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GLOSSARY OF TERMS AND ABBREVIATIONS
The following terms, abbreviations and acronyms are used to identify frequently used terms in this report:
|
TERM |
DEFINITION | |
| ACNielsen | ACNielsen Corporation – a former affiliate of Old D&B | |
| Analytics | Moody's Analytics – reportable segment of MCO formed in January 2008 which combines MKMV, the sales of MIS research and other MCO non-rating commercial activities | |
| AOCI | Accumulated other comprehensive income (loss); a separate component of shareholders' equity (deficit) | |
| ASC |
The FASB Accounting Standards Codification; the sole source of authoritative GAAP as of July 1, 2009 except for rules and interpretive releases of the SEC, which are also sources of authoritative GAAP for SEC registrants | |
| ASU | The FASB Accounting Standards Updates to the ASC. It also provides background information for accounting guidance and the bases for conclusions on the changes in the ASC. ASUs are not considered authoritative until codified into the ASC | |
| Basel II | Capital adequacy framework published in June 2004 by the Basel Committee on Banking Supervision | |
| Board | The board of directors of the Company | |
| Bps | Basis points | |
| Canary Wharf Lease | Operating lease agreement entered into on February 6, 2008 for office space in London, England, occupied by the Company in the second half of 2009 | |
| CDOs | Collateralized debt obligations | |
| CFG | Corporate finance group; an LOB of MIS | |
| CMBS | Commercial mortgage-backed securities; part of CREF | |
| Cognizant | Cognizant Corporation – a former affiliate of Old D&B, which comprised the IMS Health and NMR businesses | |
| Commission | European Commission | |
| Common Stock | The Company's common stock | |
| Company | Moody's Corporation and its subsidiaries; MCO; Moody's | |
| Corporate Family Ratings | Rating opinion of a corporate family's ability to honor all of its financial obligations which is assigned to the corporate family as if it had a single class of debt and a single consolidated legal entity structure. This rating is often issued in connection with ratings of leveraged finance transactions | |
| COSO | Committee of Sponsoring Organizations of the Treadway Commission | |
| CP | Commercial paper | |
| CP Notes | Unsecured CP notes | |
| CP Program | The Company's CP program entered into on October 3, 2007 | |
| CRAs | Credit rating agencies | |
| CREF | Commercial real estate finance which includes REITs, commercial real estate CDOs and CMBS; part of SFG | |
| CSI | CSI Global Education, Inc.; an acquisition completed in November 2010; part of the MA segment; a provider of financial learning, credentials, and certification in Canada | |
| D&B Business | Old D&B's Dun & Bradstreet operating company | |
| DBPPs | Defined benefit pension plans | |
| DCF | Discounted cash flow; a fair value calculation methodology whereby future projected cash flows are discounted back to their present value using a discount rate | |
| Debt/EBITDA | Ratio of Total Debt to EBITDA | |
| Directors' Plan | The 1998 Moody's Corporation Non-Employee Directors' Stock Incentive Plan | |
| Distribution Date | September 30, 2000; the date which Old D&B separated into two publicly traded companies – Moody's Corporation and New D&B | |
| EBITDA | Earnings before interest, taxes, depreciation, amortization and extraordinary items | |
| ECAIs | External Credit Assessment Institutions | |
| ECB | European Central Bank | |
| EMEA | Represents countries within Europe, the Middle East and Africa | |
| Enb | Enb Consulting; an acquisition completed in December 2008; part of the MA segment; a provider of credit and capital markets training services | |
| EPS | Earnings per share | |
| ESPP | The 1999 Moody's Corporation Employee Stock Purchase Plan | |
| ETR | Effective Tax Rate | |
| EU | European Union | |
| EUR | Euros | |
| Excess Tax Benefit | The difference between the tax benefit realized at exercise of an option or delivery of a restricted share and the tax benefit recorded at the time that the option or restricted share is expensed under GAAP | |
| Exchange Act | The Securities Exchange Act of 1934, as amended | |
| FASB | Financial Accounting Standards Board | |
| Fermat | Fermat International; an acquisition completed in October 2008; part of the MA segment; a provider of risk and performance management software to the global banking industry | |
| FIG | Financial institutions group; an LOB of MIS | |
| Fitch | Fitch Ratings, a part of the Fitch Group which is a majority-owned subsidiary of Fimalac, S.A. | |
| Financial Reform Act | Dodd-Frank Wall Street Reform and Consumer Protection Act | |
| FSF | Financial Stability Forum | |
| FX | Foreign exchange | |
| GAAP | U.S. Generally Accepted Accounting Principles | |
| GBP | British pounds | |
| G-8 | The finance ministers and central bank governors of the group of eight countries consisting of Canada, France, Germany, Italy, Japan, Russia, U.S. and U.K. | |
| G-20 | The G-20 is an informal forum that promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. By contributing to the strengthening of the international financial architecture and providing opportunities for dialogue on national policies, international co-operation, and international financial institutions, the G-20 helps to support growth and development across the globe. The G-20 is comprised of: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, U.K., U.S. and the EU, which is represented by the rotating Council presidency and the ECB | |
| HFSC | House Financial Services Committee | |
| IMS Health | A spin-off of Cognizant, which provides services to the pharmaceutical and healthcare industries | |
| Indenture | Indenture and supplemental indenture dated August 19, 2010, relating to the 2010 Senior Notes | |
| Indicative Ratings | These are ratings which are provided as of a point in time, and not published or monitored. They are primarily provided to potential or current issuers to indicate what a rating may be based on business fundamentals and financial conditions as well as based on proposed financings | |
| Intellectual Property | The Company's intellectual property, including but not limited to proprietary information, trademarks, research, software tools and applications, models and methodologies, databases, domain names, and other proprietary materials | |
| IOSCO | International Organization of Securities Commissions | |
| IOSCO Code | Code of Conduct Fundamentals for CRAs issued by IOSCO | |
| IRS | Internal Revenue Service | |
| Legacy Tax Matter(s) | Exposures to certain tax matters in connection with the 2000 Distribution | |
| LIBOR | London Interbank Offered Rate | |
| LOB | Line of Business | |
| MA | Moody's Analytics – a reportable segment of MCO formed in January 2008 which includes the non-rating commercial activities of MCO | |
| Make Whole Amount | The prepayment penalty relating to the Series 2005-1 Notes and Series 2007-1 Notes; a premium based on the excess, if any, of the discounted value of the remaining scheduled payments over the prepaid principal | |
| MCO | Moody's Corporation and its subsidiaries; the Company; Moody's | |
| MD&A | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
| MIS | Moody's Investors Service – a reportable segment of MCO | |
| MIS Code | Moody's Investors Service Code of Professional Conduct | |
| MKMV | Moody's KMV – a reportable segment of MCO prior to January 2008 | |
| Moody's | Moody's Corporation and its subsidiaries; MCO; the Company | |
| Net Income | Net income attributable to Moody's Corporation, which excludes the portion of net income from consolidated entities attributable to non-controlling shareholders | |
| New D&B | The New D&B Corporation – which comprises the D&B business after September 30, 2000 | |
| NM | Not-meaningful percentage change (over 400%) | |
| NMR | Nielsen Media Research, Inc.; a spin-off of Cognizant; a leading source of television audience measurement services | |
| NRSRO | Nationally Recognized Statistical Rating Organization | |
| Old D&B | The former Dun and Bradstreet Company which distributed New D&B shares on September 30, 2000, and was renamed Moody's Corporation | |
| Post-Retirement Plans | Moody's funded and unfunded U.S. pension plans, the U.S. post-retirement healthcare plans and the U.S. post-retirement life insurance plans | |
| PPIF | Public, project and infrastructure finance; an LOB of MIS | |
| Profit Participation Plan | Defined contribution profit participation plan that covers substantially all U.S. employees of the Company | |
| PPP |
Profit Participation Plan | |
| RD&A | Research, Data and Analytics; an LOB within MA that distributes investor-oriented research and data, including in-depth research on major debt issuers, industry studies, commentary on topical credit events, economic research and analytical tools such as quantitative risk scores | |
| Reform Act | Credit Rating Agency Reform Act of 2006 | |
| REITs | Real estate investment trusts | |
| Reorganization | The Company's business reorganization announced in August 2007 which resulted in two new reportable segments (MIS and MA) beginning in January 2008 | |
| RMBS | Residential mortgage-backed securities; part of SFG | |
| RMS | The Risk Management Software LOB within MA which provides both economic and regulatory capital risk management software and implementation services | |
| S&P | Standard & Poor's Financial Services, a division of The McGraw-Hill Companies, Inc. | |
| SEC | Securities and Exchange Commission | |
| Series 2005-1 Notes | Principal amount of $300.0 million, 4.98% senior unsecured notes due in September 2015 pursuant to the 2005 Agreement | |
| Series 2007-1 Notes | Principal amount of $300.0 million, 6.06% senior unsecured notes due in September 2017 pursuant to the 2007 Agreement | |
| SFG | Structured finance group; an LOB of MIS | |
| SG&A | Selling, general and administrative expenses | |
| Stock Plans | The Old D&B's 1998 Key Employees' Stock Incentive Plan and the Restated 2001 Moody's Corporation Key Employees' Stock Incentive Plan | |
| T&E | Travel and entertainment expenses | |
| TPE | Third party evidence, as defined in the ASC, used to determine selling price based on a vendor's or any competitor's largely interchangeable products or services in standalone sales transactions to similarly situated customers | |
| Total Debt | Current and long-term portion of debt as reflected on the consolidated balance sheets, excluding current accounts payable and accrued liabilities incurred in the ordinary course of business | |
| U.K. | United Kingdom | |
| U.S. | United States | |
| USD | U.S. dollar | |
| UTBs | Unrecognized tax benefits | |
| UTPs | Uncertain tax positions | |
| VAT | Value added tax | |
| VSOE | Vendor specific objective evidence; evidence, as defined in the ASC, of selling price limited to either of the following: the price charged for a deliverable when it is sold separately, or for a deliverable not yet being sold separately, the price established by management having the relevant authority | |
| WACC | Weighted average cost of capital | |
| 1998 Plan | Old D&B's 1998 Key Employees' Stock Incentive Plan | |
| 2000 Distribution | The distribution by Old D&B to its shareholders of all of the outstanding shares of New D&B common stock on September 30, 2000 | |
|
2000 Distribution Agreement |
Agreement governing certain ongoing relationships between the Company and New D&B after the 2000 Distribution including the sharing of any liabilities for the payment of taxes, penalties and interest resulting from unfavorable IRS determinations on certain tax matters and certain other potential tax liabilities | |
| 2001 Plan | The Amended and Restated 2001 Moody's Corporation Key Employees' Stock Incentive Plan | |
| 2005 Agreement | Note purchase agreement dated September 30, 2005 relating to the Series 2005-1 Notes | |
| 2007 Agreement | Note purchase agreement dated September 7, 2007 relating to the Series 2007-1 Notes | |
| 2007 Facility | Revolving credit facility of $1 billion entered into on September 28, 2007, expiring in 2012 | |
| 2007 Restructuring Plan | The Company's 2007 restructuring plan approved December 31, 2007 | |
| 2008 Term Loan | Five-year $150.0 million senior unsecured term loan entered into by the Company on May 7, 2008 | |
| 2009 Restructuring Plan | The Company's 2009 restructuring plan approved March 27, 2009 | |
| 2010 Senior Notes | Principal amount of $500.0 million, 5.50% senior unsecured notes due in September 2010 pursuant to the Indenture | |
| 7WTC | The Company's corporate headquarters located at 7 World Trade Center | |
| 7WTC Lease | Operating lease agreement entered into on October 20, 2006 | |
|
|||
| NOTE 1 | DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION |
Moody's is a provider of (i) credit ratings, (ii) credit and economic related research, data and analytical tools, (iii) risk management software and (iv) quantitative credit risk measures, credit portfolio management solutions, training, and financial credentialing and certification services. In 2007 and prior years, Moody's operated in two reportable segments: Moody's Investors Service and Moody's KMV. Beginning in January 2008, Moody's segments were changed to reflect the Reorganization announced in August 2007 and Moody's now reports in two reportable segments: MIS and MA. As a result of the Reorganization, the rating agency remains in the MIS operating segment and several ratings business lines have been realigned. All of Moody's other non-rating commercial activities are included within the Moody's Analytics segment. The MIS segment publishes credit ratings on a wide range of debt obligations and the entities that issue such obligations in markets worldwide. Revenue is derived from the originators and issuers of such transactions who use MIS's ratings to support the distribution of their debt issues to investors. The MA segment develops a wide range of products and services that support the credit risk management activities of institutional participants in global financial markets. These offerings include quantitative credit risk scores, credit processing software, economic research, analytical models, financial data, and specialized advisory, training, financial credentialing and certification services. MA also distributes investor-oriented research and data developed by MIS as part of its rating process, including in-depth research on major debt issuers, industry studies, and commentary on topical events.
The Company operated as part of Old D&B until September 30, 2000, when Old D&B separated into two publicly traded companies – Moody's Corporation and New D&B. At that time, Old D&B distributed to its shareholders shares of New D&B stock. New D&B comprised the business of Old D&B's Dun & Bradstreet operating company. The remaining business of Old D&B consisted solely of the business of providing ratings and related research and credit risk management services and was renamed Moody's Corporation. For purposes of governing certain ongoing relationships between the Company and New D&B after the 2000 Distribution and to provide for an orderly transition, the Company and New D&B entered into various agreements including a distribution agreement, tax allocation agreement and employee benefits agreement.
|
|||
| 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. Interest income on cash and cash equivalents and short-term investments was $3.1 million, $2.5 million and $12.2 million for the years ended December 31, 2010, 2009 and 2008, respectively.
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 $20.3 million, $14.3 million and $13.2 million for the years ended December 31, 2010, 2009 and 2008, 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 that will 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, 2010, 2009 and 2008.
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 of 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
Goodwill is tested for impairment, at the reporting unit level, annually on November 30th or more frequently if events or circumstances indicate the assets may be impaired, in accordance with the provisions of ASC Topic 350. If the estimated fair value, which is based on a discounted cash flow methodology, is less than its carrying amount, the Company would proceed to step two of the impairment test as prescribed by Topic 350 of the ASC. Under step two, the estimated fair value of the reporting units would be allocated to the assets and liabilities of the reporting unit to derive the implied fair value of the goodwill. If the implied fair value of the goodwill determined under step two of the impairment test is less than its carrying amount, an impairment charge would be recognized for the difference. The discounted cash flow methodology used to value the reporting units is based on the present value of the cash flows that the Company expects the reporting unit to generate in the future. The significant estimates used to derive the present value of the cash flows include the reporting units WACC and future growth rates.
Finite-lived intangible assets and other long-lived 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.
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, restricted stock and stock appreciation rights. The Company has also established a pool of additional paid-in capital related to the tax effects of employee share-based compensation ("APIC Pool"), 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 as 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.
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 new standard changes 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 has elected to early adopt ASU 2009-13 on a prospective basis for applicable transactions originating or materially modified on or after January 1, 2010. 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 is also not expected to 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 if available, third party evidence if VSOE is not available, or estimated selling price 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, 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 the Company's 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 its 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 51 years at December 31, 2010. At December 31, 2010, 2009 and 2008, deferred revenue related to these securities was approximately $76 million, $78 million and $82 million, respectively.
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, 2010, 2009 and 2008, accounts receivable included approximately $25 million, $27 million and $34 million, respectively, related to accrued commercial paper revenue. Historically, MIS has not had material differences between the estimated revenue and the actual billings.
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.
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.
Prior to January 1, 2010 and pursuant to the previous accounting standards, the Company allocated revenue in a multiple element arrangement to each deliverable based on its relative fair value, or for software elements, based on VSOE. If the fair value was not available for an undelivered element, the revenue for the entire arrangement was deferred.
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.
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.
Restructuring
The Company's restructuring accounting follows the provisions of: Topic 712 of the ASC for severance relating to employee terminations, Topic 715 of the ASC for pension settlements and curtailments, and Topic 420 of the ASC for contract termination costs and other exit 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.
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 impacts related to derivative instruments designated as cash flow hedges. Accumulated other comprehensive (loss) income is primarily comprised of:
| December 31, | ||||||||
| (in millions) | 2010 | 2009 | ||||||
| Currency translation adjustments, net of tax | $ | 23.6 | $ | 12.1 | ||||
| Net actuarial losses and net prior service costs related to Post-Retirement Plans, net of tax | (51.4 | ) | (47.0 | ) | ||||
| Realized and unrealized losses on cash flow hedges, net of tax | (5.6 | ) | (6.3 | ) | ||||
|
Total accumulated other comprehensive loss |
$ | (33.4 | ) | $ | (41.2 | ) | ||
Income Taxes
The Company accounts for income taxes under the asset and liability method in accordance with Topic 740 of the ASC. 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 in interest expense in its consolidated statements of operations. Penalties, if incurred, would be 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 a portion of its 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, payables and short-term borrowings, 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. The Company also has long-term debt which is described in detail in Note 14. 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.
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.
Refer to Note 5 and Note 11 for specific valuation methodologies related to the Company's derivative instruments and pension assets.
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 and trade receivables.
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, 2010 and 2009. 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, 2010 or 2009.
Earnings per Share of Common Stock
Basic EPS is calculated based on the weighted average number of shares of common stock outstanding during the reporting period. Diluted EPS is calculated giving effect to all potentially dilutive common shares, assuming that such shares were outstanding during the reporting period.
Pension and Other Post-Retirement Benefits
Moody's maintains various noncontributory DBPPs as well as other contributory and noncontributory retirement and post-retirement plans. The expense and assets/liabilities that the Company reports for its pension and other post-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 post-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 2010, 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 recur 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 post-retirement benefits.
Recently Issued Accounting Pronouncements
Adopted:
In June 2009, the FASB issued a new accounting standard related to the consolidation of variable interest entities. This new standard eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. This new standard also requires enhanced disclosures regarding an enterprise's involvement in variable interest entities. The Company has adopted this new accounting standard as of January 1, 2010 and the implementation did not impact its consolidated financial statements.
In October 2009, the FASB issued ASU No. 2009-13, "Multiple-Deliverable Revenue Arrangements" ("ASU 2009-13"). The new standard changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable based on the relative selling price. The selling price for each deliverable is based on vendor-specific objective evidence of selling price if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE nor TPE is available. The Company has elected to early adopt ASU 2009-13 on a prospective basis for applicable transactions originating or materially modified on or after January 1, 2010. The early adoption of this ASU did not have a material impact on the Company's consolidated financial statements. Further information on the early adoption of this standard is set forth in this note above, under "Revenue Recognition".
In January 2010, the FASB issued ASU No. 2010-06, "Improving Disclosures about Fair Value Measurements". The new standard requires disclosure regarding transfers in and out of Level 1 and Level 2 classifications within the fair value hierarchy as well as requiring further detail of activity within the Level 3 category of the fair value hierarchy. The new standard also requires disclosures regarding the fair value for each class of assets and liabilities, which is a subset of assets or liabilities within a line item in a company's balance sheet. Additionally, the standard will require further disclosures surrounding inputs and valuation techniques used in fair value measurements. The new disclosures and clarifications of existing disclosures set forth in this ASU are effective for interim and annual reporting periods beginning after December 15, 2009, except for the additional disclosures regarding Level 3 fair value measurements, for which the effective date is for fiscal years and interim periods within those years beginning after December 15, 2010. The Company has adopted the provisions of this ASU as of January 1, 2010 for all new disclosure requirements except for the aforementioned requirements regarding Level 3 fair-value measurements, for which the Company will adopt that portion of the ASU on January 1, 2011. The portion of this ASU that was adopted on January 1, 2010 did not have a material impact on the Company's consolidated financial statements. The Company does not expect the implementation of the remaining portion of this ASU to have a material impact on its consolidated financial statements.
Not yet adopted
In December 2010, the FASB issued ASU No. 2010-29, "Disclosure of Supplementary Pro Forma Information for Business Combinations". The objective of this ASU is to address diversity in practice regarding proforma disclosures for revenue and earnings of the acquired entity. The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this ASU also expand the supplemental pro forma disclosures under ASC Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this ASU are effective for fiscal years beginning on or after December 15, 2010. The Company will conform to the disclosure requirements set forth in this ASU for any future material business combinations.
Reclassifications
Certain reclassifications have been made to the prior year amounts to conform to the current year presentation.
|
|||
| NOTE 3 | RECONCILIATION OF WEIGHTED AVERAGE SHARES OUTSTANDING |
Below is a reconciliation of basic to diluted shares outstanding:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Basic | 235.0 | 236.1 | 242.4 | |||||||||
| Dilutive effect of shares issuable under stock-based compensation plans | 1.6 | 1.7 | 2.9 | |||||||||
| Diluted | 236.6 | 237.8 | 245.3 | |||||||||
|
Antidilutive options to purchase common shares and restricted stock excluded from the table above |
15.5 | 15.6 | 11.3 | |||||||||
The calculation of diluted EPS requires certain assumptions regarding the use of both cash proceeds and assumed proceeds that would be received upon the exercise of stock options and vesting of restricted stock outstanding as of December 31, 2010, 2009 and 2008. These assumed proceeds include Excess Tax Benefits and any unrecognized compensation on the awards.
|
|||
| NOTE 4 | SHORT-TERM INVESTMENTS |
Short-term investments are securities with maturities greater than 90 days at the time of purchase that are available for use in the Company's operations in the next twelve months. The short-term investments, primarily consisting of certificates of deposit, are classified as held-to-maturity and therefore are carried at cost. The remaining contractual maturities of the short-term investments were one to six months and one to three months as of December 31, 2010 and 2009, respectively. Interest and dividends are recorded into income when earned.
|
|||
| NOTE 5 | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
The Company is exposed to global market risks, including risks from changes in FX rates and changes in interest rates. Accordingly, the Company uses derivatives in certain instances to manage the aforementioned financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for speculative purposes.
In the fourth quarter of 2010, the Company entered into interest rate swaps with a total notional amount of $300 million to convert the fixed interest rate on the Series 2005-1 Notes to a floating interest rate based on the 3-month LIBOR. The purpose of this hedge was to mitigate the risk associated with changes in the fair value of the Series 2005-1 Notes, thus the Company has designated these swaps as fair value hedges. As a result, the fair value of the swaps and changes in the fair value of the underlying debt are reported in other liabilities and as a reduction of the carrying amount of the Series 2005-1 Notes, respectively, at December 31, 2010. The changes in the fair value of the hedges and the underlying hedged item generally offset and the net cash settlements on the swaps are recorded each period within interest income (expense), net in the Company's consolidated statement of operations. The net interest income recognized in interest income (expense), net on these swaps was immaterial in 2010.
In May 2008, the Company entered into interest rate swaps with a total notional amount of $150.0 million to protect against fluctuations in the LIBOR-based variable interest rate on the 2008 Term Loan, further described in Note 14. These interest rate swaps are designated as cash flow hedges.
The Company also enters into foreign exchange forwards to mitigate the change in fair value on certain assets and liabilities denominated in currencies other than an entity's functional currency. These forward contracts are not designated as hedging instruments under the applicable sections of Topic 815 of the ASC. Accordingly, changes in the fair value of these contracts are recognized immediately in other non-operating (expense) income, net in the Company's consolidated statements of operations along with the FX gain or loss recognized on the assets and liabilities denominated in a currency other than the entity's functional currency. The notional principal of foreign exchange forwards to purchase U.S. dollars with foreign currencies was approximately $17 million at December 31, 2010. The notional principal of foreign exchange forwards to sell U.S. dollars for foreign currencies was approximately $96 million at December 31, 2010 and approximately $66 million at December 31, 2009. The notional principal amounts of foreign exchange forwards to purchase euros with other foreign currencies was approximately 11 million euros at December 31, 2010 and approximately 10 million euros at December 31, 2009. The net gains (losses) on these instruments recognized in other non-operating income (expense), net in the Company's consolidated statements of operations was $(3.0) million and $3.0 million in 2010 and 2009, respectively.
The Company engaged in hedging activities to protect against FX risks from forecasted billings and related revenue denominated in the euro and the GBP. FX options and forward exchange contracts were utilized to hedge exposures related to changes in FX rates. As of December 31, 2010, all FX options and forward exchange contracts have matured. The hedging program mainly utilized FX options. The FX options and forward exchange contracts were designated as cash flow hedges.
The following table summarizes the notional amounts of the Company's outstanding FX options:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| Notional amount of Currency Pair: | ||||||||
|
GBP/USD |
£ | — | £ | 5.0 | ||||
|
EUR/USD |
€ | — | € | 9.9 | ||||
|
EUR/GBP |
€ | — | € | 21.0 | ||||
The tables below show the classification between assets and liabilities on the Company's consolidated balance sheets of the fair value of derivative instruments as well as information on gains/(losses) on those instruments:
| Fair Value of Derivative Instruments | ||||||||||||||||
| Asset | Liability | |||||||||||||||
| December 31, 2010 |
December 31, 2009 |
December 31, 2010 |
December 31, 2009 |
|||||||||||||
| Derivatives designated as accounting hedges: | ||||||||||||||||
| FX options | $ | — | $ | 1.2 | $ | — | $ | — | ||||||||
| Interest rate swaps | — | — | 12.2 | 7.6 | ||||||||||||
| Total derivatives designated as accounting hedges | — | 1.2 | 12.2 | 7.6 | ||||||||||||
| Derivatives not designated as accounting hedges: | ||||||||||||||||
| FX forwards on certain assets and liabilities | 2.0 | 0.3 | 0.7 | 1.0 | ||||||||||||
| Total | $ | 2.0 | $ | 1.5 | $ | 12.9 | $ | 8.6 | ||||||||
The fair value of the interest rate swaps is included in other liabilities in the consolidated balance sheets at December 31, 2010 and December 31, 2009. The fair value of the FX forwards is included in other current assets and accounts payable and accrued liabilities, respectively, in the consolidated balance sheets at December 31, 2010 and 2009. All of the above derivative instruments are valued using Level 2 inputs as defined in Topic 820 of the ASC as more fully discussed in Note 2. In determining the fair value of the derivative contracts in the table above, the Company utilizes industry standard valuation models when active market quotes are not available. Where applicable, these models project future cash flows and discount the future amounts to a present value using spot rates, forward points, currency volatilities, interest rates as well as the risk of non-performance of the Company and the counterparties with whom it has derivative contracts. The Company has established strict counterparty credit guidelines and only enters into transactions with financial institutions that adhere to these guidelines. Accordingly, the risk of counterparty default is deemed to be minimal.
|
Derivatives in Cash Flow Hedging Relationships |
Amount of Gain/(Loss) Recognized in AOCI on Derivative (Effective Portion) |
Location of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion) |
Amount of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion) |
Location of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
|||||||||||||||||||||||||
| Year Ended December 31, |
Year Ended December 31, |
Year Ended December 31, |
||||||||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||
| FX options | $ | — | $ | (1.5 | ) | Revenue | $ | (1.0 | ) | $ | 2.0 | Revenue | $ | — | $ | (0.1 | ) | |||||||||||||
| Interest rate swaps | (3.1 | ) | (0.7 | ) | Interest expense | (2.8 | ) | (2.6 | ) | N/A | — | — | ||||||||||||||||||
| Total | $ | (3.1 | ) | $ | (2.2 | ) | $ | (3.8 | ) | $ | (0.6 | ) | $ | — | $ | (0.1 | ) | |||||||||||||
All gains and losses on derivatives designated as cash flow hedges for accounting purposes are initially recognized through AOCI. Realized gains and losses reported in AOCI are reclassified into earnings (into revenue for the FX options and into Interest income (expense), net for the interest rate swaps) as the underlying transaction is recognized. The existing realized losses as of December 31, 2010 expected to be reclassified to earnings in the next twelve months is immaterial.
The cumulative amount of unrecognized hedge losses recorded in AOCI is as follows:
| Unrecognized Losses, net of tax |
||||||||
| December 31, 2010 |
December 31, 2009 |
|||||||
| FX options | $ | (0.2 | ) | $ | (1.2 | ) | ||
| Interest rate swaps | (5.4 | ) | (5.1 | ) | ||||
|
Total |
$ | (5.6 | ) | $ | (6.3 | ) | ||
|
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| NOTE 6 | PROPERTY AND EQUIPMENT, NET |
Property and equipment, net consisted of:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| Office and computer equipment (3 – 20 year estimated useful life) | $ | 92.2 | $ | 99.2 | ||||
| Office furniture and fixtures (5 – 10 year estimated useful life) | 40.2 | 37.4 | ||||||
| Internal-use computer software (3 – 8 year estimated useful life) | 199.1 | 145.9 | ||||||
| Leasehold improvements (5 – 20 year estimated useful life) | 188.6 | 175.3 | ||||||
|
Total property and equipment, at cost |
520.1 | 457.8 | ||||||
| Less: accumulated depreciation and amortization | (200.8 | ) | (164.8 | ) | ||||
| Total property and equipment, net | $ | 319.3 | $ | 293.0 | ||||
Depreciation and amortization expense related to the above assets was $49.9 million, $47.7 million and $46.7 million for the years ended December 31, 2010, 2009 and 2008, respectively.
|
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| NOTE 7 | ACQUISITIONS |
All of the acquisitions described below were accounted for using the purchase method of accounting whereby the purchase price is allocated first to the net assets of the acquired entity based on the fair value of its net assets. Any excess of the purchase price over the fair value of the net assets acquired is recorded to goodwill. These acquisitions are discussed below in more detail.
CSI Global Education, Inc.
On November 18, 2010, a subsidiary of the Company acquired CSI Global Education, Inc., Canada's leading provider of financial learning, credentials, and certification. CSI will operate within MA, strengthening the Company's capabilities for delivering credit and other financial training programs to financial institutions worldwide and bolsters Moody's efforts to serve as an essential resource to financial market participants.
The aggregate purchase price was $151.4 million in net cash payments to the sellers. There is a 2.5 million Canadian dollar contingent cash payment which is dependent upon the achievement of a certain contractual milestone by January 2016. The Company has recognized the fair value of the contingent payment of $2.0 million as a long-term liability at the acquisition date using a discounted cash flow methodology which assumes that the entire 2.5 million Canadian dollar payment will be made by January 2016. This methodology is based on significant inputs that are not observable in the market, which ASC 820 refers to as Level 3 inputs. Subsequent fair value changes, which will be measured quarterly, up to the ultimate amount paid, will be recognized in earnings. The purchase price was funded with cash on hand.
Shown below is the purchase price allocation, which summarizes the fair values of the assets acquired, and liabilities assumed, at the date of acquisition:
| Current assets | $ | 5.1 | ||||||
| Property and equipment, net | 0.8 | |||||||
| Intangible assets: | ||||||||
|
Trade name (30 year weighted average life) |
$ | 9.0 | ||||||
|
Client relationships (21 year weighted average life) |
63.1 | |||||||
|
Trade secret (13 year weighted average life) |
5.8 | |||||||
|
Total intangible assets (21 year weighted average life) |
77.9 | |||||||
| Goodwill | 104.6 | |||||||
| Liabilities assumed | (37.0 | ) | ||||||
| Net assets acquired | $ | 151.4 | ||||||
Current assets include acquired cash of approximately $2.8 million. The acquired goodwill, which has been assigned to the MA segment, will not be amortized and will not be deductible for tax. As of December 31, 2010, CSI operates as its own reporting unit and thus goodwill associated with the acquisition of CSI is all part of that reporting unit within the MA segment. CSI will remain a separate reporting unit until MA management completes its evaluation as to how the acquired entity will be integrated into the MA segment.
The amount of revenue and expenses included in the Company's consolidated statement of operations from the acquisition date through December 31, 2010 was not material. The near term impact to operations and cash flow from this acquisition is not expected to be material to the Company's consolidated financial statements.
Enb Consulting Ltd.
In December 2008, a subsidiary of the Company acquired Enb Consulting Ltd., a provider of credit and capital markets training services. The purchase price was not material and the impact to operations and cash flow is not material. Enb is part of the MA segment.
Fermat International SA
On October 9, 2008, a subsidiary of the Company acquired Fermat International SA, a provider of risk and performance management software to the global banking sector, which is now part of the MA segment. The combination of MA's credit portfolio management and economic capital tools with Fermat's expertise in risk management software positions MA to deliver comprehensive analytical solutions for financial institutions worldwide. The results of Fermat are reflected in the MA operating segment since the acquisition date.
The aggregate purchase price of $211 million consisted of $204.5 million in cash payments to the sellers and $6.5 million in direct transaction costs, primarily professional fees. The purchase price was funded by using Moody's cash on hand.
Shown below is the purchase price allocation, which summarizes the fair values of the assets acquired, and liabilities assumed, at the date of acquisition:
| Current assets | $ | 53.9 | ||||||
| Property and equipment, net | 1.6 | |||||||
| Intangible assets: | ||||||||
|
Software (9.0 year weighted average life) |
$ | 43.0 | ||||||
|
Client relationships (16.0 year weighted average life) |
12.1 | |||||||
|
Other intangibles (1.8 year weighted average life) |
2.6 | |||||||
|
Total intangible assets |
57.7 | |||||||
| In-process technology | 4.5 | |||||||
| Goodwill | 125.0 | |||||||
| Liabilities assumed | (31.7 | ) | ||||||
| Net assets acquired | $ | 211.0 | ||||||
The acquired goodwill, which has been assigned to the MA segment, will not be amortized and will not be deductible for tax. The $4.5 million allocated to acquired in-process technology was written off immediately following the acquisition because the technological feasibility had not yet been established as of the acquisition date and was determined to have no future use. This write-off is included in depreciation and amortization expenses for the year ended December 31, 2008. Current assets include acquired cash of approximately $26 million.
BQuotes, Inc.
In January 2008, a subsidiary of the Company acquired BQuotes, Inc., a global provider of price discovery tools and end-of-day pricing services for a wide range of fixed income securities, which was part of the MA segment. The purchase price was not material and the impact to operations and cash flow was not material.
Financial Projections Ltd.
In January 2008, a subsidiary of the Company acquired Financial Projections Ltd., a leading provider of in-house credit training services, with long-standing relationships among European banks. The purchase price was not material and the impact to operations and cash flow is not material. Financial Projections is part of the MA segment.
|
|||
| NOTE 8 | GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS |
The following table summarizes the activity in goodwill:
| Year Ended December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | |||||||||||||||||||||||
| MIS | MA | Consolidated | MIS | MA | Consolidated | |||||||||||||||||||
| Beginning balance | $ | 11.1 | $ | 338.1 | $ | 349.2 | $ | 10.6 | $ | 327.4 | $ | 338.0 | ||||||||||||
| Additions/adjustments | — | 104.6 | 104.6 | (0.3 | ) | 5.0 | 4.7 | |||||||||||||||||
| Foreign currency translation adjustments | 0.3 | 11.4 | 11.7 | 0.8 | 5.7 | 6.5 | ||||||||||||||||||
| Ending balance | $ | 11.4 | $ | 454.1 | $ | 465.5 | $ | 11.1 | $ | 338.1 | $ | 349.2 | ||||||||||||
The additions/adjustments during 2010 for the MA segment in the table above relate to the acquisition of CSI further described in Note 7 above.
The additions/adjustments during 2009 for the MA segment in the table above primarily relate to adjustments made to the purchase accounting associated with the December 2008 acquisition further described in Note 7 above.
Acquired Intangible assets consisted of:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| Customer relationships | $ | 145.1 | $ | 80.6 | ||||
| Accumulated amortization | (49.2 | ) | (42.8 | ) | ||||
|
Net customer lists |
95.9 | 37.8 | ||||||
| Trade secrets | 31.4 | 25.5 | ||||||
| Accumulated amortization | (10.9 | ) | (8.7 | ) | ||||
|
Net trade secrets |
20.5 | 16.8 | ||||||
| Software | 54.8 | 55.0 | ||||||
| Accumulated amortization | (20.3 | ) | (14.8 | ) | ||||
|
Net software |
34.5 | 40.2 | ||||||
| Other | 37.5 | 26.8 | ||||||
| Accumulated amortization | (19.6 | ) | (16.7 | ) | ||||
|
Net other |
17.9 | 10.1 | ||||||
|
Total |
$ | 168.8 | $ | 104.9 | ||||
The amounts as of December 31, 2010 in the table above include intangible assets acquired in the purchase of CSI as more fully discussed in Note 7 above. Other intangible assets primarily consist of databases, trade-names and covenants not to compete. Amortization expense relating to intangible assets is as follows:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Amortization Expense | $ | 16.4 | $ | 16.4 | $ | 28.2 | ||||||
Estimated future annual amortization expense for intangible assets subject to amortization is as follows:
|
Year Ending December 31, |
||||
| 2011 | $ | 18.7 | ||
| 2012 | 18.1 | |||
| 2013 | 17.9 | |||
| 2014 | 14.5 | |||
| 2015 | 13.4 | |||
| Thereafter | 86.2 | |||
Intangible assets are reviewed for impairment whenever circumstances indicate that the carrying amount may not be recoverable. If the estimated undiscounted future cash flows are lower than the carrying amount of the related asset, a loss is recognized for the difference between the carrying amount and the estimated fair value of the asset. Goodwill is tested for impairment annually as of November 30th, or more frequently if circumstances indicate the assets may be impaired.
For the years ended December 31, 2010 and 2009, there were no impairments to goodwill or to intangible assets except for an immaterial $0.2 million impairment of intangible assets in 2009 which was included in the restructuring charge as further discussed in Note 10 below. In 2008 an impairment of $11.1 million was recognized for certain software and database intangible assets within the MA segment, which is reflected in amortization expense. These intangible assets were determined to be impaired as a result of comparing the carrying amount to the undiscounted cash flows of the related asset group expected to result from the use and eventual disposition of the assets. The Company measured the amount of the impairment loss by comparing the carrying amount of the related assets to their fair value. The fair value was determined by utilizing the expected present value technique which uses multiple cash flow scenarios that reflect the range of possible outcomes and a risk-free rate.
|
|||
| NOTE 9 | DETAIL OF CERTAIN BALANCE SHEET CAPTIONS |
The following tables contain additional detail related to certain balance sheet captions:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| Other current assets: | ||||||||
|
Prepaid taxes |
$ | 82.3 | $ | 18.6 | ||||
|
Other prepaid expenses |
39.8 | 28.2 | ||||||
|
Other |
5.8 | 5.0 | ||||||
|
Total other current assets |
$ | 127.9 | $ | 51.8 | ||||
| December 31, | ||||||||
| Other assets: | 2010 | 2009 | ||||||
|
Investments in Joint Ventures |
$ | 30.8 | $ | 30.4 | ||||
|
Deposits for real-estate leases |
11.4 | 9.5 | ||||||
|
Other |
13.6 | 10.8 | ||||||
|
Total other assets |
$ | 55.8 | $ | 50.7 | ||||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| Accounts and accrued liabilities: | ||||||||
|
Salaries and benefits |
$ | 69.6 | $ | 51.5 | ||||
|
Incentive compensation |
116.8 | 74.6 | ||||||
|
Profit sharing contribution |
12.6 | — | ||||||
|
Customer credits, advanced payments and advanced billings |
15.3 | 14.8 | ||||||
|
Dividends |
27.9 | 26.3 | ||||||
|
Professional service fees |
50.6 | 35.5 | ||||||
|
Interest accrued on debt |
17.6 | 9.6 | ||||||
|
Accounts payable |
14.3 | 7.1 | ||||||
|
Income taxes (see Note 13) |
26.9 | 20.3 | ||||||
|
Restructuring (see Note 10) |
0.7 | 5.9 | ||||||
|
Pension and other post retirement employee benefits (see Note 11) |
9.5 | 8.8 | ||||||
|
Other |
52.6 | 62.8 | ||||||
|
Total accounts payable and accrued liabilities |
$ | 414.4 | $ | 317.2 | ||||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| Other liabilities: | ||||||||
|
Pension and other post retirement employee benefits (see Note 11) |
$ | 132.8 | $ | 112.7 | ||||
|
Deferred rent-non-current portion |
100.4 | 87.4 | ||||||
|
Interest accrued on UTPs |
33.7 | 27.7 | ||||||
|
Legacy and other tax matters |
57.3 | 52.8 | ||||||
|
Other |
38.1 | 37.2 | ||||||
|
Total other liabilities |
$ | 362.3 | $ | 317.8 | ||||
|
|||
| NOTE 10 | RESTRUCTURING |
On March 27, 2009 the Company approved the 2009 Restructuring Plan to reduce costs in response to a strategic review of its business in certain jurisdictions and the then current weak global economic and market conditions. The 2009 Restructuring Plan consisted of headcount reductions of approximately 150 positions representing approximately 4% of the Company's workforce at December 31, 2008 as well as contract termination costs and the divestiture of non-strategic assets. The Company's plan included closing offices in South Bend, Indiana; Jakarta, Indonesia and Taipei, Taiwan. There was $0.2 million in accelerated amortization for intangible assets recognized in the first quarter of 2009 relating to the closure of the Jakarta, Indonesia office. The cumulative amount of expense incurred from inception through December 31, 2010 for the 2009 Restructuring Plan was $14.7 million. The 2009 Restructuring Plan was substantially complete at September 30, 2009.
On December 31, 2007, the Company approved the 2007 Restructuring Plan that reduced global headcount by approximately 275 positions, or approximately 7.5% of the workforce at December 31, 2007, in response to the Company's reorganization announced in August 2007 and a decline in the then current and anticipated issuance of rated debt securities in some market sectors. Included in the 2007 Restructuring Plan was a reduction of staff as a result of: (i) consolidation of certain corporate staff functions, (ii) the integration of businesses comprising MA and (iii) an anticipated decline in new securities issuance in some market sectors. The 2007 Restructuring Plan also called for the termination of technology contracts as well as the outsourcing of certain technology functions. The cumulative amount of expense incurred from inception through December 31, 2010 for the 2007 Restructuring Plan was $50.4 million. The 2007 Restructuring Plan was substantially complete as of December 31, 2008.
Total expenses included in the accompanying consolidated statements of operations are as follows:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| 2007 Restructuring Plan | $ | 1.0 | $ | 1.9 | $ | (2.5 | ) | |||||
| 2009 Restructuring Plan | (0.9 | ) | 15.6 | — | ||||||||
|
Total |
$ | 0.1 | $ | 17.5 | $ | (2.5 | ) | |||||
The expense in 2010, 2009 and 2008 related to the 2007 Restructuring Plan primarily reflects adjustments to previous estimates.
Changes to the restructuring liability for the year ended December 31, 2010 and 2009 were as follows:
| Employee Termination Costs | ||||||||||||||||||||
| Severance | Pension Settlements |
Total | Contract Termination Costs |
Total Restructuring Liability |
||||||||||||||||
| Balance at December 31, 2008 | $ | 1.5 | $ | 8.1 | $ | 9.6 | $ | 1.8 | $ | 11.4 | ||||||||||
| 2007 Restructuring Plan: | ||||||||||||||||||||
|
Costs incurred and adjustments |
0.4 | — | 0.4 | 1.5 | 1.9 | |||||||||||||||
|
Cash payments |
(1.7 | ) | — | (1.7 | ) | (2.6 | ) | (4.3 | ) | |||||||||||
| 2009 Restructuring Plan: | ||||||||||||||||||||
|
Costs incurred and adjustments |
12.0 | — | 12.0 | 3.3 | 15.3 | |||||||||||||||
|
Cash payments |
(7.8 | ) | — | (7.8 | ) | (2.5 | ) | (10.3 | ) | |||||||||||
| Balance at December 31, 2009 | $ | 4.4 | $ | 8.1 | $ | 12.5 | $ | 1.5 | $ | 14.0 | ||||||||||
| 2007 Restructuring Plan: | ||||||||||||||||||||
|
Costs incurred and adjustments |
(0.2 | ) | — | (0.2 | ) | (0.1 | ) | (0.3 | ) | |||||||||||
|
Cash payments |
— | (3.0 | ) | (3.0 | ) | (0.5 | ) | (3.5 | ) | |||||||||||
| 2009 Restructuring Plan: | ||||||||||||||||||||
|
Costs incurred and adjustments |
(0.4 | ) | — | (0.4 | ) | — | (0.4 | ) | ||||||||||||
|
Cash payments |
(3.4 | ) | — | (3.4 | ) | (0.5 | ) | (3.9 | ) | |||||||||||
|
FX Translation |
(0.1 | ) | — | (0.1 | ) | — | (0.1 | ) | ||||||||||||
| Balance at December 31, 2010 | $ | 0.3 | $ | 5.1 | $ | 5.4 | $ | 0.4 | $ | 5.8 | ||||||||||
As of December 31, 2010 the remaining restructuring liability of $0.7 million relating to severance and contract termination costs is expected to be paid out during the year ending December 31, 2011. Payments related to the $5.1 million unfunded pension liability will be paid as certain of the affected employees reach retirement age and continue in accordance with plan provisions.
Severance and contract termination costs of $0.7 million and $5.9 million as of December 31, 2010 and December 31, 2009, respectively, are recorded in accounts payable and accrued liabilities in the Company's consolidated balance sheets. Additionally, the amount for pension settlements is recorded within other liabilities as of December 31, 2010 and December 31, 2009.
|
|||
| NOTE 11 | PENSION AND OTHER POST-RETIREMENT BENEFITS |
Moody's maintains funded and unfunded noncontributory Defined Benefit Pension Plans. The U.S. plans provide defined benefits using a cash balance formula based on years of service and career average salary or final average pay for selected executives. The Company also provides certain healthcare and life insurance benefits for retired U.S. employees. These post-retirement healthcare plans are contributory with participants' contributions adjusted annually; the life insurance plans are noncontributory. Moody's funded and unfunded U.S. pension plans, the U.S. post-retirement healthcare plans and the U.S. post-retirement life insurance plans are collectively referred to herein as the "Post-Retirement Plans". Effective at the Distribution Date, Moody's assumed responsibility for the pension and other post-retirement benefits relating to its active employees. New D&B has assumed responsibility for the Company's retirees and vested terminated employees as of the Distribution Date.
Through 2007, substantially all U.S. employees were eligible to participate in the Company's DBPPs. Effective January 1, 2008, the Company no longer offers DBPPs to employees hired or rehired on or after January 1, 2008 and new hires instead will receive a retirement contribution in similar benefit value under the Company's Profit Participation Plan. Current participants of the Company's DBPPs continue to accrue benefits based on existing plan benefit formulas.
Following is a summary of changes in benefit obligations and fair value of plan assets for the Post-Retirement Plans for the years ended December 31:
| Pension Plans | Other Post-Retirement Plans | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Change in Benefit Obligation: | ||||||||||||||||
|
Benefit obligation, beginning of the period |
$ | (213.0 | ) | $ | (171.8 | ) | $ | (13.1 | ) | $ | (11.0 | ) | ||||
|
Service cost |
(13.5 | ) | (12.1 | ) | (0.9 | ) | (0.8 | ) | ||||||||
|
Interest cost |
(12.0 | ) | (9.9 | ) | (0.8 | ) | (0.7 | ) | ||||||||
|
Plan participants' contributions |
— | — | (0.2 | ) | (0.2 | ) | ||||||||||
|
Benefits paid |
10.5 | 3.9 | 0.7 | 1.1 | ||||||||||||
|
Plan amendments |
— | (2.5 | ) | — | — | |||||||||||
|
Actuarial gain (loss) |
7.4 | 7.4 | (0.4 | ) | (0.7 | ) | ||||||||||
|
Assumption changes |
(21.9 | ) | (28.0 | ) | (0.9 | ) | (0.8 | ) | ||||||||
| Benefit obligation, end of the period | (242.5 | ) | (213.0 | ) | (15.6 | ) | (13.1 | ) | ||||||||
| Change in Plan Assets: | ||||||||||||||||
|
Fair value of plan assets, beginning of the period |
108.2 | 88.6 | — | — | ||||||||||||
|
Actual return on plan assets |
13.9 | 15.5 | — | — | ||||||||||||
|
Benefits paid |
(10.5 | ) | (3.9 | ) | (0.7 | ) | (1.1 | ) | ||||||||
|
Employer contributions |
8.8 | 8.0 | 0.5 | 0.9 | ||||||||||||
|
Plan participants' contributions |
— | — | 0.2 | 0.2 | ||||||||||||
|
Fair value of plan assets, end of the period |
120.4 | 108.2 | — | — | ||||||||||||
| Funded status of the plans | (122.1 | ) | (104.8 | ) | (15.6 | ) | (13.1 | ) | ||||||||
| Amounts Recorded on the Consolidated Balance Sheets: | ||||||||||||||||
|
Pension and post-retirement benefits liability-current |
(8.9 | ) | (8.2 | ) | (0.6 | ) | (0.6 | ) | ||||||||
|
Pension and post-retirement benefits liability-non current |
(113.2 | ) | (96.6 | ) | (15.0 | ) | (12.5 | ) | ||||||||
| Net amount recognized | $ | (122.1 | ) | $ | (104.8 | ) | $ | (15.6 | ) | $ | (13.1 | ) | ||||
| Accumulated benefit obligation, end of the period | $ | (214.6 | ) | $ | (185.2 | ) | ||||||||||
The pension plan amendment in 2009 relates to a retroactive adjustment to the pay credit schedule as determined by the IRS.
The following information is for those pension plans with an accumulated benefit obligation in excess of plan assets:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| Aggregate projected benefit obligation | $ | 242.5 | $ | 213.0 | ||||
| Aggregate accumulated benefit obligation | $ | 214.6 | $ | 185.2 | ||||
| Aggregate fair value of plan assets | $ | 120.4 | $ | 108.2 | ||||
The following table summarizes the pre-tax net actuarial losses and prior service cost recognized in AOCI for the Company's Post-Retirement Plans as of December 31:
| Pension Plans | Other Post-Retirement Plans | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Net actuarial (losses) | $ | (80.9 | ) | $ | (73.8 | ) | $ | (3.1 | ) | $ | (2.0 | ) | ||||
| Net prior service costs | (5.3 | ) | (6.0 | ) | — | — | ||||||||||
|
Total recognized in AOCI- pretax |
$ | (86.2 | ) | $ | (79.8 | ) | $ | (3.1 | ) | $ | (2.0 | ) | ||||
For the Company's pension plans, the Company expects to recognize in 2011 as components of net periodic expense $4.6 million for the amortization of net actuarial losses and $0.7 million for the amortization of prior service costs. Expected amortizations for other post-retirement plans in 2011 are not material.
Net periodic benefit expenses recognized for the Post-Retirement Plans for years ended December 31:
| Pension Plans | Other Post-Retirement Plans | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
| Components of net periodic expense | ||||||||||||||||||||||||
| Service cost | $ | 13.5 | $ | 12.1 | $ | 12.4 | $ | 0.9 | $ | 0.8 | $ | 0.8 | ||||||||||||
| Interest cost | 12.0 | 9.9 | 9.7 | 0.8 | 0.7 | 0.6 | ||||||||||||||||||
| Expected return on plan assets | (10.5 | ) | (10.0 | ) | (9.9 | ) | — | — | — | |||||||||||||||
| Amortization of net actuarial loss from earlier periods | 2.8 | 0.6 | 0.2 | 0.1 | — | — | ||||||||||||||||||
| Amortization of net prior service costs from earlier periods | 0.7 | 0.4 | 0.4 | — | — | — | ||||||||||||||||||
| Curtailment loss | — | — | 1.0 | — | — | — | ||||||||||||||||||
| Cost of special termination benefits | — | — | 2.8 | — | — | — | ||||||||||||||||||
| Settlement charges | 1.3 | — | — | — | — | — | ||||||||||||||||||
| Net periodic expense | $ | 19.8 | $ | 13.0 | $ | 16.6 | $ | 1.8 | $ | 1.5 | $ | 1.4 | ||||||||||||
The following table summarizes the pre-tax amounts recorded in OCI related to the Company's Post-Retirement Plans for the years ended December 31:
| Pension Plans | Other Post-Retirement Plans | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Amortization of net actuarial losses | $ | 2.8 | $ | 0.6 | $ | 0.1 | $ | — | ||||||||
| Amortization of prior service costs | 0.7 | 0.4 | — | — | ||||||||||||
| Accelerated recognition of actuarial loss due to settlement | 1.3 | — | — | — | ||||||||||||
| Net actuarial (loss) arising during the period | (11.2 | ) | (15.2 | ) | (1.2 | ) | (1.5 | ) | ||||||||
| Net prior service cost arising during the period due to plan amendment | — | (2.5 | ) | — | — | |||||||||||
|
Total recognized in Other Comprehensive |
$ | (6.4 | ) | $ | (16.7 | ) | $ | (1.1 | ) | $ | (1.5 | ) | ||||
ADDITIONAL INFORMATION:
Assumptions – Post-Retirement Plans
Weighted-average assumptions used to determine benefit obligations at December 31:
| Pension Plans | Other Post-Retirement Plans | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Discount rate | 5.39 | % | 5.95 | % | 5.15 | % | 5.75 | % | ||||||||
| Rate of compensation increase | 4.00 | % | 4.00 | % | — | — | ||||||||||
Weighted-average assumptions used to determine net periodic benefit expense for years ended December 31:
| Pension Plans | Other Post-Retirement Plans | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
| Discount rate | 5.95 | % | 6.00 | % | 6.45 | % | 5.75 | % | 6.25 | % | 6.35 | % | ||||||||||||
| Expected return on plan assets | 8.35 | % | 8.35 | % | 8.35 | % | — | — | — | |||||||||||||||
| Rate of compensation increase | 4.00 | % | 4.00 | % | 4.00 | % | — | — | — | |||||||||||||||
For 2011, the Company continued to use an expected rate of return on assets of 8.35% for Moody's funded pension plan. The expected rate of return on plan assets represents the Company's best estimate of the long-term return on plan assets and is determined by using a building block approach, which generally weighs the underlying long-term expected rate of return for each major asset class based on their respective allocation target within the plan portfolio. As the assumption reflects a long-term time horizon, the plan performance in any one particular year does not, by itself, significantly influence the Company's evaluation and the assumption is generally not revised unless there is a significant change in one of the factors upon which it is based, such as target asset allocation or long-term capital market conditions.
Assumed Healthcare Cost Trend Rates at December 31:
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Pre-age 65 | Post-age 65 | Pre-age 65 | Post-age 65 | Pre-age 65 | Post-age 65 | |||||||||||||||||||
| Healthcare cost trend rate assumed for the following year | 7.9 | % | 8.9 | % | 8.4 | % | 9.4 | % | 9.4 | % | 10.4 | % | ||||||||||||
| Ultimate rate to which the cost trend rate is assumed to decline (ultimate trend rate) | 5.0% | 5.0% | 5.0% | |||||||||||||||||||||
| Year that the rate reaches the ultimate trend rate | 2020 | 2020 | 2015 | |||||||||||||||||||||
The assumed health cost trend rate reflects different expectations for the medical and prescribed medication components of health care costs for pre and post-65 retirees. The Company revised its trend rates in 2010 to a slower grading period at a reduction of 0.5% per year to reach the ultimate trend rate of 5% in 2020 to reflect its current expectation as the Company believes the historical trend rate assumptions used have been decreased too quickly relative to actual trend. As the Company subsidies for retiree healthcare coverage are capped at the 2005 level, for the majority of the post-retirement health plan participants, retiree contributions are assumed to increase at the same rate as the healthcare cost trend rates. As such, a one percentage-point increase or decrease in assumed healthcare cost trend rates would not have affected total service and interest cost and would have a minimal impact on the post-retirement benefit obligation.
In March 2010, the Patient Protection and Affordable Care Act (the "Act") and the related reconciliation measure, which modifies certain provisions of the Act, were signed into law. The Act repeals the current rule permitting deduction of the portion of the drug coverage expense that is offset by the Medicare Part D subsidy. The provision of the Act is effective for taxable years beginning after December 31, 2010 and the reconciliation measure delays the aforementioned repeal of the drug coverage expense reduction by two years to December 31, 2012. The Company has accounted for the enactment of the two laws in the first quarter of 2010, for which the impact to the Company's income tax expense and net income was immaterial. Other key provisions of the Act, such as coverage mandates, early retiree reinsurance program, and excise tax are also considered and their impacts on the benefit plan obligation of the Company's Other Post-Retirement Plans are deemed immaterial.
Plan Assets – Post-Retirement Plans
Moody's investment objective for the assets in the funded pension plan is to earn total returns that will minimize future contribution requirements over the long-term within a prudent level of risk. The Company works with its independent investment consultants to determine asset allocation targets for its pension plan investment portfolio based on its assessment of business and financial conditions, demographic and actuarial data, funding characteristics, and related risk factors. Other relevant factors, including historical and forward –looking views of inflation and capital market returns, are also considered. Risk management practices include monitoring of the plan, diversification across asset classes and investment styles, and periodic rebalancing toward asset allocation targets. The Company's monitoring of the plan includes ongoing reviews of investment performance, annual liability measurements, periodic asset/liability studies, and investment portfolio reviews.
Prior to 2009, the Company's target asset allocation was approximately 70% in diversified U.S. and non-U.S. equity securities, 20% in long-duration investment grade government and corporate bonds, and 10% in private real estate funds. In 2009, the Company revised its target asset allocation to approximately 60% (range of 50% to 70%) in equity securities, 30% (range of 25% to 35%) in fixed income securities and 10% (range of 7% to 13%) in other investments. The revised asset allocation policy is based on the Company's pension asset-liability study and is expected to earn a return comparable to its 2008 allocation target over the long-term. The Company has rebalanced its pension plan assets in 2010 to comply with the revised asset allocation policy.
In accordance with the revised asset allocation policy, the funded plan will use a combination of active and passive investment strategies and different investment styles for its investment portfolios within each asset class. The plan's equity investments are diversified across U.S. and non-U.S. stocks of small, medium and large capitalization. The plan's fixed income investments are diversified principally across U.S. and non-U.S. government and corporate bonds, which is expected to help reduce plan exposure to interest rate variation and to better align assets with obligations. Approximately 3% of total plan assets may be invested in funds which invest in debts rated below investment grade and 3% may be invested in emerging market debt. The plan's other investments are made through private real estate and convertible securities funds and these investments are expected to provide additional diversification benefits and absolute return enhancement to the plan assets. The Company does not use derivatives to leverage the portfolio. The overall allocation is expected to help protect the plan's funded status while generating sufficiently stable returns over the long-term.
The fair value of the Company's pension plan assets by asset category at December 31, 2010 and 2009, determined based on the hierarchy of fair value measurements as defined in Note 2 and are as follows:
| Fair Value Measurement as of December 31, 2010 | ||||||||||||||||||||
|
Asset Category |
Balance | Level 1 | Level 2 | Level 3 | % of total assets |
|||||||||||||||
| Emerging markets equity fund | $ | 10.3 | $ | 10.3 | $ | — | $ | — | 9 | % | ||||||||||
| Common/collective trust funds – equity securities | ||||||||||||||||||||
|
U.S. large-cap |
26.0 | — | 26.0 | — | 21 | % | ||||||||||||||
|
U.S. small and mid-cap |
9.6 | — | 9.6 | — | 8 | % | ||||||||||||||
|
International |
32.1 | — | 32.1 | — | 27 | % | ||||||||||||||
| Total equity investments | 78.0 | 10.3 | 67.7 | — | 65 | % | ||||||||||||||
| Common/collective trust funds –fixed income securities | ||||||||||||||||||||
|
Long-term investment grade government /corporate bonds |
18.8 | — | 18.8 | — | 15 | % | ||||||||||||||
|
U.S. Treasury Inflation-Protected Securities (TIPs) |
5.4 | — | 5.4 | — | 4 | % | ||||||||||||||
|
Emerging markets bonds |
3.2 | — | 3.2 | — | 3 | % | ||||||||||||||
|
High yield bonds |
3.3 | — | 3.3 | — | 3 | % | ||||||||||||||
| Total fixed-income investments | 30.7 | — | 30.7 | — | 25 | % | ||||||||||||||
| Common/collective trust funds – convertible securities | 3.4 | — | 3.4 | — | 3 | % | ||||||||||||||
| Private real estate fund | 8.3 | — | — | 8.3 | 7 | % | ||||||||||||||
| Total other investment | 11.7 | — | 3.4 | 8.3 | 10 | % | ||||||||||||||
| Total Assets | $ | 120.4 | $ | 10.3 | $ | 101.8 | $ | 8.3 | 100 | % | ||||||||||
| Fair Value Measurement as of December 31, 2009 | ||||||||||||||||||||
|
Asset Category |
Balance | Level 1 | Level 2 | Level 3 | % of total assets |
|||||||||||||||
| Cash and cash equivalent | $ | 0.1 | $ | — | $ | 0.1 | $ | — | — | |||||||||||
| Emerging markets equity fund | 7.5 | 7.5 | — | — | 7 | % | ||||||||||||||
| Common/collective trust funds – equity securities | ||||||||||||||||||||
|
U.S. large-cap |
38.4 | — | 38.4 | — | 35 | % | ||||||||||||||
|
U.S. small and mid-cap |
17.1 | — | 17.1 | — | 16 | % | ||||||||||||||
|
International |
16.7 | — | 16.7 | — | 16 | % | ||||||||||||||
| Total equity investments | 79.7 | 7.5 | 72.2 | — | 74 | % | ||||||||||||||
| Common/collective trust funds-fixed income securities | ||||||||||||||||||||
|
Long-term investment grade government /corporate bonds |
20.1 | — | 20.1 | — | 18 | % | ||||||||||||||
| Total fixed- income Investments | 20.1 | — | 20.1 | — | 18 | % | ||||||||||||||
| Private real estate fund | 8.3 | — | — | 8.3 | 8 | % | ||||||||||||||
| Total other investments | 8.3 | — | — | 8.3 | 8 | % | ||||||||||||||
| Total Assets | $ | 108.2 | $ | 7.5 | $ | 92.4 | $ | 8.3 | 100 | % | ||||||||||
Cash and cash equivalents is primarily comprised of investment in money market mutual funds. In determining fair value, Level 1 investments are valued based on quoted market prices in active markets. Investments in common/collective trust funds are valued using the net asset value (NAV) per unit in each fund. The NAV is based on the value of the underlying investments owned by each trust, minus its liabilities, and then divided by the number of shares outstanding. Common/collective trust funds are categorized in Level 2 to the extent that they are readily redeemable at their NAV or else they are categorized in Level 3 of the fair value hierarchy. The Company's investment in a private real estate fund is valued using the NAV per unit of funds that are invested in real property, and the real property is valued using independent market appraisals. Since appraisals involve utilization of significant unobservable inputs and the private real estate fund is not readily redeemable for cash, the Company's investment in the private real estate fund is categorized in Level 3.
The table below is a summary of changes in the fair value of the Plan's Level 3 assets:
| Real estate investment fund: | ||||
| Balance as of December 31, 2009 | $ | 8.3 | ||
| Return on plan assets related to assets still held as of December 31, 2010 | 0.8 | |||
| Return on plan assets related to assets sold during the period | 0.1 | |||
| Purchases (sales), net | (0.9 | ) | ||
| Balance as of December 31, 2010 | $ | 8.3 | ||
Except for the Company's U.S. funded pension plan, all of Moody's Post-Retirement Plans are unfunded and therefore have no plan assets.
Cash Flows – Post-Retirement Plans
The Company made no contribution to its funded pension plan during the year ended December 31, 2010 and contributed $5.8 million to its funded plan in 2009. The Company made payments of $8.8 million and $2.2 million related to its U.S. unfunded pension plan obligations during the years ended December 31, 2010 and 2009, respectively. The payments made in 2010 include a settlement payment to a participant terminated under the 2007 Restructuring Plan as more fully described in Note 10 above. The Company made payments of $0.5 million and $0.9 million to its other U.S. post-retirement plans during the years ended December 31, 2010 and 2009, respectively. The Company presently anticipates making a lump-sum contribution of $13.6 million to its funded pension plan in the first quarter of 2011 and anticipates making payments of $8.9 million to its unfunded U.S. pension plans and $0.6 million to its other U.S. post-retirement plans during the year ended December 31, 2011.
Estimated Future Benefits Payable
Estimated future benefits payments for the Post-Retirement Plans are as follows at December 31, 2010:
|
Year Ending December 31, |
Pension Plans | Other Post- Retirement Plans * |
||||||
| 2011 | $ | 10.9 | $ | 0.6 | ||||
| 2012 | 6.1 | 0.8 | ||||||
| 2013 | 6.8 | 0.9 | ||||||
| 2014 | 7.2 | 1.0 | ||||||
| 2015 | 9.5 | 1.1 | ||||||
| 2016 – 2020 | $ | 87.1 | $ | 7.3 | ||||
| * | The estimated future benefits payable for the Post-Retirement Plans are reflected net of the expected Medicare Part D subsidy for which the subsidy is insignificant on an annual basis for all the years presented. |
Defined Contribution Plans
Moody's has a Profit Participation Plan covering substantially all U.S. employees. The Profit Participation Plan provides for an employee salary deferral and the Company matches employee contributions with cash contributions equal to 50% of employee contributions up to a maximum of 3% of the employee's pay. Moody's also makes additional contributions to the Profit Participation Plan based on year-to-year growth in the Company's diluted EPS. Effective January 1, 2008, all new hires are automatically enrolled in the Profit Participation Plan when they meet eligibility requirements unless they decline participation. As the Company's U.S. DBPPs are closed to new entrants effective January 1, 2008, all eligible new hires will instead receive a retirement contribution into the Profit Participation Plan in value similar to the pension benefits. Additionally, effective January 1, 2008, the Company implemented a deferred compensation plan in the U.S., which is unfunded and provides for employee deferral of compensation and Company matching contributions related to compensation in excess of the IRS limitations on benefits and contributions under qualified retirement plans.Total expenses associated with the U.S. defined contribution plans were $19.4 million, $9.1 million and $8.0 million in 2010, 2009, and 2008, respectively.
Effective January 1, 2008, Moody's has designated the Moody's Stock Fund, an investment option under the Profit Participation Plan, as an Employee Stock Ownership Plan and, as a result, participants in the Moody's Stock Fund may receive dividends in cash or may reinvest such dividends into the Moody's Stock Fund. Moody's paid approximately $0.3 million in dividends in each of the years ended December 31, 2010 and 2009 for the Company's common shares held by the Moody's Stock Fund. The Company records the dividends as a reduction of retained earnings in the Consolidated Statements of Shareholders' Equity (Deficit). The Moody's Stock Fund held approximately 645,000 and 669,000 shares of Moody's common stock at December 31, 2010 and 2009, respectively.
International Plans
Certain of the Company's international operations provide pension benefits to their employees. For defined contribution plans, company contributions are primarily determined as a percentage of employees' eligible compensation. Moody's also makes contributions to non-U.S. employees under a profit sharing plan which is based on year-to-year growth in the Company's diluted EPS. Expenses related to these defined contribution plans for the years ended December 31, 2010, 2009, and 2008 were $11.8 million, $5.7 million and $5.3 million, respectively.
For defined benefit plans, the Company maintains various unfunded DBPPs and post-retirement health benefit plan for certain of its non-U.S. subsidiaries located in Germany, France and Canada. These defined plan benefits are generally based on each eligible employee's years of credited service and on compensation levels as specified in the plans. The DBPP in Germany was closed to new entrants in 2002. Total defined benefit pension liabilities recorded related to non-U.S. pension plans was $4.6 million, $3.6 million, and $3.0 million based on a weighted average discount rate of 5.28%, 5.56%, and 5.76% at December 31, 2010, 2009, and 2008, respectively. The pension liabilities recorded as of December 31, 2010 represent the unfunded status of these pension plans and were recognized in the statement of financial position as non-current liabilities. Total pension expense recorded for the years ended December 31, 2010, 2009 and 2008 was approximately $0.5 million, $0.4 million and $0.3 million, respectively. These amounts are not included in the tables above. As of December 31, 2010, the Company has included in AOCI net actuarial gains of $1.1 million ($0.8 million net of tax) related to non-U.S. pension plans that have yet to be recognized as a reduction to net periodic pension expense and the Company expects its 2011 amortization of the net actuarial gains to be immaterial. The Company's non-U.S. other post-retirement benefit obligation is not material as of December 31, 2010.
|
|||
| NOTE 12 | STOCK-BASED COMPENSATION PLANS |
Presented below is a summary of the stock compensation cost and associated tax benefit in the accompanying consolidated statements of operations:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Stock compensation cost | $ | 56.6 | $ | 57.4 | $ | 63.2 | ||||||
| Tax benefit | $ | 23.9 | $ | 20.9 | $ | 23.5 | ||||||
The fair value of each employee stock option award is estimated on the date of grant using the Black-Scholes option-pricing model that uses the assumptions noted below. The expected dividend yield is derived from the annual dividend rate on the date of grant. The expected stock volatility is based on an assessment of historical weekly stock prices of the Company as well as implied volatility from Moody's traded options. The risk-free interest rate is based on U.S. government zero coupon bonds with maturities similar to the expected holding period. The expected holding period was determined by examining historical and projected post-vesting exercise behavior activity.
The following weighted average assumptions were used for options granted:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Expected dividend yield | 1.58% | 1.59% | 1.06% | |||||||||
| Expected stock volatility | 44% | 38% | 25% | |||||||||
| Risk-free interest rate | 2.73% | 2.63% | 2.96% | |||||||||
| Expected holding period | 5.9 yrs | 5.8 yrs | 5.5 yrs | |||||||||
| Grant date fair value | $ | 10.38 | $ | 8.52 | $ | 9.73 | ||||||
Under the 1998 Plan, 33.0 million shares of the Company's common stock have been reserved for issuance. The 2001 Plan, which is shareholder approved, permits the granting of up to 35.6 million shares, of which not more than 15.0 million shares are available for grants of awards other than stock options. The 2001 Plan was amended and approved at the annual shareholders meeting on April 20, 2010, increasing the number of shares reserved for issuance by 7.0 million which are included in the aforementioned amounts. The Stock Plans provide that options are exercisable not later than ten years from the grant date. The vesting period for awards under the Stock Plans is generally determined by the Board at the date of the grant and has been four years except for employees who are at or near retirement eligibility, as defined, for which vesting is between one and four years. Additionally, the vesting period for certain performance-based restricted stock, which is described in more detail below, vests after a three year period. Options may not be granted at less than the fair market value of the Company's common stock at the date of grant. The Stock Plans also provide for the granting of restricted stock.
The Company maintains the Directors' Plan for its Board, which permits the granting of awards in the form of non-qualified stock options, restricted stock or performance shares. The Directors' Plan provides that options are exercisable not later than ten years from the grant date. The vesting period is determined by the Board at the date of the grant and is generally one year for options and between one and three years for restricted stock. Under the Directors' Plan, 0.8 million shares of common stock were reserved for issuance. Any director of the Company who is not an employee of the Company or any of its subsidiaries as of the date that an award is granted is eligible to participate in the Directors' Plan.
A summary of option activity as of December 31, 2010 and changes during the year then ended is presented below:
|
Options |
Shares | Weighted Average Exercise Price Per Share |
Weighted Average Remaining Contractual Term |
Aggregate Intrinsic Value |
||||||||||||
| Outstanding, December 31, 2009 | 20.1 | $ | 37.26 | |||||||||||||
| Granted | 2.4 | 26.69 | ||||||||||||||
| Exercised | (2.1 | ) | 17.03 | |||||||||||||
| Forfeited | (0.3 | ) | 33.40 | |||||||||||||
| Expired | (0.8 | ) | 41.17 | |||||||||||||
| Outstanding, December 31, 2010 | 19.3 | $ | 38.11 | 5.2 yrs | $ | 24.8 | ||||||||||
| Vested and expected to vest, December 31, 2010 | 18.6 | $ | 38.42 | 5.1 yrs | $ | 24.4 | ||||||||||
| Exercisable, December 31, 2010 | 13.5 | $ | 40.47 | 4.0 yrs | $ | 22.0 | ||||||||||
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between Moody's closing stock price on the last trading day of the year ended December 31, 2010 and the exercise prices, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options as of December 31, 2010. This amount varies based on the fair value of Moody's stock. As of December 31, 2010, there was $31.9 million of total unrecognized compensation expense related to options. The expense is expected to be recognized over a weighted average period of 1.6 years.
The following table summarizes information relating to stock option exercises:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Proceeds from stock option exercises | $ | 36.4 | $ | 18.0 | $ | 23.2 | ||||||
| Aggregate intrinsic value | $ | 19.7 | $ | 13.8 | $ | 21.6 | ||||||
| Tax benefit realized upon exercise | $ | 7.8 | $ | 5.4 | $ | 8.5 | ||||||
A summary of the status of the Company's nonvested restricted stock as of December 31, 2010 and changes during the year then ended is presented below:
|
Nonvested Restricted Stock |
Shares | Weighted Average Grant Date Fair Value Per Share |
||||||
| Balance, December 31, 2009 | 1.5 | $ | 44.02 | |||||
|
Granted |
1.1 | 25.57 | ||||||
|
Vested |
(0.5 | ) | 50.40 | |||||
|
Forfeited |
(0.1 | ) | 34.81 | |||||
| Balance, December 31, 2010 | 2.0 | $ | 33.10 | |||||
As of December 31, 2010, there was $30.7 million of total unrecognized compensation expense related to nonvested restricted stock. The expense is expected to be recognized over a weighted average period of 1.4 years.
The following table summarizes information relating to the vesting of restricted stock awards:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Fair value of vested shares | $ | 12.4 | $ | 8.0 | $ | 23.7 | ||||||
| Tax benefit realized upon vesting | $ | 4.7 | $ | 2.9 | $ | 8.8 | ||||||
During the year ended December 31, 2010, the Company granted 0.4 million shares of restricted stock that contained a condition whereby the number of shares that ultimately vest are based on the achievement of certain non-market based performance metrics of the Company over a three year period. The weighted average grant date fair value of these awards was $25.33 per share. As of December 31, 2010, there was $7.3 million of total unrecognized compensation expense related to this plan. The expense is expected to be recognized over a weighted average period of 2.1 years.
The Company has a policy of issuing treasury stock to satisfy shares issued under stock-based compensation plans.
In addition, the Company also sponsors the ESPP. Under the ESPP, 6.0 million shares of common stock were reserved for issuance. The ESPP allows eligible employees to purchase common stock of the Company on a monthly basis at a discount to the average of the high and the low trading prices on the New York Stock Exchange on the last trading day of each month. This discount was 5% in both 2010 and 2009 and 15% in 2008. The employee purchases are funded through after-tax payroll deductions, which plan participants can elect from one percent to ten percent of compensation, subject to the annual federal limit. In 2008 the Company recorded stock-based compensation expense for the difference between the purchase price and fair market value under Topic 718 of the ASC. Beginning on January 1, 2009 the discount offered on the ESPP was reduced to 5% resulting in the ESPP qualifying for non-compensatory status under Topic 718 of the ASC. Accordingly, no compensation expense was recognized for the ESPP in 2010 and 2009.
|
|||
| NOTE 13 | INCOME TAXES |
Components of the Company's income tax provision are as follows:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Current: | ||||||||||||
|
Federal |
$ | 106.6 | $ | 99.2 | $ | 147.5 | ||||||
|
State and Local |
22.1 | 53.3 | 49.3 | |||||||||
|
Non-U.S. |
82.9 | 70.1 | 88.7 | |||||||||
|
Total current |
211.6 | 222.6 | 285.5 | |||||||||
| Deferred: | ||||||||||||
|
Federal |
(14.7 | ) | 22.8 | (10.9 | ) | |||||||
|
State and Local |
10.6 | (9.3 | ) | (0.8 | ) | |||||||
|
Non-U.S. |
(6.5 | ) | 3.0 | (5.6 | ) | |||||||
|
Total deferred |
(10.6 | ) | 16.5 | (17.3 | ) | |||||||
| Total income tax provision | $ | 201.0 | $ | 239.1 | $ | 268.2 | ||||||
A reconciliation of the U.S. federal statutory tax rate to the Company's effective tax rate on income before provision for income taxes is as follows:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| U.S. statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
| State and local taxes, net of federal tax benefit | 2.9 | 4.4 | 4.1 | |||||||||
| Benefit of foreign operations | (9.7 | ) | (2.4 | ) | (2.6 | ) | ||||||
| Legacy tax items | (0.4 | ) | (0.3 | ) | (0.3 | ) | ||||||
| Other | 0.3 | 0.3 | 0.5 | |||||||||
| Effective tax rate | 28.1 | % | 37.0 | % | 36.7 | % | ||||||
| Income tax paid | $ | 247.9 | $ | 192.2 | $ | 319.9 | ||||||
The source of income before provision for income taxes is as follows:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| United States | $ | 390.6 | $ | 386.9 | $ | 437.4 | ||||||
| International | 323.8 | 259.3 | 292.4 | |||||||||
| Income before provision for income taxes | $ | 714.4 | $ | 646.2 | $ | 729.8 | ||||||
The components of deferred tax assets and liabilities are as follows:
| Year Ended December 31, | ||||||||
| 2010 | 2009 | |||||||
| Deferred tax assets: | ||||||||
|
Current: |
||||||||
|
Account receivable allowances |
$ | 10.5 | $ | 7.5 | ||||
|
Accrued compensation and benefits |
12.3 | 10.5 | ||||||
|
Deferred revenue |
6.0 | 7.9 | ||||||
|
Legal and professional fees |
13.1 | — | ||||||
|
Restructuring |
1.1 | 2.6 | ||||||
|
Other |
4.9 | 3.9 | ||||||
|
Total current |
47.9 | 32.4 | ||||||
|
Non-current: |
||||||||
|
Accumulated depreciation and amortization |
1.6 | 1.3 | ||||||
|
Stock-based compensation |
84.9 | 81.0 | ||||||
|
Benefit plans |
62.8 | 43.8 | ||||||
|
Deferred rent and construction allowance |
30.4 | 28.9 | ||||||
|
Deferred revenue |
37.4 | 39.2 | ||||||
|
Foreign net operating loss (1) |
11.5 | 7.1 | ||||||
|
Uncertain tax positions |
58.8 | 46.0 | ||||||
|
Self-insured related reserves |
22.7 | — | ||||||
|
Other |
5.4 | 5.2 | ||||||
|
Total non-current |
315.5 | 252.5 | ||||||
| Total deferred tax assets | 363.4 | 284.9 | ||||||
| Deferred tax liabilities: | ||||||||
|
Current: |
||||||||
|
Other |
(0.2 | ) | (0.1 | ) | ||||
|
Total current |
(0.2 | ) | (0.1 | ) | ||||
|
Non-current: |
||||||||
|
Accumulated depreciation |
(16.4 | ) | (19.2 | ) | ||||
|
Foreign earnings to be repatriated |
(1.2 | ) | (25.2 | ) | ||||
|
Amortization of intangible assets and capitalized software |
(108.2 | ) | (39.0 | ) | ||||
|
Self-insured related income |
(27.1 | ) | — | |||||
|
Other liabilities |
(1.5 | ) | (3.4 | ) | ||||
|
Total non-current |
(154.4 | ) | (86.8 | ) | ||||
| Total deferred tax liabilities | (154.6 | ) | (86.9 | ) | ||||
| Net deferred tax asset | 208.8 | 198.0 | ||||||
| Valuation allowance | (12.8 | ) | (4.5 | ) | ||||
| Total net deferred tax assets | $ | 196.0 | $ | 193.5 | ||||
| (1) | Amounts are primarily set to expire beginning in 2015, if unused. |
Prepaid taxes of $82.3 million and $18.6 million for December 31, 2010 and 2009, respectively are included in other current assets in the consolidated balance sheets. As of December 31, 2010, the Company had approximately $758.1 million of undistributed earnings of foreign subsidiaries that it intends to indefinitely reinvest in foreign operations. The Company has not provided deferred income taxes on these indefinitely reinvested earnings. It is not practicable to determine the amount of deferred taxes that might be required to be provided if such earnings were distributed in the future, due to complexities in the tax laws and in the hypothetical calculations that would have to be made.
The Company had valuation allowances of $12.8 million and $4.5 million at December 31, 2010 and 2009, respectively, related to foreign net operating losses for which realization is uncertain. The change in the valuation allowances for 2010 and 2009 results primarily from the increase in valuation allowances in certain jurisdictions based on the Company's evaluation of the expected realization of these future benefits.
As of December 31, 2010 the Company had $180.8 million of UTPs of which $138.3 million represents the amount that, if recognized, would impact the effective tax rate in future periods.
A reconciliation of the beginning and ending amount of UTPs is as follows:
| 2010 | 2009 | 2008 | ||||||||||
| Balance as of January 1 | $ | 164.2 | $ | 185.1 | $ | 156.1 | ||||||
| Additions for tax positions related to the current year | 31.1 | 31.1 | 34.5 | |||||||||
| Additions for tax positions of prior years | 16.2 | 52.5 | 8.2 | |||||||||
| Reductions for tax positions of prior years | (9.9 | ) | (47.0 | ) | (12.2 | ) | ||||||
| Settlements with taxing authorities | — | (50.7 | ) | (0.7 | ) | |||||||
| Lapse of statute of limitations | (20.8 | ) | (6.8 | ) | (0.8 | ) | ||||||
| Balance as of December 31 | $ | 180.8 | $ | 164.2 | $ | 185.1 | ||||||
The Company classifies interest related to UTPs in interest expense in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating expenses. During 2010, the amount of net interest accrued for UTPs was $5.9 million. As of December 31, 2010 and 2009 the amount of accrued interest recorded in the Company's balance sheets related to UTPs was $33.7 million and $27.7 million, respectively.
Moody's Corporation and subsidiaries are subject to U.S. federal income tax as well as income tax in various state, local and foreign jurisdictions. Moody's U.S. federal tax returns filed for the years 2007 through 2009 remain subject to examination by the IRS. The Company's tax filings in New York State for the years 2004 through 2007 are currently under examination. The income tax returns for 2008 and 2009 remain open to examination for both New York State and New York City. Tax filings in the U.K. for 2006 are currently under examination by the U.K. taxing authorities and for 2007 to 2009 remain open to examination.
For current ongoing audits related to open tax years the Company estimates that it is possible that the balance of UTPs could decrease in the next twelve months as a result of the effective settlement of these audits, which might involve the payment of additional taxes, the adjustment of certain deferred taxes and/or the recognition of tax benefits. It is also possible that new issues might be raised by tax authorities which might necessitate increases to the balance of UTPs. As the Company is unable to predict the timing of conclusion of these audits, the Company is unable to estimate the amount of changes to the balance of UTPs at this time. However, the Company believes that it has adequately provided for its financial exposure for all open tax years by tax jurisdiction. Additionally, the Company is seeking tax rulings on certain tax positions which, if granted, could decrease the balance of UTPs over the next twelve months however, due to the uncertainty involved with this process, the Company is unable to estimate the amount of changes to the balance of UTPs at this time.
|
|||
| NOTE 14 | INDEBTEDNESS |
The following table summarizes total indebtedness:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| 2007 Facility | $ | — | $ | — | ||||
| Commercial paper, net of unamortized discount of $0.1 million at 2009 | — | 443.7 | ||||||
| Notes payable: | ||||||||
|
Series 2005-1 Notes due 2015, net of fair value of interest rate swap of $3.7 million in 2010 |
296.3 | 300.0 | ||||||
|
Series 2007-1 Notes due 2017 |
300.0 | 300.0 | ||||||
|
2010 Senior Notes, net of unamortized discount of $3.0 million at 2010, due 2020 |
497.0 | — | ||||||
| 2008 Term Loan, various payments through 2013 | 146.3 | 150.0 | ||||||
| Total debt | 1,239.6 | 1,193.7 | ||||||
| Current portion | (11.3 | ) | (447.5 | ) | ||||
| Total long-term debt | $ | 1,228.3 | $ | 746.2 | ||||
2007 Facility
On September 28, 2007, the Company entered into a $1.0 billion five-year senior, unsecured revolving credit facility, expiring in September 2012. The 2007 Facility will serve, in part, to support the Company's CP Program described below. Interest on borrowings is payable at rates that are based on LIBOR plus a premium that can range from 16.0 to 40.0 basis points of the outstanding borrowing amount depending on the Debt/EBITDA ratio. The Company also pays quarterly facility fees, regardless of borrowing activity under the 2007 Facility. The quarterly fees for the 2007 Facility can range from 4.0 to 10.0 basis points per annum of the facility amount, depending on the Company's Debt/EBITDA ratio. The Company also pays a utilization fee of 5.0 basis points on borrowings outstanding when the aggregate amount outstanding exceeds 50% of the total facility. The 2007 Facility contains certain covenants that, among other things, restrict the ability of the Company and certain of its subsidiaries, without the approval of the lenders, to engage in mergers, consolidations, asset sales, transactions with affiliates and sale-leaseback transactions or to incur liens, as defined in the related agreement. The 2007 Facility also contains financial covenants that, among other things, require the Company to maintain a Debt/EBITDA ratio of not more than 4.0 to 1.0 at the end of any fiscal quarter.
Commercial Paper
On October 3, 2007, the Company entered into a private placement commercial paper program under which the Company may issue CP notes up to a maximum amount of $1.0 billion. Amounts available under the CP Program may be re-borrowed. The CP Program is supported by the Company's 2007 Facility. The maturities of the CP Notes will vary, but may not exceed 397 days from the date of issue. The CP Notes are sold at a discount from par or, alternatively, sold at par and bear interest at rates that will vary based upon market conditions at the time of issuance. The rates of interest will depend on whether the CP Notes will be a fixed or floating rate. The interest on a floating rate may be based on the following: (a) certificate of deposit rate; (b) commercial paper rate; (c) the federal funds rate; (d) the LIBOR; (e) prime rate; (f) Treasury rate; or (g) such other base rate as may be specified in a supplement to the private placement agreement. The weighted average interest rate on CP borrowings outstanding was 0.3% as of December 31, 2009. The CP Program contains certain events of default including, among other things: non-payment of principal, interest or fees; entrance into any form of moratorium; and bankruptcy and insolvency events, subject in certain instances to cure periods.
Notes Payable
On August 19, 2010, the Company issued $500 million aggregate principal amount of senior unsecured notes in a public offering. The 2010 Senior Notes bear interest at a fixed rate of 5.50% and mature on September 1, 2020. Interest on the 2010 Senior Notes will be due semi-annually on September 1 and March 1 of each year, commencing March 1, 2011.The Company may prepay the 2010 Senior Notes, in whole or in part, at any time at a price equal to 100% of the principal amount being prepaid, plus accrued and unpaid interest and a Make Whole Amount. Additionally, at the option of the holders of the notes, the Company may be required to purchase all or a portion of the notes upon occurrence of a "Change of Control Triggering Event," as defined in the Indenture, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The Indenture contains covenants that limit the ability of the Company and certain of its subsidiaries to, among other things, incur or create liens and enter into sale and leaseback transactions. In addition, the Indenture contains a covenant that limits the ability of the Company to consolidate or merge with another entity or to sell all or substantially all of its assets to another entity. The Indenture contains customary default provisions. In addition, an event of default will occur if the Company or certain of its subsidiaries fail to pay the principal of any indebtedness (as defined in the Indenture) when due at maturity in an aggregate amount of $50 million or more, or a default occurs that results in the acceleration of the maturity of the Company's or certain of its subsidiaries' indebtedness in an aggregate amount of $50 million or more. Upon the occurrence and during the continuation of an event of default under the Indenture, the notes may become immediately due and payable either automatically or by the vote of the holders of more than 25% of the aggregate principal amount of all of the notes then outstanding.
On September 7, 2007, the Company issued and sold through a private placement transaction, $300.0 million aggregate principal amount of its 6.06% Series 2007-1 Senior Unsecured Notes due 2017 pursuant to the 2007 Agreement. The Series 2007-1 Notes have a ten-year term and bear interest at an annual rate of 6.06%, payable semi-annually on March 7 and September 7. Under the terms of the 2007 Agreement, the Company may, from time to time within five years, in its sole discretion, issue additional series of senior notes in an aggregate principal amount of up to $500.0 million pursuant to one or more supplements to the 2007 Agreement. The Company may prepay the Series 2007-1 Notes, in whole or in part, at any time at a price equal to 100% of the principal amount being prepaid, plus accrued and unpaid interest and a Make Whole Amount. The 2007 Agreement contains covenants that limit the ability of the Company, and certain of its subsidiaries to, among other things: enter into transactions with affiliates, dispose of assets, incur or create liens, enter into any sale-leaseback transactions, or merge with any other corporation or convey, transfer or lease substantially all of its assets. The Company must also not permit its Debt/EBITDA ratio to exceed 4.0 to 1.0 at the end of any fiscal quarter.
On September 30, 2005, the Company issued and sold through a private placement transaction, $300.0 million aggregate principal amount of its Series 2005-1 Senior Unsecured Notes due 2015 pursuant to the 2005 Agreement. The Series 2005-1 Notes have a ten-year term and bear interest at an annual rate of 4.98%, payable semi-annually on March 30 and September 30. Proceeds from the sale of the Series 2005-1 Notes were used to refinance $300.0 million aggregate principal amount of the Company's outstanding 7.61% senior notes which matured on September 30, 2005. In the event that Moody's pays all, or part, of the Series 2005-1 Notes in advance of their maturity, such prepayment will be subject to a Make Whole Amount. The Series 2005-1 Notes are subject to certain covenants that, among other things, restrict the ability of the Company and certain of its subsidiaries, without the approval of the lenders, to engage in mergers, consolidations, asset sales, transactions with affiliates and sale-leaseback transactions or to incur liens, as defined in the related agreements.
2008 Term Loan
On May 7, 2008, Moody's entered into a five-year, $150.0 million senior unsecured term loan with several lenders. Proceeds from the loan were used to pay off a portion of the CP outstanding. Interest on borrowings under the 2008 Term Loan is payable quarterly at rates that are based on LIBOR plus a margin that can range from 125 basis points to 175 basis points depending on the Company's Debt/EBITDA ratio. The outstanding borrowings shall amortize beginning in 2010 in accordance with the schedule of payments set forth in the 2008 Term Loan outlined in the table below.
The 2008 Term Loan contains restrictive covenants that, among other things, restrict the ability of the Company to engage or to permit its subsidiaries to engage in mergers, consolidations, asset sales, transactions with affiliates and sale-leaseback transactions or to incur, or permit its subsidiaries to incur, liens, in each case, subject to certain exceptions and limitations. The 2008 Term Loan also limits the amount of debt that subsidiaries of the Company may incur. In addition, the 2008 Term Loan contains a financial covenant that requires the Company to maintain a Debt/EBITDA ratio of not more than 4.0 to 1.0 at the end of any fiscal quarter.
The principal payments due on the Company's long-term borrowings for each of the next five years are presented in the table below:
| 2008 Term Loan | Series 2005-1 Notes | Total | ||||||||||
|
Year Ending December 31, |
||||||||||||
| 2011 | $ | 11.3 | $ | — | $ | 11.3 | ||||||
| 2012 | 71.2 | — | 71.2 | |||||||||
| 2013 | 63.8 | — | 63.8 | |||||||||
| 2014 | — | — | — | |||||||||
| 2015 | — | 300.0 | 300.0 | |||||||||
| Total | $ | 146.3 | $ | 300.0 | $ | 446.3 | ||||||
In the fourth quarter of 2010, the Company entered into interest rate swaps with a total notional amount of $300 million which will convert the fixed rate of interest on the Series 2005-1 Notes to a floating LIBOR-based interest rate. Also, on May 7, 2008, the Company entered into interest rate swaps with a total notional amount of $150 million to protect against fluctuations in the LIBOR-based variable interest rate on the 2008 Term Loan. Both of these interest rate swaps are more fully discussed in Note 5 above.
INTEREST (EXPENSE) INCOME, NET
The following table summarizes the components of interest as presented in the consolidated statements of operations:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Income | $ | 3.1 | $ | 2.5 | $ | 18.1 | ||||||
| Expense on borrowings | (52.2 | ) | (45.5 | ) | (60.0 | ) | ||||||
| UTBs and other tax related interest | (7.7 | ) | 1.6 | (13.7 | ) | |||||||
| Legacy Tax (a) | 2.5 | 6.5 | 2.3 | |||||||||
| Interest capitalized | 1.8 | 1.5 | 1.1 | |||||||||
| Total | $ | (52.5 | ) | $ | (33.4 | ) | $ | (52.2 | ) | |||
| Interest paid | $ | 44.0 | $ | 46.1 | $ | 59.5 | ||||||
| (a) | Represents a reduction of accrued interest related to the favorable resolution of Legacy Tax Matters, further discussed in Note 17 to the consolidated financial statements. |
Net interest expense of $33.4 million in 2009 reflects a reduction of approximately $12 million related to tax and tax-related liabilities.
At December 31, 2010, the Company was in compliance with all covenants contained within all of the debt agreements. In addition to the covenants described above, the 2007 Facility, the 2005 Agreement, the 2007 Agreement, the 2010 Senior Notes and the 2008 Term Loan contain cross default provisions whereby 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.
The Company's long-term debt, including the current portion, is recorded at cost except for the Series 2005-1 Notes which are carried at cost net of 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 December 31, 2010 and 2009 is as follows:
| December 31, 2010 | December 31, 2009 | |||||||||||||||
| Carrying Amount |
Estimated Fair Value |
Carrying Amount |
Estimated Fair Value |
|||||||||||||
| Series 2005-1 Notes | $ | 296.3 | $ | 310.6 | $ | 300.0 | $ | 291.1 | ||||||||
| Series 2007-1 Notes | 300.0 | 321.3 | 300.0 | 298.6 | ||||||||||||
| 2010 Senior Notes | 497.0 | 492.1 | — | — | ||||||||||||
| 2008 Term Loan | 146.3 | 146.3 | 150.0 | 150.0 | ||||||||||||
| Total | $ | 1,239.6 | $ | 1,270.3 | $ | 750.0 | $ | 739.7 | ||||||||
The fair value of the Company's 2010 Senior Notes is based on quoted market prices. The fair value of the remaining long-term debt, which is not publicly traded, is estimated using discounted cash flows based on prevailing interest rates available to the Company for borrowings with similar maturities.
|
|||
| NOTE 15 | CAPITAL STOCK |
Authorized Capital Stock
The total number of shares of all classes of stock that the Company has authority to issue under its Restated Certificate of Incorporation is 1.02 billion shares with a par value of $0.01, of which 1.0 billion are shares of common stock, 10.0 million are shares of preferred stock and 10.0 million are shares of series common stock. The preferred stock and series common stock can be issued with varying terms, as determined by the Board.
Rights Agreement
The Company had a rights agreement, which expired as of June 30, 2008 and was not renewed. The rights agreement was designed to protect its shareholders in the event of unsolicited offers to acquire the Company and coercive takeover tactics that, in the opinion of the Board, could impair its ability to represent shareholder interests.
Share Repurchase Program
The Company implemented a systematic share repurchase program in the third quarter of 2005 through an SEC Rule 10b5-1 program. Systematic share repurchases are initiated at management's discretion. Moody's may also purchase opportunistically when conditions warrant. On June 5, 2006, the Board authorized a $2.0 billion share repurchase program, which the Company completed during January 2008. On July 30, 2007, the Board of the Company authorized an additional $2.0 billion share repurchase program, which the Company began utilizing in January 2008 after completing the June 2006 authorization. There is no established expiration date for the remaining authorization. The Company's intent is to return capital to shareholders in a way that serves their long-term interests. As a result, Moody's share repurchase activity will continue to vary from quarter to quarter.
During 2010, Moody's repurchased 8.6 million shares of its common stock, under the aforementioned July 30, 2007 authorization and issued 2.7 million shares under employee stock-based compensation plans.
Dividends
During 2010, 2009 and 2008, the Company paid a quarterly dividend of $0.105, $0.10 and $0.10 per share of Moody's common stock in each of the quarters, resulting in dividends paid per share during the years ended December 31, 2010, 2009 and 2008 of $0.42, $0.40 and $0.40, respectively.
On December 14, 2010, the Board of the Company approved the declaration of a quarterly dividend of $0.115 per share of Moody's common stock, payable on March 10, 2011 to shareholders of record at the close of business on February 20, 2011. The continued payment of dividends at the rate noted above, or at all, is subject to the discretion of the Board.
|
|||
| NOTE 16 | LEASE COMMITMENTS |
Moody's operates its business from various leased facilities, which are under operating leases that expire over the next 17 years. Moody's also leases certain computer and other equipment under operating leases that expire over the next four years. Rent expense, including lease incentives, is amortized on a straight-line basis over the related lease term. Rent expense under operating leases for the years ended December 31, 2010, 2009 and 2008 was $70.9 million, $74.3 million and $64.4 million, respectively. The total amount of deferred rent that is included in other liabilities and accounts payable and accrued liabilities in the consolidated balance sheets is $103.1 million and $90.8 million at December 31, 2010 and 2009, respectively. The Company had $4.8 million of computer equipment subject to capital lease obligations at December 31, 2009, with accumulated amortization of $4.3 million. There were no assets subject to capital lease obligations at December 31, 2010.
The approximate minimum rent for operating leases that have remaining or original noncancelable lease terms in excess of one year at December 31, 2010 is as follows:
|
Year Ending December 31, |
Operating Leases | |||
| 2011 | $ | 58.7 | ||
| 2012 | 62.0 | |||
| 2013 | 60.4 | |||
| 2014 | 56.1 | |||
| 2015 | 51.1 | |||
| Thereafter | 575.7 | |||
| Total minimum lease payments | $ | 864.0 | ||
On October 20, 2006, the Company entered into a 21-year operating lease agreement to occupy 15 floors of an office building at 7WTC which includes a total of 20 years of renewal options. On March 28, 2007 the 7WTC lease agreement was amended for the Company to lease an additional two floors for a term of 20 years. The total base rent for the entire lease term, including rent credits, for the 7WTC lease is approximately $642 million.
On February 6, 2008, the Company entered into a 17.5 year operating lease agreement to occupy six floors of an office tower located in the Canary Wharf district of London, England. The total base rent of the Canary Wharf Lease over its 17.5-year term is approximately 134 million GBP, and the Company will begin making base rent payments in 2011. In addition to the base rent payments the Company will be obligated to pay certain customary amounts for its share of operating expenses and tax obligation.
|
|||
| NOTE 17 | CONTINGENCIES |
From time to time, Moody's is involved in legal and tax proceedings, governmental investigations, claims and litigation that are incidental to the Company's business, including claims based on ratings assigned by MIS. Moody's is also subject to ongoing tax audits in the normal course of business. Management periodically assesses the Company's liabilities and contingencies in connection with these matters based upon the latest information available. Moody's discloses material pending legal proceedings pursuant to SEC rules and other pending matters as it may determine to be appropriate.
Following the events in the U.S. subprime residential mortgage sector and the credit markets more broadly over the last several years, MIS and other credit rating agencies are the subject of intense scrutiny, increased regulation, ongoing investigation, and civil litigation. Legislative, regulatory and enforcement entities around the world are considering additional legislation, regulation and enforcement actions, including with respect to MIS's compliance with newly imposed regulatory standards. Moody's has received subpoenas and inquiries from states attorneys general and other governmental authorities and is responding to such investigations and inquiries.
In addition, the Company is facing litigation from market participants relating to the performance of MIS rated securities. Although Moody's in the normal course experiences such litigation, the volume and cost of defending such litigation has significantly increased in the current economic environment.
On June 27, 2008, the Brockton Contributory Retirement System, a purported shareholder of the Company's securities, filed a purported shareholder derivative complaint on behalf of the Company against its directors and certain senior officers, and the Company as nominal defendant, in the Supreme Court of the State of New York, County of New York. The plaintiff asserts various causes of action relating to the named defendants' oversight of MIS's ratings of RMBS and constant-proportion debt obligations, and their participation in the alleged public dissemination of false and misleading information about MIS's ratings practices and/or a failure to implement internal procedures and controls to prevent the alleged wrongdoing. The plaintiff seeks compensatory damages, restitution, disgorgement of profits and other equitable relief. On July 2, 2008, Thomas R. Flynn, a purported shareholder of the Company's securities, filed a similar purported shareholder derivative complaint on behalf of the Company against its directors and certain senior officers, and the Company as nominal defendant, in the Supreme Court of the State of New York, County of New York, asserting similar claims and seeking the same relief. The cases have been consolidated and plaintiffs filed an amended consolidated complaint in November 2008. The Company removed the consolidated action to the United States District Court for the Southern District of New York in December 2008. In January 2009, the plaintiffs moved to remand the case to the Supreme Court of the State of New York, which the Company opposed. On February 23, 2010, the court issued an opinion remanding the case to the Supreme Court of New York. On October 30, 2008, the Louisiana Municipal Police Employees Retirement System, a purported shareholder of the Company's securities, also filed a shareholder derivative complaint on behalf of the Company against its directors and certain officers, and the Company as a nominal defendant, in the U.S. District Court for the Southern District of New York. This complaint also asserts various causes of action relating to the Company's ratings of RMBS, CDO and constant-proportion debt obligations, and named defendants' participation in the alleged public dissemination of false and misleading information about MIS's ratings practices and/or a failure to implement internal procedures and controls to prevent the alleged wrongdoing. On December 9, 2008, Rena Nadoff, a purported shareholder of the Company, filed a shareholder derivative complaint on behalf of the Company against its directors and its CEO, and the Company as a nominal defendant, in the Supreme Court of the State of New York. The complaint asserts a claim for breach of fiduciary duty in connection with alleged overrating of asset-backed securities and underrating of municipal securities. On October 20, 2009, the Company moved to dismiss or stay the action in favor of related federal litigation. On January 26, 2010, the court entered a stipulation and order, submitted jointly by the parties, staying the Nadoff litigation pending coordination and prosecution of similar claims in the above and below described federal derivative actions. On July 6, 2009, W. A. Sokolowski, a purported shareholder of the Company, filed a purported shareholder derivative complaint on behalf of the Company against its directors and current and former officers, and the Company as a nominal defendant, in the United States District Court for the Southern District of New York. The complaint asserts claims relating to alleged mismanagement of the Company's processes for rating structured finance transactions, alleged insider trading and causing the Company to buy back its own stock at artificially inflated prices.
Two purported class action complaints have been filed by purported purchasers of the Company's securities against the Company and certain of its senior officers, asserting claims under the federal securities laws. The first was filed by Raphael Nach in the U.S. District Court for the Northern District of Illinois on July 19, 2007. The second was filed by Teamsters Local 282 Pension Trust Fund in the U.S. District Court for the Southern District of New York on September 26, 2007. Both actions have been consolidated into a single proceeding entitled In re Moody's Corporation Securities Litigation in the U.S. District Court for the Southern District of New York. On June 27, 2008, a consolidated amended complaint was filed, purportedly on behalf of all purchasers of the Company's securities during the period February 3, 2006 through October 24, 2007. Plaintiffs allege that the defendants issued false and/or misleading statements concerning the Company's business conduct, business prospects, business conditions and financial results relating primarily to MIS's ratings of structured finance products including RMBS, CDO and constant-proportion debt obligations. The plaintiffs seek an unspecified amount of compensatory damages and their reasonable costs and expenses incurred in connection with the case. The Company moved for dismissal of the consolidated amended complaint in September 2008. On February 23, 2009, the court issued an opinion dismissing certain claims and sustaining others.
Moody's Analytics is cooperating with an investigation by the SEC concerning services provided by that unit to certain financial institutions in connection with the valuations used by those institutions with respect to certain financial instruments held by such institutions.
For claims, litigation and proceedings not related to income taxes, where it is both probable that a liability is expected to be incurred and the amount of loss can be reasonably estimated, the Company records liabilities in the consolidated financial statements and periodically adjusts these as appropriate. In other instances, because of uncertainties related to the probable outcome and/or the amount or range of loss, management does not record a liability but discloses the contingency if significant. As additional information becomes available, the Company adjusts its assessments and estimates of such matters accordingly. In view of the inherent difficulty of predicting the outcome of litigation, regulatory, enforcement and similar matters and contingencies, particularly where the claimants seek large or indeterminate damages or where the parties assert novel legal theories or the matters involve a large number of parties, the Company cannot predict what the eventual outcome of the pending matters will be or the timing of any resolution of such matters. The Company also cannot predict the impact (if any) that any such matters may have on how its business is conducted, on its competitive position or on its financial position, results of operations or cash flows. As the process to resolve the pending matters referred to above progresses, management will continue to review the latest information available and assess its ability to predict the outcome of such matters and the effects, if any, on its operations and financial condition. However, in light of the inherent uncertainties involved in these matters, the large or indeterminate damages sought in some of them and the novel theories of law asserted, an estimate of the range of possible losses cannot be made at this time. For income tax matters, the Company employs the prescribed methodology of Topic 740 of the ASC which requires a company to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.
Legacy Tax Matters
Moody's continues to have exposure to potential liabilities arising from Legacy Tax Matters. As of December 31, 2010, Moody's has recorded liabilities for Legacy Tax Matters totaling $59.3 million. This includes liabilities and accrued interest due to New D&B arising from the 2000 Distribution Agreement. It is possible that the ultimate liability for Legacy Tax Matters could be greater than the liabilities recorded by the Company, which could result in additional charges that may be material to Moody's future reported results, financial position and cash flows.
The following summary of the relationships among Moody's, New D&B and their predecessor entities is important in understanding the Company's exposure to the Legacy Tax Matters.
In November 1996, The Dun & Bradstreet Corporation separated into three separate public companies: The Dun & Bradstreet Corporation, ACNielsen Corporation and Cognizant Corporation. In June 1998, The Dun & Bradstreet Corporation separated into two separate public companies: Old D&B and R.H. Donnelley Corporation. During 1998, Cognizant separated into two separate public companies: IMS Health Incorporated and Nielsen Media Research, Inc. In September 2000, Old D&B separated into two separate public companies: New D&B and Moody's.
Old D&B and its predecessors entered into global tax planning initiatives in the normal course of business. These initiatives are subject to normal review by tax authorities. Old D&B and its predecessors also entered into a series of agreements covering the sharing of any liabilities for payment of taxes, penalties and interest resulting from unfavorable IRS determinations on certain tax matters, and certain other potential tax liabilities, all as described in such agreements. Further, in connection with the 2000 Distribution and pursuant to the terms of the 2000 Distribution Agreement, New D&B and Moody's have agreed on the financial responsibility for any potential liabilities related to these Legacy Tax Matters.
At the time of the 2000 Distribution, New D&B paid Moody's $55.0 million for 50% of certain anticipated future tax benefits through 2012. In the event that these tax benefits are not claimed or otherwise not realized by New D&B, or there is an IRS audit of New D&B impacting these tax benefits, Moody's would be required to repay to New D&B an amount equal to the discounted value of its share of the related future tax benefits as well as its share of any tax liability incurred by New D&B. As of December 31, 2010, Moody's liability with respect to this matter totaled $57.3 million. In 2008, as part of this matter, and due to a statute of limitations expiration, Moody's recorded a reduction of accrued interest expense of $2.3 million ($1.4 million, net of tax) and an increase in other non-operating income of $6.4 million relating to amounts due to New D&B.
In 2005, settlement agreements were executed with the IRS with respect to certain Legacy Tax Matters related to the years 1989-1990 and 1993-1996. With respect to these settlements, Moody's and New D&B believed that IMS Health and NMR did not pay their full share of the liability to the IRS under the terms of the applicable separation agreements between the parties. Moody's and New D&B subsequently paid these amounts to the IRS and commenced arbitration proceedings against IMS Health and NMR to resolve this dispute. This resulted in settlement payments to Moody's of $6.7 million ($6.1 million as a reduction of interest expense and $0.6 million as a reduction of selling, general and administrative expense) in 2008 and $10.8 million ($6.5 million as a reduction of interest expense and $4.3 million as a reduction of tax expense) in 2009. The aforementioned settlement payments resulted in net income benefits of $4 million and $8.2 million in 2008 and 2009, respectively. The Company continues to carry a $2 million liability for this matter.
In 2006, New D&B and Moody's each deposited $39.8 million with the IRS in order to stop the accrual of statutory interest on potential tax deficiencies with respect to the 1997 through 2002 tax years. In 2007, New D&B and Moody's requested a return of that deposit. The IRS applied a portion of the deposit in satisfaction of an assessed deficiency and returned the balance to the Company. Moody's subsequently pursued a refund for a portion of the outstanding amount. In May 2010, the IRS refunded $5.2 million to the Company for the 1997 tax year, which included interest of approximately $2.5 million resulting in an after-tax benefit of $4.6 million.
|
|||
| NOTE 18 | SEGMENT INFORMATION |
Beginning in January 2008, Moody's segments were changed to reflect the business Reorganization announced in August 2007. As a result of the Reorganization, the rating agency is reported in the MIS segment and several ratings business lines have been realigned. All of Moody's other non-rating commercial activities are reported in the MA segment. As a result, the Company began operating in two reportable segments beginning in January 2008.
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. Additionally, overhead costs and corporate expenses of the Company, all of which were previously included in the former MIS segment, are allocated to each new segment based on a revenue-split methodology. Overhead expenses include costs such as rent and occupancy, information technology and support staff such as finance, human resource, information technology and legal. "Eliminations" in the table below represents intersegment royalty revenue/expense. Below is financial information by segment, MIS and MA revenue by LOB and consolidated information by geographic area and total assets by segment. The effects of the change in the composition of reportable segments have been reflected throughout the accompanying financial statements.
FINANCIAL INFORMATION BY SEGMENT:
| Year Ended December 31, | ||||||||||||||||||||||||||||||||
| 2010 | 2009 | |||||||||||||||||||||||||||||||
| MIS | MA | Eliminations | Consolidated | MIS | MA | Eliminations | Consolidated | |||||||||||||||||||||||||
| Revenue | $ | 1,466.3 | $ | 627.0 | $ | (61.3 | ) | $ | 2,032.0 | $ | 1,277.7 | $ | 579.5 | $ | (60.0 | ) | $ | 1,797.2 | ||||||||||||||
| Expenses: | ||||||||||||||||||||||||||||||||
|
Operating and SG&A |
783.0 | 471.1 | (61.3 | ) | 1,192.8 | 680.1 | 408.0 | (60.0 | ) | 1,028.1 | ||||||||||||||||||||||
|
Restructuring |
0.1 | — | — | 0.1 | 9.1 | 8.4 | — | 17.5 | ||||||||||||||||||||||||
|
Depreciation and amortization |
33.8 | 32.5 | — | 66.3 | 31.3 | 32.8 | — | 64.1 | ||||||||||||||||||||||||
|
Total |
816.9 | 503.6 | (61.3 | ) | 1,259.2 | 720.5 | 449.2 | (60.0 | ) | 1,109.7 | ||||||||||||||||||||||
| Operating income | $ | 649.4 | $ | 123.4 | $ | — | $ | 772.8 | $ | 557.2 | $ | 130.3 | $ | — | $ | 687.5 | ||||||||||||||||
| Year Ended December 31, 2008 | ||||||||||||||||
| MIS | MA | Eliminations | Consolidated | |||||||||||||
| Revenue | $ | 1,268.3 | $ | 550.7 | $ | (63.6 | ) | $ | 1,755.4 | |||||||
| Expenses: | ||||||||||||||||
|
Operating and SG&A |
636.0 | 362.2 | (63.6 | ) | 934.6 | |||||||||||
|
Restructuring |
(1.6 | ) | (0.9 | ) | — | (2.5 | ) | |||||||||
|
Depreciation and amortization |
33.3 | 41.8 | — | 75.1 | ||||||||||||
|
Total |
667.7 | 403.1 | (63.6 | ) | 1,007.2 | |||||||||||
| Operating income | $ | 600.6 | $ | 147.6 | $ | — | $ | 748.2 | ||||||||
The cumulative restructuring charges from inception through December 31, 2010 incurred for both the 2007 and 2009 Restructuring Plans, which are further discussed in Note 10 above, are $48.9 million and $16.2 million for the MIS and MA operating segments, respectively.
MIS AND MA REVENUE BY LINE OF BUSINESS
As part of the Reorganization there were several realignments within the MIS LOB as follows: Sovereign and sub-sovereign ratings, which were previously part of financial institutions; infrastructure/utilities ratings, which were previously part of CFG; and project finance, which was previously part of structured finance, were combined with the public finance business to form a new LOB called public, project and infrastructure finance or PPIF. In addition, real estate investment trust ratings were moved from FIG and CFG to the SFG business. Furthermore, in August 2008, the global managed investments ratings group which was previously part of SFG, was moved to the FIG business.
Within MA, various aspects of the legacy MIS research business and MKMV business were combined in 2008 to form the subscriptions, software and professional services LOB. The subscriptions business included credit and economic research, data and analytical models that are sold on a subscription basis; the software business included license and maintenance fees for credit risk software products; and the professional services business included risk modeling, credit scorecard development, and other specialized analytical projects, as well as credit education services that are typically sold on a per-engagement basis.
In 2009, the aforementioned MA businesses were realigned and renamed to reflect the reporting unit structure for the MA segment at December 31, 2009. Pursuant to this realignment the subscriptions business was renamed RD&A and the software business was renamed RMS. The revised groupings classify certain subscription-based risk management software revenue and advisory services relating to software sales to the redefined RMS business.
The tables below present revenue by LOB within each new segment and reflects the related intra-segment realignment:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| MIS: | ||||||||||||
| Corporate finance | $ | 563.9 | $ | 408.2 | $ | 307.0 | ||||||
| Structured finance | 290.8 | 304.9 | 404.7 | |||||||||
| Financial institutions | 278.7 | 258.5 | 263.0 | |||||||||
| Public, project and infrastructure finance | 271.6 | 246.1 | 230.0 | |||||||||
|
Total external revenue |
1,405.0 | 1,217.7 | 1,204.7 | |||||||||
| Intersegment royalty | 61.3 | 60.0 | 63.6 | |||||||||
| Total | 1,466.3 | 1,277.7 | 1,268.3 | |||||||||
| MA: | ||||||||||||
| RD&A | 425.0 | 413.6 | 418.7 | |||||||||
| RMS | 173.2 | 145.1 | 108.8 | |||||||||
| Professional services | 28.8 | 20.8 | 23.2 | |||||||||
| Total | 627.0 | 579.5 | 550.7 | |||||||||
| Eliminations | (61.3 | ) | (60.0 | ) | (63.6 | ) | ||||||
| Total MCO | $ | 2,032.0 | $ | 1,797.2 | $ | 1,755.4 | ||||||
CONSOLIDATED INFORMATION BY GEOGRAPHIC AREA
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Revenue: | ||||||||||||
| U.S. | $ | 1,089.5 | $ | 920.8 | $ | 910.1 | ||||||
| International: | ||||||||||||
|
EMEA |
627.4 | 624.7 | 603.1 | |||||||||
|
Other |
315.1 | 251.7 | 242.2 | |||||||||
|
Total International |
942.5 | 876.4 | 845.3 | |||||||||
| Total | $ | 2,032.0 | $ | 1,797.2 | $ | 1,755.4 | ||||||
| Long-lived assets at December 31: | ||||||||||||
| United States | $ | 476.5 | $ | 465.0 | $ | 456.4 | ||||||
| International | 477.1 | 282.1 | 243.3 | |||||||||
| Total | $ | 953.6 | $ | 747.1 | $ | 699.7 | ||||||
TOTAL ASSETS BY SEGMENT
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||||||||||
| MIS | MA | Corporate Assets (a) |
Consolidated | MIS | MA | Corporate Assets (a) |
Consolidated | |||||||||||||||||||||||||
| Total Assets | $ | 639.0 | $ | 910.0 | $ | 991.3 | $ | 2,540.3 | $ | 579.4 | $ | 724.9 | $ | 699.0 | $ | 2,003.3 | ||||||||||||||||
| (a) | Represents common assets that are shared between each segment or utilized by the corporate entity. Such assets primarily include cash and cash equivalents, short-term investments, unallocated property and equipment and deferred tax assets. |
|
|||
| NOTE 19 | VALUATION AND QUALIFYING ACCOUNTS |
Accounts receivable allowances represent adjustments to customer billings that are estimated when the related revenue is recognized and also represents an estimate for uncollectible accounts. The valuation allowance on deferred tax assets relates to foreign net operating losses for which realization is uncertain. Below is a summary of activity for both allowances:
|
Year Ended December 31, |
Balance at Beginning of the Year |
Additions | Write-offs and Adjustments |
Balance at End of the Year |
||||||||||||
| 2010 | ||||||||||||||||
|
Accounts receivable allowance |
$ | (24.6 | ) | $ | (46.5 | ) | $ | 38.1 | $ | (33.0 | ) | |||||
|
Deferred tax assets – valuation allowance |
$ | (4.5 | ) | $ | (8.8 | ) | $ | 0.5 | $ | (12.8 | ) | |||||
| 2009 | ||||||||||||||||
|
Accounts receivable allowance |
$ | (23.9 | ) | $ | (41.2 | ) | $ | 40.5 | $ | (24.6 | ) | |||||
|
Deferred tax assets – valuation allowance |
$ | (0.7 | ) | $ | (4.5 | ) | $ | 0.7 | $ | (4.5 | ) | |||||
| 2008 | ||||||||||||||||
|
Accounts receivable allowance |
$ | (16.2 | ) | $ | (39.6 | ) | $ | 31.9 | $ | (23.9 | ) | |||||
|
Deferred tax assets – valuation allowance |
$ | — | $ | (0.7 | ) | $ | — | $ | (0.7 | ) | ||||||
|
|||
| NOTE 20 | OTHER NON-OPERATING INCOME (EXPENSE), NET |
The following table summarizes the components of other non-operating income (expense) as presented in the consolidated statements of operations:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| FX gain/(loss) | $ | (5.1 | ) | $ | (9.5 | ) | $ | 24.7 | ||||
| Legacy Tax (see Note 17) | — | — | 11.0 | |||||||||
| Joint venture income | 2.8 | 6.1 | 3.9 | |||||||||
| Other | (3.6 | ) | (4.5 | ) | (5.8 | ) | ||||||
|
Total |
$ | (5.9 | ) | $ | (7.9 | ) | $ | 33.8 | ||||
|
|||
| NOTE 21 | RELATED PARTY TRANSACTIONS |
Moody's Corporation made grants of $4.4 million to The Moody's Foundation in 2010. No grants were made during the years ended December 31, 2009 and 2008. The Foundation carries out philanthropic activities primarily in the areas of education and health and human services. Certain members of Moody's senior management are on the Board of the Foundation.
|
|||
|
NOTE 22 |
QUARTERLY FINANCIAL DATA (UNAUDITED) |
|
|
|
Three Months Ended |
| |||||||||||||
|
(amounts in millions, except EPS) |
|
March 31 |
|
|
June 30 |
|
|
September 30 |
|
|
December 31 |
| ||||
|
2010 |
|
|
|
|
||||||||||||
|
Revenue |
|
$ |
476.6 |
|
|
$ |
477.8 |
|
|
$ |
513.3 |
|
|
$ |
564.3 |
|
|
Operating income |
|
$ |
196.8 |
|
|
$ |
190.5 |
|
|
$ |
188.9 |
|
|
$ |
196.6 |
|
|
Net income attributable to Moody's |
|
$ |
113.4 |
|
|
$ |
121.0 |
|
|
$ |
136.0 |
|
|
$ |
137.4 |
|
|
EPS: |
|
|
|
|
||||||||||||
|
Basic |
|
$ |
0.48 |
|
|
$ |
0.51 |
|
|
$ |
0.58 |
|
|
$ |
0.59 |
|
|
Diluted |
|
$ |
0.47 |
|
|
$ |
0.51 |
|
|
$ |
0.58 |
|
|
$ |
0.58 |
|
|
2009 |
|
|
|
|
||||||||||||
|
Revenue |
|
$ |
408.9 |
|
|
$ |
450.7 |
|
|
$ |
451.8 |
|
|
$ |
485.8 |
|
|
Operating income |
|
$ |
148.9 |
|
|
$ |
187.2 |
|
|
$ |
172.5 |
|
|
$ |
178.9 |
|
|
Net income attributable to Moody's |
|
$ |
90.2 |
|
|
$ |
109.3 |
|
|
$ |
100.6 |
|
|
$ |
101.9 |
|
|
EPS: |
|
|
|
|
||||||||||||
|
Basic |
|
$ |
0.38 |
|
|
$ |
0.46 |
|
|
$ |
0.43 |
|
|
$ |
0.43 |
|
|
Diluted |
|
$ |
0.38 |
|
|
$ |
0.46 |
|
|
$ |
0.42 |
|
|
$ |
0.43 |
|
Basic and diluted EPS are computed for each of the periods presented. The number of weighted average shares outstanding changes as common shares are issued pursuant to employee stock plans and for other purposes or as shares are repurchased. Therefore, the sum of basic and diluted EPS for each of the four quarters may not equal the full year basic and diluted EPS.
The quarterly financial data includes a $4.6 million and an $8.2 million benefit to net income related to the resolution of Legacy Tax Matters for the three months ended June 30, 2010 and June 30, 2009, respectively. Additionally, there was a tax benefit of approximately $17.6 million during the three months ended September 30, 2010 resulting from the indefinite reinvestment of certain foreign earnings and a tax benefit of approximately $18.4 million in the three months ended December 31, 2010 resulting from the utilization of foreign tax credits and lower state taxes. There were pre-tax restructuring charges of $11.8 million, $3.1 million and $3.7 million for the three months ended March 31, 2009, June 30, 2009 and September 30, 2009, respectively.
|
|||
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. Interest income on cash and cash equivalents and short-term investments was $3.1 million, $2.5 million and $12.2 million for the years ended December 31, 2010, 2009 and 2008, respectively.
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 $20.3 million, $14.3 million and $13.2 million for the years ended December 31, 2010, 2009 and 2008, 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 that will 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, 2010, 2009 and 2008.
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 of 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
Goodwill is tested for impairment, at the reporting unit level, annually on November 30th or more frequently if events or circumstances indicate the assets may be impaired, in accordance with the provisions of ASC Topic 350. If the estimated fair value, which is based on a discounted cash flow methodology, is less than its carrying amount, the Company would proceed to step two of the impairment test as prescribed by Topic 350 of the ASC. Under step two, the estimated fair value of the reporting units would be allocated to the assets and liabilities of the reporting unit to derive the implied fair value of the goodwill. If the implied fair value of the goodwill determined under step two of the impairment test is less than its carrying amount, an impairment charge would be recognized for the difference. The discounted cash flow methodology used to value the reporting units is based on the present value of the cash flows that the Company expects the reporting unit to generate in the future. The significant estimates used to derive the present value of the cash flows include the reporting units WACC and future growth rates.
Finite-lived intangible assets and other long-lived 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.
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, restricted stock and stock appreciation rights. The Company has also established a pool of additional paid-in capital related to the tax effects of employee share-based compensation ("APIC Pool"), 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 as 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.
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 new standard changes 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 has elected to early adopt ASU 2009-13 on a prospective basis for applicable transactions originating or materially modified on or after January 1, 2010. 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 is also not expected to 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 if available, third party evidence if VSOE is not available, or estimated selling price 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, 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 the Company's 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 its 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 51 years at December 31, 2010. At December 31, 2010, 2009 and 2008, deferred revenue related to these securities was approximately $76 million, $78 million and $82 million, respectively.
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, 2010, 2009 and 2008, accounts receivable included approximately $25 million, $27 million and $34 million, respectively, related to accrued commercial paper revenue. Historically, MIS has not had material differences between the estimated revenue and the actual billings.
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.
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.
Prior to January 1, 2010 and pursuant to the previous accounting standards, the Company allocated revenue in a multiple element arrangement to each deliverable based on its relative fair value, or for software elements, based on VSOE. If the fair value was not available for an undelivered element, the revenue for the entire arrangement was deferred.
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.
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.
Restructuring
The Company's restructuring accounting follows the provisions of: Topic 712 of the ASC for severance relating to employee terminations, Topic 715 of the ASC for pension settlements and curtailments, and Topic 420 of the ASC for contract termination costs and other exit 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.
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 impacts related to derivative instruments designated as cash flow hedges. Accumulated other comprehensive (loss) income is primarily comprised of:
| December 31, | ||||||||
| (in millions) | 2010 | 2009 | ||||||
| Currency translation adjustments, net of tax | $ | 23.6 | $ | 12.1 | ||||
| Net actuarial losses and net prior service costs related to Post-Retirement Plans, net of tax | (51.4 | ) | (47.0 | ) | ||||
| Realized and unrealized losses on cash flow hedges, net of tax | (5.6 | ) | (6.3 | ) | ||||
|
Total accumulated other comprehensive loss |
$ | (33.4 | ) | $ | (41.2 | ) | ||
Income Taxes
The Company accounts for income taxes under the asset and liability method in accordance with Topic 740 of the ASC. 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 in interest expense in its consolidated statements of operations. Penalties, if incurred, would be 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 a portion of its 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, payables and short-term borrowings, 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. The Company also has long-term debt which is described in detail in Note 14. 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.
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.
Refer to Note 5 and Note 11 for specific valuation methodologies related to the Company's derivative instruments and pension assets.
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 and trade receivables.
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, 2010 and 2009. 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, 2010 or 2009.
Earnings per Share of Common Stock
Basic EPS is calculated based on the weighted average number of shares of common stock outstanding during the reporting period. Diluted EPS is calculated giving effect to all potentially dilutive common shares, assuming that such shares were outstanding during the reporting period.
Pension and Other Post-Retirement Benefits
Moody's maintains various noncontributory DBPPs as well as other contributory and noncontributory retirement and post-retirement plans. The expense and assets/liabilities that the Company reports for its pension and other post-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 post-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 2010, 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 recur 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 post-retirement benefits.
|
|||
| December 31, | ||||||||
| (in millions) | 2010 | 2009 | ||||||
| Currency translation adjustments, net of tax | $ | 23.6 | $ | 12.1 | ||||
| Net actuarial losses and net prior service costs related to Post-Retirement Plans, net of tax | (51.4 | ) | (47.0 | ) | ||||
| Realized and unrealized losses on cash flow hedges, net of tax | (5.6 | ) | (6.3 | ) | ||||
|
Total accumulated other comprehensive loss |
$ | (33.4 | ) | $ | (41.2 | ) | ||
|
|||
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Basic | 235.0 | 236.1 | 242.4 | |||||||||
| Dilutive effect of shares issuable under stock-based compensation plans | 1.6 | 1.7 | 2.9 | |||||||||
| Diluted | 236.6 | 237.8 | 245.3 | |||||||||
|
Antidilutive options to purchase common shares and restricted stock excluded from the table above |
15.5 | 15.6 | 11.3 | |||||||||
|
|||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| Notional amount of Currency Pair: | ||||||||
|
GBP/USD |
£ | — | £ | 5.0 | ||||
|
EUR/USD |
€ | — | € | 9.9 | ||||
|
EUR/GBP |
€ | — | € | 21.0 | ||||
| Fair Value of Derivative Instruments | ||||||||||||||||
| Asset | Liability | |||||||||||||||
| December 31, 2010 |
December 31, 2009 |
December 31, 2010 |
December 31, 2009 |
|||||||||||||
| Derivatives designated as accounting hedges: | ||||||||||||||||
| FX options | $ | — | $ | 1.2 | $ | — | $ | — | ||||||||
| Interest rate swaps | — | — | 12.2 | 7.6 | ||||||||||||
| Total derivatives designated as accounting hedges | — | 1.2 | 12.2 | 7.6 | ||||||||||||
| Derivatives not designated as accounting hedges: | ||||||||||||||||
| FX forwards on certain assets and liabilities | 2.0 | 0.3 | 0.7 | 1.0 | ||||||||||||
| Total | $ | 2.0 | $ | 1.5 | $ | 12.9 | $ | 8.6 | ||||||||
|
Derivatives in Cash Flow Hedging Relationships |
Amount of Gain/(Loss) Recognized in AOCI on Derivative (Effective Portion) |
Location of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion) |
Amount of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion) |
Location of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
|||||||||||||||||||||||||
| Year Ended December 31, |
Year Ended December 31, |
Year Ended December 31, |
||||||||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||
| FX options | $ | — | $ | (1.5 | ) | Revenue | $ | (1.0 | ) | $ | 2.0 | Revenue | $ | — | $ | (0.1 | ) | |||||||||||||
| Interest rate swaps | (3.1 | ) | (0.7 | ) | Interest expense | (2.8 | ) | (2.6 | ) | N/A | — | — | ||||||||||||||||||
| Total | $ | (3.1 | ) | $ | (2.2 | ) | $ | (3.8 | ) | $ | (0.6 | ) | $ | — | $ | (0.1 | ) | |||||||||||||
| Unrecognized Losses, net of tax |
||||||||
| December 31, 2010 |
December 31, 2009 |
|||||||
| FX options | $ | (0.2 | ) | $ | (1.2 | ) | ||
| Interest rate swaps | (5.4 | ) | (5.1 | ) | ||||
|
Total |
$ | (5.6 | ) | $ | (6.3 | ) | ||
|
|||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| Office and computer equipment (3 – 20 year estimated useful life) | $ | 92.2 | $ | 99.2 | ||||
| Office furniture and fixtures (5 – 10 year estimated useful life) | 40.2 | 37.4 | ||||||
| Internal-use computer software (3 – 8 year estimated useful life) | 199.1 | 145.9 | ||||||
| Leasehold improvements (5 – 20 year estimated useful life) | 188.6 | 175.3 | ||||||
|
Total property and equipment, at cost |
520.1 | 457.8 | ||||||
| Less: accumulated depreciation and amortization | (200.8 | ) | (164.8 | ) | ||||
| Total property and equipment, net | $ | 319.3 | $ | 293.0 | ||||
|
| 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 | $ | 53.9 | ||||||
| Property and equipment, net | 1.6 | |||||||
| Intangible assets: | ||||||||
|
Software (9.0 year weighted average life) |
$ | 43.0 | ||||||
|
Client relationships (16.0 year weighted average life) |
12.1 | |||||||
|
Other intangibles (1.8 year weighted average life) |
2.6 | |||||||
|
Total intangible assets |
57.7 | |||||||
| In-process technology | 4.5 | |||||||
| Goodwill | 125.0 | |||||||
| Liabilities assumed | (31.7 | ) | ||||||
| Net assets acquired | $ | 211.0 | ||||||
|
|||
| Year Ended December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | |||||||||||||||||||||||
| MIS | MA | Consolidated | MIS | MA | Consolidated | |||||||||||||||||||
| Beginning balance | $ | 11.1 | $ | 338.1 | $ | 349.2 | $ | 10.6 | $ | 327.4 | $ | 338.0 | ||||||||||||
| Additions/adjustments | — | 104.6 | 104.6 | (0.3 | ) | 5.0 | 4.7 | |||||||||||||||||
| Foreign currency translation adjustments | 0.3 | 11.4 | 11.7 | 0.8 | 5.7 | 6.5 | ||||||||||||||||||
| Ending balance | $ | 11.4 | $ | 454.1 | $ | 465.5 | $ | 11.1 | $ | 338.1 | $ | 349.2 | ||||||||||||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| Customer relationships | $ | 145.1 | $ | 80.6 | ||||
| Accumulated amortization | (49.2 | ) | (42.8 | ) | ||||
|
Net customer lists |
95.9 | 37.8 | ||||||
| Trade secrets | 31.4 | 25.5 | ||||||
| Accumulated amortization | (10.9 | ) | (8.7 | ) | ||||
|
Net trade secrets |
20.5 | 16.8 | ||||||
| Software | 54.8 | 55.0 | ||||||
| Accumulated amortization | (20.3 | ) | (14.8 | ) | ||||
|
Net software |
34.5 | 40.2 | ||||||
| Other | 37.5 | 26.8 | ||||||
| Accumulated amortization | (19.6 | ) | (16.7 | ) | ||||
|
Net other |
17.9 | 10.1 | ||||||
|
Total |
$ | 168.8 | $ | 104.9 | ||||
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Amortization Expense | $ | 16.4 | $ | 16.4 | $ | 28.2 | ||||||
|
Year Ending December 31, |
||||
| 2011 | $ | 18.7 | ||
| 2012 | 18.1 | |||
| 2013 | 17.9 | |||
| 2014 | 14.5 | |||
| 2015 | 13.4 | |||
| Thereafter | 86.2 | |||
|
|||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| Other current assets: | ||||||||
|
Prepaid taxes |
$ | 82.3 | $ | 18.6 | ||||
|
Other prepaid expenses |
39.8 | 28.2 | ||||||
|
Other |
5.8 | 5.0 | ||||||
|
Total other current assets |
$ | 127.9 | $ | 51.8 | ||||
| December 31, | ||||||||
| Other assets: | 2010 | 2009 | ||||||
|
Investments in Joint Ventures |
$ | 30.8 | $ | 30.4 | ||||
|
Deposits for real-estate leases |
11.4 | 9.5 | ||||||
|
Other |
13.6 | 10.8 | ||||||
|
Total other assets |
$ | 55.8 | $ | 50.7 | ||||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| Accounts and accrued liabilities: | ||||||||
|
Salaries and benefits |
$ | 69.6 | $ | 51.5 | ||||
|
Incentive compensation |
116.8 | 74.6 | ||||||
|
Profit sharing contribution |
12.6 | — | ||||||
|
Customer credits, advanced payments and advanced billings |
15.3 | 14.8 | ||||||
|
Dividends |
27.9 | 26.3 | ||||||
|
Professional service fees |
50.6 | 35.5 | ||||||
|
Interest accrued on debt |
17.6 | 9.6 | ||||||
|
Accounts payable |
14.3 | 7.1 | ||||||
|
Income taxes (see Note 13) |
26.9 | 20.3 | ||||||
|
Restructuring (see Note 10) |
0.7 | 5.9 | ||||||
|
Pension and other post retirement employee benefits (see Note 11) |
9.5 | 8.8 | ||||||
|
Other |
52.6 | 62.8 | ||||||
|
Total accounts payable and accrued liabilities |
$ | 414.4 | $ | 317.2 | ||||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| Other liabilities: | ||||||||
|
Pension and other post retirement employee benefits (see Note 11) |
$ | 132.8 | $ | 112.7 | ||||
|
Deferred rent-non-current portion |
100.4 | 87.4 | ||||||
|
Interest accrued on UTPs |
33.7 | 27.7 | ||||||
|
Legacy and other tax matters |
57.3 | 52.8 | ||||||
|
Other |
38.1 | 37.2 | ||||||
|
Total other liabilities |
$ | 362.3 | $ | 317.8 | ||||
|
|||
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| 2007 Restructuring Plan | $ | 1.0 | $ | 1.9 | $ | (2.5 | ) | |||||
| 2009 Restructuring Plan | (0.9 | ) | 15.6 | — | ||||||||
|
Total |
$ | 0.1 | $ | 17.5 | $ | (2.5 | ) | |||||
| Employee Termination Costs | ||||||||||||||||||||
| Severance | Pension Settlements |
Total | Contract Termination Costs |
Total Restructuring Liability |
||||||||||||||||
| Balance at December 31, 2008 | $ | 1.5 | $ | 8.1 | $ | 9.6 | $ | 1.8 | $ | 11.4 | ||||||||||
| 2007 Restructuring Plan: | ||||||||||||||||||||
|
Costs incurred and adjustments |
0.4 | — | 0.4 | 1.5 | 1.9 | |||||||||||||||
|
Cash payments |
(1.7 | ) | — | (1.7 | ) | (2.6 | ) | (4.3 | ) | |||||||||||
| 2009 Restructuring Plan: | ||||||||||||||||||||
|
Costs incurred and adjustments |
12.0 | — | 12.0 | 3.3 | 15.3 | |||||||||||||||
|
Cash payments |
(7.8 | ) | — | (7.8 | ) | (2.5 | ) | (10.3 | ) | |||||||||||
| Balance at December 31, 2009 | $ | 4.4 | $ | 8.1 | $ | 12.5 | $ | 1.5 | $ | 14.0 | ||||||||||
| 2007 Restructuring Plan: | ||||||||||||||||||||
|
Costs incurred and adjustments |
(0.2 | ) | — | (0.2 | ) | (0.1 | ) | (0.3 | ) | |||||||||||
|
Cash payments |
— | (3.0 | ) | (3.0 | ) | (0.5 | ) | (3.5 | ) | |||||||||||
| 2009 Restructuring Plan: | ||||||||||||||||||||
|
Costs incurred and adjustments |
(0.4 | ) | — | (0.4 | ) | — | (0.4 | ) | ||||||||||||
|
Cash payments |
(3.4 | ) | — | (3.4 | ) | (0.5 | ) | (3.9 | ) | |||||||||||
|
FX Translation |
(0.1 | ) | — | (0.1 | ) | — | (0.1 | ) | ||||||||||||
| Balance at December 31, 2010 | $ | 0.3 | $ | 5.1 | $ | 5.4 | $ | 0.4 | $ | 5.8 | ||||||||||
|
|||
| Pension Plans | Other Post-Retirement Plans | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Change in Benefit Obligation: | ||||||||||||||||
|
Benefit obligation, beginning of the period |
$ | (213.0 | ) | $ | (171.8 | ) | $ | (13.1 | ) | $ | (11.0 | ) | ||||
|
Service cost |
(13.5 | ) | (12.1 | ) | (0.9 | ) | (0.8 | ) | ||||||||
|
Interest cost |
(12.0 | ) | (9.9 | ) | (0.8 | ) | (0.7 | ) | ||||||||
|
Plan participants' contributions |
— | — | (0.2 | ) | (0.2 | ) | ||||||||||
|
Benefits paid |
10.5 | 3.9 | 0.7 | 1.1 | ||||||||||||
|
Plan amendments |
— | (2.5 | ) | — | — | |||||||||||
|
Actuarial gain (loss) |
7.4 | 7.4 | (0.4 | ) | (0.7 | ) | ||||||||||
|
Assumption changes |
(21.9 | ) | (28.0 | ) | (0.9 | ) | (0.8 | ) | ||||||||
| Benefit obligation, end of the period | (242.5 | ) | (213.0 | ) | (15.6 | ) | (13.1 | ) | ||||||||
| Change in Plan Assets: | ||||||||||||||||
|
Fair value of plan assets, beginning of the period |
108.2 | 88.6 | — | — | ||||||||||||
|
Actual return on plan assets |
13.9 | 15.5 | — | — | ||||||||||||
|
Benefits paid |
(10.5 | ) | (3.9 | ) | (0.7 | ) | (1.1 | ) | ||||||||
|
Employer contributions |
8.8 | 8.0 | 0.5 | 0.9 | ||||||||||||
|
Plan participants' contributions |
— | — | 0.2 | 0.2 | ||||||||||||
|
Fair value of plan assets, end of the period |
120.4 | 108.2 | — | — | ||||||||||||
| Funded status of the plans | (122.1 | ) | (104.8 | ) | (15.6 | ) | (13.1 | ) | ||||||||
| Amounts Recorded on the Consolidated Balance Sheets: | ||||||||||||||||
|
Pension and post-retirement benefits liability-current |
(8.9 | ) | (8.2 | ) | (0.6 | ) | (0.6 | ) | ||||||||
|
Pension and post-retirement benefits liability-non current |
(113.2 | ) | (96.6 | ) | (15.0 | ) | (12.5 | ) | ||||||||
| Net amount recognized | $ | (122.1 | ) | $ | (104.8 | ) | $ | (15.6 | ) | $ | (13.1 | ) | ||||
| Accumulated benefit obligation, end of the period | $ | (214.6 | ) | $ | (185.2 | ) | ||||||||||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| Aggregate projected benefit obligation | $ | 242.5 | $ | 213.0 | ||||
| Aggregate accumulated benefit obligation | $ | 214.6 | $ | 185.2 | ||||
| Aggregate fair value of plan assets | $ | 120.4 | $ | 108.2 | ||||
| Pension Plans | Other Post-Retirement Plans | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Net actuarial (losses) | $ | (80.9 | ) | $ | (73.8 | ) | $ | (3.1 | ) | $ | (2.0 | ) | ||||
| Net prior service costs | (5.3 | ) | (6.0 | ) | — | — | ||||||||||
|
Total recognized in AOCI- pretax |
$ | (86.2 | ) | $ | (79.8 | ) | $ | (3.1 | ) | $ | (2.0 | ) | ||||
| Pension Plans | Other Post-Retirement Plans | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
| Components of net periodic expense | ||||||||||||||||||||||||
| Service cost | $ | 13.5 | $ | 12.1 | $ | 12.4 | $ | 0.9 | $ | 0.8 | $ | 0.8 | ||||||||||||
| Interest cost | 12.0 | 9.9 | 9.7 | 0.8 | 0.7 | 0.6 | ||||||||||||||||||
| Expected return on plan assets | (10.5 | ) | (10.0 | ) | (9.9 | ) | — | — | — | |||||||||||||||
| Amortization of net actuarial loss from earlier periods | 2.8 | 0.6 | 0.2 | 0.1 | — | — | ||||||||||||||||||
| Amortization of net prior service costs from earlier periods | 0.7 | 0.4 | 0.4 | — | — | — | ||||||||||||||||||
| Curtailment loss | — | — | 1.0 | — | — | — | ||||||||||||||||||
| Cost of special termination benefits | — | — | 2.8 | — | — | — | ||||||||||||||||||
| Settlement charges | 1.3 | — | — | — | — | — | ||||||||||||||||||
| Net periodic expense | $ | 19.8 | $ | 13.0 | $ | 16.6 | $ | 1.8 | $ | 1.5 | $ | 1.4 | ||||||||||||
| Pension Plans | Other Post-Retirement Plans | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Amortization of net actuarial losses | $ | 2.8 | $ | 0.6 | $ | 0.1 | $ | — | ||||||||
| Amortization of prior service costs | 0.7 | 0.4 | — | — | ||||||||||||
| Accelerated recognition of actuarial loss due to settlement | 1.3 | — | — | — | ||||||||||||
| Net actuarial (loss) arising during the period | (11.2 | ) | (15.2 | ) | (1.2 | ) | (1.5 | ) | ||||||||
| Net prior service cost arising during the period due to plan amendment | — | (2.5 | ) | — | — | |||||||||||
|
Total recognized in Other Comprehensive |
$ | (6.4 | ) | $ | (16.7 | ) | $ | (1.1 | ) | $ | (1.5 | ) | ||||
| Pension Plans | Other Post-Retirement Plans | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Discount rate | 5.39 | % | 5.95 | % | 5.15 | % | 5.75 | % | ||||||||
| Rate of compensation increase | 4.00 | % | 4.00 | % | — | — | ||||||||||
| Pension Plans | Other Post-Retirement Plans | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
| Discount rate | 5.95 | % | 6.00 | % | 6.45 | % | 5.75 | % | 6.25 | % | 6.35 | % | ||||||||||||
| Expected return on plan assets | 8.35 | % | 8.35 | % | 8.35 | % | — | — | — | |||||||||||||||
| Rate of compensation increase | 4.00 | % | 4.00 | % | 4.00 | % | — | — | — | |||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Pre-age 65 | Post-age 65 | Pre-age 65 | Post-age 65 | Pre-age 65 | Post-age 65 | |||||||||||||||||||
| Healthcare cost trend rate assumed for the following year | 7.9 | % | 8.9 | % | 8.4 | % | 9.4 | % | 9.4 | % | 10.4 | % | ||||||||||||
| Ultimate rate to which the cost trend rate is assumed to decline (ultimate trend rate) | 5.0% | 5.0% | 5.0% | |||||||||||||||||||||
| Year that the rate reaches the ultimate trend rate | 2020 | 2020 | 2015 | |||||||||||||||||||||
| Fair Value Measurement as of December 31, 2010 | ||||||||||||||||||||
|
Asset Category |
Balance | Level 1 | Level 2 | Level 3 | % of total assets |
|||||||||||||||
| Emerging markets equity fund | $ | 10.3 | $ | 10.3 | $ | — | $ | — | 9 | % | ||||||||||
| Common/collective trust funds – equity securities | ||||||||||||||||||||
|
U.S. large-cap |
26.0 | — | 26.0 | — | 21 | % | ||||||||||||||
|
U.S. small and mid-cap |
9.6 | — | 9.6 | — | 8 | % | ||||||||||||||
|
International |
32.1 | — | 32.1 | — | 27 | % | ||||||||||||||
| Total equity investments | 78.0 | 10.3 | 67.7 | — | 65 | % | ||||||||||||||
| Common/collective trust funds –fixed income securities | ||||||||||||||||||||
|
Long-term investment grade government /corporate bonds |
18.8 | — | 18.8 | — | 15 | % | ||||||||||||||
|
U.S. Treasury Inflation-Protected Securities (TIPs) |
5.4 | — | 5.4 | — | 4 | % | ||||||||||||||
|
Emerging markets bonds |
3.2 | — | 3.2 | — | 3 | % | ||||||||||||||
|
High yield bonds |
3.3 | — | 3.3 | — | 3 | % | ||||||||||||||
| Total fixed-income investments | 30.7 | — | 30.7 | — | 25 | % | ||||||||||||||
| Common/collective trust funds – convertible securities | 3.4 | — | 3.4 | — | 3 | % | ||||||||||||||
| Private real estate fund | 8.3 | — | — | 8.3 | 7 | % | ||||||||||||||
| Total other investment | 11.7 | — | 3.4 | 8.3 | 10 | % | ||||||||||||||
| Total Assets | $ | 120.4 | $ | 10.3 | $ | 101.8 | $ | 8.3 | 100 | % | ||||||||||
| Fair Value Measurement as of December 31, 2009 | ||||||||||||||||||||
|
Asset Category |
Balance | Level 1 | Level 2 | Level 3 | % of total assets |
|||||||||||||||
| Cash and cash equivalent | $ | 0.1 | $ | — | $ | 0.1 | $ | — | — | |||||||||||
| Emerging markets equity fund | 7.5 | 7.5 | — | — | 7 | % | ||||||||||||||
| Common/collective trust funds – equity securities | ||||||||||||||||||||
|
U.S. large-cap |
38.4 | — | 38.4 | — | 35 | % | ||||||||||||||
|
U.S. small and mid-cap |
17.1 | — | 17.1 | — | 16 | % | ||||||||||||||
|
International |
16.7 | — | 16.7 | — | 16 | % | ||||||||||||||
| Total equity investments | 79.7 | 7.5 | 72.2 | — | 74 | % | ||||||||||||||
| Common/collective trust funds-fixed income securities | ||||||||||||||||||||
|
Long-term investment grade government /corporate bonds |
20.1 | — | 20.1 | — | 18 | % | ||||||||||||||
| Total fixed- income Investments | 20.1 | — | 20.1 | — | 18 | % | ||||||||||||||
| Private real estate fund | 8.3 | — | — | 8.3 | 8 | % | ||||||||||||||
| Total other investments | 8.3 | — | — | 8.3 | 8 | % | ||||||||||||||
| Total Assets | $ | 108.2 | $ | 7.5 | $ | 92.4 | $ | 8.3 | 100 | % | ||||||||||
| Real estate investment fund: | ||||
| Balance as of December 31, 2009 | $ | 8.3 | ||
| Return on plan assets related to assets still held as of December 31, 2010 | 0.8 | |||
| Return on plan assets related to assets sold during the period | 0.1 | |||
| Purchases (sales), net | (0.9 | ) | ||
| Balance as of December 31, 2010 | $ | 8.3 | ||
|
Year Ending December 31, |
Pension Plans | Other Post- Retirement Plans * |
||||||
| 2011 | $ | 10.9 | $ | 0.6 | ||||
| 2012 | 6.1 | 0.8 | ||||||
| 2013 | 6.8 | 0.9 | ||||||
| 2014 | 7.2 | 1.0 | ||||||
| 2015 | 9.5 | 1.1 | ||||||
| 2016 – 2020 | $ | 87.1 | $ | 7.3 | ||||
| * | The estimated future benefits payable for the Post-Retirement Plans are reflected net of the expected Medicare Part D subsidy for which the subsidy is insignificant on an annual basis for all the years presented. |
|
|||
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Stock compensation cost | $ | 56.6 | $ | 57.4 | $ | 63.2 | ||||||
| Tax benefit | $ | 23.9 | $ | 20.9 | $ | 23.5 | ||||||
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Expected dividend yield | 1.58% | 1.59% | 1.06% | |||||||||
| Expected stock volatility | 44% | 38% | 25% | |||||||||
| Risk-free interest rate | 2.73% | 2.63% | 2.96% | |||||||||
| Expected holding period | 5.9 yrs | 5.8 yrs | 5.5 yrs | |||||||||
| Grant date fair value | $ | 10.38 | $ | 8.52 | $ | 9.73 | ||||||
|
Options |
Shares | Weighted Average Exercise Price Per Share |
Weighted Average Remaining Contractual Term |
Aggregate Intrinsic Value |
||||||||||||
| Outstanding, December 31, 2009 | 20.1 | $ | 37.26 | |||||||||||||
| Granted | 2.4 | 26.69 | ||||||||||||||
| Exercised | (2.1 | ) | 17.03 | |||||||||||||
| Forfeited | (0.3 | ) | 33.40 | |||||||||||||
| Expired | (0.8 | ) | 41.17 | |||||||||||||
| Outstanding, December 31, 2010 | 19.3 | $ | 38.11 | 5.2 yrs | $ | 24.8 | ||||||||||
| Vested and expected to vest, December 31, 2010 | 18.6 | $ | 38.42 | 5.1 yrs | $ | 24.4 | ||||||||||
| Exercisable, December 31, 2010 | 13.5 | $ | 40.47 | 4.0 yrs | $ | 22.0 | ||||||||||
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Proceeds from stock option exercises | $ | 36.4 | $ | 18.0 | $ | 23.2 | ||||||
| Aggregate intrinsic value | $ | 19.7 | $ | 13.8 | $ | 21.6 | ||||||
| Tax benefit realized upon exercise | $ | 7.8 | $ | 5.4 | $ | 8.5 | ||||||
|
Nonvested Restricted Stock |
Shares | Weighted Average Grant Date Fair Value Per Share |
||||||
| Balance, December 31, 2009 | 1.5 | $ | 44.02 | |||||
|
Granted |
1.1 | 25.57 | ||||||
|
Vested |
(0.5 | ) | 50.40 | |||||
|
Forfeited |
(0.1 | ) | 34.81 | |||||
| Balance, December 31, 2010 | 2.0 | $ | 33.10 | |||||
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Fair value of vested shares | $ | 12.4 | $ | 8.0 | $ | 23.7 | ||||||
| Tax benefit realized upon vesting | $ | 4.7 | $ | 2.9 | $ | 8.8 | ||||||
|
|||
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Current: | ||||||||||||
|
Federal |
$ | 106.6 | $ | 99.2 | $ | 147.5 | ||||||
|
State and Local |
22.1 | 53.3 | 49.3 | |||||||||
|
Non-U.S. |
82.9 | 70.1 | 88.7 | |||||||||
|
Total current |
211.6 | 222.6 | 285.5 | |||||||||
| Deferred: | ||||||||||||
|
Federal |
(14.7 | ) | 22.8 | (10.9 | ) | |||||||
|
State and Local |
10.6 | (9.3 | ) | (0.8 | ) | |||||||
|
Non-U.S. |
(6.5 | ) | 3.0 | (5.6 | ) | |||||||
|
Total deferred |
(10.6 | ) | 16.5 | (17.3 | ) | |||||||
| Total income tax provision | $ | 201.0 | $ | 239.1 | $ | 268.2 | ||||||
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| U.S. statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
| State and local taxes, net of federal tax benefit | 2.9 | 4.4 | 4.1 | |||||||||
| Benefit of foreign operations | (9.7 | ) | (2.4 | ) | (2.6 | ) | ||||||
| Legacy tax items | (0.4 | ) | (0.3 | ) | (0.3 | ) | ||||||
| Other | 0.3 | 0.3 | 0.5 | |||||||||
| Effective tax rate | 28.1 | % | 37.0 | % | 36.7 | % | ||||||
| Income tax paid | $ | 247.9 | $ | 192.2 | $ | 319.9 | ||||||
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| United States | $ | 390.6 | $ | 386.9 | $ | 437.4 | ||||||
| International | 323.8 | 259.3 | 292.4 | |||||||||
| Income before provision for income taxes | $ | 714.4 | $ | 646.2 | $ | 729.8 | ||||||
| Year Ended December 31, | ||||||||
| 2010 | 2009 | |||||||
| Deferred tax assets: | ||||||||
|
Current: |
||||||||
|
Account receivable allowances |
$ | 10.5 | $ | 7.5 | ||||
|
Accrued compensation and benefits |
12.3 | 10.5 | ||||||
|
Deferred revenue |
6.0 | 7.9 | ||||||
|
Legal and professional fees |
13.1 | — | ||||||
|
Restructuring |
1.1 | 2.6 | ||||||
|
Other |
4.9 | 3.9 | ||||||
|
Total current |
47.9 | 32.4 | ||||||
|
Non-current: |
||||||||
|
Accumulated depreciation and amortization |
1.6 | 1.3 | ||||||
|
Stock-based compensation |
84.9 | 81.0 | ||||||
|
Benefit plans |
62.8 | 43.8 | ||||||
|
Deferred rent and construction allowance |
30.4 | 28.9 | ||||||
|
Deferred revenue |
37.4 | 39.2 | ||||||
|
Foreign net operating loss (1) |
11.5 | 7.1 | ||||||
|
Uncertain tax positions |
58.8 | 46.0 | ||||||
|
Self-insured related reserves |
22.7 | — | ||||||
|
Other |
5.4 | 5.2 | ||||||
|
Total non-current |
315.5 | 252.5 | ||||||
| Total deferred tax assets | 363.4 | 284.9 | ||||||
| Deferred tax liabilities: | ||||||||
|
Current: |
||||||||
|
Other |
(0.2 | ) | (0.1 | ) | ||||
|
Total current |
(0.2 | ) | (0.1 | ) | ||||
|
Non-current: |
||||||||
|
Accumulated depreciation |
(16.4 | ) | (19.2 | ) | ||||
|
Foreign earnings to be repatriated |
(1.2 | ) | (25.2 | ) | ||||
|
Amortization of intangible assets and capitalized software |
(108.2 | ) | (39.0 | ) | ||||
|
Self-insured related income |
(27.1 | ) | — | |||||
|
Other liabilities |
(1.5 | ) | (3.4 | ) | ||||
|
Total non-current |
(154.4 | ) | (86.8 | ) | ||||
| Total deferred tax liabilities | (154.6 | ) | (86.9 | ) | ||||
| Net deferred tax asset | 208.8 | 198.0 | ||||||
| Valuation allowance | (12.8 | ) | (4.5 | ) | ||||
| Total net deferred tax assets | $ | 196.0 | $ | 193.5 | ||||
| (1) | Amounts are primarily set to expire beginning in 2015, if unused. |
| 2010 | 2009 | 2008 | ||||||||||
| Balance as of January 1 | $ | 164.2 | $ | 185.1 | $ | 156.1 | ||||||
| Additions for tax positions related to the current year | 31.1 | 31.1 | 34.5 | |||||||||
| Additions for tax positions of prior years | 16.2 | 52.5 | 8.2 | |||||||||
| Reductions for tax positions of prior years | (9.9 | ) | (47.0 | ) | (12.2 | ) | ||||||
| Settlements with taxing authorities | — | (50.7 | ) | (0.7 | ) | |||||||
| Lapse of statute of limitations | (20.8 | ) | (6.8 | ) | (0.8 | ) | ||||||
| Balance as of December 31 | $ | 180.8 | $ | 164.2 | $ | 185.1 | ||||||
|
|||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| 2007 Facility | $ | — | $ | — | ||||
| Commercial paper, net of unamortized discount of $0.1 million at 2009 | — | 443.7 | ||||||
| Notes payable: | ||||||||
|
Series 2005-1 Notes due 2015, net of fair value of interest rate swap of $3.7 million in 2010 |
296.3 | 300.0 | ||||||
|
Series 2007-1 Notes due 2017 |
300.0 | 300.0 | ||||||
|
2010 Senior Notes, net of unamortized discount of $3.0 million at 2010, due 2020 |
497.0 | — | ||||||
| 2008 Term Loan, various payments through 2013 | 146.3 | 150.0 | ||||||
| Total debt | 1,239.6 | 1,193.7 | ||||||
| Current portion | (11.3 | ) | (447.5 | ) | ||||
| Total long-term debt | $ | 1,228.3 | $ | 746.2 | ||||
| 2008 Term Loan | Series 2005-1 Notes | Total | ||||||||||
|
Year Ending December 31, |
||||||||||||
| 2011 | $ | 11.3 | $ | — | $ | 11.3 | ||||||
| 2012 | 71.2 | — | 71.2 | |||||||||
| 2013 | 63.8 | — | 63.8 | |||||||||
| 2014 | — | — | — | |||||||||
| 2015 | — | 300.0 | 300.0 | |||||||||
| Total | $ | 146.3 | $ | 300.0 | $ | 446.3 | ||||||
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Income | $ | 3.1 | $ | 2.5 | $ | 18.1 | ||||||
| Expense on borrowings | (52.2 | ) | (45.5 | ) | (60.0 | ) | ||||||
| UTBs and other tax related interest | (7.7 | ) | 1.6 | (13.7 | ) | |||||||
| Legacy Tax (a) | 2.5 | 6.5 | 2.3 | |||||||||
| Interest capitalized | 1.8 | 1.5 | 1.1 | |||||||||
| Total | $ | (52.5 | ) | $ | (33.4 | ) | $ | (52.2 | ) | |||
| Interest paid | $ | 44.0 | $ | 46.1 | $ | 59.5 | ||||||
| (a) | Represents a reduction of accrued interest related to the favorable resolution of Legacy Tax Matters, further discussed in Note 17 to the consolidated financial statements. |
| December 31, 2010 | December 31, 2009 | |||||||||||||||
| Carrying Amount |
Estimated Fair Value |
Carrying Amount |
Estimated Fair Value |
|||||||||||||
| Series 2005-1 Notes | $ | 296.3 | $ | 310.6 | $ | 300.0 | $ | 291.1 | ||||||||
| Series 2007-1 Notes | 300.0 | 321.3 | 300.0 | 298.6 | ||||||||||||
| 2010 Senior Notes | 497.0 | 492.1 | — | — | ||||||||||||
| 2008 Term Loan | 146.3 | 146.3 | 150.0 | 150.0 | ||||||||||||
| Total | $ | 1,239.6 | $ | 1,270.3 | $ | 750.0 | $ | 739.7 | ||||||||
|
|||
|
Year Ending December 31, |
Operating Leases | |||
| 2011 | $ | 58.7 | ||
| 2012 | 62.0 | |||
| 2013 | 60.4 | |||
| 2014 | 56.1 | |||
| 2015 | 51.1 | |||
| Thereafter | 575.7 | |||
| Total minimum lease payments | $ | 864.0 | ||
|
|||
| Year Ended December 31, | ||||||||||||||||||||||||||||||||
| 2010 | 2009 | |||||||||||||||||||||||||||||||
| MIS | MA | Eliminations | Consolidated | MIS | MA | Eliminations | Consolidated | |||||||||||||||||||||||||
| Revenue | $ | 1,466.3 | $ | 627.0 | $ | (61.3 | ) | $ | 2,032.0 | $ | 1,277.7 | $ | 579.5 | $ | (60.0 | ) | $ | 1,797.2 | ||||||||||||||
| Expenses: | ||||||||||||||||||||||||||||||||
|
Operating and SG&A |
783.0 | 471.1 | (61.3 | ) | 1,192.8 | 680.1 | 408.0 | (60.0 | ) | 1,028.1 | ||||||||||||||||||||||
|
Restructuring |
0.1 | — | — | 0.1 | 9.1 | 8.4 | — | 17.5 | ||||||||||||||||||||||||
|
Depreciation and amortization |
33.8 | 32.5 | — | 66.3 | 31.3 | 32.8 | — | 64.1 | ||||||||||||||||||||||||
|
Total |
816.9 | 503.6 | (61.3 | ) | 1,259.2 | 720.5 | 449.2 | (60.0 | ) | 1,109.7 | ||||||||||||||||||||||
| Operating income | $ | 649.4 | $ | 123.4 | $ | — | $ | 772.8 | $ | 557.2 | $ | 130.3 | $ | — | $ | 687.5 | ||||||||||||||||
| Year Ended December 31, 2008 | ||||||||||||||||
| MIS | MA | Eliminations | Consolidated | |||||||||||||
| Revenue | $ | 1,268.3 | $ | 550.7 | $ | (63.6 | ) | $ | 1,755.4 | |||||||
| Expenses: | ||||||||||||||||
|
Operating and SG&A |
636.0 | 362.2 | (63.6 | ) | 934.6 | |||||||||||
|
Restructuring |
(1.6 | ) | (0.9 | ) | — | (2.5 | ) | |||||||||
|
Depreciation and amortization |
33.3 | 41.8 | — | 75.1 | ||||||||||||
|
Total |
667.7 | 403.1 | (63.6 | ) | 1,007.2 | |||||||||||
| Operating income | $ | 600.6 | $ | 147.6 | $ | — | $ | 748.2 | ||||||||
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| MIS: | ||||||||||||
| Corporate finance | $ | 563.9 | $ | 408.2 | $ | 307.0 | ||||||
| Structured finance | 290.8 | 304.9 | 404.7 | |||||||||
| Financial institutions | 278.7 | 258.5 | 263.0 | |||||||||
| Public, project and infrastructure finance | 271.6 | 246.1 | 230.0 | |||||||||
|
Total external revenue |
1,405.0 | 1,217.7 | 1,204.7 | |||||||||
| Intersegment royalty | 61.3 | 60.0 | 63.6 | |||||||||
| Total | 1,466.3 | 1,277.7 | 1,268.3 | |||||||||
| MA: | ||||||||||||
| RD&A | 425.0 | 413.6 | 418.7 | |||||||||
| RMS | 173.2 | 145.1 | 108.8 | |||||||||
| Professional services | 28.8 | 20.8 | 23.2 | |||||||||
| Total | 627.0 | 579.5 | 550.7 | |||||||||
| Eliminations | (61.3 | ) | (60.0 | ) | (63.6 | ) | ||||||
| Total MCO | $ | 2,032.0 | $ | 1,797.2 | $ | 1,755.4 | ||||||
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Revenue: | ||||||||||||
| U.S. | $ | 1,089.5 | $ | 920.8 | $ | 910.1 | ||||||
| International: | ||||||||||||
|
EMEA |
627.4 | 624.7 | 603.1 | |||||||||
|
Other |
315.1 | 251.7 | 242.2 | |||||||||
|
Total International |
942.5 | 876.4 | 845.3 | |||||||||
| Total | $ | 2,032.0 | $ | 1,797.2 | $ | 1,755.4 | ||||||
| Long-lived assets at December 31: | ||||||||||||
| United States | $ | 476.5 | $ | 465.0 | $ | 456.4 | ||||||
| International | 477.1 | 282.1 | 243.3 | |||||||||
| Total | $ | 953.6 | $ | 747.1 | $ | 699.7 | ||||||
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||||||||||
| MIS | MA | Corporate Assets (a) |
Consolidated | MIS | MA | Corporate Assets (a) |
Consolidated | |||||||||||||||||||||||||
| Total Assets | $ | 639.0 | $ | 910.0 | $ | 991.3 | $ | 2,540.3 | $ | 579.4 | $ | 724.9 | $ | 699.0 | $ | 2,003.3 | ||||||||||||||||
| (a) | Represents common assets that are shared between each segment or utilized by the corporate entity. Such assets primarily include cash and cash equivalents, short-term investments, unallocated property and equipment and deferred tax assets. |
|
|||
|
Year Ended December 31, |
Balance at Beginning of the Year |
Additions | Write-offs and Adjustments |
Balance at End of the Year |
||||||||||||
| 2010 | ||||||||||||||||
|
Accounts receivable allowance |
$ | (24.6 | ) | $ | (46.5 | ) | $ | 38.1 | $ | (33.0 | ) | |||||
|
Deferred tax assets – valuation allowance |
$ | (4.5 | ) | $ | (8.8 | ) | $ | 0.5 | $ | (12.8 | ) | |||||
| 2009 | ||||||||||||||||
|
Accounts receivable allowance |
$ | (23.9 | ) | $ | (41.2 | ) | $ | 40.5 | $ | (24.6 | ) | |||||
|
Deferred tax assets – valuation allowance |
$ | (0.7 | ) | $ | (4.5 | ) | $ | 0.7 | $ | (4.5 | ) | |||||
| 2008 | ||||||||||||||||
|
Accounts receivable allowance |
$ | (16.2 | ) | $ | (39.6 | ) | $ | 31.9 | $ | (23.9 | ) | |||||
|
Deferred tax assets – valuation allowance |
$ | — | $ | (0.7 | ) | $ | — | $ | (0.7 | ) | ||||||
|
|||
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| FX gain/(loss) | $ | (5.1 | ) | $ | (9.5 | ) | $ | 24.7 | ||||
| Legacy Tax (see Note 17) | — | — | 11.0 | |||||||||
| Joint venture income | 2.8 | 6.1 | 3.9 | |||||||||
| Other | (3.6 | ) | (4.5 | ) | (5.8 | ) | ||||||
|
Total |
$ | (5.9 | ) | $ | (7.9 | ) | $ | 33.8 | ||||
|
|||
|
|
|
Three Months Ended |
| |||||||||||||
|
(amounts in millions, except EPS) |
|
March 31 |
|
|
June 30 |
|
|
September 30 |
|
|
December 31 |
| ||||
|
2010 |
|
|
|
|
||||||||||||
|
Revenue |
|
$ |
476.6 |
|
|
$ |
477.8 |
|
|
$ |
513.3 |
|
|
$ |
564.3 |
|
|
Operating income |
|
$ |
196.8 |
|
|
$ |
190.5 |
|
|
$ |
188.9 |
|
|
$ |
196.6 |
|
|
Net income attributable to Moody's |
|
$ |
113.4 |
|
|
$ |
121.0 |
|
|
$ |
136.0 |
|
|
$ |
137.4 |
|
|
EPS: |
|
|
|
|
||||||||||||
|
Basic |
|
$ |
0.48 |
|
|
$ |
0.51 |
|
|
$ |
0.58 |
|
|
$ |
0.59 |
|
|
Diluted |
|
$ |
0.47 |
|
|
$ |
0.51 |
|
|
$ |
0.58 |
|
|
$ |
0.58 |
|
|
2009 |
|
|
|
|
||||||||||||
|
Revenue |
|
$ |
408.9 |
|
|
$ |
450.7 |
|
|
$ |
451.8 |
|
|
$ |
485.8 |
|
|
Operating income |
|
$ |
148.9 |
|
|
$ |
187.2 |
|
|
$ |
172.5 |
|
|
$ |
178.9 |
|
|
Net income attributable to Moody's |
|
$ |
90.2 |
|
|
$ |
109.3 |
|
|
$ |
100.6 |
|
|
$ |
101.9 |
|
|
EPS: |
|
|
|
|
||||||||||||
|
Basic |
|
$ |
0.38 |
|
|
$ |
0.46 |
|
|
$ |
0.43 |
|
|
$ |
0.43 |
|
|
Diluted |
|
$ |
0.38 |
|
|
$ |
0.46 |
|
|
$ |
0.42 |
|
|
$ |
0.43 |
|
|
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