MOODYS CORP /DE/, 10-K filed on 2/26/2013
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2012
Jan. 31, 2013
Jun. 30, 2012
Document Information [Line Items]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2012 
 
 
Document Fiscal Year Focus
2012 
 
 
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 Well-known Seasoned Issuer
Yes 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
223,600,000 
 
Entity Public Float
 
 
$ 8,100,000,000 
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Revenue
$ 2,730.3 
$ 2,280.7 
$ 2,032.0 
Expenses
 
 
 
Operating
795.0 
683.5 
604.8 
Selling, general and administrative
752.2 
629.6 
588.0 
Goodwill impairment charge
12.2 
 
 
Restructuring
 
 
0.1 
Depreciation and amortization
93.5 
79.2 
66.3 
Total expenses
1,652.9 
1,392.3 
1,259.2 
Operating income
1,077.4 
888.4 
772.8 
Interest income (expense), net
(63.8)
(62.1)
(52.5)
Other non-operating income (expense), net
10.4 
13.5 
(5.9)
Non-operating income (expense), net
(53.4)
(48.6)
(58.4)
Income before provision for income taxes
1,024.0 
839.8 
714.4 
Provision for income taxes
324.3 
261.8 
201.0 
Net income
699.7 
578.0 
513.4 
Less: Net income attributable to noncontrolling interests
9.7 
6.6 
5.6 
Net income attributable to Moody's
$ 690.0 
$ 571.4 
$ 507.8 
Earnings per share
 
 
 
Basic
$ 3.09 
$ 2.52 
$ 2.16 
Diluted
$ 3.05 
$ 2.49 
$ 2.15 
Weighted average shares outstanding
 
 
 
Basic
223.2 
226.3 
235.0 
Diluted
226.6 
229.4 
236.6 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Net income
$ 699.7 
$ 578.0 
$ 513.4 
Foreign currency translation adjustments
35.2 1
(48.7)1
11.8 1
Cash flow and net investment hedges, net of tax:
 
 
 
Net unrealized losses on cash flow and net investment hedges
(2.3)2
(0.6)2
(3.1)2
Reclassification of losses included in net income
2.4 3
3.2 3
3.8 3
Net change
0.1 
2.6 
0.7 
Pension and Other Retirement Benefits, net of tax:
 
 
 
Amortization of actuarial losses and prior service costs included in net income
5.9 4
4.4 4
2.9 4
Net actuarial losses and prior service costs
(14.8)5
(34.2)5
(7.3)5
Net change
(8.9)
(29.8)
(4.4)
Comprehensive income
726.1 
502.1 
521.5 
Less: comprehensive income attributable to noncontrolling interests and redeemable noncontrolling interest
10.7 
4.8 
5.9 
Comprehensive income attributable to Moody's
$ 715.4 
$ 497.3 
$ 515.6 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Tax on foreign currency translation adjustments
$ 0.2 
$ 1.6 
$ 11.7 
Tax on unrealized losses on cash flow and investment hedges
1.6 
0.4 
2.2 
Tax on reclassification losses included in net income
1.7 
2.1 
2.6 
Tax on amortization of actuarial losses and prior service costs included in net income
4.1 
3.0 
2.1 
Tax on actuarial losses and prior service costs
$ 11.2 
$ 22.1 
$ 5.2 
CONSOLIDATED BALANCE SHEETS (USD $)
In Millions, unless otherwise specified
Dec. 31, 2012
Dec. 31, 2011
Current assets:
 
 
Cash and cash equivalents
$ 1,755.4 
$ 760.0 
Short-term investments
17.9 
14.8 
Accounts receivable, net of allowances of $29.1 in 2012 and $28.0 in 2011
621.8 
489.8 
Deferred tax assets, net
38.7 
82.2 
Other current assets
91.9 
77.6 
Total current assets
2,525.7 
1,424.4 
Property and equipment, net
307.1 
326.8 
Goodwill
637.1 
642.9 
Intangible assets, net
226.5 
253.6 
Deferred tax assets, net
168.5 
146.4 
Other assets
96.0 
82.0 
Total assets
3,960.9 
2,876.1 
Current liabilities:
 
 
Accounts payable and accrued liabilities
555.3 
452.3 
Unrecognized tax benefits
 
90.0 
Current portion of long-term debt
63.8 
71.3 
Deferred revenue
545.8 
520.4 
Total current liabilities
1,164.9 
1,134.0 
Non-current portion of deferred revenue
94.9 
97.7 
Long-term debt
1,607.4 
1,172.5 
Deferred tax liabilities, net
58.1 
49.6 
Unrecognized tax benefits
156.6 
115.4 
Other liabilities
410.1 
404.8 
Total liabilities
3,492.0 
2,974.0 
Contingencies (Note 17)
   
   
Redeemable noncontrolling interest
72.3 
60.5 
Shareholders' equity (deficit):
 
 
Preferred stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding
   
   
Capital surplus
365.1 
394.5 
Retained earnings
4,713.3 
4,176.1 
Treasury stock, at cost; 119,650,254 and 120,462,232 shares of common stock at December 31, 2012 and December 31, 2011, respectively
(4,614.5)
(4,635.5)
Accumulated other comprehensive loss
(82.1)
(107.5)
Total Moody's shareholders' equity (deficit)
385.2 
(169.0)
Noncontrolling interests
11.4 
10.6 
Total shareholders' equity (deficit)
396.6 
(158.4)
Total liabilities, redeemable noncontrolling interest and shareholders' equity (deficit)
3,960.9 
2,876.1 
Series common stock
 
 
Shareholders' equity (deficit):
 
 
Common stock
   
   
Common Stock
 
 
Shareholders' equity (deficit):
 
 
Common stock
$ 3.4 
$ 3.4 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Dec. 31, 2012
Dec. 31, 2011
Accounts receivable, allowances
$ 29.1 
$ 28.0 
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
119,650,254 
120,462,232 
Series common stock
 
 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
10,000,000 
10,000,000 
Common stock, shares issued
   
   
Common stock, shares outstanding
   
   
Common Stock
 
 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
1,000,000,000 
1,000,000,000 
Common stock, shares issued
342,902,272 
342,902,272 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Cash flows from operating activities
 
 
 
Net income
$ 699.7 
$ 578.0 
$ 513.4 
Reconciliation of net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
93.5 
79.2 
66.3 
Stock-based compensation expense
64.5 
56.7 
56.6 
Goodwill impairment charge
12.2 
 
 
Deferred income taxes
36.1 
10.3 
(10.6)
Excess tax benefits from settlement of stock-based compensation awards
(15.7)
(7.4)
(7.0)
Legacy Tax Matters
(12.8)1
(6.4)1
 
Changes in assets and liabilities:
 
 
 
Accounts receivable
(128.2)
17.1 
(54.4)
Other current assets
(14.1)
53.5 
(73.5)
Other assets
5.1 
7.5 
3.7 
Accounts payable and accrued liabilities
101.8 
24.4 
83.5 
Restructuring liability
(0.1)
(0.5)
(5.2)
Deferred revenue
20.9 
8.8 
19.6 
Unrecognized tax benefits and other non-current tax liabilities
(49.2)
3.9 
30.8 
Deferred rent
0.8 
7.4 
12.0 
Other liabilities
8.6 
(29.2)
18.1 
Net cash provided by operating activities
823.1 
803.3 
653.3 
Cash flows from investing activities
 
 
 
Capital additions
(45.0)
(67.7)
(79.0)
Purchases of short-term investments
(56.2)
(43.3)
(26.2)
Sales and maturities of short-term investments
54.5 
40.9 
25.0 
Cash paid for acquisitions and investment in affiliates, net of cash acquired
(3.5)
(197.5)
(148.6)
Net cash used in investing activities
(50.2)
(267.6)
(228.8)
Cash flows from financing activities
 
 
 
Borrowings under revolving credit facilities
 
 
250.0 
Repayments of borrowings under revolving credit facilities
 
 
(250.0)
Issuance of commercial paper
 
 
2,232.8 
Repayment of commercial paper
 
 
(2,676.4)
Issuance of notes
496.1 
 
496.9 
Repayment of notes
(71.3)
(11.3)
(3.8)
Net proceeds from stock plans
116.7 
46.4 
34.7 
Excess tax benefits from settlement of stock-based compensation awards
15.7 
7.4 
7.0 
Cost of treasury shares repurchased
(196.5)
(333.8)
(223.6)
Payment of dividends
(143.0)
(121.0)
(98.6)
Payment of dividends to noncontrolling interests
(8.3)
(5.1)
(4.8)
Payments under capital lease obligations
 
 
(1.2)
Contingent consideration paid
(0.5)
(0.3)
 
Debt issuance costs and related fees
(6.3)
 
(4.3)
Net cash provided by (used in) financing activities
202.6 
(417.7)
(241.3)
Effect of exchange rate changes on cash and cash equivalents
19.9 
(17.6)
2.5 
Increase in cash and cash equivalents
995.4 
100.4 
185.7 
Cash and cash equivalents, beginning of period
760.0 
659.6 
473.9 
Cash and cash equivalents, end of period
$ 1,755.4 
$ 760.0 
$ 659.6 
Consolidated Statement of Shareholders' Equity (Deficit) (USD $)
In Millions
Total
Common Stock
Capital Surplus
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Income (Loss)
Total Moody's Shareholders' Equity (Deficit)
Non-Controlling Interests
Beginning Balance at Dec. 31, 2009
$ (596.1)
$ 3.4 
$ 391.1 
$ 3,329.0 
$ (4,288.5)
$ (41.2)
$ (606.2)
$ 10.1 
Beginning Balance (in shares) at Dec. 31, 2009
 
342.9 
 
 
(106.0)
 
 
 
Net income
513.4 
 
 
507.8 
 
 
507.8 
5.6 
Dividends
(105.4)
 
 
(100.6)
 
 
(100.6)
(4.8)
Stock-based compensation
56.9 
 
56.9 
 
 
 
56.9 
 
Shares issued for stock-based compensation plans, net
34.6 
 
(70.2)
 
104.8 
 
34.6 
 
Shares issued for stock-based compensation plans, net (in shares)
 
 
 
 
2.5 
 
 
 
Net excess tax benefit upon settlement of stock-based compensation awards
13.7 
 
13.7 
 
 
 
13.7 
 
Treasury shares repurchased, shares
 
 
 
 
(8.6)
 
 
 
Treasury shares repurchased
(223.6)
 
 
 
(223.6)
 
(223.6)
 
Currency translation adjustment
11.8 
 
 
 
 
11.5 
11.5 
0.3 
Net actuarial losses and prior service cost
(7.3)1
 
 
 
 
(7.3)
(7.3)
 
Amortization and recognition of prior service costs and actuarial losses
2.9 2
 
 
 
 
2.9 
2.9 
 
Net unrealized gain on cash flow hedges
0.7 
 
 
 
 
0.7 
0.7 
 
Ending Balance at Dec. 31, 2010
(298.4)
3.4 
391.5 
3,736.2 
(4,407.3)
(33.4)
(309.6)
11.2 
Ending Balance (in shares) at Dec. 31, 2010
 
342.9 
 
 
(112.1)
 
 
 
Net income
577.0 
 
 
571.4 
 
 
571.4 
5.6 
Dividends
(136.6)
 
 
(131.5)
 
 
(131.5)
(5.1)
Stock-based compensation
56.9 
 
56.9 
 
 
 
56.9 
 
Shares issued for stock-based compensation plans, net
46.4 
 
(59.2)
 
105.6 
 
46.4 
 
Shares issued for stock-based compensation plans, net (in shares)
 
 
 
 
2.6 
 
 
 
Net excess tax benefit upon settlement of stock-based compensation awards
7.2 
 
7.2 
 
 
 
7.2 
 
Excess of consideration paid over carrying value of additional investment in KIS Pricing
(1.9)
 
(1.9)
 
 
 
(1.9)
 
Purchase of KIS Pricing shares from noncontrolling interest
(1.0)
 
 
 
 
 
 
(1.0)
Treasury shares repurchased, shares
 
 
 
 
(11.0)
 
 
 
Treasury shares repurchased
(333.8)
 
 
 
(333.8)
 
(333.8)
 
Currency translation adjustment
(47.0)
 
 
 
 
(46.9)
(46.9)
(0.1)
Net actuarial losses and prior service cost
(34.2)1
 
 
 
 
(34.2)
(34.2)
 
Amortization and recognition of prior service costs and actuarial losses
4.4 2
 
 
 
 
4.4 
4.4 
 
Net unrealized gain on cash flow hedges
2.6 
 
 
 
 
2.6 
2.6 
 
Ending Balance at Dec. 31, 2011
(158.4)
3.4 
394.5 
4,176.1 
(4,635.5)
(107.5)
(169.0)
10.6 
Ending Balance (in shares) at Dec. 31, 2011
 
342.9 
 
 
(120.5)
 
 
 
Net income
696.1 
 
 
690.0 
 
 
690.0 
6.1 
Dividends
(157.5)
 
 
(152.8)
 
 
(152.8)
(4.7)
Stock-based compensation
64.6 
 
64.6 
 
 
 
64.6 
 
Shares issued for stock-based compensation plans, net
116.6 
 
(100.9)
 
217.5 
 
116.6 
 
Shares issued for stock-based compensation plans, net (in shares)
 
 
 
 
5.6 
 
 
 
Net excess tax benefit upon settlement of stock-based compensation awards
10.3 
 
10.3 
 
 
 
10.3 
 
Adjustment to redemption value of redeemable noncontrolling interest
(3.4)
 
(3.4)
 
 
 
(3.4)
 
Treasury shares repurchased, shares
 
 
 
 
(4.8)
 
 
 
Treasury shares repurchased
(196.5)
 
 
 
(196.5)
 
(196.5)
 
Currency translation adjustment
33.6 
 
 
 
 
34.2 
34.2 
(0.6)
Net actuarial losses and prior service cost
(14.8)1
 
 
 
 
(14.8)
(14.8)
 
Amortization and recognition of prior service costs and actuarial losses
5.9 2
 
 
 
 
5.9 
5.9 
 
Net unrealized gain on cash flow hedges
0.1 
 
 
 
 
0.1 
0.1 
 
Ending Balance at Dec. 31, 2012
$ 396.6 
$ 3.4 
$ 365.1 
$ 4,713.3 
$ (4,614.5)
$ (82.1)
$ 385.2 
$ 11.4 
Ending Balance (in shares) at Dec. 31, 2012
 
342.9 
 
 
(119.7)
 
 
 
Consolidated Statement of Shareholders' Equity (Deficit) (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Currency translation adjustment, tax
$ 0.2 
$ 1.6 
$ 11.7 
Net actuarial losses and prior service cost, tax
11.2 
22.1 
5.2 
Amortization and recognition of prior service cost and actuarial losses, tax
4.1 
3.0 
2.1 
Net unrealized gain on cash flow hedges, tax
$ 0.1 
$ 1.7 
$ 0.4 
GLOSSARY OF TERMS AND ABBREVIATIONS
GLOSSARY OF TERMS AND ABBREVIATIONS

GLOSSARY OF TERMS AND ABBREVIATIONS

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

 

TERM   

DEFINITION

ACNielsen    ACNielsen Corporation – a former affiliate of Old D&B
Adjusted Operating
Income
   Operating income excluding restructuring, depreciation and amortization and a goodwill impairment charge
Adjusted Operating
Margin
   Adjusted Operating Income divided by revenue
Analytics    Moody’s Analytics – reportable segment of MCO formed in January 2008 which includes the non-rating commercial activities of MCO
AOCI    Accumulated other comprehensive income (loss); a separate component of shareholders’ equity (deficit)
ASC   

The FASB Accounting Standards Codification; the sole source of authoritative

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

ASU    The FASB Accounting Standards Updates to the ASC. It also provides background information for accounting guidance and the bases for conclusions on the changes in the ASC. ASUs are not considered authoritative until codified into the ASC
B&H    Barrie & Hibbert Limited, an acquisition completed in December 2011; part of the MA segment, a leading provider of risk management modeling tools for insurance companies worldwide
Basel II    Capital adequacy framework published in June 2004 by the Basel Committee on Banking Supervision
Basel III    A new global regulatory standard on bank capital adequacy and liquidity agreed by the members of the Basel Committee on Banking Supervision. Basel III was developed in a response to the deficiencies in financial regulation revealed by the global financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage.
Board    The board of directors of the Company
Bps    Basis points
Canary Wharf Lease    Operating lease agreement entered into on February 6, 2008 for office space in London, England, occupied by the Company in the second half of 2009
CDOs    Collateralized debt obligations
CFG    Corporate finance group; an LOB of MIS
CMBS    Commercial mortgage-backed securities; part of CREF
Cognizant    Cognizant Corporation – a former affiliate of Old D&B, which comprised the IMS Health and NMR businesses
Commission    European Commission
Common Stock    The Company’s common stock
Company    Moody’s Corporation and its subsidiaries; MCO; Moody’s
Copal    Copal Partners; an acquisition completed in November 2011; leading provider of outsourced research and analytical services to institutional investors.
COSO    Committee of Sponsoring Organizations of the Treadway Commission
CP    Commercial paper
CP Notes    Unsecured CP notes
CP Program    The Company’s CP program entered into on October 3, 2007
CRAs    Credit rating agencies
CREF    Commercial real estate finance which includes REITs, commercial real estate collateralized debt obligations and CMBS; part of SFG
CSI    CSI Global Education, Inc.; an acquisition completed in November 2010; part of the MA segment; a provider of financial learning, credentials, and certification in Canada
D&B Business    Old D&B’s Dun & Bradstreet operating company
DBPPs    Defined benefit pension plans
DCF    Discounted cash flow; a fair value calculation methodology whereby future projected cash flows are discounted back to their present value using a discount rate
Debt/EBITDA    Ratio of Total Debt to EBITDA
Directors’ Plan    The 1998 Moody’s Corporation Non-Employee Directors’ Stock Incentive Plan
Distribution Date    September 30, 2000; the date which Old D&B separated into two publicly traded companies – Moody’s Corporation and New D&B
EBITDA    Earnings before interest, taxes, depreciation and amortization
ECAIs    External Credit Assessment Institutions
ECB    European Central Bank
EMEA    Represents countries within Europe, the Middle East and Africa
EPS    Earnings per share
ERS    The enterprise risk solutions LOB within MA (formerly RMS); which offers risk management software products as well as software implementation services and related risk management advisory engagements
ESMA    European Securities and Market Authority
ESPP    The 1999 Moody’s Corporation Employee Stock Purchase Plan
ETR    Effective tax rate
EU    European Union
EUR    Euros
Eurosystem    The monetary authority of the Eurozone, the collective of European Union member states that have adopted the euro as their sole official currency. The Eurosystem consists of the European Central Bank and the central banks of the member states that belong to the Eurozon
Excess Tax Benefit    The difference between the tax benefit realized at exercise of an option or delivery of a restricted share and the tax benefit recorded at the time that the option or restricted share is expensed under GAAP
Exchange Act    The Securities Exchange Act of 1934, as amended
FASB    Financial Accounting Standards Board
FIG    Financial institutions group; an LOB of MIS
Fitch    Fitch Ratings, a part of the Fitch Group
Financial Reform
Act
   Dodd-Frank Wall Street Reform and Consumer Protection Act
FX    Foreign exchange
FSTC    Financial Services Training and Certifications; a reporting unit within the MA Segment that includes classroom-based training services and CSI.
GAAP    U.S. Generally Accepted Accounting Principles
GBP    British pounds
G-8    The finance ministers and central bank governors of the group of eight countries consisting of Canada, France, Germany, Italy, Japan, Russia, U.S. and U.K.
G-20    The G-20 is an informal forum that promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. By contributing to the strengthening of the international financial architecture and providing opportunities for dialogue on national policies, international co-operation, and international financial institutions, the G-20 helps to support growth and development across the globe. The G-20 is comprised of: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, U.K., U.S. and the EU, which is represented by the rotating Council presidency and the ECB
IMS Health    A spin-off of Cognizant, which provides services to the pharmaceutical and healthcare industries
Indicative Ratings    These are ratings which are provided as of a point in time, and not published or monitored. They are primarily provided to potential or current issuers to indicate what a rating may be based on business fundamentals and financial conditions as well as based on proposed financings
Intellectual Property    The Company’s intellectual property, including but not limited to proprietary information, trademarks, research, software tools and applications, models and methodologies, databases, domain names, and other proprietary materials
IOSCO    International Organization of Securities Commissions
IOSCO Code    Code of Conduct Fundamentals for CRAs issued by IOSCO
IRS    Internal Revenue Service
KIS    Korea Investors Service, Inc.; a leading Korean rating agency and consolidated subsidiary of the Company
KIS Pricing    Korea Investors Service Pricing, Inc.; a Korean provider of fixed income securities pricing and consolidated subsidiary of the Company
Korea    Republic of South Korea
Legacy Tax Matter(s)    Exposures to certain potential tax liabilities assumed in connection with the 2000 Distribution
LIBOR    London Interbank Offered Rate
LOB    Line of Business
MA    Moody’s Analytics – a reportable segment of MCO formed in January 2008 which includes the non-rating commercial activities of MCO
Make Whole Amount    The prepayment penalty relating to the Series 2005-1 Notes, Series 2007-1 Notes, 2010 Senior Notes and 2012 Senior Notes; a premium based on the excess, if any, of the discounted value of the remaining scheduled payments over the prepaid principal
MCO    Moody’s Corporation and its subsidiaries; the Company; Moody’s
MD&A    Management’s Discussion and Analysis of Financial Condition and Results of Operations
MIS    Moody’s Investors Service – a reportable segment of MCO
MIS Code    Moody’s Investors Service Code of Professional Conduct
Moody’s    Moody’s Corporation and its subsidiaries; MCO; the Company
Net Income    Earnings attributable to Moody’s Corporation, which excludes the portion of net income from consolidated entities attributable to non-controlling shareholders
New D&B    The New D&B Corporation – which comprises the D&B business after September 30, 2000
NM    Not-meaningful percentage change (over 400%)
NMR    Nielsen Media Research, Inc.; a spin-off of Cognizant; a leading source of television audience measurement services
NRSRO    Nationally Recognized Statistical Rating Organization
OCI    Other comprehensive income (loss)
Old D&B    The former Dun and Bradstreet Company which distributed New D&B shares on September 30, 2000, and was renamed Moody’s Corporation
Other Retirement
Plans
   The U.S. retirement healthcare and U.S. retirement life insurance plans
PPIF    Public, project and infrastructure finance; an LOB of MIS
Profit Participation
Plan
   Defined contribution profit participation plan that covers substantially all U.S. employees of the Company
PPP    Profit Participation Plan
PS    Professional Services; an LOB of MA
RD&A    Research, Data and Analytics; an LOB within MA that produces, sells and distributes research, data and related content. Includes products generated by MIS, such as analyses on major debt issuers, industry studies, and commentary on topical credit events, as well as economic research, data, quantitative risk scores, and the analytical tools that are produced within MA
Redeemable
Noncontrolling
Interest
   Represents minority shareholders’ interest in entities which are controlled but not wholly-owned by Moody’s and for which Moody’s obligation to redeem the minority shareholders’ interest is in the control of the minority shareholders
Reform Act    Credit Rating Agency Reform Act of 2006
REITs    Real estate investment trusts
Reorganization    The Company’s business reorganization announced in August 2007 which resulted in two new reportable segments (MIS and MA) beginning in January 2008
Retirement Plans    Moody’s funded and unfunded U.S. pension plans, the U.S. post-retirement healthcare plans and the U.S. post-retirement life insurance plans
RMBS    Residential mortgage-backed securities; part of SFG
RMS    The Risk Management Software LOB within MA which provides both economic and regulatory capital risk management software and implementation services. Now referred to as “ERS”
S&P    Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc.
SEC    Securities and Exchange Commission
Securities Act    Securities Act of 1933
Series 2005-
1 Notes
   Principal amount of $300 million, 4.98% senior unsecured notes due in September 2015 pursuant to the 2005 Agreement
Series 2007-1
Notes
   Principal amount of $300 million, 6.06% senior unsecured notes due in September 2017 pursuant to the 2007 Agreement
SFG    Structured finance group; an LOB of MIS
SG&A    Selling, general and administrative expenses
SIV    Structured Investment Vehicle
Stock Plans    The Old D&B’s 1998 Key Employees’ Stock Incentive Plan and the Restated 2001 Moody’s Corporation Key Employees’ Stock Incentive Plan
T&E    Travel and entertainment expenses
TPE    Third party evidence, as defined in the ASC, used to determine selling price based on a vendor’s or any competitor’s largely interchangeable products or services in standalone sales transactions to similarly situated customers
Total Debt    Current and long-term portion of debt as reflected on the consolidated balance sheets, excluding current accounts payable and accrued liabilities incurred in the ordinary course of business
U.K.    United Kingdom
U.S.    United States
USD    U.S. dollar
UTBs    Unrecognized tax benefits
UTPs    Uncertain tax positions
VSOE    Vendor specific objective evidence; evidence, as defined in the ASC, of selling price limited to either of the following: the price charged for a deliverable when it is sold separately, or for a deliverable not yet being sold separately, the price established by management having the relevant authority
WACC    Weighted average cost of capital
1998 Plan    Old D&B’s 1998 Key Employees’ Stock Incentive Plan
2000 Distribution    The distribution by Old D&B to its shareholders of all of the outstanding shares of New D&B common stock on September 30, 2000
2000 Distribution

Agreement

   Agreement governing certain ongoing relationships between the Company and New D&B after the 2000 Distribution including the sharing of any liabilities for the payment of taxes, penalties and interest resulting from unfavorable IRS determinations on certain tax matters and certain other potential tax liabilities
2001 Plan    The Amended and Restated 2001 Moody’s Corporation Key Employees’ Stock Incentive Plan
2005 Agreement    Note purchase agreement dated September 30, 2005 relating to the Series 2005-1 Notes
2007 Agreement    Note purchase agreement dated September 7, 2007 relating to the Series 2007-1 Notes
2007 Facility    Revolving credit facility of $1 billion entered into on September 28, 2007, expiring in 2012
2007 Restructuring
Plan
   The Company’s 2007 restructuring plan approved December 31, 2007
2008 Term Loan    Five-year $150.0 million senior unsecured term loan entered into by the Company on May 7, 2008
2009 Restructuring
Plan
   The Company’s 2009 restructuring plan approved March 27, 2009
2010 Indenture    Supplemental indenture and related agreements dated August 19, 2010, relating to the 2010 Senior Notes
2010 Senior Notes    Principal amount of $500.0 million, 5.50% senior unsecured notes due in September 2020 pursuant to the 2010 Indenture
2012 Facility    Revolving credit facility of $1 billion entered into on April 18, 2012, expiring in 2017
2012 Indenture    Supplemental indenture and related agreements dated August 18, 2012, relating to the 2012 Senior Notes
2012 Senior Notes    Principal amount of $500 million, 4.50% senior unsecured notes due in September 2022 pursuant to the 2012 Indenture
7WTC    The Company’s corporate headquarters located at 7 World Trade Center
7WTC Lease    Operating lease agreement entered into on October 20, 2006
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
NOTE 1 DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Moody’s is a provider of (i) credit ratings, (ii) credit, capital markets and economic research, data and analytical tools, (iii) software solutions and related risk management services, (iv) quantitative credit risk measures, financial services training and certification services and (v) outsourced research and analytical services to institutional customers. Moody’s has two reportable segments: MIS and MA.

MIS, the credit rating agency, publishes credit ratings on a wide range of debt obligations and the entities that issue such obligations in markets worldwide. Revenue is derived from the originators and issuers of such transactions who use MIS ratings in the distribution of their debt issues to investors.

MA, which includes all of the Company’s non-rating commercial activities, develops a wide range of products and services that support financial analysis and risk management activities of institutional participants in global financial markets. Within its Research, Data and Analytics business, MA distributes research and data developed by MIS as part of its ratings process, including in-depth research on major debt issuers, industry studies and commentary on topical credit-related events. The RD&A business also produces economic research as well as data and analytical tools such as quantitative credit risk scores. Within its Enterprise Risk Solutions business (formerly referred to as Risk Management Software), MA provides software solutions as well as related risk management services. The Professional Services business provides outsourced research and analytical services along with financial training and certification programs.

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

Basis of Consolidation

The consolidated financial statements include those of Moody’s Corporation and its majority- and wholly-owned subsidiaries. The effects of all intercompany transactions have been eliminated. Investments in companies for which the Company has significant influence over operating and financial policies but not a controlling interest are accounted for on an equity basis.

The Company applies the guidelines set forth in Topic 810 of the ASC in assessing its interests in variable interest entities to decide whether to consolidate that entity. The Company has reviewed the potential variable interest entities and determined that there are no consolidation requirements under Topic 810 of the ASC.

Cash and Cash Equivalents

Cash equivalents principally consist of investments in money market mutual funds and high-grade commercial paper with maturities of three months or less when purchased.

Property and Equipment

Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives. Expenditures for maintenance and repairs that do not extend the economic useful life of the related assets are charged to expense as incurred.

Research and Development Costs

All research and development costs are expensed as incurred. These costs primarily reflect the development of credit processing software and quantitative credit risk assessment products sold by the MA segment. These costs also reflect expenses for new quantitative research and business ideas that potentially warrant near-term investment within MIS or MA which could potentially result in commercial opportunities for the Company.

Research and development costs were $16.1 million, $29.8 million, and $20.3 million for the years ended December 31, 2012, 2011 and 2010, respectively, and are included in operating expenses within the Company’s consolidated statements of operations. These costs generally consist of professional services provided by third parties and compensation costs of employees.

Costs for internally developed computer software that will be sold, leased or otherwise marketed are capitalized when technological feasibility has been established. These costs primarily relate to the development or enhancement of credit processing software and quantitative credit risk assessment products sold by the MA segment, to be licensed to customers and generally consist of professional services provided by third parties and compensation costs of employees that develop the software. Judgment is required in determining when technological feasibility of a product is established and the Company believes that technological feasibility for its software products is reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to customers. Accordingly, costs for internally developed computer software that will be sold, leased or otherwise marketed that were eligible for capitalization under Topic 985 of the ASC as well as the related amortization expense related to such costs were immaterial for the years ended December 31, 2012, 2011 and 2010.

Computer Software Developed or Obtained for Internal Use

The Company capitalizes costs related to software developed or obtained for internal use. These assets, included in property and equipment in the consolidated balance sheets, relate to the Company’s accounting, product delivery and other systems. Such costs generally consist of direct costs for third-party license fees, professional services provided by third parties and employee compensation, in each case incurred either during the application development stage or in connection with upgrades and enhancements that increase functionality. Such costs are depreciated over their estimated useful lives on a straight-line basis. Costs incurred during the preliminary project stage of development as well as maintenance costs are expensed as incurred.

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

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

The Company has five reporting units: one in MIS that encompasses all of Moody’s ratings operations and four reporting units within MA: RD&A, ERS, Financial Services Training and Certifications and Copal Partners. The RD&A reporting unit encompasses the distribution of investor-oriented research and data developed by MIS as part of its ratings process, in-depth research on major debt issuers, industry studies, economic research and commentary on topical events and credit analytic tools. The ERS reporting unit consists of credit risk management and compliance software that is sold on a license or subscription basis as well as related advisory services for implementation and maintenance. In the first quarter of 2012, a division formerly in the RD&A reporting unit which provided various financial modeling services was transferred to the ERS reporting unit. Additionally, in the second quarter of 2012, the CSI reporting unit, which consisted of all operations relating to CSI which was acquired in November 2010, was integrated into MA’s training reporting unit to form the FSTC reporting unit. The new FSTC reporting unit consists of the portion of the MA business that offers both credit training as well as other professional development training and certification services. In the fourth quarter of 2011, the Company acquired Copal which is deemed to be separate reporting unit at December 31, 2012. Also, in December 2011, the Company acquired B&H which is part of the ERS reporting unit.

Rent Expense

The Company records rent expense on a straight-line basis over the life of the lease. In cases where there is a free rent period or future fixed rent escalations the Company will record a deferred rent liability. Additionally, the receipt of any lease incentives will be recorded as a deferred rent liability which will be amortized over the lease term as a reduction of rent expense.

Stock-Based Compensation

The Company records compensation expense for all share-based payment award transactions granted to employees based on the fair value of the equity instrument at the time of grant. This includes shares issued under employee stock purchase plans, stock options and restricted stock. The Company has also established a pool of additional paid-in capital related to the tax effects of employee share-based compensation, which is available to absorb any recognized tax deficiencies.

Derivative Instruments and Hedging Activities

Based on the Company’s risk management policy, from time to time the Company may use derivative financial instruments to reduce exposure to changes in foreign exchange rates and interest rates. The Company does not enter into derivative financial instruments for speculative purposes. All derivative financial instruments are recorded on the balance sheet at their respective fair values. The changes in the value of derivatives that qualify as fair value hedges are recorded currently into earnings. Changes in the derivative’s fair value that qualify as cash flow hedges are recorded to accumulated other comprehensive income or loss, to the extent the hedge is effective, and such amounts are reclassified to earnings in the same period or periods during which the hedged transaction affects income. Changes in the derivative’s fair value that qualify as net investment hedges are recorded to accumulated other comprehensive income or loss, to the extent the hedge is effective.

 

Revenue Recognition

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or the services have been provided and accepted by the customer when applicable, fees are determinable and the collection of resulting receivables is considered probable.

In October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”). The standard changed the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration based on the relative selling price of each deliverable. The Company adopted ASU 2009-13 on a prospective basis for applicable transactions originating or materially modified on or after January 1, 2010. If applied in the same manner to the year ended December 31, 2009, ASU 2009-13 would not have had a material impact on net revenue reported for both its MIS and MA segments in terms of the timing and pattern of revenue recognition. The adoption of ASU 2009-13 did not have a significant effect on the Company’s net revenue in the period of adoption and also did not have a significant effect on the Company’s net revenue in periods after the initial adoption when applied to multiple element arrangements based on the currently anticipated business volume and pricing.

For 2010 and future periods, pursuant to the guidance of ASU 2009-13, when a sales arrangement contains multiple deliverables, the Company allocates revenue to each deliverable based on its relative selling price which is determined based on its vendor specific objective evidence (“VSOE”) if available, third party evidence (“TPE”) if VSOE is not available, or estimated selling price (“ESP”) if neither VSOE nor TPE is available.

The Company’s products and services will generally continue to qualify as separate units of accounting under ASU 2009-13. The Company evaluates each deliverable in an arrangement to determine whether it represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting when it has stand-alone value to the customers and if the arrangement includes a customer refund or return right relative to the delivered item and the delivery and performance of the undelivered item is considered probable and substantially in the Company’s control. In instances where the aforementioned criteria are not met, the deliverable is combined with the undelivered items and revenue recognition is determined as one single unit.

The Company determines whether its selling price in a multi-element transaction meets the VSOE criteria by using the price charged for a deliverable when sold separately. In instances where the Company is not able to establish VSOE for all deliverables in a multiple element arrangement, which may be due to the Company infrequently selling each element separately, not selling products within a reasonably narrow price range, or only having a limited sales history, the Company attempts to establish TPE for deliverables. The Company determines whether TPE exists by evaluating largely similar and interchangeable competitor products or services in standalone sales to similarly situated customers. However, due to the difficulty in obtaining third party pricing, possible differences in its market strategy from that of its peers and the potential that products and services offered by the Company may contain a significant level of differentiation and/or customization such that the comparable pricing of products with similar functionality cannot be obtained, the Company generally is unable to reliably determine TPE. Based on the selling price hierarchy established by ASU 2009-13, when the Company is unable to establish selling price using VSOE or TPE, the Company will establish an ESP. ESP is the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company establishes its best estimate of ESP considering internal factors relevant to is pricing practices such as costs and margin objectives, standalone sales prices of similar products, percentage of the fee charged for a primary product or service relative to a related product or service, and customer segment and geography. Additional consideration is also given to market conditions such as competitor pricing strategies and market trend. The Company reviews its determination of VSOE, TPE and ESP on an annual basis or more frequently as needed.

In the MIS segment, revenue attributed to initial ratings of issued securities is recognized when the rating is issued. Revenue attributed to monitoring of issuers or issued securities is recognized ratably over the period in which the monitoring is performed, generally one year. In the case of commercial mortgage-backed securities, derivatives, international residential mortgage-backed and asset-backed securities, issuers can elect to pay the monitoring fees upfront. These fees are deferred and recognized over the future monitoring periods based on the expected lives of the rated securities, which ranged from two to 52 years at December 31, 2012. At December 31, 2012, 2011 and 2010, deferred revenue related to these securities was approximately $82 million, $79 million, and $76 million.

Multiple element revenue arrangements in the MIS segment are generally comprised of an initial rating and the related monitoring service. Beginning January 1, 2010, in instances where monitoring fees are not charged for the first year monitoring effort, fees are allocated to the initial rating and monitoring services based on the relative selling price of each service to the total arrangement fees. The Company generally uses ESP in determining the selling price for its initial ratings as the Company rarely sells initial ratings separately without providing related monitoring services and thus is unable to establish VSOE or TPE for initial ratings. Prior to January 1, 2010 and pursuant to the previous accounting standards, for these types of arrangements the initial rating fee was first allocated to the monitoring service determined based on the estimated fair market value of monitoring services, with the residual amount allocated to the initial rating. Under ASU 2009-13 this practice can no longer be used for non-software deliverables upon the adoption of ASU 2009-13.

 

MIS estimates revenue for ratings of commercial paper for which, in addition to a fixed annual monitoring fee, issuers are billed quarterly based on amounts outstanding. Revenue is accrued each quarter based on estimated amounts outstanding and is billed when actual data is available. The estimate is determined based on the issuers’ most recent reported quarterly data. At December 31, 2012, 2011 and 2010, accounts receivable included approximately $22 million, $24 million, and $25 million, respectively, related to accrued commercial paper revenue. Historically, MIS has not had material differences between the estimated revenue and the actual billings. Furthermore, for certain annual monitoring services, fees are not invoiced until the end of the annual monitoring period. Revenue is accrued ratably over the monitoring period.

In the MA segment, products and services offered by the Company include software licenses and related maintenance, subscriptions, and professional services. Revenue from subscription based products, such as research and data subscriptions and certain software-based credit risk management subscription products, is recognized ratably over the related subscription period, which is principally one year. Revenue from sale of perpetual licenses of credit processing software is generally recognized at the time the product master or first copy is delivered or transferred to and accepted by the customer. Software maintenance revenue is recognized ratably over the annual maintenance period. Revenue from services rendered within the professional services line of business is generally recognized as the services are performed. If uncertainty exists regarding customer acceptance of the product or service, revenue is not recognized until acceptance occurs. A large portion of annual research and data subscriptions and annual software maintenance are invoiced in the months of November, December and January.

Products and services offered within the MA segment are sold either stand-alone or together in various combinations. In instances where a multiple element arrangement includes software and non-software deliverables, revenue is allocated to the non-software deliverables and to the software deliverables, as a group, using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. Revenue is recognized for each element based upon the conditions for revenue recognition noted above.

If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is allocated to each software deliverable using VSOE. In the instances where the Company is not able to determine VSOE for all of the deliverables of an arrangement, the Company allocates the revenue to the undelivered elements equal to its VSOE and the residual revenue to the delivered elements. If the Company is unable to determine VSOE for an undelivered element, the Company defers all revenue allocated to the software deliverables until the Company has delivered all of the elements or when VSOE has been determined for the undelivered elements.

Accounts Receivable Allowances

Moody’s records an allowance for estimated future adjustments to customer billings as a reduction of revenue, based on historical experience and current conditions. Such amounts are reflected as additions to the accounts receivable allowance. Additionally, estimates of uncollectible accounts are recorded as bad debt expense and are reflected as additions to the accounts receivable allowance. Billing adjustments and uncollectible account write-offs are recorded against the allowance. Moody’s evaluates its accounts receivable allowance by reviewing and assessing historical collection and adjustment experience and the current status of customer accounts. Moody’s also considers the economic environment of the customers, both from an industry and geographic perspective, in evaluating the need for allowances. Based on its analysis, Moody’s adjusts its allowance as considered appropriate in the circumstances.

Contingencies

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

For claims, litigation and proceedings and governmental investigations and inquires not related to income taxes, where it is both probable that a liability is expected to be incurred and the amount of loss can be reasonably estimated, the Company records liabilities in the consolidated financial statements and periodically adjusts these as appropriate. When the reasonable estimate of the loss is within a range of amounts, the minimum amount of the range is accrued unless some higher amount within the range is a better estimate than another amount within the range. In other instances, because of uncertainties related to the probable outcome and/or the amount or range of loss, management does not record a liability but discloses the contingency if significant. As additional information becomes available, the Company adjusts its assessments and estimates of such matters accordingly. In view of the inherent difficulty of predicting the outcome of litigation, regulatory, governmental investigations and inquiries, enforcement and similar matters and contingencies, particularly where the claimants seek large or indeterminate damages or where the parties assert novel legal theories or the matters involve a large number of parties, the Company cannot predict what the eventual outcome of the pending matters will be or the timing of any resolution of such matters. The Company also cannot predict the impact (if any) that any such matters may have on how its business is conducted, on its competitive position or on its financial position, results of operations or cash flows. As the process to resolve any pending matters progresses, management will continue to review the latest information available and assess its ability to predict the outcome of such matters and the effects, if any, on its operations and financial condition. However, in light of the large or indeterminate damages sought in some of them, the absence of similar court rulings on the theories of law asserted and uncertainties regarding apportionment of any potential damages, an estimate of the range of possible losses cannot be made at this time.

The Company’s wholly-owned insurance subsidiary insures the Company against certain risks including but not limited to deductibles for worker’s compensation, employment practices litigation, employee medical claims and terrorism, for which the claims are not material to the Company. In addition, for claim years 2008 and 2009, the insurance subsidiary insured the Company for defense costs related to professional liability claims. For matters insured by the Company’s insurance subsidiary, Moody’s records liabilities based on the estimated total claims expected to be paid and total projected costs to defend a claim through its anticipated conclusion. The Company determines liabilities based on an assessment of management’s best estimate of claims to be paid and legal defense costs as well as actuarially determined estimates. The Cheyne SIV and Rhinebridge SIV matters more fully discussed in Note 17 are both cases from the 2008/2009 claims period, and accordingly these matters are covered by the Company’s insurance subsidiary. Defense costs for matters not self-insured by the Company’s wholly-owned insurance subsidiary are expensed as services are provided.

For income tax matters, the Company employs the prescribed methodology of Topic 740 of the ASC which requires a company to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.

Operating Expenses

Operating expenses are charged to income as incurred. These expenses include costs associated with the development and production of the Company’s products and services and their delivery to customers. These expenses principally include employee compensation and benefits and travel costs that are incurred in connection with these activities.

Selling, General and Administrative Expenses

SG&A expenses are charged to income as incurred. These expenses include such items as compensation and benefits for corporate officers and staff and compensation and other expenses related to sales of products. They also include items such as office rent, business insurance, professional fees and gains and losses from sales and disposals of assets.

Redeemable Noncontrolling Interest

The Company records its redeemable noncontrolling interest at fair value on the date of the related business combination transaction. The redeemable noncontrolling interest represents noncontrolling shareholders’ interest in entities which are controlled but not wholly-owned by Moody’s and for which Moody’s obligation to redeem the minority shareholders’ interest is in the control of the minority shareholders. Subsequent to the initial measurement, the redeemable noncontrolling interest is recorded at the greater of its redemption value or its carrying value at the end of each reporting period. If the redeemable noncontrolling interest is carried at its redemption value, the difference between the redemption value and the carrying value would be adjusted through capital surplus at the end of each reporting period. The Company also performs a quarterly assessment to determine if the aforementioned redemption value exceeds the fair value of the redeemable noncontrolling interest. If the redemption value of the redeemable noncontrolling interest were to exceed its fair value, the excess would reduce the net income attributable to Moody’s shareholders.

Foreign Currency Translation

For all operations outside the U.S. where the Company has designated the local currency as the functional currency, assets and liabilities are translated into U.S. dollars using end of year exchange rates, and revenue and expenses are translated using average exchange rates for the year. For these foreign operations, currency translation adjustments are accumulated in a separate component of shareholders’ equity.

Comprehensive Income

Comprehensive income represents the change in net assets of a business enterprise during a period due to transactions and other events and circumstances from non-owner sources including foreign currency translation impacts, net actuarial losses and net prior service costs related to pension and other post-retirement plans and derivative instruments.

Income Taxes

The Company accounts for income taxes under the asset and liability method in accordance with ASC Topic 740. Therefore, income tax expense is based on reported income before income taxes and deferred income taxes reflect the effect of temporary differences between the amounts of assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes.

 

The Company classifies interest related to unrecognized tax benefits as a component of interest expense in its consolidated statements of operations. Penalties are recognized in other non-operating expenses. For UTPs, the Company first determines whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.

For certain of its non-U.S. subsidiaries, the Company has deemed the undistributed earnings relating to these subsidiaries to be indefinitely reinvested within its foreign operations. Accordingly, the Company has not provided deferred income taxes on these indefinitely reinvested earnings. It is not practicable to determine the amount of deferred taxes that might be required to be provided if such earnings were distributed in the future due to complexities in the tax laws and in the hypothetical calculations that would have to be made.

Fair Value of Financial Instruments

The Company’s financial instruments include cash, cash equivalents, trade receivables and payables, all of which are short-term in nature and, accordingly, approximate fair value. Additionally, the Company invests in short-term investments that are carried at cost, which approximates fair value due to their short-term maturities. Also, the Company uses derivative instruments, as further described in Note 5, to manage certain financial exposures that occur in the normal course of business. These derivative instruments are carried at fair value on the Company’s consolidated balance sheets. The Company also is subject to contingent consideration obligations related to certain of its acquisitions as more fully discussed in Note 7. These obligations are carried at their estimated fair value within the Company’s consolidated balance sheets.

Fair value is defined by the ASC as the price that would be received from selling an asset or paid to transfer a liability (i.e., an exit price) in an orderly transaction between market participants at the measurement date. The determination of this fair value is based on the principal or most advantageous market in which the Company could commence transactions and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance. Also, determination of fair value assumes that market participants will consider the highest and best use of the asset.

The ASC establishes a fair value hierarchy whereby the inputs contained in valuation techniques used to measure fair value are categorized into three broad levels as follows:

Level 1 : quoted market prices in active markets that the reporting entity has the ability to access at the date of the fair value measurement;

Level 2 : inputs other than quoted market prices described in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities;

Level 3 : unobservable inputs that are supported by little or no market activity and that are significant to the fair value measurement of the assets or liabilities.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk principally consist of cash and cash equivalents, short-term investments, trade receivables and derivatives.

Cash equivalents consist of investments in high quality investment-grade securities within and outside the U.S. The Company manages its credit risk exposure by allocating its cash equivalents among various money market mutual funds and issuers of high- grade commercial paper. Short-term investments primarily consist of certificates of deposit and high-grade corporate bonds in Korea as of December 31, 2012 and 2011. The Company manages its credit risk exposure on cash equivalents and short-term investments by limiting the amount it can invest with any single issuer. No customer accounted for 10% or more of accounts receivable at December 31, 2012 or 2011.

Earnings per Share of Common Stock

Basic shares outstanding is calculated based on the weighted average number of shares of common stock outstanding during the reporting period. Diluted shares outstanding is calculated giving effect to all potentially dilutive common shares, assuming that such shares were outstanding during the reporting period.

Pension and Other Retirement Benefits

Moody’s maintains various noncontributory DBPPs as well as other contributory and noncontributory retirement plans. The expense and assets/liabilities that the Company reports for its pension and other retirement benefits are dependent on many assumptions concerning the outcome of future events and circumstances. These assumptions represent the Company’s best estimates and may vary by plan. The differences between the assumptions for the expected long-term rate of return on plan assets and actual experience is spread over a five-year period to the market related value of plan assets which is used in determining the expected return on assets component of annual pension expense. All other actuarial gains and losses are generally deferred and amortized over the estimated average future working life of active plan participants.

The Company recognizes as an asset or liability in its statement of financial position the funded status of its defined benefit post-retirement plans, measured on a plan-by-plan basis. Changes in the funded status are recorded as part of other comprehensive income during the period the changes occur.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Estimates are used for, but not limited to, revenue recognition, accounts receivable allowances, income taxes, contingencies, valuation of long-lived and intangible assets, goodwill, pension and other retirement benefits, stock-based compensation, and depreciation and amortization rates for property and equipment and computer software.

The financial market volatility and poor economic conditions beginning in the third quarter of 2007 and continuing into 2012, both in the U.S. and in many other countries where the Company operates, have impacted and will continue to impact Moody’s business. If such conditions were to continue they could have a material impact to the Company’s significant accounting estimates discussed above, in particular those around accounts receivable allowances, valuations of investments in affiliates, goodwill and other acquired intangible assets, and pension and other retirement benefits.

Recently Issued Accounting Pronouncements

In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. The objective of this ASU is to improve reporting by requiring entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in the statement of operations. The amendments in this ASU are required to be applied retrospectively and are effective for reporting periods beginning after December 15, 2012. The adoption of this ASU will not have any impact on the Company’s consolidated financial statements other than revising the presentation relating to items reclassified from accumulated other comprehensive income to the statement of operations.

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

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,  
     2012      2011      2010  
Basic      223.2        226.3        235.0  
Dilutive effect of shares issuable under stock-based compensation plans      3.4        3.1        1.6  
  

 

 

    

 

 

    

 

 

 
Diluted      226.6        229.4        236.6  
  

 

 

    

 

 

    

 

 

 

Antidilutive options to purchase common shares and restricted stock as well as contingently issuable restricted stock which are excluded from the table above

     7.5        10.6        15.5  
  

 

 

    

 

 

    

 

 

 

 

The calculation of diluted EPS requires certain assumptions regarding the use of both cash proceeds and assumed proceeds that would be received upon the exercise of stock options and vesting of restricted stock outstanding as of December 31, 2012, 2011 and 2010. These assumed proceeds include Excess Tax Benefits and any unrecognized compensation on the awards.

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 11 months and one to seven months as of December 31, 2012 and 2011, 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.

Interest Rate Swaps

In the fourth quarter of 2010, the Company entered into interest rate swaps with a total notional amount of $300 million to convert the fixed interest rate on the Series 2005-1 Notes to a floating interest rate based on the 3-month LIBOR. The purpose of this hedge was to mitigate the risk associated with changes in the fair value of the Series 2005-1 Notes, thus the Company has designated these swaps as fair value hedges. The fair value of the swaps is adjusted quarterly with a corresponding adjustment to the carrying value of the Series 2005-1 Notes. The changes in the fair value of the hedges and the underlying hedged item generally offset and the net cash settlements on the swaps are recorded each period within interest income (expense), net in the Company’s consolidated statements of operations.

In May 2008, the Company entered into interest rate swaps with a total notional amount of $150 million to protect against fluctuations in the LIBOR-based variable interest rate on the 2008 Term Loan further described in Note 14. These interest rate swaps are designated as cash flow hedges. Accordingly, changes in the fair value of these swaps are recorded to other comprehensive income or loss, to the extent that the hedge is effective, and such amounts are reclassified to earnings in the same period during which the hedged transaction affects income.

Foreign Exchange Forwards and Options

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

The Company also enters into foreign exchange forwards to mitigate the change in fair value on certain assets and liabilities denominated in currencies other than the subsidiary’s functional currency. These forward contracts are not designated as hedging instruments under the applicable sections of Topic 815 of the ASC. Accordingly, changes in the fair value of these contracts are recognized immediately in other non-operating income (expense), net in the Company’s consolidated statements of operations along with the FX gain or loss recognized on the assets and liabilities denominated in a currency other than the subsidiary’s functional currency. These contracts have expiration dates at various times through March 2013.

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

 

     December 31,
2012
     December 31,
2011
 
Notional amount of Currency Pair:      
Contracts to purchase USD with euros    $ 34.3      $ 27.5  
Contracts to sell USD for euros    $ 48.4      $ 47.7  
Contracts to purchase USD with GBP    $ 2.1      $ 2.4  
Contracts to sell USD for GBP    $ 1.7      $ 17.6  
Contracts to purchase USD with other foreign currencies    $ 6.7      $ 3.2  
Contracts to sell USD for other foreign currencies    $ 5.1      $ 7.6  
Contracts to purchase euros with other foreign currencies    14.4      13.6  
Contracts to purchase euros with GBP         1.6  
Contracts to sell euros for GBP    8.9      7.2  

 

Net Investment Hedges

The Company enters into foreign currency forward contracts to hedge the exposure related to non-U.S. dollar net investments in certain foreign subsidiaries against adverse changes in foreign exchange rates. These forward contracts are designated as hedging instruments under the applicable sections of Topic 815 of the ASC. Hedge effectiveness is assessed based on the overall changes in the fair value of the forward contracts on a pre-tax basis. For hedges that meet the effectiveness requirements, any change in fair value for the hedge is recorded in the currency translation adjustment component of AOCI. Any change in the fair value of these hedges that is the result of ineffectiveness would be recognized immediately in other non-operating (expense) income in the Company’s consolidated statements of operations. These outstanding contracts expire in March 2013.

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

 

     December 31,
2012
     December 31,
2011
 
Notional amount of Currency Pair:      
Contracts to sell euros for USD    50.0        N/A   

The table below shows the classification between assets and liabilities on the Company’s consolidated balance sheets for the fair value of the derivative instruments:

 

    

Fair Value of Derivative Instruments

 
    

Balance

Sheet Location

   December 31,
2012
     December 31,
2011
 
Assets:         
Derivatives designated as accounting hedges:         
Interest rate swaps    Other assets    $ 13.8      $ 11.5  
     

 

 

    

 

 

 
Total derivatives designated as accounting hedges         13.8        11.5  
Derivatives not designated as accounting hedges:         
FX forwards on certain assets and liabilities    Other current assets      1.4        1.1  
     

 

 

    

 

 

 
Total       $ 15.2      $ 12.6  
     

 

 

    

 

 

 
Liabilities:         
Derivatives designated as accounting hedges:         
Interest rate swaps    Accounts payable and accrued liabilities    $ 0.7      $ 4.5  
FX forwards on net investment in certain foreign subsidiaries    Accounts payable and accrued liabilities      1.0         
     

 

 

    

 

 

 
Total derivatives designated as accounting hedges         1.7        4.5  
Derivatives not designated as accounting hedges:         
FX forwards on certain assets and liabilities    Accounts payable and accrued liabilities      0.7        2.3  
     

 

 

    

 

 

 
Total       $ 2.4      $ 6.8  
     

 

 

    

 

 

 

 

The following table summarizes the net gain (loss) on the Company’s foreign exchange forwards which are not designated as hedging instruments as well as the gain (loss) on the interest rate swaps designated as fair value hedges:

 

          Amount of Gain (Loss)
Recognized in consolidated
statement of operations
 
          Year Ended December 31,  
          2012      2011     2010  
Derivatives designated as accounting hedges    Location on Consolidated Statements of Operations        
Interest rate swaps    Interest Expense, net    $ 3.6      $ 4.1        
     

 

 

    

 

 

   

 

 

 
Derivatives not designated as accounting hedges           
Foreign exchange forwards    Other non-operating (expense) income    $ 0.9      $ (1.4     (2.2
     

 

 

    

 

 

   

 

 

 

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

 

Derivatives in Cash Flow
Hedging Relationships

  Amount of
Gain/(Loss)
Recognized in
AOCI on
Derivative
(Effective
Portion)
     Location of
Gain/(Loss)
Reclassified from
AOCI into
Income
(Effective
Portion)
  Amount of
Gain/(Loss)
Reclassified
from AOCI
into Income
(Effective
Portion)
     Location of Gain/(Loss)
Recognized in Income
on Derivative
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)
  Amount of
Gain/(Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion
and Amount
Excluded from
Effectiveness
Testing)
 
    Year Ended
December 31,
         Year Ended
December 31,
         Year Ended
December 31,
 
    2012     2011     2010          2012     2011     2010          2012     2011     2010  
FX options   $     $     $      Revenue   $     $ (0.2)      $ (1.0)       Revenue   $     $      $   
Interest rate swaps     (0.1)        (0.6)        (3.1)       Interest income

(expense), net

    (2.4)        (3.0)        (2.8)       N/A                  
 

 

 

   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

 
Total   $ (0.1)      $ (0.6)      $ (3.1)         $ (2.4)      $ (3.2)      $ (3.8)         $      $     $   
 

 

 

   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

 

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

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

 

Derivatives in Net Investment

Hedging Relationships

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

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

into Income
(Effective
Portion)
     Location of Gain/(Loss)
Recognized in Income
on Derivative
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)
   Amount of
Gain/(Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion

and Amount
Excluded from
Effectiveness
Testing)
 
     Year Ended
December 31,
          Year Ended
December 31,
          Year Ended
December 31,
 
     2012     2011           2012      2011           2012      2011  
FX forwards    $ (2.2   $  —       N/A    $      $       N/A    $       $  —   
  

 

 

   

 

 

       

 

 

    

 

 

       

 

 

    

 

 

 
Total    $ (2.2   $          $       $          $       $   
  

 

 

   

 

 

       

 

 

    

 

 

       

 

 

    

 

 

 

 

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
 
     December 31,
2012
    December 31,
2011
 
FX forwards on net investment hedges    $ (2.2   $  
Interest rate swaps (1)      (0.7     (3.0
  

 

 

   

 

 

 

Total

   $ (2.9   $ (3.0
  

 

 

   

 

 

 

 

(1)

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

PROPERTY AND EQUIPMENT, NET
PROPERTY AND EQUIPMENT, NET
NOTE 6 PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of:

 

     December 31,  
     2012     2011  
Office and computer equipment (3 – 20 year estimated useful life)    $ 119.7     $ 106.8  
Office furniture and fixtures (5 – 10 year estimated useful life)      40.3       40.6  
Internal-use computer software (3 – 5 year estimated useful life)      263.9       241.8  
Leasehold improvements (3 – 20 year estimated useful life)      197.5       195.8  
  

 

 

   

 

 

 

Total property and equipment, at cost

     621.4       585.0  
Less: accumulated depreciation and amortization      (314.3     (258.2
  

 

 

   

 

 

 
Total property and equipment, net    $ 307.1     $ 326.8  
  

 

 

   

 

 

 

Depreciation and amortization expense related to the above assets was $63.4 million, $58.7 million, and $49.9 million for the years ended December 31, 2012, 2011 and 2010, respectively.

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.

Barrie & Hibbert, Limited

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

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

 

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

 

Current assets       $ 15.2  
Property and equipment, net         0.7  
Intangible assets:      

Trade name (5 year weighted average life)

   $ 1.9     

Client relationships (18 year weighted average life)

     8.3     

Software (7 year weighted average life)

     16.8     

Other intangibles (2 year weighted average life)

     0.1     
  

 

 

    

Total intangible assets (12 year weighted average life)

        27.1  
Goodwill         54.6  
Liabilities assumed         (18.1
     

 

 

 
Net assets acquired       $ 79.5  
     

 

 

 

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

The Company incurred approximately $1 million of costs directly related to the acquisition of B&H during the year ended December 31, 2011. These costs, which primarily consisted of consulting and legal fees, are recorded within selling, general and administrative expenses in the Company’s consolidated statements of operations.

The amount of revenue and expenses included in the Company’s consolidated statement of operations for B&H from the acquisition date through December 31, 2011 was not material. The near term impact to operations and cash flow from this acquisition was not material to the Company’s consolidated financial statements.

Copal Partners

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

 

Cash paid    $ 125.0  
Put/call option for non-controlling interest      68.0  
Contingent consideration liability assumed      6.8  
  

 

 

 
Total fair value of consideration transferred    $ 199.8  
  

 

 

 

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

Additionally, as part of the consideration transferred, the Company issued a note payable of $14.2 million to the sellers which is more fully discussed in Note 14. The Company has a right to reduce the amount payable under this note with payments that it may be required to make relating to certain UTPs associated with the acquisition. Accordingly, this note payable is not carried on the consolidated balance sheet as of December 31, 2012 and 2011 in accordance with certain indemnification arrangements relating to these UTP’s which are more fully discussed below.

 

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

Each of these contingent payments has a maximum payout of $2.5 million. Further information on the inputs and methodologies utilized to derive the fair value of these contingent consideration liabilities are discussed in Note 9.

The Company incurred approximately $7 million of costs directly related to the acquisition of Copal during the year ended December 31, 2011. These costs, which primarily consist of consulting and legal fees, are recorded within selling, general and administrative expenses in the Company’s consolidated statements of operations.

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

 

Current assets       $ 15.5  
Property and equipment, net         0.5  
Intangible assets:      

Trade name (15 year weighted average life)

   $ 8.6     

Client relationships (16 year weighted average life)

     66.2     

Other (2 year weighted average life)

     4.4     
  

 

 

    

Total intangible assets (15 year weighted average life)

        79.2  
Goodwill         136.9  
Indemnification asset         18.8  
Other assets         6.6  
Liabilities assumed         (57.7
     

 

 

 
Net assets acquired       $ 199.8  
     

 

 

 

Current assets include acquired cash of approximately $7 million. The acquired goodwill, which has been assigned to the MA segment, will not be deductible for tax.

In connection with the acquisition, the Company assumed liabilities relating to UTPs. These UTPs are included in the liabilities assumed in the table above. The sellers have contractually indemnified the Company against any potential payments that may have to be made regarding these UTPs. Under the terms of the acquisition agreement, a portion of the purchase price was remitted to an escrow agent for various uncertainties associated with the transaction of which a portion relates to these UTPs. Additionally, the Company is contractually indemnified for payments in excess of the amount paid into escrow via a reduction to the amount payable under the aforementioned note payable issued to the sellers. Accordingly, the Company carries an indemnification asset on its consolidated balance sheet at December 31, 2012 and 2011 for which a portion has been offset by the note payable in the amount of $14.2 million.

As of December 31, 2012, Copal operates as its own reporting unit. Accordingly, goodwill associated with the acquisition is part of the Copal reporting unit within the MA segment. Copal will remain a separate reporting unit until MA management completes evaluation of options for integrating the entity into the other MA reporting units.

The amount of revenue and expenses for Copal from the acquisition date through December 31, 2011 was not material. The near term impact to operations and cash flow from this acquisition was not material to the Company’s consolidated financial statements.

KIS Pricing, Inc.

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

 

CSI Global Education, Inc.

On November 18, 2010, a subsidiary of the Company acquired CSI Global Education, Inc., Canada’s leading provider of financial learning, credentials, and certification. CSI operates within MA, strengthening the Company’s capabilities for delivering credit and other financial training programs to financial institutions worldwide and bolsters Moody’s efforts to serve as an essential resource to financial market participants. The purchase price was funded with cash on hand.

The aggregate purchase price was $151.4 million in net cash payments to the sellers. There is a 2.5 million Canadian dollar contingent cash payment which is dependent upon the achievement of a certain contractual milestone by January 2016 which is more fully discussed in Note 9.

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

 

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

Trade name (30 year weighted average life)

   $ 9.0     

Client relationships (21 year weighted average life)

     63.1     

Trade secret (13 year weighted average life)

     5.8     
  

 

 

    

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 deductible for tax. In 2012 CSI was integrated into MA’s training reporting unit to form the FSTC reporting unit.

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

For all of the acquisitions described above, the Company has not presented proforma combined results for these acquisitions because the impact on the previously reported statements of operations would not have been material.

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,  
     2012     2011  
     MIS      MA     Consolidated     MIS     MA     Consolidated  
Beginning balance:              

Goodwill

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

Accumulated impairment charge

                                           
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Total      11.0        631.9       642.9       11.4       454.1       465.5  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Additions/adjustments              (4.4     (4.4            198.5       198.5  
Impairment charge              (12.2     (12.2                     
Foreign currency translation adjustments      0.5        10.3       10.8       (0.4     (20.7     (21.1
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Ending balance:              

Goodwill

     11.5        637.8       649.3       11.0       631.9       642.9  

Accumulated impairment charge

             (12.2     (12.2                     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Total    $ 11.5      $ 625.6     $ 637.1     $ 11.0     $ 631.9     $ 642.9  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The 2012 and 2011 additions/adjustments for the MA segment relate to the acquisitions of Copal and B&H in the fourth quarter of 2011, more fully discussed in Note 7.

The impairment charge above relates to goodwill in the FSTC reporting unit within MA. The Company evaluates its goodwill for potential impairment annually on July 31 or more frequently if impairment indicators arise throughout the year. Projected operating results for the FSTC reporting unit at December 31, 2012 were lower than projections utilized for the annual impairment analysis performed at July 31, 2012 reflecting a contraction in spending for training and certification services for many individuals and global financial institutions amidst current macroeconomic uncertainties. Based on this trend and overall macroeconomic uncertainties, the Company lowered its cash flow forecasts for this reporting unit in the fourth quarter of 2012. Accordingly, the Company performed another goodwill impairment assessment as of December 31, 2012 which resulted in an impairment charge of $12.2 million. The fair value of the FSTC reporting unit utilized in the impairment assessment was estimated using a discounted cash flow methodology and comparable public company and precedent transaction multiples.

Acquired intangible assets consisted of:

 

     December 31,  
     2012     2011  
Customer relationships    $ 219.6     $ 217.9  
Accumulated amortization      (74.0     (58.6
  

 

 

   

 

 

 

Net customer relationships

     145.6       159.3  
  

 

 

   

 

 

 
Trade secrets      31.4       31.3  
Accumulated amortization      (16.0     (13.4
  

 

 

   

 

 

 

Net trade secrets

     15.4       17.9  
  

 

 

   

 

 

 
Software      73.2       70.9  
Accumulated amortization      (33.7     (25.1
  

 

 

   

 

 

 

Net software

     39.5       45.8  
  

 

 

   

 

 

 
Trade names      28.3       28.1  
Accumulated amortization      (10.3     (9.0
  

 

 

   

 

 

 

Net trade names

     18.0       19.1  
  

 

 

   

 

 

 
Other      24.9       24.6  
Accumulated amortization      (16.9     (13.1
  

 

 

   

 

 

 

Net other

     8.0       11.5  
  

 

 

   

 

 

 

Total

   $ 226.5      $ 253.6  
  

 

 

   

 

 

 

Other intangible assets primarily consist of databases and covenants not to compete. Amortization expense relating to intangible assets is as follows:

 

     Year Ended December 31,  
     2012      2011      2010  
Amortization expense    $ 30.1      $ 20.5      $ 16.4  

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

 

Year Ended December 31,

      
2013    $ 28.2   
2014      22.9  
2015      21.6  
2016      20.4  
2017      15.5  
Thereafter      117.9  

 

Amortizable intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In conjunction with the assessment of goodwill impairment at July 31, 2012, the Company reviewed the recoverability of certain customer lists within its FSTC reporting unit. This review resulted in an impairment of approximately $1 million in the third quarter of 2012 which is recorded in depreciation and amortization expense in the consolidated statement of operations. The fair value of these customer lists was determined using a discounted cash flow analysis. The Company again reviewed the recoverability of these customer lists in the fourth quarter of 2012 in conjunction with the quantitative goodwill impairment test performed at December 31, 2012. Based on this assessment, there was no further impairment of the customer lists in the fourth quarter of 2012. For all other intangible assets, there were no such events or changes during 2012 that would indicate that the carrying amount of amortizable intangible assets in any of the Company’s reporting units may not be recoverable. This determination was made based on improving market conditions for the reporting unit where the intangible asset resides and an assessment of projected cash flows for all reporting units. Additionally, there were no events or circumstances during 2012 that would indicate the need for an adjustment of the remaining useful lives of these amortizable intangible assets.

 

FAIR VALUE
FAIR VALUE
NOTE  9 FAIR VALUE

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

 

     Fair Value Measurement as of December 31, 2012  

Description

   Balance      Level 1      Level 2      Level 3  
Assets:            

Derivatives (a)

   $ 15.2      $       $ 15.2      $   
  

 

 

    

 

 

    

 

 

    

 

 

 

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  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurement as of December 31, 2011  

Description

   Balance      Level 1      Level 2      Level 3  
Assets:            

Derivatives (a)

   $ 12.6      $       $ 12.6      $   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 12.6      $       $ 12.6      $   
  

 

 

    

 

 

    

 

 

    

 

 

 
Liabilities:            

Derivatives (a)

   $ 6.8      $       $ 6.8      $   

Contingent consideration arising from acquisitions (b)

     9.1                        9.1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15.9      $       $ 6.8      $ 9.1  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Represents interest rate swaps and FX forwards on certain assets and liabilities as well as on certain non U.S. dollar net investments in certain foreign subsidiaries more fully discussed in Note 5.
(b) Represents contingent consideration liabilities pursuant to the agreements for certain MA acquisitions which are more fully discussed in Note 7.

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

 

     Contingent Consideration
Year Ended December 31,
 
     2012     2011  
Balance as of January 1    $ 9.1     $ 2.1  
Issuances             7.4  
Settlements      (0.5     (0.3
Losses included in earnings      0.1       0.3  
Foreign currency translation adjustments      0.3       (0.4
  

 

 

   

 

 

 
Balance as of December 31    $ 9.0     $ 9.1  
  

 

 

   

 

 

 

 

The losses included in earnings in the table above are recorded within SG&A expenses in the Company’s consolidated statements of operations. During the year ended December 31, 2012, there were immaterial gains relating to contingent consideration obligations that were settled during the year. The remaining losses of $0.1 million relate to contingent consideration obligations outstanding at December 31, 2012.

Of the $9.0 million in contingent consideration obligations as of December 31, 2012, $2.5 million is classified within accounts payable and accrued liabilities with the remaining $6.5 million classified in other liabilities within the Company’s consolidated balance sheet.

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

Derivatives:

In determining the fair value of the derivative contracts in the table above, the Company utilizes industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using spot rates, forward points, currency volatilities, interest rates as well as the risk of non-performance of the Company and the counterparties with whom it has derivative contracts. The Company established strict counterparty credit guidelines and only enters into transactions with financial institutions that adhere to these guidelines. Accordingly, the risk of counterparty default is deemed to be minimal.

Contingent Consideration:

At December 31, 2012, the Company has contingent consideration obligations related to the acquisitions of CSI and Copal which are based on certain financial and non-financial metrics set forth in the acquisition agreements. These obligations are measured using Level 3 inputs as defined in the ASC. The Company has recorded the obligations for these contingent consideration arrangements on the date of each respective acquisition based on management’s best estimates of the achievement of the metrics and the value of the obligations are adjusted quarterly.

The contingent consideration obligation for CSI is based on the achievement of a certain contractual milestone by January 2016. The Company utilizes a discounted cash flow methodology to value this obligation. The future expected cash flow for this obligation is discounted using an interest rate available to borrowers with similar credit risk profiles to that of the Company. The most significant unobservable input involved in the measurement of this obligation is the probability that the milestone will be reached by January 2016. At December 31, 2012, the Company expects that this milestone will be reached by the aforementioned date.

There are several contingent consideration obligations relating to the acquisition of Copal which are more fully discussed in Note 7. The Company utilizes discounted cash flow methodologies to value these obligations. The expected future cash flows for these obligations are discounted using a risk-free interest rate plus a credit spread based on the option adjusted spread of the Company’s publicly traded debt as of the valuation date. The most significant unobservable input involved in the measurement of these obligations is the projected future financial results of the applicable Copal entities. Also, for the portion of the obligations which are dependent upon the exercise of the call/put option, the Company has utilized a Monte Carlo simulation model to estimate when the option will be exercised, thus triggering the payment of contingent consideration.

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

DETAIL OF CERTAIN BALANCE SHEET INFORMATION
DETAIL OF CERTAIN BALANCE SHEET INFORMATION
NOTE 10 DETAIL OF CERTAIN BALANCE SHEET INFORMATION

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

 

     December 31,  
     2012      2011  
Other current assets:      

Prepaid taxes

   $ 31.8      $ 27.6  

Prepaid expenses

     47.3        44.6  

Other

     12.8        5.4  
  

 

 

    

 

 

 

Total other current assets

   $ 91.9      $ 77.6  
  

 

 

    

 

 

 
     December 31,  
     2012      2011  
Other assets:      

Investments in joint ventures

   $ 38.3      $ 37.2  

Deposits for real-estate leases

     10.0        12.2  

Other

     47.7        32.6  
  

 

 

    

 

 

 

Total other assets

   $ 96.0      $ 82.0  
  

 

 

    

 

 

 
     December 31,  
     2012      2011  
Accounts payable and accrued liabilities:      

Salaries and benefits

   $ 79.2      $ 67.5  

Incentive compensation

     162.6        114.1  

Profit sharing contribution

     12.6        7.1  

Customer credits, advanced payments and advanced billings

     21.5        17.6  

Self-insurance reserves

     55.8        27.1  

Dividends

     47.7        38.2  

Professional service fees

     30.2        29.7  

Interest accrued on debt

     23.4        15.1  

Accounts payable

     14.3        16.4  

Income taxes (see Note 13)

     56.1        23.4  

Deferred rent-current portion

     1.1        1.7  

Pension and other retirement employee benefits (see Note 11)

     4.4        3.8  

Interest accrued on UTPs

            29.7  

Other

     46.4        60.9  
  

 

 

    

 

 

 

Total accounts payable and accrued liabilities

   $ 555.3      $ 452.3  
  

 

 

    

 

 

 
     December 31,  
     2012      2011  
Other liabilities:      

Pension and other retirement employee benefits (see Note 11)

   $ 213.3      $ 187.5  

Deferred rent-non-current portion

     110.2        108.8  

Interest accrued on UTPs

     10.6        11.8  

Legacy and other tax matters

     37.1        52.6  

Other

     38.9        44.1  
  

 

 

    

 

 

 

Total other liabilities

   $ 410.1      $ 404.8  
  

 

 

    

 

 

 

 

Redeemable Noncontrolling Interest:

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

 

     Year Ended December 31,                                
     2012     2011  
(in millions)    Redeemable Noncontrolling Interest  
Balance January 1,    $ 60.5     $   

Fair value at date of acquisition

           68.0  

Adjustment due to right of offset for UTPs*

     6.8       (6.8

Net earnings

     3.6       1.0  

Distributions

     (3.6 )       

FX translation

     1.6       (1.7

Adjustment to redemption value

     3.4        
  

 

 

   

 

 

 
Balance December 31,    $ 72.3     $ 60.5  
  

 

 

   

 

 

 

 

* Relates to an adjustment for the right of offset pursuant to the Copal acquisition agreement whereby the amount due to the sellers under the put/call arrangement is reduced by the amount of UTPs that the Company may be required to pay. See Note 7 for further detail on this arrangement.

AOCI:

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

 

(in millions)    December 31,  
     2012     2011  

Currency translation adjustments, net of tax

   $ 10.9     $ (23.3

Net actuarial losses and net prior service cost related to pension and other retirement employee benefits, net of tax

     (90.1     (81.2

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

     (2.9     (3.0
  

 

 

   

 

 

 

Total accumulated other comprehensive loss

   $ (82.1   $ (107.5
  

 

 

   

 

 

 

Changes in the Company’s self-insurance reserves are as follows:

 

     Year Ended December 31,  
(in millions)    2012     2011     2010  
Balance January 1,    $ 27.1     $ 30.0     $ 19.9  

Charged to costs and expenses

     38.1       10.9       29.1  

Payments

     (9.4     (13.8     (19.0
  

 

 

   

 

 

   

 

 

 
Balance December 31,*    $ 55.8     $ 27.1     $ 30.0  
  

 

 

   

 

 

   

 

 

 

 

* Refer to Note 2, “Contingencies” for further information on the Company’s self-insurance reserves. These reserves primarily relate to legal defense costs for claims from 2008 and 2009.
PENSION AND OTHER RETIREMENT BENEFITS
PENSION AND OTHER RETIREMENT BENEFITS
NOTE 11 PENSION AND OTHER RETIREMENT BENEFITS

U.S. Plans

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

 

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

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

 

     Pension Plans     Other Retirement Plans  
     2012     2011     2012     2011  
Change in benefit obligation:         

Benefit obligation, beginning of the period

   $ (298.8     (242.5 )   $ (20.2     (15.6

Service cost

     (18.9     (15.1 )     (1.5     (1.1

Interest cost

     (13.1     (13.1 )     (0.7     (0.8

Plan participants’ contributions

                   (0.3     (0.2

Benefits paid

     5.7        13.6        1.0        0.8   

Actuarial gain (loss)

     (11.0     (4.9 )     1.1        (0.9

Assumption changes

     (20.2     (36.8 )     (1.2     (2.4
  

 

 

   

 

 

   

 

 

   

 

 

 
Benefit obligation, end of the period      (356.3     (298.8 )     (21.8 )     (20.2 )
  

 

 

   

 

 

   

 

 

   

 

 

 
Change in plan assets:         

Fair value of plan assets, beginning of the period

     133.0        120.4                 

Actual return on plan assets

     19.0        0.8                 

Benefits paid

     (5.7     (13.6 )     (1.0     (0.8

Employer contributions

     21.3        25.4        0.7        0.6   

Plan participants’ contributions

                   0.3        0.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of plan assets, end of period

     167.6        133.0                 
  

 

 

   

 

 

   

 

 

   

 

 

 
Funded status of the plans      (188.7     (165.8 )     (21.8     (20.2
  

 

 

   

 

 

   

 

 

   

 

 

 
Amounts recorded on the consolidated balance sheets:         

Pension and retirement benefits liability-current

     (3.6     (3.0 )     (0.8     (0.8

Pension and retirement benefits liability-non current

     (185.1     (162.8 )     (21.0     (19.4
  

 

 

   

 

 

   

 

 

   

 

 

 
Net amount recognized    $ (188.7     (165.8 )   $ (21.8     (20.2
  

 

 

   

 

 

   

 

 

   

 

 

 
Accumulated benefit obligation, end of the period    $ (298.4 )     (256.1 )    
  

 

 

   

 

 

     

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

 

     December 31,  
     2012      2011  
Aggregate projected benefit obligation    $ 356.3       $ 298.8   
Aggregate accumulated benefit obligation    $ 298.4       $ 256.1   
Aggregate fair value of plan assets    $ 167.6       $ 133.0   

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

 

     Pension Plans     Other Retirement Plans  
     2012     2011     2012     2011  
Net actuarial losses    $ (142.7 )   $ (127.1 )   $ (6.0 )   $ (6.1 )
Net prior service costs      (4.0 )     (4.7 )              
  

 

 

   

 

 

   

 

 

   

 

 

 

Total recognized in AOCI- pretax

   $ (146.7 )    $ (131.8 )   $ (6.0 )    $ (6.1 )
  

 

 

   

 

 

   

 

 

   

 

 

 

 

The following table summarizes the estimated pre-tax net actuarial losses and prior service cost for the Company’s Retirement Plans that will be amortized from AOCI and recognized as components of net periodic expense during the next fiscal year:

 

     Pension Plans      Other Retirement Plans  
Net actuarial losses    $ 11.1       $ 0.4   
Net prior service costs      0.6           
  

 

 

    

 

 

 

Total to be recognized as components of net periodic expense

   $ 11.7       $ 0.4   
  

 

 

    

 

 

 

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

 

     Pension Plans     Other Retirement Plans  
     2012     2011     2010     2012      2011      2010  
Components of net periodic expense               
Service cost    $ 18.9      $ 15.1      $ 13.5      $ 1.5       $ 1.1       $ 0.9   
Interest cost      13.1        13.1        12.0        0.7         0.8         0.8   
Expected return on plan assets      (12.5 )     (11.9 )     (10.5 )                       
Amortization of net actuarial loss from earlier periods      9.1        5.0        2.8        0.3         0.3         0.1   
Amortization of net prior service costs from earlier periods      0.7        0.6        0.7                          
Settlement charges             1.6        1.3                          
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 
Net periodic expense    $ 29.3      $ 23.5      $ 19.8      $ 2.5       $ 2.2       $ 1.8   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

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

 

     Pension Plans      Other Retirement Plans  
     2012     2011      2012     2011  
Amortization of net actuarial losses    $ 9.1      $ 5.0       $ 0.3      $ 0.3   
Amortization of prior service costs      0.7        0.6                  
Accelerated recognition of actuarial loss due to settlement             1.6                  
Net actuarial loss arising during the period      (24.7 )     (52.8 )      (0.2 )     (3.3 )
  

 

 

   

 

 

    

 

 

   

 

 

 

Total recognized in OCI – pre-tax

   $ (14.9   $ (45.6    $ 0.1      $ (3.0 )
  

 

 

   

 

 

    

 

 

   

 

 

 

ADDITIONAL INFORMATION:

Assumptions – Retirement Plans

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

 

     Pension Plans     Other Retirement Plans  
     2012     2011     2012     2011  
Discount rate      3.82 %     4.25 %     3.55 %     4.05
Rate of compensation increase      4.00 %     4.00 %              

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

 

     Pension Plans     Other Retirement Plans  
     2012     2011     2010     2012     2011     2010  
Discount rate      4.25 %     5.39 %     5.95 %     4.05 %     5.15 %     5.75 %
Expected return on plan assets      7.85 %     8.35 %     8.35 %                     
Rate of compensation increase      4.00 %     4.00 %     4.00 %                     

 

The expected rate of return on plan assets represents the Company’s best estimate of the long-term return on plan assets and is determined by using a building block approach, which generally weighs the underlying long-term expected rate of return for each major asset class based on their respective allocation target within the plan portfolio, net of plan paid expenses. As the assumption reflects a long-term time horizon, the plan performance in any one particular year does not, by itself, significantly influence the Company’s evaluation. For 2012, the expected rate of return used in calculating the net periodic benefit costs was 7.85%. For 2013, the Company reduced the expected rate of return assumption to 7.30% to reflect the Company’s current view of long-term capital market outlook and is commensurate with the returns expected to be generated by the plan assets under Company’s current investment strategy.

Assumed Healthcare Cost Trend Rates at December 31:

 

     2012     2011     2010  
     Pre-age 65     Post-age 65     Pre-age 65     Post-age 65     Pre-age 65     Post-age 65  

Healthcare cost trend rate assumed

for the following year

     6.9     7.9     7.4     8.4 %     7.9     8.9 %

Ultimate rate to which the cost trend

rate is assumed to decline (ultimate

trend rate)

     5.0%     

 

5.0%

  

    5.0%   
Year that the rate reaches the ultimate trend rate      2020     

 

2020

  

    2020   

The assumed health cost trend rate reflects different expectations for the medical and prescribed medication components of health care costs for pre and post-65 retirees. As the Company subsidies for retiree healthcare coverage are capped at the 2005 level, for the majority of the retirement health plan participants, retiree contributions are assumed to increase at the same rate as the healthcare cost trend rates.

In 2012, the Company amended its retiree medical plan to modify its current design. Effective January 1, 2013, the newly implemented plan design will provide current retirees age 65 and older with the option over the next three years to either enroll in a new Health Reimbursement Account (HRA) Program and receive a fixed amount annual subsidy or continue to stay in the current retiree medical plan. All future retirees age 65 and older will have to participate in the new HRA Program. There will be no change to pre-65 coverage. As the new plan is designed to be cost neutral to the Company, the amendment of the plan has no significant impact to the plan and a one percentage-point increase or decrease in assumed healthcare cost trend rates would not have affected total service and interest cost and would have a minimal impact on the retiree medical benefit obligation.

Plan Assets

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

The Company’s current target asset allocation is approximately 60% (range of 50% to 70%) in equity securities, 30% (range of 25% to 35%) in fixed income securities and 10% (range of 7% to 13%) in other investments and the plan will use a combination of active and passive investment strategies and different investment styles for its investment portfolios within each asset class. The plan’s equity investments are diversified across U.S. and non-U.S. stocks of small, medium and large capitalization. The plan’s fixed income investments are diversified principally across U.S. and non-U.S. government and corporate bonds which are expected to help reduce plan exposure to interest rate variation and to better align assets with obligations. Approximately 3% of total plan assets may be invested in funds which invest in debts rated below investment grade and 3% may be invested in emerging market debt. The plan’s other investments are made through private real estate and convertible securities funds and these investments are expected to provide additional diversification benefits and absolute return enhancement to the plan assets. The Company does not use derivatives to leverage the portfolio. The overall allocation is expected to help protect the plan’s funded status while generating sufficiently stable returns over the long-term.

 

Fair value of the assets in the Company’s funded pension plan by asset category at December 31, 2012 and 2011 is determined based on the hierarchy of fair value measurements as defined in Note 2 to these financial statements and is as follows:

 

     Fair Value Measurement as of December 31, 2012  

Asset Category

   Balance      Level 1      Level 2      Level 3      % of total
assets
 
Cash and cash equivalent    $ 0.2       $       $ 0.2       $        
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Emerging markets equity fund      13.3       $ 13.3       $                 8
Common/collective trust funds – equity securities               

U.S. large-cap

     32.0                 32.0                 19

U.S. small and mid-cap

     10.7                 10.7                 6

International

     44.1                 44.1                 27
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Total equity investments      100.1         13.3         86.8                60
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Common/collective trust funds – fixed income securities               

Long-term government/treasury bonds

     13.8                 13.8                 8

Long-term investment grade corporate bonds

     17.5                 17.5                 11

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

     8.5                 8.5                 5

Emerging markets bonds

     5.4                 5.4                 3

High yield bonds

     5.2                 5.2                 3
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Total fixed-income investments      50.4                50.4                30
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Common/collective trust funds – convertible securities      4.8                 4.8                 3
Private real estate fund      12.1                         12.1         7
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Total other investment      16.9                4.8         12.1         10
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Total Assets    $ 167.6       $ 13.3      $ 142.2       $ 12.1         100
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurement as of December 31, 2011  

Asset Category

   Balance      Level 1      Level 2      Level 3      % of total
assets
 
Cash and cash equivalent    $  0.2       $       $  0.2       $        
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Emerging markets equity fund      7.7       $  7.7       $                 6
Common/collective trust funds – equity securities               

U.S. large-cap

     26.4                 26.4                 20

U.S. small and mid-cap

     9.3                 9.3                 7

International

     30.4                 30.4                 23
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Total equity investments      73.8         7.7         66.1                56
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Common/collective trust funds – fixed income securities               

Long-term government/treasury bonds

     13.9                 13.9                 10

Long-term investment grade corporate bonds

     14.9                 14.9                 11

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

     7.6                 7.6                 6

Emerging markets bonds

     4.5                 4.5                 3

High yield bonds

     3.6                 3.6                 3
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Total fixed-income investments      44.5                44.5                33
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Common/collective trust funds – convertible securities      4.8                 4.8                 4
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Private real estate fund      9.7                         9.7         7
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Total other investment      14.5                4.8         9.7         11
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Total Assets    $ 133.0       $ 7.7      $ 115.6       $ 9.7         100
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

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

 

Real estate investment fund:   
Balance as of December 31, 2011    $ 9.7   
Return on plan assets related to assets held as of December 31, 2012      0.8   
Return on plan assets related to assets sold during the period        
Purchases (sales), net      1.6   
  

 

 

 
Balance as of December 31, 2012    $ 12.1   
  

 

 

 

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

Cash Flows

The Company contributed $17.8 million and $13.6 million to its U.S. funded pension plan during the years ended December 31, 2012 and 2011, respectively. The Company made payments of $3.5 million and $11.8 million related to its U.S. unfunded pension plan obligations during the years ended December 31, 2012 and 2011, respectively, which included lump sum settlement payments of $6.9 million in 2011. The Company made payments of $0.7 million and $0.6 million to its Other Retirement Plans during the years ended December 31, 2012 and 2011, respectively. The Company presently anticipates making contributions of $15.5 million to its funded pension plan and anticipates making payments of $3.6 million related to its unfunded U.S. pension plans and $0.8 million related to its Other Retirement Plans during the year ended December 31, 2013.

Estimated Future Benefits Payable

Estimated future benefits payments for the Retirement Plans are as follows at ended December 31, 2012:

 

Year Ending December 31,

   Pension Plans      Other Retirement Plans  
2013    $ 6.4       $ 0.8   
2014      7.5         0.9   
2015      7.9         1.0   
2016      10.5         1.2   
2017      11.0         1.3   
2018 – 2022    $ 108.5       $ 8.3   

Defined Contribution Plans

Moody’s has a Profit Participation Plan covering substantially all U.S. employees. The Profit Participation Plan provides for an employee salary deferral and the Company matches employee contributions with cash contributions equal to 50% of employee contribution up to a maximum of 3% of the employee’s pay. Moody’s also makes additional contributions to the Profit Participation Plan based on year-to-year growth in the Company’s EPS. Effective January 1, 2008, all new hires are automatically enrolled in the Profit Participation Plan when they meet eligibility requirements unless they decline participation. As the Company’s U.S. DBPPs are closed to new entrants effective January 1, 2008, all eligible new hires will instead receive a retirement contribution into the Profit Participation Plan in value similar to the pension benefits. Additionally, effective January 1, 2008, the Company implemented a deferred compensation plan in the U.S., which is unfunded and provides for employee deferral of compensation and Company matching contributions related to compensation in excess of the IRS limitations on benefits and contributions under qualified retirement plans. Total expenses associated with U.S. defined contribution plans were $24.5 million, $14.9 million and $19.4 million in 2012, 2011, and 2010, respectively.

Effective January 1, 2008, Moody’s has designated the Moody’s Stock Fund, an investment option under the Profit Participation Plan, as an Employee Stock Ownership Plan and, as a result, participants in the Moody’s Stock Fund may receive dividends in cash or may reinvest such dividends into the Moody’s Stock Fund. Moody’s paid approximately $0.4 million and $0.3 million in dividends during the years ended December 31, 2012 and 2011, respectively, for the Company’s common shares held by the Moody’s Stock Fund. The Company records the dividends as a reduction of retained earnings in the Consolidated Statements of Shareholders’ Equity (Deficit). The Moody’s Stock Fund held approximately 580,000 and 610,000 shares of Moody’s common stock at December 31, 2012 and 2011, respectively.

International Plans

Certain of the Company’s international operations provide pension benefits to their employees. For defined contribution plans, company contributions are primarily determined as a percentage of employees’ eligible compensation. Moody’s also makes contributions to non-U.S. employees under a profit sharing plan which is based on year-to-year growth in the Company’s diluted EPS. Expenses related to these defined contribution plans for the years ended December 31, 2012, 2011 and 2010 were $18.8 million, $16.3 million and $11.8 million, respectively.

For defined benefit plans, the Company maintains various unfunded DBPPs and retirement health benefit plan for certain of its non-U.S. subsidiaries located in Germany, France and Canada. These unfunded DBPPs are generally based on each eligible employee’s years of credited service and on compensation levels as specified in the plans. The DBPP in Germany was closed to new entrants in 2002. Total defined benefit pension liabilities recorded related to non-U.S. pension plans was $7.2 million, $5.3 million and $4.6 million based on a weighted average discount rate of 3.53%, 4.79% and 5.28% at December 31, 2012, 2011 and 2010, respectively. The pension liabilities recorded as of December 31, 2012 represent the unfunded status of these pension plans and were recognized in the consolidated balance sheet as non-current liabilities. Total pension expense recorded for the years ended December 31, 2012, 2011 and 2010 was approximately $0.6 million, $0.6 million and $0.5 million, respectively. These amounts are not included in the tables above. As of December 31, 2012, the Company has included in AOCI net actuarial losses of $0.5 million ($0.3 million net of tax) related to non-U.S. pension plans that have yet to be recognized as increases to net periodic pension expense and the Company expects its 2013 amortization of the net actuarial losses to be immaterial. The Company’s non-U.S. other retirement benefit obligation is not material as of December 31, 2012.

 

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

Under the 1998 Plan, 33.0 million shares of the Company’s common stock have been reserved for issuance. The 2001 Plan, which is shareholder approved, permits the granting of up to 35.6 million shares, of which not more than 15.0 million shares are available for grants of awards other than stock options. The Stock Plans also provide for the granting of restricted stock. The Stock Plans provide that options are exercisable not later than ten years from the grant date. The vesting period for awards under the Stock Plans is generally determined by the Board at the date of the grant and has been four years except for employees who are at or near retirement eligibility, as defined, for which vesting is between one and four years. Additionally, the vesting period is three years for certain performance-based restricted stock that contain a condition whereby the number of shares that ultimately vest are based on the achievement of certain non-market based performance metrics of the Company. Options may not be granted at less than the fair market value of the Company’s common stock at the date of grant.

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

Presented below is a summary of the stock-based compensation expense and associated tax benefit in the accompanying Consolidated Statements of Operations:

 

     Year Ended December 31,  
     2012      2011      2010  
Stock-based compensation expense    $ 64.5      $ 56.7      $ 56.6  
Tax benefit    $ 23.3      $ 18.1      $ 23.9  

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

The following weighted average assumptions were used for options granted:

 

     Year Ended December 31,  
     2012     2011     2010  
Expected dividend yield      1.66     1.53     1.58
Expected stock volatility      44     41     44
Risk-free interest rate      1.55     3.33     2.73
Expected holding period      7.4 years        7.6 years        5.9 years   
Grant date fair value    $ 15.19     $ 12.49     $ 10.38  

A summary of option activity as of December 31, 2012 and changes during the year then ended is presented below:

 

Options

   Shares     Weighted
Average
Exercise Price
Per Share
     Weighted
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic Value
 
Outstanding, December 31, 2011      17.4     $ 39.60        
Granted      0.5       38.68        
Exercised      (4.4     28.77        
Forfeited      (0.1     27.66        
Expired      (0.4     57.28        
  

 

 

         
Outstanding, December 31, 2012      13.0     $ 42.82        4.6 yrs       $ 163.9