MOODYS CORP /DE/, 10-K filed on 3/1/2010
Annual Report
Statement Of Income Alternative (USD $)
In Millions, except Per Share data
Year Ended
Dec. 31,
2009
2008
2007
Revenue
$ 1,797.2 
$ 1,755.4 
$ 2,259.0 
Expenses
 
 
 
Operating
532.4 
493.3 
584.0 
Selling, general and administrative
495.7 
441.3 
451.1 
Restructuring
17.5 
(2.5)
50.0 
Depreciation and amortization
64.1 
75.1 
42.9 
Total expenses
1,109.7 
1,007.2 
1,128.0 
Operating income
687.5 
748.2 
1,131.0 
Interest income (expense), net
(33.4)
(52.2)
(24.3)
Other non-operating income (expense), net
(7.9)
33.8 
15.3 
Non-operating income (expense), net
(41.3)
(18.4)
(9.0)
Income before provision for income taxes
646.2 
729.8 
1,122.0 
Provision for income taxes
239.1 
268.2 
415.2 
Net income
407.1 
461.6 
706.8 
Less: Net income attributable to noncontrolling interests
5.1 
4.0 
5.3 
Net income attributable to Moody's
402.0 
457.6 
701.5 
Earnings per share
 
 
 
Basic
1.70 
1.89 
2.63 
Diluted
1.69 
1.87 
2.58 
Weighted average shares outstanding
 
 
 
Basic
236.1 
242.4 
266.4 
Diluted
237.8 
245.3 
272.2 
Statement Of Financial Position Classified (USD $)
In Millions
Dec. 31, 2009
Dec. 31, 2008
Assets
 
 
Current assets:
 
 
Cash and cash equivalents
$ 473.9 
$ 245.9 
Short-term investments
10.0 
7.1 
Accounts receivable, net of allowances of $24.6 in 2009 and $23.9 in 2008
444.9 
421.8 
Deferred tax assets, net
32.3 
26.5 
Other current assets
51.8 
107.8 
Total current assets
1,012.9 
809.1 
Property and equipment, net
293.0 
247.7 
Goodwill
349.2 
338.0 
Intangible assets, net
104.9 
114.0 
Deferred tax assets, net
192.6 
220.1 
Other assets
50.7 
44.5 
Total assets
2,003.3 
1,773.4 
Liabilities and shareholders' deficit
 
 
Current liabilities:
 
 
Accounts payable and accrued liabilities
317.2 
240.4 
Commercial paper
443.7 
104.7 
Revolving credit facility
0.0 
613.0 
Current portion of long-term debt
3.8 
0.0 
Deferred revenue
471.3 
435.0 
Total current liabilities
1,236.0 
1,393.1 
Non-current portion of deferred revenue
103.8 
114.8 
Long-term debt
746.2 
750.0 
Deferred tax liabilities, net
31.4 
19.0 
Unrecognized tax benefits
164.2 
185.1 
Other liabilities
317.8 
297.5 
Total liabilities
2,599.4 
2,759.5 
Commitments and contingencies (Notes 16 and 17)
 
 
Shareholders' deficit:
 
 
Preferred stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding
Capital surplus
391.1 
392.7 
Retained earnings
3,329.0 
3,023.2 
Treasury stock, at cost; 106,044,833 and 107,757,537 shares of common stock at December 31, 2009 and 2008, respectively
(4,288.5)
(4,361.6)
Accumulated other comprehensive loss
(41.2)
(52.1)
Total Moody's shareholders' deficit
(606.2)
(994.4)
Noncontrolling interests
10.1 
8.3 
Total shareholders' deficit
(596.1)
(986.1)
Total liabilities and shareholders' deficit
2,003.3 
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
Dec. 31, 2009
Dec. 31, 2008
Accounts receivable, allowances
$ 24.6 
$ 23.9 
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
106,044,833 
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
Year Ended
Dec. 31,
2009
2008
2007
Cash flows from operating activities
 
 
 
Net income
$ 407.1 
$ 461.6 
$ 706.8 
Reconciliation of net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
64.1 
75.1 
42.9 
Stock-based compensation expense
57.4 
63.2 
90.2 
Non-cash portion of restructuring charge
0.0 
0.0 
7.0 
Deferred income taxes
16.5 
(17.3)
(76.4)
Excess tax benefits from exercise of stock options
(5.0)
(7.5)
(52.2)
Legacy Tax Matters
0.0 
(7.8)
(52.3)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(14.9)
26.2 
36.7 
Other current assets
55.3 
(23.1)
(58.3)
Other assets
(7.4)
26.0 
15.5 
Accounts payable and accrued liabilities
50.4 
(118.4)
53.9 
Restructuring liability
2.6 
(29.8)
33.1 
Deferred revenue
17.9 
9.0 
79.2 
Unrecognized tax benefits and other non-current tax liabilities
(21.0)
30.8 
91.9 
Deferred rent
21.1 
6.6 
53.1 
Other liabilities
(0.3)
45.1 
17.1 
Net cash provided by operating activities
643.8 
539.7 
988.2 
Cash flows from investing activities
 
 
 
Capital additions
(90.7)
(84.4)
(181.8)
Purchases of short-term investments
(17.6)
(10.3)
(191.4)
Sales and maturities of short-term investments
15.4 
15.9 
252.9 
Cash paid for acquisitions and investment in affiliates, net of cash acquired
(0.9)
(241.4)
(4.4)
Insurance recovery
0.0 
0.9 
0.0 
Net cash used in investing activities
(93.8)
(319.3)
(124.7)
Cash flows from financing activities
 
 
 
Borrowings under revolving credit facilities
2,412.0 
4,266.2 
1,000.0 
Repayments of borrowings under revolving credit facilities
(3,025.0)
(3,653.2)
(1,000.0)
Issuance of commercial paper
11,075.5 
11,522.7 
6,684.1 
Repayment of commercial paper
(10,736.5)
(11,969.4)
(6,136.7)
Issuance of long term debt
0.0 
150.0 
300.0 
Net proceeds from stock plans
19.8 
23.5 
65.9 
Excess tax benefits from exercise of stock options
5.0 
7.5 
52.2 
Cost of treasury shares repurchased
0.0 
(592.9)
(1,738.4)
Payment of dividends to MCO shareholders
(94.5)
(96.8)
(85.2)
Payment of dividends to noncontrolling interests
(3.7)
(5.0)
(4.2)
Payments under capital lease obligations
(1.4)
(1.7)
(2.0)
Debt issuance costs and related fees
0.0 
(0.7)
(1.4)
Net cash used in financing activities
(348.8)
(349.8)
(865.7)
Effect of exchange rate changes on cash and cash equivalents
26.8 
(51.0)
20.4 
Increase (decrease) in cash and cash equivalents
228.0 
(180.4)
18.2 
Cash and cash equivalents, beginning of the period
245.9 
426.3 
408.1 
Cash and cash equivalents, end of the period
$ 473.9 
$ 245.9 
$ 426.3 
Statement Of Shareholders Equity And Other Comprehensive Income (USD $)
In Millions
Common stock
Capital Surplus
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Income (Loss)
Shareholders' of Moody's Corporation
Non-Controlling Interests
Total Comprehensive Income
Total Comprehensive Income | Shareholders' of Moody's Corporation
Total Comprehensive Income | Non-Controlling Interests
Total
1/1/2007 - 12/31/2007
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance (in shares)
342.9 
 
 
(64.3)
 
 
 
 
 
 
 
Beginning Balance
3.4 
345.7 
2,091.4 
(2,264.7)
(8.4)
167.4 
10.5 
 
 
 
177.9 
Net income
 
 
701.5 
 
 
701.5 
5.3 
706.8 
701.5 
5.3 
706.8 
Dividends
 
 
(88.4)
 
 
(88.4)
(4.2)
 
 
 
(92.6)
Amounts recognized upon adoption of accounting guidance for UTPs
 
 
(43.4)
 
 
(43.4)
 
 
 
 
(43.4)
Stock-based compensation
 
94.5 
 
 
 
94.5 
 
 
 
 
94.5 
Shares issued for stock-based compensation plans, net
 
(85.5)
 
151.5 
 
66.0 
 
 
 
 
66.0 
Shares issued for stock-based compensation plans, net (in shares)
 
 
 
4.1 
 
 
 
 
 
 
 
Net excess tax benefit upon settlement of stock-based compensation awards
 
33.2 
 
 
 
33.2 
 
 
 
 
33.2 
Treasury shares repurchased (in shares)
 
 
 
(31.3)
 
 
 
 
 
 
 
Treasury shares repurchased
 
 
 
(1,738.4)
 
(1,738.4)
 
 
 
 
(1,738.4)
Currency translation adjustment (net of tax of $18.5 million in 2009 $12.1 million in 2008 and $5.5 million in 2007)
 
 
 
 
12.9 
12.9 
0.1 
13.0 
12.9 
0.1 
13.0 
Net actuarial gains (losses) and prior service costs (net of tax of $8.9 million in 2009, $18.0 million in 2008, and $5.9 million in 2007)
 
 
 
 
7.8 
7.8 
 
7.8 
7.8 
 
7.8 
Amortization and recognition of prior service cost and actuarial losses (net of tax of $0.4 million in 2009, $0.8 million in 2008, and $2.5 million in 2007)
 
 
 
 
3.4 
3.4 
 
3.4 
3.4 
 
3.4 
Unrealized loss on cash flow hedges (net of tax of $1.5 million in 2009 and $2.1 million in 2008)
 
 
 
 
(0.1)
(0.1)
 
(0.1)
(0.1)
 
(0.1)
Comprehensive income
 
 
 
 
 
 
 
730.9 
725.5 
5.4 
 
Ending Balance (in shares)
342.9 
 
 
(91.5)
 
 
 
 
 
 
 
Ending Balance
3.4 
387.9 
2,661.1 
(3,851.6)
15.6 
(783.6)
11.7 
 
 
 
(771.9)
1/1/2008 - 12/31/2008
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance (in shares)
342.9 
 
 
(91.5)
 
 
 
 
 
 
 
Beginning Balance
3.4 
387.9 
2,661.1 
(3,851.6)
15.6 
(783.6)
11.7 
 
 
 
(771.9)
Net income
 
 
457.6 
 
 
457.6 
4.0 
461.6 
457.6 
4.0 
461.6 
Dividends
 
 
(95.5)
 
 
(95.5)
(5.0)
 
 
 
(100.5)
Amounts recognized upon adoption of accounting guidance for UTPs
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation
 
63.5 
 
 
 
63.5 
 
 
 
 
63.5 
Shares issued for stock-based compensation plans, net
 
(59.3)
 
82.9 
 
23.6 
 
 
 
 
23.6 
Shares issued for stock-based compensation plans, net (in shares)
 
 
 
1.9 
 
 
 
 
 
 
 
Net excess tax benefit upon settlement of stock-based compensation awards
 
0.6 
 
 
 
0.6 
 
 
 
 
0.6 
Treasury shares repurchased (in shares)
 
 
 
(18.2)
 
 
 
 
 
 
 
Treasury shares repurchased
 
 
 
(592.9)
 
(592.9)
 
 
 
 
(592.9)
Currency translation adjustment (net of tax of $18.5 million in 2009 $12.1 million in 2008 and $5.5 million in 2007)
 
 
 
 
(37.8)
(37.8)
(2.4)
(40.2)
(37.8)
(2.4)
(40.2)
Net actuarial gains (losses) and prior service costs (net of tax of $8.9 million in 2009, $18.0 million in 2008, and $5.9 million in 2007)
 
 
 
 
(26.7)
(26.7)
 
(26.7)
(26.7)
 
(26.7)
Amortization and recognition of prior service cost and actuarial losses (net of tax of $0.4 million in 2009, $0.8 million in 2008, and $2.5 million in 2007)
 
 
 
 
0.9 
0.9 
 
0.9 
0.9 
 
0.9 
Unrealized loss on cash flow hedges (net of tax of $1.5 million in 2009 and $2.1 million in 2008)
 
 
 
 
(4.1)
(4.1)
 
(4.1)
(4.1)
 
(4.1)
Comprehensive income
 
 
 
 
 
 
 
391.5 
389.9 
1.6 
 
Ending Balance (in shares)
342.9 
 
 
(107.8)
 
 
 
 
 
 
 
Ending Balance
3.4 
392.7 
3,023.2 
(4,361.6)
(52.1)
(994.4)
8.3 
 
 
 
(986.1)
1/1/2009 - 12/31/2009
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance (in shares)
342.9 
 
 
(107.8)
 
 
 
 
 
 
 
Beginning Balance
3.4 
392.7 
3,023.2 
(4,361.6)
(52.1)
(994.4)
8.3 
 
 
 
(986.1)
Net income
 
 
402.0 
 
 
402.0 
5.1 
407.1 
402.0 
5.1 
407.1 
Dividends
 
 
(96.2)
 
 
(96.2)
(3.7)
 
 
 
(99.9)
Amounts recognized upon adoption of accounting guidance for UTPs
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation
 
57.9 
 
 
 
57.9 
 
 
 
 
57.9 
Shares issued for stock-based compensation plans, net
 
(53.4)
 
73.1 
 
19.7 
 
 
 
 
19.7 
Shares issued for stock-based compensation plans, net (in shares)
 
 
 
1.8 
 
 
 
 
 
 
 
Net excess tax benefit upon settlement of stock-based compensation awards
 
(6.1)
 
 
 
(6.1)
 
 
 
 
(6.1)
Treasury shares repurchased (in shares)
 
 
 
 
 
 
 
 
 
 
 
Treasury shares repurchased
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment (net of tax of $18.5 million in 2009 $12.1 million in 2008 and $5.5 million in 2007)
 
 
 
 
22.2 
22.2 
0.4 
22.6 
22.2 
0.4 
22.6 
Net actuarial gains (losses) and prior service costs (net of tax of $8.9 million in 2009, $18.0 million in 2008, and $5.9 million in 2007)
 
 
 
 
(10.4)
(10.4)
 
(10.4)
(10.4)
 
(10.4)
Amortization and recognition of prior service cost and actuarial losses (net of tax of $0.4 million in 2009, $0.8 million in 2008, and $2.5 million in 2007)
 
 
 
 
0.6 
0.6 
 
0.6 
0.6 
 
0.6 
Unrealized loss on cash flow hedges (net of tax of $1.5 million in 2009 and $2.1 million in 2008)
 
 
 
 
(1.5)
(1.5)
 
(1.5)
(1.5)
 
(1.5)
Comprehensive income
 
 
 
 
 
 
 
418.4 
412.9 
5.5 
 
Ending Balance (in shares)
342.9 
 
 
(106.0)
 
 
 
 
 
 
 
Ending Balance
$ 3.4 
$ 391.1 
$ 3,329.0 
$ (4,288.5)
$ (41.2)
$ (606.2)
$ 10.1 
 
 
 
$ (596.1)
Statement Of Shareholders Equity And Other Comprehensive Income (Parenthetical) (USD $)
In Millions
Year Ended
Dec. 31,
2009
2008
2007
Currency translation adjustment, tax
$ 18.5 
$ 12.1 
$ 5.5 
Net actuarial gains (losses) and prior service costs, tax
8.9 
18.0 
5.9 
Amortization and recognition of prior service cost and actuarial losses, tax
0.4 
0.8 
2.5 
Unrealized loss on cash flow hedges, tax
1.5 
2.1 
Total Comprehensive Income
 
 
 
Currency translation adjustment, tax
18.5 
12.1 
5.5 
Net actuarial gains (losses) and prior service costs, tax
8.9 
18.0 
5.9 
Amortization and recognition of prior service cost and actuarial losses, tax
0.4 
0.8 
2.5 
Unrealized loss on cash flow hedges, tax
$ 1.5 
$ 2.1 
$ 0 
GLOSSARY OF TERMS AND ABBREVIATIONS
GLOSSARY OF TERMS AND ABBREVIATIONS

GLOSSARY OF TERMS AND ABBREVIATIONS

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

 

TERM

  

DEFINITION

ACNielsen    ACNielsen Corporation – a former affiliate of Old D&B
Analytics    Moody’s Analytics – reportable segment of MCO formed in January 2008 which combines MKMV, the sales of MIS research and other MCO non-rating commercial activities
AOCI    Accumulated other comprehensive income (loss); a separate component of shareholders’ equity (deficit)
ASC   

The FASB Accounting Standards Codification; the sole source of authoritative

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

ASU    The FASB Accounting Standards Updates to the ASC. It also provides background information for accounting guidance and the bases for conclusions on the changes in the ASC. ASUs are not considered authoritative until codified into the ASC.
Basel II    Capital adequacy framework published in June 2004 by the Basel Committee on Banking Supervision
Board    The board of directors of the Company
Bps    Basis points
Canary Wharf Lease    Operating lease agreement entered into on February 6, 2008 for office space in London, England, occupied by the Company in the second half of 2009
CDOs    Collateralized debt obligations
CFG    Corporate finance group; an LOB of MIS
CMBS    Commercial mortgage-backed securities; part of CREF
Cognizant    Cognizant Corporation – a former affiliate of Old D&B, which comprised the IMS Health and NMR businesses
Commission    European Commission
Common Stock    the Company’s common stock
Company    Moody’s Corporation and its subsidiaries; MCO; Moody’s
COSO    Committee of Sponsoring Organizations of the Treadway Commission
CP    Commercial paper
CP Notes    Unsecured CP notes
CP Program    The Company’s CP program entered into on October 3, 2007
CRAs    Credit rating agencies
CREF    Commercial real estate finance which includes REITs, commercial real estate CDOs and CMBS; part of SFG
D&B Business    Old D&B’s Dun & Bradstreet operating company
DBPPs    Defined benefit pension plans
DCF    Discounted cash flow; a fair value calculation methodology whereby future projected cash flows are discounted back to their present value using a discount rate
Debt/EBITDA    Ratio of Total Debt to EBITDA
Directors’ Plan    The 1998 Moody’s Corporation Non-Employee Directors’ Stock Incentive Plan
Distribution Date    September 30, 2000; the date which Old D&B separated into two publicly traded companies – Moody’s Corporation and New D&B
EBITDA    Earnings before interest, taxes, depreciation, amortization and extraordinary items
ECAIs    External Credit Assessment Institutions
ECB    European Central Bank
EMEA    Represents countries within Europe, the Middle East and Africa
Enb    Enb Consulting; an acquisition completed in December 2008; part of the MA segment; a provider of credit and capital markets training services
EPS    Earnings per share
ESPP    The 1999 Moody’s Corporation Employee Stock Purchase Plan
ETR    Effective Tax Rate
EU    European Union
EUR    Euros
Excess Tax Benefit    The difference between the tax benefit realized at exercise of an option or delivery of a restricted share and the tax benefit recorded at the time that the option or restricted share is expensed under GAAP
Exchange Act    The Securities Exchange Act of 1934, as amended
FASB    Financial Accounting Standards Board
Fermat    Fermat International; an acquisition completed in October 2008; part of the MA segment; a provider of risk and performance management software to the global banking industry
FIG    Financial institutions group; an LOB of MIS
Fitch    Fitch Ratings, a part of the Fitch Group which is a majority-owned subsidiary of Fimalac, S.A.
FSF    Financial Stability Forum
FX    Foreign exchange
GAAP    U.S. Generally Accepted Accounting Principles
GBP    British pounds
G-8    The finance ministers and central bank governors of the group of eight countries consisting of Canada, France, Germany, Italy, Japan, Russia, U.S. and U.K.
G-20    The G-20 is an informal forum that promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. By contributing to the strengthening of the international financial architecture and providing opportunities for dialogue on national policies, international co-operation, and international financial institutions, the G-20 helps to support growth and development across the globe. The G-20 is comprised of: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, U.K., U.S. and the EU, which is represented by the rotating Council presidency and the ECB.
HFSC    House Financial Services Committee
IMS Health    A spin-off of Cognizant, which provides services to the pharmaceutical and healthcare industries
Intellectual Property    The Company’s intellectual property, including but not limited to proprietary information, trademarks, research, software tools and applications, models and methodologies, databases, domain names, and other proprietary materials
IOSCO    International Organization of Securities Commissions
IOSCO Code    Code of Conduct Fundamentals for CRAs issued by IOSCO
IRS    Internal Revenue Service
Legacy Tax Matter(s)    Exposures to certain tax matters in connection with the 2000 Distribution
LIBOR    London Interbank Offered Rate
LOB    Line of Business
MA    Moody’s Analytics – a reportable segment of MCO formed in January 2008 which includes the non-rating commercial activities of MCO
Make Whole Amount    The prepayment penalty relating to the Series 2005-1 Notes and Series 2007-1 Notes; a premium based on the excess, if any, of the discounted value of the remaining scheduled payments over the prepaid principal
MCO    Moody’s Corporation and its subsidiaries; the Company; Moody’s
MD&A    Management’s Discussion and Analysis of Financial Condition and Results of Operations
MIS    Moody’s Investors Service – a reportable segment of MCO
MIS Code    Moody’s Investors Service Code of Professional Conduct
MKMV    Moody’s KMV – a reportable segment of MCO prior to January 2008
Moody’s    Moody’s Corporation and its subsidiaries; MCO; the Company
Net Income    Net income attributable to Moody’s Corporation, which excludes the portion of net income from consolidated entities attributable to non-controlling shareholders
New D&B    The New D&B Corporation – which comprises the D&B business
NM    Not-meaningful percentage change (over 400%)
NMR    Nielsen Media Research, Inc.; a spin-off of Cognizant; a leading source of television audience measurement services
Notices    IRS Notices of Deficiency for 1997-2002
NRSRO    Nationally Recognized Statistical Rating Organizations
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
PPP    Defined contribution profit participation retirement plan that covers substantially all U.S. employees of the Company
RD&A    Research, Data and Analytics; a LOB within MA that distributes investor-oriented research and data, including in-depth research on major debt issuers, industry studies, commentary on topical credit events, economic research and analytical tools such as quantitative risk scores
Reform Act    Credit Rating Agency Reform Act of 2006
REITs    Real estate investment trusts
Reorganization    The Company’s business reorganization announced in August 2007 which resulted in two new reportable segments (MIS and MA) beginning in January 2008
RMBS    Residential mortgage-backed security; part of SFG
RMS    The Risk Management Software LOB within MA which provides both economic and regulatory capital risk management software and implementation services
S&P    Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc.
SEC    Securities and Exchange Commission
Series 2005-1 Notes    Principal amount of $300.0 million, 4.98% senior unsecured notes due in September 2015 pursuant to the 2005 Agreement
Series 2007-1 Notes    Principal amount of $300.0 million, 6.06% senior unsecured notes due in September 2017 pursuant to the 2007 Agreement
SFG    Structured finance group; an LOB of MIS
SG&A    Selling, general and administrative expenses
Stock Plans    The 1998 Plan and the 2001 Plan
T&E    Travel and entertainment expenses
Total Debt    Current and long-term portion of debt as reflected on the consolidated balance sheets, excluding current accounts payable incurred in the ordinary course of business
U.K.    United Kingdom
U.S.    United States
USD    U.S. dollar
UTBs    Unrecognized tax benefits
UTPs    Uncertain tax positions
VAT    Value added tax
WACC    Weighted average cost of capital
1998 Plan    Old D&B’s 1998 Key Employees’ Stock Incentive Plan
2000 Distribution    The distribution by Old D&B to its shareholders of all of the outstanding shares of New D&B common stock on September 30, 2000

2000 Distribution

Agreement

   Agreement governing certain ongoing relationships between the Company and New D&B after the 2000 Distribution including the sharing of any liabilities for the payment of taxes, penalties and interest resulting from unfavorable IRS determinations on certain tax matters and certain other potential tax liabilities
2001 Plan    The Amended and Restated 2001 Moody’s Corporation Key Employees’ Stock Incentive Plan
2005 Agreement    Note purchase agreement dated September 30, 2005 relating to the Series 2005-1 Notes
2007 Agreement    Note purchase agreement dated September 7, 2007 relating to the Series 2007-1 Notes
2007 Facility    Revolving credit facility of $1 billion entered into on September 28, 2007, expiring in 2012
2007 Restructuring Plan    The Company’s 2007 restructuring plan approved December 31, 2007
2008 Term Loan    Five-year $150.0 million senior unsecured term loan entered into by the Company on May 7, 2008
2009 Restructuring Plan    The Company’s 2009 restructuring plan approved March 27, 2009
7WTC    The Company’s corporate headquarters located at 7 World Trade Center
7WTC Lease    Operating lease agreement entered into on October 20, 2006

 

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
NOTE 1 DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Moody’s is a provider of (i) credit ratings , (ii) credit and economic related research, data and analytical tools, (iii) risk management software and (iv) quantitative credit risk measures, credit portfolio management solutions and training services. In 2007 and prior years, Moody’s operated in two reportable segments: Moody’s Investors Service and Moody’s KMV. Beginning in January 2008, Moody’s segments were changed to reflect the Reorganization announced in August 2007 and Moody’s now reports in two new reportable segments: MIS and MA. As a result of the Reorganization, the rating agency remains in the MIS operating segment and several ratings business lines have been realigned. All of Moody’s other non-rating commercial activities are included within the new Moody’s Analytics segment. The MIS segment publishes credit ratings on a wide range of debt obligations and the entities that issue such obligations in markets worldwide. Revenue is derived from the originators and issuers of such transactions who use MIS’s ratings to support the distribution of their debt issues to investors. The MA segment develops a wide range of products and services that support the credit risk management activities of institutional participants in global financial markets. These offerings include quantitative credit risk scores, credit processing software, economic research, analytical models, financial data, and specialized advisory and training 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.

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

Basis of Consolidation

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

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

Cash and Cash Equivalents

Cash equivalents principally consist of investments in money market mutual funds and high-grade commercial paper with maturities of three months or less when purchased. Interest income on cash and cash equivalents and short-term investments was $2.5 million, $12.2 million and $19.3 million for the years ended December 31, 2009, 2008 and 2007, respectively.

Property and Equipment

Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives which range from three to seven years for computer equipment, three to 20 years for equipment, five to 10 years for furniture and fixtures and three to seven years for software. Leasehold improvements have an estimated useful life of five to 20 years and are amortized over the shorter of the term of the lease or the estimated useful life of the improvement. Expenditures for maintenance and repairs that do not extend the economic useful life of the related assets are charged to expense as incurred.

Computer Software

Costs for the internally developed computer software that will be sold, leased or otherwise marketed are capitalized when technological feasibility has been established. These costs primarily relate to the development or enhancement of credit processing software and quantitative credit risk assessment products sold by the MA segment, to be licensed to customers and generally consist of professional services provided by third parties and compensation costs of employees that develop the software. Judgment is required in determining when technological feasibility of a product is established and the Company believes that technological feasibility for its software products is reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to customers. The Company amortizes these assets based on the greater of either (i) a ratio of current product revenue to estimated total product revenue or (ii) the straight-line basis over the useful life. Amortization expense for all such software for the year ended December 31, 2009, 2008 and 2007 was immaterial, $0.2 million and $1.7 million, respectively. The Company assesses the recoverability of these assets at each period end date.

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

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

Goodwill is tested for impairment, at the reporting unit level, annually on November 30th or more frequently if events or circumstances indicate the assets may be impaired, in accordance with the provisions of ASC Topic 350. If the estimated fair value, which is based on a discounted cash flow methodology, is less than its carrying amount, the Company would proceed to step two of the impairment test as prescribed by Topic 350 of the ASC. Under step two, the estimated fair value of the reporting units would be allocated to the assets and liabilities of the reporting unit to derive the implied fair value of the goodwill. If the implied fair value of the goodwill determined under step two of the impairment test is less than its carrying amount, an impairment charge would be recognized for the difference. The discounted cash flow methodology used to value the reporting units is based on the present value of the cash flows that the Company expects the reporting unit to generate in the future. The significant estimates used to derive the present value of the cash flows include the reporting units WACC and future growth rates.

Finite-lived intangible assets and other long-lived assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the estimated undiscounted future cash flows are lower than the carrying amount of the related asset, a loss is recognized for the difference between the carrying amount and the estimated fair value of the asset.

Rent Expense

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

Stock-Based Compensation

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

Derivative Instruments and Hedging Activities

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

Revenue Recognition

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or the services have been provided and accepted by the customer, fees are determinable and the collection of resulting receivables is considered probable. If uncertainty exists regarding customer acceptance of the product or service, revenue is not recognized until acceptance occurs.

In the MIS segment, revenue attributed to initial ratings of issued securities is recognized when the rating is issued. Revenue attributed to monitoring of issuers or issued securities is recognized over the period in which the monitoring is performed. In most areas of the ratings business, MIS charges issuers annual monitoring fees and amortizes such fees ratably over the related one-year period. In the case of commercial mortgage-backed securities, derivatives, international residential mortgage-backed and asset-backed securities, issuers can elect to pay the monitoring fees upfront. These fees are deferred and recognized over the future monitoring periods, ranging from three to 51 years, which are based on the expected lives of the rated securities as of December 31, 2009.

 

 

In areas where MIS does not separately charge monitoring fees, it defers portions of the rating fees that it estimates will be attributed to future monitoring activities and recognizes such fees ratably over the applicable estimated monitoring period. The portion of the revenue to be deferred is based upon a number of factors, including the estimated fair market value of the monitoring services charged for similar securities or issuers. The estimated monitoring period is determined based on factors such as the lives of the rated securities. Currently, the estimated monitoring periods range from one to ten years.

In the MA segment, revenue from sales of research products and from credit risk management subscription products is recognized ratably over the related subscription period, which is principally one year, beginning upon delivery of the initial product. Revenue from licenses of credit processing software is recognized at the time the product master or first copy is delivered or transferred to customers. Related software maintenance revenue is recognized ratably over the annual maintenance period. Revenue from services rendered within the professional services line of business is generally recognized as the services are performed.

Certain revenue arrangements within the MA segment include multiple elements such as software licenses, maintenance, subscription fees and professional services. In these types of arrangements, the fee is allocated to the various products or services based on objective measurements of fair value; that is, generally the price charged when sold separately – or vendor-specific objective evidence. Revenue is recognized for each element based upon the conditions for revenue recognition noted above unless objective evidence of fair value is not available for an undelivered element. If the fair value is not available for an undelivered element, the revenue for all elements is deferred. The deferred revenue will be recognized when MA has delivered the elements that do not have fair value or the fair value becomes readily determinable.

Amounts billed or received in advance of providing the related products or services are reflected in revenue when earned and are classified in accounts payable and accrued liabilities in the consolidated financial statements, as are customer overpayments and other credits. In addition, the consolidated balance sheets reflect as current deferred revenue amounts that are expected to be recognized within one year of the balance sheet date, and as non-current deferred revenue amounts that are expected to be recognized over periods greater than one year. The majority of the balance in non-current deferred revenue relates to fees for future monitoring of CMBS.

In 2009, 2008 and 2007, no single customer accounted for 10% or more of total revenue.

Accounts Receivable Allowances

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

Operating Expenses

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

Restructuring

The Company’s restructuring accounting follows the provisions of: Topic 712 of the ASC for severance relating to employee terminations, Topic 715 of the ASC for pension settlements and curtailments, and Topic 420 of the ASC for contract termination costs and other exit activities.

Selling, General and Administrative Expenses

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

Foreign Currency Translation

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

Comprehensive Income

Comprehensive income represents the change in net assets of a business enterprise during a period due to transactions and other events and circumstances from non-owner sources including foreign currency translation impacts, net actuarial losses and net prior service costs related to pension and other post-retirement plans and derivative instruments. Accumulated other comprehensive (loss) income is primarily comprised of currency translation adjustments of $12.1 million and $(10.1) million at December 31, 2009 and 2008, respectively, net actuarial losses and net prior service costs related to the Company’s Post-Retirement Plans-net of tax, of $(47.0) million and $(37.2) million at December 31, 2009 and 2009, respectively and realized and unrealized losses on cash flow hedges of $(6.3) million and $(4.8) million at December 31, 2009 and 2008, respectively.

Income Taxes

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

The Company classifies interest related to unrecognized tax benefits in interest expense in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating expenses. On January 1, 2007, the Company adopted accounting guidance for UTPs 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.

For certain of its non-U.S. subsidiaries, the Company has deemed a portion of the undistributed earnings relating to these subsidiaries to be permanently reinvested within its foreign operations. Accordingly, the Company has not provided deferred income taxes on these indefinitely reinvested earnings. A future distribution by the non-U.S. subsidiaries of these earnings could result in additional tax liability for the Company which may be material to Moody’s future reported results, financial position and cash flows.

Fair Value of Financial Instruments

The Company’s financial instruments include cash, cash equivalents, trade receivables and payables, all of which are short-term in nature and, accordingly, approximate fair value. Additionally, the Company invests in short-term investments that are carried at cost, which approximates fair value due to their short-term maturities. Also, the Company uses derivative instruments, as further described in Note 5, to manage certain financial exposures that occur in the normal course of business. These derivative instruments are carried at fair value on the Company’s consolidated balance sheets. The fair value of the Company’s CP Notes, 2007 Facility and 2008 Term Loan approximates cost due to the floating interest rate paid on these outstanding loans. The fair value of the Company’s Series 2005-1 Notes and Series 2007-1 Notes, both of which have a fixed rate of interest, is estimated using discounted cash flow analyses based on the prevailing interest rates available to the Company for borrowings with similar maturities.

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

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

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

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

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

Refer to Note 5 and Note 11 for specific valuation methodologies related to the Company’s derivative instruments and pension assets.

Concentration of Credit Risk

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

Cash equivalents consist of investments in high quality investment-grade securities within and outside the U.S. The Company manages its credit risk exposure by allocating its cash equivalents among various money market mutual funds and issuers of high- grade commercial paper. Short-term investments primarily consist of certificates of deposit and high-grade corporate bonds in Korea as of December 31, 2009 and 2008. The Company manages its credit risk exposure on cash equivalents and short-term investments by limiting the amount it can invest with any single issuer. No customer accounted for 10% or more of accounts receivable at December 31, 2009 or 2008.

 

 

Earnings per Share of Common Stock

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

Pension and Other Post-Retirement Benefits

Moody’s maintains various noncontributory DBPPs as well as other contributory and noncontributory retirement and post-retirement plans. The expense and assets/liabilities that the Company reports for its pension and other post-retirement benefits are dependent on many assumptions concerning the outcome of future events and circumstances. These assumptions represent the Company’s best estimates and may vary by plan. If actual results differ from the Company’s assumptions, the resulting actuarial gains or losses are generally deferred and amortized over the estimated average future working life of active plan participants.

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

Use of Estimates

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

The financial market volatility and poor economic conditions beginning in the third quarter of 2007 and continuing into early 2009, both in the U.S. and in many other countries where the Company operates, have impacted and will continue to impact Moody’s business. Such conditions could have a material impact to the Company’s significant accounting estimates discussed above, in particular those around accounts receivable allowances, valuations of investments in affiliates, goodwill and other acquired intangible assets, and pension and other post-retirement benefits.

Reclassifications

Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. These reclassifications include, but are not limited to, reclassifications related to new disclosure requirements for ownership interests in consolidated subsidiaries held by parties other than the Company (noncontrolling interests) pursuant to an accounting standard issued by the FASB in December 2007, which was effective for fiscal years beginning on or after December 15, 2008.

Recently Issued Accounting Pronouncements

Adopted:

In December 2008, the FASB issued a new accounting standard that requires additional disclosures about assets held in an employer’s defined benefit pension or other postretirement plan. The Company has adopted this new accounting standard as of December 31, 2009 and has presented the required disclosures in the prescribed format in Note 11 to the consolidated financial statements. This new standard only affected the notes to the Company’s consolidated financial statements and did not have any impact on the Company’s consolidated financial statements.

During the period ending September 30, 2009, the Company adopted the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles which only affected the specific references to GAAP literature in the notes to the Company’s consolidated financial statements.

Not yet adopted:

In June 2009, the FASB issued a new accounting standard related to the consolidation of variable interest entities. This new standard eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. This new standard also requires enhanced disclosures regarding an enterprise's involvement in variable interest entities. The Company will adopt this new accounting standard as of January 1, 2010 and does not expect the implementation to have a material impact on its consolidated financial statements.

In October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”). The new standard changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable based on the relative selling price. The selling price for each deliverable is based on vendor-specific objective evidence of selling price (“VSOE”) if available, third-party evidence (“TPE”) if VSOE is not available, or estimated selling price (“ESP”) if neither VSOE nor TPE is available. The Company has elected to early adopt ASU 2009-13 on a prospective basis for applicable transactions originating or materially modified on or after January 1, 2010. If applied in the same manner to the year ended December 31, 2009, ASU 2009-13 would not have had a material impact on net revenue reported for both its MIS and MA segments in terms of the timing and pattern of revenue recognition. The adoption of ASU 2009-13 is also not expected to have a significant effect on the Company’s net revenue in periods after the initial adoption when applied to multiple element arrangements based on its current pricing strategies.

In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements”. The new standard requires disclosure regarding transfers in and out of Level 1 and Level 2 classifications within the fair value hierarchy as well as requiring further detail of activity within the Level 3 category of the fair value hierarchy. The new standard also requires disclosures regarding the fair value for each class of assets and liabilities, which is a subset of assets or liabilities within a line item in a company’s balance sheet. Additionally, the standard will require further disclosures surrounding inputs and valuation techniques used in fair value measurements. The new standard is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is currently evaluating the potential impact, if any, of the implementation of ASU No. 2010-06 on its consolidated financial statements.

 

RECONCILIATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
RECONCILIATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
NOTE 3 RECONCILIATION OF WEIGHTED AVERAGE SHARES OUTSTANDING

Below is a reconciliation of basic to diluted shares outstanding:

 

     Year Ended December 31,
     2009    2008    2007
Basic    236.1    242.4    266.4
Dilutive effect of shares issuable under stock-based compensation plans    1.7    2.9    5.8
              
Diluted    237.8    245.3    272.2
              

Antidilutive options to purchase common shares and restricted stock excluded from the table above

   15.6    11.3    5.6
              

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 December 31, 2009, 2008 and 2007. These assumed proceeds include Excess Tax Benefits and any unrecognized compensation on the awards.

 

SHORT-TERM INVESTMENTS
SHORT-TERM INVESTMENTS
NOTE 4 SHORT-TERM INVESTMENTS

Short-term investments are securities with maturities greater than 90 days at the time of purchase that are available for use in the Company’s operations in the next twelve months. The short-term investments, primarily consisting of certificates of deposit, are classified as held-to-maturity and therefore are carried at cost. The remaining contractual maturities of the short-term investments were one to three months and one to ten months as of December 31, 2009 and 2008, respectively. Interest and dividends are recorded into income when earned.

 

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
NOTE 5 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

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 December 31, 2009, all FX options and forward exchange contracts had maturities between one and 11 months. The hedging program mainly utilizes FX options. The forward exchange contracts are immaterial. Both the FX options and forward exchange contracts are designated as cash flow hedges.

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

 

     December 31,
     2009    2008
Notional amount of Currency Pair:      

GBP/USD

   £ 5.0    £ 7.4

EUR/USD

   9.9    12.9

EUR/GBP

   21.0    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 14. These interest rate swaps are designated as cash flow hedges.

The Company also enters into foreign exchange forwards to mitigate the change in fair value on certain intercompany loans denominated in currencies other than the U.S. dollar. These forward contracts are not designated as hedging instruments under the applicable sections of Topic 815 of the ASC. Accordingly, changes in the fair value of these contracts are recognized immediately in other non-operating (expense) income, net in the Company’s consolidated statements of operations along with the FX gain or loss recognized on the intercompany loan.

The tables below show the classification between assets and liabilities on the Company’s consolidated balance sheets of the fair value of derivative instruments as well as information on gains/(losses) on those instruments:

 

     Fair Value of Derivative Instruments
     Asset    Liability
     December 31,
2009
   December 31,
2008
   December 31,
2009
   December 31,
2008
Derivatives designated as hedging instruments:            
FX options    $ 1.2    $ 4.9    $    $
Interest rate swaps                7.6      10.7
                           
Total derivatives designated as hedging instruments      1.2      4.9      7.6      10.7
Derivatives not designated as hedging instruments:            
FX forwards on intercompany loans      0.3           1.0     
                           
Total    $ 1.5    $ 4.9    $ 8.6    $ 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 December 31, 2009 and December 31, 2008. The fair value of the FX forwards are included in other current assets and accounts payable and accrued liabilities, respectively, in the consolidated balance sheet at December 31, 2009. All of the above derivative instruments are valued using Level 2 inputs as defined in Topic 820 of the ASC as more fully discussed in Note 2. In determining the fair value of the derivative contracts in the table above, the Company utilizes industry standard valuation models when active market quotes are not available. Where applicable, these models project future cash flows and discount the future amounts to a present value using spot rates, forward points, currency volatilities, interest rates as well as the risk of non-performance of the Company and the counterparties with whom it has derivative contracts. The Company has established strict counterparty credit guidelines and only enters into transactions with financial institutions that adhere to these guidelines. Accordingly, the risk of counterparty default is deemed to be minimal.

 

Derivatives in Cash Flow

Hedging Relationships

   Amount of
Gain/(Loss)
Recognized in
AOCI on
Derivative
(Effective
Portion)
    Location of
Gain/(Loss)
Reclassified from
AOCI into
Income
(Effective
Portion)
   Amount of
Gain/(Loss)
Reclassified
from AOCI
into Income
(Effective
Portion)
    Location of Gain/(Loss)
Recognized in Income
on Derivative
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)
   Gain/(Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion
and Amount
Excluded from
Effectiveness
Testing)
     Year Ended
December 31,
         Year Ended
December 31,
         Year Ended
December 31,
     2009     2008          2009     2008          2009     2008
FX options    $ (1.5 )   $ 1.5      Revenue    $ 2.0      $ (1.0   Revenue    $ (0.1 )   $ 0.3
Interest rate swaps      (0.7 )     (7.3 )   Interest expense      (2.6 )     (0.4 )   N/A            
                                                    
Total    $ (2.2 )   $ (5.8      $ (0.6 )   $ (1.4 )      $ (0.1 )   $ 0.3
                                                    

All gains and losses on derivatives designated as hedging instruments are initially recognized through AOCI. Realized gains and losses reported in AOCI are reclassified into earnings (into revenue for the FX options and into Interest income (expense), net for the interest rate swaps) as the underlying transaction is recognized. The existing realized gains as of December 31, 2009 expected to be reclassified to earnings in the next twelve months are $0.4 million, net of tax.

 

 

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

 

     Unrecognized Gains/
(Losses), net of tax
 
     December 31,
2009
    December 31,
2008
 
FX options    $ (1.2 )   $ 2.2   
Interest rate swaps      (5.1     (7.0
                

Total

   $ (6.3   $ (4.8
                

 

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

Property and equipment, net consisted of:

 

     December 31,  
     2009     2008  
Office and computer equipment    $ 99.2      $ 89.3   
Office furniture and fixtures      37.4        34.4   
Internal-use computer software      145.9        101.2   
Leasehold improvements      175.3        153.2   
                

Total property and equipment, at cost

     457.8        378.1   
Less: accumulated depreciation and amortization      (164.8     (130.4
                
Total property and equipment, net    $ 293.0      $ 247.7   
                

Depreciation and amortization expense related to the above assets was $47.7 million, $46.7 million and $31.5 million for the years ended December 31, 2009, 2008 and 2007, respectively.

 

ACQUISITIONS
ACQUISITIONS
NOTE 7 ACQUISITIONS

During 2008, the Company completed the acquisitions of Financial Projections, BQuotes, Fermat and Enb. These acquisitions were accounted for using the purchase method of accounting whereby the purchase price is allocated first to the net assets of the acquired entity based on the fair value of its net assets. Any excess of the purchase price over the fair value of the net assets acquired is recorded to goodwill. These acquisitions are discussed below in more detail.

Enb Consulting Ltd.

In December 2008, a subsidiary of the Company acquired Enb Consulting Ltd., a provider of credit and capital markets training services. The purchase price was not material and the near term impact to operations and cash flow is not expected to be material. Enb is part of the MA segment.

Fermat International SA

On October 9, 2008, a subsidiary of the Company acquired Fermat International SA, a provider of risk and performance management software to the global banking sector, which is now part of the MA segment. The combination of MA’s credit portfolio management and economic capital tools with Fermat’s expertise in risk management software positions MA to deliver comprehensive analytical solutions for financial institutions worldwide. The results of Fermat are reflected in the MA operating segment since the acquisition date.

The aggregate purchase price of $211 million consisted of $204.5 million in cash payments to the sellers and $6.5 million in direct transaction costs, primarily professional fees. The purchase price was funded by using Moody’s cash on hand.

 

 

The acquisition has been accounted for as a purchase. Shown below is the purchase price allocation, which summarizes the fair values of the assets acquired, and liabilities assumed, at the date of acquisition:

 

Current assets       53.9   
Property and equipment, net       1.6   
Intangible assets:      

Software (9.0 year weighted average life)

   $ 43.0   

Client relationships (16.0 year weighted average life)

     12.1   

Other intangibles (1.8 year weighted average life)

     2.6   
         

Total intangible assets

      57.7   
In-process technology       4.5   
Goodwill       125.0   
Liabilities assumed       (31.7
         
Net assets acquired       211.0   
         

The acquired goodwill, which has been assigned to the MA segment, will not be amortized and will not be deductible for tax. The $4.5 million allocated to acquired in-process technology was written off immediately following the acquisition because the technological feasibility had not yet been established as of the acquisition date and was determined to have no future use. This write-off is included in depreciation and amortization expenses for the year ended December 31, 2008. Current assets include acquired cash of approximately $26 million.

BQuotes, Inc.

In January 2008, a subsidiary of the Company acquired BQuotes, Inc., a global provider of price discovery tools and end-of-day pricing services for a wide range of fixed income securities, which was part of the MA segment. The purchase price was not material and the impact to operations and cash flow will not be material.

Financial Projections Ltd.

In January 2008, a subsidiary of the Company acquired Financial Projections Ltd., a leading provider of in-house credit training services, with long-standing relationships among European banks. The purchase price was not material and the near term impact to operations and cash flow is not expected to be material. Financial Projections is part of the MA segment.

 

GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS
GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS
NOTE 8 GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS

The following table summarizes the activity in goodwill:

 

     Year Ended December 31,  
     2009    2008  
     MIS     MA    Consolidated    MIS     MA    Consolidated  
Beginning balance    $ 10.6      $ 327.4    $ 338.0    $ 11.4      $ 168.5    $ 179.9   
Additions/adjustments      (0.3     5.0      4.7      1.4        158.7      160.1   
Foreign currency translation adjustments      0.8        5.7      6.5      (2.2     0.2      (2.0
                                             
Ending balance    $ 11.1      $ 338.1    $ 349.2    $ 10.6      $ 327.4    $ 338.0   
                                             

The additions/adjustments for the MA segment in the table above relate primarily to adjustments made to the purchase accounting associated with the December 2008 acquisitions.

 

 

Acquired Intangible assets consisted of:

 

     December 31,  
     2009     2008  
Customer lists    $ 80.6      $ 80.5   
Accumulated amortization      (42.8     (37.7
                

Net customer lists

     37.8        42.8   
                
Trade secret      25.5        25.5   
Accumulated amortization      (8.7     (6.6
                

Net trade secret

     16.8        18.9   
                
Software      55.0        55.2   
Accumulated amortization      (14.8     (11.0
                

Net software

     40.2        44.2   
                
Other      26.8        28.2   
Accumulated amortization      (16.7     (20.1
                

Net other

     10.1        8.1   
                

Total

   $ 104.9      $ 114.0   
                

Other intangible assets primarily consist of databases, trade-names and covenants not to compete. Amortization expense for the years ended December 31, 2009, 2008 and 2007 was $16.4 million, $28.2 million and $9.7 million, respectively.

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

 

Year Ending December 31,

    
2010    $ 16.0
2011      15.0
2012      14.3
2013      14.1
2014      10.8
Thereafter      34.7

Intangible assets are reviewed for recoverability 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 or more frequently if circumstances indicate the assets may be impaired.

For the year ended December 31, 2009, there were no impairments to goodwill or to intangible assets. In 2008 an impairment of $11.1 million was recognized for certain software and database intangible assets within the MA segment, which is reflected in amortization expense. These intangible assets were determined to be impaired as a result of comparing the carrying amount to the undiscounted cash flows of the related asset group expected to result from the use and eventual disposition of the assets. The Company measured the amount of the impairment loss by comparing the carrying amount of the related assets to their fair value. The fair value was determined by utilizing the expected present value technique which uses multiple cash flow scenarios that reflect the range of possible outcomes and a risk-free rate. For the year ended December 31, 2007 there were no impairments to goodwill or other intangible assets.

 

 

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
NOTE 9 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consisted of:

 

     December 31,
     2009    2008
Salaries and benefits    $ 59.3    $ 49.7
Incentive compensation      75.6      47.1
Customer credits, advanced payments and advanced billings      14.8      23.4
Dividends      26.3      24.5
Professional service fees      35.5      23.9
Interest      9.6      10.2
Accounts payable      7.1      8.6
Income taxes (see Note 13)      20.3      3.5
Restructuring (see Note 10)      5.9      3.3
Other      62.8      46.2
             

Total

   $ 317.2    $ 240.4
             

 

RESTRUCTURING
RESTRUCTURING
NOTE 10 RESTRUCTURING

On March 27, 2009 the Company approved the 2009 Restructuring Plan to reduce costs in response to a strategic review of its business in certain jurisdictions and weak global economic and market conditions. The 2009 Restructuring Plan consists of headcount reductions of approximately 150 positions representing approximately 4% of the Company’s workforce at December 31, 2008 as well as contract termination costs and the divestiture of non-strategic assets. The Company’s plan included closing offices in South Bend, Indiana; Jakarta, Indonesia and Taipei, Taiwan. There was $0.2 million in accelerated amortization for intangible assets recognized in the first quarter of 2009 relating to the closure of the Jakarta, Indonesia office. The remaining liability of $5 million at December 31, 2009 will result in cash outlays that will be substantially paid out over the next twelve months. The cumulative amount of expense incurred from inception through December 31, 2009 for the 2009 Restructuring Plan was $15.6 million. The 2009 Restructuring Plan was substantially complete at September 30, 2009.

On December 31, 2007, the Company approved the 2007 Restructuring Plan that reduced global headcount by approximately 275 positions, or approximately 7.5% of the workforce, in response to the Company’s reorganization announced in August 2007 and a decline in the then current and anticipated issuance of rated debt securities in some market sectors. Included in the 2007 Restructuring Plan was a reduction of staff as a result of: (i) consolidation of certain corporate staff functions, (ii) the integration of businesses comprising MA and (iii) an anticipated decline in new securities issuance in some market sectors. The 2007 Restructuring Plan also called for the termination of technology contracts as well as the outsourcing of certain technology functions. The cumulative amount of expense incurred from inception through December 31, 2009 for the 2007 Restructuring Plan was $49.4 million. The 2007 Restructuring Plan was substantially complete as of December 31, 2008.

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

 

     Year Ended December 31,
     2009    2008     2007
2007 Restructuring Plan    $ 1.9    $ (2.5 )   $ 50.0
2009 Restructuring Plan      15.6            
                     

Total

   $ 17.5    $ (2.5 )   $ 50.0
                     

The expense in 2009 and 2008 related to the 2007 Restructuring Plan primarily reflects adjustments to previous estimates.

 

 

Changes to the restructuring liability for the year ended December 31, 2009 and 2008 were as follows:

 

     Employee Termination Costs              
     Severance     Pension
Settlements
   Total     Contract
Termination
Costs
    Total
Restructuring
Liability
 
Balance at December 31, 2007    $ 29.0      $ 8.1    $ 37.1      $ 4.1      $ 41.2   
2007 Restructuring Plan:            

Costs incurred and adjustments

     (2.5          (2.5     0.3        (2.2

Cash payments

     (25.0          (25.0     (2.6     (27.6
                                       
Balance at December 31, 2008    $ 1.5      $ 8.1    $ 9.6      $ 1.8      $ 11.4   
2007 Restructuring Plan:            

Costs incurred and adjustments

     0.4             0.4        1.5        1.9   

Cash payments

     (1.7 )          (1.7 )     (2.6 )     (4.3 )
2009 Restructuring Plan:            

Costs incurred and adjustments

     12.0             12.0        3.3        15.3   

Cash payments

     (7.8 )          (7.8     (2.5 )     (10.3 )
                                       
Balance at December 31, 2009    $ 4.4      $ 8.1    $ 12.5      $ 1.5      $ 14.0   
                                       

As of December 31, 2009 the remaining restructuring liability of $5.9 million relating to severance and contract termination costs million is expected to be paid out during the year ending December 31, 2010. Payments related to the $8.1 million unfunded pension liability will commence when certain of the affected employees reach retirement age and continue in accordance with plan provisions.

Severance and contract termination costs of $5.9 million and $3.3 million as of December 31, 2009 and December 31, 2008, respectively, are recorded in accounts payable and accrued liabilities in the Company’s consolidated balance sheets. Additionally, the amount for pension settlements is recorded within other liabilities as of December 31, 2009 and December 31, 2008.

 

PENSION AND OTHER POST-RETIREMENT BENEFITS
PENSION AND OTHER POST-RETIREMENT BENEFITS
NOTE 11 PENSION AND OTHER POST-RETIREMENT BENEFITS

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

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

 

 

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

 

     Pension Plans     Other Post-Retirement Plans  
     2009     2008     2009     2008  
Change in Benefit Obligation:         

Benefit obligation, beginning of the period

   $ (171.8   $ (149.3   $ (11.0   $ (9.7

Service cost

     (12.1     (12.4     (0.8     (0.8

Interest cost

     (9.9     (9.7     (0.7     (0.6

Plan participants’ contributions

                   (0.2     (0.1

Benefits paid

     3.9        3.3        1.1        0.4   

Plan amendments

     (2.5                     

Impact of curtailment

            1.1                 

Impact of special termination benefits

            (2.8              

Actuarial gain (loss)

     7.4        (0.8     (0.7     (0.2

Assumption changes

     (28.0     (1.2     (0.8       
                                
Benefit obligation, end of the period      (213.0     (171.8     (13.1     (11.0
                                
Change in Plan Assets:         

Fair value of plan assets, beginning of the period

     88.6        123.9                 

Actual return on plan assets

     15.5        (33.9              

Benefits paid

     (3.9     (3.3     (1.1     (0.4

Employer contributions

     8.0        1.9        0.9        0.3   

Plan participants’ contributions

                   0.2        0.1   
                                

Fair value of plan assets, end of the period

     108.2        88.6                 
                                
Funded status of the plans      (104.8     (83.2     (13.1     (11.0
                                
Amounts Recorded on the Consolidated Balance Sheets:         

Pension and post-retirement benefits liability-current

     (8.2     (1.3     (0.6     (0.4

Pension and post-retirement benefits liability-non current

     (96.6     (81.9     (12.5     (10.6
                                
Net amount recognized    $ (104.8   $ (83.2   $ (13.1   $ (11.0
                                
Accumulated benefit obligation, end of the period    $ (185.2   $ (141.5    
                    

The pension plans assumption changes in 2009 are primarily attributed to the increase of the cash balance interest crediting rate due to increase of the IRS published 30-year U.S. Treasury rate. The pension plan amendment in 2009 relates to an update retroactive to 1997 to the pay credit schedule used for both the Company’s tax qualified Retirement Account and non-qualified excess plan to reflect a tentative determination made by the IRS in 2009 which requires the Company to make certain retroactive adjustments to the accrual rules for to its tax qualified pension plan. The pension plan curtailment and the special termination benefits in 2008 relate to the termination of a certain participant of the Company’s Supplemental Executive Benefit Plan.

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

 

     December 31,
     2009    2008
Aggregate projected benefit obligation    $ 213.0    $ 70.6
Aggregate accumulated benefit obligation    $ 185.2    $ 56.8
Aggregate fair value of plan assets    $ 108.2    $

 

 

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

 

     Pension Plans     Other Post-Retirement Plans  
     2009     2008     2009     2008  
Net actuarial (losses)    $ (73.8   $ (59.3   $ (2.0   $ (0.4
Net prior service costs      (6.0     (3.8            (0.1
                                

Total recognized in AOCI- pretax

   $ (79.8   $ (63.1   $ (2.0   $ (0.5
                                

For the Company’s pension plans, the Company expects to recognize in 2010 as components of net periodic expense $3.3 million for the amortization of net actuarial losses and $0.7 million for the amortization of prior service costs. Expected amortizations for other post-retirement plans in 2010 are not material.

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

 

     Pension Plans     Other Post-Retirement Plans
     2009     2008     2007     2009    2008    2007
Components of net periodic expense               
Service cost    $ 12.1      $ 12.4      $ 12.6      $ 0.8    $ 0.8    $ 0.9
Interest cost      9.9        9.7        8.1        0.8      0.6      0.6
Expected return on plan assets      (10.0     (9.9     (9.0              
Amortization of net actuarial loss from earlier periods      0.6        0.2        2.5                 
Amortization of net prior service costs from earlier periods      0.4        0.4        0.4                  0.2
Curtailment loss             1.0        2.7                 
Cost of special termination benefits             2.8        8.1                 
                                            
Net periodic expense    $ 13.0      $ 16.6      $ 25.4      $ 1.6    $ 1.4    $ 1.7
                                            

The Company spreads the differences between the expected long-term rate of return assumption and actual asset experience over a five-year period for purposes of calculating the market-related value of assets that is used in determining the expected return on asset’s component of annual expense and in calculating the total unrecognized gain or loss subject to amortization.

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

 

     Pension Plans     Other Post-Retirement Plans  
   2009     2008     2009     2008  
Amortization of net actuarial losses    $ 0.6      $ 0.2      $      $   
Amortization of prior service costs      0.4        0.4                 
Accelerated recognition of prior service costs due to curtailment             1.0                 
Net actuarial gain (loss) arising during the period      (15.2     (44.7     (1.5     (0.2
Net prior service cost arising during the period due to plan amendment      (2.5                     
                                

Total recognized in Other Comprehensive Income – pre-tax

   $ (16.7   $ (43.1   $ (1.5   $ (0.2
                                

ADDITIONAL INFORMATION:

Assumptions

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

 

     Pension Plans     Other Post-Retirement Plans  
   2009     2008     2009     2008  
Discount rate    5.95   6.00   5.75   6.25
Rate of compensation increase    4.00   4.00          

 

 

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

 

     Pension Plans     Other Post-Retirement Plans  
   2009     2008     2007     2009     2008     2007  
Discount rate    6.00   6.45   5.90   6.25   6.35   5.80
Expected return on plan assets    8.35   8.35   8.35               
Rate of compensation increase    4.00   4.00   4.00               

For 2009, the Company continued to use an expected rate of return on assets of 8.35% for Moody’s funded pension plan. The expected rate of return on plan assets represents the Company’s best estimate of the long-term return on plan assets and is estimated by using a building block approach, which generally weighs the underlying long-term expected rate of return for each major asset class based on their respective allocation target within the plan portfolio. As the assumption reflects a long-term time horizon, the plan performance in any one particular year does not, by itself, significantly influence the Company’s evaluation and the assumption is generally not revised unless there is a significant change in one of the factors upon which it is based, such as target asset allocation or long-term capital market conditions.

Assumed Healthcare Cost Trend Rates at December 31:

 

     2009     2008     2007  
     Pre-age 65     Post -age 65     Pre-age 65     Post-age 65     Pre-age 65     Post-age 65  
Healthcare cost trend rate assumed for the following year    8.4   9.4   9.4   10.4   10.4   11.4
Ultimate rate to which the cost trend rate is assumed to decline (ultimate trend rate)   

5.0%

  

 

5.0%

  

 

5.0%

  

Year that the rate reaches the ultimate trend rate   

2020

  

 

2015

  

 

2015

  

The assumed health cost trend rate reflects different expectations for the medical and prescribed medication components of health care costs for pre and post-65 retirees. The Company revised its trend rates in 2009 to a slower grading period at a reduction of 0.5% per year to reach the ultimate trend rate of 5% in 2020 to reflect its current expectation as the Company believes the historical trend rate assumptions used have been decreased too quickly relative to actual trend. As the Company subsidies for retiree healthcare coverage are capped at the 2005 level, for the majority of the post-retirement health plan participants, retiree contributions are assumed to increase at the same rate as the healthcare cost trend rates. As such, a one percentage-point increase or decrease in assumed healthcare cost trend rates would not have affected total service and interest cost and would have a minimal impact on the post-retirement benefit obligation.

Plan Assets

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

In 2008, the Company’s target asset allocation was approximately 70% in diversified U.S. and non-U.S. equity securities, 20% in long-duration investment grade government and corporate bonds, and 10% in private real estate funds. In 2009, as a result of its most recent pension asset-liability study, the Company revised its target asset allocation to approximately 60% (range of 50% to 70%) in equity securities, 30% (range of 25% to 35%) in fixed income securities and 10% (range of 7% to 13%) in other investments. The revised asset allocation policy is expected to earn a return comparable to its 2008 allocation target over the long-term and thus has no impact on the Company’s 2009 expected rate of return assumption. The Company expects to implement this revised asset allocation policy in early 2010 and the Company’s actual asset allocation as of December 31, 2009 did not reflect this policy change.

 

 

The fair value of the Company’ pension plan assets by asset category at December 31, 2009, determined based on the hierarchy of fair value measurements as defined in Footnote 2, and at December 31, 2008 are as follows:

 

     Fair Value Measurement as of December 31,  
     2009     2008  

Asset Category

   Balance    Quoted Prices
in active
Markets for
Identical
Assets

(Level 1)
   Significant
observable
Inputs

(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
   % of total
assets
    Balance    % of total
assets
 
Cash and cash equivalent (a)    $ 0.1    $    $ 0.1    $         $ 0.2      
                                               
Equity securities                    

U.S. large-cap (b)

     38.4           38.4         35     26.8    30

U.S. small and mid-cap

     17.1           17.1         16     11.5    13

International equities

     16.7           16.7         16     11.2    13

Emerging markets value

     7.5      7.5              7     3.2    4
                                               
Total equity securities      79.7      7.5      72.2         74     52.7    60
                                               

Long-term government/credit bonds (c)

     20.1           20.1         18     23.2    26
                                               
Total fixed income securities      20.1           20.1         18     23.2    26
                                               

Private equity- real estate investment fund (d)

     8.3                8.3    8     12.5    14
                                               
Total other investments      8.3                8.3    8     12.5    14
                                               
Total Assets    $ 108.2    $ 7.5    $ 92.4    $ 8.3    100   $ 88.6    100
                                               

 

(a) This category represents investment primarily in money market mutual funds.

 

(b) This category invests in an equity index fund which invests primarily in the broadly diversified common stocks of large U.S. companies that is passively managed and tracks the S& P 500 Composite Stock Price Index.

 

(c) This category invests in a commingle fund which holds portfolios of fixed income securities comprised of investment grade long-term U.S. and non-U.S. Government and corporate bonds.

 

(d) This category invests in a private equity fund which invests primarily in commercial and residential real estate across the U.S.

In determining fair value, Level 1 investment is valued based on quoted prices from the exchange. As these securities are actively traded, valuation adjustments are not applied. For Level 2 investments, the unit value of a fund is calculated by dividing the fund’s net asset value on the calculation date by the number of units of the fund that are outstanding on the calculation date. The number of units of the fund that are outstanding on the calculation date is derived from observable purchase and redemption activity in the fund. For Level 3 investment, the valuation methodology for the real estate investment fund is based on various approaches utilized by the investment manager which are primarily based on appraisals of the properties and investments held by the fund and are based on a discounted cash flow analysis.

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

 

Real estate investment fund:   
Balance as of December 31, 2008    $ 12.5   
Return on plan assets related to assets still held as of December 31, 2009      (4.3
Purchases      0.1   
        
Balance as of December 31, 2009    $ 8.3   
        

 

 

In accordance with the revised asset allocation policy, the funded plan will use a combination of active and passive investment strategies and different investment styles for its investment portfolios within each asset class. The plan’s equity securities are diversified across U.S. and non-U.S. stocks of small, medium and large capitalization. The plan’s fixed income securities are diversified principally across U.S. and non-U.S. long — duration investment grade government and corporate bonds. Approximately 6% of the actively managed debt securities may be invested in securities rated below investment grade. In addition to help reduce plan exposure to interest rate variation and to better align assets with obligations, the long-duration fixed income allocation is expected to help maintain the stability of plan contributions over the long term. The plan’s other investments are made through U.S. private equity real estate funds and convertible debts and these investments are expected to provide additional diversification benefits and absolute return enhancement to the plan. The use of derivatives to leverage the portfolio or otherwise is not permitted. The overall allocation is expected to help protect the plan’s funded status while generating sufficiently stable returns over the long-term.

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

Cash Flows

The Company contributed $5.8 million to its funded pension plan during the year ended December 31, 2009 and made no contribution in 2008. The Company made payments of $2.2 million and $1.9 million related to its unfunded pension plan obligations during the years ended December 31, 2009 and 2008, respectively. The Company made payments of $0.9 million and $0.4 million to its other post-retirement plans during the years ended December 31, 2009 and 2008, respectively. The Company presently does not anticipate making contributions to its funded pension plan and anticipates making payments of $8.2 million to its unfunded pension plans and $0.6 million to its other post-retirement plans during the year ended December 31, 2010.

Estimated Future Benefits Payable

Estimated future benefits payments for the Post-Retirement Plans are as follows at December 31, 2009:

 

Year Ending December 31,

   Pension Plans    Other Post-
Retirement Plans *
2010    $ 10.6    $ 0.6
2011      10.6      0.7
2012      5.9      0.8
2013      7.0      0.8
2014      7.6      0.9
2015 – 2019    $ 80.0    $ 6.3

 

* The estimated future benefits payable for the Post-Retirement Plans are reflected net of the expected Medicare Part D subsidy for which the subsidy is insignificant on an annual basis for all the years presented.

Defined Contribution Plans

Moody’s has a Profit Participation Plan covering substantially all U.S. employees. The Profit Participation Plan provides for an employee salary deferral and the Company matches employee contributions with cash contributions equal to 50% of employee contribution up to a maximum of 3% of the employee’s pay. Moody’s also makes additional contributions to the Profit Participation Plan based on year-to-year growth in the Company’s EPS. Effective January 1, 2008, all new hires are automatically enrolled in the Profit Participation Plan when they meet eligibility requirements unless they decline participation. As the Company’s DBPPs are closed to new entrants effective January 1, 2008, all eligible new hires will instead receive a retirement contribution into the Profit Participation Plan in value similar to the pension benefits. Additionally, effective January 1, 2008, the Company implemented a deferred compensation plan in the U.S., which is unfunded and provides for employee deferral of compensation and Company matching contributions related to compensation in excess of the IRS limitations on benefits and contributions under qualified retirement plans. Total expenses associated with defined contribution plans were $9.1 million, $8.0 million and $13.3 million in 2009, 2008, and 2007, respectively.

Effective January 1, 2008, Moody’s has designated the Moody’s Stock Fund, an investment option under the Profit Participation Plan, as an Employee Stock Ownership Plan and, as a result, participants in the Moody’s Stock Fund may receive dividends in cash or may reinvest such dividends into the Moody’s Stock Fund. Moody’s paid approximately $0.3 million in dividends for the Company’s common shares held by the Moody’s Stock Fund in both 2009 and 2008. The Company records the dividends as a reduction of retained earnings in the Consolidated Statements of Shareholders’ Equity (Deficit). The Moody’s Stock Fund held approximately 669,000 and 703,000 shares of Moody’s common stock at December 31, 2009 and 2008, respectively.

International Plans

Certain of the Company’s international operations provide pension benefits to their employees in the form of defined contribution plans. Company contributions are primarily determined as a percentage of employees’ eligible compensation. Expenses related to these plans for the years ended December 31, 2009, 2008, and 2007 were $5.7 million, $5.3 million and $4.8 million, respectively.

 

 

In addition, the Company also maintains an unfunded DBPP for its German employees, which was closed to new entrants in 2002. Furthermore, as a result of the acquisition of Fermat (See Note 7, Acquisitions) in October 2008, the Company has assumed Fermat’s pension liability related to a state pension plan mandated by the French Government. Total defined benefit pension liabilities recorded related to these plans was $3.6 million, $3.0 million, and $2.9 million based on a weighted average discount rate of 5.56%, 5.76%, and 5.60% at December 31, 2009, 2008, and 2007, respectively. The pension liabilities recorded as of December 31, 2009 represent the unfunded status of these plans and were recognized in the statement of financial position as non-current liabilities. Total pension expense recorded for the years ended December 31, 2009, 2008 and 2007 was approximately $0.4 million, $0.3 million and $0.4 million, respectively. These amounts are not included in the tables above. As of December 31, 2009, the Company has included in AOCI net actuarial gains of $1.2 million ($0.8 million net of tax) that have yet to be recognized as a reduction to net periodic pension expense. The Company expects its 2010 amortization of the net actuarial gains to be immaterial.

 

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

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

 

     Year Ended December 31,
     2009    2008    2007
Stock compensation cost    $ 57.4    $ 63.2    $ 90.2
Tax benefit    $ 20.9    $ 23.5    $ 34.0

The 2007 restructuring charge, as described in Note 10, includes $4.3 million relating to a stock award modification for three employees which is not included in the stock compensation cost for 2007 shown in the table above. The nature of the modification was to accelerate the vesting of certain awards for the affected employees as if they were retirement-eligible at the date of their termination.

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

The following weighted average assumptions were used for options granted:

 

     Year Ended December 31,
     2009    2008    2007
Expected dividend yield      1.59%      1.06%      0.44%
Expected stock volatility      38%      25%      23%
Risk-free interest rate      2.63%      2.96%      4.78%
Expected holding period      5.8 yrs      5.5 yrs      5.7 yrs
Grant date fair value    $ 8.52    $ 9.73    $ 22.65

Under the 1998 Plan, 33.0 million shares of the Company’s common stock have been reserved for issuance. The 2001 Plan, which is shareholder approved, permits the granting of up to 28.6 million shares, of which not more than 8.0 million shares are available for grants of awards other than stock options. The 2001 Plan was amended and approved at the annual shareholders meeting on April 24, 2007, increasing the number of shares reserved for issuance by 3.0 million which are included in the aforementioned amounts. The Stock Plans provide that options are exercisable not later than ten years from the grant date. The vesting period for awards under the Stock Plans is generally determined by the Board at the date of the grant and has been four years except for employees who are at or near retirement eligibility, as defined, for which vesting is between one and four years. Options may not be granted at less than the fair market value of the Company’s common stock at the date of grant. The Stock Plans also provide for the granting of restricted stock.

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

 

 

A summary of option activity as of December 31, 2009 and changes during the year then ended is presented below:

 

Options

   Shares     Weighted
Average
Exercise Price
Per Share
   Weighted
Average
Remaining
Contractual
Term
   Aggregate
Intrinsic Value
Outstanding, December 31, 2008    19.4      $ 37.72      
Granted    2.6        25.23      
Exercised    (1.2     14.68      
Forfeited    (0.4     42.70      
Expired    (0.3     47.39      
              
Outstanding, December 31, 2009    20.1      $ 37.26    5.1 yrs    47.8
              
Vested and expected to vest, December 31, 2009    19.3      $ 37.25    5.0 yrs    47.1
              
Exercisable, December 31, 2009    14.1      $ 35.66    3.9 yrs    43.6
              

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between Moody’s closing stock price on the last trading day of the year ended December 31, 2009 and the exercise prices, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options as of December 31, 2009. This amount varies based on the fair value of Moody’s stock. As of December 31, 2009, there was $39.5 million of total unrecognized compensation expense related to options. The expense is expected to be recognized over a weighted average period of 1.5 years.

The following table summarizes information relating to stock option exercises:

 

     Year Ended December 31,
     2009    2008    2007
Proceeds from stock option exercises    $ 18.0    $ 23.2    $ 69.3
Aggregate intrinsic value    $ 13.8    $ 21.6    $ 139.4
Tax benefit realized upon exercise    $ 5.4    $ 8.5    $ 53.9

A summary of the status of the Company’s nonvested restricted stock as of December 31, 2009 and changes during the year then ended is presented below:

 

Nonvested Restricted Stock

   Shares     Weighted Average Grant
Date Fair Value Per Share
Balance, December 31, 2008    1.5      $ 55.33

Granted

   0.6        25.08

Vested

   (0.5     55.90

Forfeited

   (0.1     46.50
            
Balance, December 31, 2009    1.5      $ 44.02
            

As of December 31, 2009, there was $30.0 million of total unrecognized compensation expense related to nonvested restricted stock. The expense is expected to be recognized over a weighted average period of 1.4 years.

The following table summarizes information relating to the vesting of restricted stock awards:

 

     Year Ended December 31,
     2009    2008    2007
Fair value of vested shares    $ 8.0    $ 23.7    $ 43.2
Tax benefit realized upon vesting    $ 2.9    $ 8.8    $ 16.6

The Company has a policy of issuing treasury stock to satisfy shares issued under stock-based compensation plans.

In addition, the Company also sponsors the ESPP. Under the ESPP, 6.0 million shares of common stock were reserved for issuance. The ESPP allows eligible employees to purchase common stock of the Company on a monthly basis at a discount to the average of the high and the low trading prices on the New York Stock Exchange on the last trading day of each month. This discount was 5% in 2009 and 15% in 2008 and 2007. The employee purchases are funded through after-tax payroll deductions, which plan participants can elect from one percent to ten percent of compensation, subject to the annual federal limit. In 2008 and 2007 the Company recorded stock-based compensation expense for the difference between the purchase price and fair market value under Topic 718 of the ASC. Beginning on January 1, 2009 the discount offered on the ESPP was reduced to 5% which will result in the ESPP qualifying for non-compensatory status under Topic 718 of the ASC. Accordingly, no compensation expense was recognized for the ESPP in 2009.

 

INCOME TAXES
INCOME TAXES
NOTE 13 INCOME TAXES

Components of the Company’s income tax provision are as follows:

 

     Year Ended December 31,  
     2009     2008     2007  
Current:       

Federal

   $ 99.2      $ 147.5      $ 277.0   

State and Local

     53.3        49.3        89.8   

Non-U.S.

     70.1        88.7        124.8   
                        

Total current

     222.6        285.5        491.6   
                        
Deferred:       

Federal

     22.8        (10.9     (64.9

State and Local

     (9.3     (0.8     (10.7

Non-U.S.

     3.0        (5.6     (0.8
                        

Total deferred

     16.5        (17.3     (76.4
                        
Total Income Tax Provision    $ 239.1      $ 268.2      $ 415.2   
                        
     Year Ended December 31,  
     2009     2008     2007  
U.S. statutory tax rate      35.0     35.0     35.0
State and local taxes, net of federal tax benefit      4.4        4.1        4.6   
Benefit of foreign operations      (2.4     (2.6     (0.1
Legacy tax items      (0.3     (0.3     (2.4
Other      0.3        0.5        (0.1
                        
Effective tax rate      37.0     36.7     37.0
                        
Income tax paid    $ 192.2      $ 319.9      $ 408.7   
                        
     Year Ended December 31,
     2009    2008    2007
United States    $ 386.9    $ 437.4    $ 814.7
International      259.3      292.4      307.3
                    
Income before provision for income taxes    $ 646.2    $ 729.8    $ 1,122.0
                    

 

 

The components of deferred tax assets and liabilities are as follows:

 

     Year Ended December 31,  
     2009     2008  
Deferred tax assets:     

Current:

    

Account receivable allowances

   $ 7.5      $ 6.5   

Accrued compensation and benefits

     10.5        7.8   

Deferred revenue

     7.9        5.5   

Restructuring

     2.6        3.0   

Other

     3.9        3.4   
                

Total current

     32.4        26.2   
                

Non-current:

    

Accumulated depreciation and amortization

     1.3        1.9   

Stock-based compensation

     81.0        68.5   

Benefit plans

     43.8        39.1   

Deferred rent and construction allowance

     28.9        27.9   

Deferred revenue

     39.2        38.6   

Foreign net operating loss (1)

     7.1        3.6   

Uncertain tax positions

     46.0        59.8   

Other

     5.2        9.9   
                

Total non-current

     252.5        249.3   
                
Total deferred tax assets      284.9        275.5   
                
Deferred tax liabilities:     

Current:

    

Prepaid expenses

            (0.3

Other

     (0.1     (0.2
                

Total current

     (0.1     (0.5
                

Non-current:

    

Accumulated depreciation

     (19.2     (11.4

Foreign earnings to be repatriated

     (25.2       

Amortization of intangible assets and capitalized software

     (39.0     (35.8

Other liabilities

     (3.4     (0.3
                

Total non-current

     (86.8     (47.5
                
Total deferred tax liabilities      (86.9     (48.0
                
Net deferred tax asset      198.0        227.5   
Valuation allowance      (4.5     (0.7
                
Total deferred income taxes    $ 193.5      $ 226.8   
                

 

(1) Amounts are primarily set to expire beginning in 2015, if unused.

Prepaid taxes of $18.6 million and $62.7 million for December 31, 2009 and 2008, respectively are included in other current assets in the consolidated balance sheets. As of December 31, 2009, the Company had approximately $480.1 million of undistributed earnings of foreign subsidiaries that it intends to indefinitely reinvest in foreign operations. The Company has not provided deferred income taxes on these indefinitely reinvested earnings. It is not practicable to determine the amount of deferred taxes that might be required to be provided if such earnings were distributed in the future, due to complexities in the tax laws and in the hypothetical calculations that would have to be made.

 

 

The Company had valuation allowances of $4.5 million and $0.7 million at December 31, 2009 and 2008, respectively, related to foreign net operating losses, which are uncertain as to realizability. The change in the valuation allowances for 2009 and 2008 results primarily from the increase in valuation allowances in certain jurisdictions based on the Company’s evaluation of the realizability of future benefits.

As of December 31, 2009 the Company had $164.2 million of uncertain tax positions (UTPs) of which $130.2 million represents the amount that, if recognized, would impact the effective tax rate in future periods.

A reconciliation of the beginning and ending amount of UTPs is as follows:

 

     2009     2008     2007  
Balance as of January 1    $ 185.1      $ 156.1      $ 122.7   
Additions for tax positions related to the current year      31.1        34.5        41.5   
Additions for tax positions of prior years      52.5        8.2        27.7   
Reductions for tax positions of prior years      (47.0     (12.2     (4.0
Settlements with taxing authorities      (50.7     (0.7       
Lapse of statute of limitations      (6.8     (0.8     (31.8
                        
Balance as of December 31    $ 164.2      $ 185.1      $ 156.1   
                        

The Company classifies interest related to UTPs in interest expense in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating expenses. During 2009, the Company accrued interest of $7.6 million related to UTPs. The company paid $16.3 million interest to settle a New York City audit of the years 2001 through 2007. As of December 31, 2009 and 2008 the amount of accrued interest recorded in the Company’s balance sheets related to UTPs was $27.7 million and $36.4 million, respectively.

Moody’s Corporation and subsidiaries are subject to U.S. federal income tax as well as income tax in various state and local and foreign jurisdictions. Moody’s federal income tax returns filed for the years 2006 through 2008 remain subject to examination by the IRS. New York State income tax returns for 2004 through 2007 are currently under examination. The income tax returns for 2008 remain open to examination for both New York State and New York City. Tax filings in the U.K. for 2001 through 2006 are currently under examination by the U.K. taxing authorities and for 2007 through 2008 remain open to examination.

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

 

INDEBTEDNESS
INDEBTEDNESS
NOTE 14 INDEBTEDNESS

The following table summarizes total indebtedness:

 

     December 31,  
     2009     2008  
2007 Facility    $      $ 613.0   
Commercial paper, net of unamortized discount of $0.1 million at 2009 and $0.3 million at 2008      443.7        104.7   
Current Portion of Long-Term Debt      3.8          
Notes payable:     

Series 2005-1 Notes

     300.0        300.0   

Series 2007-1 Notes

     300.0        300.0   
2008 Term Loan      146.2        150.0   
                
Total Debt      1,193.7        1,467.7   
Current portion      (447.5     (717.7
                
Total long-term debt    $ 746.2      $ 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 per annum of the facility amount, depending on the Company’s Debt/EBITDA ratio. The Company also pays a utilization fee of 5.0 basis points on borrowings outstanding when the aggregate amount outstanding exceeds 50% of the total facility. The weighted average interest rate on borrowings outstanding as December 31, 2008 was 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 0.3% and 2.08% as of December 31, 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    $ 3.8
2011      11.3
2012      71.2
2013      63.7
      
Total    $ 150.0
      

Also, on May 7, 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 as more fully discussed in Note 5.

INTEREST (EXPENSE) INCOME, NET

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

 

     Year Ended December 31,  
     2009     2008     2007  
Income    $ 2.5      $ 18.1      $ 19.3   
Expense on borrowings      (45.5     (60.0     (40.7
UTBs and other tax related interest      1.6        (13.7     (21.5
Reversal of accrued interest (a)      6.5        2.3        17.5   
Interest capitalized      1.5        1.1        1.1   
                        
Total    $ (33.4   $ (52.2   $ (24.3
                        
Interest paid    $ 46.1      $ 59.5      $ 32.5   
                        

 

(a) Represents a reduction of accrued interest related to the favorable resolution of Legacy Tax Matters, further discussed in Note 17 to the consolidated financial statements.

At December 31, 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 whereby default under one of the aforementioned debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under those instruments to be immediately due and payable.

The Company’s long-term debt, including the current portion, is recorded at cost. The fair value and carrying value of the Company’s long-term debt as of December 31, 2009 and 2008 is as follows:

 

     December 31, 2009    December 31, 2008
     Carrying
Amount
   Estimated Fair
Value
   Carrying
Amount
   Estimated Fair
Value
Series 2005-1 Notes    $ 300.0    $ 291.1    $ 300.0    $ 271.9
Series 2007-1 Notes      300.0      298.6      300.0      278.1
2008 Term Loan      150.0      150.0      150.0      150.0
                           
Total    $ 750.0    $ 739.7    $ 750.0    $ 700.0
                           

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

 

CAPITAL STOCK
CAPITAL STOCK
NOTE 15 CAPITAL STOCK

Authorized Capital Stock

The total number of shares of all classes of stock that the Company has authority to issue under its Restated Certificate of Incorporation is 1.02 billion shares with a par value of $0.01, of which 1.0 billion are shares of common stock, 10.0 million are shares of preferred stock and 10.0 million are shares of series common stock. The preferred stock and series common stock can be issued with varying terms, as determined by the Board.

 

 

Rights Agreement

The Company had a rights agreement, which expired as of June 30, 2008 and was not renewed. The rights agreement was designed to protect its shareholders in the event of unsolicited offers to acquire the Company and coercive takeover tactics that, in the opinion of the Board, could impair its ability to represent shareholder interests.

Share Repurchase Program

The Company implemented a systematic share repurchase program in the third quarter of 2005 through an SEC Rule 10b5-1 program. Moody’s may also purchase opportunistically when conditions warrant. On June 5, 2006, the Board authorized a $2.0 billion share repurchase program, which the Company completed during January 2008. On July 30, 2007, the Board of the Company authorized an additional $2.0 billion share repurchase program, which the Company began utilizing in January 2008 after completing the June 2006 authorization. There is no established expiration date for the remaining authorization. The Company’s intent is to return capital to shareholders in a way that serves their long-term interests. As a result, Moody’s share repurchase activity will continue to vary from quarter to quarter.

During 2009, Moody’s did not repurchase any of its common stock, and issued 1.9 millions shares under employee stock-based compensation plans.

Dividends

During 2009, 2008 and 2007, the Company paid a quarterly dividend of $0.10, $0.10 and $0.08 per share of Moody’s common stock in each of the quarters, resulting in dividends paid per share during the years ended December 31, 2009, 2008 and 2007 of $0.40, $0.40 and $0.32, respectively.

On December 15, 2009, the Board of the Company approved the declaration of a quarterly dividend of $0.105 per share of Moody’s common stock, payable on March 10, 2010 to shareholders of record at the close of business on February 20, 2010. The continued payment of dividends at the rate noted above, or at all, is subject to the discretion of the Board.

 

LEASE COMMITMENTS
LEASE COMMITMENTS
NOTE 16 LEASE COMMITMENTS

Moody’s operates its business from various leased facilities, which are under operating leases that expire over the next 18 years. Moody’s also leases certain computer and other equipment under operating and capital leases that expire over the next four years. Rent expense, including lease incentives, is amortized on a straight-line basis over the related lease term. Rent and amortization expense under operating leases for the years ended December 31, 2009, 2008 and 2007 was $74.3 million, $64.4 million and $65.8 million, respectively. The amount of deferred rent that is included in other liabilities in the consolidated balance sheets is $90.8 million and $69.7 million at December 31, 2009 and 2008, respectively. The Company has $4.8 million and $5.5 million of computer equipment subject to capital lease obligations at December 31, 2009 and 2008, respectively, with accumulated amortization of $4.3 million and $2.9 million, respectively.

The approximate minimum rent for leases that have remaining or original noncancelable lease terms in excess of one year at December 31, 2009 is as follows:

 

Year Ending December 31,

   Capital Leases    Operating Leases
2010    $ 1.3    $ 57.9
2011           50.6
2012           55.3
2013           54.6
2014           54.3
Thereafter           632.5
             
Total minimum lease payments    $ 1.3    $ 905.2
         

Less: amount representing interest

       
         

Present value of net minimum lease payments under capital leases

   $ 1.3   
         

On October 20, 2006, the Company entered into a 21-year operating lease agreement to occupy 15 floors of an office building at 7WTC which includes a total of 20 years of renewal options. On March 28, 2007 the 7WTC lease agreement was amended for the Company to lease an additional two floors for a term of 20 years. The total base rent for the entire lease term, including rent credits, for the 7WTC lease is approximately $642 million.

On February 6, 2008, the Company entered into a 17.5 year operating lease agreement to occupy six floors of an office tower located in the Canary Wharf district of London, England. The total base rent of the Canary Wharf Lease over its 17.5-year term is approximately 134 million GBPs, and the Company will begin making base rent payments in 2011. In addition to the base rent payments the Company will be obligated to pay certain customary amounts for its share of operating expenses and tax obligation. The Company expects to incur approximately 41 million GBP of costs to build out the floors to its specifications of which, approximately 17 million GBPs is expected to be incurred over the next twelve months.

 

CONTINGENCIES
CONTINGENCIES
NOTE 17 CONTINGENCIES

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

Following the events in the U.S. subprime residential mortgage sector and the credit markets more broadly over the last two years, MIS and other credit rating agencies are the subject of intense scrutiny, increased regulation, ongoing investigation, and civil litigation. Legislative, regulatory and enforcement entities around the world are considering additional legislation, regulation and enforcement actions, including with respect to MIS’s compliance with newly imposed regulatory standards. Moody’s has received subpoenas and inquiries from states attorneys general and other governmental authorities and is responding to such investigations and inquiries. Moody’s is 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, which the Company opposed. On February 23, 2010, the court issued an opinion remanding the case to the Supreme Court of New York. On October 30, 2008, the Louisiana Municipal Police Employees Retirement System, a purported shareholder of the Company’s securities, also filed a shareholder derivative complaint on behalf of the Company against its directors and certain officers, and the Company as a nominal defendant, in the U.S. District Court for the Southern District of New York. This complaint also asserts various causes of action relating to the Company’s ratings of RMBS, CDO and constant-proportion debt obligations, and named defendants’ participation in the alleged public dissemination of false and misleading information about MIS’s ratings practices and/or a failure to implement internal procedures and controls to prevent the alleged wrongdoing. On December 9, 2008, Rena Nadoff, a purported shareholder of the Company, filed a shareholder derivative complaint on behalf of the Company against its directors and its CEO, and the Company as a nominal defendant, in the Supreme Court of the State of New York. The complaint asserts a claim for breach of fiduciary duty in connection with alleged overrating of asset-backed securities and underrating of municipal securities. On October 20, 2009, the Company moved to dismiss or stay the action in favor of related federal litigation. On January 26, 2010, the court entered a stipulation and order, submitted jointly by the parties, staying the Nadoff litigation pending coordination and prosecution of similar claims in the above and below described federal derivative actions. On July 6, 2009, W. A. Sokolowski, a purported shareholder of the Company, filed a purported shareholder derivative complaint on behalf of the Company against its directors and current and former officers, and the Company as a nominal defendant, in the United States District Court for the Southern District of New York. The complaint asserts claims relating to alleged mismanagement of the Company’s processes for rating structured finance transactions, alleged insider trading and causing the Company to buy back its own stock at artificially inflated prices.

Two purported class action complaints have been filed by purported purchasers of the Company’s securities against the Company and certain of its senior officers, asserting claims under the federal securities laws. The first was filed by Raphael Nach in the U.S. District Court for the Northern District of Illinois on July 19, 2007. The second was filed by Teamsters Local 282 Pension Trust Fund in the U.S. District Court for the Southern District of New York on September 26, 2007. Both actions have been consolidated into a single proceeding entitled In re Moody’s Corporation Securities Litigation in the U.S. District Court for the Southern District of New York. On June 27, 2008, a consolidated amended complaint was filed, purportedly on behalf of all purchasers of the Company’s securities during the period February 3, 2006 through October 24, 2007. Plaintiffs allege that the defendants issued false and/or misleading statements concerning the Company’s business conduct, business prospects, business conditions and financial results relating primarily to MIS’s ratings of structured finance products including RMBS, CDOs 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 is expected to be incurred and the amount of loss can be reasonably estimated, the Company records liabilities in the consolidated financial statements and periodically adjusts these as appropriate. In other instances, because of uncertainties related to the probable outcome and/or the amount or range of loss, management does not record a liability but discloses the contingency if significant. As additional information becomes available, the Company adjusts its assessments and estimates of such matters accordingly. For income tax matters, the Company employs the prescribed methodology of Topic 740 of the ASC which requires a company to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.

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 potential liabilities arising from Legacy Tax Matters. As of December 31, 2009, Moody's has recorded liabilities for Legacy Tax Matters totaling $55.8 million. This includes liabilities and accrued interest due to New D&B arising from the 2000 Distribution Agreement. It is possible that the ultimate liability for Legacy Tax Matters could be greater than the liabilities recorded by the Company, which could result in additional charges that may be material to Moody's future reported results, financial position and cash flows.

The following summary of the relationships among Moody's, New D&B and their predecessor entities is important in understanding our exposure to the Legacy Tax Matters.

In November 1996, The Dun & Bradstreet Corporation separated into three separate public companies: The Dun & Bradstreet Corporation, ACNielsen Corporation and Cognizant Corporation. In June 1998, The Dun & Bradstreet Corporation separated into two separate public companies: Old D&B and R.H. Donnelley Corporation. During 1998, Cognizant separated into two separate public companies: IMS Health Incorporated and Nielsen Media Research, Inc. In September 2000, Old D&B separated into two separate public companies: New D&B and Moody’s.

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

Settlement agreements were executed with the IRS in 2005 regarding the Legacy Tax Matters for the years 1989-1990 and 1993-1996. These settlements represent substantially all of the total potential liability to the IRS, including penalties. As of December 31, 2009, the Company continues to carry a liability of $1.9 million for the remaining potential exposure. In addition, 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 represents interest and $4.3 million is a reduction of tax expense.

 

 

Amortization Expense Deductions

This Legacy Tax Matter, which was affected by developments in June 2007 and 2008 as further described below, 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. The absence of any tax deficiencies in the Notices for the amortization expense deductions for the years 1997 through 2002, combined with the expiration of the statute of limitations for 1997 through 2002, for issues not assessed, resulted in Moody’s recording an earnings benefit of $52.3 million in the second quarter of 2007. This is comprised of two components, as follows: (i) a reversal of a tax liability of $27.3 million related to the period from 1997 through the Distribution Date, reducing the provision for income taxes; and (ii) a reduction of accrued interest expense of $17.5 million ($10.6 million, net of tax) and an increase in other non-operating income of $14.4 million, relating to amounts due to New D&B. In June 2008, the statute of limitations for New D&B relating to the 2003 tax year expired. As a result, in the second quarter of 2008, Moody’s recorded a reduction of accrued interest expense of $2.3 million ($1.4 million, net of tax) and an increase in other non-operating income of $6.4 million, relating to amounts due to New D&B. As of December 31, 2009, Moody's carries a liability of $1.1 million 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 that 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 December 31, 2009, Moody’s liability with respect to this matter totaled $52.8 million.

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, and in September 2008 the IRS paid Moody’s $0.2 million of interest on that balance.

 

 

SEGMENT INFORMATION
SEGMENT INFORMATION
NOTE 18 SEGMENT INFORMATION

Beginning in January 2008, Moody’s segments were changed to reflect the business Reorganization announced in August 2007. As a result of the Reorganization, the rating agency is reported in the MIS segment and several ratings business lines have been realigned. All of Moody’s other non-rating commercial activities are reported in the MA segment. As a result, the Company began operating in two new reportable segments beginning in January 2008.

Revenue for MIS and expenses for MA include an intersegment royalty charged to MA for the rights to use and distribute content, data and products developed by MIS. Additionally, overhead costs and corporate expenses of the Company, all of which were previously included in the former MIS segment, are allocated to each new segment based on a revenue-split methodology. Overhead expenses include costs such as rent and occupancy, information technology and support staff such as finance, human resource, information technology and legal. “Eliminations” in the table below represents intersegment royalty revenue/expense. Below is financial information by segment, MIS revenue by business unit and consolidated revenue by geographic area and total assets by segment. The effects of the change in the composition of reportable segments have been reflected throughout the accompanying financial statements.

 

 

FINANCIAL INFORMATION BY SEGMENT:

 

     Year Ended December 31,  
     2009    2008  
     MIS    MA    Eliminations     Consolidated    MIS     MA     Eliminations     Consolidated  
Revenue    $ 1,277.7    $ 579.5    $ (60.0   $ 1,797.2    $ 1,268.3      $ 550.7      $ (63.6   $ 1,755.4   
                                                             
Expenses:                    

Operating and SG&A

     680.1      408.0      (60.0     1,028.1      636.0        362.2        (63.6     934.6   

Restructuring

     9.1      8.4             17.5      (1.6     (0.9            (2.5

Depreciation and amortization

     31.3      32.8             64.1      33.3        41.8               75.1   
                                                             

Total

     720.5      449.2      (60.0     1,109.7      667.7        403.1        (63.6     1,007.2   
                                                             
Operating income    $ 557.2    $ 130.3    $      $ 687.5    $ 600.6      $ 147.6      $      $ 748.2   
                                                             

 

     Year Ended December 31, 2007
   MIS    MA    Eliminations/
Corporate Items
    Consolidated
Revenue    $ 1,835.4    $ 479.1    $ (55.5   $ 2,259.0
                            
Expenses:           

Operating and SG&A

     759.4      331.2      (55.5     1,035.1

Restructuring

     41.3      8.7             50.0

Depreciation and amortization

     24.0      18.9             42.9
                            

Total

     824.7      358.8      (55.5     1,128.0
                            
Operating income    $ 1,010.7    $ 120.3    $      $ 1,131.0
                            

MIS AND MA REVENUE BY LINE OF BUSINESS

As part of the Reorganization there were several realignments within the MIS LOB as follows: Sovereign and sub-sovereign ratings, which were previously part of financial institutions; infrastructure/utilities ratings, which were previously part of CFG; and project finance, which was previously part of structured finance, were combined with the public finance business to form a new LOB called public, project and infrastructure finance or PPIF. In addition, real estate investment trust ratings were moved from FIG and CFG to the SFG business. Furthermore, in August 2008, the global managed investments ratings group which was previously part of SFG, was moved to the FIG business.

 

 

Within MA, various aspects of the legacy MIS research business and MKMV business were combined to form the subscriptions, software and professional services LOB. The subscriptions business included credit and economic research, data and analytical models that are sold on a subscription basis; the software business included license and maintenance fees for credit risk software products; and the professional services business included risk modeling, credit scorecard development, and other specialized analytical projects, as well as credit education services that are typically sold on a per-engagement basis.

In 2009, the aforementioned MA businesses were realigned and renamed to reflect the reporting unit structure for the MA segment at December 31, 2009. Pursuant to this realignment the subscriptions business was renamed RD&A and the software business was renamed RMS. The revised groupings classify certain subscription-based risk management software revenue and advisory services relating to software sales to the redefined RMS business.

The tables below present revenue by LOB within each new segment and reflects the related intra-segment realignment:

 

     Year Ended December 31,  
     2009     2008     2007  
MIS:       
Structured finance    $ 304.9      $ 404.7      $ 868.4   
Corporate finance      408.2        307.0        416.4   
Financial institutions      258.5        263.0        274.3   
Public, project and infrastructure finance      246.1        230.0        220.8   
                        

Total external revenue

     1,217.7        1,204.7        1,779.9   
Intersegment royalty      60.0        63.6        55.5   
                        
Total      1,277.7        1,268.3        1,835.4   
                        
MA:       
RD&A      413.6        418.7        370.3   
RMS      145.1        108.8        92.4   
Professional services      20.8        23.2        16.4   
                        
Total      579.5        550.7        479.1   
                        
Eliminations      (60.0     (63.6     (55.5
                        
Total MCO    $ 1,797.2      $ 1,755.4      $ 2,259.0   
                        

 

 

CONSOLIDATED REVENUE INFORMATION BY GEOGRAPHIC AREA

 

     Year Ended December 31,
     2009    2008    2007
Revenue:         
U.S.    $ 920.8    $ 910.1    $ 1,361.8
                    
International:         

EMEA

     624.7      603.1      659.3

Other

     251.7      242.2      237.9
                    

Total International

     876.4      845.3      897.2
                    
Total    $ 1,797.2    $ 1,755.4    $ 2,259.0
                    
Long-lived assets at December 31:         
United States    $ 465.0    $ 456.4    $ 414.6
International      282.1      243.3      37.1
                    
Total    $ 747.1    $ 699.7    $ 451.7
                    

TOTAL ASSETS BY SEGMENT

 

     December 31, 2009    December 31, 2008
   MIS    MA    Corporate
Assets (a)
   Consolidated    MIS    MA    Corporate
Assets (a)
   Consolidated
Total Assets    $ 579.4    $ 724.9    $ 699.0    $ 2,003.3    $ 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 tax assets.

 

VALUATION AND QUALIFYING ACCOUNTS
VALUATION AND QUALIFYING ACCOUNTS
NOTE 19 VALUATION AND QUALIFYING ACCOUNTS

Accounts receivable allowances primarily represent adjustments to customer billings that are estimated when the related revenue is recognized. Below is a summary of activity:

 

Year Ended December 31,

   Balance at Beginning
of the Year
    Additions     Write-offs and
Adjustments
   Balance at End of the
Year
 
2009    $ (23.9   $ (41.2   $ 40.5    $ (24.6
2008    $ (16.2   $ (39.6   $ 31.9    $ (23.9
2007    $ (14.5   $ (39.3   $ 37.6    $ (16.2

 

OTHER NON-OPERATING INCOME (EXPENSE), NET
OTHER NON-OPERATING INCOME (EXPENSE), NET
NOTE 20 OTHER NON-OPERATING INCOME (EXPENSE), NET

The following table summarizes the components of other non-operating income (expense) as presented in the consolidated statements of operations:

 

     Year Ended December 31,  
   2009     2008     2007  
FX gain/(loss)    $ (9.5   $ 24.7      $ 0.2   
Legacy Tax (see Note 17)             11.0        14.4   
Joint venture income      6.1        3.9        2.2   
Other      (4.5     (5.8     (1.5
                        

Total

   $ (7.9   $ 33.8      $ 15.3   
                        

 

 

QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERLY FINANCIAL DATA (UNAUDITED)
NOTE 21 QUARTERLY FINANCIAL DATA (UNAUDITED)

 

     Three Months Ended

(amounts in millions, except EPS)

   March 31    June 30    September 30    December 31
2009            
Revenue    $ 408.9    $ 450.7    $ 451.8    $ 485.8
Operating income    $ 148.9    $ 187.2    $ 172.5    $ 178.9
Net income attributable to Moody’s    $ 90.2    $ 109.3    $ 100.6    $ 101.9
EPS:            

Basic

   $ 0.38    $ 0.46    $ 0.43    $ 0.43

Diluted

   $ 0.38    $ 0.46    $ 0.42    $ 0.43
2008            
Revenue    $ 430.7    $ 487.6    $ 433.4    $ 403.7
Operating income    $ 199.3    $ 233.7    $ 189.8    $ 125.4
Net income attributable to Moody’s    $ 120.7    $ 135.2    $ 113.0    $ 88.7
EPS:            

Basic

   $ 0.49    $ 0.55    $ 0.47    $ 0.38

Diluted

   $ 0.48    $ 0.54    $ 0.46    $ 0.37

Basic and diluted EPS are computed for each of the periods presented. The number of weighted average shares outstanding changes as common shares are issued pursuant to employee stock plans and for other purposes or as shares are repurchased. Therefore, the sum of basic and diluted EPS for each of the four quarters may not equal the full year basic and diluted EPS.

The quarterly financial data includes an $8.2 million, $7.8 million and $2.9 million benefit to net income related to the resolution of Legacy Tax Matters for the three months ended June 30, 2009, June 30, 2008 and September 30, 2008, respectively. There was an $11.8 million pre-tax restructuring charge for the three months ended March 31, 2009.

 

SUBSEQUENT EVENTS
SUBSEQUENT EVENTS
NOTE 22 SUBSEQUENT EVENTS

Subsequent events were evaluated by the Company through the date the financial statements were issued. There were no events that occurred subsequent to December 31, 2009 that would require recognition in the Company’s consolidated financial statements.

Document Information
Year Ended
Dec. 31, 2009
Document Type
10-K 
Amendment Flag
FALSE 
Document Period End Date
12/31/2009 
Entity Information (USD $)
Jan. 31, 2010
Year Ended
Dec. 31, 2009
Jun. 30, 2009
Trading Symbol
 
MCO 
 
Entity Registrant Name
 
MOODYS CORP /DE/ 
 
Entity Central Index Key
 
0001059556 
 
Current Fiscal Year End Date
 
12/31 
 
Entity Well-known Seasoned Issuer
 
Yes 
 
Entity Current Reporting Status
 
Yes 
 
Entity Voluntary Filers
 
No 
 
Entity Filer Category
 
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
236,900,000 
 
 
Entity Public Float
 
 
$ 6,200,000,000