10-K 1 d665999d10k.htm FORM 10-K FORM 10-K
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

(MARK ONE)

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013

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, NEW YORK 10007

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

(ZIP CODE)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 553-0300.

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

TITLE OF EACH CLASS   NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, PAR VALUE $.01 PER SHARE   NEW YORK STOCK EXCHANGE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

NONE

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes þ  No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ¨  No þ

Indicate by check mark whether the Registrant: (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.    Yes þ  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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes þ  No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (see definition of “accelerated filer and large accelerated filer” in Exchange Act Rule 12b-2).

Large Accelerated Filer þ     Accelerated Filer ¨    Non-accelerated Filer ¨    Smaller reporting company ¨

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

The aggregate market value of Moody’s Corporation Common Stock held by nonaffiliates* on June 30, 2013 (based upon its closing transaction price on the Composite Tape on such date) was approximately $13.4 billion.

As of January 31, 2014, 213.7 million shares of Common Stock of Moody’s Corporation were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement for use in connection with its annual meeting of stockholders scheduled to be held on April 15, 2014, are incorporated by reference into Part III of this Form 10-K.

The Index to Exhibits is included as Part IV, Item 15(3) of this Form 10-K.

 

* Calculated by excluding all shares held by executive officers and directors of the Registrant without conceding that all such persons are “affiliates” of the Registrant for purposes of federal securities laws.

 

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MOODY’S CORPORATION

INDEX TO FORM 10-K

 

 

  

Page(s)

 
   Glossary of Terms and Abbreviations      4-9   

PART I.

  

Item 1.    BUSINESS      10   
   Background      10  
   The Company      10  
   Prospects for Growth      10-12   
   Competition      12  
   Moody’s Strategy      12-13  
   Regulation      13-14   
   Intellectual Property      14   
   Employees      14  
   Available Information      14  
   Executive Officers of the Registrant      15-16   
Item 1A.    RISK FACTORS      17-21   
Item 1B.    UNRESOLVED STAFF COMMENTS      21  
Item 2.    PROPERTIES      21  
Item 3.    LEGAL PROCEEDINGS      22-23   
Item 4.    MINE SAFETY DISCLOSURES      23  

PART II.

  

Item 5.    MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES      24  
   Moody’s Purchase of Equity Securities      24  
   Common Stock Information and Dividends      25  
   Equity Compensation Plan Information      25   
   Performance Graph      26  
Item 6.    SELECTED FINANCIAL DATA      27  
Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      28  
   The Company      28  
   Critical Accounting Estimates      28-35   
   Operating Segments      35  
   Results of Operations      36-46   
   Market Risk      46-47  
   Liquidity and Capital Resources      47-55   
   2014 Outlook      55-56   
   Recently Issued Accounting Pronouncements      56   
   Contingencies      56-58   
   Forward-Looking Statements      58-59   
Item 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      59  
Item 8.    FINANCIAL STATEMENTS      60-112   
Item 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE      113   
Item 9A.    CONTROLS AND PROCEDURES      113  
Item 9B.    OTHER INFORMATION      113  

 

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   Page(s)  

PART III.

  

Item 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATION GOVERNANCE      114   
Item 11.    EXECUTIVE COMPENSATION      114   
Item 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS      114   
Item 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE      114   
Item 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES      114   
  

PART IV.

  
Item 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES      115   
SIGNATURES      116   
INDEX TO EXHIBITS      117-120   

 

  

 

 

 

 

Exhibits
filed Herewith

  

 

10.25    Moody’s Corporation Retirement Account, amended and restated as of December 18, 2013
10.32    Sixth Amendment to the Profit Participation Plan of Moody’s Corporation
21    SUBSIDIARIES OF THE REGISTRANT
23.1    CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM – 2013 and 2012
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
101.DEF    XBRL Definitions Linkbase Document
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB    XBRL Taxonomy Extension Labels Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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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
Adjusted Operating Income   Operating income excluding restructuring, depreciation and amortization and a goodwill impairment charge
Adjusted Operating Margin   Adjusted Operating Income divided by revenue
Amba   Amba Investment Services; a provider of investment research and quantitative analytics for global financial institutions; a subsidiary of the Company acquired 100% of Amba in December 2013.
Americas   Represents countries within North and South America, excluding the U.S.
Analytics   Moody’s Analytics – 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); includes accumulated gains & losses on cash flow and net investment hedges, certain gains and losses relating to pension and other retirement benefits obligations and foreign currency translation adjustments.
ASC  

The FASB Accounting Standards Codification; the sole source of authoritative

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

Asia-Pacific   Represents countries in Asia also including but not limited to: Australia and its proximate islands, China, India, Indonesia, Japan, Korea, Malaysia, Singapore and Thailand
ASU   The FASB Accounting Standards Updates to the ASC. It also provides background information for accounting guidance and the bases for conclusions on the changes in the ASC. ASUs are not considered authoritative until codified into the ASC
B&H   Barrie & Hibbert Limited, an acquisition completed in December 2011; part of the MA segment, a leading provider of risk management modeling tools for insurance companies worldwide
Basel II   Capital adequacy framework published in June 2004 by the Basel Committee on Banking Supervision
Basel III   A new global regulatory standard on bank capital adequacy and liquidity agreed by the members of the Basel Committee on Banking Supervision. Basel III was developed in a response to the deficiencies in financial regulation revealed by the global financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage.
Board   The board of directors of the Company
Bps   Basis points
Canary Wharf Lease   Operating lease agreement entered into on February 6, 2008 for office space in London, England, occupied by the Company in the second half of 2009
CDOs   Collateralized debt obligations
CFG   Corporate finance group; an LOB of MIS
CLO   Collateralized loan obligation
CMBS   Commercial mortgage-backed securities; part of CREF
Cognizant   Cognizant Corporation – a former affiliate of Old D&B, which comprised the IMS Health and NMR businesses
Commission   European Commission
Common Stock   The Company’s common stock
Company   Moody’s Corporation and its subsidiaries; MCO; Moody’s

 

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Term

 

Definition

Copal   Copal Partners; an acquisition completed in November 2011; part of the MA segment; leading provider of outsourced research and analytical services to institutional investors
COSO   Committee of Sponsoring Organizations of the Treadway Commission
CP   Commercial paper
CP Notes   Unsecured CP notes
CP Program   The Company’s CP program entered into on October 3, 2007
CRAs   Credit rating agencies
CREF   Commercial real estate finance which includes REITs, commercial real estate collateralized debt obligations and CMBS; part of SFG
CreditView   Research product offered by MA that provides credit professionals a comprehensive, consolidated and streamlined view of credit information
CSI   CSI Global Education, Inc.; an acquisition completed in November 2010; part of the MA segment; a provider of financial learning, credentials, and certification in Canada
D&B Business   Old D&B’s Dun & Bradstreet operating company
DBPPs   Defined benefit pension plans
DCF   Discounted cash flow; a fair value calculation methodology whereby future projected cash flows are discounted back to their present value
Debt/EBITDA   Ratio of Total Debt to EBITDA
Directors’ Plan   The 1998 Moody’s Corporation Non-Employee Directors’ Stock Incentive Plan
Distribution Date   September 30, 2000; the date which Old D&B separated into two publicly traded companies – Moody’s Corporation and New D&B
EBITDA   Earnings before interest, taxes, depreciation and amortization
ECB   European Central Bank
EMEA   Represents countries within Europe, the Middle East and Africa
EPS   Earnings per share
ERS   The enterprise risk solutions LOB within MA (formerly RMS); offers risk management software products as well as software implementation services and related risk management advisory engagements
ESMA   European Securities and Market Authority
ESP   Estimated Selling Price; estimate of selling price, as defined in the ASC, at which the vendor would transact if the deliverable were sold by the vendor regularly on a stand-alone basis
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 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 Benefit   The difference between the tax benefit realized at exercise of an option or delivery of a restricted share and the tax benefit recorded at the time that the option or restricted share is expensed under GAAP
Exchange Act   The Securities Exchange Act of 1934, as amended
FASB   Financial Accounting Standards Board
FDIC   Federal Deposit Insurance Corporation

 

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Term

 

Definition

FIG   Financial institutions group; an LOB of MIS
Fitch   Fitch Ratings, a part of the Fitch Group
Financial Reform Act   Dodd-Frank Wall Street Reform and Consumer Protection Act
Free Cash Flow   Net cash provided by operating activities less cash paid for capital additions
FSTC   Financial Services Training and Certifications; a reporting unit within the MA segment that includes on-line and classroom-based training services and CSI
FX   Foreign exchange
GAAP   U.S. Generally Accepted Accounting Principles
GBP   British pounds
IMS Health   A spin-off of Cognizant, which provides services to the pharmaceutical and healthcare industries
Intellectual Property   The Company’s intellectual property, including but not limited to proprietary information, trademarks, research, software tools and applications, models and methodologies, databases, domain names, and other proprietary materials
IRS   Internal Revenue Service
IT   Information technology
KIS   Korea Investors Service, Inc.; 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 and consolidated subsidiary of the Company
Korea   Republic of South Korea
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 relating to the Series 2005-1 Notes and Series 2007-1 Notes; a premium based on the excess, if any, of the discounted value of the remaining scheduled payments over the prepaid principal
MCO   Moody’s Corporation and its subsidiaries; the Company; Moody’s
MD&A   Management’s Discussion and Analysis of Financial Condition and Results of Operations
MIS   Moody’s Investors Service – a reportable segment of MCO
Moody’s   Moody’s Corporation and its subsidiaries; MCO; the Company
Net Income   Earnings attributable to Moody’s Corporation, which excludes the portion of net income from consolidated entities attributable to non-controlling shareholders
New D&B   The New D&B Corporation – which comprises the D&B business after September 30, 2000
NM   Not-meaningful percentage change (over 400%)
NMR   Nielsen Media Research, Inc.; a spin-off of Cognizant; a leading source of television audience measurement services
NRSRO   Nationally Recognized Statistical Rating Organization

 

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Term

 

Definition

OCI   Other comprehensive income (loss); includes gains and losses on cash flow and net investment hedges, certain gains and losses relating to pension and other retirement benefit obligations and foreign currency translation adjustments.
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
Other Retirement Plans   The U.S. retirement healthcare and U.S. retirement life insurance plans
PPIF   Public, project and infrastructure finance; an LOB of MIS
Profit Participation Plan   Defined contribution profit participation plan that covers substantially all U.S. employees of the Company
PPP   Profit Participation Plan
PS   Professional Services ; an LOB of MA
RD&A   Research, Data and Analytics; an LOB within MA that distributes investor-oriented research and data, including in-depth research on major debt issuers, industry studies, commentary on topical credit events, economic research and analytical tools such as quantitative risk scores, and other analytical tools that are produced within MA

Redeemable

Noncontrolling

Interest

  Represents minority shareholders’ interest in entities which are controlled but not wholly-owned by Moody’s and for which Moody’s obligation to redeem the minority shareholders’ interest is represented by a put/call relationship
Reform Act   Credit Rating Agency Reform Act of 2006
REITs   Real estate investment trusts
Relationship Revenue   In MIS, 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. For MA, revenue represents subscription-based revenue and maintenance revenue
Reorganization   The Company’s business reorganization announced in August 2007 which resulted in two new reportable segments (MIS and MA) beginning in January 2008
Retirement Plans   Moody’s funded and unfunded U.S. pension plans, the U.S. post-retirement healthcare plans and the U.S. post-retirement life insurance plans
RMBS   Residential mortgage-backed securities; part of SFG
RMS   The Risk Management Software LOB within MA which provides both economic and regulatory capital risk management software and implementation services. Now referred to as “ERS”
S&P   Standard & Poor’s, a division of McGraw-Hill Financial, Inc.
SEC   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
SIV   Structured Investment Vehicle
Stock Plans   The Old D&B’s 1998 Key Employees’ Stock Incentive Plan and the Restated 2001 Moody’s Corporation Key Employees’ Stock Incentive Plan
T&E   Travel and entertainment expenses

 

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Term

 

Definition

Total Debt   Current and long-term portion of debt as reflected on the consolidated balance sheets, excluding current accounts payable and accrued liabilities incurred in the ordinary course of business
TPE   Third party evidence, as defined in the ASC, used to determine selling price based on a vendor’s or any competitor’s largely interchangeable products or services in standalone sales transactions to similarly situated customers
Transaction Revenue   For MIS, revenue representing the initial rating of a new debt issuance as well as other one-time fees. For MA, revenue represents software license fees and revenue from risk management advisory projects, training and certification services, and knowledge outsourcing engagements
U.K.   United Kingdom
U.S.   United States
USD   U.S. dollar
UTBs   Unrecognized tax benefits
UTPs   Uncertain tax positions
VSOE   Vendor specific objective evidence; evidence, as defined in the ASC, of selling price limited to either of the following: the price charged for a deliverable when it is sold separately, or for a deliverable not yet being sold separately, the price established by management having the relevant authority
WACC   Weighted average cost of capital
1998 Plan   Old D&B’s 1998 Key Employees’ Stock Incentive Plan
2000 Distribution   The distribution by Old D&B to its shareholders of all of the outstanding shares of New D&B common stock on September 30, 2000

2000 Distribution

Agreement

  Agreement governing certain ongoing relationships between the Company and New D&B after the 2000 Distribution including the sharing of any liabilities for the payment of taxes, penalties and interest resulting from unfavorable IRS determinations on certain tax matters and certain other potential tax liabilities
2001 Plan   The Amended and Restated 2001 Moody’s Corporation Key Employees’ Stock Incentive Plan
2005 Agreement   Note purchase agreement dated September 30, 2005 relating to the Series 2005-1 Notes
2007 Agreement   Note purchase agreement dated September 7, 2007 relating to the Series 2007-1 Notes
2007 Facility   Revolving credit facility of $1 billion entered into on September 28, 2007, expiring in 2012
2007 Restructuring Plan   The Company’s 2007 restructuring plan approved December 31, 2007
2008 Term Loan   Five-year $150.0 million senior unsecured term loan entered into by the Company on May 7, 2008
2009 Restructuring Plan   The Company’s 2009 restructuring plan approved March 27, 2009
2010 Indenture   Supplemental indenture and related agreements dated August 19, 2010, relating to the 2010 Senior Notes
2010 Senior Notes   Principal amount of $500.0 million, 5.50% senior unsecured notes due in September 2020 pursuant to the 2010 Indenture
2012 Facility   Revolving credit facility of $1 billion entered into on April 18, 2012, maturing in 2017
2012 Indenture   Supplemental indenture and related agreements dated August 18, 2012, relating to the 2012 Senior Notes
2012 Senior Notes   Principal amount of $500 million, 4.50% senior unsecured notes due in September 2022 pursuant to the 2012 Indenture
2013 Indenture   Supplemental indenture and related agreements dated August 12, 2013, relating to the 2013 Senior Notes
2013 Senior Notes   Principal amount of $500 million, 4.875% senior unsecured notes due in February 2024 pursuant to the 2013 Indenture

 

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Term

 

Definition

7WTC   The Company’s corporate headquarters located at 7 World Trade Center
7WTC Lease   Operating lease agreement entered into on October 20, 2006

 

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PART I

 

ITEM 1.   BUSINESS

BACKGROUND

As used in this report, except where the context indicates otherwise, the terms “Moody’s” or the “Company” refer to Moody’s Corporation, a Delaware corporation, and its subsidiaries. The Company’s executive offices are located at 7 World Trade Center at 250 Greenwich Street, New York, NY 10007 and its telephone number is (212) 553-0300.

THE COMPANY

Moody’s is a provider of (i) credit ratings, (ii) credit, capital markets and economic related research, data and analytical tools, (iii) software solutions and related risk management services, (iv) quantitative credit risk measures, financial services training and certification services and (v) outsourced research and analytical services to institutional customers. Moody’s reports in two reportable segments: MIS and MA. The MIS segment consists of all credit rating activity. All of Moody’s other non-rating commercial activities are included within the MA segment. Financial information and operating results of these segments, including revenue, expenses and operating income, are included in Part II, Item 8. Financial Statements of this annual report, and are herein incorporated by reference.

MIS publishes credit ratings on a wide range of debt obligations and the entities that issue such obligations in markets worldwide, including various corporate and governmental obligations, structured finance securities and commercial paper programs. Revenue is derived from the originators and issuers of such transactions who use MIS ratings to support the distribution of their debt issues to investors. MIS provides ratings in more than 120 countries. Ratings are disseminated via press releases to the public through a variety of print and electronic media, including the Internet and real-time information systems widely used by securities traders and investors. As of December 31, 2013, MIS had ratings relationships with approximately 11,000 corporate issuers and approximately 21,000 public finance issuers. Additionally, the Company has rated and currently monitors ratings on approximately 76,000 structured finance obligations (representing approximately 12,000 transactions). The aforementioned amounts relating to the number of issuers and transactions represent issuers or transactions that had an active rating at any point during the year ended December 31, 2013.

The MA segment develops a wide range of products and services that support financial analysis and risk management activities of institutional participants in global financial markets. Within its Research, Data and Analytics business, MA distributes research and data developed by MIS as part of its ratings process, including in-depth research on major debt issuers, industry studies, commentary on topical credit related events and also provides economic research and credit data and analytical tools such as quantitative credit risk scores. Within its Enterprise Risk Solutions business, MA provides software solutions as well as related risk management services. Within its Professional Services business it provides outsourced research and analytical services along with financial training and certification programs. MA customers represent more than 3,900 institutions worldwide operating in approximately 120 countries. During 2013 Moody’s research web site was accessed by over 230,000 individuals including 31,000 client users.

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.

PROSPECTS FOR GROWTH

Over recent decades, global fixed-income markets have grown significantly both in terms of the amount and the types of securities or other obligations outstanding. Beginning in mid-2007, there was a severe market disruption and associated financial crisis both in the

 

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developed and emerging markets resulting in a global decline in issuance activity for some significant asset classes and weak economic performance in advanced economies. Since this financial crisis, many markets and economies have recovered and Moody’s believes that the overall long-term outlook remains favorable for continued growth of the global fixed-income market and related financial information market, which includes information such as credit opinions, research, data, analytics, risk management tools and related services.

Moody’s growth is influenced by a number of trends that impact financial information markets including:

 

»   Health of the world’s major economies;

 

»   Debt capital markets activity;

 

»   Disintermediation of credit markets;

 

»   Fiscal and monetary policy of governments;

 

»   Changing regulatory requirements; and

 

»   Business investment spending.

Moody’s is well positioned to benefit from a continued recovery in global fixed-income market activity and a more informed use of credit ratings as well as research and related analytical products in an environment with heightened attention to credit risk analysis and management. Moody’s expects that these developments will support continued long-term demand for high-quality, independent credit opinions, research, data, analytics, risk management tools and related services.

Strong secular trends will continue to provide long-term growth opportunities. Moody’s key growth drivers include debt market issuance driven by global GDP growth, continued disintermediation of fixed-income markets in both developed and emerging economies that drives issuance and demand for new products and services, growth in MA driven by further penetration of MA’s client base and expansion of bank and insurance risk regulatory requirements, pricing opportunities aligned with value and advances in information technology.

Growth in global fixed income markets in a given year is dependent on many macroeconomic and capital market factors including interest rates, business investment spending, corporate refinancing needs, merger and acquisition activity, issuer profits, consumer borrowing levels and securitization activity. Rating fees paid by debt issuers account for most of the revenue of MIS. Therefore, a substantial portion of MIS’s revenue is dependent upon the dollar-equivalent volume and number of ratable debt securities issued in the global capital markets. MIS’s results can be affected by factors such as the performance and the prospects for growth of the major world economies, the fiscal and monetary policies pursued by their governments and the decisions of issuers to request MIS ratings to aid investors in their investment decisions. However, annual fee arrangements with frequent debt issuers, annual debt monitoring fees and annual fees from commercial paper and medium-term note programs, bank and insurance company financial strength ratings, mutual fund ratings, and other areas partially mitigate MIS’s dependence on the volume or number of new debt securities issued in the global fixed-income markets. Furthermore, the strong growth trend seen in the issuance of structured finance securities from the mid-1990’s reversed dramatically in 2008 due to market turmoil, with continued declines seen in 2009 and 2010, before stabilizing in 2011 with Moody’s experiencing revenue growth in this market in 2012. In 2013, Moody’s experienced revenue growth in the U.S. structured credit and commercial real estate subsectors of the structured finance market, but also experienced a decline in non-U.S. structured finance revenue, most notably in EMEA. Despite significant declines from peak market issuance levels, Moody’s believes that structured finance securities will continue to play a role in global fixed-income markets and will provide opportunities for longer term revenue growth. Moody’s will continue to monitor this market and adapt to meet the changing needs of its participants.

The pace of change in technology and communication over the past two decades makes information about investment alternatives widely available throughout the world and facilitates issuers’ ability to place securities outside their national markets and investors’ capacity to obtain information about securities issued outside their national markets. Technology also allows issuers and investors the ability to more readily obtain information about new financing techniques and new types of securities that they may wish to purchase or sell, which in the absence of the appropriate technology may not be readily or easily obtainable. This availability of information promotes the ongoing integration and expansion of financial markets worldwide giving issuers and investors access to a wider range of established and newer capital markets. As technology provides broader access to worldwide markets, it also results in a greater need for credible, globally comparable opinions about credit risk, data, analytics and related services. Additionally, information technology also provides opportunities to further build a global platform to support Moody’s continued expansion in developing markets.

An ongoing trend in the world’s capital markets is the disintermediation of financial systems. Issuers increasingly raise capital in the global public capital markets, in addition to, or in substitution for, traditional financial intermediaries. Moreover, financial intermediaries have sold assets in the global public capital markets, in addition to, or instead of, retaining those assets. Credit market disruptions, which began in mid-2007, temporarily slowed the trend of disintermediation globally. Moody’s believes that debt capital markets offer advantages in capacity and efficiency compared to the traditional banking systems and that the trend of increased disintermediation will continue. In fact, disintermediation continued in the past year because of the ongoing low interest rate environment and ongoing

 

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bank deleveraging, which has encouraged a number of corporations and other entities to seek alternative funding in the bond markets. Moody’s also observes disintermediation in key emerging markets where economic growth may outpace internal banking system capacity. Thus, disintermediation is expected to continue over the longer-term, with Moody’s continuing to target investment and resources to those markets where disintermediation and bond issuance is expected to remain robust.

In response to the credit market disruptions beginning in mid-2007 and, ongoing volatility in the global capital markets, and new regulatory requirements, financial institutions are investing in people, processes and systems to enhance risk management and compliance functions. Regulations such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, Basel II, Basel III, Solvency II and others may stimulate demand for MA products. Financial institutions are also investing in advanced qualitative and quantitative tools and services to support their management of complex balance sheets and diverse portfolios. MA offers a suite of risk management products and services to address these needs, including but not limited to risk management software, economic analysis, training and professional services.

Legislative bodies and regulators in the U.S., Europe and selective other jurisdictions continue to conduct regulatory reviews of CRAs, which may result in, for example, an increased number of competitors, changes to the business model or restrictions on certain business activities of MIS, removal of references to ratings in certain regulations, or increased costs of doing business for MIS. Therefore, in order to broaden the potential for expansion of non-ratings services, Moody’s reorganized in January 2008 into two distinct businesses: MIS, consisting solely of the ratings business, and MA, which conducts all non-ratings activities including the sale of credit research produced by MIS and the production and sale of other economic and credit-related products and services. The reorganization broadens the opportunities for expansion by MA into activities that may have otherwise been restricted for MIS, due to the potential for conflicts of interest with the ratings business. At present, Moody’s is unable to assess the nature and effect that any regulatory changes may have on future growth opportunities.

Moody’s operations are subject to various risks, as more fully described in Part I, Item 1A “Risk Factors,” inherent in conducting business on a global basis. Such risks include currency fluctuations and possible nationalization, expropriation, exchange and price controls, changes in the availability of data from public sector sources, limits on providing information across borders and other restrictive governmental actions.

COMPETITION

The MIS business competes with other CRAs and with investment banks and brokerage firms that offer credit opinions and research. Many users of MIS’s ratings also have in-house credit research capabilities. MIS’s largest competitor in the global credit rating business is Standard & Poor’s Ratings Services (S&P), a division of McGraw Hill Financial. There are some rating markets, based on industry, geography and/or instrument type, in which Moody’s has made investments and obtained market positions superior to S&P, while in other markets, the reverse is true.

In addition to S&P, MIS’s competitors include Fitch Ratings, Dominion Bond Rating Service, A.M. Best Company, Japan Credit Rating Agency Ltd., Kroll Bond Rating Agency Inc., Morningstar Inc. and Egan-Jones Ratings Company. In Europe, examples of competitors include Euler Hermes Rating, Feri EuroRating Services AG, Creditreform Rating AG, ICAP Group and Companhia Portuguesa de Rating. There are additional competitors in other regions and countries, for example, in China, where Moody’s operates through a joint venture. These competitors include China Lianhe Credit Rating Co Ltd., Shanghai Brilliance Credit Rating & Investors Service Co Ltd., Dagong Global Credit Rating Co Ltd. and Pengyuan Credit Rating Co Ltd.

MA competes broadly in the financial information industry against diversified competitors such as Thomson Reuters, Bloomberg, S&P Capital IQ, Fitch Solutions, Dun & Bradstreet, IBM, Wolters Kluwer, Sungard, SAS, Fiserv, MSCI and Markit Group among others. MA’s main competitors within RD&A include S&P Capital IQ, CreditSights, Thomson Reuters, Intex, IHS Global Insight, BlackRock Solutions, FactSet and other providers of fixed income analytics, valuations, economic data and research. In ERS, MA faces competition from both large software providers such as IBM Algorithmics, SunGard, SAS, Oracle, Misys, Oliver Wyman, Verisk and various other vendors and in-house solutions. Within PS, MA competes with Omega Performance, DC Gardner, and a host of financial training and education firms, and with Evalueserve, CRISIL Global Research & Analytics, and other providers of outsourced research and professional services.

MOODY’S STRATEGY

Moody’s corporate strategy is to be the world’s most respected authority servicing financial risk-sensitive markets. The key aspects to implement this strategy are to:

 

»   Defend and enhance the core ratings and research business of MIS;

 

»   Build MA’s position as a leading provider of risk management solutions to financial institutions; and

 

»   Invest in strategic growth opportunities.

 

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Moody’s will make investments to defend and enhance its core businesses in an attempt to position the Company to fully capture market opportunities resulting from global debt capital market expansion and increased business investment spending. Moody’s will also make strategic investments to achieve scale in attractive financial information markets, move into attractive product and service adjacencies where the Company can leverage its brand, extend its thought leadership and expand its geographic presence in high growth emerging markets.

To broaden the Company’s potential, MA provides a wide range of products and services to enable financial institutions to better manage risk. As such, MA adds to the Company’s value proposition in three ways. First, MA’s subscription businesses provide a significant base of recurring revenue to offset cyclicality in ratings issuance volumes that may result in volatility to MIS revenues. Second, MA products and services, such as financial training and professional services on research and risk management best practices, provide opportunities for entry into emerging markets before debt capital markets fully develop and present growth opportunities for the ratings business. Finally, MA’s integrated risk management software platform embeds Moody’s solutions deep into the technology infrastructure of banks and insurance companies worldwide.

Moody’s invests in initiatives to implement the Company’s strategy, including internally-led organic development and targeted acquisitions. Example initiatives include:

 

»   Enhancements to ratings quality and product extensions;

 

»   Investments that extend ownership and participation in JVs and strategic alliances;

 

»   Headcount growth to meet customer demand for new products and services;

 

»   Selective, bolt-on acquisitions that accelerate the ability to grow Moody’s businesses; and

 

»   Expansion in emerging markets.

The 2013 acquisition of Amba Investment Services is illustrative of Moody’s strategy to pursue selective, bolt-on acquisitions and expand product and service offerings for our customers. Founded in 2003, Amba provides outsourced investment research and analytics to financial institutions, including asset managers, investment banks, broker-dealers, insurance and alternative investment firms. The acquisition bolsters the research and analytical capabilities offered by MA through Copal.

REGULATION

MIS and many of the securities that it rates are subject to extensive regulation in both the U.S. and in other countries (including by state and local authorities). Thus, existing and proposed laws and regulations can impact the Company’s operations and the markets for securities that it rates. Additional laws and regulations have been adopted but not yet implemented or have been proposed or are being considered. Each of the existing, adopted, proposed and potential laws and regulations can increase the costs and legal risk associated with the issuance of credit ratings and may negatively impact Moody’s operations or profitability, the Company’s ability to compete, or result in changes in the demand for credit ratings, in the manner in which ratings are utilized and in the manner in which Moody’s operates.

In the EU, the CRA industry is registered and supervised through a pan-European regulatory framework which is a compilation of three sets of legislative actions. In 2009, the European Parliament passed a new regulation (“CRA1”) that established an oversight regime for the CRA industry in the EU. CRA1, which required the registration, formal regulation and periodic inspection of CRAs operating in the EU, became fully effective in September 2010. MIS applied for registration in August 2010 and was granted registration in October 2011. In January 2011, CRA2 established the European Securities and Markets Authority. ESMA has had direct supervisory responsibility for the registered CRA industry throughout the EU since July 2011.

In the summer of 2013, a new set of rules that augmented the CRAs’ supervisory framework went into effect. Commonly referred to as CRA3, these new rules, among other things:

 

»   impose various additional procedural requirements with respect to ratings of sovereign issuers;

 

»   require member states to adopt laws imposing liability on CRAs for an intentional or grossly negligent failure to abide by the applicable regulations;

 

»   impose mandatory rotation requirements on CRAs hired by issuers of securities for ratings of resecuritizations, which may limit the number of years a CRA can issue ratings for such securities of a particular issuer;

 

»   impose restrictions on CRAs or their shareholders if certain ownership thresholds are crossed; and

 

»   impose additional procedural and substantive requirements on the pricing of services.

 

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Certain of the provisions of CRA3 will be subject to ESMA rule-making and it is expected that process will happen within the year.

In December 2012, the Staff of the SEC’s Trading and Markets Division published a “Report to Congress on Assigned Credit Ratings.” In the report, commonly referred to as the Franken Amendment Study, the SEC Staff identified several potential courses of action without endorsing any of them and noted that any changes through SEC rulemaking would require additional study of relevant information. The timing regarding the remainder of the SEC’s rulemaking under the Financial Reform Act remains uncertain.

In light of the regulations that have gone into effect in both the EU and the US (as well as many other countries), from time to time and as a matter of course pursuant to their enabling legislation these regulatory authorities have and will continue to publish reports that describe their oversight activities over the industry. In addition, other legislation and regulation relating to credit rating and research services is being considered by local, national and multinational bodies and this type of activity is likely to continue in the future. Finally, in certain countries, governments may provide financial or other support to locally-based rating agencies. For example, governments may from time to time establish official rating agencies or credit ratings criteria or procedures for evaluating local issuers. If enacted, any such legislation and regulation could change the competitive landscape in which MIS operates. The legal status of rating agencies has been addressed by courts in various decisions and is likely to be considered and addressed in legal proceedings from time to time in the future. Management of the Company cannot predict whether these or any other proposals will be enacted, the outcome of any pending or possible future legal proceedings, or regulatory or legislative actions, or the ultimate impact of any such matters on the competitive position, financial position or results of operations of Moody’s.

INTELLECTUAL PROPERTY

Moody’s and its affiliates own and control a variety of intellectual property, including but not limited to proprietary information, trademarks, research, software tools and applications, models and methodologies, databases, domain names, and other proprietary materials that, in the aggregate, are of material importance to Moody’s business. Management of Moody’s believes that each of the trademarks and related corporate names, marks and logos containing the term “Moody’s” are of material importance to the Company.

The Company, primarily through MA, licenses certain of its databases, software applications, credit risk models, training courses in credit risk and capital markets, research and other publications and services that contain Intellectual Property to its customers. These licenses are provided pursuant to standard fee-bearing agreements containing customary restrictions and intellectual property protections.

In addition, Moody’s licenses certain technology and other intellectual property rights owned and controlled by others. Specifically, Moody’s licenses financial information (such as market and index data, financial statement data, third party research, default data, and security identifiers) as well as software development tools and libraries. The Company obtains such technology and intellectual property rights from generally available commercial sources. Most of such technology and intellectual property is available from a variety of sources. Although certain financial information (particularly security identifiers and certain pricing or index data) is available only from a limited number of sources, Moody’s does not believe it is dependent on any one data source for a material aspect of its business.

The Company considers its Intellectual Property to be proprietary, and Moody’s relies on a combination of copyright, trademark, trade secret, patent, non-disclosure and other contractual safeguards for protection. Moody’s also pursues instances of third-party infringement of its Intellectual Property in order to protect the Company’s rights. The Company owns a single, non-material patent. None of the Intellectual Property is subject to a specific expiration date, except to the extent that the copyright in items that the Company authors (such as credit reports, research, and other written opinions) expires pursuant to relevant law, currently 95 years from first publication in the US; and the single patent that Moody’s owns expires in 2028.

The names of Moody’s products and services referred to herein are trademarks, service marks or registered trademarks or service marks owned by or licensed to Moody’s or one or more of its subsidiaries.

EMPLOYEES

As of December 31, 2013 the number of full-time equivalent employees of Moody’s was approximately 8,400.

AVAILABLE INFORMATION

Moody’s investor relations Internet website is http://ir.moodys.com/. Under the “SEC Filings” tab at this website, the Company makes available free of charge its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after they are filed with, or furnished to, the SEC.

The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and other information statements that the Company files electronically with the SEC. The SEC’s internet site is http://www.sec.gov/.

 

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Executive Officers of the Registrant

 

Name, Age and Position

  

Biographical Data

Mark E. Almeida, 54

President, Moody’s Analytics

   Mr. Almeida has served as President of Moody’s Analytics since January 2008. Prior to this position, Mr. Almeida was Senior Vice President of Moody’s Corporation from August 2007 to January 2008, Senior Managing Director of the Investor Services Group (ISG) at Moody’s Investors Service, Inc. from December 2004 to January 2008 and was Group Managing Director of ISG from June 2000 to December 2004. Mr. Almeida joined Moody’s Investors Service, Inc. in April 1988 and has held a variety of positions with the company in both the U.S. and overseas.

Richard Cantor, 56

Chief Risk Officer

   Mr. Cantor has served as Chief Risk Officer of Moody’s Corporation since December 2008 and as Chief Credit Officer of Moody’s Investors Service, Inc. since November 2008. From July 2008 to November 2008, Mr. Cantor served as Acting Chief Credit Officer. Prior thereto, Mr. Cantor was Managing Director of Moody’s Credit Policy Research Group from June 2001 to July 2008, after serving as Senior Vice President in the Financial Guarantors Rating Group. Mr. Cantor joined Moody’s in 1997 from the Federal Reserve Bank of New York, where he served as Assistant Vice President in the Research Group and was Staff Director at the Discount Window. Prior to the Federal Reserve, Mr. Cantor taught Economics at UCLA and Ohio State and has taught on an adjunct basis at the business schools of Columbia University and New York University.

Robert Fauber, 43

Senior Vice President,

Corporate Development

   Mr. Fauber has served as Senior Vice President—Corporate Development of Moody’s Corporation since April 2009 and Head of the MIS Commercial Group since January 2013. Mr. Fauber served as Vice President-Corporate Development from September 2005 to April 2009. Prior to joining Moody’s, Mr. Fauber served in several roles at Citigroup from 1999 to 2005, including most recently, Director of Planning and Business Development for Citigroup’s Alternative Investments division. Prior to that, Mr. Fauber worked as a Director in Corporate Strategy & Business Development for Citigroup and a Vice President and Associate in the Financial Sponsor and Telecom investment banking groups at the firm’s Salomon Smith Barney subsidiary. From 1992-1996, Mr. Fauber worked at NationsBank (now Bank of America), working in the middle market commercial banking group and also ran the firm’s Global Finance college recruiting program in 1997.

John J. Goggins, 53

Executive Vice President
and General Counsel

   Mr. Goggins has served as the Company’s Executive Vice President and General Counsel since April 2011 and the Company’s Senior Vice President and General Counsel from October 2000 until April 2011. Mr. Goggins joined Moody’s Investors Service, Inc. in February 1999 as Vice President and Associate General Counsel. Prior thereto, he served as counsel at Dow Jones & Company from 1995 to 1999, where he was responsible for securities, acquisitions and general corporate matters. Prior to Dow Jones, he was an associate at Cadwalader, Wickersham & Taft from 1985 to 1995, where he specialized in mergers and acquisitions.

Linda S. Huber, 55

Executive Vice President
and Chief Financial Officer

   Ms. Huber has served as the Company’s Executive Vice President and Chief Financial Officer since May 2005. Prior thereto, she served as Executive Vice President and Chief Financial Officer at U.S. Trust Company, a subsidiary of Charles Schwab & Company, Inc., from 2003 to 2005. Prior to U.S. Trust, she was Managing Director at Freeman & Co. from 1998 through 2002. She served PepsiCo as Vice President of Corporate Strategy and Development from 1997 until 1998 and as Vice President and Assistant Treasurer from 1994 until 1997. She served as Vice President in the Energy Investment Banking Group at Bankers Trust Company from 1991 until 1994 and as an Associate in the Energy Group at First Boston Corporation from 1986 through 1990. She also held the rank of Captain in the U.S. Army where she served from 1980 to 1984.

 

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Name, Age and Position

  

Biographical Data

Michel Madelain, 58

President and
Chief Operating Officer, Moody’s Investors Service

   Mr. Madelain has served as President of Moody’s Investors Service Inc. since November 2010 and as Chief Operating Officer since May 2008. Prior to this, Mr. Madelain served as Executive Vice President, Fundamental Ratings from September 2007 to May 2008, with responsibility for all Global Fundamental Ratings, including Corporate Finance, Financial Institutions, Public Finance and Infrastructure Finance. He managed the Financial Institutions group from March 2007 until September 2007. Mr. Madelain served as Group Managing Director, EMEA Corporate Ratings from November 2000 to March 2007 and prior thereto held several Managing Director positions in the U.S. and U.K. Fundamental Rating Groups. Prior to joining Moody’s in 1994, Mr. Madelain served as a Partner of Ernst & Young, Auditing Practice. Mr. Madelain is qualified as a Chartered Accountant in France.

Joseph (Jay) McCabe, 63

Senior Vice President,
Corporate Controller

   Mr. McCabe has served as the Company’s Senior Vice President—Corporate Controller since December 2005. Mr. McCabe joined Moody’s in July 2004 as Vice President and Corporate Controller. Before joining the Company, he served as Vice President—Corporate Controller at PPL Corporation, an energy and utility holding company, from 1994 to 2003. Prior to PPL Corporation, he served Deloitte & Touche as Partner from 1984 to 1993 and as a member of the firm’s audit practice from 1973 to 1984.

Raymond W. McDaniel, Jr., 56

President and
Chief Executive Officer

   Mr. McDaniel has served as the President and Chief Executive Officer of the Company since April 2012, and served as the Chairman and Chief Executive Officer from April 2005 until April 2012. He currently serves on the MIS Committee of the Board of Directors. Mr. McDaniel served as the Company’s President from October 2004 until April 2005 and the Company’s Chief Operating Officer from January 2004 until April 2005. He has served as Chairman and Chief Executive Officer of Moody’s Investors Service, Inc., a subsidiary of the Company, since October 2007 and held the additional title of President from November 2001 to August 2007 and December 2008 to November 2010. Mr. McDaniel served as the Company’s Executive Vice President from April 2003 to January 2004, and as Senior Vice President, Global Ratings and Research from November 2000 until April 2003. He served as Senior Managing Director, Global Ratings and Research, of Moody’s Investors Service from November 2000 until November 2001 and as Managing Director, International from 1996 to November 2000. Mr. McDaniel currently is a Director of John Wiley & Sons, Inc.

Lisa S. Westlake, 52

Senior Vice President and
Chief Human Resource Officer

   Ms. Westlake has served as the Company’s Senior Vice President and Chief Human Resources Officer since November 2008. Prior to this position, Ms. Westlake served as Vice President—Investor Relations from December 2006 to November 2008 and Managing Director—Finance from September 2004 to December 2006. Prior to joining the Company, Ms. Westlake was a senior consultant with the Schiff Consulting Group from 2003 to 2004. From 1996 to 2003 Ms. Westlake worked at American Express Company where she held several different positions such as Vice President and Chief Financial Officer for the OPEN Small Business Network, Vice President and Chief Financial Officer for Establishment Services and Vice President and Chief Financial Officer for Relationship Services. From 1989 to 1995 Ms. Westlake held a range of financial management positions at Dun & Bradstreet Corporation and its subsidiary at the time, IMS International. From 1984 to 1987 Ms. Westlake served at Lehman Brothers in both the investment banking and municipal trading areas.

Blair L. Worrall, 57

Senior Vice President,
Ratings Delivery and Data

   Mr. Worrall has served as Senior Vice President—Ratings Delivery and Data since February 2013 and Head of MIS Ratings Transaction Services since January 2014. Mr. Worrall served as Senior Vice President—Internal Audit from April 2011 to February 2013 and as Vice President—Internal Audit from September 2007 to April 2011. He served as the Controller for MIS from November 2004 until September 2007. Prior to joining the Company, Mr. Worrall was Vice President, Accounting for RCN Corporation from 2002 to 2004 and held various finance positions at Dow Jones & Company, Inc. from 1979 to 2001.

 

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ITEM 1A.   RISK FACTORS

The following risk factors and other information included in this annual report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones the Company faces. Additional risks and uncertainties not presently known to the Company or that the Company’s management currently deems minor or insignificant also may impair its business operations. If any of the following risks occur, Moody’s business, financial condition, operating results and cash flows could be materially and adversely affected. These risk factors should be read in conjunction with the other information in this annual report on Form 10-K.

U.S. Laws and Regulations Affecting the Credit Rating Industry are Rapidly Evolving and May Negatively Impact the Nature and Economics of the Company’s Business

Moody’s operates in a highly regulated industry and is subject to extensive regulation by federal, state and local authorities in the U.S., including the Reform Act and the Financial Reform Act. These regulations are complex, continually evolving and have tended to become more stringent over time. See “Regulation” in Part 1, Item 1 of this annual report on Form 10-K for more information. These laws and regulations:

 

»   seek to encourage, and may result in, increased competition among rating agencies and in the credit rating business;

 

»   may result in alternatives to credit ratings or changes in the pricing of credit ratings;

 

»   restrict the use of information in the development or maintenance of credit ratings;

 

»   increase regulatory oversight of the credit markets and CRA operations;

 

»   limit the number of years a CRA can rate the securities of a particular issuer;

 

»   provide for direct jurisdiction of the SEC over CRAs that seek NRSRO status, and grant authority to the SEC to inspect the operations of CRAs; and

 

»   authorize the adoption of enhanced oversight standards, new pleading standards and enhanced liability for CRAs, which may result in increases in the number of legal proceedings claiming liability for losses suffered by investors on rated securities and aggregate legal defense costs.

These laws and regulations, and any future rulemaking, could result in reduced demand for credit ratings and increased costs, which Moody’s may be unable to pass through to customers. In addition, there may be uncertainty over the scope, interpretation and administration of such laws and regulations. The Company may be required to incur significant expenses in order to ensure compliance and mitigate the risk of fines, penalties or other sanctions. Legal proceedings could become increasingly lengthy and there may be uncertainty over and exposure to liability. It is difficult to accurately assess the future impact of legislative and regulatory requirements on Moody’s business and its customers’ businesses, and they may affect MIS’s communications with issuers as part of the rating assignment process, alter the manner in which MIS’s ratings are developed, assigned and communicated, affect the manner in which MIS or its customers or users of credit ratings operate, impact the demand for MIS’s ratings and alter the economics of the credit ratings business, including by restricting or mandating business models for rating agencies. Further, speculation concerning the impact of legislative and regulatory initiatives and the increased uncertainty over potential liability and adverse legal or judicial determinations may affect Moody’s stock price. Although these recent and pending legislative and regulatory initiatives apply to rating agencies and credit markets generally, they may affect Moody’s in a disproportionate manner. Each of these developments increase the costs and legal risk associated with the issuance of credit ratings and may have a material adverse effect on Moody’s operations, profitability and competitiveness, the demand for credit ratings and the manner in which such ratings are utilized.

Financial Reforms Outside the U.S. Affecting the Credit Rating Industry May Negatively Impact the Nature and Economics of the Company’s Business

In addition to the extensive and evolving U.S. laws and regulations governing the industry, foreign jurisdictions have taken measures to increase regulation of rating agencies and the markets for ratings. In particular, the EU has adopted a new regulatory framework for rating agencies operating in the EU, and introduced a common EU regulatory approach to oversight of CRAs. The EU has established conditions for the issuance of credit ratings, rules on the organization and conduct of CRAs—including restrictions on certain activities deemed to create a conflict of interest—and special requirements for the rating of structured finance instruments. ESMA has direct supervisory authority for CRAs in the EU.

The amendments adopted by the European Parliament to its existing CRA regulations (generally referred to as CRA3) became effective on June 20, 2013. As adopted, CRA3, among other things, imposes: (i) various additional procedural requirements with respect to ratings of sovereign issuers; (ii) requirements that member states to adopt laws imposing liability on CRAs for an intentional or grossly negligent failure to abide by the applicable regulations; (iii) mandatory rotation requirements on CRAs hired by issuers of securities for ratings on resecuritizations, which may limit the number of years a CRA can issue ratings for such securities of a particular issuer; (iv) restrictions on CRAs or their shareholders if certain ownership thresholds are crossed; (v) additional procedural and substantive requirements on the pricing of services.

 

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EU financial reforms could have a significant negative effect on Moody’s operations, profitability or ability to compete, or the markets for its products and services, including in ways that Moody’s presently is unable to predict. In particular, exposure to increased liability under the EU regulations may further increase costs and legal risks associated with the issuance of credit ratings and materially and adversely impact Moody’s results of operations. In addition, compliance with the amended EU regulations may increase costs of operations.

Further, Moody’s believes there is still potential for additional rulemaking by the EU and other jurisdictions that can significantly impact operations or the markets for Moody’s products and services, such as regulations affecting the need for debt securities to be rated, establishing criteria for credit ratings or limiting the entities authorized to provide credit ratings. Moody’s cannot predict the extent of such future laws and regulations, and the effect that they will have on Moody’s business or the potential for increased exposure to liability could be significant. Financial reforms in the EU and other foreign jurisdictions may have a material adverse effect on Moody’s business, operating results and financial condition.

The Company Faces Exposure to Litigation Related to Rating Opinions

Moody’s faces exposure to litigation related to MIS’s ratings actions, as well as other business practices. As a result of difficult economic times and turbulent markets in recent years, the market value of credit-dependent instruments has declined and defaults have increased. This development has led to a significant increase in the number of legal proceedings that Moody’s is facing, including class actions and other litigation, government investigations and inquiries concerning events in the U.S. subprime residential mortgage sector and the credit markets more broadly. Legal proceedings impose additional expenses on the Company and require the attention of senior management to an extent that may significantly reduce their ability to devote time addressing other business issues. Risks relating to legal proceedings may be heightened in foreign jurisdictions that lack the legal protections or liability standards comparable to those that exist in the U.S. In addition, new laws and regulations have been and may continue to be enacted that establish lower liability standards, shift the burden of proof or relax pleading requirements, thereby increasing the risk of successful litigations in the U.S. and in foreign jurisdictions. These litigation risks are often difficult to assess or quantify. Moody’s may not have adequate insurance or reserves to cover these risks, and the existence and magnitude of these risks often remains unknown for substantial periods of time. Furthermore, to the extent that Moody’s is unable to achieve dismissals at an early stage and litigation matters proceed to trial, the aggregate legal defense costs incurred by Moody’s increase substantially, as does the risk of an adverse outcome. See “Contingencies” for more information regarding ongoing investigations and civil litigation that the Company currently faces. Due to the number of these proceedings and the significant amount of damages sought, there is a risk that Moody’s will be subject to judgments, settlements, fines, penalties or other adverse results that could have a material adverse effect on its business, operating results and financial condition.

The Company is Exposed to Legal, Economic and Regulatory Risks of Operating in Foreign Jurisdictions

Moody’s conducts operations in various countries outside the U.S. and derives a significant portion of its revenue from foreign sources. Changes in the economic condition of the various foreign economies in which the Company operates may have an impact on the Company’s business. For example, economic uncertainty in the Eurozone or elsewhere could affect the number of securities offerings undertaken within those particular areas. In addition, operations abroad expose Moody’s to a number of legal, economic and regulatory risks such as:

 

»   restrictions on the ability to convert local currency into USD;

 

»   exposure to exchange rate movements between foreign currencies and USD;

 

»   the costs of repatriating cash held by entities outside the U.S.;

 

»   U.S. laws affecting overseas operations including domestic and foreign export and import restrictions, tariffs and other trade barriers;

 

»   differing legal or civil liability, compliance and regulatory standards;

 

»   uncertain and evolving laws and regulations applicable to the financial services industries;

 

»   economic, political and geopolitical market conditions;

 

»   the possibility of nationalization, expropriation, price controls and other restrictive governmental actions;

 

»   competition with local rating agencies that have greater familiarity, longer operating histories and/or support from local governments or other institutions;

 

»   reduced protection for intellectual property rights;

 

»   longer payment cycles and possible problems in collecting receivables;

 

»   differing accounting principles and standards;

 

»   difficulties and delays in translating documentation into foreign languages; and

 

»   potentially adverse tax consequences.

 

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Additionally, Moody’s is subject to complex U.S. and foreign laws and regulations, such as the Foreign Corrupt Practices Act, the U.K. Bribery Act and other anti-bribery and anti-corruption laws. Although the Company has implemented internal controls, policies and procedures and employee training and compliance programs to deter prohibited practices, such measures may not be effective in preventing employees, contractors or agents from violating or circumventing such internal policies and violating applicable laws and regulations. Any determination that the Company has violated anti-bribery or anti-corruption laws could have a material adverse effect on Moody’s financial condition. Compliance with international and U.S. laws and regulations that apply to the Company’s international operations increases the cost of doing business in foreign jurisdictions. Violations of such laws and regulations may result in fines and penalties, criminal sanctions, administrative remedies, restrictions on business conduct and could have a material adverse effect on Moody’s reputation, its ability to attract and retain employees, its business, operating results and financial condition.

Moody’s Operations and Infrastructure May Malfunction or Fail

Moody’s ability to conduct business may be materially and adversely impacted by a disruption in the infrastructure that supports its businesses and the communities in which Moody’s is located, including New York City, the location of Moody’s headquarters, and major cities worldwide in which Moody’s has offices. This may include a disruption involving physical or technological infrastructure used by the Company or third parties with or through whom Moody’s conducts business, whether due to human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, intentional acts of vandalism, acts of terrorism, political unrest, war or otherwise. Moody’s efforts to secure and plan for potential disruptions of its major operating systems may not be successful. The Company relies on third-party providers to provide certain essential services. While the Company believes that such providers are reliable, the Company has limited control over the performance of such providers. To the extent any of the Company’s third-party providers ceases to provide these services in an efficient, cost-effective manner or fail to adequately expand its services to meet the Company’s needs and the needs of the Company’s customers, the Company could experience lower revenues and higher costs. The Company also does not have fully redundant systems for most of its smaller office locations and low-risk systems, and its disaster recovery plan does not include restoration of non-essential services. If a disruption occurs in one of Moody’s locations or systems and its personnel in those locations or those who rely on such systems are unable to utilize other systems or communicate with or travel to other locations, such persons’ ability to service and interact with Moody’s clients and customers may suffer. We cannot predict with certainty all of the adverse effects that could result from our failure, or the failure of a third party, to efficiently address and resolve these delays and interruptions. A disruption to Moody’s operations or infrastructure may have a material adverse effect on its business, operating results and financial condition.

The Company is Exposed to Risks Related to Cybersecurity and Protection of Confidential Information

The Company’s operations rely on the secure processing, storage and transmission of confidential, sensitive and other types of information in the Company’s computer systems and networks and those of its third party vendors. The cyber risks we face range from cyber-attacks common to most industries, to more advanced threats that target the Company because of its prominence in the global marketplace, or due to its ratings of sovereign debt. Breaches of our or our vendors’ technology and systems, whether from circumvention of security systems, denial-of-service attacks or other cyber-attacks, hacking, computer viruses or malware, employee error, malfeasance, physical breaches or other actions, may cause material interruptions or malfunctions in the Company’s or such vendors’ web sites, applications or data processing, or may compromise the confidentiality and integrity of material information regarding the Company or our business or customers. Measures that Moody’s takes to avoid or mitigate material incidents can be expensive, and may be insufficient, circumvented, or may become obsolete. Any material incidents could cause the Company to experience reputational harm, loss of customers, regulatory actions, sanctions or other statutory penalties, litigation or financial losses that are either not insured against or not fully covered through any insurance maintained by the Company. Any of the foregoing may have a material adverse effect on Moody’s business, operating results or financial condition.

Changes in the Volume of Debt Securities Issued in Domestic and/or Global Capital Markets and Changes in Interest Rates and Other Volatility in the Financial Markets May Negatively Impact the Nature and Economics of the Company’s Business

Moody’s business is impacted by general economic conditions and volatility in the U.S. and world financial markets. Furthermore, issuers of debt securities may elect to issue securities without ratings or securities which are rated or evaluated by non-traditional parties such as financial advisors, rather than traditional CRAs, such as MIS. A majority of Moody’s credit-rating-based revenue is transaction-based, and therefore it is especially dependent on the number and dollar volume of debt securities issued in the capital markets. Accordingly, any market volatility or conditions that either reduce investor demand for debt securities or issuers’ willingness or ability to issue such securities could reduce the number and dollar-equivalent volume of debt issuances for which Moody’s provides ratings services and thereby have an adverse effect on the fees derived from the issuance of ratings. Therefore, no assurance can be given as to the amount of revenues that may be derived from Moody’s ratings services.

Credit market disruptions and economic slowdown and uncertainty have in the past negatively impacted the volume of debt securities issued in global capital markets and the demand for credit ratings. Economic and government factors such as a long-term continuation of difficult economic conditions, uncertainty regarding the U.S. debt ceiling and a worsening of the sovereign debt crisis in Europe may have an adverse impact on the Company’s business. Future debt issuances could be negatively affected by a sharp increase in long-term

 

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interest rates or factors which cause instability or volatility in the global capital markets, such as significant regulatory, political or economic events, the use of alternative sources of credit, including financial institutions and government sources, and defaults of significant issuers. Changes in the markets for such securities and in the role and regulation of rating agencies may materially and adversely affect the Company.

The timing, nature, extent and sustainability of any recovery in the credit and other financial markets is uncertain, and a prolonged period of market decline or weakness could have a material adverse effect on the business. Moody’s initiatives to reduce costs may not be sufficient and further cost reductions may be difficult or impossible to obtain in the short term, due in part to rent, technology, compliance and other fixed costs associated with some of the Company’s operations as well as the need to monitor outstanding ratings. Further, the cost-reduction initiatives undertaken to date could make it difficult for the Company to rapidly expand operations in order to accommodate any unexpected increase in the credit markets and the resulting demand for ratings. Volatility in the financial markets, including changes in the volumes of debt securities and changes in interest rates, may have a material adverse effect on the business, operating results and financial condition.

The Company Faces Increased Pricing Pressure from Competitors and/or Customers

There is intense price competition in the credit rating, research, credit risk management markets, outsourced research and analytical services and financial training and certification services. Competition for customers and market share has spurred more aggressive tactics by some competitors in areas such as pricing and services, as well as increased competition from non-NRSROs that evaluate debt risk for issuers or investors. At the same time, bankruptcies, consolidation of customers, particularly those involved in structured finance products, and other factors affecting demand may enhance the market power of competitors. Tepid economic growth is also intensifying the competitive pressures as to pricing. While Moody’s seeks to compete primarily on the basis of the quality of its products and services, it may lose market share if its pricing is not sufficiently competitive with its current and future competitors. In addition, the Reform Act was designed to encourage competition among rating agencies. The formation of additional NRSROs may increase pricing, as well as other competitive, pressures. Any inability of Moody’s to compete successfully with respect to the pricing of its products and services could have a material adverse impact on its business, operating results and financial condition.

The Company is Exposed to Reputation and Credibility Concerns

Moody’s reputation and the strength of its brand are key competitive strengths. To the extent that the rating agency business as a whole or Moody’s, relative to its competitors, suffers a loss in credibility, Moody’s business could be significantly impacted. Factors that may have already affected credibility and could potentially continue to have an impact in this regard include the appearance of a conflict of interest, the performance of securities relative to the rating assigned to such securities, the timing and nature of changes in ratings, a major compliance failure, negative perceptions or publicity and increased criticism by users of ratings, regulators and legislative bodies, including as to the ratings process and its implementation with respect to one or more securities. Operational errors, whether by Moody’s or a Moody’s competitor, could also harm the reputation of the Company or the credit rating industry. Damage to reputation and credibility could have a material adverse impact on Moody’s business, operating results and financial condition.

The Introduction of Competing Products or Technologies by Other Companies May Negatively Impact the Nature and Economics of the Company’s Business

The markets for credit ratings, research, credit risk management services, outsourced research and analytical services and financial training and certification services are highly competitive. The ability to provide innovative products and technologies that anticipate customers’ changing requirements and utilize emerging technological trends is a key factor in maintaining market share. Moody’s competitors include both established companies with significant financial resources, brand recognition, market experience and technological expertise, and smaller companies which may be better poised to quickly adopt new or emerging technologies or respond to customer requirements. Competitors may develop quantitative methodologies or related services for assessing credit risk that customers and market participants may deem preferable, more cost-effective or more valuable than the credit risk assessment methods currently employed by Moody’s, or may price or market their products in manners that differ from those utilized by Moody’s. Customers or others may develop alternative, proprietary systems for assessing credit risk. Such developments could affect demand for Moody’s products and services and its growth prospects. In addition, the increased availability in recent years of free or relatively inexpensive Internet information may reduce the demand for Moody’s products and services. Moody’s growth prospects also could be adversely affected by Moody’s failure to make necessary or optimal capital infrastructure expenditures and improvements and the inability of its information technologies to provide adequate capacity and capabilities to meet increased demands of producing quality ratings and research products at levels achieved by competitors. Any inability of Moody to compete successfully may have a material adverse effect on its business, operating results and financial condition.

The Company Has a Significant Amount of Intangible Assets

At December 31, 2013, Moody’s had $665.2 million of goodwill and $221.6 million of intangible assets on its balance sheet. Approximately 99% of these intangibles reside in the MA business and are allocated to the four reporting units within MA: RD&A; ERS; Financial Services Training and Certifications; and Copal Amba. Failure to achieve business objectives and financial projections in any of these reporting units could result in an asset impairment charge, which would result in a non-cash charge to operating expenses. Goodwill

 

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and intangible assets with indefinite lives are tested for impairment on an annual basis and also when events or changes in circumstances indicate that impairment may have occurred. Determining whether an impairment of goodwill exists can be difficult as a result of increased uncertainty and current market dynamics, and requires significant management estimates and judgment. In addition, the potential for goodwill impairment is increased during periods of economic uncertainty. An asset impairment charge could have a material adverse effect on Moody’s business, operating results and financial condition.

Possible Loss of Key Employees and Related Compensation Cost Pressures May Negatively Impact the Company

Moody’s success depends upon its ability to recruit, retain and motivate highly skilled, experienced financial analysts and other professionals. Competition for skilled individuals in the financial services industry is intense, and Moody’s ability to attract high quality employees could be impaired if it is unable to offer competitive compensation and other incentives or if the regulatory environment mandates restrictions on or disclosures about individual employees that would not be necessary in competing analytical industries. As greater focus has been placed on executive compensation at public companies, in the future, Moody’s may be required to alter its compensation practices in ways that could adversely affect its ability to attract and retain talented employees. Investment banks, investors and competitors may seek to attract analyst talent by providing more favorable working conditions or offering significantly more attractive compensation packages than Moody’s. Moody’s also may not be able to identify and hire the appropriate qualified employees in some markets outside the U.S. with the required experience or skills to perform sophisticated credit analysis. There is a risk that even if the Company invests significant resources in attempting to attract, train and retain qualified personnel, it will not succeed in its efforts, and its business could be harmed.

Moody’s is highly dependent on the continued services of Raymond W. McDaniel, Jr., the President and Chief Executive Officer, and other senior officers and key employees. The loss of the services of skilled personnel for any reason and Moody’s inability to replace them with suitable candidates quickly or at all, as well as any negative market perception resulting from such loss, could have a material adverse effect on Moody’s business, operating results and financial condition.

Moody’s Acquisitions and Other Strategic Transactions May Not Produce Anticipated Results

Moody’s has made and expects to continue to make acquisitions or enter into other strategic transactions to strengthen its business and grow the Company. Such transactions present significant challenges and risks. The market for acquisition targets and other strategic transactions is highly competitive, especially in light of industry consolidation, which may affect Moody’s ability to complete such transactions. If Moody’s is unsuccessful in completing such transactions or if such opportunities for expansion do not arise, its business, operating results and financial condition could be materially adversely affected.

If such transactions are completed, the anticipated growth and other strategic objectives of such transactions may not be fully realized, and a variety of factors may adversely affect any anticipated benefits from such transactions. For instance, the process of integration may require more resources than anticipated, the Company may assume unintended liabilities, there may be unexpected regulatory and operating difficulties and expenditures, the Company may fail to retain key personnel of the acquired business and such transactions may divert management’s focus from other business operations. The anticipated benefits from an acquisition or other strategic transaction may not be realized fully, or may take longer to realize than expected. As a result, the failure of acquisitions and other strategic transactions to perform as expected may have a material adverse effect on Moody’s business, operating results and financial condition.

The Trading Price of Moody’s Stock Could be Affected by Third Party Actions

Ownership of Moody’s stock is highly concentrated with a significant portion of shares held by a few institutional stockholders. Due to this concentrated stockholder base, the trading price of Moody’s stock could be affected considerably by actions of significant stockholders to increase or decrease their positions in Moody’s stock. As a result, the actions of these institutional stockholders could create high stock volatility.

 

ITEM 1B.   UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2.   PROPERTIES

Moody’s corporate headquarters is located at 7 World Trade Center at 250 Greenwich Street, New York, New York 10007, with approximately 797,537 square feet of leased space. As of December 31, 2013, Moody’s operations were conducted from 15 U.S. offices and 60 non-U.S. office locations, all of which are leased. These properties are geographically distributed to meet operating and sales requirements worldwide. These properties are generally considered to be both suitable and adequate to meet current operating requirements.

 

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ITEM 3.   LEGAL PROCEEDINGS

From time to time, Moody’s is involved in legal and tax proceedings, governmental investigations and inquiries, 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 global credit crisis of 2008, MIS and other credit rating agencies have been the subject of intense scrutiny, increased regulation, ongoing inquiry and governmental investigations, 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 domestic and foreign 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 global credit markets more broadly over the last several years.

Two purported class action complaints were 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 United States District Court for the Southern District of New York on September 26, 2007. Both actions were consolidated into a single proceeding entitled In re Moody’s Corporation Securities Litigation in the U.S. District Court for the Southern District of New York. On June 27, 2008, a consolidated amended complaint was filed, purportedly on behalf of all purchasers of the Company’s securities during the period February 3, 2006 through October 24, 2007. Plaintiffs alleged 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 sought 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. On September 14, 2012, the Company filed a motion for summary judgment, which was fully briefed on December 21, 2012. On August 23, 2013, the court issued an opinion granting defendants’ motion for summary judgment. Judgment was entered in Moody’s favor on August 26, 2013. On September 23, 2013, plaintiffs filed a notice of appeal from the judgment and from the March 2011 decision denying class certification. On December 19, 2013, that appeal was voluntarily dismissed with prejudice pursuant to a confidential settlement agreement, thereby concluding this litigation.

On August 25, 2008, Abu Dhabi Commercial Bank filed a purported class action in the United States District Court for the Southern District of New York asserting numerous common-law causes of action against two subsidiaries of the Company, another rating agency, and Morgan Stanley & Co. The action related to securities issued by a structured investment vehicle called Cheyne Finance (the “Cheyne SIV”) and sought, among other things, compensatory and punitive damages. The central allegation against the rating agency defendants was that the credit ratings assigned to the securities issued by the Cheyne SIV were false and misleading. In early proceedings, the court dismissed all claims against the rating agency defendants except those for fraud and aiding and abetting fraud. In June 2010, the court denied plaintiff’s motion for class certification, and additional plaintiffs were subsequently added to the complaint. In January 2012, the rating agency defendants moved for summary judgment with respect to the fraud and aiding and abetting fraud claims. Also in January 2012, in light of new New York state case law, the court permitted the plaintiffs to file an amended complaint that reasserted previously dismissed claims against all defendants for breach of fiduciary duty, negligence, negligent misrepresentation, and related aiding and abetting claims. In May 2012, the court, ruling on the rating agency defendants’ motion to dismiss, dismissed all of the reasserted claims except for the negligent misrepresentation claim, and on September 19, 2012, after further proceedings, the court also dismissed the negligent misrepresentation claim. On August 17, 2012, the court ruled on the rating agencies’ motion for summary judgment on the plaintiffs’ remaining claims for fraud and aiding and abetting fraud. The court dismissed, in whole or in part, the fraud claims of four plaintiffs as against Moody’s but allowed the fraud claims to proceed with respect to certain claims of one of those plaintiffs and the claims of the remaining 11 plaintiffs. The court also dismissed all claims against Moody’s for aiding and abetting fraud. Three of the plaintiffs whose claims were dismissed filed motions for reconsideration, and on November 7, 2012, the court granted two of these motions, reinstating the claims of two plaintiffs that were previously dismissed. On February 1, 2013, the court dismissed the claims of one additional plaintiff on jurisdictional grounds. Trial on the remaining fraud claims against the rating agencies,

 

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and on claims against Morgan Stanley for aiding and abetting fraud and for negligent misrepresentation, was scheduled for May 2013. On April 24, 2013, pursuant to confidential settlement agreements, the 14 plaintiffs with claims that had been ordered to trial stipulated to the voluntary dismissal, with prejudice, of these claims as against all defendants, and the Court so ordered that stipulation on April 26, 2013. The settlement did not cover certain claims of two plaintiffs that were previously dismissed by the Court. On May 23, 2013, these two plaintiffs filed a Notice of Appeal to the Second Circuit, seeking reversal of the dismissal of their claims and also seeking reversal of the Court’s denial of class certification. According to pleadings filed by plaintiffs in earlier proceedings, they seek approximately $76 million in total compensatory damages in connection with the two claims at issue on the appeal.

In October 2009, plaintiffs King County, Washington and Iowa Student Loan Liquidity Corporation each filed substantially identical putative class actions in the Southern District of New York against two subsidiaries of the Company and several other defendants, including two other rating agencies and IKB Deutsche Industriebank AG. These actions arose out of investments in securities issued by a structured investment vehicle called Rhinebridge Plc (the “Rhinebridge SIV”) and sought, among other things, compensatory and punitive damages. Each complaint asserted a claim for common law fraud against the rating agency defendants, alleging, among other things, that the credit ratings assigned to the securities issued by the Rhinebridge SIV were false and misleading. The case was assigned to the same judge presiding over the litigation concerning the Cheyne SIV, described above. In April 2010, the court denied the rating agency defendants’ motion to dismiss. In June 2010, the court consolidated the two cases and the plaintiffs filed an amended complaint that, among other things, added Morgan Stanley & Co. as a defendant. In January 2012, in light of new New York state case law, the court permitted the plaintiffs to file an amended complaint that asserted claims against the rating agency defendants for breach of fiduciary duty, negligence, negligent misrepresentation, and aiding and abetting claims. In May 2012, the court, ruling on the rating agency defendants’ motion to dismiss, dismissed all of the new claims except for the negligent misrepresentation claim and a claim for aiding and abetting fraud; on September 28, 2012, after further proceedings, the court also dismissed the negligent misrepresentation claim. Plaintiffs did not seek class certification. On September 7, 2012 the rating agencies filed a motion for summary judgment dismissing the remaining claims against them. On January 3, 2013, the Court issued an order dismissing the claim for aiding and abetting fraud against the rating agencies but allowing the claim for fraud to proceed to trial. In June 2012 and March 2013, respectively, defendants IKB Deutsche Industriebank AG (and a related entity) and Fitch, Inc. informed the court that they had executed confidential settlement agreements with the plaintiffs. On April 24, 2013, pursuant to a confidential settlement agreement, the plaintiffs stipulated to the voluntary dismissal, with prejudice, of all remaining claims as against the remaining defendants, including Moody’s, and the Court so ordered that stipulation on April 26, 2013.

For claims, litigation and proceedings and governmental investigations and inquiries not related to income taxes, where it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated, the Company records liabilities in the consolidated financial statements and periodically adjusts these as appropriate. When the reasonable estimate of the loss is within a range of amounts, the minimum amount of the range is accrued unless some higher amount within the range is a better estimate than another amount within the range. 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, governmental investigations and inquiries, 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 any pending matters 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 large or indeterminate damages sought in some of them, the absence of similar court rulings on the theories of law asserted and uncertainties regarding apportionment of any potential damages, an estimate of the range of possible losses cannot be made at this time.

 

ITEM 4.   MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

 

 

ITEM 5.   MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Information in response to this Item is set forth under the captions below.

MOODY’S PURCHASES OF EQUITY SECURITIES

For the Three Months Ended December 31, 2013

 

                                                                                       

Period

   Total Number
of Shares  Purchased(1)
     Average Price
Paid per Share
     Total Number of
Shares Purchased as
Part of Publicly
Announced  Program
     Approximate Dollar
Value of Shares That May
yet be Purchased Under

the Program(2)
 
October 1 – 31      1,148,051      $ 70.56        1,147,301      $ 848.7 million   
November 1 – 30      324,646      $ 73.98        323,759      $ 824.7 million   
December 1 – 31      547,183      $ 74.21        546,536      $ 784.1 million   
  

 

 

       

 

 

    
Total      2,019,880      $ 72.10        2,017,596     
  

 

 

       

 

 

    

 

(1) Includes the surrender to the Company of 750 shares, 887 shares and 647 shares of common stock in October, November and December, respectively, to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees.

 

(2) As of the last day of each of the months. On February 12, 2013, the Board authorized a $1 billion share repurchase program. Also, on February 11, 2014, the Board authorized a new $1 billion share repurchase program which will commence following the completion of the existing program. There is no established expiration date for either of the remaining authorizations.

During the fourth quarter of 2013, Moody’s issued 0.9 million shares under employee stock-based compensation plans.

 

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COMMON STOCK INFORMATION AND DIVIDENDS

The Company’s common stock trades on the New York Stock Exchange under the symbol “MCO”. The table below indicates the high and low sales price of the Company’s common stock and the dividends declared and paid for the periods shown. The number of registered shareholders of record at January 31, 2014 was 2,557. A substantially greater number of the Company’s common stock is held by beneficial holders whose shares are held of record by banks, brokers and other financial institutions.

 

                                                                                       
     Price Per Share      Dividends Per Share  
     High      Low      Declared      Paid  
2013:            
First quarter    $ 55.58      $ 40.67      $      $ 0.20  
Second quarter    $ 69.70      $ 51.31        0.20        0.20  
Third quarter    $ 71.74      $ 59.69        0.25        0.25  
Fourth quarter    $ 79.15      $ 66.91        0.53        0.25  
        

 

 

    

 

 

 
Year ended December 31, 2013          $ 0.98      $ 0.90  
        

 

 

    

 

 

 
2012:            
First quarter    $ 42.67      $ 34.35      $      $ 0.16  
Second quarter    $ 43.05      $ 33.86        0.16        0.16  
Third quarter    $ 46.26      $ 35.13        0.16        0.16  
Fourth quarter    $ 51.63      $ 43.23        0.36        0.16  
        

 

 

    

 

 

 
Year Ended December 31, 2012          $ 0.68      $ 0.64  
        

 

 

    

 

 

 

During 2011, the Company paid a quarterly dividend of $0.115 per share of Moody’s common stock in the first quarter and $0.14 per share of Moody’s common stock in each of the remaining quarters, resulting in dividends paid per share during the year ended December 31, 2011 of $0.535.

On December 17, 2013, the Board of the Company approved the declaration of a quarterly dividend of $0.28 per share of Moody’s common stock, payable on March 10, 2014 to shareholders of record at the close of business on February 20, 2014. The continued payment of dividends at the rate noted above, or at all, is subject to the discretion of the Board.

EQUITY COMPENSATION PLAN INFORMATION

The table below sets forth, as of December 31, 2013, certain information regarding the Company’s equity compensation plans.

 

                                                                 
     Number of Securities to
be Issued Upon Exercise
of Outstanding  Options,
Warrants and Rights
    Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights(2)
     Number of Securities
Remaining Available for
Future Issuance  Under
Equity Compensation
Plans (excluding
Securities Reflected in
Column (a)
 

Plan Category

   (a)     (b)      (c)  
Equity compensation plans approved by security holders      13,935,606 (1)    $ 45.00        25,767,878 (3)
Equity compensation plans not approved by security holders          $         
  

 

 

      

 

 

 
Total      13,935,606     $ 45.00        25,767,878  
  

 

 

      

 

 

 

 

(1) Includes 11,080,277 options and unvested restricted shares outstanding under the Company’s 2001 Key Employees’ Stock Incentive Plan, 835,364 options and unvested restricted shares outstanding under the Company’s 1998 Key Employees’ Stock Incentive Plan, and 23,477 options and unvested restricted shares outstanding under the 1998 Non-Employee Directors’ Stock Incentive Plan. This number also includes a maximum of 1,996,488 performance shares outstanding under the Company’s 2001 Key Employees’ Stock Incentive Plan, which is the maximum number of shares issuable pursuant to performance share awards assuming the maximum payout at 200% of the target award for performance shares granted in 2011 and the maximum payout at 225% of the target award for performance shares granted in 2012 and 2013. Assuming payout at target, the number of shares to be issued upon the vesting of outstanding performance share awards is 924,834.

 

(2) Does not reflect unvested restricted shares or performance share awards included in column (a) because these awards have no exercise price.

 

(3) Includes 21,777,186 shares available for issuance as under the 2001 Stock Incentive Plan, of which all may be issued as options and 14,000,000 may be issued as restricted stock, performance shares or other stock-based awards under the 2001 Stock Incentive Plan and 975,208 shares available for issuance as options, shares of restricted stock or performance shares under the 1998 Directors Plan, and 3,015,484 shares available for issuance under the Company’s Employee Stock Purchase Plan. No new grants may be made under the 1998 Stock Incentive Plan, which expired by its terms in June 2008.

 

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PERFORMANCE GRAPH

The following graph compares the total cumulative shareholder return of the Company to the performance of Standard & Poor’s Stock 500 Composite Index and the Russell 3000 Financial Services Index. Both of the aforementioned indexes are easily accessible to the Company’s shareholders in newspapers, the internet and other readily available sources for purposes of the following graph.

The comparison assumes that $100.00 was invested in the Company’s common stock and in each of the foregoing indices on December 31, 2008. The comparison also assumes the reinvestment of dividends, if any. The total return for the common stock was 323% during the performance period as compared with a total return during the same period of 99% for the Russell 3000 Financial Services Index and 128% for the S&P 500 Composite Index.

Comparison of Cumulative Total Return

Moody’s Corporation, Russell 3000 Financial Services Index and S&P 500 Composite Index

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN

Among Moody’s Corporation, the S&P 500 Index,

and the Russell 3000 Financial Services Index

 

LOGO

 

                                                                                                                                   
     Year Ended December 31,  
     2008      2009      2010      2011      2012      2013  
Moody’s Corporation    $ 100.00      $ 135.58      $ 136.62      $ 176.18      $ 267.54      $ 423.30  
S&P 500 Composite Index    $ 100.00      $ 126.46      $ 145.51      $ 148.59      $ 172.37      $ 228.18  
Russell 3000—Financial Services Index    $ 100.00      $ 117.61      $ 132.42      $ 116.64      $ 147.64      $ 198.52  

The comparisons in the graph above are provided in response to disclosure requirements of the SEC and are not intended to forecast or be indicative of future performance of the Company’s common stock.

 

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ITEM 6.   SELECTED FINANCIAL DATA

The Company’s selected consolidated financial data should be read in conjunction with Item 7. “MD&A” and the Moody’s Corporation consolidated financial statements and notes thereto.

 

     Year Ended December 31,  

amounts in millions, except per share data

   2013     2012     2011     2010     2009  
Results of operations           

Revenue

   $ 2,972.5     $ 2,730.3     $ 2,280.7     $ 2,032.0     $ 1,797.2  

Operating and SG&A expenses

     1,644.5       1,547.2       1,313.1       1,192.8       1,028.1  

Depreciation and amortization

     93.4       93.5       79.2       66.3       64.1  

Goodwill impairment

           12.2                    

Restructuring

                       0.1       17.5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Operating income      1,234.6       1,077.4       888.4       772.8       687.5  

Non-operating (expense) income, net (1)

     (65.3 )      (53.4     (48.6     (58.4     (41.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Income before provision for income taxes      1,169.3       1,024.0       839.8       714.4       646.2  

Provision for income taxes

     353.4       324.3       261.8       201.0       239.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Net income (2)      815.9       699.7       578.0       513.4       407.1  

Less: Net income attributable to noncontrolling interests

     11.4       9.7       6.6       5.6       5.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Net income attributable to Moody’s (2)    $ 804.5     $ 690.0     $ 571.4     $ 507.8     $ 402.0  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Earnings per share           

Basic

   $ 3.67     $ 3.09     $ 2.52     $ 2.16     $ 1.70  

Diluted

   $ 3.60     $ 3.05     $ 2.49     $ 2.15     $ 1.69  
Weighted average shares outstanding           

Basic

     219.4       223.2       226.3       235.0       236.1  

Diluted

     223.5       226.6       229.4       236.6       237.8  
Dividends declared per share    $ 0.98     $ 0.68     $ 0.58     $ 0.43     $ 0.405  
Operating margin      41.5     39.5     39.0     38.0     38.3
     December 31,  
     2013     2012     2011     2010     2009  
Balance sheet data           
Total assets    $ 4,395.1     $ 3,960.9     $ 2,876.1     $ 2,540.3     $ 2,003.3  
Long-term debt    $ 2,101.8     $ 1,607.4     $ 1,172.5     $ 1,228.3     $ 746.2  
Total shareholders’ equity (deficit)    $ 347.9     $ 396.6     $ (158.4   $ (298.4   $ (596.1
     NON-GAAP FINANCIAL MEASURES (3)   
     Year Ended  
     2013     2012     2011     2010     2009  
Adjusted Operating Income    $ 1,328.0     $ 1,183.1     $ 967.6     $ 839.2     $ 769.1  
Adjusted Operating Margin      44.7     43.3     42.4     41.3     42.8
Non-GAAP Diluted EPS attributable to Moody’s common shareholders    $ 3.65     $ 2.99     $ 2.46     $ 2.13     $ 1.70  
Free cash flow    $ 884.5     $ 778.1     $ 735.6     $ 574.3     $ 553.1  

 

(1) The 2013, 2012, 2011, 2010 and 2009 amounts include benefits of $22.8 million, $17.2 million, $10.1 million, $2.5 million, and $6.5 million, respectively, related to the favorable resolution of certain Legacy Tax Matters.

 

(2) The 2013, 2012, 2011, 2010 and 2009 amounts include benefits of $21.3 million, $12.8 million, $7.0 million, $4.6 million and $8.2 million, respectively, related to the resolution of certain Legacy Tax Matters.

 

(3) Refer to “Non-GAAP measures” in Item 7 of this Form 10K for a discussion of the Company’s non-GAAP financial measures

 

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ITEM 7.   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 consolidated financial statements and notes thereto included elsewhere in this annual report on Form 10-K.

This MD&A contains Forward-Looking Statements. See “Forward-Looking Statements” commencing on page 58 and Item 1A. “Risk Factors” commencing on page 17 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) software solutions and related risk management services, (iv) quantitative credit risk measures, financial services training and certification services and (v) outsourced research and analytical services to institutional customers. Moody’s has two reportable segments: MIS and MA.

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

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

CRITICAL ACCOUNTING ESTIMATES

Moody’s discussion and analysis of its financial condition and results of operations are based on the Company’s consolidated financial statements, which have been prepared in accordance with GAAP. 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, goodwill and intangible assets, pension and other retirement benefits, UTPs and stock-based compensation. Actual results may differ from these estimates under different assumptions or conditions. The following accounting estimates are considered critical because they are particularly dependent on management’s judgment about matters that are uncertain at the time the accounting estimates are made and changes to those estimates could have a material impact on the Company’s consolidated results of operations or financial condition.

Revenue Recognition

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or the services have been provided and accepted by the customer when applicable, fees are determinable and the collection of resulting receivables is considered probable.

Pursuant to the guidance of ASC Topic 605, when a sales arrangement contains multiple deliverables, the Company allocates revenue to each deliverable based on its relative selling price which is determined based on its vendor specific objective evidence if available, third party evidence if VSOE is not available, or estimated selling price if neither VSOE nor TPE is available.

The Company’s products and services will generally continue to qualify as separate units of accounting under ASC Topic 605. The Company evaluates each deliverable in an arrangement to determine whether it represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting when it has stand-alone value to the customers and if the arrangement includes a customer refund or return right relative to the delivered item, the delivery and performance of the undelivered item is considered probable and substantially in the Company’s control. In instances where the aforementioned criteria are not met, the delivered item is combined with the undelivered items and revenue recognition is determined as one single unit.

The Company determines whether its selling price in a multi-element transaction meets the VSOE criteria by using the price charged for a deliverable when sold separately. In instances where the Company is not able to establish VSOE for all deliverables in a multiple element arrangement, which may be due to the Company infrequently selling each element separately, not selling products within a

 

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reasonably narrow price range, or only having a limited sales history, the Company attempts to establish TPE for deliverables. The Company determines whether TPE exists by evaluating largely similar and interchangeable competitor products or services in standalone sales to similarly situated customers. However, due to the difficulty in obtaining third party pricing, possible differences in the Company’s market strategy from that of its peers and the potential that products and services offered by the Company may contain a significant level of differentiation and/or customization such that the comparable pricing of products with similar functionality cannot be obtained, the Company generally is unable to reliably determine TPE. Based on the selling price hierarchy established by ASU 2009-13, when the Company is unable to establish selling price using VSOE or TPE, the Company will establish an ESP. ESP is the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company establishes its best estimate of ESP considering internal factors relevant to its pricing practices such as costs and margin objectives, standalone sales prices of similar products, percentage of the fee charged for a primary product or service relative to a related product or service, and customer segment and geography. Additional consideration is also given to market conditions such as competitor pricing strategies and market trend. The Company reviews its determination of VSOE, TPE and ESP on an annual basis or more frequently as needed.

In the MIS segment, revenue attributed to initial ratings of issued securities is recognized when the rating is issued. Revenue attributed to monitoring of issuers or issued securities is recognized ratably over the period in which the monitoring is performed, generally one year. In the case of commercial mortgage-backed securities, derivatives, international residential mortgage-backed and asset-backed securities, issuers can elect to pay the monitoring fees upfront. These fees are deferred and recognized over the future monitoring periods based on the expected lives of the rated securities, which was approximately 30 years on a weighted average basis at December 31, 2013. At December 31, 2013, 2012 and 2011, deferred revenue related to these securities was approximately $97 million, $82 million and $79 million, respectively.

Multiple element revenue arrangements in the MIS segment are generally comprised of an initial rating and the related monitoring service. In instances where monitoring fees are not charged for the first year monitoring effort, fees are allocated to the initial rating and monitoring services based on the relative selling price of each service to the total arrangement fees. The Company generally uses ESP in determining the selling price for its initial ratings as the Company rarely sells initial ratings separately without providing related monitoring services and thus is unable to establish VSOE or TPE for initial ratings.

MIS estimates revenue for ratings of commercial paper for which, in addition to a fixed annual monitoring fee, issuers are billed quarterly based on amounts outstanding. Revenue is accrued each quarter based on estimated amounts outstanding and is billed when actual data is available. The estimate is determined based on the issuers’ most recent reported quarterly data. At December 31, 2013, 2012 and 2011, accounts receivable included approximately $21 million, $22 million and $24 million, respectively, related to accrued commercial paper revenue. Historically, MIS has not had material differences between the estimated revenue and the actual billings. Furthermore, for certain annual monitoring services, fees are not invoiced until the end of the monitoring period, however, revenue is recognized ratably over the monitoring period.

In the MA segment, products and services offered by the Company include software licenses and related maintenance, subscriptions, and professional services. Revenue from subscription based products, such as research and data subscriptions and certain software-based credit risk management subscription products, is recognized ratably over the related subscription period, which is principally one year. Revenue from sale of perpetual licenses of credit processing software is generally recognized at the time the product master or first copy is delivered or transferred to and accepted by the customer. Software maintenance revenue is recognized ratably over the annual maintenance period. Revenue from services rendered within the professional services line of business is generally recognized as the services are performed. If uncertainty exists regarding customer acceptance of the product or service, revenue is not recognized until acceptance occurs. A large portion of annual research and data subscriptions as well as annual software maintenance is invoiced in November, December and January of each year.

Products and services offered within the MA segment are sold either stand-alone or together in various combinations. In instances where a multiple element arrangement includes software and non-software deliverables, revenue is allocated to the non-software deliverables and to the software deliverables, as a group, using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. Revenue is recognized for each element based upon the conditions for revenue recognition previously described.

If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is allocated to each software deliverable using VSOE. In the instances where the Company is not able to determine VSOE for all of the deliverables of an arrangement, the Company allocates the revenue to the undelivered elements equal to its VSOE and the residual revenue to the delivered elements. If the Company is unable to determine VSOE for an undelivered element, the Company defers all revenue allocated to the software deliverables until the Company has delivered all of the elements or when VSOE has been determined for the undelivered elements. In cases where software implementation services are considered essential and VSOE of fair value exists for post-contract customer support (“PCS”), once the delivery criteria has been met on the standard software, license and service revenue is recognized on a percentage-of-completion basis as implementation services are performed, while PCS is recognized

 

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over the coverage period. If VSOE of fair value does not exist for PCS, once the delivery criteria has been met on the standard software, service revenue is recognized on a zero profit margin basis until essential services are complete, at which point total arrangement revenue is then spread ratably over the remaining PCS coverage period.

Accounts Receivable Allowance

Moody’s records an allowance for estimated future adjustments to customer billings as a reduction of revenue, based on historical experience and current conditions. Such amounts are reflected as additions to the accounts receivable allowance. Additionally, estimates of uncollectible accounts are recorded as bad debt expense and are reflected as additions to the accounts receivable allowance. Actual billing adjustments and uncollectible account write-offs are charged against the allowance. Moody’s evaluates its accounts receivable allowance by reviewing and assessing historical collection and adjustment experience and the current aging status of customer accounts. Moody’s also considers the economic environment of the customers, both from an industry and geographic perspective, in evaluating the need for allowances. Based on its analysis, Moody’s adjusts its allowance as considered appropriate in the circumstances. This process involves a high degree of judgment and estimation and could involve significant dollar amounts. Accordingly, Moody’s results of operations can be affected by adjustments to the allowance. Management believes that the allowance for uncollectible accounts receivable is adequate to cover anticipated adjustments and write-offs under current conditions. However, significant changes in any of the above factors, or actual write-offs or adjustments that differ from the estimated amounts could impact the Company’s consolidated results of operations.

Contingencies

Accounting for contingencies, including those matters described in the “Contingencies” section of this “MD&A”, commencing on page 56 is highly subjective and requires the use of judgments and estimates in assessing their magnitude and likely outcome. In many cases, the outcomes of such matters will be determined by third parties, including governmental or judicial bodies. The provisions made in the consolidated financial statements, as well as the related disclosures, represent management’s best estimates of the then current status of such matters and their potential outcome based on a review of the facts and in consultation with outside legal counsel where deemed appropriate. The Company regularly reviews contingencies and as new information becomes available may, in the future, adjust its associated liabilities.

For claims, litigation and proceedings and governmental investigations and inquiries not related to income taxes, where it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated, the Company records liabilities in the consolidated financial statements and periodically adjusts these as appropriate. When the reasonable estimate of the loss is within a range of amounts, the minimum amount of the range is accrued unless some higher amount within the range is a better estimate than another amount within the range. 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, governmental investigations and inquiries, 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 any pending matters 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 large or indeterminate damages sought in some of them, the absence of similar court rulings on the theories of law asserted and uncertainties regarding apportionment of any potential damages, an estimate of the range of possible losses cannot be made at this time.

The Company’s wholly-owned insurance subsidiary insures the Company against certain risks including but not limited to deductibles for worker’s compensation, employment practices litigation, employee medical claims and terrorism, for which the claims are not material to the Company. In addition, for claim years 2008 and 2009, the insurance subsidiary insured the Company for defense costs related to professional liability claims. For matters insured by the Company’s insurance subsidiary, Moody’s records liabilities based on the estimated total claims expected to be paid and total projected costs to defend a claim through its anticipated conclusion. The Company determines liabilities based on an assessment of management’s best estimate of claims to be paid and legal defense costs as well as actuarially determined estimates. The Cheyne SIV and Rhinebridge SIV matters, more fully discussed in the “Contingencies” section of this MD&A, were both cases from the 2008/2009 claims period, and accordingly the defense cost for these matters were insured by the Company’s insurance subsidiary. Defense costs for matters not self-insured by the Company’s wholly-owned insurance subsidiary are expensed as services are provided.

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 knowl-

 

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edge 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.

Goodwill and Other Acquired Intangible Assets

On July 31 of each year, Moody’s evaluates its goodwill for impairment at the reporting unit level, defined as an operating segment or one level below an operating segment.

At July 31, 2013, the Company had five primary reporting units: one in MIS that encompasses all of Moody’s ratings operations and four reporting units within MA: RD&A, ERS, FSTC and Copal. The RD&A reporting unit encompasses the distribution of investor-oriented research and data developed by MIS as part of its ratings process, in-depth research on major debt issuers, industry studies, economic research and commentary on topical events and credit analytic tools. The ERS reporting unit consists of credit risk management and compliance software licenses and related maintenance and implementation services. The FSTC reporting unit consists of the portion of the MA business that offers both credit training as well as other professional development training and certification services. Copal, which was acquired in the fourth quarter of 2011, provides outsourced research and analytical services and was a separate reporting unit since its acquisition. On December 10, 2013, a subsidiary of the Company acquired Amba Investment Services which was combined with Copal to form the Copal Amba reporting unit.

The Company evaluates the recoverability of goodwill using a three-step impairment test approach at the reporting unit level. In the first step, the Company assesses various qualitative factors to determine whether the fair value of a reporting unit may be less than its carrying amount. If a determination is made that, based on the qualitative factors, an impairment does not exist, the Company is not required to perform further testing. If the aforementioned qualitative assessment results in the Company concluding that it is more likely than not that the fair value of a reporting unit may be less than its carrying amount, the fair value of the reporting unit will be determined and compared to its carrying value including goodwill. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and the Company is not required to perform further testing. If the fair value of the reporting unit is less than the carrying value, the Company must perform a third step of the impairment test to determine the implied fair value of the reporting unit’s goodwill. The implied fair value of the goodwill is determined based on the difference between the fair value of the reporting unit and the net fair value of the identifiable assets and liabilities of the reporting unit. If the implied fair value of the goodwill is less than its carrying value, the difference is recognized as an impairment charge. For the reporting units where the Company is consistently able to conclude on impairment using only a qualitative approach, the Company’s accounting policy is to perform the second step of the aforementioned goodwill impairment assessment at least once every three years. At July 31, 2013, the Company performed the second step of the goodwill impairment test on all reporting units, which resulted in no impairment of goodwill.

Determining the fair value of a reporting unit or an indefinite-lived acquired intangible asset involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and appropriate comparable market metrics. The Company bases its fair value estimates on reasonable assumptions. However, as these estimates and assumptions are unpredictable and inherently uncertain, actual future results may differ from these estimates. In addition, the Company also makes certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of its reporting units.

Goodwill is assigned to a reporting unit at the date when an acquisition is integrated into one of the established reporting units, and is based on which reporting unit is expected to benefit from the synergies of the acquisition. Other assets and liabilities, including applicable corporate assets, are allocated to the extent they are related to the operation of respective reporting units.

 

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Sensitivity Analyses and Key Assumptions for Deriving the Fair Value of a Reporting Unit

The following table identifies the amount of goodwill allocated to each reporting unit as of December 31, 2013 as well as the amount by which the net assets of each reporting unit would exceed the fair value under Step 2 of the goodwill impairment test as prescribed in ASC Topic 350 as of July 31, 2013, assuming hypothetical reductions in their fair values.

 

                                                                                                             
            Sensitivity Analysis  
            Deficit Caused by a Hypothetical Reduction to Fair Value  
     Goodwill      10%     20%     30%     40%  
MIS    $ 11.8      $     $     $     $  
RD&A      163.7                           
ERS      219.4                    (43.7     (92.3
FSTC      107.6        (11.6     (28.7     (45.9     (63.0
Copal Amba *      162.7                           
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Totals

   $ 665.2      $ (11.6   $ (28.7   $ (89.6   $ (155.3
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

* Prior to the acquisition of Amba, a hypothetical reduction to the fair value of the Copal reporting unit of up to 40% would not have resulted in the reporting unit’s carrying value to exceed its fair value.

As can be seen from the table above, the reporting unit most at risk for potential impairment is the FSTC reporting unit and failure to meet its financial projections could result in further goodwill impairment (there was a goodwill impairment charge of $12.2 million for this reporting unit in the fourth quarter of 2012). This business is, in part, sensitive to the staffing levels and profitability of the global financial services industry, particularly in Canada and EMEA.

The ERS reporting unit also carries some risk of potential impairment. Management of the ERS reporting unit is currently focused on expanding market penetration as well as enhancing the scalability of its products and services. While the business continues to expand its customer footprint, operating margins are expected to remain lower than previously anticipated.

There could be a future goodwill impairment charge if FSTC fails or ERS significantly fails to meet its current financial projections.

Methodologies and significant estimates utilized in determining the fair value of reporting units:

The following is a discussion regarding the Company’s methodology for determining the fair value of its reporting units as of July 31, 2013.

The fair value of each reporting unit was estimated using a discounted cash flow methodology and comparable public company and precedent transaction multiples. The DCF analysis requires significant estimates, including projections of future operating results and cash flows of each reporting unit, which is based on internal budgets and strategic plans, expected long-term growth rates, terminal values, weighted average cost of capital and the effects of external factors and market conditions. Changes in these estimates and assumptions could materially affect the estimated fair value of each reporting unit which could result in an impairment charge to reduce the carrying value of goodwill, which could be material to the Company’s financial position and results of operations. Moody’s allocates newly acquired goodwill to reporting units based on the reporting unit expected to benefit from the acquisition. The Company evaluates its reporting units on an annual basis, or more frequently if there are changes in the reporting structure of the Company due to acquisitions or realignments.

 

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The sensitivity analyses on the future cash flows and WACC assumptions described below are as of July 31, 2013. The following discusses the key assumptions utilized in the discounted cash flow valuation methodology which requires significant management judgment:

 

»   Future cash flow assumptions: The projections for future cash flows utilized in the models are derived from historical experience and assumptions regarding future growth and profitability of each reporting unit. These projections are consistent with the Company’s operating and strategic plan. Cash flows for the five years subsequent to the date of the quantitative goodwill impairment analysis were utilized in the determination of fair value for each reporting unit. The growth rates utilized in the projections assumed a gradual increase in revenue from financial service customers based on a continued improvement in the global economy and capital markets, new customer acquisition and new products. Beyond five years a terminal value was determined using a perpetuity growth rate based on inflation and real GDP growth rates. A sensitivity analysis of the growth rates was performed on all reporting units. For all reporting units, a 10% decrease in the growth rates used would not have resulted in the carrying value of the reporting unit exceeding its respective estimated fair value.

 

»   WACC: The WACC is the rate used to discount each reporting unit’s estimated future cash flows. The WACC is calculated based on the proportionate weighting of the cost of debt and equity. The cost of equity is based on a risk-free interest rate adjusted for an equity risk factor which is derived from public companies similar to the reporting unit and which captures the perceived risks and uncertainties associated with the reporting unit’s cash flows. The cost of debt component is calculated as the weighted average cost associated with all of the Company’s outstanding borrowings as of the date of the impairment test and was immaterial to the computation of the WACC. The cost of debt and equity is weighted based on the debt to market capitalization ratio of publicly traded companies with similarities to the reporting unit being tested. The WACC for all reporting units ranged from 10% to 11.5% as of July 31, 2013. Differences in the WACC used between reporting units is primarily due to distinct risks and uncertainties regarding the cash flows of the different reporting units. A sensitivity analysis of the WACC was performed on all reporting units as of July 31, 2013. For the FSTC reporting unit, an increase in the WACC of one percentage point would have resulted in the carrying value of the reporting unit exceeding its estimated fair value by approximately $5 million under step one of the goodwill impairment test as prescribed in ASC Topic 350. For the remaining reporting units, an increase in the WACC of one percentage point would not result in the carrying value of the reporting unit exceeding its fair value

Amortizable intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. There were no such events or changes during 2013 that would indicate that the carrying amount of amortizable intangible assets in any of the Company’s reporting units may not be recoverable. This determination was made based on improving market conditions for the reporting unit where the intangible asset resides and an assessment of projected cash flows for all reporting units. Additionally, there were no events or circumstances during the 2013 that would indicate the need for an adjustment of the remaining useful lives of these amortizable intangible assets.

Pension and Other Retirement Benefits

The expenses, assets and liabilities that Moody’s reports for its Retirement Plans are dependent on many assumptions concerning the outcome of future events and circumstances. These assumptions include the following:

 

»   future compensation increases, based on the Company’s long-term actual experience and future outlook

 

»   long-term return on pension plan assets, based on historical portfolio results and the expected future average annual return for each major asset class within the plan’s portfolio (which is principally comprised of equity and fixed-income investments)

 

»   future healthcare cost trends, based on historical market data, near-term outlooks and assessments of likely long-term trends

 

»   discount rates, based on current yields on high-grade corporate long-term bonds

The discount rates selected to measure the present value of the Company’s benefit obligation for its Retirement Plans as of December 31, 2013 were derived using a cash flow matching method whereby the Company compares each plan’s projected payment obligations by year with the corresponding yield on the Citibank pension discount curve. The cash flows by plan are then discounted back to present value to determine the discount rate applicable to each plan.

Moody’s major assumptions vary by plan and assumptions used are set forth in Note 12 to the consolidated financial statements. In determining these assumptions, the Company consults with outside actuaries and other advisors as deemed appropriate. While the Company believes that the assumptions used in its calculations are reasonable, differences in actual experience or changes in assumptions could have a significant effect on the expenses, assets and liabilities related to the Company’s Retirement Plans.

When actual plan experience differs from the assumptions used, actuarial gains or losses arise. Excluding differences between the expected long-term rate of return assumption and actual experience on plan assets, the Company amortizes, as a component of annual pension expense, total outstanding gains or losses over the estimated average future working lifetime of active plan participants to the extent that the gain/loss exceeds 10% of the greater of the beginning-of-year projected benefit obligation or the market-related value

 

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of plan assets. For Moody’s Retirement Plans, the total actuarial losses as of December 31, 2013 that have not been recognized in annual expense are $95.2 million, and Moody’s expects to recognize a net periodic expense of $6.0 million in 2014 related to the amortization of actuarial losses.

For Moody’s funded U.S. pension plan, the differences between the expected long-term rate of return assumption and actual experience could also affect the net periodic pension expense. As permitted under ASC Topic 715, the Company spreads the impact of asset experience over a five-year period for purposes of calculating the market-related value of assets that is used in determining the expected return on assets’ component of annual expense and in calculating the total unrecognized gain or loss subject to amortization. As of December 31, 2013, the Company has an unrecognized asset gain of $8.2 million, of which $1.8 million will be recognized in the market-related value of assets that is used to calculate the expected return on assets’ component of 2015 expense.

The table below shows the estimated effect that a one percentage-point decrease in each of these assumptions will have on Moody’s 2014 operating income. These effects have been calculated using the Company’s current projections of 2014 expenses, assets and liabilities related to Moody’s Retirement Plans, which could change as updated data becomes available.

 

                                           
     Assumption Used for 2014      Estimated Impact on
2014 Operating Income
(Decrease)/Increase
 
Weighted Average Discount Rates*      4.71%/4.45%       $ (9.8
Weighted Average Assumed Compensation Growth Rate      4.00%       $ 2.0  
Assumed Long-Term Rate of Return on Pension Assets      6.80%       $ (2.1

 

* Weighted average discount rates of 4.71% and 4.45% for pension plans and Other Retirement Plans, respectively.

A one percentage-point increase in assumed healthcare cost trend rates will not affect 2014 projected expenses. Based on current projections, the Company estimates that expenses related to Retirement Plans will be $29.6 million in 2014 compared with $34.6 million in 2013. The expected expense decrease in 2014 reflects the effects of lower benefit obligations primarily due to higher discount rate assumptions, and lower amortization of actuarial losses.

Stock-Based Compensation

The Company records compensation expense for all share-based payment award transactions granted to employees based on the fair value of the equity instrument at the time of grant. This includes stock options and restricted stock. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions and estimates that the Company believes are reasonable. Some of the assumptions and estimates, such as share price volatility and expected option holding period, are based in part on Moody’s experience during the period since becoming a public company. The use of different assumptions and estimates in the Black-Scholes option pricing model could produce materially different estimated fair values for option awards and related expense.

An increase in the following assumptions would have had the following estimated effect on operating income in 2013 (dollars in millions):

 

     Assumption Used for 2009-2013
employee stock  options
     Increase in Assumption      Estimated impact on
Operating Income in 2013
Increase/(Decrease)
 
Average Expected Dividend Yield      1.4% - 2.1%         0.1%       $ 0.1  
Average Expected Share Price Volatility      37.7% - 48.7%         5%       $ (1.2
Expected Option Holding Period      5.6 - 7.6 years         1.0 year       $ (0.6

Income Taxes

The Company is subject to income taxes in the U.S. and various foreign jurisdictions. The Company’s tax assets and liabilities are affected by the amounts charged for services provided and expenses incurred as well as other tax matters such as intercompany transactions. The Company accounts for income taxes under the asset and liability method in accordance with ASC Topic 740. Therefore, income tax expense is based on reported income before income taxes, and deferred income taxes reflect the effect of temporary differences between the amounts of assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes.

The Company is subject to tax audits in various jurisdictions which involve Legacy Tax and other tax matters. The Company regularly assesses the likely outcomes of such audits in order to determine the appropriateness of liabilities for UTPs. The Company classifies interest related to income taxes as a component of interest expense in the Company’s consolidated financial statements and associated penalties, if any, as part of other non-operating expenses.

 

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For UTPs, ASC Topic 740 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. As the determination of liabilities related to UTPs and associated interest and penalties requires significant estimates to be made by the Company, there can be no assurance that the Company will accurately predict the outcomes of these audits, and thus the eventual outcomes could have a material impact on the Company’s operating results or financial condition.

For certain of its non-U.S. subsidiaries, the Company has deemed the undistributed earnings relating to these subsidiaries to be indefinitely reinvested within its foreign operations. Accordingly, the Company has not provided deferred income taxes on these indefinitely reinvested earnings. It is not practicable to determine the amount of deferred taxes that might be required to be provided if such earnings were distributed in the future due to complexities in the tax laws and in the hypothetical calculations that would have to be made.

Other Estimates

In addition, there are other accounting estimates within Moody’s consolidated financial statements, including recoverability of deferred tax assets, anticipated dividend distributions from non-U.S. subsidiaries and valuation of investments in affiliates. Management believes the current assumptions and other considerations used to estimate amounts reflected in Moody’s consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in Moody’s consolidated financial statements, the resulting changes could have a material adverse effect on Moody’s consolidated results of operations or financial condition.

See Note 2 to the consolidated financial statements for further information on significant accounting policies that impact Moody’s.

OPERATING SEGMENTS

The Company is organized into two reportable segments at December 31, 2013: 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 ongoing monitoring of credit ratings on debt obligations and the entities that issue such obligations in markets worldwide.

The MA segment, which includes all of the Company’s non-rating commercial activities, develops a wide range of products and services that support financial analysis and risk management activities of institutional participants in global financial markets. The MA segment consists of three lines of business – RD&A, ERS and PS. In the first quarter of 2013, a portion of a division within the PS LOB that provides solutions for structured finance securities was transferred to the RD&A LOB. Additionally, in the first quarter of 2012, a division within the PS LOB that provides various financial modeling services was transferred to the ERS LOB. Accordingly, the prior year revenue by LOB for MA has been reclassified to reflect these transfers.

In December 2013, a subsidiary of the Company acquired Amba, a provider of investment research and quantitative analytics for global financial institutions. In the fourth quarter of 2011, subsidiaries of the Company acquired B&H and a majority interest in Copal. B&H is a provider of insurance risk management tools. Copal is an outsourced research and consulting business. Amba, B&H and Copal are part of the MA segment and B&H’s revenue is included in the ERS LOB while Amba and Copal’s revenue is included in the PS LOB.

The following is a discussion of the results of operations of these segments, including the intersegment royalty revenue for MIS and expense charged to MA for the rights to use and distribute content, data and products developed by MIS. The royalty rate charged by MIS approximates the fair value of the aforementioned content, data and products developed by MIS. The discussion also includes intersegment fees charged to MIS from MA for the use of certain MA products and services in MIS’s ratings process. These fees charged by MA are generally equal to the costs incurred by MA to provide these products and services. Overhead charges and corporate expenses which exclusively benefit one segment are fully charged to that segment. Additionally, overhead costs and corporate expenses of the Company which benefit both segments are generally 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 and information technology.

Beginning on January 1, 2013, the Company refined its methodology for allocating certain overhead departments to its segments to better align the costs allocated based on each segment’s usage of the overhead service. The refined methodology is reflected in the segment results for the year ended December 31, 2013, and accordingly, the segment results for the prior year comparative periods have been reclassified to conform to the new presentation. These reclassifications were not material.

 

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Year ended December 31, 2013 compared with year ended December 31, 2012

Executive Summary

Moody’s revenue in 2013 totaled $2,972.5 million, an increase of $242.2 million compared to 2012 and reflected good growth in both reportable segments, most notably in the high-yield and bank loan sectors of CFG within MIS and within all LOBs within MA. Total expenses, which included the settlement of the Abu Dhabi and Rhinebridge litigation matters more fully discussed in the “Contingencies” section of this MD&A, increased $85.0 million compared to the prior year which included a $12.2 million goodwill impairment charge relating to the Company’s FSTC reporting unit within MA. The increase in expenses also reflected higher salaries and benefit costs of $56.2 million primarily relating to headcount growth and annual compensation increases. These increases were partially offset by lower incentive compensation costs of $30.3 million. Operating income of $1,234.6 million increased $157.2 million compared to 2012 and resulted in an operating margin of 41.5% in 2013, compared to 39.5% in the prior year. Adjusted Operating Income of $1,328.0 million in 2013 increased $144.9 million compared to 2012 resulting in an Adjusted Operating Margin of 44.7% compared to 43.3% in the prior year period. Diluted EPS of $3.60 in 2013, which includes a $0.14 charge in the first quarter related to the aforementioned settlement of two litigation matters and a $0.09 benefit from a Legacy Tax Matter in the fourth quarter of 2013, increased $0.55 over the prior year period, which included a $0.06 benefit relating to a Legacy Tax Matter. Excluding the litigation settlement in the first quarter of 2013 and the benefits from Legacy Tax Matters in both years, Non-GAAP Diluted EPS was $3.65, or $0.66 higher than $2.99 in 2012.

 

                                                                 
     Year Ended December 31,     % Change Favorable
(Unfavorable)
 
     2013     2012    
Revenue:       

United States

   $ 1,626.5     $  1,472.4       10 %
  

 

 

   

 

 

   

International:

      

EMEA

     862.8       800.2       8 %

Asia-Pacific

     286.1       266.5       7 %

Americas

     197.1       191.2       3 %
  

 

 

   

 

 

   

Total International

     1,346.0       1,257.9       7 %
  

 

 

   

 

 

   

Total

     2,972.5       2,730.3       9 %
  

 

 

   

 

 

   
Expenses:       

Operating

     822.4       795.0       (3 %) 

SG&A

     822.1       752.2       (9 %) 

Goodwill impairment charge

           12.2       100

Depreciation and amortization

     93.4       93.5        
  

 

 

   

 

 

   

Total

     1,737.9       1,652.9       (5 %) 
  

 

 

   

 

 

   
Operating income    $ 1,234.6     $ 1,077.4       15 %
  

 

 

   

 

 

   
Adjusted Operating Income (1)    $ 1,328.0     $ 1,183.1       12 %
  

 

 

   

 

 

   
Interest income (expense), net    $ (91.8   $ (63.8     (44 %) 
Other non-operating income (expense), net    $ 26.5     $ 10.4       155 %
Net income attributable to Moody’s    $ 804.5     $ 690.0       17 %
Diluted EPS attributable to Moody’s common shareholders    $ 3.60     $ 3.05       18 %
Non-GAAP Diluted EPS attributable to Moody’s common shareholders    $ 3.65     $ 2.99       22 %
Operating margin      41.5     39.5  
Adjusted Operating Margin (1)      44.7     43.3  

 

(1) Adjusted Operating Income, Adjusted Operating Margin and Non-GAAP Diluted EPS attributable to Moody’s common shareholders are non-GAAP financial measures. Refer to the section entitled “Non-GAAP Financial Measures” of this Management Discussion and Analysis for further information regarding these measures.

 

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

 

                                                                 
     December 31,      % Change  
     2013     2012     
United States      2,847       2,609        9
International      5,517 *     4,149        33
  

 

 

   

 

 

    
Total      8,364       6,758        24
  

 

 

   

 

 

    

 

  * Total as of December 31, 2013 includes 971 staff from the fourth quarter 2013 acquisition of Amba, of which a significant portion are based in low cost jurisdictions.

Global revenue of $2,972.5 million in 2013 increased $242.2 million compared to 2012 reflecting good growth in both reportable segments. The increase in ratings revenue reflects benefits from changes in the mix of fee type, new fee initiatives and certain pricing increases, primarily in the U.S., coupled with higher global rated issuance volumes for high-yield corporate debt and bank loans. The growth in MA reflects higher revenue across all LOBs, most notably in RD&A, which benefited from solid demand for data and analytic products, and in ERS which was driven by the completion of certain software implementations. Transaction revenue accounted for 50% of global MCO revenue in both 2013 and 2012.

U.S. revenue of $1,626.5 million increased $154.1 million over 2012, reflecting growth across all ratings LOBs, most notably in CFG and SFG, coupled with growth in all LOBs within MA.

Non-U.S. revenue increased $88.1 million compared to 2012, reflecting higher CFG revenue in all regions coupled with increases in MA revenue within the EMEA and Asia-Pacific regions. These increases were partially offset by declines in all asset classes in SFG within the EMEA region.

Operating expenses were $822.4 million in 2013, an increase of $27.4 million from 2012 and reflected growth in both compensation and non-compensation costs. The increase in compensation costs of approximately $11 million reflects higher salaries and related employee benefits of approximately $30 million primarily resulting from increases in headcount as well as the impact of annual compensation increases. These increases were partially offset by lower incentive compensation of approximately $21 million due to lower achievement against full-year targeted results in 2013 compared to 2012. The growth in non-compensation expenses of approximately $17 million is primarily due to an increase in costs relating to ongoing IT initiatives coupled with higher variable costs correlated with business growth.

SG&A expenses of $822.1 million in 2013 increased $69.9 million from 2012 with the primary driver of the expense growth reflecting the settlement of the Abu Dhabi and Rhinebridge litigation matters more fully discussed in the “Contingencies” section of this MD&A. The remaining increase in SG&A expenses reflects growth in compensation costs of approximately $18 million primarily due to higher salaries and related employee benefits of approximately $26 million resulting from annual compensation increases and headcount growth in sales personnel within MA as well as in overhead support areas. The growth in salaries and related employee benefits was partially offset by lower incentive compensation of $10 million due to lower achievement against full-year targeted results in 2013 compared to 2012. Additionally, there was a decline in non-compensation expenses (excluding the aforementioned settlement for litigation matters) which primarily reflected lower legal defense costs in 2013 following the first quarter litigation settlement. These declines were partially offset by higher costs for ongoing IT initiatives coupled with higher contingent consideration costs of approximately $7 million relating to the acquisition of Copal.

Operating income of $1,234.6 million increased $157.2 million from 2012. Adjusted Operating Income was $1,328.0 million in 2013 and increased $144.9 million compared to 2012. Operating margin and Adjusted Operating Margin of 41.5% and 44.7%, respectively, increased 200bps and 140bps, respectively, compared to the prior year. The increased margins reflected good revenue growth in both reportable segments outpacing operating expense growth.

Interest income (expense), net in 2013 was ($91.8) million, a $28.0 million increase in expense compared to 2012. This increase is due to higher interest on borrowings reflecting the issuance of the 2012 Senior Notes and the 2013 Senior Notes in August 2012 and 2013, respectively, partially offset by lower interest expense due to the final repayment of the 2008 Term Loan in May 2013. Also, the increase in expense reflects an approximate $7 million reversal of interest on UTPs in 2012 related to the settlement of state and local tax audits.

Other non-operating income (expense), net was $26.5 million in 2013, a $16.1 million increase in income compared to 2012 and reflected approximately $6 million in FX losses in 2012 compared to immaterial gains in 2013. The FX losses in 2012 primarily related to the decline of the euro relative to the British pound in the prior year. Also contributing to the increase in income was a higher Legacy Tax benefit in 2013 compared to 2012 ($19.2 million in 2013 compared to $12.8 million in 2012).

 

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The Company’s ETR was 30.2% in 2013, down from 31.7% in 2012. The decrease was primarily due to U.S. tax legislation enacted in early 2013 which retroactively extended certain tax benefits to the 2012 tax year and prospectively extended these benefits to the 2013 tax year as well as tax benefits on the aforementioned litigation settlement charge.

Net Income in 2013 was $804.5 million, or $3.60 per diluted share, and included a $0.14 charge related to the aforementioned litigation settlement in the first quarter of 2013 as well as a $0.09 benefit relating to the resolution of a Legacy Tax Matter. This is an increase of $114.5 million, or $0.55 per diluted share, compared to 2012, which included a $0.06 benefit relating to a Legacy Tax Matter. Excluding the charge for the litigation settlement in 2013 and the Legacy Tax benefits in both years, Non-GAAP Diluted EPS of $3.65 in 2013 was $0.66 higher than in the same period of 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:

 

                                                                 
     Year Ended December 31,     % Change Favorable
(Unfavorable)
 
     2013     2012    
Revenue:       

Corporate finance (CFG)

   $ 996.8     $ 857.6       16

Structured finance (SFG)

     382.5       381.0         

Financial institutions (FIG)

     338.8       325.5       4

Public, project and infrastructure finance (PPIF)

     341.3       322.7       6
  

 

 

   

 

 

   

Total external revenue

     2,059.4       1,886.8       9
  

 

 

   

 

 

   

Intersegment royalty

     78.6       71.5       10
  

 

 

   

 

 

   

Total MIS Revenue

     2,138.0       1,958.3       9
  

 

 

   

 

 

   
Expenses:       

Operating and SG&A (external)

     1,011.0       955.8       (6 %) 

Operating and SG&A (intersegment)

     11.6       11.8       2
  

 

 

   

 

 

   
Adjusted Operating Income      1,115.4       990.7       13
  

 

 

   

 

 

   

Depreciation and amortization

     46.6       44.2       (5 %) 
  

 

 

   

 

 

   
Operating income    $ 1,068.8     $ 946.5       13
  

 

 

   

 

 

   
Adjusted Operating Margin      52.2     50.6  
Operating margin      50.0     48.3  

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

Global MIS revenue of $2,059.4 million in 2013 increased $172.6 million compared to 2012, reflecting growth in all ratings LOBs excluding SFG, which was flat compared to the prior year. The drivers of the growth include changes in the mix of fee type, new fee initiatives and certain pricing increases, primarily in the U.S. and an increase in rated issuance volumes for speculative-grade corporate debt and bank loans, particularly in the first half of 2013, coupled with higher U.S. CMBS and REIT issuance. These increases were partially offset by declines across all asset classes within SFG in EMEA. Transaction revenue for MIS was 62% of total MIS revenue in both 2013 and 2012.

In the U.S., revenue was $1,216.7 million in 2013, an increase of $103.9 million, or 9% compared to 2012 reflecting changes in the mix of fee type, new fee initiatives and certain pricing increases as well as strong growth in rated issuance volumes for bank loans, CMBS, REITs and CLOs. Higher revenue from monitoring fees in CFG also contributed to the growth.

Non-U.S. revenue was $842.7 million in 2013, an increase of $68.7 million compared to 2012 reflecting changes in the mix of fee type, new fee initiatives and certain pricing increases as well as higher revenue from rating high-yield corporate debt and bank loans across all regions. Partially offsetting these increases were declines in rated issuance volumes across most asset classes in SFG within the EMEA region.

Global CFG revenue of $996.8 million in 2013 increased $139.2 million from 2012 reflecting changes in the mix of fee type, new fee initiatives and certain pricing increases, primarily in the U.S. as well as growth in rated issuance volumes for high-yield corporate debt and bank loans, particularly in the first half of 2013. The increase in high-yield corporate debt and bank loans largely reflected issuers taking advantage of the overall low interest rate environment to issue new debt as well as to refinance existing borrowings combined

 

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with increased investor appetite for higher-yielding fixed income securities. Monitoring and program fee revenue also increased due to growth in the number of outstanding rated issuances. Transaction revenue represented 73% of total CFG revenue in 2013, compared to 74% in 2012. In the U.S., revenue in 2013 was $613.2 million, or $51.4 million higher than 2012. Internationally, revenue of $383.6 million in 2013 increased $87.8 million compared to 2012.

Global SFG revenue of $382.5 million in 2013 was flat compared to 2012 reflecting an increase in rated issuance volumes for CMBS, REITs and CLOs in the U.S. coupled with the favorable impact of changes in the mix of fee type, new fee initiatives and certain pricing increases. These increases were offset by declines across all asset classes in EMEA. Transaction revenue was 60% of total SFG revenue in 2013 compared to 58% in 2012. In the U.S., revenue of $244.7 million increased $37.3 million compared to the same period in 2012, reflecting the aforementioned growth in CLO, CMBS and REIT rated issuance volumes due to favorable market conditions. Non-U.S. revenue in 2013 of $137.8 million decreased $35.8 million compared to 2012 reflecting declines across all asset classes in the EMEA region, most notably in RMBS and ABS. The decline in EMEA RMBS and ABS was primarily due to depressed issuance levels reflecting banks use of unsecured financing in preference to securitized funding conduits, coupled with their balance sheets being well funded from the ECB and other government sponsored funding programs (e.g. the ECB’s long-term refinancing operation).

Global FIG revenue of $338.8 million in 2013 was $13.3 million higher compared to 2012 due to benefits from changes in the mix of fee type, new fee initiatives and pricing increases as well as growth in banking-related revenue in the U.S. The growth in banking-related revenue reflects higher issuance volumes from specialty finance, financial leasing and securities holding companies due to favorable market conditions. Additionally, the increase reflected higher insurance revenue, most notably in EMEA, primarily reflecting issuers opportunistically refinancing debt amidst favorable interest rate conditions coupled with issuance to fund M&A activity in the sector, particularly in the first half of 2013. Transaction revenue was 35% of total FIG revenue in 2013 compared to 37% in the same period in 2012. In the U.S. and internationally, revenue was $143.4 million and $195.4 million, respectively, in 2013, or 6% and 3% higher, respectively, compared to 2012.

Global PPIF revenue was $341.3 million in 2013, an increase of $18.6 million compared to 2012, reflecting benefits from changes in the mix of fee type, new fee initiatives and pricing increases as well as increases in U.S. project and infrastructure finance rated issuance volumes. Partially offsetting these increases was a decline in U.S. public finance issuance reflecting lower municipal bond refunding volumes due to higher borrowing costs associated with increases in benchmark interest rates for U.S. Treasury Bonds beginning in May 2013. Transaction revenue was 60% and 61% of total PPIF revenue in 2013 and 2012, respectively. In the U.S., revenue in 2013 was $215.4 million and increased $6.8 million compared to 2012. Outside the U.S., PPIF revenue increased $11.8 million compared to 2012.

Operating and SG&A expenses in 2013 increased $55.2 million compared to 2012 primarily due to growth in non-compensation costs of approximately $56 million, for which the primary driver was the settlement of the Abu Dhabi and Rhinebridge litigation matters more fully discussed in the “Contingencies” section of this MD&A. Compensation costs were flat compared to the prior year reflecting higher salaries and related employee benefits costs of approximately $31 million resulting from annual compensation increases, headcount growth in the ratings LOBs as well as in support areas such as IT, finance and human resources for which the costs are allocated to each segment based on a revenue-split methodology. This increase was offset by an approximate $32 million decline in incentive compensation which was primarily due to lower achievement against full-year targeted results in 2013 compared to 2012.

Adjusted Operating Income in 2013, which includes intersegment royalty revenue, intersegment expenses and the aforementioned litigation settlement charge was $1,115.4 million, an increase of $124.7 million compared to 2012. Operating income in 2013 of $1,068.8 million increased $122.3 million from 2012. Adjusted Operating Margin and operating margin were 52.2% and 50.0%, respectively, or 160bps and 170 bps higher compared to 2012.

 

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Moody’s Analytics

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

 

                                                                 
     Year Ended December 31,     % Change Favorable
(Unfavorable)
 
     2013     2012    
Revenue:       

Research, data and analytics (RD&A)

   $ 532.0     $ 493.2       8 %

Enterprise risk solutions (ERS)

     262.5       242.6       8 %

Professional services (PS)

     118.6       107.7       10 %
  

 

 

   

 

 

   

Total external revenue

     913.1       843.5       8 %
  

 

 

   

 

 

   

Intersegment revenue

     11.6       11.8       (2 %)
  

 

 

   

 

 

   

Total MA Revenue

     924.7       855.3       8 %
  

 

 

   

 

 

   
Expenses:       

Operating and SG&A (external)

     633.5       591.4       (7 %)

Operating and SG&A (intersegment)

     78.6       71.5       (10 %)
  

 

 

   

 

 

   

Adjusted Operating Income

     212.6       192.4       10 %
  

 

 

   

 

 

   

Depreciation and amortization

     46.8       49.3       5 %

Goodwill impairment charge

           12.2       100
  

 

 

   

 

 

   
Operating income    $ 165.8     $ 130.9       27 %
  

 

 

   

 

 

   
Adjusted Operating Margin      23.0 %      22.5  
Operating margin      17.9 %      15.3  

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

Global MA revenue increased $69.6 million compared to 2012, with good growth across all LOBs. Recurring revenue comprised 78% and 77% of total MA revenue in 2013 and 2012, respectively.

In the U.S., revenue of $409.8 million in 2013 increased $50.2 million, and reflected growth across all three LOBs. International revenue of $503.3 million in 2013 was $19.4 million higher than in 2012.

Global RD&A revenue, which comprised 58% of total external MA revenue in both 2013 and 2012, increased $38.8 million over the prior year period. The growth was primarily due to increased sales of the CreditView product and solid growth from other data and analytic products as well as general market price increases.

Global ERS revenue in 2013 increased $19.9 million over 2012, primarily due to revenue from the sale and implementation of regulatory and compliance software to various financial institutions. This growth is primarily due to demand for solutions to comply with an increasingly complex regulatory environment in the banking industry. Revenue in ERS is subject to quarterly volatility resulting from the variable nature of project timing and the concentration of revenue in a relatively small number of engagements.

Revenue from PS, which included approximately $2 million in revenue from the acquisition of Amba, increased $10.9 million compared to 2012, reflecting growth in revenue from Copal being partially offset by softness in the FSTC reporting unit. This growth in revenue from Copal reflects further penetration into the market for outsourced research and analytical services. If the FSTC reporting unit does not achieve its financial forecast it could result in a goodwill impairment charge in future quarters.

Operating and SG&A expenses in 2013 increased $42.1 million compared to 2012 reflecting both higher compensation and non-compensation costs of approximately $29 million and $13 million, respectively. The increase in compensation costs reflects higher headcount to support business growth coupled with annual compensation increases as well as higher headcount in support areas for which the costs are allocated to each segment based on a revenue-split methodology. The increase in non-compensation expenses is primarily due to higher contingent consideration costs of approximately $7 million relating to the acquisition of Copal and higher professional service fees of approximately $7 million related to product delivery.

Adjusted Operating Income was $212.6 million in 2013 and increased $20.2 million compared to the same period in 2012. Operating income of $165.8 million in 2013, which includes intersegment revenue and expenses, increased $34.9 million compared to the same period in 2012, which included a $12.2 million goodwill impairment charge. Adjusted Operating Margin for 2013 was 23.0%, compared

 

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to 22.5% in 2012. Operating margin was 17.9%, or 260bps higher compared to the prior year, with the higher margin in 2013 reflecting the absence of the aforementioned goodwill impairment charge and good revenue growth outpacing expense growth.

Year ended December 31, 2012 compared with year ended December 31, 2011

Executive Summary

Moody’s revenue in 2012 totaled $2,730.3 million, an increase of $449.6 million compared to 2011 and reflected strong growth in both reportable segments. Excluding the unfavorable impact from changes in FX translation rates, revenue in 2012 increased $495.5 million compared to 2011. Total expenses were $1,652.9 million, and increased $260.6 million compared to the prior year and reflected both higher compensation and non-compensation costs, a full-year of expenses related to the fourth quarter 2011 acquisitions of Copal and B&H and a $12.2 million goodwill impairment charge relating to the Company’s FSTC reporting unit within MA. Operating income of $1,077.4 million in 2012, which included the aforementioned goodwill impairment charge, increased $189.0 million compared to 2011 and resulted in an operating margin of 39.5% in 2012 compared to 39.0% in the prior year period. Adjusted Operating Income of $1,183.1 million in 2012 increased $215.5 million compared to 2011 resulting in an Adjusted Operating Margin of 43.3% compared to 42.4% in the prior year period. Diluted EPS of $3.05 in 2012, which included a $0.06 per share benefit related to the favorable resolution of a Legacy Tax Matter, increased $0.56 over the prior year period, which included a $0.03 per share benefit related to favorable resolutions of Legacy Tax Matters as well as other tax benefits totaling $0.09 per share. Excluding the aforementioned impacts related to the favorable resolutions of Legacy Tax Matters in both years, Non-GAAP Diluted EPS in 2012 increased $0.53 per share compared to the prior year.

Moody’s Corporation

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

 

                                                                 
     Year Ended December 31,        
     2012     2011     %  Change
Favorable
(Unfavorable)
 
Revenue:       

United States

   $ 1,472.4      $ 1,177.0       25
  

 

 

   

 

 

   

International:

      

EMEA

     800.2       708.4       13

Asia-Pacific

     266.5        233.0        14

Americas

     191.2        162.3        18
  

 

 

   

 

 

   

Total International

   $ 1,257.9      $ 1,103.7       14
  

 

 

   

 

 

   

Total

     2,730.3       2,280.7        20
  

 

 

   

 

 

   
Expenses:       

Operating

     795.0       683.5       (16 %) 

SG&A

     752.2       629.6       (19 %) 

Goodwill impairment charge

     12.2             NM   

Depreciation and amortization

     93.5       79.2       (18 %) 
  

 

 

   

 

 

   

Total

     1,652.9       1,392.3       (19 %) 
  

 

 

   

 

 

   
Operating income    $ 1,077.4     $ 888.4       21
  

 

 

   

 

 

   
Adjusted Operating Income (1)    $ 1,183.1     $ 967.6       22
  

 

 

   

 

 

   
Interest income (expense), net    $ (63.8   $ (62.1     (3 %) 
Other non-operating income (expense), net    $ 10.4     $ 13.5       (23 %) 
Net income attributable to Moody’s    $ 690.0     $ 571.4       21
Diluted EPS attributable to Moody’s common shareholders    $ 3.05     $ 2.49       22
Non-GAAP Diluted EPS attributable to Moody’s common shareholders (1)    $ 2.99     $ 2.46       22
Operating margin      39.5     39.0  
Adjusted Operating Margin (1)      43.3     42.4  

 

(1) Adjusted Operating Income, Adjusted Operating Margin and Non-GAAP Diluted EPS attributable to Moody’s Common Shareholders are non-GAAP financial measures. Refer to the section entitled “Non-GAAP Financial Measures” of this Management Discussion and Analysis for further information regarding these measures.

 

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

 

                                                                 
     December 31,        
     2012     2011     % Change  
United States      2,609       2,465       6
International      4,149       3,661       13
  

 

 

   

 

 

   
Total      6,758  *      6,126  *      10
  

 

 

   

 

 

   

 

  * Includes approximately 1,600 and 1,300 personnel as of December 31, 2012 and 2011, respectively, relating to the 2011 MA acquisitions, of which a majority are in low-cost jurisdictions.

Global revenue of $2,730.3 million in 2012 increased $449.6 million compared to 2011 reflecting strong growth in both segments. The increase in ratings revenue compared to 2011 reflects growth across all ratings LOBs, most notably in CFG. The growth in MA reflects higher revenue across all LOBs and includes revenue from Copal and B&H, which were acquired in the fourth quarter of 2011. Transaction revenue accounted for 50% and 46% of global MCO revenue in 2012 and 2011, respectively.

U.S. revenue of $1,472.4 million increased $295.4 million over 2011, primarily reflecting growth across all ratings LOBs, most notably in CFG, coupled with growth in all LOBs within MA. Also contributing to the growth were changes in the mix of fee type, new fee initiatives and certain pricing increases in the MIS segment.

Non-U.S. revenue increased $154.2 million over 2011, reflecting strong growth in PS and ERS revenue within MA due to the acquisitions of Copal and B&H in the fourth quarter of 2011 as well as higher MIS revenue from rating investment-grade and speculative-grade corporate debt. Changes in FX translation rates had an approximate $45 million unfavorable impact on non-U.S. revenue in 2012.

Operating expenses were $795.0 million in 2012, an increase of $111.5 million from 2011 and reflected an increase in both compensation and non-compensation costs. The increase in compensation costs of approximately $96 million reflects higher salaries and related employee benefits resulting from increases in headcount which includes the fourth quarter 2011 acquisitions of Copal and B&H as well as higher headcount in both the MIS and MA base business. Also contributing to the increase in salaries and related employee benefits was the impact of annual merit increases. Additionally, the increase in compensation expense is due to higher incentive compensation reflecting greater achievement against full-year targeted results compared to achievement in the prior year period. The increase in non-compensation costs of approximately $16 million is primarily due to higher costs to support investment in IT infrastructure.

SG&A expenses of $752.2 million in 2012 increased $122.6 million from 2011 and reflected increases in both compensation and non-compensation expenses. Compensation costs increased approximately $73 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 the support areas of compliance and IT. Also, the growth in compensation expenses reflects a full-year of costs for Copal and B&H which were acquired in the fourth quarter of 2011. Additionally, the increase in compensation expense is due to higher incentive compensation reflecting greater achievement against full-year targeted results compared to achievement in the prior year period. Non-compensation expenses increased approximately $49 million over 2011 primarily reflecting higher legal defense costs for certain matters which are more fully discussed in the “Contingencies” section of this MD&A below. The increase compared to 2011 also reflects a full-year of expenses relating to the fourth quarter 2011 acquisitions of Copal and B&H as well as investments in IT infrastructure and higher variable costs to support business growth.

The goodwill impairment charge of $12.2 million relates to the FSTC reporting unit within MA. This impairment resulted from a decline in projected cash flows for this reporting unit as many individuals and global financial institutions have reduced spending on training and certification services amidst macroeconomic uncertainties in North America and EMEA.

Depreciation and amortization of $93.5 million in 2012 increased $14.3 million from 2011 reflecting higher amortization of: i) internal use software; and ii) intangible assets acquired as part of the fourth quarter 2011 acquisitions of Copal and B&H.

Operating income of $1,077.4 million increased $189.0 million from 2011, reflecting revenue growth outpacing the increase in total expenses. Adjusted Operating Income was $1,183.1 million in 2012 and increased $215.5 million compared to 2011. Operating margin and Adjusted Operating Margin in 2012 of 39.5% and 43.3%, respectively, increased 50bps and 90bps, respectively, compared to the prior year, and reflected revenue growth exceeding expense growth. Changes in FX translation rates had an approximate $30 million unfavorable impact on both operating income and Adjusted Operating Income in 2012.

Interest income (expense), net in 2012 was ($63.8) million, a $1.7 million increase in expense compared to 2011. This increase is primarily due to higher interest on borrowings reflecting the issuance of the 2012 Senior Notes in the third quarter of 2012 partially offset by an approximate $7 million reversal of interest on UTPs in 2012 due to the settlement of state and local tax audits.

 

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Other non-operating income (expense), net was $10.4 million in 2012, or $3.1 million lower compared to 2011 and reflected approximately $6 million in FX losses in 2012 compared to FX gains of approximately $3 million in 2011. The FX losses in 2012 related primarily to the decline of the euro relative to the British pound. The FX losses were partially offset by a higher Legacy Tax benefit in 2012 compared to 2011 ($12.8 million in 2012 compared to $6.4 million in 2011).

The Company’s ETR was 31.7% in 2012, up slightly from 31.2% in 2011. The increase was primarily due to the reversal of UTPs in the prior year resulting from a foreign tax ruling as well as benefits from the settlement of state tax audits in 2011. These items were partially offset by the favorable impact of tax planning initiatives in 2012.

Net Income in 2012 was $690.0 million, or $3.05 per diluted share and included a $12.8 million benefit from the favorable settlement of a Legacy Tax Matter and a $12.2 million goodwill impairment charge. This is an increase of $118.6 million, or $0.56 per diluted share, compared to 2011 when Net Income included a $7.0 million net benefit, or $0.03 per diluted share, relating to the favorable resolution of a Legacy Tax Matter as well as other tax benefits totaling $0.09. Excluding benefits from the favorable resolutions of Legacy Tax Matters in both 2012 and 2011, Non-GAAP Diluted EPS increased $0.53 per diluted share, 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:

 

                                                                 
     Year Ended December 31,        
     2012     2011     %  Change
Favorable
(Unfavorable)
 
Revenue:       

Corporate finance (CFG)

   $ 857.6     $ 652.1       32

Structured finance (SFG)

     381.0       344.6       11

Financial institutions (FIG)

     325.5       294.9       10

Public, project and infrastructure finance (PPIF)

     322.7       277.3       16
  

 

 

   

 

 

   

Total external revenue

     1,886.8       1,568.9       20

Intersegment royalty

     71.5       65.8       9
  

 

 

   

 

 

   

Total MIS Revenue

     1,958.3       1,634.7       20
Expenses:       

Operating and SG&A (external)

     955.8        821.7        (16 %) 

Operating and SG&A (intersegment)

     11.8        10.6        (11 %) 
  

 

 

   

 

 

   
Adjusted Operating Income      990.7        802.4        23
  

 

 

   

 

 

   

Depreciation and amortization

     44.2       41.2       (7 %) 
  

 

 

   

 

 

   
Operating income    $ 946.5     $ 761.2        24
  

 

 

   

 

 

   
Adjusted Operating Margin      50.6     49.1  
Operating margin      48.3     46.6  

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

Global MIS revenue of $1,886.8 million in 2012 increased $317.9 million compared to 2011 and reflected growth in all ratings LOBs. The growth over the prior year period reflected robust rated issuance volumes for high-yield corporate debt and bank loans as well as investment-grade corporate debt. Additionally, the growth reflects higher rated issuance within public finance. The growth also reflected changes in the mix of fee type, new fee initiatives and certain pricing increases, primarily in the U.S. Transaction revenue for MIS was 62% and 58% in 2012 and 2011, respectively.

In the U.S., revenue was $1,112.9 million in 2012, an increase of $233.8 million, or 27% compared to 2011. The increase reflects the aforementioned robust rated issuance volumes in the high-yield and investment-grade corporate debt sectors as well as the public finance sector. The increase also reflects growth in rated issuance volumes for CMBS within SFG and the aforementioned changes in the mix of fee type, new fee initiatives and certain pricing increases.

 

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Non-U.S. revenue was $773.9 million in 2012, an increase of $84.1 million compared to 2011. The growth over 2011 reflects higher rated issuance volumes for investment grade corporate debt as well as high-yield corporate debt and bank loans across all regions. Additionally, there was higher banking-related revenue across all regions coupled with higher infrastructure finance issuance in EMEA. Also contributing to the growth over 2011 were benefits from changes in the mix of fee type, new fee initiatives and certain pricing increases. Partially offsetting these increases were declines across most asset classes within SFG in the EMEA region. Changes in FX translation rates had an approximate $37 million unfavorable impact on non-U.S. MIS revenue in 2012.

Global CFG revenue of $857.6 million in 2012 increased $205.5 million from 2011 reflecting growth in rated issuance volumes for high-yield and investment-grade corporate debt across all regions as well as an increase in both monitoring fees as well as fees for commercial paper and medium term note programs. Also contributing to the growth in revenue were changes in the mix of fee type, new fee initiatives and certain pricing increases, primarily in the U.S. The aforementioned higher rated issuance volumes for investment grade corporate debt largely reflected issuers taking advantage of the overall low interest rate environment to issue new debt as well as refinance existing borrowings. The increase in U.S. rated issuance volumes in the high-yield sector reflects the current low interest rate environment coupled with an increase in investor demand for higher-yielding securities. Transaction revenue represented 74% of total CFG revenue in 2012, compared to 71% in 2011. In the U.S., revenue in 2012 was $561.8 million, or $139.5 million higher than 2011. Internationally, revenue of $295.8 million in 2012 increased $66.0 million compared to 2011. Unfavorable changes in FX translation rates had an approximate $14 million impact on international CFG revenue in 2012.

Global SFG revenue of $381.0 million in 2012 increased $36.4 million compared to 2011 and reflected higher rated issuance volumes across most asset classes in the U.S. These increases were partially offset by revenue declines in all asset classes in the EMEA region. The aforementioned increases in the U.S. resulted in transaction revenue increasing to 58% of total SFG revenue in 2012 compared to 52% in 2011. In the U.S., revenue of $207.4 million increased $45.8 million compared to 2011, reflecting growth in REIT, CMBS, collateralized loan obligation and asset-backed securities rated issuance volumes. The growth in these asset classes reflects the current low interest rate environment and narrow credit spreads for these securities. The growth in CMBS rated issuance volumes also reflects increasing activity in bank conduit operations. Non-U.S. revenue in 2012 of $173.6 million decreased $9.4 million compared to 2011. This decrease was primarily due to lower asset-backed securities issuance in EMEA reflecting strong issuance in 2011 when issuers were requesting a second rating for these securities in the first quarter of 2011, which was a new requirement by the ECB for existing asset-backed securities that could be used as collateral in Eurosystem credit operations. The decrease also reflects lower covered bond issuance in the EMEA region reflecting continued macroeconomic uncertainties in Europe. Unfavorable changes in FX translation rates had an approximate $11 million impact on international SFG revenue in 2012.

Global FIG revenue of $325.5 million in 2012 was $30.6 million higher compared to 2011 reflecting higher banking-related issuance in the U.S. as well as the Asia and Americas regions coupled with benefits from changes in the mix of fee type, new fee initiatives and pricing increases, primarily in the U.S. Also contributing to the increase was higher insurance revenue in the U.S. reflecting issuers opportunistically refinancing debt amidst favorable interest rate conditions coupled with issuance to fund M&A activity in the sector. Transaction revenue was 37% of total FIG revenue in 2012 compared to 34% in 2011. In the U.S. and internationally, revenue was $135.0 million and $190.5 million, respectively, for 2012, or 14% and 8% higher, respectively, compared to 2011. Unfavorable changes in FX translation rates had an approximate $8 million impact on international FIG revenue in 2012.

Global PPIF revenue was $322.7 million in 2012, an increase of $45.4 million compared to 2011, primarily reflecting both increases in U.S. public and project finance rated issuance volumes as well as the favorable impact of the aforementioned changes in the mix of fee type, new fee initiatives and pricing increases, primarily in the U.S. Revenue generated from new transactions was 61% and 58% of total PPIF revenue in 2012 and 2011, respectively. In the U.S., revenue in 2012 was $208.7 million and increased $32.2 million compared to 2011 and reflected higher rated issuance volumes in PFG and project finance as well as the aforementioned pricing increases. The increase in rated issuance volumes within PFG reflects issuers opportunistically refinancing obligations ahead of scheduled maturities in the current low interest rate environment as well as a challenging prior year period when issuance had declined reflecting the expiration of the Build America Bond Program in the fourth quarter of 2010. Outside the U.S., PPIF revenue increased 13% compared to 2011 due to growth in infrastructure finance rated issuance volumes in the EMEA region which reflects a partial easing of macroeconomic concerns following the ECB’s bond purchasing program announced in the third quarter of 2012. Unfavorable changes in FX translation rates had an approximate $5 million impact on international PPIF revenue in 2012.

Operating and SG&A expenses in 2012 increased $134.1 million compared to 2011 and reflected increases in compensation and non-compensation costs of approximately $87 million and $47 million, respectively. The increase in compensation costs reflects higher salaries and employee benefits resulting from annual merit increases, headcount growth in the ratings LOBs as well as in support areas such as IT, finance and human resources for which the costs are allocated to each segment based on a revenue-split methodology. The increase in compensation costs is also due to higher incentive compensation which reflects greater achievement against full-year 2012 targeted results compared to achievement in 2011. Compensation costs also increased due to higher pension expense resulting from a decrease in the discount rate used to value the Company’s obligation and higher amortization of actuarial losses. The increase in non-

 

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compensation expenses reflected higher costs resulting from the Company’s continued investment in improving IT infrastructure and regulatory and compliance initiatives coupled with higher variable costs reflecting improving business conditions. Additionally, the increase in non-compensation expenses reflects higher legal defense costs relating to ongoing matters, which are more fully discussed in the “Contingencies” section of this MD&A.

Adjusted Operating Income in 2012 was $990.7 million, an increase of $188.3 million compared to 2011. Operating income in 2012 of $946.5 million, which includes intersegment royalty revenue and intersegment expenses, increased $185.3 million from 2011 and reflects the $323.6 million increase in total MIS revenue outpacing the $135.3 million increase in total expenses. Adjusted Operating Margin and operating margin and were 50.6% and 48.4%, respectively, or 150bps and 180bps higher compared to 2011 reflecting revenue growth exceeding the increase in expenses.

Moody’s Analytics

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

 

                                                                 
     Year Ended December 31,     % Change Favorable
(Unfavorable)
 
     2012     2011    
Revenue:       

Research, data and analytics (RD&A)

   $ 493.2     $ 453.9       9

Enterprise risk solutions (ERS)

     242.6       196.1       24

Professional services (PS)

     107.7       61.8       74
  

 

 

   

 

 

   

Total external revenue

     843.5       711.8       19
  

 

 

   

 

 

   

Intersegment revenue

     11.8       10.6       11
  

 

 

   

 

 

   

Total MA Revenue

     855.3       722.4       18
  

 

 

   

 

 

   
Expenses:       

Operating and SG&A (external)

     591.4       491.4       (20 %) 

Operating and SG&A (intersegment)

     71.5        65.8        (9 %) 
  

 

 

   

 

 

   
Adjusted Operating Income      192.4       165.2       16
  

 

 

   

 

 

   

Depreciation and amortization

     49.3       38.0       (30 %) 

Goodwill impairment charge

     12.2             NM   
  

 

 

   

 

 

   
Operating income    $ 130.9     $ 127.2       3
  

 

 

   

 

 

   
Adjusted Operating Margin      22.5     22.9  
Operating margin      15.3     17.6  

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

Global MA revenue increased $131.7 million compared to 2011, with 60% of the growth generated internationally, and included revenue from Copal and B&H which were acquired in the fourth quarter of 2011. Recurring revenue comprised 77% of total MA revenue in 2012 compared to 80% in 2011.

In the U.S., revenue of $359.6 million in 2012 increased $61.6 million, and reflected growth across all three LOBs. International revenue of $483.9 million in 2012 was $70.1 million higher than in 2011, and reflected growth across all LOBs.

Global RD&A revenue, which comprised 58% and 64% of MA external revenue in 2012 and 2011, respectively, increased $39.3 million in 2012. The growth was primarily due to increased sales of credit research via the CreditView product and solid growth from other data and analytic products. Global ERS revenue in 2012 increased $46.5 million over 2011, due to revenue from the acquisition of B&H in the fourth quarter of 2011 coupled with good growth in the base business. Revenue from the PS LOB increased $45.9 million compared to 2011, with substantially all of the growth reflecting the acquisition of Copal in the fourth quarter of 2011. Revenue in the ERS and PS 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 2012 increased $100.0 million compared to 2011 reflecting both higher compensation and non-compensation costs of approximately $82 million and $18 million, respectively. The increase in compensation costs reflects an increase in headcount relating to the acquisitions of Copal and B&H in the fourth quarter of 2011 as well as to support business growth coupled with annual merit increases. The increase in non-compensation costs reflects expenses related to the acquisitions of Copal and B&H which were acquired in the fourth quarter of 2011, as well as increases in certain variable costs that are correlated with business growth.

 

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Depreciation and amortization of $49.3 million in 2012 increased $11.3 million from 2011 reflecting higher amortization related to intangible assets acquired as part of the fourth quarter 2011 acquisitions of Copal and B&H.

The goodwill impairment charge of $12.2 million relates to the FSTC reporting unit within MA. This impairment resulted from lower than expected projected growth for this reporting unit as many individuals and global financial institutions have reduced spending on training and certification services amidst macroeconomic uncertainties in North America and EMEA.

Adjusted Operating Income was $192.4 million in 2012, including intersegment revenue and expenses, and increased $27.2 million compared to 2011. Adjusted Operating Margin for 2012 was 22.5%, compared to 22.9% in 2011. Operating income of $130.9 million in 2012, which includes intersegment revenue and expenses, increased $3.7 million compared to 2011 and resulted in an operating margin of 15.3%, a decline of 230bps from the prior year reflecting the aforementioned increase in depreciation and amortization and goodwill impairment charge being partially offset by strong total revenue growth.

MARKET RISK

Foreign exchange risk:

Moody’s maintains a presence in 30 countries outside the U.S. In 2013, approximately 48% and 59% of the Company’s revenue and expenses, respectively, were in currencies other than the U.S. dollar, principally in the GBP and the euro. As such, the Company is exposed to market risk from changes in FX rates. As of December 31, 2013, approximately 55% of Moody’s assets were located outside the U.S. making the Company susceptible to fluctuations in FX rates. The effects of translating assets and liabilities of non-U.S. operations with non-U.S. functional currencies to the U.S. dollar are charged or credited to the cumulative translation adjustment account in the consolidated statements of shareholders’ equity (deficit).

The effects of revaluing assets and liabilities that are denominated in currencies other than an entity’s functional currency are charged to other non-operating income (expense), net in the Company’s consolidated statements of operations. Accordingly, the Company enters into foreign exchange forwards to mitigate the change in fair value on certain assets and liabilities denominated in currencies other than an entity’s functional currency. If foreign currencies in the Company’s foreign exchange forward portfolio were to devalue 10% compared to the U.S. dollar, there would be an approximate $7 million unfavorable impact to the fair value of the forward contracts. Additionally, if foreign currencies in the Company’s foreign exchange forward portfolio were to devalue 10% compared to the euro, there would be an approximate $4 million favorable impact to the fair value of the forward contracts. The change in fair value of the foreign exchange forward contracts would be offset by FX revaluation gains or losses in future earnings on underlying assets and liabilities denominated in currencies other than an entity’s functional currency. Additional information on the Company’s forward contracts can be found in Note 5 to the consolidated financial statements located in Item 8 of this Form 10K.

Additionally, the Company enters into foreign currency forward contracts to hedge the exposure related to non-U.S. dollar net investments in certain foreign subsidiaries against adverse changes in foreign exchange rates. Any change in the fair value of these hedges that is the result of ineffectiveness would be recognized immediately in other non-operating (expense) income in the Company’s consolidated statements of operations. For the year ended December 31, 2013 all gains and losses on these derivatives designated as net investment hedges were recognized in OCI. If all foreign currencies in the Company’s net investment hedge portfolio were to appreciate 10% compared to the U.S. dollar, there would be an approximate $29 million unfavorable impact to the currency translation adjustment component of AOCI.

Moody’s aggregate cash and cash equivalents and short term investments of $2,106.3 million at December 31, 2013 consisted of approximately $881 million denominated in currencies other than the U.S. dollar. As such, a decrease in the value of foreign currencies against the U.S. dollar, particularly the euro and GBP, could reduce the reported amount of cash and cash equivalents and short-term investments.

Credit and Interest rate risk:

The Company’s interest rate risk management objective is to reduce the funding cost and volatility to the Company and to alter the interest rate exposure to the desired risk profile. Moody’s uses interest rate swaps as deemed necessary to assist in accomplishing this objective.

The Company is exposed to interest rate risk on its various outstanding fixed rate debt for which the fair value of the outstanding fixed rate debt fluctuates based on changes in interest rates. The Company entered into interest rate swaps with a total notional amount of $300 million in the fourth quarter of 2010 to convert the fixed rate of interest on its $300 million Series 2005-1 Notes to a floating interest rate based on the 3 month LIBOR. These swaps are adjusted to fair market value based on prevailing interest rates at the end of each reporting period and fluctuations are recorded as a reduction or addition to the carrying value of the Series 2005-1 Notes, while net interest payments are recorded as interest expense/income in the Company’s consolidated statement of operations. A hypothetical change of 100bps in the LIBOR-based swap rate would result in an approximate $5 million change to the fair value of these interest rate swaps. Additional information on this interest rate swap is disclosed in Note 5 to the consolidated financial statements located in Item 8 of this Form 10K.

 

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Moody’s cash equivalents consist of investments in high-quality investment-grade securities within and outside the U.S. with maturities of three months or less when purchased. The Company manages its credit risk exposure by allocating its cash equivalents among various money market mutual funds and issuers of high-grade commercial paper and by limiting the amount it can invest with any single issuer. Short-term investments primarily consist of certificates of deposit.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow

The Company is currently financing its operations, capital expenditures and share repurchases from operating and financing cash flow.

The following is a summary of the changes in the Company’s cash flows followed by a brief discussion of these changes:

 

                                                                                                                                   
    Year Ended December 31,           Year Ended December 31,        
    2013     2012     $ Change
Favorable
(unfavorable)
    2012     2011     $ Change
Favorable
(unfavorable)
 
Net cash provided by operating activities   $ 926.8     $ 823.1     $ 103.7     $ 823.1     $ 803.3     $ 19.8  
Net cash used in investing activities   $ (261.9   $ (50.2   $ (211.7   $ (50.2   $ (267.6   $ 217.4  
Net cash provided by (used in) financing activities   $ (498.8   $ 202.6     $ (701.4   $ 202.6     $ (417.7   $ 620.3  
Free cash flow*   $ 884.5     $ 778.1     $ 106.4     $ 778.1     $ 735.6     $ 42.5  

 

* Free cash flow is a non-GAAP measure and is defined by the Company as net cash provided by operating activities minus cash paid for capital additions. Refer to the section “Non-GAAP Financial Measures” of this MD&A for further information on this financial measure.

Net Cash Provided By Operating Activities

Year ended December 31, 2013 compared to the year ended December 31, 2012:

The following changes in non-cash items impacted cash provided by operating activities in 2013 compared to 2012, relative to net income:

 

»   A $63.3 million decrease in deferred income taxes primarily due to the utilization of deferred tax assets relating to the settlement of UTPs in the first quarter of 2012;

 

»   a $12.2 million goodwill impairment charge in 2012 related to the FSTC reporting unit within MA;

In addition to the non-cash items discussed above and an increase in net income of $116.2 million, the change in net cash flows provided by operating activities also reflected:

 

»   Payments of approximately $121 million in the first quarter of 2012, reflecting the settlement of state and local tax audits;

 

»   a $61.2 million increase in cash flow from changes in accounts receivable balances primarily reflecting a larger increase in accounts receivable balances in 2012 compared to 2013. The increase in 2012 reflected lower accounts receivable balances at December 31, 2011 resulting from declines in corporate finance issuance in the fourth quarter of 2011. Approximately 26% and 23% of the Company’s accounts receivable balance at December 31, 2013 and 2012, respectively, represents unbilled receivables which primarily reflect certain annual fees in MIS which are invoiced in arrears;

 

»   a $45.2 million increase in cash flows from changes in deferred revenue balances primarily reflecting overall growth in both segments;

Partially offset by:

»   an approximate $100 million decrease relating to higher incentive compensation payouts (including profit sharing and related payroll taxes) in 2013 compared to 2012 reflecting higher achievement against full-year targeted results in 2012 compared to achievement in the prior year period;

 

»   an approximate $45 million decrease in cash flows relating to the timing of income tax payments primarily resulting from IRS relief due to Hurricane Sandy which allowed for the delay of fourth quarter 2012 estimated tax payments to the first quarter of 2013;

 

»   a $23.1 million decrease relating to greater excess tax benefits from stock-based compensation plans primarily due to a higher intrinsic value of awards exercised in 2013 resulting from a higher Moody’s stock price.

 

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Year ended December 31, 2012 compared to the year ended December 31, 2011:

The following changes in non-cash items impacted cash provided by operating activities in 2012 compared to 2011, relative to net income:

 

»   A $14.3 million increase in depreciation and amortization expense reflecting higher amortization of intangible assets due to the fourth quarter 2011 acquisitions of Copal and B&H as well as higher amortization related to the Company’s continued investment in IT infrastructure;

 

»   A $25.8 million increase in deferred income taxes primarily due to the utilization of deferred tax assets relating to the settlement of UTPs in the first quarter of 2012;

 

»   A $12.8 million non-cash reduction of a liability related to the resolution of a Legacy Tax Matter in 2012 compared to a $6.4 million non-cash reduction of a Legacy Tax liability in 2011;

 

»   $12.2 million non-tax deductible goodwill impairment charge in 2012 related to the FSTC reporting unit within MA.

In addition to the non-cash items discussed above and an increase in net income of $121.7 million, the change in net cash flows provided by operating activities also reflected:

 

»   Payments of approximately $121 million in the first quarter of 2012, reflecting the settlement of state and local tax audits;

 

»   A $145.3 million decrease in cash flow from changes in accounts receivable balances primarily reflecting higher billings in both reportable segments. The higher accounts receivable balances in the ratings segment reflect an increase in rated issuance volumes compared to the prior year. The higher balances in MA primarily reflect the timing of billings for annual software maintenance fees. Approximately 23% and 25% of the Company’s accounts receivable balance at December 31, 2012 and 2011, respectively, represent unbilled receivables which primarily reflect certain annual fees in MIS which are invoiced in arrears;

Partially offset by:

»   An approximate $69 million increase in cash flows reflecting higher incentive compensation accruals compared to the prior year period resulting from greater achievement against targeted results compared to achievement in 2011;

 

»   An approximate $25 million increase in cash flows reflecting higher accruals for legal defense costs which is primarily due to two matters related to SIVs rated by MIS which are more fully discussed in the “Contingencies” section of this MD&A.

Net Cash Used In Investing Activities

Year ended December 31, 2013 compared to the year ended December 31, 2012:

The $211.7 million increase in cash flows used in investing activities compared to 2012 primarily reflects :

 

»   A $169.7 million increase in cash used to purchase short-term investments with excess non-U.S. cash;

 

»   cash paid, net of cash acquired, of $50.7 million relating to the acquisition of Amba in December 2013.

Year ended December 31, 2012 compared to the year ended December 31, 2011:

The $217.4 million decrease in cash flows used in investing activities compared to 2011 primarily reflects payments in 2011, net of cash acquired, for the Copal and B&H acquisitions. The decrease also reflects lower capital additions of $22.7 million due to project timing of certain of the Company’s IT infrastructure initiatives.

Net Cash Used In Financing Activities

Year ended December 31, 2013 compared to the year ended December 31, 2012:

The $701.4 million increase in cash used in financing activities was primarily attributed to:

 

»   Treasury shares repurchased of $893.1 million in 2013 compared to $196.5 million repurchased in the prior year period;

 

»   Higher dividends paid to MCO shareholders of $54.3 million reflecting $0.90 per share paid in 2013 compared to $0.64 per share paid in the prior year;

Partially offset by:

»   an increase in net proceeds from stock-based compensation plans of $19.3 million reflecting higher strike prices for options exercised in 2013 compared to the prior year. These proceeds were partially offset by a greater number of shares repurchased from employees to satisfy tax withholding obligations in connection with the vesting of restricted stock in March 2013;

 

»   Higher excess tax benefits from stock-based compensation plans of $23.1 million due to due to a higher intrinsic value of awards exercised in 2013 resulting from a higher Moody’s stock price.

 

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Year ended December 31, 2012 compared to the year ended December 31, 2011:

The $620.3 million increase in cash provided by financing activities was primarily attributed to:

 

»   A $496.1 million increase relating to proceeds received from the issuance of the 2012 Senior Notes;

 

»   Treasury shares repurchased of $196.5 million in 2012 compared to $333.8 million in 2011;

 

»   Higher net proceeds from stock-based compensation plans of $70.3 million reflecting a greater number of stock option exercises in 2012 compared to the prior year due to the Company’s higher trading price for its common stock;

Partially offset by:

»   Higher dividends paid of $22.0 million due to an increase in the Company’s annual dividend paid per share from $0.535 cents in 2011 to $0.64 cents in 2012;

 

»   Repayments on the 2008 Term Loan of $71.3 million in 2012 compared to $11.3 million in 2011.

Cash held in non-U.S. jurisdictions

The Company’s aggregate cash and cash equivalents and short-term investments of $2.1 billion at December 31, 2013 consisted of approximately $1.2 billion located outside of the U.S., a majority of which is denominated in euros and British pounds. Over 95% of the cash and short-term investments in the Company’s non-U.S. operations are held by 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 December 2013, the Board of Directors of the Company declared a quarterly dividend of $0.28 per share of Moody’s common stock, payable on March 10, 2014 to shareholders of record at the close of business on February 20, 2014. The continued payment of dividends at this rate, or at all, is subject to the discretion of the Board. On February 12, 2013, the Board approved an additional $1.0 billion of share repurchase authority. At December 31, 2013, the Company had $0.8 billion of share repurchase authority remaining under this program, which does not have an established expiration. On February 11, 2014, the Board approved an additional $1.0 billion of share repurchase authority which will be utilized once the February 12, 2013 authorization is exhausted. The Company expects to complete approximately $1 billion of share repurchases in 2014. Share repurchase activity in the near term is subject to available cash flow, market conditions and other capital allocation decisions.

As part of the Copal acquisition in November 2011, Moody’s and the non-controlling shareholders entered into a put/call arrangement whereby the noncontrolling shareholders have the option to sell the portion of Copal that Moody’s does not currently own and Moody’s has the option to purchase this portion from the noncontrolling shareholders. The exercise price of this option was valued at $68 million at the time of acquisition and will fluctuate based on the entity’s financial results subject to a floor exercise price of approximately $46 million. The redemption value of this redeemable noncontrolling interest was $80.0 million at December 31, 2013. There is no limit as to the amount of the strike price on the put/call option. It is estimated that the exercise of the put/call arrangement will take place in the next one to four years based on a Monte Carlo simulation. This put/call arrangement expires on the sixth anniversary date of the acquisition.

At December 31, 2013, Moody’s had $2.1 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 under the 2012 Facility. Principal payments on the Company’s borrowings will be made 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, 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 December 31, 2013 are approximately £109 million, of which approximately £10 million will be paid in the next twelve months.

 

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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 December 31, 2013, including the aforementioned rent credits, are approximately $479 million, of which approximately $33 million will be paid during the next twelve months.

On October 21, 2013, the Company entered into a fourteen-year lease for three additional floors at its 7WTC headquarters. The total net commitment for this lease is approximately $74 million, including capital expenditures to build-out the space. The lease became effective in January 2014.

During the year ending December 31, 2014, the Company anticipates making contributions of approximately $20 million to its funded U.S. pension plan and anticipates making payments of $6.2 million related to its unfunded U.S. pension plans and $0.8 million related to its Other Retirement Plans.

On February 21, 2014, the Company made a conditional open offer to acquire up to 2,650,000 equity shares of ICRA Limited, a leading provider of credit ratings and research in India. The offer is conditional upon acquiring at least 2,149,101 equity shares, which would increase Moody’s ownership stake from 28.5% to just over 50.0%. Full acceptance of the offer would increase Moody’s ownership stake in ICRA to approximately 55.0%. The offer price, payable in cash, is 2,000 Indian rupees per share. The tender period is expected to begin in April 2014, subject to completion of a review of the transaction by Indian regulatory authorities. Subject to completion of the offer and based on exchange rates in effect as of the date of the offer, the cash payment would be between $69 million and $85 million depending on the number of shares acquired.

INDEBTEDNESS

The following table summarizes total indebtedness:

 

                                           
     December 31,  
     2013      2012  
2012 Facility    $      $  
Notes payable:      

Series 2005-1 Notes due 2015, including fair value of interest rate swap of $10.3 million at 2013 and $13.8 million at 2012

     310.3        313.8  

Series 2007-1 Notes due in 2017

     300.0        300.0  

2010 Senior Notes, due 2020, net of unamortized discount of $2.2 million and $2.6 million in 2013 and 2012, respectively

     497.8        497.4  

2012 Senior Notes, due 2022, net of unamortized discount of $3.5 million in 2013 and $3.8 million in 2012

     496.5        496.2  

2013 Senior Notes, due 2024, net of unamortized discount of $2.8 million in 2013

     497.2         
2008 Term Loan, various payments through 2013             63.8  
  

 

 

    

 

 

 
Total debt      2,101.8        1,671.2  
Current portion             (63.8
  

 

 

    

 

 

 
Total long-term debt    $ 2,101.8      $ 1,607.4  
  

 

 

    

 

 

 

2012 Facility

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

The 2012 Facility contains covenants that, among other things, restrict the ability of the Company and its subsidiaries, without the approval of the lenders, to engage in mergers, consolidations, asset sales, transactions with affiliates and sale-leaseback transactions or to incur liens, as set forth in the facility agreement. The 2012 Facility also contains a financial covenant that requires the Company to maintain a Debt to EBITDA Ratio of not more than 4 to 1 at the end of any fiscal quarter. Upon the occurrence of certain financial or economic events, significant corporate events or certain other events constituting an event of default under the 2012 Facility, all loans outstanding under the facility (including accrued interest and fees payable thereunder) may be declared immediately due and payable and all commitments under the facility may be terminated.

 

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Commercial Paper

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

Notes Payable

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

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

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

On November 4, 2011, in connection with the acquisition of Copal, a subsidiary of the Company issued a $14.2 million non-interest bearing note to the sellers which represented a portion of the consideration transferred to acquire the Copal entities. If a seller subsequently transfers to the Company all of its shares, the Company must repay the seller its proportion of the principal on the later of (i) the fourth anniversary date of the note or (ii) within a time frame set forth in the acquisition agreement relating to the resolution of certain income tax uncertainties pertaining to the transaction. Otherwise, the Company must repay any amount outstanding on the earlier of (i) two business days subsequent to the exercise of the put/call option to acquire the remaining shares of Copal of (ii) the tenth anniversary date of the issuance of the note. The Company has the right to offset payment of the note against certain indemnification assets associated with UTPs related to the acquisition, which are more fully discussed in Note 7 to the consolidated financial statements. Accordingly, the Company has offset the liability for this note against the indemnification asset, thus no balance for this note is carried on the Company’s consolidated balance sheet at December 31, 2013 and 2012. In the event that the Company would not be required to settle amounts related to the UTPs, the Company would be required to pay the sellers the principal in accordance with the note agreement. The Company may prepay the note in accordance with certain terms set forth in the acquisition agreement.

On August 20, 2012, the Company issued $500 million aggregate principal amount of unsecured notes in a public offering. The 2012 Senior Notes bear interest at a fixed rate of 4.50% and mature on September 1, 2022. Interest on the 2012 Senior Notes will be due

 

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semi-annually on September 1 and March 1 of each year, commencing March 1, 2013. The Company may prepay the 2012 Senior Notes, in whole or in part, at any time at a price equal to 100% of the principal amount being prepaid, plus accrued and unpaid interest and a Make-Whole Amount. Additionally, at the option of the holders of the notes, the Company may be required to purchase all or a portion of the notes upon occurrence of a “Change of Control Triggering Event,” as defined in the 2012 Indenture, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The 2012 Indenture contains covenants that limit the ability of the Company and certain of its subsidiaries to, among other things, incur or create liens and enter into sale and leaseback transactions. In addition, the 2012 Indenture contains a covenant that limits the ability of the Company to consolidate or merge with another entity or to sell all or substantially all of its assets to another entity. The 2012 Indenture contains customary default provisions. In addition, an event of default will occur if the Company or certain of its subsidiaries fail to pay the principal of any indebtedness (as defined in the 2012 Indenture) when due at maturity in an aggregate amount of $50 million or more, or a default occurs that results in the acceleration of the maturity of the Company’s or certain of its subsidiaries’ indebtedness in an aggregate amount of $50 million or more. Upon the occurrence and during the continuation of an event of default under the 2012 Indenture, the 2012 Senior notes may become immediately due and payable either automatically or by the vote of the holders of more than 25% of the aggregate principal amount of all of the notes then outstanding.

On August 12, 2013, the Company issued $500 million aggregate principal amount of senior unsecured notes in a public offering. The 2013 Senior Notes bear interest at a fixed rate of 4.875% and mature on February 15, 2024. Interest on the 2013 Senior Notes will be due semi-annually on February 15 and August 15 of each year, commencing February 15, 2014. The Company may prepay the 2013 Senior Notes, in whole or in part, at any time at a price equal to 100% of the principal amount being prepaid, plus accrued and unpaid interest and a Make-Whole Amount. Notwithstanding the immediately preceding sentence, the Company may redeem the 2013 Senior Notes, in whole or in part, at any time or from time to time on or after November 15, 2023 (three months prior to their maturity), at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding the redemption date. Additionally, at the option of the holders of the notes, the Company may be required to purchase all or a portion of the notes upon occurrence of a “Change of Control Triggering Event,” as defined in the 2013 Indenture, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The 2013 Indenture contains covenants that limit the ability of the Company and certain of its subsidiaries to, among other things, incur or create liens and enter into sale and leaseback transactions. In addition, the 2013 Indenture contains a covenant that limits the ability of the Company to consolidate or merge with another entity or to sell all or substantially all of its assets to another entity. The 2013 Indenture contains customary default provisions. In addition, an event of default will occur if the Company or certain of its subsidiaries fail to pay the principal of any indebtedness (as defined in the 2013 Indenture) when due at maturity in an aggregate amount of $50 million or more, or a default occurs that results in the acceleration of the maturity of the Company’s or certain of its subsidiaries’ indebtedness in an aggregate amount of $50 million or more. Upon the occurrence and during the continuation of an event of default under the 2013 Indenture, the 2013 Senior Notes may become immediately due and payable either automatically or by the vote of the holders of more than 25% of the aggregate principal amount of all of the notes then outstanding.

2008 Term Loan

On May 7, 2008, Moody’s entered into a five-year, $150.0 million senior unsecured term loan with several lenders due at various times through May 7, 2013. Proceeds from the loan were used to pay off a portion of the CP outstanding. Interest on borrowings under the 2008 Term Loan was payable quarterly at rates that were based on LIBOR plus a margin that could range from 125 basis points to 175 basis points depending on the Company’s Debt/EBITDA ratio.

The 2008 Term Loan contained restrictive covenants that, among other things, restricted the ability of the Company to engage or to permit its subsidiaries to engage in mergers, consolidations, asset sales, transactions with affiliates and sale-leaseback transactions or to incur, or permit its subsidiaries to incur, liens, in each case, subject to certain exceptions and limitations. The 2008 Term Loan also limited the amount of debt that subsidiaries of the Company may incur. In addition, the 2008 Term Loan contained a financial covenant that requires the Company to maintain a Debt/EBITDA ratio of not more than 4.0 to 1.0 at the end of any fiscal quarter. The 2008 Term Loan was repaid in full in May 2013.

 

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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 Ending December 31,

   Series 2005-1
Notes
     Series 2007-1
Notes
     2010 Senior
Notes
     2012 Senior
Notes
     2013 Senior
Notes
     Total  
2014    $      $      $      $      $      $  
2015      300.0                                    300.0  
2016                                          
2017             300.0                             300.0  
2018                                          
Thereafter                    500.0        500.0        500.0        1,500.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Total    $ 300.0      $ 300.0      $ 500.0      $ 500.0      $ 500.0      $ 2,100.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In the fourth quarter of 2010, the Company entered into interest rate swaps with a total notional amount of $300 million which will convert the fixed rate of interest on the Series 2005-1 Notes to a floating LIBOR-based interest rate.

At December 31, 2013, the Company was in compliance with all covenants contained within all of the debt agreements. In addition to the covenants described above, the 2012 Facility, the 2005 Agreement, the 2007 Agreement, the 2013 Indenture, the 2012 Indenture and the 2010 Indenture 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 December 31, 2013, there are no such cross defaults.

INTEREST EXPENSE, NET

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

 

                                                                 
     Year Ended December 31,  
     2013     2012     2011  
Income    $ 5.5     $ 5.2     $ 5.3  
Expense on borrowings      (92.3     (73.8     (65.5
(Expense) income on UTPs and other tax related liabilities      (8.6     0.4       (8.7
Legacy Tax (a)      3.6       4.4       3.7  
Interest capitalized                  3.1  
  

 

 

   

 

 

   

 

 

 
Total    $ (91.8   $ (63.8   $ (62.1
  

 

 

   

 

 

   

 

 

 
Interest paid (b)    $ 81.9     $ 94.4     $ 67.2  
  

 

 

   

 

 

   

 

 

 

 

(a) Represents a reduction of accrued interest related to the favorable resolution of Legacy Tax Matters, further discussed in Note 18 to the consolidated financial statements.

 

(b) Interest paid includes payments of interest relating to the settlement of income tax audits in the first quarter of 2012 as well as net settlements on interest rate swaps more fully discussed in Note 5.

The Company’s long-term debt, including the current portion, is recorded at cost except for the Series 2005-1 Notes which is 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 December 31, 2013 and 2012 is as follows:

 

                                                                                       
     December 31, 2013      December 31, 2012  
     Carrying
Amount
     Estimated Fair
Value
     Carrying
Amount
     Estimated Fair
Value
 
Series 2005-1 Notes*    $ 310.3      $ 319.2      $ 313.8      $ 326.1  
Series 2007-1 Notes      300.0        334.7        300.0        348.3  
2010 Senior Notes      497.8        536.6        497.4        562.8  
2012 Senior Notes      496.5        497.0         496.2         528.8   
2013 Senior Notes      497.2        501.2                  
2008 Term Loan                    63.8        63.8  
  

 

 

    

 

 

    

 

 

    

 

 

 
Total    $ 2,101.8      $ 2,188.7      $ 1,671.2      $ 1,829.8  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* The carrying amount includes a $10.3 million and $13.8 million fair value adjustment on an interest rate hedge at December 31, 2013 and 2012, respectively.

 

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

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 December 31, 2013, 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 December 31, 2013:

 

                                                                                                             
            Payments Due by Period  

(in millions)

   Total      Less Than 1 Year      1-3 Years      3-5 Years      Over 5 Years  
Indebtedness (1)    $ 2,849.6      $ 104.6      $ 498.6      $ 467.3      $ 1,779.1  
Operating lease obligations      805.6         78.0        127.6        116.0        484.0   
Purchase obligations      118.9         71.7         47.2                
Contingent consideration related to acquisitions (2)      6.7        4.3        2.4                
Pension obligations (3)      131.0        27.7        11.1        36.6        55.6  
Conditional open offer to acquire shares of ICRA Limited (4)      69.2         69.2                        
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Total (5)    $ 3,981.0      $ 355.5       $ 686.9      $ 619.9      $ 2,318.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Reflects principal payments, related interest and applicable fees due on the Series 2005-1 Notes, the Series 2007-1 Notes, the 2010 Senior Notes, the 2012 Senior Notes, the 2013 Senior Notes, and the 2012 Facility as described in Note 15 to the consolidated financial statements

 

(2) Reflects a $4.3 million contingent cash payment related to the December 10, 2013 acquisition of Amba that is dependent on the acquired entity achieving certain revenue targets for its fiscal year ended March 31, 2014. Also, 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.

 

(3) Reflects projected benefit payments for the next ten years relating to the Company’s U.S. unfunded Retirement Benefit Plans described in Note 12 to the condensed consolidated financial statements

 

(4) Reflects the minimum number of shares to be acquired pursuant to the Company’s open offer to acquire additional shares of ICRA Limited, which is more fully discussed in Note 24 to the consolidated financial statements. If the Company were to acquire the maximum amount of 2.7 million shares set forth in the open offer, the total cash payment in 2014 would be approximately $85 million. The estimated commitments were calculated using exchange rates on the day of the offer.

 

(5) The table above does not include the Company’s net long-term tax liabilities of $211.0 million relating to UTP and Legacy Tax Matters, since the expected cash outflow of such amounts by period cannot be reasonably estimated. This amount is excluded as the exact amount of the payment is still uncertain. The table above does not include the following relating to the acquisition of Copal; (i) the $14.2 million note payable as described in Note 7 to the consolidated financial statements, (ii) the $10.8 million contingent consideration obligation and the (iii) the $80.0 million Redeemable Non Controlling Interest, as the expected cash outflow of such amounts by period cannot be reasonably estimated

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, facilitate comparisons to competitors’ operating results and can provide greater transparency to investors of supplemental information used by management in its financial and operational decision-making. These non-GAAP measures, as defined by the Company, are not necessarily comparable to similarly defined measures of other companies. Furthermore, these non-GAAP measures should not be viewed in isolation or used as a substitute for other GAAP measures in assessing the operating performance or cash flows of the Company. Below are brief descriptions of the Company’s non-GAAP financial measures accompanied by a reconciliation of the non-GAAP measure to its most directly comparable GAAP measure:

Adjusted Operating Income and Adjusted Operating Margin:

The Company presents Adjusted Operating Income because management deems this metric to be a useful measure of assessing the operating performance of Moody’s, measuring the Company’s ability to service debt, fund capital expenditures, and expand its business. Adjusted Operating Income excludes depreciation and amortization as well as goodwill impairment charges because companies utilize productive assets of different ages and use different methods of acquiring productive assets including goodwill. Companies also have different methods of depreciating and amortizing productive assets as well as different methods of valuing goodwill. Management

 

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believes that the exclusion of certain items, detailed in the reconciliation below, allows for a more meaningful comparison of the Company’s operating results from period to period and across companies. Below is a reconciliation of the Company’s operating income and operating margin to Adjusted Operating Income and Adjusted Operating Margin:

 

                                                                                                             
     Year Ended December 31,  
     2013     2012     2011     2010     2009  
Operating income    $ 1,234.6     $ 1,077.4     $ 888.4     $ 772.8     $ 687.5  
Adjustments:           

Depreciation and amortization

     93.4       93.5       79.2       66.3       64.1  

Goodwill impairment charge

           12.2                    

Restructuring

                       0.1       17.5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Adjusted Operating Income    $ 1,328.0     $ 1,183.1     $ 967.6     $ 839.2     $ 769.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Operating Margin      41.5     39.5     39.0     38.0     38.3
Adjusted Operating Margin      44.7     43.3     42.4     41.3     42.8

Non-GAAP Diluted EPS

The Company presents this non-GAAP measure to exclude the impact of litigation settlements, Legacy Tax Matters and restructuring items to allow for a more meaningful comparison of Moody’s diluted earnings per share from period to period. The Legacy Tax items are specific to the Company resulting from the 2000 Distribution. The restructuring items relate to the certain costs incurred in connection with the 2007 Restructuring Plan and the 2009 Restructuring Plan. The impact of litigation settlement relates to the settlement of two legal matters in the first quarter of 2013 which are more fully discussed in the “Contingences” section of this MD&A. Below is a reconciliation of these measures to their most directly comparable U.S. GAAP amount:

 

                                                                                                             
     Year Ended December 31,  
     2013     2012     2011     2010     2009  
Diluted EPS attributable to Moody’s common shareholders—GAAP    $ 3.60     $ 3.05     $ 2.49     $ 2.15     $ 1.69  
Legacy Tax      (0.09 )     (0.06 )     (0.03 )     (0.02 )     (0.04 )
Restructuring                              0.05  
Impact of litigation settlement      0.14                          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Diluted EPS attributable to Moody’s common shareholders—Non-GAAP    $ 3.65     $ 2.99     $ 2.46     $ 2.13     $ 1.70  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow:

The Company defines free cash flow as net cash provided by operating activities minus payments for capital additions. Management believes that free cash flow is a useful metric in assessing the Company’s cash flows to service debt, pay dividends and to fund acquisitions and share repurchases. Management deems capital expenditures essential to the Company’s product and service innovations and maintenance of Moody’s operational capabilities. Accordingly, capital expenditures are deemed to be a recurring use of Moody’s cash flow. Below is a reconciliation of the Company’s net cash flows from operating activities to free cash flow:

 

                                                                                                             
     Year Ended December 31,  
     2013     2012     2011     2010     2009  
Net cash provided by operating activities    $ 926.8     $ 823.1     $ 803.3     $ 653.3     $ 643.8  

Capital additions

     (42.3     (45.0     (67.7     (79.0     (90.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Free cash flow    $  884.5     $ 778.1     $ 735.6     $ 574.3     $ 553.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Net cash used in investing activities    $ (261.9   $ (50.2   $ (267.6   $ (228.8   $ (93.8
Net cash provided by (used in) financing activities    $ (498.8   $ 202.6     $ (417.7   $ (241.3   $ (348.8

2014 OUTLOOK

Moody’s outlook for 2014 is based on assumptions about many macroeconomic and capital market factors, including interest rates, corporate profitability and business investment spending, merger and acquisition activity, consumer borrowing and securitization, and the amount of debt issued. There is an important degree of uncertainty surrounding these assumptions, and, if actual conditions differ, Moody’s results for the year may differ materially from the current outlook. Our guidance assumes foreign currency translation at end-of-quarter exchange rates.

 

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For Moody’s overall, the Company expects full-year 2014 revenue to grow in the high-single-digit percent range. Full-year 2014 operating expenses are projected to increase in the mid-single-digit percent range. Full-year 2014 operating margin is projected to be between 42 and 43 percent and adjusted operating margin for the year is expected to be between 45 and 46 percent. The effective tax rate is expected to be approximately 33 percent due to various tax law changes. The Company expects diluted earnings per share for full-year 2014 of $3.90 to $4.00. Full-year 2014 share repurchases are expected to be approximately $1.0 billion, subject to available cash, market conditions and other ongoing capital allocation decisions. Capital expenditures are projected to be approximately $90 million, reflecting ongoing infrastructure maintenance, fit-out of additional floors at 7 World Trade Center and investments in our business for efficiency and growth. The Company expects approximately $100 million in depreciation and amortization expense. Growth in compliance and regulatory expense in 2014 is projected to be less than $5 million. Free cash flow is expected to be approximately $900 million.

For the global MIS business, revenue for full-year 2014 is expected to increase in the mid-single-digit percent range. Within the U.S., MIS revenue is expected to increase in the low-single-digit percent range, while non-U.S. revenue is expected to increase in the low-double-digit percent range. Corporate finance revenue is projected to grow in the high-single-digit percent range. Revenue from structured finance is expected to grow in the low-single-digit percent range. Financial institutions revenue is expected to grow in the mid-single-digit percent range. Public, project and infrastructure finance revenue is expected to increase in the high-single-digit percent range.

For MA, full-year 2014 revenue including the recent acquisition of Amba Investment Services is expected to increase in the low-teens percent range. Within the U.S., MA revenue is expected to increase in the high-single-digit percent range. Non-U.S. revenue is expected to increase in the high-teens percent range. Revenue from research, data and analytics is projected to grow in the high-single-digit percent range, while revenue for enterprise risk solutions is expected to grow in the low-teens percent range. Professional services revenue, including Amba Investment Services, is projected to grow in the mid-forties percent range. Excluding the acquisition of Amba Investment Services, organic revenue for professional services and MA is expected to grow in the low-double-digit and high-single-digit percent ranges, respectively.

Recently Issued Accounting Pronouncements

In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. The objective of this ASU is to improve reporting by requiring entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in the statement of operations. The amendments in this ASU are required to be applied prospectively and are effective for reporting periods beginning after December 15, 2012. The Company has fully adopted all provisions of this ASU as of January 1, 2013, and the implementation did not have any impact on the Company’s consolidated financial statements other than to provide additional footnote disclosure which in included in Note 11.

CONTINGENCIES

From time to time, Moody’s is involved in legal and tax proceedings, governmental investigations and inquiries, 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 global credit crisis of 2008, MIS and other credit rating agencies have been the subject of intense scrutiny, increased regulation, ongoing inquiry and governmental investigations, 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 domestic and foreign 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 global credit markets more broadly over the last several years.

Two purported class action complaints were 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 United States District Court for the Southern District of New York on September 26, 2007. Both actions were consolidated into a single proceeding entitled In re Moody’s Corporation Securities Litigation in the U.S. District Court for the Southern District of New York. On June 27, 2008, a consolidated amended complaint was filed, purportedly on behalf of all purchasers of the Company’s securities during the period February 3, 2006 through October 24, 2007. Plaintiffs alleged that the defendants issued false and/or misleading statements

 

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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 sought 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. On September 14, 2012, the Company filed a motion for summary judgment, which was fully briefed on December 21, 2012. On August 23, 2013, the court issued an opinion granting defendants’ motion for summary judgment. Judgment was entered in Moody’s favor on August 26, 2013. On September 23, 2013, plaintiffs filed a notice of appeal from the judgment and from the March 2011 decision denying class certification. On December 19, 2013, that appeal was voluntarily dismissed with prejudice pursuant to a confidential settlement agreement, thereby concluding this litigation.

On August 25, 2008, Abu Dhabi Commercial Bank filed a purported class action in the United States District Court for the Southern District of New York asserting numerous common-law causes of action against two subsidiaries of the Company, another rating agency, and Morgan Stanley & Co. The action related to securities issued by a structured investment vehicle called Cheyne Finance (the “Cheyne SIV”) and sought, among other things, compensatory and punitive damages. The central allegation against the rating agency defendants was that the credit ratings assigned to the securities issued by the Cheyne SIV were false and misleading. In early proceedings, the court dismissed all claims against the rating agency defendants except those for fraud and aiding and abetting fraud. In June 2010, the court denied plaintiff’s motion for class certification, and additional plaintiffs were subsequently added to the complaint. In January 2012, the rating agency defendants moved for summary judgment with respect to the fraud and aiding and abetting fraud claims. Also in January 2012, in light of new New York state case law, the court permitted the plaintiffs to file an amended complaint that reasserted previously dismissed claims against all defendants for breach of fiduciary duty, negligence, negligent misrepresentation, and related aiding and abetting claims. In May 2012, the court, ruling on the rating agency defendants’ motion to dismiss, dismissed all of the reasserted claims except for the negligent misrepresentation claim, and on September 19, 2012, after further proceedings, the court also dismissed the negligent misrepresentation claim. On August 17, 2012, the court ruled on the rating agencies’ motion for summary judgment on the plaintiffs’ remaining claims for fraud and aiding and abetting fraud. The court dismissed, in whole or in part, the fraud claims of four plaintiffs as against Moody’s but allowed the fraud claims to proceed with respect to certain claims of one of those plaintiffs and the claims of the remaining 11 plaintiffs. The court also dismissed all claims against Moody’s for aiding and abetting fraud. Three of the plaintiffs whose claims were dismissed filed motions for reconsideration, and on November 7, 2012, the court granted two of these motions, reinstating the claims of two plaintiffs that were previously dismissed. On February 1, 2013, the court dismissed the claims of one additional plaintiff on jurisdictional grounds. Trial on the remaining fraud claims against the rating agencies, and on claims against Morgan Stanley for aiding and abetting fraud and for negligent misrepresentation, was scheduled for May 2013. On April 24, 2013, pursuant to confidential settlement agreements, the 14 plaintiffs with claims that had been ordered to trial stipulated to the voluntary dismissal, with prejudice, of these claims as against all defendants, and the Court so ordered that stipulation on April 26, 2013. The settlement did not cover certain claims of two plaintiffs that were previously dismissed by the Court. On May 23, 2013, these two plaintiffs filed a Notice of Appeal to the Second Circuit, seeking reversal of the dismissal of their claims and also seeking reversal of the Court’s denial of class certification. According to pleadings filed by plaintiffs in earlier proceedings, they seek approximately $76 million in total compensatory damages in connection with the two claims at issue on the appeal.

In October 2009, plaintiffs King County, Washington and Iowa Student Loan Liquidity Corporation each filed substantially identical putative class actions in the Southern District of New York against two subsidiaries of the Company and several other defendants, including two other rating agencies and IKB Deutsche Industriebank AG. These actions arose out of investments in securities issued by a structured investment vehicle called Rhinebridge Plc (the “Rhinebridge SIV”) and sought, among other things, compensatory and punitive damages. Each complaint asserted a claim for common law fraud against the rating agency defendants, alleging, among other things, that the credit ratings assigned to the securities issued by the Rhinebridge SIV were false and misleading. The case was assigned to the same judge presiding over the litigation concerning the Cheyne SIV, described above. In April 2010, the court denied the rating agency defendants’ motion to dismiss. In June 2010, the court consolidated the two cases and the plaintiffs filed an amended complaint that, among other things, added Morgan Stanley & Co. as a defendant. In January 2012, in light of new New York state case law, the court permitted the plaintiffs to file an amended complaint that asserted claims against the rating agency defendants for breach of fiduciary duty, negligence, negligent misrepresentation, and aiding and abetting claims. In May 2012, the court, ruling on the rating agency defendants’ motion to dismiss, dismissed all of the new claims except for the negligent misrepresentation claim and a claim for aiding and abetting fraud; on September 28, 2012, after further proceedings, the court also dismissed the negligent misrepresentation claim. Plaintiffs did not seek class certification. On September 7, 2012 the rating agencies filed a motion for summary judgment dismissing the remaining claims against them. On January 3, 2013, the Court issued an order dismissing the claim for aiding and abet-

 

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ting fraud against the rating agencies but allowing the claim for fraud to proceed to trial. In June 2012 and March 2013, respectively, defendants IKB Deutsche Industriebank AG (and a related entity) and Fitch, Inc. informed the court that they had executed confidential settlement agreements with the plaintiffs. On April 24, 2013, pursuant to a confidential settlement agreement, the plaintiffs stipulated to the voluntary dismissal, with prejudice, of all remaining claims as against the remaining defendants, including Moody’s, and the Court so ordered that stipulation on April 26, 2013.

Legacy Tax Matters

Moody’s continues to have exposure to potential liabilities arising from Legacy Tax Matters. As of December 31, 2013, Moody’s has recorded liabilities for Legacy Tax Matters totaling $17.6 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.

In the fourth quarter of 2013, certain Legacy Tax Matters were resolved, resulting in a $19.2 million reduction of Legacy Tax liabilities and a $3.6 million reduction of related accrued interest expense. Similarly, in the third quarter of 2012, certain Legacy Tax Matters were resolved, resulting in a $12.8 million reduction of Legacy Tax liabilities and a $4.4 million reduction of related accrued interest expense.

Forward-Looking Statements

Certain statements contained in this annual report on Form 10-K are forward-looking statements and are based on future expectations, plans and prospects for the Company’s business and operations that involve a number of risks and uncertainties. Such statements involve estimates, projections, goals, forecasts, assumptions and uncertainties that could cause actual results or outcomes to differ materially from those contemplated, expressed, projected, anticipated or implied in the forward-looking statements. Those statements appear at various places throughout this annual report on Form 10-K, including in the sections entitled “2014 Outlook” and “Contingencies” under Item 7. “MD&A”, commencing on page 28 of this annual report on Form 10-K, under “Legal Proceedings” in Part I, Item 3, of this Form 10-K, and elsewhere in the context of statements containing the words “believe”, “expect”, “anticipate”, “intend”, “plan”, “will”, “predict”, “potential”, “continue”, “strategy”, “aspire”, “target”, “forecast”, “project”, “estimate”, “should”, “could”, “may” and similar expressions or words and variations thereof relating to the Company’s views on future events, trends and contingencies. Stockholders and investors are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements and other information are made as of the date of this annual report on Form 10-K, and the Company undertakes no obligation (nor does it intend) to publicly supplement, update or revise such statements on a going-forward basis, whether as a result of subsequent developments, changed expectations or otherwise. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company is identifying examples of factors, risks and uncertainties that could cause actual results to differ, perhaps materially, from those indicated by these forward-looking statements.

Those factors, risks and uncertainties include, but are not limited to, the current world-wide credit market disruptions and economic slowdown, which is affecting and could continue to affect the volume of debt and other securities issued in domestic and/or global capital markets; other matters that could affect the volume of debt and other securities issued in domestic and/or global capital markets, including credit quality concerns, changes in interest rates and other volatility in the financial markets; the uncertain effectiveness and possible collateral consequences of U.S. and foreign government initiatives to respond to the current world-wide credit market disruptions and economic slowdown; concerns in the marketplace affecting our credibility or otherwise affecting market perceptions of the integrity or utility of independent credit agency ratings; the introduction of competing products or technologies by other companies; pricing pressure from competitors and/or customers; the impact of regulation as an NRSRO, the potential for new U.S., state and local legislation and regulations, including provisions in the Financial Reform Act and anticipated regulations resulting from that Act; the potential for increased competition and regulation in the EU and other foreign jurisdictions; exposure to litigation related to our rating opinions, as well as any other litigation to which the Company may be subject from time to time; provisions in the Financial Reform Act legislation modifying the pleading standards, and EU regulations modifying the liability standards, applicable to credit rating agencies in a manner adverse to credit rating agencies; provisions of EU regulations imposing additional procedural and substantive requirements on the pricing of services; the possible loss of key employees; failures or malfunctions of our operations and infrastructure; any vulnerabilities to cyber threats or other cybersecurity concerns; the outcome of any review by controlling tax authorities of the Company’s global tax planning initiatives; the outcome of those Legacy Tax Matters and legal contingencies that relate to the Company, its predecessors and their affiliated companies for which Moody’s has assumed portions of the financial responsibility; the ability of the Company to successfully integrate acquired businesses; currency and foreign exchange volatility; and a decline in the demand for credit risk management tools by financial institutions. These factors, risks and uncertainties as well as other risks and uncertainties that could cause Moody’s actual results to differ materially from those contemplated, expressed, projected, anticipated or implied in the forward-looking statements are described in greater detail under “Risk Factors” in Part I, Item 1A of this annual report on Form 10-K, and in other filings made by the Company from time to time with the SEC or in materials incorporated herein or therein. Stockholders and investors are cautioned that the occurrence of any of these factors, risks and uncertainties may cause the Company’s actual results

 

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to differ materially from those contemplated, expressed, projected, anticipated or implied in the forward-looking statements, which could have a material and adverse effect on the Company’s business, results of operations and financial condition. New factors may emerge from time to time, and it is not possible for the Company to predict new factors, nor can the Company assess the potential effect of any new factors on it.

 

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information in response to this Item is set forth under the caption “Market Risk” in Part II, Item 7 on page 46-47 of this annual report on Form 10-K.

 

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ITEM 8.   FINANCIAL STATEMENTS

Index to Financial Statements

 

 

   Page(s)  
Management’s Report on Internal Control Over Financial Reporting      61  
Report of Independent Registered Public Accounting Firm      62  
Consolidated Financial Statements:   

Consolidated Statements of Operations

     63  

Consolidated Statements of Comprehensive Income

     64  

Consolidated Balance Sheets

     65   

Consolidated Statements of Cash Flows

     66  

Consolidated Statements of Shareholders’ Equity (Deficit)

     67-69   

Notes to Consolidated Financial Statements

     70-112   

 

  

 

 

Schedules are omitted as not required or inapplicable or because the required information is provided in the consolidated financial statements, including the notes thereto.

 

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Moody’s Corporation is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the SEC in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the Company’s Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Moody’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of Moody’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management of the Company has undertaken an assessment of the design and operational effectiveness of the Company’s internal control over financial reporting as of December 31, 2013 based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The COSO framework is based upon five integrated components of control: risk assessment, control activities, control environment, information and communications and ongoing monitoring.

Based on the assessment performed, management has concluded that Moody’s maintained effective internal control over financial reporting as of December 31, 2013.

The effectiveness of our internal control over financial reporting as of December 31, 2013 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which appears herein.

/s/ RAYMOND W. MCDANIEL, JR.

Raymond W. McDaniel, Jr.

President and Chief Executive Officer

/s/ LINDA S. HUBER

Linda S. Huber

Executive Vice President and Chief Financial Officer

February 26, 2014

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Moody’s Corporation:

We have audited the accompanying consolidated balance sheets of Moody’s Corporation (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, shareholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2013. We also have audited Moody’s Corporation’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Moody’s Corporation’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Moody’s Corporation as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Moody’s Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

/s/ KPMG LLP

New York, New York

February 26, 2013

 

62   MOODY’S  2013 10K  


Table of Contents

MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in millions, except per share data)

 

                                                                 
     Year Ended December 31,  
     2013     2012     2011  
Revenue    $ 2,972.5     $ 2,730.3     $ 2,280.7  
  

 

 

   

 

 

   

 

 

 
Expenses       

Operating

     822.4       795.0       683.5  

Selling, general and administrative

     822.1       752.2       629.6  

Goodwill impairment charge

           12.2        

Depreciation and amortization

     93.4       93.5       79.2  
  

 

 

   

 

 

   

 

 

 

Total expenses

     1,737.9       1,652.9       1,392.3  
  

 

 

   

 

 

   

 

 

 
Operating income      1,234.6       1,077.4       888.4  
  

 

 

   

 

 

   

 

 

 

Interest income (expense), net

     (91.8     (63.8     (62.1

Other non-operating income (expense), net

     26.5       10.4       13.5  
  

 

 

   

 

 

   

 

 

 

Non-operating income (expense), net

     (65.3     (53.4     (48.6
  

 

 

   

 

 

   

 

 

 
Income before provision for income taxes      1,169.3       1,024.0       839.8  

Provision for income taxes

     353.4       324.3       261.8  
  

 

 

   

 

 

   

 

 

 
Net income      815.9       699.7       578.0  

Less: Net income attributable to noncontrolling interests

     11.4       9.7       6.6  
  

 

 

   

 

 

   

 

 

 
Net income attributable to Moody’s    $ 804.5     $ 690.0     $ 571.4  
  

 

 

   

 

 

   

 

 

 
Earnings per share       

Basic

   $ 3.67     $ 3.09     $ 2.52  
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 3.60     $ 3.05     $ 2.49  
  

 

 

   

 

 

   

 

 

 
Weighted average shares outstanding       

Basic

     219.4       223.2       226.3  
  

 

 

   

 

 

   

 

 

 

Diluted

     223.5       226.6       229.4  
  

 

 

   

 

 

   

 

 

 

 

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

 

  MOODY’S  2013 10K     63   


Table of Contents

MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in millions)

 

    Year Ended
December 31, 2013
    Year Ended
December 31, 2012
    Year Ended
December 31, 2011
 
    Pre-tax
Amounts
    Tax
Amounts
    After-tax
Amounts
    Pre-tax
Amounts
    Tax
Amounts
    After-tax
Amounts
    Pre-tax
Amounts
    Tax
Amounts
    After-tax
Amounts
 
Net income       $ 815.9         $ 699.7         $ 578.0  
Other Comprehensive Income (loss):                  

Foreign currency adjustments:

                 

Foreign currency translation adjustments

  $ (15.8   $ 0.6       (15.2   $ 35.4     $ (0.2     35.2     $ (50.3   $ 1.6       (48.7

Foreign currency translation adjustments – reclassification of losses included in net income due to liquidation of foreign subsidiaries

    1.4             1.4                                      

Cash flow and net investment hedges:

                 

Net realized and unrealized (loss) gain on cash flow and net investment hedges

    6.3       (2.6     3.7       (3.9     1.6       (2.3     (1.0     0.4       (0.6

Reclassification of losses included in net income

    1.2       (0.5     0.7       4.1       (1.7     2.4       5.3       (2.1     3.2  

Pension and Other Retirement Benefits:

                 

Amortization of actuarial losses and prior service costs included in net income

    11.9       (4.9     7.0       10.0       (4.1     5.9       7.4       (3.0     4.4  

Net actuarial gains (losses) and prior service costs

    50.9       (21.0     29.9       (26.0     11.2       (14.8     (56.3     22.1       (34.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Total other comprehensive income (loss)   $ 55.9     $ (28.4     27.5     $ 19.6     $ 6.8       26.4     $ (94.9   $ 19.0       (75.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Comprehensive Income         843.4           726.1           502.1  

Less: comprehensive income attributable to noncontrolling interests and redeemable noncontrolling interest

        11.4           10.7           4.8  
     

 

 

       

 

 

       

 

 

 
Comprehensive income attributable to Moody’s       $ 832.0         $ 715.4         $ 497.3  
     

 

 

       

 

 

       

 

 

 

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

 

64   MOODY’S  2013 10K  


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MOODY’S CORPORATION

CONSOLIDATED BALANCE SHEETS

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

 

                                           
     December 31,  
     2013     2012  
ASSETS     
Current assets:     

Cash and cash equivalents

   $ 1,919.5     $ 1,755.4  

Short-term investments

     186.8       17.9  

Accounts receivable, net of allowances of $28.9 in 2013 and $29.1 in 2012

     694.2       621.8  

Deferred tax assets, net

     53.9       38.7  

Other current assets

     114.4       91.9  
  

 

 

   

 

 

 

Total current assets

     2,968.8       2,525.7  
Property and equipment, net      278.7       307.1  
Goodwill      665.2       637.1  
Intangible assets, net      221.6       226.5  
Deferred tax assets, net      148.7       168.5  
Other assets      112.1       96.0  
  

 

 

   

 

 

 

Total assets

   $ 4,395.1     $ 3,960.9  
  

 

 

   

 

 

 
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY     
Current liabilities:     

Accounts payable and accrued liabilities

   $ 538.9     $ 555.3  

Deferred tax liabilities, net

     4.0        

Current portion of long-term debt

           63.8  

Deferred revenue

     598.4       545.8  
  

 

 

   

 

 

 

Total current liabilities

     1,141.3       1,164.9  
Non-current portion of deferred revenue      109.2       94.9  
Long-term debt      2,101.8       1,607.4  
Deferred tax liabilities, net      59.1       58.1  
Unrecognized tax benefits      195.6       156.6  
Other liabilities      360.2       410.1  
  

 

 

   

 

 

 

Total liabilities

     3,967.2       3,492.0  
Contingencies (Note 18)     
Redeemable noncontrolling interest      80.0       72.3  
  

 

 

   

 

 

 
Shareholders’ equity:     

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 December 31, 2013 and December 31, 2012, respectively.

     3.4       3.4  

Capital surplus

     405.8       365.1  

Retained earnings

     5,302.1       4,713.3  

Treasury stock, at cost; 128,941,621 and 119,650,254 shares of common stock at December 31, 2013 and December 31, 2012, respectively

     (5,319.7     (4,614.5

Accumulated other comprehensive loss

     (54.6     (82.1
  

 

 

   

 

 

 

Total Moody’s shareholders’ equity

     337.0       385.2  

Noncontrolling interests

     10.9       11.4  
  

 

 

   

 

 

 

Total shareholders’ equity

     347.9       396.6  
  

 

 

   

 

 

 

Total liabilities, redeemable noncontrolling interest and shareholders’ equity

   $ 4,395.1     $ 3,960.9  
  

 

 

   

 

 

 

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

 

  MOODY’S  2013 10K     65   


Table of Contents

MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in millions)

 

     Year Ended December 31,  
     2013     2012     2011  
Cash flows from operating activities       

Net income

   $ 815.9     $ 699.7     $ 578.0  

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

      

Depreciation and amortization

     93.4       93.5       79.2  

Stock-based compensation expense

     67.1       64.5       56.7  

Goodwill impairment charge

           12.2        

Deferred income taxes

     (27.2     36.1       10.3  

Excess tax benefits from settlement of stock-based compensation awards

     (38.8     (15.7     (7.4

Legacy Tax Matters

     (19.2     (12.8     (6.4

Changes in assets and liabilities:

      

Accounts receivable

     (67.0     (128.2     17.1  

Other current assets

     (21.7     (14.1     53.5  

Other assets

     (0.7     5.1       7.5  

Accounts payable and accrued liabilities

     (2.9     101.7       23.9  

Deferred revenue

     66.1       20.9       8.8  

Unrecognized tax benefits

     30.9       (49.2     3.9  

Other liabilities

     30.9       9.4       (21.8
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     926.8       823.1       803.3  
  

 

 

   

 

 

   

 

 

 
Cash flows from investing activities       

Capital additions

     (42.3     (45.0     (67.7

Purchases of short-term investments

     (225.9     (56.2     (43.3

Sales and maturities of short-term investments

     57.0       54.5       40.9  

Cash paid for acquisitions and investment in affiliates, net of cash acquired

     (50.7     (3.5     (197.5
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (261.9     (50.2     (267.6
  

 

 

   

 

 

   

 

 

 
Cash flows from financing activities       

Issuance of notes

     497.2       496.1        

Repayment of notes

     (63.8     (71.3     (11.3

Net proceeds from stock plans

     136.0       116.7       46.4  

Excess tax benefits from settlement of stock-based compensation awards

     38.8