MOODYS CORP /DE/, 10-Q filed on 7/31/2014
Quarterly Report
Document and Entity Information
In Millions, unless otherwise specified
6 Months Ended
Jun. 30, 2014
Document Information [Line Items]
 
Document Type
10-Q 
Amendment Flag
false 
Document Period End Date
Jun. 30, 2014 
Document Fiscal Year Focus
2014 
Document Fiscal Period Focus
Q2 
Trading Symbol
MCO 
Entity Registrant Name
MOODYS CORP /DE/ 
Entity Central Index Key
0001059556 
Current Fiscal Year End Date
--12-31 
Entity Filer Category
Large Accelerated Filer 
Entity Common Stock, Shares Outstanding
211.2 
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Revenues
$ 873.5 
$ 756.0 
$ 1,640.7 
$ 1,487.8 
Expenses
 
 
 
 
Operating
222.1 
197.1 
438.1 
397.9 
Selling, general and administrative
217.4 
185.0 
412.5 
412.0 
Depreciation and amortization
22.3 
23.1 
45.4 
46.7 
Total expenses
461.8 
405.2 
896.0 
856.6 
Operating Income
411.7 
350.8 
744.7 
631.2 
Non-operating (expense) income, net
 
 
 
 
Interest expense, net
(26.0)
(21.7)
(49.8)
(43.7)
Other non-operating income (expense), net
(3.3)
7.7 
(0.9)
16.5 
ICRA Gain
102.8 
102.8 
Total non-operating (expense) income, net
73.5 
(14.0)
52.1 
(27.2)
Income before provisions for income taxes
485.2 
336.8 
796.8 
604.0 
Provision for income taxes
160.8 
108.4 
250.7 
184.5 
Net income
324.4 
228.4 
546.1 
419.5 
Less: Net income attributable to noncontrolling interests
5.2 
2.9 
8.9 
5.6 
Net income attributable to Moody's
$ 319.2 
$ 225.5 
$ 537.2 
$ 413.9 
Earnings per share attributable to Moody's common shareholders
 
 
 
 
Basic
$ 1.51 
$ 1.01 
$ 2.52 
$ 1.86 
Diluted
$ 1.48 
$ 1 
$ 2.47 
$ 1.83 
Weighted average number of shares outstanding
 
 
 
 
Basic
212.0 
222.3 
213.0 
222.8 
Diluted
215.7 
226.2 
217.1 
226.7 
Dividends declared per share attributable to Moody's common shareholders
$ 0.28 
$ 0.2 
$ 0.28 
$ 0.2 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $)
In Millions, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Net income
$ 324.4 
$ 228.4 
$ 546.1 
$ 419.5 
Foreign currency translation adjustment-Pre Tax Amount
14.1 
(13.0)
9.3 
(72.8)
Foreign currency translation adjustment-Tax Amount
Foreign currency translation adjustments-Net of Tax
14.1 
(13.0)
9.3 
(72.8)
Cash Flow And Net Investment Hedges [Abstract]
 
 
 
 
Net unrealized gain (losses) on cash flow and net investment hedges- Pre Tax
(2.7)
(0.4)
(6.3)
1.0 
Net unrealized gain (losses) on cash flow and net investment hedges-Tax Amount
(1.1)
(0.1)
(2.6)
0.5 
Net unrealized losses on cash flow and net investment hedges
(1.6)
(0.3)
(3.7)
0.5 
Reclassification of losses included in net income-Pre Tax
0.1 
0.7 
Reclassification of losses included in net income-Tax Amount
0.2 
Reclassification of losses included in net income- Net of Tax
0.1 
0.5 
Pension and Other Retirement Benefits Net of Tax [Abstract]
 
 
 
 
Amortization of actuarial losses and prior service costs included in net income (pre-tax)
(2.0)
(2.8)
(3.7)
(5.9)
Amortization of actuarial losses and prior service costs included in net income
(1.2)
(1.6)
(1.4)
(3.5)
Net actuarial losses and prior service costs (pre-tax)
(6.9)
0.9 
(6.9)
0.9 
Net actuarial losses and prior service costs (tax)
2.8 
(0.4)
2.8 
(0.4)
Net actuarial losses and prior service costs
(4.1)
0.5 
(4.1)
0.5 
Total other comprehensive income (loss)-Pre Tax
10.9 
(9.6)
4.2 
(64.3)
Net current period other comprehensive income/(loss)
(3.1)
1.5 
(3.1)
3.5 
Total other comprehensive income (loss)-Net of Tax
14.0 
(11.1)
7.3 
(67.8)
Comprehensive income (loss)
338.4 
217.3 
553.4 
351.7 
Comprehensive income attributable to noncontrolling interests and redeemable noncontrolling interest
5.2 
2.9 
8.9 
5.6 
Comprehensive income attributable to Moody's
333.2 
214.4 
544.5 
346.1 
Foreign Currency Translation Adjustment Reclassification Of Losses To Net Income Pursuant To Icra Step Acquisition Pre Tax
4.4 
4.4 
Foreign Currency Translation Adjustment Reclassification Of Losses To Net Income Pursuant To Icra Step Acquisition Tax
Foreign Currency Translation Adjustment Reclassification Of Losses To Net Income Pursuant To Icra Step Acquisition Net Of Tax
$ 4.4 
$ 0 
$ 4.4 
$ 0 
CONSOLIDATED BALANCE SHEETS (USD $)
In Millions, unless otherwise specified
Jun. 30, 2014
Dec. 31, 2013
Current assets:
 
 
Cash and cash equivalents
$ 1,777.3 
$ 1,919.5 
Short-term investments
182.0 
186.8 
Accounts receivable, net of allowances of $30.0 in 2012 and $28.0 in 2011
758.3 
694.2 
Deferred tax assets, net
49.7 
53.9 
Other current assets
177.0 
114.4 
Total current assets
2,944.3 
2,968.8 
Property and equipment, net of accumulated depreciation of $286.6 in 2012 and $258.2 in 2011
298.3 
278.7 
Goodwill
955.2 
665.2 
Intangible assets, net
310.5 
221.6 
Deferred tax assets, net
130.9 
148.7 
Other assets
147.4 
112.1 
Total assets
4,786.6 
4,395.1 
Current liabilities:
 
 
Accounts payable and accrued liabilities
430.8 
538.9 
Deferred revenue
661.0 
598.4 
Total current liabilities
1,093.4 
1,141.3 
Deferred tax liabilities, net
1.6 
4.0 
Non-current portion of deferred revenue
120.8 
109.2 
Long-term debt
2,104.5 
2,101.8 
Deferred tax liabilities, net
112.2 
59.1 
Unrecognized tax benefits
204.5 
195.6 
Other liabilities
354.7 
360.2 
Total liabilities
3,990.1 
3,967.2 
Contingencies (Note 14)
   
   
Redeemable noncontrolling interest
122.6 
80.0 
Shareholders' equity(deficit):
 
 
Preferred stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding
Capital surplus
385.0 
405.8 
Retained earnings
5,780.7 
5,302.1 
Treasury stock, at cost; 120,619,040 and 120,462,232 shares of common stock at June 30, 2012 and December 31, 2011, respectively
5,676.4 
5,319.7 
Accumulated other comprehensive loss
(47.3)
(54.6)
Total Moody's shareholders' equity (deficit)
445.4 
337.0 
Noncontrolling interests
228.5 
10.9 
Total shareholders' equity (deficit)
673.9 
347.9 
Total liabilities, redeemable noncontrolling interest and shareholders' equity (deficit)
4,786.6 
4,395.1 
Nonvoting Common Stock [Member]
 
 
Shareholders' equity(deficit):
 
 
Common stock
   
   
Common Stock [Member]
 
 
Shareholders' equity(deficit):
 
 
Common stock
$ 3.4 
$ 3.4 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Jun. 30, 2014
Dec. 31, 2013
Accounts receivable, allowances
$ 30.6 
$ 28.9 
Property and equipment, accumulated depreciation
$ 414.9 
$ 375.7 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, shares authorized
 
1,000,000,000 
Treasury stock, shares
131,693,425 
128,941,621 
Nonvoting Common Stock [Member]
 
 
Preferred stock, shares authorized
10,000,000.0 
10,000,000.0 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
10,000,000 
10,000,000 
Common stock, shares issued
Common stock, shares outstanding
Common Stock [Member]
 
 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
1,000,000,000 
 
Common stock, shares issued
342,902,272 
342,902,272 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Cash flows from operating activities
 
 
Net income
$ 546.1 
$ 419.5 
Reconciliation of net income to net cash provided by operating activities:
 
 
Depreciation and amortization
45.4 
46.7 
Stock-based compensation expense
40.6 
33.3 
Deferred income taxes
46.2 
10.8 
Excess tax benefits from stock-based compensation plans
(45.2)
(27.0)
ICRA Gain
(102.8)
Changes in assets and liabilities:
 
 
Accounts receivable
(45.8)
2.4 
Other current assets
(56.1)
(56.6)
Other assets
3.3 
(0.8)
Accounts payable and accrued liabilities
(26.6)
(168.4)
Deferred revenue
62.2 
59.6 
Unrecognized tax benefits
5.8 
34.5 
Other liabilities
(15.1)
15.1 
Net cash provided by operating activities
458.0 
369.1 
Cash flows from investing activities
 
 
Capital additions
(38.8)
(18.1)
Purchases of short-term investments
(39.8)
(17.5)
Sales and maturities of short-term investments
45.7 
16.6 
Net cash used in investing activities
(113.4)
(19.0)
Cash paid into escrow for ICRA share tender offer
(80.5)
Cash flows from financing activities
 
 
Repayments of notes
   
(63.8)
Net proceeds from stock-based compensation plans
40.2 
60.8 
Cost of treasury shares repurchased
(459.7)
(350.4)
Excess tax benefits from stock-based compensation plans
45.2 
27.0 
Payment of dividends
(119.2)
(89.1)
Payment of dividends to noncontrolling interests
(7.7)
(8.2)
Contingent consideration paid
   
(2.5)
Net cash used in financing activities
(501.2)
(426.2)
Effect of exchange rate changes on cash and cash equivalents
14.4 
(46.3)
Net increase in cash and cash equivalents
(142.2)
(122.4)
Cash and cash equivalents, beginning of the period
1,919.5 
1,755.4 
Cash and cash equivalents, end of the period
$ 1,777.3 
$ 1,633.0 
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

Adjusted Operating Income Operating income excluding depreciation and amortization

Adjusted Operating Margin Operating margin excluding depreciation and amortization

Amba Amba Investment Services; a provider of outsourced investment research and quantitative analytics for global financial institutions; a majority owned subsidiary of the Company acquired 100% of Amba in December 2013

Americas Represents countries within North and South America, excluding the U.S.

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

AOCI Accumulated other comprehensive income (loss); a separate component of shareholders’ equity

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

Asia-Pacific Represents countries in Asia including but not limited to: Australia and its proximate islands, China, India, Indonesia, Japan, Korea, Malaysia, Singapore and Thailand

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

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

CDO Collateralized debt obligation

CFG Corporate finance group; an LOB of MIS

CLO Collateralized loan obligation

CMBS Commercial mortgage-backed securities; part of CREF

Commission European Commission

Company Moody’s Corporation and its subsidiaries; MCO; Moody’s

Copal Copal Partners; an acquisition completed in November 2011; part of the MA segment; leading provider of outsourced research and analytical services to institutional investors

Copal Amba Operating segment created in January 2014 that consists of all operations from Copal as well as the operations of Amba. The Copal Amba operating segment provides outsourced research and analytical services to the global financial and corporate sectors

Council Council of the European Union

CRAs Credit rating agencies

CRA1 Regulation (EC) No 1060/2009 of the European Parliament and of the Council, establishing an oversight regime for the CRA industry in the EU

TERM DEFINITION

CRA2 Regulation (EU) No 513/2011 of the European Parliament and of the Council, which transferred direct supervisory responsibility for the registered CRA industry in the EU to ESMA

CRA3 Regulation (EU) No 462/2013 of the European Parliament and of the Council, which updated the regulatory regimes imposing additional procedural requirements on CRAs

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

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

D&B Business Old D&B’s Dun & Bradstreet operating company

DBPP 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

EBITDA Earnings before interest, taxes, depreciation and amortization

EMEA Represents countries within Europe, the Middle East and Africa

EPS Earnings per share

ERS The enterprise risk solutions LOB within MA which offers risk management software products as well as software implementation services and related risk management advisory engagements

ESMA European Securities and Markets Authority

ETR Effective tax rate

EU European Union

EU Parliament European Parliament

EUR Euros

European Ratings Platform Central credit ratings website administered by ESMA

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

Exchange Act The Securities Exchange Act of 1934, as amended

FASB Financial Accounting Standards Board

FIG Financial institutions group; an LOB of MIS

Financial Reform Act Dodd-Frank Wall Street Reform and Consumer Protection Act

Free Cash Flow Net cash provided by operating activities less cash paid for capital additions

FSTC Financial Services Training and Certifications; a reporting unit within the MA segment that includes on-line and classroom-based training services and CSI

FX Foreign exchange

GAAP U.S. Generally Accepted Accounting Principles

GBP British pounds

TERM DEFINITION

ICRA ICRA Limited.; a leading provider of credit ratings and research in India. The Company previously held 28.5% equity ownership and in June 2014, increased that ownership stake to 50.06% through the acquisition of additional shares

ICRA Gain Gain relating to the step-acquisition of ICRA; U.S. GAAP requires the remeasurement to fair value of the previously held non-controlling shares upon obtaining a controlling interest in a step-acquisition. This remeasurement of the Company’s equity investment in ICRA to fair value resulted in a pre-tax gain of $102.8 million ($78.5 million after tax) in the second quarter of 2014.

IRS Internal Revenue Service

IT Information technology

Legacy Tax Matter(s) Exposures to certain potential tax liabilities assumed in connection with the 2000 Distribution

LIBOR London Interbank Offered Rate

LOB Line of business

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

M&A Mergers and acquisitions

Make Whole Amount The prepayment penalty amount relating to the Series 2005-1 Notes, Series 2007-1 Notes, 2010 Senior Notes, 2012 Senior Notes and 2013 Senior Notes which is a premium based on the excess, if any, of the discounted value of the remaining scheduled payments over the prepaid principal

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

MD&A Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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

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

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

NM Percentage change is not meaningful

NRSRO Nationally Recognized Statistical Rating Organization

Old D&B The former Dun and Bradstreet Company which distributed New D&B shares on September 30, 2000, and was renamed Moody’s Corporation

PPIF Public, project and infrastructure finance; an LOB of MIS

Profit Participation Plan Defined contribution profit participation plan that covers substantially all U.S. employees of the Company

PS Professional Services, an LOB within MA that provides outsourced research and analytical services as well as financial training and certification programs

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

TERM DEFINITION

Redeemable Noncontrolling Represents minority shareholders’ interest in entities which are controlled but not

Interest wholly-owned by Moody’s and for which Moody’s obligation to redeem the minority shareholders’ interest is in the control of the minority shareholders

REIT Real Estate Investment Trust

Relationship Revenue In MIS, relationship revenue represents the recurring monitoring of a rated debt obligation and/or entities that issue such obligations, as well as revenue from programs such as commercial paper, medium-term notes and shelf registrations. For MA, revenue represents subscription-based revenue and maintenance revenue

Retirement Plans Moody’s funded and unfunded pension plans, the retirement healthcare plans and retirement life insurance plans

SEC U.S. Securities and Exchange Commission

Securities Act Securities Act of 1933

Series 2005-1 Notes Principal amount of $300 million, 4.98% senior unsecured notes due in September 2015 pursuant to the 2005 Agreement

Series 2007-1 Notes Principal amount of $300 million, 6.06% senior unsecured notes due in September 2017 pursuant to the 2007 Agreement

SFG Structured finance group; an LOB of MIS

SG&A Selling, general and administrative expenses

Total Debt All indebtedness of the Company as reflected on the consolidated balance sheets

Transaction Revenue For MIS, revenue representing the initial rating of a new debt issuance as well as other one-time fees. For MA, revenue represents software license fees and revenue from risk management advisory projects, training and certification services, and knowledge outsourcing engagements

U.K. United Kingdom

U.S. United States

USD U.S. dollar

UTBs Unrecognized tax benefits

UTPs Uncertain tax positions

TERM DEFINITION

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

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

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

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

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

2010 Indenture Supplemental indenture and related agreements dated August 19, 2010, relating to the 2010 Senior Notes

2010 Senior Notes Principal amount of $500 million, 5.50% senior unsecured notes due in September 2020 pursuant to the 2010 Indenture

2012 Indenture Supplemental indenture and related agreements dated August 18, 2012, relating to the 2012 Senior Notes

2012 Senior Notes Principal amount of $500 million, 4.50% senior unsecured notes due in September 2022 pursuant to the 2012 Indenture

2012 Facility Revolving credit facility of $1 billion entered into on April 18, 2012, expiring in 2017

2013 Indenture Supplemental indenture and related agreements dated August 12, 2013, relating to the 2013 Senior Notes

2013 Senior Notes Principal amount of $500 million, 4.875% senior unsecured notes due in February 2024 pursuant to the 2013 Indenture

2014 Senior Notes (5-Year) Principal amount of $450 million, 2.750% senior unsecured notes due in July 2019

2014 Senior Notes (30-Year) Principal amount of $300 million, 5.250% senior unsecured notes due in July 2044

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

7WTC Lease Operating lease agreement entered into on October 20, 2006

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

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

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

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

These interim financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the Company’s consolidated financial statements and related notes in the Company’s 2013 annual report on Form 10-K filed with the SEC on February 27, 2014. The results of interim periods are not necessarily indicative of results for the full year or any subsequent period. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION

NOTE 2. STOCK-BASED COMPENSATION

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

Three Months EndedSix Months Ended
June 30,June 30,
2014201320142013
Stock-based compensation cost$ 20.3$ 16.1$ 40.6$ 33.3
Tax benefit$ 6.5$ 5.8$ 12.8$ 12.0

During the first six months of 2014, the Company granted 0.3 million employee stock options, which had a weighted average grant date fair value of $31.49 per share based on the Black-Scholes option-pricing model. The Company also granted 0.9 million shares of restricted stock in the first six months of 2014, which had a weighted average grant date fair value of $79.55 per share and generally vest ratably over a four-year period. Additionally, the Company granted approximately 0.2 million shares of performance-based awards whereby the number of shares that ultimately vest are based on the achievement of certain non-market based performance metrics of the Company over a three-year period. The weighted average grant date fair value of these awards was $76.24 per share.

The following weighted average assumptions were used in determining the fair value for options granted in 2014:

Expected dividend yield 1.41%
Expected stock volatility 41.2%
Risk-free interest rate 2.30%
Expected holding period7.2 years
Grant date fair value$ 31.49

Unrecognized compensation expense at June 30, 2014 was $12.3 million and $111.2 million for stock options and unvested restricted stock, respectively, which is expected to be recognized over a weighted average period of 1.3 years and 1.8 years, respectively. Additionally, there was $20.9 million of unrecognized compensation expense relating to the aforementioned non-market based performance-based awards, which is expected to be recognized over a weighted average period of 1.1 years.

The following tables summarize information relating to stock option exercises, restricted stock vesting and the delivery of performance-based awards:

Six Months Ended
June 30,
Exercise of stock options:20142013
Proceeds from stock option exercises$ 89.0$ 89.2
Aggregate intrinsic value$ 69.2$ 66.7
Tax benefit realized upon exercise$ 25.3$ 24.4
Number of shares exercised 2.0 2.7
Six Months Ended
June 30,
Vesting of restricted stock:20142013
Fair value of shares vested$ 91.9$ 53.8
Tax benefit realized upon vesting$ 32.0$ 19.1
Number of shares vested 1.2 1.1
Six Months Ended
June 30,
Vesting of performance-based restricted stock:20142013
Fair value of shares vested$ 38.0$ 25.5
Tax benefit realized upon vesting$ 14.8$ 9.7
Number of shares vested 0.5 0.5
INCOME TAXES
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2014
INCOME TAXES

NOTE 3. INCOME TAXES

Moody’s effective tax rate was 33.1% and 32.2% for the three months ended June 30, 2014 and 2013, respectively and 31.5% and 30.5% for the six month periods ended June 30, 2014 and 2013, respectively. The increase in the ETR compared to the second quarter of 2013 was primarily due to higher taxes on foreign income. The six months ended June 30, 2013 ETR included a tax benefit related to U.S. tax legislation enacted in early 2013 which retroactively extended certain tax benefits to the 2012 tax year, as well as tax benefits on a litigation settlement in the first quarter of 2013. The ETR for the six month period ended June 30, 2014 includes a benefit related to the reversal of UTPs resulting from the favorable resolution of certain international tax matters. 

The Company classifies interest related to UTPs in interest expense, net in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating (expense) income, net. The Company had an increase in its UTPs of $13.7 million ($12.1 million net of federal tax benefit) during the second quarter of 2014 and an overall increase in its UTPs during the first six months of 2014 of $8.9 million ($4.3 million net of federal tax benefits).

Moody’s Corporation and subsidiaries are subject to U.S. federal income tax as well as income tax in various states, local and foreign jurisdictions. The Company’s U.S. federal income tax returns for the years 2008 through 2010 are under examination and its returns for 2011 and 2012 remain open to examination. The Company’s New York State tax returns for 2011 and 2012 remain open to examination. Income tax filings in the U.K. for 2012 remain open to examination.

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

The following table shows the amount the Company paid for income taxes:

INCOME TAXES

NOTE 3. INCOME TAXES

Moody’s effective tax rate was 33.1% and 32.2% for the three months ended June 30, 2014 and 2013, respectively and 31.5% and 30.5% for the six month periods ended June 30, 2014 and 2013, respectively. The increase in the ETR compared to the second quarter of 2013 was primarily due to higher taxes on foreign income. The six months ended June 30, 2013 ETR included a tax benefit related to U.S. tax legislation enacted in early 2013 which retroactively extended certain tax benefits to the 2012 tax year, as well as tax benefits on a litigation settlement in the first quarter of 2013. The ETR for the six month period ended June 30, 2014 includes a benefit related to the reversal of UTPs resulting from the favorable resolution of certain international tax matters. 

The Company classifies interest related to UTPs in interest expense, net in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating (expense) income, net. The Company had an increase in its UTPs of $13.7 million ($12.1 million net of federal tax benefit) during the second quarter of 2014 and an overall increase in its UTPs during the first six months of 2014 of $8.9 million ($4.3 million net of federal tax benefits).

Moody’s Corporation and subsidiaries are subject to U.S. federal income tax as well as income tax in various states, local and foreign jurisdictions. The Company’s U.S. federal income tax returns for the years 2008 through 2010 are under examination and its returns for 2011 and 2012 remain open to examination. The Company’s New York State tax returns for 2011 and 2012 remain open to examination. Income tax filings in the U.K. for 2012 remain open to examination.

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

The following table shows the amount the Company paid for income taxes:

Six Months Ended
June 30,
20142013
Income Taxes Paid*$ 216.7$ 231.6
* Payments in 2013 include $50 million of 2012 estimated federal taxes paid in the first quarter of 2013 pursuant to IRS relief due to Hurricane Sandy.
WEIGHTED AVERAGE SHARES OUTSTANDING
WEIGHTED AVERAGE SHARES OUTSTANDING

NOTE 4. WEIGHTED AVERAGE SHARES OUTSTANDING

Below is a reconciliation of basic to diluted shares outstanding:

Three Months EndedSix Months Ended
June 30,June 30,
2014201320142013
Basic 212.0 222.3 213.0 222.8
Dilutive effect of shares issuable under stock-based compensation plans 3.7 3.9 4.1 3.9
Diluted 215.7 226.2 217.1 226.7
Anti-dilutive options to purchase common shares and restricted stock as well as contingently issuable restricted stock which are excluded from the table above 0.7 4.4 0.7 4.7

The calculation of diluted EPS requires certain assumptions regarding the use of both cash proceeds and assumed proceeds that would be received upon the exercise of stock options and vesting of restricted stock outstanding as of June 30, 2014 and 2013. These assumed proceeds include Excess Tax Benefits and any unrecognized compensation of the awards.

SHORT-TERM INVESTMENTS
SHORT-TERM INVESTMENTS

NOTE 5. SHORT-TERM INVESTMENTS

Short-term investments are securities with maturities greater than 90 days at the time of purchase that are available for operations in the next twelve months. The short-term investments, primarily consisting of certificates of deposit, are classified as held-to-maturity and therefore are carried at cost. The remaining contractual maturities of the short-term investments than one month to 12 months and one month to nine months as of June 30, 2014 and December 31, 2013, respectively. Interest and dividends are recorded into income when earned.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

NOTE 6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

Interest Rate Swaps

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

In the second quarter of 2014, the Company entered into interest rate swaps with a total notional amount of $250 million to convert the fixed interest rate on the 2010 Senior 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 2010 Senior 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 2010 Senior Notes. The changes in the fair value of the hedges and the underlying hedged item generally offset and the net cash settlements on the swaps are recorded each period within interest income (expense), net, in the Company’s consolidated statement of operations.

Foreign Exchange Forwards

The Company also enters into foreign exchange forwards to mitigate the change in fair value on certain assets and liabilities denominated in currencies other than a subsidiary’s functional currency. These forward contracts are not designated as accounting hedges under the applicable sections of Topic 815 of the ASC. Accordingly, changes in the fair value of these contracts are recognized immediately in other non-operating (expense) income, net in the Company’s consolidated statements of operations along with the FX gain or loss recognized on the assets and liabilities denominated in a currency other than the subsidiary’s functional currency. These contracts have expiration dates at various times through February 2015.

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

June 30,December 31,
20142013
Notional amount of currency pair:
Contracts to purchase USD with euros$ 71.1$ 14.2
Contracts to sell USD for euros$ 54.7$ 53.2
Contracts to purchase USD with GBP$ 0.7$ -
Contracts to purchase USD with other foreign currencies$ 1.9$ -
Contracts to sell USD for other foreign currencies$ 20.1$ -
Contracts to purchase euros with other foreign currencies 53.8 13.1
Contracts to purchase euros with GBP 24.1 22.1
Contracts to sell euros for GBP 67.3 -

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 accounting hedges under the applicable sections of Topic 815 of the ASC. Hedge effectiveness is assessed based on the overall changes in the fair value of the forward contracts on a pre-tax basis. For hedges that meet the effectiveness requirements, any change in the fair value for the hedge is recorded in the currency translation adjustment component of AOCI. Any change in the fair value of these hedges that is the result of ineffectiveness would be recognized immediately in other non-operating (expense) income in the Company’s consolidated statement of operations. These outstanding contracts expire in September 2014 for contracts to sell euros for USD and in November 2014 for contracts to sell Japanese yen for USD.

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

June 30,December 31,
20142013
Notional amount of currency pair:
Contracts to sell euros for USD 50.0 50.0
Contracts to sell Japanese yen for USD 19,700 19,700

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

Fair Value of Derivative Instruments
Derivatives InstrumentsBalance Sheet LocationJune 30, 2014December 31, 2013
Assets:
Derivatives designated as accounting hedges:
Interest rate swapsOther assets$ 12.6$ 10.3
FX forwards on net investment in certain foreign subsidiariesOther current assets 2.5 9.3
Total derivatives designated as accounting hedges 15.1 19.6
Derivatives not designated as accounting hedges:
FX forwards on certain assets and liabilitiesOther current assets 3.4 0.9
Total assets$ 18.5$ 20.5
Liabilities:
Derivatives designated as accounting hedges:
FX forwards on net investment in certain foreign subsidiariesAccounts payable and accrued liabilities$ 0.5$ 1.0
Derivatives not designated as accounting hedges:
FX forwards on certain assets and liabilitiesAccounts payable and accrued liabilities 0.2 0.7
Total liabilities$ 0.7$ 1.7

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

Amount of gain (loss) recognized in the consolidated statements of operations
Three Months EndedSix Months Ended
June 30,June 30,
Derivatives designated as fair value accounting hedgesLocation on Statement of Operations2014201320142013
Interest rate swapsInterest income(expense), net$2.0$1.0$0.5$2.1
Derivatives not designated as accounting hedges
Foreign exchange forwardsOther non-operating income (expense), net$1.3$1.0$ 0.9$ (0.1)

All gains and losses on interest rate swaps designated as cash flow hedges were initially recognized through AOCI. Realized gains and losses reported in AOCI were reclassified into interest income (expense), net as the underlying transaction was recognized. There were no cash flow hedges outstanding at both June 30, 2014 and 2013. Accordingly, there were no gains or losses recorded in AOCI in the three and six months ended June 30, 2014. The amount of losses reclassified from AOCI into net income in the three and six months ended June 30, 2013 was immaterial.

 

All gains and losses on derivatives designated as net investment hedges are recognized in the currency translation adjustment component of AOCI. The losses recognized in OCI in the three and six months ended June 30, 2014 and 2013 were immaterial. Additionally, the cumulative amount of unrecognized hedge losses recorded in AOCI at June 30, 2014 and December 31, 2013 were not 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 for the periods indicated:

Six Months Ended June 30, 2014
MISMAConsolidated
Gross goodwillAccumulated impairment chargeNet goodwillGross goodwillAccumulated impairment chargeNet goodwillGross goodwillAccumulated impairment chargeNet goodwill
Balance at beginning of year$ 11.4$ -$ 11.4$ 666.0$ (12.2)$ 653.8$ 677.4$ (12.2)$ 665.2
Additions/adjustments 294.6 - 294.6 (5.3) - (5.3) 289.3 - 289.3
Foreign currency translation adjustments 0.2 - 0.2 0.5 - 0.5 0.7 - 0.7
Ending balance$ 306.2$ -$ 306.2$ 661.2$ (12.2)$ 649.0$ 967.4$ (12.2)$ 955.2
Year ended December 31, 2013
MISMAConsolidated
Gross goodwillAccumulated impairment chargeNet goodwillGross goodwillAccumulated impairment chargeNet goodwillGross goodwillAccumulated impairment chargeNet goodwill
Balance at beginning of year$ 11.5$ -$ 11.5$ 637.8$ (12.2)$ 625.6$ 649.3$ (12.2)$ 637.1
Additions - - - 34.5 - 34.5 34.5 - 34.5
Foreign currency translation adjustments (0.1) - (0.1) (6.3) - (6.3) (6.4) - (6.4)
Ending balance$ 11.4$ -$ 11.4$ 666.0$ (12.2)$ 653.8$ 677.4$ (12.2)$ 665.2

The 2014 additions/adjustments for the MIS segment in the table above relate to the ICRA acquisition in the second quarter of 2014 as further discussed in Note 7. The 2014 and 2013 additions/adjustments for the MA segment in the table above relate to the acquisition of Amba in the fourth quarter of 2013. There were no impairments to goodwill in the six months ended June 30, 2014 and year ended December 31, 2013.

Acquired intangible assets and related amortization consisted of:

June 30,December 31,
20142013
Customer relationships$ 272.0$ 237.4
Accumulated amortization (93.5) (86.6)
Net customer relationships 178.5 150.8
Trade secrets 31.0 31.1
Accumulated amortization (19.7) (18.5)
Net trade secrets 11.3 12.6
Software 72.5 71.0
Accumulated amortization (42.7) (38.8)
Net software 29.8 32.2
Trade names 81.3 31.3
Accumulated amortization (12.5) (11.7)
Net trade names 68.8 19.6
Other 42.9 26.1
Accumulated amortization (20.8) (19.7)
Net other 22.1 6.4
Total acquired intangible assets, net$ 310.5$ 221.6

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

Amortization expense relating to acquired intangible assets is as follows:

Three Months EndedSix Months Ended
June 30,June 30,
2014201320142013
Amortization expense$ 6.3$ 6.9$ 13.6$ 14.0

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

Year Ending December 31,
2014 (after June 30,)$ 12.3
2015 24.2
2016 23.5
2017 19.9
2018 15.1
Thereafter 114.1

Due to the proximity of the acquisition date to filing of this Form 10Q, the above table does not include future amortization for intangible assets from the ICRA acquisition as more fully discussed in Note 7 as the Company is still in the process of determining the estimated useful lives of these assets.

Amortizable intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the estimated undiscounted future cash flows are lower than the carrying amount of the related asset, a loss is recognized for the difference between the carrying amount and the estimated fair value of the asset. There were no impairments to intangible assets during the three and six months ended June 30, 2014 and 2013.

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 June 30, 2014 and December 31, 2013:

Fair Value Measurement as of June 30, 2014
DescriptionBalanceLevel 1Level 2Level 3
Assets:
Derivatives (a)$ 18.5$ -$ 18.5$ -
Fixed maturity and open ended mutual funds (b) 44.6 44.6 - -
Total$ 63.1$ 44.6$ 18.5$ -
Liabilities:
Derivatives (a)$ 0.7$ -$ 0.7$ -
Contingent consideration arising from acquisitions (c) 17.2 - - 17.2
Total$ 17.9$ -$ 0.7$ 17.2
Fair Value Measurement as of December 31, 2013
DescriptionBalanceLevel 1Level 2Level 3
Assets:
Derivatives (a)$ 20.5$ -$ 20.5$ -
Total$ 20.5$ -$ 20.5$ -
Liabilities:
Derivatives (a)$ 1.7$ -$ 1.7$ -
Contingent consideration arising from acquisitions (c) 17.5 - - 17.5
Total$ 19.2$ -$ 1.7$ 17.5
(a) Represents interest rate swaps and FX forwards on certain assets and liabilities as well as on certain non-U.S. dollar net investments in certain foreign subsidiaries as more fully described in Note 6 to the financial statements.
(b) Represents investments in fixed maturity mutual funds and open ended mutual funds. These investments were acquired pursuant to the ICRA step-acquisition, more fully discussed in Note 7 to the financial statements. The remaining contractual maturities for the fixed maturity instruments range from one month to 11 months.
(c) Represents contingent consideration liabilities pursuant to the agreements for certain MA acquisitions.

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

Contingent Consideration
Six Months Ended
June 30,
20142013
Balance as of January 1$ 17.5$ 9.0
Contingent consideration payments - (2.5)
Total losses (gains) (realized and unrealized):
Included in earnings (0.2) 4.1
Foreign currency translation adjustments (0.1) (0.1)
Balance as of June 30$ 17.2$ 10.5

The gains and losses included in earnings in the table above are recorded within SG&A expenses in the Company’s consolidated statements of operations. The gains in the six months ended June 30, 2014 relate to contingent consideration obligations outstanding at June 30, 2014.

Of the $17.2 million of contingent consideration obligations as of June 30, 2014, $14.9 million is classified in accounts payable and accrued liabilities and $2.3 million is classified in other liabilities within the Company’s consolidated balance sheet.

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

Derivatives:

In determining the fair value of the derivative contracts, 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.

Fixed maturity and open ended mutual funds:

The fixed maturity mutual funds and open ended mutual funds primarily represent exchange traded funds in India which were acquired as part of the ICRA step-acquisition and are classified as securities available-for-sale. Accordingly, any unrealized gains and losses in future quarters will be recognized through other comprehensive income until the instruments mature. The cost basis of these investments is $42.3 million at June 30, 2014.

Contingent consideration:

At June 30, 2014, the Company has contingent consideration obligations related to the acquisitions of CSI, Copal and Amba which are carried at estimated fair value, and are based on certain financial and non-financial metrics set forth in the acquisition agreements. These obligations are measured using Level 3 inputs as defined in the ASC. The Company recorded the obligations for these contingent consideration arrangements on the date of each respective acquisition based on management’s best estimates of the achievement of the metrics and the value of the obligations are adjusted quarterly.

The contingent consideration obligation for CSI is based on the achievement of a certain contractual milestone by January 2016. The Company utilizes a discounted cash flow methodology to value this obligation. The future expected cash flow for this obligation is discounted using an interest rate available to borrowers with similar credit risk profiles to that of the Company. The most significant unobservable input involved in the measurement of this obligation is the probability that the milestone will be reached by January 2016. At June 30, 2014, the Company expects that this milestone will be reached by the aforementioned date.

There are several contingent consideration obligations relating to the acquisition of Copal. A portion of the contingent cash payments are based on revenue and EBITDA growth for certain of the Copal entities. This growth is calculated by comparing revenue and EBITDA in the year immediately prior to the exercise of the put/call option to acquire the remaining 33% ownership interest of Copal Partners Limited which the Company does not currently own, to revenue and EBITDA in Copal’s fiscal year ended March 31, 2011. There are no limitations set forth in the acquisition agreement relating to the amount payable under this contingent consideration arrangement. Payments under this arrangement, if any, would be made upon the exercise of the aforementioned put/call option, which expires in November 2017. 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 plus sovereign and size risk premiums. The most significant unobservable input involved in the measurement of these obligations is the projected future financial results of the applicable Copal entities. These remaining obligations will be settled upon the exercise of the call/put option. Other contingent cash payments were based on the achievement of revenue targets for Copal’s fiscal year ended March 31, 2012 and 2013, with certain limits on the amount of revenue that can be applied to the calculation of these contingent payments. Each of these contingent payments had a maximum payout of $2.5 million and have been settled as of December 31, 2013.

For the contingent consideration obligations relating to the acquisition of Amba, the payment is based on the acquired entity achieving a revenue target for its fiscal year ended March 31, 2014. The Company has utilized a discounted cash flow methodology to value this obligation. At March 31, 2014, Amba has met this revenue target and a $4.3 million contingent consideration payment will be made in 2014.

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.

OTHER BALANCE SHEET INFORMATION
OTHER BALANCE SHEET INFORMATION

NOTE 10. OTHER BALANCE SHEET AND STATEMENT OF OPERATIONS INFORMATION

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

June 30,December 31,
20142013
Other current assets:
Prepaid taxes$ 100.3$ 40.0
Prepaid expenses 48.3 48.1
Other 28.4 26.3
Total other current assets$ 177.0$ 114.4
June 30,December 31,
20142013
Other assets:
Investments in joint ventures$ 17.3$ 37.5
Deposits for real-estate leases 11.5 10.3
Indemnification assets related to acquisitions 26.1 27.0
Fixed maturity and open ended mutual funds 44.6 -
Other 47.9 37.3
Total other assets$ 147.4$ 112.1
June 30,December 31,
20142013
Accounts payable and accrued liabilities:
Salaries and benefits$ 69.5$ 77.1
Incentive compensation 73.2 135.9
Customer credits, advanced payments and advanced billings 23.2 21.7
Self-insurance reserves 26.6 27.6
Dividends 4.4 65.5
Professional service fees 49.3 32.9
Interest accrued on debt 36.1 36.3
Accounts payable 20.4 16.4
Income taxes 33.2 47.5
Pension and other retirement employee benefits 7.1 7.0
Other 87.8 71.0
Total accounts payable and accrued liabilities$ 430.8$ 538.9
June 30,December 31,
20142013
Other liabilities:
Pension and other retirement employee benefits$ 161.7$ 164.0
Deferred rent-non-current portion 108.5 106.3
Interest accrued on UTPs 16.2 18.0
Legacy and other tax matters 15.6 15.4
Other 52.7 56.5
Total other liabilities$ 354.7$ 360.2

Redeemable Noncontrolling Interest:

In connection with the acquisition of Copal, the Company and the non-controlling shareholders entered into a put/call option agreement whereby the Company has the option to purchase from the non-controlling shareholders and the non-controlling shareholders have the option to sell to the Company the remaining 33% ownership interest of Copal Partners Limited based on a strike price to be calculated on pre-determined formulas using a combination of revenue and EBITDA multiples when exercised. The value of the estimated put/call option strike price on the date of acquisition was based on a Monte Carlo simulation model. This model contemplated multiple scenarios which simulated certain of Copal’s revenue, EBITDA margins and equity values to estimate the present value of the expected strike price of the option. In connection with the acquisition of Amba in December 2013, which was combined with Copal to form the Copal Amba reporting unit, the aforementioned revenue and EBITDA multiples set forth in the put/call option were modified to include the results of Amba. The option is subject to a minimum exercise price of $46 million. There is no limit as to the maximum amount of the strike price on the put/call option.

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

Six Months EndedYear Ended
June 30, 2014December 31, 2013
(in millions)Redeemable Noncontrolling Interest
Balance January 1,$ 80.0$ 72.3
Net earnings 5.4 5.8
Dividends (3.7) (6.0)
Adjustment to redemption value * 40.9 7.9
Balance $ 122.6$ 80.0
* The adjustment to the redemption value in the six months ended June 30, 2014 reflects the aforementioned revisions to the revenue and EBITDA multiples pursuant to the amendment of the put/call agreement which occurred contemporaneously with the acquisition of Amba coupled with growth in the Copal Amba reporting unit.

Noncontrolling Interests:

The following table summarizes the changes in the Company’s noncontrolling interests:

Six Months EndedYear Ended
June 30, 2014December 31, 2013
(in millions)Noncontrolling Interests
Balance January 1,$ 10.9$ 11.4
Net earnings 3.5 5.7
Dividends (4.7) (6.2)
ICRA noncontrolling interest* 218.8 -
Balance $ 228.5$ 10.9

* Represents the fair value of the ICRA noncontrolling interest as of the day majority control was acquired.

Other Non-Operating (Expense) Income:

The following table summarizes the components of other non-operating (expense) income:

Three Months EndedSix Months Ended
June 30,June 30,
2014201320142013
FX gain/(loss)$ (7.1)$ 5.3$ (6.1)$ 12.7
Joint venture income 3.5 3.2 5.3 4.9
Other 0.3 (0.8) (0.1) (1.1)
Total$ (3.3)$ 7.7$ (0.9)$ 16.5

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

Six Months EndedYear Ended
June 30,December 31,
(in millions)20142013
Balance January 1,$ 27.6$ 55.8
Accruals (reversals), net 13.7 (0.9)
Payments (14.7) (27.3)
Balance*$ 26.6$ 27.6
* These reserves primarily relate to legal defense costs for claims from prior years.
PENSION AND OTHER POST-RETIREMENT BENEFITS
PENSION AND OTHER POST-RETIREMENT BENEFITS

NOTE 12. PENSION AND OTHER RETIREMENT BENEFITS

Moody’s maintains funded and unfunded noncontributory Defined Benefit Pension Plans. The U.S. DBPPs provide defined benefits using a cash balance formula based on years of service and career average salary for its employees or final average pay for selected executives. The Company also provides certain healthcare and life insurance benefits for retired U.S. employees. The 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 funded and unfunded U.S. pension plans are referred to herein as “Pension 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 January 1, 2008, the Company no longer offers DBPPs to U.S. employees hired or rehired on or after January 1, 2008. New U.S. employees will instead receive a retirement contribution of similar benefit value under the Company’s Profit Participation Plan. Current participants of the Company’s DBPPs continue to accrue benefits based on existing plan formulas.

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

Three Months Ended June 30,
Pension PlansOther Retirement Plans
2014201320142013
Components of net periodic expense
Service cost$ 4.6$ 4.7$ 0.4$ 0.4
Interest cost 4.2 3.3 0.3 0.2
Expected return on plan assets (3.5) (3.1) - -
Amortization of net actuarial loss from earlier periods 1.8 2.6 - 0.1
Amortization of net prior service costs from earlier periods 0.1 0.1 - -
Net periodic expense$ 7.2$ 7.6$ 0.7$ 0.7
Six Months Ended June 30,
Pension PlansOther Retirement Plans
2014201320142013
Components of net periodic expense
Service cost$ 9.2$ 9.9$ 0.8$ 0.8
Interest cost 8.2 6.7 0.5 0.4
Expected return on plan assets (7.0) (6.4) - -
Amortization of net actuarial loss from earlier periods 3.3 5.4 - 0.2
Amortization of net prior service costs from earlier periods 0.3 0.3 - -
Net periodic expense$ 14.0$ 15.9$ 1.3$ 1.4

The Company contributed $20.7 million to its U.S. funded pension plan and made payments of $1.2 million related to its unfunded U.S. DBPPs and $0.2 million to its U.S. other retirement plans, respectively during the six months ended June 30, 2014. The Company presently anticipates making additional payments of $3.1 million related to its unfunded U.S. DBPPs and $0.4 million to its U.S. other retirement plans during the remainder of 2014.

INDEBTEDNESS
3 Months Ended 6 Months Ended
Mar. 31, 2014
Jun. 30, 2014
INDEBTEDNESS
  • The carrying amount for the Series 2005-1 Notes includes an $8.7 million and $10.3 million fair value adjustment on an interest rate hedge at June 30, 2014 and December 31, 2013, respectively.
  • The carrying amount for the 2010 Senior Notes includes the unamortized discount of $2.1 million and $2.2 million in 2014 and 2013, respectively, and a $3.9 million fair value adjustment on an interest rate hedge at June 30, 2014.

The fair value of the Company’s long-term debt is estimated using discounted cash flows with inputs based on prevailing interest rates available to the Company for borrowings with similar maturities.

INDEBTEDNESS

NOTE 13. INDEBTEDNESS

The following table summarizes total indebtedness:

June 30,December 31,
20142013
2012 Facility$ -$ -
Notes Payable:
4.98% Series 2005-1 Notes, due 2015; includes the fair value of interest rate swap of $8.7 million at 2014 and $10.3 million at 2013 308.7 310.3
6.06% Series 2007-1 Notes due 2017 300.0 300.0
5.50% 2010 Senior Notes, due 2020, net of unamortized discount of $2.1 million in 2014 and $2.2 million in 2013; also includes the fair value of interest rate swap of $3.9 million in 2014 501.8 497.8
4.50% 2012 Senior Notes, due 2022, net of unamortized discount of $3.4 million in 2014 and $3.5 million in 2013 496.6 496.5
4.875% 2013 Senior Notes, due 2024, net of unamortized discount of $2.6 million in 2014 and $2.8 million in 2013 497.4 497.2
Total long-term debt$ 2,104.5$ 2,101.8

The Company has the capacity to borrow up to $1 billion under its unsecured revolving credit facility which expires in April 2017. Any future borrowings under this facility would accrue interest at LIBOR plus a premium that can range from 77.5 bps to 120 bps per annum based on the Company’s debt/EBITDA ratio.

The Company has entered into interest rate swaps on the Series 2005-1 Notes and the 2010 Senior Notes which are more fully discussed in Note 6 above.

At June 30, 2014, the Company was in compliance with all covenants contained within all of the debt agreements. In addition to the covenants described above, the 2012 Facility, the 2005 Agreement, the 2007 Agreement, the 2010 Senior Notes, the 2012 Senior Notes and the 2013 Senior Notes contain cross default provisions. These provisions state that default under one of the aforementioned debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under those instruments to be immediately due and payable. As of June 30, 2014, there were no such cross defaults.

Interest expense, net

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

Three Months EndedSix Months Ended
June 30,June 30,
2014201320142013
Income$ 1.7$ 1.2$ 3.3$ 2.4
Expense on borrowings (25.6) (20.5) (51.7) (41.5)
UTPs and other tax related liabilities* (2.1) (2.4) (1.5) (4.6)
Capitalized - - 0.1 -
Total$ (26.0)$ (21.7)$ (49.8)$ (43.7)
* The six months ended June 30, 2014 amount includes $2.0 million reversal of an interest accrual relating to the favorable resolution of an international tax matter.
Six Months Ended
June 30,
20142013
Interest paid$ 60.5$ 41.4

The Company’s long-term debt is recorded at its carrying amount, which represents the issuance amount plus or minus any issuance premium or discount, except for the Series 2005-1 Notes and the 2010 Senior Notes which are recorded at the carrying amount adjusted for the fair value of an interest rate swap used to hedge the fair value of the note. The fair value and carrying value of the Company’s long-term debt as of June 30, 2014 and December 31, 2013 are as follows:

June 30, 2014December 31, 2013
Carrying AmountEstimated Fair ValueCarrying AmountEstimated Fair Value
Series 2005-1 Notes(1)$ 308.7$ 314.5$ 310.3$ 319.2
Series 2007-1 Notes 300.0 338.9 300.0 334.7
2010 Senior Notes(2) 501.8 565.7 497.8 536.6
2012 Senior Notes 496.6 524.5 496.5 497.0
2013 Senior Notes 497.4 537.5 497.2 501.2
Total$ 2,104.5$ 2,281.1$ 2,101.8$ 2,188.7
  • The carrying amount for the Series 2005-1 Notes includes an $8.7 million and $10.3 million fair value adjustment on an interest rate hedge at June 30, 2014 and December 31, 2013, respectively.
  • The carrying amount for the 2010 Senior Notes includes the unamortized discount of $2.1 million and $2.2 million in 2014 and 2013, respectively, and a $3.9 million fair value adjustment on an interest rate hedge at June 30, 2014.

The fair value of the Company’s long-term debt is estimated using discounted cash flows with inputs based on prevailing interest rates available to the Company for borrowings with similar maturities.

CONTINGENCIES
CONTINGENCIES

NOTE 14. CONTINGENCIES

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

Following the global credit crisis of 2008, MIS and other credit rating agencies have been the subject of intense scrutiny, increased regulation, ongoing inquiry and governmental investigations, and civil litigation. Legislative, regulatory and enforcement entities around the world are considering additional legislation, regulation and enforcement actions, including with respect to MIS’s compliance with newly imposed regulatory standards. Moody’s has received subpoenas and inquiries from states attorneys general and other domestic and foreign governmental authorities and is responding to such investigations and inquiries.

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

On August 25, 2008, Abu Dhabi Commercial Bank filed a purported class action in the United States District Court for the Southern District of New York asserting numerous common-law causes of action against two subsidiaries of the Company, another rating agency, and Morgan Stanley & Co. The action related to securities issued by a structured investment vehicle called Cheyne Finance (the “Cheyne SIV”) and sought, among other things, compensatory and punitive damages. The central allegation against the rating agency defendants was that the credit ratings assigned to the securities issued by the Cheyne SIV were false and misleading. In early proceedings, the court dismissed all claims against the rating agency defendants except those for fraud and aiding and abetting fraud. In June 2010, the court denied plaintiff’s motion for class certification, and additional plaintiffs were subsequently added to the complaint. In January 2012, the rating agency defendants moved for summary judgment with respect to the fraud and aiding and abetting fraud claims. Also in January 2012, in light of new New York state case law, the court permitted the plaintiffs to file an amended complaint that reasserted previously dismissed claims against all defendants for breach of fiduciary duty, negligence, negligent misrepresentation, and related aiding and abetting claims. In May 2012, the court, ruling on the rating agency defendants’ motion to dismiss, dismissed all of the reasserted claims except for the negligent misrepresentation claim, and on September 19, 2012, after further proceedings, the court also dismissed the negligent misrepresentation claim. On August 17, 2012, the court ruled on the rating agencies’ motion for summary judgment on the plaintiffs’ remaining claims for fraud and aiding and abetting fraud. The court dismissed, in whole or in part, the fraud claims of four plaintiffs as against Moody’s but allowed the fraud claims to proceed with respect to certain claims of one of those plaintiffs and the claims of the remaining 11 plaintiffs. The court also dismissed all claims against Moody’s for aiding and abetting fraud. Three of the plaintiffs whose claims were dismissed filed motions for reconsideration, and on November 7, 2012, the court granted two of these motions, reinstating the claims of two plaintiffs that were previously dismissed. On February 1, 2013, the court dismissed the claims of one additional plaintiff on jurisdictional grounds. Trial on the remaining fraud claims against the rating agencies, and on claims against Morgan Stanley for aiding and abetting fraud and for negligent misrepresentation, was scheduled for May 2013. On April 24, 2013, pursuant to confidential settlement agreements, the 14 plaintiffs with claims that had been ordered to trial stipulated to the voluntary dismissal, with prejudice, of these claims as against all defendants, and the Court so ordered that stipulation on April 26, 2013. The settlement did not cover certain claims of two plaintiffs that were previously dismissed by the Court. On May 23, 2013, these two plaintiffs filed a Notice of Appeal to the Second Circuit, seeking reversal of the dismissal of their claims and also seeking reversal of the Court’s denial of class certification. According to pleadings filed by plaintiffs in earlier proceedings, they seek approximately $76 million in total compensatory damages in connection with the two claims at issue on the appeal.

In October 2009, plaintiffs King County, Washington and Iowa Student Loan Liquidity Corporation each filed substantially identical putative class actions in the Southern District of New York against two subsidiaries of the Company and several other defendants, including two other rating agencies and IKB Deutsche Industriebank AG. These actions arose out of investments in securities issued by a structured investment vehicle called Rhinebridge Plc (the “Rhinebridge SIV”) and sought, among other things, compensatory and punitive damages. Each complaint asserted a claim for common law fraud against the rating agency defendants, alleging, among other things, that the credit ratings assigned to the securities issued by the Rhinebridge SIV were false and misleading. The case was assigned to the same judge presiding over the litigation concerning the Cheyne SIV, described above. In April 2010, the court denied the rating agency defendants’ motion to dismiss. In June 2010, the court consolidated the two cases and the plaintiffs filed an amended complaint that, among other things, added Morgan Stanley & Co. as a defendant. In January 2012, in light of new New York state case law, the court permitted the plaintiffs to file an amended complaint that asserted claims against the rating agency defendants for breach of fiduciary duty, negligence, negligent misrepresentation, and aiding and abetting claims. In May 2012, the court, ruling on the rating agency defendants’ motion to dismiss, dismissed all of the new claims except for the negligent misrepresentation claim and a claim for aiding and abetting fraud; on September 28, 2012, after further proceedings, the court also dismissed the negligent misrepresentation claim. Plaintiffs did not seek class certification. On September 7, 2012 the rating agencies filed a motion for summary judgment dismissing the remaining claims against them. On January 3, 2013, the Court issued an order dismissing the claim for aiding and abetting fraud against the rating agencies but allowing the claim for fraud to proceed to trial. In June 2012 and March 2013, respectively, defendants IKB Deutsche Industriebank AG (and a related entity) and Fitch, Inc. informed the court that they had executed confidential settlement agreements with the plaintiffs. On April 24, 2013, pursuant to a confidential settlement agreement, the plaintiffs stipulated to the voluntary dismissal, with prejudice, of all remaining claims as against the remaining defendants, including Moody’s, and the Court so ordered that stipulation on April 26, 2013.

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.

Legacy Tax Matters

Moody’s continues to have exposure to potential liabilities arising from Legacy Tax Matters. As of June 30, 2014, Moody’s has recorded liabilities for Legacy Tax Matters totaling $17.8 million. This includes liabilities and accrued interest due to New D&B arising from the 2000 Distribution Agreement. It is possible that the ultimate liability for Legacy Tax Matters could be greater than the liabilities recorded by the Company, which could result in additional charges that may be material to Moody’s future reported results, financial position and cash flows.

SEGMENT INFORMATION
SEGMENT INFORMATION

NOTE 15. SEGMENT INFORMATION

Beginning in January 2014, pursuant to certain management realignment, the Company revised its operating segments. Accordingly, the Company is now organized into four operating segments: (i) MIS, (ii) MA, (iii) Copal Amba and (iv) an immaterial operating segment that provides fixed income pricing services and research in the Asia-Pacific region. The Copal Amba and the immaterial operating segment have been aggregated with the MA operating segment to form the MA reportable segment based on the determination that all of the operating segments demonstrate similar economic characteristics. Accordingly, the Company continues to be organized into two reportable segments: (i) MIS and (ii) MA. The MIS segment is comprised of all of the Company’s ratings activities. All of Moody’s other non-rating commercial activities are included in the MA reportable segment. Revenue from the Copal Amba operating segment continues to be reported within the PS LOB while revenue from the immaterial operating segment that provides fixed income pricing services and research in the Asia-Pacific region continues to be reported within RD&A.

The MIS segment consists of four lines of business—corporate finance, structured finance, financial institutions and public, project and infrastructure finance—that generate revenue principally from fees for the assignment and ongoing monitoring of credit ratings on debt obligations and the entities that issue such obligations in markets worldwide.

The MA segment, which includes all of the Company’s non-rating commercial activities, develops a wide range of products and services that support the risk management activities of institutional participants in global financial markets. The MA segment consists of three lines of business – RD&A, ERS and PS.

Revenue for MIS and expenses for MA include an intersegment royalty charged to MA for the rights to use and distribute content, data and products developed by MIS. The royalty rate charged by MIS approximates the fair value of the aforementioned content, data and products and is generally based on comparable market transactions. Also, revenue for MA and expenses for MIS include an intersegment fee charged to MIS from MA for certain MA products and services utilized in MIS’s ratings process. These fees charged by MA are generally equal to the costs incurred by MA to produce these products and services. Additionally, overhead costs and corporate expenses of the Company which exclusively benefit only one segment, are fully charged to that segment. Overhead costs and corporate expenses of the Company which benefit both segments are allocated to each segment based on a revenue-split methodology. Overhead expenses include costs such as rent and occupancy, information technology and support staff such as finance, human resources and information technology. “Eliminations” in the table below represent intersegment revenue/expense.

Financial Information by Segment

The table below shows revenue, Adjusted Operating Income and operating income by reportable segment. Adjusted Operating Income is a financial metric utilized by the Company’s chief operating decision maker to assess the profitability of each reportable segment.

Three Months Ended June 30,
20142013
MISMAEliminationsConsolidatedMISMAEliminationsConsolidated
Revenue$ 643.6$ 255.1$ (25.2)$ 873.5$ 556.3$ 221.4$ (21.7)$ 756.0
Operating, SG&A 268.9 195.8 (25.2) 439.5 236.2 167.6 (21.7) 382.1
Adjusted Operating Income 374.7 59.3 - 434.0 320.1 53.8 - 373.9
Less:
Depreciation and amortization 11.4 10.9 - 22.3 11.5 11.6 - 23.1
Operating income$ 363.3$ 48.4$ -$ 411.7$ 308.6$ 42.2$ -$ 350.8
Six Months Ended June 30,
20142013
MISMAEliminationsConsolidatedMISMAEliminationsConsolidated
Revenue$ 1,190.9$ 499.8$ (50.0)$ 1,640.7$ 1,096.4$ 434.8$ (43.4)$ 1,487.8
Operating, SG&A 514.6 386.0 (50.0) 850.6 520.5 332.8 (43.4) 809.9
Adjusted Operating Income 676.3 113.8 - 790.1 575.9 102.0 - 677.9
Less:
Depreciation and amortization 22.8 22.6 - 45.4 22.8 23.9 - 46.7
Operating income$ 653.5$ 91.2$ -$ 744.7$ 553.1$ 78.1$ -$ 631.2

MIS and MA Revenue by Line of Business

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

Three Months Ended June 30,Six Months Ended June 30,
2014201320142013
MIS:
Corporate finance (CFG)$ 320.9$ 262.9$ 585.3$ 521.2
Structured finance (SFG) 110.6 97.2 205.9 190.2
Financial institutions (FIG) 92.2 84.5 177.6 171.0
Public, project and infrastructure finance (PPIF) 98.0 92.7 178.7 176.1
Total external revenue 621.7 537.3 1,147.5 1,058.5
Intersegment royalty 21.9 19.0 43.4 37.9
Total 643.6 556.3 1,190.9 1,096.4
MA:
Research, data and analytics (RD&A) 144.7 130.3 285.6 259.9
Enterprise risk solutions (ERS) 67.2 60.2 127.0 113.2
Professional services (PS) 39.9 28.2 80.6 56.2
Total external revenue 251.8 218.7 493.2 429.3
Intersegment revenue 3.3 2.7 6.6 5.5
Total 255.1 221.4 499.8 434.8
Eliminations (25.2) (21.7) (50.0) (43.4)
Total MCO$ 873.5$ 756.0$ 1,640.7$ 1,487.8
Consolidated Revenue Information by Geographic Area:
Three Months Ended June 30,Six Months Ended June 30,
2014201320142013
United States$ 461.1$ 408.4$ 886.7$ 818.3
International:
EMEA 263.3 222.5 483.9 429.6
Asia-Pacific 88.6 75.5 158.5 143.7
Americas 60.5 49.6 111.6 96.2
Total International 412.4 347.6 754.0 669.5
Total$ 873.5$ 756.0$ 1,640.7$ 1,487.8
RECENTLY ISSUED ACCOUNTING STANDARDS
RECENTLY ISSUED ACCOUNTING STANDARDS

NOTE 16. RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”. This ASU outlines a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This ASU is effective for annual and interim reporting periods beginning after December 15, 2016 and early adoption is not permitted. Companies may either use a full retrospective or modified retrospective approach to adopt this ASU. The Company is currently evaluating both adoption options and the impact that adoption of this update will have on its consolidated financial statements.

In April 2014, the FASB issued ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. The objective of this ASU is to change the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. In accordance with this ASU, only those disposals of components of an entity that represent a strategic shift which has or will have a material effect on an entity’s operations and financial results will be reported as discontinued operations. The amendments in this ASU are required to be applied prospectively for any disposals (of classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014 and interim periods within those years. Early adoption is permitted, for disposals (or classifications as held for sale) that have not been previously reported in an entity’s financial statements. The adoption of this ASU will not have any impact on the Company’s consolidated financial statements other than changing the classification criteria and related disclosures for any potential future disposals (or classifications as held for sale).

SUBSEQUENT EVENTS
SUBSEQUENT EVENTS

NOTE 17. SUBSEQUENT EVENTS

On July 16, 2014, the Company issued $450 million aggregate principal amount of unsecured notes in a public offering. The notes bear interest at 2.750% and mature on July 15, 2019. Also on July 16, 2014, the Company issued $300 million aggregate principal amount of unsecured notes in a public offering. The $300 million notes bear interest at 5.250% and mature on July 15, 2044. The Company intends to use the proceeds of these notes to retire the Series 2005-1 Notes, for which the Company has issued a notice to the bondholders calling the notes, as well as for general corporate purposes. The Company entered into interest rate swaps in July 2014 with a total notional amount of $250 million to convert the fixed interest rate on a portion of the $450 million unsecured 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 a portion of the $450 million unsecured notes.

On July 14, 2014, the Board approved the declaration of a quarterly dividend of $0.28 per share of Moody’s common stock, payable on September 10, 2014 to shareholders of record at the close of business on August 20, 2014.

STOCK-BASED COMPENSATION (Tables)
Three Months EndedSix Months Ended
June 30,June 30,
2014201320142013
Stock-based compensation cost$ 20.3$ 16.1$ 40.6$ 33.3
Tax benefit$ 6.5$ 5.8$ 12.8$ 12.0
Expected dividend yield 1.41%
Expected stock volatility 41.2%
Risk-free interest rate 2.30%
Expected holding period7.2 years
Grant date fair value$ 31.49
Six Months Ended
June 30,
Exercise of stock options:20142013
Proceeds from stock option exercises$ 89.0$ 89.2
Aggregate intrinsic value$ 69.2$ 66.7
Tax benefit realized upon exercise$ 25.3$ 24.4
Number of shares exercised 2.0 2.7
Six Months Ended
June 30,
Vesting of restricted stock:20142013
Fair value of shares vested$ 91.9$ 53.8
Tax benefit realized upon vesting$ 32.0$ 19.1
Number of shares vested 1.2 1.1
Six Months Ended
June 30,
Vesting of performance-based restricted stock:20142013
Fair value of shares vested$ 38.0$ 25.5
Tax benefit realized upon vesting$ 14.8$ 9.7
Number of shares vested 0.5 0.5
INCOME TAXES (Tables)
Income Taxes Paid
Six Months Ended
June 30,
20142013
Income Taxes Paid*$ 216.7$ 231.6
* Payments in 2013 include $50 million of 2012 estimated federal taxes paid in the first quarter of 2013 pursuant to IRS relief due to Hurricane Sandy.
WEIGHTED AVERAGE SHARES OUTSTANDING (Tables)
Reconciliation of Basic to Diluted Shares Outstanding
Three Months EndedSix Months Ended
June 30,June 30,
2014201320142013
Basic 212.0 222.3 213.0 222.8
Dilutive effect of shares issuable under stock-based compensation plans 3.7 3.9 4.1 3.9
Diluted 215.7 226.2 217.1 226.7
Anti-dilutive options to purchase common shares and restricted stock as well as contingently issuable restricted stock which are excluded from the table above 0.7 4.4 0.7 4.7
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Tables)
Fair Value of Derivative Instruments
Derivatives InstrumentsBalance Sheet LocationJune 30, 2014December 31, 2013
Assets:
Derivatives designated as accounting hedges:
Interest rate swapsOther assets$ 12.6$ 10.3
FX forwards on net investment in certain foreign subsidiariesOther current assets 2.5 9.3
Total derivatives designated as accounting hedges 15.1 19.6
Derivatives not designated as accounting hedges:
FX forwards on certain assets and liabilitiesOther current assets 3.4 0.9
Total assets$ 18.5$ 20.5
Liabilities:
Derivatives designated as accounting hedges:
FX forwards on net investment in certain foreign subsidiariesAccounts payable and accrued liabilities$ 0.5$ 1.0
Derivatives not designated as accounting hedges:
FX forwards on certain assets and liabilitiesAccounts payable and accrued liabilities 0.2 0.7
Total liabilities$ 0.7$ 1.7
Amount of gain (loss) recognized in the consolidated statements of operations
Three Months EndedSix Months Ended
June 30,June 30,
Derivatives designated as fair value accounting hedgesLocation on Statement of Operations2014201320142013
Interest rate swapsInterest income(expense), net$2.0$1.0$0.5$2.1
Derivatives not designated as accounting hedges
Foreign exchange forwardsOther non-operating income (expense), net$1.3$1.0$ 0.9$ (0.1)
June 30,December 31,
20142013
Notional amount of currency pair:
Contracts to sell euros for USD 50.0 50.0
Contracts to sell Japanese yen for USD 19,700 19,700
June 30,December 31,
20142013
Notional amount of currency pair:
Contracts to purchase USD with euros$ 71.1$ 14.2
Contracts to sell USD for euros$ 54.7$ 53.2
Contracts to purchase USD with GBP$ 0.7$ -
Contracts to purchase USD with other foreign currencies$ 1.9$ -
Contracts to sell USD for other foreign currencies$ 20.1$ -
Contracts to purchase euros with other foreign currencies 53.8 13.1
Contracts to purchase euros with GBP 24.1 22.1
Contracts to sell euros for GBP 67.3 -
GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS (Tables)
Six Months Ended June 30, 2014
MISMAConsolidated
Gross goodwillAccumulated impairment chargeNet goodwillGross goodwillAccumulated impairment chargeNet goodwillGross goodwillAccumulated impairment chargeNet goodwill
Balance at beginning of year$ 11.4$ -$ 11.4$ 666.0$ (12.2)$ 653.8