments recognized in other non-operating income (expense), net in the Company's consolidated statements of operations was $(3.0) million and $3.0 million in 2010 and 2009, respectively.

The Company engaged in hedging activities to protect against FX risks from forecasted billings and related revenue denominated in the euro and the GBP. FX options and forward exchange contracts were utilized to hedge exposures related to changes in FX rates. As of December 31, 2010, all FX options and forward exchange contracts have matured. The hedging program mainly utilized FX options. The FX options and forward exchange contracts were designated as cash flow hedges.

The following table summarizes the notional amounts of the Company's outstanding FX options:

 

     December 31,  
     2010      2009  
Notional amount of Currency Pair:      

GBP/USD

   £       £ 5.0   

EUR/USD

         9.9   

EUR/GBP

         21.0   

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 gains/(losses) on those instruments:

 

     Fair Value of Derivative Instruments  
     Asset      Liability  
     December 31,
2010
     December 31,
2009
     December 31,
2010
     December 31,
2009
 
Derivatives designated as accounting hedges:            
FX options    $       $ 1.2       $       $   
Interest rate swaps                      12.2         7.6   
                                   
Total derivatives designated as accounting hedges              1.2         12.2         7.6   
Derivatives not designated as accounting hedges:            
FX forwards on certain assets and liabilities      2.0         0.3         0.7         1.0   
                                   
Total    $ 2.0       $ 1.5       $ 12.9       $ 8.6   
                                   

 

The fair value of the interest rate swaps is included in other liabilities in the consolidated balance sheets at December 31, 2010 and December 31, 2009. The fair value of the FX forwards is included in other current assets and accounts payable and accrued liabilities, respectively, in the consolidated balance sheets at December 31, 2010 and 2009. All of the above derivative instruments are valued using Level 2 inputs as defined in Topic 820 of the ASC as more fully discussed in Note 2. 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)
 
     Year Ended
December 31,
           Year Ended
December 31,
         Year Ended
December 31,
 
     2010     2009            2010     2009          2010      2009  
FX options    $      $ (1.5 )     Revenue       $ (1.0 )   $ 2.0      Revenue    $       $ (0.1
Interest rate swaps      (3.1     (0.7     Interest expense         (2.8     (2.6   N/A                
                                                       
Total    $ (3.1   $ (2.2 )      $ (3.8   $ (0.6      $       $ (0.1
                                                       

All gains and losses on derivatives designated as cash flow hedges for accounting purposes are initially recognized through AOCI. Realized gains and losses reported in AOCI are reclassified into earnings (into revenue for the FX options and into Interest income (expense), net for the interest rate swaps) as the underlying transaction is recognized. The existing realized losses as of December 31, 2010 expected to be reclassified to earnings in the next twelve months is immaterial.

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

 

     Unrecognized
Losses, net of tax
 
     December 31,
2010
    December 31,
2009
 
FX options    $ (0.2   $ (1.2 )
Interest rate swaps      (5.4 )     (5.1 )
                

Total

   $ (5.6 )   $ (6.3 )
                
PROPERTY AND EQUIPMENT, NET
PROPERTY AND EQUIPMENT, NET
NOTE 6 PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of:

 

     December 31,  
     2010     2009  
Office and computer equipment (3 – 20 year estimated useful life)    $ 92.2      $ 99.2   
Office furniture and fixtures (5 – 10 year estimated useful life)      40.2        37.4   
Internal-use computer software (3 – 8 year estimated useful life)      199.1        145.9   
Leasehold improvements (5 – 20 year estimated useful life)      188.6        175.3   
                

Total property and equipment, at cost

     520.1        457.8   
Less: accumulated depreciation and amortization      (200.8 )     (164.8 )
                
Total property and equipment, net    $ 319.3      $ 293.0   
                

 

Depreciation and amortization expense related to the above assets was $49.9 million, $47.7 million and $46.7 million for the years ended December 31, 2010, 2009 and 2008, respectively.

ACQUISITIONS
ACQUISITIONS
NOTE 7 ACQUISITIONS

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

CSI Global Education, Inc.

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

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 purchase price was funded with cash on hand.

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

 

Current assets       $ 5.1   
Property and equipment, net         0.8   
Intangible assets:      

Trade name (30 year weighted average life)

   $ 9.0      

Client relationships (21 year weighted average life)

     63.1      

Trade secret (13 year weighted average life)

     5.8      
           

Total intangible assets (21 year weighted average life)

        77.9   
Goodwill         104.6   
Liabilities assumed         (37.0 )
           
Net assets acquired       $ 151.4   
           

Current assets include acquired cash of approximately $2.8 million. The acquired goodwill, which has been assigned to the MA segment, will not be amortized and will not be deductible for tax. As of December 31, 2010, CSI operates as its own reporting unit and thus goodwill associated with the acquisition of CSI is all part of that reporting unit within the MA segment. CSI will remain a separate reporting unit until MA management completes its evaluation as to how the acquired entity will be integrated into the MA segment.

The amount of revenue and expenses included in the Company's consolidated statement of operations from the acquisition date through December 31, 2010 was not material. 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.

Enb Consulting Ltd.

In December 2008, a subsidiary of the Company acquired Enb Consulting Ltd., a provider of credit and capital markets training services. The purchase price was not material and the impact to operations and cash flow is not material. Enb is part of the MA segment.

Fermat International SA

On October 9, 2008, a subsidiary of the Company acquired Fermat International SA, a provider of risk and performance management software to the global banking sector, which is now part of the MA segment. The combination of MA's credit portfolio management and economic capital tools with Fermat's expertise in risk management software positions MA to deliver comprehensive analytical solutions for financial institutions worldwide. The results of Fermat are reflected in the MA operating segment since the acquisition date.

The aggregate purchase price of $211 million consisted of $204.5 million in cash payments to the sellers and $6.5 million in direct transaction costs, primarily professional fees. The purchase price was funded by using Moody's cash on hand.

 

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

 

Current assets       $ 53.9   
Property and equipment, net         1.6   
Intangible assets:      

Software (9.0 year weighted average life)

   $ 43.0      

Client relationships (16.0 year weighted average life)

     12.1      

Other intangibles (1.8 year weighted average life)

     2.6      
           

Total intangible assets

        57.7   
In-process technology         4.5   
Goodwill         125.0   
Liabilities assumed         (31.7 )
           
Net assets acquired       $ 211.0   
           

The acquired goodwill, which has been assigned to the MA segment, will not be amortized and will not be deductible for tax. The $4.5 million allocated to acquired in-process technology was written off immediately following the acquisition because the technological feasibility had not yet been established as of the acquisition date and was determined to have no future use. This write-off is included in depreciation and amortization expenses for the year ended December 31, 2008. Current assets include acquired cash of approximately $26 million.

BQuotes, Inc.

In January 2008, a subsidiary of the Company acquired BQuotes, Inc., a global provider of price discovery tools and end-of-day pricing services for a wide range of fixed income securities, which was part of the MA segment. The purchase price was not material and the impact to operations and cash flow was not material.

Financial Projections Ltd.

In January 2008, a subsidiary of the Company acquired Financial Projections Ltd., a leading provider of in-house credit training services, with long-standing relationships among European banks. The purchase price was not material and the impact to operations and cash flow is not material. Financial Projections 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:

 

     Year Ended December 31,  
     2010      2009  
     MIS      MA      Consolidated      MIS     MA      Consolidated  
Beginning balance    $ 11.1       $ 338.1       $ 349.2       $ 10.6      $ 327.4       $ 338.0   
Additions/adjustments              104.6         104.6         (0.3 )     5.0         4.7   
Foreign currency translation adjustments      0.3         11.4         11.7         0.8        5.7         6.5   
                                                    
Ending balance    $ 11.4       $ 454.1       $ 465.5       $ 11.1      $ 338.1       $ 349.2   
                                                    

The additions/adjustments during 2010 for the MA segment in the table above relate to the acquisition of CSI further described in Note 7 above.

The additions/adjustments during 2009 for the MA segment in the table above primarily relate to adjustments made to the purchase accounting associated with the December 2008 acquisition further described in Note 7 above.

 

Acquired Intangible assets consisted of:

 

     December 31,  
     2010     2009  
Customer relationships    $ 145.1      $ 80.6   
Accumulated amortization      (49.2 )     (42.8 )
                

Net customer lists

     95.9        37.8   
                
Trade secrets      31.4        25.5   
Accumulated amortization      (10.9 )     (8.7 )
                

Net trade secrets

     20.5        16.8   
                
Software      54.8        55.0   
Accumulated amortization      (20.3 )     (14.8 )
                

Net software

     34.5        40.2   
                
Other      37.5        26.8   
Accumulated amortization      (19.6 )     (16.7 )
                

Net other

     17.9        10.1   
                

Total

   $ 168.8      $ 104.9   
                

The amounts as of December 31, 2010 in the table above include intangible assets acquired in the purchase of CSI as more fully discussed in Note 7 above. Other intangible assets primarily consist of databases, trade-names and covenants not to compete. Amortization expense relating to intangible assets is as follows:

 

     Year Ended December 31,  
     2010      2009      2008  
Amortization Expense    $ 16.4       $ 16.4       $ 28.2   

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

 

Year Ending December 31,

      
2011    $ 18.7   
2012      18.1   
2013      17.9   
2014      14.5   
2015      13.4   
Thereafter      86.2   

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 years ended December 31, 2010 and 2009, there were no impairments to goodwill or to intangible assets except for an immaterial $0.2 million impairment of intangible assets in 2009 which was included in the restructuring charge as further discussed in Note 10 below. In 2008 an impairment of $11.1 million was recognized for certain software and database intangible assets within the MA segment, which is reflected in amortization expense. These intangible assets were determined to be impaired as a result of comparing the carrying amount to the undiscounted cash flows of the related asset group expected to result from the use and eventual disposition of the assets. The Company measured the amount of the impairment loss by comparing the carrying amount of the related assets to their fair value. The fair value was determined by utilizing the expected present value technique which uses multiple cash flow scenarios that reflect the range of possible outcomes and a risk-free rate.

DETAIL 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:

 

     December 31,  
     2010      2009  
Other current assets:      

Prepaid taxes

   $ 82.3       $ 18.6   

Other prepaid expenses

     39.8         28.2   

Other

     5.8         5.0   
                 

Total other current assets

   $ 127.9       $ 51.8   
                 
     December 31,  
Other assets:    2010      2009  

Investments in Joint Ventures

   $ 30.8       $ 30.4   

Deposits for real-estate leases

     11.4         9.5   

Other

     13.6         10.8   
                 

Total other assets

   $ 55.8       $ 50.7   
                 
     December 31,  
     2010      2009  
Accounts and accrued liabilities:      

Salaries and benefits

   $ 69.6       $ 51.5   

Incentive compensation

     116.8         74.6   

Profit sharing contribution

     12.6         —     

Customer credits, advanced payments and advanced billings

     15.3         14.8   

Dividends

     27.9         26.3   

Professional service fees

     50.6         35.5   

Interest accrued on debt

     17.6         9.6   

Accounts payable

     14.3         7.1   

Income taxes (see Note 13)

     26.9         20.3   

Restructuring (see Note 10)

     0.7         5.9   

Pension and other post retirement employee benefits (see Note 11)

     9.5         8.8   

Other

     52.6         62.8   
                 

Total accounts payable and accrued liabilities

   $ 414.4       $ 317.2   
                 
     December 31,  
     2010      2009  
Other liabilities:      

Pension and other post retirement employee benefits (see Note 11)

   $ 132.8       $ 112.7   

Deferred rent-non-current portion

     100.4         87.4   

Interest accrued on UTPs

     33.7         27.7   

Legacy and other tax matters

     57.3         52.8   

Other

     38.1         37.2   
                 

Total other liabilities

   $ 362.3       $ 317.8   
                 
RESTRUCTURING
RESTRUCTURING
NOTE 10 RESTRUCTURING

On March 27, 2009 the Company approved the 2009 Restructuring Plan to reduce costs in response to a strategic review of its business in certain jurisdictions and the then current weak global economic and market conditions. The 2009 Restructuring Plan consisted of headcount reductions of approximately 150 positions representing approximately 4% of the Company's workforce at December 31, 2008 as well as contract termination costs and the divestiture of non-strategic assets. The Company's plan included closing offices in South Bend, Indiana; Jakarta, Indonesia and Taipei, Taiwan. There was $0.2 million in accelerated amortization for intangible assets recognized in the first quarter of 2009 relating to the closure of the Jakarta, Indonesia office. The cumulative amount of expense incurred from inception through December 31, 2010 for the 2009 Restructuring Plan was $14.7 million. The 2009 Restructuring Plan was substantially complete at September 30, 2009.

On December 31, 2007, the Company approved the 2007 Restructuring Plan that reduced global headcount by approximately 275 positions, or approximately 7.5% of the workforce at December 31, 2007, in response to the Company's reorganization announced in August 2007 and a decline in the then current and anticipated issuance of rated debt securities in some market sectors. Included in the 2007 Restructuring Plan was a reduction of staff as a result of: (i) consolidation of certain corporate staff functions, (ii) the integration of businesses comprising MA and (iii) an anticipated decline in new securities issuance in some market sectors. The 2007 Restructuring Plan also called for the termination of technology contracts as well as the outsourcing of certain technology functions. The cumulative amount of expense incurred from inception through December 31, 2010 for the 2007 Restructuring Plan was $50.4 million. The 2007 Restructuring Plan was substantially complete as of December 31, 2008.

Total expenses included in the accompanying consolidated statements of operations are as follows:

 

     Year Ended December 31,  
     2010     2009      2008  
2007 Restructuring Plan    $ 1.0      $ 1.9       $ (2.5
2009 Restructuring Plan      (0.9 )     15.6           
                         

Total

   $ 0.1      $ 17.5       $ (2.5
                         

The expense in 2010, 2009 and 2008 related to the 2007 Restructuring Plan primarily reflects adjustments to previous estimates.

Changes to the restructuring liability for the year ended December 31, 2010 and 2009 were as follows:

 

     Employee Termination Costs              
     Severance     Pension
Settlements
    Total     Contract
Termination
Costs
    Total
Restructuring
Liability
 
Balance at December 31, 2008    $ 1.5      $ 8.1      $ 9.6      $ 1.8      $ 11.4   
2007 Restructuring Plan:           

Costs incurred and adjustments

     0.4               0.4        1.5        1.9   

Cash payments

     (1.7 )            (1.7 )     (2.6 )     (4.3 )
2009 Restructuring Plan:           

Costs incurred and adjustments

     12.0               12.0        3.3        15.3   

Cash payments

     (7.8            (7.8 )     (2.5     (10.3
                                        
Balance at December 31, 2009    $ 4.4      $ 8.1      $ 12.5      $ 1.5      $ 14.0   
2007 Restructuring Plan:           

Costs incurred and adjustments

     (0.2 )            (0.2 )     (0.1     (0.3

Cash payments

            (3.0 )     (3.0     (0.5     (3.5
2009 Restructuring Plan:           

Costs incurred and adjustments

     (0.4 )            (0.4 )            (0.4 )

Cash payments

     (3.4            (3.4 )     (0.5     (3.9

FX Translation

     (0.1            (0.1            (0.1
                                        
Balance at December 31, 2010    $ 0.3      $ 5.1      $ 5.4      $ 0.4      $ 5.8   
                                        

As of December 31, 2010 the remaining restructuring liability of $0.7 million relating to severance and contract termination costs is expected to be paid out during the year ending December 31, 2011. Payments related to the $5.1 million unfunded pension liability will be paid as certain of the affected employees reach retirement age and continue in accordance with plan provisions.

Severance and contract termination costs of $0.7 million and $5.9 million as of December 31, 2010 and December 31, 2009, respectively, are recorded in accounts payable and accrued liabilities in the Company's consolidated balance sheets. Additionally, the amount for pension settlements is recorded within other liabilities as of December 31, 2010 and December 31, 2009.

PENSION AND OTHER POST-RETIREMENT BENEFITS
PENSION AND OTHER POST-RETIREMENT BENEFITS
NOTE 11 PENSION AND OTHER POST-RETIREMENT BENEFITS

Moody's maintains funded and unfunded noncontributory Defined Benefit Pension Plans. The U.S. plans provide defined benefits using a cash balance formula based on years of service and career average salary or final average pay for selected executives. The Company also provides certain healthcare and life insurance benefits for retired U.S. employees. These 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 at the Distribution Date, Moody's assumed responsibility for the pension and other post-retirement benefits relating to its active employees. New D&B has assumed responsibility for the Company's retirees and vested terminated employees as of the Distribution Date.

Through 2007, substantially all U.S. employees were eligible to participate in the Company's DBPPs. Effective January 1, 2008, the Company no longer offers DBPPs to employees hired or rehired on or after January 1, 2008 and new hires instead will receive a retirement contribution in similar benefit value under the Company's Profit Participation Plan. Current participants of the Company's DBPPs continue to accrue benefits based on existing plan benefit formulas.

Following is a summary of changes in benefit obligations and fair value of plan assets for the Post-Retirement Plans for the years ended December 31:

 

     Pension Plans     Other Post-Retirement Plans  
     2010     2009     2010     2009  
Change in Benefit Obligation:         

Benefit obligation, beginning of the period

   $ (213.0 )   $ (171.8 )   $ (13.1 )   $ (11.0 )

Service cost

     (13.5 )     (12.1 )     (0.9 )     (0.8 )

Interest cost

     (12.0 )     (9.9 )     (0.8 )     (0.7 )

Plan participants' contributions

                   (0.2 )     (0.2 )

Benefits paid

     10.5        3.9        0.7        1.1   

Plan amendments

            (2.5 )              

Actuarial gain (loss)

     7.4        7.4        (0.4 )     (0.7 )

Assumption changes

     (21.9 )     (28.0 )     (0.9 )     (0.8 )
                                
Benefit obligation, end of the period      (242.5 )     (213.0 )     (15.6 )     (13.1 )
                                
Change in Plan Assets:         

Fair value of plan assets, beginning of the period

     108.2        88.6                 

Actual return on plan assets

     13.9        15.5                 

Benefits paid

     (10.5 )     (3.9 )     (0.7 )     (1.1 )

Employer contributions

     8.8        8.0        0.5        0.9   

Plan participants' contributions

                   0.2        0.2   
                                

Fair value of plan assets, end of the period

     120.4        108.2                 
                                
Funded status of the plans      (122.1 )     (104.8 )     (15.6 )     (13.1 )
                                
Amounts Recorded on the Consolidated Balance Sheets:         

Pension and post-retirement benefits liability-current

     (8.9 )     (8.2 )     (0.6 )     (0.6 )

Pension and post-retirement benefits liability-non current

     (113.2 )     (96.6 )     (15.0 )     (12.5 )
                                
Net amount recognized    $ (122.1 )   $ (104.8 )   $ (15.6 )   $ (13.1 )
                                
Accumulated benefit obligation, end of the period    $ (214.6 )   $ (185.2 )    
                    

The pension plan amendment in 2009 relates to a retroactive adjustment to the pay credit schedule as determined by the IRS.

The following information is for those pension plans with an accumulated benefit obligation in excess of plan assets:

 

     December 31,  
     2010      2009  
Aggregate projected benefit obligation    $ 242.5       $ 213.0   
Aggregate accumulated benefit obligation    $ 214.6       $ 185.2   
Aggregate fair value of plan assets    $ 120.4       $ 108.2   

 

The following table summarizes the pre-tax net actuarial losses and prior service cost recognized in AOCI for the Company's Post-Retirement Plans as of December 31:

 

     Pension Plans     Other Post-Retirement Plans  
     2010     2009     2010     2009  
Net actuarial (losses)    $ (80.9 )   $ (73.8 )   $ (3.1 )   $ (2.0 )
Net prior service costs      (5.3 )     (6.0 )              
                                

Total recognized in AOCI- pretax

   $ (86.2 )   $ (79.8 )   $ (3.1 )   $ (2.0 )
                                

For the Company's pension plans, the Company expects to recognize in 2011 as components of net periodic expense $4.6 million for the amortization of net actuarial losses and $0.7 million for the amortization of prior service costs. Expected amortizations for other post-retirement plans in 2011 are not material.

Net periodic benefit expenses recognized for the Post-Retirement Plans for years ended December 31:

 

     Pension Plans     Other Post-Retirement Plans  
     2010     2009     2008     2010      2009      2008  
Components of net periodic expense               
Service cost    $ 13.5      $ 12.1      $ 12.4      $ 0.9       $ 0.8       $ 0.8   
Interest cost      12.0        9.9        9.7        0.8         0.7         0.6   
Expected return on plan assets      (10.5 )     (10.0 )     (9.9 )                       
Amortization of net actuarial loss from earlier periods      2.8        0.6        0.2        0.1                   
Amortization of net prior service costs from earlier periods      0.7        0.4        0.4                          
Curtailment loss                    1.0                          
Cost of special termination benefits                    2.8                          
Settlement charges      1.3                                        
                                                  
Net periodic expense    $ 19.8      $ 13.0      $ 16.6      $ 1.8       $ 1.5       $ 1.4   
                                                  

The following table summarizes the pre-tax amounts recorded in OCI related to the Company's Post-Retirement Plans for the years ended December 31:

     Pension Plans     Other Post-Retirement Plans  
   2010     2009     2010     2009  
Amortization of net actuarial losses    $ 2.8      $ 0.6      $ 0.1      $   
Amortization of prior service costs      0.7        0.4                 
Accelerated recognition of actuarial loss due to settlement      1.3                        
Net actuarial (loss) arising during the period      (11.2 )     (15.2 )     (1.2 )     (1.5 )
Net prior service cost arising during the period due to plan amendment             (2.5 )              
                                

Total recognized in Other Comprehensive
Income – pre-tax

   $ (6.4 )   $ (16.7 )   $ (1.1 )   $ (1.5 )
                                

 

ADDITIONAL INFORMATION:

Assumptions – Post-Retirement Plans

Weighted-average assumptions used to determine benefit obligations at December 31:

 

     Pension Plans     Other Post-Retirement Plans  
   2010     2009     2010     2009  
Discount rate      5.39 %     5.95 %     5.15 %     5.75 %
Rate of compensation increase      4.00 %     4.00 %              

Weighted-average assumptions used to determine net periodic benefit expense for years ended December 31:

 

     Pension Plans     Other Post-Retirement Plans  
   2010     2009     2008     2010     2009     2008  
Discount rate      5.95 %     6.00 %     6.45 %     5.75 %     6.25 %     6.35 %
Expected return on plan assets      8.35 %     8.35 %     8.35 %                     
Rate of compensation increase      4.00 %     4.00 %     4.00 %                     

For 2011, the Company continued to use an expected rate of return on assets of 8.35% for Moody's funded pension plan. The expected rate of return on plan assets represents the Company's best estimate of the long-term return on plan assets and is determined by using a building block approach, which generally weighs the underlying long-term expected rate of return for each major asset class based on their respective allocation target within the plan portfolio. As the assumption reflects a long-term time horizon, the plan performance in any one particular year does not, by itself, significantly influence the Company's evaluation and the assumption is generally not revised unless there is a significant change in one of the factors upon which it is based, such as target asset allocation or long-term capital market conditions.

Assumed Healthcare Cost Trend Rates at December 31:

 

     2010     2009     2008  
     Pre-age 65     Post-age 65     Pre-age 65     Post-age 65     Pre-age 65     Post-age 65  
Healthcare cost trend rate assumed for the following year      7.9 %     8.9 %     8.4 %     9.4 %     9.4 %     10.4 %
Ultimate rate to which the cost trend rate is assumed to decline (ultimate trend rate)      5.0%        5.0%        5.0%   
Year that the rate reaches the ultimate trend rate      2020        2020        2015   

The assumed health cost trend rate reflects different expectations for the medical and prescribed medication components of health care costs for pre and post-65 retirees. The Company revised its trend rates in 2010 to a slower grading period at a reduction of 0.5% per year to reach the ultimate trend rate of 5% in 2020 to reflect its current expectation as the Company believes the historical trend rate assumptions used have been decreased too quickly relative to actual trend. As the Company subsidies for retiree healthcare coverage are capped at the 2005 level, for the majority of the post-retirement health plan participants, retiree contributions are assumed to increase at the same rate as the healthcare cost trend rates. As such, a one percentage-point increase or decrease in assumed healthcare cost trend rates would not have affected total service and interest cost and would have a minimal impact on the post-retirement benefit obligation.

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. The 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. Other key provisions of the Act, such as coverage mandates, early retiree reinsurance program, and excise tax are also considered and their impacts on the benefit plan obligation of the Company's Other Post-Retirement Plans are deemed immaterial.

 

Plan Assets – Post-Retirement Plans

Moody's investment objective for the assets in the funded pension plan is to earn total returns that will minimize future contribution requirements over the long-term within a prudent level of risk. The Company works with its independent investment consultants to determine asset allocation targets for its pension plan investment portfolio based on its assessment of business and financial conditions, demographic and actuarial data, funding characteristics, and related risk factors. Other relevant factors, including historical and forward –looking views of inflation and capital market returns, are also considered. Risk management practices include monitoring of the plan, diversification across asset classes and investment styles, and periodic rebalancing toward asset allocation targets. The Company's monitoring of the plan includes ongoing reviews of investment performance, annual liability measurements, periodic asset/liability studies, and investment portfolio reviews.

Prior to 2009, the Company's target asset allocation was approximately 70% in diversified U.S. and non-U.S. equity securities, 20% in long-duration investment grade government and corporate bonds, and 10% in private real estate funds. In 2009, the Company revised its target asset allocation to approximately 60% (range of 50% to 70%) in equity securities, 30% (range of 25% to 35%) in fixed income securities and 10% (range of 7% to 13%) in other investments. The revised asset allocation policy is based on the Company's pension asset-liability study and is expected to earn a return comparable to its 2008 allocation target over the long-term. The Company has rebalanced its pension plan assets in 2010 to comply with the revised asset allocation policy.

In accordance with the revised asset allocation policy, the funded plan will use a combination of active and passive investment strategies and different investment styles for its investment portfolios within each asset class. The plan's equity investments are diversified across U.S. and non-U.S. stocks of small, medium and large capitalization. The plan's fixed income investments are diversified principally across U.S. and non-U.S. government and corporate bonds, which is expected to help reduce plan exposure to interest rate variation and to better align assets with obligations. Approximately 3% of total plan assets may be invested in funds which invest in debts rated below investment grade and 3% may be invested in emerging market debt. The plan's other investments are made through private real estate and convertible securities funds and these investments are expected to provide additional diversification benefits and absolute return enhancement to the plan assets. The Company does not use derivatives to leverage the portfolio. The overall allocation is expected to help protect the plan's funded status while generating sufficiently stable returns over the long-term.

The fair value of the Company's pension plan assets by asset category at December 31, 2010 and 2009, determined based on the hierarchy of fair value measurements as defined in Note 2 and are as follows:

 

     Fair Value Measurement as of December 31, 2010  

Asset Category

   Balance      Level 1      Level 2      Level 3      % of total
assets
 
Emerging markets equity fund    $ 10.3       $ 10.3       $       $         9
Common/collective trust funds – equity securities               

U.S. large-cap

     26.0                 26.0                 21 %

U.S. small and mid-cap

     9.6                 9.6                 8 %

International

     32.1                 32.1                 27 %
                                            
Total equity investments      78.0         10.3         67.7                 65 %
                                            
Common/collective trust funds –fixed income securities               

Long-term investment grade government /corporate bonds

     18.8                 18.8                 15

U.S. Treasury Inflation-Protected Securities (TIPs)

     5.4                 5.4                 4

Emerging markets bonds

     3.2                 3.2                 3

High yield bonds

     3.3                 3.3                 3
                                            
Total fixed-income investments      30.7                 30.7                 25 %
Common/collective trust funds – convertible securities      3.4                 3.4                 3 %
Private real estate fund      8.3                         8.3         7 %
                                            
Total other investment      11.7                 3.4         8.3         10 %
                                            
Total Assets    $ 120.4       $ 10.3       $ 101.8       $ 8.3         100 %
                                            

 

     Fair Value Measurement as of December 31, 2009  

Asset Category

   Balance      Level 1      Level 2      Level 3      % of total
assets
 
Cash and cash equivalent    $ 0.1       $       $ 0.1       $           
                                            
Emerging markets equity fund      7.5         7.5                         7 %
Common/collective trust funds – equity securities               

U.S. large-cap

     38.4                 38.4                 35 %

U.S. small and mid-cap

     17.1                 17.1                 16 %

International

     16.7                 16.7                 16 %
                                            
Total equity investments      79.7         7.5         72.2                 74
                                            
Common/collective trust funds-fixed income securities               

Long-term investment grade government /corporate bonds

     20.1                 20.1                 18 %
                                            
Total fixed- income Investments      20.1                 20.1                 18 %
                                            
Private real estate fund      8.3                         8.3         8 %
                                            
Total other investments      8.3                         8.3         8 %
                                            
Total Assets    $ 108.2       $ 7.5       $ 92.4       $ 8.3         100 %
                                            

Cash and cash equivalents is primarily comprised of investment in money market mutual funds. In determining fair value, Level 1 investments are valued based on quoted market prices in active markets. Investments in common/collective trust funds are valued using the net asset value (NAV) per unit in each fund. The NAV is based on the value of the underlying investments owned by each trust, minus its liabilities, and then divided by the number of shares outstanding. Common/collective trust funds are categorized in Level 2 to the extent that they are readily redeemable at their NAV or else they are categorized in Level 3 of the fair value hierarchy. The Company's investment in a private real estate fund is valued using the NAV per unit of funds that are invested in real property, and the real property is valued using independent market appraisals. Since appraisals involve utilization of significant unobservable inputs and the private real estate fund is not readily redeemable for cash, the Company's investment in the private real estate fund is categorized in Level 3.

The table below is a summary of changes in the fair value of the Plan's Level 3 assets:

 

Real estate investment fund:   
Balance as of December 31, 2009    $ 8.3   
Return on plan assets related to assets still held as of December 31, 2010      0.8   
Return on plan assets related to assets sold during the period      0.1   
Purchases (sales), net      (0.9 )
        
Balance as of December 31, 2010    $ 8.3   
        

Except for the Company's U.S. funded pension plan, all of Moody's Post-Retirement Plans are unfunded and therefore have no plan assets.

Cash Flows – Post-Retirement Plans

The Company made no contribution to its funded pension plan during the year ended December 31, 2010 and contributed $5.8 million to its funded plan in 2009. The Company made payments of $8.8 million and $2.2 million related to its U.S. unfunded pension plan obligations during the years ended December 31, 2010 and 2009, respectively. The payments made in 2010 include a settlement payment to a participant terminated under the 2007 Restructuring Plan as more fully described in Note 10 above. The Company made payments of $0.5 million and $0.9 million to its other U.S. post-retirement plans during the years ended December 31, 2010 and 2009, respectively. The Company presently anticipates making a lump-sum contribution of $13.6 million to its funded pension plan in the first quarter of 2011 and anticipates making payments of $8.9 million to its unfunded U.S. pension plans and $0.6 million to its other U.S. post-retirement plans during the year ended December 31, 2011.

 

Estimated Future Benefits Payable

Estimated future benefits payments for the Post-Retirement Plans are as follows at December 31, 2010:

 

Year Ending December 31,

   Pension Plans      Other Post-
Retirement Plans *
 
2011    $ 10.9       $ 0.6   
2012      6.1         0.8   
2013      6.8         0.9   
2014      7.2         1.0   
2015      9.5         1.1   
2016 – 2020    $ 87.1       $ 7.3   

 

* The estimated future benefits payable for the Post-Retirement Plans are reflected net of the expected Medicare Part D subsidy for which the subsidy is insignificant on an annual basis for all the years presented.

Defined Contribution Plans

Moody's has a Profit Participation Plan covering substantially all U.S. employees. The Profit Participation Plan provides for an employee salary deferral and the Company matches employee contributions with cash contributions equal to 50% of employee contributions up to a maximum of 3% of the employee's pay. Moody's also makes additional contributions to the Profit Participation Plan based on year-to-year growth in the Company's diluted EPS. Effective January 1, 2008, all new hires are automatically enrolled in the Profit Participation Plan when they meet eligibility requirements unless they decline participation. As the Company's U.S. DBPPs are closed to new entrants effective January 1, 2008, all eligible new hires will instead receive a retirement contribution into the Profit Participation Plan in value similar to the pension benefits. Additionally, effective January 1, 2008, the Company implemented a deferred compensation plan in the U.S., which is unfunded and provides for employee deferral of compensation and Company matching contributions related to compensation in excess of the IRS limitations on benefits and contributions under qualified retirement plans.Total expenses associated with the U.S. defined contribution plans were $19.4 million, $9.1 million and $8.0 million in 2010, 2009, and 2008, respectively.

Effective January 1, 2008, Moody's has designated the Moody's Stock Fund, an investment option under the Profit Participation Plan, as an Employee Stock Ownership Plan and, as a result, participants in the Moody's Stock Fund may receive dividends in cash or may reinvest such dividends into the Moody's Stock Fund. Moody's paid approximately $0.3 million in dividends in each of the years ended December 31, 2010 and 2009 for the Company's common shares held by the Moody's Stock Fund. The Company records the dividends as a reduction of retained earnings in the Consolidated Statements of Shareholders' Equity (Deficit). The Moody's Stock Fund held approximately 645,000 and 669,000 shares of Moody's common stock at December 31, 2010 and 2009, respectively.

International Plans

Certain of the Company's international operations provide pension benefits to their employees. For defined contribution plans, company contributions are primarily determined as a percentage of employees' eligible compensation. Moody's also makes contributions to non-U.S. employees under a profit sharing plan which is based on year-to-year growth in the Company's diluted EPS. Expenses related to these defined contribution plans for the years ended December 31, 2010, 2009, and 2008 were $11.8 million, $5.7 million and $5.3 million, respectively.

For defined benefit plans, the Company maintains various unfunded DBPPs and post-retirement health benefit plan for certain of its non-U.S. subsidiaries located in Germany, France and Canada. These defined plan benefits are generally based on each eligible employee's years of credited service and on compensation levels as specified in the plans. The DBPP in Germany was closed to new entrants in 2002. Total defined benefit pension liabilities recorded related to non-U.S. pension plans was $4.6 million, $3.6 million, and $3.0 million based on a weighted average discount rate of 5.28%, 5.56%, and 5.76% at December 31, 2010, 2009, and 2008, respectively. The pension liabilities recorded as of December 31, 2010 represent the unfunded status of these pension plans and were recognized in the statement of financial position as non-current liabilities. Total pension expense recorded for the years ended December 31, 2010, 2009 and 2008 was approximately $0.5 million, $0.4 million and $0.3 million, respectively. These amounts are not included in the tables above. As of December 31, 2010, the Company has included in AOCI net actuarial gains of $1.1 million ($0.8 million net of tax) related to non-U.S. pension plans that have yet to be recognized as a reduction to net periodic pension expense and the Company expects its 2011 amortization of the net actuarial gains to be immaterial. The Company's non-U.S. other post-retirement benefit obligation is not material as of December 31, 2010.

STOCK-BASED COMPENSATION PLANS
STOCK-BASED COMPENSATION PLANS
NOTE 12 STOCK-BASED COMPENSATION PLANS

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

     Year Ended December 31,  
     2010      2009      2008  
Stock compensation cost    $ 56.6       $ 57.4       $ 63.2   
Tax benefit    $ 23.9       $ 20.9       $ 23.5   

The fair value of each employee stock option award is estimated on the date of grant using the Black-Scholes option-pricing model that uses the assumptions noted below. The expected dividend yield is derived from the annual dividend rate on the date of grant. The expected stock volatility is based on an assessment of historical weekly stock prices of the Company as well as implied volatility from Moody's traded options. The risk-free interest rate is based on U.S. government zero coupon bonds with maturities similar to the expected holding period. The expected holding period was determined by examining historical and projected post-vesting exercise behavior activity.

The following weighted average assumptions were used for options granted:

 

     Year Ended December 31,  
     2010      2009      2008  
Expected dividend yield      1.58%         1.59%         1.06%   
Expected stock volatility      44%         38%         25%   
Risk-free interest rate      2.73%         2.63%         2.96%   
Expected holding period      5.9 yrs         5.8 yrs         5.5 yrs   
Grant date fair value    $ 10.38       $ 8.52       $ 9.73   

Under the 1998 Plan, 33.0 million shares of the Company's common stock have been reserved for issuance. The 2001 Plan, which is shareholder approved, permits the granting of up to 35.6 million shares, of which not more than 15.0 million shares are available for grants of awards other than stock options. The 2001 Plan was amended and approved at the annual shareholders meeting on April 20, 2010, increasing the number of shares reserved for issuance by 7.0 million which are included in the aforementioned amounts. The Stock Plans provide that options are exercisable not later than ten years from the grant date. The vesting period for awards under the Stock Plans is generally determined by the Board at the date of the grant and has been four years except for employees who are at or near retirement eligibility, as defined, for which vesting is between one and four years. Additionally, the vesting period for certain performance-based restricted stock, which is described in more detail below, vests after a three year period. Options may not be granted at less than the fair market value of the Company's common stock at the date of grant. The Stock Plans also provide for the granting of restricted stock.

The Company maintains the Directors' Plan for its Board, which permits the granting of awards in the form of non-qualified stock options, restricted stock or performance shares. The Directors' Plan provides that options are exercisable not later than ten years from the grant date. The vesting period is determined by the Board at the date of the grant and is generally one year for options and between one and three years for restricted stock. Under the Directors' Plan, 0.8 million shares of common stock were reserved for issuance. Any director of the Company who is not an employee of the Company or any of its subsidiaries as of the date that an award is granted is eligible to participate in the Directors' Plan.

 

A summary of option activity as of December 31, 2010 and changes during the year then ended is presented below:

 

Options

   Shares     Weighted
Average
Exercise Price
Per Share
     Weighted
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic Value
 
Outstanding, December 31, 2009      20.1      $ 37.26         
Granted      2.4        26.69         
Exercised      (2.1 )     17.03         
Forfeited      (0.3 )     33.40         
Expired      (0.8 )     41.17         
                
Outstanding, December 31, 2010      19.3      $ 38.11         5.2 yrs       $ 24.8   
                
Vested and expected to vest, December 31, 2010      18.6      $ 38.42         5.1 yrs       $ 24.4   
                
Exercisable, December 31, 2010      13.5      $ 40.47         4.0 yrs       $ 22.0   
                

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between Moody's closing stock price on the last trading day of the year ended December 31, 2010 and the exercise prices, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options as of December 31, 2010. This amount varies based on the fair value of Moody's stock. As of December 31, 2010, there was $31.9 million of total unrecognized compensation expense related to options. The expense is expected to be recognized over a weighted average period of 1.6 years.

The following table summarizes information relating to stock option exercises:

     Year Ended December 31,  
     2010      2009      2008  
Proceeds from stock option exercises    $ 36.4       $ 18.0       $ 23.2   
Aggregate intrinsic value    $ 19.7       $ 13.8       $ 21.6   
Tax benefit realized upon exercise    $ 7.8       $ 5.4       $ 8.5   

A summary of the status of the Company's nonvested restricted stock as of December 31, 2010 and changes during the year then ended is presented below:

 

Nonvested Restricted Stock

   Shares      Weighted Average Grant
Date Fair Value Per Share
 
Balance, December 31, 2009      1.5       $ 44.02   

Granted

     1.1         25.57   

Vested

     (0.5 )      50.40   

Forfeited

     (0.1 )      34.81   
           
Balance, December 31, 2010      2.0       $ 33.10   
           

As of December 31, 2010, there was $30.7 million of total unrecognized compensation expense related to nonvested restricted stock. The expense is expected to be recognized over a weighted average period of 1.4 years.

The following table summarizes information relating to the vesting of restricted stock awards:

     Year Ended December 31,  
     2010      2009      2008  
Fair value of vested shares    $ 12.4       $ 8.0       $ 23.7   
Tax benefit realized upon vesting    $ 4.7       $ 2.9       $ 8.8   

 

During the year ended December 31, 2010, the Company granted 0.4 million shares of restricted stock that contained 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 $25.33 per share. As of December 31, 2010, there was $7.3 million of total unrecognized compensation expense related to this plan. The expense is expected to be recognized over a weighted average period of 2.1 years.

The Company has a policy of issuing treasury stock to satisfy shares issued under stock-based compensation plans.

In addition, the Company also sponsors the ESPP. Under the ESPP, 6.0 million shares of common stock were reserved for issuance. The ESPP allows eligible employees to purchase common stock of the Company on a monthly basis at a discount to the average of the high and the low trading prices on the New York Stock Exchange on the last trading day of each month. This discount was 5% in both 2010 and 2009 and 15% in 2008. The employee purchases are funded through after-tax payroll deductions, which plan participants can elect from one percent to ten percent of compensation, subject to the annual federal limit. In 2008 the Company recorded stock-based compensation expense for the difference between the purchase price and fair market value under Topic 718 of the ASC. Beginning on January 1, 2009 the discount offered on the ESPP was reduced to 5% resulting in the ESPP qualifying for non-compensatory status under Topic 718 of the ASC. Accordingly, no compensation expense was recognized for the ESPP in 2010 and 2009.

INCOME TAXES
INCOME TAXES
NOTE 13 INCOME TAXES

Components of the Company's income tax provision are as follows:

 

     Year Ended December 31,  
     2010     2009     2008  
Current:       

Federal

   $ 106.6      $ 99.2      $ 147.5   

State and Local

     22.1        53.3        49.3   

Non-U.S.

     82.9        70.1        88.7   
                        

Total current

     211.6        222.6        285.5   
                        
Deferred:       

Federal

     (14.7 )     22.8        (10.9 )

State and Local

     10.6        (9.3 )     (0.8 )

Non-U.S.

     (6.5 )     3.0        (5.6 )
                        

Total deferred

     (10.6 )     16.5        (17.3 )
                        
Total income tax provision    $ 201.0      $ 239.1      $ 268.2   
                        

A reconciliation of the U.S. federal statutory tax rate to the Company's effective tax rate on income before provision for income taxes is as follows:

 

     Year Ended December 31,  
     2010     2009     2008  
U.S. statutory tax rate      35.0 %     35.0 %     35.0 %
State and local taxes, net of federal tax benefit      2.9        4.4        4.1   
Benefit of foreign operations      (9.7 )     (2.4 )     (2.6 )
Legacy tax items      (0.4 )     (0.3 )     (0.3 )
Other      0.3        0.3        0.5   
                        
Effective tax rate      28.1 %     37.0 %     36.7 %
                        
Income tax paid    $ 247.9      $ 192.2      $ 319.9   
                        

 

The source of income before provision for income taxes is as follows:

 

     Year Ended December 31,  
     2010      2009      2008  
United States    $ 390.6       $ 386.9       $ 437.4   
International      323.8         259.3         292.4   
                          
Income before provision for income taxes    $ 714.4       $ 646.2       $ 729.8   
                          

The components of deferred tax assets and liabilities are as follows:

 

     Year Ended December 31,  
     2010     2009  
Deferred tax assets:     

Current:

    

Account receivable allowances

   $ 10.5      $ 7.5   

Accrued compensation and benefits

     12.3        10.5   

Deferred revenue

     6.0        7.9   

Legal and professional fees

     13.1          

Restructuring

     1.1        2.6   

Other

     4.9        3.9   
                

Total current

     47.9        32.4   
                

Non-current:

    

Accumulated depreciation and amortization

     1.6        1.3   

Stock-based compensation

     84.9        81.0   

Benefit plans

     62.8        43.8   

Deferred rent and construction allowance

     30.4        28.9   

Deferred revenue

     37.4        39.2   

Foreign net operating loss (1)

     11.5        7.1   

Uncertain tax positions

     58.8        46.0   

Self-insured related reserves

     22.7          

Other

     5.4        5.2   
                

Total non-current

     315.5        252.5   
                
Total deferred tax assets      363.4        284.9   
                
Deferred tax liabilities:     

Current:

    

Other

     (0.2 )     (0.1 )
                

Total current

     (0.2 )     (0.1 )
                

Non-current:

    

Accumulated depreciation

     (16.4 )     (19.2 )

Foreign earnings to be repatriated

     (1.2 )     (25.2 )

Amortization of intangible assets and capitalized software

     (108.2 )     (39.0 )

Self-insured related income

     (27.1       

Other liabilities

     (1.5 )     (3.4 )
                

Total non-current

     (154.4 )     (86.8 )
                
Total deferred tax liabilities      (154.6 )     (86.9 )
                
Net deferred tax asset      208.8        198.0   
Valuation allowance      (12.8     (4.5
                
Total net deferred tax assets    $ 196.0      $ 193.5   
                

 

(1) Amounts are primarily set to expire beginning in 2015, if unused.

 

Prepaid taxes of $82.3 million and $18.6 million for December 31, 2010 and 2009, respectively are included in other current assets in the consolidated balance sheets. As of December 31, 2010, the Company had approximately $758.1 million of undistributed earnings of foreign subsidiaries that it intends to indefinitely reinvest in foreign operations. The Company has not provided deferred income taxes on these indefinitely reinvested earnings. It is not practicable to determine the amount of deferred taxes that might be required to be provided if such earnings were distributed in the future, due to complexities in the tax laws and in the hypothetical calculations that would have to be made.

The Company had valuation allowances of $12.8 million and $4.5 million at December 31, 2010 and 2009, respectively, related to foreign net operating losses for which realization is uncertain. The change in the valuation allowances for 2010 and 2009 results primarily from the increase in valuation allowances in certain jurisdictions based on the Company's evaluation of the expected realization of these future benefits.

As of December 31, 2010 the Company had $180.8 million of UTPs of which $138.3 million represents the amount that, if recognized, would impact the effective tax rate in future periods.

A reconciliation of the beginning and ending amount of UTPs is as follows:

 

     2010     2009     2008  
Balance as of January 1    $ 164.2      $ 185.1      $ 156.1   
Additions for tax positions related to the current year      31.1        31.1        34.5   
Additions for tax positions of prior years      16.2        52.5        8.2   
Reductions for tax positions of prior years      (9.9 )     (47.0 )     (12.2 )
Settlements with taxing authorities             (50.7 )     (0.7
Lapse of statute of limitations      (20.8 )     (6.8 )     (0.8 )
                        
Balance as of December 31    $ 180.8      $ 164.2      $ 185.1   
                        

The Company classifies interest related to UTPs in interest expense in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating expenses. During 2010, the amount of net interest accrued for UTPs was $5.9 million. As of December 31, 2010 and 2009 the amount of accrued interest recorded in the Company's balance sheets related to UTPs was $33.7 million and $27.7 million, respectively.

Moody's Corporation and subsidiaries are subject to U.S. federal income tax as well as income tax in various state, local and foreign jurisdictions. 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 to 2009 remain open to examination.

For current ongoing audits related to open tax years the Company estimates that it is possible that the balance of UTPs could decrease in the next twelve months as a result of the effective settlement of these audits, which might involve the payment of additional taxes, the adjustment of certain deferred taxes and/or the recognition of tax benefits. It is also possible that new issues might be raised by tax authorities which might necessitate increases to the balance of UTPs. As the Company is unable to predict the timing of conclusion of these audits, the Company is unable to estimate the amount of changes to the balance of UTPs at this time. However, the Company believes that it has adequately provided for its financial exposure for all open tax years by tax jurisdiction. Additionally, the Company is seeking tax rulings on certain tax positions which, if granted, could decrease the balance of UTPs over the next twelve months however, due to the uncertainty involved with this process, the Company is unable to estimate the amount of changes to the balance of UTPs at this time.

INDEBTEDNESS
INDEBTEDNESS
NOTE  14 INDEBTEDNESS

The following table summarizes total indebtedness:

 

     December 31,  
     2010     2009  
2007 Facility    $   </