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The following terms, abbreviations and acronyms are used to identify frequently used terms in this report:
TERM DEFINITION
ACNielsen ACNielsen Corporation – a former affiliate of Old D&B
Adjusted Operating Income Operating income excluding restructuring and depreciation and amortization
Adjusted Operating Margin Operating margin excluding restructuring and depreciation and amortization
Americas Represents countries within North and South America, excluding the U.S.
Analytics Moody's Analytics – a reportable segment of MCO formed in January 2008, which includes the non-rating commercial activities of MCO
AOCI Accumulated other comprehensive income (loss); a separate component of shareholders' equity (deficit)
ASC The FASB Accounting Standards Codification; the sole source of authoritative GAAP as of July 1, 2009 except for rules and interpretive releases of the SEC, which are also sources of authoritative GAAP for SEC registrants
Asia-Pacific Represents countries in Asia also including but not limited to: Australia and its proximate islands, China, India, Indonesia, Japan, Korea, Malaysia, Singapore and Thailand
ASU The FASB Accounting Standards Update to the ASC. It also provides background information for accounting guidance and the bases for conclusions on the changes in the ASC. ASUs are not considered authoritative until codified into the ASC
B&H Barrie & Hibbert Limited, an acquisition completed in December 2011; part of the MA segment, a leading provider of risk management modeling tools for insurance companies worldwide
Basel II Capital adequacy framework published in June 2004 by the Basel Committee on Banking Supervision
Basel III A new global regulatory standard on bank capital adequacy and liquidity agreed by the members of the Basel Committee on Banking Supervision. Basel III was developed in a response to the deficiencies in financial regulation revealed by the global financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage.
Board The board of directors of the Company
Bps Basis points
Canary Wharf Lease Operating lease agreement entered into on February 6, 2008 for office space in London, England, occupied by the Company in the second half of 2009
CDOs Collateralized debt obligation
CFG Corporate finance group; an LOB of MIS
CLO Collateralized loan obligation
CMBS Commercial mortgage-backed securities; part of CREF
Cognizant Cognizant Corporation – a former affiliate of Old D&B; comprised the IMS Health and NMR businesses
Commission European Commission
Company Moody's Corporation and its subsidiaries; MCO; Moody's
TERM DEFINITION
Copal Copal Partners; an acquisition completed in November 2011; part of the MA segment; leading provider of outsourced research and analytical services to institutional investors
CP Commercial paper
CP Program The Company's commercial paper program entered into on October 3, 2007
CRAs Credit rating agencies
CRA1 Regulation (EC) No 1060/2009 of the European Parliament and of the Council, establishing an oversight regime for the CRA industry in the EU
CRA2 Regulation (EU) No 513/2011 of the European Parliament and of the Council, which transferred direct supervisory responsibility for the registered CRA industry in the EU to ESMA
CRA3 Regulation (EU) No 462/2013 of the European Parliament and of the Council, which updated the regulatory regimes imposing additional procedural requirements on CRAs
CREF Commercial real estate finance which includes REITs, commercial real estate CDOs and mortgage-backed securities; part of SFG
CSI CSI Global Education, Inc.; an acquisition completed in November 2010; part of the MA segment; a provider of financial learning, credentials, and certification in Canada
D&B Business Old D&B's Dun & Bradstreet operating company
DBPP Defined benefit pension plans
Debt/EBITDA Ratio of Total Debt to EBITDA
EBITDA Earnings before interest, taxes, depreciation and amortization
ECB European Central Bank
EMEA Represents countries within Europe, the Middle East and Africa
EPS Earnings per share
ERS The enterprise risk solutions LOB within MA (formerly RMS); which offers risk management software products as well as software implementation services and related risk management advisory engagements
ESMA European Securities and Markets Authority
ESPP The 1999 Moody's Corporation Employee Stock Purchase Plan
ETR Effective tax rate
EU European Union
EUR Euros
Excess Tax Benefits The difference between the tax benefit realized at exercise of an option or delivery of a restricted share and the tax benefit recorded at the time the option or restricted share is expensed under GAAP
Exchange Act The Securities Exchange Act of 1934, as amended
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
FIG Financial institutions group; an LOB of MIS
Financial Reform Act Dodd-Frank Wall Street Reform and Consumer Protection Act
Free Cash Flow Net cash provided by operating activities less cash paid for capital additions
TERM DEFINITION
FSTC Financial Services Training and Certifications; a reporting unit within the MA segment that includes classroom-based training services and CSI
FX Foreign exchange
GAAP U.S. Generally Accepted Accounting Principles
GBP British pounds
G-8 The finance minister and central bank governors of the group of eight countries consisting of Canada, France, Germany, Italy, Japan, Russia, U.S. and U.K., that meet annually
G-20 The G-20 is an informal forum of industrial and emerging-market countries who comment on key issues related to global economic stability. The G-20 is comprised of: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the U.K. and the U.S. and The EU who is represented by the rotating Council presidency and ECB
IMS Health A spin-off of Cognizant; provides services to the pharmaceutical and healthcare industries
IRS Internal Revenue Service
Legacy Tax Matter(s) Exposures to certain potential tax liabilities assumed in connection with the 2000 Distribution
LIBOR London Interbank Offered Rate
LOB Line of business
MA Moody's Analytics – a reportable segment of MCO formed in January 2008, which includes the non-rating commercial activities of MCO
M&A Mergers and acquisitions
Make Whole Amount The prepayment penalty amount relating to the Series 2005-1 Notes, Series 2007-1 Notes, 2010 Senior Notes and 2012 Senior Notes which is a premium based on the excess, if any, of the discounted value of the remaining scheduled payments over the prepaid principal
MCO Moody's Corporation and its subsidiaries; the Company; Moody's
MD&A Management's Discussion and Analysis of Financial Condition and Results of Operations
MIS Moody's Investors Service – a reportable segment of MCO; consists of four LOBs – SFG, CFG, FIG and PPIF
Moody's Moody's Corporation and its subsidiaries; MCO; the Company
Net Income Net income attributable to Moody's Corporation, which excludes net income from consolidated noncontrolling interests belonging to the minority interest holder
New D&B The New D&B Corporation – which comprises the D&B Business
NM Percentage change is not meaningful
NMR Nielsen Media Research, Inc.; a spin-off of Cognizant; a leading source of television audience measurement services
NRSRO Nationally Recognized Statistical Rating Organization
Old D&B The former Dun and Bradstreet Company which distributed New D&B shares on September 30, 2000, and was renamed Moody's Corporation
PPIF Public, project and infrastructure finance; an LOB of MIS
TERM DEFINITION
Profit Participation Plan Defined contribution profit participation plan that covers substantially all U.S. employees of the Company
PS Professional Services, an LOB within MA that provides outsourced research and analytical services as well as financial training and certification programs
RD&A Research, Data and Analytics; an LOB within MA that produces, sells and distributes research, data and related content. Includes products generated by MIS, such as analyses on major debt issuers, industry studies, and commentary on topical credit events, as well as economic research, data, quantitative risk scores, and other analytical tools that are produced within MA
Redeemable Noncontrolling Represents minority shareholders' interest in entities which are controlled but not
Interest wholly-owned by Moody's and for which Moody's obligation to redeem the minority shareholders' interest is in the control of the minority shareholders
Reform Act Credit Rating Agency Reform Act of 2006
RMBS Residential mortgage-backed security; part of SFG
Retirement Plans Moody's funded and unfunded pension plans, the retirement healthcare plans and retirement life insurance plans
S&P Standard & Poor's Ratings Services; a division of The McGraw-Hill Companies, Inc.
SEC U.S. Securities and Exchange Commission
Securities Act Securities Act of 1933
Series 2005-1 Notes Principal amount of $300 million, 4.98% senior unsecured notes due in September 2015 pursuant to the 2005 Agreement
Series 2007-1 Notes Principal amount of $300 million, 6.06% senior unsecured notes due in September 2017 pursuant to the 2007 Agreement
SFG Structured finance group; an LOB of MIS
SG&A Selling, general and administrative expenses
T&E Travel and entertainment expenses
Total Debt All indebtedness of the Company as reflected on the consolidated balance sheets
U.K. United Kingdom
U.S. United States
USD U.S. dollar
UTBs Unrecognized tax benefits
UTPs Uncertain tax positions
2000 Distribution The distribution by Old D&B to its shareholders of all the outstanding shares of New D&B common stock on September 30, 2000
2000 Distribution Agreement Agreement governing certain ongoing relationships between the Company and New D&B after the 2000 Distribution including the sharing of any liabilities for the payment of taxes, penalties and interest resulting from unfavorable IRS rulings on certain tax matters and certain other potential tax liabilities
2005 Agreement Note purchase agreement dated September 30, 2005, relating to the Series 2005-1 Notes
TERM DEFINITION
2007 Agreement Note purchase agreement dated September 7, 2007, relating to the Series 2007-1 Notes
2007 Facility Revolving credit facility of $1 billion entered into on September 28, 2007, expiring in 2012
2008 Term Loan Five-year $150 million senior unsecured term loan entered into by the Company on May 7, 2008
2010 Indenture Supplemental indenture and related agreements dated August 19, 2010, relating to the 2010 Senior Notes
2010 Senior Notes Principal amount of $500 million, 5.50% senior unsecured notes due in September 2020 pursuant to the 2010 Indenture
2012 Indenture Supplemental indenture and related agreements dated August 18, 2012, relating to the 2012 Senior Notes
2012 Senior Notes Principal amount of $500 million, 4.50% senior unsecured notes due in September 2022 pursuant to the 2012 Indenture
2012 Facility Revolving credit facility of $1 billion entered into on April 18, 2012, expiring in 2017
7WTC The Company's corporate headquarters located at 7 World Trade Center in New York, NY
7WTC Lease Operating lease agreement entered into on October 20, 2006
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NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Moody's is a provider of (i) credit ratings, (ii) credit, capital markets and economic research, data and analytical tools, (iii) software solutions and related risk management services, (iv) quantitative credit risk measures, financial services training and certification services and (v) outsourced research and analytical services to institutional customers. Moody's has two reportable segments: MIS and MA.
MIS, the credit rating agency, publishes credit ratings on a wide range of debt obligations and the entities that issue such obligations in markets worldwide. Revenue is derived from the originators and issuers of such transactions who use MIS ratings in the distribution of their debt issues to investors.
The MA segment, which includes all of the Company's non-rating commercial activities, develops a wide range of products and services that support financial analysis and risk management activities of institutional participants in global financial markets. Within its Research, Data and Analytics business, MA distributes research and data developed by MIS as part of its ratings process, including in-depth research on major debt issuers, industry studies and commentary on topical credit-related events. The RD&A business also produces economic research as well as data and analytical tools such as quantitative credit risk scores. It also provides fixed income pricing in the Asia-Pacific region. Within its Enterprise Risk Solutions business, MA provides software solutions as well as related risk management services. The Professional Services business provides outsourced research and analytical services along with financial training and certification programs.
These interim financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the Company's consolidated financial statements and related notes in the Company's 2012 annual report on Form 10-K filed with the SEC on February 26, 2013. The results of interim periods are not necessarily indicative of results for the full year or any subsequent period. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Certain prior year amounts have been reclassified to conform to the current year presentation.
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NOTE 2. STOCK-BASED COMPENSATION
Presented below is a summary of the stock-based compensation cost and associated tax benefit included in the accompanying consolidated statements of operations:
Three Months Ended | Six Months Ended | ||||||||||
June 30, | June 30, | ||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||
Stock-based compensation cost | $ | 16.1 | $ | 14.9 | $ | 33.3 | $ | 29.9 | |||
Tax benefit | $ | 5.8 | $ | 5.4 | $ | 12.0 | $ | 10.8 |
During the first six months of 2013, the Company granted 0.5 million employee stock options, which had a weighted average grant date fair value of $17.58 per share based on the Black-Scholes option-pricing model. The Company also granted 1.3 million shares of restricted stock in the first six months of 2013, which had a weighted average grant date fair value of $46.51 per share and generally vest ratably over a four-year period. Additionally, the Company granted approximately 0.3 million shares of performance-based awards 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 $44.07 per share.
The following weighted average assumptions were used in determining the fair value for options granted in 2013:
Expected dividend yield | 1.72% |
Expected stock volatility | 42.6% |
Risk-free interest rate | 1.53% |
Expected holding period | 7.2 years |
Grant date fair value | $ 17.58 |
Unrecognized compensation expense at June 30, 2013 was $14.6 million and $94.8 million for stock options and unvested restricted stock, respectively, which is expected to be recognized over a weighted average period of 1.4 years and 1.8 years, respectively. Additionally, there was $18.8 million of unrecognized compensation expense relating to the aforementioned non-market based performance-based awards, which is expected to be recognized over a weighted average period of 1.0 years.
The following tables summarize information relating to stock option exercises and restricted stock vesting:
Six Months Ended | ||||||
June 30, | ||||||
Stock option exercises: | 2013 | 2012 | ||||
Proceeds from stock option exercises | $ | 89.2 | $ | 46.7 | ||
Aggregate intrinsic value | $ | 66.7 | $ | 26.6 | ||
Tax benefit realized upon exercise | $ | 24.4 | $ | 10.1 | ||
Number of shares exercised | 2.7 | 1.9 | ||||
Six Months Ended | ||||||
June 30, | ||||||
Restricted stock vesting: | 2013 | 2012 | ||||
Fair value of shares vested | $ | 53.8 | $ | 37.5 | ||
Tax benefit realized upon vesting | $ | 19.1 | $ | 13.2 | ||
Number of shares vested | 1.1 | 1.0 | ||||
Six Months Ended | ||||||
June 30, | ||||||
Performance-based awards vesting: | 2013 | 2012 | ||||
Fair value of shares vested | $ | 25.5 | $ | - | ||
Tax benefit realized upon vesting | $ | 9.7 | $ | - | ||
Number of shares vested | 0.5 | - |
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NOTE 3. INCOME TAXES
Moody's effective tax rate was 32.2% and 33.6% for the three months ended June 30, 2013 and 2012, respectively and 30.5% and 32.9% for the six months ended June 30, 2013 and 2012, respectively. The decrease in the effective tax rate in both periods is primarily due to U.S. tax legislation enacted in the first quarter of 2013 which retroactively extended certain favorable tax benefits to the 2012 tax year and lower taxes on foreign income. The decrease in the ETR for the six months ended June 30, 2013 also reflects the tax effect of the litigation settlement in the first quarter of 2013.
The Company classifies interest related to UTPs in interest expense, net in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating (expense) income, net. The Company had an overall increase in its UTPs of $17.4 million ($14.7 million net of federal tax benefit) during the second quarter of 2013 and an overall increase in its UTPs during the first six months of 2013 of $28.0 million ($23.0 million net of federal tax benefits).
Moody's Corporation and subsidiaries are subject to U.S. federal income tax as well as income tax in various state, local and foreign jurisdictions. The Company's U.S. federal income tax returns for the years 2008 through 2010 are under examination and its 2011 return remains open to examination. The Company's New York State and New York City income tax returns for 2011 remain open to examination. Income tax filings in the U.K. for 2007 through 2010 are under examination and 2011 remains open to examination.
For ongoing audits, it is possible the balance of UTBs could decrease in the next twelve months as a result of the settlement of these audits, which might involve the payment of additional taxes, the adjustment of certain deferred taxes and/or the recognition of tax benefits. It is also possible that new issues might be raised by tax authorities which could necessitate increases to the balance of UTBs. As the Company is unable to predict the timing or outcome of these audits, it is unable to estimate the amount of changes to the balance of UTBs at this time. However, the Company believes that it has adequately provided for its financial exposure relating to all open tax years by tax jurisdiction in accordance with the applicable provisions of Topic 740 of the ASC regarding UTBs.
The following table shows the amount the Company paid for income taxes:
Six Months Ended | |||||||||||
June 30, | |||||||||||
2013 | 2012 | ||||||||||
Income Taxes Paid* | $ | 231.6 | $ | 235.0 | |||||||
* Includes approximately $92 million in payments for tax audit settlements in the first quarter of 2012. | |||||||||||
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NOTE 4. WEIGHTED AVERAGE SHARES OUTSTANDING
Below is a reconciliation of basic to diluted shares outstanding:
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||
Basic | 222.3 | 223.9 | 222.8 | 223.7 | ||||||||
Dilutive effect of shares issuable under stock-based compensation plans | 3.9 | 3.3 | 3.9 | 3.6 | ||||||||
Diluted | 226.2 | 227.2 | 226.7 | 227.3 | ||||||||
Anti-dilutive options to purchase common shares and restricted stock as well as contingently issuable restricted stock which are excluded from the table above | 4.4 | 7.2 | 4.7 | 7.1 |
The calculation of diluted EPS requires certain assumptions regarding the use of both cash proceeds and assumed proceeds that would be received upon the exercise of stock options and vesting of restricted stock outstanding as of June 30, 2013 and 2012. These assumed proceeds include Excess Tax Benefits and any unrecognized compensation of the awards.
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NOTE 5. SHORT-TERM INVESTMENTS
Short-term investments are securities with maturities greater than 90 days at the time of purchase that are available for operations in the next twelve months. The short-term investments, primarily consisting of certificates of deposit, are classified as held-to-maturity and therefore are carried at cost. The remaining contractual maturities of the short-term investments were one month to twelve months and one month to 11 months as of June 30, 2013 and December 31, 2012, respectively. Interest and dividends are recorded into income when earned.
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NOTE 6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to global market risks, including risks from changes in FX rates and changes in interest rates. Accordingly, the Company uses derivatives in certain instances to manage the aforementioned financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for speculative purposes.
Interest Rate Swaps
In the fourth quarter of 2010, the Company entered into interest rate swaps with a total notional amount of $300 million to convert the fixed interest rate on the Series 2005-1 Notes to a floating interest rate based on the 3-month LIBOR. The purpose of this hedge was to mitigate the risk associated with changes in the fair value of the Series 2005-1 Notes, thus the Company has designated these swaps as fair value hedges. The fair value of the swaps is adjusted quarterly with a corresponding adjustment to the carrying value of the Series 2005-1 Notes. The changes in the fair value of the hedges and the underlying hedged item generally offset and the net cash settlements on the swaps are recorded each period within interest income (expense), net, in the Company's consolidated statement of operations.
In May 2008, the Company entered into interest rate swaps with a total notional amount of $150 million to protect against fluctuations in the LIBOR-based variable interest rate on the 2008 Term Loan, further described in Note 12. These interest rate swaps were designated as cash flow hedges. Accordingly, changes in the fair value of these swaps were recorded to other comprehensive income or loss, to the extent that the hedge is effective, and such amounts were reclassified to earnings in the same period during which the hedged transaction affects income. At June 30, 2013, the 2008 Term Loan has been repaid in full in accordance with the payment terms set forth in Note 12. Accordingly, all amounts in accumulated other comprehensive income have been reclassified to interest income (expense), net in the Company's consolidated statements of operations.
Foreign Exchange Forwards
The Company also enters into foreign exchange forwards to mitigate the change in fair value on certain assets and liabilities denominated in currencies other than the subsidiary's functional currency. These forward contracts are not designated as hedging instruments under the applicable sections of Topic 815 of the ASC. Accordingly, changes in the fair value of these contracts are recognized immediately in other non-operating (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 subsidiary's functional currency. These contracts have expiration dates at various times through September 2013.
The following table summarizes the notional amounts of the Company's outstanding foreign exchange forwards:
June 30, | December 31, | ||||
2013 | 2012 | ||||
Notional amount of currency pair: | |||||
Contracts to purchase USD with euros | $ | 25.7 | $ | 34.3 | |
Contracts to sell USD for euros | $ | 49.6 | $ | 48.4 | |
Contracts to purchase USD with GBP | $ | 3.5 | $ | 2.1 | |
Contracts to sell USD for GBP | $ | 0.1 | $ | 1.7 | |
Contracts to purchase USD with other foreign currencies | $ | 7.0 | $ | 6.7 | |
Contracts to sell USD for other foreign currencies | $ | 11.4 | $ | 5.1 | |
Contracts to purchase euros with other foreign currencies | € | 14.2 | € | 14.4 | |
Contracts to purchase euros with GBP | € | 2.0 | € | - | |
Contracts to sell euros for GBP | € | 18.3 | € | 8.9 |
Net Investment Hedges
The Company enters into foreign currency forward contracts to hedge the exposure related to non-U.S. dollar net investments in certain foreign subsidiaries against adverse changes in foreign exchange rates. These forward contracts are designated as hedging instruments under the applicable sections of Topic 815 of the ASC. Hedge effectiveness is assessed based on the overall changes in the fair value of the forward contracts on a pre-tax basis. For hedges that meet the effectiveness requirements, any change in the fair value for the hedge is recorded in the currency translation adjustment component of AOCI. Any change in the fair value of these hedges that is the result of ineffectiveness would be recognized immediately in other non-operating (expense) income in the Company's consolidated statement of operations. These outstanding contracts expire in September 2013.
The following table summarizes the notional amounts of the Company's outstanding foreign exchange forward contracts that are designated as net investment hedges:
June 30, | December 31, | ||||
2013 | 2012 | ||||
Notional amount of currency pair: | |||||
Contracts to sell euros for USD | € | 50.0 | € | 50.0 |
The table below shows the classification between assets and liabilities on the Company's consolidated balance sheets for the fair value of the derivative instruments:
Fair Value of Derivative Instruments | ||||||||
Derivatives Instruments | Balance Sheet Location | June 30,2013 | December 31, 2012 | |||||
Assets: | ||||||||
Derivatives designated as accounting hedges: | ||||||||
Interest rate swaps | Other assets | $ | 11.2 | $ | 13.8 | |||
Total derivatives designated as accounting hedges | 11.2 | 13.8 | ||||||
Derivatives not designated as accounting hedges: | ||||||||
FX forwards on certain assets and liabilities | Other current assets | 1.2 | 1.4 | |||||
Total assets | $ | 12.4 | $ | 15.2 | ||||
Liabilities: | ||||||||
Derivatives designated as accounting hedges: | ||||||||
Interest rate swaps | Accounts payable and accrued liabilities | $ | - | $ | 0.7 | |||
FX forwards on net investment in certain foreign subsidiaries | Accounts payable and accrued liabilities | - | 1.0 | |||||
Total derivatives designated as accounting hedges | - | 1.7 | ||||||
Derivatives not designated as accounting hedges: | ||||||||
FX forwards on certain assets and liabilities | Accounts payable and accrued liabilities | 0.5 | 0.7 | |||||
Total liabilities | $ | 0.5 | $ | 2.4 | ||||
The following table summarizes the net gain (loss) on the Company's foreign exchange forwards which are not designated as hedging instruments as well as the gain (loss) on the interest rate swaps designated as fair value hedges:
Amount of Gain (Loss) Recognized in the consolidated statements of operations | |||||||||||||||
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
Derivatives designated as accounting hedges | Location on Income Statement | 2013 | 2012 | 2013 | 2012 | ||||||||||
Interest rate swaps | Interest income(expense), net | $ | 1.0 | $ | 0.9 | $ | 2.1 | $ | 1.7 | ||||||
Derivatives not designated as accounting hedges | |||||||||||||||
Foreign exchange forwards | Other non-operating income (expense), net | $ | 1.0 | $ | (1.4) | $ | (0.1) | $ | (0.4) | ||||||
The following table provides information on gains/(losses) on the Company's cash flow hedges:
Derivatives in Cash Flow Hedging Relationships | Amount of Gain/(Loss) Recognized in AOCI on Derivative (Effective Portion) | Location of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion) | Amount of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion) | Location of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | ||||||||||||||||||
Three Months Ended | Three Months Ended | Three Months Ended | |||||||||||||||||||||
June 30, | June 30, | June 30, | |||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2013 | 2012 | ||||||||||||||||||
Interest rate swaps | - | - | Interest income (expense), net | (0.1) | (0.7) | N/A | - | - | |||||||||||||||
Total | $ | - | $ | - | $ | (0.1) | $ | (0.7) | $ | - | $ | - | |||||||||||
Six Months Ended | Six Months Ended | Six Months Ended | |||||||||||||||||||||
June 30, | June 30, | June 30, | |||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2013 | 2012 | ||||||||||||||||||
Interest rate swaps | - | (0.1) | Interest income (expense), net | (0.5) | (1.3) | N/A | - | - | |||||||||||||||
Total | $ | - | $ | (0.1) | $ | (0.5) | $ | (1.3) | $ | - | $ | - |
All gains and losses on interest rate swaps designated as cash flow hedges are initially recognized through AOCI. Realized gains and losses reported in AOCI are reclassified into interest income (expense), net as the underlying transaction is recognized.
The following table provides information on gains/(losses) on the Company's net investment hedges:
Derivatives in Net Investment Hedging Relationships | Amount of Gain/(Loss) Recognized in AOCI on Derivative (Effective Portion) | Location of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion) | Amount of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion) | Location of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | ||||||||||||||||||
Three Months Ended | Three Months Ended | Three Months Ended | |||||||||||||||||||||
June 30, | June 30, | June 30, | |||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2013 | 2012 | ||||||||||||||||||
FX forwards | $ | (0.3) | $ | (1.5) | N/A | $ | - | $ | - | N/A | $ | - | $ | - | |||||||||
Total | $ | (0.3) | $ | (1.5) | $ | - | $ | - | $ | - | $ | - | |||||||||||
Six Months Ended | Six Months Ended | Six Months Ended | |||||||||||||||||||||
June 30, | June 30, | June 30, | |||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2013 | 2012 | ||||||||||||||||||
FX forwards | $ | 0.5 | $ | (1.5) | N/A | $ | - | $ | - | N/A | $ | - | $ | - | |||||||||
Total | $ | 0.5 | $ | (1.5) | $ | - | $ | - | $ | - | $ | - |
All gains and losses on derivatives designated as net investment hedges are recognized in the currency translation adjustment component of AOCI.
The cumulative amount of unrecognized hedge losses recorded in AOCI is as follows:
Unrecognized Losses, net of tax | ||||||
June 30, | December 31, | |||||
2013 | 2012 | |||||
FX forwards on net investment hedges | $ | (1.7) | $ | (2.2) | ||
Interest rate swaps | (0.2) | (0.7) | ||||
Total | $ | (1.9) | $ | (2.9) |
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NOTE 7. GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS
The following table summarizes the activity in goodwill for the periods indicated:
Six Months Ended June 30, 2013 | |||||||||||||||||||||||||||
MIS | MA | Consolidated | |||||||||||||||||||||||||
Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | |||||||||||||||||||
Balance at beginning of year | $ | 11.5 | $ | - | $ | 11.5 | $ | 637.8 | $ | (12.2) | $ | 625.6 | $ | 649.3 | $ | (12.2) | $ | 637.1 | |||||||||
Additions/adjustments | - | - | - | - | - | - | - | - | - | ||||||||||||||||||
Foreign currency translation adjustments | (0.6) | - | (0.6) | (16.7) | - | (16.7) | (17.3) | - | (17.3) | ||||||||||||||||||
Ending balance | $ | 10.9 | $ | - | $ | 10.9 | $ | 621.1 | $ | (12.2) | $ | 608.9 | $ | 632.0 | $ | (12.2) | $ | 619.8 | |||||||||
Year Ended December 31, 2012 | |||||||||||||||||||||||||||
MIS | MA | Consolidated | |||||||||||||||||||||||||
Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | |||||||||||||||||||
Balance at beginning of year | $ | 11.0 | $ | - | $ | 11.0 | $ | 631.9 | $ | - | $ | 631.9 | $ | 642.9 | $ | - | $ | 642.9 | |||||||||
Additions/adjustments | - | - | - | (4.4) | - | (4.4) | (4.4) | - | (4.4) | ||||||||||||||||||
Impairment charge | - | - | - | - | (12.2) | (12.2) | - | (12.2) | (12.2) | ||||||||||||||||||
Foreign currency translation adjustments | 0.5 | - | 0.5 | 10.3 | - | 10.3 | 10.8 | - | 10.8 | ||||||||||||||||||
Ending balance | $ | 11.5 | $ | - | $ | 11.5 | $ | 637.8 | $ | (12.2) | $ | 625.6 | $ | 649.3 | $ | (12.2) | $ | 637.1 |
The 2012 additions/adjustments for the MA segment in the table above relate to the acquisitions of Copal and B&H in the fourth quarter of 2011.
The 2012 impairment charge in the table above relates to goodwill in the FSTC reporting unit within MA. The Company evaluates its goodwill for potential impairment annually on July 31 or more frequently if impairment indicators arise throughout the year. Projected operating results for the FSTC reporting unit at December 31, 2012 were lower than projections utilized for the annual impairment analysis performed at July 31, 2012 reflecting a contraction in spending for training and certification services for many individuals and global financial institutions amidst macroeconomic uncertainties. Based on this trend and overall macroeconomic uncertainties at the time, the Company lowered its cash flow forecasts for this reporting unit in the fourth quarter of 2012. Accordingly, the Company performed another goodwill impairment assessment as of December 31, 2012 which resulted in an impairment charge of $12.2 million. The fair value of the FSTC reporting unit utilized in the impairment assessment was estimated using a discounted cash flow methodology and comparable public company and precedent transaction multiples. There were no impairments to goodwill in the three and six months ended June 30, 2013 and 2012. However, a failure of the FSTC reporting unit to meet its financial projections could result in further goodwill impairment.
Acquired intangible assets and related amortization consisted of:
June 30, | December 31, | ||||||
2013 | 2012 | ||||||
Customer relationships | $ | 210.3 | $ | 219.6 | |||
Accumulated amortization | (79.5) | (74.0) | |||||
Net customer relationships | 130.8 | 145.6 | |||||
Trade secrets | 31.1 | 31.4 | |||||
Accumulated amortization | (17.2) | (16.0) | |||||
Net trade secrets | 13.9 | 15.4 | |||||
Software | 67.6 | 73.2 | |||||
Accumulated amortization | (33.4) | (33.7) | |||||
Net software | 34.2 | 39.5 | |||||
Trade names | 27.7 | 28.3 | |||||
Accumulated amortization | (10.8) | (10.3) | |||||
Net trade names | 16.9 | 18.0 | |||||
Other | 24.2 | 24.9 | |||||
Accumulated amortization | (18.0) | (16.9) | |||||
Net other | 6.2 | 8.0 | |||||
Total acquired intangible assets, net | $ | 202.0 | $ | 226.5 |
Other intangible assets primarily consist of databases and covenants not to compete.
Amortization expense relating to acquired intangible assets is as follows:
Three Months Ended | Six Months Ended | ||||||||||
June 30, | June 30, | ||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||
Amortization expense | $ | 6.9 | $ | 7.1 | $ | 14.0 | $ | 14.4 |
Estimated future amortization expense for acquired intangible assets subject to amortization is as follows:
Year Ending December 31, | ||
2013 (after June 30,) | $ | 16.8 |
2014 | 28.9 | |
2015 | 24.1 | |
2016 | 17.8 | |
2017 | 13.1 | |
Thereafter | 101.3 |
Amortizable intangible assets are reviewed for recoverability whenever events or changes in 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. There were no impairments to intangible assets during the three and six months ended June 30, 2013 and 2012.
|
NOTE 8. FAIR VALUE
The table below presents information about items, which are carried at fair value on a recurring basis at June 30, 2013 and December 31, 2012:
Fair Value Measurement as of June 30, 2013 | |||||||||||||||
Description | Balance | Level 1 | Level 2 | Level 3 | |||||||||||
Assets: | |||||||||||||||
Derivatives (a) | $ | 12.4 | $ | - | $ | 12.4 | $ | - | |||||||
Total | $ | 12.4 | $ | - | $ | 12.4 | $ | - | |||||||
Liabilities: | |||||||||||||||
Derivatives (a) | $ | 0.5 | $ | - | $ | 0.5 | $ | - | |||||||
Contingent consideration arising from acquisitions (b) | 10.5 | - | - | 10.5 | |||||||||||
Total | $ | 11.0 | $ | - | $ | 0.5 | $ | 10.5 | |||||||
Fair Value Measurement as of December 31, 2012 | |||||||||||||||
Description | Balance | Level 1 | Level 2 | Level 3 | |||||||||||
Assets: | |||||||||||||||
Derivatives (a) | $ | 15.2 | $ | - | $ | 15.2 | $ | - | |||||||
Total | $ | 15.2 | $ | - | $ | 15.2 | $ | - | |||||||
Liabilities: | |||||||||||||||
Derivatives (a) | $ | 2.4 | $ | - | $ | 2.4 | $ | - | |||||||
Contingent consideration arising from acquisitions (b) | 9.0 | - | - | 9.0 | |||||||||||
Total | $ | 11.4 | $ | - | $ | 2.4 | $ | 9.0 | |||||||
(a) Represents interest rate swaps and FX forwards on certain assets and liabilities as well as on certain non-U.S. dollar net investments in certain foreign subsidiaries as more fully described in Note 6 to the financial statements | |||||||||||||||
(b) Represents contingent consideration liabilities pursuant to the agreements for certain MA acquisitions. | |||||||||||||||
The following table summarizes the changes in the fair value of the Company's Level 3 liabilities: |
The following table summarizes the changes in the fair value of the Company's Level 3 liabilities:
Contingent Consideration | |||||||||||
Six Months Ended June 30, | |||||||||||
2013 | 2012 | ||||||||||
Balance as of January 1 | $ | 9.0 | $ | 9.1 | |||||||
Settlements | (2.5) | (0.5) | |||||||||
Total losses (realized and unrealized): | |||||||||||
Included in earnings | 4.1 | (2.5) | |||||||||
Foreign currency translation adjustments | (0.1) | 0.3 | |||||||||
Balance as of June 30 | $ | 10.5 | $ | 6.4 |
The losses included in earnings in the table above are recorded within operating expenses in the Company's consolidated statements of operations. These losses relate to contingent consideration obligations outstanding at June 30, 2013.
The $10.5 million of contingent consideration obligations as of June 30, 2013 is classified in other liabilities within the Company's consolidated balance sheet.
The following are descriptions of the methodologies utilized by the Company to estimate the fair value of its derivative contracts and contingent consideration obligations:
Derivatives:
In determining the fair value of the derivative contracts in the table above, the Company utilizes industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using spot rates, forward points, currency volatilities, interest rates as well as the risk of non-performance of the Company and the counterparties with whom it has derivative contracts. The Company established strict counterparty credit guidelines and only enters into transactions with financial institutions that adhere to these guidelines. Accordingly, the risk of counterparty default is deemed to be minimal.
Contingent consideration:
At June 30, 2013, the Company has contingent consideration obligations related to the acquisitions of CSI and Copal which are based on certain financial and non-financial metrics set forth in the acquisition agreements. These obligations are measured using Level 3 inputs as defined in the ASC. The Company recorded the obligations for these contingent consideration arrangements on the date of each respective acquisition based on management's best estimates of the achievement of the metrics and the value of the obligations are adjusted quarterly.
The contingent consideration obligation for CSI is based on the achievement of a certain contractual milestone by January 2016. The Company utilizes a discounted cash flow methodology to value this obligation. The future expected cash flow for this obligation is discounted using an interest rate available to borrowers with similar credit risk profiles to that of the Company. The most significant unobservable input involved in the measurement of this obligation is the probability that the milestone will be reached by January 2016. At June 30, 2013, the Company expects that this milestone will be reached by the aforementioned date.
There are several contingent consideration obligations relating to the acquisition of Copal. A portion of the contingent cash payments are based on revenue and EBITDA growth for certain of the Copal entities. This growth is calculated by comparing revenue and EBITDA in the year immediately prior to the exercise of the put/call option to acquire the remaining 33% ownership interest of Copal Partners Limited which the Company does not currently own, to revenue and EBITDA in Copal's fiscal year ended March 31, 2011. There are no limitations set forth in the acquisition agreement relating to the amount payable under this contingent consideration arrangement. Payments under this arrangement, if any, would be made upon the exercise of the aforementioned put/call option. Other contingent cash payments are based on the achievement of revenue targets for Copal's fiscal year ended March 31, 2012 and 2013, with certain limits on the amount of revenue that can be applied to the calculation of these contingent payments. Each of these contingent payments had a maximum payout of $2.5 million and have been settled as of June 30, 2013. The Company utilizes discounted cash flow methodologies to value these obligations. The expected future cash flows for these obligations are discounted using a risk-free interest rate plus a credit spread based on the option adjusted spread of the Company's publicly traded debt as of the valuation date. The most significant unobservable input involved in the measurement of these obligations is the projected future financial results of the applicable Copal entities. Also, for the portion of the obligations which are dependent upon the exercise of the call/put option, the Company has utilized a Monte Carlo simulation model to estimate when the option will be exercised, thus triggering the payment of contingent consideration.
A significant increase or decrease in any of the aforementioned significant unobservable inputs related to the fair value measurement of the Company's contingent consideration obligations would result in a significantly higher or lower reported fair value for these obligations.
|
NOTE 9. OTHER BALANCE SHEET AND STATEMENT OF OPERATIONS INFORMATION
The following tables contain additional detail related to certain balance sheet captions:
June 30, | December 31, | |||||
2013 | 2012 | |||||
Other current assets: | ||||||
Prepaid taxes | $ | 94.0 | $ | 31.8 | ||
Prepaid expenses | 42.8 | 47.3 | ||||
Other | 10.8 | 12.8 | ||||
Total other current assets | $ | 147.6 | $ | 91.9 | ||
June 30, | December 31, | |||||
2013 | 2012 | |||||
Other assets: | ||||||
Investments in joint ventures | $ | 35.1 | $ | 38.3 | ||
Deposits for real-estate leases | 9.0 | 10.0 | ||||
Other | 45.8 | 47.7 | ||||
Total other assets | $ | 89.9 | $ | 96.0 | ||
June 30, | December 31, | |||||
2013 | 2012 | |||||
Accounts payable and accrued liabilities: | ||||||
Salaries and benefits | $ | 63.2 | $ | 79.2 | ||
Incentive compensation | 62.0 | 162.6 | ||||
Profit sharing contribution | - | 12.6 | ||||
Customer credits, advanced payments and advanced billings | 23.0 | 21.5 | ||||
Self-insurance reserves | 36.1 | 55.8 | ||||
Dividends | 3.4 | 47.7 | ||||
Professional service fees | 35.5 | 30.2 | ||||
Interest accrued on debt | 23.1 | 23.4 | ||||
Accounts payable | 14.9 | 14.3 | ||||
Income taxes | 2.4 | 56.1 | ||||
Deferred rent-current portion | 1.0 | 1.1 | ||||
Pension and other retirement employee benefits | 4.4 | 4.4 | ||||
Other | 43.8 | 46.4 | ||||
Total accounts payable and accrued liabilities | $ | 312.8 | $ | 555.3 | ||
June 30, | December 31, | |||||
2013 | 2012 | |||||
Other liabilities: | ||||||
Pension and other retirement employee benefits | $ | 206.8 | $ | 213.3 | ||
Deferred rent-non-current portion | 105.7 | 110.2 | ||||
Interest accrued on UTPs | 14.4 | 10.6 | ||||
Legacy and other tax matters | 38.1 | 37.1 | ||||
Other | 47.9 | 38.9 | ||||
Total other liabilities | $ | 412.9 | $ | 410.1 |
Redeemable Noncontrolling Interest:
In connection with the acquisition of Copal, the Company and the non-controlling shareholders entered into a put/call option agreement whereby the Company has the option to purchase from the non-controlling shareholders and the non-controlling shareholders have the option to sell to the Company the remaining 33% ownership interest of Copal Partners Limited based on a strike price to be calculated on pre-determined formulas using a combination of revenue and EBITDA multiples when exercised. The value of the estimated put/call option strike price on the date of acquisition was based on a Monte Carlo simulation model. This model contemplated multiple scenarios which simulated certain of Copal's revenue, EBITDA margins and equity values to estimate the present value of the expected strike price of the option. The option is subject to a minimum exercise price of $46 million. There is no limit as to the maximum amount of the strike price on the put/call option.
The following table shows changes in the redeemable noncontrolling interest related to the acquisition of Copal:
Six Months Ended June 30, 2013 | Year Ended December 31, 2012 | |||||
(in millions) | Redeemable Noncontrolling Interest | |||||
Balance January 1, | $ | 72.3 | $ | 60.5 | ||
Adjustment due to right of offset for UTPs* | - | 6.8 | ||||
Net earnings | 2.3 | 3.6 | ||||
Dividends | (3.0) | (3.6) | ||||
FX translation | - | 1.6 | ||||
Adjustment to redemption value | 7.1 | 3.4 | ||||
Balance | $ | 78.7 | $ | 72.3 | ||
* Relates to an adjustment for the right of offset pursuant to the Copal acquisition agreement whereby the amount due to the sellers under the put/call arrangement is reduced by the amount of UTPs that the Company may be required to pay. |
Noncontrolling Interests:
The following table summarizes the changes in the Company's noncontrolling interests:
Six Months Ended June 30, 2013 | Year Ended December 31, 2012 | ||||||
(in millions) | Noncontrolling Interests | ||||||
Balance January 1, | $ | 11.4 | $ | 10.6 | |||
Net earnings | 3.4 | 6.1 | |||||
Dividends | (5.6) | (4.7) | |||||
FX translation | - | (0.6) | |||||
Balance | $ | 9.2 | $ | 11.4 |
Other Non-Operating (Expense) Income:
The following table summarizes the components of other non-operating (expense) income:
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||
FX gain/(loss) | $ | 5.3 | $ | 0.3 | $ | 12.7 | $ | (1.2) | ||||
Joint venture income | 3.2 | 2.6 | 4.9 | 4.6 | ||||||||
Other | (0.8) | (0.2) | (1.1) | (0.8) | ||||||||
Total | $ | 7.7 | $ | 2.7 | $ | 16.5 | $ | 2.6 |
Changes in the Company's self-insurance reserves are as follows:
Six Months Ended June 30, | Year Ended December 31, | ||||||||
(in millions) | 2013 | 2012 | |||||||
Beginning balance | $ | 55.8 | $ | 27.1 | |||||
Accruals (reversals), net | (9.3) | 38.1 | |||||||
Payments | (10.4) | (9.4) | |||||||
Ending balance* | $ | 36.1 | $ | 55.8 | |||||
* These reserves primarily relate to legal defense costs for claims from prior years. |
|
Three Months Ended | Six Months Ended | ||||||||||
June 30, | June 30, | ||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||
Stock-based compensation cost | $ | 16.1 | $ | 14.9 | $ | 33.3 | $ | 29.9 | |||
Tax benefit | $ | 5.8 | $ | 5.4 | $ | 12.0 | $ | 10.8 |
Expected dividend yield | 1.72% |
Expected stock volatility | 42.6% |
Risk-free interest rate | 1.53% |
Expected holding period | 7.2 years |
Grant date fair value | $ 17.58 |
Six Months Ended | ||||||
June 30, | ||||||
Stock option exercises: | 2013 | 2012 | ||||
Proceeds from stock option exercises | $ | 89.2 | $ | 46.7 | ||
Aggregate intrinsic value | $ | 66.7 | $ | 26.6 | ||
Tax benefit realized upon exercise | $ | 24.4 | $ | 10.1 | ||
Number of shares exercised | 2.7 | 1.9 | ||||
Six Months Ended | ||||||
June 30, | ||||||
Restricted stock vesting: | 2013 | 2012 | ||||
Fair value of shares vested | $ | 53.8 | $ | 37.5 | ||
Tax benefit realized upon vesting | $ | 19.1 | $ | 13.2 | ||
Number of shares vested | 1.1 | 1.0 | ||||
Six Months Ended | ||||||
June 30, | ||||||
Performance-based awards vesting: | 2013 | 2012 | ||||
Fair value of shares vested | $ | 25.5 | $ | - | ||
Tax benefit realized upon vesting | $ | 9.7 | $ | - | ||
Number of shares vested | 0.5 | - |
|
Six Months Ended | |||||||||||
June 30, | |||||||||||
2013 | 2012 | ||||||||||
Income Taxes Paid* | $ | 231.6 | $ | 235.0 | |||||||
* Includes approximately $92 million in payments for tax audit settlements in the first quarter of 2012. | |||||||||||
|
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||
Basic | 222.3 | 223.9 | 222.8 | 223.7 | ||||||||
Dilutive effect of shares issuable under stock-based compensation plans | 3.9 | 3.3 | 3.9 | 3.6 | ||||||||
Diluted | 226.2 | 227.2 | 226.7 | 227.3 | ||||||||
Anti-dilutive options to purchase common shares and restricted stock as well as contingently issuable restricted stock which are excluded from the table above | 4.4 | 7.2 | 4.7 | 7.1 |
|
Fair Value of Derivative Instruments | ||||||||
Derivatives Instruments | Balance Sheet Location | June 30,2013 | December 31, 2012 | |||||
Assets: | ||||||||
Derivatives designated as accounting hedges: | ||||||||
Interest rate swaps | Other assets | $ | 11.2 | $ | 13.8 | |||
Total derivatives designated as accounting hedges | 11.2 | 13.8 | ||||||
Derivatives not designated as accounting hedges: | ||||||||
FX forwards on certain assets and liabilities | Other current assets | 1.2 | 1.4 | |||||
Total assets | $ | 12.4 | $ | 15.2 | ||||
Liabilities: | ||||||||
Derivatives designated as accounting hedges: | ||||||||
Interest rate swaps | Accounts payable and accrued liabilities | $ | - | $ | 0.7 | |||
FX forwards on net investment in certain foreign subsidiaries | Accounts payable and accrued liabilities | - | 1.0 | |||||
Total derivatives designated as accounting hedges | - | 1.7 | ||||||
Derivatives not designated as accounting hedges: | ||||||||
FX forwards on certain assets and liabilities | Accounts payable and accrued liabilities | 0.5 | 0.7 | |||||
Total liabilities | $ | 0.5 | $ | 2.4 | ||||
Amount of Gain (Loss) Recognized in the consolidated statements of operations | |||||||||||||||
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
Derivatives designated as accounting hedges | Location on Income Statement | 2013 | 2012 | 2013 | 2012 | ||||||||||
Interest rate swaps | Interest income(expense), net | $ | 1.0 | $ | 0.9 | $ | 2.1 | $ | 1.7 | ||||||
Derivatives not designated as accounting hedges | |||||||||||||||
Foreign exchange forwards | Other non-operating income (expense), net | $ | 1.0 | $ | (1.4) | $ | (0.1) | $ | (0.4) | ||||||
Unrecognized Losses, net of tax | ||||||
June 30, | December 31, | |||||
2013 | 2012 | |||||
FX forwards on net investment hedges | $ | (1.7) | $ | (2.2) | ||
Interest rate swaps | (0.2) | (0.7) | ||||
Total | $ | (1.9) | $ | (2.9) |
Derivatives in Cash Flow Hedging Relationships | Amount of Gain/(Loss) Recognized in AOCI on Derivative (Effective Portion) | Location of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion) | Amount of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion) | Location of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | ||||||||||||||||||
Three Months Ended | Three Months Ended | Three Months Ended | |||||||||||||||||||||
June 30, | June 30, | June 30, | |||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2013 | 2012 | ||||||||||||||||||
Interest rate swaps | - | - | Interest income (expense), net | (0.1) | (0.7) | N/A | - | - | |||||||||||||||
Total | $ | - | $ | - | $ | (0.1) | $ | (0.7) | $ | - | $ | - | |||||||||||
Six Months Ended | Six Months Ended | Six Months Ended | |||||||||||||||||||||
June 30, | June 30, | June 30, | |||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2013 | 2012 | ||||||||||||||||||
Interest rate swaps | - | (0.1) | Interest income (expense), net | (0.5) | (1.3) | N/A | - | - | |||||||||||||||
Total | $ | - | $ | (0.1) | $ | (0.5) | $ | (1.3) | $ | - | $ | - |
June 30, | December 31, | ||||
2013 | 2012 | ||||
Notional amount of currency pair: | |||||
Contracts to sell euros for USD | € | 50.0 | € | 50.0 |
Derivatives in Net Investment Hedging Relationships | Amount of Gain/(Loss) Recognized in AOCI on Derivative (Effective Portion) | Location of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion) | Amount of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion) | Location of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | ||||||||||||||||||
Three Months Ended | Three Months Ended | Three Months Ended | |||||||||||||||||||||
June 30, | June 30, | June 30, | |||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2013 | 2012 | ||||||||||||||||||
FX forwards | $ | (0.3) | $ | (1.5) | N/A | $ | - | $ | - | N/A | $ | - | $ | - | |||||||||
Total | $ | (0.3) | $ | (1.5) | $ | - | $ | - | $ | - | $ | - | |||||||||||
Six Months Ended | Six Months Ended | Six Months Ended | |||||||||||||||||||||
June 30, | June 30, | June 30, | |||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2013 | 2012 | ||||||||||||||||||
FX forwards | $ | 0.5 | $ | (1.5) | N/A | $ | - | $ | - | N/A | $ | - | $ | - | |||||||||
Total | $ | 0.5 | $ | (1.5) | $ | - | $ | - | $ | - | $ | - |
June 30, | December 31, | ||||
2013 | 2012 | ||||
Notional amount of currency pair: | |||||
Contracts to purchase USD with euros | $ | 25.7 | $ | 34.3 | |
Contracts to sell USD for euros | $ | 49.6 | $ | 48.4 | |
Contracts to purchase USD with GBP | $ | 3.5 | $ | 2.1 | |
Contracts to sell USD for GBP | $ | 0.1 | $ | 1.7 | |
Contracts to purchase USD with other foreign currencies | $ | 7.0 | $ | 6.7 | |
Contracts to sell USD for other foreign currencies | $ | 11.4 | $ | 5.1 | |
Contracts to purchase euros with other foreign currencies | € | 14.2 | € | 14.4 | |
Contracts to purchase euros with GBP | € | 2.0 | € | - | |
Contracts to sell euros for GBP | € | 18.3 | € | 8.9 |
|
Six Months Ended June 30, 2013 | |||||||||||||||||||||||||||
MIS | MA | Consolidated | |||||||||||||||||||||||||
Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | |||||||||||||||||||
Balance at beginning of year | $ | 11.5 | $ | - | $ | 11.5 | $ | 637.8 | $ | (12.2) | $ | 625.6 | $ | 649.3 | $ | (12.2) | $ | 637.1 | |||||||||
Additions/adjustments | - | - | - | - | - | - | - | - | - | ||||||||||||||||||
Foreign currency translation adjustments | (0.6) | - | (0.6) | (16.7) | - | (16.7) | (17.3) | - | (17.3) | ||||||||||||||||||
Ending balance | $ | 10.9 | $ | - | $ | 10.9 | $ | 621.1 | $ | (12.2) | $ | 608.9 | $ | 632.0 | $ | (12.2) | $ | 619.8 | |||||||||
Year Ended December 31, 2012 | |||||||||||||||||||||||||||
MIS | MA | Consolidated | |||||||||||||||||||||||||
Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | |||||||||||||||||||
Balance at beginning of year | $ | 11.0 | $ | - | $ | 11.0 | $ | 631.9 | $ | - | $ | 631.9 | $ | 642.9 | $ | - | $ | 642.9 | |||||||||
Additions/adjustments | - | - | - | (4.4) | - | (4.4) | (4.4) | - | (4.4) | ||||||||||||||||||
Impairment charge | - | - | - | - | (12.2) | (12.2) | - | (12.2) | (12.2) | ||||||||||||||||||
Foreign currency translation adjustments | 0.5 | - | 0.5 | 10.3 | - | 10.3 | 10.8 | - | 10.8 | ||||||||||||||||||
Ending balance | $ | 11.5 | $ | - | $ | 11.5 | $ | 637.8 | $ | (12.2) | $ | 625.6 | $ | 649.3 | $ | (12.2) | $ | 637.1 |
June 30, | December 31, | ||||||
2013 | 2012 | ||||||
Customer relationships | $ | 210.3 | $ | 219.6 | |||
Accumulated amortization | (79.5) | (74.0) | |||||
Net customer relationships | 130.8 | 145.6 | |||||
Trade secrets | 31.1 | 31.4 | |||||
Accumulated amortization | (17.2) | (16.0) | |||||
Net trade secrets | 13.9 | 15.4 | |||||
Software | 67.6 | 73.2 | |||||
Accumulated amortization | (33.4) | (33.7) | |||||
Net software | 34.2 | 39.5 | |||||
Trade names | 27.7 | 28.3 | |||||
Accumulated amortization | (10.8) | (10.3) | |||||
Net trade names | 16.9 | 18.0 | |||||
Other | 24.2 | 24.9 | |||||
Accumulated amortization | (18.0) | (16.9) | |||||
Net other | 6.2 | 8.0 | |||||
Total acquired intangible assets, net | $ | 202.0 | $ | 226.5 |
Three Months Ended | Six Months Ended | ||||||||||
June 30, | June 30, | ||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||
Amortization expense | $ | 6.9 | $ | 7.1 | $ | 14.0 | $ | 14.4 |
Year Ending December 31, | ||
2013 (after June 30,) | $ | 16.8 |
2014 | 28.9 | |
2015 | 24.1 | |
2016 | 17.8 | |
2017 | 13.1 | |
Thereafter | 101.3 |
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Fair Value Measurement as of June 30, 2013 | |||||||||||||||
Description | Balance | Level 1 | Level 2 | Level 3 | |||||||||||
Assets: | |||||||||||||||
Derivatives (a) | $ | 12.4 | $ | - | $ | 12.4 | $ | - | |||||||
Total | $ | 12.4 | $ | - | $ | 12.4 | $ | - | |||||||
Liabilities: | |||||||||||||||
Derivatives (a) | $ | 0.5 | $ | - | $ | 0.5 | $ | - | |||||||
Contingent consideration arising from acquisitions (b) | 10.5 | - | - | 10.5 | |||||||||||
Total | $ | 11.0 | $ | - | $ | 0.5 | $ | 10.5 | |||||||
Fair Value Measurement as of December 31, 2012 | |||||||||||||||
Description | Balance | Level 1 | Level 2 | Level 3 | |||||||||||
Assets: | |||||||||||||||
Derivatives (a) | $ | 15.2 | $ | - | $ | 15.2 | $ | - | |||||||
Total | $ | 15.2 | $ | - | $ | 15.2 | $ | - | |||||||
Liabilities: | |||||||||||||||
Derivatives (a) | $ | 2.4 | $ | - | $ | 2.4 | $ | - | |||||||
Contingent consideration arising from acquisitions (b) | 9.0 | - | - | 9.0 | |||||||||||
Total | $ | 11.4 | $ | - | $ | 2.4 | $ | 9.0 | |||||||
(a) Represents interest rate swaps and FX forwards on certain assets and liabilities as well as on certain non-U.S. dollar net investments in certain foreign subsidiaries as more fully described in Note 6 to the financial statements | |||||||||||||||
(b) Represents contingent consideration liabilities pursuant to the agreements for certain MA acquisitions. | |||||||||||||||
The following table summarizes the changes in the fair value of the Company's Level 3 liabilities: |
Contingent Consideration | |||||||||||
Six Months Ended June 30, | |||||||||||
2013 | 2012 | ||||||||||
Balance as of January 1 | $ | 9.0 | $ | 9.1 | |||||||
Settlements | (2.5) | (0.5) | |||||||||
Total losses (realized and unrealized): | |||||||||||
Included in earnings | 4.1 | (2.5) | |||||||||
Foreign currency translation adjustments | (0.1) | 0.3 | |||||||||
Balance as of June 30 | $ | 10.5 | $ | 6.4 |
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June 30, | December 31, | |||||
2013 | 2012 | |||||
Other current assets: | ||||||
Prepaid taxes | $ | 94.0 | $ | 31.8 | ||
Prepaid expenses | 42.8 | 47.3 | ||||
Other | 10.8 | 12.8 | ||||
Total other current assets | $ | 147.6 | $ | 91.9 | ||
June 30, | December 31, | |||||
2013 | 2012 | |||||
Other assets: | ||||||
Investments in joint ventures | $ | 35.1 | $ | 38.3 | ||
Deposits for real-estate leases | 9.0 | 10.0 | ||||
Other | 45.8 | 47.7 | ||||
Total other assets | $ | 89.9 | $ | 96.0 | ||
June 30, | December 31, | |||||
2013 | 2012 | |||||
Accounts payable and accrued liabilities: | ||||||
Salaries and benefits | $ | 63.2 | $ | 79.2 | ||
Incentive compensation | 62.0 | 162.6 | ||||
Profit sharing contribution | - | 12.6 | ||||
Customer credits, advanced payments and advanced billings | 23.0 | 21.5 | ||||
Self-insurance reserves | 36.1 | 55.8 | ||||
Dividends | 3.4 | 47.7 | ||||
Professional service fees | 35.5 | 30.2 | ||||
Interest accrued on debt | 23.1 | 23.4 | ||||
Accounts payable | 14.9 | 14.3 | ||||
Income taxes | 2.4 | 56.1 | ||||
Deferred rent-current portion | 1.0 | 1.1 | ||||
Pension and other retirement employee benefits | 4.4 | 4.4 | ||||
Other | 43.8 | 46.4 | ||||
Total accounts payable and accrued liabilities | $ | 312.8 | $ | 555.3 | ||
June 30, | December 31, | |||||
2013 | 2012 | |||||
Other liabilities: | ||||||
Pension and other retirement employee benefits | $ | 206.8 | $ | 213.3 | ||
Deferred rent-non-current portion | 105.7 | 110.2 | ||||
Interest accrued on UTPs | 14.4 | 10.6 | ||||
Legacy and other tax matters | 38.1 | 37.1 | ||||
Other | 47.9 | 38.9 | ||||
Total other liabilities | $ | 412.9 | $ | 410.1 |
Six Months Ended June 30, 2013 | Year Ended December 31, 2012 | |||||
(in millions) | Redeemable Noncontrolling Interest | |||||
Balance January 1, | $ | 72.3 | $ | 60.5 | ||
Adjustment due to right of offset for UTPs* | - | 6.8 | ||||
Net earnings | 2.3 | 3.6 | ||||
Dividends | (3.0) | (3.6) | ||||
FX translation | - | 1.6 | ||||
Adjustment to redemption value | 7.1 | 3.4 | ||||
Balance | $ | 78.7 | $ | 72.3 | ||
* Relates to an adjustment for the right of offset pursuant to the Copal acquisition agreement whereby the amount due to the sellers under the put/call arrangement is reduced by the amount of UTPs that the Company may be required to pay. |
Six Months Ended June 30, 2013 | Year Ended December 31, 2012 | ||||||
(in millions) | Noncontrolling Interests | ||||||
Balance January 1, | $ | 11.4 | $ | 10.6 | |||
Net earnings | 3.4 | 6.1 | |||||
Dividends | (5.6) | (4.7) | |||||
FX translation | - | (0.6) | |||||
Balance | $ | 9.2 | $ | 11.4 |
Six Months | ||||||||||||||
Ended June 30, 2013 | ||||||||||||||
Gains/(Losses) on Cash Flow and Net Investment Hedges | Pension and Other Retirement Benefits | Foreign Currency Translation Adjustments | Total | |||||||||||
Balance December 31, 2012 | $ | (2.9) | $ | (90.1) | $ | 10.9 | $ | (82.1) | ||||||
Other comprehensive income/(loss) before reclassifications | 0.5 | 0.5 | (72.8) | (71.8) | ||||||||||
Amounts reclassified from AOCI | 0.5 | 3.5 | - | 4.0 | ||||||||||
Other comprehensive income/(loss) | 1.0 | 4.0 | (72.8) | (67.8) | ||||||||||
Balance June 30, 2013 | $ | (1.9) | $ | (86.1) | $ | (61.9) | $ | (149.9) |
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||
FX gain/(loss) | $ | 5.3 | $ | 0.3 | $ | 12.7 | $ | (1.2) | ||||
Joint venture income | 3.2 | 2.6 | 4.9 | 4.6 | ||||||||
Other | (0.8) | (0.2) | (1.1) | (0.8) | ||||||||
Total | $ | 7.7 | $ | 2.7 | $ | 16.5 | $ | 2.6 |
Six Months Ended June 30, | Year Ended December 31, | ||||||||
(in millions) | 2013 | 2012 | |||||||
Beginning balance | $ | 55.8 | $ | 27.1 | |||||
Accruals (reversals), net | (9.3) | 38.1 | |||||||
Payments | (10.4) | (9.4) | |||||||
Ending balance* | $ | 36.1 | $ | 55.8 | |||||
* These reserves primarily relate to legal defense costs for claims from prior years. |
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NOTE 10. COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table provides details about the reclassifications out of AOCI:
Three Months Ended June 30, | Six Months Ended June 30, | Affected line in the consolidated statement of operations | |||||||||||
2013 | 2013 | ||||||||||||
Gains/(losses) on cash flow hedges | |||||||||||||
Interest rate swap derivative contracts | $ | (0.1) | $ | (0.7) | Interest income (expense),net | ||||||||
Income tax effect of item above | - | 0.2 | Provision for income taxes | ||||||||||
Total gains (losses) on cash flow hedges | (0.1) | (0.5) | |||||||||||
Pension and other retirement benefits | |||||||||||||
Amortization of actuarial losses and prior service costs included in net income | (1.8) | (3.9) | Operating expense | ||||||||||
Amortization of actuarial losses and prior service costs included in net income | (1.0) | (2.0) | SG&A expense | ||||||||||
Total before income taxes | (2.8) | (5.9) | |||||||||||
Income tax effect of item above | 1.2 | 2.4 | Provision for income taxes | ||||||||||
Total pension and other retirement benefits | (1.6) | (3.5) | |||||||||||
Total losses included in Net Income attributable to reclassifications out of AOCI | $ | (1.7) | $ | (4.0) | |||||||||
Changes in AOCI by component (net of tax) for the period ended June 30, 2013:
Six Months | ||||||||||||||
Ended June 30, 2013 | ||||||||||||||
Gains/(Losses) on Cash Flow and Net Investment Hedges | Pension and Other Retirement Benefits | Foreign Currency Translation Adjustments | Total | |||||||||||
Balance December 31, 2012 | $ | (2.9) | $ | (90.1) | $ | 10.9 | $ | (82.1) | ||||||
Other comprehensive income/(loss) before reclassifications | 0.5 | 0.5 | (72.8) | (71.8) | ||||||||||
Amounts reclassified from AOCI | 0.5 | 3.5 | - | 4.0 | ||||||||||
Other comprehensive income/(loss) | 1.0 | 4.0 | (72.8) | (67.8) | ||||||||||
Balance June 30, 2013 | $ | (1.9) | $ | (86.1) | $ | (61.9) | $ | (149.9) |
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Three Months Ended June 30, | Six Months Ended June 30, | Affected line in the consolidated statement of operations | |||||||||||
2013 | 2013 | ||||||||||||
Gains/(losses) on cash flow hedges | |||||||||||||
Interest rate swap derivative contracts | $ | (0.1) | $ | (0.7) | Interest income (expense),net | ||||||||
Income tax effect of item above | - | 0.2 | Provision for income taxes | ||||||||||
Total gains (losses) on cash flow hedges | (0.1) | (0.5) | |||||||||||
Pension and other retirement benefits | |||||||||||||
Amortization of actuarial losses and prior service costs included in net income | (1.8) | (3.9) | Operating expense | ||||||||||
Amortization of actuarial losses and prior service costs included in net income | (1.0) | (2.0) | SG&A expense | ||||||||||
Total before income taxes | (2.8) | (5.9) | |||||||||||
Income tax effect of item above | 1.2 | 2.4 | Provision for income taxes | ||||||||||
Total pension and other retirement benefits | (1.6) | (3.5) | |||||||||||
Total losses included in Net Income attributable to reclassifications out of AOCI | $ | (1.7) | $ | (4.0) | |||||||||
Six Months | ||||||||||||||
Ended June 30, 2013 | ||||||||||||||
Gains/(Losses) on Cash Flow and Net Investment Hedges | Pension and Other Retirement Benefits | Foreign Currency Translation Adjustments | Total | |||||||||||
Balance December 31, 2012 | $ | (2.9) | $ | (90.1) | $ | 10.9 | $ | (82.1) | ||||||
Other comprehensive income/(loss) before reclassifications | 0.5 | 0.5 | (72.8) | (71.8) | ||||||||||
Amounts reclassified from AOCI | 0.5 | 3.5 | - | 4.0 | ||||||||||
Other comprehensive income/(loss) | 1.0 | 4.0 | (72.8) | (67.8) | ||||||||||
Balance June 30, 2013 | $ | (1.9) | $ | (86.1) | $ | (61.9) | $ | (149.9) |
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