MOODYS CORP /DE/, 10-Q filed on 10/31/2013
Quarterly Report
Document and Entity Information
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2013
Document Information [Line Items]
 
Document Type
10-Q 
Amendment Flag
false 
Document Period End Date
Sep. 30, 2013 
Document Fiscal Year Focus
2013 
Document Fiscal Period Focus
Q3 
Trading Symbol
MCO 
Entity Registrant Name
MOODYS CORP /DE/ 
Entity Central Index Key
0001059556 
Current Fiscal Year End Date
--12-31 
Entity Filer Category
Large Accelerated Filer 
Entity Common Stock, Shares Outstanding
215.1 
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2013
Sep. 30, 2012
Revenue
$ 705.5 
$ 688.5 
$ 2,193.3 
$ 1,976.1 
Expenses
 
 
 
 
Operating
203.5 
207.3 
601.4 
573.4 
Selling, general and administrative
187.1 
187.4 
599.1 
515.8 
Depreciation and amortization
23.4 
24.1 
70.1 
69.7 
Total expenses
414.0 
418.8 
1,270.6 
1,158.9 
Operating Income
291.5 
269.7 
922.7 
817.2 
Non-operating (expense) income, net
 
 
 
 
Interest expense, net
(24.4)
(15.3)
(68.1)
(42.2)
Other non-operating income (expense), net
(3.6)
10.0 
12.9 
12.6 
Total non-operating (expense) income, net
(28.0)
(5.3)
(55.2)
(29.6)
Income before provisions for income taxes
263.5 
264.4 
867.5 
787.6 
Provision for income taxes
76.7 
77.9 
261.2 
249.9 
Net income
186.8 
186.5 
606.3 
537.7 
Less: Net income attributable to noncontrolling interests
2.9 
2.6 
8.5 
7.8 
Net income attributable to Moody's
$ 183.9 
$ 183.9 
$ 597.8 
$ 529.9 
Earnings per share attributable to Moody's common shareholders
 
 
 
 
Basic
$ 0.84 
$ 0.83 
$ 2.70 
$ 2.37 
Diluted
$ 0.83 
$ 0.81 
$ 2.66 
$ 2.34 
Weighted average number of shares outstanding
 
 
 
 
Basic
217.8 
222.5 
221.1 
223.3 
Diluted
222.0 
226.1 
225.1 
226.7 
Dividends declared per share attributable to Moody's common shareholders
$ 0.25 
$ 0.16 
$ 0.45 
$ 0.32 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2013
Sep. 30, 2012
Net income
$ 186.8 
$ 186.5 
$ 606.3 
$ 537.7 
Foreign currency translation adjustment-Pre Tax Amount
48.1 
32.8 
(24.7)
23.5 
Foreign currency translation adjustment-Tax Amount
Foreign currency translation adjustments-Net of Tax
48.1 
32.8 
(24.7)
23.5 
Cash Flow And Net Investment Hedges [Abstract]
 
 
 
 
Net unrealized gain (losses) on cash flow and net investment hedges- Pre Tax
(2.7)
0.2 
(1.7)
(2.5)
Net unrealized gain (losses) on cash flow and net investment hedges-Tax Amount
(1.2)
0.1 
(0.7)
(1.0)
Net unrealized losses on cash flow and net investment hedges
(1.5)
0.1 
(1.0)
(1.5)
Reclassification of losses included in net income-Pre Tax
1.0 
0.7 
3.2 
Reclassification of losses included in net income-Tax Amount
0.4 
0.2 
1.3 
Reclassification of losses included in net income- Net of Tax
0.6 
0.5 
1.9 
Pension and Other Retirement Benefits Net of Tax [Abstract]
 
 
 
 
Amortization Of Actuarial Losses And Prior Service Costs Included In Net Income Pre Tax
3.1 
2.6 
9.0 
7.6 
Amortization Of Actuarial Losses And Prior Service Costs Included In Net Income Tax
1.3 
1.1 
3.7 
3.1 
Amortization Of Actuarial Losses And Prior Service Costs Included In Net Income Net Of Tax
1.8 
1.5 
5.3 
4.5 
Net Actuarial Losses And Prior Service Costs Pre Tax
0.9 
(9.5)
Net Actuarial Losses And Prior Service Costs Tax Effect
0.4 
(3.9)
Net Actuarial Losses And Prior Service Costs Net Of Tax
0.5 
(5.6)
Total other comprehensive income (loss)-Pre Tax
49.8 
36.6 
(14.5)
22.3 
Net current period other comprehensive income/(loss)
0.1 
1.6 
3.6 
(0.5)
Total other comprehensive income (loss)-Net of Tax
49.7 
35.0 
(18.1)
22.8 
Comprehensive income (loss)
236.5 
221.5 
588.2 
560.5 
comprehensive income attributable to noncontrolling interests and redeemable noncontrolling interest
2.9 
2.5 
8.5 
8.8 
Comprehensive income attributable to Moody's
233.6 
219.0 
579.7 
551.7 
Foreign currency translation adjustments - reclassification of losses included in net income due to liquidation of a foreign subsidiary Pre Tax
1.3 
1.3 
Foreign currency translation adjustments - reclassification of losses included in net income due to liquidation of a foreign subsidiary Tax Effect
Foreign currency translation adjustments - reclassification of losses included in net income due to liquidation of a foreign subsidiary Net of Tax
$ 1.3 
$ 0 
$ 1.3 
$ 0 
CONSOLIDATED BALANCE SHEETS (USD $)
In Millions, unless otherwise specified
Sep. 30, 2013
Dec. 31, 2012
Current assets:
 
 
Cash and cash equivalents
$ 1,835.1 
$ 1,755.4 
Short-term investments
209.6 
17.9 
Accounts receivable, net of allowances of $30.0 in 2012 and $28.0 in 2011
592.0 
621.8 
Deferred tax assets, net
46.7 
38.7 
Other current assets
98.8 
91.9 
Total current assets
2,782.2 
2,525.7 
Property and equipment, net of accumulated depreciation of $286.6 in 2012 and $258.2 in 2011
284.3 
307.1 
Goodwill
630.8 
637.1 
Intangible assets, net
198.2 
226.5 
Deferred tax assets, net
165.1 
168.5 
Other assets
93.9 
96.0 
Total assets
4,154.5 
3,960.9 
Current liabilities:
 
 
Accounts payable and accrued liabilities
337.9 
555.3 
Unrecognized tax benefits
Current portion of long-term debt
63.8 
Deferred revenue
559.3 
545.8 
Total current liabilities
897.2 
1,164.9 
Non-current portion of deferred revenue
105.2 
94.9 
Long-term debt
2,098.6 
1,607.4 
Deferred tax liabilities, net
54.5 
58.1 
Unrecognized tax benefits
199.2 
156.6 
Other liabilities
426.4 
410.1 
Total liabilities
3,781.1 
3,492.0 
Contingencies (Note 14)
   
   
Redeemable noncontrolling interest
81.5 
72.3 
Shareholders' equity(deficit):
 
 
Preferred stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding
Capital surplus
377.1 
365.1 
Retained earnings
5,210.6 
4,713.3 
Treasury stock, at cost; 120,619,040 and 120,462,232 shares of common stock at June 30, 2012 and December 31, 2011, respectively
(5,209.4)
(4,614.5)
Accumulated other comprehensive loss
(100.2)
(82.1)
Total Moody's shareholders' equity (deficit)
281.5 
385.2 
Noncontrolling interests
10.4 
11.4 
Total shareholders' equity (deficit)
291.9 
396.6 
Total liabilities, redeemable noncontrolling interest and shareholders' equity (deficit)
4,154.5 
3,960.9 
Nonvoting Common Stock [Member]
 
 
Shareholders' equity(deficit):
 
 
Common stock
Common Stock [Member]
 
 
Shareholders' equity(deficit):
 
 
Common stock
$ 3.4 
$ 3.4 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Sep. 30, 2013
Dec. 31, 2012
Accounts receivable, allowances
$ 30.2 
$ 29.1 
Property and equipment, accumulated depreciation
$ 343.4 
$ 314.3 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, shares authorized
 
1,000,000,000 
Treasury stock, shares
122,470,202 
119,650,254 
Nonvoting Common Stock [Member]
 
 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
10,000,000 
10,000,000 
Common stock, shares issued
Common stock, shares outstanding
Common Stock [Member]
 
 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
1,000,000,000 
 
Common stock, shares issued
342,902,272 
342,902,272 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Cash flows from operating activities
 
 
Net income
$ 606.3 
$ 537.7 
Reconciliation of net income to net cash provided by operating activities:
 
 
Depreciation and amortization
70.1 
69.7 
Stock-based compensation expense
49.3 
46.3 
Deferred income taxes
(13.0)
29.8 
Excess tax benefits from stock-based compensation plans
(32.4)
(11.8)
Legacy Tax Matters
(12.8)
Changes in assets and liabilities:
 
 
Accounts receivable
26.8 
(57.0)
Other current assets
(7.0)
8.9 
Other assets
(6.0)
2.5 
Accounts payable and accrued liabilities
(138.6)
(48.5)
Restructuring
(0.1)
Deferred revenue
25.6 
(2.7)
Unrecognized tax benefits
44.8 
(61.5)
Other liabilities
27.6 
(4.5)
Net cash provided by operating activities
653.5 
496.0 
Cash flows from investing activities
 
 
Capital additions
(31.0)
(35.2)
Purchases of short-term investments
(215.2)
(47.8)
Sales and maturities of short-term investments
23.4 
40.4 
Cash paid for acquisitions
3.5 
Net cash used in investing activities
(222.8)
(46.1)
Cash flows from financing activities
 
 
Repayments of notes
63.8 
39.4 
Net proceeds from stock-based compensation plans
(96.6)
(71.9)
Cost of treasury shares repurchased
747.6 
125.1 
Excess tax benefits from stock-based compensation plans
(32.4)
(11.8)
Payment of dividends
(143.7)
(107.3)
Payment of dividends to noncontrolling interests
(9.9)
(6.8)
Contingent consideration paid
(0.3)
(0.5)
Debt issuance costs and related fees
(4.1)
(6.3)
Net cash used in financing activities
(343.2)
294.4 
Issuance of Notes
(497.2)
(496.1)
Effect of exchange rate changes on cash and cash equivalents
(7.8)
14.2 
Net increase in cash and cash equivalents
79.7 
758.5 
Cash and cash equivalents, beginning of the period
1,755.4 
760.0 
Cash and cash equivalents, end of the period
$ 1,835.1 
$ 1,518.5 
GLOSSARY OF TERMS AND ABBREVIATIONS
GLOSSARY OF TERMS AND ABBREVIATIONS
GLOSSARY OF TERMS AND ABBREVIATIONS

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

              TERM                                          DEFINITION

Adjusted Operating Income Operating income excluding restructuring and depreciation and amortization

Adjusted Operating Margin Operating margin excluding restructuring and depreciation and amortization

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

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

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

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

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

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

B&H       Barrie & Hibbert Limited, an acquisition completed in December 2011; part of the MA segment, a leading provider of risk management modeling tools for insurance companies worldwide

Basel II       Capital adequacy framework published in June 2004 by the Basel Committee on Banking Supervision

Basel III       A new global regulatory standard on bank capital adequacy and liquidity agreed by the members of the Basel Committee on Banking Supervision. Basel III was developed in a response to the deficiencies in financial regulation revealed by the global financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage.

Board       The board of directors of the Company

Bps       Basis points

Canary Wharf Lease       Operating lease agreement entered into on February 6, 2008 for office space in London, England, occupied by the Company in the second half of 2009

CFG       Corporate finance group; an LOB of MIS

CLO       Collateralized loan obligation

CMBS       Commercial mortgage-backed securities; part of CREF

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

TERM                             DEFINITION

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

CP       Commercial paper

CP Program       The Company's commercial paper program entered into on October 3, 2007

CRAs       Credit rating agencies

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

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

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

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

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

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

DBPP       Defined benefit pension plans

DCF       Discounted cash flow; a fair value calculation methodology whereby future projected cash flows are discounted back to their present value using a discount rate

Debt/EBITDA       Ratio of Total Debt to EBITDA

EBITDA       Earnings before interest, taxes, depreciation and amortization

ECB       European Central Bank

EMEA       Represents countries within Europe, the Middle East and Africa

EPS       Earnings per share

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

ESMA       European Securities and Markets Authority

ETR       Effective tax rate

EU       European Union

EUR       Euros

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

Exchange Act       The Securities Exchange Act of 1934, as amended

FASB       Financial Accounting Standards Board

FDIC       Federal Deposit Insurance Corporation

FIG       Financial institutions group; an LOB of MIS

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

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

              TERM                                          DEFINITION

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

FX       Foreign exchange

GAAP       U.S. Generally Accepted Accounting Principles

GBP       British pounds

GDP       Gross domestic product

IRS       Internal Revenue Service

IT       Information technology

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

LIBOR       London Interbank Offered Rate

LOB       Line of business

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

M&A       Mergers and acquisitions

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

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

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

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

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

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

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

NM       Percentage change is not meaningful

NRSRO       Nationally Recognized Statistical Rating Organization

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

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

              TERM                                          DEFINITION

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

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

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

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

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

Reform Act                      Credit Rating Agency Reform Act of 2006

REIT       Real Estate Investment Trust

RMBS       Residential mortgage-backed security; part of SFG

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

S&P       Standard & Poor's Ratings Services; a division of McGraw Hill Financial, Inc.

SEC       U.S. Securities and Exchange Commission

Securities Act       Securities Act of 1933

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

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

SFG       Structured finance group; an LOB of MIS

SG&A       Selling, general and administrative expenses

T&E       Travel and entertainment expenses

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

U.K.       United Kingdom

U.S.       United States

USD       U.S. dollar

UTBs       Unrecognized tax benefits

UTPs       Uncertain tax positions

WACC       Weighted average cost of capital

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

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

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

TERM                                   DEFINITION

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

2007 Facility       Revolving credit facility of $1 billion entered into on September 28, 2007, expiring in 2012

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

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

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

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

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

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

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

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

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

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

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

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

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

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

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

These interim financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the Company's consolidated financial statements and related notes in the Company's 2012 annual report on Form 10-K filed with the SEC on February 26, 2013. The results of interim periods are not necessarily indicative of results for the full year or any subsequent period. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Certain prior year amounts have been reclassified to conform to the current year presentation.

STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION

NOTE 2. STOCK-BASED COMPENSATION

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

 Three Months Ended Nine Months Ended
 September 30, September 30,
 2013 2012 2013 2012
Stock-based compensation cost$ 16.0 $ 16.4 $ 49.3 $ 46.3
Tax benefit$ 5.9 $ 5.9 $ 17.9 $ 16.7

During the first nine months of 2013, the Company granted 0.5 million employee stock options, which had a weighted average grant date fair value of $17.58 per share based on the Black-Scholes option-pricing model. The Company also granted 1.3 million shares of restricted stock in the first nine months of 2013, which had a weighted average grant date fair value of $46.52 per share and generally vest ratably over a four-year period. Additionally, the Company granted approximately 0.3 million shares of performance-based awards whereby the number of shares that ultimately vest are based on the achievement of certain non-market based performance metrics of the Company over a three-year period. The weighted average grant date fair value of these awards was $44.07 per share.

       The following weighted average assumptions were used in determining the fair value for options granted in 2013:

Expected dividend yield 1.72%
Expected stock volatility 42.6%
Risk-free interest rate 1.53%
Expected holding period7.2 years
Grant date fair value$ 17.58

Unrecognized compensation expense at September 30, 2013 was $10.9 million and $83.1 million for stock options and unvested restricted stock, respectively, which is expected to be recognized over a weighted average period of 1.3 years and 1.7 years, respectively. Additionally, there was $15.1 million of unrecognized compensation expense relating to the aforementioned non-market based performance-based awards, which is expected to be recognized over a weighted average period of 0.9 years.

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

  Nine Months Ended
  September 30,
Exercise of stock options: 2013 2012
Proceeds from stock option exercises $ 124.4 $ 83.2
Aggregate intrinsic value $ 89.0 $ 41.4
Tax benefit realized upon exercise $ 32.6 $ 15.7
Number of shares exercised   3.5   3.1
       
  Nine Months Ended
  September 30,
Vesting of restricted stock: 2013 2012
Fair value of shares vested $ 54.0 $ 37.7
Tax benefit realized upon vesting $ 19.2 $ 13.3
Number of shares vested   1.1   1.0
       
  Nine Months Ended
  September 30,
Delivery of performance-based restricted stock: 2013 2012
Fair value of shares delivered $ 25.5 $ -
Tax benefit realized upon delivery $ 9.7 $ -
Number of shares delivered   0.5   -
INCOME TAXES
INCOME TAXES

NOTE 3. INCOME TAXES

Moody's effective tax rate was 29.1% and 29.5% for the three months ended September 30, 2013 and 2012, respectively and 30.1% and 31.7% for the nine months ended September 30, 2013 and 2012, respectively. The decrease in the effective tax rate for the nine months ended September 30, 2013 is primarily due to U.S. tax legislation enacted in the first quarter of 2013 which retroactively extended certain favorable tax benefits to the 2012 tax year and prospectively extended these benefits to the 2013 tax year. Additionally, the tax effect of the litigation settlement in the first quarter of 2013 favorably impacted the 2013 ETR.

The Company classifies interest related to UTBs in interest expense, net in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating (expense) income, net. The Company had an overall increase in its UTBs of $14.6 million ($11.8 million net of federal tax benefit) during the third quarter of 2013 and an overall increase in its UTBs during the first nine months of 2013 of $42.6 million ($34.8 million net of federal tax benefits).

Moody's Corporation and subsidiaries are subject to U.S. federal income tax as well as income tax in various state, local and foreign jurisdictions. Tax returns remain subject to examination by the various tax authorities until the relevant statutes of limitations have expired. The Company's U.S. federal income tax returns for the years 2008 through 2010 are under examination and its 2011and 2012 returns remain open to examination. The Company's New York State and New York City income tax returns for 2011 and 2012 remain open to examination. Income tax filings in the U.K. for 2007 through 2010 are under examination and 2011 and 2012 remain open to examination.

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

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

   Nine Months Ended
   September 30,
     2013 2012
Income Taxes Paid*      $ 267.3 $ 271.9
* Includes approximately $92 million for tax audit settlements paid in the first quarter of 2012. Payments in 2013 include $50 million of 2012 estimated federal taxes paid in the first quarter of 2013 pursuant to IRS relief due to Hurricane Sandy.  
            
WEIGHTED AVERAGE SHARES OUTSTANDING
WEIGHTED AVERAGE SHARES OUTSTANDING

NOTE 4. WEIGHTED AVERAGE SHARES OUTSTANDING

       Below is a reconciliation of basic to diluted shares outstanding:

  Three Months Ended Nine Months Ended
  September 30, September 30,
  2013 2012 2013 2012
Basic  217.8   222.5   221.1   223.3
 Dilutive effect of shares issuable under stock-based compensation plans  4.2   3.6   4.0   3.4
Diluted  222.0   226.1   225.1   226.7
             
Anti-dilutive options to purchase common shares and restricted stock as well as contingently issuable restricted stock which are excluded from the table above  2.6   6.6   4.3   6.6

       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 September 30, 2013 and 2012. These assumed proceeds include Excess Tax Benefits and any unrecognized compensation of the awards.

SHORT-TERM INVESTMENTS
SHORT-TERM INVESTMENTS

NOTE 5. SHORT-TERM INVESTMENTS

       Short-term investments are securities with maturities greater than 90 days at the time of purchase that are available for operations in the next twelve months. The short-term investments, primarily consisting of certificates of deposit, are classified as held-to-maturity and therefore are carried at cost. The remaining contractual maturities of the short-term investments were one month to 11 months as of September 30, 2013 and December 31, 2012. Interest and dividends are recorded into income when earned.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

NOTE 6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

Interest Rate Swaps

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

       In May 2008, the Company entered into interest rate swaps with a total notional amount of $150 million to protect against fluctuations in the LIBOR-based variable interest rate on the 2008 Term Loan. These interest rate swaps were designated as cash flow hedges. Accordingly, changes in the fair value of these swaps were recorded to other comprehensive income or loss, to the extent that the hedge is effective, and such amounts were reclassified to earnings in the same period during which the hedged transaction affects income. The 2008 Term Loan has been repaid in full in accordance with the payment terms set forth in Note 12 and the interest rate swaps have matured. Accordingly, all amounts in accumulated other comprehensive income have been reclassified to interest income (expense), net in the Company's consolidated statements of operations.

Foreign Exchange Forwards

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

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

 September 30, December 31,
 2013 2012
Notional amount of currency pair:     
Contracts to purchase USD with euros$ 23.5 $ 34.3
Contracts to sell USD for euros$ 53.0 $ 48.4
Contracts to purchase USD with GBP$ 4.2 $ 2.1
Contracts to sell USD for GBP$ 7.7 $ 1.7
Contracts to purchase USD with other foreign currencies$ 8.0 $ 6.7
Contracts to sell USD for other foreign currencies$ 10.9 $ 5.1
Contracts to purchase euros with other foreign currencies 13.5  14.4
Contracts to purchase euros with GBP 6.4  -
Contracts to sell euros for GBP 16.4  8.9

Net Investment Hedges

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

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

 September 30, December 31,
 2013 2012
Notional amount of currency pair:     
Contracts to sell euros for USD 50.0  50.0

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

  Fair Value of Derivative Instruments
Derivatives Instruments Balance Sheet Location September 30, 2013 December 31, 2012
Assets:        
Derivatives designated as accounting hedges:        
Interest rate swaps Other assets $ 7.3 $ 13.8
Total derivatives designated as accounting hedges     7.3   13.8
Derivatives not designated as accounting hedges:        
FX forwards on certain assets and liabilities Other current assets   1.1   1.4
Total assets   $ 8.4 $ 15.2
         
Liabilities:        
Derivatives designated as accounting hedges:        
Interest rate swaps Accounts payable and accrued liabilities $ - $ 0.7
FX forwards on net investment in certain foreign subsidiaries Accounts payable and accrued liabilities   1.5   1.0
Total derivatives designated as accounting hedges     1.5   1.7
Derivatives not designated as accounting hedges:        
FX forwards on certain assets and liabilities Accounts payable and accrued liabilities   0.5   0.7
Total liabilities   $ 2.0 $ 2.4
         

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

 

      Amount of gain (loss) recognized in the consolidated statements of operations
      Three Months Ended  Nine months ended
      September 30,  September 30,
Derivatives designated as accounting hedges Location on Statement of Operations 2013  2012  2013  2012
Interest rate swaps Interest income(expense), net$1.0 $0.9 $3.1 $2.6
                
Derivatives not designated as accounting hedges             
Foreign exchange forwards Other non-operating income (expense), net$2.1 $0.4 $ 2.0 $ -
                

       The following table provides information on gains/(losses) on the Company's cash flow hedges:

Derivatives in Cash Flow Hedging Relationships Amount of Gain/(Loss) Recognized in AOCI on Derivative (Effective Portion) Location of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion) Amount of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion) Location of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
   Three Months Ended   Three Months Ended   Three Months Ended
   September 30,   September 30,   September 30,
   2013 2012   2013 2012   2013 2012
Interest rate swaps   -   - Interest income (expense), net   -   (0.6) N/A   -   -
 Total $ - $ -   $ - $ (0.6)   $ - $ -
                        
   Nine Months Ended   Nine Months Ended   Nine Months Ended
   September 30,   September 30,   September 30,
   2013 2012   2013 2012   2013 2012
Interest rate swaps   -   (0.1) Interest income (expense), net   (0.5)   (1.9) N/A   -   -
 Total $ - $ (0.1)   $ (0.5) $ (1.9)   $ - $ -

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

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

Derivatives in Net Investment Hedging Relationships Amount of Gain/(Loss) Recognized in AOCI on Derivative (Effective Portion) Location of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion) Amount of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion) Location of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
   Three Months Ended   Three Months Ended   Three Months Ended
   September 30,   September 30,   September 30,
   2013 2012   2013 2012   2013 2012
FX forwards $ (1.5) $ 0.1 N/A $ - $ - N/A $ - $ -
 Total $ (1.5) $ 0.1   $ - $ -   $ - $ -
                        
   Nine Months Ended   Nine Months Ended   Nine Months Ended
   September 30,   September 30,   September 30,
   2013 2012   2013 2012   2013 2012
FX forwards $ (1.0) $ (1.4) N/A $ - $ - N/A $ - $ -
 Total $ (1.0) $ (1.4)   $ - $ -   $ - $ -

All gains and losses on derivatives designated as net investment hedges are recognized in the currency translation adjustment component of AOCI.

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

  Losses, net of tax
  September 30, December 31,
  2013 2012
FX forwards on net investment hedges$ (3.2) $ (2.2)
Interest rate swaps  (0.2)   (0.7)
 Total$ (3.4) $ (2.9)
GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS
GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS

NOTE 7. GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS

       The following table summarizes the activity in goodwill for the periods indicated:

  Nine Months Ended September 30, 2013
  MIS MA Consolidated
  Gross goodwill Accumulated impairment charge Net goodwill Gross goodwill Accumulated impairment charge Net goodwill Gross goodwill Accumulated impairment charge Net goodwill
Balance at beginning of year$ 11.5 $ - $ 11.5 $ 637.8 $ (12.2) $ 625.6 $ 649.3 $ (12.2) $ 637.1
Additions/adjustments  -   -   -   -   -   -   -   -   -
Foreign currency translation adjustments  (0.1)   -   (0.1)   (6.2)   -   (6.2)   (6.3)   -   (6.3)
                            
Ending balance$ 11.4 $ - $ 11.4 $ 631.6 $ (12.2) $ 619.4 $ 643.0 $ (12.2) $ 630.8
                            
  Year ended December 31, 2012
  MIS MA Consolidated
  Gross goodwill Accumulated impairment charge Net goodwill Gross goodwill Accumulated impairment charge Net goodwill Gross goodwill Accumulated impairment charge Net goodwill
Balance at beginning of year$ 11.0 $ - $ 11.0 $ 631.9 $ - $ 631.9 $ 642.9 $ - $ 642.9
                            
Additions/adjustments  -   -   -   (4.4)   -   (4.4)   (4.4)   -   (4.4)
Impairment charge  -   -   -   -   (12.2)   (12.2)   -   (12.2)   (12.2)
Foreign currency translation adjustments  0.5   -   0.5   10.3   -   10.3   10.8   -   10.8
                            
Ending balance$ 11.5 $ - $ 11.5 $ 637.8 $ (12.2) $ 625.6 $ 649.3 $ (12.2) $ 637.1

The 2012 additions/adjustments for the MA segment in the table above relate to the acquisitions of Copal and B&H in the fourth quarter of 2011.

The 2012 impairment charge in the table above relates to goodwill in the FSTC reporting unit within MA. The Company evaluates its goodwill for potential impairment annually on July 31 or more frequently if impairment indicators arise throughout the year. Projected operating results for the FSTC reporting unit at December 31, 2012 were lower than projections utilized for the annual impairment analysis performed at July 31, 2012 reflecting a contraction in spending for training and certification services for many individuals and global financial institutions amidst macroeconomic uncertainties. Based on this trend and overall macroeconomic uncertainties at the time, the Company lowered its cash flow forecasts for this reporting unit in the fourth quarter of 2012. Accordingly, the Company performed another goodwill impairment assessment as of December 31, 2012 which resulted in an impairment charge of $12.2 million. The fair value of the FSTC reporting unit utilized in the impairment assessment was estimated using a discounted cash flow methodology and comparable public company and precedent transaction multiples. There were no impairments to goodwill in the three and nine months ended September 30, 2013 and 2012. However, a failure of the FSTC reporting unit to meet its current financial projections could result in further goodwill impairment.

       Acquired intangible assets and related amortization consisted of:

   September 30, December 31,
   2013 2012
Customer relationships $ 212.2 $ 219.6
Accumulated amortization   (83.3)   (74.0)
 Net customer relationships   128.9   145.6
        
Trade secrets   31.2   31.4
Accumulated amortization   (17.9)   (16.0)
 Net trade secrets   13.3   15.4
        
Software   70.2   73.2
Accumulated amortization   (36.4)   (33.7)
 Net software   33.8   39.5
        
Trade names   28.1   28.3
Accumulated amortization   (11.3)   (10.3)
 Net trade names   16.8   18.0
        
Other  24.4   24.9
Accumulated amortization   (19.0)   (16.9)
 Net other  5.4   8.0
        
Total acquired intangible assets, net $ 198.2 $ 226.5

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

Amortization expense relating to acquired intangible assets is as follows:

 Three Months Ended Nine Months Ended
 September 30, September 30,
 2013 2012 2013 2012
Amortization expense$ 7.0 $ 8.1 $ 21.0 $ 22.5

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

Year Ending December 31,  
2013 (after September 30,)$ 6.5
2014  22.0
2015  19.1
2016  18.2
2017  13.3
Thereafter  119.1

Amortizable intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the estimated undiscounted future cash flows are lower than the carrying amount of the related asset, a loss is recognized for the difference between the carrying amount and the estimated fair value of the asset. There were no impairments to intangible assets during the three and nine months ended September 30, 2013 and 2012.

 

FAIR VALUE
FAIR VALUE

NOTE 8. FAIR VALUE

The table below presents information about items, which are carried at fair value on a recurring basis at September 30, 2013 and December 31, 2012:

 

    Fair Value Measurement as of September 30, 2013
 Description Balance Level 1 Level 2 Level 3
Assets:            
 Derivatives (a) $ 8.4 $ - $ 8.4 $ -
 Total $ 8.4 $ - $ 8.4 $ -
               
Liabilities:            
 Derivatives (a) $ 2.0 $ - $ 2.0 $ -
 Contingent consideration arising from acquisitions (b)  12.4   -   -   12.4
 Total $ 14.4 $ - $ 2.0 $ 12.4
               
    Fair Value Measurement as of December 31, 2012
 Description Balance Level 1 Level 2 Level 3
Assets:            
 Derivatives (a) $ 15.2 $ - $ 15.2 $ -
 Total $ 15.2 $ - $ 15.2 $ -
Liabilities:            
 Derivatives (a) $ 2.4 $ - $ 2.4 $ -
 Contingent consideration arising from acquisitions (b)  9.0   -   -   9.0
 Total $ 11.4 $ - $ 2.4 $ 9.0
               
               
(a) Represents interest rate swaps and FX forwards on certain assets and liabilities as well as on certain non-U.S. dollar net investments in certain foreign subsidiaries as more fully described in Note 6 to the financial statements
               
(b) Represents contingent consideration liabilities pursuant to the agreements for certain MA acquisitions.
               
 

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

        Contingent Consideration
        Nine months ended
        September 30,
        2013  2012
 Balance as of January 1 $ 9.0 $ 9.1
 Settlements   (2.5)   (0.5)
 Total losses (realized and unrealized):      
  Included in earnings   6.0   (2.2)
 Foreign currency translation adjustments   (0.1)   0.4
 Balance as of September 30 $ 12.4 $ 6.8

The losses included in earnings in the table above are recorded within SG&A expenses in the Company's consolidated statements of operations. These losses relate to contingent consideration obligations outstanding at September 30, 2013.

The $12.4 million of contingent consideration obligations as of September 30, 2013 is classified in other liabilities within the Company's consolidated balance sheet.

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

Derivatives:

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

Contingent consideration:

At September 30, 2013, the Company has contingent consideration obligations related to the acquisitions of CSI and Copal which are based on certain financial and non-financial metrics set forth in the acquisition agreements. These obligations are measured using Level 3 inputs as defined in the ASC. The Company recorded the obligations for these contingent consideration arrangements on the date of each respective acquisition based on management's best estimates of the achievement of the metrics and the value of the obligations are adjusted quarterly.

The contingent consideration obligation for CSI is based on the achievement of a certain contractual milestone by January 2016. The Company utilizes a discounted cash flow methodology to value this obligation. The future expected cash flow for this obligation is discounted using an interest rate available to borrowers with similar credit risk profiles to that of the Company. The most significant unobservable input involved in the measurement of this obligation is the probability that the milestone will be reached by January 2016. At September 30, 2013, the Company expects that this milestone will be reached by the aforementioned date.

There are several contingent consideration obligations relating to the acquisition of Copal. A portion of the contingent cash payments are based on revenue and EBITDA growth for certain of the Copal entities. This growth is calculated by comparing revenue and EBITDA in the year immediately prior to the exercise of the put/call option to acquire the remaining 33% ownership interest of Copal Partners Limited which the Company does not currently own, to revenue and EBITDA in Copal's fiscal year ended March 31, 2011. There are no limitations set forth in the acquisition agreement relating to the amount payable under this contingent consideration arrangement. Payments under this arrangement, if any, would be made upon the exercise of the aforementioned put/call option, which expires in November 2017. Other contingent cash payments were based on the achievement of revenue targets for Copal's fiscal year ended March 31, 2012 and 2013, with certain limits on the amount of revenue that can be applied to the calculation of these contingent payments. Each of these contingent payments had a maximum payout of $2.5 million and have been settled as of September 30, 2013. The Company utilizes discounted cash flow methodologies to value these obligations. The expected future cash flows for these obligations are discounted using a risk-free interest rate plus a credit spread based on the option adjusted spread of the Company's publicly traded debt as of the valuation date. The most significant unobservable input involved in the measurement of these obligations is the projected future financial results of the applicable Copal entities. Also, the remaining obligations are dependent upon the exercise of the call/put option and the Company has utilized a Monte Carlo simulation model to estimate when the option will be exercised, thus triggering the payment of contingent consideration.

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

OTHER BALANCE SHEET INFORMATION
OTHER BALANCE SHEET INFORMATION

NOTE 9. OTHER BALANCE SHEET AND STATEMENT OF OPERATIONS INFORMATION

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

  September 30, December 31,
  2013 2012
Other current assets:     
 Prepaid taxes$ 46.6 $ 31.8
 Prepaid expenses  39.4   47.3
 Other  12.8   12.8
       
Total other current assets$ 98.8 $ 91.9
       
  September 30, December 31,
  2013 2012
Other assets:     
 Investments in joint ventures$ 35.9 $ 38.3
 Deposits for real-estate leases  9.1   10.0
 Other  48.9   47.7
       
Total other assets$ 93.9 $ 96.0
       
  September 30, December 31,
  2013 2012
Accounts payable and accrued liabilities:     
 Salaries and benefits$ 62.4 $ 79.2
 Incentive compensation  94.2   162.6
 Profit sharing contribution  -   12.6
 Customer credits, advanced payments and advanced billings  24.6   21.5
 Self-insurance reserves  28.4   55.8
 Dividends  3.9   47.7
 Professional service fees  37.9   30.2
 Interest accrued on debt  9.6   23.4
 Accounts payable  10.0   14.3
 Income taxes  3.6   56.1
 Deferred rent-current portion  1.0   1.1
 Pension and other retirement employee benefits  4.4   4.4
 Other  57.9   46.4
       
 Total accounts payable and accrued liabilities$ 337.9 $ 555.3
       
  September 30, December 31,
  2013 2012
Other liabilities:     
 Pension and other retirement employee benefits$ 212.5 $ 213.3
 Deferred rent-non-current portion  106.6   110.2
 Interest accrued on UTPs  16.2   10.6
 Legacy and other tax matters  38.4   37.1
 Other  52.7   38.9
       
 Total other liabilities$ 426.4 $ 410.1

Redeemable Noncontrolling Interest:

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

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

       
       
       
   Nine months ended  Year Ended
   September 30, 2013  December 31, 2012
(in millions)Redeemable Noncontrolling Interest
       
Balance January 1,$ 72.3 $ 60.5
 Adjustment due to right of offset for UTPs*  -   6.8
 Net earnings  3.9   3.6
 Dividends  (4.3)   (3.6)
 FX translation  -   1.6
 Adjustment to redemption value  9.6   3.4
Balance $ 81.5 $ 72.3
       
 * Relates to an adjustment for the right of offset pursuant to the Copal acquisition agreement whereby the amount due to the sellers under the put/call arrangement is reduced by the amount of UTPs that the Company may be required to pay.

Noncontrolling Interests:

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

        
        
   Nine months ended Year Ended
   September 30, 2013 December 31, 2012
 (in millions)Noncontrolling Interests
        
 Balance January 1,$ 11.4 $ 10.6
  Net earnings  4.6   6.1
  Dividends  (5.6)   (4.7)
  FX translation  -   (0.6)
 Balance $ 10.4 $ 11.4

Other Non-Operating (Expense) Income:

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

  Three Months Ended Nine Months Ended
  September 30, September 30,
  2013 2012 2013 2012
FX gain/(loss)$ (5.8) $ (4.8) $ 6.9 $ (6.0)
Legacy Tax  -   12.8   -   12.8
Joint venture income  2.5   2.3   7.4   6.9
Other  (0.3)   (0.3)   (1.4)   (1.1)
Total$ (3.6) $ 10.0 $ 12.9 $ 12.6

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

       
       
  Nine Months Ended Year Ended
  September 30, December 31,
(in millions)2013 2012
Beginning balance$ 55.8 $ 27.1
 Accruals (reversals), net  (7.4)   38.1
 Payments  (20.0)   (9.4)
Ending balance*$ 28.4 $ 55.8
       
* These reserves primarily relate to legal defense costs for claims from prior years.
PENSION AND OTHER POST-RETIREMENT BENEFITS
PENSION AND OTHER POST-RETIREMENT BENEFITS

NOTE 11. PENSION AND OTHER RETIREMENT BENEFITS

Moody's maintains funded and unfunded noncontributory Defined Benefit Pension Plans. The U.S. DBPPs provide defined benefits using a cash balance formula based on years of service and career average salary for its employees or final average pay for selected executives. The Company also provides certain healthcare and life insurance benefits for retired U.S. employees. The retirement healthcare plans are contributory; the life insurance plans are noncontributory. Moody's funded and unfunded U.S. pension plans, the U.S. retirement healthcare plans and the U.S. retirement life insurance plans are collectively referred to herein as the “Retirement Plans”. The U.S. retirement healthcare plans and the U.S. retirement life insurance plans are collectively referred to herein as the “Other Retirement Plans”.

  Effective January 1, 2008, the Company no longer offers DBPPs to U.S. employees hired or rehired on or after January 1, 2008. New U.S. employees will instead receive a retirement contribution of similar benefit value under the Company's Profit Participation Plan. Current participants of the Company's DBPPs continue to accrue benefits based on existing plan formulas.

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

   Three Months Ended September 30,
  Pension Plans Other Retirement Plans
  2013 2012 2013 2012
Components of net periodic expense           
 Service cost$ 4.9 $ 4.7 $ 0.5 $ 0.4
 Interest cost  3.4   3.3   0.2   0.1
 Expected return on plan assets  (3.3)   (3.1)   -   -
 Amortization of net actuarial loss from earlier periods  2.8   2.2   -   -
 Amortization of net prior service costs from earlier periods  0.2   0.2   -   0.1
Net periodic expense$ 8.0 $ 7.3 $ 0.7 $ 0.6
             
   Nine Months Ended September 30,
  Pension Plans Other Retirement Plans
  2013 2012 2013 2012
Components of net periodic expense           
 Service cost$ 14.8 $ 14.2 $ 1.3 $ 1.1
 Interest cost  10.1   9.8   0.6   0.5
 Expected return on plan assets  (9.7)   (9.3)   -   -
 Amortization of net actuarial loss from earlier periods  8.2   6.8   -   -
 Amortization of net prior service costs from earlier periods  0.5   0.5   0.2   0.2
Net periodic expense$ 23.9 $ 22.0 $ 2.1 $ 1.8

The Company contributed $16.8 million to its U.S. funded pension plan and made payments of $2.6 million related to its unfunded U.S. DBPPs and $0.4 million to its U.S. other retirement plans, respectively during the nine months ended September 30, 2013. The Company presently anticipates making additional payments of $1.0 million related to its unfunded U.S. DBPPs and $0.3 million to its U.S. other retirement plans during the remainder of 2013.

INDEBTEDNESS
3 Months Ended 9 Months Ended
Dec. 31, 2012
Sep. 30, 2013
INDEBTEDNESS

*The carrying amount includes an $7.3 million and $13.8 million fair value adjustment on an interest rate hedge at September 30, 2013 and December 31, 2012, respectively.

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

*The carrying amount includes an $7.3 million and $13.8 million fair value adjustment on an interest rate hedge at September 30, 2013 and December 31, 2012, respectively.

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

INDEBTEDNESS

NOTE 12. INDEBTEDNESS

       The following table summarizes total indebtedness:

    September 30, December 31,
    2013 2012
2012 Facility $ - $ -
Commercial paper   -   -
Notes Payable:      
  Series 2005-1 Notes, due 2015; which includes the fair value of interest rate swap of $7.3 million at 2013 and $13.8 million at 2012   307.3   313.8
  Series 2007-1 Notes due 2017   300.0   300.0
 2010 Senior Notes, due 2020, net of unamortized discount of $2.3 million in 2013 and $2.6 million in 2012   497.7   497.4
 2012 Senior Notes, due 2022, net of unamortized discount of $3.6 million in 2013 and $3.8 million in 2012   496.4   496.2
 2013 Senior Notes, due 2024, net of unamortized discount of $2.8 million in 2013   497.2   -
2008 Term Loan   -   63.8
         
Total debt   2,098.6   1,671.2
Current portion   -   (63.8)
         
Total long-term debt $ 2,098.6 $ 1,607.4

2012 Facility

On April 18, 2012, the Company and certain of its subsidiaries entered into a $1 billion five-year senior, unsecured revolving credit facility in an aggregate principal amount of $1 billion that expires in April 2017. The 2012 Facility replaced the $1 billion 2007 Facility that was scheduled to expire in September 2012. The proceeds from the 2012 Facility will be used for general corporate purposes, including, without limitation, support for the Company's $1 billion commercial paper program, share repurchases and acquisition financings. Interest on borrowings under the facility is payable at rates that are based on LIBOR plus a premium that can range from 77.5 basis points to 120 basis points per annum of the outstanding amount, depending on the Company's Debt/EBITDA ratio. The Company also pays quarterly facility fees, regardless of borrowing activity under the 2012 Facility. These quarterly fees can range from 10 basis points of the facility amount to 17.5 basis points, depending on the Company's Debt/ EBITDA Ratio.

The 2012 Facility contains covenants that, among other things, restrict the ability of the Company and 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 set forth in the facility agreement. The 2012 Facility also contains a financial covenant that requires the Company to maintain a Debt to EBITDA Ratio of not more than 4 to 1 at the end of any fiscal quarter. Upon the occurrence of certain financial or economic events, significant corporate events or certain other events constituting an event of default under the 2012 Facility, all loans outstanding under the facility (including accrued interest and fees payable thereunder) may be declared immediately due and payable and all commitments under the facility may be terminated.

 

Commercial Paper

On October 3, 2007, the Company entered into a private placement commercial paper program under which the Company could issue CP notes up to a maximum amount of $1.0 billion. In October 2013, the Company terminated its CP program.

Notes Payable

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.

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 August 19, 2010, the Company issued $500 million aggregate principal amount of 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 2010 Indenture, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The 2010 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 2010 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 2010 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 2010 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 November 4, 2011, in connection with the acquisition of Copal, a subsidiary of the Company issued a $14.2 million non-interest bearing note to the sellers which represented a portion of the consideration transferred to acquire the Copal entities. If a seller subsequently transfers to the Company all of its shares, the Company must repay the seller its proportion of the principal on the later of (i) the fourth anniversary date of the note or (ii) within a time frame set forth in the acquisition agreement relating to the resolution of certain income tax uncertainties pertaining to the transaction. Otherwise, the Company must repay any amount outstanding on the earlier of (i) two business days subsequent to the exercise of the put/call option to acquire the remaining shares of Copal or (ii) the tenth anniversary date of the issuance of the note. The Company has the right to offset payment of the note against certain indemnification assets associated with UTPs related to the acquisition. Accordingly, the Company has offset the liability for this note against the indemnification asset, thus no balance for this note is carried on the Company's consolidated balance sheet at September 30, 2013 and December 31, 2012. In the event that the Company would not be required to settle amounts related to the UTPs, the Company would be required to pay the sellers the principal in accordance with the note agreement. The Company may prepay the note in accordance with certain terms set forth in the acquisition agreement.

On August 20, 2012, the Company issued $500 million aggregate principal amount of unsecured notes in a public offering. The 2012 Senior Notes bear interest at a fixed rate of 4.50% and mature on September 1, 2022. Interest on the 2012 Senior Notes will be due semi-annually on September 1 and March 1 of each year, commencing March 1, 2013. The Company may prepay the 2012 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 2012 Indenture, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The 2012 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 2012 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 2012 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 2012 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 2012 Senior 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 August 12, 2013, the Company issued $500 million aggregate principal amount of senior unsecured notes in a public offering. The 2013 Senior Notes bear interest at a fixed rate of 4.875% and mature on February 15, 2024. Interest on the 2013 Senior Notes will be due semi-annually on February 15 and August 15 of each year, commencing February 15, 2014. The Company may prepay the 2013 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. Notwithstanding the immediately preceding sentence, the Company may redeem the 2013 Senior Notes, in whole or in part, at any time or from time to time on or after November 15, 2023 (three months prior to their maturity), at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding the redemption date. 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 2013 Indenture, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The 2013 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 2013 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 2013 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 2013 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 2013 Indenture, the 2013 Senior 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.

2008 Term Loan

On May 7, 2008, Moody's entered into a five-year, $150.0 million senior unsecured term loan with several lenders due at various times through May 7, 2013. Proceeds from the loan were used to pay off a portion of the CP outstanding. Interest on borrowings under the 2008 Term Loan was payable quarterly at rates that were 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 2008 Term Loan contained restrictive covenants that, among other things, restricted 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 limited the amount of debt that subsidiaries of the Company may incur. In addition, the 2008 Term Loan contained 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 2008 Term Loan was repaid in full in May 2013.

The principal payments due on the Company's long-term borrowings for each of the next five years are presented in the table below:

Year Ended December 31, Series 2005-1 Notes Series 2007-1 Notes 2010 Senior Notes 2012 Senior Notes 2013 Senior Notes Total
2013 (after September 30,) $ - $ - $ - $ - $ - $ -
2014   -   -   -   -   -   -
2015   300.0   -   -   -   -   300.0
2016   -   -   -   -   -   -
2017   -   300.0   -   -   -   300.0
Thereafter   -   -   500.0   500.0   500.0   1,500.0
Total $ 300.0 $ 300.0 $ 500.0 $ 500.0 $ 500.0 $ 2,100.0

In the fourth quarter of 2010, the Company entered into interest rate swaps with a total notional amount of $300 million which converted 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 6 above.

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

Interest expense, net

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

  Three Months Ended Nine Months Ended
  September 30, September 30,
  2013 2012 2013 2012
Income$ 1.6 $ 1.2 $ 4.0 $ 3.7
Expense on borrowings  (23.9)   (19.3)   (65.4)   (52.1)
(Expense) income on UTPs and other tax related liabilities (a)  (2.1)   (1.7)   (6.7)   1.8
Legacy Tax (b)  -   4.4   -   4.4
Capitalized  -   0.1   -   -
Total$ (24.4) $ (15.3) $ (68.1) $ (42.2)
             

  • The amount in the nine months ended September 30, 2012 contains a benefit of approximately $7 million related to the settlement of state and local income tax audits.
  • The 2012 amounts represent a reversal of $4.4 million of accrued interest relating to the favorable resolution of a Legacy Tax Matter.

The following table shows the cash paid for interest:

   Nine Months Ended
   September 30,
     2013 2012
Interest paid*      $ 78.7 $ 97.1

       * Interest paid includes payments of interest relating to the settlement of income tax audits in the first quarter of 2012 as well as net settlements on interest rate swaps more fully discussed in Note 6.

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 adjusted for the fair value of an interest rate swap used to hedge the fair value of the note. The fair value and carrying value of the Company's long-term debt as of September 30, 2013 and December 31, 2012 are as follows:

 September 30, 2013 December 31, 2012
 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value
Series 2005-1 Notes*$ 307.3 $ 320.8 $ 313.8 $ 326.1
Series 2007-1 Notes  300.0   337.0   300.0   348.3
2010 Senior Notes  497.7   544.1   497.4   562.8
2012 Senior Notes  496.4   498.9   496.2   528.8
2013 Senior Notes  497.2   502.0   -   -
2008 Term Loan  -   -   63.8   63.8
            
Total$ 2,098.6 $ 2,202.8 $ 1,671.2 $ 1,829.8

    September 30, December 31,
    2013 2012
2012 Facility $ - $ -
Commercial paper   -   -
Notes Payable:      
  Series 2005-1 Notes, due 2015; which includes the fair value of interest rate swap of $7.3 million at 2013 and $13.8 million at 2012   307.3   313.8
  Series 2007-1 Notes due 2017   300.0   300.0
 2010 Senior Notes, due 2020, net of unamortized discount of $2.3 million in 2013 and $2.6 million in 2012   497.7   497.4
 2012 Senior Notes, due 2022, net of unamortized discount of $3.6 million in 2013 and $3.8 million in 2012   496.4   496.2
 2013 Senior Notes, due 2024, net of unamortized discount of $2.8 million in 2013   497.2   -
2008 Term Loan   -   63.8
         
Total debt   2,098.6   1,671.2
Current portion   -   (63.8)
         
Total long-term debt $ 2,098.6 $ 1,607.4

2012 Facility

On April 18, 2012, the Company and certain of its subsidiaries entered into a $1 billion five-year senior, unsecured revolving credit facility in an aggregate principal amount of $1 billion that expires in April 2017. The 2012 Facility replaced the $1 billion 2007 Facility that was scheduled to expire in September 2012. The proceeds from the 2012 Facility will be used for general corporate purposes, including, without limitation, support for the Company's $1 billion commercial paper program, share repurchases and acquisition financings. Interest on borrowings under the facility is payable at rates that are based on LIBOR plus a premium that can range from 77.5 basis points to 120 basis points per annum of the outstanding amount, depending on the Company's Debt/EBITDA ratio. The Company also pays quarterly facility fees, regardless of borrowing activity under the 2012 Facility. These quarterly fees can range from 10 basis points of the facility amount to 17.5 basis points, depending on the Company's Debt/ EBITDA Ratio.

The 2012 Facility contains covenants that, among other things, restrict the ability of the Company and 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 set forth in the facility agreement. The 2012 Facility also contains a financial covenant that requires the Company to maintain a Debt to EBITDA Ratio of not more than 4 to 1 at the end of any fiscal quarter. Upon the occurrence of certain financial or economic events, significant corporate events or certain other events constituting an event of default under the 2012 Facility, all loans outstanding under the facility (including accrued interest and fees payable thereunder) may be declared immediately due and payable and all commitments under the facility may be terminated.

 

Commercial Paper

On October 3, 2007, the Company entered into a private placement commercial paper program under which the Company could issue CP notes up to a maximum amount of $1.0 billion. In October 2013, the Company terminated its CP program.

Notes Payable

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.

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 August 19, 2010, the Company issued $500 million aggregate principal amount of 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 2010 Indenture, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The 2010 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 2010 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 2010 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 2010 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 November 4, 2011, in connection with the acquisition of Copal, a subsidiary of the Company issued a $14.2 million non-interest bearing note to the sellers which represented a portion of the consideration transferred to acquire the Copal entities. If a seller subsequently transfers to the Company all of its shares, the Company must repay the seller its proportion of the principal on the later of (i) the fourth anniversary date of the note or (ii) within a time frame set forth in the acquisition agreement relating to the resolution of certain income tax uncertainties pertaining to the transaction. Otherwise, the Company must repay any amount outstanding on the earlier of (i) two business days subsequent to the exercise of the put/call option to acquire the remaining shares of Copal or (ii) the tenth anniversary date of the issuance of the note. The Company has the right to offset payment of the note against certain indemnification assets associated with UTPs related to the acquisition. Accordingly, the Company has offset the liability for this note against the indemnification asset, thus no balance for this note is carried on the Company's consolidated balance sheet at September 30, 2013 and December 31, 2012. In the event that the Company would not be required to settle amounts related to the UTPs, the Company would be required to pay the sellers the principal in accordance with the note agreement. The Company may prepay the note in accordance with certain terms set forth in the acquisition agreement.

On August 20, 2012, the Company issued $500 million aggregate principal amount of unsecured notes in a public offering. The 2012 Senior Notes bear interest at a fixed rate of 4.50% and mature on September 1, 2022. Interest on the 2012 Senior Notes will be due semi-annually on September 1 and March 1 of each year, commencing March 1, 2013. The Company may prepay the 2012 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 2012 Indenture, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The 2012 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 2012 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 2012 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 2012 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 2012 Senior 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 August 12, 2013, the Company issued $500 million aggregate principal amount of senior unsecured notes in a public offering. The 2013 Senior Notes bear interest at a fixed rate of 4.875% and mature on February 15, 2024. Interest on the 2013 Senior Notes will be due semi-annually on February 15 and August 15 of each year, commencing February 15, 2014. The Company may prepay the 2013 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. Notwithstanding the immediately preceding sentence, the Company may redeem the 2013 Senior Notes, in whole or in part, at any time or from time to time on or after November 15, 2023 (three months prior to their maturity), at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding the redemption date. 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 2013 Indenture, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The 2013 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 2013 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 2013 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 2013 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 2013 Indenture, the 2013 Senior 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.

2008 Term Loan

On May 7, 2008, Moody's entered into a five-year, $150.0 million senior unsecured term loan with several lenders due at various times through May 7, 2013. Proceeds from the loan were used to pay off a portion of the CP outstanding. Interest on borrowings under the 2008 Term Loan was payable quarterly at rates that were 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 2008 Term Loan contained restrictive covenants that, among other things, restricted 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 limited the amount of debt that subsidiaries of the Company may incur. In addition, the 2008 Term Loan contained 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 2008 Term Loan was repaid in full in May 2013.

The principal payments due on the Company's long-term borrowings for each of the next five years are presented in the table below:

Year Ended December 31, Series 2005-1 Notes Series 2007-1 Notes 2010 Senior Notes 2012 Senior Notes 2013 Senior Notes Total
2013 (after September 30,) $ - $ - $ - $ - $ - $ -
2014   -   -   -   -   -   -
2015   300.0   -   -   -   -   300.0
2016   -   -   -   -   -   -
2017   -   300.0   -   -   -   300.0
Thereafter   -   -   500.0   500.0   500.0   1,500.0
Total $ 300.0 $ 300.0 $ 500.0 $ 500.0 $ 500.0 $ 2,100.0

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

Interest expense, net

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

  Three Months Ended Nine Months Ended
  September 30, September 30,
  2013 2012 2013 2012
Income$ 1.6 $ 1.2 $ 4.0 $ 3.7
Expense on borrowings  (23.9)   (19.3)   (65.4)   (52.1)
(Expense) income on UTPs and other tax related liabilities (a)  (2.1)   (1.7)   (6.7)   1.8
Legacy Tax (b)  -   4.4   -   4.4
Capitalized  -   0.1   -   -
Total$ (24.4) $ (15.3) $ (68.1) $ (42.2)
             

   Nine Months Ended
   September 30,
     2013 2012
Interest paid*      $ 78.7 $ 97.1

       * Interest paid includes payments of interest relating to the settlement of income tax audits in the first quarter of 2012 as well as net settlements on interest rate swaps more fully discussed in Note 6.

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 adjusted for the fair value of an interest rate swap used to hedge the fair value of the note. The fair value and carrying value of the Company's long-term debt as of September 30, 2013 and December 31, 2012 are as follows:

 September 30, 2013 December 31, 2012
 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value
Series 2005-1 Notes*$ 307.3 $ 320.8 $ 313.8 $ 326.1
Series 2007-1 Notes  300.0   337.0   300.0   348.3
2010 Senior Notes  497.7   544.1   497.4   562.8
2012 Senior Notes  496.4   498.9   496.2   528.8
2013 Senior Notes  497.2   502.0   -   -
2008 Term Loan  -   -