MOODYS CORP /DE/, 10-Q/A filed on 8/14/2009
Amended Quarterly Report
Statement Of Income Alternative (USD $)
In Millions, except Per Share data
3 Months Ended
Jun. 30, 2009
6 Months Ended
Jun. 30, 2009
3 Months Ended
Jun. 30, 2008
6 Months Ended
Jun. 30, 2008
Revenue
$ 450.7 
$ 859.6 
$ 487.6 
$ 918.3 
Expenses
 
 
 
 
Operating
128.0 
250.4 
123.3 
243.2 
Selling, general and administrative
116.7 
226.9 
114.0 
213.7 
Restructuring
3.1 
14.9 
(0.2)
(0.9)
Depreciation and amortization
15.7 
31.3 
16.8 
29.3 
Total expenses
263.5 
523.5 
253.9 
485.3 
Operating income
187.2 
336.1 
233.7 
433.0 
Non-operating (expense) income, net
 
 
 
 
Interest (expense) income, net
(6.1)
(9.4)
(12.4)
(23.9)
Other non-operating (expense) income, net
(6.5)
(10.5)
2.5 
11.4 
Total non-operating (expense) income, net
(12.6)
(19.9)
(9.9)
(12.5)
Income before provision for income taxes
174.6 
316.2 
223.8 
420.5 
Provision for income taxes
63.6 
114.1 
86.2 
161.7 
Net income
111.0 
202.1 
137.6 
258.8 
Less: Net income attributable to noncontrolling interests
1.7 
2.6 
2.4 
2.9 
Net income attributable to Moody's
109.3 
199.5 
135.2 
255.9 
Earnings per share attributable to Moody's common shareholders
 
 
 
 
Basic
0.46 
0.85 
0.55 
1.04 
Diluted
0.46 
0.84 
0.54 
1.03 
Weighted average number of shares outstanding
 
 
 
 
Basic
236.1 
235.8 
244.6 
246.0 
Diluted
238.1 
237.3 
248.1 
249.5 
Dividends declared per share attributable to Moody's common shareholders
$ 0.10 
$ 0.10 
$ 0.10 
$ 0.10 
Statement Of Financial Position Classified (USD $)
In Millions
Jun. 30, 2009
Dec. 31, 2008
ASSETS
 
 
Current assets:
 
 
Cash and cash equivalents
$ 392.8 
$ 245.9 
Short-term investments
4.9 
7.1 
Accounts receivable, net of allowances of $28.3 in 2009 and $23.9 in 2008
407.6 
421.8 
Deferred tax assets, net
31.2 
26.5 
Other current assets
64.1 
107.8 
Total current assets
900.6 
809.1 
Property and equipment, net of accumulated depreciation of $152.7 in 2009 and $130.4 in 2008
267.6 
247.7 
Goodwill
344.6 
338.0 
Intangible assets, net
106.7 
114.0 
Deferred tax assets, net
206.6 
220.1 
Other assets
47.7 
44.5 
Total assets
1,873.8 
1,773.4 
LIABILITIES AND SHAREHOLDERS' DEFICIT
 
 
Current liabilities:
 
 
Accounts payable and accrued liabilities
262.0 
240.4 
Commercial paper
370.4 
104.7 
Revolving credit facility
210.0 
613.0 
Deferred revenue
462.7 
435.0 
Total current liabilities
1,305.1 
1,393.1 
Non-current portion of deferred revenue
108.4 
114.8 
Long-term debt
750.0 
750.0 
Deferred tax liabilities, net
15.7 
19.0 
Unrecognized tax benefits
156.9 
185.1 
Other liabilities
287.2 
297.5 
Total liabilities
2,623.3 
2,759.5 
Contingencies (Note 11)
Shareholders' deficit:
 
 
Preferred stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding
Capital surplus
380.7 
392.7 
Retained earnings
3,199.0 
3,023.2 
Treasury stock, at cost; 106,585,040 and 107,757,537 shares of common stock at June 30, 2009 and December 31, 2008, respectively
(4,310.3)
(4,361.6)
Accumulated other comprehensive loss
(30.1)
(52.1)
Total Moody's shareholders' deficit
(757.3)
(994.4)
Noncontrolling interests
7.8 
8.3 
Total shareholders' deficit
(749.5)
(986.1)
Total liabilities and shareholders' deficit
1,873.8 
1,773.4 
Series common stock
 
 
Shareholders' deficit:
 
 
Common stock
Common Stock
 
 
Shareholders' deficit:
 
 
Common stock
$ 3.4 
$ 3.4 
Statement Of Financial Position Classified (Parenthetical) (USD $)
In Millions, except Share and Per Share data
Jun. 30, 2009
Dec. 31, 2008
Accounts receivable, allowances
$ 28.3 
$ 23.9 
Property and equipment, accumulated depreciation
152.7 
130.4 
Preferred stock, par value
0.01 
0.01 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Treasury stock, shares
106,585,040 
107,757,537 
Series common stock
 
 
Common stock, par value
0.01 
0.01 
Common stock, shares authorized
10,000,000 
10,000,000 
Common stock, shares issued
Common stock, shares outstanding
Common Stock
 
 
Common stock, par value
0.01 
0.01 
Common stock, shares authorized
1,000,000,000 
1,000,000,000 
Common stock, shares issued
342,902,272 
342,902,272 
Statement Of Cash Flows Indirect (USD $)
In Millions
6 Months Ended
Jun. 30,
2009
2008
Cash flows from operating activities
 
 
Net income
$ 202.1 
$ 258.8 
Reconciliation of net income to net cash provided by operating activities:
 
 
Depreciation and amortization
31.3 
29.3 
Stock-based compensation expense
30.6 
29.2 
Excess tax benefits from stock-based compensation plans
(2.9)
(5.5)
Legacy Tax
0.0 
(7.8)
Changes in assets and liabilities:
 
 
Accounts receivable
15.9 
32.1 
Other current assets
42.6 
0.6 
Other assets
(2.7)
27.9 
Accounts payable and accrued liabilities
(11.2)
(137.2)
Restructuring
9.4 
(17.6)
Deferred revenue
15.5 
7.4 
Unrecognized tax benefits
3.8 
19.3 
Other liabilities
(9.9)
12.2 
Net cash provided by operating activities
324.5 
248.7 
Cash flows from investing activities
 
 
Capital additions
(34.8)
(44.0)
Purchases of short-term investments
(2.3)
(6.1)
Sales and maturities of short-term investments
4.4 
6.9 
Cash paid for acquisitions, net of cash acquired
(0.9)
(38.6)
Insurance recovery
0.0 
0.9 
Net cash used in investing activities
(33.6)
(80.9)
Cash flows from financing activities
 
 
Borrowings under revolving credit facilities
2,232.0 
425.0 
Repayments of borrowings under revolving credit facilities
(2,635.0)
0.0 
Issuance of commercial paper
5,013.6 
7,655.7 
Repayments of commercial paper
(4,747.9)
(8,105.5)
Proceeds from term loan
0.0 
150.0 
Net proceeds from stock-based compensation plans
12.4 
16.5 
Cost of treasury shares repurchased
0.0 
(327.9)
Excess tax benefits from stock-based compensation plans
2.9 
5.5 
Payment of dividends to MCO shareholders
(47.2)
(49.2)
Payment of dividends to noncontrolling interests
(2.9)
(2.0)
Debt issuance costs and related fees
0.0 
(0.7)
Payments under capital lease obligations
(0.8)
(0.9)
Net cash used in financing activities
(172.9)
(233.5)
Effect of exchange rate changes on cash and cash equivalents
28.9 
19.5 
Net increase (decrease) in cash and cash equivalents
146.9 
(46.2)
Cash and cash equivalents, beginning of the period
245.9 
426.3 
Cash and cash equivalents, end of the period
$ 392.8 
$ 380.1 
Notes to Financial Statements
6 Months Ended
Jun. 30, 2009
GLOSSARY OF TERMS AND ABBREVIATIONS
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
NOTE 2. STOCK-BASED COMPENSATION
NOTE 3. INCOME TAXES
NOTE 4. WEIGHTED AVERAGE SHARES OUTSTANDING
NOTE 5. SHORT-TERM INVESTMENTS
NOTE 6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
NOTE 7. GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS
NOTE 8. RESTRUCTURING
NOTE 9. PENSION AND OTHER POST-RETIREMENT BENEFITS
NOTE 10. INDEBTEDNESS
NOTE 11. CONTINGENCIES
NOTE 12. COMPREHENSIVE INCOME AND NONCONTROLLING INTERESTS
NOTE 13. SEGMENT INFORMATION
NOTE 14. RECENTLY ISSUED ACCOUNTING STANDARDS
NOTE 15. SUBSEQUENT EVENTS

GLOSSARY OF TERMS AND ABBREVIATIONS

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

 

TERM

  

DEFINITION

ACNielsen    ACNielsen Corporation – a former affiliate of Old D&B
Analytics    Moody’s Analytics – reportable segment of MCO; consists of three LOBs – subscriptions, software and professional services
AOCI    Accumulated other comprehensive income (loss); a separate component of shareholders’ equity (deficit)
Basel II    Capital adequacy framework published in June 2004 by the Basel Committee on Banking Supervision
Board    The board of directors of the Company
Bps    Basis points
BQuotes    BQuotes, Inc.; an acquisition completed in January 2008; part of the MA segment; a global provider of price discovery tools and end-of-day pricing services
Canary Wharf Lease    Operating lease agreement entered into on February 6, 2008 for office space in London, England, to be occupied by the Company in the second half of 2009.
CDO    Collateralized debt obligations
CESR    Committee of European Securities Regulators
CFG    Corporate finance group; an LOB of MIS
CMBS    Commercial mortgage-backed securities; part of CREF
Cognizant    Cognizant Corporation – a former affiliate of Old D&B; comprised the IMS Health and NMR businesses
Commission    European Commission
Company    Moody’s Corporation and its subsidiaries; MCO; Moody’s
COSO    Committee of Sponsoring Organizations of the Treadway Commission
CP    Commercial paper
CP Notes    Unsecured commercial paper notes
CP Program    The Company’s commercial paper program entered into on October 3, 2007
CRAs    Credit rating agencies
CREF    Commercial real estate finance which includes REITs, commercial real estate CDOs and MBS; part of SFG
D&B Business    Old D&B’s Dun & Bradstreet operating company
DBPP    Defined benefit pension plans
Debt/EBITDA    Ratio of Total Debt to EBITDA
Directors’ Plan    The 1998 MCO Non-Employee Directors’ Stock Incentive Plan
Distribution Date    September 30, 2000; the date which old D&B separated into two publicly traded companies – Moody’s Corporation and New D&B
EBITDA    Earnings before interest, taxes, depreciation and amortization
ECAIs    External Credit Assessment Institutions
ECB    European Central Bank

 

EITF    Emerging Issues Task Force; a task force established by the FASB to improve financial reporting through the timely identification, discussion, and resolution of financial accounting issues within the framework of existing authoritative literature.
EMEA    Represents countries within Europe, the Middle East and Africa
Enb    Enb Consulting; an acquisition completed in December 2008; part of the MA segment; a provider of credit and capital markets training services;
EPS    Earnings per share
ESPP    The 1999 Moody’s Corporation Employee Stock Purchase Plan
ETR    Effective tax rate
EU    European Union
EUR    Euros
Excess Tax Benefit    The difference between the tax benefit realized at exercise of an option or delivery of a restricted share and the benefit recorded at the time that the option or restricted share is expensed under GAAP
Exchange Act    The Securities Exchange Act of 1934, as amended
FASB    Financial Accounting Standards Board
Fermat    Fermat International; an acquisition completed in October 2008; part of the MA segment; a provider of risk and performance management software to the global banking industry
FIG    Financial institutions group; an LOB of MIS
FIN 48    FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”
Fitch    Fitch Ratings, a division of the Fitch Group which is a majority-owned subsidiary of Fimalac, S.A.
FSF    Financial Stability Forum
FX    Foreign exchange
GAAP    U.S. Generally Accepted Accounting Principles
GBP    British pounds
G-7    The finance ministers and central bank governors of the group of seven countries consisting of Canada, France, Germany, Italy, Japan, U.S. and U.K., that meet annually
G-20    The G-20 is an informal forum of industrial and emerging-market countries on key issues related to global economic stability. The G-20 is comprised of: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the U.K. and the U.S. and The EU who is represented by the rotating Council presidency and the ECB
HFSC    House Financial Services Committee
IMS Health    A spin-off of Cognizant; provides services to the pharmaceutical and healthcare industries
IOSCO    International Organization of Securities Commissions
IOSCO Code    Code of Conduct Fundamentals for Credit Rating Agencies
IRS    Internal Revenue Service
Legacy Tax Matter(s)    Exposures to certain potential tax liabilities assumed in connection with the 2000 Distribution
LIBOR    London Interbank Offered Rate

 

LOB    Line of business
MA    Moody’s Analytics – a reportable segment of MCO formed in January 2008; consists of three LOBs – subscriptions, software and professional services
Make Whole Amount    The prepayment penalty amount relating to the Series 2005-1 Notes and Series 2007-1 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
MIS Code    Moody’s Investors Service Code of Professional Conduct
Moody’s    Moody’s Corporation and its subsidiaries; MCO; the Company
Net Income    Net income attributable to Moody’s Corporation, which excludes net income from consolidated noncontrolling interests belonging to the minority interest holder
New D&B    The New D&B Corporation - which comprises the D&B business
NM    Percentage change is not-meaningful
NMR    Nielsen Media Research, Inc.; A spin-off of Cognizant; a leading source of television audience measurement services
Notices    IRS Notices of Deficiency for 1997-2002
NRSRO    Nationally Recognized Statistical Rating Organization
Old D&B    The former Dun and Bradstreet Company which distributed New D&B shares on September 30, 2000, and was renamed Moody’s Corporation
Post-Retirement Plans    Moody’s funded and unfunded pension plans, the post-retirement healthcare plans and the post-retirement life insurance plans
PPIF    Public, project and infrastructure finance; an LOB of MIS
Profit Participation Plan    Defined contribution profit participation plan that covers substantially all U.S. employees of the Company
PWG    President’s Working Group on Financial Markets
Reform Act    Credit Rating Agency Reform Act of 2006
REITs    Real estate investment trusts
RMBS    Residential mortgage-backed security; part of SFG
S&P    Standard & Poor’s Ratings Services; a division of The McGraw-Hill Companies, Inc.
SEC    U.S. Securities and Exchange Commission
Series 2005-1 Notes    Principal amount of $300.0 million, 4.98% senior unsecured notes due in September 2015 pursuant to the 2005 Agreement
Series 2007-1 Notes    Principal amount of $300.0 million, 6.06% senior unsecured notes due in September 2017 pursuant to the 2007 Agreement
SFAS    Statement of Financial Accounting Standards
SFAS No. 87    SFAS No. 87, “Employers’ Accounting for Pensions”
SFAS No. 88    SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefits Pension Plans and for Termination Benefits”

 

SFAS No. 109    SFAS No. 109, “Accounting for Income Taxes”
SFAS No. 112    SFAS No. 112, “Employers’ Accounting for Postemployment Benefits”
SFAS No. 123    SFAS No. 123 “Accounting for Stock-Based Compensation”
SFAS No. 123R    SFAS No. 123R, “Share-Based Payment” (Revised 2004)
SFAS No. 132R    SFAS No. 132R, “Employers’ Disclosures about Pensions and Other Postretirement Benefits – an amendment of FASB Statements No. 87, 88, and 106” (Revised 2003)
SFAS No. 133    SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”
SFAS No. 141R    SFAS No. 141R, “Business Combinations” (Revised 2007)
SFAS No. 142    SFAS No. 142, “Goodwill and Other Intangible Assets”
SFAS No. 144    SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”
SFAS No. 146    SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”
SFAS No. 157    SFAS No. 157, “Fair Value Measurements”
SFAS No. 157    SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R)”
SFAS No. 159    “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115”
SFAS No. 160    SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51”
SFAS No. 161    SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of SFAS No. 133”
SFG    Structured finance group; an LOB of MIS
SG&A    Selling, general and administrative expenses
Stock Plans    The 1998 Plan and the 2001 Plan
T&E    Travel and entertainment expenses
Total Debt    All indebtedness of the Company as reflected on the consolidated balance sheets, excluding current accounts payable and deferred revenue incurred in the ordinary course of business
U.K.    United Kingdom
U.S.    United States
USD    U.S. dollar
UTBs    Unrecognized tax benefits
UTPs    Uncertain tax positions
1998 Plan    Old D&B’s 1998 Key Employees’ Stock Incentive Plan
2000 Distribution    The distribution by Old D&B to its shareholders of all of the outstanding shares of New D&B common stock on September 30, 2000
2000 Distribution Agreement    Agreement governing certain ongoing relationships between the Company and New D&B after the 2000 Distribution including the sharing of any liabilities for the payment of taxes, penalties and interest resulting from unfavorable IRS rulings on certain tax matters and certain other potential tax liabilities
2001 Plan    The Amended and Restated 2001 MCO Key Employees’ Stock Incentive Plan
2005 Agreement    Note purchase agreement dated September 30, 2005, relating to the Series 2005-1 Notes

 

2007 Agreement    Note purchase agreement dated September 7, 2007 relating to the Series 2007-1 Notes
2007 Facility    Revolving credit facility of $1 billion entered into on September 28, 2007, expiring in 2012
2007 Restructuring Plan    The Company’s 2007 restructuring plan approved on December 31, 2007
2008 Term Loan    Five-year $150.0 million senior unsecured term loan entered into by the Company on May 7, 2008
2009 Restructuring Plan    The Company’s 2009 restructuring plan approved on March 27, 2009
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

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Moody’s is a provider of (i) credit ratings and related research, data and analytical tools, (ii) quantitative credit risk measures, risk scoring software, and credit portfolio management solutions and (iii) securities pricing software and valuation models. Moody’s operates in two reportable segments: Moody’s Investors Service and Moody’s Analytics. The MIS segment publishes credit ratings on a wide range of debt obligations and the entities that issue such obligations in markets worldwide. Revenue is derived from the originators and issuers of such transactions who use MIS’s ratings to support the distribution of their debt issues to investors. The MA segment develops a wide range of products and services that support the credit risk management activities of institutional participants in global financial markets. These offerings include quantitative credit risk scores, credit processing software, economic research, analytical models, financial data, securities pricing software and valuation models, and specialized professional services. MA also distributes investor-oriented research and data developed by MIS as part of its rating process, including in-depth research on major debt issuers, industry studies, and commentary on topical events.

The Company operated as part of Old D&B until September 30, 2000, when Old D&B separated into two publicly traded companies – Moody’s Corporation and New D&B. At that time, Old D&B distributed to its shareholders shares of New D&B stock. New D&B comprised the business of Old D&B’s Dun & Bradstreet operating company. The remaining business of Old D&B consisted solely of the business of providing ratings and related research and credit risk management services and was renamed Moody’s Corporation. For purposes of governing certain ongoing relationships between the Company and New D&B after the 2000 Distribution and to provide for an orderly transition, the Company and New D&B entered into various agreements including a distribution agreement, tax allocation agreement and employee benefits agreement.

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 2008 annual report on Form 10-K filed with the SEC on March 2, 2009. 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.

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
June 30,
   Six Months Ended
June 30,
     2009    2008    2009    2008

Stock compensation cost

   $ 16.1    $ 18.0    $ 30.6    $ 29.2

Tax benefit

   $ 5.9    $ 6.7    $ 11.3    $ 10.8

During the first half of 2009, the Company granted 2.6 million employee stock options, which had a weighted average grant date fair value of $8.52 per share based on the Black-Scholes option-pricing model. The Company also granted 0.6 million shares of restricted stock in the first six months of 2009, which had a weighted average grant date fair value of $25.18 per share.

Unrecognized compensation expense at June 30, 2009 was $57.8 million and $42.1 million for stock options and nonvested restricted stock, respectively, which is expected to be recognized over a weighted average period of 1.6 years and 1.5 years, respectively.

 

The following tables summarize information relating to stock option exercises and restricted stock vesting:

Stock option exercises:

 

     Six Months Ended
June 30,
     2009    2008

Proceeds from stock option exercises

   $ 12.1    $ 16.5

Aggregate intrinsic value

   $ 8.0    $ 15.6

Tax benefit realized upon exercise

   $ 3.2    $ 6.2

Restricted stock vesting:

 

     Six Months Ended
June 30,
     2009    2008

Fair value of shares vested

   $ 7.9    $ 22.7

Tax benefit realized upon vesting

   $ 2.9    $ 8.6

NOTE 3. INCOME TAXES

Moody’s effective tax rate was 36.4% and 38.5% for the three month periods ended June 30, 2009 and 2008, respectively and 36.1% and 38.5% for the six month periods ended June 30, 2009 and 2008, respectively. The decrease in the effective tax rate was primarily due to a larger portion of consolidated taxable income being generated from international sources, which is taxed at a lower rate than the U.S. statutory rate, net reductions to tax and tax-related liabilities in the first quarter of 2009 and a $4.3 million tax benefit related to the settlement of a Legacy Tax Matter in the second quarter of 2009. Additionally, in the second quarter of 2008 there was a $6.4 million non-taxable Legacy Tax benefit recorded in other non-operating income.

The Company classifies interest related to FIN 48 tax liabilities in interest expense in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating expenses. During the second quarter and first six months of 2009, the Company had a net decrease in its UTBs of $9.8 million ($4.5 million, net of tax) and a net increase of $3.9 million ($4.4 million, net of tax), respectively, primarily relating to U.S. tax issues. As of June 30, 2009 approximately $32 million of UTBs are included in accounts payable and accrued liabilities.

Prepaid taxes of $29.5 million and $62.7 million at June 30, 2009 and December 31, 2008, respectively, are included in other current assets in the consolidated balance sheets.

Moody’s Corporation and subsidiaries are subject to U.S. federal income tax as well as income tax in various state, local and foreign jurisdictions. The Company’s tax filings in New York State for the years 2004 through 2006 are currently under examination; tax filings in the U.K. for 2001 through 2006 are currently under examination by the U.K. taxing authorities; and income tax and value-added-tax filings in Italy for 2003 through 2007 are currently under examination by the Italian taxing authorities. During the second quarter of 2009, New York City concluded its tax audits for Moody’s 2001 through 2007 tax years with no material impact to the statement of operations.

For ongoing audits related to open tax years, the Company estimates that it is possible the balance of UTBs could decrease in the next twelve months as a result of the settlement of these audits, which might involve the payment of additional taxes, the adjustment of certain deferred taxes and/or the recognition of tax benefits. It is also possible that new issues might be raised by tax authorities which could necessitate increases to the balance of UTBs. As the Company is unable to predict the timing or outcome of these audits, it is therefore unable to estimate the amount of changes to the balance of UTBs at this time. However, the Company believes that it has adequately provided for its financial exposure for all open tax years by tax jurisdiction in accordance with the provisions of FIN 48. Additionally, the Company is seeking tax rulings on certain tax positions which, if granted, could change the balance of UTBs over the next twelve months. However, due to the uncertainty involved with this process, MCO is unable to estimate the amount of changes to the balance of UTBs at this time. 

NOTE 4. WEIGHTED AVERAGE SHARES OUTSTANDING

Below is a reconciliation of basic to diluted shares outstanding:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2009    2008    2009    2008

Basic

   236.1    244.6    235.8    246.0

Dilutive effect of shares issuable under stock-based compensation plans

   2.0    3.5    1.5    3.5
                   

Diluted

   238.1    248.1    237.3    249.5
                   

Anti-dilutive options to purchase common shares and restricted stock excluded from the table above

   15.1    11.0    16.7    11.1
                   

The calculation of diluted EPS requires certain assumptions regarding the use of both cash proceeds and assumed proceeds that would be received upon the exercise of stock options and vesting of restricted stock outstanding as of June 30, 2009 and 2008. These assumed proceeds include Excess Tax Benefits and any unrecognized compensation as calculated under SFAS No. 123R.

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 four months and one month to ten months as of June 30, 2009 and December 31, 2008, respectively. Interest and dividends are recorded into income when earned.

NOTE 6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company engages in hedging activities to protect against FX risks from forecasted billings and related revenue denominated in the euro and the GBP. FX options and forward exchange contracts are utilized to hedge exposures related to changes in FX rates. As of June 30, 2009 all FX options and forward exchange contracts had maturities between one and 14 months. The hedging program mainly utilizes FX options. The forward exchange contracts are immaterial.

The following table summarizes the notional amounts of the Company’s outstanding FX options:

 

     June 30,
2009
   December 31,
2008

Notional amount of Currency Pair:

     

GBP/USD

   £ 6.7    £ 7.4

EUR/USD

   12.0    12.9

EUR/GBP

   18.0    24.3

In May 2008, the Company entered into interest rate swaps with a total notional amount of $150.0 million to protect against fluctuations in the LIBOR-based variable interest rate on the 2008 Term Loan, further described in Note 10. These interest rate swaps are designated as cash flow hedges.

 

The tables below reflect the expanded disclosure requirements of SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133”, which the Company implemented in the first quarter of 2009.

 

     Fair Value of Derivative Instruments
     Asset    Liability
     June 30,
2009
   December 31,
2008
   June 30,
2009
   December 31,
2008

Derivatives designated as hedging instruments under SFAS No. 133

           

FX options

   $ 2.7    $ 4.9    $ —      $ —  

Interest rate swaps

     —        —        7.3      10.7
                           

Total

   $ 2.7    $ 4.9    $ 7.3    $ 10.7
                           

The fair value of FX options and interest rate swaps are included in other current assets and other liabilities, respectively, in the consolidated balance sheets at June 30, 2009 and December 31, 2008.

 

Derivatives in SFAS No. 133 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 June 30,
         Three Months
Ended June 30,
         Three Months
Ended June 30,
     2009     2008          2009    2008          2009     2008

FX options

   $ (0.2   $ (0.3  

Revenue

   $ 0.6    $ (0.4  

Revenue

   $ —        $ —  

Interest rate swaps

     1.8        1.1     

Interest expense

     —        —       

N/A

     —          —  
                                                   

Total

   $ 1.6      $ 0.8         $ 0.6    $ (0.4      $ —        $ —  
                                                   
     Six Months Ended
June 30,
         Six Months Ended
June 30,
         Six Months Ended
June 30,
     2009     2008          2009    2008          2009     2008

FX options

   $ 0.2      $ (2.3  

Revenue

   $ 0.9    $ (0.6  

Revenue

   $ (0.2   $ —  

Interest rate swaps

     2.0        1.1     

Interest expense

     —        —       

N/A

     —          —  
                                                   

Total

   $ 2.2      $ (1.2      $ 0.9    $ (0.6      $ (0.2   $ —  
                                                   

All gains and losses on hedging instruments are initially recognized through AOCI. Realized gains and losses reported in AOCI are reclassified into earnings as the underlying transaction is recognized. The existing realized gains as of June 30, 2009 expected to be reclassified to earnings in the next twelve months are $1.4 million, net of tax.

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

 

     June 30,
2009
    December 31,
2008
 
     Unrecognized Gains/
(Losses), net of tax
 

FX options

   $ 1.6      $ 2.2   

Interest rate swaps

     (4.9     (6.9
                

Total

   $ (3.3   $ (4.7
                

 

NOTE 7. GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS

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

 

     Six Months Ended
June 30, 2009
   Year Ended
December 31, 2008
 
     MIS    MA    Consolidated    MIS     MA    Consolidated  

Beginning balance

   $ 10.6    $ 327.4    $ 338.0    $ 11.4      $ 168.5    $ 179.9   

Additions

     —        3.8      3.8      1.4        158.7      160.1   

FX translation

     0.1      2.7      2.8      (2.2     0.2      (2.0
                                            

Ending balance

   $ 10.7    $ 333.9    $ 344.6    $ 10.6      $ 327.4    $ 338.0   
                                            

The purchase price allocation for acquisitions made in the fourth quarter of 2008 is subject to adjustment as more detailed analyses are completed and additional information about fair value of assets and liabilities become available. Changes in the fair value of the net assets acquired could impact the amount of the purchase price allocable to goodwill.

Acquired intangible assets and related amortization consisted of:

 

     June 30,
2009
    December 31,
2008
 

Customer lists

   $ 81.0      $ 80.5   

Accumulated amortization

     (40.6     (37.7
                

Net customer lists

     40.4        42.8   
                

Trade secret

     25.5        25.5   

Accumulated amortization

     (7.6     (6.6
                

Net trade secret

     17.9        18.9   
                

Software

     55.7        55.2   

Accumulated amortization

     (13.9     (11.0
                

Net software

     41.8        44.2   
                

Other

     28.6        28.2   

Accumulated amortization

     (22.0     (20.1
                

Net other

     6.6        8.1   
                

Total acquired intangible assets, net

   $ 106.7      $ 114.0   
                

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

Amortization expense is as follows:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2009    2008    2009    2008

Amortization expense

   $ 4.2    $ 2.7    $ 8.2    $ 5.4

 

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

 

Year Ending December 31,

    

2009 (after June 30)

   $ 8.4

2010

     15.5

2011

     14.4

2012

     13.7

2013

     13.5

Thereafter

     41.2

Intangible assets are reviewed for impairment whenever circumstances indicate that the carrying amount may not be recoverable. If the estimated undiscounted future cash flows are lower than the carrying amount of the related asset, a loss is recognized for the difference between the carrying amount and the estimated fair value of the asset. Goodwill is tested for impairment annually as of November 30th, or more frequently if circumstances indicate the assets may be impaired. For the three and six months ended June 30, 2009 there were no impairments to goodwill; however $0.2 million of intangible assets written off in the first quarter of 2009 was included in the restructuring charge as further discussed in Note 8 below

NOTE 8. RESTRUCTURING

The Company’s restructuring accounting comes under the scope of the following GAAP: SFAS No. 112 for severance relating to employee terminations, SFAS No. 88 for pension settlements and curtailments, SFAS No. 144 for asset impairments and SFAS No. 146 for contract termination costs and other exit activities.

On March 27, 2009 the Company approved the 2009 Restructuring Plan to reduce costs in response to a strategic review of its business in certain jurisdictions and weak global economic and market conditions. This will result in a total estimated restructuring charge between $14 million to $16 million. The 2009 Restructuring Plan consists of headcount reductions of approximately $11 million to $12 million as well as contract termination costs and the potential divestiture of non-strategic assets totaling $3 million to $4 million. The Company’s plan includes closing offices in South Bend, Indiana; Jakarta, Indonesia and Taipei, Taiwan. There was $0.2 million in accelerated amortization for intangible assets recognized in the first quarter of 2009 relating to the closure of the Jakarta, Indonesia office. The 2009 Restructuring Plan will result in a global headcount reduction between 120 and 170 positions, representing 3% to 4% of the Company’s workforce as of December 31, 2008. The entire charge, except for $0.2 million of intangible assets written off relating to the Indonesia office closure, will result in cash outlays that will be substantially paid out over the next twelve months. The 2009 Restructuring Plan is expected to be substantially complete by December 31, 2009.

On December 31, 2007, the Company approved the 2007 Restructuring Plan that reduced global head count by approximately 275 positions, or approximately 7.5% of the workforce, in response to the Company’s reorganization announced in August 2007 and a decline in the then current and anticipated issuance of rated debt securities in some market sectors. Included in the 2007 Restructuring Plan was a reduction of staff as a result of: (i) consolidation of certain corporate staff functions, (ii) the integration of businesses comprising MA and (iii) an anticipated decline in new securities issuance in some market sectors. The 2007 Restructuring Plan also called for the termination of technology contracts as well as the outsourcing of certain technology functions. The cumulative amount of expense incurred from inception through June 30, 2009 for the 2007 Restructuring Plan was $48.4 million. The 2007 Restructuring Plan was substantially complete as of December 31, 2008.

Total expenses included in the accompanying consolidated statements of operations are as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
(in millions)    2009    2008     2009    2008  

2007 Restructuring Plan

   $ 0.3    $ (0.2   $ 0.9    $ (0.9

2009 Restructuring Plan

     2.8      —          14.0      —     
                              

Total

   $ 3.1    $ (0.2   $ 14.9    $ (0.9
                              

The expense related to the 2007 Restructuring Plan primarily reflects adjustments to previous estimates.

 

Changes to the restructuring liability during the first six months of 2009 were as follows:

 

     Employee Termination Costs     Contract
Termination
Costs
    Total
Restructuring
Liability
 
     Severance     Pension
Settlements
   Total      

Balance at December 31, 2008

   $ 1.5      $ 8.1    $ 9.6      $ 1.8      $ 11.4   

2007 Restructuring Plan:

           

Costs incurred and adjustments

     —          —        —          0.9        0.9   

Cash payments

     (1.4     —        (1.4     (2.0     (3.4

2009 Restructuring Plan:

           

Costs incurred and adjustments

     11.4        —        11.4        2.4        13.8   

Cash payments

     (1.9     —        (1.9     —          (1.9
                                       

Balance at June 30, 2009

   $ 9.6      $ 8.1    $ 17.7      $ 3.1      $ 20.8   
                                       

As of June 30, 2009, the remaining restructuring liability relating to severance and contract termination costs of $12.7 million is expected to be paid out during the years ending December 31, 2009 and 2010. Payments related to the $8.1 million unfunded pension liability will commence when the affected employees reach retirement age beginning in September 2009. The 2009 pension payments are not expected to be material and will continue in accordance with the provisions of the Post-Retirement Plans.

Severance and contract termination costs of $12.7 million and $3.3 million as of June 30, 2009 and December 31, 2008, respectively, are recorded in accounts payable and accrued liabilities in the Company’s consolidated balance sheets. Additionally, the $8.1 million of pension settlements is recorded within other liabilities as of June 30, 2009 and December 31, 2008.

NOTE 9. PENSION AND OTHER POST-RETIREMENT BENEFITS

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

Effective January 1, 2008, the Company no longer offers DBPPs to employees hired or rehired on or after January 1, 2008 and new hires instead 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 benefit formulas.

 

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

 

     Three Months Ended June 30,
     Pension Plans     Other
Post-Retirement
Plans
     2009     2008     2009    2008

Components of net periodic expense

         

Service cost

   $ 3.0      $ 3.2      $ 0.2    $ 0.2

Interest cost

     2.4        2.5        0.2      0.2

Expected return on plan assets

     (2.5     (2.5     —        —  

Amortization of net actuarial loss from earlier periods

     0.1        0.1        —        —  

Amortization of net prior service costs from earlier periods

     0.1        0.1        —        —  

Curtailment loss

     —          1.0        —        —  

Cost of special termination benefits

     —          2.8        —        —  
                             

Net periodic expense

   $ 3.1      $ 7.2      $ 0.4    $ 0.4
                             
     Six Months Ended June 30,
     Pension Plans     Other
Post-Retirement
Plans
     2009     2008     2009    2008

Components of net periodic expense

         

Service cost

   $ 6.1      $ 6.2      $ 0.4    $ 0.4

Interest cost

     4.9        4.9        0.4      0.3

Expected return on plan assets

     (5.0     (5.0     —        —  

Amortization of net actuarial loss from earlier periods

     0.3        0.1        —        —  

Amortization of net prior service costs from earlier periods

     0.2        0.2        —        —  

Curtailment loss

     —          1.0        —        —  

Cost of special termination benefits

     —          2.8        —        —  
                             

Net periodic expense

   $ 6.5      $ 10.2      $ 0.8    $ 0.7
                             

The curtailment loss and the cost of special termination benefits in 2008 relates to the accelerated recognition of prior service costs for a participant in the Company’s Supplemental Executive Benefit Plan.

The Company made payments of $1.0 million to its unfunded DBPPs and $0.6 million to its other post-retirement plans during the six months ended June 30, 2009. The Company presently anticipates making additional payments of $0.5 million to its unfunded DBPPs and $0.3 million to its other post-retirement plans during the remainder of 2009. 

NOTE 10. INDEBTEDNESS

The following table summarizes total indebtedness:

 

     June 30,
2009
    December 31,
2008
 

2007 Facility

   $ 210.0      $ 613.0   

Commercial paper, net of unamortized discount of $0.1 at 2009 and $0.3 at 2008

     370.4        104.7   

Notes payable:

    

Series 2005-1 Notes

     300.0        300.0   

Series 2007-1 Notes

     300.0        300.0   

2008 Term Loan

     150.0        150.0   
                

Total Debt

     1,330.4        1,467.7   

Current portion

     (580.4     (717.7
                

Total long-term debt

   $ 750.0      $ 750.0   
                

2007 Facility

On September 28, 2007, the Company entered into a $1.0 billion five-year senior, unsecured revolving credit facility, expiring in September 2012. The 2007 Facility will serve, in part, to support the Company’s CP Program described below. Interest on borrowings is payable at rates that are based on LIBOR plus a premium that can range from 16.0 to 40.0 basis points of the outstanding borrowing amount depending on the Debt/EBITDA ratio. The Company also pays quarterly facility fees, regardless of borrowing activity under the 2007 Facility. The quarterly fees for the 2007 Facility can range from 4.0 to 10.0 basis points of the facility amount, depending on the Company’s Debt/EBITDA ratio. The Company also pays a utilization fee of 5.0 basis points on borrowings outstanding when the aggregate amount outstanding exceeds 50% of the total facility. The weighted average interest rate on borrowings outstanding as of June 30, 2009 and December 31, 2008 was 0.6% and 1.47%. The 2007 Facility contains certain covenants that, among other things, restrict the ability of the Company and certain of its subsidiaries, without the approval of the lenders, to engage in mergers, consolidations, asset sales, transactions with affiliates and sale-leaseback transactions or to incur liens, as defined in the related agreement. The 2007 Facility also contains financial covenants that, among other things, require the Company to maintain a Debt/EBITDA ratio of not more than 4.0 to 1.0 at the end of any fiscal quarter.

Commercial Paper

On October 3, 2007, the Company entered into a private placement commercial paper program under which the Company may issue CP notes up to a maximum amount of $1.0 billion. Amounts available under the CP Program may be re-borrowed. The CP Program is supported by the Company’s 2007 Facility. The maturities of the CP Notes will vary, but may not exceed 397 days from the date of issue. The CP Notes are sold at a discount from par or, alternatively, sold at par and bear interest at rates that will vary based upon market conditions at the time of issuance. The rates of interest will depend on whether the CP Notes will be a fixed or floating rate. The interest on a floating rate may be based on the following: (a) certificate of deposit rate; (b) commercial paper rate; (c) the federal funds rate; (d) the LIBOR; (e) prime rate; (f) treasury rate; or (g) such other base rate as may be specified in a supplement to the private placement agreement. The weighted average interest rate on CP borrowings outstanding was 0.6% and 2.08% as of June 30, 2009 and December 31, 2008, respectively. The CP Program contains certain events of default including, among other things: non-payment of principal, interest or fees; violation of covenants; invalidity of any loan document; material judgments; and bankruptcy and insolvency events, subject in certain instances to cure periods.

Notes Payable

On September 7, 2007, the Company issued and sold through a private placement transaction, $300.0 million aggregate principal amount of its 6.06% Series 2007-1 Senior Unsecured Notes due 2017 pursuant to the 2007 Agreement. The Series 2007-1 Notes have a ten-year term and bear interest at an annual rate of 6.06%, payable semi-annually on March 7 and September 7. Under the terms of the 2007 Agreement, the Company may, from time to time within five years, in its sole discretion, issue additional series of senior notes in an aggregate principal amount of up to $500.0 million pursuant to one or more supplements to the 2007 Agreement. The Company may prepay the Series 2007-1 Notes, in whole or in part, at any time at a price equal to 100% of the principal amount being prepaid, plus accrued and unpaid interest and a Make Whole Amount. The 2007 Agreement contains covenants that limit the ability of the Company, and certain of its subsidiaries to, among other things: enter into transactions with affiliates, dispose of assets, incur or create liens, enter into any sale-leaseback transactions, or merge with any other corporation or convey, transfer or lease substantially all of its assets. The Company must also not permit its Debt/EBITDA ratio to exceed 4.0 to 1.0 at the end of any fiscal quarter.

 

On September 30, 2005, the Company issued and sold through a private placement transaction, $300.0 million aggregate principal amount of its Series 2005-1 Senior Unsecured Notes due 2015 pursuant to the 2005 Agreement. The Series 2005-1 Notes have a ten-year term and bear interest at an annual rate of 4.98%, payable semi-annually on March 30 and September 30. Proceeds from the sale of the Series 2005-1 Notes were used to refinance $300.0 million aggregate principal amount of the Company’s outstanding 7.61% senior notes which matured on September 30, 2005. In the event that Moody’s pays all, or part, of the Series 2005-1 Notes in advance of their maturity, such prepayment will be subject to a Make Whole Amount. The Series 2005-1 Notes are subject to certain covenants that, among other things, restrict the ability of the Company and certain of its subsidiaries, without the approval of the lenders, to engage in mergers, consolidations, asset sales, transactions with affiliates and sale-leaseback transactions or to incur liens, as defined in the related agreements.

2008 Term Loan

On May 7, 2008, Moody’s entered into a five-year, $150.0 million senior unsecured term loan with several lenders. Proceeds from the loan were used to pay off a portion of the CP outstanding. Interest on borrowings under the 2008 Term Loan is payable quarterly at rates that are based on LIBOR plus a margin that can range from 125 basis points to 175 basis points depending on the Company’s Debt/EBITDA ratio. The outstanding borrowings shall amortize beginning in 2010 in accordance with the schedule of payments set forth in the 2008 Term Loan outlined in the table below.

The 2008 Term Loan contains restrictive covenants that, among other things, restrict the ability of the Company to engage or to permit its subsidiaries to engage in mergers, consolidations, asset sales, transactions with affiliates and sale-leaseback transactions or to incur, or permit its subsidiaries to incur, liens, in each case, subject to certain exceptions and limitations. The 2008 Term Loan also limits the amount of debt that subsidiaries of the Company may incur. In addition, the 2008 Term Loan contains a financial covenant that requires the Company to maintain a Debt/EBITDA ratio of not more than 4.0 to 1.0 at the end of any fiscal quarter.

The principal payments due on the 2008 Term Loan through its maturity are as follows:

 

Year Ending December 31,

    

2010 (beginning in September)

   $ 3.8

2011

     11.3

2012

     71.2

2013

     63.7
      

Total

   $ 150.0
      

At June 30, 2009, the Company was in compliance with all covenants contained within all of the debt agreements. In addition to the covenants described above, the 2007 Facility, the 2005 Agreement, the 2007 Agreement and the 2008 Term Loan contain cross default provisions. These provisions state that default under one of the aforementioned debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under those instruments to be immediately due and payable. As of June 30, 2009, there were no such cross defaults.

Interest (expense) income, net

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2009     2008     2009     2008  

Expense on borrowings

   $ (12.5   $ (14.3   $ (24.4   $ (29.7

Income

     0.6        3.2        1.4        10.2   

FIN 48 and other tax related interest

     (0.7     (3.7     6.7        (6.8

Interest capitalized

     —          0.1        0.4        0.1   

Legacy Tax (a)

     6.5        2.3        6.5        2.3   
                                

Total interest expense, net

   $ (6.1   $ (12.4   $ (9.4   $ (23.9
                                

 

 

(a)

The 2009 amount represents interest income related to the favorable settlement of the 1993 – 1996 Legacy Tax Matter, as further discussed in Note 11 below; the 2008 amount represents a reduction of accrued interest due to the favorable resolution of Legacy Tax Matters, as further discussed in Note 11 below.

Net interest expense of $9.4 million for the first six months of 2009 reflects a reduction of approximately $12 million for tax and tax-related liabilities.

NOTE 11. CONTINGENCIES

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

As a result of events in the U.S. subprime residential mortgage sector and the credit markets more broadly over the last two years, various legislative, regulatory and enforcement entities around the world are investigating or evaluating the role of rating agencies in the U.S. subprime mortgage-backed securitization market and structured finance markets more generally. Moody’s has received subpoenas and inquiries from states attorneys general and other governmental authorities and is cooperating with such investigations and inquiries. Moody’s is also cooperating with a review by the SEC relating to errors in the model used by MIS to rate certain constant-proportion debt obligations. In addition, the Company is facing market participant litigation relating to the performance of MIS rated securities. Although Moody’s in the normal course experiences such litigation, the volume and cost of defending such litigation has significantly increased in the current economic environment.

On June 27, 2008, the Brockton Contributory Retirement System, a purported shareholder of the Company’s securities, filed a purported shareholder derivative complaint on behalf of the Company against its directors and certain senior officers, and the Company as nominal defendant, in the Supreme Court of the State of New York, County of New York. The plaintiff asserts various causes of action relating to the named defendants’ oversight of MIS’s ratings of RMBS and constant-proportion debt obligations, and their participation in the alleged public dissemination of false and misleading information about MIS’s ratings practices and/or a failure to implement internal procedures and controls to prevent the alleged wrongdoing. The plaintiff seeks compensatory damages, restitution, disgorgement of profits and other equitable relief. On July 2, 2008, Thomas R. Flynn, a purported shareholder of the Company’s securities, filed a similar purported shareholder derivative complaint on behalf of the Company against its directors and certain senior officers, and the Company as nominal defendant, in the Supreme Court of the State of New York, County of New York, asserting similar claims and seeking the same relief. The cases have been consolidated and plaintiffs filed an amended consolidated complaint in November 2008. The Company removed the consolidated action to the United States District Court for the Southern District of New York in December 2008. In January 2009, the plaintiffs moved to remand the case to the Supreme Court of the State of New York. The Company has opposed the remand and expects to move to dismiss the amended consolidated complaint upon resolution of the remand motion. On October 30, 2008, the Louisiana Municipal Police Employees Retirement System, a purported shareholder of the Company’s securities, also filed a shareholder derivative complaint on behalf of the Company against its directors and certain officers, and the Company as a nominal defendant, in the U.S. District Court for the Southern District of New York. This complaint too asserts various causes of action relating to the Company’s ratings of RMBS, CDO and constant-proportion debt obligations, and named defendants’ participation in the alleged public dissemination of false and misleading information about MIS’s ratings practices and/or a failure to implement internal procedures and controls to prevent the alleged wrongdoing. On December 9, 2008, Rena Nadoff, a purported shareholder of the Company, filed a shareholder derivative complaint on behalf of the Company against its directors and its CEO, and the Company as a nominal defendant, in the Supreme Court of the State of New York. The complaint asserts a claim for breach of fiduciary duty in connection with alleged overrating of asset-backed securities and underrating of municipal securities. On July 6, 2009, W. A. Sokolowski, a purported shareholder of the Company, filed a purported shareholder derivative complaint on behalf of the Company against its directors and current and former officers, and the Company as a nominal defendant, in the United States District Court for the Southern District of New York. The complaint asserts claims relating to alleged mismanagement of the Company’s processes for rating structured finance transactions, alleged insider trading and causing the Company to buy back its own stock at artificially inflated prices.

Two purported class action complaints have been filed by purported purchasers of the Company’s securities against the Company and certain of its senior officers, asserting claims under the federal securities laws. The first was filed by Raphael Nach in the U.S. District Court for the Northern District of Illinois on July 19, 2007. The second was filed by Teamsters Local 282 Pension Trust Fund in the U.S. District Court for the Southern District of New York on September 26, 2007. Both actions have been consolidated into a single proceeding entitled In re Moody’s Corporation Securities Litigation in the U.S. District Court for the Southern District of New York. On June 27, 2008, a consolidated amended complaint was filed, purportedly on behalf of all purchasers of the Company’s securities during the period February 3, 2006 through October 24, 2007. Plaintiffs allege that the defendants issued false and/or misleading statements concerning the Company’s business conduct, business prospects, business conditions and financial results relating primarily to MIS’s ratings of structured finance products including RMBS, CDO and constant-proportion debt obligations. The plaintiffs seek an unspecified amount of compensatory damages and their reasonable costs and expenses incurred in connection with the case. The Company moved for dismissal of the consolidated amended complaint in September 2008. On February 23, 2009, the court issued an opinion dismissing certain claims and sustaining others.

For claims, litigation and proceedings not related to income taxes, where it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated, the Company has recorded liabilities in the consolidated financial statements and periodically adjusts these as appropriate. In other instances, because of uncertainties related to the probable outcome and/or the amount or range of loss, management does not record a liability but discloses the contingency if significant. As additional information becomes available, the Company adjusts its assessments and estimates of such matters accordingly. For income tax matters, the Company employs the prescribed methodology of FIN 48 implemented as of January 1, 2007 which requires a company to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.

The Company cannot predict the ultimate impact that any of the legislative, regulatory, enforcement or litigation matters may have on how its business is conducted and thus its competitive position, financial position or results of operations. Based on its review of the latest information available, in the opinion of management, the ultimate monetary liability of the Company for the pending matters referred to above (other than the Legacy Tax Matters that are discussed below) is not likely to have a material adverse effect on the Company’s consolidated financial position, although it is possible that the effect could be material to the Company’s consolidated results of operations for an individual reporting period.

Legacy Tax Matters

Moody’s continues to have exposure to certain Legacy Tax Matters. At June 30, 2009, Moody’s has recorded liabilities for Legacy Tax Matters totaling $54.3 million. This includes liabilities and accrued interest due to New D&B arising from the 2000 Distribution Agreement. It is possible that the ultimate liability for Legacy Tax Matters could be greater than the liabilities recorded by the Company, which could result in additional charges that may be material to Moody’s future reported results, financial position and cash flows.

The following description of the relationships among Moody’s, New D&B and their predecessor entities is important in understanding the Legacy Tax Matters.

In November 1996, The Dun & Bradstreet Corporation separated into three separate public companies: The Dun & Bradstreet Corporation, ACNielsen Corporation and Cognizant Corporation. In June 1998, The Dun & Bradstreet Corporation separated into two separate public companies: Old D&B and R.H. Donnelley Corporation. During 1998, Cognizant separated into two separate public companies: IMS Health Incorporated and Nielsen Media Research, Inc. In September 2000, Old D&B separated into two separate public companies: New D&B and Moody’s, as further described in Note 1 to the consolidated financial statements.

Old D&B and its predecessors entered into global tax planning initiatives in the normal course of business. These initiatives are subject to normal review by tax authorities. Old D&B and its predecessors also entered into a series of agreements covering the sharing of any liabilities for payment of taxes, penalties and interest resulting from unfavorable IRS determinations on certain tax matters, and certain other potential tax liabilities, all as described in such agreements. Further, in connection with the 2000 Distribution and pursuant to the terms of the 2000 Distribution Agreement, New D&B and Moody’s have agreed on the financial responsibility for any potential liabilities related to Legacy Tax Matters.

Settlement agreements were executed with the IRS in 2005 regarding Legacy Tax Matters for the years 1989-1990 and 1993-1996. With respect to these settlement agreements, Moody’s and New D&B believe that IMS Health and NMR did not pay their full share of the liability to the IRS pursuant to the terms of the applicable separation agreements among the parties. Moody’s and New D&B paid these amounts to the IRS on their behalf, and attempted to resolve this dispute with IMS Health and NMR. As a result, Moody’s and New D&B commenced arbitration proceedings against IMS Health and NMR in connection with the 1989-1990 matter. This matter was resolved during the third quarter of 2008 in favor of Moody’s and New D&B, resulting in IMS Health and NMR having paid a total of $6.7 million to Moody’s. In the second quarter of 2009, Moody’s and New D&B reached a settlement with IMS Health and NMR with respect to the 1993-1996 matter resulting in $10.8 million of cash proceeds paid to Moody’s of which $6.5 million is interest and $4.3 million is a reduction of tax expense. This settlement increased the Company’s net income by $8.2 million for both the second quarter and year to date periods in 2009. As of June 30, 2009, the Company continues to carry a liability of $1.9 million with respect to these matters.

 

Amortization Expense Deductions

This Legacy Tax Matter involves a partnership transaction which resulted in amortization expense deductions on the tax returns of Old D&B since 1997. IRS audits of Old D&B’s and New D&B’s tax returns for the years 1997 through 2002 concluded in June 2007 without any disallowance of the amortization expense deductions, or any other adjustments to income related to this partnership transaction. These audits resulted in the IRS issuing the Notices for other tax issues for the 1997-2000 years aggregating $9.5 million in tax and penalties, plus statutory interest of approximately $6 million, which should be apportioned among Moody’s, New D&B, IMS Health and NMR pursuant to the terms of the applicable separation agreements. Moody’s share of this assessment was $6.6 million including interest, net of tax. In November 2007, the IRS assessed the tax and penalties and used a portion of the deposit discussed below to satisfy the assessment, together with interest. The Company believes it has meritorious grounds to challenge the IRS’s actions and is evaluating its alternatives to recover these amounts. In June 2008, the statute of limitations for New D&B relating to the 2003 tax year expired. As a result, Moody’s recorded a reduction of accrued interest expense of $2.3 million ($1.4 million, net of tax) and an increase in other non-operating income of $6.4M, relating to amounts due to New D&B in the three and six months ended June 30, 2008. Moody’s continues to carry a liability of $1.5 million at June 30, 2009 with respect to this matter

On the Distribution Date, New D&B paid Moody’s $55.0 million for 50% of certain anticipated future tax benefits of New D&B through 2012. It is possible that IRS audits of New D&B for tax years after 2003 could result in income adjustments with respect to the amortization expense deductions of this partnership transaction. In the event these tax benefits are not claimed or otherwise not realized by New D&B, or there is an audit adjustment, Moody’s would be required, pursuant to the terms of the 2000 Distribution Agreement, to repay to New D&B an amount equal to the discounted value of its share of the related future tax benefits and its share of any tax liability that New D&B incurs. As of June 30, 2009, Moody’s liability with respect to this matter totaled $50.9 million, including interest.

In March 2006, New D&B and Moody’s each deposited $39.8 million with the IRS in order to stop the accrual of statutory interest on potential tax deficiencies with respect to the 1997 through 2002 tax years. In July 2007, New D&B and Moody’s commenced procedures to recover approximately $57 million of these deposits ($24.6 million for New D&B and $31.9 million for Moody’s), which represents the excess of the original deposits over the total of the deficiencies asserted in the Notices. As noted above, in November 2007 the IRS used $7.9 million of Moody’s portion of the deposit to satisfy an assessment and related interest. Additionally, in the first quarter of 2008 the IRS returned to Moody’s $33.1 million in connection with this matter, which includes $3.0 million of interest. In July 2008, the IRS paid Moody’s the remaining $1.8 million balance of the original deposit.

NOTE 12. COMPREHENSIVE INCOME AND NONCONTROLLING INTERESTS

The components of total comprehensive income, net of tax, are as follows:

 

     Three months ended June 30,  
     2009    2008  
     Shareholders’
of Moody’s
Corporation
   Noncontrolling
Interests
    Total    Shareholders’
of Moody’s
Corporation
    Noncontrolling
Interests
    Total  

Net income

   $ 109.3    $ 1.7      $ 111.0    $ 135.2      $ 2.4      $ 137.6   

Net realized and unrealized gain/(loss) on cash flow hedges (net of tax of $0.3 million in both 2009 and 2008)

     1.0      —          1.0      1.2        —          1.2   

FX translation (net of tax of $2.1 million and $3.1 million in 2009 and 2008, respectively)

     49.2      (0.9     48.3      (1.4     (1.4     (2.8

Net actuarial gains recognized (net of tax of $2.1 million and $0.5 million in 2009 and 2008, respectively)

     3.1      —          3.1      0.8        —          0.8   

Amortization of actuarial losses and prior service costs (net of tax of $0.1 million in both 2009 and 2008)

     0.1      —          0.1      0.1        —          0.1   
                                              

Total comprehensive income

   $ 162.7    $ 0.8      $ 163.5    $ 135.9      $ 1.0      $ 136.9   
                                              
     Six months ended June 30,  
     2009    2008  
     Shareholders’
of Moody’s
Corporation
   Noncontrolling
Interests
    Total    Shareholders’
of Moody’s
Corporation
    Noncontrolling
Interests
    Total  

Net income

   $ 199.5    $ 2.6      $ 202.1    $ 255.9      $ 2.9      $ 258.8   

Net realized and unrealized gain/ (loss) on cash flow hedges, net of tax of $0.3 million in both 2009 and 2008.

     1.5      —          1.5      (0.5     —          (0.5

FX translation, net of tax of $11.7 million and $2.8 million in 2009 and 2008, respectively.

     17.3      (0.2     17.1      10.1        1.1        11.2   

Net actuarial gains recognized (net of tax of $2.1 million and $0.8 million in 2009 and 2008, respectively)

     3.1      —          3.1      0.6        —          0.6   

Amortization of actuarial losses and prior service costs (net of tax of $0.2 million and $0.1 million in 2009 and 2008, respectively)

     0.3      —          0.3      0.2        —          0.2   
                                              

Total comprehensive income

   $ 221.7    $ 2.4      $ 224.1    $ 266.3      $ 4.0      $ 270.3   
                                              

 

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

 

Balance at December 31, 2008

   $ 8.3   

Net income attributable to noncontrolling interests

     2.6   

Dividends declared attributable to noncontrolling interests

     (2.9

FX translation

     (0.2
        

Balance at June 30, 2009

   $ 7.8   
        

NOTE 13. SEGMENT INFORMATION

The Company operates in two reportable segments in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”: MIS and MA.

Revenue for MIS and expenses for MA include an intersegment royalty charged to MA for the rights to use and distribute content, data and products developed by MIS. Additionally, overhead costs and corporate expenses of the Company are allocated to each segment based on a revenue-split methodology. Overhead expenses include costs such as rent and occupancy, information technology and support staff such as finance, human resource, information technology and legal. “Eliminations” in the table below represent intersegment royalty revenue/expense.

Below is financial information by segment, MIS and MA revenue by line of business and consolidated revenue information by geographic area, each of which is for the three and six-month periods ended June 30, 2009 and 2008, and total assets by segment as of June 30, 2009 and December 31, 2008.

Financial Information by Segment

 

     Three Months Ended June 30,  
     2009    2008  
     MIS    MA    Eliminations     Consolidated    MIS    MA     Eliminations     Consolidated  

Revenue

   $ 324.7    $ 140.4    $ (14.4   $ 450.7    $ 371.5    $ 131.8      $ (15.7   $ 487.6   

Expenses:

                    

Operating, SG&A

     163.2      95.9      (14.4     244.7      170.4      82.6        (15.7     237.3   

Restructuring

     0.5      2.6      —          3.1      0.2      (0.4     —          (0.2

Depreciation and amortization

     7.5      8.2      —          15.7      10.4      6.4        —          16.8   
                                                            

Total

     171.2      106.7      (14.4     263.5      181.0      88.6        (15.7     253.9   
                                                            

Operating income

   $ 153.5    $ 33.7    $ —        $ 187.2    $ 190.5    $ 43.2      $ —        $ 233.7   
                                                            

 

     Six Months Ended June 30,  
     2009    2008  
     MIS    MA    Eliminations     Consolidated    MIS     MA     Eliminations     Consolidated  

Revenue

   $ 609.6    $ 279.1    $ (29.1   $ 859.6    $ 685.7        264.3      $ (31.7   $ 918.3   

Expenses:

                   

Operating, SG&A

     315.8      190.6      (29.1     477.3      323.8        164.8        (31.7     456.9   

Restructuring

     8.1      6.8      —          14.9      (0.4     (0.5     —          (0.9

Depreciation and amortization

     15.2      16.1      —          31.3      17.4        11.9        —          29.3   
                                                             

Total

     339.1      213.5      (29.1     523.5      340.8        176.2        (31.7     485.3   
                                                             

Operating income

   $ 270.5    $ 65.6    $ —        $ 336.1    $ 344.9      $ 88.1      $ —        $ 433.0   
                                                             

The cumulative restructuring charges incurred since the fourth quarter of 2007 through June 30, 2009 for the MIS and MA operating segments are $47.8 million and $14.6 million, respectively.

MIS and MA Revenue by Line of Business

In August 2008, the global managed investments group within MIS moved from structured finance to the financial institutions business. Prior period amounts have been reclassified to the current year presentation. The table below presents revenue by LOB within each reportable segment:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2009     2008     2009     2008  

MIS:

        

Structured finance

   $ 74.6      $ 115.6      $ 147.0      $ 218.0   

Corporate finance

     107.5        98.9        191.6        172.2   

Financial institutions

     67.3        75.1        123.6        142.1   

Public, project and infrastructure finance

     60.9        66.2        118.3        121.7   
                                

Total external revenue

     310.3        355.8        580.5        654.0   

Intersegment royalty

     14.4        15.7        29.1        31.7   
                                

Total MIS

     324.7        371.5        609.6        685.7   
                                

MA:

        

Subscription

     117.8        117.1        234.8        235.3   

Software

     17.4        9.5        33.5        19.0   

Professional Services

     5.2        5.2        10.8        10.0   
                                

Total MA

     140.4        131.8        279.1        264.3   
                                

Eliminations

     (14.4     (15.7     (29.1     (31.7
                                

Total MCO

   $ 450.7      $ 487.6      $ 859.6      $ 918.3   
                                

 

Consolidated Revenue Information by Geographic Area

 

     Three Months Ended June 30,    Six Months Ended June 30,
     2009    2008    2009    2008

United States

   $ 237.1    $ 263.5    $ 446.0    $ 496.4
                           

International:

           

EMEA

     152.1      158.8      296.6      299.2

Other

     61.5      65.3      117.0      122.7
                           

Total International

     213.6      224.1      413.6      421.9
                           

Total

   $ 450.7    $ 487.6    $ 859.6    $ 918.3
                           

Total Assets by Segment

 

     June 30, 2009    December 31, 2008
     MIS    MA    Corporate
Assets (a)
   Consolidated    MIS    MA    Corporate
Assets (a)
   Consolidated

Total Assets

   $ 535.2    682.5    656.1    $ 1,873.8    $ 392.4    692.5    688.5    $ 1,773.4
                                               

 

(a) Represents common assets that are shared between each segment or utilized by the corporate entity. Such assets primarily include cash and cash equivalents, short-term investments, unallocated property and equipment and deferred taxes.

NOTE 14. RECENTLY ISSUED ACCOUNTING STANDARDS

Adopted:

In May 2009, the FASB issued SFAS No. 165 – “Subsequent Events”, which sets forth principles and disclosure requirements for events that occur after the balance sheet date. In particular, SFAS No. 165 requires disclosure of the date through which management of a company has evaluated subsequent events and whether that date represents the date the financial statements were issued or available to be issued. The Company has implemented the provisions of SFAS No. 165 as of June 30, 2009. The implementation did not have any impact on the Company’s consolidated financial statements.

Not Yet Adopted:

In June 2009, the FASB issued SFAS No. 167 – “Amendments to FASB Interpretation No. 46(R)”, which sets forth new guidance on the analysis that must be performed to determine if an enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. Additionally, SFAS No. 167 requires enhanced disclosures that will provide more transparent information about an enterprise’s involvement in a variable interest entity. The Company plans to implement the provisions of SFAS No. 167 as of January 1, 2010 and does not expect the implementation to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168 – “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162”. SFAS No. 168 sets forth the FASB’s new codification which was first introduced in SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” as the source of authoritative GAAP. The Company will implement the provisions of this statement in its financial statements for the period ending September 30, 2009. The implementation of the standard will not have any impact on its consolidated financial statements but will require the Company to reference the new codification beginning in the third quarter of 2009.

NOTE 15. SUBSEQUENT EVENTS

On July 27, 2009, the Board approved the declaration of a quarterly dividend of $0.10 per share of Moody’s common stock, payable on September 10, 2009 to shareholders of record at the close of business on August 20, 2009.

Subsequent events were evaluated by the Company through July 31, 2009 which is the date the financial statements were issued.

Document Information
6 Months Ended
Jun. 30, 2009
Document Information [Text Block]
 
Document Type
10-Q 
Amendment Flag
FALSE 
Amendment Description
N.A. 
Document Period End Date
06/30/2009 
Entity Information (USD $)
6 Months Ended
Jun. 30, 2009
Jun. 30, 2008
Entity [Text Block]
 
 
Trading Symbol
MCO 
 
Entity Registrant Name
MOODYS CORP /DE/ 
 
Entity Central Index Key
0001059556 
 
Current Fiscal Year End Date
12/31 
 
Entity Well-known Seasoned Issuer
Yes 
 
Entity Current Reporting Status
Yes 
 
Entity Voluntary Filers
No 
 
Entity Filer Category
Large Accelerated Filer 
 
Common Stock
 
 
Entity [Text Block]
 
 
Entity Common Stock, Shares Outstanding
236,300,000 
 
Entity Public Float
 
$ 8,300,000,000