10-Q 1 d230122d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark one)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

Or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 1-14037

 

 

Moody’s Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   13-3998945
(State of Incorporation)   (I.R.S. Employer Identification No.)

7 World Trade Center at

250 Greenwich Street, New York, N.Y.

  10007
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code:

(212) 553-0300

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months, or for such shorter period that the registrant was required to submit and post such files.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨ (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Title of Each Class

 

Shares Outstanding at September 30, 2011

Common Stock, par value $0.01 per share   222.0 million

 

 

 


Table of Contents

MOODY’S CORPORATION

INDEX TO FORM 10-Q

 

          Page(s)  
   Glossary of Terms and Abbreviations      3-7   
PART I. FINANCIAL INFORMATION   

Item 1.

   Financial Statements   
  

Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2011 and 2010

     8   
  

Consolidated Balance Sheets (Unaudited) at September 30, 2011 and December 31, 2010

     9   
  

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2011 and 2010

     10   
  

Notes to Condensed Consolidated Financial Statements (Unaudited)

     11-34   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      35-62   
   The Company      35   
   Critical Accounting Estimates      35   
   Operating Segments      36   
   Results of Operations      36-49   
   Liquidity and Capital Resources      50-56   
   2011 Outlook      57   
   Recently Issued Accounting Pronouncements      57-58   
   Contingencies      58-61   
   Regulation      61-62   
   Forward-Looking Statements      62-63   

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk      63   

Item 4.

   Controls and Procedures      63   
PART II. OTHER INFORMATION   

Item 1.

   Legal Proceedings      64   

Item 1A.

   Risk Factors      64   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      64   

Item 5.

   Other Information      64   

Item 6.

   Exhibits      65   

SIGNATURES

     66   

Exhibits Filed Herewith

  

31.1

   Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   

31.2

   Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   

32.1

   Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   

32.2

   Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   

 

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GLOSSARY OF TERMS AND ABBREVIATIONS

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

 

TERM

  

DEFINITION

ACNielsen

   ACNielsen Corporation – a former affiliate of Old D&B

Analytics

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

AOCI

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

ASC

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

ASU

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

Board

   The board of directors of the Company

Bps

   Basis points

Canary Wharf Lease

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

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; comprised the IMS Health and NMR businesses

Commission

   European Commission

Company

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

CP

   Commercial paper

CP Notes

   Unsecured commercial paper notes

CP Program

   The Company’s commercial paper program entered into on October 3, 2007

CRAs

   Credit rating agencies

 

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TERM

  

DEFINITION

CREF

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

CSI

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

D&B Business

   Old D&B’s Dun & Bradstreet operating company

DBPP

   Defined benefit pension plans

Debt/EBITDA

   Ratio of Total Debt to EBITDA

EBITDA

   Earnings before interest, taxes, depreciation and amortization

ECB

   European Central Bank

EMEA

   Represents countries within Europe, the Middle East and Africa

EPS

   Earnings per share

ESMA

   European Securities and Market Authority

ESPP

   The 1999 Moody’s Corporation Employee Stock Purchase Plan

ETR

   Effective tax rate

EU

   European Union

EUR

   Euros

Eurosystem

   The monetary authority of the Eurozone, the collective of European Union member states that have adopted the euro as their sole official currency. The Eurosystem consists of the European Central Bank and the central banks of the member states that belong to the Eurozone

Excess Tax Benefits

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

Exchange Act

   The Securities Exchange Act of 1934, as amended

FASB

   Financial Accounting Standards Board

FIG

   Financial institutions group; an LOB of MIS

Financial Reform Act

   Dodd-Frank Wall Street Reform and Consumer Protection Act

FX

   Foreign exchange

GAAP

   U.S. Generally Accepted Accounting Principles

GBP

   British pounds

 

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TERM

  

DEFINITION

IMS Health

   A spin-off of Cognizant; provides services to the pharmaceutical and healthcare industries

Indenture

   Indenture and supplemental indenture dated August 19, 2010, relating to the 2010 Senior Notes

Indicative Ratings

   These are ratings which are provided as of a point in time, and not published or monitored. They are primarily provided to potential or current issuers to indicate what a rating may be based on business fundamentals and financial conditions as well as based on proposed financings

IRS

   Internal Revenue Service

KIS

   Korea Investors Service; a leading Korean rating agency and consolidated subsidiary of the Company

KIS Pricing

   Korea Investors Service Pricing, Inc.; a Korean provider of fixed income securities pricing

Legacy Tax Matter(s)

   Exposures to certain potential tax liabilities assumed in connection with the 2000 Distribution

LIBOR

   London Interbank Offered Rate

LOB

   Line of business

MA

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

Make Whole Amount

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

MCO

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

MD&A

   Management’s Discussion and Analysis of Financial Condition and Results of Operations

MIS

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

Moody’s

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

Net Income

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

New D&B

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

NM

   Percentage change is not meaningful

NMR

   Nielsen Media Research, Inc.; a spin-off of Cognizant; a leading source of television audience measurement services

NRSRO

   Nationally Recognized Statistical Rating Organization

 

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TERM

  

DEFINITION

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 post-retirement life insurance plans

PPIF

   Public, project and infrastructure finance; an LOB of MIS

Profit Participation Plan

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

RD&A

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

Reform Act

   Credit Rating Agency Reform Act of 2006

REITs

   Real estate investment trusts

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

   U.S. Securities and Exchange Commission

Securities Act

   Securities Act of 1933

Series 2005-1 Notes

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

Series 2007-1 Notes

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

SFG

   Structured finance group; an LOB of MIS

SG&A

   Selling, general and administrative expenses

T&E

   Travel and entertainment expenses

Total Debt

   All indebtedness of the Company as reflected on the consolidated balance sheets, excluding current accounts payable and deferred revenue incurred in the ordinary course of business

U.K.

   United Kingdom

U.S.

   United States

USD

   U.S. dollar

UTBs

   Unrecognized tax benefits

UTPs

   Uncertain tax positions

 

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TERM

  

DEFINITION

2000 Distribution

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

2000 Distribution

Agreement

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

2005 Agreement

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

2007 Agreement

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

2007 Facility

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

2008 Term Loan

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

2010 Senior Notes

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

7WTC

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

7WTC Lease

   Operating lease agreement entered into on October 20, 2006

 

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Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(Amounts in millions, except per share data)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Revenue

   $ 531.3     $ 513.3     $ 1,713.6     $ 1,467.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

        

Operating

     171.0       153.7       502.3       423.9  

Selling, general and administrative

     145.0       152.2       436.4       418.5  

Restructuring

     0.2       0.4       0.1       —     

Depreciation and amortization

     19.0       18.1       58.5       49.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     335.2       324.4       997.3       891.5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

     196.1       188.9       716.3       576.2  
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-operating (expense) income, net

        

Interest expense, net

     (12.9     (12.8     (45.2     (35.1

Other non-operating income, net

     1.6       5.3       13.1       0.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating (expense) income, net

     (11.3     (7.5     (32.1     (34.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provisions for income taxes

     184.8       181.4       684.2       541.8  

Provision for income taxes

     52.7       44.2       204.3       167.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     132.1       137.2       479.9       374.5  

Less: Net income attributable to noncontrolling interests

     1.4       1.2       4.7       4.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Moody’s

   $ 130.7     $ 136.0     $ 475.2     $ 370.4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to Moody’s common shareholders

        

Basic

   $ 0.58     $ 0.58     $ 2.09     $ 1.57  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.57     $ 0.58     $ 2.06     $ 1.56  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares outstanding

        

Basic

     226.0       234.3       227.7       235.5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     229.0       235.7       230.7       237.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share attributable to Moody’s common shareholders

        
   $ 0.14     $ 0.105     $ 0.28     $ 0.21  
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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MOODY’S CORPORATION

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Amounts in millions, expect share and per share data)

 

     September 30,
2011
    December 31,
2010
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 854.2     $ 659.6  

Short-term investments

     13.3       12.7  

Accounts receivable, net of allowances of $29.7 in 2011 and $33.0 in 2010

     400.5       497.5  

Deferred tax assets, net

     42.2       45.3  

Other current assets

     49.8       127.9  
  

 

 

   

 

 

 

Total current assets

     1,360.0       1,343.0  

Property and equipment, net of accumulated depreciation of $244.4 in 2011 and $200.8 in 2010

     323.7       319.3  

Goodwill

     451.1       465.5  

Intangible assets, net

     153.0       168.8  

Deferred tax assets, net

     172.1       187.9  

Other assets

     61.4       55.8  
  

 

 

   

 

 

 

Total assets

   $ 2,521.3     $ 2,540.3  
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ DEFICIT     

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 311.2     $ 414.4  

Current portion of long-term debt

     43.1       11.3  

Deferred revenue

     480.6       508.1  
  

 

 

   

 

 

 

Total current liabilities

     834.9       933.8  

Non-current portion of deferred revenue

     96.4       96.6  

Long-term debt

     1,200.9       1,228.3  

Deferred tax liabilities, net

     31.1       36.9  

Unrecognized tax benefits

     174.6       180.8  

Other liabilities

     357.6       362.3  
  

 

 

   

 

 

 

Total liabilities

     2,695.5       2,838.7  

Contingencies (Note 12)

    

Shareholders’ deficit:

    

Preferred stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding

     —          —     

Series common stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding

     —          —     

Common stock, par value $.01 per share; 1,000,000,000 shares authorized; 342,902,272 shares issued at September 30, 2011 and December 31, 2010, respectively.

     3.4       3.4  

Capital surplus

     386.7       391.5  

Retained earnings

     4,147.4       3,736.2  

Treasury stock, at cost; 120,863,505 and 112,116,581 shares of common stock at September 30, 2011 and December 31, 2010, respectively

     (4,651.0     (4,407.3

Accumulated other comprehensive loss

     (70.5     (33.4
  

 

 

   

 

 

 

Total Moody’s shareholders’ deficit

     (184.0     (309.6

Noncontrolling interests

     9.8       11.2  
  

 

 

   

 

 

 

Total shareholders’ deficit

     (174.2     (298.4
  

 

 

   

 

 

 

Total liabilities and shareholders’ deficit

   $ 2,521.3     $ 2,540.3  
  

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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Table of Contents

MOODY’S CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in millions)

 

     Nine Months Ended
September 30,
 
     2011     2010  

Cash flows from operating activities

    

Net income

   $ 479.9     $ 374.5  

Reconciliation of net income to net cash provided by operating activities:

    

Depreciation and amortization

     58.5       49.1  

Stock-based compensation expense

     43.2       41.3  

Excess tax benefits from stock-based compensation plans

     (6.0     (6.1

Legacy Tax Matters

     (6.4     —     

Changes in assets and liabilities:

    

Accounts receivable

     97.5       31.1  

Other current assets

     80.6       (1.1

Other assets

     24.2       (46.2

Accounts payable and accrued liabilities

     (70.7     24.7  

Restructuring

     (0.1     (4.7

Deferred revenue

     (26.3     (30.7

Unrecognized tax benefits

     (0.1     21.8  

Other liabilities

     (8.0     21.0  
  

 

 

   

 

 

 

Net cash provided by operating activities

     666.3       474.7  
  

 

 

   

 

 

 

Cash flows from investing activities

    

Capital additions

     (53.6     (54.6

Purchases of short-term investments

     (28.9     (24.0

Sales and maturities of short-term investments

     27.3       23.6  

Cash paid for acquisitions

     (10.1     —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (65.3     (55.0
  

 

 

   

 

 

 

Cash flows from financing activities

    

Issuance of commercial paper

     —          2,232.8  

Repayments of commercial paper

     —          (2,661.5

Issuance of notes

     —          496.9  

Repayments of notes

     (7.5     (1.9

Net proceeds from stock-based compensation plans

     37.6       26.0  

Cost of treasury shares repurchased

     (333.8     (119.6

Excess tax benefits from stock-based compensation plans

     6.0       6.1  

Payment of dividends

     (89.9     (74.1

Payment of dividends to noncontrolling interests

     (4.8     (4.4

Payments under capital lease obligations

     —          (1.0

Debt issuance costs and related fees

     —          (4.0
  

 

 

   

 

 

 

Net cash used in financing activities

     (392.4     (104.7

Effect of exchange rate changes on cash and cash equivalents

     (14.0     4.8  
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     194.6       319.8  

Cash and cash equivalents, beginning of the period

     659.6       473.9  
  

 

 

   

 

 

 

Cash and cash equivalents, end of the period

   $ 854.2     $ 793.7  
  

 

 

   

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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MOODY’S CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(tabular dollar and share amounts in millions, except per share data)

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Moody’s is a provider of (i) credit ratings, (ii) credit and economic related research, data and analytical tools, (iii) risk management software and (iv) quantitative credit risk measures, credit portfolio management solutions, training, and financial credentialing and certification services. The Company has two reportable segments: MIS and MA. 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, which contains all non-rating commercial activities of the Company, 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, specialized advisory and training services and financial credentialing and certification services. MA also distributes investor-oriented research and data developed by MIS as part of its rating process, including in-depth research on major debt issuers, industry studies and commentary on topical events.

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

These interim financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the Company’s consolidated financial statements and related notes in the Company’s 2010 annual report on Form 10-K filed with the SEC on February 28, 2011. The results of interim periods are not necessarily indicative of results for the full year or any subsequent period. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Certain prior year amounts have been reclassified to conform to the current year presentation.

NOTE 2. STOCK-BASED COMPENSATION

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Stock compensation cost

   $ 12.9      $ 13.6      $ 43.2      $ 41.3  

Tax benefit

   $ 5.0      $ 5.0      $ 16.2      $ 15.6  

 

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During the first nine months of 2011, the Company granted 0.6 million employee stock options, which had a weighted average grant date fair value of $12.49 per share based on the Black-Scholes option-pricing model. The Company also granted 1.5 million shares of restricted stock in the first nine months of 2011, which had a weighted average grant date fair value of $30.05 per share and generally vest ratably over a four-year period. Additionally, the Company granted approximately 0.4 million shares of restricted stock that contain a condition whereby the number of shares that ultimately vest are based on the achievement of certain non-market based performance metrics of the Company over a three-year period. The weighted average grant date fair value of these awards was $28.76 per share.

The following weighted average assumptions were used in determining the fair value for options granted in 2011:

 

Expected dividend yield

     1.53

Expected stock volatility

     41

Risk-free interest rate

     3.33

Expected holding period

     7.6 yrs   

Grant date fair value

   $ 12.49   

Unrecognized compensation expense at September 30, 2011 was $24.1 million and $50.6 million for stock options and nonvested restricted stock, respectively, which is expected to be recognized over a weighted average period of 1.4 years and 1.7 years, respectively. Additionally, there was $14.1 million of unrecognized compensation expense relating to the aforementioned non-market based performance awards which is expected to be recognized over a weighted average period of 1.0 years.

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

 

     Nine Months Ended
September 30,
 
      2011      2010  

Stock option exercises:

     

Proceeds from stock option exercises

   $ 41.5      $ 28.5  

Aggregate intrinsic value

   $ 20.4      $ 16.3  

Tax benefit realized upon exercise

   $ 8.0      $ 6.6  
      Nine Months Ended
September 30,
 
      2011      2010  

Restricted stock vesting:

     

Fair value of shares vested

   $ 18.8      $ 12.4  

Tax benefit realized upon vesting

   $ 7.0      $ 4.6  

NOTE 3. INCOME TAXES

Moody’s effective tax rate was 28.5% and 24.4% for the three months ended September 30, 2011 and 2010, respectively, and 29.9% and 30.9% for the nine months ended September 30, 2011 and 2010, respectively. The increase in the ETR compared to the third quarter of 2010 was primarily due to a tax benefit associated with foreign earnings in 2010, partially offset by a tax benefit from the settlement of state tax audits in the current period. The decrease in the ETR compared to the nine months ended September 30, 2010 was primarily due to lower U.S. taxes on foreign earnings and state income taxes in the current period.

 

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The Company classifies interest related to UTBs in interest expense, net in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating income, net. The Company had an overall decrease in its UTBs of $12.6 million ($10.4 million net of federal tax benefit) during the third quarter of 2011 and an overall decrease in its UTBs during the first nine months of 2011 of $6.2 million ($8.7 million, net of federal tax benefit).

Prepaid taxes of $12.6 million and $82.3 million at September 30, 2011 and December 31, 2010, respectively, are included in other current assets in the consolidated balance sheets.

Moody’s Corporation and subsidiaries are subject to U.S. federal income tax as well as income tax in various state, local and foreign jurisdictions. Moody’s U.S. federal tax returns filed for the years 2008 through 2010 remain subject to examination by the IRS. The Company’s tax filings in New York State for the years 2004 through 2007 are currently under examination. The income tax returns for 2008 and 2009 remain open to examination for both New York State and New York City. Tax filings in the U.K. for 2007 through 2009 remain open to examination.

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

NOTE 4. WEIGHTED AVERAGE SHARES OUTSTANDING

Below is a reconciliation of basic to diluted shares outstanding:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Basic

     226.0        234.3        227.7        235.5  

Dilutive effect of shares issuable under stock-based compensation plans

     3.0        1.4        3.0        1.6  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     229.0        235.7        230.7        237.1  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     10.7        16.0        10.8        16.3  
  

 

 

    

 

 

    

 

 

    

 

 

 

The calculation of diluted EPS requires certain assumptions regarding the use of both cash proceeds and assumed proceeds that would be received upon the exercise of stock options and vesting of restricted stock outstanding as of September 30, 2011 and 2010. These assumed proceeds include Excess Tax Benefits and any unrecognized compensation of the awards.

NOTE 5. SHORT-TERM INVESTMENTS

Short-term investments are securities with maturities greater than 90 days at the time of purchase that are available for operations in the next twelve months. The short-term investments, primarily consisting of certificates of deposit, are classified as held-to-maturity and therefore are carried at cost. The remaining contractual maturities of the short-term investments were one month to ten months and one month to six months as of September 30, 2011 and December 31, 2010, respectively. Interest and dividends are recorded into income when earned.

 

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NOTE 6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

Interest Rate Swaps

In the fourth quarter of 2010, the Company entered into interest rate swaps with a total notional amount of $300 million to convert the fixed interest rate on the Series 2005-1 Notes to a floating interest rate based on the 3-month LIBOR. The purpose of this hedge was to mitigate the risk associated with changes in the fair value of the Series 2005-1 Notes, thus the Company has designated these swaps as fair value hedges. The fair value of the swaps is reported in other assets at September 30, 2011 and in other liabilities at December 31, 2010 in the Company’s consolidated balance sheets with a corresponding adjustment to the carrying value of the Series 2005-1 Notes. The changes in the fair value of the hedges and the underlying hedged item generally offset and the net cash settlements on the swaps are recorded each period within interest expense, net in the Company’s consolidated statement of operations. The net interest income recognized in interest expense, net within the Company’s consolidated statement of operations on these swaps was $1.0 million and $3.1 million in the three months and nine months ended September 30, 2011, respectively.

In May 2008, the Company entered into interest rate swaps with a total notional amount of $150 million to protect against fluctuations in the LIBOR-based variable interest rate on the 2008 Term Loan, further described in Note 11. These interest rate swaps are designated as cash flow hedges. Accordingly, changes in the fair value of these swaps are recorded to other comprehensive income or loss, to the extent that the hedge is effective, and such amounts are reclassified to earnings in the same period during which the hedged transaction affects income. The fair value of the swaps is reported in other liabilities in the Company’s consolidated balance sheets at September 30, 2011 and December 31, 2010.

Foreign Exchange Forwards and Options

The Company engaged in hedging activities to protect against FX risks from forecasted billings and related revenue denominated in the euro and the GBP. FX options and forward exchange contracts were utilized to hedge exposures related to changes in FX rates. As of December 31, 2010, these FX options and forward exchange contracts have matured and as of September 30, 2011 all realized gains and losses have been reclassified from AOCI into earnings. These FX options and forward exchange contracts were designated as cash flow hedges.

 

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The Company also enters into foreign exchange forwards to mitigate the change in fair value on certain assets and liabilities denominated in currencies other than the entity’s functional currency. These forward contracts are not designated as hedging instruments under the applicable sections of Topic 815 of the ASC. Accordingly, changes in the fair value of these contracts are recognized immediately in other non-operating income, net in the Company’s consolidated statements of operations along with the FX gain or loss recognized on the assets and liabilities denominated in a currency other than the entity’s functional currency. These contracts have expiration dates at various times through December 2011. The following table summarizes the notional amounts of the Company’s outstanding foreign exchange forwards:

 

     September 30,
2011
     December 31,
2010
 

Notional amount of Currency Pair:

     

Contracts to purchase USD with euros

   $ 12.6      $ 11.7  

Contracts to sell USD for euros

   $ 54.1      $ 55.5  

Contracts to purchase USD with GBP

   $ 4.1      $ —     

Contracts to sell USD for GBP

   $ 19.6      $ 20.7  

Contracts to purchase USD with other foreign currencies

   $ 6.1      $ 5.4  

Contracts to sell USD for other foreign currencies

   $ 7.3      $ 19.5  

Contracts to purchase euros with other foreign currencies

   10.8      10.5  

Contracts to purchase euros with GBP

   5.4      —     

Contracts to sell euros for GBP

   15.5      14.0  

The net gains (losses) on these instruments recognized in other non-operating income, net in the Company’s consolidated statements of operations was ($3.1) million and $8.3 million in the three months ended September 30, 2011 and 2010, respectively, and ($0.6) million and ($1.7) million in the nine months ended September 30, 2011 and 2010, respectively.

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 the gains/(losses) on those instruments:

 

     Fair Value of Derivative Instruments  
     Asset      Liability  
     September 30,
2011
     December 31,
2010
     September 30,
2011
     December 31,
2010
 

Derivatives designated as accounting hedges:

  

Interest rate swaps

   $ 8.0      $ —         $ 5.8      $ 12.2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives designated as accounting hedges

     8.0        —           5.8        12.2  

Derivatives not designated as accounting hedges:

  

FX forwards on certain assets and liabilities

     0.7        2.0        5.3        0.7  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8.7      $ 2.0      $ 11.1      $ 12.9  
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value for the interest rate swaps is included in other assets and other liabilities in the consolidated balance sheets at September 30, 2011 and in other liabilities at December 31, 2010. The fair value of the FX forwards is included in other current assets and account payable and accrued liabilities as of September 30, 2011 and December 31, 2010. All of the above derivative instruments are valued using Level 2 inputs as defined in Topic 820 of the ASC. A Level 2 input is an input other than a quoted market price that is 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. 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

 

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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)
 
     Three Months  Ended
September 30,
         Three Months  Ended
September 30,
         Three Months  Ended
September 30,
 
     2011     2010          2011     2010          2011      2010  

FX options

   $ —        $ (0.4   Revenue    $ —        $ (0.2   Revenue    $ —         $ —     

Interest rate

swaps

     (0.1     (1.1   Interest Expense      (0.9     (0.7   N/A      —           —     
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

    

 

 

 

Total

   $ (0.1   $ (1.5      $ (0.9   $ (0.9      $ —         $ —     
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

    

 

 

 
     Nine Months  Ended
September 30,
         Nine Months  Ended
September 30,
         Nine Months  Ended
September 30,
 
     2011     2010          2011     2010          2011      2010  

FX options

   $ —        $ 0.1     Revenue    $ (0.2   $ (0.7   Revenue    $ —         $ (0.2

Interest rate

swaps

     (0.5     (3.6   Interest Expense      (2.2     (2.3   N/A      —           —     
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

    

 

 

 

Total

   $ (0.5   $ (3.5      $ (2.4   $ (3.0      $ —         $ (0.2
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

    

 

 

 

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

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

 

     Unrecognized Losses, net of tax  
     September 30,
2011
    December 31,
2010
 

FX options

   $ —           $ (0.2

Interest rate swaps

     (3.7        (5.4
  

 

 

   

 

  

 

 

 

Total

   $ (3.7      $ (5.6
  

 

 

   

 

  

 

 

 

NOTE 7. ACQUISITIONS

CSI Global Education, Inc.

On November 18, 2010, a subsidiary of the Company acquired CSI Global Education, Inc., a provider of financial learning, credentials, and certification in Canada. CSI operates within MA, strengthening the Company’s capabilities for delivering credit and other financial training programs to financial institutions worldwide and bolsters Moody’s efforts to serve as an essential resource to financial market participants.

 

 

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This acquisition was 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.

The aggregate purchase price was $151.4 million in net cash payments to the sellers. There is a 2.5 million Canadian dollar contingent cash payment which is dependent upon the achievement of a certain contractual milestone by January 2016. The Company has recognized the fair value of the contingent payment of $2.0 million as a long-term liability at the acquisition date using a discounted cash flow methodology which assumes that the entire 2.5 million Canadian dollar payment will be made by January 2016. This methodology is based on significant inputs that are not observable in the market, which ASC 820 refers to as Level 3 inputs. Subsequent fair value changes, which will be measured quarterly, up to the ultimate amount paid, will be recognized in earnings. The change in fair value of the contingent payment in the first nine months of 2011 was de minimis. The purchase price was funded with cash on hand.

The near term impact to operations and cash flow from this acquisition is not expected to be material to the Company’s consolidated financial statements.

KIS Pricing, Inc.

On May 6, 2011, a subsidiary of the Company acquired a 16% additional direct equity investment in KIS Pricing from a shareholder with a non-controlling interest in the entity. The acquisition adds to the Company’s existing indirect ownership of KIS Pricing through its controlling equity stake in Korea Investors Service (KIS). The aggregate purchase price was not material and the near term impact to operations and cash flow is not expected to be material. KIS Pricing is part of the MA segment.

NOTE 8. GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS

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

 

     Nine Months Ended
September 30, 2011
    Year ended
December 31,  2010
 
     MIS     MA     Consolidated     MIS      MA      Consolidated  

Beginning Balance

   $ 11.4     $ 454.1     $ 465.5     $ 11.1      $ 338.1      $ 349.2  

Additions/adjustments

     —          2.7       2.7       —           104.6        104.6  

FX translation

     (0.4     (16.7     (17.1     0.3        11.4        11.7  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance

   $ 11.0     $ 440.1     $ 451.1     $ 11.4      $ 454.1      $ 465.5  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

The 2011 additions/adjustments for the MA segment in the table above relate to an immaterial acquisition by a subsidiary of the Company. The 2010 additions/adjustments for the MA segment in the table above relate to the acquisition of CSI in November 2010, more fully discussed in Note 7, above.

 

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Acquired intangible assets and related amortization consisted of:

 

     September 30,
2011
    December 31,
2010
 

Customer relationships

   $ 142.7     $ 145.1  

Accumulated amortization

     (55.6     (49.2
  

 

 

   

 

 

 

Net customer relationships

     87.1       95.9  
  

 

 

   

 

 

 

Trade secrets

     31.2       31.4  

Accumulated amortization

     (12.8     (10.9
  

 

 

   

 

 

 

Net trade secrets

     18.4       20.5  
  

 

 

   

 

 

 

Software

     54.8       54.8  

Accumulated amortization

     (23.9     (20.3
  

 

 

   

 

 

 

Net software

     30.9       34.5  
  

 

 

   

 

 

 

Other

     37.8       37.5  

Accumulated amortization

     (21.2     (19.6
  

 

 

   

 

 

 

Net other

     16.6       17.9  
  

 

 

   

 

 

 

Total acquired intangible assets, net

   $ 153.0     $ 168.8  
  

 

 

   

 

 

 

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

Amortization expense relating to acquired intangible assets is as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Amortization Expense

   $ 5.0      $ 4.2      $ 14.6      $ 12.1  

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

 

Year Ending December 31,

      

2011 (after September 30,)

   $ 4.6   

2012

     18.2   

2013

     18.0   

2014

     14.5   

2015

     13.4   

Thereafter

     84.3   

Intangible assets are reviewed for impairment whenever circumstances indicate that the carrying amount may not be recoverable. If the estimated undiscounted future cash flows are lower than the carrying amount of the related asset, a loss is recognized for the difference between the carrying amount and the estimated fair value of the asset. Goodwill is tested for impairment annually as of November 30th, or more frequently if circumstances indicate the assets may be impaired. For the three and nine months ended September 30, 2011 and 2010, there were no impairments to goodwill or intangible assets.

 

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NOTE 9 . DETAIL OF CERTAIN BALANCE SHEET CAPTIONS

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

 

     September 30,
2011
     December 31,
2010
 

Other current assets:

     

Prepaid taxes

   $ 12.6      $ 82.3  

Prepaid expenses

     32.5        39.8  

Other

     4.7        5.8  
  

 

 

    

 

 

 

Total other current assets

   $ 49.8      $ 127.9  
  

 

 

    

 

 

 
     September 30,
2011
     December 31,
2010
 

Other assets:

     

Investments in joint ventures

   $ 34.2      $ 30.8  

Deposits for real-estate leases

     11.3        11.4  

Other

     15.9        13.6  
  

 

 

    

 

 

 

Total other assets

   $ 61.4      $ 55.8  
  

 

 

    

 

 

 
     September 30,
2011
     December 31,
2010
 

Accounts payable and accrued liabilities:

     

Salaries and benefits

   $ 60.7      $ 69.6  

Incentive compensation

     90.5        116.8  

Profit sharing contribution

     4.5        12.6  

Customer credits, advanced payments and advanced billings

     18.4        15.3  

Dividends

     1.9        27.9  

Professional service fees

     51.8        50.6  

Interest accrued on debt

     3.6        17.6  

Accounts payable

     16.4        14.3  

Income taxes

     3.0        26.9  

Restructuring

     0.6        0.7  

Deferred rent-current portion

     1.0        2.7  

Pension and other post retirement employee benefits

     9.5        9.5  

Other

     49.3        49.9  
  

 

 

    

 

 

 

Total accounts payable and accrued liabilities

   $ 311.2      $ 414.4  
  

 

 

    

 

 

 

 

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     September 30,
2011
     December 31,
2010
 

Other liabilities:

     

Pension and other post retirement employee benefits

   $ 129.9      $ 132.8  

Deferred rent-non-current portion

     107.4        100.4  

Interest accrued on UTPs

     37.3        33.7  

Legacy and other tax matters

     51.5        57.3  

Other

     31.5        38.1  
  

 

 

    

 

 

 

Total other liabilities

   $ 357.6      $ 362.3  
  

 

 

    

 

 

 

NOTE 10. PENSION AND OTHER POST-RETIRMENT BENEFITS

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

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

 

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

 

     Three Months Ended September 30,  
     Pension Plans     Other Post-Retirement Plans  
     2011     2010     2011      2010  
Components of net periodic expense          

Service cost

   $ 3.7     $ 3.3     $ 0.3      $ 0.2  

Interest cost

     3.3       3.1       0.2        0.2  

Expected return on plan assets

     (3.0     (2.7     —           —     

Amortization of net actuarial loss from earlier periods

     1.2       0.7       —           —     

Amortization of net prior service costs from earlier periods

     0.2       0.2       0.1        0.1  

Settlement loss

     1.6       —          —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Net periodic expense

   $ 7.0     $ 4.6     $ 0.6      $ 0.5  
  

 

 

   

 

 

   

 

 

    

 

 

 
     Nine Months Ended September 30,  
     Pension Plans     Other Post-Retirement Plans  
     2011     2010     2011      2010  

Components of net periodic expense

         

Service cost

   $ 11.3     $ 10.1     $ 0.9      $ 0.6  

Interest cost

     9.9       9.1       0.6        0.6  

Expected return on plan assets

     (9.0     (8.0     —           —     

Amortization of net actuarial loss from earlier periods

     3.7       2.1       —           —     

Amortization of net prior service costs from earlier periods

     0.5       0.5       0.2        0.1  

Settlement loss

     1.6       —          —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Net periodic expense

   $ 18.0     $ 13.8     $ 1.7      $ 1.3  
  

 

 

   

 

 

   

 

 

    

 

 

 

The settlement loss in 2011 relates to a lump sum pension benefit payment of $6.9 million related to the Company’s unfunded pension plan.

In March 2010, the Patient Protection and Affordable Care Act (the “Act”) and the related reconciliation measure, which modifies certain provisions of the Act, were signed into law. The Act repeals the current rule permitting deduction of the portion of the drug coverage expense that is offset by the Medicare Part D subsidy. This provision of the Act is effective for taxable years beginning after December 31, 2010 and the reconciliation measure delays the aforementioned repeal of the drug coverage expense reduction by two years to December 31, 2012. The Company has accounted for the enactment of the two laws in the first quarter of 2010, for which the impact to the Company’s income tax expense and net income was immaterial.

The Company contributed $13.6 million to its U.S. funded pension plan during the nine months ended September 30, 2011 and has no plan to make any additional contribution for the remainder of 2011. The Company made payments of $11.1 million, which includes a lump sum payment of $6.9 million as stated above, related to its unfunded U.S. DBPP and $0.3 million to its U.S. other post-retirement plans during the nine months ended September 30, 2011. The Company presently anticipates making additional payments of $0.8 million related to its unfunded U.S. DBPPs and $0.3 million to its U.S. other post-retirement plans during the remainder of 2011.

 

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NOTE 11. INDEBTEDNESS

The following table summarizes total indebtedness:

 

     September 30,
2011
    December 31,
2010
 

2007 Facility

   $ —        $ —     

Commercial paper

     —          —     

Notes Payable:

    

Series 2005-1 Notes, due 2015, including fair value of interest rate swap of $8.0 million at 2011 and $(3.7) million at 2010

     308.0       296.3  

Series 2007-1 Notes due 2017

     300.0       300.0  

2010 Senior Notes, due 2020, net of unamortized discount of $2.8 million and $3.0 million in 2011 and 2010, respectively

     497.2       497.0  

2008 Term Loan, various payments through 2013

     138.8       146.3  
  

 

 

   

 

 

 

Total debt

     1,244.0       1,239.6  

Current portion

     (43.1     (11.3
  

 

 

   

 

 

 

Total long-term debt

   $ 1,200.9     $ 1,228.3  
  

 

 

   

 

 

 

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 serves, in part, to support the Company’s CP Program described below. Interest on borrowings is payable at rates that are based on LIBOR plus a premium that can range from 16.0 to 40.0 basis points of the outstanding borrowing amount depending on the Debt/EBITDA ratio. The Company also pays quarterly facility fees, regardless of borrowing activity under the 2007 Facility. The quarterly fees for the 2007 Facility can range from 4.0 to 10.0 basis points per annum of the facility amount, depending on the Company’s Debt/EBITDA ratio. The Company also pays a utilization fee of 5.0 basis points on borrowings outstanding when the aggregate amount outstanding exceeds 50% of the total facility. The 2007 Facility contains certain covenants that, among other things, restrict the ability of the Company and certain of its subsidiaries, without the approval of the lenders, to engage in mergers, consolidations, asset sales, transactions with affiliates and sale-leaseback transactions or to incur liens, as defined in the related agreement. The 2007 Facility also contains financial covenants that, among other things, require the Company to maintain a Debt/EBITDA ratio of not more than 4.0 to 1.0 at the end of any fiscal quarter.

Commercial Paper

On October 3, 2007, the Company entered into a private placement commercial paper program under which the Company may issue CP notes up to a maximum amount of $1.0 billion. Amounts available under the CP Program may be re-borrowed. The CP Program is supported by the Company’s 2007 Facility. The maturities of the CP Notes will vary, but may not exceed 397 days from the date of issue. The CP Notes are sold at a discount from par or, alternatively, sold at par and bear interest at rates that will vary based upon market conditions at the time of issuance. The rates of interest will depend on whether the CP Notes will be a fixed or floating rate. The interest on a floating rate may be based on the following: (a) certificate of deposit rate; (b) commercial paper rate; (c) federal funds rate; (d) 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 CP Program contains certain events of default including, among other things: non-payment of principal, interest or fees; entrance into any form of moratorium; and bankruptcy and insolvency events, subject in certain instances to cure periods.

 

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Notes Payable

On August 19, 2010, the Company issued $500 million aggregate principal amount of unsecured notes in a public offering. The 2010 Senior Notes bear interest at a fixed rate of 5.50% and mature on September 1, 2020. Interest on the 2010 Senior Notes will be due semi-annually on September 1 and March 1 of each year, commencing March 1, 2011. The Company may prepay the 2010 Senior Notes, in whole or in part, at any time at a price equal to 100% of the principal amount being prepaid, plus accrued and unpaid interest and a Make-Whole Amount. Additionally, at the option of the holders of the notes, the Company may be required to purchase all or a portion of the notes upon occurrence of a “Change of Control Triggering Event,” as defined in the Indenture, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The Indenture contains covenants that limit the ability of the Company and certain of its subsidiaries to, among other things, incur or create liens and enter into sale and leaseback transactions. In addition, the Indenture contains a covenant that limits the ability of the Company to consolidate or merge with another entity or to sell all or substantially all of its assets to another entity. The Indenture contains customary default provisions. In addition, an event of default will occur if the Company or certain of its subsidiaries fail to pay the principal of any indebtedness (as defined in the Indenture) when due at maturity in an aggregate amount of $50 million or more, or a default occurs that results in the acceleration of the maturity of the Company’s or certain of its subsidiaries’ indebtedness in an aggregate amount of $50 million or more. Upon the occurrence and during the continuation of an event of default under the Indenture, the notes may become immediately due and payable either automatically or by the vote of the holders of more than 25% of the aggregate principal amount of all of the notes then outstanding.

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

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

2008 Term Loan

On May 7, 2008, Moody’s entered into a five-year, $150.0 million senior unsecured term loan with several lenders. Proceeds from the loan were used to pay off a portion of the CP outstanding. Interest on borrowings under the 2008 Term Loan is payable quarterly at rates that are based on LIBOR plus a margin that can range from 125 basis points to 175 basis

 

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points depending on the Company’s Debt/EBITDA ratio. The outstanding borrowings shall amortize in accordance with the schedule of payments set forth in the 2008 Term Loan outlined in the table below.

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

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

 

Year Ended December 31,

   2008 Term Loan      Series 2005-1 Notes      Total  

2011 (after September 30,)

   $ 3.8      $ —         $ 3.8  

2012

     71.2        —           71.2  

2013

     63.8        —           63.8  

2014

     —           —           —     

2015

     —           300.0        300.0  
  

 

 

    

 

 

    

 

 

 

Total

   $ 138.8      $ 300.0      $ 438.8  
  

 

 

    

 

 

    

 

 

 

In the fourth quarter of 2010, the Company entered into interest rate swaps with a total notional amount of $300 million which converted the fixed rate of interest on the Series 2005-1 Notes to a floating LIBOR-based interest rate. Also, on May 7, 2008, the Company entered into interest rate swaps with a total notional amount of $150 million to protect against fluctuations in the LIBOR-based variable interest rate on the 2008 Term Loan. Both of these interest rate swaps are more fully discussed in Note 6 above.

At September 30, 2011, the Company was in compliance with all covenants contained within all of the debt agreements. In addition to the covenants described above, the 2007 Facility, the 2005 Agreement, the 2007 Agreement, the 2010 Senior Notes and the 2008 Term Loan contain cross default provisions. These provisions state that default under one of the aforementioned debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under those instruments to be immediately due and payable. As of September 30, 2011, there were no such cross defaults.

 

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Interest expense, net

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Expense on borrowings

   $ (16.2   $ (14.0   $ (48.9   $ (35.4

Income

     1.6       0.8       3.9       1.9  

Income/(expense) on UTBs and other tax related liabilities

     0.9       (0.2     (6.1     (5.3

Capitalized

     0.8       0.6       2.2       1.2  

Legacy Tax (a)

     —          —          3.7       2.5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense, net

   $ (12.9   $ (12.8   $ (45.2   $ (35.1
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) The 2011 amount represents a reversal of $2.8 million of accrued interest expense relating to the favorable resolution of a Legacy Tax Matter and $0.9 million of interest income related to a tax year prior to the 2000 Distribution. The 2010 amount represents interest income related to the favorable settlement of Legacy Tax Matters.

The Company’s long-term debt, including the current portion, is recorded at cost except for the Series 2005-1 Notes which are carried at cost adjusted for the fair value of an interest rate swap used to hedge the fair value of the note. The fair value and carrying value of the Company’s long-term debt as of September 30, 2011 and December 31, 2010 is as follows:

 

     September 30, 2011      December 31, 2010  
     Carrying
Amount
     Estimated  Fair
Value
     Carrying
Amount
     Estimated  Fair
Value
 

Series 2005-1 Notes

   $ 308.0      $ 312.2      $ 296.3      $ 310.6  

Series 2007-1 Notes

     300.0        327.7        300.0        321.3  

2010 Senior Notes

     497.2        524.6        497.0        492.1  

2008 Term Loan

     138.8        138.8        146.3        146.3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,244.0      $ 1,303.3      $ 1,239.6      $ 1,270.3  
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of the Company’s 2010 Senior Notes is based on quoted market prices. The fair value of the remaining long-term debt, which is not publicly traded, is estimated using discounted cash flows with inputs based on prevailing interest rates available to the Company for borrowings with similar maturities.

NOTE 12. CONTINGENCIES

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

Following the events in the U.S. subprime residential mortgage sector and the credit markets more broadly over the last several years, MIS and other credit rating agencies are the subject of intense scrutiny, increased regulation,

 

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ongoing investigation, and civil litigation. Legislative, regulatory and enforcement entities around the world are considering additional legislation, regulation and enforcement actions, including with respect to MIS’s compliance with newly imposed regulatory standards. Moody’s has received subpoenas and inquiries from states attorneys general and other governmental authorities and is responding to such investigations and inquiries.

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

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

 

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amended complaint was filed, purportedly on behalf of all purchasers of the Company’s securities during the period February 3, 2006 through October 24, 2007. Plaintiffs allege that the defendants issued false and/or misleading statements concerning the Company’s business conduct, business prospects, business conditions and financial results relating primarily to MIS’s ratings of structured finance products including RMBS, CDO and constant-proportion debt obligations. The plaintiffs seek an unspecified amount of compensatory damages and their reasonable costs and expenses incurred in connection with the case. The Company moved for dismissal of the consolidated amended complaint in September 2008. On February 23, 2009, the court issued an opinion dismissing certain claims and sustaining others. On January 22, 2010, plaintiffs moved to certify a class of individuals who purchased Moody’s Corporation common stock between February 3, 2006 and October 24, 2007, which the Company opposed. On March 31, 2011, the court issued an opinion denying plaintiffs’ motion to certify the proposed class. On April 14, 2011, plaintiffs filed a petition in the United States Court of Appeals for the Second Circuit seeking discretionary permission to appeal the decision. The Company filed its response to the petition on April 25, 2011. On July 20, 2011, the Second Circuit issued an order denying plaintiffs’ petition for leave to appeal.

For claims, litigation and proceedings not related to income taxes, where it is both probable that a liability is expected to be incurred and the amount of loss can be reasonably estimated, the Company records liabilities in the consolidated financial statements and periodically adjusts these as appropriate. In other instances, because of uncertainties related to the probable outcome and/or the amount or range of loss, management does not record a liability but discloses the contingency if significant. As additional information becomes available, the Company adjusts its assessments and estimates of such matters accordingly. In view of the inherent difficulty of predicting the outcome of litigation, regulatory, enforcement and similar matters and contingencies, particularly where the claimants seek large or indeterminate damages or where the parties assert novel legal theories or the matters involve a large number of parties, the Company cannot predict what the eventual outcome of the pending matters will be or the timing of any resolution of such matters. The Company also cannot predict the impact (if any) that any such matters may have on how its business is conducted, on its competitive position or on its financial position, results of operations or cash flows. As the process to resolve the pending matters referred to above progresses, management will continue to review the latest information available and assess its ability to predict the outcome of such matters and the effects, if any, on its operations and financial condition. However, in light of the inherent uncertainties involved in these matters, the large or indeterminate damages sought in some of them and the novel theories of law asserted, an estimate of the range of possible losses cannot be made at this time. For income tax matters, the Company employs the prescribed methodology of Topic 740 of the ASC which requires a company to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.

Legacy Tax Matters

Moody’s continues to have exposure to potential liabilities arising from Legacy Tax Matters. As of September 30, 2011, Moody’s has recorded liabilities for Legacy Tax Matters totaling $53.6 million. This includes liabilities and accrued interest due to New D&B arising from the 2000 Distribution Agreement. It is possible that the ultimate liability for Legacy Tax Matters could be greater than the liabilities recorded by the Company, which could result in additional charges that may be material to Moody’s future reported results, financial position and cash flows.

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

In November 1996, The Dun & Bradstreet Corporation separated into three separate public companies: The Dun & Bradstreet Corporation, ACNielsen Corporation and Cognizant Corporation. In June 1998, The Dun & Bradstreet Corporation separated into two separate public companies: Old D&B and R.H. Donnelley Corporation. During 1998,

 

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Cognizant separated into two separate public companies: IMS Health Incorporated and Nielsen Media Research, Inc. In September 2000, Old D&B separated into two separate public companies: New D&B and Moody’s.

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

At the time of the 2000 Distribution, New D&B paid Moody’s $55.0 million for 50% of certain anticipated future tax benefits through 2012. In the event that these tax benefits are not claimed or otherwise not realized by New D&B, or there is an IRS audit of New D&B impacting these tax benefits, Moody’s would be required to repay to New D&B an amount equal to the discounted value of its share of the related future tax benefits as well as its share of any tax liability incurred by New D&B. In June 2011, the statute of limitations for New D&B relating to the 2004 tax year expired. As a result, in the second quarter of 2011, Moody’s recorded a reduction of accrued interest expense of $2.8 million ($1.7 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 September 30, 2011, Moody’s liability with respect to this matter totaled $51.5 million.

Additionally, in April 2011, Moody’s received a refund of $0.9 million ($0.6 million, net of tax) for interest assessed related to pre-spinoff tax years. Coupled with the $6.4 million noted above (and related interest of $1.7 million), net legacy tax benefits were $8.7 million in the nine months ended September 30, 2011 of which $7 million was deemed to be unusual in nature.

In 2005, settlement agreements were executed with the IRS with respect to certain Legacy Tax Matters related to the years 1989-1990 and 1993-1996. With respect to these settlements, Moody’s and New D&B believed that IMS Health and NMR did not pay their full share of the liability to the IRS under the terms of the applicable separation agreements between the parties. Moody’s and New D&B subsequently paid these amounts to the IRS and commenced arbitration proceedings against IMS Health and NMR to resolve this dispute. Pursuant to these arbitration proceedings, the Company received $10.8 million ($6.5 million as a reduction of interest expense and $4.3 million as a reduction of tax expense) in 2009. The aforementioned settlement payment resulted in net income benefits of $8.2 million in 2009. The Company continues to carry a $2 million liability for this matter.

In 2006, New D&B and Moody’s each deposited $39.8 million with the IRS in order to stop the accrual of statutory interest on potential tax deficiencies with respect to the 1997 through 2002 tax years. In 2007, New D&B and Moody’s requested a return of that deposit. The IRS applied a portion of the deposit in satisfaction of an assessed deficiency and returned the balance to the Company. Moody’s subsequently pursued a refund for a portion of the outstanding amount. In May 2010, the IRS refunded $5.2 million to the Company for the 1997 tax year, which included interest of approximately $2.5 million resulting in an after-tax benefit of $4.6 million.

 

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NOTE 13. COMPREHENSIVE INCOME AND NONCONTROLLING INTERESTS

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

 

     Three Months Ended September 30,  
     2011     2010  
     Shareholders’
of  Moody’s
Corporation
    Noncontrolling
Interests
    Total     Shareholders’
of  Moody’s
Corporation
    Noncontrolling
Interests
     Total  

Net income

   $ 130.7     $ 1.4     $ 132.1     $ 136.0     $ 1.2      $ 137.2  

Net realized and unrealized gain/(loss) on cash flow hedges (net of tax of $0.5 million and $0.1 million in 2011 and 2010, respectively)

     0.7       —          0.7       (0.6     —           (0.6

FX translation (net of tax of $0.1 million and $1.7 million in 2011 and 2010, respectively)

     (73.3     (1.1     (74.4     58.8       0.7        59.5  

Amortization and recognition of actuarial losses and prior service costs (net of tax of $0.5 million and $0.4 million in 2011 and 2010, respectively)

     0.6       —          0.6       0.5       —           0.5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total comprehensive income

     $58.7       $0.3       $59.0       $194.7       $1.9        $196.6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

     Nine Months Ended September 30,  
     2011     2010  
     Shareholders’
of Moody’s
Corporation
    Noncontrolling
Interests
    Total     Shareholders’
of Moody’s
Corporation
    Noncontrolling
Interests
     Total  

Net income

   $ 475.2     $ 4.7     $ 479.9     $ 370.4     $ 4.1      $ 374.5  

Net realized and unrealized gain/(loss) on cash flow hedges (net of tax of $1.2 million and $0.1 million in 2011 and 2010, respectively)

     1.8       —          1.8       (0.3     —           (0.3

FX translation (net of tax of $0.1 million and $10.3 million in 2011 and 2010, respectively)

     (37.9     (0.3     (38.2     11.5       0.3        11.8  

Net actuarial gains and prior service costs (net of tax of $2.4 million and $2.9 million in 2011 and 2010, respectively)

     (3.3     —          (3.3     4.1       —           4.1  

Amortization and recognition of actuarial losses and prior service costs (net of tax of $1.7 million and $1.4 million in 2011 and 2010, respectively)

     2.3       —          2.3       1.3       —           1.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total comprehensive income

   $ 438.1     $ 4.4     $ 442.5     $ 387.0     $ 4.4      $ 391.4  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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

 

     Nine Months  Ended
September 30,
 
     2011     2010  

Beginning Balance

   $ 11.2     $ 10.1  

Net income attributable to noncontrolling interests

     4.7       4.1  

Dividends declared to noncontrolling interests

     (4.8     (4.4

Purchase of KIS Pricing shares from noncontrolling interest

     (1.0     —     

FX translation

     (0.3     0.3  
  

 

 

   

 

 

 

Ending Balance

   $ 9.8     $ 10.1  
  

 

 

   

 

 

 

NOTE 14. SEGMENT INFORMATION

The Company operates in two reportable segments: MIS and MA.

Revenue for MIS and expenses for MA include an intersegment royalty charged to MA for the rights to use and distribute content, data and products developed by MIS. Also, revenue for MA and expenses for MIS include an intersegment license fee charged to MIS from MA for certain MA products and services utilized in MIS’s ratings process. Overhead charges and corporate expenses which exclusively benefit only one segment, are fully charged to that segment. Additionally, overhead costs and corporate expenses of the Company which benefit both segments are allocated to each segment based on a revenue-split methodology. Overhead expenses include costs such as rent and occupancy, information technology and support staff such as finance, human resource, information technology and legal. Beginning on January 1, 2011, the Company refined its methodology for allocating the aforementioned overhead and corporate costs to its segments. The refined methodology is reflected in the segment results for the three and nine months ended September 30, 2011 and accordingly, the segment results for the three and nine months ended September 30, 2010 have been reclassified to conform to the new presentation. “Eliminations” in the table below represent intersegment royalty/license revenue/expense.

 

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Below is financial information by segment, MIS and MA revenue by line of business and consolidated revenue information by geographic area, each of which is for the three and nine month periods ended September 30, 2011 and 2010, and total assets by segment as of September 30, 2011 and December 31, 2010.

Financial Information by Segment

 

     Three Months Ended September 30,  
     2011      2010  
     MIS      MA      Eliminations     Consolidated      MIS      MA      Eliminations     Consolidated  

Revenue

   $ 368.2      $ 182.5      $ (19.4   $ 531.3      $ 373.7      $ 157.4      $ (17.8   $ 513.3  

Expenses:

                     

Operating, SG&A

     200.0        135.4        (19.4     316.0        204.3        119.4        (17.8     305.9  

Restructuring

     0.1        0.1        —          0.2        0.3        0.1        —          0.4  

Depreciation and amortization

     9.8        9.2        —          19.0        10.3        7.8        —          18.1  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     209.9        144.7        (19.4     335.2        214.9        127.3        (17.8     324.4  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 158.3      $ 37.8      $ —        $ 196.1      $ 158.8      $ 30.1      $ —        $ 188.9  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     Nine Months Ended September 30,   
     2011        2010  
     MIS         MA         Eliminations        Consolidated         MIS         MA         Eliminations        Consolidated   

Revenue

   $ 1,251.0      $ 519.4      $ (56.8   $ 1,713.6      $ 1,068.6      $ 452.4      $ (53.3   $ 1,467.7  

Expenses:

                     

Operating, SG&A

     604.2        391.3        (56.8     938.7        562.0        333.7        (53.3     842.4  

Restructuring

     —           0.1        —          0.1        —           —           —          —     

Depreciation and amortization

     30.8        27.7        —          58.5        26.3        22.8        —          49.1  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     635.0        419.1        (56.8     997.3        588.3        356.5        (53.3     891.5  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 616.0      $ 100.3      $ —        $ 716.3      $ 480.3      $ 95.9      $ —        $ 576.2  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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MIS and MA Revenue by Line of Business

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

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2011     2010     2011     2010  

MIS:

        

Corporate finance (CFG)

   $ 129.0     $ 144.9     $ 510.9     $ 399.2  

Structured finance (SFG)

     82.0       70.1       257.7       214.7  

Financial institutions (FIG)

     72.1       73.6       228.1       213.0  

Public, project and infrastructure finance (PPIF)

     68.3       69.6       205.3       195.4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total external revenue

     351.4       358.2       1,202.0       1,022.3  

Intersegment royalty

     16.8       15.5       49.0       46.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     368.2       373.7       1,251.0       1,068.6  
  

 

 

   

 

 

   

 

 

   

 

 

 

MA:

        

Research, data and analytics (RD&A)

     115.3       106.0       335.9       315.8  

Risk management software (RMS)

     47.9       42.8       127.5       115.3  

Professional services

     16.7       6.3       48.2       14.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total external revenue

     179.9       155.1       511.6       445.4  

Intersegment license fee

     2.6       2.3       7.8       7.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     182.5       157.4       519.4       452.4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Eliminations

     (19.4     (17.8     (56.8     (53.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Total MCO

   $ 531.3     $ 513.3     $ 1,713.6     $ 1,467.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Consolidated Revenue Information by Geographic Area:

 

  

     Three Months Ended September 30,        Nine Months Ended September 30,   
     2011       2010       2011       2010  

United States

   $ 274.3     $ 278.3     $ 890.7     $ 794.4  
  

 

 

   

 

 

   

 

 

   

 

 

 

International:

        

EMEA

     163.1       155.5       532.1       453.9  

Other

     93.9       79.5       290.8       219.4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total International

     257.0       235.0       822.9       673.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 531.3     $ 513.3     $ 1,713.6     $ 1,467.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Total Assets by Segment:  
     September 30, 2011      December 31, 2010  
     MIS      MA      Corporate
Assets (a)
     Consolidated      MIS      MA      Corporate
Assets (a)
     Consolidated  

Total Assets

   $ 591.3        821.2        1,108.8      $ 2,521.3      $ 639.0        910.0        991.3      $ 2,540.3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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NOTE 15. RECENTLY ISSUED ACCOUNTING STANDARDS

In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements”. The new standard requires disclosure regarding transfers in and out of Level 1 and Level 2 classifications within the fair value hierarchy as well as requiring further detail of activity within the Level 3 category of the fair value hierarchy. The new standard also requires disclosures regarding the fair value for each class of assets and liabilities, which is a subset of assets or liabilities within a line item in a company’s balance sheet. Additionally, the standard will require further disclosures surrounding inputs and valuation techniques used in fair value measurements. The new disclosures and clarifications of existing disclosures set forth in this ASU are effective for interim and annual reporting periods beginning after December 15, 2009, except for the additional disclosures regarding Level 3 fair value measurements, for which the effective date is for fiscal years and interim periods within those years beginning after December 15, 2010. The Company has fully adopted all provisions of this ASU as of January 1, 2011 and the implementation did not have a material impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued ASU No. 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations”. The objective of this ASU is to address diversity in practice regarding proforma disclosures for revenue and earnings of the acquired entity. The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this ASU also expand the supplemental pro forma disclosures under ASC Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this ASU are effective for fiscal years beginning on or after December 15, 2010. The Company will conform to the disclosure requirements set forth in this ASU for any future material business combinations.

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. The objective of this ASU is to achieve common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. The amendments in this ASU change the wording used to describe current requirements in U.S. GAAP for measuring fair value and for financial statement disclosure about fair value measurements. Some of the amendments in the ASU clarify the FASB’s intent or change a particular principle or requirement pertaining to the application of existing fair value measurement requirements or for disclosing information about fair value measurements. The amendments in this ASU are required to be applied prospectively and are effective for fiscal years beginning after December 15, 2011 and early adoption is not permitted. The Company is currently evaluating the potential impact, if any, of the implementation of this ASU on its consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”. Under the amendments in this ASU, an entity has two options for presenting its total comprehensive income: to show its components along with the components of net income in a single continuous statement, or in two separate but consecutive statements. The amendments in this ASU are required to be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company intends to conform to the new presentation required in this ASU beginning with its Form 10Q for the three months ended March 31, 2012.

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles—Goodwill and Other (Topic 350)”. The objective of this ASU is to simplify how entities test goodwill for impairment. This ASU permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350 of the ASC. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Prior to the issuance of this ASU, an entity was required to test goodwill for impairment, on at least an annual

 

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basis, by comparing the fair value of a reporting unit with its carrying amount, including goodwill (step one). If the fair value of a reporting unit was less than its carrying amount, then the second step of the test would be performed to measure the amount of the impairment loss, if any. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted. The Company intends to early adopt the provisions of this ASU for its assessment of potential goodwill impairment which is performed at least annually as of November 30.

NOTE 16. SUBSEQUENT EVENTS

On October 25, 2011, the Board approved the declaration of a quarterly dividend of $0.14 per share of Moody’s common stock, payable on December 10, 2011 to shareholders of record at the close of business on November 20, 2011.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis of financial condition and results of operations should be read in conjunction with the Moody’s Corporation condensed consolidated financial statements and notes thereto included elsewhere in this quarterly report on Form 10-Q.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains Forward-Looking Statements. See “Forward-Looking Statements” commencing on page 62 for a discussion of uncertainties, risks and other factors associated with these statements.

The Company

Moody’s is a provider of (i) credit ratings, (ii) credit and economic related research, data and analytical tools, (iii) risk management software and (iv) quantitative credit risk measures, credit portfolio management solutions, training and financial credentialing and certification services. Moody’s operates in two reportable segments: MIS and MA.

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

The MA segment develops a wide range of products and services that support the risk management activities of institutional participants in global financial markets. Within its RD&A business, MA distributes investor-oriented research and data developed by MIS as part of its ratings process, including in-depth research on major debt issuers, industry studies and commentary on topical credit related events. The RD&A business also produces and provides economic research and credit data and analytical tools such as quantitative credit risk scores. Within its RMS business, MA provides both economic and regulatory capital risk management software solutions. Within its professional services business it provides quantitative credit risk measures, credit portfolio management solutions, training and financial credentialing services.

Critical Accounting Estimates

Moody’s discussion and analysis of its financial condition and results of operations are based on the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Moody’s to make estimates and judgments that affect reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the dates of the financial statements and revenue and expenses during the reporting periods. These estimates are based on historical experience and on other assumptions that are believed to be reasonable under the circumstances. On an ongoing basis, Moody’s evaluates its estimates, including those related to revenue recognition, accounts receivable allowances, contingencies, restructuring, goodwill and acquired intangible assets, pension and other post-retirement benefits, stock-based compensation, and income taxes. Actual results may differ from these estimates under different assumptions or conditions. Item 7, MD&A, in the Company’s annual report on Form 10-K for the year ended December 31, 2010, includes descriptions of some of the judgments that Moody’s makes in applying its accounting estimates in these areas. Since the date of the annual report on Form 10-K, there have been no material changes to the Company’s critical accounting estimates.

 

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Operating Segments

The Company reports in two reportable segments: MIS and MA. The MIS segment is comprised of all of the Company’s ratings activities. All of Moody’s other non-rating commercial activities are included in the MA segment.

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

The MA segment consists of three lines of business – research, data and analytics, risk management software, and professional services – that develop a wide range of products and services that support the risk management activities of institutional participants in global financial markets. Within its research, data and analytics business, MA distributes investor-oriented research and data developed by MIS as part of its ratings process, including in-depth research on major debt issuers, industry studies and commentary on topical credit related events. RD&A also produces and provides economic research and credit data and analytical tools such as quantitative credit risk scores. Within its risk management software business, MA provides both economic and regulatory capital risk management software and implementation services. Within its professional services business it provides quantitative credit risk measures, credit portfolio management solutions, training and financial credentialing services.

The following is a discussion of the results of operations of the Company and these segments, including the intersegment royalty revenue for MIS and expense incurred by MA for the rights to use and distribute content, data and products developed by MIS. The discussion also includes intersegment license revenue charged to MIS from MA for the use of certain MA products and services in MIS’s ratings process. Overhead charges and corporate expenses which exclusively benefit only one segment, are fully charged to that segment. Additionally, overhead costs and corporate expenses of the Company which benefit both segments are allocated to each segment based on a revenue-split methodology. Overhead expenses include costs such as rent and occupancy, information technology and support staff such as finance, human resources, information technology and legal. Beginning on January 1, 2011, the Company refined its methodology for allocating the aforementioned overhead and corporate costs to its segments. The refined methodology is reflected in the segment results for the three and nine months ended September 30, 2011 and accordingly, the segment results for the same periods in 2010 have been reclassified to conform to the new presentation.

Certain prior year amounts have been reclassified to conform to the current presentation.

Results of Operations

Three Months Ended September 30, 2011 compared with Three Months Ended September 30, 2010

Executive Summary

Moody’s revenue for the third quarter of 2011 totaled $531.3 million, an increase of $18.0 million compared to the same period in 2010. Excluding the favorable impact from changes in FX translation rates, revenue in the third quarter of 2011 increased $6.4 million compared to 2010. Total expenses were $335.2 million, an increase of $10.8 million compared to the third quarter of 2010, of which approximately $8 million of the increase was due to unfavorable changes in FX translation rates. Operating income of $196.1 million in the third quarter of 2011 increased $7.2 million compared to the same period in the prior year. Diluted EPS of $0.57 for the third quarter of 2011, which included $0.03 from the favorable resolution of a state tax matter, decreased $0.01 over the prior year period, which included a $0.07 tax benefit on foreign earnings that are indefinitely reinvested.

 

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Moody’s Corporation

The table below provides a summary of revenue and operating results, followed by further insight and commentary:

 

    Three Months Ended September 30,     % Change
Favorable
 
    2011     2010     (Unfavorable)  

Revenue:

     

United States

  $ 274.3     $ 278.3       (1 %) 
 

 

 

   

 

 

   

International:

     

EMEA

    163.1       155.5       5

Other

    93.9       79.5       18
 

 

 

   

 

 

   

Total International

    257.0       235.0       9
 

 

 

   

 

 

   

Total

    531.3       513.3       4
 

 

 

   

 

 

   

Expenses:

     

Operating

    171.0       153.7       (11 %) 

SG&A

    145.0       152.2       5

Restructuring

    0.2       0.4       50

Depreciation and amortization

    19.0       18.1       (5 %) 
 

 

 

   

 

 

   

Total

    335.2       324.4       (3 %) 
 

 

 

   

 

 

   

Operating income

  $ 196.1     $ 188.9       4
 

 

 

   

 

 

   

Interest expense, net

  $ (12.9   $ (12.8     (1 %) 

Other non-operating income, net

  $ 1.6     $ 5.3       (70 %) 

Net income attributable to Moody’s

  $ 130.7     $ 136.0       (4 %) 

Global revenue of $531.3 million in the third quarter of 2011 increased $18.0 million compared to the same period in 2010 reflecting good growth in MA being partially offset by a modest decline in MIS. The decline in ratings revenue compared to the third quarter of 2010 primarily reflects decreases in speculative-grade corporate debt issuance being partially offset by higher SFG revenue. The growth in MA revenue reflects higher revenue across all LOBs, most notably in the professional services LOB, and includes revenue from CSI which was acquired in the fourth quarter of 2010. Transaction revenue accounted for 41% of global MCO revenue in the third quarter of 2011, compared to 45% in the same period of the prior year. Transaction revenue in the MIS segment represents the initial rating of a new debt issuance as well as other one-time fees while relationship revenue represents the recurring monitoring of a rated debt obligation and/or entities that issue such obligations, as well as revenue from programs such as commercial paper, medium-term notes and shelf registrations. In the MA segment, relationship revenue represents subscription-based revenues and software maintenance revenue. Transaction revenue in MA represents software license fees and revenue from the professional services line of business which offers credit risk management advisory and training services, and are typically sold on a per-engagement basis.

U.S. revenue decreased $4.0 million from the third quarter of 2010, primarily reflecting lower speculative-grade corporate debt issuance volumes being partially offset by higher CMBS issuance within SFG and RD&A revenue within MA.

Non-U.S. revenue increased $22.0 million over 2010, reflecting strong growth in MA and modest growth in MIS. The increase in non-U.S. MA revenue reflects growth across all LOBs, most notably in professional services, which is primarily attributed to the acquisition of CSI in the fourth quarter of 2010. The increase in non-U.S. ratings revenue primarily reflects growth in rated issuance across most asset classes within SFG as well as higher project and infrastructure revenue, particularly in the EMEA region. These increases were partially offset by declines in high-yield and investment-grade corporate debt issuance across all regions. Changes in FX translation rates had an approximate $11 million favorable impact on non-U.S. revenue for the quarter ended September 30, 2011.

 

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The table below shows Moody’s global staffing by geographic area:

 

     September 30,      %
Change
 
     2011      2010         

United States

     2,414        2,275        6

International

     2,318        2,014        15
  

 

 

    

 

 

    

Total

     4,732        4,289        10
  

 

 

    

 

 

    

Operating expenses were $171.0 million in the third quarter of 2011, an increase of $17.3 million from the same period in 2010 and reflected both higher compensation and non-compensation costs. Non-compensation costs have increased approximately $11 million over the third quarter of 2010 reflecting higher costs resulting from the Company’s ongoing investments in technology infrastructure. Compensation costs increased approximately $6 million from the prior year reflecting higher salaries and related employee benefits which resulted from increases in headcount in both the MIS and MA segments coupled with annual merit increases. Partially offsetting this increase was lower incentive compensation primarily due to the quarterly revision to the Company’s full-year projected achievement against certain full-year targeted results. Additionally, the increase in both compensation and non-compensation costs compared to the prior year reflects costs from CSI which was acquired in the fourth quarter of 2010.

SG&A expenses of $145.0 million in the third quarter of 2011 decreased $7.2 million from the same period in 2010 reflecting lower non-compensation costs partially offset by higher compensation costs. Non-compensation costs decreased approximately $12 million compared to the same period in 2010 and reflected lower legal and litigation-related costs. Compensation costs increased approximately $5 million primarily due to higher salaries and related employee benefits which reflects annual merit increases and headcount growth in sales personnel within MA as well as in support areas such as compliance and IT. Partially offsetting this increase was lower incentive compensation primarily due to the quarterly revision to the Company’s full-year projected achievement against certain full-year targeted results.

Operating income of $196.1 million increased $7.2 million from the same period in 2010, reflecting the 4% increase in revenue exceeding the 3% increase in operating and SG&A expenses. Changes in FX translation rates had an approximate $4 million favorable impact on operating income in the three months ended September 30, 2011.

Interest expense, net for the three months ended September 30, 2011 was $12.9 million, consistent with the same period in 2010. The third quarter of 2011 reflects higher expense on borrowings which includes a full quarter of interest on the $500 million 2010 Senior Notes issued in August 2010 partially offset by lower interest expense on the $300 million Series 2005-1 Notes resulting from benefits on interest rate swaps entered into in the fourth quarter of 2010 to convert the fixed rate of interest on the notes to a floating LIBOR-based rate. The aforementioned increase in interest on borrowings was offset by a reversal of interest on UTPs of approximately $3 million related to the favorable resolution of a state tax matter.

Other non-operating income, net of $1.6 million in the three months ended September 30, 2011 decreased $3.7 million compared to the same period in 2010 and primarily reflects lower income from investments in entities for which the Company does not have a controlling interest.

Moody’s ETR was 28.5% in the third quarter of 2011, up from 24.4% in 2010. The increase was primarily due to a tax benefit of approximately $18 million in 2010 related to foreign earnings that are indefinitely reinvested, partially offset by a tax benefit of approximately $5 million from the settlement of state tax matters in the current period. Excluding the aforementioned tax benefits in both periods, the Company’s ETR was 270 bps lower than the same period in 2010 reflecting lower U.S. taxes on foreign earnings and state income taxes.

Net Income for the three months ended September 30, 2011, which reflected a net benefit of approximately $7 million, or $0.03 per diluted share that related to the aforementioned settlement of a state tax matter, was $130.7 million, or

 

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$0.57 per diluted share. This is a decline of $5.3 million, or $0.01 per diluted share, compared to the same period in 2010 when Net Income included an $18 million, or $0.07 per share tax benefit related to the indefinite reinvestment of foreign earnings. This decrease in tax benefits was partially offset by higher operating income and a lower ETR excluding the aforementioned tax benefits in both years.

Segment Results

Moody’s Investors Service

The table below provides a summary of revenue and operating results, followed by further insight and commentary:

 

    Three Months Ended September 30,     % Change
Favorable
 
    2011     2010     (Unfavorable)  

Revenue:

     

Corporate finance (CFG)

  $ 129.0     $ 144.9       (11 %) 

Structured finance (SFG)

    82.0       70.1       17

Financial institutions (FIG)

    72.1       73.6       (2 %) 

Public, project and infrastructure finance (PPIF)

    68.3       69.6       (2 %) 
 

 

 

   

 

 

   

Total external revenue

    351.4       358.2       (2 %) 

Intersegment royalty

    16.8       15.5       8
 

 

 

   

 

 

   

Total MIS Revenue

    368.2       373.7       (1 %) 

Expenses:

     

Operating and SG&A (including intersegment expenses)

    200.0       204.3       2

Restructuring

    0.1       0.3       67

Depreciation and amortization

    9.8       10.3       5
 

 

 

   

 

 

   

Total

    209.9       214.9       2
 

 

 

   

 

 

   

Operating income

  $ 158.3     $ 158.8       —     
 

 

 

   

 

 

   

The following is a discussion of external MIS revenue and operating expenses:

Global MIS revenue of $351.4 million for the three months ended September 30, 2011 decreased $6.8 million compared to the same period in 2010, reflecting declines in high-yield and investment-grade corporate debt issuance. These declines in rated issuance volumes reflect the widening of credit spreads due to uncertainties in the EMEA sovereign debt markets coupled with weakening macroeconomic conditions in the U.S. The aforementioned declines were partially offset by growth across most asset classes within SFG compared to challenging conditions in the securitization markets in the prior year as well as certain pricing increases in the fundamental rating LOBs reflecting the Company’s enhanced commitment to monitoring and surveillance functions. Transaction revenue for MIS in the three months ended September 30, 2011 was 52% of total revenue compared to 58% in 2010, with the decrease primarily reflecting the aforementioned declines in corporate debt issuance.

In the U.S., revenue was $198.8 million in the third quarter of 2011, a decrease of $8.4 million, or 4% compared to the same period in 2010. The decrease was primarily due to declines in rated issuance volumes for both high-yield corporate debt and bank loans within CFG as well as infrastructure finance within PPIF. Partially offsetting these declines were higher rated issuance volumes in the CMBS asset class within SFG compared to the third quarter of 2010.

 

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Non-U.S. revenue was $152.6 million in the third quarter of 2011 and increased $1.6 million, or 1% compared to the same period in the prior year. The increase reflects growth across most asset classes within SFG as well as higher project and infrastructure revenue in the EMEA region partially offset by lower speculative-grade and investment-grade corporate debt issuance across all regions. Changes in FX translation rates had an approximate $10 million favorable impact on non-U.S. MIS revenue in the third quarter of 2011.

Global CFG revenue of $129.0 million in the third quarter of 2011 decreased $15.9 million from the same period in 2010, primarily reflecting significant declines in high-yield and investment-grade corporate debt issuance volumes partially offset by higher surveillance revenue and price increases. Transaction revenue represented 62% of total CFG revenue in the third quarter of 2011, compared to 74% in the prior year period. In the U.S., revenue in the third quarter of 2011 was $83.9 million, $10.9 million lower than the same period in 2010. The decrease was primarily due to lower rated issuance volumes for high-yield corporate debt and bank loans. Internationally, revenue of $45.1 million in the third quarter of 2011 decreased $5.0 million compared to the same period in 2010, reflecting declines in both high-yield and investment-grade rated issuance volumes across most regions. The aforementioned global declines in corporate bond rated issuance volumes reflect an increase in credit spreads during the third quarter of 2011 resulting from uncertainties in the EMEA sovereign debt markets and weakening macroeconomic conditions in the U.S. Favorable changes in FX translation rates had an approximate $3 million impact on international CFG revenue in the third quarter of 2011.

Global SFG revenue of $82.0 million in the third quarter of 2011 increased $11.9 million compared to the same period in 2010, reflecting growth in most asset classes internationally as well as higher CMBS issuance in the U.S. This resulted in transaction revenue increasing to 49% of total SFG revenue in the third quarter of 2011 compared to 47% in the prior year period. In the U.S., revenue of $40.8 million increased $6.8 million compared to the third quarter of 2010, reflecting strong growth in CMBS rated issuance volumes due to the current low interest rate environment and increased investor appetite for this asset class. Non-U.S. revenue in the third quarter of 2011 of $41.2 million increased $5.1 million compared to the same period in the prior year, primarily reflecting growth across most asset classes within the EMEA region, most notably in the covered bond sector. The growth in covered bond revenue in the EMEA region is primarily due to increased monitoring revenue as a result of higher rated issuance volumes from previous quarters. Favorable changes in FX translation rates had an approximate $4 million impact on international SFG revenue in the third quarter of 2011.

Global FIG revenue of $72.1 million in the third quarter of 2011 decreased $1.5 million compared to the same period in 2010 primarily reflecting declines in banking issuance volumes partially offset by price increases. Transaction revenue was 30% of total FIG revenue in the quarter ended September 30, 2011, compared to 37% in same period in 2010. In the U.S., revenue of $29.4 million in the third quarter of 2011 was flat compared to the prior year. Outside the U.S., revenue in the third quarter of 2011 was $42.7 million, or 3% lower than in the prior year. The decline is primarily due to lower banking issuance volumes in EMEA which reflects current uncertainties in the region’s sovereign debt markets. Favorable changes in FX translation rates had an approximate $3 million impact on international FIG revenue in the third quarter of 2011.

Global PPIF revenue was $68.3 million in the third quarter of 2011, a decrease of $1.3 million compared to the same period in 2010, reflecting modest declines in all sectors . Revenue generated from new transactions was 58% of total PPIF revenue in the third quarter of 2011, compared to 60% in the prior year period. In the U.S., revenue for the three months ended September 30, 2011 of $44.7 million decreased $4.1 million over the prior year primarily due to lower rated issuance volumes in infrastructure finance reflecting weakening macroeconomic conditions in the U.S. Outside the U.S., PPIF revenue increased 13% compared to the third quarter of 2010 due to growth in infrastructure and project finance revenue in EMEA which primarily reflected the mix of fee type and certain pricing increases. Favorable changes in FX translation rates had an approximate $1 million impact on international PPIF revenue in the third quarter of 2011.

 

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Operating and SG&A expenses in the third quarter of 2011 decreased $4.3 million compared to the same period in 2010 and reflected lower non-compensation expenses of approximately $6 million. This decrease in non-compensation expenses primarily reflects lower legal and litigation-related costs.

Operating income in the third quarter of 2011 of $158.3 million, which includes intersegment royalty revenue and intersegment license expense, was flat compared to the same period in 2010.

Moody’s Analytics

The table below provides a summary of revenue and operating results, followed by further insight and commentary:

 

    Three Months Ended September 30,     % Change
Favorable
 
    2011     2010     (Unfavorable)  

Revenue:

     

Research, data and analytics (RD&A)

  $ 115.3     $ 106.0       9

Risk management software (RMS)

    47.9       42.8       12

Professional services

    16.7       6.3       165
 

 

 

   

 

 

   

Total external revenue

    179.9       155.1       16
 

 

 

   

 

 

   

Intersegment license fees

    2.6       2.3       13
 

 

 

   

 

 

   

Total MA Revenue

    182.5       157.4       16

Expenses:

     

Operating and SG&A (including intersegment expenses)

    135.4       119.4       (13 %) 

Restructuring

    0.1       0.1       —     

Depreciation and amortization

    9.2       7.8       (18 %) 
 

 

 

   

 

 

   

Total

    144.7       127.3       (14 %) 
 

 

 

   

 

 

   

Operating income

  $ 37.8     $ 30.1       26
 

 

 

   

 

 

   

The following is a discussion of external MA revenue and operating expenses:

Global MA revenue increased $24.8 million compared to the third quarter of 2010, with over 82% of the growth generated internationally, and reflected revenue from CSI which was acquired in the fourth quarter of 2010. Recurring revenue comprised 81% of total MA revenue in the third quarter of 2011 compared to 86% in the same period of the prior year.

In the U.S., revenue of $75.5 million in the third quarter of 2011 increased $4.4 million and primarily reflected growth in RD&A. International revenue of $104.4 million for the three months ended September 30, 2011 was $20.4 million higher than the same period in 2010, and reflected growth across all LOBs, most notably in professional services which includes revenue from the CSI acquisition completed in the fourth quarter of 2010.

Global RD&A revenue, which comprised 64% and 68% of MA revenue in the third quarter ended September 30, 2011 and 2010, respectively, increased $9.3 million over the prior year. The increase reflects greater demand for products that support analysis for investment and commercial credit applications. Global RMS revenue in the third quarter of 2011 increased $5.1 million over the same period in 2010, due to the final delivery and client acceptance of software licenses and implementations. Revenue from professional services increased $10.4 million compared to the third quarter of 2010 with substantially all of the growth reflecting the acquisition of CSI in the fourth quarter of 2010. Revenue in the RMS and professional services LOBs are subject to quarterly volatility resulting from the variable nature of project timing and the concentration of revenue in a relatively small number of engagements.

 

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Operating and SG&A expenses in the third quarter of 2011, which include the intersegment royalty for the right to use and distribute content, data and products developed by MIS, increased $16.0 million compared to the same period in 2010 reflecting both higher compensation and non-compensation costs of approximately $10 million and $5 million, respectively. The increase in compensation costs reflects higher salaries and related employee benefits reflecting annual merit increases coupled with an increase in headcount which included the acquisition of CSI in the fourth quarter of 2010 as well as increases to support business growth. Additionally, the increase in compensation costs reflects higher incentive compensation due to the aforementioned increase in headcount. The increase in non-compensation costs reflects expenses related to CSI which was acquired in the fourth quarter of 2010 as well as increases in certain variable costs, such as T&E, that are correlated with business growth.

Depreciation and amortization of $9.2 million in the third quarter of 2011 increased $1.4 million from the same period in 2010 and reflected higher amortization related to intangible assets acquired as part of the fourth quarter 2010 acquisition of CSI.

Operating income of $37.8 million in the third quarter of 2011, which includes intersegment license revenue and intersegment royalty expense, increased $7.7 million compared to the same period in 2010, reflecting the total revenue growth of 16% exceeding the 14% increase in operating expenses.

Nine Months Ended September 30, 2011 compared with Nine Months Ended September 30, 2010

Executive Summary

Moody’s revenue for the nine months ended September 30, 2011 totaled $1,713.6 million, an increase of $245.9 million compared to the same period in 2010. Excluding the favorable impact from changes in FX translation rates, revenue in the nine months ended September 30, 2011 increased $218.8 million compared to 2010. Total expenses were $997.3 million, an increase of $105.8 million compared to the nine months ended September 30, 2010, of which approximately $24 million of the increase was due to unfavorable changes in FX translation rates. Operating income of $716.3 million in the nine months ended September 30, 2011 increased $140.1 million compared to the same period in the prior year. Diluted EPS of $2.06 for the nine months ended September 30, 2011, which included a $0.03 benefit related to favorable resolutions of Legacy Tax Matters as well as other tax benefits totaling $0.09, increased $0.50 over the prior year period, which included a $0.07 tax benefit on foreign earnings that are indefinitely reinvested. Excluding the $0.03 favorable impact relating to the resolution of Legacy Tax Matters in 2011, diluted EPS of $2.03 increased $0.49, or 32%, from $1.54 in 2010, which excludes a prior year favorable impact of $0.02 related to the resolution of a Legacy Tax Matter.

 

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Moody’s Corporation

The table below provides a summary of revenue and operating results, followed by further insight and commentary:

 

    Nine Months Ended September 30,     % Change
Favorable
 
    2011     2010     (Unfavorable)  

Revenue:

     

United States

  $ 890.7     $ 794.4       12
 

 

 

   

 

 

   

International:

     

EMEA

    532.1       453.9       17

Other

    290.8       219.4       33
 

 

 

   

 

 

   

Total International

    822.9       673.3       22
 

 

 

   

 

 

   

Total

    1,713.6       1,467.7       17
 

 

 

   

 

 

   

Expenses:

     

Operating

    502.3       423.9       (18 %) 

SG&A

    436.4       418.5       (4 %) 

Restructuring

    0.1       —          NM   

Depreciation and amortization

    58.5       49.1       (19 %) 
 

 

 

   

 

 

   

Total

    997.3       891.5       (12 %) 
 

 

 

   

 

 

   

Operating income

  $ 716.3     $ 576.2       24
 

 

 

   

 

 

   

Interest expense, net

  $ (45.2   $ (35.1     (29 %) 

Other non-operating income, net

  $ 13.1     $ 0.7       NM   

Net income attributable to Moody’s

  $ 475.2     $ 370.4       28

Global revenue of $1,713.6 million in the nine months ended September 30, 2011 increased $245.9 million compared to the same period in 2010, reflecting strong growth in both segments. The increase in ratings revenue compared to the nine months ended September 30, 2010 reflects growth across all ratings LOBs, most notably from within CFG. The growth in MA revenue reflects higher revenue across all LOBs, most notably in professional services which includes revenue from CSI which was acquired in the fourth quarter of 2010. Transaction revenue accounted for 46% of global MCO revenue in the nine months ended September 30, 2011, compared to 41% in the same period of the prior year.

U.S. revenue of $890.7 million increased $96.3 million over 2010, primarily reflecting growth in CFG largely due to strong rated issuance volumes in the first half of 2011 for investment-grade corporate debt as well as high-yield corporate debt and bank loans compared to the prior year period. These increases were partially offset by significant third quarter declines in high-yield corporate debt issuance volumes. Also contributing to the growth in U.S. ratings revenue over the prior year was higher rated issuance volumes in CREF within SFG. The aforementioned growth in ratings revenue was also partially offset by declines in U.S. public and project finance rated issuance. Additionally, the increase over the nine months ended September 30, 2010 reflects good growth in the RD&A LOB within MA.

Non-U.S. revenue increased $149.6 million over 2010, reflecting growth in all LOBs within both segments. The most notable growth in non-U.S. ratings revenue resulted from higher rated issuance volumes in the EMEA region for high-yield and investment-grade corporate debt as well as from most asset classes within SFG in the EMEA and Asia regions. Additionally, the growth over 2010 reflects higher infrastructure finance and banking-related issuance in the EMEA and Asia regions. The increase in non-U.S. MA revenue reflects growth across all LOBs, most notably in professional services, where over 89% of the growth for this LOB is attributed to the acquisition of CSI in the fourth quarter of 2010 coupled with strong growth in the base business. Changes in FX translation rates had an approximate $27 million favorable impact on non-U.S. revenue for the nine months ended September 30, 2011.

Operating expenses were $502.3 million in the nine months ended September 30, 2011, an increase of $78.4 million from the same period in 2010 and reflected both higher compensation and non-compensation costs. Compensation costs increased approximately $52 million from the prior year reflecting higher salaries and related employee benefits which has resulted from increases in headcount in both the MIS and MA segments coupled with annual merit increases. Additionally, there was approximately $10 million higher incentive compensation resulting from increased headcount and greater projected achievement against full-year 2011 targeted results through the third quarter of 2011 compared to the projected achievement against full-year targets in the prior year period. Non-compensation costs have increased approximately $26 million over the same period in 2010 resulting from the Company’s ongoing investments in technology infrastructure as well as higher travel-related costs which are correlated with improved overall business conditions in both segments. Additionally, the increase in both compensation and non-compensation costs compared to the prior year reflects costs from CSI which was acquired in the fourth quarter of 2010.

 

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SG&A expenses of $436.4 million in the nine months ended September 30, 2011 increased $17.9 million from the same period in 2010. Compensation costs increased approximately $38 million primarily due to higher salaries and related employee benefits which reflects annual merit increases and headcount growth in sales personnel within MA as well as in support areas such as compliance and IT. Additionally there was approximately $5 million higher incentive compensation costs compared to 2010 reflecting increased headcount and greater projected achievement against full-year 2011 targeted results through the third quarter of 2011 compared to the projected achievement against full-year targets in the prior year period. Non-compensation expenses decreased approximately $20 million over the prior year primarily reflecting lower legal and litigation-related costs partially offset by higher costs relating to ongoing investments in technology infrastructure.

Depreciation and amortization of $58.5 million in the nine months ended September 30, 2011 increased $9.4 million from the same period in 2010 and reflected higher amortization for software developed or obtained for internal use coupled with higher amortization related to intangible assets acquired as part of the fourth quarter 2010 acquisition of CSI.

Operating income of $716.3 million, was up $140.1 million from the same period in 2010, reflecting the 17% increase in revenue exceeding the 12% increase in operating expenses. Changes in FX translation rates had an immaterial impact on operating income in the nine months ended September 30, 2011.

Interest expense, net for the nine months ended September 30, 2011 was $45.2 million, a $10.1 million increase in expense compared to the same period in 2010. This increase is primarily due to higher expense on borrowings reflecting nine months of interest on the $500 million 2010 Senior Notes issued in August 2010 partially offset by lower interest expense on the $300 million Series 2005-1 Notes resulting from benefits on interest rate swaps entered into in the fourth quarter of 2010 to convert the fixed rate of interest on the notes to a floating LIBOR-based rate. This increase in interest on borrowings was partially offset by a reversal of interest on UTPs of approximately $3 million related to the favorable resolution of a state tax matter. Additionally, there were benefits of $3.7 million and $2.5 million in the nine months ended September 30, 2011 and 2010, respectively, related to the favorable resolution of Legacy Tax Matters. The benefits in 2011 consist of a $2.8 million reversal of interest expense related to a matter for which the statute of limitations had lapsed coupled with $0.9 million in interest income received for the settlement of a matter for a tax year that preceded the 2000 Distribution. The benefit in 2010 reflects interest income received for the favorable settlement of Legacy Tax Matters.

Other non-operating income, net of $13.1 million in the nine months ended September 30, 2011 increased $12.4 million compared to the same period in 2010. The increase in income reflects a $6.4 million reversal of reserves in the first half of 2011 for the lapse of a statute of limitations relating to a Legacy Tax Matter. Additionally, there were FX gains of approximately $3 million in the first nine months of 2011 compared to FX losses of approximately $4 million in the prior year period. The gains in 2011 primarily reflect the strengthening of the euro to the British pound over the nine months ended September 30, 2011. The losses in the prior year period primarily reflected the weakening of the euro to the British pound.

Moody’s ETR was 29.9% in the nine month period ended September 30, 2011, down from 30.9% in 2010. The decrease was primarily due to lower U.S. taxes on foreign earnings and state income taxes in the current period as well as beneficial adjustments in UTBs in 2011 totaling approximately $19 million, which resulted from a foreign tax ruling and the settlement of state tax audits. This compares to a tax benefit in 2010 of approximately $18 million relating to foreign earnings that are indefinitely reinvested.

 

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Net Income for the nine months ended September 30, 2011, which reflected the aforementioned $19 million of tax benefits, was $475.2 million, or $2.06 per diluted share and increased $104.8 million, or $0.50 per diluted share, compared to the same period in 2010. The increase in EPS over the prior year reflects higher Net Income coupled with fewer diluted shares outstanding compared to the first nine months of 2010. Excluding net benefits from the favorable resolution of Legacy Tax Matters in both periods as well as minor restructuring-related adjustments in 2011, Net Income increased $102.5 million, or 28%, to $468.3 million, resulting in a $0.49, or 32%, increase in diluted EPS compared to the prior year.

Segment Results

Moody’s Investors Service

The table below provides a summary of revenue and operating results, followed by further insight and commentary:

 

    Nine Months Ended September 30,     % Change
Favorable
 
    2011     2010     (Unfavorable)  

Revenue:

     

Corporate finance (CFG)

  $ 510.9     $ 399.2       28

Structured finance (SFG)

    257.7       214.7       20

Financial institutions (FIG)

    228.1       213.0       7

Public, project and infrastructure finance (PPIF)

    205.3       195.4       5
 

 

 

   

 

 

   

Total external revenue

    1,202.0       1,022.3       18

Intersegment royalty

    49.0       46.3       6
 

 

 

   

 

 

   

Total MIS Revenue

    1,251.0       1,068.6       17

Expenses:

     

Operating and SG&A (including intersegment expenses)

    604.2       562.0       (8 %) 

Depreciation and amortization

    30.8       26.3       (17 %) 
 

 

 

   

 

 

   

Total

    635.0       588.3       (8 %) 
 

 

 

   

 

 

   

Operating income

  $ 616.0     $ 480.3       28
 

 

 

   

 

 

   

The following is a discussion of external MIS revenue and operating expenses:

Global MIS revenue of $1,202.0 million for the nine months ended September 30, 2011, increased $179.7 million compared to 2010, reflecting growth in all ratings LOBs. The most notable growth reflected higher rated issuance for investment-grade corporate debt and bank loans as well as high-yield corporate debt in the first half of 2011 before uncertainties in the U.S. and EMEA capital markets resulted in lower issuance volumes in the third quarter. Additionally, there was growth across most asset classes within SFG compared to challenging conditions in the securitization markets in the prior year as well as stronger banking and insurance-related issuance within FIG and infrastructure finance revenue within PPIF in the first half of the year. Furthermore, a portion of the revenue growth over 2010 relates to certain pricing increases that reflect the Company’s enhanced commitment to monitoring and surveillance functions. Transaction revenue for MIS in the nine months ended September 30, 2011 was 59% of total revenue compared to 54% in 2010, with the increase primarily reflecting the aforementioned growth in rated issuance volumes in the CFG and SFG LOBs.

 

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In the U.S., revenue was $673.8 million in the first nine months of 2011, an increase of $82.9 million, or 14% compared to the same period in 2010. The increase was primarily due to strong rated issuance volumes for investment-grade and speculative-grade corporate debt and bank loans in the first half of 2011 partially offset by third quarter declines in issuance volumes for these types of corporate debt. Additionally, there were higher rated issuance volumes in the CREF asset classes within SFG compared to the same period in 2010. These increases were partially offset by declines in rated issuance for U.S. public finance and high-yield corporate debt.

Non-U.S. revenue was $528.2 million in the first nine months of 2011, an increase of $96.8 million, or 22% compared to the same period in the prior year. The growth over the prior year period reflects higher rated issuance volumes in the EMEA region across most asset classes within SFG as well as higher infrastructure finance revenue across all regions. Additionally, the increase reflects strong growth in high-yield and investment-grade corporate debt in the first half of 2011 partially offset by third quarter declines in issuance volumes for these types of corporate debt. Furthermore, there was higher banking and insurance-related issuance in the EMEA and Asia regions. Changes in FX translation rates had an approximate $27 million favorable impact on non-U.S. MIS revenue in first nine months of 2011.

Global CFG revenue of $510.9 million in the first nine months of 2011 increased $111.7 million from the same period in 2010. The increase over the prior year primarily reflects strong growth in rated issuance volumes in the first half of the year for investment-grade corporate bonds and bank loans as well as good growth in high-yield corporate debt issuance prior to third quarter 2011. The higher rated issuance volumes in the first half of the year largely reflected issuers taking advantage of the overall low interest rate environment to refinance existing borrowings. This increase was partially offset by declines in rated issuance volumes in the third quarter of 2011 resulting from higher credit spreads on corporate debt which reflected uncertainties in the EU sovereign debt markets coupled with weakening macroeconomic conditions in the U.S. Additionally, the growth over the prior year period reflects higher surveillance revenue and price increases. Transaction revenue represented 72% of total CFG revenue in the nine months ended September 30, 2011, compared to 70% in the prior year period. In the U.S., revenue in the first nine months of 2011 was $328.4 million, $67.4 million higher than the same period in 2010. The increase was primarily due to growth in rated issuance for investment-grade and speculative-grade corporate debt and bank loans in the first half of 2011 reflecting the overall low interest rate environment. Also, the growth in investment-grade corporate debt reflects an increase in issuance to fund merger and acquisition-related activity. These increases were partially offset by declines in rated issuance volumes for high-yield corporate debt in the third quarter of 2011. Internationally, revenue of $182.5 million in the first nine months of 2011 increased $44.3 million compared to the same period in 2010, driven by rated issuance growth in high-yield corporate debt and bank loans as well as investment-grade corporate debt in the EMEA and Asia regions. This growth reflects higher issuance volumes in the first half of 2011 before sovereign debt uncertainties in the EMEA region, which were exacerbated in the third quarter of 2011, resulted in issuance declines. The growth in non-U.S. revenue over the prior year period also reflected an increase in Indicative Ratings assigned. Favorable changes in FX translation rates had an approximate $9 million impact on international CFG revenue in the first nine months of 2011.

Global SFG revenue of $257.7 million in the first nine months of 2011 increased $43.0 million compared to the same period in 2010, primarily reflecting growth in most asset classes internationally coupled with strong growth in CREF issuance volumes in the U.S. The aforementioned increases resulted in transaction revenue increasing to 52% of total SFG revenue in the first nine months of 2011 compared to 43% in the prior year period. In the U.S., revenue of $121.4 million increased $14.1 million compared to the first nine months of 2010, reflecting good growth in CMBS rated issuance volumes due to the current low interest rate environment and narrow credit spreads for these asset classes for most of 2011. Non-U.S. revenue in the nine months ended September 30, 2011 of $136.3 million increased $28.9 million compared to the same period in the prior year, primarily reflecting growth across most asset classes within the EMEA region, most notably in the ABS, RMBS and covered bonds sectors. The increases in ABS and RMBS partly reflected issuers coming to market ahead of regulatory changes implemented by the ECB in March 2011, which required two ratings for asset-backed securities that may be used as collateral in Eurosystem credit operations. Favorable changes in FX translation rates had an approximate $9 million impact on international SFG revenue in the first nine months of 2011.

 

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Global FIG revenue of $228.1 million in the first nine months of 2011 increased $15.1 million compared to the same period in 2010 reflecting growth in banking and insurance-related revenue across all regions coupled with price increases. Transaction revenue was 37% of total FIG revenue in the first nine months of 2011, compared to 33% in same period in 2010. In the U.S., revenue of $93.7 million for the nine months ended September 30, 2011 increased $6.1 million compared to the prior year. The increase was primarily due to higher banking and insurance issuance volumes which reflected issuers taking advantage of the low interest rate environment in the first half of 2011 as well as price increases. Outside the U.S., revenue in the first nine months of 2011 was $134.4 million, or $9.0 million higher than in the prior year, and was primarily due to good growth in banking and insurance revenue in the EMEA and Asia regions reflecting issuers opportunistically coming to market in the first half of 2011 in the low interest rate environment as well as price increases. Favorable changes in FX translation rates had an approximate $6 million impact on international FIG revenue in the nine months ended September 30, 2011.

Global PPIF revenue was $205.3 million in the first nine months of 2011, an increase of $9.9 million compared to the same period in 2010, primarily reflecting increases in infrastructure finance revenue across all regions which reflected price increases partially offset by declines in U.S. public and project finance issuance. Revenue generated from new transactions was 57% of total PPIF revenue in the first nine months of 2011, compared to 56% in the prior year period. In the U.S., revenue for the nine months ended September 30, 2011 of $130.3 million decreased $4.7 million compared to the prior year primarily due to declines in public finance rated issuance. The decrease in rated issuance volumes for U.S. public finance reflected declines in state and local government spending and the expiration of the Build America Bond Program in the fourth quarter of 2010, which was implemented in the U.S. as part of the American Recovery and Reinvestment Act of 2009. Outside the U.S., PPIF revenue increased 24% compared to the first nine months of 2010 due to growth in infrastructure finance revenue across all non-U.S. regions. Favorable changes in FX translation rates had an approximate $4 million impact on international PPIF revenue in the first nine months of 2011.

Operating and SG&A expenses in the first nine months of 2011 increased $42.2 million compared to the same period in 2010 and reflected increases in compensation costs of approximately $52 million partially offset by lower non-compensation expenses of approximately $10 million. The increase in compensation costs reflects higher salaries and related employee benefits resulting from annual merit increases, modest headcount growth in the ratings LOBs and in support areas such as IT for which the costs are allocated to each segment based on a revenue-split methodology. Additionally, there was higher incentive compensation due to an increase in headcount and greater projected achievement against full-year 2011 targeted results through the third quarter of 2011 compared to the projected achievement against full-year targets in the prior year period. The decrease in non-compensation expenses primarily reflected lower legal and litigation-related costs as well as lower bad debt expense compared to the prior year. These decreases were partially offset by higher costs resulting from the Company’s continued investment in improving IT infrastructure.

Operating income in the third quarter of 2011 of $616.0 million, which includes intersegment royalty revenue and intersegment license expense, increased $135.7 million from the same period in 2010 and reflects the 17% increase in total MIS revenue outpacing the 8% increase in total operating expenses.

 

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Moody’s Analytics

The table below provides a summary of revenue and operating results, followed by further insight and commentary:

 

    Nine Months Ended September 30,     % Change
Favorable
 
    2011     2010     (Unfavorable)  

Revenue:

     

Research, data and analytics (RD&A)

  $ 335.9     $ 315.8       6

Risk management software (RMS)

    127.5       115.3       11

Professional services

    48.2       14.3       237
 

 

 

   

 

 

   

Total external revenue

    511.6       445.4       15
 

 

 

   

 

 

   

Intersegment license fees

    7.8       7.0       11
 

 

 

   

 

 

   

Total MA Revenue

    519.4       452.4       15

Expenses:

     

Operating and SG&A (including intersegment expenses)

    391.3       333.7       (17 %) 

Restructuring

    0.1       —          NM   

Depreciation and amortization

    27.7       22.8       (21 %) 
 

 

 

   

 

 

   

Total

    419.1       356.5       (18 %) 
 

 

 

   

 

 

   

Operating income

  $ 100.3     $ 95.9       5
 

 

 

   

 

 

   

The following is a discussion of external MA revenue and operating expenses:

Global MA revenue increased $66.2 million compared to the first nine months of 2010, with 80% of the growth generated internationally, and reflected revenue from CSI which was acquired in the fourth quarter of 2010. Recurring revenue comprised 82% of total MA revenue in the first nine months of 2011 compared to 88% in the same period of the prior year.

In the U.S., revenue of $216.9 million in the nine months ended September 30, 2011 increased $13.4 million, primarily reflecting growth in RD&A. International revenue of $294.7 million for the nine months ended September 30, 2011 was $52.8 million higher than the same period in 2010, and reflected growth across all LOBs, most notably in professional services which includes revenue from the CSI acquisition completed in the fourth quarter of 2010.

Global RD&A revenue, which comprised 66% and 71% of MA revenue in the nine months ended September 30, 2011 and 2010, respectively, increased $20.1 million over the prior year. The increase reflects greater demand for products that support analysis for investment and commercial credit applications. Global RMS revenue in the first nine months of 2011 increased $12.2 million over the same period in 2010, due to the final delivery and client acceptance of software licenses and implementations. Revenue from the professional services LOB increased $33.9 million compared to the same period in 2010, with approximately 85% of the growth reflecting the acquisition of CSI in the fourth quarter of 2010 coupled with strong growth in the base business. Revenue in the RMS and professional services LOBs are subject to quarterly volatility resulting from the variable nature of project timing and the concentration of revenue in a relatively small number of engagements.

Operating and SG&A expenses in the first nine months of 2011, which include the intersegment royalty for the right to use and distribute content, data and products developed by MIS, increased $57.6 million compared to the same period in 2010 reflecting both higher compensation and non-compensation costs of approximately $38 million and $17 million, respectively. The increase in compensation costs reflects higher salaries and related employee benefits resulting from annual merit increases coupled with an increase in headcount relating to the acquisition of CSI in the fourth quarter of 2010 as well as to support business growth. Additionally, the increase in compensation costs reflects higher incentive compensation primarily due to the aforementioned increase in headcount. Also, there was an increase in commissions reflecting stronger MA sales than in the prior period. The increase in non-compensation costs reflects expenses related to CSI which was acquired in the fourth quarter of 2010 as well as increases in certain variable costs, such as T&E, that are correlated with business growth.

 

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Depreciation and amortization of $27.7 million in the nine months ended September 30, 2011 increased $4.9 million from the same period in 2010 and reflected higher amortization related to intangible assets acquired as part of the fourth quarter 2010 acquisition of CSI.

Operating income of $100.3 million in the first nine months of 2011, which includes intersegment license revenue and intersegment royalty expense, increased $4.4 million compared to the same period in 2010, reflecting the $67.0 million increase in total MA revenue exceeding the $62.6 million increase in total expenses.

Non-GAAP Financial Measures:

In addition to its reported results, Moody’s has included in this MD&A certain adjusted results that the SEC defines as “non-GAAP financial measures.” Management believes that such non-GAAP financial measures, when read in conjunction with the Company’s reported results, can provide useful supplemental information for investors analyzing period to period comparisons of the Company’s performance. These non-GAAP financial measures relate to minor adjustments made to both the Company’s 2007 and 2009 Restructuring Plans and Legacy Tax Matters, with the Legacy Tax Matters being further discussed in Note 12 to the Company’s consolidated financial statements. The table below shows Moody’s consolidated results for the nine months ended September 30, 2011 and 2010, adjusted to exclude the impact of the aforementioned items:

 

Amounts in millions, except per share amounts   Nine Months Ended September 30,  
    2011     2010  
    As
Reported
    Restructuring
(a)
    Legacy
Tax (b)
    Non-GAAP
Financial
Measures
    As
Reported
    Legacy
Tax (b)
    Non-GAAP
Financial
Measures
 

Total expenses

  $ 997.3     $ (0.1   $ —        $ 997.2     $ 891.5     $ —        $ 891.5  

Operating income

  $ 716.3     $ 0.1     $ —        $ 716.4     $ 576.2     $ —        $ 576.2  

Interest expense, net

  $ (45.2   $ —        $ (0.9   $ (46.1   $ (35.1   $ (2.5   $ (37.6

Other non-operating, income, net

  $ 13.1     $ —        $ (6.4   $ 6.7     $ 0.7     $ —        $ 0.7  

Provision for income taxes

  $ 204.3     $ —        $ (0.3   $ 204.0     $ 167.3     $ 2.1     $ 169.4  

Net income attributable to Moody’s Corporation

  $ 475.2     $ 0.1     $ (7.0   $ 468.3     $ 370.4     $ (4.6   $ 365.8  

Earnings per share attributable to Moody’s common shareholders

             

Basic

  $ 2.09     $ —        $ (0.03   $ 2.06     $ 1.57     $ (0.02   $ 1.55  

Diluted

  $ 2.06     $ —        $ (0.03   $ 2.03     $ 1.56     $ (0.02   $ 1.54  

 

(a) To exclude minor adjustments related to both the 2009 and 2007 restructuring charges. Additionally, include the tax impacts of aforementioned adjustments.
(b) To exclude benefits related to the resolution of certain legacy tax matters.

 

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Liquidity and Capital Resources

Cash Flow

The Company is currently financing its operations, capital expenditures and share repurchases from operating cash flow. The following is a summary of the changes in the Company’s cash flows followed by a brief discussion of these changes:

 

     Nine Months Ended
September 30,
    $ Change
Favorable

(Unfavorable)
 
     2011     2010        

Net cash provided by operating activities

   $ 666.3     $ 474.7     $ 191.6  

Net cash used in investing activities

   $ (65.3   $ (55.0   $ (10.3

Net cash used in financing activities

   $ (392.4   $ (104.7   $ (287.7

Net cash provided by operating activities

The $191.6 million increase in net cash flows provided by operating activities resulted from an increase in net income of $105.4 million, which was further impacted by the following changes in assets and liabilities:

 

   

An approximate $55 million increase in cash flows reflecting lower prepaid tax balances in 2011 resulting from both a refund received from the Internal Revenue Service in 2011 for tax overpayments made in 2010 as well as the application of a portion of the aforementioned overpayments to 2011 quarterly estimated tax payments;

 

   

An approximate $79 million increase in cash flows due to a larger benefit from changes in net deferred tax assets in 2010, which favorably impacted cash flow from operations compared to net income in the prior year. The benefits in 2010 primarily relate to foreign earnings indefinitely reinvested;

 

   

A $66.4 million increase in cash flow due to higher cash collections in the nine months ended September 30, 2011 compared to the same period in 2010 reflecting the collection of fees billed in the fourth quarter of 2010 and the first half of 2011 when there was strong growth in rated issuance volumes within CFG, particularly in high-yield corporate debt and bank loans. A decline in rated issuance volumes in the third quarter of 2011 resulted in steeper declines in accounts receivable balances in the first nine months of 2011 compared to 2010. Approximately 29% of the Company’s accounts receivable balance at both September 30, 2011 and 2010 represent unbilled receivables which primarily reflect certain annual fees in MIS which are invoiced in arrears;

 

   

An approximate $38 million decrease in cash flows primarily reflecting higher incentive compensation payments made in 2011 compared to the prior year. The higher payouts in 2011 reflect greater achievement against targeted results in 2010 as compared to achievement against targets in 2009. Additionally, the decrease reflects a profit sharing contribution paid to eligible employees of the Company in 2011 which was based on the Company’s diluted EPS growth from 2009 to 2010. There was no such contribution made in 2010;

 

   

A decrease in cash flow of approximately $25 million relating to contributions and payments made by the Company to its funded and unfunded U.S. DBPPs and its U.S. other post-retirement plans in 2011;

 

   

A decrease in cash flow of $42 million reflecting timing of tax payments;

 

   

The remaining decrease in cash flows from operations of approximately $9 million is due to changes in various other assets and liabilities.

Net cash used in investing activities

 

   

The cash paid for acquisitions in 2011 represents approximately $7 million for small acquisitions within the MA segment as well as an approximate $3 million payment to acquire a 16% additional equity investment in KIS Pricing. The additional investment in KIS Pricing adds to the Company’s existing indirect ownership of this entity through its controlling stake in KIS.

 

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Net cash used in financing activities

The $287.7 million increase in cash used in financing activities was attributed to:

 

   

A $214.2 million increase in treasury shares repurchased compared to 2010;

 

   

Higher dividends paid of $15.8 million due to an increase in the March 2011 payout reflecting an increase in the Company’s quarterly dividend from 10.5 cents to 11.5 cents per share of Moody’s common stock as well as an increase from 11.5 cents per share to 14 cents per share for the June and September 2011 payout;

 

   

Proceeds received in August 2010 of $496.9 million relating to the issuance of the 2010 Senior Notes;

Partially offset by:

 

   

A $428.7 million decrease in net repayments on short-term borrowings under the Company’s CP program. The Company had paid all outstanding CP Notes during 2010 and has no borrowings outstanding under the CP program or the revolving credit facility as of September 30, 2011.

Cash held in non-U.S. jurisdictions

The Company’s aggregate cash and cash equivalents of $854.2 million at September 30, 2011 consisted of approximately $681 million located outside of the U.S. The cash held in the Company’s non-U.S. operations contains approximately $579 million in entities whose undistributed earnings are indefinitely reinvested in the Company’s foreign operations. Accordingly, the Company has not provided deferred income taxes on these indefinitely reinvested earnings. A future distribution or change in assertion regarding reinvestment by the foreign subsidiaries relating to these earnings could result in additional tax liability to the Company. It is not practicable to determine the amount of the potential additional tax liability due to complexities in the tax laws and in the hypothetical calculations that would have to be made. The Company manages both its U.S and international cash flow to maintain sufficient liquidity in all regions to effectively meet its operating needs.

Future Cash Requirements

The Company believes that it has the financial resources needed to meet its cash requirements and expects to have positive operating cash flow for the next twelve months. Cash requirements for periods beyond the next twelve months will depend, among other things, on the Company’s profitability and its ability to manage working capital requirements. The Company may also borrow from various sources.

The Company remains committed to using its strong cash flow to create value for shareholders by investing in growing areas of the business, reinvesting in ratings quality initiatives, making selective acquisitions in related businesses, repurchasing stock and paying a dividend, all in the manner consistent with maintaining sufficient liquidity. In October of 2011, the Board of Directors of the Company declared a quarterly dividend of $0.14 per share of Moody’s common stock, payable on December 10, 2011 to shareholders of a record at the close of business on November 20, 2011. The continued payment of dividends at this rate, or at all, is subject to the discretion of the Board. Additionally, the Company expects to continue share repurchases at modest levels in the fourth quarter of 2011 subject to available cash flow, market conditions

 

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and other capital allocation decisions. The Company repurchased $333.8 million of shares in the nine months ended September 30, 2011. As of September 30, 2011, Moody’s had $0.9 billion of share repurchase authority remaining under its current program, which does not have an established expiration.

At September 30, 2011, Moody’s had $1.2 billion of outstanding debt, which is further described in the “Indebtedness” section of this MD&A below, with $1.0 billion of additional capacity available. Principal payments on the 2008 Term Loan commenced in September 2010 and will continue through its maturity in accordance with the schedule of payments outlined in the “Indebtedness” section of this MD&A below.

On February 6, 2008, the Company entered into a 17.5 year operating lease agreement to occupy six floors of an office tower located in the Canary Wharf district of London, England. The total base rent of the Canary Wharf Lease over its 17.5-year term is approximately 134 million GBP, and the Company began 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 obligations. The total remaining lease payments as of September 30, 2011 are approximately 131 million GBP, of which approximately 7 million GBP will be paid in the next twelve months.

On October 20, 2006, the Company entered into an operating lease agreement with 7 World Trade Center, LLC for 589,945 square-feet of an office building located at 7WTC at 250 Greenwich Street, New York, New York, which is serving as Moody’s headquarters. The 7WTC Lease has an initial term of 21 years with a total of 20 years of renewal options. The total base rent of 7WTC Lease over its initial 21-year term is approximately $536 million including rent credits from the World Trade Center Rent Reduction Program promulgated by the Empire State Development Corporation. On March 28, 2007, the 7WTC lease agreement was amended for the Company to lease an additional 78,568 square-feet at 7WTC. The additional base rent is approximately $106 million over a 20-year term. The total remaining lease payments as of September 30, 2011, including the aforementioned rent credits, are approximately $539 million, of which approximately $27 million will be paid during the next twelve months.

Indebtedness

The following table summarizes total indebtedness:

 

    September 30,
2011
    December 31,
2010
 

2007 Facility

  $ —        $ —     

Commercial paper

    —          —     

Notes Payable:

   

Series 2005-1 Notes, due 2015, including fair value of interest rate swap of $8.0 million at 2011 and $(3.7) million at 2010

    308.0       296.3  

Series 2007-1 Notes due 2017

    300.0       300.0  

2010 Senior Notes, due 2020, net of unamortized discount of $2.8 million and $3.0 million in 2011 and 2010, respectively

    497.2       497.0  

2008 Term Loan, various payments through 2013

    138.8       146.3  
 

 

 

   

 

 

 

Total debt

    1,244.0       1,239.6  

Current portion

    (43.1     (11.3
 

 

 

   

 

 

 

Total long-term debt

  $ 1,200.9     $ 1,228.3  
 

 

 

   

 

 

 

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 serves, in part, to support the Company’s CP Program described

 

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below. Interest on borrowings is payable at rates that are based on LIBOR plus a premium that can range from 16.0 to 40.0 basis points of the outstanding borrowing amount depending on the Debt/EBITDA ratio. The Company also pays quarterly facility fees, regardless of borrowing activity under the 2007 Facility. The quarterly fees for the 2007 Facility can range from 4.0 to 10.0 basis points per annum of the facility amount, depending on the Company’s Debt/EBITDA ratio. The Company also pays a utilization fee of 5.0 basis points on borrowings outstanding when the aggregate amount outstanding exceeds 50% of the total facility. The 2007 Facility contains certain covenants that, among other things, restrict the ability of the Company and certain of its subsidiaries, without the approval of the lenders, to engage in mergers, consolidations, asset sales, transactions with affiliates and sale-leaseback transactions or to incur liens, as defined in the related agreement. The 2007 Facility also contains financial covenants that, among other things, require the Company to maintain a Debt/EBITDA ratio of not more than 4.0 to 1.0 at the end of any fiscal quarter.

Commercial Paper

On October 3, 2007, the Company entered into a private placement commercial paper program under which the Company may issue CP notes up to a maximum amount of $1.0 billion. Amounts available under the CP Program may be re-borrowed. The CP Program is supported by the Company’s 2007 Facility. The maturities of the CP Notes will vary, but may not exceed 397 days from the date of issue. The CP Notes are sold at a discount from par or, alternatively, sold at par and bear interest at rates that will vary based upon market conditions at the time of issuance. The rates of interest will depend on whether the CP Notes will be a fixed or floating rate. The interest on a floating rate may be based on the following: (a) certificate of deposit rate; (b) commercial paper rate; (c) federal funds rate; (d) 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 CP Program contains certain events of default including, among other things: non-payment of principal, interest or fees; entrance into any form of moratorium; and bankruptcy and insolvency events, subject in certain instances to cure periods.

Notes Payable

On August 19, 2010, the Company issued $500 million aggregate principal amount of unsecured notes in a public offering. The 2010 Senior Notes bear interest at a fixed rate of 5.50% and mature on September 1, 2020. Interest on the 2010 Senior Notes will be due semi-annually on September 1 and March 1 of each year, commencing March 1, 2011. The Company may prepay the 2010 Senior Notes, in whole or in part, at any time at a price equal to 100% of the principal amount being prepaid, plus accrued and unpaid interest and a Make-Whole Amount. Additionally, at the option of the holders of the notes, the Company may be required to purchase all or a portion of the notes upon occurrence of a “Change of Control Triggering Event,” as defined in the Indenture, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The Indenture contains covenants that limit the ability of the Company and certain of its subsidiaries to, among other things, incur or create liens and enter into sale and leaseback transactions. In addition, the Indenture contains a covenant that limits the ability of the Company to consolidate or merge with another entity or to sell all or substantially all of its assets to another entity. The Indenture contains customary default provisions. In addition, an event of default will occur if the Company or certain of its subsidiaries fail to pay the principal of any indebtedness (as defined in the Indenture) when due at maturity in an aggregate amount of $50 million or more, or a default occurs that results in the acceleration of the maturity of the Company’s or certain of its subsidiaries’ indebtedness in an aggregate amount of $50 million or more. Upon the occurrence and during the continuation of an event of default under the Indenture, the notes may become immediately due and payable either automatically or by the vote of the holders of more than 25% of the aggregate principal amount of all of the notes then outstanding.

On September 7, 2007, the Company issued and sold through a private placement transaction, $300.0 million aggregate principal amount of its 6.06% Series 2007-1 Senior Unsecured Notes due 2017 pursuant to the 2007 Agreement. The Series 2007-1 Notes have a ten-year term and bear interest at an annual rate of 6.06%, payable semi-annually on March 7 and September 7. Under the terms of the 2007 Agreement, the Company may, from time to time

 

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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 in accordance with the schedule of payments set forth in the 2008 Term Loan outlined in the table below.

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

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

 

Year Ended December 31,

   2008 Term Loan      Series 2005-1 Notes      Total  

2011 (after September 30,)

   $ 3.8      $ —         $ 3.8  

2012

     71.2        —           71.2  

2013

     63.8        —           63.8  

2014

     —           —           —     

2015

     —           300.0        300.0  
  

 

 

    

 

 

    

 

 

 

Total

   $ 138.8      $ 300.0      $ 438.8  
  

 

 

    

 

 

    

 

 

 

In the fourth quarter of 2010, the Company entered into interest rate swaps with a total notional amount of $300 million which converted the fixed rate of interest on the Series 2005-1 Notes to a floating LIBOR-based interest rate. Also, on May 7, 2008, the Company entered into interest rate swaps with a total notional amount of $150 million to protect against fluctuations in the LIBOR-based variable interest rate on the 2008 Term Loan. Both of these interest rate swaps are more fully discussed in Note 6 to the condensed consolidated financial statements.

 

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At September 30, 2011, the Company was in compliance with all covenants contained within all of the debt agreements. In addition to the covenants described above, the 2007 Facility, the 2005 Agreement, the 2007 Agreement, the 2010 Senior Notes and the 2008 Term Loan contain cross default provisions. These provisions state that default under one of the aforementioned debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under those instruments to be immediately due and payable. As of September 30, 2011, there were no such cross defaults.

Interest expense, net

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Expense on borrowings

   $ (16.2   $ (14.0   $ (48.9   $ (35.4

Income

     1.6       0.8       3.9       1.9  

Income (expense) on UTBs and other tax related liabilities

     0.9       (0.2     (6.1     (5.3

Capitalized

     0.8       0.6       2.2       1.2  

Legacy Tax (a)

     —          —          3.7       2.5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense, net

   $ (12.9   $ (12.8   $ (45.2   $ (35.1
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) The amounts in both years represent interest income related to the favorable settlement of Legacy Tax Matters, as further discussed in Note 12 to the condensed consolidated financial statements.

The Company’s long-term debt, including the current portion, is recorded at cost except for the Series 2005-1 Notes which are carried at cost adjusted for the fair value of an interest rate swap used to hedge the fair value of the note. The fair value and carrying value of the Company’s long-term debt as of September 30, 2011 and December 31, 2010 is as follows:

 

     September 30, 2011      December 31, 2010  
     Carrying
Amount
     Estimated Fair
Value
     Carrying
Amount
     Estimated Fair
Value
 

Series 2005-1 Notes

   $ 308.0      $ 312.2      $ 296.3      $ 310.6  

Series 2007-1 Notes

     300.0        327.7        300.0        321.3  

2010 Senior Notes

     497.2        524.6        497.0        492.1  

2008 Term Loan

     138.8        138.8        146.3        146.3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,244.0      $ 1,303.3      $ 1,239.6      $ 1,270.3  
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of the Company’s 2010 Senior Notes is based on quoted market prices. The fair value of the remaining long-term debt, which is not publicly traded, is estimated using discounted cash flows with inputs based on prevailing interest rates available to the Company for borrowings with similar maturities.

 

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Management may consider pursuing additional long-term financing when it is appropriate in light of cash requirements for operations, share repurchases and other strategic opportunities, which would result in higher financing costs.

Off-Balance Sheet Arrangements

At September 30, 2011, Moody’s did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as special purpose or variable interest entities where Moody’s is the primary beneficiary, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, Moody’s is not exposed to any financing, liquidity market or credit risk that could arise if it had engaged in such relationships.

Contractual Obligations

The following table presents payments due under the Company’s contractual obligations as of September 30, 2011:

 

             Payments Due by Period  

(in millions)

   Total      Less Than 1
Year
     1 - 3 Years      3 - 5 Years      Over 5 Years  

Indebtedness(1)

   $ 1,645.0      $ 105.1      $ 209.7      $ 401.9      $ 928.3  

Operating lease obligations(2)

     843.7        66.3        129.0        104.2        544.2  

Purchase obligations

     118.1        47.0        56.9        14.2        —     

Acquisition costs(3)

     2.4        —           —           2.4        —     

Pension obligations(4)

     66.0        2.6        6.4        8.5        48.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total(5)

   $ 2,675.2      $ 221.0      $ 402.0      $ 531.2      $ 1,521.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Reflects principal payments, related interest and applicable fees due on the 2008 Term Loan, the Series 2005-1 Notes, the Series 2007-1 Notes, the 2010 Senior Notes as well as fees related to the 2007 Facility, as described in Note 11 to the condensed consolidated financial statements
(2)

Primarily reflects real estate operating leases

(3) Reflects a $2.4 million contingent cash payment related to the November 18, 2010 acquisition of CSI Global Education, Inc.; the cash payment is dependent upon the achievement of a certain contractual milestone by January 2016 as discussed in Note 7 to the condensed consolidated financial statements
(4) Reflects projected benefit payments for the next ten years relating to the Company’s U.S. unfunded Post-Retirement Benefit Plans described in Note 10 to the condensed consolidated financial statements
(5) The table above does not include the Company’s net long-term tax liabilities of $226.1 million relating to UTP and Legacy Tax Matters, since the expected cash outflow of such amounts be period cannot be reasonably estimated.

Dividends

On October 25, 2011, the Board approved the declaration of a quarterly dividend of $0.14 per share of Moody’s common stock, payable on December 10, 2011 to shareholders of record at the close of business on November 20, 2011.

 

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2011 Outlook

Moody’s outlook for 2011 is based on assumptions about many macroeconomic and capital market factors, including interest rates, corporate profitability and business investment spending, merger and acquisition activity, and consumer borrowing and securitization. There is an important degree of uncertainty surrounding these assumptions and, if actual conditions differ from these assumptions, Moody’s results for the year may differ materially from the current outlook. The Company’s guidance assumes foreign currency translation at end-of-quarter exchange rates.

Moody’s is reaffirming its EPS guidance for the full-year 2011 and expects to be at the upper end of the range. For Moody’s overall, the Company now expects full-year 2011 revenue to grow in the low-double-digit percent range. Full-year 2011 expenses are now projected to increase in the high-single-digit percent range. Full-year 2011 operating margin is now projected to be approximately 39%, due to the planned increase in expenses and lower expected revenue in the fourth quarter. The effective tax rate is now expected to be approximately 31 percent. Share repurchase remains subject to available cash flow and other capital allocation decisions. The Company still expects diluted earnings per share for full-year 2011 in the range of $2.38 to $2.48 but expects to be at the upper end of the range.

For the global MIS business, revenue for full-year 2011 is now expected to increase in the high-single-digit percent range. Within the U.S., MIS revenue is now expected to increase in the mid-single-digit percent range, while non-U.S. revenue is now projected to increase in the low-teens percent range. Corporate finance revenue is now forecasted to grow in the low-double-digit percent range. Revenue from structured finance is now projected to increase in the mid-teens percent range. Financial institutions is now forecasted to increase in the mid-single-digit percent range, while public, project and infrastructure finance revenue is still expected to be about flat.

For Moody’s Analytics, full-year 2011 revenue is still expected to increase in the low-double-digit percent range. Revenue growth is still projected in the mid-single-digit percent range for research, data and analytics and in the low- to mid-single-digit percent range for risk management software. Professional services revenue is still projected to more than double, primarily reflecting revenue from the late 2010 acquisition of CSI Global Education and very strong performance in the risk management advisory business. MA revenue is now expected to increase in the high-single-digit percent range in the U.S. and in the mid-teens percent range outside the U.S.

Recently Issued Accounting Pronouncements

In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements”. The new standard requires disclosure regarding transfers in and out of Level 1 and Level 2 classifications within the fair value hierarchy as well as requiring further detail of activity within the Level 3 category of the fair value hierarchy. The new standard also requires disclosures regarding the fair value for each class of assets and liabilities, which is a subset of assets or liabilities within a line item in a company’s balance sheet. Additionally, the standard will require further disclosures surrounding inputs and valuation techniques used in fair value measurements. The new disclosures and clarifications of existing disclosures set forth in this ASU are effective for interim and annual reporting periods beginning after December 15, 2009, except for the additional disclosures regarding Level 3 fair value measurements, for which the effective date is for fiscal years and interim periods within those years beginning after December 15, 2010. The Company has fully adopted all provisions of this ASU as of January 1, 2011 and the implementation did not have a material impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued ASU No. 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations”. The objective of this ASU is to address diversity in practice regarding proforma disclosures for revenue and earnings of the acquired entity. The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this ASU also expand the supplemental pro forma disclosures under ASC Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly

 

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attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this ASU are effective for fiscal years beginning on or after December 15, 2010. The Company will conform to the disclosure requirements set forth in this ASU for any future material business combinations.

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. The objective of this ASU is to achieve common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. The amendments in this ASU change the wording used to describe current requirements in U.S. GAAP for measuring fair value and for financial statement disclosure about fair value measurements. Some of the amendments in the ASU clarify the FASB’s intent or change a particular principle or requirement pertaining to the application of existing fair value measurement requirements or for disclosing information about fair value measurements. The amendments in this ASU are required to be applied prospectively and are effective for fiscal years beginning after December 15, 2011 and early adoption is not permitted. The Company is currently evaluating the potential impact, if any, of the implementation of this ASU on its consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”. Under the amendments in this ASU, an entity has two options for presenting its total comprehensive income: to show its components along with the components of net income in a single continuous statement, or in two separate but consecutive statements. The amendments in this ASU are required to be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company intends to conform to the new presentation required in this ASU beginning with its Form 10Q for the three months ended March 31, 2012.

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles – Goodwill and Other (Topic 350)”. The objective of this ASU is to simplify how entities test goodwill for impairment. This ASU permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350 of the ASC. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Prior to the issuance of this ASU, an entity was required to test goodwill for impairment, on at least an annual basis, by comparing the fair value of a reporting unit with its carrying amount, including goodwill (step one). If the fair value of a reporting unit was less than its carrying amount, then the second step of the test would be performed to measure the amount of the impairment loss, if any. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with ea